$10,000 Gold?
SAN FRANCISCO – It has never been easy to have a rational conversation about the value of gold.
Lately, with gold prices up more than 300% over the last decade, it is harder than ever.
Just last December, fellow economists Martin Feldstein and Nouriel Roubini each penned op-eds bravely questioning bullish market sentiment, sensibly pointing out gold’s risks.
Wouldn’t you know it?
Since their articles appeared, the price of gold has moved up still further.
Gold prices even hit a record-high $1,300 recently.
Last December, many gold bugs were arguing that the price was inevitably headed for $2,000.
Now, emboldened by continuing appreciation, some are suggesting that gold could be headed even higher than that.
One successful gold investor recently explained to me that stock prices languished for a more than a decade before the Dow Jones index crossed the 1,000 mark in the early 1980’s.
Since then, the index has climbed above 10,000.
Now that gold has crossed the magic $1,000 barrier, why can’t it increase ten-fold, too?
Admittedly, getting to a much higher price for gold is not quite the leap of imagination that it seems.
After adjusting for inflation, today’s price is nowhere near the all-time high of January 1980.
Back then, gold hit $850, or well over $2,000 in today’s dollars.
But January 1980 was arguably a “freak peak” during a period of heightened geo-political instability.
At $1,300, today’s price is probably more than double very long-term, inflation-adjusted, average gold prices.
So what could justify another huge increase in gold prices from here?
One answer, of course, is a complete collapse of the US dollar.
With soaring deficits, and a rudderless fiscal policy, one does wonder whether a populist administration might recklessly turn to the printing press.
And if you are really worried about that, gold might indeed be the most reliable hedge.
Sure, some might argue that inflation-indexed bonds offer a better and more direct inflation hedge than gold.
But gold bugs are right to worry about whether the government will honor its commitments under more extreme circumstances.
In fact, as Carmen Reinhart and I discuss in our recent book on the history of financial crises, This Time is Different, cash-strapped governments will often forcibly convert indexed debt to non-indexed debt, precisely so that its value might be inflated away.
Even the United States abrogated indexation clauses in bond contracts during the Great Depression of the 1930’s. So it can happen anywhere.
Even so, the fact that very high inflation is possible does not make it probable, so one should be cautious in arguing that higher gold prices are being driven by inflation expectations.
Some have argued instead that gold’s long upward march has been partly driven by the development of new financial instruments that make it easier to trade and speculate in gold.
There is probably some slight truth – and also a certain degree of irony – to this argument.
After all, medieval alchemists engaged in what we now consider an absurd search for ways to transform base metals into gold.
Wouldn’t it be paradoxical, then, if financial alchemy could make an ingot of gold worth dramatically more?
In my view, the most powerful argument to justify today’s high price of gold is the dramatic emergence of Asia, Latin America, and the Middle East into the global economy.
As legions of new consumers gain purchasing power, demand inevitably rises, driving up the price of scarce commodities.
At the same time, emerging-market central banks need to accumulate gold reserves, which they still hold in far lower proportion than do rich-country central banks. With the euro looking less appetizing as a diversification play away from the dollar, gold’s appeal has naturally grown.
So, yes, there are solid fundamentals that arguably support today’s higher gold price, although it is far more debatable whether and to what extent they will continue to support higher prices in the future.
Indeed, another critical fundamental factor that has been sustaining high gold prices might prove far more ephemeral than globalization.
Gold prices are extremely sensitive to global interest-rate movements.
After all, gold pays no interest and even costs something to store.
Today, with interest rates near or at record lows in many countries, it is relatively cheap to speculate in gold instead of investing in bonds.
But if real interest rates rise significantly, as well they might someday, gold prices could plummet.
Most economic research suggests that gold prices are very difficult to predict over the short to medium term, with the odds of gains and losses being roughly in balance.
It is therefore dangerous to extrapolate from short-term trends.
Yes, gold has had a great run, but so, too, did worldwide housing prices until a couple of years ago.
If you are a high-net-worth investor, a sovereign wealth fund, or a central bank, it makes perfect sense to hold a modest proportion of your portfolio in gold as a hedge against extreme events.
But, despite gold’s heightened allure in the wake of an extraordinary run-up in its price, it remains a very risky bet for most of us.
Of course, such considerations might have little influence on prices.
What was true for the alchemists of yore remains true today: gold and reason are often difficult to reconcile.
1929 or 1989?
PARIS – As the economic crisis deepens and widens, the world has been searching for historical analogies to help us understand what has been happening.
At the start of the crisis, many people likened it to 1982 or 1973, which was reassuring, because both dates refer to classical cyclical downturns.
Today, the mood is much grimmer, with references to 1929 and 1931 beginning to abound, even if some governments continue to behave as if the crisis was more classical than exceptional.
The tendency is either excessive restraint (Europe) or a diffusion of the effort (the United States).
Europe is being cautious in the name of avoiding debt and defending the euro, whereas the US has moved on many fronts in order not to waste an ideal opportunity to implement badly needed structural reforms.
For geo-strategists, however, the year that naturally comes to mind, in both politics and economics, is 1989.
Of course, the fall of the house of Lehman Brothers has nothing to do with the fall of the Berlin Wall.
Indeed, on the surface it seems to be its perfect antithesis: the collapse of a wall symbolizing oppression and artificial divisions versus the collapse of a seemingly indestructible and reassuring institution of financial capitalism.
Yet 2008-2009, like 1989, may very well correspond to an epochal change, whose unfolding consequences will be felt for decades.
The end of the East-West ideological divide and the end of absolute faith in markets are historical turning points.
And what happens in 2009 may jeopardize some of the positive results of 1989, including the peaceful reunification of Europe and the triumph of democratic principles over nationalist, if not xenophobic, tendencies.
In 1989, liberal democracy triumphed over the socialist ideology incarnated and promoted by the Soviet Bloc.
For many of his supporters, it was President Ronald Reagan who, with his deliberate escalation of the arms race, pushed the Soviet economy to the brink, thereby fully demonstrating the superiority of liberal societies and free markets.
Of course, there are obvious differences between 1989 and now.
First, and perhaps above all, the revolutions of 1989 and the subsequent collapse of the Soviet Union put an end to global bipolarity.
By contrast, 2009 is likely to pave the way to a new form of bipolarity, but with China substituting for the Soviet Union.
Second, whereas democracy and market capitalism appeared as clear – if more fragile than expected – winners in 1989, it is difficult in 2009, with the spread of the global crisis, to distinguish winners from losers.
Everyone seems to be a loser, even if some are more affected than others.
Yet, history is unfair, and the US, despite its greater responsibility for today’s global crisis, may emerge in better shape than most countries from the morass.
In better shape, but not alone.
As a visiting professor at Harvard and MIT, I am getting a good preview of what the world could look like when the crisis finally passes.
One senses something like the making of an American-Asian dominated universe.
From the incredible media lab at MIT to the mathematics and economics departments at Harvard, Asians – Chinese and Indians, in particular – are everywhere, like the Romans in Athens in the first century BC: full of admiration for those from whom they were learning so much, and whom they would overcome in the coming decades.
But before this new order appears, the world may be faced with spreading disorder, if not outright chaos.
What, for example, will happen to a country as central and vulnerable as Egypt when hundred of thousands of Egyptians working in the Gulf are forced to return to their homeland as a result of the crisis in the oil-producing countries?
When the rich get less rich, the poor get poorer.
And what about the foreign workers who have reached for the “European dream” and are now faced with potential explosions of xenophobia in Europe’s supposedly open countries?
The consequences of 1989 ended up being less enduring than many observers, including me, would have assumed.
We can only hope that, in the end, the consequences of 2009 similarly prove to be far less dramatic than we now – intuitively and in our historical reflexes – feel them to be.
The End of 1945
NEW YORK – On May 8, 1945, when World War II in Europe officially ended, much of the world lay in ruins.
But if the human capacity for destruction knows few limits, the ability to start over again is just as remarkable.
Perhaps that is why mankind has so far managed to survive.
No doubt, millions of people at the end of the war were too hungry and exhausted to do anything much beyond staying alive.
But, at the same time, a wave of idealism swept across the wreckage, a collective sense of determination to build a more equal, peaceful, and safer world.
That is why the war’s great hero, Winston Churchill, was voted out of office in the summer of 1945, even before Japan surrendered.
Men and women had not risked their lives simply to return to the old days of class privilege and social deprivation.
They wanted better housing, education, and free health care for all.
Similar demands were heard all over Europe, where the anti-Nazi or anti-fascist resistance was often led by leftists, or indeed Communists, and prewar conservatives were frequently tainted by collaboration with fascist regimes.
There was talk of revolution in countries such as France, Italy, and Greece.
This did not happen, because neither the Western Allies nor the Soviet Union supported it.
Stalin was content to settle for an empire in Eastern Europe.
But even Charles de Gaulle, a resistance leader of the right, had to accept Communists in his first postwar government, and he agreed to nationalize industries and banks.
The swing to the left, to social-democratic welfare states, occurred all over Western Europe.
It was part of the 1945 consensus.
A different kind of revolution was taking place in Europe’s former colonies in Asia, where native peoples had no desire to be ruled once more by Western powers, which had been so ignominiously defeated by Japan.
Vietnamese, Indonesians, Filipinos, Burmese, Indians, and Malays wanted their freedom, too.
These aspirations were often voiced in the United Nations, founded in 1945.
The UN, like the dream of European unity, was also part of the 1945 consensus.
For a short while, many prominent people – Albert Einstein, for one – believed that only a world government would be able to ensure global peace.
This dream quickly faded when the Cold War divided the world into two hostile blocs. But in some ways the 1945 consensus, in the West, was strengthened by Cold War politics.
Communism, still wrapped in the laurel leaf of anti-fascism, had a wide intellectual and emotional appeal, not only in the so-called Third World, but also in Western Europe.
Social democracy, with its promise of greater equality and opportunities for all, served as an ideological antidote.
Most social democrats were in fact fiercely anti-communist.
Today, 70 years later, much of the 1945 consensus no longer survives.
Few people can muster great enthusiasm for the UN.
The European dream is in crisis.
And the post-war social-democratic welfare state is being eroded more and more every day.
The rot began during the 1980s, under Ronald Reagan and Margaret Thatcher.
Neoliberals attacked the expense of entitlement programs and the vested interests of trade unions.
Citizens, it was thought, had to become more self-reliant; government welfare programs were making everyone soft and dependent.
In Thatcher’s famous words, there was no such thing as “society,” only families and individuals who ought to be taking care of themselves.
But the 1945 consensus was dealt a much greater blow precisely when we all rejoiced at the collapse of the Soviet Empire, the other great twentieth-century tyranny.
In 1989, it looked as if the dark legacy of World War II, the enslavement of Eastern Europe, was finally over.
And in many ways, it was.
But much else collapsed with the Soviet model.
Social democracy lost its raison d’être as an antidote to Communism.
All forms of leftist ideology – indeed, everything that smacked of collective idealism – came to be viewed as misguided utopianism that could lead only to the Gulag.
Neoliberalism filled the vacuum, creating vast wealth for some people, but at the expense of the ideal of equality that had emerged from World War II.
The extraordinary reception of Thomas Piketty’s Capital in the Twenty-First Century shows how keenly the consequences of the collapse of the left have been felt.
In recent years, other ideologies have also emerged to fill the human need for collective ideals.
The rise of right-wing populism reflects revived yearnings for pure national communities that keep immigrants and minorities out.
And, perversely, American neo-conservatives have transformed the internationalism of the old left by seeking to impose a democratic world order by US military force.
The answer to these alarming developments is not nostalgia.
We cannot simply return to the past.
Too much has changed.
But a new aspiration toward social and economic equality, and international solidarity, is badly needed.
It cannot be the same as the 1945 consensus, but we would do well, on this anniversary, to remember why that consensus was forged in the first place.
2011: My Space Odyssey
MOSCOW – Most people who know of me think of me as an information-technology expert, someone who probably lives in California and invests in edgy Internet start-ups.
In fact, my formal residence is in New York City, but I am about to spend most of the next five months in Russia, training to be a cosmonaut in Star City, just outside Moscow.
It all came about in a number of ways.
First of all, as a kid, I just assumed that I would go to the moon, without having to do much in particular to make it happen.
I just took it for granted that, by the time I was, say, 40, space travel would be a common thing.
My father was involved with the United States space program, and we had some moon rocks at home, so I thought it was no big deal.
Then I got distracted for about 40 years.
A few years ago, however, I started paying attention to space again.
A lot of people I knew in the IT industry were doing the same: Elon Musk, a co-founder of PayPal, founded Space-X;
Jeff Bezos of Amazon started a spacecraft company called Blue Origin;
Jeff Greason, a senior manager at Intel, started XCOR Aerospace (in which I’m an investor).
In 2005, the last year I held my PC Forum conference for IT entrepreneurs, I started a conference called Flight School for entrepreneurs in space and private aviation.
Meanwhile, in about 2005, I was in South Africa with a small group advising former President Thabo Mbeki and his government about its IT policy.
One of the group was Mark Shuttleworth, founder of Thawte (sold to VeriSign), who had recently come back from a trip to the space station as the second “space tourist.”
One evening, the group sat around a campfire as the sun set, and around 50 African schoolchildren were bussed in.
Altogether, there were about 100 of us, President Mbeki included, around a roaring fire.
Once it was dark, a screen was set up and Mark showed home videos from space.
He gave a fascinating talk about his adventures, complete with clips of him floating around, catching bubbles in his mouth, and so on.
The kids loved it, and I'm sure some of them decided then and there to study math and science.
Eventually, I invested in Space Adventures, the company that organized Shuttleworth’s trip into space.
Later, I went on a tour that they organized to watch the launch of Charles Simonyi, the fifth (and soon seventh) space tourist, from Baikonur in Kazakhstan.
(Simonyi wrote the Microsoft Word program, and now has another start-up, Intentional Software, and a foundation, as well as a Web site, CharlesinSpace.org.)
Soon after, I started casually discussing the notion of becoming a backup cosmonaut with the Space Adventures team.
Yes, I would love to actually go, but the trip to space costs $35 to $40 million, whereas backup training costs “only” $3 million.
So I had vague thoughts that I might go into space sometime in 2011 - the year that Google co-founder Sergey Brin is (very) tentatively slated to go.
Space Adventures was pushing for 2009, but I was pretty busy.
Then something happened last spring: my sister Emily discovered that she had cancer and had a double mastectomy.
(She is doing well now and, in fact, just won a mini-marathon.)
A couple of weeks later, I was faced with one of those conflicts: a board meeting here, a conference there, another opportunity at the same time somewhere else.
Good grief! I realized my priorities were all out of whack.   So in some odd way, this sabbatical in Russia is my alternative to a double mastectomy – a positive one, to be sure, but the same kind of reset-button experience.
It is also the answer to another question I hear a lot because of my work on human genetics through 23andMe (www.23andme.com) and the Personal Genome Project (www.personalgenome.org): If you learned you had a high chance of developing Alzheimer’s in a few years, what would you do?
Why, I’d go train to be a cosmonaut, of course! And why wait to find out I may get Alzheimer’s? Next month, I will write about what training to go into space actually involves.
9/11 and the New Authoritarianism
Five years after the attacks on the Twin Towers in New York and the Pentagon in Washington, “9/11” is no longer a mere date.
It has entered the history books as the beginning of something new, a new era perhaps, but in any case a time of change.
The terrorist bombings in Madrid and London and elsewhere will also be remembered; but it is “9/11” that has become the catchphrase, almost like “August 1914.”
But was it really a war that started on September 11, 2001?
Not all are happy about this American notion.
During the heyday of Irish terrorism in the UK, successive British governments went out of their way not to concede to the IRA the notion that a war was being waged. “War” would have meant acceptance of the terrorists as legitimate enemies, in a sense as equals in a bloody contest for which there are accepted rules of engagement.
This is neither a correct description nor a useful terminology for terrorist acts, which are more correctly described as criminal.
By calling them war – and naming an opponent, usually al-Qaeda and its leader, Osama bin Laden – the United States government has justified domestic changes that, before the 9/11 attacks, would have been unacceptable in any free country.
Most of these changes were embodied in the so-called “USA Patriot Act.”
Though some of the changes simply involved administrative regulations, the Patriot Act’s overall effect was to erode the great pillars of liberty, such as habeas corpus , the right to recourse to an independent court whenever the state deprives an individual of his freedom.
From an early date, the prison camp at Guantánamo Bay in Cuba became the symbol of something unheard of: the arrest without trial of “illegal combatants” who are deprived of all human rights.
The world now wonders how many more of these non-human humans are there in how many places.
For everyone else, a kind of state of emergency was proclaimed that has allowed state interference in essential civil rights.
Controls at borders have become an ordeal for many, and police persecution now burdens quite a few.
A climate of fear has made life hard for anyone who looks suspicious or acts suspiciously, notably for Muslims.
Such restrictions on freedom did not meet with much public opposition when they were adopted.
On the contrary, by and large it was the critics, not the supporters, of these measures who found themselves in trouble.
In Britain, where Prime Minister Tony Blair supported the US attitude entirely, the government introduced similar measures and even offered a new theory.
Blair was the first to argue that security is the first freedom.
In other words, liberty is not the right of individuals to define their own lives, but the right of the state to restrict individual freedom in the name of a security that only the state can define.
This is the beginning of a new authoritarianism.
The problem exists in all countries affected by the threat of terrorism, though in many it has not become quite as specific.
In most countries of continental Europe, “9/11” has remained an American date.
There is even a debate – and indeed some evidence – concerning the question of whether involvement in the “war against terrorism” has actually increased the threat of terrorist acts.
Germans certainly use this argument to stay out of the action wherever possible.
This stance, however, has not prevented the spread of something for which a German word is used in other languages, too: Angst .
A diffuse anxiety is gaining ground.
People feel uneasy and worried, especially when traveling.
Any train accident or airplane crash is now at first suspected of being an act of terrorism.
Thus, 9/11 has meant, directly or indirectly, a great shock, both psychologically and to our political systems.
While terrorism is fought in the name of democracy, the fight has in fact led to a distinct weakening of democracy, owing to official legislation and popular angst.
One of the worrying features of the 9/11 attacks is that it is hard to see their purpose beyond the perpetrators’ resentment of the West and its ways.
But the West’s key features, democracy and the rule of law, have taken a far more severe battering at the hands of their defenders than by their attackers.
Two steps, above all, are needed to restore confidence in liberty within the democracies affected by the legacy of 9/11.
First, we must make certain that the relevant legislation to meet the challenge of terrorism is strictly temporary.
Some of today’s restrictions on habeas corpus and civil liberties have sunset clauses restricting their validity; all such rules should be re-examined by parliaments regularly.
Second, and more importantly, our leaders must seek to calm, rather than exploit, public anxiety.
The terrorists with whom we are currently at “war” cannot win, because their dark vision will never gain broad popular legitimacy.
That is all the more reason for democrats to stand tall in defending our values – first and foremost by acting in accordance with them.
Transatlantic Trade for All
WASHINGTON, DC – The negotiations to create a Transatlantic Trade and Investment Partnership between the European Union and the United States are being widely welcomed.
British Prime Minister David Cameron has called the TTIP a “once-in-a-generation prize,” citing potential gains of £80 billion ($125.5 billion) each for the EU and the US and £85 billion for the rest of the world.
For a world weary of waiting for the World Trade Organization’s interminable Doha trade round to conclude, even a bilateral trade initiative may seem like a boon, especially when, as a recent Financial Times editorial pointed out, “bilateral” covers half of the world’s economy.
But there is a serious downside: The deal could hurt developing-country exporters, unless the EU and the US make a concerted effort to protect these actors’ interests.
The feature of the proposed pact that elicits the most excitement – its focus on regulatory barriers like mandatory product standards – should actually incite the greatest concern.
Given low tariffs in the EU and the US – less than 5%, on average – further preferential reductions will not seriously handicap outsiders.
But, when it comes to standards – such as those governing safety, health, and the environment – the market-access requirements are brutal and binary: either you meet the established standard or you do not sell.
As a result, third-country firms’ options will depend on how TTIP standards are established: through harmonization (adoption of a common standard) or mutual recognition (acceptance of goods that meet one another’s established standards).
The first option would enable producers everywhere to take advantage of economies of scale.
But, in some cases, the harmonized standard could be more stringent than some countries’ original standards.
Even though new standards would apply to suppliers from all exporting countries, compliance costs usually vary, meaning that those less equipped to meet higher standards could suffer.
In the late 1990’s, when the EU decided to harmonize standards for aflatoxins (a group of toxic compounds produced by certain molds), eight member states – including Italy, the Netherlands, and Spain – raised their national standards substantially, which is likely to have caused African exports of cereals, dried fruits, and nuts to Europe to decline by as much as $670 million.
With mutual recognition, the EU and the US would accept each other’s standards or conformity-assessment procedures, allowing firms to adhere to the less stringent requirements in each area.
If the policy were extended to third-country firms, it would have a powerful liberalizing impact.
For example, Malaysian television producers could choose to comply with, say, America’s easier-to-meet safety standards, then sell the same product in both markets, reaping the benefits of economies of scale while lowering compliance costs.
If, however, the TTIP excluded third-country firms from the mutual recognition policy, their competitiveness vis-à-vis European and American companies would diminish substantially.
Indeed, our research shows that when mutual-recognition agreements include restrictive rules of origin, intra-regional trade increases – at the expense of trade with other countries – and that developing countries tend to suffer most.
In fact, excessively constraining rules of origin have proved problematic for some of the EU’s previous recognition agreements, such as those governing professional-services standards.
While a Brazilian orange admitted for sale in Portugal can be sold throughout the EU, a Brazilian engineer or accountant licensed in Portugal must fulfill separate licensing requirements to work elsewhere in the EU, hampering much-needed labor mobility by forcing non-European workers to endure costly and inefficient bureaucratic procedures.
Furthermore, when it comes to tariffs and standards, WTO rules are not created equal.
While they protect countries excluded from bilateral or regional tariff agreements, thereby ensuring that integrated markets do not receive additional advantages, few safeguards exist to shield third countries from the fallout of agreements on mandatory standards.
Even in the absence of international rules, the EU and the US could take two actions to ensure that the TTIP does not have adverse consequences for developing economies.
First, they could allow all countries to reap the benefits of a bilateral mutual-recognition deal by agreeing not to impose restrictive rules of origin.
Second, where they do consider harmonization, they could favor the less stringent of the original standards, unless there is credible evidence that it would not support the relevant regulatory objective.
This is akin to a WTO test for departures from established international standards.
If the EU and the US made these two commitments, the rest of the world could follow the TTIP negotiations with hope, rather than trepidation.
A Bad Deal for America’s Future
WASHINGTON, DC – The painfully negotiated US budget legislation that President Barack Obama signed on August 2 combines an increase in America’s government debt ceiling with reductions in federal spending, thus averting the prospect of the first default in the 224-year history of the United States.
But the agreement has three major flaws.
Two of them offset each other, but the third threatens what America needs most in the coming years: economic growth.
The first flaw is that the spending reductions are badly timed: coming as they do when the US economy is weak, they risk triggering another recession.
The measure’s second shortcoming, however, is that the spending reductions that it mandates are modest.
While the legislation does too little to address America’s problem of chronic and rising budget deficits, the damage that it inflicts on the economy in the short term is likely to be limited.
The third and most damaging flaw, however, is that the spending cuts come in the wrong places.
Because the Democrats in Congress have an almost religious commitment to preserving, intact, America’s principal welfare programs for senior citizens, Social Security and Medicare, the legislation does not touch either of them.
These programs’ costs will rise sharply as the 78-million-strong baby-boom generation – those born between 1946 and 1964 – retires and collects benefits, accounting for the largest increase in government spending and prospective deficits in the years ahead.
And, because the Republicans in Congress have an equally strong allergy to raising any taxes, any time, under any circumstances, the bill does not rely at all on tax increases – not even for the wealthiest Americans – for the deficit reduction that it provides.
All of the spending cuts come from the “discretionary” part of the federal budget, which excludes Social Security, Medicare, the Medicaid program for the poor, and interest on the national debt.
That leaves only about one-third of total federal spending from which to cut, and much of that goes to the defense budget, which Republicans will attempt to protect in the future.
So the structure established by the August 2 law concentrates deficit reduction on the “discretionary non-defense” part of the federal budget, which is only about 10% of it.
This is too small a pool of money from which to achieve deficit reduction on the scale that the US will need in the years ahead.
Worse yet, discretionary non-defense spending includes programs that are indispensable for economic growth – and economic growth is indispensable for America’s future prosperity and global standing.
Growth is, in the first place, the best way to reduce the country’s budget deficits.
The higher the growth rate, the more revenues the government will collect without raising tax rates; and higher revenues enable smaller deficits.
Moreover, economic growth is necessary to keep the promise – enormously important to individual Americans – that each generation will have the opportunity to become more prosperous than the preceding one, the popular term for which is “the American dream.”
Just as important for non-Americans, only robust economic growth can ensure that the US sustains its expansive role in the world, which supports the global economy and contributes to stability in Europe, East Asia, and the Middle East.
As Thomas L. Friedman and I explain in our forthcoming book That Used To Be Us: How America Fell Behind in the World It Invented and How We Can Come Back, a crucial factor in America's economic success has been an ongoing public-private partnership, which dates back to the founding of the country, that is imperiled by the pattern of budget cuts established by the August 2 legislation.
That partnership has five components: wider opportunities for education in order to produce a workforce with cutting-edge skills; investment in infrastructure – roads, power plants, and ports – that supports commerce; funds for research and development to expand the frontiers of knowledge in ways that generate new products; an immigration policy that attracts and retains talented people from beyond America’s borders; and business regulations strong enough to prevent disasters such as the near-meltdown of the financial system in 2008 but not so stringent as to stifle the risk-taking and innovation that produce growth.
The first three elements of the American formula for growth cost money, and that money is included in the “discretionary non-defense” part of the federal budget now targeted by the debt-ceiling legislation.
Cutting these programs will lower American economic growth in the long term, with negative consequences both at home and abroad.
Reducing the deficit by cutting funds for education, infrastructure, and research and development is akin to trying to lose weight by cutting off three fingers.
Most of the weight will remain, and one’s life prospects will have worsened significantly.
Reducing deficits in order to raise the debt ceiling was the right thing to do, but the August 2 law does it in the wrong way.
Unless more deficit reduction, which is inevitable, comes from curbing entitlement benefits and increasing revenues, and less from programs vital for economic growth, the result will be a poorer, weaker US – and a more uncertain, if not unstable, world.
A Balanced Look at Sino-American Imbalances
BEIJING – Before July 2007, most economists agreed that global imbalances were the most important threat to global growth.
It was argued that the United States’ rising net foreign debt-to-GDP ratio – the result of chronic current-account deficits – would put a sharp brake on capital inflows, in turn weakening the dollar, driving up interest rates, and plunging the US economy into crisis.
But this scenario failed to materialize.
Instead, the crisis stemmed from the US sub-prime debacle, which quickly dragged the global economy into its deepest recession since the 1930’s.
Most economists failed to foresee the economic dynamics that actually led to the crisis, because they failed to pay enough attention to the rapid increase in US total debt.
Instead, they focused exclusively on US foreign debt, ignoring household debt (mortgage and consumer debt), public debt, business debt, and financial debt.
In particular, they should have paid greater attention to the sustainability of US mortgage and consumer debt.
In 2007, the mortgage and consumer debt-to-GDP ratio was more than 90%, compared to 24% for net foreign debt.
Of course, the various components of debt differ considerably in their character and sources of financing – and thus in their sustainability.
But all parts of a country’s total debt and how it is financed are interconnected.
This means two things.
First, funds from different sources of finance are interchangeable to a certain degree: deficiency of funds for one component of total debt can be supplemented by surplus funds originally aimed at financing other components.
Second, troubles in any single component of total debt will have an impact on all the other components.
After the subprime crisis erupted, mortgage and consumer debt was paid down by households either with their savings or by default.
The fall in US total debt, and the narrowing of the financing gap between total debt and domestic funds, led to a significant improvement in the US current-account deficit in 2008-2009, disproving US Federal Reserve Board Chairman Ben Bernanke’s claim that the deficit was caused by a global “saving glut.”
Indeed, America’s current-account position strengthened despite the dollar’s appreciation in the face of safe-haven demand.
Unfortunately, as a result of the private-sector deleveraging and an increase in household savings, the US economy, driven by debt and consumption, slid into recession.
To offset the negative impact of private-sector deleveraging on growth, the US government has maintained expansionary fiscal and monetary policies.
Now, with household debt sustained on a knife-edge after feverish government intervention, the fiscal position has deteriorated dramatically and the current-account balance has worsened again.
Sustainability of public debt has replaced sustainability of private debt as the biggest threat to financial stability, and the focus of debate about the US current account has shifted from the sustainability of foreign debt to the impact of reducing the external deficit on growth and employment.
The dilemma facing US policymakers is how to stimulate growth while lowering the level of total debt.
The most important way to achieve both objectives is to increase exports by strengthening US competitiveness.
But where will increased competitiveness come from?
Devaluation of the dollar could improve US competitiveness in the short run, but it is not a solution.
Because rapid fiscal deterioration now has investors worrying about capital losses on US government securities, devaluation would make foreigners more hesitant to finance America’s budget deficit.
If foreign financing is not forthcoming, yields on US government debt will rise and the US economy will fall back into recession.
In the long run, America’s growth pattern must undergo a structural shift from reliance on debt and consumption one based on Americans vaunted capacity for creativity and innovation.
Only then will America improve its competitiveness enough to allow the government to reduce both private and public debt to sustainable levels while maintaining a respectable growth rate.
But neither improved competitiveness, nor reduction of total debt, can be achieved overnight.
In the short run, the US current-account deficit will remain, regardless of which country runs bilateral surpluses.
Thus, China’s continued reinvestment of its current-account surplus in US government securities is of utmost important for US growth and financial stability.
Given that America benefits mightily from China’s purchases of US government securities, it is difficult to understand why the US government and Congress have been complaining so much about the bilateral current-account deficit.
It is also difficult to grasp why China is so reluctant to reduce its bilateral surplus, given meager returns on its massive holdings of US government securities and a sustained risk of large capital losses in the future.
The good news is that, following President Hu Jintao’s recent visit to Washington, both America and China have been taking positive steps to resolve their differences over the bilateral current-account balance.
That augurs well for a more rational and constructive Sino-American dialogue on global imbalances, which would certainly benefit the global economy.
A Banking Union Baby Step
BRUSSELS – At the beginning of the financial crisis, it was said that banks were, in Charles Goodhart’s crisp phrase, “international in life, but national in death.”
At the time (2008-2009), large international banks had to be rescued by their home countries’ governments when they ran into trouble.
But the problem now in Europe is the opposite: banks are “national in life, but European in death.”
In Spain, for example, local savings banks (cajas) financed an outsize real-estate boom.
As the boom turned to bust, the losses threatened to overwhelm the capacity of the Spanish state, and the problem became European, because it threatened the very survival of the euro.
The Spanish case is symptomatic of a larger problem.
National supervisors always tend to minimize problems at home.
Their instinct (and their bureaucratic interest) is to defend their countries’ “national champion” bank(s) abroad.
But their resistance to recognizing problems at home runs even deeper.
Until recently, the Spanish authorities maintained that the problems in their country’s real-estate sector were temporary.
To acknowledge the truth would have meant admitting that for years they had overlooked the build-up of an unsustainable construction boom that now threatens to bankrupt the entire country.
In the case of Ireland, the situation was initially not much different.
When problems started to surface, the finance minister at the time initially claimed that the country would carry out “the cheapest bank rescue ever.”
Given national supervisors’ predictable tendency not to recognize problems at home, it seemed natural that the cost of cleaning up insolvent banks should also be borne at the national level.
It thus seemed to make sense that even in the eurozone, banking supervision remained largely national.
The recently created European Banking Authority has only limited powers over national supervisors, whose daily work is guided mainly by national considerations.
But reality has shown that this approach is not tenable.
Problems might originate at the national level, but, owing to monetary union, they quickly threaten the stability of the entire eurozone banking system.
At their June summit, Europe’s leaders finally recognized the need to rectify this situation, transferring responsibility for banking supervision in the eurozone to the European Central Bank.
Given that financial integration is particularly strong within the monetary union, putting the ECB in charge was an obvious choice.
Moreover, the ECB already bears de facto responsibility for the stability of the eurozone’s banking system.
But, until now, it had to lend massive amounts to banks without being able to judge their soundness, because all of that information was in the hands of national authorities who guarded it jealously and typically denied problems until it was too late.
Putting the ECB in charge should also help to stop the creeping disintegration process, which is not publicly visible, but is very real nonetheless.
Just ask any of the large international banking groups headquartered in financially stressed eurozone countries.
Consider the case of a bank headquartered in Italy, but with an important subsidiary in Germany.
The German operations naturally generate a surplus of funds (given that savings in Germany far exceed investment on average).
The parent bank would like to use these funds to reinforce the group’s liquidity.
But the German supervisory authorities consider Italy at risk and thus oppose any transfer of funds there.
The supervisor of the home country (Italy) has the opposite interest.
It would like to see the “internal capital market” operate as much as possible.
Here, too, it makes sense to have the ECB in charge as a neutral arbiter with respect to these opposing interests.
But, while putting the ECB in charge of banking supervision solves one problem, it creates another: can national authorities still be held responsible for saving banks that they no longer supervise?
Economic (and political) logic requires that the eurozone will soon also need a common bank rescue fund.
Officially, this has not yet been acknowledged.
But that is often the way that European integration proceeds: an incomplete step in one area later requires further steps in related areas.
This incremental approach has worked well in the past; indeed, today’s European Union resulted from it.
But a financial crisis does not give policymakers the time that they once had to explain to voters why one step required another.
Abba Eban: The Voice of Israel
For almost two generations, Abba Eban was Israel's voice - its messenger to the high and mighty among the nations as well as to the Jewish people all over the world.
Since he first appeared at the side of Dr. Chaim Weizmann in the late 1940's during the struggle for Jewish statehood and sovereignty, few people could articulate the Zionist and later the Israeli case with comparable eloquence and conviction.
With his Churchillian prose and almost Shakespearean cadences, his mellifluous phrases and sonorous voice carried for decades a message of hope from a people that could have lost all hope and trust in humanity after the horrors of World War II.
As Ambassador to the United States and the UN, and later as Foreign Minister, he represented an Israel with which the world's liberal imagination could identify.
Larger and more powerful nations were envious of so a powerful spokesman, and his speeches became textbook models for statesmen and diplomats in distant lands.
His books - which he found time to write despite the hectic demands of diplomacy - were a unique combination of enormous erudition and crystalline clarity.
His scholarly training and rhetorical gifts supplemented each other in a rare fashion.
Rarely has a small country been represented by a statesman of such world stature: only Thomas Masaryk and Jan Smuts come to mind to compare with him.
He was a true patriot, in the old-fashioned sense of the word: proud of his people, but never ethno-centric; a man of the world, but deeply embedded in Jewish cultural heritage; focused on the plights and tribulations of the Jewish people, but never losing the universal horizon of mankind.
In short, he was a modern Jew in the best sense of the word.
It was said of Prime Minister Levi Eshkol that he spoke seven languages, all of them in Yiddish.
Of Eban it could be said that he spoke ten languages, and all of them with an Oxford/Cambridge accent.
Yet what appealed to the outside world was not always an asset in the rough and tumble of Israeli politics.
Perhaps Eban was too urbane, too much of a scholar and gentleman to be able to make it - in Disraeli's phrase - to the top of the greasy pole.
Together with Golda Meir and Moshe Dayan he had to leave government in 1974 in the wake of the Yom Kippur War.
He could hardly have been held responsible for the hubris which led to the avalanche of 1973, yet it nonetheless brought him down as well.
He never found his way back, and when confronted with the New Politics of primaries and populism, he became dispirited when he could not cope with this new style.
In the international arena, Eban's pen was his sword, and the spoken word his lance.
He was less adept in political infighting in Israel.
He could be a fierce turf fighter, yet it is fair to say that he could have fought harder for his moderate and dovish views in the post-1967 government in which he served.
It is far from clear if he would have prevailed, given his lack of an independent political base, but his international prestige and standing might have given him a chance if he would have chosen to throw the gauntlet.
He never did.
Eban's silence in the last years was not only a product of his disenchantment with Israeli politics or his failing health.
At a time when public debate in Israel is torn between pseudo-religious nationalist fanatics and anti-Zionists masquerading as post-modernists, the moral certitudes of Eban, for all their urbanity, may sound shallow.
But nation-building requires moral stamina, and Eban provided it to his people and the world in abundance.
Without having spoken to Eban in the last few years, I have no doubt that he would be extremely unhappy about the turn of events after the failure of Camp David and Taba in 2000-01, and the present course of Israeli policies would fill him with foreboding.
Yet in all probability he would have been even more deeply disappointed in the inability of the Palestinians to come to terms with the existence of the Jewish state.
As an Arabist by training, immersed in Arab and Muslim culture, he always hoped that the glorious Arab past could be rejuvenated, that an Arab and Muslim culture of tolerance could triumph over fanaticism and extremism.
This was the bedrock of his hope for reconciliation between Jew and Arab.
That this Arab renaissance - to use the phrase of the great Palestinian scholar George Antonius - did not take place may have been Eban's greatest disappointment.
Despite the high-born image Eban projected, he was an extremely vulnerable person: what some occasionally discerned as traits of vanity may have had their origins in his humble origins.
While appearing to own the Queen's English, Eban was not to the manor born: he came from the extremely modest fringes of Anglo-Jewry.
He was, in the true sense of the word, a self-made man, whose pluck, ambition, drive and inner belief in his destiny carried him to the pinnacle of his achievements.
His was the aristocracy of the spirit.
In this Abba Eban was a true representative of the people he so gloriously represented.
A Berlin Consensus?
HONG KONG – A recent trip to Berlin brought back memories of an earlier visit in the summer of 1967, when I was a poor student who marveled at the Wall that would divide and devastate an entire society for another two decades.
Berlin today is vibrant and rejuvenated, rebuilt by the German peoples' hard work and sacrifice to unify the country, and an apt setting for the conference of the Institute for New Economic Thinking (INET), which I was there to attend.
The conference’s theme was “Paradigm Lost,” with more than 300 economists, political scientists, systems analysts, and ecologists gathering to rethink economic and political theory for the challenges and uncertainty posed by growing inequality, rising unemployment, global financial disarray, and climate change.
Almost everyone agreed that the old paradigm of neoclassical economics was broken, but there was no agreement on what can replace it.
Nobel laureate Amartya Sen attributed the European crisis to four failures – political, economic, social, and intellectual.
The global financial crisis, which began in 2007 as a crisis of US subprime lending and has broadened into a European sovereign-debt (and banking) crisis, has raised questions that we cannot answer, owing to over-specialization and fragmentation of knowledge.
And yet there is no denying that the world has become too intricate for any simple, overarching theory to explain complex economic, technological, demographic, and environmental shifts.
In particular, the rise of emerging markets has challenged traditional Western deductive and inductive logic.
Deductive inference enables us to predict effects if we know the principles (the rule) and the cause.
By inductive reasoning, if we know the cause and effects, we can infer the principles.
Eastern thinking, by contrast, has been abductive, moving from pragmatism to guessing the next steps.
Abductive inference is pragmatic, looking only at outcomes, guessing at the rule, and identifying the cause.
Like history, social-scientific theory is written by the victors and shaped by the context and challenges of its time.
Free-market thinking evolved from Anglo-Saxon theorists (many from Scotland), who migrated and colonized territories, allowing fortunate individuals to assume that there were no limits to consumption.
European continental thinking, responding to urbanization and the need for social order, emphasized institutional analysis of political economy.
Thus, the emergence of neoclassical economics in the nineteenth century was very much influenced by Newtonian and Cartesian physics, moving from qualitative analysis to quantifying human behavior by assuming rational behavior and excluding uncertainty.
This “predetermined equilibrium” thinking – reflected in the view that markets always self-correct – led to policy paralysis until the Great Depression, when John Maynard Keynes’s argument for government intervention to address unemployment and output gaps gained traction.
By the 1970’s, the neoclassical general-equilibrium school captured Keynesian economics through real-sector models that assumed that “finance is a veil,” thereby becoming blind to financial markets’ destabilizing effects.
Economists like Hyman Minsky, who tried to correct this, were largely ignored as Milton Friedman and others led the profession’s push for free markets and minimal government intervention.
But then technology, demographics, and globalization brought dramatic new challenges that the neoclassical approach could not foresee.
Even as the world’s advanced countries over-consumed through leveraging from derivative finance, four billion of the world’s seven billion people began moving to middle-income status, making huge demands on global resources and raising the issue of ecological sustainability.
New thinking is required to manage these massive and systemic changes, as well as the integration of giants like China and India into the modern world.
A change of mindset is needed not just in the West, but also in the East.
In 1987, the historian Ray Huang explained it for China:
“As the world enters the modern era, most countries under internal and external pressure need to reconstruct themselves by substituting the mode of governance rooted in agrarian experience with a new set of rules based on commerce.…This is easier said than done.
The renewal process could affect the top and bottom layers, and inevitably it is necessary to recondition the institutional links between them.
Comprehensive destruction is often the order; and it may take decades to bring the work to completion.”
Using this macro-historical framework, we can see Japanese deflation, European debt, and even the Arab Spring as phases of systemic changes within complex structures that are interacting with one another in a new, multipolar global system.
We are witnessing simultaneous global convergence (the narrowing of income, wealth, and knowledge gaps between countries) and local divergence (widening income, wealth, and knowledge gaps within countries).
Adaptive systems struggle with order and creativity as they evolve.
As the philosopher Bertrand Russell presciently put it: “Security and justice require centralized governmental control, which must extend to the creation of a world government if it is to be effective.
Progress, on the contrary, requires the utmost scope for personal initiative that is compatible with social order.”
A new wave of what the economist Joseph Schumpeter famously called “creative destruction” is under way: even as central banks struggle to maintain stability by flooding markets with liquidity, credit to business and households is shrinking.
We live in an age of simultaneous fear of inflation and deflation; of unprecedented prosperity amid growing inequality; and of technological advancement and resource depletion.
Meanwhile, existing political systems promise good jobs, sound governance, a sustainable environment, and social harmony without sacrifice – a paradise of self-interested free riders that can be sustained only by sacrificing the natural environment and the welfare of future generations.
We cannot postpone the pain of adjustment forever by printing money.
Sustainability can be achieved only when the haves become willing to sacrifice for the have-nots.
The Washington Consensus of free-market reforms for developing countries ended more than two decades ago.
The INET conference in Berlin showed the need for a new one – a consensus that supports sacrifice in the interest of unity.
A Better and Safer Europe
To many, myself included, NATO's enlargement to take in, among others, the Baltic states of Estonia, Latvia, and Lithuania -- which were once Soviet republics -- is an impossible dream come true.
When the idea was first floated some 10 years ago, expansion into the Baltics was taken seriously by few people.
Until recently, Russia's robust opposition to the idea posed a serious obstacle, because it sharpened the impression that Russia regarded its so-called "near abroad" as a zone of special interest and influence.
NATO's enlargement makes it crystal clear that no country in the new Europe can be regarded as part of another country's "zone."
It assures the three small Baltic countries that the nightmare of occupation by big neighbors (Hitler's Reich and Stalin's USSR), which they endured for half-a-century -- will not be repeated.
By putting paid to any revanchist tendencies in Russia concerning the Baltics, Europe is made a safer place, and Russia is helped in its effort to redefine itself as a national state and not an empire.
Expansion will also create a better Europe because enlargement widens the territory in which countries are committed to NATO's political values, including individual rights as well as the rights of minorities.
Fortunately Russia now seems to grasp the value of this political aspect of NATO-enlargement.
Rightly so: enlargement of NATO is not an "expansion" that threatens Russia or other countries which strive for democratic political reforms.
On the contrary, expansion takes away the worries - be they real or imagined - that surround the situation of the large Russian-speaking populations that now live outside of Russia but within the borders of the former Soviet Union.
The civil rights of the Russian minorities in the Baltics and elsewhere are now enshrined in law, due in no small part to NATO demands.
Those civil rights initiatives on the part of NATO reflect the increasingly workmanlike way that Russia, Europe, and America now work out their disagreements.
Indeed, enlargement of NATO comes only a few days after a deal was struck between Russia and the EU on the tricky question of access to the Russian enclave of Kaliningrad.
This small piece of Russia, with 1 million inhabitants and bordering on the Baltic Sea, is squeezed between Poland and Lithuania, two future members of the EU.
This could have incited a complicated situation where Russians were faced with tough visa requirements when travelling between Kaliningrad and Russia proper.
A deal was struck between President Putin and the EU that makes access much easier without compromising the status of Lithuania and Poland within the EU-regime.
This, in turn, created once again the kind of win-win situation that is so important for future relations between the EU and Russia.
When the enlargement of the EU into Central and Eastern Europe is finally decided by the European Council in Copenhagen next month, the conclusion is clear: Europe has become a much better and safer place to live in, thanks to the decisions taken by NATO and the EU during the crucial autumn of 2002.
But this is no cause for complacency. For the really hard work is only now beginning: dealing with all the internal practical and political problems that these enlargements will bring, as well as reckoning with countries in the membership waiting rooms, in particular Russia.
Relations with Russia are of vital importance if Europe is to continue to improve the quality of life of its citizens and address concerns of safety.
The common threat of international terrorism must be faced jointly.
We need to convince each other that the fight against this common enemy has to be fought with a keen eye to balancing the needs of security with those of human and minority rights.
Kaliningrad could be a litmus test of these relations.
The first hurdle has been overcome with the agreement on access to the enclave.
The next hurdle is to support Kalingrad's fight against disease and crime as well as strengthening its economic and social structures.
This calls for generosity from the EU and flexibility from Moscow.
In a wider context this could lead to a strengthening of the so-called Northern Dimension of the EU, where the goal is a free trade area to include all the countries around the Baltic Sea.
Such a grand project can be achieved if the political will exists and asserts itself.
Only a few years ago EU and NATO enlargement were regarded as wild dreams.
But determination and political will has now made the dreams come true.
Now is the time to set new ambitious goals for Europe.
A Better Way to Reduce Nuclear Risks
In 1977, when I served in President Jimmy Carter's State Department, I was sent to India to dissuade that country's leaders from developing a nuclear bomb.
My hosts replied that they needed to keep up with China.
I said that Pakistan would inevitably follow suit and the world would become less safe.
India promised that it would not export its weapons technology.
So far as we know, its leaders have kept their word.
But revelations about the nuclear weapons smuggling network organized by A. Q. Khan, the father of Pakistan's bomb, confirm the danger I predicted back then.
Some call Khan's network an effort to spread an "Islamic bomb," but given that North Korea was on the list of recipients along with Libya and Iran, it might better be termed a corrupt bomb.
As events in Pakistan illustrate, the spread of nuclear technology does not extend the stability that comes with mutual deterrence.
Rather, it increases the prospects of corrupt leakage that may allow terrorist groups access to nuclear weapons.
That makes everyone less safe.
Any pathological group of extremists could destroy New Delhi, Tokyo, Paris, or any city they chose.
Now the world's attention is focussed on Iran, one recipient of Pakistani technology, as the country seemingly keenest to create its own nuclear arsenal.
According to the International Atomic Energy Agency (IAEA), Iran began enriching uranium at a pilot centrifuge plant last August, and is constructing larger underground enrichment facilities.
Iran proclaims that its programs are for peaceful generation of nuclear energy, but inspectors have already found traces of highly enriched weapons-grade uranium.
Last October, Mohamed El Baradei, the head of the IAEA, announced that Iran had accepted enhanced inspection procedures.
In addition, after visits by the French, British, and German foreign ministers, Iran announced a temporary suspension of its enrichment program.
Now it hints that it may resume enrichment, and recent press reports about the imports from Pakistan suggest Iran failed to disclose everything to the IAEA.
Iran claims that as a party to the Non-Proliferation Treaty, it has the right to enrich uranium for peaceful purposes.
Correct, because the NPT was born with a loophole.
Even if a country agrees to broad ranging IAEA inspections, it can legally accumulate enriched uranium (or reprocessed plutonium) under the guise of a peaceful energy program, and then suddenly declare that circumstances have changed and withdraw from the treaty - with the ability to produce nuclear weapons on short notice.
If Iran did this, it would not only add to the dangers in an unstable region, but would likely begin a process of unravelling the non-proliferation regime worldwide.
Iran may ask what right others have to demand that it forego nuclear weapons.
The answer lies both in the fact that it promised not to do so when it signed the NPT and in the consequences that it would impose on others.
For these reasons, President Bush declared an Iranian nuclear weapon unacceptable.
However, America's unilateral options are limited.
Not only is the US military busy trying in Iraq, but the way the US went into Iraq - which proved to have fewer nuclear capabilities than Iran - undermined American credibility, making it difficult to recruit allies to contain Iran's nuclear ambitions.
Fortunately, there is a multilateral option and an existing precedent.
In the mid-1970's, many parties to the NPT planned to import and develop enrichment and reprocessing facilities.
Realizing the threat to the non-proliferation regime, countries as diverse as the Soviet Union, France, Germany, and Japan formed a "Nuclear Suppliers Group" that restrained the export of enrichment and reprocessing facilities.
That plugged part of the loophole in the treaty without amending it.
Today, such countries should join together to offer Iran (and others) a deal.
Countries that wish to develop nuclear energy but not nuclear bombs should be given international guarantees of fuel supply and disposal of spent fuel.
For example, Russia, which is helping Iran construct a nuclear reactor at Bushehr, should offer Iran a guarantee of low enriched uranium fuel and reprocessing of the reactor's spent fuel by sending it back to Russia if Iran agrees to forego enrichment and reprocessing.
This deal could then be given teeth by the UN Security Council.
The Council would declare that further proliferation of nuclear weapons is a threat to peace, and that any country moving in that direction is subject to sanctions.
Such a resolution would also include a carrot by guaranteeing Iran access to the non-dangerous parts of the nuclear energy fuel cycle.
The pot could be further sweetened by offers to relax existing sanctions and provide a security guarantee if Iran remains non-nuclear.
European foreign ministers have already expressed their concerns about Iran's nuclear program.
Russia indicates that it is willing to provide such fuel services.
It is time for the Security Council to try to internationalize the most dangerous parts of the nuclear fuel cycle.
It is not too late to learn the lessons of the misadventures of A. Q. Khan.
A Big Chance for Small Farmers
NEW YORK – The G-8’s $20 billion initiative on smallholder agriculture, launched at the group’s recent summit in L’Aquila, Italy, is a potentially historic breakthrough in the fight against hunger and extreme poverty.
With serious management of the new funds, food production in Africa will soar.
Indeed, the new initiative, combined with others in health, education, and infrastructure, could be the greatest step so far toward achieving the Millennium Development Goals, the internationally agreed effort to reduce extreme poverty, disease, and hunger by half by 2015 .
During 2002-2006, I led the United Nations Millennium Project, which aimed to achieve the Millennium Development Goals, for then-UN Secretary General Kofi Annan.
One cornerstone of the project was “smallholder farmers,” meaning peasant farm families in Africa, Latin America, and Asia – working farms of around one hectare (2.5 acres) or less.
These are some of the poorest households in the world, and, ironically, some of the hungriest as well, despite being food producers.
They are hungry because they lack the ability to buy high-yield seeds, fertilizer, irrigation equipment, and other tools needed to increase productivity.
As a result, their output is meager and insufficient for their subsistence.
Their poverty causes low farm productivity, and low farm productivity reinforces their poverty.
It’s a vicious circle, technically known as a poverty trap.
The UN Millennium Project’s Hunger Task Force, led by two world-leading scientists, M. S. Swaminathan and Pedro Sanchez, examined how to break this vicious circle.
The Hunger Task Force determined that Africa could substantially increase its food production if help was given to smallholder farmers, in the form of agricultural inputs. The Millennium Project recommended a big increase in global funding for this purpose.  Drawing on that work and related scientific findings, Annan launched a call in 2004 for an African Green Revolution, based on an expanded partnership between Africa and donor countries.
Many of us, notably current UN Secretary General Ban Ki-moon, have worked hard to make this possible, with Ban repeatedly emphasizing the special emergency arising from the global food, financial, and energy crises of the past two years.
The G-8 announcement reflects these years of effort, and of course the boost from the leadership of US President Barack Obama, Spanish Prime Minister Jose Luis Zapatero, Australian Prime Minister Kevin Rudd, World Bank President Robert Zoellick, European Commissioner Louis Michel, European Parliamentarian Thijs Berman, and others.
Now the key is to make this effort work.
The lessons of history are clear.
Getting seed and fertilizer to smallholder farmers at highly subsidized prices (or even free in some cases) will make a lasting difference.
Not only will food yields rise in the short term, but farm households will use their higher incomes and better health to accumulate all sorts of assets: cash balances, soil nutrients, farm animals, and their children’s health and education.
That boost in assets will, in turn, enable local credit markets, such as micro-finance, to begin operating.
Farmers will be able to buy inputs, either out of their own cash, or by borrowing against their improved creditworthiness.
A consensus has now been reached on the need to assist smallholders, but obstacles remain.
Perhaps the main risk is that the “aid bureaucracies” now trip over each other to try to get their hands on the $20 billion, so that much of it gets taken up by meetings, expert consultations, overhead, reports, and further meetings. “Partnerships” of donors can become an expensive end in themselves, merely delaying real action.
If donor governments really want results, they should take the money out of the hands of thirty or more separate aid bureaucracies and pool it in one or two places, the most logical being the World Bank in Washington and the International Fund for Agricultural Development (IFAD) in Rome.
One or both of these agencies would then have an account with several billion dollars.
Governments in hunger-stricken regions, especially Africa, would then submit national action plans that would provide details on how they would use the donor funds to get high-yield seeds, fertilizer, irrigation, farm tools, storage silos, and local advice to impoverished farmers.
An independent expert panel would review the national plans to verify their scientific and managerial coherence.
Assuming that a plan passes muster, the money to support it would quickly be disbursed.
Afterward, each national program would be monitored, audited, and evaluated.
This approach is straightforward, efficient, accountable, and scientifically sound.
Two major recent success stories in aid have used this approach: the Global Alliance on Vaccines and Immunizations, which successfully gets immunizations to young children, and the Global Fund to Fight AIDS, TB, and Malaria, which supports national action plans to battle these killer diseases.
Both have saved millions of lives during the past decade, and have paved the way to a new more efficient and scientifically sound method of development assistance.
Not surprisingly, many UN agencies and aid agencies in rich countries fight this approach.
All too often, the fight is about turf, rather than about the most effective way to speed help to the poor.
Obama, Rudd, Zapatero, and other forward-thinking leaders can therefore make a huge difference by following up on their pledges at the G-8 and insisting that the aid really works.
The bureaucracies must be bypassed to get help to where it is needed: in the soil tilled by the world’s poorest farm families.
A Black and White Question
NEW YORK – In the afternoon of July 16 two men appeared to be breaking into a fine house in an expensive area of Cambridge, Massachusetts.
Alerted by a telephone call, a policeman arrived smartly on the scene.
He saw one black male standing inside the house and asked him to come out.
The man refused.
He was then told to identify himself.
The man, still refusing to step out, said he was a Harvard professor, showed his ID, and warned the cop not to mess with him.
He said something about black men in America being singled out, and asked the cop, who was white, for his name and identification.
The cop, joined by several colleagues, arrested the professor for disorderly conduct.
We now know that the professor had broken into his own home, with the help of his chauffeur, because the door was jammed.
What was unusual here was not the cop’s heavy-handedness.
Most people in the US know that if you talk back to the police, they will get nasty very fast.
The fact that the man was black might or might not have made the cop go for his handcuffs even sooner than he might normally have done.
That, too, would not have been unusual.
What made this case special was that Henry Louis “Skip” Gates is one of the most celebrated professors in the country, famous for his books, his articles, and numerous television appearances.
He is a grandee, a mover and shaker in the academic and media world, a friend of President Barack Obama. That is why he warned the cop, Sgt. James Crowley, a veteran of the Cambridge police force, not to mess with him.
Class and race overlap in the US.
In this instance, it is impossible to pry them apart.
Gates, deeply conscious, indeed a specialist of the terrible history of race relations in his country, instinctively assumed that he was a victim of prejudice.
From his words it appears that he was equally conscious of not getting the proper respect due to a distinguished Harvard professor and media celebrity. As he put it to his daughter in an interview published online: “[Crowley] should have gotten out of there and said, ‘I’m sorry, sir, good luck.
Loved your [television] series—check with you later!’”
Alas, Sgt.Crowley had never heard of Professor Gates. A local man whose brothers all serve in the police force, a sports fan, and an amateur basketball coach, Crowley does not move in the same social circles as Gates.
As it happens, the charges were duly dropped, and there the case might have rested if President Obama, tired and frustrated after weeks of fighting for his healthcare bill, had not weighed in on behalf of his “friend” Gates, and called the police “stupid.”
Both he and Gates then spoke of “learning” from the incident.
Gates might even be planning a television documentary on racial profiling.
One thing to be learned, if we didn’t know this already, is how close racial sensitivities are to the surface of US life, despite the election of a black president.
The complexities of black anger, white guilt, and of black, and white fear, are so vexed that most Americans prefer not to talk about race at all. The field is too full of mines.
One of Obama’s great achievements is that he made it into a serious topic through the brilliance and subtlety of his rhetoric.
And there remains plenty to talk about: the grotesquely disproportionate number of black men in US prisons; the lack of educational opportunities in poor, mostly black areas; the appalling healthcare system; and the very real brutality used by police officers against blacks, who don’t have the privilege of a Harvard ID.
It is probably true that many white policemen, even if they are trained to avoid racial profiling, as Sgt. Crowley was, need to be convinced that a black man can be at home in one of the finer houses of Cambridge, or any other American city.
But is the Gates affair the right way to enter into this discussion?
One might argue that it
There is, however, a danger that it will have an adverse affect on the necessary national discussion about race.
By having made such a big issue out of what was in fact a relatively minor event Gates could be accused of trivializing much worse instances of abuse.
Indeed, we don’t even know for certain whether this was such an instance.
Crowley never mentioned the color of Gates’ skin.
There was no question of violence. There were just very raw nerves and hypersensitivity to hints of disrespect, on the part of the professor, and of the cop.
Outrage about a professor who is not to be messed with is not the best way to discuss the plight of countless, poor, anonymous people, whom most of us find it too easy to ignore.
A Bollywood Bride for Sarkozy?
PARIS &#45;&#45; Ever since French President Nicolas Sarkozy took himself off his country’s most-eligible-bachelor list by publicly acknowledging his affair with supermodel-turned-pop-musician Carla Bruni during a romantic trip to Euro Disney, he’s run into trouble.
His ratings have dipped below 50% for the first time.
Older French citizens don’t find the public spectacle of their leader in love very amusing.
Abroad, Egyptian lawmakers were so exercised over the prospect of the French head of state sharing a bed with his girlfriend that several vented their disapproval on the floor of the parliament.
Likewise, India is all in a quandary over how to handle protocol during Sarkozy’s impending visit to the subcontinent as the guest of honor at the country’s Republic Day celebrations on January 26.
Should the First Girlfriend have her own motorcade, as a first lady would?
Meanwhile, the same hard-right Hindu groups that protest Valentine’s Day as a decadent Western holiday have warned that if Sarkozy arrives with his girlfriend in tow, they’ll be out in the streets to welcome him.
This controversy has threatened to cast a pall over a much-heralded summit between two of the world’s great democracies.
With lucrative deals at stake for the big-ticket products that drive the French economy – military hardware, nuclear power plants, and Airbus planes – France has a strong interest in a successful summit in India.
So, as rumors fly of secret marriage ceremonies either already concluded or in the works, could the trouble brewing in India over the French president’s very public love life be behind the rush to have the couple legally wed?
The news in Sarkozy’s favored media outlet
It’s “serious,” the smitten president admitted.
But he refused, even under direct questioning by reporters, to reveal an exact date.
“You’ll probably find out after it’s happened,” he taunted.
Rumor has it the couple has set February 8 or 9 for the wedding. Others say that Sarkozy has already outsmarted the media by secretly marrying in the Elysee Palace, even as he was dodging wedding questions.
If that is true, then Sarkozy missed the romantic opportunity of a lifetime.
If the couple sizzled for cameras with Luxor and Petra as the backdrop, just imagine how hot things could get at the most romantic spot on Earth, the Taj Mahal.
And, given the current rage for all things Bollywood in France, a lavish Indian wedding would be fitting.
Bruni’s own life path closely resembles any number of Bollywood stars who have made the transition from model to actress.
A comely brunette who sings is perfect for a Bollywood makeover.
The Indian government will be nothing if not relieved to see the first girlfriend made a wife.
As one of India’s leading daily newspapers, the
Despite the sometimes downright pornographic on-screen writhing of Bollywood starlets, India is still a deeply conservative society.
Divorce is anathema.
(Sarkozy is now twice divorced.)
And, while mistresses abound among the privileged classes, they do not strut publicly by their power-mates’ sides.
Kissing and fondling in public, even by spouses, is taboo.
In this respect, India more resembles the France with which Sarkozy wants to make a clean break than the current one.
Most Indians, as it seems many French, would prefer not to shed the “hypocrisy” Sarkozy laments on the part of his predecessors (read: former French President François Mitterrand, who had a child with his mistress about whom the public knew nothing until the man’s funeral).
Sarkozy, of all people, should know that a large part of the gravitas of office derives from pomp and circumstance.
Statecraft is a realm where appearances are meant to be deceiving.
When Sarkozy, who otherwise has such finely tuned media instincts, protests that he’s no different from any other man, he comes dangerously close to confusing the office and the person of the president.
Most French people could only dream of an exotic wedding in India.
Sarkozy could make that dream come true.
If he really is as head-over-heels in love with Bruni as he claims, and plans to marry her imminently, why not take advantage of his upcoming trip to India and make this a wedding to remember?
He could meet his bride seated majestically on the caparison of an elaborately decorated elephant, and she would look ravishing swathed and bejeweled in Indian finery.
The “bling-bling” president, as Sarkozy has been dubbed, can wear all the gold he wants and heap yet more diamonds on his bride.
The cameras would roll, Indians would smile, and France would be treated to a Bollywood spectacle beyond its wildest dreams.
And if it’s too late for the wedding, there’s always the reception.
A Bomb in Every Reactor
BERLIN – Twenty-five years after the nuclear disaster at Chernobyl, the ongoing catastrophe at the Fukushima nuclear reactor in Japan has – it must be hoped – made clear once and for all that the purported blessings of the nuclear age are mere illusions: nuclear power is neither clean nor safe nor cheap.
Indeed, the opposite is true. Nuclear power is saddled with three major unresolved risks: plant safety, nuclear waste, and, most menacing of all, the risk of military proliferation.
Moreover, the alternatives to nuclear energy – and to fossil fuels – are well known and technically much more advanced and sustainable.
Taking on nuclear risk is not a necessity; it is a deliberate political choice.
Fossil-fuel and nuclear energy belong to the technological utopias of the nineteenth and twentieth centuries, which were based on a belief in the innocence of the technologically feasible and on the fact that, at the time, only a minority of people worldwide, largely in the West, benefited from technological progress.
By contrast, the twenty-first century will be informed by the realization that the global ecosystem and its resources, which are indispensable for human survival, are finite, and that this implies an enduring responsibility to preserve what we have.
Meeting this imperative entails both an enormous technological challenge and an opportunity to redefine the meaning of modernity.
The energy future of nine billion people, which is what the world population will be in the middle of the century, lies neither in fossil fuels nor in nuclear energy, but in renewable energy sources and dramatic improvements in energy efficiency.
We already know this.
Why, then, do the most advanced countries, in particular, take on the risk of a mega-catastrophe by seeking to create energy from radioactive fission?
The answer, ultimately, doesn’t lie with any civilian use of nuclear energy, but first and foremost with its military applications.
The energy derived from splitting uranium and plutonium atoms was originally used for the ultimate weapon, the atomic bomb.
Being a nuclear power provides sovereign states with protection and prestige.
Even today, the Bomb divides the world into two classes: the few states have it, and the many that do not.
The old Cold War world order was based on the nuclear arms race between the two superpowers, the United States and Soviet Union.
To stop others from trying to become nuclear powers, which would have multiplied and spread the risk of nuclear confrontation, the Non-Proliferation Treaty (NPT) was framed in the 1960’s. To this day, it governs the relationships between the nuclear powers and the rest of the world, imposing renunciation on the have-nots and nuclear-disarmament obligations on the haves.
Of course, the NPT has repeatedly been violated or circumvented by states that never subscribed to it.
To this day, therefore, the risk remains that the number of nuclear powers will increase, particularly given small and medium powers’ hope to enhance their prestige and position in regional conflicts.
Iran is the most current example of this.
The nuclearization of these not-always-stable states threatens to make the regional conflicts of the twenty-first century much more dangerous, and will also substantially increase the risk that nuclear weapons eventually end up in the hands of terrorists.
Despite the NPT, a clear separation between civilian and military use of nuclear energy hasn’t always worked, or worked completely, because the NPT’s rules permit all signatory states to develop and use – under international supervision – all of the components of the nuclear fuel cycle for civilian purposes.
From here, then, all that is required to become a nuclear power are a few small technical steps and political leaders’ decision to take them.
This political power, not the requirements of energy policy, is what makes giving up nuclear energy so difficult.
As a rule, the path to nuclear-power status always begins with so-called “civilian” nuclear programs.
The supposed “civilian” nuclear ambitions of Iran have thus, for instance, led to a large number of such “civilian” programs in neighboring states.
Honni soit qui mal y pense!
And, of course, the reactions of the nuclear powers to the disaster at Fukushima will be watched and analyzed closely by the so-called “clandestine threshold countries.”
So how will the world – first and foremost, the main nuclear powers – react to the Fukushima disaster?
Will the tide truly turn, propelling the world towards nuclear disarmament and a future free of nuclear weapons?
Or will we witness attempts to downplay the calamity and return to business as usual as soon as possible?
Fukushima has presented the world with a far-reaching, fundamental choice.
It was Japan, the high-tech country par excellence (not the latter-day Soviet Union) that proved unable to take adequate precautions to avert disaster in four reactor blocks.
What, then, will a future risk assessment look like if significantly less organized and developed countries begin – with the active assistance of the nuclear powers – to acquire civilian nuclear-energy capabilities?
Any decision to continue as before would send an unambiguous message to the clandestine threshold countries that are secretly pursuing nuclear weapons: despite lofty rhetoric and wordy documents, the nuclear powers lack the political will to change course.
Were they to abandon nuclear energy, however, their epochal change of heart would constitute a seminal contribution to global nuclear security – and thus to the fight against nuclear proliferation.
A Born-Again CAP
WAGENINGEN, NETHERLANDS – Born in 1957, the Common Agricultural Policy (CAP) is now more than 50 years old, and the European Commission is proposing what it calls a health check for its middle-aged child.
But superficial repairs will not meet the European Union’s future needs.
The CAP must be born again.
Work on its renewal is due to start now, with the completed project ready in 2013.
But a much more profound re-think is needed.
The CAP’s original aim was to provide a secure source of food for the six original member states of the Union, which were importers of food and sought a degree of self-sufficiency.
Good, healthy, and cheap food had to be accessible for all citizens.
Improved agricultural productivity would benefit rural areas and give farmers a comparative share in the Union’s growing wealth.
Instruments to achieve those objectives were developed, and food security was achieved.
The CAP quickly came to be seen as the jewel in the crown of the European project.
As the EU has evolved and expanded, food systems have become more complex, involving production, processing, supply-chain organization, and wholesale and retail distribution, with all of these involving new issues like health and the environment.
The use of land is also receiving more serious scrutiny.
A 1991 study by the Netherlands Scientific Council for Governmental Policy, entitled
Those figures were for an EU of 15 countries, so with today’s 27 members the possibilities are even greater.
A Dutch analysis of land use has shown that by employing the best technical and ecological means on the best available land, substantial gains could be made in food production.
So it is not surprising that the number of farmers needed has fallen substantially.
Viewed from the standpoint of food security and the wealth of rural areas, there is now an urgent need to revisit the CAP’s main instruments so that a new policy formula can be introduced.
Perverse subsidies must be removed and recent new ones favoring products such as bio-fuels reconsidered.
The
A simplified CAP would encourage cleaner, more productive, and efficient agriculture.
A side benefit for the EU’s standing in the world could be that the World Trade Organization’s stalled Doha negotiations could be restarted once farmers in developing countries are assured of getting a fair deal from Europe. Moreover, the CAP’s role as a motor of political and social integration in Europe could be restored once renewed policies are in place.
But renewal of this sort cannot be left to global market forces, as the results might not necessarily benefit European agriculture and society.
If the market “misbehaves,” farmers could be reduced to poverty, leading to the neglect of large areas of Europe.
That is a real enough danger to which policymakers must give serious thought as they reform the CAP on the basis of the following five pillars.
1.&#160;&#160;&#160;&#160;&#160;
The EU needs a knowledge and innovation policy that strengthens European agriculture’s competitiveness.
Such a policy has been successful in the Netherlands, substantially contributing to the development and power of the country’s agribusiness.
Ten of 21 branches of Dutch agribusiness, including horticultural seeds, ornamentals, seed potatoes, and veal, are among the top contributors to the national economy and the country’s trade balance.
In the EU as a whole, a policy directed toward research programs stimulating scientific excellence and greater coherence in the European knowledge system would greatly strengthen agriculture’s competitiveness and contribute to food security and sustainable development.
2.&#160;&#160;&#160;&#160;&#160;
Europe also needs a restructuring policy for land use.
Many structural improvement programs have been financed at the European level, but agricultural production and land use are not among them.
The development of an Agricultural Main Structure would compliment the European Ecological Main Structure.
Reforestation and the repair of natural ecosystems should also be part of a land use policy.
3.&#160;&#160;&#160;&#160;&#160;
A policy for European food systems would treat production, processing, distribution, logistics, and retailing in combination.
Consumption patterns and preferences are an integral part of such systems.
Preliminary studies by the European Science Foundation’s “Forward Look on European Food Systems” could prove useful in devising an EU-wide policy.
4.&#160;&#160;&#160;&#160;&#160;
Metropolitan agriculture in a rapidly urbanizing world can provide high-quality produce on small amounts of land.
It offers an answer to rising demand for healthy food with minimal environmental side effects.
5.&#160;&#160;&#160;&#160;&#160;
A new CAP should include a policy to safeguard Europe’s landscapes.
But a cultural heritage should not be maintained everywhere, nor should it ignore cost.
And it should not be a defensive policy of the sort that tends to concentrate on poor-quality land.
These five pillars involve drastic choices, but they will probably require less money from Europe’s taxpayers, not more.
They could make a real contribution to cleaner, more productive, and efficient farming and land use, while addressing social needs.
A Boycott Against Reason
“It could happen here” is the shorthand phrase frequently used for a variety of alarming hypothetical scenarios. “How could this happen here?” was the question more pertinently asked in Great Britain recently, as its universities witnessed the unfolding of an all-too-real and perplexing action.
In early June, the National Association of Teachers in Further and Higher Education (NATFHE), Britain’s largest academic union, with 67,000 members, passed a motion to sever ties with all Israeli professors and institutions of higher learning unless they publicly dissociate themselves from “continuing Israeli apartheid policies.”
The motion was subsequently revoked; but the fact that it was put forward at all is astonishing enough.
Indeed, the union’s call for a wholesale boycott contravened its most fundamental values: the principle of academic freedom, openness, and exchange; protection of research from state politics; and the fundamental right to free speech.
The motion implicitly adopted the yardstick of collective punishment and a distinctly McCarthyite tone, demanding a sort of “disloyalty oath” from Israeli academics.
What led scholars who are putatively the guardians of democratic freedoms to embrace measures so reminiscent of fascist and Stalinist tactics?
Unfortunately, the NATFHE effort is part of a larger phenomenon.
In 2005, the Association of University Teachers (AUT) called for a more limited boycott, singling out Bar Ilan and Haifa Universities for opprobrium.
Before that, a petition, signed by roughly 80 prominent British intellectuals and a few from other European countries, demanded the cessation of European Union funding for Israeli cultural projects and institutions.
These campaigns, encouraged by Palestinian groups and non-governmental organizations, have been accompanied by individual acts of professional ostracism, and an informal boycott of Israeli scholars, publications, and cultural projects already exists in some European circles.
Such developments suggest an advanced and deeply disturbing trend, whereby certain segments of the European intelligentsia are willing to violate their own beliefs in order to target one state for unique stigmatization; and whereby insidious and sometimes illegal forms of discrimination against that state’s citizens are increasingly seen as acceptable.
In a certain ideological mind-set
In the putatively “radical” interpretation, the relationship between Israel and the Palestinians is rarely seen as a conflict between two groups with sometimes tragically opposed interests.
Rather, the stubborn complexities of the situation are reduced to a stark struggle between absolute power and absolute powerlessness, the archetypal oppressor and archetypal oppressed.
The rhetoric applied to Israel becomes ever more extreme, and conducive to hatred.
Phrases like “apartheid state” and “Zionism is racism,” unthinkable in liberal discourse a few years ago, have become routine.
At the same time, the Palestinians become objects of romanticized identifications – one of the leaders of the NAFTHE motion was seen, prior to a meeting, draped in a Palestinian flag – and unwitting condescension.
They are seen as the last pure cause, the entirely innocent “Other,” unimplicated in their fate and apparently deprived of political agency or choice.
The possibility that the Palestinians are capable of deliberate decisions, that they have adopted policies which may have contributed to the current situation, or that they have exercised their own forms of power and violence, is, in this framework, never admitted.
Hamas was never mentioned in either of the university unions’ motions.
This is Manicheanism of the left, and, like Manicheanism of the political right, it can distort reality to the point of becoming divorced from it.
Certainly, the boycott efforts ignored basic facts.
Unless British academics are ill informed, they know that Israel, far from being an “apartheid state,” has a large proportion of Arab citizens; that Israeli universities are well integrated, in some cases with considerable numbers of Arab students, as well as a number – admittedly small and insufficiently representative – of Arab faculty; that many universities sponsor collaborative projects with Palestinian and Arab colleagues; that they are often sites of dissidence against government policies; and that such dissidence, even in radical forms, is tolerated.
Advocates of discriminatory measures often charge their opponents with stifling legitimate criticism of Israel.
This argument is both disingenuous and dishonest.
Many of the boycotts’ critics are also critical of Israel.
But credible criticism must be based on evidence – and on generally applicable criteria of judgment.
If the British unions wanted to be ethically consistent, they should apply the same strategies to universities in the numerous countries where human rights are brutally abused and free speech suppressed.
Some see this hostility to Israel as camouflaging old-fashioned anti-Semitism.
It is always risky to speculate about hidden motives; nevertheless, systematic disparagement of Israeli society and culture undoubtedly encourages the sense that anti-Semitism, too, is a permitted prejudice.
It is always easier to see a group or nation as a malevolent “Other” when this impulse is fed by an old, and still potent, prejudice.
There is a deeper issue at stake.
Democratic societies depend not only on the foundational principle of free speech, but on the character of political thought and conversation among various constituencies.
When the supposedly most enlightened and liberal of those constituencies resorts to illiberal discourse and intolerant measures, tendencies toward bigotry and ideological irrationality are reinforced.
The actions of the British academic unions have Israel as their obvious target.
But their main effect may be an erosion of reasoned debate and civil conduct, without which democracy is powerless against the forces of polarization and extremism.
A Breakthrough Against Hunger
NEW YORK – Today’s world hunger crisis is unprecedentedly severe and requires urgent measures.
Nearly one billion people are trapped in chronic hunger – perhaps 100 million more than two years ago.
Spain is taking global leadership in combating hunger by inviting world leaders to Madrid in late January to move beyond words to action.
With Spain’s leadership and United Nations Secretary General Ban Ki-moon’s partnership, several donor governments are proposing to pool their financial resources so that the world’s poorest farmers can grow more food and escape the poverty trap.
The benefits of some donor help can be remarkable.
Peasant farmers in Africa, Haiti, and other impoverished regions currently plant their crops without the benefit of high-yield seed varieties and fertilizers.
The result is a grain yield (for example, maize) that is roughly one-third less than what could be achieved with better farm inputs.
African farmers produce roughly one ton of grain per hectare, compared with more than four tons per hectare in China, where farmers use fertilizers heavily.
African farmers know that they need fertilizer; they just can’t afford it.
With donor help, they can.
Not only do these farmers then feed their families, but they also can begin to earn market income and to save for the future.
By building up savings over a few years, the farmers eventually become creditworthy, or have enough cash to purchase vitally necessary inputs on their own.
There is now widespread agreement on the need for increased donor financing for small farmers (those with two hectares or less of land, or impoverished pastoralists), which is especially urgent in Africa.
The UN Secretary General led a steering group last year that determined that African agriculture needs around $8 billion per year in donor financing – roughly four times the current total – with a heavy emphasis on improved seeds, fertilizer, irrigation systems, and extension training.
In addition to direct help for small farms, donors should provide more help for the research and development needed to identify new high-yielding seed varieties, especially to breed plants that can withstand temporary flooding, excess nitrogen, salty soils, crop pests, and other challenges to sustainable food production.
Helping the poor with today’s technologies, while investing in future improved technologies, is the optimum division of labor.
This investment pays off wonderfully, with research centers such as the International Rice Research Institute and the International Maize and Wheat Improvement Centre providing the high-yield seeds and innovative farming strategies that together triggered the Asian Green Revolution.
These centers are not household names, but they deserve to be.
Their scientific breakthroughs have helped to feed the world, and we’ll need more of them.
Dozens of low-income, food-deficit countries, perhaps as many as 40-50, have elaborated urgent programs for increased food production by small farms, but are currently held back by the lack of donor funding.
These countries have appealed to the World Bank for financing, and the Bank made a valiant effort in 2008 to help through its new Global Food Crisis Response Program (GFCRP).
But the Bank does not yet have sufficient funds to meet these countries’ urgent needs, and has had to ration assistance to a small fraction of the flows that could be effectively and reliably used.
Hundreds of millions of people, in the meantime, remain trapped in hunger.
Many individual donor countries have declared that they are now prepared to increase their financial support for smallholder agriculture, but are searching for the appropriate mechanisms to do so.
The current aid structures are inadequate.
The more than 20 bilateral and multilateral donor agencies for agriculture are highly fragmented and of insufficient scale individually and collectively.
Despite the dedicated efforts of many professionals, the response to the hunger crisis remains utterly inadequate.
The 2008 planting seasons came and went with much too little additional help for impoverished small farmers.
African countries search endlessly, and mostly fruitlessly, for the small amounts of funding needed for their purchases of fertilizer and improved seeds.
My colleagues and I, serving on an advisory committee for the Spanish initiative, have recommended that donors pool their funds into a single international account, which we call the Financial Coordination Mechanism (FCM).
These pooled funds would enable farmers in poor countries to obtain the fertilizer, improved seed varieties, and small-scale irrigation equipment that they urgently need.
Poor countries would receive prompt and predictable financing for agricultural inputs from a single account, rather than from dozens of distinct and fragmented donors.
By pooling financial resources into a single-donor FCM, aid programs’ administrative costs could be kept low, the availability of aid flows could be assured, and poor countries would not have to negotiate 25 times in order to receive help.
The time for business as usual is over.
The donors promised to double aid to Africa by 2010, but are still far off track.
Indeed, during the past 20 years, they actually cut aid for agriculture programs, and only now are reversing course.
Meanwhile, a billion people go hungry each day.
We need a breakthrough that is demonstrable, public, clear, and convincing, that can mobilize the public’s hearts and minds, and that can demonstrate success.
History can be made in Madrid at the end of January, when the world’s richest and poorest countries converge to seek solutions to the global hunger crisis.
The lives of the billion poorest people depend on it.
A Breakthrough Opportunity for Global Health
NEW YORK – Every year, millions of people die from preventable and treatable diseases, especially in poor countries.
In many cases, lifesaving medicines can be cheaply mass-produced, but are sold at prices that block access to those who need them.
And many die simply because there are no cures or vaccines, because so little of the world’s valuable research talent and limited resources is devoted to addressing the diseases of the poor.
This state of affairs represents a failure of economics and law that urgently needs to be corrected.
The good news is that there are now opportunities for change, most promisingly through an international effort headed by the World Health Organization that would begin to fix the broken intellectual-property regime that is holding back the development and availability of cheap drugs.
Two main problems limit the availability of medicines today.
One is that they are very costly; or, more accurately, the price charged for them is very high, though the cost of producing them is but a fraction of that amount.
Second, drug development is geared toward maximizing profit, not social benefit, which skews efforts directed at the creation of medicines that are essential to human welfare.
Because the poor have so little money to spend, drug companies, under current arrangements, have little incentive to do research on the diseases that afflict them.
It doesn’t have to be this way.
Drug companies argue that high prices are necessary to fund research and development.
But, in the United States, it is actually the government that finances most health-related research and development – directly, through public support (National Institutes of Health, National Science Foundation), and indirectly, through public purchases of medicine, both in the Medicare and Medicaid programs.
Even the part that is not government-financed is not a conventional market; most individuals’ purchases of prescription medicines are covered by insurance.
Government finances health-care research because improved medicines are a public good.
The resulting knowledge benefits everyone by stopping epidemics and limiting the economic and human toll of widespread illness.
Efficiency requires sharing research as widely as possible as soon as it is available.
Thomas Jefferson compared knowledge to candles: when one is used to light another, it does not diminish the light of the first.
On the contrary, everything becomes brighter.
Yet, in America and most of the world, drug prices are still exorbitant and the spread of knowledge is tightly limited.
That is because we have created a patent system that gives innovators a temporary monopoly over what they create, which encourages them to hoard their knowledge, lest they help a competitor.
While this system does provide incentives for certain kinds of research by making innovation profitable, it allows drug companies to drive up prices, and the incentives do not necessarily correspond to social returns.
In the health-care sector, it may be more profitable to devote research to a “me-too” drug than to the development of a treatment that really makes a difference.
The patent system may even have adverse effects on innovation, because, while the most important input into any research is prior ideas, the patent system encourages secrecy.
A solution to both high prices and misdirected research is to replace the current model with a government-supported prize fund.
With a prize system, innovators are rewarded for new knowledge, but they do not retain a monopoly on its use.
That way, the power of competitive markets can ensure that, once a drug is developed, it is made available at the lowest possible price – not at an inflated monopoly price.
Fortunately, some US lawmakers are taking a strong interest in this approach.
The Prize Fund for HIV/AIDS Act, a congressional bill introduced by Senator Bernie Sanders, is just such an initiative.
His bill also contains an important provision aimed at encouraging open-source research, which would move the current research model away from secrecy toward sharing.
But, globally, our innovation system needs much bigger changes.
The WHO’s efforts to encourage broad reforms at the international level are crucial.
This spring, the WHO released a report that recommends solutions similar to those proposed in the US Senate bill, but on a global level.
Importantly, the report, “Research and Development to Meet Health Needs in Developing Countries,” recommends a comprehensive approach, including mandatory funding contributions from governments for research on developing countries’ health needs; international coordination of health-care priorities and implementation; and a global observatory that would monitor where needs are greatest.
In late May, the international community will have a chance to begin implementing these ideas at the WHO World Health Assembly – a moment of hope for public health around the world.
Reforming our innovation system is not just a matter of economics. It is, in many cases, a matter of life and death.
It is therefore essential to de-link R&amp;D incentives from drug prices, and to promote greater sharing of scientific knowledge.
For America, the Sanders bill marks important progress.
For the world, the WHO’s recommendations represent a once-in-a-generation opportunity to remedy a long-standing and egregious inequity in health care, and, more broadly, to set a model for governance of global public goods befitting an era of globalization.
Absent-Minded Killers
As a species, human beings have a major self-control problem.
We humans are now so aggressively fishing, hunting, logging, and growing crops in all parts of the world that we are literally chasing other species off the planet.
Our intense desire to take all that we can from nature leaves precious little for other forms of life.
In 1992, when the world’s governments first promised to address man-made global warming, they also vowed to head off the human-induced extinction of other species.
The Convention on Biological Diversity, agreed at the Rio Earth Summit, established that “biological diversity is a common concern of humanity.” The signatories agreed to conserve biological diversity, by saving species and their habitats, and to use biological resources (e.g., forests) in a sustainable manner.
In 2002, the treaty’s signatories went further, committing to “a significant reduction in the current rate of biodiversity loss” by 2010.
Unfortunately, like so many other international agreements, the Convention on Biological Diversity remains essentially unknown, un-championed, and unfulfilled.
That neglect is a human tragedy.
For a very low cash outlay – and perhaps none at all on balance – we could conserve nature and thus protect the basis of our own lives and livelihoods.
We kill other species not because we must, but because we are too negligent to do otherwise.
Consider a couple of notorious examples.
Some rich countries, such as Spain, Portugal, Australia, and New Zealand, have fishing fleets that engage in so-called “bottom trawling.”
Bottom trawlers drag heavy nets over the ocean bottom, destroying magnificent, unexplored, and endangered marine species in the process.
Complex and unique ecologies, most notably underground volcanoes known as seamounts, are ripped to shreds, because bottom trawling is the “low cost” way to catch a few deep sea fish species.
One of these species, orange roughy, has been caught commercially for only around a quarter-century, but already is being fished to the point of collapse.
Likewise, in many parts of the world, tropical rainforest is being cleared for pasture land and food crops.
The result is massive loss of habitat and destruction of species, yielding a tiny economic benefit at a huge social cost.
After cutting down a swath of rainforest, soils are often quickly leached of their nutrients so that they cannot sustain crops or nutritious grasses for livestock.
As a result, the new pasture land or farmland is soon abandoned, with no prospect for regeneration of the original forest and its unique ecosystems.
Because these activities’ costs are so high and their benefits so low, stopping them would be easy.
Bottom trawling should simply be outlawed; it would be simple and inexpensive to compensate the fishing industry during a transition to other activities.
Forest clearing, on the other hand, is probably best stopped by economic incentives, perhaps combined with regulatory limits.
Simply restricting the practice of land clearing probably would not work, since farm families and communities would face a strong temptation to evade legal limits.
On the other hand, financial incentives would probably succeed, because cutting down forest to create pastureland is not profitable enough to induce farmers to forego payments for protecting the land.
Many rainforest countries have united in recent years to suggest the establishment of a rainforest conservation fund by the rich countries, to pay impoverished small farmers a small amount of money to preserve the forest.
A well-designed fund would slow or stop deforestation, preserve biodiversity, and reduce emissions of carbon dioxide the burning of cleared forests.
At the same time, small farmers would receive a steady flow of income, which they could use for micro-investments to improve their household’s wealth, education, and health.
Aside from banning bottom trawling and establishing a global fund for avoided deforestation, we should designate a global network of protected marine areas, in which fishing, boating, polluting, dredging, drilling, and other damaging activities would be prohibited.
Such areas not only permit the regeneration of species, but also provide ecological benefits that spill over to neighboring unprotected areas.
We also need a regular scientific process to present the world with the evidence on species abundance and extinction, just as we now have such a process for climate change.
Politicians don’t listen very well to individual scientists, but they are forced to listen when hundreds of scientists speak with a united voice.
Finally, the world should negotiate a new framework no later than 2010 to slow human-induced climate change.
There can be little doubt that climate change poses one of the greatest risks to species’ viability.
As the planet warms, and rain and storm patterns change dramatically, many species will find themselves in climate zones that no longer support their survival.
Some can migrate, but others (such as polar bears) are likely to be driven to extinction unless we take decisive action to head off climate change.
These measures are achievable by 2010.
They are affordable, and in each case would ultimately deliver large net benefits.
Most importantly, they would allow us to follow through on a global promise.
It is too painful to believe that humanity would destroy millions of other species – and jeopardize our own future – in a fit of absent-mindedness.
Polluters Must Pay
NEW YORK – When BP and its drilling partners caused the Deepwater Horizon oil spill in the Gulf of Mexico in 2010, the United States government demanded that BP finance the cleanup, compensate those who suffered damages, and pay criminal penalties for the violations that led to the disaster.
BP has already committed more than $20 billion in remediation and penalties.
Based on a settlement last week, BP will now pay the largest criminal penalty in US history – $4.5 billion.
The same standards for environmental cleanup need to be applied to global companies operating in poorer countries, where their power has typically been so great relative to that of governments that many act with impunity, wreaking havoc on the environment with little or no accountability.
As we enter a new era of sustainable development, impunity must turn to responsibility.
Polluters must pay, whether in rich or poor countries.
Major companies need to accept responsibility for their actions.
Nigeria has been Exhibit A of corporate environmental impunity.
For decades, major oil companies, including Shell, ExxonMobil, and Chevron, have been producing oil in the Niger Delta, an ecologically fragile environment of freshwater swamp forests, mangroves, lowland rainforests, and coastal barrier islands.
This rich habitat supports remarkable biodiversity – or did before the oil companies got there –&#160;and more than 30 million local inhabitants, who depend on the local ecosystems for their health and livelihoods.
Twenty years ago, the International Union for Conservation of Nature and Natural Resources classified the Niger Delta as a region of high biodiversity of marine and coastal flora and fauna – tree species, fish, birds, and mammals, among other forms of life – and therefore rated it as a very high priority for conservation.
Yet it also noted that the region’s biodiversity was under massive threat, with little or no protection.
The global companies operating in the delta have spilled oil and flared natural gas for decades, without regard for the natural environment and the communities impoverished and poisoned by their actions.
One estimate puts the cumulative spills over the past 50 years at approximately 10 million barrels – twice the size of the BP spill.
The data are uncertain: there have been many thousands of spills during this period – often poorly documented and their magnitude hidden or simply unmeasured by either the companies or the government.
Indeed, just as BP was being hit with new criminal penalties, ExxonMobil announced yet another pipeline leak in the Niger Delta.
The environmental destruction of the delta is part of a larger saga: corrupt companies operating hand in hand with corrupt government officials.
The companies routinely bribe officials to gain oil leases, lie about output, evade taxes, and dodge responsibility for the environmental damage that they cause.
Nigerian officials have become fabulously wealthy, owing to decades of payoffs by international companies that have plundered the delta’s natural wealth.
Shell, the largest foreign operator in the Niger Delta, has been criticized repeatedly for its egregious practices and its unwillingness to be held to account.
Meanwhile, the local population has remained impoverished and beset by diseases caused by unsafe air, poisoned drinking water, and pollution in the food chain.
Local lawlessness has led to gang warfare and persistent illegal tapping into the pipelines to steal oil, leading to further massive oil spills and frequent explosions that kill dozens, including innocent bystanders.
In the colonial era, it was the official purpose of imperial power to extract wealth from the administered territories.
In the post-colonial period, the methods are better disguised.
When oil companies misbehave in Nigeria or elsewhere, they are protected by the power of their home countries.
Don’t mess with the companies, they are told by the United States and Europe.
Indeed, one of the largest bribes (a reputed $180 million) paid in recent times in Nigeria was by Halliburton, a company tightly intertwined with US political power.
(Dick Cheney went from being Halliburton’s CEO to the US vice presidency.)
Last year, the United Nations Environment Program (UNEP) issued a remarkable report on Ogoniland, a major ethnic homeland in the Niger Delta that has been at the epicenter of conflict between local communities and international oil.
The report was as scathing as it was scientifically clear.
Despite many past promises of a cleanup, Ogoniland remains in environmental agony, impoverished and sickened by the oil industry.
UNEP also offered clear and detailed recommendations, including emergency measures to ensure safe drinking water; cleanup activities targeting the mangroves and soils; public-health studies to identify and counteract the consequences of pollution; and a new regulatory framework.
The world’s governments have recently agreed to move to a new framework for sustainable development, declaring their intention to adopt Sustainable Development Goals at the Rio+20 Summit in June.
The SDGs offer a critical opportunity for the world to set clear, compelling standards for government and corporate behavior.
Many major companies, including in the oil industry, have expressed their readiness to support sustainable development goals.
Cleaning up the Niger Delta would provide the strongest possible example of a new age of accountability.
Shell, Chevron, ExxonMobil, and other major oil companies should step forward and help to fund the necessary cleanup, ushering in a new era of responsibility.
The Nigerian government’s own accountability is on the line as well.
It is heartening that several Nigerian senators have recently been in the forefront of efforts to strengthen the rule of law in the oil sector.
The cleanup of the Niger Delta provides an ideal opportunity for Nigeria, the oil industry, and the international community to show convincingly that a new age has dawned.
From now on, sustainable development must not be a mere slogan, but rather an operational approach to global governance and well-being on a strained and crowded planet.
Accounting for Gaza
New York – This week the United Nations Human Rights Council will debate the report of the fact-finding mission led by Judge Richard Goldstone on human rights violations in the Gaza conflict.
Let us hope it is a full and fair examination based on the report’s findings and recommendations.
Goldstone and his team concluded that both Israel and Hamas, the Palestinian group controlling Gaza, committed war crimes and possibly crimes against humanity during the period of the conflict which the investigation addressed. The report calls for credible investigations of alleged rights violations  and recommends that the UN Security Council require both sides to report back within six months on the results, including any prosecutions they will carry out in connection with the violations identified.
Failure to do so, in the view of Goldstone’s commission, should result in the Security Council referring the matter to the prosecutor for the International Criminal Court in The Hague.
Unfortunately, rather than debating Goldstone’s detailed findings and the merits of his recommendations on ways to move forward, there are indications that governments may focus instead on the process leading up to the investigation and seek to limit full discussion of the report.
As someone involved in that process, I feel it is important to put my views on record, as comments I made previously are now being used as part of the effort to undermine Judge Goldstone and his important work.
I refused to accept the invitation from the president of the Human Rights Council at the time, Ambassador Martin Uhomoibhi of Nigeria, to lead the investigation following the Human Rights Council’s January 12, 2009 resolution. As a former UN High Commissioner for Human Rights, I felt strongly that the Council’s resolution was one-sided and did not permit a balanced approach to determining the situation on the ground.
It referred only to “the grave violations of human rights in the Occupied Palestinian Territory, particularly due to the recent Israeli military attacks,” and called for a mission to investigate “all violations of international human rights law and international humanitarian law by the occupying power, Israel, against the Palestinian people.”
I was also aware that the UN Human Rights Council had made repeated condemnations of Israel over the past two years but had focused little attention on large-scale violations of human rights in other countries.
This pattern of action and inaction by the Council has given greater credence to those who believe the UN’s highest human rights body is inherently anti-Israel.
I decided I could not undertake the mission for these reasons.
I am aware that Judge Goldstone, a dedicated and unimpeachable human rights lawyer and advocate, shared similar concerns when he was initially approached.
But he was able to work with the Council’s president to secure an agreement he felt confident would permit the mandate to be interpreted in such a way as to allow his team to address the actions taken by
Experts can debate whether this was in conformity with UN rules and procedures.
I have no doubt that those involved were seeking a way forward that would allow for a full investigation and help overcome the political divisiveness currently undermining the Human Rights Council within the UN system.
The question now is whether governments will give Judge Goldstone’s findings the serious attention they deserve, or instead fall back into an overtly political posture.
As Goldstone's report makes clear:
Both the Palestinians and the Israelis are legitimately angered at the lives that they are forced to lead: For the Palestinians, the anger about individual events – the civilian casualties, injuries and destruction in Gaza following from military attacks, the blockade, the continued construction of the Wall outside of the 1967 borders – feed into an underlying anger about the continuing Israeli occupation, its daily humiliations and their as-yet-unfulfilled right to self-determination.
In this way, both the Israelis and the Palestinians share a secret fear – for some, a belief – that each has no intention of accepting the other’s right to a country of their own.
This anger and fear are unfortunately ably represented by many politicians. (Para.
1705)
For the sake of human rights and peace in the region, my hope is that the international community will bear witness to these circumstances, consider Judge Goldstone’s report in its entirety and press for accountability for the most serious crimes.
Accounting Tricks Around the Globe
Accounting chicanery will be high on the agenda of the bankers who will meet at the annual IMF/World Bank gathering in Washington, D.C. The IMF should do more than offer the private sector advice about how to fix its accounting problems; governmental accounting tricks and the IMF's own wheezes should also be addressed, says Nobel laureate Joseph Stiglitz.
The Arthur Anderson and Enron scandals in America have focused attention on the problems of accounting in private businesses.
But the scale of this corruption should not blind us to the problem of public sector accounting, where many deceitful things are also being done.
Accounting rules are designed to provide standardized frameworks within which the financial position of a firm, or government, can be assessed.
Bad accounting frameworks always lead to bad information, and bad information leads to bad decisions, with serious long term consequences.
This is true in the public as well as the private sector.
America's business scandals showed how accounting rules can be bent and abused to provide a misleading picture of what is really happening in a company.
The Bush Administration, not to be left behind, has shown how public accounting rules can be bent so as to provide a misleading picture of what is really happening in a national economy.
Indeed, last year saw what may be the largest accounting fraud ever conducted, as a mega-surplus of more than $3trillion for the years 2002 to 2011 was transformed into a $2 trillion deficit.
Investors in Enron waited years before discovering that something was amiss.
Though sudden and vast, the change in America's fiscal stance already provides a clear inkling that something was amiss.
It will be years before the full magnitude of President Bush's deception is apparent.
Meanwhile, the Bush Administration will blame the sinking economy, bad luck, and unintentional miscalculations for the vanished surplus.
But America is not alone in allowing for official accounting shenanigans.
In Latin America and elsewhere in the developing world, the IMF imposes accounting frameworks that not only make little sense, but result in excessive austerity.
In some of the poorest countries in the world - ie, those most dependent on aid - the IMF has argued that foreign aid should not be listed as revenue in a government's budget calculations.
But what else is aid if it is not revenue?
The IMF's argument seems to be this: a country cannot rely on foreign aid because aid is too unstable.
The truth, of course, is that aid is more stable than tax revenues in poor countries.
By the IMF's logic, neither aid nor tax revenues should be included in budgets.
If that is the case, every country in the world is in deep trouble.
The absurdity here is the idea that all foreign aid should be added to reserves.
But donor countries want to see the money they give to finance schools or health clinics spent on schools and health clinics; they don't want to see it added to a nation's reserves.
Governments in developing countries have the
Other IMF accounting practices, including how the capital expenditures of government-owned enterprises are treated, are also causing outrage.
If a state owned enterprise
But by
A second IMF accounting distortion involves stabilization funds.
These are national funds that, in boom years, receive revenues from sales of natural resources to be set aside against a rainy day.
This makes sense.
But IMF accounting inhibits the use of these funds to help stabilize an economy through counter-cyclical fiscal spending.
According to Mexican and Chilean officials I have discussed the matter with, spending from a stabilization fund is reportedly treated as if the country is borrowing, thus adding to its deficit.
It is, of course, in times of economic downturn that countries worry most about their credit rating, so the IMF stance is particularly unhelpful.
IMF accounting frameworks, rather than providing useful signals to the market, provide distorted information that exacerbates a troubled country's problems.
Good decisions require
A Centerless Euro Cannot Hold
CAMBRIDGE – With youth unemployment touching 50% in eurozone countries such as Spain and Greece, is a generation being sacrificed for the sake of a single currency that encompasses too diverse a group of countries to be sustainable?
If so, does enlarging the euro’s membership really serve Europe’s apparent goal of maximizing economic integration without necessarily achieving full political union?
The good news is that economic research does have a few things to say about whether Europe should have a single currency.
The bad news is that it has become increasingly clear that, at least for large countries, currency areas will be highly unstable unless they follow national borders.
At a minimum, currency unions require a confederation with far more centralized power over taxation and other policies than European leaders envision for the eurozone.
What of Nobel Prize winner Robert Mundell’s famous 1961 conjecture that national and currency borders need not significantly overlap?
In his provocative American Economic Review paper “A Theory of Optimum Currency Areas,” Mundell argued that as long as workers could move within a currency region to where the jobs were, the region could afford to forgo the equilibrating mechanism of exchange-rate adjustment.
He credited another (future) Nobel Prize winner, James Meade, for having recognized the importance of labor mobility in earlier work, but criticized Meade for interpreting the idea too stringently, especially in the context of Europe’s nascent integration.
Mundell did not emphasize financial crises, but presumably labor mobility is more important today than ever.
Not surprisingly, workers are leaving the eurozone’s crisis countries, but not necessarily for its stronger northern region.
Instead, Portuguese workers are fleeing to booming former colonies such as Brazil and Macau.
Irish workers are leaving in droves to Canada, Australia, and the United States. Spanish workers are streaming into Romania, which until recently had been a major source of agricultural labor in Spain.
Still, if intra-eurozone mobility were anything like Mundell’s ideal, today we would not be seeing 25% unemployment in Spain while Germany’s unemployment rate is below 7%.
Later writers came to recognize that there are other essential criteria for a successful currency union, which are difficult to achieve without deep political integration.
Peter Kenen argued in the late 1960’s that without exchange-rate movements as a shock absorber, a currency union requires fiscal transfers as a way to share risk.
For a normal country, the national income-tax system constitutes a huge automatic stabilizer across regions.
In the US, when oil prices go up, incomes in Texas and Montana rise, which means that these states then contribute more tax revenue to the federal budget, thereby helping out the rest of the country.
Europe, of course, has no significant centralized tax authority, so this key automatic stabilizer is essentially absent.
Some European academics tried to argue that there was no need for US-like fiscal transfers, because any desired degree of risk sharing can, in theory, be achieved through financial markets.
This claim was hugely misguided.
Financial markets can be fragile, and they provide little capacity for sharing risk related to labor income, which constitutes the largest part of income in any advanced economy.
Kenen was mainly concerned with short-term transfers to smooth out cyclical bumpiness.
But, in a currency union with huge differences in income and development levels, the short term can stretch out for a very long time.
Many Germans today rightly feel that any system of fiscal transfers will morph into a permanent feeding tube, much the way that northern Italy has been propping up southern Italy for the last century.
Indeed, more than 20 years on, Western Germans still see no end in sight for the bills from German unification.
Later, Maurice Obstfeld pointed out that, in addition to fiscal transfers, a currency union needs clearly defined rules for the lender of last resort.
Otherwise, bank runs and debt panics will be rampant.
Obstfeld had in mind a bailout mechanism for banks, but it is now abundantly clear that one also needs a lender of last resort and a bankruptcy mechanism for states and municipalities.
A logical corollary of the criteria set forth by Kenen and Obstfeld, and even of Mundell’s labor-mobility criterion, is that currency unions cannot survive without political legitimacy, most likely involving region-wide popular elections.
Europe’s leaders cannot carry out large transfers across countries indefinitely without a coherent European political framework.
European policymakers today often complain that, were it not for the US financial crisis, the eurozone would be doing just fine.
Perhaps they are right.
But any financial system must be able to withstand shocks, including big ones.
Europe may never be an “optimum” currency area by any standard.
But, without further profound political and economic integration – which may not end up including all current eurozone members – the euro may not make it even to the end of this decade.
A Century of Chinese Protests
Achieving a “Europe of Results”
BRUSSELS – The tsunami that has swept across financial markets is a global catastrophe.
If handled correctly, however, the crisis may yet raise the esteem of the European Union and its institutions.
The EU’s legitimacy problem has two different aspects: apathy, leading to a low turnout in the European parliamentary elections, and outright euro-skepticism.
The voter-turnout problem partly reflects frustration about the present state of the EU, and also people’s impression that they can exert little influence by voting one way or the other.
Euro-skepticism, on the other hand, and the looming threat of anti-European populism, is directly linked to the idea that the EU is not merely incapable of offering a solution to the crisis, but in fact is part of the problem.
So, although the EU represents our best hope of ensuring that Europe is internationally competitive in today’s increasingly difficult environment, it is actually being blamed for globalization.
Many people confuse these two aspects of the EU’s legitimacy problem, and believe that somehow turnout in European elections can be increased by pointing out to people how good and important the EU is.
But in most cases, this is not possible.
At first sight, the easiest answer to the problem of low voter turnout is to give more power to the European Parliament.
But if this was the solution, then we would not have had steadily declining turnouts since the high point of 63%, at the first elections to the European Parliament in 1979.
After all, since then the EP’s influence and powers of joint decision-making have grown constantly.
The trouble is that, EP elections must be “about” something if voters are to be interested, which means they must involve a real choice.
And a real choice requires Europe-wide election campaigns by all parties.
This would also involve making the choice of the European Commission’s president dependent on the outcome of the EP elections.
But, in fact, both of these conditions have already been met; in 2004, Portuguese Prime Minister José Manuel Durão Barroso was appointed President of the Commission because he came from the political organization with the strongest election result, the European People’s Party.
And this year’s elections saw a more intensive presence of party organizations at European level than ever before.
Instead, I believe that the most important way to reawaken voters’ interest in European elections will be to open up the election of the Commission’s President to them, and create a genuinely Europe-wide political debate during the next election campaign.
The Euro-skepticism problem can be tackled only if the Union itself starts to perform better, and is seen to be doing so.
That is why in the aftermath of the failed referenda four years ago in France and the Netherlands on the Constitutional treaty, the Commission tried to emphasize the idea of a “Europe of Results” that would seek to convince citizens of its worth through concrete achievements.
Given the gravity of the economic crisis, the time has come for the EU to demonstrate its strengths whenever possible.
The aim must be not only to win back the hearts of Europeans who have become skeptical, but also to convince them that the Union is indispensable to meeting the challenges Europeans face.
Europe’s citizens understand that the relatively small nation-states that make up the EU are no longer able to face these enormous challenges on their own.
In Ireland, last autumn’s financial crisis provoked a turnaround in public opinion about the EU, and even in Iceland, although it lies on the periphery of our continent, membership of the EU and the euro have become a priority.
European countries have become so interconnected that isolated national measures on issues like financial-market regulation are hopeless.
A changing world in which new powers like China and India play an increasingly important role will not wait for Europe to make up its mind.
The EU must instead show leadership through its efforts to solve the world’s current problems.
As for the European People’s Party, for us the economy is not an end in itself but should serve the people.
The economic crisis was caused by shortsightedness and a lack of control in the global financial system.
Now we must redefine the role of regulators in financial markets and in the wider economy, for we cannot let the financial sector walk off with the profits and leave taxpayers bearing the losses.
That doesn’t mean that we are advocating a move to socialism; we want better and smarter regulation, not regulation for its own sake.
We see five keys to recovery:
A “Europe of Results” is achievable.
It can strengthen the EU’s legitimacy, though, only if policy recommendations such as these, and the successes that result from implementing them, are communicated clearly and effectively to the general public.
Achieving Growth in a Rebalanced World
MILAN – Although the financial crisis is winding down, the prospects for growth in the global economy are unlikely to pick up.
This is, in part, inevitable.
But it is also the result of poor coordination between governments as the world economy rebalances.
Prior to the crisis, American consumers, on average, either saved nothing or accumulated debt.
That has now changed.
With household wealth seriously damaged by the housing crash and other asset-price declines, pensions and retirement provisions are in disarray.
Because asset prices will not reach pre-crisis levels anytime soon (that is, without inflating another bubble and risking renewed instability), household saving in the United States has risen to about 5% of disposable income, and probably will rise further.
This withdrawal of the US consumer is part (perhaps half) of the process of rebalancing the global economy.
Restoring America’s savings-investment balance implies a reduction in global aggregate demand of around $800 billion.
To be sure, fiscal deficits and emergency measures in advanced economies and some major developing countries have cushioned the sharp decline, substituting in part for missing consumers.
But this substitution cannot continue indefinitely.
In advanced countries, governments will eventually be forced to reduce spending, and central banks will withdraw from emergency credit provisions and guarantees.
As a result, many believe that a “new normal” of slower advanced-country growth is upon us.
Despite a recovery in asset prices in many countries and the deceleration of negative growth, unemployment is high and rising.
Risk spreads have declined from their mid-crisis highs, but credit in many sectors remains tight or barely available, while the financial sector is set to become more conservative – and is likely to be re-regulated with higher capital, reserve, and margin requirements.
And this is just the baseline scenario.
Downside risks include fiscal destabilization resulting from a failure to rein in deficits, inflation and withdrawal of central bank autonomy, and loss of confidence in the dollar, which continues to be the reserve currency for the global economy.
Little wonder, then, that many knowledgeable analysts reasonably expect post-crisis growth in advanced countries to be lower, perhaps by 0.5 to 1%.
A 1% slowdown in advanced-country growth translates into roughly $350 billion of missing aggregate demand every year, in addition to the shortfall because of rebalancing in the US.
If the slowdown in advanced countries persists, pre-crisis growth levels will not be achievable in the developing world either, owing to insufficient demand to absorb the implied increase in output.
Of course, individual developing countries may be spared.
But it is an unfortunate mathematical fact that not everyone can gain market share.
If the advanced-country scenario is right, many developing countries will lose out and experience sharply diminished growth.
Prior to the crisis, many suspected that the mix of aggregate demand that was supporting high growth was unsustainable, though the problem perhaps seemed too hypothetical to compel collective action.
Not anymore.
But the collective action problem is no less daunting, and it requires urgent attention if the world’s growth aspirations are to be achieved.
The problem is all the more pressing because countries can achieve gains in market share not only through higher private-sector competitiveness, but also by means of protectionist measures.
And, as we have seen in many countries’ efforts to ameliorate the crisis, the non-cooperative protectionist response is much more likely to be adopted – despite wide recognition that it is highly destructive – when aggregate demand is in short supply.
So what can be done to shore up global aggregate demand and growth prospects, while preserving the economic openness that has benefited major parts of the developing world so greatly in the past 30 years?
First, countries with current-account surpluses such as Germany, Japan and China must recognize that their own growth (and that of others) depends on reducing the global savings-investment imbalance, which will result in narrowing external deficits elsewhere.
This needs to be done on a sustained basis following the withdrawal of extraordinary fiscal stimulus.
Second, everyone must recognize their stake in restoring balanced advanced-country growth as much and as soon as possible in order to counter the ongoing shortfall in aggregate demand.
After all, advanced countries account for about two-thirds of global GDP, so slow growth in these countries will inevitably impede global growth and truncate the growth potential of much of the developing world.
This challenge, however, is very complex because deleveraging and rebalancing cannot be completed overnight.
But key steps can and should be taken: restoration of fiscal balance in well-communicated plans, commitment to central bank autonomy and low inflation, and striking a thoughtful balance between under- and over-regulation of the financial sector.
Externally, major trading partners and holders of advanced-country assets can support rebalancing by agreeing to avoid sudden and potentially destabilizing shifts in the composition of their balance sheets.
So, two crucial items must claim priority at the top of the world’s economic agenda in the months ahead.
The first is re-regulation of advanced countries financial systems with a view to ensuring greater stability without impairing essential functions or unnecessarily elevating the cost of capital.
The second is a set of understandings and commitments among the major advanced and developing countries to rebalance the global economy in order to restore aggregate demand and growth.
If that can be accomplished, the world will have taken a major step toward a relatively smooth, effective, and equitable global economic recovery.
A Civilization in Crisis
A Clockwork Chemistry
OXFORD – In Anthony Burgess’s novella (and Stanley Kubrick’s film) A Clockwork Orange, Alex, an unrepentant psychopath, has his eyes pried wide open and is forced to watch violent images.
Like Pavlov’s dog, Alex is being programmed to respond with nausea to violence and sex.
This scene remains shocking, but, like most science fiction, it has aged.
The behaviorist psychology it drew upon has long expired, and the fear that science will be used to make, or even force, people to be morally better now sounds old-fashioned.
Science fiction ages fast, but it has a long afterlife.
Over the past decade, an army of psychologists, neuroscientists, and evolutionary biologists has been busy trying to uncover the neural “clockwork” that underlies human morality.
They have started to trace the evolutionary origins of pro-social sentiments such as empathy, and have begun to uncover the genes that dispose some individuals to senseless violence and others to acts of altruism, and the pathways in our brain that shape our ethical decisions.
And to understand how something works is also to begin to see ways to modify and even control it.
Indeed, scientists have not only identified some of the brain pathways that shape our ethical decisions, but also chemical substances that modulate this neural activity.
A recent study has shown that the anti-depressant Citalopram can change the responses of individuals to hypothetical moral dilemma scenarios.
Individuals given the drug were less willing to sacrifice an individual to save the lives of several others.
Another series of studies has shown that when the hormone oxytocin is administered via nasal spray, it increases trusting and cooperative behavior within social groups, but also decreases cooperation with those perceived as outsiders.
Neuroscientists have even magnetically “zapped” carefully targeted areas of people’s brains to influence their moral judgments in surprising ways – for example, making it easier for them to lie.
Of course, no one is developing a “moral pill” that will transform us into saints.
But the research is advancing fast, and it is almost certain to suggest new ways to reshape our moral intuitions, sentiments, and motivations.
Should we use our growing scientific understanding of the basis of human morality to try to make people morally better?
A Clockwork Orange was accused of glorifying violence, and some of its scenes are still hard to watch.
But as Burgess himself argued, the novella has an almost Christian message: what makes us human is our freedom to choose both good and evil, and for society to crush individuals into servile conformity is as wicked as, and perhaps even worse than, the sadism of psychopaths like Alex.
I suspect that many will agree with this view.
They will agree that our ability to distinguish right from wrong is something precious that we should safeguard, not a broken clock that scientists should fix.
Of course, most of us don’t need to be conditioned to feel repulsed by rape or torture.
But this does not mean that we are morally good, or good enough.
As you read this, perfectly ordinary people somewhere in the world are doing unspeakable things to others.
Even in the most advanced and affluent societies, a vast concentrated effort is needed to preserve even minimal decency: think of locks, security alarms, police, courts, and prisons.
And it is doubtful that we really care enough about others, or give enough to the less fortunate.
Humans are born with the capacity to be moral, but it is a limited capacity which is ill equipped to deal with the ethical complexities of the modern world.
For thousands of years, humans have relied on education, persuasion, social institutions, and the threat of real (or supernatural) punishment to make people behave decently.
We could all be morally better, but it is clear that this traditional approach cannot take us much further.
It is not as if people would suddenly begin to behave better if we just gave them more facts and statistics, or better arguments.
So we shouldn’t be too quick to dismiss the suggestion that science might help – in the first instance, by helping us design more effective institutions, more inspiring moral education, or more persuasive ethical arguments.
But science might also offer more direct ways of influencing our brains.
Science fiction sometimes limits rather than expands our sense of what is possible.
It would be self-defeating, or worse, to try to promote morality through brutal coercion.
Governments must not be given the power to control its citizens’ moral code – we know that if they had such power, they would misuse it.
It would be ideal if individuals could freely explore different ways to improve themselves, whether by practicing mindfulness, reading moral philosophy, or, yes, by taking a ’morality’ pill.
But it is also true that although some people are eager to take pills that make them feel better or think faster, it is not so obvious that people would really want to take pills that would make them morally better.
It is not clear that people really want to be morally better.
And those who, like the psychopathic Alex, need the most help are probably those who would want it least.
These are, of course, hypothetical questions.
We don’t yet know what is possible.
But it is better to begin the ethical discussion too early than too late.
And even if “moral pills” are just science fiction, they raise deep questions.
Will we want to take them if they ever become available?
And what does it say about us if we won’t?
A Cloud over Airplane Safety
PRINCETON – When airports across Europe reopened after the closure caused by the eruption of Iceland’s Eyjafjallajökull volcano, it was not because the amount of ash in the atmosphere had dropped, but because the risk that the ash posed to airplane safety had been reassessed.
Was it new scientific information that led to the lifting of the flight ban, or was it a reflection of the hardship, both personal and economic, that the ban was causing?
Over six days, about 95,000 flights were canceled, at a cost to airlines of more than $1 billion.
An estimated five million people were stranded or delayed.
The British economy lost £1.5 billion, and others were similarly affected.
Flower growers in Kenya, who depend on air transport to take their short-lived product to Europe, suddenly had no income.
Sixteen cancer patients in critical need of bone marrow for transplants were put at risk because the matching marrow could not be flown in from the United States or Canada.
In the past, jets flying into ash from volcanoes in the US, Indonesia, the Philippines, and Mexico have temporarily lost engine power, and in one case, dropped thousands of feet, although all managed to land safely.
But there was no evidence that the more widely dispersed ash blowing over Europe from Iceland would cause similar problems.
The decision to ground flights was based on the view that any level of ash in the atmosphere posed some risk to aircraft, and that no matter how slight that risk might be, the government’s job was, as British Prime Minister Gordon Brown put it, “to make sure that safety was paramount.”
Indeed, in closing their skies, European governments seem to have given safety absolute priority over everything else.
Yet none of them act on that principle in other areas.
Some 3,000 people die on the world’s roads every day.
Cutting speed limits to, say, 10 kilometers per hour would prevent most accidents and save many lives.
We don’t do it, because we give safety a lower priority than our desire to spend less time driving.
The price we are willing to pay for safety cannot be infinite.
It is distasteful to put a price on human life, but the more we spend on safety, the less we will have for our other goals.
The British government uses a figure of a little more than £1 million as a general limit to the amount it is prepared to pay to save a statistical life – for example, by improving road safety.
In the US, the Department of Transportation is prepared to go up to $5.8 million – nearly four times as much, at current exchange rates – for the same purpose.
Does that mean that safety is paramount in the US, but not in Britain?
Giovanni Bisignani, the head of the International Air Transport Association, an industry group, criticized the shutdown, saying that no risk assessment had been undertaken.
On the whole, though, the public seemed to support the decision.
Stranded travelers, interviewed at airports, typically said that they would rather be stuck at an airport than in a plane falling out of the sky.
But what if some travelers have a higher tolerance of risk, or just a more urgent need to travel, than others?
John Stuart Mill, in his classic book On Liberty, considered a situation in which a man sets out to cross a bridge that we know is unsafe.
In Mill’s view, we are justified in stopping him only to make sure that he is aware of the danger.
Once he knows of it, the decision is his to make, because only he can judge the importance of his journey, and balance that against the risk he is running.
Air safety is slightly different, because a crashing plane can kill people on the ground, but the greatest risks by far are borne by the passengers and crew.
If they are fully informed of the risks, and are still willing to fly – perhaps the crew has been offered more money, as workers in dangerous occupations often are – should we prevent them from making the decision to fly?
In the end, after test flights with no passengers aboard had shown no engine damage, and aircraft engine manufacturers told aviation authorities that their engines could operate safely with a low level of ash in the atmosphere, Europe’s skies were reopened.
The International Civil Aviation Authority has announced that it will convene a group of experts to help it provide guidance for the industry to decide what level of ash in the atmosphere makes it unsafe to fly.
Now that we have seen the costs of giving absolute priority to safety, we know that this is not only a technical question.
I trust that among the experts will be some who have pondered the underlying ethical question: how safe should we aim to be?
A Communist Party without Communism
PRINCETON – Russian President Vladimir Putin’s anointment of Alexander Medvedev to succeed him in what is supposed to be a democratic presidential election next March shows that Russia’s leaders have not changed a whit.
It looks increasingly likely that, as under Leonid Brezhnev, we will see the same names in the news for decades to come.
According to Gleb Pavlovsky, the Putin regime’s leading ideologist, the current Russian system is perfect in all respects but one: it doesn’t know its enemies.
Indeed, it seems as if everyone in the Kremlin is reading Carl Schmitt, the Nazi legal theorist who taught that naming your enemy is the central mission of politics.
In the spirit of Schmitt, Putin’s men designated a liberal party, the Union of Right Forces, as their ur-enemy.
Its public meetings were broken up by armed police; its leaders arrested and beaten; Putin called its supporters “coyotes.”
What is surprising is that this aggressive behavior occurred in response to no visible danger. Oil prices are soaring, as are Putin’s approval ratings.
His appointees control everything that matters, from Gazprom to the Central Electoral Committee.
Since the pacification of Chechnya with violence and subsidies, the incarceration or emigration of a few financially viable opponents, and the massive “social investments” of recent years, which, under Medvedev’s personal supervision, have bribed the population, no credible force can seriously challenge Putin’s men.
Yet their regime is in crisis, and they know it.
Russia’s economy is more dependent on gas and oil than ever before.
Military reform has been reversed.
Despite increasing incomes, Russians are less educated and less healthy than they were when Putin came to power; they still die at a shockingly young age.
Russian involvement in world affairs is tainted by poison and corruption.
State monopolies undo what private businesses created.
With more money, ill-educated bureaucrats hire more ill-educated bureaucrats; as a result, the regime fails to rule the country.
The country is unruly, and its rulers know it.
So they panic.
Putin’s aim was to subject all power to the control of Russia’s security forces.
His generation of KGB officers watched the collapse of the Communist Party and all the governmental bodies that it “directed and controlled,” including the KGB.
Under Putin, the security service has had its revenge.
Its people have become powerful, arrogant, and enormously rich.
They have also become disobedient.
In 2004, General Viktor Cherkesov, then Putin’s representative in northwest Russia, published an essay that glorified the KGB as the only unspoiled authority in a corrupted country.
This essay, more than anything else, defined Putin’s second term.
In October 2007, Cherkesov (now chief of one of the most obscure and powerful services, the Federal Anti-Drug Administration) published another essay in which he lamented his colleagues’ degradation: warriors had turned into traders, he complained.
Earlier, generals from a competing service, the FSB, had arrested Cherkesov’s deputy for “illegal bugging.”
In a public gesture of despair, Cherkesov admitted the failure of Putin’s project to reanimate Russian governance by subordinating it to the security services.
Cherkesov’s deputy remains in prison.
Most believe that Putin is unable to intervene in his defense.
In the absence of Communist Party control, these security officers betrayed their corporate ethic and engaged in horse-trading, applying force when a trade did not go well.
That this happens to ordinary Russians is clear; what Cherkesov revealed was that Putin’s circle also confronts this situation.
What is to be done when ex-KGB warriors turn their swords and bugs against one another?
Cherkesov’s case exemplifies Putin’s nightmare.
But if your instincts betray you, you go back to even deeper ones.
Now that Putin’s people have left their predecessors’ neo-liberal ideas behind and feel disenchanted with the ex-KGB clique, the task is to recreate an omnipresent political party that controls the security services, the administration, business, and much else.
This party will be centralized under personal leadership and will reduce the state to a legal fiction.
Preaching nationalism, its managers will believe in their universal competence, as opposed to KGB-style professionalism and corporatism.
Boris Yeltsin forbade party cells in state-controlled institutions by decree.
Putin’s lawyers will reverse that decision; the party will have cells or committees in every factory, corporation, military unit, university department, etc.
Integrated by the leader’s charisma and party discipline, party members will direct and unify the desolated country.
This is Putin’s plan.
Like former Soviet leader Yuri Andropov, the only other KGB man to rule Russia, Putin will become the party’s general secretary.
As in the Soviet era, state and governmental officials will be reduced to party ciphers – the role that President Medvedev will play under General Secretary Putin.
And, of course, being General Secretary carries no constitutional term limit.
In the end, Putin has what history left him: not ideas, just a faction yearning to consolidate its grip on power.
Lenin and Trotsky needed a party to make their ideology a reality;
Putin and Medvedev are devising an ideology to solidify their party.
It is a bizarre ideology.
Accusing warriors of being traders and traders of being thieves, it shuns its Marxist origins.
It will subordinate all who really do work – traders, warriors, journalists, and others – to party ideologues whose sole job is to search for enemies.
A Confederal Solution for Palestine
LONDON – Last month, while in New York City, I happened to be staying in the same hotel as Israeli Prime Minister Binyamin Netanyahu.
To accommodate his security needs, the hotel had been converted into a fortress, much like Israel itself.
Netanyahu was in the United States for yet another round of Middle East peace talks.
The US offered various sweeteners to induce Israel to freeze its West Bank settlement construction for another 90 days.
The Israelis refused; another impasse was reached.
What, then, might be the prospects of a negotiated peace between two peoples with claims to the same land?
The answer is: very poor.
All peace efforts since the Oslo accords of 1993 have been based on the “two-state solution,” according to which Israel is supposed to turn over the occupied territories to a Palestinian state, the Palestinians are supposed to renounce any claims on the Jewish state, and everyone is supposed to live happily ever after.
A negotiated “land for peace” solution still remains official Western doctrine.
As US Secretary of State Hillary Clinton put it in a recent speech, “a just, lasting, and comprehensive peace” has to be based on “two states for two peoples.”
Meanwhile, the two main parties to the dispute, Palestine and Israel, are searching for unilateral alternatives to the stymied “peace process.” The Palestinians are pushing for international recognition of their statehood, while the Israelis are using their settlement policy to preempt a Palestinian state.
Palestinian President Mahmoud Abbas has said that, if the latest peace talks collapse, he will press for UN recognition of a Palestinian state based on the 1967 borders.
This month, Brazil and Argentina recognized “Palestine,” and a cascade of Latin American countries is expected to follow.
Abbas is now setting his sights on Europe, and would ask Turkey to serve as a go-between.
The game is to use international recognition of an independent Palestinian state to pressure the US to retreat from its almost unconditional support for Israeli policy.
Israel’s main concern continues to be security.
The official Western doctrine is that Israel’s long-term security depends on the success of the “peace process.”
In practice, Israel has been taking other measures to secure its future.
Media attention has been focused on the “security wall,” which has certainly succeeded in reducing the level of violence.
But, to the hawks who now control Israeli politics, the key to Israel’s security depends on depth of defense, for which expansion of the settlements is indispensable.
The hawks’ recipe for survival is threefold: continued military and economic support from the US, defensible frontiers through a strategic settlement program, and the carve-up of the Palestinian West Bank into disconnected bantustans, or subordinate authorities, incapable of concerted opposition to Israeli policy.
Thus, while Abbas seeks to create a new “fact on the ground” by drumming up international support for a Palestinian state, Israel aims to trump him by making such a state unviable.
The ideal alternative to both strategies is a peace process that aims not to create two states, but rather to establish the political and economic basis for a single confederal state.
Indeed, the two-state solution was always an illusion.
There was never enough land to satisfy the passionate possessiveness of all those with claims to it.
And, over time, Israeli settler disengagement from the West Bank and East Jerusalem has become just as impossible as any attempt by Israel to expel its remaining Arabs.
Israeli Jews are bound to stay in the West Bank and East Jerusalem, and Israeli Arabs are bound to stay in Israel proper.
These are the “facts on the ground” that doom Palestinian hopes for a sovereign Palestinian state no less than Israeli hopes for a wholly Jewish state.
Moreover, land for peace never made sense from an economic point of view.
If compensation for wrongs to the Palestinians was to be the guiding principle, there were always better ways of going about it than to found a rickety, poverty-ridden new country dependent on foreign aid.
Most people have forgotten that the Paris Protocols of April 1994 established a customs union between Israel and the occupied territories, with a joint Economic Council to adjudicate trade disputes.
The free movement of goods, labor, and capital between the two parts could have given a tremendous economic boost to Palestinian GDP.
It could also have been the basis of a confederal state, whose Palestinian part would have benefited from the West Bank settlers’ productivity and taxes.
But this benign prospect was undermined by the violence needed to maintain the Jewish state and enable the emergence of a Palestinian one.
The official view remains that only an internationally guaranteed two-state settlement will bring about the security needed for the economic revival of the Palestinian territories.
But it is just possible that unilateral Israeli policy, implicitly backed by the US, will create interim conditions of peace that are sufficient for economic growth to cool Palestinian nationalism.
The Palestinian cause is not the overriding preoccupation of even the Arab states, so Netanyahu’s strategy of defense in depth stands a better chance of success than Abbas’s pursuit of statehood through international recognition.
Netanyahu’s project is not moral.
But that doesn’t mean that it won’t work, at least for a time.
A Confederation for Kosovo
Time is running out in Kosovo.
If a United Nations-backed settlement is not reached by early December, the province’s majority Albanian population is likely to declare independence unilaterally – a move that the United States has announced it may support.
That would be a disastrous step.
Russia would be furious, because it fears that Kosovo’s secession – whether or not it is internationally recognized – might fuel separatist movements in the former Soviet empire.
Serbia is even more strongly opposed.
Dusan Prorokovic, Serbia’s state secretary for Kosovo, has said that his country might use force to maintain its sovereignty.
Even if the government hesitates, ultranationalist groups might push Prime Minister Vojislav Kostunica to send in troops: the current UN presence in Kosovo is very thin (only 40 “military observers” and 2,116 policemen) but the stationing of 15,000 NATO troops could make any armed clash very dangerous.
After eight years of international administration, Kosovo’s Albanian majority has tasted freedom and is eager for full independence.
But Serbia claims that the province remains an essential part of its historical and cultural tradition.
Moreover, independence would not be accepted by the Serbian public, which has already watched in dismay as “Great Serbia” has been gradually whittled away, most recently with the secession of Montenegro.
Serbia is prepared to concede only “enhanced autonomy” to Kosovo, and some capacity to enter into international agreements.
Yet, while the two parties now seem irreconcilable, it is not too late for compromise.
But this is possible only by resuscitating – and updating – an old institution of the international community: a confederation of states.
By means of a binding UN Security Council resolution, Kosovo could be granted full and exclusive authority over its citizens and territory, as well as limited capacity for action on the international scene.
It could be authorized to enter into trade agreements as well as agreements concerning individuals (for example, admission and circulation of foreigners, or extradition), plus the right to seek admission to the UN (which does not require full sovereignty and independence).
Kosovo would thus gain some essential trappings of statehood.
However, a decision-making body consisting of delegates from Kosovo, Serbia, and the European Union would be given full authority over major foreign policy issues (for example, alliances and relations with international economic institutions), defence, borders (in case Kosovo wished to join with Albania), and the treatment of Kosovo’s Serbian minority.
As a result, Kosovo and Serbia would constitute two distinct international subjects, bound by a confederation hinging on a common decision-making body.
Of course, this confederation would be asymmetrical, because the Serbian government’s sovereignty over the rest of Serbia would remain intact and unlimited, whereas the Kosovar government’s “sovereignty” over Kosovo would be restrained.
To avoid one of the two parties getting the upper hand and imposing arbitrary decisions, the common decision-making body should consist of four Serbian delegates, two Kosovar delegates, and three representatives of the EU, thus requiring both sides to gain the support of the European delegates.
In addition, the EU should create a small but effective military force (say, 5,000 troops) to back up the common body’s decisions.
As with any compromise, the contending parties would both gain and lose from this arrangement.
Serbia would save face, and would continue to have a say on crucial matters concerning Kosovo, including the treatment of the Serbian minority.
Kosovo would acquire limited independence, with its status rising from a province of a sovereign state to an international subject capable of entering into certain agreements with other states and even joining the UN.
The EU would benefit as well, by contributing to the stabilization of a highly volatile area.
Subsequently, the EU would monitor Kosovo and prevent any dispute that might turn violent.
A final advantage of this solution is that it would be temporary.
Historically, confederations sooner or later either become federations (as occurred in the US, Germany, and Switzerland) or, pushed by centrifugal forces, split up (as with the United Arab Republic, established in 1958, which split three years later into Egypt and Syria).
The confederation I advocate would thus constitute an intermediate stage (lasting five or ten years), at the end of which Kosovo is likely to become fully independent.
Delaying a final solution in this way would provide time to verify Kosovo’s prospects of joining the EU and thus eventually sharing “sovereign authority” with other independent states, which could deflate Kosovars’ dangerously robust nationalistic demands.
A Conservative Europe
Last week Tony Blair, Jacques Chirac, and Gerhard Schroeder met in Berlin.
They departed pledging to revive Europe's growth.
We've heard that empty promise before.
Instead, the European Union needs a new direction.
I say this as leader of the party which has been at the forefront of Britain's engagement with Europe.
It was a Conservative government that first applied for membership in the early 1960's.
A Conservative government took the United Kingdom into the European Economic Community in 1973.
Margaret Thatcher worked with Jacques Delors to forge the Single Market in 1986.
So I have no doubt that Britain must remain influential within the Union.
But British policy towards the EU has often led to worse rather than better relations among member states.
Faced with a new EU initiative, our traditional response has often been to oppose it, vote against it, lose the vote, then sulkily to adopt it while blaming everyone else.
Many Europeans are sick of British vetoes.
So am I.
Of course there are basic requirements that all member states must accept.
Foremost are the four freedoms of the single market; free movement of goods, services, people and capital.
But a single market does not require a single social or industrial policy, far less a common taxation policy.
Allowing countries to pursue their own policies in these areas encourages competitiveness.
Forcing common standards means that Europe will fall further behind as member states shuffle their costs onto their neighbours.
Which areas should be applied to every member state, and which should be optional?
I believe that every member state should administer those policies that do not directly and significantly affect other member states.
In areas which serve their national interest, individual members should decide whether to retain wholly national control or whether to co‑operate with others.
The Union's members should form a series of overlapping circles: different combinations of members should be able to pool their responsibilities in different areas of their own choosing.
Precedents exist for this.
NATO has been flexible since its inception.
France signed up for membership but later refused to submit her armed forces to NATO's central command.
Similar flexibility exists with the Euro, the Schengen Agreement, and the Social Chapter.
These precedents can be extended.
So far, everyone has had to move forward together, with individual countries negotiating specific opt‑outs.
But since 1998, there has been a procedure within the Treaties - called enhanced co‑operation - that could allow some members to go ahead with further integration in a specific area without involving every other member.
Instead of individual member states having fraught negotiations to opt‑out of a new initiative, those that support it can simply opt‑in.
Countries that want to integrate further can do so.
They don't need to drag Britain and others kicking and screaming in their wake because the others are not compelled to join them.
In this way we can break free of the institutionalised tug of war that has characterised EU relations.
I am not talking about a two‑speed Europe.
That implies that we all agree on the destination and differ only about the speed of the journey.
I don't want to reach the destination that some of our partners may aspire to.
But I don't want to block their way.
There are some who say that this would mean a loss of influence on the part of those countries which choose not to integrate more closely.
But influence is not an end in itself - it is a means to an end.
Britain does not need a seat at the table when decisions on the Euro are taken.
Our economy has not been adversely affected by staying out.
Keeping the pound does not mean that we oppose the Euro, or hope for its failure.
The European Union should stop trying to do everything and concentrate on doing fewer things more effectively.
It should give member states the chance to develop an approach to Europe that suits their national traditions, within the EU framework.
It is on this basis that British Conservatives oppose the proposed constitution.
We disagree with many of its contents, of course, but also oppose the idea of having an EU constitution at all.
There is a world of difference between an association of nation states bound together by treaty, and a single entity, whether you call it a state or not, with its own legal personality, deriving its authority from its own constitution.
If this constitution were accepted in anything like the proposed form, the EU would gain many attributes and trappings of statehood: its own president and foreign minister, its own legal system.
The supremacy of EU law would derive not from Acts of national Parliaments but from a supra‑national constitution.
That is a radical change, not the mere tidying‑up exercise some suggest.
I do not believe it is right to make a change of such magnitude without specifically consulting the people on whose behalf we govern.
Elected parliaments do not own our liberties.
They safeguard them, and should not diminish those liberties without an explicit mandate.
Any proposal for a new constitution must be put to the British people and to the people in each EU member state.
A Conspiracy So Immense
NEW YORK – Is this the Age of the Conspiracy Theory?
Plenty of evidence suggests that we are in something of a golden age for citizen speculation, documentation, and inference that takes shape – usually on the Internet – and spreads virally around the globe.
In the process, conspiracy theories are pulled from the margins of public discourse, where they were generally consigned in the past, and sometimes into the very heart of politics.
I learned this by accident.
Having written a book about the hijacking of executive power in the United States in the Bush years, I found myself, in researching new developments, stumbling upon conversations online that embrace narratives of behind-the-scenes manipulation.
There are some major themes.
A frequent one in the US is that global elites are plotting – via the Bilderberg Group and the Council on Foreign Relations, among others – to establish a “One World Government” dominated by themselves rather than national governments.
Sometimes, more folkloric details come into play, broadening the members of this cabal to include the Illuminati, the Freemasons, Rhodes Scholars, or, as always, the Jews.
The hallmarks of this narrative are familiar to anyone who has studied the transmission of certain story categories in times of crisis.
In literary terms, this conspiracy theory closely resembles The Protocols of the Elders of Zion , featuring secretive global elite with great power and wicked aims.
Historically, there tends to be the same set of themes: fearsome, uncontrolled transformative change led by educated, urbanized cosmopolitans.
Students of Weimar Germany know that sudden dislocations and shocks – rapid urbanization, disruption of traditional family and social ties, loosening of sexual restrictions, and economic collapse – primed many Germans to become receptive to simplistic theories that seemed to address their confusion and offer a larger meaning to their suffering.
Similarly, the “9/11 Truth Movement” asserts that al-Qaeda’s attack on the Twin Towers was an “inside job.”
In the Muslim world, there is a widespread conspiracy theory that the Israelis were behind those attacks, and that all Jews who worked in the buildings stayed home that day.
Usually, conspiracy theories surface where people are poorly educated and a rigorous independent press is lacking.
So why are such theories gaining adherents in the US and other affluent democracies nowadays?
Today’s explosion of conspiracy theories has been stoked by the same conditions that drove their acceptance in the past: rapid social change and profound economic uncertainty.
A clearly designated “enemy” with an unmistakable “plan” is psychologically more comforting than the chaotic evolution of social norms and the workings – or failures – of unfettered capitalism.
And, while conspiracy theories are often patently irrational, the questions they address are often healthy, even if the answers are frequently unsourced or just plain wrong.
In seeking answers, these citizens are reacting rationally to irrational realities.
Many citizens believe, rightly, that their mass media are failing to investigate and document abuses.
Newspapers in most advanced countries are struggling or folding, and investigative reporting is often the first thing they cut.
Concentration of media ownership and control further fuels popular mistrust, setting the stage for citizen investigation to enter the vacuum.
Likewise, in an age when corporate lobbyists have a free hand in shaping – if not drafting – public policies, many people believe, again rightly, that their elected officials no longer represent them.
Hence their impulse to believe in unseen forces.
Finally, even rational people have become more receptive to certain conspiracy theories because, in the last eight years, we actually have seen some sophisticated conspiracies.
The Bush administration conspired to lead Americans and others into an illegal war, using fabricated evidence to do so.
Is it any wonder, then, that so many rational people are trying to make sense of a political reality that really has become unusually opaque?
When even the 9/11 commissioners renounce their own conclusions (because they were based on evidence derived from torture), is it surprising that many want a second investigation?
Frequently enough, it is citizens digging at the margins of the discourse – pursuing such theories – who report on news that the mainstream media ignores.
For example, it took a “conspiracy theorist,” Alex Jones, to turn up documentation of microwave technologies to be used by police forces on US citizens.
The New Yorker confirmed the story much later – without crediting the original source.
The mainstream media’s tendency to avoid checking out or reporting what is actually newsworthy in Internet conspiracy theories partly reflects class bias.
Conspiracy theories are seen as vulgar and lowbrow.
So even good, critical questions or well-sourced data unearthed by citizen investigators tend to be regarded as radioactive to highly educated formal journalists.
The real problem with this frantic conspiracy theorizing is that it leaves citizens emotionally agitated but without a solid ground of evidence upon which to base their worldview, and without constructive directions in which to turn their emotions.
This is why so many threads of discussion turn from potentially interesting citizen speculation to hate speech and paranoia.
In a fevered environment, without good editorial validation or tools for sourcing, citizens can be preyed upon and whipped up by demagogues, as we saw in recent weeks at Sarah Palin’s rallies after Internet theories painted Barack Obama as a terrorist or in league with terrorists.
We need to change the flow of information in the Internet age.
Citizens should be able more easily to leak information, pitch stories, and send leads to mainstream investigative reporters.
They should organize new online entities in which they pay a fee for direct investigative reporting, unmediated by corporate pressures.
And citizen investigators should be trained in basic journalism: finding good data, confirming stories with two independent sources, using quotes responsibly, and eschewing anonymity – that is, standing by their own bylines, as conventional reporters do.
This is how citizens can be taken – and take themselves – seriously as documenters and investigators of our common situation.
In a time of official lies, healthy investigative energy should shed light, not just generate heat.
A Constitutional Coup in Ukraine
Changing constitutions is always a risky business.
But it is a downright dangerous one when undertaken to benefit one man alone.
Indeed, when a president volunteers to reduce the powers of his own office, you can be certain that he is up to no good.
That is exactly what is going on in Ukraine, where President Leonid Kuchma proposes to junk our presidential system and replace it with a strange type of parliamentary system he has concocted.
Kuchma has not suddenly converted to the view that parliamentary democracies are better than presidential ones.
No, Kuchma wants to change Ukraine's constitution for no other reason than to maintain his grip on power.
Today, Kuchma rules as an all-powerful president.
But his term ends next year and he cannot run again.
So, instead of retiring gracefully, as presidents from Bill Clinton to Boris Yeltsin routinely do, Kuchma wants to change the constitution in order to become an all-powerful prime minister who will never face a limit on the length of his term.
Of course, constitutions are not meant to protect the status quo if the status quo is rotten.
Constitutions can, and should, accommodate reform when necessary.
A powerful president, however, is not necessarily wrong for Ukraine.
In our wrenching postcommunist transition, it is essential that a government can act decisively.
To change a system that seems best suited to Ukraine's circumstances, you need a good reason.
The Ukraine president is authorized to appoint and sack the prime minister, dissolve parliament if he wishes, and rule by decree if he judges that the country's institutions are in danger.
He maintains day-to-day control over every aspect of government. So
Kuchma is not.
On the contrary, what is rotten in Ukraine is not its constitution, but its president, who is mired in charges of corruption and orchestrating the murder of journalists, and who is shunned by other world leaders.
As president, Kuchma is grotesquely unpopular.
Even Slobodan Milosevic had more support in Yugoslavia before his fall.
So Kuchma knows that he cannot rely on handpicking his successor, as Yeltsin did in Russia.
Unable to assure himself of a tame presidential successor, Kuchma wants what he calls a "parliamentary republic" with a weak president and powerful prime minister.
But the parliament he has in mind is a mutant, one where the authoritarian rule of the criminal clans Kuchma controls will continue, unabated, behind the facade of parliamentary procedure.
People too easily forget Ukraine, this big country on the border of the soon-to-be enlarged European Union.
But any attempt to prolong Kuchma's rule will create such a political mess that it is not absurd to fear that Ukraine could follow Belarus and the Balkans of the early 1990's into outright dictatorship and chaos.
Indeed, this scenario could worsen, because Russia is unlikely to sit around idly and watch Ukraine unravel.
Intervention of some type seems more likely in such circumstances.
Only an imperial Russia, however, would dare reabsorb Ukraine.
But an imperial Russia cannot be a democratic Russia.
So Kuchma endangers freedom and human rights not only in Ukraine, but ultimately threatens Russia's democracy as well.
Luckily, there has never been a better time for the West--particularly the EU--to nudge Ukraine back from the brink.
With EU expansion coming next spring, all Ukrainians fear that a new wall will cut their country off from the Union's easternmost border in Poland.
Although the job of maintaining Ukraine's democracy is primarily one for Ukrainians, the EU can help if it takes practical steps to reassure Ukrainians that they won't be cut off from the rest of Europe.
A generous visa regime and the use of regional development funds in Ukraine that will benefit impoverished eastern Poland, are two possible inducements.
But these should be made conditional on Kuchma leaving the country's constitution and democracy alone.
The EU should not fret about interfering in Ukraine's domestic affairs.
After all, it hesitated little a few years ago to put a current member state, Austria, on notice that it was watching out for the welfare of that country's democracy.
The wayward Kuchma is far more deserving of Europe imposing safeguards to ensure his good behavior.
Similarly, the US should cast a wary eye at Kuchma's decision to send troops to Iraq.
It cannot be the case that America's fidelity to democracy in Ukraine can be so cynically purchased.
Within Ukraine, a government capable of truly governing should seek to adopt EU laws and norms in exactly the manner that the countries poised to join the Union have done, thus helping to clean up the murky system in which Kuchma's criminal cronies flourish.
The constitution must be reformed, but not to shift power from one unaccountable leader to another.
What is needed are clear checks on arbitrary rule, and transparency in decision-making.
No one should doubt that Kuchma intends to stay in power, no matter what.
Less certain is whether he will feel secure enough to hold a presidential election (or any other kind of election) if he cannot change the constitution in a way that guarantees his continued misrule.
It is, after all, President Kuchma who is discredited, not Ukraine's constitutional arrangements.
A Contagion of Bad Ideas
NEW YORK – The Great Recession of 2008 has morphed into the North Atlantic Recession: it is mainly Europe and the United States, not the major emerging markets, that have become mired in slow growth and high unemployment.
And it is Europe and America that are marching, alone and together, to the denouement of a grand debacle.
A busted bubble led to a massive Keynesian stimulus that averted a much deeper recession, but that also fueled substantial budget deficits.
The response – massive spending cuts – ensures that unacceptably high levels of unemployment (a vast waste of resources and an oversupply of suffering) will continue, possibly for years.
The European Union has finally committed itself to helping its financially distressed members.
It had no choice: with financial turmoil threatening to spread from small countries like Greece and Ireland to large ones like Italy and Spain, the euro’s very survival was in growing jeopardy.
Europe’s leaders recognized that distressed countries’ debts would become unmanageable unless their economies could grow, and that growth could not be achieved without assistance.
But, even as Europe’s leaders promised that help was on the way, they doubled down on the belief that non-crisis countries must cut spending.
The resulting austerity will hinder Europe’s growth, and thus that of its most distressed economies: after all, nothing would help Greece more than robust growth in its trading partners.
And low growth will hurt tax revenues, undermining the proclaimed goal of fiscal consolidation.
The discussions before the crisis illustrated how little had been done to repair economic fundamentals.
The European Central Bank’s vehement opposition to what is essential to all capitalist economies – the restructuring of failed or insolvent entities’ debt – is evidence of the continuing fragility of the Western banking system.
The ECB argued that taxpayers should pick up the entire tab for Greece’s bad sovereign debt, for fear that any private-sector involvement (PSI) would trigger a “credit event,” which would force large payouts on credit-default swaps (CDSs), possibly fueling further financial turmoil.
But, if that is a real fear for the ECB – if it is not merely acting on behalf of private lenders – surely it should have demanded that the banks have more capital.
Likewise, the ECB should have barred banks from the risky CDS market, where they are held hostage to ratings agencies’ decisions about what constitutes a “credit event.”
Indeed, one positive achievement by European leaders at the recent Brussels summit was to begin the process of reining in both the ECB and the power of the American ratings agencies.
Indeed, the most curious aspect of the ECB’s position was its threat not to accept restructured government bonds as collateral if the ratings agencies decided that the restructuring should be classified as a credit event.
The whole point of restructuring was to discharge debt and make the remainder more manageable.
If the bonds were acceptable as collateral before the restructuring, surely they were safer after the restructuring, and thus equally acceptable.
This episode serves as a reminder that central banks are political institutions, with a political agenda, and that independent central banks tend to be captured (at least “cognitively”) by the banks that they are supposed to regulate.
And matters are little better on the other side of the Atlantic.
There, the extreme right threatened to shut down the US government, confirming what game theory suggests: when those who are irrationally committed to destruction if they don’t get their way confront rational individuals, the former prevail.
As a result, President Barack Obama acquiesced in an unbalanced debt-reduction strategy, with no tax increases – not even for the millionaires who have done so well during the past two decades, and not even by eliminating tax giveaways to oil companies, which undermine economic efficiency and contribute to environmental degradation.
Optimists argue that the short run macroeconomic impact of the deal to raise America’s debt ceiling and prevent sovereign default will be limited – roughly $25 billion in expenditure cuts in the coming year.
But the payroll-tax cut (which put more than $100 billion into the pockets of ordinary Americans) was not renewed, and surely business, anticipating the contractionary effects down the line, will be even more reluctant to lend.
The end of the stimulus itself is contractionary.
And, with housing prices continuing to fall, GDP growth faltering, and unemployment remaining stubbornly high (one of six Americans who would like a full-time job still cannot get one), more stimulus, not austerity, is needed – for the sake of balancing the budget as well.
The single most important driver of deficit growth is weak tax revenues, owing to poor economic performance; the single best remedy would be to put America back to work.
The recent debt deal is a move in the wrong direction.
There has been much concern about financial contagion between Europe and America.
After all, America’s financial mismanagement played an important role in triggering Europe’s problems, and financial turmoil in Europe would not be good for the US – especially given the fragility of the US banking system and the continuing role it plays in non-transparent CDSs.
But the real problem stems from another form of contagion: bad ideas move easily across borders, and misguided economic notions on both sides of the Atlantic have been reinforcing each other.
The same will be true of the stagnation that those policies bring.
A Cool Calculus of Global Warming
The British government recently issued the most comprehensive study to date of the economic costs and risks of global warming, and of measures that might reduce greenhouse gas emissions, in the hope of averting some of the direst consequences.
Written under the leadership of Sir Nicholas Stern of the London School of Economics, who succeeded me as Chief Economist of the World Bank, the report makes clear that the question is no longer whether we can afford to do anything about global warming, but whether we can afford not to.
The report proposes an agenda whose cost would be equivalent to just 1% of annual consumption, but would save the world risk equivalent costs that are five times greater.
The reported costs of global warming are higher than in earlier studies because it takes into account the mounting evidence that the process of global warming is highly complex and non-linear, with a non-negligible chance that it may proceed much faster than had previously been thought and that the extent of warming may be much greater than had previously been thought.
Indeed, the study may actually significantly underestimate the costs: for instance, climate change may lead to more weather variability, a possible disappearance or major shift of the Gulf Stream – of particular concern to Europe – and a flourishing of disease.
When I served in 1995 on the Intergovernmental Panel on Climate Change, the scientific group that periodically assesses the science of global warming, there was overwhelming evidence that the concentration of greenhouse gases in the atmosphere had increased markedly since the beginning of the industrial revolution, that human activity had contributed significantly to those increases, and that they would have profound effects on climate and sea levels.
But few saw, for instance, the Artic ice cap melting as rapidly as now seems to be the case.
Still, some suggest that because we are not certain about how bad global warming will be, we should do little or nothing.
To me, uncertainty should make us act more resolutely today, not less.
As one scientist friend puts it: if you are driving on a mountain road, approaching a cliff, in a car whose brakes may fail, and a fog bank rolls in, should you drive more or less cautiously?
Global warming is one of those rare instances where the scientific community is more fearful of what may be happening than the population at large.
Scientists have glimpsed what the future may portend.
As the Stern report points out, as usual, the poor are the most vulnerable.
A third of Bangladesh will be underwater by the end of this century.
The Maldives and a host of Pacific Island states will disappear: our twenty-first-century Atlantis.
To an economist, the problem is obvious: polluters are not paying the full costs of the damage they cause.
Pollution is a global externality of enormous proportions.
The advanced countries might mean Bangladesh and the disappearing island states no harm, but no war could be more devastating.
A global externality can best be dealt with by a globally agreed tax rate.
This does not mean an increase in overall taxation, but simply a substitution in each country of a pollution (carbon) tax for some current taxes.
It makes much more sense to tax things that are bad, like pollution, than things that are good, like savings and work.
Although President George W. Bush says he believes in markets, in this case he has called for voluntary action.
But it makes far more sense to use the force of markets – the power of incentives – than to rely on goodwill, especially when it comes to oil companies that regard their sole objective as maximizing profits, regardless of the cost to others.
Exxon has reportedly been funding so-called think tanks to undermine confidence in the science of global warming, just as the tobacco industry funded “research” to question the validity of statistical findings showing the link between smoking and cancer.
Some companies even seem to celebrate the melting of the polar ice cap, because it will reduce the cost of extracting the oil that lies beneath the Arctic Ocean.
The good news is that there are many ways by which improved incentives could reduce emissions – partly by eliminating the myriad of subsidies for inefficient usages.
The US subsidizes corn-based ethanol, and imposes tariffs on sugar-based ethanol; hidden in the tax code are billions of dollars of subsidies to the oil and gas industries.
Most importantly, price signals that show the true social costs of energy derived from fossil fuels will encourage innovation and conservation.
Small changes in practices, when replicated by hundreds of millions of people, can make an enormous difference.
For example, simply changing the color of roofs in warm climates to reflect sunlight or planting trees around houses can lead to great savings on energy used for air conditioning.
We have but one planet, and should treasure it.
Global warming is a risk that we simply cannot afford to ignore anymore.
A Crisis in Two Narratives
CHICAGO – With the world’s industrial democracies in crisis, two competing narratives of its sources – and appropriate remedies – are emerging.
The first, better-known diagnosis is that demand has collapsed because of high debt accumulated prior to the crisis.
Households (and countries) that were most prone to spend cannot borrow any more.
To revive growth, others must be encouraged to spend – governments that can still borrow should run larger deficits, and rock-bottom interest rates should discourage thrifty households from saving.
Under these circumstances, budgetary recklessness is a virtue, at least in the short term.
In the medium term, once growth revives, debt can be paid down and the financial sector curbed so that it does not inflict another crisis on the world.
This narrative – the standard Keynesian line, modified for a debt crisis – is the one to which most government officials, central bankers, and Wall Street economists have subscribed, and needs little elaboration.
Its virtue is that it gives policymakers something clear to do, with promised returns that match the political cycle.
Unfortunately, despite past stimulus, growth is still tepid, and it is increasingly difficult to find sensible new spending that can pay off in the short run.
Attention is therefore shifting to the second narrative, which suggests that the advanced economies’ fundamental capacity to grow by making useful things has been declining for decades, a trend that was masked by debt-fueled spending.
More such spending will not return these countries to a sustainable growth path.
Instead, they must improve the environment for growth.
The second narrative starts with the 1950’s and 1960’s, an era of rapid growth in the West and Japan.
Several factors, including post-war reconstruction, the resurgence of trade after the protectionist 1930’s, the introduction of new technologies in power, transport, and communications across countries, and expansion of educational attainment, underpinned the long boom.
But, as Tyler Cowen has argued in his book The Great Stagnation, once these “low-hanging fruit” were plucked, it became much harder to propel growth from the 1970’s onward.
Meanwhile, as Wolfgang Streeck writes persuasively in New Left Review, democratic governments, facing what seemed, in the 1960’s, like an endless vista of innovation and growth, were quick to expand the welfare state.
But, when growth faltered, this meant that government spending expanded, even as its resources shrank.
For a while, central banks accommodated that spending.
The resulting high inflation created widespread discontent, especially because little growth resulted.
Faith in Keynesian stimulus diminished, though high inflation did reduce public-debt levels.
Central banks then began to focus on low and stable inflation as their primary objective, and became more independent from their political masters.
But deficit spending by governments continued apace, and public debt as a share of GDP in industrial countries climbed steadily from the late 1970’s, this time without inflation to reduce its real value.
Recognizing the need to find new sources of growth, towards the end of Jimmy Carter’s presidency, and then under Ronald Reagan, the United States deregulated industry and the financial sector, as did Margaret Thatcher in the United Kingdom.
Productivity growth increased substantially in these countries over time, which persuaded Continental Europe to adopt reforms of its own, often pushed by the European Commission.
Yet even this growth was not enough, given previous governments’ generous promises of health care and pensions – promises made even less tenable by rising life expectancy and falling birth rates.
Public debt continued to grow.
And the incomes of the moderately educated middle class failed to benefit from deregulation-led growth (though it improved their lot as consumers).
The most recent phase of the advanced economies’ frenzied search for growth took different forms.
In some countries, most notably the US, a private-sector credit boom created jobs in low-skilled industries like construction, and precipitated a consumption boom as people borrowed against overvalued houses.
In other countries, like Greece, as well as under regional administrations in Italy and Spain, a government-led hiring spree created secure jobs for the moderately educated.
In this “fundamental” narrative, the advanced countries’ pre-crisis GDP was unsustainable, bolstered by borrowing and unproductive make-work jobs.
More borrowed growth – the Keynesian formula – may create the illusion of normalcy, and may be useful in the immediate aftermath of a deep crisis to calm a panic, but it is no solution to a fundamental growth problem.
If this diagnosis is correct, advanced countries need to focus on reviving innovation and productivity growth over the medium term, and on realigning welfare promises with revenue capacity, while alleviating the pain of the truly destitute in the short run.
For example, Southern Europe’s growth potential may consist in deregulating service sectors and reducing employment protection to spur creation of more private-sector jobs for retrenched government workers and unemployed youth.
In the US, the imperative is to improve the match between potential jobs and worker skills.
People understand better than the government what they need and are acting accordingly.
Many women, for example, are leaving low-paying jobs to acquire skills that will open doors to higher-paying positions.
Too little government attention has been focused on such issues, partly because payoffs occur beyond electoral horizons, and partly because the effectiveness of government programs has been mixed.
Tax reform, however, can provide spur retraining and maintain incentives to work, even while fixing gaping fiscal holes.
Three powerful forces, one hopes, will help to create more productive jobs in the future: better use of information and communications technology (and new ways to make it pay), lower-cost energy as alternative sources are harnessed, and sharply rising demand in emerging markets for higher-value-added goods.
The advanced countries have a choice.
They can act as if all is well, except that their consumers are in a funk, and that “animal spirits” must be revived through stimulus.
Or they can treat the crisis as a wake-up call to fix what debt has papered over in the last few decades.
For better or worse, the narrative that persuades these countries’ governments and publics will determine their future –&nbsp;and that of the global economy.
A Crisis of Trust
LONDON – Public trust in financial institutions, and in the authorities that are supposed to regulate them, was an early casualty of the financial crisis.
That is hardly surprising, as previously revered firms revealed that they did not fully understand the very instruments they dealt in or the risks they assumed.
It is difficult not to take some private pleasure in this comeuppance for the Masters of the Universe.
But, unfortunately, if this loss of trust persists, it could be costly for us all.
As Ralph Waldo Emerson remarked, “Our distrust is very expensive.” The Nobel laureate Kenneth Arrow made the point in economic terms almost 40 years ago: “It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.”
Indeed, much economic research has demonstrated a powerful relationship between the level of trust in a community and its aggregate economic performance.
Without mutual trust, economic activity is severely constrained.
Even within Europe, there is powerful evidence that countries where mutual trust is higher achieve higher levels of investment, particularly through venture capital investment, and are prepared to use more flexible contracts, which are also beneficial for growth and investment.
So if it is true that trust in financial institutions – and in the governments that oversee them – has been damaged by the crisis, we should care a lot, and we should be devising responses which seek to rebuild that trust.
In fact, the evidence for a crisis of trust is rather difficult to interpret.
In the United Kingdom, recent survey results are ambiguous.
Surveys promoted by financial firms tend to show that trust in them has not diminished much, and that people continue to trust them even more than they do the National Health Service or the BBC.
Surveys promoted by the BBC tend to show the reverse.
Banks quote statistics to show that they are more trusted than supermarkets, whereas supermarkets cite evidence that the opposite is true, and are expanding into financial services in the belief that the public will trust them more than they trust the banks, which have had to be expensively bailed out by the government.
The market will prove one side right before too long.
In the United States, there is now a more systematic, independent survey promoted by economists at the University of Chicago Booth School of Business.
Their financial trust index, based on a large-scale survey of financial decision-makers in American households, did show a sharp fall in trust in late 2008 and early 2009, following the collapse of Lehman Brothers.
That fall in confidence affected banks, the stock market, and the government and its regulators.
Furthermore, the survey showed that declining trust was strongly correlated with financial behavior.
In other words, if your trust in the market and in the way it is regulated fell sharply, you were less likely to deposit money in banks or invest in stocks.
So falling trust had real economic consequences.
Fortunately, the latest survey, published in July this year, shows that trust in banks and bankers has begun to recover, and quite sharply.
This has been positive for the stock market.
There is also a little more confidence in the government’s response and in financial regulation than there was at the end of last year.
The latter point, which no doubt reflects the Obama administration’s attempts to reform the dysfunctional system it inherited, is particularly important, as the sharpest declines in investment intentions were among those who had lost confidence in the government’s ability to regulate.
It would seem that rebuilding confidence in the Federal Reserve and the Securities and Exchange Commission is economically more important than rebuilding trust in Citibank or AIG.
Continuing disputes in Congress about the precise details of reform could, therefore, have an economic cost if a perception that the system will not be overhauled gains ground.
All these data are at an aggregate level and reflect average views among voters and investors.
Yet we also know that individual views are remarkably heterogeneous.
Some people are very trusting of others, and of the firms and institutions with which they do business.
Others are congenitally distrustful.
Researchers at the European University Institute in Florence and UCLA recently demonstrated that there is a relationship between trust and individuals’ income.
A pan-European opinion survey, which has been carried out for many years, allows us to relate the two.
It asks simple but powerful questions about how far individuals are inclined to trust those with whom they deal.
The data show, intriguingly, that those who show levels of trust well below the average for the country they live in are likely to have lower incomes.
Is that just because low-income people feel that life is unfair and therefore distrust those around them?
It would seem not, as it is also true that very trusting people also have lower incomes than the average.
In other words, if you diverge markedly from society’s average level of trust, you are likely to lose out, either because you are so distrustful of others that you miss out on opportunities for investment and mutually beneficial exchange, or because you are so trusting that you leave yourself open to being cheated and abused.
When anyone I don’t know says “trust me” – an irritating conversational tic – I usually close my wallet.
Perhaps most academics, who are at the lower end of the skill and qualification-adjusted income scale, do the same.
Maybe we should trust each other more – but not too much.
A Crisis of Understanding
NEW HAVEN – Few economists predicted the current economic crisis, and there is little agreement among them about its ultimate causes.
So, not surprisingly, economists are not in a good position to forecast how quickly it will end, either.
Of course, we all know the proximate causes of an economic crisis: people are not spending, because their incomes have fallen, their jobs are insecure, or both.
But we can take it a step further back: people’s income is lower and their jobs are insecure because they were not spending a short time ago – and so on, backwards in time, in a repeating feedback loop.
It is a vicious circle, but where and why did it start?
Why did it worsen?
What will reverse it?
It is to these questions that economists have been unable to offer clear answers.
The state of economic knowledge was just as bad in the Great Depression that followed the 1929 stock market crash.
Economists did not predict that event, either.
In the 1920’s, some warned about an overpriced stock market, but they did not predict a decade-long depression affecting the entire economy.
Late in the Great Depression, in August 1938, an article by Ralph M. Blagden in
The causes given were “distributed widely among government, labor, industry, international politics and policies.”
They included misguided government interference with markets, high income and capital gains taxes, mistaken monetary policy, pressures towards high wages, monopoly, overstocked inventories, uncertainty caused by the reorganization plan for the Supreme Court, rearmament in Europe and fear of war, government encouragement of labor disputes, a savings glut because of population shrinkage, the passing of the frontier, and easy credit before the depression.
Although economic theory today is much improved, if we ask people about the cause of the current crisis, we will mostly get the same answers. We would certainly hear some new ones, too: unprecedented real-estate bubbles, a global savings glut, international trade imbalances, exotic financial contracts, sub-prime mortgages, unregulated over-the-counter markets, rating agencies’ errors, compromised real-estate appraisals, and complacency about counterparty risk.
More likely than not, many or most of these people would be mostly or partly right, for the economic crisis was caused by a confluence of many factors, the chance co-occurrence of a lot of bad things, which pushed the financial system beyond its breaking point.
At that point, the trouble grabbed widespread attention, destroyed public confidence, and set in motion a negative feedback loop.
Our attention, after all, is naturally drawn to the worst events.
Consider the question of predicting events like the January 2010 earthquake in Haiti, which killed more than 200,000 people.
It captured our attention because it was so bad in terms of lives and property damage.
But if one went beyond trying to predict the occurrence of earthquakes to predicting the extent of the damage, one could surely devise a long list of contributing factors – including even political, financial, and insurance factors – that resembles the list of factors that caused the global economic crisis.
Indeed, the crisis knows no end to the list of its causes. For, in a complicated economic system that feeds back on itself in many ways, events that start a vicious cycle might be as seemingly trivial as the proverbial butterfly in the Amazon, which, by flapping its wings, sets off a chain of events that eventually results in a far-away hurricane.
Chaos theory in mathematics explains such dependency on remote and seemingly trivial initial conditions, and explains why even the extrapolation of apparently precise planetary motion becomes impossible when taken far enough into the future.
Weather forecasters cannot forecast far into the future, either, but at least they have precise mathematical models.
Massive parallel computers are programmed to yield numerical solutions of differential equations derived from the theory of fluid dynamics and thermodynamics. &nbsp;
Scientists appear to know the mechanism that generates weather, even if it is inherently difficult to extrapolate very far.
The problem for macroeconomics is that the types of causes mentioned for the current crisis are difficult to systematize.
The mathematical models that macroeconomists have may resemble weather models in some respects, but their structural integrity is not guaranteed by anything like a solid, immutable theory.
The most important new book about the origins of the economic crisis, Carmen Reinhart’s and Kenneth Rogoff’s
This leaves us trying to use patterns from past, dissimilar crises to try to infer the likely prognosis for the current crisis.
As a result, we simply do not know if the recovery will be solid or disappointing.
Financing the Next Development Agenda
WASHINGTON, DC – As the 2015 target date for the Millennium Development Goals approaches, the United Nations is intensifying its efforts to foster debate about what comes next for promotion of development worldwide.
The outcome of these discussions will shape policies and investment aimed at spurring GDP growth, strengthening human capital, and promoting more inclusive prosperity.
With the global population expected to reach nine billion people by 2050 – a significant proportion of whom will reside in developing or underdeveloped countries – the international community must improve access to education, health care, and employment opportunities worldwide.
Meanwhile, the prospect of a rise in global temperature of more than 2°C (3.6°F) over pre-industrial levels by the end of this century (which would trigger global warming’s most damaging effects) calls for higher investment in sustainable urbanization, climate-smart agriculture, and social safety nets.
Both factors challenge us to define, in the longer term, more sustainable patterns of production and consumption.
Governments, civil society, and the private sector must rise to the challenge, cooperating to find and implement creative solutions.
But, first, they must anticipate the associated financing requirements, which will soon surpass the current capacities of governments and international donors, and take action now to activate new, reliable sources of financing.
To start, governments should design targeted, evidence-based policies and support the development of sound institutions.
This would make government services more effective, while helping to catalyze additional development aid from traditional donors and mobilize private-sector resources.
In many countries, there is considerable scope for domestic resource mobilization.
Broadening the tax base, improving tax administration, and closing gaps in the value-added tax could make a significant difference in lower-income countries, where tax revenues account for only about 10-14% of GDP, compared to 20-30% of GDP in high-income countries.
More equitable taxation would have a positive impact on governance, another important tool for mobilizing domestic resources.
With improved corporate and public governance and clear transfer-pricing policies, resource-rich countries could shore up their capacity to negotiate fair contracts with extractive industries, balance revenues and expenditures over time, and manage their natural endowments more transparently.
Progress in these areas would help governments to channel their spending more effectively toward those who would benefit the most.
For example, only 8% of the $409 billion spent on fossil-fuel subsidies in 2010 reached the poorest 20% of the population.
A targeted support program could increase substantially the efficiency of spending, freeing up resources for education, health, and poverty eradication.
Furthermore, promoting financial deepening and inclusiveness could accelerate private-sector growth, creating more opportunities.
Indeed, broader access to financial services would help the estimated 400 million micro, small, and medium-size enterprises in developing countries to prosper, while enabling the 2.5 billion people worldwide who currently lack access to such services to build their assets.
A deeper and more efficient financial sector would also reduce transaction costs and facilitate risk management.
Local-currency bond markets could help to develop domestic investor bases and mobilize domestic savings to support long-term investments.
At the same time, the international community should work to improve the availability and effectiveness of official development assistance.
The ODA target of 0.7% of GDP – agreed in 2002 at the International Conference on Financing for Development in Monterrey, Mexico – should motivate countries to increase their contributions.
They can also take steps to make ODA more predictable from year to year.
Donors should structure aid to ensure that it supports sound national development policies and programs, rather than their own narrow interests.
This is particularly relevant as emerging development partners, especially the BRICS (Brazil, Russia, India, China, and South Africa), offer new kinds of aid packages that incorporate investment and non-financial assistance.
Private charities, which have been instrumental in promoting innovation in fields such as health care, the environment, and education, could provide valuable insight into channeling aid more effectively.
More generally, improving coordination among donors would help to maximize the impact of aid on the ground.
While ODA remains an important source of financing for fragile and very-low-income countries, it represents only 7% of net financial flows to developing countries, where foreign direct investment, remittances, long-term debt, and portfolio investment have a larger impact.
Donors should leverage aid to “grow the pie” and to diversify financing sources for the world’s poorest countries by providing risk guarantees, innovative investment vehicles, debt syndication, and co-financing arrangements.
Attracting even a fraction of the assets held by institutional investors, sovereign-wealth funds, and public pension funds could boost development finance substantially.
Diaspora populations are another major potential source of development financing.
Reducing transfer costs, which average an estimated 9% of the value of transactions, would put more money into the hands of those who need it most.
Tailoring financial products for diaspora communities could attract resources for investment, while reinforcing migrants’ ties – economic and otherwise – to their home countries.
Finally, the international community bears a special responsibility for delivering global public goods.
The responsibility to preserve the environment, stem the spread of communicable diseases, strengthen the international financial architecture, enhance developing-country participation in the global trading system, and facilitate the exchange of knowledge lies at the intersection of national development priorities and global interests.
Duty-free, quota-free access to OECD markets, complemented by simpler, more transparent rules of origin, would raise GDP by 1% in the least-developed countries, lifting millions out of poverty.
Investment in statistical capacity would help governments and businesses worldwide to make better policy decisions, based on a more accurate accounting of the associated costs and benefits.
The challenge of the post-2015 development agenda lies in finding creative solutions to support prosperity, equality, and sustainability.
Together, governments, civil society, international organizations, and the private sector can improve the availability and quality of finance for development, and shape a better future for all.
A Cure for Fiscal Failure?
CAMBRIDGE – Should more countries create independent fiscal advisory councils to infuse greater objectivity into national budget debates?
Jailed swindler Bernie Madoff recently summed up a lot of people’s feelings about fiscal policy, declaring that “the whole government is a Ponzi scheme.”
Perhaps this was just wishful thinking from a man who will die in prison after his own record-breaking $50 billion pyramid scheme collapsed in 2008.
Personally, I suspect Madoff’s unenviable place in the record books will be secure for quite a while.
Still, with many of the world’s largest governments facing a lethal combination of unsustainable conventional debt, unprecedented old-age pension obligations, and a downshift in growth, one has to wonder what the fiscal plan is.
In a new paper, “A Decade of Debt,” Carmen M. Reinhart and I show that general government debt in the United States, including federal, state, and local debt, has now surpassed the record 120% of GDP reached at the end of World War II.
Japan, of course, is in even worse shape, with government debt totaling more than 200% of GDP.
Though this is partially offset by foreign-exchange reserves, Japan now faces massive disaster-relief costs – and this on top of its depressing demographic trends.
Many other rich countries’ debt levels are also uncomfortably close to 150-year highs, despite relative peace in much of the world.
There is a no easy way out.
For now, low world interest rates are restraining debt-service costs, but debt levels can be reduced only very gradually over long periods, whereas real (inflation-adjusted) interest rates can rise far more quickly, even for rich countries.
Debt crises tend to come out of the blue, hitting countries whose debt trajectories simply have no room for error or unplanned adversity.
The single most immediate and direct impact of having an independent fiscal policy would be to reign in spending by producing a counterpoint to Panglossian government growth and revenue forecasts.
In principle, an independent and respected advisory council could also force governments to acknowledge the hidden costs of government guarantees and off-balance sheet debts.
It is high time to consider novel approaches.
Of course, no one simple change will eliminate the huge bias towards deficit spending in most modern political systems.
And no one simple change will preclude the risk of future debt and inflation crises.
Many countries require sweeping reforms to make their tax systems more efficient and their entitlement programs – including their pension schemes – more realistic.
The recent advent of fiscal advisory councils is a promising institutional start.
A number of countries, including Denmark, the Netherlands, the US, and Belgium, have long-standing fiscal watchdog agencies, such as the US Congressional Budget Office (CBO).
But, while these older institutions have proven enormously useful, they are typically quite constrained.
The CBO, for example, is free to issue long-term fiscal projections based on its own best estimates of growth, but is largely forced to accept politically implausible future “fixes” at face value, somewhat neutralizing the potential effectiveness of any critique of deficit policies.
To enhance credibility, a number of governments are gingerly moving towards creating fiscal councils with greater independence, often with central banks as a role model.
The new vanguard includes councils in Sweden, the United Kingdom, Slovenia, and Canada.
The remit of Sweden’s fiscal council is particularly broad, giving it a mandate not only to forecast, but also to look more deeply at the motivations and consequences of government policy.
In principle, an independent fiscal council could have provided invaluable help during the financial crisis.
In the US, such an agency could have weighed in on the costs and benefits of bailout plans, perhaps helping to end congressional paralysis and steeling nerves to give taxpayers more upside risk.
It is too much to expect that these new fiscal institutions will become as important or powerful as central banks, at least anytime soon.
There is far more consensus over monetary policy than over fiscal policy.
And fiscal policy is far more complex and multi-dimensional.
Still, the general principle seems like an important step towards fiscal sanity.
Of course, fiscal councils by themselves are not enough, no matter how well designed they are.
It will remain very tempting for each generation to say, “My grandchildren will be two or three times richer than I, so who cares if they have to pay some debt?” Moreover, the political cycle creates a very strong deficit bias, as leaders seek to embellish feelings of economic health and prosperity by raising visible expenditures at the cost of hidden debts and lower long-term investment.
To resist these powerful pressures, fiscal councils will need to have their work audited periodically by international agencies such as the International Monetary Fund, both to protect their independence and to promote accountability.
To be sure, Bernie Madoff may yet be proved right, and his will not turn out to be the biggest Ponzi scheme ever.
But greater transparency and a more systematic independent evaluation of government policies could be a very helpful step towards solving the perpetual conundrum of outsized deficits.
It is certainly one of the more innovative and promising ideas to emerge from a rather barren policy landscape.
A Customs Union for the Balkans
The fall of Milosevic does not cure the political woes of the Balkans; indeed, it raises their urgency.
Yugoslavia has disintegrated, but the disintegration is incomplete.
It was in Yugoslavia that Vojislav Kostunica was elected president, but his mandate comes solely from support in Serbia.
Montenegro, Serbia’s junior partner in the Yugoslav federation, mostly boycotted the election while Albanians in Kosovo ignored them.
Yet it was Yugoslavia, whose foundations are unstable, that was recently admitted to the UN.
A host of problems remain unresolved: relations between Serbia and Montenegro and the status of Kosovo (not to mention Serbia’s northern province of Vojvodina).
Any resolution – any suggestion of change – will engender new conflicts because of conflicting claims of sovereignty.
However tempting it may be to solve the puzzle by drawing new borders or establishing new entities, this conundrum cannot be resolved in terms of sovereignty.
That traditional solution would only perpetuate the problems of the Balkans.
A new approach is needed: the European Union should use the prospect of European integration as the way to promote regional integration.
The EU could act as a magnet to bring the region closer together by bringing the region as a whole closer to Europe.
This idea has great appeal to people in the region, but only the EU can make it happen.
After NATO intervention in Kosovo, European leaders made this approach the cornerstone of their vision for the Balkans.
It was enshrined in the Stability Pact signed at the Sarajevo Summit of July, 1999.
But the Stability Pact is merely a shell – it needs to be filled with content.
The time to do so is at the Zagreb Conference on November 24 called by France as the current EU president.
The European Union should now propose a three-point plan for the Balkans:
$ a customs union with preferential access to EU markets within one year. The existing EU-Turkey customs union should be used as a model.
Once all these countries reach agreement with the EU there would automatically be free trade throughout the Balkans.
This will take some time to implement.
But from the start, the EU should give a signal by unilaterally opening its border to imports from the region.
This cannot endanger any EU interests as the countries at issue now have far less than 1% of the EU market.
$ a regional VAT to replace the lost customs revenues should be established within two years.
Differences in indirect taxes such as VAT pose another way in which borders become obstacles to trade.
They should be unified throughout the region.
Regional VAT rates might be increased slightly if expenditure restraint is not sufficient to offset the loss of tariff revenues due to the customs union.
$ Temporary budgetary support on a declining scale for three years, subject to EU supervision over budgetary expenditures.
Because it will take time to collect revenues from the regional VAT, the EU should provide financial help during the transition.
The area covered by this plan would include Bulgaria, Croatia and Albania as well as Serbia, Bosnia, Macedonia, Montenegro and Kosovo.
Participation by Romania and Moldova is optional.
Bulgaria and Croatia could be persuaded to participate provided it would not interfere with their candidacy for EU membership.
Depending on the country, there could be more or less budgetary support.
(Bulgaria, for example, might not need compensation since to a great extent it has already eliminated tariffs).
In comparison to the cost of military intervention and peacekeeping, the financial costs here are ridiculously low.
I estimate that Euro 750 million in the first year, Euro 500 million in the second year and Euro 250 million in the third year would do the trick.
(If Romania and Moldova were included the figures would be slightly higher).
These figures are well within range of pledges already made by the EU for the Stability Pact and they could be easily accommodated within the confines of the Berlin Accord on the EU budget for 2000-2005 if EU member states agree to a reallocation of unspent funds.
Budgetary support in the context of a Customs Union would be a more effective way to disburse EU funds than conventional methods.
This three-point program would lay the ground for economic resurgence.
It would remove two major sources of corruption and inefficiency: the customs service and the misuse of public funds in general.
It would create a trade area large enough to generate both local and foreign investment.
The Deutsche Mark, already widely used in the region, now functions as the de facto common currency.
Any ban on its use should be lifted to make borders irrelevant for trade and investment.
Improved economic prospects and the strengthening of institutions, in turn, would have a positive impact on the political climate throughout the Balkans.
Serbia has climbed part of the way out of the abyss.
Success in peacefully removing a tyrant has set in motion a process of national renewal.
But that process has a long way to go.
The opposition inherited a bankrupt country whose institutions are in ruins.
The population, frustrated by ever deepening impoverishment and isolation, is beginning to question what happened over the past decade in Serbia.
People are asking about crimes committed by the Milosevic regime against Serbs.
They must begin to come to terms with the crimes committed against others - in Croatia, Bosnia and Kosovo.
Once that process is underway, many problems that now seem intractable will be resolved more easily.
Kostunica’s election as President of Yugoslavia amounts to an incomplete revolution: many of the old guard are still in place.
The momentum created by Milosevic’s overthrow needs to be maintained.
Milosevic was overthrown in the hope of ending Serbia’s isolation. Europe must now fulfill its promise.
If the French Presidency fails to seize the moment in Zagreb, an historic opportunity will be lost.
A Czech Moment
PRAGUE – As I listened to what some Europeans were saying as my country prepared to take over the presidency of the European Union, I heard dim echoes of Neville Chamberlain’s infamous description of Czechoslovakia as “a faraway country of which we know little.” I suppose that Donald Rumsfeld’s misguided bid a few years ago to incite a divide between “new and old” Europe contributed to the re-emergence of that disdainful attitude.
The reality is that there is no such thing as “old and new” Europe, and there never was.
The break with communism and reunification of Europe is now almost two decades old.
We Czechs are 100% European, and were even when the Iron Curtain cut us off from democratic Europe.
Indeed, our pro-EU sentiments may be all the stronger because our membership in the Union, like our freedom, is so comparatively new.
So no one in Europe needs to fear that the Czech Republic has some nostalgic or idiosyncratic agenda that it wants to impose on the Union.
On the contrary, events have imposed an agenda on Europe that we cannot escape and for which solidarity – true union – will be needed.
The primary, and most pressing, of the problems we face is the financial and economic crisis that is enveloping the EU.
Unfortunately, conditions across the Union will likely worsen before they begin to improve.
The type of social unrest recently witnessed in Greece may spread, because the downturn is likely to take a disproportionate toll on Europe’s young people, who are seeking jobs at a time when hard-pressed European businesses will be able to offer them very few.
It will fall to the Union, once again, to help transform despair into hope.
We Czechs know something about this, as the wrenching economic transition that we underwent in the 1990’s taught us much about how the right policies can break the grip of hopelessness.
To contain today’s financial and economic crisis, Europe will also need to continue the cooperation that it has shown up to this point.
The very existence of our Union, and particularly of the euro, has already helped to prevent the competitive devaluations and beggar-thy-neighbor policies that ravaged Europe during the 1930’s – the last time the continent faced so brutal an economic downturn.
But we cannot be complacent that the forces of national egoism will remain in check.
For now, EU governments’ coordinated fiscal stimulus has deprived populists of their usual charge that the EU is indifferent to the fate of individuals.
Even more policy coordination will be needed both to confront the crisis and to re-establish EU norms once the storm clouds begin to dissipate.
Although it is right that the Stability and Growth Pact has become more flexible in these extraordinary times, its rules did secure a successful first decade for the euro.
These rules must eventually be restored intact if Europe is to return to the path of sustainable growth, and a consensus will need to be forged now to make that happen.
The second key challenge that we will face during our European presidency is that of Russia.
A new Partnership and Cooperation Agreement (PCA) between the EU and the Russian Federation must be negotiated.
Those negotiations should have begun seriously last year, but the war in Georgia intervened to put them on hold.
Now those talks have resumed, but the background to the negotiations has changed dramatically.
Russia’s economy is now in far worse shape than that of EU members.
The collapse of world oil and gas prices has wounded Russia’s budget, and lack of investment in the country’s energy sector over the years is now causing the declining production that economists have long predicted.
Until now, Russia has cared less about a new PCA than the EU, because two-thirds of Russia’s exports to the Union comprise natural resources, which bring in cash even without the strong rules that a PCA provides.
Given the stark changes in economic conditions, however, it is now in Russia’s national interest to reassure international markets that it is a reliable place to do business, for which a new PCA would serve as an ideal signal.
Moreover, without a new PCA, individual European countries may feel it necessary to seek even more bilateral agreements with Russia.
Indeed, many EU members have been in a race with each other to see who will be Russia’s closest friend in the Union.
But the bilateral deals that have emerged from this race sometimes come at the expense of other Union members, and may unbalance relations within the Union as a whole. Only a rules-based EU framework can provide a firm foundation for both bilateral and Union-wide relations with Russia.
Europe’s main strength in foreign policy is not its commitment to a rules-based multilateralism, important as that undoubtedly is, but its unity.
When the Georgia crisis erupted, Europe united around a single position on Russia’s withdrawal.
It is the Czech Republic’s task, and that of the Swedish EU presidency that will follow our own, to maintain this unity as the PCA negotiations move forward.
During the 1990’s, the US and Europe erred in treating Russia with benign neglect. It would be a mistake for Russia to respond in kind today by seeking to prolong the PCA negotiations in the hope that a possibly more amenable EU president may one day offer softer terms.
We, like all EU presidencies, will be representing the wider Union interests when we negotiate.
Adapting to Climate Change
COPENHAGEN – Striking the right balance between preventing global warming and adapting to its effects is one of the most important – and most vexing – policy questions of our age.
It is also often ignored.
According to the conventional wisdom of many environmental campaigners, we should first do everything we can to mitigate global warming, and only then focus on adaptation strategies.
This seems wrong – even immoral – if we could do more for people and the planet through adaptation.
Moreover, it is inconsistent with the inescapable fact that, whatever we do, we cannot prevent all of global warming’s effects.
If we are ill-prepared, global warming will cause more deaths and devastation, especially in poor countries and fragile societies.
Adaptation would also mean saving many lives from catastrophes not related to global warming.
If we prepare societies for more ferocious hurricanes in the future, for example, we are also helping them to cope better with today’s extreme weather.
There has been a huge amount of research into the ways that humans cause climate change, and how we can reduce it.
Much less work has been devoted to adaptation.
It is important to acknowledge that some adaptation strategies will lead to more greenhouse-gas emissions.
Responding to water scarcity by re-using and treating wastewater, or through deep-well pumping and desalination, will increase fossil-fuel use.
Using more air-conditioning to cool our houses in summer will do the same – although this is vital if we want to save lives.
Adaptation could allow for higher carbon emissions in another way: reducing the damage and harm that we experience from global warming, giving us more time to implement alternatives to reliance on fossil fuels.
Should any of this stop us from using adaptation strategies?
To arrive at an informed answer, we need to work out how the planet will look in 2100 if we invest different amounts in adaptation and carbon cuts.
We need to take into account the increase in emissions that adaptation will cause.
The most critical issue isn’t any rise or fall in emissions. It is how much climate damage we can avoid.
How much of the planet can we help by dealing with rising sea levels?
How many lives can we spare from heat, starvation, or malaria?
These are the real reasons we care about global warming.
Reaching a proper answer to these questions requires extensive economic modeling, with different variables calculated and regional differences analyzed.
New research by three Italian economists, Francesco Bosello, Carlo Carraro, and Enrica De Cian does this, and, ultimately, provides a powerful economic case for a much greater focus on adaptation.
They first look at the different ways that climate change will affect us at mid-century.
This work is based on standard scenarios, and carries the typical caveats of predictions far into the future.
Nevertheless, they find that many of our biggest concerns will turn out to be trivial, or even beneficial.
Sea-level rises will be a very minor concern for every country, with the financial impact adding up to less than 0.1% of GDP.
Health problems will be negligible for all but a few nations.
And global warming’s impact would reduce energy consumption for almost all nations.
The important effects are on agriculture and tourism, where nations will lose, on average, about 0.5% of GDP from each sector.
But much of this damage will be avoided by people choosing for themselves to adapt to a change in their environment.
Farmers will choose plants that thrive in heat.
New houses will be designed to deal with warmer temperatures.
Simple economic models, often quoted in the media, show that unconstrained global warming would cost a substantial 2% of GDP in the rich world by the end of the century.
But this fails to acknowledge that people will change their behavior when the environment changes.
Taking adaptation into account, rich countries will adapt to the negative consequences of global warming and exploit the positive changes, creating a total
Poor countries will be hit harder, however.
Adaptation will reduce the climate change-related losses from 5% of GDP to slightly less than 3% – but this is still a significant impact.
The real challenge of global warming, therefore, lies in tackling its impact on the Third World.
Here, more needs to be done, above and beyond the adaptation that will happen naturally.
Importantly, the new research shows that adaptation would achieve a lot more than cuts in carbon emissions.
Reducing emissions to a level that does not extinguish economic growth could avert $3 trillion worth of damage, whereas adaptation could prevent around $8 trillion worth of damage.
For every dollar spent on adaptation, we would achieve about $1.70 worth of positive changes for the planet.
The economic case for focusing more on adaptation is clear.
The crucial next step is to ensure that economic arguments become a stronger part of our political debate about how to address global warming.
A Day for Planetary Justice
PRINCETON – What we are doing to our planet, to our children and grandchildren, and to the poor, by our heedless production of greenhouse gases, is one of the great moral wrongs of our age.
On October 24, you can stand up against this injustice.
October 24 is 350 Day.
The name comes from the number of parts per million of carbon dioxide in the atmosphere that, according to Jim Hansen, perhaps the world’s leading climate scientist, we should not exceed if we are to avoid potentially catastrophic climate change.
It is a measure of the seriousness of our problem that CO2 is already at 386 ppm, and is rising by two ppm each year.
The need to cut greenhouse gases has become increasingly clear as predictions of global warming – denounced as “alarmist” when they were first made just a few years ago – have repeatedly turned out to have been too conservative.
We are approaching a point of no return, at which feedback loops will kick in and continue to warm the planet, no matter what we do.
The melting of arctic ice is one example.
Four hundred years ago, explorers sought the legendary “Northeast Passage” across the north of Europe and Russia to China.
They found the arctic ice impenetrable, and soon gave up their quest.
This year, commercial vessels successfully navigated the Northeast Passage.
That is one of many recent dramatic signs that our climate is changing and that our planet is warmer than it has been for a very long time.
But ice-free arctic waters are more than a symptom of global warming.
They are themselves a cause of further warming: ice and snow reflect the sun’s rays.
An ice-free surface absorbs more warmth from the sun than one covered in snow or ice. In other words, our greenhouse gas emissions have, by causing enough warming to melt the arctic ice, created a feedback loop that will generate more warming, and melt more ice, even if we were to stop emitting all greenhouse gases tomorrow.
Other feedback loops pose a similar danger.
In Siberia, vast quantities of methane, an extremely potent greenhouse gas, are locked up in what used to be called “permafrost” – regions in which it was assumed that the ground was permanently frozen.
But areas that used to be frozen are now thawing, releasing methane and thus contributing to further warming – and to further thawing, which releases more methane.
Developing nations are grasping just how outrageous the current distribution of greenhouse-gas emissions really is.
At the United Nations Summit on Climate Change in September, President Paul Kagame of Rwanda pointed out that, while developed nations outside Africa are almost entirely responsible for the problem, its greatest impact will probably be on Africa, which has few resources to cope with the challenge.
Kagame then suggested giving every country an annual per capita quota for CO2 emissions, and allowing developing countries that are below the quota to trade their excess quota with countries that are above theirs.
The money that developing countries would receive for this would not be aid, but rather a recognition that the rich nations must pay for something that in the past they simply appropriated: far more than their fair share of our atmosphere’s capacity to absorb our waste gases.
Sri Lanka took a similar stance, using studies from the UN Intergovernmental Panel on Climate Change to calculate that in 2008, environmentally permissible carbon emissions totaled no more than 2,172 kilograms per person. In fact, the world’s per capita emissions were 4,700 kilograms, or more than double the permissible limit.
But, while emissions in the rich nations were far above the permissible limit, Sri Lankan emissions were, at 660 kilograms, well below it.
As Sri Lanka’s government pointed out, “That means low-emitting countries like us could not emit more because our space has already been exploited by developed or global heavy polluting countries without our consent.”
This situation is an injustice of vast proportions, reminiscent of – and arguably much worse than – the now-repudiated colonialism of the Western powers in the nineteenth century.
The task of remedying it must begin at the meeting on climate change that will be held in Copenhagen in December.
Many political leaders have expressed support for strong action on climate change, but what most of them regard as “strong action” will not be enough to get us back below 350 ppm.
In some countries, including the United States, there are major political obstacles to taking even modest steps.
On October 24, people in nearly every country will be taking action to raise awareness of the need for an international treaty to bring our atmosphere back to 350 ppm of CO2.
There will be climbers hanging banners high in the Himalayas, where the glaciers are melting, and scuba divers at Australia’s Great Barrier Reef, which is threatened by climate change.
Churches will ring bells 350 times, 350 cyclists will circle towns, and, in many places, 350 trees will be planted. At
A Day of Liberation
When I was seven years old, in 1960, my grandmother Angelica opened my eyes to the meaning of 8 May 1945, the day when Nazi Germany surrendered and World War II ended in Europe.
We were spending our summer holidays in Normandy where the liberation of Europe from Nazism had started on D-Day, 6 June 1944.
One evening, I listened to my parents and my grandmother talking about the past.
I have forgotten the details of their conversation, but I can still hear my grandmother’s sigh of relief when she said “Thank God we lost that war!”
From a child’s perspective, it wasn’t self-evident that losing was a good thing.
But of course, my grandmother was right to equate defeat with liberation.
The more I have thought about the lesson she taught me 45 years ago, the clearer I have seen another, less obvious dimension in what she said: It is “we” who lost the war.
Collectively, the Germans had not been the innocent victims of a small gang of criminal outsiders called “Nazis” – Nazism had been an inside ideology supported by millions of Germans, and every German was liable for its atrocities whether or not he or she had adhered to it individually.
In today’s Germany, an overwhelming majority subscribes to the proposition that 8 May 1945 was a day of liberation – not only for Europe, but also for Germany itself.
Compared to public opinion in 1960, that’s certainly an enormous progress.
But paradoxically, it may also contain an element of forgetfulness, because it tends to conceal the fact that liberation required a military defeat.
To use my grandmother’s parlance, it is not “us” who were the liberators, but “them”.
The way people see the past tells us more about their present attitudes than about the past itself.
This is what the term “politics of memory” is meant to indicate.
And this is why it doesn’t matter whether the relevant events happened 60 years ago (as World War II), 90 years (as in the case of the Armenian genocide) or even 600 years (such as the battle of Kosovo in 1389).
A violent conflict in the past may survive as a war of memories in the present, as can be observed in the current dispute between China and South Korea on one side, and Japan on the other.
A war of memories, in turn, may sometimes lead to a violent conflict in the future.
Former perpetrators often try to de-legitimize their former victims’ moral superiority by claiming they were victims themselves.
Therefore, the 60th anniversary of the firebombing of Dresden by Allied forces on 13 February 1945 has probably been a more crucial moment in terms of the German “politics of memory” than the 60th anniversary of 8 May 1945 is going to be.
Far-right groups infamously dubbed the attack by which at least 30,000 people were killed “Dresden’s Holocaust of bombs.”
Fortunately, their propaganda campaign has been a failure.
Although it is true that thousands of the civilians killed in Dresden and other German cities were innocent at an individual level, there can be no doubt it was morally imperative that Germany be defeated collectively.
On the left side of the German political spectrum, the proposition that 8 May 1945 was a day of liberation remains unchallenged.
However, it is sometimes repressed that the massive use of force had been necessary to achieve that result.
Left-wing pacifism tends to overlook this simple fact.
Its slogan “Never again war!” is only half the truth – the other half is “Never again appeasement!” 8 May 1945 was not “zero hour,” as a popular saying in Germany goes.
It had an antecedent, that is, a lack of pre-emptive resistance at home and abroad to the threat that built up in Nazi Germany during the 1930’s.
There is yet another lesson to be learned.
Yes, 8 May 1945 was a day of liberation to which the Soviet army contributed decisively.
But for millions of Central and East Europeans, liberation was followed by Stalin’s oppressive regime.
The current war of memories between the Baltic republics and Russia, with regard to the international celebration in Moscow on 9 May this year, reminds Germany of a special historic responsibility.
The German-Soviet non-aggression treaty, the so-called Hitler-Stalin pact, concluded in August 1939, had been supplemented by a secret appendix dividing the border states Finland, Estonia, Latvia, Lithuania, Poland and Romania into spheres of interest for the two parties.
But excusing Nazi atrocities by pointing to Stalinist crimes is an intellectually and morally unacceptable stratagem.
When Chancellor Schröder travels to Moscow for the Red Square celebrations, he should bear in mind Nazi Germany’s contribution to the Baltic tragedy.
On 8 May this year, public speakers will remind us how important it is not to forget.
They will stress that if the lessons of history are not learned, history is bound to repeat itself.
All this is perfectly true.
But personally, I will also remember my grandmother’s sentence “Thank God we lost that war!” Thank God – and thanks to all those brave Allied soldiers who sacrificed their lives for the sake of Europe’s liberty.
Crashing the SDR
SANTA BARBARA – The Chinese government’s campaign to have its currency, the renminbi, included in the International Monetary Fund’s reserve asset appears to be on the brink of success.
Last week, IMF staff formally recommended adding the renminbi to the basket of currencies that determines the value of its so-called Special Drawing Rights (SDRs).
The addition of the renminbi to the basket, which currently includes the US dollar, the euro, the British pound, and the Japanese yen, would provide China with a boost to its prestige.
More important, it would advance the government’s efforts to internationalize the renminbi.
But it would also be a mistake.
The decision to recommend the renminbi’s inclusion, far from having been made on sound economic grounds, can only be understood as political.
As such, the long-term consequences are likely to be regrettable.
On a purely technical basis, the renminbi’s qualifications for inclusion in the SDR basket are questionable.
Traditionally, the IMF has insisted on two criteria: a currency’s issuing country must be among the world’s leading exporters, and the currency must be “freely usable” – widely used and traded.
As the world’s largest exporter, China clearly meets the first condition.
The second, however, is probably still beyond its reach.
The renminbi is by no means in the same league as the SDR basket’s four incumbent currencies.
In 2014, China’s currency ranked seventh in global central-bank reserves, eighth in international bond issuance, and 11th in global currency trading. Moreover, the renminbi remains non-convertible for most capital transactions, China’s financial markets are primitive, and trading margins for the exchange rate are still set daily by the monetary authorities.
Indeed, as recently as August, the IMF was skeptical about adding the renminbi to the SDR basket, saying that “significant work” was still needed, and suggesting that a decision should be put off until 2016 in order to ensure a “smooth” transition.
So why did the IMF flip?
The answer is obvious: China mounted a full-court press to change minds.
In August, the currency’s exchange-rate regime was loosened slightly.
Renminbi-denominated government bonds were issued in London, and plans were laid to create new trading platforms for the currency in several European financial centers.
And Chinese policymakers made it abundantly clear how unhappy they would be with a negative decision.
Their pressure paid off.
One by one, Western governments fell in line behind the renminbi, despite its practical limitations.
The Fund got the message, and now the fix is in.
The recommendation to enlarge the SDR basket has been warmly backed by Christine Lagarde, the IMF’s managing director, and a final decision by the Fund’s executive board is expected at the end of the month.
Many would argue that this is a positive development.
Certainly, it mollifies China’s leaders, offering them a stronger incentive to continue to work within the existing international monetary regime.
Recent Chinese initiatives, especially the creation of the Asian Infrastructure Investment Bank, have given rise to fears that the country intends to build a new set of international institutions to compete with Western-dominated organizations like the IMF.
The decision to add the renminbi to the SDR basket may have put that danger into remission.
On the other hand, the move sets a worrying precedent, injecting politics into a policy area that had been governed by objective economic considerations.
Conceivably, over the longer term, China’s successful campaign could now open the door to lobbying by other governments to include their currencies as well.
Why not add the Swiss franc or the Canadian dollar?
Or, for that matter, why not include the Russian ruble or Indian rupee?
What was once the dignified preserve of obviously elite currencies could become the site of messy political battles for elevated status.
Of course, it can be argued that China’s recent economic trajectory means that it is only a matter of time before the renminbi does become a match for the SDR’s incumbents.
After all, international use of the currency has been growing exponentially.
But that optimistic assessment overestimates the renminbi’s prospects and illustrates the danger of linear extrapolation of the past into the future.
Likewise, use of the renminbi for the purpose of invoicing and settling trade with China is bound to continue growing.
But in terms of the all-important roles of a currency as an investment vehicle or reserve asset, the outlook for the renminbi is much less promising, owing to China’s still-tight capital controls and low level of financial development.
Nor is inclusion of the renminbi in the SDR basket likely to provide as big a boost to the currency’s internationalization as many believe.
Some central banks may decide to follow suit, adding renminbi-denominated assets to their reserves to match the composition of the basket.
But the increase will be marginal at best – some $40 billion in the next few years, according to the IMF’s calculations.
With global reserves now totaling more than $10 trillion, that is a mere drop in the proverbial bucket.
The political reasons for including the renminbi in the SDR are all too clear.
Unfortunately, the risks of doing so are no less obvious.
अंतर्राष्ट्रीय कर सहयोग की विफलता
न्यूयॉर्क – दुनिया की अधिकतर सरकारें कराधान के मामलों में सहयोग करने में रुचि रखती हैं क्योंकि वे विकास के वित्तपोषण के लिए अधिक कर राजस्व जुटाने और ऐसी व्यापक कर-वंचन योजनाओं पर अंकुश लगाने के लिए उत्सुक हैं जिनका पिछले वर्ष तथाकथित लक्ज़मबर्ग लीक कांड में खुलासा हुआ था। फिर भी पिछले महीने अदीस अबाबा में आयोजित विकास के लिए वित्तपोषण पर तीसरे अंतर्राष्ट्रीय सम्मेलन में, अंतर्राष्ट्रीय कर सहयोग को मजबूत करने की गति में अचानक अवरोध आ गया था।
विकसित देशों ने इस सम्मेलन में संयुक्त राष्ट्र की विशेषज्ञों की मौजूदा समिति के स्थान पर संयुक्त राष्ट्र के भीतर एक अंतर-सरकारी कर निकाय की स्थापना करने के एक प्रस्ताव को रोक दिया। ये देश इस बात पर जोर देते हैं कि कर सहयोग के मामले पर अनन्य रूप से ओईसीडी के नेतृत्व में विचार किया जाना चाहिए, जो एक ऐसा निकाय है जिसका नियंत्रण उनके हाथ में है।
दुनिया के बाकी देशों को यह आशा करनी चाहिए कि 13 साल पहले मॉन्टेरी, मेक्सिको में विकास के लिए वित्तपोषण पर पहले अंतर्राष्ट्रीय सम्मेलन में जिस अंतर्राष्ट्रीय कर सहयोग की शुरूआत हुई थी, इससे उसकी प्रगति का अंत नहीं होगा बल्कि इसमें एक ठहराव आएगा। दो वर्ष बाद, 2004 में, संयुक्त राष्ट्र आर्थिक और सामाजिक परिषद (ECOSOC) ने कर विशेषज्ञों के अपने "तदर्थ समूह" को एक नियमित समिति के रूप में उन्नत किया। इसका अर्थ यह था कि विशेषज्ञ नियमित रूप से मिलेंगे और वे एक विस्तारित अधिदेश के अंतर्गत कार्य करेंगे जिसका कार्यक्षेत्र मॉडल दोहरे-कराधान की संधि को अद्यतन करने मात्र से बहुत अधिक बढ़ गया था।
चार वर्ष बाद, दोहा, कतर में विकास के लिए वित्तपोषण पर दूसरे सम्मेलन में, नीति निर्माताओं ने यह स्वीकार किया कि कर संबंधी मामलों में अभी और अधिक किया जाना जरूरी है, और उन्होंने ECOSOC से अनुरोध किया कि वह संस्थागत व्यवस्थाओं को मजबूत करने पर विचार करे। और उसके बाद, अदीस अबाबा सम्मेलन के वर्ष में, संयुक्त राष्ट्र के महासचिव ने "संयुक्त राष्ट्र के तत्वावधान में, कर सहयोग पर एक अंतर-सरकारी समिति" की आवश्यकता का समर्थन किया।
उनके समर्थन, गैर-सरकारी संगठनों और अंतर्राष्ट्रीय कॉर्पोरेट कराधान के सुधार के लिए स्वतंत्र आयोग का भारी समर्थन मिलने से 77 देशों के समूह और चीन के इर्द-गिर्द संगठित विकासशील देशों की इस मांग को और अधिक बल मिला कि वैश्विक कर मानदंड स्थापित करने के मामले में उन्हें भी अपनी राय प्रकट करने का समान अधिकार मिलना चाहिए। अदीस अबाबा में वार्ता के अंतिम क्षणों तक वे एक ऐसे अंतर-सरकारी निकाय की मांग पर डटे रहे जिसके पास अंतर्राष्ट्रीय कर सहयोग के लिए सुसंगत वैश्विक ढांचा बनाने के लिए अधिदेश और संसाधन हों।
लेकिन इसका कोई लाभ नहीं हुआ: संयुक्त राज्य अमेरिका और यूनाइटेड किंगडम - जो "लक्स लीक" में फंसे कई बहुराष्ट्रीय निगमों का मूल-स्थान है - के नेतृत्व में विकसित देश वैश्विक शासन में इस बहुप्रतीक्षित कदम को रोकने में सफल रहे। अंत में, अदीस अबाबा की कार्रवाई के एजेंडा के अनुसार विशेषज्ञों की वर्तमान समिति अपने 2004 के अधिदेश के अनुसार कार्य करती रहेगी, प्रति वर्ष तीन अतिरिक्त बैठक दिवस होंगे, ये सभी स्वैच्छिक योगदान के माध्यम से वित्तपोषित होंगे। यह अत्यधिक निराशाजनक परिणाम है।
विकसित देशों के पास तर्क तो है - लेकिन कोई ठोस तर्क नहीं है। ओईसीडी, जिसके सदस्य मुख्य रूप से दुनिया के 34 सबसे अमीर देश हैं, के पास निश्चित रूप से कराधान पर अंतर्राष्ट्रीय मानक स्थापित करने की क्षमता है। फिर भी कर मानदंडों के मामले में कुछ देशों के एक चयनित समूह का वर्चस्व होने का मतलब यह रहा है कि वास्तव में, कराधान के लिए वैश्विक शासन का ढाँचा भूमंडलीकरण के साथ तालमेल नहीं रख पाया है।
2002 में हुई मॉन्टेरी आम सहमति में अंतर्राष्ट्रीय आर्थिक निर्णय लेने और मानदंड स्थापित करने में विकासशील देशों की राय सुने जाने और उनकी भागीदारी को बढ़ाने की मांग को शामिल किया गया था। हालांकि ओईसीडी मानदंडों को स्थापित करने के लिए अपने विचार-विमर्शों में भाग लेने के लिए कुछ विकासशील देशों को आमंत्रित तो करता है लेकिन यह उन्हें निर्णय लेने की कोई शक्ति प्रदान नहीं करता है। इस प्रकार ओईसीडी वैश्विक स्तर पर प्रतिनिधित्व करनेवाले एक अंतर-सरकारी मंच के लिए किराए की एक कमजोर कोख के रूप में है।
इस तरह के निकाय का संचालन संयुक्त राष्ट्र के तत्वावधान में किया जाना चाहिए जिसके पास वैश्वीकरण की चुनौतियों के लिए सुसंगत वैश्विक मानकों के साथ प्रभावी ढंग से प्रतिक्रिया करने के लिए आवश्यक संस्थागत औचित्य उपलब्ध हो, ताकि अपमानजनक कर प्रथाओं का विरोध किया जा सके और विश्व भर में कंपनियों के लाभों पर उचित कराधान सुनिश्चित किया जा सके।
अदीस अबाबा में हुई निराशा के बावजूद, अंतर्राष्ट्रीय कर प्रणाली में सुधार के लिए मांग को दबा पाने की संभावना नहीं है। इसके बजाय, यह मांग चहुँ ओर अधिक जोर से बढ़ेगी, क्योंकि अंतर्राष्ट्रीय सहयोग के मामले में किसी प्रकार के समझौते के बारे में विकसित देशों के प्रतिकूल प्रतिरोध का परिणाम ऐसे एकतरफा कर उपायों की सुनामी के रूप में होगा जो ओईसीडी के नियंत्रण से बाहर होंगे।
The Mouse Click that Roared
CAMBRIDGE – Until recently, cyber security has primarily interested computer geeks and cloak-and-dagger types.
The Internet’s creators, part of a small, enclosed community, were very comfortable with an open system in which security was not a primary concern.
But, with some three billion or so users on the Web nowadays, that very openness has become a serious vulnerability; indeed, it is endangering the vast economic opportunities that the Internet has opened for the world.
A “cyber attack” can take any number of forms, including simple probes, defacement of Web sites, denial-of-service attacks, espionage, and destruction of data.
And the term “cyber war,” though best defined as any hostile action in cyberspace that amplifies or is equivalent to major physical violence, remains equally protean, reflecting definitions of “war” that range from armed conflict to any concerted effort to solve a problem (for example, “war on poverty”).
Cyber war and cyber espionage are largely associated with states, while cyber crime and cyber terrorism are mostly associated with non-state actors.
The highest costs currently stem from espionage and crime; but, over the next decade or so, cyber war and cyber terrorism may become greater threats than they are today.
Moreover, as alliances and tactics evolve, the categories may increasingly overlap.
Terrorists might buy malware from criminals, and governments might find it useful to hide behind both.
Some people argue that deterrence does not work in cyberspace, owing to the difficulties of attribution.
But that is facile: inadequate attribution affects inter-state deterrence as well, yet it still operates.
Even when the source of an attack can be successfully disguised under a “false flag,” governments may find themselves sufficiently enmeshed in symmetrically interdependent relationships such that a major attack would be counterproductive.
China, for example, would lose from an attack that severely damaged the American economy, and vice versa.
An unknown attacker may also be deterred by cyber-security measures.
If firewalls are strong, or redundancy and resilience allow quick recovery, or the prospect of a self-enforcing response (“an electric fence”) seems possible, an attack becomes less attractive.
While accurate attribution of the ultimate source of a cyber attack is sometimes difficult, the determination does not have to be airtight.
To the extent that false flags are imperfect and rumors of the source of an attack are widely deemed credible (though not legally probative), reputational damage to an attacker’s soft power may contribute to deterrence.
Finally, a reputation for offensive capability and a declared policy that keeps open the means of retaliation can help to reinforce deterrence.
Of course, non-state actors are harder to deter, so improved defenses such as pre-emption and human intelligence become important in such cases.
But, among states, even nuclear deterrence was more complex than it first looked, and that is doubly true of deterrence in the cyber domain.
Given its global nature, the Internet requires a degree of international cooperation to be able to function.
Some people call for the cyber equivalent of formal arms-control treaties.
But differences in cultural norms and the difficulty of verification would make such treaties hard to negotiate or implement.
At the same time, it is important to pursue international efforts to develop rules of the road that can limit conflict.
The most promising areas for international cooperation today most likely concern problems posed for states by third parties such as criminals and terrorists.
Russia and China have sought to establish a treaty establishing broad international oversight of the Internet and “information security,” which would prohibit deception and embedding malicious code or circuitry that could be activated in the event of war.
But the US has argued that arms-control measures banning offensive capabilities could weaken defenses against attacks and would be impossible to verify or enforce.
Likewise, in terms of political values, the US has resisted agreements that could legitimize authoritarian governments’ censorship of the Internet – for example, by the “great firewall of China.”
Moreover, cultural differences impede any broad agreements on regulating online content.
Nonetheless, it may be possible to identify behaviors like cyber crime that are illegal in many domestic jurisdictions.
Trying to limit all intrusions would be impossible, but one could start with cyber crime and cyber terrorism involving non-state parties.
Here, major states would have an interest in limiting damage by agreeing to cooperate on forensics and controls.
The transnational cyber domain poses new questions about the meaning of national security.
Some of the most important responses must be national and unilateral, focused on hygiene, redundancy, and resilience.
It is likely, however, that major governments will soon discover that the insecurity created by non-state cyber actors will require closer cooperation among governments.
समलैंगिक होने की विकास लागत
लंदन – नाइजीरिया में रहने वाले समलैंगिक व्यक्ति के रूप में, मेरी सबसे बड़ी चुनौती थी, अपनी लिंगीयता और अपने कार्य में से किसी एक का चयन करना।
2004 में, मैंने अपने अभिनय कैरियर की शुरूआत की थी। मैंने अभी-अभी विश्वविद्यालय छोड़ा था, और मुझे नाइजीरिया के एक सबसे अधिक लोकप्रिय टीवी स्टेशन, गैलेक्सी टेलीविज़न पर प्राइम टाइम धारावाहिक "रोज़ेज़ एंड थॉर्न्स" में मुख्य पात्र के रूप में प्रस्तुत किया गया था। मैं एक अमीर परिवार के इकलौते बेटे "रिचर्ड" की भूमिका निभा रहा था, जिसका घर की नौकरानी के साथ प्रेम-प्रसंग चल रहा था।
तभी मेरे निजी जीवन के बारे में कानाफूसी होनी शुरू हो गई, और मैंने फ़ैसला कर लिया कि अब इससे बाहर आने का समय आ गया है। इसलिए अपनी लिंगीयता के बारे में चर्चा करने के लिए मैं नाइजीरिया के सबसे ज़्यादा देखे जाने वाले टीवी वार्ता शो पर जाने के लिए राजी हो गया।
लगभग तुरंत ही, धारावाहिक से मेरे पात्र को हटा दिया गया। और मेरा कार्य ख़त्म होते ही, मेरी वित्तीय सुरक्षा भी ख़त्म हो गई। अफ़्रीका में अनेक समलैंगिक पुरुषों और महिलाओं की तरह, मुझे आर्थिक स्वतंत्रता और मानसिक कारावास में से किसी एक को चुनना था।
इस साल, नाइजीरिया और युगांडा ने समलैंगिकता-विरोधी कठोर क़ानून बनाया है, जिससे दुनिया भर में मानव अधिकारों के बारे में बहस छिड़ गई है। यह बहस विश्व बैंक में भी शुरू हो गई है, जिसके अध्यक्ष, जिम योंग किम ने हाल ही में घोषित किया कि "सुनियोजित भेदभाव लोगों और समाज के लिए ख़राब है।"
किम के इस वक्तव्य की आलोचना हुई है और इससे विवाद पैदा हुआ है। अकसर, जैसा कि युगांडा और नाइजीरिया में होता है, हम इस दावे के बारे में सुनते हैं कि समलिंगी, उभयलिंगी, और विपरीत लिंगी (LGBT) लोगों के ख़िलाफ़ सरकारी स्तर पर भेदभाव का विरोध बस अफ़्रीका पर "पश्चिमी" मूल्य थोपने का तरीका मात्र है। लेकिन इसमें यह मान लिया जाता है कि समलैंगिकता "गैर-अफ़्रीकी" है। और, इस बात का सबूत न होने के बावजूद कि किसी देश विशेष या महाद्वीप में LGBT लोग नहीं हैं (और इसके विपरीत पर्याप्त सबूत होते हैं), यह एक ऐसी धारणा है जिसे अधिकाधिक अफ़्रीकी नेताओं ने मान्यता दी है।
2006 में, राष्ट्रपति ओलुसेगुन ओबासैंजो, जो उस समय नाइजीरिया क��� राष्ट्रपति थे, ऐसा करने वाले व्यक्तियों में पहले व्यक्ति थे। 2014 में समलैंगिकता-विरोधी विधेयक को क़ानून बनाने के लिए हस्ताक्षर करते समय, युगांडा के राष्ट्रपति योवेरी मुसेवेनी ने भी यही किया। गाम्बिया के राष्ट्रपति याह्या जमेह से लेकर जिम्बाब्वे के रॉबर्ट मुगाबे तक, अन्य नेताओं ने भी उसी सुर में बात की।
इस तरह के सरकारी नज़रिए ने अफ़्रीका के समलैंगिक पुरुषों और स्त्रियों के लिए बहुत अधिक पीड़ादायक स्थिति पैदा की है। निश्चित रूप से, अनेक अफ़्रीकी देशों में समलैंगिक लोगों के लिए होमोफोबिया की क़ीमत दर्दनाक रूप से स्पष्ट है: क़ानूनी दंड, सामाजिक बहिष्कार, और भीड़ का न्याय।
लेकिन अफ़्रीका के समलैंगिकता-विरोधी नेता एक बात भूल जाते हैं: क़ानूनी सुरक्षाएँ देना केवल मानवाधिकारों का मुद्दा ही नहीं है, बल्कि यह आर्थिक मुद्दा भी है। किम की बात बिल्कुल सही है, और शोध ने उन देशों में जहाँ क़ानून और सामाजिक व्यवहार समान सेक्स संबंधों का बहिष्कार किया जाता है, समलैंगिकता-विरोधी भावना और ग़रीबी के बीच संबंधों की खोज के द्वारा, होमोफोबिया की आर्थिक लागत का मूल्यांकन करना शुरू कर दिया है।
मैसाचुसेट्स-एमहर्स्ट विश्वविद्यालय के एक अर्थशास्त्री, एम.वी. ली बागेट ने मार्च 2014 में विश्व बैंक की एक बैठक में भारत में होमोफोबिया के आर्थिक प्रभाव पर एक अध्ययन के प्रारंभिक निष्कर्ष प्रस्तुत किए हैं। बागेट का अनुमान है कि भारतीय अर्थव्यवस्था को समलैंगिकता-विरोधी कलंक और भेदभाव से पैदा हुए अवसाद, आत्महत्या, और HIV उपचार असमानताओं के कारण 2012 में केवल प्रत्यक्ष स्वास्थ्य लागतों में $23.1 अरब तक की हानि हुई होगी।
ऐसी ठोस लागतों के अलावा, समलैंगिक होने से हिंसा, कार्य की हानि, परिवार की अस्वीकृति, स्कूलों में उत्पीड़न, और शादी करने के लिए दबाव भी आ सकता है। इसके परिणामस्वरूप, अनेक समलैंगिक लोगों की शिक्षा कम होती है, उत्पादकता कम होती है, आय कम होती है, स्वास्थ्य ख़राब होता है, और जीवन-काल कम होता है।
नाइजीरिया में, 2005 में अपनी लिंगीयता के बारे में संदेह होने के कारण अपना कार्य खोने वाले लोगों की बढ़ती संख्या के निदान के रूप में मैंने समान अधिकारों के लिए स्वतंत्र परियोजना (TIERS) शुरू की थी। अपने पहले साल के दौरान, हमने दर्जनों लोगों को सहायता प्रदान की। एक युवक "ओलुमाइड" को तब अस्थायी आवास दिया गया जब उसके परिवार ने समलैंगिक होने के कारण उसे घर से बाहर निकाल दिया था। एक अन्य व्यक्ति "उछे" को उसकी लिंगीयता का राज़ खुलने के बाद उसे बावर्ची की नौकरी से निकाल दिया गया था। TIERS ने उसे आवास दिया और केटरिंग व्यवसाय स्थापित करने के लिए पूँजी की मदद की। हालाँकि लगभग 10 साल बीत चुके हैं, लेकिन उनके असली नाम का उपयोग करना अभी भी सुरक्षित नहीं है।
पूरे अफ़्रीका में, नियोक्ताओं, मकान-मालिकों, स्वास्थ्य-सेवा प्रदाताओं, शैक्षिक संस्थानों, और अन्य लोगों पर LGBT लोगों को बाहर करने के लिए बढ़ते दबाव के कारण भेदभाव की आर्थिक लागत बढ़ रही है।
आज, विश्व बैंक और अन्य विकास एजेंसियाँ उन वैश्विक विकास प्राथमिकताओं का निर्धारण कर रही हैं जिन्हें सहस्राब्दि विकास लक्ष्यों (MDGs) की समाप्ति के बाद लिया जाएगा, जो आधिकारिक तौर पर 2015 में समाप्त हो जाएँगे और लैंगिक समानता को बढ़ावा देने और आर्थिक विकास के लिए रणनीति के रूप में महिलाओं को सशक्त बनाने के लिए विशिष्ट लक्ष्यों को शामिल किया है। भविष्य पर नज़र रखते हुए, विश्व बैंक को LGBT अधिकारों के लिए भी वही दृष्टिकोण अपनाना चाहिए और ऋण प्राप्त करने वाले देशों के लिए लिंगीयता और लैंगिक पहचान के लिए क़ानूनी सुरक्षाओं की शर्त रखनी चाहिए।
MDG में महिलाओं के अधिकारों को मान्यता प्रदान किए जाने के फलस्वरूप "पश्चिमी" मूल्यों को लागू करने से अफ़्रीकी संस्कृतियाँ दूषित नहीं हुईं; वास्तव में, इसने अनेक अफ़्रीकी देशों को मज़बूत बनाया है, जो अब सरकार में महिलाओं के प्रतिनिधित्व में दुनिया का नेतृत्व करते हैं। LGBT लोगों के लिए इसी तरह की सुरक्षा प्रदान करके, अंतर्राष्ट्रीय निवेश और सहायता से आर्थिक निष्पादन में सुधार हो सकता है और बुनियादी मानव अधिकारों के लिए सम्मान को मज़बूत किया जा सकता है।
विश्व बैंक ने, जो हमेशा "राजनीतिक" सवालों में उलझने से बचने के प्रति सावधान रहता है, इस बात पर ज़ोर दिया है कि वह वैश्विक मानवाधिकार प्रवर्तक नहीं है। लेकिन विश्व बैंक अपने सदस्यों को उनके मानव अधिकारों के दायित्वों को साकार करने में मदद करके अपनी मददगार की भूमिका को भी अधिकाधिक पहचान रहा है। LGBT अधिकारों का मामला एक कसौटी के रूप में होना चाहिए।
ऐसी सरकारों को सहायता देने के फलस्वरूप, जो विशिष्ट सामाजिक समूहों का बहिष्कार करने की अनुमति देती हैं, वास्तविक आर्थिक लागत बहुत अधिक हो सकती है। नए ऋणों पर विचार करते समय यह सुनिश्चित करने के लिए क़दम उठाए जाने चाहिए कि लाभ यथासंभव समावेशी हों।
अगर विश्व बैंक - जो वर्तमान में नाइजीरिया को लगभग $5.5 अरब का ऋण दे रहा है और यह उम्मीद है कि यह अगले चार सालों में हर साल अतिरिक्त $2 अरब के लिए वचन देगा - इस दिशा में कार्रवाई करता है, तो हो सकता है कि अन्य वित्तदाता भी उसका अनुसरण करें। अफ़्रीका के LGBT लोगों को अपने मानव और आर्थिक अधिकारों के लिए संघर्ष में ऐसे शक्तिशाली सहयोगियों की सख़्त ज़रूरत है।
A Declaration of Independence from the US
George W. Bush is obsessed with the war on terrorism, especially with the military response to terrorism.
American foreign policy reflects that obsession.
This year, the US will spend around $450 billion for the military, including the costs of the Iraq War, while it will spend no more than $15 billion to overcome global poverty, global environmental degradation, and global diseases.
In other words, US foreign policy spending is thirty times more focused on the military than on building global prosperity, global public health, and a sustainable environment.
Throughout 2003, the world lived with Bush's obsession.
Debate over Iraq dominated international diplomacy, and took up almost the entire UN agenda.
The war in Iraq cost countless innocent lives, such as when the UN headquarters in Baghdad was bombed.
At the same time, Bush's emphasis on a one-dimensional, militarized approach to global problems has fueled unrest and instability throughout the Islamic world, leading to increased terrorism in Turkey, North Africa, Saudi Arabia, and Southeast Asia.
The nature of suffering around the world hardly justifies this narrow strategy.
Focusing on terrorism to the exclusion of other issues, and emphasizing the military response to it, will not bring prosperity and peace, or even a significant reduction in the number of attacks.
While 3,000 innocent people died in the US on September 11, 2001, in Africa 8,000 innocent children die every day from malaria.
Yet malaria is preventable and treatable.
The problem is that most of Africa is too poor to mobilize the methods of prevention (bed nets) and treatments (anti-malarial medicines) that could save millions of children every year.
The US spends more on Iraq each day than it does on Africa's malaria in a year.
As 2003 draws to a close, it is time for world leaders to help guide the world away from the obsessive, failing approach of America's government.
President Bush should be made to understand that the US will find no true international support if America speaks incessantly about terrorism while doing almost nothing about the problems that really affect most of the world: poverty, lack of access to safe water and sanitation, vulnerability to disease, and climate change.
Ironically, President Bush claims that the UN does not follow through on its word.
He declared in London recently that "the credibility of the UN depends on a willingness to keep its word and to act when action is required."
Yet the US repeatedly violates its own UN pledges.
For example, at the International Conference on Financing for Development, in Monterrey, Mexico in March 2002, America signed the Monterrey Consensus, which includes a promise by rich countries to raise their development assistance towards 0.7% of national income.
That would bring an additional $60 billion per year in foreign assistance from the US--approximately what it spent on Iraq this year.
Yet President Bush has simply ignored this promise.
There are many other similar commitments that the US has made in recent years to the UN that remain utterly unfulfilled.
The US promised action to fight man-made climate change as a signatory to the UN Framework Convention on Climate Change (UNFCC) in 1992.
It has so far failed to act.
America also promised--in the Doha Declaration in 2001--to open its markets to the world's poorest countries.
Yet at Cancun, Mexico earlier this summer, it refused to open its markets even to exports from struggling African economies.
The list goes on and on.
At the Millennium Assembly in 2000, the US promised to pursue reduction of global poverty, yet it has taken few steps in that direction.
At the World Summit on Sustainable Development in Johannesburg in 2002, America committed itself to protect global ecosystems, yet little has been seen or heard from US policy makers on this issue since then.
America is certainly not alone in failing to promote the international goals adopted in the UN.
But because the US is the richest, most powerful country in the world, its neglect is devastating.
If the US really wants to undercut terrorism, it must recognize the interconnectedness of extremism, poverty, and environmental degradation, and it will need to understand the struggles for survival that are underway among the poor everywhere.
But the world should not wait for the America to come to its senses.
The US represents just 5% of the world's population, and just one vote of 191 countries in the UN General Assembly.
Poor countries, especially the democracies of the developing world--Brazil, South Africa, India, Mexico, Ghana, the Philippines--should say, "We need to act on the issues that concern us, not just on the issues that concern the US."
What the world needs most in 2004 is a declaration of independence from American willfulness.
A De-Globalized World?
Cambridge – It may take a few months or a couple of years, but one way or another the United States and other advanced economies will eventually recover from today’s crisis.
The world economy, however, is unlikely to look the same.
Even with the worst of the crisis over, we are likely to find ourselves in a somewhat de-globalized world, one in which international trade grows at a slower pace, there is less external finance, and rich countries’ appetite for running large current-account deficits is significantly diminished.
Will this spell doom for developing countries?
Not necesarily.
Growth in the developing world tends to come in three distinct variants.
First comes growth driven by foreign borrowing.
Second is growth as a by-product of commodity booms.
Third is growth led by economic restructuring and diversification into new products.
The first two models are at greater risk than the third.
But we should not lose sleep over them, because they are flawed and ultimately unsustainable.
What should be of greater concern is the potential plight of countries in the last group.
These countries will need to undertake major changes in their policies to adjust to today’s new realities.
The first two growth models invariably come to a bad end.
Foreign borrowing can enable consumers and governments to live beyond their means for a while, but reliance on foreign capital is an unwise strategy.
The problem is not only that foreign capital flows can easily reverse direction, but also that they produce the wrong kind of growth, based on overvalued currencies and investments in non-traded goods and services, such as housing and construction.
Growth driven by high commodity prices is also susceptible to busts, for similar reasons. Commodity prices tend to move in cycles.
When they are high, they are apt to crowd out investments in manufactures and other, non-traditional tradables.
Moreover, commodity booms frequently produce ugly politics in countries with weak institutions, leading to costly struggles for resource rents, which are rarely invested wisely.
So it is no surprise that the countries that have produced steady, long-term growth during the last six decades are those that relied on a different strategy: promoting diversification into manufactured and other “modern” goods.
By capturing a growing share of world markets for manufactures and other non-primary products, these countries increased their domestic employment opportunities in high-productivity activities.
Their governments pursued not just good “fundamentals” (e.g., macroeconomic stability and an outward orientation), but also what might be called “productivist” policies: undervalued currencies, industrial policies, and financial controls.
China exemplified this approach.
Its growth was fueled by an extraordinarily rapid structural transformation towards an increasingly sophisticated set of industrial goods.
In recent years, China also got hooked on a large trade surplus vis-à-vis the US – the counterpart of its undervalued currency.
But it wasn’t just China.
Countries that had been growing rapidly in the run-up to the great crash of 2008 typically had trade surpluses (or very small deficits).
These countries did not want to be recipients of capital inflows, because they realized that this would wreak havoc with their need to maintain competitive currencies.
It is now part of conventional wisdom that large external balances – typified by the bilateral US-China trade relationship – played a major contributing role in the great crash.
Global macroeconomic stability requires that we avoid such large current-account imbalances in the future.
But a return to high growth in developing countries requires that they resume their push into tradable goods and services.
In the past, this push was accommodated by the willingness of the US and a few other developed nations to run large trade deficits.
This is no longer a feasible strategy for large or middle-income developing countries.
So, are the requirements of global macroeconomic stability and of growth for developing countries at odds with each other?
Will developing countries’ need to generate large increases in the supply of industrial products inevitably clash with the world’s intolerance of trade imbalances?
There is in fact no inherent conflict, once we understand that what matters for growth in developing countries is not the size of their trade surpluses, nor even the volume of their exports.
What matters is their output of modern industrial goods (and services), which can expand without limit as long as domestic demand expands simultaneously.
Maintaining an undervalued currency has the upside that it subsidizes the production of such goods; but it also has the downside that it taxes domestic consumption – which is why it generates a trade surplus.
By encouraging industrial production directly, it is possible to have the upside without the downside.
There are many ways that this can be done, including reducing the cost of domestic inputs and services through targeted investments in infrastructure.
Explicit industrial policies can be an even more potent instrument.
The key point is that developing countries that are concerned about the competitiveness of their modern sectors can afford to allow their currencies to appreciate (in real terms) as long as they have access to alternative policies that promote industrial activities more directly.
So the good news is that developing countries can continue to grow rapidly even if world trade slows in and there is reduced appetite for capital flows and trade imbalances.
Their growth potential need not be severely affected as long as the implications of this new world for domestic and international policies are understood.
One such implication is that developing countries will have to substitute real industrial policies for those that operate through the exchange rate.
Another is that external policy actors (for example, the World Trade Organization) will have to be more tolerant of these policies as long as the effects on trade balances are neutralized through appropriate adjustments in the real exchange rate.
Greater use of industrial policies is the price to be paid for a reduction of macroeconomic imbalances.
A Democratic Burma?
TOKYO – Historic transformations often happen when least expected.
Mikhail Gorbachev’s liberalizing policies of glasnost and perestroika in the Soviet Union emerged at one of the Cold War’s darkest hours, with US President Ronald Reagan pushing for strategic missile defense and the two sides fighting proxy wars in Afghanistan and elsewhere.
Deng Xiaoping’s economic opening followed China’s bloody – and failed – invasion of Vietnam in 1978.
And South Africa’s last apartheid leader, F. W. de Klerk, was initially perceived as just another apologist for the system – hardly the man to free Nelson Mandela and oversee the end of white minority rule.
Now the world is suddenly asking whether Burma (Myanmar), after six decades of military dictatorship, has embarked on a genuine political transition that could end the country’s pariah status.
Is Burma, like South Africa under de Klerk, truly poised to emerge from a half-century of self-imposed isolation?
And can Aung San Suu Kyi, the heroic opposition leader, and Thein Sein, Burma’s new president, engineer a political transition as skillfully and peacefully as Mandela and de Klerk did for South Africa in the early 1990’s?
Despite her two decades of house arrest and isolation, Suu Kyi possesses two of the gifts that enabled Mandela to carry out his great task: a reassuring serenity and an utter lack of vindictiveness.
As Burma’s authorities test reform, these gifts, together with her negotiating skills and, most of all, her vast moral authority, will be tested as never before.
Moreover, unlike Mandela during his 27-year imprisonment, Suu Kyi has had her hopes raised – and dashed – before.
In the mid-1990’s, and again in 2002-2003, reconciliation between Suu Kyi’s National League for Democracy (NLD) and the military junta seemed to be in the offing.
On both occasions, however, the regime’s hardliners gained the upper hand, crushing prospects for reform.
Yet Suu Kyi, and much of the Burmese opposition, is beginning to admit that today’s political liberalization might be the real thing.
Because Burma’s generals say almost nothing in public, it is difficult to fathom why they allowed elections that elevated Thein Sein to power, or to explain their willingness to embrace dialogue with the long-suppressed opposition.
Recent events suggest one possible explanation: Burma’s rulers have grown wary of China’s almost smothering embrace – a result of the country’s international isolation.
Indeed, public protests against China’s commercial exploitation of Burma’s natural resources became so widespread that the government called a halt to construction by Chinese investors on the huge and environmentally damaging Myitsone Dam on the Irrawaddy River.
Thein Sein’s decision to halt the project is clearly an important policy shift.
It is also a signal to the outside world that Burma’s new government may be much more willing than any of its predecessors to heed both public pressure and international opinion, both of which vehemently opposed the dam’s construction.
Almost simultaneously, Thein Sein offered even stronger signals that his was a very different Burmese administration: he freed political prisoners and invited Suu Kyi for direct talks with him.
Indeed, Suu Kyi now enjoys far greater freedom of movement than she has at any time since she received the Nobel Peace Prize 20 years ago, and the NLD recently announced that it will field candidates in the forthcoming by-elections to the country’s newly established parliament.
If Suu Kyi is permitted to campaign free of restraint, for both her own seat and to boost the electoral chances of her NLD colleagues, it will be clear that Thein Sein and his government are truly determined to bring their country in from the cold.
For both Suu Kyi and Thein Sein, every step from now on will be delicate, to be calibrated with the same care and deliberation that Mandela and de Klerk used in bridging their differences and leading their country out of isolation.
But the international community, too, must act with great care.
While Thein Sein would undoubtedly wish to see the myriad economic and political sanctions imposed on Burma quickly lifted, it is too soon for a general easing of such measures.
But the outside world should demonstrate that every clear move toward greater political openness will merit more international political and economic engagement.
The Japan Investment Bank’s decision to invest in port development in Burma – essential if the economy, too, is to be opened – is one positive sign that the world will keep pace with Thein Sein step for step.
And US President Barack Obama’s decision to send Secretary of State Hillary Clinton to Burma to meet Thein Sein is another clear sign that the world is ready to end the country’s isolation.
Closer to home, ASEAN’s recent decision to give Burma a chance to chair the organization in 2014 underscores its neighbors’ desire for the country’s full participation in Asia’s growing prosperity.
No one should rush to judgment yet, but Thein Sein’s decisions, at least so far, are beginning to resemble those of South Africa’s de Klerk when he initiated his country’s reform process.
Fortunately, Burma already has in Aung San Suu Kyi its very own Nelson Mandela.
A Democratic Windfall for Turkey?
Turkey's seeming fall from grace with the US may turn out to be a blessing in disguise.
The Iraq war and the tortured diplomacy that led up to it may help resolve Turkey's conflict between its "strategic alliance" with America and its drive to join the EU.
The elections last November that brought the Justice and Development Party (AKP) to power were preceded by a dispute between the members of the then-ruling coalition over enacting the reforms demanded by the EU.
Some liberal elements of that "secular" coalition resigned from the government and joined with the Islamists to push the reforms through parliament.
After coming to power, the AKP's leaders, former Islamists who had reinvented themselves as "conservative democrats," energetically engaged with the US, the EU, and the UN on issues ranging from Cyprus to Iraq, from Kurdish language rights to other human rights issues within Turkey.
Having suffered the oppressive practices of Turkey's "secular" state and recognizing that human rights must be protected across-the-board, the AKP emerged as a credible interlocutor with the West.
The US, preoccupied with the supposed specter of a "clash of civilizations" between Islam and the West, saw the AKP's modern, westernized face as an opportunity and urged the EU to admit Turkey.
Today, both "conservative democrats" and liberals advocate passing all the reforms needed to gain accession to the EU, while opponents include extreme nationalists, of both left and right, as well as some elements of the "secular" establishment.
The Europeans could have tipped the balance decisively in favor of the reformers by finally rewarding the efforts of the pro-EU Turks at last December's summit of EU leaders.
Instead, the EU kept Turkey waiting yet again, putting off formal negotiations that, in any case, may take years to complete.
Europe's persistent reluctance puts the Turks in a quandary.
The Americans want full EU membership for Turkey--a longstanding NATO member and close American ally--while Europeans complain about the Turkish military's domestic political role.
The paradox is that, by maintaining a political distance and thus limiting Turkey's options, Europe may end up reinforcing Turkey's status as a military outpost of the US.
At least, that was how things were shaping up prior to the war in Iraq.
Then, despite massive US pressure, Turkey's parliament unexpectedly rejected the government's proposal to allow US troops in Turkey to launch an invasion from Turkish territory.
Turkey's refusal to grant the Americans access to military bases on its territory effectively ruled out a northern front in the war.
The Turkish government even attempted a regional initiative for a peaceful solution to the crisis, an effort no current EU member could have contemplated.
Parliament's rejection of US troops powerfully refutes suggestions that Turkey was primarily concerned about the size of the American aid package on offer as an inducement to cooperate.
Suggestions that characterized the vote as revealing the government's true "Islamic" character ignore the fact that the only opposition party in parliament, the Republican People's Party--founded by Atatürk and still fully "secularist"--voted against the plan.
Likewise, other elements of Turkey's secular establishment, including the President and the military leadership, either opposed or were lukewarm, at best, to the idea of war in Iraq.
Turkey's military initially remained silent on the issue, uncharacteristically watching the civilian political process unfold.
By contrast, the military had earlier publicly criticized AKP initiatives on Cyprus.
Their silence on Iraq reflected their apprehension about unwanted alternatives: either support the US plan and risk encouraging Kurdish moves toward an independent state, or oppose the Americans and jeopardize a critical strategic relationship.
They chose to defer to the civilian leadership and to parliament, which, in voting down the US plan, reflected overwhelming public sentiment against the war.
Only after the vote did the Chief of Staff publicly endorse the original proposal to bring in American troops.
In fact, the allegedly Islamic party had skilfully managed to negotiate with an unrelenting US, consult with the Turkish military and President, and share all information with the public and parliament.
Walking a fine line in what was essentially a lose-lose situation, the party leadership laid out the stakes clearly and judiciously left the final decision to parliament.
The outcome was a victory for Turkish democracy and recognized as such internationally.
After the US military action in Iraq, the tables may be turning in surprising ways.
As America establishes itself in Iraq, Turkey's geopolitical military significance may decline.
Yet the declared American aim of building a Muslim democracy in Iraq will only enhance Turkey's symbolic importance as a role model.
This shift in Turkey's strategic role may also be reflected in a new domestic balance between the military and the forces pushing for reform.
With careful management, Turkey may find itself drawing closer to Europe, while rebuilding its relationship with America.
A Dim Light on Global Warming
COPENHAGEN – Amid a growing wave of concern about climate change, many countries – including Brazil, Australia, the United States, and the members of the European Union – passed laws in the 2000’s outlawing or severely restricting access to incandescent light bulbs.
The intention was understandable: if everyone in the world exchanged most light bulbs for energy-efficient compact fluorescent light bulbs (CFLs), we could save 3.5% of all electricity, or 1% of our CO2 emissions.
The current attempt by Republicans in the US Congress to roll back America’s effort to ban incandescent bulbs has revived this discussion.
Many contend that the agenda is being driven by knuckle-dragging climate-change deniers.
But it’s worth taking a closer look at the premise that banning things is the smartest way to tackle global warming.
Let’s be clear: we do need to tackle climate change.
But this does not mean that we should just cut all emissions.
Burning fossil fuels also has significant benefits, and we should weigh those benefits against the costs.
A tax on carbon should be equivalent to its damage.
The best estimate of this is about $7/ton of CO2 or $0.06/gallon of gasoline (€0.015/liter).
Most developed countries already have a tax of this size (and often much larger) on electricity and fossil fuels, although this also incorporates the costs of air pollution and supply insecurity.
While CFLs are more expensive to buy, they are much cheaper over their lifespan, because they use much less energy (even more so with the cost of CO2 factored into taxes on electricity).
Thus, on a straightforward cost-benefit basis, it seems to make sense for most people to switch from incandescent bulbs to the new, greener technology.
This is what is great about technological solutions to climate change: if an alternative option is cheaper, people will start using it.
My household uses CFLs, and I enjoy knowing that I am causing fewer CO2 emissions and spending less money.
Why, then, is it even necessary to outlaw the old bulbs?
The reason is that monetary cost is only one factor.
Many people find it annoying that CFLs take time to “warm up.”
Or they believe that their light is “funny.”
Or they worry that the bulbs can spread poisonous mercury if they break.
For some people, energy-efficient bulbs can trigger epileptic seizures and migraines.
The up-front cost is a factor, too, especially for those on low budgets.
And in places where lights are not used very often, a lower-price incandescent bulb can cost less overall than the energy-efficient alternative.
You might imagine that people could choose the right light bulbs for themselves.
But proponents of phasing out access to incandescent bulbs argue that they know better.
As US Energy Secretary Steven Chu put it recently, “We are taking away a choice that continues to let people waste their own money.”
Setting aside other possible objections to this view, there is the problem that it presumes that all incandescent bulbs are worth less than $7/ton of CO2.
This is clearly not true for those who suffer from migraines or epileptic seizures because of the new bulbs, or for those who are seriously worried about mercury, or for those who have other reasons for preferring incandescent bulbs.
The solution should be to focus on improving the technology – making the lights safer, brighter, warm up faster, and save more energy, so that more people will replace more of their lights.
But it is not just light bulbs that policymakers have tried to ban.
EU parliamentarians voted overwhelmingly to outlaw patio heaters, which one MEP declared to be “a luxury the planet cannot afford.”
Who decides when something is luxurious?
And where does this end?
Should we outlaw air conditioning or television satellite boxes because some people find them luxurious?
Should we ban private cars wherever public transport is available to move us from A to B with fewer CO2 emissions?
It makes sense to reflect the cost of CO2 (among many other factors) in the price paid to drive our cars or heat our patios; but when the phase-out proceeds more slowly than some lawmakers wish, a ban is not the right solution.
Real reductions in carbon emissions will occur only when better technology makes it worthwhile for individuals and businesses to change their behavior.
CFLs and other advances can take us part of the way, but there are massive technological hurdles to overcome before fossil fuels generally become less attractive than greener alternatives.
This is where a lot of policymakers get it wrong.
Governments talk far too much about setting a relatively high carbon tax on emissions, while focusing far too little on ensuring a meaningful increase in research and development to bring about necessary breakthroughs.
Limiting access to the ‘wrong’ light bulbs or patio heaters, ultimately, is not the right path.
We will only solve global warming by ensuring that alternative technologies are better than our current options.
Then, people the world over will choose to use them.
Adjust and Reschedule or Delay and Default
BRUSSELS – As Greece activates its €45 billion rescue package with the International Monetary Fund and the European Union, it is becoming clear that a new, far more comprehensive approach is needed.
Two problems need to be addressed: the credibility of Greece’s fiscal stabilization program, and how to cover the country’s medium-term financing gap.
The magnitude of the fiscal adjustment effort being demanded of Greece is now well known.
The deficit has to be reduced by at least 10 percentage points of GDP (from around 13% of GDP to less than 3% of GDP).
The key problem, which has not been addressed so far, is that a fiscal adjustment on this scale requires the government to take two steps that can be implemented only with wide social approval: a cut in wages and a cut in social expenditure.
Both steps are now as unpopular in Greece as they are unavoidable.
The country’s competitiveness problems are also well known.
Unit labor costs have increased by 10-20% more than in Germany.
Assuming that Greece wishes to stay within the eurozone, an “internal devaluation,” i.e., a significant cut in nominal wages, is inevitable.
The government can (and has) cut wages in the public sector, but this is not sufficient.
A large cut in private-sector wages also is urgently needed to stimulate exports (which currently amount to less than 20% of GDP, even if one counts both goods and services) to create at least one source of growth.
Greece thus needs a “National Competitiveness Pact” in which government, opposition, employers, and workers agree on a set of measures that cut unit labor costs by at least 10%.
Three levers could be used to reach this goal: adjustment in nominal wages, extension of working time, and a reduction in social-security contributions (compensated for by an increase in value-added tax).
The mix of measures should be left to Greece to decide, but a cut in unit labor costs of this size is an essential first step for a successful adjustment, and should be a pre-condition for the IMF/EU support package.
Deep cuts in social expenditure are also unavoidable in order to achieve sustainable public finances.
The growing fiscal deficits in Greece over the last decade were essentially the result of a massive increase in the size of state social benefits, from 20% to close to 30% of GDP, without any significant increase in tax revenues.
Contrary to popular perception, the public-sector wage bill is only of marginal importance.
The government has already forced through most of the necessary adjustment in this area.
Indeed, cuts in public-sector wages can yield at most 1-2% of GDP in fiscal consolidation.
Given that social expenditure amounts to close to 60% of total public spending, a successful fiscal adjustment will ultimately require that it be cut significantly.
The alternative, an increase in tax revenues by almost 50% in the span of a few years, simply is not feasible.
Profound reform of the welfare state and building a modern tax administration system requires time.
But financial markets are in no mood to give Greece time, which brings us to the second major problem facing the country.
In order to gain the breathing space necessary for the reform process to be effective, the Greek government could just announce a simple rescheduling: the due date of all existing public debt is extended by five years at an unchanged interest rate.
In that case, the Greek government would face no redemptions for the next five years and would have to refinance about €30 billion per year from 2015 onwards, which should be manageable by then.
Official financing needs would then be much more limited, and the IMF/EU package of around €45 billion should be sufficient to cover most of the progressively lower deficits over this grace period.
Without such a rescheduling, it is unlikely that Greece will be able to roll over the approximately €30 billion maturing annually for the next few years.
Over time, the eurozone countries would inevitably have to refinance most of Greece’s public debt.
This is a recipe for continuing political problems, as the Greeks would always consider the interest rate too high, while Germany would consider it too low (at least relative to market rates).
Moreover, once the eurozone had started refinancing Greece without any contribution from private creditors, it would be politically impossible to stop.
The type of rescheduling proposed here would signal the Greek government’s readiness to service its debt in full, and thus might be accepted without too much disruption in financial markets.
Of course, markets would view any rescheduling without a credible adjustment program merely as a prelude to a real default later on, thus leading to an even higher risk premium.
But even the best adjustment program cannot be financed without some contribution by private creditors, i.e., some form of rescheduling.
The only way out for Greece is thus to combine both elements: rescheduling its debt plus national agreements on wages and social expenditure.
The current approach – concentrating only on the financing needs and fiscal adjustment in 2010, and leaving all the hard choices for later – will not work.
A Doomsday Scenario
As America debates whether or not to invade Iraq, fears that the country's economic recovery will stall are beginning to creep into the discussion; with that, worries about the health of the global economy are growing, too.
A consensus is emerging that the gap between the US economy's growth potential and its actual performance will remain large for some time to come.
Can the situation get worse?
Yes, it can: much worse.
A number of worrying factors about the US economy have been around for a long time:
huge trade deficits have persisted since Ronald Reagan's misguided tax cuts of 1981 converted America from the world's largest creditor into the world's largest debtor.
Today, these deficits set new records by the month;
America's appallingly low savings rate.
When American wealth seemed to be growing year after year as the stock market boomed, this was understandable; individual Americans were becoming richer without savings, so why bother?
Today's savings rate, while it has increased slightly, still finds America at the bottom of the world's savings league tables;
lax accounting standards.
The Arthur Anderson, Enron, and WorldCom scandals didn't emerge out of thin air, but had their origins in the mid-1990s, when the US Treasury actually intervened to stop attempts by the supposedly independent accounting standards board to improve matters.
Bad accounting contributed to the recent stock market bubble; bad information led to stock prices that did not reflect underlying realities; and these in turn provided incentives for the excess investment in telecoms that caused today's excess capacity.
To this old brew, new ingredients have been added, notably the most rapid change in a nation's fiscal posture the world has probably ever seen.
In a "now you see it, now you don't" move only a magician should love, the $3 trillion, ten year (non social security) US budget surplus was - in a matter of months - converted into a gaping
Of course, excuses are at hand: the magnitude of the economic downturn was not anticipated and the increased expenditures to fight terrorism could not be foretold.
Excuses, excuses.
As the old saying goes: Don't count your chickens before they hatch.
The Bush Administration not only counted its chickens, it sold them forward!
To anyone with decent eyesight, it was clear that the rosy budget projections of two years ago were nonsense.
Clear, too, was the fact that, in promoting its tax cuts, the Bush Administration was engaging (on a multi-billion dollar scale) in dishonest, Enron-like accounting.
So if things are so bad now, how can they get worse?
Here's a plausible scenario.
To finance its trade deficit, America must borrow from abroad over a billion dollars a day.
When America was the only safe haven for global investors, this was easy.
But America today appears less safe.
The combination of lack of confidence in US corporate accounts, lack of confidence in America's economic policy management (compounded by the mounting deficits), and America's soft underlying economic fundamentals, has dented the US economy's global reputation.
As foreigners start pulling their money out of a country they suspect, the dollar will weaken.
As the dollar weakens, America looks even less safe. So a rush to the door begins.
While a weak dollar may be good for exports, a falling dollar will be accompanied by stock market losses and greater declines in confidence.
Eventually, even the almighty American consumer will be shaken and realize that he is poorer today than three years ago and that he better start putting money away for his retirement, especially given Bush's proposed risky experiments with the social security system.
At that point, Americans will join the stampede out of their economy.
Why shouldn't they?
They're free to choose where to put their money.
Europe's stock markets will begin to look like an attractive alternative.
But this scenario offers no happy ending for Europe.
A weakening US economy and the strengthening Euro will dampen European exports.
The European Central Bank, fixated on inflation, will be slow to lower interest rates, and the European Stability Pact will make it impossible for fiscal policy to offset these weaknesses.
Europe will join America in a downturn, reinforcing America's decline and setting in motion a global downward spiral.
I am not predicting that this will happen.
I hope that the Bush Administration will enact policies to strengthen the US economy: a tax cut that might made minimal sense when it
America is strong, and the global economy is strong.
Should the disastrous events contemplated here occur, a new global economy will eventually emerge from the ashes.
Downturns, of course, can never be fully prevented. We can, however, decrease their frequency; we can make them shallower; we can ensure that fewer people are hurt and that those that get hurt are better protected.
Sadly, we are doing less than is possible to prevent things from getting worse and doing less than necessary to protect ourselves from the consequences.
A Double-Dip Recession for the US?
Last winter, America's central bank - the Federal Reserve - was busy patting itself on the back.
The Fed's cut in its basic interest rate to 1.75% per year seemed to have worked: the recession was ending.
Despite sobered expectations about the high-tech revolution's impact on productivity and profits, as well as the jitters inspired by the terror attack on the World Trade Center, American businesses, it was believed, would soon start investing again big-time because borrowing money at 1.75% was too good a deal to pass up.
By late spring, those expectations had disintegrated alongside the collapse of Enron, WorldCom, and Arthur Andersen.
Suddenly, everyone doubted the integrity of the financial accounts of American companies.
Suddenly, everyone saw just how much America's system of corporate surveillance and control had deteriorated during the bubble of the 1990s.
The American stock market fell 15-20% below its winter levels.
Spreads between the interest rate at which America's government could borrow and the interest rates at which America's corporations could borrow widened.
Suddenly, the Fed stopped congratulating itself: a 1.75% interest rate might be the right interest rate to fuel a recovery when the Dow-Jones stock market index stands at 10,000, but not when the Dow-Jones index stands at 8,500.
Throughout the summer, corporate investment news remained disappointing.
More and more analysts began to speak about the possibility of a "double dip" recession.
Yet throughout all this, the Federal Reserve remained passive.
The short-term interest rates it controlled didn't budge.
Only in mid-August did the Fed hint that interest rates might be cut.
The informal and unofficial rationale leaking out of the Fed for its inaction had two parts.
First, short-term interest rates were already so low that everyone would see further cuts as temporary only.
They would thus have little effect on the longer-term rates that really drive business investment.
Second, short-term interest rates were so low that additional cuts would spook the financial markets: if even the Fed thought conditions warranted cuts, the argument went, businesses would respond not by increasing their investments but by reducing them.
The Fed's judgment appeared to be that it was largely (if not completely) powerless: it had done all that it could, and the levers of monetary policy were no longer strongly connected to determining the level of economic activity.
So the US in 2002 joined Japan in what economists have for sixty-five years called a Liquidity Trap: a situation in which the short-term nominal interest rates the central bank controls are so low and so loosely connected to the level of aggregate demand that further reductions are ineffective in fighting a recession.
America's situation was not unique: Japan had been in been in thrall to a liquidity trap since the mid-1990s.
But there had been no other examples since the Great Depression of the 1930s.
Whether America now really is in a liquidity trap is uncertain. How long this state of affairs will last is unknown.
Nevertheless, even if America is only on the edge of a liquidity trap, and even if it moves away from the current state of affairs soon, this is a frightening situation.
If monetary policy is not effective, the only lever the American government has to manage its economy is fiscal policy: changes in the government's tax and spending plans to change the government's direct contribution to aggregate demand.
But the lesson of the decades since World War II is that the US government - with its complex, baroque, eighteenth-century organization - is incapable of changing policy fast enough to make effective use of fiscal policy as a tool for managing the economy.
It simply takes too long for changes in taxes and spending to work their way through Congress and the bureaucracy.
An America caught in a liquidity trap is, quite simply, a country with no effective tools of macroeconomic management.
There have been two eras since World War II when policymakers - American policymakers, at least - believed that they had solved the riddle of the business cycle and had learned how to manage a modern industrial or post-industrial economy.
The first was the Keynesian high-water mark of confidence in demand management of the 1960s.
It was destroyed by the inflation of the Vietnam era and the oil-price shocks of the 1970s.
The second was the decade of successful business-cycle management by Alan Greenspan's independent, apolitical, and technocratic Fed during the 1990s.
This second era now appears to have been as fleeting as the first.
Eighty years ago, John Maynard Keynes argued that governments needed to take responsibility for maintaining full employment and price stability - that the pre-World War I gold standard had not been the golden age people thought it was, and that its successes were the result of a lucky combination of circumstances unlikely to be repeated.
Keynes was an optimist in believing that governments could learn to manage the business cycle.
He would be shocked to look at today's world: a Europe with stubbornly high unemployment, a Japan mired in a decade of near stagnation, and now an America lacking the policy tools to deal with any additional unexpected economic bad news.
A Global \
ATHENS – The International Monetary Fund’s belated admission that it significantly underestimated the damage that austerity would do to European Union growth rates highlights the self-defeating character of “orthodox” recipes to address the causes of the debt crisis that followed the financial crash of 2008-2009.
Conventional theory suggests that a single country (or group of countries) consolidating its finances can expect lower interest rates, a weaker currency, and an improved trade position.
But, because this cannot happen for all major economies simultaneously – one country’s (or group of countries’) austerity implies less demand for other countries’ products – such policies eventually lead to beggar-thy-neighbor situations.
Indeed, it was this dynamic – against which John Maynard Keynes fought – that made the Great Depression of the 1930’s so grim.
Today’s problems are compounded by a lack of sufficient private demand – particularly household consumption – in the advanced economies to compensate for demand losses stemming from austerity.
During the last two decades, consumption drove these countries’ economic growth, reaching historically high GDP shares.
Moreover, major advanced economies, such as the United States, Germany, and Japan, face longer-term fiscal problems in the form of aging populations or oversize welfare states, limiting their capacity to contribute to demand management.
Recent moves to ease monetary policy have been a step in the right direction; but, so far, they have not proved to be a game changer.
For domestic demand to act as an engine of growth, policies should shift resources from investment to consumption.
While the magnitudes involved are huge, they must be attained if an extended period of low growth, high unemployment, and declining living standards among the world’s poorest is to be avoided.
International economic policy coordination should be significantly strengthened in order to deal effectively with changes on such a scale.
Start with Europe.
It is by now patently obvious that austerity and domestic reforms are not enough to pull the eurozone’s periphery out of deep recession.
Growing awareness of the failure of current policies is causing social discontent, civil disorder, and political instability, with the recently concluded Italian elections and the growing popular resistance to Greek reform efforts serving as a bellwether.
Returning the eurozone’s peripheral economies to the path of growth requires more than structural reforms and fiscal consolidation.
It also requires a substantial reform of the monetary union’s system of economic governance, aimed at restoring financial stability and lowering borrowing costs, together with a boost in external demand in order to compensate for the effects of austerity.
Reforming governance implies significant progress toward economic unification: centralizing European debt through Eurobonds, mobilizing sufficient rescue funds, allowing the European Central Bank to intervene in the primary bond markets, and establishing both a fiscal and a banking union.
This is a tall order, in view of the reluctance of most EU member states to cede competences to European institutions.
But Europe should move more decisively in this direction.
Otherwise, speculation on member states’ national debt will persist, keeping borrowing costs at levels that are inconsistent with the conditions required to sustain economic recovery.
Concerning external demand, intra-European help in the form of reflationary policies in stronger economies is unlikely to prove sufficient, owing primarily to the fiscal and political conditions prevailing in Germany.
Implementing a Marshall Plan-type initiative by mobilizing EU budget resources and additional lending by the European Investment Bank to finance investments in weaker countries could be an alternative, but it lacks political support.
On a global scale, neither the US nor Japan is in a position to provide significant external stimulus.
Only the emerging and developing economies of Asia could effectively contribute to lifting global demand through a coordinated effort aimed at boosting domestic consumption, which, in turn, would stimulate additional investment.
Recent IMF experience suggests that, through appropriate coordination, private funds could be mobilized for big private-public partnership projects linking demand expansion with infrastructure investment.
In other words, a global “New Deal” – combining policies designed to achieve an orderly realignment of consumption and investment worldwide – seems to be required.
The advanced economies should promote productivity-enhancing structural reforms with renewed vigor.
The eurozone should solidify its currency union.
And the emerging and developing economies should support domestic sources of growth.
For such a deal to become possible, certain preconditions must be met.
First, international policy coordination by the G-20 must be tightened by creating a permanent secretariat to make policy proposals and recommendations concerning macroeconomic and financial developments.
The secretariat should actively cooperate with the IMF to benefit from its analysis, notably regarding exchange rates.
Second, global financial reform must proceed at a faster pace.
The financial sector requires tougher regulation, strengthened supervision, and internationally consistent resolution mechanisms to address the problems posed by very large, global institutions that are considered too big (or too complex) to fail.
Such reform is essential if the international financial system is to mediate the sizeable resource transfers that will underpin the required changes in the structure of global demand.
Finally, a new trade pact – possibly, but not necessarily, within the Doha Round – is needed to ensure the major trading powers’ access to foreign markets.
This is critically important for inspiring confidence in Asian countries, which might be persuaded to favor domestic, as opposed to external, sources of demand.
Moreover, trade liberalization will also increase consumer confidence worldwide.
The time is right for a new global settlement that targets growth, addresses crisis conditions in certain parts of the world, and rebalances the global economy to set it back on a path of strong and steady growth.
The Other Financial Crisis
NEWPORT BEACH – Two variants of financial crisis continue to wreak havoc on Western economies, fueling joblessness and poverty: the one that we read about regularly in newspapers, involving governments around the world; and a less visible one at the level of small and medium-size businesses and households.
Until both are addressed properly, the West will remain burdened by sluggish growth, persistently high unemployment, and excessive income and wealth inequality.
The sovereign-debt crisis is well known.
In order to avert a likely depression, governments around the world engaged in fiscal and monetary stimulus in the midst of the global financial crisis.
They succeeded in offsetting nasty economic dislocations caused by private-sector deleveraging, but at the cost of encumbering their fiscal balances and their central banks’ balance sheets.
While sovereign credit quality has deteriorated virtually across the board, and will most probably continue to do so, the implications for individual countries vary.
Some Western countries – such as Greece – had fragile government accounts from the outset and tipped quickly into persistent crisis mode.
There they remain, still failing to provide citizens with a light at the end of what already has been a long tunnel.
Other countries had been fiscally responsible, but were overwhelmed by the liabilities that they had assumed from others (for example, Ireland’s irresponsible banks sank their budget).
Still others, including the United States, faced no immediate threat but failed to make progress on longer-term issues.&nbsp;A few, like Germany, had built deep economic and financial resilience through years of fiscal discipline and structural reforms.
It is not surprising that policy approaches have also varied.
Indeed, they have shared only one, albeit crucial (and disappointing) feature: the inability to rely on rapid growth as the “safest” way to deleverage an over-indebted economy.
Greece essentially defaulted on some obligations.
Ireland opted for austerity and reforms, as has the United Kingdom.
The US is gradually transferring resources from creditors to debtors through financial repression.
And Germany is slowly acquiescing to a prudent relative expansion in domestic demand.
So much for the sovereign-debt crisis, which, given its national, regional, and global impact, has been particularly well covered.
After all, sovereigns are called that because they have the power to impose taxes, regulations, and, at the extreme, confiscation.
But the other credit crisis is equally consequential, and receives much less attention, even as it erodes societies’ integrity, productive capabilities, and ability to maintain living standards (particularly for the least fortunate).
I know of very few Western countries where small and medium-size companies, as well as middle-income households and those of more limited means, have not experienced a significant decline in their access to credit – not just new financing, but also the ability to roll over old credit lines and loans.
The immediate causes are well known.
They range from subdued bank lending to unusually high risk aversion, and from discredited credit vehicles to the withdrawal of some institutions from credit intermediation altogether.
Such credit constraints are one reason why unemployment rates continue to rise in so many countries – often from already alarming levels, such as 25% in Greece and Spain (where youth unemployment is above 50%) – and why unemployment remains unusually high in countries like the US (albeit it at a much lower level).
This is not just a matter of lost capabilities and rising poverty; persistently high unemployment also leads to social unrest, erosion of trust in political leaders and institutions, and the mounting risk of a lost generation.
Indeed, unemployment data in many advanced countries are dominated by long-term joblessness (usually defined as six months or more). Skill erosion becomes a problem for those with prior work experience, while unsuccessful first-time entrants into the labor force are not just unemployed, but risk becoming unemployable.
Governments are doing too little to address the private credit debacle.
Arguably, they must first sort out the sovereign side of the crisis; but it is not clear that most officials even have a comprehensive plan.
Policy asymmetry is greatest for the countries most acutely affected by the sovereign-debt crisis.
There, the private sector has essentially been left to fend for itself; and most households and companies are struggling, thus fueling continued economic implosion.
Other countries appear to have adopted a “Field of Dreams” – also known as “build it and they will come” – approach to private credit markets, In the US, for example, artificially low interest rates for home mortgages, resulting from the Federal Reserve’s policy activism, are supposed to kick-start prudent financing.
The European Central Bank is taking a similarly indirect approach.
In both places, other policymaking entities, with much better tools at their disposal, appear either unwilling or unable to play their part.
As such, action by central banks will repeatedly fail to gain sufficient traction.
In fact, only the UK is visibly opting for a more coordinated and direct way to counter the persistent shortfalls stemming from the private part of the credit crisis.
There, the “Funding for Lending Scheme,” jointly designed by the Bank of England and the Treasury, seeks “to boost the incentive for banks and building societies to lend to UK households and non-financial companies,” while holding them accountable for proper behavior.
The UK example is important; but, given the scope and scale of the challenges, the proposal is a relatively modest one.
The program may stimulate some productive credit intermediation, but it will not make a significant dent in what will remain one of the major obstacles to robust economic recovery.
Proper access to credit for productive segments is an integral part of a well-functioning economy.
Without it, growth falters, job creation is insufficient, and widening income and wealth inequality undermines the social fabric.
That is why any comprehensive approach to restoring the advanced countries’ economic and financial vibrancy must target the proper revival of private credit flows.
Advise and Relent
WASHINGTON, DC – Dropping bombs as a solution to the world’s trouble spots may be falling out of fashion (with the notable exception of Libya), but finger wagging is definitely back in.
Hardly a day goes by without a major newspaper somewhere in the West offering sage and specific, but often not-so-friendly, advice to distant struggling democracies on what they “must” do to earn the “international community’s” approbation.
Of course, such advice, like much of newspapers themselves nowadays, comes free of charge.
But it is also advice that is free of responsibility, and, as Stanley Baldwin once said, power without responsibility is the prerogative of the harlot.
There is a considerable gap between offers of advice one cannot refuse and the responsibility to deal with the consequences when that advice proves wrong or extremely difficult to implement.
The world’s advice givers might try to keep this in mind when offering to help leaders of distant countries that are grappling with problems with which the adviser has little or no first-hand experience.
Every once in a while, a profession (most frequently, economics) determines that it has reached a consensus on how to solve a problem.
The so-called “Washington Consensus” that held sway before the recent financial crisis was a good example.
In the case of nascent democracies, the formula that is now often made compulsory is this: lift all bans on political activities, liberalize the media, hold elections (the sooner, the better), resolve all minority issues in favor of the minorities, abandon trade barriers, and rid the country of corruption, preferably overnight.
New governments are urged to tackle all of these problems immediately and simultaneously, lest they lose “momentum” and begin backsliding.
The subtext is clear: be like us now.
How to do this is left up to the new leaders, who are often credited with goodness and powers of persuasion they never had and never will have.
In many cases, the cohesiveness of opposition movements that come to power in the wake of a political upheaval may not be what the international media presume it to be.
Indeed, some components of these so-called “democratic coalitions” may not be democratic at all.
Some leaders, such as Nelson Mandela, rise to the historic occasion, against all odds.
Others, such as Kazakhstan’s Nursultan Nazarbayev (popular with Western media when he first came on the scene) plainly has not.
How can we help ensure these movements’ sustainability in such fluid moments?
Modesty is a virtue in private life.
It should also be a guide in dispensing political advice.
I would start by keeping in mind that some countries’ capacity to absorb advice is limited, so it should be offered in smaller portions.
Where to start?
The most important and potentially sustaining feature of a new democracy lies in its effort to commit itself to observing international human-rights standards.
In fact, there is a large body of literature that indicates that even countries in the aftermath of internal conflict can reach a higher level of compliance with these standards.
But human rights should not be conflated with democracy.
While democracy is, no doubt, the form of governance that best preserves human rights, the two are not the same thing.
Human rights will not co-exist with dictatorship, or with any other non-democracy, for long.
Setting standards and goals of human rights is a powerful signal that a country is pointing itself in the right direction.
The country is in effect announcing that it is moving toward democratic institutional arrangements.
Banning torture, complying with international standards of prisoners’ rights, and enshrining rights of association and public assembly all immediately come to mind.
The embrace of essential human-rights standards as a cornerstone of a country’s development is one of our era’s seminal innovations.
The notion that a dictator can claim the sovereign right to abuse his people has become unacceptable.
A country that makes progress on human rights and commits to the change of behavior required to meet these international standards can also make a decisive turn toward a better future.
We should therefore focus on meeting international human-rights standards as a goal that a new democracy “must” (to use a favorite word of Western editorial writers) move toward quickly.
But we should not confuse these values with the other essential elements of progress, such as establishing liberalized trade regimes, creating institutional structures with a separation of powers, and rooting out corruption.
These are absolute necessities for democratic success, but they require longer-term development of institutional capacity.
Corruption, for example, may have cultural antecedents and is part and parcel of institutional weakness.
In most cases, neither can be remedied overnight.
Above all, we need to show patience with the new governments of the countries we hope to see evolving toward democracy, and avoid the tendency to expect instant gratification.
A few months of politics will never overcome a few centuries of sociology.
So, as we watch and wait, we need to be as supportive – but not overbearing – as possible.
A European Cure for Balkan Depression
VIENNA – European politics is mostly shaped by events and anniversaries.
But while events are often unforeseeable, anniversaries are not.
Five years from now, Europe will be reflecting on the 100th anniversary of the outbreak of World War 1, which led to a loss of life almost without parallel and set in motion a chain of events that led to the creation of Europe as we now know it.
World leaders may have already reserved some days in August 2014 to mark the occasion.
It is easy to predict that Sarajevo will be the place where they will meet to look back on Europe’s savage twentieth century.
But how will Sarajevo look in five years?
Will it still be the capital of a country whose citizens view the future bleakly and whose politicians have totally lost touch with the electorate?
Or is there a hope that European leaders will use the anniversary to announce the successful integration of the remaining Balkan countries into the European Union?
A Balkan Monitor survey recently conducted by Gallup Europe gives suggests the state of public opinion in Serbia, Montenegro, Macedonia, Albania, Croatia, Bosnia and Herzegovina, and Kosovo 20 years on from the fall of the Berlin Wall and a decade after the end of the Kosovo war.
The findings seem to indicate that the next five years will be a make-or-break period for the region’s future development.
While the overwhelming majority of citizens are convinced that further armed conflict in the region is unlikely, the public’s mood – with the exception of Kosovars and Albanians – is pessimistic.
The future promises peace without development.
Trust in political elites and in national and European institutions has been steadily declining.
The majority of citizens have experienced a decline in living standards in the last year, and there remains a perception that people have more opportunities outside their own countries.
Pessimism about employment is alarmingly high among young people, while corruption and government mismanagement are regarded as being widespread.
All those who have made it their job to praise the stability in the region should look at these figures.
Indeed, it is striking that the majority of citizens of Bosnia and Herzegovina believe that their leaders are not interested in their country joining the EU.
An absolute majority of citizens in each of the surveyed countries are convinced that their country is heading in the wrong direction.
Less than one in 10 Croats (whose country could be joining the EU in the near future) believes that their country is heading in the right direction.
There are now two options for the region: one is a “shock integration” program that takes all of the Western Balkan states into the EU; the other is a journey into the unknown.
The hope that these countries can muddle through on their own is a dangerous illusion.
Stability alone can no longer be the EU’s only objective in the region.
The EU’s continuing presence as a colonial power in places like Bosnia and Herzegovina and Kosovo could cause even more problems in the future, especially if benefits are not forthcoming.
In particular, a delay in Serbia’s integration into the EU could bring Tito-inspired fantasies to the heart of the country’s foreign and security policy.
Thus, demoralization of Balkan society creates a dynamic of its own when the best and the brightest see their future outside of their own countries and where “stability” is just another name for political and economic stagnation.
If European leaders do plan to meet in 2014 in Sarajevo, they should act now.
The ratification of the Lisbon Treaty allows for an element of visionary realism in European politics, as there are no longer any institutional obstacles to the future enlargement of the EU.
Today, unlike a year ago, we know how many states are in the Balkans, and the
But it is now or never for the Balkans.
Visa liberalization can be a strategic step in the direction of “shock integration,” but if it is not followed by bold political action from the EU, it could merely become a re-packaging of the
Closing Europe’s Strategy Gap
MADRID – The ongoing crisis in Ukraine has been a hot topic of analysis for almost a year.
But one question has largely escaped thorough examination: what Russia’s annexation of Crimea and invasion of eastern Ukraine indicates about the European Union’s foreign policy.
During the early stages of the crisis, Germany, which had bet heavily on Russia’s modernization, was averse to taking any consequential action.
But, as the crisis deepened, German Chancellor Angela Merkel worked to persuade her European counterparts to implement a broad and biting sanctions regime.
This certainly was a step in the right direction, but it did nothing to address the foreign-policy failings that helped spark the Ukrainian crisis and continue to undermine Europe’s response – namely, the EU’s misguided Neighborhood Policy (ENP) and its muddled approach to energy.
On both of these fronts, the EU’s lack of strategic vision has created the impression that Europe is repeatedly being outmaneuvered by Russian President Vladimir Putin.
It increasingly appears that Ukraine is becoming locked in a “frozen conflict” – Russia’s foreign-policy specialty.
Indeed, the situation in Ukraine represents a tactical victory for Russia, with the fragile but enduring ceasefire – and accompanying legislation that grants Donetsk and Luhansk considerable political autonomy – allowing Russia to entrench the conflict near the EU’s border.
Moreover, the delayed implementation of key elements of the EU’s association agreement with Ukraine is clear evidence that, at the moment, Russia dictates the terms of EU-Ukrainian engagement.
In Europe, the Kremlin has been able to pursue a successful divide-and-rule strategy, particularly in view of Hungary’s decision to suspend gas flows to Ukraine.
Prime Minister Viktor Orbán’s government, whose behavior in recent years has been at odds with the EU’s criteria for democracy, now openly approves of authoritarian regimes – and Putin’s, in particular – with serious potential consequences for European unity.
Nonetheless, the timing of the current ceasefire, which coincides with the installation of a new EU Commission, is advantageous, as is Putin’s shortsighted emphasis on tactical victories.
EU leaders should take advantage of the break in the fighting to stop reacting and start anticipating.
With a long-term strategic vision, the EU could overwhelm and ultimately undermine Putin’s short-term successes.
Such a vision must include a reconceptualization of the ENP.
The program’s mission – to help guide the political, social, and economic transitions of neighboring states – is not inherently problematic; the problem lies in the way that the mission has been interpreted and pursued.
For starters, the ENP assumes that all of the EU’s neighbors, both in the south and in the east, ultimately want to realize European values and structures in their own countries.
In other words, the ENP does not account for the developmental, cultural, and aspirational differences among the EU’s partner countries.
The ENP suffers operationally from its excessively technical approach and lack of strategic vision.
For example, before the Ukraine crisis, the European Commission was so focused on negotiating the technical features of the association agreement that it did not consider adequately the potential fallout of the process – such as, say, a response from Russia.
To be sure, the EU recognized its need for a coherent strategy, and attempted to resolve it by establishing the European External Action Service and the position of High Representative for Foreign Affairs.
But the EEAS ended up in a turf war with the European Commission, and outgoing High Representative Catherine Ashton did little to ease the tension, owing to her unwillingness to involve herself in intra-EU disagreements.
It is telling that Ashton has made progress exclusively in areas defined by ample consensus, such as the negotiations on Iran’s nuclear program and the pact between Kosovo and Serbia.
Further eroding Europe’s effectiveness is its fragmented approach to securing energy supplies.
With every country largely controlling its own energy policy, Europe’s energy market has become inefficient and excessively dependent on Russian supplies.
To the extent that there has been an EU-wide energy strategy, it has related to renewables, rather than the intersection of geopolitics and energy security.
But there is reason for hope.
The new Commission, which its president, Jean Claude Juncker, has restructured significantly, could provide Europe with the strategic leadership it so badly needs.
In fact, Juncker has already expressed a desire to integrate incoming High Representative Federica Mogherini into the Commission’s policy program.
The new structure – which tasks Mogherini with guiding and coordinating the work of multiple commissioners, including those responsible for trade, the ENP, and climate and energy – should strengthen the coherence and direction of EU policies, particularly after Mogherini completes her European Council-mandated assessment of the global strategic landscape.
But a restructured Commission is not enough to ensure a reset of Europe’s foreign-policy strategy.
For that to happen, Mogherini must assert herself as a leader, backed by Juncker and the new European Council president, Donald Tusk.
And, most important, all EU member states must recommit themselves to cooperation.
The Ukrainian people have demonstrated the power of Europe’s values.
Indeed, Europe has a large set of tools at its disposal; it just needs to figure out how to use them.
If it can, it will be better able to respond not only to the Russian challenge, but also to many of the other challenges that characterize today’s rapidly shifting global environment.
A Europe of Provinces, Not States
As the European Constitutional Convention assembles to debate the fine points of the European Union's future institutions, now is the moment to think the unthinkable about where Europe is heading.
Or at least, to consider perhaps a quite different question: where would it be reasonable for the EU to move?
Communism's fall saw the appearance of several small states in Europe.
Estonia, Latvia, and Lithuania reemerged from Soviet occupation.
Czechoslovakia split into two separate states.
Yugoslavia gave way to Slovenia, Croatia, Bosnia, Serbia, Macedonia; it may perhaps shortly disgorge Kosovo and Montenegro as well.
Although the Baltic republics merely reestablished their pre-WWII independence, and Yugoslavia's breakup was a bloody affair like so many other wars of independence, there is something tantalizing new in all this as well.
In the interwar years, the Baltic states were often viewed as impractical, artificial creations of the Great Powers.
Czechoslovakia and Yugoslavia came into existence because their constituent parts were not seen as viable independent states.
Why was this?
Because 80 years ago, when Wilson, Clemenceau, and Lloyd George redrew the map of Europe, small states were dysfunctional in times of both war and peace.
To be viable, a state needed to be large enough to defend itself and to constitute a relatively self-contained economic market.
None of this holds true today.
With the prospect of entry into the EU, national markets matter less.
Both EU and NATO membership make war among European member states unthinkable, and an attack on even the smallest NATO member would bring a response from all NATO members.
Lacking such external threats, the ties between, say, Czechs and Slovaks (to say nothing of Serbs and Croats!) are too weak to warrant a common national level of government.
Does this tell us something about the future of Europe as a whole?
The difference between Czechoslovakia and Italy or Germany is mostly one of 50 years.
After all, wasn't Italy, until 1860s, a collection of kingdoms and principalities?
Wasn't Germany's unification a matter of ``blood and iron''?
France and Spain are older, but is the marriage of Basques, Catalans, and Corsicans with their national states that much happier than the former Czech/Slovak marriage?
Is there really that much reason why the Scots and Welsh should be part of the same national state as the English?
Abstract for a second from the idea of French or German or Italian identity, patriotism, the collective memories of war and carnage that cemented the consciousness of today's linguistic communities and think of this: why do Europeans need an intermediate level of government, between the common European framework and their local institutions?
Why do Piemontese, Bavarians, or Scots need intermediate national bureaucracies to run their tax policies, welfare programs, securities laws, and the largely useless, duplicative armies?
Wouldn't life be easier if a common market, currency, foreign policy, army, and a few other things were run on a Europe-wide basis, with the rest left to more meaningful local units?
It is fashionable to mock the bureaucratic minutia of European regulation.
But European regulation is as nothing compared to the mountains of national laws and decrees, billions wasted in political patronage, and the colossal state machines that eat up 30-40% of the economic product of Europe's nation states.
Could any common European state do worse?
Indeed, the creation of a European federal government and the elimination of national intermediaries would probably lead to the greatest liberalization of the economy (and society as a whole) in Europe's entire history.
Look at America in 1787: creation of the federal government swept away the balkanized system of pre-revolutionary colonies, ushering in an era of entrepreneurial expansion across the entire American Continent.
The simple fact is that Europe as a whole is too diverse to be captured by the economic and political interest groups that now dominate national states.
It is only as an
Nations also put Europe's constitutional balance out of kilter.
Germany and Italy are simply too big, as compared to Portugal or Belgium (itself a rather questionable amalgam of the Flemish and the Walloons), and this creates the types of imbalances reminiscent of the heavy foot of Prussia in the old Bismarckian empire.
Could a federal Europe replace today's national identities?
Could the French and the British feel as spiritually at home in ``Europe'' as they feel in their national states?
No, but must they?
When Europeans think of future institutions, the tension is always seen as that between national differences and the common European identity.
But what if common European institutions are not viewed through the prism of national institutions?
What if the evolution of European consciousness proceeds not by an upward transfer of attachment to supranational institutions, but by a
Of course, the demise of national states is not imminent, but not because they are so deeply rooted in the consciousness of their citizens.
Indeed, national identities are mostly impoverishing abstractions, clichés, like race, class, and other ideological creations.
Think of how much more genuine diversity would there be in a united Europe if national states did not squat in the middle.
But Europe's nation states are not going to disappear for a while because they are
A Europe of Women?
PARIS – Are women in Europe on the verge of becoming an engine for political change?
In economic-development circles, experience and common sense suggest that progress, accountability, and hard work start with and depend on women.
Micro-credits, for example, are much more efficient when women receive and repay them.
Perhaps because they bear children and must find the means to feed them, women are now perceived as the best and most determined “agents of change.”
That seems to be as true now of European politics as it has been of economics in parts of Africa and Asia.
The results of Italy’s recent municipal elections could be a signal of an incipient electoral dynamic: it was women who voted Silvio Berlusconi’s party out of power in Milan, a city that he has long controlled (and the original seat of his power).
No direct link exists between that result and the dramatic Dominique Strauss-Kahn scandal in New York, but in the immediate aftermath of DSK’s arrest, Italian women and young voters decisively mobilized to defeat Berlusconi’s party (led in Milan, ironically, by a woman).
These voters could no longer stand the combination of machismo and vulgarity that had once served so well the man Italian humorists now call “Berlus-Kahn.”
When Berlusconi first came to power 17 years ago, he had the support of a majority of women.
They were not discouraged by his ambivalent perception of them (by turns celebrating their traditional domesticity and glorifying their sexual objectification).
But Italian society has changed: most women are now working, and they are no longer willing to accept Belusconi’s anachronistic and outrageous chauvinism.
Italian men may pity the aging, isolated leader, who looks increasingly like his wax effigy at Madame Tussaud’s.
But Italian women (indeed, women everywhere, it seems) feel only anger and humiliation over a man so obsessed with himself, his various criminal trials, and his vulgar pleasures that he appears to them to have no purpose left except to remain in power as long as possible.
Women, of course, are not alone in their opposition to Berlusconi, but they made the difference in Milan.
They are the incarnation of modernity, animated by a yearning for simple dignity and respect.
They are not alone in the vanguard of a new Europe of women.
As Iceland spiraled into bankruptcy, owing the irresponsible behavior of its mostly male political and financial elites, the people of Iceland decided that only a strong and responsible woman could redress the country’s problems.
So they elected one as President.
The depth and gravity of the current economic and social crisis in countries like Greece, Portugal, and Spain present women with a new opportunity.
Confronted with what many of them perceive as the equivalent of an “economic war,” women are playing an increasingly important role in maintaining their families’ financial security.
And the more widespread this becomes, the more women will seek a political role that reflects their economic clout.
Of course, women’s changing status may not translate immediately into growing political influence.
And the rest of Europe might never follow the example of Scandinavia, where gender equality has advanced much further than anywhere else.
But such a dynamic does now seem to be in motion.
Similarly, regardless of the outcome of DSK’s trial in New York, the case might represent a turning point in the treatment of women in Europe.
Public and private displays of atavistic machismo, one hopes, will no longer be considered acceptable.
In the Arab world, too, from Tunis to Cairo, young women have played an important role in the revolutionary process.
Their appetite for change – understandable, given the treatment of women in traditional Muslim societies – appears to be one of the main causes underlying the force of the revolutionary impulse in Tunisia and Egypt.
None of this is to argue that “women” are a universal force for positive change in Europe and around the world.
Consider, for example, Marine Le Pen, the new head of France’s National Front, Elena Ceaucescu, the sordid wife of the former Romanian dictator, or, more recently, Tunisian ex-President Zine El Abidine Ben Ali’s wife, Leila Trabelsi, who fled to Dubai with 1.5 tons of gold plundered from the central bank.
The point, simply, is that with so many people in so many countries demanding far-reaching change, the politics of gender is very much in play – in Europe and beyond.
The main question is whether the growing number of women in politics will deliver the different perspectives and modes of leadership that many voters (or protesters) now seem to crave.
A Failed Global Recovery
NEW HAVEN – The global economy is in the midst of its second growth scare in less than two years.
Get used to it.
In a post-crisis world, these are the footprints of a failed recovery.
The reason is simple.
The typical business cycle has a natural cushioning mechanism that wards off unexpected blows.
The deeper the downturn, the more powerful the snapback, and the greater the cumulative forces of self-sustaining revival.
Vigorous V-shaped rebounds have a built-in resilience that allows them to shrug off shocks relatively easily.
But a post-crisis recovery is a very different animal.
As Carmen Reinhart and Kenneth Rogoff have shown in their book This Time is Different, over the long sweep of history, post-crisis recoveries in output and employment tend to be decidedly subpar.
Such weak recoveries, by definition, lack the cushion of V-shaped rebounds.
Consequently, external shocks quickly expose their vulnerability.
If the shocks are sharp enough – and if they hit a weakened global economy that is approaching its “stall speed” of around 3% annual growth – the relapse could turn into the dreaded double-dip recession.
That is the risk today.
There can be no mistaking the decidedly subpar character of the current global recovery.
Superficially, the numbers look strong: world GDP rebounded by 5.1% in 2010, and is expected to rise another 4.3% in 2011, according to the International Monetary Fund.
But because these gains follow the massive contraction that occurred during the Great Recession of 2008-2009, they are a far cry from the trajectory of a classic V-shaped recovery.
Indeed, if the IMF’s latest forecast proves correct, global GDP at the end of 2012 will still be about 2.2 percentage points below the level that would have been reached had the world remained on its longer-term 3.7% annual-growth path.
Even if the global economy holds at a 4.3% cruise speed – a big “if,” in my view – it will remain below its trend-line potential for over eight years in a row, through 2015.
This protracted “global output gap” underscores the absence of a cushion in today’s world economy, as well as its heightened sensitivity to shocks.
And there have certainly been numerous such blows in recent months – from Europe’s sovereign-debt crisis and Japan’s natural disasters to sharply higher oil prices and another setback in the US housing recovery.
While none of these shocks appears to have been severe enough to have derailed the current global recovery, the combined effect is worrisome, especially in a still-weakened post-crisis world.
Most pundits dismiss the possibility of a double-dip recession.
Labeling the current slowdown a temporary “soft patch,” they pin their optimism on the inevitable rebound that follows any shock.
For example, a boost is expected from Japan’s reconstruction and supply-chain resumption.
Another assist may come from America’s recent move to tap its strategic petroleum reserves in an effort to push oil prices lower.
But in the aftermath of the worst crisis and recession of modern times – when shocks can push an already weakened global economy to its tipping point a lot faster than would be the case under a stronger growth scenario – the escape velocity of self-sustaining recovery is much harder to achieve.
The soft patch may be closer to a quagmire.
This conclusion should not be lost on high-flying emerging-market economies, especially in Asia – currently the world’s fastest-growing region and the leader of what many now call a two-speed world.
Yet with exports still close to a record 45% of pan-regional GDP, Asia can hardly afford to take external shocks lightly – especially if they hit an already weakened baseline growth trajectory in the post-crisis developed world.
The recent slowdown in Chinese industrial activity underscores this very risk.
Policymakers are ill prepared to cope with a steady stream of growth scares.
They continue to favor strategies that are better suited to combating crisis than to promoting post-crisis healing.
That is certainly true of the United States.
While the US Federal Reserve Board’s first round of quantitative easing was effective in ending a wrenching crisis, the second round has done little to sustain meaningful recovery in the labor market and the real economy.
America’s zombie consumers need to repair their damaged balance sheets, and US workers need to align new skills with new jobs.
Open-ended liquidity injections accomplish neither.
European authorities are caught up in a similar mindset.
Mistaking a solvency problem for a liquidity shortfall, Europe has become hooked on the drip feed of bailouts.
However, this works only if countries like Greece grow their way out of a debt trap or abrogate their deeply entrenched social contracts.
The odds on either are exceedingly poor.
The likelihood of recurring growth scares for the next several years implies little hope for new and creative approaches to post-crisis monetary and fiscal policies.
Driven by short-term electoral horizons, policymakers repeatedly seek a quick fix – another bailout or one more liquidity injection.
Yet, in the aftermath of a balance-sheet recession in the US, and in the midst of a debt trap in Europe, that approach is doomed to failure.
Liquidity injections and bailouts serve only one purpose – to buy time.
Yet time is not the answer for economies desperately in need of the structural repairs of fiscal consolidation, private-sector deleveraging, labor-market reforms, or improved competitiveness.
Nor does time cushion anemic post-crisis recoveries from the inevitable next shock.
It’s hard to know when the next shock will hit, or what form it will take; otherwise, it wouldn’t be a shock.
But, as night follows day, such a disruption is inevitable.
With policymakers reluctant to focus on the imperatives of structural healing, the result will be yet another growth scare – or worse.
A failed recovery underscores the risks of an increasingly treacherous endgame in today’s post-crisis world.
A Fair Deal for Turkey
Turkey has been given what looks like an ultimatum from the EU Commission: open your ports for ships from Cyprus within a month, or you may risk a halt to the EU accession talks now underway.
At the same time, the Commission’s latest report on Turkey’s progress toward accession notes that political reforms have slowed down, further calling into question the country’s future EU membership.
The Commission’s progress report will be dealt with by the European Council next month.
At that meeting, European leaders should ask themselves the following questions: Has the EU given Turkey a fair deal in the case of Cyprus?
Has the EU’s behavior been consistent in supporting political reform in Turkey?
What are the EU’s long-term interests vis-à-vis Turkey?
If the answers to the first two questions are “no” – as I believe they are – the third question becomes vitally important.
True, Turkey has closed its ports to ships from (Greek) Cyprus, and this is a violation of agreements.
But it is also true that the northern Turkish part of Cyprus is denied access to free trade and other benefits from EU-membership.
This is because Cyprus remains a divided island.
It was assumed that Cyprus should be united when the country joined the EU in 2004.
A United Nations plan for unification was accepted by the Turkish part.
But the Greek Cypriots voted against the plan because their leaders did not live up to the implicit deal with the EU to support it.
Nevertheless, Cyprus became an EU member – but only the Greek part.
This was clearly a mistake, because it made the EU part of the conflict.
It gave Greek Cypriot leaders the possibility of blocking progress in negotiations between the EU and Turkey.
So how can Turkey under these conditions maintain confidence in the EU’s fairness?
Political and legal reforms in Turkey in recent years have been remarkably far-reaching, for they have clearly been spurred by Turks’ wish to move closer to the EU.
But Turkish public support for EU membership has fallen dramatically as Turks have grown to feel that they are not being given a fair deal.
This has given new strength to those who want Turkey to develop in another direction, towards a more Islamic society instead of a modern secular state.
Therefore, the recent lack of progress in Turkey’s reform process can to a large extent be explained by the EU’s behavior.
This leaves us with the third question: what kind of Turkey does the EU want?
There should be no doubt about the answer: it is clearly in the EU’s interest to see Turkey’s democracy and economy continue to strengthen.
More than 40 years ago, it was promised that once Turkey lives up to the preconditions for membership, it will be welcome in the EU.
It is high time that European leaders take this promise seriously.
It is a sad fact that a large majority of voters in the EU are against Turkish membership.
But they are reacting to the current situation.
When they are asked if they would like a reformed Turkey as a partner – a Turkey that lives up fully to the conditions for membership described in the Copenhagen Criteria (democracy, rule of law, respect for human rights, and an effective market economy) – many more are inclined to say yes.
European leaders must therefore take up two challenges.
First, they should say clearly to their own voters that the EU must live up to its promises to Turkey, and that this is in the larger interest of all Europeans.
Second, they should give Turkey a fair deal in the negotiations.
The first litmus test on European leadership concerns the practical problem of access to harbors.
Here the Finns, who chair the EU right now, have taken an initiative to implement a pragmatic solution that takes into consideration both sides in the conflict.
The Finnish initiative should be given strong support from all European leaders.
At the same time, a new effort should be made to bring life to the UN’s proposals regarding Cyprus.
If this means putting pressure on some actors within the EU’s own ranks, so be it.
A Fair Deal on Climate Change
The agreement on climate change reached at Heiligendamm by the G8 leaders merely sets the stage for the real debate to come: how will we divide up the diminishing capacity of the atmosphere to absorb our greenhouse gases?
The G8 leaders agreed to seek “substantial” cuts in greenhouse gas emissions and to give “serious consideration” to the goal of halving such emissions by 2050 – an outcome hailed as a triumph by German Chancellor Angela Merkel and British Prime Minister Tony Blair.
Yet the agreement commits no one to any specific targets, least of all the United States, whose president, George W. Bush, will no longer be in office in 2009, when the tough decisions have to be made.
One could reasonably ask why anyone thinks such a vague agreement is any kind of advance at all.
At the United Nations Conference on Environment and Development in Rio de Janeiro in 1992, 189 countries, including the US, China, India, and all the European nations, signed the UN Framework Convention on Climate Change, thereby agreeing to stabilize greenhouse gases “at a low enough level to prevent dangerous anthropogenic interference with the climate system.”
Fifteen years later, no country has done that.
US per capita greenhouse gas emissions, already the highest of any major nation when Bush took office, have continued to rise.
In March, a leaked Bush administration report showed that US emissions were expected to rise almost as fast over the next decade as they did during the previous decade.
Now we have yet another agreement to do what these same nations said they would do 15 years ago.
That’s a triumph?
If Bush or his successor wants to ensure that the next round of talks fails, that will be easy enough.
In justifying his refusal to sign the Kyoto Protocol, Bush has always referred to the fact that it did not commit China and India to mandatory emission limits.
Now, in response to suggestions by Bush and other G8 leaders that the larger developing nations must be part of the solution to climate change, Ma Kai, the head of China’s National Development and Reform Commission, has said that China will not commit to any quantified emissions reduction targets.
Likewise, the spokesman of India’s foreign minister, Navtej Sarna, has said that his country would reject such mandatory restrictions.
Are China and India being unreasonable?
Their leaders have consistently pointed out that our current problems are the result of the gases emitted by the industrialized nations over the past century.
That is true: most of those gases are still in the atmosphere, and without them the problem would not be nearly as urgent as it now is.
China and India claim the right to proceed with industrialization and development as the developed nations did, unhampered by limits on their greenhouse gas emissions.
China, India, and other developing nations, have a point – or rather, three points.
First, if we apply the principle “You broke it, you fix it,” then the developed nations have to take responsibility for our “broken” atmosphere, which can no longer absorb more greenhouse gases without the world’s climate changing.
Second, even if we wipe the slate clean and forget about who caused the problem, it remains true that the typical US resident is responsible for about six times more greenhouse gas emissions than the typical Chinese, and as much as 18 times more than the average Indian.
Third, the richer nations are better able than less well-off nations to absorb the costs of fixing the problem without causing serious harm to their populations.
But it is also true that if China and India continue to increase their output of greenhouse gases, they will eventually undo all the good that would be achieved by deep emissions cuts in the industrialized nations.
This year or next, China will overtake the US as the world’s biggest greenhouse gas emitter – on a national, rather than a per capita basis, of course.
In 25 years, according to Fatih Birol, chief economist at the International Energy Agency, China’s emissions could be double those of the US, Europe, and Japan combined.
But there is a solution that is both fair and practical:
Establish the total amount of greenhouse gases that we can allow to be emitted without causing the earth’s average temperature to rise more than two degrees Celsius (3.6 degrees Fahrenheit), the point beyond which climate change could become extremely dangerous.
Divide that total by the world’s population, thus calculating what each person’s share of the total is.
Allocate to each country a greenhouse gas emissions quota equal to the country’s population, multiplied by the per person share.
Finally, allow countries that need a higher quota to buy it from those that emit less than their quota.
The fairness of giving every person on earth an equal share of the atmosphere’s capacity to absorb our greenhouse gas emissions is difficult to deny.
Why should anyone have a greater entitlement than others to use the earth’s atmosphere?
But, in addition to being fair, this scheme also has practical benefits.
It would give developing nations a strong incentive to accept mandatory quotas, because if they can keep their per capita emissions low, they will have excess emissions rights to sell to the industrialized nations.
The rich countries will benefit, too, because they will be able to choose their preferred mix of reducing emissions and buying up emissions rights from developing nations.
A Farewell to (Glorious) War
In recent days, Italy’s government fell after losing a parliamentary vote on the country’s troop deployment in Afghanistan, while Britain and Denmark announced that they are to begin withdrawing their troops from Iraq.
Whereas the Bush administration is deploying an additional 21,000 American soldiers in Iraq, and is pushing for more allied troops in Afghanistan, America’s allies are rejecting its Middle East policy.
They are increasingly convinced that “victory” will be elusive in any asymmetric conflict between states, however powerful, and religiously driven armed insurgents.
Donald Rumsfeld’s dogma of military “transformation” – the technological upgrading of an army’s capacity to enable decisive victory with fewer troops – failed resoundingly in Iraq.
Nor could Israel, with its overwhelming technological advantage, defeat Hezbollah in Lebanon.
More rockets and missiles fell on northern Israel in 33 days than hit Britain during all of World War II.
So the Israelis now must reckon with an entirely new phenomenon: an asymmetric entity, Hezbollah, with nation-state firepower.
So the fierce debate over whether to increase the size of American ground forces in Iraq is beside the point.
Neither the Soviet experience in Afghanistan in the 1980’s nor NATO’s today vindicates the claim that troop numbers are what matter most on the modern battlefield.
When geo-strategic military front lines are non-existent, as in Kosovo, Afghanistan, and Iraq, mass no longer equals victory.
The great military thinker Carl von Clausewitz’s notion of “decisive battles” as the “center of gravity” of war is simply irrelevant to conflicts that have no visible “center of gravity.”
Indeed, while wars from the time of Hannibal’s defeat of the Romans in 216 B.C. to the Gulf War of 1991 had this center of gravity, with a massive concentration of force capable of bringing an enemy to its knees, such industrial inter-state wars have now become an historical anachronism.
Most states nowadays lie within borders that are widely accepted as legitimate, and they increasingly abide by international norms of behavior in times of war.
In fact, the obligation of states to abide by humanitarian rules of conduct while their enemies are free to barbarize warfare is what makes asymmetric wars especially insoluble.
Moreover, in an era of global media and international war crimes courts, the criteria for states’ use of military force have become more complex than ever.
Inter-state combat may still occur where strategic front lines can be found, such as Israel’s border with Syria, India’s border with Pakistan, and the border dividing the two Koreas.
In such cases, war, as the Egyptians showed in 1973, might still serve as an avenue to resolving a conflict.
The Syrians might be tempted to launch an offensive against Israel with the objective of breaking the deadlock over the future of the Golan Heights.
However, in the case of Kashmir, the asymmetric conflict currently fought by proxies and terrorist groups might not degenerate into all-out war precisely because India and Pakistan have mutual nuclear deterrence.
This changing nature of the battlefield essentially means that war as a conclusive event in an international conflict has become obsolete.
The facile Clausewitzian wisdom that military action ultimately leads to a political solution is no longer convincing.
“Victory” cannot bring peace, simply because there will always be a war after the war.
Thus, for example, the conventional war in Kosovo lasted for two months, only to usher in a six-year asymmetric conflict.
Likewise, America’s three-week “shock and awe” campaign in Iraq in 2003 ended in “victory,” but opened the gates of hell for occupiers and ordinary Iraqis alike.
And six months after the merciless pounding of southern Lebanon, Hezbollah is as strong as it was before.
Nor does the return of the Taliban in Afghanistan six years after their overthrow now seen too far-fetched.
It is during the war after the war that the occupier’s inferiority is revealed, with constant reinforcements increasing the number of targets for the insurgents far more quickly than the occupier can adapt to the changing battlefield.
The insurgents in Iraq, as the British admit, were able in just three years to cope with their enemies’ technological superiority in a way that the IRA in Northern Ireland was unable to do in 30 years.
The Iraq war and Israel’s wars with Hamas and Hezbollah show the limits of what military power can achieve, as well as vindicate diplomacy and conflict resolution.
When it comes to tackling complex political and cultural conflicts, forging international and regional alliances around a legitimate objective is more important than sheer military capacity.
That said, it would be dangerously naïve to believe that the exercise of power and the capacity to intimidate are unnecessary.
But the objectives of the use of force need to be linked to the recognition that in today’s asymmetric conflicts, victory is no longer achieved on the battlefield.
Only better-informed foreign policies that can address the genuine anxieties of civilizations in crisis will yield more sustainable results.
Affordable Green Energy
COPENHAGEN – Public skepticism about global warming may be growing, but the scientific consensus is as solid as ever: man-made climate change is real, and we ignore it at our peril.
But if that issue is settled (and it should be), there is an equally large and important question that remains wide open: what should we do about it?
One prescription that is bandied about with increasing frequency certainly sounds sensible: the world should drastically cut the amount of greenhouse gases that it pumps into the atmosphere each day.
Specifically, we are told, the goal should be a 50% reduction in global carbon-dioxide emissions by the middle of the century.
Even its backers concede that achieving this target won’t be easy – and they are right.
In fact, they are so right that they are wrong.
Allow me to explain.
Our dependency on carbon-emitting fuels is more than enormous.
It is overwhelming.
For all the talk about solar, wind, and other hyped green-energy sources, they make up only 0.6% of global energy consumption.
Renewable energy overwhelmingly comes from often-unsustainable burning of wood and biomass by people in the Third World.
Fossil fuels account for more than four-fifths of the world’s energy diet.
So, in order to cut global carbon emissions in half by the middle of the century, we would obviously have to start getting a lot more of our energy from sources that don’t emit carbon.
Can we do this?
According to the International Energy Agency, here’s what it would take to achieve the goal of cutting emissions by 50% between now and mid-century:
30 new nuclear plants; 17,000 windmills; 400 biomass power plants;Two hydroelectric facilities the size of China’s massive Three Gorges Dam; and42 coal and gas power plants with yet-to-be-developed carbon-capture technology.Now consider this: this list does not describe what we would have to build between now and 2050, but what we would have to build each and every year until then!
One more thing: even if we managed to do all this (which we obviously cannot), the impact on global temperatures would be hardly noticeable by 2050.
According to the best-known climate-economic model, this vast undertaking would likely wind up reducing global temperatures by just one-tenth of one degree centigrade (one-fifth of one degree Fahrenheit), while holding back sea-level rises by only one centimeter (less than half an inch).
That’s not a lot of bang for the buck.
Indeed, the projected costs of this approach – some $5 trillion annually by mid-century – are so much greater than its likely benefits that it makes no sense to call it a solution at all.
Fortunately, there is a better, smarter way to deal with global warming. What if, instead of spending trillions of dollars trying to build an impossible number of power plants – or, more likely, condemning billions of people around the world to continued poverty by trying to make carbon-emitting fuels too expensive to use – we devoted ourselves to making green energy cheaper?
Right now, solar panels are so expensive – about 10 times more than fossil fuels in terms of cost per unit of energy output – that only well-heeled, well-meaning (and, usually, well-subsidized) Westerners can afford to install them.
But think where we’d be if we could improve the efficiency of solar cells by a factor of ten – in other words, if we could make them cheaper than fossil fuels.
We wouldn’t have to force (or subsidize) anyone to stop burning coal and oil.
Everyone, including the Chinese and the Indians, would shift to the cheaper and cleaner alternatives – and global emission targets would automatically be met.
Can we achieve this technological miracle over the next 20 to 40 years?
In a word, yes.
The price of solar energy has been dropping steadily for 30 years – by about 50% every decade – and we could likely accelerate that decline further with sufficiently large investments in research and development.
How large?
If we were willing to devote just 0.2% of global GDP (roughly $100 billion a year) to green-energy R&amp;D, I believe that we could bring about game-changing breakthroughs not just for solar power, but also for a wide variety of other alternative-energy technologies.
This belief in the potential of technological progress strikes some climate activists as naïve or even delusional.
But is it really?
Consider one of the miracles of the modern age – the personal computer.
These devices didn’t become household items because governments subsidized purchases or forced up the price of typewriters and slide rules.
No, what happened is that, largely as a result of the space race, the United States government poured lots of money into R&amp;D for solid-state physics and electronics engineering.
The resulting breakthroughs not only got Neil Armstrong to the moon in 1969, but also made it possible for Apple to introduce the first Mac in 1976 and IBM to debut the first PC five years later.
We can do the same for clean energy.
Forget about subsidizing inefficient technologies or making fossil fuels too expensive to use.
Instead, let’s fund the basic research that will make green energy too cheap and easy to resist.
Afghanistan’s Drug-Friendly Environment
Afghanistan’s President Hamid Karzai has stepped up international fundraising efforts in recent weeks, seeking a fresh package of military and reconstruction aid from the United States, together with stronger strategic guarantees.
But Karzai’s relationship with his sponsors has begun to sour, in part owing to charges that his government has failed to stop the resurgence of Afghanistan’s huge opium trade.
Underlying the opium trade issue is a security threat of another kind, one overlooked since the US-led invasion toppled the Taliban regime in 2001, despite the grave risk it poses to Afghanistan’s long-term stability, and that of the region.
In countries like Afghanistan, where 80% of the population lives on what they grow and many communities live far from any water source, environmental damage can be both economically devastating and politically momentous.
That lesson should have been absorbed and understood, not least by American strategists, long before the Taliban’s fall.
After all, desertification and deforestation helped fuel the rise, two decades earlier, of the Maoist guerilla group Sendero Luminoso (Shining Path) in Peru.
Sendero, which supplemented its income with drug production and timber smuggling, deliberately chose drought-weakened and deforested mountain villages as the stronghold of its insurgency.
Similarly, the Maoist insurgency in Nepal, which has claimed 10,000 lives, exploits the desperation of mountain villagers hit by flash floods – the result of deforestation higher up.
No Maoist group could ever gain a toehold in Afghanistan’s parched Pashtun south (these were, after all, people who, bare-knuckled, smashed the Soviets).
But the Taliban’s rapid rise in the 1990’s was inextricably linked to the failure of irrigation systems.
Villagers whose crops shriveled and whose livestock died in a prolonged drought saw joining the Taliban as an economic opportunity.
Had there been more irrigation, the Taliban’s gains might have been far less impressive.
The Taliban are now an increasingly spent force, but lack of water reinforced the logic of opium production across its former strongholds in the south.
Irrigation has failed or is inadequate in Helmand, Uruzgan, and Kandahar – three of the top five opium-producing provinces – where indebted farmers are hooked by the economics: opium brings in eight times as much cash as wheat and uses less water.
Without serious investment in irrigation, including construction of reservoirs to make use of the snowfall in the Hindu Kush, and in new cash crops such as saffron and rose oil, Afghanistan’s drift toward narco-statehood will continue, with all the instability that this implies.
Clear-cutting of old growth forests in the mountains bordering Pakistan may prove as problematic.
Agriculture there has been damaged by the cutting of walnut, apricot, and mulberry trees for winter fuel, and by a failure to replant poplar, willow, and tamarisk – the trees that hold fragile meadows in place.
These sorts of trees can be restored, given a concerted campaign and investment in nurseries to produce local varieties.
Loss of the ancient cedar, pine, fir, and oak forests on the slopes above is another matter.
This year’s snowmelt caused landslides and flooding – a warning of more soil erosion and destruction of arable land to come; hundreds died and thousands lost their livelihoods.
Forestry has always been a problem in Afghanistan.
In 1960, the United Nations Food and Agriculture Organization spoke of wasteful logging practices, such as “head-skidding” (in which a log is rolled downhill, ripping up plants and soil).
Aerial photographers were called in, and a large budget was set aside.
But, in 1976, the FAO admitted in a new plan that forest and watershed management activities had “turned out to be quite limited.”
The 1976 plan called for sustainable logging and basic forest-fire control, but war intervened, costing Afghanistan half its forest cover.
Up to 60% of the old growth forest in Nangahar, the second largest opium-producing province, may have been cut during the war years.
Mujahedin factions and later the Taliban exported stands of fine-grained cedar by the truckload from Nangahar and surrounding provinces to Pakistan, often in return for arms.
Illegal logging continues today, with only ineffectual efforts made to stop it.
At the current rate, Afghanistan’s old growth forest could vanish within a decade.
The UN acknowledges the problem but is (rightly) unwilling to risk sending forestry experts into a tribal region where American and allied troops venture only in armored convoys.
Safety concerns and cost also limit intervention by international conservation organizations.
A new initiative called the Green Corps includes 300 forest rangers charged with stopping illegal logging, and the ministry hopes to boost their numbers within a year.
But the initiative is unlikely to have much effect.
Illegal logging crews number 200 or more.
They have chain saws and trucks.
They are armed and work with the backing of drug and emerald smugglers – and often of local officials.
The price of plank cedar in Lahore is incentive enough to corrupt, or kill, any Green Corps men brave enough to stand in their way.
Environmental issues are of paramount importance in marginal countries because their impact on human survival is immediate and direct.
The inadequate response to pressing questions of natural resource management, whether of water or trees, merely strengthens the hands of opium dealers and malcontents in what is already the most disaffected and sensitive part of Afghanistan – the clear-cut mountain slopes where intelligence officers believe Osama bin Laden is most likely holed up.
Afghanistan’s Dying Mothers
Roughly 75% of Afghan newborns that die do so because of lack of food, warmth, and care.
Unloved little girls fare the worst.
In Afghanistan as a whole, a woman dies of pregnancy-related causes every 27 minutes – and perhaps even more frequently, because many such deaths go unrecorded.
Many, perhaps most, are under sixteen years of age.
The Taliban – blamed nowadays for just about all of Afghanistan’s ills – have officially been gone for nearly seven years, so why are conditions still so abysmal?
In Kabul and Herat, mobile phones abound, a tooth-eroding concoction called “Afghan Cola” is sold, the Internet works (sometimes), there are ATM machines, sophisticated heroin laboratories, four-wheel drive vehicles, five-star hotels, ads for private banks – all the trappings of globalized modernity.
Yet so many women die like flies, in pools of blood and deep-rooted indifference.
While billions of dollars in aid have led to improvements in urban areas, where health facilities have been built and midwives trained, the overall maternal death figures have hardly changed.
As one doctor told me: “A competent midwife or nurse would rather be out of work in Kabul than stuck in a remote village.”
This miserable situation has been attributed to various causes, mainly lack of infrastructure and local economic conditions.
But cultural questions must also be addressed, because gender discrimination is the most important cause of maternal mortality.
In Afghan society, discrimination begins at birth.
One obvious reason is that a boy is destined to support his parents and much of his family all his life, and therefore represents a long-term investment, whereas a girl will be given over to her husband’s family as soon as possible.
Feeding a girl is seen as effectively looking after someone else’s property.
Once, I heard a dreadful story of a breech birth which a traditional midwife did not know how to handle.
In the end, she wrenched the baby’s body out, severing it from its head, which remained inside the mother’s womb.
It took six days to get the woman to a hospital in Jalalabad though it was not very far from where she lived.
She somehow survived, with major health complications, including permanent fistula, which will condemn her to a life of exclusion from her family and unrelieved misery.
That tragedy can be read on many levels, each more heart-rending than the next.
But note that it occurred near a health facility.
As soon as the midwife saw that the baby was coming out feet forward, she must have known that there was little she could do to save either mother or baby.
Even before that, she would have noticed that the child had not turned properly, and that major problems were on the way.
This means that someone – a husband or mother-in-law – had taken the decision not to send the young woman to the hospital, instead keeping her in inhuman suffering for nearly a week.
The solution is not just to build more hospitals, but also to change deep-rooted disdain for women.
And, sadly, things have become worse in the past 30 years, as Afghanistan’s particular brand of Islam, combined with its legacy of dire poverty and war, compounds an already misogynist pre-Islamic tradition.
Maternal mortality is a sinister consequence of this complex situation.
The legal system, schools, and the media could bring change, but no official entity takes the problem seriously enough to initiate effective action.
The central reason is despairingly simple: women’s lives are not valued, and even women themselves perceive their suffering as being unavoidable.
What Afghanistan needs is an inquest after each death and laws making it a criminal offense to forbid access to medical aid, when available, to women and children (or, more correctly, to children and their children, given that girls are often married by age 14).
Prisons, I fear, would be full of abusive husbands and, I regret to say, vengeful mothers-in-law.
Health education through public media, reaching distant areas of the country, is an urgent priority, but has been utterly ignored in favor of commercial priorities.
Questioning culture is, of course, a politically incorrect approach.
But we must refuse to bow before the altar of tolerance when it comes to what is truly unacceptable, wherever it occurs, and this is what the world is witnessing passively in Afghanistan.
Does diversity authorize such brutal deaths and senseless violence against women simply because some supposedly traditional practice allows them to be married before their bodies are ready and denies them health care when they give birth?
The fight against maternal mortality in Afghanistan must become a global priority.
Ultimately, a society that allows women to be brutalized will remain a breeding ground of generalized violence.
Afghanistan’s Feminist Revolution
On April 16, more than 300 Afghani women – many of them students – marched together in Kabul in protest of a new law passed by Parliament that would impose a series of Taliban-like restrictions on women.
The law would permit marital rape, limit women’s movements – say, for work or study – without male permission, and even make it illegal for a woman to refuse to dress as her husband wishes.
The women, facing a crowd of furious men calling them “whores” and other epithets, marched two miles under a rain of abuse and delivered their petition against the law to legislators.
Both houses of Parliament had approved the law, and President Hamid Karzai signed it.
The law now affects only the Shia minority, but threatens to affect pending legislation that could restrict the rights of non-Shia women as well.
When Western media sought quotes from the women, they frequently heard a Western-style feminist refrain: “These laws would make women into a kind of property.”
In the West, the counterpoint to the notion of woman as property has been a highly individualistic demand for personal autonomy – decision-making based primarily on a woman’s own wishes, rather than as wife, mother, community member, or worshipper.
But, while some Western feminist insights may be useful to Afghani women and other women in the developing world as they resist certain forms of male oppression, we should not assume – as Western feminists often have – that our job is to proselytize “our” feminism.
On the contrary, the feminism expressed by women such as these Afghani heroines should educate us in the West about our own shortcomings.
The core theory with which emerging feminists in more traditional and religious societies are working is far different from that of Western feminism – and in some ways far more profound and humane.
In India, for example, feminists articulated to me a vision of women’s equality that was family-centered rather than self-centered, and that valued service to community rather than personal gratification.
They did not see their struggle as a cultural or ideological clash between men and women, but rather as a very practical effort to live free from violence and sexual assault, forced child marriage and bride-burning, and legal exclusion from parity.
The emerging consensus in India in support of greater rights and freedoms for women, while certainly causing some upheaval and adjustment (especially within the growing middle classes) has not yet – and might never – poison the basic trust and warmth between men and women.
Nor does it seem likely to emulate the splintered, individualized, solitary society – and the commodified sexual revolution – that Western, self-based feminism reflects.
This version of feminism – the notion that women can claim equality and still have a valued role in the home, prize family above all, and view rights in the context of community and spirituality – seems like a much-needed corrective to some of Western feminism’s shortcomings.
Ideally, men’s drive for progress in the developing world would also evolve, uniting the idea of the autonomous self with support for family, community, and other ties, and Western men would learn from this as well.
Moreover, intellectually, these women remind us that Western feminism did not have to evolve the way it did, and can still change and grow to embrace a more satisfying and humane definition of equality.
Simone de Beauvoir, whose seminal book
The good news for all women, East and West, is that President Karzai, under intense international criticism – and not just Western criticism – changed the law less than one week after the march.
This global uproar is a testament to how three decades of Western feminist challenges to leadership have changed the world for the better.
But our (Western) moment of feminist leadership is over now – for good reasons.
We know by now what our problems are as women in the West, and we know the blueprint for solving them.
What we lack now is not analysis, but the organizational and political will to do so.
So the leadership role is shifting to women in the developing world.
Their agenda is more pressing, and their problems, frankly, far more serious than ours, which makes it much more urgent for them to develop theories appropriate to the challenges they face.
If one of those courageous Afghan women who marched in Kabul wrote – as I hope she or one of her sisters in the developing world is doing right now – the seminal text for the next 50 years on non-Western feminism, it would no doubt be equality-driven and practical.
And perhaps, in its likely view of the world as being more than the sum of consuming, competing autonomies, or gender warfare, it would be a valuable challenge to truisms that we Western feminists – and the men who love us – have thought we had to take for granted.
Afghanistan’s Opium War
When NATO leaders meet for their summit in Riga at the end of this month, there will be a ghost at the feast: Afghanistan’s opium.
Afghanistan is in danger of falling back into the hands of terrorists, insurgents, and criminals, and the multi-billion-dollar opium trade is at the heart of the country’s malaise.
Indeed, NATO’s top general, James Jones, has called drugs the “Achilles heel” of Afghanistan.
This year’s record harvest of 6,100 tons of opium will generate more than $3 billion in illicit revenue – equivalent to almost half of Afghanistan’s GDP.
Profits for drug traffickers downstream will be almost 20 times that amount.
Opium money is corrupting Afghan society from top to bottom.
High-level collusion enables thousands of tons of chemical precursors, needed to produce heroin, to be trucked into the country.
Armed convoys transport raw opium around the country unhindered.
Sometimes even army and police vehicles are involved.
Guns and bribes ensure that the trucks are waved through checkpoints.
Opiates flow freely across borders into Iran, Pakistan, and other Central Asian countries.
The opium fields of wealthy landowners are untouched, because local officials are paid off.
Major traffickers never come to trial because judges are bribed or intimidated.
Senior government officials take their cut of opium revenues or bribes in return for keeping quiet.
Perversely, some provincial governors and government officials are themselves major players in the drug trade.
As a result, the Afghan state is at risk of takeover by a malign coalition of extremists, criminals, and opportunists.
Opium is choking Afghan society.
Within Afghanistan, drug addiction is rising.
Neighbors that used to be transit states for drugs are now major consumers, owing to similar dramatic increases in opium and heroin addiction.
Intravenous drug use is spreading HIV/AIDS in Iran, Central Asia, and the former Soviet Union.
In traditional Western European markets, health officials should brace for a rise in the number of deaths from drug overdoses, as this year’s bumper opium crop will lead to higher-purity doses of heroin.
What can be done?
First, the veil of corruption in Afghanistan must be lifted.
Afghans are fed up with arrogant and well-armed tycoons who live in mansions and drive top-of-the range Mercedes limousines – this in a country where barely 13% of the population have electricity and most people must survive on less than $200 a year.
It is time for the Afghan government to name, shame, and sack corrupt officials, arrest major drug traffickers and opium landlords, and seize their assets.
Donors have trained police and prosecutors and built courts and detention centers.
Now it is up to the government to use the judicial system to impose the rule of law.
It will be difficult, but not impossible, to re-establish confidence in the central government.
Putting major drug traffickers behind bars at the new maximum-security prison at Pul-i-Charki, near Kabul, would be a good start.
Of course, Afghanistan does not bear sole responsibility for its plight.
The heroin trade would not be booming if Western governments were serious about combating drug consumption.
It is a bitter irony that the countries whose soldiers’ lives are on the line in Afghanistan are also the biggest markets for Afghan heroin.
Furthermore, Afghanistan’s neighbors must do more to stop insurgents, weapons, money, and chemical precursors from flowing across their borders into the country.
Coalition forces should take a more robust approach to the drug problem.
Counter-insurgency and counter-narcotics are two sides of the same coin.
Improving security and the rule of law must include destroying the opium trade.
Allowing opium traffickers to operate with impunity gives them a free hand to raise money to pay for the arms and fighters battling the Afghan army and NATO forces.
The United Nations Security Council has authorized the International Security Assistance Force to take all necessary measures to fulfill its mandate.
NATO troops should be given the green light to help the Afghan army fight opium – destroy the heroin labs, disband the opium bazaars, attack the opium convoys, and bring the big traders to justice.
And they should be given the tools and manpower to do the job.
There is no point in trying to win the hearts and minds of major drug traffickers.
Farmers are a different story.
Forced eradication risks pushing farmers into the hands of extremists, and thus will not lead to the sustainable reduction of opium fields.
Indeed, as we have seen in some Andean countries, it can be counter-productive.
Therefore, security and development must go hand in hand.
To achieve this, Afghanistan needs more development assistance.
International support so far has been generous, but it is still well below per capita equivalents for other post-conflict situations – and the need is much greater.
Farmers will be weaned off opium over the long term only if they have sustainable livelihoods.
At the moment, Afghanistan’s drug lords are prospering, and rural communities are suffering.
That situation needs to be reversed.
We must punish the traffickers and reward the farmers.
We cannot afford to fail in Afghanistan.
Recent history has given us graphic evidence of what would happen if we do.
But any solution in Afghanistan depends on eliminating its opium.
Afghanistan’s Terrorized Women
KABUL – Recently, the Afghan Independent Human Rights Commission (AIHRC) office in Kudoz province reported the rescue of a young woman who had been imprisoned in her in-laws’ dungeon for seven months.
Fifteen-year-old Sahar Gul was forced to marry an older man who serves in the Afghan army.
She was then kept in the dungeon by her husband’s family and brutally tortured for months, because she refused to work as a prostitute.
Over the past ten years, the AIHRC has received more than 19,000 complaints related to violence against women.
Despite making some progress in investigating the complaints and referring them to the justice system, as well as in raising public awareness about the issue, the challenges remain huge.
Since 2002, many efforts have been made to improve women’s lives in Afghanistan.
The country has enacted several new laws and established a fairly advanced legal framework to end discrimination against women, including a new law that criminalizes any act that results in violence against women.
But laws and policies alone are not sufficient to protect women from horrific domestic abuse.
Indeed, the Gul case is hardly the only well-publicized case.
There was also Gulnaz, a young woman who was jailed for adultery after being raped by a relative (she was recently released after a presidential pardon, but may be forced to marry her attacker).
The husband of another young woman, Aisha, cut off her nose and ears when she ran away.
Violence against women in Afghanistan persists for many reasons.
First, the country has inherited a patriarchal tribal tradition that assumes women’s inferiority.
Women are therefore deprived of their basic rights and freedoms.
Second, there is a strong political incentive to deprive women of their rights.
Radical groups receive immense support from the large share of the population that opposes women’s rights.
The Taliban, for example, have consistently used an anti-women policy to appeal to tribal and rural people.
Third, family pride and honor are deemed more important than a woman’s individual well-being and safety.
For example, if family members beat or abuse a woman, she has few options.
Often, her only choice is to remain silent or risk disgracing the family.
If she does report the matter to the authorities, the case will almost certainly never be properly investigated, nor the perpetrators ever prosecuted.
Gul, for example, complained to the police about her abusive in-laws, but she was returned to the family when some of their influential contacts intervened.
Fourth, laws are often arbitrarily applied, and sharia (Islamic law) frequently takes precedence over civil legislation, resulting in widespread impunity for crimes of violence against women.
For example, in October 2010, the Afghan Supreme Court ruled that women who run away from home can be charged with prostitution, unless they go to the police or an immediate relative's home.&#160;It is this mindset that led to Gul’s victimization.
Finally, while the Taliban lost power ten years ago, discrimination and violence against women has occurred in Afghan society for centuries.
Thus, despite some progress, public and official sensitivity to violence against women is only slowly emerging.
The Afghan government must take several steps to protect women fully.
Above all, perpetrators of violence against women should be prosecuted and tried under due process of law.
This will require strengthening the rule of law and ending the prevailing culture of impunity.
That, in turn, requires educating the public further about human rights and women’s rights through school textbooks, continuing education courses, and a vigorous media campaign.
It also requires persuading representatives and policymakers to develop policies and allocate budget revenues to combat violence against women, and training police and judges to handle cases of violence against women without deferring to claims of family honor.
Perhaps most importantly, non-constitutional justice systems, such as sharia, must be monitored and checked, if not prohibited altogether.
As for Sahar Gul, her case must be thoroughly investigated, and the police and judiciary must commit to bringing her torturers to justice.
Furthermore, Gul’s case, and others like it, should be studied in order to understand the roots of such crimes.
Until Afghanistan’s leaders begin to address this problem seriously, our country will continue to bear the scar of violence against women on its face.
A Field Guide to Israeli Hawks
Prime Minister Ariel Sharon's announcement that he plans to dismantle Jewish settlements in the Gaza Strip, as well as some settlements in the West Bank, has shocked and caught people off guard both in Israel and around the world.
Many denounced Sharon's plan as a trick.
But that surprise was wrong-headed from the start.
Despite the way it often looks to outsiders, debates in Israel about the future of the occupied territories have never been confined to hawks and doves.
Like everything in Israel, the process is more complicated, especially where the hawks are concerned.
Basically, there are two species of Israeli hawks: call one kind ideological and the other strategic.
Ideological hawks view the occupied territories as an integral part of the historical Land of Israel, the homeland of the Jewish people.
For them, the territories are part of the Jewish patrimony, which is why they insist on referring to the West Bank by its Hebrew historical appellation - Judea and Samaria.
Not all ideological hawks are religious, although those who are base their claim on divine promises and prophecies.
But many ideological hawks are secular nationalists, and their jargon is similar to that of typical Central and Eastern European nationalists.
Former Prime Minister Menachem Begin and Yitzhak Shamir belonged to that category.
Ideological hawks usually come from the National-Religious Party and from members of the Likud.
They are inspired by the nationalist ideology connected with Vladimir Jabotinsky, who founded "Revisionist" Zionism as a challenge to the more moderate version espoused by Israel's Founding Fathers like Chaim Weizmann and David Ben-Gurion.
Then there are the strategic hawks.
For them, given Israel's narrow and vulnerable geographic shape and continuing Arab enmity, controlling the West Bank and Gaza is not an ideological imperative, but is driven by security considerations.
For them, Jewish settlements in the territories are not a return to historical lands, but security outposts, aimed at preventing - or repelling from a better strategic position - an attack on the Israeli heartland.
They may be right or wrong in this assessment, but it is not an ideological one.
Ariel Sharon, who comes from a military background - he grew up in a social milieu much nearer to Labor than to Jabotinsky's ideas - is a strategic hawk.
For ideological hawks, compromises are treason: how can you jeopardize the historical patrimony of the Jewish people, let alone God's promise to Abraham?
Strategic hawks, however, are open to practical bargains and compromises - if the circumstances are right and if the security considerations justify it in their eyes.
It is in this context that Sharon's moves should be seen.
He was elected on the promise that he would bring peace and security.
He has brought neither.
With the defeat and demise of Saddam Hussein, the danger of an "Eastern front" against Israel has diminished.
Absent a Palestinian partner, and given continuing Palestinian terrorism - which Israel's harsh responses fail to quell - what Sharon appears to be doing now follows from his strategic-oriented thinking: set up an effective barrier, move some of the isolated and strategically untenable settlements, and wait for another day.
If one follows Sharon's statements in the last year, a clear pattern emerges.
First, he admitted that "eventually" a Palestinian state would emerge - something unthinkable for dyed-in-the-wool ideological hawks.
A few months later, he scandalized his own Likud party conference by stating that occupation is wrong and untenable - another shock for those who always speak of "liberated" rather than "occupied" territories.
Last December, he explicitly stated that Israel is headed towards unilateral disengagement, and that this would entail the "relocation" of some settlements.
Although this was still merely verbiage, it was novel language for a Likud prime minister.
Sharon's latest statements, though, explicitly specified the settlements to be evacuated; the Director of the National Security Council, General Giora Eiland, was appointed to chair an inter-ministerial Relocation Committee and work out plans for conducting the evacuations, including compensation for relocated settlers.
All of this has radically altered Israel's domestic political map.
Some ideological hawks in Sharon's government threatened to resign;
Shimon Peres announced that Labor will offer Sharon a parliamentary safety net; there is even talk about Labor joining a national unity government.
The test, of course, is not in the planning, but in the implementation of withdrawal, and the road is long and bumpy.
Sharon's timing may have been determined by his problems with police investigations into alleged corruption.
Yet anyone who would like to predict Sharon's future behavior should remember that unlike Begin and Shamir, Sharon comes from the military, and for him security - not ideology - is supreme.
So his apparent pragmatism should come as no surprise.
A Foreign Policy for New and Old Europe
Watching the news from Iraq, I recall when I was Poland's Prime Minister during the Gulf War in 1991.
I watched from home on CNN as the first cruise missiles hit Baghdad.
Hours later our military informed me that armed conflict was underway in Iraq. ``Yes, I know,'' I said. ``I've been watching the bombardment on TV.''
Twelve years later, Poland's Prime Minister didn't need a belated call from his military to know that war was underway in Iraq.
All the details of the attack were provided in advance by the US, now Poland's NATO ally.
Indeed, Poland has secured a leading role in Iraq's occupation.
What a distance Poland has travelled since communism's collapse in 1989!
Little of this, however, is the result of design, for (unfortunately) we in Poland have not thought through what sort of foreign policy we need as a member of NATO and putative member of the European Union.
We remain narrowly focussed on whether an initiative will be immediately good or bad for us.
Couple this with a form of foreign policy schizophrenia--some Poles think that by ``simply existing'' we influence Europe's fate; others suffer crippling pessimism, consigning Poland to permanent ``second-class'' status--and you have a recipe for inertia.
Our attitude seems to be that somehow things will sort themselves out.
Much of Europe seems to be stuck in the same mindset: we say that we want a common foreign and security policy, but we do nothing about it until a crisis emerges.
Then we squabble about what to do.
The time for such laxity is over.
For Poland and the other countries of East-Central Europe that have or are about to join NATO, membership in the Alliance didn't really require debate.
Our histories of oppression by powerful neighbours told us that collective security within NATO was the
EU membership and the global war on terror, however, demand a more deeply considered response.
Why?
Because EU membership affects every aspect of a state, economy, and society, while the war on terror demands a completely new way to conduct diplomacy and security policy.
Today's crisis in transatlantic relations, and our accidental involvement in it as part of Donald Rumsfeld's ``New Europe,'' means that Poland (like every other European state) must now decide what it really wants from the EU and NATO.
We must consider both our attitude to global problems that were once deemed peripheral to European interests, as well what it really means to be an EU partner.
Only answers to these questions can reconcile the divide between the ``new'' and ``old'' Europe, as well as the new and old Atlantic worlds.
Poland as an ally of the US is not the real headache facing President Jacques Chirac or Chancellor Gerhard Schroeder.
Instead, the French and German leaders are really responding to the growing unpredictability of today's emerging European order.
They see new players (say, Spain) rising to shape EU policy, particularly foreign policy, and sense that their traditional leadership is being challenged.
But an EU with 10 new members simply cannot be run as it has for decades.
So the challenge to France and Germany does not arise because Poland is some sort of American ``Trojan Horse.''
Instead, the EU's structure now demands not only a new consensus about Europe's role in the world, but also new means to achieve consensus. History cannot be put on hold as Europe sorts out its internal balance of power.
The world needs a united continent, ready to go into action.
That consensus must include the US.
During the Cold War, most Europeans tolerated America's tendency to lead unilaterally, because of the Soviet threat and the preponderance of US power.
But America is having a hard time understanding the new circumstances of the post-Cold war era.
Its difficulties are exacerbated by the dramatic disparity in military forces on either side of the Atlantic, and its belief that Europe's ambitions to become a military power will come to nothing because Europeans won't spend the money necessary to achieve that goal.
Here is where Poland can help bridge the Atlantic divide and forge a European consensus.
September 1939 taught every Pole that military power must be real to be effective.
Intentions don't deter invasions.
As Danish Premier Anders Fogh Rasmussen recently said, ``France and Germany are not in a position to guarantee our country's security.
The US is, but security does not come free of charge.''
Most Poles think that Poland's situation is akin to Denmark's.
Indeed, all of Europe is in thrall to American power.
But this dependence should not disguise the fact that there is a commonality of foreign policy interests between Europe and America.
If the EU builds its foreign and security policy on the basis of recognition of this truth, many of today's divisions will disappear.
The EU's foreign policy should be guided by the following goals:
fight terrorism;
prevent local conflict;
promote human rights and democracy;
oblige unpredictable countries to become responsible;
maintain close cooperation between Europe and the US;
help poor countries.
Polish foreign policy, like that of the EU, can only be effective in the long term if it takes realistic steps--and spends the necessary money--to realize these objectives.
They are the only possible bedrock in transatlantic relations, in an expanded Union, and in relations between the ``New'' and ``Old'' Europe.
A Fracking Good Story
PRAGUE – Weather conditions around the world this summer have provided ample fodder for the global warming debate.
Droughts and heat waves are a harbinger of our future, carbon cuts are needed now more than ever, and yet meaningful policies have not been enacted.
But, beyond this well-trodden battlefield, something amazing has happened: Carbon-dioxide emissions in the United States have dropped to their lowest level in 20 years.
Estimating on the basis of data from the US Energy Information Agency (EIA) from the first five months of 2012, this year’s expected CO2 emissions have declined by more than 800 million tons, or 14%, from their peak in 2007.
The cause is an unprecedented switch to natural gas, which emits 45% less carbon per energy unit.
The US used to generate about half its electricity from coal, and roughly 20% from gas.
Over the past five years, those numbers have changed, first slowly and now dramatically: in April of this year, coal’s share in power generation plummeted to just 32%, on par with gas.
America’s rapid switch to natural gas is the result of three decades of technological innovation, particularly the development of hydraulic fracturing, or “fracking,” which has opened up large new resources of previously inaccessible shale gas.
Despite some legitimate concerns about safety, it is hard to overstate the overwhelming benefits.
For starters, fracking has caused gas prices to drop dramatically.
Adjusted for inflation, gas has not been this cheap for the past 35 years, with the price this year 3-5 times lower than it was in the mid-2000’s.
And, while a flagging economy may explain a small portion of the drop in US carbon emissions, the EIA emphasizes that the major explanation is natural gas.
The reduction is even more impressive when one considers that 57 million additional energy consumers were added to the US population over the past two decades.
Indeed, US carbon emissions have dropped some 20% per capita, and are now at their lowest level since Dwight D. Eisenhower left the White House in 1961.
David Victor, an energy expert at the University of California, San Diego, estimates that the shift from coal to natural gas has reduced US emissions by 400-500 megatonnes (Mt) of CO2 per year.
To put that number in perspective, it is about twice the total effect of the Kyoto Protocol on carbon emissions in the rest of the world, including the European Union.
It is tempting to believe that renewable energy sources are responsible for emissions reductions, but the numbers clearly say otherwise.
Accounting for a reduction of 50 Mt of CO2 per year, America’s 30,000 wind turbines reduce emissions by just one-tenth the amount that natural gas does.
Biofuels reduce emissions by only ten Mt, and solar panels by a paltry three Mt.
This flies in the face of conventional thinking, which continues to claim that mandating carbon reductions – through cap-and-trade or a carbon tax – is the only way to combat climate change.
But, based on Europe’s experience, such policies are precisely the wrong way to address global warming.
Since 1990, the EU has heavily subsidized solar and wind energy at a cost of more than $20 billion annually.
Yet its per capita CO2 emissions have fallen by less than half of the reduction achieved in the US – even in percentage terms, the US is now doing better.
Because of broad European skepticism about fracking, there is no gas miracle in the EU, while the abundance of heavily subsidized renewables has caused over-achievement of the CO2 target.
Along with the closure of German nuclear power stations, this has led, ironically, to a resurgence of coal.
Well-meaning US politicians have likewise shown how not to tackle global warming with subsidies and tax breaks.
The relatively small reduction in emissions achieved through wind power costs more than $3.3 billion annually, and far smaller reductions from ethanol (biofuels) and solar panels cost at least $8.5 and $3 billion annually.
Estimates suggest that using carbon taxes to achieve a further 330 Mt CO2 reduction in the EU would cost $250 billion per year. Meanwhile, the fracking bonanza in the US not only delivers a much greater reduction for free, but also creates long-term social benefits through lower energy costs.
The amazing truth is that fracking has succeeded where Kyoto and carbon taxes have failed.
As shown in a study by the Breakthrough Institute, fracking was built on substantial government investment in technological innovation for three decades.
Climate economists repeatedly have pointed out that such energy innovation is the most effective climate solution, because it is the surest way to drive the price of future green energy sources below that of fossil fuels.
By contrast, subsidizing current, ineffective solar power or ethanol mostly wastes money while benefiting special interests.
Fracking is not a panacea, but it really is by far this decade’s best green-energy option.
A Free Lunch for America
BERKELEY – Former US Treasury Secretary Lawrence Summers had a good line at the International Monetary Fund meetings this year: governments, he said, are trying to treat a broken ankle when the patient is facing organ failure.
But, on the other side of the Atlantic, Americans have no reason to feel smug.
Summers could have used the same metaphor to criticize the United States, where the continued focus on the long-run funding dilemmas of social insurance is sucking all of the oxygen out of efforts to deal with America’s macroeconomic and unemployment crisis.
The US government can currently borrow for 30 years at a real (inflation-adjusted) interest rate of 1% per year.
Suppose that the US government were to borrow an extra $500 billion over the next two years and spend it on infrastructure – even unproductively, on projects for which the social rate of return is a measly 25% per year.
Suppose that – as seems to be the case – the simple Keynesian government-expenditure multiplier on this spending is only two.
In that case, the $500 billion of extra federal infrastructure spending over the next two years would produce $1 trillion of extra output of goods and services, generate approximately seven million person-years of extra employment, and push down the unemployment rate by two percentage points in each of those years.
And, with tighter labor-force attachment on the part of those who have jobs, the unemployment rate thereafter would likely be about 0.1 percentage points lower in the indefinite future.
The impressive gains don’t stop there.
Better infrastructure would mean an extra $20 billion a year of income and social welfare.
A lower unemployment rate into the future would mean another $20 billion a year in higher production.
And half of the extra $1 trillion of goods and services would show up as consumption goods and services for American households.
In sum, on the benefits side of the equation: more jobs now, $500 billion of additional consumption of goods and services over the next two years, and then a $40 billion a year flow of higher incomes and production each year thereafter.
So, what are the likely costs of an extra $500 billion in infrastructure spending over the next two years?
For starters, the $500 billion of extra government spending would likely be offset by $300 billion of increased tax collections from higher economic activity.
So the net result would be a $200 billion increase in the national debt.
American taxpayers would then have to pay $2 billion a year in real interest on that extra national debt over the next 30 years, and then pay off or roll over the entire $200 billion.
The $40 billion a year of higher economic activity would, however, generate roughly $10 billion a year in additional tax revenue.
Using some of it to pay the real interest on the debt and saving the rest would mean that when the bill comes due, the tax-financed reserves generated by the healthier economy would be more than enough to pay off the additional national debt.
In other words, taxpayers win, because the benefits from the healthier economy would more than compensate for the costs of servicing the higher national debt, enabling the government to provide more services without raising tax rates.
Households win, too, because they get to buy more and nicer things with their incomes.
Companies win, because goods and workers get to use the improved infrastructure.
The unemployed win, because some of them get jobs.
And even bond investors win, because they get their money back, with the interest for which they contracted.
So what is not to like?
Nothing.
How, you might ask, can I say this?
I am an economist – a professor of the Dismal Science, in which there are no free lunches, in which benefits are always balanced by costs, and in which stories that sound too good to be true almost inevitably are.
But there are two things different about today.
First, the US labor market is failing so badly that expanded government spending carries no resource cost to society as a whole.
Second, bond investors are being really stupid.
In a world in which the S&amp;P 500 has a 7% annual earnings yield, nobody should be happy holding a US government 30-year inflation-adjusted bond that yields 1% per year.
That six-percentage-point difference in anticipated real yield is a measure of bond investors’ extraordinary and irrational panic.
They are willing to pay 6% per year for “safety.”
Right now, however, the US government can manufacture “safety” out of thin air merely by printing bonds.
The government, too, would then win by pocketing that 6% per year of value – though 30 years from now, bondholders who feel like winners now would most likely look at their portfolios’ extraordinarily poor performance of over 2011-2041 and rue their strategy.
A French Cure for the Resource Curse
NEW YORK – The campaign to ensure that companies engaged in extractive activities disclose all of their payments in their host countries is gaining momentum – and France is leading the effort.
President Nicolas Sarkozy should be applauded for supporting a new initiative promoting strict transparency standards for petroleum, gas, and mining companies listed on European stock exchanges.
France, at the heart of the European Union and President of both the G-8 and G-20 this year, is in an exceptional position to encourage such a regulatory move.
With French leadership, 2011 offers a golden opportunity for the most important capital markets to adopt clear, precise rules requiring full financial disclosure by extractive-industry companies to governmental authorities.
Oil, gas, and mining generate billions of dollars per year for governments and companies.
Moreover, these industries often play a central role in the economic development of resource-rich countries.
Yet, despite great natural wealth, a majority of people in these countries lives in poverty.
The actual taxes and payments made by mining, oil, and other extractive-industry companies to governments are usually a well-kept secret, even though most of these governments claim to use the revenue for the public good.
In reality, in far too many countries, ordinary citizens do not benefit from any of this money; in fact, they must bear the brunt of the environmental and social costs imposed by mining and drilling operations.
Indeed, these well-kept industry and government secrets can have serious and widespread repercussions.
Witness the upheaval in North Africa and the Middle East.
In these countries, many of which are rich in oil and gas, citizens are staging protests against corruption and political repression.
At bottom, they are protesting against the mismanagement of their countries’ wealth and resources – with implications that affect the security and affordability of the entire world’s energy supplies.
Transparency is an essential part of the solution. Citizens everywhere must be assured that oil and gas firms, as well as mining companies, publish all of their relevant financial information, broken down by country and by project, and including all payments made to host-country public budgets.
If European regulators can agree on this requirement for all extractive-industry companies listed on their stock exchanges, this transparency norm will be applied to companies regardless of where their headquarters are located.
Regulators must also stipulate that company reports be made available on a regular, timely basis, and that they are easily accessible and comparable across countries and other extractive companies.
The United States has already passed legislation requiring public disclosure of payments to governments, through the 2010 Dodd-Frank law.
That law’s requirement that companies fully disclose their revenue streams by country and by project applies to 90% of international oil and gas companies and to eight of the ten largest mining companies.
This will help citizens track how that money is used, but it will not help them to assess whether their governments are collecting a fair share.
If the EU were to require companies to publish detailed information regarding production and operational numbers, financial and accounting balances, and payments to authorities, companies would become truly accountable to citizens, and government revenues would be augmented.
Such regulatory reform is now under consideration by the European Commission, and French support is imperative if the EU is to announce this month the necessary legislative moves to promote transparency.
French Finance Minister Christine Lagarde recently highlighted the necessity of promoting “initiatives within industrial sectors that aim to enhance governance, integrity, and transparency in economic transactions.”
At its just-completed summit in Deauville, France, the G-8 called for the first time for mandatory reporting by oil, gas, and mining companies. This is an important advance, but, unfortunately, it is qualified by language that allows voluntary approaches as an alternative, and it focuses only on payments transparency.
Now the world must look to the G-20 summit in Cannes this November to make an unequivocal commitment to the reporting requirements needed, given that important emerging economies such as Brazil, India, and China, as well as South Africa and other resource-rich African countries, will be at the table.
The importance of financial transparency in the extractive industries is not limited to one country or era – and it is too important to be left to voluntary efforts alone.
Greater accountability and stronger governance for such companies could potentially change lives, economies, and political systems around the world.
A French Presidential Primer
The late British Prime Minister Harold Wilson used to quip that “a week is a long time in politics.”
So, in the 30 or so weeks between now and the next French presidential election, any prediction made today could be reversed, and reversed again, before the vote.
But two candidates have emerged as clear and constant favorites in opinion polls: Nicolas Sarkozy on the right and Ségolène Royal on the left.
In fact, they have more in common than meets the eye, for each speaks of a rupture with the past while incarnating a form of continuity.
For Sarkozy, “rupture” reflects both mundanely tactical and deeply personal choices.
The 12 years of Jacques Chirac‘s presidency, together with France’s tradition of alternation in power, suggests a victory for the left.
Positioning himself as the candidate who represents a sharp break with today’s unpopular politics is the only means to escape that fate.
This is reflected in Sarkozy’s openly pro-American stance – an act of political courage in a France where anti-Americanism is running high.
Sarkozy’s message is that Chirac and Villepin were right in substance to oppose America’s military adventure in Iraq, but that their style was disastrously wrong.
Thus, his deep admiration for “American values,” while sincere, implies no embrace of President George W. Bush.
It also reassures the French business community, which was shocked by Dominique de Villepin’s flamboyant opposition to the United States when he was Chirac’s foreign minister.
At home, Sarkozy has aimed his message particularly at the young, issuing a patriotic call to the values of work and discipline, a counter-revolutionary revolution.
The revolution that must be overcome is that of May 1968, whose leaders and supporters, according to Sarkozy, may have lost politically to de Gaulle, but deeply weakened France over the succeeding decades with their emphasis on “false values.”
By contrast, rebelling against one’s parents’ generation and rediscovering traditional moral stances will save France – a message that is highly applicable to issues, such as education and immigration, that may dominate the electoral campaign.
In the case of Royal, the meaning of “rupture” is both more obvious and more visible.
She is seeking to become the first woman President of the French Republic.
To achieve her goal, she prefers to emphasize her “essence,” thereby countering Sarkozy’s stress on his record as a “doer.”
Her appeal to voters is simple: “I am a woman, and you have never tried a woman, so be modern and try one now.”
Hiding behind the originality (in French presidential politics) of her gender, Royal has avoided specifying a detailed program.
When challenged by inquisitive journalists demanding greater precision about her policy agenda, her highly effective line of defense (so far!) has been: “You would not dare to ask me such a question if I were not a woman!”
Thus, Royal’s program is her popularity.
In foreign policy, one can only guess what her priorities would be.
As far as Europe is concerned, she seems as “agnostic” as Sarkozy, who, like her, incarnates a new generation of “post-European” leaders.
In terms of values, Royal, too, seems to represent a rupture with May 1968, with her emphasis on discipline and family.
According to public opinion polls, Royal is the clear favorite of the left and the only candidate able to defeat Sarkozy.
Her support is particularly strong among women voters.
For the Socialist Party, which is eager to return to power but has not yet recovered from the humiliating defeat of Lionel Jospin in the first round of the presidential election in 2002, the question is whether it can afford to resist the wave of favorable public opinion behind Royal.
In the opinion of Royal’s many opponents among Socialist leaders and militants, the dominance of the media in the political process is leading to mediocrity: the qualities required to be elected are becoming nearly incompatible with those needed to govern.
According to Royal’s Socialist critics, the “Hollywoodization” of politics from which she benefits entails a new approach in which leaders follow and followers lead.
But the same criticism can be directed at Sarkozy.
Moreover, both candidates embody continuity – with Chirac’s Gaullist side for Sarkozy and with François Mitterrand for Royal – as much as rupture.
Royal openly claims Mitterand’s legacy as she searches for legitimacy, while Sarkozy’s rejection of Chirac’s legacy has more to do with form than substance.
To a large extent, Sarkozy can be seen as Chirac with more, whereas Royal is clearly Mitterrand with less.
When the voters decide in the spring of 2007, their choice may depend more on negative than positive considerations, as it did in 2002, when Chirac faced the odious nationalist Jean-Marie Le Pen in the second round.
As in 2002, the winner next year will be whomever the electorate dislikes or fears less.
But one way or the other, personalities will prevail over programs.
A Fresh Start for China and Japan?
Edmonton – Chinese President Hu Jintao will make a high-profile visit to Japan from May 6-10, making him the second Chinese head of state ever to travel there.
The trip is being carefully managed by both countries, and is being watched closely around the world, with good reason: Sino-Japanese relations over the past decade have been turbulent, to say the least.
When Hu’s predecessor, Jiang Zemin, traveled to Japan ten years ago, bilateral relations were deteriorating: China was unhappy with the Japanese government’s refusal to extend the same apology offered to South Korea for past aggression;
Japan was worried about a rising China and thus turning more confrontational.
The Japanese media’s coverage of the visit was overwhelmingly negative, and it was remembered as a public-relations disaster.
Hu succeeded Jiang in 2002, almost as former Prime Minister Junichiro Koizumi was coming to power in Japan, and encouraged “New Thinking” in China’s Japan policy, which would entail moving away from historical grievances and promoting better ties.
But, instead of accepting China’s olive branch, Koizumi implemented a more nationalistic agenda, including annual visits to the Yasukuni Shine, which is regarded as a symbol of Japanese militarism by Japan’s neighbors.
His hard-line approach isolated Japan and angered China, leading to an outburst of anti-Japanese demonstrations in China in 2005.
But both Japan and China recognize that further tension will serve neither country’s long-term interests.
Koizumi’s successors, Prime Ministers Shinzo Abe and Yasuo Fukuda, have sought to engage China over the past two years, with summits in Beijing and a successful visit by Chinese Premier Wen Jiabao to Japan last year.
Hu’s trip is likely follow the example set by Wen.
He will emphasize common strategic interests, highlight mutual economic benefits, generate positive public opinion, and promote further exchanges.
Japan is not only one of China’s largest trade and investment partners, it is also the most powerful neighbor with which China wants to be on good terms, partly to showcase that China’s rise is not a threat to Asia and the rest of the world.
Japan, whose economic recovery is attributable largely to its deepening ties with China in recent years, is also eager to demonstrate that it regards China not as a threat but as an opportunity, as least in economic terms.
It was 30 years ago that former Prime Minister Takeo Fukuda, the father of today’s prime minister, signed a Peace and Friendship Treaty with China.
The two governments will certainly use Hu’s visit to celebrate the anniversary with new programs designed to enhance bilateral understanding and friendship.
But, unlike three decades ago, when the Japanese regarded China as one of their most favored countries, public opinion in both countries nowadays registers more negative feelings than positive ones.
Behind the smiles, the polite interactions, and the cautiously worded diplomatic language, strong undercurrents of suspicion remain.
One problem is the disputed waters of the East China Sea.
Despite new joint projects in energy efficiency and environmental protection, areas in which China ranks Japan as the best performer among industrialized countries, the two sides remain in bitterly divided over these territorial waters, which contain huge potential oil, gas, and other mineral deposits.
Even after many rounds of talks, no resolution is in sight, and Hu’s visit is not expected to produce any breakthroughs.
Then there are strategic suspicions.
Fukuda has dropped Abe’s talk about an “arch of freedom” – an effort to forge a bloc with the United States, Australia, and India.
But Japan remains concerned about China’s rapidly modernizing military, while China worries about a potential US-Japan containment strategy for China, especially in the case of a crisis in the Taiwan Straits.
So, although both sides endorse the idea of a “mutually beneficial strategic relationship,” and despite progress bilateral on military exchanges, mutual trust and confidence-building have a long way to go.
Moreover, today’s “warm politics, cool economics” trend is the reverse of the “cold politics, warm economics” pattern under Koizumi.
Last year, Japan’s committed investment projects in China fell 24% from 2006, while actual investment volume decreased by 25%, partly owing to regulatory changes in China regarding foreign investment.
Recent food safety issues, such as the “poisoned dumplings” cases, have clearly heightened the Japanese public’s sensitivity about Chinese exports.
Finally, historical issues could still resurface to cause new problems.
While Fukuda has made it clear that he will not visit the Yasukuni Shrine, 160 other parliamentarians paid homage at the site last month, an indication that conservative forces in Japan remain strong and that future prime ministers may not abstain from visiting Yasukuni.
And Japan has so far failed to live up to its treaty obligations to clean up between 700,000 and two million chemical weapons that were abandoned in China by the Japanese army at the end of World War II, another potential flash point if any of these weapons causes casualties in China.
A Fresh Start for Europe in Latin America?
MILAN – By 2050, Brazil and Mexico will be among the world’s six leading economies, according to analysts at the investment bank Goldman Sachs.
Does the European Union care?
Is Latin America to be Europe’s next missed business opportunity?
Latin America has a population of 550 million, with average yearly per capita income of $4,000, immense natural resources, and substantial human capital.
It accounts for 8% of world production and grew by more than 5% in each of the past three years.
Although the United States remains the main destination of Latin American and Caribbean exports, Asia is becoming an increasingly important market for goods based on natural resources.
During the past four years, Latin America attracted an annual average of $61 billion in foreign direct investment, 60% of which went to Brazil and Mexico.
In the 1990’s, foreign investors were chiefly attracted by privatization programs in the region, but more recently mergers and acquisitions and greenfield projects have been the most common type of investment.
Predictably, Spain is the most important European investor in the region, though several important Spanish operations have recently passed to Italian companies, among them the utility Endesa, acquired by Enel, which is now the biggest private energy distributor in Latin America.
Meanwhile, Latin American businesses have been increasing their own foreign investments.
In 2006, Brazil invested $28.2 billion abroad, compared to inflows of $18.8 billion.
Indeed, emerging giants from Latin America and Asia will be at the center of worldwide investment in the coming decades.
In 2006, Italy’s Fiat Group and India’s Tata Motors established a joint venture to make passenger vehicles and engines in India.
The following year, they extended their partnership to Latin America, investing $80 million in production of a Tata pick-up truck at Fiat’s factory in Cordoba, Argentina.
It is to be hoped that many more major European corporations will follow suit.
But small and medium sized enterprises (SMEs) – the majority of firms in both Latin America and Europe – find it difficult to trade and invest at international level, in part because of high transaction and information costs.
In Europe, clusters of SMEs appear able to achieve economies of scale and scope, and thus to succeed collectively in global markets.
This European experience is now being widely studied in Latin America.
In Brazil, four local production systems have combined to form Project Promos/Sebrae/BID, based on the example of Italy’s industrial districts.
Between 2002 and 2006, Brazil’s SME support services and the Milan Chamber of Commerce created partnerships involving furniture, shoes, designer lingerie, and handicrafts from different regions of the country.
This approach may well be the shape of things to come.
But, while the EU’s association agreement with Mexico is 10 years old, it does not yet have a strategic partnership with Brazil.
This is partly because of the never-ending negotiation process with Mercosur, the troubled – and still incomplete – Latin American customs union.
The EU is currently negotiating trade liberalization deals with all of Latin America’s regional blocs: Mercosur, the Caribbean Community, the Central America Common Market, and the Andean Community.
The EU must urge its Latin American partners towards further integration.
Adopting a common “rule of origin” for their products would be an incentive to liberalize their international trade further, thus increasing it.
Full trade liberalization in Latin America, although difficult to achieve, must be made central to EU strategy, and would boost economic growth.
But even if tariffs and quotas are progressively reduced, trade flows may remain low if other trade costs remain high.
EU cooperation thus should be directed to lowering trade costs.
The crucial issue is market access.
Most Latin American countries still get poor results from their efforts to export to Europe, the exceptions being raw materials and energy resources.
After the establishment of the EU-Chile free-trade area, Chilean exports to the EU increased substantially.
But in the case of EU-Mexico trade liberalization, the growth of imports from the EU has exceeded the growth of exports to Europe, resulting in a widening Mexican trade deficit with the EU.
This is at odds with the EU’s proclamations since the 1999 Rio summit that Latin America is a vital political and economic partner.
A change in Europe’s approach is needed if a strategic partnership is to be created.
The European Commission understands this.
Although the EU does not have a strategic partnership with Brazil, it intends to push ahead with one as fast as possible.
In mid-2007, the Commission confirmed that it will revisit the EU’s dialogue with Mercosur, with the aim of giving new impetus to negotiations.
But there is also keen awareness that the EU’s hope for a special relationship with Brazil must not be allowed to hinder regional integration or worsen asymmetries and imbalances within the bloc.
If Latin America is to become a strategic partner for the EU and a more attractive market for European companies, European institutions must become more open to the region’s needs.
A fresh start by the EU with Brazil and Mexico could prove promising, because of the “pull” it might have on other countries.
But this must be accompanied by measures to keep all Latin American countries on board.
Otherwise, Latin America may well prove to be Europe’s next missed business opportunity.
Africa at Risk
ADDIS ABABA – Climate change will hit Africa – a continent that has contributed virtually nothing to bring it about – first and hardest.
Aside from Antarctica, Africa is the only continent that has not industrialized.
Indeed, since 1980’s the industrialization that had taken place in Africa has by and large been reversed.
Africa has thus contributed nothing to the historical accumulation of greenhouse gases through carbon-based industrialization.
Moreover, its current contribution is also negligible, practically all of it coming from deforestation and degradation of forests and farmland.
Yet climate change will hit Africa hardest, because it will cripple the continent’s vulnerable agricultural sector, on which 70% of the population depends.
All estimates of the possible impact of global warming suggest that a large part of the continent will become drier, and that the continent as a whole will experience greater climatic variability.
We know what the impact of periodic droughts have been on the lives of tens of millions of Africans.
We can therefore imagine what the impact of a drier climate on agriculture is likely to be.
Conditions in this vital economic sector will become even more precarious than they currently are.
Africa will not only be hit hardest, but it will be hit first.
Indeed, the long dreaded impact of climate change is already upon us.
The current drought covering much of East Africa – far more severe than past droughts – has been directly associated with climate change.
The upcoming climate negotiations ought to address the specific problems of Africa and similarly vulnerable poor parts of the world.
This requires, first and most importantly, reducing global warming to the apparently inevitable increase of two degrees Celsius, beyond which lies an environmental catastrophe that could be unmanageable for poor and vulnerable countries.
Second, adequate resources should be made available to poor and vulnerable regions and countries to enable them to adapt to climate change.
Climate change, which was largely brought about by the activities of developed countries, has made it difficult for poor and vulnerable countries to fight poverty.
It has created a more hostile environment for development.
No amount of money will undo the damage done.
But adequate investment in mitigating the damage could partly resolve the problem.
Developed countries are thus morally obliged to pay partial compensation to poor and vulnerable countries and regions to cover part of the cost of the investments needed to adapt to climate change.
Various estimates have been made of the scale of investment required by those countries.
One conservative estimate – which has a reasonable chance of being accepted precisely because it is conservative – calls for $50 billion per year as of 2015, increasing to $100 billion by 2020 and beyond.
A transitional financing arrangement would be put in place for the period 2010-2015.
Some argue that developed countries cannot come up with such sums, particularly given their current economic challenges.
But no one has so far argued that the cost of damage caused to the development prospects of poor countries and regions is less than the amount of compensation being offered to cover adjustment costs.
The reason is obvious: the damage caused is many times higher than the compensation being requested.
Nonetheless, it is argued, whatever the real cost of the damage, developed countries currently cannot afford to provide that kind of money.
But we all know that these countries and their national banks were able to spend trillions of dollars in a few months to bail out their bankers, who earned super-profits when the going was good.
When the good times ended, taxpayers and governments were prepared to rescue them and to ensure that they continued to receive their extraordinary bonuses.
If the developed world is able to pay trillions of dollars to clean up its bankers’ mess, how is it possible that it cannot afford to pay billions of dollars to clean up a mess that it created, and that is threatening the survival of whole continents?
Clearly this is not about the availability of resources.
It is about the inappropriate priorities in how resources are allocated.
It is about moral values that make it appropriate to rescue bankers, who expect everyone but themselves to pay for the mess they created, and inappropriate to compensate the world’s poorest people, whose survival is threatened precisely because of the mess created by developed countries.
I cannot believe that people in developed counties, when informed about the issues, would support rescuing bankers and oppose partial compensation for poor countries and regions.
I cannot believe that they will let such an injustice occur.
If they are not expressing their outrage over the injustice of it all, it can only be because they are inadequately informed.
Africa, Climate Change, and the G-8 Summit
British Prime Minister Tony Blair has declared that the two issues at the center of the G-8 Summit this July will be African poverty and global climate change.
These may seem to be distinct issues.
In fact, they are linked.
A trip I took to a village in the Tigre region in northern Ethiopia shows why.
One morning, I was taken to a dry riverbed at the village’s edge.
Farmers were digging a pit in the riverbed, down to the water table approximately two meters below ground level.
They explained that until recently this was a perennial river – one that flows throughout the year – but now the river stops flowing during the dry season.
Only when the annual rains begin in the summer does water reappear in the river bed.
Until then, water-starved communities dig for water, if they can find it and if they can afford to pump it out.
In northern Ethiopia, as in much of Africa, the rain cycle has changed markedly in recent years.
Ethiopian village life has long depended on two crops, one during a short rain in March and April, and the main crop during the long rain in the summer months.
In recent years, the short rains have failed entirely, and long rains have been erratic.
Hunger is omnipresent.
Perhaps half of the children are severely underweight.
Much of arid sub-Saharan Africa, notably in the Sahel (the region just south of the Sahara desert), has experienced a pronounced drop in rainfall over the past quarter-century.
This decline coincided with a rise in the surface temperature of the neighboring Indian Ocean, a hint that the decline in rainfall is in fact part of the longer-term process of man-made global warming.
Failures of rainfall contribute not only to famines and chronic hunger, but also to the onset of violence when hungry people clash over scarce food and water.
When violence erupts in water-starved regions such as Darfur, Sudan, political leaders tend to view the problems in narrow political terms.
If they act at all, they mobilize peacekeepers, international sanctions, and humanitarian aid.
But Darfur, like Tigre, needs a development strategy to fight hunger and drought even more than it needs peacekeepers.
Soldiers cannot keep peace among desperately hungry people.
One course of action must be to help impoverished African regions to “adapt” to climate change and to escape the poverty trap.
Water-stressed regions like Ethiopia and Sudan can adapt, at least in part, through improved technologies such as “drip irrigation,” rainwater harvesting, improved water storage facilities, deep wells, and agro-forestry techniques that make best use of scarce rainfall.
Better land-management practices (the re-planting of degraded forests, for example) can recharge underground water aquifers.
Poor countries cannot afford these technologies on their own.
Nor should they have to.
Help for poor countries in Africa and elsewhere to adapt to climate change should not be described as charity or aid, but rather as compensation for damages being imposed on the poorest people on the planet.
Greater help for these countries to escape from extreme poverty has been promised for decades but has not been delivered.
In addition to adapting to climate change, the world must also reduce future risks to the planet by cutting back on emissions of greenhouse gases, which are the source of man-made climate change.
While adaptation to climate change is necessary – because it is already occurring – this is not enough.
If the world fails to mitigate future climate change, the effects of rising temperatures, increasing droughts, more numerous and severe tropical storms, rising sea levels, and a spread of tropical diseases will pose huge threats to the entire planet.
The famines in Ethiopia and the violence in Darfur suggest what can lie ahead.
The best way to reduce long-term climate change is to reduce carbon emissions.
There are at least three options: shift to non-carbon energy sources such as solar or nuclear energy; capture and dispose of the carbon dioxide emitted at carbon-based power plants; economize on energy use, for example by shifting to hybrid automobiles and trucks.
Most likely, all three of these methods will have to play a role.
The effort to reduce greenhouse gases will require decades of action, but, given the long lead times in overhauling the world’s energy systems, we must start now.
Rich countries need to lead the way.
It is ironic that the United States, which portrays itself as a friend of democracy and impoverished countries, gives the smallest share of its GNP in aid among the rich countries, and also refuses to participate in global efforts to reduce greenhouse gas emissions.
This is especially ironic because African countries like Ethiopia stand steadfastly and bravely with the US in the fight for freedom and against terrorism, even as they struggle with hunger, disease, and famine.
Moreover, countries like Ethiopia are making valiant, indeed remarkable, efforts to overcome their problems, despite the lack of adequate, and long-promised, help from the world’s richest countries.
Africans suffering from hunger and drought, and indeed poor people everywhere, have a right to ask much more of the US and other rich countries.
Tony Blair is right to call on his rich-country colleagues to follow through on their unfulfilled promises.
African Misrule on Trial
THE HAGUE – As the world focuses on the inauguration of America’s first black president and celebrates an important milestone in the ongoing struggle for racial equality, recent developments across the Atlantic represent significant progress in a related global campaign to end impunity for mass crimes.
In the coming days, judges sitting on the International Criminal Court in The Hague will decide whether to issue a warrant for the arrest of Sudanese President Omar al-Bashir for the crime of genocide.
And on January 26, the ICC will begin its first trial – that of Thomas Lubanga Dyilo, a former Congolese warlord.
Neither event is earth shattering, but, taken together, these two steps mean that a new system of international justice is working.
Government and rebel leaders around the globe have been put on notice that criminal conduct will no longer be given a free pass.
Although the threatened indictment of al-Bashir has prompted protest in Khartoum, no one expects him to appear in court soon.
As for Lubanga, he is one of many in the Congo who has used civilians as pawns in a war that has cost more than five million lives in the past decade.
Though serious, the charges against him – recruiting child soldiers – do not pretend to encompass the range of abuses committed.
Five years after the world’s first permanent criminal tribunal commenced operations, it has made its mark.
The ICC has opened four active investigations, issued public charges against twelve people, and to date secured custody of four.
Nonetheless, the Court has come under fire for three alleged failings.
First, some argue that by interjecting itself into ongoing conflicts, the ICC has impeded efforts to secure peace.
But the facts on the ground do not bear this out.
In northern Uganda, ICC charges against leaders of the rebel Lord’s Resistance Army have helped bring an end to years of brutal fighting, and marginalized the LRA’s chief, Joseph Kony.
Similarly, in Sudan’s Darfur region, there has been no genuine peace process to disrupt, as attacks on civilians continue to be reported, even after the United Nations Security Council referred the matter to the ICC in 2005.
Even so, the ICC prosecutor’s application for an arrest warrant for al-Bashir – announced this past July – has yet to provoke a widely-feared crackdown on humanitarian organizations.
On the contrary, it may have prompted the arrest of a lower-level indictee for crimes in Darfur.
In short, more law, rather than less, is needed to help stem the violence.
Second, the ICC is said to have allowed itself to become a tool of national political leaders.
The fact that national governments referred three of the Court’s four active cases – and that in each of those cases only armed rebels or government opponents have been charged so far – has contributed to this perception.
Navigating this interplay between law and politics is perhaps the ICC’s greatest challenge.
On the one hand, the Court’s actions often have political consequences: however well-founded, accusing the leader of a rebel army may be seen as taking sides in a conflict.
On the other hand, the Court cannot charge – or refrain from charging – a senior political or military official responsible for grave crimes solely to avert negative political repercussions.
Nor would it be proper, where the gravity and scale of crimes materially differ, to charge all sides in a conflict in order to preserve a false sense of parity.
Both of these complaints reflect a third: unease with the Court’s overwhelming focus on Africa.
Some suggest that this is yet another example of Western institutions applying to Africa principles that they don’t apply to themselves.
The long history of Africa’s exploitation demands that this concern not be dismissed out of hand.
Nevertheless, Africa is the site of many of the world’s worst conflicts.
Nor is the ICC a foreign body.
Thirty African governments have ratified the ICC’s governing statute, and several of the Court’s 18 judges hail from Africa, as does a substantial portion of its staff.
Still, the Court should not hesitate to act outside Africa when mass atrocities demand redress.
The experience of other war crimes tribunals suggests that questions about political bias may take years to overcome.
Only by demonstrating professionalism in its work, and willingness to hold senior government figures accountable where appropriate, can the ICC engender broad and lasting support.
Over time, the ICC’s example should foster more effective national and regional prosecutions of serious crimes such as genocide, crimes against humanity, and war crimes.
For now, the Court can best address skeptics by more regularly and transparently explaining itself – its decisions, its mandate, and its constraints – to a global public to whom it ultimately must answer.
African Muslims In The Islamic World
Nigeria has been convulsed by religious violence triggered by the cartoons of the Prophet Muhammad published in a Danish newspaper months ago.
The violence began in the northern Nigerian city of Maiduguri during a protest by Muslims against the cartoons, with the Christian Association of Nigeria reporting at least 50 Christians killed.
Reprisals were swift, and at least 50 Muslims were killed in three days of violence in the southeastern (predominantly Christian) cities of Onitsha and Enugu.
The Nigerian protests against the cartoons (so far the most violent in Africa) raise the question: what is the role and position of African Muslims (or more accurately, sub-Saharan African Muslims) in the “Islamic World”?
When people in the rest of the world use the term “Islamic World” do they include in it sub-Saharan African Muslims, or do they have in mind only the Muslims of the Middle East and Asia?
Muslims in sub-Saharan Africa do not share many characteristics with Muslims in other parts of the world, especially those of the Arab world.
Sub-Saharan African Muslims are less assertive, and they face considerably more difficulties in their attempts to articulate their rights and establish their presence in their respective states and regions.
Part of the difficulty arises from the perpetual African dilemma of identity.
Africa has been described as a continent having a triple heritage, and the African Muslim, too, has a split personality.
He must decide whether he is a Muslim first, then a member of his tribe, say, Hausa, and then of his nation, say, Nigeria.
Even though Muslim practice is strong in Africa, there is widespread incorporation of traditional African rituals in ceremonies like weddings and funerals.
For example, among the Luhya in Western Kenya, it is not uncommon for Muslims to slaughter animals during funerals, even though, strictly speaking, there is no such provision in Islam.
Muslims in many sub-Saharan African states are also minorities.
They do not form a formidable presence, as in Nigeria, where some Muslim-majority states in the north have even implemented Sharia Law, making them more or less Islamic states.
Nevertheless, the Federal Republic of Nigeria is a secular state, as are almost all sub-Saharan African states.
The colonial legacy also helps account for the relatively docile nature of Muslims in sub-Saharan Africa.
The colonial powers’ arbitrary demarcation of borders lumped together in one state diverse ethnic groups which may have been historical antagonists.
Colonial political economy also concentrated “development” in resource-rich areas, while neglecting resource-poor regions and their populations, which in many cases were Muslim.
Thus we see a relatively poor Hausa-Muslim majority population in northern Nigeria and a relatively rich Ibo-Christian majority population in oil-rich southeastern Nigeria; a relatively rich Christian majority population in central Kenya and a relatively poor Muslim majority population on the coast and in the northeastern provinces; and so on.
As political power tends to polarize around economic power, sub-Saharan African Muslims have been under-represented in these mostly centralized political systems.
Moreover, Muslims in these mostly patron-client states have been forced to identify more with atomistic/parochial ethnic nationalism in order to enjoy the “fruits of independence” and thus acquire whatever political representation they have.
This has led to a related problem in countries bordering the Indian Ocean: disunity between coastal, more Arabized Muslims and the non-Arabized Muslims of the interior.
It is no exaggeration to argue that the more Arabized African Muslims along the Kenyan and Tanzanian coasts (including the island of Zanzibar) consider themselves “more Muslim” than the less Arabized Muslims inland.
Muslim political participation in sub-Saharan Africa has thus been extremely limited.
Political Islam is an almost unknown phenomenon in this region (the Islamic Party of Kenya was never registered, for example), and Muslim organizations have mostly focused on welfare and rights.
However, Muslims in sub-Saharan Africa, like most Muslims around the world, exhibit an “us versus them” mentality.
When Muslims form a minority, they have tended to co-exist peacefully with other religions, but where their populations are substantial (as in Nigeria), they tend to assert themselves.
Whatever ethnic and other divisions are at stake, the “us versus them” sentiment has played a large role in fomenting religious conflict in Nigeria.
Nevertheless, Nigeria (and perhaps Zanzibar) remains an exception in Islamic assertiveness in sub-Saharan Africa, which is why the idea of an active “Islamic World” includes only a relatively limited segment of sub-Saharan African Muslims.
Whether they like it or not, the majority of sub-Saharan African Muslims are represented by states that are mostly secular, Christian, or dominated by other religions.
Africa’s Avoidable AIDS Crisis
NEW YORK – At Uganda’s largest AIDS clinic, I recently witnessed a remarkable celebration of life.
The performers were a troupe of young African singers, drummers and dancers, ranging in age from roughly eight to 28.
Rarely have I been so profoundly moved.
&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; “This is a land,” they sang,
&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; “Where beautiful people
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Laugh and dance in harmony.
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Africa.
O Africa.”
And, indeed, these young people laughed and danced not only in harmony but with a joie de vivre that lit up their faces and filled us all with happiness.
Listening, it was hard to imagine that they could easily be dead – and would be, if not for this clinic.
Each of those splendid performers is living with HIV.
Some arrived at the clinic so ill that they could scarcely walk.
Others showed few symptoms but, having tested positive, came to be treated.
They were mothers and fathers, sisters and brothers, children and grandparents.
All were alive and healthy for one reason only: the Joint Clinical Research Center in Kampala, and the drugs that it provides them.
Uganda was the epicenter of the AIDS epidemic.
There the scourge began in earnest; there (as elsewhere in Africa) it exacts its highest toll.
Yet Uganda is also a success story.
A decade ago, fewer than 10,000 people were taking the new generation of antiretroviral drugs that suppress the disease and offer the promise of a normal life.
Today, that figure is 200,000, thanks in large measure to generous support from the United States (under its PEPFAR program) and the Global Fund in Geneva.
We have seen similarly encouraging progress elsewhere.
Botswana, among others, has invested heavily to offer universal treatment, and now is well on its way to ensuring that no baby is born with HIV – a reality in developed countries, but not so in Africa, where 400,000 children are born with the disease each year.
South Africa, with the largest number of people living with HIV, has spent nearly $1 billion over the past year in an ambitious counseling and testing campaign to roll back the epidemic.
But there is a new and growing danger that these advances might not be sustained.
Peter Mugyenyi, who runs the Joint Clinical Research Center, told me that part of the problem is the sheer weight of numbers.
In Uganda, only about half of those with HIV/AIDS are being treated.
Meanwhile, money for treatment is drying up.
Because of the global recession, some international donors are threatening to cap their financial support.
Countries such as Malawi, Zimbabwe, and Kenya, as well as Uganda, are requesting assistance for emergency drug supplies.
In Kampala, Dr. Mugyenyi has begun placing new patients on a waiting list.
As many as seven million Africans who should be getting treatment for HIV are not.
Worldwide, the number is about 10 million.
Compounding the problem: donors have also been shifting their focus from AIDS to other diseases, because there is a sense that more lives can be saved more cheaply.
At a time when we should be scaling up to meet the AIDS challenge, we are dialing back.
In our global war on AIDS, the international community is on the verge of snatching defeat from the jaws of victory.
Those who rallied to the fight are alarmed.
They fear that the impressive gains of the last decade will be lost. “We are sitting on a time bomb,” Dr. Mugyenyi told me.
Every day, he is forced into moral choices that no one should have to make.
How do you choose to treat a young girl but not her little brother?
How do you turn away a pregnant mother, sitting with her children, crying for help?
Surely we can do better.
In Kampala, I promised my young friends that I would do everything I could to help.
In Washington recently, the United Nations rolled out an action plan that should dramatically accelerate progress on maternal and child health, including HIV.
At the International AIDS Conference in Vienna, in July, I hope that the international community will rally around UNAIDS’ launch of Treatment 2.0 — the next generation of HIV treatment, which must be more affordable, more effective, and accessible to all.
As chair of this year’s replenishment of the Global Fund, I urge all donors to see to it that countries such as Uganda get the support they need, so that Dr. Mugyenyi and other front-line soldiers in the fight against AIDS need not make those difficult choices.
I left Uganda with a snatch of song that still echoes within my heart.
Its inherent truth would be obvious, had you been there to see:&#160;
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We are still useful.
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To our countries, to our families.
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All we need is a way to live our days,
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All we need is to survive in Africa.
Yes, times are hard.
That is all the more reason to act out of compassion and with generosity.
Africa\u0027s \
I visited Ghana recently and like many others left asking: how can a "developing" country be developed?
But there was something troubling about this formulation, in particular with the word "developing," which is often a euphemism for the absence of economic development.
Do countries stop developing because outsiders are so intent on developing them?
My hosts, the Kweku Hutchful Foundation, invited me with a different question in mind: How can Ghanaian leaders be developed?
Something troubled me about this formulation, too.
It was that word "development" again.
Do we really "develop" leaders or countries?
Do multinational companies, international non-governmental organizations, and multilateral lenders really understand local needs?
Just because some "best practice" works in New York, does that mean it will work in Accra, Ghana?
Imagine how American managers would react to consultants arriving from Ghana with their "best practice": "It worked in Accra, so it is bound to work in New York!"
Of course, there is a prominent example of just that: Kofi Annan, under whose stewardship the UN has undergone a remarkable improvement.
Annan spent most of his career outside of Ghana, and had some of his higher education in the US.
But, as one of Annan's advisors once put it, he "runs the UN like an old-fashioned African village, with long discussions among the elders, periods of reflection, and eventually a decision."
Of course, Annan can hardly control the UN by imposing great strategies on everyone else, as American corporate CEOs do.
But perhaps he knows better.
Unlike most American CEOs, Annan was not parachuted in from outside; he is the first career employee to lead the UN.
So he knew what was wrong and appreciated that it had to be fixed carefully and patiently, by engaging the staff rather than intimidating them.
His re-election to a second term as UN Secretary General was supported by nations all over the world, rich and poor, as well as by UN employees.
Was Kofi Annan "developed?"
Perhaps we don't develop leaders so much as foster the conditions that bring out leadership.
If so, then a key condition must be the self-respect that comes from working things out for ourselves, individually and collectively.
This self-respect is fostered by organizations and institutions that can likewise stand on their own feet, building on the best of their own cultural traditions.
Passive importation of techniques, controls, and beliefs, via agencies and experts that run around solving everyone else's problems, may be the biggest impediment to development--just another form of outside exploitation, of which Africa has had more than enough.
Is it not time for indigenous development, of countries and leaders alike?
One thing is clear.
Countries like Ghana do not lack enterprise.
Markets and personal initiative are pervasive.
At a red light in New York, a squeegee kid or two might approach your car; in Accra, a stopped car is immediately surrounded by a virtual supermarket.
What Ghana and most of Africa lacks is not enterprise, but
Instead, foreign corporations, with their funds, controls, and experts--and, just as importantly, their beliefs--dominate larger enterprise.
To be sure, foreign corporations can do good things: bring in fresh ideas, techniques, and processes, as well as capital and the scale required in some contemporary forms of manufacturing.
But nothing they do--aside from cosmetic modifications to consumer products and marketing tactics--responds to local conditions.
Development as now practiced often fails because it does not build on a country's unique strengths, respect its social traditions, or foster the autonomy necessary to develop indigenous leaders and enterprises.
All too often, it is
Pride, dignity, and self-confidence do not figure in economic theory: they cannot be measured.
But they figure prominently in just about every story of success, whether of countries or of leaders.
How people feel about themselves, personally and collectively, greatly influences the energy with which they develop themselves.
America, for example, did not develop by depending on an imposed ideology or outside experts.
It developed through the indigenous efforts of Americans acting in their own way--assisted by extensive state intervention, through land grants to farmers, railroads, and mining companies, military spending that stimulated the economy (and still does), and, of course, tariff barriers.
Likewise, indigenous development played a key role in Japan and Germany after WWII, in South Korea more recently, and the UK long before.
In fact, has
Globalization must not be allowed to blind us.
Ghana certainly needs to develop economically, because material wealth is required to improve health, provide education, and sustain democracy.
But the reverse is also true: a deep-rooted sense of democracy--precisely what globalization lacks--seems necessary to support economic efforts.
The (economically) developed West should consider importing that lesson.
Africa\u0027s Debt Dilemma
The success that US President George W. Bush and his special envoy, former Secretary of State James Baker, had in getting Iraq's foreign debts canceled or rescheduled shows what can be done when a policy is backed by political will.
The contrast with Africa's debts could hardly be starker.
Just three years ago, Jubilee 2000 made news when civil society groups, rock stars, and a few finance ministers like Britain's Gordon Brown pushed for African debt cancellation.
President Bush mostly succeeded in his crusade;
Jubilee 2000 succeeded mostly in getting empty promises.
Of course, the two campaigns confronted different obstacles and had different bases of support.
Baker's mission possessed the unlimited backing of a US faced with the gargantuan cost of reconstructing Iraq;
Jubilee 2000 had only world opinion behind it.
Lucrative reconstruction contracts in Iraq gave America leverage to coerce its allies into submission;
Jubilee 2000 had no such weapon of persuasion.
Finally, Baker was appealing to America's traditional allies in Europe and the Middle East, who need American friendship in many areas.
The campaign to forgive Africa's debt was, on the other hand, focused on the crushing debt load owed by African countries to the IMF and the World Bank, who only have money to worry about.
Still, the Jubilee campaign's street protests began a healthy debate about the lending arrangements of the IMF/World Bank.
But the time has come to abandon the Jubilee movement's humanitarian approach and focus instead on the legal aspect.
It is worth remembering that no sub-Saharan African country - with the exceptions of South Africa and Rhodesia (now Zimbabwe), then administered by white minority governments - could tap international capital markets at independence in the early 1960's.
Domestic capital markets were non-existent.
As a result, these countries were left with no choice but to subcontract their development to the IMF and World Bank.
These institutions identified, appraised, approved, and financed projects that ratcheted up African debt.
They monitored and sanctioned the recruitment of consultants that conducted the studies related to these projects, as well as the expatriate staff involved in their execution.
During the period of implementation, they carried out regular supervisory missions supplemented by quarterly progress reports and annual audits.
Still, despite all these costly measures paid for by Africans, all the post-evaluation reports on completed projects indicated that the overwhelming majority of projects were unable to generate the revenues needed to service the debts that financed them.
But the debtor countries are nonetheless obliged to service these debts by whatever means necessary, including more borrowing and further entanglement, leading to further impoverishment.
For example, per capita growth between 1965 and 1998
What went wrong?
The multilateral lenders advocated a development strategy based on the theory of comparative advantage and unbridled economic liberalization.
Africa had to open its markets while producing raw materials and basic products to generate revenues for investment in industry, education, health, and food production.
These assumptions turned out to be wrong, as export prices fell steadily over four decades.
But it should have been obvious from the outset that the IMF/World Bank strategy was doomed to fail.
All developed nations protected and subsidized their domestic production in the first phases of their development - and still do whenever it suits them.
Furthermore the US, the EU member states and the East Asian countries all regulated inward foreign investment and imposed capital controls.
Partnerships with foreign companies were designed to allow local businesses to benefit from technology transfer and training, while creating the most favorable conditions for local producers to add value to domestic production and exports.
In the face of these undeniable facts, the path chosen by the IMF and the World Bank was, at best, a mark of their incompetence and, at worst, a deliberate ploy to keep the sub-Saharan countries and their populations in bondage.
Whatever the case, both institutions certainly have much to answer for - and the loan agreements provide an arbitration clause to bring them to account.
These clauses have yet to be invoked, but for the sake of unity and to strengthen the solidarity of African countries, it would be advisable for the nascent African Union take the lead.
The AU should seek legal advice, have the issue included on the agenda of the UN General Assembly, advocate the freezing of international debt payments while arbitration proceedings are taking place and secure the support of the international community, especially NGOs that have a track record in raising awareness about Africa's debts.
Any compensation retrieved from such legal proceedings should be used to establish an African monetary fund whose objective would be to put Africa on a fast track to comprehensive regional integration, enabling the continent to capitalize on globalization's positive features.
Litigation can be costly and hazardous.
However, set against the alternative of relying on handouts punctuated by desperation and frequent episodes of collective self-destruction, Africa should choose the legal option to rally its people and rescue its development process.
Africa’s Dictator-Diplomat
BRUSSELS – The recent death in Brussels of Ethiopian Prime Minister Meles Zenawi finally brings to light what lay behind his mysterious two-month disappearance from public life.
Ethiopia’s government had strenuously denied rumors of serious ill health caused by liver cancer.
Now that the worst has, indeed, proven true, Ethiopia and all of East Africa will need to learn to live without the stabilizing influence of its great dictator-diplomat.
Meles was certainly both.
Ethiopia has undergone a remarkable transformation under his strongman rule since 1991, when his Tigrayan minority group from the country’s north came to power with the overthrow of the odious Communist Derg led by Mengistu Haile Mariam (still enjoying a comfortable retirement in Robert Mugabe’s Zimbabwe).
Initially serving as the president of the first post-Derg government, and then as Ethiopia’s prime minister from 1995 until his death, Meles (his nom de guerre in the revolution) oversaw 7.7% annual GDP growth in recent years.
Strong economic performance is somewhat surprising, given his party’s interventionist policy approach, but Meles showed himself to be a consummate pragmatist in attracting investment – particularly from China – to drive growth.
Meles’s own political provenance as the leader of the Tigrayan People’s Liberation Front was Marxist-Leninist.
But, when the Cold War ended, so, too, did his dogmatism.
To his credit, child mortality was reduced by 40% under his government; Ethiopia’s economy became more diversified, with new industries like car manufacturing, beverages, and floriculture; and major infrastructure projects, including Africa’s largest hydroelectric dam, were launched.
Once a basket-case associated in the world’s eyes only with famine and drought, Ethiopia has become one of Africa’s largest economies – and without the benefit of gold or oil.
Perhaps more important than Meles’s domestic achievements was his diplomatic record.
He was an indispensable ally of the West in the fight against Islamist terrorism, culminating in Ethiopia’s military operation in neighboring Somalia in 2006.
More recently, Meles coordinated efforts with Kenya to stage limited strikes against the al-Shabaab militia, which has waged an unrelenting war to turn Somalia into a fundamentalist Islamic theocracy.
At the same time, Meles courted China as both an investor and as a hedge against the West’s criticism of his human-rights record.
And yet he controversially but rightly held out a hand of friendship to the breakaway region of Somaliland, before it became fashionable, and went as far as he could short of formal re-recognition of that ray of democratic hope in the Horn of Africa.
Meles will be sorely missed in Hargeisa, as he planned to run a Chinese-financed gas pipeline through Somaliland territory from the Ogaden to the coast.
More important, Meles put Addis Ababa on the map as the home of the African Union, and as a capital where Africa’s worst problems could be discussed in a pragmatic manner, unburdened by colonial grudges.
Meles himself became a major diplomatic player, particularly over climate-change policy, and most recently was active in mediating border and natural-resource disputes between Sudan and the newly independent (and oil-rich) South Sudan.
He will be remembered for accepting the painful secession of Eritrea in 1993, rather than prolong the civil war, and for his efforts to reach an agreement with Egypt over the use of the Blue Nile waters.
The great stain on Meles’s record will always be his intolerance of dissent.
To be sure, his human-rights record was far better than the Derg’s.
For example, he allowed a private press to flourish, and in 2000 he became the first Ethiopian leader to hold multi-party parliamentary elections.
Moreover, compared to neighboring Eritrea under President Isaias Afewerki or Omar al-Bashir’s Sudan, his regime was by no means the worst offender in the region.
Nor was there much evidence of personal enrichment or widespread corruption.
Nevertheless, following a violently contested parliamentary election in 2005, in which more than 30 parties participated, Meles demonstrated open contempt for democratic pluralism and press freedom, jailing several journalists in recent years. At the same time, he imposed increasingly strict central control on his ethnically and linguistically diverse country.
Although nominally governed by “ethnic federalism,” where this threatened secession, as in Oromia or the Ogaden, Meles was quick to ignore the constitutional set-up.
Although he strengthened religious freedom and peaceful coexistence between Muslims and Christians, the human-rights situation in Ethiopia remained poor.
For example, groups like Freedom House and Human Rights Watch have documented widespread official repression of the Oromo people.
And yet Meles is irreplaceable – unmatched intellectually as an African leader (he dropped out of medical school, but went on to teach himself impeccable English and obtain European university degrees by correspondence), and unmatched politically at home, with no obvious successor groomed to replace him.
In the Horn of Africa, there is no leader of his stature who could ensure the stability and strong governance that the region so desperately needs.
Hailemariam Desalegn, Meles’s foreign minister, will take over Ethiopia’s government.
But there will be considerable concern in the West about the danger of a power vacuum or struggle in a geopolitically vital but fractious country –&nbsp;and just when neighboring Somalia is supposed to be undergoing a transition to a new parliament and elected government.
For his admirers and critics alike, Meles leaves behind a potent political legacy.
He will be remembered as an African leader of major historical significance: visionary, despotic, and indispensable.
Africa’s Hard Black Gold
LAGOS - Few infrastructure services in the developed world may be as taken for granted as electric power.
To consumers in industrialized countries, uninterrupted power supply is a given.
Not so in much of Africa, which experiences some of the world’s greatest power deficits, and where only two in ten people have access to electricity.
According to the International Monetary Fund’s most recent Regional Economic Outlook for Sub-Saharan Africa , in 2007 alone, nearly two-thirds of the countries in the region experienced an acute energy crisis marked by frequent and extended electricity outages.
There is no shortage of hydropower plants for electricity generation in Africa.
However, many of these plants are unable to keep up with rapid population growth and attendant increases in demand.
Furthermore, they are prone to frequent drought, which reduces their output significantly, leaving many as little more than decorative infrastructure landmarks.
Increasingly burgeoning populations in countries like Nigeria and Ghana imply a greater extraction of water resources for power generation.
Rapid expansion of agricultural activity is requiring more and more water all across the continent.
Other resources like fuel oil, diesel, light crude, solar, and gas are also available as means of electricity generation, but their costs are all quite prohibitive.
These factors make a good argument for coal as a cheap alternative source of Africa's power.
Coal has historically played a crucial role as a source of energy worldwide, and has several important advantages over other fossil fuels. First is its relative abundance.
The current level of proven coal reserves worldwide stands at roughly 850 billion tons.
Africa has about 50 billion tons.
Coal is also much more widely distributed geographically than any other fossil fuel.
Worldwide energy demand has increased by more than 50% since 1980, and is expected to grow annually by 1.6% between now and 2030.
More than 70% of this new demand will come from developing countries, with fossil fuels projected to account for about 80% of total energy demand by the end of this period.
Coal is the world’s fastest growing fossil fuel, with annual production increasing by 6.4% since 2004.
It is already the dominant source of power generation in some very important energy-consuming nations.
Much of the future increases in coal-fired electricity generation will come from strategically important developing countries like China and India.
In 2006 alone, China added about 93,000 megawatts of coal- fired electricity generating capacity, and this trend is expected to continue as the country tries to meet its huge energy needs.
Even in many developed countries, coal still accounts for a large share of power generation.
Coal plants currently provide more than half of America’s electricity supply.
Denmark, which houses some of the most efficient coal-fired power plants in the world, equally relies on coal for half of its electricity production.
The same is true for Germany, which is home to some of the most efficient pulverized coal combustion units in Europe.
Poland uses coal for 98% of its electricity production, and South Africa uses coal for about 50% of its electricity production.
Against this picture then, it is hard not to expect developing countries to exploit their abundant coal resources to generate power for their own development, especially given that modern technology can help produce coal cleanly.
Some argue that gas might be a better alternative to hydro or coal, but for countries that must import much of their gas the benefits of a stable and reliable source of cheap fuel in the form of coal present a very strong counter-argument to the capital costs of a gas plant.
Unlike prices for coal, which is abundant and dispersed geographically, gas prices are subject to significant volatility, and the long-term trend in the face of fossil fuel depletion is uncertain.
In contrast, coal prices are more stable, and may remain that way for a long time.
Apart from electric-power generation, coal also has wide application in a number of industries.
It is pivotal in both steel and cement production.
Moreover, the use of wood by Africa’s growing population is causing increasingly rapid deforestation in many countries.
There is significant potential domestic demand for coal briquettes to replace wood for cooking and domestic and industrial heating.
The demand outlook thus appears favorable for the coal industry, creating significant investment opportunities.
Clearly, there are environmental drawbacks from the use of coal as an energy resource, and these concerns are far too important to overlook.
The massive reserves notwithstanding, coal is still a finite resource.
It must be mined with greater efficiency and with a view to mitigating the environmental impact.
Fortunately, much greater attention is paid today to mine safety and the management of the by-products of coal use.
With acid rain and other public-health hazards linked to coal combustion, more technologies are emerging for reducing harmful emissions from power plants.
Fueled by research, the past few years have witnessed the development of increasingly cleaner and more energy-efficient coal-fired generation plants and the retirement of older technologies, especially in the developed world.
Developing countries have lagged behind in this process, but, with the common threat of global warming, there is now growing pressure to adopt conservation policies.
Africa's mineral-rich countries must exploit their abundant natural resources.
They must use coal to advance their economic development.
Failure to do so would be a missed opportunity at a time when African countries must avail themselves of all available resources for poverty reduction.
Africa’s Immunity
ACCRA – The United States suffers rising job losses.
Britain nationalizes its banks.
Once high-flying small economies like Ireland, Hungary, and Iceland break down.
Even robust China and India are experiencing slower growth, curtailed ambitions, and broken dreams.
Yet, in sub-Saharan Africa, there are few hints of the global financial crisis that is consuming the capitalist world.
In fashionable African cities, residential home prices remain stratospheric.
A typical Western-style house in Kampala or Accra, for example, now costs an astonishing two to three times the price of a comparable home in, say, Cleveland or other cities in the American heartland.
While home prices are crashing from Madrid to Dublin and Miami to Los Angeles, African prices remain near or at record-high levels.
African banks, meanwhile, are rock-solid compared to their debt-heavy counterparts in the US and Europe.
While international bankers went bust by making legions of bad loans, African bankers stuck to earning profits the old-fashioned way: paying very little to depositors, and earning a big “spread” by buying guaranteed government debt, which yielded healthy returns.
Even government deficit spending – long the bane of Africa – seems positively puny compared to the massive debts that the US and some European countries face.
The new Obama administration is proposing spending plans that would create a record US deficit of more than one trillion dollars – and this coming on top of the outgoing Bush administration’s record deficit.
And yet there are good reasons to believe that it is just a matter of time before Africa and its peoples experience the ill effects of the global crisis.
From Ghana to Kenya, governments are having increased difficulty in raising money for infrastructure projects and selling official debt.
Foreign investment in sub-Saharan Africa, which reached record levels in recent years, is retreating, which is evidence of investor caution, not any underlying lack of optimism about the region.
And exports of raw materials to China, India, Europe, and the US – a key factor in Africa’s recent growth surge – may suffer simply because the global slowdown means less consumption everywhere.
All of these factors suggest that an African financial bust is possible.
Popular equity investments, such as shares in Safaricom, are already trading at unexpectedly low levels.
If real estate prices were to fall dramatically, a chain reaction could occur, taking down big and small investors alike, and over time causing wide suffering to ordinary Africans.
Even assuming stability in real estate prices, the global crisis surely will cause a fall in remittances by Africans working good jobs in Europe, the US, Canada, Australia, and the Middle East.
Remittances are already believed to be falling, which makes sense: immigrants in rich countries are and will be disproportionately hurt by slowing economic activity.
Immigration itself may even slow dramatically, depending on the length and depth of the economic slowdown.
Fewer Africans working in rich countries will automatically translate into less money circulating in African countries.
The decline in remittances, however, cuts both ways.
Remittances have long spurred inflation in many parts of Africa.
A Ugandan doctor working in Norway, for instance, cares little about the cost of a beer in Kampala.
He is also willing – and able – to pay more than a local doctor for services and, of course, a home in Uganda.
Fewer remittances flowing into Uganda could mean less economic activity – or simply lower prices.
The financial meltdown in the US, which incubated the global crisis, is either coming under control or threatening to mutate into a new, more virulent form that could destroy not only America’s paper economy of trading and brokering, but also its real economy of goods and services.
President Barack Obama, acting as if the latter scenario remains likely, is betting on large-scale government spending to prop up the real economy.
If his administration succeeds, the chances that Africa will remain relatively unscathed will grow.
Even if Obama fails, however, Africans should escape the worst of the global crisis, for both good reasons and bad.
The good reasons have to do with African self-reliance and a growing awareness among scholars and policymakers that trade within the region – especially between urban and rural Africa – will ultimately deliver enormous benefits.
Another factor working in Africa’s favor is its private companies’ and consumers’ low dependence on borrowed money.
People tend to pay cash for goods and services, however costly.
In the US, loans for cars and homes – loans that now aren’t being paid back – are the major factor behind the financial crisis.
In Africa, very few people borrow money for such purchases.
Africa’s cash-based economy has in the past constrained development.
After all, by allowing people to spend more than they have, borrowed money can fuel growth.
But today, Africa’s pay-as-you-go practices are a powerful defense against financial contagion.
Another way of looking at Africa’s paradoxical economic position is to admit that the region’s historical marginalization within the international financial system – so costly in times of global plenty – is proving to be an unexpected benefit when the wealthiest of the world are sick unto death.
Africa’s Integration Imperative
Karl Marx predicted that states would wither away in anticipation of an idyllic communist society capable of auto-regulating economic imbalances and empowering the masses.
So he would have been flabbergasted to see his prophecy realized, not by communism, but by the globalization of Anglo-American economic liberalism.
Opening up markets to the free flow of capital, not the dictatorship of the proletariat, has rendered state power obsolete.
Today’s capital markets raise money for governments, corporate clients, and individual customers, manage pension funds’ investments, and bet on the level of interest rates or the stock market.
Trading in derivatives by investment banks, hedge funds, and other market participants, reaps huge profits for traders while depriving the real economy of productive investment and job creation.
No population in the world is spared from the harsh treatment of such a system.
Some 40% of the world’s 6.5 billion people live in poverty, and a sixth live in extreme poverty.
However, the world’s black populations are the prime victims.
In the United States, one-eighth of all black males between the ages of 25 and 34 are in jail, and three out of five black American households with children are headed by a single mother.
As for African countries, the politics and economics of globalization have stripped them of their assets and natural resources and left them with an unbearable debt burden.
As a result, the percentage of Africa’s population living in extreme poverty increased from 41.6% in 1981 to 46.9% in 2001.
On the other hand, in the era of globalization, regions in which internal trade exceeds external trade have better economic outlooks and stronger social cohesion.
This is the case for Europe, Asia, and, increasingly, Latin America, particularly among the member states of Mercosur (Argentina, Brazil, Chile, Uruguay, and Paraguay).
The opposite is true for regional groupings in Africa and in the Middle East where trade with the outside world is more important than intra-regional trade.
As a result, any country formulating strategies to counter the destructive forces of globalization should give overriding priority to a self-centred economic development strategy, preferably within a regional framework.
This is a prerequisite to defending against market fundamentalism and avoiding the iniquitous conditions of the international marketplace.
In this respect, the Association of Southeast Asian Nations (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) constitutes an edifying example.
The ASEAN economies adopted a united front on international economic issues and accorded priority to internal economic integration and expanding linkages with major trading partners.
Exports have remained the main driver of economic performance for the ASEAN countries, contributing to 5.8% regional GDP growth in 2006.
ASEAN foreign direct investment (FDI) flows reached US$38 billion in 2005, up by 48% from the previous year.
The outlook for 2006 was also bullish, with preliminary data for the first quarter indicating that FDI flows had already reached US$14 billion, up from US$7.4 billion in the year-earlier period.
ASEAN’s drive to establish a fully-fledged economic community has been underlined by implementation of its Priority Integration Sector Roadmaps.
By contrast, sub-Saharan Africa’s historical legacy of artificial and unmanageable colonial boundaries, ethnic antagonisms, its citizens’ deficit of self-respect, and an appalling record of leadership failures has hampered its quest for economic integration.
But a sector-by-sector approach could mitigate these handicaps, and, given the pressing need to address demand for energy and climate change, it might be strategically advisable to start with the energy sector.
Africa is a continent rich in energy, holding two-thirds of the world’s reserves of hydro-electric power – trillions of kilowatt-hours representing about half of total world resources.
The Congo River alone holds more than 600 billion kilowatt-hours of annual reserves. The Sanaga (Cameroon) and the Ogooué (Gabon) hold half as much.
Technological breakthroughs have made it feasible to transport electricity via high-voltage direct current (HVDC) over long distances without incurring great losses (only about 3% per 1,000 kilometers).
Carbon-free hydroelectric power is the right choice as sub-Saharan Africa’s principal source of energy.
Harnessing the hydroelectric power of the Congo Basin alone would be enough to meet all of Africa’s energy needs, or to light the entire continent of South America. Moreover, establishing an African grid would enable power from the Democratic Republic of Congo to be delivered to southern European countries such as Spain, Portugal, and Italy.
However, while 90% of world reserves of hydraulic energy are concentrated in underdeveloped regions like sub-Saharan Africa, HVDC technology remains the preserve of developed countries.
There is thus an imperative not only for regional integration in Africa, but also for a joint strategic vision and partnership to help build global energy and climate security.
Africa’s Misplaced Monetary Ambitions
DAKAR – Sub-Saharan African is in the grip of currency-union mania.
Regional groups of countries in eastern, southern, and western Africa are all giving priority to the idea of creating a monetary union.
But haven’t we heard this all before in Africa?
Indeed, today’s enthusiasm for currency unions ignores the poor track record of previous attempts on the continent to establish them through peaceful means.
A common currency requires unified and centrally agreed monetary and fiscal policies.
But this necessitates political integration, which, as the troubles of the euro this year have demonstrated, is a hard sell among nation-states.
Before the euro’s arrival on the international financial scene in 1999, the only examples of countries with common currencies were neo-colonial francophone Africa and nineteenth-century precedents like the Latin American and Scandinavian monetary unions.
The creation of the CFA franc, which gives France control of 65% of the CFA countries’ foreign-exchange reserves, combined currency convertibility with a grossly overvalued parity – pegged first to the French franc and now to the euro – as well as trade barriers.
This led only to structural deficits, vast capital flight, and, in 1994, a 100% devaluation.
Yet, despite the difficulties that have bedeviled the CFA (and the euro of late) – indeed, despite the absence of viable regional customs unions (except in the East African Community), let alone a single market – Africans retain a strong allegiance to the idea of a currency union.
That allegiance is misplaced.
At this stage of their economic development, with its focus on commodity exports, the priority for Africa’s countries should be long-term economic integration, not currency union.
Here, the model to follow is not the euro, but Latin America’s Southern Common Market (Mercosur) and the Association of Southeast Asian Nations (ASEAN).
Both regional groupings have, by lowering trade barriers, delivered a real catalyst to economic growth.
Mercosur’s member countries have adopted a strategy that prioritizes the creation of a free-trade area.
They steered clear of establishing a heavy budget-fueled bureaucracy, leaving respective ministries to handle administering the accord. In 2008, Mercosur intra-regional exports reached $41.6 billion, up by 28.4% from 2007.
The external trade of Paraguay, Argentina, and Brazil within the area amounted, respectively, to 65%, 33%, and 15% of their total exports.
The other major advantage of such regional groupings has been their ability to attract foreign direct investment. Since the early 1990’s, Mercosur has managed to mobilize 5.9% of world FDI inflows.
In 2008, it attracted a record $56 billion in FDI, an increase of 31.5 % from 2007. Moreover, cross-investment between Mercosur member countries has led to greater economic integration. Argentina is now Brazil’s second-largest trading partner, behind the United States, while Brazil is Argentina’s largest trading partner, ahead of the US.
The seven member countries of ASEAN decided to implement economic “roadmaps” defining integration priorities, a testimony to their determination to achieve a single economic community.
A currency union, however, is not high on the agenda.
In 2009, ASEAN regional trade represented 24.6% of its members’ total exports and 24.3% of total imports.
By contrast, trade among African countries accounts for only about 10-12% of the continent’s exports and imports.
But, partly because several African countries have escaped the hang-over from the global credit crisis, more investors are focusing on business opportunities there.
By 2050, the combined GDP of the largest 11 African economies should reach more than $13 trillion, surpassing Brazil and Russia (but not China or India).
For some analysts, the emergence of countries like Brazil as economic powerhouses stems partly from successful demutualization of their stock exchanges.
Twenty-three bourses are currently operating in Africa, and their combined market capitalization has soared from $245 billion in 2002 to $1 trillion (2% of the world total) at the end of 2009 – as high as the fifteenth-largest stock exchange in the world.
With a volume of $800 billion, the Johannesburg Stock Exchange alone accounts for 80% of the total and ranks 19th worldwide. Nigeria plans to demutualize its stock exchange in order to establish it among the prime destinations for frontier investors.
Africa stands to benefit from a massive economic turnaround, provided that the right environment for sustainable growth and rising productivity is created.
This requires consistent macroeconomic policies focused on economic integration, food self-sufficiency, low inflation, and reduced debt.
It also requires political stability, eradication of corruption, enhanced rule of law, improvement of basic levels of education, and greater use of mobile telephones and the Internet.
What it does not require is a currency union.
When it comes to exchange rates, the members of Africa’s economic groupings would be better off linking their currencies in regional monetary systems to prevent large fluctuations relative to one another.
Africa’s Press: Missing in Action
In much of Africa, the challenge for journalists, editors, and readers goes beyond freedom of the press, and involves its very survival.
Under Nigeria’s various dictatorships, for example, many journalists underwent a rite of passage that most prefer to forget: routine harassment, beatings, torture, frame-ups on spurious charges, and incongruously long prison sentences.
Among the numerous victims, perhaps the most bizarre case was that of a young journalist named Bagauda Kaltho.
His body was found in a hotel toilet in the city of Kaduna with the remains of a parcel bomb after an explosion that no one heard.
Yet there he lay, and with a copy of my book The Man Died beside him.
The implication, encouraged by the regime, was that Kaltho was a recruit of mine who blew himself up while preparing his next bomb in a campaign of terror aimed at Sanni Abacha’s dictatorship.
This unconscionable fabrication was fully exposed only after Abacha’s death and the spate of confessions that followed it by the police agents who actually committed the crime.
The press fought back tenaciously, despite casualties.
Journalists adopted tactics of underground publication, in the best tradition of East European samizdat.
When police raided one place, copies emerged from other secure depots, to be sold in the streets by kamikaze youths who darted in and out of traffic offering the subversive contraband.
It did not matter that these youthful hawkers, some no more than seven or eight years old, were often arrested, beaten, and locked up for weeks, occasionally months. When they emerged from prison, they returned to their dangerous work.
But Nigeria does not offer the premier example of the awesome power of the press. That honor belongs to a different history and region.
If benchmarks such as focus, mobilization, commitment, organization, and sheer impact are any guide, then the prize goes to the media’s baleful role in preparing the Rwandan massacre of 1994, and in directing, overseeing, and stoking the fervor of the génocidaires once the extermination of Tutsis began.
It remains a sobering lesson, one that presents the media in the role of aggressor and violator, in contrast to their normal position as victim.
Those events are too familiar to require re-hashing.
What matters now is the role that the rest of the African media should have played, and the questions that this raises about their capacity to function as a watchdog.
Not many Africans, even among those who are knowledgeable in world affairs, had ever heard of Radio Milles Collines, the most blatant instrument of the Rwandan genocide.
It is chastening that events primarily concerning Africans enter the public domain mainly owing to the intervention of the foreign media.
It was they who exposed the complicity of certain foreign powers in an ongoing crime against humanity.
And it was the foreign press that detailed the parallel failure of the United Nations, whose agents were on the ground but whose inability to call genocide by its proper name led to a comatose response.
Simply put, the African media failed to reach beyond immediate borders and serve as a voice for the continent in its encounters with the world.
The African media’s response to the massacres and rapes in Darfur has been equally muted.
Once again, African readers are being shortchanged, remaining dependent on foreign reportage in order to grasp the enormity of what is transpiring.
African civil society, whose mouthpiece is the press, cannot escape some measure of reproach for its failure to urge leaders to rescue fellow Africans.
From Liberia to the Congo, the predicament of the African continent today demands that the press act not only as a watchdog, but as a goad.
It is to the media that the continent must look for an example of solidarity.
Such solidarity should not be understood as something to be exercised only in times of convulsion.
The cheap recourse to dismissive invectives such as “outside interference,” “jaundiced reporting,” and “imperial mouthpiece” – so beloved by corrupt and/or repressive regimes – is recognized as self-serving cant even by those who routinely mouth them.
Africa’s media must respond with its own analyses, explanations, and narratives.
Unfortunately, in repressive conditions such as those in, say, Zimbabwe, Third-World journalists tend to take their cues from the conduct of their national leaders and close ranks around the continent’s rogue elephants.
This reflex has left Zimbabwe practically a journalism-free zone, with only the foreign press seeking to hold President Robert Mugabe to account.
Imitation appears to be a hallmark of tyrants in their exercise of power, so the absence of solidarity among Africa’s journalists and Africa’s peoples has created a dangerous vacuum.
Today it is Zimbabwe’s press that is under the gun.
Tomorrow?
We should all bear this in mind, for territorial ambition often goes hand in hand with the censor’s creed.
Africa’s Urban Farmers
NAIROBI – When I met Eunice Wangari at a Nairobi coffee shop recently, I was surprised to hear her on her mobile phone, insistently asking her mother about the progress of a corn field in her home village, hours away from the big city.
A nurse, Wangari counts on income from farming to raise money to buy more land – for more farming.
Even though Wangari lives in Kenya’s capital, she is able to reap hundreds of dollars a year in profit from cash crops grown with the help of relatives.
Her initial stake – drawn from her nursing wages of about $350 a month – has long since been recovered.
Wangari is one of thousands of urban workers in Kenya – and one of hundreds of thousands, even millions, across Africa – who are increasing their incomes through absentee agriculture.
With prices for basic foodstuffs at their highest levels in decades, many urbanites feel well rewarded by farming.
Absentee agriculture also bolsters national pride – and pride in traditional diets – by specializing in vegetables specific to the region. “For too long our country has been flooded with imported food and Westernized foods,” Wangari says.
Across Africa, political leaders, long dismissive of rural concerns, have awakened to the importance of agriculture and the role that educated people, even those living in major cities, can play in farming.
In Nigeria, former President Olusegun Obasanjo has a huge diversified farm and has pushed for policies to help absentee farmers prosper.
In Uganda, Vice President Gilbert Bukenya routinely travels the country, promoting higher-value farming, such as dairy production.
Perhaps the most visible political support for absentee agriculture is in Liberia, a small West African country where civil war destroyed agriculture, rendering the population dependent on food imports, even today.
President Johnson-Sirleaf, recognizing that educated people could contribute much to an agriculture revival, launched her “Back to the Soil” campaign in June 2008 in large part to encourage urban dwellers to farm.
To be sure, absentee farming by elites and educated urban workers can’t solve all of Africa’s urgent food needs.
Moreover, absentee farmers face unexpected problems.
Because they don’t visit their fields often, they rely heavily on relatives and friends. When I decided to farm wheat for the first time this spring on leased land in my childhood village, my mother agreed to supervise plowing, planting, and harvesting.
Without her help, I might not have farmed at all.
Even with mother’s help, I have worries.
Although I grew up around wheat fields, my knowledge of farming is thin.
Fertilizer and spraying were both more expensive than I thought.
While my wheat stalks are sprouting on schedule, I now fear that at harvest time – in November – prices will fall and I won’t recoup my costs.
One key tool is the mobile phone.
My hopes for success are buoyed by my ability to call my mother inexpensively and discuss the farm.
We even decided over the phone what kind of pesticide to use and which tractor company to hire.
Because they know both the tastes of fellow city dwellers and rural conditions, many urban farmers are succeeding.
In fact, some city dwellers don’t even bother with acquiring land or gaining distant help.
Certain crops can be grown in their own homes.
James Memusi, an accountant, grows mushrooms in a spare bedroom, selling them to nearby hotels and supermarkets.
Nevertheless, most people living in Africa’s cities have access to land in the countryside, which is why Liberia’s government rightly highlights the potential for farm expansion.
In a new advertising campaign rolled out this summer, the authorities declared, “The soil is a bank; invest in it.”
In Liberia, the main push is to reduce imports of staples such as rice and tomatoes.
In more prosperous countries, African elites are motivated by a complex interplay of national pride, dietary concerns, and the pursuit of profit.
In Zambia, for example, Sylva Banda ignited a craze for authentic traditional meals two decades ago with a chain of popular restaurants.
Now, ordinary Lusakans want to cook similar meals in their own homes, driving demand for farmers who produce such delicacies as dried pumpkin, “black jack” leaves, and fresh Okra.
Similarly, in Nairobi, Miringo Kinyanjui, another woman entrepreneur, is supplying unrefined – and more nutritious – maize and wheat flour.
In another move to distinguish her ingredients from Western versions, Kinyanjui also sells through grocery stores flour flavored with Amarathan, a green vegetable that grows around Kenya.
The revival of traditional foods has attracted the attention of large multinational corporations.
Last year, Unilever’s Kenyan branch ran a “taste our culture” campaign in support of its line of traditional East African herbs and spices.
Such campaigns go hand-in-hand with expanded farming, because sellers of these foods prefer nearby growers – even if these growers increasingly live in the city.
After Arafat
Yasir Arafat appears, once again, to have held off challenges to his rule.
But his latest victory does not answer the question of what will happen when he finally does leave the political scene.
When Arafat was seriously ill in 2003, Palestinians were near panic.
Ahmad Dudin, former Fatah leader in Hebron, summed up the dilemma this way: "The Palestinian Authority has always been a one-man operation.
Arafat never really agreed to share power.
That is the problem."
Not only does Arafat have no designated successor, but he has crippled the creation of institutions that could provide for a smooth transition, develop new leaders, mediate disputes among competing candidates and factions, or check the power of a future dictator.
But at some point, Arafat will depart.
He is 74 years old, and cannot be described as healthy.
Arafat's ability to symbolize the Palestinian cause throughout the world has worn thin in recent years, but any successor would be more obscure.
So what will happen when a transition is forced on the Palestinian movement by his demise?
The best way to address that question is to focus not on who, but on what , would replace Arafat.
In a certain sense, Arafat is the Palestinian Authority (PA).
As a pro-reform Fatah official put it: "This is Arafat's narcissism.
I am afraid the Palestinian people will still be suffering from it even after his death."
Arafat's departure will leave a vacuum that no other institution or leader will be able to fill.
Indeed, Arafat has had several roles, and in each of them his stature has been unique.
While nominally the Palestinians have a collective leadership, the reality is that Arafat has overwhelming control.
He has been the Palestinian movement's sole leader almost from the day he founded it in 1959.
Other contenders, like Abu Jihad and Abu Iyad, were assassinated, and Faisal al-Husseini - the only major leader to rise to prominence within the West Bank and Gaza Strip - died young.
Arafat alone has the power to make everyone obey him, even if he often decides not to exercise this power.
Some argue that an obvious alternative to Arafat is democracy.
But the more likely outcome is an unstable and ineffective collective leadership, a division of power into fiefdoms, or a high degree of anarchy.
In a post-Arafat situation, it will be much harder for any successor or successors to impose discipline and hierarchy on the Palestine Liberation Organization (PLO), the PA, or Fatah.
Nor will Arafat's departure revive hopes for a political settlement with Israel.
True, Arafat's refusal to authorize crucial compromises on such matters as Israel's legitimacy and Palestine's borders has been a critical reason for the failure to resolve the Israel-Palestinian or Arab-Israeli conflicts.
Given Arafat's stature and control over the movement, he could have downsized the Palestinians' goals to acceptance of a state in only part of historic Palestine.
But he never took the leap, and the major issues remain unresolved.
The problem is that even if future Palestinian leaders want to resolve the issues that block peace with Israel, doing so will be far more difficult than it would have been for Arafat.
Under Arafat's long rule, whole generations of Palestinians have been indoctrinated with the belief that only total victory is acceptable.
Indeed, beyond day-to-day policies, Arafat has constructed the Palestinian movement's intellectual and psycho-political style, which is dogmatic and uncompromising.
Arafat's legacy is thus a political culture in which a leader may portray a disastrous tactic, strategy, or outcome as a victory and be believed.
So no political price is ever paid for continuing wars that cannot be won or making demands that will not be met.
The acceptance of violence without limit will be the most devastating feature of Arafat's legacy.
Many movements throughout history have used violence, but few have so thoroughly justified and romanticized it.
This problem will not go away when Arafat does.
How can someone with less legitimacy than Arafat escape this justification of violence?
Entire groups - Hamas, Islamic Jihad, Fatah's al-Aqsa Martyrs' Brigades - and their leaders owe their power to their willingness to kill Israelis, which has become the ultimate measure of political virtue.
Any effort by Palestinian security authorities to put down these groups by force would lead to far more violence.
Arafat's refusal to take sides ideologically helped create an illusion of Palestinian unity, with everyone dedicated to a single Palestinian struggle.
He achieved this consensus by devaluing statehood as an end in itself, building political unity on the myth of an idealized pre-1948 Palestinian society that could be "recreated" on the basis of the "right of return" and Israel's disappearance.
These aims are never going to be realized, but they also have never been subordinated to "ending the occupation," so they form the glue of Palestinian nationalism.
In today's divisive circumstances, the emergence of a new Palestinian leader will most likely take years.
During that interregnum, we should expect deadlock, anarchy, or civil war.
After Austerity
NEW YORK – This year’s annual meeting of the International Monetary Fund made clear that Europe and the international community remain rudderless when it comes to economic policy.
Financial leaders, from finance ministers to leaders of private financial institutions, reiterated the current mantra: the crisis countries have to get their houses in order, reduce their deficits, bring down their national debts, undertake structural reforms, and promote growth.
Confidence, it was repeatedly said, needs to be restored.
It is a little precious to hear such pontifications from those who, at the helm of central banks, finance ministries, and private banks, steered the global financial system to the brink of ruin – and created the ongoing mess.
Worse, seldom is it explained how to square the circle.
How can confidence be restored as the crisis economies plunge into recession?
How can growth be revived when austerity will almost surely mean a further decrease in aggregate demand, sending output and employment even lower?
This we should know by now: markets on their own are not stable.
Not only do they repeatedly generate destabilizing asset bubbles, but, when demand weakens, forces that exacerbate the downturn come into play.
Unemployment, and fear that it will spread, drives down wages, incomes, and consumption – and thus total demand.
Decreased rates of household formation – young Americans, for example, are increasingly moving back in with their parents – depress housing prices, leading to still more foreclosures.
States with balanced-budget frameworks are forced to cut spending as tax revenues fall – an automatic destabilizer that Europe seems mindlessly bent on adopting.
There are alternative strategies.
Some countries, like Germany, have room for fiscal maneuver.
Using it for investment would enhance long-term growth, with positive spillovers to the rest of Europe.
A long-recognized principle is that balanced expansion of taxes and spending stimulates the economy; if the program is well designed (taxes at the top, combined with spending on education), the increase in GDP and employment can be significant.
Europe as a whole is not in bad fiscal shape; its debt-to-GDP ratio compares favorably with that of the United States.
If each US state were totally responsible for its own budget, including paying all unemployment benefits, America, too, would be in fiscal crisis.
The lesson is obvious:&#160; the whole is more than the sum of its parts.
If Europe – particularly the European Central Bank – were to borrow, and re-lend the proceeds, the costs of servicing Europe’s debt would fall, creating room for the kinds of expenditure that would promote growth and employment.
There are already institutions within Europe, such as the European Investment Bank, that could help finance needed investments in the cash-starved economies.
The EIB should expand its lending.
There need to be increased funds available to support small and medium-size enterprises – the main source of job creation in all economies – which is especially important, given that credit contraction by banks hits these enterprises especially hard.
Europe’s single-minded focus on austerity is a result of a misdiagnosis of its problems.
Greece overspent, but Spain and Ireland had fiscal surpluses and low debt-to-GDP ratios before the crisis.
Giving lectures about fiscal prudence is beside the point.
Taking the lectures seriously – &#160;even adopting tight budget frameworks –&#160;can be counterproductive.
Regardless of whether Europe’s problems are temporary or fundamental – the eurozone, for example, is far from an “optimal” currency area, and tax competition in a free-trade and free-migration area can erode a viable state – austerity will make matters worse.
The consequences of Europe’s rush to austerity will be long-lasting and possibly severe.
If the euro survives, it will come at the price of high unemployment and enormous suffering, especially in the crisis countries.
And the crisis itself almost surely will spread.
Firewalls won’t work, if kerosene is simultaneously thrown on the fire, as Europe seems committed to doing: there is no example of a large economy – and Europe is the world’s largest – recovering as a result of austerity.
As a result, society’s most valuable asset, its human capital, is being wasted and even destroyed.
Young people who are long deprived of a decent job – and youth unemployment in some countries is approaching or exceeding 50%, and has been unacceptably high since 2008 – become alienated.
When they eventually find work, it will be at a much lower wage.
Normally, youth is a time when skills get built up; now, it is a time when they atrophy.
So many economies are vulnerable to natural disasters – earthquakes, floods, typhoons, hurricanes, tsunamis –&#160;that adding a man-made disaster is all the more tragic.
But that is what Europe is doing.
Indeed, its leaders’ willful ignorance of the lessons of the past is criminal.
The pain that Europe, especially its poor and young, is suffering is unnecessary.
Fortunately, there is an alternative.
But delay in grasping it will be very costly, and Europe is running out of time.
After Chernobyl
KIEV: Chernobyl, the world’s most notorious nuclear power plant, will be shut down today, fourteen years after it spewed clouds of radioactive dust into the atmosphere.
Back then, Ukraine became the focus of global attention, but Ukrainians learned of the disaster much later than the rest of the world.
I recall that fateful Saturday afternoon with utter clarity, strolling through Kiev with my six-year-old daughter, oblivious to the danger.
Chernobyl changed Ukraine forever, and was a catalyst for the downfall of the Soviet Union.
Ultimately, Chernobyl changed the world.
Now that Chernobyl will be permanently shut down, world attention again turns to Ukraine, this time in hope, not fear.
Shutting down a vital source of electrical energy, which Chernobyl remains, is no an easy task, particularly with winter upon us.
Ukraine’s energy infrastructure is weak; losing 8-10% of our electricity production and $100 million in revenues will strain the system even more.
We also bear the responsibilities involved in laying off Chernobyl’s workers and depriving the adjacent city of Slavutych (population 28,000), of its main source of income.
Moreover, we must continue dealing with the technical and ecological issues surrounding the Chernobyl sarcophagus, as well as maintain nuclear safety in the remaining nuclear plants in operation in Ukraine, including what is left of Chernobyl.
In recent years, Ukraine alone financed all the costs of dealing with the Chernobyl disaster, consistently spending 5-10% of our state budget revenues to this end.
Dealing with the aftermath of the disaster will remain a financial burden even with the plant closed.
Yet closing the plant proves that we keep our promises.
We committed to shut down Chernobyl this year in an agreement with the G-7 countries and the European Commission.
Closure of the last remaining reactor at Chernobyl, I believe, must mark the beginning of a new phase of cooperation with the European Union and G-7 countries.
Closing Chernobyl may be the most dramatic, but it is only a single episode in our reform efforts.
When we gained independence, the world expected great things from Ukraine.
Over the course of a decade, the world appeared to forget about us.
Now we finally have a chance to break out of the downward spiral of economic decline.
At long last, our society and economy are set on the path to growth and development.
After pro-reform forces secured victory in last year’s presidential elections, all of the branches of government began cooperating to entrench democracy and the market economy in Ukraine.
For the first time since independence, Ukraine recorded growth in industrial output of 12.5% in the first 11 months of 2000, and GDP has grown by 5.4% this year.
Tough decisions were made, not least involving the energy sector.
Barter payments, -- which stifled the energy market -- were eliminated. So too tax breaks and other privileges that skewed the playing field in favor of a select few.
We are also doing everything possible to make Ukraine attractive to foreign investors.
In the energy sector, we are privatizing state-owned energy distributors.
To ensure complete transparency in the tender process, and eliminate problems experienced in the past, Western advisors are assisting us.
For our intention is to attract large Western energy companies with experience in this field as strategic investors.
Ten leading international energy companies, indeed, will participate in the privatization of the first group of companies.
By the end of next year, we will privatize 12 additional energy companies.
In its sheer scale, this may be the largest single energy privatization ever attempted in Europe.
Our energy companies service a territory the size of France; they will all be privatized.
Of course, these reforms are resisted, primarily by the oligarchs who thrive on a lack of transparency and use privileged access to state resources to enhance their business interests.
By eliminating barter and requiring monetary payment, we curtailed their opportunities to profit at the state’s expense.
Although we can and will continue the fight against corruption, we cannot do everything alone.
International support for our efforts is crucial.
A positive sign here is the recent decision by the European Bank for Reconstruction and Development (EBRD) to provide $215 million to complete the nuclear power stations at Rivne and Khmelnytsky, which will compensate for the loss of Chernobyl’s generating capacity.
Euroatom is also helping with a loan of $585 million to finance repairs at Ukraine’s functioning nuclear power plants.
In return, Ukraine will uphold its end of the deal: in addition to closing Chernobyl, we will introduce Western nuclear safety standards and renew cooperation with the IMF via the Extended Fund Facility program.
We still need other potential creditors to confirm their involvement.
Closing Chernobyl will not eliminate the Chernobyl threat.
Our people will be unable to live on thousands of acres of contaminated earth for hundreds of years.
The concrete sarcophagus built over the destroyed reactor must be renovated.
We are grateful to all the donor countries who, with contributions from our own state budget, helped raise the $760 million needed to make the sarcophagus safer.
In the end, Chernobyl’s legacy does not belong solely to Ukraine, for ours is a country located in the heart of Europe.
We are a European nation.
We realize that no one will implement reforms for us.
The West can, however, help speed up and facilitate our efforts, as it did with the closure of Chernobyl.
Cooperation between Ukraine and the West, without a disaster to concentrate everyone’s minds, will benefit all concerned.
After Kyoto
The Kyoto Protocol treaty has now entered into force for the 126 nations who have joined it so far.
Now is the time to start thinking about how to engage all nations, including large emitters, in conversations about what to do after the treaty’s expiration in 2012.
This is exactly what the European Commission did recently by providing its first strategy for a post-Kyoto era, which will be discussed by the European Council next March.
While the Kyoto Protocol represents only a modest reduction of carbon emissions in industrialized countries – 5.2% between 2008-2012 relative to 1990 levels, with varying targets for individual countries – real progress can be made in sustaining development efforts and preserving our planet.
But first, all countries must integrate climate concerns into policy planning, and improve their governance in key sectors such as energy, infrastructure, and transport.
In other words, we must act in accordance with the recognition that climate change and its effects on people in both rich and poor countries remains a threat to global security.
At the end of the day, the long-term approach is likely to include a rules-based system, an incentives system, and investments in technology change.
Increasingly, adaptation at the national level will be recognized as a major issue that will require appropriate funding.
Dealing with the impacts of climate change and with emission reductions should not be mutually exclusive, but complementary.
Looking ahead to the post-Kyoto world offers us the chance to start a new dialogue and to look at new options on climate change.
Nations could set the more ambitious goal of limiting the long-term change in the earth’s temperature, and then assign emissions rights among countries in such a way that will eventually limit temperature increases to an acceptable level.
This would require increasing investments in energy research and development for new and improved technologies – a process that needs to be supported by stronger public-private partnerships.
Up to now, with only 15% of the world’s population, rich countries have been responsible for more than 75% of global carbon dioxide (CO2) emissions, and thus most of the environmental damage.
However, it is the developing countries – and thus the world’s poor – who are most vulnerable.
It is unrealistic to ask poor countries, where more than 1.6 billion people do not have access to clean energy and technologies, to bear the costs associated with the much needed technological change.
Working with partners, the World Bank is supporting financial strategies to assist developing countries in meeting the costs caused by climate change.
To date, over $1 billion dollars in Global Environment Facility (GEF) grants, together with about $8 billion in co-financing, have been committed to programs related to climate change.
While the regulatory mechanisms of both Kyoto and the European Trading Scheme have contributed to the establishment of an emerging market for carbon trading, interested parties are now concerned about the immediate future.
Without a regulatory framework beyond 2012, the window of opportunity for initiating project-based transactions will close by 2006/2007.
Given the long lead time between project preparation and the first benefits of emissions reductions, project developers have only a few years to act before carbon payments cease to make a meaningful contribution to project finance in the current context.
Developing infrastructure projects is a long process that requires 3-7 years from identification, through licensing, financing, and construction, and finally to the first certification of carbon emission reductions.
Therefore, projects need to be operational at the latest by 2007.
The World Bank has been instrumental in advancing carbon finance as a viable development tool, and in facilitating private-sector participation in the market.
The Bank is focused on representing the interests of its borrowing countries, helping them to develop assets for carbon trading according to their own priorities.
But, without a commitment by governments to limit greenhouse gas emissions beyond 2012, the carbon market will remain uncertain, and the private sector – vital to the market’s success – is unlikely to expand its participation in a meaningful and sustained way.
According to a recent World Bank-supported survey of companies interested in carbon finance, only one in five respondents declared that they were interested in buying post-2012 emissions reductions.
Now is the chance to look forward and enlist the global community – with no exclusions, although with differentiated responsibilities – in the pursuit of a more secure world, one that avoids the dire risks of environmental degradation and social conflict implied by inaction.
After Neoliberalism, What?
Two decades of applying neoliberal economic policies to the developing world have yielded disappointing results.
Latin America, the region that tried hardest to implement the "Washington Consensus" recipes--free trade, price deregulation, and privatization--has experienced low and volatile growth, with widening inequalities.
Among the former socialist economies of Eastern Europe and the Soviet Union, few have caught up with real output levels that prevailed before 1990.
In Sub-Saharan Africa, most economies failed to respond to the adjustment programs demanded by the IMF and World Bank.
The few instances of success occurred in countries that marched to their own drummers--and that are hardly poster children for neoliberalism.
China, Vietnam, India: all three violated virtually every rule in the neoliberal guidebook, even as they moved in a more market-oriented direction.
It is time to abandon neoliberalism and the Washington Consensus.
But the challenge is to provide an alternative set of policy guidelines for promoting development, without falling into the trap of promulgating yet another impractical blueprint, supposedly right for all countries at all times.
The record suggests that an adequate growth program needs to be anchored in two strategies: an investment strategy designed to kick-start growth in the short term, and an institution-building strategy designed to provide an economy with resilience in the face of adverse shocks.
The key to investment strategy is to get domestic entrepreneurs excited about the home economy.
Encouraging foreign investment or liberalizing everything and then waiting for things to improve does not work.
An effective strategy must accomplish two tasks: encourage investment in non-traditional areas, and weed out projects and investments that fail.
For this, governments must deploy both the carrot and the stick.
Learning what a country is (or can be) good at producing is a key challenge of economic development.
The carrot is needed because there is great social value in discovering, for example, that cut flowers, or soccer balls, or computer software can be produced at low cost, because this knowledge can orient the investments of other entrepreneurs.
The entrepreneur who makes the initial "discovery" can capture only a small part of the social value that this knowledge generates, as other entrepreneurs will quickly emulate him.
Consequently, entrepreneurship of this type--learning what can be produced--will typically be under-supplied in the absence of non-market incentives.
In turn, the stick is needed to ensure that these incentives do not lock in unproductive and wasteful investments.
Implementing such a strategy may differ from country to country, depending on administrative capacity, the prevailing incentive regime, the flexibility of the fiscal system, the degree of sophistication of the financial sector, and the underlying political economy.
Time-bound subsidy schemes, public venture funds, and export subsidization are some of the ways in which this approach can be implemented, but there are many others.
No single instrument will work everywhere.
Governments without adequate capacity to exercise leadership over their private sectors are likely to mess things up rather than improve allocation of resources.
The job can be done, but economic growth requires more than eliciting a temporary boost in investment and entrepreneurship.
It also requires effort to build four types of institutions required to maintain growth momentum and build resilience to shocks:
Market-creating institutions (for property rights and contract enforcement);
Market-regulating institutions (for externalities, economies of scale, and information about companies);
Market-stabilizing institutions (for monetary and fiscal management);
Market-legitimizing institutions (for social protection and insurance).
Building and solidifying these institutions, however, takes time.
Using an initial period of growth to experiment and innovate on these fronts can pay high dividends later on.
A key point here is that institutional arrangements are, by necessity, country-specific.
Discovering what works in any one country requires experimentation.
After all, institutions are not hot-house plants capable of being planted in any soil and climate.
Reforms that succeed in one setting may perform poorly or fail completely in others.
Such specificity helps explain why successful countries--China, India, South Korea, and Taiwan, among others--usually combined unorthodox elements with orthodox policies.
It also accounts for why important institutional differences persist among the advanced countries of North America, Western Europe, and Japan in areas such as the role of the public sector, the legal system, corporate governance, financial markets, labor markets, and social insurance.
While economic analysis can help in making institutional choices, there is also a large role for public deliberation and collective choice.
In fact, we can think of participatory democracy as a meta-institution that helps select among the "menu" of possible institutional arrangements in each area.
Designing such a growth strategy is both harder and easier than implementing standard neoliberal policies.
It is harder because the binding constraints on growth are usually country-specific and do not respond well to standardized recipes.
But it is easier because once those constraints are appropriately targeted, relatively simple policy changes can yield enormous economic payoffs and start a virtuous cycle of growth and institutional reform.
Adopting this approach does not mean abandoning mainstream economics--far from it.
Neoliberalism is to neoclassical economics as astrology is to astronomy.
In both cases, it takes a lot of blind faith to go from one to the other.
Critics of neoliberalism should not oppose mainstream economics--only its misuse.
Selepas Serangan di Paris
NEW YORK – Sejumlah serangan di Paris yang dilakukan oleh beberapa pelaku yang terkait dengan Islamic State atau ISIS (Negara Islam Irak dan Suriah), yang terjadi setelah dua bom meledak di Beirut dan jatuhnya pesawat Rusia di Semenanjung Sinai, kembali menegaskan fakta bahwa ancaman teroris telah memasuki fase baru dan semakin berbahaya.
Alasan mengapa ISIS memutuskan untuk melakukan serangannya sekarang masih berupa dugaan; barangkali ISIS memperluas terornya ke tingkat global untuk mengimbangi kehilangan wilayah mereka di Irak.
Tetapi, apapun alasannya, wajib bagi kita untuk memberi respon jelas.
Sebetulnya, tantangan yang ditimbulkan ISIS justru menjadi seruan bagi kita untuk menerapkan beberapa tindakan, sebab tidak ada kebijakan tunggal yang memadai.
Berbagai upaya perlu diterapkan di berbagai bidang.
Pertama, militer. Serangan udara yang lebih kuat untuk melemahkan aset-aset militer, fasilitas minyak dan gas, dan para pemimpin ISIS sangat penting.
Meskipun demikian, serangan udara saja tidak akan cukup.
Unsur militer yang kuat di darat juga diperlukan jika ingin mengambil alih dan mempertahankan wilayah darat.
Sayangnya, kita tidak punya cukup waktu untuk membangun kekuatan gabungan di darat dari nol.
Upaya ini sudah dicoba namun gagal, dan negara-negara Arab tidak mampu atau tidak mau membentuk armadanya.
Tentara Irak pun gagal memenuhi harapan.
Kelompok milisi yang didukung Iran justru memperburuk keadaan.
Pilihan terbaik adalah bekerja sama lebih erat dengan tentara Kurdi dan memilih warga dari suku Sunni di Irak dan Suriah.
Hal ini berarti menyediakan intelijen, senjata, dan kemauan untuk menugaskan lebih banyak tentara – lebih dari 3.500 tentara Amerika sudah bertugas disana dan kemungkinan akan ada penambahan 10.000 tentara – untuk melatih, memberi masukan, dan membantu mengarahkan tindakan militer.
Upaya seperti ini harus bersifat kolektif.
Bentuknya bisa informal – “koalisi negara-negara yang bersedia” (coalition of the willing) yang meliputi Amerika Serikat, Perancis, Britania Raya, negara-negara Arab, dan bahkan Rusia dalam kondisi yang tepat – atau dilaksanakan di bawah naungan NATO atau PBB.
Tidak masalah apapun bentuk atau kemasannya, yang penting adalah hasilnya.
Tetapi, deklarasi perang secara simbolis haruslah dipertimbangkan dengan penuh kehati-hatian, jangan sampai ISIS terkesan memenangi perang ini.
Komponen diplomasi pun tidak kalah penting dibanding tindakan lainnya.
Presiden Suriah, Bashar al-Assad, adalah sosok yang layaknya menjadi recruiting tools bagi ISIS dan harus dicopot dari jabatannya.
Siapapun yang meneruskan jabatan beliau harus mampu menjaga ketertiban dan melarang ISIS memanfaatkan kekosongan kekuasaan, seperti yang terjadi di Libya.
Selain itu, perubahan politik yang teratur hanya akan dimungkinkan melalui dukungan Rusia dan Iran.
Satu opsi jangka pendek yang patut dicoba adalah pembentukan pemerintah koalisi yang masih dipimpin oleh perwakilan dari kelompok minoritas Alawite, suatu persetujuan yang sepadan dengan mencopot jabatan Assad.
Secara prinsip, dan seiring berjalannya waktu, pemerintah pusat yang lebih representatif akan terbentuk, walaupun pembahasan mengenai rencana pemilihan umum dalam waktu 18 bulan ke depan nampaknya terlalu bermuluk-muluk.
Mencapai suatu kompromi dalam pembentukan pemerintah hampir mustahil.
Itulah sebabnya penguatan upaya militer diperlukan untuk menjadikan daerah-daerah kantong lebih aman dan luas sehingga mampu melindungi penduduk sipil dan memerangi ISIS.
Suriah bukanlah negara yang hidup dalam kondisi layak dan normal, bahkan mungkin tidak akan bisa kembali ke kondisi normal.
Negara Suriah yang terdiri dari daerah-daerah kantong dan canton-canton adalah bentuk yang lebih realistis di masa mendatang.
Elemen lainnya yang sangat diperlukan dalam strategi efektif apapun harus meliputi bantuan tambahan atau memberi tekanan kepada Turki untuk mengambil lebih banyak tindakan demi membendung rekrutmen ISIS.
Turki, bersama dengan Yordania dan Lebanon, memerlukan bantuan finansial lebih besar sebab mereka memikul sebagian besar beban karena persoalan pengungsi.
Pemimpin Arab dan Muslim dapat berperan dengan menyampaikan pesan untuk menantang visi ISIS dan mendelegitimasi perilaku mereka.
Aspek domestik dalam kebijakan juga diperlukan.
Keamanan dalam negeri dan penegakan hukum – meningkatkan perlindungan baik di wilayah perbatasan dan dalam negeri – harus disesuaikan dengan kenaikan tingkat ancaman.
Retail terrorists – individu atau kelompok melakukan serangan bersenjata ke kelompok rentan di masyarakat – sangat sulit diatasi.
Ancaman dan terjadinya beberapa serangan mengharuskan ketahanan sosial yang lebih kuat dan sedapat mungkin menyeimbangkan ulang antara privasi individu dan keamanan kolektif.
Kita juga perlu menerima fakta dan kenyataan yang ada.
Perjuangan melawan Negara Islam bukanlah perang konvensional.
Kita tidak bisa memberantas atau menghancurkannya dalam waktu dekat, sebab ISIS merupakan jaringan dan gagasan, serta suatu organisasi dan negara de facto yang mengendalikan wilayah dan sumber daya.
Memang, terorisme masih dan terus menjadi salah satu momok di era ini.
Meskipun demikian, kabar baiknya adalah ancaman yang diakibatkan ISIS ke Timur Tengah dan seluruh dunia dapat dikurangi secara signifikan melalui tindakan terpadu dan berkelanjutan.
Pembelajaran utama dari serangan di Paris adalah kita harus siap bertindak kapan pun dan dimanapun.
After Pax Americana?
NEW YORK – It has become popular to suggest that when the dust settles from the global financial crisis, it may become clear that the United States-led post-war world has come to an end.
If so, the global system that has secured peace, security, openness, and economic growth over the past six decades could be in grave danger.
Inspired by American leadership since World War II’s end, Europe, then Japan, then much of Asia and the world rose to new levels of prosperity; the world economy globalized upon the foundation of international institutions, norms, and standards; and foreign students educated in American universities returned home with new ideas about free markets, entrepreneurship, and democracy.
The US military’s protective umbrella gave large swaths of the world a vacation from war, making it easier for them to focus on economic growth and regional integration.
America not only took the lead role in building the institutions of a globalizing world – the United Nations, World Bank, IMF, NATO– it also became the model that many other countries looked to for inspiration.
After eight years of compromised American leadership, a botched war of choice in Iraq, failure to take the lead in global efforts to address climate change, Abu Ghraib, Guantánamo Bay, running up a $10 trillion debt, and igniting a global financial crisis – America’s once-glittering model has lost a good deal of its luster and America’s leadership has been questioned by many.
The point was driven home at the 7th Asia-Europe Meeting (ASEM) in Beijing this autumn, where European and Asian leaders began exploring ideas for a new global financial structure.
For much of the past 60 years, it would have been impossible to hold such a fundamental dialogue without US participation.
Today, it is almost becoming a new global norm that neither the international committee nor the US is prepared for.
Despite talk about American decline, the world is not prepared for a post-American era.
As irksome as some of America’s actions have been, particularly over the past eight years, America remains the world’s most critical champion of the progressive values that have lifted hundreds of millions of people out of abject poverty and political repression.
If the US were to play a relatively smaller role in world affairs, and no other system was created to pick up the slack, these values could be at risk.
Although many states now hide behind an alleged universal principle of inviolable state sovereignty, for example, would the international community really want to go back to the old model where states did whatever they wanted to their citizens within the confines of their own borders?
Do countries around the world believe that they will be better off if the global trade system breaks down or international shipping lanes become less secure?
Are countries like China willing to step up and pay their fair share of dues to keep the UN running (China currently pays 2.1% of UN dues, compared to more than 25% for the US), or to capitalize revised international financial institutions or the Global Fund to Fight AIDS, Tuberculosis, and Malaria in a meaningful way?
Unless other countries become more willing to step forward for the common good, a post-American world could quickly become a far more frightening environment than what it would replace.
To make its case for a continued global leadership role, America must, however, step up to the plate. While the go-it-alone impulse of the Bush administration has been discredited by its consequences, the inverse lessons regarding how important collaborative action is in today’s interconnected world are still being learned.
Even at the apex of American power, America’s greatness was always based on inspiring others, and the opportunities for building market share in that particular category remain unlimited.
It is impossible to overestimate how significant a step Barack Obama’s election is in this direction, but America’s actions over the coming years will be the ultimate determinant of whether the power of America’s model can be restored.
America can and should, for example, become the global leader combating climate change through major investments in alternative energy, conservation, and energy efficiency, and by taking strong actions at home to reduce America’s greenhouse gas emissions. It should transform its immigration policy to recruit the best and brightest people from around the world to move to the US and become citizens, and remain the world’s leading champion of open markets, especially during the current financial crisis.
Closing the prison at Guantánamo and reaffirming America’s commitment to international law and human rights will also be an important step in this direction.
The world wants to believe in an America that lives up to its own best values.
The prospect of a truly global community of nations working together to achieve the greater good for all is indeed exciting.
But, although America has been far from perfect over the last six decades, the end of the
If the world is going to shift in the direction of a new and more globally democratic system, other nations will need to meaningfully step forward to assume new responsibilities.
It is in America’s and the world’s interest that they do so. The evidence of this will be seen not only in global institutions but also in places like Darfur, Zimbabwe, and Burma.
Until this happens, let us all hope that America can get back on track as the global champion of collaborative action to address the world’s greatest challenges and work with as many other countries as possible to move collectively in the right direction.
Aftershocks from Japan
NEW HAVEN – The devastation – both human and physical – from the earthquake and tsunami in Japan is unfathomable.
It is impossible at this point to gauge the full extent of the damage with any degree of precision.
But we can nonetheless begin to assess its potential spillover effects on the rest of Asia and other major economies around the world.
The narrow view of the catastrophe’s economic impact is that Japan doesn’t really matter anymore.
After all, more than 20 years of unusually sluggish trend growth in Japanese output has sharply reduced its incremental impact on the broader global economy.
The disaster may produce some disproportionate supply-chain effects in autos and information-technology product lines such as flash drives, but any such disruptions would tend to be transitory.
On the surface, the world’s two largest economies have little to fear.
Japan accounts for only 5% of America’s exports and 8% of China’s.
Under the worst-case outcome of a complete disruption to the Japanese economy, the direct repercussions on the United States and Chinese economies would be small – shaving no more than a few tenths of a percentage point off their annual growth rates.
Within the so-called G-10 developed economies, Australia has the largest direct exposure to Japan – the destination of about 19% of its total exports.
The eurozone is at the opposite end of the spectrum, with Japan accounting for less than 2% of its exports.
Among emerging-markets, the Philippines and Indonesia are the most exposed to Japan, which absorbs about 16% of their total exports.
South Korea, the third-largest economy in East Asia, is at the other end of the scale, relying on Japanese demand for only about 6% of its exports.
But the narrow view misses the most critical consideration: this “Japan shock” has not occurred at a time of great economic strength.
That is true not only of Japan itself, where two lost decades have left a once-vigorous economy on a less-than-1% growth trajectory since the early 1990’s.
But it is also true of the broader global economy, which was only just beginning to recover from the worst financial crisis and recession since the 1930’s.
Moreover, the Japan shock is not the only negative factor at work today.
The impacts of sharply rising oil prices and ongoing sovereign debt problems in Europe are also very worrisome.
While each of these shocks may not qualify as the proverbial tipping point, the combination and the context are disconcerting, to say the least.
Context is vital.
Notwithstanding the euphoric resurgence of global equity markets over the past two years, the world economy remains fragile.
What markets seem to have forgotten is that post-bubble, post-financial-crisis recoveries tend to be anemic.
Economies grow at something much closer to their stall speeds, thus lacking the cyclical “escape velocity” required for a self-sustaining recovery.
As a result, post-crisis economies are far more vulnerable to shocks and prone to relapses than might otherwise be the case.
Alas, there is an added complication that makes today’s shocks all the more vexing: governments and central banks have exhausted the traditional ammunition upon which they have long relied during times of economic duress.
That is true of both monetary and fiscal policy – the two mainstays of modern countercyclical stabilization.
Policy interest rates are close to zero in the major economies in the developed world, and outsize budget deficits are the norm.
As a result, unconventional – and untested – policies, such as so-called “quantitative easing,” have become the rage among central bankers.
All along, such unconventional policies were viewed as a temporary fix.
The hope was that policy settings soon would return to pre-crisis norms.
But, with one shock following another, the “exit strategy” keeps being deferred.
Just as it is next to impossible to take a critically ill patient off life-support treatment, it is equally difficult to wean post-bubble economies from their now steady dose of liquidity injections and deficit spending.
In an era of extraordinarily high unemployment, political pressures only compound the problem.
This raises perhaps the most troublesome concern of all: with a post-crisis world getting hit by one shock after another, and with central banks having no latitude to cut interest rates, it is not hard to envision a scenario of open-ended monetary expansion that ends in tears.
The dreaded inflationary endgame suddenly looms as a very real possibility.
None of this detracts from the resilience factor.
Yes, Japan will rebuild, which will undoubtedly spur some type of recovery in its disaster-battered economy.
That happened in the aftermath of the Hanshin (Kobe) earthquake in 1995, and it will happen this time as well.
But, just as the post-Kobe rebuilding did little to end the first of Japan’s lost decades, a similar outcome can be expected this time.
The upside of rebuilding – beyond the urgent restoration of normal life for thousands of people – is only a temporary palliative for an impaired economy.
That’s only one of the lessons that Japan offers the rest of us.
The Japanese economy has, in fact, been on the leading edge of many of the more serious problems that have afflicted the global economy in recent years.
From asset bubbles and a dysfunctional financial system to currency suppression and monetary-policy blunders, Japan has been in many respects the laboratory of our future.
Unfortunately, the world has failed to learn the lessons of Japan.
And now it risks missing another important clue.
The significance of the earthquake and tsunami of 2011 is not the relatively low magnitude of Japan’s direct impact on the broader global economy.
The more meaningful message is how these shocks box the rest of us into an even tighter corner.
After the Dear Leader
SEOUL – Korea is a unique country.
The Cold War ended when the Soviet Union collapsed in 1991, and is now remembered only as history to most people around the world.
The Korean Peninsula, however, remains divided along ideological lines, and the two Koreas co-exist as living remnants of the Cold War.
A total of almost 1.5 million young soldiers from both North and South Korea face off against each across the heavily armed Demilitarized Zone.
Events and structural forces, however, have affected and changed the nature of the North Korean system since 1991.
The sudden discontinuation of the supply of petroleum and natural resources from Russia in the early 1990’s, the failure of the centrally-planned economy, and the subsequent massive famine in the mid-1990’s left North Korea’s leaders no alternative but to tolerate informal market activities.
Nowadays, every North Korean seems to like money and know its value.
The engagement policy pursued by the South Korean government in recent years also contributed to changes in North Koreans’ perceptions of the outside world and of their own abject economic situation.
In these desperate circumstances, North Korea’s leaders clung to their strategy of developing nuclear weapons as a last resort to defend the security of their regime.
But, regardless of whether the nuclear issue is resolved, the spread of market forces in North Korea will continue to change every aspect of life there in the coming years.
Nobody yet knows what the political consequences of these economic changes will be.
So, even before the recent reports of North Korean leader Kim Jong-il’s health problems, North Korea was already a country marked by growing uncertainty.
Nevertheless, the reports about Kim’s ill health hit like a rude wake-up call about the precarious nature of conditions in North Korea.
The “Dear Leader’s” declining health will add even more uncertainty and may cause international instability across East Asia.
For example, Kim Il Sung groomed his son Kim Jong-il as his successor for about two decades before the younger Kim took power in 1994.
Kim Jong-il, however, has not yet even chosen his successor.
Indeed, it is widely expected that a new system of collective leadership will emerge if Kim Jong-il is incapacitated.
The problem is that North Korea has no experience with collective leadership.
In the last six decades, all power has been concentrated in the hands of one person.
One-man rule has been so completely embedded in North Korea’s political culture and system that it is difficult to expect collective leadership to succeed.
Thus, some type of power struggle, rather like what occurred in the Soviet Union following Stalin’s death, may invariably follow a brief period of collective rule.
The dilemma for the world is that major decisions will have to be made during this period of instability.
Will the North’s would-be leaders be able to manage the country’s stock of nuclear weapons responsibly and safely without transferring a few of them abroad, much less respond to international pressure to dismantle them in a reasonable and flexible manner?
Over the past decade, Kim Jong-il has emphasized the importance of his military-first policy.
As a result, the army will be dominant in decision making on important issues like nuclear negotiations.
But the problem with military rule is a tendency toward incomplete understanding of the implications of political decisions – a problem that will be aggravated further by collective leadership.
Under a North Korean collective leadership dominated by the military, the power of the country’s economic bureaucrats will be marginal, at best.
This may lead to suppression of pressure from below for economic reform and opening.
As a result, the economy may worsen and political instability increase.
In such a difficult domestic situation, North Korea’s leaders may adopt more hostile policies to obtain economic aid from both South Korea and the United States.
Recently, South Korea’s government made it clear that it would continue to engage North Korea, but in a more principled way than had previous administrations.
This reflects a hardening of South Korean public opinion, following North Korea’s nuclear test in 2006.
As a result of this policy shift – and the recent killing of a South Korean tourist in North Korea’s Kumgang Mountains – official dialogue between North and South has stopped for the past several months.
International relations in northeast Asia will become more subtle and unstable as the Kim Jong-il era ends.
After six turbulent but somewhat predictable decades, we may be entering into a new era of greater turbulence but less predictability on the Korean Peninsula.
After the Death of Utopia
A decade ago, people spoke of the end of history, meaning the ultimate triumph of a liberal capitalist political order.
Nowadays, many scoff at that notion as too simplistic.
Nonetheless, we are at both the end and beginning of something remarkable.
In the wake of the death of the utopian - and often bloody - certainties of the 19th and 20th centuries (Communism's collapse was but the latest spectacular example), and with fading belief in the liberal welfare state, traditional views about work, retirement, education, the Church, solidarity, and other social institutions are changing rapidly.
The central driver of all this is today's enormous acceleration in the underlying pace of technological and economic change.
Call it fast-forward modernization .
Of course, the worldwide crash of high-tech stocks in 2000 chilled the hype about a "new economy" that seemed to be emerging at the "end of history."
But falling share prices should not blind us to the fact that on top of the ongoing information revolution, three fresh waves of revolutionary technology are poised to hit: bio-technology (including new medical technologies and genetic engineering, such as the creation of human embryos through cloning), nanotechnology, and robotics.
Each is its own industrial revolution, and will profoundly alter our lives and ways of thinking.
Indeed, the revolution is already upon us.
For the first time in history, a global techno-market order is transforming the world of finance, business, politics and, indeed, physiology, beyond recognition.
This new techno-market system is shaped and characterized by a belief in the increasing importance of knowledge, new ideas, innovations and new technologies, and a higher pace of what the economist Joseph Schumpeter famously called "creative destruction."
As a result, corporate capitalism is rapidly becoming obsolete, replaced by a creative capitalism in which entrepreneurship, combined with a greater willingness to adopt innovations, transforms the business landscape.
Innovative start-up firms become huge companies faster than ever before.
But these infant giants are quickly threatened with eclipse by even newer enterprises.
Take the example of computers.
It took 15 years for other countries to compete successfully with America's Silicon Valley in semi-conductors, but less than five years in Internet technology.
This system provides unprecedented financial incentives to scientists and entrepreneurs to aggressively develop new technologies and thus become rich.
But the revolution is not only for the elite; it also offers a realistic (non-utopian) promise of dramatically improved lives for many people around the entire globe - not in 100 years, but in the foreseeable future.
We are not
These changes are also triggering changes in human consciousness.
The result is a litany of "post-utopian" values that include a stronger emphasis on individual freedom and personal responsibility.
In this world without utopia, individual freedom is the supreme value.
But, as with any change of such magnitude, there are holdouts.
Indeed, politics everywhere now seems dominated by the "war of lifestyles" that has emerged from today's emphasis on individual autonomy.
Not so long ago, issues such as the environment, the balance of work versus leisure in daily life, and the role of marriage, abortion, and other family concerns were secondary political disputes, as politicians fought over who would receive what share of a nation's wealth.
Now these issues define domestic political agendas.
Much of the new battle over lifestyles is undoubtedly misunderstood, perhaps because debates about them are conducted in a simplistic way: anti-global movements versus multi-nationals, environmentalists versus corporate polluters, small farmers versus agro-business, and so on.
This conflict exists globally.
In societies that have been preparing themselves by opening their markets and embracing universal education, the disruptions of this revolution can probably be absorbed and handled.
Conflict is most acute in closed societies characterized by a politically repressive climate and culturally induced obstacles to growth.
Such obstacles include the absence of an informed and capable workforce, instinctive mistrust and rejection of new ideas and technologies just because they come from the West, lack of respect for those who acquire new knowledge, and endemic discrimination against women.
The new battle of lifestyles has given rise to new enemies of open societies, such as the Taliban and Al Qaeda.
It is no coincidence that terrorism thrives in societies that are intrinsically hostile to today's modernizing values and belief in individual autonomy.
So long as these ideas clash, violence will lurk.
To defend post-utopian values in the longer-term, politicians (and generals and spymasters) cannot seek security by drastically curtailing fundamental freedoms, because to do so risks forfeiting public support and a weakening of the pillars of the post-utopian market order.
In challenging groups like Al Qaeda, they must understand that they are engaged in a war of ideas; winning the hearts - and the lifestyles - of societies is the only way to win that battle.
After the God that Failed
Discussing morality and politics, it is said, is like discussing vegetarianism with cannibals.
Much of the public, it seems, thinks this way--for good reason.
Moral principles and moral obligations in today's political/economical realm have undoubtedly gone astray, unashamedly displaced by the interests of profit and power.
The implications are clear.
In today's world, "order" reflects a balance of interests that is maintained mainly by force--be it military or financial.
But something other than this "order of the barracks" is possible.
Think of it as the order of the church choir, where individual members cooperate on the basis of a shared culture and values.
One reason for the complete absence of values in "power politics" nowadays is that leaders get away with speaking words whose true meaning they leave out of their policies.
Moreover, secular spiritual leaders like Gandhi, Schweitzer, and King have vanished, annihilated it seems by our new fetishes--success, expediency, gain, and special interests.
Of course, the so-called civilized world never managed to create a living utopia.
Efforts to do so usually ended disastrously.
As someone born in the old Soviet Union, I know firsthand the despair and brutality of such attempts.
This does not mean that all efforts to build a more moral world are doomed.
Having survived an age of extreme ideologies, such as capitalism, communism, and, recently, market fundamentalism, most people no longer seek answers in ideological clichés and the driving, purifying force of political certainty.
Forced harmonization is dead, which opens the door to making new voluntary forms of social harmony possible.
Let me suggest five steps necessary to begin to bring this about.
The first calls for the world to deem as utterly unacceptable state violence that seeks to impose conformity and discipline.
Such violence is unjust on its face because it suppresses and intimidates both body and spirit.
To achieve this end, however, the state must be stripped of its ability to impose divisive dogmas, traditions, and stereotypes.
That can happen only if a carefully crafted system of "checks and balances" is established, in which powerful organized interests--states, above all--are restrained in their efforts at dominance.
Not only political forces need to be checked.
In the rush to concentrate wealth, for example, majority owners of corporations must not be allowed to harm the interests of minority shareholders, who as a rule are honest common citizens.
This leads me to my second reform priority: a systemic separation of state power and capital.
Even in long-established democracies, candidates for elective office are not evaluated according to their wisdom and leadership, but according to the size of their campaign war chests.
Acquiring government power through possession of capital--and converting it into unjust economic rents--must be curtailed.
Can such a boundary between power and capital be set?
Yes.
I say this as someone who created significant capital and, having done so, changed her occupation in order to cultivate morality in politics.
Laws can make the separation of capital and political power transparent for all to see.
But the will to achieve this division is, sadly, absent among most people in power.
Related to this, it is necessary to separate mass media from both power and the interests of capital.
In Europe, America, and Japan, media ownership is increasingly concentrated, which rightly worries citizens in these countries, particularly when media owners move from forming opinion to forming governments.
How much more worrying, then, is such concentrated ownership in new democracies and developing countries, where the check of civil society is mostly absent?
All these reforms presuppose an independent judiciary.
The autonomy of judges must be assured, which requires that their character is such that people trust their decisions.
In states where justice is bought by the rich and powerful, this may impossible, but individual judges can and do stand up to power.
All citizens should support such judicial stalwarts, for their example can refashion an entire justice system.
In essence, creating a more moral political order requires the removal of money as
Of course my proposed "transformations" may sound too good to be possible.
In defense I wish to cite the great Harvard philosopher John Rawls, who died recently.
Theory, no matter how elegant, Rawls argued, should be dismissed or revised when proven untrue.
The corollary to this is that institutions and even world orders--no matter how efficient and successful--must be reformed if they are unjust.
Perhaps only someone who comes from one of the post-Soviet states can conceive of politics in terms of original principles in the manner of Rawls.
Our newborn states were given the opportunity to create moral political systems on the ruins of a "god that failed."
The struggle to do so has been mighty, but despite our travails--and our poverty--I believe that my country has the strength to contribute creatively to this endeavour.
After the Golden Age of Finance
LONDON – Even after the passage of new financial regulations in the United States, the Dodd-Frank Act, and the publication of the Basel Committee’s new capital requirements, the financial sector’s prospects over the next few years remain highly uncertain.
There has been some recovery in prices for bank shares from the lows of 2008, of course, but that rally faltered recently.
Quite apart from their concerns about the robustness of the rebound in the economy, investors are uncertain about many financial firms’ business models, and about the future size, shape, and profitability of the financial sector in general.
After all, banks remain deeply unpopular in all developed countries.
Bankers are still social pariahs, as lowly valued by the public as drug dealers or journalists.
They are reviled if they lose money, and assailed if they make it.
For banks and their shareholders, it looks a case of heads they win, tails we lose. Thus, as banks return to profitability, politicians in North America and Europe have begun to talk again about new taxes that would skim those profits off to the benefit of taxpayers, whose support kept banks in business at the height of the crisis.
This is a huge contrast with the financial sector’s position in the previous three decades.
From the late 1970’s until 2007, the financial sector grew far more rapidly than the real economy.
In 1980, financial assets – stocks, bonds, and bank deposits – totaled around 100% of GDP in the advanced economies.
By 2007, the figure was over 400% in the US, the United Kingdom, and Japan.
During this period, credit expanded rapidly as a share of GDP, reaching more than 300% at the peak.
In the UK, the profits of financial intermediaries, which had averaged around 1.5% of the whole economy’s profits in the 1970’s, reached 15% in 2008.
In the US, bank profits were an even larger share of the total.
This was the golden age of finance.
Bankers’ pay soared alongside profits – indeed, it grew even faster.
To paraphrase William Wordsworth, bliss was it in that dawn to be alive, and to be a derivatives trader was very heaven.
But the expansion came to a shuddering halt in 2008, the first year in decades in which aggregate financial assets fell, and there is still little sign of a sustained recovery.
Is this a short-term phenomenon?
Will the financial sector return to pre-crisis growth rates when the economic situation has been fully stabilized?
Will financial “deepening” continue?
Will bank stocks once again outperform the market?
A recent study by Andy Haldane and others at the Bank of England casts doubt on the prospect of a return to the status quo ante.
They note that the Golden Age was in fact an unusual period, if you look at the last two centuries of economic history.
Haldane bases his analysis on the trend in the Gross Value Added (GVA) of the financial sector.
Over the last 160 years, the GVA of finance has grown by two percentage points a year faster than that of the economy as a whole.
But this excess growth has not been evenly spread.
During the two decades leading up to World War I, the financial sector grew almost four times faster than the economy, in the first wave of financial deepening and globalization, but from 1918 until the 1970’s, finance expanded less rapidly than average economic growth.
Only when markets were deregulated and liberalized from the early 1970’s onwards did finance once again leap ahead.
In the US, financial sector GVA was only 2% of the total in the 1950s, but stands at 8% today.
Haldane believes that this growth spurt is well and truly over.
He argues that much of the apparent growth in value added has in fact been illusory, based on increased leverage, excess trading, and banks writing deep out-of-the-money options – for example, credit-default swaps (a $60 trillion market in 2007). “What all these strategies had in common,” writes Haldane, “was that they involved banks assuming risk in the hunt for yield – risk that was often disguised because it was parked in the tail of the return distribution.”
From a regulator’s perspective, this is a powerful argument for requiring higher capital to constrain the risk that banks can take on.
Indeed, the Basel Committee plans to require more capital in the future, though the new requirements will be delayed, owing to concerns about the cost and availability of credit to sustain the recovery.
Against that background, it is hard to believe that we will quickly return to the heady growth in financial assets, credit, and risk we saw from the 1970’s to 2007.
Financial-sector returns are likely to be lower.
Returns of 20% on equity targets are a thing of the past.
And lower profitability will reduce pay more effectively than any direct regulatory controls.
For most of us, unless we remain seriously overweight in financial stocks, this may not be a bad prospect.
We do not want to inflate another asset-price bubble on the scale of the one that burst in 2007-2008.
But there is a risk for regulators and central banks.
If they over-constrain the financial sector, risk may migrate outside the regulatory frontier, where it will be harder to measure and monitor.
That is why it is important to maintain some flexibility, to allow currently unregulated institutions like hedge funds and private-equity funds to be swept into the regulatory net if they become large and systemically important.
The tighter their controls on risk in banks, the more frontier police the regulators will need.
After the Greek Default
CAMBRIDGE – The Greek government, the European Commission, and the International Monetary Fund are all denying what markets perceive clearly: Greece will eventually default on its debts to its private and public creditors.
The politicians prefer to postpone the inevitable by putting public money where private money will no longer go, because doing so allows creditors to maintain the fiction that the accounting value of the Greek bonds that they hold need not be reduced.
That, in turn, avoids triggering requirements of more bank capital.
But, even though the additional loans that Greece will soon receive from the European Union and the IMF carry low interest rates, the level of Greek debt will rise rapidly to unsustainable levels.
That’s why market interest rates on privately held Greek bonds and prices for credit-default swaps indicate that a massive default is coming.
And a massive default, together with a very large sustained cut in the annual budget deficit, is, in fact, needed to restore Greek fiscal sustainability.
More specifically, even if a default brings the country’s debt down to 60% of GDP, Greece would still have to reduce its annual budget deficit from the current 10% of GDP to about 3% if it is to prevent the debt ratio from rising again.
In that case, Greece should be able to finance its future annual government deficits from domestic sources alone.
But fiscal sustainability is no cure for Greece’s chronically large trade deficit.
Greece’s imports now exceed its exports by more than 4% of its GDP, the largest trade deficit among eurozone member countries.
If that trade gap persists, Greece will have to borrow the full amount from foreign lenders every year in the future, even if the post-default budget deficits could be financed by borrowing at home.
Eliminating or reducing this trade gap without depressing economic activity and employment in Greece requires that the country export more and import less.
That, in turn, requires making Greek goods and services more competitive relative to those of the country’s trading partners.
A country with a flexible currency can achieve that by allowing the exchange rate to depreciate.
But Greece’s membership in the eurozone makes that impossible.
So Greece faces the difficult task of lowering the prices of its goods and services relative to those in other countries by other means, namely a large cut in the wages and salaries of Greek private-sector employees.
But, even if that could be achieved, it would close the trade gap only for as long as Greek prices remained competitive.
To maintain price competitiveness, the gap between Greek wage growth and the rise in Greek productivity – i.e., output per employee hour – must not be greater than the gap in other eurozone countries.
That will not be easy.
Greece’s trade deficit developed over the past decade because Greek prices have been rising faster than those of its trading partners.
And that has happened precisely because wages have been rising faster in Greece, relative to productivity growth, than in other eurozone countries.
To see why it will be difficult for Greece to remain competitive, assume that the rest of the eurozone experiences annual productivity gains of 2%, while monetary policy limits annual price inflation to 2%.
In that case, wages in the rest of the eurozone can rise by 4% a year.
But if productivity in Greece rises at just 1%, Greek wages can increase at only 3%.
Any higher rate would cause Greek prices to rise more rapidly than those of its eurozone trading partners.
So Greece faces a triple challenge: the fiscal challenge of cutting its government debt and future deficits; the price-level challenge of reducing its prices enough to wipe out the current trade gap; and the wage-productivity challenge of keeping future wage growth below the eurozone average or raising its productivity growth rate.
Ever since the Greek crisis began, the country has shown that it cannot solve its problems as the IMF and the European Commission had hoped.
The countries that faced similar problems in other parts of the world always combined fiscal contractions with currency devaluations, which membership in a monetary union rules out.
A temporary leave of absence from the eurozone would allow Greece to achieve a price-level decline relative to other eurozone countries, and would make it easier to adjust the relative price level if Greek wages cannot be limited.
The Maastricht treaty explicitly prohibits a eurozone country from leaving the euro, but says nothing about a temporary leave of absence (and therefore doesn’t prohibit one).
It is time for Greece, other eurozone members, and the European Commission to start thinking seriously about that option.
After the Guns of August
The Middle East is a place where the dust hardly ever settles.
When it occasionally does, even for a short interval – as UN Resolution 1701 for cessation of hostilities in Lebanon seems to be holding – it is time to take stock of events in the hopes that a responsible debate may influence those in power.
Let’s start with the United States.
President George W. Bush has been short on neither initiatives nor catchy slogans and acronyms.
Recent years are littered with them: “Global War on Terror” (GWOT), “Road Map,” “Middle East Partnership Initiative “ (MEPI), “Broader Middle East and North Africa” (BMENA) – originally “Greater Middle East Initiative (GMEI) – Democracy Assisted Dialogue (DAD), and so on.
His latest reverie, envisioned in the thick of the recent fighting between Israel and Hezbollah, was the New Middle East (NME), with US clients Israel, Egypt, Jordan, and Saudi Arabia serving as the pillars of regional order.
But like all his previous initiatives since the terrorist attacks on New York and Washington almost five years ago now, the NME ran into trouble from the outset.
Secretary of State Condoleezza Rice announced its birth while rejecting an immediate ceasefire in Lebanon.
Her poor timing made the initiative appear heartless, as thousands of civilians were being uprooted, killed, or maimed by Israel’s efficient but ruthless artillery and air force.
This so embarrassed the three Arab NME partners that each raced to distance itself from the US-sponsored initiative.
Saudi Arabia, which had remained silent for nearly two weeks, did so with a $500 million contribution to rebuilding devastated areas of Lebanon and another billion to support Lebanon’s threatened currency.
Egypt’s heir apparent Gamal Mubarak followed suit in the fourth week of the fighting by heading a 70-member delegation on a solidarity visit to Beirut.
But, rather than earning him the respect of an outraged Egyptian public, revelations in the opposition press that his plane had to obtain a safe passage and authority to land from the Israelis garnered only howls of derision.
As for America, anything it touches in the Middle East has become radioactive, even for longstanding clients and friends.
In the course of maneuvering to delay the UN ceasefire, Bush and Rice continually reiterated the need for a Security Council resolution that deals forcefully with “the roots of the problem.”
Of course, for them and for Israel, this was Hezbollah and the need to eradicate or at a minimum disarm it and force its fighters to a safe distance from settlements and towns in northern Israel.
While this is a reasonable demand, the rest of the Middle East – and, indeed, much of the world, including Europe – regard the root cause of the conflict as Israeli intransigence and arrogance, together with America’s blind support for it.
Both America and Israel have cited foot-dragging in implementing UN Resolution 1559, which calls for disarming all non-state actors in Lebanon and the deployment of government forces all the way to the southern border.
But for years the US and Israel have not uttered a word about the dozens of UN resolutions, going back as far as Resolution 49 on partition in 1947, which called for the establishment of distinct Arab and Jewish states on roughly half of Mandated Palestine.
This and numerous other resolutions seeking redress for injustices toward Palestinians have been ignored by the US.
Thus, for 300 million Arabs and more than one billion Muslims the “root cause” of the Middle East conflict is not Hezbollah.
As its leader, Hassan Nasrallah aptly put it, “We are just a reaction to chronic injustice.”
It may well be that there is more than one root cause – every party to the conflict has a favorite one.
There is no point in belaboring whose pain is greater or whose root cause is deeper.
In fact, arguing over grievances merely drives the sides further apart.
The long overdue UN Resolution 1701 may, with its adoption, indicate that all parties are fatigued, or could no longer withstand international pressure.
This is good news for all concerned and provides an opportunity to tackle each party’s “root cause.”
Seizing the opportunity requires that humility rather than moral supremacy prevails.
Empathy, not ethnocentrism, should be the order of the day now that the guns are falling silent and we have rediscovered the limits of military force.
But if we have learned anything at all from the tragic assassinations of the region’s greatest peacemakers, Anwar Sadat and Yitzhak Rabin, it is that the guns do not remain silent for long.
During any lull, a fanatic from either side could jump to center stage and, through an act of utter madness, kick up the settling dust and dash the hopes of the many on both sides who still long for a lasting peace.
After the Millennium Development Goals
CAMBRIDGE – In 2000, 189 countries collectively adopted the United Nations Millennium Declaration, which evolved into a set of concrete targets called the Millennium Development Goals (MDGs).
These ambitious targets – ranging from halving extreme poverty and reducing maternal mortality by three-quarters to achieving universal primary schooling and halting (and beginning to reverse) the spread of HIV/AIDS – are supposed to be met by the end of 2015.
As the deadline approaches, development experts are debating a new question: What comes next?
It is virtually certain that many of the MDGs will not have been met by the end of 2015, but there have been striking successes in some areas.
For example, the goal of halving extreme poverty (measured by the number of people living on less than $1.25 a day) will likely be achieved ahead of time, largely thanks to China’s phenomenal growth.
At the same time, there is little evidence to suggest that those successes were the result of the MDGs themselves.
China implemented the policies that engineered history’s greatest poverty eradication program prior to, and independently from, the Millennium Declaration and the MDGs.
Clearly, however, the MDGs were a public-relations triumph, which is not to belittle their contribution.
Like all worthwhile PR efforts, the MDGs served to raise awareness, galvanize attention, and mobilize action – all for a good cause.
They amplified the global conversation about development and defined its terms.
And there is evidence that they got advanced countries to pay more attention to poor nations.
Indeed, the MDGs possibly had their clearest impact on aid flows from rich to poor countries.
A study by Charles Kenny and Andy Sumner for the Center for Global Development in Washington, DC, suggests that the MDGs not only boosted aid flows, but also redirected them toward smaller, poorer countries, and toward targeted areas like education and public health.
However, aid was not directly linked to performance and results, and it is much more difficult to know whether it had the desired impact overall.
The MDGs encompass eight goals, 21 targets, and 60 indicators.
Much criticism has focused on the use of these numerical targets and indicators, which, skeptics argue, are misspecified, mismeasured, and divert attention from equally important areas.
But these complaints miss the point.
Any effort that is concrete and implementable needs to monitor the results, and setting clear numerical targets is the best way to do so.
Still, a central paradox plagues the MDGs.
The Millennium Declaration was meant to be a compact between the world’s rich and poor countries.
Poor countries promised to refocus their development efforts while rich countries pledged to support them with finance, technology, and access to their markets.
But, oddly, of the eight goals, only the last one deals with “global partnership,” or what rich countries can and should do.
Even here, the MDGs contain no numerical target for financial aid or any other aspect of rich countries’ assistance, in contrast to the highly specific poverty-related targets set for developing countries.
It is perhaps telling that the “progress charts” prepared by the United Nations Development Program, the agency charged with reporting on progress toward achieving the MDGs, track only Internet usage under that goal.
Why we need a global effort to convince developing countries to do what is good for them is not clear.
Poverty reduction and human development should be the first order of business for governments in these countries, with or without the MDGs.
It is true, of course, that these governments often pursue different goals, for political, military, and other reasons.
But it is wishful thinking to believe that they can be persuaded to act otherwise by international declarations that lack enforcement mechanisms.
If we have learned one thing in the development business, it is that real reform cannot be bought with donors’ money, let alone with vague promises of money.
Equally problematic, the MDGs implicitly assume that we know how to achieve development targets, and that only resources and political will are missing.
But it is doubtful that even well-intentioned policymakers have a good handle on, say, how to raise secondary-school completion rates sustainably or reduce maternal mortality.
Many development economists would argue that significant improvements in governance and political institutions are required before such goals can be achieved.
The most that rich countries can do is to provide an enabling environment for the benefit of developing countries that are willing and able to take advantage of it.
These considerations suggest an obvious direction for the next iteration of the MDGs.
First, a new global compact should focus more directly on rich countries’ responsibilities.
Second, it should emphasize policies beyond aid and trade that have an equal, if not greater, impact on poor countries’ development prospects.
A short list of such policies would include: carbon taxes and other measures to ameliorate climate change; more work visas to allow larger temporary migration flows from poor countries; strict controls on arms sales to developing nations; reduced support for repressive regimes; and improved sharing of financial information to reduce money laundering and tax avoidance.
Notice that most of these measures are actually aimed at reducing damage – for example, climate change, military conflict, and financial crime – that otherwise results from rich countries’ conduct.
“Do no harm” is as good a principle here as it is in medicine.
This kind of reorientation will not be easy.
Advanced countries are certain to resist any new commitments.
But most of these measures do not cost money, and, as the MDGs have shown, setting targets can be used to mobilize action from rich-country governments.
If the international community is going to invest in a bold new public-relations initiative, it might as well focus on areas where the potential payoffs are the greatest.
After the Promised Land
LONDON – At the height of the Arab uprisings last spring, many Europeans were gripped by nightmare visions of a tsunami of migrants crashing against the continent’s shores.
The wave never hit, but its specter fed a tenacious anti-immigrant populism that has concealed an important new trend: migration to Europe – and to the United States – has largely stalled.
In many countries, more immigrants are leaving than are arriving, owing mainly to the economic crisis that has drained jobs in the West.
That reversal is one of the great under-reported stories of 2011 (and of the preceding two years), and the numbers are startling. Consider Spain, which is on track to lose more than a half-million residents by 2020.
By contrast, between 2002 and 2008, Spain’s population grew by 700,000 a year, driven largely by immigration.
The trends are similar elsewhere in Europe.
While this fact alone will not quiet opponents of immigration, it does give countries more breathing room to repair and strengthen badly broken systems for receiving and integrating newcomers.
Although rapidly aging Western countries are unable to attract the immigrants they need, they allow millions who are already there to suffer discrimination and abuse.
Detentions and deportations take place under sometimes terrible conditions.
Meanwhile, the international community collectively fails to protect vast populations of vulnerable migrants, such as the millions stranded by the recent conflicts in North Africa.
Undoubtedly, rising anti-immigrant populism must be confronted.
While polling suggests that attitudes are influenced more by ethnicity than religion, both help to define identities and mindsets.
Political parties in France, Switzerland, and the Netherlands (to name a few) have run successful campaigns that scapegoat immigrants.
Moreover, governments from Alabama to Hungary are passing laws that undermine what should be migrants’ rights.
Italy recently adopted harsh “emergency” decrees that target migrants by making undocumented entry and residence a criminal offense.
Anti-immigrant rhetoric from the political extremes has fed into mainstream political discourse.
European leaders trip over themselves to declare, one more forcefully than the next, that multiculturalism is dead.
Dutch politician Geert Wilders, whose Freedom Party is informally part of the governing coalition, did them one better by being charged with incitement to anti-Muslim hatred.
In the US, alligator-filled moats and electrified border fences have featured in the current presidential campaign.
Such attacks on immigration might offer some instant political gratification, but their net result is to cleave societies whose cohesion is already seriously challenged by the economic crisis.
Growing discrimination in employment, housing, and education affects not just immigrants and their children; it harms our societies as a whole.
With the lull in net immigration, we now have a window of opportunity to address these shortcomings.
Debunking the myths about migration – that most immigrants enter unlawfully, for example, or that immigration displaces existing workers – would be a good place to start.
It would also be useful to explain that immigration is necessary for prosperity and growth in almost all OECD countries.
If aging societies in the West and elsewhere (like Japan) fail to get immigration right, they will be woefully unprepared when they confront the real tidal wave: the retirement of baby boomers in the coming two decades.
The gaps in these countries’ labor markets – from software specialists to physicians to home health aides – will be immense.
The European Union’s labor force will decline by almost 70 million workers in the next 40 years; in the absence of significant net immigration (combined with a much higher retirement age), European economies and social safety nets will shrivel.
The priorities are clear.
We need to understand better how our economies will evolve in the coming decades, and to redesign our educational systems to produce workers with usable skills.
And, where it is clear that immigrants will be needed, we must be able to identify, welcome, integrate, and protect them.
Meanwhile, our most fundamental institutions – schools, police, and the courts – must be re-engineered to reflect and respond to the diversity of our communities, which is now a fact of life.
Countries must learn to work together to achieve these goals, few of which can be reached by going it alone.
If our toolbox were empty, our inaction might be understandable.
But examples of smart migration practices abound.
Canada and the Philippines, for instance, have a well-functioning accord that protects the rights of temporary workers.
Sweden has developed legislation that minimizes bureaucracy for companies that need foreign workers.
And important advances have been made in ensuring that immigrant children receive the education that they need to become full members of society.
Progress is being made on the global level as well, despite the economic crisis and populist headwinds.
In June, the International Labor Organization’s member states overwhelmingly approved the Domestic Workers Convention, which will significantly increase protections for a vulnerable group of workers –&nbsp;the majority of whom are migrants.
Meanwhile, the Global Forum on Migration and Development, established in 2007, has quickly become an important means of fostering knowledge and partnerships.
The reason for growing international cooperation is simple: countries everywhere are affected by migration, and, increasingly, they are experiencing immigration and emigration simultaneously.
Indeed, roughly one-third of migrants nowadays move between developed countries; one-third move between developing countries; and only one-third move from the developing to the developed world.
Highly skilled workers, such as bankers and engineers, are flocking to China.
Mexico, known primarily as a country of emigration, is home to millions of migrants from Central America.
Millions of people in Southeast Asia venture to the Middle East to work, but millions more cross borders within the region.
The list goes on.
When it comes to migration, we are all in the same boat – and that boat is leaking.
Starting in 2012, countries should redouble their efforts to fix it.
After the Taliban
``Failed state'' is a term applied frequently to Afghanistan and is often deemed the cause for why terrorists gained such influence there.
But a country does not fail of its own volition, nor is it weakened by unknown causes.
A country fails, when it fails, for definite, identifiable reasons.
These must be addressed if Afghanistan is to be revived.
Twenty years of invasion, civil war, and drought have left Afghanistan's institutions in ruin.
Millions of Afghans huddle in refugee camps or are displaced from their homes.
Land-mines defile the countryside.
Millions are sick and poor; many live at starvation levels.
For these and many other reasons, rebuilding Afghanistan's economy will require not only economic reconstruction but an effort to reinvent the country's political and cultural institutions.
Such a massive effort will be doomed to failure, however, if Afghanistan's neighbors intervene in ways that promote economic upheaval all over again.
Afghanistan is no place for quick fixes.
Rebuilding the country cannot be done cheaply.
Any thought that the anti-terror coalition will be able to bail out fast (as the West did when it abandoned Afghanistan to its fate after the Soviet withdrawal ten years ago) should be forgotten.
The West must stick with Afghanistan until its reconstruction is established.
Otherwise, it runs the risk of renewed chaos and violence, but this time in a more destabilized region, as Pakistan's current problems demonstrate.
Three problems are of immediate concern, the most important being feeding the Afghan people - both within the country and in refugee camps outside Afghanistan.
Humanitarian aid is being delivered, but a distribution system safe from the predations of Afghanistan's warlords needs to be built.
Indeed, the warlords have been given too big a say in distributing aid already, and it may be hard to strip them of this power.
But stripped they must be.
The second problem involves relocating Afghan refugees now living in Pakistan and Iran, as well as those displaced within Afghanistan.
To achieve this goal, the agricultural economy must be revived in order to revive this industry, providing jobs and food for people.
A massive impediment here is the millions of mines left over from the Soviet invasion that must be removed.
The West has a big incentive to be generous to Afghanistan's rural poor.
Starving farmers, if unassisted, may return to cultivating a very reliable cash crop: the opium poppy, long a staple of the warlord economy.
Eliminating it will not only help farmers and the West as it tries to curtail heroin use, but also Afghanistan's infant government as it struggles to assert its national authority against the warlords.
A bankrupt warlord, after all, cannot buy weapons or bribe people to maintain their loyalty.
Major infrastructure investments will also be needed if the economy is to be revived.
Housing, particularly for returning refugees, will need to be constructed fast.
Cities such as Kabul, Mazar, Herat and others will need to be rebuilt as centers of economic and cultural life.
Village housing must be provided at a massive level.
Roads, airports and communications systems must also be revitalized if trade is to be restored.
The educational system needs to be rebuilt almost from scratch, and with so many women anxious to return to teaching, a revived educational system will also help Afghanistan's democratic politicians gain a powerful lobby of workers.
Particular attention should be given to elementary schools and libraries outside of cities.
Afghanistan poses particular difficulties in reconstruction, as it is not a society with a strong political center.
Planners should take advantage of the country's decentralized nature and emphasize private sector participation in reconstruction.
A decentralized system will respond better to local needs and avoid an over-bureaucratic public sector.
But autonomous economic regions should be avoided as a threat to Afghan national unity because they would play into the hands of the warlords.
Moreover, poorer regions would do badly in such a system.
In the long run, Afghanistan has resources that can be exploited.
There is the potential for oil and gas exploration, and of mining iron ore and precious metals.
These activities should be explored in a framework of economic development across Central Asia.
Afghanistan, indeed, must be integrated into the regional pipeline and other development schemes.
Afghans can contribute in a tangible way here by reopening the North-South route connecting the resource rich economies of Central Asia to densely populated India and Pakistan.
None of this will be possible unless Afghanistan's young males are disarmed and given productive work.
Essential here, is to attract expatriate Afghans with skills and professional achievements to help in rebuilding the country by establishing small firms that will suck up the unemployed.
Expatriate involvement will also likely support the rights of women to participate fully and legally in economic and political life, as was the case before 1978.
Finally, donor countries must apply the lessons learned in restoring the war-ravaged states of the former Yugoslavia.
Grants and planning must be coordinated, and the consent of Afghanistan's neighboring countries assured.
If the latter are ignored, regional interests can incite chaos once again.
An international conference on Afghanistan should be called by the US and held under UN auspices.
It must affirm not only Afghanistan's territorial integrity, but insure that donor commitments meet the scale of the job and that these promises are kept.
A decade ago, the West turned its back on Afghanistan and chaos ensued.
To abandon the country again would be criminal folly.
After the War on Terror
NEW YORK – The basic outlines of Barack Obama’s approach to foreign policy became clear in 2009.
His administration believes that the United States should talk with other governments even if it disagrees profoundly with their character.
He prefers acting with other countries to going it alone.
And he has shifted the focus of US foreign policy from what countries do within their borders to how they act beyond them.
All of this differentiates Obama from his immediate predecessor, George W. Bush, whose administration branded selected countries as evil and mostly refused to deal with them; often rejected cooperation with other governments, lest the US find itself constrained; and sought to transform other countries, rather than to influence their actions.
Any parallels between Obama’s foreign policy and that of Bush are more with the father, America’s 41st president, George H.W. Bush.
Diplomacy, of course, should not be viewed as a favor or concession that signals “softness.”
Obama rightly recognizes that it is an important tool of foreign policy, to be employed when it promises results that are more favorable than the alternatives.
Obama is also correct that acting in concert with others is almost always desirable.
The challenges that most define this era – nuclear proliferation, terrorism, global climate change, and pandemic disease – can be managed only collectively.
Moreover, the reality is that the US is now too stretched economically and militarily to succeed by relying solely on its own resources.
Finally, Obama is right to focus more on the behavior of countries than on their nature.
It is not just that the assistance of odious governments is sometimes essential; it is also that there is nothing more difficult than remaking the internal workings of other societies.
Yet, even with these adjustments, and despite Obama’s communication skills and his personal popularity (reflected in his Nobel Peace Prize and in declining anti-Americanism around the world), 2009 was a difficult first year for his administration’s foreign policy.
To begin with, a willingness to talk to governments does not always translate into an ability to work with them.
The US has shown new flexibility with Iran and North Korea, but neither has reciprocated so far.
Reasonableness does not always yield results.
Similarly, countries often choose not to cooperate.
China, for example, resists using its influence with North Korea, fearing that instability on the Korean peninsula could lead to large refugee flows into China or a united Korea allied with the US.
China prefers an imperfect status quo to such alternatives.
For its part, Russia appears reluctant to pressure Iran to reining in its nuclear ambitions.
Obama has worked hard to improve US-Russian ties: bilateral arms control is again a priority, and the president agreed to alter plans for anti-missile deployments in Poland and the Czech Republic.
But Russian leaders resist tough sanctions on Iran, lest they jeopardize financial dealings there and lead to increased Iranian support for Muslim minorities inside Russia.
As a result, it will be difficult in 2010 and beyond to develop an effective package of sanctions and incentives that enjoys broad international backing.
Similarly, when it came to negotiating a new pact to mitigate global climate change, diplomatic efforts had to contend with international discord in 2009, forcing leaders to postpone their efforts yet again.
With developing countries fearing the impact of binding limits on carbon emissions on their economic growth, and with insufficient support in the US Congress, a global treaty appears unlikely in 2010 as well.
In the Middle East, despite Obama’s vow to re-start the Israeli-Palestinian peace process, progress remained stymied by differences over the scope and content of an agreement and how to bring it about.
The lack of forward movement stems not just from disagreement over goals, but also from the inability of a divided Palestinian leadership to compromise.
Weak protagonists make poor participants in peace negotiations.
Moreover, other countries’ domestic politics do matter for what Obama can accomplish.
Afghanistan’s often corrupt and incompetent government undermines counter-insurgency efforts there.
Pakistan’s government does not share the same threat assessments or priorities as its American benefactor.
No amount of increased American military effort is likely to offset the resulting lack of progress in weakening extremists in both countries.
Domestic politics in the US is also getting in the way of Obama’s foreign-policy goals.
The absence of consensus on climate change, or resistance in Congress to new trade agreements, weakens the president’s hand.
And America’s unwillingness to take meaningful steps to reduce its ballooning fiscal deficit further undermines the effectiveness of its foreign policy.
Finally, some of what the Obama administration chose to do (singling out Israeli settlements, for example) and how it did it (Guantánamo comes to mind) made tough situations tougher.
But the larger truth is that the world has become a more difficult place to manage, much less to lead.
The post-Cold War era of US unipolarity has ended, owing to America’s economic mismanagement, the war in Iraq, the continuing rise of other countries, and globalization.
There are bright spots, of course.
America’s relations with other major powers – China, India, Japan, Russia, Europe, and Brazil – are at least as cooperative as they are competitive; conflict between such major powers, the dominant characteristic of the international order in the twentieth century, is unlikely.
It is also possible that some of today’s most closed countries, including Iran, North Korea, Burma, Cuba, and Venezuela, will become more open and less threatening with time.
On balance, though, early evidence suggests that this will not be an era of smooth multilateralism or American leadership.
Something more complicated, and unwieldy, appears increasingly likely.
Barack Obama’s next three years in office (or seven, if he is re-elected in 2012) will likely be characterized as much by frustration as by accomplishment.
A Future for the World\u0027s Coral Reefs?
Coral reefs are the world's most biologically rich marine ecosystems, harboring some of the world's most beautiful organisms.
They provide the principal source of protein for over ten million people worldwide.
Reef-based activities (principally fishing and tourism) form the economic livelihood of millions more.
Clearly, the human costs of a worldwide breakdown of these ecosystems are enormous.
Yet global deterioration of coral reefs is severe and ongoing.
Wholesale disintegration of reef ecosystems has occurred in some places, and collapse on a worldwide scale is a real risk.
But there is some good news, too: we know what steps the international community can take now to protect and restore reefs' ``resilience''-- their capacity to maintain integrity in the face of the environmental fluctuations that are a natural part of life in any ecosystem.
We must mediate the severity of global warming, while simultaneously conserving the resilience of coral reefs.
Historically, the principal agents of reef degradation have been over-fishing and pollution, not global warming.
In healthy ecosystems, when prey numbers decline, predators become malnourished, and their numbers decline, too, giving their prey a chance to recover.
But human predators are different. When our prey numbers decline, their economic value tends to increase, so fishing intensifies.
This means that once predator species become depleted, fishing pressure shifts towards plant-eating fish species, leading to precipitous declines in the numbers of herbivores on coral reefs.
Herbivorous fish are key players on coral reefs.
When coral populations decline in the aftermath of cyclones, diseases, and other disturbances, it is the herbivores that keep seaweed in check, and allow coral populations to recover.
Without them, fast-growing seaweed quickly monopolizes space on the reef, preventing restoration of healthy quantities of coral cover.
Because corals provide the habitat structure on which other reef organisms depend, the decreases in coral cover lead to big decreases in a reef's biodiversity.
Pollution by nutrients and toxins from adjacent land areas further vitiate coral populations' ability to recover, giving seaweed an even greater competitive edge.
Corals are formed by a symbiosis between an animal and a one-celled plant.
The animal provides shelter and nutrients for the plant; the plant converts sunlight into energy, which it shares with the animal.
For reasons that are not yet fully understood, this partnership breaks down when corals experience unusually high temperatures.
The plant is expelled, and corals turn a brilliant white color.
If temperatures soon return to normal, the partnership can be restored.
But if corals remain ``bleached'' for too long, they die.
For many species of coral, this bleaching threshold is usually only a couple of degrees centigrade above the typical maximum temperature for a given location.
Interpreted in light of even the most optimistic global warming scenarios, this is disturbing news.
If coral bleaching thresholds remain steady, local summer temperatures will exceed those thresholds regularly within a few decades.
Corals grow slowly, so reefs sustaining severe bleaching will not recover before they bleach again.
Fortunately, there is evidence that bleaching thresholds evolve.
Most coral species have broad geographical distributions, and bleach at different temperatures depending on location.
Many species that bleach at 28
Two things can be done to protect coral reefs.
The first is obvious: minimize global warming by, say, honoring the Kyoto Treaty's emissions targets.
Second, we must restore coral reefs' capacity to cope with environmental change--their resilience--by protecting the fish stocks that keep seaweed in check, and thereby facilitate the recovery of coral populations from bleaching.
These recovery phases enable adaptations to higher temperatures to spread.
Without fish, seaweed dominance will prevent that recovery.
The catastrophic collapse of fish stocks around the world--on coral reefs and elsewhere--has provided hard lessons about managing fisheries.
Many intensively regulated fisheries have collapsed along with the unregulated ones.
So there is a growing consensus that standard techniques for managing fisheries must be complemented with a system of ``no-take zones''--areas in which fishing is prohibited altogether.
As fish populations in these no-take zones recover, they create ``spill-over'' effects, with catches often increasing in areas outside the no-take zones.
More importantly, they provide a refuge for fish populations, a kind of insurance policy against stock collapse.
On coral reefs, these no-take zones can help insure that a portion of coral reef habitat sustains a healthy fish community, and secure the coral reef resilience that this brings.
Scientific evidence indicates that, to be effective, 30-50% of available habitat should be set aside as no-take zones.
This figure is far higher than levels of protection in even the wealthiest countries that harbor significant coral reefs, the US and Australia, where current levels of protection are less than 5%.
Given the magnitude of the threat to the world's coral reefs, the international community's response has been frighteningly slow.
But there is some encouraging news: in June, Australia's government proposed a major increase in no-take areas within the Great Barrier Reef to over 30%.
If adopted, this policy would set a new global standard and perhaps prompt other nations to follow suit.
The future of tropical marine ecosystems, and the millions of people whose lives are linked to them, depend on it.
A Future without Precedent
JERUSALEM – In my nearly nine decades of life, I cannot recall a time in which the past was so irrelevant to policymaking.
All of today’s significant developments went unpredicted by anyone.
Experts studied the past, but, constrained by old paradigms, they could not discern the future.
Today’s dynamic complexity, in which a science-based, fast-changing global economy makes so many more phenomena interdependent, prevents us from foreseeing the future through linear extrapolations of the past.
The only certainty is that the future will be defined by scientific progress and innovation, which cannot be known ahead of time.
As a result, the traditional power of states and leaders is declining; in today’s global economy, innovators, not politicians, wield the most influence.
The globalized economy affects every state, yet no single state can determine the outcomes, because science and technology are borderless.
Global companies wish to do business worldwide, eroding not just sovereignty, but also racism and prejudice, as well as significantly weakening nationalism.
This transformation has placed the world in the hands of a younger generation, more technologically savvy than their parents and connected to one another through social networks that are not confined by territory, language, or government.
The young leaders who created Facebook and Google have had a greater global impact than many statesmen and generals.
These young people are also the leaders of erupting political protest movements.
The “Arab Spring,” the tent demonstrations in Israel, Occupy Wall Street, and the protests in Russia reveal not a clash of civilizations, but a battle of generations.
The young generation understands that the way states and economies are currently run is unfit for the new era.
Yet there are political “hitchhikers” who want to exploit the recent awakening, not by promoting an agenda of freedom, but by imposing a different type of coercion.
In the Arab world, it is mainly extreme Islamists who are hijacking the young generation’s wave, stealing their revolution.
Israel has reacted positively to the will of the young generation, but it cannot and should not intervene in events in the Arab world.
Our hearts are with the rebelling youngsters and their legitimate yearning for freedom and basic rights to express themselves, choose their leaders, and earn their own living.
Israelis wait for the day when our country will no longer be the region’s only democracy, because being an island of prosperity in a sea of poverty is unnatural.
Yet there is a real concern that the extremists, who are politically well organized, are seeking to gain control by the ballot over less-organized liberals, thus preventing peace and stability.
Fundamentalist radicals cannot provide real solutions to the region’s basic problems.
The social changes now underway threaten their way of life, which includes discrimination against women and a ban on modern education.
But only profound reforms of traditional authority can pave the way towards freedom and growth.
Israel can serve as an example to others striving to reach economic prosperity and social freedom, because its success is due to the fact that the country had absolutely nothing at the start.
We returned to our homeland, rich with history, but devoid of natural resources.
Israel was left with only one resource: its human capital.
So we invested in education and science, and today we have the world’s highest percentage of scientists and patents per capita.
Roughly 95% of our agriculture is hi-tech.
We use less water and yield more crops per acre than any other country in the world.
What Israel can do, others can do as well.
We will gladly offer a helping hand to whoever is willing to reach for it.
Together, in peace with our neighbors, we can create a region of hope, development, and success.
In particular, we must do everything in our power to end the conflict with the Palestinians.
Israel was not born, and it is not Israel’s destiny, to govern another people.
We are sincerely interested in the establishment of a Palestinian state living peacefully side-by-side with Israel, the democratic state of the Jewish people.
For us, peace is both a moral imperative and a national-security strategy, because resolving the conflict would help to stabilize the region by neutralizing the extremists who seek to manipulate today’s popular movements to advance their radical agenda.
The international community can support these efforts by providing incentives to countries that choose freedom and progress.
At the same time, determined and decisive policies must be taken against extremists.
In particular, Iran is a fount of moral corruption that spearheads extremism and halts reform, crushing the legitimate protest of its own citizens and acting against the brave Syrians now fighting for their freedom.
Iran also uses proxies to instigate terror against moderate forces in the Palestinian Authority, Lebanon, and Iraq.
If Iran is successful in its plan to acquire nuclear weapons, its leaders could shake the Middle East and encourage more extremism and violence.
Israel will defend itself if Iran continues to call for its destruction.
However, the threat is not to Israel alone;
Iran is a danger to the peace and stability of the entire world.
The world’s democracies have declared that they will not allow Iran to possess nuclear arms; it is their duty to follow through on that commitment, before doing so becomes impossible.
Beyond the short-term challenges ahead, we all have a duty to profoundly change the way we prepare our children to cope with today’s new world.
In an era where yesterday has become almost irrelevant and we can hardly predict tomorrow, the role of education must allow all children to reach their highest potential.
Today’s educators should inspire our children towards creativity and innovation.
Self-expression is as important as free expression.
I write this in the 88th year of my life, but not because I have learned from experience.
On the contrary, experience is overrated, often constraining the courage needed to face tomorrow and build an unprecedented new world.
The future is already here; there is no point in looking back.
Against Simplification
NEW YORK – It is said that Americans have a genius for simplification.
Gradually, however, the quest for it has become a global trend, one that continues to conquer new territories, just as blue jeans once did.
The speed of our daily life is visibly increased – and not for the better – by this unstoppable evolution.
The tyranny of pragmatism seems to mark all of the complex dilemmas of our time.
Too many valid choices are ignored or skirted through the routine of short-cuts.
Nowhere is this trend more damaging than in today’s mercantile approach to art.
Even the much-praised notion of competition seems fake and cynically manipulated by the “corporate” mentality that now pervades the world of culture – by the financial pre-selection that determines what publishers, producers, and other impresarios will support.
Just imagine what might have happened with the works of, say, Proust, Kafka, Musil, Faulkner, or Borges had they been subjected to mass-market competition like shoes or cosmetics.
Culture is a necessary pause from the daily rat race, from our chaotic and often vulgar political surroundings, and it is a chance to recover our spiritual energy.
Great books, music, and paintings are not only an extraordinary school of beauty, truth, and good, but also a way of discovering our own beauty, truth, and good – the potential for change, of bettering ourselves and even some of our interlocutors.
If this respite and refuge is gradually narrowed and invaded by the same kind of “products” as those that dominate the mass market, we are condemned to be perpetual captives of the same stunted universe of “practicalities,” the ordinary agglomeration of clichés packaged in advertisements.
I was thinking again about these old and seemingly unsolvable questions during my re-reading of a quite challenging novel by a close friend and a great writer, not very present in the vivid landscape of American letters of today.
The theme, style, and echo of his work says a lot, I think, about our simplified world.
The novel is Blinding, by Claudio Magris.
Hailed in Europe as one of the great novels of the twentieth century, Blinding arrived in America only after a great delay, and never received the attention that it deserved.
Unfortunately, that is no surprise.
The number of literary translations done nowadays in the United States is, according to a United Nations report, equal to that of Greece, a country one-tenth the size.
Imported books are thought to be too “complicated,” which is another way of saying that literature should deal with simple issues in a simple way, obeying the rules of the mass market, with its tricks of packaging, accessibility, advertisement, and comfort.
At the core of Magris’ book is the destiny of a group of Italian communists who travel to Yugoslavia after the Second World War to contribute to the construction of a socialist society, only to be caught in the conflict between Stalin and Tito.
They are imprisoned for their Stalinist allegiance; when they are finally allowed to return to Italy, their old comrades refuse to accept them.
The book’s plot spans two centuries of revolution.
Then, suddenly,
“the party vanished, overnight, as if all of a sudden a giant sponge had drained the entire sea, Adriatic and Austral, leaving litter and clots of mud, and all the boats stranded.
How can you go home again if the sea has been sucked down a vast drain that opened up beneath it, emptying it who knows where, into a void?
The earth is arid and dead, but there won’t be another one, nor another heaven.”
The solitude of the individual facing his faith alone, without collective illusions, and forced to do something with himself in the arid, noisy world tells us something important about the exiled world of modernity and its complex and contradictory problems.
Magris’s novel is not only an important literary achievement; it also has a deep connection to the dangers that we face now, particularly the wave of fanaticism, from Mumbai to Oslo, in the name of a holy war against the “other.”
Are all the extremists searching for a new coherence, for a lost illusion of togetherness and a new hope of resurrection?
Can we ever forget September 11, 2001, the start of a bloody century in which the mystical force of hatred and destruction has recovered its strength?
Are Osama Bin Laden’s minions, the bloody Hamas-Hezbollah battalions, or troubled loners like Timothy McVeigh, Theodore Kaczynski, and now Norway’s Anders Behring Breivik, the “heroes” of our contemporary nightmare?
Is this the “rebel” response to an overly globalized, incoherent, and ultimately disturbing reality?
If so, their barbarism demands scrutiny – in relation to both historical precedent and to our modernity – rather than merely being labeled “monstrous” (though it certainly is that).
The new religious militants, fighting in the name of their particular and peculiar God, seem as fanaticized as the Fascists, Nazis, and Communists of earlier decades.
Magris’s main character is a rebel in more than one embodiment: as Salvatore Cipico, one of the inmates in the communist concentration camp in Yugoslavia; as Jurgen Jurgensen, ephemeral king of Iceland and a convict forced to build his own jail; and as Jason, the mythic adventurer searching for the volatile truth.
A multilayered and complex chronicle of the devastating tragedies of the twentieth century, Blinding is an insistent, informed, and irreplaceable incursion into the moving landscape of the human soul, its wounds and voids, its vitality and versatility, its deep distortions and its unpredictable dynamics.
It is a fascinating story about the conflict between ideals and reality, or Utopia and humanness; about being faithful to a cause and betraying it; and about sacrifice and solidarity.
It is also a rich and original literary achievement that challenges today’s consumerist ethic.
By renouncing simplicity, it also repudiates today’s prevailing confusion of information with literature, of facts with creativity, and best-selling products with true works of art.
A Gasp from Europe
French President Jacques Chirac has alarmed the EU candidate countries of Central and Eastern Europe.
The French president has accused them of being "childish" and "irresponsible" in voicing their pro-US stance on the Iraq issue, and warned that their position could be "dangerous," as the decision to let them into the EU has not yet been ratified.
Quite a salvo.
Then the French president assumed the role of kindergarten instructor vis-à-vis what he called "badly brought up" candidate countries, telling them that they were "ill-behaved" and that "they missed a great opportunity to shut up."
To anyone who remembers that 40 years ago President Charles de Gaulle slammed Europe's door shut in the face of Britain's request to join the European community--the General thought the British too tied to the US to enter the European family--these remarks are worrying.
But put things in perspective: Jacques Chirac is not Charles de Gaulle; and Europe has moved far beyond the time when its agenda was unilaterally written by France.
President Chirac's self-appointed role as an expert in diplomatic good behavior cannot be taken seriously, even by those of us who know (and love) France.
Instead, his outburst is best explained as a sign of frustration over the fact that French influence in the EU is being diluted.
Like King Lear after he lost his kingdom, there is nothing France can do about its lost influence but rage impotently.
But this dispute within Europe goes deeper than the matter of France's lapsed primacy.
I have always been skeptical about the rhetoric of a "common" foreign policy for the EU.
How can you possibly expect a country such as, say, France to accept being voted down by its EU partners on vital foreign and security policy issues?
At best, Europe should hope for a "more common" foreign and security policy, even though this fails to answer Henry Kissinger's old question: If you want to speak to "Europe," whom do you call?
I have long worked to secure a "much more common" foreign policy within the EU.
Therefore I am worried by today's split within the EU as well as between some member countries and the US over Iraq.
When eight European leaders published their appeal to heal the growing transatlantic rift, they were accused of undermining European unity.
Nothing could be more incorrect.
They were only exposing the lack of unity that already existed.
It all began last autumn when German Chancellor Gerhard Schröder, desperate to hold on to power, made Iraq an issue in the German election campaign.
He played on Germany's well-known and respectable pacifist feelings.
But by declaring that he would not, under any circumstance, participate in military actions against Iraq, he undermined the efforts at the UN to put maximum pressure behind the demands that Iraq disarm.
Then France embraced Germany.
French ways in foreign policy are often murky and difficult to decipher, unless it is crystal clear where France regards its interests to lie.
Usually France likes to keep its options open.
But when the French and German governments celebrated the fortieth anniversary of the Elysée Treaty last month, France seemed to paint herself into a corner by supporting the German view.
All this was done without consultations between the French and German governments and their partners within the EU.
It was a demonstration of the special relationship between France and Germany that has for so many years been the driving force in European integration.
The history of Franco-German reconciliation is impressive indeed.
But it can no longer be taken for granted that other EU countries will automatically ratify the agreements that they reach between themselves as the lodestar for common policies.
This is particularly true when their objective is to establish an "alternative" to American leadership in security policy.
Enlargement of the EU with a number of Central and Eastern European countries will strengthen resistance to Franco-German initiatives in this direction.
The letter from the eight European leaders--and the later statement from the "Vilnius Ten" group of Central and Eastern European countries--demonstrated that France (and Germany) cannot dictate a European agenda that creates transatlantic rifts.
This has obviously caused frustrations.
But it should not have been a surprise to anyone.
The split within the EU and NATO has increased the risk of armed conflict with Iraq because the pressure on Iraq to comply with the UN resolutions was weakened.
Chirac and Schröder do not seem to grasp this.
So this has not been one of Europe's finest hours, especially not while the EU's institutional convention is discussing a text that calls for EU governments to "actively and unreservedly support the Union's common foreign policy."
The German acronym for the EU's "common foreign and security policy" is GASP.
That seems an entirely appropriate expression for what we have been witnessing.
A Gazan Education
GAZA – This was supposed to be my first year of medical school. Instead, I am stuck here in Gaza, in my father’s house inside the Jabalia refugee camp, with few options and no way out.
After I finished high school last year, I decided to become a doctor.
Gaza cries out for bone specialists, but the training I need is available only abroad.
When I won a place at a medical college in Germany, my parents were proud.
I was excited to follow my older brother, who is already studying there.
In February, the German authorities granted me an entrance visa.
I wasted no time in asking the Israeli authorities for permission to travel to Europe.
But I was told that only patients in need of emergency medical evacuation would be allowed out – not students.
Hundreds of other young people trapped in the Gaza Strip have won admission to study abroad.
For many of us, this is our only opportunity to continue our education.
Gaza is one of the most densely populated places on earth, and one of the poorest – 1.5 million of us live on a patch of land about 41 kilometers long and 6-12 kilometers wide.
The local hospitals lack the equipment needed to perform many important procedures, like radiation treatments for cancer patients and heart surgery.
Universities in Gaza are overcrowded and starved for supplies.
Many subjects are not even taught, and there are few post-graduate programs.
Instructors from abroad cannot enter Gaza.
Without the ability to go overseas, we cannot learn.
In June, after the United States pressured Israel to allow Fulbright scholarship winners to leave the Gaza Strip, the Israeli military announced that it would grant exit permits for a few more students with “recognized” scholarships – but not “hundreds.”
So hundreds of us are still waiting, most without prestigious scholarships to draw the world’s attention.
I am sure to be one of the many who will not be allowed to leave.
Life in Gaza has bled away my optimism.
My father is a teacher and owns a children’s clothing shop.
My mother is a housekeeper.
I have six brothers and three sisters.
We returned to Palestine in 1996 from Saudi Arabia, where my father had been working as a teacher.
That was at the height of the peace process.
My parents put their hope in the Oslo Accords signed in 1993, and decided that they could give us a better life here.
But when I was ten, the second
With the backing of the US, Canada, and the European Union, Israel has maintained its blockade in an attempt to defeat Hamas, which won the elections here in 2006.
But the blockade only makes people more desperate.
Hamas and other armed groups, I know, have launched rocket attacks from the Gaza Strip that have killed civilians in Israeli towns and villages.
But I also have witnessed how Israel has retaliated with air strikes and armed incursions into the Gaza Strip, including Jabalia.
Israel’s blockade amounts to collective punishment.
It is hurting all of us, whether we support Hamas or not.
It is also destroying my dream to write “Specialist in Bone Medicine” after my name.
Sometimes, I am sorry that I am from Gaza.
But my hope is still to go abroad, learn skills, and return to help others here.
Sometimes, when there is electricity, I watch television and see how people live in other places.
I ask myself why they have the opportunity to travel, to study, to take vacations, when I cannot go abroad even to learn medicine.
We are students, not soldiers.
We are not fighters in this conflict.
Why doesn’t Israel let us go study?
Why do Europe and America support a blockade of young minds?
Soon, my fellow classmates at the medical college will be starting classes.
When they do, I will probably still be here in my father’s house, waiting for the blockade to end.
A Gender Divided
OXFORD – The top and the bottom of the list of countries in Newsweek’s recent cover story, “The 2011 Global Women’s Progress Report,” evoke images of two different worlds.
At the top of the list – the “Best Places to be a Woman” – we see the usual suspects: Iceland and the Scandinavian countries, the Netherlands, Switzerland, and Canada.
On that planet, we see rankings in the upper 90’s for the survey’s five categories: justice, health, education, economics, and politics.
Women are out-earning men in college degrees (United States), domestic abusers are being banned from their homes and tracked with electronic monitors (Turkey), and female prime ministers are being elected (Denmark and Australia).
Now look at the other planet, “The Worst Places in the World to be a Woman.”
In Chad, the worst of the worst, woman have “almost no legal rights,” and girls as young as ten are legally married off, which is also true in Niger, the seventh worst place for a woman.
Most women in Mali – the fifth worst – have been traumatized by female genital mutilation.
In Democratic Republic of Congo, 1,100 women are raped every day.
In Yemen, you are free to beat your wife whenever you like.
Though it is stunning to see these two worlds in such stark and detailed relief, their existence is not news: development specialists and human rights groups have been calling attention to these inequities for years.
But the systemic oppression of women tends to be cast in terms of claims for empathy: we shouldn’t follow these policies because they are not nice, not enlightened.
Some development researchers have started to make a compelling case, too, that oppression of women impedes countries’ efforts to escape poverty.
But the data in the Newsweek list show that we need to frame this issue in stronger, more sweeping terms: When poor countries choose to oppress their own women, they are to some extent choosing their own continued poverty.
Female oppression is a moral issue; but it also must be seen as a choice that countries make for short-term “cultural” comfort, at the expense of long-term economic and social progress.
It is not politically correct to attribute any share of very poor countries’ suffering to their own decisions.
But it is condescending to refuse to hold many of them partly responsible for their own plight.
Obviously, the legacy of colonialism – widespread hunger, illiteracy, lack of property or legal recourse, and vulnerability to state violence – is a major factor in their current poverty.
But how can we blame that legacy while turning a blind eye to a kind of colonialism against women in these same countries’ private homes and public institutions?
When the poorest countries – most of them in Africa or with Muslim majorities – choose to sustain and even devise new policies that oppress women, we have to be willing to say that, in some measure, they are choosing the economic misfortune that follows.
The developed world’s silence suggests that it takes the mistreatment of black and brown women by black and brown men for granted, rather than holding all people to one standard of justice.
The “surprises” on the Newsweek list confirm that educating women boosts economic prosperity.
Many countries with histories of colonialism and other forms of tyranny, as well as countries without abundant natural resources, have chosen to educate women and grant them legal rights. Some continue to struggle economically, but none is abjectly poor – and some are booming.
Think of China, India, Malaysia, Indonesia, Brazil, South Korea, and Turkey.
The low status of women on Planet Worst cannot be blamed on cultural stasis: many of the “surprise” countries – Romania, Portugal, the Philippines, and India – treated women far more unequally a mere 50-100 years ago.
In Pakistan, marital rape is not illegal today, and there are 800 honor killings a year.
What kind of economic boom might stagnating Pakistan enjoy if patriarchy relaxed its grip?
If you are not innumerate, you can start a business.
If you are not living in mortal fear of rape and beatings at home, you can organize your community to dig a new well.
If you are not subjecting your daughter to traumatic genital injury at three and marrying her off at ten, she can go to school.
And, when she does marry and has children of her own, they will benefit from two educated, employed parents, which means twice as much literate conversation in the home, twice the contacts, and twice the encouragement to succeed.
Educated, pushy mothers make all the difference.
As US Secretary of State Hillary Clinton put it in the Newsweek issue, “The world needs to think more strategically and creatively about tapping into women’s potential for growth.
Studies show that helping women access trade and grow businesses helps create jobs and boost incomes.”
But on Planet Worst, forcing terrified, uneducated women to remain at home is more socially acceptable than facing the fact that this means choosing to drag down incomes for everyone.
It is time to stop tiptoeing around the poorest countries’ responsibility to do something essential about their own plight: emancipate their women.
A German Conservative Credo
Few concepts are as elastic as that of ``Conservatism.''
At one end of its spectrum of meanings, conservatism has (over the last two decades) come to be viewed as promoting too much of a civic life of greed and grab.
At the other end, conservatism in many European countries has historically veered too close for comfort to right-wing extremism.
In Germany today, conservatism was forged in the wake of the Weimar Republic's failures, experiences unknown to Anglo-Saxon conservatives.
This history accounts for the type of conservatism practiced by the Christian-Democratic Union (CDU) and Christian-Social Union (CSU), who focus on moderation and balance, preservation and innovation, and on commanding Germany's political center.
With federal elections due in Germany this autumn, much will be said about the nature of German conservatism.
Some, looking at CDU/CSU candidate for Chancellor Edmund Stoiber's emphasis on Bavaria's economic success, will seek to portray the coalition as shaded dangerously by the ``anything goes'' market conservatism practiced in America.
Others, pointing to the German conservatives' emphasis on social values, will say that we are as statist as the Social Democrats.
The truth itself is far more complex than these facile comparisons, which also makes it more durable.
CDU/CSU policies are, of course, founded on the idea of individual freedom, but we believe in an individualism tempered by Western culture and the Christian tradition.
We are skeptical about unfettered individualism because of our awareness of man's sins, but also because of our profound awareness of the historical defects and aberrations in Germany's 20 th century history.
Yet, despite this deeply ingrained skepticism about human nature, we embrace humanity's talent for progress and innovation, because we recognize man's ability to correct mistakes and errors.
These two traits, although they seem to conflict, and are certainly different from the values of American and British conservatives, nonetheless form a sound basis for a realistic pragmatism and the shunning of ideological politics - which is precisely the politics that Germany now requires.
Far from being willing to coerce people to live in a certain way, German conservatives seek a politics that recognizes limits - the limits of the state, the market, and the individual.
We conceive of politics as a mechanism to reconcile enduring conflicts, such as those that exist between freedom and security. Each, indeed, is unsustainable without the other.
Security is useless without freedom, but freedom makes no sense without security - both national security and economic security.
The social market economy, which we continue to embrace, is based on these principles.
It sees competition as the most effective means to promote economic growth, but also embraces state interference, when necessary, to secure equality of opportunity, social solidarity, and social balance. This interference is also intended to help avoid the ``economization'' of all aspects of civic life.
The market is merely a tool, not an answer to every human problem.
It is in recognition of this fact that German conservatives strive, for example, to strike a balance between economy and ecology. We feel responsible, on a global level, for the environment, which is why we disagree with unilateral decisions by individual nations when such decisions ignore the needs of the rest of the world.
For globalization is both a challenge and an opportunity. As we open ourselves to the wind's of globalization, we must also strengthen the local institutions that foster social ties and identity, such as the family, local and regional communities, religious communities, and the tradition of voluntary worker solidarity - all which have been neglected in recent years.
This is the principle of ``subsidiarity'' which supports placing decision-making power, wherever and whenever possible, in governmental bodies nearest to the individual citizen.
This is of particular importance for our ideas about the European Union, where we seek an effective balance between the nation and Europe.
For German conservatives, European integration and national identity are not warring concepts, as they seem to be to our opponents and so many others.
They are, instead, two sides of the same coin. The EU was founded in recognition that certain goals could only be achieved through cooperation.
Decades later, the European Union still needs the binding power and legitimacy of its constituent nations, as well as of historical regional political structures within those nations, because a common European identity is emerging only slowly and cannot yet justify a unitary constitutional structure.
In essence, the form of government we seek within Germany and across Europe is built on a sense of moral discourse and moral decision-making rather than on the supposedly eternal truth of some abstract political concept.
Indeed, only an ongoing skepticism of fashionable political nostrums - both of the statist and market fundamentalist variety - can promote pluralism and tolerance, and avoid a ballooning of the bureaucracy that enfeebles our economy.
In a fast changing world, this skepticism of the center is the only sensible attitude a responsible political party and government can strike.
Our political approach embraces this humane and realistic pragmatism, for it is only such an approach that offers a chance to secure a prosperous stability within which necessary change can be made without ending up in an extremist euphoria or a fear of the future.
Moderation, tolerance, and a capacity for reform in equal measure are the watchwords of today's German conservatism.
A German Glimmer in a Global Boom
In 2004, the world economy grew at a rate of 5.1%, the fastest pace in the last 28 years.
While Ifo`s World Economic Climate indicator, generated from quarterly surveys of 1,200 experts in 90 countries, worsened slightly during the first three quarters of 2005, it rose again in the last quarter, indicating a continuation of the boom.
In 2005, growth is estimated to have been about 4.3%, and a similar rate can be expected in 2006, marking a period of sustained rapid global growth unseen since the 1970’s.
But the boom is not uniform.
In the United States, the number of experts giving a favorable assessment of the current situation declined; indeed, a majority believes that the economic situation will worsen during the next six months.
However, in the Asian countries, including China, the optimism is unbroken.
The same is true for Eastern Europe, the ex-Soviet states, and Latin America.
The big surprise is Europe, which, unlike in 2004 and the first half of 2005, now seems to be catching up with the rest of the world.
Whereas growth was a miserable 1.5% in 2005 in the 15 “old” members of the European Union, Ifo expects EU-15 growth to accelerate to 2.1% in 2006.
To be sure, economic performance will vary widely among EU countries.
While Italy will be the laggard, with only 1.1% growth, the Irish rocket will not lose its force, pushing real GDP up by about 4.8%.
In general, the big EU countries are still performing badly, in contrast to the smaller members – hardly surprising, given that the EU is basically an institution to help the smaller countries overcome the drawback of their size by extending the agglomeration advantages that formerly were reserved to the bigger countries.
But even Germany, Europe’s biggest economy, is experiencing an upswing.
The Ifo climate indicator for Germany, based on monthly surveys of 7,000 firms, jumped upwards in the second half of 2005, reaching its highest value since the boom year 2000, with businesses’ assessment of the current situation and expectations improving.
After five years of stagnation, the economy is finally on the move.
The driving force is external demand, as Germany, the world’s second-largest exporter, profits from the global boom.
Exports increased by 6.2% in 2005 and are expected to increase by 7.4% in 2006.
However, as we saw in 2004 and 2005, exports are not enough to create substantial growth if domestic demand does not follow.
The good news for Germany is that investment demand is now growing, too.
While the second half of 2005 was already quite good, Ifo expects investment in equipment to grow by a healthy 6% in 2006.
After many years of contraction, investment in construction also will rise slightly.
Total investment growth is expected to reach 2.9% – weak by past standards, but nonetheless a promising salve for the wounded German mood.
Moreover, any investment growth is vital for Germany, which, according to the latest OECD statistics, currently suffers from the world’s lowest share of net investment in national income.
Even if Germany remains the world’s laggard, rising investment demand as such will contribute to GDP growth, which Ifo estimates at 1.7% in 2006.
That number looks small compared to most other countries.
In fact, all EU countries except Italy and the Netherlands will grow faster.
But everything is relative: Germany’s trend growth rate is just 1.1%, and the country has been the slowest growing EU country since 1995.
Measured against a disappointing past, even Germany is currently experiencing an economic boom.
Indeed, even German unemployment, which has been rising in cycles since 1970, will decline slightly in 2006, from 4.8 to 4.7 million.
The good economic data will reinforce initial favorable impressions of Angela Merkel’s new government, which got off to an excellent start at the EU Summit, where Merkel helped to broker a compromise between Britain and France on the Union’s 2007-2013 budget (by adding another €2 billion to Germany’s annual contribution).
In fact, the government may even have contributed a bit to the good economic data by announcing a serious effort to consolidate Germany’s own public finances – a prerequisite for investor confidence.
According to the government, substantial tax increases will bring the fiscal deficit below the 3%-of-GDP limit set by the Stability and Growth Pact – a target missed for five consecutive years – by 2007.
The real test for the German government is the labor market.
Most observers now agree that Germany needs something like the American earned-income tax credit.
In Germany, it’s called “activating social aid” or “combi wages,” but the principle is the same: the state should reduce the money it pays for doing nothing and pay more for participating in the work force.
That would widen the wage distribution, create jobs, and maintain the living standard of the poor.
Merkel announced in her inaugural speech in the Bundestag that her government will introduce such a system in 2006.
If this is more than lip service, and if she really carries out a serious reform of the German welfare state’s incentive structure, the result could be higher employment and structural economic growth.
In the long term, that would be more promising for the EU – and for the global economy – than the demand-driven performance that Germany is currently enjoying.
A Global Agenda for Seven Billion
NEW YORK – Late next month, a child will be born – the 7th billion citizen of planet Earth. We will never know the circumstances into which he or she was born.
We do know that the baby will enter a world of vast and unpredictable change – environmental, economic, geopolitical, technological, and demographic.
The world’s population has tripled since the United Nations was created in 1945.
And our numbers keep growing, with corresponding pressures on land, energy, food, and water. The global economy is generating pressures as well: rising joblessness, widening social inequalities, and the emergence of new economic powers.
These trends link the fate and future of today’s seven billion people as never before. No nation alone can solve the great global challenges of the twenty-first century. International cooperation is a universal need.
The 66th session of the UN General Assembly is a renewed opportunity for the countries of the world to set aside narrow, short-term interests and commit to cooperative efforts to address humanity’s long-term imperatives.
At a time when all nations are experiencing individual challenges, we need to forge a worldwide common agenda that can help to ensure that the seven billionth baby and future generations grow up in a world characterized by sustainable peace, prosperity, freedom, and justice.
To help create this future, I am focusing my second term as Secretary-General on five global imperatives – five generational opportunities to shape the world of tomorrow by the decisions we make today.
The first and greatest of these imperatives is sustainable development. We all must understand that saving our planet, lifting people out of poverty, and advancing economic growth are one and the same fight. We must connect the dots between climate change, water scarcity, energy shortages, global health, food security, and women’s empowerment. Solutions to one problem must be solutions for all.
In the next five years, we need to create a new economic vision for sustainable development and forge global consensus on a binding climate change agreement.
Fostering economic growth, realizing the Millennium Development Goals, and combating climate change will all depend on creating a new energy system for the twenty-first century and extending it to every person on the planet.
Prevention as a framework for international cooperation is a second opportunity.
This year, the UN peacekeeping budget will total $8 billion. Think of what we could save by avoiding conflicts – by deploying political mediation missions, for example, rather than troops.
We know how to do this.
Our record proves it – in Guinea, Kenya, and Kyrgyzstan.
A third imperative is building a safer and more secure world. In this effort, we must be courageous in standing up for democracy, human rights, and peace.
This year was one of signature achievements in restoring and securing peace – in Côte d’Ivoire, Darfur, Egypt, and elsewhere. But hatred and bloodshed still stand in the way of our vision for peace.
In the Middle East, we must break the stalemate.
Palestinians deserve a state.
Israel needs security.
Both want peace. A negotiated settlement can produce these outcomes, and the UN is a platform for forging such a peace.
So, too, will we continue our efforts to foster democratic governance in Iraq, Afghanistan, the Democratic Republic of Congo, and Sierra Leone. And, in the name of all of humanity, we will continue to push forward on nuclear disarmament and non-proliferation, in service of realizing a world free of nuclear weapons.
The fourth big opportunity is supporting countries in transition.
This year’s dramatic events in North Africa and the Middle East inspired people around the globe.
Let us help make the Arab Spring a true season of hope for all.
In Libya, we are deploying a new UN support mission to assist the country’s transitional authorities in establishing a new government and legal order, consistent with the aspirations of the Libyan people.
Syria is a special concern.
For six months we have seen escalating violence and repression.
The government has repeatedly pledged to undertake reforms and listen to its people.
It has not done so.
The moment to act is now.
The violence must stop.
Last but not least is the imperative of working with and for women and young people.
Women hold up more than half the sky and represent much of the world’s unrealized potential.
We need their full engagement – in government, business, and civil society.
The UN has placed a high priority on promoting women at all levels of the Organization and this year, for the first time, UN Women is operating to promote the interests and rights of women all over the world.
Seven billion people now look toward the United Nations for solutions to the world’s great global challenges.
They hold different religions and backgrounds but common dreams and aspirations.
Our global future depends on bringing these individual talents and universal rights together in common cause.
Let our common agenda begin.
A Global Consensus Against Terrorism
Mention the United Nations and the first reaction is likely to be the ongoing oil-for-food scandal and what it will mean for Secretary-General Kofi Annan’s ability to lead the organization for the remaining year and a half of his tenure.
But there is much more going on at the UN than investigations.
Reform is in the air – in part because of the scandal, but also because of the UN’s inability to deal effectively with challenges ranging from Rwanda and Kosovo to Iraq and, most recently, Sudan.
Even the UN’s most ardent supporters now recognize that change is called for if the organization is to make a significant contribution to international peace and security.
Some of the reform talk concerns the UN Security Council’s composition.
The Security Council represents what the World War II Allies believed the post-war world would look like and how it should be run.
This helps to explain why a much-weakened France was made a permanent member of the Council – and why Germany and Japan (and a not-yet independent India) were not.
Defending the Security Council’s current make-up is impossible; the need for change is beyond debate.
But coming up with an approach that gains broad international support will prove extremely difficult.
Great Britain and France will resist being replaced by a single EU seat, while making Germany a permanent member would only exacerbate the problem of Europe’s relative over-representation.
Pakistan would object to adding India to the Security Council; Argentina, Chile, and Mexico to adding Brazil;
Nigeria to South Africa (and vice-versa); and several countries, including China, Indonesia, and South Korea, might resist creating a permanent seat for Japan.
Clearly, fixing the Security Council will require considerable time and political effort.
In the meantime, there is important work to be done.
One productive avenue would be to follow up on one of the recommendations of the High Level Panel that was endorsed by Annan; namely, that all UN members go on record declaring that terrorism has no place in today’s world.
This will prove more difficult than it first sounds.
For too long, the international community has tolerated terrorism – the intentional killing of civilians and noncombatants by non-state actors for political purposes – on the grounds that, on occasion, “one man’s terrorist is another man’s freedom fighter.”
Historians have the luxury of debating whether terrorism may have been justified in certain situations in the past.
We do not.
Modern terrorism is too destructive to be tolerated, much less supported.
Weapons of mass destruction – nuclear, biological, and chemical weapons – are just that, and no cause can excuse their use.
Moreover, as the terrorist attacks on America of 2001 showed, weapons as basic as box-cutters can become weapons of mass destruction if they are used to exploit the vulnerabilities of modern, global life.
Terrorism is even less justified given that political avenues exist nowadays for pursuing political aims.
Palestinians can negotiate their future relationship with Israel and can count on American, Russian, European, and UN assistance.
Iraqis have elected their own representatives and are poised to write their constitution.
No one pursuing reasonable goals and who is prepared to compromise can argue that terrorism is his or his group’s only option.
The world has already taken some important steps against terrorism.
A dozen international conventions and numerous UN resolutions commit governments to oppose hostage taking, the hijacking of civilian aircraft, and terrorism more broadly.
Similarly, the mandate of the Financial Action Task Force, created in 1989 to curb money laundering, has grown and become focused mainly on curbing terrorist financing.
UN Security Council Resolution 1373, passed after the September 11 attacks, calls on states to deny safe haven to terrorists, bring to justice anyone associated with terrorism, suppress recruitment by terrorist groups, block terrorists’ efforts to acquire weapons, and cooperate with other governments and international organizations in tracking suspects and boosting security.
What is missing is a new, 13th convention that closes the loophole that seems to permit governments to decide what constitutes terrorism and what does not.
Broad agreement is needed that any intentional killing of civilians and noncombatants is unacceptable, and that its perpetrators and supporters must be punished.
Of course, such a convention will not prevent all future acts of terrorism.
But ideas matter.
Terrorism needs to be de-legitimized in the way that slavery has been.
Doing so will make governments and individuals think twice before becoming a party to terrorism; it should also make it less difficult to garner support for international action against those who nevertheless carry it out.
We are taught early on in our lives that the end cannot justify the means.
It is time to put this principle into effect before many more innocent lives are lost.
A Global Green New Deal
NAIROBI – With unemployment soaring, bankruptcies climbing, and stock markets in free-fall, it may at first glance seem sensible to ditch the fight against climate change and put environmental investments on hold.
But this would be a devastating mistake of immediate, as well as inter-generational, proportions.
Far from burdening an already over-stressed, over-stretched global economy, environmental investments are exactly what is needed to get people back to work, get order books flowing, and assist in powering economies back to health.
In the past, concern for the environment was viewed as a luxury; today, it is a necessity – a point grasped by some, but by no means all, economic architects yet.
A big slice of President Barack Obama’s $825 billion stimulus package for the United States includes a boost to renewable energy, “weatherizing” a million homes, and upgrading the country’s inefficient electricity grid.
Such investments could generate an estimated five million “green-collar” jobs, provide a shot in the arm for the construction and engineering industries, and get America back into the equally serious business of combating climate change and achieving energy security.
The Republic of Korea, which is losing jobs for the first time in more than five years, has also spotted the green lining to grim economic times.
President Lee Myung-Bak’s government plans to invest $38 billion employing people to clean up four major rivers and reduce disaster risks by building embankments and water-treatment facilities.
Other elements of Lee’s plan include construction of eco-friendly transportation networks, such as high-speed railways and hundreds of kilometers of bicycle tracks, and generating energy using waste methane from landfills.
The package also counts on investments in hybrid vehicle technologies.
Similar pro-employment “Green New Deal” packages have been lined up in China, Japan, and the United Kingdom.
They are equally relevant to developing economies in terms of jobs, fighting poverty, and creating new opportunities at a time of increasingly uncertain commodity prices and exports.
In South Africa, the government-backed
This work is set to expand as more than 40 million tons of invasive alien plants are harvested for power-station fuel.
As a result, an estimated 500 megawatts of electricity, equal to 2% of the country’s electricity needs, will be generated, along with more than 5,000 jobs.
So it is clear that some countries now view environmental investments in infrastructure, energy systems, and ecosystems as among the best bets for recovery.
Others may be unsure about the potential returns from investing in ecosystem services such as forest carbon storage or in renewable energy for the 80% of Africans who have no access to electricity.
Still others may simply be unaware of how to precisely follow suit.
In early February, the United Nations Environment Program will convene some of the world’s leading economists at the UN’s headquarters in New York.
A strategy for a Global Green New Deal, tailored to different national challenges, will be fleshed out in order to assist world leaders and ministers craft stimulus packages that work on multiple fronts.
The Global Green New Deal, which UNEP launched as a concept in October 2008, responds to the current economic malaise.
Spent wisely, however, these stimulus packages could trigger far-reaching and transformational trends, setting the stage for a more sustainable, urgently needed Green Economy for the twenty-first century.
The trillions of dollars that have been mobilized to address current woes, together with the trillions of investors’ dollars waiting in the wings, represent an opportunity that was unthinkable only 12 months ago: the chance to steer a more resource-efficient and intelligent course that can address problems ranging from climate change and natural-resource scarcity to water shortages and biodiversity loss.
Blindly pumping the current bail-out billions into old industries and exhausted economic models will be throwing good money after bad while mortgaging our children’s future.
Instead, political leaders must use these windfalls to invest in innovation, promote sustainable businesses, and encourage new patterns of decent, long-lasting employment.
A Global Perfect Storm
NEW YORK – Dark, lowering financial and economic clouds are, it seems, rolling in from every direction: the eurozone, the United States, China, and elsewhere.
Indeed, the global economy in 2013 could be a very difficult environment in which to find shelter.
For starters, the eurozone crisis is worsening, as the euro remains too strong, front-loaded fiscal austerity deepens recession in many member countries, and a credit crunch in the periphery and high oil prices undermine prospects of recovery.
The eurozone banking system is becoming balkanized, as cross-border and interbank credit lines are cut off, and capital flight could turn into a full run on periphery banks if, as is likely, Greece stages a disorderly euro exit in the next few months.
Moreover, fiscal and sovereign-debt strains are becoming worse as interest-rate spreads for Spain and Italy have returned to their unsustainable peak levels.
Indeed, the eurozone may require not just an international bailout of banks (as recently in Spain), but also a full sovereign bailout at a time when eurozone and international firewalls are insufficient to the task of backstopping both Spain and Italy.
As a result, disorderly breakup of the eurozone remains possible.
Farther to the west, US economic performance is weakening, with first-quarter growth a miserly 1.9% – well below potential.
And job creation faltered in April and May, so the US may reach stall speed by year end.
Worse, the risk of a double-dip recession next year is rising: even if what looks like a looming US fiscal cliff turns out to be only a smaller source of drag, the likely increase in some taxes and reduction of some transfer payments will reduce growth in disposable income and consumption.
Moreover, political gridlock over fiscal adjustment is likely to persist, regardless of whether Barack Obama or Mitt Romney wins November’s presidential election.
Thus, new fights on the debt ceiling, risks of a government shutdown, and rating downgrades could further depress consumer and business confidence, reducing spending and accelerating a flight to safety that would exacerbate the fall in stock markets.
In the east, China, its growth model unsustainable, could be underwater by 2013, as its investment bust continues and reforms intended to boost consumption are too little too late.
A new Chinese leadership must accelerate structural reforms to reduce national savings and increase consumption’s share of GDP; but divisions within the leadership about the pace of reform, together with the likelihood of a bumpy political transition, suggest that reform will occur at a pace that simply is not fast enough.
The economic slowdown in the US, the eurozone, and China already implies a massive drag on growth in other emerging markets, owing to their trade and financial links with the US and the European Union (that is, no “decoupling” has occurred).
At the same time, the lack of structural reforms in emerging markets, together with their move towards greater state capitalism, is hampering growth and will reduce their resiliency.
Finally, long-simmering tensions in the Middle East between Israel and the US on one side and Iran on the other on the issue of nuclear proliferation could reach a boil by 2013.
The current negotiations are likely to fail, and even tightened sanctions may not stop Iran from trying to build nuclear weapons.
With the US and Israel unwilling to accept containment of a nuclear Iran by deterrence, a military confrontation in 2013 would lead to a massive oil price spike and global recession.
These risks are already exacerbating the economic slowdown: equity markets are falling everywhere, leading to negative wealth effects on consumption and capital spending.
Borrowing costs are rising for highly indebted sovereigns, credit rationing is undermining small and medium-size companies, and falling commodity prices are reducing exporting countries’ income.
Increasing risk aversion is leading economic agents to adopt a wait-and-see stance that makes the slowdown partly self-fulfilling.
Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of policy bullets (or, more cynically, policy rabbits to pull out of their hats).
Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing.
Indeed, economies and markets no longer face liquidity problems, but rather credit and insolvency crises.
Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited the scope for further fiscal stimulus.
Using exchange rates to boost net exports is a zero-sum game at a time when private and public deleveraging is suppressing domestic demand in countries that are running current-account deficits and structural issues are having the same effect in surplus countries.
After all, a weaker currency and better trade balance in some countries necessarily implies a stronger currency and a weaker trade balance in others.
Meanwhile, the ability to backstop, ring-fence, and bail out banks and other financial institutions is constrained by politics and near-insolvent sovereigns’ inability to absorb additional losses from their banking systems.
As a result, sovereign risk is now becoming banking risk.
Indeed, sovereigns are dumping a larger fraction of their public debt onto banks’ balance sheet, especially in the eurozone.
To prevent a disorderly outcome in the eurozone, today’s fiscal austerity should be much more gradual, a growth compact should complement the EU’s new fiscal compact, and a fiscal union with debt mutualization (Eurobonds) should be implemented.&nbsp;
In addition, a full banking union, starting with eurozone-wide deposit insurance, should be initiated, and moves toward greater political integration must be considered, even as Greece leaves the eurozone.
Unfortunately, Germany resists all of these key policy measures, as it is fixated on the credit risk to which its taxpayers would be exposed with greater economic, fiscal, and banking integration.
As a result, the probability of a eurozone disaster is rising.
And, while the cloud over the eurozone may be the largest to burst, it is not the only one threatening the global economy.
A Global Solutions Network
NEW YORK – Great social change occurs in several ways.
A technological breakthrough – the steam engine, computers, the Internet – may play a leading role.
Visionaries, such as Mahatma Gandhi, Martin Luther King Jr., and Nelson Mandela, may inspire a demand for justice.
Political leaders may lead a broad reform movement, as with Franklin Roosevelt and the New Deal.
Our own generation urgently needs to spur another era of great social change.
This time, we must act to save the planet from a human-induced environmental catastrophe.
Each of us senses this challenge almost daily.
Heat waves, droughts, floods, forest fires, retreating glaciers, polluted rivers, and extreme storms buffet the planet at a dramatically rising rate, owing to human activities.
Our $70-trillion-per-year global economy is putting unprecedented pressures on the natural environment.
We will need new technologies, behaviors, and ethics, supported by solid evidence, to reconcile further economic development with environmental sustainability.
United Nations Secretary-General Ban Ki-moon is taking on this unprecedented challenge from his unique position at the crossroads of global politics and society.
At the political level, the UN is the meeting place for 193 member states to negotiate and create international law, as in the important treaty on climate change adopted at the Rio Earth Summit in 1992.
At the level of global society, the UN represents the world’s citizenry, “we the peoples,” as it says in the UN Charter.&nbsp;
At the societal level, the UN is about the rights and responsibilities of all of us, including future generations.
In the past two decades, governments have come up short on solutions to environmental threats.
Politicians have failed to implement properly the treaties adopted at the 1992 Earth Summit.
Ban knows that strong government action remains vital, but he also recognizes that civil society must also play a larger role, especially because too many governments and politicians are beholden to vested interests, and too few politicians think in time horizons that extend past the next election.
To empower global society to act, Ban has launched a bold new global initiative, for which I am grateful to volunteer.
The UN Sustainable Development Solutions Network is a powerful effort to mobilize global knowledge to save the planet.
The idea is to use global networks of knowledge and action to identify and demonstrate new, cutting-edge approaches to sustainable development around the world.
The network will work alongside and support governments, UN agencies, civil-society organizations, and the private sector.
Humanity needs to learn new ways to produce and use low-carbon energy, grow food sustainably, build livable cities, and manage the global commons of oceans, biodiversity, and the atmosphere.
But time is running very short.
Today’s mega-cities, for example, already have to confront dangerous heat waves, rising sea levels, more extreme storms, dire congestion, and air and water pollution.
Agricultural regions already need to become more resilient in the face of increased climate volatility.
And as one region in one part of the world designs a better way to manage its transport, energy needs, water supplies, or food supplies, those successes should quickly become part of the global knowledge base, enabling other regions to benefit rapidly as well.
Universities have a special role to play in the new UN knowledge network.
Exactly 150 years ago, in 1862, Abraham Lincoln created America’s “land-grant” universities to help local communities to improve farming and the quality of life through science.
Today, we need universities in all parts of the world to help their societies face the challenges of poverty reduction, clean energy, sustainable food supplies, and the rest.
By linking together, and putting their curricula online, the world’s universities can become even more effective in discovering and promoting science-based solutions to complex problems.
The world’s corporate sector also has a significant role to play in sustainable development.
Now the corporate sector has two faces.
It is the repository of cutting-edge sustainable technologies, pioneering research and development, world-class management, and leadership in environmental sustainability.
Yet at the same time, the corporate sector lobbies aggressively to gut environmental regulations, slash corporate-tax rates, and avoid their own responsibility for ecological destruction.
Sometimes the same company operates on both sides of the divide.
We urgently need far-sighted companies to join the Sustainable Development Solutions Network.
These companies are uniquely placed to move new ideas and technologies into early-stage demonstration projects, thereby accelerating global learning cycles.
Equally important, we need a critical mass of respected corporate leaders to press their peers to cease the anti-environmental lobbying and campaign-finance practices that account for the inaction of governments.&nbsp;
Sustainable development is a generational challenge, not a short-term task.
The reinvention of energy, food, transport, and other systems will take decades, not years.
But the long-term nature of this challenge must not lull us into inaction.
We must start reinventing our productive systems now, precisely because the path of change will be so long and the environmental dangers are already so pressing.&nbsp;
At the Rio+20 Summit this past June, the world’s governments agreed to adopt a new set of goals on sustainable development for the period after 2015, to build upon the Millennium Development Goals’ success in reducing poverty, hunger, and disease.
In the post-2015 era, the fight against poverty and the fight to protect the environment will go hand in hand, reinforcing each other.
Secretary-General Ban Ki-moon has already initiated several global processes to help establish the new post-2015 goals in an open, participatory, and knowledge-based way.&nbsp;
The Secretary General’s launch of the Sustainable Development Solutions Network is therefore especially timely.
Not only will the world adopt a new set of goals to achieve sustainable development, but it will also have a new global network of expertise to help achieve those vital objectives.&nbsp;
A Good Rate Hike for Europe
Two wrongs don’t make a right.
Just because European governments have failed to put bread on their constituents’ tables doesn’t mean that the European Central Bank should likewise fail in its job of promoting price stability in the euro zone.
That may sound obvious, but abandoning price stability is exactly what some European politicians are advocating.
For example, Italian politicians, who, given Italy’s recent dismal economic performance, would seem the least qualified to offer the ECB advice on monetary policy, are nonetheless advocating interest-rate cuts.
Echoing comments by Italian Prime Minister Silvio Berlusconi, Deputy Economics Minister Mario Baldassarri said in Il Sole 24 Ore last week that all efforts to boost growth are in vain “if someone is pushing on the brake pedal.”
Who’s he kidding?
If anyone is “pushing down on the Italian growth brake” it is Berlusconi himself.
He has made no efforts at economic reform during his term and now seeks to blame the ECB for Italy’s lame economic performance.
But it is precisely the lack of economic reform at home that has made Italy one of the least competitive states in the euro-zone economy.
More than the usual “blame game” is at work here.
Pressures are mounting on the ECB to raise interest rates – and Berlusconi and Co.’s attacks are as much as an attempt to forestall future rate hikes as to get the ECB to loosen its monetary policy.
Soaring energy prices, for example, have become a leading inflation risk.
But higher energy prices, by themselves, will not cause the ECB to pull the interest-rate trigger.
The key will be so-called “second-round effects” – whether growing crude prices lead to higher wage demands from trade unions.
So far, the “social partners,” as ECB president Jean-Claude Trichet likes to call the unions, have been quiet.
Should this change, the ECB will have to raise rates even if Europe’s economic growth remains slack.
The good news is that economic growth in the euro-zone economy appears to be picking up (even in Italy).
Though second-quarter GDP growth was weak — the euro-zone average was only 0.3% year on year – third-quarter data are indicating a sustained economic pick-up in the second half of the year.
Only consumption is lagging.
How will the ECB react to better economic news?
Some on the Governing Council have grown uncomfortable that euro-zone interest rates have stayed so low, at 2%, for so long (more than two years).
True, there is no inflation problem in the short run, but the ECB’s monetary policy focuses on the medium term.
One particular worry is that euro-zone money supply is well above the ECB’s benchmark level, indicating an excess supply of liquidity.
It is doubtful that the ECB would raise interest rates to curb excess liquidity so long as economic recovery remains in question.
Slow growth has silenced the monetarists on the ECB’s Governing Council.
This will change, however, once the economic pick-up is confirmed.
Interest-rate hikes may be coming sooner rather than later, which is why Berlusconi and French President Jacques Chirac are talking up interest-rate cuts now.
Meanwhile, in Germany, the elections this September may have surprising consequences for ECB monetary policy.
Angela Merkel, the Christian Democrats’ candidate, is a reformer, holding out hope for Germany’s future – and that of Europe.
Unfortunately, Merkel’s campaign is off to a rocky start, and the recent entry of Oskar Lafontaine’s extreme left-wing party into the fray may necessitate the formation of a grand coalition between the Christian Democrats and the Social Democrats.
This would be bad news for the German economy, which could delay possible ECB interest rate hikes.
Because the expected gridlock in parliament would make reforms less likely, companies might hold off on investment, while consumers would be more likely to keep their wallets closed, because official policy would be even less clear than it is now.
On the other hand, a center-right coalition between the Christian Democrats and the Free Democrats could spark the ECB into action.
This raises an interesting point.
The public should be relieved if the ECB raises rates, because this would most likely signal that the long-awaited economic recovery is well under way, and that inflationary repercussions are being addressed.
A hike, in other words, would indicate that good things are happening.
But the public often views interest-rate increases as negative events that increase unemployment and stifle growth.
Blame-game politicians like Berlusconi, who have failed to put bread on the table, their minions in the media, and Keynesian economic professors who don’t understand and misrepresent Keynes sustain this distorted view.
Europe would be a lot better off if someone told the public the truth.
A Grand Bargain with Iran
The specter of a nuclear Iran haunts Arabs and Israelis alike, but it is the United States and Israel that are the driving force behind efforts to curtail Iran’s nuclear ambitions.
The America-Iran-Israel triangle is where the clue to the problem and its possible solution lie.
Though Ayatollah Khomeini’s Islamic revolution in 1979 disrupted Israel’s old alliance with Iran, the two countries continued to conduct business with America’s blessing.
The Iran-Contra affair of the 1980’s, through which Israel supplied arms to the Islamic Republic in its war against Iraq is a case in point.
Israel and Iran, two non-Arab powers in a hostile Arab environment, shared fundamental interests that the Islamic revolution could not change.
It was during Yitzhak Rabin’s government in the early 1990’s that Israel and Iran entered into open conflict, owing to the changing strategic environment after America’s victory in the first Gulf War and the collapse of the Soviet Union.
The US-sponsored Arab-Israeli peace process, which produced a series of breathtaking achievements – the Madrid peace conference, the Oslo accords, Israel’s peace agreement with Jordan, a near-rapprochement with Syria, and Israel’s inroads into Arab states from Morocco to Qatar – was an increasingly isolated Iran’s worst nightmare.
It was at that crossroads that Israel and Iran, two powers vying for mastery in a rapidly changing Middle East, chose to cast their strategic competition in ideological terms.
The conflict was now between Israel, a beacon of democracy fighting the expansion of a Shiite obscurantist empire, and an Iran that chose to protect its revolution by mobilizing the Arab masses in the name of Islamic values and against treacherous rulers who had betrayed the dispossessed Palestinians.
More an enemy of Israeli-Arab reconciliation than of Israel as such, the Mullahs’ resort to an incendiary anti-Jewish, pan-Islamic discourse is aimed at ending Iran’s isolation and presenting its regional ambitions in a light palatable to the Sunni masses.
In an Arab Middle East, Iran is the natural enemy; in an Islamic world, Iran is a potential leader.
Ironically, Iran has been the main supporter of Arab democracy, for the best way to undermine the incumbent regimes is to promote popularly based Islamist movements such as Hezbollah in Lebanon, the Muslim Brotherhood in Egypt, Hamas in Palestine, and the Shiite majority in Iraq.
Yitzhak Rabin believed that an Israeli-Arab peace could prevent a nuclear Iran, but now his nightmare seems rapidly approaching.
As an anti-status quo power, Iran is not pursuing nuclear capabilities in order to destroy Israel, but to gain prestige and influence in a hostile environment and as a shield for its challenge to the regional order.
But Israel has every reason to be concerned, for a nuclear Iran would undermine the promise of Zionism to secure a Jewish refuge – the core rationale of Israel’s own strategy of “nuclear ambiguity” – and would embolden its enemies throughout the region.
It would also trigger uncontrolled regional nuclear proliferation, with Saudi Arabia and Egypt leading the way.
A military attack on Iran’s nuclear facilities is too dangerous, and its results uncertain.
And, however severe economic sanctions might be, they might not bring Iran to its knees.
Nor is it clear that the split within the Iranian elite between revolutionary purists and those with a merchant-class mentality would lead to regime change any time soon.
However, being radical does not necessarily mean being irrational, and revolutionary Iran has given frequent proof of its pragmatism.
In the American-Iranian equation it was the US, not Iran, that conducted rigid ideological diplomacy.
Iran backed the US during the first Gulf War, but was left out of the Madrid peace conference.
Iran also supported America in its war to depose the Taliban in Afghanistan.
And, when US forces overran Saddam Hussein’s army in the spring of 2003, the encircled Iranians proposed a grand bargain that would put all contentious issues on the table, from the nuclear issue to Israel, from Hezbollah to Hamas.
The Iranians also pledged to stop obstructing the Israeli-Arab peace process.
But, neo-conservative haughtiness – “We don’t speak to evil” – ruled out a pragmatic response to Iran’s demarche.
Iran’s mood changed by the time America’s entire Middle East strategy had gone adrift, but the grand bargain remains the only viable way out of the impasse.
This would not be achieved, however, through an inevitably imperfect sanctions regime, or by America’s resort to Cold War logic aimed at breaking Iran’s backbone by drawing it into a ruinous arms race.
Iran’s growing regional influence does not stem from its military expenditures, which are far lower than those of its enemies, but from its challenge to America and Israel through an astute use of soft power.
There is no better way to undercut Iran’s regional strategy of destabilization than a comprehensive Arab-Israeli peace, accompanied by massive investments in human development, and followed by an internationally sponsored system of peace and security in a verifiably nuclear-free Middle East, including Israel.
A Gravity Test for the Euro
CAMBRIDGE – Although I appreciate that exchange rates are never easy to explain or understand, I find today’s relatively robust value for the euro somewhat mysterious.
Do the gnomes of currency markets seriously believe that the eurozone governments’ latest “comprehensive package” to save the euro will hold up for more than a few months?
The new plan relies on a questionable mix of dubious financial-engineering gimmicks and vague promises of modest Asian funding.
Even the best part of the plan, the proposed (but not really agreed) 50% haircut for private-sector holders of Greek sovereign debt, is not sufficient to stabilize that country’s profound debt and growth problems.
So how is it that the euro is trading at a 40% premium to the US dollar, even as investors continue to view southern European government debt with great skepticism?
I can think of one very good reason why the euro needs to fall, and six not-so-convincing reasons why it should remain stable or appreciate.
Let’s begin with why the euro needs to fall.
Absent a clear path to a much tighter fiscal and political union, which can lead only through constitutional change, the current halfway house of the euro system appears increasingly untenable.
It seems clear that the European Central Bank will be forced to buy far greater quantities of eurozone sovereign (junk) bonds.
That may work in the short term, but if sovereign default risks materialize – as my research with Carmen Reinhart suggests is likely – the ECB will in turn have to be recapitalized.
And, if the stronger northern eurozone countries are unwilling to digest this transfer – and political resistance runs high – the ECB may be forced to recapitalize itself through money creation.
Either way, the threat of a profound financial crisis is high.
Given this, what arguments support the current value of the euro, or its further rise?
First, investors might be telling themselves that in the worst-case scenario, the northern European countries will effectively push out the weaker countries, creating a super-euro.
But, while this scenario has a certain ring of truth, surely any breakup would be highly traumatic, with the euro diving before its rump form recovered.
Second, investors may be remembering that even though the dollar was at the epicenter of the 2008 financial panic, the consequences radiated so widely that, paradoxically, the dollar actually rose in value.
Although it may be difficult to connect the dots, it is perfectly possible that a huge euro crisis could have a snowball effect in the US and elsewhere.
Perhaps the transmission mechanism would be through US banks, many of which remain vulnerable, owing to thin capitalization and huge portfolios of mortgages booked far above their market value.
Third, foreign central banks and sovereign wealth funds may be keen to keep buying up euros to hedge against risks to the US and their own economies.
Government investors are not necessarily driven by the return-maximizing calculus that motivates private investors.
If foreign official demand is the real reason behind the euro’s strength, the risk is that foreign sovereign euro buyers will eventually flee, just as private investors would, only in a faster and more concentrated way.
Fourth, investors may believe that, ultimately, US risks are just as large as Europe’s.
True, the US political system seems stymied in coming up with a plan to stabilize medium-term budget deficits.
Whereas the US Congress’s “supercommittee,” charged with formulating a fiscal-consolidation package, will likely come up with a proposal, it is far from clear that either Republicans or Democrats will be willing to accept compromise in an election year.
Moreover, investors might be worried that the US Federal Reserve will weigh in with a third round of “quantitative easing,” which would further drive down the dollar.
Fifth, the current value of the euro does not seem wildly out of line on a purchasing-power basis.&#160;
An exchange rate of $1.4:€1 is cheap for Germany’s export powerhouse, which could probably operate well even with a far stronger euro.
For the eurozone’s southern periphery, however, today’s euro rate is very difficult to manage.
Whereas some German companies persuaded workers to accept wage cuts to help weather the financial crisis, wages across the southern periphery have been marching steadily upwards, even as productivity has remained stagnant.
But, because the overall value of the euro has to be a balance of the eurozone’s north and south, one can argue that 1.4 is within a reasonable range.
Finally, investors might just believe that the eurozone leaders’ latest plan will work, even though the last dozen plans have failed.
Abraham Lincoln is credited with saying “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.” A comprehensive euro fix will surely arrive for some of the countries at some time, but not for all of the countries anytime soon.
So, yes, there are plenty of vaguely plausible reasons why the euro, despite its drawn-out crisis, has remained so firm against the dollar so far.
But don’t count on a stable euro-dollar exchange rate – much less an even stronger euro – in the year ahead.
A Greek Catch-22
BUENOS AIRES – Desperate times bring desperate measures.
The latest package to cope with Greece’s insolvency offers a bond buyback to lighten the country’s debt burden.
In essence, this is a back-door debt restructuring: Europe’s bailout fund, the European Financial Stability Facility (EFSF) would lend the money for Greece to buy back its own debt in the secondary market at deep discounts, thereby imposing a loss on private bondholders without the need to declare a default.
A recurrent characteristic of Europe’s debt-crisis debate is a Latin American precedent.
Indeed, many highly indebted countries in Latin America conducted similar debt buybacks in the late 1980’s.
Bolivia’s 1988 buyback of close to half of its defaulted sovereign debt, an operation funded by international donors, is a classic example.
But the most relevant Latin American experience with debt buybacks is a more recent and far less studied case: Ecuador in 2008.
President Rafael Correa had been toying with default since the 2006 presidential campaign (debt repudiation was part of his platform), and quickly earned a CCC rating from Fitch.
The reasons invoked by Correa (legal concerns about how the bonds were issued in the 2000 debt exchange) were beside the point.
The default threat was a way to depress bond prices in secondary markets, only to buy them back at a discount through the back door.
That task was outsourced to Banco del Pacífico, which bought the soon-to-be-defaulted Ecuadorian paper at 20 cents on the dollar and above – a level low enough for a deep haircut but high enough to fend off “vulture” investors.
To speed things up, after the default was declared in December 2008, Ecuador completed the buyback with an inverse auction for the remaining bondholders, to be settled in cash – rather than a regular exchange in which the legality of undercover purchases was likely to be questioned.
With the larger part of the outstanding stock in friendly hands, and institutional bondholders pressed to liquidate their positions in the midst of the post-Lehman Brothers selloff, the operation was a success.
This episode offers a few preliminary lessons on debt buybacks.
The first concerns the market response.
Judging from the recent evolution of Ecuadorian bond yields, it appears that markets have not punished Ecuador’s behavior: Ecuador, an oil exporter blessed by the 2009 recovery in oil prices, could have returned to the capital markets shortly after the exchange.
This is particularly notable, given that Ecuador’s was perhaps the first opportunistic default (triggered by unwillingness, rather than inability, to pay) in recent history.
The second lesson, and the one most pertinent to Europe now, concerns the crucial role played by the default scenario.
Indeed, almost two years of default threats by Correa were not enough to elicit a deep discount.
Ecuador needed to go all the way to a “credit event” in December 2008 to be able to purchase the bonds at bargain prices.
The premise that only a credible default ensures significant private-sector involvement (that is, that private bondholders take a real hit) is apparent when we compare the market-friendly Uruguayan debt exchange in 2003 with the draconian Argentine restructuring of 2005.
In Uruguay, what the authorities presented as a voluntary transaction produced no nominal haircuts and only minor debt relief; in Argentina, a four-year debt moratorium was essential to achieving nominal haircuts above 50%.
So the question arises: how are private bondholders to be convinced to get rid of their Greek bonds at a loss if there is a credible buyer of last resort?
If Europe credibly volunteered funds to buy back all Greek debt, the Greek risk premium would disappear and private investors would be fully bailed out.
Only the probability of a default – and the goal of avoiding even deeper haircuts – can induce investors to liquidate their positions at a discount.
But the buyback can succeed only if the market perceives it as the last chance before a unilateral debt restructuring.
In other words, a successful buyback is a preamble to default.
Can Greece, with the EFSF’s help, obtain debt relief while avoiding default?
Small purchases at current panic prices, vulture-fund style, are always possible, but they do not promise substantial debt relief.
Large purchases would drive up prices in the secondary market, defeating the point of the whole operation.
And the opaque Ecuadorian methods are not possible in Europe, both for legal reasons and because a transaction of this size could hardly be disguised or outsourced.
But what if the EFSF were to mimic Banco del Pacífico in a transparent way, say, by setting a threshold spread level above which it would fund buy-backs of any Greek bond in the market?
Naturally, the spread would automatically converge to the threshold, but how much would be sold?
Would the EFSF be retiring Greek debt at bargain prices or would it be providing insurance to current bondholders?
If the threshold spread is set reasonably high in order to achieve a significant discount, the stock of debt retired by the buyback would be marginal.
After all, by capping spreads, the buyback facility would limit the downside risk while providing incentives to hold the bonds and wait for the upside – a good reason, perhaps, to make the facility a temporary offer.
By contrast, if the threshold is set low enough to bring spreads down from panic levels, purchases will be more substantive, but at the expense of reducing considerably the effective haircut on private holders.
A debt buyback is something of a Catch 22: to succeed in inducing a haircut, it needs to profit from the default fears that it intends to alleviate.
Without Ecuador’s gimmicks, buybacks do not seem to be the solution to Greece’s debt overhang.
Ethics and Agriculture
MELBOURNE – Should rich countries – or investors based there – be buying agricultural land in developing countries?
That question is raised in Transnational Land Deals for Agriculture in the Global South, a report issued last year by the Land Matrix Partnership, a consortium of European research institutes and nongovernmental organizations.
The report shows that since 2000, investors or state bodies in rich or emerging countries have bought more than 83 million hectares (more than 200 million acres) of agricultural land in poorer developing countries.
This amounts to 1.7% of the world’s agricultural land.
Most of these purchases have been made in Africa, with two-thirds taking place in countries where hunger is widespread and institutions for establishing formal land ownership are often weak.
The purchases in Africa alone amount to an area of agricultural land the size of Kenya.
It has been claimed that foreign investors are purchasing land that has been left idle; thus, by bringing it into production, the purchases are increasing the availability of food overall.
But the Land Matrix Partnership report found that this is not the case: roughly 45% of the purchases involved existing croplands, and almost a third of the purchased land was forested, indicating that its development may pose risks for biodiversity.
The investments are both private and public (for example, by state-owned entities) and come from three different groups of countries: emerging economies like China, India, Brazil, South Africa, Malaysia, and South Korea; oil-rich Gulf states; and wealthy developed economies like the United States and several European countries.
On average, per capita income in the countries that are the source of these investments is four times higher than in the target countries.
Most of the investments are aimed at producing food or other crops for export from the countries in which the land is acquired, for the obvious reason that richer countries can pay more for the output.
More than 40% of such projects aim to export food to the source country – suggesting that food security is a major reason for buying the land.
Oxfam International calls some of these deals “land grabs.”
Its own report, Our Land, Our Lives,indicates that, since 2008, communities affected by World Bank projects have brought 21 formal complaints alleging violations of their land rights.
Oxfam, drawing attention to large-scale land acquisitions that have entailed direct rights violations, has called on the Bank to freeze investments in land purchases until it can set standards ensuring that local communities are informed of them in advance, with the option of refusing them.
Oxfam also wants the Bank to ensure that these land deals do not undermine either local or national food security.
In response, the World Bank agreed that there are instances of abuse in land acquisition, particularly in developing countries in which governance is weak, and said that it supported more transparent and inclusive participation.
At the same time, it pointed to the need to increase food production to feed the extra two billion people expected to be alive in 2050, and suggested that more investment in agriculture in developing countries is required to improve productivity.
The Bank rejected the idea of a moratorium on its own work with investors in agriculture, arguing that this would target precisely those who are most likely to do the right thing.
One may ask whether transparency and the requirement that local landholders consent to a sale is enough to protect people living in poverty.
Supporters of free markets will argue that if local landowners wish to sell their land, that is their choice to make.&#160;
But, given the pressures of poverty and the lure of cash, what does it take for people to be able to make a genuinely free and informed choice about selling something as significant as a right to land?
After all, we do not allow poor people to sell their kidneys to the highest bidder.
Of course, hardline supporters of free markets will say that we should.
But, at the very least, it needs to be explained why people should be prohibited from selling kidneys, but not from selling the land that grows their food.
Most people can live without one kidney.
No one can live without food.
Why does the purchase of body parts give rise to international condemnation, while the purchase of agricultural land does not – even when it involves evicting local landholders and producing food for export to rich countries instead of for local consumption?
The World Bank may indeed be more concerned about local landholders’ rights than other foreign investors are.
If so, the 21 complaints made against Bank projects are most likely the visible tip of a vast iceberg of violations of land rights by foreign investors in agricultural projects in developing countries – with the others remaining invisible because victims have no access to any complaint procedure.
One such case belatedly came to the attention of the United Nations Human Rights Committee.
In November, the Committee concluded that Germany had failed to police the Neumann Kaffee Gruppe regarding its complicity in the forced eviction of several villages in Uganda to make way for a large coffee plantation.
But the evictions took place in 2001, and the villagers are still living in extreme poverty.
They found no remedy, in either Uganda or Germany, for the violation of rights that, according to the Committee, they possess under the International Covenant on Civil and Political Rights, to which Germany is a signatory.
Are we to believe that landholders fare better with Chinese or Saudi investors?
A History Lesson for Koizumi
Once again, protests against Japanese Prime Minister Junichiro Koizumi’s annual visit to the Yasukuni shrine are breaking out in China as well as South Korea.
Koizumi’s insistence on paying homage to the war dead interred at Yasukuni, where convicted war criminals from World War II are among the buried, has been damaging relations with Japan’s neighbors for years.
Indeed, Chinese President Hu Jintao continually affirms that he will not hold a summit with a Japanese prime minister who goes to Yasukuni, which most Chinese regard as a glorification of past Japanese aggression and colonialism.
Even some in Japan are becoming critical of Koizumi.
While the public remains negative about Chinese outbursts against Japan, a recent survey indicates that more than 70% of Japanese view the current state of Japan-China relations as unacceptable.
More people are not supporting Koizumi’s annual pilgrimage to Yasukuni, with seven former prime ministers jointly demanding that he refrain from the visits.
Yet Koizumi remains defiant.
Moreover, Chief Cabinet Secretary Shinzu Abe, the front-runner to succeed him, has openly declared that he will continue to visit the shrine as prime minister.
Foreign Minister Taro Aso, another possible successor to Koizumi, has called for the Japanese Emperor to pray at Yasukuni.
So pessimism appears to be settling in, and the deadlock over Yasukuni appears to be deepening.
But the past can bring us more than just troubles of this kind. Even on the issue of Yasukuni, there are positive lessons to be learned.
Consider Yasuhiro Nakasone, Koizumi’s predecessor in the 1980’s.
Both are master politicians who remained popular and served long terms in office.
Both are conservative and nationalistic, advocating the revision of the constitution and an assertive political and military role for Japan abroad.
Finally, both are pro-American, with Nakasone declaring Japan to be America’s “unsinkable aircraft carrier” in East Asia and Koizumi sending troops to Iraq in support of the United States-led war effort.
But a crucial difference between Nakasone and Koizumi is often overlooked: their handling of the Yasukuni controversy and relations with China.
Nakasone broke the taboo by being the first prime minister to worship at the Yasukuni shrine in his official capacity on August 15, 1985, the fortieth anniversary of the end of World War II.
The decision triggered a severe response from China, where students held demonstrations against his visit.
Bilateral relations were frozen.
But, instead of capitalizing on domestic resentment over China’s criticisms, Nakasone decided not to visit Yasukuni again.
He chose to mend relations with China by focusing on the positive aspects of bilateral ties.
In 1986, Nakasone went to Beijing at the personal invitation of Chinese Communist Party General Secretary Hu Yaobang and laid the cornerstone for a Sino-Japanese Youth Exchange Center, promising to forge future friendships with China.
This genuine embrace of reconciliation provided much-needed support to Chinese leaders, who were eager to control anti-Japanese sentiments.
Hu praised Nakasone’s courage and warned Chinese youth publicly that if they “think merely of the well-being of their own country… they are not sober-minded patriots.”
Nakasone emerged from the crisis and was recognized as a capable statesman in managing Japan’s diplomacy with China.
There was no accusation that Nakasone was “selling out” to Beijing.
Nor were his conservative, nationalist, and pro-American credentials damaged.
This episode suggests that Koizumi’s hardline position isn’t the only option.
A Japanese prime minister can be strong without exploiting domestic resentment against the country’s neighbors, and conservative, patriotic, and pro-American while forging a healthy working relationship with China.
Indeed, the cessation of Yasukuni visits would likely open the door to the long-overdue Sino-Japanese summit, which in turn might strengthen moderate voices in China seeking a future-oriented relationship with Japan.
Unfortunately, Koizumi and his allies are not prepared to move forward on the Yasukuni issue.
As Foreign Minister Aso recently put it: “The more China voices [opposition], the more one feels like going there.
It’s just like when you’re told ‘Don't smoke cigarettes,’ it actually makes you want to smoke.”
No one expects the current Japanese and Chinese leaders to embrace, as Nakasone and Hu did two decades ago, but it is a sad state of affairs when the leaders of neighboring giants pretend not to see each other at international forums.
If Nakasone, who now urges Koizumi to stop the Yasukuni pilgrimage, were to respond to Aso, he might simply extend the analogy: it is not in Japan’s national interest to continue to inhale Koizumi’s second-hand smoke.
A Human Rights Crime In Gaza
The world is witnessing a terrible human rights crime in Gaza, where a million and a half human beings are being imprisoned with almost no access to the outside world by sea, air, or land. An entire population is being brutally punished.
This gross mistreatment of the Palestinians in Gaza was escalated dramatically by Israel, with United States backing, after political candidates representing Hamas won a majority of seats in the Palestinian Authority parliament in 2006.
The election was unanimously judged to be honest and fair by all international observers.
Israel and the US refused to accept the right of Palestinians to form a unity government with Hamas and Fatah and now, after internal strife, Hamas alone controls Gaza. Forty-one of the 43 victorious Hamas candidates who lived in the West Bank are now imprisoned by Israel, plus an additional ten who assumed positions in the short-lived coalition cabinet.
Regardless of one’s choice in the partisan struggle between Fatah and Hamas within occupied Palestine, we must remember that economic sanctions and restrictions in delivering water, food, electricity, and fuel are causing extreme hardship among the innocent people in Gaza, about one million of whom are refugees.
Israeli bombs and missiles periodically strike the encapsulated area, causing high casualties among both militants and innocent women and children.
Prior to the highly publicized killing of a woman and her four little children last week, this pattern was illustrated by a previous report from B’Tselem, the leading Israeli human rights organization: 106 Palestinians were killed between February 27 and March 3.
Fifty-four of them were civilians who didn't take part in the fighting, and 25 were under 18 years of age.
On a recent trip through the Middle East, I attempted to gain a better understanding of the crisis.
One of my visits was to Sderot, a community of about 20,000 in southern Israel that is frequently struck by rudimentary rockets fired from nearby Gaza.
I condemned these attacks as abominable and an act of terrorism, since most of the thirteen victims during the past seven years have been non-combatants.
Subsequently, I met with leaders of Hamas, both a delegation from Gaza and the top officials in Damascus, Syria.
I made the same condemnation to them, and urged that they declare a unilateral ceasefire or orchestrate with Israel a mutual agreement to terminate all military action in and around Gaza for an extended period.
They responded that such previous action by them had not been reciprocated, and they reminded me that Hamas had previously insisted on a ceasefire throughout Palestine including both Gaza and the West Bank, which Israel had refused.
Hamas then made a public proposal of a mutual ceasefire restricted to Gaza, which the Israelis considered and also rejected.
There are fervent arguments heard on both sides concerning blame for a lack of peace in the Holy Land.
Israel has occupied and colonized the Palestinian West Bank, which is approximately one-fourth (28.5%) the size of the nation of Israel as recognized by the international community.
Some Israeli religious factions claim a right to the land on both sides of the Jordan River, and others aver that their 205 settlements with some 500,000 people are necessary for “security.”
All Arab nations have agreed to full recognition of Israel if it will comply with key United Nations resolutions.
Hamas has agreed to accept any negotiated peace settlement between Palestinian Authority President Mahmoud Abbas and Israeli Prime Minister Ehud Olmert, provided it is approved in a referendum among the Palestinian people.
This holds promise of progress, but despite the brief fanfare and positive statements at the peace conference last November in Annapolis, Maryland, a retrogression has occurred in the process.
Nine thousand new Israeli settlement housing units have been announced in Palestine, the number of roadblocks within the West bank has increased, and the stranglehold on Gaza has been tightened.
It is one thing for other leaders to defer to the US on the crucial peace negotiations, but the world must not stand idle while innocent people are treated cruelly.
It is time for strong voices in Europe, the US, Israel, and elsewhere to speak out and condemn this human rights tragedy among the Palestinian people.
A Hundred Years of Superconductivity
CHICAGO – The world’s first “quantum” computer – a machine that harnesses the magic of quantum phenomena to perform memory and processing tasks incredibly faster than today’s silicon-based computer chips – was recently sold by D-Wave Systems of Canada to Lockheed-Martin.
And, while some question whether the machine is truly a quantum computer, its designers have published articles in peer-reviewed journals demonstrating that the basic elements of this novel computer are indeed superconducting quantum bits.
This spring marked the 100th anniversary of the discovery of superconductivity – the ability of materials to carry electrical current with no loss.
Currents set up in superconducting wires can exist for years without any measurable decay.
Because of this property, superconductors have unique features that can be exploited in many ways.
They can carry enormous amounts of current, making them ideal for urban power grids.
And, when wound into coils, they can produce extremely strong magnetic fields.
Such superconducting magnets have been applied in a variety of technologies.
The best-known examples are the magnets that drive the magnetic resonance imaging (MRI) machines found in most hospitals.
Perhaps the most exotic are the huge magnets used to accelerate particles in the Large Hadron Collider, which seeks to discover the fundamental principles of matter.
Despite their great promise, however, superconductors have limits, the primary one being that most superconduct at very low temperatures – indeed, near absolute zero (-273 ºC).
Such temperatures can be achieved only through liquid-helium cooling.
Thus, Swiss researchers caused excitement in 1986 by announcing the discovery of superconductivity in an oxide of copper at twice the temperature of the previous record holder.
Shortly thereafter, researchers in the United States found a related material that superconducts above the temperature at which air liquefies.
As Time magazine proclaimed in May 1987, with the discovery of these so-called “cuprates,” the superconducting revolution had begun.
Alas, the revolution soon bogged down.
Cuprates are notoriously difficult materials to work with, because they are very brittle.
This is exacerbated by their strong anisotropy – the materials have a quasi-two-dimensional structure consisting of a weakly coupled stack of conducting sheets.
As such, they are a challenge for industry, though applications are beginning to appear.
Since the cuprates first appeared, a variety of other “high temperature” superconductors have been discovered – one is a simple compound of magnesium and boron, and another involves a mixture of iron and arsenic.
Although none of them superconduct at temperatures as high as liquid air, they may ultimately be better materials with which to work.
Given the vast number of combinations of elements that can form compounds, there is a good chance that better superconductors await our discovery.
In the coming years, superconductors are expected to play a growing role in technology.
Already, “second generation” cuprate wires are being used to make high-capacity cables for electric-power transmission, and lighter-weight generators for wind turbines.
Stronger superconducting magnets are leading to the development of MRIs with more sophisticated diagnostic capabilities.
Superconductors are being used for levitated trains in high-speed rail transport, and as microwave filters for improved signal bandwidth in cellular base stations.
The discovery of a new superconductor with enhanced properties could lead to even greater technological innovation.
This brings us to the intellectual challenge of superconductors.
It took 46 years from the discovery of superconductivity to the 1957 Bardeen, Cooper, and Schrieffer (BCS) theory of how the phenomenon occurs.
Along the way, a number of famous physicists tried and failed to get the answer – Albert Einstein, Werner Heisenberg, and Richard Feynman being notable examples.
Discovering the solution required the development of advanced theoretical techniques.
What had been difficult to figure out was how to get electrons to superconduct.
The basic discovery of BCS was that if the electrons pair up, those couples could indeed superconduct.
Fortunately, the mechanism for such coupling was known.
Although electrons are negatively charged, and therefore repel one another, the positive ions that they leave behind when they flow through a metal can mediate an effective attraction between two electrons under restrictive conditions (for example, the metal must be very cold).
The suspicion, though, is that this is not the case in the new superconductors.
Cuprates superconduct at much higher temperatures, but, more importantly, they possess some exotic properties: they are formed by doping electrical carriers into a host material that is a magnetic insulator – the last place one would look for a conventional superconductor.
And, unlike BCS theory, in which the pairs are isotropic – with identical properties in all directions in space – the pairs in cuprates are strongly anisotropic, resembling a cloverleaf.
How can one pair electrons without ions holding them together, thereby enabling higher-temperature superconductors?
While ideas about this abound, new theoretical breakthroughs most likely will be needed to develop the machinery required to solve such electron-electron theories, perhaps even involving black holes.
Whatever the theory turns out to be, it is certain to revolutionize physics.
Aid Works
NEW YORK – The critics of foreign aid are wrong.
A growing flood of data shows that death rates in many poor countries are falling sharply, and that aid-supported programs for health-care delivery have played a key role.
Aid works; it saves lives.
One of the newest studies, by Gabriel Demombynes and Sofia Trommlerova, shows that Kenya’s infant mortality (deaths under the age of one year) has plummeted in recent years, and attributes a significant part of the gain to the massive uptake of anti-malaria bed nets.
These findings are consistent with an important study of malaria death rates by Chris Murray and others, which similarly found a significant and rapid decline in malaria-caused deaths after 2004 in sub-Saharan Africa resulting from aid-supported malaria-control measures.
Let’s turn back the clock a dozen years.
In 2000, Africa was struggling with three major epidemics.
AIDS was killing more than two million people each year, and spreading rapidly.
Malaria was surging, owing to the parasite’s growing resistance to the standard medicine at the time.
Tuberculosis was also soaring, partly as a result of the AIDS epidemic and partly because of the emergence of drug-resistant TB.
In addition, hundreds of thousands of women were dying in childbirth each year, because they had no access to safe deliveries in a clinic or hospital, or to emergency help when needed.
These interconnected crises prompted action.
The United Nations’ member states adopted the Millennium Development Goals in September 2000.
Three of the eight MDGs – reductions in children’s deaths, maternal deaths, and epidemic diseases – focus directly on health.
Likewise, the World Health Organization issued a major call to scale up development assistance for health.
And African leaders, led by Nigeria’s president at the time, Olusegun Obasanjo, took on the challenge of battling the continent’s epidemics.
Nigeria hosted two landmark summits, on malaria in 2000 and on AIDS in 2001, which were a crucial spur to action.
At the second of these summits, then-UN Secretary-General Kofi Annan called for the creation of the Global Fund to Fight AIDS, TB, and Malaria.
The Global Fund began operations in 2002, financing prevention, treatment, and care programs for the three diseases.
High-income countries also finally agreed to reduce the debt owed by heavily indebted poor countries, allowing them to spend more on health care and less on crippling payments to creditors.
The United States also took action, adopting two major programs, one to fight AIDS and the other to fight malaria.
In 2005, the UN Millennium Project recommended specific ways to scale up primary health care in the poorest countries, with the high-income countries helping to cover the costs that the poorest could not pay by themselves.
The UN General Assembly backed many of the project’s recommendations, which were then implemented in numerous low-income countries.
Donor aid did start to rise sharply as a result of all of these efforts.
In 1995, total aid for health care was around $7.9 billion.
This inadequate level then crept up slowly, to $10.5 billion by 2000.
By 2005, however, annual aid for health had jumped another $5.9 billion, and by 2010, the total had grown by another $10.5 billion, to reach $26.9 billion for the year.
The expanded funding allowed major campaigns against AIDS, TB, and malaria; a major scaling up of safe childbirth; and increased vaccine coverage, including the near-eradication of polio.
Many innovative public-health techniques were developed and adopted.
With one billion people living in high-income countries, total aid in 2010 amounted to around $27 per person in the donor countries – a modest sum for them, but a life-saving one for the world’s poorest people.
The public-health successes can now be seen on many fronts.
Around 12 million children under five years old died in 1990.
By 2010, this number had declined to around 7.6 million – still far too high, but definitely an historic improvement.
Malaria deaths in children in Africa were cut from a peak of around one million in 2004 to around 700,000 by 2010, and, worldwide, deaths of pregnant women declined by almost half between 1990 and 2010, from an estimated 543,000 to 287,000.
Another $10-15 billion in annual aid (that is, roughly $10-15 more per person in the high-income world), bringing total aid to around $40 billion per year, would enable still greater progress to be made in the coming years.
The MDGs for health could be achieved even in many of the world’s poorest countries.
Unfortunately, at every step during the past decade – and still today – a chorus of aid skeptics has argued against the needed help.
They have repeatedly claimed that aid does not work; that the funds will simply be wasted; that anti-malaria bed nets cannot be given to the poor, since the poor won’t use them; that the poor will not take anti-AIDS medicines properly; and so on and so forth.
Their attacks have been relentless (I’ve faced my share).
The opponents of aid are not merely wrong.
Their vocal antagonism still threatens the funding that is needed to get the job done, to cut child and maternal deaths by enough to meet the MDGs by 2015 in the poorest countries, and to continue after that to ensure that all people everywhere finally have access to basic health services.
A decade of significant progress in health outcomes has proved the skeptics wrong.
Aid for health care works – and works magnificently – to save and improve lives.
Let us continue to support these life-saving programs, which uphold the dignity and well-being of all people on the planet.
A Japanese Metamorphosis?
OSAKA – Yesterday’s landslide general-election victory by the Democratic Party of Japan (DPJ) terminated the one-party-dominated system that the catch-all Liberal Democratic Party (LDP) has controlled almost without interruption since 1955.
For most of the last decade, the DPJ was not seen as a viable alternative to the LDP, although they appeared to form a pseudo-two-party system.
Twenty years after the Cold War’s end, Japan will at last have a post-Cold War system of government.
The Japanese public, even now, remains uncertain about the DPJ’s ability to govern and is skeptical of its rosy programs of wealth redistribution, which lack solid funding.
The public is also fully aware that the ideologically fragmented DPJ lacks a pragmatic, coherent foreign and security policy
Yet the DPJ will form the next government because of public disgust with the LDP.
For the last four years, the LDP had shown itself to be utterly unresponsive to the key issues of popular concern: pensions, unemployment, and the fraying social safety net.
Moreover, the LDP was plagued by a string of minor scandals and consistent bungling.
The LDP’s need for three different prime ministers in the space of little more than a year made plain that the party’s power nucleus had melted down.
Once in power, the DPJ will immediately confront the massive bureaucracy and entrenched mandarins, which usually sabotage any efforts at administrative reform that threatens their power and vested interests.
Indeed, immediately after the election, the budget estimates for the next fiscal year are due.
The figures that will be presented are the result of a lengthy process, in which the bureaucracy closely consulted with LDP.
So, without breaking the regular budget cycle, the DPJ will be forced to implement not only the supplementary budget drawn up by the LDP, but will also be stuck with next year’s budget, which embodies LDP policies that the DPJ has denounced.
As a result, the DPJ has announced plans to revoke the LDP’s guidelines for a ceiling on budget requests so as to formulate its own budget from scratch. It will also revise the supplementary budget as well.
But time is short, and few of new DPJ lawmakers possess the legislative experience and budgetary expertise to make that happen.
To gain control of the mandarins, the DPJ plans to place 100 lawmakers in the ministries’ top leadership, as well as three dozen political appointees to policy staffs in the office of the prime minister.
Unfortunately, the DPJ scrapped an LDP-sponsored civil-service reform bill, which would have allowed the DPJ to replace mandarins with an army of political appointees.
The DPJ, despite its manifesto, seems unprepared to tame the mandarins, and so may be forced to rely on them.
The ascendency of the mandarins is a legacy of Japan’s unique historical development dating back to its early modern period.
Unlike in Europe, Japan developed its state before building a strong civil society.
Indeed, full-fledged “society”-building started only after the 1868 Meiji Restoration, which tipped the balance of power definitively in favor of the state.
As a result, the mandarins survived WWII and the postwar American occupation relatively undamaged, and they will strive to survive the DPJ government as well.
They will most likely succeed.
LDP lawmakers and mandarins developed a routine in which mandarins drafted cabinet-sponsored bills, LDP lawmakers checked the bills, and the two together finalized legislative drafts before they were introduced to the Diet (parliament).
Since the LDP, recently with a coalition partner, controlled the Diet, the legislative process was simply the interaction between LDP lawmakers and mandarins, centered in the LDP’s headquarters.
The Diet’s role was merely pro forma.
Indeed, under the LDP-led one-party-dominant system, this extra-constitutional mechanism became an integral part of Japan’s government polity.
The DPJ government will collide head-on with the mandarins, partly because the party will find it hard to recruit sufficiently qualified policymakers.
The mandarins have maintained their privileged position in this regard, owing partly to the tax system, which prevents the emergence of non-profit institutions, especially think tanks, where independent policy expertise can be forged.
Moreover, perhaps in anticipation of a change in power, the mandarins have moved forward the annual personnel changes in the major ministries’ top administrative positions.
And what of the LDP?
Having fallen from power, it will lose its control of the redistribution of government funds.
Unable to pay off its constituencies, disintegration looms, for the LDP has never been a party with entrenched grass-roots support, but instead operates as a machine of power and redistribution through a web of insiders across the country’s industrial sectors, occupational associations, and local communities.
Only by recruiting new blood and reorganizing itself with a solid ideological platform will an LDP comeback be possible.
The DPJ has even weaker grass-roots support, so the mandarins will most likely use their standard techniques of divide and rule to cajole the party by teaching it to mimic the LDP in using state money and contracts to underwrite its major constituencies, such as labor unions and other interest groups.
The birth of the DPJ government can yet be a turning point.
A major power shift in favor of “society” has taken place.
If the DPJ can break free of mandarin control by centralizing policy formation in the office of the prime minister, as it intends, Japan can emerge as a more resilient democracy with a full-fledged two-party system and greater willingness to assume an international leadership role.
A Jobless Recovery?
CAMBRIDGE – Who will suffer the longest and the most from the implosion in 2008-2009 of Wall Street and the ensuing world recession?
Not the bankers and financiers who created the disaster.
Some financiers, like Bernard Madoff, will go to prison for fraud.
But, although Madoff was only the tip of the iceberg of rampant financial malfeasance, most suspect financiers need not fear arrest, either because their behavior merely skirted the law, or because financial impropriety more subtle than outright fraud is often difficult to prove.
Some bank bosses will retire in shame, but with huge payments to ease their pain – such as the $55 million golden parachute handed to Bank of America’s Ken Lewis, with his, and the £25 million pension bestowed on Royal Bank of Scotland’s Fred Godwin.
But, buoyed by government bailout money, guarantees, and low interest rates, many banks have again begun to pay their top managers huge bonuses while fighting vigorously against reforms designed to restrain their risk-taking and compensation.
The big losers from this economic disaster are workers in the advanced countries that bought into the laissez-faire flexibility of American-style capitalism.
From 2007 to October 2009, the United States lost nearly eight million jobs, which reduced the employment-population ratio from 63% to 58.5%.
The unemployment rate at the end of 2009 was above 10%, duration of joblessness was the longest since the Great Depression, millions had had their working hours cut, and millions more were too discouraged by a lack of jobs to seek work.
Advanced Europe, Canada, and Japan also suffered major job losses that will last for a long time.
Spain, which allows for widespread temporary contracts, has had the biggest increase in unemployment, because Spanish workers can be fired as quickly as those in the US.
Some countries – for example, Germany, Sweden, and South Korea – have “hidden” their joblessness by paying firms to keep workers on the payroll.
This can work in the short term, but it cannot be sustained over time.
From the 1980’s through the mid-2000’s, employment has increasingly lagged GDP in economic recoveries.
In the US, there was a jobless recovery under President Bill Clinton until the dot.com boom in the latter part of the 1990’s, and there was a jobless recovery under George W. Bush in the wake of the 2001 slowdown.
In the early 1990’s, Sweden suffered a huge recession precipitated by a housing bubble and a banking crisis.
Its unemployment rate rose from 1.8% in 1990 to 9.6% in 1994, before bottoming out at 5% in 2001.
Sixteen years after the crisis, the unemployment rate was 6.2% – more than triple the rate in 1990.
In 1997, Korea suffered not only from the Asian financial crisis, but also from insistence by the US and the International Monetary Fund that it raise interest rates and undertake “Washington Consensus”-style reforms to receive aid.
Employment recovered, but primarily in “non-regular” jobs with limited benefits, low wages, and little job security.
Inequality in Korea rose from moderate levels to second highest (behind the US) among advanced OECD countries.
Weakness in the job market takes a huge toll on economic and personal well-being.
Young people seeking their first jobs and experienced workers who lose jobs in a weak job market suffer economic losses that will last their entire lives.
Studies of happiness show that unemployment reduces happiness by as much as the loss of a family member.
It is difficult to see the US re-attaining full employment anytime soon.
From 1993 to 1998, the US created millions of jobs, which raised the employment rate by 5.4 percentage points.
If employment began rising at this rate in 2010, it would take until 2015 before it reached its pre-recession level.
And slow recovery in the US will drag down recovery in other advanced countries, reducing their employment as well.
A long, painful period of high unemployment runs counter to what most experts believed the flexible US economic model would ever produce.
From the early 1990’s on, many analysts viewed America’s weak unionization, at-will employment, limited legal job protection, and high job turnover as major factors in achieving a lower unemployment rate than most EU countries.
Many OECD countries initiated various kinds of flexibility reforms in the hope of improving their economies along US lines.
The view that flexibility is the key factor in employment is no longer tenable.
In its 2009 Employment Outlook , the OECD took a hard look at its favored policy reforms and found them deficient in helping countries adjust to a finance-driven recession.
According to the OECD, “there does not appear to be any strong reason to expect that recent structural reforms mean that OECD labor markets are now substantially less sensitive to severe economic downturns.”
So the lesson from the recession is clear.
The weak reed in capitalism is not the labor market, but the financial market.
At worst, labor-market failures impose modest inefficiency costs on society, whereas capital-market failures harm society greatly, with workers, rather than the perpetrators of financial disaster, suffering the most.
Moreover, globalization means that the US capital market’s failure spreads misery around the world.
We owe it to workers victimized by this recession to reinvent finance so that it works to enrich the real economy, instead of enriching only the financiers.
This means changing the incentives and rules that govern the financial sector.
Since other countries’ economies and jobs are also at stake, they owe it to their citizens to press the US to deliver meaningful financial reforms.
France’s Midsummer Night’s Dream
PARIS – Bastille Day, the French national holiday, was glorious this year.
The military parade, dominated by the celebration of “victory” in Mali and the joint participation of African and United Nations troops, had the perfection of a gracious, albeit muscular, ballet.
The classical concert that preceded the magisterial fireworks that ended the day was the closest thing to a French version of the Proms in London, mixing light classical and popular songs.
The Eiffel Tower imbued the evening with its magic.
Paris, in case anyone had any lingering doubts, remains the capital of the world – or so it seemed for a night.
The melancholia that began to seize France many years ago was all but forgotten.
The celebration of the glory of the past, mixed with popular English songs of the present, seemed to indicate renewed national confidence.
What was the meaning of this moment of grace?
Was it purely the product of a collective delusion, an emotional Potemkin village of sorts, encouraged, if not conceived, by the authorities to restore some level of self-assurance among France’s depressed citizens?
Even if the positive emotions remain only fleeting (as seems most likely), they were real and palpable.
The French seemed to be in the mood to celebrate.
Of course, it could simply have been the weather; a gorgeous summer has finally settled in after a miserable spring.
But it might also have been one of those natural turning points, a collective and spontaneous decision to say: “Enough of depression, let’s move on.”
We have a great revolutionary past that still conveys universal values – liberty, equality, fraternity – and an army that, as in Mali, continues to make a difference in the world.
One can draw two lessons from this collective form of escapism.
The first is that, beyond the many layers of depression and distrust in France, there is potential for a new and collective departure.
This would require, of course, less cynical political elites who can transcend their petty ambitions and divisions for the sake of the country.
The second lesson, even more obvious, is that reality cannot be changed with a simple public spectacle.
France is not Imperial Rome, where panem et circenses made a fundamental difference.
It is a weakened democracy mired in an economic and social crisis so deep that it verges on becoming an identity crisis.
The proof was provided by a third traditional event on Bastille Day, between the morning’s military parade and the evening’s music and fireworks: President François Hollande’s speech to the nation, which took the form of an interview with two prominent journalists.
He, too, was in a reassuring mood.
According to Hollande, the economic upturn – la reprise – had just started, and hope was around the corner.
His tone and message had changed.
He was no longer the “normal man” of his election campaign and tenure until now; instead, he tried to present himself, like his predecessor, Nicolas Sarkozy, as a superhero.
Of course, given his personality and low public-approval ratings, his address was the least convincing event of the day.
Who could have said with certainty that the economic upturn announced by Hollande was real rather than aspirational?
Beyond his message’s wishful thinking, the public’s reaction to the messenger was a mixture of disbelief and indifference.
Seeing the behavior of friends, all French, listening with me to Hollande, I was reminded of another moment.
It was December 31, 1989, and I was in the Soviet Union. I had found myself in a restaurant in the old city of Suzdal, listening to President Mikhail Gorbachev’s “New Year wishes.”
I was moved: The man who symbolized glasnost and perestroika, who had allowed the peaceful emancipation of most of Eastern and Central Europe, was speaking.
But I was alone in paying attention to him.
The restaurant’s customers, like my French friends now, could not have cared less.
Their president had become background noise.
Has Hollande become, in this sense, a French Gorbachev?
For the left and the Greens, he is close to being a traitor.
These voters chose him a year ago not only because he was not Sarkozy, but because he incarnated the values of the true left, even if his centrist moderation seemed a bad omen.
Voters of the center or even the center-right are disappointed, too, by their president’s lack of charisma, if not sheer incompetence.
After a year of Hollande, France is witnessing a fundamental political revolution.
During the half-century of the Fifth Republic, a bipartisan system of left and right has traditionally prevailed.
But now France is becoming a country dominated by a “tripartite system” of more or less equal strength: the left, the right, and the extreme right.
If France wants to capitalize on the positive emotions of Bastille Day, it needs much more responsible elites, ready to unite in the fight against unemployment and its causes (lack of competitiveness and labor-market rigidity) and consequences (the rise of populist, non-republican forces).
What Bastille Day revealed, even briefly and superficially, is that the potential to unite France exists.
A Kick-Off for Peace?
Yerevan – Armenian President Serzh Sargsyan’s recent invitation to Turkish President Abdullah Gul to visit Yerevan to watch a football match together was historic.
Given the two countries’ long-strained relations, this visit would have been remarkable at any time.
But coming as it does only one month after the alarming Russian-Georgian confrontation, it may offer real hope that tensions in the volatile Caucasus region can be eased.
Of course, ancient and difficult issues divide Armenia and Turkey.
But now is the moment for both countries to put the past aside in order to address their common security concerns.
In the new context set by the war in Georgia, the urgency of Turkey becoming a real bridge between the nations of the Caucasus is not lost on anyone.
This expectation is an inevitable consequence of Turkey’s geography and history.
Situated figuratively between modernity and tradition, secularism and Islam, and democracy and tyranny, Turkey also is an actual physical bridge between East and West.
For the peoples of the Caucasus, Turkey marks our path to Europe.
It is a NATO member, bordering the three Caucasus republics that have NATO Individual Partnership Action Programs.
It aspires to join the European Union, and would bring the EU to our three borders, even as we, too, aspire to join one day.
Indeed, Turkey has never missed an opportunity to present itself as a regional broker.
Immediately after the collapse of the Soviet Union, Turkey proposed the Black Sea Economic Cooperation.
This year, as the American-led effort to mediate a Middle East peace settlement began to falter, Turkey took up the job of mediator in both the Israeli-Palestinian conflict and the conflict between Syria and Israel.
Now, in the immediate wake of the Russia-Georgia crisis, Turkey’s leaders have stepped forward once again to take a leadership role in the Caucasus.
The world must fervently hope that the Turkish proposal for a Caucasus Stability and Cooperation Platform is more serious and sustained than previous similar efforts.
But, in order to succeed, Turkey must firmly pursue a pledge from all the region’s players to repudiate the use of force in settling their disputes.
If this pledge is adopted and respected, conflicts in the region will be viewed in a wholly different, more tolerant context, marking a historic breakthrough to peace.
In fact, why not take the idea of such a pact one step further?
We in this region can, and I believe should, call for a non-aligned Caucasus, free of security blocs and adversarial alliances.
After all, security alliances and guarantees only create dividing lines, with their attendant security challenges.
Our countries and peoples have, throughout history, lived under a common umbrella for far longer than we have been divided.
Today, we share a common vision of European integration, and it is in this broader context that our conflicts should be resolved.
French President Nicolas Sarkozy’s and German Chancellor Angela Merkel’s visits to Georgia and Russia proved that there is no substitute for Europe insofar as the Caucasus is concerned.
Only Europe can play the role of honest broker in the region’s atmosphere of suspicion and intolerance.
But, at the end of the day, we ourselves must be willing to work toward a region of peace and cooperation.
The Caucasus is too small a space for closed borders and explosive conflicts.
Although some of those tensions appear purely bilateral, the Georgian-Russian conflict demonstrates that there is no such thing anymore in this globalized world, and certainly not in this interconnected region.
In fact, real peace in the Caucasus requires two key strategic transformations.
One is a lesson from history: Russia’s strategic interests here cannot be ignored.
To believe and behave otherwise would lead to regional chaos.
The other lesson is that Turkey and Armenia cannot remain adversaries forever.
There must be normalization in our relations in order for the Caucasus to coalesce into a functional region.
Ironically, both Russia and the United States recognize that this is in their interest.
The Russians view normal relations between Turkey and Armenia as a way to minimize Georgia’s strategic role in the region.
The US views an opening to Turkey as a way to decrease Armenia’s real and imagined reliance on Russia.
Beyond the emotional impact of President Gul’s visit to Yerevan, real improvement in Turkish-Armenian relations requires opening the two countries’ closed border – the last in Europe.
Or, for a start, the existing railroad link between the two countries could be made operational.
If this does not happen within the coming weeks and months, then Turkey will have demonstrated that all this was just a show.
President Gul’s visit does mark a watershed – either as a failure to make history, or as the beginning of a new era.
Alan Greenspan on Trial
The release of Alan Greenspan’s ghostwritten memoirs The Age of Turbulence has elicited charges that he was not such a great central banker after all.
Stan Collender of National Journal sees the fingerprints of the White House on these attacks: Greenspan is harshly critical of George W. Bush’s administration, after all, and to attack the credibility of Republican ex-policymakers who are critical of Bush is standard counterpunching for it.
But what is one to make of the criticisms of Greenspan’s tenure at the Federal Reserve?
The indictment contains four counts: that Greenspan wrongly cheered the growth of non-standard adjustable-rate mortgages, which fueled the housing bubble; that he wrongly endorsed Bush’s tax cuts; that he should have reined in the stock market bubble of the 1990’s; and that he should have done the same with the real estate bubble of the 2000’s.
To the first two counts, Greenspan now pleads guilty.
He says that he did not understand how the growth of non-standard mortgages had lured borrowers and investors into bearing dangerous risks.
He was, he now says, focusing on how fixed-rate mortgages are relatively bad deals for borrowers in times of low inflation, which was a mistake.
Greenspan also pleads guilty to a mistake in early 2001.
He thought that he was giving balanced testimony to Congress on government budget issues.
He testified that it is important to run surpluses to pay down the debt, but that surpluses must not be so large that the government winds up owning American industry.
He also testified that tax cuts are better than spending increases to keep surpluses from growing too large, but that uncertainty is enormous, so that any tax cuts should be canceled if they threatened to bring us back to an age of deficits.
Robert Rubin and Kent Conrad warned him that the press would not interpret his testimony as being balanced, and that Congress would interpret it as an excuse to abandon fiscal discipline.
They were right.
Greenspan also pleads guilty to misunderstanding the character of the Bush administration.
He thought that his old reality-based friends from the Ford administration were back in power. He thought that he – and Treasury Secretary Paul O’Neill – could win the quiet “inside game” for sensible policy without resorting to an “outside game” that would make his reappointment in 2004 unlikely.
He was wrong.
But how serious are these policy-political crimes to which Greenspan now pleads guilty?
In my view, they are misdemeanors.
Against them you have to set what former Treasury Secretary Larry Summers calls Greenspan’s “golden glove” performance at avoiding and minimizing recessions during his years at the Fed.
The “felonies” of which Greenspan stands accused are the other two charges: that he should have done more to stop the stock market bubble of the late 1990’s, and that he should have done more to stop the housing bubble of the early 2000’s.
Here, Greenspan holds his ground, and pleads not guilty.
The only way, he says, for the Fed to have kept stock prices in reasonable equilibrium ranges in the late 1990’s would have been to raise interest rates so high that they hit the real economy on the head with a brick.
Interest rates high enough to curb stock market speculation would also have curbed construction and other forms of investment, raised unemployment, and sent the economy into recession.
To cause a significant current evil in order to avoid a possible future danger when our knowledge is limited and our judgments uncertain is, Greenspan believes, unwise.
In this, he is following a tradition of caution that extends from Edmund Burke to John Maynard Keynes.
Greenspan mounts a similar defense concerning the housing bubble.
High construction employment has been good for American workers in the past half-decade – a period that has not produced much good for them.
Higher interest rates to reduce the housing boom seem, even in retrospect, ill advised if the cost is mass unemployment.
And Greenspan eschews paternalism: he would not assume the role of a regulator telling people that they cannot buy a house even though a lender is willing to finance it.
But Greenspan would have served the country and the world better if he had been somewhat more paternalist in slowing the growth of non-standard adjustable-rate mortgages.
He would have served the country and the world better had he been less of a loyal Republican working the inside game of trying to convince Bush’s political advisors that good policy was important, and more of a nonpartisan steward of America’s long-term fiscal stability.
Of course, such a Greenspan would never have been re-appointed.
All in all, Greenspan served the United States and the world well through his stewardship of monetary policy, especially by what he did not do: trying to stop stock and housing speculation by halting the economy in its tracks.
A Lasting Poison
NEW YORK – Next year will mark the twentieth anniversary of the collapse of communism in Europe.
Liberated from the complexity of knowing too much about the cruel past, the young people of Eastern Europe’s post-communist generation seem uninterested in what their parents and grandparents endured.
Yet the recent revelation of the Czech writer Milan Kundera’s presumed complicity in the face of Stalinism is but the latest of the long half-life of a toxic past.
Other examples come to mind: the accusations of collaboration with the secret police raised against Lech Walesa, Romania’s public controversies surrounding Mircea Eliade’s fascist past, and the attacks on the alleged “Jewish monopoly of suffering” which equate the Holocaust with the Soviet Gulag.
Friedrich Nietzsche said that if you look in the eye of the Devil for too long, you risk becoming a devil yourself.
A Bolshevik anticommunism, similar in its dogmatism to communism itself, has from time to time run riot in parts of Eastern Europe.
In country after country, that Manichean mindset, with its oversimplifications and manipulations, was merely re-fashioned to serve the new people in power.
Opportunism has had its share in this, of course.
In 1945, when the Red Army occupied Romania, the Communist Party had no more than 1,000 members; in 1989, it had almost four million.
One day after Nicolae Ceausescu’s execution, most of these people suddenly became fierce anticommunists and victims of the system they had served for decades.
Residual traces of totalitarian thinking can also be found in the hostility to former dissidents like Adam Michnik or Václav Havel, both of whom argued that the new democracies should not exploit resentments or seek revenge, as the totalitarian state did, but instead build a new national consensus to structure and empower a genuine civil society.
Former generals of the secret police and members of the Communist
But the case of Kundera appears different – though no less disturbing.
In 1950, Kundera, then a 20-year-old Communist, reportedly denounced to the criminal police as a Western spy a man he had never met – a friend of his friend’s girlfriend.
The man was later brutally interrogated in a former Gestapo torture facility and spent 14 years in prison.
Kundera’s name was contained in the investigating officer’s report, which was authenticated after a respected historian discovered it in a dusty Prague archive.
The reclusive Kundera, who immigrated to Paris in 1975, has declared that “it never happened.” Moreover, Czechoslovakia’s fearsome secret police, who had every interest in silencing or compromising the famous dissident writer, never used the incident to blackmail or expose him.
Until more information is forthcoming, both from Kundera and from the authorities, the case will not be solved “beyond reasonable doubt.”
But
As far as we know, Kundera never was an informer before or after this incident, and we cannot ignore that he later freed himself from the compulsory totalitarian happiness that communism propagated.
Indeed, his case also serves as a reminder that the early 1950’s was the most brutal period of “proletarian dictatorship” in Eastern Europe – a period of great enthusiasm and terrible fear that poisoned the minds and souls of devoted believers, fierce opponents, and apathetic bystanders alike.
Moreover, Kundera’s case is hardly unique.
In 2006, the Nobel Prize-winning German author Günter Grass’s disclosed that, 60 years earlier, he was, as a teenager, a member of the Waffen-SS.
Similarly, a few years ago, the world was shocked to learn that famous Italian writer Ignazio Silone had, in his youth, collaborated with the fascist police.
Daily life under totalitarianism, be it communist or fascist, was routinely based on a deep duplicity whose effects are longstanding.
I don’t agree with those who say we should not be interested in the dark episodes in the life of a great writer.
Why not?
We should be interested not for prosecutorial purposes, but in order to gain a more profound understanding of a bloody, demagogical, and tyrannical Utopia – and of human weakness and vulnerability. We may even consider it a rewarding testament to an artist’s ability to overcome his past mistakes and still produce priceless work.
But can we justifiably defend morally compromised artists and intellectuals on the basis of their work’s merit, yet condemn ordinary people for often less grave offenses?
An egregious example of this was the way followers of Romanian philosopher Constantin Noica defended his support for the fascist Iron Guard and his later collaboration with the Communists, while at the same time condemning even a generic cleaning woman for mopping the floors in the offices of the secret police.
Shouldn’t that cleaner’s drudgery to support her family, children, and her own survival be taken equally into account?
Life under totalitarianism was an extreme situation that requires us to apply special, nuanced rules to
In Eastern Europe today, old and young alike stand to benefit from that lesson.
Moses wandered with his people in the desert for 40 years, until they had rid themselves of the poisonous slave mentality.
A League of Democracies?
LONDON – Senator John McCain, the Republican presidential candidate, has been calling for the creation of a “League of Democracies.”
This new international group would possess a formidable military capacity, based partly on NATO and partly on a “new quadrilateral security partnership” in the Pacific between Australia, India, Japan, and the US.
Neither Russia nor China, of course, would be invited to join: indeed, McCain wants to exclude Russia from the G8.
The League is necessary, argues McCain, because in matters vital to the US, such as fighting Islamic terrorism, humanitarian intervention, and spreading liberty, democracy, and free markets, the US and its democratic partners must be able to act without permission from the United Nations (i.e., from Russia and China).
In other words, the League’s main purpose is to marginalize Russia and China in world affairs.
The most damning criticism of McCain’s plan is that it would launch a new Cold War between states labeled democracies and autocracies.
This is not only dangerous, but incoherent.
Russia and China do not “threaten” the “free world” with a powerful ideology and massive armed forces, as they did during the Cold War.
Moreover, the world’s democracies are themselves divided on how to deal with Islamic terrorism or genocide in Darfur: it was France, after all, which led the opposition in the UN Security Council to the US invasion of Iraq.
Moreover, on issues like terrorism, nuclear proliferation, and climate change, the US needs Russian and Chinese help.
Stigmatizing Russia and China as pariahs will not get them on board.
(China must learn to behave “responsibly,” McCain declares with breath-taking condescension.) In fact, Russia has mostly cooperated with the US in the “war against terrorism.”
Finally, the idea is impracticable.
One cannot imagine India or Brazil wanting to be part of any such a combination.
So we would all spare ourselves an awful lot of trouble if McCain’s brainchild were buried as quickly as possible.
Yet underlying this idea is a serious proposition, to which Britain’s former prime minister, Tony Blair, often gave eloquent expression: democracies don’t fight each other, so if the whole world were democratic, wars would stop.
Presumably, McCain’s League of Democracies is designed to bring Immanuel Kant’s dream of perpetual peace closer to realization by putting  pressure on non-democracies to change their ways, by force if necessary.
Leave aside the fact that efforts to make democracy bloom have become bloodily unstuck in Iraq and Afghanistan. Is it true that democracies never fight each other?
The affirmative answer seems to depend on two separate claims.
The first is that democracies have, as a matter of historical record, never fought each other.
This is true of a rather small group of rich countries (India is a partial exception), mainly in western Europe and its overseas offshoots, since World War II.
Moroever, they are “our kind” of democracy – constitutional democracies that contain all the features we take for granted in modern Western systems, not “Islamic democracies” like Iran.
A reasonable generalization from this rather small sample would be that “prosperous and constitutional democracies tend to live in peace with each other.”
The second claim is that these countries live in peace because they are democracies.
But is it democracy that has brought them peace and prosperity, or is it peace and prosperity that have brought democracy?
Is it democracy that has kept Europe peaceful since 1945, or is it the long period of peace since 1945 that has allowed democracy to become the European norm?
The world already has a peace-maintaining institution.
The UN was created under rules designed to enable states of different political colors to live together.
Members accept the obligation not to use force except in self-defense or unless it is authorized by the Security Council.
The US is frustrated by not being able to get its way at the UN.
But the UN exists to protect all states from lawless behavior, including by the US.
By implicitly bypassing the UN, and dividing the world into two armed camps, the League of Democracies would increase the danger of war.
The world also already has a prosperity-spreading mechanism.
It is called trade.
In 1994, the World Trade Organization was created to liberalize trade under agreed rules.
It is full of faults, which need to be corrected. But we don’t need a League of Democracies to do this.
By subjecting trade relations to embargoes, sanctions, and tests of democracy, environmental standards, and human rights, the League is likely to retard the growth of trade, and thus the chance for poor non-democracies to catch up.
The only purpose of the League of Democracies seems to be to legitimize war-making by democracies – in order to spread democracy!
This is the thrust of McCain’s message.
As he put it, the US was built for a purpose – to serve “eternal and universal principles.”
Its God-given task is to build an “enduring global peace on the foundations of freedom, security, prosperity, and hope.”
Noble rhetoric!
But if that is the League’s purpose – and I see no other – then it is a danger to peace.
This is because its advocates believe that no long-term co-existence with non-democracies is possible.
This is crazy and unhistorical.
It is up to the chastened nations of Western Europe, which broadly share American values but have learned something about political patience, to rein in the American fantasy of re-making the world in its own image.
I am all for spreading Western-style democracy, but not at the cost of making the world more warlike.
Peaceful coexistence between different political systems is an attainable objective, and one to which all the world’s major powers can sign up.
A Less-is-More Growth Strategy for Africa
REYKJAVIK – If African countries were to adopt only one policy to boost economic growth and improve macroeconomic stability, they should reduce the number of currencies in circulation across the continent as quickly as possible.
Doing so would most likely encourage trade, as happened in Europe with the arrival of the euro, and could help contain inflation – which is always good for growth – by imposing international discipline on monetary policy.
The African Union is now aiming at pooling all the continent’s currencies into a single currency by 2028.
In the meantime, several regional monetary unions are on the drawing board, in addition to the two monetary unions that already exist, one
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The premier and oldest of these unions is composed of the fourteen countries that belong to the Economic and Monetary Community of Central Africa and the West African Economic and Monetary Union, which both use the CFA franc.
The second of these unions is composed of Lesotho, Namibia, Swaziland, and now Zimbabwe, all of which use the South African rand.
Disregarding Zimbabwe, a recent and incomplete convert, the 18 countries of the two existing monetary unions have, as intended, benefited from lower inflation than much of the rest of Africa.
To see why, consider Nigeria.
Before independence, Nigeria’s legal tender was the British pound.
With the establishment of the Central Bank of Nigeria in 1959, the Nigerian pound was introduced.
Back then, one Nigerian pound was equivalent to one British pound.
This arrangement remained intact until 1973, when Nigeria adopted a new currency, the naira.
The exchange rate remained unchanged: one naira was equivalent to one British pound.
The naira was intended to bolster the country‘s independence by making it possible for the central bank to pursue its own monetary policy.
It was also a matter of national pride.
The thinking behind the new arrangement was that an independent and flexible monetary policy would serve the nation‘s interest better than a fixed exchange rate that tied the naira to the pound.
But the naira’s introduction quickly put an end to parity with the British pound.
Government expenditure exceeded federal revenue, despite rapidly rising foreign-exchange earnings from oil exports after 1970.
The federal government’s budget deficits were financed through foreign and domestic borrowing, and by printing money, which led to inflation and depreciation of the new currency.
Today, it costs 220 naira to buy one British pound, which implies 15% annual average depreciation since 1973.
This depreciation would perhaps be justifiable had Nigeria managed to use easy money to narrow the gap between ordinary Nigerians’ standard of living and that of people living in Britain.
But that did not happen.
The purchasing power of national income per person in Nigeria is now 50% lower relative to Britain than in 1980.
In view of this experience, Nigeria now plans to abolish the naira in favor of joining a monetary union with four or five other West African countries (The Gambia, Ghana, Guinea, Sierra Leone, and perhaps Liberia).
But that planned monetary union, until recently envisaged to be launched in 2009, has now been put on ice.
The smallest countries show no signs of fear of being swamped by Nigeria, by far the most populous country in the group (accounting for 155 million of the six countries’ 200 million people), especially as the new West African Central Bank is to be located in Accra, the capital of Ghana (24 million). Others, though, may fear the dilution of their sovereignty when the new Central Bank of the
takes over some of the policymaking responsibilities of national central banks.
But that, of course, is the chief purpose of a monetary union.
When the West African Monetary Zone finally is established, the number of currencies in Africa will equal about half the number of countries.
And when the East African Community with its five members (Burundi, Kenya, Rwanda, Tanzania, and Uganda) re-emerges as scheduled, the number of currencies will be reduced by another four.
The belief that sovereign national currencies, by enabling independent and flexible monetary policies, are the best way to foster economic and social development – the vision of Nigeria’s post-colonial leaders – is gradually falling by the wayside.
Efficiency dictates the use of fewer and larger currencies (and foreign investors, understandably wary of weak and volatile currencies, demand it).
Indeed, the success of the European Union and of the euro since its launch in 1999 has made a strong impression in Africa.
Alexander Hamilton’s Eurozone Tour
PRINCETON – Europe’s debt crisis has piqued Europeans’ interest in American precedents for federal finance.
For many, Alexander Hamilton has become a contemporary hero.
Perhaps one day his face should appear on the €10 banknote.
Specifically, for European states groaning under unbearable debt burdens, Hamilton’s negotiation in 1790 of the new federal government’s assumption of the states’ large debts looks like a tempting model.
Indeed, after Thomas Sargent won the Nobel Prize in Economics last year, he cited it as a precedent in his acceptance speech.
Hamilton argued – against James Madison and Thomas Jefferson – that the debts accumulated by the states during the War of Independence should be assumed by the federation.
There were two sides to his case, one practical, the other philosophical.
Initially, the most appealing argument for his plan was that it would provide greater security to creditors, and thus reduce interest rates, from the 6% at which the states financed their debt to 4%.
Hamilton emphasized the importance of a commitment to sound finance as a prerequisite to public economy. “When the credit of a country is in any degree questionable,” he argued, “it never fails to give an extravagant premium upon all the loans it has occasion to make.”
While that logic certainly appeals to Europeans today, Hamilton insisted on a stronger reason for pursuing sound finance than merely the pursuit of expediency.
There is, he maintained, “an intimate connection between public virtue and public happiness.”
That virtue consisted in honoring commitments, and it would build solidarity in the new political community of the United States.
Indeed, public virtue made federal finance what he called “the powerful cement of our union.”
The condition for success in the American case was that the US raised its own revenue, with federally administered customs houses initially providing the bulk of its receipts.
The logic of a need for specific revenue applies also in modern Europe, where a reformed fiscal system might include common administration of value-added tax (with the additional benefit of eliminating a considerable amount of cross-border fraud).
In the American case, however, unity carried a price: a ceiling was imposed on Virginia’s exposure to the common debt.
Only this inducement to the most powerful state in the union persuaded Madison to drop his opposition to the proposal.
That compromise (which also led to the US capital’s relocation to the District of Columbia, on the border of Virginia and Maryland) may serve as a precedent for limiting Germany’s liabilities if Eurobonds, or some other debt-mutualization scheme, are introduced.
The US experiment in federalized finance was not immediately successful.
Two important components of Hamilton’s financial architecture were not realized, or were realized imperfectly.
He proposed a model of joint-stock banking on a national scale, which ran into immediate opposition (curiously, his proposal was much more influential in Canada).
Second, opponents eventually blocked his proposal for a national central bank.
The charter of the First Bank of the United States was allowed to lapse in 1811; a generation later, in 1836, President Andrew Jackson successfully opposed the charter of the Second Bank of the United States.
Nor did the Hamiltonian scheme of federal finance guarantee a peaceful commonwealth.
In fact, the fiscal union proved to be explosive rather than adhesive.
As international capital markets developed in the early nineteenth century, state governments borrowed on a large scale, quickly turning them from creditors into debtors.
A wave of state defaults followed in the late 1830’s.
A generation later, in the 1860’s, the Civil War between northern and southern states resulted in large part from a dispute about the character of financial burdens –amp at least from the South’s perspective.
Abraham Lincoln’s original proposal to end the immoral practice of slavery by compensating slave owners for manumission was unacceptably expensive, so the Union, according to the slave-holding Confederacy, was determined to expropriate the South.
The federal assumption of states’ debts by itself could not guarantee political order.
The Civil War revealed the centrality of a common foundation of morality to Hamilton’s approach to debt and public finance.
As a result, his approach foundered on the differences between the different states’ conception of morality.
Europeans today have latched onto the practical side of Hamilton’s argument – that is, the idea that debt mutualization might be a means to cheaper credit; but they have worked out neither the political institutions, nor the shared public virtue, that Hamilton deemed crucial.
The extended and politicized debate about debt restructuring has made a Hamiltonian solution more difficult, because the credit of the countries that would be party to it has become questionable.
An obvious starting point for a Hamiltonian Europe would be to set some standard limit for federalized national debt – perhaps the tarnished threshold of 60% of GDP that was mandated (without adequate enforcement) by the Maastricht convergence criteria, or perhaps a lower limit.
Debt exceeding that amount would be left to the responsibility of the member states.
Collective burden-sharing is in the long run the only non-catastrophic way out of Europe’s current crisis, but that requires a substantially greater degree of political accountability and control on a European level.
The lesson to be learned from Hamilton and the US is that the necessary institutions will not function without a greater degree of moral consensus as well.
Alexievich’s Achievement
NEW YORK – It was 1985, and change was in the air in the Soviet Union.
Aging general secretaries were dropping like flies.
Elem Klimov’s cinematic magnum opus “Come and See” depicted World War II without the heroics on which we were reared, highlighting the tremendous human suffering instead.
Klimov’s approach echoed that of Svetlana Alexievich – this year’s Nobel laureate in literature – in her first book, War’s Unwomanly Face, published the year before.
But, whereas many rushed to see Klimov’s film, Alexievich’s book did not seem to excite readers.
The Soviet Union, supposedly progressive, remained rooted in patriarchy.
Women had jobs, but rarely careers.
Women writers wrote exquisite poetry and prose, and they were officially recognized as the equals (well, almost) of their male peers; but they tended to avoid certain topics – and war was a man’s business.
And thus Alexievich begins War’s Unwomanly Face, “There had been more than 3,000 wars in the world, and even more books.
But all we know about war is what men told us.”
And men told us a lot. “We always remembered the war,” Alexievich recalled, “at school, at home, at weddings and christenings, during holidays and funerals.
War and post-war lived in the home of our soul.” Indeed, I had heard so much about the war by the time War’s Unwomanly Face came out, I had little interest in hearing more about it – whether the suffering and sacrifice or the heroism and triumph – from any perspective.
Fast-forward almost a decade.
America was big on gender politics, and, as a graduate student there, I was embarrassed to be behind.
So I finally read War’s Unwomanly Face.
To my surprise, it was not WWII that I learned about; rather, I got my first glimpse into the emotions that my own relatives experienced, as they fought and survived the war.
People like my grandmother had recounted only the oft-repeated male story, completely denying her own experience.
But her experience mattered, and Alexievich recognized that.
I was so inspired by War’s Unwomanly Face that a few years ago I wrote my own book detailing the endurance of women in my family in the war-ravaged Soviet Union.
Other books by Alexievich were similarly inspiring.
Zinky Boys: Soviet Voices from the Afghanistan War (1991) spoke of a distant fight – the nine-year Soviet war in Afghanistan – that eroded Russian culture and humanity, while Voices from Chernobyl: The Oral History of a Nuclear Disaster (1997) meditated on the global significance of the nuclear disaster.
Public reaction to both was mixed.
Neither the state nor the people quite knew how they felt about Afghanistan or Chernobyl – one a lost war, the other an incomprehensible catastrophe.
Alexievich has described herself as “an ear, not a pen.”
She listens and builds a story, before writing it down.
Her talent is to make the private public, to expose the thoughts that people are afraid to think.
Alexievich does not shy away from the horrific aspects of her subject matter, exemplified in a passage from War’s Unwomanly Face: “We didn’t just shoot [prisoners]… we pinned them up, like pigs, with ramrods, cut into pieces.
I went to observe… I waited for that moment when their eyes would start bursting from pain.” While this brutally matter-of-fact tone can make readers uneasy (indeed, it was one reason why I took so long to read the book), we cannot afford to be ignorant of the truth, even – or perhaps especially – if it makes us squirm.
Honest, daring, and sad, Alexievich’s books – containing stories in which life, broken and stolen, is worse than death – show how a woman’s perspective can humanize world problems and make them understandable to all.
In some ways, Alexievich’s literary contribution, which the Nobel committee called “a monument to suffering and courage in our time,” is equal to that of the Austrian novelist and playwright Elfriede Jelinek, whom the committee recognized in 2004 for her work’s feminist critique of Austria’s Nazi past and patriarchal present.
Now, like Jelinek, whose work was largely unknown to non-German readers until she won the Nobel, Alexievich is finally being recognized for her profound impact.
Her award sends a powerful message – not only about her talent, but also about the importance of the female perspective in the public sphere.
To be sure, Alexievich was far from invisible before.
Her books have been translated into 20 languages, with millions in circulation.
And, like many other Nobel laureates, including Jelinek, she has played an active role in civil society, most recently taking a stand against Russia’s annexation of Crimea.
Interestingly, the frequency with which Nobel Prizes have been awarded to women has been increasing.
In 1991, Nadine Gordimer was the first woman in more than a quarter-century to receive the literature prize; now, women receive it every 2-3 years.
Moreover, this summer, the writer and literary critic Sarah Danius became the first woman in 200 years to serve as the permanent secretary of the Swedish Academy, which chooses the Nobel laureate in literature.
But the patriarchal culture from which Alexievich emerged is far from dead.
Recognizing the ways in which she has enriched people’s thinking about difficult – and historically masculine – subjects can only be good, not only for the women she inspires, but also for the men she influences.
I have just finished Alexievich’s latest dreadful masterpiece, Secondhand Time, a brutal account of the chaotic Russian capitalism of the 1990s.
In recent interviews, Alexievich has said she is working on two more books – one about love, the other about aging.
A Liquid Europe
BRUSSELS – Is the eurozone stepping back from the brink?
This might just be possible, because the emerging outlines of a new framework to resolve the ongoing sovereign-debt crisis contain a key component that was missing so far.
Indeed, that component’s absence was behind this summer’s spreading financial crisis, which moved beyond small, peripheral countries like Greece, Ireland, and Portugal to strike systemically important countries like Italy and Spain.
The starting point of the contagion was investors’ realization that Europe’s rescue fund, the European Financial Stability Facility, was designed to provide emergency financial support only to the peripheral countries.
It simply does not and will never have enough funds to undertake the massive bond purchases required to stabilize the debt markets of large economies such as Spain and Italy.
The EFSF will have at most €440 billion at its disposal (any increase would endanger France’s AAA rating), while the combined public debt of Italy and Spain is more than €2 trillion.
In early August, the domino effect of the eurozone periphery’s sovereign-debt crisis started to kick in, because financial markets do not wait for country after country to be downgraded.
Instead, they tend to anticipate the endgame, or at least one potential scenario, namely the unraveling of the entire crisis-containment structure.
Markets noticed that the euro seemed caught between a rock (the EFSF’s limited borrowing capacity) and a hard place (the European Central Bank’s great reluctance to engage in large-scale purchases of financially troubled governments’ bonds).
It later turned out that the ECB was not that hard after all, though it emphasized that it would stop intervening as soon as the new EFSF became operational.
And, given the EFSF’s limited firepower, the market would have been left without support.
To state the problem more generally, the eurozone requires a liquidity backstop for its fiscal authority.
In a “normal” economy with its own currency, the fiscal authorities can never face a liquidity shortage, because the government can always rely, at least potentially, on support from the central bank.
A eurozone government, by contrast, is always in a precarious situation: it has only very long-term assets (its taxing power) and shorter-term liabilities, namely government debt, much of which has to be rolled over annually.
If investors refuse to buy the debt on any terms, even a fiscally prudent government could find itself in a liquidity squeeze and become insolvent.
Similarly, banks have short-term liabilities (deposits) and long-term assets, which they cannot liquidate quickly without incurring great losses.
This is why all countries provide emergency liquidity support when a bank run materializes, as was done on a global scale when confidence in the banking sector collapsed alongside Lehman Brothers in 2008.
Likewise, the eurozone needs a mechanism to confront runs on its member countries’ government debt.
This requires that fiscal authorities have access to a large pool of liquidity in an emergency.
Only the ECB can provide this insurance.
The good news is that a solution is now slowly taking shape that promises to create a mechanism by which the ECB could backstop the EFSF.
This could be achieved simply by registering the EFSF as a bank, which would give it access to normal ECB refinancing on the same terms as other normal banks.
The EFSF could then conduct very large purchases of government debt by levering up its limited capital through ECB refinancing, using the government bonds it is buying as collateral.
In this way, the proper division of labor could be established.
The EFSF would be responsible for dealing with fiscal crises in member states.
For countries with solvency problems, an adjustment program like those for Greece, Ireland, or Portugal would be appropriate.
But, for large countries facing a liquidity shortage, the EFSF could rely on support from the ECB.
If investors know that a liquidity squeeze is no longer possible, they will refrain from speculative attacks on solvent countries.
The near-panic conditions in financial markets eased as soon as rumors spread that this solution had at least been discussed behind closed doors.
It now needs to be implemented.
As always in Europe, there are legal and political obstacles to change.
But even the most reluctant policymakers recognize that the cost of inaction is too great.
The legal obstacles to potential “monetary financing” of the public sector in the European Union’s governing treaties can be overcome.
The more important obstacle is Germany’s reluctance to admit publicly that ECB liquidity support for government debt markets can be crucial in maintaining financial stability.
Only the German government and the ECB can open the door to this subtle but profound reform of the euro’s fundamental underpinnings.
It is a choice that they cannot put off much longer.
All for One Tax and One Tax for All?
CAMBRIDGE – When the next full-scale global financial crisis hits, let it not be said that the International Monetary Fund never took a stab at forestalling it.
Recently, the IMF proposed a new global tax on financial institutions loosely in proportion to their size, as well as a tax on banks’ profits and bonuses.
The Fund’s proposal has been greeted with predictable disdain and derision by the financial industry.
More interesting and significant are the mixed reviews from G-20 presidents and finance ministers.
Governments at the epicenter of the recent financial crisis, especially the United States and the United Kingdom, are downright enthusiastic, particularly about the tax on size.
After all, they want to do that anyway.
Countries that did not experience recent bank meltdowns, such as Canada, Australia, China, Brazil, and India, are unenthusiastic.
Why should they change systems that proved so resilient?
It is all too easy to criticize the specifics of the IMF plan.
But the IMF’s big-picture diagnosis of the problem gets a lot right.
Financial systems are bloated by implicit taxpayer guarantees, which allow banks, particularly large ones, to borrow money at interest rates that do not fully reflect the risks they take in search of outsized profits.
Since that risk is then passed on to taxpayers, imposing taxes on financial firms in proportion to their borrowing is a simple way to ensure fairness.
“What risks?” the financial firms demand to know.
The average cost of the bailouts was “only” a few percentage points of GNP.
And the crisis was a once-in-a-half-century event.
The IMF rightly points out that these claims are nonsense.
During the crisis, taxpayers were on the hook for almost a quarter of national income.
Perhaps the next crisis will not turn out so “well,” and the losses borne by the public will be staggering.
Even with the “success” of the bailouts, countries suffered massive output losses due to recessions and sustained subpar growth.
But, while regulation must address the oversized bank balance sheets that were at the root of the crisis, the IMF is right not to focus excessively on fixing the “too big to fail” problem.
A surprising number of pundits seem to think that if one could only break up the big banks, governments would be far more resilient to bailouts, and the whole “moral hazard” problem would be muted.
That logic is dubious, given how many similar crises have hit widely differing systems over the centuries.
A systemic crisis that simultaneously hits a large number of medium-sized banks would put just as much pressure on governments to bail out the system as would a crisis that hits a couple of large banks.
There are altogether too many complex ideas floating around that look good on paper, but might well prove deeply flawed in a big-time crisis.
Any robust solution must be reasonably simple to understand and implement.
The IMF proposal seems to pass these tests.
By contrast, some finance specialists favor forcing banks to rely much more on “contingent” debt that can be forcibly converted to (possibly worthless) stock in the event of a system-wide meltdown.
But how this form of “pre-packaged bankruptcy” could be implemented in a world of widely different legal, political, and banking systems is unclear.
Financial history is littered with untested safety-net devices that failed in a crisis.
Better to rein in the growth of the system.
The IMF is on much weaker ground, however, in thinking that its one-size-fits-all global tax system will somehow level the playing field internationally.
It won’t.
Countries that now have solid financial regulatory systems in place are already effectively “taxing” their financial firms more than, say, the US and the UK, where financial regulation is more minimal.
The US and the UK don’t want to weaken their competitive advantage by taxing banks while some other countries do not.
But it is their systems that are in the greatest and most urgent need of stronger checks and balances.
Let’s not go too far in defending the “holdout” countries that are resisting the IMF proposal.
These countries need to recognize that if the US and the UK do implement even modest reforms, a lot of capital will flow elsewhere, potentially overwhelming regulatory systems that seemed to work well until now.
And what about the second tax proposed by the IMF, on banks’ profits and bonuses?
Such a tax is politically appealing, but ultimately it makes little sense – except, perhaps, in a crisis year when bank subsidies are glaringly transparent.
It would be better to improve financial-market regulation directly and let national tax systems handle banks’ income like that of any other industry.
The IMF’s first effort at prescribing a cure may be flawed, but its diagnosis of a financial sector bloated by moral hazard is manifestly correct.
Let’s hope that when the G-20 leaders meet later this year, they decide to take the problem seriously instead of tabling discussion for a decade or two until the next crisis is upon us.
All in the Family
MUNICH – Big economic crises often cause iconic companies to falter.
Rupert Murdoch’s media empire is a model of the modern global enterprise.
A particularly dynamic and innovative business model came from outside and took over central aspects of British and then American public life.
That model is now threatened by the fallout from the scandal that started with phone hacking in Murdoch’s British press operations.
The Murdoch experience is a microcosm of how modern globalization works.
Murdoch always looked like a foreign intrusion into British life.
It was not just that he was Australian; he also brought new ideas.
In particular, the application of digital technology, introduced after a ferocious struggle with the powerful print unions, brought substantial cost savings and allowed a new era of journalism.
Even more importantly, Murdoch represented a concept of family business that is common in many parts of the world, but relatively rare in Britain and the United States.
Family capitalism in the continental European model uses relatively little capital to achieve maximum control.
It frequently depends on very complex corporate structures, with multiple layers of holding companies, as well as privileged shares that can guarantee the continuation of control.
This sort of firm is also very common in the most dynamic emerging-market economies in Asia and Latin America.
The Murdoch family holds only 12% of the shares of News Corporation, the top-level holding company, but it wields about two-fifths of the voting rights; other votes are held by a loyal Saudi prince.
For decades, academic analysts have been fighting over whether such large-scale family businesses should be considered beneficial.
Their defenders point out that such companies often have a much longer-term vision than is true of managerial capitalism, which enables them to establish strong and enduring relationships with their customers and suppliers.
At least in the case of the Murdoch empire, it now appears that they pursue long and binding relationships with politicians and the police as well.
Indeed, political entanglements are one of two sources of weakness in European-style family capitalism, as owners seek political advantages and preferred access as much as they strive for technical innovation.
Murdoch’s empire depended on its closeness to politicians.
In retrospect, three successive British prime ministers – Tony Blair, Gordon Brown, and David Cameron – were on overly familiar terms with a manipulative business leader.
Cameron now talks about the need for “a healthier relationship between politicians and media owners.”
And Murdoch apparently is now saying that he wishes that all these prime ministers would “leave me alone.”
The second notorious weakness of family businesses is the problem of succession.
When he appeared before the British parliament in July, Rupert Murdoch looked like an old man, remote and out of control.
In old-style family firms, there is a clear rule of succession that the oldest son takes over.
But that rule is rightly recognized as being potentially dysfunctional.
There is obviously no guarantee that the oldest son is the best businessman, and the result could be bitter and ferocious sibling rivalry.
Such succession disputes become even more acute when there are multiple marriages and multiple sets of competing children.
Until the eruption of the current scandal, the youngest of Murdoch’s three children from his second marriage, James, was generally believed to stand the greatest chance of succeeding his father.
The complexities of modern marriage patterns make family life much more fraught, especially when phenomenal power and huge sums of money are involved.
All three of Murdoch’s marriages have produced children, though those from his current relationship are too young to be considered potential corporate successors.
In addition, succession planning can become complicated by the emergence of “substitute children” from the company’s management.
Rebekah Brooks, the editor of The News of the World at the beginning of the phone-hacking scandal, and subsequently the chief executive of News International, Murdoch’s British subsidiary, played precisely such a role.
The disintegration of the business empire is then accompanied and amplified by bitter disputes between the children and the substitute children.
Indeed, the crisis of the Murdoch family’s business empire is neither unique nor unprecedented.
In the first half of the 1990’s, many observers of the alleged Asian economic miracle emphasized trust and families’ capacity to cooperate with political authorities in order to realize long-term growth plans.
After the 1997-1998 Asia crisis, and as authoritarian regimes in South Korea and Indonesia disintegrated, these relationships were suddenly interpreted as corrupt, and the counter-view – that “crony capitalism” had become entrenched in these countries – soon prevailed.
The Arab Spring has been in large part a movement against corrupt family capitalism, embodied not only in ruling families like the Ben Alis, the Mubaraks, and the Assads, but also in the large family business empires that depended on and supported them.
As a result of globalization, large family firms could increase their size and their geographic range.
But globalization also increases the chances of backlashes that focus on the vulnerabilities, weaknesses, and mistakes of big family firms.
They are vulnerable to an Arab Spring (and a British summer) – and maybe to a US autumn that will focus not just on the Murdochs’ business, but also on its interplay with politics.
All Man’s Land
NEW DELHI – Ernest Hemingway’s collection of stories, Men without Women, examines tense gender relationships.
In a particularly poignant story, a young man convinces his partner to have an abortion, viewing their unborn child as a hindrance to the status quo.
Frustrated, the woman gives in.
That story, published more than 80 years ago, remains relevant today in India, where female fetuses face severe risks.
According to the 2011 census, the sex ratio of the country’s children has dipped from 927 females per 1000 males to 914, a 60-year low.
Ratios in the northern states are particularly alarming: only Himachal Pradesh now has a ratio of girls to boys above 900.
Despite being illegal, ultrasound sex-determination tests are being used across India to identify for abortion extraordinary numbers of healthy female fetuses.
But there are serious concerns about legal operations, too.
Genitoplasty – a sex-change operation on newborn girls – is a mushrooming, and deeply disturbing, business in India.
There’s only one word for it: gendercide.
Left unchecked, it will leave India’s next generation of men with a severe shortage of women.
Indian couples have a strong cultural preference, bordering on obsession, for sons over daughters – despite the strides in education and employment that women have made over the last few decades.
Education and wealth have nothing to do with it – in fact, some of the worst-affected areas are in India’s wealthiest cities.
However discomfiting a possibility, the real culprit might be Indian culture and tradition itself.
The expenses and pressure of the dowry system, and the fact that, in most joint families, only sons inherit property and wealth, contribute to this favoritism.
Perhaps just as important is that sons typically live with their parents even after they are married, and assume responsibility for parents in their old age.
Daughters, who live with their in-laws after they marry, are viewed as amanat – someone else’s property.
In short, sons represent income and daughters an expense.
In the old days, when families typically had 5-10 children, this didn’t matter so much.
The number of sons and daughters often evened out.
But, for today’s smaller families, whether the children are two boys or two girls influences everything from financial planning to preparations for old age.
Many have argued that Indian women should stand up to their families and refuse to abort their daughters.
But Indian women want male children just as much.
Unlike Hemingway’s character, they are often more than willing to abort a girl and try for a boy.
The novelist Salman Rushdie once put the question to supporters of abortion rights: “What should be done when a woman uses her power over her own body to discriminate against female fetuses?”
This raises other questions concerning the consequences of a large shortage of girls.
Will women be valued and treasured?
Or will the oversupply of men result in more bride trafficking, sexual violence, and female suicides?
Niall Ferguson, the British historian, cites scholars who attribute Japan’s imperial expansion after 1914 to a male youth bulge, and who link the rise of Islamist extremism to an Islamic youth bulge.
“Maybe the coming generation of Asian men without women will find harmless outlets for their inevitable frustrations, like team sports or video games.
But I doubt it,” he writes.
He warns us not to be surprised if, in the coming generation, “shrill nationalism is replaced by macho militarism or even imperialism.”
Unfortunately, there is no instant solution.
Saving our girls will require radically altering some of Indian society’s family arrangements, traditions, and attitudes.
And there is no easy way to accomplish this.
Legislation alone won’t help, for tradition is a law unto itself.
Hindu religious law, for example, allows a woman to claim an equal share in her parents’ wealth, but few exercise this right.
Culturally, she feels that she does not have an equal claim on her father’s property.
Nonetheless, India does need new laws – direct and enforceable – that clamp down on the cultural practices that underpin destructive traditions.
For example, India could enforce a ceiling on wedding expenditure – typically a father’s biggest expense associated with his daughter.
Constrained from spending on the wedding, he would compensate her differently – perhaps with a larger inheritance.
Gradually, this would become the norm, and tradition would adjust accordingly.
(Interestingly, the state of Kerala, whose people adhere to matrilineal inheritance, has among the most equal sex ratios and literacy rates in India.)
A more radical measure, which some have advocated, would be direction intervene, with the state providing benefits for families with more girls.
Perhaps the authorities could also penalize families with boys, at least temporarily.
India imagines herself as a woman – Bharat Mata, or Mother India.
The irony is that, unless far-reaching changes are made soon, Mother India could eventually be the only woman left in the country.
All Quiet on the Burundi Front?
Like its neighbors, Congo and Rwanda, Burundi is a war-torn land.
Its troubles have not riveted world attention in recent years, probably because Burundi's rebels failed to plumb the depths of savagery seen in Rwanda and Congo.
But, unlike its neighbors, this year can mark a turning point for Burundi.
Thanks to agreements between the rebels and the government that Nelson Mandela and South African Vice President Jacob Zuma helped broker, Burundi can now either turn decisively away from civil strife, or risk a return to the machete politics that have mauled Africa's Great Lakes region for a decade.
Since its independence from Belgium in 1962, Burundi has suffered five episodes of what amounts to the same civil war.
About 600,000 people have been killed and hundreds of thousands made into refugees.
Many portray this war as the result of hatred between the majority Hutu and the minority Tutsi.
But this does not explain why these groups supposedly hate each other so much.
Burundi's cultural and linguistic homogeneity, rare in Africa, belies the simplistic view that the Hutu and Tutsi fight because they are so different.
Indeed, most countries are far more heterogeneous than Burundi but have never fallen into ethnic war.
To understand the dynamics of conflict in Burundi, we need to examine three root causes.
The first such cause is the legacy of colonization.
In the 1920's and 1930's, the Belgian authorities enacted policies that defined the population along ethnic lines and favored the Tutsi in a deliberate - and successful - effort to divide society and fan resentment among Hutu leaders.
Second, the bloody 1959 revolution in Rwanda, a country mirroring Burundi's ethnic and social structure, induced Burundi's Tutsi to cling even more tightly to power.
At the same time, Burundi's Hutu saw Rwanda as a role model and believed their ethnic majority should guarantee them de facto control of the country.
Third, successive governments widened the ethnic divide through catastrophically predatory governance.
A tiny elite of Tutsi from the southern province of Bururi controlled all institutions, exploiting them to the fullest.
The army brutally suppressed any opposition to Bururi rule.
No surprise, then, that millions of Burundians felt alienated, and that many resorted to violence.
In October 1993, the killing by members of the army of Melchior Ndadaye, the first civilian, Hutu, non-Bururi, and democratically elected president provoked a bloody reaction by the Hutu.
Presidential assassinations do not necessarily lead to civil wars, but in Burundi, a large-scale massacre of Tutsi civilians by Hutu immediately followed the coup attempt.
Fearing retribution by the Tutsi-dominated army, large numbers of Hutu fled the country while armed rebels engaged the army.
For the first time, the army failed to crush the rebellion.
As a result, the Tutsi-dominated government entered into negotiations with Hutu leaders, which led to the signing of a political accord in August 2000.
But the accord had a major flaw: the absence of a cease-fire.
Violence only receded in 2003, when the main rebel group, the
These breakthroughs came about thanks to the dedicated mediation of Mandela and Zuma.
The presidents of Uganda and Tanzania, and the international community in general, also exerted leverage.
(Burundi is an aid-dependent country, so donors have considerable sway in influencing its rulers' behavior.)
The question now is whether each party will honor its commitments.
What guarantees exist that the rebel groups will fully demobilize?
Why should the rebels believe that the government will honor its commitments once they no longer represent a threat?
Neither party, it seems, can commit credibly to peace.
Burundi's donors need to join hands with African leaders to make certain that the agreements are implemented.
Everyone agrees that recent pledges of a $1 billion in aid are a sign that donors are ready to show Burundians that peace has a dividend.
But aid will help build peace only if it is carefully used.
It must be distributed to the needy rather than favoring the elite - a tendency established in the past.
Yet it would be dangerous to redress past imbalances solely at the expense of traditional beneficiaries, especially because they remain powerful enough to derail the peace process.
It is encouraging to note that Burundi's leaders have so far managed to integrate leaders from the opposition and rebel groups into the country's political and military institutions without dismissing incumbents.
The danger is that applying this approach rigorously will invariably result in a bloated civil service and army.
But while downsizing government may be fashionable in the West, now is not the time for slimming down Burundi's state sector.
For once, over employment is politically justified.
The international community must understand that the political benefits of not alienating the old elite while offering new opportunities to traditionally excluded groups outweigh the financial cost.
Burundi will need even deeper pockets from its donors to transform today's political overtures into sustainable peace.
All Stimulus Roads Lead to China
BEIJING – Now that the “green shoots” of recovery have withered, the debate over fiscal stimulus is back with a vengeance.
In the United States, those who argue for another stimulus package observe that it was always wishful thinking to believe that a $787 billion package could offset a $3 trillion fall in private spending.
But unemployment has risen even faster and further than expected.
Combine this with the continued fall in housing prices, and it is understandable that consumer spending remains depressed.
The banks, having been recapitalized only to the extent necessary to keep them afloat, still have weak balance sheets.
Their consequent reluctance to lend constrains investment.
Meanwhile, state governments, seeing revenues fall as a result of lower taxable incomes last year, are cutting back like mad.
If there was a case for additional stimulus back in February, that case is even stronger now.
But the case against additional stimulus is also strong.
The US federal deficit is an alarming 12% of GDP, and public debt as a share of national income is already projected to double, to 80% of GDP.
The idea that the US can grow out of its debt burden, as did Finland and Sweden following their financial crises in the 1990’s, seems unrealistic.
Given all this, more deficit spending will only stoke fears of higher future taxes and inflation.
It will encourage the reemergence of global imbalances.
And it will not reassure consumers or investors.
It is possible to argue the economics both ways, but the politics all point in one direction.
The US Congress lacks the stomach for another stimulus package.
It has already faced intense criticism for its failure to get the country’s fiscal house in order.
The slowness with which the first stimulus has been rolled out, and the fact that it will take even more time for its full effects to be felt, provides more fodder for the chattering classes.
Disappointment over the effects of the TARP has already destroyed popular – and Congressional – support for more public money to recapitalize the banks.
So, even those who find the economic logic of arguments for fiscal activism compelling must acknowledge that the politics are not supportive.
A second stimulus simply is not in the cards.
If there is going to be more aggregate demand, it can come from only one place.
That place is not Europe or Japan, where debts are even higher than in the US – and the demographic preconditions for servicing them less favorable.
Rather, it is emerging markets like China.
The problem is that China has already done a lot to stimulate domestic demand, both through government spending and by directing its banks to lend.
As a result, its stock market is frothy, and it is experiencing an alarming property boom.
Through May, property prices were up 18% year on year.
Understandably, Chinese officials worry about bubble trouble.
The obvious way to square this circle is to spend more on imports.
China can purchase more industrial machinery, transport equipment, and steelmaking material, which are among its leading imports from the US.
Directing spending toward imports of capital equipment would avoid overheating China’s own markets, boost the economy’s productive capacity (and thus its ability to grow in the future), and support demand for US, European, and Japanese products just when such support is needed most.
This strategy is not without risks.
Allowing the renminbi to appreciate as a way of encouraging imports may also discourage exports, the traditional motor of Chinese growth.
And lowering administrative barriers to imports might redirect more spending toward foreign goods than the authorities intend.
But these are risks worth taking if China is serious about assuming a global leadership role.
The question is what China will get in return.
And the answer brings us back, full circle, to where we started, namely to US fiscal policy.
China is worried that its more than $1 trillion investment in US Treasury securities will not hold its value.
It wants reassurance that the US will stand behind its debts.
It therefore wants to see a credible program for balancing the US budget once the recession ends.
And, tough talk notwithstanding, the Obama administration has yet to offer a credible roadmap for fiscal consolidation.
Doing so would reassure American taxpayers worried about current deficits.
Just as importantly, it would reassure Chinese policymakers.
We live in a multipolar world where neither the US nor China is large enough to exercise global economic leadership on its own.
For China, leadership means assuming additional risks.
But for this to be tolerable, the US needs to relieve China of existing risks.
Only by working together can the two countries lead the world economy out of its current doldrums.
All the Queen’s Children
NEW YORK – Does monarchy – constitutional monarchy, that is, not the despotic kind – have any redeeming features left?
The arguments against maintaining kings and queens are mostly quite rational.
It is unreasonable in this democratic age to pay special deference to people solely on the basis of their birth.
Are we really supposed to admire and love modern monarchies, such as the British House of Windsor, even more so today, just because some new princess has been plucked from the middle class?
Monarchy has an infantilizing effect.
Witness how otherwise sensible adults are reduced to nervously grinning sycophants when they are granted the privilege of touching an extended royal hand.
At great monarchical displays, such as the royal wedding in London, millions become enthralled by child-like dreams of a “fairy-tale” marriage.
The mystique of immense wealth, noble birth, and great exclusivity is further sustained by the global mass media that promote these rituals.
Now, one might argue that the dignified pomp of Queen Elizabeth II is preferable to the tawdry grandiosity of Silvio Berlusconi, Madonna, or Cristiano Ronaldo.
In fact, the British monarchy, especially, has been reinventing itself by adopting many of the most vulgar features of modern showbiz or sports celebrity.
And the worlds of royalty and popular fame often overlap.
For example, David Beckham and his ex-pop-star wife Victoria, live out their own dream of royalty, aping some of its gaudiest aspects.
They also happened to be among the favored guests at the latest royal wedding.
Similarly, while Britain has many outstanding musicians, the favorite of the royal court is Elton John.
Infantile or not, there is a common human craving for taking vicarious pleasure in the lives of kings, queens, and other shining stars.
To call these people’s ostentatious displays of extravagance wasteful is to miss the point: a world of glittering dreams that must remain entirely beyond our grasp is precisely what many people want to see.
But there is another, darker side to this craving, which is the wish to see idols dragged through the mud in vicious gossip magazines, divorce courts, and so on.
This is the vengeful side of our fawning, as though the humiliation of worshipping idols must be balanced by our delight in their downfall.
Indeed, to subject people who are born into royal families, or people who marry into them, to lives in a fishbowl, where they are on constant display, like actors and actresses in a continuous soap opera, where human relations are distorted and stunted by absurd rules of protocol, is a terrible form of cruelty.
The current Japanese empress and her daughter-in-law, both from non-aristocratic families, have had nervous breakdowns as a result.
Likewise, movie stars often fall victim to alcohol, drugs, and breakdowns, but at least they have chosen the lives they live.
Kings and queens, on the whole, have not.
Prince Charles might have been far happier as a gardener, but this was never an option.
One thing to be said for monarchs is that they provide people with a sense of continuity, which can be useful in times of crisis or radical change.
The King of Spain provided stability and continuity after the end of Franco’s dictatorship.
During World War II, European monarchs kept a sense of hope and unity alive among their subjects under Nazi occupation.
But there is something else, too.
Monarchies are often popular with minorities.
Jews were among the most loyal subjects of the Austro-Hungarian Emperor.
Franz Joseph I stood up for his Jewish subjects when they were threatened by German anti-Semites.
To him, Jews, Germans, Czechs, or Hungarians were all his subjects, wherever they lived, from the smallest Galician shtetl to the grand capitals of Budapest or Vienna.
This offered some protection to minorities at a time of rising ethnic nationalism.
In this sense, monarchy is a little like Islam, or the Catholic Church: all believers are supposed to be equal in the eyes of God, or the Pope, or the Emperor – hence the appeal to the poor and the marginalized.
This might explain some right-wing populists’ animus against monarchy.
The Dutch populist leader Geert Wilders, for example, has denounced Queen Beatrix on several occasions as a leftist, elitist, and multiculturalist.
Like the new wave of populists worldwide, Wilders promises to take his country back for his followers, to stop immigration (especially of Muslims), and to make the Netherlands Dutch again, whatever that means.
Beatrix, like Franz Joseph, refuses to make ethnic or religious distinctions between her subjects.
That is what she means when she preaches tolerance and mutual understanding.
To Wilders and his supporters, this is a sign of her molly-coddling of aliens, of appeasing Muslims.
To them, the queen seems almost anti-Dutch.
To be sure, like all European royal families, the origins of the Dutch royal family are decidedly mixed.
The emergence of kings and queens as specifically national figureheads is a relatively recent historical development.
Empires contained many nations, after all.
Queen Victoria, mostly of German blood, did not regard herself as a monarch of Britons alone, but of Indians, Malays, and many other peoples, too.
This aristocratic tradition of standing above the narrow strains of ethnic nationalism may be the best argument to hang on to royalty a little longer.
Now that many European nations have become increasingly mixed in terms of ethnicity and culture, the only way forward is to learn to live together.
If monarchs can teach their subjects to do so, then let us give at least one cheer for the remaining kings and queens.
A Long March with China
BEIJING – US Vice President Joe Biden’s recent four-day visit to China ended on a high note.
He assured Chinese leaders that the United States is committed to honoring all its debts, despite its recent credit downgrade; he talked enthusiastically about US-China interdependence; and he showcased his granddaughter, who has studied Chinese for several years, as a future bridge between the two countries.
But, behind all the smiles and banquet toasts, serious issues and perception gaps continue to divide the world’s two great powers.
For starters, there is always an attitude problem.
To those who view China’s rise in a negative light, the country is simply becoming ever more arrogant.
It is getting tough in its territorial disputes with Japan in the East China Sea; it is becoming assertive in the South China Sea with its neighbors, also over disputed islands; it put its own stealth fighter on display during the US defense secretary’s visit to China; it is sending its first aircraft carrier out to sea for trials, indicating the possibility of establishing naval bases in the Indian Ocean.
Even a brawl between the Chinese and a visiting American basketball team is viewed as evidence of China’s aggressive behavior.
Many Chinese, on the other hand, tend to think that the US is suffering from severe case of conceited superpower syndrome.
As these Chinese see it, the US has a rather dysfunctional government, but nevertheless insists that its political and economic system is the best in the world, and that everyone should emulate it.
It is heavily in debt, but cannot stop spending and borrowing.
It is no longer competitive in manufacturing, but blames others for its huge trade deficit.
And the world’s only military superpower is often seen within China as trigger-happy when intervening in other countries’ internal affairs.
Then, there is the issue of trust.
China’s critics argue that its claims to a peaceful rise are not credible, given the country’s non-democratic, one-party system.
Coupled with this is a zero-sum view of the world, in which any Chinese gain in the share of the global economy, or any increased presence in many parts of the world, must be at the expense of the US or other powers.
Any Chinese military move is portrayed as an expansionary and aggressive act that must be contained.
Any attempts at engagement by Western politicians, such as Biden’s recent trip, are automatically met with doubt and criticism for cozying up to dictators.
Likewise, for those Chinese who are suspicious of US intentions, conspiracy is always in play.
They see a declining superpower using economic, military, and diplomatic means in an unrelenting effort to prevent China’s rise.
Talk of human rights and democracy is nothing but a smoke screen for demonizing China.
Arms sales to Taiwan, Tibetan activism, and “color revolutions” of various kinds are all sponsored by the US and other Western powers, and are aimed at weakening China.
Despite decades of close interaction, with millions of Americans, Europeans, and Japanese visiting China every year and similar numbers of Chinese now visiting the US and other advanced countries, both sides see each other through a glass darkly.
Increased interdependence has not led to better understandings on even some of the most basic issues.
China’s Vice Minister of Foreign Affairs Fu Ying expressed her country’s anxiety about this state of affairs in a recent interview. “The most important thing is the question of whether China and the US are enemies.
Are we going to be in a war?
Are we preparing for a war against each other?” Biden, while reaffirming that the US does not view China as an enemy, implied that Fu’s worries are not fanciful, saying that the worst scenario is a misunderstanding that leads to an unintended conflict.
So the key issue for China, its neighbors, the US, and rest of the world is not how many aircraft carriers, missiles, submarines, and next-generation fighters China may produce and deploy in the coming years and decades.
Rather, it is how China intends to use its newly acquired economic and military strength in pursuing its domestic and foreign-policy goals – and how the world’s leading powers can ensure that they do not end up harming each other by accident or misunderstanding.
To meet these challenges successfully, there is no viable alternative to a positive, continuous, and frank engagement between China and the rest of the world.
The Chinese economy will continue to grow; the Chinese military will continue to modernize; and the Chinese people will remain united in their Great Power aspirations.
A Cold War-style confrontation and containment policy from the West will be met with strong resistance from the Chinese, whose global leverage, particularly in finance, cannot be ignored.
Only a patient, creative, and consistent engagement strategy will mitigate fears on both sides.
China’s rise is a fact; the enduring peacefulness of that rise must be a priority for China, its neighbors, the West, and, most importantly, the US.
Alpine Schadenfreude
Not surprisingly, the atmosphere at this year’s World Economic Forum was grim.
Those who think that globalization, technology, and the market economy will solve the world’s problems seemed subdued.
Most chastened of all were the bankers.
Against the backdrop of the sub-prime crisis, the disasters at many financial institutions, and the weakening of the stock market, these “masters of the universe” seemed less omniscient than they did a short while ago.
And it was not just the bankers who were in the Davos doghouse this year, but also their regulators – the central bankers.
Anyone who goes to international conferences is used to hearing Americans lecture everyone else about transparency.
There was still some of that at Davos.
I heard the usual suspects – including a former treasury secretary who had been particularly vociferous in such admonishments during the East Asia crisis – bang on about the need for transparency at sovereign wealth funds (though not at American or European hedge funds).
But this time, developing countries could not resist commenting on the hypocrisy of it all. There was even a touch of schadenfreude in the air about the problems the United States is having right now – though it was moderated, of course, by worries about the downturn’s impact on their own economies.
Had America really told others to bring in American banks to teach them about how to run their business?
Had America really boasted about its superior risk management systems, going so far as to develop a new regulatory system (called Basle II)?
Basle II is dead – at least until memories of the current disaster fade.
Bankers – and the rating agencies – believed in financial alchemy.
They thought that financial innovations could somehow turn bad mortgages into good securities, meriting AAA ratings.
But one lesson of modern finance theory is that, in well functioning financial markets, repackaging risks should not make much difference.
If we know the price of cream and the price of skim milk, we can figure out the price of milk with 1% cream, 2% cream, or 4% cream.
There might be some money in repackaging, but not the billions that banks made by slicing and dicing sub-prime mortgages into packages whose value was much greater than their contents.
It seemed too good to be true – and it was.
Worse, banks failed to understand the first principle of risk management: diversification only works when risks are not correlated, and macro-shocks (such as those that affect housing prices or borrowers’ ability to repay) affect the probability of default for all mortgages.
I argued at Davos that central bankers also got it wrong by misjudging the threat of a downturn and failing to provide sufficient regulation.
They waited too long to take action.
Because it normally takes a year or more for the full effects of monetary policy to be felt, central banks need to act preemptively, not reactively.
Worse, the US Federal Reserve and its previous chairman, Alan Greenspan, may have helped create the problem, encouraging households to take on risky variable-rate mortgages by reassuring those who worried about a housing bubble that there was at most a little “froth” in the market.
Normally, a Davos audience would rally to the support of the central bankers.
This time, a vote at the end of the session supported my view by a margin of three to one.
Even the plea of one of central banker that “no one could have predicted the problems” moved few in the audience – perhaps because several people sitting there had, like me, explicitly warned about the impending problem in previous years.
The only thing we got wrong was how bad banks’ lending practices were, how non-transparent banks really were, and how inadequate their risk management systems were.
It was interesting to see the different cultural attitudes to the crisis on display.
In Japan, the CEO of a major bank would have apologized to his employees and his country, and would have refused his pension and bonus so that those who suffered as a result of corporate failures could share the money.
He would have resigned.
In America, the only questions are whether a board will force a CEO to leave and, if so, how big his severance package will be.
When I asked one CEO whether there was any discussion of returning their bonuses, the response was not just no, but an aggressive defense of the bonus system.
This is the third US crisis in the past 20 years, after the Savings &amp;
Loan crisis of 1989 and the Enron/WorldCom crisis in 2002.
Deregulation has not worked. Unfettered markets may produce big bonuses for CEO’s, but they do not lead, as if by an invisible hand, to societal well-being.
Until we achieve a better balance between markets and government, the world will continue to pay a high price.
Alternatives to Alternative Energy
VIRGINIA BEACH – The problem of long-term energy sources has been drifting towards crisis for decades.
Indeed, the catastrophes in Japan might finally achieve what decades of conflict in the Middle East have not: compel governments to invest in the research required to develop viable energy alternatives.
The immediate political response to the Japanese disaster will be to make small re-adjustments among known energy sources, including wind and solar.
But the current options that many governments wish to embrace will not do the job.
Production of the materials used to capture and store solar electricity, for example, can cause just as much environmental damage as conventional fuels, and existing wind and solar technology cannot easily meet the needs of large populations.
Of course, fossil fuels, mainly coal and natural gas, remain important, but their extraction and use is tied to groundwater pollution and carbon-dioxide emissions, especially in North America and China.
The tragedy in Japan reminds us that, though nuclear energy emits no CO2, it is toxic in other ways.
If there was ever a time for a massive investment in research into long-term energy sources, that time is now.
We need something on the scale of the Manhattan Project (which created the atomic bomb), or the Apollo Program (which put a man on the moon).
Both initiatives succeeded in a short period of time and at a relatively low price.
In current dollars, each cost about $200 billion – a mere fraction of what the United States has paid for the Iraq war, and less than the cost implied by the rise in oil prices over the past year.
Both the Apollo Program and the Manhattan Project had unique characteristics.
Each marshaled the sharpest minds from a range of countries to address one task.
Tolerance for failure was slim in both initiatives, so they tended to rely on the previous generation of scientific insight, because the resulting technology was more trustworthy.
Neither entailed a great scientific challenge, but rather a vast engineering problem.
Although invention was required, existing scientific methods were used.
Unfortunately, governments now focus only on one aspect of this investment format, in which technology that is almost ready is funded.
But this results in endless efforts to make non-ideal methods less troublesome.
We need a game changer, like the integrated circuit, radio, or electricity.
Such a paradigm shift requires an Apollo-scale investment, but in basic science.
There are several examples of the kind of phenomena that, with the benefit of new insight, could lead to unexpected energy sources.
Quite apart from daily sunlight, for instance, Earth is bombarded by all sorts of other radiation from outside our solar system.
Some of this we understand, but most of the material in the universe, and the forces associated with it, are not well explained.
There is most likely an exploitable galactic source of energy that is constant, unlimited, and in our sky right now.
Without basic research to help us understand these forces, their potential will elude us.
An even more mysterious effect occurs on Earth with living creatures.
According to general laws of physics, everything tends to disorder – a process known as entropy. Less well understood is why some agents do the opposite, tending toward order and structure.
Plants, for example, interact with their environment to produce locally ordered systems, resulting in the creation of wood (and other biomass).
When we burn wood, we reverse the process, unraveling that order and producing energy.
At this simple level, we understand how nature works.
But in more complex cases, in which living beings collaborate to build societies or create knowledge, our scientific models are inadequate.
This has prompted some scientists to begin investigating new models of energy from the perspective of “intelligence and information,” in which order is equivalent to information.
With such a fresh perspective on matter, new potentials could emerge.
For example, consider methane clathrate, an ice-like stone that in most cases is built in an ordered way by a complex collaboration of microbes.
Global deposits of methane clathrate contain more than twice the amount of energy of all known fossil fuels, and it can burn cleanly.
If not burned in a controlled way, the release of raw clathrates into the atmosphere would represent a global climate threat, and past massive releases have been catastrophic.
But a better understanding of biological “information flow” could help us use methane clathrate in ways that could actually counter global warming.
Solutions such as these are not explored, however, because they are not within obviously immediate reach, as the atomic bomb and the lunar landing were.
So, perhaps a radically new approach to research is also needed.
Given humanity’s common interest in new energy sources, it seems that the world’s brightest scientific minds should collaborate to identify them.
Such a project would flourish in a scientific establishment that is maturing, rather than frozen in its methods.
Whereas Japan, the US, and Europe are competent at research into what is almost known, the cutting-edge science is more likely to emerge in an economy hungry for resources and infrastructure, such as China.
Rather than a single laboratory, such a program could be a distributed virtual enterprise, taking advantage of the sort of innovative industrial collaboration in which China currently excels.
We need fundamental breakthroughs in alternative energy sources, and soon.
Getting them will probably require a large, collaborative effort focused on theoretical science.
Changing our approach to research in this way might seem more difficult than using what we already have.
But, as with our natural resources, we are running out of options.
Alternatives to Austerity
NEW YORK – In the aftermath of the Great Recession, countries have been left with unprecedented peacetime deficits and increasing anxieties about their growing national debts.
In many countries, this is leading to a new round of austerity – policies that will almost surely lead to weaker national and global economies and a marked slowdown in the pace of recovery.
Those hoping for large deficit reductions will be sorely disappointed, as the economic slowdown will push down tax revenues and increase demands for unemployment insurance and other social benefits.
The attempt to restrain the growth of debt does serve to concentrate the mind – it forces countries to focus on priorities and assess values.
The United States is unlikely in the short term to embrace massive budget cuts, à la the United Kingdom.
But the long-term prognosis – made especially dire by health-care reform’s inability to make much of a dent in rising medical costs – is sufficiently bleak that there is increasing bipartisan momentum to do something.
President Barack Obama has appointed a bipartisan deficit-reduction commission, whose chairmen recently provided a glimpse of what their report might look like.
Technically, reducing a deficit is a straightforward matter: one must either cut expenditures or raise taxes.
It is already clear, however, that the deficit-reduction agenda, at least in the US, goes further: it is an attempt to weaken social protections, reduce the progressivity of the tax system, and shrink the role and size of government – all while leaving established interests, like the military-industrial complex, as little affected as possible.
In the US (and some other advanced industrial countries), any deficit-reduction agenda has to be set in the context of what happened over the last decade:
·&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; a massive increase in defense expenditures, fueled by two fruitless wars, but going well beyond that;
·&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; growth in inequality, with the top 1% garnering more than 20% of the country’s income, accompanied by a weakening of the middle class – median US household income has fallen by more than 5% over the past decade, and was in decline even before the recession;
·&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; underinvestment in the public sector, including in infrastructure, evidenced so dramatically by the collapse of New Orleans’ levies; and
·&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; growth in corporate welfare, from bank bailouts to ethanol subsidies to a continuation of agricultural subsidies, even when those subsidies have been ruled illegal by the World Trade Organization.
As a result, it is relatively easy to formulate a deficit-reduction package that boosts efficiency, bolsters growth, and reduces inequality.
Five core ingredients are required.
First, spending on high-return public investments should be increased.
Even if this widens the deficit in the short run, it will reduce the national debt in the long run.
What business wouldn’t jump at investment opportunities yielding returns in excess of 10% if it could borrow capital – as the US government can – for less than 3% interest?
Second, military expenditures must be cut – not just funding for the fruitless wars, but also for the weapons that don’t work against enemies that don’t exist.
We’ve continued as if the Cold War never came to an end, spending as much on defense as the rest of the world combined.
Following this is the need to eliminate corporate welfare.
Even as America has stripped away its safety net for people, it has strengthened the safety net for firms, evidenced so clearly in the Great Recession with the bailouts of AIG, Goldman Sachs, and other banks.
Corporate welfare accounts for nearly one-half of total income in some parts of US agro-business, with billions of dollars in cotton subsidies, for example, going to a few rich farmers – while lowering prices and increasing poverty among competitors in the developing world.
An especially egregious form of corporate special treatment is that afforded to the drug companies.
Even though the government is the largest buyer of their products, it is not allowed to negotiate prices, thereby fueling an estimated increase in corporate revenues – and costs to the government – approaching $1 trillion dollars over a decade.
Another example is the smorgasbord of special benefits provided to the energy sector, especially oil and gas, thereby simultaneously robbing the treasury, distorting resource allocation, and destroying the environment.
Then there are the seemingly endless giveaways of national resources – from the free spectrum provided to broadcasters to the low royalties levied on mining companies to the subsidies to lumber companies.
Creating a fairer and more efficient tax system, by eliminating the special treatment of capital gains and dividends, is also needed.
Why should those who work for a living be subject to higher tax rates than those who reap their livelihood from speculation (often at the expense of others)?
Finally, with more than 20% of all income going to the top 1%, a slight increase, say 5%, in taxes actually paid would bring in&nbsp;more than $1 trillion over the course of a decade.
A deficit-reduction package crafted along these lines would more than meet even the most ardent deficit hawk’s demands.
It would increase efficiency, promote growth, improve the environment, and benefit workers and the middle class.
There’s only one problem: it wouldn’t benefit those at the top, or the corporate and other special interests that have come to dominate America’s policymaking.
Its compelling logic is precisely why there is little chance that such a reasonable proposal would ever be adopted.
Testing Times for Alzheimer’s
LONDON – Alzheimer’s disease is by far the most common cause of dementia and one of the world’s most feared disorders.
By 2050, there will be 135 million Alzheimer’s sufferers worldwide, a threefold increase from today, with three-quarters of cases occurring in low- and middle-income countries.
Predicting the onset of Alzheimer’s, let alone preventing or curing it, remains an immense challenge.
Alzheimer’s disease was identified more than a century ago from autopsy results that showed characteristic brain lesions called “amyloid plaques.”
The disease is more difficult to diagnose in the living.
Doctors rely on observation of memory loss and other thinking deficits (such as reasoning or language comprehension) – signs that plaques are already present in the brain.
But any cure&nbsp;would have to be administered before the plaques form, and years before symptoms of dementia appear.
Alzheimer’s might be more predictable if scientists had the time and resources to conduct far-reaching longitudinal studies over many years.
Such studies ideally would involve blood, imaging, memory, and medical tests, as well as detailed lifestyle questionnaires filled out by thousands of young and middle-aged people.
Study participants would be followed over decades to see who developed the disease, and which tests proved positive before Alzheimer’s was diagnosed.
In fact, two famous longitudinal studies – the Framingham Heart Study in Massachusetts and the Kungsholmen Project in Sweden – have led to important progress in predicting the disease. These studies found that short-term memory may be impaired for up to ten years before an Alzheimer’s diagnosis.
Major advances have since been made in brain imaging, biochemical analysis, and, perhaps most important, genetic testing.
Indeed, the risk of Alzheimer’s doubles if a parent or sibling has it, probably due in large part to the presence of the ApoE gene.
The risk triples for Europeans who inherit a particular type of ApoE, called ε4; inheriting two copies of ε4 increases the risk roughly tenfold.
But genetic testing alone is unlikely to be an accurate predictor, because around half of Alzheimer’s sufferers do not carry ε4, and probably half of those with ε4 do not develop the disease.
Moreover, though international studies of more than 70,000 people have found over 20 other genes linked to Alzheimer’s, their impact is minimal.
That said, a&nbsp;groundbreaking 2012 study&nbsp;published in the&nbsp;New England Journal of Medicine, analyzed a rare genetic mutation found in just 500 families around the world, which would lead to Alzheimer’s before the age of 50.
The study showed which tests were able to predict the outcome most accurately decades ahead of onset.
The research found that amyloid-beta – the substance that clumps together and forms amyloid plaques – becomes depleted in the cerebrospinal fluid around the brain as long as 25 years before the onset of dementia.
Fifteen years prior to onset, a positron emission tomography (PET) scan showed amyloid-beta being deposited in plaques in the brain itself.
And detailed short-term memory tests were abnormal ten years before onset, as suggested in the Framingham and Kungsholmen studies.
These tests are now becoming part of clinical practice, and are available commercially.
Memory and other cognitive tests can reveal whether one has minor problems with some aspects of thinking – a condition known as “mild cognitive impairment” that precedes Alzheimer’s disease.
The problem is that the tests must be administered by a trained neuropsychologist and take more than an hour to complete; moreover, many people with mild cognitive impairment do not progress to dementia.
Sampling cerebrospinal fluid via a lumbar puncture (or “spinal tap”) can predict which people with mild cognitive impairment will progress to dementia with over 80% accuracy, but this still means a misdiagnosis for one in five patients.
PET scans are slightly less accurate, while routine MRI brain scans can reveal with perhaps only 70% accuracy subtle abnormalities in people with mild cognitive impairment.
Scientists are therefore still searching for an accurate predictive test that is cheaper, quicker, and less invasive than PET scans or lumbar punctures.
This year, two small studies of blood tests seemed to predict Alzheimer’s 1-3 years before it occurred, but the tests are complicated and require the measurement of ten or more substances.
Whichever predictive methods doctors use over the next few years will probably enable them to inform those patients with mild cognitive impairment about their chances of developing Alzheimer’s in the short term.
The trickier question is whether we will be able to predict Alzheimer’s disease accurately in those with normal cognition and memory, or to predict it more than five years in advance.
Even if accurate early prediction of Alzheimer’s eventually is achieved, there are currently no drugs available to prevent or cure it before the amyloid plaques start destroying the mind.
A Man against the Machine
WASHINGTON, DC ­– America’s financial sector has shown renewed strength in recent months – political strength, that is – by undermining most of the sensible proposals for banking reform that remain on the table.
If we are still making any progress at all, it is because of the noble efforts of a small number of United States senators.
Most notable has been the work of Senator Ted Kaufman, a Democrat from Delaware (yes, a pro-business state), who has pressed tirelessly to fix the most egregious problems in the US financial sector.
Kaufman understands that successful reform requires three ingredients: arguments that persuade, the ability to bring colleagues along, and a good deal of luck in the form of events that highlight problems at just the right time.
On two fronts, Kaufman has – against long odds – actually managed to make substantial steps.
Long before it became fashionable, Kaufman persisted with the idea that the US real estate boom was fueled in part by pervasive fraud within the mortgage-securitization-derivatives complex, effectively at the heart of Wall Street.
This thesis is now gaining much broader traction – major newspapers now report a broadening criminal probe by the federal government – and by New York’s state attorney general – into the US financial sector’s residential lending and related securities practices.
With Senators Patrick Leahy and Chuck Grassley, Kaufman worked last year to pass a bill providing timely resources to federal law enforcement agencies working on recent financial fraud.
More recently, Kaufman was devastating in his cross-examination of Goldman Sachs executives.
Senator Carl Levin, chairman of the subcommittee that heard their testimony, evidently seeing eye to eye with Kaufman, was just as tough after a year-long investigation of Washington Mutual, Goldman, and the abject failures of bank regulators and credit rating agencies.
Kaufman scored an even bigger coup with his warnings about the dangers of the explosive growth of high-frequency trading, which is little understood by America’s main financial watchdog, the Securities and Exchange Commission (SEC), and poses systemic market risk.
His concerns appear to have been vindicated by the 20-minute shutdown of trading in New York on May 6, when the stock market completely failed in its most basic function: price discovery between buyers and sellers.
We do not yet know what combination of black-box computer programs and electronic trading algorithms, interacting across more than 50 market centers, caused this catastrophe.
But our lack of knowledge itself confirms how far our regulatory and surveillance capabilities have fallen behind “financial innovation.”
Kaufman’s approach – with speeches on the Senate floor as a central feature – seemed irrelevant or even quaint to critics even a few weeks ago.
No significant Wall Street voices acknowledged his concerns – preferring instead to praise the equity markets as a shining example of well-functioning technology.
Now people get it.
As Senator Mark Warner graciously acknowledged, “The Senator from Delaware sounded an early warning signal that the massive amounts of investments that had been made by certain firms to try to get what appears to be a fractional millisecond advantage in the trading process might come back and haunt us all... I’ve been proud to follow his lead.”
The SEC was once a great and powerful independent agency.
It fell on hard times in recent decades and is only beginning to get its act together under new leadership.
Yet it still does not routinely collect the data that it needs – trades by time and customer – to understand the actions and impact of large traders.
Kaufman has consistently pressed them to do more – and do it much faster; to be sure, they and many others are now listening.
On a third issue, the results so far are mixed.
Kaufman championed the case for making America’s biggest banks smaller, as part of comprehensive financial-reform efforts.
His advocacy helped build support and forced a Senate floor vote on an amendment, co-sponsored with Senator Sherrod Brown, that would have imposed a hard cap on banks’ size and leverage (debt relative to assets).
The amendment was moderate and entirely reasonable, yet it went down to defeat, 33-61, also on May 6.
It might have gained more support just a few days later – after senators witnessed the bailout of the giant eurozone banks.
Still, it has strengthened backing for another amendment, sponsored by Senators Jeff Merkley and Carl Levin, which would restrict proprietary trading by megabanks for their own account – coincidentally a practice that is presumed to be a large and “dark” part of high-speed trading.
The deeper and overriding point of Kaufman’s critique of our system is the need for tough laws.
We cannot merely rely on regulators to do the right thing.
In particular, regulators have no chance to look over the horizon and act preventively when markets are opaque, and when powerful Wall Street interests (and their Capitol Hill allies) can circle the wagons and claim that there is no problem.
Unfortunately, despite his newfound prominence on the national stage, Kaufman will be out of office at the end of this year – he was appointed to fill Vice President Joe Biden’s seat at the end of 2008 and committed at that time not to run for re-election.
When he goes, dangerous elements on Wall Street will no doubt breathe a sigh of relief.
Let’s hope that by then he will have helped move the consensus permanently among his colleagues – preparing the ground for further congressional action aimed at a serious tightening of safeguards over the financial sector.
Kaufman’s lasting legacy will be a simple and powerful idea that reasonable people increasingly find to be self-evident: relying on deregulation and self-interest in today’s complex, opaque markets will manifestly fail to produce a reasonable allocation of capital or support entrepreneurship and growth.
We must write and enforce laws that restore credibility to our financial markets.
A Mania for Diagnosing Bipolar Disorder
PROVIDENCE, RI – During the past few years, many experts have suggested that bipolar disorder – a serious illness resulting in significant psychosocial morbidity and excess mortality – is under-recognized, particularly in patients with major depression.
Even patients who are diagnosed with bipolar disorder often wait more than 10 years after initially seeking treatment for the correct diagnosis to be made.
The clinical implications of the failure to recognize bipolar disorder in depressed patients include the under-prescription of mood-stabilizing medications, and an increased risk of rapid “cycling” – swings between manic and depressive phases.
But, perhaps as a consequence of concerted efforts to improve the recognition of bipolar disorder, during the past few years we have observed the emergence of an opposite phenomenon – over-diagnosis.
In my own practice, my colleagues and I have encountered patients who reported that they were previously diagnosed with bipolar disorder, despite lacking a history of manic or hypomanic episodes.
To be sure, we have also seen patients seeking treatment for depression who really did have bipolar disorder.
However, there seemed to be more over-diagnosis than under-diagnosis.
We therefore conducted a study to examine empirically how often bipolar disorder might be over- and under-diagnosed.
Seven hundred psychiatric outpatients were interviewed with the Structured Clinical Interview for DSM-IV (SCID) and completed a self-administered questionnaire that asked whether they had been previously diagnosed by a health-care professional with bipolar or manic-depressive disorder.
Family history information was obtained from the patient regarding their immediate relatives.
Slightly more than 20% (145 patients) in our sample reported that they had been previously diagnosed as having bipolar disorder, significantly higher than the 12.9% rate based on the SCID.
Less than half of those who reported that they had been previously diagnosed with bipolar disorder were diagnosed with bipolar disorder based on the SCID.
Patients with SCID-diagnosed bipolar disorder had a significantly higher risk of bipolar disorder in their immediate family members than patients who self-reported a previous diagnosis of bipolar disorder that was not confirmed by the SCID.
Patients who self-reported a previous diagnosis of bipolar disorder that was not confirmed by the SCID did not have a significantly higher risk for bipolar disorder than the patients who were negative for bipolar disorder by self-report and the SCID.
Our findings, validated by family history, thus suggest that bipolar disorder was over-diagnosed.
Any study seeking to determine whether a psychiatric disorder is over-diagnosed will find that some patients with the condition do not have it upon re-interview.
Such is the nature of the imperfect reliability of psychiatric diagnosis.
The question, then, is not whether
Over-diagnosis of bipolar disorder has costs.
Mood stabilizers are the treatment of choice, and, depending on the medication, they can produce potentially significant health complications affecting renal, endocrine, hepatic, immunologic, or metabolic function.
Thus, over-diagnosing bipolar disorder can unnecessarily expose patients to serious side-effects of medication.
The impact of marketing efforts by pharmaceutical companies and publicity probably plays a role in the emerging tendency to over-diagnose bipolar disorder.
Direct-to-consumer advertisements that refer individuals to screening questionnaires can result in patients suggesting to their doctors that they have bipolar disorder.
We have seen evidence of this in our practice.
This does not necessarily reflect a problem with the performance of a screening questionnaire, but rather how these scales are used.
Screening questionnaires maximize sensitivity, at a cost of false positives, because it is presumed that they are followed by expert clinical evaluation.
But insufficient diagnostic rigor can result in over-diagnosis.
Clinicians are inclined to diagnose disorders that they feel more comfortable treating.
We believe that the increased availability of medications that have been approved for the treatment of bipolar disorder might be influencing clinicians who are unsure whether or not a patient has bipolar disorder or borderline personality disorder to err on the side of diagnosing the disorder that is responsive to medication.
This bias is reinforced by the marketing message of pharmaceutical companies to physicians, which has emphasized research on delayed diagnosis and under-recognition of bipolar disorder, possibly sensitizing clinicians accordingly.
The campaign against under-recognition has probably resulted in some anxious, agitated, and/or irritable depressed patients who complain of insomnia and “racing thoughts” being misdiagnosed with bipolar disorder.
The results of our study are consistent with prior studies suggesting possible problems with the diagnosis of bipolar disorder. With the greater number of medications approved for the treatment of bipolar disorder, along with multiple reports cautioning clinicians against under-diagnosis, it appears that over-diagnosis has become a greater problem than under-diagnosis.
Both can have negative consequences. While there is still some uncertainty as to the best assessment approach, we recommend that clinicians use a standardized, validated method.
A Marshall Plan for the Arab World
ROME – US President Barack Obama’s major speech on the consequences of the Arab Spring is also a challenge for Europe.
Only if the trans-Atlantic partnership proves effective, as it did to meet the demands of the Cold War and the end of Europe’s division, can the West contribute to realizing the hopes engendered by the Arab uprisings.
The crisis in Europe’s southern neighborhood reflects a deep-seated transformation process that will have long-lasting consequences – for the region, for Europe, and for the world.
The Mediterranean region is vital to Europe’s peace, stability, and economic growth.
The continent’s Mediterranean neighbors look to Europe as their natural partner.
And events there, including the Israeli-Palestinian peace process, have a broader impact that naturally entails the close involvement of global partners – first and foremost the United States.
Current events, not just in Libya, but also in Tunisia, Egypt, Syria, Yemen, and Bahrain, mirror the political complexity of these countries.
They also spring from different factors, such as frustration with rising food prices and widespread corruption, coupled with demands for greater democratization, reduction of economic and social inequalities, and job creation.
Europe’s response to this process must embody the goal of an orderly and rapid transition.
Proposals for some sort of “partnership for transformation,” based on political reform and full respect of human rights and fundamental freedoms, should bear in mind that the region’s political landscape looks certain to remain volatile and tense in the coming months.
No surprise, then, that regional stability has emerged as a high priority for Europeans.
Chaos, a resurgence of terrorism, the rise of radical Islamism, and massive waves of immigration towards Europe are just a few of the potential threats to the European Union that are now being contemplated.
Given this, the EU should be doing its utmost to prevent any deterioration of the region’s security.
Just as the post-1945 Marshall Plan consisted of a financial-aid package aimed at reconstructing and re-launching Western Europe’s economies to support democratic transformation and political stability, the countries of the Arab Spring face similar challenges and needs.
We need to enable countries like Egypt and Tunisia – and possibly a peaceful Libya – to strengthen their political stability through democratization.
The Marshall Plan was accompanied by partnerships for reconstruction in which the US and European recipient countries were on an equal footing.
The aim was to strengthen cooperation as a means of creating a lasting peace.
The situation in the Mediterranean region is at a more advanced stage. The broad planks of a partnership are already there, so what is now needed is to enhance Europe’s integration with its southern neighbors.
This is why Italy has proposed a new EU “Plan for the Mediterranean” aimed at supporting the transition process and building upon existing institutional and financial tools to provide the region with additional resources.
The Union for the Mediterranean, launched by French President Nicolas Sarkozy in 2008, must be revitalized and re-directed towards development projects ranging from highways and ports to the promotion of small and medium-size enterprises (SMEs).
But a broader economic initiative is also needed to mobilize a critical mass of European and international financial resources to attract investment to the region and modernize its infrastructures and services.
Let us, together with the US, tear down the trade and economic barriers that are stifling these economies.
Let us also grant some Mediterranean countries association status that will allow them to integrate progressively into the EU’s internal market and participate in EU programs.
To achieve all of this, a clear set of principles is required.
We Europeans must favor stability, create a real spirit of co-ownership, and promote political responsibility.In this new framework, the EU should avoid excessive conditionality, especially during the transition period.
Europe’s strong support for the region’s economic development must remain the top priority, as Arab countries introduce necessary reforms.
Moreover, a dedicated financial institution should be set up to aid in this task.
One proposal worth considering is to upgrade and strengthen the European Investment Bank’s Facility for Euro-Mediterranean Investment and Partnership (FEMIP), which would become an autonomous institution, perhaps headquartered in the Middle East or North Africa, with shares held by the region’s governments (or other institutions) and other willing parties.
The London-based European Bank for Reconstruction and Development could join this effort by extending its activities to the region, which could be coupled with the creation of dedicated services to support the growth of job-creating enterprises.
The EBRD made an important contribution to the economic transition process in Eastern Europe; there’s a good case for drawing on its experience and expertise to help the southern Mediterranean.
At the same time, the EU must launch a “dialogue among equals” on political and security matters, aimed at confidence-building across the region.
A Conference on Security and Cooperation in the Mediterranean and the Middle East (CSCM) could quickly become a useful instrument for promoting this comprehensive approach to security and development.
In short, we need to transform the Mediterranean countries into producers rather than consumers of regional stability.
We Europeans cannot afford to turn our backs on our Arab friends along the far shores of “mare nostrum.”
They are part of our collective history, and they deserve the better future that we can help them to build.
Ambivalent Arabia
A democratic tide seems to be sweeping across the Arab world.
Even the traditional Arab monarchies and Emirates are changing in its wake.
Kuwait now allows women to vote, Qatar has embraced an ambitious reform program, Bahrain has shown great tolerance of mass demonstrations, and the U.A.E. is allowing something like a free press.
But Saudi Arabia continues to be deeply wary of any sort of change, and thus remains a huge and seemingly immovable obstacle to region-wide reform.
Although the Saudi ruling family, the al-Saud, is under enormous pressure to follow the example of its neighbors, internal resistance to doing so remains very strong.
So the al-Saud have become Janus-faced: looking in one direction, the royal family encourages democratic reformers to speak out; looking in the opposite direction, it jails them when they do.
On May 15, in a closed trial without legal representation for the accused, three leading reformers – Ali Al Dumaini, a well-known journalist and poet, and university professors Abdullah Al Hamid and Matruk al Falih – were condemned and sentenced to prison terms ranging from six to nine years.
Their crime was to call for a constitutional monarchy.
The official verdict states that they threatened national unity, challenged those in authority, and incited public opinion against the state while using “foreign,” that is, Western, terminology.
Not long after the September 2001 terrorist attacks in the United States, these liberal reformers joined with 160 other professionals to write and sign a petition to Crown Prince Abdullah asking for reforms.
The petition called for the monarchy to work within constitutionally prescribed limits, and for an independent judiciary.
The reformers believe that such reforms are the only way for Saudi Arabia to survive the threat of violence, instability, and national fragmentation that is looming on its horizon.
Only a constitution, they argue, can restore much needed legitimacy to a political system that is widely perceived as deeply corrupt and inept.
Crown Prince Abdullah, Saudi Arabia’s de facto ruler in place of his incapacitated half-brother King Fahd, is keen to be seen as a champion of reform.
He received these proposals with a warm welcome in January 2003.
But his half-brother and more powerful rival, Prince Naif, the Minister of Interior, ordered the arrests, trial, and imprisonment of 13 reformers in March 2004.
Crown Prince Abdullah offered not a peep of opposition, leaving the reform agenda that he initiated in a political netherworld.
In order to maintain absolutist power and to minimize public anger, the Saudi princes, led by Prince Naif, asked the reformers to sign an agreement that they would never again ask for reform.
Prince Naif bans the very word “reform” from public discourse, because it suggests that there is something wrong with the system; his preferred term is “development.”
Of the thirteen reformers who were arrested, ten submitted to this demand, but the other three refused and have paid the price.
They remained in jail in Riyadh without legal representation until the final verdict.
Those who submitted had their passports withdrawn, lost their jobs, and were forbidden to speak to the press.
Under regional and international pressure, the Saudi ruling family has constructed a Potemkin village of reform while retaining absolute control over all political developments.
Earlier this year, they staged partial, and tightly regulated municipal elections, with no independent opinion permitted to influence when and how the ballots were held.
These entire female population was excluded, and only one-quarter of the male population was eligible to vote.
Inevitably, Wahhabi Islamists did best.
The al-Saud face two threats: one from violent Islamists, and the other from liberal reformers.
There is every indication that they fear the reformers far more.
Perhaps the princes believe that it is easier to kill “terrorist” criminals than to crush demands for social justice.
Indeed, killing violent Islamists and al-Qaeda affiliates is applauded by the international community, especially the United States, as success in the “war on terrorism.”
But as they hunt down and kill violent domestic extremists, they are quietly tightening the noose around all those who want moderate reform.
This repression of liberal reformers passes unnoticed in the wider world, with America’s silence particularly noticeable.
This silence is vital to the princes, for what the al-Saud care about most is US support.
As things stand in Saudi Arabia, the US administration has no credible ally for change outside of the existing regime.
So, unlike in Ukraine, Georgia, Kyrgizstan, and Lebanon, it does nothing to encourage popular opposition.
As long as the Saudi regime meets America’s oil needs and fights Islamist radicals, it will continue to receive US support and silence – and hence its tacit consent.
But turning a blind eye is shortsighted, for America and for the Saudis.
Those who make peaceful revolutions impossible make violent revolutions inevitable.
The liberal reformers who have been jailed could have paved the way for a peaceful transition to a reformed Saudi Arabia.
By jailing them, the regime has made it clear that violence is the only avenue open to those seeking change.
America and Europe Divided Over Saddam
Talk is growing of a change in US defense doctrine to allow for pre-emptive strikes on states that harbor weapons of mass destruction.
That talk is sending shudders across Europe, where many people connect it with America's oft-stated desire to remove Saddam Hussein from power in Iraq.
Ever since the Gulf war, Iraq has been a source of friction among the western permanent members of the UN Security Council.
By the end of 1999, divergence was complete: the United States and Britain were employing their air power to enforce the no-fly zones while France joined Russia and China in abstaining on resolution 1284.
As this UK-sponsored resolution was meant to bring the Iraq issue back to the Security Council after the withdrawal of the UN weapons inspectors and subsequent American air strikes of December 1998, hope for progress on Iraq within the Security Council was scant.
This rapidly changed after last September 11 th .
On May 14, 2002, the Security Council gave the tottering sanctions regime a new lease on life by unanimously adopting a simplified screening procedure.
Even Iraq showed signs of being prepared to consider a possible return of the UN weapons inspectors.
At first sight this seems to bode well for the transatlantic relationship.
In reality, the current relaxation is more likely a lull before the storm.
Most Europeans take it for granted that the US will attack Iraq, and that this act of unilateralism, coming in the wake of all the other irritants such as the ABM Treaty, the Kyoto Agreement, the steel tariffs and the International Criminal Court, will have a devastating effect on transatlantic relations.
Europe would be ill-advised to become mesmerized by this approaching disaster.
Everyone understands that the Iraqi government's improved attitude is caused by the Bush administration's sabre-rattling, but no one can tell whether this is a prelude to an inevitable war or a stratagem to make Iraq cooperate with UN weapons inspectors.
Obviously, the US cannot remove this uncertainty without robbing the sabre-rattling of its beneficial effect.
Given this ambiguity, there remains time for Europe to engage the US in a serious discussion of the options for dealing with Saddam.
The common aim should be to remove the threat posed by a dictator with so well-documented a predilection for weapons of mass destruction.
The options vary from resumed inspections to `regime change'.
There are arguments which make the choice far less clear-cut than it may seem.
Several of these are also being advanced within the Bush administration.
Europe can constructively participate in such discussion provided it first clears the way by:
1. ridding itself of its constant
2. showing some understanding for the view of some in the Bush administration that the US should not be bogged down by a continent that is soft, decadent and moralizing.
This is not a pleasant way of putting it, but many Americans remember how on two occasions in the former Yugoslavia - a pre-eminently European theatre - Europe was helpless until American warplanes showed up;
3. making clear that Europe and the US are
This debate about how to deal with Saddam might go as follows.
It is not difficult to overthrow Saddam, but it is impossible to predict who or what will take his place.
Iraq may even disintegrate, leaving us with a much stronger Iran, also a member of the
Moreover, Saddam may already possess a weapon of mass destruction but has been deterred from using it.
Once he is attacked by the US, he may use it against Israel, which will retaliate.
So it may well be wiser to induce Iraq to readmit the UN weapons inspectors and make sure they can do their job.
This will not entirely remove the Iraqi threat but will make it controllable.
Should this be the outcome, European governments would breathe a sigh of relief.
But the debate may also go the other way.
Saddam will cooperate with UN inspectors only as long as the American threat remains, and the US may conclude that it cannot afford that.
If President Bush then opts for regime change, Europe should not opt out.
This is easier said than done.
Many Europeans will argue that they cannot condone military action without a Security Council mandate.
But they already did, twice.
They condoned or even supported American air strikes against Baghdad in December 1998, and they supported or even participated in NATO's air strikes against the Federal Republic of Yugoslavia in March 1999.
True, some will say, but that was under the Clinton administration.
If Europe conveys the impression that its friendship with America depends on who wins the US presidential elections, it is likely to freeze the transatlantic relationship for years.
That hardly seems a rational policy for a continent in profound transition.
America and Global Public Goods
America is currently transfixed with the problem it has created for itself in Iraq, but the presidential candidates are also beginning to ask what principles should guide United States foreign policy after Iraq.
In my view, a focus on global public goods – things everyone can consume without diminishing their availability to others – could help America reconcile its preponderant power with others’ interests.
Of course, pure public goods are rare.
Most only partially approach the ideal case of clean air, where none can be excluded and all can benefit simultaneously.
Combating global climate change is probably the most dramatic current case.
If the largest beneficiary of a public good (like the US) does not take the lead in devoting disproportionate resources toward its provision, smaller beneficiaries are unlikely to be able to produce it because of the difficulties of organizing collective action when large numbers are involved.
While this responsibility often lets others become “free riders,” the alternative is no ride for anyone.
The US could gain doubly, both from the public goods themselves, and from the way they legitimize its preponderant power in the eyes of others.
America can learn from the lesson the nineteenth century, when Great Britain was a preponderant power and took the lead in maintaining the balance of power between Europe’s major states, promoting an open international economic system, and maintaining freedom of the seas.
These issues remain relevant today, and the establishment of rules that preserve access for all remains as much a public good now as it was then, even though some of the issues are more complex.
Maintaining regional balances of power and dampening local incentives to use force to change borders provides a public good for many (but not all) countries.
Similarly, maintaining open global markets is a necessary (though not sufficient) condition for alleviating poverty in poor countries even as it benefits the US.
Today, however, global public goods include new issues – not only climate change, but also preservation of endangered species, outer space, and the “virtual commons” of cyberspace.
A reasonable consensus in American public opinion supports ensuring both these and the “classic” global public goods, even if the US has failed to lead on some issues, notably global climate.
There are also three new dimensions of global public goods in today’s world.
First, the US should take the lead in helping to develop and maintain international laws and institutions to organize collective action to deal with not only trade and the environment, but also weapons proliferation, peacekeeping, human rights, and other concerns.
Others benefit from the order that such efforts provide, but so does the US.
Likewise, while unilateralists complain that the US is constrained by international regimes, so are others.
Second, the US should make international development a higher priority.
Much of the poor majority of the world is mired in a vicious circle of disease, poverty, and political instability.
Financial and scientific help from rich countries is important not only for humanitarian reasons, but also to prevent failed states from becoming sources of disorder for the rest of the world.
Here, too, America’s record is less than impressive.
Protectionist trade measures often hurt poor countries most, and foreign assistance is generally unpopular with the American public.
Development will take a long time, and the international community needs to explore better ways to make sure that help actually reaches the poor, but both prudence and a concern for soft power suggest that the US should take the lead.
Finally, as a preponderant power, the US can provide an important public good by acting as a mediator and convener.
By using its good offices to mediate conflicts in places like Northern Ireland, Morocco, and the Aegean Sea, the US has helped in shaping international order in ways that are beneficial to other nations.
The Middle East is the crucial current case.
It is sometimes tempting to let intractable conflicts fester, and there are some situations where other countries can play the mediator’s role more effectively.
Even when the US does not want to take the lead, it can share leadership with others, such as with Europe in the Balkans.
But often the US is the only country that can bring parties together.
When successful, such leadership increases American soft power while reducing sources of instability.
The US can also encourage other countries to share in production of such public goods.
Welcoming the rise of Chinese power in terms of that country’s becoming a “responsible stakeholder” is an invitation to begin such a dialogue.
Nevertheless, the US is likely to remain the world’s preponderant power even after it extricates itself from Iraq.
But it will have to learn to work with other countries to share leadership.
That will require combining the soft power of attraction with the hard power of military might to produce a “smart power” strategy for providing global public goods.
America at Stall Speed?
NEWPORT BEACH – Judging from the skittishness of both markets and “consensus expectations,” the United States’ economic prospects are confusing.
One day, the country is on the brink of a double-dip recession; the next, it is on the verge of a turbo-charged recovery, powered by resilient consumers and US multinationals starting to deploy, at long last, their massive cash reserves.
In the process, markets take investors on a wild rollercoaster ride, with the European crisis (riddled with even more confusion and volatility) serving to aggravate their queasiness.
This situation is both understandable and increasingly unsettling for America’s well-being and that of the global economy.
It reflects the impact of fundamental (and historic) economic and financial re-alignments, insufficient policy responses, and system-wide rigidities that frustrate structural change.
As a result, there are now legitimate questions about the underlying functioning of the US economy and, therefore, its evolution in the months and years ahead.
One way to understand current conditions – and what is needed to improve them – is to consider two events that recently attracted considerable worldwide attention: the launch of Boeing’s Dreamliner passenger jet and the tragic death of Apple’s Steve Jobs.
Let us start with some simple aeronautic dynamics, using an analogy that my PIMCO colleague, Bill Gross, came up with to describe the economic risks facing the American economy.
For the Dreamliner to take off, ascend, and maintain a steady altitude, it must do more than move forward.
It has to move forward fast enough to exceed critical physical thresholds, which are significantly higher than those for most of Boeing’s other (smaller) planes.
Failure would mean succumbing to a mid-air stall, with tepid forward motion giving way to a sudden loss of altitude.
Unless we are convinced of the Dreamliner’s ability to avoid stall speed, it makes no sense to talk about all the ways in which it will enhance the travel experience for millions of people around the world.
America’s economy today risks stall speed.
Specifically, the question is not whether it can grow, but whether it can grow fast enough to propel a large economy that, according to the US Federal Reserve, faces “balance-sheet deleveraging, credit constraints, and household and business uncertainty about the economic outlook.”
And, remember, it is just over a year since certain US officials were proclaiming the economy’s “summer of recovery” – a view underpinned by the erroneous belief that America was reaching “escape velocity.”
Stall speed is a terrifying risk for an economy like that of the US, which desperately needs to grow robustly.
Without rapid growth, there is no way to reverse persistently high and increasingly structural (and therefore protracted) unemployment; safely de-leverage over-indebted balance sheets; and prevent already-disturbing income and wealth inequalities from growing worse.
The private sector alone cannot and will not counter the risk of stall speed.
What is desperately needed is better policymaking.
Specifically, policymakers must be open and willing to understand the unusual challenges facing the US economy, react accordingly, and possess sufficiently potent policy instruments.
Unfortunately, this has been far from the case in America (and in Europe, where the situation is worse).
Moreover, US policymakers in the last few weeks have been more interested in pointing fingers at Europe and China than in recognizing and responding to the paradigm shifts that are at the root of the country’s economic problems and mounting social challenges.
This is where the insights of Steve Jobs, one of the world’s best innovators and entrepreneurs, come in.
Jobs did more than navigate paradigm shifts; he essentially created them.
He was a master at converting the complicated into the simple; and, rather than being paralyzed by complexity, he found new ways to deconstruct and overcome it.
Teamwork was an obligation, not a choice.
And he eschewed the search for the single “big bang” in favor of aiming for multiple breakthroughs.
Underlying it all was a willingness to evolve – a drive for perfection through experimentation.
Moreover, he excelled at selling to audiences worldwide both his vision and his strategy for realizing it.
So far, America’s economic policymakers have fallen short on all of these fronts.
Rather than committing to a comprehensive set of urgently-needed reinforcing measures, they seem obsessed with the futile search for the one “killer app” that will solve all of the country's economic problems.
No surprise that they have yet to find it.
Teamwork has repeatedly fallen hostage to turf wars and political bickering.
Little has been done to deconstruct structural complexity, let alone win sufficient public support for a medium-term vision, a credible implementation strategy, and a set of measures that is adequate to the task at hand.
The longer the policymaking impasse persists, the greater the stall-speed risk for an economy that already has an unemployment crisis, a large budget deficit, many underwater mortgages, and policy interest rates floored at zero.
This is an atmosphere in which unhealthy balance sheets come under even greater pressure, and healthy investors refuse to engage.
In the process, the risk of recession remains uncomfortably high, the unemployment crisis deepens, and inequities rise as already-stretched social safety nets prove even more porous.
America, China, and the Productivity Paradox
NEW HAVEN – In the late 1980s, there was intense debate about the so-called productivity paradox – when massive investments in information technology (IT) were not delivering measureable productivity improvements.
That paradox is now back, posing a problem for both the United States and China – one that may well come up in their annual Strategic and Economic Dialogue.
Back in 1987, Nobel laureate Robert Solow famously quipped, “You can see the computer age everywhere except in the productivity statistics.” The productivity paradox seemed to be resolved in the 1990s, when America experienced a spectacular productivity renaissance.
Average annual productivity growth in the country’s nonfarm business sector accelerated to 2.5% from 1991 to 2007, from the 1.5% trend in the preceding 15 years.
The benefits of the Internet Age had finally materialized.
Concern about the paradox all but vanished.
But the celebration appears to have been premature.
Despite another technological revolution, productivity growth is slumping again. And this time the downturn is global in scope, affecting the world’s two largest economies, the US and China, most of all.
Over the past five years, from 2010 to 2014, annual US productivity growth has fallen to an average of 0.9%.
It actually fell at a 2.6% annual rate in the two most recent quarters (in late 2014 and early 2015).
Barring a major data revision, America’s productivity renaissance seems to have run into serious trouble.
China is witnessing a similar pattern.
Although the government does not publish regular productivity statistics, there is no mistaking the problem: Overall urban employment growth has been steady, at around 13.2 million workers per year since 2013 – well in excess of the government’s targeted growth rate of ten million.
Moreover, hiring seems to be holding at that brisk pace in early 2015.
At the same time, output growth has slowed from the 10% trend of the 33 years ending in 2011 to around 7% today.
That downshift, in the face of sustained rapid job creation, implies an unmistakable deceleration of productivity.
Therein lies the latest paradox.
With revolutionary technologies now driving the creation of new markets (digital media and computerized wearables), services (energy management and DNA sequencing), products (smartphones and robotics), and technology companies (Alibaba and Apple), surely productivity growth must be surging.
As a modern-day Solow might say, the “Internet of Everything” is everywhere except in the productivity statistics.
But is there really a paradox?
Northwestern University’s Robert Gordon has argued that IT- and Internet-led innovations like automated high-speed data processing and e-commerce pale in comparison to the breakthroughs of the Industrial Revolution, including the steam engine, electricity, and indoor plumbing.
He maintains that, although these innovations led to dramatic transformations of the major advanced economies – such as higher female labor-force participation, increased transportation speed, urbanization, and normalized temperature control – these changes will be extremely hard to replicate.
Indeed, as taken with today’s revolutionary technologies as we are – I say this staring at my sleek new Apple Watch – I am sympathetic to Gordon’s argument.
If US productivity figures are to be taken at anything close to face value – a persistently sluggish trend interrupted by a 16-year spurt that now appears to have faded – it is possible that all America has accomplished are transitional efficiency improvements associated with the IT-enabled shift from one technology platform to another.
Optimists maintain that the official statistics fail to capture marked quality-of-life improvements, which may be true, especially in the light of promising advances in biotechnology and online education.
But this overlooks a much more important aspect of the productivity-measurement critique: the undercounting of work time associated with the widespread use of portable information appliances.
In the US, the Bureau of Labor Statistics estimates that the length of the average workweek has held steady at about 34 hours since the advent of the Internet two decades ago.
Yet nothing could be further from the truth: knowledge workers continually toil outside the traditional office, checking their email, updating spreadsheets, writing reports, and engaging in collective brainstorming.
Indeed, white-collar knowledge workers – that is, most workers in advanced economies – are now tethered to their workplaces essentially 24 hours a day, seven days a week, a reality that is not reflected in the official statistics.
Productivity growth is not about working longer; it is about generating more output per unit of labor input.
Any undercounting of output pales in comparison with the IT-assisted undercounting of working hours.
China’s productivity slowdown is probably more benign.
It is an outgrowth of the Chinese economy’s nascent structural transformation from capital-intensive manufacturing to labor-intensive services.
Indeed, it was only in 2013 that services supplanted manufacturing and construction as the economy’s largest sector.
Now the gap is widening, and that is likely to continue.
With Chinese services requiring about 30% more workers per unit of output than manufacturing and construction, combined, the economy’s structural rebalancing is now shifting growth to China’s lower-productivity services sector.
China has time before this becomes a problem.
As Gordon notes, there have been long-lasting productivity dividends associated with urbanization – a trend that could continue for at least another decade in China.
But there will come a time when this tailwind subsides and China begins to converge on the so-called frontier of the advanced economies.
At that point, China will face the same productivity challenges that confront America and others.
Chinese policymakers’ new focus on innovation-led growth seems to recognize this risk.
Without powerful innovations, sustaining productivity growth will be an uphill battle.
China’s recent shift to a slower-productivity trajectory is an early warning of what may well be one of its most daunting economic challenges.
There is no escaping the key role that productivity growth plays in any country’s economic performance.
Yet, for advanced economies, periods of sustained rapid productivity growth have been the exception, not the rule.
Recent signs of slowing productivity growth in both the US and China underscore this reality.
For a world flirting with secular stagnation, that is disturbing news, to say the least.
America Confronts Old and New Europe
US Secretary of Defense Donald Rumsfeld's petulant remark of last year about "old and new Europe" was right for the wrong reasons.
He meant it to refer to Europe's divisions, but in May, ten additional states joined the European Union.
The expanded Europe truly forms a new Europe.
Should America be nervous?
Fifty-four years after the announcement of the Schuman Plan that began to knit together the economies of France and Germany, the EU now has 25 countries and a population larger than that of the United States.
Eight of the new members are former Communist countries that were locked behind the Iron Curtain for nearly half a century.
Their attraction to the Union is a sign of the appeal - the "soft power" - of the idea of European unification.
Of course, this new Europe faces many problems.
The per capita income of the new countries is less than half of that of the fifteen members they are joining.
Concerns have been raised about the influx of cheap labor.
But average GDP growth rates in the new members are twice as high as in the original members, and this can provide a welcome stimulus to stagnant labor markets and sluggish economies.
Political arrangements are somewhat more problematic.
Negotiations are underway to revise a draft EU constitution.
Some Europeans worry that the constitution will enable courts to carry the integration process further and faster than public opinion in member states will tolerate.
Lack of grassroots support might lead to rejection of the constitution in countries like Britain, where referenda have been promised before the new arrangements come into force.
Across the Atlantic, most Americans (to the extent they pay attention) regard these changes with general approval.
But some express concern that the new Europe will be defined in opposition to the US.
Not only do the remarks of French leaders about recreating a multi-polar world arouse alarm, but recent public opinion polls show a decline in the popularity of the US among Europeans and a desire for more independent policies.
The Iraq War proved costly to American soft power, with the US losing about 30 percentage points of attractiveness on average in Europe, including in countries like Britain, Spain, and Italy, whose governments supported the war.
The recent photographs of detainees being abused and sexually degraded in Baghdad's Abu Ghraib prison added fuel to the fire.
Now some American neo-conservatives argue that the US should drop its longstanding support for European integration.
Such a policy change would be a serious mistake.
Not only would it add to anti-American attitudes and fail to accomplish its objectives, but it over-estimates the extent to which the new Europe is being formed in opposition to the US.
Whatever the rhetoric in France, for example, the policies and attitudes in countries such as Britain or Poland demonstrate that good trans-Atlantic relations can be maintained.
If anything, the risks of a US-Europe split will be reduced rather than increased by the EU's recent enlargement.
Moreover, there are several objective reasons why the current friction between Europe and the US is unlikely to lead to divorce.
For one thing, the divisive war in Iraq may turn out to be the last act of the twentieth century rather than a harbinger of the twenty-first.
American unilateralism is much less in evidence in the world's other hot spots, such as North Korea and Iran, both because of the costs of the war in Iraq and the realities of the situation in those other regions.
Moreover, while the common security threat from the Soviet Union has disappeared, both the US and Europe face a new common threat from radical
Europe and America also share a common structure of economic interests and values.
While trade produces frictions in democracies, it also enhances wealth.
If one looks at foreign direct investment, it is clear that the two sides of the Atlantic are closely integrated.
In terms of values, while some differences exist between Europe and America, at the fundamental level of democracy and human rights, no other two parts of the globe share more.
As the writer Robert Kagan concluded in the revision of his book in which he declared Europeans to be from Venus and Americans from Mars, it turns out that Americans seeking democratic legitimization of their policies and self-images cannot escape Europe.
In short, it is good for Americans - and for the world - that old and new Europe are becoming one.
We can all benefit from the soft power of an enlarged Europe.
America Goes from Teacher to Student
Cambridge &#45;&#45; As the United States’ epic financial crisis continues to unfold, one can only wish that US policymakers were half as good at listening to advice from developing countries as they are at giving it.
Americans don’t seem to realize that their “sub-prime” mortgage meltdown has all too much in common with many previous post-1945 banking crises throughout the world.
The silver lining is that there are many highly distinguished current and former policymakers out there, particularly from emerging market countries, who have seen this movie before.
If US policymakers would only listen, they might get an idea or two about how to deal with financial crises from experts who have lived through them and come out safely on the other side.
Unfortunately, the parallel between today’s US crisis and previous financial crises is not mere hyperbole.
The qualitative parallels are obvious: banks using off-balance loans to finance highly risky ventures, exotic new financial instruments, and excessive exuberance over the promise of new markets.
But there are strong quantitative parallels as well.
Professor Carmen Reinhart of the University of Maryland and I systematically compared the run-up to the US sub-prime crisis with the run-up to the 19 worst financial crises in the industrialized world over the past 60 years. These include epic crises in the Scandinavian countries, Spain, and Japan, along with lesser events such as the US savings and loan crises of the 1980’s.
Across virtually all the major indicators – including equity and housing price runs-ups, trade balance deficits, surges in government and household indebtedness, and pre-crisis growth trajectories – red lights are blinking for the US.
Simply put, surging capital flows into the US artificially held down interest rates and inflated asset prices, leading to laxity in banking and regulatory standards and, ultimately, to a meltdown.
When Asia and Latin America had their financial meltdowns in the 1990’s and early 2000’s, they took advice not only from the IMF, but also from a number of small panels composed of eminent people representing diverse backgrounds and experiences.
The US should do the same.
The head of the IMF, Frenchman Dominique Strauss-Kahn, could easily select a superb panel from any range of former crisis countries, including Mexico, Brazil, Korea, Turkey, Japan, and Sweden, not to mention Argentina, Russia, Chile, and many others.
Admittedly, the IMF’s panel would have to look past America’s current hypocrisy.
The US Treasury strongly encouraged Asia to tighten fiscal policy during its 1990’s crisis.
But today the US Congress and President are tripping over themselves to adopt an ill-advised giant fiscal stimulus package, whose main effects will be to tie the hands of the next president in simplifying the US tax code and closing the budget deficit.
Americans firmly told Japan that the only way to clean up its economy was to purge insolvent banks and regenerate the financial system through Schumpeterian “creative destruction.”
Today, US authorities appear willing to contemplate any measure, no matter how inflationary, to insure that none of its major banks and investment houses fails.
For years, foreign governments complained about American hedge funds, arguing that their non-transparent behavior posed unacceptable risks to stability.
Now, many US politicians are complaining about the transparency of sovereign wealth funds (big government investors mainly from Asia and the Middle East), which are taking shares in trophy American assets such as Citibank and Merrill Lynch.
In fact, having countries like Russia and China more vested in the well-being of the US economy would not be a bad thing.
Yes, the IMF ought to develop a voluntary code of conduct for SWF’s, but it should not be used as a weapon to enforce financial protectionism.
For years, I, along with many others, have complained that emerging markets need greater representation in global financial governance.
Today, the issue goes far beyond symbolism.
The US economy is in trouble, and the problems it spins off are unlikely to stop at the US border.
Experts from emerging markets and elsewhere have much to say about dealing with financial crises.
America should start to listen before it is too late.
Alliances for Peace
WASHINGTON, DC – I grew up in the shadow of World War II, and at the dawn of the Cold War.
My father’s work as a Foreign Service officer gave me an opportunity to see history up close in a searing way: I will never forget walking the beaches of Normandy with him and seeing the burned hulks of Higgins’ boats still on those shores, just a few years after so many young men went to their graves so the world could be free.
Likewise, I will never forget the eerie feeling of riding my bike through the Brandenburg Gate from West Berlin into the East, and seeing the contrast between people who were free and those who were trapped behind the Iron Curtain.
What strikes me now, all these years later, is that a generation of leaders won not only a war, but also the peace.
They did it together.
The United States and our partners worked to create alliances that brought prosperity and stability to Western Europe, Japan, and South Korea.
Old enemies became new allies, and together pioneered a new global economic system that made the world more prosperous.
And even as the Cold War raged, leaders found ways to cooperate on arms control and prevent a nuclear Armageddon.
In short, by building effective and indispensable international institutions and strategic partnerships, we did not just avoid another catastrophic world war; we ultimately ended the Cold War and lifted global living standards for hundreds of millions of people.
That is the remarkable story of the twentieth century.
The question now is what story will emerge from the twenty-first century.
Today, the world order faces new challenges.
Russian aggression is rattling allies.
Extremists who hijack religion threaten governments and people everywhere.
Technology is accelerating a shift in the balance of power between governments and governed that offers both opportunities for democratic accountability and obstacles to inclusive politics.
We have gone from a world where power resided in hierarchies to one where it inhabits networks.
Statecraft has yet to adapt.
The international institutions and partnerships that emerged in the postwar years demand both maintenance and modernization.
In the face of all of this turbulence, some suggest that America should turn inward.
That is nothing new.
Some argued the same after WWII.
They argued it again 25 years ago, after the fall of the Berlin Wall.
They were wrong then – and they are wrong now.
The need for leadership has never been greater, and the US has never been more engaged with the world.
Our role in Afghanistan’s first-ever peaceful, democratic transition reminds us all that, having invested so much blood and treasure in helping to give Afghans a chance to succeed in battle, the world has just as much responsibility to help its leaders succeed in governance.
We know that the destruction of 100% of Syria’s declared chemical weapons would not have happened without direct, hands-on diplomacy and perseverance, just as Syria’s immoral and horrifying civil war will not end without an equal commitment.
So, too, in Asia, where President Barack Obama and Chinese President Xi Jinping just announced ambitious commitments to tackle climate change, we are reminded of what countries can accomplish together with real leadership – and of how much additional leadership is required to conclude a successful climate agreement in Paris next year.
The world has changed, and we are changing with it.
Lines on the map no longer contain the gravest threats, and the players are no longer divided neatly into two camps.
In the twenty-first century, next door is everywhere.
That is why the world needs coalition diplomacy.
No country can defeat terrorism on its own.
No country can solve the existential threat of climate change alone.
No country can eradicate extreme poverty, combat potential pandemics, or improve nuclear security by itself.
None of us can live safer, richer lives by turning our back to the world.
We must build on our history of working with allies by forming new coalitions – with governments, with civil society, and, yes, with everyday people.
A good example is the international effort to confront the Islamic State’s malign brutality in Iraq and Syria.
Political, humanitarian, and intelligence tools from more than 60 countries are being used to support unified military action.
Success depends not on what one or even a handful of countries can do alone, but on what all of us are able to achieve by moving forward together against this common threat.
On an equally important front, the US is working with the United Nations to galvanize a global response to the danger posed by the Ebola virus.
I have personally talked with more than 50 foreign leaders, and we all agree that only by coordinating our actions can we stop the devastation in West Africa and halt Ebola’s spread.
We are making progress on both issues, but much work remains.
Bringing together countries with competing interests and varying resources is hard work.
It demands intense diplomatic engagement and calls upon relationships that have been built and maintained over decades, as well as alliances with new partners.
But by overcoming differences and coordinating efforts to defeat the Islamic State and conquer Ebola, we are reinforcing support for a world order grounded in collective solutions to common problems.
Cooperation is equally vital in reinforcing the bedrock economic principles on which America and other countries built their postwar prosperity.
Frustration cannot grow faster than opportunity in any country.
For example, the negotiations on the Trans-Pacific Partnership (TPP) reflect President Obama’s determination to strike an accord with countries that represent one-third of global trade and 40% of global GDP.
The benefits – for both the US and our partners – are enormous.
Estimates are that the TPP could provide $77 billion a year in real income and support 650,000 new jobs in the US alone. The Transatlantic Trade and Investment Partnership being negotiated with the European Union offers another major step toward increasing trade.
Whether for mutual security or shared prosperity, genuine partnerships are not built overnight.
Patient diplomacy and a collective will are needed to advance common goals.
America’s objectives remain the same as they have been for decades – peace, prosperity, and stability for the US and for our partners around the world.
Inequality and the American Child
NEW YORK – Children, it has long been recognized, are a special group.
They do not choose their parents, let alone the broader conditions into which they are born.
They do not have the same abilities as adults to protect or care for themselves.
That is why the League of Nations approved the Geneva Declaration on the Rights of the Child in 1924, and why the international community adopted the Convention on the Rights of the Child in 1989.
Sadly, the United States is not living up to its obligations.
In fact, it has not even ratified the Convention on the Rights of the Child.
The US, with its cherished image as a land of opportunity, should be an inspiring example of just and enlightened treatment of children.
Instead, it is a beacon of failure – one that contributes to global sluggishness on children’s rights in the international arena.
Though an average American childhood may not be the worst in the world, the disparity between the country’s wealth and the condition of its children is unparalleled.
About 14.5% of the American population as a whole is poor, but 19.9% of children – some 15 million individuals – live in poverty.
Among developed countries, only Romania has a higher rate of child poverty.
The US rate is two-thirds higher than that in the United Kingdom, and up to four times the rate in the Nordic countries.
For some groups, the situation is much worse: more than 38% of black children, and 30% of Hispanic children, are poor.
None of this is because Americans do not care about their children.
It is because America has embraced a policy agenda in recent decades that has caused its economy to become wildly unequal, leaving the most vulnerable segments of society further and further behind.
The growing concentration of wealth – and a significant reduction in taxes on it – has meant less money to spend on investments for the public good, like education and the protection of children.
As a result, America’s children have become worse off.
Their fate is a painful example of how inequality not only undermines economic growth and stability – as economists and organizations like the International Monetary Fund are finally acknowledging – but also violates our most cherished notions of what a fair society should look like.
Income inequality is correlated with inequalities in health, access to education, and exposure to environmental hazards, all of which burden children more than other segments of the population.
Indeed, nearly one in five poor American children are diagnosed with asthma, a rate 60% higher than non-poor children.
Learning disabilities occur almost twice as frequently among children in households earning less than $35,000 a year than they do in households earning more than $100,000.
And some in the US Congress want to cut food stamps – on which some 23 million American households depend, threatening the poorest children with hunger.
These inequalities in outcomes are closely tied to inequalities in opportunities.
Inevitably, in countries where children have inadequate nutrition, insufficient access to health care and education, and higher exposure to environmental hazards, the children of the poor will have far different life prospects from those of the rich.
And, partly because an American child’s lifetime prospects are more dependent on his or her parents’ income and education than in other advanced countries, the US now has the least equality of opportunity of any advanced country.
At America’s most elite universities, for example, only around 9% of students come from the bottom half of the population, while 74% come from the top quarter.
Most societies recognize a moral obligation to help ensure that young people can live up to their potential.
Some countries even impose a constitutional mandate for equality of educational opportunities.
But in America, more is spent on the education of rich students than on the education of the poor.
As a result, the US is wasting some of its most valuable assets, with some young people – bereft of skills – turning to dysfunctional activities.
American states like California spend about as much on prisons as on higher education – and sometimes more.
Without compensatory measures – including pre-school education, ideally beginning at a very young age – unequal opportunities translate into unequal lifelong outcomes by the time children reach the age of five.
That should be a spur to policy action.
Indeed, while inequality’s harmful effects are wide-reaching, and impose huge costs on our economies and societies, they are largely avoidable.
The extremes of inequality observed in some countries are not the inexorable result of economic forces and laws.
The right policies – stronger social safety nets, progressive taxation, and better regulation (especially of the financial sector), to name a few – can reverse these devastating trends.
To generate the political will that such reforms require, we must confront policymakers’ inertia and inaction with the grim facts of inequality and its devastating effects on our children.
We can reduce childhood deprivation and increase equality of opportunity, thereby laying the groundwork for a more just and prosperous future – one that reflects our own avowed values.
So why don’t we?
Of the harm that inequality inflicts on our economies, politics, and societies, the damage done to children demands special concern.
Whatever responsibility poor adults may bear for their lot in life – they may not have worked hard enough, saved enough, or made good decisions – children’s circumstances are thrust upon them without any sort of choice.
Children, perhaps more than anyone, need the protection that rights afford – and the US should be providing the world with a shining example of what that means.
American Conservatism’s Crisis of Ideas
BERKELEY – On the back left corner of my desk right now are three recent books: Arthur Brooks’ The Battle, Charles Murray’s Coming Apart, and Nicholas Eberstadt’s A Nation of Takers.
Together, they constitute an important intellectual movement, which also happens to be a large part of the reason that American conservatism today has little that is constructive to say about managing the economy – and little purchase on the center of the American electorate.
But let’s back up historically, to the founding of what we might call modern conservatism in early nineteenth-century Britain and France.
There were some – Frédéric Bastiat and Jean-Baptiste Say come to mind – who believed that government should put the unemployed to work building infrastructure when markets or production were temporarily disrupted.
But they were balanced by those like Nassau Senior, who spoke out against even famine relief: Although a million people would die in the Irish Potato Famine, “that would scarcely be enough.”
The main thrust of early conservatism was root-and-branch opposition to every form of social insurance: make the poor richer, and they would become more fertile.
As a result, farm sizes would drop (as land was divided among ever more children), labor productivity would fall, and the poor would become even poorer.
Social insurance was not just pointless; it was counterproductive.
The proper economic policy was to teach people to venerate the throne (so that they would respect property), the paternal hearth (so that they would not marry imprudently young), and the religious altar (so that they would fear pre-marital sex).
Then, perhaps, with women chaste for half or more of their childbearing years, the surplus population would diminish and conditions for the poor would be as good as they could be.
Fast-forward 150 years to post-World War II America, and to the original Chicago School critique of the New Deal version of social insurance – that it created “notches” that perverted economic incentives.
The government, Milton Friedman and others argued, told the poor: make more money and we will take away your free housing, food stamps, and income support.
People are rational, Friedman said, so they will not work for long if they get nothing or next to nothing for it.
The big difference between the Malthusian conservative critics of social insurance in the early nineteenth century and the Chicago critics of the 1970’s is that the Chicago critics had a point: Providing public support to the “worthy” poor, and then removing it when they began to stand on their own feet, poisoned incentives and was unlikely to lead to good outcomes.
And so, from 1970 to 2000, a broad coalition of conservatives (who wanted to see the government stop encouraging immorality), centrists (who wanted government money spent effectively), and leftists (who wanted poverty alleviated) removed the “notches” from the social-insurance system.
Presidents Jimmy Carter, Ronald Reagan, George H. W. Bush, Bill Clinton, and even George W. Bush and their supporters created the current system, in which tax rates and eligibility thresholds are not punitive disincentives to enterprise.
So what is the problem that America’s new generation of conservative critics of social insurance sees?
It is not that raising poor people’s standard of living above bare subsistence produces Malthusian catastrophe, or that taxes and withdrawal of welfare benefits make people work, at the margin, for nothing.
For Eberstadt, the problem is that dependence on government is emasculating, and that too many people are dependent on government.
For Brooks, it is that knowing that public programs make one’s life easier causes one to vote for non-Republican candidates.
For Murray, it is that social insurance means that behaving badly does not lead to catastrophe – and we need bad behavior to lead to catastrophe in order to keep people from behaving badly.
The crucial point is that America’s conservative elites believe Brooks, Eberstadt, and Murray.
To this day, Mitt Romney is convinced that he lost the presidency in 2012 because Barack Obama unfairly gave Latino-Americans subsidized health insurance; gave women free reproductive health coverage (excluding abortion); and gave other groups similar “gifts.”
He could “never convince them that they should take personal responsibility and care for their lives.”
In fact, it would be a tough sell for any candidate to convince Americans who receive government benefits that they are dependent rather than empowered; that it is bad for people to vote for politicians who make their lives better; and that good public policy seeks to create human catastrophe rather than to avert it.
The problem for American conservatives is not their choice of candidates or the tone of their rhetoric.
American Crony Capitalists Go to War
When financial crisis hit Asia in 1997, America's leaders charged Asian governments with practicing crony capitalism.
In retrospect, the charge seems like rank hypocrisy.
America has shown itself to be second to none in practicing cronyism, first with its rotten corporate scandals of recent years, and now in Iraq.
Asian capitalists may have stolen some borrowed loot, but at least they didn't mix finance with war.
Whatever other goals lay behind the Iraq war, the Bush Administration seems keen to line the pockets of its cronies and to capture increased control over Middle East oil and pipeline routes.
Only a few pesky obstacles--the UN, and the Iraqi people--stand in their way.
The Iraq war was ostensibly launched because of Saddam's weapons of mass destruction, yet each passing day suggests that the threat was exaggerated.
Another goal also loomed large: control over 11% (or more) of the world's oil reserves and, in the longer term, control over pipeline routes between the Mediterranean, the Caspian Sea, and the Indian Ocean.
The failure to locate Saddam's WMD's is putting America's grab for Iraqi oil into sharp focus.
The Cheney-Rumsfeld team is so arrogant that it acts as if it can flaunt the takeover of Middle East oil while brushing aside questions.
In Afghanistan last year, the US installed Hamid Karzai, a former consultant for oil giant Unocal, as interim leader.
It also appointed Kalmay Khalilzad, another former Unocal consultant --indeed, Karzai's boss--as special US envoy.
Khalilzad and Karzai spent considerable efforts in the late 1990s to get an American-built pipeline to carry gas from Turkeminstan through Afghanistan to Pakistan and the Indian Ocean.
Even before the bombs stopped falling on Baghdad, Khalilzad's writ as Special Envoy was extended to Iraq.
Among his likely jobs in Iraq will be to secure a pipeline carrying Iraqi oil from Mosul, Iraq to Haifa, Israel via Syria.
To stop Syria from objecting, the US is now threatening it as well.
Khalilzad will have plenty of support in the Bush Administration, which is heavily loaded with oil industry executives.
National Security Advisor Condeleeza Rice was a Director of Chevron-Texaco before coming to the National Security Council.
She even had an oil tanker named after her.
Commerce Secretary Don Evans is also an oil-company CEO.
Vice President Richard Cheney was in effect lead conductor of the group when he served as Chairman of Halliburton, the world's largest oil services company.
Halliburton is now at the front of the line for Iraqi reconstruction projects, for which contracts are being handed out without any transparent and competitive process whatsoever.
But what is happening here is more than "guilt by association" with the oil industry.
The Bush Administration is flouting every rule to give its cronies the inside track.
Before joining the Pentagon, Donald Rumsfeld was a key player as well.
A longstanding sidekick of Cheney, Rumsfeld traveled to Baghdad in 1983 and 1984 at the behest of former Bechtel Corporation President George Shultz, then passing a bit of non-corporate time as US Secretary of State.
Rumsfeld's hidden mission was to win Saddam's support of a Bechtel-built oil pipeline to run from Iraq via Jordan to the Gulf of Aqaba.
This is the same Bechtel which built Saddam's "dual use" chemical industry; now it has been awarded a non-competitive $600 million mega-contract to rebuild Iraqi infrastructure.
American newspapers now report that former Shell Oil CEO Philip Carroll will be appointed as the US czar of Iraqi oil.
Carroll's most recent job was as Chief Executive of Fluor, the giant construction conglomerate, another company that, together with Bechtel and Halliburton, is in line for the big bucks that will soon be paid (using Iraq's oil earnings) for US-led reconstruction.
The United Kingdom can't match the US in cronyism, but Britain's support for America in the war also has a commercial logic.
While Saddam gave oil contracts to French, Russian, and Chinese oil firms, UK firms such as BP were frozen out.
UK firms are no doubt counting on returning to Iraq on America's coattails.
Only a few hurdles remain before the US can consummate its crony takeover of Iraq's oil.
America will soon try to appoint an Iraqi regime that will aim to cancel many of Saddam's oil contracts with France, Russia, and China, in order to make room for US and UK firms.
But this will be harder to accomplish than simply sending in the US army.
The US can not legally market Iraqi oil, much less invest in new fields, until the old UN sanctions against Iraq are lifted.
But the rest of the world believes that lifting the sanctions is tantamount to handing Iraq's oil future over to the US and UK occupying forces and their corporate cronies.
More telling, and significant in the long term, is the remarkable anti-US and anti-UK sentiment now sweeping Iraq.
Rather than being welcomed as liberators, the US and UK are seen as new colonial occupiers, and the Iraqis are mobilizing to push the occupiers out.
The US may have done something few could have expected: united the Shi'ites and the Sunnis in a common cause.
Democracy may come to Iraq, and the will of the people will be to stop the plunder of their country's natural resources by US crony capitalists.
The Indispensable American Partner
MADRID – The United States is gearing up for that most intoxicating (and exhausting) of political events: an open-seat race for the presidency.
With US President Barack Obama's eight years in office coming to an end, and Vice President Joe Biden unlikely to run, the race will be without an incumbent.
As a result, the election could be less a referendum on the last eight years than a contest of ideas, with foreign policy emerging as a key topic.
The potential candidates have already sought to stake out their positions on key foreign-policy issues, with early Republican frontrunner Jeb Bush, for example, delivering a speech devoted entirely to the topic.
As for the Democrats, former Secretary of State Hillary Clinton's likely nomination (despite recent revelations that she used her personal email account to conduct government business) reinforces foreign policy's centrality to the election.
Recognizing this trend, the World Economic Forum Global Agenda Council has brought together a group of experts and practitioners to help infuse substance into the foreign-policy discussions leading up to the US election, including by preparing a public discussion paper.
From my perspective as the group's only European member, the overarching message should be that the US must conceive of itself not as “the indispensable power," as it now does, but as “the indispensable partner."
This is not merely a matter of semantics; such a change will require the US to re-conceive its role in the world.
But the payoff, for both the US and the liberal world order that it created, would be substantial.
The key to success will be America's ability to retain the best – and abandon the worst – of that most American of notions: exceptionalism.
The sense in the US that the country is unique, with a special mission to promote prosperity, security, and freedom worldwide, has long shaped American foreign policy.
The idea extends as far back as 1630, when John Winthrop, the Massachusetts Bay Colony's first governor, declared that his community must act as a “city upon a hill," setting an example for the world.
In doing so, he planted the seed of the values-based approach that was adopted by the US as it spearheaded the development of the rules and structures that order today's world.
Those rules and structures have delivered unprecedented economic growth, benefiting all (though the US has reaped the greatest rewards).
But, ironically, the notion of American exceptionalism often has led the US to undermine the international system that it nurtured.
Indeed, US history reveals a persistent isolationist streak, in which the “city upon a hill" is not a beacon, but a fortress.
At times, including over the last six years, the belief that the US is better off going it alone has led to withdrawal from the world.
This tendency was not a serious issue before World War II (though the people of Abyssinia and Manchuria may beg to differ).
But today, US withdrawal from the international system that it built has serious ramifications – namely, the kind of chaos and lawlessness exemplified by Russia's invasion of Ukraine.
Yet isolationism is not America's most destructive impulse.
Worse is its “exemptionalism": its penchant for opting out of the rules that it promotes – and often actively enforces – elsewhere.
The lengthy – and growing – list of major international conventions left unratified by the US includes the Rome Statute of the International Criminal Court, the Convention on the Elimination of All Forms of Discrimination Against Women, the Mine Ban Convention, the Convention on the Rights of the Child, and the Convention on the Rights of Persons with Disabilities.
Beyond the resentment that such an attitude engenders, American exemptionalism directly undermines multilateral institutions' capacity to address challenges that the US is unwilling or unable to resolve on its own.
How can the US expect China to follow rules on maritime delimitation in the East and South China Seas when it refuses to ratify the United Nations Convention on the Law of the Sea?
US President Barack Obama's administration has tried to create the illusion of a change of course in this regard, pushing “soft" deals that allow the US to participate without submitting to binding rules.
Such was the case with the much-lauded “handshake agreement" between Obama and Chinese President Xi Jinping on carbon-dioxide emissions in November.
But, though such arrangements make for great headlines, they do not provide the stability and predictability necessary for long-term success.
For that, hard rules and strong institutions are essential.
If the US is to serve as the world's “indispensable partner," it must recommit to the rules-based order that has served it – and the world – so well for the last seven decades.
It should begin by strengthening the flagging institutions that have served as the backbone of the liberal international order.
Specifically, the US should finally approve the International Monetary Fund reform package that was agreed in 2010; promote real progress at the Non-Proliferation Treaty Review Conference in May; and ensure that this December's UN Framework Convention on Climate Change Conference in Paris yields formal commitments.
Indispensable partnership is about helping countries help themselves.
It requires vision, commitment, and, most important, leadership.
A frank discussion about America's foreign policy could prove vital to ensuring that this “city upon a hill" remains a beacon of hope – and a catalyst of progress.
American Foreign Policy after Iraq
What comes after Iraq?
If President George W. Bush’s current troop “surge” fails to produce an outcome that can be called “victory,” what lessons will the United States draw for its future foreign policy?
Will it turn inward, as it did after its defeat in Vietnam three decades ago?
Will it turn from promoting democracy to a narrow realist view of its interests?
Even while discussion in Washington is fixated on Iraq, a number of thoughtful foreign observers are asking these longer-term questions.
Analysts and pundits have often been mistaken about America’s position in the world.
For example, two decades ago, the conventional wisdom was that the US was in decline.
A decade later, with the Cold War’s end, the new conventional wisdom was that the world was a unipolar American hegemony.
Some neo-conservative pundits drew the conclusion that the US was so powerful that it could decide what it thought was right, and others would have to follow.
Charles Krauthammer celebrated this view as “the new unilateralism,” and it heavily influenced the Bush administration even before the attacks on September 11, 2001.
But the new unilateralism was based on a profound misunderstanding of the nature of power in world politics.
Power is the ability to get the outcomes one wants.
Whether the possession of resources will produce such outcomes depends upon the context.
For example, a large, modern tank army is a powerful resource if a war is fought in a desert, but not if it is fought in a swamp – as America discovered in Vietnam.
In the past, it was assumed that military power dominated most issues, but in today’s world, the contexts of power differ greatly.
I have likened the distribution of power in politics today as analogous to a three-dimensional chess game.
On the top board – military relations among states – the world is, indeed, unipolar, and likely to remain that way for decades.
But on the middle board of economic relations, the world is already multipolar, and the US cannot obtain the outcomes it wants without the cooperation of Europe, Japan, China, and others.
And, on the bottom board of transnational issues outside the control of governments – including everything from climate change to pandemics to transnational terrorism – power is chaotically distributed, and it makes no sense at all to claim American hegemony.
Yet it is on this bottom board that we find most of the greatest challenges we face today.
The only way to grapple with these problems is through cooperation with others, and that requires the “soft” power of attraction as well as the hard power of coercion.
There is no simple military solution that will produce the outcomes we want.
The new unilateralists who dominated Bush’s first administration made the mistake of thinking that the unipolar distribution of power in the military context was sufficient to guide foreign policy.
They were like a young boy with a hammer who thinks that every problem resembles a nail.
The danger of their approach is now obvious.
Whoever plays a three-dimensional game by focusing on only one board is bound to lose in the long run.
Fortunately, the pendulum has begun to swing back toward cooperation.
In Bush’s second term, some of the most extreme unilateralists have departed from the government, and the president has approached difficult problems like North Korea or Iran with a more multilateral approach than during his first term.
Likewise, for all the complaints about the United Nations, the US and others turned to UN peacekeepers to sort out the mess after the Lebanon War last summer.
The Iraq War, in particular, increased public awareness of the mistakes in Bush’s first term, but other issues are changing as well.
Americans now view cooperative action on global climate change more favorably.
Similarly, the threat of pandemics means that Americans may come to recognize the importance of a stronger World Health Organization, just as the problem of nuclear proliferation is increasing awareness of the importance of the International Atomic Energy Agency.
The nature of these problems means that the US does not have the luxury of turning inward no matter what the outcome in Iraq.
These are not problems you can leave overseas.
They follow you home.
It also is unlikely that American foreign policy will return to a narrow realism and drop all emphasis on democracy and human rights.
While the Iraq War discredited the idea of coercive democratization, both Republicans and Democrats have a strong strand of idealism in their foreign policy orientations.
The problem for whoever is elected president in 2008 will be to find appropriate realistic means to advance democratic values and adjust official rhetoric accordingly.
When rhetoric greatly outstrips reality, others view it as hypocrisy.
Americans will need to find ways to assert their narrative of democracy, freedom, and rights in a manner that respects diversity and the views of others.
What Iraq has taught is the importance of developing civil society and the rule of law before trying to hold broad-based elections.
Democracy is more than voting, for it requires large investments in education, institutions, and promotion of non-governmental organizations.
It must be rooted in the indigenous society and bear its characteristics, not be imposed from abroad.
It is highly unlikely that the US will react after Iraq as it did after Vietnam.
The paradox of American power is that the world’s only military superpower cannot protect its citizens by acting alone.
America’s Global Balancing Act
With Russia’s invasion of Ukraine and annexation of Crimea, the disintegration of Iraq’s and Syria’s borders, and increasing Chinese assertiveness in the South and East China Seas, the post-Cold War era appears to have ended in 2014.
Is that true?
The post-Cold War era was not really an “era,” but rather a gradual transition from a bilateral Cold War to a more complex international order that still involves, in the final analysis, two world powers.
In brief, the decisive axis of the new order increasingly involves the United States and the People’s Republic of China.
The Sino-American competition involves two significant realities that distinguish it from the Cold War: neither party is excessively ideological in its orientation; and both parties recognize that they really need mutual accommodation.
America’s supposed “pivot to Asia” took a back seat in 2014 to the crises in Ukraine and the Middle East.
To what extent has uncertainty about the US commitment in Asia stoked tension between China and America’s Asian allies?
I disagree with the premises of the question.
I do think America has made it quite clear that it is in the interest both of America and China to avoid situations in which they will be pushed toward a collision.
The recent indications of some initial dialogue between China and India, and between China and Japan, suggest that China also realizes that escalating old grievances is not in its interest.
The more serious problem with the “pivot to Asia” was its actual wording, which implied a military posture designed to “contain” or “isolate” China.
The Chinese have come to realize more clearly that we were not deliberately attempting to isolate them, but that we had a stake in the avoidance of collisions in the Far East that could produce a wider spillover.
Xi Jinping has used his war on corruption to concentrate more power in his hands than any Chinese leader since Deng Xiaoping, 30 years ago.
How do you see Xi’s presidency evolving?
Power in China is somewhat informally defined, and its limits are set more by political realities than by constitutional arrangements.
That makes it difficult to say whether Xi’s power is greater than any Chinese leader’s since Deng.
He certainly has an authoritative personality and without doubt is more active on the international scene than some of his predecessors.
He has also been very decisive in attacking the growing corruption that has become a major source of internal malaise, reaching even the highest levels of government.
In that respect, it may be argued that his power is more wide-ranging than that of his predecessors, but in fairness it must also be noted that the patterns of corruption that his predecessors faced were not as acute and widespread as they have become in recent years.
At the same time, the increasing emphasis in party journals on the proposition that China’s armed forces must be viewed as servants of the Communist Party, and not simply of the nation, seems to suggest concern that the military may be developing its own view of Chinese domestic affairs, in addition to proclaiming with increasing assertiveness its responsibility for national security.
The Party elite, quite understandably, does not find this reassuring.
Can Russian President Vladimir Putin’s regime withstand a prolonged period of low energy prices and Western sanctions?
What risks do you see emerging should Russia’s economy continue to decline, with Putin increasingly unable to reward his political base?
There is, of course, a danger that at some point Putin may choose to lash out and create a truly massive international crisis, and perhaps precipitate some new form of direct East-West warfare.
But to say that, one must also assume that to some extent he himself is unbalanced and has shifted from a kind of guerilla warfare against the West, always with some possibility of retreat, to all-out combat.
The outcome of that would be inherently unpredictable, but probably in any case very destructive for Russian wellbeing.
If Russia’s economy continues to decline, and if the West succeeds in deterring Putin from further use of force, it is still conceivable that some acceptable resolution (a form of which I recommended publicly by talking about the Finland model) may be contrived.
But that depends in turn on the West’s firmness in supporting Ukraine’s efforts to stabilize itself.
Following the withdrawal of US troops from Afghanistan and Iraq, much of the world now perceives the US as being in a period of “retreat,” similar to the post-Vietnam War era.
Is the US embracing a form of neo-isolationism?
Or will America’s apparent inward turn be as brief as it was following Vietnam?
I do not believe that the US is in a “period of retreat.”
The fact of the matter is that the redistribution of global power has produced a situation in which the US is no longer the sole hegemon.
The US has to acknowledge the fact that the world is now much more complex.
The spread of conflict throughout the Middle East is currently precipitated more by the rise of religious sectarianism than by American interventionism.
In these volatile circumstances, greater attention must be given to the national interests of countries such as Turkey, Iran, Saudi Arabia, Egypt, and Israel.
By the same token, the interests of any one of them must not be allowed to become the total interest of the US.
What may surprise the world most in 2015?
Perhaps the gradual reappearance in Russia of a more politically assertive liberal middle class.
That middle class was beginning to play a more significant role in shaping domestic and international Russian policy under Dmitri Medvedev.
With Putin’s return to power and his recent adventurism, it has been pushed aside by deliberately awakened and intensely stimulated national chauvinism.
Waving a chauvinist banner, however, may not be the best solution for dealing with international problems, especially if the West is intelligent and united.
The Russian middle class, quite naturally, wishes to live in a society like that of Western Europe.
A Russia that gradually begins to gravitate toward the West will also be a Russia that ceases to disrupt the international system.
America’s Enemy Within
NEW YORK – Barring any unexpected new revelations, there is not much to be learned from the Tsarnaev brothers, better known as “the Boston bombers.”
We can dig into their family histories in strife-torn Dagestan, or examine, once again, the lethal appeal of Islamist radicalism.
But I doubt that this would be enlightening.
The elder brother, Tamerlan, who died in a gun battle with the police, appears to fit perfectly the profile of what the German writer Hans Magnus Enzensberger calls “the radical loser.”
And his younger brother, Dzhokhar, recovering from gunshot wounds in a Boston hospital while waiting to be put on trial for his life, seems to have been a pathetic follower who acted less out of deep conviction than out of fraternal love.
The radical loser is the kind of young man who feels victimized by an unfeeling, uncaring world.
That sour sense of rejection, felt by many confused youths, turns for some into a fierce desire for vengeance.
Like Samson in the temple of Gaza, he wishes to destroy himself in a public act of violence, taking as many people as possible with him.
Anything can trigger this final act: a lover’s rejection, a job application denied.
In the case of Tamerlan, a talented boxer, he was denied the chance to become a champion because he was not yet a United States citizen.
Radical Islamism offered him a ready-made cause to die for.
More interesting, and in a way far more disturbing, has been the reaction in the US to the Boston bombings, which killed three people and injured 264.
Even after Tamerlan had died, and Dzhokhar, already wounded, was the only known fugitive, the Boston authorities decided to close down the entire city.
Public transport was halted, trains to and from the city were stopped, shops and business closed, and citizens were told to stay home.
Until the surviving bomber was found, Boston was reduced to a ghost town.
If two troubled young men with homemade bombs cobbled together from fertilizer and pressure cookers can have this effect on a major American city, one can imagine how tempting their example must now be to other radical losers, not to mention radical groups.
It shows how vulnerable a modern city can be when its leaders lose their nerve.
The authorities’ overblown reaction – and that of much of the press – was all the odder for having occurred just as the US Senate was voting down a bill that would have made it harder for known killers and mentally disturbed people to buy guns, or for private individuals to acquire weapons normally used only in warfare.
It seems as though Americans can tolerate a society in which schoolchildren and other innocents are regularly murdered by deranged men with weapons bought on the open market, but erupt in collective hysteria when the killings are committed by people labeled as “terrorists.”
This may reflect what people are accustomed to.
The Spanish had grown so inured to acts of violence from Basque separatists that the murder of 191 people in Madrid by Islamist extremists in 2004 was met with remarkable sang-froid.
When 52 people were killed in a suicide bombing on the London Underground the following year, the British, too, reacted with relative calm, having lived through years of Irish terrorist violence in the 1970’s.
Like the Spanish, they were used to it.
Americans, despite the attacks of September 11, 2001, are not.
Worse than that, a number of Republican senators, including such luminaries as John McCain, called for stripping Dzhokhar Tsarnaev, who is a US citizen, of his legal rights and placing him before a military tribunal as an “enemy combatant,” as though the 19-year-old college student were a soldier in a war against America.
Exaggerated fear of outside enemies has always been part of the American political landscape.
The “nation of immigrants” was traditionally regarded as a refuge from danger.
The evil outside world should not be able to touch the Land of the Free.
When it does – Pearl Harbor, September 2001 – all hell breaks loose.
Another factor may be the need for a common enemy in a country whose citizens come from so many different cultures and traditions.
Besieged by Communists or Islamists, people feel a sense of belonging.
Defense of the nation against dangerous outsiders – and their domestic agents, whether real or imagined – provides a powerful bond.
Such bonds can be useful, even necessary, in times of war.
But the politics of fear poses a danger to the US itself.
The aim of political terrorist groups, such as Al Qaeda, is to provoke retaliation and maximize publicity for their cause.
As common criminals, such groups’ members would not achieve this goal.
But by claiming to be soldiers at war with the world’s biggest military power, they gain sympathy, as well as recruits, among the radical losers and the disaffected.
Former President George W. Bush once explained terrorism as the expression of hatred for American freedom.
But when terrorism results in torture of prisoners, ever more police surveillance, and official threats to US citizens’ legal rights – or, for that matter, when a crime committed by two young immigrants causes an entire city to be shut down – Americans’ government is harming their freedom more than any terrorist could ever hope to do.
American Funk
NEW YORK – The eccentric Bengali intellectual Nirad C. Chaudhuri once explained the end of the British Raj in India as a case of “funk,” or loss of nerve.
The British had stopped believing in their own empire.
They simply lost the will, in Rudyard Kipling’s famous words, to fight “the savage wars of peace.”
In fact, Kipling’s poem, “The White Man’s Burden,” which exhorted the white race to spread its values to the “new-caught sullen peoples, half devil and half child,” was not about the British Empire at all, but about the United States.
Subtitled “The United States and the Philippine Islands,” it was published in 1899, just as the US was waging a “savage war of peace” of its own.
Chaudhuri had a point.
It is difficult to sustain an empire without the will to use force when necessary.
Much political rhetoric, and a spate of new books, would have us believe that the US is now in a dangerous state of funk.
For example, Republican presidential candidate Mitt Romney likes to castigate President Barack Obama for “apologizing for America’s international power,” for daring to suggest that the US is not “the greatest country on earth,” and for being “pessimistic.”
By contrast, Romney promises to “restore” America’s greatness and international power, which he proposes to do by boosting American military force.
Romney’s Kipling is the neo-conservative intellectual Robert Kagan, whose new book, The World America Made, argues against “the myth of American decline.” Yes, he admits, China is growing in strength, but US dominance is still overwhelming;
American military might can still “make right” against any challenger. The only real danger to US power is “declinism”: the loss of self-belief, the temptation to “escape from the moral and material burdens that have weighed on [Americans] since World War II.”
Like Chaudhuri, Kagan is an engaging writer.
His arguments sound reasonable.
And his assessment of US firepower is no doubt correct.
True, he has little time for domestic problems like antiquated infrastructure, failing public schools, an appalling health care system, and grotesque disparities in income and wealth.
But he is surely right to observe that no other power is threatening to usurp America’s role as the world’s military policeman.
Less certain, however, is the premise that the world order would collapse without “American leadership.”
France’s King Louis XV allegedly declared on his deathbed: “Après moi, le déluge” (After me, the flood).
This is the conceit of all great powers.
Even as the British were dismantling their empire after World War II, the French and Dutch still believed that parting with their Asian possessions would result in chaos.
And it is still common to hear autocratic leaders who inherited parts of the Western empires claim that democracy is all well and good, but the people are not yet ready for it.
Those who monopolize power cannot imagine a world released from their grip as anything but a catastrophe.
In Europe after World War II, Pax Americana, guaranteed by US military power, was designed “to keep the Russians out and Germany down.”
In Asia, it was meant to contain communism, while allowing allies, from Japan to Indonesia, to build up economic strength.
Spreading democracy was not the main concern; stopping communism – in Asia, Europe, Africa, the Middle East, and the Americas – was.
In this respect, it succeeded, though at great human cost.
But, now that the specter of global communist domination has joined other fears – real and imagined – in the dustbin of history, it is surely time for countries to start handling their own affairs.
Japan, in alliance with other Asian democracies, should be able to counterbalance China’s growing power.
Similarly, Europeans are rich enough to manage their own security.
But neither Japan nor the European Union seems ready to pull its own weight, owing in part to decades of dependency on US security.
As long as Uncle Sam continues to police the world, his children won’t grow up.
In any case, as we have seen in Iraq and Afghanistan, “savage wars of peace” are not always the most effective way to conduct foreign policy.
Old-fashioned military dominance is no longer adequate to promote American interests.
The Chinese are steadily gaining influence in Africa, not with bombers, but with money.
Meanwhile, propping up secular dictators in the Middle East with US arms has helped to create Islamist extremism, which cannot be defeated by simplysending more drones.
The notion promoted by Romney and his boosters that only US military power can preserve world order is deeply reactionary.
It is a form of Cold War nostalgia – a dream of returning to a time when much of the globe was recovering from a ruinous world war and living in fear of communism.
Obama’s recognition of America’s limitations is not a sign of cowardly pessimism, but of realistic wisdom.
His relative discretion in the Middle East has allowed people there to act for themselves.
We do not yet know what the outcome there will be, but “the greatest country on earth” cannot impose a solution.
Nor should it.
American Gulag
Recently, the United States achieved the dubious honor of boasting the largest prison and jail population on earth.
It reached this zenith by surpassing cash-strapped Russia - long its only rival as a mass imprisonment society - after Russia released thousands of inmates so as to save money.
A few years earlier, as America rushed to lock up ever more of its population for ever-pettier offenses, the absolute size of its incarcerated population surpassed that of China - despite China's population being more than four times that of America.
According to research conducted by the British Home Office, America now incarcerates over one fifth of the world's total prisoners.
There is something bitterly ironic in this. For America really is a land of liberty, a place where lives, often scarred by injustice elsewhere, can be remade.
How tragic, therefore, that over the past twenty years, the country's political leaders have so often decided to deal with many of the most noxious side-effects of poverty - from chronic drug use and the establishment of street drug markets, to hustling, to gang membership and the spraying of graffiti on public buildings - through a vast over-reliance on incarceration.
How doubly tragic that this has occurred in tandem with a political assault on the Great Society anti-poverty programs put in place during the 1960s; that the investments in infrastructure, public education, public healthcare and job training which might curtail crime more effectively are, instead, being replaced by massive public expenditures on building new prisons to incarcerate hundreds of thousands of low-level offenders.
With such vicious cycles of crime, punishment and dis-investment in poor communities it is no surprise that the prison population has expanded to such an extent.
The numbers buttressing this sprawling prison system are extraordinary.
Approximately two million Americans are now serving either prison or jail time, over one million of them for non-violent offenses (a preponderance of these either for drug use or low-level drug sales).
Per hundred thousand residents, the US has an incarceration rate over five times that of England, six times that of Canada, and seven times that of Germany.
Somewhere in the region of 10% of African American men in their twenties live behind bars.
In some states, where a single felony conviction is enough to bar the offender from ever being able to vote again, over one quarter of African American males are disenfranchised.
High levels of disenfranchisement in Florida likely played a critical role in the much-disputed electoral victory of President Bush.
Since 1980, a virtual ``prison industrial complex'' has arisen, with phenomenal rates of new-prison construction abetted by lucrative construction and prison-guard union lobbies.
Several states, including California, now spend more on prisons than they do on higher education.
Despite dramatically falling crime rates over the last ten years (which most criminologists attribute more to demography - there have simply been fewer young men of late - than incarceration), prison populations have continued to soar.
Much of that increase has more to do with public perceptions about supposed crime waves and ham-handed public and political responses to occasional headline-capturing murders, than any actual underlying crime rate.
As the actual number of truly heinous crimes has in fact fallen, increasingly it is small-time hoodlums, drug users, and mentally ill people who have been drawing long spells behind bars.
America today has five times as many prisoners as it did in 1980.
One of the most dismaying developments is the spread of so-called ``three-strikes-and-you're out'' laws.
California's version, passed by citizen referendum in 1993 and ratcheted into place by state legislators in 1994, provides for the life imprisonment of any criminal with two previous serious convictions who is found guilty of any third felony.
By the end of last year there were about 7,000 people serving life sentences in California under this law.
Many thousands of them are serving life for small-time ``Third Strikes'': minor drug crimes, car theft, petty fraud, burglary, and drunk driving (even graffiti spraying, to the tune of $400 damage, which has now been reclassified as a felony).
One such man is fifty-eight year old heroin addict Billy Ochoa, who is serving a staggering 326 years in a supermax (super maximum security) prison for $2,100 of welfare fraud. Because he had been convicted of several burglaries over the previous decades, when Ochoa was caught making fraudulent applications for food stamps and emergency housing vouchers in Los Angeles, he was tried under the Three Strikes law and given sentences on thirteen separate counts to be served in one of the toughest, most secure prisons in America.
In many high security American prisons, inmates are routinely kept in virtual isolation, fed in their cells, allowed out for only half an hour of exercise a day, sometimes denied a TV, a radio, or even decorations for their concrete walls - conditions which have been documented to drive many of them into states of serious psychosis.
How can things have come to this America?
Now is the time - with the world watching America fight to defend its values - for the worst excesses of its criminal justice system to be addressed.
It is a tragedy that a great democracy should have so ugly and vast a prison system corroding both its reputation and its polity.
American Hegemony or American Primacy?
CAMBRIDGE – No country in modern history has possessed as much global military power as the United States.
Yet some analysts now argue that the US is following in the footsteps of the United Kingdom, the last global hegemon to decline.
This historical analogy, though increasingly popular, is misleading.
Britain was never as dominant as the US is today.
To be sure, it maintained a navy equal in size to the next two fleets combined, and its empire, on which the sun never set, ruled over a quarter of humankind.
But there were major differences in the relative power resources of imperial Britain and contemporary America.
By the outbreak of World War I, Britain ranked only fourth among the great powers in terms of military personnel, fourth in terms of GDP, and third in military spending.
The British Empire was ruled in large part through reliance on local troops.
Of the 8.6 million British forces in WWI, nearly a third came from the overseas empire.
That made it increasingly difficult for the government in London to declare war on behalf of the empire when nationalist sentiments began to intensify.
By World War II, protecting the empire had become more of a burden than an asset.
The fact that the UK was situated so close to powers like Germany and Russia made matters even more challenging.
For all the loose talk of an “American empire,” the fact is that the US does not have colonies that it must administer, and thus has more freedom to maneuver than the UK did.
And, surrounded by unthreatening countries and two oceans, it finds it far easier to protect itself.
That brings us to another problem with the global hegemon analogy: the confusion over what “hegemony” actually means.
Some observers conflate the concept with imperialism; but the US is clear evidence that a hegemon does not have to have a formal empire.
Others define hegemony as the ability to set the rules of the international system; but precisely how much influence over this process a hegemon must have, relative to other powers, remains unclear.
Still others consider hegemony to be synonymous with control of the most power resources.
But, by this definition, nineteenth-century Britain – which at the height of its power in 1870 ranked third (behind the US and Russia) in GDP and third (behind Russia and France) in military expenditures – could not be considered hegemonic, despite its naval dominance.
Similarly, those who speak of American hegemony after 1945 fail to note that the Soviet Union balanced US military power for more than four decades.
Though the US had disproportionate economic clout, its room for political and military maneuver was constrained by Soviet power.
Some analysts describe the post-1945 period as a US-led hierarchical order with liberal characteristics, in which the US provided public goods while operating within a loose system of multilateral rules and institutions that gave weaker states a say.
They point out that it may be rational for many countries to preserve this institutional framework, even if American power resources decline.
In this sense, the US-led international order could outlive America’s primacy in power resources, though many others argue that the emergence of new powers portends this order’s demise.
But, when it comes to the era of supposed US hegemony, there has always been a lot of fiction mixed in with the facts.
It was less a global order than a group of like-minded countries, largely in the Americas and Western Europe, which comprised less than half of the world.
And its effects on non-members – including significant powers like China, India, Indonesia, and the Soviet bloc – were not always benign.
Given this, the US position in the world could more accurately be called a “half-hegemony.”
Of course, America did maintain economic dominance after 1945: the devastation of WWII in so many countries meant that the US produced nearly half of global GDP.
That position lasted until 1970, when the US share of global GDP fell to its pre-war level of one-quarter.
But, from a political or military standpoint, the world was bipolar, with the Soviet Union balancing America’s power.
Indeed, during this period, the US often could not defend its interests: the Soviet Union acquired nuclear weapons; communist takeovers occurred in China, Cuba, and half of Vietnam; the Korean War ended in a stalemate; and revolts in Hungary and Czechoslovakia were repressed.
Against this background, “primacy” seems like a more accurate description of a country’s disproportionate (and measurable) share of all three kinds of power resources: military, economic, and soft.
The question now is whether the era of US primacy is coming to an end.
Given the unpredictability of global developments, it is, of course, impossible to answer this question definitively.
The rise of transnational forces and non-state actors, not to mention emerging powers like China, suggests that there are big changes on the horizon.
But there is still reason to believe that, at least in the first half of this century, the US will retain its primacy in power resources and continue to play the central role in the global balance of power.
In short, while the era of US primacy is not over, it is set to change in important ways.
Whether or not these changes will bolster global security and prosperity remains to be seen.
Renewing American Leadership
MADRID – December always provides an opportunity to pause and reflect on what was and what will be.
This year, one of the conclusions that such reflection yields is that the United States remains firmly at the center of the liberal world order.
Another is that the US needs to do more to lead in the way that its international standing demands.
Doubts about America’s continued global leadership have been proliferating for years.
But, though the much-discussed multi-polar world order may well be in the cards, the reality is that, for now, efforts to address global challenges – from climate change to conflict in the Middle East – demand US engagement.
Unfortunately, the narrative of American decline has gained so much traction in recent years that even US officials seem to have started to believe it, pursuing weak and piecemeal policies (or, in some cases, doing nothing at all).
President Barack Obama’s restrained foreign-policy approach appears to be fueling, not reducing, global instability.
The reasons for this lack of strong action are disputed.
Some blame Obama’s own fears about repeating his predecessors’ mistakes; others blame a hostile Congress for tying his hands.
In fact, both factors may be at work.
It may well be true that Obama would rather exercise caution – even when bold action is called for – than act impulsively and potentially cause more damage.
But the negative impact of an obstructionist, highly partisan US Congress should not be underestimated.
For example, by blocking reforms to International Monetary Fund governance that were agreed in 2010, Congress has damaged, perhaps irreparably, the legitimacy and relevance of the Bretton Woods institutions.
Likewise, by refusing to ratify the United Nations Convention on the Law of the Sea, the US Congress has undermined America’s credibility as it attempts to reaffirm international law in the South China Sea, where China is acting with increasing audacity.
And, by opposing the inclusion of legally binding climate commitments, it weakened the global climate agreement that was reached this month in Paris, leaving compliance and implementation uncertain.
Stalemate has become the name of the game in US politics in recent years.
That is why next year’s presidential election is so crucial.
It offers an opportunity for a fresh start, a new approach that produces the type of policy actions that the world needs.
The key is engagement – among branches of the US government, between the US government and the public, and between the US and the rest of the world.
For starters, to avoid the kind of obstructionism that prevailed in the last eight years, the next president must engage Congress directly and actively.
And, in fact, two of the Obama administration’s recent wins – the passage of so-called trade promotion authority (fast-track negotiating authority to conclude the Trans-Pacific Partnership) and the reauthorization of the small but vital Export-Import Bank – were the result of dedicated outreach, education, and, yes, cajoling of lawmakers.
The Iran nuclear agreement, one of Obama’s hallmark achievements, involved similar efforts to engage Congress, from protracted trips to Capitol Hill by Obama administration officials to a creative approach that allowed legislators to display their displeasure for the deal, without blocking its progress.
Even in America’s highly divisive political atmosphere, it seems, where there is a will, there is a way.
America’s next president must also improve engagement with citizens, whose widespread disaffection constrains – or allows – US leaders to pursue a weak foreign policy.
Like many Europeans today, most Americans do not seem to understand – or care to understand – that the crumbling of the liberal world order would have dire consequences for all of them.
It was not always this way.
Immediately after World War II, the memory of war, together with the enduring threat posed by the Soviet Union, made plain the importance of building and maintaining a liberal world order.
Today, though the need for such an order is just as great, the argument is not nearly as comprehensible or emotionally powerful.
Discussion of rules and institutions comes across as bloodless.
It is up to political leaders – and especially the president – to figure out how to make a compelling case about what is at stake.
Only this approach can secure the mandate from the public that the next US president will need to engage effectively with other world leaders.
And make no mistake: Such engagement is indispensable.
While the US must play an integral role in addressing global challenges, from ending the Syrian civil war to following through on the promises of the Paris climate agreement, it cannot do it alone.
Real progress will demand real cooperation.
In the second half of the twentieth century, the US showed that committed leadership could help to ensure widespread stability and prosperity.
In the twenty-first century, it has showed how devastating a lack of such leadership can be.
Finger pointing will not fix anything.
Only by pursuing genuine, deep, and sustained engagement, both at home and abroad, can the next administration ensure that the coming years will be better than the last.
American Pie in the Sky
NEW YORK – While the risk of a disorderly crisis in the eurozone is well recognized, a more sanguine view of the United States has prevailed.
For the last three years, the consensus has been that the US economy was on the verge of a robust and self-sustaining recovery that would restore above-potential growth.
That turned out to be wrong, as a painful process of balance-sheet deleveraging – reflecting excessive private-sector debt, and then its carryover to the public sector – implies that the recovery will remain, at best, below-trend for many years to come.
Even this year, the consensus got it wrong, expecting a recovery to above-trend &nbsp;annual GDP growth – faster than 3%.
But the first-half growth rate looks set to come in closer to 1.5% at best, even below 2011’s dismal 1.7%.
And now, after getting the first half of 2012 wrong, many are repeating the fairy tale that a combination of lower oil prices, rising auto sales, recovering house prices, and a resurgence of US manufacturing will boost growth in the second half of the year and fuel above-potential growth by 2013.
The reality is the opposite: for several reasons, growth will slow further in the second half of 2012 and be even lower in 2013 – close to stall speed.
First, growth in the second quarter has decelerated from a mediocre 1.8% in January-March, as job creation – averaging 70,000 a month – fell sharply.
Second, expectations of the “fiscal cliff” – automatic tax increases and spending cuts set for the end of this year – will keep spending and growth lower through the second half of 2012.
So will uncertainty about who will be President in 2013; about tax rates and spending levels; about the threat of another government shutdown over the debt ceiling; and about the risk of another sovereign rating downgrade should political gridlock continue to block a plan for medium-term fiscal consolidation.
In such conditions, most firms and consumers will be cautious about spending – an option value of waiting – thus further weakening the economy.
Third, the fiscal cliff would amount to a 4.5%-of-GDP drag on growth in 2013 if all tax cuts and transfer payments were allowed to expire and draconian spending cuts were triggered.
Of course, the drag will be much smaller, as tax increases and spending cuts will be much milder.
But, even if the fiscal cliff turns out to be a mild growth bump – a mere 0.5% of GDP – and annual growth at the end of the year is just 1.5%, as seems likely, the fiscal drag will suffice to slow the economy to stall speed: a growth rate of barely 1%.
Fourth, private consumption growth in the last few quarters does not reflect growth in real wages (which are actually falling).
Rather, growth in disposable income (and thus in consumption) has been sustained since last year by another $1.4 trillion in tax cuts and extended transfer payments, implying another $1.4 trillion of public debt.
Unlike the eurozone and the United Kingdom, where a double-dip recession is already under way, owing to front-loaded fiscal austerity, the US has prevented some household deleveraging through even more public-sector releveraging –&nbsp;that is, by stealing some growth from the future.
In 2013, as transfer payments are phased out, however gradually, and as some tax cuts are allowed to expire, disposable income growth and consumption growth will slow.
The US will then face not only the direct effects of a fiscal drag, but also its indirect effect on private spending.
Fifth, four external forces will further impede US growth: a worsening eurozone crisis; an increasingly hard landing for China; a generalized slowdown of emerging-market economies, owing to cyclical factors (weak advanced-country growth) and structural causes (a state-capitalist model that reduces potential growth); and the risk of higher oil prices in 2013 as negotiations and sanctions fail to convince Iran to abandon its nuclear program.
Policy responses will have very limited effect in stemming the US economy’s deceleration toward stall speed: even with only a mild fiscal drag on growth, the US dollar is likely to strengthen as the eurozone crisis weakens the euro and as global risk aversion returns.
The US Federal Reserve will carry out more quantitative easing this year, but it will be ineffective: long-term interest rates are already very low, and lowering them further would not boost spending.
Indeed, the credit channel is frozen and velocity has collapsed, with banks hoarding increases in base money in the form of excess reserves.
Moreover, the dollar is unlikely to weaken as other countries also carry out quantitative easing.
Similarly, the gravity of weaker growth will most likely overcome the levitational effect on equity prices from more quantitative easing, particularly given that equity valuations today are not as depressed as they were in 2009 or 2010.
Indeed, growth in earnings and profits is now running out of steam, as the effect of weak demand on top-line revenues takes a toll on bottom-line margins and profitability.
A significant equity-price correction could, in fact, be the force that in 2013 tips the US economy into outright contraction.
And if the US (still the world’s largest economy) starts to sneeze again, the rest of the world – its immunity already weakened by Europe’s malaise and emerging countries’ slowdown – will catch pneumonia.
American Power after Bin Laden
OXFORD – When one state is preponderant in power resources, observers often refer to the situation as hegemonic.
Today, many pundits argue that other countries’ rising power and the loss of American influence in a revolutionary Middle East point to the decline of “American hegemony.”
But the term is confusing.
For one thing, possession of power resources does not always imply that one can get the outcomes one prefers.
Even the recent death of Osama bin Laden at the hands of United States special forces does not indicate anything about American power one way or the other.
To see why, consider the situation after World War II.
The US accounted for more than one-third of global product and had an overwhelming preponderance in nuclear weapons.
Many considered it a global hegemon.
Nonetheless, the US was unable to prevent the “loss” of China, “roll back” communism in Eastern Europe, prevent stalemate in the Korean War, defeat Vietnam’s National Liberation Front, or dislodge the Castro regime in Cuba.
Even in the era of alleged American hegemony, studies show that only one-fifth of America’s efforts to compel change in other countries through military threats were successful, while economic sanctions worked in only half of all cases.
Yet many believe that America’s current preponderance in power resources is hegemonic, and that it will decline, like that of Britain before it.
Some Americans react emotionally to that prospect, though it would be ahistorical to believe that the US will have a preponderant share of power resources forever.
But the term “decline” conflates two different dimensions of power: absolute decline, in the sense of decay or loss of ability to use one’s resources effectively, and relative decline, in which the other states’ power resources become greater or are used more effectively.
For example, in the seventeenth century, the Netherlands flourished domestically but declined in relative power as other states grew in strength.
Conversely, the Western Roman Empire did not succumb to another state, but instead to internal decay and swarms of barbarians.
Rome was an agrarian society with low economic productivity and a high level of internecine strife.
While the US has problems, it hardly fits the description of absolute decline in ancient Rome, and the analogy to British decline, however popular, is similarly misleading.
Britain had an empire on which the sun never set, ruled more than a quarter of humankind, and enjoyed naval supremacy.
But there are major differences in the relative power resources of imperial Britain and contemporary America.
By World War I, Britain ranked only fourth among the great powers in terms of military personnel, fourth in GDP, and third in military spending.
The costs of defense averaged 2.5-3.4% of GDP, and the empire was ruled in large part with local troops.
In 1914, Britain’s net export of capital gave it an important financial kitty to draw upon (though some historians consider that it would have been better to have invested the money in domestic industry).
Of the 8.6 million British forces in WWI, nearly one-third were provided by the overseas empire.
With the rise of nationalism, however, it became increasingly difficult for London to declare war on behalf of the empire, the defense of which became a heavier burden.
By contrast, America has had a continental-scale economy immune from nationalist disintegration since 1865.
For all the loose talk of American empire, the US is less tethered and has more degrees of freedom than Britain ever had.
Indeed, America’s geopolitical position differs profoundly from that of imperial Britain: while Britain faced rising neighbors in Germany and Russia, America benefits from two oceans and weaker neighbors.
Despite these differences, Americans are prone to cycles of belief in decline.
The Founding Fathers worried about comparisons to the decline of the Roman republic.
Moreover, cultural pessimism is very American, extending back to the country’s Puritan roots.
As Charles Dickens observed a century and a half ago, “if its individual citizens, to a man, are to be believed, [America] always is depressed, and always is stagnated, and always is in an alarming crisis, and never was otherwise.”
More recently, polls showed widespread belief in decline after the Soviet Union launched Sputnik in 1957, then again during the Nixon-era economic shocks in the 1970’s, and after Ronald Reagan’s budget deficits in the 1980’s.
At the end of that decade, American’s believed the country was in decline; yet, within a decade, they believed that the US was the sole superpower.
Now many have gone back to believing in decline.
Cycles of declinism tell us more about American psychology than about underlying shifts in power resources.
Some observers, such as the Harvard historian Niall Ferguson, believe that “debating the stages of decline may be a waste of time – it is a precipitous and unexpected fall that should most concern policy makers and citizens.”
Ferguson believes that a doubling of public debt in the coming decade cannot erode US strength on its own, but that it could weaken a long-assumed faith in America’s ability to weather any crisis.
Ferguson is correct that the US will have to come to terms with its budget deficit to maintain international confidence, but, as I show in my book The Future of Power, doing so is within the range of possible outcomes.
America enjoyed a budget surplus only a decade ago, before George W. Bush’s tax cuts, two wars, and recession created fiscal instability.
The US economy is still ranked near the top in competitiveness by the World Economic Forum, and the political system, in its own messy way, has slowly begun to wrestle with the necessary changes.
Some believe a political compromise between Republicans and Democrats can be reached before the 2012 election; others suggest an agreement is more likely after the election.
Either way, fuzzy statements about hegemonic decline would again prove misleading.
American Power and the 2004 Campaign
America's presidential election campaign is heating up, and with it the debate about American power.
A year ago, after the blitz victory in the four-week Iraq War, many people thought the issue was settled.
But the subsequent difficulties in Iraq - and in America's foreign relations more generally - have placed that topic at the heart of the election campaign.
It is hard to recall, but a little over a decade ago, conventional wisdom - both inside and outside the US - held that America was in decline.
In 1992, the winner of the New Hampshire primary election argued that "the Cold War is over - and Japan won."
When I published Bound to Lead in 1990, I predicted the continuing rise of American power.
But today I regard it as equally important to challenge the new conventional wisdom that America is invincible, and that the "new unilateralism" should guide US foreign policy.
After the collapse of the Soviet Union, some analysts described the resulting world as unipolar and saw few constraints on American power.
This is misleading.
Power in a global information age is distributed among countries in a pattern that resembles a complex three-dimensional chess game.
On the top chessboard, military power is largely unipolar.
The US is the only country with large state of the art air, naval, and ground forces capable of global deployment - thus, the quick victory in Iraq last year.
But on the middle chessboard, economic power is multi-polar, with the US, Europe, Japan, and China representing two-thirds of world production.
On this economic board, other countries often balance American power.
The bottom chessboard is the realm of transnational relations that cross borders beyond government control.
At the benign end of the spectrum, this realm includes actors as diverse as bankers electronically transferring huge sums; at the other end are terrorists transferring weapons or hackers disrupting Internet operations.
On this bottom board, power is widely dispersed, and it makes no sense to speak of unipolarity, multipolarity, or hegemony.
Those who recommend a unilateral American foreign policy based on such traditional descriptions of American power are relying on a woefully inadequate analysis.
Many of the real challenges to American power are coming not on the upper military board, on which the unilateralists concentrate, but on the lower transnational board.
Ironically, the temptation to go it alone may ultimately weaken the US in this domain.
Why is this true?
Today's information revolution and the type of globalization that accompanies it are transforming and shrinking the world.
At the beginning of the 21st century, these two forces increased American power, particularly the ability to influence others through attractive, or what I call "soft" power.
But with time, technological gains will spread to other countries and peoples, diminishing America's relative pre-eminence.
For example, today America's 5% of the global population represents more than half of all Internet users.
But in a decade or two, Chinese may become the language of the largest number of Internet users.
It will not dethrone English as a lingua franca, but at some point, the Asian market will loom larger than the American market.
Even more important, the information revolution is creating virtual communities and networks that cut across national borders, and transnational corporations and non-governmental actors - terrorists included - will play larger roles.
Many organizations will have soft power of their own as they attract citizens into coalitions that cut across national boundaries.
The terrorist attacks on New York, Washington, and now Madrid are terrible symptoms of the deep changes already occurring.
Technology has been diffusing power away from governments, and empowering individuals and groups to play roles in world politics - including wreaking massive destruction - that were once reserved to governments.
Privatization has been the leitmotif in economic policy in recent years, but in politics the privatization of war is terrorism.
Moreover, as globalization shrinks distance, events in faraway places - like Afghanistan - have a greater impact on everyone's lives.
The world has moved from the Cold War to the Global Information Age, but the dominant foreign policy paradigms have not kept pace.
Today's growing global networks of interdependence are putting new items on national and international agendas; Americans simply cannot solve many of these by themselves.
International financial stability is vital to prosperity, but the US needs the cooperation of others to ensure it.
In a world where borders are becoming more porous than ever to everything from drugs to infectious diseases to terrorism, Americans will be forced to work with other countries beyond their borders.
Because of its leading edge in the information revolution, and its vast investment in traditional power resources, the US will remain the world's single most powerful country well into this new century.
While potential coalitions to check American power may be created, it is unlikely that they will become firm alliances unless the US handles its hard coercive power in an overbearing unilateral manner that undermines its "soft" or attractive power.
American Retreats
Los Angeles – As Barack Obama’s incoming administration debates the pace and consequences of withdrawal from Iraq, it would do well to examine the strategic impact of other American exits in the final decades of the twentieth century.
Although American commitments to Lebanon, Somalia, Vietnam, and Cambodia differed mightily, history reveals that despite immediate costs to America’s reputation, disengagement ultimately redounded to America’s advantage.
In all of these cases, regional stability of sorts emerged after an American military withdrawal, albeit at the cost of a significant loss of life.
America’s former adversaries either became preoccupied with consolidating or sharing power, suffered domestic defeat, or confronted neighboring states.
Ultimately, America’s vital interests prevailed.
The evidence today suggests that this pattern can be repeated when the United States departs Mesopotamia and leaves Iraqis to define their own fate.
Of the four withdrawals, arguably the 1982-1984 American intervention in Lebanon marks the closest parallel to Iraq today.
A country torn by sectarian violence beginning in 1975, Lebanon pitted an even more complex array of contestants against each other than Iraq does today.
Into this fray stepped the US and its Western allies.
Their objective was to create a military buffer between the PLO and Israeli forces that were then fighting in Beirut in order to promote the departure of both.
The massacres in Palestinian refugee camps prompted a new commitment to “restore a strong and central government” to Lebanon, to quote President Ronald Reagan.
But the result of intervention was that US forces became just one more target, culminating in the 1983 bombing of a US Marine barracks that killed 241 American soldiers.
A similar suicide bombing two days later claimed the lives of 58 French soldiers.
In February 1984, facing a quagmire, Reagan acceded to Vice President George H.W. Bush’s recommendation to get out of Lebanon.
But the withdrawal of Western forces did not stop the fighting.
The civil war continued for another six years, followed by a bumpy political aftermath: Syrian intervention and expulsion (two decades later), as the Lebanese defined their own fate with the US exercising only background influence.
In 1992, the sirens of Somalia’s political collapse lured the US into another civil war to save a country from itself.
The US humanitarian mission to that benighted country sought to salvage a failed United Nations enterprise to secure and feed Somalia’s ravaged population.
The US committed 28,000 troops, which for a time imposed a modicum of security.
But ill-equipped and poorly led UN replacement forces for the American presence put the remaining US troops in the bull’s eye as they attempted to bring to justice the Somali warlord responsible for the death of Pakistani peacekeepers.
The ensuing bloodbath of US soldiers generated images that the American public could not stomach, prompting the exit of American and then UN forces.
As unrest mounted with these military retreats, offshore US forces monitored and intercepted jihadists who sought to enter Somalia, while Kenya and Ethiopia blocked the unrest from metastasizing across the region.
In 2006, the capture of Somalia’s capital, Mogadishu, by the Islamic Courts raised the specter of a jihadist state.
But Somalia soon demonstrated that quagmires can be a two-way street.
Following Ethiopia’s intervention, the Islamists found themselves out of power.
Today, Somalia remains a dysfunctional state, as rival clans, jihadists, and an interim government with Ethiopian support compete for power.
The US, now out of the quagmire, exercises limited influence from afar.
While Lebanon and Somalia remain damaged and failed states, respectively, regional and domestic factors have cauterized the consequences of America’s retreat from Vietnam and Southeast Asia.
The result is the stable region that the world sees today.
But the US saw things very differently in the 1960’s, when the ghosts of Munich hovered over Vietnam’s jungles.
As President George W. Bush argued about the war in Iraq, US President Lyndon Johnson predicted that defeat in Vietnam “would be renewed in one country and then another.”
What Johnson failed to foresee were the domestic and regional constraints that would prevent the dominos from falling in the way he predicted.
Although the US bombed northeastern Cambodia intensely throughout the Vietnam War years, it had no stomach for a ground commitment there.
Still within congressional restraints, the Nixon administration attempted to bolster Cambodia’s military government.
But, despite modest material support, the US could not sustain a government that could not sustain itself.
Rather than the dominos falling following America’s retreat from Saigon in 1975, a Vietnam-Cambodian War ensued.
This in turn stimulated China’s unsuccessful intervention in North Vietnam.
The withdrawal by all of these invading armies to the recognized international boundaries demonstrated that nationalist forces were dominant in the region, not communist solidarity.
None of these American exits was without consequence.
But, while the US suffered costs to its reputation around the world, the supposed advantages from this for America’s opponents proved illusory.
America’s departure from Mesopotamia will likewise put the burden of problem solving onto Iraqis and other regional players, leaving the US offshore to assist when and where it deems appropriate.
History suggests that, in fits and starts, Iraq, like Vietnam and Lebanon, will find itself able to sort out its own affairs.
A Wiser America
NEW YORK – When America absorbed the bombings at the Boston Marathon, what was striking was what did not happen.
Twelve years after the attacks of September 11, 2001, the country was saddened, but it was also better informed.
There was little of the rampant jingoism, get-them-at-all-costs bloodlust, constant speechifying, and flag-waving that followed the 2001 attacks.
Perhaps most remarkable was the absence of reflexive Islamophobia and of the willingness to fight any war – even the wrong war in the wrong country for the wrong reasons – against the supposedly culpable “other.”
Instead, this time, Americans’ sadness was mingled with cynicism and suspicion.
The country is warier of being manipulated.
While Americans certainly mourn the dead and support the city of Boston, there has been a kind of penetration into the national consciousness that, after the 2001 attacks, America’s leaders used the bogeyman of terrorism to encroach on individual rights, fund almost every conceivable domestic-security boondoggle, and advance the self-interested agendas of the defense and surveillance industries.
Even conservative, Fox News-watching Americans have become aware, in a way that was not the case in the aftermath of the 2001 attacks, that America has created its own “blowback.”
The spin that worked so well back then – that the attacks occurred because “they hate our freedoms” – does not ring true anymore.
Americans know that a million refugees have fled Iraq; the Oscar-nominated documentary Five Broken Cameras and other media have shown how the United States contributes to the brutalization of Palestinians – a major driver of “jihad,” or what the US State Department calls “extremism”;
US soldiers have repeatedly been implicated in war crimes; and Jeremy Scahill’s book Dirty Wars, which details targeted assassinations by the US around the world, has hit bookstores.
In short, while no one condones violence against innocents like that suffered by the victims at the Boston Marathon, Americans are far more aware than they were 12 years ago of their own slaughter of innocents around the world.
Their self-image is no longer that of the “good guys,” against whom an act of violence is mad and inexplicable.
Americans also are more aware of how such attacks are used to justify abuses of their own rights.
Immediately, the bombings began to be cited by some leaders as a call to limit constitutional rights.
Republican Senators John McCain and Lindsey Graham have called for the surviving suspect, Dzokhar Tsarnaev, to be labeled an “enemy combatant” and shipped to Guantánamo Bay – an idea that many Americans find chilling.
Other responses appall many in the US as well.
The fact that Tsarnaev, despite his many requests, was not initially informed of his right to remain silent and be represented by an attorney – normally a required part of any US arrest – caused considerable anxiety.
The panicky public response that permitted the establishment of GITMO is no more.
Americans recognize that a violation of anyone’s rights threatens the rights of all.
Notable, too, are the conspiracy theories this time around.
Most Americans probably do not actually believe that the bombing was a “false flag” event, perpetrated by others than the Tsarnaev brothers; rather, the conspiracy theories seem to show how jaded Americans have become about their government’s approach to “terror.”
After all, US leaders lied about so much in the aftermath of the 2001 attacks.
They lied about Saddam Hussein’s weapons of mass destruction; lied about why Iraq had to be attacked, and then about the course of the war there; and the head of the federal Environmental Protection Agency at the time, Christie Whitman, even lied about the air quality in lower Manhattan after the attack, leading thousands of New York City children to suffer from severe respiratory problems.
Of course, reliance on fear and misdirection may still be part of official strategy.
With Dzokhar Tsarnaev in custody and his brother dead, the next round of stories reported on alleged “sleeper cells” and planned attacks that had been thwarted by America’s security services.
The Boston Globe, for example, ran an article about the man – identified only by his first name, Danny – whom the brothers carjacked three days after the attack.
Danny claimed that the only word of the brothers’ conversation that he understood was “Manhattan,” and that the terrorists had asked him if his car could leave the state – say, to get to New York.
The Globe’s one-source report proved nothing – and was unverifiable by other reporters or citizens – but it suggested much, leading to a spate of equally unverifiable reports that New York had been targeted.
Other recent “terror”-related reporting has been as flimsy.
In Charles Savage’s recent account of the Guantánamo “uprising,” The New York Times credulously reproduced the “arsenal” that GITMO officials showed reporters in a video still.
The “weapons” were allegedly made from mop handles and nail files – objects that, as I know from having reported from Guantánamo, are literally impossible for any detainee to obtain.
The prisoners are housed far from anything like mops or other cleaning articles; they are given no chores to perform; and they receive no mail.
In swallowing the official account without skepticism – Savage did not ask where any of these items may have come from – The New York Times has apparently learned nothing from its badly flawed reporting on Saddam’s supposed WMD.
Fortunately, most Americans have learned from the past, and this was reflected in the public response this time around – sadness, yes, but also some wisdom.
Perhaps Americans have moved closer to understanding that they can and must fight terrorism in a civilized way, as free and thoughtful people.
America’s Anti-Environmentalists
As an American, I am appalled, ashamed, and embarrassed by my country’s lack of leadership in dealing with global warming.
Scientific evidence on the risks mounts by the day, as most recently documented in England’s magisterial Stern Report .
Yet, despite the fact that the United States accounts for roughly 25% of all man-made global carbon emissions, Americans show little will or inclination to temper their manic consumption.
The first George W. Bush administration was probably right to refuse to sign the so-called “Kyoto Protocol,” albeit for the wrong reasons.
Among other problems, the Kyoto Protocol does not go far enough towards redistributing carbon emission rights towards developing countries.
But why can’t the US bring itself to raise taxes on gasoline and other sources of carbon emission like coal burning power plants?
It is not like the US government, running a huge deficit despite an economic boom, does not need the money.
Many people seem to think that the Bush administration is the problem.
Put a Texas oilman and his buddies in charge and what do you expect, conservation?
Unfortunately, that is a facile excuse.
American citizens’ resistance to moderating energy consumption for the sake of the global environment is much more deeply embedded.
Consider former US Vice President Al Gore, for example, whose documentary film on global warming, An Inconvenient Truth , is celebrated for its unflinching look at how fossil fuel consumption is leading mankind to the brink of catastrophe.
The evidence on global warming is considerably more muddled than Gore’s film suggests, but the basic problem is real.
Unfortunately, however, Gore was not successful in carrying the torch on global warming when he was a politician.
One cannot commend the 1990’s Clinton-Gore administration for taking any brave steps aimed at radically reducing carbon emissions.
Small wonder: the American public is fiercely resistant to anything that seriously forces them to compromise on their energy-burning, gas-guzzling lifestyle.
It is not just politicians who have failed to provide leadership here.
The venerable
The typical argument one hears is, “What about the poor guy with the gas-guzzling 1980 Chevy car, who has no other way to get to work?” It is a legitimate point, but if ocean levels start rising, as the
The change of position by the
Until Americans suck it up and start fixing global environmental problems that they, more than anyone, have caused, it will be difficult to get the wholehearted support of the rest of the world.
Developing countries ask why they should pay attention to global warming if rich countries are not prepared to curtail their own emissions sharply?
Why should poor countries worry about how deforestation contributes to global warming when rich countries remain so profligate?
The scientific evidence suggests that carbon emissions from anywhere in the world have about the same impact on global warming.
For this reason, a wide range of economists favor a uniform (“harmonized”) global tax that would tax carbon emissions equally everywhere in the world, and from whatever source – whether coal, oil, or gas, and whether consumers or businesses.
Such a tax is the most flexible and market-friendly approach, and would have the least impact on economic growth.
Instead, the complex system of quotas favored by the Europeans and embodied in the Kyoto Protocol is likely to lead to much larger inefficiencies and costs.
For this reason, England’s
America’s unwillingness to take the lead on environmental issues may some day be regarded as one of the country’s most profound political failures.
One hopes that it changes course soon, before we all are forced to wear swimsuits to work.
America’s Anti-Immigrant Road Rage
Because Latin American countries enjoy the billions of dollars that their countrymen in the United States send home, they should take note of how many of their benefactors are being treated by American officials.
Despite their numbers – the Urban Institute estimates that more than nine million undocumented immigrants live in the US, a number that exceeds the entire populations of countries like Costa Rica and Nicaragua – the undocumented worker has long been North America’s favorite punching bag.
Damned on Sunday, they are hired for work on Monday.
Attacks on immigrants went into high gear in February, when the US Congress passed a bill that will make it illegal for any state to issue driver’s licenses to undocumented workers.
No one in America is even writing about this or taking much notice because few care about those who are in the US illegally.
Undocumented workers pick America’s crops, clean Americans’ houses, and serve Americans their food, but their fate simply does not matter to many US citizens.
Most groups with nine million members who represent billions of dollars would be raising hell in Congress if they were targeted for ill treatment.
But the money undocumented workers earn goes abroad to build homes, start businesses, and take care of elderly parents throughout Latin America.
So the countries that benefit from this largesse have a responsibility to speak up for the constituents who help keep their economies afloat.
US Congresswoman Linda Sanchez says that if foreign presidents don’t speak up for their constituents in America, few others will.
If California is any indicator, a ban on driver’s licenses won’t be effective in keeping undocumented workers off the road.
It will merely make life riskier and more expensive for them, pushing them even further to the margins of society.
Gil Cedillo, a California state senator who has been trying to reverse earlier legislation that in 1994 made it illegal for undocumented workers in California to drive, wrote in a recent policy paper, “While the number of immigrant drivers may be minimally reduced, most simply drive without being trained, tested, licensed, and insured.”
Unlicensed drivers, he found, are nearly five times more likely to be in a fatal crash.
In addition to all the deaths, the net result of this, Cedillo found, was that unlicensed drivers cost Californians some $831 million a year in uninsured motorist coverage.
In some neighborhoods of Los Angeles where undocumented immigrants are concentrated, roughly 90% of drivers are uninsured.
Immigrants need to get to work and so they buy, sell, drive, and abandon cars in a parallel market.
When I talked to immigrants in Oakland, they called their license “tu licencia con dios,” or “your license with God.”
A benevolent God keeps the immigrant from being stopped by the police.
Undocumented workers thus enter the cycle of those who live and drive with nearly throwaway cars that cost between $200 and $700.
When it breaks down, the car of an unlicensed driver is towed to a lot, where it is rarely claimed.
It is then put up for auction and repurchased by agents who in turn sell it to another unlicensed immigrant.
The trick for an immigrant is to always buy cheap, because he never knows how long it will be before a car breaks down.
It is time for Latin America’s leaders to stand up for citizens who mean so much for their countries’ economies.
For example, fighting the Congress’s proposed nationwide ban on driver’s licenses for undocumented immigrants could be a high priority while negotiating new trade agreements with the US.
In any case, the time to act is now: once the ban is passed by Congress and signed by the president, it is unlikely to be lifted any time soon.
The California experience is a case in point.
Probably no other state governor has the political clout to win against the tide of activists who regard offering an undocumented immigrant a driver’s license as tantamount to offering them work, which they already have, and legitimacy, which they apparently don’t need to work.
While repealing one law to satisfy his voters – and get elected – Governor Arnold Schwarzenegger promised new legislation that would restore undocumented workers’ ability to obtain a driver’s license.
But the anti-immigrant vitriol of the 1990’s, which pushed California’s legislature to impose the ban, remains strong, and not even the immigrant Terminator can muster the courage to fight it.
Instead, Schwarzenegger, like other Americans, makes laws in the belief that nine million undocumented workers do not matter.
America’s Arab Comeback
AMMAN – Without much fanfare, the past few months have seen no anti-American demonstrations and no burning of American flags across the Arab world.
Arabs seem increasingly willing to accept – and even applaud – the Obama administration’s policy toward the region.
Of course, Arabs are still unhappy with the United States’ continued bias towards Israel.
Its inability to end the 44-year military occupation of Palestinian lands has not gone unnoticed.
But many Arabs nowadays prefer to give the US a break.
With the exception of the Obama administration’s lack of resolve in denouncing the treatment of protesters by the US-allied regimes in Bahrain and Yemen, America’s position on the Arab revolts has been welcomed.
Arabs, especially young Arabs, who comprise the majority of the region’s population, look up to America for its global power when it upholds democratic morals and values.
There is high respect for the concept of rule of, by, and for the people, as well as for the US Constitution’s guarantee of freedom of expression.
It is precisely the failure to apply these values in areas such as Palestine or Iraq that has made – and can still make – countless Arabs vehemently anti-American.
President Barack Obama’s election two years ago positively shocked Arabs and empowered Arab democrats, who saw it as proof of America’s true democratic nature.
Obama’s Cairo speech, delivered on one of his first foreign trips, promised a new US-Arab beginning, and certainly invigorated Arab democrats.
But the first test of Obama’s foreign leadership disappointed many Arabs.
A US veto of a Security Council resolution – supported by the Council’s 14 other members – to oppose Israeli settlements seemed to signal that Obama had crumbled under pressure from America’s pro-Israel lobby.
The US had not revised its policy, even with an African immigrant’s son living in the White House.
A more positive view of Obama emerged when the Arab revolts began in Tunisia and Egypt –countries with pro-US regimes.
While the US initially demonstrated prudence in word and deed, it quickly understood that the revolts truly reflected the will of the people and acted to align itself with the democratic cause.
The same people that Obama had called on in his Cairo speech to seek democracy had now formed the most important nonviolent movement the world had seen in decades.
Arab youth had finally moved, and Obama and his team made the right statements to encourage them, while also making it clear to the Egyptian and Tunisian regimes that they could no longer hide behind the claim that they were fighting America’s war in north Africa.
Pulling away from dictators without trying to take credit for or hijack the revolt was exactly what was required.
Arab youth had to fight and win democracy for themselves.
All that what was wanted from America, most of the young people thought, was withdrawal of its support for allies like Hosni Mubarak and other Arab dictators.
In Libya, however, the need was different.
The same energy on display in Cairo and Tunis was evident among Libyan youth, but this time, America was able to do little diplomatically because it had no relationship with Col. Muammar el-Qaddafi.
So, no surprise, the energy of Libyan youth ran head-on into Qaddafi’s inclination toward brutality and, more importantly, into his paid mercenaries.
America had a moral responsibility to protect the young people whom Obama had encouraged.
Another type of help was needed, but deciding what form it should take was complicated.
Arab countries, especially Egypt, had hundreds of thousands of their nationals working in Libya.
Their governments saw themselves as Qaddafi’s hostages.
But what the Arab countries couldn’t do with military support, they were able to do by providing political cover for the military intervention led by the US, Britain, and France.
The Gulf countries, which have no citizens working in Libya, were the first to denounce Qaddafi.
Then the Arab League met to follow the Gulf states’ lead.
With angry young Arabs from different countries demonstrating outside its Cairo offices and demanding support for their Libyan brethren, the Arab League took an uncharacteristic position: it agreed to denounce a fellow Arab leader.
Clearly, the Arab world was changing, and the US was suddenly no longer an enemy, but a friend.
After gaining Security Council support, the US, Europe, and some Arab countries began doing exactly what should be expected of the international community when a government is preparing to butcher its own citizens: prevent the slaughter.
Of course, America’s problems with Arabs and its challenges in the Middle East are far from over.
Obama must still fulfill his promises to celebrate with Palestinians their full membership of the UN this fall and to draw down its forces in Afghanistan.
But, for the moment, Arabs are not demonstrating against America.
Instead, with America’s help, they are enjoying the first blush of freedom.
A New Low for China Bashing
NEW HAVEN – As America’s election season nears its finish, the debate seems to have come unhinged.
Nowhere is that more evident than in the fixation on China – singled out by both President Barack Obama and his Republican challenger, Mitt Romney, as a major source of pressure bearing down on American workers and their families.
Get tough with China, both stressed in the presidential debates, and the pain will ease.
Nothing could be further from the truth.
Consider the following charges:
Currency manipulation. Since China reformed its exchange-rate regime in July 2005, the renminbi has risen 32% relative to the dollar and about 30% in inflation-adjusted terms against a broad basket of currencies.
These are hardly trivial amounts, and more renminbi appreciation can be expected in the years to come.
Unlike Japan, which was pressured by the West into a large yen revaluation in 1985 (the “Plaza Accord”), the Chinese have opted to move gradually and deliberately.
American officials call this “manipulation,” arguing that market forces would have resulted in a sharper renminbi appreciation than has occurred.
Fixated on stability – a concept alien to US politicians and policymakers – the Chinese prefer, instead, to play a more active role in managing the adjustment of their currency.
I call that prudence – perhaps even wisdom.
Two lost decades later, the guinea pig, Japan, might have a view on which approach works best.
Outsourcing and intellectual property. Notwithstanding some recent modest improvements in the US labor market, America’s job situation remains terrible.
Private-sector employment is still down 4.1 million from its January 2008 peak.
Yet there is not a shred of evidence to support bipartisan claims that this ongoing carnage is the result of outsourcing US manufacturing jobs to China.
While the manufacturing sector’s share of private employment fell from 11.9% in January 2008 to 10.7% in September 2012, this is only a small portion of the enormous secular decline since the early 1970’s, when manufacturing accounted for more than 30% of private-sector employment.
Weak demand – especially the post-crisis collapse in consumer spending growth – is a far more likely culprit than China in explaining the recent hiring shortfall.
China, for its part, has become a major workhorse of globalization – an assembly hub for inputs produced by multi-country supply chains and an offshore efficiency solution for hard-pressed Western multinational corporations.
About 50% of all exports leaving China have been processed previously by other economies, and close to 60% are shipped by Chinese subsidiaries of “foreign-invested enterprises.”
While these trends benefit Chinese workers, they also support America and other countries by holding down inflation and making it possible for their companies to cope with tough competitive pressures.
They allow beleaguered American families to stretch their paychecks (think Wal-Mart).
And they have not stopped innovative Western companies from putting their intellectual property and new technologies on the line in China in order to deliver spectacular new products to US customers (think Apple).
The trade deficit. Yes, the US runs a massive trade deficit with China – around $295 billion in 2011, or fully 40% of America’s total merchandise trade gap of $738 billion.
Republicans and Democrats alike argue that this is the crux of America’s jobs problem. After all, trade deficits mean job losses.
Because the biggest share of the US trade gap is with China, a country vilified as a currency-manipulating cheater, the bilateral trade deficit has become the lightening rod for China bashers.
It is what has driven Obama to go to the mat with China on recent disputes within the World Trade Organization and on restrictions on Chinese investment in Oregon wind farms, and what has led to saber-rattling by Romney on currency manipulation and trade sanctions.
But neither candidate acknowledges the much bigger elephant in the room.
In 2011, the US had trade deficits with 98 countries.
The other 97 deficits did not magically appear.
They are all part of an enormous multilateral trade deficit that stems from America’s unprecedented shortfall of saving – a depreciation-adjusted “net national saving rate” (combining businesses, households, and the government sector) that has been negative since 2008.
Lacking in savings and wanting to grow, the US runs massive current-account and multilateral trade deficits in order to import other countries’ surplus savings.
This goes to the heart of the folly of China bashing.
No leading country in world history has persistently maintained a negative saving rate.
Trade deficits – with China or any other country – are part of the price that America pays for its unbridled profligacy.
Unless and until the US faces up to its chronic aversion to saving – namely, by reducing massive federal budget deficits and encouraging the rebuilding of severely depleted household saving – multilateral trade deficits will persist.
Simple arithmetic and basic economics tell us that a multilateral problem cannot be addressed by a bilateral solution.
Politicians have a penchant for simple and powerful messages.
Yet those messages are often more spin than substance.
American families are hurting, and elected officials want to pin the blame on China, thereby deflecting attention from the difficult task of rebuilding saving, restoring competitiveness, and living within the country’s means.
Indeed, one could argue that it is the American public that is being manipulated by the erroneous charges leveled at China.
Fortunately, the campaign season is nearly over.
Left unanswered, however, is what comes next.
China bashers typically change their tune after a presidential election.
But there is nothing typical about the pressures that are likely to continue squeezing American families long after November 6.
Both Obama and Romney run the risk of painting themselves into a corner when it comes to China.
That could take all of us to the edge of a slippery slope.
America’s leaders need to come clean with the American people – before it is too late.
America’s Coming Social Democracy?
Almost all of the world’s developed countries consider themselves, and are, social democracies: mixed economies with very large governments performing a wide array of welfare and social insurance functions, and removing large chunks of wealth and commodity distribution from the market.
The United States is something different.
Or is it?
Whatever it has been in the past, the US in the future will have to choose whether, and how much, it will be a social democracy.
Once upon a time, according to mythology at least, America had little downward mobility.
On the contrary, before the Civil War you could start out splitting rails, light out for the Western Territory, make a success of yourself on the frontier, and wind up as President – if you were named Abraham Lincoln.
In the generation after World War II, you could secure a blue-collar unionized manufacturing job or climb to the top of a white collar bureaucracy that offered job security, relatively high salaries, and long, stable career ladders.
This was always half myth.
Setting out for the Western Territory was expensive.
Covered wagons were not cheap.
Even in the first post-WWII generation, only a minority of Americans – a largely white, male minority – found well-paying stable jobs at large, unionized, capital-intensive manufacturing companies like GM, GE, or AT&T.
But if this story was half myth, it was also half true, particularly in the years after WWII.
Largely independent of education or family, those Americans who did value stability and security could grasp it in the form of jobs with “a future.”
Even for those not so lucky, economic risks were usually fairly low: the unemployment rate for married men during the 1960’s averaged 2.7%, and finding a new job was a relatively simple matter.
It was during this era – roughly from 1948 to 1973 – that sociologists found that a majority of Americans had come to define themselves not as working class, but as middle class.
The post-WWII period stands as a reference point in America’s collective memory, but it was in all likelihood an aberration.
In the early postwar decades, foreign competition exerted virtually no pressure on the economy, owing to the isolation of America’s continental market from the devastation of WWII.
At the same time, the war left enormous pent-up demand for the products of mass production: cars, washing machines, refrigerators, lawn mowers, television sets, and more.
Government policy back then began with a permanent military program of spending and R&D and continued through massive public works program and suburbanization, underpinned by the Federal Highway Program and subsidized home ownership loans from the Federal Housing Administration.
The regulatory institutions and behavioral norms that originated in the New Deal and developed during WWII came into full force: social security, a system of unionized labor relations, market regulation.
Favorable macroeconomic circumstances, the absence of foreign competition, a system of government support and regulation, and large-scale private provision of what in Europe would have been public social insurance all combined to give post-WWII America many of social democracy’s benefits without the costs. The economy did not stagger under the weight of ample benefits or high taxes.
Americans – at least white, male Americans – did not have to worry about tradeoffs between security and opportunity, because the US offered the advantages of both.
Corporate welfare capitalism substituted for what in Europe would have been government provided social democracy.
America was thus a special place. It had its cake and ate it, too: a combination of security with opportunity and entrepreneurship.
It seemed that this was the natural order of things.
Hence there was little pressure for government-sponsored social democracy: Why bother?
What would it add?
Now things are very different.
The typical American employer is no longer General Motors.
It is Wal-Mart.
Private businesses are providing their workers with less and less in the form of defined-benefit pensions, health insurance, and other forms of insurance against life’s economic risks.
Sharply rising income inequality has raised the stakes of the economic game.
A government that cannot balance its own finances cannot be relied on to provide macroeconomic stability.
Indeed, former Chairman of the US Federal Reserve Paul Volcker sees the US as so macroeconomically vulnerable as to be running a 75% chance of a full-fledged dollar crisis over the next several years.
The coming generation will be one of massive downward mobility for many Americans.
The political struggles that this generates will determine whether America will move more closely to the social democratic norm for developed countries, or find some way to accept and rationalize its existence as a country of high economic risk and deep divisions of income and wealth.
Syria and September 11
PARIS – By chance, it appears that the US Congress will decide on or around September 11 whether to endorse President Barack Obama’s proposal to respond militarily to the Syrian government’s use of poison gas against civilians.
The shadow of two previous events that took place on September 11 looms over the outcome – indeed, over the fact that the question is even being considered at all.
Long before September 11 became a day of infamy in the United States, it acquired similar significance in Chile, where 40 years ago, on September 11, 1973, the armed forces, led by General Augusto Pinochet, overthrew the country’s democratically elected government.
More than any other event of our era, that violent coup was responsible for launching both the contemporary global movement for human rights and the American movement to promote human rights internationally.
In part, this reflected the new regime’s cruelty.
More than three thousand people were murdered or “disappeared” during Pinochet’s rule, thousands more were tortured by his forces, and tens of thousands were forcibly exiled.
To an even greater extent, however, the motivation that spurred the human-rights movement was revulsion worldwide, including in the US, against American aid to Pinochet’s forces, a policy directed by President Richard Nixon and Secretary of State Henry Kissinger.
In the US, members of Congress turned the coup into a platform for efforts to promote human rights.
They condemned developments in Chile, held hearings about the importance of promoting human rights, and adopted legislation – over President Gerald Ford’s veto – requiring that human-rights standards guide US foreign policy.
A slightly revised version of that legislation remains in force.
Obama’s proclamation that the use of chemical weapons in Syria would cross a “red line” – and his implicit threat to use force if that line were crossed – reflects the commitment that the US has made during the past four decades to promote human rights worldwide.
The events of September 11, 2001, are also playing a crucial role in deciding the question of a punitive strike against Syrian President Bashar al-Assad’s regime.
One consequence of the terrorist attacks 12 years ago is that Americans and others in the West became aware that developments in the Middle East could affect their own safety and security.
Initially, the attacks unleashed a strong desire to retaliate, which later gave way to caution about intervention, owing to unforeseen consequences.
In Britain, continuing intense resentment over the deceptions that led to the country’s engagement in the Iraq war seems to be the main reason for Parliament’s refusal to back a strike against Syria.
Wariness of another Middle East war has also underpinned Obama’s unwillingness to go beyond a one-time punitive strike on Syria – with some in Congress opposed to even that.
Though Congress must guard against repeating its disastrous mistake in 2003, when it supported the war in Iraq, the commitment to promote human rights that the US made following September 11, 1973, seems a more appropriate standard for weighing Obama’s proposal for US military action in Syria. Maintaining the international prohibition on the use of chemical weapons is an urgent concern.
The Assad regime’s culpability for using these weapons is not in doubt.
If the US Congress deals with Obama’s proposal responsibly, and does not yield to those motivated by a partisan desire to embarrass him at every turn, it will enhance its own claim to recapture the constitutional power to authorize military conflict – a power that has been disregarded more often than not in the past half-century.
A critical part of its role must be to consider with care the limits that should be placed on a punitive strike.
The war in Iraq was misconceived from the start, because it was an attempt to avenge the September 11, 2001, terrorist attacks by invading and occupying a country that had no part in them.
Obama’s proposal to strike Syria, by contrast, is an attempt to enforce an important human-rights norm by directly punishing – through means that do not involve invasion and occupation – those who committed a gross violation.
It restores human rights to the central place in American foreign policy set forth after September 11, 1973.
America’s Constrained Choice
NEWPORT BEACH – The conventional wisdom about the November presidential election in the United States is only partly correct.
Yes, economic issues will play a large role in determining the outcome.
But the next step in the argument – that the winner of an increasingly ugly contest will have the luxury of pursuing significantly different policies from his opponent – is much more uncertain.
By the time the next presidential term starts in January 2013, and contrary to the current narratives advanced by the Obama and Romney campaigns, the incumbent will find himself with limited room for maneuver on economic policy.
Indeed, the potential differences for America are elsewhere, and have yet to be adequately understood by voters.
They center on the social policies that would accompany a broadly similar set of economic measures; and, here, the differences between the candidates are consequential.
Whoever wins will face an economy growing at a sluggish 2% or less next year, with a nagging risk of stalling completely.
Unemployment will still be far too high, and almost half of it will be hard-to-solve, long-term joblessness – and even more if we count (as we should) the millions of Americans who have dropped out of the labor force.
The financial side of the economy will also be a source of concern.
The fiscal deficit will continue to flirt with the 10%-of-GDP level, adding to worries about the country’s medium-term debt dynamics.
The banking sector will still be “de-risking,” limiting the flow of credit to small and medium-size companies and undermining hiring and investment in plant and equipment.
And the household sector will be only partly through its painful de-leveraging phase.
The policy front will be equally unsettling.
Having dithered and bickered for too long, the US Congress will find it increasingly difficult to postpone action on these challenges.
Meanwhile, the Federal Reserve’s unusual activism, including an ever-expanding list of experimental measures, will yield fewer benefits and entail growing costs and risks.
The US economy will also be operating in a more difficult global environment.
In the next few months, Europe’s debt crisis will most likely worsen.
With emerging economies (including China) slowing, and with meaningful multilateral policy coordination remaining inadequate, protectionist pressures will mount as major trading powers compete for a stagnant pie.
So, whether President Barack Obama or Mitt Romney prevails in November, the next president will be constrained by the twin need for urgent economic stabilization and longer-term reforms.
And, with headwinds from Europe and a synchronized global slowdown, the candidates will have no choice but to pursue, at least initially, similar economic policies to restore dynamic job creation and financial stability.
In striking the right balance between immediate economic stimulus and medium-term fiscal sustainability, the most urgent step will be to counter properly the looming fiscal cliff, as temporary tax cuts expire and deep, across-the-board spending reductions kick in automatically.
Failure to do so would significantly increase the risk of an outright American recession.
Serious medium-term budget reforms are needed to deal with the legacy of repeated congressional failures.
And, if provided with realistic numbers, the next president will soon recognize that the right mix of tax and spending reforms falls into a much narrower range than today’s competing political narratives suggest.
It is certainly not an either/or proposition.
Fiscal reforms work best in a dynamic economy.
To this end, Obama and Romney will need to lift the impediments to growth and job creation.
Here again – in areas like housing, the labor market, credit intermediation, and infrastructure – there is less room for maneuver than most politicians would like us to believe.
But this does not mean that there is no scope for differences.
There is, and they reflect the fact that general economic tendencies will be accompanied by multi-speed dynamics at many levels.
From persistent differences in unemployment rates depending on skills and education to record-high income and wealth inequalities, each economic decision will be accompanied by the need for social judgment – whether explicit or, more likely, implicit – regarding its distributional impact.
After an “age” of excessive leverage, debt creation, and credit entitlement that culminated in the 2008 global financial crisis, America still faces the tricky challenge of allocating cumulative losses that continuously inhibit investment, jobs, and competitiveness.
Until now, Congress’s excessive political polarization has translated into an approach that has pushed more of the burden of adjustment onto those who are less able to bear it.
In an ideal world, America’s next president would rapidly embark on a two-step approach to restoring job dynamism and financial soundness.
First, he would devise a comprehensive set of economic-policy initiatives that are both feasible and desirable – and, again, the scope for major differences here is limited.
Second, he would accompany this with an explicit set of social policies – and here the potential differences are profound – that addresses the need for equitable burden-sharing.
This is not really an election about such hotly-debated issues as outsourcing, tax increases versus entitlement reforms, government control of production versus unfettered private sector activity, or job creators versus free riders.
It is much more about the accompanying concepts of social fairness, entitlement, equality and, yes, standards of behavior for a rich and civilized society.
This is an election about social responsibility – a society’s obligation to support those who are struggling, through no fault of their own, to find jobs and make ends meet.
It is about protecting the most vulnerable segments of society, including by providing them access to proper health coverage.
It is about reforming an education system that fails America’s young people (and about providing appropriate retraining to those who need it).
Among the numerous issues of fairness and equality, it is about the rich giving back to a system that has brought them unimaginable wealth.
It is here where the differences between Obama and Romney are important.
The sooner the campaign debate pivots to this, the greater the probability that Americans will make a more informed choice and, thus, buy into the collective effort needed to escape national malaise.
America\u0027s Crisis Election
CAMBRIDGE – On November 4, Americans will elect their 44th president amidst the worst financial turmoil the country has known since the onset of the Great Depression in 1929. Both candidates are United States senators with little experience as executives, so their ability to manage the crisis has become a central issue in the election.
At the beginning of the campaign, many observers predicted that Iraq would be the major issue in 2008.
Instead, it is the financial crisis.
In principle, this should help Barack Obama and the Democrats, because polls show them stronger on economic issues, whereas Republicans and John McCain do better on security issues.
After the Republican convention, polls showed McCain ahead in early September, but after the financial meltdown, Obama took the lead.
Although both men have warily embraced the $700 billion bailout of the financial sector, the contrasts between the two men are sharp.
Obama is not only the first African-American nominee of a major party, but also one of the youngest candidates ever.
McCain has experience as a naval aviator and more than two decades in the Senate.
If elected, he would be the oldest incoming president.
The two men differ in temperament as well as experience.
McCain is a man of strong traditional values who prides himself on his willingness to act quickly and decisively, which he sought to do during the negotiations on the bailout by suspending his campaign to return to Washington.
That effort appears to have backfired, because the Republicans that he leads initially balked at passing the legislation.
But McCain has shown himself to be resilient.
In 2007, many people wrote off his campaign, but he had the skills to resurrect it and capture the Republican nomination.
His choice of Alaska’s Governor Sarah Palin as his running mate shook up the presidential campaign.
Obama, while an inspirational orator, has shown a cool and calm demeanor in responding to both the financial crisis and the turbulence of political campaigning. When embarrassed by comments made by the pastor of his church, he delivered an exceptional speech about race in America.
If anything, some of Obama’s Democratic supporters wish he would show more emotion in responding to criticism.
One should be careful, however, about reading too much into national opinion polls measuring the candidates’ popular support.
American presidents are elected by an Electoral College in which each state votes in proportion to the number of members it has in Congress.
Since even the smallest states have two senators, this leads to overrepresentation of lightly populated Western states that tend to vote Republican.
In 2000, Al Gore won the popular vote, but George W. Bush prevailed in the electoral college.
Thus, the two candidates’ campaigns are focusing heavily on a dozen or so states in which voters are closely divided and could sway the electoral college outcome.
Each campaign is now desperately trying to gauge the impact of the financial crisis on these battleground states.
Not only does the Electoral College confuse predictions based on national opinion polls, but there is also the possibility of surprises which can lead to last-minute reversals.
A mistake in a presidential debate can turn the tide of public opinion overnight, as happened to President Gerald Ford in his debate with Jimmy Carter in 1976.
Conversely, Ronald Reagan’s performance in his debate with Carter in 1980 is often credited with his victory.
Another event that could turn the tables would be an “October surprise” associated with terrorism, which could switch the agenda from the financial crisis back to security, the Republicans’ stronger suit.
In 2004, shortly before the election, Osama bin Laden released a video tape that may have helped President Bush defeat Senator John Kerry.
From bin Laden’s point of view, Bush’s policies were more useful for his efforts to recruit supporters than Kerry’s might have been.
One would assume that Obama would prove even more unsettling to bin Laden.
A recent BBC poll of 22 countries found that if the world could vote, Obama would win in a landslide.
The pro-Obama margin varied from 82% in Kenya (where Obama’s father was born) to 9% in India.
But Americans do not like outside interference in their elections.
When Obama attracted a crowd of 200,000 to a speech in Berlin last summer, Republicans criticized him as an elitist who appeals to crowds overseas but not to blue-collar workers at home.
On the other hand, in a September poll that asked Americans to rate a series of foreign-policy goals for the next president, 83% ranked “improving America’s standing in the world” as most important.
And certainly the election of the first African-American as president would do wonders to restore the soft power that the Bush administration squandered over the past eight years.
Some people worry that Obama might be good for American soft power, but not for its hard power.
Machiavelli famously said that it is more important for a prince to be feared than to be loved.
Machiavelli may be correct, but we sometimes forget that the opposite of love is not fear, but hatred.
And Machiavelli made it clear that hatred is something a prince should carefully avoid.
When the exercise of hard power undercuts soft power, it makes leadership more difficult – as Bush found out after the invasion of Iraq.
Both McCain and Obama possess impressive hard-power political and organizational skills; otherwise, they would not be where they are today.
But when it comes to the soft power skills of emotional intelligence, vision, and communication, Obama outranks McCain.
Whether that will sway American voters wary of financial turmoil on November 4 remains to be seen.
America’s Crony Capitalism
Buenos Aires – For 20 years, Americans have denounced the “crony capitalism” of Third World countries, especially in Asia.
But, just as those regions have been improving their public and corporate governance – Hong Kong just witnessed a breakthrough court decision against a telecom tycoon who is the son of the province’s richest and most powerful man – crony capitalism is taking root in the United States, a country that the world long considered the gold standard of a level playing field in business.
The recently completed “stress tests” of US banks are but the latest indication that crony capitalists have now captured Washington, DC.
It is no surprise that stock markets liked the results of the stress tests that US Treasury Secretary Timothy Geithner administered to America’s big banks, for the general outcome had been leaked weeks before.
Indeed, most professional investors trashed the tests as dishonest even as their holdings benefited from a rising market.
Even The Wall Street Journal , usually financial markets’ loudest cheerleader, openly disparaged the tests’ integrity.
The government had allowed bankers to “negotiate” the results, like a student taking a final examination and then negotiating her grade.
The tests were supposed to reveal the true conditions of banks saddled with unaudited toxic assets in housing loans and financial derivatives.
The reasoning behind the tests seemed unimpeachable.
But was it?
As any seasoned banker knows, a well-managed bank should undertake internal “stress tests” regularly as a matter of good housekeeping.
The financial crisis should have mandated a running stress test to keep senior management up to date daily. Why, then, did the US need the government to conduct a financial exercise that bankers themselves could and should have done far better and faster?
The truth is that the tests were not designed to find answers.
Both Wall Street’s chieftains and the Obama administration already knew the truth.
They knew that if the true conditions at many big banks were publicly revealed, many would have been immediately declared bankrupt, necessitating government receivership to stop a tsunami of bank runs.
But the Obama administration did not want to be tagged as “socialist” for nationalizing banks, however temporarily, even though experts such as former US Federal Reserve Chairman Paul Volcker had recommended just that.
Moreover, nationalizing banks would have required dismissing Wall Street captains and their boards for grossly mismanaging their firms.
Wall Street’s titans, however, had convinced Obama and his team that their continued stewardship was essential to getting the world out of its crisis.
They successfully portrayed themselves as victims of a firestorm, rather than as accessories to arson.
Geithner and Larry Summers, Obama’s chief economic advisor, share Wall Street’s culture as protégés of Robert Rubin, the former treasury secretary who went on to serve as a director and senior counselor at Citigroup.
Neither man found it difficult to accept the bankers’ absurd logic.
The stress tests were meant to signal to the public that there was no immediate threat of bank failures.
This message, it was hoped, would stabilize the market so that prices for “toxic” assets could rise to a level at which bankers might feel comfortable selling them.
After all, senior bankers had been claiming that these assets were “mispriced,” and that pricing them at market levels would penalize the banks unnecessarily.
So far, Geithner seems to have succeeded in his “tests,” as the stock market has indeed more than stabilized, with prices of bank shares such as Citigroup and Bank of America quadrupling from their lows.
The feared implosion of Wall Street seems to have been avoided.
But no one ever seriously thought that the US would allow Citigroup and Bank of America, to name just two, to fail.
In fact, the stock market bottomed out last winter.
Markets had factored into share prices the belief that the US government would not allow any more banks to collapse.
What the world wanted was an accurate picture of what the banks were worth and “mark-to-market” valuations to guide investors as to how much new capital they needed.
The world also wanted to see the US retaking the high road in reinforcing business ethics and integrity – so lacking under the last administration.
As taxpayers had already put huge sums into rescuing failing banks, with the prospect of more to come, a transparent process to reveal how the money was being used was imperative.
Substantial public rescue funds have reportedly been siphoned off to foreign banks, Goldman Sachs, and staff bonuses for purposes unrelated to protecting public interests.
None of this was either revealed or debunked by Geithner’s tests.
Instead, public servants now appear to be in cahoots with Wall Street to engineer an artificial aura of profitability.
Moreover, the value of toxic assets remains as murky as ever.
Once sacrosanct accounting principles have been amended at Wall Street’s behest in order to allow banks to report essentially whatever they want.
And now negotiated stress test results have been released to “prove” that the banks are a lot healthier.
Calling this a Ponzi scheme might be too harsh.
But few financial professionals have been fooled.
Meanwhile, Wall Street chieftains and their boards of directors have nothing to fear from government.
On the contrary, they are now the government’s partners in a joint venture to manage this dishonest scheme.
Like swine flu, crony capitalism has migrated from corrupt Third World countries to America, once the citadel of sound public and private governance.
Is it any wonder that China is perceived as an increasingly credible model for much of the developing world, while the US is now viewed as a symbol of hypocrisy and double standards?
America’s Dangerous Debt Ceiling Debate
NEWPORT BEACH – It has been raised more than 70 times in the last 50 years, mostly without commotion.
It must be raised again this summer if the United States government is to continue paying its bills on time.
But now America’s debt ceiling has become the subject of intense political posturing and touch-and-go negotiations behind closed doors.
And, obviously, the outcome has implications that go well beyond the US.
As part of America’s system of checks and balances, Congress gets to do more than just approve the annual federal budget.
It also sets a limit on how much debt the US Treasury is allowed to issue.
Beyond this ceiling, the government can spend only from current revenues.
US Treasury Secretary Timothy Geithner recently informed members of Congress that the government will be in this situation on or around August 2.
Having already officially hit the ceiling, the Treasury is moving money around and tapping various pots of unused funds to pay its bills.
In a few weeks, this “flexibility” will be used up.
With the US government now borrowing around 40% of every dollar it spends, a truly binding debt ceiling would immediately force the government to reduce spending radically and in a disorderly fashion.
Politicians across the political spectrum know that such a situation would unsettle an already fragile US economy, severely weaken the dollar, and raise serious concerns about the country's ability to meet its debt-service obligations, including to the many foreign creditors that the US will need in the future.
Yet, in today’s polarized environment in Washington, Republicans and Democrats are unwilling to compromise – or at least to compromise “too early.”
By holding out, Republicans wish to force President Barack Obama’s administration into massive spending cuts.
Democrats respond that such a one-sided approach would be economically harmful and socially unjust.
In the meantime, both sides risk disrupting transfer payments (including to the elderly) and the provision of public services, as well as eroding further America’s global credit standing.
The overwhelming – and sensible – expectation is that the two parties will compromise and raise the debt ceiling before inflicting serious economic and financial dislocations.
The most recent precedent was the bipartisan agreement reached earlier this year on another fiscal issue that threatened to disrupt the normal functioning of government: the absence of a formally approved budget for this year.
A compromise would allow both parties to declare partial victory, for it would likely entail commitments to cut spending and some steps to make taxation more socially just.
But, like many last-minute agreements, it would have little durable impact.
In effect, the political system would again be kicking the can down the road, with real progress on necessary fiscal reforms expected only after the November 2012 presidential election.
Two scenarios for the timing of an interim compromise are possible, depending on whether it is a one- or two-step process.
Most observers expect a one-step process for bipartisan agreement before August 2.
But politicians may need two steps: an initial failure to agree, and then a quick deal in response to the resulting financial-market convulsions.
In the meantime, the Treasury would temporarily re-prioritize and slow outgoing payments.
This two-step process would be similar to what happened in 2008, when Congress was confronted with another cliffhanger: the Bush administration’s request for $700 billion to prevent a financial-market collapse and an economic depression.
Congress initially rejected the measure, but a dramatic 770-point drop in the stock market focused politicians’ minds, bringing them back to the table – and to agreement.
But the two-step scenario involves incremental risks to the US economy, and to its standing in the global system.
And the longer America’s politicians take to resolve the debt-ceiling issue, the greater the risk of an inadvertent accident.
This brings us to a third, and even more unsettling possibility: a longer and more protracted negotiation, resulting in greater disruptions to government entitlement payments, other contractual obligations, and public services.
Creditors would then ask many more questions before adding to their already-considerable holdings of US government debt, generating still more headwinds in a US economy that already faces an unemployment crisis and uneven growth.
The next few weeks will provide plenty of political drama.
The baseline expectation, albeit subject to risk, is that Democrats and Republicans will find a way to avoid disruptions that would damage the fragile US economy, but that the compromise will not meaningfully address the need for sensible medium-term fiscal reforms.
Such political paralysis on key economic issues is increasingly unsettling for the US private sector, and for other countries that rely on a strong US at the core of the global economy.
This helps to explain why so many companies continue to hoard cash, rather than investing domestically, and why a growing number of countries want to diversify gradually away from dependence on the dollar as the reserve currency and on US financial markets for intermediation of their hard-earned savings.
The world economy is hard-wired to the assumption of a strong America, and Americans benefit from this.
But the more their politicians argue over the debt ceiling, the greater the risk that the wiring will become irreparably frayed.
America’s Day of Reckoning
The pessimists who have long forecasted that America’s economy was in for trouble finally seem to be coming into their own.
Of course, there is no glee in seeing stock prices tumble as a result of soaring mortgage defaults.
But it was largely predictable, as are the likely consequences for both the millions of Americans who will be facing financial distress and the global economy.
The story goes back to the recession of 2001.
With the support of Federal Reserve Chairman Alan Greenspan, President George W. Bush pushed through a tax cut designed to benefit the richest Americans but not to lift the economy out of the recession that followed the collapse of the Internet bubble.
Given that mistake, the Fed had little choice if it was to fulfill its mandate to maintain growth and employment: it had to lower interest rates, which it did in an unprecedented way – all the way down to 1%.
It worked, but in a way fundamentally different from how monetary policy normally works.
Usually, low interest rates lead firms to borrow more to invest more, and greater indebtedness is matched by more productive assets.
But, given that overinvestment in the 1990’s was part of the problem underpinning the recession, lower interest rates did not stimulate much investment.
The economy grew, but mainly because American families were persuaded to take on more debt, refinancing their mortgages and spending some of the proceeds.
And, as long as housing prices rose as a result of lower interest rates, Americans could ignore their growing indebtedness.
In fact, even this did not stimulate the economy enough.
To get more people to borrow more money, credit standards were lowered, fueling growth in so-called “subprime” mortgages.
Moreover, new products were invented, which lowered upfront payments, making it easier for individuals to take bigger mortgages.
Some mortgages even had negative amortization: payments did not cover the interest due, so every month the debt grew more.
Fixed mortgages, with interest rates at 6%, were replaced with variable-rate mortgages, whose interest payments were tied to the lower short-term T-bill rates.
What were called “teaser rates” allowed even lower payments for the first few years: they were teasers, because they played off the fact that many borrowers were not financially sophisticated, and didn’t really understand what they were getting into.
And Alan Greenspan egged them to pile on the risk by encouraging these variable-rate mortgages.
On February 23, 2004, he pointed out that “many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade.”
But did Greenspan really expect interest rates to remain permanently at 1% – a negative real interest rate?
Did he not think about what would happen to poor Americans with variable-rate mortgages if interest rates rose, as they almost surely would?
Of course, Greenspan’s behavior meant that under his watch, the economy performed better than it otherwise would have.
But it was only a matter of time before that performance became unsustainable.
Fortunately, most Americans did not follow Greenspan’s advice to switch to variable-rate mortgages.
But even as short-term interest rates began to rise, the day of reckoning was postponed, as new borrowers could obtain fixed-rate mortgages at interest rates that were not increasing.
Remarkably, as short-term interest rates rose, medium- and long-term interest rates did not, something that was referred to as a “conundrum.”
One hypothesis is that foreign central banks that were accumulating trillions of dollars finally figured out that they were likely to be holding these reserves for years to come, and could afford to put at least some of the money into medium-term US treasury notes yielding (initially) far higher returns than T-bills.
The housing price bubble eventually broke, and, with prices declining, some have discovered that their mortgages are larger than the value of their house.
Others found that as interest rates rose, they simply could not make their payments.
Too many Americans built no cushion into their budgets, and mortgage companies, focusing on the fees generated by new mortgages, did not encourage them to do so.
Just as the collapse of the real estate bubble was predictable, so are its consequences: housing starts and sales of existing homes are down and housing inventories are up.
By some reckonings, more than two-thirds of the increase in output and employment over the past six years has been real estate-related, reflecting both new housing and households borrowing against their homes to support a consumption binge.
The housing bubble induced Americans to live beyond their means – net savings has been negative for the past couple of years.
With this engine of growth turned off, it is hard to see how the American economy will not suffer from a slowdown.
A return to fiscal sanity will be good in the long run, but it will reduce aggregate demand in the short run.
There is an old adage about how people’s mistakes continue to live long after they are gone.
That is certainly true of Greenspan.
In Bush’s case, we are beginning to bear the consequences even before he has departed.
America’s Deepening Moral Crisis
NEW YORK – America’s political and economic crisis is set to worsen following the upcoming November elections.
President Barack Obama will lose any hope for passing progressive legislation aimed at helping the poor or the environment.
Indeed, all major legislation and reforms are likely to be stalemated until 2013, following a new presidential election.
An already bad situation marked by deadlock and vitriol is likely to worsen, and the world should not expect much leadership from a bitterly divided United States.
Much of America is in a nasty mood, and the language of compassion has more or less been abandoned.
Both political parties serve their rich campaign contributors, while proclaiming that they defend the middle class.
Neither party even mentions the poor, who now officially make up 15% of the population but in fact are even more numerous, when we count all those households struggling with health care, housing, jobs, and other needs.
The Republican Party recently issued a “Pledge to America” to explain its beliefs and campaign promises.
The document is filled with nonsense, such as the fatuous claim that high taxes and over-regulation explain America’s high unemployment.
It is also filled with propaganda.
A quotation by President John F. Kennedy states that high tax rates can strangle the economy, but Kennedy’s was speaking a half-century ago, when the top marginal tax rates were twice what they are today.
Most of all, the Republican platform is devoid of compassion.
America today presents the paradox of a rich country falling apart because of the collapse of its core values.
American productivity is among the highest in the world.
Average national income per person is about $46,000 – enough not only to live on, but to prosper.
Yet the country is in the throes of an ugly moral crisis.
Income inequality is at historic highs, but the rich claim that they have no responsibility to the rest of society.
They refuse to come to the aid of the destitute, and defend tax cuts at every opportunity.
Almost everybody complains, almost everybody aggressively defends their own narrow and short-term interests, and almost everybody abandons any pretense of looking ahead or addressing the needs of others.
What passes for American political debate is a contest between the parties to give bigger promises to the middle class, mainly in the form of budget-busting tax cuts at a time when the fiscal deficit is already more than 10% of GDP.
Americans seem to believe that they have a natural right to government services without paying taxes.
In the American political lexicon, taxes are defined as a denial of liberty.
There was a time, not long ago, when Americans talked of ending poverty at home and abroad.
Lyndon Johnson’s War on Poverty in the mid-1960’s reflected an era of national optimism and the belief that society should make collective efforts to solve common problems, such as poverty, pollution, and health care.
America in the 1960’s enacted programs to rebuild poor communities, to fight air and water pollution, and to ensure health care for the elderly.
Then the deep divisions over Vietnam and civil rights, combined with a surge of consumerism and advertising, seemed to end an era of shared sacrifice for the common good.
For 40 years, compassion in politics receded.
Ronald Reagan gained popularity by cutting social benefits for the poor (claiming that the poor cheated to receive extra payments).
Bill Clinton continued those cuts in the 1990’s.
Today, no politician even dares to mention help for poor people.
The big campaign contributors to both parties pay to ensure that their vested interests dominate political debates.
That means that both parties increasingly defend the interests of the rich, though Republicans do so slightly more than Democrats.
Even a modest tax increase on the rich is unlikely to find support in American politics.
The result of all of this is likely to be a long-term decline of US power and prosperity, because Americans no longer invest collectively in their common future.
America will remain a rich society for a long time to come, but one that is increasingly divided and unstable.
Fear and propaganda may lead to more US-led international wars, as in the past decade.
And what is happening in America is likely to be repeated elsewhere.
America is vulnerable to social breakdown because it is a highly diverse society.
Racism and anti-immigrant sentiments are an important part of the attack on the poor, or at least the reason why so many are willing to heed the propaganda against helping the poor.
As other societies grapple with their own increasing diversity, they may follow the US into crisis.
Swedes recently gave enough votes to a right-wing, anti-immigrant party to give it representation in parliament, reflecting a growing backlash against the rising number of immigrants in Swedish society.
In France, Nicolas Sarkozy’s government has tried to regain popularity with the working class by deporting Roma migrants, a target of widespread hatred and ethnic attacks.
Both examples show that Europe, like the US, is vulnerable to the politics of division, as our societies become more ethnically diverse.
The lesson from America is that economic growth is no guarantee of wellbeing or political stability.
American society has become increasingly harsh, where the richest Americans buy their way to political power, and the poor are abandoned to their fate.
In their private lives, Americans have become addicted to consumerism, which drains their time, savings, attention, and inclination to engage in acts of collective compassion.
The world should beware.
Unless we break the ugly trends of big money in politics and rampant consumerism, we risk winning economic productivity at the price of our humanity.
America’s Economic Stalemate
CAMBRIDGE – The United States appears trapped in a dangerous economic stalemate.&#160;
The refusal by both Republicans and Democrats to give ground on the budget is preventing the government from dealing with its massive fiscal deficit and rapidly rising national debt.
Indeed, the Congressional Budget Office projects that the national debt could increase to 82% of GDP over the next ten years – more than double the debt ratio as recently as 2008.
That forecast, moreover, is based on quite optimistic assumptions of strong economic growth and low interest rates.
With slower growth and more normal interest rates, the debt ratio could easily rise to more than 100% in 2021, and exceed 150% by 2030.
A major reason for the accelerating growth in government debt is America’s rapidly aging population and the resulting increase in the cost of the universal pension and health-care programs – Social Security and Medicare.
Most experts believe that limiting the rise in debt will require slowing the growth of these “entitlement” programs and increasing taxes as a share of GDP.
But President Barack Obama and the congressional Democrats oppose any reduction in future entitlement programs, while the Republican presidential candidates and their party’s congressional delegation oppose any increase in tax revenues.
The result is the current stalemate in reducing the fiscal deficit and reversing the growth of the national debt.
Republicans argue that the national debt’s growth should be limited only by cutting government spending.
Although some cuts in traditional outlays should be part of efforts to rein in spending, this approach should be supplemented by reducing “tax expenditures” – the special features of the tax code that subsidize health care, mortgage borrowing, local-government taxes, etc..
Limiting tax expenditures could reduce the annual deficit by as much as 2% of GDP, thereby reducing the debt-to-GDP ratio in 2021 by more than 25 percentage points.
Republicans generally reject this form of spending reduction, because it results in additional tax revenue.
While this method does indeed increase total revenue, the economic effect of limiting tax expenditures is the same as it is under any other method of cutting spending on those programs.
But the Republicans’ opposition to anything that raises revenue means that this key to breaking the budget stalemate won’t be implemented.
The budget cost of Social Security pensions could be gradually reduced by substituting annuities generated by investment-based personal retirement accounts for part of the current tax-financed benefits.
But even though such a reform could maintain income levels for retirees, Democrats oppose it, because it lowers traditional government benefits.
This reinforces the stalemate.
The two parties’ hardline stances anticipate the upcoming congressional and presidential elections in November 2012.
The Republicans, in effect, face the voters with a sign that says, “We won’t raise your taxes, but the Democrats will.” The Democrats’ sign, by contrast, says, “We won’t reduce your pension or health benefits, but the Republicans will.”
Neither side wants any ambiguity in their message before the election, thus ruling out the possibility of any immediate changes in tax expenditures or future Social Security pensions.
But, for the same reason, I am optimistic that the stalemate will end after the election.
At that point, both Republicans and Democrats will be able to accept reforms that they must reject now.
Another post-election route to deficit reduction would be to lower marginal tax rates and balance that revenue loss with cuts in tax expenditures.
Official analyses downplay the effect of lower marginal tax rates on taxable income, but experience shows that taxable income rises substantially as taxpayers respond to lower marginal rates by working more, taking more of their compensation in taxable cash than in fringe benefits, and reducing their tax-deductible consumption.
Reducing tax expenditures while lowering marginal tax rates can produce substantial revenue by increasing the level of taxable income.&#160;
The current economic stalemate is troubling, because financial markets could react adversely, and because delays in addressing the fiscal deficit means a higher national debt.
I may be too optimistic, but I think there is good reason to believe that the current budget stalemate reflects election posturing, and that the US political system will prove more effective at making progress on fiscal consolidation once the election is past.
America’s Election and the Global Economy
STANFORD – As America’s elections approach, with President Barack Obama slightly in front of his Republican challenger, former Massachusetts Governor Mitt Romney, pollsters still rate the races for control of the presidency and the United States Senate too close to call, with the House of Representatives likely to remain in Republican hands.
The differences between the candidates are considerable, and highly consequential for American economic policy and the global economy, although enactment of their programs will depend on the makeup of Congress.
The most important differences between the two candidates can be summarized as follows:
Spending.
Obama has dramatically increased spending.
He would likely continue many of his temporary programs (as Milton Friedman once observed, “There is nothing so permanent as a temporary government program.”); double down on having government pick winners and losers in green energy; expand spending on education and infrastructure; and substantially reduce defense expenditures.
Romney, by contrast, favors limiting overall federal spending, currently 24% of GDP, to 20%, and keeping defense at 4%.
He wants private markets, not government, to choose winning firms and technologies.
Democrats oppose most nondefense spending cuts, arguing that reductions would cause the economy to contract.
That case is strongest if the spending reductions are large and abrupt in a weak economy.
If phased in over a multi-year period as the economy recovers, as Romney proposes, thrift would likely be expansionary.
For example, federal spending relative to GDP fell by five percentage points from the mid-1980’s to the late 1990’s in the US, and by an even larger margin in recent decades in Canada – that is, through periods of strong economic growth.
Taxes.
Obama would raise the top marginal tax rates on wages, capital gains, dividends, interest, and estates, especially on higher-income individuals and small businesses.
Yet he has never proposed comprehensive reform of either the personal or corporate income tax.
By contrast, Romney would reduce America’s corporate tax rate (the highest in the OECD) to 25% and tax American multinationals on a territorial, rather than a worldwide, basis in order to increase their tax competitiveness.
He would also lower personal tax rates by 20%, and make up lost revenue by limiting tax deductions and credits, particularly at the upper end, thereby raising about 18.5% of GDP, just above the historical average, at full employment.
Romney’s fiscal plan thus reduces deficits sufficiently to decrease the debt-to-GDP ratio.
He favors a balanced-budget amendment to the Constitution, and hopes to balance the budget over eight years.
Obama, by contrast, would run larger deficits – his spending increase is much larger than his tax increase – which imply large tax hikes in the future.
Moreover, he would run far larger debt ratios than Romney, because the main driver of the debt is entitlement spending.
Entitlements.
Obama has remained silent about reform of Medicare and Social Security, whose long-run deficits are several times the national debt.
Vice President Joe Biden has even said that “no changes” to Social Security are to be made.
Romney supports gradually increasing retirement ages, a premium-support model for Medicare, and shifting Medicaid (health insurance for the poor) to the states via block grants.
The Obama campaign is pummeling Romney on Medicare, and the Romney campaign is hammering Obama for his refusal to negotiate or even propose a solution.
The Obama policy would thus lead to ever-higher deficits and debt ratios well over 100% of GDP, a level that numerous studies imply would reduce US economic growth by one-third or more and might induce a sovereign-debt crisis.
Some observers suggest that Obama’s unspoken plan is ever-growing entitlements eventually paid for by a European-style value-added tax.
Trade.
Obama is the first US president in a long time who has not played a leading role on global trade liberalization.
The Doha Round of global trade talks remains stalled, and Obama delayed the three bilateral free-trade agreements that awaited approval when he came into office.
Romney is a proponent of free trade, but has said that he would be tougher on China’s trade practices and currency policies.
Regulation.
Obama wants to expand federal command-and-control regulation further (though the courts have stopped his extension of some regulatory powers).
Romney vows an economically balanced approach that would reform Obama’s major health-care, environmental, and financial-services regulations.
Appointments.
Every US president appoints thousands of officials, many with considerable power.
Romney has said that he would not reappoint Ben Bernanke as Fed Chairman (likely candidates: economists Glenn Hubbard, Greg Mankiw, John Taylor, and Martin Feldstein).
Other presidential appointees exert considerable influence on firms, industries, or the entire economy.
For example, Obama’s appointees to the obscure National Labor Relations Board tried to prevent Boeing from expanding in South Carolina, despite the state’s anti-union “right to work” legislation.
These policies would affect US economic growth, the budget deficit, national saving, and hence global trade and capital flows.
With larger deficits under Obama than under Romney, America would need more capital from Europe, Latin America, and Asia, while higher taxes and debt would impede US growth and thus undermine these regions’ exports.
Obama would steer America in the direction of European social-welfare states;
Romney’s agenda is designed to prevent that.
Whoever wins, a fiscal cliff looms at the end of 2012.
Previous legislation, if not reversed, will lead to large abrupt tax hikes and spending cuts, which the Congressional Budget Office forecasts would likely cause a recession in 2013.
While a post-election, lame-duck session of Congress will address the fiscal cliff, the deep differences between Republicans and Democrats on taxes and spending remain wide and difficult to bridge.
With uncertainty plaguing Europe’s finances and China slowing, the last thing the global economy needs is a stagnant or shrinking US economy.
But it will take strong leadership by the president-elect to avoid it.
America’s Employment and Growth Challenges
NEW YORK – For many, if not most, Americans, the crisis that befell them in 2008 – leading to slow growth, rising unemployment, and high anxiety among voters – appeared to spring from nowhere.
Certainly, the vast majority of economists, investment analysts, financial firms, and regulators failed to see the growing risk.
In fact, it had deep roots.
While the precise timing of any crisis is impossible to predict, ample signs of rising risk, distortions, structural problems, and imbalances could be seen by anyone who took the time to interpret a decade’s worth of mounting debt, low savings, surging asset prices, and excess consumption.
The United States was on an unsustainable growth path for at least a decade – probably longer – before the crisis.
Restoring balance and eliminating the distortions will require time, investment, and structural change, and should be the central focus of America’s economic policy.
The household sector is especially important.
If the main problem had been confined to excess leverage and risk-taking within the financial sector, the economic shock would have been large, but the recovery quicker.
It was the huge loss of households’ net worth that brought down the real economy (with an assist from the credit squeeze on smaller businesses).
Let’s be clear: elevated savings and reduced consumption relative to pre-crisis levels are likely to be permanent even after households reduce leverage and restore retirement savings – a process that in the US has removed roughly $1 trillion from the demand side of the economy.
To make up the difference, Americans need to compete effectively for a portion of global demand.
Does this mean that the US is headed for a “new normal,” rather than a reversion to pre-crisis conditions?
It does. Put bluntly, Americans were living beyond their means for too long.
With foreign borrowing financing a yawning trade deficit, the US economy as a whole spent more than it earned, which both caused and hid structural problems.
So the main post-crisis challenge is not to return to the old normal, which was not sustainable, nor is it to recover from a deep balance-sheet recession, but rather to make a structural transition from the old abnormal to a new normal that is sustainable.
This does not mean that recovery of households’ balance sheets can be ignored in the post-crisis period.
The US Federal Reserve has had to carry out a difficult balancing act: with no sign of inflation on the horizon – and at least some risk of deflation – it has maintained low interest rates even as credit conditions have eased.
True, low interest rates, together with a second round of quantitative easing, are causing considerable global distortions, as funds flow into fast-growing emerging markets, fueling inflationary pressure and asset bubbles.
But, given the US housing market’s fragility, raising interest rates could cause prices to plummet, sinking the economy again. Despite their complaints, it is not clear that emerging economies would prefer another deep US downturn to the current flood of inbound capital that that they must manage.
As it is, deficient consumption and stubbornly high unemployment are likely to be with Americans for some time.
But this is not how the future was sold to the public, and, until recently, financial markets were acting as if recovery was at hand and would be relatively quick.
The proverbial dead-cat bounce – when freefall stops and inventories run out, causing output to pick up a bit – was misinterpreted as evidence of a V-shaped recovery: sharply down and sharply back up.
Despite the impression created, particularly in the US, by media commentary and political debate, fiscal stimulus clearly helped in the crisis, though its impact is diminishing rapidly.
Recent studies by the International Monetary Fund indicate that in most advanced countries, including the US, the growth in budget deficits was largely automatic, owing far more to declining tax revenues and rising expenditures on unemployment benefits than to stimulus spending.
The appropriate timing of fiscal retrenchment is, in fact, difficult to decide.
On one side is concern about another downturn and deflation.
On the other side is the risk of excessive debt, currency instability, and – where unemployment is structural – doubts about the benefits of additional stimulus.
Indeed, advanced countries, including the US, have dug themselves into a deep hole.
It is not yet a hole of the type one finds in Greece, where restoring fiscal balance and reviving economic growth are probably impossible without a restructuring of public debt. But climbing out will be difficult and painful.
At this stage, the best course would be to adopt a credible multi-year plan, based on reasonable but conservative growth assumptions, to reduce deficits to sustainable levels and limit the accumulation of public debt.
With a new, more hostile Congress, and with members of a new economic team coming on board, Obama’s challenge is to build a consensus around a medium- and long-term recovery strategy, with a focus on restoring growth and employment.
The limited fiscal resources that are available should be targeted on areas that affect competitiveness in the tradable sector.
That means forgoing some government services.
The truth is that all the net employment growth in the US economy over the last 20 years has been in the non-tradable sector, where Americans don’t have to compete.
Leading drivers of employment growth have been government, health care, and, until the crisis, construction.
While this is just one part of a much more complex story, it seems unlikely that these and other non-tradable sectors can sustain employment growth in the future.
With the tradable sector neutralized and the non-tradable sectors maxed out, the economy lacks sufficiently powerful growth engines.
That must be fixed, which requires that competitiveness become the central focus of longer-term US economic policy – the sooner, the better.
America’s Failed Militarized Foreign Policy
Many of today’s war zones – including Afghanistan, Ethiopia, Iran, Iraq, Pakistan, Somalia, and Sudan – share basic problems that lie at the root of their conflicts.
They are all poor, buffeted by natural disasters – especially floods, droughts, and earthquakes – and have rapidly growing populations that are pressing on the capacity of the land to feed them.
And the proportion of youth is very high, with a bulging population of young men of military age (15-24 years).
All of these problems can be solved only through long-term sustainable economic development.
Yet the United States persists in responding to symptoms rather than to underlying conditions by trying to address every conflict by military means.
It backs the Ethiopian army in Somalia.
It occupies Iraq and Afghanistan.
It threatens to bomb Iran.
It supports the military dictatorship in Pakistan.
None of these military actions addresses the problems that led to conflict in the first place.
On the contrary, American policies typically inflame the situation rather than solve it.
Time and again, this military approach comes back to haunt the US.
The US embraced the Shah of Iran by sending massive armaments, which fell into the hands of Iran’s Revolutionary Government after 1979.
The US then backed Saddam Hussein in his attack on Iran, until the US ended up attacking Saddam himself.
The US backed Osama bin Laden in Afghanistan against the Soviets, until the US ended up fighting bin Laden.
Since 2001 the US has supported Pervez Musharraf in Pakistan with more than $10 billion in aid, and now faces an unstable regime that just barely survives.
US foreign policy is so ineffective because it has been taken over by the military.
Even postwar reconstruction in Iraq under the US-led occupation was run by the Pentagon rather than by civilian agencies.
The US military budget dominates everything about foreign policy.
Adding up the budgets of the Pentagon, the Iraq and Afghanistan wars, the Department of Homeland Security, nuclear weapons programs, and the State Department’s military assistance operations, the US will spend around $800 billion this year on security, compared with less than $20 billion for economic development.
In a stunning article on aid to Pakistan during the Bush administration, Craig Cohen and Derek Chollet demonstrated the disastrous nature of this militarized approach – even before the tottering Musharraf regime’s latest crackdown.
They show that even though Pakistan faces huge problems of poverty, population, and environment, 75% of the $10 billion in US aid has gone to the Pakistani military, ostensibly to reimburse Pakistan for its contribution to the “war on terror,” and to help it buy F-16s and other weapons systems.
Another 16% went straight to the Pakistani budget, no questions asked.
That left less than 10% for development and humanitarian assistance.
Annual US aid for education in Pakistan has amounted to just $64 million, or $1.16 per school-aged child.
The authors note that “the strategic direction for Pakistan was set early by a narrow circle at the top of the Bush administration and has been largely focused on the war effort rather than on Pakistan’s internal situation.” They also emphasize that “US engagement with Pakistan is highly militarized and centralized, with very little reaching the vast majority of Pakistanis.”
This militarized approach is leading the world into a downward spiral of violence and conflict.
Each new US weapons system “sold” or given to the region increases the chances of expanded war and further military coups, and to the chance that the arms will be turned on the US itself.
None of it helps to address the underlying problems of poverty, child mortality, water scarcity, and lack of livelihoods in places like Pakistan’s Northwest Frontier Province, Sudan’s Darfur region, or Somalia.
These places are bulging with people facing a tightening squeeze of insufficient rainfall and degraded pasturelands.
Naturally, many join radical causes.
The Bush administration fails to recognize these fundamental demographic and environmental challenges, that $800 billion of security spending won’t bring irrigation to Afghanistan, Pakistan, Sudan, and Somalia, and therefore won’t bring peace.
Instead of seeing real people in crisis, they see caricatures, a terrorist around every corner.
A more peaceful world will be possible only when Americans and others begin to see things through the eyes of their supposed enemies, and realize that today’s conflicts, having resulted from desperation and despair, can be solved through economic development rather than war.
We will have peace when we heed the words of President John F. Kennedy, who said, a few months before his death, “For, in the final analysis, our most basic common link is that we all inhabit this small planet.
We all breathe the same air.
We all cherish our children’s future. And we are all mortal.”
America’s Financial Leviathan
BERKELEY – In 1950, finance and insurance in the United States accounted for 2.8% of GDP, according to US Department of Commerce estimates.
By 1960, that share had grown to 3.8% of GDP, and reached 6% of GDP in 1990.
Today, it is 8.4% of GDP, and it is not shrinking.
The Wall Street Journal’s Justin Lahart reports that the 2010 share was higher than the previous peak share in 2006.
Lahart goes on to say that growth in the finance-and-insurance share of the economy has “not, by and large, been a bad thing....Deploying capital to the places where it can be best used helps the economy grow...”
But if the US were getting good value from the extra 5.6% of GDP that it is now spending on finance and insurance – the extra $750 billion diverted annually from paying people who make directly useful goods and provide directly useful services – it would be obvious in the statistics.
At a typical 5% annual real interest rate for risky cash flows, diverting that large a share of resources away from goods and services directly useful this year is a good bargain only if it boosts overall annual economic growth by 0.3% – or 6% per 25-year generation.
There have been many shocks to the US economy over the past couple of generations, and many factors have added to or subtracted from economic growth.
But it is not obvious that the US economy today would be 6% less productive if it had had the finance-insurance system of 1950 rather than the one that prevailed during the past 20 years.
There are five ways that an economy gains from a well-functioning finance-insurance system.
First, people are no longer as vulnerable to the effects of fires, floods, medical disasters, unemployment, business collapses, sectoral shifts, and so forth, because a well-working finance-insurance system diversifies and thus dissipates some risks, and deals with others by matching those who fear risk with those who can comfortably bear it.
While it might be true that America’s current finance-insurance system better distributes risk in some sense, it is hard to see how that could be the case, given the experience of investors in equities and housing over the past two decades.
Second, well-functioning financial systems match large, illiquid investment projects with the relatively small pools of money contributed by individual savers who value liquidity highly.
There has been one important innovation over the past two generations: businesses can now issue high-yield bonds.
But, given the costs of the bankruptcy process, it has never been clear why a business would rather issue high-yield bonds (besides gaming the tax system), or why investors would rather buy them than take an equity stake.
Third, improved opportunities to borrow allow one to spend more now, when one is poor, and save more later, when one is rich.
Households are certainly much more able to borrow, thanks to home-equity loans, credit-card balances, and payday loans.
But what are they really buying?
Many are not buying the ability to spend when they are poor and save when they are rich, but instead appear to be buying postponement of the “unpleasant financial retrenchment” talk with the other members of their household.
And that is not something you want to buy.
Fourth, we have seen major improvements in the ease of transactions.
But, while electronic transactions have made a great deal of financial life much easier, this should have been accompanied by a decrease, not an increase, in the finance share of GDP, just as automated switching in telecommunications led to a decrease in the number of telephone switchboard operators per phone call.
Indeed, the operations of those parts of the financial system most closely related to technological improvements have slimmed down markedly: consider what has happened to the checking operations of the regional Federal Reserve Banks.
Finally, better finance should mean better corporate governance.
Since shareholder democracy does not provide effective control over entrenched, runaway, self-indulgent management, finance has a potentially powerful role to play in ensuring that corporate managers work in the interest of shareholders.
And a substantial change has indeed occurred over the past two generations: CEOs focus much more attention than they used to on pleasing the stock market, and this is likely to be a good thing.
Overall, however, it remains disturbing that we do not see the obvious large benefits, at either the micro or macro level, in the US economy’s efficiency that would justify spending an extra 5.6% of GDP every year on finance and insurance.
Lahart cites the conclusion of New York University’s Thomas Philippon that today’s US financial sector is outsized by two percentage points of GDP.
And it is very possible that Philippon’s estimate of the size of the US financial sector’s hypertrophy is too small.
Why has the devotion of a great deal of skill and enterprise to finance and insurance sector not paid obvious economic dividends?
There are two sustainable ways to make money in finance: find people with risks that need to be carried and match them with people with unused risk-bearing capacity, or find people with such risks and match them with people who are clueless but who have money.
Are we sure that most of the growth in finance stems from a rising share of financial professionals who undertake the former rather than the latter?
America’s Fiscal Isolationism
DENVER – Patience might be a virtue, but not necessarily when it comes to American foreign policy.
Consider “the long war,” a bold concept embraced a few years ago to describe the continuing struggle against terrorism, the grudging progress that could realistically be achieved, and the enormous financial burden that it would impose for years to come.
It was also a realpolitik acknowledgement of the setbacks to be expected along the way (the “slog,” as then Defense Secretary Donald Rumsfeld put it).
Above all, the term was an effort to communicate to Americans, accustomed to waging war with speed and decisiveness (and insistent on it since Vietnam), the long-term sacrifice and commitment needed to win a war of survival.
Its proponents also understood that the war would not be limited to weapons, but would need to be a sustained effort, involving, as they put it, the “whole of government,” with civilian agencies marshaled behind military – or paramilitary – objectives.
Daunting as the effort would be, its advocates assumed a sustainable political consensus to support it.
After all, the United States had been attacked.
Today, that consensus is unraveling as America’s politicians wrestle with a federal budget that is itself turning into a long war – one with its own casualties.
The battle lines in this struggle suggest that there is little accord among political elites for any spending, let alone for a long war with far-flung commitments.
As a result, basic assumptions are being questioned at every turn.
Indeed, the current budget war seems to be reopening old divisions about America’s view of itself and the world.
The outcome is far from certain, but even isolationism, a perennial American malady, seems to be making a comeback.
Isolationism is a familiar refrain in US foreign policy among those elements of the right that consider the US too good for the world, as well as among those on the left who consider America a destructive global force.
But this time, as perhaps never before, a bipartisan isolationist impulse is being driven by the budget.
America’s fiscal crisis is profound, and it is not just about numbers.
As the emotions in Washington today suggest, the aversion to tax increases runs far deeper than concern about their effect on current economic performance and job growth.
In part, it represents a fundamental – some would say fundamentalist – view that taxes are to government what a bottle of whisky is to an alcoholic.
Government, as Ronald Reagan told us, is the problem, not the solution.
That message is bad news for American diplomacy.
The linkage between politicians’ unwillingness to fund domestic programs and the imperiled commitment to “the long war” might elude those in US foreign-policy circles, but it is not lost on the rest of the country.
Opinion surveys suggest that Americans want to maintain many of the “discretionary” domestic programs – schools, hospitals, transportation infrastructure, recreational parks, etc. – that are now on the chopping block in budget negotiations.
In places like rural El Paso County, on the eastern plains of Colorado, far from the federal budget debate’s epicenter, spending cuts are the order of the day.
School districts are increasing class sizes as they shed teachers, as well as deferring maintenance projects and curtailing the school-bus service.
These cuts are having a very real and immediate impact on El Paso County’s residents.
Can they, and other Americans who are losing vital services, really be expected to rise above it all and support funding to build new schools in Afghanistan?
Not only are America’s public schools starting to look second-rate, but so is its infrastructure, which had long been a source of national pride.
How many travelers nowadays can fail to note the difference between Asia’s new, efficient airports and the aging, clogged antiques in some major US cities?
The budget war is not producing any consensus on fixing America’s infrastructure, but it is beginning to produce a view that Afghanistan and Pakistan are far from being core US national interests.
Why, people ask, are schools and roads in Afghanistan and Iraq more important than those in Colorado or California? At one point in 2008, the US military picked up the cost of transporting a tiger for the Baghdad zoo.
When was the last time the US government did that for a US zoo (outside of Washington, of course)?
How this debate sorts itself out will have profound consequences for how America conducts itself in the world.
But it might also take a toll on how the world reacts to America’s fastest-growing export: unsolicited advice.
Countries take others’ advice for many reasons.
Sometimes they respect the adviser’s wisdom and insights (fairly rare in diplomacy).
Or they might fear the consequences of not taking the advice (an offer one cannot refuse, so to speak).
Or, as is true of many of America’s diplomatic transactions, accepting advice could open the way to a better relationship and to additional assistance.
In short, diplomacy – and US diplomacy, in particular – often involves money.
But what if there is no money to offer?
What if Americans, tired of the budget cuts in their neighborhoods, refuse to support funds even for “the long war”?
At that point, senior US officials might well arrive in a country, offer advice, and find that nobody is bothering to listen.
America’s Free-Trade Abdication
NEW YORK – The indifference and apathy that one finds in Washington from both the Congress and President Barack Obama on the Doha Round of world trade talks, and the alarm and concern expressed by statesmen elsewhere over the languishing negotiations, mark the end of the post-1945 era of American leadership on multilateral free trade.
Evidence of anxiety outside the US has been clear to everyone for almost a year.
German Chancellor Angela Merkel and British Prime Minister David Cameron were concerned enough to join with Turkey’s President Abdullah Gül and Indonesia’s President Susilo Bambang Yudhoyono in appointing Peter Sutherland and me as Co-Chairs of a High-Level Trade Experts Group in November 2010.
We held a prestigious Panel at Davos with these leaders in January 2011, where, on the occasion of our Interim Report, we gave full-throated support to concluding Doha.
But there was no response from the US government.
In September, former British Prime Minister Gordon Brown, former Spanish Prime Minister Felipe González, and former Mexican President Ernesto Zedillo reminded G-20 leaders that in November 2009, at their first meeting in London, they had expressed “a commitment to …conclude the Round in 2010.”
And, two weeks ago, the UN met again on the Millennium Development Goals (MDGs).
Goal 8 is about instruments such as trade and aid, and MDG 8A commits the UN member nations to “[d]evelop further an open, rule-based, predictable, non-discriminatory trading and financial system.”
But, while practically every country today has embraced preferential Free Trade Agreements, the recent leader in this proliferation is the US.
There, Congress and the president apparently have plenty of time to discuss bilateral FTAs with South Korea, Colombia, and Panama, as well as the regional Trans-Pacific Partnership (TPP), but none for negotiating the non-discriminatory Doha Round, which is languishing in its tenth year of talks.
Indeed, it is notable that, while Obama’s State of the Union address in January 2010 at least mentioned Doha, his address in January 2011 did not.
Obama confined himself to promoting the pending bilateral agreements with Colombia and other emerging-market countries.
Obama’s regrettable retreat from support for the Doha Round is the result of many factors and fallacies.
These were highlighted in an “Open Letter to Obama” that I organized and released, over the signatures of nearly 50 of today’s most influential trade experts worldwide, urging a presidential shift in policy towards Doha.
America’s president is captive to the country’s labor unions, who buy the false narrative that trade with poor countries is increasing the ranks of the poor in the US by driving down wages.
In fact, however, there is plenty of evidence for the rival narrative that rapid and deep labor-saving technological change is what is putting pressure on wages, and that imports of cheap labor-intensive goods that US workers consume are actually offsetting that distress.
Again, Washington lobbyists have bought into the absurd claim of trade experts such as Fred Bergsten that the gain from Doha, as it stands now, is a paltry $7 billion or so annually.
This ignores the far greater losses that a failed Doha Round would entail, for example, by undermining the World Trade Organization’s credibility as the principal guarantor of rules-based trade, and by leaving trade liberalization entirely to discriminatory liberalization under preferential bilateral agreements.
Again, someone needs to tell Obama that imports create jobs, too, and that his emphasis on promoting US exports alone is bad economics.
Most of all, Obama is badly served on trade by his senior colleagues.
Secretary of State Hillary Clinton, for example, was opposed to trade liberalization when she ran against Obama for president, and advocated a “pause” in free-trade negotiations.
She also misinterpreted the great economist Paul Samuelson as a protectionist, when he said nothing of the kind.
She has never recanted.
Likewise, now that Warren Buffett is considered to be Obama’s most trusted economic adviser, it is worth recalling that back in 2003 he produced the astonishing prescription that the best way to reduce the US trade deficit was to allow no more imports than it could finance from its export earnings.
An amused and alarmed Samuelson drew my attention to this nutty idea.
While Buffett’s prescription of higher taxes for America’s wealthy is entirely desirable, will Obama realize that a genius in one area may be a dunce in another?
What we need today is for the world’s leading statesmen to stop pussyfooting and to unite in nudging Obama towards a successful conclusion of the Doha Round.
That alone would provide the counterweight to the forces that pull him in the wrong direction.
It is still not too late.
Obama’s Underachieving Foreign Policy
PARIS – To evaluate an American president’s foreign-policy performance after one term is challenging, given the complex diplomatic and strategic environment and significant domestic constraints that confront every US president.
Nevertheless, in advance of November’s presidential election, it is important to distinguish the forces that have shaped Barack Obama’s foreign policy, and to assess his handling of them.
Obama kept his promise to withdraw American forces from Iraq during his first term.
But the move proved to be a strategic defeat, given that it significantly diminished the United States’ political influence in Iraq.
Indeed, Prime Minister Nouri al-Maliki’s government is becoming increasingly allied with Iran.
Obama, who opposed the Iraq war, should not be blamed for current circumstances there.
But he was unable to improve the situation or help Iraq’s Shias and Sunnis reach a political compromise.
In contrast, Obama expanded the war in Afghanistan – which he considered to be a war of necessity – and put the Taliban on the defensive.
But the US will begin to withdraw troops after 2014, without having defined a political solution in line with its interests.
Meanwhile, America’s strategic partnership with Pakistan, where Obama won a significant symbolic victory by eliminating Osama bin Laden, is in tatters.
US-Pakistan relations have regressed to their level before September 11, 2001, with mutual distrust minimizing cooperation.
In fact, in all of the strategic challenges to US security that Obama inherited – Iran, North Korea, Iraq, Afghanistan, Pakistan, and the Israeli-Palestinian conflict – he has made virtually no significant political gains.
Notwithstanding Obama’s skillful response to the Arab Spring – the only strategic surprise that he has faced as president – his credibility in the Muslim world has steadily declined.
He has failed to deliver on the key promise of his Cairo speech in 2009: “to seek a new beginning between the United States and Muslims around the world.”
Moreover, Obama’s efforts to improve relations with Russia – embodied in the Strategic Arms Reduction Treaty (START) – did not lead to a genuine “reset” in bilateral ties, largely because an increasingly Soviet-style Russian leadership distrusts a US establishment that still regards Russia as a foe.
And the US-China relationship has deteriorated, with America seeking to manage China’s rise strategically – for example, through regional trade agreements and an enhanced military presence in Asia.
On multilateral issues, Obama’s performance is equally unimpressive.
After committing to a 17% reduction of greenhouse-gas emissions by 2020 – and despite his declaration that he would not tolerate inaction in this area – he simply stopped raising the issue after the Republicans’ sweeping victory in the November 2010 mid-term elections.
Likewise, domestic pressure has caused Obama to neglect trade issues.
The US is largely responsible for the failure of the Doha Round of global trade talks.
Obama’s one significant foreign-policy breakthrough has been to release the US from the grip of the “global war on terror.”
Jettisoning the Manichean rhetoric of that “war” allowed the US to regain the political legitimacy that former President George W. Bush had lost, without diminishing its strategic credibility.
After the Vietnam War, Jimmy Carter hoped to make a break with established US policy.
But his administration’s actions – including serious blunders in Iran and Afghanistan – made the US appear weak and indecisive.
While Obama’s policies have not weakened America’s international standing, they also have not led to achievements comparable to Richard Nixon’s rapprochement with China, largely owing to what might be described as the dogmatic pragmatism that underlies them – an emphasis on avoiding the worst, rather than on striving for the best.
Moreover, Obama has been confronted with significant constraints, including the global economic crisis, domestic political polarization, a hostile Congress, and the rise of emerging powers that need the US but are unwilling to accept its dominance.
As a result, he has failed to change strategic realities by, for example, reconciling America’s broader interests with those of Iran (a declared enemy), Pakistan (a “frenemy”), and Israel (a key ally).
To be sure, Obama faces a more complex diplomatic and strategic environment than Nixon faced in the 1970’s.
Unstable coalitions in Iran prevent any substantive negotiations between the two countries, while political fragmentation in Pakistan significantly hinders US policy there.
And the fragility of Israel’s ruling coalition, combined with strong congressional support for Prime Minister Binyamin Netanyahu, makes it difficult to influence the country’s policies, despite Israel’s significant impact on US strategy in the Arab world.
But Obama has also struggled to define the terms of a possible grand bargain.
Any agreement with Iran would require consent from Israel and the Gulf countries, which do not share the same objectives.
And the US cannot reach an accord with Pakistan without India’s consent, which America would be unable to force, especially given that it relies on India to counterbalance China’s growing clout in Asia.
With Israel, the terms are ostensibly simpler: in exchange for a stronger US security guarantee, Israel would accept the establishment of a Palestinian state based on the 1967 borders.
But Israel is also a crucial domestic political topic in the US; indeed, any distancing from Israel is unacceptable to most Americans.
While Obama’s first term could not be called a foreign-policy disappointment, his achievements – although not trivial – have been limited.
If he wins a second term, he is likely to find it increasingly difficult to win by playing not to lose.
America’s Groucho Marxists
LONDON – Groucho Marx has always been my favorite Marxist.
One of his jokes goes to the heart of the failure of the ideology – the dogmatic religion – inflicted on our poor world by his namesake, Karl.
“Who are you going to believe,” Groucho once asked, “me, or your own eyes?” For hundreds of millions of citizens in Communist-run countries in the twentieth century, the “me” in the question was a dictator or oligarchy ruling with totalitarian or authoritarian powers.
It didn’t matter what you could see with your own eyes.
You had to accept what you were told the world was like.
Reality was whatever the ruling party said it was.
The designated successor to Mao Zedong in China, Hua Guofeng, raised this attitude to an art form.
He was known as a “whateverist.” The Party and people should faithfully follow whatever Mao instructed them to do.
Groucho posed two insuperable problems for the “whateverists” of communism. First, your own eyes and your reason would surely tell you before long that the communist idyll – the withering away of the state and the triumph over need – would never come.
Communism, like the horizon, was always just beyond reach.
It would be interesting to know how many of those at Beijing’s Central Party School – the party’s main educational institute – believe that the Chinese state is about to wither away, or ever will.
The second application of Groucho’s question was that citizens of most Communist countries soon learned that the loss of freedom that they suffered was not compensated by greater prosperity or a higher quality of life.
The more that Russians, Poles, Czechs, and others saw of the life-style in the Western democracies, the more they questioned their own system.
In his magisterial book
So, in the political sphere, reason has trumped both faith in an unattainable goal and self-delusion about the consequences of its pursuit.
Authoritarian party-states, such as China and Vietnam, survive, but not through commitment to communism.
Their legitimacy depends on their ability to deliver economic growth through state-managed capitalism.
Democracies, of course, allow people to use their reason to make choices based on the evidence of their own eyes.
When you don’t like a government, you can turn the rascals out without overthrowing the whole system.
Change can be made in an evolutionary, rather than a revolutionary, way.
But no one should think that debate in democracies is always based on reason, or that democracy necessarily makes people more rational.
Sometimes reason does prevail.
This is what appeared to happen in the last Indian election, and the election in the United States of President Barack Obama was also plainly a supremely rational moment.
But reason does not seem to be getting much of a hearing during the current health-care debate in the US.
Outsiders, even admirers, have often wondered how the most globalized country in the world – a continent inhabited by people from every land – can be so irrationally insular on some issues.
We scratch our heads about America’s gun laws.
We were astonished during President George W. Bush’s first term at the administration’s hostility to science, reflected in its stance on climate change and Charles Darwin’s theory of evolution.
The opposition to health-care reform is a similar cause of bemusement.
We know that despite its great wealth – and its groundbreaking medical research – America’s health-care system is awful.
It is hugely expensive.
Its costs overwhelm workplace health-insurance schemes.
The poor go unprotected.
Too many of the sick are untreated.
Overall health statistics are worse than those in comparable countries.
Yet Obama’s attempts to reform health care have run into hysterical opposition.
His proposals would lead, it is said, to the state murdering the elderly.
They would introduce Soviet communism into the US – just like what apparently exists in Canada and Britain, with their state-sponsored health systems.
Communism in Toronto and London?
Or just better, cheaper, more reliable health care for all?
Reason seems to be having a hard time of it in the US just now.
Maybe it’s no coincidence that Groucho Marx was an American citizen.
But surely the way a society cares for its sick and needy and elderly is sufficiently important to deserve serious and thoughtful argument based on what we really can see with our own eyes rather than on uninformed partisan prejudice.
America’s Growth in the Decade Ahead
CAMBRIDGE – Although the strength of the US economy in 2010 remains uncertain, it is important to look ahead to its likely performance in the coming decade.
The rise of GDP over the next ten years will reflect the very positive effect of the eventual recovery from the current deep downturn, combined with a below-trend rise in the economy’s potential output at full employment.
When I add up all the key components, I conclude that the coming decade’s annual growth is likely to be about 1.9%, roughly the same as the average rate over the past ten years.
To understand why, let’s start with the cyclical recovery.
I’ll make the optimistic but plausible assumption that the economy will fully recover over the next decade, lowering the unemployment rate from the current 10% to about 5%.
That return to full employment will also reduce the number of people who, discouraged that no jobs exist for those with their skills, have stopped looking for work (and are therefore not counted as unemployed).
That cyclical recovery of employment will cause GDP to rise by about 13% over the next decade, or an average of 1.2% per year.
That represents a substantial turnaround from the past decade, when the unemployment rate rose from 4% to 10% and the labor-force participation rate fell from 67% to 65%, reducing GDP by about 1.6% per year.
The full rise in GDP will combine the 1.2%-per-year cyclical rebound with the increase in potential full-employment GDP.
The growth of potential GDP will reflect the structural rise of the labor force, the increase in the capital stock, and the improvement in multifactor productivity (i.e., the change in the output that results from improvements in technology rather than from increases in labor and capital.)
Although there are uncertainties about each of these components of growth, their performance in the coming years is unlikely to be as good as it was in recent decades.
Slower population growth and a demographically driven decline in the labor-force participation rate will reduce employment growth.
Indeed, the US Department of Labor recently predicted that the labor force will grow by only 8% between 2008 and 2018, down from 12% in the previous ten years.
That growth of the labor force will raise potential GDP by only about 0.5% per year.
Although the capital stock will benefit from a higher household saving rate, the increase will be offset by more government “dissaving” as budget deficits remain high.
A reluctance of foreign investors to keep accumulating dollar assets will cause a smaller capital inflow from the rest of the world.
Finally, the change in potential GDP will depend on what happens to the rate of change of multifactor productivity – that is, the change in output that results from changes in technology and production processes.
According to the OECD, US multifactor productivity rose at a relatively stable annual rate of about 0.75% from 1985 to 2000, and then jumped to 1.4% per year from 2001 through 2008.
There is no way to know whether the rate of growth of multifactor productivity will remain at its current level or will revert to the pre-2000 pace.
Assuming slower growth in the labor force than in the past decade, no rise in productivity due to capital accumulation, and a decline in multifactor productivity growth to its pre-2000 average implies that annual potential GDP growth will be only 1.4%.
Combining these conservative assumptions about potential GDP with the effect of the cyclical rebound – an estimated 1.2% annual rise in real GDP – would produce real GDP growth at an average annual rate of 2.6%, which would be significantly higher than the 1.9% rate in the decade ending in 2009.
But not all of the extra output produced over the next decade will remain in the US.
If the trade deficit is reduced by 3% of GDP between now and the end of the decade, the implied rise in exports and decline in imports would reduce output available for US consumption and investment by about 0.3% per year.
The effect of a decline in the dollar over the coming decade could be equally important.
If the real trade-weighted value of the dollar falls by 25% over the coming decade, and the full effect of that dollar decline is reflected in import prices, the increased cost of imports would reduce the growth of US real incomes by about 0.4% a year.
These two international effects would leave annual net growth of real goods and services available for US consumption and investment – both domestically produced and imported – at just 1.9%, implying no change compared to the past decade.
During those years, the rise in the volume of net imports just balanced the effect of the dollar’s fall on the total cost of imports.
As a result, the rise in the real value of goods and services available for US consumption and investment was the same as the rise of real GDP.
There are, of course, serious downside risks to this forecast, especially if the fiscal deficit remains high or adverse tax policies depress the rise in productivity.
The government should take the weak ten-year projection as a warning and a reason to devote policies to reducing fiscal deficits and strengthening incentives for growth.
America’s G-Zero Moment
NEW YORK – The 2008 financial crisis marked the end of the global order as we knew it.
In advance of the upcoming G-8 summit, it is impossible to overlook the fact that, for the first time in seven decades, the United States cannot drive the international agenda or provide global leadership on all of today’s most pressing problems.
Indeed, the US has trimmed its presence abroad by refusing to contribute to a eurozone bailout, intervene in Syria, or use force to contain Iran’s nuclear breakout (despite strong Israeli support).
President Barack Obama officially ended the war in Iraq, and is withdrawing US troops from Afghanistan at a pace constrained only by the need to save face.
America is handing off the leadership baton – even if no other country or group of countries is willing or able to grasp it.
In short, US foreign policy may be as active as ever, but it is downsizing and becoming more exacting about its priorities.
As a result, many global challenges – climate change, trade, resource scarcity, international security, cyber-warfare, and nuclear proliferation, to name a few – are bound to loom larger.
Welcome to the G-Zero world, a more turbulent, uncertain environment in which coordination on global policy issues falls by the wayside.
Paradoxically, this new environment, though daunting, is less troublesome for the US; in fact, it provides fresh opportunities for the US to capitalize on its unique position.
The G-Zero world is not all bad for the US – if it plays its cards right.
Many residual strengths take on greater importance in such a world, and America remains the world’s only true superpower and its largest economy – still more than twice the size of China’s.
Its defense expenditures represent nearly half the world total, and exceed those of the next 17 countries combined.
The dollar remains the world’s reserve currency, and investors’ scramble into US government debt at every peak in the crisis since 2008 has underscored America’s safe-haven status (even in crises that America caused).
Likewise, the US continues to lead in entrepreneurship, research and development, higher education, and technological innovation.
Moreover, it is now the world’s largest natural-gas producer and calorie exporter, which has reduced its vulnerability to price shocks or food shortages.
No country rivals America’s promotion of the rule of law, liberal democracy, transparency, and free enterprise.
While other countries certainly support these values, only the US has been willing, healthy, and big enough to ensure that they prevail.
So, as America curtails its global leadership, it will find itself in more demand.
Consider Asia, for example.&nbsp;As China’s economic importance and regional influence grows, its neighbors are seeking to deepen ties with the US.
Japan, Australia, Indonesia, and Taiwan have all recently closed trade and security-related deals with the US.
Even Burma has gotten on board, resuming diplomatic engagement with the US while trying to work its way out of China’s shadow.
In other words, in a G-Zero world, an increasingly aggressive global environment makes the US all the more appealing to countries seeking to hedge their bets.&nbsp;As a result, the US has an opportunity to act more precisely in its own interests.
Supplying less leadership allows the US to weigh opportunity costs before taking action, and to select the issues and circumstances that suit it the best.&nbsp;In this environment, military intervention in Libya does not necessitate the same in Syria.
The extent to which the US will capitalize on these opportunities remains to be seen.
In fact, America’s short-term advantages pose the biggest obstacle to its long-term outlook.
Call this the “safe-haven curse”:&nbsp;as long as the US remains the safest port in any storm, it faces no immediate pressure to address its weaknesses.
For example, for all of the hand-wringing about America’s national debt, investors will continue to loan the US money.
Over the long term, however, US policymakers must make steady progress in restoring confidence in the nation’s fiscal health by cutting politically sacred programs like social security, Medicare, and defense.
Officials will have to put aside short-term motives and party orthodoxy to bolster America’s aging infrastructure, reform its education and immigration systems, and pursue long-term fiscal consolidation.
America’s advantages in the G-Zero world afford it the chance to invest in the future.
But, by cushioning against sufficiently calamitous risks, the same advantages allow the US to procrastinate.
American politicians need to recognize the new G-Zero reality and rebuild America’s domestic sources of strength, even if only incrementally.&nbsp;If they do, the US will have the vigor and flexibility to shape the next world order.
America’s political system usually works well in crises.&nbsp;But, thanks to its residual advantages in a leaderless world, the US need not rely on a crisis to precipitate action.
It need only seize the G-Zero moment.
America Shoots Itself
One of the casualties of the war against terrorism--or, rather, of the way the United States is conducting the war--is the US influence in promoting human rights worldwide.
For the international human rights movement, this is a severe setback.
For more than a quarter of a century, ever since advancing human rights internationally became an explicit and avowed goal of US foreign policy under President Jimmy Carter, American influence played a leading role in mitigating abuses.
The consequences were most profound in what were the countries of the Soviet empire, but they extended to other regions as well.
Even where the US supported regimes that committed grave violations of rights--or served as an apologist for them because other national interests took precedence--it was often possible for the human rights movement to embarrass Washington by making it the surrogate villain for its clients' abuses.
In the 1980's, this approach focused attention on abuses in conflict-ridden Central America and in Saddam Hussein's Iraq, which the Reagan Administration favored in its struggle with America's enemy, Ayatollah Khomeini's Iran.
It thus sometimes achieved indirectly what could not be done directly: the leveraging of American influence to promote human rights.
But America's capacity to promote human rights in other countries has never been weaker than now.
One reason is the tremendous increase in anti-Americanism since the terrorist attacks of September 11, 2001.
This is largely due to a widespread perception of American arrogance.
Despite (or because of) its insistence that all who are not with America are against it, the Bush administration alienated many who previously counted themselves either as friends of the US or did not take sides.
At the same time, rising anti-Americanism preceded the US response to the terrorist attacks.
The Bush team was outspoken in its hostility to a range of international agreements, from the Kyoto Treaty to reduce global warming to the establishment of the International Criminal Court.
Whatever goodwill towards the US prevailed after September 11 was quickly squandered.
The Bush administration proclaimed a national security policy that insists that America provides the only sustainable model for national success, and asserted its right to engage in unilateral, preemptive military strikes.
It treated the UN Security Council with disdain in its rush to war in Iraq, invoking justifications that have not stood up to scrutiny.
Since then, it has continued to insist that its arguments for invading Iraq are beyond criticism, while making a mess of the postwar administration by refusing to share authority.
The other major reason that America is losing its effectiveness as a promoter of human rights is a widespread perception of hypocrisy.
Even before the terrorist attacks on New York and Washington, America's image as a rights proponent had been tarnished, particularly in Europe, by its continued practice of capital punishment and, to a lesser degree, by its high incarceration rate--approximately seven times the average in the European Union's fifteen member countries.
Since September 2001, the cause for concern has grown dramatically.
Much international attention has focused on the USA Patriot Act's sanctioning of grave violations of civil liberties, and on the subsequent treatment of thousands of immigrants--particularly south Asian Muslims--who have faced secret detention and deportation.
Above all, the rest of the world has looked on with alarm as the US holds more than 600 men at Guantanamo Bay in Cuba without access to family or counsel, and without prospect of an impartial hearing or trial.
In some instances, reports of rights violations in the US are exaggerated.
But this is an inevitable consequence of the Bush administration's own haughty manner, with leading spokespersons, such as Attorney General John Ashcroft, proclaiming their own righteousness in leading the effort to abrogate rights.
Ashcroft is much less known internationally than Secretary of Defense Donald Rumsfeld, but he is an even match in arousing dislike for the US among those who do know him.
Unfortunately, there is no ready substitute for the US as a force for advancing human rights internationally.
The UN has been useful as a forum for adopting standards, but its machinery for seeking compliance with those standards is weak and has been badly compromised over the years by its failure to address grotesque abuses.
The choice of Libya to chair the UN Human Rights Commission adds insult to injury.
Some European governments have evolved strong human rights polices but, for a variety of reasons, they have been unable, individually or collectively, to exert the influence of the US.
Fortunately, while this is likely to remain true for the foreseeable future, the international human rights movement is not completely without resources.
Its own prestige is high: groups such as Amnesty International and Human Rights Watch are respected voices, to whom many governments feel obliged to pay attention.
There is also the promise of new institutions.
In cases of extreme rights abuses, the chance that an international criminal tribunal will ultimately sit in judgment of those principally responsible is growing, thereby becoming a deterrent to would-be tyrants elsewhere.
America should take note.
America Should Not Lower the Nuclear Threshold
President Bush has pushed stopping the spread of nuclear weapons to the top of the international agenda.
Ironic, then, that America's nuclear weapons development program may promote the very proliferation it seeks to prevent, as US Senator Dianne Feinstein explains.
With the world's focus on the debate over Iraq, the war on terror, and the Bush administration's doctrine of unilateral preemption, the American government's new emphasis on the utility of nuclear weapons has not received the attention it deserves.
This is unfortunate, as this exploration of new uses for nuclear weapons represents a revolutionary shift in US national security policy.
Today, the world faces unprecedented challenges at the nexus of terror and weapons of mass destruction.
With both North Korea and Iran openly pursuing nuclear ambitions and a potential nuclear arms race in South Asia, it is critical that America provide leadership, in both word and in deed, to reduce the risks and the role of nuclear weapons throughout the world.
Instead, the Bush administration seems intent on doing just the opposite.
Many of the actions of the American administration, and much of the US government's rhetoric, may actually be increasing the threat from nuclear weapons rather than making the world safer.
The Bush administration's January 2002 Nuclear Posture Review signaled a major change in US nuclear policy by advancing a new triad that integrates nuclear weapons with conventional strike options and blurring the line between the use of conventional and nuclear weapons.
It also specified scenarios in which the US might use nuclear weapons first, even against non-nuclear states, and called for a new generation of US nuclear warheads, including low yield or so-called "mini-nukes."
The US has never had a no-first-strike policy, but it has likewise never had a policy such as that embodied in the Nuclear Policy Review.
Today, under the terms of the ideas set out in that review, the US contemplates the first use of nuclear weapons, and seeks to integrate tactical battlefield nuclear weapons alongside conventional munitions.
Despite efforts to downplay the significance of the Nuclear Posture Review since its publication, it remains, in my view, extremely provocative and dangerous.
Earlier this year, at a hearing of the US Senate's Committee on Energy and Natural Resources, I asked Energy Secretary Spencer Abraham, whose Department oversees America's research and development of nuclear weapons, whether the Bush administration wanted to develop new low-yield nuclear weapons.
Secretary Abraham said it did not; that his department was only studying adaptations of existing weapons.
Yet, there should be no doubt that the Bush administration is beginning the research and development of new nuclear weapons.
Just this year, a 10-year-old ban on the research and development of nuclear weapons below five kilotons--the bomb at Hiroshima was 15 kilotons--was eliminated.
Pushed by the Bush administration, Congress authorized $21 million for the study and development of new nuclear weapons, including a 100-kiloton bunker buster, as well as tactical battlefield nuclear weapons.
Moreover, the time to test readiness of the Nevada test site has been moved up from three years to two years, and funding has been provided to produce additional fissile material for new nuclear weapons.
I argued and voted against these new nuclear initiatives in the US Senate earlier this year.
Clearly, the nuclear door is being reopened.
For, by taking the steps called for in the Nuclear Posture Review--specifically, developing "new capabilities...to defeat emerging threats," including "extensive research and timely fielding of
This approach is not in America's national interest, nor is it consistent with American traditions and values.
A first-use of nuclear weapons by the US should be unthinkable, and responding to a non-nuclear attack with nuclear weapons violates a central tenet of just war and US military tradition.
Indeed, nuclear options should not be considered as an extension of conventional options.
Why?
Because this inevitably lowers the threshold for use.
So, if the US develops nuclear weapons that blur the distinction between conventional and nuclear forces, the message this sends to the rest of the world must be considered.
I believe it is critical that the US set a very high international standard for nuclear restraint.
If America does not, it may very likely encourage others to develop their own standards and their own nuclear arsenals.
That seems to be happening.
Both India and Pakistan are nuclear powers, and the history of bloody warfare between them presents a major and ongoing security threat to South Asia.
If either country adhered to the thinking embodied in the Bush administration's new nuclear policy, there would be little reason for each not to seek to integrate nuclear weapons even more deeply into their own contingency plans--and possibly use them.
At a time when the US brands as "evil" certain countries based, in part, on their pursuit of nuclear arms and weapons of mass destruction, it must be especially careful in how it considers its own options and contingencies regarding nuclear weapons.
If the US is not careful, our own new nuclear posture could provoke the very nuclear-proliferation activities we are seeking to prevent.
America’s Houses of Cards
There are times when being proven right brings no pleasure.
For several years, I argued that America’s economy was being supported by a housing bubble that had replaced the stock market bubble of the 1990’s.
But no bubble can expand forever.
With middle-class incomes in the United States stagnating, Americans could not afford ever more expensive homes.
As one of my predecessors as Chairman of the US President’s Council of Economic Advisers famously put it, “that which is not sustainable will not be sustained.” Economists, as opposed to those who make their living gambling on stocks, make no claim to being able to predict when the day of reckoning will come, much less identifying the event that will bring down the house of cards.
But the patterns are systematic, with consequences that unfold gradually, and painfully, over time.
There is a macro-story and a micro-story here.
The macro-story is simple, but dramatic.
Some, observing the crash of the sub-prime mortgage market, say, “Don’t worry, it is only a problem in the real estate sector.” But this overlooks the key role that the housing sector has played in the US economy recently, with direct investment in real estate and money taken out of houses through refinancing mortgages accounting for two-thirds to three-quarters of growth over the last six years.
Booming home prices gave Americans the confidence, and the financial wherewithal, to spend more than their income.
America’s household savings rate was at levels not seen since the Great Depression, either negative or zero.
With higher interest rates depressing housing prices, the game is over.
As America moves to, say, a 4% savings rate (still small by normal standards), aggregate demand will weaken, and with it, the economy.
The micro-story is more dramatic.
Record-low interest rates in 2001, 2002 and 2003 did not lead Americans to invest more – there was already excess capacity.
Instead, easy money stimulated the economy by inducing households to refinance their mortgages, and to spend some of their capital.
It is one thing to borrow to make an investment, which strengthens balance sheets; it is another thing to borrow to finance a vacation or a consumption binge.
But this is what Alan Greenspan encouraged Americans to do.
When normal mortgages did not prime the pump enough, he encouraged them to take out variable-rate mortgages – at a time when interest rates had nowhere to go but up.
Predatory lenders went further, offering negative amortization loans, so the amount owed went up year after year.
Sometime in the future, payments would rise, but borrowers were told, again, not to worry: house prices would rise faster, making it easy to refinance with another negative amortization loan.
The only way (in this view) not to win was to sit on the sidelines.
All of this amounted to a human and economic disaster in the making.
Now reality has hit: newspapers report cases of borrowers whose mortgage payments exceed their entire income.
Globalization implies that America’s mortgage problem has worldwide repercussions.
The first run on a bank occurred against the British mortgage lender Northern Rock.
America managed to pass off bad mortgages worth hundreds of billions of dollars to investors (including banks) around the world.
They buried the bad mortgages in complicated instruments, buried them so deep that no one knew exactly how badly they were impaired, and no one could calculate how to re-price them quickly.
In the face of such uncertainty, markets froze.
Those in financial markets who believe in free markets have temporarily abandoned their faith.
For the greater good of all (of course, it is never for their own selfish interests), they argued a bailout was necessary.
While the US Treasury and the IMF warned East Asian countries facing financial crises ten years ago against the risks of bail-outs and told them not to raise their interest rates, the US ignored its own lectures about moral hazard effects, bought up billions in mortgages, and lowered interest rates.
But lower short-term interest rates have led to higher medium-term interest rates, which are more relevant for the mortgage market, perhaps because of increasing worries about inflationary pressures.
It may make sense for central banks (or Fannie Mae, America’s major government-sponsored mortgage company) to buy mortgage-backed securities in order to help provide market liquidity.
But those from whom they buy them should provide a guarantee, so the public does not have to pay the price for their bad investment decisions.
Equity owners in banks should not get a free ride.
Securitization, with all of its advantages in sharing risk, has three problems that were not adequately anticipated.
While it meant that American banks were not hit as hard as they would otherwise, America’s bad lending practices have had global effects.
Moreover, securitization contributed to bad lending: in the old days, banks that originated bad loans bore the consequences; in the new world of securitization, the originators could pass the loans onto others.
(As economists would say, problems of asymmetric information have increased.)
In the old days, when borrowers found it impossible to make their payments, mortgages would be restructured; foreclosures were bad for both the borrower and the lender.
Securitization made debt restructuring difficult, if not impossible.
It is the victims of predatory lenders who need government help.
With mortgages amounting to 95% or more of the value of the house, debt restructuring will not be easy.
What is required is to give individuals with excessive indebtedness an expedited way to a fresh start – for example, a special bankruptcy provision allowing them to recover, say, 75% of the equity they originally put into the house, with the lenders bearing the cost.
There are many lessons for America, and the rest of the world; but among them is the need for greater financial sector regulation, especially better protection against predatory lending, and more transparency.
America’s Interest-Rate Puzzle
A great puzzle in today’s world economy is the continued low level of long-term real interest rates in the United States.
Conventional macroeconomists like me look at America’s current-account deficit, now running at 7% of GDP, and know that such vast deficits are inevitably followed by large currency depreciations.
So we expect a substantial depreciation premium on US interest rates.
If the dollar falls 20% more against the euro sometime in the next ten years, US long-term interest rates should be two percentage points higher than euro rates.
If it falls 40% against the yen sometime in the next ten years, US long-term interest rates should be four percentage points higher than Japanese rates.
If it falls 60% against China’s currency, the yuan, sometime in the next ten years, US long-term interest rates should be six percentage points higher than Chinese rates.
But we are not seeing signs of anything like this.
The puzzle is not only that long-term rates are too low when viewed in the international context, but also that they are too low when viewed in America’s domestic context.
The Bush administration continues to have no plans to sew up the veins it has opened with its medieval economic policy, which holds that bleeding revenue from the government cures all economic problems.
This means that unless America’s domestic savings rate rises mightily – which it shows no signs of doing – and unless investment expenditure remains abnormally low for the rest of this decade, the supply of loanable funds to finance investment will soon be much less than demand when the current-account deficit narrows to sustainable levels.
But when supply is less than demand, prices rise sharply.
In this case, the price of loanable funds is the real interest rate.
An expectation that interest rates will be high sometime in the next decade should mean high interest rates on long-term bonds today.
Yet financial markets are not pricing dollar depreciation and a rise in long-term US interest rates accordingly.
When we macroeconomists talk to our friends on Wall Street, we find that they don’t view this as a puzzle at all.
On the contrary, they are puzzled about why we view the current low level of US long-term interest rates as worrisome.
From their perspective, today’s high demand for long-term dollar-denominated securities is easily explained: Asian central banks are buying in order to hold down their currencies, the US Treasury is borrowing short (and thus not issuing that many long-term securities), and US companies are not undertaking the kinds of investments that would lead them to issue many long-term bonds.
But for every market mispricing there is a profit opportunity: if long-term interest rates are, indeed, too low and long-term bond prices too high, investors will short long-term US bonds, park the money elsewhere, wait for bond prices to return to fundamentals, and then cover their short positions.
By doing so, they will push prices close to fundamentals today.
Wall Streeters, however, offer a counterargument: for any financial institution to, say, bet on the decline of the dollar against the yuan over the next five years in a serious, leveraged way is to put its survival at risk should the trades go wrong.
And trades do go wrong: remember the collapse of Long-Term Capital Management.
The existence of large financial-market actors that do not care about maximizing their profits magnifies the riskiness of the bets.
If, say, the Bank of China and the Federal Reserve decided to teach speculators a lesson by pushing the dollar’s value relative to the yuan up by 20% for a month, they could do so, bankrupting many financial institutions with short positions.
Similarly, any financial institution that bets on a sharp rise in long-term interest rates over the next five years in a serious, leveraged way also puts its survival at risk.
For where should they park their money?
Real estate rental yields and stock-market payouts are low, and real estate and stock prices may well fall as much as or more than bond prices if interest rates spike.
Only businesses that can borrow long-term now, lock in a low real interest rate, and invest in expanding their capacity can make the domestic bet that interest rates will rise.
But America’s businesses see enough risk in the future to be wary of getting stuck with unutilized capacity.
Economists believe that market forces drive prices to fundamentals.
But we are not careful enough to distinguish situations in which equilibrium-restoring forces are strong from those in which such forces are weak.
The dollar will fall and US long-term interest rates will rise, but only when traders on Wall Street and elsewhere decide that holding dollars and long-term US bonds is more risky in the short run.
When that happens, the long-run future will be now.
America’s Islamist Allies of Convenience
NEW DELHI – In just one decade, the United States has intervened militarily in three Muslim-majority countries and overthrown their governments.
Now the same coalition of American liberal interventionists and neoconservatives that promoted those wars is pushing for punitive airstrikes in Syria without reflecting on how US policy has ended up strengthening Islamists and fostering anti-Americanism.
Indeed, the last “humanitarian intervention” has clearly backfired, turning Libya into a breeding ground for transnational militants.
As the intense US debate about President Barack Obama’s proposed use of military force highlights, the attack-Syria push is not about upholding America’s national interest.
Rather, the desire to protect US “credibility” has become the last refuge of those seeking yet another war in the wider Middle East.
If “credibility” were purged from the debate and the focus placed squarely on advancing long-term US interests, it would become apparent that an attack on Syria might not yield even temporary geopolitical gains.
Beyond the short term, it would unleash major unintended consequences, potentially including an Iraq-style “soft” partition of Syria and the creation of a haven for extremists stretching across much of Islamist-controlled northern Syria and into the Sunni areas of Iraq.
Indeed, an attack would most likely increase America’s reliance on unsavory Islamist rulers in countries ranging from Saudi Arabia and Qatar to Turkey and the United Arab Emirates.
Some Arab monarchs have pledged to bankroll the US attack – an investment that they would easily recover, given that the war talk has already increased oil prices.
Al Qaeda-type groups already have gained ground in the Middle East and North Africa as an unintended byproduct of US policies, creating fertile conditions for stepped-up international terrorism in the coming years.
The US invasion and occupation of Iraq, for example, created a major opening for Al Qaeda, whose affiliates now represent the Sunni struggle against the Shia-dominated government.
Likewise, regime change in Libya aided the rise of Al Qaeda-linked militants, leading to the killing in Benghazi of the US ambassador.
A system based on sharia (Islamic law) has been imposed, human-rights abuses are legion, and cross-border movement of weapons and militants has undermined the security of Libya’s neighbors.
Meanwhile, America’s support for the regimes in Yemen and Saudi Arabia has contributed to the rise of Al Qaeda in the Arabian Peninsula.
In parts of southern Yemen, an Al Qaeda affiliate, Ansar al-Sharia, functions as a de facto government.
In Syria, where sizable chunks of territory are already under Islamist control and the pro-Al Qaeda Al Nusra Front overshadows the US-backed Free Syrian Army, the Obama administration is staring at the bitter harvest of its previous policy choices.
Airstrikes now would merely make matters worse by undercutting the FSA’s grassroots legitimacy and aiding Islamist forces.
Farther east, the US wants an “honorable” exit from Afghanistan – the longest war in its history – through a peace deal with the Taliban, its main battlefield opponent.
In seeking to co-opt the Taliban – an effort that has resulted in the Taliban establishing what amounts to a diplomatic mission in Doha, Qatar – the US is bestowing legitimacy on a thuggish militia that enforces medieval practices in the areas under its control.
America’s dalliances with Islamist-leaning political forces – and governments – have been guided by the notion that the cloak of Islam helps to protect the credibility of leaders who might otherwise be seen as foreign puppets.
That simply will not work, even in the short term.
On the contrary, until the Egyptian army removed him from the presidency, the Muslim Brotherhood’s Mohamed Morsi was coming to be seen by many as America’s man in Cairo.
In the long term, the US will gain nothing – and risk much – by continuing to back oil sheikhdoms that fund Muslim extremist groups and madrasas from the Philippines and India to South Africa and Venezuela.
By supporting Islamist rulers, the US is contributing to a trend evident from the Maghreb to the badlands of Afghanistan and Pakistan – Muslims killing Muslims.
American policy has also contributed to a growing conflict between Islamist and secular forces in Muslim countries.
This is best illustrated by Turkey, where Obama has ignored Prime Minister Recep Tayyip Erdoğan’s heavy-handed efforts to annul free speech and turn himself into a twenty-first-century Sultan.
There and elsewhere, the US, motivated by the larger geopolitical goal of containing Shia Iran and its regional allies, has embraced Sunni rulers steeped in religious and political bigotry, even though they pose a transnational threat to the values of freedom and secularism.
Moreover, the clash within Islam is likely to be destabilizing regionally and counterproductive to the interests of the free world.
Against this background, Obama should heed the doctrine proposed in 1991 by General Colin Powell.
The Powell doctrine stipulates that the US should use military force only when a vital national-security interest is at stake; the strategic objective is clear and attainable; the benefits are likely to outweigh the costs; adverse consequences can be limited; broad international and domestic support has been obtained; and a plausible exit strategy is in place.
Given the US record since the doctrine was formulated, another criterion should be added: the main beneficiaries of military intervention are not America’s mortal enemies.
Drone Wars
BRUSSELS – “Sometime they’ll give a war and nobody will come,” the American poet Carl Sandburg wrote hopefully in 1936.
His sentiment seems more apt than ever nowadays, but not because humanity has turned pacifistic.
Rather, wars are increasingly fought remotely, with drones – or unmanned aerial vehicles (UAVs) – doing the killing.
Under President Barack Obama, the number of drone strikes carried out by the United States has soared, with more than 300 UAV attacks reported in Pakistan alone.
In March 2011, the US Air Force for the first time trained more pilots for drones than for any other purpose.
This raises serious ethical questions.
With no military personnel risking their lives, UAVs make it easier to kill, and to justify war operations to the public at home.
Moreover, a human being’s reticence to kill is inversely related to the distance between attacker and target.
In the case of a pilot flying drones over Yemen by operating a joystick in Nevada, the threshold to pulling the trigger is dangerously low.
Killing is just a part of the job, to be followed by bowling, perhaps, or a quiet evening at home.
Meanwhile, the mere sound of drones terrorizes whole populations, indicating to enemies and civilians alike that they are being watched and might be attacked at any moment – which could well play into the hands of terrorist recruiters.
From a legal and human-rights point of view, the US drone program is even more alarming.
After all, countries such as Pakistan, Yemen, and Somalia do not belong to declared war zones.
Outside the context of war, in turn, state killings are legal only if they prove absolutely necessary to save lives.
They must be conducted either in self-defense after an attack, or in anticipatory self-defense against an immediate threat, when taking time to discuss non-lethal alternatives is not feasible.
More than a decade after September 11, America’s drone program does not fall into the first category of reactive self-defense.
Likewise, there is no evidence that any presumed terrorist who was killed outside of official war zones in the last few years represented a threat so immediate to US citizens’ lives that preventive and premeditated killing was the only option.
Unless US leaders prove otherwise in every case, American UAV attacks in countries like Pakistan or Yemen should be called what they are: extrajudicial killings.
US State Department legal adviser Harold Koh disagrees, arguing that America is involved in a worldwide “armed conflict with Al Qaeda, as well as the Taliban and associated forces.”
So, Koh claims, drone attacks are part of a global war, fought both in declared war zones and non-war countries; therefore, they are legal.
But, even under this adventurous assumption, human-rights issues arise.
The laws of war condone targeted killings only of “combatants” who “directly participate in hostilities.”
The killings must be proportionate, strategically necessary, and publicly justified.
Avoiding harm to civilians should be the top priority.
At the slightest sign of illegality, an investigation must be conducted, offenders prosecuted, and victims compensated.
The US drone program’s legal basis is entirely unclear, however.
Given that most information about UAV activity is classified, it is impossible to know whether all drone targets directly participated in hostilities.
And, while the Obama administration’s claim of zero or single-digit civilian fatalities may be true according to the official definition, it rests on the premise that any military-age male killed in a drone strike is a militant, unless intelligence posthumously proves otherwise.
A recent report by the law schools at Stanford University and New York University concludes that, in reality, civilian casualties in Pakistan may have accounted for up to 75% of all UAV victims between 2008 and 2011.
Others estimate a lower, but still alarming, rate of 30%.
The legal obligation of proportionality is clearly being violated.
Accountability is also being flouted.
Drone operations are carried out by the Central Intelligence Agency, an organization whose activities are shrouded in secrecy.
And, unlike military personnel, CIA agents enjoy extensive immunity, undermining international legal standards.
Without increased transparency, to declare America’s UAV campaign legal is impossible, both in the context of war and outside of armed conflict.
As long as the US keeps the rest of the world in the dark, illegal acts – including possible war crimes – may be committed with impunity.
Just as citizens worldwide are demanding increased economic and financial accountability, more pressure must be placed on the US to either prove that its drone activities are necessary and legal, or to stop them immediately.
Victims of UAV attacks, their families, and civil-society groups have begun to speak out against America’s questionable drone campaign, and to pursue legal action.
Others should feel encouraged to follow suit.
In the meantime, every drone strike will not only undermine human rights and international humanitarian law, but will also further widen a legal loophole that other governments and armed groups will not hesitate to exploit.
The US drone program does not make the world a safer place; it creates an environment in which unlawful killings can happen virtually anywhere, at any time, violating the fundamental human right not to be arbitrarily deprived of one’s life.
America’s Locust Years
BERKELEY – It is hard right now to write about American political economy.
Nobody knows whether the debt-ceiling tripwire will be evaded; if so, how; or what will happen if it is not.
If no deal to raise the debt ceiling is reached by August 3, interest rates on United States Treasury bonds could spike, or they could remain stable, as investors decide they have other problems to worry about.
Or the US Federal Reserve, the Peoples Bank of China (PBC), or both – or even some other body – could support the market.
Or interest rates could rise if people expect a much weaker global economy – and, in a weaker global economy with no inflation, investors should be holding more US Treasuries, not fewer.
Frankly, no one knows what legislative deal will be struck to raise the debt ceiling.
All we know as of this writing is that a deal would probably involve cuts in near-term spending, meaning weaker growth and higher unemployment over the next 18 months.
And we can assume that it would be repealed and replaced by something else come January 2013, either by a re-elected President Barack Obama, or by a new, Republican president.
So, rather than talking about the US debt ceiling, let us think instead about all of the things that the debt-ceiling impasse has prevented the US government from doing during the past six months – all of the useful policies that might have been debated and enacted, but were not.
The risks imposed by global warming, for example, have not gone away.
The sooner the world starts preparing to deal with those threats, the better.
Another six months should not be lost.
The employment-to-population ratio in the US remains flat – mired at the very low levels to which it fell during the recession.
With households desperately trying to rebuild their balance sheets, and with capital investment remarkably healthy, the only places to boost spending to restore capacity utilization and unemployment to normal levels are exports, government purchases, and construction investment.
But opportunities to pursue the necessary policies have not been grasped.
Here, too, another six months should not be lost.
Likewise, the US could have fulfilled its normal role as the conductor of the international economic orchestra.
It has not, even as the European Union continues to respond inadequately to its own slow-moving solvency crises.
The mandarins of northern Europe continue to measure out a drip-feed of support with coffee spoons.
Another six months have been lost.
America faces long-run and short-run problems: decaying infrastructure, weakening educational systems, and a dysfunctional health-care system that produces sub-standard outcomes at twice the cost of any other industrial country.
Solving any of these three problems would go a long way toward resolving the long-run financing imbalance between current tax rates and America’s long-run social-insurance promises that the debt-ceiling debate’s instigators supposedly want to address.
But the US government won’t address them.
Six months that could have been spent boosting the long-run growth potential of the American economy through infrastructure investment, educational reform, or an overhaul of health-care financing – greatly easing America's long-run deficit and debt dilemmas in the process – have been lost.
During the run-up to World War II, Winston Churchill, speaking in Parliament, lamented “the years that the locusts hath eaten” – the period during which preparatory action to face the great crisis of his day (the rise of Continental fascism) could have been taken, but was not.
Over the past century – with the notable exception of the Great Depression – the US political system has been remarkably good at foreseeing crises long before they have happened, and at least setting the foundation for dealing with them when they have occurred.
But so far in the third millennium, this skill – or simply run of luck – has deserted the US.
My view is that the problem would fix itself easily if only the Republican Party of Dwight D. Eisenhower could stage a comeback (though without Richard Nixon and Joseph McCarthy).
It is becoming increasingly clear, however, that the problem is one not only for the US, but for the rest of the world as well.
Since December 7, 1941, the world has in large part been able to rely on global governance by a somewhat-competent hyperpower.
That America may be gone for good.
If it is, the world needs to develop other institutions for global management – and quickly.
America’s Misplaced Deficit Complacency
CAMBRIDGE – The United States still faces a dangerous fiscal deficit, but one might not know it from the complacency that dominates budget discussions in Washington.
Regarded as an urgent problem until recently, the federal deficit is now being placed on the back burner of American politics.
The shift in thinking was triggered by the revised deficit forecasts recently published by the Congressional Budget Office, the independent technical agency responsible for advising Congress on budget issues.
According to the CBO’s report, the US fiscal deficit will decline from 7% of GDP in 2012 to 4% in 2013.
This reduction reflects the cuts in government spending on defense and non-defense programs mandated by the budget “sequester” that took effect in March, as well as the rise in revenue caused by higher rates for income and payroll taxes since the end of 2012.
More striking is the CBO’s projection that the deficit will continue to decline rapidly, reaching just 2.1% of GDP in 2015, before rising gradually to just 3.5% of GDP in 2023, the end of the CBO’s official forecast period.
That path of deficits implies that the government debt/GDP ratio will remain at about the current level of 75% for the next ten years.
Unfortunately, these headline-grabbing numbers are not likely to be borne out in reality; indeed, even the CBO does not believe that they represent what will occur.
Instead, these official forecasts represent a “baseline” scenario that the CBO is required to present.
The CBO’s “baseline budget” assumes that all of the deficit-reducing features in current law will remain unchanged.
These include, for example, an old legislative requirement that payments to physicians in the government’s Medicare program be reduced sharply in future years, a requirement that Congress has voted each year to “postpone.”
In order to provide better guidance, the CBO presents an “alternative fiscal scenario,” in which such very unlikely features are removed from the forecast.
The alternative forecast implies that the annual budget deficit at the end of ten years will be back up to 4.7% of GDP, with the debt/GDP ratio at 83% and rising.
And those estimates are based on the optimistic assumption that the economy will have returned gradually to full employment with low inflation and moderate interest rates.
Officials and others who favor stimulating growth through increased government spending ignore the CBO’s more realistic alternative scenario.
They buttress their argument that the deficit is not an immediate problem by pointing to very low interest rates on long-term government debt, with a 2% yield on the ten-year Treasury bond and a negative real interest rate on Treasury inflation-protected bonds (TIPS).
But such low rates do not reflect ordinary market sentiment; rather, they stem from the fact that the Federal Reserve is now buying more long-term securities than the government is issuing to finance the budget deficit.
Looking further ahead, the CBO warns that the combination of a rapidly aging population and the increase in medical costs will cause the deficit to rise rapidly, driven by the higher costs of pension and health-care benefits for middle-income retirees.
According to the CBO, without legislative changes, the fiscal deficit in 2037 will be 17% of GDP, while the national debt will increase to more than 195% of GDP.
A large and rising national debt is a serious danger to an economy’s health.
Higher debt-service costs require higher tax rates, which in turn weaken incentives and reduce economic growth.
By the end of the decade, the US will have to pay an amount equivalent to more than one-third of the revenue from personal-income taxes just to pay the interest on the national debt.
Foreign investors now hold more than half of that debt.
Paying interest to them requires sending more goods and services to the rest of the world than the US receives from the rest of the world.
That requires a weaker dollar to make US goods more attractive to foreign buyers and to make foreign goods more expensive to American consumers.
The weaker dollar reduces the US standard of living.
A large national debt also limits the government’s ability to respond to emergencies, including both military threats and economic downturns.
And it makes the US vulnerable to changes in financial-market sentiment, as the European experience has shown.
Reducing future deficits and reversing the rise in the national debt require raising tax revenue and slowing the growth of government pension and health-care programs.
Tax revenue can be raised without increasing marginal tax rates by limiting the tax subsidies that are built into the current tax code.
Those subsidies are a hidden form of government spending on everything from home mortgages and health insurance to the purchase of hybrid cars and residential solar panels.
Slowing the growth of the pension and health-care programs for middle-class retirees cannot be done abruptly.
It must begin by giving notice to those who are now a decade away from retirement – which is why it is important to launch such reforms now.
Unfortunately, the new complacency about future deficits makes it difficult, if not impossible, to enact the legislation needed to begin the process of trimming America’s long-term fiscal deficit.
It is important for policymakers and the public alike to understand the real fiscal outlook and the damage that high deficits will cause if prompt action is not taken.
Merely moving the problem to the back burner will not prevent it from boiling over.
Meeting America’s Growth Challenge
BERKELEY – The United States continues to recover from its deepest economic slump since the Great Depression, but the pace of recovery remains frustratingly slow.
There are several reasons to anticipate modest improvement in 2013, although, as usual, there are downside risks.
Prolonged recession or a financial crisis in Europe and slower growth in emerging markets are the main external sources of potential danger.
At home, political infighting underlies the two greatest risks: failure to reach a deal to raise the debt ceiling and an additional round of fiscal contraction that stymies economic growth.
Since 2010, tepid average annual GDP growth of 2.1% has meant weak job creation.
In both this recovery and the previous two, the rebound in employment growth has been weaker and later than the rebound in GDP growth.
But the loss of jobs in the most recent recession was more than twice as large as in previous recessions, so a slow recovery has meant a much higher unemployment rate for a much longer period.
Weak aggregate demand is the primary culprit for subdued GDP and employment growth.
The 2008 recession was triggered by a financial crisis that erupted after the collapse of a credit-fueled asset bubble decimated the housing market.
Private-sector demand contracts sharply and recovers only slowly after such crises.
The private-sector financial balance swung from a deficit of 3.7% of GDP in 2006, at the height of the boom, to a surplus of about 6.8% of GDP in 2010 and about 5% today.
This represents the sharpest contraction and weakest recovery in private-sector demand since the end of World War II.
Growth in two components of private demand, residential investment and consumption, which account for more than 75% of total spending in the US economy, has been especially slow.
Both sources of demand are likely to strengthen in 2013.
Residential investment is still at an historic low as a share of GDP as a result of overbuilding during the 2003-2008 housing boom and the tsunami of foreclosures that followed.
But the headwinds in the housing market are dissipating.
Home sales, prices, and construction all rose last year, while foreclosures declined.
Residential investment should be a source of output and job growth this year.
Large losses in household wealth, deleveraging from unsustainable debt, weak wage growth, and a decline in labor’s share of national income to a historic low have combined to constrain consumption growth.
Real median household income is still nearly 7% below its 2007 peak, real median household net worth dropped by 35% between 2005 and 2010 (and remains significantly below its pre-recession peak), and about 90% of the income gains during the recovery have gone to the top 1%.
To be sure, the balance-sheet headwinds holding back consumption have eased.
Households have slashed their debt – often through painful foreclosures and bankruptcies – and their debt relative to income has sunk to its 2005 level, significantly below its 2008 peak. &#160;Helped by low interest rates, debt service relative to household income has fallen back to levels not seen since the early 1980’s.
But consumption will be hit by the expiration of the payroll tax cut, which will reduce household income by about $125 billion this year.
Another factor holding back recovery has been weak growth in spending on goods and services by both state and local governments, and more recently by the federal government.
Indeed, since the recession’s onset, state and local governments have cut nearly 600,000 jobs and reduced spending for infrastructure projects by 20%.
The fiscal trends for 2013 are mixed, but negative overall.
While state and local government cutbacks in spending and employment are ending as the recovery boosts their tax revenues, the fiscal drag at the federal level is strengthening.
The American Taxpayer Relief Act – the tax deal reached in early January to avoid the “fiscal cliff” – shaves about $750 billion from the deficit over the next ten years and could take a percentage point off the 2013 growth rate.
In addition, although less widely appreciated, significant reductions in federal spending are already under way, with more likely to come.
Spending cuts and revenue increases that have been legislated since 2011 will reduce the projected deficit by $2.4 trillion over the next decade, with three-quarters coming from spending cuts, almost exclusively in non-defense discretionary programs.
Based on current economic assumptions, the US needs about $4 trillion in savings to stabilize the debt/GDP ratio over the next decade.
It is already three-fifths of the way there.
The so-called sequester (the across-the-board spending cuts scheduled to begin in March), would slash another $100 billion this year and $1.2 trillion over the next decade.
Although it could stabilize the debt/GDP ratio, the sequester would be a mistake: it fails to distinguish among spending priorities, would undermine essential programs, and would mean another significant dent in growth this year.
Moreover, despite the warnings of deficit alarmists, the US does not face an imminent debt crisis.
Currently, the federal debt held by the public is just over 70% of GDP, a level not seen since the early 1950’s.
However, government debt soars by an average of 86% after severe financial crises, so the increase in the federal debt by 70% between 2008 and 2012 is not surprising.
Nor is it alarming.
The US economy grew rapidly for several years after WWII with a higher debt/GDP ratio, and today’s ratio is lower than in all other major industrial countries (and roughly half that of Greece, analogies to which are absurd and misleading).
During the last two years, Washington has been obsessed with the need to cut the deficit and put the debt/GDP ratio on a “sustainable” path, even as global investors have flocked to US government debt, driving interest rates to historic lows.
The considerable progress that has been made on deficit reduction over the next ten years has been overlooked.
Also overlooked have been the immediate challenges of low growth, weak investment, and high unemployment.
It is time to refocus.
The US needs a plan for faster growth, not more deficit reduction.
Evsey Domar, a legendary growth economist (and one of my MIT professors) counseled that the problem of alleviating the debt burden is essentially a problem of achieving growth in national income.
America’s New Progressive Era?
NEW YORK – In 1981, US President Ronald Reagan came to office famously declaring that, “Government is not the solution to our problem.
Government is the problem.”
Thirty-two years and four presidents later, Barack Obama’s recent inaugural address, with its ringing endorsement of a larger role for government in addressing America’s – and the world’s – most urgent challenges, looks like it may bring down the curtain on that era.
Reagan’s statement in 1981 was extraordinary.
It signaled that America’s new president was less interested in using government to solve society’s problems than he was in cutting taxes, mainly for the benefit of the wealthy.
More important, his presidency began a “revolution” from the political right – against the poor, the environment, and science and technology – that lasted for three decades, its tenets upheld, more or less, by all who followed him: George H. W. Bush, Bill Clinton, George W. Bush, and, in some respects, by Obama in his first term.
The “Reagan Revolution” had four main components: tax cuts for the rich; spending cuts on education, infrastructure, energy, climate change, and job training; massive growth in the defense budget; and economic deregulation, including privatization of core government functions, like operating military bases and prisons.
These special interests included Wall Street, Big Oil, the big health insurers, and arms manufacturers.
They demanded tax cuts, and got them; they demanded a rollback of environmental protection, and got it; they demanded, and received, the right to attack unions; and they demanded lucrative government contracts, even for paramilitary operations, and got those, too.
For more than three decades, no one really challenged the consequences of turning political power over to the highest bidders.
In the meantime, America went from being a middle-class society to one increasingly divided between rich and poor.
CEOs who were once paid around 30 times what their average workers earned now make around 230 times that amount.
Once a world leader in the fight against environmental degradation, America was the last major economy to acknowledge the reality of climate change.
Financial deregulation enriched Wall Street, but ended up creating a global economic crisis through fraud, excessive risk-taking, incompetence, and insider dealing.
Maybe, just maybe, Obama’s recent address marks not only the end of this destructive agenda, but also the start of a new era.
Indeed, he devoted almost the entire speech to the positive role of government in providing education, fighting climate change, rebuilding infrastructure, taking care of the poor and disabled, and generally investing in the future.
It was the first inaugural address of its kind since Reagan turned America away from government in 1981.
If Obama’s speech turns out to mark the start of a new era of progressive politics in America, it would fit a pattern explored by one of America’s great historians, Arthur Schlesinger, Jr., who documented roughly 30-year intervals between periods of what he called “private interest” and “public purpose.”
In the late 1800’s, America had its Gilded Age, with the creation of large new industries by the era’s “robber barons” accompanied by massive inequality and corruption.
The subsequent Progressive Era was followed by a temporary return to plutocracy in the 1920’s.
Then came the Great Depression, Franklin Roosevelt’s New Deal, and another 30 years of progressive politics, from the 1930’s to the 1960’s.
The 1970’s were a transition period to the Age of Reagan – 30 years of conservative politics led by powerful corporate interests.
It is certainly time for a rebirth of public purpose and government leadership in the US to fight climate change, help the poor, promote sustainable technologies, and modernize America’s infrastructure.
If America realizes these bold steps through purposeful public policies, as Obama outlined, the innovative science, new technology, and powerful demonstration effects that result will benefit countries around the world.
It is certainly too early to declare a new Progressive Era in America.
Vested interests remain powerful, certainly in Congress – and even within the White House.
These wealthy groups and individuals gave billions of dollars to the candidates in the recent election campaign, and they expect their contributions to yield benefits.
Moreover, 30 years of tax cutting has left the US government without the financial resources needed to carry out effective programs in key areas such as the transition to low-carbon energy.
Still, Obama has wisely thrown down the gauntlet, calling for a new era of government activism.
He is right to do so, because many of today’s crucial challenges – saving the planet from our own excesses; ensuring that technological advances benefit all members of society; and building the new infrastructure that we need nationally and globally for a sustainable future – demand collective solutions.
Implementation of public policy is just as important to good governance as the vision that underlies it.
So the next task is to design wise, innovative, and cost-effective programs to address these challenges.
Unfortunately, when it comes to bold and innovative programs to meet critical human needs, America is out of practice.
It is time to begin anew, and Obama’s full-throated defense of a progressive vision points the US in the right direction.
America’s Opposing Futures
I recently learned something interesting: American international finance economists and American domestically oriented macroeconomists have very different – indeed, opposing – views of the likely consequences of America’s huge current-account deficit.
International finance economists see a financial crisis as likely, followed by a painful and perhaps prolonged recession in the United States.
Domestically oriented macroeconomists, by contrast, see a forthcoming fall in the value of the dollar not as a crisis, but as an opportunity to accelerate growth.
Domestically oriented macroeconomists look at the situation roughly like this: at some point in the future, foreign central banks will become less willing to continue buying massive amounts of dollar-denominated securities in order to prop up the greenback.
When they cease their large-scale dollar-purchase programs, the value of the dollar will fall – and it will fall hard.
But, according to this view, as the dollar’s value declines, US exports will become more attractive to foreigners and American employment will rise, with labor re-allocated to the newly-vibrant export sector.
It will be like what happened in Britain after it abandoned its exchange-rate peg and allowed the pound to depreciate relative to the Deutschmark , or what happened in the US in the late 1980’s, when the dollar depreciated against the pound, the Deutschmark , and – most importantly – the Japanese yen.
International finance economists see a far bleaker future.
They see the end of large-scale dollar-purchase programs by central banks leading not only to a decline in the dollar, but also to a spike in US long-term interest rates, which will curb consumption spending immediately and throttle investment spending after only a short lag.
To be sure, international finance economists also see US exports benefiting as the value of the dollar declines, but the lags in demand are such that the export boost will come a year or two after the decline in consumption and investment spending.
Eight to ten million people will have to shift employment from services and construction into exports and import-competing goods, implying that structural unemployment will rise.
Moreover, there may be a financial panic: large financial institutions with short-term liabilities and long-term assets will have a difficult time weathering a large rise in long-term dollar-denominated interest rates.
This mismatch can cause financial stress and bankruptcy just as easily as banks’ local-currency assets and dollar liabilities caused stress and bankruptcy in the Mexican and East Asian crises of the 1990’s and in the Argentinean crisis of this decade.
When international finance economists sketch this scenario, domestically oriented macroeconomists respond that it sounds like a case of incompetent monetary policy.
Why should the Federal Reserve allow long-term interest rates to spike just because other central banks have ceased their dollar-purchase programs?
Should not the Fed step in and replace them with its own purchases of long-term US Treasury bonds, thereby keeping long-term interest rates at a level conducive to full employment?
To this, international finance economists respond that the Fed does not have the power to do so.
When forced to choose between full employment and price stability, the international finance economists say that the Fed will choose price stability, because its institutional memory of the 1970’s, when inflation ran rampant, remains very strong.
Therefore, since a fall in the value of the dollar raises import prices, and thus functions as a negative shock to the supply side of the economy, the Fed will have to raise, not lower, interest rates, and sell, not buy, bonds.
Serious economists whom I respect enormously find themselves taking strong positions on opposite sides of this debate.
I’m not wise enough to say which side is right, but I certainly know which side I hope is wrong.
America’s Other 30%
NEW HAVEN – The American consumer is but a shadow of its former almighty self.
Personal consumption in the United States expanded at only a 1.5% annual rate in real (inflation-adjusted) terms in the second quarter of 2012 – and that was no aberration.
Unfortunately, it continues a pattern of weakness that has been evident since early 2008.
Over the last 18 quarters, annualized growth in real consumer demand has averaged a mere 0.7%, compared to a 3.6% growth trend in the decade before the crisis erupted.
Never before has the American consumer been this weak for this long.
The cause is no secret.
Consumers made huge bets on two bubbles – housing and credit.
Reckless monetary and regulatory policies turned the humble abode into an ATM, allowing families to extract dollars from bubbles and live beyond their means.
Both bubbles have long since burst, and US households are now dealing with post-bubble financial devastation – namely, underwater assets, record-high debt, and profound shortages of savings.
At the same time, sharply elevated unemployment and subpar income growth have combined to tighten the noose on over-extended consumers.
As a result, American households have hunkered down as never before.
Consumers are diverting what little income they earn away from spending toward paying down debt and rebuilding savings.
That is both logical and rational – and thus not something that the US Federal Reserve can offset with unconventional monetary easing.
American consumers’ unprecedented retrenchment has turned the US economy’s growth calculus inside out.
Consumption typically accounts for 70% of GDP (71% in the second quarter, to be precise).
But the 70% is barely growing, and is unlikely to expand strongly at any point in the foreseeable future.
That puts an enormous burden on the other 30% of the US economy to generate any sort of recovery.
In fact, the other 30% has not done a bad job, especially considering the severe headwinds coming from consumers’ 70%.
The 30% mainly consists of four components – capital spending by firms, net exports (exports less imports), residential construction, and government purchases.
(Technically, the pace of inventory investment should be included, but this is a cyclical buffer between production and sales rather than a source of final demand.)
Given the 0.7% trend in real consumption growth over the past four and a half years, the US economy’s anemic 2.2% annualized recovery in the aftermath of the Great Recession is almost miraculous.
Credit that mainly to the other 30%, especially to strong exports and a rebound in business capital spending.
By contrast, the government sector has been moving in the opposite direction, as state and local governments retrench and federal purchases top out after post-crisis deficit explosions.
The housing sector has started to recover over the past five quarters, but from such a severely depressed level that its growth has had little impact on the overall economy.
Given the strong likelihood that consumers will remain weak for years to come, America’s growth agenda needs to focus on getting more out of the other 30%.
Of the four growth components that fall into this category, two have the greatest potential to make a difference – capital spending and exports.
Prospects for these two sources of growth will not only influence the vigor, or lack thereof, of any recovery; they could well be decisive in bringing about an important shift in the US growth model.
The 70/30 split underscores the challenge: the US must face up to a fundamental rebalancing – weaning itself from excessive reliance on internal demand and drawing greater support from external demand.
Capital spending and exports, which together account for about 24% of GDP, hold the key to this shift.
At just over 10% of GDP, the share of capital spending is well below the peak of nearly 13% in 2000.
But capital spending must exceed that peak if US businesses are to be equipped with state-of-the-art capacity, technology, and private infrastructure that will enable them to recapture market share at home and abroad.
Only then could export growth, impressive since mid-2009, sustain further increases.
And only then could the US stem the rising tide of import penetration by foreign producers.
The other 30% is also emblematic of a deeper strategic issue that America faces – a profound competitive challenge.
A shift to external demand is not there for the asking. It must be earned by hard work, sheer determination, and a long overdue competitive revival.
On that front, too, America has been falling behind.
According to the World Economic Forum’s Global Competitiveness Index, the US slipped to fifth place in 2011-2012, from fourth place the previous year, continuing a general downward trend evident since 2005.
The erosion is traceable to several factors, including deficiencies in primary and secondary education as well as poor macroeconomic management.
But the US also has disturbingly low rankings in the quality of its infrastructure (#24), technology availability and absorption (#18), and the sophistication and breadth of its supply-chain production processes (#14).
Improvement on all counts is vital for America’s competitive revival.
But meeting the challenge will require vigorous growth from America’s other 30% – especially private capital spending.
With the American consumer likely to remain on ice, the same 30% must also continue to shoulder the burden of a sluggish economic recovery.
None of this can occur in a vacuum.
The investment required for competitive revival and sustained recovery cannot be funded without a long-overdue improvement in US saving.
In an era of outsize government deficits and subpar household saving, that may be America’s toughest challenge of all.
America\u0027s Other 87 Deficits
NEW HAVEN – The United States has a classic multilateral trade imbalance.
While it runs a large trade deficit with China, it also runs deficits with 87 other countries.
A multilateral deficit cannot be fixed by putting pressure on one of its bilateral components.
But try telling that to America’s growing chorus of China bashers.
America’s massive trade deficit is a direct consequence of an unprecedented shortfall of domestic saving.
The broadest and most meaningful measure of a country’s saving capacity is what economists call the “net national saving rate” – the combined saving of individuals, businesses, and the government.
It is measured in “net” terms to strip out the depreciation associated with aging or obsolescent capacity.
It provides a measure of the saving that is available to fund expansion of a country’s capital stock, and thus to sustain its economic growth.
In the US, there simply is no net saving any more.
Since the fourth quarter of 2008, America’s net national saving rate has been negative – in sharp contrast to the 6.4%-of-GDP averaged over the last three decades of the twentieth century.
Never before in modern history has the world’s leading economic power experienced a saving shortfall of such epic proportions.
Yet the US found a way to finesse this problem.
Exploiting what&#160;Valéry Giscard d’Estaing called the “exorbitant privilege” of the world’s reserve currency, the US borrowed surplus savings from abroad on very attractive terms, running massive balance-of-payments, or current-account, deficits to attract foreign capital.
The US current account, which was last in balance in 1991, hit a record deficit of $801 billion (6% of GDP) in 2006.
This gap has narrowed in the past couple of years, but much of the improvement probably reflects little more than the temporary impact of an unusually tough business cycle.
This is where America’s multilateral trade deficit enters the equation, for it has long accounted for the bulk of America’s balance-of-payments gap.
Since 2000, it has made up fully 96% of the cumulative current-account shortfall.
And that is what ultimately makes the China-centric blame game so absurd.
Without addressing the root of the problem – America’s chronic saving shortfall – it is ludicrous to believe that there can be a bilateral solution for a multilateral problem.
Yet that is exactly what US officials, together with many prominent economists, believe America needs.
Since the trade deficit is widely thought to put pressure on US jobs and real wages, the US-China trade imbalance has come under special scrutiny in these days of great angst.
Yes, China does account for the largest component of America’s multilateral trade deficit – making up 42% of the total trade gap in 2010.
Conscious outsourcing and supply-chain management decisions by US multinationals play an important role in exaggerating China’s share. But that does little to let China off the hook in the eyes of Washington.
Long-standing charges of currency manipulation provide the proverbial smoking gun that US politicians – of both parties –&#160;believe justifies the imposition of steep tariffs on China’s exports to the US (which totaled $365 billion in 2010).
That was precisely the argument behind the US Senate’s recent overwhelming approval of a “currency bill” that took dead aim on China.
While it may be convenient to hold others accountable for America’s problems, this is bad economics driving bad politics.
In an era of open-ended US government budget deficits and chronic shortfalls in personal saving, America is doomed to suffer subpar savings and massive multilateral trade deficits for as far as the eye can see.
In that vein, closing down trade with China, while failing to address the saving shortfall, is like putting pressure on one end of a water balloon.
The Chinese component of America’s multilateral trade deficit will simply migrate somewhere else – most likely to a higher-cost producer.
That would be the functional equivalent of a tax hike on beleaguered American families – hardly the solution that US politicians are promising.
This is not to ignore important US-China trade issues that need to be addressed.
Market access should be high on the agenda – especially for a sluggish US economy that needs new sources of growth, like exports.
With China now America’s third largest – and by far its most rapidly growing – export market, the US should push hard to expand business opportunities in China, especially as the Chinese economy tilts increasingly toward internal demand.
China should be viewed as an opportunity, not a threat.
At the same time, the US government should come clean with the American public about charges of Chinese currency manipulation and unfair trade practices.
The renminbi has, in fact, appreciated by 30% relative to the US dollar since mid-2005.
In broad multilateral terms – a far more meaningful gauge because it measures a currency’s value against a broad cross-section of a country’s trading partners – the “real effective” renminbi currently stands about 8% above its most recent 12-year average (1998-2010).
Yes, China continues to accumulate a vast fund of foreign-exchange reserves.
But this is as much the result of speculators’ “hot money” plays as it is a conscious and perfectly reasonable effort by Chinese policymakers to remain focused on financial stability and manage currency appreciation in a gradual, disciplined, and orderly fashion.
China-bashing in the US speaks to a corrosive shift in the American psyche.
It deflects attention away from those truly responsible for perpetuating the greatest saving shortfall in history.
Washington has been seduced by the political economy of false prosperity.
That seduction has encouraged America to squander its savings and live beyond its means for nearly two decades.
Now the game is up.
The ultimate test of any nation’s character is to look inside itself at moments of great challenge.
Swept up in the blame game, the US is doing the opposite.
And that could well be the greatest tragedy of all.
After all, America’s 88 deficits did not arise of thin air.
The American Consumer is Not Okay
NEW HAVEN – The spin-doctors are hard at work talking up America’s subpar economic recovery.
All eyes are on households.
Thanks to falling unemployment, rising home values, and record stock prices, an emerging consensus of forecasters, market participants, and policymakers has now concluded that the American consumer is finally back.
Don’t believe it.
First, consider the facts: Over the 21 quarters since the beginning of 2008, real (inflation-adjusted) personal consumption has risen at an average annual rate of just 0.9%.
That is by far the most protracted period of weakness in real US consumer demand since the end of World War II – and a massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.
With household consumption accounting for about 70% of the US economy, that 2.7-percentage-point gap between pre-crisis and post-crisis trends has been enough to knock 1.9 percentage points off the post-crisis trend in real GDP growth. Look no further for the cause of unacceptably high US unemployment.
To appreciate fully the unique character of this consumer-demand shortfall, trends over the past 21 quarters need to be broken down into two distinct sub-periods.
First, there was a 2.2% annualized decline from the first quarter of 2008 through the second quarter of 2009.
This was crisis-driven carnage, highlighted by a 4.5% annualized collapse in the final two quarters of 2008.
Second, this six-quarter plunge was followed, from mid-2009 through early 2013, by 15 quarters of annualized consumption growth averaging just 2% – an upturn that pales in comparison with what would have been expected based on past consumer-spending cycles.
That key point appears all but lost on the consumer-recovery crowd.
In recent speeches and discussions with current and former central bankers, I have been criticized for focusing too much on the 0.9% trend of the past 21 quarters and paying too little attention to the 2% recovery phase of the post-crisis period.
At least it’s a recovery, they claim, and a sign of healing that can be attributed mainly to the heroic, unconventional efforts of the US Federal Reserve.
This brings us to the second part of the argument against optimism: analytics.
One of the first concepts to which an economics student is exposed in a basic macro course is “pent-up” consumer demand.
Discretionary consumption is typically deferred during recessions, especially for long-lasting durable goods such as motor vehicles, furniture, and appliances.
Once the recession ends and recovery begins, a “stock-adjustment” response takes hold, as households compensate for foregone replacement and update their aging durable goods.
Over most of the postwar period, this post-recession release of pent-up consumer demand has been a powerful source of support for economic recovery.
In the eight recoveries since the early 1950’s (excluding the brief pop following the credit-controls-induced slump in the 1980’s), the stock-adjustment response lifted real consumption growth by 6.1%, on average, for five quarters following business-cycle downturns; spurts of 7-8% growth were not uncommon for a quarter or two.
By contrast, the release of pent-up demand in the current cycle amounted to just 3% annualized growth in the five quarters from early 2010 to early 2011.
Moreover, the strongest quarterly gain was a 4.1% increase in the fourth quarter of 2010.
This is a stunning result.
The worst consumer recession in modern history, featuring a record collapse in durable-goods expenditures in 2008-2009, should have triggered an outsize surge of pent-up demand.
Yet it did anything but that.
Instead, the release of pent-up consumer demand was literally half that of previous business cycles.
The third point is more diagnostic: The shockingly anemic pattern of post-crisis US consumer demand has resulted from a deep Japan-like balance-sheet recession.
With the benefit of hindsight, we now know that the 12-year pre-crisis US consumer-spending binge was built on a precarious foundation of asset and credit bubbles.
When those bubbles burst, consumers were left with a massive overhang of excess debt and subpar saving.
The post-bubble aversion to spending, and the related focus on balance-sheet repair, reflects what Nomura Research Institute economist Richard Koo has called a powerful “debt rejection” syndrome.
While Koo applied this framework to Japanese firms in Japan’s first lost decade of the 1990’s, it rings true for America’s crisis-battered consumers, who are still struggling with the lingering pressures of excessive debt loads, underwater mortgages, and woefully inadequate personal saving.
Through its unconventional monetary easing, the Fed is attempting to create a shortcut around the imperative of household sector balance-sheet repair. This is where the wealth effects of now-rebounding housing prices and a surging stock market come into play.
But are these newfound wealth effects really all that they are made out to be?
Yes, the stock market is now at an all-time high – but only in current dollars.
In real terms, the S&amp;P 500 is still 20% below its January 2000 peak. Similarly, while the Case-Shiller index of US home prices is now up 10.2% over the year ending March 2013, it remains 28% below its 2006 peak.
Wealth creation matters, but not until it recoups the wealth destruction that preceded it.
Sadly, most American households are still far from recovery on the asset side of their balance sheets.
Moreover, though the US unemployment rate has fallen, this largely reflects an alarming decline in labor-force participation, with more than 6.5 million Americans since 2006 having given up looking for work.
At the same time, while consumer confidence is on the mend, it remains well below pre-crisis readings.
In short, the American consumer’s nightmare is far from over.
Spin and frothy markets aside, the healing has only just begun.
America’s Political Recession
BERKELEY – The odds are now about 36% that the United States will be in a recession next year.
The reason is entirely political: partisan polarization has reached levels never before seen, threatening to send the US economy tumbling over the “fiscal cliff” – the automatic tax increases and spending cuts that will take effect at the beginning of 2013 unless Democrats and Republicans agree otherwise.
More than a century ago, during the first Gilded Age, American politics was sharply polarized as well.
In 1896, future President Theodore Roosevelt was a Republican attack dog.
He denounced Democratic presidential candidate William Jennings Bryan as a mere puppet of the sinister governor of Illinois, John Peter Altgeld.
Bryan, Roosevelt said, “would be as clay in the hands of the potter under the astute control of the ambitious and unscrupulous Illinois communist.”
The “free coinage of silver” would be “but a step towards the general socialism which is the fundamental doctrine of his political belief.”
He and Altgeld “seek to overturn the...essential policies which have controlled the government since its foundation.”
Such language is as extreme as any we hear today – and from a man who was shortly to become Vice President (and later President, following the assassination of William McKinley).
We have heard Texas Governor Rick Perry call obliquely for the lynching of his fellow Republican, Federal Reserve Chairman Ben Bernanke, should he come to the Lone Star State.
And we have seen Kansas Secretary of State Kris Kobach explore the possibility of removing President Barack Obama from the ballot in Kansas, because, Kobach suggested, Obama is “not a natural-born citizen.”
But neither Perry nor Kobach is likely ever to be a US president, whereas Theodore Roosevelt was more than a partisan.
He was happy to make deals with Democrats – to put himself at the head not just of the Republican Party but of the bipartisan Progressive coalition, trying either to yoke the two forces together or to tack back and forth between them to achieve legislative and policy goals.
Obama broadly follows Ronald Reagan’s (second-term) security policy, George H.W. Bush’s spending policy, Bill Clinton’s tax policy, the bipartisan Squam Lake Group’s financial-regulatory policy, Perry’s immigration policy, John McCain’s climate-change policy, and Mitt Romney’s health-care policy (at least when Romney was governor of Massachusetts).
And yet he has gotten next to no Republicans to support their own policies.
Indeed, like Clinton before him, Obama has been unable to get Republican senators like Susan Collins to vote for her own campaign-finance policies, McCain to vote for his own climate-change policy, and – most laughably – Romney to support his own health-care plan.
Likewise, he has been unable to get Republican Vice-Presidential candidate Paul Ryan to endorse his own Medicare cost-control proposals.
There are obvious reasons for this.
A large chunk of the Republican base, including many of the party’s largest donors, believes that any Democratic president is an illegitimate enemy of America, so that whatever such an incumbent proposes must be wrong and thus should be thwarted.
And the Republican cadres believe this of Obama even more than they believed it of Clinton.
This view clearly influences Republican office-holders, who fear the partisan beast that mans their campaigns’ phone banks and holds the purse strings.
Moreover, ever since Clinton’s election in 1992, those at the head of the Republican Party have believed that creating gridlock whenever a Democrat is in the White House, and thus demonstrating the government’s incapacity to act, is their best path to electoral success.
That was the Republicans’ calculation in 2011-2012.
And November’s election did not change the balance of power anywhere in the American government: Obama remains President, the Republicans remain in control of the House of Representatives, and the Democrats control the Senate.
Now, it is possible that Republican legislators may rebel against their leaders, arguing that they ran for office to govern, not to paralyze the government in the hope that doing so will give the party power to reign as it wishes after the next election.
It is possible that Republican leaders like Representatives John Boehner and Eric Cantor and Senator Mitch McConnell will conclude that their policy of obstruction has been a failure.
They might note that, although the economy remains deeply troubled and depressed in the aftermath of a financial crisis for which they set the stage, Obama’s policies have been by far the most successful of those in any major advanced country, and conclude that he has been a relatively good president, and one worth supporting.
But don’t count on it.
Right now, every senior politician in America is telling their favorites in the press that they are confident that compromise on the “fiscal cliff” will be reached before the end of December.
But they are telling their favorites this because they think that pessimism now will lead to their being blamed for gridlock later.
It seems to me that the odds are around 60% that real negotiation will not begin until tax rates go up on January 1.
And it seems to me that, if gridlock continues into 2013, the odds are 60% that it will tip the US back into recession.
Bye-Bye, Middle East?
PARIS – For some time now, a certain strategic vision has been gaining traction: the United States is becoming energy-independent, paving the way for its political retreat from the Middle East and justifying its strategic “pivot” toward Asia.
This view seems intuitively correct, but is it?
Energy-hungry America has long depended on the global market to meet domestic demand.
In 2005, the US imported 60% of the energy that it consumed.
Since then, however, the share of imports has decreased, and it should continue to do so.
The US is expected to become energy self-sufficient in 2020, and to become an oil exporter by 2030.
This scenario would grant the US three enormous advantages.
It would enhance US economic competitiveness, especially relative to Europe, given the lower costs involved in the extraction of shale gas.
It would also reduce America’s exposure to growing unrest in the Arab world.
Finally, it would increase the relative vulnerability of America’s main strategic rival, China, which is becoming increasingly dependent on Middle East energy supplies.
These facts obviously need to be taken seriously, but their implications for US foreign policy in the Middle East should not be too hastily drawn.
Above all, though energy dependence is a key element of US policy in the region, it is far from being the only factor.
Israel’s security and the desire to contain Iran are equally important.
Moreover, the Middle East’s role in the global geopolitics of energy will grow in the coming decades, making it difficult to see how a superpower like the US could simply walk away from the region.
Within the next 15 years, OPEC countries will account for 50% of global oil production, compared to only 42% today.
Furthermore, the country on which this increase will most likely hinge is Iraq.
Could the US ignore a country that in roughly ten years will become the world’s second-largest oil exporter, generating more than $200 billion annually in revenue, while increasingly being dominated by an authoritarian Shia regime that is close to Iran?
Would it withdraw in the face of the consequent strategic threat to its three allies – Saudi Arabia, Turkey, and Israel – in the region?
Such a possibility seems even more far-fetched as long as the Iranian nuclear crisis remains unresolved and the Syrian crisis continues to widen the region’s Shia-Sunni divide (reflected in increased tension between Turkey and Iran).
Even as US President Barack Obama was visiting Asia in November – a trip meant to underscore America’s “pivot” – he was forced to devote considerable time and attention to mediating a cease-fire between Israel and Hamas in Gaza.
Indeed, if oil were truly America’s only or paramount interest in the Middle East, its special relationship with Israel would be mystifying, given the harm that it implies for US interests among Arab oil exporters.
Even when its energy dependence on the Middle East was at its peak, the US rarely altered its policy of support for Israel.
It is also important to bear in mind that in 1973, the US suffered less from the OPEC oil embargo than Europe did, even though America, which had resupplied Israel in its war with Egypt and Syria in October of that year, was the primary target.
In the end, America’s position in the region strengthened after Egypt became a US ally and made peace with Israel.
China’s growing interest in the Middle East also decreases the likelihood of an American withdrawal.
The US will remain concerned about ensuring the security of energy supplies for its Asian allies, which, like China, are increasingly dependent on the region’s oil exporters.
Nevertheless, while an American withdrawal from the Middle East seems highly unlikely, US exposure to the region will indeed decline; as that happens, America’s role there will probably become more subdued – and perhaps more cynical.
Its involvement in the Israeli-Palestinian conflict will likely be limited to maintaining the status quo rather than seeking a comprehensive settlement.
This stance – suggested by America’s opposition to granting Palestine observer-state status at the United Nations – would amount to an admission by the US that it has given up on the creation of two states in the Middle East.
That would certainly satisfy Israeli Prime Minister Binyamin Netanyahu and the Palestinian fringe seeking to weaken the Palestinian Authority.
But it would fully vindicate those who believe that Obama is more a man of good will than a visionary.
America’s Perpetual Christmas
Has the United States transcended the laws of economics?
As the New Year begins, the US continues to race ahead of its rich-country counterparts.
The gargantuan US trade deficit?
No problem.
In 2005, it widened further, and the dollar only strengthened.
Low investment and a deteriorating primary education system?
Not to worry.
The super-flexible US economy keeps managing to produce more with less.
Nor are there any signs of America’s economic hegemony starting to fold under the weight of maintaining its unilateral military dominance.
Instead of feeling the pinch of wartime privations, like in any ordinary country, American consumers are binging as if it were Christmas all year round.
There are those who truly believe in the idea that America is exceptional. Those true believers argue that America’s consumers can long pursue their spendthrift ways because their country’s economy is better than everyone else’s.
The US labor market is more flexible than Europe’s, enabling it to react more nimbly to the ever shifting sands of globalization. And, unlike most countries, especially in Latin America and Asia, the US system ruthlessly prunes weak corporate leadership.
Moreover, the true believers cite America’s better-funded and hyper-competitive university system, which sucks in a disproportionate share of the world’s top students and researchers.
Many ultimately choose to immigrate to America permanently, and it is relatively easy for them to do so, thanks to a society that still welcomes outsiders with open arms (even if things have become more difficult since 2001).
On top of all this, the US military, rather than being a burden, feeds the country’s technological superiority by subsidizing basic research.
By contrast, skeptics hold that the US economy already contains the seeds of its own socio-economic decline.
They point to worsening income inequality, as images beamed worldwide from post-hurricane New Orleans illustrated all too clearly.
Poor children do not have reasonable access to health care. Nor are the non-poor faring particularly well, as wage growth has remained virtually flat for a very long time, even as corporate profits are booming.
Indeed, this disconnect may explain why polls do not give President Bush the credit for economic management that his strong record would seem to merit.
Nor does it help Americans’ mood that they spend far more of their lives working than do citizens in Europe or, these days, even Japan.
All of these factors place deep stresses on the social fabric which, so the skeptics argue, will ultimately play out in the political arena.
Interestingly, both sides cite America’s gaping trade deficit – believe it or not, the US is soaking up two-thirds of global excess saving – to support their arguments.
The true believers view the deficits as evidence that the world recognizes how special the US is and wants to buy in.
Skeptics see an empire living on borrowed money and borrowed time.
So which is it?
In my view, those who think that America is about to collapse are likely to be disappointed.
Nevertheless, I suspect that the age of American exceptionalism is near an end, and soon per capita income in Europe and Japan will approach that of the US, rather than falling farther behind.
Though the next few years are likely to underscore some of the weaknesses that the skeptics highlight, the end will come mainly because other countries will find creative ways to mimic the most effective US institutions, albeit within their own legal, political, and social frameworks.
We would do well to recall how, at the beginning of the 1990’s, book after book was still being written urging US and European corporations to imitate Japan or face certain doom.
The last 15 years have of course revealed deep flaws in Japan’s financial system.
But another major factor contributing to Japan’s decline was that firms elsewhere began adopting Japanese methods, such as just-in-time supply chains.
Surely, imitation will someday impinge on superior US growth performance as well.
Perhaps the biggest weakness in the true believers’ argument is the trade deficit.
For the moment, America’s ability to borrow vast sums at low interest rates acts like a huge dose of steroids on the economy.
It artificially props up consumption growth and allows the government to defer hard choices between taxes and military expenditures.
At some point, the party is going to end.
The unwinding of the US economy might even begin in 2006, particularly if Japan continues to grow out of its doldrums, the US housing market softens dramatically, and Europe’s economic recovery accelerates.
Individually, these are each highly plausible scenarios, and collectively they would hit the US trade deficit like a perfect storm.
Perhaps the end will come in a different way, but it is difficult to imagine the age of US exceptionalism lasting indefinitely.
Can the end come abruptly in 2006?
This is not the most likely scenario, but it is not unthinkable.
America’s Strategy Vacuum
NEW HAVEN – Apparently, policymakers at the Federal Reserve are having second thoughts about the wisdom of open-ended quantitative easing (QE).
They should.
Not only has this untested policy experiment failed to deliver an acceptable economic recovery; it has also heightened the risk of another crisis.
The minutes of the January 29-30 meeting of the Fed’s Federal Open Market Committee (FOMC) speak to a simmering discontent: “[M]any participants…expressed some concerns about potential costs and risks arising from further asset purchases.”
As serious as these concerns may be, they overlook what could well be the greatest flaw in the Fed’s unprecedented gambit: an emphasis on short-term tactics over longer-term strategy.
Blindsided by the crisis of 2007-2008, the Fed has compounded its original misdiagnosis of the problem by repeatedly doubling down on tactical responses, with two rounds of QE preceding the current, open-ended iteration.
The FOMC, drawing a false sense of comfort from the success of QE1 – a massive liquidity injection in the depths of a horrific crisis – mistakenly came to believe that it had found the right template for subsequent policy actions.
That approach might have worked had the US economy been afflicted by a cyclical disease – a temporary shortfall of aggregate demand.
In that case, countercyclical policies – both fiscal and monetary – could eventually be expected to plug the demand hole and get the economy going again, just as Keynesians argue.
But the US is not suffering from a temporary, cyclical malady. It is afflicted by a very different disease: a protracted balance-sheet recession that continues to hobble American households, whose consumption accounts for roughly 70% of GDP.
Two bubbles – property and credit – against which American families borrowed freely, have long since burst. But the aftershocks linger: Household-debt loads were still at 113% of disposable personal income in 2012 (versus 75% in the final three decades of the twentieth century), and the personal-saving rate averaged just 3.9% last year (compared to 7.9% from 1970 to 1999).
Understandably fixated on balance-sheet repair, US consumers have not taken the bait from their monetary and fiscal authorities.
Instead, they have cut back on spending.
Gains in inflation-adjusted personal-consumption expenditure have averaged a mere 0.8% over the past five years – the most severe and protracted slowdown in consumer demand growth in the post-World War II era.
The brute force of massive monetary and fiscal stimulus rings hollow as a cyclical remedy to this problem.
Another approach is needed.
The focus, instead, should be on accelerating the process of balance-sheet repair, while at the same time returning monetary and fiscal policy levers to more normal settings.
Forgiveness of “underwater” mortgages (where the outstanding loan exceeds the home’s current market value), as well as reducing the foreclosure overhang of some 1.5 million homes, must be part of that solution.
How else can the crisis-battered housing market finally clear for the remainder of US homeowners?
The same can be said for enhanced saving incentives, which would contribute to longer-term financial security for American households, most of which suffered massive wealth losses in the Great Recession.
Expanded individual retirement accounts and 401K pension schemes, special incentives for low-income households (most of which have no retirement plans), and an end to the financial repression that the Fed’s zero-interest-rate policy imposes on savers must also be part of the solution.
Yes, these are controversial policies.
Debt forgiveness raises thorny ethical concerns about condoning reckless and irresponsible behavior.
But converting underwater “non-recourse” mortgage loans, where only the house is at risk, into so-called “recourse liabilities,” for which nonpayment would have consequences for all of a borrower’s assets, could address this concern, while simultaneously tempering America’s culture of leverage with a much greater sense of responsibility.
Timing is also an issue, especially with respect to saving incentives.
To avoid the shortfall in aggregate demand that might arise from an abrupt surge in saving, these measures should be phased in over a period of 3-5 years.
The main benefit of these proposals is that they are more strategic than tactical – better aligned with the balance-sheet problems that are actually afflicting the economy.
As the quintessential laissez-faire system, the US has outsourced strategy to the invisible hand of the market for far too long.
That has left the government locked into a reactive and often misguided approach to unexpected problems.
Thus, the Fed is focused on cleaning up after a crisis rather than on how to avoid another one.
The same is true of US fiscal policy, with an event-driven debate that now has ever-shorter time horizons: the fiscal cliff on January 1, sequestration of expenditures on March 1, expiration of the continuing budget resolution on March 27, and the new May 18 debt-ceiling limit.
A compliant bond market, which may well be the next bubble, is mistakenly viewed as the ultimate validation of this myopic approach.
The dangers of America’s strategy vacuum and the related penchant for short-termism have been mounting for some time.
Harvard Business School professor Michael Porter famously raised this concern in a 1996 article in the Harvard Business Review.
His focus was on corporate decision-making and misaligned incentives leading to a worrisome dichotomy between the short-term tactics of “operational effectiveness” (cost cutting, outsourcing, and reengineering) and the long-term visionary bets that frame successful strategies.
While Porter’s critique was directed at business managers, it bears critically on the current US policy debate.
A successful long-term strategy cannot be seen as a succession of short-term fixes.
The internal debate in the FOMC represents a healthy and long-overdue recognition that the central bank may be digging itself into an ever-deeper hole by committing to misguided policies aimed at the wrong problem.
A comparable debate is raging over fiscal policy.
Can America finally face up to the perils of its strategy vacuum?
America’s Political Class Struggle
NEW YORK – America is on a collision course with itself.
This month’s deal between President Barack Obama and the Republicans in Congress to extend the tax cuts initiated a decade ago by President George W. Bush is being hailed as the start of a new bipartisan consensus.
I believe, instead, that it is a false truce in what will become a pitched battle for the soul of American politics.
As in many countries, conflicts over public morality and national strategy come down to questions of money.
In the United States, this is truer than ever.
The US is running an annual budget deficit of around $1 trillion, which may widen further as a result of the new tax agreement.
This level of annual borrowing is far too high for comfort.
It must be cut, but how?
The problem is America’s corrupted politics and loss of civic morality. One political party, the Republicans, stands for little except tax cuts, which they place above any other goal.
The Democrats have a bit wider set of interests, including support for health care, education, training, and infrastructure.
But, like the Republicans, the Democrats, too, are keen to shower tax cuts on their major campaign contributors, predominantly rich Americans.
The result is a dangerous paradox.
The US budget deficit is enormous and unsustainable.
The poor are squeezed by cuts in social programs and a weak job market.
One in eight Americans depends on Food Stamps to eat.
Yet, despite these circumstances, one political party wants to gut tax revenues altogether, and the other is easily dragged along, against its better instincts, out of concern for keeping its rich contributors happy.
This tax-cutting frenzy comes, incredibly, after three decades of elite fiscal rule in the US that has favored the rich and powerful.
Since Ronald Reagan became President in 1981, America’s budget system has been geared to supporting the accumulation of vast wealth at the top of the income distribution.
Amazingly, the richest 1% of American households now has a higher net worth than the bottom 90%.
The annual income of the richest 12,000 households is greater than that of the poorest 24 million households.
The Republican Party’s real game is to try to lock that income and wealth advantage into place.
They fear, rightly, that sooner or later everyone else will begin demanding that the budget deficit be closed in part by raising taxes on the rich.
After all, the rich are living better than ever, while the rest of American society is suffering.
It makes sense to tax them more.
The Republicans are out to prevent that by any means.
This month, they succeeded, at least for now.
But they want to follow up their tactical victory – which postpones the restoration of pre-Bush tax rates for a couple of years – with a longer-term victory next spring.
Their leaders in Congress are already declaring that they will slash public spending in order to begin reducing the deficit.
Ironically, there is one area in which large budget cuts are certainly warranted: the military.
But that is the one item most Republicans won’t touch.
They want to slash the budget not by ending the useless war in Afghanistan, and by eliminating unnecessary weapons systems, but by cutting education, health, and other benefits for the poor and working class.
In the end, I don’t think they will succeed.
For the moment, most Americans seem to be going along with Republican arguments that it is better to close the budget deficit through spending cuts rather than tax increases.
Yet when the actual budget proposals are made, there will be a growing backlash.
With their backs against the wall, I predict, poor and working-class Americans will begin to agitate for social justice.
This may take time.
The level of political corruption in America is staggering.
Everything now is about money to run electoral campaigns, which have become incredibly expensive.
The mid-term elections cost an estimated $4.5 billion, with most of the contributions coming from big corporations and rich contributors.
These powerful forces, many of which operate anonymously under US law, are working relentlessly to defend those at the top of the income distribution.
But make no mistake: both parties are implicated.
There is already talk that Obama will raise $1 billion or more for his re-election campaign.
That sum will not come from the poor.
The problem for the rich is that, other than military spending, there is no place to cut the budget other than in areas of core support for the poor and working class.
Is America really going to cut health benefits and retirement income? Will it really balance the budget by slashing education spending at a time when US students already are being out-performed by their Asian counterparts?
Will America really let its public infrastructure continue to deteriorate?
The rich will try to push such an agenda, but ultimately they will fail.
Obama swept to power on the promise of change.
So far there has been none.
His administration is filled with Wall Street bankers.
His top officials leave to join the banks, as his budget director Peter Orszag recently did.
He is always ready to serve the interests of the rich and powerful, with no line in the sand, no limit to “compromise.”
If this continues, a third party will emerge, committed to cleaning up American politics and restoring a measure of decency and fairness.
This, too, will take time.
The political system is deeply skewed against challenges to the two incumbent parties.
Yet the time for change will come.
The Republicans believe that they have the upper hand and can pervert the system further in favor of the rich.
I believe that they will be proved wrong.
America\u0027s Problems Run Deeper than Wall Street
CAMBRIDGE – With less than two months remaining before America’s presidential election, much attention is focused on the state of the American economy and the challenges that it will present to the next president.
We are in the midst of a financial crisis caused by the serious mispricing of all kinds of risks and by the collapse of the housing bubble that developed in the first half of this decade.
What started as a problem with sub-prime mortgages has now spread to houses more generally, as well as to other asset classes.
The housing problem is contributing to the financial crisis, which in turn is reducing the supply of credit needed to sustain economic activity.
Indeed, the financial crisis has worsened in recent weeks, reflected in the US Federal Reserve’s takeover of quasi-government mortgage lenders Fannie Mae and Freddie Mac – which may cost American taxpayers hundreds of billions of dollars – as well as the bankruptcy of Lehman Brothers and the sale of Merrill Lynch.
Ultimately, these financial failures reflect the downward spiral of house prices and the increasing number of homes with negative equity, i.e., with substantial mortgage debt in excess of market values.
Negative equity is significant because mortgages in the United States are generally “no recourse” loans.
If a homeowner defaults, creditors can take the house, but they cannot take other property or income to make up any unpaid balance.
Even in those states where mortgages are not “no recourse” loans, creditors generally do not pursue the assets or income of individuals who default.
We cannot be sure about how much further house prices will fall.
Experts say another 15% decline is required just to return to the pre-bubble price path.
But there is nothing to stop the decline from continuing once it reaches that point.
The growing gap between mortgage debts and house prices will continue to increase the rate of defaults.
Many homeowners who can afford to make their mortgage payments will choose to default, move to rental housing, and wait to purchase until house prices have declined further.
As homeowners with large negative equity default, the foreclosed homes contribute to the excess supply that drives prices down further.
And the lower prices lead to more negative equity and therefore to more defaults and foreclosures.
It is not clear what will stop this self-reinforcing process.
Declining house prices are key to the financial crisis and the outlook for the economy, because mortgage-backed securities, and the derivatives based on them, are the primary assets that are weakening financial institutions.
Until house prices stabilize, these securities cannot be valued with any confidence.
And that means that the financial institutions that own them cannot have confidence in the liquidity or solvency of potential counterparties – or even in the value of their own capital.
Without this confidence, credit will not flow and economic activity will be constrained.
Moreover, because financial institutions’ assets were bought mainly with borrowed money, the shortage of credit is exacerbated by their need to deleverage.
Since raising capital is difficult and costly, they deleverage by lending less.
But the macroeconomic weakness in the US now goes beyond the decreased supply of credit. Falling house prices reduce household wealth and therefore consumer spending.
Falling employment lowers wage and salary incomes.
The higher prices of food and energy depress real incomes further.
And declining economic activity in the rest of the world is lowering demand for US exports.
The US Federal Reserve has, in my judgment, responded appropriately by reducing the federal funds interest rate sharply and creating a variety of new credit facilities.
The low interest rate helped by making the dollar more competitive, but otherwise monetary policy appears to have lost traction because of the condition of the housing sector and the dysfunctional state of the credit markets.
The US Congress and the Bush administration enacted a $100 billion tax rebate in an attempt to stimulate consumer spending.
Those of us who supported this policy generally knew that history and economic theory implied that such one-time fiscal transfers have little effect, but we thought that this time might be different.
Our support was, in the words of Samuel Johnson, a triumph of hope over experience.
In the end, our hopes were frustrated.
The official national income accounting data for the second quarter are now available, and they show that the rebates did very little to stimulate spending.
More than 80% of the rebate dollars were saved or used to pay down debt.
Very little was added to current spending.
So that is where the US is now: in the middle of a financial crisis, with the economy sliding into recession, monetary policy already at maximum easing, and fiscal transfers impotent.
That is an unenviable situation, to say the least, for any incoming president.
Obama’s Burmese Gamble
ARLINGTON – The rapprochement between the United States and Myanmar (Burma) has proceeded at a blistering pace.
A year ago, the two countries did not even have ambassadors in each other’s capitals.
In May, President Thein Sein became the first leader from Myanmar to visit the White House in nearly a half-century.
But has Barack Obama’s administration been too quick to embrace what was, until recently, one of the world’s most repressive regimes?
Or, on the contrary, is decisive US support essential to Myanmar’s fledgling reform process?
Until the recent opening, Myanmar, which gained independence in 1948, had been ruled by a secretive military junta since 1962.
As recently as 2010, the regime held elections so blatantly rigged that the main opposition party refused to participate.
But in 2011, shortly before assuming the presidency, Sein, a general who served as Prime Minister under the junta, began to take steps that impressed even the most skeptical observers.
Unlike the token gestures of reform offered by previous rulers, Sein’s actions appeared substantive and meaningful.
One important change was the release of hundreds of political prisoners, including the regime’s most prominent opponent, Aung San Suu Kyi, who had been under house arrest for nearly 15 years.
Moreover, Sein initiated a dialogue with Suu Kyi, a Nobel Peace Prize winner and the leader of the National League for Democracy (NLD), about a transition to civilian rule.
The subsequent elections bolstered hope for Myanmar’s democratic future.
In 1990, when the NLD won 81% of the seats in Parliament, the junta promptly voided the results and arrested Suu Kyi.
In 2012, the NLD won 43 of the 44 seats that it contested, and the military accepted Suu Kyi as the reform movement’s legitimate leader.
Furthermore, Sein has reached out to the Karen, Kachin, and other ethnic minorities – groups whose members have suffered decades of official persecution and mistreatment.
And efforts to open Myanmar’s economy to international trade have transformed the country’s commercial capital, Yangon (Rangoon), with businesspeople now arriving on direct flights from at least a half-dozen foreign capitals and once-empty streets now congested with imported cars.
But, in some areas, reform has been painfully slow.
In fact, when it comes to human rights and minority protections, Myanmar may even be regressing.
The liberalization process has exposed the country’s long-standing religious divisions, leading to a wave of sectarian violence aimed primarily at the minority Muslim community.
From coastal Rakhine to inland towns like Meiktila and Tatkon, Buddhist monks have incited violence against Muslims (and sometimes vice versa), with local officials often tacitly permitting religious bloodletting.
At his meeting with Sein in Washington, DC, Obama condemned the violence against Myanmar’s Muslims, which has displaced many of them.
On the same day, the US State Department released its annual report on religious freedom, in which Myanmar was included among the world’s eight worst offenders.
This has not always been the case.
Although Myanmar is an overwhelmingly Buddhist country, dozens of religious and ethnic communities have long lived there side by side.
In the heart of Yangon, the golden dome of the Sule Pagoda stands just across the street from the minarets of the Bengali Mosque.
In order to achieve the peace and stability needed to consolidate Myanmar’s democratic transition, both Sein and Suu Kyi should do more to establish themselves as representatives of all of Myanmar’s citizens.
Muslims need to be assured of their personal security and guaranteed full civil rights.
The Obama administration has staked significant political capital on the wager that Myanmar’s promise may finally bear fruit.
And, indeed, the rate of change in Myanmar over the last two years has been nothing short of remarkable.
But, as Sein acknowledged at the White House, Myanmar’s government “has been encountering obstacles and challenges along [its] democratization process.”
America’s Reactionary Feminists
NEW YORK – It is obvious that the left and the media establishment in the United States cannot fully understand the popular appeal of the two Republican tigresses in the news – first Sarah Palin, and now, as she consolidates her status as a Republican presidential front-runner, Michele Bachmann.
What do they have that other candidates don’t –&#160;and that so many Americans seem to want?
Both Bachmann and Palin are regularly derided in the mainstream press.
In Palin’s case, the dominant perception is that she is an intellectual lightweight: a clip of her unable to mention a single newspaper or news magazine that she reads regularly got millions of hits on YouTube during the last presidential election.
Bachmann, on the other hand,&#160;is portrayed as being slightly unhinged.
Indeed, I can attest from personal experience that to debate her is to encounter someone who is absolutely certain of facts that must exist somewhere in a parallel universe.
But it would be a mistake simply to dismiss their appeal with no effort to comprehend its source.
This is especially true of Bachmann.
Palin has not managed to secure the support and mentorship of the Republican Party establishment, and will continue to showcase her odd appeal as a media personality.
But Bachman, weirdly, might become President of the United States.
The nature of their attraction has to do with two strains in American thought to which the US left and media establishment are truly blind.
One is the American tradition of populist demagoguery – a tradition that, in the twentieth century, included the racist Father Charles Coughlin in the 1930’s, the anti-Communist witch-hunter Joe McCarthy in the 1950’s, and the radical Malcolm X in the 1960’s.
Populist leaders inspire passionate devotion, usually in people who feel (and often are) economically, politically, and culturally marginalized.
These populist movements’ energy can be directed for good or ill, but demagogues in America embrace similar tactics to fuel their rise to visibility and power.
They use emotive rhetoric.
They often invent shadowy networks of “elite” forces ranged against the ordinary, decent American.
They create an “us versus them” scenario.
And they ask their listeners to believe that they alone will restore American dignity and articulate the wishes of the unheard.
Palin and Bachmann speak this highly personal or emotional language, which even the most rock-ribbed male Republican finds difficult to emulate.
In the last three decades, America’s male-dominated politics has become increasingly wonky, abstract, and professionalized.
This is bad for demagoguery, but it does not inhibit the tigresses on the right, who did not come up through the “old boy’s club.”
As a result, Palin is free to talk about “death panels” – a wholly invented threat of President Barack Obama’s health-care reform – and Bachmann can summon the spirit of McCarthy to raise the equally bizarre specter of socialism’s tentacles infiltrating the highest levels of government.
Both can issue homespun appeals as “hockey moms” or “soccer moms” – precisely the type of emotionalism that more cut-and-dried professional male politicians, even (or especially) at the top of the party, cannot manage to deliver.
The second reason that Bachmann and Palin appeal to so many Americans – and this should not be underestimated, either – has to do with a serious historical misreading of feminism.
Because feminism in the 1960’s and 1970’s was articulated via the institutions of the left – in Britain, it was often allied with the labor movement, and in America, it was reborn in conjunction with the emergence of the New Left – there is an assumption that feminism itself must be leftist.
In fact, feminism is philosophically as much in harmony with conservative, and especially libertarian, values – and in some ways even more so.
The core of feminism is individual choice and freedom, and it is these strains that are being sounded now more by the Tea Party movement than by the left.
But, apart from these sound bites, there is a powerful constituency of right-wing women in Britain and Western Europe, as well as in America, who do not see their values reflected in collectivist social-policy prescriptions or gender quotas.
They prefer what they see as the rugged individualism of free-market forces, a level capitalist playing field, and a weak state that does not impinge on their personal choices.
Many of these women are socially conservative, strongly supportive of the armed forces, and religious – and yet they crave equality as strongly as any leftist vegetarian in Birkenstocks.
It is blindness to this perfectly legitimate approach to feminism that keeps tripping up commentators who wish to dismiss women like Margaret Thatcher, or Muslim women, or now right-wing US women leaders, as somehow not being the “real thing.”
But these women are real feminists – even if they do not share policy preferences with the already recognized “sisterhood,” and even if they themselves would reject the feminist label.
In the case of Palin – and especially that of Bachmann – we ignore the wide appeal of right-wing feminism at our peril.
America\u0027s Retreat from Asia
The United States' planned withdrawal of troops from Asia, which President George W. Bush announced on August 16, need not harm peace and stability in the region and particularly in Korea.
But a key condition for a smooth redeployment of US troops is close consultations by America with its allies, something it has not done well up to now.
South Korea and Japan need to have their views taken into serious account if this now inevitable withdrawal is to succeed.
By contrast, unilaterally announcing the withdrawal - and then unilaterally implementing it - may harm the very purpose that the remaining US troops in Asia are intended to serve: assuring deterrence, stability, and nonproliferation in Korea and Asia.
The withdrawal plan is causing countless worries.
In Japan, there are concerns that it will make the country America's frontline command post in Asia, possibly beyond the scope of its bilateral security treaty with the US.
One result is that China feels nervous about the implications of any expansion of the American-Japanese military partnership.
But the impact of America's planned troop withdrawals is felt most keenly in South Korea.
In June, the Bush administration revealed its plan to withdraw some 12,500 of the 37,000 US soldiers stationed in South Korea by the end of 2005.
These include 3,600 troops from the 2nd Brigade of the 2nd Infantry Division, who are already earmarked for redeployment in Iraq.
The US Defense Department justifies this change as part of the so-called "Global Posture Review" that it has been carrying out to provide more flexibility and mobility in deploying troops to more urgently needed places around the world.
But the unilateral nature of the announcement, and the abrupt timing of the plan, has incited alarm in South Korea, and perhaps in Japan, that withdrawal could pose serious risks to the vital role that US forces have performed in deterring another war in Korea.
South Koreans genuinely fear that the plan may weaken deterrence by sending North Korea - which is demanding a US military withdrawal while refusing to abandon its nuclear weapons ambitions - the message that intransigence pays.
Indeed, it should not be forgotten that North Korea maintains an army of 1.1 million troops.
Moreover, the manner in which the Bush administration unveiled its withdrawal plan has weakened the credibility of the US-Korean alliance.
America's unilateral announcement has fuelled rumors to the effect that withdrawal must have something to do with the rising tide of anti-Americanism in South Korea, and especially with the country's reluctance and delay in dispatching an additional 3,600 of its own soldiers to Iraq.
The Bush administration tries to rebut these charges by saying that the plan will not weaken the deterrence capabilities of American forces, for America's far more powerful air and naval presence in the area will be maintained. Moreover, the US plans to strengthen South Korea's own forces by supplying some $11 billion worth of high-technology equipment over the next five years.
Militarily, this argument does make sense.
Politically and psychologically, however, the method, let alone the timing and implementation of the withdrawals, raises many questions about the ongoing viability of the US-Korean security alliance, for the alliance now seems adrift, without a common purpose and with little direction from either side.
Yet the Bush administration insists: "The US views South Korea as a strong and steadfast ally.
We are committed to South Korea's security and to our alliance and partnership with Seoul."
If Washington is serious about these words, it should transform this commitment into a long-term and comprehensive alliance that can survive the current estrangement - and continue even after Korean unification - by making a joint declaration with South Korea's government at the highest level.
In order to allay misgivings and restore trust in the alliance, it is necessary for the US and South Korea to reaffirm their common interests and values in pursuing deterrence, nonproliferation, stability, and democracy on the Korean peninsula and across Asia.
Once they resolve to continue their alliance with these purposes in mind, it should be possible for responsible officials to work out guiding principles for concrete security cooperation.
Specific negotiations on withdrawing American troops from Korea or on redeploying them from the DMZ to south of Seoul must be carried out according to these principles.
In so doing, America must treat South Korea as a full partner with its own voice in making decisions that affect its security interests.
As an American ally for 51 years, and as East Asia's third-largest economy, South Korea is entitled to be fully consulted on such decisions.
Despite anti-American sentiments among some South Koreans, a majority of the country's people wants American forces to remain as a stabilizing force.
Securing a peaceful and nuclear-free Korean peninsula, a place where the interests of China, Japan, Russia, and America directly intersect, is one of the most important security goals anywhere on the planet.
For this reason, America and South Korea must restore a strategic vision for the future.
America’s Saving Rate and the Dollar’s Future
CAMBRIDGE – The saving rate of American households has risen sharply since the beginning of the year, reaching 6.9% of after-tax personal income in May, the highest rate since 1992.
In today’s economy, that is equivalent to annual savings of $750 billion.
While a 6.9% saving rate is not high in comparison to that of many other countries, it is a dramatic shift from the household-saving rate of less than 1% that the United States experienced in 2005, 2006, and 2007.
Before it began rising last year, the US household saving rate had been declining for more than 20 years in response to the increasing level of household wealth.
The rising stock market and the higher value of homes induced individuals to consume more of their incomes and to save less.
As a result, most working individuals reduced the amount that they saved for their retirement, and retirees were able to increase their spending.
The net saving rate fell to near zero.
The sharp drop in household wealth over the past two years, however, put an end to that.
Dramatically lower share prices and a 35% fall in home prices reduced household wealth by $14 trillion, a loss equal to 140% of annual disposable income.
Individuals now have to save more to prepare for retirement, and retirees have less wealth to spend.
Looking ahead, the saving rate may rise even further, and will, in any case, remain high for many years.
The increase in the household saving rate reduces America’s need for foreign funds to finance its business investment and residential construction.
Taken by itself, today’s $750 billion annual rate of household saving could replace that amount in capital inflows from the rest of the world.
Since the peak annual rate of capital inflow was $803 billion (in 2006), the increased household saving has the potential to eliminate almost all of America’s dependence on foreign capital.
The annual capital inflow is equal each year to the US current-account deficit – the sum of the trade deficit plus the net interest and dividends that America’s government and businesses owe to the rest of the world.
The fall in the capital inflow would therefore bring with it a fall in the trade deficit.
Since reducing the trade deficit requires increasing exports and shrinking imports, the international value of the dollar must decline to make US products more attractive to foreign buyers and US goods and services more attractive to American consumers.
Without a fall in the dollar and the resulting rise in net exports, a higher saving rate and reduced consumer spending could push the US economy into a deep recession.
By contrast, the lower dollar makes reduced consumption consistent with full employment by shifting consumer spending from imports to domestic goods and services, and by supplementing this rise in domestic demand with increased exports.
But this direct link between higher household saving and a lower dollar will only be forged if higher household saving is not outweighed by a rise in government dis-saving, i.e., by a larger government deficit.
A large fiscal deficit increases the need for foreign funds to avoid crowding out private investment.
Put differently, the value of the dollar reflects total national saving, not just savings in the household sector.
Unfortunately, the US fiscal deficit is projected to remain high for many years.
The Congressional Budget Office projects that the US government’s budget deficit will average 5.2% of GDP over the next decade, and be 5.5% of GDP a decade from now.
If that high level of government borrowing occurs, it will absorb all of the available household savings even at the current elevated level.
That would mean that the US would continue to need substantial inflows of foreign capital to fund business investment and housing construction.
So the dollar would have to stay at its current level to continue to create the large trade deficit and resulting capital inflow.
It is, of course, possible – I would say likely – that China and other foreign lenders will not be willing to continue to provide the current volume of lending to the US.
Their reduced demand for dollars will cause the dollar to decline and the trade deficit to shrink. That reduced trade deficit and the resulting decline in capital inflows will lead to higher real interest rates in the US.
The higher interest rate will reduce the level of business investment and residential construction until they can be financed with the smaller volume of national saving plus the reduced capital inflows.
Although the higher level of household saving will limit the rise in US interest rates, it will not change the fact that the combination of large future fiscal deficits and foreign lenders’ reduced willingness to buy US securities will lead to both a lower dollar and higher US interest rates.
America’s Saving Surprise
CAMBRIDGE – The household saving rate in the United States has tripled in the past three years.
Why?
And what does it mean for the US economy and the rest of the world?
The rapid rise in saving has reduced consumer spending, slowing the pace of GDP growth in 2009 and in early 2010.
If the saving rate continues to rise rapidly, it could push America’s fragile economy into another downturn.
That would mean lower imports, creating a potential problem for countries that depend for their employment on exporting to the US.
Higher household saving depresses consumption because it is the difference between households’ after-tax income and what they spend.
The saving may be deposited in bank accounts or used to buy mutual funds or corporate stock.
Saving may also take the form of individual contributions to retirement accounts or employer contributions to corporate saving plans.
Paying down debt on credit cards or mortgages also counts as saving – but increases in the value of existing assets like stocks or real estate do not, even though they increase the value of household wealth.
In any year, some households are savers and others, especially retirees, are dissavers that use past saving to finance current consumption.
The nation’s net household saving rate is the difference between the saving of the savers and the dissaving of the dissavers.
The recent rise in the US household saving rate reversed a long-term decline that began 25 years ago.
Before that, between 1960 and 1985, American households saved an average of 9% of their after-tax incomes.
The saving rate in each of those 25 years was between 7% and 11%.
But, after 1985, a variety of changes caused saving to decline until it reached less than 2% in 2007.
One reason was that rising stock markets and higher house prices made individuals wealthier, reducing their need to save for retirement and allowing retirees to dissave more.
The general shift from defined-benefit pension plans to defined-contribution plans meant that employees felt the effect of rising share prices directly in their own personal accounts.
Moreover, the increased availability of credit cards gave Americans a greater ability to dissave, buying goods and services now and paying for them later.
Mortgages became more widely available.
Rising house prices also allowed homeowners to refinance their mortgages, obtaining additional cash to spend on other things.
Credit lines secured by home equity provided another new way to finance spending.
All of this changed abruptly when the American economy fell into a deep recession at the end of 2007.
The stock market dropped sharply.
Home prices fell 40%, completely wiping out the equity of one-third of all homeowners with mortgages.
Household wealth is now $10 trillion dollars less than it was before the recession began.
That fall in wealth means that households must save more to prepare for retirement, and that retirees are not able to dissave as much as they did before.
Banks and credit-card companies have become much more cautious about extending credit.
And, with unemployment stubbornly high, many households are saving in order to have additional cash if they should lose their job or be put on shorter hours.
There is no way to predict what the saving rate will do next.
Households’ need to rebuild wealth, and the lack of access to credit, implies that the saving rate could continue to rise from the 6.4% recorded in June (the most recent month for which data are available) to the 9% rate that America averaged in the decades before 1985.
If that were to happen quickly, total spending could decline, pushing the economy into a double-dip recession.
But if households instead become optimistic about the pace of recovery, they might choose to cut back on their saving in order to maintain consumption, despite weak earnings.
Only time will tell.
Household saving is only one part of net national saving.
Since after-tax personal income accounts for about 75% of GDP, a household saving rate of 6% translates into just 4.5% of GDP.
Corporate retained earnings have averaged about 3% of GDP after allowing for depreciation of existing plant and equipment.
The combination of household and corporate saving brings total private saving to 7.5% of GDP.
Unfortunately, government borrowing to finance its deficit over the rest of this decade is projected to absorb about 5% of GDP.
That would leave a net national saving rate of just 2.5% of GDP.
Such a low national saving rate would not be sufficient to finance the level of new investment in plant, equipment, and housing that the country needs.
So, despite the rise in the household saving rate, unless federal government policies change to shrink America’s future budget deficits, the US will continue to be dependent on capital inflows from the rest of the world.
If that happens, global imbalances will continue to add risk to the global economy.
America\u0027s Schizophrenic Economy
The news about America's economy that dribbled out over the first half of March painted - once again - a picture that only a schizophrenic could create.
Real investment (investment adjusted for the declining prices of high-tech and information-related capital goods) continued to roar ahead.
Production and sales were consistent with the consensus forecast of real GDP growth at an annual rate of 4% or more.
Yet, despite all this, employment remained stagnant: net job creation in the United States continues to stall.
This does not mean that employment in America cannot grow.
Roughly 300,000 more Americans are employed in education and health care than a year ago - an annual rate of employment growth of 1.7%.
A quarter of a million more Americans are employed in business and professional services than a year ago - a 1.6% annual rate of employment growth.
The logic of stagnant employment is not that adding jobs to the American economy is impossible, but that demand growth is insufficient to create more jobs than are lost.
This is easy to demonstrate.
Total nominal spending in America grows at 5.5% per year.
Inflation is 1.5% per year. And overall productivity growth is 3.5% per year.
So the equation is simple: 5.5%-1.5%-3.5% = 0.5%.
That 0.5% is all that is left for job growth, because that's all the job growth required to meet demand given the remarkably strong rate of growth of productivity.
Where America's productivity growth is coming from is clear.
A relatively small part of it is coming from simple speed-up: in an economy where the amount of time it takes for the unemployed to find new jobs is close to a post-WWII record high, demands for speeding-up the pace of work will be met with a "Yes, boss!" rather than a "Take this job and shove it!"
A bigger part of this increased productivity comes from the extraordinary technological revolutions in computers and communications that have led to dramatic increases in the usefulness - and decreases in the cost - of high-tech capital.
The boost to wealth provided by the "new economy" is exceeding even its most avid boosters' wildest dreams.
What is unexpected is that the new wealth is flowing not to the shareholders of dot-com companies, but to purchasers and users of high-tech capital and the consumers they serve.
But why does this seem so surprising?
At the end of the nineteenth century the huge amount of investment and technological progress in America's railroads appeared to benefit everyone but the stockholders and bondholders of railroad companies, as bust followed boom and ramming worthless securities down the throats of investors became Wall Street's favorite sport.
Yet another part of US productivity growth due to the fact that high-tech capital gives America's firms enormous incentives to make massive but hard to see - and even harder to measure - investments in organization and business processes that are complementary to computerization and networking.
For the US to have a rate of productivity growth of 3.5% per annum rather than the pre-1995 rate of 1.2% is amazing.
That means an annual increment to world income of $250 billion from this source alone.
That's the equivalent of adding productive power equal to a quarter of the economy of India - and adding it every year.
This persistent acceleration in American productivity growth has, however, created a massive political problem for President George W. Bush.
Demand growth at a pace that in any previous decade would have been seen as highly satisfactory is suddenly desperately insufficient, and Bush is being blamed (with some justice) for the slack labor market that has resulted.
But for everyone except Bush - and those left unemployed by the lag in demand - it is an extraordinary opportunity.
The remarkable boosts to productivity that have been within America's grasp will ultimately lead to accelerating growth of real profits and real wages, if only US policy makers resist the temptation to pursue politically expedient, but economically damaging, measures to "protect" output and employment.
As the world's leading-edge economy, America faces the hardest work in ensuring growth, for it must create - not only copy and adapt - new technologies, better forms of capital, and more productive business organizations.
If America can grow as fast as it is now, that is very good news for other, less-developed economies, especially since one powerful effect of ongoing technological revolutions in computers and communications is to make it much easier to participate in the global division of labor now centered in the US.
So the schizophrenic American economy is a sign that the world is entering an economic era of truly wonderful things - if only we properly, and patiently, grasp them.
America’s Scorched Earth Management
Signs of the American economy’s perilous condition are everywhere – from yawning fiscal and current-account deficits to plummeting home prices and a feeble dollar.
But something that shows up in none of the economic indicators may be driving many of them: the deterioration of American management, which is undermining not only many of America’s great enterprises, but also its legendary spirit of enterprise.
Paradoxically, one indicator that has been improving steadily in the US – productivity – may be the clearest sign of the problem.
When it comes to productivity, managers either invest in employee training, more efficient manufacturing processes, and the like, or they take steps that appear to boost productivity in the short run but that erode it in the long run.
Productivity is a measure of output per hour worked.
So a company that fires all its workers and then ships from stock can look very productive – until it runs outs of stock.
Of course, no company can do that, but many US companies have been shedding workers and middle managers in great numbers – the figures for January 2008 were up 19% from a year earlier.
Meanwhile, those employees left behind must work that much harder, often without increased compensation.
Workers’ wages, adjusted for inflation, fell in 2007, continuing a trend throughout this decade.
That, too, is “productive” – until these overworked people quit or burn out.
A sustainable company is not a collection of “human resources.”
It is a community of human beings.
Its strength resides in its people, its culture, and the goodwill it has built up among its customers and suppliers.
So, as workers and middle managers have been departing these companies, they have taken with them not only much critical information, but often also the hearts and souls of their enterprises, with profound effects on American competitiveness.
Consider high technology, where America is supposed to excel.
According to a November 2006 report by The Task Force on the Future of American Innovation, made up of prominent universities, think tanks, industry trade associations, and corporations, the high-tech trade deficit widened in 2005, for the third consecutive year. This is not clothing or cars, but America’s largest, and most renowned, export sector.
This deficit reflects an underlying research deficit.
Of the 25 companies granted the most US patents in 2006, only eight were American; 12 were Japanese.
Perhaps this helps to explain why, in a survey of more than 60,000 people in 29 countries conducted in 2007 by the New York-based Reputation Institute to rank the “world’s most respected companies,” the first US company on the list appeared in 15th place; the second was in 25th place.
No one can determine how much of America’s productivity gains in recent years have resulted from squeezing human capital, because such things are not measured.
But there has clearly been a great deal of reliance on this strategy, with companies shedding employees not only because they must, but often because they have not met Wall Street analysts’ financial expectations.
Managers’ increased focus on maximizing shareholder value won many adherents when the idea was introduced in the 1980’s: the impersonal discipline of financial markets would force companies to become more productive and innovative.
And, in fact, much of the US productivity increase in the 1980’s and 1990’s can likely be attributed to large-scale investment in information and communications technology.
But, as the marginal productivity gains from such investment began to fall, senior managers’ survival and compensation continued to be tied to stock-market performance.
As a result, many simply learned to manage their companies’ short-term share price at the expense of attention to their products and customers.
Moreover, because maximizing shareholder value is a poor incentive for workers and middle managers, companies’ boards have increasingly centralized power around chief executives, thereby encouraging a “heroic” form of leadership that is detached from the rest of the enterprise.
Indeed, in many cases, the CEO – frequently a Wall Street-endorsed “superstar” parachuted in to “shake things up” – now
This shift to “heroic” leadership can be seen in ballooning CEO compensation.
According to a January 2008 report by the Hay Group, the CEO’s of the 50 largest US companies are now paid almost three times what their European counterparts receive ­– which is many hundreds of times more than their own workers.
Until recently, the US asset-price bubble ­– first in the stock market, then in real estate – masked the underlying depreciation of American enterprises.
But the bubble itself resulted from the same management pathologies as those afflicting the real economy.
After all, managing for the short run encouraged mortgage lenders to offer artificially low “teaser” interest rates to lure potential homeowners.
And then those who bought these mortgages never bothered to investigate their underlying value – a spectacular abdication of managerial responsibility.
Now that the bubble has burst, America’s current economic downturn is likely to be far worse than previous ones, because US enterprises will have to be rebuilt, slowly and carefully.
The dramatic weakening of the US dollar may help America to narrow its massive trade deficit, but we should not expect any sustained improvement without drastic changes in American management.
Fortunately, it may be possible to minimize the fallout for the rest of the world.
While American economists, politicians, and business leaders have for years sought to sell their model of management abroad, many companies elsewhere have not been buying it.
As a result, other key economies remain healthier than America’s.
Make no mistake: this problem was made in America, and that is where it will have to be solved.
America’s Self-Defeating Hegemony
When I wrote about the “end of history” almost twenty years ago, one thing that I did not anticipate was the degree to which American behavior and misjudgments would make anti-Americanism one of the chief fault-lines of global politics.
And yet, particularly since the terrorist attacks of September 11, 2001, that is precisely what has happened, owing to four key mistakes made by the Bush administration.
First, the doctrine of “preemption,” which was devised in response to the 2001 attacks, was inappropriately broadened to include Iraq and other so-called “rogue states” that threatened to develop weapons of mass destruction.
To be sure, preemption is fully justified vis-à-vis stateless terrorists wielding such weapons.
But it cannot be the core of a general non-proliferation policy, whereby the United States intervenes militarily everywhere to prevent the development of nuclear weapons.
The cost of executing such a policy simply would be too high (several hundred billion dollars and tens of thousands of casualties in Iraq and still counting).
This is why the Bush administration has shied away from military confrontations with North Korea and Iran, despite its veneration of Israel’s air strike on Iraq’s Osirak reactor in 1981, which set back Saddam Hussein’s nuclear program by several years.
After all, the very success of that attack meant that such limited intervention could never be repeated, because would-be proliferators learned to bury, hide, or duplicate their nascent weapons programs.
The second important miscalculation concerned the likely global reaction to America’s exercise of its hegemonic power.
Many people within the Bush administration believed that even without approval by the UN Security Council or NATO, American power would be legitimized by its successful use.
This had been the pattern for many US initiatives during the Cold War, and in the Balkans during the 1990’s; back then, it was known as “leadership” rather than “unilateralism.”
But, by the time of the Iraq war, conditions had changed: the US had grown so powerful relative to the rest of the world that the lack of reciprocity became an intense source of irritation even to America’s closest allies.
The structural anti-Americanism arising from the global distribution of power was evident well before the Iraq war, in the opposition to American-led globalization during the Clinton years.
But it was exacerbated by the Bush administration’s “in-your-face” disregard for a variety of international institutions as soon it came into office – a pattern that continued through the onset of the Iraq war.
America’s third mistake was to overestimate how effective conventional military power would be in dealing with the weak states and networked transnational organizations that characterize international politics, at least in the broader Middle East.
It is worth pondering why a country with more military power than any other in human history, and that spends as much on its military as virtually the rest of the world combined, cannot bring security to a small country of 24 million people after more than three years of occupation.
At least part of the problem is that it is dealing with complex social forces that are not organized into centralized hierarchies that can enforce rules, and thus be deterred, coerced, or otherwise manipulated through conventional power.
Israel made a similar mistake in thinking that it could use its enormous margin of conventional military power to destroy Hezbollah in last summer’s Lebanon War.
Both Israel and the US are nostalgic for a twentieth-century world of nation-states, which is understandable, since that is the world to which the kind of conventional power they possess is best suited.
But nostalgia has led both states to misinterpret the challenges they now face, whether by linking al-Qaeda to Saddam Hussein’s Iraq, or Hezbollah to Iran and Syria.
This linkage does exist in the case of Hezbollah, but the networked actors have their own social roots and are not simply pawns used by regional powers.
This is why the exercise of conventional power has become frustrating.
Finally, the Bush administration’s use of power has lacked not only a compelling strategy or doctrine, but also simple competence.
In Iraq alone, the administration misestimated the threat of WMD, failed to plan adequately for the occupation, and then proved unable to adjust quickly when things went wrong.
To this day, it has dropped the ball on very straightforward operational issues in Iraq, such as funding democracy promotion efforts.
Incompetence in implementation has strategic consequences.
Many of the voices that called for, and then bungled, military intervention in Iraq are now calling for war with Iran.
Why should the rest of the world think that conflict with a larger and more resolute enemy would be handled any more capably?
But the fundamental problem remains the lopsided distribution of power in the international system.
Any country in the same position as the US, even a democracy, would be tempted to exercise its hegemonic power with less and less restraint.
America’s founding fathers were motivated by a similar belief that unchecked power, even when democratically legitimated, could be dangerous, which is why they created a constitutional system of internally separated powers to limit the executive.
Such a system does not exist on a global scale today, which may explain how America got into such trouble.
A smoother international distribution of power, even in a global system that is less than fully democratic, would pose fewer temptations to abandon the prudent exercise of power.
America’s Self-Inflicted Decline
MELBOURNE – If the broad post-World War II prosperity that has endured for six decades comes to an end, both the United States and Europe will be responsible.
With rare exceptions, politics has become a discredited profession throughout the West.
Tomorrow is always treated as more important than next week, and next week prevails over next year, with no one seeking to secure the long-term future.
Now the West is paying the price.
President Barack Obama’s instincts may be an exception here, but he is fighting powerful hidebound forces in the United States, as well as a demagogic populism, in the form of the Tea Party, that is far worse – and that might defeat him in 2012, seriously damaging America in the process.
America’s friends around the world watched with dismay the recent brawl in over raising the federal government’s debt ceiling, and the US Congress’s inability to come to anything like a balanced and forward-looking compromise.
On the contrary, the outcome represents a significant victory for the Tea Party’s minions, whose purpose seems to be to reduce government obligations and expenditures to a bare minimum (some object even to having a central bank), and to maintain President George W. Bush’s outrageous tax breaks for the wealthy.
America’s current fiscal problems are rooted in a long period of unfunded spending.
Bush’s wars in Afghanistan and Iraq, and the manner in which he conducted the “global war on terror” made matters much worse, contributing to a totally unsustainable situation.
Indeed, Obama inherited an almost impossible legacy.
In the weeks since the debt ceiling agreement, it has become increasingly clear that good government might be impossible in the US.
The coming months of campaigning for the US presidency will be spent in petty brawling over what should be cut.
The example of recent weeks gives us no cause for optimism that US legislators will rise above partisan politics and ask themselves what is best for America.
In these circumstances, it is not surprising that financial markets have returned to extreme volatility.
The expenditure cuts mandated by the outcome of the debt-ceiling debate will reduce economic activity, thereby undermining growth and making debt reduction even more difficult.
Providing further fiscal stimulus to boost economic growth would carry its own risks, owing to the debt ceiling and another, more ominous factor: America is already overly indebted, and there are signs that major holders of US government securities are finally tired of being repaid in depreciated currency.
Most importantly, China’s call for the introduction of a new reserve currency stems from its frustration with the failure of major governments – whether in the US or Europe – to govern their economic affairs with realism and good sense.
China recognizes that America is in great difficulty (indeed, it recognizes this more clearly than the US itself), and that, given the poisonous political atmosphere prevailing in Washington, there will be no easy return to good government, economic stability, and strong growth.
America’s leadership in world affairs began to weaken with the unilateralism of Bush, and today’s economic problems are reinforcing this tendency.
To reverse America’s decline, Obama needs bipartisan support for his (quite mainstream) policies, but so far the US Congress has shown no stomach for a principled approach to its legislative duties.
If Germany’s half-hearted efforts to stabilize Europe somehow turn out to be successful, America’s position will be further eroded, and central banks around the world will begin to regard the euro once again as a reliable alternative to the dollar as a reserve currency.
The alternative, as China has suggested, would be to develop a new reserve currency.
These realities represent a power shift of a kind that we have not experienced in our lifetimes.
China’s economic power over the US is now substantial, and will limit not only America’s influence in the financial markets, but also its capacity to use military power.
If this forces America back towards what the international-relations scholar Joseph Nye calls “soft power and multilateral diplomacy,” it may well be a good thing.
But such approaches are anathema to the US Republican Party, and to its Tea Party faction in particular, and they might unnerve the many Asians who are nervous at China’s growing military might.
The counter-argument – that any sell-off or failure by China to continue to buy US government securities would hurt China as much as America – is not valid.
As each year passes, China’s markets expand worldwide, and its domestic market comes to represent a greater percentage of its own GDP.
As a result, China will not need a strong dollar in the long term.
Americans need to get their economic house in order before China loses its incentive to support the dollar.
On several occasions in the post-WWII period, the US has learned with great pain that there are limits to the effective use of military power.
American objectives could not be achieved in Vietnam.
The outcome in Iraq will not be determined until the last American troops have been withdrawn.
In Afghanistan, where withdrawal dates have already been set, it is difficult to believe that a cohesive unified state can be established.
As the efficacy of military power is reduced, so the importance of economic power grows.
Recognition of these central realities – and bipartisanship in addressing them – is critical for America’s future, and that of the West.
America’s Sleeping Watch Dog
I want to deviate from my usual economic theme this month and focus instead on the system by which the press – mostly the American press – covers government nowadays.
But perhaps this is not too great a deviation, for the behavior of the press affects not only politics, but economics as well.
Consider an editorial written in March by the Washington Post’s editorial director, Fred Hiatt, in which he makes a very small and limited apology for the newspaper’s coverage and evaluation of the Bush administration.
According to Hiatt, “We raised such issues” as whether the Bush administration had properly thought its proposed adventure in Iraq through, “but with insufficient force.” In other words, Hiatt finds fault with himself and his organization for saying the right thing, but not loudly enough.
Next, consider a comment by the former editor of the New York Times, Max Frankel, about how the Washington ecology of media leaks is healthy, because “most reporters do not just lazily regurgitate...leaks.” Instead, “they use them as wedges to pry out other secrets” and so oversee the government.
The system may be “sloppy and breed confusion,” but “tolerating abusive leaks by government [that misinform] is the price that society has to pay for the benefit of receiving essential leaks about government.”
So, where Hiatt sees a press corps that was a little too cowardly about overseeing the Bush administration, Frankel sees a press corps where a sloppy and confusing process is nevertheless doing a reasonable job.
I see a very different picture.
It was the summer of 2000 when I began asking Republicans I know – generally people who might be natural candidates for various sub-cabinet policy positions in a Republican administration – how worried they were that the Republican presidential candidate, George W. Bush, was clearly not up to the job.
They were not worried, they told me, that Bush was inadequately briefed and strangely incurious for a man who sought the most powerful office in the world.
One of President Clinton’s problems, they said, was that the ceremonial portions of the job bored him – and thus he got himself into big trouble.
Look at how Bush had operated as president of the Texas Rangers baseball club, they said.
Bush let the managers manage the team and the financial guys run the business.
He spent his time making sure the political coalition to support the Texas Rangers in the style to which it wanted to be accustomed remained stable.
Bush knows his strengths and weaknesses, they told me.
He will focus on being America’s Queen Elizabeth II, and will let people like Colin Powell and Paul O’Neill be America’s Tony Blair and Gordon Brown.
By the summer of 2001, it had become clear that something had gone very wrong.
By that point, Bush had rejected O’Neill’s and Christine Todd Whitman’s advice on environmental policy, just as he had rejected Alan Greenspan’s and O’Neill’s advice on fiscal policy, Powell’s and Condoleezza Rice’s advice on the importance of pushing forward on negotiations between Israel and Palestine, and – as we learned later – George Tenet’s and Richard Clarke’s advice about the importance of counterterrorism.
A strange picture of Bush emerged from conversations with sub-cabinet administration appointees, their friends, and their friends of friends.
He was not just under-briefed, but also lazy: he insisted on remaining under-briefed.
He was not just incurious, but also arrogant: he insisted on making uninformed decisions, and hence made decisions that were essentially random.
And he was stubborn: once he had made a decision – even, or rather especially, if it was glaringly wrong and stupid – he would never revisit it.
So, by the summer of 2001, a pattern was set that would lead British observer Daniel Davies to ask if there was a Bush administration policy on anything of even moderate importance that had not been completely bollixed up.
But if you relied on either the Washington Post or the New York Times, you would have had a very hard time seeing it.
Today, it is an accepted fact that the kindest thing you can say about the Bush administration is that it is completely incompetent, which is the line now taken by hard-line Bush supporters like the National Review and the commentator Robert Novak.
Why didn’t the American press corps cover the Bush administration properly for its first five years?
I really do not know.
I do know that the world cannot afford to rely again on America’s press for its information: fool me once, shame on you; fool me twice, shame on me.
So I appeal to all of you working for newspapers, radio, and television stations outside the United States: it is to you that we – including those of us in America – must look to discover what our own government is doing.
America’s Sputnik Moment in Beijing
NEW YORK – August 8, 2008, may someday be remembered as the first day of the post-American era.
Or it could be remembered as another “Sputnik moment,” when, as with the Soviet foray into outer space in 1957, the American people realized that the country had lost its footing and decided it was time for the United States to get its act together.
There was no mistaking the power and symbolism of the opening ceremonies for the Beijing Olympic Games on August 8.
That multimedia spectacular did far more than trace China’s 5,000-year history; it was a statement that China is a major civilization that demands and deserves its rightful place in the global hierarchy.
There was also no mistaking the symbolism of seeing President Bush, waving cheerfully from his spot in the bleachers while Chinese President Hu Jintao sat behind what looked more like a throne.
It is hard to imagine that China’s government, which obsesses over every minute issue of diplomatic protocol, had not orchestrated this stark image of America’s decline relative to the country to which it owes $1.4 trillion.
It would be hard to imagine Franklin Roosevelt or Ronald Reagan accepting a similar relative position.
At the very same time that Bush was waving from the stands, Russia was invading Georgia, America’s closest partner in the Caucasus.
Russia’s message to other West-leaning countries in the former Soviet world was clear: America cannot protect you.
Frighteningly, the Russians were likely correct.
While the Iraq quagmire has made it difficult for America to project force around the world, America’s growing debt, conflicts with friends and enemies alike, absence of any perceivable strategy for changing times, and its political system’s seeming inability to take action to address these challenges have combined to turn America into a struggling giant.
Today, from Iran to Darfur to Zimbabwe to Georgia, the world is witnessing the effects of a budding post-American world, and the picture does not look pretty.
As much as we all value the rise of new powers like China and India, it remains to be seen whether these countries will become as benevolent a power as America, however flawed, has been over the past half-century.
Neo-colonialism is returning to Africa, the global project of human rights is in retreat, and the world trade system is becoming far less open.
Brutal dictators go unpunished because their interests are protected by large powers with stakes in their natural resources.
Reversing this trend is not only in America’s interest, but also in the world’s interest.
To do so, Americans must identify and address the great challenges the United States faces, starting from the ground up.
Fixing America’s campaign finance structure, which leads to massive misallocations of government funds, resuscitating America’s wildly uneven and often moribund education system, building an immigration system that actively recruits the most talented people from around the world via a fast track to US citizenship, and developing a national energy policy that moves the US far more quickly toward energy independence would all be important steps in this direction.
Working to rebuild the traditional bipartisan foreign-policy consensus would also make the US a far more predictable partner to friends and allies around the world.
And America must be a respectful partner in order to encourage rising powers like India and China to play more constructive roles in international affairs.
The world is not ready for the post-American era, and countries like China and India must play a far greater role in strengthening the existing institutions of world peace and, where appropriate, building new ones that can promote a positive agenda of security, dignity, rights, and prosperity across the globe.
The world community is not there yet, and until it is, the world needs a new kind of American leader – a leader able to inspire Americans to fix their problems at home and work with partners across the globe in promoting a common agenda as bold and progressive as the order built from the ashes of World War II 60 years ago.
The Beijing Olympics could be remembered as a new “Sputnik moment” for the US, inspiring the country to meaningfully face the music of a changing world.
But America can make it so only by recognizing the great challenges it faces and taking bold steps towards addressing them, at home and with allies abroad.
America’s Perilous Pivot
MADRID – The Pacific or the Middle East?
For the United States, that is now the primary strategic question.
The violence in Gaza, coming as President Barack Obama was meeting Asia’s leaders in Phnom Penh, perfectly encapsulates America’s dilemma.
Instead of being able to focus on US foreign policy’s “pivot” to Asia, Obama was forced to spend many hours in conversation with the leaders of Egypt and Israel, and to dispatch Secretary of State Hillary Clinton from Asia, in order to facilitate a cease-fire in Gaza.
Of the two geopolitical focal points demanding America’s attention, one represents the future and the other the past.
Whereas Asia played an important role in a US presidential election campaign that was marked by often-heated references to China’s rise, the Middle East has kept the US bogged down for decades.
In addition to the eternal Israel-Palestine conflict, Iraq’s instability, the Arab Spring, Syria’s civil war, and the ongoing nuclear standoff with Iran all demand America’s attention.
If the Iran crisis were to boil over, the pivot to Asia would no longer be America’s main foreign-policy priority.
But if the dispute with Iran is resolved diplomatically, the Middle East might, perhaps, be relegated to a position of lesser importance, as Obama clearly desires.
The question, therefore, is whether the US will find itself drawn into another war in a region on which it depends less and less for energy.
Indeed, the revolution in non-conventional hydrocarbons, particularly shale gas and oil, which the International Energy Agency recently predicted would make the US the world’s largest oil producer by 2020, and the top energy producer overall by 2030, will have enormous global repercussions.
For the US, energy self-sufficiency is the perfect excuse for a phased withdrawal from the Middle East; freed from energy dependency, America should be able to concentrate on the Pacific.
Although maintaining stable global energy prices and its alliance with Israel means that the US cannot cut itself off completely from the Middle East’s troubles, the shift in focus to Asia began early in Obama’s first administration, with Clinton announcing America’s strategic reorientation even before US troops began withdrawing from Iraq.
Following his re-election, Obama’s first foreign visit was to Myanmar, Thailand, and Cambodia – a choice that cannot have pleased China, as all three are ASEAN members, while Myanmar was, until it began its democratic transition, a close Chinese ally.
Asia is, of course, experiencing rapid economic growth, but managing the region’s strong nationalist tensions calls for the creation of regional security structures, together with closer economic integration.
Complicating matters even more is what US scholar Kenneth Lieberthal and Wang Jisi, the dean of international studies at Peking University, called in a recent paper for the Brookings Institution “strategic distrust.”
Cultivating strategic trust between the twenty-first century’s leading powers will be fundamental to the international system’s harmonious functioning.
But how can this be achieved?
As China will be importing three-quarters of its oil from the Middle East by 2020, one step forward would be China’s cooperation in finding solutions to the region’s problems.
After the January 2013 Israeli elections, Iran will again move to the top of Obama’s foreign-policy agenda.
Military intervention in Iran – which itself will be holding a presidential election in June – would incite not only regional, but global, instability.
The Arab world, Russia, and China would be forced to take sides, straining global relations between the different poles of power and raising tensions in the Pacific.
So China has a large strategic interest in working with the US to avoid a showdown.
Beyond Iran, the volatile situation throughout the Middle East urgently demands solutions.
The latest eruption of violent conflict between Hamas and Israel underscores the importance of reviving the peace process.
Syria’s civil war, in which a growing number of regional players have become involved, is beginning to look increasingly like a trial run for all-out war between Sunni Muslims (Saudi Arabia and the other Gulf States, Turkey, and Egypt) and Shia Muslims (Iran and Hezbollah) for regional dominance.
Iran’s leaders appear to believe that the US, having incurred extremely high economic and human costs from more than a decade of war, would rather avoid another military intervention.
US public opinion seems to confirm this.
A recent survey by the Chicago Council on Global Affairs indicated that 67% of Americans believe that the Iraq war was not worthwhile.
Moreover, 69% do not believe that the US is safer from terrorism since the war in Afghanistan, and 71% say that the experience in Iraq shows that the US should take greater care in how it uses force.
But, if Americans seem unlikely to be willing to invest billions of dollars in another dead-end foreign adventure, Iran’s leaders, for their part, are increasingly hemmed in by international sanctions, which are beginning to wreak havoc on the country’s economy.
Both sides may believe that their best option – at least for now – is to negotiate.
Peaceful resolution of the Iranian question would help the US to complete its shift toward Asia.
China may not wish for that outcome, but its own vital interest in the security of Middle East energy supplies should compel it to cooperate.
After all, another Middle East conflict would poison and distort relations in the region for decades, which would be the worst of all possible consequences – for the US and China alike.
America’s Suicidal Statecraft
Since its victory in the Cold War, America’s global hegemony has rested on three pillars: economic power, military might, and a vast capacity to export its popular culture.
The recent emergence of additional powers – the European Union, China, India, and a Russia driven to recover its lost status – has eroded America’s capacity to shape events unilaterally.
Even so, America remains by far the world’s most powerful country; its decline has more to do with its incompetent use of power than with the emergence of competitors.
It is American leaders’ “suicidal statecraft,” to use Arnold Toynbee’s pithy phrase for what he considered the ultimate cause of imperial collapse, that is to blame for America’s plight.
Consider the Middle East.
Nothing reveals the decline of the United States in the region better than the contrast between America’s sober use of power in the first Gulf War in 1991 and the hubris and deceit of today’s Iraq war.
In 1991, America forged the most formidable international coalition since World War II, and led it in a fully legitimate war aimed at restoring regional balance after Saddam Hussein’s invasion of Kuwait.
In 2003, America went to war without its trans-Atlantic allies after manipulating false assertions.
In doing so, the US embarked on a preposterous grand strategy that aimed no less at simultaneously dismantling Iraq’s tyrannical regime, restructuring the entire Middle East, destroying al-Qaeda, and helping democracy to take root throughout the Arab world.
The result has been utter failure: military defeat and a severe degradation of America’s moral standing.
Rather than undermining radical Islam, the US has legitimized it, in Iraq and beyond.
Indeed, what will now shape the future of the region is not democracy, but the violent divide between Shiites and Sunnis that the Iraq war precipitated.
It is this Muslim civil war that is allowing al-Qaeda to gain a larger pool of recruits.
With Iraq probably becoming the first Arab country to be ruled by Shiites, and hence integrated into an expanding Shiite Iranian empire, America’s Sunni allies in the region now view the US as unreliable.
Indeed, the US is seen as practically complicit in inciting a monumental reversal of Islam’s fortunes, the Shia revival.
Nor is the gospel of democracy especially dear to America’s Arab allies, for the call to democratize has only emboldened the Islamists to challenge the incumbent elites for power.
Admittedly, violent Islamic fundamentalism has deeper roots in the fading promise of Arab nationalism.
But America’s misbegotten democratic message has ended up alienating both its conservative regional allies, as it gave a new lease on life to political Islam, which can use the ballot box as a route to power, and the Islamists, whose electoral gains are then rejected by the US.
America’s biggest strategic blunder in the Middle East arguably concerns the emergence of Iranian power.
By destroying Iraq as a counterbalancing regional force, the US dealt a major blow to its traditional Gulf allies, for whom Iraq served as a barrier against Iran’s ambitions.
America offered Iran on a silver platter strategic assets that Khomeini’s revolution failed to acquire either in eight years of war against Saddam or in its abortive attempts to export the Islamic revolution throughout the region.
Likewise, Iran’s nuclear program gained momentum thanks to its sense of impunity following the colossal failure in Iraq of America’s concept of “preventive war.”
The calamitous US military experience in Iraq has left it strategically diminished.
Iraq has now become God’s playground, and America can hope to achieve a modicum of stability there only with the help of other regional powers.
Nevertheless, the US will remain the most influential external actor in the Middle East, for its failure is one of leadership, not of actual power.
Humbled by military defeat, America can recover its regional relevance only by avoiding the sin of hubris, and learning to lead without attempting to dominate.
This requires engaging revolutionary forces like Iran and Syria; respecting, rather than ostracizing, those Islamist movements that have opted out from jihadism in favor of political participation; and leading an international alliance for an Arab-Israeli peace based on the Arab League initiative.
Indeed, the paradox of America’s pernicious policies in Iraq is that they have created favorable conditions for an Arab-Israeli peace, as the emergence of Iran and the threat of a fundamentalist tsunami have focused Arab minds on the urgency of a settlement with Israel.
The Palestinian issue is not the source of all the Middle East’s ills, but its resolution would dramatically improve America’s standing among Arabs.
More importantly, it would deny Iran the ability to link popular Islamic and Arab causes with its own hegemonic ambitions.
America’s Threat to Trans-Pacific Trade
MUMBAI – As if undermining the World Trade Organization’s Doha Round of global free-trade talks was not bad enough (the last ministerial meeting in Geneva produced barely a squeak), the United States has compounded its folly by actively promoting the Trans-Pacific Partnership (TPP).
President Barack Obama announced this with nine Asian countries during his recent trip to the region.
The TPP is being sold in the US to a compliant media and unsuspecting public as evidence of American leadership on trade.
But the opposite is true, and it is important that those who care about the global trading system know what is happening.
One hopes that this knowledge will trigger what I call the “Dracula effect”: expose that which would prefer to remain hidden to sunlight and it will shrivel up and die.
The TPP is a testament to the ability of US industrial lobbies, Congress, and presidents to obfuscate public policy.
It is widely understood today that free-trade agreements (FTAs), whether bilateral or plurilateral (among more than two countries but fewer than all) are built on discrimination.
That is why economists typically call them preferential-trade agreements (PTAs).
And that is why the US government’s public-relations machine calls what is in fact a discriminatory plurilateral FTA, a “partnership” invoking a false aura of cooperation and cosmopolitanism.
Countries are, in principle, free to join the TPP.
Japan and Canada have said they plan to do so.
But a closer look reveals that China is not a part of this agenda.
The TPP is also a political response to China's new aggressiveness, built therefore in a spirit of confrontation and containment, not of cooperation.
The US has been establishing a template for its PTAs that includes several items unrelated to trade.
So it is no surprise that the TPP template includes numerous agendas unrelated to trade, such as labor standards and restraints on the use of capital-account controls, many of which preclude China’s accession.
From the outset, the TPP’s supposed openness has been wholly misleading.
Towards this end, the TPP was negotiated with the weaker countries like Vietnam, Singapore, and New Zealand, which were easily bamboozled into accepting such conditions.
Only then were bigger countries like Japan offered membership on a “take it or leave it” basis.
The PR machine then went into overdrive by calling the inclusion of these extraneous conditions as making the TPP a “high-quality” trade agreement for the twenty-first century, when in fact it was a rip-off by several domestic lobbies.
American regionalism closer to home shows the US now trying to promote the Free Trade Agreement of the Americas (FTAA).
But its preferred template was to expand the North America Free Trade Agreement (Canada, Mexico, and the US) to the Andean countries and include huge doses of non-trade-related issues, which they swallowed.
This was not acceptable to Brazil, the leading force behind the FTAA, which focuses exclusively on trade issues.
Brazil’s former President Luiz Lula Inácio da Silva, one of the world’s great trade-union leaders, rejected the inclusion of labor standards in trade treaties and institutions.
The result of US efforts in South America, therefore, has been to fragment the region into two blocs, and the same is likely to happen in Asia.
Ever since the US realized that it had chosen the wrong region to be regional with, it has been trying to win a seat at the Asian table.
The US finally got it with the TPP, simply because China had become aggressive in asserting its territorial claims in the South China Sea, the South China Sea, and vis-à-vis India and Japan.
Many Asian countries joined the TPP to “keep the US in the region” in the face of Chinese heavy-handedness.
They embraced the US in the same way that East Europeans rushed to join NATO and the European Union in the face of the threat, real or imagined, posed by post-Soviet Russia.
America’s design for Asian trade is inspired by the goal of containing China, and the TPP template effectively excludes it, owing to the non-trade-related conditions imposed by US lobbies.
The only way that a Chinese merger with the TPP could gain credibility would be to make all non-trade-related provisions optional.
Of course, the US lobbies would have none of it.
America’s Three Deficits
BERKELEY – This year began with a series of reports providing tantalizing evidence that economic recovery in the United States is strengthening.
The pace of job creation has increased, indicators for manufacturing and services have improved, and consumption spending has been stronger than anticipated.
But it is too early to celebrate.
Output growth in the US remains anemic, and the economy continues to face three significant deficits: a jobs deficit, an investment deficit, and a long-run fiscal deficit, none of which is likely to be addressed in an election year.
Although output is now higher than it was in the fourth quarter of 2007, it remains far below what could be produced if labor and capacity were fully utilized.
That gap – between actual and potential output – is estimated at more than 7% of GDP (more than $1 trillion).
The output gap reflects a deficit of more than 12 million jobs – the number of jobs needed to return to the economy’s peak 2007 employment level and absorb the 125,000 people who enter the labor force each month.
Even if the economy grows at 2.5% in 2012, as most forecasts anticipate, the jobs deficit will remain – and will not be closed until 2024.
America’s jobs deficit is primarily the result of inadequate aggregate demand.
Consumption, which accounts for about 70% of total spending, is constrained by high unemployment, weak wage gains, and a steep decline in home values and consumer wealth.
The uptick in consumption in the last months of 2011 was financed by a decline in the household saving rate and a large increase in consumer credit.
Neither of these trends is healthy or sustainable.
With an unemployment rate of 8.5%, a labor-force participation rate of only 64%, and stagnant real wages, labor income has fallen to an historic low of 44% of national income.
And labor income is the most important component of household earnings, the major driver of consumption spending.
Even before the Great Recession, American workers and households were in trouble.
The rate of job growth between 2000 and 2007 slowed to only half its level in the three preceding decades.
Productivity growth was strong, but far outpaced wage growth, and workers’ real hourly compensation declined, on average, even for those with a university education.
Indeed, the 2002-2007 period was the only recovery on record during which the median family’s real income declined.
Moreover, job opportunities continued to polarize, with employment growing in high-wage professional, technical, and managerial occupations, as well as in low-wage food-service, personal-care, and protective-service occupations.
By contrast, employment in middle-skill, white-collar, and blue-collar occupations fell, particularly in manufacturing.
Hard-pressed American households slashed their savings rates, borrowed against their home equity, and increased their debt to maintain consumption, contributing to the housing and credit bubbles that burst in 2008, requiring painful deleveraging ever since.
Three forces have driven the US labor market’s adverse structural changes:
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Skill-biased technological change, which has automated routine work while boosting demand for highly educated workers with at least a college degree.
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Global competition and the integration of labor markets through trade and outsourcing, which have eliminated jobs and depressed wages.
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America’s declining competitiveness as an attractive place to locate production and employment.
Technological change and globalization have created similar labor-market challenges in other developed countries.
But US policy choices are responsible for the erosion of America’s competitiveness.
In particular, the US is underinvesting in three major areas that help countries to create and retain high-wage jobs: skills and training, infrastructure, and research and development.
Spending in these areas accounts for less than 10% of US government spending, and this share has been declining over time.
The federal government can currently borrow at record-low interest rates, and there are many projects in education, infrastructure, and research that would earn a higher return, create jobs now, and bolster US competitiveness in attracting high-wage jobs.
President Barack Obama has offered numerous proposals to invest in the foundations of national competitiveness, but Congressional Republicans have rebuffed them, claiming that the US faces an impending fiscal crisis.
In fact, the federal deficit as a share of GDP will shrink significantly over the next several years, even without further deficit-reduction measures, before rising to unsustainable levels by 2030.
The US does indeed face a long-run fiscal deficit, largely the result of rising health-care costs and an aging population.
But the current fiscal deficit mainly reflects weak tax revenues, owing to slow growth and high unemployment, and temporary stimulus measures that are fading away at a time when aggregate demand remains weak and additional fiscal stimulus is warranted.
At the very least, to keep the economy on course for 2.5% growth this year, the payroll tax cut and unemployment benefits proposed by Obama should be extended through the end of the year.
These measures would provide insurance to the fragile recovery and add nothing to the long-run fiscal gap.
So, how should the US economy’s jobs deficit, investment deficit, and long-run fiscal deficit be addressed?
Policymakers should pair fiscal measures to ameliorate the jobs and investment deficits now with a multi-year plan to reduce the long-run fiscal deficit gradually.
This long-run plan should increase spending on education, infrastructure, and research, while curbing future growth in health-care spending through the cost-containment mechanisms contained in Obama’s health-reform legislation.
Approving a long-run deficit-reduction plan now but deferring its starting date until the economy is near full employment would prevent premature fiscal contraction from tipping the economy back into recession.
Indeed, enactment of such a package could bolster output and employment growth by easing investor concerns about future deficits and strengthening consumer and business confidence.
Painful choices about how to close the long-run fiscal gap should be decided now and implemented promptly once the economy has recovered.
But, for the next few years, the priorities of fiscal policy should be jobs, investment, and growth.
America’s Ungovernable Budget
NEW YORK – The heart of any government is found in its budget.
Politicians can make endless promises, but if the budget doesn’t add up, politics is little more than mere words.
The United States is now caught in such a bind.
In his recent State of the Union address, President Barack Obama painted a convincing picture of modern, twenty-first-century government.
His Republican Party opponents complained that Obama’s proposals would bust the budget.
But the truth is that both parties are hiding from the reality: without more taxes, a modern, competitive US economy is not possible.
Obama rightly emphasized that competitiveness in the world today depends on an educated workforce and modern infrastructure.
That is true for any country, but it is especially relevant for rich countries. The US and Europe are in direct competition with Brazil, China, India, and other emerging economies, where wage levels are sometimes one-quarter those in high-income countries (if not even lower).
America and Europe will keep their high living standards only by basing their competitiveness on advanced skills, cutting-edge technologies, and modern infrastructure.
That is why Obama called for an increase in US public investment in three areas: education, science and technology, and infrastructure (including broadband Internet, fast rail, and clean energy).
He spelled out a vision of future growth in which public and private investment would be complementary, mutually supportive pillars.
Obama emphasized these themes for good reason.
Unemployment in the US now stands at nearly 10% of the labor force, in part because more new jobs are being created in the emerging economies, and many of the jobs now being created in the US pay less than in the past, owing to greater global competition.
Unless the US steps up its investment in education, science, technology, and infrastructure, these adverse trends will continue.
But Obama’s message lost touch with reality when he turned his attention to the budget deficit.
Acknowledging that recent fiscal policies had put the US on an unsustainable trajectory of rising public debt, Obama said that moving towards budget balance was now essential for fiscal stability.
So he called for a five-year freeze on what the US government calls “discretionary” civilian spending.
The problem is that more than half of such spending is on education, science and technology, and infrastructure – the areas that Obama had just argued should be strengthened.
After telling Americans how important government investment is for modern growth, he promised to freeze that spending for the next five years!
Politicians often change their message from one speech to the next, but rarely contradict it so glaringly in the same speech.
That contradiction highlights the sad and self-defeating nature of US budget policies over the past 25 years, and most likely in the years to come.
On the one hand, the US government must invest more to promote economic competitiveness.
On the other hand, US taxes are chronically too low to support the level of government investment that is needed.
America’s fiscal reality was made painfully clear two days after Obama’s speech, in a new study from the Congressional Budget Office, which revealed that the budget deficit this year will reach nearly $1.5 trillion – a sum almost unimaginable even for an economy the size of the US.
At nearly 10% of GDP, the deficit is resulting in a mountain of debt that threatens America’s future.
The CBO study also made clear that December’s tax-cut agreement between Obama and the Republican opposition willfully and deliberately increased the budget deficit sharply.
Various tax cuts initiated by George W. Bush were set to expire at the end of 2010.
Obama and the Republicans agreed to continue those tax cuts for at least two years (they will now probably continue beyond that), thereby lowering tax revenue by $350 billion this year and again in 2012.
Tax cuts for the richest Americans were part of the package.
The truth of US politics today is simple.
The key policy for the leaders of both political parties is tax cuts, especially for the rich.
Both political parties, and the White House, would rather cut taxes than spend more on education, science and technology, and infrastructure.
And the explanation is straightforward: the richest households fund political campaigns.
Both parties therefore cater to their wishes.
As a result, America’s total tax revenues as a share of national income are among the lowest of all high-income countries, roughly 30%, compared to around 40% in Europe. But 30% of GDP is not enough to cover the needs of health, education, science and technology, social security, infrastructure, and other vital government responsibilities.
One budget area can and should be cut: military spending.
But even if America’s wildly excessive military budget is cut sharply (and politicians in both parties are resisting that), there will still be a need for new taxes.
The economic and social consequences of a generation of tax cutting are clear.
America is losing its international competitiveness, neglecting its poor – one in five American children is trapped in poverty – and leaving a mountain of debt to its young.
For all of the Obama administration’s lofty rhetoric, his fiscal-policy proposals make no serious attempt to address these problems.
To do so would require calling for higher taxes, and that – as George H. W. Bush learned in 1992 – is no way to get re-elected.
America’s Unhinged “Pivot”
NEW DELHI – President Barack Obama’s first foreign trip since winning a second term highlights Asia’s new centrality to America’s economy and security.
But Obama’s Asian tour also underscores the main question about American policy in the region: Will the United States’ “pivot” to Asia acquire concrete strategic content, or will it remain largely a rhetorical repackaging of old policies?
The United States, quick to capitalize on regional concerns triggered by China’s increasingly muscular self-assertion, has strengthened its military ties with its existing Asian allies and forged security relationships with new friends.
But the heady glow of America’s return to center stage in Asia has obscured key challenges in remaining the region’s principal security anchor in the face of China’s strategic ambitions.
One challenge is the need to arrest the erosion of America’s relative power, which in turn requires comprehensive domestic renewal, including fiscal consolidation.
But the need for spending cuts also raises the prospect that the US might be unable to finance a military shift toward the Asia-Pacific region – or, worse, that it will be forced to retrench there.
The US under Obama has increasingly ceded ground to China, a trend that admittedly began when the Bush administration became preoccupied with the wars in Afghanistan and Iraq.
This has spurred doubts about America’s ability to provide strategic heft to its “pivot” by sustaining a higher level of commitment in the Asia-Pacific region, where it already maintains 320,000 troops.
The proposed deployment of an additional 2,500 Marines in Australia is largely symbolic.
In fact, after raising Asians’ expectations of a more robust US response to China’s growing assertiveness, the Obama administration has started to tamp down the military aspects of its “pivot,” emphasizing instead greater US economic engagement.
That change has come as a relief to those in the region who fear being forced to choose between the US and China.
But, for the countries bearing the brunt of China’s recalcitrant approach to territorial and maritime disputes, this emphasis raises new doubts about America’s commitment.
In fact, the economic reorientation of the US “pivot” corrects a policy that had overemphasized the military component and put the US on a path toward conflict with China.
It was Secretary of State Hillary Clinton who signaled a more hawkish US stance on China with her tough talk at the 2010 Association of Southeast Asian Nations (ASEAN) Regional Forum in Hanoi; now she is moderating that position by promoting trade and investment during her visits to Asian countries.
Obama, too, is highlighting the economic aspects of the US “pivot,” portraying his Asia tour as an effort to generate more domestic manufacturing jobs through higher exports to “the most rapidly growing and dynamic region in the world.”
Even his historic visit to Myanmar – the first ever by a US president – is as much about trade as it is about weaning a strategically located, resource-rich country from Chinese influence.
The refocus on trade and economic issues has also prompted Washington to promote the Trans-Pacific Partnership, which aims to create a new Asia-Pacific free-trade group that excludes China.
Moreover, the US is emphasizing the importance of the East Asia Summit and ASEAN, whose summit overlaps with the EAS meeting in Phnom Penh that Obama will be attending.
The US course correction is being dictated by another consideration as well: America has nothing to gain from taking sides in China’s disputes with its neighbors – unless, of course, US interests are directly at stake, as in the South China Sea, where Chinese maritime claims threaten freedom of navigation in some of the world’s most heavily trafficked shipping lanes.
Concern for its own national interest explains why America has charted a course of tacit neutrality regarding the revival of Sino-Indian territorial disputes, including China’s sudden resurrection of a claim to the large Himalayan Indian state of Arunachal Pradesh.
Similarly, the US has urged both China and Japan to resolve peacefully their dispute over the Japanese-controlled Senkaku Islands.
America’s main goal is to prevent the standoff from escalating to the point that it would be forced – against its own interests –&#160;to take Japan’s side.
When US Defense Secretary Leon Panetta met Chinese leader Xi Jinping in China in September, he got “an earful” that the US should stay out of the Sino-Japanese dispute.
Indeed, amid the orchestrated anti-Japanese protests in China in September, Panetta – instead of advising China to rein in the often-violent demonstrations –&#160;publicly reiterated America’s neutrality in the struggle over control of the islands.
The correction in US policy actually extends even to terminology.
American diplomats have now abandoned the term “pivot” altogether, owing to its military connotation, in favor of “rebalancing.”
Whatever one calls it, the new policy approach is all about China, with America bolstering alliances and friendships with countries around China’s periphery, including India, Japan, the Philippines, Vietnam, Indonesia, and South Korea.
Yet the Obama administration continues to deny that China is at the center of its strategy.
In fact, it is reluctant to say or do anything publicly that might raise China’s hackles.
The Asia-Pacific region will loom larger in Obama’s second-term agenda, especially as the ongoing US troop withdrawal ends the Afghanistan war by 2014.
But Obama will have to define a clearer US policy, addressing China’s rapid rise under an authoritarian regime that aggressively pursues border claims and whips up nationalism at home.
The US and the rest of Asia must not merely adjust to China; they must seek to shape a China that plays by the rules.
America’s War-Torn Economy
NEW YORK – Some say there are two issues in the coming American elections: the Iraq war and the economy.
On days when the war seems to be going better than expected, and the economy worse, the economy eclipses the war; but neither is faring well.
In some sense, there is only one issue, and that is the war, which has exacerbated America’s economic problems.
And when the world’s largest economy is sick – and it is now very sick – the entire world suffers.
It used to be thought that wars were good for the economy.
After all, World War II is widely thought to have helped lift the global economy out of the Great Depression.
But, at least since Keynes, we know how to stimulate the economy more effectively, and in ways that increase long-term productivity and enhance living standards.
This war, in particular, has not been good for the economy, for three reasons.
First, it has contributed to rising oil prices.
When the United States went to war, oil cost less than $25 a barrel, and futures markets expected it to remain there for a decade. Futures traders knew about the growth of China and other emerging markets; but they expected supply – mainly from low-cost Middle East providers – to increase in tandem with demand.
The war changed that equation.
Higher oil prices mean that Americans (and Europeans and Japanese) are paying hundreds of millions of dollars to Middle East oil dictators and oil exporters elsewhere in the world rather than spending it at home.
Moreover, money spent on the Iraq war does not stimulate the economy today as much as money spent at home on roads, hospitals, or schools, and it doesn’t contribute as much to long-term growth.
Economists talk about “bang for the buck” – how much economic stimulus is provided by each dollar of spending.
It’s hard to imagine less bang than from bucks spent on a Nepalese contractor working in Iraq.
With so many dollars going abroad, the American economy should have been in a much weaker shape than it appeared.
But, much as the Bush administration tried to hide the true costs of the war by incomplete and misleading accounting, the economy’s flaws were covered up by a flood of liquidity from the Federal Reserve and by lax financial regulation.
So much money was pumped into the economy and so lax were regulators that one leading American bank advertised its loans with the slogan “qualified at birth” – a clear indication that there were, in effect, no credit standards.
In a sense, the strategy worked: a housing bubble fed a consumption boom, as savings rates plummeted to zero. The economic weaknesses were simply being postponed to some future date; the Bush administration hoped that the day of reckoning would come after November 2008.  Instead, things began to unravel in August 2007.
Now it has responded, with a stimulus package that is too little, too late, and badly designed.
To see the inadequacy of that package, compare it with the more than $1.5 trillion that was borrowed in home equity loans in recent years, most of it spent on consumption.
That game – based on a belief in ever-spiraling home prices – is over.
With home prices falling (and set to continue to fall), and with banks uncertain of their financial position, lenders will not lend and households will not borrow.
So, while the additional liquidity injected into the financial system by the Fed may have prevented a meltdown, it won’t stimulate much consumption or investment.
Instead, much of it will find its way abroad.
China, for example, is worried that the Fed’s stimulus will increase its domestic inflation.
There is a third reason that this war is economically bad for America.
Not only has America already spent a great deal on this war – $12 billion a month, and counting – but much of the bill remains to be paid, such as compensation and health care for the 40% of veterans who are returning with disabilities, many of which are very serious.
Moreover, this war has been funded differently from any other war in America’s history –perhaps in any country’s recent history.
Normally, countries ask for shared sacrifice, as they ask their young men and women to risk their lives.
Taxes are raised.
There is a discussion of how much of the burden to pass on to future generations. In this war, there was no such discussion.
When America went to war, there was a deficit.
Yet remarkably, Bush asked for, and got, a reckless tax cut for the rich.
That means that every dollar of war spending has in effect been borrowed.
For the first time since the Revolutionary War, two centuries ago, America has had to turn to foreigners for financing, because US households have been saving nothing .
The numbers are hard to believe.
The national debt has increased by 50% in eight years, with almost $1 trillion of this increase due to the war – an amount likely to more than double within ten years.
Who would have believed that one administration could do so much damage so quickly?
America, and the world, will be paying to repair it for decades to come.
Obama’s Year of Iran
PRINCETON – As US President Barack Obama begins his second term, he will have to devote much of his attention to figuring out how to get America’s domestic finances in order.
But foreign-policy issues loom large as well, and, notwithstanding the ongoing conflict in Syria and the possible spread of war across Africa’s Sahel region, the consensus in Washington is that 2013 will be the “year of decision” on Iran.
Obama began his first administration with an offer to engage with the Islamic Republic; as he memorably put it in his first inaugural address in 2009, “We will extend a hand if you are willing to unclench your fist.”
He repeated that commitment, although much more obliquely, in his second inaugural address: “We will show the courage to try and resolve our differences with other nations peacefully – not because we are naive about the dangers we face, but because engagement can more durably lift suspicion and fear.”
As the American scholar and activist Hussein Ibish recently argued, Obama has appointed a cabinet designed to give him maximum room to negotiate a deal with Iran.
In particular, naming military veterans as Secretary of State and Secretary of Defense will provide him with valuable domestic political cover for an agreement that would inevitably require lifting sanctions on Iran and almost certainly recognizing its right to enrich uranium at a low level of concentration.
That should signal to Iran’s rulers not only that the US is serious about a deal, but also that whatever the US offers is likely to be the best deal that they can get.
The Obama administration has assembled an extraordinary coalition of countries to impose economic sanctions that are having a demonstrable effect on the price and availability of goods in Iran and on the ability of even powerful institutions, such as the Revolutionary Guard, to do business.
But coalitions do not hold together forever, and the pain of sanctions often cuts both ways, affecting buyers as well as sellers.
Countries like South Korea and Japan, for example, have curtailed their imports of Iranian oil only reluctantly; countries like China and Russia rarely play straight on sanctions in the first place.
Moreover, Obama can threaten that “all options are on the table” only so many times without losing credibility with the Iranians and other countries in the Middle East.
As Brookings Institution foreign-policy expert Suzanne Maloney points out, countries in the region and beyond are already dismayed at the lack of US leadership concerning Syria.
If the US gives negotiations one more serious try (a credible offer and a genuine willingness to engage), gets rebuffed, and then does nothing, it will effectively declare itself a paper tiger.
At that point, the sanctions coalition will most likely disintegrate amid a much broader loss of confidence in US leadership.
The US has thus painted itself into a corner.
Former US National Security Adviser Zbigniew Brzezinski recently argued strongly against military action, proposing, instead, a strategy that would continue sanctions and extend deterrence.
Like US policy toward the Soviet bloc during the Cold War, “An Iranian military threat aimed at Israel or any other US friend in the Middle East would be treated as if directed at the United States itself and would precipitate a commensurate US response.”
I can certainly see the wisdom in Brzezinski’s approach.
But Obama has marched the US and its allies too far down the current path.
Moreover, and crucially, Brzezinski forgets that Obama’s determination to stop Iran from acquiring a nuclear weapon does not stem only from his concern for Israel’s security or the stability of the wider Middle East.
Obama has repeatedly committed himself to the goal of turning the world in the direction of “global zero” – a world without nuclear weapons.
He believes (as do former Secretaries of State Henry Kissinger and George Shultz, former Secretary of Defense William Perry, and former Senator Sam Nunn) that unless the world finds a way to live without nuclear weapons, we will find ourselves in an international system in which 30-50 states possess them, raising the danger of accidental or deliberate launch to an unacceptably high level.
Convincing great powers to eliminate their nuclear arsenals might seem as politically fanciful as pushing gun-control legislation through the US Congress, but on that issue, too, Obama has made clear that he is willing to try.
However logical or attractive a containment policy might be, and however disastrous the consequences of bombing are likely to be, Obama’s commitment to realizing global denuclearization as part of his legacy implies that he will not allow another country to acquire a nuclear weapon on his watch, as his predecessors allowed India, Israel, North Korea, and Pakistan to do.
Thus, the stakes for both the US and Iran are very high.
Other countries would do well not to underestimate Obama’s resolve; governments that have relations with Iran should emphasize that the time to make a deal is now.
And countries like Turkey and Brazil (and perhaps India and Egypt) could play a useful role by devising face-saving ways for the Iranians to meet the international community’s demands, together with longer-term alternatives for fuel enrichment that would be consistent with reducing the global nuclear threat.
America’s allies, in turn, must be prepared to close ranks with it on both the outlines of a deal and the willingness to strike militarily.
The art of statecraft is not to choose between war and diplomacy as if they were mutually exclusive alternatives, but to understand how they fit together.
In the case of Syria, the West has repeatedly called for diplomacy while ruling out any military action, with predictably bad results.
America the Hypocritical
In commemorating the 230th anniversary of America’s independence last July, President George W. Bush noted that the patriots of the Revolutionary War believed that all men are created equal, and with inalienable rights.
Because of these ideals, he proclaimed, the United States “remains a beacon of hope for all who dream of liberty and a shining example to the world of what a free people can achieve.”
But, at the same time, his administration was holding approximately 400 prisoners at the US Naval Base at Guantánamo Bay in Cuba.
Some of them have now been there for more than five years.
None of them has ever been put on trial.
Last month, a highly reputable source confirmed that the Guantánamo prisoners are suffering from more than indefinite detention.
The US Federal Bureau of Investigation released documents showing that an FBI agent witnessed “on several occasions” detainees who were “chained hand and foot in [a] fetal position to [the] floor,” without a chair, or food or water.
In these conditions, “most urinated or defecated on [them]selves.”
They were left there for 18 or 24 hours, or more.
On one of these occasions, the agent reported, “the air conditioning was turned up so low that the barefooted detainee was shaking with cold.”
On another occasion the room was unventilated, the temperature over 100 degrees Fahrenheit, and the detainee was almost unconscious on the floor with a pile of hair next to him – “he had apparently been pulling it out throughout the night.”
Another FBI agent was laughingly told by a civilian contractor, “[Y]ou have to see this.”
He was then taken to an interrogation room where he saw a longhaired man with a full beard who was gagged with duct tape that “covered much of his head.”
When the agent asked how the tape would be removed, he was not given any answer.
Other FBI agents reported seeing prisoners left in shackles for 12 hours or more, again in cold conditions, being subjected to strobe lights and loud rap music for many hours, or being forced to wrap themselves in an Israeli flag.
The FBI report noted these incidents with the comment: “doesn’t seem excessive given Department of Defense policy.”
Several of the detainees told the FBI agents that they had no connection with terrorism and had no idea why they had been abducted and taken to Guantánamo.
Many prisoners were not captured fighting in Afghanistan.
Some were picked up in Bosnia, Indonesia, Thailand, Mauritania, and Pakistan.
The Bush administration says that the detainees are “enemy combatants” in the global war against terror – a war that is being waged around the world, and that could last for decades.
The commander of the Guantánamo task force, Rear Admiral Harry B. Harris, Jr., recently defended harsh treatment of his prisoners, claiming, “They’re all terrorists; they’re all enemy combatants.”
But the CIA has made mistakes before.
For example, Murat Kurnaz, a German-born Turkish man, was held in Guantánamo for four years before being released last August.
The case of Khaled el-Masri, a German citizen of Lebanese descent, appears to be another of these errors.
Seized by the CIA in Macedonia, he was taken to Afghanistan and interrogated for five months before being released without charge.
A German court has now issued arrest warrants for those involved in his abduction.
If there are any human rights at all, the right not to be locked up indefinitely without trial is surely one of them.
The US Constitution’s Bill of Rights puts considerable emphasis on that right, specifying in the Sixth Amendment that in all criminal prosecutions, “the accused shall enjoy the right to a speedy and public trial, by an impartial jury” and “to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him.”
None of the Guantánamo inmates has been granted these rights.
So it has never been proved, by the standards laid down in the US Constitution that any of them really are terrorists.
But the Sixth Amendment does not apply to the Guantánamo prisoners, because they are not US citizens and are in a facility that, technically, is not part of US territory, although it is under the full control of the US government.
Whatever US courts say about it, abducting people all over the world, locking them up for years without establishing that they are guilty of anything, and subjecting them to harsh and abusive treatment is a flagrant violation of international law.
By any standard of justice, it is also just plain wrong.
Tom Paine, the great American revolutionary and author of
America the Pariah
America Wakes Up to Climate Change
After years of debate in the United States, and opposition to action by the Bush administration, America is finally waking up to the reality of global climate change.
Leadership is still not coming from the president, but the private sector has begun to act.
Leaders of major US companies have decided that global man-made climate change is real, must be controlled, and that business must play a constructive part in the process.
Thus, even as the Bush administration and some scientific contrarians pretend that there is no problem, US corporate leaders are seeking practical solutions.
The basic situation has been clear for years.
Global use of fossil fuels is contributing to a sharp rise in atmospheric carbon dioxide, which is causing the Earth to warm.
Rainfall patterns are changing.
Deserts and dry regions are becoming drier.
Extreme weather events such as hurricanes and typhoons are likely to increase.
Flooding in Europe is likely to intensify, a process that may already have begun.
Sea levels are rising, and could climb sharply if global warming leads to a destabilization of the Greenland and Antarctic ice sheets.
In short, the scientific evidence is strong and growing that the planet is at grave risk, with many ill effects already being felt and more to come.
The proper responses are also increasingly understood.
We must move to a sustainable energy system, one that does not mean a huge increase of carbon in the atmosphere.
This will require a shift to renewable energy sources such as solar power, and perhaps nuclear power, as well as new technologies to capture carbon dioxide at power plants and then to dispose of the carbon dioxide in safe underground deposits.
Society will have to pay a price for these investments in new energy technologies, but the benefits will be vastly greater than the price.
The US is the world’s major emitter of carbon dioxide from energy use, but it has done the least among all major economies to confront the global challenge.
The Bush administration claims that more research is needed before any action is taken.
Yet real action in the US is starting, thanks to leadership in other parts of the world, and thanks to the enlightened understanding of some major American businesses.
First, the rest of the world ratified the Kyoto Protocol to control emissions of carbon dioxide.
At the beginning of this year, Europe introduced a new Greenhouse Gas Emissions Trading Scheme that uses market-based incentives to control carbon emissions.
American companies operating in Europe are part of that system for their European-based emissions, so that US companies are being pulled into climate control even if their own government avoids the issue.
Second, major US investors, such as pension fund managers, are realizing that US companies that fail to control their emissions may be vulnerable to financial losses in the future.
They know that, sooner or later, the US will have to join the rest of the world in controlling climate change.
At that point, power companies that use antiquated technologies that emit massive amounts of greenhouse gases may face serious financial losses.
So investors are telling companies to report their carbon emissions today in order to assess future liabilities.
Similarly, many company bosses know that pretending that climate problems do not exist is bad for shareholders, because reality will one day strike.
They know that investing today in clean technologies can give them a long-term competitive advantage.
As a result, many companies are taking steps now to limit their emissions to avoid future financial liabilities and a lack of investor confidence.
The most dramatic breakthrough of this kind occurred when General Electric, one of the world’s most important, innovative, and respected companies, announced that it was going “green” with a major new corporate focus on environmentally sound technologies and a commitment to limit its own greenhouse gas emissions.
With GE’s leadership, which it termed “ecomagination” (combining ecology with imagination), many US businesses are sure to follow.
It is too early to count on success in engaging the US on climate change.
The Bush administration continues to delay and to avoid sound science.
Yet it is reasonably clear that a tipping point has been reached.
Reality is catching up with the US, as it already has elsewhere in the world.
As US citizens and businesses continue to suffer the results of climate change – heat waves, droughts, hurricanes, and floods – more and more Americans, including an increasing number of business leaders, will press America’s political leaders for real action.
The solutions will not be easy, and the effort must last over many decades in all parts of the world.
But the effort needs to start now.
As with Europe’s new carbon trading, all producers and consumers around the globe will need to face market incentives to adopt technologies and consumption patterns that slow (and eventually stop) the increase of greenhouse gases in the atmosphere.
We will all need to pay a “market price” when we contribute to global climate change, so that we give true economic incentives to sustainable energy systems and new public investments – for example, mass transit – that reduce greenhouse gas emissions and thereby head off future climatic disasters.
A Misaligned Euro?
CAMBRIDGE: Caught by rising inflation from oil prices and a soaring dollar, the European Central Bank (ECB) has raised interest rates yet another notch.
More is to come.
Growth is wonderful; inflation is terrible; a central bank cannot avoid choosing: it must restore price stability even if that means sacrificing growth.
This is what lies ahead, unless there is sudden relief from an upturn in the euro.
But is it realistic to expect a rally from a currency that has been under siege since its birth?
At its introduction the euro reached impressive heights, like a high-tech IPO.
But the IPO soon sunk miserably.
Since its introduction, the euro has fallen further from its peak then even the Nasdaq in the high-tech sell-off of earlier this year.
Like the Nasdaq’s high-tech high-flyers, the nagging questions about the euro are these: what is its fundamental value?
Is there a fundamental misalignment of the euro with other currencies (most notably the dollar) and how long might this last?
It is commonly assumed (but nobody takes big bets) that the Nasdaq still carries major downside risks while the euro, sooner or later, must return to normality, whatever that means.
Could the opposite happen?
A recent study by the IMF reports on “equilibrium” exchange rates derived from models of long run factors in currency valuations.
The equilibrium rates are reported in the accompanying table and so are today’s actual rates.
According to these IMF theoretical equilibrium rates, the euro is grossly misaligned: 30% underpriced against the dollar, 18% against the Yen!
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Actual IMF Equilibrium Rate
Dollar/Euro ($/_) 0.88 1.26
Yen/Euro (-/_) 93.1 113.3
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In judging whether these theoretical values foreshadow a big euro realignment, lets see what causes them.
First and most importantly, these equilibrium rates are based on a theoretical model where long run current account balances tend toward zero.
Under this scenario, any country that runs persistent, large current account balances must look forward to a hard landing and a correction in the value of its currency.
No country can borrow forever or at least at very high rates.
But do current account constraints apply to major, financially stable countries?
Canada has run current account deficits for all but three of the last 50 years; the US has done the same for 30 years.
So long as a borrowing country is stable and attractive, a major reversal due to the current account balance will not be forced by the market.
That is America’s story: despite a yawning trade deficit, investment is running high, eagerly financed by the rest of the world; public finance is formidable and inflation insignificant; new economy prospects run unabated and asset markets are revealing that even if there is a US bubble, it is unlikely to burst as violently as in Japan a decade ago.
In such an environment, long run equilibrium rate models are pretty useless as guides to short or even medium term exchange rate developments.
The second limitation of long run models is this: they are estimated from history and so make no allowance for dramatic changes in the supply side or financial environment.
Japan, for example, is in the grip of a growth crisis and public finance disaster - not the usual companions of an appreciating currency.
On the dollar/euro front, the US has embarked on a high productivity trend unmatched anywhere; never mind the current account, the upswing in American productivity (combined with financial stability) is the dominant feature no matter the current account.
The counterpart of here, because exchange rates always ride on differential performance, is a continued poor supply side performance in Europe and Japan’s ongoing and pervasive economic distress.
There is a third reason why estimates of long run equilibrium with current account balance may be of little predictive value.
Do Europe and Japan really want to see the US achieve an external balance?
Europe and Japan, indeed the whole emerging economy world, are living off America’s trade deficits.
They keep the world growing!
Were there a risk to the continued funding of these deficits by the private sector, the ECB and the Bank of Japan would step in to buy all the dollars that their private sectors had shunned.
There is precedent for this: whenever the dollar weakens, foreign central banks are eager to help.
As John Connally, President Nixon’s Treasury Secretary of 30 years ago, said: “the dollar is our money and their problem.”
The chance of seeing exchange rates near the IMF values any time soon is slim.
Yes, the euro can tend toward dollar parity.
But it is also plausible that lack of support for the euro and the ongoing US miracle will see the euro sink to exceptionally low levels of near .80 and even less.
For the time being, investors will continue to think of the euro as a problem just as the ECB does.
The euro IPO crashed because it came at a time when the US economy was flying high.
The European product is going to make it; it will have its day in the sun.
But right now?
It has no chance to shine.
Amnesty for Saddam?
Senior US officials, including Secretary of Defense Donald Rumsfeld, have recently suggested that Saddam Hussein and his top henchmen might be given an amnesty for their past crimes in exchange for leaving Iraq and averting war.
Is such an amnesty a good idea?
How should it be judged by those attempting to end the practice of exempting from punishment government officials guilty of monstrous crimes?
These are weighty questions.
In trying to answer them, two considerations seem fundamental.
First, one should consider the severity of the crimes committed by those who would escape punishment.
Second, we should consider how much death and suffering would be avoided by letting such a ruler and his henchmen go free.
A third factor that should also be taken into account is what damage would be done to the emerging international legal system for ending the impunity long enjoyed by state officials who use their power to commit atrocities.
As for the severity of Saddam Hussein's criminal behavior, there is probably no official now in power anywhere in the world with as much blood on his hands.
An incomplete list of his crimes includes:
using chemical weapons against Iranian troops during the eight-year Iran-Iraq war that he started in 1980;
murdering about 5,000 residents of the predominantly Kurdish town of Halabja in March 1988 through the use of chemical weapons, after using these weapons in previous months against Kurdish villages in the vicinity;
murdering about 100,000 Kurds during the "Anfal" campaign between February and September 1988, mainly by transporting the victims to a desert area where they were forced into trenches, machine-gunned, and then covered with sand by bulldozers;
destroying the ancient civilization of the Marsh Arabs in southeastern Iraq, followed by the forced resettlement and murder of the region's former residents;
his actions in Kuwait when Iraq invaded in 1990, including the disappearance--still unresolved--of hundreds of Kuwaiti citizens;
savage reprisals against the Shiites in southern Iraq in the aftermath of the 1991 Gulf War;
and persecution of any and all Iraqis suspected of dissent or disloyalty.
Each of these constitutes a war crime, a crime against humanity and, in the case of the Anfal campaign and its mass slaughter, and perhaps also in the case of the Marsh Arabs, the gravest crime of all, genocide.
Although we cannot know how many lives would be lost and how much misery would be inflicted in an invasion of Iraq to oust Saddam's regime, the cost would unquestionably be great.
No matter how compelling the case for punishing Saddam Hussein and such partners in crime as Ali Hassan al-Majid ("Ali Chemical" to the Kurds), Saddam's cousin and the principal organizer of the Anfal campaign, it is equaled by our duty to try to minimize harm to the living.
The apparent conflict between doing justice and preserving peace may be resolved through international law.
As matters currently stand, there is no mechanism for bringing Saddam Hussein to trial.
The International Criminal Court, which is now taking shape in The Hague with the selection of its first justices, does not have retroactive jurisdiction.
It cannot consider crimes committed prior to July 1, 2002.
So Saddam could be tried only before a new
If Saddam were granted sanctuary in a country such as Belarus or Libya, he would probably remain safe from prosecution, but only as long as he never leaves.
For example, Uganda's Idi Amin and Ethiopia's Haile Mariam Mengistu--deposed tyrants who rival Saddam in the scale of their criminality--have taken care not to stray from their shelters in Saudi Arabia and Zimbabwe, respectively.
If Saddam is ready to abdicate to preserve his life, he should get that much security, no more.
Without amnesty from a body such as the UN Security Council, the theoretical possibility that he could be prosecuted would be preserved.
He could not move freely.
His crimes would neither be forgiven nor forgotten.
Amnesty for Saddam Hussein is simply intolerable.
But condemning thousands to death in order to be able to punish him is intolerable as well.
Let him go where we can't get at him, but with no guarantee of impunity if his actions or fate bring him to a place where justice can be done.
A More Perfect Monetary Union
WARSAW – The eurozone is often considered an experiment – a monetary union without political unification.
Those who make this claim seem to have in mind a model of a single state, which possesses two relevant features: limited fiscal sovereignty for regional and local governments and a substantial common budget from which regions hit by asymmetric shocks can receive transfers.
Those who claim that “political union” is necessary for the eurozone appear to focus on the second feature, despite the fact that fiscal constraints on local governments are clearly a typical and important component of single states.
In this sense, they ignore the fact that the European Union’s Stability and Growth Pact has been in principle an important component of political union, not its substitute.
Indeed, the eurozone’s current fiscal problems do not result from the lack of a large common budget, but from weak enforcement of the Pact.
More fundamentally, monetary unions – in a broader sense – have existed not only within single states, but also in groups of sovereign states, the gold standard being the most notable example in history.
The experience of such monetary unions offers two lessons.
First, they required fiscal discipline in the member states, which was true under the gold standard, with its informal norm of balanced budgets.
Second, they existed without any fiscal transfers from a common center, because such a center did not exist.
Instead, a great deal of flexibility, including within their labor markets, facilitated adjustment to asymmetric shocks.
It is clear that there is no scope in the foreseeable future to extend the EU budget in order to increase fiscal transfers to eurozone members affected by sharp declines in consumption.
This would require an enhanced level of European identity, something which the Union’s political elites cannot generate artificially. &#160;But the crucial point is not that a large common budget in the eurozone is politically impossible to achieve, but rather that it would not address the main problem: the weakness of the mechanisms safeguarding fiscal discipline in the member states.
Instead of looking at the wrong model – that of a single state – the EU and its member states should focus on the conditions required for the proper functioning of a currency union that has no common budget to compensate for asymmetric shocks.
First, utmost priority should be given to strengthening the mechanisms aimed at preventing pro-cyclical policies and large fiscal shocks.
This requires ensuring the credibility and transparency of the accounting rules that define budget deficits and public debt, with closer monitoring also focusing on the development of asset bubbles, which cause deep recessions – and thus sharp increases in budget deficits – when they burst.
Likewise, the European Central Bank’s monetary policy should “lean against the wind” by paying more attention to the development of asset bubbles.
As the ECB’s common monetary policy cannot fit the macroeconomic conditions of all the member countries, the eurozone countries need macro-prudential regulations that aim at reducing excessive credit growth.
Meanwhile, the Stability and Growth Pact should be strictly enforced, which implies using and strengthening the available sanctions.
To be sure, initiatives at the EU and/or eurozone level cannot substitute for stronger mechanisms of discipline in the member states, which are ultimately the responsibility of national politicians and publics.
But EU-wide measures aimed at ensuring discipline are necessary to spur the growth of preventive mechanisms in the member states, and such initiatives are largely dependent on the large countries, which thus bear a special responsibility for the developments within the eurozone – and within the EU.
Second, beyond strengthening economic institutions, EU countries must accelerate structural reforms to boost their long-run growth prospects and facilitate their smooth adjustment to shocks.
The former are necessary to help Union members grow out of their increased public debt, while the latter would help them to address unemployment.
Of the many necessary measures in this area, the most important include a vigorous effort to complete the Single Market, coupled with avoidance of economic nationalism at all costs.
Moreover, the Lisbon Agenda should be reinvigorated, with a focus on market reforms, and the EU should urgently reconsider measures – particularly regarding climate policy and the drift toward an EU-wide social policy – that risk imposing additional burdens on their economies and/or hamper the flexibility of markets.
In this respect, the mode of fiscal reforms is fundamentally important.
As EU members already have large tax burdens, further tax increases would weaken the forces of growth.
Thus, fiscal reform should focus on reducing the growth of spending commitments, which –given the aging of EU societies – must include raising the retirement age.
Finally, rigid labor markets and, more generally, regulatory constraints on prices and on the supply response of the economy, deepen recessionary reactions to various shocks, and contribute to the growth of unemployment.
Therefore, labor-market liberalization should be a high priority and another area of focus for the reinvigorated Lisbon Agenda.
European elites are fond of exclamations about “European solidarity,” “social cohesion,” and the “European social model.”
But no amount of lofty rhetoric can substitute for the reforms outlined here – or obviate the need for them.
Hardening Brazil’s Soft Power
BRASILIA – It is, perhaps, a truism for Brazil’s citizens that their country is and always will be a peaceful one.
After all, Brazil has lived with its ten neighbors without conflict for almost 150 years, having settled its borders through negotiation.
It last went to war in 1942, after direct aggression by Nazi U-boats in the South Atlantic.
It has forsworn nuclear weapons, having signed a comprehensive nuclear-safeguards agreement with Argentina and the International Atomic Energy Agency.
Through the Common Market of the South (Mercosur) and the Union of South American Nations (Unasur), Brazil is helping to integrate the region politically, economically, socially, and culturally.
But is soft power enough for one of the world’s major emerging countries?
To be sure, Brazil’s peaceful foreign policy has served it well.
Brazil has used its stature to advance peace and cooperation in South America and beyond.
Its constructive stance derives from a worldview that accords pride of place to the values of democracy, social justice, economic development, and environmental protection.
Brazil’s unique approach to promoting these ideals is an important source of its soft power, reflected in the broad international support that placed Brazilians atop international institutions like the Food and Agriculture Organization and the World Trade Organization.
Yet no country can rely on soft power alone to defend its interests.
Indeed, in an unpredictable world, where old threats are compounded by new challenges, policymakers cannot disregard hard power.
By deterring threats to national sovereignty, military power supports peace; and, in Brazil’s case, it underpins our country’s constructive role in the pursuit of global stability.
That role is more necessary than ever.
Over the past two decades, unilateral actions in disregard of the UN Security Council’s primary responsibility in matters of war and peace have led to greater uncertainty and instability.
Likewise, little progress toward nuclear disarmament has been made, in disregard of the Nuclear Non-Proliferation Treaty.
Brazil’s abundance of energy, food, water, and biodiversity increases its stake in a security environment characterized by rising competition for access to, or control of, natural resources.
In order to meet the challenges of this complex reality, Brazil’s peaceful foreign policy must be supported by a robust defense policy.
Brazil’s National Defense Strategy, updated in 2012, states that the modernization of the Armed Forces is intrinsically linked to national development.
Thus, it emphasizes the need to strengthen the domestic defense industry.
In accordance with the Strategy, Brazil is enhancing its conventional deterrence capabilities, including by building a nuclear-propelled submarine as part of a naval program commensurate with its responsibilities in the South Atlantic.
Brazil coordinates closely on defense matters with its neighbors, both bilaterally and through Unasur’s South American Defense Council, which aims to promote confidence-building, transparency, a joint regional defense industry, and, most important, a common defense identity.
One potential mechanism for advancing these objectives is a South American Defense College, now under consideration.
South America is becoming a region where war is unthinkable – what the political scientist Karl Deutsch once called a “security community.”
Having visited every South American country in my tenure as Defense Minister, I am convinced that, the most effective deterrent on the continent is cooperation.
At the same time, Brazil is pursuing increased bilateral defense cooperation with African partners.
With our neighbors on both shores of the South Atlantic, Brazil is working closely to strengthen the Zone of Peace and Cooperation of the South Atlantic (ZPCSA), which aims to keep the ocean free from rivalries foreign to it and from nuclear weapons.
Brazil is also reaching out to other emerging countries, such as its fellow BRICS (Brazil, Russia, India, China, and South Africa) and members of the IBSA Dialogue Forum (India, Brazil, and South Africa).
For example, Brazil conducts IBSAMAR, a regular trilateral naval exercise, with South Africa and India.
More broadly, we are exploring ways to cooperate in the joint development of defense technologies.
Through such endeavors, Brazil hopes to contribute to a more balanced international order, one less subject to hegemonies of any kind, without losing sight of the importance of mutually beneficial partnerships with developed countries.
Even as Brazil hardens its soft power, it remains deeply committed to the path of dialogue, conflict prevention, and the negotiated settlement of disputes.
The presence of Brazilian peacekeepers in countries like Haiti and Lebanon underscores Brazil’s contribution to maintaining peace and security worldwide.
In the twenty-first century, a truly stable global order will depend on a legitimate and effective UN Security Council, one that reflects the plurality of the emerging multipolar world.
A Movable Financial Feast
LONDON – There was a time when league tables were to be found only on the sports pages of newspapers.
Now they are a global obsession.
There are school and university league tables, rankings of companies on profitability or corporate social responsibility, tables of happiness indicators by country, and tables that attempt to rank consumer brands by value.
There is even a league table of the world’s funniest jokes (I did not laugh much).
The financial world is also full of such rankings.
Investment bankers wait with bated breath for the merger and acquisition league tables, even though the link between a high ranking and profitability is somewhere between loose and non-existent.
Bank league tables have been with us for a while, and now tend to be based on capital strength, rather than asset volume, which is an improvement of sorts, but still not very meaningful.
There are also now several different league tables – which are generating considerable angst – that rank financial centers based largely on surveys of firms.
How badly the financial crisis damaged the reputation and performance of the major Western centers is a question increasingly asked in London, and to a lesser extent in New York. (Some Americans tend to think that the world will beat a path to their door, no matter how badly they are received when they arrive!)
So far, the message from the most recent tables is not too alarming for the incumbents.
A ranking prepared for the City Corporation in London shows New York and London still neck and neck at the top of the league.
The Banker magazine produces another, with New York on top and London a close second – though the distance between them and their pursuers is narrowing.
The scores in both London and New York for the quality and intensity of regulation, and the tax burden, have dropped.
Firms seem nervous about the future in both areas.
The most striking change in the rankings is the rise of major Asian financial centers – and not just Hong Kong and Singapore, but also Shanghai, Beijing, and Shenzhen.
The Chinese have been explicitly promoting their financial centers, and the impact is beginning to be seen.
The World Economic Forum’s Financial Development Index – yet another league table to consider – shows Hong Kong and Singapore very close indeed to London, with China now ahead of Italy on the overall measure of financial sophistication.
Noodles are beating spaghetti.
Some of this is unsurprising.
As the world’s center of economic gravity shifts east, the balance of financial activity is bound to move with it.
On the principle that if something is inevitable, it is wise to welcome it, the appropriate response in London and New York is to find ways of collaborating with these new centers.
But the more important question for the traditional financial centers is whether international activity that can move really is moving.
That is far harder to judge.
There are anecdotes about individual hedge-fund managers moving to Geneva.
Every time a government, or a regulator, announces some new control, or a tightening of existing controls, there are threats from bankers that they will pack up and leave town, taking their Porsches and mistresses with them.
These threats, which used to have a lot of political impact, are now much less effective.
Some politicians and commentators quickly say, “Good riddance.” Even the Bank of England has asked whether, given the cost of mopping up the mess caused by the latest crisis, it is worth playing host to a global financial market.
This is risky speculation.
However badly bankers have behaved – and some clearly deserve a decade or more in the sin bin – financial services are a crucial element of London’s economy.
If the financial sector declines, what will replace it in employment terms?
Airy talk about science and manufacturing as ladders out of recession (a favorite image of former British Prime Minister Gordon Brown) is just that – empty words.
There are few, if any, examples of high-cost post-industrial societies reviving their manufacturing sector on a large scale once it has declined.
London, in particular, has no inalienable right to be a global financial center.
The United Kingdom’s domestic market is, after all, much smaller than that of the United States.
Indeed, the location of financial activity has changed through the centuries.
If incumbency were a permanent advantage, Goldman Sachs’ global headquarters would be in Babylon.
There must be a tipping point at which some combination of higher taxation, more burdensome regulation, and a hostile political climate causes financial firms to relocate.
There is a risk that Britain may now be approaching that point.
That is why the UK’s Financial Services Authority, and even the Confederation of British Industry, which speaks largely for non-financial firms concerned about access to credit, has begun to call for a truce between the authorities and financial markets.
The next two or three months will determine whether peace breaks out, and, if it does, whether it will endure.
As is always the case in peace negotiations, both sides must be willing to compromise.
Firms will need to show visible restraint when it comes to this year’s bonus round.
The British government will not tolerate another jamboree.
And governments on both sides of the Atlantic will need to decide just how far they want to go in punishing banks.
Continued threats of ever-higher tax burdens could prove dangerously counterproductive.
If we fail to settle on a new social contract between the state and the markets soon, those markets may indeed move elsewhere.
A Murder in Moscow
It is time to end the fiction that Vladimir Putin’s “dictatorship of law” has made postcommunist Russia any less lawless.
The murder of Anna Politkovskaya, one of Russia’s bravest and best journalists, a woman who dared to expose the brutal murders committed by Russian troops in Chechnya, is final proof that President Putin has delivered nothing more than a run of the mill dictatorship with the usual contempt for law.
This recognition is a timely one for the world to make, particularly Europe.
Germany’s Foreign Ministry is preparing a policy on Russian/German relations that will enshrine indifference to Putin’s lawlessness as being in the national interest of the most powerful member of the European Union.
But indifference becomes appeasement when it encourages Putin to pursue his lawless ways in the international arena, as in his current campaign to strangle Georgia’s economy.
The killing of Politkovskaya has incited an eerie sense of déjà vu : just as in the KGB’s heyday, people simply disappear in Putin’s Russia.
Politkovskaya’s is the third politically tinged killing in three weeks.
Enver Ziganshin, the chief engineer of BP Russia, was shot to death in Irkutsk on September 30.
Andrei Kozlov, the deputy governor of Russia’s central bank who was leading a campaign against financial fraud, was assassinated on September 14.
The fact that Russia’s Prosecutor General Yuri Chaika, took over the investigation into Politkovskaya’s killing, as he did with the murder of Kozlov, doesn’t inspire hope, as such senior level involvement would in any real democracy.
In fact, the involvement of the highest level of Russia’s government is almost a guarantee that the killers will never be found.
Politkovskaya’s murder is a particularly grim augury when you consider that she was a powerful critic of Russia’s President.
In her articles for one of the few remaining independent papers in Moscow,
I am not accusing Putin’s government of the contract killing of Politkovskaya.
After all, as a campaigning investigative journalist she made many people angry besides Putin, not least of which is the current Chechen Prime Minister, Ramzan Kadyrov, whom she accused of a policy of kidnapping for ransom.
But even if Vladimir Putin’s associates had nothing to do with Politkovskaya being gunned down in an elevator of her apartment building in the center of Moscow, his contempt for law created the climate in which the murder was carried out.
Like the murder of Archbishop Thomas Beckett in his Canterbury Cathedral many centuries ago, the crime was committed in the clear belief that it would please the king.
Given what Politkovskaya represented—the responsibility of a democratic press to question the Kremlin and its policies—the government should have made certain that nothing bad happened to her.
Putin’s Russia has already lost 12 leading journalists to murder in the past six years.
None of those crimes has been solved, which would not be the case if Putin’s “dictatorship of law” was anything more than a PR strategy.
The six year period since Vladimir Putin arrived in the Kremlin has been a time of deeply conflicting signals.
On one hand, the world sees a young, educated leader pledging to modernize Russia, particularly in terms of bringing its law enforcement and judicial practices into line with international norms.
On the other, the president watches in silence while his ex-colleagues in Russia's FSB security service (the former KGB) provide no security to those murdered, and launch a series of notorious espionage cases against journalists, scientists, and environmental activists.
These “neo-spies” include journalist Gregory Pasko, arms control expert Igor Sutyagin, diplomat Valentin Moiseyev, physicist Valentin Danilov, and others.
The supposedly civilizing influence of being a Western partner — chairing a G-8 summit in Saint Petersburg for example — seems to have been lost on Putin’s Kremlin cabal.
Once again exposure to Western values has delivered another Potemkin Village;
Russia presents a façade of laws and democratic institutions, but behind that cardboard surface the same arbitrary brutes rule.
The danger for the world is that Putin’s lawlessness is being exported.
Across Russia’s near abroad, a form of criminalized diplomacy is taking root.
Look at Putin’s attempt to rig Ukraine’s previous presidential election, and the on again off again criminal charges brought against the opposition leader Yuliya Tymoshenko.
Look at the rogue breakaway regions in Moldova and Georgia that exist only because of the Kremlin’s backing.
Look at how the Kremlin seeks to blackmail its neighbors by threatening their energy supplies.
Every policeman knows that when you ignore criminal behavior, criminals grow bolder.
It is past time for the world to recognize Vladimir Putin for what he is: a man who is taking Russia back into the shadows.
An Accidental Cure for Iraq
Doctors use the word “crisis” to describe the point at which a patient either starts to recover or dies.
President George W. Bush’s Iraqi patient now seems to have reached that point.
Most commentators appear to think that Bush’s latest prescription – a surge of 20,000 additional troops to suppress the militias in Baghdad – will, at best, merely postpone the inevitable death of his dream of a democratic Iraq.
Yet as “Battle of Baghdad” begins, factors beyond Bush’s control and not of his making (at least not intentionally) may just save Iraq from its doom.
One key factor is that, for the first time since the United States and Britain invaded Iraq, Arab Sunni leaders are backing a US military plan for that country.
These Sunni leaders live in abject fear of the geopolitical earthquake that any disintegration of political authority in Baghdad would bring, believing that all-out civil war would invariably follow – a war that would not respect international borders.
Of course, America has been encouraging Sunni leaders in this belief.
Secretary of State Condoleezza Rice’s recent tour of Middle East capitals helped spread the word to Egypt, Jordan, Saudi Arabia, and the Gulf states that any US failure and sudden withdrawal would be certain to destabilize them.
Given the fragile grip that these leaders have over their societies, America’s warnings have been taken to heart.
But the truly curious factor that might bring success to Bush is that those who have opposed or resented America’s presence in Iraq, such as the Iranian-backed Shi’a parties now also appear to want Bush’s new strategy to succeed.
They are for it because they believe it will defang Moqtada al-Sadr, the rogue Shi’a cleric whose power has mushroomed over the past three years – to the point that he now dominates much of Baghdad and holds the allegiance of countless angry young Shi’a men.
Of course, attacking Moqtada al-Sadr’s Mahdi Army in the name of fighting militia death squads has the potential to draw American military forces into a level of urban warfare unseen since the Falluja assaults of 2004 and 2005.
Al-Sadr is seen as the protector of the Shi’a of Iraq and has are an estimated 60,000 fighters in his militia.
But he is deeply mistrusted by other Shi’a leaders, who fear that they may one day have to take him on by themselves.
Better to let the Americans do it, though of course these Shi’a leaders prefer a slow strangulation of al-Sadr to a direct and bloody assault.
But make no mistake: how al-Sadr is handled is the big test of Bush’s new strategy.
Should the US choose to face al-Sadr and his forces head on, they risk alienating Iraq’s largest sectarian community, the Shi’a, adding fuel to the anti-occupation resistance and thus probably dooming Bush to failure.
Iran and Syria, which have played a spoiler role in Iraq up to now, may also now be anxious to find a way to pull the country back from the brink.
Bush still refuses to talk to either of them, and has lately been having US troops arrest Iranian agents in Iraq.
Yet Iran may already see itself as victorious, with the current Iraqi government friendlier than any the Iranians have ever known.
So maintaining that government in office has now become a strategic priority for Iran, particularly as it is now clear that any US hopes of using Iraq as a permanent military base are dead.
The “surge” also opens, perhaps for the first time, a serious possibility of pouring water on the insurgent fires in Anbar province, the heartland of the Sunni insurgency.
The US has achieved relative successes in the province through alliances with Sunni tribes.
The hope is that such realistic and pragmatic accommodations will be extended to Iraqis who are fighting under the banner of a nationalist and anti-occupation agenda.
So some of the stars have come into alignment for Bush.
But to keep them there in the long term, the Iraqi government will need to amend the constitution in a way that appeases the Sunni community.
Reassuring Iraq’s Sunnis that they have a place in the new Iraq will also reassure neighboring Sunni governments, which have mostly turned a blind eye to the support for the insurgency that has come from their lands.
Of course, should the US see failure ahead, it could seek to broaden the war beyond Iraq’s borders by attacking Iran, a policy reminiscent of “Operation Sideshow,” when US failure in Vietnam in the late 1960’s enticed President Nixon into attacking Cambodia and Laos.
But Iran has resources that Cambodia and Laos could never muster; indeed, its ability to retaliate could set the entire region ablaze.
Whereas America’s war in Indochina was a tragic mistake, the cost of a wider war precipitated by the crisis in Iraq would be incomparably greater – for both the patient and the doctor.
An Agenda for Growth in Europe
A recent OECD study reminds us, once again, that per capita income levels are roughly 30% lower in the euro area, as well as in the three largest Continental countries – France, Germany, and Italy – that dominate its performance, than in the United States.
That gap is likely to widen as Europe’s demographic profile darkens, and if productivity continues to grow more slowly than elsewhere in the industrial economies.
Why have the large European economies failed to catch up with US income levels?
The bulk of the shortfall is due to less intensive use of labor: employment rates for women and for the oldest and youngest age groups are lower in the euro area than in the US, working hours are far fewer, and, least significantly, unemployment rates are higher.
Some take consolation from this, viewing it as positive that Europeans prefer leisure to work.
But low levels of labor utilization are largely due to heavier income taxes and social security contributions, as well as high social benefit levels introduced at a time when the labor force was growing rapidly and the need to replace involuntary with voluntary unemployment seemed more urgent than today.
These measures will need to be revisited both to increase the supply of labor and to make public finances more sustainable.
This process is already underway, particularly in Italy and France, through cuts in social security contributions for lower-paid workers, tighter conditions for drawing unemployment benefits, and tax credits for “the working poor.”
Since the mid-1990’s, the relative decline in employment in these countries has, indeed, been slightly reversed.
But factors beyond taxes and benefits also contribute to low employment rates in all the three major euro-zone economies: high minimum wages and some features of employment protection legislation slow down the flow of workers through the job market.
Although a long agenda of reforms is beginning to be tackled, first in Germany and, more recently and cautiously, in France, the results are slow in coming and public understanding of the need for change remains limited.
Much can be learned from each country’s experience and from that of smaller EU member states, but labor market reforms inevitably have a strong national flavor.
Employment objectives have been formulated for all EU member states since 1997 in the so-called European Employment Strategy (EES), now part of the “Lisbon Agenda,” the set of goals established to boost EU productivity.
But, with the policy instruments for achieving these goals largely national and the arguments for applying them simultaneously in several member states weak, the EES has created unrealistic public expectations and triggered only limited action by governments.
Nor is the employment gap with the US the only problem for Europe.
Beginning in the mid-1990’s, the rate of growth in output per hour worked – a key factor behind the rise in per capita income – slowed in most European countries while it rose in the US, reversing a decades-long pattern.
Between 2000 and 2004, hourly labor productivity rose more than twice as fast in the US than in the large euro zone economies – 2.8% per year versus little more than 1%.
So why have the Europeans been unable to sustain improvements in both foundations of growth – employment and productivity – at the same time?
This proved possible not only in the US, but also in other advanced economies outside Europe – Australia, Canada, and New Zealand – and, unsurprisingly, in the new EU member states.
The explanation is not capital spending, which is normally linked to productivity growth.
There have been no major differences between the US and the large euro zone economies here.
This leaves the “explanation” to what economists call Total Factor Productivity (TFP), a mix of several important elements, including innovation activity, a well-functioning financial system ready and willing to take risks, and organizational flexibility that facilitates rapid diffusion of new technologies.
The main lapse in TFP growth in Europe over the past decade has been in services (excluding information and communications technologies).
So deregulation and integration of services will be essential if the Euro area’s TFP is to improve, as more than two-thirds of total income in most EU economies is generated in this sector.
While product markets have held center stage in the creation of the single European market, services continue to be fragmented by national regulatory, anti-competitive practices.
Much of the explanation lies in the very heterogeneity of services and the greater difficulties that mutual recognition, or the “country-of-origin principle” – essential in the integration of product markets – implies for services.
Unfortunately, reform was derailed in 2005.
During the referendum campaign in France preceding the vote on the draft EU Constitutional Treaty, the proposed directive was vilified as undermining the rights of labor, symbolized by that dreaded bogeyman, the “Polish plumber.”
These attacks overlooked the fact that the directive makes employment conditions of workers from other EU-member states subject in most respects to host-country rules.
A revised version of the directive that reduces its sectoral scope and makes a number of compromises with the country-of-origin principle is now before the European Parliament.
Even this limited version would constitute progress; most of the gains arise from removing the red tape that complicates cross-border establishment of small and medium-size service enterprises and limits competition in broad sectors of the economy.
It is a sad reflection on the state of the EU that it seems unable to agree on the one clear productivity-advancing piece of legislation when improving productivity is held out as a shared goal.
The failure to mobilize consumer interests in favor of European integration is particularly disappointing for the new member states, which had expected to reap some of the benefits.
An Agenda for the Group of 7
An Age of Diminished Expectations?
CAMBRIDGE – As the United States and European economies continue to struggle, there is rising concern that they face a Japanese-style “lost decade.”
Unfortunately, far too much discussion has centered on what governments can do to stimulate demand through budget deficits and monetary policy.
These are key issues in the short term, but, as every economist knows, long-run economic growth is determined mainly by improving productivity.
There is no doubt that Japan’s massive 1992 financial crisis was a hammer blow, from which it has yet to recover, and the parallels with the US and Europe today are worrisome.
Both seem set for a long period of slow credit growth, owing both to necessary stricter financial regulation and to the fact that their economies remain significantly over-leveraged.
There are no simple shortcuts in the healing process.
Yet, in assessing the Japanese experience and its relevance today, it is important to recognize that Japan’s fall to earth was due not only to its financial crisis.
Japan also suffered a number of severe productivity shocks, which had much to do with its longer-term problems.
Even if Japan had never experienced a real-estate and stock-market bubble, the meteoric rise of its giant neighbor China would have been a huge challenge.
At the dawn of the 1990’s, Japan’s dominance in export markets worldwide had already been dented somewhat by the rise of its smaller Asian neighbors, including Malaysia, Korea, Thailand, and Singapore.
But China presents an entirely different challenge, one for which adjustment will take much longer.
Moreover, even if it never had a financial crisis, Japan would have been plagued by adverse demographics, as its population is both aging and shrinking.
Last but not least, Japan’s hyper-growth years were built on a phenomenal rate of investment.
But, because productivity ultimately must be built on innovation, not just on ever more buildings and equipment, it was inevitable that returns on investment would turn south at some point.
In principle, with a healthier financial system, Japan’s economy would have had more flexibility to meet these challenges to its productivity growth.
But, one way or another, Japan’s once sky-high growth rates probably would have fallen sharply.
As is usually the case, financial crisis amplified other causes of economic meltdown, rather than igniting it directly.
The US Great Depression of the 1930’s is another case in point.
Again, a great deal of attention has been lavished on the ebbs and flow of fiscal and monetary policy.
But New Deal economic policies, by expanding the role of the state in an often chaotic and unpredictable fashion, probably also played a role in at least temporarily impeding productivity growth.
The US today seems to be moving towards a gentler and more European-style state, with higher taxes and possibly greater regulation.
Supporters of the US administration might fairly argue that it is undertaking long-deferred maintenance on issues such as income inequality.
But if the US does experience slow growth over the next decade, can it all be blamed on the financial crisis?
Likewise, Europe’s latest existential identity crisis is again creating a great deal of policy uncertainty and unpredictability.
In Europe, too, if there are adverse growth effects over the next decade, they cannot all be blamed on the financial crisis.
In the short term, it is important that monetary policy in the US and Europe vigilantly fight Japanese-style deflation, which would only exacerbate debt problems by lowering incomes relative to debts.
In fact, as I argued at the outset of the crisis, it would be far better to have two or three years of mildly elevated inflation, deflating debts across the board, especially if the political, legal, and regulatory systems remain somewhat paralyzed in achieving the necessary write-downs.
With credit markets impaired, further quantitative easing may still be needed.
As for fiscal policy, it is already in high gear and needs gradual tightening over several years, lest already troubling government-debt levels deteriorate even faster.
Those who believe – often with quasi-religious conviction – that we need even more Keynesian fiscal stimulus, and should ignore government debt, seem to me to be panicking.
Last but not least, however, it is important to try to preserve dynamism in the US and European economies through productivity-enhancing measures – for example, by being vigilant about anti-trust policy, and by streamlining and simplifying tax systems.
For better or for worse, productivity trends are very difficult to extrapolate, depending as they do on hugely complex interactions of social, economic, and political forces.
Nobel Prize winners Robert Solow and Paul Krugman famously once questioned whether the proliferation of computers and technology would lead to bottom-line growth.
(This theme underlies the title of Krugman’s classic 1990 book “The Age of Diminished Expectations.”)
In the end, policymakers must remember that whether or not the US and Europe avoid a lost decade depends on their ability to retain productive vitality in their economies, not simply on short-term demand-stimulation measures.
An Alliance of Civilizations?
MADRID – The first International Forum of the Alliance of Civilizations, conceived as an antidote to the idea that the world is doomed to a “clash of civilizations,” recently met in Madrid and revealed that there is more than a grain of truth in Robert Kagan’s idea that Americans are from Mars and Europeans from Venus.
Ever since September 11, 2001, the United States has been engaged in a crusade against the forces of evil in the Muslim world.
By contrast, the March 11, 2004, terrorist attack on Spain, which left 200 dead, triggered an “anti-crusade” that seeks to disarm extremism by building bridges of understanding and reconciliation with Islam.
Co-sponsored by Spain and Turkey, the Alliance of Civilizations initiative is not devoid of political calculation.
To the Spaniards, it helps to justify their abrupt withdrawal from Iraq in 2004; for the Turks, it is yet another vehicle in their struggle, as the vital bridge between Islam and the West, for admission into the European Union.
A loose and somewhat confused project, the Alliance of Civilizations aims to heal the wounds of conflict between Islam and the West through education, viable integration policies, and a better-informed dialogue with the media.
But it suffers from the major global players’ profound skepticism, with the US, Russia, and, for that matter, the EU shown no real enthusiasm for it.
However vague, the alliance of civilizations idea certainly cannot do more harm than war against Islamic extremism.
After all, none of the Muslim world’s problems and conflicts with the West are susceptible to a military solution.
Moreover, the Alliance is not an entirely incoherent proposal if the objective is that the West disengage from the politics of hubris and establish a genuine sphere of cooperation with the Muslim world in economics, culture, and science.
Of course, the idea is held back by the inner workings of both parts of the proposed alliance.
Many in the West question whether Islam is compatible with human rights and Western concepts of liberty.
Many Muslims who have been fighting for years for their countries’ modernization have so far failed to find a lucid response to the progressive wave of radical Islam.
To claim that Islam is incompatible with human rights is to consider it a civilization too hidebound to change.
This is a historic fallacy.
Nor is the claim that Islam is intrinsically inimical to innovation viable, because Muslim civilization has contributed mightily to science and art throughout history.
Today, Western universities are replete with distinguished Arab scholars in almost every field – the result of a brain drain that itself reflects the Islamic world’s centuries of decline.
In 2005, the 17 countries of the Arab world together produced 13,444 scientific publications, fewer than the 15,455 achieved by Harvard University alone.
Enemies of reason, however, are also to be found in the West.
We live in an age in which many people are disillusioned with secular politics, and are turning to religion instead, not only throughout the Muslim world, but in the core of Western civilization, Christian Europe and Evangelist America.
Nor is the Jewish state of Israel, where Messianic fanatics and religious nationalists have embraced a political theology that questions the very legitimacy of the democratic institutions, immune from this phenomenon.
The current crisis of Islam might not be congenital, but Islam’s predicament is acute.
The question is this: are Muslims ready to accept that Khomeini’s dictum that “Islam is politics or it is nothing” is wrong, that Islam is a religion and not a form of government, and that, as in the Christian world, there is a sphere for Caesar and a sphere for God?
Those in the Muslim world who want to embrace reform must be driven by the conviction that theocracy has never served as a vehicle for human progress.
Of course, the Alliance of Civilizations should not attempt to bridge differences by defending moral relativism.
If it is driven by a Western guilt complex that assumes that the solution simply lies in greater empathy for the Muslim predicament, then the skeptics are bound to be vindicated.
For the Alliance of Civilizations to have any chance of success, the emphasis must be on reciprocity.
Tolerance and religious freedom must be mutual.
Islam’s part in the deal must include a guarantee of human rights and civil liberties, improvement in women’s status, and realistic policies to stem the Islamic world’s demographic explosion.
Some, as usual, will claim that the Arab-Israeli conflict lies at the root of the problems that exist between Islam and the West, and that resolving the Palestinians’ plight will contribute immensely to smoother relations.
But Arabs and Muslims must stop deluding themselves that the Israel-Palestine dispute is what is holding them back.
Ending the American occupation in Iraq and imposing an Arab-Israeli peace would help, but they are no panacea.
The fight to eradicate misery, illiteracy, and corruption, and Islam’s embrace of science, do not depend on the results of the Middle East peace process.
An Alliance of Equals
PARIS – During NATO’s recent 60th anniversary ceremony in Strasbourg, the Alliance welcomed two new members, Albania and Croatia, bringing its total membership to 28.
This expansion is a good thing, for history has tormented these two countries.
Being welcomed within the great international family of the West will reassure them, stabilize them, and contribute to their political, cultural, and economic development.
But the good news was limited, because NATO addressed only a routine agenda.
No core problem was really tackled.
The controversy that arose in France over the country’s return to NATO’s unified military command makes this abundantly clear.
Was France losing its autonomy, perhaps even its sovereignty?
Was it capitulating to American hegemony?
These are real questions, yet at the NATO summit people spoke of them more in terms of symbols than as realities.
But what is the reality here?
NATO is a military alliance composed of 28 countries.
One of them, the United States, has a military budget that is more than three times that of all the other members combined.
Hence, the US runs most NATO civilian and military commands with the consent of the others.
Of course, there is a collective consultation and deliberative process that enables any member to be heard.
But in reality a member’s actual power is what affects common decisions.
This structure harks back to the conditions of NATO’s birth, when it was forged to thwart the Soviet threat to Western civilization.
At the time, no one ever doubted that American power – already endowed with nuclear weapons – was the only counterpart.
For this reason, the US came to preside over the alliance.
During the 41 years of the Cold War, 14 of NATO’s 16 members strictly obeyed and complied with American decisions and policies.
French President Charles de Gaulle was the only one to question whether an American president would actually ever be ready to launch a nuclear attack on the USSR in order to protect one or several Alliance members if vital US interests were not directly at stake.
Based on that doubt, France – a nuclear power since 1960 – withdrew in 1966 from the Alliance’s permanent centralized military command in order to assert its own deterrent capability.
This decision was mainly grounded on the American doctrine, adopted in 1962, of “flexible response,” which said to the Soviets: “As long as you do not use nuclear weapons, we will not use them, either.”
Indeed, while it is a much disputed question, de Gaulle was probably right about America’s lack of commitment to the nuclear defense of Europe.
Both Henry Kissinger and Robert McNamara left office admitting that de Gaulle had been correct.
Nevertheless, de Gaulle’s insights left a legacy that still causes some mistrust and dissent within NATO.
France was right on this key strategic point, but it was never able to explain its position to its allies.
This inability to discuss, clearly and forthrightly, this strategic doctrine continues to hamper the Alliance.
At the Strasbourg summit, confidence in the future could have been strengthened if a couple of troubling issues had been discussed.
Instead, once again, there was an extended focus on the past.
The key questions are whether NATO’s doctrine of common defense is currently directed at one country in particular, and whether nuclear force remains the Alliance’s major defensive tool.
In the current global situation, no predictable conflict will require the use of a nuclear weapon.
At the moment, there is no global threat and the Alliance only intervenes in regional conflicts, so why not have NATO admit this?
But the most important matter that went unmentioned in Strasbourg is the relationship with Russia.
NATO was founded to confront the threat that the USSR represented 60 years ago.
But the Warsaw Pact, the Soviet Union’s “anti-NATO” alliance of socialist countries, was dissolved in 1991; communism imploded the same year, with Russia caught ever since in a struggle to build a market economy and define a new global position for itself.
At a time when Russia was taking a more pacific course, NATO – unlike the Warsaw Pact – was not dismantled.
On the contrary, the Allies chose to maintain the pact and to extend it to numerous Russian neighbors.
NATO’s members essentially said: “We Western nations do not trust you.
Even if you become a democracy, we will always be suspicious.”
George Kennan, one of the greatest American diplomats of the post-war years, once wrote that the Western world was committing its biggest mistake in 50 years time by expanding NATO after Soviet communism collapsed.
The resulting humiliation and blatant mistrust that Russia’s elite has felt ever since has led them to their current policy of rearmament.
The only way to resolve this problem is for NATO to assert its pacific intentions before the world.
The most convincing way to do that is to moderate America’s excessive taste for power, which it demonstrated in Iraq.
NATO needs to shift its focus from organizing and administering a unified military command to building real confidence that every member’s voice will be heard.
To that end, all members must stand on an equal footing.
France’s decision to return to full and equal Alliance membership was a good one, and France must now work from within to advance the principles in which it believes.
Avoiding a New American Recession
CAMBRIDGE – The United States may be headed for a recession in 2013.
Even if the country avoids going over the “fiscal cliff,” a poorly designed political compromise that cuts the deficit too quickly could push an already weak economy into recession.
But a gradual phase-in of an overall cap on tax deductions and exclusions (so-called tax expenditures), combined with reform of entitlement spending, could achieve the long-run fiscal consolidation that America needs without risking a new recession.
The US economy has been limping along with a growth rate of less than 2% during the past year, with similarly dim prospects in 2013, even without the shock of the fiscal cliff.&#160;
That is much too weak a pace of expansion to tolerate the fiscal cliff’s increase in tax rates and spending cuts, which would reduce demand by a total of $600 billion – about 4% of GDP – next year, and by larger sums in subsequent years.
President Barack Obama’s proposed alternative to the fiscal cliff would substantially increase tax rates and limit tax deductions for the top 2% of earners, who now pay more than 45% of total federal personal-income taxes.
His budget would also increase taxes on corporations, and would end the current payroll-tax “holiday,” imposing an additional 2% tax on all wage earners.
Together, these changes could lower total demand by nearly 2% of GDP.
And the higher marginal tax rates would reduce incentives to work and to invest, further impeding economic activity.
All of that could be fateful for an economy that is still struggling to sustain a growth rate of less than 2%.
The Congressional Budget Office and the Federal Reserve predict that going over the fiscal cliff would cause a recession in 2013, with Fed Chairman Ben Bernanke recently saying that the Fed would be unable to offset the adverse effect on the economy.
He could have said the same thing about the fiscal drag that would be created by Obama’s budget proposal.
Although Congressional Republicans rightly object to raising tax rates, they appear willing to raise revenue through tax reform if that is part of a deal that also includes reductions in the long-run cost of the major entitlement programs, Medicare and Social Security.
Although some Republicans would like to see revenue increased only by stimulating faster economic growth, that cannot be achieved without the reductions in marginal tax rates and improvements in corporate taxation that the Democrats are unlikely to accept.
Raising revenue through tax reform will have to mean reducing the special deductions and exclusions that now lower tax receipts.
The potential recession risk of a budget deal can be avoided by phasing in the base-broadening that is used to raise revenue.
A desirable way to broaden the tax base would be to put an overall cap on the amount of tax reduction that each taxpayer can achieve through deductions and exclusions.
Such an overall cap would allow each taxpayer to retain all of his existing deductions and exclusions but would limit the amount by which he could reduce his tax liability in this way.
An overall cap would also cause many individuals who now itemize deductions to shift to the standard deduction – implying significant simplification in record-keeping and thus an improvement in incentives.
A cap on the tax reductions derived from tax expenditures that is equal to 2% of each individual’s adjusted gross income would raise more than $200 billion in 2013 if applied to all of the current deductions and to the exclusions for municipal-bond interest and employer-paid health insurance.
Even if the full deduction for charitable gifts is preserved and only high-value health insurance is regarded as a tax expenditure, the extra revenue in 2013 would be about $150 billion.
Over a decade, that implies nearly $2 trillion in additional revenue without any increase in tax rates from today’s levels.
Extra revenue of $150 billion in 2013 would be 1% of GDP, and could be too much for the economy to swallow, particularly if combined with reductions in government spending and a rise in the payroll tax.
But the same basic framework could be used by starting with a higher cap and gradually reducing it over several years.
A 5% cap on the tax-expenditure benefits would raise only $75 billion in 2013, about 0.5% of GDP; but the cap could be reduced from 5% to 2% over the next few years, raising substantially more revenue when the economy is stronger.
Slowing the growth of government spending for Medicare and Social Security is necessary to prevent a long-term explosion of the national debt or dramatic increases in personal tax rates.
Those changes should also be phased in gradually to protect beneficiaries and avoid an economic downturn.
America’s national debt has more than doubled in the past five years, and is set to rise to more than 100% of GDP over the next decade unless changes in spending and taxes are implemented.
A well-designed combination of caps to limit tax expenditures and a gradual slowing of growth in outlays for entitlement programs could reverse the rise in the debt and strengthen the US economy.
America’s current budget negotiations should focus on achieving a credible long-term decline in the national debt, while protecting economic expansion in the near term.
An Alternative to Deposit Insurance
Argentina's financial panic and the run on its banks that ensued, as well as Asia's financial crisis of 1997, have forced a number of countries to consider adopting deposit insurance schemes to protect their citizens' savings.
But is deposit insurance the best defense against bank panics?
Deposit insurance was a response to banking crises of the type that plagued the United States until the 1930's.
The first explicit scheme was introduced in America after the Great Depression and initially seemed an unmitigated success.
Panics no longer occurred, which stabilized the financial system and contributed to sustained post-war economic growth.
Deposit insurance did away with financial panics because bank runs are typically driven by a self-fulfilling prophecy. They occur when a bank's clients fear that most of their fellow depositors will withdraw their funds.
Because banks service their depositors on a first-come-first-served basis, those who wait risk being left empty-handed, because the bank may be forced to liquidate its long term-assets at a loss and run out of resources.
So fear of a panic can create a panic.
This is highly inefficient, because while it is individually rational for depositors to want their money immediately, the bank might have been able to service all of them had they been collectively patient.
Economists call such situations "coordination failures," if depositors could talk to each other and coordinate their actions, they would be able to avoid a self-defeating run on the bank.
By guaranteeing that there will be enough resources available for patient clients when they want to withdraw their funds, deposit insurance eliminates the coordination failure.
Patient depositors no longer need to worry about others withdrawing their funds because it has no effect on them.
But deposit insurance leads to other problems, which first appeared with the Savings and Loan crisis in the US during the 1980's.
Deposit insurance creates what economists call "moral hazard," people who are insured against an unpleasant event are not as careful as they would otherwise be in trying to avoid that event.
If my bicycle is insured against theft, I might buy a cheaper lock for it, making it more likely that it will be stolen.
With deposit insurance, clients who no longer risk losing their money have no incentive to monitor their bank, while banks, with no one watching, have incentives to invest in excessively risky projects.
Although many factors contributed to the Savings and Loan crisis, it is generally agreed that moral hazard was a major one.
Following that crisis, deposit insurance in the US was reformed with the objective of mitigating the moral hazard problem.
But did the reforms go far enough?
There are ways to improve the existing system, but is something altogether different and better possible?
As far back as 1873, in his classic book on central banking,
In case of panic, a good policy should help banks that have enough assets to cover their deposits but that can't pay all depositors at the same time because some assets are tied up in real estate or other long-term investments.
These banks are
As with deposit insurance, repurchase agreements solve the coordination failure problem because depositors know that, even if they wait, the bank will be able to accommodate their withdrawals.
In contrast to deposit insurance, however, liquidity provision can avoid moral hazard by helping
Consider a bank that has invested in risky projects and finds itself in trouble.
It can ask the central bank for help and sell some of its assets for cash.
However, under the agreement with the central bank, it must buy its assets back.
If the assets are worthless, it will ultimately be forced out of business.
If it declares bankruptcy and refuses to buy back its assets, bankruptcy laws should give the central bank the first claim on the bank's assets.
This creates a powerful incentive for depositors and investors to monitor their bank's performance.
Implementing liquidity provision policies like those advocated by Bagehot would prevent bank panics without the incentive for undue risk-taking associated with deposit insurance.
Depositors deserve strong, effective protection for their funds--and the banking system requires it in order to maintain confidence.
But neither depositors nor their banks should be given a free ride.
An Arab “Third Way”
AMMAN – Throughout the post-colonial period, Arab countries have consistently failed to produce an efficient – let alone democratic – system of government.
Now, after a half-century of competition between military or royal dictatorships and militant Islamist regimes, many Arabs are again seeking a “third way” – a path toward a credible form of representative democracy.
But will their efforts prove as futile now as they have in the past?
The Middle East – named for its geographic position between Europe and East Asia – was under Ottoman rule for 400 years before the Allied powers, after defeating the Ottomans in World War I, partitioned the region into distinct political units that, under the Sykes-Picot Agreement, fell within spheres of influence carved out by the United Kingdom and France.
But, in response to these new divisions, an Arab awakening – shaped by pan-Arabism and support for Palestine – was occurring.
Charismatic young military rulers-turned-dictators like Egypt’s Gamal Abdel Nasser, Iraq’s Saddam Hussein, Libya’s Muammar el-Qaddafi, Yemen’s Ali Abdullah Saleh, and Syria’s Hafez al-Assad used these popular causes to win public support.
But their failure to deliver better lives to their citizens, together with the discrediting of left-wing ideologies following the Soviet Union’s collapse, fueled the rise of a rival movement: political Islam.
The Muslim Brotherhood – established in the Egyptian town of Ismailia in 1928 and political Islam’s oldest, best organized, and most widespread proponent – was (and is) despised by both secular Arabs and Arab monarchies.
Indeed, secular dictators have worked to suppress the Brothers at every turn – often violently, as when Assad ruthlessly crushed a Brotherhood-led uprising in Hama in 1982.
Forced to operate clandestinely, the Brotherhood built its support base with a social agenda that targeted the needs of the poor, while consistently reinforcing its Islamic ties, even using the compulsory zakat (annual financial contribution to religious causes) to build up its social network.
The Brothers, with the help of a conservative society and the mosques, were prepared to seize power whenever the opportunity arose.
Another Islamist movement, Algeria’s Islamic Salvation Front, almost had such an opportunity in 1991, when it won the first round of a general election.
But the military prevented its victory by canceling the second round, triggering a brutal eight-year civil war in which an estimated 200,000 people died.
Palestine’s Hamas, an offshoot of the Brotherhood, succeeded at the ballot box in 2006, but has since failed to deliver credible governance.
Then the Arab Spring erupted in 2011, creating new opportunities for political renewal.
Within months, Islamist parties shaped by the Brotherhood’s ideology had replaced secular dictators in Tunisia and Egypt, and seemed poised to take over Yemen and Syria, largely because they were the only well-organized political movements on the scene.
Moreover, the Muslim Brotherhood gained control of Egypt, the largest and most influential of the Arab Spring countries.
But their exclusive, rigid ideology was poorly suited to governing such a large and diverse country.
As a result, after only a year in power, the military – backed by the same secular, liberal young people who had opposed it in 2011 – drove President Mohamed Morsi out of power.
Unable to mount a political alternative, however, the protesters’ rejection of the Islamist government served only to put the army back in charge.
Some argue that the absence of a secular liberal option in Arab politics stems from fear of political Islam.
For decades, Western powers backed military regimes in the Arab world, willingly ignoring their systematic repression of democratic movements and rights, in order to ensure that Islamists did not gain power.
Now that both the military- and Islamist-led systems have been discredited, an ideological vacuum has appeared in Arab politics.
But Arabs today – most of whom are under the age of 30 – are less interested in an overarching political ideology than they are in an efficient representative government that implements sound policies aimed at creating jobs and bolstering economic growth.
In short, they want a government that is focused on improving citizens’ lives.
In fact, the absence of a specific ideology was essential to the Arab Spring’s initial success in Egypt and Tunisia, for it allowed a large number of young activists to forge loose alliances.
But mass movements can take a country only so far; establishing a credible representative government requires political parties organized around clearly defined principles.
While the Muslim Brotherhood has such an organizing principle, its internal rigidity – at least with Morsi at its helm – made it unfit to govern.
Meanwhile, infighting among Egypt’s liberals prevented them from establishing a disciplined, reliable alternative to the Brotherhood based on principles like diversity, plurality, respect for women, and freedom of expression.
So when the Islamist government’s credibility collapsed, the military was Egypt’s only remaining option.
In order to make progress, the youth-led movements that drove the Arab Spring must translate their shared principles into effective political structures, and choose leaders who are capable of placing the search for consensus ahead of personal ambition.
If they succeed, the Arab world may finally have an alternative to rule by generals or mullahs.
Even if they fail to gain power, the emergence of such an alternative would surely influence the Arab world’s agenda for years to come.
The Uses of Nuclear Ambitions
MADRID – The agreement reached in Geneva in the wee hours of November 24 between Iran and the P5+1 (the five permanent members of the United Nations Security Council, plus Germany) on Iran’s nuclear program proves a crucially important point: the sanctions regime worked.
The interim deal is Iran’s first compromise on its nuclear program in more than a decade, and a diplomatic victory in a field long overshadowed by the looming cloud of military intervention.
Yet the euphoric reaction seen in some quarters is misplaced.
Beyond the ambiguities and limitations of the six-month agreement, the negotiations have clearly exposed Iran’s nuclear-weapons program and, more broadly, its understanding that nuclear weapons remain a geostrategic status symbol.
This points to the difficulty of achieving a comprehensive agreement and the possibility that the international effort could result only in a series of small deals aimed at delaying Iran’s acquisition of a nuclear weapon rather than removing the threat of it altogether.
Beneath the headlines of the historic deal lies a limited and ambiguous agreement.
The joint statement released by European Union High Representative Catherine Ashton and Iranian Foreign Minister Javad Zarif referred to the agreement as “a joint plan of action” that “sets out an approach toward reaching a long-term comprehensive solution.” While it includes a first step that “creates the time and environment needed for a comprehensive solution,” the interim accord is really about confidence-building measures.
Indeed, the obligations that it lists are referred to as “voluntary measures.”
At best, the agreement maintains the current status quo, and in some respects even allows for further development of Iran’s nuclear program.
In this sense, perhaps the most troubling aspect of the interim deal concerns Iran’s yet-to-be-opened Arak plant, which would offer a path to domestic plutonium production and weaponization.
Though the agreement reached in Geneva includes Iran’s pledge not to transfer fuel or heavy water or commission its Arak reactor, there does not appear to be any overarching moratorium on construction at the site.
According to the International Atomic Energy Agency, the Arak plant still lacks several major reactor components, such as control-room equipment and cooling pumps. So, Iran, it seems, will be able to advance its plutonium program during the six-month confidence-building period.
That loophole is all the more troubling in light of French press reports this week concerning Western intelligence on the construction of facilities in Shiraz that may be used to separate plutonium in order to create the fissile material needed for nuclear weapons.
That Iran’s push to acquire the capacity to produce nuclear weapons is partly motivated by security concerns cannot be denied.
Nationalism, however, is a more important factor.
It is not just that all the great powers have nuclear weapons; the problem, from Iran’s perspective, is that lesser powers – particularly neighboring states such as Pakistan and Israel – have them. The Iranians regard themselves as the heirs to a great and ancient civilization, and their ambition of achieving regional preeminence reflects this.
At the same time, they perceive their country to be marginalized, discriminated against, and the target of aggressive international condemnation.
Nearly 70 years after the bombing of Hiroshima and Nagasaki, the view persists globally that gaining a seat at the grownup table of geopolitics requires nuclear weapons.
Germany is an exception, though hardly a geostrategic heavyweight; and though Japan knows the horror of nuclear war, important domestic voices there are calling for a change of its non-nuclear status.
This view of nuclear weapons as a shorthand for national greatness is reinforced by the architecture of the non-proliferation regime, which firmly divides states into two camps: nuclear haves and have-nots.
As long as possessing nuclear weapons remains a state’s clearest way to demonstrate its bona fides as a great power, maintaining the potential to develop such weapons will be too tempting for countries like Iran to forswear.
What is needed is a global shift away from the equation of nuclear weapons with geopolitical greatness. Progress on various efforts to sever this link have not been very encouraging, as was recently demonstrated by the Kremlin’s negative reaction to US President Barack Obama’s proposal that both sides cut their nuclear stockpiles.
Meanwhile, non-P5 nuclear-weapons states continue to expand their arsenals, with Pakistan and India estimated to have nearly tripled their stockpiles during the past decade.
The interim agreement with Iran marks an important juncture.
Above all, it shows that international sanctions can bear fruit, and that a diplomatic way forward – even if proves to be a narrow one – is possible.
We can remain both ambitious and realistic.
But a comprehensive deal with Iran – and the need to preempt future epigones – requires a broader change: a world that not only excludes the offensive use of nuclear weapons but also acknowledges the ultimate unsustainability of their deterrent power.
Insecure Europe
MADRID – For the last five years, Europe has been shaken by financial and economic convulsions that have wreaked havoc on many of its citizens’ livelihoods.
The good news is that progress is finally being made in redeveloping the European Union’s economic and monetary architecture, which should help to bring about a return to growth.
But EU leaders’ focus on internal problems has caused them largely to neglect external policies, particularly in the area of security.
As 2014 begins, economic insecurity is giving way to worries about the EU’s strategic position.
There were expectations that the European Council’s December meeting would signal a return to a more outward-looking approach, especially on security matters.
Unfortunately, these hopes were quickly dashed.
Indeed, the disparate assortment of initiatives that were agreed at the meeting, though interesting, lack the needed breadth and scope, and will have to be integrated within a weak and outdated strategic framework.
The flawed nature of the current European Security Strategy – drafted in 2003, with a token revision in 2008 – reflects the circumstances surrounding its conception.
The ESS was developed in the aftermath of the Iraq war, amid heated debate over a proposed European constitution, in a hasty and reactive process hijacked by those who sought to position Europe as a counterweight – or even a rival power – to the United States.
Making matters worse, the geopolitical environment has changed fundamentally in the decade since the ESS was ratified, owing to economic rebalancing toward Asia, the upheavals in the Arab world, the revival of Russian assertiveness, and the rise of isolationist tendencies in the US.
As a result, the ESS does not capture the reality of today’s world – a fact that is obvious from its opening declaration that “Europe has never been so prosperous.”
To be sure, the ESS’s three basic tenets – development assistance, soft power, and effective multilateralism – remain important.
But Europe’s leaders must reconceive these concepts in light of today’s challenges.
In terms of development, Europe must move away from the idea that aid should be used to bolster trade linkages and acknowledge the importance of foreign investment.
In fact, net private capital flows to developing countries now outweigh official development assistance by nearly ten to one worldwide.
As the world’s second-largest source of foreign direct investment, the EU wields considerable influence, with European investors bringing credibility to projects and regions, thereby serving to attract further investment.
For example, Morocco’s Ouarzazate Solar Power Plant and its Drinking Water Efficiency Program were launched with €37 million ($50.6 million) from the EU’s Neighborhood Investment Facility; these projects subsequently gained additional funding totaling more than €600 million.
The ESS’s emphasis on soft power is also in urgent need of reassessment.
The upsurge of protest across the Arab world raised expectations among Europeans that these countries would, to some extent, emulate Western institutions, values, and norms.
But, while that did not occur, European principles certainly have not lost their allure, as recent protests in Ukraine, triggered by President Viktor Yanukovych’s decision to shun closer ties with Europe, have shown.
Nonetheless, the ESS’s soft-power vision should not be allowed to obscure the security challenges that Europe faces.
With the rise of non-traditional threats, Europeans are increasingly overlooking classical security risks like inter-state warfare, believing that they are no longer relevant – a notion that is reflected in the ESS.
But, as China’s increasingly assertive stance in the South and East China Seas starkly demonstrates, this idea is not only wrong; it can be very dangerous.
This brings us to the ESS’s third tenet: advancing “the development of a stronger international society, well-functioning international institutions, and a rule-based international order.”
Indeed, the EU is among the leading actors in the current “G” fad, which has culminated most recently in the G-20.
And, despite being an embodiment of international law, the EU indulges in soft-law approaches, whether at the recent COP-19 climate-change meeting in Warsaw, or by supporting the “Geneva agreement” on Iran’s nuclear program, which, it is now clear, is nothing more than two aspirational declarations linked by a press release.
In developing its new security strategy, Europe must consider America’s role as an essential component of the geopolitical environment, viewing the US not as a foil, but as a nuanced partner.
Beyond NATO, which remains important even at a low ebb, the proposed Transatlantic Trade and Investment Partnership offers a potent opportunity to shape a rule-based international order.
The shine may have come off the EU, but the gripping scenes from Kyiv’s Maidan Square are a powerful reminder of the enduring appeal of Europe’s core values.
What the EU needs now is an updated external strategy that capitalizes on this allure to bolster its influence, security, and prosperity, thereby halting its slide toward irrelevance.
America’s Strategic Blindness
MADRID – The recriminations over US spying activities, triggered by the revelations of the former American intelligence contractor Edward J. Snowden, have now reached fever pitch.
Questions abound – about what President Barack Obama knew and when, about the legitimacy of eavesdropping on friendly foreign leaders’ conversations, about the future of transatlantic relations, and even about the meaning of the term “ally.”
But the current firestorm, like other recent diplomatic crises for the United States, reflects a more fundamental problem: the lack of strategic vision in American foreign policy.
Until the US is able to establish an overarching, purpose-oriented framework through which it relates to the world, a reactive approach is inevitable, with high-intensity incidents such as we have seen this month continuing to be the norm.
For more than 40 years, the Cold War policy of containment of Soviet influence provided America its strategic framework.
Though US tactics were debated and shifted from administration to administration, the overarching approach remained consistent, because it was broadly supported by Republicans and Democrats alike.
Of course, an overarching national-security strategy provided no guarantee against problems or even major disasters in countries like Vietnam and Nicaragua.
Nonetheless, in hindsight, containment infused an order and organization on US foreign policy that is absent today.
After the fall of the Berlin Wall, the necessity that had been driving containment disappeared.
The US, inebriated by victory, saw in the triumph over the Soviet bloc another sign of its exceptionalism, and found itself taken in by the mirage that its Cold War success was itself a strategy.
What followed was a decade of scattershot foreign policy marked by notable cases of inaction, together with individual initiatives taken largely without reference to a broader doctrine.
Unchallenged in the world’s unipolar moment, the US had the luxury of not knowing its strategic goals.
Shocked by the attacks of September 11, the US forced a new framework onto its still-unquestioned belief in the inexorable movement of history toward freedom.
Unfortunately, what emerged was a deeply flawed approach, not least because in declaring a “war on terror,” America positioned itself against a tactic, not an entity or an ideology.
Under Obama, the US has begun to depart from this approach.
The problem is that it remains a departure without any meaningful destination.
As in the 1990’s, the US has no organizing imperative, and the result is the same: a combination of inactivity and incoherent initiatives.
And, at a time of domestic political polarization, the lack of a global strategy denies a potential rallying point around which Democrats and Republicans can unite.
Two decades ago, geopolitical conditions limited blowback from America’s foreign-policy vacuum.
Today, the US remains the world’s essential power, but it is no longer the exclusive power.
It cannot solve problems that directly affect it by acting on its own, though its leadership remains indispensable.
That is all the more true given that the nature of such problems has also changed.
America, like the rest of us, is vulnerable to climate change, pandemics, and terrorism – challenges that require coordinated global solutions.
For the US, however, the utility of multilateralism is purely situational.
Above all, multilateralism is never preferable to a “good” bilateral solution – a view that has reinforced behavior that undermines, rather than strengthens, the capacity for effective international action.
Indeed, always ready to negotiate treaties but rarely prepared to sign – and even less likely to ratify – them, the US remains absent from such key global agreements as the Kyoto Protocol, the Mine Ban Treaty, and the UN Convention on the Law of the Sea.
Its inspired creativity and support in building formal institutions like the United Nations and World Bank has given way to a predilection for weak, informal, and ad hoc groupings, such as the various G-somethings and “coalitions of the willing.”
Establishing effective multilateralism requires an emphasis on rules and institutions that facilitate coordination.
The recent decision by the US to sign the Arms Trade Treaty could be a good start – if only Congress could marshal the bipartisan support needed to ratify it.
But scattered moves in the right direction will not suffice.
What is really needed is a change in vision and mentality – a shift from viewing multilateralism as a tactic to embracing it as a strategic imperative.
The current spying scandal is the product of a rudderless US foreign policy focused on narrowly drawn tactical objectives that exist outside the conceptual funnel of a comprehensive vision.
The result in this case has been damage to the transatlantic relationship, with some in Europe even calling for a halt to the talks on the proposed Transatlantic Trade and Investment Partnership (TTIP).
Suspending the trade talks would be folly, not just in terms of the regional impact, but also because the TTIP should be an exercise in rule-making that echoes globally.
The current diplomatic crisis, too, is an opportunity to ensure that transatlantic discussions about privacy and surveillance reverberate in a multilateral setting; seizing it would represent a small but significant contribution to the strategic vision that has been sorely lacking for the last quarter-century.
Europe’s Juncker Revolution
MADRID – Before his appointment as EU Commission President, Jean-Claude Juncker was pilloried as an old-school federalist who would do little to alter the status quo.
But the new structure that he has imposed on the Commission implies a radical overhaul of how things are done in Brussels.
Up to now, a focus on who has been appointed to what post – in particular, the appointment of the relatively inexperienced Federica Mogherini as EU High Representative for the Common Foreign and Security Policy – has overshadowed the Commission’s structural transformation.
But individual commissioners are far less important than the trends that have caused the Commission to shift its priorities from enlargement and the internal market toward energy and monetary union.
One such trend is Europeans’ growing skepticism toward integration, exemplified in May’s European Parliament election.
With newer European Union members backsliding – Romania on the rule of law, Bulgaria in corruption, and Hungary on democratic norms under Viktor Orbán’s government – now is the time, or so it seems, to focus on existing members.
Reinforcing this shift is Turkey’s drift toward authoritarianism, which is undermining the viability of its candidacy for EU membership.
As for Ukraine, recent gestures of solidarity, such as the signing of an association agreement, are unlikely to develop into anything substantial in the foreseeable future.
In downgrading EU enlargement as a formal policy priority, the Commission is preparing itself to take other important steps.
The upheaval among Europe’s southern and eastern neighbors may well bring about a long-overdue revamping of the EU’s Neighborhood Policy.
And, in pursuit of other avenues for expanding the EU’s reach, European leaders might reinvigorate the European Economic Area.
Another policy area that has lost its centrality is the internal market – a notable decision, given that it has been the centerpiece of the European project since the Commission was created in 1958.
The internal market’s four pillars – the free movement of goods, services, capital, and people – have underpinned broader EU measures, in areas like foreign policy and justice and home affairs, and will now be subsumed under new policy labels, from economy and financial affairs to the digital agenda.
This move away from the internal market can be explained partly by member governments’ aversion to more EU-level legislation.
Though complaints about the “bloated” acquis communitaire (the body of EU law) are often unfounded, the EU legislative process is not without its shortcomings, as recent attempts at harmonization clearly demonstrate.
For example, for the EU-wide statutory audit that was completed in April, the European Parliament agreed to a revised directive and new regulation that should have been directly applicable in all 28 member countries.
But, in more than 20 cases, member states were given discretion over its implementation and interpretation.
The new Commission will attempt to change this by focusing on rule implementation and oversight, rather than creation.
This effort will be coordinated by representatives in seven newly established vice-presidential positions, and spearheaded by the first vice president to have a portfolio focused on “better regulation.”
To be sure, easing regulatory burdens is a longstanding leitmotif of the EU.
Though the last two Commissions, led by José Manuel Barroso, espoused a commitment to rationalizing, clarifying, and compiling rules, little concrete action has been taken.
Juncker’s changes, however, may portend genuine progress on this front, as well as toward monetary and energy union.
Indeed, the new Commission’s structure suggests that Juncker hopes to enhance its role in guiding the European Monetary Union and related policies, control over which largely rested with the European Council and EU member governments (especially Germany) during the crisis.
Similarly, a new vice president has been introduced for energy, which has been reframed as “energy union.”
The lack of progress on this front during the last two Commissions was rooted mainly in Germany’s Russian modernization project, which has shaped its approach to energy security.
For its part, France has been reluctant to build an interconnected European grid, owing to its heavy reliance on nuclear energy.
Given Russian behavior in Ukraine, however, EU leaders have been rethinking their approach.
In this context, the Commission’s new structure – not to mention the fact that the new European Council president, former Polish Prime Minister Donald Tusk, has long sought an energy union – may well push the policy forward.
Though it is impossible to understand fully the implications of the Commission’s new structure at this early stage, some of its institutional ramifications are already emerging.
Beyond inciting a kind of tug-of-war with the European Council, the Commission’s shift away from lawmaking will alter the European Parliament’s role, which it has forged over the last five years on the back of the Commission’s active legislative agenda.
With little authority to initiate legislation, the Parliament, too, will have no choice but to pivot toward oversight.
Precisely how all of this all plays out in the coming months and years will determine whether the European project progresses or stagnates.
Perhaps observers should be paying a little less attention to the “who” and a bit more to the “what.”
Africa Beyond Ebola
MADRID – Among this summer’s grave global worries, the spread of the Ebola virus has monopolized the discussion of Sub-Saharan Africa and reinvigorated hoary notions of disorder and despair – at a time when a new image of a dynamic Africa was emerging.
In fact, there is still strong reason for optimism about the region’s prospects.
The Ebola outbreak overshadowed three key events affecting the region. On July 1, a major organizational restructuring at the World Bank Group was implemented.
Two weeks later, the BRICS (Brazil, Russia, India, China, and South Africa) announced the establishment of the New Development Bank.
And, in early August, African government and business leaders gathered in Washington, DC, for a summit that could portend transformative private investment in Africa.
Such investment is essential in a world in which net private capital flows to developing countries outstrip official development assistance by a margin of ten to one.
If this is to be a turning point for Africa, rather than another false dawn, this summer must be the start of a prolonged effort to stimulate private-sector engagement.
The reorganization of the World Bank is a central part of a larger effort under its president, Jim Yong Kim, to reposition the Bank as a facilitator vis-a-vis the private sector, rather than a primary provider.
From 2009 to 2013, new investment commitments by the International Finance Corporation, the World Bank’s private-sector lending arm, have risen 73%.
Meanwhile, the Multilateral Investment Guarantee Agency, the Bank’s provider of political risk insurance covering investments in developing countries, has moved to expand its activities, both by broadening the types of projects that it supports and widening existing definitions to allow greater coverage.
July’s restructuring occurs within the context of these broader moves.
In reorganizing the World Bank Group’s central component, the International Bank for Reconstruction and Development, Kim has adopted a management-consulting model that unites expertise with regional coverage.
Seeking to eliminate the bureaucratic “silos” that have isolated regional experts from one another, 14 global practice groups in areas such as energy, water, and education have been established to bring to bear the full force of the World Bank’s considerable knowledge on projects and partnerships.
Just as the World Bank was repositioning itself, the BRICS agreed to establish their own bank.
There are significant outstanding issues about how the New Development Bank will operate, but early indications suggest that infrastructure will be central to its activities, with an emphasis on Africa.
The World Bank estimates that insufficient infrastructure reduces productivity in Africa by approximately 40%.
The entrance of a new player with initial authorized capital of $100 billion – along with the United States’ Power Africa program, which has garnered $26 billion in commitments since its launch last year, and the World Bank’s new Global Infrastructure Facility – promises to help ease infrastructure financing significantly.
But, as of now, the New Development Bank is little more than a statement of political solidarity, and whether it comes into existence remains to be seen.
Even if it does begin to function, the BRICS lack what gives development banks, and the World Bank in particular, legitimacy and weight: a staff composed mostly of dedicated experts who are among the world’s best.
Finally, the high profile of the US-Africa Leaders Summit, with more than 40 heads of state in attendance, as well as President Barack Obama’s direct involvement, generated buzz about Africa.
US businesses and investors certainly gained more awareness about Africa’s potential and a deeper understanding of the variety of investment climates throughout the continent.
But, though the summit may be called a success, its long-term implications are unclear, particularly given the uncertainty about what will follow.
At the moment, there does not seem to be a plan to institutionalize the summit.
Moreover, the participation of so many heads of state overshadowed that of African business leaders.
The practical connections that US companies will need when deciding whether to invest could have been cultivated on the summit’s margins, or in its aftermath, but were not.
Laying a foundation for future engagement requires ongoing commitment and effort that goes beyond mere publicity.
The same could be said about the World Bank.
There is much work to be done in integrating the new organizational model with existing Bank structures and practice areas.
Even if this transition occurs seamlessly, the Bank faces a serious internal struggle against entrenched bureaucratic interests and a pervasive institutional mindset that is overly risk-averse and fixates on processes rather than outcomes.
In recent years, Africa, once a land of pity, has emerged as a land of opportunity.
If it is to become a land of performance, the goal must be to facilitate investment, both domestic and foreign.
That will demand effort and commitment; given that a stable international order increasingly depends on a prosperous and growing Africa, it is a goal that the world cannot afford to miss.
Europe’s Iranian Imperative
MADRID – Last month, with the world’s attention fixed on the crisis in Crimea and the search for Malaysian Airlines Flight 370, the latest round of negotiations between Iran and the P5+1 (the United States, China, France, Russia, and the United Kingdom, plus Germany) passed quietly in Vienna.
Even with discussions set to continue next week, the talks’ outcome remains far from certain – and world leaders cannot afford to become distracted.
This is especially true for Europe, whose unified approach to Iran has been invaluable up to this point.
Indeed, it was the bite of European sanctions that ultimately brought Iran to the negotiating table, and the force of unified European diplomacy facilitated the “joint plan of action,” which set out the terms for reaching a comprehensive long-term agreement within six months.
But now, at the plan’s halfway point, there has been little concrete progress, with last month’s negotiations producing no headway on two key issues being discussed: the acceptable level for uranium enrichment in Iran and the future of the heavy-water reactor at Arak.
The sharp contrast between this lack of achievement and Iran’s recent declarations about reaching a final deal by July raises important questions about Iran’s strategy and goals – questions that negotiators must consider carefully when determining the best approach.
The key to success is the background against which the process plays out.
Iran is a land of contrasts.
On a recent visit organized by the European Council on Foreign Relations (ECFR), the coexistence of entrenched tradition and rapid transformation was starkly apparent.
Central Tehran – ebullient with young people and high-heeled women donning testimonial headscarves and mid-thigh jackets over pants – embodies a thirst for openness.
More than 60% of Iranians were born after the 1979 Islamic Revolution, and more than 40% were born after the Iran-Iraq War of the 1980’s.
For them, the revolution is a part of history, not the main source of their personal values.
The toll taken by years of tough economic sanctions is also apparent.
Despite Iranian officials’ best efforts to downplay the sanctions’ impact, it is difficult to spin inflation in excess of 30% and projected GDP growth of just 1% this year.
The combination of a young population and a crumbling economy is a combustible mix, one that amounts to an existential threat to the regime – and the regime knows it.
In this sense, the imperative to reach a prosperity-enhancing agreement with the international community is greater than ever for Iran’s leadership.
Furthermore, Iran’s negotiating style, like its capital city, can be both fatiguing and confusing.
Just moments after elaborating at length on the Koran’s prohibition of nuclear weapons, an interlocutor would declare that the underground Fordow nuclear facility’s impregnability to airstrikes must be central to any deal.
The reality is that Iran does not envisage giving up its nuclear breakout capacity.
The negotiations are aimed not at eradication, but at lengthening lead-time – specifically, limiting uranium-enrichment levels to 3.5%, establishing a strong inspections regime, and reaching an agreement on the Arak nuclear facility.
But even this may not happen.
After all, Iranian officials have thus far not demonstrated their commitment to accepting stringent and verifiable checks.
Moreover, Iran has managed to separate the nuclear negotiations from broader, related issues like its ballistic-missile program, its support for groups like Hezbollah, and its domestic human-rights record.
With the US loath to introduce potential spoilers into the mix, there is no chance that any of these issues will be up for discussion.
In this context, EU High Representative Catherine Ashton’s meeting with dissidents during her most recent trip to Tehran was merely a symbolic gesture.
This leaves Iran the opening it needs to place a strategic bet that the Syrian conflict will generate increasing friction between the West and Iran’s regional archrival, Saudi Arabia.
For Iran, a staunch supporter of Syrian President Bashar al-Assad’s regime, a weaker US-Saudi relationship is key to shifting the regional balance of power – especially if it is accompanied by the easing of Western economic sanctions.
To some degree, this hope is reinforced by Iran’s perception of US President Barack Obama as a motivated partner in the nuclear talks.
After all, a long-term agreement would be both a singular foreign-policy achievement for Obama and a boon to his efforts to disentangle the US from the Middle East.
But Iran also recognizes that the clock is ticking.
Obama’s presidency is coming to an end, the Republicans are poised to regain control of the Senate in November’s mid-term election, and Democrats are increasingly reticent to be viewed as “soft on Iran.”
As a result, the US Congress appears to be growing more hostile toward a deal; indeed, the longer it takes to conclude a final agreement, the more likely Congress is to scupper it.
In this context, Europe has a key role to play.
While Europe’s reputation for foreign-policy “softness” continues to shape Iranian perceptions, the EU’s role in compelling Iran to negotiate underpins the current talks.
Likewise, it was France’s insistence on more stringent controls that initially blocked the agreement in Geneva last November.
A decade ago, Europe disappointed Iran by withdrawing from negotiations, under pressure from the US – a move that some have suggested aided former Iranian President Mahmoud Ahmadinejad’s rise to power.
Today, Europe will be critical to driving progress, particularly in the event that the US Congress torpedoes a sensible agreement.
Indeed, on Iran, Europe’s unified approach has enabled it to have a greater impact than on any other significant foreign-policy issue.
This should be regarded as a model for the future and a lesson for the present.
By preserving its unity of purpose and maintaining the pressure and negotiating momentum that it has generated, Europe can demonstrate to Iran, the US, and itself that it has what it takes to be a major global actor.
Forsaken Syria
MADRID – In this year of ubiquitous commemorations, the centennial of Jan Karski’s birth has been largely overlooked.
And yet Karski’s legacy is more important than ever – nowhere more so than in Syria.
As the Geneva II peace process slogs along – leaving cadavers and atrocities to pile up – Karski’s dedication to bringing the plight of Poland’s Jews to the world’s attention during World War II, despite the inertia of governments and publics, embodies exactly what Syria desperately needs.
In 1942, Karski, a Polish-born diplomat, traveled to the United Kingdom to report on what came to be called the Holocaust.
The next year, he embarked on a mission to the United States to brief President Franklin D. Roosevelt and other dignitaries on the horrors that he had witnessed.
In both cases, he was met with skepticism and apathy.
Indeed, it was only toward the end of the war that action was taken to stop the slaughter.
Although the Holocaust is a category of persecution sui generis, one cannot avoid thinking of Karski in light of the international community’s approach to Syria today.
Expectations for the Geneva talks are so low that trivial matters – such as the fact that President Bashar al-Assad’s negotiators and the opposition are sitting together in the same room (though not at the same table) – are being hailed as successes.
Even the agreement to allow women and children to leave blockaded areas of the city of Homs – an anti-Assad stronghold – fell far short of international mediators’ vision (and even this achievement seems to be in doubt).
Instead of allowing a United Nations aid convoy to bring humanitarian aid to the area, the government agreed to release women and children on an as-yet-uncertain timeline, while men can leave only after their names had been cleared, raising fears of arrest.
Meanwhile, amid plodding deliberations of incremental steps that are clearly inadequate, Syrians are being displaced, wounded, tortured, and killed in droves.
By any measure, the level of suffering in Syria is shocking.
Although figures do not convey the cruelty by all sides, it has become de rigueur to cite the numbers: more than 100,000 dead, 2.3 million refugees, and four million people internally displaced.
But a year ago, the figures were already dire: 60,000 dead, 700,000 international refugees, and two million internally displaced.
If there were a threshold of misery that would cause the world to say, “Enough is enough,” it surely would have been crossed by now.
The ugly truth is that the world’s response to this crisis has been shaped by geopolitical interests, not the need to put an end to appalling human suffering.
Indeed, it is no secret that the conflict serves as a proxy for larger struggles – between Saudi Arabia and Iran, Saudi Arabia and Qatar, the US and Iran, Russia and the US, Shia and Sunni Muslims, and moderates and extremists – and that resolving it will require significant effort on all of these fronts.
From an American perspective, Syria is not strategically critical.
President Barack Obama’s administration has maintained an intensely inward-looking focus, reinforced by a public wary of foreign engagements.
Nothing short of a drastic change in the conflict’s nature that threatened America’s core interests would lead to direct US involvement.
Guilt, after all, is a poor motivator for international action.
Even the UK and France – the only two countries that were not shy about threatening military action against Assad’s regime – got cold feet when confronted with the possibility of going it alone.
Instead, the world is responding to graphic images of unspeakable brutality – torture by the regime or executions carried out by the opposition – with sterile shows of outrage.
The stream of statements, half-measures, and clumsy initiatives has done little to improve the situation – and, in some instances, has made things worse.
Consider Obama’s call, backed by no action, for Assad to “step aside,” and his repeated promises, dating to early 2012, to provide non-lethal aid to the Syrian opposition – promises that were finally fulfilled late last year, and then only temporarily.
This gap between rhetoric and action left a vacuum;
Saudi Arabia, Qatar, and private donors subsequently filled it by channeling support to extremist elements of the opposition, strengthening their hand at the expense of those being called moderates.
But the most infamous example of this policy paralysis was Obama’s 2012 declaration that the use of chemical weapons was the “red line” beyond which the US would be forced to intervene.
His ultimate failure to follow through on his proclamation emboldened and, in a way, re-legitimized Assad.
It remains to be seen whether Geneva II will follow this pattern.
The price of the talks has already been high, with all sides having ramped up violence to strengthen their respective positions ahead of the negotiations.
This is to say nothing of the fiasco surrounding the withdrawn invitation to Iran, whose buy-in will be essential for any resolution.
In any case, the incremental nature of the talks belies the situation’s urgency.
Amid the current focus on regime change, a transitional government, and negotiating delegations, there is a real danger that the desperate humanitarian situation will be overlooked.
Here, citizens have a critical role to play.
But, like their leaders, publics everywhere have been reticent to act.
Indeed, opinion polls show that, despite near-universal awareness of the situation in Syria, there is very little public support for intervention.
But handwringing will not help; we – individuals – must accept real responsibility for ending the tragedy and press our leaders to act.
It has been more than 70 years since Karski presented his report to the world.
In that time, we have created the United Nations, adopted the Universal Declaration of Human Rights, and discussed endlessly governments’ “responsibility to protect” their citizens.
Yet, watching the Syrian tragedy develop, one might conclude that nothing has changed.
An Arab Spring?
PARIS – Is Tunisia the first Arab authoritarian domino to fall?
Or is it a unique case that should not be viewed as a precedent for either the Arab world in general or the Maghreb in particular?
The region’s dictators have sought to dismiss the “Jasmine Revolution,” but the spark that started in Tunisia could spread – perhaps in a matter of months or years – to the entire Arab world.
Indeed, the wall of fear has crumbled, the people have spoken, and an “Arab spring” could be at hand.
The message from Tunisia, at least so far, is clear: corrupt and authoritarian regimes, beware: unless you reform deeply and quickly, your days are numbered.
The greatest danger is that the Jasmine Revolution could go the way of Romania’s anti-communist uprising of 20 years ago, with the old regime’s underlings expelling their bosses in order to stay in power.
But the best analogy for Tunisia today is Spain in the years preceding and following the death of Francisco Franco.
By opening itself to the world through tourism, and with its emphasis on education and women’s rights, Ben Ali’s regime created something unique in the Middle East: a vibrant middle class.
But the regime, like Franco’s dictatorship, did not treat the members of this new middle class like adults, thereby encouraging widespread frustration.
Given this, it would seem wrong, if not dangerous, to compare Tunisia and its Jasmine Revolution to other national contexts in the region.
Nevertheless, if Morocco looks stable today, this largely reflects two factors: monarchy and reform.
Led by a group of technocrats surrounding the young King Mohammed VI, a reform process – including political liberalization – has begun in earnest, even if the results still seem modest.
Moreover, Mohammed VI, as “Commander of the Believers,” benefits from a “Muslim” legitimacy that the leaders of Algeria and Egypt, two of the region’s most vulnerable regimes, do not possess.
And Morocco, contrary to Algeria, does not suffer from the curse of oil.
Even if the case of Tunisia is largely unique, it would be shortsighted to dismiss its potential influence elsewhere in the region, where many young Arabs in this age of Facebook and Twitter now “feel Tunisian.”
They, too, are humiliated by their leaders’ performance and, more deeply, their vulgar despotic essence.
They, too, thirst for freedom.
Whatever the Jasmine Revolution’s outcome, and even if it cannot become for the Arab world what the fall of the Berlin Wall was for Europe, it will establish a “before” and an “after.”
The “after” is likely to highlight two potential models of political development for the Arab world: Turkey and Iran.
If the revolutionary wave that began in Tunisia spreads to the rest of the Arab world, how many countries will be tempted by Turkish openness, and how many by Iranian fundamentalism?
Of course, that is a somewhat simplistic dichotomy.
There are grey areas in the Turkish experiment with “moderate Islam,” and, beyond Iran’s Mullahs, there are reasons for hope in the vibrant and resilient character of that country’s civil society.
What is clear is the West’s preference for the Turkish model.
Most Europeans may want to keep Turkey at a reasonable distance, but, confronted with changes and possible disorder, if not chaos, in the Arab world, they look favorably on Turkey’s potential to play a stabilizing role.
To be sure, history never repeats itself, but could some kind of neo-Ottoman order be the best answer to the risk of “Arab chaos”?
Prime Minister Recep Tayyip Erdoğan’s Turkey already plays a growing role in the region, and has strengthened its image with ordinary Arabs by taking a muscular diplomatic position against Israel’s deadly military assault in June 2010 on a Gaza-bound aid flotilla that had been organized by a Turkish charity.
But it is one thing to be popular and another to serve as a model.
Turkey is demonstrating that Islam and modernity are compatible.
But the Turks are the Ottoman Empire’s heirs, and the Arab world, contrary to Western hopes, may not be ready to exchange its current frustration for the humiliating admission that it requires its former rulers’ model to progress toward modernity.
It would be dangerous to assume that after Tunisia, democracy in the Arab world is just around the corner.
But the belief that nothing will change is equally illusory.
For better or worse, history is on the move in the Arab world – and there is very little the West can do about it.
An Asia Strategy for Iran
SINGAPORE − When the ongoing turmoil surrounding the Iranian elections finally ends, the West is likely to walk away with a simple black and white judgment: the bad guys won.
Of course, the West did the right thing by supporting the good guys, the street demonstrators.
Hence, the West need not bear any responsibility for the outcome.
The tragedy of such thinking is that it does not allow for any moral and political complexity or nuance, yet that is exactly what will be needed if the many problems surrounding Iran are to be resolved.
Moreover, with Mahmoud Ahmadinejad remaining as Iran’s president, the West will once again resort to its usual method of dealing with unfriendly regimes: impose more sanctions.
But this would lead to an even greater tragedy.
The only clear lesson to emerge from Iran’s disputed presidential election is that the country has a vibrant and indeed dynamic civil society.
Many brave Iranians were prepared to risk their lives to defend their beliefs.
Their ability to do so confirms that Iran is not a closed totalitarian state like North Korea.
Despite many years of rule by a theocratic establishment (or perhaps because of it), Iranian minds remain open and engaged.
So there is real hope that Iran can change, modernize, and open up as the rest of Asia has.
Indeed, the only viable long-term strategy to adopt, therefore, is to stop trying to isolate Iran and instead nudge Iranians into engaging more with modern Asia.
In the Iranian worldview, there are three great ancient Asian civilizations: Chinese, Indian, and Persian (with Persia being the greatest).
Iranians expect to perform on par with China and India.
So, while Western hectoring of Iran will not work, when Iranians see their society falling far behind China and India as those countries open up to the world, they may become motivated to reconsider their path.
The more Iranians visit China and India, the more likely that Iran will change.
Similarly, the West should find ways to re-engage with Iranian society, a major obstacle to which is the absence of diplomatic relations between the United States and Iran.
American foreign policy assumes that diplomatic relations with Iran are somehow an act of approval.
In fact, the exact opposite is true.
Diplomacy was invented precisely in order to enable relations between adversaries, not friends.
No one needs diplomatic immunity to talk to their friends.
They need it to talk to their adversaries.
Unfortunately, no US politician appears willing to explain this bit of common sense to the American public.
The US might also learn from other examples.
Many Americans applauded Egyptian President Anwar el - Sadat for his political courage in visiting Jerusalem three decades ago – a decision for which he ultimately paid with his life − even though the vast majority of Egyptians strongly disapproved.
It is useful to recall President Richard Nixon’s words when, prior to restoring diplomatic relations China, he visited Beijing: “We have at times in the past been enemies.
We have great differences today.
What brings us together is that we have common interests which transcend those differences.
As we discuss our differences, neither of us will compromise our principles.
But while we cannot close the gulf between us, we can try to bridge it so that we may be able to talk across it.”
In engaging Iran, the West should ignore the nature of its regime.
It is almost impossible for any outsider to understand Iran’s real internal political dynamics.
Just when the world reached a consensus that Ahmadinejad was merely an instrument of the Supreme Leader, Ayatollah Khamenei, Ahmadinejad appointed a Vice-President against Khamenei’s wishes (though he later retracted the appointment).
What we do know with certainty is that the regime is divided.
These divisions will allow new forces to emerge in Iranian society.
So all means should be found to reach out to Iranian society at all levels.
Iranian students should be encouraged to visit and study in Asian universities, where they would discover how confident young Chinese and Indian students are about the future − which might well cause them to reflect on why young Iranians do not share that optimism.
A final reason for the West to change course is that Western sanctions are proving increasingly useless.
Only 12% of the world’s population lives in the West, and power is slipping steadily away from it.
The July 2009 decision by the Non-Aligned Movement (comprising 118 member states) to hold its next meeting in Tehran provides a powerful demonstration of non-Western perceptions about Iran.
If the West persists with its sanctions, it will not do any good. It will only make Western leaders feel good.
But what is ultimately more important: doing good or feeling good?
An Assassination in Belgrade
Not since Archduke Franz Ferdinand's assassination has a murder shaken Belgrade as much as the killing of Serbian Premier Zoran Djindjic.
The bullets that killed Djindjic may also have slain Serbian hopes for normalcy at the very moment that we were emerging from the nightmare of Slobodan Milosevic's long misrule.
With the bloody wars of the Yugoslav succession still etched deeply in everyone's minds, does Djindjic's assassination herald the end of an era of political violence or the dawn of a new one?
Milosevic's ouster two years ago was turbulent, but no one was killed.
Serbs were justly proud: a dictatorship was ended in a democratic, peaceful way.
Milosevic's extradition to face charges of war crimes before the Hague Tribunal--a trial that has proceeded without incident in Serbia--was also peaceful.
With relations in the region and with the West approaching something like normalcy, Serbs were beginning to feel, at long last, that they were finding peace with themselves and the world.
Of course, assassinations are nothing new in Serbia. "Arkan," the leader of the most murderous paramilitary group in the wars in Bosnia and Kosovo, and a political power even after Milosevic's fall, was murdered in Belgrade last year.
Djindjic himself narrowly escaped a highway assassination attempt only last month.
But most Serbs were beginning to believe that the ballot and not the gun was becoming the dominant tool of politics.
Djindjic's effective leadership brought about this change.
Although the most popular politician of the uprising against Milosevic was Vojislav Kostunica, who replaced him as president, it was Djindjic who skillfully coordinated the volatile coalition that opposed the regime.
His boundless energy and quick thinking delivered success from behind the scenes.
As Serbia's prime minister after Milosevic, he resembled a corporate CEO more than the Heidelberg-educated philosophy professor that he was.
Djindjic remained pragmatic, never doctrinaire.
As a result of Serbia's predicament, he accumulated more power than prime ministers typically wield.
Milosevic's regime left behind crippled institutions, with large sections of the police and judiciary and many state-owned companies remaining under the control of Milosevic's clique.
With little trust in existing institutions to implement reforms, Djindjic often took shortcuts, using extra-legal means and improvised parliamentary majorities to push through legislation.
Only prosperity and a "European Serbia" mattered.
Did these short cuts help incite his death?
Who can say?
They certainly did little to build respect for the rule of law.
Yet the immediate consequences of Djindjic's death will be tragic.
He was seen in the West as a reformer, and reform may not proceed without him.
If it does not, urgently needed Western investment won't materialize.
Serbia will again seem a benighted and lawless land.
Although Djindjic was not popular, only extreme nationalists and die-hard Milosevic supporters are cheering.
They regard his murder as just punishment for the "traitor" Djindjic's decision to extradite Milosevic--and other Serbian "heroes"--to The Hague.
The more dangerous outcome is that the assassination may reinforce the belief in Serbia that only authoritarian rule is possible.
Given the prevalence of this belief, Djindjic's death creates a serious power vacuum precisely because his vast personal power was moving Serbia in some of the right directions.
Now, it is feared, organized crime will intimidate his less talented successors.
For now, Serbia's government has imposed a state of emergency.
But effective or quick suppression of the organized criminals who were almost certainly behind Djindjic's murder is unlikely.
The reason for this also explains why Djindjic could not rely on the Serb state to carry out his policies.
Many policemen and intelligence officers are on the crime bosses' payrolls.
The fact that a former president of Serbia, Ivan Stambolic, could disappear without a trace in 1999 is grim testimony to the power of Serbia's criminal underworld.
Indeed, Djindjic may well be a victim of his recent moves to root out organized crime.
He was initially slow in fighting organized crime, because he did not want to alienate the bulk of Milosevic's mafia-infested establishment at once.
He preferred to confront corrupt institutions one at a time as he consolidated his rule.
Sadly, he may also have needed the support of some crime bosses at the outset.
Djindjic's murder will make the fight against crime the country's main political goal.
In this, politicians will at last have something like united public support.
But crime would not be as powerful as it is, and the police and judiciary would not be as corrupt, if Serbia's economy were in better shape.
Serbia is poor and Western aid is desperately needed.
Djindjic's murder shows that the situation is so dire that aid should no longer be strictly conditional on harsh reforms.
For the moment, extreme nationalists and Milosevic supporters may feel triumphant.
But the one certain success of Djindjic's era is that they will never return to power.
Their vision of a chauvinistic, inward-looking Serbia has been discredited, while Djindjic's stance may become more popular due to his martyrdom.
Moments of defeat have always been history's turning points in Serbia.
Once again, Serbs face such a moment.
This time, however, we must resolve to remember Zoran Djindjic's cause--political and economic liberty--more than his blood sacrifice.
A Nation Kidnapped
The editorial published in the Colombian newspaper Diario del Sur on July 6 (“A Slap in the Face of Violence”) was ecstatic: “Never before, in spite of the violence that has oppressed us during so many years, has Colombia lived a day like yesterday: historic and unforgettable in every aspect.”
At noon on July 5, Colombians throughout the country poured into the streets to show their outrage at the news that 11 provincial politicians had been killed while being held by leftist rebels.
A human chain was formed, with participants wearing white tops.
My colleagues in the capital, Bogotá, and in the south of the country, where we have humanitarian projects, say that everyone was waving white scarves.
White balloons were launched everywhere.
Press agencies estimate that, with more than one million participants, this was the largest public protest since October 1999, which was also – sadly – a demonstration against violence and kidnappings.
But, while the killing of the 11 congressmen from Cali region – attributed to “crossfire’” during an attack by an “unidentified military group”the leftist rebels – provoked shock and anger, there was no agreement on how to solve the chronic problem of “El Secuestro” (The Kidnapping).
Some Colombians demand a “humanitarian accord” – an exchange of prisoners for hostages – and reject “blood and fire” rescue attempts.
Others oppose “ceding the territory” (setting up a demilitarized zone, where any such exchange could take place) and demand of the government “firmeza, siempre firmeza!” (to be “firm” and go after the rebels).
As is often the case in armed conflicts, civilians suffer the most.
The July 5 protest reminded us of the 3,000 kidnappings since the start of this four-decade conflict, but Colombians could form human chains and release white balloons for many other reasons.
Consider, for example, Colombia’s grim ranking as global leader in the number of victims injured by landmines.
According to “Landmine Monitor 2006,” Colombia had 1,110 victims last year, followed by Cambodia with 875 and Afghanistan with 848.
This unnoticed drama is emblematic of the under-reported Colombian conflict.
Indeed, if there were such a thing as a combined index of despair, Colombia would be an undisputed leader.
Hostage-taking, and killing and maiming by landmines, are but the side effects of the oldest and longest-running civil war in Latin America, which has resulted in three million internally displaced persons – one of the world’s highest levels, close to that of Sudan, Congo, and Iraq.
Even if there were, by some miracle, a negotiated end to the fighting, the scars left by this conflict will remain.
So, besides helping the country find a political solution, there is also a need to focus on long-term reconstruction and reconciliation, so that young lives distorted by the civil war can be righted and children can be rescued from the harmful influence of so much violence and bloodshed.
In Colombia’s south – where the heavy presence of illegal armed groups makes social peace a distant dream – I went to visit a secondary school, as part of a needs assessment.
After four hours on a dirt road, I reached a highlands hamlet.
The smart and friendly teenagers were eager to learn how to surf the Internet, just installed in their school.
But when I asked five of them what they would like to become, I understood that this conflict has marked them forever.
Their dream careers were: lawyer, criminal investigator, forensic physician, and soldier.
The fifth one wanted to become a chemist, so that he could set up a cocaine laboratory.
The teenagers’ plans simply reflect a sad reality: these pupils are the second generation that has not known anything but war.
On the day of the march against violence, next to the editorial in
It is perhaps a beginning.
A Nation of Vidiots
NEW YORK – The past half-century has been the age of electronic mass media.
Television has reshaped society in every corner of the world.
Now an explosion of new media devices is joining the TV set: DVDs, computers, game boxes, smart phones, and more.
The United States led the world into the television age, and the implications can be seen most directly in America’s long love affair with what Harlan Ellison memorably called “the glass teat.”
In 1950, fewer than 8% of American households owned a TV; by 1960, 90% had one.
That level of penetration took decades longer to achieve elsewhere, and the poorest countries are still not there.
True to form, Americans became the greatest TV watchers, which is probably still true today, even though the data are somewhat sketchy and incomplete.
The best evidence suggests that Americans watch more than five hours per day of television on average – a staggering amount, given that several hours more are spent in front of other video-streaming devices.
Other countries log far fewer viewing hours. In Scandinavia, for example, time spent watching TV is roughly half the US average.
The consequences for American society are profound, troubling, and a warning to the world – though it probably comes far too late to be heeded.
First, heavy TV viewing brings little pleasure.
Many surveys show that it is almost like an addiction, with a short-term benefit leading to long-term unhappiness and remorse. Such viewers say that they would prefer to watch less than they do.
Moreover, heavy TV viewing has contributed to social fragmentation.
Time that used to be spent together in the community is now spent alone in front of the screen.
Robert Putnam, the leading scholar of America’s declining sense of community, has found that TV viewing is the central explanation of the decline of “social capital,” the trust that binds communities together.
Americans simply trust each other less than they did a generation ago.
Of course, many other factors are at work, but television-driven social atomization should not be understated.
Certainly, heavy TV viewing is bad for one’s physical and mental health.
Americans lead the world in obesity, with roughly two-thirds of the US population now overweight.
Again, many factors underlie this, including a diet of cheap, unhealthy fried foods, but the sedentary time spent in front of the TV is an important influence as well.
At the same time, what happens mentally is as important as what happens physically.
Television and related media have been the greatest purveyors and conveyors of corporate and political propaganda in society.
America’s TV ownership is almost entirely in private hands, and owners make much of their money through relentless advertising.
Effective advertising campaigns, appealing to unconscious urges – typically related to food, sex, and status – create cravings for products and purchases that have little real value for consumers or society.
The same, of course, has happened to politics.
American politicians are now brand names, packaged like breakfast cereal.
Anybody – and any idea – can be sold with a bright ribbon and a catchy jingle.
All roads to power in America lead through TV, and all access to TV depends on big money.
This simple logic has put American politics in the hands of the rich as never before.
Even war can be rolled out as a new product.
The Bush administration promoted the premises of the Iraq war – Saddam Hussein’s non-existent weapons of mass destruction –in the familiar colorful, fast-paced, and graphics-heavy style of television advertising.
Then the war itself began with the so-called “shock and awe” bombing of Baghdad – a made-for-TV live spectacle aimed at ensuring high ratings for the US-led invasion.
Many neuroscientists believe that the mental-health effects of TV viewing might run even deeper than addiction, consumerism, loss of social trust, and political propaganda.
Perhaps TV is rewiring heavy viewers’ brains and impairing their cognitive capacities.
The American Academy of Pediatrics recently warned that TV viewing by young children is dangerous for their brain development, and called on parents to keep children under two away from the TV and similar media.
A recent survey in the US by the organization Common Sense Media reveals a paradox, but one that is perfectly understandable.
Children in poor American households today not only watch more TV than children in wealthy households, but are also more likely to have a television in their room.
When a commodity’s consumption falls as income rises, economists call it an “inferior” good.
To be sure, the mass media can be useful as a provider of information, education, entertainment, and even political awareness.
But too much of it is confronting us with dangers that we need to avoid.
At the very least, we can minimize those dangers.
Successful approaches around the world include limits on TV advertising, especially to young children; non-commercial, publicly-owned TV networks like the BBC; and free (but limited) TV time for political campaigns.
Of course, the best defense is our own self-control.
We can all leave the TV off more hours per day and spend that time reading, talking with each other, and rebuilding the bases of personal health and social trust.
Anatomy of a Crisis
BERKELEY – Getting out of our current financial mess requires understanding how we got into it in the first place.
The fundamental cause, according to the likes of John McCain, was greed and corruption on Wall Street.
Though not one to deny the existence of such base motives, I would insist that the crisis has its roots in key policy decisions stretching back over decades.
In the United States, there were two key decisions.
The first, in the 1970’s, deregulated commissions paid to stockbrokers.
The second, in the 1990’s, removed the Glass-Steagall Act’s restrictions on mixing commercial and investment banking.
In the days of fixed commissions, investment banks could make a comfortable living booking stock trades.
Deregulation meant competition and thinner margins.
Elimination of Glass-Steagall then allowed commercial banks to encroach on the investment banks’ other traditional preserves.
In response, investment banks branched into new businesses like originating and distributing complex derivative securities.
They borrowed money and put it to work to sustain their profitability.
This gave rise to the first causes of the crisis: the originate-and-distribute model of securitization and the extensive use of leverage.
It is important to note that these were unintended consequences of basically sensible policy decisions.
Other things being equal, deregulation allowed small investors to trade stocks more cheaply, which made them better off.
But other things were not equal.
In particular, the fact that investment banks, which were propelled into riskier activities by these policy changes, were entirely outside the regulatory net was a recipe for disaster.
Similarly, eliminating Glass-Steagall was fundamentally sensible.
Conglomerates allow financial institutions to diversify their business, and combining with commercial banks allows investment banks to fund their operations using relatively stable deposits instead of fickle money markets.
This model has proven its viability in Europe over a period of centuries, and its advantages are evident in the US even now with Bank of America’s purchase of Merrill Lynch.
But conglomeratization takes time.
In the short run, Merrill, like the other investment banks, was allowed to double up its bets.
It remained entirely outside the purview of the regulators.
As a stand-alone entity, it was then vulnerable to market swings.
A crisis sufficient to threaten the entire financial system was required to precipitate the inevitable conglomeratization.
The other element in the crisis was the set of policies that gave rise to global imbalances.
The Bush administration cut taxes.
The Fed cut interest rates in response to the 2001 recession.
Financial innovation, meanwhile, worked to make credit even cheaper and more widely available.
This, of course, is just the story of subprime mortgages in another guise.
The result was increased US spending and the descent of measured household savings into negative territory.
Of equal importance were the rise of China and the decline of investment in Asia following the 1997-1998 financial crisis.
With China saving nearly 50% of its GNP, all that money had to go somewhere.
Much of it went into US treasuries and the obligations of Fannie Mae and Freddie Mac.
This propped up the dollar and reduced the cost of borrowing for US households, encouraging them to live beyond their means.
It also created a more buoyant market for the securities of Freddie and Fannie, feeding the originate-and-distribute machine.
Again, these were not outright policy mistakes.
Lifting a billion Chinese out of poverty is arguably the single most important event in our lifetimes.
The fact that the Fed responded quickly prevented the 2001 recession from worsening.
But there were unintended consequences. The failure of US regulators to tighten capital and lending standards when abundant capital inflows combined with loose Fed policies ignited a furious credit boom.
The failure of China to move more quickly to encourage higher domestic spending commensurate with its higher incomes added fuel to the fire.
Now, a bloated financial sector is being forced to retrench.
Some outcomes, like the marriage of Bank of America and Merrill Lynch, are happier than others, like the bankruptcy of Lehman Brothers.
But, either way, there will be downsizing.
Foreign central banks are suffering capital losses on their unthinking investments.
As they absorb their losses on US treasury and agency securities, capital flows toward the US will diminish.
The US current-account deficit and the Asian surplus will shrink.
US households will have to start saving again.
The one anomaly is that the dollar has strengthened in recent weeks.
With the US no longer viewed as a supplier of high-quality financial assets, one would expect the dollar to have weakened.
The dollar’s strength reflects the knee-jerk reaction of investors rushing into US treasuries as a safe haven.
It is worth remembering that the same thing happened in August 2007, when the sub-prime crisis erupted.
But once investors realized the extent of US financial problems, the rush into treasuries subsided, and the dollar resumed its decline.
Now, as investors recall the extent of US financial problems, we will again see the dollar resume its decline.
Emphasizing greed and corruption as causes of the crisis leads to a bleak prognosis.
We are not going to change human nature.
We cannot make investors less greedy.
But an emphasis on policy decisions suggests a more optimistic outlook.
Unintended consequences cannot always be prevented. Policy mistakes may not always be avoidable.
But they at least can be corrected. That, however, requires first looking more deeply into the root causes of the problem.
Anatomy of a Financial Meltdown
NEW YORK – A vicious circle is currently underway in the United States, and its reach could broaden to the global economy.
America’s financial crisis has triggered a severe credit crunch that is making the US recession worse, while the deepening recession is leading to larger losses in financial markets – thus undermining the wider economy.
There is now a serious risk of a systemic meltdown in US financial markets as huge credit and asset bubbles collapse.
The problem is no longer merely sub-prime mortgages, but rather a “sub-prime” financial system.
The housing recession – the worst in US history and worsening every day – will eventually see house prices fall by more than 20%, with millions of Americans losing their homes.
Delinquencies, defaults, and foreclosures are now spreading from sub-prime to near-prime and prime mortgages.
Thus, total losses on mortgage-related instruments – include exotic credit derivatives such as collateralized debt obligations (CDOs) – will add up to more than $400 billion.
Moreover, commercial real estate is beginning to follow the downward trend in residential real estate.
After all, who wants to build offices, stores, and shopping centers in the empty ghost towns that litter the American West?
In addition to the downturn in real estate, a broader bubble in consumer credit is now collapsing: as the US economy slips into recession, defaults on credit cards, auto loans, and student loans will increase sharply.
US consumers are shopped-out, savings-less, and debt-burdened.
With private consumption representing more than 70% of aggregate US demand, cutbacks in household spending will deepen the recession.
We can also add to these financial risks the massive problems of bond insurers that guaranteed many of the risky securitization products such as CDOs.
A very likely downgrade of these insurers’ credit ratings will force banks and financial institutions that hold these risky assets to write them down, adding another $150 billion to the financial system’s mounting losses.
Then there is the exposure of banks and other financial institutions to rising losses on loans that financed reckless leveraged buy-outs (LBOs).
With a worsening recession, many LBOs that were loaded with too much debt and not enough equity will fail as firms with lower profits or higher losses become unable to service their loans.
Given all this, the recession will lead to a sharp increase in corporate defaults, which had been very low over the last two years, averaging 0.6% per year, compared to an historic average of 3.8%.
During a typical recession, the default rate among corporations may rise to 10-15%, threatening massive losses for those holding risky corporate bonds.
As a result, the market for credit default swaps (CDS) ­– where protection against corporate defaults is bought and sold – may also experience massive losses.
In that case, there will also be a serious risk that some firms that sold protection will go bankrupt, triggering further losses for buyers of protection when their counterparties cannot pay.
On top of all this, there is a shadow financial system of non-bank financial institutions that, like banks, borrow short and liquid and lend to or invest in longer-term and illiquid assets.
This shadow system includes structured investment vehicles (SIVs), conduits, money market funds, hedge funds, and investment banks.
Like banks, all these financial institutions are subject to liquidity or rollover risk – the risk of going belly up if their creditors do not rollover their short-term credit lines.
But, unlike banks, they do not have the safety net implied by central banks’ role as lender of last resort.
Now that a recession is underway, US and global stock markets are beginning to fall: in a typical US recession, the S&amp;P 500 index falls by an average of 28% as corporate revenues and profits sink.
Losses in stock markets have a double effect: they reduce households’ wealth and lead them to spend less; and they cause massive losses to investors who borrowed to invest in stock, thus triggering margin calls and asset fire sales.
There is thus a broader risk that many leveraged investors in both equity and credit markets will be forced to sell illiquid assets in illiquid markets, leading to a cascading fall in asset prices to below their fundamental values.
The ensuing losses will aggravate the financial turmoil and economic contraction.
Indeed, adding up all these losses in financial markets, the sum will hit a staggering $1 trillion.
Tighter credit rationing will then further hamper the ability of households and firms to borrow, spend, invest, and sustain economic growth.
The risk that a systemic financial crisis will drive a more pronounced US and global recession has quickly gone from being a theoretical possibility to becoming an increasingly plausible scenario.
Anatomy of a Revolution Delayed
The ongoing conflict between Iran’s rulers and the Iranian public is the result of a head-on collision between two contradictory forces.
In recent years, public attitudes in Iran have become more liberal.
At the same time, power has shifted from conservative pragmatism toward a much more militant fundamentalism. The call by the most important group of Iran’s clerics for the election results to be thrown out is but the latest sign of the fight back of both the reformist and pragmatic conservative factions.
Thirty years after the Islamic revolution, Iranians are growing demonstrably less religious and more liberal.
Two face-to-face surveys of more than 2,500 Iranian adults, conducted in 2000 and 2005, clearly show the trend.
The percentage of those who “strongly agree” that democracy is the best form of government increased from 20% to 31%.
Similarly, on a number of questions concerning gender equality – including political leadership, equal access to higher education, and wifely obedience – the numbers continued a downward trend.
Those who considered love as the basis for marriage increased from 49% to 69%, while those who depended on parental approval fell from 41% to 24%.
In 2005, a much higher percentage than in 2000 defined themselves as “Iranian, above all” rather than “Muslim, above all.”
This trend is not hard to understand.
The imposition of a monolithic religious discourse on society has made liberal values attractive to Iranians.
But, while this was reflected in reformist trends in the country’s wider political life, a movement toward militant fundamentalism took shape within the regime’s power structure.
Reform-minded politicians were partly to blame for this change.
Far from opposing absolutist power as an impediment to religious democracy, they tried to persuade the Supreme Leader, Ayatollah Ali Khamenei, of the value of reform.
But Khamenei had no interest in reform, as he made plain in dismantling the reform movement.
The presidency of Mohammad Khatami, an avowed reformer, who served eight years, beginning in 1997, convinced the Supreme Leader that his authority would be assured only if the presidency was held by a subservient fundamentalist such as the current president, Mahmoud Ahmadinejad.
In this, Khamenei was following the lead of the late Shah, who kept Amir Abbas Hoveyda, a loyal retainer, as prime minister from 1965 until the Shah was overthrown in 1979.
The problem with the Supreme Leader’s calculation, however, is that Ahmadinejad is a loose cannon.
His populist rhetoric and religious fundamentalism have alienated a large section of conservative-pragmatist clerics and their supporters.
Many members of this group honor the institution of private property, and Ahmadinejad’s talk of redistributing wealth is not to their liking.
More disturbing to them is his apocalyptic conviction regarding the imminent advent of the Hidden Imam, the Mahdi, whose appearance is believed to lead to the destruction of the world and the end of time.
Generally, Ahmadinejad begins his public speeches with prayers for the Mahdi’s immediate return.
For the Shia religious hierarchy, long accustomed to relegating the advent of the Mahdi to a distant future, Ahmadinejad’s insistent millenarianism is troublesome.
They have often dismissed as unorthodox, if not heretical, any claim of personal contact with the Imam or speculation about his arrival.
Several ayatollahs opined that such talk about the Mahdi is unbecoming of a president or, worse, indicative of an unstable leader.
These concerns were reflected in the fact that the Society of Combatant Clergy, a conservative body, was unable to endorse Ahmadinejad’s candidacy.
Defiance of the Supreme Leader by millions of Iranians just a day after he firmly endorsed Ahmadinejad threw the country into a political crisis.
Worldwide broadcasts of the beating and killing of protesters have undermined the regime’s religious credentials.
Seeking a way out of this difficult situation, the Supreme Leader declared that the electoral disputes must be settled in through legal channels, not on the street.
Given his role in justifying electoral fraud, this argument seems like an effort to buy time to clear the streets of demonstrators, put opposition leaders under severe physical and psychological stress, and isolate Mir Hossein Mousavi, the presumed winner of the real vote.
Nonetheless, Khamenei’s invocation of the law echoes the demands of many conservative-pragmatists who lean toward Mousavi, who is not in a position to challenge Khamenei’s authority directly.
Mousavi must carefully continue his legal campaign, without compromising the trust he has gained from the majority of Iranians.
He must stand by his two principal demands: nullification of the election and establishment of an impartial committee to rule on the government’s violations of the electoral law.
Should Mousavi persuade Khamenei to reconsider his position, the Supreme Leader’s hold on power will be shaken.
If Khamenei holds fast, Mousavi cannot gain the presidency, but he will continue to represent the hopes of the majority of Iranians who differ dramatically with their government.
For now, what will happen depends on Mousavi’s perseverance.
Anatomy of Chavez
Hugo Chavez's almost 8 years in power in Venezuela – which he will seek to extend in presidential elections next month &#45;&#45; seems to defy economic analysis.
Indeed, any and all economic examination of Chavez’s Venezuela confirms Edgar R. Fiedler’s quip that if you &quot;ask five economists something, you will get five answers...or six if one of them is a Harvard graduate.&quot;
Some people see in Chavez an innovative statesman who has seized an almost magical moment – the windfall Venezuela has received from today’s sky high oil prices &#45;&#45; to change the rules of the game in his country.
A few key indicators appear to support this.
Foreign investment has grown recently from $1.5 billion (2004) to $2.5 billion (2005).
In that two year period, Chavez stepped on the gas for his social reforms – education, health care, etc. – and also in regard to breaking down the country’s excessive concentrations of wealth.
Although over 70% of national income remains in the hands of just 20% of the population, Chavez has forced big foreign oil companies to pay much higher royalties and has started expropriating unproductive land and industrial facilities.
With oil prices now six times higher than they were when he came to power, Chavez presided over economic growth of 9% in 2005 and as much again in the first quarter of 2006.
Above all, however, he has achieved a 6.3% effective reduction of poverty, after taking over a country whose vast majority - 80% - was perched between poverty and squalor.
Seen in this angle, Chavez appears to have real achievements.
But there is another, darker, angle from which to view his presidency.
It is possible to see in Chavez but another Latin American populist sorcerer's apprentice, one whose political shelf life will expire whenever oil prices begin their inevitable shift backward.
To those who think that this is the case, Chavez is not an innovator but someone who is merely squandering Venezuela’s oil wealth in the same way that governments did following the oil shocks of the 1970's.
The notion of specific &quot;Chavist&quot; growth can also be challenged.
The highest growth achieved in the Chavez years is lower than Venezuela’s average during the second half of the 1990's, when oil was the exclusive domain of the private sector.
Moreover, growth under Chavez seems to reflect an increase in domestic consumption resulting from the flow of petrodollars and nothing more fundamental, as oil remains the economy’s only real engine.
So nothing Chavez has done translates into a fundamental improvement in, or diversification of, Venezuela’s economy.
Private investors appear to understand this, as such investment in Venezuela grew by a mere 3% between 2000 and 2004.
Suspiciously, the country’s central bank refuses to publish that figure for 2005.
Only one out of every ten Venezuelan companies polled states any intention of making middle or long term investments such as renovating existing industrial plants or building new ones.
True, businessmen have tempered their criticisms of Chavez and seem eager to participate in the profit feast brought about by increased consumption.
But they may also be waiting for the first external shock to puncture the Chavez balloon before they pounce.
These two versions of the Chavez years are both distorted &#45;&#45; to a certain degree &#45;&#45; by nostalgia.
Those who see him as successful have the 1960's and 1970's as their dream fantasy.
Their main arguments are reminiscent the arguments put forward by those who backed the Cuban Revolution.
Those who revile Chavez often do so in the name of the ‘Washington Consensus,’ that mix of capitalism and democracy that was almost hegemonic across the continent in the 1980's and 1990's.
Thus, Chavez is portrayed as a return to the Latin American populist heresy, a heresy that must be resisted because it affects not only the country with the largest oil reserves outside the Middle East, but also because it may tempt the rest of Latin America down that road.
But history never truly repeats itself.
The years of the biggest transformation demands in Latin America or those of its docility to economic orthodoxy will not come back because we can remember them.
Especially, the view of the Washington Consensus seems irretrievable; its &quot;grand tale&quot; is now beyond the pale in the region's societies after it did not deliver the promised prosperity.
Yet one thing is clear: Chavez was the first ruler of his generation to recognize the region’s fatigue and disillusion with neo-liberalism, and to propose new rules of the game.
In the end these may not be the rules he envisions today, but neither are they a spent force.
To believe that one can accurately foresee what will become of Chavez and Venezuela brings to mind another warning by Fiedler: &quot;He who lives by the crystal ball must sooner or later learn to chew glass.&quot;
Anatomy of Fear
How does your brain form its most significant memories?
Studies of fear in rats have helped us learn much here.
Although people and rats fear different things, the manner in which the rat and human brain and body respond to danger is similar.
Because fear is at the core of many human pathologies, from panic attacks to posttraumatic stress disorder, breakthroughs in understanding the brain's fear system may lead to new ways to treat these disorders.
The core of the brain's fear system is found in a region called the "amygdala".
This region receives information from all the senses and in turn controls the various networks that inspire the speeding heart, sweaty palms, wrenching stomach, muscle tension and hormonal floods that characterize being afraid.
A rat's amygdala responds to natural dangers (rats fear cats without having to learn to do so) and learns about new dangers (sounds, sights and smells that occur in anticipation of cats and other threats).
It is through studies of the way the brain learns about stimuli, such as the sounds that precede danger, that our systems for learning about fear, and memory as a whole, have been elucidated through rat studies.
There is also evidence that amygdala of reptiles and birds have similar functions.
Studies of humans with damage to the amygdala, due to neurological disease or as a consequence of surgery to control epilepsy, show that our brains also work in this same basic way.
The implication of these findings is that early on (perhaps since dinosaurs ruled the earth, or even before) evolution hit upon a way of wiring the brain to produce responses likely to keep an organism alive in dangerous situations.
The solution was so effective that it has not changed much over the ages.
Obviously, this is not the whole story. Once the fear system detects and starts responding to danger, a brain such as the human brain, with its enormous capacity for thinking, reasoning, and musing, begins to assess what is going on and tries to determine what to do.
This is when feelings of fear arise.
But in order to be consciously fearful you have to have a sufficiently complex kind of brain, one aware of its own activities.
While this is undoubtedly true of the human brain, it is not at all clear which (if any) other animals have this capacity.
So, in evolutionary terms, the fear system of the brain is very old.
It is likely that it was designed before the brain was capable of experiencing what we humans refer to as "fear" in our own lives.
If true, then the best way to understand how the fear system works is not to chase the elusive brain mechanisms of feelings of fear, but to study the underlying neural systems that evolved as behavioral solutions to problems of survival.
In order to understand feelings, we need to step back from their superficial expression in our conscious experiences and dig deeper into how the brain works when we have these experiences.
A fundamental discovery has been that the brain has multiple memory systems, each devoted to different kinds of memory functions.
For memories of fear arousing experiences, two systems are particularly important.
Take this example: if you return to the scene of a recent accident, you are likely to have a physical reaction that reflects activation of memories stored in the amygdala.
At the same time, you will be reminded of the accident, will remember where you were going, who you were with, and other details.
These are explicit (conscious) memories mediated by another system, the "hippocampus".
In contrast, memories mediated by the amygdala are unconscious.
These are memories in the sense that they cause your body to respond in a particular way as a result of past experiences.
The conscious memory of the past experience and the physiological responses elicited thus reflect the operation of two separate memory systems that operate in parallel.
Only by taking these systems apart in the brain have neuro-scientists been able to figure out that these are different kinds of memory, rather than one memory with multiple forms of expression.
Many of the most common psychiatric disorders that afflict humans are emotional disorders; many of these are related to the brain's fear system.
According to America's Public Health Service, about 50% of mental problems reported in the US (other than those related to substance abuse) are accounted for by anxiety disorders, including phobias, panic attacks, post-traumatic stress disorder, obsessive compulsive disorder, and generalized anxiety.
Research into the brain mechanisms of fear helps us to understand why these emotional conditions are so hard to control.
Neuro-anatomists have shown that the pathways that connect the amygdala with the thinking brain, the neocortex, are not symmetrical - the connections from the cortex to the amygdala are considerably weaker than those from the amygdala to the cortex.
This may explain why, once an emotion is aroused, it is so hard for us to turn it off at will.
The asymmetry of these connections may also help us understand why psychotherapy is often such a difficult and prolonged process, for it relies on imperfect channels of communication between brain systems involved in cognition and emotion.
Studies of the basic biology of the fear system are likely to continue to reveal important information both about where our emotions come from and what goes wrong in emotional disorders.
As we learn more, we may begin to figure out how to better treat - and even prevent - these conditions.
Anatomy of Thatcherism
London – Thirty years ago this month, Margaret Thatcher came to power.
Although precipitated by local conditions, the Thatcher (or more broadly the Thatcher-Reagan) revolution became an instantly recognizable global brand for a set of ideas that inspired policies to free markets from government interference.
Three decades later, the world is in a slump, and many people attribute the global crisis to these very ideas.
Indeed, even beyond the political left, the Anglo-American model of capitalism is deemed to have failed.
It is held culpable for the near financial meltdown.
But 30 years of hindsight enable us to judge which elements of the Thatcher revolution should be preserved, and which should be amended in the light of today’s global economic downturn.
Most obviously in need of amendment is the view that minimally managed and regulated markets are both more stable and more dynamic than those subject to extensive government intervention.
The Thatcherite assumption, in other words, was that government failure is far more menacing to prosperity than market failure.
This was always bad history.
The record shows that the period 1950-1973, when government intervention in market economies was at its peacetime height, was uniquely successful economically, with no global recessions and faster rates of GDP growth – and growth of GDP per capita – than in any comparable period before or since.
One can argue that economic performance would have been even better with less government intervention.
But perfect markets are no more available than perfect governments.
All we have are comparisons between what happened at different times.
What these comparisons show is that markets plus government have done better than markets minus government.
Nevertheless, by the 1970’s the pre-Thatcher political economy was in crisis.
The most notorious symptom of this was the emergence of “stagflation” – simultaneously rising inflation and unemployment.
Something had gone wrong with the system of economic management bequeathed by John Maynard Keynes.
In addition, government spending was on the rise, labor unions were becoming more militant, policies to control pay kept breaking down, and profit expectations were falling.
It seemed to many as though government’s reach had come to exceed its grasp, and that either its grasp had to be strengthened or its reach had to be reduced.
Thatcherism emerged as the most plausible alternative to state socialism.
Nigel Lawson was Thatcher’s second Chancellor of the Exchequer, or finance minister.
Out of the government’s anti-inflationary efforts emerged the “Lawson doctrine,” first stated in 1984 and broadly accepted by governments and central banks ever since. “The conquest of inflation,” Lawson said, “should...be the objective of macroeconomic policy.
And the creation of conditions conducive to growth and employment should be...the objective of microeconomic policy.”
This proposition overturned the previous Keynesian orthodoxy that macroeconomic policy should aim at full employment, with the control of inflation left to wage policy.
Yet, despite all the “supply side” reforms introduced by Thatcherite governments, unemployment has been much higher since 1980 than in the 1950’s and 1960’s – 7.4% on average in the United Kingdom, compared to 1.6% in the earlier decades.
What about inflation targeting?
Here, too, the record since 1980 has been patchy, despite the huge deflationary pressure exerted by low-wage competition from Asia.
Inflation in 1950-1973 and 1980-2007 was about the same – just over 3% – while inflation targeting has failed to prevent a succession of asset bubbles that have brought recessions in their wake.
Nor has Thatcherite policy succeeded in one of its chief aims – to reduce the share of government spending in national income.
The most one can say is that it halted the rise for a time.
Now public spending is on the increase again, and record peacetime deficits of 10% or more of GDP stretch ahead for years.
In de-regulating financial markets worldwide, the Thatcher-Reagan revolution brought about the corruption of money, without improving on the previous growth of wealth – except for the very wealthy.
The average world citizen would have been 20% richer had world GDP per capita grown at the same rate between 1980 and 2007 as it did between 1950 and 1973 – and this despite China’s high growth rates in the past 20 years.
Furthermore, in unleashing the power of money, the Thatcherites, for all their moralizing, contributed to the moral decay of the West.
Against these formidable minuses are three pluses.
The first is privatization.
By returning most state-owned industries to private ownership, the Thatcher revolution killed off state socialism.
The British privatization program’s greatest influence was in the former communist states, to which it gave the ideas and techniques needed to dismantle grossly inefficient command economies.
This gain must be preserved in the face of the current clamor to “nationalize” banks.
Thatcherism’s second success was to weaken trade unions.
Set up to protect the weak against the strong, labor unions had become, by the 1970’s, enemies of economic progress, a massive force of social conservatism.
It was right to encourage a new economy to grow outside these congealed structures.
Finally, Thatcherism put paid to the policy of fixing prices and wages by central diktat or by tripartite “bargains” between governments, employers, and trade unions.
These were the methods of fascism and communism, and they would, in the end, have destroyed not just economic, but political, liberty.
Political pendulums often swing too far.
In rebuilding the shattered post-Thatcherite economy, we should be careful not to revive the failed policies of the past.
I still find fruitful Keynes’s distinction between the agenda and the non-agenda of politics.
As long as central government takes responsibility for maintaining a high and stable level of employment, Keynes thought, most of the rest of economic life can be left free of official interference.
Building a proper division of responsibility between state and market from this insight is today’s main task.
Anatomy of the Party of Power
More than anything else, Vladimir Putin understands power: how to get it; how to consolidate it.
His predecessor, Boris Yeltsin, knew how to seize power but not how to consolidate it, which partly explains why power seeped away throughout his presidency.
President Putin's success, however, has bred its own problem: he consolidated power at the center so well that opposition is brewing in Russia's regions.
Yeltsin's biggest failing was in not creating a viable, non-ideological party - a "party of power" - to buttress his regime.
He tried to do so in 1995, but the Chechen War drove Russia's democrats away from him.
Moreover, his efforts here were amazingly clumsy.
Yeltsin once spoke about his scheme to link two centrists.
With "Ivan Rybkin (then Duma's speaker)," Yelstin said on TV, "leading the left flank, and Viktor Chernomyrdin (then prime minister) leading the right, we will encircle everyone."
But by linking both parties to his very unpopular self, Yeltsin damaged both.
Perhaps if both wings had united, that single party would have appeared as an unbeatable juggernaut.
Such unity, however, was impossible, for an obvious Russian reason: the faction leaders hated each other too much to get together, even for their own good.
Indeed, Rybkin was told to pretend to be opposed to Yeltsin's policies, but when he did object, Chernomyrdin summoned Rybkin to his office for "clarifications."
When businessmen learned about this "dressing down," they became afraid to finance Rybkin's party.
In the end, Rybkin went unelected and Chernomyrdin's `Our Home Is Russia' (NDR) came third.
Yeltsin failed to consolidate political support for other reasons as well, the most important being his unwillingness (or inability) to forcefully manipulate the media.
Of course, transformation of the presidential administration into a public relations machine began under Yeltsin when Anatoli Chubais directed the 1996 election campaign.
Before that, the Kremlin had little idea about how to manipulate the new media outlets that Russia's infant democracy had produced.
Today's Kremlin, however, is full of clever ideas about how to control and intimidate newspapers, radio, and television.
In the 1995 election, Yeltsin would have been happy if the NDR secured 25% to 30% of the vote.
Putin is far more ambitious.
He will be displeased if `United Russia' - the "party of power" he has built - wins less than 50% of the seats in the next Duma.
But are the results of the parliamentary elections due this coming January truly a foregone conclusion?
Or are surprises in store for Putin?
Surprises seem likely because Russia's political dividing line has shifted, but the President's political strategy hasn't recognized that fact.
Indeed, he appears set to be waging battles against the communists that are already won.
Putin's re-consolidation of power within the Kremlin, after much of it escaped to the regions during the Yeltsin years, dramatically shifted Russia's political dividing line.
In the past, that dividing line separated right and left, but the line at the forthcoming elections will run between the federal center and the regions.
The loss of political power in the regions (regional governors, for example, were evicted from the Duma's upper house) has incited serious discontent that is spilling over into the public sphere.
That discontent will likely gather momentum as elections near, which may be enough to stop the federal authorities from meeting their strategic goal of winning an unchallengeable majority of seats in the new Duma.
Vast administrative resources are being used to secure the desired result.
But Russia's bureaucracy is no disciplined machine, and the lower reaches of the state's `vertical' power structure may well ally themselves - quietly - with regional authorities to prevent the center from gaining too many votes.
Regional administrations also possess their own instruments of obstruction, including propaganda outlets in the regional media, as well as the ability to manipulate ballot papers.
Indeed, President Putin's failure to "reconquer" his home city of St. Petersburg, now controlled by a bitter political opponent of the President, Vladimir Yakovlev, demonstrates the bureaucratic powers that local leaders retain.
So the real issue in the forthcoming Duma elections will be how powerfully regional elites confront Putin.
Their ability to defy the president may be aided by the fact that the Kremlin is failing to recognize the potential of their challenge.
So far, the main target of its campaign is the communists, whom Kremlin political operatives hope to destroy in the way they destroyed Moscow Mayor Yuri Luzhkov and former Prime Minister Yevgeny Primakov, head of the Fatherland party, who were the leading non-communist challengers during Putin's first presidential campaign.
That focus on the battle with the communists may allow other forces to sneak into the Duma by the back door.
The Boris Nemtsov/Sergei Kiriyenko `Union of Right Forces' (SPS) is one party that seems certain to benefit in this way.
Indeed, the SPS electorate is growing faster than that of other parties.
In principle, all of Russia's political elites appear to have - or pretend to have - resigned themselves to a political landscape with Putin alone on the mountaintop and everyone else consigned to the valley below.
The upcoming elections won't knock the president off that mountain, but his `party of power' is not omnipotent enough to silence the dissenting echoes rising from below.
Antarctica’s Point of No Return
POTSDAM – Recent satellite observations have confirmed the accuracy of two independent computer simulations that show that the West Antarctic ice sheet has now entered a state of unstoppable collapse.
The planet has entered a new era of irreversible consequences from climate change.
The only question now is whether we will do enough to prevent similar developments elsewhere.
What the latest findings demonstrate is that crucial parts of the world’s climate system, though massive in size, are so fragile that they can be irremediably disrupted by human activity.
It is inevitable that the warmer the world gets, the greater the risk that other parts of the Antarctic will reach a similar tipping point; in fact, we now know that the Wilkes Basin in East Antarctica, as big or even bigger than the ice sheet in the West, could be similarly vulnerable.
There are not many human activities whose impact can reasonably be predicted decades, centuries, or even millennia in advance.
The fallout from nuclear waste is one; humans’ contribution to global warming through greenhouse-gas emissions from burning fossil fuels, and its impact on rising sea levels, is another.
Indeed, the latest Intergovernmental Panel on Climate Change (IPCC) report stated, in uncharacteristically strong terms, that the sea level is “virtually certain” to continue to rise in the coming centuries or millennia.
Moreover, the greater our emissions, the higher the seas will rise.
But the recent revelations about Antarctica are different.
Rather than reacting to global warming with gradual and predictable patterns of change, the West Antarctic ice sheet has suddenly “tipped” into a new state.
A relatively small amount of melting beneath the Amundsen Sea’s ice shelf has pushed its grounding line to the top of a sub-glacial hill, from which it is now “rolling down.”
Simply put, one thermal kick was enough to initiate an internal dynamic that will now continue under its own momentum, regardless of any action that humans might take to prevent it.
It is not completely clear whether humans have caused this tipping – though nothing like it has ever occurred during the 11,500-year Holocene period before humans started interfering with the planet’s energy balance.
But that is not the point.
What is important is that we recognize the existence of gigantic parts of the earth’s climate system – such as West Antarctica’s three-quadrillion-ton ice sheet – that can be tipped when a fractional temperature rise occurs in key locations.
This risk is no longer merely theoretical.
For the first time, findings based on observations and computer simulations all point to the same conclusion: the huge Amundsen Sea sector of West Antarctica has begun an irreversible ice discharge, and nothing can now halt the subsequent drainage of the entire basin.
It has passed the point of no return.
That is why we must now focus on similar topographic conditions elsewhere.
If an “ice plug” near the coast of Wilkes Basin melts or breaks off into icebergs, the basin’s huge quantities of water will drain into the ocean.
Although no one knows precisely what might destabilize the Wilkes Basin, we can be fairly certain that further global warming, caused by greenhouse-gas emissions, will increase the risk.
The fact that sea levels will continue to rise is now clear.
But we can still determine how high and how fast levels rise by controlling the degree of global warming that we cause.
Climate change is caused by mankind, so the good news is that mankind can stop it by cutting greenhouse-gas emissions.
Although West Antarctica’s fate is sealed, we may still be able to prevent the collapse of East Antarctica’s marine ice sheet.
That means deciding – sooner rather than later – which path to follow.
The current path risks further destabilization in Antarctica; choosing the alternative path of a new energy system for the planet is our last best hope.
Ukraine’s Prisoner’s Dilemma
WASHINGTON – The European Union’s most important decision this fall will be whether to sign an Association Agreement with Ukraine at the EU summit in Vilnius on November 28-29.
The issue will turn on whether Ukraine’s President, Viktor Yanukovych, fulfills one vital condition: a full pardon for political prisoner and former Prime Minister Yulia Tymoshenko.
The Association Agreement, which runs to some 1,200 pages, would remove almost all EU tariffs on Ukrainian goods, boosting the country’s long-term GDP by an estimated 12%.
It would also establish a political, economic, and legal reform plan for the country, supported by roughly 60 state agencies in EU member countries.
Although the Association Agreement does not lead automatically to EU membership, it is an important step in that direction.
Under the Treaty of Rome, Ukraine, as a European country, qualifies as a potential EU member.
But it would have to fulfill the EU’s “Copenhagen criteria,” established in 1993, which sets out the basic entry standards.
The Copenhagen criteria are met when the candidate country has achieved “stability of institutions guaranteeing democracy, the rule of law, human rights, and respect for, and protection of, minorities”; can ensure the existence of “a functioning market economy and the capacity to cope with competition and market forces”; and has sufficient “administrative and institutional capacity” to adopt and enforce EU law and “take on the obligations of membership.”
Ukraine is a long way from achieving this, but signing an Association Agreement would pave the way toward entry talks, while also creating tremendous economic opportunities.
Ukraine’s alternative would be to join a Russian-dominated Customs Union that includes Belarus and Kazakhstan.
Membership would require Ukraine to double import tariffs on EU goods, at an annual cost equivalent to 4% of GDP; and it would not even guarantee free trade among its members (Russia already applies trade sanctions against Belarus and Kazakhstan).
The Customs Union thus appears to be little more than a Russian neo-imperialist venture.
Unsurprisingly, Yanukovych has consistently stated his preference for an Association Agreement.
His political future may depend on it.
His advisers, and recent opinion polls, suggest that if he fails to sign a deal, he will lose the March 2015 presidential election.
The electoral math is stark.
While 40% of Ukrainians, based mainly in Yanukovych’s electoral heartland in the east and south of the country, would prefer to join the Customs Union, 60% of voters see their future with or in the EU.
Even allowing for widespread electoral fraud (which would hardly endear him to Brussels), Yanukovych would still struggle to win a majority.
It is not just the swing vote that Yanukovych needs to attract.
Ukraine’s powerful oligarchs are also looking West rather than East for business.
Many are fed up with the arbitrary imposition of trade barriers – affecting goods ranging from chocolate to steel pipes – in their former Soviet markets.
EU markets, by contrast, are viewed as being not only bigger, but safer as well.
Meddling from Moscow has certainly focused minds in Kiev.
Russia’s brief trade war in August frightened Yanukovych into pledging to fulfill all 11 of the EU’s legal and political conditions.
These require Ukraine to overhaul its judiciary and law enforcement, and ensure greater adherence to democratic norms.
The parliament currently is considering 15 bills along these lines, all of which have the full support of the main opposition parties.
But the EU’s demand that Yanukovych pardon Tymoshenko, who narrowly lost the 2010 presidential election, may prove harder to satisfy.
Tymoshenko was arrested in August 2011 and, after what was widely seen as a show trial, received a seven-year prison sentence for “abuse of power” (though she was not accused of benefiting personally) over a 2009 natural-gas deal with Russia.
An EU-appointed mediation commission that includes former Polish President Alexander Kwasniewski and former European Parliament President Pat Cox has proposed a solution.
At the commission’s request, Yanukovych would pardon Tymoshenko, who would be allowed to travel to Germany for medical reasons.
Tymoshenko has accepted the deal; Yanukovych has not.
Rather than a pardon, he wants parliament to pass a law allowing Tymoshenko to go to Germany for treatment, but on the condition that she would resume her prison sentence should she return to Ukraine.
The EU says that those terms are unacceptable.
Acquiescing in Tymoshenko’s political imprisonment would negate the very foundations of the legal and democratic standards that the EU purports to represent.
Any subsequent legal reform in Ukraine would appear hollow.
Some argue that the EU should ease its conditions: the case of a single, albeit important, individual should not stand in the way of Ukraine’s future.
But, far from this being a one-off case, the Tymoshenko affair exposes a deeper malaise.
Even now, Yanukovych is attempting to amend tax rules in order to disqualify the popular Vitali Klitschko, a champion boxer and former German resident, from standing for President.
The corruption and lawlessness that characterizes Yanukovych’s Ukraine should spur the EU to hold fast both to the letter and the spirit of its conditions.
Time is not on Yanukovych’s side.
The European Council of Ministers will make its final decision on November 18.
If Yanukovych has not amnestied Tymoshenko by then, the EU can, as the Polish MEP Jacek Saryusz-Wolski suggests, wait for a Ukrainian president that will uphold EU values.
Yanukovych will be the one blocking Ukraine’s path to the future.
And Free Flows the Nile
NEW DELHI – For 18 days, during the ebb and flow of protest, it did not seem possible that the end of the Egyptian Revolution would come so suddenly, in a terse announcement that lasted no more than a half-minute: “President Hosni Mubarak has relinquished office….”
In the days and weeks ahead, there could arise occasions when the news from Cairo is not uplifting, but let us never forget that Egypt has taken a giant step, which in reality is a giant step for all Arabs.
After all, Egypt is the heart, brain, and nerve center of the Arab world.
True, it once spawned the radical Muslim Brotherhood, but it also gave birth to Islamic socialism and anti-colonialism, Arab unity, and now a democratic affirmation of the people’s will.
Pernicious talk that Arabs do not want democracy has been exposed as the big lie it is.
Egypt, in the great Bengali poet Rabindranath Tagore’s memorable words, is the land “where the head is (now) held high and the mind is (now) without fear…” The consequences will be vast.
Ancient Arab lands are bestirred.
Decades-old, apparently immovable autocracies are finding their hold on power unhinged; change is invading their static environs.
Yesterday’s treaties, particularly those with the United States and Israel, will no longer inspire the same type of confidence they have long had as instruments of state policy.
Memory of these 18 days is so crowded that it is difficult to separate one event from another, one phase from the next: the dramatic, the moving, the bizarre, and the unreal from the bathetic.
But the thread that united all, the theme that remained unerringly constant, was the yearning for “change” – immediate, real, and tangible, not a promise or a tantalizing, unreachable mirage.
Will this yearning travel beyond the Nile, as it did from Tunis to Cairo?
This question haunts other Arab portals of power.
And not just Arab; globally, foreign policies are being hurriedly – and somewhat confusedly – revised and rewritten.
This is why US policy oscillated so disconcertingly from Secretary of State Hillary Clinton’s “Do not rush the pace or else the pro-democracy movement could well be hijacked” to President Barack Obama’s emphatic call for “change now.”
Of course, a grave question arises about the now-ruling Supreme Council of the Military High Command in Egypt: How can the enforcers of the status quo become the agents of change?
But, then, military rule is only a temporary measure, or so we reason.
The great Tunisian poet Abul-Qasim Al Shabi has captured poignantly the spirit of Egypt’s saga: “If one day the people want life, then fate will arise…night fade away, chains broken…” That, in essence, is what the young in Egypt have done.
Their idiom is current; their instruments of change are today’s electronic media.
They – and we – are very far from the world that Mubarak, or the great Gamal Abdel Nasser, knew and understood.
The Egyptian revolution now faces the exacting task that confronts all successful revolutions: how to define the future.
Like the Ottoman Empire’s fragmentation in 1922 or Nasser’s overthrow of King Farouk’s regime in 1952, the current transformation, too, must be shaped.
And how that future is shaped will determine whether or not Mubarak’s end marks the beginning of political transformation throughout the Middle East.
That is the possibility that is shaking governments from Washington to Beijing.
It is not just the reliability of the Suez Canal and oil exports that are now in doubt; decades of fixed strategic certainties must now be reexamined.
Consider Israel, which has watched the events in Cairo with a degree of worry unfelt since January 1979, when Ayatollah Ruhollah Khomeini unseated the Shah of Iran.
That strategic nightmare cost Israel and the US their closest ally in the region, one that was soon transformed into an implacable enemy.
Israel’s two most recent wars – against Hezbollah in Lebanon in 2006, and against Hamas in Gaza in 2009 – were fought against groups sponsored, supplied, and trained by Iran.
Clearly, Israeli-Palestinian negotiations will also now lie unattended as Israel concentrates on developments in Egypt.
Above all, Israel must wonder if the peace treaty with Egypt will hold, and, if not, how to carry out the massive restructuring of its defense posture that will be required.
But it is not only the fate of Israel that has now shocked US policy, in particular, to its core.
Egypt, after all, has been the cornerstone of America’s balancing act in the Middle East – and the Islamic world – for three decades.
The Egypt-Israel peace treaty has kept Egypt comfortably neutralized, freeing the US to commit its strategic resources elsewhere.
In turn, Egypt, propped up by massive US aid, has secured the region from a larger conflagration, even though the Israel-Palestine conflict has continued to smolder.
Herein lies the core of the dilemma for the US: it wants Egypt’s basic state apparatus to survive, so that the levers of power do not fall into the wrong hands.
This requires the US to be seen as siding with the public’s demand for change, yet to avoid being identified with political immobility.
There is reason to feel reassured by Obama’s reactions.
He termed Mubarak’s departure a display of “the power of human dignity,” adding that “the people of Egypt have spoken, their voices have been heard, and Egypt will never be the same.”
But nothing that Obama, or anyone else, says can answer the question now occupying the attention of senior US officials: Will the coming of popular sovereignty to Egypt inevitably lead to anti-Americanism?
The Humanities Crisis
NEW YORK – A striking symmetry is emerging in debates about the future of higher education around the world.
On the one hand, there is growing concern that the United States and many European countries are failing to prepare enough university graduates in the fields driving the twenty-first century “knowledge economy,” such as engineering and information technology.
This fear has led to the narrowing of the concept of education to mean the acquisition of practical skills.
On the other hand, the worry in some parts of Asia is that young people entering the work force with strong technical training lack sufficient experience “thinking outside the box.”
This fear is manifesting itself in an incipient effort to expand education to include the cultivation of feeling and imagination.
Both movements are rooted in economic concerns.
In the US, where most undergraduates bear at least part of the cost of their university education, political pressure is mounting to provide incentives like tuition discounts or loan forgiveness to students of science, technology, engineering, or mathematics (the so-called STEM fields).
Cost-cutting measures, such as compressing traditional four-year degree programs into three years – thereby reducing or eliminating elective courses in “impractical” subjects like literature, philosophy, and fine arts – are also being discussed.
Meanwhile, in Hong Kong, Singapore, and China, there are calls for extending university programs so that students can obtain a broad, liberal education, in the hope that graduates will be more inclined to experiment and innovate.
Hong Kong University, for example, has extended its undergraduate programs from three years to four.
But such a narrow, economics-based view fails to account for the larger questions of value that societies worldwide are facing.
To be sure, progress in any field, from commerce and communications to health and environmental science, will become increasingly dependent on technological innovation, and thus on the high-order skills – acquired through intensive technical training – that drive it.
It is also true, however, that such training does not provide an adequate foundation for addressing the more abstract, but profoundly important, questions that ultimately must guide global policy and decision-making.
For example:
· How can the imperative of economic development be reconciled with the need to limit climate change?
· What does national sovereignty mean in a world where diseases, pollutants, and terrorists cross national borders at will?
· Are there universal human rights that transcend conflicting claims of particular cultural traditions?
· How should limited resources be distributed in order to provide opportunity and hope to young people, while treating the elderly with dignity and respect?
· What are a country’s obligations to refugees fleeing from persecution, poverty, or strife elsewhere?
· How should we balance individual liberty and collective security?
In answering such questions, advances in science and technology (for example, new methods of energy production, surveillance, or online learning) will have a key role to play.
But moral and ethical questions never yield fully to technical solutions; they also require an understanding of humanity’s social and cultural heritage.
Science can help us to attain the life we want, but it cannot teach us what kind of life is worth wanting.
In short, each side in the current education debate is half right.
As human affairs become increasingly complex and morally exigent, future generations will need both scientific and humanistic learning – and they will need them more than ever.
Fortunately, promising new models for making education more coherent and capacious are emerging.
Yale University and the National University of Singapore have worked together to establish Yale-NUS, Singapore’s first liberal arts college.
Led by a literary scholar and an astronomer, this new residential college aims to break down interdisciplinary boundaries and enable students to learn from one another.
Likewise, Quest University in Canada encourages students to bring both scientific and humanistic knowledge to bear on today’s most pressing problems.
Similar efforts have been underway for years in the US.
For example, North Carolina State University’s Benjamin Franklin Scholars program – a collaboration between the College of Engineering and the College of Humanities and Social Sciences – aims “to produce well-rounded professionals who are analytical problem-solvers, ethical decision-makers, and effective communicators.”
Unfortunately, such programs largely lack the visibility and influence needed to shape educational reform.
It is time to abandon the “either/or” discourse that pits science against humanities – which the British chemist and novelist C.P. Snow identified more than a half-century ago as an obstacle to human progress.
It is time to seek out best practices that bridge this putative divide, and scale them up.
In the important work of adapting educational institutions for the future, we must not lose sight of their core mission as articulated in the past.
No one has expressed that mission better than Benjamin Franklin, a man of letters and a scientific innovator, who defined education as the quest for “true merit.”
“True merit,” Franklin wrote, consists in “an inclination joined with an ability to serve mankind, one’s country, friends, and family; which ability is…to be acquired or greatly increased by true learning; and should, indeed, be the great aim and end of all learning.”
King Coal’s Climate Challenge
WASHINGTON, DC – Coal is emerging as a major topic of conversation at the United Nations climate-change negotiations currently taking place in Warsaw – and rightly so.
Indeed, it is a discussion that the world needs to have.
The latest findings of the Intergovernmental Panel on Climate Change conclude that we are quickly using up our carbon “budget” – the amount of carbon that we can afford to emit while still having a good chance of limiting global warming to 2º Celsius.
According to the IPCC, keeping the global temperature increase from pre-industrial levels below this threshold – the recognized tipping point beyond which climate change is likely to get seriously out of control – requires that the world emit only about 1,000 gigatonnes of carbon (GtC).
More than half of this amount was already emitted by 2011.
Unless we shift away from carbon-intensive behavior, the remaining budget will run out in roughly three decades.
When it comes to tolerable CO2 emissions, coal is the budget buster.
Just this week, a group of 27 prominent scientists, representing all major continents, issued a joint statement that explains that burning all known fossil-fuel reserves would produce about 3,800 gigatonnes of CO2, or 1,053 GtC, with coal alone accounting for more than half.
Simply put, if the world burns its known coal reserves using current technologies, it is likely to push global temperature rise far beyond 2ºC.
Many governments and financial institutions recognize this.
In recent months, the World Bank, the European Investment Bank, and the United States Export-Import Bank have introduced policies that restrict financing of new coal-fired power plants unless they can capture and store their CO2 emissions.
Five Nordic countries have joined the US Treasury in ending public financing of new coal-fired power plants overseas, and others may soon follow suit.
And this fall, the US Environmental Protection Agency proposed emissions standards for new power plants that would rule out conventional coal power – an important step that would cut carbon pollution and drive innovation.
Likewise, China, concerned about the serious health costs linked to burning coal, is prohibiting new coal capacity in three coastal provinces under its newly adopted action plan on air pollution.
The Chinese authorities have also introduced policies to reduce the proportion of coal in the country’s overall energy mix.
Against this backdrop, the World Coal Association (WCA) is meeting this week, also in Warsaw – in fact, just across the river from where negotiators are trying to forge the building blocks of a global climate agreement by 2015.
The WCA is calling for the use of “high-efficiency, low-emissions coal-combustion technologies” to lower greenhouse-gas emissions from coal-fired power plants around the world.
But this approach would still consume too much of the CO2 budget.
Even the most modern and advanced conventional coal-fired power plants emit over 15 times more CO2 per unit of electricity than renewable energy systems, and more than twice the amount of efficient gas-fired power stations.
And yet coal power is still going strong globally.
The World Resources Institute estimates that there are close to 1,200 proposed coal-fired power projects around the world, with a total installed capacity of more than 1,400 gigawatts.
If built, the world would commit a large share of the remaining carbon budget to high-carbon infrastructure with a lifespan of 40-50 years.
According to the International Energy Agency, the current trend in coal use is in line with a scenario that would lead to a 6ºC temperature rise.
This is a future that would radically and irreversibly change life on earth as we know it.
This is why the OECD Secretary General has suggested that it is time for a moratorium on the construction of conventional coal-fired power plants.
Governments have far more cost-effective electricity-generation technologies at their disposal.
Renewable energies like solar and wind are already competitive with fossil fuels in many parts of the world, and they can be scaled up rapidly.
Moreover, most economic models do not account for the externalities related to coal and carbon pollution.
For example, a recent report by Trucost estimates that coal-fired power generation worldwide may be responsible for around $1 trillion of damage due to climate change and air pollution.
Many coal-fired power plants would be uncompetitive if they were required to internalize these costs.
Of course, coal continues to offer millions of people a reliable source of electricity – and the transition to low-carbon technologies will not happen overnight.
We need to expand access to these technologies rapidly, while helping people whose livelihoods depend on the coal industry.
While we need to be passionate about climate change, we must also be pragmatic about how we address it.
But so must the coal industry.
Participants at the WCA meeting this week should commit to additional measures that will help ensure that emissions are kept within safe limits.
A moratorium on conventional coal plants would be a smart place to start.
That would help to show the world that the coal industry truly understands the scientific implications of current energy-use patterns, and that it is willing to assume more responsibility for combating climate change.
We need people on both sides of the Vistula River to do their part to build a fair and ambitious universal climate agreement by 2015.
Let’s roll up our sleeves together and plot a viable pathway to a safe and effective low-carbon economy.
An Economic Agenda for Italy
MILAN – At the end of this month, Italian voters will choose their next government, from which they expect jobs and a more level economic playing field – and from which Italy’s European partners expect structural reforms and fiscal probity.
What should the new government’s economic-policy agenda be?
To reduce public debt, which stands above 120% of GDP, while minimizing painful adjustments, Italy needs economic growth – something that has eluded policymakers in recent years.
Indeed, Italy’s average annual GDP growth rate since joining Europe’s economic and monetary union in 1999 has been an anemic 0.5%, well below the eurozone average of nearly 1.5%.
In the four years since the global financial crisis struck, the growth rate fell to -1.2%, compared to the eurozone average of -0.2%, and it is expected to remain negative this year.
The new government’s biggest challenge will be to implement reforms that enable Italy’s economic performance to catch up to that of its neighbors after years of bad policies and neglect.
This requires increased investment in innovation and human capital.
From 1992 to 2011, labor productivity grew at an average annual rate of 0.9%, the lowest in the OECD.
Since 2001, unit labor costs have been growing faster than real GDP and employment, undermining the economy’s competitiveness vis-à-vis developing countries.
In the last decade, Italy’s share of global exports dropped from 3.9% to 2.9%.
Persistently weak labor-productivity growth has created a situation in which unit labor costs do not fall, even if real wages remain stagnant or decline.
Indeed, despite a 1.3% drop in real wages in 2011, unit labor costs remained unchanged.
Italy’s new leaders must address this situation by decoupling labor’s contribution to productivity growth from that of capital and total factor productivity.
According to the OECD, lower regulatory costs and more efficient public administration (building upon measures introduced by the previous government, led by Mario Monti) could add 0.3-0.4% to average annual GDP growth by 2020.
Likewise, labor-market reform, improved education, and enhanced human capital could contribute an additional 4% to GDP growth in the next decade.
Moreover, Italian policymakers should strive to boost the female labor-force participation rate, which, at 49%, is one of the lowest in the OECD.
Doing so would raise per capita income by 1% annually through 2030.
At the same time, fiscal adjustment remains essential to Italy’s short- and long-term stability.
According to the International Monetary Fund, the budget deficit is declining, and the primary surplus (net revenues minus interest payments) is growing.
Italy’s new leadership must sustain this progress.
Despite positive developments, the road ahead is bumpy.
Navigating it will require Italy to retain its credibility with other European Union member states and international investors.
The new prime minister will need to persuade Germany, financial markets, and the European Council that Italy is a reliable partner.
The ability to refinance government debt and keep costs down is essential to strengthening public finances and boosting GDP growth.
Furthermore, attracting more direct investment is crucial, given that capital inflows, while recovering, remain 30% below their pre-crisis level; with outflows exceeding inflows, Italy has become a net capital exporter.
“Selling” Italy in Europe should entail more than photo opportunities with other leaders in Brussels and the occasional road show to financial institutions in London.
Italy’s leaders should engage actively in commercial diplomacy, using the country’s embassies and trade agencies to promote Italy globally, while working to build strong bilateral relations with other EU members, particularly southern countries like Spain.
At the same time, the new leaders need to “sell” Europe in Italy, where Euro-skepticism is rampant.
According to the Pew Research Global Attitudes Project, only 30% of Italians view the euro positively.
In the country’s wealthier north, where average per capita income, at €30,000 ($40,500), approaches that of Germany, people are questioning the rationale of EU membership.
The costs are evident, they argue, but what are the benefits?
Meanwhile, fears of structural decline pervade the country.
The crisis has lasted for a long time, and people are tired.
Unemployment has risen to a record 11.2%, with 35% of young people jobless.
And the tax burden, which has exceeded 40% of GDP since 1990, now stands at almost 43% of GDP.
A Scandinavian level of taxes would be bearable if public services did not remain inferior to those offered in Scandinavia.
For example, per capita health-care spending in Sweden, Denmark, and Finland exceeds $3,000, compared to only $2,300 in Italy, where households must contribute roughly 20% of total health-care spending.
Moreover, Italy spends around 4.5% of GDP on education, while the Scandinavian countries spend more than 6% of GDP.
As a result, Italian students’ scores in the Program for International Student Assessment are significantly lower than those of their counterparts in many other OECD countries.
Italy’s new government will have to display leadership and vision to guide the economy toward stable growth, avert a race to the bottom, and stem growing social tension.
Most important, economic renewal depends on the next government’s willingness and ability to address the institutional weaknesses that have made concerted action increasingly urgent.
An Egyptian Sakharov
Saad Eddin Ibrahim is Egypt's most prominent social scientist--and the most independent-minded in a conformist society ruled by President Hosni Mubarak's authoritarian regime.
For years, Prof. Ibrahim headed the Cairo-based Ibn-Khaldun Institute, which undertook, with the European Union's encouragement, pioneering studies on women and minority rights, as well as electoral practices, in Egypt.
In a country where the President has been consistently re-elected with 97% of the vote since 1980, Ibrahim's institute is the only academic research organization that dares to ask troubling questions about the way Egypt is run.
Two years ago, Prof. Ibrahim, together with practically all of the Ibn-Khaldun Institute staff, were arrested and put on trial before a State Security Court on trumped up charges.
The allegations included financial irregularities, receiving EU funds without the proper ministerial authorization, and "tarnishing Egypt's image."
Prof. Ibrahim was sentenced to seven years imprisonment.
After diplomatic pressure was applied by the United States (through his American-born wife, Prof. Ibrahim holds US citizenship) and the EU, he was granted a re-trial.
This ended days ago with the old verdict reaffirmed: seven years in prison.
Twenty-seven of the Institute's staff members also received jail sentences, and the Institute is now practically destroyed.
Any dictator, from Saddam Hussein to Robert Mugabe, could take pride in this abuse of power.
But because Mubarak regime's is considered moderate, pro-Western, and helpful in the context of Israeli-Palestinian relations, the West's response to this and other abuses remains muted.
Indeed, the US Charge d'Affaires in Cairo expressed mere "disappointment" at the verdict--a response that gives understatement a bad name.
Since the terrorist attacks on New York and Washington last year, America and the EU recognize (or say that they do) that the lack of legitimate channels of opposition in Arab countries pushes people who might otherwise be mere critics of governments into the arms of extreme Islamic fundamentalists.
Saad Eddin Ibrahim is a liberal: he is also a staunch Egyptian and Arab nationalist.
He has vehemently condemned Israeli policies vis-à-vis the Palestinians, and is a critic of many aspects of US foreign policy.
But his has always been the voice of a
Indeed, his is the type of voice that Egyptian civil society needs if there is ever to be a chance that the country's Pharaonic authoritarian regime--symbolized by President Mubarak's high-handedness--is to be reformed.
Just because Mubarak's government persecutes Islamic terrorists, and is an ally in the war against fundamentalist extremism, is no reason to give him
Western intellectuals, who were instrumental in pressuring the Soviet Union in support of Andrei Sakharov, have been singularly quiet when it comes to Ibrahim.
An Arab intellectual persecuted by an Arab regime, it seems, is nowhere near the top of their agenda.
But it is the EU that is proving most complicit.
After all, it was the EU's effort to stimulate Egyptian civil society with its grant of funds to the Ibn-Khaldun Institute that incited Ibrahim's persecution.
The EU's silence in the face of his arrest and imprisonment is shameful.
For not just Ibrahim, but the values that the EU professes to uphold, have been on trial in Egypt, and they have been mocked by the Mubarak's regime idea of justice.
Europe must work--promptly--to overturn Ibrahim's conviction.
The EU should consider blocking all its educational and cultural programs in Egypt if the verdict on Ibrahim and his associates is not overturned and the Ibn Khaldun Institute not re-opened and restored to full vigor.
Just as the fight for Andrei Sakharov was also a fight for an open society in Russia and thus helped dismantle Communist tyranny, so the fight for Ibrahim's freedom is a fight to put an end to Egypt's oppressive authoritarian regime.
A Neighborly Option for Iran
YEREVAN – Once again, the issue of bombing or sanctioning Iran has resurfaced.
For years, debate about Iran has oscillated between two bad alternatives.
Some are convinced that a nuclear Iran is the worst of all possible scenarios, worse even than the fall-out from a pre-emptive strike.
But neither a nuclear-armed Iran nor air strikes against it are wise options, certainly not for this region.
The repercussions of bombing Iran should be clear: closure of the Straits of Hormuz, skyrocketing oil prices, possible retaliation against Israel (regardless of the origin of the attack), and even greater turmoil in Iraq and Afghanistan.
Indeed, the only certainty of any pre-emptive strike is irreparable and long-lasting damage to regional security and political and economic stability.
Of course, the alternative is no safer.
A nuclear-armed Iran would change the entire region’s security environment, and, given the enmity between Israel and Iran, two such nuclear powers facing off against each other would pose a threat.
The way out of this dilemma is to understand what Iran wants – and how to accommodate it without jeopardizing anyone’s security.
Iranian President Mahmoud Ahmadinejad has said that Iran wants to develop uranium enrichment technology for industrial use.
Everyone agrees that Iran has the right to do so.
But the world is split over whether to believe that Iran is actually doing what it says.
If as some argue Iran is being disingenuous, then once it achieves this first phase – uranium enrichment for industrial purposes – it can easily slide into weapons-grade enrichment, leaving the international community out in the cold, with no channels of communication, no observation teams in place, and no monitors ready to sound the whistle.
That is why the world must not remain focused on the already-lost first phase.
Iran has more than 3,000 centrifuges despite all the international sanctions and threats.
Instead, the world must focus on the second phase, because it is weapons potential that is the looming danger, and it is here that internationally mandated mechanisms for oversight and supervision exist.
The Iranians have always said that they will continue to honor their commitments and open their doors to observation as members of the non-proliferation community.
But the international community must be more respectful of Iran’s current industrial aims if it wants Iranian cooperation.
The first step is to assuage Iran’s feeling of being besieged.
Fortunately, there are voices in America and elsewhere that advocate engaging Iran at the highest level.
But, to talk with Iran effectively, one must understand Iranian values and thinking.
Iranians have a sense of seniority, if not superiority, born of a rich and ancient culture that has survived into modern times.
But they also have a historically ingrained sense of insecurity, owing to frequent conquest and domination, which is being aggravated today by the presence of American troops to their west in Iraq and to their east in Afghanistan.
Their outlook nowadays is the product of these two worldviews – suspicious of others’ motives and proud of themselves as smart, tough negotiators and not without their own resources.
In my meetings with the current and past leaders of Syria and Iran, as well as in my meeting with Saddam Hussein, I heard them all say the same thing: the West is out to get them.
Their explanation was that the West is uncomfortable with the motives and behavior of ideological states – Syria, Iran, and Iraq under Saddam were states with causes – Islam, Arab unity, or anti-Zionism.
For Iranians, as bearers of faith and national pride, responses that seem to others self-righteous and irrational are, in fact, necessary and acceptable.
The case of Saddam’s weapons of mass destruction is a historic example of a willingness to go to hell with your head held high.
Saddam knew that he didn’t have weapons of mass destruction, but he was unwilling to concede the right of inspectors to ask.
As in North Korea, Iran’s neighbors might provide the right mechanism to create a more transparent relationship between Iran and the world.
In the so-called “six-party talks,” North Korea’s neighbors offered tangible incentives to Kim Jong-il’s regime to abandon its nuclear program. The most prominent of these was an end to North Korea’s economic isolation.
Iran, too, feels besieged, though it is not isolated: it depends heavily on trade, and not just as a seller of oil.
Two-thirds of its population is under the age of 30, and unemployment is high; it needs to attract foreign investment for its oil and gas industry, and to finance road construction and other infrastructure projects.
Comparisons with neighboring Turkey are instructive.
Before Iran’s Islamic revolution, it led Turkey in foreign direct investment, income per head, and GDP growth.
Now Turkey has moved ahead, and may even join the European Union.
Other regional comparisons further reinforce that trend.
The Qataris have outstripped them in exploiting the huge gas field they share.
Tiny Dubai draws in far more foreign investment: Iranians go there for banking, trade, and fun.
Iran’s neighbors need to convince Iran’s rulers that Iranians, too, can participate in the region’s growth, and even become regional leaders.
Only an open Iran, fully integrated into the regional economy and granted a role commensurate to its size and economic potential, will be able to moderate its siege mentality.
Here, a vital step would be for the West to begin to envisage Iran as a potential alternative supplier of gas, by offering to link Iran to the proposed White Stream and Nabucco pipelines that are currently under development to bring Central Asian gas to Europe.
The world’s judgments about Iran’s motives and actions should not be distorted by Iranian pride.
We can only understand Iran’s real intentions by engaging the Iranians – not cornering them.
An Energy Tax for Europe
George W. Bush’s disastrous war in Iraq has put Europe in a bind.
The United States long has been Europe’s protector.
Now, because of a war it wanted no part of, Europe finds its security undermined.
Chaos in Iraq has empowered Iran – a much more dangerous country for Europe than Iraq ever was.
And, with America bogged down in Iraq, Russian President Vladimir Putin has resurrected Soviet-style bullying tactics.
Would Russia otherwise have dared to threaten to re-direct its nuclear missiles at European cities?
Not only has Bush destroyed Iran’s most formidable enemy and bogged down US troops in a hopeless cause; he also has enriched energy-abundant Iran and Russia by pursuing a war that has dramatically raised energy prices.
High crude oil prices make it easier for Iran to build nuclear weapons and for Russia to use energy blackmail to threaten Europe.
But Europe can fight back.
By imposing a stiff tax on energy consumption, Europeans would reduce both consumption of energy and its price in world markets, in turn cutting the flow of funds to Russia and Iran.
Because crude oil is priced in US dollars, and the dollar has depreciated against the euro, European consumers have gotten off relatively easy from rising energy prices.
So an energy tax roughly equal to the euro’s 33% appreciation in recent years would be about right.
Europeans might be forgiven for thinking that the Americans, who pumped up oil prices in the first place with their military misadventure in Iraq, should be the ones who “pump it down” with an energy tax.
But, with a “Texas oil man” in the White House, it won’t happen.
Perhaps after 2008, the politics in America will change in favor of an energy tax, but such a tax is needed now.
Besides, given the strength of environmentalism in Europe, the issue is tailor-made for Europeans to take the lead.
Moreover, Europeans do not narrowly equate national security with military spending.
They know that confiscating the checkbooks of Russia and Iran would probably make the world a lot safer than building another submarine or aircraft carrier.
Indeed, an energy tax would not only effectively counter the argument that Europeans are “free riders” when it comes to defense; it would be tantamount to defense leadership.
Still, with the amount of real resources transferred to their governments already high, Europeans might balk at a further increase.
That is why the energy tax must be imposed as a tax substitution, with income or payroll taxes simultaneously reduced to keep real resource transfers to government at a constant level.
This would increase economic growth as well as strengthen national security.
Critics who worry about the cost of the energy tax have not thought about tax substitutions.
They also do not seem to realize that an energy tax is a much cheaper way for Europe to protect itself from Iran and Russia than alternative means, such as a defense buildup.
Europe currently lacks military muscle because it made a decision a half-century ago to be protected by the US and devote the saved resources to building up its welfare state.
This strategy – which worked well for decades – always carried the risk that at some point America’s resources might be tied up elsewhere, leaving Europe under-protected.
That risk materialized with the Iraq war.
But Europeans are showing little taste for increased defense spending, Iraq or no Iraq.
Even France’s new president, Nicolas Sarkozy – thought by many to be a pro-American foreign policy hawk – is backing away from his campaign promise to maintain defense spending at 2% of GDP.
In a recent speech to the French defense industry, Sarkozy conspicuously failed to repeat the pledge, instead warning that he soon might cut France’s defense budget.
According to a respected defense industry publication, Sarkozy changed his mind after his party’s smaller-than-anticipated victory in June’s parliamentary election.
The reason Europeans are reluctant to increase defense spending is expense.
Cutting welfare spending – where the big money is – would be painful.
Solemn promises made over the years would have to be broken (people would not get the social services that they paid for with a lifetime of high taxes), lives would be shortened (less money for hospitals and nursing homes), and overall hardship increased.
Even economic growth will not prevent a tradeoff between defense and welfare spending for Europeans.
Fifty years of defense dependence on the US has created a powerful “peace industry” in Europe whose primary business is to fight defense spending tooth and nail.
They will want to protect all social spending, regardless of the consequences for foreign policy.
A counterweight to the “peace crowd” may be new migrants from Eastern Europe, for whom cuts in social services would break no promises, and for whom job availability and wage levels are more important.
But it will take some time before the new migrants gain decisive political influence, and the problems of Iran and Russia for Europe require immediate attention.
In short, Europeans will not allow Bush’s Iraq war to become a war on their welfare state.
What makes the energy imposed as a tax substitution tax particularly attractive as a defense measure is that it leaves the welfare state intact while making Europe safer, greener, and richer.
Why wait?
An Epidemic of Politics
Americans, like citizens in countries throughout the world, have come to accept that politics plays an important role in the appointment of certain kinds of public officials.
Few of us are surprised (though some may be disappointed) when a federal judgeship is awarded or a senior diplomat appointed because the candidate passes a litmus test of loyalty to some principle that is important to the President's or Prime Minister's party.
But science, almost everyone agrees, is different, and here the United States is beginning to stand as a cautionary example to the rest of the world.
Scientific appointments should rest on objective criteria of training, ability, and performance.
Clearly, it is legitimate to interrogate a future Secretary of Health and Human Services (HHS) about his views on abortion.
But it is entirely out of place when appointees to scientific advisory committees are subjected to tests of political loyalty.
Similarly, membership of bodies that conduct peer review of scientific proposals - a process that is fundamental to scientific progress - surely ought to be free of all barriers to entry that are unrelated to professional qualifications.
Unfortunately, scientists in the US are running up against such barriers more and more often.
During the past fall, the journal Science published several news stories related to the issue.
One involved the wholesale replacement of members of the advisory committee to the National Center for Environmental Health, a part of the Centers for Disease Control and Prevention (CDC), without consulting the center's director.
Similar cases involved the CDC's Advisory Committee on Lead Poisoning and Prevention, the Advisory Committee on National Human Research Protections, and the Advisory Committee on Genetic Testing.
The current epidemic of ideology, in which advisory committees are shut down and reassembled with new members, and candidates are subjected to loyalty tests, seems old hat to some observers.
Officials at the HHS call it "fairly standard practice."
Well, it isn't standard practice in America - or at least it wasn't.
In any case, what's really worrisome is not that the Bush administration examines candidates for compatibility with its "values."
The most alarming development is how deep the ideological vetting now cuts, invading areas that once were immune to this kind of manipulation.
Indeed, perhaps the most telling case in the widening political epidemic was a membership re-shuffle of the study section at the National Institute of Occupational Safety and Health that evaluates grants for studying workplace injuries.
Advisory committees might have been vulnerable to occasional stacking of this kind in the past.
After all, they recommend the policies that politicians may or may not want to consider.
But study sections?
In October 2002,
Their piece was a story in itself, but what followed was even more interesting.
It set off a volley of letters in which scientists told of similar experiences.
A nominee for the National Institutes of Health's Muscular Dystrophy Research Coordinating Committee told of being vetted by a White House staff member.
After being asked about her views on various Bush administration policies, none of them related to the work of the committee, she was asked whether she supports the president's policy on embryonic stem cells.
Another letter writer, a distinguished professor of psychiatry and psychology, reported receiving a call from the White House about his nomination to serve on the National Council on Drug Abuse.
The caller declared that he must vet him to "determine whether he held any views that might be embarrassing to the president."
According to the professor, a series of questions followed, with the White House official keeping a running score.
One example: "You're two for three; the president opposes needle exchange [for intravenous drug users] on moral grounds, regardless of the outcome."
Then the exchange took an even more chilling turn.
The official asked the nominee whether he had voted for Bush, and, on being informed that he had not, asked: "Why didn't you support the president?"
This is the stuff of dictatorship, not democracy.
The purpose of scientific advisory committees is to provide balanced, thoughtful advice to the policy process.
Nothing is gained - and much is lost - when a desired policy outcome is put first.
This is why deciding which research projects to support has always been a matter for objective peer review, not politicians.
In fact, the applicable statute for all this - the Federal Advisory Committee Act - specifically
US Health and Human Services Secretary Tommy Thompson and the White House Personnel Office ought to set an example to the rest of the world.
They can do so very easily: by following the law.
A New Anti-Semitism
These are violent times.
Some believe that we are experiencing a new kind of conflict: “culture wars,” such as those between Sunni and Shiite Muslims or tribal groups in Africa and Asia, or indeed Islamists and Westerners.
However, the deeper reasons for some of these conflicts may well be more traditional.
Belonging to a particular cultural group is merely a pretext for battles between the winners and losers of globalization.
Ruthless leaders mobilize disoriented followers.
Particularly the losers, often represented by young men with no future to look forward to, can be induced to take even suicidal action against the alleged enemy.
Perhaps one should not be surprised that at such a time, the oldest of our ugly ­– indeed, deadly – resentments, anti-Semitism, is re-emerging from the shadows.
Its comeback takes the classical form of attacks on individuals, like the recent killing of a young Jew in France, or of disfiguring symbolic places, like cemeteries and synagogues.
But there is also a more general sense of hostility to all things Jewish.
One would have thought that anti-Semitism died forever with the Holocaust; but it did not.
There are those who deny that the Holocaust ever took place, or that it did in its all-too-well-documented manner.
The deniers range from second-rate historians like David Irving to apparently popular politicians like Iran’s recently elected president, Mahmoud Ahmadinejad.
The evidence of what Nazi Germany did is so powerful that those who deny it can probably be dealt with even without putting them in prison and thereby drawing more attention to them than they deserve.
The more worrisome source of anti-Semitism is different and justifies speaking of a new anti-Semitism.
It has to do with Israel.
To be sure, America is the first name in anti-Western resentment. But its second name is Israel, the only successful modern country in the Middle East, which is also highly militarized, an occupying power, and ruthless in defense of its interests.
It is difficult to exaggerate the strange sentiment in the West which one might call Palestine romanticism.
Intellectuals like the late Edward Said gave voice to it, but it has many followers in the United States and Europe.
Palestine romanticism glorifies the Palestinians as the victims of Israel’s rule, points to the treatment of Israeli Palestinians as at best second-class citizens, and cites the many incidents of oppression in the occupied territories, including the effects of Israel’s “security fence.”
Implicitly or explicitly, people take the side of the victims, contribute by sending money to them, declare even suicide bombers legitimate, and move ever further away from support for and defense of Israel.
Of course, it is true that in theory one can oppose Israel’s policies without being anti-Semitic.
After all, there are enough critics of Israel’s policies among Israelis.
Yet the distinction has become more and more difficult to maintain.
Jews outside Israel feel that they have to defend – right or wrong – the country that, after all, is their ultimate hope of security.
This makes their friends hesitate to speak up for fear of being painted into not just an anti-Israel, but also an anti-Semitic corner.
The defensiveness of Jews and the uneasy silence of their friends mean that the stage of public debate is open for those who actually are anti-Semitic, though they confine themselves to anti-Israel language.
Anti-Semitism is disgusting in whatever form it arises.
This is true also for other kinds of group hatred, but the Holocaust makes anti-Semitism unique, because it is an emotion complicit in the near annihilation of an entire people.
The new anti-Semitism, however, cannot be fought successfully by education and argument in the rest of the world alone.
It is linked to Israel.
If one belongs to a generation that regarded Israel as one of the great achievements of the twentieth century, and admired the way in which the country provided a proud home for the persecuted and downtrodden, one is particularly concerned that it may now be at risk.
A New Approach to North Korea
SEOUL – The long-delayed meeting of North Korea’s ruling Worker’s Party is now underway, and comes at a time of severe tension between North Korea and the international community.
It is widely expected that Kim Jong-il’s third son, Kim Jong-eun, will be appointed to a key position and be publicly announced as his father’s successor.
There are also hints that a reshuffling of important positions within the Party will take place, allowing the presumed heir to form a new power base.
Whatever happens, and whoever turns out to be the new leader, North Korea most likely faces an unstable future.
The cost of maintaining internal order will continue to rise as the system’s fundamental defects force the new leader to confront stark new challenges.
Moreover, responsibility for managing that potential instability extends far beyond the leadership in Pyongyang.
North Korea’s fragility is suggested by the fact that even such an important political event as the Worker’s Party conference, held for the first time in three decades, was abruptly postponed earlier in September.
One cause for the delay could be a schism within the ruling elite, a group that “Dear Leader” Kim Jong-il himself cannot control as effectively as before.
Moreover, Kim’s health problems might have worsened much faster than outsiders guess, further complicating matters.
“Enough is enough,” a mid-level North Korean government official recently uttered in a private conversation with a South Korean visitor to Pyongyang regarding Kim Jong-eun’s likely succession.
Ordinary North Koreans, too, evidently seem to view this succession differently from that of Kim Jong-il’s inheritance of power from his father, Kim Il-sung.
Moreover, there is no hope that any new leader, whoever it may be, will get any breathing space to establish unquestioned control, given the economy’s utter state of decay, as last year’s failed bid to reform the currency demonstrated.
The regime is under growing pressure from those at the bottom of North Korean society, and recognizes its own inability to handle the situation.
For example, for the first time, North Korea’s prime minister publicly apologized for a policy error – the failure of the currency redenomination.
For the dynamics of the relationship between North Korea’s people and its rulers seems to be changing fundamentally.
One troubling aspect of this change is that the new leader may feel the need to resort to brute force more frequently in order to suppress popular resistance.
And, at a time of domestic hardship and diplomatic isolation, North Korea’s leaders, their confidence boosted by their possession of nuclear weapons, might try to distract their public through audacious, and possibly destructive, acts abroad.
The attack on the South Korean naval ship Cheonan earlier this year may be a grim sign of things to come.
Indeed, the North Korean threat nowadays derives more from the regime’s internal weaknesses than from its aggressive external posture – the latter being the authorities’ fearful response to the former.
Unfortunately, however, most international efforts have sought to ameliorate the symptoms rather than cure the underlying disease.
Of course, in order to pressure North Korea’s government to give up its nuclear option, the current international economic sanctions, which target WMD-related products and luxury goods, probably should continue.
But, at the same time, the international community should place greater emphasis on policies aimed at inducing North Korea to launch serious economic reform.
At a time of increased tension between North Korea, South Korea, and the United States such a policy may seem impossible to undertake.
Yet a road map for a peaceful transition can be designed.
If, say, North Korea is willing to respect international standards of economic behavior, it could be invited to join the International Monetary Fund.
Western governments also could permit charitable foundations to provide North Korean officials or students with scholarships to study abroad and learn how to run a market economy.
Of course, any assistance to North Korea would have to be monitored closely to prevent it from being diverted for military or other political purposes.
The international community would lose nothing by trying this approach and testing the regime’s will to reform.
In fact, following the recent currency fiasco, North Korean leaders may have become more open to economic reform than ever before.
Such an approach is also compatible with Chinese policy, which has been to pressure North Korea to adopt its model of economic reform.
To be sure, North Korea’s regime is not the only obstacle to international engagement.
Conservatives in both the United States and South Korea may argue that North Korea must first move toward denuclearization before any kind of economic assistance is offered.
But there is no reason why international efforts to ensure North Korea’s denuclearization must preclude policies aimed at bringing about domestic reform.
We need not assume that these goals cannot be pursued simultaneously.
On the contrary, it may be impossible to win North Korea’s assent to denuclearization in the absence of far-reaching domestic change.
The past two decades have shown that “politically correct” decisions do not produce the “right” results, even in the long run.
As North Korea grooms a new leader, the world needs to groom a new policy for North Korea.
A New Bargain for UN Reform
The United Nations is torn apart by internal tensions.
No sooner was the controversy over the creation of a Human Rights Council satisfactorily resolved than a new battle has erupted.
The United States is pressing for administrative reforms and threatening to cut off funding if the reforms are not forthcoming.
The Secretary General has submitted a reasonable reform plan, but a majority of UN member states, acting together as the so-called G-77, are balking, because they regard it as another step in reducing the authority of the General Assembly relative to the Security Council.
In particular, they object to the plan’s proposal to give increased powers and responsibilities to the Secretary General, whose selection is effectively in the hands of the Security Council’s five permanent members, which wield veto power.
Many UN members, believing that power within the UN has been shifting from the General Assembly, resist giving up what they regard as its last vestige: control over the budget through the work of the Assembly’s Fifth Committee.
In practice, the Fifth Committee has exercised the kind of micro-management over personnel and expenditure that ought to be exercised by the Secretary General if the UN is to operate effectively and to have a staff which is up to the challenges facing the organization.
This is the basis of America’s insistence on administrative reforms.
There is an urgent need to find a way out of this impasse.
Failure of the current proposal would mean an effective end to all efforts to reform the UN, with disastrous consequences for people across the world who depend on the aid provided by the UN Development Program, the security provided by the UN’s numerous peacekeeping operations, or the myriad other services rendered by UN agencies.
For example, failure of management reform would fuel demands by the US Congress to withhold America’s contributions to the UN budget – a policy that would greatly undermine America’s own interests, such as the planned expansion of the mission to stop genocide in Darfur.
The path to a satisfactory resolution is clear: give the General Assembly a greater role in the selection of the Secretary General so that members would be delegating powers to an authority of their own choosing.
This solution would not only permit the much-needed administrative reforms to be implemented; it would also bring clarity and transparency to a process that is in great need of improvement.
After all, the UN Charter provides that “the Secretary-General shall be appointed by the General Assembly upon the recommendation of the Security Council.” The original concept was that the two bodies would reach a consensus on a candidate.
In practice, however, the five permanent members now agree on a candidate, and their decision is rubber-stamped first by the Security Council and then by the General Assembly.
Real discussions about a new Secretary General are currently being conducted in secrecy among the permanent five, adding to the frustration of other UN members, including large powers that have been seeking without success to enlarge the Security Council.
To achieve the reforms of the budget process that it wants, the US will need to lead the way in persuading the other permanent members of the Council to give the General Assembly a greater role in the process.
This might be done in several ways.
The Security Council might agree to recommend several candidates from which the General Assembly would select one.
Alternatively, the General Assembly might propose several candidates to the Security Council, from which the Council would choose one to refer back to the Assembly for approval.
Either way, the selection process would benefit from greater transparency.
For example, the General Assembly should hold public hearings in which candidates are interviewed, thereby greatly enhancing the stature of the candidate who is eventually selected.
Such proposals, if accepted, would help resolve the current dispute to everyone’s satisfaction.
Indeed, they could make the UN stronger than it has ever been.
A New Chance for Darfur
NEW BRUNSWICK, NEW JERSEY – As the crisis in Sudan’s Darfur region worsens and negotiaitions to end it drag on, an international consensus is emerging around a “muscular” policy based on public denunciation, severe economic sanctions, and, increasingly, threats of military force.
But none of these steps, taken alone or together, can bring about the ends that their often well-intentioned advocates seek.
On the contrary, they risk reproducing the havoc that such measures have unleashed in Iraq and elsewhere in recent years.
In the United States, cautionary voices have been notably absent even among staunchly liberal newspapers like The New York Times .
Foreign policy advisers to the Democratic Party and neo-conservatives alike have called for “action” against Sudan – demands that have been echoed by an international group of intellectuals and celebrities ranging from Umberto Eco, Jürgen Habermas, and Harold Pinter to Bob Geldof, George Clooney, Mia Farrow, Matt Damon, Mick Jagger, and J.K. Rowling.
Meanwhile, French troops, with the support of other European Union members – notably Austria, Belgium, Ireland, Poland, Romania, and Sweden – are now deployed for putatively humanitarian reasons in the Central African Republic and Chad, where they have already clashed with Sudanese government forces.
The International Crisis Group, Human Rights Watch, and many other organizations support this deployment, while Save Darfur, despite describing itself as a non-political “alliance of more than 180 faith-based, advocacy, and humanitarian organizations,” has, in fact, been pivotal in setting the policy agenda.
This agenda’s interventionism is incremental: tougher economic sanctions, demands that China exercise its influence, creation of a “no-fly zone,” and military force against the Sudanese army.
The assumption is that only real pressure will finally force Sudan’s government to embrace the United Nations-African Union peacekeeping force, negotiate with the West, disband the feared Janjaweed militia, allow refugees from the country’s brutal civil war to return to their villages, and make peace with Southern rebels.
But realizing these aims requires cooperation from the government in Khartoum, whereas each of the proposed measures would only heighten tensions or prove useless.
Existing Western sanctions, for example, have merely driven the Sudanese regime into the arms of China, Indonesia, and Malaysia.
Indeed, investment in Sudan has actually grown $2.8 billion over the last year.
Efforts to “pressure” the Chinese appear similarly futile.
Darfur is hardly a high priority for China, which accounts for 20% of African trade, and buys 60% of Sudan’s oil.
Growing talk – both in Europe and America – about boycotting the Olympics (or the opening ceremony) has proven utterly ineffective in influencing China’s behavior in Tibet.
Would the threat of a boycott really prove more successful vis-à-vis Darfur?
Likewise, even proponents of a no-fly zone are doubtful about its potential efficacy.
After all, Sudan is the size of Western Europe, and Darfur is the size of France, with 158 refugee camps.
Strategic constraints would almost certainly overwhelm enforcement.
Finally, there is the “military option,” which would merely justify fears in Sudan of Western “imperialism.”
Worse, given the splintering of rebel forces in the South, where an estimated 80 tribes and clans control their own militias, a military response could generate a power vacuum in Sudan and destabilize the nine countries – many of them fragile or failed states – on its borders.
Western analysts and activists should have learned by now that and military threats produce only resistance, and that genuine diplomacy involves using carrots as well as sticks.
Yet the emerging policy consensus contains no positive incentives to resolve the Darfur crisis.
Nor is it clear whether its aim is to pressure Sudan into changing its policy or to bring about wholesale regime change.
I have been to Sudan twice, and, as part of a delegation organized by Conscience International, I also visited the refugee camps in Nyala and El Fasher in Darfur.
I have met with dozens of Sudanese politicians and diplomats, and I know that the regime in Khartoum is authoritarian, self-interested, and ruthless.
But it is not monolithic.
Factions within the regime might prove supportive of new policies aimed at tempering the climate of violence in Sudan, decreasing its trade dependency on China, improving conditions for refugees, and lowering international tensions.
Such policies might include:
Normalizing diplomatic relations in exchange for removing obstacles to the deployment of UN-AU forces in Darfur. Replacing sanctions on Sudan with new investment opportunities and gradually forgiving its foreign debt in exchange for achievement of benchmarks tied to repatriating refugees, rebuilding villages, and demobilizing the Janjaweed ;
Calling on not only the government, but also the rebel forces, over which the West has some influence, to bargain in good faith; Engaging China’s desire for international prestige by encouraging it to assume a public role in designing and overseeing repatriation, demobilization, and vocational programs;
Offering aid to the Sudanese in rebuilding the tribal reconciliation councils that were destroyed during the civil war; Reintegrating Sudan into the international community through academic exchanges, conferences, political visits, and the like;
Strengthening the AU, which Western analysts have consistently underestimated with almost indescribable arrogance, in order to foster African solutions to African problems. The emerging policy consensus toward Sudan is predicated on an approach that has already undermined respect for Western values throughout the non-Western world.
They are unrealistic and, ultimately, counterproductive. There is no time to lose in trying something new.
A New Dawn for Chinese Journalism?
A remarkable incident has emboldened Chinese journalists.
Earlier this year, the government suspended publication of the newspaper Bing Dian Weekly , provoking unprecedented open protest, which received extensive media coverage worldwide.
Even more surprisingly, the government, under the pressure of public opinion, has allowed Bing Dian to resume publication.
The editor-in-chief and deputy editor-in-chief were sacked, but the open questioning of the legitimacy of the government’s authority to regulate journalism is bound to have a profound impact.
Foreign observers are prone to associate the Bing Dian incident with other recent crackdowns on China’s mass media, and to conclude that Chinese journalism freedom is hopeless under the present autocratic regulation.
Undeniably, there has been no significant change in the government’s system of journalism’s regulation since China adopted its “open door” policy almost 30 years ago.
On the contrary, it has become more rigorous and covert.
But I still have faith that subtle changes are occurring.
A prerequisite of effective control of the media is that the controlled accept the controller’s ideology.
After 1949, the Communist Party cultivated a stable of “theoretical experts” and other ideological servants to write lengthy articles propagating “Marxism and Mao Zedong Thought.”
But nowadays, such writers are hard to find, and their work is received by readers with mockery and sarcasm.
In fact, the Central Propaganda Department’s ideological control can be maintained only through internal notices and telephone calls, which are widely scorned.
More importantly, even the regulators themselves have ceased to believe in obsolete and rigid doctrines.
I recently met an official working for a provincial Department of Propaganda and was impressed by his bold and straightforward comments on current affairs.
In private conversation, one might even take him for a liberal – one of a new breed of young and well-educated propaganda officials with an increasingly higher threshold of political sensitivity.
For their part, producers of news have long since ceased to believe that news is propaganda.
I started my career with
Indeed, Western works are taught as “models for writing” to journalism students in China’s universities.
This is a crucial change, and it is the fundamental reason for an increasing number of genuine news items and commentaries in China’s media today.
Market pressure has also been important in pushing Chinese media to embrace change.
Contrary to foreign perceptions, only a handful of Chinese media – for example,
To be sure, political information remains rigorously controlled, which puts a premium on “harmless” recreational, entertainment, and sports information – the reporting of which is basically free.
This has resulted, in the short run, in an embrace of low journalistic standards.
But many metropolitan newspapers that once thrived on infotainment have seen their circulation fall in recent years.
Sooner or later, readers will start to buy newspapers that can truly inform them and give voice to their opinions.
In fact, it is these tabloids, responding to market pressure, that have started to take on responsibility as public watchdogs.
On many occasions in recent years, they have been the first to break sensitive news.
As a result, mainstream media are being marginalized, and the previously marginalized media are becoming mainstream.
Thus, even without any change in the current system of regulation, extensive coverage of disasters, judicial abuses, and citizens’ pursuit of their statutory rights, along with the questioning of policies from public perspectives, is now common.
For example, reporting by the
Such progress is slow and full of frustrations, for it reflects the incremental evolution of the system.
But it is nonetheless real progress, indicating the growing influence of the Chinese media and pointing to China’s becoming a country of “free expression”.
According to an old Chinese saying, “a just cause enjoys abundant support, while an unjust cause finds scant support.” A “just cause” resides in people’s hearts.
Without the hearts of news producers – or, increasingly, of censors – the seemingly formidable edifice of journalistic regulation will, sooner or later, collapse like the Berlin Wall.
A New Deal for Fragile States
PARIS – Today, roughly one-quarter of the world’s population lives in conflict-affected and fragile states.
Despite vast sums of money spent aiding such states over the last 50 years, armed conflict and violence continue to blight the lives of millions of people around the world.
International and national partners must radically change the way they engage such states.
I experienced firsthand the need for a new approach in 2004 in Sri Lanka.
Within the first two months of the devastating tsunami that struck that December, close to 50 heads of state and foreign ministers visited the island.
Each came with their own programs, their own civil-society organizations, and their own television crews.
Few came with any deep understanding of the dynamics of the political conflict between militant Tamils and the Sri Lankan state.
Big mistakes were made, fueling further violence.
Our major challenge today is to move away from the model of partnership according to which priorities, policies, and funding needs are determined in donor capitals and development partners’ headquarters.
Conflict-affected states need to be able to determine their own destinies.
We should establish models of post-conflict transition like the one advocated by the g7+, a group of eighteen fragile states.
The model is simple: Countries assess their own situation, using tools that they develop and that are appropriate to the context, in order to formulate a vision and a plan to consolidate peace and achieve prosperity.
This may sound like pie in the sky, but we have already tasted it in Africa, where Sierra Leone’s Agenda for Prosperity 2013-2017 and the Liberia Vision 2030 exemplify the potential of such programs.
Progress on meeting national priorities such as peace consolidation, expanding access to justice, or increasing security is monitored locally.
Using local systems and capacities, it turns out, can strengthen them.
The “New Deal for Engagement in Fragile States,” which builds on a series of international commitments regarding aid and development, and was endorsed at the at the Fourth High-Level Forum on Aid Effectiveness in Busan, South Korea in 2011, proposes just such a model.
It enshrines what matters most in building peaceful states and societies: commitments – the Peace- and State-building Goals – to improve how national and international partners engage in conflict-affected and fragile contexts.
The New Deal recognizes what the history of peace-building teaches us: national leadership and ownership of agendas are key to achieving visible and sustainable results.
As Kosti Manibe Ngai, South Sudan’s finance minister, has put it, “Nothing about us without us.”
In many conversations with South Sudan’s president, Salva Kiir, we have discussed setting out a short list of clear priorities for the new state.
But such goals are meaningful only if a fragile state’s partners are ready to accept the lead from a capital like Juba rather than from their own headquarters.
More than 40 countries and institutions have endorsed the New Deal way of working, committing themselves to building better partnerships – and to investing the required resources and political capital.
This is why the New Deal model is innovative; it creates political support around issues that need to be addressed if countries are to make the transition from conflict and fragility to peace and stability.
Supporting inclusive political dialogue and ensuring that conflict is resolved through peaceful means are the highest priorities, as are security, access to justice, and a dynamic private sector that generates sufficient job opportunities.
Moreover, many fragile states are rich in natural resources, and must establish transparent resource management – aimed at curbing corruption and controlling illicit flows of money and goods – in order to raise the revenues needed to deliver services.
A focus on these processes would ensure that fragile states take the lead and the responsibility.
As partners, we must accept this national leadership.
After Haiti’s catastrophic earthquake in 2010, the country was dubbed “the republic of NGOs.”
Unable to create conditions in which Haitians themselves could take the lead in rebuilding their country, Haiti’s external partners undermined the establishment of a functioning internal governance system.
So, how can we translate our commitments and priorities into better lives for people who are affected by conflict and fragility?
OECD countries need to lead by example and meet the commitments that they have made.
Our partners, through groupings like the g7+, must continue to demand the changes in policies and practices that have been promised.
We also must plan to change for the long term.
As the Millennium Development Goals’ 2015 end date approaches, promotion of peace, security, and non-violent conflict resolution continues to be vitally important, and must be fully integrated into any future development agenda.
Recently, the members of the International Dialogue on Peacebuilding and Statebuilding, the high-level political forum that produced the New Deal, met in Washington, DC, to assess our progress in changing how we work and in implementing the New Deal commitments.
They agreed to the Washington Communiqué, which urges development partners, g7+ countries, and civil-society organizations to intensify their efforts to use the New Deal to deliver concrete results on the ground, and calls for a post-2015 development agenda that recognizes the universal importance of peace- and state-building.
Ultimately, our progress depends on the resolve of everyone to transform the lives of the 1.5 billion people whose lives are marred by violence, conflict, and insecurity.
A New Deal for Poor Farmers
NEW YORK – Many poor, food-importing countries around the world have become desperate in recent months, as global prices of rice, wheat, and maize have doubled.
Hundreds of millions of poor people, who already spend a large share of their daily budget on food, are being pushed to the edge.
Food riots are mounting.
But many poor countries can grow more food themselves, because their farmers are producing far below what is technologically possible.
In some cases, with appropriate government action, they could double or even triple food production in just a few years.
The idea is basic and well known.
Traditional farming uses few inputs and gets poor yields.
Poor peasants use their own seeds from the preceding season, lack fertilizer, depend on rain rather than irrigation, and have little if any mechanization beyond a traditional hoe.
Their farms are small, perhaps one hectare (2.5 acres) or less.
Under traditional agricultural conditions, the yields of grain – rice, wheat, maize, sorghum, or millet – are usually around one ton per hectare, for one planting season per year.
For a farm family of five or six living on one hectare, this means extreme poverty, and for their country, it means reliance on expensive food imports, including food aid.
The solution is to increase grain yields to at least two tons – and in some places to three or more tons – per hectare.
If water can be managed through irrigation, this could be combined with multi-cropping (multiple harvests per year) to produce a crop during the dry season.
Higher and more frequent yields mean less poverty in farm families, and lower food prices for cities.
The key to increasing yields is to ensure that even the poorest farmers have access to improved seed varieties (usually “hybrid” seeds created by scientific selection of seed varieties), chemical fertilizers, organic matter to replenish soil nutrients, and, where possible, small-scale irrigation methods, such as a pump to lift water from a nearby well.
There is nothing magic about this combination of high-yield seeds, fertilizer, and small-scale irrigation.
It is the key to the worldwide increase in food production since the 1960’s.
The problem is that these improved inputs have bypassed the poorest farmers and the poorest countries.
When peasants lack their own saving accounts and collateral, they are unable to borrow from banks to buy seeds, fertilizer, and irrigation.
As a result, they grow food the traditional way, often earning little or nothing from their harvest, because it’s not even enough to keep their families alive.
History has shown that government action is required to help the poorest farmers escape the low-yield poverty trap.
If farmers can be helped to obtain simple technologies, income can rise, and they can accumulate bank balances and collateral.
With a bit of temporary help, perhaps lasting around five years, farmers can build up enough wealth to obtain inputs on a market basis, either through direct purchases from savings or through bank loans.
Around the world, government-run agricultural banks in poor countries once not only financed inputs, but also provided agricultural advice and spread new seed technologies.
Of course, there were abuses, such as the allocation of public credits to richer farmers rather than to needy ones, or the prolonged subsidization of inputs even after farmers became creditworthy.
And in many cases, government agricultural banks went bankrupt.
Still, the financing of inputs played a huge and positive role in helping the poorest farmers to escape poverty and dependency on food aid.
During the debt crisis of the 1980’s and 1990’s, the International Monetary Fund and World Bank forced dozens of poor food-importing countries to dismantle these state systems.
Poor farmers were told to fend for themselves, to let “market forces” provide for inputs.
This was a profound mistake: there were no such market forces.
Poor farmers lost access to fertilizers and improved seed varieties. They could not obtain bank financing.
To its credit, the World Bank recognized this mistake in a scathing internal evaluation of its long-standing agricultural policies last year.
The time has come to reestablish public financing systems that enable small farmers in the poorest countries, notably those farming on two hectares or less, to gain access to needed inputs of high-yield seeds, fertilizer, and small-scale irrigation.
Malawi has done this for the past three seasons, and has doubled its food production as a result.
Other low-income countries should follow suit.
Importantly, the World Bank, under its new president, Robert Zoellick, has now stepped forward to help finance this new approach.
If the Bank provides grants to poor countries to help small peasant farmers gain access to improved inputs, then it will be possible for those countries to increase their food production in a short period of time.
Donor governments, including the oil-rich countries of the Middle East, should help finance the World Bank’s new efforts.
The world should set as a practical goal of doubling grain yields in low-income Africa and similar regions (such as Haiti) during the next five years.
That’s achievable if the World Bank, donor governments, and poor countries direct their attention to the urgent needs of the world’s poorest farmers.
A New Deal for the Lisbon Strategy
Whatever happened to the European Union’s Lisbon Strategy?
Not only is the public almost entirely ignorant of the EU’s policy agenda for boosting competitiveness, economic growth, and employment, but this ignorance extends to many intellectuals, academics, CEO’s, and even some MP’s.
For example, in all of the debates on the EU’s constitutional treaty, neither its supporters nor its opponents have so much as mentioned the Lisbon Strategy.
It is little wonder, then, that Euroskepticism – in France, the Netherlands, and elsewhere – is on the rise.
Despite the success and popularity of programs like ERASMUS, citizens don’t perceive the EU’s contribution to superior education or training.
Indeed, the last Eurobarometer survey on the Lisbon Strategy found that the European public sees little relation between EU policies and economic competitiveness.
Of course, some laboratories receive EU grants, but without recognizing a specific European mission in research policies.
Europe is generally considered more a constraint than as a plan, more as an instrument than a vision nourished by a clear and credible idea.
The essential responsibility for this state of affairs lies with Europe’s ruling class and policymakers.
As a recent assessment by former Dutch prime minister Wim Kok pointed out, the EU’s member states generally have not made the Lisbon Strategy a high priority, and they balk at giving the EU the means to pursue more ambitious policies to offset this neglect.
It is difficult to ask citizens to be enthusiastic about aims that their leaders ignore.
At bottom, the problem is one of legitimacy.
The main targets – jobs, growth, and research – are considered legitimate from the standpoint of fairness when described in general terms.
But the concrete policies needed to realize this aim are not, since reforming the welfare state and labor markets means more competition, which scares many citizens.
Legitimacy is even more problematic regarding recognition, which implies a feeling of community and attachment.
When we are faced with conflicting choices – burden-sharing through taxation, the organization of the public sector, the status of public employees, etc. – the member states are considered to be the only bodies entitled to decide.
In short, when the EU brings subsidies, it receives congratulations; but when it pushes for unpopular reforms, it becomes the scapegoat for political, social, and economic failures.
From an economic point of view, the Lisbon Strategy’s aim is to transform Europe into a power able to compete on equal terms with the US today and the great Asian countries.
But this aim does not appear to be creating a European identity, as the euro has.
Within many states, “power” isn’t politically correct.
Above all, there is no linkage between national power and European power.
If we want Europe to be more legitimate, we must explain how to tie these two dimensions of power.
Aside from ignorance of the Lisbon Strategy among the public and inaction on long-term reforms among the member states, a second problem concerns the lack of acceptance of the virtues of competition – the most effective way to ensure quality, innovation, and low prices for consumers.
Competition also puts an end to rent seeking and protection of traditional corporate advantages.
Of course, we must limit the scope of competition: there is no reason, for example, to extend it to taxation.
Similarly, while competition will improve the quality of research and education, this does not imply reduced public funding, a lower priority for basic research, or the elimination of scholarships.
Perhaps most importantly, competition is a powerful means to restore democracy and modernize political institutions by compelling policymakers to ensure transparency and accountability.
Elites must give up their privileges, and regulations on corporate governance must limit collusion between managers and civil servants or politicians.
We must explain to citizens Europe’s contribution to public ethics, and the democratic virtues of fair competition in economic, political, and social life.
Consider one of the main purposes of the Lisbon Strategy: the organization of research and higher education.
It is impossible to change radically the way scholars and research workers are appointed in most member states, and to revise completely the criteria for funding of faculties and laboratories.
But the EU can overcome national impediments by developing exemplary universities and research centers that would be properly European, serving as an incentive to quality and reform at the national level.
Emulation through excellence is the motor of competitiveness.
A good place to start is an idea supported by French Socialist leader Dominique Strauss-Kahn, who has proposed that 0.25% of Europe’s GDP be dedicated to research and used to create a European Agency for Research.
Moreover, Europe must build up tools for strategic analysis, assessment, and forecasting to provoke and nourish public debate.
Such think tanks at the European level must remain free and independent, but leaders must learn to pay attention to and integrate their recommendations into the policy-making process.
In many matters pertaining to the Lisbon Strategy, the EU cannot avoid member states’ concerns.
But as the states won’t be able to do everything alone and won’t renounce maintaining political control, we must be able to link the Union’s policies and those of specific states.
Otherwise, the Lisbon Strategy could merely empower an inefficient bureaucracy, rather than boosting the EU’s democratic legitimacy.
In short, the Lisbon Strategy could lead Europe to become a real power in the coming decades, or it could fuel further growth of Euroskepticism.
A New Deal for the New World
As former members of our countries' congresses we believe that it is time to create a North American Parliamentary Union (NAPU) to address the growing number of big issues that North America's national governments have pushed to the sidelines.
Both past and present have been burdened by the ad hoc nature of relations among the United States, Mexico, and Canada.
A fairer, more prosperous future for all three countries demands that we take a bold step forward.
Despite US Secretary of Defense Donald Rumsfeld's snide reference to ``Old Europe,'' North Americans can learn much from the European Union and European Parliament.
In the 1950's, most of Europe considered the idea of a Union with a single Parliament a pipe dream.
Today the EU elects its Parliament, shares a single currency, and controls a budget that emphasizes raising living standards within the less developed member countries.
Within the near future, the EU is likely to be 450 million people strong.
The combined population of the US, Mexico, and Canada is about 410 million people.
Yet North America has failed to match Europe in building the political structures necessary to focus the hemisphere on the problems of immigration, cross border security, labor rights, and environmental degradation; or in facilitating a more united approach to strong economic competition from Europe and Asia.
On the contrary, in the aftermath of the Iraq War, relations between the US and its neighbors, Canada and Mexico, are at their lowest level in years.
Clearly, efforts to deepen North American political and economic integration will be an uphill battle.
In the near future, the US government will be focused on homeland security, Iraq, the slumping domestic economy, and the run-up to the 2004 presidential election.
Canada's government has been more willing to approach North American issues on a bilateral basis than in a tri-national context; furthermore, Canadians are preoccupied with the consequences and aftermath of SARS and mad cow disease, as well as anticipating a new government next year.
Mexico's President Vincente Fox will govern through 2006.
But his vision of a North American Free Trade Association (NAFTA) encompassing elements of social and political fusion with his North American counterparts was sidetracked by the terrorist attacks of September 11, 2001, and by his political rivals' recent successes at the polls.
Notwithstanding this, most Canadians and Mexicans believe that cooperation in North America will proceed regardless of who is in office in Ottawa, Washington, or Mexico City.
Not only are Canada and Mexico the US's first and second largest trading partners, but the three countries maintain a myriad of relationships--in business, tourism, and culture--that do not pass through their embassies or governments.
Good feelings abound.
US citizens register high approval ratings in Canada and Mexico: 90% and 70%, respectively.
In proposing the creation of NAPU, we envision a specific plan to create a larger market by fostering an alliance between the three economies.
In just a single decade, the EU managed to bring poorer, peripheral member states--Greece, Portugal, Spain, and Ireland--from 50% to 90% of the EU average in per capita income, creating a bigger market for companies from wealthier northern countries, and stemming migration from poorer southern economies.
The EU invested upwards of $35 billion a year to assure the success of their Common Market integration.
North America has largely ignored the significance of ``common,'' preferring to focus on ``market.''
This blinded all three countries to the centrality of community.
We have failed to understand that a North American Free Trade Area (NAFTA) that achieves its full potential cannot be accomplished on the cheap.
A regional political structure will maintain the focus on vital but difficult issues such as immigration.
NAFTA was conceived under the assumption that expanded trade would trickle down benefits to all in the three countries.
Regretfully, this corporate-driven NAFTA exacerbated the disparities and asymmetries between Mexico and its two richer northern neighbors.
Moreover, throughout NAFTA's lifetime income and wealth have been further concentrated within the elite sectors of US and Canadian society.
Immigration illustrates the cost of integration without convergence. Demand for low-cost Mexican labor by US employers and the 10-1 wage gap between the two countries pushes 350,000 Mexicans to risk their lives every year for better paid jobs north of the border.
Without Mexican manpower, much of the work in the US simply would not get done. The issue must be addressed, not ignored and criminalized.
Everywhere nowadays, key decisions are made by a self-selected group of elites, often in non-transparent circumstances.
NAPU would allow for wider, more consistent participation in the consideration of issues now ignored in all three countries.
Inter-American issues can no longer be left subject to the whims and convenience of individual leaders.
The people of the US, Canada, and Mexico deserve better.
A New Democratic Agenda for Russia
MOSCOW – When Russian President Dmitri Medvedev delivered his annual address to the Federal Assembly I was struck by the fact that his speech seemed to be meant for an advanced, prosperous country, not the real Russia of today.
Russia will hold a presidential election in 2012.
What happens in 2011 will, in my opinion, be even more important than the election itself.
Indeed, the evolution of Russian society could transform Russian politics, despite those domestic opponents who deny change or those who unqualifiedly classify Russia as “incorrigibly authoritarian.”
But, in order for that to happen, a new agenda for Russia must be developed this year.
A decade ago, defense of Russia’s territorial integrity and restoration of governability topped the list of priorities.
People supported a president, Vladimir Putin, who was devoted to this “stabilization” agenda.
We may debate the means by which it was pursued, and how successfully, but Russia’s “existential” challenges were largely overcome.
But progress on stabilization only highlighted Russia’s unresolved problems, which the global financial crisis exacerbated, but did not cause.
After all, Russia’s resource-based, de-industrializing, expenditure-driven economy is the result of purely domestic choices.
Nor was it the crisis that gave rise to corruption, which affects officialdom at all levels, or that caused Russia to lose its democratic dynamic.
We Russians rode along on oil and gas, forgetting that these resources will not last forever.
But, even with favorable world market conditions, we did not manage to solve the problem of poverty, in which millions of Russians still live.
I am convinced that Russia’s troubles all come down to politics.
We need a democratic, competitive environment, initiative at all levels, an active civil society, and real public control.
Only under such conditions will difficult problems lend themselves to solution.
But, starting in 2005-2006, the authorities implemented measures that made responsiveness to acute problems practically impossible.
The decisions to appoint, rather than elect, regional governors, to introduce party-list voting, to raise the electoral threshold for parties to enter the Duma, and to repeal the minimum-turnout requirement – all accompanied by rampant manipulation of elections and the mass media – created a political system closed to feedback from society.
Not surprisingly, the political elite became self-absorbed and served only its own narrow interests.
This summer, with wildfires raging outside Moscow, the elite’s isolation took on a menacing nature.
But something else happened: society became more demanding, recognizing its own interests and knowing how to express them.
Although the traditions of self-organization in Russian society are neither deep nor strong, real movement in this direction became visible for all to see.
Activists from public movements, journalists, ecologists, businessmen, and ordinary people who had suffered the tyranny and corruption of public officials began to join in.
The authorities have recognized this, at least to some degree.
Medvedev's decision to suspend construction of a highway through the Khimki forest near Moscow in the face of widespread civic protest was important.
For many months, Moscow and federal authorities ignored the highway’s opponents, so Medvedev’s decision was a signal: contempt for the people is inadmissible.
Yet right after that, the bureaucracy tried to turn the public hearings – called to give people and civil institutions a voice in solving such problems – into an empty formality.
So the struggle between democratic and anti-democratic tendencies is becoming acute.
If the anti-democratic tendencies win out, all that we have accomplished in previous years will be jeopardized – including stability itself.
This threat evidently motivated Medvedev to speak out in November: “It is no secret,” Medvedev wrote in his blog, “that, as of a certain period, symptoms of stagnation have begun to appear in our political life, and the threat of turning stability into a factor of stagnation has appeared.”
The president’s statement was unexpected.
Medvedev’s assessment attested to his understanding that Russia’s problems are rooted in its politics – in the degradation of the ruling party, in the absence of a real opposition, and in the lack of respect for the rights of political minorities.
I welcome Medvedev’s emphasis on social concerns and his anti-bureaucratic rhetoric.
But his statements are only a first step toward formulating a new Russian agenda, the first point of which must be a renewal and acceleration of movement toward real and effective democracy.
It is vital that Russians believe that Medvedev’s words reflect his priorities, and that he is prepared to fight for them.
Among these priorities, one of the most important is education.
We have approached the point when the constitutional requirement of universal, free education may become a fiction.
People are asking: How is it that, after World War II, the state had enough money to provide free education, whereas today’s Russian state does not?
Society also demands effective mechanisms for combating corruption, which is turning into a serious political problem, precisely because it has widened the gap between the people and the authorities.
Indeed, today’s elite cannot or will not solve the problem.
Only a serious presidential initiative, supported by civil society and brave new political forces, can do the job.
The new agenda must also include a strong economic component.
Patching up holes in the budget and individual initiatives are not enough to ensure economic renewal.
Russia needs a breakthrough toward an up-to-date, knowledge-based, and ecologically sustainable economy.
Here, I see a direct connection with the problem of education.
I am convinced that Medvedev must become the leader in the process of formulating the new Russian agenda, and he must act in the coming year.
Society will support him.
A New Era for Islamic Science?
For a few hundred years, when science and mathematics were enjoying a period of great invention, one region of the world stood out.
Masters of these disciplines were revered there, medicine advanced quickly, and the average person was curious about how nature worked.
Not surprisingly, this region was globally respected.
In the other half of the known planet, scientists were punished, even killed.
Mathematics was outlawed as irreligious and alien, and was later made subservient to religion.
The standard of living was low.
The prosperous region was the Islamic Middle East, while an ignorant Europe remained poor.
Both regions were religiously governed (historians differ about the role and natures of the religions in this context), but science flourished only in one of them.
Now, of course the roles of the Islamic Middle East and the West are reversed.
Since World War II, the United States has been the world’s undisputed leader in science.
Throughout this period, the brightest students were drawn away from their native lands, attracted by superior research universities and opportunities.
Until recently, more than half of all mathematics, science, and engineering graduate students in the US were foreign-born.
Many of these talents stayed after graduation, and both industry and government took advantage of this.
Meanwhile, Islamic cultures entered a historical phase in which science was equated with Western influence and eschewed.
Even in countries where oil revenues could fuel a significant amount of research, Arab rulers did not encourage such investment, with the result that their societies have not prospered as much as they might have.
Recently, a desire for greater political respect has spurred Islamic nations to invest in technology, which is most visible in Pakistani and Iranian nuclear ambitions.
But while such weapons carry political weight, the science behind them is mundane and old.
More meaningful is the respect that comes from incubating insights, rather than the products of past discoveries.
Imagine the influence that would be generated by a Pakistani institute that was the world leader in cancer research.
Would the political rhetoric shift if researchers in Oman discovered a key to suppressing AIDS?
This is one unclaimed opportunity.
But another exists, and not just for Islamic societies.
The US has made profound missteps recently.
“Matters of faith” have been substituted for science across government, from the president down.
Top researchers have had their reports changed by political operatives when the facts contradicted official belief.
Encouraged by a religiously influenced administration, school systems are shifting their focus from science to “values.”
Since the terrorist attacks of September 2001, entry visas are fewer and more difficult to obtain, stanching the flow of young talent into US universities.
Major scientific organizations have protested, without result.
At the same time, tax laws have been revised to make investors wealthier in the near term, discouraging long-term investment in research.
Half a trillion dollars was committed to the war in Iraq, an amount roughly equal to the sponsorship of all basic research for the last thousand years.
Even if the US avoids a fundamentalist dark age, it clearly risks losing its global research dominance.
Japan recognized the link between political clout and science in the 1980’s.
Japan’s chief industrialist, Akio Morita, the chairman of Sony, and the right-wing politician Shintaro Ishihara gave a series of speeches that were collected and published in 1986 as a book called
Building a knowledge-based economy using oil wealth is clearly possible.
For example, Texas, like most southern US states, was once economically poor and declining.
Although it had oil revenue, the flow of dollars into an economy, by itself, does not boost prosperity as much as one might think.
So Texas decided to devote its oil money to an educational endowment.
Today, that endowment is roughly equal to that of Harvard University and spread over 15 universities.
The effect has been staggering: aerospace manufacturing has almost disappeared from California, but is booming in Texas.
Telecom research centers and consortia have flocked to Texas, even from the Canadian telecommunications giant Nortel.
Although manufacturing in the US is in crisis, Texas has one of the strongest manufacturing economies in the world.
There is no reason that the same outcome could not be achieved in the Middle East.
First, however, the Islamic world must rediscover and embrace its proud heritage.
­A New European Growth Agenda
BRUSSELS – Austerity alone cannot solve Europe's economic and financial crisis.
Growth and jobs need to be promoted with equal zeal.
European Union leaders now recognize this: kick-starting growth in 2012 was high on the agenda at the European Council’s meeting on January 30.
But the big question remains: How?
The need for immediate action is clear.
The eurozone’s economy contracted in the last three months of 2011; even Germany’s shrank.
The new year is looking grim.
France is flat-lining (as is Britain).
Italy and Spain have sunk into deep recession.
Greece is in its fifth year of a slump.
And eurozone unemployment is at record highs, with nearly one in two young people jobless in Spain and Greece.
The economic headwinds are formidable: fiscal austerity, high interest rates outside AAA-rated countries, credit cutting by banks, deleveraging households, weak private-sector investment, and declining exports as the global slowdown undermines demand.
Until growth resumes, any tentative financial stabilization will be extremely fragile.
Recession will hit banks’ and governments’ already-weak balance sheets, increasing pressure for faster deleveraging.
But, while gradual adjustment is essential, faster and deeper cuts are largely self-defeating: big reductions in private credit and government spending will cause a sharper slowdown – and thus a vicious downward spiral.
A big new push for growth is therefore vital.
So far, the growth agenda has consisted largely of structural reforms, which are essential for boosting future productivity and flexibility.
The crisis does provide a political opportunity for bold moves on this front in many countries; but structural reforms generally will not generate growth and jobs immediately (one exception is permitting shops to open longer).
On the contrary, a shakeout of less productive jobs, for example, would at first raise unemployment, increase government outlays, and reduce private spending.
And, because demand is depressed, credit is in short supply, and barriers to enterprise are often high, it will take longer than usual for businesses to create more productive jobs.
In short, structural reforms alone cannot be relied upon to stimulate growth in 2012.
Instead, the immediate focus needs to be on boosting investment and exports in economies with a current-account deficit – such as France, Italy, and Spain (and the United Kingdom) – and stimulating consumption in surplus countries such as Germany and the Netherlands.
The European Central Bank has acted decisively to prop up European banks; now it needs to support the real economy, too.
While official interest rates are only 1%, solvent sovereigns such as Spain pay more than 5% to borrow for ten years, while creditworthy businesses in Italy can borrow only at punitive rates, if at all.
So the ECB should do more to unblock the transmission mechanism for monetary policy; the European Banking Authority should discourage excessive deleveraging by insisting that banks raise specific capital amounts rather than hit a uniform 9% ratio; and, where necessary, national governments should provide guarantees for bank lending to small and medium-size businesses.
While improving access to finance is vital, governments also need to do more to boost investment.
They should prioritize measures to make it easier to start a business, lift barriers to venture capital, and introduce temporary 100% capital allowances to encourage businesses to bring forward investment.
At the EU level, the (callable) capital of the European Investment Bank should be greatly increased, as European Commission President José Manuel Barroso suggested in his State of the Union speech last September, so that the EIB can finance a big wave of pan-European investment, notably in infrastructure.
Boosting exports is also essential.
Deficit countries need to become more competitive, increasing productivity while cutting costs.
A more competitive currency would be welcome: just as the sterling’s collapse since 2008 has lifted UK exports, a weaker euro would help Mediterranean economies regain competitiveness for price-sensitive exports.
A fiscal devaluation – slashing payroll taxes and replacing the revenues with a higher VAT – would also help.
Surplus countries, too, must do their part, which is in their own interest.
Just as China needs to allow the renminbi to rise, so Germany – whose current-account surplus exceeds China's both as a share of GDP and in absolute terms – needs a higher real exchange rate.
That means that Germans need to earn higher wages, commensurate with their increased productivity, so that they can afford more Greek and Spanish holidays.
If businesses will not oblige, an income-tax cut would do the trick.
That brings us to fiscal policy.
Governments that cannot borrow cheaply (or at all) from markets have no option but to tighten their belts.
But they should pursue smart consolidation rather than unthinking austerity.
So they should maintain investment in skills and infrastructure, while cutting subsidies and transfer payments.
They should also legislate now for future reforms, notably to encourage people to work longer.
Last but not least, governments that can borrow at unprecedentedly low rates – 0% in real terms over 10 years in the case of Germany – must play their role in supporting demand.
Would it be really be so difficult to see VAT coming down ahead of the German election next year?
A New Holy Alliance?
LONDON &#45;&#45; The recent meeting in the Vatican of the “Custodian of The Holy Places,” King Abdullah of Saudi Arabia, and Pope Benedict XVI was a seminal event, particularly as it comes at a time when radical Muslims are decrying the role of “crusaders” in Middle East politics.
It was also the clearest sign yet of a rising “Holy Alliance” among the world’s conservative leaders.
For the key audience for this meeting of Muslim king and Roman Catholic Pontiff was not their followers, but another conservative leader, President George W. Bush.
The first “Holy Alliance” was a creation of Austria’s Prince Metternich following the Napoleonic wars.
It was an attempt to preserve the peace (and the security of the relatively weak Austrian Empire) through a coalition of victors upholding shared values.
Metternich’s “Holy Alliance” was the one original political idea to emerge from Napoleon’s defeat.
Behind its exalted name lay an innovation of great diplomatic significance: the introduction of an element of calculated moral restraint into international relations.
The vested interests that the Alliance members – Austria, Prussia, and Russia – had in the survival of their domestic institutions led each to seek to avoid conflicts that, in the past, they would have pursued as a matter of course.
Metternich’s system worked through much of the nineteenth century, because it protected a genuine balance of power between countries that shared common values.
But what “common values” do King, Pope, and American President share?
That such a meeting took place is a sign that both Pope and King believed that there was something to achieve.
Indeed, Abdullah, who believes himself to be the paramount leader of the Muslim world, is the first Saudi king to initiate a meeting with a leader of the Christian faith.
The two men met, seemingly as equals, not to express the common values of conservatism, but to confirm and promote their authority to uphold traditional values.
Both agreed that reform must be slow, cautious and that it must never undermine established institutions, especially religion and the patriarchal family.
Abdullah sought the meeting because he believes that the world since 2001 has divided the fraternity of conservatives.
Until then, he and Bush shared a common worldview, emphasizing the importance of religion, the traditional family (as both countries understood it), social discipline, and the state’s role in supporting these institutions.
But Bush, following the terrorist attacks of 2001, turned his back on conservatism. He sought to radically reinvent the Middle East, not only by overthrowing the Taliban regime in Afghanistan and Saddam Hussein’s regime in Iraq, but also through his strident calls for democratization.
American radicalism, however, resulted in increasing tensions between religious communities in the Middle East, and the rise of radical Iran with its bid for regional hegemony.
Since 2001, Christian minorities have been targeted throughout the region, including even Lebanon’s Maronite Christian community.
And in Iraq, Sunni Muslims feel under siege from the country’s majority and now ruling Shia.
Here is where the Holy Alliance concept of moral restraint comes in.
Abdullah, perhaps earlier than most others, understood that some code of restraint was needed if the entire region was not to descend into a war of all against all.
Moreover, Abdullah understands that his wobbly regime will only be able to withstand the radical gales that are now blowing if it can forge the type of stability-seeking alliance that Metternich built.
The King, like Metternich and the Austrian Kaisers, understands de Tocqueville’s dictum that the most dangerous moment for a regime is when it starts to reform.
Having begun, ever so carefully, to politically open his country, the King knows that he needs regional peace and a lowering of Islamic holy rage.
The problem is that Abdullah cannot rely on his domestic conservative allies to give him the time that the Kingdom needs.
The Wahhabi religious establishment, the Saudi state’s hidden co-rulers, could very well obstruct Abdullah’s attempts at regional religious reconciliation.
Members of the religious police remain adamant that the country’s Christian guests must continue to live according to strict Wahhabi rules of behavior.
While the Wahhabis could yet be bribed again with oil money, the sect’s power-hungry judges eagerly await the next beheading, stoning, or lashing in Riyadh’s public square.
Thus, uniting the forces of status quo conservatism, even if some of those conservatives are Christian, is the only viable diplomatic strategy open to Saudi Arabia.
For conservative rulers usually fall when they fail to grasp their own vulnerability, especially when the revolutionary challenge is cloaked in conservative garb.
After all, few political systems can defend against those, like Saudi Arabia’s Islamic radicals, who claim that they can preserve the system and its religious values more effectively than the current rulers.
Only an alliance of conservative leaders and powers (including a retreat by America from diplomatic radicalism), Abdullah believes, can restore some stability to the Middle East.
A New Model United Nations
The award of the Nobel Prize for Peace to the United Nations and to its Secretary General, Kofi Annan, is a cause for true celebration everywhere.
But celebrations should never become an excuse for complacency.
Yes, the UN has achieved much under Secretary General Annan's leadership.
But the idea of the United Nations as a uniter of nations remains, in many parts of the world and for many of the world's most complex problems, more an ideal still to be achieved than a living reality.
Some of the most powerful nations in the world still do not see fully cooperating with or participating in UN affairs as in their interest.
Beyond states, the world's many NGOs are growing fast and multiplying in their influence, but without formal rules to define their role in the international system.
Their real power, despite Secretary General Annan's efforts to create a dialogue with them, stands outside the UN framework.
Indeed, NGOs often assume tasks for which the current structure of the UN is unsuited or remains far too weak.
To assist them in their tasks, and to assure that the great global issues of the day are addressed in a forum that unites and does not divide, the UN needs to be strengthened in the fields in which NGO's are working so impressively.
Such strengthening can only be achieved by a fundamental reform of the UN's internal structure.
When the UN was founded in 1945, the primary objective was to prevent the outbreak of World War III.
So, at its foundation, only one powerful body was introduced, the Security Council on which the world's great military powers sat.
The agenda of the Security Council was and remains power, and meeting crises, mostly with military means.
Today, however, the real threats to the majority of the world's population stems from dangers almost unknown back then: poverty, hunger, population growth, migration, the environment, and the like.
For the UN to meet these challenges, its very structure must change.
Two new councils, each with comparable power to the Security Council, are needed: a Social Council and an Economic Council.
The IMF, World Bank, and WTO should not only report to, but be dependent upon this new UN reformed structure.
Why are these new bodies needed?
The world cannot do without rules; it cannot move forward against our age's most pressing problems without defined legal rules and the institutions that regulate international law.
Because these institutions do not exist, the UN must now invent them.
Of course some rules, such as rules governing the promulgation of trade sanctions, now exist within, say, the WTO.
These rules, however, are but steps in the right direction: steps toward socially and ecologically sustainable free trade and against protectionism, especially that often practiced by rich countries.
Across the board, more global rules are needed so that global efforts to confront poverty, disease, and mass migration can be made consistent, predictable and most of all effective.
We have the Rome Statute of International Criminal Code; we are heading for an innovative guide to best practice on how civil society organizations can best contribute to the work of the UN; and we now have a large coalition, far beyond NATO, combatting terrorism.
I am grateful that one of the reactions to September 11th was, if I am not mistaken, a somewhat changed attitude within the USA vis-à-vis the UN.
But it is of a paramount importance that these kinds of change, namely, to incorporate real power into the structure of the UN, make more progress.
In dangerous times such as these, the world's peoples need to prove their solidarity.
The large coalition now fighting terrorism is one way to demonstrate this.
But solidarity also must be recognized within the real power structures of the UN.
The Secretary General convocation of a ``Dialogue of Civilizations'' is but a start here.
Far more needs to be done.
The institution of Social and Economic Councils at the UN would mark an enormous step in the right direction.
I have tried to present the ideas outlined here not only to the General Assembly but also to the permanent members of the Security Council.
I have also been invited to present them to the US Senate.
So far, none of those discussions have proved to be very fruitful.
But just as the time is coming when the US will to come see the UN as indispensable, the Security Council and its members will come to see the creation of new bodies within the UN not as rivals, but as the only means for the world's people, in solidarity, to confront the myriad social and economic problems that they face.
A New Path to a Low-Carbon Economy
NEW YORK – The solution to manmade climate change depends on the transition to electricity production that, unlike burning oil, natural gas, and coal, emits little or no carbon dioxide – the main greenhouse gas responsible for global warming.
Low-carbon electricity can be produced by solar, nuclear, and wind energy, or by coal-burning power plants that capture and store their CO2 emissions.
The policy problem is simple. Coal is a cheaper and more easily used energy source than the alternatives.
It is cheap because it is plentiful.
It is easier to use than wind or solar power because it can produce electricity around the clock, without reliance on weather conditions.
To save the planet, we need to induce power suppliers to adopt low-carbon energy sources despite coal’s lower price and greater ease of use.
The obvious way is to tax coal, or to require power plants to have permits to use coal, and to set the tax or permit price high enough to induce a shift towards the low-carbon alternatives.
Suppose coal produces electricity at a cost of $0.06 per kilowatt-hour, while solar power costs $0.16/kilowatt-hour.
The tax on coal-based electricity would have to be $0.10/kilowatt-hour.
In that case, consumers would pay $0.16/kilowatt-hour for either coal or solar.
The utilities would then shift to low-carbon solar power.
The switchover, however, would more than double the electricity bill in this example.
Politicians are loath to impose such a tax, fearing a political backlash.
For years , this has stymied progress in the United States towards a low-carbon economy.
Yet several European countries have successfully introduced the idea of a “feed-in tariff,” which provides the core of a politically acceptable long-term solution.
A feed-in tariff subsidizes the low-carbon energy source rather than taxing the high-carbon energy source.
In our example, the government would pay a subsidy of $0.10/kilowatt-hour to the solar-power plant to make up the difference between the consumer price of $0.06 and the production cost of $0.16.
The consumer price remains unchanged, but the government must somehow pay for the subsidy.
Here is another way.
Suppose that we levy a small tax on existing coal power plants in order to pay for the solar subsidy, and then gradually raise consumers’ electricity bills as more and more solar plants are phased in.
The price charged to consumers would rise gradually from $0.06/kilowatt-hour to the full cost of $0.16/kilowatt-hour, but over a phase-in period of, say, 40 years (the lifespan of the newest of today’s coal plants).
Assume that as of 2010, the entire electricity system is coal-based, and that the electricity price paid by the consumers is $0.06/kilowatt-hour.
By 2014, suppose that 10% of the 40-year transition to solar power has been achieved.
The consumer price is raised 10% of the way from $0.06 to $0.16, thus reaching $0.07/kilowatt-hour.
The coal tax for 2014 is then set at $0.01/kilowatt-hour, which is just enough to pay the needed solar subsidy of $0.09/kilowatt-hour.
Solar producers fully cover their costs of $0.16/kilowatt-hour, since they sell power to the consumers at $0.07/kilowatt-hour and receive a subsidy of $0.09/kilowatt-hour.
A small coal tax can support a large solar subsidy.
Suppose, further, that by 2030 the transition to a low-carbon economy is halfway completed.
The consumer price for electricity is now set at $0.11, exactly halfway between $0.06 and $0.16.
The coal tax is now raised to $0.05/kilowatt-hour, just enough to cover the solar subsidy of $0.05/kilowatt-hour.
Once again, the solar producers cover their costs exactly, since the subsidy of $0.05/kilowatt-hour closes the gap between the consumer price ($0.11/kilowatt-hour) and the producer cost ($0.16/kilowatt-hour).
Let us presume, finally, that by 2050, all electricity production has made the transition to low-carbon energy sources.
The consumer price finally reaches $0.16/kilowatt-hour, enough to cover the full cost of solar power without a further subsidy.
This approach allows higher consumer electricity prices to be phased in gradually, yet establishes strong, immediate incentives for adopting solar power. Moreover, the government budget is balanced every year, since the coal tax pays for the solar subsidy.
The actual transformation in the coming years will have one major advantage compared to this illustration.
Today’s solar power plants might cost an extra $0.10/kilowatt-hour compared to coal, but such plants will be much less costly in the future because of improved technology.
Thus, the magnitude of subsidies needed in a decade or two will be lower than they are today.
Energy debates in the US, Australia, and other countries have centered so far on introducing a cumbersome cap-and-trade permit system.
Every major user of fossil fuel would need to buy permits to emit CO2, and those permits would trade in a special marketplace.
The market price of the permits would be equivalent to paying a tax on CO2 emissions.
Unfortunately, cap-and-trade systems are difficult to manage and don’t give clear signals about the future price of permits.
Europe has adopted such a system, but other parts of the world have repeatedly rejected it.
In fact, Europe’s biggest successes in promoting low-carbon energy have come from its feed-in tariffs, and carbon taxes in some countries, rather than its cap-and-trade system.
The time has come for the US, China, India, and other major economies to declare how they will foster their own transition to a low-carbon economy.
A small and gradually rising carbon tax that funds a feed-in tariff system could win political support in the US.
It could also help to foster consensus among the major coal-based economies, including China and India.
There really are effective long-term solutions to manmade climate change that are politically acceptable and feasible to implement.
It is time to embrace them.
A New Science
An unusual meeting of scientists took place in Paris this summer, when scientists gathered to brainstorm about the need for a new science, one that could be as revolutionary as Einstein’s insights were a century ago.
Most scientists assume that the basics of science are known.
In terms of big challenges, the conventional wisdom is that few things are left to discover.
The remaining options are said to fall into three groups: “grand scientific quandaries” (such as uniting gravity and electricity into one theory) which require a huge investment and first world infrastructure; “data collection,” which is the field work associated with archeological digs and biological/genetic surveys; and “science-informed problems,” such as combating AIDS or addressing global warming.
Beyond that, many believe the only hard work will be to use existing laws to benefit humankind in new technological ways.
Who can argue?
After all, today’s models work.
But an emerging group of scientists points to phenomena that current theories do not address well.
These problems are exceedingly common and artfully avoided because the science that would account for them just doesn’t exist.
This missing science would describe processes, and how entire systems evolve.
Individual scientific disciplines are understood fairly well.
Physics, at least the physics we encounter as ordinary humans, is well mapped.
Chemistry and biochemistry are similarly solid -- there are some things we don’t understand about the body, but it is believed that the basic machinery of how cells and molecules interact is known.
Slightly apart from these are the new social sciences, which deal with humans and societies.
In each of these areas -- physics, biochemistry and social science -- the theories are mature and largely uncontroversial.
Each discipline has its own language and its own separate machinery.
Rarely is a scientist an expert in more than one area, because the worlds and languages are so different.
This means that we can’t answer complex questions that depend on more than one field.
Consider the brain, for example.
This complex organ is composed of molecules that interact using the principles of physics.
That information moves according to the laws of electricity.
There is also a system of specialized cells, and these interact, exchanging chemicals that also convey information.
The interaction between two brains adds another level: here, information is exchanged by means of languages, signs and ideas.
Information is at work on each level and comfortable theories explain how the separate ones operate.
But information is being exchanged between the levels as well. There is no science that explains this, even at the most rudimentary level.
To cope with this deficiency, some scientists have tried to reinvent the tools of one level in order to apply them to another.
This leads to such things as a “language” at the level of cells and “energy” behind organized societies.
Sometimes the transplant works well enough, but it does not address the central problem: What is the nature of the information conveyed between each level, and how is it conveyed?
As it happens, nearly every system in the world is composed of such layers.
A similarly embarrassing lack of understanding about how the whole system works exists in every case.
The group of interdisciplinary scientists that met in Paris is loosely affiliated under the banner “Foundations of Information Science.”
They have been working in a distributed collaboration for eight years and come from a range of countries and specialties.
As well as scientists from the relevant disciplines, art theorists, psychiatrists, language experts and philosophers are beginning to participate in the discussion.
Most of the group is banking on the “transplant” strategy, in which the basic science of one layer is placed in another, tweaked and supplemented in order to be functional.
Others think that a whole new approach is required.
They assume that many scientific conventions are accidents of history and new abstractions can be devised.
If the FIS group is lucky, there will also be some radical input from thinkers that do not presently have access to first world infrastructure.
Independent thinking is an underestimated factor.
Nearly all the activities collected under the banner of “science” have developed institutional tendencies that are similar to their economic counterparts.
It is usually assumed that developing economies need to build resources that emulate those in the developed world, but this could actually stifle the most creative thinking.
Many scientific disciples are going through a revolution, and a lot of those ideas -- sometimes revolutionary ideas -- are bubbling up from labs and research centers that are unaffiliated with large institutions.
Twenty years of the most advanced thinking for mathematical algorithms came from a Soviet empire starved of computing power.
The cleverest, most literally earth-shattering notions of physics for two generations came not from the expected powerhouses of the day, but from Budapest.
Iran has a tradition of architectural design that has revealed key insights to cognitive scientists.
Today, some of the most radical new ideas in second generation artificial intelligence (so-called “autonomous agents”) are incubating in Prague.
The most creative breakthroughs became famous events.
When Einstein added new abstractions to the language of physics, the identity of space and time changed.
The FIS meeting in July was the unheralded beginning of an attempt to remodel the universe in such a way. The group identified the gaps that need explanation.
They will expand their pool of thinkers to include scientists from necessarily innovative regions.
Following this, they will identify which problems might be solved if this new science is developed. Or if you wish, discovered.
A New Start for Non-Proliferation
VIENNA – US President Barack Obama has injected fresh momentum into efforts – stalled for a decade – to bring about nuclear disarmament.
He has committed himself to the vision of a world free of nuclear weapons and acknowledges the link between nuclear non-proliferation and disarmament by the nuclear-weapon states.
Obama has pledged to revitalize the 1970 Nuclear Non-Proliferation Treaty (NPT), which aims to prevent the spread of nuclear weapons.
The non-proliferation regime, of which the NPT is the cornerstone, is in disarray.
The main problems are easily identified.
First, the five main nuclear-weapon states have not taken seriously their NPT obligation to work for nuclear disarmament.
Instead, they have insisted that nuclear weapons are essential for their security and continued to modernize their nuclear arsenals.
This naturally robs them of the moral authority to persuade others not to acquire nuclear weapons, which continue to be perceived as a source of power and influence, and an insurance policy against attack.
Second, as we have seen in the case of North Korea, there is nothing to stop countries that sign the Treaty from simply walking out after declaring that “extraordinary events” have jeopardized their supreme interests.
Third, the International Atomic Energy Agency, which is supposed to police the non-proliferation system, is shamefully underfunded.
When it comes to determining whether or not a country is conducting a covert nuclear weapons program, IAEA inspectors often have their hands tied, either because they lack the legal authority to gain access to all the locations they consider necessary, or because the IAEA’s analytical laboratories are outdated, or because the Agency does not have adequate access to satellite imagery.
Fourth, export controls have failed to prevent the spread of sensitive nuclear technology, not least due to the sophisticated efforts of clandestine networks like the one run by Pakistani nuclear scientist A.Q. Khan.
Nine countries already have nuclear weapons, and it would be naive to presume that others, particularly in regions of conflict, will not try to get hold of them.
In addition, a number of countries with nuclear energy programs have the capability, if they choose, to manufacture nuclear weapons within a matter of months if their security perceptions change, because they have mastered the critical technology – uranium enrichment and plutonium reprocessing.
If more countries take this path, it could prove to be the Achilles’ heel of non-proliferation.
Fifth, the international community, spearheaded by the United Nations Security Council, has more often than not been paralyzed in the face of challenges to international security and ineffectual in responding to suspected cases of nuclear proliferation.
These issues will not be resolved overnight.
But there is much that can be done relatively quickly.
The United States and Russia have started negotiations on deep cuts in their nuclear arsenals, which together account for 95% of the world’s 27,000 warheads.
Other key steps include bringing into force the Comprehensive Nuclear Test Ban Treaty; negotiating a verifiable treaty to end production of fissile material for use in weapons; radically improving the physical security of nuclear and radioactive materials, which is vital to prevent them from falling into the hands of terrorists; and strengthening the IAEA.
Last month, I proposed a key measure to strengthen non-proliferation to the IAEA’s Board of Governors – establishing an IAEA bank of low-enriched uranium (LEU) to guarantee supplies to countries that need nuclear fuel for their power reactors.
LEU cannot be used to make weapons.
Some such mechanism will be essential in the coming decades as more and more countries introduce nuclear energy.
My proposal is to create a physical stockpile of LEU at the disposal of the IAEA as a last-resort reserve for countries with nuclear power programs that face a supply disruption for non-commercial reasons.
This would give countries confidence that they can count on reliable supplies of fuel to run their nuclear power plants, and therefore do not need to develop their own uranium-enrichment or plutonium-reprocessing capability.
This could help to avoid a repeat of Iran’s experiences after its 1979 revolution, when contracts for fuel and technology for its planned nuclear power program were not honored.
Thirty years later, some of the consequences are still being felt.
The LEU would be available to countries in need on the basis of non-political and non-discriminatory criteria.
It would be accessible at market prices to all states in compliance with their nuclear safeguards obligations.
No state would be required to give up the right to develop its own fuel cycle.
The money needed to launch an LEU bank is in place, thanks primarily to a non-governmental organization – the Nuclear Threat Initiative – and initial funding from Warren Buffett.
But this can only be a first step.
It should be followed by an agreement that all new enrichment and reprocessing activities will be placed exclusively under multinational control, and that all existing such facilities will be converted from national to multinational control.
This is a bold idea, but bold ideas are needed now more than ever.
The opportunity to put the nuclear fuel cycle under multinational control was missed 60 years ago because of the Cold War.
The spread of nuclear technology and the growing risk of nuclear terrorism make it imperative that we get it right this time.
A New-State Solution for Israel and Palestine
PRINCETON – Imagine a two-state solution in Israel and Palestine in which Palestinians would have the right of return; Israelis could settle wherever they could purchase land in the West Bank; and Jerusalem need not be divided.
This is not a fanciful vision, but a creative and eminently sensible reinvention of twenty-first century statehood.
And US President Barack Obama’s just-completed visit to Israel provides an opportunity to explore genuinely new thinking.
Ever since Bill Clinton nearly succeeded in brokering a comprehensive settlement in 2000, the mantra among supporters of the Israeli-Palestinian peace process has been that, while a solution exists, Israeli and Palestinian leaders who are willing to reach it do not.
The solution is a version of the deal that Clinton sought: two sovereign states based on the 1967 borders, with negotiated land swaps to reflect existing settlement patterns.
Palestinians’ renunciation of the right of return; Israel’s willingness to dismantle settlements outside the agreed borders; and recognition of both states across the Middle East.
But suppose that the reason that no Palestinians and Israelis willing to conclude such a deal have emerged is that the solution itself is domestically unsupportable on both sides.
Suppose that as long as a version of this deal is the only game in town, the creeping physical expansion of the Israeli state and the demographic expansion of Israeli Arabs will continue to erode its foundation.
For all the dire warnings that the window for a two-state solution is rapidly closing (or has already closed), it is the solution itself that is the problem.
In 2008, a Princeton University graduate student in philosophy named Russell Nieli gave a talk at the Princeton Center for Jewish Life that was so well received that he later expanded it into an article for the US-based magazine Tikkun, founded by Rabbi Michael Lerner.
The article, “Toward a Permanent Palestinian/Israeli Peace – the Case for Two-State Condominialism,” was published with the express aim of stimulating “productive thinking among a younger generation of Jews and Arabs not bound by the restricted vision and failed policies of the past.”
“Two-state condominialism” is as visionary as the name is clunky.
The core idea is that Israelis and Palestinians would be citizens of two separate states and thus would identify with two separate political authorities.
Palestine would be defined as a state of the Palestinian people, and Israel as a Jewish state.
Under “condominialism,” however, both Palestinians and Jews “would be granted the right to settle anywhere within the territory of either of the two states, the two states thus forming a single, binational settlement community.”
Think about that for a minute.
As Nieli describes it, Palestinians “would have the right to settle anywhere within Israel just as Jews would have the right to settle anywhere within the territory of the Palestinian state.
Regardless of which of the two states they lived in, all Palestinians would be citizens of the Palestinian state, all Jews citizens of Israel.” Each state would have the authority and the obligation to provide for the economic, cultural, religious, and welfare needs of its citizens living in the other state’s territory.
These would be extraterritorial rights and responsibilities, just as the United States, for example, provides for its large numbers of expatriates, such as civilian dependents of US military personnel based abroad.
To make this work, the borders of each state would first have to be defined – presumably on the basis of the 1967 borders, with mutually agreed territorial swaps.
Israeli Arabs would then be required to transfer their citizenship, national identity, and national voting rights – but not their residence – to the new Palestinian state.
They would have a permanent right to live in Israel and would retain the benefits to which they are currently entitled as Israeli citizens, but they would now vote as citizens of Palestine.
All other Palestinians living in Israel would have rights and benefits only under Palestinian law.
Condominialism recognizes the reality of the deep interconnectedness of Israeli settlers in the West Bank with the rest of Israel –&#160;through roads, water supplies, electricity grids, administrative structures, and economic relationships (just as Israeli and Palestinian parts of Jerusalem are interdependent).
Instead of trying to separate and recreate all of these structures and relationships, it makes far more sense to build on them in ways that benefit both states’ peoples and economies.
And, in a world in which many citizens spend an increasing proportion of their time in virtual space, de facto condominialism is already happening.
In the 1950’s, after four decades of war across Europe, the idea of a European Union in which member states’ citizens could live and work freely across national borders while retaining their political allegiance and cultural identity seemed equally far-fetched.
(Indeed, the name of the political process by which the EU was to be constructed, “neo-functionalism,” was every bit as abstract and cumbersome as “two-state condominialism.”)
Yet French and German statesmen summoned the vision and the will to launch a bold experiment, one that has evolved into a single economy of 500 million people.
Why shouldn’t another site of ancient enmities be the source of a new conception of statehood?
Interestingly, many young people in the 1950’s, like my Belgian mother, ardently supported the vision of a new Europe.
Today’s young Israelis and Palestinians pride themselves on their entrepreneurialism, with all the risk and vision that starting something new entails.
Supporting and contributing to an innovative political start-up would be their generation’s defining act.
A New US Agenda for Latin America
MEXICO CITY – For the next American president, fixing the international mess inherited from the Bush administration will be no simple task.
While Latin America will not be a priority for either an Obama or McCain administration, continuing the United States’ neglect of the last seven years is no longer viable.
Two distinct political/diplomatic challenges stand out: Cuba’s imminent transition or succession crisis, and the continuing ascent of the region’s “two lefts,” one represented by Venezuela’s President Hugo Chávez and the other by Brazil’s increasingly influential President Luiz Inácio Lula da Silva.
The next US administration will only prove successful if it grasps that Latin America is living through a moment that combines the best and worst aspects of its history: the fastest economic growth since the 1970’s, with poverty and inequality diminishing, and more democratic and respectful of human rights than ever before, but becoming more politically polarized.
In Cuba, Fidel Castro’s eventual passing from the scene represents an immense challenge.
The US cannot continue with the failed policies of the past half-century.
Demanding a full-fledged democratic transition as a pre-condition for normalizing US-Cuban relations is both unrealistic and unpalatable to Latin America.
Yet the US cannot set aside the question of democracy and human rights in Cuba while it awaits the departure of Fidel’s brother, Raúl.
Realpolitik and fear of another exodus of Cuban refugees across the Florida Straits may tempt the US to pursue a “Chinese” or “Vietnamese” solution to Cuba: normalizing diplomatic relations in exchange for economic reform, while leaving the question of internal political change until later.
But the US should not succumb to this temptation.
The US, Canada, Europe, and Latin America have constructed a regional legal framework, which must not be abandoned, to defend democratic rule and human rights in the hemisphere.
Cuba needs to return to the regional concert of powers, but it must accept this concert’s rules.
Holding free and fair elections may not be the primary issue, but nor are they issues that should be shelved in the interests of stability and expediency.
Elections must instead be part of a comprehensive process of normalization: they should neither be a deal-breaker nor a non-issue.
While the US should lift its trade embargo as soon as Cuba’s transition begins, everything else should be conditional on Cuba initiating a process of resolving all outstanding issues.
But Cuba is just part of what might be called Latin America’s “left” problem.
Indeed, much has been written recently about the ascent of the left in Latin America over the past decade.
In fact, there are two lefts in the region: a modern, democratic, globalized and market-friendly left, found in Chile, Brazil, Uruguay, parts of Central America, and, up to a point, in Peru; and a retrograde, populist, authoritarian, statist, and anti-American left, found in Mexico, El Salvador, Nicaragua, Cuba, Ecuador, Bolivia, Venezuela, and, to a lesser extent, in Argentina, Colombia, and Paraguay.
Some of these “lefts” are in power; some, as in Mexico in its last, disputed presidential election, barely missed conquering it, but may still do so.
Over the past two years, it has become increasingly evident that the “modern” or “soft” left is, all in all, governing well. The other left has proved to be more extreme and erratic than many anticipated.
The former feels no urge to “export” its “model,” whereas the latter has a strategy and the means to do so.
The retrograde left today can realize Che Guevara’s old dream: not “one, two, many Vietnams,” but “one, two, many Venezuelas,” winning power by the ballot and then conserving and concentrating it through constitutional changes and the creation of armed militias and monolithic parties.
It can finance all of this with the support of Venezuela’s state oil company, implementing social policies that are misguided over the long term but seductive in the short run, especially when carried out by Cuban doctors, teachers, and instructors.
Herein lies a dilemma for the next US president: how to address the clear rift between the two lefts in a way that improves US-Latin American relations, fortifies the modern left, and weakens the retrograde left without resorting to the failed interventionist policies of the past.
The best, strictly Latin America-focused steps, are self-evident, if not easily achievable.
They require strengthening those governments of the modern left, or those of the center or center-right threatened by the old-fashioned left, and simultaneously making it clear to the latter that there is a price to be paid for violating the basic tenets of democracy, respect for human rights, and the rule of law.
Turning its back in the face of such challenges is no longer a viable American option.
Aside from areas of particular concern (oil, arms, guerrillas, drugs), the US needs Latin America dearly nowadays because resistance to it is springing up everywhere, and with greater virulence than at any time since World War II’s end.
The next US president must reinvigorate a relationship that is ready to be substantially transformed for the first time since Franklin Roosevelt’s Good Neighbor Policy of seven decades ago.
A New Velvet Revolution
PRAGUE: Rebellion by Czech TV journalists against a new director of the publicly-owned Czech TV marks the climax of a ten year battle between two concepts of democracy.
The first concept is represented by former prime Minister Vaclav Klaus, the second by President Vaclav Havel.
Klaus sees political parties as the backbone of any democratic system and sees little place for civil society in politics.
He deems the proponents of civil society “elitists” who refuse to be tested at the ballot box and who try to influence politics through informal mechanisms.
President Havel argues that a democracy based only on political parties and basic democratic mechanisms is deformed.
In his view, political parties, although necessary, must be checked by a robust civil society.
If civil society is too weak, parties will seek to dominate institutions that should remain independent.
Over the past ten years President Havel has repeatedly asked the Czechs to be more active and to not let politicians control their lives.
Klaus’s vision of democracy had the upper hand for most of the past decade.
Easily understood, it conformed to patterns of behavior most Czechs acquired during the communist era, when public and private spheres of life were rigidly separated.
True, communism’s fall was brought about by a strong civic movement called “Civic Forum”, but that movement disintegrated once it achieved its goal.
With its passing, people became passive once more.
Klaus and his followers spearheaded the creation of well-functioning, standard political parties.
But in the absence of a strong civil society, those parties monopolized public space, pushing civic activists to the sidelines.
Havel was the first important Czech politician to criticize this trend, warning against excessive partisanship and arguing that political parties would become internally weak but outwardly authoritarian if they did not draw inspiration from a vibrant civil society.
Unfortunately, Havel’s vision of democracy appears complicated when compared to that of Klaus.
In the past, calls for active civic engagement and Havel’s moralistic views left average Czechs cold and alienated political opponents, who accused him of promoting a nonpolitical form of politics.
Prompted by civic passivity, political parties not only came to dominate every aspect of Czech life but engaged in dubious practices that increased cynicism and public passivity.
At the end of 1997, the second Klaus government collapsed under the weight of financial scandals.
Rather than learn from this fiasco, Klaus went on the offensive, claiming that he was a victim of a conspiracy hatched by Havel.
But his party, the Civic Democrats (ODS), lost the June 1998 elections to the Social Democrats (CSSD), whom Klaus vilified before the elections as a threat to democracy.
Soon afterwards, however, the Civic Democrats and the Social Democrats signed the so-called “opposition agreement”, under which Klaus’s party gained important posts and other advantages in exchange for allowing the Social Democrats of Prime Minister Zeman to form a minority government.
Klaus, Zeman and their parties also agreed to work together to limit presidential power and the independence of the Central Bank by changing the Constitution, as well as to change the electoral law in their favor.
Four smaller parties, who allied themselves in a four-party coalition called “4K” objected.
Protests against these political arrangements were criticized by the ODS and CSSD as attempts to undermine their efforts to ensure political stability.
Despite the fact that the opposition agreement boosted the popularity of the unreformed Czech Communists, the determination of the Civic Democrats and Social Democrats to continue dividing the spoils of power remained undiminished.
In the fall of 2000, Czech voters rebuked both parties during regional and Senate elections, with the Social Democrats losing their joint majority in the Senate.
Because the Czech Parliament’s upper house has an absolute veto over constitutional amendments, the opportunity to amend the Constitution was lost.
Loss of control of the Senate also meant that Klaus’s hope to replace Havel as president diminished.
Defeat prompted Klaus and Zeman to try to and gain control over Czech TV by packing its council of overseers with their sympathizers.
Shortly before Christmas, Czech TV’s director, who was resisting political pressure, was replaced by Jiri Hodac, a man with close ties to ODS.
TV journalists rebelled, occupying the station's newsroom.
The protests by artists, intellectuals and opposition politicians that followed were the biggest political upheavals since 1989.
Realizing that the game was lost, the Social Democrats joined with Klaus’s opponents in parliament on January 5th to demand Hodac’s resignation.
Parliament is also working on a new TV law to prevent political parties from politicizing the TV Council.
But political realignment is not the most important news arising from this turmoil.
Of far greater importance is the reawakening of civil society which has, for the first time since 1989, stood up to the political parties to reclaim the public space it relinquished ten years ago.
Equally important is the fact that for the first time since 1989, civil society has found a voice independent of President Havel.
Unrecognized by almost everyone, Czech society has moved beyond Havel and Klaus.
It rejects Klaus’s truncated democracy, and, although it supports (to some extent) Havel’s vision, Havel himself is no longer the motor of civil society in action.
A New World Architecture
NEW YORK – Twenty years after the fall of the Berlin Wall and the collapse of communism, the world is facing another stark choice between two fundamentally different forms of organization: international capitalism and state capitalism.
The former, represented by the United States, has broken down, and the latter, represented by China, is on the rise.
Following the path of least resistance will lead to the gradual disintegration of the international financial system.
A new multilateral system based on sounder principles must be invented.
While international cooperation on regulatory reform is difficult to achieve on a piecemeal basis, it may be attainable in a grand bargain that rearranges the entire financial order.
A new Bretton Woods conference, like the one that established the post-WWII international financial architecture, is needed to establish new international rules, including treatment of financial institutions that are too big to fail and the role of capital controls.
It would also have to reconstitute the International Monetary Fund to reflect better the prevailing pecking order among states and to revise its methods of operation.
In addition, a new Bretton Woods would have to reform the currency system.
The post-war order, which made the US more equal than others, produced dangerous imbalances.
The dollar no longer enjoys the trust and confidence that it once did, yet no other currency can take its place.
The US ought not to shy away from wider use of IMF Special Drawing Rights.
Because SDRs are denominated in several national currencies, no single currency would enjoy an unfair advantage.
The range of currencies included in the SDRs would have to be widened, and some of the newly added currencies, including the renminbi, may not be fully convertible. This would, however, allow the international community to press China to abandon its exchange-rate peg to the dollar and would be the best way to reduce international imbalances.
And the dollar could still remain the preferred reserve currency, provided it is prudently managed.
One great advantage of SDRs is that they permit the international creation of money, which is particularly useful at times like the present.
The money could be directed to where it is most needed, unlike what is happening currently. A mechanism that allows rich countries that don’t need additional reserves to transfer their allocations to those that do is readily available, using the IMF’s gold reserves.
Reorganizing the world order will need to extend beyond the financial system and involve the United Nations, especially membership of the Security Council.
That process needs to be initiated by the US, but China and other developing countries ought to participate as equals.
They are reluctant members of the Bretton Woods institutions, which are dominated by countries that are no longer dominant.
The rising powers must be present at the creation of this new system in order to ensure that they will be active supporters.
The system cannot survive in its present form, and the US has more to lose by not being in the forefront of reforming it.
The US is still in a position to lead the world, but, without far-sighted leadership, its relative position is likely to continue to erode.
It can no longer impose its will on others, as George W. Bush’s administration sought to do, but it could lead a cooperative effort to involve both the developed and the developing world, thereby reestablishing American leadership in an acceptable form.
The alternative is frightening, because a declining superpower losing both political and economic dominance but still preserving military supremacy is a dangerous mix.
We used to be reassured by the generalization that democratic countries seek peace.
After the Bush presidency, that rule no longer holds, if it ever did.
In fact, democracy is in deep trouble in America.
The financial crisis has inflicted hardship on a population that does not like to face harsh reality.
President Barack Obama has deployed the “confidence multiplier” and claims to have contained the recession.
But if there is a “double dip” recession, Americans will become susceptible to all kinds of fear mongering and populist demagogy.
If Obama fails, the next administration will be sorely tempted to create some diversion from troubles at home – at great peril to the world.
Obama has the right vision.
He believes in international cooperation, rather than the might-is-right philosophy of the Bush-Cheney era.
The emergence of the G-20 as the primary forum of international cooperation and the peer-review process agreed in Pittsburgh
What is lacking, however, is a general recognition that the system is broken and needs to be reinvented.
After all, the financial system did not collapse altogether, and the Obama administration made a conscious decision to revive banks with hidden subsidies rather than to recapitalize them on a compulsory basis.
Those institutions that survived will hold a stronger market position than ever, and they will resist a systematic overhaul.
Obama is preoccupied by many pressing problems, and reinventing the international financial system is unlikely to receive his full attention.
China’s leadership needs to be even more far-sighted than Obama is.
China is replacing the American consumer as the motor of the world economy. Since it is a smaller motor, the world economy will grow slower, but China’s influence will rise very fast.
For the time being, the Chinese public is willing to subordinate its individual freedom to political stability and economic advancement.
But that may not continue indefinitely – and the rest of the world will never subordinate its freedom to the prosperity of the Chinese state.
As China becomes a world leader, it must transform itself into a more open society that the rest of the world is willing to accept as a world leader. Military power relations being what they are, China has no alternative to peaceful, harmonious development.  Indeed, the future of the world depends on it.
A New Year\u0027s Resolution
It is time for New Year's resolutions, and this year's are obvious.
When the millennium opened, world leaders pledged to seek peace, the end of poverty, and a cleaner environment.
Since then, the world has seen countless acts of violence, terrorism, famine, and environmental degradation.
In 2005, we can begin to change direction.
Knowledge, scientific advance, travel, and global communications give us many opportunities to find solutions for the world's great problems.
When a new disease called SARS hit China last year, the World Health Organization coordinated the actions of dozens of governments, and the crisis was quickly brought under control, at least for now.
When Bill Gates donated $1 billion to bring vaccines to poor children, he made it possible to protect tens of millions of young people from preventable diseases.
When an agricultural research unit called the World Agroforestry Center discovered that a certain tree could help African farmers grow more food, they introduced a new and valuable approach to overcoming Africa's chronic food crisis.
Unfortunately, such examples of international cooperation are as rare as they are impressive.
With our knowledge, science, and technology, the horrendous living conditions of the world's poorest people could be dramatically improved.
Millions of people could be spared malaria, HIV/AIDS, hunger, and life in slums.
The problem is not that we lack good solutions. The problem is that we fail to cooperate globally to put those solutions into practice.
United Nations Secretary-General Kofi Annan has honored me by making me his Special Adviser on the Millennium Development Goals and asking me to lead a group of scholars and development experts in identifying practical steps to reach the goals by the target date in 2015.
This effort, known as the UN Millennium Project, will issue its report to Secretary-General Annan on January 17, 2005.
Our study, Investing in Development: A Practical Plan to Achieve the Millennium Development Goals , will be available for free around the world at www.unmillenniumproject.org .
What we learned is easily summarized.
For every major problem - hunger, illiteracy, malnutrition, malaria, AIDS, drought, and so forth - there are practical solutions that are proven and affordable.
These investments, in turn, would strengthen the private sector and economic growth.
Yet they require global partnership between the rich and poor countries of the world.
Most importantly, the world's richest countries need to do much more to help the poorest countries make use of modern science and technology to solve these great problems.
The US, for example, currently spends around $450 billion each year on its military, but less than $15 billion to help the world's poorest countries fight disease, educate their children, and protect the environment.
This is a mistake, because military approaches alone cannot make America safe.
Only shared prosperity can truly make the planet secure.
The US should be investing much more in peaceful economic development.
Germany, Japan, and several other rich countries are also doing much less than they should - and much less than they promised the poor countries that they would do.
In 2002, all donor countries committed to "make concrete efforts" to reach 0.7% of national income in development aid to poor countries.
Germany, Japan, and the US, among others, remain far below this commitment.
The year 2005 will offer many opportunities for citizens around the world to insist that their leaders keep their Millennium promises.
After our report is issued in January, Secretary-General Kofi Annan will issue a report to the world in the spring, identifying the practical steps that should be taken this year.
Around the same time, an important commission on Africa will issue a report to United Kingdom Prime Minister Tony Blair.
Then, in July, the UK will host the annual G-8 Summit of the rich countries.
Blair has promised that he will make the fight against poverty and long-term climate change the two priorities of the summit.
In September, the world's leaders will reconvene at the UN to decide on their actions during the coming decade.
The rich and powerful nations often declare their leadership in the world.
The US claims that it helps the world fight poverty, but instead spends its money on weapons.
Germany and Japan say that they want a permanent seat on the UN Security Council, but neither has yet followed through on its own pledges to help the world's poorest people.
The world's poorest countries will ask themselves why they should vote for Germany and Japan to have permanent seats on the Security Council if they can't keep their promises.
Nothing would be wiser for the world's rich countries than to fulfill their pledges to the world's poor, hungry and disease-ridden peoples.
Therein lies the path to sustained peace.
2005 is the year that words can become reality, and that the world can begin to fulfill its hopes for our new millennium.
Let us make our leaders aware that we aspire to shared peace and prosperity.
Let us pledge that the rich and powerful should take real actions to help the poor, the weak, and the suffering.
An External Stability Pact for Europe
BERLIN – The current economic crisis has exposed two fundamental problems in the design of the European Monetary Union.
The first concerns the sustainability of public finances in a number of euro-zone member states.
Second, inadequate macroeconomic policy coordination has resulted in divergences in the international competitiveness of euro-zone members, threatening the very existence of the euro.
Countries whose public finances seemed fundamentally sound as late as last year have come under severe fiscal pressure.
Ireland’s government debt is expected to rise to almost 80% of GDP by 2010, whereas just a year ago the European Commission projected that Ireland’s government debt would be below 30% of GDP.
Likewise, whereas Spain was expected to decrease its debt ratio, its debt-to-GDP ratio is now likely to double between 2007 and 2010, to more than 60%.
The EU’s fiscal surveillance mechanisms failed to predict these developments because they neglect a crucial variable: the dynamics of private-sector debt.
Given the high economic costs of a banking crisis, governments are likely to take on the liabilities of their financial sector when a crisis hits – as recently occurred in the United Kingdom and Ireland, and in financial crises in Latin America and Asia in the 1990’s.
The same is probably true when key business sectors near insolvency.
A country with sound public finances can thus become a fiscal basket case practically overnight.
Given the increasingly close financial and economic linkages between euro-zone members, rising government debt in even one EMU country can have serious consequences for all members, because no member state will allow another to default.
Thus, EMU members indirectly share the liability for fellow countries’ private-sector debt, which for this reason should be monitored within the EMU’s surveillance framework.
Another apparent problem is that EMU member states – at least until now – do not coordinate their economic policies effectively.
Even before the crisis, this resulted in divergences in competitiveness and in the business cycle.
The persistent loss in competitiveness over the past decade is one reason why the crisis is hitting some southern European EMU countries such as Spain and Italy so hard.
The inefficiency of fiscal-policy control and the lack of economic convergence are a matter of increasing concern to both the European Central Bank and euro-zone finance ministers.
While no initiative for coping with these problems has been tabled so far, the issue is certain to become a matter of debate within the EMU.
One way to tackle the problems associated with government debt, as well as to improve economic policy coordination, is through a simple extension of existing rules: an “External Stability Pact” could be introduced to complement current EMU regulations.
This pact would monitor current-account imbalances and penalize excessive deficits or surpluses in the external account.
Monitoring external balances can be an effective tool to measure future default risks, since sustained current-account deficits lead to a growth in net foreign debt.
Moreover, there is a direct relationship between the EMU countries’ private-sector debt dynamics and their current-account imbalances within the euro zone.
So long as a national government is not running more than a modest deficit, a current-account deficit reflects the private sector’s borrowing from abroad (or the sale of previously accumulated foreign assets).
If the current-account balance is assessed together with the fiscal position, it becomes possible to draw conclusions about risky debt trends within the private sector.
The mathematics of debt dynamics suggest that no euro-zone country should have a current-account imbalance, whether a deficit or a surplus, of more than 3% of GDP.
Exceptions could be granted for countries with large inflows of foreign direct investment in greenfield projects.
The rule should apply both to debtor and creditor countries.
After all, payment imbalances always have two sides, and the burden of adjustment should not be borne only by deficit countries.
Such a pact would oblige governments to use fiscal and wage policies as well as overall economic policy to achieve external balance.
It would also lead to broader economic-policy coordination, particularly with respect to wage-setting, because governments would be compelled to use national legislation and public-sector wage settlements to influence wage policy in such a way that imbalances among euro-zone countries are reduced.
Furthermore, an External Stability Pact would oblige governments to take into account the consequences for other member states when designing national economic reforms.
If a “surplus country” such as Germany wanted to lower non-wage labor costs and increase value-added tax in order to boost its competitiveness, it would simultaneously have to adopt an expansive fiscal policy to compensate for the negative effects on its partners’ foreign trade.
Within the framework of these rules, individual countries would retain the authority to design their policies.
The Spanish government, for example, could have met Spain’s building boom and foreign-trade deficit with tax increases or by urging domestic wage restraint.
Alternatively, it could have intervened by instituting planning regulations or imposing limits on mortgage loans.
An External Stability Pact would not only detect risks to fiscal stability early on; it would also help make a reality of a fundamental principle of EU law, namely that member states finally treat economic policy as a “common interest.”
In Defense of Angela Merkel
PARIS – The recent cover of Der Spiegel showing German Chancellor Angela Merkel in front of the Acropolis surrounded by Nazi officers serves an important purpose: it finally poses, in a way that cannot be evaded, the question of Germanophobia in Europe.
The abuse of Germany has dragged on for quite some time.
Demonstrations in Cyprus in March 2013 included banners bearing caricatures of Merkel done up as Adolf Hitler.
In Valencia at around the same time, on the occasion of the annual Fallas celebration, there was Merkel as an evil headmistress delivering to the head of the Spanish government and his ministers “The Ten Commandments of Angela the Exterminator.”
She ended up being burned in effigy in the flames of the bonfires of St. Joseph.
Two months later, in Portugal, similar parades featured the same Hitlerized Merkel caricatures, borne by howling demonstrators dressed in mourning clothes and decrying the German leader’s “policy of massacring the poor.”
And, naturally, there was Greece, where the phenomenon reached its apogee during the near-riots of October 2012, in which the world was treated to the spectacle of Nazi and German flags flown together – and then burned – together before the Acropolis in scenes that presaged the Der Spiegel cover.
In Italy, the right-wing daily newspaper Il Giornale had no scruples about devoting its headline for August 3, 2012, to the emergence of the “Fourth Reich.”
Likewise, conspiracy websites in the countries of northern Europe claim that Germany’s eagerness to support Ukrainian President Petro Poroshenko against Russian President Vladimir Putin is a reenactment of Hitler’s subjugation of Ukraine.
Then there is France, where the game seems to be to see who can come out on top in populist denunciations of the new and detestable “German empire.”
From the extreme right, National Front leader Marine Le Pen chides Merkel for the “suffering” that she is imposing on the peoples of Europe.
From the opposite extreme, we have the Left Party’s Jean-Luc Mélenchon thundering against Merkel’s “austerity” policy and inviting her to “shut up.”
The problem with this Germanophobia is not simply that it is stupid, or that it is yet another symptom of the decomposition, before our eyes, of the noble European project of integration and ever-closer union.
No, the problem with today’s Germanophobia is that, contrary to what the sorcerer’s apprentices who stoke it would have us believe, their behavior is not a sign of their opposition to the true fascism that lies on the horizon, but rather of their allegiance – and even contribution – to it.
Why?
There are several reasons.
For starters, to oppose Germany’s social, economic, and foreign policies by equating Merkel with Hitler is to banalize Hitler.
However legitimate disagreement with those policies may be, Germany is one of the continent’s most scrupulous and exemplary democracies.
To say that it resembles in any way the Nazi regime – which in Europe still stands for the destruction of democracy (indeed, civilization itself) – is to exonerate that regime, and to reassure and encourage today’s neo-fascists, allowing them, whether intentionally or not, to reenter the public debate.
What is more (and this is key), those keenest to discredit Merkel just happen to be the same people who do not hesitate to waltz with Viennese neo-Nazis or to form an alliance, as in Athens, with the leaders of a genuinely extremist party.
All of the clamor raised around a Germany that has supposedly “reunited with its demons” masks the voice of fascistic parties – from Greece’s Golden Dawn to Hungary’s Jobbik, Slovakia’s SNS, Belgium’s Vlaams Belang, and Bulgaria’s Ataka – that are in the process of establishing themselves in Europe.
It should also be noted that Merkel is a woman, and that hatred for women – the disdain in which they, right alongside the Jews, were regarded by the racist theoreticians of the 1920s and 1930s – has been an essential dimension of every expression of fascism.
Likewise, the slogans slung about in Valencia in October 2012 – with demonstrators urged to chant at the chancellor’s effigy, “You will love money above all else” and “You will honor the banks and the Bank” – had the unmistakably foul odor of the old mantras about “the golden calf” and the “cosmopolitan plutocracy.”
People have finally come to understand that anti-Americanism, born on the extreme right and fed, in Germany, for example, by the philosophy of Martin Heidegger and his acolytes, is a fixture of fascism.
It is now time for us to understand that the same is true of Germanophobia.
In France, it appeared with the French anti-Semitic novelist and activist Maurice Barrès, who saw in the philosophy of Immanuel Kant a vehicle for the “Jewification” of European minds.
It triumphed with Charles Maurras’ Action Française and its protracted war with “Jewish and Germanic abstractions.”
And it culminated with the red-brown cells that, even today, on sites that I prefer not to mention, offer “grub” and a “hideout” for persons willing to “bump off” the “bosses” on the chancellor’s “payroll.”
The history of ideas has its logic, reason, and folly, its unconscious and its trajectory.
It is both futile and dangerous to deny any of them.
That is why, today, it is critically important, in the face of a dark force that is rising, swelling, and unfurling in Europe, to defend Angela Merkel.
Angela Merkel Meets the World
At long last, Angela Merkel is Germany’s new – and first woman – Chancellor.
Although continuity will remain the hallmark of foreign policy, Germany’s international engagement under Merkel will sound and feel different from that under Gerhard Schroeder’s leadership.
Schroeder came to power seven years ago representing a new generation whose formative experience was not the Cold War, European integration, and transatlantic friendship, but German unification and the restoration of national sovereignty.
For him and the team that took over after Helmut Kohl’s 16-year reign, Germany had become a normal country, no different from other European heavyweights like France or Britain.
Indeed, one of Schroeder’s first major foreign-policy experiences was the EU summit of 1999, where the leaders of France and Britain played rough with the newcomer from Berlin.
The lesson that Schroeder drew was to insist that Germany could no longer be taken for granted and would demand a role commensurate to its size and weight.
Self-assertion became the watchword of German foreign policy.
Thus, when Schroeder claimed special circumstances for Germany’s failure to meet the budgetary ceilings of the European Union’s Stability and Growth Pact, he seemed to be arguing that the restrictions should apply only to smaller countries, not to the big players.
When he rightly opposed America’s war against Iraq, the pride of standing up to the world's only superpower was palpable.
When he established a close personal and political relationship with Russian President Vladimir Putin, he signaled to the world – and to the EU’s sensitive new Eastern European members – that Germany’s foreign policy would no longer be constrained by the past.
In fairness, it should be acknowledged that it was under Schroeder that Germany shed hesitations to deploy soldiers abroad.
His support for international crisis missions in Kosovo, Bosnia, or Afghanistan required considerable political courage and made Germany one of the major contributors to international stability efforts.
To have removed the issue from domestic ideological controversy ranks as a major achievement of Schroeder’s tenure.
But it was also meant to convey that Germany had grown up into a proper international power.
With Merkel, the substance of Germany’s foreign policy will change little, but the assertive style will be muted.
American leaders will welcome her election as proof that the estrangement in bilateral relations is over. But that alienation already largely ended earlier this year, when the Bush administration realized that allies are good to have and that Germany is an important one.
Merkel will reintroduce the warmth that has been missing under Schroeder, but she will not become America’s yes-woman.
Nor will she abandon special relations with Russia, to which every German chancellor since Adenauer has attached major importance.
But she has already made clear that Germany’s neighbors to the East will have no reason not feel bypassed.
She may even want to confirm that message by making her first official trip abroad not to Paris but to Warsaw or Vilnius.
On the European project, she is as committed to integration as her predecessors have been.
She will continue to emphasize close relations with France because there is no alternative; Britain, absent from the euro zone and the Schengen border regime, remains the odd man-in of the EU.
But there will be no new initiatives on integration until leaders in the countries that rejected the Constitutional Treaty are ready for a new try.
Then Merkel will be in a key position to add weight to a new effort for moving the EU forward.
She will continue to favor the eventual admission of the Balkan states, but she has left no doubt of her opposition to full membership for Turkey, which is the major substantive change from the Schroeder era (although her government will not block the start of negotiations in early October).
In fact, there is very little Merkel has to do after her election to make her mark on foreign policy; the visible change of style will suffice, at least at first.
In any case, she will have her hands full pushing through the economic reforms for which she will be elected and which are her top priority.
There are indications that Germany is finally emerging from years of economic stagnation, not least thanks to the reforms started under Schroeder.
At home, Merkel can hope to reap the rewards.
Abroad, Merkel has no need to demonstrate that Germany is a big country in Europe; her partners are fully aware of this.
But it is also more than just a normal country: Germany remains central to holding together the two international institutions that will continue to assure its well-being, the European Union and the Atlantic alliance.
There are some indications that Merkel is more aware of this then Schroeder was.
One can only hope that this recognition will serve as her guidepost when tough decisions must be made and changes in style alone will not be enough.
Angela Merkel’s Vision Thing
CAMBRIDGE – As Europe struggles to save the euro, the chorus of complaints about weak leadership in the world’s major economies grows louder.
Many have singled out German Chancellor Angela Merkel for failing to promote a vision of Europe similar to that of her predecessor and mentor, Helmut Kohl.
Are the critics right?
Part of what effective leaders do is communicate a vision that gives meaning to policies and inspires others to support these policies (and those who propose them).
It is one of the ways in which leaders help to create shared objectives and energize common action.
Usually, such a vision provides a scenario for the future that is meant to encourage change, though it may also portray the status quo – or the past – as attractive, thereby encouraging resistance to change.
Either way, without a vision, it is difficult to lead others anywhere.
Frederick Smith, CEO of Federal Express, has argued that “the primary task of leadership is to communicate the vision and values of an organization.”
But one must be cautious about visions.
Sometimes leaders think that vision can solve most of their problems, but the wrong vision – or an overly ambitious vision – can do damage.
George H.W. Bush was faulted (and faulted himself) for not having what he called “the vision thing.”
When pressed by his staff to speak more boldly and expansively, he replied, “It’s just not me.”
After the shock of the September 2001 terrorist attacks, his son, George W. Bush, developed a far more ambitious vision.
As one former adviser put it, he was “irresistibly drawn to Big Ideas like bringing democracy to the Middle East, Big Ideas that stood in sharp contrast to the prudent small ball played by his father.” Yet the elder Bush turned out to have had the better foreign policy.
Some aspiring leaders think that they must proclaim a vision that overawes their followers.
In practice, however, a successful vision often arises from the needs of the group, which are then formulated and articulated by the leader.
The vision that Martin Luther King, Jr., expressed in his “I Have a Dream” speech, for example, was deeply rooted not only in America’s professed values of equality and inclusion, but also in African-Americans’ experience of subordination and exclusion.
At the same time, the pressure to articulate a vision can get a leader into difficulty.
As one university president put it: “Everyone asks, ‘What’s your vision?’
But you offend many people and get into trouble by answering too quickly.
The smart response at the beginning is, ‘What do you think?’ and then listen before you articulate your vision.”
A successful vision has to be attractive to various circles of followers and stakeholders.
What plays well with one group may not sit well with another.
And, to be sustainable, a successful vision must also be an effective diagnosis of the situation that a group faces.
Leaders must get the question right before proposing answers.
To choose goals and articulate them in a vision, they need not only to solicit input from their followers, but also to understand the context of their choices.
They must be able to assess reality accurately.
The boldness of a vision varies with the type of leadership involved.
Leaders of social movements can call forth larger visions than public officials can.
A movement leader can promote a vision that is miles ahead of his followers, while a prime minister with multiple objectives and responsibilities must maintain a continuous dialogue with the public, which keeps him or her from moving too far ahead of citizens.
After former US Vice President Al Gore lost his bid for the presidency in 2000, he became a leader of the social movement to combat global climate change, and his style changed from pragmatic to inspirational and prophetic.
Analysts judge a government leader’s vision in terms of whether it creates a sensible balance between realism and risk, and whether it balances objectives with capabilities.
Anyone can produce a wish list, but effective visions combine inspiration with feasibility.
Critics of former British Prime Minister Tony Blair, for example, acknowledged that his ability to articulate a vision was one of his great strengths as a leader, but complained about his lack of attention to detail.
Similarly, two twentieth-century US presidents, Woodrow Wilson and George W. Bush, were good at articulating an ambitious foreign-policy vision, but were poor at refining and reshaping their vision when they encountered implementation challenges.
Both promoted democracy, but both did so in a manner that generated a backlash against democracy promotion.
Of course, prudence is not enough.
Sometimes leaders need to stretch the boundaries of realism to inspire their followers and call forth extra effort, as Winston Churchill did in Great Britain in 1940.
But, without a degree of prudence based upon comprehension of the context, visions turn from grand to grandiose and undercut the values that they seek to promote.
Like Franklin Roosevelt, who acted very cautiously in trying to persuade American opinion to abandon isolationism in the 1930’s, Merkel has proceeded cautiously on saving the euro.
She faced public skepticism about using German funds to bail out the Greek economy.
Her coalition was divided on the issue, and her party lost state elections.
If she had acted more boldly, she might have lost even more support, but the steps that she agreed to remained insufficient to reassure markets.
At the end of October, however, she finally articulated a vision of the future of Europe that persuaded the German Bundestag to agree to a package of measures to save the euro.
Whether she waited too long – and whether her vision will prove convincing – will be determined in the coming months.
PISA’s Promise
PARIS – By assessing the capabilities and knowledge of students in the highest-performing and most rapidly improving education systems, the OECD’s Program for International Student Assessment provides valuable options for reform and information on how to achieve it.
PISA brings together policymakers, educators, and researchers from around the world to discuss what knowledge students need to become successful and responsible citizens in today’s world, and how to develop more effective, inclusive education systems.
Some claim that the PISA results are based on too wide a range of factors to be relevant, while others point out the challenges inherent in testing students in various languages and with different cultural backgrounds.
Of course, comparing education across countries is not easy, but PISA remains the most useful tool yet developed for policymakers attempting to improve their national education systems.
Before PISA, many governments claimed that they oversaw the world’s most successful education systems, and insisted that they had already taken the steps needed to address any shortcomings.
By exposing weaknesses in a particular country’s system, PISA assessments help to ensure that policymakers recognize – and, it is hoped, address – remaining deficiencies.
The sense of accountability that PISA fosters among governments and education ministers has helped to spur them into action.
They increasingly turn to one another to learn how to apply innovations in curricula, pedagogy, and digital resources; how to offer personalized learning experiences that maximize every student’s chances of success; and how to cope with diversity in the classroom.
The OECD established PISA as a global assessment, because in today’s globalized world students must be able to collaborate with people from diverse backgrounds and appreciate different ideas, perspectives, and values.
To give students the best possible chance to succeed, education must prepare them to handle issues that transcend national boundaries.
But PISA’s most important outcomes lie at the national level, because it inspires innovation and broadens educational perspectives within countries.
Education systems as diverse as those in Finland, Japan, China, and Canada – which seldom registered on policymakers’ radars before – have become global reference points for excellence in education, helping other countries to design effective reforms.
When Brazil emerged as the lowest-performing education system in the first PISA assessment, released in 2000, many people rightly questioned the fairness of comparing an emerging economy to advanced countries like Finland and Japan.
But Brazil rose to the challenge, making massive investments in improving the quality of teaching.
The country now boasts one of the world’s most rapidly improving education systems.
Germany also featured in PISA 2000, recording below-average performance and large social inequalities in education – an outcome that stunned Germans and initiated a months-long public debate.
Spurred into action, the government launched initiatives to support disadvantaged and immigrant students, and made the notion of early childhood education a driving force in German education policy.
Today, PISA reports confirm that the quality and fairness of Germany’s education system have improved considerably.
Even in the world’s best-performing education systems, PISA helps to pinpoint areas for improvement.
For example, PISA assessments have revealed that, while Japanese students excel at reproducing what they have learned, they often struggle when asked to extrapolate from that knowledge and apply it creatively.
The effort that this has inspired to create more innovative learning environments was apparent last April, during a visit to the Tohoku schools destroyed by the 2011 tsunami.
This experience offers yet another lesson: even in cases where social and cultural factors seem to be the main force shaping a country’s education style, improvements are possible.
Countries like Japan do not have to change their cultures to address their educational shortcomings; they simply have to adjust their policies and practices.
Creating a global platform for collaboration in education research and innovation has been the PISA initiative’s aspiration from its conception in the late 1990s.
Since then, policymakers, researchers, and experts have built the world’s largest professional network dedicated to the development of robust, reliable, and internationally comparable information on student learning outcomes.
At the same time, PISA measures students’ social and emotional skills and attitudes toward learning, as well as educational equity and parental support – all of which provides indispensable context for understanding scores on international assessments.
Of course, assessments do not cover every important skill or attitude.
But there is convincing evidence that the knowledge and skills that the PISA system assesses are essential to students’ future success, and the OECD works continuously to broaden the range of cognitive and social skills that PISA measures.
PISA has already prompted important advances in education worldwide.
The OECD will continue to work with the 80 participating countries to develop the program further, so that it can continue to help policymakers and educators design and implement better education policies – and give their citizens access to the tools that they need to build better lives.
The Voices Behind Angelina Jolie
NEW YORK – On May 26, Angelina Jolie’s aunt, Debbie Martin, died of breast cancer at 61.
Jolie’s mother, Marcheline Bertrand, died at 56 from a related illness, ovarian cancer.
And, two weeks before Martin died, Jolie revealed that she had undergone a preventive double mastectomy after testing positive for a BRCA gene mutation – which is correlated with a woman’s being five times more susceptible to breast cancer and 28 times more susceptible to ovarian cancer.
The test for the BRCA mutation is expensive – roughly $3,500.
In the United States, health insurers cover the cost only if a first-degree relative – for example, a woman’s mother – has had a history of breast or ovarian cancer; other women must pay out of pocket.
Given the benefits of preventive care, the test has become highly controversial, because its manufacturer, Myriad Genetics, holds a genetic patent that gives it a monopoly – and huge profits – on all testing.
Jolie’s announcement has thrown a spotlight on that issue.
More broadly, she is that rare entertainer/sex symbol who, like Madonna and a few other women, largely dictates her own narrative about the “meaning” of her celebrity.
For Jolie, that means often using her iconic status to advance a positive agenda, whether the issue is Syrian refugees in Jordan or breast-cancer awareness.
Her revelation of her mastectomy – and the evident support of her partner, Brad Pitt – has elicited a rapturous response from popular media, including the tabloids that once damned her as the “other woman” who broke up Pitt’s previous marriage.
There is something about the narrative – a sex symbol sacrificing her fetishized breasts for the sake of her children, with her husband staying by her side – that is deeply reassuring to women in Western culture.
One can be reasonably certain, however, that Jolie’s decision will alter the roles available to her as an actress.
As enthusiastically as the global mass media has received her choice, it is nonetheless extremely difficult in the West for a woman to be portrayed as maternal – let alone physically “flawed” or “impaired” – and also as a fantasy sex object.
But the real importance of Jolie’s story is its context: a wave of women and men, in very different settings around the world, who are insisting on narrating their own meanings for events involving their bodies – events that, like breast cancer, were once shrouded in shame, silence, fear, or blame.
Jolie has refused to treat mastectomy as scary or tragic – or as making her “less of a woman” in any way.
She is thus modeling a refusal to be a woman victim; by doing so, she is also modeling agency in relation to her own body and its “story.”
Jolie is prominent, but she is hardly alone.
Consider the Brazilian women who are coming forward to talk publicly about having been raped on public buses –&#160;attacks that echo similar assaults in India and Egypt.
Or consider the two young female staffers of New York officials who have publicly pressed their complaints about having been sexually harassed by New York Assemblyman Vito J. Lopez.
Similarly, the men who were sexually abused in the 1970’s at Horace Mann, a prestigious New York City private school, are refusing to perpetuate the silence and “shame” of their victimization by a circle of pedophiles (and by the school officials who covered up the abusers’ behavior).
They have now joined a highly publicized lawsuit against the school, stepping into the light of day under their own names.
Times have surely changed – partly because of people and actions like these.
Twenty-two years ago, when Anita Hill publicly accused then-US Supreme Court nominee Clarence Thomas of sexual harassment, it was she, the alleged victim, who was scrutinized and smeared as “a little bit nutty and a little bit slutty.”
In all these cases, one can see the once-silenced woman – or child of either gender – take charge of the obligation and the right to speak to her or his own situation and recast the public story.
It is they, and they alone, who may assign authoritative meaning to their breasts, their bodies, and the difficult events related to them.
When I began in recent years to insist that the traditional silence and anonymity assigned to rape victims does not protect them, but only perpetuates a Victorian framework in which rapists attack with impunity and victims are asked to carry the “shame,” my argument was met with hostility.
But events are proving me right: nothing changes until everything changes –&#160;that is, until a critical mass of “victims” comes forward under their own names to reject the shame assigned to them for carrying a scary, “mutilating” disease, for having been assaulted by rapists, or for having been abused by pedophiles.
Angelina Jolie puts a famous face on this phenomenon.
But many others are already standing up and proclaiming, under their own names and bylines: “I have a right to say publicly what happened to me, and to define it in my own terms; it is not my disgrace.”
An Honest Man?
In his gushing account of President George W. Bush, the former presidential speechwriter David Frum tells us that his boss "scorned the petty untruths of the politician."
We learn, for example, that when asked to prepare a radio broadcast for the following day, he would begin reading, "Today I am in California" and quickly break off, saying with exasperation, "But I'm not in California."
Frum thought this a bit pedantic, but concluded that it was emblematic of the President's character and that "the country could trust the Bush administration not to cheat and not to lie."
How wrong Frum now seems.
Bush may naively consider it lying, and therefore wrong, to say that he is in California when he is recording a speech in Washington.
But he fails to see anything gravely wrong about misleading his country and the world concerning Iraq's weapons of mass destruction.
As we have seen, the White House built its case for war on a highly selective dossier of evidence, and Bush made statements about Iraq's attempt to purchase uranium from Africa that he and his staff knew to be highly doubtful, if not false.
When questions were raised about how the statement about uranium was allowed to remain in Bush's State of the Union address, both National Security Advisor Condoleeza Rice and Secretary of Defense Donald Rumsfeld argued that it was not a lie.
Their reasoning indicates that they, like the President, have a childishly literal notion of what it is to lie.
Bush's actual words were these: "The British government has learned that Saddam Hussein recently sought significant quantities of uranium from Africa."
Bush's statement took this form because the CIA objected to the original version, which flatly stated that Saddam Hussein had sought to buy uranium from Africa.
The White House staff member who discussed it with the CIA then suggested changing the sentence so that it stated that the British reported that Saddam Hussein had
This was literally true, because the British had reported that.
It was nevertheless misleading, for the CIA had informed the British that their information was not reliable.
The fact that Bush only referred to a British statement is the basis for Rice and Rumsfeld's defense of it.
Rice said that "the statement that [Bush] made was indeed accurate.
The British government did say that."
Rumsfeld said that Bush's statement was "technically accurate."
In fact, even on the most literal interpretation, Bush's statement was not accurate.
Bush did not say merely that the British had "reported" that Iraq had sought to buy uranium from Africa, but that the British had ``learned'' this.
To say that someone has learned something is to endorse what they say they have learned as true.
Imagine that the British had said that Saddam Hussein was a peace-loving man about to bring democracy to his country.
Would Bush have said that the British had
Quite apart from these weak attempts to justify Bush's statement as "technically accurate," the more serious charge is that even if what Bush said really were technically accurate, it still would have been designed to mislead the world into thinking that Iraq had been trying to buy uranium in Africa.
Bush and his staff had good reason to believe that this was not true.
Bush's response to the issue after it became public shows him to be focused on the trivial and morally reckless about the essential.
A person who is morally sensitive to the seriousness of starting a war on the basis of misleading information would take appropriate steps.
He would ensure that the American public knew how the error occurred, and that whoever was responsible for it suffered the usual consequences that befall senior officials who make what was--to put the best possible interpretation on it--a grave error of judgment.
But Bush did nothing of the sort.
When the issue became public, Bush's response was to condemn his critics as "revisionist historians" and to evade questions about the credibility of the information he had provided by asserting that the removal of Saddam was a good outcome.
Then he said that the CIA had cleared his speech, as if that absolved him of all responsibility.
After CIA Director George Tenet took responsibility for the inclusion of the misleading material, Bush said that he "absolutely" had confidence in Tenet and the CIA, and that he considered the matter closed.
Belief in Bush's honesty led many voters to prefer him to Albert Gore in the 2000 presidential election.
Among voters who rated "honesty" as an important factor influencing their choice of candidate, 80% said that they voted for Bush.
These voters were disgusted with Clinton, not only for his sexual relationship with White House intern Monica Lewinsky, but for lying about it.
That Clinton did lie about his sexual activities is clear, and he was wrong to do so.
But his lies did not lead his country into a war that has cost thousands of lives.
Bush's excessively literal interpretation of the requirements of honesty conceals a deeper dishonesty whose consequences have been far more morally serious.
A Nice Mess in Nice
LONDON: A hundred years ago, the humorous English magazine Punch carried a cartoon which depicted a young and nervous curate eating breakfast with his bishop.
He was eating a boiled egg, and clearly not enjoying it.
The bishop enquired: “I say - is your egg all right?”
The cartoon caught the English fancy, and created a catch-phrase still in use today, although it is usually misunderstood and misused.
Someone may say: “It’s a bit of a curate’s egg”, when he means that something is a mixture of good and bad.
But of course the point of the original joke was that the curate was just being polite: an egg is either good or bad, and his was bad.
This week’s European Summit at Nice (December 7-9) looks like being a curate’s egg.
The question is, will it be bad all through and a failure?
Or will it be “excellent in parts”?
The probable answer is: both.
It will almost certainly fail to achieve its immediate objectives; but it may open the door to serious progress afterwards.
The ostensible purpose of the summit is to make those changes in the European Union’s decision-making machinery that would enable it to cope with the admission of at least 12 new members, mainly from Central and Eastern Europe.
Everyone knows that these changes ought to be radical, even semi-federal.
At the very least, the coming enlargement will call for much more majority voting in the Council of Ministers, if the Union is not be paralyzed by 27 member states and 27 national vetoes.
But most member states are unwilling to contemplate anything that far-reaching.
The host French, who currently hold the EU Presidency, have listed 50 policy areas where majority voting might be possible.
Every country, however, has special sensitivities: the Germans are unwilling to be outvoted on immigration; the French are unwilling to be outvoted on trade in services; the British are unwilling to be outvoted on taxation.
The cumulative result of all these national objections, is that the Nice summit is likely to see only a modest increase in the potential for majority voting, much smaller than enlargement requires.
A similar reluctance will dominate the rest of the immediate institutional agenda.
In principle, the Commission ought to be slimmed down after enlargement, with fewer Commissioners than member states.
Equally, big member states ought to have more votes in the Council of Ministers, to reflect their greater populations.
Small member states do not like either proposition, because they would lose Commissioners and votes.
On both issues, expect a serious tug-of-war, and any decisions are likely to be half-hearted, or in practice postponed.
Yet, the 15 member states may compensate for their collective failure of nerve by opening up easier options for flexible or multi-speed integration.
This might be a way round the majority voting dilemma, since it would allow groups of member states to cooperate together in particular areas, without waiting for the unanimous agreement of all partners.
Whether this would really be a desirable procedure is hotly debated; but the fact is that multi-speed integration already exists in the sense that Britain and Denmark are not now, and may never be, members of the euro.
If these scraps were to be the sum total of the Nice summit, it will prove unsatisfactory, even a failure.
But the real significance of the meeting may turn out to be, not the limited decisions which the heads of government are able and willing to take this time round, but the opening up, virtually for the first time, of serious discussion about the future direction of the European Union.
One thing that will happen at Nice will be the formal adoption of a Charter of Fundamental Rights.
In its present form, this document recapitulates all kinds of rights which EU citizens already enjoy under existing laws; it is not intended to confer any new rights, and it cannot be enforced in the European Court of Justice.
In other words, it is a public relations conjuring trick, designed to make the EU seem more attractive, without actually conferring any real benefits.
Even as a conjuring trick, the Charter could be influential.
For example, Article 2 reads: “Everyone has the right to life.
No one shall be condemned to the death penalty, or executed.” It seems evident that this principle will be effectively binding on all member states, and all candidates for membership.
The question at Nice will be whether the Charter should be incorporated into the EU Treaties, and thus given the force of law.
Another similar question at Nice will be whether the time has come to simplify the EU Treaties, which are now a confusing jumble of general principles and difficult detail.
Simplification might be intended, at the start, as another conjuring trick: to make the Treaties more comprehensible to voters without changing anything in law.
But it could also become the first, essential step on the road to the drafting of a European constitution.
An IMF We Can Love?
CAMBRIDGE – What a difference the crisis has made for the International Monetary Fund.
It was just a few months ago that this important but unloved institution, a landmark of post-war global economic arrangements, seemed destined to irrelevance.
The IMF has long been a whipping boy for both left and right – the former because of the Fund’s emphasis on fiscal rectitude and economic orthodoxy, and the latter because of its role in bailing out indebted nations.
Developing nations grudgingly took its advice, while advanced nations, not needing the money, ignored it. In a world where private capital flows dwarf the resources at its disposal, the IMF had come to seem an anachronism.
And, when some of the IMF’s largest debtors (Brazil and Argentina) began to prepay their debts a few years ago with no new borrowers in sight, it looked like the final nail in the coffin had been struck.
The IMF seemed condemned to run out of income, in addition to losing its raison d’être .
It shrank its budgets and began to downsize, and, while it was handed some new responsibilities in the meantime – surveillance over “currency manipulation,” in particular – its deliberations proved largely irrelevant.
But the crisis has invigorated the IMF.
Under its capable managing director, Dominique Strauss-Kahn, the Fund has been one of the few official agencies ahead of – instead of behind – the curve.
It moved quickly to establish a fast-disbursing emergency line of credit for countries with “reasonable” policies.
It ardently championed global fiscal stimulus on the order of 2% of world GNP – a position that is all the more remarkable in view of its traditional conservatism on all fiscal matters.
And, in the run-up to the G-20 summit in London, it thoroughly overhauled its lending policies, de-emphasizing traditional conditionality and making it easier for countries to qualify for loans.
Even more significantly, the IMF has emerged from the London meeting with substantially greater resources, as well as new responsibilities. The G-20 promised to triple the Fund’s lending capacity (from $250 billion to $750 billion), issue $250 billion of new Special Drawing Rights (a reserve asset made up of a basket of major currencies), and permit the Fund to borrow in capital markets (which it has never done) if necessary.
The IMF was also designated as one of two lead agencies – along with an expanded Financial Stability Forum (now renamed the Financial Stability Board) – charged with providing early warning of macroeconomic and financial risks and issuing the requisite policy recommendations.
Another piece of good news is that the Europeans have now given up their claim on naming the IMF’s managing director (as have the Americans their corresponding claim on the World Bank presidency).
These senior officials are henceforth to be selected “through an open, transparent, and merit-based selection process.”
This will provide for better governance (although Strauss-Kahn’s leadership has been exemplary), and will enhance both institutions’ legitimacy in the eyes of developing nations.
So the IMF now finds itself at the center of the economic universe once again.
How will it choose to deploy its newfound power?
The greatest risk is that it will once again over-reach and over-play its hand.
That is what happened in the second half of the 1990’s, as the IMF began to preach capital-account liberalization, applied over-stringent fiscal remedies during the Asian financial crisis, and single-handedly tried to reshape Asian economies.
The institution has since acknowledged its errors in all these areas.
But it remains to be seen if the lessons have been fully internalized, and whether we will have a kinder, gentler IMF in lieu of a rigid, doctrinaire one.
One encouraging fact is that developing countries will almost certainly get a larger say in how the Fund is run.
This will ensure that poorer nations’ views receive a more sympathetic hearing in the future.
But simply giving developing nations greater voting power will make little difference if the IMF’s organizational culture is not changed as well.
The Fund is staffed by a large number of smart economists, who lack much connection to (and appreciation for) the institutional realities of the countries on which they work.
Their professional expertise is validated by the quality of their advanced degrees, rather than by their achievements in practical policymaking.
This breeds arrogance and a sense of smug superiority over their counterparts – policymakers who must balance multiple, complicated agendas.
Countering this will require proactive efforts by the IMF’s top leadership in recruitment, staffing, and promotion.
One option would be to increase substantially the number of mid-career recruits with actual practical experience in developing countries.
This would make the IMF staff more cognizant of the value of local knowledge relative to theoretical expertise.
Another strategy would be to relocate some of the staff, including those in functional departments, to “regional offices” in the field.
This move would likely face considerable resistance from staff who have gotten used to the perks of Washington, DC.
But there is no better way to appreciate the role of context than to live in it.
The World Bank, which engaged in a similar decentralization a while back, has become better at serving its clients as a result (without facing difficulties in recruiting top talent).
This is an important moment for the IMF.
The international community is putting great store in the Fund’s judgment and performance.
The Fund will require internal reforms to earn that trust fully.
An Inconvenient Peace Prize
This year’s Nobel Peace Prize justly rewards the thousands of scientists of the United Nations Climate Change Panel (the IPCC).
These scientists are engaged in excellent, painstaking work that establishes exactly what the world should expect from climate change.
The other award winner, former US Vice President Al Gore, has spent much more time telling us what to fear.
While the IPCC’s estimates and conclusions are grounded in careful study, Gore doesn’t seem to be similarly restrained.
Gore told the world in his Academy Award-winning movie (recently labeled “one-sided” and containing “scientific errors” by a British judge) to expect 20-foot sea-level rises over this century.
He ignores the findings of his Nobel co-winners, the IPCC, who conclude that sea levels will rise between only a half-foot and two feet over this century, with their best expectation being about one foot.
That’s similar to what the world experienced over the past 150 years.
Likewise, Gore agonizes over the accelerated melting of ice in Greenland and what it means for the planet, but overlooks the IPCC’s conclusion that, if sustained, the current rate of melting would add just three inches to the sea level rise by the end of the century.
Gore also takes no notice of research showing that Greenland’s temperatures were higher in 1941 than they are today.
Gore also frets about the future of polar bears.
He claims they are drowning as their icy habitat disappears.
However, the only scientific study showing any such thing indicates that four polar bears drowned because of a storm.
The politician-turned-movie maker loses sleep over a predicted rise in heat-related deaths.
There’s another side of the story that’s inconvenient to mention: rising temperatures will reduce the number of cold spells, which are a much bigger killer than heat.
The best study shows that by 2050, heat will claim 400,000 more lives, but 1.8 million fewer will die because of cold.
Indeed, according to the first complete survey of the economic effects of climate change for the world, global warming will actually save lives.
The IPCC has magnanimously declared that it would have been happy if Gore had received the Nobel Peace prize alone.
I am glad that he did not, and that the IPCC’s work has rightfully been acknowledged.
Gore has helped the world to worry.
Unfortunately, our attention is diverted from where it matters.
Climate change is not the only problem facing the globe.
Our blinkered focus on it – to the detriment of other planetary challenges – will only be heightened by the attention generated by Gore’s Nobel Peace Prize.
Gore concentrates above all else on his call for world leaders to cut CO2 emissions, yet there are other policies that would do much more for the planet.
Over the coming century, developing nations will be increasingly dependent on food imports from developed countries.
This is not primarily a result of global warming, but a consequence of more people and less arable land in the developing world.
The number of hungry people depends much less on climate than on demographics and income.
Extremely expensive cuts in carbon emissions could mean more malnourished people.
If our goal is to fight malnutrition, policies like getting nutrients to those who need them are 5,000 times more effective at saving lives than spending billions of dollars cutting carbon emissions.
Likewise, global warming will probably slightly increase malaria, but CO2 reductions will be far less effective at fighting this disease than mosquito nets and medication, which can cheaply save 850,000 lives every year.
By contrast, the expensive Kyoto Protocol will prevent just 1,400 deaths from malaria each year.
While we worry about the far-off effects of climate change, we do nothing to deal with issues facing the planet today.
This year, malnutrition will kill almost four million people.
Three million lives will be lost to HIV/AIDS.
Two and a half million people will die because of indoor and outdoor air pollution.
A lack of micronutrients and clean drinking water will claim two million lives each.
With attention and money in scarce supply, what matters is that we first tackle the problems with the best solutions, doing the most good throughout the century.
If we focus on solving today’s problems, we will leave communities strengthened, economies more vibrant, and infrastructures more robust.
This will enable these societies to deal much better with future problems – including global warming.
Committing to massive cuts in carbon emissions will leave future generations poorer and less able to adapt to challenges.
Gore has an unshakable faith that climate change is the biggest challenge facing the world.
To be fair, he deserves some form of recognition for his resolute passion.
However, the contrast between this year’s Nobel winners could not be sharper.
The IPCC engages in meticulous research where facts rule over everything else.
Gore has a very different approach.
An India-China Axis?
Is a new alignment between India and China rising to balance America’s global power?
Chinese Premier Wen Jiabao just completed a four-day visit to India during which 11 agreements were signed, including a comprehensive five-year strategic cooperation pact.
In addition, Wen announced that China would support India’s bid for a permanent seat on an expanded UN Security Council, and opposed the inclusion of Japan, which the United States supports for a Council seat.
With over a third of the world’s population and two of the globe’s highest economic growth rates, an alliance between China and India could be a serious factor in world politics.
While both are developing countries – many of whose people remain impoverished – they also boast impressive capabilities in information age technologies both for civilian and military purposes.
As Indian Prime Minister Manmohan Singh put it during Wen’s visit, “India and China can together reshape the world order.”
The two countries’ recent rapprochement marks a huge change from the hostility that bedeviled their relations following their 1962 war over a disputed border in the Himalayas.
When I first visited India as an American government official in the late 1970’s, I was struck by my Indian hosts’ fixation on gaining equal status with China.
In 1998, when India tested its nuclear weapons, the defense minister referred to China, and then Prime Minister Atal Bihari Vajpayee spoke of China as India’s number one enemy.
By contrast, on more recent visits to India, I have found my hosts referring to the need to learn from China.
Trade between the two giants has grown from $100 million in 1994 to nearly $14 billion last year, and India’s minister of commerce and industry has predicted that it will double by this decade’s end.
One agreement signed during Wen’s visit was a new set of guiding principles on how to settle boundary disputes between the two countries.
While improved relations and diminished prospects for conflict are welcome, relations between India and China are more complex than they appear at first.
Not long before the visit of the Chinese premier, India hosted US Secretary of State Condoleezza Rice.
Ever since President Bill Clinton’s visit to India, but especially under President George W. Bush, the US has moved from relative indifference to India to the development of a strong strategic relationship.
This new approach might have seemed threatened by Al Qaeda’s attacks on America, which led to a strengthening of US relations with Pakistan’s General Parvez Musharaff.
But the US reassured India that they faced a common threat from transnational terrorism, and that the old Cold War pairings of India and Pakistan were outdated.
Secretary Rice made this plain during her March visit, stressing the importance of a strategic relationship, including a willingness to consider trade in high technology, nuclear energy, and co-production of fighter aircraft such as F-16’s and F-18’s.
Shortly after Rice’s visit, the US announced that it would honor a long-standing promise to sell F-16’s to Pakistan.
While the announcement incited Indian protests, they were relatively muted compared to the past.
One reason is that the State Department also issued a statement that America would help India to become a major world power in the twenty-first century, involving both a strategic and economic dialogue.
Several factors underpin this new American attitude toward India. Rhetoric about “the world’s two largest democracies” is not new, but it fits with the Bush administration’s new emphasis on promoting democracy.
The increasing role of the Indian diaspora in the US, particularly in the information industries, also had an influence, as has the rise in bilateral trade accompanying India’s surging economic growth.
Equally important are strategic concerns about transnational terrorism and the rise of Chinese power.
The rise of China is a major factor in the politics of the twenty-first century.
China has tripled the size of its economy in the past two decades, and has been increasing its military strength.
While both India and the US seek trade and good relations with China, both are aware – and wary – of China’s growing strength.
Thus, both seek to hedge their bets, and what better way to do so than by improving their strategic relationship?
Neither country aims to restrain China in the way the “containment” strategy aimed at an aggressive Soviet Union during the Cold War, but both want to create an international structure that does not tempt China to throw its weight around.
India has a 3,000-kilometer border with China, a 2,000-kilometer border with Pakistan (which has been the beneficiary of Chinese military and nuclear assistance), and growing concerns about the security of sea routes in the Indian Ocean over which oil and other trade move.
As one Indian strategist put it to me during a recent visit, “By 2030, we envisage the US, China, and India as the three largest powers in world politics.
We don’t want a China- or a US-dominated world, but if we had to choose, it would be easier for us to live with the latter.”
So, while improvement in India-China relations is welcome, it is unlikely to herald the beginning of an India-China alliance against the US.
Rather, it more likely represents another move in India’s age-old tradition of managing regional balances of power.
An Inequality Tax
The economic booms in China and India have helped to reduce global inequality.
Over the two last decades, masses of Indians and Chinese have closed the gap (in relative terms) with the rich world.
But, at the same time, many of the world’s truly poor countries have fallen further behind (particularly in Africa, where developments are often described as catastrophic), and inequality within most countries has risen.
Widening inequality has been recorded in the United States (starting with Ronald Reagan’s administration), the United Kingdom (starting with Margaret Thatcher), Russia during its privatization, and more recently in China and India.
These developments seem to add to global inequality.
So, on balance, it seems that global inequality has been relatively stable during the last two decades.
Should anything be done about this?
Many think that no global action to fight economic inequality is necessary.
They argue that only poverty reduction matters.
In the words of Anne Krueger, the Deputy Managing Director of the IMF, “Poor people are desperate to improve their material conditions…rather than to march up the income distribution [ladder].”
Thus, even if the absolute income gap between an average American and an average African increases, why worry?
After all, such people argue, the average African would be a bit less poor.
But this assumes that our income relative to the income of others does not matter.
On the contrary, psychological studies invariably show that people care not only about their absolute income, but also about where they stand in the social pyramid and whether their position is fair.
In the past, a poor African might have looked at his compatriots and resented their wealth; now, both he and his better-off compatriots look at the rich world and resent the huge income gaps they see.
The gaps are most obvious where people from different countries work together, as in many multinational companies.
An “expatriate” may be paid ten times more than local staff for the same job.
A wage premium based solely on citizenship is grating.
But even when people do not work together, globalization, by bringing the world to everyone’s living room (or hut), enables them to make much wider comparisons of their living standards.
It erodes the relative security in which the rich world could shelter itself, as in a cocoon.
Now, all can see these income differences.
This is why international action to address both global poverty and global inequality is needed.
Global redistribution through taxes that would be levied by an international body may seem far-fetched today, but the logic of development that we are witnessing – particularly the move away from nation-states as the locus of sovereignty – suggests that it may eventually come to pass.
One such opportunity was missed in the early 1990’s.
When Russia faced its worst crisis, aid was given to the corrupt Yeltsin regime.
But it should have been disbursed directly in cash to the most needy Russians: pensioners whose earnings plummeted due to inflation and economic contraction.
An international organization could have simply used the existing infrastructure of the Russian state to distribute cash grants to some 20 million pensioners – money that would have been much better targeted and spent than by giving the same amount to the government.
If this had been done, Russians would have fondly remembered receiving cash aid from the international community rather than blaming it for transferring funds to corrupt leaders.
But the same or a similar approach could be taken in many countries today, from Angola to Zimbabwe.
The approach is simple and powerful. It involves three steps: raise money from the globally rich, do not deal with governments, and transfers funds in cash to the poor.
Those who advocate leaving globalization exclusively in the hands of the private sector may resent the idea of vesting tax-raising authority in a global agency.
But they cannot fail to notice that the processes they support undercut their own position by rendering the wealth gap more obvious and the fairness of the actual global distribution more questionable.
They will ultimately realize that their self-interest lies in supporting some form of global action to deal with both poverty and inequality.
An Inflation Reality Check
CAMBRIDGE – As inflation continues to soar everywhere, maybe the world’s central bankers need a jolt to awaken them from complacency.
How about holding one of their bi-monthly meetings in hyperinflationary Zimbabwe?
It might not be comfortable, but it would be educational.
According to Zimbabwe’s official statistical agency, inflation topped 66,000% in 2007, which looks more like Weimar Germany than modern-day Africa.
While no one is quite certain how the government managed to estimate prices, given that there is virtually nothing for sale in the shops, most indicators suggest that Zimbabwe does have a good shot at breaking world records for inflation.
Of course, curious as they might be, central bankers could decide that meeting in Harare would be too inconvenient and politically unpalatable.
Fortunately, there are lots of other nice – albeit less spectacular – inflation destinations.
Inflation in Russia, Vietnam, Argentina, and Venezuela is solidly in double digits, to name just a few possibilities.
Indeed, except for deflation-ridden Japan, central bankers could meet just about anywhere and see high and rising inflation.
Chinese authorities are so worried by their country’s 7% inflation they are copying India and imposing price controls on food.
Even the United States had inflation at 4% last year, though the Federal Reserve is somehow convinced that most people won’t notice.
Many central bankers and economists argue that today’s rising global inflation is just a temporary aberration, driven by soaring prices for food, fuel, and other commodities.
True, prices for many key commodities are up 25% to 50% since the start of the year.
But if central bankers think that today’s inflation is simply the product of short-term resource scarcities as opposed to lax monetary policy, they are mistaken.
The fact is that around most of the world, inflation – and eventually inflation expectations – will keep climbing unless central banks start tightening their monetary policies.
The US is now ground zero for global inflation.
Faced with a vicious combination of collapsing housing prices and imploding credit markets, the Fed has been aggressively cutting interest rates to try to stave off a recession.
But even if the Fed does not admit it in its forecasts, the price of this “insurance policy” will almost certainly be higher inflation down the road, and perhaps for several years.
America’s inflation would be contained but for the fact that so many countries, from the Middle East to Asia, effectively tie their currencies to the dollar.
Others, such as Russia and Argentina, do not literally peg to the dollar but nevertheless try to smooth movements.
As a result, whenever the Fed cuts interest rates, it puts pressure on the whole “dollar bloc” to follow suit, lest their currencies appreciate as investors seek higher yields.
Looser US monetary policy has thus set the tempo for inflation in a significant chunk – perhaps as much as 60% – of the global economy.
But, with most economies in the Middle East and Asia in much stronger shape than the US and inflation already climbing sharply in most emerging-market countries, aggressive monetary stimulus is the last thing they need right now.
The European Central Bank is staying calm for the moment, but it, too, is probably holding back on interest-rate hikes partly out of fear of driving the euro, already at record levels, even higher.
And the ECB worries that if the US recession proves contagious, it may have to turn around and start slashing rates anyway.
So what happens next?
If the US tips from mild recession into deep recession, the global deflationary implications will cancel out some of the inflationary pressures the world is facing.
Global commodity prices will collapse, and prices for many goods and services will stop rising so quickly as unemployment and excess capacity grow.
Of course, a US recession will also bring further Fed interest-rate cuts, which will exacerbate problems later.
But inflation pressures will be even worse if the US recession remains mild and global growth remains solid.
In that case, inflation could easily rise to 1980’s (if not quite 1970’s) levels throughout much of the world.
Until now, most investors have thought that they would rather risk high inflation for a couple of years than accept even a short and shallow recession.
But they too easily forget the costs of high inflation, and how difficult it is to squeeze it out of the system.
Maybe they, too, should try holding a few conferences in Zimbabwe, and get a reality check of their own.
An Intelligent War on Terror
Terrorism is an existential threat.
In our European Security Strategy, it was deemed one of the key strategic threats facing the European Union, and to fight it we are using all instruments at our disposal, particularly in the intelligence area.
The first objective of intelligence is to find terrorists, prevent them from acting, and track them after they do attack.
This is the kind of operational intelligence that is best done at the national level.
Many arrests and disruptions of terrorist operations in Europe result from cooperation between EU members' intelligence services.
I was recently asked by journalists whether inter-agency cooperation is sufficient and whether European mechanisms for sharing operational intelligence should be created.
Later that very day, a joint operation resulted in simultaneous arrests in five European countries.
The operation's success was no accident.
Last year, the Union concluded two Europol agreements, as well as an Extradition and Mutual Legal Assistance Agreement.
Europe's security services are working closely together within the Counter-Terrorist Group, and Europol's Counter-Terrorist Task Force has been re-established.
A high-level group on border and transport security is at work, and links between member states' police chiefs are strengthening.
But widespread sharing is not always needed or appropriate.
Member states also need intelligence derived from ongoing casework, not to inform policy, at least not directly, but to disrupt and dismantle networks and prevent attacks.
This information is in many ways more sensitive, and services share it on a "need to know" basis, not for the sake of promoting cooperation.
I see another role for intelligence: to inform political action.
Intelligence services can educate the public, explaining the origins of the alienation that underpins terrorism, how radicalization and recruitment occur, and highlight terrorists' goals, methods, and targeting strategies.
Only when we understand this can we develop appropriate and concrete policies.
For this we need good strategic assessments of intelligence.
The EU's members have structures to provide this, and with their support and input we are building structures at a Europe-wide level, to bring this information to EU policymakers.
Europol is performing a similar function with material derived from police work, and we are working to ensure synergy between these two efforts.
This is a different level of intelligence, more analytical, where close collaboration adds significant value.
In the aftermath of the Madrid bombings, the EU focused on internal aspects of the fight against terrorism.
But this does not mean that the Union has become introverted. On the contrary, the EU regards international cooperation as fundamental in the fight against terrorism.
Generally, counter-terrorism is very high on our international agenda and is becoming better integrated into the Union's political dialogue with other countries.
We are better targeting our external assistance and capacity building programs, and we are ready to use our trade and economic muscle, when necessary, by demanding counter-terrorism clauses in bilateral treaties.
There has also been a sea change in transatlantic cooperation between the EU and the US.
Deeds speak louder than words, and deeds on the transatlantic level have been swift and decisive - for example, joint efforts aimed at choking off terrorist financing - even when we had strong divergences over Iraq.
Still, I am not complacent.
To facilitate the extremely complex task of counter-terrorism policymaking in the EU, we now have a Plan of Action, approved by the European Council, which clearly specifies who does what, and by when.
This will also help national parliaments understand EU objectives and facilitate their legislative planning.
I have recently appointed a counter-terrorism coordinator to assist me in following through on the Plan of Action.
We also have a considerable number of new instruments in the area of justice and home affairs.
The European Arrest Warrant is already producing concrete results, and we are moving towards the "free movement of judicial decisions" in the EU, through which judicial decisions - such as arrest and surrender of suspects, confiscation, and freezing of assets - will be mutually recognized.
Furthermore, the European Border Agency will become operational in 2005.
As requested by the European Council, I am developing, in cooperation with the European Commission, a strategy to shut down terrorist financing.
This is where the real test of cooperation lies, for our success will rely on securing the appropriate interaction and flow of intelligence between the relevant services and the financial and banking communities.
I firmly believe that the military option alone cannot defeat terror.
Judicial, police, and intelligence cooperation should be the focal point for action.
This does not mean that we are not working on how European Security and Defense Policy (ESDP) can offer a meaningful contribution.
But ESDP is not at the core of our efforts.
Aside from security and intelligence efforts, we must also work to deny "oxygen" to the terrorists.
This means addressing the factors that contribute to support for and recruitment by terrorist groups.
Regional conflicts cause anger and resentment.
The unresolved Arab-Israeli problem leads to the rise of radicalism and extremism.
There is entirely too much fuel for terrorist propaganda.
The EU will be tough on terrorism.
But it must also be tough on the causes of terrorism.
These are not two fights, but one.
An Iraqi Film Hero in America
NEW YORK –&nbsp;One of Iraq’s only working filmmakers, Oday Rasheed – whose brilliant film&nbsp;2005 Underexposure followed a group of characters in Baghdad after the United States-led invasion&nbsp;in 2003, and whose new film Qarantina is now premiering – is in Manhattan.
The glamorous settings in which he is now showing Qarantina – a screening at the Museum of Modern Art, for example, and in the private homes of American directors and stars – could not be further removed from the violence-riddled context of his daily life.
In Baghdad, Rasheed has gained fame – and notoriety – by seeking to inspire a new generation of Iraqi filmmakers and other young artists.
Qarantina is one of only four feature films completed in Iraq in the past 12 years.
A member of a collective called Najeen (Survivors), Rasheed is part of a vanguard of younger artists, writers, and filmmakers whose&nbsp;work attests to their commitment to art in the midst of crisis.
It is startling to see him walk into a New York living room: his demeanor is quiet and dignified.
He has experienced unthinkable trauma, and is still exposed to it.
“Of seven close friends I had growing up,” he tells me, “five are dead.” One was recently murdered by a gunshot to the head while he was standing in his kitchen.
Some days, he says, “you wake up and the radio or TV reports five car bombings,” leading to a kind of claustrophobia – part of the subject matter of his film.
I noted that he might be experiencing post-traumatic stress from the loss of his friend. “I have had that – have done that already,” he smiled.
Rasheed is just turning 40, and his life reflects his country’s dramas: part of what has been called a “lost generation” of Iraqi artists and intellectuals, he and his friends were isolated for years by sanctions.
But he also describes the Saddam years as an era in which, while there was no freedom, intellectuals had room to maneuver, as long as they “knew what to leave alone.”
He lived through the US-led invasion during a formative time in his creative life – he was writing for television and engaged in film criticism and commentary while trying to survive bombardment, looting, and chaos.
But he also had to maintain his intellectual integrity.
When the US military sought to showcase the fact that a filmmaker was at work in occupied Iraq, Rasheed was swept to a formal dinner in one of Saddam's former palaces in the Green Zone, attended by senior US officials and military contractors – an invitation that one would not want to receive, and would not be able to turn down.
Now Rasheed reflects on his country’s turn toward religious extremism: he describes a pre-invasion Iraq in which women were professionals and fairly emancipated, whereas now women wear headscarves under pressure, “for a peaceful life.”
His friend, a young Iraqi actress named Zahra Zubaidi, had to flee the Middle East after having played a rape victim in the Brian de&nbsp;Palma film Redacted; she has since emigrated to New York.
Constant&nbsp;intimidation by religious extremists and political factions is the intellectual’s fate in Iraq today.
And yet Rasheed refuses to be discreet: “Everything I believe, I believe in it,” he says.
Rasheed is in New York mainly because it is the location of his next film, which “deals with the influence of&nbsp;the US contractors after the invasion of Iraq, not only on the lives of Iraqis, but also on the life of the US.” As for Iraq today, Rasheed says, “I do not think that Americans are indifferent to what happened and what is happening, but the daily details of cruelty do not give them either the time or the energy to think about larger issues.”
Indeed, Rasheed notes that at every US screening of his film, audiences need to apologize before they begin to relate to Rasheed as a filmmaker rather than as a representative of his country. “Personally, I do not ask anything;
Iraq, ravaged by war and now shaken daily by violence, is known as the most intellectually inclined of the Arab countries.
As Iraqi and other Muslim intellectuals in the region often repeat: “Books are written in Egypt, printed in Lebanon, and read in Iraq.”
Here is hoping that Raheed and his colleagues continue to build up an Iraqi culture that is vibrant and free; and here is hoping that the relationship of US and international audiences to Rasheed goes from one of expiation to one of engagement with his work.
His embrace of the right to his truth, which is the artist’s task, is nonetheless remarkable, given that he is working in an environment in which part of the creative process involves trying to stay alive.
Argentina’s Sovereign Bondage
WASHINGTON, DC – Sovereign debt has been back in the news recently, this time because of a United States Supreme Court ruling concerning Argentine debt.
As a result of the ruling, a complicated issue is likely to become even more so.
Sovereign debt has been a major feature of the international financial system for centuries.
Kings borrowed, often internationally, to finance wars and other expenditures.
When they couldn’t pay, as sometimes happened, sovereigns defaulted.
Today, sovereigns are more often democratically elected governments, but they still borrow. And they still occasionally find themselves in situations in which their debt has become unsustainable and they need outside help to continue to meet their debt-service obligations.
When private firms (or subnational governments) become insolvent, there are normally legal bankruptcy procedures to determine what to do.
Without such procedures, a market economy would be unable to function.
In part, this is because creditors would otherwise stop extending credit and demand repayment at the first sign of trouble.
This is because the first creditors to be paid would receive the full amount owed to them, leaving less for later creditors – and thus creating an incentive for all creditors to rush for the exits even before debt servicing had become impossible.
Moreover, in many cases, the value of the troubled entity’s assets as a going concern is greater than it would be if the assets were sold separately.
In such cases, all creditors would be better off with a debt write-down than with dissolution.
Bankruptcy law thus protects creditors from each other by preventing an outcome that would needlessly harm all of them.
In the case of sovereign debt, however, there is no binding international law that permits bankruptcy.
Though some routine practices have emerged as international capital markets have grown, they remain ad hoc.
Given the uncertainty involved, and that sovereign debtors can repay domestic-currency debt simply by printing money, creditors have typically demanded significantly higher interest rates if bonds are not issued under the law and in the currency of an advanced country – often the United States or the United Kingdom.
When a sovereign decides that its foreign debt is unsustainable, the government and its creditors have had to negotiate among themselves about what to do.
For sovereign bonds held by other sovereigns, the Paris Club of creditor countries has developed procedures for handling the debt.
But when private creditors hold sovereign debt, organizing them creates a new challenge with each episode.
When debt is unsustainable, there are several possible negotiating outcomes.
Sometimes, debt-service payments are rescheduled and perhaps stretched out over a longer period, thus giving the debtor country time to regain its ability to pay.
Sometimes, creditors agree to exchange the old bonds for new ones, which have either a lower face value or lower interest payments.
Few governments refuse to pay at all in any form.
Argentina defaulted on its debt in 2001.
After several difficult years, the country managed to negotiate an exchange of outstanding bonds for bonds with a considerably lower face value.
About 93% of creditors accepted the exchange and received new bonds with a face value that was about one-quarter of that of the old bonds.
After 2005, Argentina maintained debt service on the new bonds.
But some creditors held out, and sued Argentina in New York (as the bonds were issued under New York law).
Argentine bonds (like most others) had a so-called pari passu clause that committed the government to treat all bondholders alike.
The holdouts claimed that, if the new bonds were being serviced in full (as they were), equal treatment required that the holdouts should receive the full amount owed to them (including not only interest but also principal).
The US Second Circuit Court of Appeals ruled that Argentina was bound to honor its obligations to the holdout bondholders in the same proportion (namely 100%) as the holders of the exchange bonds.
It was that ruling that the Supreme Court recently upheld.
Under the court order, Argentina may not pay the holders of the new bonds unless it also pays the holdouts, and no US financial institution can serve as an intermediary to make payments for Argentina.
As a result, Argentina must either pay the holdouts in full or default on the new bonds.
Regardless of how the current impasse is resolved, the ruling raises many questions for issuers and holders of sovereign debt.
If creditors now believe that holding out makes it more likely that they will receive full value at a later date, restructuring sovereign debt and restoring a debtor economy’s normal functioning will be more difficult.
Since the Argentine crisis, most new bonds have been issued with collective action clauses (CACs), under which bondholders are obliged to accept restructuring if a specified share (usually around 70%) agree to it.
As time passes, there are fewer and fewer outstanding bonds that do not contain CACs.
But CACs may not resolve the problem entirely, because a vote would be required for each separate bond issue, and a holdout position could be achieved by buying up the blocking percentage of a small issue.
It is also possible that language will be found in future bond issues that replaces the pari passu clause but provides sufficient assurance to bondholders to let the market function much as it did until the current ruling.
Until the euro crisis, it was generally believed that problems servicing sovereign debt occurred only in emerging markets and the least developed countries.
The US Supreme Court’s decision on Argentina adds a new wrinkle, and may well further increase the risk attached to holding sovereign debt – and this to the cost of issuing it.
Families of the Future
WASHINGTON, DC – It is graduation season in many countries, a time when classes of bright and fortunate young people don their caps and gowns, receive their diplomas, and hear advice from their elders.
Some commencement speakers focus on the graduates’ accomplishments; others emphasize the career-related challenges that lie ahead.
But there is another critical aspect to success and happiness that is often overlooked during these garlanded celebrations of academic achievement: family.
In fact, these ceremonies are about the graduates’ families – that is, those who have loved and supported them, regardless of their biological connection – as much as they are about the graduates themselves.
Whatever each family’s experience, the result has been a child reaching a level of education of which many people can only dream.
Beyond noting and appreciating what their families have done for them, graduates must consider the kind of family that they want to nurture.
And here they have no choice but to reflect on gender roles and relations.
Given the vastly different expectations and experiences of men and women – depending, of course, on the cultural context – the questions that they must ask themselves vary considerably.
The question of how to balance work and family, typically posed to young women, is actually a critical consideration for young men as well.
The traditional male role as “provider” has often led work to take precedence over time spent with family.
Indeed, in reflecting on their childhoods, many graduates may lament that their fathers spent too little time at home, or were less nurturing than they could have been.
Men must determine how to develop the caring side of their personality, in addition to the competitive side that will enable them to advance their careers.
They must aim to love and give fully, not only as fathers, but also as sons, husbands, brothers, uncles, and even friends.
To this end, they should ask their own fathers and grandfathers what they wish they had done differently – and plan accordingly.
Instead of waiting for challenges to arise, young men should begin establishing their priorities now.
How can they ensure that their relationship with their future partner is equal?
How will they adapt to enable their partner to fulfill his or her career aspirations?
Will they be willing to move for their partner’s job?
Would they be prepared to stop working or reduce their workload, in order to care for a child or parent?
Through all of this, men should remember that, by adopting a new approach, they are not abandoning their roles as providers.
After all, providing care is every bit as important as providing cash.
The reward is the close relationship with their children that women have traditionally enjoyed.
Women, too, must think carefully about the future that they would find most fulfilling.
For many women, the challenge is abandoning the assumption that their work/family balance will have to tip in favor of family, that it is they who will have to sacrifice their careers.
Of course, many women might choose to emphasize family (as would many men).
The point is the choice: the choice of how much energy to devote to one’s home, the choice of a career based on passion, and the choice of a genuinely equal partner.
Upholding an equal partnership of caregivers and breadwinners will require compromises on both sides.
A woman with great career ambitions should be able to find a partner who is willing to slow down or stop working to support her, just as a man should.
But bucking gender roles works both ways.
Indeed, for such a dynamic to work, the woman must recalibrate her expectations of her spouse.
If she wants to build a family with a man, she must not become caught up in traditional perceptions of masculinity.
If she is uncomfortable, say, out-earning her husband, she is limiting both partners.
Simply put, the kind of support that young women’s fathers and grandfathers probably offered to their mothers and grandmothers is not the only kind of support a woman can or should expect from her partner.
Her role should be determined not by old-fashioned rules, but by her individual strengths and ambitions.
And her partner should have the confidence and competence to encourage her to fulfill her potential.
Finally, graduation does not mean that the family’s job is complete.
Parents and grandparents must continue to play a critical role in reshaping expectations – or at least supporting the choices that their children and grandchildren make.
This means accepting the decision of a son or grandson not to use his hard-earned university degree to become the primary breadwinner in his future household.
And it means understanding that what a daughter or granddaughter needs may not be a traditional “provider,” but a partner who makes career sacrifices to enable her to advance hers.
Graduation is a day of ending and beginning.
It is a day for young people to recall the sacrifices that their families have made for them, and consider the kinds of sacrifices they will make for their families.
And it is a day to recognize that, if family comes first, work does not come second; rather, life comes together.
Bringing the Iran Deal Back Home
WASHINGTON, DC – The United States government’s initial statements on the “first-step agreement on Iran’s nuclear program” have been focused, above all, on the great deal that the US and the West have gotten.
Iran has agreed to halt enrichment of uranium above 5% purity; neutralize its stockpile of uranium enriched to near 20% purity; stop building its stockpile of 3.5% enriched uranium; forswear “next generation centrifuges”; shut down its plutonium reactor; and allow extensive new inspections of its nuclear facilities.
In return, Iran will get “limited, temporary, targeted, and reversible relief” from international sanctions.
The agreement covers only the next six months, during which both sides will try to reach a final comprehensive agreement.
For now, as President Barack Obama put it, the burden remains, from the US point of view, “on Iran to prove to the world that its nuclear program will be exclusively for peaceful purposes.”
Framing the issue this way reflects the need to sell even a limited, temporary deal to a skeptical US Congress.
Israel’s manifest displeasure with the entire negotiating process, which Prime Minister Binyamin Netanyahu has emphasized to anyone who will listen over the past three months, reverberates loudly among Israel’s many congressional friends.
Indeed, Israel’s stance bolsters the desire of Obama’s Republican opponents to paint him as weak and naïve in negotiating with Iran, a country that still describes the US as “the great Satan.”
Both Republicans and Democrats are threatening to pass a new round of tough sanctions against Iran in December.
Thus, Obama must focus as much on pushing back against domestic hardliners as on taking a hard line with Iranian negotiators.
This is hardly surprising.
One hopes that the Iranian government’s announcement to its own people reads roughly the same, in reverse, focusing on the important concessions that Iranian negotiators have won.
That includes suspension of international sanctions on Iran’s exports of oil, gold, and cars, which could yield $1.5 billion in revenue; unfreezing $4.2 billion in revenue from oil sales; and releasing tuition-assistance payments from the Iranian government to Iranian students enrolled abroad.
Iranian President Hassan Rouhani needs to marshal support for the deal just as much as Obama does, above all by reducing inflation and getting his country’s economy moving again.
If domestic tensions, above all within Iran’s restive middle class, ease as a result, the government will receive the credit, while the Iranian Republican Guard and other hardliners will be weakened.
The West had better hope that the Iranian narrative proves true, because the political space for any meaningful diplomatic agreement – both the desire for a deal and the room to achieve it – is created at home.
This is particularly true when a new government comes to power with promises of improving the economy.
Rouhani can undercut hardliners who would seek to block any ultimate deal only if the Iranian population both experiences economic relief and attributes it to his administration.
The true test of this interim agreement, therefore, is whether both sides can secure the domestic space to continue negotiating.
The stakes have never been higher – and not only because of the very real and dangerous geopolitical consequences of an Iranian bomb.
As Obama put it, “If Iran seizes this opportunity, the Iranian people will benefit from rejoining the international community, and we can begin to chip away at the mistrust between our two nations.
This would provide Iran with a dignified path to forge a new beginning with the wider world based on mutual respect.”
Let us imagine, just for a moment, what the Middle East and Central Asia could look like if the US and Iran could once again talk to each other.
As we saw briefly after the terrorist attacks of September 11, 2001, the drug trade from Afghanistan could be sharply curtailed.
Moreover, a regional agreement involving Iran, India, Pakistan, Russia, China, Turkey, the European Union, and the US would become much more likely, providing the framework for security and economic growth that diplomats from Henry Kissinger to the late Richard Holbrooke always claimed would be necessary for lasting peace in Afghanistan.
Perhaps most important, a peace settlement in Syria would be much more likely – and more likely to endure – if the US could talk to Iran, which has far more leverage with President Bashar al-Assad’s regime than Russia does.
After all, it was fighters from Hezbollah, Iran’s Lebanese proxy, who turned the tide of battle decisively against the opposition this past summer.
Iran has long made clear that it wants to resume its historic position as a major regional – and indeed global – power, an ambition that can only grow stronger as it watches Turkey’s geopolitical stature rise.
Iran and Turkey, after all, are the 17th and 18th largest countries in the world by population, respectively, with sophisticated elites and illustrious and ancient pasts.
The ultimate winner in the interim agreement with Iran is the cause of diplomacy itself.
US Secretary of State John Kerry, EU High Representative Catherine Ashton, and the other parties to the talks – all supported by able teams of diplomats – hammered out the deal’s details over months, staying at the table, compromising, holding firm, and managing the expectations of multiple players (including the press).
The Obama administration committed itself to global leadership through civilian rather than military power.
Obama Versus the Islamic State
WASHINGTON, DC – US President Barack Obama has laid out a detailed strategy for how his administration plans to combat the Islamic State, which controls a substantial portion of Syria and Iraq.
Though I have been harshly critical of Obama’s policy toward Syria for two and a half years, his new strategy reflects a mature and coherent foreign policy – albeit one that does not fully live up to his proclaimed values.
That omission may yet defeat his plan.
Obama’s approach is praiseworthy for three reasons.
First, it combines force and diplomacy.
Second, it attaches careful conditions to the type and scope of American military action.
Third, it ties the fate of these efforts to the existence and effectiveness of a broad Middle East coalition, making clear that though the United States is prepared to lead, it cannot and will not assume the role of global policeman.
In the Middle East game of thrones, Obama is playing his hand as well as he can.
He knows that a US-led military effort can significantly weaken the Islamic State, but that only a combined military-political effort can defeat it.
He created political leverage for himself by drawing a clear line, announcing that the US would “expand our efforts beyond protecting our own people and humanitarian missions” only together with the newly-formed Iraqi government.
If that government makes good on its promises of political inclusion, the US will help it get its country back; if not, not.
Equally important, but less evident, is the leverage that this position provides with respect to Iran.
Obama never mentioned Iran during his speech; but commentators have speculated about whether his strategy gives Iran greater leverage over the US, on the theory that Iranian-backed fighters are critical to the success on the ground in the fight against the Islamic State.
But Iraq’s Shia government is one of Iran’s major strategic anchors in the region; before the US began airstrikes against the Islamic State, it was far from certain that the Iraqi government would survive.
Iran needs US airpower at least as much as the US needs Iranian-backed ground troops.
The US emphasis on a regional coalition to fight the Islamic State is also deft diplomacy.
Secretary of State John Kerry has made it&nbsp;clear that for now Iran is not a welcome member.
Iran, without which the coalition essentially becomes a Sunni front, can have a place at the table – and play a large and overt role in resolving the Syrian civil war – but only if it is willing to reach a deal to rein in its nuclear program.
There has never been a better time to do so.
Where Obama’s strategy is weakest is in reaching ordinary people: the networked web of human relationships that transmits rage, hatred, and despair or hope, trust, and loyalty.
His doctrine that the US will use force to defend its “core interests,” but will mobilize others “to address broader challenges to international order,” is sound logic and good politics in a war-weary US.
But, as a Syrian tweeted to me, what the world hears Obama saying is that the US will use force to avenge the deaths of two American journalists, but will stand by while 200,000 Syrians are slaughtered.
Unless US military action is seen as actually protecting the lives and property of the Iraqi and Syrian people, the US will quickly lose the propaganda war to the Islamic state.
As many experts warn, the first time a drone strike kills a woman or child, a video of the scene and the funeral will be posted for the Muslim world to see.
Even if that video does not actually increase support for the Islamic State, it will convince millions of Muslims that the US is up to its old military tricks: bombing for oil, or for Israel, or simply to crush all Muslims.
Those anti-American attitudes, newly hardened once again, will make it much more difficult to get the necessary intelligence against the Islamic State on the ground and to deprive them of the support of other Sunni militias.
That will not just hurt the US in Syria and Iraq. It will shape popular views in other Arab states, limiting their governments’ ability to work with the US.
Most damaging of all, a purely strategic justification for military action – in defense of core US interests – leaves no room to do what actually needs to be done in Syria.
The only way to bring Syrian President Bashar al-Assad to the negotiating table is to weaken him and the Islamic State simultaneously.
And the only legal or moral justification for striking his air force, ammunition dumps, or heavy weaponry is the international responsibility to protect his people from him – just as the US helped to protect the Yezidis from the Islamic State.
For, contrary to Obama’s claim, the brutality of the Islamic State is not “unique.”
Assad has killed more than 200,000 people, mostly civilians, in a conflict that started with his government’s torture of children.
Simply talking about the responsibility to protect, as Obama once did, accompanied by even limited strikes – perhaps as punishment for Assad’s reported recent use of chlorine gas against civilians – would change the game quickly.
Iran would understand that America’s restraint in Syria is not indefinite; Sunni governments could be shamed in the eyes of their own people for not doing more; and the Islamic State’s narrative of brutality would collide with a narrative of humanity.
The fate of peasants has a direct and important impact on that of kings.
Obama’s policy wavers between geopolitical calculations based on national interest and the rhetoric of universal values, of standing for “our common security and common humanity.”
Making that rhetoric real would buy him the room for maneuver that is needed to pursue his policy’s geopolitical goals.
Post-Shutdown America
WASHINGTON, DC – After 16 days of closed museums, half-empty federal buildings, unnaturally quiet streets, and tens of thousands of workers left in existential limbo, the lights are back on in Washington.
But, while the shutdown of the United States government, initiated by radical congressional Republicans seeking to block implementation of President Barack Obama’s health-care legislation, is over – at least for now – three enduring lessons have emerged.
First, the next time the eurozone crisis flares up, the US will simply have to bite its tongue; after all, the shutdown spectacle revealed pathologies no less severe than those that have characterized the European Union’s economic and political negotiations over the past five years.
Irresponsible behavior threatening the health of the global economy?
Check.
Political posturing and outlandish claims foreclosing any possibility of compromise?
Check.
Breathtaking brinkmanship and 11th-hour decision-making leaving all bystanders wondering whether this time the cart might in fact go over the cliff?
Check.
Few countries in recent years have been spared the pain of their domestic political spectacles being broadcast around the world.
The United Kingdom had mass riots in London just two summers ago; strikes and demonstrations have paralyzed Paris on a regular basis;
Greece has a rising fascist party; Mexico City has been practically shut down by teachers occupying the central square; and Turkish Prime Minister Recep Tayyip Erdoğan resorted to violence in June to quell weeks of protests against his increasingly autocratic ways.
Among non-democracies, China had the Bo Xilai scandal, which was worthy of a spy novel, with illicit affairs, rampant corruption, murder, and a senior police official’s dramatic quest for asylum in a US consulate.
Against this backdrop, the US government shutdown looks a little different.
Yes, it was a clear symptom of deep political dysfunction, stemming from the politicized demarcation of electoral districts and the distorting effects of America’s campaign-finance system.
Nonetheless, it is noteworthy that the entire crisis played out according to constitutional rules.
Indeed, as the deadline for raising the debt ceiling neared, Henry Aaron, a distinguished senior fellow at the Brookings Institution, pointed out that the US Constitution requires the president “to spend what Congress has instructed him to spend, to raise only those taxes Congress has authorized him to impose, and to borrow no more than Congress authorizes.”
Honoring all three of those legal obligations simultaneously is impossible if Congress refuses to raise the debt ceiling, but raising the debt ceiling without Congressional approval, though illegal and an impeachable offense, was the least-bad choice.
Even in the face of deeper political polarization than the US has seen in many decades (and, in many places, a visceral hatred of the country’s first African-American president), Americans and their politicians understand that breaking the rules means dissolving the constitutional glue that holds the polity together.
This understanding means that the cure for the current dysfunction will be found at the ballot box rather than in the streets.
And it is this collective commitment to the law governing how political power can be exercised that is the essence of liberal democracy.
Indeed, the second conclusion to be drawn from the US government shutdown is the virtual disappearance of American triumphalism. Chest-thumping exceptionalism has given way to a more sober patriotism, in which ordinary citizens recognize the long-term trends eroding the promise of equal opportunity, particularly the shortcomings that beset the country’s health-care, education, and infrastructure systems.
The anger of Tea Party Republicans (like the anger of Occupy Wall Street protesters) reflects a sense that nothing but dramatic, even revolutionary, measures can change the system.
In response, however, more pragmatic voters are increasingly irate about political paralysis and their governing institutions’ inability to respond to the preferences of a clear majority of the population. In the midst of the shutdown, the Republican Party’s popular approval rating sank to barely a quarter of the national electorate, a historic low, while the approval rating for Congress as a whole stood at just 5%.
The final lesson of the shutdown is that political systems of every kind benefit from the addition of women.
Many commented on the critical role played by six women senators – Republicans and Democrats – in reaching the compromises needed to end the crisis.
These women have maintained relationships with one another across the partisan divide, while those among their male colleagues have steadily deteriorated, giving way to competitive grandstanding and vituperation.
Equally important, these women felt – and acted upon – the moral necessity of actually governing.
In the words of Senator Susan Collins, a Republican from Maine who first put together the outlines of a deal and took it to the Senate floor, the shutdown “hurt all the small businesses” around Acadia National Park in her home state, “and that is plain wrong.”
The world should note.
Women are not necessarily better than men at governing, but they often have different perspectives and habits of engagement that can be essential for cutting through the standoffs created by the need to defend male egos.
They are also often more focused on the plight of actual people than on the promotion of grand principles, preferring concrete progress to abstract victory.
From parliaments to peace negotiations, adding women improves outcomes.
Negotiations for a real budget that all sides can live with are beginning. And assessments of how the shutdown will affect the Republican Party’s fortunes in the 2014 midterm elections are rife.
But the country’s social and economic divisions will ultimately find political solutions, through elections and the efforts of millions of Americans to achieve fundamental reforms.
As frustrating and embarrassing as the last several weeks have been, it could have been much worse.
Xi’s Recipe
WASHINGTON, DC – China’s government is cracking down hard on Western journalists, threatening not to renew visas for reporters from the New York Times and Bloomberg in retaliation for their reporting on the corruption of senior Chinese officials.
Times columnist Thomas Friedman recently penned an open letter to the Chinese government telling them that, because the top “cause of death of Chinese regimes in history is greed and corruption,” a free press is more likely to help than hurt.
Anyone who holds freedom of the press and freedom of expression to be universal human rights will agree with Friedman’s position.
But, in China, politics – including the politics of rights – is always intertwined with economics.
Last month, President Xi Jinping announced a set of sweeping economic reforms at the Central Committee’s Third Plenum, setting forth his vision of “the great rejuvenation of the Chinese nation.”
His 60-point plan included reforms of fiscal policy and the financial sector that would set market interest rates on loans and deposits, permit some private-investor participation in state-owned enterprises, increase the role of small and medium-size enterprises, loosen labor restrictions, and introduce property taxes to boost revenue for local authorities.
This renewed embrace of the market, reminiscent of Deng Xiaoping’s original turn to capitalism in 1979, will be hard medicine for China’s entrenched business and government elites to swallow.
If Xi’s administration is successful – a big if – its reforms may enable China to negotiate the necessary transition from an economy driven by exports and government investment to a more sustainable growth model based on domestic consumption.
The stakes are high.
A country that has lifted hundreds of millions of people out of poverty over the last two decades must now find a way to safeguard and gradually increase those gains while engineering the same miracle for the hundreds of millions still left behind.
The world has a significant economic, political, and moral interest in the success of China’s reform agenda.
In this context, it is important to understand that Xi’s economic reforms are only one ingredient of a carefully crafted cocktail.
The rest of the recipe includes two parts popular social reforms – an end to the one-child policy for many Chinese parents and the abolition of “reeducation through labor” – and one part political crackdown.
Increased censorship and intimidation of foreign journalists, together with the imprisonment of dissidents and tighter restrictions on dissent, are an effort to ensure that economic disruption does not give rise to political rebellion.
To implement his ambitious reform agenda, Xi has taken several steps to consolidate his personal and bureaucratic power.
He has reduced the membership of the Politburo from nine to seven, making it easier to obtain agreement in a system designed to institutionalize collective leadership.
He has increased the power of the Central Committee, which he chairs.
And he has created a new State Security Council.
To understand how the State Security Council could serve Xi’s interest in centralizing power, consider the United States.
Without the National Security Council and the Domestic Policy Council, the US president would have no routine way to control and coordinate different bureaucracies.
White House staff working for the National Security Council call meetings at which officials from the State Department, Defense Department, Treasury, Justice Department, and other key agencies hash out their views on a given policy.
But it is the president’s staff who guide the outcome and determines the next steps.
Xi’s moves to strengthen his hand have helped to convince observers that he means business with the reform agenda.
Since the Third Plenum ended and the scope of Xi’s reforms has become clear, many China watchers have hailed him as the most transformative leader since Deng.
Time will tell, but a key difference between 2014 and 1979 is that today the Chinese cocktail is spiked with fear.
Evan Osnos, writing in The New Yorker, reports that two years ago, in the midst of the Arab uprisings, a senior official told a meeting in Beijing that if the Chinese government “waver[ed]” in the midst of social-media-fueled global dissidence, “the state could sink into the abyss.”
Recently, Osnos writes, a high-level Chinese diplomat explained the threatened expulsion of New York Times and Bloomberg journalists on the grounds that “the Times and Bloomberg were seeking nothing short of removing the Communist Party from power, and that they must not be allowed to continue.”
That fear is one of the principal forces driving Xi’s reform agenda.
The Communist Party must keep the Chinese economy growing (even if more slowly), while fighting rampant corruption and responding to citizens’ demands.
Chinese citizens cannot vote, but they can – and do – make their displeasure known, which places a premium on what Chinese bureaucrats call “stability maintenance.”
Will Dobson, author of The Dictator’s Learning Curve, describes the Chinese government as a technocracy whose legitimacy is founded on efficient problem-solving. “When a regime’s legitimacy is derived from its performance,” he argues, “any crisis – and how the party responds to it – can raise existential questions about the regime’s right to rule.”
China’s leaders apparently worry that Western-style investigative journalism inside China could trigger just such a crisis.
In any case, they are taking no chances.
They are placing their faith in their ability to wash their own dirty laundry and drive economic, social, and political change from the top down.
Germany Steps Up
WASHINGTON, DC – Since the start of his first administration, US President Barack Obama has repeated a simple mantra concerning other countries: “With power comes responsibility.”
Germany may now be following suit.
Several weeks ago, German President Joachim Gauck’s opening address to the 50th annual Munich Security Conference reflected on the Federal Republic’s evolution over those five decades, a period that gave rise to “a good Germany, the best we have ever known.”
And, because Germany benefits more than most countries from the current open, value-based international order, it has, Gauck said, a greater responsibility to defend and extend that order.
Gauck’s speech reflected the thinking in an important new report, entitled New Power, New Responsibility, released by the Stiftung Wissenschaft und Politik and the German Marshall Fund of the United States.
The report – the product of several months of debate within the German foreign-policy and security community – identifies Germany’s current values and interests as a commitment to “human dignity, freedom, democracy, the rule of law, and to an international order that is based on universal norms.” As Gauck proclaimed, Germany’s “overriding strategic objective” must be the “preservation and continued adaptation” of this order.
To achieve this objective, Germany must become a “shaping power,” a state with the ability to solve problems and resolve conflicts affecting all or part of the international community.
The traditional determinants of states’ power relative to other states – geography, demography, economic heft, and military might, coupled with the availability of resources and technological proficiency – remain important; but they are often insufficient to confer actual influence in international politics.
A shaping power builds relationships and invests in institutions that allow it to work well with others and to create and mobilize “coalitions and networks of like-minded states.”
As a shaping power with an enormous stake in preserving and extending the openness of the international system, Germany has a special responsibility to help integrate new global powers into that system.
Here is where things get interesting.
Germany has long sought a seat on the United Nations Security Council, making common cause with Japan, Brazil, and India.
But New Power, New Responsibility suggests a different path, arguing for the reform of the Security Council in a way that would merge the French and British seats into a permanent European seat in a “slightly enlarged circle of permanent members,” while also ensuring European representation among the non-permanent members.
Under this scenario, Germany would play a role in global peace and security through the European seat, as well as serving as a periodic rotating member.
Moreover, Germany recognizes the need to consolidate Europe’s voting power and reduce the number of European seats in other global institutions, such as the International Monetary Fund and the World Bank, to make room for emerging powers.
This renewed commitment to a strong and united Europe is the second pillar of a twenty-first-century German foreign policy.
New Power, New Responsibility calls for “deepening” the European Union through measures that would include democratizing EU financial decision-making by directly engaging national parliamentarians and exchanging tighter European fiscal constraints on member governments’ budgets for a European banking union, a eurozone budget, and Eurobonds.
In foreign and security policy, New Power, New Responsibility proposes strengthening the role of the EU High Representative and the role of the European Action Service.
Current EU High Representative Catherine Ashton continues to prove the worth of EU foreign-policy institutions by, for example, brokering a remarkable peace between Serbia and Kosovo and playing a key role in nuclear negotiations with Iran.
The third surprise concerns the use of force.
Gauck told Germans in no uncertain terms that they had to be willing to use force, at least as a last resort, and reproached those of his fellow citizens “who use Germany’s guilt for its past as a shield for laziness or a desire to disengage from the world.”
More controversially, Gauck proclaimed the need for Security Council authorization of any use of force, but also hinted at a Kosovo precedent for possible military intervention in Syria.
As he put it, when the international community confronts a clear case for the use of force to protect a population from its own government, but the Security Council is divided, “the relationship between legality and legitimacy will continue to be awkward.”
The participants in the deliberations that resulted in New Power, New Responsibility split on this question.
Some argued for an absolute requirement of Security Council authorization, while others recognized an imperative to contemplate humanitarian intervention without such authorization in “very narrowly defined exceptional cases.”
US Secretary of State John Kerry also spoke at the Munich Security Conference.
But, by not referring to Gauck’s speech, he missed an opportunity to underline the success of one of Obama’s key foreign-policy tenets: as the US steps back from its role as global policeman and focuses more on diplomacy than force, other countries must step up.
Even more important, Kerry and Obama would do well to think hard about a key lesson embedded in Gauck’s speech and the report behind it.
Countries that want to retain power in a changing global order must learn to share it, which requires accepting and embracing the contours of a new world.
The Obama administration should think hard about Security Council reform.
It should signal a real willingness to replace an order that reflects the world of 1945 with one that reflects the world of 2015.
That means supporting a greater global role for all powers that understand and accept real responsibility for maintaining global peace and security.
Stopping the Syria Contagion
WASHINGTON, DC – Syria’s civil war has become a wretchedly complicated problem.
As the parties prepare to meet in Geneva for the second round of United Nations-sponsored peace talks, the government has launched vicious barrel-bomb attacks on Aleppo and other cities; more moderate Islamist rebel groups, including the Free Syrian Army, are openly at war with Al Qaeda affiliates; and Al Qaeda-linked groups are now fighting among themselves.
Meanwhile, the war’s spillover effects are worsening.
The fighting has heightened instability in the region;
US and European citizens are streaming into Syria to take up jihad; and there is a growing consensus that the post-World War I Middle East boundaries are coming undone.
Indeed, the viability of Syria, a multi-ethnic state, is being threatened by multiple armed groups supported by external sponsors – Iran, Saudi Arabia, Qatar, Russia, the United States, Turkey, France, and many private donors – who themselves have conflicting aims.
Here are three ways to simplify the equation and maximize the chances that the parties to the Geneva II peace conference will be able to agree on more than the desirability of someday holding a Geneva III.
First, the most important contribution that this conference can make to the possibility of a negotiated settlement and a political transition in Syria is to change the principal parties’ incentives.
In the run-up to Geneva II, each party has sought to strengthen its hand at the negotiating table by killing as many adversaries and holding or regaining as much ground as possible. The task now for would-be peace brokers is to halt that dynamic by agreeing on criteria for participation in whatever elections will eventually be held, regardless of whether President Bashar al-Assad remains in power until then.
Those criteria must include the parties’ willingness to allow humanitarian aid to flow to all Syrian civilians under their control and an end to war crimes and crimes against humanity, including systematic targeting of medical personnel, starvation of populations under siege, and executions of war prisoners.
Here the UN must reaffirm its “responsibility to protect” doctrine, not as a justification for military intervention, but as a fundamental principle agreed by all countries: governments must protect their citizens.
If Assad’s Ba’ath party cannot uphold that responsibility, it forfeits its own legitimacy as a participant in any future government.
Second, the international community must re-establish the basis for its engagement.
When the Syrian conflict began, it was an internal matter, with UN involvement limited to humanitarian and refugee issues.
But now the conflict has spread across the Middle East, destabilizing Lebanon and Jordan and threatening to fracture Iraq.
The UN Security Council is charged with addressing breaches or threats to international peace, a criterion that is now clearly met.
As a permanent member of the Security Council, Russia thus has an obligation to act; it (and China) can no longer hide behind the argument that the UN should not be engaged in Syria’s internal affairs.
At a time when the Winter Olympic Games in Sochi put Russia squarely on the international stage, the US and other Security Council members should plan a series of resolutions that confront the Kremlin with the choice of meeting its responsibility or applying its own leverage to bring the conflict to an end.
Finally, the single most important step that US President Barack Obama could take is to put the credible threat of force back on the table.
In three years of increasingly bloody conflict, the only diplomatic success was achieved when Assad believed that he faced US missile strikes. He suddenly saw the desirability of getting rid of his chemical weapons.
But most experts believe that military force is off the table.
The US public sharply rejected Obama’s planned missile strikes to punish Assad for the repeated use of chemical weapons, and a recent Pew poll indicates that a majority of Americans believe that the US “should mind its own business internationally and let other countries get along the best they can on their own.”
Obama’s job, however, is to look beyond opinion polls, particularly when it comes to safeguarding national security.
The US has withdrawn from Afghanistan and Iraq, but the gains so painfully won are being reversed.
Al Qaeda is back and is fighting for its own proto-state in western Iraq and eastern Syria, which is far closer to Europe and the US than the caves of Afghanistan.
Perhaps Obama thinks that he or his successor can deal with that threat down the road.
If Al Qaeda operatives begin threatening the US from the Islamic State of Iraq and Syria, the US will just take them out with drones, as it has done in Afghanistan, Pakistan, and Yemen.
But if he is willing to contemplate using force against Al Qaeda without international authorization in the future, why not use drones now to strengthen the moderate Syrian opposition and force Assad into serious negotiations?
The threat of cruise-missile strikes last September was enough to send Al Qaeda members in Syria scrambling for the hills.
A strike designed to destroy Assad’s air force and prevent him from dropping bombs full of nails on his people would concentrate his mind on a diplomatic solution.
Obama should announce that the US is committed to a political solution in Syria, and that his government will do whatever it can to bring about such a solution through next week’s peace conference and follow-up action.
But if a ceasefire has not been achieved in the next three months, the US should work with regional organizations and all friends of the Syrian people to authorize a set of military strikes on Al Qaeda-linked forces and on the killing machine that Assad’s government has aimed at civilians.
The Obama administration should make the case for this to the American people in terms of straightforward US security interests.
After all, if Geneva II fails, Geneva III will not be about Syria alone.
World Cup America
WASHINGTON, DC – Something changed – or perhaps was revealed – in the United States during the last month.
Many millions more Americans watched the World Cup soccer tournament in English and Spanish than ever before.
True, with the World Cup’s end, many are arguing, as usual, that Americans pay attention only every four years – and only when the US is playing.
But this time something was different: Americans continued to watch even after the US team was eliminated.
Indeed, on a weekday afternoon in the middle of summer, nearly 15 million Americans tuned in to the Brazil-Germany match in the semifinal.
That is more than the usual viewership for ESPN’s Monday Night Football, the biggest regular television draw for fans of American football.
Almost every young person at my organization, New America, found ways to watch the US games in the early rounds.
My apartment mate explained that everyone in her office, in the US Department of Education, had used the excuse of a birthday party to watch the US-Germany match.
On the Tuesday afternoon when the US played Belgium in the knockout round, every bar in Aspen, Colorado, was packed.
Of course, Aspen is one of the country’s wealthiest communities, and perhaps not representative of the US as a whole.
But US television showed an enormous crowd of fans in Kansas City following the US-Belgium match on a large outdoor screen.
It was not quite the equivalent of the final match between Italy and France in 2006, when virtually every small Italian town turned out to watch on the main square; but Americans all over the country spent the month ducking out of work and into sports bars.
America’s growing embrace of soccer reflects some important ways in which the US has “joined” the world.
For starters, both the US team and the US audience for soccer derive their growing strength from immigrants – many from countries where the sport is a national passion.
For example, in Washington, DC, almost all taxi drivers are newcomers to America.
When my driver was Ethiopian, as often happened, we would commiserate over the national team’s defeat by Nigeria in a qualifying round, then celebrate the US defeat of Ghana, and end by agreeing that in four years, or certainly in eight, the US team would be among the world’s best.
In almost every case, my driver would tell me that his children were playing in local youth leagues.
These immigrants are not only providing homegrown soccer talent for US teams; they are a core part of the expanding US audience for soccer worldwide.
Dan Levy, lead writer for the US sports website The Bleacher Report, points out that most commentators define “American soccer” as the number of Americans who watch American players in US league play.
Obviously, that is a ridiculous metric.
US tennis fans watch tennis wherever it is played all over the world, and the US audience for golf does not plummet when a tournament is played in the sport’s birthplace, Scotland.
More Americans watch soccer in the European and Mexican leagues, in English and in Spanish, than watch baseball and ice hockey, traditionally considered two of the “big four” US sports (along with American football and basketball).
For the US, in particular, the World Cup is a great equalizer.
My mother is originally Belgian, though she has been a US citizen for over 50 years;
I still have an uncle, aunt, and cousins in Brussels.
During the US-Belgium match, emails flew fast and thick across the family network, with lots of friendly rivalry.
My mother claimed divided loyalty, because Belgium, after all, was “the David against the mighty Goliath.”
Her three American children all weighed in simultaneously, pointing out that in soccer it is the US that is the underdog.
Where else can the US experience what it is like to be a small country on the global stage?
Like viewers around the world, Americans rooted for their team together, regardless of their domestic differences.
At a bar in Aspen, where the only open seat was at a table with an older man and his son-in-law (who welcomed me and offered to put my beer on their tab), we cheered and groaned whenever the US got close to scoring a goal or missed a kick.
In the periodic short breaks, we sounded each other out enough to find out that we were definitely in opposing political camps.
Given the current state of polarization in US politics, I think it is likely that in most other settings, my tablemates would not willingly have bought several rounds of beer for someone who spent two years working at the State Department for Hillary Clinton.
Here, though, we were cheering not for our political side, but for our national side.
As our team maneuvered the ball down the field, politics fell away.
That happens at the Olympics, too, of course.
But the Olympics is a smorgasbord of sports, each with its core of devotees, who often cheer on their favorites at the same time, but separately, in different arenas.
And, more often than not, what we are witnessing is individual achievement – the deeply concentrated agility and courage of the downhill racer or the finely disciplined movements of the gymnast – rather than true team effort.
The World Cup allows all of the supporters of one country to come together at one moment for one game between two groups that must, like them, become more than the sum of their parts.
It actually feels incomplete to watch the World Cup alone.
At the end of the game, amid regret over the loss to mighty Belgium but convinced that the US had played a great game, my new friend said: “We need much more of this.”
US exceptionalism remains alive and well, of course.
I suspect that we will always call the world’s game “soccer.”
An Obama Moment for India’s Untouchables
NEW DELHI – Among the many international consequences of Barack Obama’s stunning victory in the United States is worldwide introspection about whether such a breakthrough could happen elsewhere.
Could a person of color win power in other white-majority countries?
Could a member of a beleaguered minority transcend the circumstances of his birth to lead his or her country?
While many analysts in a wide variety of nations, especially in Europe, have concluded that such an event could not occur there in the foreseeable future, India is an exception.
Minority politicians have long wielded authority, if not power, in its various high offices.
Indeed, India’s last general election, in 2004, was won by a woman of Italian heritage and Roman Catholic faith (Sonia Gandhi) who made way for a Sikh (Manmohan Singh) to be sworn in as Prime Minister by a Muslim (President Abdul Kalam) in a country that is 81% Hindu.
Not only could it happen here, Indians say, it already has.
Such complacency is premature.
The closest Indian analogy to the position of black Americans is that of the Dalits – formerly called “Untouchables,” the outcastes who for millennia suffered humiliating discrimination and oppression.
Like blacks in the US, Dalits account for about 15% of the population; they are found disproportionately in low-status, low-income jobs; their levels of educational attainment are lower than the upper castes; and they still face daily incidents of discrimination for no reason other than their identity at birth.
Only when a Dalit rules India can the country truly be said to have attained its own “Obama moment.”
In theory, this already has happened: K. R. Narayanan, born into a poor Dalit family, served as India’s president, the highest office in the land, from 1997 to 2002.
But the Indian Presidency is a largely ceremonial position: real power is vested in the office of prime minister, and no Dalit has come close to holding that post.
Since independence in 1947, a majority of India’s prime ministers have been Brahmins, the highest Hindu caste.
Yet the next national elections, due before May 2009, may produce a plausible Dalit contender for the job of prime minister – Kumari Mayawati, the female chief minister of India’s largest state, Uttar Pradesh.
Since 1991, no Indian governing party has enjoyed a secure parliamentary majority on its own, necessitating multi-party coalition governments.
The current Congress Party-led government of Manmohan Singh comprises 20 parties; it succeeded a 23-party coalition headed by the Bharatiya Janata Party’s Atal Bihari Vajpayee.
When the election results are declared next year, no one doubts that the first challenge will be to cobble together another coalition.
Both the Congress and the BJP will seek to make alliances with the dozens of smaller parties likely to be represented in parliament.
But this time they are likely to face a third alternative: Mayawati, whose Bahujan Samaj Party (BSP) may command a bloc of at least 50 seats.
She has publicly expressed her disdain for both large national parties; she would much rather lead a coalition than join one.
And if the electoral numbers break down right, she could conceivably assemble a collection of regional and left-wing parties and stake a claim to rule India.
This is a remarkable development: the idea that a Dalit woman could lead India has been inconceivable for 3,000 years.
But India’s democracy has opened new pathways to empowerment for its underclasses.
The poor and the oppressed may not have much, but they do have the numbers, which is what matters at the ballot box.
Dalits and India’s aboriginals (listed in the Constitution as “Scheduled Castes and Tribes”) are entitled to 85 seats in India’s 543-member parliament that are “reserved” for candidates from their communities.
Mayawati’s shrewd alliances, including with some members of the upper castes, which propelled her to power in Uttar Pradesh, give her party a fighting chance to win a number of other seats as well.
In a coalition-dependent parliamentary system, that could be all she needs to become prime minister.
The daughter of a government clerk, Mayawati studied law and worked as a teacher before being spotted by the BSP’s founder, the late Kanshi Ram, and groomed for political leadership.
Her ascent has been marked by a heavy emphasis on symbolism – her rule in Uttar Pradesh has featured the construction of numerous statues of Dalit leaders, notably herself – and a taste for lavish celebrations.
Mayawati’s weakness for “bling” has been demonstrated at her extravagant birthday parties, which she presides over laden with diamonds, saying (rather like Evita Peron) that her luster brings glamour and dignity to her people.
She takes pride in being the Indian politician who pays the highest income taxes – about $6 million last year – though the sources of her income are shrouded in controversy.
She has been accused, but not convicted, of corruption several times, with one notable case involving the construction of an elaborate shopping complex near the Taj Mahal, in violation of zoning laws.
Critics argue that Mayawati’s promotion of Dalit welfare seems to start with herself. But there is no denying that her rise to power in India’s largest state, which sends 80 members to parliament, has given her a vital platform to bid for India’s most powerful job.
With her diamonds and her statues, and a reputation for dealing imperiously with her subordinates, she’s clearly no Obama.
But if she succeeds, she will have overcome a far longer legacy of discrimination.
A No-Fly Zone for Libya
WASHINGTON, DC – Leaders around the world are vigorously debating the advisability of establishing a no-fly zone to stop the violence unfolding in Libya.
Some cite Bosnia, where NATO took too long to protect civilian populations in the mid-1990’s, as a reason to act. Others remember Rwanda, where President Bill Clinton later expressed regret for not acting to save innocent lives.
But the stakes in Libya today are more appropriately underscored by the tragedy in southern Iraq in the waning days of the Persian Gulf War 20 years ago.
As coalition forces were routing the Iraqi army in February 1991, President George H.W. Bush encouraged the Iraqi people to “take matters into their hands to force Saddam Hussein the dictator to step aside.” When Iraqi Shiites, Kurds, and Marsh Arabs rebelled against Hussein, they believed that American forces would protect them against their brutal dictator’s superior firepower.
Instead, when Iraqi attack helicopters and elite troops began butchering their own people, coalition forces were ordered to stand down.
The world watched as thousands of Iraqis were slaughtered.
The situation in Libya today is not identical.
Inspired by events in Tunisia and Egypt, the Libyan people rose up spontaneously against four decades of repression by Col. Muammar el-Qaddafi.
Still, the specter that haunts me is the same – ordinary people facing off against an autocrat’s airpower and well-armed soldiers, counting on the free world to protect them against massacre after we have applauded and bolstered their bravery with our words.
So far, Qaddafi’s forces have relied on airpower selectively.
But Qaddafi is shrewd.
My fear is that he is either choosing to bleed the opposition to death, rather than invite global action with a broad massacre, or waiting for the world to prove itself unwilling to act – at which point he might well begin killing civilians in large numbers.
We cannot wait for that to happen.
We need to take concrete steps now so that we are prepared to implement a no-fly zone immediately if Qaddafi starts using his airpower to kill large numbers of civilians.
Diplomacy is urgently needed to build broad support for a no-fly zone.
The most important imprimatur should come from the United Nations, where debate should begin immediately over a resolution authorizing a no-fly zone.
China and Russia have expressed reservations.
If the Security Council fails to authorize action, those of us determined to protect Libyan civilians will face a more difficult choice should the violence escalate.
So our diplomatic efforts must extend beyond the UN.
The support of NATO and the African Union are important.
To avoid the perception of NATO or the US attacking another Muslim country, the backing of the Arab world is also needed.
On that front, there are promising signs.
The six Arab countries of the Gulf Cooperation Council have called for a UN-imposed no-fly zone.
The Arab League has endorsed a similar proposal.
Muslim countries in particular should support preparations for intervention if the violence spirals out of control.
Qaddafi cannot be allowed to think that he can massacre his people with impunity.
And he cannot be free to make those attacks more lethal by using his airpower.
If the UN cannot approve a resolution for implementing a no-fly zone, then the US and its allies in NATO and the Arab world must be prepared to prevent a massacre like the one that occurred in Srebrenica in 1995, when more than 8,000 Bosnian men and boys were slaughtered.
Of course, imposing a no-fly zone would not be a panacea.
It probably would not tip the balance if the situation in Libya deteriorates into a full-scale civil war.
But a no-fly zone would eliminate airstrikes and save civilian lives.
It is a tool that we should be ready to use if the situation warrants it, and it would signal to the opposition that it is not alone.
Before that decision is reached, the international community needs to provide humanitarian assistance and medical supplies to the rebels in eastern Libya.
We must not allow them to be starved into submission.
The one option that should not be on the table is US ground troops; no one wants to see US forces bogged down in another war, especially in another Muslim country.
And, as President Barack Obama has said, the Libyan people must not be deprived of full ownership of their struggle for freedom, and Qaddafi must not be given a useful foil and scapegoat.
Perhaps the mere threat of a no-fly zone will keep Qaddafi’s pilots from using their helicopters and fighter jets to kill their own people.
If it does not, we should make clear that we will lead the free world to avoid the senseless slaughter of any more Libyan citizens by a madman bent on maintaining power.
The US and the world community should also make clear – as we did in Bosnia and Kosovo – that we are taking a united stand against a thug who is killing Muslims.
A No-Fly Zone for Syria
BRUSSELS – There is a saying, too often used in interpreting international relations, that my enemy’s enemy is my friend.
Sometimes it proves true; often it does not.
Thirty years ago, the Afghan mujahedin were mistaken for friends of the West when they fought their country’s Soviet invaders.
But how lazy that assumption seems now, given all that has since happened.
Syria’s deepening crisis, and the criminal use of chemical weapons there, has created a similar dynamic and dilemma.
But the West need not risk making the same mistake and accepting the same false choices.
Begin with first principles.
A chemical-weapons attack on the scale just seen in Syria must be deemed a game changer.
Although possessing these weapons of mass destruction is technically not illegal, most states are parties to the 1993 Chemical Weapons Convention, which Syria has refused to sign.
So the answer to the question “What happens next?” cannot be “Nothing.”
Principles of international law – in particular, the emerging “responsibility to protect” doctrine and enforcement of the global ban on the use of chemical weapons – dictate that some form of military intervention must occur in order to deter others from using WMDs, particularly against civilians.
But which measures are appropriate and genuinely useful?
What is more likely to strengthen the West’s security, and what runs the risk of weakening it?
I believe that the fairest and simplest proportionate response would be to impose a no-fly zone on Syria.
The proposal is particularly appropriate in the likely absence of any resolution under United Nations Chapter VII (“Action with Respect to Threats to the Peace”), owing to the (almost certain) cynical use by Russia and China of their veto power in the Security Council.
Of course, claims and counter-claims have been swirling in the aftermath of the appalling chemical-weapons attack on a rebel-controlled area east of Damascus.
But, given the brutality of President Bashar al-Assad’s regime, no one can doubt the lengths to which it would go to hide its guilt.
The five-day delay in allowing UN chemical-weapons experts to verify the attack gave Assad’s government ample time to conceal incriminating evidence, allow it to degrade, or destroy it with further shelling.
The United States, France, and the United Kingdom are adamant that all the intelligence and eyewitness evidence points to the Assad government as the perpetrator of the attack.
There also is no doubt about the legitimacy of concerns about elements of the Syrian opposition.
The Al Qaeda-led and Salafist extremist groups in the rebel forces, such a Al Nusra, have proved to be just as vicious as the government and its allies, the Iranian proxy Hezbollah and Iran’s Revolutionary Guard.
But the united view of Western intelligence services is that there is no evidence that these rebel groups launched the chemical-weapons attack.
In these circumstances, a no-fly zone would not only clear the skies of Syrian warplanes and missiles, thereby reducing the scale of the slaughter; it would also show Assad and his supporters that he truly is vulnerable.
Generals ordered to use chemical weapons would have to reckon with the prospect that the regime could, actually, fall, and that they then might find themselves on trial for war crimes.
It would be better, of course, if Russia and China would allow the Security Council to do the job for which it was intended – securing peace and preventing war crimes.
By continuing to support Assad despite his use of chemical weapons, Russia’s standing in the Arab world has gone from patron to pariah.
What little moral and political standing Russian President Vladimir Putin has retained in the rest of the world is also evaporating, as he will soon discover at the upcoming G-20 Summit in Saint Petersburg.
But the world cannot hold its breath waiting for a change of heart by Putin and China, which is why a no-fly zone should be examined as a military option.
In the aftermath of the Gulf War in 1991, a no-fly zone, initially proposed by British Prime Minister John Major, did not topple Saddam Hussein, but it did prevent him from carrying out further attacks from the air on Kurds in the north and Shia in the south.
Likewise, a no-fly zone in Syria would immediately restrict the Syrian government’s means of delivery of weapons of mass destruction.
Some military experts may say that Syria’s air-defense systems are too sophisticated to suppress, making a no-fly zone too dangerous to enforce.
But Israel has managed to attack Syrian territory twice – destroying a North Korean-staffed nuclear reactor in 2007 and, more recently, striking a Hezbollah convoy – with no casualties or loss of planes.
Mindful of this weakness, Russia has offered Syria its more modern S-300 missiles; but there is no evidence that they have arrived, let alone been deployed.
And once Syria’s air-defense system is sufficiently degraded, it would be best if Arab countries – Saudi Arabia, Qatar, and other Gulf states – and Turkey used their air forces to police the zone.
Any malicious wishful thinking on the part of Assad’s regime would be dispelled with every glance at the sky.
An Old Problem on China’s New Frontier
WARSAW – Had the August 1991 putsch against Mikhail Gorbachev not failed, the riots and death recently seen in Xinjiang could have been taking place in Russia.
Instead of hearing about a crackdown in Urumqi, Xinjiang’s capital, we might be reading about hundreds killed on the streets of Almaty, and columnists would be making comparisons to the bloody crushing of Ukrainian independence demonstrations in Lvov the previous year.
As with China today, there would have been some feeble international condemnation, and some speculation about possible links between Kazakh militants and exile groups, or Islamic fundamentalists.
Experts would remind us that Kazakhstan had never been a country, and that Ukrainian claims to independence are historically dubious.
Substitute Xinjiang for Kazakhstan and Tibet for Ukraine and you get the picture.
But that putsch, thankfully, ended as a farce.
The decaying Soviet regime was unable to crush Russia’s growing democratic movement – it would take Vladimir Putin to do that a decade later.
By opting for the Tiananmen Square massacre in 1989, the Chinese Communist leadership set their country on a road starkly different from the one on which Russia subsequently embarked.
Though China’s policies have brought about Pinochet-style economic growth, if on the scale of a country that is almost a continent unto itself, they have also ensured that there is in no freedom for anyone, including the Han majority.
This, in turn, means that, while Kazakhstan and Ukraine are independent, Tibet and Xinjiang alternate between phases of violent agitation and bloody repression.
Though Russia today is autocratically governed, the introduction of a Chinese-style dictatorship seems hardly plausible, while GDP per capita was $15,800 last year, or almost three times that of China.
Yet a majority of the Chinese population seems to support its’ government’s policies, including its brutal suppression of minorities and denial of democratic freedoms.
In fact, the latter seems to be the price paid for the success of the former.
This is not a novel phenomenon.
In 1863, the Russian democratic émigré thinker Alexander Herzen, commenting on the brutal crushing of the Polish uprising by the Tsarist army, wrote in his publication
When Herzen was writing his words, Moscow was not only busy successfully putting down the Poles, reasserting its rule there for another half-century, but also, together with China, carving up Central Asia, known then as Turkestan.
The eastern part of the region fell under Chinese rule, and was renamed Xinjiang, or New Frontier.
Each time Chinese rule weakened, as in the 1930’s and 1940’s, short-lived East Turkestan Republics were established, with Russian support, only to flounder when Russia and China struck new deals.
The leadership of the second East Turkestan Republic was presumably murdered on Stalin’s orders, when the plane carrying it to Beijing for talks allegedly crashed in Soviet airspace.
Since then, East Turkestan has existed solely on paper, as a member of the Unrepresented Nations and Peoples Organization (UNPO), a would-be competitor of the United Nations set up in 1991.
In Xinjiang itself, the current agitation is more social than nationalist in character, and targets cultural oppression (Han Chinese by now make up half of the region’s population) rather than expressing aspirations for independence.
Yet the recent bloodbath there is almost sure to change that, as violence unavoidably breeds radicalization.
In the short and medium term, China’s rule in Xinjiang and Tibet seems secure: the international community will not challenge a Security Council member state.
Only its own citizens could do that, but Herzen’s package deal seems to prevent that: just like the Tibetans, the Uighurs elicit not Han solidarity, but a braying for their blood – somewhat understandable, given that ordinary Han in Lhasa and Urumqi were made to pay with their own for China’s misdeeds.
In the longer term, however, the Chinese authorities have every reason to be worried: Xinjiang will grow to be a problem like Tibet.
Indeed, though the UNPO, to which both belong – alongside Assyria and the Buffalo River Dene Nation – has a vaguely Marx Brothers’ air to it (one expects Freedonia, the mythical country of which Groucho Marx was prime minister, to be on the roster), six member states already have left it to join the UN, and Kosovo, now independent if lacking UN recognition, will eventually follow.
Political maps are never carved in stone.
It is therefore safe to assume that not only obscure academics and correspondents, but officials in Beijing as well, are now busy studying the history of the Ghulja uprising and of Osman Batur’s guerillas.
Come to think of it: whatever happened to the Poles, whom Russia so successfully put down in 1863?
An Open Letter to Ehud Olmert
Dear Mr. Olmert,
I am writing you in the hope that you will take time from your busy schedule as Israel’s acting Prime Minister to hear one Palestinian’s hopes.
Even though your ascension to the position of Prime Minister came in an awkward way because of Ariel Sharon’s stroke, I believe that you have an opportunity to be part of a historic reconciliation.
While I am sure you will insist that you are going to follow in the political legacy of Sharon, you have some important advantages with Palestinians that Sharon did not have.
The first advantage is that you’re not burdened with Ariel Sharon’s negative image among Palestinians and Arabs.
Having been the mayor of Jerusalem for 10 years, you know the situation of Palestinians close up.
I believe that the chances for a political breakthrough in our region have never been better.
On the Israeli side, your faith in the political process was demonstrated recently when you and Sharon decided unilaterally to go against your own ideology and take on the powerful settler movement.
The two of you also went against conventional Israeli thinking by breaking away from your Likud party, greatly weakening the ideological stranglehold that Likud’s far-right central committee held on Israeli politics.
The realization that withdrawal from populated areas, and thus an end to holding another people under permanent occupation, was necessary to preserve the Jewish nature of Israel clearly brought the two of you to the center of Israeli thinking.
On a much smaller scale, significant change has been taking place on the Palestinian side as well.
While I believe that the occupation, rather than the reaction to it, is the main cause of our conflict, the unilateral tahdia (“declared calm”) decision by Palestinian militant groups has reduced anti-Israeli attacks mightily, which shows that Palestinians also realize the limits of their military actions.
The decision by Hamas to join the political process by participating in the upcoming legislative elections shows that even this hardline Islamic movement has concluded that our conflict needs to be addressed by political rather than military means.
While I understand that you are an Israeli patriot, I believe that much can be done to reduce the tensions between our two peoples, eventually leading to genuine reconciliation and peace.
As a start, priority must be given to face-to-face negotiations.
Sharon and you might have felt that unilateral action was needed in Gaza, but the withdrawal from Gaza could have produced many more benefits for both sides had it been done bilaterally.
Direct talks should concentrate on two parallel tracks.
They should attempt to produce an immediate cessation of violence from both sides while simultaneously focusing on a permanent settlement of our conflict.
Contrary to territorial withdrawal, cessation of violence can be achieved only bilaterally.
Both sides should commit to an end to assassinations, shelling, bombings, and any other form of attacks on the other side’s military targets and citizens.
To be effective, such a cease-fire must contain a monitoring mechanism.
Neutral foreign observers should be asked to be deployed in major hot spots and be asked to identify anyone on either side who violates any of the agreement’s clauses.
Alongside this effort, vigorous negotiations on a permanent settlement should start immediately.
Historically, cease-fires have survived only when they are backed by talks that both parties believe are genuine and serious.
At the same time, the atmosphere among Palestinians and their attitude towards Israel must be improved, so that we can have a political environment that supports negotiations.
Improving the daily conditions of life, particularly increasing Palestinians’ freedom of travel both between Gaza and the West Bank and within the West Bank, will also go a long way in helping to create a positive atmosphere.
I truly wish you success in your responsibilities as acting Prime Minister and acting head of Kadima.
Your efforts to move forward towards resolving the Palestinian-Israeli conflict will generate significant improvement in the political atmosphere in the entire Middle East.
But, whatever you do in the next few months to win the forthcoming parliamentary elections, please remember that the support that Kadima has received from the Israeli public derives precisely from the fact that it has taken a moderate centrist position.
So please don’t allow yourself to be drawn into pandering to Israel’s radicals and hawks.
The support that you and your colleagues will get from Israelis and Arabs will depend on the resolve that you show in making serious progress in the peace process.
That process, now as before, must culminate in an independent and democratic Palestine alongside a safe and secure Israel.
Another Argentine History
On top of Argentina’s bestseller list is The Myths of Argentine History, Volume Two .
In second place is The Myths of Argentine History, Volume One .
Both, of course, are by the same author: Felipe Pigna, a 45-year-old historian.
It is a rare event when two volumes of the same book top the Argentine bestseller list.
Nevertheless, the same thing occurred with the first and second volumes of The Argentines , another look at our history by Jorge Lanata, one of Argentina’s best known journalists.
Argentina has been on the front pages of the world’s newspapers, with stories describing an economic and social crisis born of debt default and devaluation, unemployment and widespread poverty.
The subplot is inevitably how a Latin American country that once seemed more like Europe developed all the maladies of its Southern neighbors: a state unable to guarantee public health and education; a growing gap between rich and poor; the disappearance of the middle class; and the decline of industrial capacity in favor of producing raw materials.
All of this is undeniable, and yet the most important change in Argentina – one that occurred a few years earlier – went unnoticed.
Argentina had been, since the end of the nineteenth century, the country of the future.
Millions of immigrants arrived with great expectations of making a country – and making it
In the collective imagination, this idea was expressed in the phrase, “The country that we all deserve.”
The immigrants would raise a new generation of doctors, lawyers, and engineers.
For the individual, Argentina embodied the dream that one’s children would live better – and their children even better.
This idea of promise and progress was central to Argentines.
It was the basis for Argentina, the paradigm for our lives and our way of living.
It lasted for nearly a century, until the early 1980’s.
Since then, not even campaigning politicians have dared to promise a prosperous future.
Slowly, many parents began to accept the fact that their children would be worse off.
The notion of Argentina as a country with infinite promise became a
We lost our organizing principle and no other idea has replaced it.
We no longer have a guide, an idea of how to think about our country, how to understand it and how to imagine who we are and who we can become.
Argentina has become a country without direction.
It hasn’t been easy living without knowing who we are, and it became even more difficult to live this way as we watched our world crumble.
This absence of animating purpose, of faith in the future, has made us hungry for our past.
Faced with the loss of the nation’s central idea and desperately in search of a new one, millions of Argentines have become interested in their history.
These books tell our history in an odd way.
To begin with, they reject all academic conventions, such as footnotes, graphics, or judicious explanations in favor of agreeable journalistic narratives pitched to a mass audience.
They appeal, above all, to the logic of popular suspicion that perhaps becomes inevitable when a proud nation is suddenly laid low: Pigna, like Lanata, presents a history full of conspiracy, lies, treason, and corruption.
Both books apply to the past the lens that Argentines are accustomed to using when they look at the present: the lens of the press.
If these books can be read as developing a new idea of Argentina, it is the idea that there is little to trust, that everything is fraudulent, and that leeriness must be our worldview.
This is an interesting view – and perhaps a necessary one – but it is also dangerous.
The process of developing and coming to terms with a new national idea cannot begin and end with a rejection of the very concept.
Argentina’s ongoing search is an untold, fascinating story of how we Argentines imagine and define who we want to be in the next decades.
In an uncertain age, whoever defines us first, whether a politician, an artist, or an intellectual, will merit a prominent place in our history.
Another Asian Wake-Up Call
NEW HAVEN – For the second time in three years, global economic recovery is at risk.
In 2008, it was all about the subprime crisis made in America. Today, it is the sovereign-debt crisis made in Europe.
The alarm bells should be ringing loud and clear across Asia – an export-led region that cannot afford to ignore repeated shocks to its two largest sources of external demand.
Indeed, both of these shocks will have long-lasting repercussions.
In the United States, the American consumer (who still accounts for 71% of US GDP) remains in the wrenching throes of a Japanese-like balance-sheet recession.
In the 15 quarters since the beginning of 2008, real consumer spending has increased at an anemic 0.4% average annual rate.
Never before has America, the world’s biggest consumer, been so weak for so long.
Until US households make greater progress in reducing excessive debt loads and rebuilding personal savings – a process that could take many more years if it continues at its recent snail-like pace – a balance-sheet-constrained US economy will remain hobbled by exceedingly slow growth.
A comparable outcome is likely in Europe.
Even under the now seemingly heroic assumption that the eurozone will survive, the outlook for the European economy is bleak.
The crisis-torn peripheral economies – Greece, Ireland, Portugal, Italy, and even Spain – are already in recession.
And economic growth is threatened in the once-solid core of Germany and France, with leading indicators – especially sharply declining German orders data – flashing ominous signs of incipient weakness.
Moreover, with fiscal austerity likely to restrain aggregate demand in the years ahead, and with capital-short banks likely to curtail lending – a serious problem for Europe’s bank-centric system of credit intermediation – a pan-European recession seems inevitable.
The European Commission recently slashed its 2012 GDP growth forecast to 0.5% – teetering on the brink of outright recession.
The risks of further cuts to the official outlook are high and rising.
It is difficult to see how Asia can remain an oasis of prosperity in such a tough global climate.
Yet denial is deep, and momentum is seductive.
After all, Asia has been on such a roll in recent years that far too many believe that the region can shrug off almost anything that the rest of the world dishes out.
If only it were that easy.
If anything, Asia’s vulnerability to external shocks has intensified.
On the eve of the Great Recession of 2008-2009, exports had soared to a record 44% of combined GDP for Asia’s emerging markets – fully ten percentage points higher than the export share prevailing during Asia’s own crisis in 1997-1998.
So, while post-crisis Asia focused in the 2000’s on repairing the financial vulnerabilities that had wreaked such havoc – namely, by amassing huge foreign-exchange reserves, turning current-account deficits into surpluses, and reducing its outsize exposure to short-term capital inflows – it failed to rebalance its economy’s macro structure.
In fact, Asia became more reliant on exports and external demand for economic growth.
As a result, when the shock of 2008-2009 hit, every economy in the region either experienced a sharp slowdown or fell into outright recession.
A similar outcome cannot be ruled out in the months ahead.
After tumbling sharply in 2008-2009, the export share of emerging Asia is back up to its earlier high of around 44% of GDP – leaving the region just as exposed to an external-demand shock today as it was heading into the subprime crisis three years ago.
China – long the engine of the all-powerful Asian growth machine – typifies Asia’s potential vulnerability to such shocks from the developed economies.
Indeed, Europe and the US, combined, accounted for fully 38% of total Chinese exports in 2010 – easily its two largest foreign markets.
The recent data leave little doubt that Asia is now starting to feel the impact of the latest global shock.
As was the case three years ago, China is leading the way, with annual export growth plummeting in October 2011, to 16%, from 31% in October 2010 – and likely to slow further in coming months.
In Hong Kong, exports actually contracted by 3% in September – the first year-on-year decline in 23 months.
Similar trends are evident in sharply decelerating exports in Korea and Taiwan.
Even in India – long thought to be among Asia’s most shock-resistant economies – annual export growth plunged from 44% in August 2011 to just 11% in October.
As was true three years ago, many hope for an Asian “decoupling” – that this high-flying region will be immune to global shocks.
But, with GDP growth now slowing across Asia, that hope appears to be wishful thinking.
The good news is that a powerful investment-led impetus should partly offset declining export growth and allow Asia’s landing to be soft rather than hard.
All bets would be off, however, in the event of a eurozone breakup and a full-blown European implosion.
This is Asia’s second wake-up call in three years, and this time the region needs to take the warning seriously.
With the US, and now Europe, facing long roads to recovery, Asia’s emerging economies can no longer afford to count on solid growth in external demand from the advanced countries to sustain economic development.
Unless they want to settle for slower growth, lagging labor absorption, and heightened risk of social instability, they must move aggressively to shift focus to the region’s own 3.5 billion consumers.
The need for a consumer-led Asian rebalancing has never been greater.
Another BRIC in the Wall?
NEW YORK – Conventional wisdom rarely survives a good stress test, and few tests have been as stressful as that which the global economy has endured over the past 24 months.
A healthy season of reappraisal has dawned, shining a new light on boom-time notions like the value of opaque markets, the untouchable status of the American consumer, or the wisdom of deregulation.
One piece of bubble wisdom that has escaped relatively unscathed, however, is the assumption that the “BRIC” countries – Brazil, Russia, India, and China – will increasingly call the economic tune in years to come.
The BRIC notion, coined in a 2003 Goldman Sachs report, is not all bad: at 75% correct, it scores a good deal better than most economic prognostications of the day.
Yet the economic crisis that began in 2008 exposed one of the four as an impostor.
Set the vital statistics of the BRIC economies side-by-side and it becomes painfully obvious that, in the words of the old Sesame Street game, “One of these things is not like the other.”
The weakness of the Russian economy and its highly leveraged banks and corporations, in particular, which was masked in recent years by the windfall brought by spiking oil and gas prices, burst into full view as the global economy tumbled.
Saddled with a rust-belt infrastructure, Russia further disqualifies itself with dysfunctional and revanchist politics and a demographic trend in near-terminal decline.
Even with the modest recovery in commodity prices over the past six months, Russia’s energy sector has experienced declining production in recent years, due in part to fears among foreign investors of expropriation.
Russia’s sovereign wealth fund, integral in propping up an increasingly re-centralized economy, is being depleted fast.
If negative trends continue, Russia’s reserve fund could eventually be exhausted.
Russia’s fall back to earth, meanwhile, spawned a kind of parlor game among academics, foreign-policy wonks, and educated investors, aimed at replacing the country in the club of major emerging-market economies.
A variety of acronyms has been suggested, from the cutesy BRICET (adding Eastern Europe and Turkey) to BRICKETs (the former plus South Korea) and – an even greater stretch – BRIMC, which shoehorns Mexico into the mix.
In all of these revisions, Russia survives, despite the writing on its economic wall.
While Russia retains the world’s largest (if somewhat aging) arsenal of nuclear weapons, as well as a permanent seat (and thus veto power) on the UN Security Council, it is more sick than BRIC.
Purely from the standpoint of economic potential and fundamentals, the case is far stronger for South Korea, a sophisticated economic power whose primary liability is the danger that the regime of its evil twin to the north will collapse and inundate it with hungry refugees.
The same is true of Turkey, with its robust banking sector, thriving domestic market, growing importance to Middle East and energy politics, NATO membership, European Union membership bid, and ties to ethnic cousins across Central Asia.
Perhaps the most compelling case of all is that of Indonesia, the world’s largest Muslim state, with a rapidly expanding middle class, relatively stable democratic politics, and an economy that has been a star performer in Asia despite the global recession.
From an American perspective, Indonesia is an attractive alternative to Russia, which recently has vied with Venezuela for leadership of the “America in decline” cheering section.
Indonesia, moreover, has shown resilience not only economically, but also as a nation.
In spite of its diverse ethnic makeup and far-flung island territory, the country has made a quick transition from military dictatorship and has recovered from myriad challenges and setbacks, including the 1997 Asian financial crisis, the tsunami in 2004, the emergence of radical Islam, and domestic unrest.
While Indonesia’s per capita GDP remains low, it is a country’s potential that matters in economic affairs, and here Indonesia shines.
Indonesia depends less on exports than its Asian peers (let alone Russia), and its asset markets (timber, palm oil, and coal, in particular) have attracted major foreign investment.
The government in Jakarta, meanwhile, has taken a strong stand against corruption and moved to address structural problems.
Even demographic trends favor Indonesia, which, with 230 million people, is already the fourth largest country in the world by population – a full Germany (80-plus million) larger than Russia.
But catchy ideas die hard, and Russia has moved to cement the current concept of the BRICs into an irreversible reality.
The ossification of the BRICs into a
That meeting produced a notable broadside against the United States, as each member declared its desire to unseat the dollar as the global reserve currency.
A few months earlier, the four were moved to issue a joint communiqué ahead of the G-20 Summit in April noting their shared determination to change the rules of the global economic system.
In the private sector, BRIC index funds have proliferated, though Goldman Sachs has radically hedged its own BRIC bet by introducing a second term – the “Next 11,” or N-11 – to the debate. This grouping adds
Russia sniffs at the idea of demotion, and American officials appear to have decided to steer clear of the semantic debate.
Still, it should surprise no one that Russia lobbied hard for the Yekaterinburg BRIC summit, and footed the bill for much of it as well.
Why risk exposure too soon?
Another European Failure
JERUSALEM: The European Union has failed once again.
Its total impotence to prevent war near the heart of Europe was amply proved in Bosnia and Kosovo over the last decade.
Now the European Union has once again failed to respond to the challenge posed by the Haider phenomenon in Austria.
By lifting the half-hearted sanctions imposed by the 14 members of the EU on Austria in February, any talk about Europe standing for a community of values sounds even more hollow than ever before.
In the case of Bosnia and Kosovo, Brussels proved itself to be totally irrelevant and impotent when the use of force – or the threat of the use of force – was concerned.
Fine words and mellifluous phrases filled many documents – but when Vukovar was destroyed, Dubrovnik shelled, Sarajevo besieged for years and then the horrible mass murders in Srebrenica occurred – all that the European Union was able to muster were more words and self-righteous indignation.
But then one could argue that the European Union was not a military alliance.
In the end, it proved that – of all people – Machiavelli was right when he argued that even prophets need to be armed in order to be effective: the moral imperative not to allow another genocide-like development in Europe needed the NATO’s armaments to be effective.
The European Union continued to produce words.
When it came to Austria, however, there was a feeling that since this was not a military, but a purely political and moral situation, Brussels – and the Continent-wide political clout signified by it – would be able to prove efficient.
Alas, it failed as dismally as the League of Nations failed in the l930's.
Let us revisit what the issue was and still is: in the heart of Europe – and in a country burdened by the political ideologies which gave rise to Hitler, himself an Austrian – Jörg Haider and his party revived the political discourse of xenophobia, racism and visceral anti-foreign sentiment.
It is true that democracies always find it difficult to balance their commitment to human rights with their commitment to free speech: it is a delicate path to tread, and there is no easy answer on a legal and constitutional level.
Yet the issue is not legal or constitutional – it is political.
To preserve democracy and human rights, democratic parties have realized that the most effective ways to confront racist and xenophobic parties is to marginalize and exclude them – to treat them as beyond the pale as potential partners for government.
The Austrians are right that Haider-like parties exist in many European countries – in Britain, France, even in some Scandinavian countries.
But in all these countries, the political discourse of all democratic parties ostracized these racist groups and parties: British Conservatives have never entered into an alliance with the British National Front; the same goes for France, where French conservatives have expelled from their own party local leaders who fashioned municipal alliances with Le Pen's representatives.
This is exactly what the Austrian conservative People's Party under Wolfgang Schuessel did not do.
Confronted with an election outcome of whether to rejoin the Social Democrats or Haider's Freedom Party, they made a Faustian pact with Haider.
There may be good political reasons why another alliance with the Social Democrats was not appealing to Schuessel's party (for one, he would not be Chancellor in such a coalition).
But there are basic values which should have overruled such purely tactical considerations and have prevented Schuessel's party from joining with Haider.
It is the moral blindness of Schuessel and his party that triggered the response of the 14 members of the EU.
One could argue that the bilateral sanctions imposed by the 14 on Austria were inadequate and even ineffective.
This is besides the point: the point is, what is the European Union, committed to democracy and human rights, going to do now?
Let us put it bluntly: the continued participation of Haider's party in a governing coalition in a European country is totally unacceptable.
The language Haider and many leaders of his party have used over the years is informed by the same racist and anti-Semitic discourse that gave birth to Nazism: in the specific Austrian context, it is violently anti-Slav as well as anti-Turkish.
While Haider is careful not to say anything which can be construed as anti-Semitic, his praise for the valor and honor of Waffen-SS veterans as well as comments on Nazi concentration camps clearly suggest where his ideological home is.
Haider and his party deserve to be politically isolated and ostracized.
The EU countries have failed twice in their attempt to respond to this challenge – once by half-hearted sanctions; now by lifting them.
What is Brussels to do?
Continue with business-as-usual, churning out document upon document of bureaucratic mumbo-jumbo, perhaps even continue to give free advice to Israelis and Palestinians about how to work out their differences?
One wonders what a good European word for chutzpa would be.
Charity begins at home.
At a time when the EU is on the verge of an ambitious project of enlargement to include many Slav and other Eastern European nations, to allow a racist and xenophobic party to be in power in Austria – or anywhere else within the EU – is a continued reminder of the moral bankruptcy of the idea of European unification.
After the l930's and l940's one would have hoped that European countries would take threats emanating from a kind of language and sentiment expressed by Haider and his party more seriously.
This is the challenge for European leaders now, and one would hope that under the French Presidency, and with the traditions of the Enlightenment being so central to French and European discourse, a vigorous, efficient response will be found.
Another Failed British Experiment
FLORENCE – British politics has always been something of an experimental laboratory for the industrialized world.
In the 1970’s, Britain was where the preeminent postwar model of how to manage the economy collapsed.
That model had been based politically on the creation of consensus, and economically on Keynesian demand management. Today, the equivalent collapse has been of the “regulation-lite” regime in which a party that styled itself as “New Labour” accepted a powerful role for markets – particularly for largely deregulated financial markets.
In the 1960’s, Keynesian policies delivered the illusion that everyone was benefiting, with high levels of employment and significant wage growth.
Britain was the coolest place on earth, boasting the Beatles and the Rolling Stones and the pastel fashions of Carnaby Street.
But Keynesianism involved continued fiscal expansion, with no offsetting monetary contraction.
By the 1970’s, it had brought to the United Kingdom large and ultimately unsustainable current-account deficits, high levels of inflation, and then political gridlock over what to do.
Which group should be the first to make a sacrifice?
In early 1974, Edward Heath’s Conservative government was locked in a struggle with the powerful coal miners’ union over “who rules Britain.” He called a premature election in February, in which there was no clear winner.
Heath was deeply unpopular. But the opposition Labour Party was not convincing either, and had little in the way of an intellectual alternative.
It simply sought to avoid confrontation with the unions.
The election produced a political stalemate.
The centrist Liberal Democrats appeared to hold the balance of power, and stories circulated of how Heath was prepared to concede a reformed voting system.
He held out the promise of proportional representation, which would ensure a greater number of parliamentary seats for the Liberal Democrats in future elections, in exchange for the party’s support for a new Conservative government.
There appears to be an overwhelming likelihood that the 1974 stalemate will be repeated in the upcoming general election on May 6.
The political maneuvering has already started, with the unpopular incumbent prime minister, Gordon Brown, today’s equivalent of Heath, bidding for the Liberal Democrats’ support by promising a constitutional reform that would give the party major advantages.
In 1974, the touted Conservative-Liberal Democrat coalition never materialized, as the Liberal Democrats were wary of hitching their fortunes to an unpopular and discredited politician.
The result was a minority government that struggled for support and legitimacy, and in the end offered only policies that provided no real answer to the country’s underlying problems.
Britain today resembles 1974 much more than it resembles 1979, when the Thatcher revolution set the country on a new path.
There is again a major economic problem, the end of a credit-driven boom, and a threat to the banks (except that it all looks much bigger, owing to the financial system’s massive growth and internationalization).
Both major political parties look tired, and at the same time as if they are competing to imitate each other.
The choice appalls voters.
There is also an ominous resemblance to Italy in 1992, when both major parties of the previous 40 years, the Christian Democrats and the Communists, simply melted away in a mixture of corruption and intellectual failure.
In the 2000’s boom, as in the 1960’s, it looked as if everyone could live on the never-never.
In 1960’s, it was counter-cyclical fiscal policy that held out the promise of prosperity for all; in the 2000’s, it was that individuals rather than the state piled up debt.
The magic of markets made possible an individualization of borrowing and consumption.
As in the meltdown of the 1970’s, it is easy to see how everyone benefited from the recent boom: homeowners saw their houses rising in price, social-welfare payments were expanded, and people seemed swept up in a new wave of 1960’s-style “Cool Britannia.”
But now, as then, Britain’s future is bleak and overshadowed by debt.
Major adjustments are needed.
At the same time, the main parties find it hard to address the country’s problems, because they are reluctant to call for sacrifice before an election.
And, because the party programs of the Labour government and the Conservative opposition are not clearly distinguishable, they find it hard to differentiate themselves from the Liberal Democrats.
Both major parties are appealing to the political center, but they will never be as convincing as a political party that really is in the political center, and that is unencumbered by the scandals attached to the past exercise of power.
The course of the electoral struggle so far indicates that the Liberal Democrats will do very well.
Their leader outshines his Conservative and Labour counterparts in television debates and on the campaign trail.
Moreover, Labour and the Conservatives are in a political trap.
The moment they start to disagree with the Liberal Democrats, they will make themselves look extreme and will forfeit voter sympathies.
But this demand for political moderation impedes the search for the radical and painful solutions that Britain needs.
Little wonder, then, that currency markets are treating the likely outcome in Britain – a hung parliament, with no clear majority for any party – as a repeat of the mid-1970’s, with no clear solution to the country’s underlying economic problems on offer.
Another Fine Italian Mess
ROME – A game of smoke and mirrors: this is how Italy’s current electoral campaign appears – both to Italians and the wider world.
Of course, there is nothing new in this: Italy’s political dynamics have always baffled participants and observers alike.
That a small centrist party may now get the courts to postpone the election merely adds to the usual confusion.
But one thing that seems certain this time is the likely result.
Silvio Berlusconi, the leader of the right-wing alliance, will win his third election (he has also lost twice), while the vote for the Senate is expected to produce a draw.
In this case, Berlusconi’s forces could ally themselves with Pier Ferdinando Casini’s centrist Catholic party, or work to form a coalition with their center-left adversary, the Democratic Party, led by Walter Veltroni.
The latter option, once unthinkable, is possible because Berlusconi is not running the type of inflammatory electoral campaign that he has in the past.
The sharp tone and fierce partisanship of the past 13 years have been cast aside.
Berlusconi seems to be fully aware of the difficulty of governing Italy.
He needs to be.
With public debt expected to stand at 102% of GDP in 2009, rising inflation, and growth of just 0.2%, it will be difficult to keep electoral promises.
Sagging public infrastructure and an inability to attract foreign capital have made the economic outlook even worse.
In addition, while the state-owned companies Telecom, Autostrade, and Alitalia were subject to an extremely interventionist policy by Romano Prodi’s outgoing government, they have little to show for it.
Plans to build a high-speed train connecting Italy with northern Europe continue to experience delays.
The garbage crisis in Naples remains unresolved putting the international reputation of one of Italy’s most famous products, mozzarella, at risk.
With global financial markets in crisis and Europe’s economy softening, the challenges for the new Italian government will only become greater.
Foreign policy, too, may prove difficult to manage.
New activism on the part of France and the United Kingdom, along with Germany’s emergence as a central player in EU affairs, risk marginalizing Italy’s influence even more.
If Berlusconi returns to office, he will again seek strong cooperation with the United States, the path now being followed by French President Nicolas Sarkozy and British Prime Minister Gordon Brown.
If he succeeds, something like a six-nation “contact group” (France, the UK, Germany, Spain, Poland, and Italy) will have formed to determine EU relations with the US.
This leadership will be needed, because, regardless of who wins the US presidential election, the next American administration is bound to ask for greater EU participation in addressing international conflicts.
But Italy, unlike France, is in no position to substitute the beauty of Carla Bruni, Sarkozy’s new wife, for real prestige.
To achieve that, the country must promote itself as a motor of serious European reform, without neglecting the debate on the member states’ role in the EU’s economic choices.
Here Italy could join the more nationally minded economic policies now being pursued by France and the UK, to the detriment of EU technocrats in Brussels.
The one thing that seems certain from the upcoming vote is that – barring any last-minute surprises – the billionaire Berlusconi will re-assert his hold over Italian politics.
In fact, he has been Italy’s true ruler for the past 13 years.
Born as a “plastic party” to unite a gamut of political forces following the implosion of the Christian Democrats in 1994, Berlusconi’s Forza Italia showed itself to be a very cunningly structured movement, with a strong and stable consensus among its members on core doctrine.
In this election, Berlusconi decided to open the door to Gianfranco Fini’s right-wing National Alliance, with which he founded a new group, People of Freedom – the only party allied with Umberto Bossi’s Northern League – in an effort to ensure that the government is backed by an even stronger and more cohesive core party.
The Catholics of the Union of Christian and Center Democrats and the post-fascist right of Francesco Storace have left the coalition.
A similar choice was made on the left by Veltroni, whose Democratic Party is now allied with Antonio Di Pietro’s Italy of Values Party.
The Communist Party and the Socialists have left the coalition that Prodi forged to gain his parliamentary majority.
The purpose of this realignment was to create more stable large parties, but further changes are likely.
Strong pan-European center-right and center-left political parties are likely to contest the European Parliament elections in the spring of 2009.
As Europe presses ahead with reform, the question for Italy is whether smoke and mirrors is all its politics have to offer.
Another Roller Coaster Ride for Exchange Rates in 2009?
CAMBRIDGE – 2008 has been an exceptionally tumultuous year for exchange rates.
The American dollar soared, the Japanese yen went into orbit, the euro fell to earth, and the British pound crashed, leaving a giant crater.
Emerging-market currencies were hammered, as were “commodity currencies” such as the Canadian, Australian, and New Zealand dollars, and the South African rand.
Indeed, the currency of any country that is significantly dependent on commodity exports has suffered.
So, what will the New Year bring for exchange rates?
While the only safe bet is continuing high volatility, we are at an unusual juncture where the short- and long-term trends appear to be very different.
In the short run, the yen and the dollar continue to benefit from a flight to safety, as panicked investors seek a place to hide.
The yen and dollar are also being bolstered as central banks elsewhere continue to cut interest rates towards zero, territory that the yen and dollar policy rates already occupy.
Thus, even though the United States and Japan will not be raising interest rates anytime soon, lower foreign rates still make the dollar and yen relatively more attractive.
Commodity prices will continue to be soft, pulling down commodity currencies, and bolstering the yen especially, since resource-poor Japan is so reliant on commodity imports.
Normally, short-run and long-run exchange-rate trends point in the same direction.
Indeed, a huge body of research shows that for most major currencies, the best forecast of next week’s exchange rate, next month’s exchange rate, or even next year’s exchange rate is simply today’s exchange rate.
But times are hardly normal.
The continuing financial crisis is putting steady upward pressure on the dollar thanks to its safe haven status.
Commodity prices are plumbing new depths.
Yet the financial crisis will eventually end, as will the global recession.
Neither will end soon, mind you, perhaps not for another seven or eight months, if not longer.
But, when more normal growth does resume, the recent trends underpinning dollar and yen appreciation will disappear.
Perhaps international investors will be grateful to the US for its aggressive monetary and fiscal stimulus, which will accelerate sharply when President-elect Barack Obama takes office on January 20.
But investors will still worry about what happens when the bills come due.
Many emerging markets will also want to engage in countercyclical macroeconomic policy, but they are hemmed in by concerns of fiscal sustainability and fear of rampant inflation.
European fiscal policy is constrained by the Maastricht Treaty, while European monetary policy is rather single-mindedly devoted to price stability.ampnbsp;
True, China, with its vast foreign exchange reserves, has the wherewithal to spend as much on countercyclical macroeconomic policy as anyone.
But China’s rulers know that their highly repressed banking system is vulnerable as the country continues to pursue gradual financial liberalization, and that foreign currency reserves may be needed for recapitalization.
Thus perhaps no region will be as expansionary as the US.
For the moment, global investors cannot get enough of US treasury bills, as collapsing interest rates for short-term US securities demonstrates.
But a lot of this demand is driven by short-term, crisis-fueled fear.
As markets normalize, surely investors will look around and realize that the US has vastly increased its debt in fighting the downturn, possibly by several trillion dollars.
At the same time, today’s falling prices (or “deflation”) will eventually morph into inflation as aggressive monetary easing takes its toll on price stability.
Admittedly, some of the major currency’s movements during the past year can be regarded as normalizing.
On a purchasing power basis (a crude measure of what different currencies can buy in terms of real goods), the euro was absurdly overvalued at $1.60, just as the yen was absurdly undervalued at over ¥120 to the dollar.
Commodity currencies had to come off their meteoric highs.
Thus, the past year’s currency alignments have, to some extent, simply brought relative domestic price levels and exchange rates into better balance.
But by now, emerging-market countries’ exchange rates, and even more so commodity currencies, have probably overshot on the downside.ampnbsp;
Over the long run, globalization and economic convergence will resume, and emerging market and commodity currencies will have to strengthen.
At the same time, the prospect of higher US inflation and massively higher US public debt levels must eventually weigh on the dollar, as does the still worrisome US trade deficit.
As for the yen, it, too, will suffer from the continuing rise in Japan’s public debt levels, which are already among the highest in the world.
Continuing weakness in the Japanese economy will eventually hit the yen.
If today’s constellation of exchange rates represents some excessive dollar and yen appreciation, especially against emerging-market currencies, when it will unwind?
That depends on when you think the financial crisis will abate, and the timing of that is as hard to predict as exchange rates.
But come it will. Then watch for the dollar and yen to boomerang.
रोगाणुरोधी प्रतिरोध के ख़िलाफ़ निष्पक्ष लड़ाई
ब्राइटन - मौजूदा रोगाणु-रोधी दवाएँ अप्रभावी होती जा रही हैं। अगर मौजूदा रुझान जारी रहते हैं, तो हम एंटीबायोटिक की खोज से पहले की स्थितियों में दोबारा जी रहे होंगे, जब संक्रामक रोग प्रमुख प्राणघातक थे।
दवा-रोधी रोगाणुओं की चुनौती का सामना करना कठिन होगा। इसके लिए न केवल नई रोगाणु-रोधी दवाओं के अनुसंधान और विकास में प्रमुख निवेश की ज़रूरत होगी, बल्कि नए इलाजों को नियंत्रित और सीमित करने की ज़रूरत भी होगी, ताकि उनकी प्रभावकारिता संरक्षित रखी जा सके। जैसा कि जलवायु परिवर्तन पर प्रतिक्रिया के साथ है, प्रभावी रणनीति के लिए अंतर्राष्ट्रीय समन्वय की ज़रूरत होगी। ख़ास तौर से, सरकारी भुगतानकर्ताओं और वैश्विक ग़रीबों के साथ फ़ार्मास्यूटिकल कंपनियों की ज़रूरतों का समाधान किया जाना चाहिए।
दरअसल, किसी भी प्रयास के लिए ग़रीबों को जोड़ना महत्वपूर्ण होगा। निम्न और मध्यम आय वाले देश दवा-रोधी जीवों के महत्वपूर्ण स्रोत हैं। भीड़-भाड़ वाले आवास, ख़राब स्वच्छता, और प्रतिरक्षा प्रणाली को ख़तरे में डालना, चाहे वह कुपोषण या HIV जैसे जीर्ण संक्रमण के कारण हो, संक्रमण के लिए उपजाऊ ज़मीन प्रदान करते हैं। एंटीबायोटिक का अक्सर दुरुपयोग किया जाता है या उनकी गुणवत्ता कम होती है, जिससे बैक्टीरिया को प्रतिरोध विकसित करने का अवसर मिलता है। एंटीबायोटिक की बड़ी मात्रा का इस्तेमाल पशुपालन में भी किया जाता है। इस बीच, परिवहन की बुनियादी सुविधाओं में अत्यधिक सुधार - ग्रामीण और शहरी क्षेत्रों के बीच और देशों के बीच - का मतलब है कि प्रतिरोधी जीन शीघ्र वैश्विक पूल का हिस्सा बन जाते हैं।
कई असुरक्षित देशों में, सरकारी स्वास्थ्य-देखभाल प्रणाली माँग पूरा नहीं कर पाती, और विविध प्रदाता इस खाई को पाटने की कोशिश कर रहे हैं। इनमें चिकित्सा विशेषज्ञों से लेकर अनौपचारिक प्रदाता तक शामिल हैं, जो मुख्यतः विनियामक ढाँचे के बाहर काम करते हैं। पैबंद वाली इन प्रणालियों के लाभ भी हैं। उदाहरण के लिए, बांग्लादेश में एक ताज़ा अध्ययन में निष्कर्ष निकाला गया है कि अक्सर बाज़ार के स्टालों से संचालन करने वाले तथाकथित "गाँव के डॉक्टरों" द्वारा प्रदान की जाने वाली एंटीबायोटिक दवाओं ने प्रसवोत्तर रोगाणुता और बचपन के निमोनिया से मृत्यु दर में गिरावट लाने में योगदान किया है। लेकिन इसके भी काफ़ी सबूत हैं कि प्रदान की जा रही दवाएँ विविध गुणवत्ता की होती हैं और अक्सर उन्हें बिना आवश्यकता के ले लिया जाता है। बहुत बार, रोगी इलाज का पूरा कोर्स नहीं ख़रीदते।
इस पर एक प्रतिक्रिया यह हो सकती है कि ऐसे क़ानून तैयार और लागू किए जाएँ जिनसे एंटीबायोटिक दवाएँ केवल डॉक्टर के पर्चे पर उपलब्ध हो सकें। बहरहाल, इसके परिणामस्वरूप एंटीबायोटिक दवाओं तक ग़रीब लोगों की पहुँच गंभीर रूप से सीमित हो सकती है, जिससे संक्रमण से मृत्यु दर उच्च हो सकती है, जो इसे राजनीतिक रूप से अस्वीकार्य और इसलिए लागू करने में मुश्किल बना देगा। इसका बेहतर विकल्प यह होगा कि एंटीबायोटिक इलाजों को बेहतर बनाने के लिए ऐसी नई रणनीतियाँ विकसित की जाएँ जिनसे इन्हें अनौपचारिक स्रोतों के माध्यम से प्रदान किया जाए।
शुरूआत करनेवालों के लिए, उन दवाओं पर भरोसेमंद निगरानी डेटा उत्पन्न करने के लिए निवेश करने की ज़रूरत है जो आ�� संक्रमण के ख़िलाफ़ प्रभावी हैं। इलाज के दिशा-निर्देशों में यह जानकारी शामिल की जानी चाहिए और एंटीबायोटिक दवाओं के सभी प्रदाताओं की दी जानी चाहिए।
इस बीच, उच्च गुणवत्ता वाली एंटीबायोटिक दवाएँ किफ़ायती क़ीमतों पर उपलब्ध कराई जानी चाहिए। नकली उत्पादों की पहचान की जानी चाहिए और उन्हें बाज़ार से निकाल दिया जाना चाहिए, और गुणवत्ता नियंत्रित करने के लिए सरकारों, फ़ार्मास्यूटिकल क्षेत्र, और नागरिक समूहों के बीच नियामक साझेदारी विकसित की जानी चाहिए। क़ीमतों को थोक ख़रीद के माध्यम से कम रखा जाना चाहिए; कुछ मामलों में, सार्वजनिक आर्थिक सहायता भी ज़रूरी हो सकती है।
क़ीमतों को कम करने के उपायों के पूरक के रूप में बहुत ज़्यादा इस्तेमाल को हतोत्साहित करने की ज़रूरत होगी। पैकेजिंग में नवाचार, शायद दवाओं के उचित संयोजन का पूरा कोर्स उपलब्ध कराना, इलाज के फ़ैसले को आसान बना सकेगा। इसी तरह, कम-लागत की नैदानिक प्रौद्योगिकियों का विकास केवल लक्षणों के आधार पर इलाज प्रदान करने की ज़रूरत कम करने में मदद कर सकता है।
सबसे बड़ी चुनौती एंटीबायोटिक दवाओं के प्रदाताओं को अपना व्यवहार बदलने के लिए प्रोत्साहित करना होगी। इसके लिए, तकनीकी सहायता देने और कार्य-निष्पादन की निगरानी के लिए मान्यता, भुगतान तंत्र के संशोधन, और मध्यस्थ संगठनों की भागीदारी जैसे उपायों की ज़रूरत होगी। इन संगठनों में गैर-सरकारी संगठन, धार्मिक संगठन, सामाजिक उद्यमी, और दवाएँ वितरित करने वाली कंपनियाँ शामिल हो सकती हैं। इसकी संभावना नहीं है कि ये गतिविधियाँ वाणिज्यिक रूप से स्थायी हो सकेंगी, और इसलिए इनके लिए सरकारों, परोपकारी संस्थाओं, और शायद दवा उत्पादकों से समर्थन की ज़रूरत होगी।
इस बीच, लोगों को एंटीबायोटिक दवाओं के समुचित इस्तेमाल पर भरोसेमंद जानकारी और सलाह मिलनी चाहिए। यह ख़ास तौर से वहाँ महत्वपूर्ण है जहाँ नागरिक स्वास्थ्य की समस्याओं से निपटने के लिए काफ़ी हद तक अपने खुद के संसाधनों पर निर्भर करते हैं।
एंटीबायोटिक दवाओं के इस्तेमाल में प्रणाली में व्यापक बदलाव लागू करने के लिए राष्ट्रीय और वैश्विक गठबंधनों की ज़रूरत होगी। एक मुख्य लक्ष्य स्वास्थ्य कर्मियों और दवा कंपनियों के आचरण के बुनियादी मानक स्थापित करना होगा जिसमें रोगियों और समुदायों की ज़रूरतें प्रतिबिंबित हों। सरकारों को इस प्रक्रिया में प्रभावी भूमिका निभाने के लिए अपनी क्षमता का निर्माण करने की ज़रूरत होगी, और दवाओं और नैदानिक प्रौद्योगिकियों का विकास, उत्पादन, और वितरण करने वाली कंपनियों को सहयोगी समाधानों की खोज के लिए सक्रिय रूप से योगदान करना होगा। हम एंटीबायोटिक दवाओं से सही रूप में लाभ तभी उठा सकेंगे जब हम उनका निष्पक्ष और स्थायी तरीके से प्रबंधन कर सकेंगे।
Immigration and the New Class Divide
SINGAPORE – The British shadow minister for Europe, Pat McFadden, recently warned members of his Labour Party that they should try to make the most of the global economy and not treat immigration like a disease.
As he put it, “You can feed on people’s grievances or you can give people a chance.
And I think our policies should be around giving people a chance.”
In a world increasingly dominated by grievances – against immigrants, bankers, Muslims, “liberal elites,” “Eurocrats,” cosmopolitans, or anything else that seems vaguely alien – such wise words are rare.
Leaders worldwide should take note.
In the United States, Republicans – backed by their Tea Party activists – are threatening to close the government down just because President Barack Obama has offered undocumented immigrants who have lived and worked in the US for many years a chance to gain citizenship.
The United Kingdom Independence Party (UKIP) wants to introduce a five-year ban on immigration for permanent settlement.
Russia’s deputy prime minister, Dmitry Rogozin, once released a video promising to “clean the rubbish” – meaning migrant workers, mostly from former Soviet republics – “away from Moscow.”
Even the once famously tolerant Dutch and Danes are increasingly voting for parties that fulminate against the scourge of immigration.
Always keen to assert the freedom to insult Muslims, the Dutch Freedom Party wants to ban all mosques.
And the tiny and much-harassed opposition parties in Singapore – a country where almost everyone is descended from immigrants – are gaining traction by appealing to popular gripes about immigrants (mostly from India and China) who are supposedly taking jobs from “natives.”
What can American Tea Party enthusiasts, Russian chauvinists, fearful Dutch and Danes, and Singaporean leftists possibly have in common that is driving this anti-immigrant sentiment?
Retaining one’s job in a tightening economy is undoubtedly a serious concern.
But the livelihoods of most of the middle-aged rural white Americans who support the Tea Party are hardly threatened by poor Mexican migrants.
UKIP is popular in some parts of England where immigrants are rarely seen.
And many of the Dutch Freedom Party’s voters live nowhere near a mosque.
Anti-immigrant sentiment cuts across the old left-right divide.
One thing Tea Party or UKIP supporters share with working-class voters who genuinely fear losing their jobs to low-paid foreigners is anxiety about being left behind in a world of easy mobility, supranational organizations, and global networking.
On the right, support for conservative parties is split between business interests that benefit from immigration or supranational institutions, and groups that feel threatened by them.
That is why the British Tories are so afraid of UKIP.
Nigel Farage, UKIP’s leader, is less concerned with economic growth than with pursuing his extreme conception of national independence.
On the left, opinion is split between those who oppose racism and intolerance above all and those who want to protect employment and preserve “solidarity” for what is left of the native-born working class.
It would be a mistake to dismiss anxiety about immigration as mere bigotry or apprehension about the globalized economy as simply reactionary.
National, religious, and cultural identities (for lack of a better word) are being transformed, though less by immigration than by the development of globalized capitalism.
In the new global economy, there are clear winners and losers.
Educated men and women who can communicate effectively in varied international contexts are benefiting.
People who lack the needed education or experience – and there are many of them – are struggling.
In other words, the new class divisions run less between the rich and the poor than between educated metropolitan elites and less sophisticated, less flexible, and, in every sense, less connected provincials.
It is irrelevant that the provincials’ political leaders (and their backers) are sometimes wealthier than the resented metropolitan elites.
They still feel looked down upon.
And so they share the bitterness of those who feel alienated in a world they find bewildering and hateful.
Populist rabble-rousers like to stir up such resentments by ranting about foreigners who work for a pittance or not at all.
But it is the relative success of ethnic minorities and immigrants that is more upsetting to indigenous populations.
This explains the popular hostility toward Obama.
Americans know that, before too long, whites will be just another minority, and people of color will increasingly be in positions of power.
At this point, all Tea Partiers and others like them can do is declare, “We want our country back!”
Of course, this is an impossible demand.
Short of unleashing massive and bloody ethnic cleansing – Bosnia, on a continental scale – Americans and others have no choice but to get used to living in increasingly diverse societies.
Likewise, economic globalization cannot be undone.
But regulation can and should be improved.
After all, some things are still worth protecting.
There are good reasons not to leave culture, education, lifestyles, or jobs completely exposed to the creative destruction of market forces.
McFadden has pinpointed the central solution to globalization’s challenges: giving people “the tools to reap the benefits” of the globalized world, thereby making the “connected world work better for people.”
The problem is that this call is more likely to appeal to the highly educated, already privileged classes than to those who feel disenfranchised in today’s global economy.
This is a serious problem for political parties on the left, which increasingly seem to be speaking for the metropolitan elites, while provincial populists are pushing traditional conservatives further to the right by fishing in the dark waters of popular resentment.
दवा का सामाजिक विज्ञान
डावोस – 1980 के दशक के मध्य में जब मैं एक मेडिकल छात्र था, मुझे पापुआ न्यू गिनी में मलेरिया हुआ था। यह एक कष्टकारी अनुभव था। मेरे सिर में दर्द होता था। मेरा तापमान बढ़ गया था। मुझमें खून की कमी हो गई थी। लेकिन मैंने दवा लेना जारी रखा, और मैं ठीक हो गया। यह अनुभव सुखद नहीं था, लेकिन सस्ती, प्रभावशाली मलेरिया की दवाओं की बदौलत मैं बहुत ज्यादा खतरे में कभी नहीं था।
क्लोरोक्विन की जिन गोलियों से मैं ठीक हुआ था वे गोलियां अब बिल्कुल काम नहीं करती हैं। यहां तक कि जब मैं उन्हें ले रहा था तब भी, जिस परजीवी के कारण मलेरिया होता है वह पहले ही दुनिया के कई हिस्सों में क्लोरोक्विन का प्रतिरोधी बन चुका था; पापुआ न्यू गिनी उन कुछ स्थानों में से एक था जहां गोलियाँ प्रभावशाली बनी हुई थीं, और इसके बावजूद वहां भी उनकी शक्ति कम होती जा रही थी। आज, क्लोरोक्विन मूल रूप से हमारे चिकित्सा शस्त्रागार से गायब हो गई है।
एंटीबायोटिक दवाओं और अन्य रोगाणुरोधी दवाओं का प्रतिरोध करनेवाले रोगाणुओं की बढ़ती क्षमता आजकल के स्वास्थ्य देखभाल के क्षेत्र में सबसे बड़े उभरते संकट में तब्दील हो रही है - और यह एक ऐसा संकट है जिसे अकेले विज्ञान द्वारा हल नहीं किया जा सकता है।
अब क्लोरोक्विन की जगह अन्य दवाएं आने लगी हैं। तपेदिक की बहु-दवा-प्रतिरोधी प्रजातियां, ई.कोली, और साल्मोनेला अब आम हो चुकी हैं। अधिकांश सूजाक संक्रमण लाइलाज हैं। मेथिसिलिन-प्रतिरोधी स्टैफ़िलोकॉकस ऑरियस (एसआरएसए) और क्लोस्ट्रीडियम डिफ़िसाइल जैसे सुपरबग, तेजी से फैल रहे हैं। भारत में एंटीबायोटिक-प्रतिरोधी संक्रमणों से 2013 में 58,000 से अधिक नवजात शिशुओं की मृत्यु हो गई थी।
आज, मलेरिया का इलाज अक्सर चीनी जड़ी-बूटी से निकाली गई एक दवा - आर्टीमिसिनिन - और अन्य मलेरिया-रोधी दवाओं के संयोजन से किया जाता है। लेकिन इन क्रांतिकारी दवाओं के क्लोरोक्विन की ही तरह अप्रचलन में होने का खतरा है; दक्षिण पूर्व एशिया में मलेरिया की प्रतिरोधी-प्रजातियां होने का पता चला है।
यह मात्र चिकित्सा समस्या नहीं है; यह एक संभावित आर्थिक आपदा है। अर्थशास्त्री जिम ओ नील की अध्यक्षता में की गई रोगाणुरोधी प्रतिरोध पर समीक्षा द्वारा की गई शोध में यह अनुमान लगाया गया है कि यदि मौजूदा प्रवृत्तियां जारी रहती हैं तो दवा प्रतिरोधी संक्रमणों से 2050 तक प्रति वर्ष दस लाख लोगों की मृत्यु होगी और अगले 35 वर्षों में वैश्विक अर्थव्यवस्था को लगभग $100 ट्रिलियन खर्च करना पड़ेगा।
हो सकता है कि यह नाटकीय भविष्यवाणी भी बहुत कम हो क्योंकि इसमें संक्रमण के कारण जीवन और स्वास्थ्य की होने वाली हानि की दृष्टि से केवल प्रत्यक्ष लागतें ही शामिल हैं। आधुनिक चिकित्सा के कई अन्य पहलू भी एंटीबायोटिक दवाओं पर भरोसा करते हैं। कीमोथेरेपी प्राप्त करनेवाले कैंसर रोगी इन्हें बैक्टीरिया को दबाने के लिए लेते हैं जो अन्यथा उनकी कमजोर प्रतिरक्षा प्रणाली पर हमला कर देगा। आजकल जोड़ों के प्रतिस्थापन और सीजेरियन वर्गों सहित जिन शल्यक्रियाओं को नेमी मान लिया जाता है, उन्हें केवल तभी सुरक्षित ���ूप से किया जा सकता है जब एंटीबायोटिक दवाओं से संभावित संक्रमणों को रोका जाता है।
दवा प्रतिरोध के मूल विकास के अच्छी तरह से समझे-बूझे मामले हैं। यदि रोगजनकों पर विषाक्त दवाओं का चयनात्मक दबाव पड़ता है, तो अंततः वे उसके अनुकूल हो जाएंगे। मैं जिस वैलकम ट्रस्ट का नेतृत्व करता हूं, उसने इन तंत्रों के बारे में शोध, निदान में सुधार, और नई दवाएं तैयार करने में करोड़ों डॉलर का निवेश किया है।
समस्या का प्रभावी ढंग से समाधान करने के लिए, इस प्रयास को जैविक विज्ञान के दायरे से आगे बढ़ाकर दवा के साथ पारंपरिक रूप से न जुड़े क्षेत्रों तक ले जाना चाहिए। अमीर और गरीब देशों दोनों में ही समान रूप से, हम एंटीबायोटिक दवाओं के नियमित नशेड़ी बन गए हैं। प्रतिरोध का मुकाबला करने की कुंजी यह है कि रोगजनक जिस गति से अनुकूलन कर सकते हैं उस गति को कम किया जाए। लेकिन, एंटीबायोटिक दवाओं के अधिक उपयोग और उपचार के लिए आवश्यक कोर्स को पूरा न करने के फलस्वरूप, हम रोगाणुओं का उपयोग अभी पर्याप्त दवा प्रतिरोध को प्रोत्साहित करने के लिए कर रहे हैं। वास्तव में, हम रोगाणुओं का टीका लगाकर हम उनके खिलाफ जो प्रयोग करना चाहते हैं उसे दवाओं के खिलाफ कर रहे हैं।
यह इसलिए है कि हम एंटीबायोटिक दवाओं को लगभग उपभोक्ता वस्तुओं के रूप में मानने लग गए हैं, क्योंकि हम डॉक्टरों से इसकी मांग करते हैं, और हम इसे अपनी मर्ज़ी से लेते हैं या जब हमें ठीक लगता है हम इसे लेना बंद कर देते हैं। यहां तक कि सबसे अधिक सूचनाप्राप्त रोगियों द्वारा इन चमत्कारी दवाओं का दुरुपयोग किया जाता है। यूनाइटेड किंगडम में की गई शोध से पता चला है कि यहां तक कि जो लोग यह समझते हैं कि प्रतिरोध कैसे विकसित होता है वे अक्सर समस्या को इस रूप में बढ़ा देते हैं कि वे डॉक्टर के पर्चे के बिना एंटीबायोटिक लेने लगते हैं या अपनी दवाएं अपने परिवार के सदस्यों को दे देते हैं।
ऐसे विनाशकारी व्यवहार को बदलने के लिए यह आवश्यक होगा कि हम इसके सामाजिक और सांस्कृतिक कारणों को बेहतर रूप से समझें। इतिहास, मनोविज्ञान, समाजशास्त्र, नृविज्ञान, अर्थशास्त्र, बाजार अनुसंधान, और सामाजिक विपणन जैसे विषय इसमें मदद कर सकते हैं।
यह केवल रोगाणुरोधी प्रतिरोध के लिए ही सत्य नहीं है। यह इबोला जैसी महामारी के फैलने पर भी लागू होता है। वायरस का मुकाबला करने के लिए उसके जीव विज्ञान, इसके संचारण के महामारी विज्ञान, और उन दवाओं और टीकों के बारे में ज्ञान की आवश्यकता है जिनका संभवतः इसके खिलाफ उपयोग किया जा सकता है। लेकिन इसके लिए उन व्यवहारों को भी समझने की आवश्यकता है जिनके कारण यह संक्रमण लाइबेरिया, सिएरा लियोन, और गिनी में फैल सका।
यह समझाने के लिए कि ये समाज किन कारणों से इतने कमजोर बने हैं, इसके लिए इन क्षेत्रों के हाल के इतिहास के बारे में जानने और यह समझने की आवश्यकता है कि वहां के लोगों में सरकारी अधिकारियों के प्रति इतना अधिक अविश्वास क्यों है। इबोला को नियंत्रण में रखने के लिए रोगियों को अलग रखना और मृतकों को सुरक्षित रूप से दफन करना महत्वपूर्ण हैं, लेकिन दोनों को सांस्कृतिक संवेदनशीलता के साथ लागू किए जाने की जरूरत है – केवल उनके पीछे मौजूद विज्ञान संबंधी कारणों के स्पष्टीकरण की नहीं।
आज के सार्वजनिक स्वास्थ्य के बड़े खतरों के आर्थिक परिणाम बहुत गंभीर होते हैं। उनके कारण होनेवाले जोखिमों को न्यूनतम रखने के लिए यह जानना बहुत जरूरी है कि वे सामाजिक, व्यवहार संबंधी और सांस्कृतिक परिदृश्य के साथ परस्पर गुंथे हुए हैं। विज्ञान शक्तिशाली उपकरण उपलब्ध करता है। लेकिन इन उपकरणों का प्रभावी रूप से उपयोग करने के लिए हमें केवल विज्ञान की ही जरूरत नहीं है।
Anti-Semitism on Trial
When Brazil's Supreme Court ruled in the case of Sigfried Ellwanger ­- an editor, author, and notorious Nazi sympathizer - it entered the perilous field where free speech and efforts to contain racism meet.
For years, Ellwanger published anti-Semitic books, such as The Protocols of the Elders of Zion , as well as books of Holocaust denial, such as his own Jewish or German Holocaust: Behind the Lie of the Century .
By a vote of eight to three, the Court upheld his conviction on charges of racism.
Of course, the enormity of the Holocaust ought to have eradicated anti-Semitism for all time.
Shamefully, it did not.
In many places, hatred of Jews thrives.
Elsewhere - including Europe and the United States - anti-Semitism survives among a fringe of neo-Nazis and renegades like Ellwanger, but also, more widely, in milder forms of prejudice.
But punishing someone criminally for being an anti-Semite and a racist propagandist raises troublesome issues that different countries approach in different ways.
To be sure, every country places some limits on speech.
As Oliver Wendell Holmes famously put it in a 1919 US Supreme Court decision, "Even the most stringent protection of free speech would not protect a man in falsely shouting 'fire' in a crowded theater and causing a panic."
Banning someone from shouting "Fire!" in a crowded theater is not the same, however, as convicting him for holding and propagating an opinion, even a despicable one, such as anti-Semitism.
In a democracy, standard restrictions regulate the time, place, and manner of speech in order to prevent imminent violence and civil disorder.
They bar threats against, and harassment of, individuals. They forbid libel and fraud.
Some countries, such as the US, refuse to go further and regulate speech because of its
Why, then, do many countries prosecute the hate speech of racists?
Why do International Human Rights Conventions stipulate that the law should prohibit speech that supports national, racial, or religious hatred?
Is any form of race-related speech that anybody finds offensive to be prosecuted?
Will such prosecutions actually deter hard-core racists?
No court should convict someone lightly because of the views he espouses in the public sphere.
But Ellwanger's appeal, which took almost a year for Brazil's Supreme Court to hear and decide, put Brazil squarely on the side of those who believe that inciting hatred against even a small minority - such as Jews in Brazil - cannot be allowed in the name of freedom of speech.
The Ellwanger case arose because many believe that anti-racism laws can be effective in reassuring minorities of their safety and place in the community.
Brazil is a large, pluralist, multi-ethnic country.
Its social fabric, like that of many other countries around the world, depends on mutual trust among citizens.
Constitutional and legal provisions that make practicing racism a crime punishable by imprisonment have great symbolic significance and help insure - indeed, create and secure - social peace.
Defining the offensive racist views proscribed by the Constitution was the first challenge in the Ellwanger case, because the defense denied that anti-Semitism constitutes racism at all.
The Jews, the defense claimed, do not constitute a race.
In fact, the Jews are, of course,
The second issue the Court considered was the conflict between constitutional principles: the clash between freedom to express one's thoughts and condemnation of Ellwanger for the crime of racism.
The court ruled that, ultimately, freedom to express one's thoughts, however generously conceived in a democracy, must be balanced against other values, such as reputation, honor, privacy, dignity, and equality.
Ellwanger crossed the line separating free expression from hate speech.
As in the Ellwanger case, restrictions on free expression should be defined narrowly.
But by opting for a balanced concept of free speech, Brazil's Supreme Court followed precedents in a number of European countries condemning Holocaust deniers, as well the opinion of the committee charged with monitoring compliance with the UN Convention on the Elimination of all Forms of Racial Discrimination and the European Court of Human Rights.
In a world where anti-Semitism and racism fester, where prejudice on national, religious, colored-based, or ethnic grounds foster discrimination, that is the view that best nurtures the rights of all.
A Path through Europe’s Minefield
LONDON – Earlier this week, a group of almost 100 prominent Europeans delivered an open letter to the leaders of all 17 eurozone countries.
The letter said, in so many words, what the leaders of Europe now appear to have understood: they cannot go on “kicking the can down the road.”
And, just as importantly, they now understand that it is not enough to ensure that governments can finance their debt at reasonable interest rates; they must also address the weakness of Europe’s banking system.
Indeed, Europe’s banking and sovereign-debt problems are mutually self-reinforcing.
The decline in government bond prices has exposed the banks’ undercapitalization, while the prospect that governments will have to finance banks’ recapitalization has driven up risk premiums on government bonds.
Facing the prospect of having to raise additional capital at a time when their shares are selling at a fraction of book value, banks have a powerful incentive to reduce their balance sheets by withdrawing credit lines and shrinking their loan portfolios.
Europe’s leaders are now contemplating what to do, and their next move will have fateful consequences, either calming the markets or driving them to new extremes.
All agree that Greece needs an orderly restructuring, because a disorderly default could cause a eurozone meltdown.
But, when it comes to the banks, I am afraid that the eurozone’s leaders are contemplating some inappropriate steps.
Specifically, they are talking about recapitalizing the banking system, rather than guaranteeing it.
And they want to do it on a country-by-country basis, rather than on the basis of the eurozone as a whole.
There is a good reason for this: Germany does not want to pay for recapitalizing French banks.
But, while Chancellor Angela Merkel is justified in insisting on this, it is driving her in the wrong direction.
Let me stake out more precisely the narrow path that would allow Europe to pass through this minefield.
The banking system needs to be guaranteed first, and recapitalized later.
Governments cannot afford to recapitalize the banks now; it would leave them with insufficient funds to deal with the sovereign-debt problem.
It will cost much less to recapitalize the banks after the crisis has abated and both government bonds and bank shares have returned to more normal levels.
Governments can, however, provide a credible guarantee, given their power to tax.
A new, legally binding agreement – not a change to the Lisbon Treaty (which would encounter too many hurdles), but a new agreement – will be needed for the eurozone to mobilize that power, and such an accord will take time to negotiate and ratify.
But, in the meantime, governments can call upon the European Central Bank, which the eurozone member states already fully guarantee on a pro rata basis.
In exchange for a guarantee, the eurozone’s major banks would have to agree to abide by the ECB’s instructions.
This is a radical step, but a necessary one under the circumstances.
Acting at the behest of the member states, the ECB has sufficient powers of persuasion: it could close its discount window to the banks, and the governments could seize institutions that refuse to cooperate.
The ECB would then instruct the banks to maintain their credit lines and loan portfolios while strictly monitoring the risks they take for their own account.
This would remove one of the two main driving forces of the current market turmoil.
The ECB could deal with the other driving force, the lack of financing for sovereign debt, by lowering its discount rate, encouraging distressed governments to issue treasury bills, and encouraging the banks to subscribe (an idea I owe to Tommaso Padoa-Schioppa).
The T-bills could be sold to the ECB at any time, making them tantamount to cash; but, as long as they yield more than deposits with the ECB, the banks would find it advantageous to hold them.
Governments could meet their financing needs within agreed limits at very low cost during this emergency period, and the ECB would not violate Article 123 of the Lisbon Treaty.
These measures would be sufficient to calm markets and bring the acute phase of the crisis to an end.
Recapitalization of the banks should wait until then; only the holes created by restructuring the Greek debt would have to be filled immediately.
In conformity with Germany’s demand, the additional capital would come first from the market and then from individual governments – and from the European Financial Stability Facility only as a last resort, thereby preserving the EFSF’s firepower.
A new agreement for the eurozone, negotiated in a calmer atmosphere, should not only codify the practices established during the emergency, but also lay the groundwork for an economic-growth strategy.
During the emergency period, fiscal retrenchment and austerity are unavoidable; but, in the longer term, the debt burden will become unsustainable without growth – and so will the European Union itself.
A Peace Agenda for Global Development
MONROVIA, LIBERIA – This week, the 27 members of the High-level Panel of Eminent Persons on the Post-2015 Development Agenda gather in Monrovia, Liberia, to advise United Nations Secretary-General Ban Ki-moon.
At the meeting, the Panel will establish a “bold yet practical” vision for joint action on sustainable development.
While these discussions – hosted by Liberian President and Nobel Peace Prize laureate Ellen Johnson Sirleaf, Indonesian President Susilo Bambang Yudhoyono, and British Prime Minister David Cameron – take place, the nearby Sahel and the Great Lakes region continue to be plagued by violence and conflict.
Indeed, large-scale displacement of people and unspeakable human suffering are occurring in many African countries (not to mention in Syria and elsewhere), threatening to reverse the continent’s unprecedented economic progress during the last decade.
The Panel (of which I am a member) must seize the opportunity presented by the Monrovia meeting to contribute to a global development agenda that addresses the vicious cycle of conflict and poverty that hampers economic activity and undermines human well-being.
For more than a decade, the Millennium Development Goals, which expire in two years, have provided the framework for international development cooperation, with a focus on combating poverty worldwide.
In developing a new, comprehensive follow-up agenda, global leaders should recognize that, although the MDGs have enabled millions of people worldwide to escape illiteracy, disease, and hunger, their overall impact has been inadequate, particularly in fragile, conflict-ridden countries.
World Bank statistics show that no conflict-affected low-income country has achieved a single MDG, reflecting the framework’s failure to address problems caused by organized violence and insecurity effectively.
That is why the post-2015 agenda should be centered on peace, security, and freedom from fear.
It should aim to make justice and prosperity a reality for everyone.
And it should reflect the understanding that development is impossible without peace, just as peace is impossible without development – and that lasting peace and sustainable development are impossible without respect for human rights and the rule of law.
Furthermore, as the Monrovia meeting’s theme, “National Building Blocks for Sustained Prosperity,” suggests, post-2015 global development initiatives should emphasize support for national efforts to achieve strong, stable, long-term prosperity.
Strategies that would help countries to overcome domestic insecurity and conflict, transform their economies, and, ultimately, meet their potential include strengthening governance institutions and the rule of law, ensuring multi-stakeholder participation, and guaranteeing that all citizens have equal access to justice.
International support for such efforts would mean giving African leaders and stakeholders the opportunity – and the responsibility – to eliminate underdevelopment and boost prosperity.
Moreover, while poverty eradication will remain a paramount concern after 2015, the focus must shift from national averages to local disparities.
Measures must move beyond overall social needs to bolster progress in productive job-creating and income-generating sectors.
And strong efforts must be made in conflict-affected countries to promote reconciliation and prevent the revival of violence.
Given Liberia’s recent success in post-conflict reconstruction and human development, following a 14-year civil war, it is a fitting setting for the Panel’s deliberations.
Since 2003, domestic vision and commitment, together with international support, have enabled Liberia to hold democratic elections, reintroduce some essential public services, reestablish a public-finance management system, and make progress in addressing endemic corruption, rebuilding public institutions, and reconstructing national infrastructure.
The Panel should view Liberia’s ongoing efforts to secure peace, maintain stability, and initiate economic and social transformation as a blueprint for successful post-conflict transition.
Other inspiring models can be found in Rwanda, Mozambique, and Sierra Leone.
The Panel is committed to creating an ambitious, coherent, and practical proposal for a sustainable global development agenda.
The process will be open, inclusive, and transparent, and will be informed by the opinions and experiences of experts and stakeholders representing young people, women, the elderly, and the disabled, as well as legislative, academic, and inter-governmental actors.
The Panel will also take advantage of extensive online and offline efforts to engage with people worldwide and gain insight into the future that they envision.
Their perspectives will enrich efforts to develop an agenda that addresses their priorities.
In a world roiled by conflict, development efforts will always fall short.
The post-2015 global development agenda must take a comprehensive approach, combining poverty-reduction measures with peace-building initiatives and strategies for economic transformation.
In this way, global leaders can begin to lay the foundations for prosperity, justice, and sustainable development worldwide.
A Peace of Water
PRAGUE – The global financial crisis may be grabbing all the headlines, but resolving it should not be allowed to crowd out other vital issues.
In the Middle East, for example, Israelis and Palestinians – as well as many others around the world – are beginning to believe that the permanent status negotiations to determine the future of Palestine are going nowhere.
The situation may be more promising than it appears, but one cannot deny that hope for real changes on the ground has faded since talks were re-launched two years ago.
This loss of faith is, sadly, establishing a dynamic that will itself inhibit the concessions that are needed if a permanent agreement is to be found.
Because an impasse beckons, it is vitally important to work on those areas where intensive negotiations have the potential to produce quick results.
Fresh water is one such area.
Across the Middle East, water is a security issue.
Indeed, people are now recognizing two important facts.
First, nations faced with conflicting claims to water have historically found ways to collaborate rather than to fight.
Even during the 60 years of conflict in the Jordan Valley, water has more often been a source of cooperation than of conflict.
Second, water scarcity is seldom absolute, and even less often an explanation of poverty.
To quote the United Nations Human Development Report for 2006: “There is more than enough water in the world for domestic purposes, for agriculture and for industry….Scarcity is manufactured through political processes and institutions that disadvantage the poor.”
But almost every nation in the Middle East is using more water than arrives on a renewable basis.
There simply is not enough water for everything these nations want to use it for, and the situation will only worsen.
Yet, even in Palestine, the key water issue is not thirst, but arrested economic development.
In the short term, Palestine needs more water to provide employment and income from farming; in the longer term, educational, cultural, and political changes are needed in order to develop a capacity to adapt.
The region’s climate and geography mean that water resources are unavoidably shared.
But only if water is shared in a rational manner that respects the region’s fragile ecology will human life be sustainable.
Clearly, no final agreement on water will be possible until there are agreed-upon borders between the State of Israel and the State of Palestine, and some resolution of the Israeli settlements in the West Bank.
But interim resolution of water issues does not need to wait for final resolution of the major issues.
Finding rational ways to share and co-manage water may be easier than solving the “big” issues.
In fact, water could help to create a climate of success that aids progress in other areas.
The good news is that the quantity of water that is needed for drinking, cooking, other household chores and sanitation is small.
Most water is used to grow food, so, if a nation’s economy is healthy, there is scope for saving water by importing a greater share of food, although every nation will want to maintain some assured food supply for security reasons.
The bad news is that water, unlike land, cannot simply be divided.
Water flows on the surface and underground.
As it moves, it changes in quantity and quality, and it supports different ecosystems.
Moreover, demand for water changes over time.
Only a few percentage points of the Israeli GNP come from agriculture today; as a result, its economy requires less water than it once did.
Exactly the same transition is likely to occur in Palestine, but it has not happened yet.
Few Israelis deny that Palestinians need more water.
Similarly, there is wide agreement that some water currently used by Israelis will have to be allocated to Palestinian use.
The current negotiations will inevitably deal with rights to water, which do not seem to be very contentious anymore, and the talks can suggest various mechanisms for transfer of management in some cases and for shared management in others.
These are eminently negotiable issues.
A flexible and sustainable formula can certainly be found, almost surely including a transitional period that allows both sides to adjust to and account for their different water management systems, as well as for changing conditions and institutions in the future.
The principle of a just division of water resources to meet the Palestinians’ urgent needs for additional water should be taken as a starting point.
Everything else can be worked out.
Shared water calls for flexible, continuous, cooperative water management, based on agreed-upon rights and responsibilities, as well as ongoing monitoring and dispute resolution mechanisms.
One important point should be added: extensive public participation and transparency, in terms of both process and outcomes, will be key to successful management.
We believe that progress in the peace process and in finding solutions for water issues between Israel and Palestine would also help to unblock progress in the broader region, between the parties on the Jordan, the Orontes, the Tigris, and the Euphrates rivers.
Water can be a catalyst for regional cooperation, opening the way to a future comprehensive “Community of Water and Energy” to enhance the human environment.
In such a forum, water and solar energy in tandem could help to move the Middle East from conflict to collaboration.
The cost of inaction or merely pretending to act is likely to be high for everyone in the Middle East.
Future water policy should no longer be seen as an extension of current policy, but rather as a new opportunity.
Water is the essence of life.
People in Palestine and in Israel need it; people in the region need it.
Cooperating to secure it is the only way forward.
APEC at the Apex
BRISBANE – The significance of the upcoming Asia-Pacific Economic Cooperation Summit in Beijing consists not so much in what is on APEC’s agenda as in what transpires on the sidelines.
Meetings between Chinese President Xi Jinping and US President Barack Obama; as well as Xi’s meetings with Japanese Prime Minister Shinzo Abe loom especially large.
These bilateral relationships constitute much of the strategic undercurrent of East Asian security at a time when the region’s long-term geostrategic stability has come into question.
The core reality is that the Asia-Pacific region comprises a group of rapidly globalizing twenty-first-century economies sitting on top of a set of nineteenth-century national tensions.
That contradiction matters for the entire world, because the region accounts for some 60% of global output.
Economically speaking, where Asia goes in the future, the world will follow.
But Asia is home to a multiplicity of unresolved territorial disputes.
It is the epicenter of underlying tensions stemming from China’s rise and its impact on the United States, the region’s established power since World War II’s end.
Indeed, many of the region’s territorial disputes pit China against US allies.
More broadly, the region’s rifts are endemic: a divided Korean Peninsula; territorial disputes between Russia and Japan, China and Korea, and China and Japan; the unique circumstances of Taiwan; and conflicting maritime claims in the South China Sea involving China, the Philippines, Indonesia, Brunei, Malaysia, Vietnam, and Taiwan.
There are also long-standing border disputes between China and India, and between India and China’s ally, Pakistan.
As if that were not worrying enough, Asia has become the next global arms bazaar, with military outlays in the region now higher than in Europe.
Moreover, six Asian states have nuclear weapons.
Both the tone and the content of the China-US relationship are a cause for concern.
China argues that it is subject to a US policy of isolation and containment.
It points to America’s “rebalancing” strategy, to military and/or diplomatic support for those countries with which China has bilateral territorial disputes, and US support for Japan’s revision of its post-WWII “peace constitution” as a precursor for what China views as significant Japanese rearmament.
The Chinese also see the commercial equivalent of containment in the US-proposed Trans-Pacific Partnership, which includes Japan but excludes China.
Furthermore, Chinese leaders point to what they regards as intrusive US human-rights diplomacy aimed at fomenting political protest within China (including Hong Kong) and undermining the regime’s domestic legitimacy.
The US, no surprise, disputes these claims.
For starters, the US argues that it is the various states of East Asia that have actively sought American support for their security, owing to their collective concerns about China.
Moreover, the US insists that it is not containing China (as it did the Soviet Union); on the contrary, China’s economic rise has been facilitated by access to US markets, as well as to global markets through American support for Chinese accession to the World Trade Organization.
On human rights, the US argues that there are indeed fundamental differences between the two countries’ political traditions and current systems.
But, in the American view, this is vastly different from an organized national strategy of undermining the Chinese state and its institutions.
For these reasons, the bilateral strategic-trust deficit is growing.
Xi, to his credit, has advanced what he describes as a concept for “a new type of great power relationship,” one that seeks to avoid what others have concluded is the near-inevitability of long-term conflict between a rising power (China) and the established power (America).
It is imperative that both parties try to close the trust deficit.
Doing so calls for a framework of what I call “constructive realism.”
Such a framework embraces realism about areas of contention defined by significant conflicting national interests and values.
These issues should simply be peacefully managed over time, until sufficient political capital has been created in the rest of the relationship to address them directly.
At the same time, it is “constructive” in the sense of identifying areas of sufficient commonality to create new public goods, such as bilateral investment treaties, a non-nuclear Korean Peninsula, and a global agreement on climate change.
A constructive realist approach should also begin to sketch the broad outlines of a long-term “common security” concept for East Asia.
The outlook for the China-Japan relationship appears somewhat better.
Just a few months ago, the bilateral relationship had sunk to an all-time post-war low, owing to a toxic cocktail of territorial disputes over the Diaoyu/Senkaku Islands, Japan’s handling of its wartime history (particularly prime ministerial visits to the controversial Yasukuni Shrine), and Chinese fears about Japanese rearmament.
But now both governments appear to have recognized the growing risk of unintended conflict in the seas and airspace around the disputed territories, given the sheer concentration of naval and air assets in a limited space and the absence of effective protocols to manage incidents and prevent them from escalating.
Both sides have concluded that even limited armed conflict would be disastrous.
Moreover, with Japan and China facing increasing economic uncertainty, they have recognized that it makes sense for the world’s second and third largest economies to remove major political impediments to expanded bilateral trade and investment.
For these reasons, barring any last-minute diplomatic indelicacies, the APEC Summit is likely to represent the start of a formal thaw in Sino-Japanese relations.
APEC, an Australian diplomatic initiative launched 25 years ago, was originally conceived as an exclusively economic forum.
Fortunately, it has also become an annual forum for US, Chinese, Japanese, and other leaders to engage with one another on critical questions of long-term strategic stability.
The future of the region’s economy and the global economy – and the stability upon which they are predicated – will be powerfully shaped by the outcome of these deliberations.
A People’s Economics
NEW HAVEN – We are in the midst of a boom in popular economics: books, articles, blogs, public lectures, all followed closely by the general public.
I recently participated in a panel discussion of this phenomenon at the American Economic Association annual meeting in Denver.
An apparent paradox emerged from the discussion: the boom in popular economics comes at a time when the general public seems to have lost faith in professional economists, because almost all of us failed to predict, or even warn of, the current economic crisis, the biggest since the Great Depression.
So, why is the public buying more books by professional economists?
The most interesting explanation I heard was that economics has become more interesting, because it no longer seems to be a finished and closed discipline.
It is no fun to read a book or article that says that economic forecasting is best left to computer models that you, the general reader, would need a Ph.D. to understand.
And, in truth, the public is right: while there is a somewhat scientific basis for these models, they can go spectacularly wrong.
Sometimes we need to turn off autopilot and think for ourselves, and when a crisis occurs, use our best human intellect.
The panelists all said, in one way or another, that popular economics facilitates an exchange between specialized economists and the broader public – a dialogue that has never been more important.
After all, most economists did not see this crisis coming in part because they had removed themselves from what real-world people were doing and thinking.
Successful popular economics involves the reader or listener, in some sense, as a collaborator.
That, of course, means that economists must be willing to include new and original theories that are not yet received doctrine among professional specialists.
Until recently, many professional economists would be reluctant to write a popular book.
Certainly, it would not be viewed favorably in considering a candidate for tenure or a promotion.
Since it does not include equations or statistical tables, they would argue, it is not serious work that is worthy of scholarly attention.
Worse than that, at least until recently, a committee evaluating an economist would likely think that writing a popular economics book that does not repeat the received wisdom of the discipline might even be professionally unethical.
Imagine how the medical profession would view one of its members who recommended to the general public some therapy that had not yet passed scrutiny from the appropriate authorities.
Medical professionals know how often seemingly promising new therapies turn out, after careful study, not to work, or even to be harmful.
There is a rigorous process of scholarly review of proposed new therapies, associated with professional journals that uphold high research standards.
Circumventing that process and promoting new, untested ideas to the general public is unprofessional.
In the decades prior to the current financial crisis, economists gradually came to view themselves and their profession in the same way, encouraged by research trends.
For example, after 1960, when the University of Chicago started creating a Univac computer tape that contained systematic information about millions of stock prices, a great deal of scientific research on the properties of stock prices was taken as confirming the “efficient markets hypothesis.”
The competitive forces that underlie stock exchanges were seen to force all securities prices to their true fundamental values.
All trading schemes not based on this hypothesis were labeled as either misguided or outright frauds.
Science had triumphed over stock-market punditry – or so it seemed.
The financial crisis delivered a fatal blow to that overconfidence in scientific economics.
It is not just that the profession didn’t forecast the crisis.
Their models, taken literally, sometimes suggested that a crisis of this magnitude couldn’t happen.
One way to interpret this is that the economics profession was not fully accounting for the economy’s human element, an element that can’t be reduced to mathematical analysis.
The relatively few professional economists who warned of the current crisis were people, it seems, who not only read the scholarly economics literature, but also brought into play more personal judgment: intuitive comparisons with past historical episodes; conclusions about speculative trading, price bubbles, and the stability of confidence; evaluations of the moral purposes of economic actors; and impressions that complacency had set in, lulling watchdogs to sleep.
These were judgments made by economists who were familiar with our business leadership – their inspirations, beliefs, subterfuges, and rationalizations.
Their views could never be submitted to a scholarly journal and evaluated the way a new medical procedure is.
There is no established scientific procedure that could prove their validity.
Of course, economics is in many ways a science, and the work of our scholars and their computer models really does matter.
But, as the economist Edwin R. A. Seligman put it in 1889, “Economics is a social science, i.e., it is an ethical and therefore an historical science….It is not a natural science, and therefore not an exact or purely abstract science.”
To me, and no doubt to the other panelists, part of the process of pursuing the inexact aspects of economics is speaking honestly to the broader public, looking them in the eye, learning from them, reading the emails they send, and then searching one’s soul to decide whether one’s favored theory is really close to the truth.
A Phantom Recovery?
NEW YORK – Where is the American and global economy headed?
Last year, there were two sides to the debate.
One camp argued that the recession in the United States would be V-shaped – short and shallow.
It would last only eight months, like the two previous recessions of 1990-1991 and 2001, and the world would decouple from the US contraction.
Others, including me, argued that, given the excesses of private-sector leverage (in households, financial institutions, and corporate firms), this would be a U-shaped recession – long and deep.
It would last about 24 months, and the world would not decouple from the US contraction.
Today, 20 months into the US recession – a recession that became global in the summer of 2008 with a massive re-coupling – the V-shaped decoupling view is out the window.
This is the worst US and global recession in 60 years.
If the US recession were – as most likely - to be over at the end of the year, as is likely, it will have been three times as long and about fives times as deep – in term of the cumulative decline in output – as the previous two.
Today’s consensus among economists is that the recession is already over, that the US and global economy will rapidly return to growth, and that there is no risk of a relapse.
Unfortunately, this new consensus could be as wrong now as the defenders of the V-shaped scenario were for the past three years.
Data from the US – rising unemployment, falling household consumption, still declining industrial production, and a weak housing market – suggest that America’s recession is not over yet.
A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close but it has not yet been reached.
Most emerging economies may be returning to growth, but they are performing well below their potential.
Moreover, for a number of reasons, growth in the advanced economies is likely to remain anemic and well below trend for at least a couple of years.
The first reason is likely to create a long-term drag on growth: households need to deleverage and save more, which will constrain consumption for years.
Second, the financial system – both banks and non-bank institutions – is severely damaged.
Lack of robust credit growth will hamper private consumption and investment spending.
Third, the corporate sector faces a glut of capacity, and a weak recovery of profitability is likely if growth is anemic and deflationary pressures still persist.
As a result, businesses are not likely to increase capital spending.
Fourth, the re-leveraging of the public sector through large fiscal deficits and debt accumulation risks crowding out a recovery in private-sector spending.
The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.
Domestic private demand, especially consumption, is now weak or falling in over-spending countries (the US, the United Kingdom, Spain, Ireland, Australia, New Zealand, etc.), while not increasing fast enough in over-saving countries (China, Asia, Germany, Japan, etc.) to compensate for the reduction in these countries’ net exports.
Thus, there is a global slackening of aggregate demand relative to the glut of supply capacity, which will impede a robust global economic recovery.
There are also now two reasons to fear a double-dip recession.
First, the exit strategy from monetary and fiscal easing could be botched, because policymakers are damned if they do and damned if they don’t.
If they take their fiscal deficits (and a potential monetization of these deficits) seriously and raise taxes, reduce spending, and mop up excess liquidity, they could undermine the already weak recovery.
But if they maintain large budget deficits and continue to monetize them, at some point – after the current deflationary forces become more subdued – bond markets will revolt.
At this point, inflationary expectations will increase, long-term government bond yields will rise, and the recovery will be crowded out.
A second reason to fear a double-dip recession concerns the fact that oil, energy, and food prices may be rising faster than economic fundamentals warrant, and could be driven higher by the wall of liquidity chasing assets, as well as by speculative demand.
Last year, oil at $145 a barrel was a tipping point for the global economy, as it created a major income shock for the US, Europe, Japan, China, India, and other oil-importing economies.
The global economy, barely rising from its knees, could not withstand the contractionary shock if similar speculative forces were to drive oil rapidly towards $100 a barrel.
So the end of this severe global recession will be closer at the end of this year than it is now, the recovery will be anemic rather than robust in advanced economies, and there is a rising risk of a double-dip recession.
The recent market rallies in stocks, commodities, and credit may have gotten ahead of the improvement in the real economy.
If so, a correction cannot be too far behind.
A Pig’s Breakfast
LONDON – The Greek debt problem has been poorly handled by Europe’s decision-makers.
European Union heads of government, and the European Central Bank, initially rejected the idea of involving the International Monetary Fund, but without a fall-back plan.
It is hard to avoid the conclusion that part of the motivation for this was French President Nicolas Sarkozy’s reluctance to see Dominique Strauss-Kahn, the IMF’s managing director, ride in from Washington to the rescue of the eurozone.
Strauss-Kahn is, of course, likely to be Sarkozy’s Socialist rival in the next French presidential election.
Is Greece the “canary in the coalmine” – the warning that tells us that Europe’s monetary union is on the verge of dissolution, with the other three of the famous PIGS (Portugal, Italy, and Spain) lining up like dominoes to fall?
George Soros fears this might be the case, and gives the eurozone only a 50% chance of survival in its present form.
Certainly, the episode highlighted flaws in the way the euro’s governance – flaws that are no surprise to some of those involved in creating the common currency.
Helmut Kohl, one of the euro’s principal parents, said in 1991 that “the idea of sustaining an economic and monetary union over time without political union is a fallacy.” Margaret Thatcher, from the opposite camp, said in her memoirs: “I believe the European single currency is bound to fail, economically, politically and indeed socially, although the timing, occasion and consequences are all still unclear.”
There may now be a market for a Greek translation of her book.
Although they might not agree with either of these two apocalyptic predictions, many of Europe’s leaders are coming round to the view that there is a need for change, and that the Greek case has revealed a flaw at the center of the project.
Sarkozy, for example, has revived a long-standing French argument for some form of economic government in Europe as a counterweight to the ECB.
The French usually advance this proposal to get some purchase on the ECB’s monetary decisions, which they sometimes consider hostile to growth and employment, or in order to prevent other countries from maintaining unfair tax policies (“unfair” usually being defined as a tax rate lower than the relevant French one).
In the past, the Germans brushed these arguments aside, but now they are a little more receptive.
German Finance Minister Wolfgang Schäuble, however, focuses on the issue of distressed members, and has advanced a proposal for a European Monetary Fund to provide assistance to countries in Greek-style difficulties, roughly on the IMF model.
This idea has logic behind it.
The drawback is that it would require a change in the European treaties, which in turn requires a unanimous decision by 27 countries, and positive votes in referendums in some of them, including the United Kingdom if David Cameron’s Conservatives win the upcoming general election there.
In the aftermath of the negative referendum votes in France, the Netherlands, and Ireland on European constitutional reform, it is close to inconceivable that EU heads of government would agree to set off down that path again.
Certainly nothing could be achieved on a timetable that would offer any comfort to the other PIGS.
They would all be bacon and sausages before any agreement was reached.
So, in the short run, the IMF will have to be used, if that kind of support is needed, and Sarkozy will have to swallow his pride.
But is an EMF really what is required in the long run?
I think not.
Nor do I think that a European economic government is strictly necessary.
What is needed, though, is a collective agreement on fiscal discipline, and a revival of the Stability and Growth Pact, which was unwisely abandoned – ironically when the French and Germans found its rules too constraining.
Europe’s leaders should refer to a paper by Otmar Issing, “The Euro – A Currency Without a State,” published in December 2008, before the debt crisis erupted.
Issing, the ECB’s chief economist in its formative years, knows more about how a monetary union operates in practice than any man alive.
He maintains that “the Stability and Growth Pact contains all the rules that are necessary for Monetary Union to function.
There is no need for coordination of macroeconomic policies to go any further than this.”
Europe does not need the French plan for coordination of tax policies, or another IMF, but there does need to be fiscal discipline to prevent other countries from free riding, as the Greeks seem to have done.
They apparently assumed that the rest of Europe would overlook continuing high deficits, and that, as eurozone members, the market would consider their debt to be just like German bunds, though issued by friendly and welcoming people in an agreeable climate, and with a glass of ouzo on the side.
The original Pact envisaged a 3%-of-GDP cap on fiscal deficits, save in exceptional circumstances.
Investors well understand that we are in such circumstances now, so it will take some time to get back to that level.
But that should be the clear aim, with IMF assistance along the way to provide interim funding where necessary and political cover for governments obliged to take tough decisions on public spending and taxation.
Fiscal discipline does not sound as visionary as “economic government.”
But the EU has suffered from a surfeit of “vision” and a deficit of practical budgetary measures.
It is time to redress that balance, or Soros’s gloomy prognosis may become reality.
A Pivot to the People
PRINCETON – On February 1, the United Nations Security Council met to consider the Arab League’s proposal to end the violence in Syria.
Secretary of State Hillary Clinton represented the United States.
Midway through her remarks, she began speaking not to the Syrian ambassador, who was in the room, or even the Syrian government, but directly to the Syrian people.
She said that change in Syria would require Syrians of every faith and ethnicity to work together, protecting and respecting the rights of minorities.
Addressing those minorities, she continued: “We do hear your fears, and we do honor your aspirations.
She told Syria’s business, military, and other leaders that they must recognize that their futures lie with the state, not with the regime. “Syria belongs to its 23 million citizens, not to one man or his family.”
Speaking directly to citizens – seeing a country’s people, as well as its government – is not just a rhetorical device.
While many foreign-policy pundits have focused on the US “pivot to Asia,” Clinton has also executed a less-publicized, but no less important, pivot to the people. She has introduced policies, programs, and institutional reforms designed to support government-to-society and society-to-society diplomacy, alongside traditional government-to-government relations.
These initiatives do not get headlines, but they will gradually transform much of American foreign policy.
In January, the State Department unveiled a new “super-office” of Civilian Security, Democracy, and Human Rights, under the leadership of Under-Secretary Maria Otero.
The office brings together agencies that focus on international law enforcement, counter-terrorism, and reconstruction and stabilization with those charged with advancing democracy, human rights, and humanitarian assistance to refugees and migrants.
Otero explains the logic behind the initiative in terms of “protecting individuals.”
That, in turn, requires “not just engaging state to state,” but also working “with players and actors outside of the traditional [channels] we’ve engaged in.”
Viewed from this perspective, countering terrorism includes rebutting terrorist propaganda with a strategic communications campaign.
Countering narco-gang violence includes working with Mexican telecommunications mogul Carlos Slim to develop tools that allow ordinary citizens to report violence anonymously by text message and enable police to map the results.
Strengthening democracy means working with the Kenyan developers of a crisis-mapping platform that allows anyone with a cell phone to text information about election fraud or violence to a central monitoring station.
On a country-by-country basis, pivoting to the people means engaging with Egypt’s bloggers as well as with the ruling Supreme Council of the Armed Forces; convening young entrepreneurs in Tunisia, Algeria, and Morocco and connecting them to funding and mentoring; and using social media in Russia to rebut government efforts to smear the US ambassador.
And, working at an official level, it means co-sponsoring with Brazil the Open Government Partnership, which brings together governments committed to increasing transparency, accountability, and citizen participation, and uses mutual peer pressure and open reporting to hold them to their commitments.
Thinking about countries in these comprehensive terms also provides a different strategic perspective.
Clinton has created a raft of new positions at the State Department to spur outreach to different social segments.
The strategies and programs developed by the Ambassador for Global Women’s Issues, the Special Adviser for Global Youth Issues, the Senior Adviser for Civil Society and Emerging Democracies, the Special Representative for Outreach to Muslim Communities, the Special Representative for Global Partnerships, and the Special Representative for Commercial and Business Affairs often present a very different face of the US.
As a result, Clinton has launched an actual strategic dialogue with civil society.
For example, Ambassador Melanne Verveer has attended more than 1,000 events around the world focused on empowering women in areas ranging from peace negotiations to farming.
Similarly, she has launched programs such as mWomen, designed to expand and support mobile technology that increases women’s independence, security, and access to health care and vital knowledge.
The Office of Global Youth Affairs is building a local youth council at every US embassy around the world, to advise and help to implement embassy programming aimed at local youth.
Much of the programming aimed at youth, women, entrepreneurs, diasporas, technologists, and other social groups is partly funded and conducted by the private sector.
Indeed, the Obama administration’s National Security Strategy mentions “public-private partnerships” more than 30 times.
Clinton created the Global Partnership Initiative to build as many coalitions, networks, and partnerships as possible with corporations, foundations, NGOs, universities, and other civic organizations.
Here, the pivot to the people includes the American people: the dynamism, creativity, and resources of American business and non-profit organizations already engaged around the world.
One privately-funded initiative spearheaded by the State Department will send 300 dogwood trees to Japan this spring, to be planted in the tsunami-affected region and in Tokyo to express the American people’s support for the Japanese people; another will send English teachers throughout Southeast Asia.
After participating in the Friends of Syria conference in Tunis, Clinton convened a town hall meeting with Tunisian youth.
In her opening remarks, she told her audience that “young people are at the heart of today’s great strategic opportunities and challenges.”
Speaking about her lifetime efforts to put “women’s empowerment on the international agenda,” she added, “It’s time to put youth empowerment there as well.”
The implications of all of this activity, which Clinton calls “twenty-first-century statecraft,” are profound.
From now on, US diplomatic relations with other countries will engage directly with their people and connect them to the American people as much as possible.
From the perspective of US diplomats, the people of every country stand on the same footing as their government.
That assumption is the heart of democracy; it is a revolution for diplomacy.
A Planet for All Apes
MELBOURNE – Two new movies released this month – one a science-fiction blockbuster, the other a revealing documentary – raise the issue of our relations with our closest non-human relatives, the great apes.
Both dramatize insights and lessons that should not be ignored.
Rupert Wyatt’s Rise of the Planet of the Apes is the seventh film in a series based on Pierre Boule’s 1963 novel, Planet of the Apes, about a world populated by highly intelligent simians.
Publicity for the new film claims that it is “the first live-action film in the history of movies to star, and be told from the point of view of, a sentient animal.”
Yet no live apes were used.
Instead, “performance capture technology,” originally invented for the movie Avatar, enables a human actor, Andy Serkis, to play the role of the chimpanzee Caesar, not by dressing in a chimp suit, but by having every gesture and facial movement, even the twitch of an eyebrow, transformed into the movement of an ape.
When I spoke with Wyatt last month, he acknowledged that there were practical reasons for not using real apes in his movie.
But he also understood the ethical issue.
“There are things I didn’t want to be involved in,” he told me.
“To get apes to do anything you want them to do, you have to dominate them; you have to manipulate them into performing.
That’s exploitative.”
Wyatt’s reluctance to join in the exploitation of great apes is understandable, given that the film itself tells the story of apes rising up in response to oppression from dominant humans.
The central human character, Will Rodman (played by James Franco), is a scientist seeking a cure for Alzheimer’s disease who experiments on apes.
Many films would have glorified a scientist seeking such a goal, and treated the use of animals for that purpose as obviously justified.
Rise of the Planet of the Apes, however, portrays Rodman as, in Franco’s words, “a cold, isolated person.”
Only when Rodman’s superiors cancel his experiments and he takes home Caesar, an infant chimpanzee, does the scientist begin to care about others.
The plot then takes another turn when Caesar becomes too big and aggressive to live in a human home, and is taken to what is supposed to be a primate sanctuary, but is in fact a dumping ground for unwanted apes, run by humans who display cruelty to the captive animals.
As far as the treatment of apes is concerned, much of the film is firmly grounded in reality, as a viewing of Project Nim, a documentary based on Elizabeth Hess’s book Nim Chimpsky: The Chimp Who Would be Human, clearly demonstrates.
Nim was born in 1973, in a primate research facility in Oklahoma, and was taken from his mother when he was only ten days old, to be used in a sign-language experiment.
Reared as part of a human family, he learned to use more than 100 signs from American Sign Language, the language used by Deaf Americans.
But he was taken from his first human family and handed over to other teachers with whom he did not have the same kind of bond.
He grew stronger and more aggressive and began biting his teachers.
Herbert Terrace, the Columbia University psychologist who was directing the project, decided to end it and sent Nim back to the primate facility in Oklahoma.
There, the pampered chimpanzee – who, when asked to sort photos of humans and apes, put his own photo among the humans – was locked in a cage with other chimps.
He demonstrated his view of that situation by signing “out” to passing humans.
Nim suffered various other vicissitudes – and narrowly escaped being infected with hepatitis as part of a medical experiment – until he was eventually released to an animal sanctuary, where he died in 2000.
In 1993, Paola Cavalieri and I founded The Great Ape Project, an organization dedicated to the idea of recognizing that great apes have a moral status befitting their nature as self-aware beings who are capable of thought and have rich and deep emotional lives.
At a minimum, they should have the rights to life, liberty, and protection from torture that we grant to all members of our own species, regardless of their intellectual abilities.
In the intervening years, that idea has made steady progress.
Since 2010, the European Union has essentially banned the use of great apes in experiments.
Experiments on great apes are now either banned or severely restricted in New Zealand, Australia, and Japan.
In the United States, a bipartisan group of members of Congress is supporting legislation to end the use of chimpanzees in invasive research.
In Spain in 2008, a parliamentary resolution urged the government to grant some basic legal rights to great apes, but the Spanish government has yet to implement it.
Perhaps the release of these two very different films will lead to a further push to bring great apes within the circle of beings with moral and legal rights.
In that way, our closest relatives could serve to bridge the moral gulf that we have dug between ourselves and other animals.
A “Portfolio” Approach to Climate Change
The world has tried with little success to cut carbon emissions under the Kyoto Protocol.
The enormous effort expended to bring the Protocol into force nonetheless indicates how much work will be required to produce the next treaty, due to be agreed in Copenhagen in December 2009.
Campaigners will push for tough and far-reaching policies, but strong resistance will continue from countries concerned about their economic vitality.
The new negotiations will have one advantage over the earlier efforts, because governments now understand the need for a portfolio of adaptation, mitigation, and research efforts.
New research that my colleagues and I undertook for the Copenhagen Consensus Center in Denmark explores the effectiveness of different responses to this global challenge, but it strongly supports the portfolio approach for several reasons.
First, we now know that adaptation will be essential, because temperatures will rise by another 0.6°C by 2100 even if greenhouse gas emissions are eliminated tomorrow.
We also know that the impact of climate change will not be evenly distributed across the globe.
In some areas, modestly warmer temperatures could produce higher crop yields if associated changes in precipitation patterns are not adverse and/or irrigation remains viable.
Even with 0.6°C warming, however, Africa and South Asia will experience almost immediate reductions in the viability of many crops and, eventually, increased vulnerability to infectious disease.
These impacts will clearly hit the planet’s worst-off inhabitants hardest: the “bottom billion” who already bear the heaviest burden of disease, poverty, conflict and malnutrition.&#160;
Ensuring that adaptive capacity is expanded and exploited where it is most needed is thus a key challenge.
Long-term development may give countries more capacity to soften the impact of climate change on the environment and citizens’ health, but in the meantime the planet’s poorest people will need help from the rich.
Our analysis investigated, for example, the merits of more targeted policies for the near term: purchasing mosquito-resistant bed nets and oral re-hydration malaria therapy for children in the poorest nations affected by climate change.
The goal was to deal aggressively and proactively with some of the marginal health impacts of global warming.
Benefits would appear almost immediately, but would dissipate over time as economies developed.
Even as development improves conditions, however, reducing carbon emissions would become increasingly important over the longer term as the impact of climate change become more severe.
Since the effects of climate change have been observed in many areas around the world, thinking about mitigation makes sense everywhere.
But we found that mitigation
The Copenhagen Consensus study also examined a portfolio option of the sort heralded by the United Nations’ Intergovernmental Panel on Climate Change.
We allocated $50 billion to research into greener technology, so that only $750 billion could be absorbed by the economic cost of adaptation and mitigation.
The gap between the cost of carbon-free and carbon-emitting technology fell, and the taxes designed to mitigate emissions became more effective.
As a result, the research and development program essentially paid for itself, and total discounted benefits for the $800 billion investment climbed to more than $2.1 trillion.&#160;
Ensuring that research and development is part of the world’s climate change response portfolio would make mitigation efforts more efficient and significantly enhance their ability to reduce carbon emissions over the next century.
But these favorable net benefits reflect very conservative assumptions regarding the timing of emissions reductions and when the developing world would “come onboard.”
Optimizing investment in the portfolio over time would, for example, increase the discounted benefits by more than a factor of three.
Expected benefits would increase further if we included the chance that potentially higher climate sensitivities would exacerbate damages, even though doing so would require including similarly plausible lower climate sensitivities, which would push in the opposite direction.
Fighting climate change can be a sound investment, even though neither mitigation nor adaptation alone will be enough to “solve” the problem.
To make a real difference, especially in the near term, the world must combine mitigation and adaptation with increased research and development into carbon-saving and sequestering technology, which in turn requires designing and exploiting market-based incentives.
A Post-Crisis World of Risk
MILAN – The global economy’s most striking feature nowadays is the magnitude and interconnectedness of the macro risks that it faces.
The post-crisis period has produced a multi-speed world, as the major advanced economies – with the notable exception of Germany – struggle with low growth and high unemployment, while the main emerging-market economies (Brazil, China, India, Indonesia, and Russia) have restored growth to pre-crisis levels.
This divergence is mirrored in public finances.
Emerging economies’ debt-to-GDP ratios are trending down toward 40%, while those of advanced economies are trending up toward 100%, on average.
Neither Europe nor the United States has put in place credible medium-term plans to stabilize their fiscal positions.
The volatility of the euro-dollar exchange rate reflects the uncertainty about which side of the Atlantic faces higher risks.
In Europe, this has led to several ratings downgrades of the sovereign debt of the most distressed countries, accompanied by bouts of contagion spilling over to the euro.
More seem likely.
As for the US, Moody’s recently issued a warning on the country’s sovereign debt in the face of uncertainty about Congress’s willingness to raise the debt ceiling amid highly partisan debate about the deficit.
Both issues – the debt ceiling and a credible deficit-reduction plan – remain unresolved.
Moreover, economic growth in the US is modest, and appears to come mainly from segments of the tradable sector that are exposed to and benefit from emerging-market demand.
The non-tradable sector, which created virtually all of the new employment in the two decades prior to the crisis, is stagnating, owing to a shortfall in domestic demand and seriously constrained government budgets.
The result is persistent unemployment.&nbsp;
Meanwhile, the tradable side is not large enough in competitive terms to take up the slack in growth and employment.
By contrast, emerging markets’ rapid growth and urbanization are delivering a global investment boom, documented in a recent McKinsey Global Institute study.
A likely consequence is that the cost of capital will rise in the next few years, putting pressure on highly leveraged entities, including governments that have grown accustomed to a low interest-rate environment and may not see this shift coming.
Countries with persistent structural current-account deficits will incur additional external-financing costs, and eventually will reach the limits of leverage.
At that point, the weak productivity and competitiveness of their tradable sectors will become clear.
Adjustments will need to be made.
The options are higher investment levels financed by domestic savings, productivity growth, and increased competitiveness, or stagnant real incomes as rebalancing occurs through the exchange-rate mechanism (or a large dose of domestic deflation in the debt-distressed eurozone countries, since they do not control their own exchange rates).
Many of these structural problems were hidden from view before the crisis, thereby delaying both market and policy responses.
In the US, excess domestic consumption, based on a debt-fueled asset bubble, helped to sustain employment and growth, though the current account held worrying signs.
In several European countries, governments, aided by low interest rates, filled in the gap created by lagging productivity.
In all cases, assessments of fiscal balance were mistakenly predicated on the assumed stability and sustainability of the existing growth paths.
The assumption that a benign growth and interest-rate environment was a permanent state of affairs led to a massive failure of fiscal counter-cyclicality in the advanced economies, as budget deficits became chronic, rather than a response to depressed domestic demand.
In emerging markets, China’s growth is crucial, owing to its size and importance as an export market for Brazil, India, South Korea, Japan, and even Germany.
But inflation is a dual threat to China, jeopardizing both economic growth and internal cohesion.
Housing has become unaffordable for many young people entering the work force.
Reining in price and asset inflation without undermining growth will be a delicate balancing act.
Moreover, China shares with the US the challenge of limiting growth in income inequality.
In both cases, the employment engines need to keep running or be restarted, in order to prevent political volatility and social unrest.
Protectionism on a large scale is not a likely outcome – at least not yet – but that could change if employment and distributional issues are not handled well.
For Asia, which is relatively poor in resources compared to the Middle East, Latin America, and Africa, the rising cost of commodities, driven in part by emerging-market growth, is a cause for concern.
Energy security is also a notable risk factor, especially given the uncertain outcomes of the popular uprisings in the Middle East.
Emerging-market growth is the world’s bright spot and looks to be sustainable even as the advanced countries experience an extended period of rebalancing and slow growth.
But even there, risks lurk.
A major downturn in Europe or America would have a significant negative impact on these economies, which can generate enough incremental demand to sustain their own growth, but not enough to make up for a large drop in advanced-country demand.
Markets may have factored in the combined effect of these macro risks, which nowadays are pervasive and correlated, but I doubt it.
Nonetheless, all countries share a strong and immediate interest in reducing them.
Let’s hope that an awareness of this will add a much-needed sense of urgency to national policy responses, as well as to efforts by the G-20 and other international bodies to improve international policy coordination.
Appeal for freedom of speech and respect for minority rights in Russia
We were taken aback and dismayed by reports of actions directed against ethnic Georgians in Russia.
These include accounts in the international media that Moscow police have asked schools to draw up lists of pupils with Georgian surnames as part of their search for illegal immigrants, and verifiable cases where Georgian businesses in Russia have been closed.
Knowing the importance to poor families of remittance to Georgia, we are also concerned at reports of measures to block bank transfers.
We feel obliged to emphasize that disputes between governments are not grounds for actions against the civilian population.
We would hope that the leadership of the Russian Federation will affirm the rights of ethnic minorities; refrain from hostile rhetoric and actions against Georgians; and ensure that our common democratic values and respectful relations between neighbours are upheld.
André Glucksmann
Vartan Gregorian
Frederik Willem de Klerk
Václav Havel
Mike Moore
Michael Novak
Yohei Sasakawa
Karel Schwarzenberg
Appeasement Revisited
I vividly remember the slightly ludicrous, slightly risqué, and somewhat distressing predicament in which Western diplomats in Prague found themselves during the Cold War.
They regularly needed to resolve the delicate issue of whether to invite to their embassy celebrations various Charter 77 signatories, human rights activists, critics of the communist regime, displaced politicians, or even banned writers, scholars, and journalists – people with whom the diplomats were generally friends.
Sometimes we dissidents were not invited, but received an apology, and sometimes we were invited, but did not accept the invitation so as not to complicate the lives of our courageous diplomat friends.
Or we were invited to come at an earlier hour in the hope that we would leave before the official representatives arrived, which sometimes worked and sometimes didn’t.
When it didn’t, either the official representatives left in protest at our presence, or we left hurriedly, or we all pretended not to notice each other, or – albeit on rare occasions – we started to converse with each other, which frequently were the only moments of dialogue between the regime and the opposition (not counting our courthouse encounters).
This all happened when the Iron Curtain divided Europe – and the world – into opposing camps.
Western diplomats had their countries’ economic interests to consider, but, unlike the Soviet side, they took seriously the idea of “dissidents or trade.”
I cannot recall any occasion at that time when the West or any of its organizations (NATO, the European Community, etc.) issued some public appeal, recommendation, or edict stating that some specific group of independently-minded people – however defined – were not to be invited to diplomatic parties, celebrations, or receptions.
But today this is happening.
One of the strongest and most powerful democratic institutions in the world – the European Union – has no qualms in making a public promise to the Cuban dictatorship that it will re-institute diplomatic Apartheid.
The EU’s embassies in Havana will now craft their guest lists in accordance with the Cuban government’s wishes.
The shortsightedness of socialist Prime Minister José Zapatero of Spain has prevailed.
Try to imagine what will happen: at each European embassy, someone will be appointed to screen the list, name by name, and assess whether and to what extent the persons in question behave freely or speak out freely in public, to what extent they criticize the regime, or even whether they are former political prisoners.
Lists will be shortened and deletions made, and this will frequently entail eliminating even good personal friends of the diplomats in charge of the screening, people whom they have given various forms of intellectual, political, or material assistance.
It will be even worse if the EU countries try to mask their screening activities by inviting only diplomats to embassy celebrations in Cuba.
I can hardly think of a better way for the EU to dishonor the noble ideals of freedom, equality, and human rights that the Union espouses – indeed, principles that it reiterates in its constitutional agreement.
To protect European corporations’ profits from their Havana hotels, the Union will cease inviting open-minded people to EU embassies, and we will deduce who they are from the expression on the face of the dictator and his associates.
It is hard to imagine a more shameful deal.
Cuba’s dissidents will, of course, happily do without Western cocktail parties and polite conversation at receptions.
This persecution will admittedly aggravate their difficult struggle, but they will naturally survive it.
The question is whether the EU will survive it.
Today, the EU is dancing to Fidel’s tune.
That means that tomorrow it could bid for contracts to build missile bases on the coast of the People’s Republic of China.
The following day it could allow its decisions on Chechnya to be dictated by Russian President Vladimir Putin’s advisers.
Then, for some unknown reason, it could make its assistance to Africa conditional on fraternal ties with the worst African dictators.
Where will it end?
The release of Milosevic?
Denying a visa to Russian human rights activist Sergey Kovalyov?
An apology to Saddam Hussein?
The opening of peace talks with Al Qaida?
It is suicidal for the EU to draw on Europe’s worst political traditions, the common denominator of which is the idea that evil must be appeased and that the best way to achieve peace is through indifference to the freedom of others.
Just the opposite is true: such policies expose an indifference to one’s own freedom and pave the way for war.
After all, Europe is uniting in order to defend its freedom and values, not to sacrifice them to the ideal of harmonious coexistence with dictators and thus risk gradual infiltration of its soul by the anti-democratic mindset.
I firmly believe that the new members of the EU will not forget their experience of totalitarianism and non-violent opposition to evil, and that that experience will be reflected in how they behave in EU bodies.
Indeed, this could be the best contribution they can make to the common spiritual, moral, and political foundations of a united Europe.
Realism on North Korea
BERLIN – The world’s task in addressing North Korea’s saber rattling is made no easier by the fact that it confronts an impoverished and effectively defeated country.
On the contrary, it is in such circumstances that calm foresight is most necessary.
The genius of the Habsburg Empire’s Prince Klemens von Metternich in framing a new international order after the Napoleonic Wars was that he did not push a defeated France into a corner.
Although Metternich sought to deter any possible French resurgence, he restored France’s prewar frontiers.
By contrast, as Henry Kissinger has argued, the victors in World War I could neither deter a defeated Germany nor provide it with incentives to accept the Versailles Treaty.
Instead, they imposed harsh terms, hoping to weaken Germany permanently.
We know how that plan ended.
John F. Kennedy was in the Metternich mold.
During the Cuban missile crisis, he did not try to humiliate or win a total victory over the Soviet Union.
Rather, he put himself in Nikita Khrushchev’s shoes and agreed to dismantle, secretly, American missiles in Turkey and Italy in exchange for withdrawal of Soviet missiles from Cuba.
Kennedy’s pragmatism prevented World War III.
Sadly, North Korea has not received such far-sighted statesmanship.
Faced with the North’s dangerous nuclear game, we should ask what would have happened if, over the last 20 some years, the North Korea problem had been approached with the sagacity of Metternich and Kennedy.
Of course, North Korea is not early-nineteenth century France or the USSR of 1962.
In the eyes of Western (including Japanese) political leaders, it has never amounted to more than a small, fringe country whose economic failings made it appear to be poised perpetually on the edge of self-destruction.
For the most part, world leaders preferred not to be bothered with North Korea, and so reacted in an ad hoc way whenever it created a security problem.
But now, following the North’s recent nuclear tests, and given its improving ballistic-missile capabilities, that approach is no longer tenable.
Perhaps the best chance to address the problem at an earlier stage was immediately after the Soviet Union’s collapse in 1991.
Back then, Kim Il-sung – the North’s founder – faced economic collapse, diminution of his conventional military forces, and diplomatic isolation.
In interviews with Asahi Shimbun and The Washington Times in March and April 1992, Kim clearly expressed a wish to establish diplomatic relations with the US.
But US and South Korean leaders were not ready to accommodate Kim’s overture.
Their received ideas about North Korea prevented them from recognizing a fast-changing political reality.
Another opportunity was missed later in the decade.
If North Korea had reciprocated in a timely manner following US envoy William Perry’s visit to Pyongyang in May 1999, President Bill Clinton’s policy of engagement with the North might have been upgraded to a push for normalization of diplomatic relations.
Instead, the North procrastinated, sending Vice Marshall Jo Myong-rok to the US only in October 2000, near the end of Clinton’s presidency.
A few months later, newly elected President George W. Bush reversed Clinton’s North Korea policy.
I still recall the difficulty that I faced, as South Korea’s foreign minister, in convincing Bush administration policymakers to negotiate with North Korea instead of merely applying pressure and waiting for the North to capitulate.
Back then, North Korea was restarting its Yongbyon nuclear facility and producing plutonium, thus strengthening its bargaining position vis-à-vis the US.
Precious time was squandered before North Korea’s first nuclear test in 2006.
Though Bush shifted his policy toward bilateral negotiations with the North a few months later, the Kim regime had become much more obstinate.
Indeed, North Korea’s behavior has since become even more volatile.
Its sinking of the South Korean corvette Cheonan and the shelling of Yeonpyeong Island in 2010 were unprecedented, and raised inter-Korean tensions to their highest level in decades.
Today, following the North’s third nuclear test, we seem to have entered the most precarious stage yet, with the regime declaring that it will never surrender its nuclear option.
So, what should be done?
The first option should be deterrence of further aggression through diplomacy.
But achieving diplomatic deterrence will depend on China’s cooperation, and this requires that China’s vital national-security interests be recognized.
China fears not only the social and economic consequences of a North Korean implosion, but also the strategic consequences of reunification – in particular, that the US military, through its alliance with South Korea, would gain access to territory on its border.
A mere statement by the US that it has no intention to press this military advantage will not assuage China’s fears.
Chinese leaders recall that the US promised Soviet President Mikhail Gorbachev that German reunification and democratic transition in Eastern Europe would not mean eastward expansion of NATO.
So a more concrete undertaking, one that preserves South Korea’s bedrock security concerns, is needed.
Only after its security is assured will China free itself from complicity in North Korean brinkmanship and be better able to control the North’s behavior.&#160;
But Chinese cooperation, though necessary, will not resolve the North Korea problem on its own.
A comprehensive approach must recognize the speed of internal change, especially in the minds of ordinary North Koreans.
Simply put, North Koreans are not as isolated as they once were, and have a growing appreciation of their impoverishment, owing primarily to greater trade and closer connections with booming China.
This internal change needs to be encouraged, because it will prove more effective than external pressure in influencing the regime’s behavior.
But such encouragement must be undertaken in ways that do not incite the North’s fears of being destroyed by indirect means.&#160;
South Korean President Park Geun-hye’s recent proposal to provide humanitarian assistance despite the recent spike in tension, is a start in the right direction.
The lives of ordinary North Koreans matter as much as the security of North Korea’s neighbors.
A comprehensive approach is required – one that focuses as much on the human dimension as on the security dimension.
It remains to be seen whether this approach requires more foresight and courage than today’s political leaders in South Korea, the West, and China can muster.
A President in the Dock
NEW YORK – In a way, the stir aroused by the decision by the International Criminal Court (ICC) to indict Sudan’s President Omar al-Bashir for war crimes and crimes against humanity in Darfur is a surprise.
After all, the Court has no means of its own to arrest anyone in Sudan, much less a head of state who commands the country’s armed forces.
Nor is there any prospect that someone else will intervene in Sudan to make an arrest.
While the ICC’s chief prosecutor, Luis Moreno-Ocampo, expresses confidence that Bashir will be brought to justice, it is unclear how this will happen.
But it could.
Despite the ICC’s seeming powerlessness, many governments’ leaders are engaged in strenuous efforts to block the indictment.
They do not seem concerned that the charges are unfair; rather, they appear to be demonstrating solidarity with a fellow head of state.
Those denouncing the attempt to put Bashir on trial include the large blocs of countries that are members of the Organization of the Islamic Conference and the African Union, together with such powerful states as China and Russia.
One can only guess whether some of those joining this effort are motivated by concern that they themselves may some day face charges like those leveled at Bashir by the ICC judges.
Though Bashir may be able to avoid arrest simply by limiting his international travel, the commotion provoked by the indictment is not irrational.
The charges against him have a powerful stigmatizing effect.
The fact that a panel of judges representing the 108 governments that are parties to the ICC has accused Bashir of principal responsibility for the crimes committed in Darfur during the past six years undermines the legitimacy of his continued rule.
Those crimes have caused more than 300,000 deaths, and have forcibly displaced at least another 2.7 million people.
Even if Bashir’s fellow heads of state succeed in their effort to persuade the United Nations Security Council to defer prosecution – which is highly unlikely – the charges will continue to hang over Bashir’s head unless and until he stands trial.
In 1999, an international criminal tribunal indicted another sitting head of state, Slobodan Milosevic of the Federal Republic of Yugoslavia.
Though he seemed secure at the time, a year and a half later he was sent to The Hague to stand trial.
Similarly, in 2003, an international criminal tribunal indicted Liberia’s then president, Charles Taylor.
He had to flee Liberia a few months later and initially received asylum in Nigeria, but is now on trial in The Hague.
When those indictments were issued, no one could have predicted how events would unfold; in retrospect, it is evident that the indictments’ delegitimizing effects had important consequences.
Of course, the ICC’s prosecutor and judges are themselves taking a substantial risk in the indictment of Bashir.
The Court is still in its infancy, and antagonizing the many government leaders expressing solidarity with him could jeopardize its future.
Yet it should be recognized that the Court’s personnel are carrying out their duties.
The treaty establishing the ICC explicitly states that heads of state do not enjoy immunity.
And the Security Council referred the Darfur case to the Court in 2005.
This was an investigation that had to be conducted, and those found to have the highest level of responsibility for the crimes had to be indicted.
Many of those now objecting to the prosecution of Bashir participated in the decisions leading to the indictment.
If the ICC’s indictment now causes them discomfort, that is only because they did not anticipate that the Court would carry out the responsibilities that they themselves assigned to it.
A Press Without Principles
NEW YORK – Julian Assange, the founder of WikiLeaks, is in the news again, this time after former Swiss banker Rudolf Elmer turned over to him confidential records on roughly 2,000 wealthy individuals that Elmer claims contain evidence of money laundering and tax evasion.
Elmer was quickly convicted of violating Switzerland’s bank-secrecy law, but few journalists have demanded that Assange be prosecuted for his role in the affair.
That, apparently, happens only in the United States.
There, in the midst of the debate over WikiLeaks’ ongoing release of classified US State Department cables, and as the government threatens Assange with extradition and prosecution, respected journalists are running for cover.
One would expect lead editorials by The New York Times, The Wall Street Journal, and USA Today, not to mention all major television outlets, defending WikiLeaks’ right to publish.
Instead, all we have heard is an awkward, deafening, and breathtakingly hypocritical silence – or worse.
Most American journalists fully understand that Assange did not illegally obtain classified material; the criminally liable party is whoever released the material to the site.
He is not the equivalent of Daniel Ellsberg, who in 1971 illegally released the Pentagon Papers, the US military’s secret history of the Vietnam War; rather, he is analogous to The New York Times, which made the brave and correct decision to publish that material.
Moreover, American journalists know perfectly well that they, too, traffic in classified material constantly – indeed, many prominent US reporters have built lucrative careers doing exactly what Assange is doing.
Any dinner party in media circles in New York or Washington features journalists jauntily showing prospective employers their goods, or trading favors with each other, by disclosing classified information.
On CNN recently, a long pause followed when I asked legal analyst Jeffrey Toobin – who was calling for Assange’s arrest – if he had really never handled classified information.
That is what serious journalists do, after all: their job is to find out what government officials do not want revealed.
American journalists also know that the government classifies information mostly to spare it embarrassment, or for expediency, rather than because it has genuine national-security concerns.
Many of the Washington Post reporter Bob Woodward’s bestselling books, which have made him America’s highest-paid print journalist, are based on classified information.
So where are the calls for Woodward’s arrest?
Why do all these reporters, who get praise and money for doing what Assange has done, maintain a cowardly silence (at best) while a fellow publisher faces threats of extradition, banning, and espionage charges (which can incur the death penalty), not to mention calls for his assassination?
One reason might be the sexual-misconduct charges against Assange.
But any serious journalist knows that the two issues must not be conflated.
The right to free expression applies to rogues and scoundrels, sleazy personalities, and even criminals.
Indeed, the most famous free-speech cases – the ones that are supposed to showcase America’s strength and moral power – involve the protection of speech that most decent people hate.
So, again: why have US journalists and editors turned Assange into a pariah?
According to Nancy Youssef, a journalist for McClatchy Newspapers, the Freedom of the Press Committee of the Overseas Press Club of America in New York City declared Assange to be “not one of us.”
The Associated Press refuses to comment on him.
And even the National Press Club decided not to speak publicly about the possibility that Assange may be charged with a crime.
Instead, it has fallen to foreign press organizations to defend him.
The Assange case shows that no coup is needed to close down an open society.
You need only accomplish a few key critical tasks.
One is to intimidate journalists, say, by accusing a high-profile reporter of “treason” or endangering national security through his reporting, and then threatening him with torture, a show trial, or indefinite detention.
No mass arrests or further threats are required, because other reporters immediately start to police and censor themselves – and to attack the “traitor” in their midst.
There is another sense in which, from the perspective of establishment US journalists, Assange is “not one of us.”
American journalism’s business model is collapsing; the people who should be defending Assange are facing salary cuts or unemployment, owing in large part to the medium that he represents.
These journalists’ self-interested prejudice against a medium in which they are not the gatekeepers prevents them from conceding that Assange is a publisher, rather than some sort of hybrid terrorist blogger.
In this, paradoxically, they have become like the outraged US government officials who are now threatening Assange, and who also are no longer able to control the flow of information.
In their behavior toward Assange, the US government and major American media are lashing out at the face of a future in which there are no traditional gatekeepers, and all institutions live in glass houses.
This is why pursuing Assange is futile and absurd.
Even if he is locked up forever, the world of the future is a WikiLeaks world.
Trying to convict him is like trying to convict the first person who installed a telephone.
In five years, every major institution could be held accountable by its own version of WikiLeaks – so that taxpayers, shareholders, members of university communities, and so on, can find out what the traditional gatekeepers prefer to hide.
When bullied, journalists can protect themselves only by fighting back – as a group.
And when a technology-led change is inevitable, integrating it into an open society should be one of journalism’s chief tasks.
But that mission now seems lost in America.
A Primer for Pandemics
A few times each year, the world is reminded that a pandemic threat is immanent.
In 2003, it was SARS.
Today, it is a potential avian virus similar to the one that killed 30 million people after 1914.
“Bird flu” has already shown that it can jump from fowl to humans, and now even to cats, which indicates that it might be the next global killer.
But there are many other potential pandemics, and many are not even viruses.
Bacteria, prions, parasites, and even environmental factors could suddenly change in a way that slays us.
It is widely predicted that when this happens, the economic and human losses will exceed that of any previous war.
Indeed, it is humbling to remember that some of history’s most deadly invasions were carried out by single-cell organisms, such as cholera, bubonic plague, and tuberculosis.
Countries with the resources to do so are making resistance plans against pandemics – limited strategies that would protect their own citizens.
Most governments are hoping that early detection will make containment possible.
Containment depends heavily on vaccines, but vaccines are only part of the answer.
While they are a good defense against many viruses, each vaccine is highly specific to the threat.
Viruses are parasites to cells, and each virus attacks a particular type of cell.
The virus is shaped so that it can drill into a particular feature of that cell and inject parts of itself inside, confusing the cell into making more viruses and destroying itself in the process.
With their very specific forms, the most effective anti-viral vaccines must be designed for a narrow range of factors.
Sometimes the tailored nature of viruses works in our favor.
For example, they usually find it difficult to jump between species, because they would have to change their structure.
But if large numbers of a host – say, birds – encounter a great number of people, eventually the virus will find a way to prosper in a new type of cell.
Birds are the greatest concern today only because the spread is easy to see.
But AIDS jumped from monkeys and several types of flu jumped from swine.
Deadly mutations of any kind need to be identified urgently, so that an effective vaccine can be designed before the strain becomes comfortable in the human body.
Unfortunately our present methods of detection are not sensitive enough.
This is even more worrying when you realize that scientists should also be monitoring bacteria, prions, and parasites.
There are more bacteria than any other life form.
Many live harmlessly in our bodies and perform useful functions.
They evolve and adapt easily, which means that they learn to sidestep our drugs over time.
Bacteria should be checked for two types of mutation: adaptation by a hostile form that enables it to become super-immune to drugs, or a deadly mutant strain that appears in one of the multitude of “safe” bacteria.
Prions are a relatively new discovery.
They are made from proteins similar to those that the body uses during healthy operations, which means that they are able to fool the body’s tools into making more prions.
They have only recently been recognized as the cause of several infectious diseases, including mad cow disease and Creutzfeldt-Jakob Disease, which kill by crowding out healthy brain cells.
Many nerve, respiratory and muscle diseases might also be caused by prions.
Finally, parasites, simple animals that infect us, are already classified as pandemics.
Malaria afflicts 300 million people and is the world’s biggest killer of children.
Many parasites are worms: hookworm (800 million people infected), roundworm (1.5 billion), schistosomes (200 million), and the worm that causes Elephantiasis (150 million).
There are also antagonists that are currently ignored.
Environmental chemicals and particulates might warrant their own categories.
Or consider combinations of problems, such as these chemical infectors mixing with airborne pollens, and apparently pushing up incidences of asthma.
New fungal infections are even scarier and might be harder to treat.
The bottom line is that we can’t predict where the threat will emerge, so we need a distributed, intelligent detection system.
In practical terms, how should it be built?
“Detectors” would have to be expert enough to know when an ordinary-looking symptom is actually an emergency.
They would be located everywhere, with an emphasis on vulnerable regions.
Initial warning signs of a pandemic are most likely to appear in the developing world, but detection nodes should be positioned in every country, with the least possible expense.
This is not as difficult as it sounds.
The key is to harness existing infrastructure.
Medical infrastructure exists everywhere, in some form.
It also tends to be the least corrupt of institutions in regions where that is a problem.
Medical centers and clinics would be expected to investigate the cause of ailments in a large number of their patients, even in cases where the symptoms seem common.
A small amount of additional scientific expertise and lab equipment would need to be added to a public health system that serves ordinary needs.
Enhancing existing resources would be effective for two reasons.
First, illness is more likely to be reported in a city hospital than at a specialist institute. Second, the investment would boost latent public health in that region.
For poor regions, investment in equipment and training would have to come from wealthier counterparts.
Rich countries could justify the expense in terms of the savings that would result from early detection of a major threat.
Tropical climates and urban slums are humanity’s front line against pandemics, and they should be equipped properly.
Public health is an important asset for any nation.
With so much at stake, it makes sense to place sentinels near every swamp, city, public market, and farmyard on earth.
A Private Affair?
Can a public figure have a private life?
Recent events in three countries have highlighted the importance of this question.
In the French presidential election, both candidates tried to keep their domestic life separate from their campaign.
Ségolène Royal is not married to François Hollande, the father of her four children.
When asked whether they were a couple, Royal replied, “Our lives belong to us.” Similarly, in response to rumors that President-elect Nicholas Sarkozy’s wife had left him, a spokesman for Sarkozy said, “That’s a private matter.”
The French have a long tradition of respecting the privacy of their politicians’ personal lives, and French public opinion is more broad-minded than in the United States, where an unwed mother of four would have no chance of being nominated for the presidency by a major party.
Indeed, last month, Randall Tobias, the top foreign aid adviser in the US State Department, resigned after acknowledging that he had used an escort service described as providing “high-end erotic fantasy” – although Tobias said he only had a massage.
In Britain, Lord John Browne, the chief executive who transformed BP from a second-tier European oil company into a global giant, resigned after admitting he had lied in court about the circumstances in which he had met a gay companion (apparently, he met him through a male escort agency).
In resigning, he said that he had always regarded his sexuality as a personal matter, and he was disappointed that a newspaper – The Mail on Sunday – had made it public.
Candidates for public office, and those holding high administrative or corporate positions, should be judged on their policies and performance, not on private acts that are irrelevant to how well they carry out, or will carry out, their public duties.
Sometimes, of course, the two overlap.
The Mail on Sunday and its sister paper, The Daily Mail, justified their publication of revelations by Browne’s former companion on the grounds that they include allegations that Browne had allowed him to use corporate resources for the benefit of his own private business.
The company denied that there was any substance to these allegations.
As the administrator of the US Agency for International Development, Tobias implemented the Bush administration’s policy that requires organizations working against HIV/AIDS to condemn prostitution if they are to be eligible for US assistance.
That policy has been criticized for making it more difficult to assist sex workers who are at high risk of contracting and spreading HIV/AIDS.
Arguably, the public has an interest in knowing if those who implement such policies are themselves paying for sexual services.
Where there is no suggestion that a matter of personal morality has had an impact on the performance of a business executive or government official, we should respect that person’s privacy.
But what about candidates for political leadership?
Since politicians ask us to entrust them with sweeping powers, it can be argued that we should know as much as possible about their morality.
For example, we might reasonably ask whether they pay their fair share of taxes, or inquire about their charitable donations.
Such things tell us something about their concern for the public good.
Similarly, the revelation three years ago that the then-Australian opposition leader and aspiring prime minister, Mark Latham, had assaulted a taxi driver and broken his arm in a dispute about a fare was relevant for those who believe that a nation’s leader should be slow to anger.
But does the legitimate interest in knowing more about a politician extend to details about personal relations?
It is hard to draw a line of principle around any area and determine if knowledge of it will provide relevant information about a politician’s moral character.
The problem is that the media have an interest in publishing information that increases their audience, and personal information, especially of a sexual nature, will often do just that.
Even so, whether people choose to marry or not, whether they are heterosexual or homosexual, even whether they pay to fulfill their erotic fantasies or have fantasies they can fulfill at no cost, tells us little about whether they are good people who can be trusted with high office – unless, of course, they say one thing while doing another.
If we can cultivate a wider tolerance of human diversity, politicians, business leaders, and administrators would be less fearful of “exposure,” because they would realize that they have done nothing that they must hide.
Prostitution is illegal in most of the US, including Washington DC, and this could be one reason why Tobias had to resign.
But when New Jersey Governor John Corzine was involved in a serious road accident last month, it became known that he violated his own state’s law by not wearing his seat belt.
By any sensible measure, Corzine’s violation of the law was more serious than that of Tobias.
Laws requiring the wearing of seatbelts save many lives.
Laws prohibiting prostitution do no evident good at all, and may well do harm.
Yet no one suggested that Corzine should resign because of his foolish and illegal act.
In the US, at least, breaching sexual norms still brings with it a moral opprobrium that is unrelated to any real harm it may do.
A Putin Boom?
MOSCOW: Vladimir Putin has more to celebrate than his election as Russia’s president in his own right.
After a decade of horrific turmoil, Russia’s economy is at last turning around.
Recently, the Moscow brokers Brunswick Warburg predicted that Russia’s GDP will surge 5% this year.
That growth should give President Putin - if he is patient and persistent - leeway to tackle the longer term reforms his country needs if it is to become the powerful state he seeks it to be.
Until now, a broad consensus forecast 1-2% growth in Russia this year.
The reason behind that uninspiring consensus is simple: people - economists and investors alike - have become so pessimistic about Russia that they no longer can see positive facts.
The conventional wisdom is that Russian industrial growth is only an effect of high oil prices and import substitution, facilitated by a great devaluation of the ruble.
Considering that Russia’s growth was 3.2% last year, a staggering 8.8% in the last quarter, this makes little sense.
Growth, indeed, is accelerating.
Dynamism like this does not stop without a major shock.
Industrial growth was 8.1% last year, and has accelerated since, to 14% in February.
Oil and gas have not led the recovery; indeed, they stagnated last year.
Major industries with 16-22% growth were chemicals, light manufacturing, pulp and paper, and machine building; that is, intermediary goods and simple manufacturing, exactly the kind of industries economists like to see expanding at this stage of a recovery.
Within each industry, the best enterprises dash ahead, as should be the case when real restructuring is taking place.
Another tired argument is that Russia’s growth is superficial and not generated by investment.
However, recovery in transition economies from Estonia to Poland to Hungary is usually export led.
Investments tend to follow recovery, as there is so much underutilized capital around.
Even so, investment actually increased by 6% in 1999 and is rising further.
But the most over-hyped argument concerns Russia’s feeble tax collection.
But this obscures the real issue, which is excessive government expenditures.
Last year the government put its finances in order by cutting wasteful and corrupt expenditures, such as enterprise subsidies.
The total government budget deficit stopped at 1.7% of GDP.
This year it will be nearly eliminated.
Barter and arrears (ie, debts between factories and firms), long major concerns, are also diminishing.
Since the financial crash of August 1998 all kinds of arrears have fallen by two/thirds in real terms and barter by half.
One reason was that in 1999 almost 10,000 loss-making Russian enterprises were put into bankruptcy.
The financial crash introduced hard budget constraints on Russian enterprises; they realized they had to make money, prompting rapid monetization.
Today, we are seeing the structural changes that we had hoped to see years ago.
Russia is getting some return from the substantial structural reforms it has actually undertaken.
The last real worry was the foreign balance.
Russia has a substantial foreign debt service, but the recent London Club deal reduced Soviet-era debt to commercial banks by half, easing the pressure mightily.
A similar deal is likely in the Paris Club for the regulation of debts to governments.
During the last few months Russia’s international reserves have grown sharply, as one would expect of a country with a staggering trade surplus of $33 billion this year and which is likely to surge to over $40 billion this year. Of course, Russia is still hemorrhaging money.
But the cause of Russia’s so-called capital flight is a poor bank system and its dysfunctional tax system.
Fortunately, Russia now has such liberal currency regulations that Russians can keep their money in good international banks instead.
All of these changes mark the beginning of the end of the era of the oligarchs, ushered in with the presidential elections of 1996.
Mr. Putin has no need for the oligarchs to provide him with media support to avert a communist threat or offer a conduit for covert state financing.
To him, Boris Berezovsky and his cronies are a nuisance; most are already been broken to Putin’s will.
Instead, a new group of Russian businessmen, mainly manufacturers, are rising.
Their increasing strength is a reflection of robust economic growth, which promotes production for the market rather than sheer redistribution of resources, implying a new sort of politics.
Last October, McKinsey Global Institute published a major empirical report of Russian industry.
Its conclusion was that Russia had real and human capital suitable to sustain a growth rate of 8% a year, and that its problem was primarily the distortions imposed by a poorly functioning tax system and the absence of a land market.
However, neither the bank system nor the legal system were actually impediments at this stage of development.
They will become important as Russia moves to the next stage of growth, and so these new businessmen are demanding these reforms.
Mr. Putin is no great thinker or reformer, but he is astute and genuinely popular.
He is likely to surf on the current wave of economic growth, using broad consensus about the need for reform to clean up the state administration, and liberalize a tax regime which, though grossly inefficient, is heavy-handed when it goes after a company.
Land reform remains so controversial he may shrink from addressing the issue.
My greatest worry is not Putin but that Russia will face an excessive inflow of foreign portfolio investment again, as in 1997.
Fortunately, the bond markets are dead, and it might take a year to revive them.
Their absence makes it difficult to invest too large amounts of money in Russian securities.
Something fundamental has changed in the Russian economy.
A time comes when all disasters have occurred and all stupidities are recognized.
For Russia, August 1998 marked that dividing line.
It was a horrendous shock, imposing great social costs, but it changed Russia’s mentality, not only the exchange rate.
Arab Fathers and Sons
The deaths of Yasir Arafat and of Sheikh Zayd, the long-standing ruler of the United Arab Emirates, continues the generational change that began in 1999-2000, when the leaders of Jordan, Morocco, Bahrain, and Syria died in quick succession.
Across the Middle East people are younger, and their political leaders older, than the world average.
The gradual replacement of one generation of elites by another may be one of the key factors in determining whether or not effective reform takes place in the Arab world.
At present, four political generations co-exist on the region’s socio-political map.
The outgoing leadership generation – that of Arafat, King Hussein or Hafiz al-Assad, King Fahd and President Mubarak – was born before 1935 and has determined events in the Middle East since the 1970’s.
These leaders came of age and began their careers during the era of decolonization.
They were weaned on Gamal Abdel-Nasser’s pan-Arab nationalism, and the crucial political event for them was the Arab defeat in the 1967 Arab-Israeli war.
Members of this generation sought a strong Arab leadership that would create a balance of power with Israel.
They also believed in – or at least toyed with – forms of socialism and étatism, and did not consider democracy or civil rights to be priorities.
The next generation was born between 1935 and 1955, and in many respects represents a generation “in between.”
Most benefited from the economic growth and expanded educational opportunities associated with the oil boom of the 1970’s.
At the same time, political participation remained blocked by the previous generation, which never intended to give up power voluntarily.
Unsurprisingly, many in this generation grew dissatisfied, and not a few began to look for Islamic alternatives to the prevailing political systems.
Rather than determining events in the coming two or three decades, this generation is likely to be sidelined by the next cohort, born between 1955 and 1975.
This is the generation of Syria’s President Bashar al-Assad, Jordan’s King Abdullah and Morocco’s King Muhammad VI. Some call this the “generation of sons” – sons of leaders who led their states for decades.
This age cohort was not much influenced by the Arab-Israeli wars or the East-West conflict. Instead, their political education included the Gulf War of 1991 and the Arab-Israeli peace process of the 1990’s, with its crises and breakdown.
Jailed West Bank Fatah leader Marwan Barghouti is as representative of this group as the leaders of Syria and Jordan.
Members of this generation are better acquainted with notions of globalization and economic reform than with socialism and revolution.
Except for the Palestinians, they have never known their countries other than as independent and comparatively stable states.
In the Palestinian territories, the jil al-intifada , the generation of the (first and second) Palestinian uprising, will likely become the founding generation.
But it is the fourth group that underscores the relevance of generational issues in the Arab world.
Even when combined, the first three generations make up barely one-third of the entire Arab population.
Almost 60% of all Arabs are younger than 20, with roughly 70% below the age of 30.
This raises a key question: what happens to these Arab “baby boomers” if the generation now coming to power clings to it as tenaciously as the generation of Mubarak, Assad, and Hussein?
The political generation of Bashar al-Assad, King Abdullah, and Gamal Mubarak – son of Egypt’s ailing president – forms a less coherent picture than that of the outgoing leadership.
In that elder generation, many had pursued military careers, and many of their aides and collaborators were engineers and civil servants.
The socio-professional profile of the new elite is broader.
Economists, bankers, and entrepreneurs as well as of technology or communication experts are common.
There are also more traditional politicians: personalities who see themselves as representatives of particular social or economic interests, not as apolitical technocrats.
This new leadership elite is in many ways more cosmopolitan than its predecessors; their average level of education is higher; a few have foreign degrees.
Women also play a somewhat greater role.
Developments in Morocco, Bahrain, and Jordan certainly seem to suggest that this changing of the guard can help soften rigid political structures and allow for broader participation.
But generational change need not be accompanied by economic reform and steps towards political liberalization – witness North Korea under Kim Il Sung’s son, Kim Jong Il.
Indeed, experience gives little reason to presume that a modern way of speaking, willingness to liberalize the economy, and an urge for technological development automatically translates into a democratic opening.
It is more realistic to expect that the new Arab elites will make use of their states’ authoritarian institutions, both to overcome resistance to their economic agendas and to consolidate their newly acquired power.
This is anything but a risk-free path.
Without a significant increase in opportunities for political participation, including genuinely competitive elections, the chasm between a predominantly young population and a ruling elite with a narrow generational base will widen.
Such continuing political inertia leaves an increasingly young Arab population prey to the appeal of extremist ideologies, while driving the best and brightest to seek their fortune elsewhere.
Arab Fathers and Sons
The problem of succession in the Arab secular republics highlights their predicament in the transition to a post-revolutionary phase, for succession in regimes that fail to build strong institutions always risks triggering a systemic crisis.
While the decision by some in favor of dynastic succession may be lacking in democracy, it is not entirely devoid of merit.
Arguably, it is a choice for economic modernization, for an end to the politics of conflict, and for positive political change further down the road.
Years of Western-backed repressive authoritarianism nipped in the bud any potential growth of a liberal alternative to the incumbent Arab regimes, and turned any abrupt move to free elections into a dangerous exercise in Islamic democracy.
A democracy that produces governments led by Hamas, Hezbollah, or the Muslim Brotherhood is inevitably bound to be anti-Western and opposed to an American-inspired “peace process” with Israel.
Syria has already sought to assure regime continuity through quasi-monarchic hereditary succession with the move from Hafez al-Assad to his son Bashar.
There are indications that Egypt might follow suit, with Hosni Mubarak’s son, Gamal, taking over.
Likewise, Libya’s Muammar Khaddafi may be succeeded by his son, Seif el Islam.
As products of revolutionary military takeovers, these secular nationalist regimes failed to produce genuine popular legitimacy and have had to fall back on the dynastic succession practiced by the regimes they toppled.
The centrality of hereditary succession in the quest for peace and stability was shown by Hafez al-Assad when he agreed to unprecedented good will gestures aimed at drawing Ehud Barak’s Israeli government into a peace deal.
An old and sick man who was to die a few months later, he acted with a sense of urgency to reach a deal that would relieve his inexperienced son of the burden of struggling for the recovery of the Golan Heights.
Bashar Assad remains essentially loyal to his father’s legacy.
Not unlike North Korea’s and Iran’s defiant nuclear policies, Bashar’s membership in the region’s “axis of evil” is a call for dialogue with America, not an invitation to an invasion, and for a settlement with Israel, not a drive to wage war on it.
In Egypt, Mubarak turned his back on the lofty rhetoric of Gamal Abdel-Nasser’s revolution and its grand strategic designs.
Stability is at the heart of his thinking.
Hence, he could not accept America’s awkward pro-democracy agenda.
But he was more than willing to occupy center stage in Arab diplomacy’s support of the Annapolis peace conference.
After all, the passion that the Palestinians’ plight evokes among ordinary Egyptians is a dangerous source of instability.
Mubarak’s succession is being conducted in an especially sophisticated manner.
His son’s ascension, unlike that of Bashar on the eve of his father’s death, is anything but settled.
But, by being allowed to acquire popular legitimacy and a high degree of acceptance within the political establishment as the driving force behind the ruling party’s preparations for the post-Mubarak era, Gamal is being positioned strategically to compete effectively for the presidency.
He is widely credited for setting the country’s agenda, and for being the motor behind the liberal economic reforms that since 2004 have meant a qualitative leap in the Egyptian economy.
It may be, as President Mubarak’s critics argue, that the faltering progress of democratization reflects the attempt to block all potential challengers to Gamal.
But, with the decline of secular nationalism and Islamism’s rise, the hidden electoral power of the Muslim Brotherhood poses a mortal threat to the regime and its strategic alliance with the West.
As a result, the regime refuses to take any chances.
Nor was Muammar Khaddafi’s decision to stop being an international pariah entirely unrelated to his concern to bequeath to his son a state that lives in peace with the world.
His abysmal human rights record remains, but the flamboyant “Guide of the Revolution” ceased flirting with weapons of mass destruction and global terrorism in exchange for the end of sanctions and international rehabilitation.
A sick man whose rule at home is being challenged by Islamist opponents, he decided that international ostracism and domestic troubles is too explosive a combination for his son, a spoiled playboy, to handle.
Algeria is an especially difficult case.
The last of the revolutionary generation, President Abdulaziz Buteflika must still conceive a succession that ends his country’s civil war.
Fully-fledged democracy might lead to victory for Islamists, as it did in 1991.
A transition to democracy in the old revolutionary Arab regimes will not correspond to a Western model, nor can it be imposed by American F-16’s.
But, as countries like Egypt, Syria, and Lybia might be indicating, hereditary succession is not an inherently reactionary move.
Rather, it means opting for a controlled transition to a post-revolutionary phase in which economic modernization and international integration might usher in greater political change in the future.
Arab Myths and Realities
WASHINGTON, DC – With Hosni Mubarak’s ouster in Egypt – widely considered to have one of the region’s most stable regimes until only recently – and Colonel Muammar Qaddafi clinging to power in Libya, there is no clear end in sight to the turmoil sweeping across the Arab world.
Protests have already toppled governments in Tunisia and Egypt, leaving other Arab countries faced with widespread discontent.
The unrest caught most people by surprise – both inside and outside the region – and has fundamentally upended at least five conventional beliefs about the Arab world.
Arabs don’t go into the street.
Before the protests began in Egypt and Tunisia, many people argued that there was no real urgency to political reform, and that those who were calling for change did not understand the public mood – things weren’t as bad as the dissidents made them out to be.
This line of thinking led governments to believe that Arabs would not demonstrate in large numbers and demand change.
In each country, rapid reform was seen as detrimental to national interests.
This argument clearly is no longer tenable.
No one predicted what happened in Egypt and Tunisia, which means that no Arab country is immune.
Governments don’t have the luxury of waiting forever, and they can no longer use the myth of popular quiescence to avoid initiating the necessary reforms that will address the public’s underlying grievances.
Economic liberalization should precede political reform.
Arab governments – and many Westerners – claimed that privatization and other economic reforms should be given priority over political change.
But, while it is easy to argue that citizens want bread before freedom, economic liberalization came without a system of checks and balances, and thus largely resulted in neither bread nor freedom.
Instead, the benefits of privatization and other initiatives went largely to political and business elites.
As a result, Arabs have come to view liberalization and globalization negatively.
It is clear by now that economic reform must be coupled with political reform, so that institutional mechanisms of accountability are developed to monitor any excesses and ensure that benefits are made available to all.
Governments have been quick to believe that the protests are fundamentally about high prices and unemployment, but the issue that unites Arab discontent is inadequate governance.
Closed systems are necessary to prevent Islamists from taking power.
The West is often afraid that democracy will give Islamists the opening they need to gain control – a fear that Arab regimes exploit to justify maintaining closed political systems.
But Islamists did not play a big role in Egypt or Tunisia, and they are not expected to lead any of the new governments that are formed – though they are an important part of Arab societies and should play a role in their emerging regimes.
So it is untrue that the only viable alternative to unrelenting absolutist rule must be Islamist.
The protests are clearly the result of ordinary citizens becoming fed up with corruption, the lack of any semblance of rule of law, and arbitrary treatment.
There is an opportunity here to start developing pluralistic systems where not only Islamists, but also other parties and discourses can play a role.
Elections equal democracy.
No one is fooled by this claim anymore.
In order to maintain their dominance, Arab governments have relied on flawed laws and elections that don’t produce strong parliaments or lead to real change.
Indeed, in countries like Egypt and Tunisia, government and parliament alike were unpopular.
Throughout the region, elections have been used to create a façade of democracy aimed at impressing citizens and the outside world while insulating the regimes from pressure for genuine reform.
The Arab public, however, will no longer accept the status quo.
People will not be satisfied with economic handouts or cosmetic changes in governance; they are demanding real change that puts their country on a clear path toward democracy.
The international community has no role to play.
While the reform process should certainly be homegrown, the United States and the rest of the international community can encourage democratic development without imposing it from afar.
President Barack Obama rejected many of the policies of the George W. Bush administration that were seen as trying to force democracy on Arab countries.
But the subsequent silence on democratization aggravated – though it certainly did not cause – the unraveling of the Arab reform process in the last few years.
The US and the West can discuss with Arab countries how political reform should be carried out in a way that would contribute to greater openness and opportunities for power-sharing.
The West should not sacrifice these objectives for others; if allies ultimately lose power in popular revolts, such a tradeoff would not have furthered the West’s interests, to say the least.
The unfolding events grabbing headlines around the world have shattered key myths about the Arab world.
These countries’ people need to start gradual, sustained, and serious political reform now.
At the dawn of a new Arab era, it is up to them to build new, open political systems that can head off the looming threat of escalating crises.
Arab Spring, Western Fall
TEL AVIV – The old vocation of what Rudyard Kipling called the “White Man’s Burden” – the driving idea behind the West’s quest for global hegemony from the days of imperial expansion in the nineteenth century to the current, pathetically inconclusive, Libyan intervention – has clearly run out of steam.
Politically and economically exhausted, and attentive to electorates clamoring for a shift of priorities to urgent domestic concerns, Europe and America are no longer very capable of imposing their values and interests through costly military interventions in faraway lands.
US Secretary of Defense Robert Gates was stating the obvious when he recently lambasted NATO’s European members for their lukewarm response to the alliance’s missions, and for their poor military capabilities.
(Ten weeks into the fighting in Libya, the Europeans were already running out of munitions.)
He warned that if Europe’s attitude to NATO did not change, the Alliance would degenerate into “collective military irrelevance.”
Europe’s reluctance to participate in military endeavors should not come as a revelation.
The Old Continent has been immersed since World War II in a “post-historical” discourse that rules out the use of force as a way to resolve conflicts, let alone to bring about regime change.
And now it is engaged in a fateful struggle to secure the very existence and viability of the European Union. As a result, Europe is retreating into a narrow regional outlook – and assuming that America will carry the burden of major global issues.
But America itself is reconsidering its priorities.
These are trying economic times for the US, largely owing to imperial overstretch financed by Chinese credit.
Admiral Mike Mullen, the US Chairman of the Joint Chiefs of Staff, recently defined America’s colossal fiscal deficits as the biggest threat to its national security.
Indeed, at a time of painful budget cuts – the US is facing a $52 trillion shortfall on public pensions and health care in the coming decades – the US can no longer be expected to maintain its current level of global military engagement.
But the fiscal crisis is not the whole story.
The dire lessons of the wars in Iraq and Afghanistan will shape future debate about America’s international role in the twenty-first century.
At an address in February to cadets at the US Military Academy at West Point, Gates said that “any future defense secretary who advises the president to send a big American land army into Asia or into the Middle East or Africa should have his head examined.”
Gates’s recent statements are by no means those of a lonely isolationist in an otherwise interventionist America.
He expressed a widely perceived imperative for strategic reassessment.
In 1947, in a landmark article, “The Sources of Soviet Conduct,” which he signed as “X,” George Kennan defined America’s foreign-policy strategy for the Cold War as one of containment and deterrence.
It is difficult to imagine a more marked departure from Kennan’s concepts than a report recently released by the Pentagon – A National Strategic Narrative – authored by two active-duty military officers who signed as “Y.”
The report can be dismissed as just the musings of two senior members of the Joint Chiefs of Staff writing in their “personal capacity.”
But its real power stems from the degree to which it reflects America’s mood in an era of declining global influence and diminishing expectations regarding the relevance of military power to sustaining US global hegemony.
Just as Kennan’s “X” article was fully reflective of the mood in America at the time, so the Narrative expresses the current American Zeitgeist.
Thus, the idea that “Y” might turn out to be a latter-day “X” – defining the nature of America’s international role in the twenty-first century – may not be far-fetched.
Conspicuously, there is much in the Narrative that coincides with Europe’s emphasis on soft power.
The authors call for a shift from outdated Cold War strategies of “power and control” to one of civic engagement and sustainable prosperity.
Security, they maintain, means more than defense.
It means engagement whereby America should not seek “to bully, intimidate, cajole, or persuade others to accept our unique values or to share our national objectives.”
America, “Y” argues, must first put its own house in order if it is to recover credible global influence as a beacon of prosperity and justice.
This would require improving America’s diplomatic capabilities, as well as regaining international competitiveness through greater investment in education and infrastructure at home.
The message emanating now from the US is not one of non-interventionism, but a strategy of restraint that assumes that there are limits to American power and seeks to minimize the risk of entanglement in foreign conflicts.
As Gates put it in his West Point address, the US Army would no longer be “a Victorian nation-building constabulary designed to chase guerrillas, build schools, or sip tea.”
The bad news is that Europe’s feebleness and America’s fatigue might also signal the limits of noble ideas such as the obligation to interfere in order to protect populations being brutalized by their own rulers.
America’s reluctance to be drawn into the Libyan quagmire, and the West’s failure to intervene in order to stop the Syrian army from massacring civilians, now looks like a sad, and fairly accurate, guide to the future.
A Race to Hunger
SYDNEY – Spectators at February’s Daytona 500 in Florida were handed green flags to wave in celebration of the news that the race’s stock cars now use gasoline with 15% corn-based ethanol.
It was the start of a season-long television marketing campaign to sell the merits of biofuel to Americans.
On the surface, the self-proclaimed “greening of NASCAR” (National Association for Stock Car Auto Racing) is merely a transparent (and, one suspects, ill-fated) exercise in an environmental form of whitewashing for the sport – call it “greenwashing.”
But the partnership between a beloved American pastime and the biofuel lobby also marks the latest attempt to sway public opinion in favor of a truly irresponsible policy.
The United States spends about $6 billion a year on federal support for ethanol production through tax credits, tariffs, and other programs.
Thanks to this financial assistance, one-sixth of the world’s corn supply is burned in American cars.
That is enough corn to feed 350 million people for an entire year.
Government support of rapid growth in biofuel production has contributed to disarray in food production.
Indeed, as a result of official policy in the US and Europe, including aggressive production targets, biofuel consumed more than 6.5% of global grain output and 8% of the world’s vegetable oil in 2010, up from 2% of grain supplies and virtually no vegetable oil in 2004.
This year, after a particularly bad growing season, we see the results.
Global food prices are the highest they have been since the United Nations started tracking them in 1990, pushed up largely by increases in the cost of corn.
Despite the strides made recently against malnutrition, millions more people will be undernourished than would have been the case in the absence of official support for biofuels.
We have been here before.
In 2007 and 2008, the swift increase in biofuel production caused a food crisis that incited political instability and fueled malnutrition.
Developed countries did not learn.
Since 2008, ethanol production has increased by 33%.
Biofuels were initially championed by environmental campaigners as a silver bullet against global warming.
They started to change their minds as a stream of research showed that biofuels from most food crops did not significantly reduce greenhouse gas emissions – and in many cases, caused forests to be destroyed to grow more food, creating more net carbon-dioxide emissions than fossil fuels.
Some green activists supported mandates for biofuel, hoping they would pave the way for next-generation ethanol, which would use non-food plants.
That has not happened.
Today, it is difficult to find a single environmentalist who still backs the policy.
Even former US Vice President and Nobel laureate Al Gore – who once boasted of casting the deciding vote for ethanol support – calls the policy “a mistake.”
He now admits that he supported it because he “had a certain fondness for the [corn] farmers in the state of Iowa” – who, not coincidentally, were crucial to his 2000 presidential bid.
It is refreshing that Gore has now changed his view in line with the evidence.
But there is a wider lesson.
A chorus of voices from the left and right argue against continued government support for biofuel.
The problem, as Gore has put it, is that “it’s hard once such a program is put in place to deal with the lobbies that keep it going.”
Politicians can’t stop such rent-seeking behavior.
What they can do is craft well-considered policies that maximize social welfare.
Unfortunately, when it comes to policies marketed as reining in global warming, protecting the environment, or creating “green jobs,” we have a tendency to make hasty decisions that don’t pass the test.
Government support for biofuel is only one example of a knee-jerk “green” policy that creates lucrative opportunities for a self-interested group of businesses but does very little to help the planet.
Consider the financial support afforded early-generation renewable-energy companies.
Germany led the world in putting up solar panels, funded by $75 billion in subsidies.
The result?
Inefficient, uncompetitive solar technology sitting on rooftops in a fairly cloudy country, delivering a trivial 0.1% of Germany’s total energy supply, and postponing the effects of global warming by seven hours in 2100.
Given the financial stakes, it is little wonder that alternative-energy companies, “green” investment firms, and biofuel producers are lobbying hard for more government largesse, and marketing their cause directly to the public by highlighting its supposed benefits for the environment, energy security, and even employment – none of which withstand scrutiny. “The NASCAR deal will push American ethanol into the stratosphere,” declared Tom Buis, CEO of the ethanol trade association Growth Energy.
At least one group is already sold: presidential contenders.
In Iowa last month, possible Republican candidate Newt Gingrich derided “big-city attacks” on ethanol subsidies.
And, in what must be music to the industry’s ears, an Obama administration official declared that even amidst the highest food prices the world has seen, there is “no reason to take the foot off the gas” on biofuel.
In fact, there are millions of reasons – all of them suffering needlessly – to apply the brakes.
Arafat\u0027s Ghost
History gave Yasir Arafat far more time than most leaders to achieve his mission.
After all, at the time of his death he had been leader of the Palestinians for 35 years.
Yet he left his people in a terrible situation, with no state, in the midst of a losing war, and with a bankrupt economy.
Whether his successors can revive and complete the Palestinians' historic mission depends on how they define their goal.
Looking back at his career, Arafat never really veered from the belief that his life's mission was to destroy Israel by any means necessary and replace it with a Palestinian Arab state.
An independent Palestinian state that did not include all of Israel held no appeal to him.
He was equally indifferent to his people's material welfare and anything particular about the design of a viable political and economic system.
Now, in the post-Arafat era, Palestinians must choose one of several strategies.
Unfortunately, most of the alternatives call for the continued use of violence and terrorism.
The moderate strategy seeks an independent Palestine state as quickly as possible, on the assumption that once there is no more Israeli presence or violence, the Palestinians can concentrate on constructive pursuits, including resettling refugees and improving living standards.
But this is the view of only a small minority of leaders, notably former Prime Minister Abu Mazin and Muhammad Dahlan, who heads his own militia in the Gaza Strip.
If Arafat had taken this road - accepting Israel's existence, ending terrorism, and confronting Palestinian extremists - the conflict would have ended long ago.
But, with no single all-powerful leader, it will be hard for any successor to force through the difficult decisions required by such an orientation.
The
The younger generation of indigenous West Bank Palestinians, whose leaders began political activity in the uprising of the late 1970's, embraces a
The militants argue that a two-stage strategy is needed to defeat Israel.
First, long-term continuation of violence will force Israel to withdraw from the occupied territories.
Then, with Palestinians gaining the upper hand, they can advance to a second stage in which all of Israel is conquered, implying armed struggle - which often takes the form of anti-civilian terrorism - for many more years.
Finally, there is the
The problem for Palestinian moderates is clear: any leader willing to agree a peace treaty with Israel would be opposed - passionately and even violently - by roughly 80% of the movement.
A key question is whether the Palestinian masses, fed up with their leadership's bickering, corruption, and incompetence, could make their wishes known to find an end to a conflict that has cost them so much.
But none of the main leadership factions are proposing that the masses be consulted very much.
Nor did Arafat leave in place any institutional mechanisms for doing so.
Moreover, the popular appeal of radical religion, ideology, and misinformation should not be underestimated.
Few Palestinians are even aware that four years ago Arafat turned down an independent state equal in size to the entire West Bank and Gaza Strip, in addition to more than $20 billion in refugee compensation.
The main problem left by Arafat is the lack of any leadership at all.
Rarely in history has a political movement been so deliberately set by its founder on a course toward chaos.
Arafat not only left no successor, but no order.
Over the decades, the movement has developed a political culture of indiscipline.
Arafat presided over a sort of anarchy, encouraging rivalries, undermining other potential leaders, and ensuring that all authority (and money) ran through his hands.
Only if the post-Arafat movement decides that it really wants a Palestinian state in exchange for ending the conflict with Israel in every respect will there be a real chance of peace.
Arafat's death may well mark the beginning of that process, but the transition to a new Palestinian leadership could take years, and there is no assurance that it will be a moderate one.
Arafat’s Last Hurrrah
In his protracted moment of death, Yasir Arafat performed his last act of duty to the Palestinian cause to which he devoted his entire life.
Everything about the man was, indeed, protracted.
He carried out a protracted war of national liberation.
He withstood a series of protracted sieges – in Amman (1970), Beirut (1982), and in Ramallah (2002-2004).
Arafat’s leadership was the most protracted among his counterparts in the Arab World, as he outlived three Egyptian Presidents (Naguib, Nasser, Sadat and spanned all of Mubarak’s quarter of a century), five Lebanese Presidents, three Iraqis, five Algerians, three Syrians, three Saudi Monarchs, and two in Morocco, not to mention other world leaders, from Eisenhower to Bush in the US, from de Gaulle to Chirac in France, and from Maó to three successors in China.
Probably no other political figure alive today met and endured as many world leaders as Arafat.
But there is much more to Arafat’s legacy than endurance.
It has been correctly said over and again that Arafat was a mixed blessing for his people.
Their fate and destiny have been inextricably linked, to the near demise of both at times.
For several decades after the usurpation of their homeland, Palestinians were reduced to aggregates of refugees, some remaining in the newly-created state of Israel as second-class citizens, with others scattered over the Arab World and far beyond.
It was Yasir Arafat, through the Palestinian Liberation Organization (PLO) he founded, that gave them a sense of identity as a people.
Regardless of its effectiveness, the armed struggle waged by the PLO did empower the Palestinians and internalize a sense of collective dignity and self respect within them.
Their cause could no longer be ignored.
No other modern issue has appropriated as many UN resolutions or as much international diplomacy.
If politics is defined as the art of compromise, Arafat was a master of it at the Palestinian and Arab levels.
He managed to stay at the helm for over forty years with no serious challengers.
Internationally, however, he was out of step with the post Cold War era.
Whether or not he was solely to blame, a true opportunity for historical compromise was missed at Camp David in August 2000, and he himself acknowledged it a year later.
By that time it was too late, as the leadership in both the US and Israel had changed and there was no interest to engage him.
During the last four years of his life, Arafat’s public space was literally and metaphorically diminishing.
He was unable to re-engage his Israeli adversaries or control his suicide-bound Palestinian militants.
Nor was he able to contain let alone combat rampant corruption in the Palestinian Authority.
Nor was Arafat helped by world events that shifted the spotlight to Bush’s wars on terrorism in Afghanistan and Iraq.
If anything, they had adverse effects for him and his life-long cause.
Like his own body, Arafat’s familiar world was steadily fading away with irreversible loss of control.
Ironically however, as he was dying, world leaders and the media were rediscovering the importance of Arafat’s leadership if not his persona.
The sustained focus of the media on him, to the point of near saturation, focused world attention on the Palestinian Question once again.
Statements by Tony Blair, Jacques Chirac, Kofi Annan and others on the occasion of Arafat’s death have been forceful in demanding a speedy and long overdue resolution of the conflict.
It is as if in death, Arafat has given his people a chance to achieve what he could not achieve in life –the dream of an independent democratic Palestinian state.
It is Arafat’s last hurrah.
Are Bad Banks a Good Idea?
STOCKHOLM – The idea of a “bad bank” appears to grow more popular by the day in countries where toxic assets have paralyzed lending.
The Swedish bank cleanup in the early 1990’s is often cited as an example of how successful this idea can be.
But the lessons that are sometimes derived from Sweden’s experience are based on misunderstandings of what we actually did, and of how our system worked.
The initiative to set up a “bad bank” in Sweden was taken not by politicians, but by the management of Nordbanken.
Following years of mismanagement and reckless lending, the bank was the first big victim of the commercial property market’s decline in 1990.
Nordbanken had become fully state-owned and a new management was put in place to restore the bank to viability.
But it soon turned out that the managers had little time to spend on Nordbanken’s core banking business, because they had to focus disproportionately on handling an enormous variety of assets.
And every quarter brought new write-offs that ruined efforts to rebuild the bank’s reputation and its employees’ morale.
The radical solution was to separate all the assets that were alien to the bank’s core business, mainly real estate companies, but also firms in the manufacturing, construction, and service industries.
The “bad bank” that was established for this purpose, Securum, needed an enormous injection of capital from the owner, the Swedish government.
But Securum was then able to recruit skilled staff members who could maximize the assets’ value when markets recovered, and to be in a financial position to await that recovery.
The rest of Nordbanken, now known as Nordea, proceeded to become the largest bank in Scandinavia.
In contrast to today’s situation, the bad assets were usually entire companies, not complex securities.
But, as with today’s toxic assets, there was no market, and rapid disinvestment would have triggered fire-sale prices, depressing all asset values in the economy and resulting in more bank failures.
Furthermore, the point was not to help private banks get rid of their troubled assets.
When most other Swedish banks followed Nordbanken’s example and established their own bad banks, they did so without state participation.
But this was possible only because the Swedish government already owned all the assets, thereby circumventing the hopelessly difficult issue of pricing them.
With a private owner, huge public subsidies would have been politically unacceptable.
The assets either would have to be priced at far above their market value, with taxpayers thereby subsidizing the previous, failed owners, or the private bank would not have been helped at all.
A government-sponsored bad bank for private assets is thus a very bad idea.
In 1994, when I became State Secretary for Financial Affairs in Sweden’s Ministry of Finance, recovery appeared to be on the horizon, following the abolition of the fixed exchange rate, the ensuing sharp depreciation of the Krona, and lower interest rates.
The new government implemented an effective and very big program to close a budget deficit of roughly 12% of GDP.
Gradually, confidence grew, and financial markets began to function again.
As opportunities appeared, we began to re-privatize assets, and within a few years Securum was closed.
With hindsight, I believe we sold its assets too quickly.
Taxpayers could have recovered more of their losses if we had been more patient, as prices continued to rise for a long time.
But the stigma of socialism was stronger than the instinct to make a profit.
The following lessons of Sweden’s experience seem relevant today:
· A bad bank can be an effective instrument in the recovery of losses and the revival of banks.
· Although Sweden’s experience concerned shares in companies used as collateral for credit, rather than bonds or similar financial instruments, this situation will likely arise in many countries today as the crisis continues, more companies go bankrupt, and banks recall their collateral and take possession of shares in indebted companies.
· Government subsidies for private bad banks, or public bad banks to clean up private banks’ toxic assets, are a bad way for taxpayers to transfer money to troubled banks compared to normal capital injections.
All subsidies should be transparent, and public/private bad banks are not.
· It is vital to staff bad banks with professional and experienced managers who are untainted by previous scandals.
Here, Sweden’s experience is encouraging.
It was easier than we expected to recruit good people for Securum, because working in the public interest for this pioneering state-owned bad bank was perceived as a unique challenge.
· Maximizing taxpayers’ economic interests, not ideology or political considerations, must be the guiding principle.
The public should be in no doubt about this, for their trust is essential.
Are Bankers Really Overpaid?
LONDON – Are financial sector workers paid too much?
Not all of them are, of course, for there are poorly paid bank clerks and cleaners who count in this category. But is it possible to justify the enormous rewards earned – or should we say received – by investment bankers, hedge fund managers and private equity partners?
Most people would easily and quickly answer “no.”
Certainly that is what Congressmen in the US, and Members of Parliament in the UK think.
They are trying to cook up ways to discipline financial firms, albeit without conspicuous success so far, as demonstrated by the large sums stashed away for employee compensation by Goldman Sachs after its most recent profitable quarter.
But what does it mean to say that financial folk are paid too much?
By what measure, and in relation to whom are they overpaid?
Like many other people, I tend to believe that anyone paid more than me is prima facie over-rewarded, but I know this is not the most rigorous test I could apply.
Economists have been trying to produce more robust answers to those questions.
Thomas Philippon and Ariell Reshef, for the National Bureau of Economic Research, have looked at a hundred years of data in the US, for pay in finance, and in other occupations.
Their conclusions are fascinating.
They find that if you control for educational attainment and skills, financial jobs were highly paid until the Great Depression of the 1930s, higher than the quality of the people who held the jobs would imply.
Then from the Depression, and the introduction of new and tighter regulation, financial sector pay reverted to the norm, and remained there until around 1990.
But from that date up to 2006 it raced ahead and, on average, employees in financial firms were paid between a third and a half more than similarly qualified counterparts elsewhere.
We just don’t know yet whether the crisis will cause another reversion to the mean, but some downward adjustment looks likely.
So there is some basis for saying they are overpaid, but why?
Philippon and Reshef argue that regulation, or deregulation is a big part of the story.
Deregulation increased the opportunities for innovation and trading, and for profit.
There is also evidence to support that proposition from the observable fact that rewards in the less regulated parts of the asset management sector- hedge funds etc- are typically higher than in Security and Exchange Commission regulated competitors.
But is this a good enough explanation? As rewards went up, why did new competitors, prepared to undercut, fail to come into the market?
In other parts of the economy, where we see excess returns, we usually look for some weakness in competition, or perhaps for the exploitation of insider information, which excludes new entrants.
That may be part of the story, but competition for talent and for customers seems intense between investment banks and others, yet they have collectively been extravagantly rewarded at the expense of those customers.
An alternative hypothesis, which seems to fit the facts, recently emerged from the Paul Woolley Centre for the Study of Dysfunctionality in Capital Markets, at the London School of Economics.
Researchers there argue that in fragile speculative industries (and finance has certainly been in that category in recent years) it is hard for investors to monitor those who manage their money.
They can see short-term returns, but they do not understand very well how those returns are generated.
Managers can demand higher and higher returns in the upturn.
But eventually these high returns reduce the payouts to investors (Bernie Madoff may be the reduction
If this explanation is broadly correct (and it incorporates the deregulation point as well, as you can see) then what can be done about it?
Politicians and regulators are exploring a number of options, from higher tax rates, through fines for certain types of bonus arrangements, to variable capital requirements.
Higher taxes may be justified for other reasons, but are unlikely to solve the problem described.
Regulators have struggled with the problem for years without finding a solution.
The Bank of England has described the way in which remuneration policy can create risks for banks and said that, as a result, “it is of increasing interest and concern to supervisors and regulators.” But that was written in 1997, and progress since then has been very slow, on both sides of the Atlantic.
Shouldn’t shareholders take more of an interest?
After all, it is their money which is at stake.
They have earned low returns from financial sector investments, indeed those returns have been very strongly negative in the last two years.
Shareholders seem to take little interests in pay policy.
The arrival of “say on pay” provisions in the US – whereby boards will need to put their compensation policies to a shareholder vote in future– may focus minds, though the impact of similar provisions in the UK has been modest.
Yet without shareholder pressure, all the signs are that the problem will persist.
Immunization on the Front Line
MAPUTO – Most of the news one hears coming out of Mozambique is bad – poverty, disease, conflict, and floods.
But there are a lot of good things happening in my country, too.
In the past two decades, Mozambique has become a functioning democracy; grown its agriculture sector; raised literacy rates; increased water supply and electricity in rural areas; and reduced child mortality dramatically, from 219 per 1,000 live births in 1990, two years before the civil war ended, to 135 per 1,000 in 2010.
I am particularly proud of the last achievement, because, by working in partnership with my fellow Mozambicans to expand immunization coverage, I believe that I have played a part in bringing it about.
I grew up in Mozambique when the country was still under Portuguese rule, and the inequality in our colonial society shaped my view that all people have a right to health care.
I remember working at a pediatric ward as a teenager and watching children die from diseases like polio, measles, and tetanus – all easily prevented by vaccines.
The impact of that experience led me to spend the next 40 years working to ensure that every child in Mozambique, regardless of her ethnicity or where she lives, gets the vaccines that she needs to help her lead a long and healthy life.
In a few days, I will join 300 global leaders in Abu Dhabi for the world’s first vaccine summit – a gathering dedicated to ensuring that all children everywhere have access to vaccines.
People like Bill Gates and Kofi Annan will make the case that immunization programs deserve adequate funding and political support.
I don’t have an audience like Gates or Annan, but I would like to add my voice to theirs.
Millions of health workers like my colleagues and I make immunization their daily work.
We have made tremendous strides in reaching more children with more vaccines, which is why more children are surviving than ever before.
But there are still even more children to save, and we need help to do our work on the ground.
Because vaccines are useless if parents refuse to give them to their children, a big part of my job is to collaborate with health workers, community leaders, school teachers, and local political figures to educate parents about vaccines.
But having the community’s support is not enough.
It is also vital to ensure that vaccines get to the right place, at the right time, and in the right condition.
For example, in order to prevent shortages, VillageReach, the organization for which I work, helped to correct the population figures used to forecast the number of vaccines needed in each health center.
VillageReach also started a company that delivers propane gas to health centers in northern Mozambique, where, like in many of the country’s rural areas, electricity is unreliable or completely unavailable to power the refrigerators that keep vaccines cool.
Through the use of propane, we can ensure that the vaccines do not spoil during the journey from manufacturer to mother and child.
And once a month, we make sure that health workers deliver vaccines and other health services “the last mile” to mothers and children in remote rural areas.
Finally, I have learned that meticulous record-keeping and measuring results is critical to reaching more children.
That is why we are assessing different methods for gathering data from the field, including the use of mobile applications to digitize paper records.
Building these routine immunization systems has already helped us to eradicate diseases like polio and all but one type of measles.
Earlier this month, we used them to vaccinate children against pneumonia for the first time in Mozambique’s history, and we hope that next year we will begin to address rotavirus, which causes diarrhea and is the number one killer for children under five years old.
Our longer-term goal is to strengthen these systems enough to reach all children in Mozambique with basic vaccines and other forms of health care.
I believe that we can achieve this goal, because I have witnessed how far we have come already, despite our struggles.
Big challenges lie ahead, but I am confident that with the support of the global community, I can leave to my own children and community a thriving country where every person has the opportunity to prosper.
A Recovery for All
NEW YORK – Over the last two years, the majority of countries in the world chose to expand public spending in order to buffer the impact of the global financial crisis on their economies and populations.
But, this year, with signs of economic recovery emerging, advanced countries have quickly shifted from fiscal stimulus to fiscal consolidation.
Now developing countries are also following the trend to consolidate.
A recent UNICEF survey of 126 countries shows that a significant number of low- and middle-income countries are expected to reduce public expenditures in 2010-2011.
This comes at a bad time, just after world governments committed themselves to achieving the development goals, such as reducing poverty and infant mortality, agreed last September at the United Nations’ Millennium Summit.
For most low- and middle-income countries, the incipient economic recovery appears to be fragile and uneven.
Indeed, many of these countries remain vulnerable to volatile commodity prices, financial-system weaknesses, depressed demand from world markets, and shortfalls in external finance, overseas development assistance, and investment.
More importantly, according to the UN and the World Bank, the social impact of the global economic crisis continues to be felt in terms of rising hunger, unemployment, and social unrest.
The combination of rising food and fuel prices and the financial and economic crisis has reduced poor families’ purchasing power, access to social services, and employment opportunities.
Moreover, poor households have reduced food consumption, with the UN Food and Agricultural Organization estimating that nearly one billion people are hungry and malnourished.
In addition to the millions already pushed into poverty in 2008-09, another 64 million could fall into extreme poverty during 2010 as a result of the combined, lingering effects of the crisis.
In the 1980’s, adjustment programs required countries to cut back on their expenditures, including outlays on education, health, water, agriculture, and other sectors that make a difference to poor households.
As the late Tanzanian President Julius Nyerere demanded publicly: “Must we starve our children to pay our debts?”
Infant mortality rates rose among low-income groups in many developing countries, and inequality increased.
This period came to be known as the “lost decade.” UNICEF responded with Adjustment with a Human Face, which argued that children must be protected during economic crises.
It argued for more expansionary macroeconomic policies to generate employment, public-sector investments to serve the poor, and the establishment of social-protection systems.
Thirty years later, déjà vu, the same message applies.
The poor in developing countries are again being made to endure the worst consequences of a crisis that they played no part in creating.
It is critically important that this does not lead to a new lost decade of development, and that poor households – especially children – do not suffer as they did in the 1980‘s.
And yet that could very well happen.
Our UNICEF survey of 126 developing countries found that among the nearly one-half that are reducing public expenditures, common adjustment measures include public-sector wage cuts or caps, withdrawal of food subsidies, and the targeting and rationalization of already meager social-protection systems.
These adjustment measures are often adopted without carefully examining their social impact.
How many poor children will suffer – or die – from lack of food and health care?
How many children will miss out on education because teachers are absent due to low wages, or simply because poor children must work to supplement their family income?
Adjustment of public expenditures raises the risk of a recovery that discriminates against the poor, and thus fuels greater inequities in developing countries.
Premature fiscal contraction and/or withdrawal of countercyclical measures threaten the public support that is essential to promoting recovery among those hardest hit by the crisis.
As the global recession ebbs, the most urgent imperative is recovery for all – a recovery that is inclusive, expands employment opportunities, reduces inequalities, and sustains development processes.
This can be achieved.
It requires that aid to poor countries be sustained; that governments focus on expansionary macroeconomic policies that support employment and broad-based economic activities; that new schemes be introduced to extend health services and social protection for the poor; and that investments in education, water supply, sanitation, agriculture, and food security receive the support they need.
A Recovery Plan for Argentina
Argentina's president, Eduardo Duhalde, has been making impassioned pleas for international support to rebuild his country.
Argentina needs and deserves such help, and the foundations for economic success-skills (a literate and well-educated population) and institutions (a federal constitutional democracy)-have been in place for a long time.
But Mr Duhalde has yet to specify what must be done to take advantage of Argentina' favorable endowments.
He does at least recognize that only Argentina is responsible for the bad policy choices that led to today's morass.
No one forced Argentina to adopt the currency board devised by Domingo Cavallo, the former economy minister, which pegged the peso to the dollar at a fixed exchange rate of one to one.
(The IMF, however, clearly should not have helped finance the currency board's operation without demanding fiscal adjustment when the country liberalized its foreign trade.)
As a result of the currency peg, Argentina's interest rates were largely determined in the US.
Lacking access to basic economic tools such as exchange rate and monetary policies, Argentina could not surmount the profound external shocks of the second half of the 1990s, when export prices fell, the US dollar appreciated, and Brazil, the country's main trading partner, devalued its currency.
The only alternative was severe fiscal austerity, for which the government never mustered the political will.
Argentina is now in a deep recession, with unemployment above 30%, and a shattered banking and financial system.
Fiscal austerity and balanced budgets should be priorities in the longer term, but they are inappropriate now.
The first priority should be boosting employment to enable citizens to put food on the table and recover a basic sense of confidence in the future.
Otherwise, the country's impoverishment will continue to deplete its middle class and lead many young and capable professionals to emigrate.
It will also sustain unprecedented levels of violence and criminality-another crucial dimension of today's insecurity.
To jump-start the economy, the government must promote exports, particularly in the manufacturing and agro-industrial sectors, as well as tourism and infrastructure construction projects.
After all, there can be no reliance on domestic consumption or private investment to turn the tide.
Higher exports will also generate the foreign exchange needed to resume external debt payments, now in default.
But Argentina's exporters will need help in returning to foreign markets, such as removal of tariff and non-tariff trade barriers by rich countries.
The country has already shown that under favorable conditions its exports can compete and grow rapidly.
According to World Bank data, 32% of Argentina's exports are manufactured goods, with roughly one-quarter classified as high-technology products.
From 1991 to 2001, total exports grew from about $12 billion to $27 billion (an average annual growth rate of about 8.5%), despite the overvalued currency.
President Duhalde has specifically requested the help of the IMF, the World Bank, and the Inter-American Development Bank.
Such assistance should be forthcoming, and in order to avoid bureaucratic overlap and turf conflicts, the responsibilities and priorities in dispensing it should be spelled out and agreed upon in advance by the government and these organizations.
Specifically, the IMF should be responsible for advice related to overall macroeconomic policy, as well as for assembling the financial package required to support the government while it implements its program of economic reactivation and reform of the financial sector.
The IMF should also provide technical and financial assistance to support a long-term program aimed at redefining the fiscal responsibility of the central and provincial governments.
True fiscal decentralization must take hold if the central government is ever to regain full control of public finances.
The World Bank should provide technical and financial assistance to support a reorganized judiciary.
This must include making the appointment of federal and Supreme Court judges free from nepotism and political influence.
A shameful legacy of President Menem's government in the 1990s was that it prevented the investigation and prosecution of serious improprieties, corruption, illegal arms sales, and major terrorist acts.
Finally, the Inter-American Development Bank should assist with programs designed to promote and finance industrial exports, as well as underwriting tourism projects.
These are areas in which the Bank has substantial experience in Latin America.
Argentina deserves the international support it is requesting.
At a time of deep recession, such support should not be made contingent on reaching unattainable fiscal objectives.
Fiscal consolidation should be a condition for the longer-term aid that international organizations will have to provide.
But the first priority must be putting people back to work.
Addressing the glaring shortcomings in the country's judicial system should also be made a condition for support, both as an immediate and a long-term objective.
Under any economic circumstances, denial of justice, and poor implementation of the country's laws, must be remedied as quickly as possible.
For, at the most fundamental level, what is at stake in Argentina is not merely the health of the economy, but the quality of its civil society.
What Good Are Economists?
NEW HAVEN – Since the global financial crisis and recession of 2007-2009, criticism of the economics profession has intensified.
The failure of all but a few professional economists to forecast the episode – the aftereffects of which still linger – has led many to question whether the economics profession contributes anything significant to society.
If they were unable to foresee something so important to people’s wellbeing, what good are they?
Indeed, economists failed to forecast most of the major crises in the last century, including the severe 1920-21 slump, the 1980-82 back-to-back recessions, and the worst of them all, the Great Depression after the 1929 stock-market crash.
In searching news archives for the year before the start of these recessions, I found virtually no warning from economists of a severe crisis ahead.
Instead, newspapers emphasized the views of business executives or politicians, who tended to be very optimistic.
The closest thing to a real warning came before the 1980-82 downturn. In 1979, Federal Reserve Chair Paul A. Volcker told the Joint Economic Committee of the US Congress that the United States faced “unpleasant economic circumstances,” and had a “need for hard decisions, for restraint, and even for sacrifice.”
The likelihood that the Fed would have to take drastic steps to curb galloping inflation, together with the effects of the 1979 oil crisis, made a serious recession quite likely.
Nonetheless, whenever a crisis loomed in the last century, the broad consensus among economists was that it did not.
As far as I can find, almost no one in the profession – not even luminaries like John Maynard Keynes, Friedrich Hayek, or Irving Fisher – made public statements anticipating the Great Depression.
As the historian Douglas Irwin has documented, a major exception was the Swedish economist Gustav Cassel.
In a series of lectures at Columbia University in 1928, Cassel warned of “a prolonged and worldwide depression.”
But his rather technical discussion (which focused on monetary economics and the gold standard) forged no new consensus among economists, and the news media reported no clear sense of alarm.
Interestingly, contemporary news accounts reveal little evidence of public anger at economists after disaster struck in 1929.
So why has the failure to foresee the latest crisis turned out so differently for the profession?
Why has it – unlike previous forecasting failures – stoked so much mistrust of economists?
One reason may be the perception that many economists were smugly promoting the “efficient markets hypothesis” – a view that seemed to rule out a collapse in asset prices.
Believing that markets always know best, they dismissed warnings by a few mere mortals (including me) about overpricing of equities and housing.
After both markets crashed spectacularly, the profession’s credibility took a direct hit.
But this criticism is unfair.
We do not blame physicians for failing to predict all of our illnesses.
Our maladies are largely random, and even if our doctors cannot tell us which ones we will have in the next year, or eliminate all of our suffering when we have them, we are happy for the help that they can provide.
Likewise, most economists devote their efforts to issues far removed from establishing a consensus outlook for the stock market or the unemployment rate.
And we should be grateful that they do.
In his new book Trillion Dollar Economists, Robert Litan of the Brookings Institution argues that the economics profession has “created trillions of dollars of income and wealth for the United States and the rest of the world.”
That sounds like a nice contribution for a relatively small profession, especially if we do some simple arithmetic.
There are, for example, only 20,000 members of the American Economic Association (of which I am President-Elect); if they have created, say, $2 trillion of income and wealth, that is about $100 million per economist.
A cynic might ask, “If economists are so smart, why aren’t they the richest people around?” The answer is simple: Most economic ideas are public goods that cannot be patented or otherwise owned by their inventors.
Just because most economists are not rich does not mean that they have not made many people richer.
The fun thing about Litan’s book is that he details many clever little ideas about how to run businesses or to manage the economy better.
They lie in the realm of optimal pricing and marketing mechanisms, regulation of monopolies, natural-resource management, public-goods provision, and finance.
None of them is worth even a trillion dollars, but, taken together, Litan’s conclusion is plausible indeed.
The 2010 book Better Living through Economics, edited by John Siegfried, emphasizes the real-world impact of such innovations: emissions trading, the earned-income tax credit, low trade tariffs, welfare-to-work programs, more effective monetary policy, auctions of spectrum licenses, transport-sector deregulation, deferred-acceptance algorithms, enlightened antitrust policy, an all-volunteer military, and clever use of default options to promote saving for retirement.
The innovations described in Litan’s and Siegfried’s books show that the economics profession has produced an enormous amount of extremely valuable work, characterized by a serious effort to provide genuine evidence.
Yes, most economists fail to predict financial crises – just as doctors fail to predict disease.
But, like doctors, they have made life manifestly better for everyone.
A Referendum For Kurdistan?
The assassination of the President of Iraq's Governing Council makes it crystal clear that the US is failing to create the minimal law-and-order needed for any sort of orderly transfer of power to take place by June 30th. Barely two months ago, the signing of a constitutional document by a US-appointed group of un-elected Iraqi officials was heralded as if it were the re-enactment of America's constitutional convention in Philadelphia in 1787.
But by now it is clear that this is a worthless piece of paper.
No imposed constitution, however elegant it may be, will be very helpful to Coalition forces when confronted with the type of mayhem seen in towns like Fallujah or Najjaf.
In the Kurdish region of northern Iraq, however, the situation is completely different: in the last ten years, under the protection of the Allies' no-fly zone, and even more so since the toppling of Saddam, the Kurdish regional government has been able to establish and sustain a relatively orderly administration.
It has overcome tribal and party differences and created a de facto functioning government, with an impressive record on development issues such as education, irrigation, and construction - and, above all, with no violence.
Confronted with the debacle in the rest of (Arab) Iraq, the question has to be asked why the US-led coalition should not hold a referendum in the Kurdish region, asking the population how they would like to be ruled.
After all, the Kurds have, by any internationally accepted standards, a right to self-determination.
Historically, the Kurds - who are distinct in language, culture, and historical consciousness from Arabs - never had their day in court.
After World War I and the fall of the Ottoman Empire, the victorious Allies promised them a state of their own - a promise that was cynically betrayed when British and French imperial interests took precedence.
Since then, the Kurds have suffered under the despotic rule of rival ethnic groups.
There are obvious obstacles to holding such a referendum, primarily because the US does not have a mandate to dispose of Iraq as it pleases.
But the same goes for the rest of Iraq: the US is now lamely asking for a UN resolution mandating a transfer of power to a legitimate Iraqi government - but such an authorization is highly unlikely, nor is there anyone in Iraq to whom authority can conceivably be transferred.
Why should the one region - and people - who run an orderly government, are not involved in murder, attacks on mosques, and suicide bombing of schoolchildren, be penalized?
Another objection is the opposition of Turkey - and, to a lesser degree, Iran and Syria - to granting the Iraqi Kurds self-determination.
But if one thinks in terms of universal norms of human rights, what right has Turkey to dictate internal development in another country?
After all, nobody accepts Israel's claim to oppose as a matter of principle the establishment of a Palestinian state in the West Bank and Gaza.
The same should apply to Turkey.
If Turkey grants its own Kurdish minority more cultural and language rights and allows legitimate Kurdish political representation in the Turkish parliament, the willingness of Turkish Kurds to oppose Ankara will be diminished.
In the nineteenth century, the joint interests of the authoritarian Russian, German, and Austrian Empires prevented the establishment of a free Poland: such unholy alliances have no place in the twenty-first century.
Recently, under the aegis of the UN, a referendum on the future of Cyprus was held within the island's Greek and Turkish communities.
The outcome was paradoxical, and not to the liking of those who initiated it: but the right of the communities to determine their future was accepted.
Why not in Iraqi Kurdistan?
Perhaps to assuage political fears - and considerations of international law - any plebiscite in the Kurdish region should, initially, have only a consultative status.
But it will give legitimate expression to the will of a people long oppressed and entitled to their place in the sun.
Such a referendum may also concentrate minds among the Arab Sunnis and Shia in Iraq, when they come to realize that it is their violence that is dismantling Iraq.
Perhaps they may decide that violence is counter-productive and carries its own penalties, and may then follow the Kurdish example of curbing violence, which would help put Iraq together again without recourse to permanent repression.
If not, at the very least, the injustice suffered by the Kurdish people for generations would, at long last, be rectified.
A Referendum on Obama
STANFORD – Successful political candidates try to implement the proposals on which they ran.
In the United States, President Barack Obama and the Democrats, controlling the House of Representatives and (a filibuster-proof) Senate, had the power to do virtually anything they wanted in 2009 – and so they did.
Obama and his congressional allies enacted an $800 billion “stimulus” bill that was loaded with programs geared to key Democratic constituencies, such as environmentalists and public employees; adopted a sweeping and highly unpopular health-care reform (whose constitutionality will be determined by the Supreme Court this year); imposed vast new regulations on wide swaths of the economy; embraced an industrial policy that selects certain companies for special treatment; engaged in borrowing and spending at levels exceeded only in World War II; and centralized power in Washington, DC (and, within the federal government, in the executive branch and regulatory agencies).
The last election that was followed by such a sweeping change in policy direction occurred in 1980, when President Ronald Reagan overhauled taxes, spending, and regulation, and supported the Federal Reserve’s course of disinflation.
While the 1988, 1992, and 2000 elections were also quite consequential, the policy shifts were not nearly as large as in 1980 and 2008.
The country rebelled against Obama and the Democrats’ lurch to the left with historic Congressional election victories for Republicans in 2010.
Since then, many Republicans have been deeply disappointed that the House of Representatives has been unable to roll back much of Obama’s agenda.
But the US political system is set up to make it much harder to accomplish something than to block it.
It is not easy to do a lot while controlling only one-half of one-third of the federal government.
The 2012 election is shaping up as a referendum on Obama’s policies and performance.
The economy is improving slowly, but it remains in bad shape, with high unemployment and millions having left the labor force.
Republicans are expected to retain control of the House and regain a majority in the Senate.
Former Massachusetts Governor Mitt Romney, the Republican frontrunner to challenge Obama in November, and the party’s other leading candidates, including former House Speaker Newt Gingrich, want less spending, major reforms of government programs, lower taxes, trade expansion, and less and more-targeted regulation than does Obama.
Romney, for example, has a detailed 59-point economic program, including a cap on federal spending at 20% of GDP, which would require reductions similar to those in the 1980’s and 1990’s.
Gingrich and the other Republicans have an even more aggressive agenda of cutting taxes and reducing the size and scope of government.
The eventual nominee would be wise to incorporate his opponents’ best ideas and top people into his campaign.
A Republican presidential victory, together with Republican control of the House and Senate, would likely lead to substantial reduction, repeal, and replacement of many Obama initiatives, attempts to reform taxes and entitlements, and measures to impose greater fiscal discipline.
High on Romney’s agenda is a reduction of the corporate-tax rate, from 35% to 25%, the OECD average level (the other Republican candidates would lower it still more), which would redress a major competitive disadvantage for American multinational companies’ global business.
A Republican victory would also most likely lead to a major push to open up many more energy-exploration opportunities within America, which Obama has stymied.
Romney has promised tougher negotiations on trade and currency with China, but is generally far more likely to push new trade agreements than the labor-supported Obama administration.
If, however, Democrats retain control of the Senate, this will be far more difficult to accomplish.
A Republican president also would make appointments to many key policymaking positions, from the Federal Reserve and the Treasury to regulatory agencies.
If Obama is re-elected, and Republicans control the House and Senate, his legislative agenda will essentially be a dead letter, and he will spend the next two years, at least, negotiating its reform and rollback.
In this scenario, the policy center of gravity in the Republican party would shift to House Speaker John Boehner, the chairman of the House Budget Committee, Paul Ryan, House Majority Leader Eric Cantor, and other key Representatives, including David Camp, Kevin Brady, and Kevin McCarthy, along with several Senators.
In that case, Obama would be wise to move to the center (as Bill Clinton did after the Democrats lost control of Congress in 1994) and work with congressional Republicans to shape sensible tax and entitlement reforms.
But that seems unlikely: since the Democrats’ massive defeat in 2010, Obama has moved even further to the left, embracing a more populist agenda.
Regardless of the outcome of this year’s presidential and congressional elections, various Republican state governors are likely to gain a higher national profile.
All of them –&nbsp;including Mitch Daniels of Indiana, Chris Christie of New Jersey, Bob McDonnell of Virginia, and former Governor Jeb Bush of Florida – declined to seek the Republican presidential nomination, but will be on the short list for 2016 should Obama win in November.
Supreme Court Justice Louis Brandeis famously described the states as “laboratories”: they should be allowed to experiment and learn from each other which policies work.
For example, Clinton and the Republican Congress based landmark 1996 welfare reform on policies originated by Wisconsin Governor Tommy Thompson and successfully emulated by New York City Mayor Rudy Giuliani, both reformist Republicans.
The current cohort of Republican governors offers similarly innovative state-level solutions – for example, on spending, debt, and unfunded pension and health liabilities – as models for the country.
Until November, divided government and contentious campaigning will most likely prevent significant policy moves.
But, following the election, taxes and spending, trade policy, federalism, regulation, and defense will take a different course – how different depends on who wins – with important implications for America’s fiscal position, external balance, and much else, including its relations with the rest of the world.
Are Foreign Investors Still Welcome?
World flows of foreign direct investment (FDI) have soared over the past two decades, from $40 billion in the early 1980’s to $900 billion last year.
The cumulative stock of FDI has reached close to $10 trillion, making it the most important mechanism for delivery of goods and services to foreign markets: sales by foreign affiliates total roughly $19 trillion, compared to world exports of $11 trillion.
At the same time, the liberalization of FDI regimes by virtually all countries has been a driving force of intra-firm trade – the lifeblood of the emerging system of integrated international production and already around one-third of world trade.
But are the good times coming to an end?
FDI can bring a range of benefits, but it also can have costs.
During the 1970’s, when the transnational corporations (TNC’s) undertaking such investment caught the public eye, many governments believed that the costs of FDI outweighed its benefits, so they controlled it.
Led by the developed countries, the pendulum began to swing in the 1980’s.
Once viewed as part of the problem, FDI became part of the solution to economic growth and development.
Nothing exemplifies this more than changes in national FDI regimes.
As the United Nations Conference on Trade and Development reports, of the 2,156 changes that took place between 1991 and 2004, 93% were in the direction of creating a more hospitable environment for TNC’s.
But there is a real danger that the pendulum is beginning to swing back, leading to a reversal of that liberalization process.
FDI in developed countries (and increasingly in emerging markets) often takes the form of cross-border mergers and acquisitions (M&amp;A’s).
Resistance to such M&amp;A’s is becoming more frequent when they involve domestic firms that are regarded by politicians as “national champions” or important for national security, economic development, or cultural identity.
The growing involvement of private equity groups in M&amp;A activity implies additional controversy, as such transactions are typically regarded as being purely speculative.
In the name of “economic patriotism,” security, and other considerations, resistance to M&amp;A’s is being codified in an increasing number of countries.
For example, a United States Senate committee recently sought to block the planned liberalization of foreign takeover rules for airlines, while Europe has enacted more restrictive takeover laws.
Moreover, governments are applying more strictly existing regulatory provisions concerning the vetting of takeovers by foreign firms.
This response is intertwined with a defensive reaction to the growing role of TNC’s from emerging markets, the “new kids on the block.”
Established TNC’s, and their home countries, will need to adjust to this new constellation of forces and its implications for the world market.
As we know from other contexts, adjustment to newcomers is not easy: compare, say, the reaction to the tie-up between France’s Alcatel and America’s Lucent to the bids by the China National Offshore Oil Corporation for Chevron or Mittal for Acelor.
Another type of defensive reaction – this time to outward FDI – may well arise once the offshoring of services gathers more speed.
All indications are that offshoring has reached the tipping point, and more of it will take place through FDI.
If home countries do not put in place the adjustment mechanisms to deal with the rapidly unfolding revolution in making service industry jobs tradable, a backlash against such outward FDI will become inevitable.
The growing unease with FDI is so far largely confined to developed countries.
But there are signs that it is spreading to emerging markets.
In the case of large-scale projects, some host countries are raising questions about the contracts that define their relationship with TNC’s, and governments are reviewing such contracts because they believe (rightly or wrongly) that they did not get a fair deal.
Of the 219 known international arbitration cases concerning investment projects, some two-thirds were initiated during the past three years.
Approaches to FDI have changed in the past, and they can change again in the future, depending on how governments view the balance of costs and benefits.
This balance involves not only economic factors, but also such considerations as security and the desire to control one’s own economic development.
The concept of “twenty-first-century nationalization,” introduced by Peruvian presidential candidate Ollanta Humala, mirrors in this respect the “economic patriotism” of French Prime Minister Dominique de Villepin.
Reservations against FDI (as against anything foreign) can be found in all groups of countries, and politicians can bring them to the surface, resulting in protectionism.
It would be ironic, though, if developed countries – which led the FDI liberalization wave of the past two decades – now led a backlash against FDI.
Let us hope that the de-liberalization seen in developed countries can be checked before it spreads to other parts of the world and ultimately brings undesirable consequences for all.
America’s Hope Against Hope
NEW YORK – After a hard-fought election campaign, costing well in excess of $2 billion, it seems to many observers that not much has changed in American politics: Barack Obama is still President, the Republicans still control the House of Representatives, and the Democrats still have a majority in the Senate.
With America facing a “fiscal cliff” – automatic tax increases and spending cuts at the start of 2013 that will most likely drive the economy into recession unless bipartisan agreement on an alternative fiscal path is reached – could there be anything worse than continued political gridlock?
In fact, the election had several salutary effects – beyond showing that unbridled corporate spending could not buy an election, and that demographic changes in the United States may doom Republican extremism.
The Republicans’ explicit campaign of disenfranchisement in some states – like Pennsylvania, where they tried to make it more difficult for African-Americans and Latinos to register to vote – backfired: those whose rights were threatened were motivated to turn out and exercise them.
In Massachusetts, Elizabeth Warren, a Harvard law professor and tireless warrior for reforms to protect ordinary citizens from banks’ abusive practices, won a seat in the Senate.
Some of Mitt Romney’s advisers seemed taken aback by Obama’s victory: Wasn’t the election supposed to be about economics?
They were confident that Americans would forget how the Republicans’ deregulatory zeal had brought the economy to the brink of ruin, and that voters had not noticed how their intransigence in Congress had prevented more effective policies from being pursued in the wake of the 2008 crisis.
Voters, they assumed, would focus only on the current economic malaise.
The Republicans should not have been caught off-guard by Americans’ interest in issues like disenfranchisement and gender equality.
While these issues strike at the core of a country’s values – of what we mean by democracy and limits on government intrusion into individuals’ lives – they are also economic issues.
As I explain in my book The Price of Inequality, much of the rise in US economic inequality is attributable to a government in which the rich have disproportionate influence –&amp; and use that influence to entrench themselves.
Obviously, issues like reproductive rights and gay marriage have large economic consequences as well.
In terms of economic policy for the next four years, the main cause for post-election celebration is that the US has avoided measures that would have pushed it closer to recession, increased inequality, imposed further hardship on the elderly, and impeded access to health care for millions of Americans.
Beyond that, here is what Americans should hope for: a strong “jobs” bill – based on investments in education, health care, technology, and infrastructure – that would stimulate the economy, restore growth, reduce unemployment, and generate tax revenues far in excess of its costs, thus improving the country’s fiscal position.
They might also hope for a housing program that finally addresses America’s foreclosure crisis.
A comprehensive program to increase economic opportunity and reduce inequality is also needed – its goal being to remove, within the next decade, America’s distinction as the advanced country with the highest inequality and the least social mobility.
This implies, among other things, a fair tax system that is more progressive and eliminates the distortions and loopholes that allow speculators to pay taxes at a lower effective rate than those who work for a living, and that enable the rich to use the Cayman Islands to avoid paying their fair share.
America – and the world – would also benefit from a US energy policy that reduces reliance on imports not just by increasing domestic production, but also by cutting consumption, and that recognizes the risks posed by global warming.
Moreover, America’s science and technology policy must reflect an understanding that long-term increases in living standards depend upon productivity growth, which reflects technological progress that assumes a solid foundation of basic research.
Finally, the US needs a financial system that serves all of society, rather than operating as if it were an end in itself.
That means that the system’s focus must shift from speculative and proprietary trading to lending and job creation, which implies reforms of financial-sector regulation, and of anti-trust and corporate-governance laws, together with adequate enforcement to ensure that markets do not become rigged casinos.
Globalization has made all countries more interdependent, in turn requiring greater global cooperation.
We might hopethat America will show more leadership in reforming the global financial system by advocating for stronger international regulation, a global reserve system, and better ways to restructure sovereign debt; in addressing global warming; in democratizing the international economic institutions; and in providing assistance to poorer countries.
Americans should hope for all of this, though I am not sanguine that they will get much of it.&amp;
More likely, America will muddle through – here another little program for struggling students and homeowners, there the end of the Bush tax cuts for millionaires, but no wholesale tax reform, serious cutbacks in defense spending, or significant progress on global warming.
With the euro crisis likely to continue unabated, America’s continuing malaise does not bode well for global growth.
Even worse, in the absence of strong American leadership, longstanding global problems – from climate change to urgently needed reforms of the international monetary system – will continue to fester.
Nonetheless, we should be grateful: it is better to be standing still than it is to be heading in the wrong direction.
Are Housing Prices a House of Cards?
The first big city to boom was London, starting around 1996.
Boom mentality spread to Los Angeles, New York, and Sydney around 1997, to Paris in 1998, to Miami, Moscow, and Shanghai in 2001, and Vancouver around 2002.
These and other cities have been booming pretty much ever since; prices in most are up at least 50% in real terms since 2000.
This has been a big windfall to homeowners, but has hurt anyone planning to buy.
Now growth in home prices is weakening in some of these cities.
The rate of price growth in London and New York slowed sharply over the past year, to only about a 1% real increase in the second quarter of 2004.
In Sydney, home prices actually fell in the second quarter.
Has the boom ended?
Will no other cities benefit?
Worse still, could the mood in housing markets soon lead prices in downward?
No one predicted this boom, so predicting its end is risky.
Housing prices have shown tremendous upward momentum in the face of previous warnings that the party is over.
Any prediction concerning the boom's end requires understanding why it occurred in so many places.
Surprisingly, there is no well-received explanation, because this boom's ultimate causes are mostly psychological.
Economists would rather talk about interest rates or unemployment statistics - factors that are concrete and knowable.
Of course, these indicators do have a legitimate role to play in explaining housing markets, but they are simply not adequate to account for the recent booms.
Three psychological causes stand out: first, a change in people's perceptions about the source of value in a changing world economy; second, increasing public faith in "glamour" cities with international name recognition; and third, the plain giddy dynamics of speculative bubbles.
Each factor deserves greater attention if we are to understand current housing market conditions and discern future price trends.
First, the world economy does look more chaotic than it did a decade ago.
The crash in equity prices since 2000 in most countries has made financial assets look less secure, spurring a "flight to quality" - in this case, housing.
Moreover, terrorism is now viewed as a problem for everyone, with major tragedies in Indonesia, Spain, and Russia.
People feel safest investing in their homes, and there is little reason to expect imminent change.
Fear and upward momentum in home prices go together.
Second, the public's faith in glamorous international cities has increased with the explosive growth in global communications due to the Internet and the cell phone.
Just as people increasingly admire international celebrities, so they believe that world famous centers of business, technology, and culture - whose names are household words to people everywhere - are uniquely valuable.
As with fear of terrorism and suspicion of equities, geographical celebrity appears resilient, if not self-reinforcing: the more famous New York, Paris, and London get, the more glamorous they become.
Third, and no less important, is the speculative contagion that underlies any bubble.
The current boom has seen contagion
In contrast to the other two psychological causes, speculative contagion has a natural end.
A speculative bubble, sustaining itself solely by reaction to price increases, cannot go on forever.
So, where does this leave us?
Two of the three psychological causes suggest continued upward momentum in housing prices, while the third suggests that the momentum will come to an end some day, but does not pinpoint when.
I am betting that some high-flying glamour cities will continue to see decelerating growth in home prices - and eventually decreases.
Historically, housing prices have shown a lot of momentum, and prices in all these cities are still going up at a brisk rate, though usually somewhat slower than a year or more ago.
Based on extrapolation of growth trends, it looks safe to predict that prices will go up substantially in most of these places for another year or more, even as the rate of increase continues to decline.
The psychological factors are more important for longer-term forecasts, beyond a year, where momentum no longer plays an important role.
At this point, there is likely to be some downward instability in prices, because enthusiasm for investing in houses is likely to wane in line with declining price growth.
Prices in glamour cities are likely to drop sharply the next time there is a serious recession, or if the local economy suffers a severe shock, or if interest rates rise too fast.
Then, contagion within and across markets can work in a downward direction, propelling prices lower for years.
Are Human Rights Universal?
Even in our globalizing world, the question as to whether "human rights" is an essentially Western concept, which ignores the very different cultural, economic, and political realities of the South, persists.
Can the values of a consumer society be applied to societies with nothing to consume?
At the risk of sounding frivolous: When you stop a man in traditional dress from beating his wife, are you upholding her human rights or violating his?
The fact is that a number of serious objections exist to the concept of universal human rights, which its defenders need to acknowledge - honestly - if only to refute them.
The first objection argues that all rights and values are defined and limited by cultural perceptions; there is no universal culture, therefore there are no universal human rights.
Some philosophers object that the concept of human rights is founded on an individualistic view of man as an autonomous being whose greatest need is to be free from interference by the state, imbued, as it were, with the right to be left alone.
Non-Western societies often espouse a communitarian ethic that sees society as more than the sum of its individual members, and considers duties to be more important than rights.
Then there is the usual North/South argument, with "human rights" cast as a cover for Western intervention in the developing world.
Developing countries, some also argue, cannot afford human rights, since the tasks of nation-building and economic development remain unfinished; suspending or limiting human rights thus sacrifices the few to benefit the many.
Others object to specific rights which they say reflect Western cultural bias, the most troublesome here being women's rights.
How can women's rights be universal when, in some societies, marriage is seen not as a contract between two individuals but as an alliance between lineages, and when the permissible behavior of women is central to a society's perception of familial honor?
In addition, some religious leaders argue that human rights can be acceptable only if they are founded on the transcendent values of faith and are thus sanctioned by God.
There is a built-in conflict between the universality of human rights and the particularity of religious perspectives.
How to respond to these objections?
Concepts of justice and law, legitimacy and dignity, protection from oppressive rule, and participation in community affairs are found in every society; the challenge facing human rights advocates is to identify the common denominators, and not throw up their hands at the impossibility of universalism.
These objections reflect a false opposition between the primacy of the individual and the paramountcy of society.
Culture is too often cited as a defence against human rights by authoritarians who crush culture whenever it suits them.
Besides, which country can claim to be following its pure "traditional culture"?
You cannot follow the model of a "modern" nation-state cutting across tribal boundaries and conventions, and then argue that tribal traditions should be applied to judge the state's human-rights conduct.
There is nothing sacrosanct about culture anyway.
Culture constantly evolves in any living society, responding to both internal and external stimuli, and societies outgrow and reject much in every culture.
Let us concede that child marriage, female circumcision, and the like are not found reprehensible by many societies; but let us also ask the victims of these practices how they feel.
Where coercion exists, rights are violated, and these violations must be condemned whatever the traditional justification.
Coercion, not culture, is the test.
As for religion, every religion embodies certain verities that are applicable to all mankind - justice, truth, mercy, compassion - and men often allow God to be blamed for their own sins.
As UN Secretary-General Kofi Annan put it, the problem is not with the faith, but with the faithful.
As for suspending human rights in the interests of development, authoritarianism promotes repression, not development.
Development is about change, but repression prevents change.
Though there may be cases where authoritarian societies had success in achieving economic growth, Botswana, an exemplar of African democracy, has grown faster than most authoritarian states.
A number of developing countries – notably India, China, Chile, Cuba, Lebanon, and Panama – played an active and influential part in drafting the Universal Declaration of Human Rights.
The principles of human rights have been widely adopted, imitated, and ratified by developing countries, so it is hardly fair to suggest that they have been imposed on them.
When one hears of the unsuitability or ethnocentricism of human rights, what are these human rights that someone in a developing country can do without?
The right to life?
Freedom from torture?
The right not to be enslaved, not to be physically assaulted, not to be arbitrarily arrested, imprisoned, or executed?
No one actually advocates the abridgement of any of these rights.
Objections to the applicability of human-rights standards are all too frequently voiced by authoritarian rulers and power elites to rationalize violations that keep them in power.
Just as the Devil can quote scripture for his purpose, Third World communitarianism can be the slogan of a deracinated tyrant trained, as in the case of Pol Pot, at the Sorbonne.
The authentic voices of the South know how to cry out in pain.
Those are the voices that must be heeded.
Are Humans Getting Better?
MELBOURNE – With daily headlines focusing on war, terrorism, and the abuses of repressive governments, and religious leaders frequently bemoaning declining standards of public and private behavior, it is easy to get the impression that we are witnessing a moral collapse.
But I think that we have grounds to be optimistic about the future.
Thirty years ago, I wrote a book called The Expanding Circle, in which I asserted that, historically, the circle of beings to whom we extend moral consideration has widened, first from the tribe to the nation, then to the race or ethnic group, then to all human beings, and, finally, to non-human animals.
That, surely, is moral progress.
We might think that evolution leads to the selection of individuals who think only of their own interests, and those of their kin, because genes for such traits would be more likely to spread.
But, as I argued then, the development of reason could take us in a different direction.
On the one hand, having a capacity to reason confers an obvious evolutionary advantage, because it makes it possible to solve problems and to plan to avoid dangers, thereby increasing the prospects of survival.
Yet, on the other hand, reason is more than a neutral problem-solving tool.
It is more like an escalator: once we get on it, we are liable to be taken to places that we never expected to reach.
In particular, reason enables us to see that others, previously outside the bounds of our moral view, are like us in relevant respects.
Excluding them from the sphere of beings to whom we owe moral consideration can then seem arbitrary, or just plain wrong.
Steven Pinker’s recent book The Better Angels of Our Nature lends weighty support to this view.&nbsp;
Pinker, a professor of psychology at Harvard University, draws on recent research in history, psychology, cognitive science, economics, and sociology to argue that our era is less violent, less cruel, and more peaceful than any previous period of human existence.
The decline in violence holds for families, neighborhoods, tribes, and states.
In essence, humans living today are less likely to meet a violent death, or to suffer from violence or cruelty at the hands of others, than their predecessors in any previous century.
Many people will doubt this claim.
Some hold a rosy view of the simpler, supposedly more placid lives of tribal hunter-gatherers relative to our own.
But examination of skeletons found at archaeological sites suggests that as many as 15% of prehistoric humans met a violent death at the hands of another person.
(For comparison, in the first half of the twentieth century, the two world wars caused a death rate in Europe of not much more than 3%.)
Even those tribal peoples extolled by anthropologists as especially “gentle” – for example, the Semai of Malaysia, the Kung of the Kalahari, and the Central Arctic Inuit – turn out to have murder rates that are, relative to population, comparable to Detroit, which has one of the highest murder rates in the United States.
In Europe, your chance of being murdered is now less than one-tenth, and in some countries only one-fiftieth, of what it would have been had you lived 500 years ago.
Pinker accepts that reason is an important factor underlying the trends that he describes.
In support of this claim, he refers to the “Flynn Effect” – the remarkable finding by the philosopher James Flynn that since IQ tests were first administered, scores have risen considerably.
The average IQ is, by definition, 100; but, to achieve that result, raw test results have to be standardized.
If the average teenager today took an IQ test in 1910, he or she would score 130, which would be better than 98% of those taking the test then.
It is not easy to attribute this rise to improved education, because the aspects of the tests on which scores have risen the most do not require a good vocabulary, or even mathematical ability, but instead assess powers of abstract reasoning.
One theory is that we have gotten better at IQ tests because we live in a more symbol-rich environment.
Flynn himself thinks that the spread of the scientific mode of reasoning has played a role.
Pinker argues that enhanced powers of reasoning give us the ability to detach ourselves from our immediate experience and from our personal or parochial perspective, and frame our ideas in more abstract, universal terms.
This, in turn, leads to better moral commitments, including avoidance of violence.
It is just this kind of reasoning ability that improved during the twentieth century.
So there are grounds to believe that our improved reasoning abilities have enabled us to reduce the influence of those more impulsive elements of our nature that lead to violence.
Perhaps this underlies the significant drop in deaths inflicted by war since 1945 – a decline that has become even steeper over the past 20 years.
If so, there would be no denying that we continue to face grave problems, including of course the threat of catastrophic climate change.
But there would nonetheless be some reason to hope for moral progress.
Are Humans to Blame for Global Warming?
Global warming is an environmental, economic, scientific, and political problem of the first order, and one doubly difficult to address because its dangers lie decades in the future.
So if we are to act now to head it off, we must first scrutinize what is known about the nature of the threat.
Should we place our faith in the Kyoto Treaty, which sets firm limits on human emissions of so-called greenhouse gases?
Or is the US administration right to reject the Kyoto Treaty, because targeting emissions is based on "bad science"?
Circumstantial evidence does indeed point to our profligate burning of fossil fuels and perhaps also to its impact on global warming.
Since 1900 the global temperature of the Earth's atmosphere and ocean surface waters has risen by 0.5-1 degree Celsius, and the prime suspect is atmospheric carbon dioxide, CO2, which is second only to water vapor in its greenhouse effect.
Since 1860, when the industrial revolution and soaring population growth led to widespread consumption of fossil fuels, the volume of atmospheric CO2 has increased by about 28%.
The increase began slowly, rising from 290 parts per million in 1860 to 295 ppm in 1900.
But it then accelerated rapidly, reaching 310 ppm in 1950 and 370 ppm in 2000, with half of the total gain of 80 ppm occurring just since 1975.
Numerical global climate models suggest that a doubling of the current atmospheric accumulation of CO2 will produce further warming of 3-5 degrees Celsius, perhaps as soon as 2050.
The consequences of this would be devastating: inland areas desiccated, low-lying coastal regions battered and flooded as polar ice melts and sea levels rise, and possibly further warming and a runaway greenhouse effect due to an increase in atmospheric water vapor.
The only rational course of action would seem to be to curtail global consumption of fossil fuels, as the Kyoto Treaty's proponents contend, and invest in alternative energy sources.
But while researchers created impressive global climate models in recent years, they are the first to admit that such models can include only a fraction of the many physical forces that together determine the climate and global mean temperature.
For example, studies during the past 20 years have shown that changes in solar magnetic activity cause the Sun's brightness to vary by 0.1%, and that the average annual temperature in the northern Temperate Zone has tracked the level of solar activity over the last 1,000 years.
Indeed, monitoring of other solar-type stars has revealed one whose brightness decreased by 0.5% in a period of 5 years, during which its magnetic activity declined sharply, suggesting that the Sun behaves similarly.
Core samples from the Greenland ice cap, for example, show occasional sudden drops in temperature.
Contrary to what climate models focusing on greenhouse gas emissions would predict, the samples show that a decline in atmospheric CO2 followed, rather than preceded, these frigid intervals.
What, then, is responsible for global warming so far? A safe bet is that from 1900 until 1950, global warming was driven mainly by the solar brightening, as solar magnetic activity increased by a factor of two or three during this period.
Atmospheric CO2 could not have been a major contributor, because it had increased by only about 7% before 1950, when the warming leveled off for a couple of decades. After 1950, however, solar activity showed no significant rise, while atmospheric CO2 increased by 20%, accounting for the warming from 1970 to 2000.
Atmospheric CO2 is therefore presumably the controlling factor for the coming century as well.
But this does not mean that human emissions are responsible for the growing accumulation of atmospheric CO2. The atmosphere contains about 750 gigatons of CO2, while total annual human emission is approximately 5.5 Gt, thus adding annually roughly 0.7% of the total.
This equilibrium is, in turn, determined by the temperature of ocean surface water. So it is plausible that the solar-driven ocean warming between 1900 and 1950 started things off by shifting the equilibrium toward higher concentrations of CO2 in the atmosphere, accelerating global warming since then.
So, while our own contribution of CO2 is not helping matters, it hardly seems to be the determining factor. On the available evidence, then, skeptics of the Kyoto Treaty appear to have a powerful case.
For example, aside from solar magnetic activity, the Sun affects the Earth's climate in several other ways, including ultraviolet warming of the upper stratosphere, the nucleation of aerosols, and cloud formation. The climate is also subject to the rate of water vapor exchange between the atmosphere and Earth's surface, which requires taking into account ocean currents, wind, and geography.
All of these contributing effects must be understood quantitatively in order to produce an accurate model of global climate change and we remain far from that point.
So the only rational response is to research aggressively into the many unknown factors: the physics of cloud formation, the dynamic coupling of the upper stratosphere to the lower atmosphere, the accumulation of atmospheric water vapor.
If effective solutions are to be found, they must await a fuller definition of the problem.
Are Israel and Syria Ready for Peace?
JERUSALEM – The resumption of peace talks between Israel and Syria after eight years of saber-rattling is not a diversion from the political troubles of Israel’s lame-duck prime minister.
Nor are the talks a Syrian ploy to avoid facing an international tribunal on the assassination of Lebanon’s former prime minister, Rafik Hariri.
An Israeli-Syrian peace deal is strategically vital for both sides, and both sides know it.
The two major formative experiences of Syria’s Ba’ath regime have been Hafez al-Assad’s loss of the Golan Heights in the 1967 war with Israel, and the loss of Lebanon by his son, Bashar, who was forced to withdraw his army under irresistible American-led international pressure.
Recovering the Golan Heights and protecting Syria’s vital interests in Lebanon are not only major strategic concerns for Syria’s president; they are also crucial to the regime’s drive for national legitimacy, and to Bashar’s assertion of his own leadership.
Peace with Israel is not Assad’s priority.
Rather, it is the prerequisite without which superior goals – rapprochement with the United States, legitimization of Syria’s special status in Lebanon, and avoidance of a potentially devastating war with Israel if the Golan Heights are not recovered by peaceful means – cannot be attained.
Indeed, the regime has hinted that it may be willing to compromise on the issue – the delineation of the 1967 border along a tiny piece of land on the Eastern shore of the Sea of Galilee – that wrecked the negotiations eight years ago.
An Israeli-Syrian peace is a weighty strategic necessity for Israel, too.
The complexities of the threats to Israel are such that a possible confrontation with Hamas in Gaza might trigger a flare-up with Hezbollah in Lebanon.
Such a war could be won only by the total destruction of Lebanon by Israel’s air force.
In that case, Syria would likely seize the opportunity to break the deadlock over the Golan Heights through a military move that could develop into a massive war of missiles targeting Israel’s vulnerable home front.
And Iran, in its drive to protect its nuclear program from an Israeli-American attack, might be very active in supporting this ominous scenario.
Admittedly, the strategic conditions in the region are far more complex today than they were eight years ago, when Israel’s requirements for a deal with Syria focused mainly on security arrangements on the Golan Heights, and on Syria using its leverage in Lebanon to permit an Israeli settlement with that country.
Syria’s alliance with Iran was not a major issue.
Syria’s subsequent forced withdrawal from Lebanon was not good news for Israel.
In the last round of Israeli-Palestinian peace talks eight years ago, it was clear that a deal with Syria would automatically pave the way to a settlement with Lebanon, and an end to Hezbollah’s threat to Israel’s northern border.
Today, peace with Syria might facilitate an Israeli peace with Lebanon down the road, but that will not be an automatic outcome.
Indeed, while Hezbollah prospered under Syrian occupation, it never reached the extraordinary political power that it has today.
Nevertheless, peace with Syria could be a major building block in a wider Israeli-Arab settlement, and consequently of a more stable Middle East, though it is unrealistic to expect that Syria would automatically sever its special relationship with Iran in exchange for the Golan Heights.
These are peace talks, not a defense treaty, and Syria would not abruptly disengage from its Iranian friends.
But good relations between an Arab state at peace with Israel and Iran are not necessarily a bad thing.
Syria’s stance might limit, rather than extend, the reach of Iran’s strategy of regional destabilization.
As always, much will depend on America’s readiness to move away from military solutions and rigid ideological imperatives and instead embrace the pragmatic culture of conflict resolution.
A US-backed Israeli-Syrian peace could transform the strategic environment, potentially drawing other Middle East spoilers into a system of regional cooperation and security.
A Relationship Strengthened by Crisis
NEW YORK – In recent years, emerging-market countries, including those in Asia, have made impressive strides in strengthening their fundamentals, accelerating their economic growth and cushioning themselves against external shocks.
Nevertheless, as the events of recent months have shown, emerging markets are not immune from the current bout of global financial turmoil.
In particular, slowing global economic demand poses daunting challenges for many Asian economies, especially those that are more dependent on export-led growth.
While most Asian countries have had relatively limited direct exposure to mortgage-related assets, deleveraging by foreign investors and slowing external demand have simultaneously created tighter credit conditions and lower expectations for growth.
This has led to heightened volatility in equity, money, and debt markets.
These developments put to rest the notion of “decoupling,” the idea that economic growth in emerging markets, whether in Asia or elsewhere, is independent from that of the developed world.
As the current crisis makes painfully clear, in this era of global trade and investment, our economies − and our prosperity − are inextricably linked.
In order to maintain strong economic growth in America, we need a strong, growing Asia, just as Asia’s success depends on a thriving US.
The US-Asia economic partnership can be strengthened if we heed the lessons that we have already learned from the ongoing turmoil.
Undoubtedly, much of the current situation will be best understood with the benefit of time, but five lessons are already coming into focus, and we should consider their implications for the choices policymakers will make in the future.
First, openness to international trade and investment has been and will continue to be the linchpin of economic growth for the global economy.
The US and Asia are more mutually dependent than ever for their economic growth and prosperity.
In the current climate of anxiety and uncertainty, policymakers must ensure strong communication and coordination, avoid beggar-thy-neighbor policies, and guard against protectionism.
Fortunately, as the crisis has worsened, global policymakers have responded with coordinated policy action.
The G-7 action plan aims to restore the flow of credit by securing interbank lending, and coordinated central bank actions have provided unprecedented levels of liquidity to the market.
Bilaterally, the Strategic Economic Dialogue (SED), which has been an invaluable forum for building US-China economic relations, has been especially important in strengthening our lines of communication and cooperation during the crisis.
And many policymakers around the world have reaffirmed their commitment to completing a successful Doha trade round and refraining from raising new barriers to trade and investment.
Second, it is also clear that developed countries must act rapidly and in concert to minimize the impact of the crisis on emerging markets.
As is always the case, however, resources alone cannot solve problems rooted in weak policies.
Before we provide financial assistance, whether bilaterally or through the international financial institutions (IFIs), we must determine the underlying cause of economic vulnerability and ensure necessary corrective action.
Lending large sums before assessing root causes and determining appropriate policy responses can undermine the IFIs’ credibility and reduce the capital available to assist other countries in need.
When resources are needed, however, the IFIs are a logical place to turn, and they must show flexibility and adaptability to help their member countries.
Both the International Monetary Fund and the World Bank have taken encouraging steps to develop new programs and approaches and quickly increase their commitments.
The IMF recently established the Short-Term Liquidity Facility to help strong-performing members facing temporary liquidity problems.
The World Bank and the multilateral development banks are also developing innovative ways to strengthen country financial sectors and address potential shortfalls in trade finance.
Third, as the IFIs play an even more crucial role, further delay in reforming them to include major emerging-market economies will only harm their effectiveness and legitimacy.
But greater representation is not a one-way street: with greater voice and influence, emerging-market countries must assume greater leadership responsibilities and act as constructive partners in these institutions.
Fourth, governments and the IFIs cannot solve this crisis alone, and they cannot and should not crowd out the private sector.
In situations where government intervention is necessary, we must consider specific ways in which the private sector can assist in the recovery.
For example, the US has helped promote financial-sector stability with direct capital injections, but ultimately it is the banks that must resume responsible lending to consumers and businesses.
Moreover, the US Treasury has structured its Capital Purchase Program with disincentives for long-term government ownership.
Finally, both Asia and the US must remain focused on addressing the fundamental macroeconomic policy challenges that contributed to the crisis.
Some of these challenges, such as the buildup of global imbalances, have been discussed for many years.
The turmoil has led to a gradual rebalancing, with the US current-account deficit beginning to narrow and emerging markets taking steps to boost domestic demand.
But we must guard against the re-emergence of significant imbalances, which means, in part, assuring the exchange-rate flexibility that must play a critical role in allowing needed economic adjustments to occur.
Many of the important steps taken to stabilize the global financial system and economy, as well as to address the root causes of this crisis, will be achieved through the G-20.
It is also clear that the US and Asia will be at the center of any effective multilateral action.
We must therefore seek to enhance our cooperation and leverage our regional, multilateral, and bilateral dialogues and relationships to ensure the integrity and efficacy of these efforts.
The road ahead will not be easy, but the US-Asia economic partnership will be at the heart of our recovery.
And our economic relationship will no doubt emerge even stronger as a consequence of weathering this storm together.
Violence and Innovation
ABU DHABI – In the 1949 British film The Third Man, the character Harry Lime observes that, during the Borgia family’s rule in Renaissance Italy, the country “had warfare, terror, murder, and bloodshed.
But [it] produced Michelangelo, Leonardo da Vinci, and the Renaissance.”
By contrast, he contends, Switzerland’s 500 years of democracy and peace produced little more than the cuckoo clock.
While the implication that innovation and creativity are born only of conflict is extreme – in fact, Switzerland is a world leader in innovation – Lime makes a crucial point.
Although peace, order, and political stability are widely perceived as essential prerequisites for invention, entrepreneurship, and economic development, there have been many exceptions to this rule – especially when it comes to creativity and innovation.
The United States is consistently ranked among the world’s top ten countries for innovation, including by INSEAD’s Global Innovation Index.
But, on the Global Peace Index, it is ranked 88th of 153 countries.
Likewise, the United Kingdom and the Netherlands rank, respectively, fifth and sixth on the Innovation Index, but only 28th and 29th on the Peace Index.
Conversely, Bhutan is among the top 20 most peaceful nations, but does not even make it onto innovation indices.
Of course, crime, terrorism, conflict, and political instability severe enough to cause a total breakdown of law and order significantly impede creativity and innovation.
But some countries show strong resilience in the face of pervasive violence and volatility.
For example, despite widespread violent crime, Mexico and South Africa have high levels of innovation (measured by patent filing and trademark registration).
When terrorism indicators are taken into account, Lebanon, Turkey, Jordan, and Israel emerge as resilient innovators.
Just as peace and stability do not always lead to creativity and innovation, fighting and uncertainty do not necessarily deter it.
Although peace, political stability, and civil order are important factors to consider when selecting a location for a large-scale foreign production or service operation, they are far less important when it comes to sourcing creativity and making the related investments.
In particular, creative industries, such as animation, arts, design, and software – which are mostly based on individual skills and talent – tend to be more resilient to conflict than others.
Given this, officials, investors, and business leaders in search of revolutionary ideas, cutting-edge solutions, and untapped talent should not allow turbulence in some societies, or tranquility in others, to influence their decisions excessively.
In fact, stepping out of one’s comfort zone may offer significant benefits.
Some evidence suggests that the prevalence of uncertainty may boost competition, thereby sparking innovation.
Furthermore, social environments that are characterized by lower levels of consensus and higher levels of violence may be more likely than their more harmonious counterparts to catalyze radical innovation.
Lebanon’s experience supports this assessment.
Despite its long history of political violence, its creative industries are expanding.
According to a 2007 study of Lebanon’s copyright-based industries, conducted by the World Intellectual Property Organization, the main challenges facing the country’s software sector – an important part of its economy – include restricted markets, intense competition, a brain drain (loss of human capital), inadequate technology policy, a lack of government incentives, and rampant piracy.
Violence is conspicuously absent from the list.
To be sure, violence is always a problem.
But countries like Lebanon have become resistant to its effects – for example, by developing creative industries – diminishing its negative impact on economic, social, and intellectual development.
In 2005, 10% of all new businesses in Lebanon were in the creative sector, and the copyright-based industries contributed 4.75% of GDP.
Similarly, despite high levels of political violence, Nigeria produces more than 1,000 films annually.
Indeed, Nigeria’s film industry is the world’s third largest, after the US and India, and is second only to oil production in terms of its economic significance to the country.
According to a 2010 United Nations report on the creative economy, global trade in creative goods grew at an annual rate of 14% from 2002 to 2008.
Meanwhile, exports of such goods from developing countries, which tend to experience more violence, grew at a rate of 13.5%, reaching $176 billion (43% of total world trade in creative industries) in 2008.
Although overall global trade declined by 12% that year, trade in creative goods and services continued to expand.
This has significant implications for political and business leaders – especially in turbulent regions like the Middle East.
In order to bolster economic growth and innovation amid conflict and volatility, policymakers and investors should focus on building the creative industries.
The resilience and adaptability that they provide are crucial to supporting long-term economic growth and job creation – no matter what the future brings.
Are Saudi Women Next?
LONDON – The unexpected visibility and assertiveness of women in the revolutions unfolding across the Arab world – in Tunisia, Egypt, Libya, Yemen, Bahrain, Syria, and elsewhere – has helped propel what has become variously known as the “Arab awakening” or “Arab Spring.”
Major changes have occurred in the minds and lives of women, helping them to break through the shackles of the past, and to demand their freedom and dignity.
Since January 2011, images of millions of women demonstrating alongside men have been beamed around the world by television journalists, posted on YouTube, and splashed on the front pages of newspapers.
One saw women from all walks of life marching in hope of a better future, for themselves and for their countries.
They appeared prominently – eloquent and outspoken, marching daily, holding caricatures of dictators and chanting calls for democratic change.
They walked, bussed, traveled in carts, telephoned and tweeted with compatriots, motivated in part by social demands – above all for their own empowerment.
The contrast between this dynamic space for open protest and Saudi Arabia could hardly be starker.
Saudi women find themselves living in a petrified system.
Faces of the royal family are seen everywhere; the faces of women are shrouded, forcibly hidden.
Nowhere else in the world do we see modernity experienced as such a problem.
Skyscrapers rise out of the desert, yet women are not permitted to ride with men in their lifts.
Nor are they allowed to walk in the streets, drive a car, or leave the country without the permission of a male guardian.
Fatima, a young woman from Mecca, sent me an email at the height of the Egyptian revolution: “Forget about the cries for freedom;
I can’t even give birth without being accompanied to hospital by a mihrim (male guardian).”
She went on, “And the mataw’a (the religious police, known officially as the Committee for the Promotion of Virtue and the Prevention of Vice, and whose leader has ministerial rank) have been given the right to humiliate us in public.”
Indeed, the mutaw’a saw their wide powers enhanced even more by decrees issued by King Abdullah in March, after helping to suppress protests in the kingdom earlier in the month.
Yet globalization knows no limits, not even those set by the guardians of Islamic probity.
Nine-year-old Saudi girls chat online, disregarding fatwas issued by Wahhabi clerics that forbid them access to the Internet without the supervision of a male guardian.
Many women remain secretly glued to satellite television channels, watching their peers in the public squares of Egypt or Yemen, beyond their reach but not beyond their imagination.
On May 21, a brave woman named Manal al Sharif broke the silence and apathy, daring to defy the ban on women driving.
For the next week, she sat in a Saudi prison.
But, within two days of her detention, 500,000 viewers had watched the YouTube video of her excursion.
Thousands of Saudi women, frustrated and humiliated by the ban, have vowed to stage a “driving day” on June 17.
Saudi Arabia is the only country in the world that forbids women to drive cars.
The system of confinement that the ban represents is justified neither by Islamic texts, nor by the nature of the diverse society that the Al Saud and their Wahhabi partners’ rule.
Indeed, it is far removed even from the rest of the Arab world – which has become glaringly obvious in the context of massive social upheaval almost everywhere else in the region.
Enforced segregation is mirrored in every aspect of Saudi life.
Religious education constitutes up to 50% of students’ curriculum.
As a result, Wahhabi dogma penetrates every home in the country.
Textbooks – pink for girls, blue for boys, each with different contents – emphasize the rules prescribed by Imam Muhammad bin Abdul Wahhab, an eighteenth-century cleric and the founder of Wahhabism.
The Saudi judicial system is one of the most formidable obstacles to women’s aspirations, relying on Islamic interpretations that protect a defensive patriarchal system.
Indeed, not only do judges’ decisions support the system, but the reverse is also true: patriarchy has become the driving force of the law.
Thus, Saudi women are barred from the legal profession on the basis of a Wahhabi stricture that “a woman is lacking in mind and religion.”
In other words, the rule of law in Saudi Arabia is the rule of misogyny – the comprehensive legal exclusion of women from the public sphere.
Saudi rulers have announced that demonstrations are haram – a sin punishable by jail and flogging.
Now some clerics have pronounced driving by women to be foreign-inspired haram, punishable in the same way.
Yet, despite such threats, thousands of Saudi women joined “We are all Manal al Sharif” on Facebook, and countless other videos of women driving have appeared on YouTube since her arrest.
Like Mamal, they, too, have been detained, and the government appears determined to prosecute them.
But Wajeha al Huwaider, Bahia al Mansour, Rasha al Maliki, and many other activists are nonetheless insisting that driving a car is their legitimate right, and are eloquently demanding the removal of restrictions and an end to women’s dependency.
Rosa Parks’ revolutionary bravery in refusing to move to the back of a Montgomery, Alabama municipal bus in 1955 helped spark the American civil rights movement.
We shall soon find out whether Manal al Sharif’s defiance of the Saudi regime’s systemic confinement of women produces a similar effect.
A “Reset” Button for Europe’s Backyard
STOCKHOLM – One year after the war in Georgia of last August, pushing the “reset” button on diplomatic relations is a popular endeavor nowadays.
President Barack Obama recently journeyed to Moscow in order to “reset” strained United States-Russian ties.
The European Union, though not in need of a “reset” because of strained ties with its eastern neighbors, is involved in a deep strategic reconstruction of those relations.
When the EU launched its new “Eastern Partnership” in May, the purpose was to promote further integration with the Union’s six immediate eastern neighbors – Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine.
The global financial crisis had made an updated and strengthened policy for the EU’s eastern neighborhood an urgent need.
Equally important was the fact that all the countries concerned expressed an ambition to move closer to the EU.
The Eastern Partnership – originating from a Polish/Swedish initiative – offers to the six countries a substantial upgrading and deepening of relations with the EU in key areas.
In trade and economic relations, it clearly sets out the objective of establishing deep and comprehensive free-trade areas between the EU and the partner countries.
It confirms full visa liberalization as a long-term goal (with visa facilitation agreements in the meantime), promises enhanced cooperation on energy security, diversification, and efficiency, and comes with dedicated programs and projects to help the neighbors in their integration and reform efforts in all these areas.
Sweden’s assumption of the EU Presidency this month should help these efforts.
However, it comes at a time when the Union’s eastern neighborhood faces severe challenges, with the financial and economic crisis hitting many of the partner countries hard.
Ukraine suffers from the sharp drop in global demand and trade, severely undermining its steel industry.
Georgia’s economic success has been largely dependent on direct foreign investment, for which there is hardly any appetite today.
Partner countries that are less integrated into the global market, such as Moldova, have seen the crisis arrive more slowly, but the real effect might be equally as bad, and they are likely to recover more slowly.
The Eastern Partnership does not offer any quick remedies to the crisis.
But it can provide a political framework and institution-building support to improve the deficiencies that made these countries so vulnerable to the crisis: imperfect market economies, weak state institutions, and continued corruption.
The Eastern Partnership’s offer of deep integration with the EU in the areas such as trade and energy carries with it considerable transformational power.
The other type of crisis that most of the partner countries are enduring is political.
In most of these countries, democratic development has not yet reached a point where a change in government is a routine part of political life and can take place without risking the country’s stability.
The Eastern Partnership is based on the profound values of democracy, human rights, and the rule of law.
Political association with the EU, and the process of integration under this Partnership, will promote reforms in these key areas.
The Swedish EU Presidency will concentrate on starting up the concrete work – the nuts and bolts – of the Partnership.
The establishment of “Comprehensive Institution-Building Programs,” designed to support reform of key institutions in each partner country, should take place before the year’s end.
Some flagship initiatives proposed by the European Commission will finally see the light of day as well, and new projects and initiatives are likely to be developed.
Here, Sweden will attach particular importance to energy efficiency programs, which will serve not only the purposes of enhancing energy security and reducing costs, but will also be an important contribution to the fight against climate change.
The Swedish Presidency, together with the European Commission, intends to organize the first meeting of the Eastern Partnership Civil Society Forum this autumn.
We hope to see the start of parliamentary cooperation, as well as exchanges between local and regional authorities of the thirty-three EU and partner countries.
At the end of the year, a meeting of EU foreign ministers and their colleagues from the six partners will assess the progress made so far and give guidance on the way ahead.
The Eastern Partnership is about EU integration, about the six countries moving closer to the EU’s values, legislation, and ways of working, and about the EU being there to support and help this convergence.
In Russia, there is a perception that is sometimes fostered which suggests that the Partnership is directed against it.
But this, of course, is untrue.
On the contrary, Russia, like Turkey, will be welcome to take part in relevant activities within the Partnership’s multilateral dimensions.
The Eastern Partnership is not an answer to all the problems and difficulties that the six partners are facing.
Nevertheless, it does represent a clear commitment by the EU to lend its political and economic support to their transition and reform – a process that should bring prosperity and stability to the whole region.
A Reset in the Caucasus
YEREVAN – Will Turkey’s current turmoil between Prime Minister Recep Tayyip Erdoğan and the country’s powerful army complicate and delay the country’s boldest initiatives in years – the moves to address decades-old tensions with both Armenians and Kurds?
Restructuring the role of Turkey’s army is vital, but if Turkey cannot follow through with the Armenian and Kurdish openings, the country’s own domestic situation, its relations with the two peoples, as well as tensions in the Caucasus, will undoubtedly worsen.
Of the several flashpoints in the region, including that between Georgia and Russia over South Ossetia and Abkhazia, the tension between Armenians and Azerbaijan over Nagorno-Karabakh is among the most challenging.
As to Georgia and Russia, the disproportionate size, weight, and power on one side are enough to deter any return to violence.
Moreover, there are no entangling alliances complicating the matter.
Georgia is not a NATO member, and the United States, it is clear, will not go to war with Russia over Georgia.
The Armenian-Azerbaijani struggle is more precarious.
It is no longer a two-way tug-of-war between two small post-Soviet republics, but part of an Armenia-Turkey-Azerbaijan triangle.
This triangle is the direct consequence of the process of normalization between Armenia and Turkey, which began when both countries’ presidents met at a football game.
That process now hinges on protocols for establishing diplomatic relations that have been signed by both governments but unratified by either parliament.
Completing the process depends directly and indirectly on how Armenians and Azerbaijan work to resolve the Nagorno-Karabakh conflict.
This snarled three-way dispute, if not carefully untangled, holds many dangers. Turkey, which for nearly two decades has proclaimed its support for Azerbaijan, publicly conditioned rapprochement with Armenia on Armenian concessions to Azerbaijan.
Turkey, a NATO member, is thus a party to this conflict now, and any military flare-up between Armenians and Azerbaijanis might draw it in – possibly triggering Russia’s involvement, either through its bilateral commitments to Armenia, or through the Collective Security Treaty Organization, of which Armenia and Russia are members.
Given energy-security concerns, any Azerbaijani conflict would also seriously affect Europe. Iran, too would be affected, since it is a frontline state with interests in the region.
Armenians and Azerbaijanis have not clashed militarily for more than a decade and a half. But this is only because there has been the perception of a military balance and a hope that ongoing negotiations would succeed.
Today, both factors have changed.
The diplomatic protocols awaiting ratification by the two countries’ parliaments have fallen victim to miscalculations on both sides.
The Armenians came to believe that Turkey would find a way to reconcile Azerbaijan’s interests with the Turkish opening to Armenia, and would open the border with Armenia regardless of progress on resolving the Nagorno-Karabakh issue. The problem is that Turkey initially closed the border precisely because of Nagorno-Karabakh, rather than any bilateral issue.
Turkey believed that by signing protocols with Armenia and clearly indicating its readiness to open the border, the Armenians could somehow be cajoled or pressured into resolving the Nagorno-Karabakh problem more quickly or cede territories surrounding Nagorno-Karabakh. But this has always been unlikely in the absence of a comprehensive settlement that addresses Armenians’ greatest fear – security – and fulfils their basic political requirement, namely a definition of Nagorno-Karabakh’s status.
Both sides seem to be somewhat surprised by the other’s expectations. Indeed, there is a growing fear that a settlement of the Nagorno-Karabakh dispute is more distant now, because Turkey’s public backing has raised Azerbaijan’s expectations, while some Armenians fear collusion between neighbors out to railroad them into an unsustainable agreement.
This is Turkey’s moment of truth.
The Armenia-Turkey diplomatic process has stalled, and the Turkish government’s effort at reconciliation with the country’s large Kurdish minority has soured.
Just as a loss of confidence among Kurds and Turks in eastern Turkey will rock the shaky stability that they have recently enjoyed, a loss of hope for a settlement of the Nagorno-Karabakh dispute may end the tentative military calm between Armenians and Azerbaijanis
But the situation is not irretrievable.
So, even as Turkey tries to deal with the consequences of its history at home, and redefine the army’s role in society, it must reset its tortured relationship with Armenia.
The recent resolution passed by the Foreign Relations Committee of the US Congress, which called
The two sides must step back, look at the situation dispassionately, acknowledge the deficiencies in the protocols, address the other side’s minimum requirements, and bear in mind that a single document will not heal all wounds or wipe out all fears.
The international community must support this effort.
The problem should not be dismissed as a mere settling of old scores.
What is at stake is the future of a region critical to Eurasia’s peace.
Are Terrorists Insane?
ORLANDO – One of the most common popular misunderstandings about the causes of terrorism is the notion that terrorists must be “insane” to behave as they do.
That idea is as wrong as it is comforting.
Conservatives in the United States, for example, frequently rail against the “madness” of Islamic terrorists, and regard attempts to understand terrorism as appeasement or liberalism gone wild.
In the wake of September 11, 2001, in particular, many on the right mistook the attempt to understand or explain the terrorists’ actions as an effort to condone them.
We have been here before, though.
After World War II, the myth of the “mad Nazi” exerted a forceful grip upon the popular imagination; surely, only insane individuals could perpetrate something like the Holocaust.
But social science research in the 1940’s and 1950’s, including interviews with surviving Nazi leaders, demonstrated that members of the German governmental hierarchy were not only sane, but also highly intelligent.
Moreover, by the early 1960’s, the social psychologist Stanley Milgram had shown that ordinary Americans would go to extraordinary lengths in obeying malevolent authority.
He famously induced people from a variety of social classes and occupations to administer what they thought were increasingly harsh electrical shocks to a helpless victim (played by an actor) sitting in an adjoining room, and his findings have since been replicated around the world.
This was an unpalatable conclusion.
Faced with the horror of what the Nazis had done, most people found it psychologically easier to think of what had happened as the behavior of mentally unhinged individuals, or the result of some sort of collective fugue.
But had vast numbers of Germans suddenly lost their senses overnight, or were they part of a situation in which most of us would simply have done as we were told?
A similar resistance to noisome conclusions – and similarly understandable from a psychological viewpoint – informs today’s thinking about terrorists.
Our default reaction, often reinforced by Western philosophical traditions and simplistic political rhetoric, is that evil acts must be the product of fundamentally evil or insane individuals.
As with the Nazis, the study of modern terrorism began from the starting position that a single disposition – known in the literature as the “terrorist personality” – characterizes most or all terrorists.
In the 1970’s and 1980’s, West German authorities allowed psychologists and psychiatrists to interview terrorism suspects then being held in prison or awaiting trial, including members of the Red Army Faction.
A brigade of experts descended on the jails, looking for evidence to justify their own pet theories of terrorist psychology.
Terrorists were all self-serving narcissists, some found after the interviews were done.
Others argued that terrorists were all victims of clinical paranoia or some other psychosis.
Some even suggested, somewhat bizarrely, that terrorists tend to have lost a parent in their childhood years and are acting out the aggression that derives from their resulting frustration with life.
All of these views shared the belief that there was something fundamentally dysfunctional about the “terrorist personality,” something warped and unusual that sets “them” apart from “us.”
Never mind that different researchers found different features of this so-called personality salient, and came to fundamentally different conclusions about it.
In the years since, social science has reinforced skepticism that all terrorists share such essential personality traits.
There is also a growing recognition that the social circumstances to which terrorists are exposed play a significant role.
What we know about the mindset of terrorists tells us that they are mostly not deranged or insane, but have acquired a different set of beliefs and been exposed to social conditions very different from our own.
Put simply, the causes of terror are largely situational, and the situations are themselves as varied as the acts themselves (members of the IRA, for instance, have obviously been exposed to circumstances very different from members of Al Qaeda).
It must be admitted, of course, that our access to real-life terrorists is limited, and we still have much to learn about the kind of environments that foster terroristic behavior.
Arguably, our knowledge of the factors that led to the July 2005 bombings in London, for example, is still far less impressive than our ignorance.
The great contribution of social science to the understanding of human evil has been to expose unpalatable truths.
When we resort to psychologically comforting but misleading assumptions about terrorism, we hamper our own understanding of political violence in general – and hence weaken our ability to avert or minimize it.
Are the Barbarians at the EU Gates?
BRUSSELS – The euro area confronts a fundamental crisis that attacks on financial speculators will do nothing to resolve.
The European Council of Ministers had to promise hundreds of billions of euros to its financially imperiled member countries, even though the European economy as a whole is not really in crisis.
On the contrary, most surveys and hard economic indicators point to a strong upswing, with the one country that is in really serious trouble, Greece, representing only 3% of the area’s GDP.
Nevertheless, the crisis poses an almost existential challenge to the European Union – and has required such huge sums – because it directly implicates the key underlying principle of European governance: the nature of the state.
The case of Greece has raised the simple but profound question: can a member state of the EU be allowed to fail?
One view is that the state is sacrosanct: the EU has to intervene and help any errant member to get back on its feet.
But this view assumes that all member states adhere to the Union’s underlying economic values of fiscal prudence and market reform.
Problems could arise only because of unanticipated shocks, temporary local political difficulties, and – the favorite culprit – irrational markets.
Applied to Greece, this view implies that the country’s fiscal crisis resulted from an overreaction by world financial markets to local political difficulties (excessive spending by the Greek government before last year’s elections).
Moreover, it implies that the crisis is fully under European control, and that the European authorities have elaborated a comprehensive plan that will resolve all of Greece’s fiscal and structural problems.
Hence the official – let’s say “Southern” – refrain: “The IMF/EU plan will succeed.
Failure is not an option.”
The alternative view is more pragmatic and rules-based.
This “Northern” view starts from the premise that member states remain sovereign units, and that it is possible that a member country does not implement a necessary economic-adjustment program.
This view is embodied in the “no bailout” clause in the euro’s founding document, which stipulates that each country is responsible for its own public debt.
Failure then becomes an option if the country concerned violates the single currency’s basic rules.
Financial markets do not participate directly in this debate.
But they have much skin in this game.
Any holder of Greek debt, especially long-term debt, must calculate the likelihood that Greece’s political system will prove strong enough to push through the reforms needed to enable the country to service its debt fully (and on time).
The collective judgment of financial markets on any government’s economic and fiscal policy is expressed in the risk premium that the government must pay on its external debt.
Doubts in financial markets lead to higher risk premia, which make it even more difficult to finance a government that is already facing financial problems.
Financial markets are often wrong in their judgments.
But they are a fact of life that cannot just be wished or regulated away.
One might object that the distinction between Southern and Northern views is academic nowadays, because failure really isn’t an option, given that it would trigger a disastrous reaction in global financial markets.
But the European Council also created a Task Force under President Herman Van Rompuy to elaborate concrete proposals for reforming the monetary union.
The key choice for this group is simple: should they direct their efforts solely at preventing failure (including open-ended fiscal support), or should they also prepare for the failure of a member state in order to mitigate the consequences if that should happen?
The first choice is bound to imply elaborate measures designed to deliver “more of the same” – a strengthening of the Stability and Growth Pact, for example, with more provisions for economic policy surveillance and cooperation.
But this approach has no answer to the fundamental question: What if the framework does not work?
So long as EU leaders cannot answer that question, financial markets will continue to harbor doubts about the euro’s long-term stability.
The eurozone cannot stabilize in political and economic terms without a solid framework for crisis resolution and an ability to deal with sovereign default by a member state. The view that member states cannot be allowed to fail logically implies that a political or at least a fiscal union must underpin the euro.
This is the choice that European leaders now confront: a radical step forward toward political or policy integration, or a clear framework to deal with the consequences of a member country’s failure to abide by the fundamental rules of the monetary union.
No amount of money will allow European leaders to fudge this issue.
Are the Saudis Fanatics?
Terrorist attacks in Saudi Arabia have led many to question not only the ruling House of Saud's prospects for survival, but also whether the kingdom is fundamentally dysfunctional and destructive.
Somehow, it seems, Saudi society has produced a stream of violent fanaticism that draws its inspiration from extreme religious orthodoxy.
The fact that 15 of the 19 hijackers in the September 11, 2001, attacks on the United States were Saudis crystallized a long-held view of the kingdom as a bastion of authoritarianism and intolerance.
In some respects, this perception is accurate, but it cannot be applied to the broad Saudi public.
On the contrary, it would be a grave mistake to assume that fanatical Islamism fully defines Saudi attitudes toward religion.
Between 2001 and 2003, I was part of a team that undertook an extensive survey of values in Saudi Arabia, Egypt, Iran, and Jordan.
Our results provide a surprisingly nuanced picture of Saudi attitudes.
Compared to respondents in the other Middle Eastern countries, Saudis were less religious overall, and their attitudes toward democracy and arranged marriage also indicate a moderate undercurrent.
To be sure, in all four countries, religiosity is widespread, with more than 90% of respondents collectively reporting that they believe in God, in life after death, and in heaven and hell.
But the Saudis appear to be less religious than their fellow Muslims.
Sixty-two percent of Saudis described themselves as religious, compared with 82% of Iranians, 85% of Jordanians, and 98% of Egyptians.
Americans also appear to be far more religious than Saudis, with 81% describing themselves that way.
Some of this variation may be explained by cross-national differences regarding what it means to be religious.
For example, Americans may define religiosity differently than Middle Easterners, with perhaps a weaker attachment to religious beliefs than is true in Islamic countries.
This might also account in part for the differences between Muslim countries.
But the gap in self-defined religiosity between Saudis, on the one hand, and Iranians, Jordanians, and Egyptians, on the other, is so great that it challenges the prevalent perception of Saudi Arabia as a highly conservative and religious society.
Indeed, actions speak louder than words: only 28% of Saudis said that they participate in weekly religious services, compared to 27% of Iranians, 44% of Jordanians, 42% of Egyptians, and 45% of Americans.
These findings, while running contrary to popular perceptions of Saudi culture, are less startling than they appear.
Sociologists of religion have long argued that in a monolithic religious environment, or when religious institutions are closely tied to the state, the overall religiosity of the public declines.
It makes sense to think that when state authorities enforce strict codes of behavior, people tend to rebel and move away from officially sanctioned religious institutions.
Little wonder, then, that Egyptians and Jordanians, who live in countries where the state does not enforce piety, are more religious than Iranians or Saudis, who must cope with local "virtue" police backed by the state.
Even on marriage, many Saudis expressed surprisingly liberal views.
Respondents were nearly evenly split on the question of arranged marriages, with half supporting the idea that marriage should be based on parental consent, while 48% preferred love as the basis of matrimony.
Given entrenched gender segregation and paternal dominance, this finding appears to reveal a strong desire for greater individual choice in what has traditionally been a family-driven decision.
Finally, the Saudis turn out to be strong supporters of democracy, once again contradicting a popular image of Saudi conservatism.
Of the Saudis polled, 58% considered democracy the best form of government, 23% disagreed, and 18% did not express an opinion.
Majority support for democracy in a country with no prior secular and nationalist history seems counter-intuitive.
In fact, support for democracy corresponds with a number of other liberal attitudes that we found in Saudi Arabia.
Supporters of democracy tend to be less religious, more secular, more tolerant of others, more critical of public-sector performance, and more concerned with Western cultural invasion.
Beyond the survey data, history has shown that liberal ideas become more popular when a despotic monarch governs people in alliance with a religious establishment.
A strong current of liberalism appeared in the late nineteenth century in Ottoman Syria in response to the religious despotism of Sultan Abdulhamid.
At the same time, an anti-clerical, secular movement on behalf of constitutionalism appeared in Iran - a reaction to the absolutist alliance between the Quajar Shahs and the religious establishment.
In view of the similarities between those historical precedents and current conditions in Saudi Arabia, we ought not to rule out the possibility of reform.
Now survey data, too, suggest that Saudis may well begin demanding a more transparent politics and a less interventionist religion.
A Return to Reason
COPENHAGEN – Common sense was an early loser in the scorching battle over the reality of man-made global warming.
For nearly 20 years, one group of activists argued – in the face of ever-mounting evidence – that global warming was a fabrication.
Their opponents, meanwhile, exaggerated the phenomenon’s likely impact – and, as a consequence, dogmatically fixated on drastic, short-term carbon cuts as the only solution, despite overwhelming evidence that such cuts would be cripplingly expensive and woefully ineffective.
This scientific pie fight, characterized by juvenile name-calling, ignoble tactics, and intellectual intransigence on both sides, not only left the public confused and scared; it undermined the efforts of the most important organizations working on advancing the science of climate change.
Almost inevitably, at international summits from Kyoto to Copenhagen, governments failed to take any meaningful action on global warming.
Fortunately, there finally seems to be a growing number of influential scientists, economists, and politicians who represent a more sensible approach to the issue.
As I argued in my 2007 book Cool It, the most rational response to global warming is to make alternative energy technologies so cheap that the whole world can afford them.
In broad strokes, this requires a deliberate and significant boost to research and development spending.
Based on recent work by Isabel Galiana and Chris Green of McGill University, I advocate expenditure totaling around 0.2% of global GDP – roughly $100 billion a year.
Of course, no fix to global warming will work overnight.
So we need to focus more on adapting to the effects of global warming – for example, by stepping up efforts to cope with inland flooding and the urban “heat island” effect.
At the same time, we should explore the practicality of climate engineering, which we may need to buy more time for a smooth transition away from fossil fuels.
Acknowledging that man-made climate change is real, but arguing that carbon cuts are not the answer, amounts to staking out a middle ground in the global warming debate – which means being attacked from both sides.
For so-called “alarmists,” pointing out what’s wrong with drastic carbon cuts is somehow tantamount to denying the reality of climate change, while so-called “deniers” lambast anyone who accepts the scientific evidence supporting this “mythical” problem.
Nevertheless, there are encouraging signs that the minority of sensible voices in this debate are beginning to get the attention they deserve.
In mid-2009, as part of a project by the Copenhagen Consensus Center to assess different responses to global warming, Green and Galiana performed a cost-benefit analysis of R&amp;D spending on green technologies.
Green, a long-time proponent of a technology-led response to global warming, demonstrated the effectiveness of a policy of government investment in R&amp;D aimed at developing new low-carbon technologies, making current technologies cheaper and more effective, and expanding energy-related infrastructure such as smart grids. As Green and Galiana bluntly noted, “No approach to climate stabilization will work without an energy technology revolution.”
Another academic who has advocated a smarter response to global warming is Roger Pielke, Jr. of the University of Colorado, the author of this year’s must-read global-warming book The Climate Fix.
Along with Green, Pielke was one of 14 noted academics who co-wrote February’s “Hartwell Paper,” commissioned by the London School of Economics and the University of Oxford.
The paper made the case for developing alternatives to fossil fuels, ensuring that economic development doesn’t wreak environmental havoc, and recognizing the importance of adaptation to climate change.
In the US, we witnessed an equally promising development in the climate debate just last month, when the conservative American Enterprise Institute, the liberal Brookings Institution, and the centrist Breakthrough Institute teamed up to publish a report that called for revamping America’s energy system with the aim of making clean energy cheap.
Entitled “Post-Partisan Power,” the report comprehensively and convincingly argues that the US government should invest roughly $25 billion per year (about 0.2% of America’s GDP) in low-carbon military procurement, R&amp;D, and a new network of university-private sector innovation hubs to create an “energy revolution.”
This sensible proposal predictably drew fire from committed “alarmists” and “deniers.”
But, promisingly – and surprisingly, given the somewhat toxic state of US politics – it attracted broad support and intelligent commentary from many mainstream pundits.
Adding to the swell of voices, November will see the documentary film based on my book ‘Cool It’ released in the US.
It is too early to suggest that politicians might make real progress toward implementing genuinely effective policies on climate change.
But, given the dearth of common sense in recent years, the mere fact that a growing chorus of reasonable voices can now be heard is nothing short of miraculous.
Are US Middle-Class Incomes Really Stagnating?
CAMBRIDGE – The challenge of raising the incomes of middle-class families has emerged as an important focus of the presidential election campaign in the United States.
Everyone agrees that incomes at the top have surged ahead in recent decades, helped by soaring rewards for those with a high-tech education and rising share prices.
And there is general support for improving programs – such as food stamps and means-tested retiree benefits – that help those who would otherwise be poor.
But the public debate is largely about how to help the more numerous (and politically more important) middle class.
Here, much can be done by improving existing government programs: expanding market-relevant training, increasing opportunities for married women to join or rejoin the labor force, reducing the penalties in Social Security rules for continued employment by older workers, and changing tax rules in ways that will increase productivity and wages.
But, while strengthening such programs should be a high priority, we should not lose sight of how well middle-income families have actually done over the past few decades.
Unfortunately, the political debate is distorted by misleading statistics that grossly understate these gains.
For example, it is frequently said that the average household income has risen only slightly, or not at all, for the past few decades.
Some US Census figures seem to support that conclusion.
But more accurate government statistics imply that the real incomes of those at the middle of the income distribution have increased about 50% since 1980.
And a more appropriate adjustment for changes in the cost of living implies a substantially greater gain.
The US Census Bureau estimates the money income that households receive from all sources and identifies the income level that divides the top and bottom halves of the distribution.
This is the median household income.
To compare median household incomes over time, the authorities divide these annual dollar values by the consumer price index to create annual real median household incomes.
The resulting numbers imply that the cumulative increase from 1984 through 2013 was less than 10%, equivalent to less than 0.3% per year.
Any adult who was alive in the US during these three decades realizes that this number grossly understates the gains of the typical household.
One indication that something is wrong with this figure is that the government also estimates that real hourly compensation of employees in the non-farm business sector rose 39% from 1985 to 2015.
The official Census estimate suffers from three important problems.
For starters, it fails to recognize the changing composition of the population; the household of today is quite different from the household of 30 years ago.
Moreover, the Census Bureau’s estimate of income is too narrow, given that middle-income families have received increasing government transfers while benefiting from lower income-tax rates.
Finally, the price index used by the Census Bureau fails to capture the important contributions of new products and product improvements to Americans’ standard of living.
Consider first the changing nature of households.
From 1980 to 2010, the share of “households” that consisted of just a single man or woman rose from 26% to 33%, while the share that contained married couples declined from 60% to 50%.
When the nonpartisan Congressional Budget Office (CBO) conducted a detailed study of changes in household incomes from 1979 to 2011, it expanded the definition of income to include near-cash benefits like food stamps and in-kind benefits like health care.
It also subtracted federal taxes, which fell from 19% of pretax income for middle-income households in 1980 to just 11.5% in 2010.
To convert annual incomes to real incomes, the CBO used the price deflator for consumer expenditures, which many believe is better for this purpose than the consumer price index.
The CBO also presented a separate analysis that adjusted for household size.
With the traditional definition of money income, the CBO found that real median household income rose by just 15% from 1980 to 2010, similar to the Census Bureau’s estimate.
But when they expanded the definition of income to include benefits and subtracted taxes, they found that the median household’s real income rose by 45%.
Adjusting for household size boosted this gain to 53%.
And, again, even this more substantial rise probably represents a substantial underestimate of the increase in the real standard of living.
The authorities arrive at their estimates by converting dollar incomes into a measure of real income by using a price index that reflects the changes in the prices of existing goods and services.
But that price index does not reflect new products or improvements to existing goods and services.
Thus, if everyone’s money incomes rose by 2% from one year to the next, while the prices of all goods and services also rose by 2%, the official calculation would show no change in real incomes, even if new products and important quality improvements contributed to our wellbeing.
Indeed, the US government does not count the value created by Internet services like Google and Facebook as income at all, because these services are not purchased.
No one knows how much such product innovations and improvements have added to our wellbeing.
But if the gains have been worth just 1% a year, over the past 30 years that would cumulate to a gain of 35%.
And combining that with the CBO estimate of a gain of about 50% would imply that the real income of the median household is up nearly 2.5% a year over the past 30 years.
So the US middle class has been doing much better than the statistical pessimists assert.
And with better policies, these households can do even better in the future.
Are We Five Years Wiser?
As the fifth anniversary of the September 11, 2001, attacks on the United States by al-Qaeda approaches, we should take the opportunity to assess the results of the response by the US and the international community.
The attacks and the response to them have obviously brought about a sea change in international relations, but it would be difficult to argue that further atrocities have become less likely as a result.
Why are we no more secure than we were five years ago?
Within a week of the attacks, President George W. Bush declared a “war on terrorism.”
The metaphor of war has the singular advantage that it clearly and strongly evokes the intensity of the counterattack that was called for.
Moreover, the metaphor of war constitutes an implicit appeal to intense mobilization, not only by a country that comes under attack, but also by its friends and allies.
Naturally, no one questions America’s right to defend itself.
The legitimacy of a violent counterattack has never been in doubt.
But the war metaphor also carries inevitable connotations that, when applied to terrorism, are misleading and counterproductive.
Whenever war is invoked, it implies a fight against nations, peoples, or states.
It implies that whole territories and the populations living there are to be considered hostile.
War implies armies and command structures that can be recognized, if not clearly known; in any case, war entails a military confrontation with an identifiable adversary .
On all of these points, the concept of war, to paraphrase US Defense Secretary Donald Rumsfeld, is not helpful.
Even if the scale of the September 11 attack was of such a dimension that only the American army seemed able to face the challenge, in technical terms dealing with a threat that is extra-national rather than international is a matter of police techniques, not military tactics.
The negative consequences of this mistaken vision very quickly became apparent.
It is now widely known that the US government, perhaps partly unconsciously, embraced a deeply distorted image of al-Qaeda that portrayed it as a hierarchical organization with a seamless command structure – the prototype of a foe that the American army could attack and destroy.
But al-Qaeda – the word means “the base” or “the camp,” that is, nothing more or less than a point of gathering and training – is more like a blurred sphere of influence, comprising individuals and small local cells that act on their own initiative and cooperate very rarely, and only for large-scale operations.
It has not been proved that the attacks in London, Madrid, or Bali in the years since the September 11 plot, or the attack on America’s warship the USS Cole in 2000, reflected the existence of a “center” that coordinated the operations or gave orders to carry them out.
It is also wrong to conflate Islamic terrorism with that of the Basque ETA, Sri Lanka’s Tamil Tigers, or the Irish Republican Army.
Whereas these groups have a territorial base and are preoccupied with national aims, Islamic terrorism appears to be the work of a very small number of individuals who seek to avenge the centuries-long “humiliation” of the Muslim world, brought about by colonization, absence of economic development, and political weakness.
The goal of Islamic terrorists is nothing less than the destruction of the “hegemonic” Western world, despite most Muslim nations’ desire to live in peace within the international community and to cooperate in crafting effective development strategies.
The only viable strategy for confronting the threat of Islamic terrorism was, and continues to be, a search for agreement among Muslims, and among the leaders of Muslim nations, on the forms of mutual cooperation, including police cooperation, that are needed to isolate, weaken, or destroy the militants in their midst.
This is a long and difficult enterprise, but there remains no alternative.
Instead, the war metaphor continues to define the US response and that of several of America’s allies.
The attraction of this metaphor may be attributable to the excessive trust that Americans place not only in their army, which is understandable, but in force in general, which is much less understandable in the case of an intelligent people.
Whatever the case, casting the fight against terrorism as a war has led American policymakers to multiply violent military operations that have absolutely no chance of winning hearts and minds in the Muslim world.
Quite the contrary.
Afghanistan was the only case where a military response was understandable: its government had, after all, given al-Qaeda a temporary territorial home.
But to implicate Iraq, which had nothing to do with al-Qaeda or the September 11 attacks, was a huge mistake, one that has strengthened Islamic extremists and has probably helped them recruit terrorists.
Moreover, the US response has strengthened Israel’s belief in the effectiveness of military methods, leading to the recent war in Lebanon and the ongoing invasion of Gaza.
Powerless, the international community does nothing.
The rigidity and brutality of America’s behavior – resulting in many times more civilian deaths than occurred on September 11 – have blocked any useful intervention by countries such as Algeria, Morocco, Jordan, Saudi Arabia, or the United Arab Emirates.
Likewise, the appeal of war has ruled out the prospect of serious negotiations between Israel, Syria, and Lebanon.
By attacking one Muslim country after another, the US and its allies have created the impression that Islam itself is the enemy, leading inexorably to the “clash of civilizations” that America says it wants to avoid.
But America’s strategy has failed.
Force cannot accomplish everything.
The international community must say clearly that Islam is not our enemy and that terrorism must be fought in other ways.
Muslim political leaders, for their part, should declare just as openly that terrorism is not their choice.
If both sides can stifle their murderous deviances, the hope of cultural and political reconciliation will be reborn.
Are We Running Out of Oil (Again)?
Oil prices are now running well above $50 a barrel, partly owing to short-run supply shocks, such as the Iraq conflict, Nigerian labor disputes, the conflict between Yukos Oil and the Russian government, and Florida's recent hurricanes.
Oil prices may fall once these shocks dissipate, but speculative effects could keep them relatively high, weakening the world economy and depressing stock markets.
Even a temporary spike in oil prices can have long-term effects because of the social reactions they provoke. High oil prices fuel public discussion about the future of oil prices.
The outcome of any public discussion can never be known with certainty, but chances are that it will amplify stories that imply risks of higher oil prices.
Experts may say that short-run supply factors caused the recent price increases, but the price increases will nonetheless lend credibility to scarier long-term stories.
The scary story that is being amplified now concerns the developing world, notably China and India, where rapid economic growth - and no restrictions on emissions under the Kyoto Protocol - are seen as creating insatiable demands for oil.
The story's premise is that the world will run out of oil faster than we thought, as these billions of people chase their dreams of big houses and sport utility vehicles.
Is this plausible?
Certainly, China, India, and some other emerging countries are developing fast.
But experts find it difficult to specify the long-run implications of this for the energy market.
Too many factors remain fuzzy: the rate of growth of these countries' energy demand, discoveries of new oil reserves, developments in oil-saving technology, and the ultimate replacement of oil by other energy sources.
But what matters for oil prices now and in the foreseeable future is the perception of the story, not the ambiguities behind it.
If there is a perception that prices will be higher in the future, then prices will tend to be higher today.
That is how markets work.
If it is generally thought that oil prices will be higher in the future, owners of oil reserves will tend to postpone costly investments in exploration and expansion of production capacity, and they may pump oil at below capacity.
They would rather sell their oil and invest later, when prices are higher, so they restrain increases in supply.
Expectations become self-fulfilling, oil prices rise, a speculative bubble is born.
But if owners of oil reserves think that prices will fall in the long run, they gain an incentive to explore for oil and expand production now in order to sell as much oil as possible before the fall.
The resulting supply surge drives down prices, reinforces expectations of further declines, and produces the inverse of a speculative bubble: a collapse in prices.
All of this may seem obvious, but we tend not to think of oil prices as being determined by expectations of future prices.
For example, in January 1974, when the first world oil crisis began, oil prices doubled in just days.
The immediate cause was believed to have been Israel's stunning success in the Yom Kippur War, which led Arab oil producers to retaliate by choking off output.
The second crisis, in 1979, is usually attributed to supply disruptions from the Persian Gulf following the Islamic revolution in Iran and the subsequent start of the Iran-Iraq war.
Why, then, did real inflation-corrected oil prices remain at or above their 1974 levels until 1986?
Speculative pressures are likely to have been at work, influencing the decisions of OPEC and many others.
Although changes in market psychology are difficult to understand, the broad concerns that underlie such episodes of irrational exuberance are almost always clear.
For example, in 1972, scientists at the Massachusetts Institute of Technology, including computer pioneer Jay Forrester, published The Limits to Growth .
The book launched an international debate on whether the world would soon face immense economic problems due to shortages of oil and other natural resources - problems that seemed to be presaged by OPEC's production cuts eighteen months later.
The second crisis was immediately preceded by the accident at the Three-Mile Island nuclear reactor in Pennsylvania in March 1979, which reinvigorated the anti-nuclear movement.
With nuclear power - regarded as the main technological bulwark against depletion of the world's oil supplies - suddenly suspect, oil prices doubled again by the year's end.
After 1979, fears about limits to growth and nuclear power ebbed.
Oil prices gradually fell, and the stock market began its long climb towards its peak in 2000.
But the current rise in oil prices shows that people are still eager to embrace "running out of oil" stories - this time focused on China and India - even when short-run factors are to blame.
Indeed, the International Energy Agency noted in September that the usual relationship between oil prices and inventory levels has broken down, with prices much higher than the usual relationship would suggest.
The IEA's report calls this breakdown evidence of a "structural shift in the market."
But the same pattern followed the 1973-4 and 1979-80 oil crises, when prices dropped from their highest peaks, but stayed quite high for years, representing a drag on the stock market, the housing market, and the world economy.
Let's hope that the effects of the present spike will be more short-lived.
But don't hold your breath.
Are We Still Evolving?
NEW HAVEN – Many public-policy decisions are based on implicit assumptions about “human nature,” and it is currently popular to speculate about how evolution might have shaped human behavior and psychology.
But this raises some important questions: are humans continuing to evolve –&#160;and, if so, is our basic biological nature changing – or has modern culture stopped evolution?
For some traits, we do not have to speculate – we can measure and compare on the basis of studies covering thousands of individuals over several generations.
Such studies have not yet been done on most of the traits where speculation is popular, but they have been done on some traits of medical interest.
What have we learned?
Scientists are taking two approaches.
In one, they sequence the DNA of particular genes in many individuals with or without some determined health condition and look for differences between the two groups.
This genetic approach measures effects that have accumulated over hundreds to thousands of generations, and the message is clear: humans have evolved in these respects fairly recently, some in one direction, some in another, depending on their environment and other conditions encountered.
From this approach, we have learned, for example, that the ability to digest milk as adults evolved within the last 10,000 years – and several times – in cultures that domesticated sheep, goats, or cattle.
Similar studies have taught us that sensitivity to alcohol consumption and resistance to diseases like malaria and leprosy also evolved within the last several thousand years.
Some scientists, myself included, have taken a different approach.
Instead of looking for changes in genes that take many generations to accumulate until they can be detected, we have measured natural selection directly.
This method can reveal selection in action, working over periods of time as short as one generation – so that it can answer the question of whether modern culture has stopped evolution.
The message of this approach is also clear: natural selection continues to operate in modern cultures.
Whether it will operate consistently enough for a long enough time to produce significant genetic change can be answered only by future generations.
Nevertheless, it is interesting to see in what direction natural selection is starting to shape us.
Some of the answers are surprising.
We measured natural selection operating on women in Framingham, Massachusetts, where a long-term medical study on heart disease produced the data that we used.
The women were born between 1892 and 1956.
We found significant selection and projected that if it continued for ten generations, the women would evolve to be about two centimeters shorter and have their first child about five months earlier.
This is a surprising result, because women in developed countries have become taller thanks to better nutrition, and are having children later in life for many reasons, some of them cultural.
So what is going on here?
Three things:
First, we know that giving birth for the first time when younger carries a cost in increased infant mortality, but modern medicine and hygiene have strikingly reduced infant mortality, reducing the cost of younger age at first birth.
We therefore expect a shift toward earlier reproduction, because the costs previously associated with doing so have disappeared – exactly what we found in Framingham.
And we expect those younger women to be shorter simply because they have had less time to grow.
In five other cases, scientists found women in developed countries maturing earlier, in two of them at smaller size (in the other three cases, size was not measured).
It is too early to say that this is a general trend, but right now, all signs point that way.
Second, we measured the effects of natural selection by noting that women who were shorter and first gave birth when younger had more children.
But genes are only one of many factors that influence height and age at first birth.
Personal decisions, nutrition, income level, education, and religious affiliation all enter the mix.
When we estimated how much of the variation among individuals could be attributed to biology, the answer was less than 5%.
That left 95% of the variation to be explained by the effects of culture and individual decisions.
But, while the effects of biology on the traits that we measured are relatively small for humans living in complex modern cultures, even small effects, when repeated consistently, will accumulate.
Third, traits like these are always the result of interactions between genes and environment.
A woman could have genes that would tend to make her taller than average but end up shorter than average if she had been poorly nourished as a child.&#160;
If evolution took its steady course and changed the genetic basis of height and age at first birth, we might not see women ten generations later who were shorter and matured earlier, for the effects of nutrition and culture could more than compensate for the genetic change.
As a colleague of mine likes to put it, one good school-lunch program could be enough to obscure the biological effects.
Even when we focus on a simple physical trait like height, natural selection in humans turns out to be a multifaceted and nuanced process.
Similar studies on human behavior and psychology, where causation is more complex, remain beyond our grasp.
In such cases, silence may be wiser than speculation.
Are We Working Ourselves to Death?
Work can give structure and meaning to life.
But working conditions can also trigger or accelerate the symptoms of ill health - physical and mental - that feed back into our productivity and earning capacity, as well as into our social and family relationships.
In fact, an alarmingly large number of people appear to be at risk.
Of the EU's 160 million-strong labour force, 56% report working at very high speeds, and 60% to tight deadlines.
More than a third have no influence on task order, and 40% perform monotonous tasks.
This probably contributes to a host of health-related problems: 15% of the workforce complain of headaches, 33% of backache, 23% of fatigue, and 23% of neck and shoulder pains, plus a host of other illnesses, including life-threatening ones.
Sustained work-related stress is also an important determinant of depressive disorders - the fourth-largest cause of disease world-wide.
They are expected to rank second by 2020, behind only heart disease.
In the EU, the cost of these and related mental health problems is estimated to average 3-4% of GNP, amounting to approximately 265 billion euros annually.
Moreover, sustained work-related stress is likely to contribute to `metabolic syndrome,' a cluster of pathogenic mechanisms characterised by an accumulation of abdominal fat, a decrease in sensitivity to insulin, increased levels of cholesterol, and heightened blood pressure, all related to the onset of heart disease and diabetes.
Of course, working conditions may be experienced as threatening even when objectively they are not, or trivial symptoms may be interpreted as manifestations of serious illness.
But stress is worrisome precisely because even misinterpretations can add to, or result in, a wide variety of health problems, including heart disease, stroke, cancer, musculoskeletal and gastrointestinal diseases, anxiety and depression, accidents, and suicides.
Briefly stress consists of a pattern of built-in processes preparing the human organism for physical activity in response to demands and influences that tax its capacity to adapt.
Activation of our "fight or flight" mechanism is an appropriate adaptive response when facing a wolf pack, but not so when struggling to adjust to rotating shifts, monotonous and fragmented tasks, or over-demanding customers.
If sustained, stress is often maladaptive and eventually disease provoking.
Stress-related paths to pathologies take a wide variety of forms.
They can be emotional (anxiety, depression, hypochondria, and alienation), cognitive (loss of concentration or recall, inability to learn new things, be creative, make decisions), behavioural (abuse of drugs, alcohol, and tobacco, refusal to seek or accept treatment), or physiological (neuroendocrine and immunological dysfunction).
To identify, prevent, and counteract the causes and consequences of work-related stress, we need to monitor job content, working conditions, terms of employment, social relations at work, health, well-being and productivity.
The first step is to identify the incidence, prevalence, severity, and trends of work-related stress and its causes and health consequences.
Are they likely to contribute to stress-related ill health?
Can they be changed?
Are such changes acceptable to workers and employers?
Wherever the answers are affirmative, an integrated package of organisational changes should be considered.
Such changes are likely to include the following areas:
Work schedule. Design labor time to avoid conflict with demands and responsibilities unrelated to the job;
Participation/control. Allow workers to take part in decisions or actions affecting their jobs;
Workload. Ensure that workers have enough time to complete assigned tasks, and allow for recovery from especially demanding physical or mental tasks;
Content. Design tasks to provide meaning, stimulation, a sense of completeness, and an opportunity to use skills;
Roles. Define work roles and responsibilities clearly;
Social environment. Ensure a working atmosphere free of all forms of invidious discrimination and harassment;
Future. Avoid ambiguity in matters of job security and career development; promote life-long learning and employability.
Although it is likely, the short- and long-term outcomes of such changes may not always suffice in the fight against work-related stress.
They need therefore to be evaluated in terms of exposures and reactions to stress, the incidence and prevalence of ill health, and the quality and quantity of goods or services.
Many companies world-wide recognize that success requires satisfying the three elements of sustainable development: financial, environmental, and social.
Failure to do so leads, over time, to terminal organizational weakness, owing to lost credibility amongst employees, shareholders, customers, and communities.
This has numerous implications for relations with employees.
Ensuring long-term economic growth and social cohesion requires a commitment to health and safety, a better balance between work, family and leisure, lifelong learning, greater workforce diversity, gender-blind pay and career prospects, and profit-sharing and equity-ownership schemes.
These practices can have a positive impact on profits through increased productivity, lower staff turnover, greater amenability to change, more innovation, and better, more reliable output.
Indeed, companies often have an interest in going beyond minimum legal requirements: peer respect and a good reputation as an employer are marketable assets.
The challenge for science is to find out what to do, for whom, and how.
The challenge to workers, employers, governments, and communities is to translate what we now know into coordinated and sustainable programs.
Argentina’s Economic Big Bang
FRANKFURT – Last week, the government of newly elected Argentine President Mauricio Macri launched a bold plan to revitalize a bruised and beleaguered economy plagued by high inflation.
At a time of daunting crisis conditions, one should not underestimate the importance of this move not just for Argentina, but also for other countries, where leaders are watching closely for clues about how to deal with their own economic woes.
Thanks to years of economic mismanagement, Argentina’s economy has been badly underperforming for decades.
Previous governments sought to avoid difficult policy choices and obfuscate fundamental issues by implementing inefficient controls that grossly misallocated resources and undermined Argentina’s ability to generate the foreign-exchange earnings needed to cover its import bill, resulting in domestic shortages.
The recent drop in commodity prices has exacerbated the situation, depleting what little growth dynamism the economy had left, while fueling inflation, deepening poverty, and spreading economic insecurity and financial instability.
In theory, governments in such a situation have five basic options to contain crisis conditions, pending the effects of measures to reinvigorate growth and employment engines.
· Run down the financial reserves and wealth that were accumulated when the economy was doing better.
· Borrow from foreign and domestic lenders.
· Cut public-sector spending directly, while creating incentives to induce lower private-sector expenditure.
· Generate revenues through higher taxes and fees, and earn more from abroad.
· Use the price mechanism to accelerate adjustments throughout the economy, as well as in trade and financial interactions with other countries.
Through careful design and sequencing, these five measures can help not only to deal with immediate economic and financial problems, but also to create the conditions for higher growth, job creation, and financial stability in the longer term.
In this manner, they can contain the spread of economic hardship among the population, protect the most vulnerable segments, and put future generations on a better footing.
In practice, however, governments often face complications that undermine effective implementation of these measures.
If policymakers are not careful, two problems, in particular, can reinforce each other, potentially pushing the economy over the precipice.
The first problem arises when specific factors, real or perceived, block some options from the adjustment menu.
Some measures may already have been exhausted: the country may not have any wealth or reserves left to tap, and there may be a shortage of willing lenders.
Other measures, such as fiscal adjustment, must be implemented very carefully, in order to avoid torpedoing the growth objective.
The second problem is timing, with governments struggling to ensure that the measures take effect in the right sequence.
Effective implementation requires understanding key features of economic and financial interactions, including not just feedback effects, but also the behavioral aspects of private-sector responses.
And all of this must be closely coordinated with the pursuit of supply-side reforms that promote robust, durable, and inclusive growth.
Here is where the Macri government’s approach is an historical exception.
Macri took over the presidency with a bang, launching an audacious – and highly risky – strategy that places aggressive price liberalization and the removal of quantitative controls front and center, ahead of the five measures relating to demand management and financial assistance.
Already, most export taxes and currency controls have been scrapped, income taxes have been cut, and the exchange rate has been freed up, allowing for an immediate 30% depreciation of the peso.
Historically, few governments have pursued this type of sequencing, much less with such fervor; indeed, most governments have hesitated, especially when it comes to full currency liberalization.
When governments have taken similar steps, they usually have done so after – or at least alongside – the provision of financial injections and efforts to restrain demand.
The reason is clear: by taking time to set the stage for liberalization, governments hoped to limit the initial spike in price inflation, thereby avoiding a wage-price spiral and curbing capital flight.
They worried that, if these problems emerged, they would derail reform measures and erode the public support needed to press on.
To revive the Argentine economy in a durable and inclusive manner, Macri’s government needs to act fast to mobilize sizeable external financial assistance, generate additional domestic resources, and implement deeper structural reforms.
If it does, Argentina’s bold economic strategy will become a model for other countries, both now and in the future.
But if the approach falters – whether because of incorrect sequencing or a surge of popular dissatisfaction – other countries will become even more hesitant to lift controls and fully liberalize their currencies.
Argentina’s Bumpy Ride
SANTIAGO – “Fasten your seat belts, because it should be a bumpy ride,” the captain warned from the cockpit.
We were about to enter Argentine airspace.
Investors looking to do business in Argentina have long been issued similar warnings.
This is the country that scholars study when they want to understand financial crises.
The country’s largest such crisis, in 2001, brought down the local banking system and caused the Argentine government to default on its debts.
The economy contracted by a whopping 18%, and the unemployment rate peaked above 22%.
After a period of calm that has now lasted a decade, dire economic warnings are back. Forecasts for the world economy are turning pessimistic, and economists in export-dependent Argentina are finding much to worry about.
Itau, Latin America’s largest bank, is predicting GDP growth in Argentina of only 3.2% next year, down sharply from 6% in 2011.
Inflation is another concern.
With official figures widely discredited, private analysts estimate that consumer prices are rising at an annual rate of 25% or more.
Those are careful estimates by serious economists.
But, then again, one should take all economic forecasts about Argentina with a grain of salt.
In the decade since the last crisis, Argentine policymakers have broken almost every rule in the economic-policy playbook.
Again and again, local and international economists have issued dire warnings about what would happen if it persisted in its heterodoxy.
And yet Argentina has managed to grow fast, doubling per capita income since 2002.
Energy policy is a perfect example of a wrongheaded strategy.
The Argentine government fixed gas prices, despite ongoing inflation.
Gas became artificially cheap, consumers seldom bothered to turn the thermostat down, and producers stopped investing.
As a result Argentina, once a thriving gas exporter, had to seek imports to overcome domestic shortages.
What saved Argentina over the last decade were highly favorable external conditions: sky-high global commodity prices and technological innovations that greatly increased farm yields.
Neighboring Brazil helped by undergoing a boom of its own, which pumped up demand for a wide range of Argentine products.
With rising tax revenues and the burden of debt gone after the default a decade ago, the government went on a spending spree: real public expenditure grew at double-digit rates most years since 2002.
At the same time, the central bank kept interest rates low, so that the inflation-adjusted cost of loans is zero or negative.
In this environment, Argentine consumers naturally also went on a spending spree, and corporate profits rose accordingly.
Not long ago, I met with a group of foreign investors in Argentina.
They owned everything from paper mills to department stores and supermarket chains.
After they finished trading stories of endless red tape and arbitrary government decisions, I asked why they kept investing in Argentina. “Because we make a lot of money,” was the unanimous answer.
The question making the rounds in Argentina nowadays is whether this period of plenty is coming to an end.
You would not feel any such anxiety in Buenos Aires shopping malls, which are as crowded as ever.
Nor could you infer it from the behavior of voters, who seem poised to re-elect President Cristina Kirchner in October.
But the signs of economic deterioration are surely there.
With imports still growing strongly and commodity prices beginning to fall as a result of the world slowdown, Argentina’s large trade surplus is disappearing quickly.
Fearing a weaker peso, spooked investors demand dollars.
Capital is flowing out of the country, and official reserves are slowly being depleted.
To stem the outflow of dollars, the central bank may well be forced to raise interest rates.
That, plus the gloomy international outlook and a fiscal policy that will have to become less expansionary after the election, will slow the economy down.
A bumpy ride is acceptable as long as the landing is smooth.
Ensuring that outcome will be the number one job for a newly re-elected President Cristina Kirchner.
It will prove a difficult period at the controls.
The Vultures’ Victory
NEW YORK – A recent decision by a United States appeals court threatens to upend global sovereign-debt markets.
It may even lead to the US no longer being viewed as a good place to issue sovereign debt.
At the very least, it renders non-viable all debt restructurings under the standard debt contracts.
In the process, a basic principle of modern capitalism – that when debtors cannot pay back creditors, a fresh start is needed – has been overturned.
The trouble began a dozen years ago, when Argentina had no choice but to devalue its currency and default on its debt.
Under the existing regime, the country had been on a rapid downward spiral of the kind that has now become familiar in Greece and elsewhere in Europe.
Unemployment was soaring, and austerity, rather than restoring fiscal balance, simply exacerbated the economic downturn.
Devaluation and debt restructuring worked.
In subsequent years, until the global financial crisis erupted in 2008, Argentina’s annual GDP growth was 8% or higher, one of the fastest rates in the world.
Even former creditors benefited from this rebound.
In a highly innovative move, Argentina exchanged old debt for new debt – at about 30 cents on the dollar or a little more – plus a GDP-indexed bond.
The more Argentina grew, the more it paid to its former creditors.
Argentina’s interests and those of its creditors were thus aligned: both wanted growth.
It was the equivalent of a “Chapter 11” restructuring of American corporate debt, in which debt is swapped for equity, with bondholders becoming new shareholders.
Debt restructurings often entail conflicts among different claimants.
That is why, for domestic debt disputes, countries have bankruptcy laws and courts.
But there is no such mechanism to adjudicate international debt disputes.
Once upon a time, such contracts were enforced by armed intervention, as Mexico, Venezuela, Egypt, and a host of other countries learned at great cost in the nineteenth and early twentieth centuries.
After the Argentine crisis, President George W. Bush’s administration vetoed proposals to create a mechanism for sovereign-debt restructuring.
As a result, there is not even the pretense of attempting fair and efficient restructurings.
Poor countries are typically at a huge disadvantage in bargaining with big multinational lenders, which are usually backed by powerful home-country governments.
Often, debtor countries are squeezed so hard for payment that they are bankrupt again after a few years.
Economists applauded Argentina’s attempt to avoid this outcome through a deep restructuring accompanied by the GDP-linked bonds.
But a few “vulture” funds – most notoriously the hedge fund Elliott Management, headed by the billionaire Paul E. Singer – saw Argentina’s travails as an opportunity to make huge profits at the expense of the Argentine people.
They bought the old bonds at a fraction of their face value, and then used litigation to try to force Argentina to pay 100 cents on the dollar.
Americans have seen how financial firms put their own interests ahead of those of the country – and the world.
The vulture funds have raised greed to a new level.
Their litigation strategy took advantage of a standard contractual clause (called pari passu) intended to ensure that all claimants are treated equally.
Incredibly, the US Court of Appeals for the Second Circuit in New York decided that this meant that if Argentina paid in full what it owed those who had accepted debt restructuring, it had to pay in full what it owed to the vultures.
If this principle prevails, no one would ever accept debt restructuring.
There would never be a fresh start – with all of the unpleasant consequences that this implies.
In debt crises, blame tends to fall on the debtors. They borrowed too much.
But the creditors are equally to blame – they lent too much and imprudently.
Indeed, lenders are supposed to be experts on risk management and assessment, and in that sense, the onus should be on them.
The risk of default or debt restructuring induces creditors to be more careful in their lending decisions.
The repercussions of this miscarriage of justice may be felt for a long time.
After all, what developing country with its citizens’ long-term interests in mind will be prepared to issue bonds through the US financial system, when America’s courts – as so many other parts of its political system – seem to allow financial interests to trump the public interest?
Countries would be well advised not to include pari passu clauses in future debt contracts, at least without specifying more fully what is intended.
Such contracts should also include collective-action clauses, which make it impossible for vulture funds to hold up debt restructuring.
When a sufficient proportion of creditors agree to a restructuring plan (in the case of Argentina, the holders of more than 90% of the country’s debt did), the others can be forced to go along.
The fact that the International Monetary Fund, the US Department of Justice, and anti-poverty NGOs all joined in opposing the vulture funds is revealing.
But so, too, is the court’s decision, which evidently assigned little weight to their arguments.
For those in developing and emerging-market countries who harbor grievances against the advanced countries, there is now one more reason for discontent with a brand of globalization that has been managed to serve rich countries’ interests (especially their financial sectors’ interests).
In the aftermath of the global financial crisis, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System urged that we design an efficient and fair system for the restructuring of sovereign debt.
The US court’s tendentious, economically dangerous ruling shows why we need such a system now.
Argentina’s Energy Dilemma
BUENOS AIRES –&nbsp;The expropriation of nearly all of the Spanish company Repsol’s stake in Argentina’s energy producer YPF, announced in a vehement speech by President Cristina Fernández de Kirchner, has raised legal alarms worldwide.
In fact, the move will not resolve the country’s energy problems in the absence of enormous inflows of investment to the sector.
Repsol acquired complete control of YPF in 1999; in February 2008, it transferred part of its shares to the Petersen Group, which today holds 25%.
Repsol currently holds 57%, with the rest owned by stock-market investors.
The Argentine government intends to expropriate 51%, leaving Repsol with a 6% stake.
In the 2008 sale of shares, the two majority stockholders agreed to distribute at least 90% of future profits in cash.
That decision was intended to allow the Petersen Group to service the debts to banks, and to Repsol itself, that it incurred with its share purchase, for which it made no initial payment.
This is an extraordinarily high dividend in the world oil industry.
In the past decade, YPF’s reserves diminished significantly, along with those of most oil companies operating in Argentina, because investment in exploration was greatly reduced.
At the same time, natural gas accounts for 51% of energy consumption, compared to 32% for oil and barely 17% for coal, renewables, and hydroelectric and nuclear power.
Worldwide, gas accounts for barely a quarter of total energy consumption – for example, 27% in the United States and just 9% in neighboring Brazil.
Argentina has the world’s largest fleet of vehicles running on compressed natural gas; families use gas intensively; most electricity is generated with gas; and the petrochemical industry is based on it.
Of course, in a few other countries (Qatar, Algeria, the United Arab Emirates, Iran, and Russia), gas also accounts for more than half – or even more than 60% – of energy consumption.
But there is an enormous difference: all of these countries have reserves that will last another 70-100 years.
Argentina, by contrast, is a highly gas-dependent country with diminishing reserves – equivalent to less than eight years of production.
Covering this drop in reserves – more than half of gas reserves and a fifth of oil reserves have been consumed – with imports implies an annual cost of more than $300 billion.
Indeed, after two decades of cheap, abundant energy and exports of surplus output, a new cycle of expensive, scarce, and imported energy has begun, as oil production has fallen by one-third since 1998, and gas production by 15% since 2004.
Argentina’s greatest challenge today is to try to regain energy self-sufficiency through significant investment in exploration on land, as well as in the Atlantic Ocean.
At the same time, the country must modify its consumption model through greater reliance on hydroelectric, nuclear, and wind energy.
While there is great potential for new non-conventional resources, all of this is expensive, requiring annual investment of about 3% of GDP over the next five years.
It is very likely that, in the short term, growing imports of expensive liquid natural gas and other fuels will continue to exert pressure for change.
Last year, the external energy deficit was more than $3 billion, and this year it is expected to double.
The important question is whether the Argentine government’s decision to nationalize 51% of YPF’s shares is the best way to recover self-sufficiency in oil and gas production, and to attract the capital needed for exploration and development of conventional reserves.
Argentina has particularly high potential for production of non-conventional gas resources as well, given that it holds the world’s third-highest level of such reserves, after China and the United States.
But, as with the country’s conventional resources, these reserves will not produce themselves.
Argentina\u0027s Lessons
Argentina's collapse incited the largest default in history.
Pundits agree this is merely the latest in a string of IMF-led bailouts that squandered billions of dollars and failed to save the economies they were meant to help. The nature of that failure, however, is disputed.
Some claim that the IMF was too lenient; others that it was too tough.
Those who blame the IMF see the problem as self-inflicted through profligate and corrupt spending by Argentina.
Such attempts at blame-shifting are misguided: one can understand the default as the consequence of economic mistakes made over a decade.
Understanding what went wrong provides important lessons for the future.
The problems began with the hyperinflation of the 1980s.
To slash inflation, expectations needed to be changed; ``anchoring'' the currency to the dollar was supposed to do this.
This was a return to a variant of the old gold standard argument.
If inflation continued, the country's real exchange rate would appreciate, the demand for its exports would fall, unemployment would increase, and that would dampen wage and price pressures.
Market participants, knowing this, would realize that inflation would not be sustained.
So long as the commitment to the exchange rate system remained credible, so was the commitment to halt inflation.
If inflationary expectations were changed, then disinflation could occur without the costly unemployment.
This prescription worked for a time in a few countries, but was risky, as Argentina was to show.
The IMF encouraged this exchange rate system.
Now they are less enthusiastic, though Argentina, not the IMF, is paying the price.
The peg did lower inflation; but it did not promote sustained growth.
Argentina should have been encouraged to fix a more flexible exchange rate system, or at least an exchange rate more reflective of the country's trading patterns.
Other mistakes in Argentina's ``reform'' program also occurred.
Argentina was praised for allowing large foreign ownership of banks.
For a while this created a seemingly more stable banking system, but that system failed to lend to small and medium sized firms.
After the burst of growth that arrived with hyperinflation's end, growth slowed, partly because firms in the country couldn't get adequate finance.
Argentina's government recognized the problem, but was hit by numerous shocks beyond its control before it could act.
East Asia's crisis of 1997 provided the first hit.
Partly because of IMF mismanagement, this became a global financial crisis, raising interest rates for all emerging markets including Argentina.
Argentina's exchange rate system survived, but at a heavy price - the onset of double-digit unemployment.
Soon, high interest rates strained the country's budget.
Yet Argentina's debt to GDP ratio - even as it began to collapse - remained moderate, at around 45%, lower than Japan's.
But with 20% interest rates, 9% of the country's GDP would be spent annually on financing its debt.
The government pursued fiscal austerity, but not enough to make up for the vagaries of the market.
The global financial crisis that followed East Asia's crisis set off a series of big exchange rate adjustments.
The dollar, to which Argentina's peso was tied, increased sharply in value.
Meanwhile, Argentina's neighbor and Mercosur trading partner, Brazil, saw its currency depreciate - some say that it became significantly undervalued.
Wages and prices fell, but not enough to allow Argentina to compete effectively, especially since many of the agricultural goods which constitute Argentina's natural comparative advantages face high hurdles in entering the markets of rich countries.
Hardly had the world recovered from the 1997-1998 financial crisis when it slid into the 2000/2001 global slowdown, worsening Argentina's situation.
Here the IMF made its fatal mistake.
It encouraged a contractionary fiscal policy, the same mistake it had made in East Asia, and with the same disastrous consequence.
Fiscal austerity was supposed to restore confidence.
But the numbers in the IMF program were fiction; any economist would have predicted that contractionary policies incite slowdown, and that budget targets would not be met.
Needless to say, the IMF program did not fulfill its commitments.
Confidence is seldom restored as an economy goes into a deep recession and double-digit unemployment.
Perhaps a military dictator, like Chile's Pinochet, could suppress the social and political unrest that arises in such conditions.
But in Argentina's democracy, this was impossible.
In repeated visits to Argentina, I marveled at how long suffering the Argentineans were; to me, it is more a surprise that unrest took so long to manifest itself, not that street turmoil unseated Argentina's president.
Seven lessons must now be drawn:
1. In a world of volatile exchange rates, pegging a currency to one like the dollar is highly risky.
Argentina should have been encouraged to move off its exchange rate system years ago.
2. Globalization exposes a country to enormous shocks.
Countries must cope with those shocks - adjustments in exchange rates are part of the coping mechanism.
3. You ignore social and political contexts at your peril.
Any government that follows policies which leave large fractions of the population unemployed or underemployed is failing in its primary mission.
4. A single-minded focus on inflation - without a concern for unemployment or growth - is risky.
5. Growth requires financial institutions that lend to domestic firms.
Selling banks to foreign owners, without creating appropriate safeguards, may impede growth and stability.
6. One seldom restores economic strength - or confidence - with policies that force an economy into a deep recession.
For insisting on contractionary policies, the IMF bears its great culpability.
7. Better ways are needed to deal with situations akin to Argentina.
I argued for this during East Asia's crisis; the IMF argued against me, preferring its big-bail-out strategy.
Now the IMF belatedly recognizes that it should explore alternatives.
The IMF will work hard to shift blame - there will be allegations of corruption, and it will be said that Argentina did not pursue needed measures.
Of course, the country needed to undertake other reforms - but following the IMF's advice regarding contractionary fiscal policies made matters worse.
Argentina's crisis should remind us of the pressing need to reform the global financial system - and thorough reform of the IMF is where we must begin.
Argentina’s Monetary Mess
CAMBRIDGE: Efforts to make the world safe for investment bankers are underway once again.
The IMF is preparing a bailout estimated at $20 billion to keep Argentina from defaulting on loans to foreign investors.
As usual, investors will get repaid, while Argentina sinks deeper into crisis.
The story goes back decades.
Argentina was seriously mismanaged from the 1940s to the early 1990s.
Military and civilian governments alternated in irresponsible monetary and fiscal policies, and in trade protectionism that cut Argentina off from world markets.
That combination produced massive foreign debt, a low level of exports relative to the size of the economy, and high inflation.
In the early 1990s, President Carlos Menem and Finance Minister Domingo Cavallo took drastic actions, reducing budget deficits and ending protectionism.
To battle inflation, however, they resorted to a trick.
They fixed the exchange rate of the Argentina Peso at a value of one Peso per US dollar, and promised that the exchange rate would never change.
This system is known as a “currency board” arrangement.
Irrevocably fixing the exchange rate was at best a gamble, at worst a blunder.
The exchange rate is a safety valve: when an economy becomes uncompetitive – say, if international demand for its products declines, or domestic costs rise above other countries – a decline in the currency’s value can restore demand for the nation’s output, and so help preserve employment.
If the exchange rate is irrevocably fixed, that safety valve disappears.
The economy can remain uncompetitive for years, causing chronically high unemployment and slow growth.
At the start, Argentina’s gamble seemed to pay off.
Foreign investors, who understand little about macroeconomics and long-term growth, were delighted with Argentina’s new-found stability.
They poured money in; Argentina seemed to boom.
But it is easy to boom when money pours in.
Investors did not understand that Argentina was at risk of longer-term stagnation as a result of its currency board gamble.
Argentine wages and prices rose significantly from 1991 through 1993.
As a result, Argentina priced itself out of world markets for many exports.
Luckily, Brazil was also becoming a very expensive economy as a result of fixing the Brazilian Real to the US dollar in 1994.
Argentine producers could sell goods to Brazil even when they could not sell them elsewhere.
Argentina experienced a deep financial crisis in 1995, but recovered fast when exports to Brazil increased.
Pleased with its success, Argentina began telling other countries to set up currency boards.
I argued with them, saying that Argentina was in more trouble than appeared, and that Argentina should not encourage others to take the same gamble.
Few listened.
Argentine officials repeatedly told me that I was wrong, that Argentina was in great shape.
The IMF also championed Argentina’s gamble, urging Bulgaria, for example, to follow the same approach.
Predictably, Argentina’s gamble turned sour.
In early 1999 Brazil decided to devalue its currency.
Suddenly, Brazilian goods were cheaper than Argentine goods, so Brazilian consumers and businesses reduced their purchases.
Automobile manufacturers with divided production between Argentina and Brazil shifted production to Brazilian factories.
Unemployment rose in Argentina, and GNP fell by 3.1% in 1999, while Brazil’s GNP rose by 1%.
Argentina was not the only South American economy to suffer in 1999, but the others adjusted their exchange rates to restore international competitiveness.
Argentina was stuck with its currency board and overvalued currency.
Once investors understood Argentina’s predicament, they started dumping its government bonds, and the risk premium on loans to Argentina rose several percent.
Early in the year, investors required a risk premium of almost 6 points in order to buy Argentine debts.
Bond rating agencies downgraded Argentina’s government debt, which contributed to a further rise in the risk premium.
Recently, holders of Argentina’s debts have been receiving a rate of return of 15% per year or even higher.
High interest rate compensate for the risk that Argentina might stop paying the debts or devalue the currency or both.
Holders of Argentine debt now scream that the world will come to an end if Argentina devalues its currency or suspends payments on its debts.
Dutifully, the IMF is going to the rescue of bond holders.
The IMF, World Bank, and the Inter-American Development Bank are gearing up to lend Argentina $20 billion so that it can continue to pay its debts without changing the exchange rate.
(If it devalued the exchange rate, creditors holding Argentine debt denominated in pesos would receive a smaller amount in terms of US dollars).
This “bailout” will not bail out Argentina.
The IMF’s advice - to cut government spending and raise taxes - will deepen the crisis.
This bailout money will encourage investment bankers to continue ignoring their risks.
Yes, Argentina’s debts will probably be paid in full, but Argentina’s taxpayers and workers will bear a heavy burden for years to come.
What should be done?
First, Argentina should end its currency board and devalue its currency.
Argentina is uncompetitive, and will have several years of slow growth if it doesn’t move the exchange rate.
In a bold stroke, it could devalue the currency and then join a monetary union with Brazil.
(The other hope for Argentina is that the US dollar collapses in value compared to the Euro, so that the Argentine peso becomes more competitive vis-a-vis the Euro).
Second, the IMF should let Argentina and its creditors work out a refinancing or rescheduling agreement.
A bailout just enriches creditors and lets them continue irresponsible gambling and ignore macroeconomic realities.
Third, the World Bank and the Inter-American Development Bank, both development institutions, should not be misused for short-term bailouts.
Fourth, the IMF and others should stop peddling monetary mischief such as currency boards and fixed exchange rates.
Such arrangements make sense in rare circumstances (perhaps in a very small and open economy such as Estonia).
Even if the system made sense in Argentina in 1991 to end hyperinflation, it came at a high cost that need not be paid by other countries.
Argentina: Stuck in a Time Warp
Argentina is stuck in a time warp.
Political and economic reforms over the past decade were supposed to lead the country out of chronic economic crisis.
In April 1991 Economy Minister Domingo Cavallo linked the Argentine Peso to America’s dollar at a rate of one to one, kicking off an era of radical reform.
Yet ten years later, the same Signor Cavallo is trying to fend off recession and government default.
Argentina’s cycle of crisis is perplexing.
The past ten years saw industries and social security privatized and international trade liberalized.
A chronic budget deficit was brought under control, infrastructure upgraded, and the banking sector strengthened.
All this, and currency stabilization, made for an economic boom in Argentina that lasted until 1995, as foreign investors poured money in.
In that year, the economy was set back by Mexico’s financial crisis.
Growth rebounded strongly until 1998.
Since then, the economy has confronted prolonged recession, and the government is having trouble refinancing the public debt.
Fears of a default abound.
Starting with Cavallo, Argentina’s boosters argue that these problems are transitory, and blame the country’s difficulties on turmoil in world financial markets and the US dollar’s excessive strength in relation to the Euro, which reduces Argentina’s export competitiveness.
Brazil’s devaluation in 1999 also undermined export competitiveness.
Low world commodities prices and protectionism against Argentina’s agricultural exports are additional factors.
These supporters also argue, with some justice, that Argentina’s crisis results in part from a self- fulfilling prophesy among creditors.
Since Argentina has been in crisis so often, investors always fear the worst and withdraw funds at the first hint of trouble, provoking an even deeper crisis.
But something more than bad luck and self-fulfilling prophecies are at work.
Argentina’s Peso, because it is pegged to the US dollar, provides little flexibility.
There is no safety valve in currency depreciation when the economy is buffeted by external shocks.
Compare Argentina with another grain exporter, Australia, which has been hit by some of the same shocks.
Australia’s dollar depreciated from 78 US cents per Australian dollar in May 1997 to just 53 US cents per Australian dollar in May 2001.
This helped maintain Australia’s exports and kept the economy growing at around 2% per year, while Argentina’s economy has been shrinking at around 2% per year.
But Argentina’s woes go deeper.
Argentina is vulnerable to external shocks such as declining agricultural commodity prices because Argentina failed to develop a diversified export sector, one in which a broad range of industrial and service sectors are internationally competitive.
Argentina’s trade is overwhelmingly concentrated in a small number of commodities, including cereals, meats, processed foods, and other agricultural products.
Exports of machinery and transport equipment, embodying higher technology, claimed only 10% or so of exports and only 1% of GDP.
In other words, Argentina has failed to become a technology-based economy.
Market reformers focused their attention on reducing the size of government, but overlooked the government’s role in raising the country’s technological capacity.
An economy’s technological capacity depends on a wide range of social institutions.
A well-functioning market system helps attract high-tech investors from abroad and fosters high-technology startups at home.
But a high-tech economy also requires strong universities, with high enrolment, and large-scale government support for scientific research.
America, for example, invests around $90 billion of public funds each year in scientific research.
Some developing countries - Israel, Korea, and Taiwan - also invest heavily in higher education and scientific research.
Sadly, Argentina did not.
Under-investment in technology is evident throughout the economy.
There are around 600 scientists for every million Argentines, compared with 2,200 scientists for every million Koreans.
Argentina invests less than 1% of its national income in research and development, compared with around 2.5% of national income in Korea.
Argentine inventors received just 63 patents in the US in the year 2000, compared with 3,400 patents received by Korean inventors.
The difference is reflected in economic growth.
Argentina achieved per capita economic growth of just 0.5% during 1980-1998, while Korea grew at a rate of 6.2% per year, fueled by its high-technology exports.
Argentina’s fate teaches a lot about development strategies.
Argentina has much going for it: widespread literacy, a healthy population, a highly productive agricultural economy, and a strong natural resource base.
Indeed, Argentina has had its share of economic success, with an income level, adjusted for purchasing power, around one-third of that of the US, and is far ahead of most countries in the world.
But Argentina did not make a successful transformation from a resource-based to a technology-based economy.
The reform prescriptions it followed helped end inflation but ignored the need for government to promote a knowledge-based economy.
In the past countries could achieve high living standards by exploiting natural resources.
In today’s global economy, however, international competitive advantage is mostly based upon knowledge and the capacity to harness knowledge in new technologies.
Countries need strategies to foster education and innovation just as they need strategies to preserve macroeconomic stability and a healthy business environment.
The next stage of reforms in Argentina, and in countries in similar positions, should focus on fostering society’s educational, scientific, and technological capacities.
Argentina’s Two-for-One Presidency
Cristina Fernández de Kirchner’s victory in Argentina’s presidential election ushers in a political experiment that goes beyond national boundaries: that of “ruling couples.”
It’s not that the Kirchners have much global influence.
But they precede by a year the power duo that the Clintons may form in the United States, which gives them an aura of importance that extends far beyond Latin America.
Néstor Kirchner, Cristina’s husband and Argentina’s current president, did not want to run for office again, despite being legally permitted to do so and voters’ preference for him over her.
According to Kirchner’s inner circle, he wanted to avoid becoming a “lame duck” and losing power at the end of a second term in office.
Here lies a possible inspiration for the early handover to his wife.
In Argentina, unlike in the US, re-election is unlimited, as long as the president does not exceed two consecutive periods in office.
So, in four years, Cristina, may feel the same way, and pass the baton back to Néstor, who in turn will retire in four years to avoid becoming a “lame duck,” and so on.
“Buy two for the price of one,” Bill Clinton joked about ruling couples when he first ran for president in 1992.
Néstor Kirchner doesn’t joke.
Instead, he busies himself with organizing a political movement that will structure his project.
No one believes that such an edifice can be detached from the government, or that he will abstain from taking part in his wife’s decisions as president.
So Argentineans have, indeed, bought “two for the price of one.”
They have voted for continuity – the core of Cristina’s campaign – because their situation is much improved since 2001, when the country was in the midst of economic and political crisis.
Maybe the most important point – and a key difference with the Clintons – is that this experiment begins in an Argentina that suffers from great institutional vulnerability.
Néstor and Cristina will be dealing with a parliament that is much weakened: laws passed by legislators close to the government allow the president to “correct” the budget and issue “necessary and urgent” decrees that substitute for laws.
The Kirchners will practice a form of hyper-presidentialism.
Since 2001, the Kirchners have ruled with a siege mentality.
They have built up an image of authority and moral inflexibility, and have helped themselves by picking enemies who are damned by all and lacking any kind of power to move against them (the weakened military, for example, or civilian members of the 1976-1983 dictatorship).
This has been accompanied by cascades of populist rhetoric: loud voices and defiant words, and promises to fight to the death against ill-defined but malignant economic special interests.
Meanwhile, the types of structural changes that Argentina needs have not been made.
Corruption remains.
The economic boom brought on by soaring global demand for commodities – Argentina is a leading exporter of soy beans, corn, wheat, honey, and limes, for example – resulted from a shift in Argentine farming that pre-dates the Kirchners: the old landholders have given way to operators with managerial skills.
What the Kirchners have done well is to use the wealth gained from exports to strengthen the economy and improve conditions for the middle and lower classes.
It is a significant achievement.
But Argentina remains overly dependent on commodities, and has failed to encourage economic activity based on its peoples’ culture and ingenuity.
Moreover, manipulation of official statistics highlights the problems of an economic model based on peso depreciation and the accumulation of reserves.
The main concern is inflation, which the government has covered up and contained by precarious price agreements that will not last very long once Cristina takes over.
Some officials claim that Cristina will bring in a new era of higher institutional quality.
But the problem with “ruling couples” – in Argentina and, perhaps, throughout the world – is that no law or democratic constitution could envisage them.
This is why the Kirchners will rely on secrecy.
Néstor will not publicly express any attitude that hints at shared government, but nobody believes that he will be far from the scene.
Institutional quality and lack of transparency are not compatible.
Usually, decision-making is confined to ever smaller circles, with ever greater secrecy.
And, as with humans who mix only with their close relatives, the political gene pool weakens.
Yet this seems to be the distinctive operating style of Kirchnerism, torn between an elite born and raised in Patagonia, a few close allies, and everybody else.
Their relationship with the press is similar. They talk only to state-controlled media and never hold press conferences.
Hyper-presidentialism, inbred politics, and a plan to keep power indefinitely through a legal technicality: all this could put the Kirchners on the same level with the “caudillos for life” that Venezuelan President Hugo Chávez has brought back to the Latin American scene.
If Cristina wants to improve institutional quality and the problems that the economy is already showing, she will need more than strength.
Above all, she will need fresh sources of ideas.
A Rio Report Card
NEW YORK – One of the world’s pre-eminent scientific publications, Nature, has just issued a scathing report card in advance of next week’s Rio+20 summit on sustainable development.
The grades for implementation of the three great treaties signed at the first Rio Earth Summit in 1992 were as follows: Climate Change – F;
Biological Diversity – F; and Combating Desertification – F. Can humanity still avoid getting itself expelled?
We have known for at least a generation that the world needs a course correction.
Instead of powering the world economy with fossil fuels, we need to mobilize much greater use of low-carbon alternatives such as wind, solar, and geothermal power.
Instead of hunting, fishing, and clearing land without regard for the impact on other species, we need to pace our agricultural production, fishing, and logging in line with the environment’s carrying capacity.
Instead of leaving the world’s most vulnerable people without access to family planning, education, and basic health care, we need to end extreme poverty and reduce the soaring fertility rates that persist in the poorest parts of the world.
In short, we need to recognize that with seven billion people today, and nine billion by mid-century, all inter-connected in a high-tech, energy-intensive global economy, our collective capacity to destroy the planet’s life-support systems is unprecedented.
Yet the consequences of our individual actions are typically so far removed from our daily awareness that we can go right over the cliff without even knowing it.
When we power our computers and lights, we are unaware of the carbon emissions that result.
When we eat our meals, we are unaware of the deforestation that has resulted from unsustainable farming.
And when billions of our actions combine to create famines and floods halfway around the world, afflicting the poorest people in drought-prone Mali and Kenya, few of us are even dimly aware of the dangerous snares of global interconnectedness.
Twenty years ago, the world tried to address these realities through treaties and international law.
The agreements that emerged in 1992 at the first Rio summit were good ones: thoughtful, far-sighted, public-spirited, and focused on global priorities.
Yet they have not saved us.
Those treaties lived in the shadow of our daily politics, imaginations, and media cycles.&nbsp;
Diplomats trudged off to conferences year after year to implement them, but the main results were neglect, delay, and bickering over legalities.
Twenty years on, we have only three failing grades to show for our efforts.
Is there a different way?
The path through international law engages lawyers and diplomats, but not the engineers, scientists, and community leaders on the front lines of sustainable development.
It is littered with technical arcana about monitoring, binding obligations, annex-I and non-annex-I countries, and thousands of other legalisms, but has failed to give humanity the language to discuss our own survival.
We have thousands of documents but a failure to speak plainly to one other.
Do we want to save ourselves and our children?
Why didn’t we say so?
At Rio+20 we will have to say so, clearly, decisively, and in a way that leads to problem-solving and action, not to bickering and defensiveness.
Since politicians follow public opinion rather than lead it, it must be the public itself that demands its own survival, not elected officials who are somehow supposed to save us despite ourselves.
There are few heroes in politics; waiting for the politicians would be to wait too long.
The most important outcome in Rio, therefore, will not be a new treaty, binding clause, or political commitment. It will be a global call to action.
Around the world, the cry is rising to put sustainable development at the center of global thinking and action, especially to help young people to solve the triple-bottom-line challenge – economic well-being, environmental sustainability, and social inclusion – that will define their era.&nbsp;Rio+20 can help them to do it.
Rather than a new treaty, let us adopt at Rio+20 a set of Sustainable Development Goals, or SDGs, that will inspire a generation to act.
Just as the Millennium Development Goals opened our eyes to extreme poverty and promoted unprecedented global action to fight AIDS, tuberculosis, and malaria, the SDGs can open the eyes of today’s youth to climate change, biodiversity loss, and the disasters of desertification.
We can still make good on the three Rio treaties, by putting people at the forefront of the effort.
SDGs to end extreme poverty; decarbonize the energy system; slow population growth; promote sustainable food supplies; protect the oceans, forests, and drylands; and redress the inequalities of our time can galvanize a generation’s worth of problem-solving.&nbsp;
Engineers and technology wizards from Silicon Valley to São Paolo to Bangalore to Shanghai have world-saving ideas up their sleeves.
Universities around the world are home to legions of students and faculty intent on solving practical problems in their communities and countries.
Businesses, at least the good ones, know that they can’t flourish and motivate their workers and consumers unless they are part of the solution.
The world is poised to act.
Rio+20 can help to unleash a generation of action.
There is still time, just barely, to turn the F’s to A’s, and to pass humanity’s ultimate test.
Armageddon Can Wait
CAMBRIDGE – Where are global currencies headed in 2011?
After three years of huge, crisis-driven exchange-rate swings, it is useful to take stock both of currency values and of the exchange-rate system as a whole.
And my best guess is that we will see a mix of currency wars, currency collapses, and currency chaos in the year ahead – but that this won’t spell the end of the economic recovery, much less the end of the world.
Let’s start by acknowledging that the modern system of floating exchange rates has, on the whole, acquitted itself remarkably well.
True, given complex risk factors and idiosyncratic policy preferences, it has been particularly challenging of late to divine the logic underlying big exchange-rate swings.
For example, even though the United States was at the heart of the financial crisis, the dollar initially soared.
But, even if exchange rates work in mysterious ways, their cushioning effect is undeniable.
The sharp depreciation of the euro after the crisis helped sustain German exports, thereby keeping the eurozone afloat.
Emerging markets’ currencies also collapsed, even in economies with huge foreign-exchange reserves and relatively little debt.
Since then, most emerging-market currencies have rebounded sharply.
In hindsight, these exchange-rate swings mirrored the initial collapse and subsequent rebound in global trade, helping to mitigate the recession.
By contrast, the financial crisis was hardly an advertisement for expanding the scope of fixed exchange rates.
The eurozone’s peripheral countries, including Greece, Portugal, Ireland, and Spain, found themselves pinned to the mast of the common currency, unable to gain competitiveness through exchange-rate depreciation.
The intellectual father of the euro, Columbia University’s Robert Mundell, once famously opined that the optimal number of currencies in the world is an odd number, preferably less than three.
It is hard to see why right now.
Perhaps when we have one world government, it will make sense to have one world currency. But, even setting aside the equilibrating benefits of flexible currencies, the prospect of a single, omnipotent central bank is not particularly appealing.
Witness the vitriol and hysteria that accompanied the US Federal Reserve’s policy of so-called “quantitative easing.”
Imagine the panic that would have ensued in a world where gold, storable commodities, and art were the only ways for investors to flee from the dollar.
But the continuing success of the floating exchange-rate system does not imply a smooth ride in 2011.
For starters, we can certainly expect a continuation of the so-called currency wars, in which countries strive to keep their exchange rates from appreciating too rapidly and choking off exports.
Asian governments will probably gradually “lose” their battle in this war in 2011, allowing their currencies to appreciate in the face of inflationary pressures and threats of trade retaliation.
As for currency collapse, the most prominent candidate has to be the euro.
In an ideal world, Europe would deal with its excessive debt burdens through a restructuring of Greek, Irish, and Portuguese liabilities, as well as municipal and bank debt in Spain.
At the same time, these countries would regain export competiveness through massive wage reductions.
For now, however, European policymakers seem to prefer to keep escalating the size of bridge loans to the periphery, not wanting to acknowledge that private markets will ultimately require a more durable and sustainable solution.
No risk factor is more dangerous for a currency than policymakers’ refusal to face fiscal realities; until European officials do, the euro remains vulnerable.
The dollar, on the other hand, looks like a safer bet in 2011.
For one thing, its purchasing power is already scraping along at a fairly low level globally – indeed, near an all-time low, according to the Fed’s broad dollar exchange-rate index.
Thus, normal re-equilibration to “purchasing power parity” should give the dollar slight upward momentum.
Of course, some believe that the Fed’s mass purchases of US debt poses an even bigger risk than Europe’s sovereign debt crisis.
Perhaps, but most students of monetary policy view quantitative easing as the textbook policy for pulling an economy out of a zero-interest-rate “liquidity trap,” thereby preventing the onset of a sustained deflation, which would exacerbate debt burdens.
As for China’s renminbi, it is still supported by a highly political exchange-rate regime.
Eventually, China’s rapid growth will have to be reflected in a significant rise in its currency, its domestic price level, or in both.
But, in 2011, most of the equilibration will likely take place through inflation.
Finally, currency chaos is the safest bet of all, with sharp and unpredictable swings in floating exchange rates around the world.
During the mid-2000’s, there was a brief window when some argued that currencies had become more stable as a corollary of the “Great Moderation” in macroeconomic activity.
Nobody is saying that now.
The floating exchange-rate system works surprisingly well, but currency volatility and unpredictability look likely to remain an enduring constant in 2011 and beyond.
Arming the Asylum
NEW YORK –&nbsp;The horror has become almost routine.
This time, the massacre site was a movie theater in Aurora, Colorado, where accused shooter James Holmes murdered and injured dozens of moviegoers.
In 1999, the scene was nearby Columbine High School.
By some estimates, there are more than 20 mass shootings per year in the United States.
And always the same question: Why?
When the US is compared to the rest of the world, one reason becomes obvious: while America may not have more homicidally insane people than other countries do, homicidally insane people can get their hands on guns more easily in America than they can virtually anywhere else.
According to a 2007 survey, the United States is far ahead of the rest of the world in terms of gun ownership, with 90 guns for every 100 citizens.
With 5% of the global population, America has between one-third and one-half of the world’s civilian-owned guns – around 270 million weapons.
And many studies show that the US far surpasses other developed countries in deaths from gun violence – 30,000 per year, most of them suicides, but more than 12,000 of them homicides – while guns injure 200,000 Americans annually.
With these casualty figures, one would think that gun-control laws would be a much higher national priority in America than the far more loudly hyped fight against terrorism.
After all, ever since the terrorist attacks of September 11, 2001 left roughly 3,000 people dead, gun violence has killed almost 140,000 and injured more than two million.
But, when one looks more closely at why the US is so addicted to this unique kind of violence, the obvious is not so obvious.
Why are gun-control laws so hard to pass?
One big reason is the gun lobby, which is one of the most heavily funded in America.
Few legislators – Democrats and Republicans alike – care to take on the National Rifle Association.
And many Americans believe that the US Constitution’s Second Amendment (“A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms, shall not be infringed”) permits individuals virtually unrestricted access to guns.
Indeed, many argue that the risk of gun-related deaths and injuries is the price that Americans must pay for the right to bear arms, which they regard as a powerful defense against tyranny.
And, given how many ascendant tyrants have systematically disarmed the population they seek to control, it is difficult to dismiss this argument entirely.
But surely there can be a balance between Second Amendment rights and rational constraints on the ability of mentally unstable people to accumulate arsenals.
For example, Colorado and many other states have sought to require more stringent background checks, aimed at preventing those with criminal records or obvious mental-health problems from arming themselves.
But few such restrictions have been legislated – or have been left unchallenged by the gun lobby when they are.
Finally, opposition to reasonable gun-control laws in America is cultural, which is reflected in the many news reports following mass shootings that, refusing to admit that America could be wrong, downplay the striking contrast between US gun laws and those elsewhere.
So, for example, journalists stress the rather pathetic high note of a grim reality: at least there are not more massacres and murders, and the numbers are stable.
Such coverage also tends to individualize and psychologize social pathologies – another deep-seated American trait, and one reinforced by the lone-cowboy frontier ethos that is central to US mythology (and to gun mythology).
As a result, the media tend to focus on the need for better parenting and mental-health treatment.
But little US coverage following a gun massacre assesses the impact of America’s health-care system, which is unaffordable to many, especially for those with mental-health problems.
That is why, in many US cities, it is common to see people with serious mental illnesses speaking to themselves and otherwise acting out, sometimes violently, on the street.
This is a far less common sight in countries with functioning mental-health systems.
Many mental illnesses, such as schizophrenia and bipolar disorder, can cause auditory hallucinations that “command” the patient to commit acts of violence.
Medication manages such psychotic symptoms.
But proper diagnosis and treatment requires money, and funding is being cut.
Indeed, according to a report in February, US states have had to cut mental-health services by almost 10% in three years, threatening to “swamp emergency rooms and raise health-care costs for all patients.” But, if patients cannot get low-cost outpatient psychiatric care for chronic illnesses such as schizophrenia and bipolar disorder – which require continual management to adjust medication – there will also be more lethal violence, especially if guns are readily available.
Inpatient care, too, has been slashed.
In recent decades, mental institutions and halfway houses have been closed in a wholesale way, often in the name of reforming care.
But nothing has replaced these facilities, leaving many patients homeless and their severe psychotic symptoms untreated.
Despite the well-documented shortcomings of America’s mental-health services, few US policymakers are prepared to address the issue.
Until they do, the easy availability of guns all but ensures that massacres like the one in Aurora remain a bitter American refrain.
A Roadmap to Peace that Can Work
In the days after the so-called "Roadmap for Peace between Israel and Palestine" was unveiled, a new cycle of violence exploded between the warring parties.
Palestinian suicide bombings and Israeli attacks against Palestinian leaders came with such speed and ferocity that determining who was striking first and who was counterattacking became impossible.
Of course, recriminations also began immediately, with Israelis and Palestinians each accusing the other of deliberately destroying the peace process.
The truth, as usual, is more complicated, and understanding it helps us to comprehend what will be needed if real peace is to be achieved.
There are at least four sides to this conflict: moderate and extremist Israelis and moderate and extremist Palestinians.
Complicated strategic interactions exist not only between Israelis and Palestinians, but also within the two sides.
The extremist positions are clear.
Extremist Palestinians vow to fight until Israel--viewed as a colonial imposition on the Islamic world--is destroyed.
Extremist Israelis vow to fight to hold the entire West Bank, pushing out the Palestinians if necessary.
For them, Israel's pre-1967 borders, the entire city of Jerusalem, and the West Bank of the Jordan River is land given to the Jewish people by God.
No land-for-peace deal will satisfy either side.
Large majorities on both sides--perhaps two-thirds or even three-fourths of each population--would accept a return by Israel to something like its pre-1967 borders in exchange for real peace.
Of course, moderates on both sides would prefer as much land and room to maneuver as possible, but they prefer a negotiated compromise aimed at ending the violence.
The moderates are understandably wary.
Compromise on their side if met by extremism on the other would incite disaster.
If Israel returns to its pre-1967 borders, only to find continuing hostility and terrorism among the Palestinians, Israel will have gravely weakened its security for nothing.
If Palestinians disarm but still confront Israeli demands to keep West Bank settlements, then Palestine will never have a viable state.
Compromise is therefore difficult even among moderates: it requires a belief that moderation on one side will be met by moderation on the other.
The Oslo Peace Process was built on the premise that moderates on both sides would gradually gain each other's trust and move steadily towards compromise.
But this largely ignored the role of extremists.
Israeli extremists assassinated Prime Minister Yitzhak Rabin, lest he mobilize broad public support to make peace.
Arab extremists launched attacks against Israelis civilians, in part to show moderates on both sides that compromise would not stick.
That dynamic is still at work.
Palestinian Prime Minister Abu Mazen has called on Palestinian extremists to disarm, or at least to accept a prolonged cease-fire, but they have responded with more terrorist attacks.
Israel's government, meanwhile, has gone out of its way to attack Palestinian hard-line groups, causing more death, damage, and bitter feelings.
Extremists on both sides "win" their battle to undermine the peace process.
But all factions lose, because violence continues and none of them achieves its goals.
Israelis and Palestinians cannot find the way out alone, because neither side would dare to forcibly disarm its own extremists without absolute proof that the other side will do the same.
So it is fatuous for Israel's government to insist that the Palestinians disarm completely before the peace process can continue, when Palestinian moderates have no proof that Israel will withdraw to the pre-1967 boundaries.
In these circumstances, gradual confidence building will not work.
Extremists simply have enough power to undermine a process based on trust alone.
Nor will one side's extremists defeat the other side's extremists.
Israel's military has failed to destroy Palestinian terrorism through hard-line reprisals; Palestinian extremists have not scared Israeli hard-liners into concessions.
A solution is possible only if the outside world is prepared to police an agreement reached between the moderate majorities.
A strong international peacekeeping force, agreed by the UN, and perhaps led by the US or NATO, must be placed between the warring sides, and must be prepared to suffer losses to terrorists in the service of peace.
The roadmap is--so far--silent on this issue.
When UN Secretary General Kofi Annan made such a proposal, extremists on both sides denounced the plan.
But moderates raised red flags, too.
Would a peacekeeping force truly serve the interests of the agreement, rather than one side or the other?
Would it have the firepower to hold back extremists?
Would it stick to its long-term mission in the face of inevitable attacks?
Would peacekeepers withdraw at one side's insistence (as UN peacekeepers have retreated in other circumstances, including just before the 1967 Six Day War), putting the other side in jeopardy?
The Roadmap to Peace can work only if both sides are pressed to a real compromise, whose outline is clear: Israel's return to something like its pre-1967 borders; financial compensation of Palestinians for losses of land in Israel, rather than a right to return; and Jerusalem as a shared capital.
But enforcement of this compromise against extremists will require putting credible and well-armed international peacekeepers in place to hold the parties to the deal.
Designing such an international peacekeeping effort, one with the credibility and staying power, should now be a priority.
A Roosevelt Moment for America’s Megabanks?
WASHINGTON, DC – Just over a hundred years ago, the United States led the world in terms of rethinking how big business worked – and when the power of such firms should be constrained.
In retrospect, the breakthrough legislation – not just for the US, but also internationally – was the Sherman Antitrust Act of 1890.
The Dodd-Frank Financial Reform Bill, which is about to pass the US Senate, does something similar – and long overdue – for banking.
Prior to 1890, big business was widely regarded as more efficient and generally more modern than small business.
Most people saw the consolidation of smaller firms into fewer, large firms as a stabilizing development that rewarded success and allowed for further productive investment.
The creation of America as a major economic power, after all, was made possible by giant steel mills, integrated railway systems, and the mobilization of enormous energy reserves through such ventures as Standard Oil.
But ever-bigger business also had a profound social impact, and here the ledger entries were not all in the positive column. The people who ran big business were often unscrupulous, and in some cases used their dominant market position to drive out their competitors – enabling the surviving firms subsequently to restrict supply and raise prices.
There was dominance, to be sure, in the local and regional markets of mid-nineteenth-century America, but nothing like what developed in the 50 years that followed.
Big business brought major productivity improvements, but it also increased the power of private companies to act in ways that were injurious to the broader marketplace – and to society.
The Sherman Act itself did not change this situation overnight, but, once President Theodore Roosevelt decided to take up the cause, it became a powerful tool that could be used to break up industrial and transportation monopolies.
By doing so, Roosevelt and those who followed in his footsteps shifted the consensus.
Roosevelt’s first case, against Northern Securities in 1902, was immensely controversial.
But the break-up, a decade later, of Standard Oil – perhaps the most powerful company in the history of the world to that date – was seen by mainstream opinion as completely reasonable.
And the break-up of Standard Oil took place in great American style: the company was split into more than 30 pieces, the shareholders did very well, and the Rockefeller family went on to rehabilitate itself in the eyes of the American public.
Why are these antitrust tools not used against today’s megabanks, which have become so powerful that they can sway legislation and regulation massively in their favor, while also receiving generous taxpayer-financed bailouts as needed?
The answer is that the kind of power that big banks wield today is very different from what was imagined by the Sherman Act’s drafters – or by the people who shaped its application in the early years of the twentieth century.
The banks do not have monopoly pricing power in the traditional sense, and their market share – at the national level – is lower than what would trigger an antitrust investigation in the non-financial sectors.
Effective size caps on banks were imposed by the banking reforms of the 1930’s, and there was an effort to maintain such restrictions in the Riegle-Neal Act of 1994.
But all of these limitations fell by the wayside during the wholesale deregulation of the past 15 years.
Now, however, a new form of antitrust arrives – in the form of the Kanjorski Amendment, whose language was embedded in the Dodd-Frank bill.
Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, as necessary, break them up when they pose a “grave risk” to financial stability.
This is not a theoretical possibility – such risks manifested themselves quite clearly in late 2008 and into early 2009.
It remains uncertain, of course, whether the regulators would actually take such steps.
But, as Representative Paul Kanjorski, the main force behind the provision, recently put it, “The key lesson of the last decade is that financial regulators must use their powers, rather than coddle industry interests.”
And Kanjorski probably is right that not much would be required. “If just one regulator uses these extraordinary powers [to break up too-big-to-fail banks] just once,” he says, “it will send a powerful message,” one that would “significantly reform how all financial services firms behave forever more.”
Regulators can do a great deal, but they need political direction from the highest level in order to make genuine progress.
Teddy Roosevelt, of course, preferred to “Speak softly and carry a big stick.”
The Kanjorski Amendment is a very big stick.
Who will pick it up?
Arrogance and Authority
WASHINGTON, DC – It is increasingly common to hear prominent American and European central bankers proclaim, with respect to the crisis of 2008-2010, the following verdict: “We did well.”
Their view is that the various government actions to support the financial system helped to stabilize the situation.
Indeed, what could be wrong when the United States Federal Reserve’s asset purchases may have actually made money (which is then turned over to the US Treasury)?
But to frame the issue in this way is, at best, to engage in delusion.
At worst, however, it creates an image of arrogance that can only undermine the credibility on which central banks’ authority rests.
The real cost of the crisis is not measured by the profit and loss statement of any central bank – or by whether or not the Troubled Asset Relief Program (TARP), run by the Treasury Department, made or lost money on its various activities.
The cost is eight million jobs in the US alone, with employment falling 6% from its peak and – in a major departure from other post-1945 recessions – remaining 5% below that peak today, 31 months after the crisis broke in earnest.
The cost is also the increase in net federal government debt held by the private sector – the most accurate measure of true government indebtedness.
Comparing the US Congressional Budget Office’s medium-term forecasts before (in January 2008) and after the crisis, this debt increase is a staggering 40% of GDP.
Indeed, the reason there is a perceived fiscal crisis in the US today – along with spending cuts that will further hurt many people – is simple: the banks blew themselves up at great cost to the American people, with major negative global implications.
Most of the public-debt increase in the US and elsewhere is not due to any kind of discretionary fiscal stimulus; it’s all about the loss of tax revenue that comes with a deep recession.
(And the Bush administration’s tax cuts for the wealthiest, unfunded Medicare prescription benefit, and debt-financed wars in Afghanistan and Iraq have severely weakened the long-term fiscal outlook.)
Finally, the cost of the crisis is millions of homes lost and lives damaged, some permanently.
The issue is not whether the Fed, or any central bank, should seek to prevent the collapse of its country’s banking system.
To see the severe effects of a banking crisis, look no further than the 1930’s, a period that Ben Bernanke studied in detail before he became Fed chair.
If the choice at any particular moment is to provide support or let the system collapse, you should choose support.
But, more broadly, as Dennis Lockhart, President of the Atlanta Federal Reserve Bank, said last week at a public conference organized by his institution, we should not seek to operate a system based on the principle of “private gains and public losses.”
And these losses are massively skewed in ways that are grossly inefficient, in addition to being completely unfair.
The private gains can be measured most directly in the form of executive compensation.
From 2000 to 2008, the people running the top 14 US financial institutions received cash compensation (salary, bonus, and the value of stock sold) of around $2.6 billion.
Of this amount, around $2 billion was received by the five best-paid individuals, who were also central to creating the highly risky asset structures that brought the financial system to the edge of the abyss: Sandy Weil (built Citigroup, which blew up shortly after he left);
Hank Paulson (greatly expanded Goldman Sachs, lobbied for allowing more leverage in investment banks, then moved to the US Treasury and helped save them);
Angelo Mozilo (built Countrywide, a central player in irresponsible mortgage lending);
Dick Fuld (ran Lehman Brothers into the ground); and Jimmy Cayne (ran Bear Stearns into the ground).
The public losses are massive in comparison: roughly $6 trillion, if we limit ourselves just to the increase in federal government debt.
And leading bank executives still insist that they should be allowed to run highly leveraged global businesses, in which they are paid based on their return on equity – unadjusted for any risk.
The world’s top independent financial minds have looked long and hard at these arrangements, and, given what we have learned in recent years, have found them worse than wanting (see the Web page of Anat Admati at Stanford’s Graduate School of Business for the details).
In their view, the big banks should be funded much more with equity – perhaps as much as 30% of their capitalization.
But bankers strongly reject this approach (because it would likely lower their pay), as do central bankers (because they are too much persuaded by the protestation of bankers).
There are many advantages to having an independent central bank run by professionals who can keep their distance from politicians.
But when the people at the apex of these institutions insist that the crisis response went well, and that everything will be fine, even as the financial behemoths that caused the crisis lumber forward, their credibility inevitably suffers.
That should worry central bankers, because their credibility is pretty much all they have.
The US Constitution, after all, does not guarantee the Fed’s independence.
Congress created the Fed, which means that Congress can un-create it.
By assuming away the damage that highly leveraged megabanks can do, the myth of a “good crisis” merely makes political pressure on central banks all the more likely.
Artificial Intelligence and Globalization
Today’s conventional wisdom is that the rise of India and China will be the single biggest factor driving global jobs and wages over the twenty-first century. High-wage workers in rich countries can expect to see their competitive advantage steadily eroded by competition from capable and fiercely hard-working competitors in Asia, Latin America, and maybe even some day Africa.
This is a good story, full of human drama and power politics.
But I wonder whether, even within the next few decades, another factor will influence our work lives even more: the exponential rise of applications of artificial intelligence.
My portal to the world of artificial intelligence is a narrow one: the more than 500-year-old game of chess.
You may not care a whit about chess, long regarded as the ultimate intellectual sport.
But the stunning developments coming out of the chess world during the past decade should still command your attention.
Chess has long been the centerpiece of research in artificial intelligence.
While in principle, chess is solvable, the game’s computational complexity is almost incomprehensible.
It is only a slight exaggeration to say there are more possible moves in a chess game than atoms in a universe.
For most of the twentieth century, programmers were patently unsuccessful in designing chess computers that could compete with the best humans.
A human chess master’s ability to intuit, visualize, and prioritize easily prevailed over the brute force approach of computers.
The computers gradually improved, but they still seemed far inferior to the top humans.
Or so we thought.
Then, in 1997, in what will surely long be remembered as a historical milestone for modern man, IBM’s “Deep Blue” computer stunned the world by defeating the world champion Garry Kasparov.
Proud Kasparov, who was perhaps more stunned than anyone, was sure that the IBM team must have cheated.
He sarcastically told reporters that he sensed the “the hand of God” guiding his silicon opponent.
But the IBM team had not cheated.
Rather, through a combination of ingenious software and massive parallel computing power, they had produced a silicon-based entity capable of such finesse and subtlety, that international chess grandmasters worldwide (including me) were simply amazed.
Since 1997, the computers have only gotten better, to the point where computer programmers no longer find beating humans a great challenge.
Only a game, you say?
Perhaps, but let me tell you this: when I played professional chess 30 years ago (I once represented the United States in the World Chess Championship cycle), I felt I could tell a lot about someone’s personality by seeing a sampling of their games, even those of an amateur.
Until a short while ago, I could certainly distinguish a computer from a human opponent.
Now everything changed like lightning.
The machines can now even be set to imitate famous human players – including their flaws – so well that only an expert eye (and sometimes only another computer!) can tell the difference.
More than half a century ago, the godfather of artificial intelligence, Alan Turing, argued that the brain’s function could all be reduced to mathematics and that, someday, a computer would rival human intelligence.
He claimed that the ultimate proof of artificial intelligence would be met if a human interrogator were unable to figure out that he was conversing with a computer.
The “Turing test” is the holy grail of artificial intelligence research.
Well, for me, a chess game is a conversation of sorts.
From my perspective, today’s off-the-shelf computer programs come awfully close to meeting Turing’s test.
Over the course of a small number of games on the Internet, I could not easily tell the difference.
True, today’s computers have not evolved to the level of the deranged chess-playing HAL in the filmmaker Stanley Kubrick’s masterpiece “2001: A Space Odyssey,” much less Arnold Schwarzenegger-like droids from the Terminator movies.
But the level that computers have reached already is scary enough.
What’s next?
I certainly don’t feel safe as an economics professor!
I have no doubt that sometime later this century, one will be able to buy pocket professors – perhaps with holographic images – as easily as one can buy a pocket Kasparov chess computer today.
So let’s go back to India and China.
Globalization proceeded at a rapid pace through much of the last century, and at a particularly accelerated rate during its last two decades.
Yet the vast body of evidence suggests that technological changes were a much bigger driver in global wage patterns than trade.
That is, technology, not trade, was the big story of the twentieth-century economy (of course, the two interact, with trade helping to diffuse and stimulate technology, but this is a matter of semantics.)
Are we so sure that it will be different in this century?
Or will artificial intelligence replace the mantra of outsourcing and manufacturing migration?
Chess players already know the answer.
Education in the Second Machine Age
MUNICH – Artificial intelligence, once confined to the realm of science fiction, is changing our lives.
Cars are driving themselves.
Drones are being programmed to deliver packages.
Computers are learning to diagnose diseases.
In a recent book, the economists Erik Brynjolfsson and Andrew McAfee describe these recent advances as examples of the beginning of what they call “the second machine age.”
The very name – the first machine age was the Industrial Revolution – suggests an epochal shift.
And, indeed, if the predictions are to be believed, these technological advances could have profound implications for the way we live.
One common forecast is that as ever-more advanced robots substitute workers, the cost of labor will become less important, and manufacturing will move back to rich countries.
Another is that increasingly intelligent machines will reduce the demand for advanced skills, and that the economic advantage of having these skills will decline as a result.
The first of these two hypotheses remains far-fetched.
But there is evidence that the second has already started to come to pass, with serious implications for the way that modern economies have attempted to meet the challenges of globalization.
To be sure, there has been plenty of anecdotal evidence of “reshoring” – the relocation of jobs from low-wage countries to high-wage economies.
Apple is shifting some manufacturing from China to Silicon Valley; Airtex Design Group is moving part of its textile production from China back to the United States.
In a recent survey of 384 firms in the eurozone by the management consultancy PricewaterhouseCoopers, two-thirds of the respondents said that they had reshored some activities during the past year, and 50% plan to do so in the next.
But when one looks at the data, there is no sign of reshoring.
Indeed, the trend is continuing in the opposite direction.
Offshoring dropped during the Great Recession that followed the 2008 global financial crisis, but quickly rebounded, accelerating past pre-crisis levels.
For the moment, the return of manufacturing to rich countries remains a prediction, not an outcome.
Evaluating the second hypothesis is more complicated.
At first glance, the evidence supports the possibility that demand for advanced skills is falling.
With the exceptions of the US and Germany, the wage gap between skilled and unskilled workers has been declining in all Western countries in the last 17 years.
One possible explanation is that education levels in Europe outstripped the pace of technological change, oversupplying the market for advanced skills.
In Austria, the share of people with a university degree or its equivalent increased by 250% between 1996 and 2012.
In the United Kingdom and Italy, it almost doubled.
In Spain, it jumped by 70%, and in France by 60%.
By comparison, in the US and Germany, the share of the population with a tertiary education rose by a more modest 25%.
It is also possible, however, that the drop in the wage gap between skilled and unskilled workers represents competition from increasingly intelligent machines.
Here, the US is a case in point.
Because educational attainment has been advancing only modestly in the US since the turn of the century, we would expect the wage gap to be rising steeply, as it did in the 1980s and 1990s.
Instead, it has remained largely unchanged, and it is the unemployment rate among skilled workers that is on the rise, doubling in the US and the United Kingdom from 2000 to 2012.
Until the 1980s, about 70% of income went to labor income and 30% to capital income.
But, since then, the share of income going to labor has declined in all rich countries. It is now at about 58% of GDP.
According to research by the economists Loukas Karabarbounis and Brent Neiman, half of this decline is the result of cheaper information technology, which has enabled firms to replace workers with computers.
The implications are serious.
If these are indeed the first signs of the second machine age, it is possible that we have been fighting the wrong battle.
As the scarcity of human capital declines in importance, the rapid expansion of education may not be the answer to the challenges of globalization that we hoped it would be.
A Russian Spring?
PARIS – Russia is not Egypt.
And Moscow is not on the eve of revolution as Cairo was less than a year ago.
Indeed, Russia’s powerful have at their disposal assets that former Egyptian President Hosni Mubarak’s regime lacked.
As an energy superpower, Russia can open its coffers to appease, at least in part, the humiliation that it has inflicted on its citizens by falsifying the country’s recent legislative election results.
And not all Russians are in the streets.
We should beware of the “zoom effect,” which made many people believe that the young protesters of Cairo’s Tahrir Square were fully representative of Egyptian society.
They were not.
Rural Egypt, like rural Russia, is much more conservative than the young elites who seize the world’s imagination with their protests and embrace of modern social media.
Furthermore, Mubarak was old and sick, and no longer enjoyed the trust of his people.
Vladimir Putin, by contrast, exudes energy and health, and may still reassure many segments of Russian society whose main concern is their country’s glory rather than its citizens’ happiness.
Yet Putin may be overplaying the macho card so excessively that it could backfire and contribute to his isolation from Russia’s urban and more educated voters.
But, even if the tens of thousands of demonstrators are unlikely to threaten the survival of Putin’s regime, the Kremlin would be wise to take them seriously.
The protesters’ trademark so far has been moderation and restraint; nothing would be more dangerous than violent repression.
Beyond the issue of violence, the Russian authorities would take a huge historical risk by failing to register the public’s growing alienation.
Sheltered physically and metaphorically by the Kremlin’s high walls, and having progressively lost contact with the living conditions of ordinary people (if they ever had any), Russia’s leaders seem to consider their lifestyle to be both normal and eternal.
From the standpoint of condemning elite behavior, Russian protesters evoke, at least partly, the actors of the Arab revolution.
In their denunciation of “Soviet electoral practices,” they reject the combination of despotism and corruption that characterized Soviet power yesterday and Russian power today – rhetoric familiar from Arab revolutionaries.
As young Arabs told the rulers of Libya, Egypt, Tunisia, Syria, Yemen, and other Arab countries, this new generation of Russians is telling Putin: “Get Out!”
But most participants hold few illusions about the efficacy of their protest. They want to express to Russia’s rulers the extent of their frustration and determination.
They may not expect regime change, but they expect at least some minimal reforms.
Above all, they want to set limits on Putin’s power.
But their protest’s ironic consequence may be that the more moderate of the two figures at the summit of Russian politics, Dmitri Medvedev, will not return to the post of prime minister, as had been planned.
A game of political musical chairs would simply be too much in the eyes of too many Russians.
The protests have caught the Kremlin’s masters, as well as the majority of Russia’s citizens, by surprise.
They failed to recognize that globalization – particularly the global information revolution – has made the world more transparent and interdependent than ever.
The protesters of Madrid were inspired by those of Cairo, and were themselves a source of inspiration from New York to Tel Aviv – and, subsequently, to Moscow.
A lesson emerges: with the deepening of the economic crisis, on the one hand, and instant global connectivity, on the other, what was accepted yesterday is regarded as intolerable today.
That applies to Russia, too.
For a long time, Russia has perceived itself as a “White Africa.”
The average life expectancy of Russian men, slightly below 60, is more African than European (or even Asian, for the most part).
The corrupt enrichment of so many Russian elites mimics the disastrous habits of many of their African counterparts.
But this comparison has limits.
Despite its many problems, Africa today has become a continent of hope.
Its population is exploding, as are its economic-growth rates.
Senegalese firms seek to help their Spanish business partners, while Portugal extends an almost royal welcome to the leaders of their former colony, newly oil-rich Angola.
Africa is on the rise, while Russia is on the decline.
The democratic idealism that accompanied the fall of communism 20 years ago is gone, but the “imperial pride” recovered in part during the Putin years may not be enough to compensate for the contempt with which the Russian state treats its citizens.
Russia’s demonstrators’ message is simple: “Too much corruption, disdain, and inequality is too much.”
Spain’s Human-Rights Dilemma
NEW YORK – Spanish MPs want to legislate restraints that would prevent a few of the country’s judges from exercising what has seemed like a roving license to prosecute in Spanish courts human-rights violations committed anywhere in the world.
In a current case, a Spanish judge is seeking arrest warrants against Jiang Zemin, the former president of China, and Li Peng, a former Chinese prime minister, for alleged crimes committed in Tibet.
There is no discernible Spanish connection to the case.
The Spanish MPs have a point: Allowing the country’s prosecuting magistrates to select targets from anywhere in the world, without there being a clear legal nexus to Spain, is an invitation to politicize the process.
But it is also important to preserve the core principle underlying these prosecutions: the concept of universal jurisdiction.
Indeed, it is a concept with ancient origins, and it plays a crucial role in the global protection of human rights.
Universal jurisdiction originated in Greek and Roman times in the struggle against piracy.
Because pirates committed their crimes on the high seas, beyond the territory of any state, the idea developed that they were enemies of humanity whom any state could prosecute.
In the seventeenth century, the Dutch scholar Hugo Grotius, who is recognized for codifying international law, argued that pirates could be tried for their crimes, regardless of where they were committed, aboard the ships that captured them.
Following the 1814-1815 Congress of Vienna, with its condemnation of slavery, some states applied the concept to slave traders, who also committed many of their crimes outside national jurisdictions.
Later, the crimes of the Nazis played an essential part in winning widespread acceptance of the concept of universal jurisdiction.
At the end of World War II, Nazi leaders fled, relocating all over the world.
Countries like Canada and Australia, seeking certainty that those who had committed horrendous crimes would not find safe haven within their borders, established the authority to try suspects in their own courts.
The concept has since been embodied in treaties that virtually every country in the world has ratified.
The 1949 Geneva Conventions require states to search for those who have committed war crimes and either prosecute them in their own courts or turn them over to another state that is prepared to try them.
Similarly, the 1984 Convention Against Torture requires states to establish their own jurisdiction to prosecute torture if an offender is on their territory and is not extradited to stand trial in the country where the crime was committed.
A crucial test of universal jurisdiction is now moving forward in Senegal, where one of Africa’s cruelest dictators, Hissène Habré, who ruled Chad from 1982 to 1990, is set to be prosecuted.
A commission of inquiry established that, during its time in power, Habré’s regime carried out torture and was responsible for the deaths of an estimated 40,000 people.
When Habré was deposed, he fled to Senegal with a substantial portion of the national treasury, living there in comfort with much of his extended family, as well as key supporters.
For many years, African human-rights activists, aided by Human Rights Watch, struggled to hold him accountable.
Now, at long last, with the support of the African Union, he faces trial in his adopted home for the crimes he committed in Chad.
A related practice has developed in the United States, where victims of human-rights crimes committed elsewhere file civil suits against immigrant perpetrators.
In a substantial number of cases since the early 1980’s, US courts have ordered the defendants to pay compensation to the victims.
Most often, universal jurisdiction is invoked when the person alleged to have committed war crimes, crimes against humanity, or genocide in another country is present in the territory where he or she is to be tried.
This is consistent with the principle that there should be no safe haven for those who commit such crimes.
If Spain incorporates such a requirement in its law, and also provides for some other appropriate connection (such as the inclusion of Spaniards among the victims), it will overcome the tendency of a few of its judges to reach out too widely.
Such a reform would remain faithful to the principles of justice that underlie the concept of universal jurisdiction.
A Saudi Asks, \
A journalist visiting the Kingdom of Saudi Arabia recently asked me why five out of six students he interviewed at King Saud University still believe that Al Qaida was not responsible for the attacks on the World Trade Center and the Pentagon in America last year?
Dealing with this question is increasingly frustrating for me, because I have run out of plausible explanations.
I used to believe that denial of Saudi complicity in the attacks reflected our distress with what happened on that dark day.
I hoped that we would have the courage to overcome our perceived humiliation and start looking deep into our national psyche, asking the big question, "Why did 15 of our young men attack America in so brutal a way?"
So far, we are no closer than we were after the attack to answering to this question, because we cannot even find the nerve to ask it.
Had we been more confident and less full of bluster, we would have organized seminar after seminar to analyze what happened, to understand the reasons behind it, and to plan for a future without a similar tragedy.
After all, Osama bin Laden's hijacked planes not only attacked New York and Washington, they also attacked Islam as a faith and the values of tolerance and coexistence that it preaches.
But despite the enormity of what happened, we remain in denial.
We still cling to conspiracy theories even after bin Laden and his fellow conspirators bragged about their great "achievement."
We continue to close our eyes to the fact that 19 young Muslim men decided to leave home, head for what they described as jihad, and became criminals.
It is past time to move forward.
We must admit that 15 Saudis helped perpetrate the attacks on America of last September 11
When Arabs, including Saudis, first fought in Afghanistan in the mid-1980s, their campaign was politically and religiously just.
Afghan Muslims were confronting foreign aggressors who sought to impose Soviet-style communism upon them.
The Mujahideen were overseen by responsible clerics, who gave a shining example to Saudi youth.
Some of those young men remained in Afghanistan as Mujahideen entered Kabul to take part in the bitter infighting that led to the Taliban's rise.
Others returned home and were welcomed as heroes.
Were those young men who returned home then wiser than today's Saudi youth?
What happened in the last ten years that allowed extremists to find so many eager followers?
Since September 11
We must answer this question not for the Americans' sake, but for our own.
It is not enough to say that the hijackers--and, indeed, the many Saudis being held at Guantanamo Bay--represent a subset of duped youngsters and that the rest of Saudi youth are different.
That is true, of course, but the damage that this relatively small group inflicted was monumental.
It is far better to try and understand their motives.
In our attempts to defend and justify ourselves over the past year, we Saudis learned about the consequences of extremism at Waco, Texas and Oklahoma City.
We wrote about the Michigan Militia and other American radical extremists.
Of course there is extremism in America--extremism as ugly as any that we have at home.
But the Americans studied and analyzed minutely the Waco and Oklahoma City incidents on their own.
The motives behind those attacks were examined in an effort to guarantee that such events would not recur.
We Saudis have failed to do the same.
The most pressing issue now is to ensure that our children are never influenced by extremist ideas like those that misled 15 of our countrymen into hijacking four planes that fine September day, piloting them, and us, straight into the jaws of hell.
A Saudi Survival Strategy
Did the bombings that rocked Riyadh shock the al-Saud royal family from its complacency at long last?
This rude interruption to their majesties' indolence by their subjects incited rage and fury and something else--fear.
Of course, alarm bells have rung before in Saudi Arabia, but the ruling family remained in denial--deniability and repression being the political arts at which the al-Saud excel.
If the regime is to forge a survival strategy, it must now re-examine its foundations.
As ruling families go, the al-Saud are spectacularly numerous--there are perhaps as many 22,000 of them.
But vast bloodlines have not prevented hardening of the arteries.
Indeed, the men now struggling to hold things together are the incapacitated King Fahd (84 years old), his half-brother Crown Prince Abdullah (79 years old), and his full brothers, Defence Minister Sultan (78 years old), and Interior Minister Naif (75 years old).
Old men, unsurprisingly, find it hard to cope with the breakdown of the assumptions that have governed their entire lives.
Perhaps the most shattering lost illusion is the fact that the bombings occurred in the heart of the al-Saud's home-base in the Najdi region, which indicates that the enemy within resides nearer to the throne than anyone suspected.
This recognition is particularly unsettling because the al-Saud have alienated every group except their own.
If some Najdi may now be mistrusted, where can the al-Saud turn?
Saudi Arabia's population is divided into distinctive regional, tribal, and sectarian groups.
To the east, in the oil-rich province, are the Shia.
Politically emboldened since the fall of Saddam's regime and the resurgence of their brethren in Iraq, the Shia wasted no time in petitioning Crown Prince Abdullah to end both their exclusion from Saudi politics and their demonization as heretics by the Wahhabi religious establishment.
Their message to the rulers is that it will no longer suffice to identify being Saudi exclusively with being Wahhabi Najdi.
Meanwhile, the Hijazis, who originate in Mecca and Medina, hold long-repressed resentments due to their humiliating partial inclusion in Saudi politics.
Although the Hijazis, who are Sunnis but not Wahhabis, are not viewed as heretics, they are marginalized because the Islam they practice has Sufi leanings--and tolerant Sufiism is anathema to the austerely dogmatic Wahhabis.
Educated Hijazis ask only for modest reforms.
Yet even moderation is dismissed by the al-Saud.
The tribes of the Asir region, which have a mixed sense of identity due to their close ties to Yemeni tribes, feel alienated from both the political and the economic center.
The population of al-Jawf in the north has a similar sense of political and economic alienation.
Despite long simmering feelings of resentment and dispossession, these `minorities' remain moderate in their demands for reform.
Their leaders want to rescue the state, not raze it.
They form the vast majority of people in Saudi Arabia, and have not yet embraced the uncompromising rage of Osama bin Laden's clones.
The challenge facing the al-Saud is to include at the heart of the political system the peoples they have shunned for decades.
Unless they begin to do so, these peoples will drift into the camp of the fanatics--if not as active terrorists than as passive supporters, much as the Catholic community in Northern Ireland passively embraced IRA terrorism as a way to end their exclusion from political life in the province.
The danger in Saudi Arabia is that the IRA are no match for Muslim fundamentalists in their fanaticism.
For the regime to embrace peoples it has excluded, it must agree on inclusiveness--and the tolerance of non-Wahhabi forms of Islam--as a survival strategy and stick to it.
This is difficult because the ruling al-Saud are themselves divided.
Crown Prince Abdullah is far more disposed to reform than Prince Naif, the powerful Interior Minister, who clings to the old narrow system of repression.
The al-Saud will undoubtedly be ruthless in seeking out the individuals directly implicated in the terrorist bombings.
Those captured face beheading in the traditional way.
The problem for the regime is that the springs that nourish fanaticism will not be dammed by such exemplary punishment.
Some royals recognize this and know that a more thorough housecleaning is needed.
They realize that the al-Saud must choose: continue on the narrow path of repression and ethnic and religious intolerance, or adopt a more open and inclusive policy.
Both choices are fraught with danger: open up, and they include people in Saudi public life hitherto considered unworthy for being either heretics (the Shia) or of impure blood (the Hejazis) or too primitive (the border tribes).
Remain closed, and they will find themselves hostage to the forces of intolerance that threaten the regime.
The al-Saud religious alliance with the Wahhabis and the latter's control of a rigid religious educational system must change.
"Moderate" elements among the population will support this change (and the manhunt for terrorist fanatics) if they secure inclusion in Saudi life.
Alexis de Tocqueville warned that the most dangerous time for any authoritarian regime is when it reforms.
The al-Saud have procrastinated so long that every choice they now face is risky.
Inclusion is the less dangerous path.
It puts at risk only the ethnically narrow and religiously intolerant structure of the regime.
By contrast, the regime itself will be imperiled if it clings to its narrow base.
As China Gains, Will Southern Africa?
China and southern Africa have received growing international attention in recent years, but for very different reasons.
As a rising, rapidly modernizing power, China – already a permanent member of the UN Security Council – is now on the verge of coveted G8 membership and a powerful role in the World Trade Organization.
By contrast, southern Africa is beset with problems.
Its position in the world economy is marginal – tenuously plugged into global investment flows and dependent on northern markets for its commodity exports, tariff preferences, and financial aid.
South Africa is a notable exception, offering the best prospect for driving regional economic integration, but it, too, has chronic social problems and, compared to East Asia, anemic economic growth.
What implications does China’s emergence onto the global stage hold for southern Africa?
Can China help lift the world’s poorest region out of its deep economic and political malaise?
In theory, at least, China’s rapid growth, if it continues, offers southern Africa a highly promising economic opportunity, not least by underpinning commodity prices and thus boosting southern Africa’s terms of trade.
This, in turn, would support fragile balance-of-payments positions throughout the region, potentially assisting with pervasive debt-repayment problems.
Although in South Africa, for example, imports of cheap Chinese manufactures have produced a large and widening bilateral trade deficit over the last decade, southern Africa as a whole stands to gain from the “minerals nexus.” China’s manufacturing boom is fuelled by imported minerals, such as iron ore and chromium, which southern Africa possesses in abundance.
This implies increasing minerals exports to China, together with growing Chinese investment in the region to secure sources of supply.
China’s agricultural imports should also continue to rise, as land is taken out of agricultural production and its urban population expands.
Southern Africa has the potential to export such goods to China.
Although much depends on greater regional investment in increasing export capacity, further Chinese investment in the region would most likely follow.
Finally, South Africa, with its world-class banking sector and internationally competitive construction companies, can supply services to the Chinese market.
Moreover, these services are set to benefit from the broader trade expansion with China, potentially establishing a virtuous circle of investment and exports.
But China’s rise also holds risks for southern Africa.
Imports of cheap Chinese goods threaten to displace regional production, particularly in labor-intensive manufacturing sectors that are finding it difficult to compete.
In a region of pervasive unemployment, the key question will be how to ensure future employment growth.
This raises troubling questions about the region’s industrial trajectory.
Indeed, fears are growing that southern Africa will be condemned to the role of exporter of raw materials.
The composition of South Africa’s exports to China supports these concerns. In 1993, advanced manufactured goods accounted for 50% of total exports to China, while raw materials and intermediate goods comprised the remainder.
By 2003, advanced manufactures accounted for a mere 8% of the total, with resource and intermediate products accounting for the rest.
This turnaround comes despite South Africa’s protection of its labor-intensive sectors, such as clothing and textiles, through high tariffs.
With WTO negotiations underway and an expanding free-trade agenda taking hold, those tariffs are under pressure.
Their future is further clouded by the fact that the United States and the European Union will phase out their apparel quotas next year, potentially reducing quota-hopping investment in South Africa and the broader region.
If the economic impact of China’s growing global importance on southern Africa is promising, but uncertain, what about the geopolitical implications?
Will China’s rise open up greater opportunities for multilateral cooperation?
Throughout southern Africa, lingering resentments associated with colonization fuel distrust of the major Western powers, which continue to control the key institutions so determinative of the region’s future, notably the IMF and the World Bank.
While China is not about to dominate these institutions, in southern Africa it is regarded as a potential counterweight to the US and the EU.
Given China’s growing interest in securing African votes in the UN Security Council, there is scope for collaboration.
On the other hand, the Darfur crisis, in which China has lent its support to Khartoum, has provided a reality check for both sides, revealing the limits to collaboration.
It also exposes the dark side of China’s growing involvement in Africa, namely that its thirst for oil outweighs humanitarian considerations.
Furthermore, trade tensions could weaken political ties.
In particular, China’s G20 membership and its strong interest in securing greater access to developing markets confronts southern Africa’s association with the G90 coalition, which seeks to block progress in the WTO.
On balance, then southern Africa clearly stands to benefit economically from China’s emergence as a global power.
But both sides’ stated commitment to fraternal ties will not be enough to sustain their political relationship into the future.
As China Turns
This motto helped catalyze China into becoming what it is today: an increasingly materialistic, money-worshipping society that has lost touch with traditional ethics.
The program’s “hero,” Guo Haizao, is a fair-skinned and innocent 25-year-old woman living near Shanghai.
Initially she follows in her older sister’s footsteps in quest of their common dream, to attend one of China’s top universities.
But, even with a university degree, life in go-go Shanghai turns out not to be as she had imagined.
“Why is the world so full of unfairness, with the limelight only splashing on the prettiest spots in the city?” she wonders one night, as she worries about her and her sister’s struggle to buy a home.
As Song Siming, a handsome, successful, and Audi-driving – but also married – secretary to the Mayor, tells her, “On those unsightly corners in the dark where dirt, flies, and rats wander, nobody's paying attention.”
Song is a resourceful man who oozes charm. Guo soon becomes intoxicated by his air of can-do and success.
When problems arise, he makes a quick phone call and gets things “settled.”
Little by little, Guo finds herself taken in by his charm and ability to get things done.
Before long, she is cheating on her boyfriend and swooning into Song’s arms and bed.
When Guo overhears fights between her sister and brother-in-law in their crammed rented room, her aspirations to get an apartment through hard work, and to start a family with her boyfriend and soon-to-be husband, begin to fade.
She is tempted by the shortcut Song promises and allows herself to be seduced by him in turn for a large sum of cash and luxury apartment.
Soon she is even pregnant.
Song certainly knows how “to catch mice”!
“Wo Ju” is an adaptation of a novel about recent skyrocketing housing prices in Chinese cities – especially in Shanghai – and the effect of real-estate fever on young Chinese men and women in today’s get-rich-by-any-means China.
Through the soap opera, viewers get a sense of how the Chinese dream has begun to center around property ownership rather than education or love, and how this change has been transforming Chinese society, sometimes in startling ways.
These changes have created a new kind of hope and despair among the generation of Chinese now coming of age.
But, of course, the sub-text is that if this fixation on property has also led to greater pragmatism in affairs of the heart, it has also led to a worrisome property bubble that many economists now fear could soon burst.
Then, because this is a soap opera, Song suddenly dies in a car crash, just as he is rushing to the hospital – while being chased by corruption investigators! – to check on his sweetheart and their unborn baby boy.
But, as it happens, only days before Guo secretly had an abortion, right after a dramatic fight with Song’s wife.
As fantastic and convoluted as the plot sometimes gets, “Wo Ju” offers a truthful look at what animates contemporary Chinese society: property, money, sex, cars, and power.
Perhaps because it captures the zeitgeist so well, the program has become hugely popular, so much so that it has recently caught the attention of media censors.
Indeed, its realistic use of profanity and its depiction of the spiritual vacuum that grips China got it banished from one of Beijing’s TV channels.
While the official media are flooding television and cinema screens with propaganda about Confucius, ancient fairytales, and kung fu epics, “Wo Ju” engages a broad cross-section of contemporary society, which sees in it troubling aspects of their own lives: official corruption, mistresses, even house slaves.
As Song arrogantly says to Guo before he dies, “As long as it’s a problem that we can solve with money, then it’s not a big problem.”
The program has caused a tsunami of online reflection.
Many Web sites and bulletin boards have run surveys with questions like, “If you were Guo Haizao, would you choose Song Siming and an apartment or Xiaobei (the dumped boyfriend) and true love?”
On one of China’s largest sites, 46% picked Song, while only 22% chose the young boyfriend, a choice that suggests where the new generation’s values now lay.
The traditional virtues of “true love” have been replaced by pragmatism and a willingness to become a mistress before youth expires and all chances of getting a good apartment are lost.
After all, many netizens now argue, does not such a practical course of action save many years of hard work?
One recent Internet match-making effort attracted applications from more than 10,000 young women, all seeking a chance to marry a Shenzhen multi-millionaire sight unseen.
That was not the first lottery marriage in today’s China, and it surely will not be the last.
The most interesting thing about “Wo Ju” may be that most viewers do not dislike Song, the string-pulling mayor’s secretary.
Indeed, while Song may be cast as an anti-hero, in contemporary China, he is considered a “good catch.”
More and more young women are making just such practical choices: putting an apartment before love and pragmatism before principle.
Trashing the ASEAN Brand
CANBERRA – Having a reputation for integrity and decency matters as much in international relations as in professional and personal life.
States that are so regarded consistently punch above their weight – witness the Scandinavians.
By contrast, those that never earn – or fritter away – such a reputation can seriously endanger their own interests, jeopardizing trade, tourism, foreign investment, political support in international forums and negotiations, and the security of their own nationals abroad.
Three of Southeast Asia's most important states – Malaysia, Thailand, and now Indonesia – have brought trouble on themselves in this respect in recent months.
All three are raising serious doubts, in different ways, about their commitment to the rule of law, the integrity of their judicial systems, and the quality of mercy in the administration of justice.
In Malaysia, the country's highest court last month rejected opposition leader Anwar Ibrahim's appeal against a five-year prison sentence and a ban against running for public office for a further five years – a shocking and indefensible decision.
Prime Minister Najib Razak's government was transparently vindictive in pursuing allegations of sodomy (a crime rarely prosecuted in Malaysia) against Anwar.
The evidence against him was obviously inconclusive; and the court's acceptance of it was manifestly craven.
If the fiction is maintained that the court was merely doing its judicial duty as it saw it, decency could still prevail: Anwar could be granted executive clemency.
But there is no sign that Najib's government will advise such action.
Anwar's real crime was that his opposition coalition of conservative Muslim, secular, and Chinese parties was seriously challenging the six-decade supremacy of Najib's United Malays National Organization (UMNO), losing the 2013 election only because of a transparent gerrymander.
In Thailand, the biggest crime of former Prime Minister Thaksin Shinawatra and his supporters was to keep winning national elections with populist campaigns that threatened the interests of the country's long-established Bangkok-based elite.
Serious wrongdoing, involving bribery and institutional corruption, no doubt occurred along the way; but the scale of such offenses could hardly justify last year's military coup and the subsequent repression.
Some of those in the army-installed National Reform Council and Constitutional Drafting Committee have a real interest in ensuring that Thailand's next constitution – the 20th since 1932 – will be genuinely democratic.
Many do want to end, once and for all, the corrupt, vote-buying culture that has long afflicted Thai politics on both sides.
But true reform can be achieved only in a spirit of reconciliation, and the military regime's crude impeachment of deposed Prime Minister Yingluck Shinawatra (Thaksin's sister) in January – on trumped-up charges that seemed flimsy even to many of her diehard opponents – has made that impossible.
The law, once again, has been used for nakedly political ends.
Indonesia's case is different from the other two, and less extreme, but also troubling for the country's reputation.
The grassroots-driven victory of President Joko “Jokowi" Widodo last year triumphantly consolidated the country's democratic transition, and raised high expectations for human-rights and anti-corruption campaigners.
But, domestically, confidence in Jokowi's capacity and will to tackle corruption has eroded with his nomination – only very belatedly withdrawn – of a suspiciously wealthy but politically well-connected candidate for National Police Chief.
Internationally, concern has been growing about Jokowi's stated determination to allow – after a long moratorium – the executions of scores of convicted drug traffickers to proceed.
His stance reflects no consideration of whether their individual cases might justify clemency, as well as apparent indifference to mounting evidence that sentencing in capital cases might have owed less to a case's merits than to the presence or absence of bribes.
Two Australian drug traffickers have been scheduled for execution this month.
While no one doubts that they were properly convicted ten years ago, their behavior since – and questions about the integrity of the judicial process that condemned them to die but allowed others to live – has made a compelling case for the exercise of mercy, for them and for others.
What does not yet seem to have registered with Jokowi, or with enough of his fellow citizens, is the incongruity of refusing even to consider clemency for those on Indonesia's death row, while lobbying passionately for clemency for more than 200 Indonesians condemned to die elsewhere, notably in the Gulf.
Decency can be credibly demanded of others only if one practices it oneself.
It seems only a matter of time before Indonesians start feeling the pain of this inconsistency.
Malaysia has earned worldwide condemnation for its handling of the Anwar affair, and Thailand has lost many international friends since its latest coup, reflected in a humiliating loss in its recent bid for a seat on the UN Human Rights Council.
Thai diplomats fear another such defeat in their country's current attempt to win a seat on the UN Security Council.
There are some larger regional consequences in all of this.
The Association of Southeast Asian Nations (ASEAN) has tenaciously fought for its place as the geopolitical hinge between East and South Asia, and an important player in Asia-Pacific economic and security diplomacy.
In doing so, it has had to repeatedly finesse issues like Cambodia's authoritarian leadership, Myanmar's struggle with democratic transition, Vietnam's stubbornly anachronistic one-party state, and even impeccably incorruptible Singapore's regular misuse of defamation laws to neutralize political opponents.
The question that ASEAN leaders must now ask themselves is just how much trashing of the Southeast Asian brand, by how many of its members simultaneously, the region can afford while still fully realizing its aspirations for economic growth and political influence.
It is always tempting to claim that what happens behind sovereign borders is nobody else's business.
But that is no longer true in today's interconnected world.
Some states may be big and powerful enough to get away with behaving badly, but winning respect for behaving well is a much stronger foundation for economic and political success.
ASEAN’s New Approach to Myanmar
NEW YORK – The recent decision by Myanmar’s government to sentence pro-democracy leader Aung San Suu Kyi to a further 18 months’ house arrest shows how difficult it is to deal with that country’s ruling generals.
Yet the first steps toward a new approach may already have been taken.
The clearest sign comes from the Association of Southeast Asian Nations (ASEAN), of which Myanmar is a member.
At first, most of ASEAN’s member governments responded mildly to the verdict, expressing their “disappointment” – a stance that reflects the group’s principle of noninterference in fellow members’ internal politics.
But Thai Foreign Minister Kasit Piromya then consulted his counterparts in Cambodia, Indonesia, Singapore, and Vietnam.
As current ASEAN chair, he floated the idea of concertedly requesting a pardon for Aung San Suu Kyi.
ASEAN government officials have since met to draft a text.
Approval by the association’s foreign ministers may come in September, with ASEAN leaders tackling the issue in October.
Of course, amendments and objections to the draft should be expected.
But the pardon request is already significant.
It seeks to be finely balanced, respecting the regime’s sovereignty while subtly pressing home the point in unison, as neighboring states.
The request would be politely worded, but it would also be an official and public mode of communication, instead of the usual behind-the-scenes quiet diplomacy.
What ASEAN says or does not say will not change things immediately.
Cynics might add that even if Aung San Suu Kyi is pardoned, she may yet still be detained on political grounds or face other barriers aimed at preventing her from competing in the elections promised in Myanmar for 2010.
But Western sanctions have not worked, either.
Since the 1990’s crackdown, human rights violations have continued, most recently with the suppression of the protests led by Buddhist monks in 2007.
The average citizen has grown poorer, even as those close to the junta become ostentatiously rich.
Western sanctions instead paved the way for investments in Myanmar by those with less concern about human rights violations – first by ASEAN neighbors in hotels and other sectors, and more recently by China and India, which are vying for projects and influence in the strategic energy sector.
As a result, Myanmar’s generals have been able to play one side off against another.
The game, however, may now be changing.
ASEAN’s initiative is a new step forward for the group.
While ASEAN rejected previous calls to impose sanctions, or even to expel Myanmar, this step shows that it will not remain inert regardless of what the generals do.
Moreover, some ASEAN member countries, like Singapore, have explicitly called for Aung San Suu Kyi to be allowed to participate in the 2010 elections.
The ASEAN effort coincides with two other developments.
One is the decision by the United States to reconsider its policy of sanctions, becoming more flexible while remaining true to its values and interests.
Some activists have criticized US Senator Jim Webb’s journey to Yangon to obtain the release of John Yettaw, the American whose actions triggered the charges against Aung San Suu Kyi.
But this is consistent with the Obama administration’s policy of seeking a dialogue even with those who are not America’s friends.
Such dialogue is vital if Myanmar is to be prevented from possibly pursuing nuclear weapons and rigging elections, à la Iran.
The other development is less obvious.
After the court delivered its verdict, the regime halved the sentence and agreed to keep Aung San Suu Kyi under house arrest, rather than moving her to one of its worst jails.
This may not seem like much of a concession. But the junta seems to be trying to cause less offense.
Consider, too, the junta’s gesture in handing over Yettaw to Senator Webb, and its interaction with the international community on humanitarian assistance after Cyclone Nargis.
Might it be possible that the generals in Myanmar recognize that they are in a cul de sac?
Could the regime be seeking ways out of its isolation in the run-up to the 2010 elections?
Could it welcome dialogue and engagement?
How the generals respond to the ASEAN request will be an important signal of the regime’s intentions.
Even if the regime does want to begin talking, sustaining a dialogue will be no easier than has been the case with North Korea.
ASEAN, as the organization of neighboring states, is important to achieving that goal, but US involvement is key, as is inclusion of China and India.
They must be pressed to see more than the opportunity for strategic access to energy and other natural resources.
Japan, too – still the largest Asian economy and a traditional donor to the region – must also play a role.
A moral but pragmatic community needs to be constructed, with all in agreement on how to deal with Myanmar.
Even if, like an orchestra, different countries use different instruments and play different notes, the main theme must be consistent.
If this can be done, the chances of progress in the run-up to the 2010 elections will be strengthened.
Success may still prove elusive, but a new game with a greater possibility for success will have begun.
A Security Strategy for the 21st Century
MADRID – “Time and again in our Nation’s history, Americans have risen to meet –and to shape – moments of transition.
This must be one of those moments.” So begins the National Security Strategy of the United States of America, presented before Congress on May 27.
As with the politics pursued in the Obama administration’s 16 months of office – dialogue, international commitment, nuclear non-proliferation and disarmament – the document’s strength lies in the position that it takes.
The Security Strategy is a clear departure from that of its predecessor and offers a wider conception of what national security represents for US President Barack Obama.
In the face of the major challenges of our times, Obama has taken a stand with a comprehensive doctrine.
Indeed, the Security Strategy is almost a “National” Strategy.
Its thinking goes beyond the dominant, unilateral paradigm of its predecessor and includes a defense of international law.
This is particularly noteworthy, given that none of the great treaties to create an international criminal court and a permanent war-crimes tribunal was signed by the US during George W. Bush’s presidency.
Obama’s approach to security is broader as well, proposing the “three Ds” – defense, diplomacy, and development – as indivisible parts of a whole.
The military dimension of intervention abroad loses its privileged role, making way for the prevention of conflict and for peace-keeping and stabilization missions.
In the fight against terrorism, the Strategy abandons the predominantly military viewpoint underlying the war against terror, and embraces a more significant role for the intelligence services.
For the first time, precise reference is made to people liable to be a threat to US security.
The US is not waging a war against terrorism; it is at “war against a specific network, al Qaida, and its affiliates.” In this war, information resources are particularly necessary.
In order to guarantee national security, the Strategy is categorical – without giving in to the temptation of isolationism – in admitting the strategic value of the example and the importance of doing one’s homework first.
Obama steers clear both of interventions for humanitarian purposes and of attempting to export democracy by force.
There is no better way of exporting the values of democracy than by strengthening the US internally.
Thus, an economic policy that tackles America’s debt and deficit makes up the main portion of the Strategy.
Backing competitive education, innovation, technology, energy, and a more efficient and accessible health-care system complements and reinforces Obama’s leadership approach of setting an example with one’s own policies.
An important example is removing the US prison at Guantánamo Bay from international limbo – one of his first initiatives as president.
This approach does not have unanimous support among international experts.
The two main criticisms – lack of strategic clarity and less emphasis on the classical concepts of power – point to America’s loss of influence, power, and leadership.
But these criticisms reflect an inability to contemplate the current nature of armed conflict, which no longer follows the classical logic of military victory or defeat.
The war in Afghanistan and the complex situation in Iraq have highlighted the importance of a comprehensive approach.
Military action cannot be considered the only variable of success.
A successful strategy should use civilian means – incidentally a model advocated by the European Union.
We are faced with forging a new long-term policy that affects both states and societies.
That task requires patience and strategic perseverance.
Change will not occur from one day to the next, but the results obtained in the end will be better and more enduring.
Obama maintains the idea of service to a historical mission for the US: the important job of guaranteeing global security.
But, unlike his White House predecessors, Obama’s National Security Strategy recognizes the value of partnerships; attaches greater importance to the civilian dimension as opposed to the military; and stresses the value of dialogue and the need to reinforce international institutions.
This is a good sign for a world with different power centers and interests, with resources and legitimacy remaining tied to the nation-state, but in which challenges (climate change, armed conflicts, pandemics, and transnational crime) are global and, therefore, require cooperation among states.
We are in a transition period: international interconnection is increasing, as the global economic crisis has shown, but the management tools and mechanisms to guarantee the smooth operation of governments are still not being shared.
Obama’s new National Security Strategy shows a political willingness to back an international order able to tackle these challenges.
The road ahead is not free of difficulties, but the Strategy represents a decisive step towards solving the challenges of the twenty-first century and preparing us for the world of tomorrow.
A Seismic Crime
NEW YORK – Few people outside Italy are aware that six seismologists and a government official are on trial in the small city of L’Aquila.
But the story has implications for scientists, engineers, administrators, and legal systems far beyond Italy’s borders.
L’Aquila was largely destroyed by earthquakes in 1461 and 1703.
The city was rebuilt, eventually grew to more than 73,000 inhabitants, and remained stable for more than 300 years – until October 2008, when tremors began again.
From January 1 through April 5, 2009, 304 additional tremors were reported.
Italy’s National Commission for Prediction and Prevention of Major Risks, which comprised the seven men now on trial, met in L’Aquila for one hour on March 31, 2009, to assess the earthquake swarms.
According to the minutes, Enzo Boschi, President of the National Institute of Geophysics and Volcanology, was asked if they were precursors to an earthquake resembling the one in 1703.
He replied: “It is unlikely that an earthquake like the one in 1703 could occur in the short term, but the possibility cannot be totally excluded.”
On April 6, 2009, a 6.3 magnitude earthquake struck L’Aquila and nearby towns, killing more than 300 people and injuring more than 1,500.
The quake also destroyed roughly 20,000 buildings, temporarily displacing another 65,000 people.
More than a year later, in July 2010, prosecutor Fabio Picuti charged the Commission members with manslaughter and negligence for failing to warn the public of the impending risk.
The trial began last September, and is expected to last for months, if not years.
After Picuti made the charges public in June 2010, Alan Leshner, Executive Publisher of Science, sent an open letter of protest to Italian President Giorgio Napolitano on behalf of the American Association for the Advancement of Science.
He wrote that the “charges against these scientists are both unfair and naïve….[T]here is no accepted scientific method for earthquake prediction that can be reliably used to warn citizens of an impending disaster.” The American Geophysical Union and thousands of other scientists also objected.
Picuti reportedly responded: “I’m not crazy.
The basis of the charges is not that they didn’t predict the earthquake.
As functionaries of the state, they had certain duties imposed by law: to evaluate and characterize the risks that were present in L’Aquila.”
In 1989, a United States National Research Council report, Improving Risk Communication, recommended that one-way communication from experts to non-experts be replaced with an “interactive process of exchange of information and opinion.” The report suggested that risk communication is successful only if those involved are satisfied that they are adequately informed about the relevant issues, given the limits of available knowledge.
Yet such information exchange remains a problem – and not only in Italy – more than 20 years later.
The interactions between science, technology, and law are growing increasingly complex.
As science and technologies evolve, risk assessments and the dialogue between scientists and governments must adapt.
Both sides must continually determine, before disaster strikes, whether existing laws provide scientists and administrators with clear, realistic standards for their analyses and public communications. If they do not, the best qualified scientists and administrators might be frightened away.
In 2011, the National Research Council and the US Federal Judicial Center issued the 1,016-page third edition of the Reference Manual on Scientific Evidence.
Although its purpose is to help judges and attorneys to understand the science from which legal evidence is derived, its index contains no entry for earthquakes.
Furthermore, the manual mentions risk communication only briefly, in the context of medical testimony.
Given such shortcomings, courses on science and engineering and their social applications should become part of the core training and continuing education of those in law, public administration, and official policymaking positions.
Legislators, prosecutors, and judges, in particular, need to understand what natural sciences, social sciences, and engineering can and cannot offer.
At the same time, natural scientists must become better educated to work effectively with engineers, public administrators, and social scientists (for example, economists, demographers, and psychologists) to communicate the consequences of scientific findings, especially when high risks are involved.
Those risks will not go away.
In February 2011, almost 200 people died when a 6.3-magnitude earthquake struck Christchurch, New Zealand.
The following month, Japan’s Tōhoku earthquake killed almost 16,000 people.
As the anniversary of that earthquake approaches on March 11, Japanese researchers predicted in January 2012 that another major earthquake will strike the southern Kanto region, including Tokyo, by 2016 with 70% probability.
The Big One will one day strike California.
Will we be ready?
The Eurozone’s Narrowing Window
PRINCETON – Portuguese authorities recently made a preemptive offer to their country’s creditors: Instead of redeeming bonds maturing in September 2013, the government would stretch its repayment commitment out to October 2015.
The deal was concluded on October 3, and has been interpreted as a successful market test for Portugal.
Ireland’s authorities have conducted similar recent operations, exchanging short-maturity paper for longer-term debt.
These transactions highlight the broader strategy of buying time.
Both countries are seeking to create a longer, more manageable repayment profile for their privately-held debt as they begin weaning themselves from dependence on official “bailout” funds provided by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund).
Private investors are acknowledging the reality that repayments will likely be drawn out, because insisting on existing terms could cause an untenable bunching of debt-service payments, with possibly unpleasant consequences.
This strategy’s success presupposes that, in the interim, economic growth will strengthen the capacity to repay debt down the line.
The debt ratios for both Ireland and Portugal are expected to peak at about 120% of GDP in 2013, after which they are projected to fall.
The peak ratio and the subsequent downward trajectory depend crucially on the assumed pace of economic growth.
But growth prospects remain grim.
The Portuguese economy is now expected to contract by 1% in 2013.
In late June, the IMF projected modest growth, and, at the time of the “bailout” agreement in May 2011, GDP in 2013 was expected to grow by 1.25%.
Such successive downward forecast revisions have become commonplace.
The latest estimates for Italy and Spain project a deeper contraction, prolonged into next year.
Ireland is doing better, although its growth forecast has also been revised downward, to just under 0.5% in 2012 and 1.4% next year.
Moreover, Irish GNP (the income accruing to its nationals, as distinct from foreign firms operating in Ireland) continues to shrink.
Each downward revision implies postponement of the date on which the debt/GDP ratio will peak.
Beyond 2013, growth must depend on either the elixir of structural reforms, or a strong revival of the global economy.
But a revival of economic growth in the short term is unlikely.
Crucially for Europe, world trade has been virtually stagnant in recent months.
Global trade and economic performance in the eurozone appear to be dragging each other down.
The potential consequences are serious.
While the IMF’s primary scenario is that Irish and Portuguese debt levels will soon stop rising, it comes with a chilling litany of downside risks.
The likelihood that budget deficit and debt targets will be missed is rising.
Thus, the eurozone faces three choices: even more austerity for the heavily-indebted countries, socialization of the debt across Europe, or a creative re-profiling of debt, with investors forced to accept losses sooner or later.
Austerity alone cannot do it.
Some countries face the growing risk of near-perpetual belt-tightening, which would further dampen growth and thus keep debt ratios high.
After all, if a country’s debt/GDP ratio is to decline without austerity, the interest rate that it pays on its debt must be lower than its GDP growth rate.
If the interest rate is higher than the growth rate, austerity is required;&nbsp;the wider the gap, the more austerity is needed.
Acknowledging the limits of austerity, several initiatives attempt a European resolution.
Special European facilities, along with the IMF, lend money at below-market interest rates, which reduces the extent of austerity required.
But the facilities’ resources are dwindling, and they certainly would not be sufficient if Spain and Italy were to seek support.
The ECB’s announcement of a new program to purchase sovereign bonds has lowered market interest rates.
But, even with that decline, many countries’ long-term interest rates will most likely remain higher than their growth rates for the next several years.
More ambitious pan-European efforts are embodied in various Eurobond proposals.
These schemes imply socialization of debt – taxpayers elsewhere in Europe would share a country’s debt burden.
These proposals, once in great vogue, have receded. Not surprisingly, the political opposition to such debt mutualization was intense.
Given that perpetual austerity is untenable and others in Europe can only do so much, without robust growth the options will narrow quickly.
As a result, much now hangs on the ECB’s actions – and how long they will be sufficient to maintain a truce with financial markets.
Perhaps the Portuguese time-buying strategy points the way ahead.
But time eventually does run out.
If buying time is not enough, will there finally be a greater call on bondholders to share the pain?
The Looming Lost Decade
PRINCETON – As 2013 comes to an end, it looks like the world economy will remain stuck in low gear.
For those reading the tea leaves of global recovery, the third-quarter GDP numbers offered no solace.
While the United States is ahead of the pack, some of its gains could soon be lost, as accumulating inventories begin eroding profits.
Despite glimmers of hope, the eurozone and Japan are struggling to cross the 1% threshold for annual economic growth.
And the major emerging economies are all slowing, with Russia practically at a standstill.
Not surprisingly, a catchphrase in economic-policy debates nowadays is “secular stagnation,” the idea that excess savings chronically dampen demand.
The economist Robert Gordon has also argued that the world is low on economically productive ideas.
But before we despair, there is work to be done.
The coordinated fiscal stimulus that saved the world from economic collapse in 2009 disappeared too quickly, with governments shifting their focus to domestic politics and priorities.
As domestic policy options have been exhausted, economic prospects have dimmed.
A renewed emphasis on stimulus must be augmented by global coordination on the timing and content of stimulus measures.
The crisis was and remains global.
Trade data tell the story: after increasing by about 7% annually in the decade before 2008, world trade fell faster than global GDP in 2009 (and more sharply than during the Great Depression).
Once the brief stimulus-fueled recovery faded, growth in world trade again slowed quickly, falling to 2% year on year over the past 18 months.
Disappointing export performance is largely responsible for the recent weakening of economic-growth prospects.
At the end of 2008, when the scale of the impending economic destruction was not yet apparent, Olivier Blanchard, the International Monetary Fund’s chief economist, boldly called for a global fiscal stimulus, stating that, in these “not normal times,” the IMF’s usual advice – fiscal retrenchment and public-debt reduction – did not apply.
He warned that if the international community did not come together, “vicious cycles” of deflation, liquidity traps, and increasingly pessimistic expectations could take hold.
Fortunately, world leaders listened, agreeing in April 2009 at the G-20 Summit in London to provide a total of $5 trillion in fiscal stimulus.
The US and Germany added stimulus amounting to about 2% of GDP.
And China’s banks pumped massive amounts of credit into the country’s economy, enabling it to sustain import demand, which was critical to the global recovery.
But hubris rapidly set in, and parochial interests took over.
Before the wounds had fully healed, the treatment was terminated.
The worst offenders were the US and Germany, which shirked the responsibility to protect the global common good that accompanies their status as economic hegemons.
The United Kingdom, with its contrived rationale for fiscal austerity, was not much better.
Fiscal stimulus by these three countries – together with smaller contributions from France and China – could have continued the necessary healing.
Countries now seem to think that monetary-policy measures are their only option.
But, whereas fiscal stimulus boosts growth at home and abroad, enabling mutual reinforcement through world trade, monetary policy is guided primarily by domestic goals, and, in the short term, one country’s gain can be another’s loss.
America leads the world in monetary-policy ambition.
The researchers Cynthia Wu and Fan Dora Xia estimate that the US Federal Reserve’s open-ended asset purchases (so-called quantitative easing, or QE) have led to an effective US policy rate of -1.6%.
QE helped American exports by weakening the dollar relative to other currencies.
Once the Japanese engineered their own QE, the yen promptly depreciated. That has kept the euro strong.
The weakest of the “big three” developed economies – the eurozone – has thus been left with the strongest currency.
In the third quarter of 2013, Germany’s export growth slowed and French exports fell.
After a spike earlier in the year, Japan’s exports have also contracted.
Only US exports have maintained some traction, thanks to the weaker dollar.
In the 1930’s, after the gold standard broke down, world leaders could not agree on coordinated reflation of the global economy.
In his book Golden Fetters, the economist Barry Eichengreen argued that the lack of coordinated action dragged out the global recovery process.
Such delays are costly, and risk allowing pathologies to fester, prolonging the healing process further.
Now, despite unfavorable political circumstances, Blanchard should make an even bolder call.
These are still not “normal” times, and the “vicious cycles” persist.
Another global fiscal stimulus – focused on public investment in infrastructure and education – would deliver the adrenaline shot needed for a robust recovery.
More public investment is twice blessed.
It can shake the world out of its stupor; and it can safeguard against “secular stagnation.”
The US, Germany, the United Kingdom, France, and China should act together to provide that boost.
Otherwise, a sustainable global recovery may remain elusive, in which case 2014 could end in low gear as well.
The IMF’s False Confession
PRINCETON – “Do I have to go on my knees?” the International Monetary Fund’s managing director, Christine Lagarde, asked the BBC’s Andrew Marr.
Lagarde was apologizing for the IMF’s poor forecasting of the United Kingdom’s recent economic performance, and, more seriously, for the Fund’s longer-standing criticism of the fiscal austerity pursued by Prime Minister David Cameron’s government.
Now endorsing British austerity, Lagarde said that it had increased confidence in the UK’s economic prospects, thereby spurring the recent recovery.
Lagarde’s apology was unprecedented, courageous, and wrong.
By issuing it, the IMF compromised on an economic principle that enjoys overwhelming academic support: The confidence “fairy” does not exist.
And, by bowing to the UK’s pressure, the Fund undermined its only real asset – its independence.
The IMF has dodged responsibility for far more serious forecasting errors, including its failure to anticipate every major crisis of the last generation, from Mexico in 1994-1995 to the near-collapse of the global financial system in 2008.
Indeed, in the 6-12 months prior to every crisis, the IMF’s forecasts implied business as usual.
Some claim that the Fund counsels countries in private, lest public warnings trigger the very crisis that is to be avoided.
But, with the possible exception of Thailand in 1997, the IMF’s long-time resident historian, James Boughton, finds little evidence for that view in internal documents.
The IMF’s Internal Evaluation Office is more directly scathing in its assessment of the Fund’s obliviousness to the US subprime crisis as it emerged.
Given that the IMF is the world’s anointed guardian of financial stability, its failure to warn and preempt constitutes a far more grievous lapse than its position on British austerity, with huge costs borne by many, especially the most vulnerable.
For these failures, the Fund has never offered any apology, certainly not in the abject manner of Lagarde’s recent statement.
The Fund does well to reflect on its errors.
In a September 2003 speech in Kuala Lumpur, then-Managing Director Horst Köhler conceded that temporary capital controls can provide relief against volatile inflows from the rest of the world.
He was presumably acknowledging that the Fund had it wrong when it criticized Malaysia for imposing such controls at the height of the Asian crisis.
Among the countries hurt by that crisis, Malaysia chose not to ask for the Fund’s help and emerged at least as well as others that did seek IMF assistance.
Malaysia’s imposition of capital controls was a controversial policy decision.
And even as the Fund opposed them, prominent economists – among them Paul Krugman – endorsed their use.
In his speech, Köhler reported that the Fund had taken the evidence on board and would incorporate it in its future advice.
But in the current crisis, the academic evidence has overwhelmingly shown that fiscal austerity does what textbook economics says it will do: the more severe the austerity, the greater the drag on growth.
A variety of studies confirming this proposition, including one by the IMF’s chief economist, Olivier Blanchard, have withstood considerable scrutiny and leave little room for ambiguity.
The two public voices arguing for the magical properties of austerity are official agencies based in Europe: the OECD and the European Commission.
The Commission’s stance, in particular, is animated by an institutional commitment to a fiscal viewpoint that leaves no room for evidence.
Among the G-7 economies, only Italy has done worse than the UK since the Great Recession began.
Indeed, the UK’s GDP has only just regained its 2008 level, lagging behind even France.
This is all the more remarkable given that the crisis in the UK was comparatively mild.
The fall in property prices was modest relative to Ireland and Spain, and, because there was no construction boom, there was no construction bust.
Having missed the warning signs about the bank Northern Rock, which needed to be bailed out by the UK government after a run on its deposits in September 2007, the British authorities, unlike their eurozone counterparts, quickly dealt with the economy’s distressed banks.
For these reasons, the UK should have had a quick recovery; instead, the Cameron government’s gratuitous austerity stifled it.
The IMF’s apology was a mistake for two reasons.
Thumbing one’s nose at scholarly evidence is always a bad idea, but it is especially damaging to an institution that relies so heavily on the credibility of its technical competence and neutrality.
If the Fund embraces muddled economics, on what basis will it defend its policy advice?
Moreover, in choosing to flatter the UK’s misguided policy, the Fund has confirmed its deference to its major shareholders.
For years, the view has been that the IMF is a foreign-policy instrument of the United States.
The softness in its annual surveillance of UK economic policy has also been well known.
But in taking this latest step, the Fund has undermined – perhaps fatally – its ability to speak “truth to power.”
If so, a fundamental question may well become unavoidable: Why does the IMF exist, and for whom?
Asia After Obama
NEW DELHI – US President Barack Obama’s 10-day Asian tour and the consecutive summit meetings of the East Asian Summit (EAS), the G-20, and the Asia-Pacific Economic Cooperation (APEC) have helped shine a spotlight on Asia’s challenges at a time when tensions between an increasingly ambitious China and its neighbors permeate the region’s geopolitical landscape.
Significantly, Obama restricted his tour to Asia’s leading democracies – India, Indonesia, Japan, and South Korea – which surround China and are central to managing its rise.
Yet he spent all of last year assiduously courting the government in Beijing in the hope that he could make China a global partner on issues ranging from climate change to trade and financial regulation.
The catchphrase coined by US Deputy Secretary of State James Steinberg in relation to China, “strategic reassurance,” actually signaled America’s intent to be more accommodating toward China’s ambitions.
Now, with his China strategy falling apart, Obama is seeking to do exactly what his predecessor attempted – to line up partners as an insurance policy in case China’s rising power slides into arrogance.
Other players on the grand chessboard of Asian geopolitics also are seeking to formulate new equations, as they concurrently pursue strategies of hedging, balancing, and bandwagoning.
A fast-rising Asia has, moreover, become the fulcrum of global geopolitical change.
Asian policies and challenges now help shape the international economy and security environment.
But major power shifts within Asia are challenging the continent’s own peace and stability.
With the specter of strategic disequilibrium looming large in Asia, investments to help build geopolitical stability have become imperative.
China’s lengthening shadow has prompted a number of Asian countries to start building security cooperation on a bilateral basis, thereby laying the groundwork for a potential web of interlocking strategic partnerships.
Such cooperation reflects a quiet desire to influence China’s behavior positively, so that it does not cross well-defined red lines or go against the self-touted gospel of its “peaceful rise.”
But building genuine partnerships is a slow process, because it demands major accommodation and adjustment on both sides.
The US, for example, has worked hard in recent years to co-opt India in a “soft alliance” shorn of treaty obligations.
Yet, despite a rapidly warming bilateral rapport and Obama’s recent statement calling India the “cornerstone of America's engagement in Asia,” conflicting expectations and interests often surface.
The US is now courting Vietnam as well, and the two countries are even negotiating a civilian nuclear deal.
The Cold War legacy, however, continues to weigh down thinking in Hanoi and Washington to some extent.
Within Vietnam’s ruling Communist Party, there are deep divisions over the country’s relations with the US.
Even as Vietnam moves closer to the US as a hedge against China’s muscular strategy, some Vietnamese leaders fear that the Americans remain committed to regime change.
After all, despite Burma’s strategic importance vis-à-vis China and Aung San Suu Kyi’s release from house detention, the US continues to enforce stringent sanctions against that country, with the aim of toppling its government.
In the process, Burma has become more dependent than ever on China.
The US-China relationship itself is likely to remain uneasy, but overt competition or confrontation suits neither side.
For the US, China’s rising power actually helps validate American forward military deployments in the Asian theater. The China factor also helps the US to retain existing allies and attract new ones, thereby enlarging its strategic footprint in Asia.
While the US is thus likely to remain a key factor in influencing Asia’s strategic landscape, the role of the major Asian powers will be no less important.
If China, India, and Japan constitute a scalene strategic triangle in Asia, with China representing the longest side, side A, the sum of side B (India) and side C (Japan) will always be greater than A. Not surprisingly, the fastest-growing relationship in Asia today is probably between Japan and India.
If this triangle turned into a quadrangle with the addition of Russia, China would be boxed in from virtually all sides.
Japan plus Russia plus India, with the US lending a helpful hand, would not only extinguish any prospect of a Sino-centric Asia, but would create the ultimate strategic nightmare for China.
As recent developments show, however, a Russian-Japanese rapprochement remains far off.
Against this geopolitical background, Asia’s power dynamics are likely to remain fluid, with new or shifting alliances and strengthened military capabilities continuing to challenge the prevailing order.
That befits the year of the tiger in Chinese astrology – a year in which China roared by ratcheting up tensions with neighbors from Japan to India by escalating territorial feuds.
In fact, 2010 will be remembered as the year that Chinese leaders undercut their country’s own interests by kindling fears of an expansionist China, thereby facilitating America’s return to center stage in Asia.
Asia After the Afghan War
TOKYO – July will mark two milestones in America’s sometimes-tortured relations with Asia.
One is the beginning of the end of the nearly decade-long struggle in Afghanistan – the longest war in United States history – with President Barack Obama announcing the withdrawal of 30,000 US troops from the country by next summer.
The other is the 40th anniversary of Henry Kissinger’s secret mission to Beijing, a turning point in the Cold War and the first step on China’s road to modernization – but at the time a huge shock to Asia, particularly Japan.
The looming Afghan withdrawal recalls, at least for some Asians, a third, even more traumatic event: America’s chaotic exit from Saigon in April 1975.
Back then, that debacle seemed to presage a broader US withdrawal from Asia, with a war-weary American public seeking the supposed comforts of isolationism.
Today’s Asian nervousness exists not only because isolationism appears to be gaining ground once more in America, but also because Afghanistan’s stability remains in doubt, while China’s power is rising in the absence of any pan-Asian consensus or institutional structure.
America did, indeed, turn inward following the fall of Saigon, and its neglect of Afghanistan following the Soviet withdrawal in 1989 led to chaos and Al Qaeda’s near-takeover of the country.
So it is not surprising that many Asian leaders are asking themselves what commitments the US will maintain once its troops leave Afghanistan.
Perhaps equally important, many people in Asia are also debating whether the region would be able to rebalance itself should the US scale back its military presence.
Fortunately, US Secretary of Defense Robert Gates has reassured America’s Asian friends and allies that regional disengagement is not being contemplated.
At the recent Shangri La Dialogue in Singapore – indeed, in the presence of Chinese Minister of Defense General Liang Guanglie – Gates outlined his ideas for continuing US cooperation in and with Asia.
Gates promised to increase the number of US warships deployed to Singapore as part of the US-Singapore Strategic Framework Agreement; increase the number of US Navy calls in Asian ports; hold more joint naval exercises; and improve multilateral military cooperation.
Even more reassuring were the principles that will, according to Gates, guide America’s future Asian strategy: free and open commerce; support for the rule of law and the rights, responsibilities, and sovereignty of Asia’s states; open access to Asian and global sea lanes, airspace, and cyberspace; and peaceful resolution of all conflicts.
These principles matter, because Australia, Japan, South Korea, Thailand, the Philippines, India, Indonesia, Singapore, Malaysia, New Zealand, Vietnam, and even Mongolia all regard America’s military presence in the region as essential to counterbalancing China’s increasing might.
Gates, however, is due to step down from his post shortly, which is unfortunate, because the Obama administration’s apparent lack of any explicit Asia strategy means that Gates’s reassurances might not reassure for very long.
Nowadays, US policy on Asia needs the type of strategic vision and insight that guided Kissinger’s discussions with Mao Zedong and Zhou En-lai four decades ago.
Without a clear and convincing doctrine, at least some Asian leaders are likely to remain dubious of America’s ability to remain Asia’s dominant military force, particularly given its economic woes, projected fiscal retrenchment, and other overseas commitments.
This lack of clarity may become particularly troublesome should China’s leaders underestimate the enduring quality of America’s Asian commitments.
Securing a structure of peace in Asia, however, is not solely America’s responsibility.
America’s friends and allies need to think hard about what sort of regional order they want, and they must begin to collaborate in order to breathe life into a structure of peace within which all of Asia can prosper and feel secure.
Japan’s government in particular needs to identify a coherent Asia strategy and stick to it, instead of leaning towards China one minute, and America the next.
In constructing a viable strategy, deepening Japan’s partnerships with Asia’s great democracies – India, Indonesia, and South Korea – must be a priority.
But the biggest question concerns China’s place in a consensual Asian order, and its willingness to collaborate with its neighbors, as well as with the US, in creating it.
The doubts that many Asians now hold about China’s intentions are well grounded, given the secretive nature of China’s military build-up, and its leaders’ increasingly aggressive tone in territorial disputes with India, Japan, the Philippines, and Vietnam.
China’s unconditional support for North Korea’s wayward regime, despite its repeated crimes against peace, is also a cause for concern about whether China will treat its neighbors’ security concerns with respect.
Today’s Asia-Pacific region has now become the focus of the global economy.
According to the World Bank, three of the top five economic powers (China, Japan, and India) will be Asian powers within this decade.
The boom that has brought this shift occurred because America’s military presence in the region provided stability and predictability.
America’s withdrawal from Afghanistan must not be allowed to call this stability into question.
What happens in Afghanistan as America begins to draw down its troops will test the willingness of all of Asia’s powers to work together to build a secure regional order.
In Afghanistan, their long-term interests are essentially in harmony, as none – including China – wants to see Afghanistan become a haven for terrorism once again.
But only a strong regional consensus on Afghanistan’s future can avert the prospect of a renewed struggle for mastery there.
If such a consensus can be forged, however, it will provide a foundation for further collaboration in building a pan-Asian order based on consent, not military might.
Northeast Asia’s Home Fires Burning
TOKYO – Successful diplomatic summits are almost always pre-cooked affairs, with every aspect of the meeting, from the initial handshakes to the final communiqué, minutely choreographed.
But next month’s Asia-Pacific Economic Cooperation (APEC) summit in Beijing looks like a high-risk enterprise.
It is not even clear whether Chinese President Xi Jinping will agree to meet with one of his most important guests, Japanese Prime Minister Shinzo Abe.
It is also unclear whether Abe will be able to meet with South Korean President Park Geun-hye.
And yet there is considerable reason to hope not only for formal handshakes and bilateral meetings among Northeast Asia’s “Big Three” leaders, but also for substantive discussions aimed at lowering tensions in the region.
That hope is built on all three leaders’ need for a period of diplomatic quiet, owing to the difficult domestic challenges that each now faces.
Xi may be confronting the most difficult domestic agenda: an effort to engineer a relatively smooth transition from an economic structure based on manufacturing and exports to one in which domestic consumption and services fuel growth.
Not only has structural transformation caused the economy to slow; it has also exposed deep flaws in China’s financial system.
The shift in the country’s economic model would be difficult in the best of circumstances.
But it is being undertaken simultaneously with the deepest political purge China has experienced since the days of Mao Zedong, with Xi targeting corrupt officials high and low.
At the moment, the focus seems to be on People’s Liberation Army officers and those tied to now-imprisoned former Chongqing Communist Party boss Bo Xilai and the former Politburo security chief Zhou Yongkang, who is awaiting sentencing.
Indeed, the most perilous phase of Xi’s purge may now be underway, given the recent arrest of the deputy commander of the Sichuan Military District – a key post, given the district’s large and restive Tibetan population.
Abe’s domestic troubles, stemming from two decades of economic stagnation, are well known.
Although his economic strategy, known as “Abenomics,” appears to have ended deflation, vibrant growth is nowhere in sight.
Moreover, after a series of scandals cost Abe some newly appointed ministers, some fear that he may no longer be willing to follow through on the liberalizing structural reforms – the so-called “third arrow” of Abenomics – that sustained economic recovery requires.
Park may appear to face the least vexing domestic conditions, with South Korea’s economy growing at a 3.2% annual pace in the second quarter of 2014, only marginally lower than market forecasts.
But Park undoubtedly views her domestic circumstances as anything but rosy; in many ways, this has been an annus horribilis for her and her country.
Indeed, disaster has stalked South Korea this year, beginning in April with the sinking of the ferry Sewol, which claimed some 300 lives, most of them high school students.
The trial of the Sewol’s captain, the apparent suicide of its owner, and a series of scandals involving beatings and bullying leading to death and suicide among army conscripts have cost Park key ministerial resignations, and have created a pervasive sense of unease about how the country is governed.
Complicating matters further is the need for Park to devise a viable response to a new diplomatic charm offensive by North Korea’s usually charmless leader, Kim Jong-un.
Park remains, rightly, a skeptic concerning Kim’s motives; but the spectacle of the North’s second-highest-ranking official appearing suddenly at the Asian Games earlier this month created a frisson of excitement that perhaps Kim the Younger may actually want to improve relations.
Faced with these domestic concerns, all three leaders need a respite from the tensions that have bedeviled relations among their countries over the past three years.
But, because each has played on these tensions, particularly with Japan, in order to control their domestic opponents, achieving this necessary respite may prove difficult.
And yet there are signs that the three leaders understand that the APEC summit may be a make-or-break moment for their countries’ relations.
Much of the worst anti-Japanese bombast has disappeared from Chinese television in recent weeks, and former Japanese Prime Minister Yasuo Fukuda is due to meet with Xi in Beijing this week.
This does not yet add up to a thaw in the bilateral relationship, but it does suggest that Xi may be seeking a respite, at least until China’s economy is on a more stable footing and his anti-corruption campaign begins to wind down.
Park, too, has sent signals that she may want to ease tensions.
She recently met with former Japanese finance minister Fukushiro Nukaga, and Kim Kwan-jin, the chief of South Korea’s National Security Office, recently met with Abe’s national security adviser, Shotaro Yachi.
With Abe, Park, and Xi each facing daunting domestic challenges, a rare convergence in each country of self-interest and national interest may be creating a chance for improved relations.
The question now is whether Northeast Asia’s Big Three leaders can overcome old positions, shake hands, and get serious about regional diplomacy.
Asia Enters the Storm
BERKELEY – As 2011 draws to a close, there are growing signs that Asia is becoming caught up in the global slowdown, dashing hopes that the region’s economies would “decouple” from the prolonged recession in Europe and America’s lackluster recovery.
China’s export growth is slipping, owing to faltering demand in Europe, which has surpassed the United States as China’s largest foreign market.
Indeed, China’s manufacturing activity is contracting for the first time in almost three years.
Reverberations are already evident in other emerging Asian economies that depend on exports both to China-based manufacturers and to the US and Europe.
Decoupling did not occur in 2008, when exports accounted for about 45% of pan-Asian GDP (excluding Japan) and every emerging country in the region experienced a sharp contraction in growth as world trade plummeted.
Nor is decoupling likely today, because exports still account for about the same share of the region’s GDP, and about 50% of these exports are still headed to developed countries.
So the idea of decoupling appears to be a chimera.
Even if the euro crisis is resolved, austerity in Europe, along with anemic growth or worse in the US, will mean a slowdown in export-dependent Asia.
But Asia’s economies can still grow much faster than the developed West if they respond to prolonged stagnation by rebalancing their growth toward internal demand, especially household consumption.
The good news is that these economies have substantial room for such rebalancing, as well as the policy flexibility to accomplish it.
The share of consumption in GDP in these economies fell from more than 60% in the early 1980’s to less than 50% today.
In China, it is less than 40% – far below the norm for the world’s major economies and for other Asian economies at a comparable stage of development – despite nearly 7% annual average growth in China’s per capita consumption in recent years.
The Asian economies are home to 3.5 billion consumers, but their share in global consumption remains small – much smaller than their share in global GDP.
China alone accounts for 20% of the world’s population, nearly 11% of global GDP, but only 3% of global consumption.
China and most of the other emerging Asian economies have strong government balance sheets – the GDP shares of their budget deficits and public debt are relatively small.
As a result, they have the fiscal firepower to boost consumption in order to mitigate the effects of declining exports.
True, many local governments in China are saddled with debt, some of which may need to be restructured.
But the central government enjoyed a 28% increase in revenues over the last year, and has more than $3 trillion in foreign-exchange reserves.
In addition, the moderation of inflationary pressure as a result of slower growth and cooling global commodity markets will allow Chinese and other Asian policymakers to shift their focus from containing economic overheating to rebalancing growth.
In China, where inflation is falling sharply, monetary policy has already begun to ease.
Even with significant policy support, however, most of the smaller Asian economies – Taiwan, Thailand, Singapore, and even South Korea – will not be able to replace external demand with internal demand to the same extent that China can.
So, even with rebalancing, exports will remain a significant determinant of their growth, and China is already their major export market.
That is why China’s rebalancing is so important not only for its own economy, but for all of China-centric Asia.
Intra-regional trade flows have surged during the last decade, but they have been concentrated in parts and components that go into finished products assembled in China for export to developed countries.
With depressed markets in the developed world, intra-regional trade in the future will depend more on exports to satisfy Chinese domestic demand.
Again, there is cause for optimism: China’s imports from Asia have been growing faster than China’s exports to the US for the last several years.
China responded to the 2009 global slowdown with dramatic fiscal and monetary stimulus, which fueled a rapid investment-led recovery at home and throughout Asia.
Investment, mainly by local governments and state-owned companies with easy access to bank financing, soared to more than 45% of GDP, and, consistent with China’s long-run urbanization strategy, was concentrated in infrastructure and property-development projects.
Over time, much of the expansion in capacity will be absorbed, as an estimated 15 million people move from rural to urban areas each year over the next decade.
But, for now, many investment projects are not yet generating enough income to service their debts (some of them never will), and there is significant spare capacity.
Confronted with another global slowdown that could depress its export markets for years, China needs to boost consumption even as it cools investment.
And it needs to so in ways that do not rely on excessive credit expansion.
China’s 12th Five-Year Plan, which will take effect in 2012, recognizes these policy imperatives and calls for several measures to fulfill them, including wage increases for urban workers; income support for rural households; enhanced access to capital for small businesses, especially in the underbuilt services sector; and more generous social-welfare programs, which would reduce Chinese households’ high levels of precautionary saving.
All of these measures are already underway, and Chinese leaders appear committed to embracing a new growth strategy that will benefit both China’s population and Asia as a whole.
The Asian economies should not count on being able to decouple from the economic woes of Europe and the US in the short run.
But there are promising signs that, over time, the advanced countries’ difficulties will trigger a healthy, if belated, shift in Asia’s development strategy, with China leading the way.
Asia Exposed
NEW HAVEN – Asian authorities were understandably smug in the aftermath of the financial crisis of 2008-2009.
Growth in the region slowed sharply, as might be expected of export-led economies confronted with the sharpest collapse in global trade since the 1930’s.
But, with the notable exception of Japan, which suffered its deepest recession of the modern era, Asia came through an extraordinarily tough period in excellent shape.
That was then.
For the second time in less than four years, Asia is being hit with a major external demand shock.
This time it is from Europe, where a raging sovereign-debt crisis threatens to turn a mild recession into something far worse: a possible Greek exit from the euro, which could trigger contagion across the eurozone.
This is a big deal for Asia.
Financial and trade linkages make Asia highly vulnerable to Europe’s malaise.
Owing to the former, the risks to Asia from a European banking crisis cannot be taken lightly.
Lacking well-developed capital markets as an alternative source of credit, bank-funding channels are especially vital in Asia.
Indeed, the Asian Development Bank estimates that European banks fund about 9% of total domestic credit in developing Asia – three times the share of financing provided by banks based in the United States.
The role of European banks is especially significant in Singapore and Hong Kong – the region’s two major financial centers.
That means that Asia is far more exposed to an offshore banking crisis today than it was in the aftermath of Lehman Brothers’ collapse in 2008, which led to a near-meltdown of the US banking system.
The transmission effects through trade linkages are just as worrying.
Historically, the US was modern Asia’s largest source of external demand.
But that appears to have changed over the past decade.
Seduced by China’s spectacular growth, the region shifted from US- to China-centric export growth.
That seemed like a good move.
Combined shipments to the US and Europe fell to 24% of developing Asia’s total exports in 2010 – down sharply from 34% in 1998-1999.&#160;
Meanwhile, over the same period, Asia’s dependence on intraregional exports – trade flows within the region – expanded sharply, from 36% of total exports in 1998 to 44% in 2010.
These numbers seem to paint a comforting picture of an increasingly autonomous Asia that can better withstand the blows from the West’s recurring crises.
But research by the International Monetary Fund shows that, beneath the veneer, 60-65% of all trade flows in the region can be classified as “intermediate goods” – components that are made in countries like Korea and Taiwan, assembled in China, and ultimately shipped out as finished goods to the West.
With Europe and the US still accounting for the largest shares of China’s end-market exports, there can be no escaping the tight linkages of Asia’s China-centric supply chain to the ups and downs of demand in the major developed economies.
Moreover, there is an important and worrisome twist to those linkages: China itself has tilted increasingly toward Europe as its major source of external demand.
In 2007, the European Union surpassed the US as China’s largest export market. By 2010, the EU accounted for 20% of total Chinese exports, while the US share was just 18%.
In other words, a China-centric Asian supply chain has made a big bet on the grand European experiment –&#160;a bet that now appears to be backfiring.
Indeed, in China, a now-familiar pattern is playing out yet again – another slowdown in domestic growth stemming from a crisis in the advanced economies of the West.
And, as goes China, so will go the rest of an increasingly integrated Asia.
The good news is that, so far, the downside has been much better contained than was the case in late 2008 and early 2009.
Back then, Chinese exports went from boom to bust in just seven months – from 26% annual growth in July 2008 to a 27% decline in February 2009.
This time, the annual export gain has slowed from 20% in 2011 to 5% in April 2012 – a significant deceleration, to be sure, but one that stops well short of the previous outright collapse.
That could change in the event of a disorderly euro breakup, but, barring that outcome, there is reason to be more sanguine this time around.
The bad news is that Asia seems to be learning little from repeated external demand shocks.
In the end, internal demand is the only effective defense against external vulnerability.
Yet the region has failed to construct that firewall.
On the contrary, private consumption fell to a record-low 45% of developing Asia’s GDP in 2010 – down ten percentage points from 2002.
In these circumstances, immunity from external shocks – or “decoupling,” as it is often called – seems fanciful.
As with most things in Asia nowadays, China holds the key to supplying Asia’s missing consumer demand.
The recently enacted 12th Five-Year Plan (2011-15) has all the right ingredients to produce the ultimate buffer between the dynamism of the East and the perils of a crisis-battered West.
But, as the euro crisis causes China’s economy to slow for the second time in three and a half years, there can be little doubt that implementation of the Plan’s pro-consumption rebalancing is lagging.
There are no oases of prosperity in a crisis-prone globalized world.
That is equally true for Asia, the world’s fastest-growing region.
As Europe’s crisis deepens, the twin channels of financial and trade linkages have placed Asia’s economies in a vice.
Rebalancing is the only way out for China and its partners in the Asian supply chain.
Until that occurs, the vice now gripping Asia will only continue to tighten.
Asia in the Balance
CAMBRIDGE – Last year, the leaders of all five permanent members of the United Nations Security Council visited India, accompanied by delegations of business leaders.
The Indian economy has been growing at more than 8% annually, making it increasingly attractive for trade and investment.
When US President Barack Obama visited in November, he supported permanent membership of the UN Security Council for India.
So did British Prime Minister David Cameron, French President Nicolas Sarkozy, and Russian President Dmitri Medvedev.
But the last to visit, Chinese Prime Minister Wen Jiabao, said nothing at all about it.
Official pronouncements stress friendly relations between India and China, and some trade analysts argue that the two giant, rapidly growing markets will become an economic “Chindia.”
When Premier Wen visited several years ago, he signed a comprehensive five-year strategic cooperation pact.
As Indian Prime Minister Manmohan Singh put it at the time, “India and China can together reshape the world order.”
Such statements reflect a considerable change from the hostility that bedeviled Indian-Chinese relations following the two countries’ 1962 war over a disputed border in the Himalayas.
Nevertheless, strategic anxiety lurks below the surface, particularly in India.
China’s GDP is three times that of India’s, its growth rate is higher, and its defense budget has been increasing.
The border dispute remains unsettled, and both countries vie for influence in neighboring states such as Myanmar.
And, in recent years, China has worked behind the scenes to prevent permanent Security Council membership from conveying great-power status on India.
But talk of India as a future great power is unavoidable, and some Indians predict a tri-polar world, anchored by the US, China, and India, by mid-century.
India’s population of 1.2 billion is four times that of the US, and likely to surpass China’s by 2025.
Vijay Joshi of St John’s College, Oxford, argues that, “if we extrapolate present trends, India will have the world’s third largest national income (after the US and China) within 25 years.”
For decades, India suffered from what some called the “Hindu rate of economic growth” of a little over 1% per year.
After independence in 1947, India followed an inward-looking policy that focused on heavy industry.
But it turned out that the rate of economic growth owed less to Hindu culture than to imported British Fabian (and other) socialist economic planning.
After market-oriented reforms in the early 1990’s, growth rates soared, with projections of double-digit growth in the future.
Martin Wolf of the Financial Times calls India a “premature superpower” – a country with low living standards but a huge economy.
He thinks that the Indian economy will be bigger than Britain’s in a decade and bigger than Japan’s in two.
India has an emerging middle class of several hundred million, and English is an official language, spoken by 50-100 million people.
Building on that base, Indian information industries are able to play a major global role.
India has significant hard-power resources as well, with an estimated 60-70 nuclear weapons, intermediate-range missiles, a space program, 1.3 million military personnel, and annual military expenditure of nearly $30 billion, or 2% of the world total.
In terms of soft power, India has an established democracy, and a vibrant popular culture with transnational influence.
India has an influential diaspora, and its motion picture industry, “Bollywood,” is the largest in the world in terms of the number of films produced yearly, out-competing Hollywood in parts of Asia and the Middle East.
At the same time, India remains very much an underdeveloped country, with hundreds of millions of illiterate, destitute citizens.
Around one-third of Indians live in conditions of acute poverty, and India accounts for roughly one-third of the world’s poor.
India’s GDP of $3.3 trillion compares to China’s $5 trillion, and is 20% that of the United States.
As a result, India’s per capita income of $2,900 (in purchasing-power-parity terms) is one-half of China’s and one-fifteenth that of the US.
Even more striking, while 91% of the Chinese population is literate and 43% is urban, the numbers for India are only 61% and 29%, respectively.
Each year, India produces about twice as many engineering and computing graduates as America, but The Economist reports that “only 4.2% are fit to work in a software product firm, and just 17.8% are employable by an IT services company, even with six months training.”
A symptom of this is India’s poor performance in international comparisons of universities: the 2009 Asian University Rankings, prepared by the higher education consultancy QS, shows the top Indian institution to be the Indian Institute of Technology in Bombay, at number 30.
High-tech exports are only 5% of India’s total exports, compared to 30% for China.
India is thus unlikely to develop the power resources to become an equal to China in the next decade or two.
And, while the two countries signed agreements in 1993 and 1996 that promised a peaceful settlement of the border dispute that led them to war in l962, it is worth noting that, just prior to India’s nuclear tests in March l998, India’s defense minister described China as India’s “potential enemy number one.”
More recently, in 2009, the border issue flared again.
Indian officials are generally discrete in public about relations with China, but in private their concerns remain intense.
Rather than becoming an ally, India is more likely to become one of the Asian countries that will tend to balance China’s strategic rise.
Asia in the World
NEW YORK – Before I became the UN’s Secretary-General, I was an Asian diplomat.
While I was foreign minister of the Republic of Korea, my Government and I strongly advocated détente with the North.
When some in the world called for sanctions and punitive action, South Korea pushed for dialogue.
That requires listening as well as speaking.
It means sticking to principles, but also attempting to understand the other side, however irrational or intransigent it may sometimes appear.
This remains my style at the United Nations.
I believe in the power of diplomacy and engagement.
I prioritize dialogue over debate or declaration.
Above all, I seek results.
We are doing that now in Myanmar.
My Special Adviser, Ibrahim Gambari, has been back in Yangon.
His brief is to be the honest broker, the facilitator of a dialogue between government and opposition leaders, particularly Aung San Suu Kyi.
The goal is for Myanmar’s Government to release all detained students and demonstrators, engage with the opposition, move toward a more democratic society, and rejoin the international community.
This brand of diplomacy is not quick or easy.
There is seldom applause, and often no outward evidence of movement.
It is a quiet, painstaking slog behind the scenes.
You have to work the phones, cajole world leaders to do this or that.
It is a symphony – often not a very harmonious one – of small steps that you hope will lead to something greater.
You expect nothing.
You can only keep trying, keep pushing.
Maybe it works, maybe not.
Then you try some more, in a different way, aiming all the while for some small progress that makes the next step possible.
We are at this point in Darfur.
I have spent hundreds of hours working behind closed doors with various parties to the conflict – Sudan’s Government, rebel leaders, neighbouring countries, and African Union partners.
Meanwhile, we are pushing ahead with one of the most complex peacekeeping operations in our history, feeding and protecting hundreds of thousands of displaced people, and sponsoring difficult peace negotiations in Libya.
But even as I push my brand of “Asian” diplomacy, it can sometimes feel a bit lonely to be an Asian at the international community’s diplomatic roundtable.
We Asians inhabit the world’s largest continent, with the world’s largest population and its fastest-growing economies.
We have a rich history and ancient cultures.
Yet our role in international affairs is far less than it could, or should be.
Asia’s contribution to the UN, though significant, could be greater.
Its humanitarian assistance, to put it politely, is less than generous.
We are the only continent where regional integration and common markets have not taken hold.
Latin Americans and North Americans dream of creating a free-trade zone.
Europeans speak of building a United States of Europe.
The African Union aspires to become a United States of Africa.
Why no United States of Asia?
There are many reasons why Asia is different: history, cultural diversity, unresolved territorial and political disputes, a lack of multilateral experience, and the predominance of one or two centers of power.
But the main reason is that we have not tried.
Asia does not do itself justice.
As an Asian Secretary-General, I hope to see this change.
I hope to see an Asia that is both better integrated and more internationally engaged.
I expect particularly great things of my fellow Koreans, a remarkable people who have come into their own.
I hope to see Korea assume more responsibility in the world, commensurate with its growing economic clout – especially in the area of development, one of the three pillars of the UN Charter.
Koreans need to step up, speak out, and do more, and that should start with more generous official development assistance.
Koreans have already shown their penchant for multi-lateral diplomacy and trouble shooting through the six-party talks.
Now, they, and Asians at large, need to bring both their skills and their success to bear on the most pressing global issues of the day.
This is not just my hope, it is also Asia’s obligation.
Asian Alternatives to the G7 Bank Bailout
The trillion-dollar commitments made so far by governments, with the exception of Britain’s, have been biased toward restoring market confidence instead of healing the core of what ails banks.
So it might be a good idea for them to look to Asia to help them get the job done, and to do it right, both in terms of strategy and funding.
Ending the crisis requires not only easing liquidity, but also repairing banks’ balance sheets and rebuilding their capital base.
While the times call for a systematic approach, the solutions offered have been disjointed or inadequate.
Guarantees on interbank lending won’t reduce bad loans; purchasing bad loans won’t improve banks’ ability to lend; and taking minority stakes in banks with marquee names ignores smaller ones that are just as likely to be badly exposed to sub-prime debt and thus unable to serve the local businesses and consumers that oil the economy.
One of the astounding things about the ongoing efforts to resolve the crisis has been the lack of a clear initiative to inspect banks’ balance sheets thoroughly.
Regulators need to know just how many banks are in trouble and approximate how bad their situations are in order to design and implement targeted solutions.
The measures that Asian governments took to repair their financial sectors during the Asian crisis ten years ago could provide a template for the US and European bailouts.
Asian governments borrowed heavily from the International Monetary Fund to bail out their crumbling financial systems.
They assessed the health of major financial institutions, and then established asset management companies to acquire non-performing loans at a fraction of face value, as well as restructuring agencies to close insolvent banks, nationalize ailing ones, and recapitalize viable ones.
Those that survived the cull were forced to consolidate and then were recapitalized.
Weaker banks merged with stronger rivals, or combined to form new, stronger entities under state supervision.
In some cases, banks were given a timetable for meeting capital-adequacy ratios.
Eventually, the state agencies sold controlling stakes in the nationalized banks to foreign investors, and auctioned off the bad loans they had repackaged.
Now substitute the IMF loan with the American and European rescue packages, the bad loans with sub-prime debt, and you have virtually parallel situations and transplantable measures with which to fix the US and European financial sectors.
It is, of course, clear that the US and others in the G7 are wary of even temporary nationalization.
But the bitter pill of bankruptcies, consolidation, and recapitalization is what the system needs to repair itself.
By buying minority stakes in a handful of banks, US Treasury Secretary Henry Paulson is acting like an investment banker who focuses on instant results, not like a regulator who takes aim at the root of the problem.
British Prime Minister Gordon Brown deserves the accolades he is now receiving.
His actions toward HBOS and RBS show that his government is prepared to take control, not just equity.
One option that Western regulators can pursue to boost their banks is to bring in Asian sovereign wealth funds (SWFs) and large financial institutions.
Learning from their own hardships has helped some Asian countries become the cash-rich sovereigns they are today.
China, which dealt with its own bad-loan problems in the first half of this decade, now has nearly $2 trillion in foreign reserves, almost three times the size of the US bailout budget.
There is no reason why the US and Europe should not take advantage of the wealth of Asian institutions.
This would help reduce the cost to taxpayers of the bailout, and, by keeping bigger banks in the hands of eager players, the government could focus on nationalizing and rehabilitating the smaller banks and thrifts that serve a greater number of consumers.
In return, the Asian institutions would have a chance at the rich returns they desperately seek but cannot receive at home.
SWFs are meant to diversify state investments to higher-risk, higher-return assets.
China, Korea, Singapore, and Japan all have aging populations and massive pension obligations that need immediate funding.
Likewise, many of their banks are overcapitalized with nowhere to go: after the Asian crisis and the Japanese asset bubble of the 1990’s, companies have become conservative borrowers, while banks’ opportunities to expand within the region remain limited by restrictions on foreign ownership of local banks.
Unfortunately, some SWFs that invested in financial institutions in the earlier part of the year have seen their portfolios decline in value.
But it would be foolish to make that a reason for ignoring the opportunities before them now.
It therefore behooves the US and Europe to reach out to Asian institutions to participate in mending their financial systems.
A key to the success of Asia’s restructuring effort, despite massive social, political, and economic obstacles, is the defined and systematic way in which each market dealt with its banks to reorganize the sector.
This approach, so far, has been lacking in the West.
As the crisis threatens the global economy, regulators do not have the luxury of taking their time.
Asian Footsteps in Africa
CAMBRIDGE – Don’t look now, but capitalism – maligned in these bailout-ridden recessionary days – is reshaping Africa inexorably.
What is different today is that it is emanating from China and India, rather than from the conventional bastions of capitalist prowess.
Devi Shetty, a celebrated cardiac surgeon in Bangalore, brings health relief to India’s masses through his Narayana group of hospitals.
Some years ago, I witnessed his early experiments with rural telemedicine, especially in the Indian states of Karnataka and West Bengal.
In my visit last month, the wall was adorned by a large map of Karnataka festooned with colored pins, to indicate that he now served most district capitals in the remotest parts of the state.
Moreover, a world map showed outreach to rural areas of East Africa and Southeast Asia, and the room has been upgraded to reflect a still-expanding global reach.
All this comes from carefully acquired experience – technical and sociological – with delivering expert medical advice through teleconference facilities, aided by satellite links.
Shetty’s team has successfully participated in telemedicine consultations – multi-specialty, non-stop availability, and supplemented by continuing education – with hospitals in 14 African countries.
This effort is part of then Indian President A. P. J. Abdul Kalam’s ambitious pan-African e-Network project to link all 53 African capitals to tertiary care facilities across India.
Shetty is a healer, first and foremost. But he is also an entrepreneur, and this is the latest in his many efforts to create successful, low-cost, but cutting-edge medical ecosystems in tough locations worldwide.
He aspires audaciously to what he calls the universal Walmartization of healthcare – a reshaping of medical care that the world’s indigent need, and in Africa more than most other locations.
Cynics say that India’s e-Network is currying favor with Africa in exchange for natural resources.
Perhaps.
But in that effort, India must contend with its neighbor, China, which speaks with a louder voice and carries a larger stick.
Chinese Communist Party President Hu Jintao’s peripatetic diplomacy across Africa has ensured that the Chinese are omnipresent there.
China has traded much investment in physical infrastructure in places otherwise shunned – Angola, Sudan, and Zimbabwe – for access to natural resources.
Witness also an unprecedented convening of 48 African heads of state and senior officials in Beijing in 2006 to signal unequivocally that China would speak with the loudest voice.
India tried to mimic the event, with an India-Africa summit in New Delhi in 2008.
Fourteen countries attended to discuss food price inflation, energy needs, etc.
Alas, India’s voice was drowned out, not by China’s attempts to provide medicine and education to Africa, but by the sheer magnitude of Chinese state-owned enterprises’ investments in physical infrastructure.
But loud voices need not be the most effective.
Indian influence will no doubt exploit assets less available to others, particularly the Indian diaspora in countries like South Africa, Kenya, Tanzania, and Nigeria.
India and Africa have been linked over the centuries by trade, religion, and post-imperial political consciousness.
Gandhi and the Non-Aligned Movement remain important symbols.
Indians are more part of Africa’s social tapestry than are the Chinese, a fabric that has been strengthened through opportunity and adversity through the ages.
Consider Olam, a Singapore-headquartered but Africa-centric global agribusiness company. From the soybean farms of Brazil’s Matto Grosso to the granaries of Ukraine, Olam is prized for its ability to add value in disparate conditions.
Olam was started by Indians in Nigeria and remains a world-beating trader in cotton, coffee, cashews and the like.
To succeed, Olam has had to work “up-country” ­– a euphemism for difficult conditions far from comfortable port cities – requiring it to rely on Indians’ familiarity with, and willingness to work in, Africa’s interior.
Indeed, so competent is Olam that when Wilmar, a Southeast Asian firm run by overseas Chinese and a force in its own right in China and across Asia, sought to expand in Africa, it sought out Olam in a joint venture.
The connection between Nigerian cashew farmers and Devi Shetty’s pediatric cardiac surgery is that they both represent decentralized private activity, undertaken through the market, unlike the operations of the China National Petroleum Corporation, Sinopec, and others in Darfur and elsewhere.��They all add value, but decentralized market-based activity appears likelier to engender additional goodwill.
But there is more reshaping to come, again fostered by mutual self-interest, rather than by fiat.
The Olam and Wilmar joint venture is, in a sense, symptomatic of the combination of assets from across Asia that can catalyze productive change in Africa.
It is fitting that Olam, in Hebrew, means “transcending boundaries.”
Such symbiosis requires a healthy disregard for convention.
Failures will result, surely.
But, to my mind, for the most part, decentralized experimentation beats Africa’s partial addiction to aid.
Asian Nationalism at Sea
CAMBRIDGE – Will war break out in the seas of East Asia?
After Chinese and Japanese nationalists staged competing occupations of the barren landmasses that China refers to as the Diaoyu Islands and Japan calls the Senkaku Islands, angry demonstrators in the southwestern Chinese city of Chengdu chanted, “We must kill all Japanese.”
Likewise, a standoff between Chinese and Philippine vessels in the Scarborough Shoal in the South China Sea led to protests in Manila.
And a long planned step forward in cooperation between South Korea and Japan was torpedoed when the South Korean president visited the barren island that Korea calls Dokdo, Japan calls Takeshima, and the United States calls the Liancourt Rocks.
One should not be too alarmist.
The US has declared that the Senkaku Islands (administered by the Okinawa Prefecture when it was returned to Japan in 1972) are covered by the US-Japan security treaty.
Meanwhile, the standoff over the Scarborough Shoal has calmed down, and, while Japan recalled its ambassador from South Korea over the Dokdo incident, it is unlikely the two countries would come to blows.
But it is worth recalling that China used lethal force to expel Vietnamese from the Paracel Islands in 1974 and 1988.
And China prevailed upon the Cambodian host of this year’s ASEAN summit to block a final communiqué that would have called for a code of conduct in the South China Sea – the first time in the ten-member association’s four-decade history that it failed to issue a communiqué.
The revival of extreme nationalism in East Asia is both worrisome and understandable.
In Europe, while Greeks may grumble about the terms of German backing for emergency financing, the period since World War II has seen enormous progress in knitting countries together.
Nothing similar has happened in Asia, and issues dating back to the 1930’s and 1940’s remain raw, a problem exacerbated by biased textbooks and government policies.
The Chinese Communist Party is not very communist any more.
Instead, it bases its legitimacy on rapid economic growth and ethnic Han nationalism.
Memories of the Sino-Japanese War of 1894-1895 and Japanese aggression in the 1930’s are politically useful and fit within a larger theme of Chinese victimization by imperialist forces.
Some American defense analysts view China’s maritime strategy as being clearly aggressive.
They point to increasing defense expenditures and the development of missile and submarine technology designed to cordon off the seas extending from China’s coast to “the first island chain” of Taiwan and Japan.
Others, however, see a Chinese strategy that is confused, contradictory, and paralyzed by competing bureaucratic interests.
They point to the negative results of China’s more assertive policies since the economic crisis of 2008.
Indeed, China’s policies have damaged its relations with nearly all of its neighbors.
Consider the Senkaku incident in 2010, when, after Japan arrested the crew of a Chinese trawler that had rammed a Japanese coast guard vessel, China escalated its economic reprisals.
The result, as one Japanese analyst put it, was that “China scored an own goal,” immediately reversing what had been a favorable trend in bilateral relations under the ruling Democratic Party of Japan.
More generally, while China spends billions of renminbi in efforts to increase its soft power in Asia, its behavior in the South China Sea contradicts its own message.
I have asked Chinese friends and officials why China follows such a counterproductive strategy.
The first and formal answer is that China inherited historical territorial claims, including a map from the Nationalist period that sketches a “nine-dotted line” encompassing virtually the entire South China Sea.
Today, with technology making underwater as well as fisheries resources more exploitable in the area, it is impossible to abandon this patrimony.
In 2009-2010, some mid-ranking officials and commentators even referred to the South China Sea as a sovereign “core interest” like Taiwan or Tibet.
But China’s leaders have never been clear about the exact location of the “nine-dotted line,” or about whether their claims refer only to certain land features, or also to more extensive continental shelves and seas.
When asked why they do not clarify their claims, my Chinese interlocutors sometimes say that to do so would require difficult political and bureaucratic compromises that would provoke domestic nationalists.
Moreover, sometimes they say that they do not want to give away a bargaining chip prematurely.
In 1995, and again in 2010, the US declared that the waters of the South China Sea should be governed by the 1982 United Nations Law of the Seas Treaty (which, ironically, the US has not yet ratified), but that the US takes no position on the territorial claims.
Instead, the US urged that competing claims be resolved through negotiation.
In 2002, China and ASEAN agreed on a legally non-binding code of conduct for managing such disputes, but, as a large power, China believes that it will gain more in bilateral rather than multilateral negotiations with small countries.
That belief was behind China’s pressure on Cambodia to block ASEAN’s final communiqué this summer.
But this is a mistaken strategy.
As a large power, China will have great weight in any circumstance, and it can reduce its self-inflicted damage by agreeing to a code of conduct.
As for the Senkaku/Diaoyu Islands, the best proposal comes from The Economist.
China should refrain from sending official vessels into Japanese waters, and use a hotline with Japan to manage crises generated by nationalist “cowboys.”
At the same time, the two countries should revive a 2008 framework for joint development of disputed gas fields in the East China Sea, and Japan’s central government should purchase the barren islands from their private owner and declare them an international maritime protected area.
It is time for all countries in East Asia to remember Winston Churchill’s famous advice: “To jaw-jaw is always better than to war-war.”
Asian Values RIP
NEW YORK – Few politicians have garnered as many effusive public tributes after their death as Lee Kuan Yew, Singapore’s founder and long-serving former prime minister.
A man who was treated as a sage by Henry Kissinger, regarded as a political role model by Russian President Vladimir Putin, and described as “a true giant of history” by President Barack Obama must have done something right.
One thing is indisputable: Lee’s influence was many times greater than his actual political authority, which, to his evident chagrin when Singapore and Malaysia split in 1965, never stretched beyond the narrow borders of a small city-state in Southeast Asia.
Lee’s most profound influence has been in post-Mao China, where booming economic enterprise coexists with an authoritarian Leninist one-party state.
Lee was the pioneer of capitalism with an iron fist.
His People’s Action Party, though far less brutal than the Chinese Communist Party, has ruled over a de facto one-party state.
Like many authoritarian leaders (Mussolini, for one), Lee was once a socialist.
But his thinking was influenced just as much by oddly nostalgic memories of British colonial discipline and a somewhat self-serving take on Confucianism, stressing obedience to authority, while disregarding the equally Confucian right to dissent.
Singapore’s humming economy, material comfort, and smooth efficiency seem to confirm the view of many that authoritarianism works better than democracy, at least in some parts of the world.
No wonder, then, that Lee was so much admired by autocrats everywhere who dream of combining their monopoly on power with the creation of great wealth.
Yet there is something extraordinary about the adulation of Lee.
Other leaders who held similar views were not treated as great sages, let alone as giants of history.
The Chilean military strongman Augusto Pinochet, for example, imposed his own version of capitalism with an iron fist, and, though Margaret Thatcher and Friedrich von Hayek admired him, hardly anyone reveres him today.
Why Lee, and not Pinochet?
For starters, Lee did not come to power in a military coup, and his opponents were not massacred in football stadiums.
Dissidents in Singapore were often locked up and maltreated, but no one was tortured to death.
Lee’s government, while still allowing elections as a token of democratic rule, preferred to crush opposition through intimidation and financial punishment: brave men and women who stood up to him were bankrupted in ruinously expensive lawsuits;
But Lee’s stellar reputation has to do with culture, too.
He was very good at playing to that ancient Western stereotype of the Wise Man from the East.
Even though “Harry” Lee, as he was known when he was a student at Cambridge, imbibed much from Western civilization, including a peculiar admiration for the hierarchy of the Catholic Church, he was always careful to stress the Asian provenance of his political ideas.
Lee never claimed that liberal democracy in the West was a mistake.
All he said was that it was not suitable for “Asians.”
His argument was that Asians were used to putting the collective good above individual interests.
Asians were naturally obedient to higher authority.
These traits were rooted in Asian history: they were deep “Asian values.”
There are good reasons to doubt this thesis.
First of all, who are these “Asians”?
Most Indians would surely disagree that they are culturally unsuited to democracy – as would modern Japanese, Taiwanese, or South Koreans.
It makes a certain sense to speak of Asian values in Singapore, because it would be disrespectful to the Malay and Indian minorities to justify their subservience by invoking Chinese values.
But there are plenty of Chinese as well, not just in Taiwan and Hong Kong, who would take issue with Lee’s cultural defense of authoritarianism.
Even Singaporeans are beginning to get a little restless.
Is it true at least to say that more democracy would have made Singapore a less efficient, prosperous, and peaceful society?
Many Singaporeans might believe so.
But whether they are right is by no means certain, because the question was never put to the test.
South Korea and Taiwan went through democratic transformations in the 1980s, following the end of their versions of authoritarian capitalism, and are thriving more than ever.
Democracy certainly did the Japanese economy no harm.
Lee’s premise, from which he never departed, was that, especially in a multi-ethnic society like Singapore, a meritocratic elite must impose social harmony from above.
In this sense, he was indeed rather Chinese.
By richly awarding the elite, Lee minimized the scope for corruption.
It is to his credit that he made this work in Singapore, though at some cost.
Singapore may be efficient, and relatively free of corruption; but it is also a rather sterile place, with little room for intellectual or artistic achievement.
What might work for a time in a small city-state can hardly be a useful model for larger, more complex societies.
China’s attempt at capitalism with an iron fist has created a system of gross corruption, with huge disparities in wealth.
And Putin has to resort to ever more belligerent nationalism to cover up the social and economic deficiencies of his rule.
So, by all means, let us admire the smooth highways, towering office blocks, and spotless shopping malls of Singapore.
But, when assessing Lee’s legacy, we should also heed the words of Kim Dae-jung, who was jailed and almost killed for opposing South Korea’s dictatorship, before becoming the country’s democratically elected president in 1998.
“Asia should lose no time in firmly establishing democracy and strengthening human rights,” he wrote in response to Lee.
“The biggest obstacle is not its cultural heritage, but the resistance of authoritarian rulers and their apologists.”
Asia’s Age of Thaksin?
The retirements from frontline politics of Singapore’s Lee Kuan Yew and Malaysia’s Mahathir Mohamed have deprived Southeast Asia of its senior leaders.
Can Thailand’s Prime Minister Thaksin Shinawatra fill the regional leadership vacuum?
A series of bold foreign-policy strokes – the Asia Cooperation Dialogue, the Economic Cooperation Strategy for the development of mainland Southeast Asia, and America’s designation of Thailand as a “major non-NATO ally” – turned the international spotlight on Thaksin during his first term.
Violence in Thailand’s predominantly Muslim south seemed to dent his ambitions last year, but his Thai Rak Thai (TRT) party’s landslide victory last February gave his bid for regional leadership a new lease on life.
With the TRT capturing over 75% of the seats in the lower house of parliament, Thaksin is now politically invincible at home.
Indeed, he has become the first elected Thai leader to finish a four-year term, be re-elected, and preside over a one-party government.
Thaksin’s dominance of Thai politics is unprecedented, and his resilient popularity in the face of a fickle electorate is unparalleled.
Apart from his complete control of domestic politics, Thaksin commands other prerequisites of regional leadership. Already eyeing a third term, he can count on political longevity on the order of Mahathir’s 22-year rule.
Notwithstanding the one-party system that the TRT is cultivating, Thaksin is armed with democratic legitimacy in a global arena bent on democracy promotion, and he speaks English decently enough to articulate his views and vision to a global audience.
He even has his own development strategy, dubbed “Thaksinomics,” a self-styled approach that blends neo-liberal export-led growth with grassroots-based domestic demand.
The Thai economy emerged out of its post-1997 crisis doldrums under Thaksin’s watch, and is now firmly positioned on a 6% annual growth trajectory.
While it relies on profligate subsidies and cash handouts, Thaksinomics also banks on structural reforms to propel economic growth.
The strategy’s most promising prospects include the promotion of industrial upgrading, niche industries, and competitiveness-boosting cluster projects that aim to make Thailand a global and regional hub for food, fashion, tourism, automobiles, and healthcare.
A vibrant economy – GDP growth is second only to China’s in Asia – is indispensable for regional leadership.
Of the policies that will determine his future role in the region, the Asia Cooperation Dialogue and Economic Cooperation Strategy stand out.
Based on the concept of “Asia for Asians,” the nascent ACD’s membership straddles the Asian landmass from the Korean Peninsula to the Middle East, with Thailand at the geographic center.
Although its future directions are uncertain, this 26-member forum trumps Asia-Pacific Economic Cooperation, the Association of Southeast Asian Nations (ASEAN), and ASEAN Plus Three, which includes China, Japan, and South Korea.
The region-wide crisis in 1997, weak progress on free trade, and the region’s security vulnerabilities have made Thaksin aware of ASEAN’s limitations.
As Indonesia’s size makes it a natural leader of ASEAN, the ACD lends Thaksin a broader platform that stresses Thailand’s geographical advantages.
It allows him to trumpet Thailand’s strategic objectives and the region’s major issues, sometimes in confrontation with the interests and the demands of the West.
Within the ACD framework, Thaksin launched the $1 billion “Asia Bond” last year in an effort to match Asia’s financial capital with its financing requirements.
In a smaller sphere of operations, the ECS envisages economic development in Cambodia, Laos, Myanmar, and Vietnam.
Under Thaksin, Thailand graduated from aid recipient and became a donor country for the first time, having turned away development assistance from countries like Japan.
A Thai fund of 10 billion baht was established to provide outright aid and soft loans to the ECS members.
Like the ACD, the ECS shifts Thai foreign policy priorities to the Southeast Asian mainland, highlighting Thailand’s role and Thaksin’s canny leadership.
Two major obstacles stand in Thaksin’s way.
The raging violence in southern Thailand over the past 15 months has made him look bad, as his myriad strategies and tactics have failed repeatedly.
Nor have his bluster and ill temper improved matters.
Thaksin initially dismissed the violent attacks as the work of bandits.
Only late last year did he admit that southern Muslim separatism was the cause.
Signs of a symbiotic relationship between local separatists and regional terrorists have emerged.
If the attacks widen beyond the three southernmost provinces of Yala, Pattani, and Narathiwat, Thaksin’s regional leadership chances will be dimmed.
Thaksin knows this.
Since his sweeping re-election, he has been surprisingly modest and magnanimous.
He has appointed Anand Panyarachun, a former Thai prime minister who recently headed a United Nations reform panel, to select and direct a blue-ribbon national commission to seek reconciliation with the southern separatists.
In addition, Thaksin will have to do something about Myanmar if the international community is to accept his wider role.
To many, Thai-Myanmar relations are too cozy.
Critics accuse Thaksin of conflicts of interest, as his family-owned telecommunications conglomerate holds sizeable investments in Myanmar.
It is now largely up to Thaksin himself.
If he is enlightened enough to make amends with disaffected southerners and move beyond his vested interests in Myanmar, he retains a good shot at becoming Asia’s next spokesman.
Asia’s Changing Power Dynamics
NEW DELHI – At a time when Asia is in transition, with the specter of a power imbalance looming large, it has become imperative to invest in institutionalized cooperation to reinforce the region’s strategic stability.
After all, not only is Asia becoming the pivot of global geopolitical change, but Asian challenges are also playing into international strategic challenges.
Asia’s changing power dynamics are reflected in China’s increasingly assertive foreign policy, the new Japanese government’s demand for an “equal” relationship with the United States, and the sharpening Sino-Indian rivalry, which has led to renewed Himalayan border tensions.
All of this is highlighting America’s own challenges, which are being exacerbated by its eroding global economic preeminence and involvement in two overseas wars.
Such challenges dictate greater US-China cooperation to ensure continued large capital inflows from China, as well as Chinese political support on difficult issues ranging from North Korea and Burma to Pakistan and Iran.
But, just when America’s Sino-centric Asia policy became noticeable, Japan put the US on notice that it cannot indefinitely remain a faithful servant of American policies.
Prime Minister Yukio Hatoyama’s government is seeking to realign foreign policy and rework a 2006 deal for the basing of US military personnel on Okinawa.
It also announced an end to its eight-year-old Indian Ocean refueling mission in support of the US-led war in Afghanistan.
Meanwhile, China’s resurrection of its long-dormant claim to the northeastern Indian state of Arunachal Pradesh, and its needling of India over Kashmir (one-fifth of which is under Chinese control), is testing the new US-India global strategic partnership.
The US has chartered a course of tacit neutrality on the Arunachal Pradesh issue — to the delight of China, which aims to leave an international question mark hanging over the legitimacy of India’s control of the Himalayan territory, which is almost three times as large as Taiwan.
Indeed, the Obama administration has signaled its intent to abandon elements in its ties with India that could rile China, including a joint military exercise in Arunachal and any further joint naval maneuvers involving Japan or other parties, like Australia.
Yet, the recent Australia-India security agreement, signed during Prime Minister Kevin Rudd’s visit to New Delhi, symbolizes the role of common political values in helping to forge an expanding strategic constellation of Asian-Pacific countries.
The Indo-Australian agreement received little attention, but such is its significance that it mirrors key elements of Australia’s security accord with Japan – and that between India and Japan.
All three of these accords, plus the 2005 US-India defense framework agreement, recognize a common commitment to democracy, freedom, human rights, and the rule of law, and obligate their signatories to work together to build security in Asia.
An Asian geopolitical divide centered on political values would, of course, carry significant implications.
And, while Asia – with the world’s fastest-growing markets, fastest-rising military expenditures, and most-volatile hot spots – holds the key to the future global order, its major powers remain at loggerheads.
Central to Asia’s future is the strategic triangle made up of China, India, and Japan.
Not since Japan rose to world-power status during the Meiji emperor’s reign in the second half of the nineteenth century has another non-Western power emerged with such potential to alter the world order as China today.
Indeed, as the US intelligence community’s 2009 assessment predicted, China stands to affect global geopolitics more profoundly than any other country.
China’s ascent, however, is dividing Asia, and its future trajectory will depend on how its neighbors and other players, like the US, manage its rapidly accumulating power.
At present, China’s rising power helps validate American forward military deployments in East Asia.
The China factor also is coming handy in America’s efforts to win new allies in Asia.
But, as the US-China relationship deepens in the coming years, the strains in some of America’s existing partnerships could become pronounced.
For example, building a stronger cooperative relationship with China is now taking precedence in US policy over the sale of advanced weaponry to Asian allies, lest the transfer of offensive arms provoke Chinese retaliation in another area.
While the European community was built among democracies, the political systems in Asia are so varied – and some so opaque – that building inter-state trust is not easy.
In Europe, the bloody wars of the past century have made armed conflict unthinkable today.
But in Asia, the wars since 1950 failed to resolve disputes.
And, while Europe has built institutions to underpin peace, Asia has yet to begin such a process in earnest.
Never before have China, Japan, and India all been strong at the same time.
Today, they need to find ways to reconcile their interests in Asia so that they can coexist peacefully and prosper.
But there can be no denying that these three leading Asian powers and the US have different playbooks: America wants a uni-polar world but a multi-polar Asia;
China seeks a multi-polar world but a uni-polar Asia; and Japan and India desire a multi-polar Asia and a multi-polar world.
Asia\u0027s Dysfunctional Democracies.
Asia has been gripped by election fever all year.
The Philippines and Taiwan have chosen new presidents; India and Malaysia have ushered in new parliaments and prime ministers.
September brings two more vital polls: a legislative election in Hong Kong and a presidential election in Indonesia.
Voters there may also extend a disturbing paradox that has emerged in the region: the more "vigorous" Asian democracy becomes, the more dysfunctional it is.
The attempt by opposition parties to impeach South Korea's President Roh Moo Hyun on the flimsiest of excuses; Taiwan President Chen Shui-bian's inability to pass legislation through a parliament controlled by the opposition Kuomintang;
Philippine President Gloria Macapagal Arroyo's stalemated first term and the logjam over the fiscal reforms needed to prevent a predicted Argentine-style meltdown early in her second: each bears testimony to democratic paralysis in Asia.
If deadlock and confusion were the only results, such political impasses might be tolerable. But chronic stalemate has confronted many Asian democracies with the threat of being discredited, a potential for violence, and the prospect of economic decline.
Indeed, the precedents of democratic immobility in Asia are hardly encouraging.
For example, since Pakistan's creation in 1947, partisan divisions have ensured that no elected government has been able to serve its full term.
So Pakistanis have grimly accepted military rule as their destiny.
The problem in Asia often arises from something the French call "cohabitation" - an awkward arrangement by which a directly elected president must co-exist with a parliament controlled by a rival party or parties.
The United States and Europe's mature democracies may function well enough with the "checks and balances" of divided government (though the Republicans' bid to impeach President Clinton a few years ago might suggest otherwise), but in Asia the failure to bestow executive and legislative powers on a single institution is usually a terrible drawback.
This seems especially true when a government tries to enact radical economic or political reforms.
The elected president wants to act, but the assembly refuses to approve the necessary laws. Or vice versa.
The pattern begins in parliamentary deadlock.
Incompetent leaders blame legislatures for their failures; legislators blame presidents from rival parties.
Finger pointing replaces responsibility, fueling popular demand for a strongman (or woman) who can override political divisions.
Indira Gandhi's brief "emergency rule" in the 1970's was partly the result of such institutional dysfunction.
Divided government also plays into the hands of Asia's separatists.
At a critical moment for Sri Lanka's peace process, President Kumaratunga was so incensed by the policies of her political rival, Prime Minister Wickremessinghe, that she sacked three of his ministers and called elections almost four years early.
The only people who seem to have benefited from this democratic division are the murderous Tamil Tigers.
Similarly, in Nepal, a Maoist insurgency has taken advantage of divisions between the King and parliament to gain control of much of the countryside.
True, Asian democracies, however unstable, are preferable to autocracies, whether military, as in Pakistan and Burma, or communist, as in China and Vietnam.
But the danger in a weakened democracy is not merely blocked legislation and ineffective government.
Ambitious but thwarted presidents are easily tempted to take unconstitutional measures; after all, they reason, the people elected them directly.
The same is true of some prime ministers, like Thailand's authoritarian Thaksin Shinawatra, who now stands accused of weakening his country's democratic traditions in favor of personal rule.
Given these precedents and the widespread instability exposed by this year's elections, perhaps Asian policymakers should consider the merits of doing away with "cohabitation" and adopting systems where electoral victory translates into real power.
Of course, parliamentary political systems are far from perfect.
Neither Singapore nor Malaysia, where ruling parties have long dominated the parliaments, has a political culture as healthy as in Taiwan or South Korea.
But in parliamentary democracies such as Japan and India, an elected leader runs the country until the day his or her party or coalition loses its legislative majority.
This means that governments are judged not by their ability to outmaneuver legislatures, but by the quality of their policies.
This seems to be a more efficient - and politically more stable - form of democracy than the unhappy cohabitation that produces such ugly confrontations in Taiwan, South Korea, and the Philippines.
By contrast, the threats posed by divided government could be greater than mere parliamentary rumbles.
Cohabitation could very soon become a problem even in the quasi-democracy of Hong Kong, if voters there on September 12 elect a legislature hostile to Tung Chee-hwa, the territory's Beijing-anointed chief executive, later this month.
Indonesia also risks deadlock if, as seems likely, the election on September 20 produces a president from a different party than the one that controls parliament.
Abraham Lincoln was right: a house divided against itself cannot stand.
In many Asian democracies, only institutional reconstruction will prevent a collapse.
Asia’s Dysfunctional Democracies
The abrupt resignation of Thailand’s Prime Minister Thaksin Shinawatra is but another sign of a disturbing paradox: the more “vigorous” Asian democracy becomes, the more dysfunctional it is.
The attempt by opposition parties last year to impeach South Korea’s President Roh Moo Hyun on the flimsiest of excuses; Taiwan President Chen Shui-bian’s inability to pass legislation through a parliament controlled by the opposition Kuomintang;
Philippine President Gloria Macapagal Arroyo’s stalemated first term and the repeated rumors of looming coup attempts against her: each bears testimony to a form of democratic paralysis in Asia.
If deadlock and confusion were the only results, such political impasses might be tolerable. But chronic stalemate has confronted many Asian democracies with the threat of being discredited, a potential for violence, and the prospect of economic decline.
Indeed, the precedents of democratic immobility in Asia are hardly encouraging.
For example, since Pakistan’s creation in 1947, partisan divisions ensured that no elected government has been able to serve its full term.
So Pakistanis grimly learned to accept military rule as their destiny.
The problem in Asia often arises from something the French call “cohabitation” – an awkward arrangement by which a directly elected president must co-exist with a parliament controlled by a rival party or parties.
The United States and Europe’s mature democracies may function well enough with the “checks and balances” of divided government (though the Republicans’ bid to impeach President Clinton eight years ago might suggest otherwise), but in Asia the failure to bestow executive and legislative powers on a single institution is usually a terrible drawback.
This seems especially true when a government tries to enact radical economic or political reforms.
The elected president wants to act, but the assembly refuses to approve the necessary laws. Or vice versa.
The pattern begins in parliamentary deadlock.
Incompetent leaders blame legislatures for their failures; legislators blame presidents from rival parties.
Finger pointing replaces responsibility, fueling popular demand for a strongman (or woman) who can override political divisions.
Indira Gandhi’s brief “emergency rule” in the 1970’s was partly the result of such institutional dysfunction.
Divided government also plays into the hands of Asia’s separatists.
At a critical moment for Sri Lanka’s peace process, President Kumaratunga was so incensed by the policies of her political rival, Prime Minister Wickremessinghe, that she sacked three of his ministers and called elections almost four years early.
The only people who seem to have benefited from this democratic division are the murderous Tamil Tigers.
Similarly, in Nepal, a Maoist insurgency has taken advantage of divisions between the King and parliament to gain control of much of the countryside.
True, Asian democracies, however unstable, are preferable to autocracies, whether military, as in Pakistan and Burma, or communist, as in China and Vietnam.
But the danger in a weakened democracy is not merely blocked legislation and ineffective government.
Ambitious but thwarted presidents are easily tempted to take unconstitutional measures; after all, they reason, the people elected them directly.
The same is true of some prime ministers.
Indeed, one of the causes of the protests that led to the resignation of Thailand’s Thaksin was the accusation that he was weakening his country’s democratic traditions in favor of personal rule.
Given these precedents, perhaps Asian policymakers should consider the merits of doing away with “cohabitation” and adopting systems where electoral victory translates into real power.
Of course, parliamentary political systems are far from perfect.
Neither Singapore nor Malaysia, where ruling parties have long dominated the parliaments, has a political culture as healthy as in Taiwan or South Korea.
But in parliamentary democracies such as Japan and India, an elected leader runs the country until the day his or her party or coalition loses its legislative majority.
This means that governments are judged not by their ability to outmaneuver legislatures, but by the quality of their policies.
This seems to be a more efficient – and politically more stable – form of democracy than the unhappy cohabitation that produces such ugly confrontations of the type seen across the region.
For Abraham Lincoln was right: a house divided against itself cannot stand.
In many Asian democracies, only institutional reconstruction will prevent collapse.
Asia’s Energy Future
SINGAPORE – Asia’s rise is unstoppable.
What is stoppable is the steep rise in Asia’s reliance on fossil fuels.
Indeed, the decisions to be made by Asia on energy production and use will determine the fate of our planet’s environment.
It is natural for the world to be alarmed by Asia’s growing appetite for energy.
If China and India replicate American per capita consumption of fossil fuels, the resulting greenhouse-gas emissions will only accelerate global warming.
But Asians will not accept Western moralizing on energy use.
The West industrialized rapidly without worrying about climate change, contributing mightily to the stock of greenhouse gases that has led the world ever closer to the tipping point at which global warming can no longer be halted.
If the West now wants to hold Asian countries responsible for restraining new sources of greenhouse-gas emissions, it must first hold itself accountable for its old stock and current emissions.
This is why there is unanimous agreement in Asia, including China and India, that any just solution for climate change demands greater sacrifice from rich Western countries.
The good news is that robust public policy, coupled with rapid advances in technology, could help humanity as a whole reduce its energy consumption.
Consistent policy and superior technology explain why Japan uses one-tenth the energy that China uses to generate the same amount of economic output.
Both China and India can learn a lot from Japan, and both governments, fortunately, are firmly committed to increasing their energy efficiency and use of green technology.
Zhenhua Xie, Chinese President Hu Jintao’s special representative on climate change, has stated categorically that China has no other choice than to pursue sustainable development.
In 2007, China founded its National Leading Group on Climate Change, headed by President Hu, and adopted its National Climate Change Program, the first by any developing country.
China aims to lower its energy consumption per unit of GDP by 20% relative to 2005 levels by 2010.
As for India, at the G-8 Summit in July 2009, Prime Minister Manmohan Singh said, “Nothing could be farther from the truth than the notion that the developing countries were complacent or were not interested in addressing the consequences of climate change.” Indeed, in 2008 India unveiled an ambitious National Action Plan on Climate Change, which includes eight national missions, including solar and enhanced energy efficiency missions.
Asia is also at the forefront of innovative energy technology and policy efforts.
The nonprofit company Grameen Shakti currently leads the world in the installation of solar panels for the rural poor.
From 1996 to 2009, Grameen Shakti installed 750,000 solar home systems in Bangladesh to provide emissions-free electricity to more than two million people.
China doubled the efficiency of rural energy consumption between 1983 and 1998 by distributing safer and cleaner stoves to 185 million households.
In Singapore, regulators are developing an innovative Electricity Vending System to give 1.2 million consumers real-time price signals so that they can learn to conserve electricity during peak periods.
India, China, and a handful of other Asian countries are also witnessing remarkable growth in local alternative energy companies and the use of renewable energy.
India ranks fifth in the world in total production of wind power and third in terms of wind power added in 2008.
Suzlon Energy, an Indian company started in 1995 with just 20 people, has become one of the world’s leading wind power companies, with offices in 21 countries.
Moreover, China is the world leader in total renewable energy capacity, small hydroelectric capacity, and the use of solar hot water heaters; second for wind power added in 2008 (ahead of Germany and Spain); and third in total ethanol production.
Suntech, a Chinese company founded in 2001, is the third largest manufacturer of solar cells in the world.
Japan and South Korea were third in the amount of grid-connected solar photovoltaic panels added in 2008; the Philippines was second for total geothermal power and third for total biomass power;
Indonesia was third for total geothermal power.
Yet neither policy nor technological innovations in Asia will solve the world’s climate change problem.
Only a major global bargain between the West and the rest will suffice.
In the eyes of most Asian policymakers, the proposed contribution by the West, especially America, towards solving the problem is woefully inadequate.
The American public is simply not being asked to make any serious sacrifices.
The G-8’s declaration that its members will reduce carbon emissions by 80% in 2050 contains no upfront commitments.
And the clock is ticking.
Today, Earth’s atmosphere already contains 380 parts per million of CO2.
The “tipping point” could come when we reach 450 ppm.
Developing countries, particularly those in Asia, will suffer the worst consequences of global warming: storm damage, rising sea levels, and massive refugee flows.
The Maldives will likely disappear entirely.
In these circumstances, Asians cannot afford to sit back and moralize.
They must formulate and present realistic solutions, and negotiate forcefully and realistically before and during the Copenhagen conference in December 2009 in order to produce a global agreement that is based on an equitable sharing of the global commons.
The biggest challenge Asians face is to use their intellectual and political leadership to save the world and themselves.
Asia’s Fragile Special Relationship
NEW DELHI – “Tzu-Ch’in asked Tzu-Kung a few questions;
Tzu-Kung answered: …Our Master gets things (done) by being cordial, frank, courteous, temperate, deferential.
That is our…way.”
But will Chinese Premier Wen Jiabao live up to that standard, as conveyed in the Analects of Confucius, on his current visit to India?
The world has a variety of “special relationships.”
The United States’ partnership with the United Kingdom is one forged in war – and a pillar of the West for more than a half-century.
The US-Soviet rivalry of the Cold War era was special in that relations between those two countries shaped the fate of the world until the USSR imploded.
The US and China are said to be forging a new special relationship.
But, in looking toward the future of Asia – and, indeed, the future of world diplomacy – it is the relationship between the world’s two most populous countries and largest emerging economies, India and China, which will increasingly set the global agenda.
Japan’s change of military doctrine for the first time since the start of the Cold War – a shift that implicitly makes China the greatest threat – suggests that the Chinese leadership needs to take a hard look at its regional grand strategy.
Wen’s priorities for his trip to India are clear: trade, security, and, far behind, the territorial disputes between the two countries.
Such an approach might make tactical diplomatic sense, as long as there is no background clatter.
But it lacks a sense of strategic urgency, which, given rising international tensions across Asia, amounts to a serious strategic blunder.
The sources of those tensions are clear: North Korea’s shelling of South Korea’s Yeonpyeong Island and its flaunting of a modern, previously unknown, nuclear plant; the US-led armada now cruising through the South China and Yellow Sea; and China’s claim that the South China Sea is an area of vital national interest akin to Tibet.
In its bilateral relations with India, China’s shift in focus from its claims on the Northeastern Indian state of Arunachal Pradesh to Jammu and Kashmir is enormously worrisome.
Indeed, around Gilgit in Kashmir, China’s People’s Liberation Army has greatly enhanced its troop presence.
Small wonder that, on the eve of Wen’s visit, China’s ambassador in New Delhi finds relations between the two countries to be “very fragile, easily damaged, and difficult to repair.”
But, despite all this diplomatic friction, Wen’s entourage for his visit is dominated by a large business delegation.
Currently, both countries’ economies are thrusting confidently forward; both are thirsty for more and bigger markets.
India is growing at an annual rate of around 9%; China at around 10%.
So the opportunities for trade between the two are certainly enormous.
But, for both countries, economic growth is not hurdle-free.
India’s economy is continuing to grow, but faces rising inflation, fiscal and current-account deficits, a slowdown in agricultural growth, and infrastructure bottlenecks.
China’s problems arise mainly from widening income disparities, which are inciting hitherto unheard of levels of labor unrest – though this should not be viewed as a precursor to change of the sort that marked the rise of the Solidarity trade union and the end of communism in Poland.
But labor unrest and the desire to maintain 10% growth suggest that China should be taking the lead in ensuring peace on the Korean peninsula and preventing other political developments from derailing its economy.
After all, as the Chinese leadership knows, only continued strong growth will provide the government with the wriggle room it needs to begin to revalue the renminbi.
Revaluation of its currency is necessary in part because the undervalued renminbi has become yet another a source of friction in Asia, as many in the region now believe the Chinese are using their currency as a “policy weapon.”
To untangle the complex policy web surrounding the renminbi’s value will demand greater regional stability, not less.
Yet China’s international grand strategy does not appear to reflect this.
Instead, it remains focused on Northeast Asia, Tibet, Taiwan, and on its aspirations to move into the Indian Ocean, that great global highway of trade in the twenty-first century.
China’s leaders recognize that their country needs time, space, and peace for economic development.
Yet their pursuit of a dominant position on the strategic chokepoints in the Indian Ocean undermines these goals by raising tensions not only with India, but with Asia’s other powers and the US.
Their focus on inhibiting India seems particularly misguided, given that China’s core interests (Tibet, Taiwan, and the heartland of the Chinese mainland) are far beyond the reach of most of India’s military capabilities.
By contrast, India’s most important national security concerns – the unsettled border between the two countries, and Beijing’s ties with Pakistan, which often operates as a Chinese surrogate – are closely connected to China: Both factors are directly linked to China’s perceived threat to India’s Himalayan territory and its rapid development of strategic infrastructure in that region.
India’s concerns also focus on China’s ongoing supply of arms, including missiles and nuclear weapons technology, to Pakistan.
No amount of discussion over trade can obscure the true issues of vital concern between China and India.
China may take comfort in remaining focused on non-core issues, because such an approach suggests tactical cooperation with India.
That is a convenient international ploy, but it leaves the sources of bilateral discord unattended.
The idea of collaboration only in areas of interest to China while neglecting issues of substance to India is untenable, even in the short term.
Indeed, neglect of the core disputes is what has resulted in the relationship’s “extreme fragility.”
India cannot and will not abandon its territorial sovereignty, or its pursuit of secure land borders or a greater balance in trade.
These are challenges that cry out for clarity, not diplomatic fudges.
But surely two great and ancient civilizations can find their way to the type of “cordial, frank, courteous, temperate, deferential…” relations that would have pleased Confucius.
Asia’s Hour?
NEW YORK – As Asia emerges from the global economic crisis faster than the rest of the world, it is increasingly clear that the world’s center of gravity is shifting from the Atlantic to the Pacific.
It is equally clear that Asian states are not yet ready to assume the more meaningful leadership in global affairs that will be necessary to ensure that this tectonic shift can make the world more stable and secure than it has been.
Asian states have a tremendous opportunity to rise to this challenge.
The signs of Asia’s rise are unmistakable.
Over the past five years, China’s contribution to world GDP growth has steadily increased from one-fifth to one-third, and India’s from approximately 6% to 16%.
Given their growing footprints on global economics, politics, and the environment, it is now impossible to imagine any major international agreement without China, Japan, and India on board.
China, in particular, has emerged as the key counterpart to the United States in almost all major global forums, as well as international platforms for discussing critical transnational issues, from the Six-Party Talks with North Korea and the G-20 to talks about climate change.
Some even call for establishing a US-China G-2.
Asia’s new clout holds tremendous promise.
If Asian domestic consumption increases, for example, global economic growth will depend far less on over-consumption by debt-laden Americans.
This would help all economies.
If Asian countries other than Japan commit to binding caps on greenhouse gas emissions, a global deal on climate change will be possible at this December’s Copenhagen Summit, even if developing Asia’s caps are implemented more gradually than those for the developed world.
Moreover, if China, India, and the ASEAN states take the lead in promoting a just resolution for the people of Burma/Myanmar, or if China proves more willing to press North Korea on nuclear weapons, these states will demonstrate that a world with multiple leading stakeholders can be safer than a world led by a single superpower.
Critics of America’s record as a global hegemony make a strong case against a uni-polar world.
America’s interventions in Vietnam and Iraq, its opposition to the Kyoto Protocol and insatiable consumption of natural resources, its role in creating the current financial crisis, the abuses at Abu Ghraib, and much else highlight America’s flawed record.
Yet America’s legacy of global leadership over the past six decades, warts and all, is unprecedented in its relative benevolence and positive impact.
America played the lead in creating the United Nations, the International Monetary Fund and World Bank, and international humanitarian and human rights law.
It resuscitated its World War II enemies and fostered economic development in countries around the world, and established a security umbrella that helped Europe and Asia focus more on diplomacy and economic growth than on military competition.
It opened its markets and laid the foundations for globalization and the information revolution, kept sea-lanes open for international trade, and catalyzed the Green Revolution… The list goes on.
But weakened by the financial crisis, deeply indebted to foreign countries, bogged down in Iraq, facing major challenges in Afghanistan and Pakistan, and feeling psychologically humbled, the US may no longer be in the same unrivalled position to lead the international community, even under the inspiring leadership of Barack Obama.
Despite the growing promise of a multi-polar world with Asian powers playing a greater role in addressing global challenges and sharing leadership with a weary US, that world does not yet exist.
America may be recognizing its limits, but no new system has emerged to take up the slack.
If Asian states are to play this role, they must do far more to address their own regional challenges and to promote a positive, universal set of norms.
Asian states could do far more, for example, to address the dangerous nationalism that persists in Asia.
Unlike Europe, which largely put its historical ghosts to bed after 1945, Asian countries remain mired in nineteenth-century-style nationalisms that weakens collaboration and makes the region more dangerous than it needs to be.
China and Japan, Japan and Korea, India and Pakistan, Singapore and Malaysia, and many other pairings of states connect on some levels, but remain dangerously divided on others.
Furthermore, Asian states could be far more assertive in addressing humanitarian issues in their own backyard – especially for places like Burma and North Korea – and in taking a lead in international climate change negotiations.
The US, for example, provides 50% of UN food aid and pays 20% of the UN’s overall costs.
China, soon to be the world’s second largest economy, pays 0.7% of food aid and a mere two percent of overall UN costs.
Japan has shown leadership in all these areas, but few others in the region have demonstrated a similar sense of global responsibility.
Asian states should also strengthen Asia-Pacific regional structures like APEC and the ASEAN Regional Forum in order to ensure stronger collaboration on issues of regional and global concern.
Although states in the Asia-Pacific region have come a long way in this regard, regional structures are nowhere near as strong as Euro-Atlantic structures.
If the twenty-first century is to be the Asia-Pacific century, they must be.
Until such changes occur, many challenges will fall through the cracks that exist between a strained Pax Americana and a rebalancing world.
Issues such as Burma, North Korea, Darfur, Zimbabwe, climate change, and nuclear proliferation all appear to be falling, because they are being insufficiently addressed, into this crack.
All nations must work together to revise our models for international cooperation in a way that incorporates the global shift in economic power.
Until this structure emerges, let us hope that America can lead wisely and that other countries, particularly Asia’s new powers, will assume more meaningful responsibilities in managing global crises.
Asia’s Inflation Trap
NEW HAVEN – Asia has an inflation problem.
The sooner it comes to grips with its problem, the better.
Unfortunately, the appropriate sense of urgency is missing.
Willingness to tackle inflation is impeded by Asia’s heavy reliance on exports and external demand.
Fearful of a relapse of end-market demand in a still-shaky post-crisis world, Asian policymakers have been reluctant to take an aggressive stand for price stability.
That needs to change – before it’s too late.
Excluding Japan, which remains mired in seemingly chronic deflation, Asian inflation rose to 5.3% in the 12 months ending in November 2010, up markedly from the 3.5% rate a year earlier.
Trends in the region’s two giants are especially worrisome, with inflation having pierced the 5% threshold in China and running in excess of 8% in India.
Price growth is worrisome in Indonesia (7%), Singapore (3.8%), Korea (3.5%), and Thailand (3%) as well.
Yes, sharply rising food prices are an important factor in boosting headline inflation in Asia.
But this is hardly a trivial development for low-income families in the developing world, where the share of foodstuffs in household budgets – 46% in India and 33% in China – is 2-3 times the ratio in developed countries.
At the same time, there has been a notable deterioration in underlying “core” inflation, which strips out food and energy prices.
Annual core inflation for Asia (excluding Japan) was running at a 4% rate in late 2010 – up about one percentage point from late 2009.
A key lesson from the Great Inflation of the 1970’s is that central banks can’t afford a false sense of comfort from any dichotomy between headline and core inflation.
Spillover effects are inevitable, and once a corrosive increase in inflationary expectations sets in, it becomes all the more painful to unwind.
The good news for Asia is that most of the region’s monetary authorities are, in fact, tightening policy.
The bad news is that they have been generally slow to act.
Financial markets appear to be expecting a good deal more Asian monetary tightening – at least that’s the message that can be drawn from sharply appreciating Asian currencies, which seem to be responding to prospective moves in policy interest rates.
Relative to the US dollar, an equal-weighted basket of 10 major Asian currencies (excluding Japan) has retraced the crisis-related distortions of 2008-2009 and has now returned to pre-crisis highs.
Export-led economies, of course, can’t take currency appreciation lightly – it undermines competitiveness and risks eroding the country’s share of the global market.
It also invites destabilizing hot-money capital inflows.
Given the tenuous post-crisis climate, with uncertain demand prospects in the major markets of the developed world, Asia finds itself in a classic policy trap, dragging its feet on monetary tightening while risking the negative impact of stronger currencies.
There is only one way out for Asia: a significant increase in real, or inflation-adjusted, policy interest rates.
Benchmark policy rates are currently below headline inflation in India, South Korea, Hong Kong, Singapore, Thailand, and Indonesia.
They are only slightly positive in China, Taiwan, and Malaysia.
The lessons of earlier battles against inflation are clear on one fundamental point: inflationary pressures cannot be contained by negative, or slightly positive, real short-term interest rates.
The only effective anti-inflation strategy entails aggressive monetary tightening that takes policy rates into the restrictive zone.
The longer this is deferred, the more wrenching the ultimate policy adjustment – and its consequences for growth and employment – will be.
With inflation – both headline and core – now on an accelerating path, Asian central banks can’t afford to slip further behind the curve.
Asia has far too many important items on its strategic agenda to remain caught in a policy trap.
This is especially true of China, whose government is focused on the pro-consumption rebalancing imperatives of its soon-to-be-enacted 12th Five-Year Plan.
So far, the Chinese leadership has adopted a measured approach to inflation.
Its efforts focus mainly on increasing banks’ mandatory reserve ratios while introducing administrative measures to deal with food price pressures, approving a couple of token interest-rate hikes, and managing a modest upward adjustment in the currency.
The mix of Chinese policy tightening, however, needs to shift much more decisively toward higher interest rates.
With the Chinese economy still growing at close to 10% per year, the government can afford to take more short-term policy risk in order to clear the way for its structural agenda.
Indeed, China’s dilemma is emblematic of one of developing Asia’s greatest challenges: the need to tilt the growth model away from external toward internal demand.
That can’t happen without increased wages and purchasing power for workers.
But, in an increasingly inflationary environment, any such efforts could fuel an outbreak of the dreaded wage-price spiral – the same lethal interplay that wreaked such havoc in the United States in the 1970’s.
Asia can avoid this problem and get on with the heavy lifting of pro-consumption rebalancing only by nipping inflation in the bud.
Much is made of Asia’s Teflon-like resilience in an otherwise tough post-crisis climate.
Led by China, the high-flying economies of developing Asia are increasingly viewed as the new and powerful engines of a multi-speed world.
While the jury is out on whether there has really been such a seamless transition of global economic leadership, Asia must face up to the critical challenges that may come with this new role.
Inflation, if not addressed now, could seriously compromise the region’s ability to meet those challenges.
Asia’s New Growth Model
MILAN – Led by Asia, the share of the global economy held by emerging markets has risen steadily over recent decades.
For the countries of Asia – especially its rising giants, China and India – sustainable growth is no longer part of a global challenge. Instead, it has become a national growth-strategy issue.
This marks a sea change in the global structure of incentives with respect to achieving sustainability.
Over the next few decades, almost all of the world’s growth in energy consumption, urbanization, automobile usage, airline travel, and carbon emissions will come from emerging economies.
By mid-century, the number of people living in what will be (by then) high-income economies will rise to 4.5 billion, from one billion today.
Global GDP, which currently stands at about $60 trillion, will at least triple in the next 30 years.
If emerging economies try to reach advanced-country income levels by following roughly the same pattern as their predecessors, the impact on natural resources and the environment would be enormous, risky, and probably disastrous.
One or several tipping points would most likely bring the process to a screeching halt.
Energy security and cost, water and air quality, climate, ecosystems on land and in the oceans, food security, and much more would be threatened.
At present, almost any standard measure of the concentration of global economic power would show a declining trend.
If that were to continue, the result would be a world in which each country’s contribution to pressure on natural resources and the environment would make sustainability a major global challenge, as the free-rider problem in its most extreme form would prevail.
To change course, global agreements that impinge on growth would be needed, along with systems that ensure compliance.
But the trend in concentration will reverse about a decade from now, owing to the size and growth rates of India and China, which together account for almost 40% of the world’s population.
Although their current combined GDP is still a relatively small fraction of global output (about 15%), that share is rising rapidly.
By mid-century, India and China will account for 2.5 billion of the 3.5 billion additional people with advanced-country incomes.
By themselves, they will cause global GDP to at least double in the next three decades, even in the absence of growth anywhere else.
For India and China separately, and certainly together, sustainability is no longer mainly a global issue; it is a domestic challenge to long-term growth.
Their growth patterns and strategies, and the tradeoffs and choices they make with respect to lifestyle, urbanization, transportation, the environment, and energy efficiency, will largely determine whether their economies can complete the long transition to advanced-income levels.
Moreover, both countries know it.
There is a growing awareness among policymakers, businesses, and citizens in China and India (and in Asia more broadly) that the historical growth paths that all of their predecessors followed simply will not work, because they do not “scale” to a world economy that is triple its current size.
As a result, these countries will have to invent new growth patterns to reach advanced-country levels of development.
They are too big to be free riders, so the incentives relating to sustainability are becoming internalized as national priorities.
Perceptions are rapidly coming into line with the reality that sustainability must become a critical ingredient of growth.
The old model won’t work.
Of course, no one currently knows how to achieve sustainability at three (or more) times the size of the current global economy.
That objective will be determined by a process of discovery, experimentation, innovation, and creativity, with tradeoffs along the way.
But the incentive to ignore these issues is gone, independent of what other countries choose to do and whatever global agreements may be reached.
The large, high-growth emerging economies have certain advantages.
Integrating sustainability into growth strategies and policies is in their self-interest, and it is consistent with their long-term time horizons.
The legacy assets that one finds in advanced countries – the way cities are configured, for example – don’t have to be replaced to the same extent.
China’s 12th Five-Year Plan lowers the growth forecast (to 7%) to create “space” to deal with issues like equity, sustainability, and the environment.
The process of discovering a new growth path has started.
The emergence of sustainability as a critical element in growth strategies in the worlds’ future largest economies is an extraordinarily positive development, because national needs, goals, and priorities remain much more powerful incentives than international agreements.
This all may seem to be at variance with common wisdom.
How could a tripling of global GDP and a fourfold expansion of the world’s high-income population be good news, given all that goes with it?
Well, it depends on what one thinks the alternative is.
Slow global growth would benefit natural resources and the environment.
But that will not happen unless the world’s resource supplies and environmental underpinnings collapse.&nbsp;
So the baseline is high emerging-market growth, the key to which is innovation and adjustment of the growth path.
As Asians drive growth toward more sustainable patterns, they will increase the incentives for others to do so by generating new technology, lowering the environmental cost of growth, and undercutting the argument that leadership incurs competitive and other economic costs, but few benefits.
To say that free-rider problems are gone, or that multinational agreements are no longer desirable, would be incorrect.
But real parallel progress, driven by necessity and self-interest, is becoming the most likely medium-term path.
Asia’s New Tripartite Entente
NEW DELHI – The launch of trilateral strategic consultations among the United States, India, and Japan, and their decision to hold joint naval exercises this year, signals efforts to form an entente among the Asia-Pacific region’s three leading democracies.
These efforts – in the world’s most economically dynamic region, where the specter of a power imbalance looms large – also have been underscored by the Obama administration’s new strategic guidance for the Pentagon.
The new strategy calls for “rebalancing toward the Asia-Pacific” and support of India as a “regional economic anchor and provider of security in the broader Indian Ocean region.”
At a time when Asia is in transition and troubled by growing security challenges, the US, India, and Japan are seeking to build a broader strategic understanding to advance their shared interests.
Their effort calls to mind the pre-World War I Franco-British-Russian “Triple Entente” to meet the threat posed by the rapid rise of an increasingly assertive Germany.
This time, the impetus has been provided by China’s increasingly muscular foreign policy.
But unlike the anti-German entente a century ago, the aim is not to contain China.
Rather, US policy is to use economic interdependence and China’s full integration into international institutions to dissuade its leaders from aggressively seeking Asian hegemony.
Indeed, the intention of the three democratic powers is to create an entente cordiale without transforming it into a formal military alliance, which they recognize would be counterproductive.
Yet this entente could serve as an important strategic instrument to deter China’s rising power from sliding into arrogance.
The three partners also seek to contribute to the construction of a stable, liberal, rules-based regional order.
After their recent first round of strategic dialogue in Washington, the US, Japan, and India will hold more structured discussions in Tokyo, aimed at strengthening trilateral coordination.
Over time, the trilateral initiative could become quadrilateral with Australia’s inclusion.
A parallel Australia-India-US axis, however, is likely to precede the formation of any quadrilateral partnership, especially in view of the earlier failure to launch such a four-party coalition.
Important shifts in American, Japanese, and Indian strategic preferences and policies, however, are needed to build meaningful trilateral collaboration.
Japan, America’s treaty ally, has established military interoperability only with US forces.
Following its 2008 security-cooperation declaration with India, Japan must also build interoperability with Indian naval forces, so that, as former Japanese Prime Minister Shinzo Abe has said, “Japan’s navy and the Indian navy are seamlessly interconnected.”
American and Indian forces have conducted dozens of joint exercises in recent years, but some US analysts complain that India still hews to “nonalignment” in power politics by guarding its strategic autonomy.
In reality, India is just being more cautious, because it is more vulnerable to direct Chinese pressure from across a long, disputed Himalayan border.
Whereas Japan is separated from China by an ocean and the US is geographically distant, China has sharply escalated border violations and other incidents in recent years to increase pressure on India, even as the US has maintained tacit neutrality on Sino-Indian disputes.
But, in view of America’s dire fiscal challenges, the Obama administration has just announced plans for a leaner military and greater reliance on regional allies and partners.
This demands that the US transcend its Cold War-era hub-and-spoke system, whose patron-client framework is hardly conducive to building new alliances (or “spokes”).
India for example, cannot be a Japan to the US.
Indeed, the US has worked to co-opt India in a “soft alliance” devoid of treaty obligations.
The hub-and-spoke system, in fact, is more suited to maintain Japan as an American protectorate than to allow Japan to contribute effectively to achieving the central US policy objective in Asia: a stable balance of power.
A subtle US policy shift that encourages Tokyo to cut its overdependence on America and do more for its own defense can more effectively contribute to that equilibrium.
Such a shift is likely to be dictated by the US imperative to cut defense expenditure further, in order to focus on the comprehensive domestic renewal needed to arrest the erosion in its relative power.
If the US is to rely less on prepositioned forward deployments and more on acting as an offshore balancer, it will need to make fundamental changes in its post-1945 security system.
The three entente parties must also understand the limits of their partnership.
The broad convergence of their strategic objectives in the Asia-Pacific region does not mean that they will see eye-to-eye on all issues.
Consider, for example, their earlier contrasting approaches toward Burma, or their current differences over the new US energy sanctions against Iran.
Building true military interoperability within the entente will not be easy, owing to the absence of a treaty relationship between the US and India, and to their forces’ different weapon systems and training.
But, given that no formal tripartite alliance is sought, limited interoperability may mesh well with this entente cordiale’s political objectives.
Indeed, the entente’s political utility is likely to surpass its military value.
Even so, the deepening cooperation between the US, India, and Japan can help to strengthen maritime security in the Indo-Pacific region – the world’s leading trade and energy seaway – and shape a healthy and stable Asian power equilibrium.
Asia’s Overlooked Great Power
Mention Asia, and most people think of the region’s fascinating, rising giants, China or India – or both.
Or people think about North Korea’s nuclear program, some terrorist incident, or the humanitarian consequences of the latest earthquake or tsunami.
But often overlooked – or at least underestimated – is Japan.
This is odd, given that Japan is still the world’s second largest economy, with a GDP of $5 trillion – more than China and India combined.
Despite Japan’s relatively modest rate of economic growth, its GDP per capita is roughly $38,000, more than ten times that of either China or India.
Moreover, there are important stirrings in Japan that suggest change on both the economic and security fronts.
The 1990’s may have been a lost decade, but Japan’s economy has begun to recover, now growing at more than 2% a year and boasting several firms that are truly global and hugely successful.
Changes in foreign and defense policy are more considerable.
Japan’s self-defense agency was upgraded in January to a full ministry.
Japan now spends more than $40 billion a year on defense and maintains one of the world’s most diverse and modern militaries.
Approximately 1,000 Japanese forces serve in and around Iraq.
Intellectuals, journalists, and politicians are now saying and writing things about Japan’s role in the world that were unthinkable a decade ago.
It is a question of when, not if, the Japanese amend Article IX of their constitution, which limits the role of Japan’s armed forces to self-defense.
Not everyone will welcome these changes.
Japan’s neighbors, who continue to harbor concerns stemming from World War II and Japan’s failure to deal adequately with its history, will worry about Japanese nationalism.
Nevertheless, a more active and more capable Japan, with a robust democracy and a thriving economy, is in its neighbors’ best interests.
The danger is not renewed Japanese militarism, but rather a Japan that is unable and unwilling to do its share to meet the regional and global challenges facing Asia.
Japan, for its part, needs to continue to open and reform its economy, improve its military, and make its forces available for the sort of low-intensity but manpower-intensive missions, ranging from genocide prevention to nation-building to peacekeeping, that are increasingly required in the greater Middle East and Africa.
Japanese leaders also need to act with sensitivity.
Prime Minister Shinzo Abe is off to an uneven start.
On one hand, he is wise not to have visited the Yasukuni shrine, which honors millions of Japan’s war dead, including 14 Class A war criminals.
On the other hand, Abe’s public statements denying Japan’s coercion of “comfort women” in China and Korea have been clumsy at best, insensitive at worst.
It is essential that Japan and China forge a modern relationship.
The increasing frequency of high-level visits – Prime Minister Abe went to China in October, and Chinese Premier Wen Jiabao was just in Japan – is a welcome development.
But more is needed.
Trade and investment flows can and should be expanded, which is likely only if political relations improve.
Both countries should commit themselves to a diplomatic resolution of competing claims to offshore resources.
Exchanges of every kind – military, educational, touristic – should be facilitated.
The world also needs to take into account Japan’s importance.
Japan should no longer be denied fair treatment because of events more than 60 years ago.
There is no reason Japan should not hold a permanent seat in the United Nations Security Council.
Japan should also be a full participant in Asian regional arrangements.
Asia is rich in dynamism, but relatively thin in influential political, economic, and security-related institutions, in contrast to Europe, which often lacks dynamism but is institution-heavy.
The Franco-German relationship, central to much twentieth-century conflict, now forms the core of modern Europe.
The goal should be the same for China and Japan.
The agenda is virtually limitless, including trade and investment, energy and climate change, and confidence-building in the security sphere.
A new regional institution could be based on an existing one (such as the six-party arrangement used to manage North Korea’s nuclear challenge) or start afresh.
Moreover, just as the United States continues to play a major role in Europe, so, too, should it act as a guarantor of Asia’s stability and a source of regional prosperity.
The US-Japan alliance is central to America’s position in Asia.
The goal is not to enlist Japan in any anti-Chinese coalition, but rather to increase the depth and breadth of US-Japanese cooperation.
Both countries have many reasons to pursue this goal, considering North Korea’s missile and nuclear programs, terrorism, and the numerous challenges to stability around the world.
Abe’s visit to Washington in late April is an opportunity to continue to modernize a relationship conceived in an earlier geopolitical era.
It is to be hoped that it will not be overshadowed by calls in Congress for Japan to apologize more formally than it already has for the comfort women.
Rather, the focus should be on the future and on welcoming the emergence of a Japan that is increasingly able and willing to act as a partner of the US in addressing regional and global challenges.
Asia’s Questions for America’s Next President
NEW YORK – In one of the longest American Presidential campaigns in history, neither party has addressed one of the most critical issues of the day: how can the United States successfully integrate its domestic concerns with an increasingly competitive global marketplace?
At home and abroad, it is impossible to miss the breadth and depth of change sweeping the globe, particularly in Asia.
While the US economy is in the final stages of a seismic shift from manufacturing to service-oriented industries, China and India are ascendant, and Muslims throughout Asia are clamoring for a greater role in global affairs.
And yet the Democratic presidential candidates, Hillary Clinton and Barack Obama, and the Republican nominee, John McCain, continue to tiptoe around such issues.
Instead, their campaigns’ treatment of US foreign policy has been reduced to endless debates about the wars in Iraq and Afghanistan, and about the wisdom of the North America Free Trade Agreement (NAFTA).
Surely this is unacceptable to every American committed to a safe and prosperous future.
The next US president needs to provide a clearer understanding of how he or she will prepare America for a twenty-first century in which local issues are tied to global developments, global trends can have local implications, and America’s international authority will confront Asia’s newfound clout.
With this in mind, here are five questions that should be posed to America’s presidential candidates:
1. Big construction firms and technology companies such as Microsoft, IBM, and Cisco Systems already have huge campuses in India.
But now we see Asian companies beginning to acquire valuable US-owned economic assets – witness India’s Tata Group’s proposed acquisition of Jaguar and Land Rover from Ford.
Do you see foreign investment and acquisitions in America as a positive development or a potential peril?
2. America once defined free trade for the new global economy, but many Americans are now using demands for “fair trade” to impose reactionary and protectionist trade policies.
As Democrats suggest renegotiating NAFTA, Asian countries are watching with increasing trepidation.
South Korea, in particular, is left to wonder whether or not the US is serious about pursuing similar trade agreements with one of Asia’s strongest economies and one of America’s oldest regional allies.
Will you back – or back away from – free trade pacts with Asia?
3. The American invasions of Iraq and Afghanistan, regardless of their relative merits, have unquestionably poisoned America’s standing among Asia’s 900 million Muslims, from Pakistan to the Philippines and all points in between.
A 2006 Pew poll found that support for the US in Indonesia, the world’s most populous Muslim country, has plunged to around 30%.
How will you engage Muslims in Asia, and how will you garner support at home for stronger ties with Muslims around the world?
4. The Asia Society recently co-presented a new education study that showed American 15-year-olds’ science proficiency ranked 25th out of 30 countries tested, and lagged far behind their peers in Japan, South Korea, and Hong Kong.
Meanwhile, US colleges and universities are struggling to attract the best and brightest minds from abroad, because those students – and their professors – are increasingly being denied US visas or subjected to harrowing entry delays when they arrive.
Business leaders, such as Microsoft’s Bill Gates, have also complained about shortages of skilled workers, and have called for large increases in “H1-B” visas, which allow professionals to work in the US for short periods of time.
How will you help American students compete globally, while ensuring a level playing field at home for talented foreign students and workers?
5. Both China and India are demanding concessions from the US before they will even consider caps on greenhouse-gas emissions.
Are you willing to sacrifice some economic growth domestically – or, conversely, are you willing to jeopardize relations with China and India – for the sake of the environment?
America’s next president must re-engage with Asia not as an afterthought, and not as a corollary to the “war on terror,” but as a central component of a roadmap to a safe, secure, and prosperous future.
He or she should start now by answering Asia’s questions.
Asia’s Take on Austerity
NEW HAVEN – The austerity debate was the topic du jour at this year’s World Economic Forum in Davos.
With good reason.
Europe is slipping back into recession just when recovery in the United States is finally getting some traction.&nbsp;
That has undermined the case for fiscal consolidation, which is so heavily favored in Europe.
Yet I took away a different conclusion from Davos.
I moderated a session on “The New Context in East Asia,” addressed by a panel of senior representatives from Thailand, South Korea, Malaysia, Singapore, and Japan.
With the exception of the Japanese participant, all had first-hand experience with the devastating Asian financial crisis of the late 1990’s.
I couldn't resist the temptation to draw Asia into the debate between Europe and the US.
Rather than ask the Asian panelists to theorize about the impact of austerity in the overly indebted developed West, I asked them to assess their own experiences during and after the crisis of the late 1990’s.
Frankly, I was surprised by what I heard.
The panelists agreed on two points: first, they initially detested the wrenching adjustment programs dictated by the terms of the International Monetary Fund’s so-called conditional bailouts (the South Koreans still refer scornfully to the “IMF crisis” of the late 1990’s).
Second – and here’s where the surprise came – they all agreed that, with the benefit of hindsight, these excruciating adjustments were worth it, because their crisis-torn economies were forced to embrace structural reforms that paved the way for their spectacular economic performance today.
On the surface, the numbers speak for themselves.
In 1998, during the depths of the Asian crisis, aggregate output in the so-called ASEAN-5 – Indonesia, Malaysia, the Philippines, Thailand, and Vietnam – plunged by 8.3%.
Real GDP in South Korea – long considered the darling of Asia’s newly industrialized economies – contracted by 5.7% that year.
But then the tough conditionality of IMF bailouts and adjustment programs – Asia’s own dose of austerity – kicked in.
In response, current-account balances – the Achilles’ heel of the so-called East Asian growth miracle – went from deficit to surplus.
For the ASEAN-5, current-account deficits averaging 4% of GDP in 1996-97 swung dramatically into average surpluses of 6.8% of GDP in 1998-99. A similar transformation occurred in South Korea, where a 2.8% current-account deficit in 1996-1997 became an 8.6% surplus in 1998-1999.
Since then, the region has never looked back.
Within two years, most of Asia’s crisis-ridden economies had regained their pre-crisis peaks.
Nor was this a temporary rebound.
Beginning in 1999, the ASEAN-5 began a ten-year spurt of 5% average annual GDP growth (5.5% in South Korea over the same period).
In short, there were no lasting negative effects from the short-term dose of austerity, and, to the extent that austerity was essential to post-crisis healing, the long-term benefits have proven to be both enduring and astounding.
Three lessons for the rest of us come to mind.
First, there is no gain without pain.
Few of us in the developed world can fathom aggregate-output contractions on the scale that crisis-torn Asia suffered in 1998, let alone muster the political will to impose them on our economies.
The economic dislocations and the humiliation of proud nations were, indeed, devastating (as Greeks today can attest).
But, once the excesses were purged, Asia’s post-crisis rebounds were both strong and sustainable.
Second, currencies played an important role as an escape valve in the early days of Asia’s post-crisis adjustment process.
As the region moved from hard exchange-rate pegs to floating rates, Asian currencies plunged – with drops against the dollar ranging from 28% in South Korea and roughly 37% in Thailand, Malaysia, and the Philippines to almost 80% in Indonesia.
Finally, there is no substitute for restructuring.
In Asia in the late 1990’s, measures aimed at the financial sector dominated IMF-imposed structural adjustment programs, but there were also programs that focused on tax and expenditure reforms, corporate governance, privatization, and business-debt restructuring.
While not all of these programs were implemented in strict compliance with IMF conditionality, they played a key role in promoting significant improvements in Asian competiveness.
None of these lessons should be lost on either Europe or the US.
While individual countries obviously lack currency flexibility in a monetary union – one of Europe’s most obvious and important differences from Asia in the late 1990’s – there is nothing to prevent a depreciation of the euro from boosting pan-regional competitiveness.
The same, of course, is true of the US dollar.
But no country – or group of countries, in Europe’s case – has ever devalued its way back to prosperity.
So Asia’s structural lessons are equally important to the developed world.
Indeed, Germany’s economy is out-competing and out-growing the rest of Europe, largely owing to labor-market reforms and deregulation.
The same medicine might prove equally beneficial to the rest of Europe – to say nothing of the US, which faces a major competitiveness challenge of its own.
In the end, Asia’s developing economies had no choice but to accept draconian measures as the price of bailouts in the late 1990’s. It remains to be seen if rich developed countries are willing to take the same route.
Two decades ago, in their book Changing Fortunes, Paul Volcker and Toyo Gyohten underscored the glaring double standard of crisis resolution: “When the [International Monetary] Fund consults with a poor and weak country, the country gets in line.
When it consults with a strong country, the Fund gets in line.”
Perhaps that is the key lesson from the Asian crisis of the late 1990’s: austerity can work.&nbsp;
But its success or failure ultimately boils down to power politics – namely, a resolution of the tension between short-term palliatives and the commitment to a long-term strategy.&nbsp;
That’s where the battle still rages in the West.&nbsp;
A Squandered Golden Opportunity
PALO ALTO – A group of multi-national European scientists has used gene-splicing techniques to create an extraordinary tomato.
It boasts a deep purple skin and flesh, and contains levels of antioxidants 200% higher than unmodified tomatoes.
When fed to highly cancer-susceptible mice, the tomatoes significantly extended the mice’s lifespan.
These studies have received wide attention, but an equally momentous achievement of genetic modification has been largely ignored for almost a decade.
That innovation is “Golden Rice,” a collection of new rice varieties that is bio-fortified, or enriched, by genes that express beta-carotene, the precursor of vitamin A, which is converted in the body, as needed, to the active form.
Most physicians in North America and Europe never see a single case of vitamin A deficiency in their professional lifetimes.
But the situation is very different in poor countries, where vitamin A deficiency is epidemic among the poor, whose diet is heavily dominated by rice (which contains neither beta-carotene nor vitamin A) or other carbohydrate-rich, vitamin-poor sources of calories.
In developing countries, 200-300 million children of preschool age are at risk of vitamin A deficiency, which can be devastating and even fatal.
It increases susceptibility to common childhood infections such as measles and diarrheal diseases, and is the single most important cause of childhood blindness in developing countries.
Every year, about 500,000 children become blind as a result of vitamin A deficiency, and 70% die within a year of losing their sight.
In theory, we could simply supplement children’s diets with vitamin A in capsules, or add it to some staple foodstuff, the way that we add iodine to table salt to prevent hypothyroidism and goiter.
Unfortunately, neither the resources – hundreds of millions of dollars annually – nor the infrastructure for distribution are available.
Biotechnology offers a better, cheaper, and more feasible solution: Golden Rice, which incorporates beta-carotene into the genetically altered rice grains.
The concept is simple.
Although rice plants do not normally synthesize beta-carotene in the endosperm (seeds), they do make it in the green portions of the plant.
By using gene-splicing techniques to introduce the two genes that express these enzymes, the pathway is restored and the rice grains accumulate therapeutic amounts of beta-carotene.
Golden Rice offers the potential to make contributions to human health and welfare as monumental as the discovery and distribution of the Salk polio vaccine.
With wide use, it could save hundreds of thousands of lives every year and enhance the quality of life for millions more.
But one aspect of this shining story is tarnished.
Intransigent opposition by anti-science, anti-technology activists – Greenpeace, Friends of the Earth, and a few other groups – has spurred already risk-averse regulators to adopt an overly cautious approach that has stalled approvals.
There is absolutely nothing about Golden Rice that should require endless case-by-case reviews and bureaucratic dithering.
As the British journal Nature argued in 1992, a broad scientific consensus holds that “the same physical and biological laws govern the response of organisms modified by modern molecular and cellular methods and those produced by classical methods.... [Therefore] no conceptual distinction exists between genetic modification of plants and microorganisms by classical methods or by molecular techniques that modify DNA and transfer genes.”
Put another way, government regulation of field research with plants should focus on the traits that may be related to risk – invasiveness, weediness, toxicity, and so forth – rather than on whether one or another technique of genetic manipulation was used.
Nine years after its creation, despite its vast potential to benefit humanity – and a negligible probability of harm to human health or the environment – Golden Rice remains hung up in regulatory red tape, with no end in sight.
(Cancer-preventing tomatoes, take notice.)
By contrast, plants constructed with less precise techniques such as hybridization or mutagenesis generally are subject to no government scrutiny or requirements (or opposition from activists) at all.
That applies even to the numerous new plant varieties that have resulted from “wide crosses,” hybridizations that move genes from one species or genus to another – across what used to be considered natural breeding boundaries.
Judith Rodin, the president of the Rockefeller Foundation, announced last October that her organization will provide funding to the International Rice Research Institute to shepherd Golden Rice through national regulatory approval processes in Bangladesh, India, Indonesia, and the Philippines.
This is good news, but what is really needed is a multi-faceted, aggressive reform of the regulatory process so that all new genetic constructions will have a chance to succeed.
In an April editorial in the journal Science , Nina Fedoroff, an eminent plant geneticist who serves as senior scientific advisor to US Secretary of State Condoleezza Rice, wrote: “A new Green Revolution demands a global commitment to creating a modern agricultural infrastructure everywhere, adequate investment in training and modern laboratory facilities, and progress toward simplified regulatory approaches that are responsive to accumulating evidence of safety.
The Golden Rice story makes it clear that we do not yet have the will and the wisdom to make that happen.
Assisted dying – from ‘Should we do it?’ to ‘Who should do it?’
In the past, intentionally hastening the death of any person was always a crime, no matter the circumstances.
But public attitudes have been changing.
Assisting a person who has explicitly asked to die is increasingly being seen as a justifiable action, especially in the context of a terminal illness.
This is a consistent finding of opinion polls in westernized countries.
Still, legislative bodies are cautious when considering possible changes to the law.
So far only the Netherlands, Belgium, and the state of Oregon in the US have put explicit legislation into practice.
But serious political discussions on similar legal changes are taking place in many other countries, including the UK, South Africa and Australia.
As adamant opposition to the legal regulation of assisted dying weakens, so the issues of practical applicability become more important.
Of course there is the question of who qualifies for an assisted death.
Should it be only the terminally ill?
Should, for instance, the early stages of Alzheimer’s disease qualify?
Or even any serious and incurable illness or disability?
And what about people whose reason for wanting to die is not related to their medical condition at all?
There is also another central question that has not yet been granted the attention it merits: who should actually take responsibility for the assistance?
In public discussions there is often a presumption that it is the task of the medical profession.
There are sometimes specific references to the Dutch practice that allows doctors to end their patients’ lives if they explicitly ask for it, as long as certain preconditions of due practice are met.
Assistance in dying provided by a non-physician remains illegal.
In such a medicalized framework it is morally and legally almost irrelevant who finally administers the lethal drug: if physicians are closely involved, there is no reason why they should not administer the lethal drug themselves.
Although Belgium recently followed the Dutch way of regulating voluntary active euthanasia in a strictly medicalized framework, it is precisely this sort of regulation that is increasingly challenged.
Doctors have pointed out that, whilst recognizing that an increasing majority of the population wants such a service to be available, to hasten death intentionally is still inherently incompatible with the basic objectives of medicine.
In this respect, the Death with Dignity Act in Oregon is an interesting law.
Of course, any regulation in this field requires at least some involvement by a doctor but the Oregon Act recognizes the fundamental dilemma faced by doctors confronted with a patient’s request to die and strives to keep that involvement to a minimum.
Oregon physicians may write a prescription for a lethal substance on the explicit request of a terminally ill patient, provided they can confirm the fatal prognosis, the patient’s decision-making capacity, and have informed the patient about any feasible alternative such as hospice care or pain-control options.
Physicians are not required to be present at the suicide, and they are not allowed to administer the lethal drug.
In Oregon, the patient decides independently of the physician where and when he or she wants to die, or even at all.
Compassion in Dying, a right-to-die society and non-medical NGO, participates in a consultative way in most of these cases.
Interestingly, research on the rationales of people who have legally hastened their death under the Oregon Death with Dignity Act reveals that the fear of pain and other distressing symptoms was not a major concern in most cases.
Instead, issues of personal independence, retaining control and not becoming a burden to family, friends, or caregivers turned out to be the main reasons.
Recent developments in the Netherlands have also shown that euthanasia is discussed more in the context of autonomy, control, and rational choice rather than of uncontrollable medical symptoms.
The decision in such cases is based mostly on personal and social considerations rather than medical ones.
Given that this framework extends far beyond any medical expertise, it is not surprising that no medical association anywhere in the world has so far embraced the Dutch regulation.
Whilst the Dutch Medical Association does not oppose the profession’s role in the practice of euthanasia, current evidence suggests a continuing unwillingness on the part of Dutch doctors to report cases of assistance in dying to the authorities, and a return to practices that are closer to a medical context, such as terminal sedation.
So there is great tension everywhere between how the public, and how doctors regard a possible contract in the field of assisted dying.
What is happening at the moment could be described as a power struggle over who should be responsible for a service that more and more people wish to be available but where no amount of professional expertise can fully safeguard the right decision. At the same time, any wrong decision has far-reaching and irreversible consequences.
It has been said that assisted dying is pivotal to the discussion about what constitutes a good death; it is also a focal point in the relationship between the medical profession and society as a whole.
A Standby Program for the Eurozone
CHICAGO – How will the eurozone crisis play out in the next few weeks?
With luck, Italy may soon get a credible government of national unity, Spain will obtain a new government in November with a mandate for change, and Greece will do enough to avoid roiling the markets.
But none of this can be relied upon.
So, what needs to be done?
First, eurozone banks have to be recapitalized.
Second, enough funding must be available to meet Italy’s and Spain’s needs over the next year or so if their market access dries up.
And, third, Greece, now the sickest man of Europe, must be treated in a way that does not spread the infection to the other countries on the eurozone’s periphery.
All of this requires financing – bank recapitalization alone could require hundreds of billions of euros (though these needs would be mitigated somewhat if the sovereign debt of large eurozone countries looked healthier).
In the short run, it is unlikely that Germany (and Northern Europe more generally) will put up more money for the others.
Germans are upset at being asked to support countries that do not seem to want to adjust – unlike Germany, which is competitive because it endured years of pain: low wage increases to absorb the former East Germany’s workers and deep labor-market and pension reforms.
The unwillingness of the Greek rich to pay taxes, or of Italian parliamentarians to cut their own perks, confirms Germans’ fears.
At the same time, German politicians have done a poor job explaining to their people how much they have gained from the euro.
But we are where we are.
A glimmer of hope is Europe’s willingness to use the European Financial Stability Facility (EFSF) imaginatively – as equity or first-loss cover.
Clearly, some of the EFSF funds will have to go to recapitalize banks that cannot raise money from the markets.
As for the rest, the amounts that are not already committed to the peripheral countries could be used to support borrowing that can be lent onward to Italy and Spain.
There is, however, no consensus about how to do this.
Some propose bringing in the European Central Bank to leverage the EFSF’s funds.
This is a recipe for trouble.
Giving the ECB a quasi-fiscal role, even if it is somewhat insulated from losses, risks undermining its credibility.
And if Italy were helped, the incoming ECB President, Mario Draghi, an Italian, would be criticized, no matter how dire Italy’s need.
Moreover, financing would have to be accompanied by conditionality, and these institutions have neither the requisite expertise nor the necessary distance from the countries at risk to apply and enforce appropriate conditions.
Finally, both the EFSF and the ECB ultimately rely on the same eurozone resources for their financial strength.
If markets start panicking about large eurozone defaults, they could question whether even a willing Germany has the necessary capacity to support the EFSF-ECB combine.
Put differently, these institutions do not offer a credible, non-inflationary, external source of strength.
Indeed, the eurozone’s problems might soon become too big for its members to address.
The world has a stake in their resolution.
And it has an institution that can channel help: the International Monetary Fund.
The IMF could set up a special vehicle along the lines of its New Arrangements to Borrow (NAB), which would be capitalized by a first-loss layer from the EFSF with the IMF’s own capital comprising a second layer.
This NAB-like vehicle could borrow as needed from countries, including the United States and China, as well as tap financial markets.
It would offer large lines of credit to illiquid countries like Italy, with conditionality intended to help such countries resume borrowing from markets at reasonable cost.
A special vehicle is required because the amounts that must be made available far exceed what IMF members can usually access, and it is only right that if the eurozone seeks such amounts for its members, it should bear a significant portion of any potential losses.
At the same time, the Fund’s capital resources would back the vehicle if the first-loss buffer provided by the eurozone were eroded; that way, the market would understand that strength from outside the eurozone can be brought to bear.
The IMF is not an institution that inspires warm and cuddly feelings.
But it is also not the mindless preacher of fiscal austerity that it is accused of being – and it should start taking the lead in managing the crisis, rather than holding up the rear.
The eurozone needs an independent outside assessment of what needs to be done, and rapid implementation, before it is too late and the incipient bank runs become uncontrollable.
Of course, the IMF cannot act without the permission of its masters, the large countries.
The eurozone should suppress any wounded pride, acknowledge that it needs help, and provide quickly what it has already promised.
The US should continue pushing hard for a solution.
And the emerging-market countries should pitch in too, once some safeguards for their money are in place.
Unresolved, the crisis will spare no one.
As for the birthplace of the euro crisis, Greece’s debt will almost surely have to be restructured.
But adequate funding structures for Italy and Spain must be in place before any resolution.
So, while others have to step forward to do their part, it is best if Greece steps back from the brink.
A Star is Jailed
BANGKOK – Joseph Estrada, the disgraced former president of the Philippines, faces the prospect of spending his remaining years in prison after a special court in Manila found him guilty of amassing around US$15 million in bribes and kickbacks.
During the 30 months he ruled his country, from mid-1998 to the start of 2001, Estrada accepted payoffs from gambling lords and orchestrated (with social security funds) sales of stocks, channeling much of the profits into his personal aliased account.
Estrada literally defined plunder: as a senator in the early 1990’s, he was a member of the congress that crafted the law under which he was convicted.
For many Filipinos, there is more than enough poetry in this fact, and certainly more irony than Estrada’s action-comedy movies of the 1960’s ever mustered.
There is no underplaying the significance of the court’s unanimous decision to convict the first Philippine president ever to undergo a criminal trial.
This is, after all, the Philippines, where Imelda Marcos is still living free and easy.
Despite massive evidence of the widespread death, poverty, suffering, and dysfunction she and her late husband, the dictator Ferdinand Marcos, inflicted on the Philippines, the only real disappointment she has subsequently endured has been losing the last presidential election she was allowed to contest.
The Philippines is not a country used to seeing powerful people punished.
When officials are accused or suspected of corruption, they do not quickly resign, as in Korea or Japan.
Instead, they often seek immunity by running for public office.
When a bloody coup against Corazon Aquino’s fledgling democratic government failed, the leader of the putsch escaped from a floating prison – and then successfully ran for senator.
The wheels of Philippine justice need retooling, so much so that the country’s Chief Justice himself recently called for an emergency summit to discuss a rash of extra-judicial killings that have the claimed the lives of leftists, human rights workers, and journalists under President Gloria Macapagal Arroyo.
There have been few convictions for these crimes.
Yet Filipinos themselves simply cannot seem to imagine their leaders behind bars.
Even before Estrada’s conviction, opinion polls showed that 48% of Filipinos wanted clemency, if not a guaranteed pardon from Arroyo.
More than 80% said Estrada should be allowed to languish in a lush private family vacation home where he already spent the last six years awaiting his verdict.
Is this lack of appetite for justice a part of Filipino culture, or learned behavior?
Has an overly forgiving nature prevented Filipinos from achieving closure in so many painful chapters of their history, or are the ravages of impunity to blame?
With so few examples of justice clearly dispensed, and overwhelmed by examples of villains so easily forgiven or forgotten, perhaps Filipinos could not bring themselves to demand what they could not imagine.
Estrada’s conviction gives Filipinos the clearest illustration of what the rule of law may bring to their society.
Estrada remains adored by the masses, but so far the public’s reaction to the verdict has been nonviolent and almost subdued.
Notwithstanding the opinion polls, it does seem as though the public not only accepts his conviction, but that they respect it as the outcome of a fair system that has been allowed to work.
This suggests not only that justice in the Philippines has a chance; equally important, it suggests that Filipinos will give justice a chance.
If the Estrada saga leads to a firm yet dignified exercise of justice, Filipinos may discover a taste for more of the same.
Europe’s Lost Keynesians
CAMBRIDGE – There is no magic Keynesian bullet for the eurozone’s woes.
But the spectacularly muddle-headed argument nowadays that too much austerity is killing Europe is not surprising.
Commentators are consumed by politics, flailing away at any available target, while the “anti-austerity” masses apparently believe that there are easy cyclical solutions to tough structural problems.
The eurozone’s difficulties, I have long argued, stem from European financial and monetary integration having gotten too far ahead of actual political, fiscal, and banking union.
This is not a problem with which Keynes was familiar, much less one that he sought to address.
Above all, any realistic strategy for dealing with the eurozone crisis must involve massive write-downs (forgiveness) of peripheral countries’ debt.
These countries’ massive combined bank and government debt – the distinction everywhere in Europe has become blurred – makes rapid sustained growth a dream.
This is hardly the first time I have stressed the need for wholesale debt write-downs.
Two years ago, in a commentary called “The Euro’s Pig-Headed Masters,” I wrote that “Europe is in constitutional crisis.
No one seems to have the power to impose a sensible resolution of its peripheral countries’ debt crisis.
Instead of restructuring the manifestly unsustainable debt burdens of Portugal, Ireland, and Greece (the PIGs), politicians and policymakers are pushing for ever-larger bailout packages with ever-less realistic austerity conditions.”
My sometime co-author Carmen Reinhart makes the same point, perhaps even more clearly.
In a May 2010 Washington Post editorial (co-authored with Vincent Reinhart), she described “Five Myths About the European Debt Crisis” – among them, “Myth #3: Fiscal austerity will solve Europe’s debt woes.”
In a debt restructuring, the northern eurozone countries (including France) will see hundreds of billions of euros go up in smoke.
Northern taxpayers will be forced to inject massive amounts of capital into banks, even if the authorities impose significant losses on banks’ large and wholesale creditors, as well they should.
These hundreds of billions of euros are already lost, and the game of pretending otherwise cannot continue indefinitely.
A gentler way to achieve some modest reduction in public and private debt burdens would be to commit to a period of sustained but moderate inflation, as I recommended in December 2008 in a commentary entitled “Inflation is Now the Lesser Evil.”
Sustained moderate inflation would help to bring down the real value of real estate more quickly, and potentially make it easier for German wages to rise faster than those in peripheral countries.
It would have been a great idea four and a half years ago.
It remains a good idea today.
What else needs to happen?
The other steps involve economic restructuring at the national level and political integration of the eurozone.
In another commentary, “A Centerless Euro Cannot Hold,” I concluded that “without further profound political and economic integration – which may not end up including all current eurozone members – the euro may not make it even to the end of this decade.”
Here, all eyes may be on Germany, but today it is really France that will play the central role in deciding the euro’s fate.
Germany cannot carry the euro on its shoulders alone indefinitely.
France needs to become a second anchor of growth and stability.
Temporary Keynesian demand measures may help to sustain short-run internal growth, but they will not solve France’s long-run competitiveness problems.
At the same time, France and Germany must both come to terms with an approach that leads to far greater political union within a couple of decades.
Otherwise, the coming banking union and fiscal transfers will lack the necessary political legitimacy.
As my colleague Jeffrey Frankel has remarked, for more than 20 years, Germany’s elites have insisted that the eurozone will not be a transfer union.
But, in the end, ordinary Germans have been proved right, and the elites have been proved wrong.
Indeed, if the eurozone is to survive, the northern countries will have to continue to help the periphery with new loans until access to private markets is restored.
So, given that Germany will be picking up many more bills (regardless of whether the eurozone survives), how can it best use the strength of its balance sheet to alleviate Europe’s growth problems?
Certainly, Germany must continue to acquiesce in an ever-larger role for the European Central Bank, despite the obvious implicit fiscal risks.
There is no safe path forward.
There are a number of schemes floating around for leveraging Germany’s lower borrowing costs to help its partner countries, beyond simply expanding the ECB’s balance sheet.
For meaningful burden-sharing to work, however, eurozone leaders must stop dreaming that the single currency can survive another 20 or 30 years without much greater political union.
Debt write-downs and guarantees will inevitably bloat Germany’s government debt, as the authorities are forced to bail out German banks (and probably some neighboring countries’ banks).
But the sooner the underlying reality is made transparent and becomes widely recognized, the lower the long-run cost will be.
To my mind, using Germany’s balance sheet to help its neighbors directly is far more likely to work than is the presumed “trickle-down” effect of a German-led fiscal expansion.
This, unfortunately, is what has been lost in the debate about Europe of late: However loud and aggressive the anti-austerity movement becomes, there still will be no simple Keynesian cure for the single currency’s debt and growth woes.
A Survival Strategy for the Eurozone
NEW YORK – After the Greek and Irish crises and the spread of financial contagion to Portugal, Spain, and possibly even Italy, the eurozone is now in a serious crisis.
There are three possible scenarios: “muddle through,” based on the current approach of “lend and pray”; “break-up,” with disorderly debt restructurings and possible exit of weaker members; and “greater integration,” implying some form of fiscal union.
The muddle-through scenario – with financing provided to member states in distress (conditional on fiscal adjustment and structural reforms), in the hope that they are illiquid but solvent – is an unstable disequilibrium.
Indeed, it could lead to the disorderly breakup scenario if institutional reforms and other policies leading to closer integration and restoration of growth in the eurozone’s periphery are not implemented soon.
The crisis started with too much private debt and leverage, which became public debt and deficits as crisis and recession triggered fiscal deterioration and private losses were mostly socialized via bailouts of financial systems.
Then, distressed sovereigns that had already lost market access – Greece and Ireland – were bailed out by the International Monetary Fund and the European Union.
But no one will bail out these super-sovereigns if the sovereigns prove to be insolvent.
Thus, the current strategy of kicking the can down the road will soon reach its limits, and a different plan will be needed to save the eurozone.
The first institutional reform takes the form of a larger envelope of official resources, which would mean a quasi-fiscal union.
Official resources currently are sufficient to bail out Greece, Ireland, and Portugal, but not to prevent a self-fulfilling run on the short-term sovereign and financial liabilities of Spain and other potentially distressed eurozone members.
So, even if these countries were to implement the necessary fiscal and structural reforms, an increase of official resources would nonetheless be needed.
Because nervous investors don’t want to be last in line in case of a run, a disorderly rush to the exits is likely when official resources are insufficient.
Short of full fiscal unification – or a variant of it in the form of eurozone bonds – this increase in official resources would occur through a much-enlarged European Financial Stability Facility and a much greater commitment by the European Central Bank to long-term bond purchases and liquidity operations to support banks.
Since quasi-fiscal union implies that the eurozone’s core economies could end up systematically bailing out those on the periphery, only a formal loss of fiscal sovereignty – a credible commitment by the peripheral countries to medium- and long-term fiscal discipline – could overcome the current political resistance of Germany and others.
But even a larger envelope of official resources is not sufficient to stem the insolvency problems of Greece, Ireland, and, possibly, Portugal and Spain.
Thus, a second set of policies and institutional reforms requires that all unsecured creditors of banks and other financial institutions need to be “treated” – that is, they must accept losses (or “haircuts”) on their claims.
This is needed to prevent even more private debt being put on government balance sheets, causing a fiscal blowout.
If orderly treatment of unsecured senior creditors requires a new cross-border regime to close down insolvent European banks, such a regime should be implemented without delay.
Similarly, super-sovereigns cannot continue to bail out distressed sovereigns that are insolvent rather than illiquid.
Thus, in addition to an orderly resolution regime for banks, Europe must also implement early orderly restructurings of distressed sovereigns’ public debt.
Waiting until 2013 to implement these restructurings, as German Chancellor Angela Merkel proposes, will destroy confidence, as it implies a much larger haircut on residual private claims on sovereign borrowers.
Thus, orderly market-based restructurings via exchange offers need to occur in 2011.
Such exchange offers can limit private creditors’ losses if they are done early.
That way, formal haircuts on the face value of debt can be avoided via new bonds that include only a maturity extension and an interest-rate cap that is set below today’s unsustainable market rates.
Waiting to restructure unsustainable debts would only lead to disorderly workouts and severe haircuts for some private creditors.
Finally, Europe needs policies that restore competitiveness and growth to the eurozone’s periphery, where GDP is either still contracting (Greece, Spain, and Ireland) or barely growing (Italy and Portugal).
Without growth, it will be difficult to stabilize public and private debts and deficits as a share of GDP – the most important indicator of fiscal sustainability.
Moreover, without growth, the social and political backlash against painful belt-tightening will eventually undermine austerity and reform.
Unfortunately, fiscal austerity and structural reforms are – at least in the short run – recessionary and deflationary.
So other policies are needed to restore growth.
The ECB should pursue a much looser monetary policy to jump-start growth, with a weaker euro to help boost the periphery’s competitiveness.
In addition, Germany should delay its fiscal consolidation; if anything, it should cut taxes for a couple of years to boost its own growth and – via trade – that of the periphery.
In the next few months, it will become clear whether European policymakers can compromise and implement reforms that dampen the threat of a eurozone breakup.
Either the EU moves in the direction of a more stable equilibrium of closer integration, or the risk of an unstable and disorderly breakup scenario will rise significantly.
A Sustainable Housing Recovery?
NEW HAVEN – Volatility in the housing market has long been known, but until now it has never been visible in so many places around the world at the same time.
Indeed, the year 2009 might even be a milestone marking a new era of volatility.
Since 2000, we have seen the most dramatic evidence ever of speculative bubbles in markets for owner-occupied homes.
Home prices exploded after 2000 in North America, Europe, and Asia, and in many isolated places elsewhere in the world.
Markets peaked in 2007, and then fell sharply in many of these places with the onset of the global financial crisis.
Surprisingly, prices rebounded in some places in 2009.
It seems the story never ends.
In the United States, the S&amp;P/Case-Shiller 10-City Home Price Index recorded the biggest turnaround since the index began in 1987, rising 5% (a 15% annual rate) from April to August 2009, after having fallen 7% (a 21% annual rate) in the four months from December 2008 to March 2009.
Recent increases in home prices have also been seen in Australia, the United Kingdom, Hong Kong, Korea, Singapore, and Sweden, and optimistic talk is heard in still more places.
Housing prices are on a rollercoaster ride, and we may never be able to make complete sense of their movements, other than to understand the volatility that they represent.
Indeed, in a volatile speculative market, where people buy and sell in anticipation of further price movements, history confirms that price movements will be hard to explain, even after the fact.
They reflect changing investor psychology, which is hard to discern, and new information, which may still be amorphous and ambiguous.
This surge in volatility appears to reflect a new and different attitude toward homes as an asset – an attitude that has spread around much of the world. We used to think that homes were in the same category as automobiles: depreciating assets that grow obsolete over time, are costly to maintain, and go out of style, eventually to be scrapped and replaced.
Now we think of them as claims on increasingly scarce resources in a rapidly growing world, with prices potentially skyrocketing any day.
It used to be commonly thought that a home’s value consists primarily in the structure, not in the land on which it sits.
This should be increasingly true as high-rise condominiums become more common.
In some cases 100 homes can, in effect, be stacked on one another.
With such intensive use of land, our land constraints for housing construction are vanishingly small.
This long-term trend towards multifamily housing may be expected to continue, further diminishing the importance of land to home values.
But the recent speculative bubbles have in effect boosted the percentage of land value in home value.
Although much of this was temporary, we now tend to think of homes as land rather than structures.
Economists usually compute urban land value by subtracting the estimated construction cost of the home from the home price, so that land value is inferred as a residual.
Economists do this because in most places direct sales of vacant urban land are rare, and often involve unusual places or unusual circumstances, that make such sales unrepresentative of land values underneath homes.
Thus, the bubble component in home prices is attributed to a surge in land prices, even though land prices outside of bubbly urban areas are vastly lower.
Many people appear to believe that upswings in home prices reflect increasing scarcity of land in a world constrained by rapid economic growth and severe resource constraints (symbolized by the fear of global warming).
They view the recent collapse of the housing bubble as merely the effect of a temporary financial crisis, which governments around the world seem to be confronting aggressively.
Such thinking may be playing a part in the recent rebound of home prices.
But in fact, it is probably more accurate to think of the ups and downs of the world’s housing markets as a reflection of the change in our thinking about housing as an investment.
If so, the volatility in home prices after 2000 was the result of faulty thinking, not of the natural effects of global economic growth, which has occurred at a relatively smooth rate for decades now. Faulty thinking, in turn, encouraged loose practices by mortgage lenders, and led central banks to take no action against housing bubbles as they developed.
In many countries, governments in 2009 responded to the collapse of housing bubbles by instituting policies aimed at supporting these speculative markets.
The result, however, has been to lead people to add another, political, component to their assessment of home prices, unhinging them further from economic fundamentals.
A basic fact is often forgotten: the modern construction industry is quite capable of building vast numbers of fine modern homes, including units in high-rise buildings, at costs far below the prices of homes in many urban areas today.
This should put a break on long-run escalation of home prices.
Housing speculators seem often to be betting on the political equilibrium that restricts the supply of housing, and on the indefinite continuation of the artificial supports started during this financial crisis.
But, in a newly global economy, with increasing interregional and international population flows and widespread commitment to economic freedom, it is very hard for governments to restrict supply in the long run.
That is why it appears safer to predict high volatility in 2010 than to predict that home prices will rise.
A Sustainable Recovery
NEW YORK – The global recession now underway is the result not only of a financial panic, but also of more basic uncertainty about the future direction of the world economy.
Consumers are pulling back from home and automobile purchases not only because they have suffered a blow to their wealth with declining stock prices and housing values, but also because they don’t know where to turn.
Should they risk buying a new car when gasoline prices might soar again?
Will they be able to put food on the table after this year’s terrifying rise in food prices?
Decisions about business investment are even starker.
Businesses are reluctant to invest at a time when consumer demand is plummeting and they face unprecedented risk penalties on their borrowing costs.
They are also facing huge uncertainties.
What kinds of power plants will be acceptable in the future?
Will they be allowed to emit carbon dioxide as in the past?
Can the United States still afford a suburban lifestyle, with sprawling homes in far-flung communities that require long-distance automobile commutes?
To a large extent, economic recovery will depend on a much clearer sense of the direction of future economic change.
That is largely the job of government.
After the confused and misguided leadership of the Bush administration, which failed to give any clear path to energy, health, climate, and financial policies, President-elect Barack Obama will have to start charting a course that defines the American economy’s future direction.
The US is not the only economy in this equation.
We need a global vision of sustainable recovery that includes leadership from China, India, Europe, Latin America, and, yes, even Africa, long marginalized from the world economy, but very much part of it now.
There are a few clear points amidst the large uncertainties and confusions.
First, the US cannot continue borrowing from the rest of the world as it has for the past eight years.
America’s net exports will have to increase, meaning that the net exports of China, Japan, and other surplus countries will consequently decrease.
The adjustments needed amount to a sizeable deficit-to-balance swing of around $700 billion in the US current account, or nearly 5% of US GNP.
China’s trade surplus might shrink by half of that amount (with cuts in trade surpluses also spread over other global regions), meaning a shift in Chinese GNP toward internal demand and away from net exports equal to between 5% and 10% of China’s GNP.
Fortunately, China is promoting a major domestic expansion.
Second, the decline in US consumption should also be partly offset by a rise in US investment.
However, private business will not step up investment unless there is a clear policy direction for the economy.
Obama has emphasized the need for a “green recovery,” that is, one based on sustainable technologies, not merely on consumption spending.
The US auto industry should be re-tooled for low-carbon-emission automobiles, either plug-in hybrids or pure battery-operated vehicles.
Either technology will depend on a national electricity grid that uses low-emission forms of power generation, such as wind, solar, nuclear, or coal-fired plants that capture and store the carbon-dioxide emissions.
All of these technologies will require public funding alongside private investment.
Third, the US recovery will not be credible unless there is also a strategy for getting the government’s own finances back in order.
George W. Bush’s idea of economic policy was to cut taxes three times while boosting spending on war.
The result is a massive budget deficit, which will expand to gargantuan proportions in the coming year (perhaps $1 trillion) under the added weight of recession, bank bailouts, and short-term fiscal stimulus measures.
Obama will need to put forward a medium-term fiscal plan that restores government finances.
This will include ending the war in Iraq, raising taxes on the rich, and also gradually phasing in new consumption taxes.
The US currently collects the lowest ratio of taxes to national income among rich nations.
This will have to change.
Fourth, the world’s poor regions need to be seen as investment opportunities, not as threats or places to ignore.
At a time when the major infrastructure companies of the US, Europe, and Japan will have serious excess capacity, the World Bank, the European Investment Bank, the US Export-Import Bank, the African Development Bank, and other public investment funds should be financing large-scale infrastructure spending in Africa, to build roads, power plants, ports, and telecommunications systems.
So long as the credits are long term and carry a modest interest rate (say, 25-year dollar loans at 5% per annum), the recipient countries could repay the loans out of the significant boost in incomes that would result over the course of a generation.
The benefits would be extraordinary, for both Africa and the rich countries, which would be putting their businesses and skilled workers back to work.
Such loans, of course, would require a major global initiative, at a time when even blue-chip companies cannot borrow overnight, much less for 25 years!
In typical business cycles, countries are usually left to manage the recovery largely on their own.
This time we will need global cooperation.
Recovery will require major shifts in trade imbalances, technologies, and public budgets.
These large-scale changes will have to be coordinated, at least informally if not tightly, among the major economies.
Each should understand the basic directions of change that will be required at the national level and globally, and all nations must share in the deployment of new sustainable technologies and in the co-financing of global responsibilities, such as increased investments in African infrastructure.
We have arrived at a moment in history when cooperative global political leadership is more important than ever.
Fortunately, the US has taken a huge step forward with Obama’s election.
Now to action.
A Tale of Two American Economies
NEW YORK – While the United States recently reported 3.5% GDP growth in the third quarter, suggesting that the most severe recession since the Great Depression is over, the American economy is actually much weaker than official data suggest.
But official measures of GDP may grossly overstate growth in the economy as they don't capture the fact that business sentiment among small firms is abysmal and their output is still falling sharply.
Third quarter GDP - properly corrected for these factors - may have been 2% rather than 3.5%.
The story of the US is, indeed, one of two economies. There is a smaller one that is slowly recovering and a larger one that is still in a deep and persistent downturn.
Consider the following facts. While America’s official unemployment rate is already 10.2%, the figure jumps to a whopping 17.5% when discouraged workers and partially employed workers are included.
And, while data from firms suggest that job losses in the last three months were about 600,000, household surveys, which include self-employed workers and small entrepreneurs, suggest that those losses were above two million.
Moreover, the total effect on labor income – the product of jobs times hours worked times average hourly wages – has been more severe than that implied by the job losses alone, because many firms are cutting their workers’ hours, placing them on furlough, or lowering their wages as a way to share the pain.
Many of the lost jobs – in construction, finance, and outsourced manufacturing and services – are gone forever, and recent studies suggest that a quarter of US jobs can be fully outsourced over time to other countries.
Thus, a growing proportion of the workforce – often below the radar screen of official statistics – is losing hope of finding gainful employment, while the unemployment rate (especially for poor, unskilled workers) will remain high for a much longer period of time than in previous recessions.
Consider also the credit markets.
Prime borrowers with good credit scores and investment-grade firms are not experiencing a credit crunch at this point, as the former have access to mortgages and consumer credit while the latter have access to bond and equity markets.
But non-prime borrowers – about one-third of US households – do not have much access to mortgages and credit cards.
They live from paycheck to paycheck – often a shrinking paycheck, owing to the decline in hourly wages and hours worked.
And the credit crunch for non-investment-grade firms and smaller firms, which rely mostly on access to bank loans rather than capital markets, is still severe.
Or consider bankruptcies and defaults by households and firms.
Larger firms – even those with large debt problems – can refinance their excessive liabilities in court or out of court; but an unprecedented number of small businesses are going bankrupt.
The same holds for households, with millions of weaker and poorer borrowers defaulting on mortgages, credit cards, auto loans, student loans, and other forms of consumer credit.
Consider also what is happening to private consumption and retail sales.
Recent monthly figures suggest a pick-up in retail sales.
But, because the official statistics capture mostly sales by larger retailers and exclude the fall in sales by hundreds of thousands of smaller stores and businesses that have failed, consumption looks better than it really is.
And, while higher-income and wealthier households have a buffer of savings to smooth consumption and avoid having to increase savings, most lower-income households must save more, as banks and other lenders cut back on home-equity loans and lower limits on credit cards.
As a result, the household savings rate has risen from zero to 4% of disposable income.
But it must rise further, to 8%, in order to reduce the high leverage of household sector.
To be sure, the US government is increasing its budget deficits to put a floor under demand.
But most state and local governments that have experienced a collapse in tax revenues must sharply retrench spending by firing policemen, teachers, and firefighters while also cutting welfare benefits and social services for the poor.
Many state and local governments in poorer regions of the country are at risk of bankruptcy unless the federal government undertakes a massive bailout of their finances.
Moreover, income and wealth inequality is rising again: poorer households are at greater risk of unemployment, falling wages, or reductions in hours worked, all leading to lower labor income, whereas on Wall Street outrageous bonuses have returned with a vengeance.
With the stock market rising while home prices are still falling, the wealthy are becoming richer, while the middle class and the poor – whose main wealth is a home rather than equities – are becoming poorer and being saddled with an unsustainable debt burden.
So, while the US may technically be close to the end of a severe recession, most of America is facing a near-depression.
Little wonder, then, that few Americans believe that what walks like a duck and quacks like a duck is actually the phoenix of recovery.
A Tale of Two Currency Areas
PALO ALTO – The United States and Europe are two giant free-trade areas, each wealthy but with serious short-run problems and immense long-run challenges.
They are also two single-currency areas: the dollar and, for much of Europe, the euro.
The challenges facing both are monumental.
But only Europe’s currency union faces uncertainty about its future;
America faces no existential crisis for its currency.
The two economic powers’ similarities and differences, particularly with respect to internal labor mobility, productivity, and fiscal policies, suggest why – and provide clues about whether the eurozone can weather the crises on its periphery and evolve into a stable single-currency area.
Labor mobility from poorer to richer areas provides a shock absorber against differential economic hardship.
The other natural shock absorber is a depreciating currency, which increases competitiveness in the area hit hardest.
That cannot happen with a common currency, and economic adjustment is doubly difficult when labor is not mobile enough to help mitigate regional contractions in income and unemployment.
The reasons for lower labor mobility in the eurozone than in America are legion.
True, America’s original thirteen colonies were a loose federation, and many Americans considered themselves citizens of their state first and of the US second as late as a century after the Revolution.
But one’s state was not a fully formed nation, with its own shared and deeply ingrained history, culture, ethnic identity, and religion.
Perhaps the most important cultural component of labor mobility is language.
From Mississippi to Maine, and from New York to New Orleans, America’s written language is the same and the spoken language is understandable to all.
Not so from Berlin to Barcelona or Rome to Rotterdam.
(Or, for that matter, from northern to southern China or in multilingual India, where Hindi is spoken by only 42% of the population.)
For eurozone citizens who do not speak a major language, especially English, mobility across national borders within the single-currency area is limited at best.
These are differences that cannot be easily erased.
While some aspects of culture are becoming globalized, variation across borders in Europe is far greater than it is between US states.
For example, until the second half of the twentieth century, today’s eurozone members regularly slaughtered each other on centuries of battlefields.
By contrast, history is more commonly shared among Americans from different states, who, other than in the Civil War, have fought side by side in the nation’s external wars.
All of this means that when California slumps, residents simply leave for the mountain states; when manufacturing jobs disappear in the upper Midwest, people migrate to new jobs in Texas.
That pattern is much less prevalent in Europe.
Moreover, it is a pattern that has closed the gap (now roughly 40%) between per capita income in America’s poorest and richest states, as labor and capital continually adjust by moving to areas where productivity is higher.
The range of productivity and per capita income within the eurozone is considerably wider, making mobility even more important.
Finally, while fiscal systems differ among American states, the overall fiscal burden is under half that of the federal level.
Almost all states’ constitutions require balanced budgets (with exceptions for emergencies).
American states and municipalities do face serious medium- and long-term fiscal challenges from underfunded pension and health-care systems, but citizens living in different states have a common national budget, whereas citizens of different eurozone countries face radically different central-government fiscal positions.
Indeed, many observers argue that the eurozone’s lack of a common fiscal system is its main problem.
But competition over taxes and services is beneficial, not harmful.
Nevertheless, much tighter constraints, with serious and enforceable penalties, must be placed on permissible budget positions and their transparency if the euro is to survive.
And it can survive.
Those who would write off the euro as a failure should consider that it is only ten years old.
America, too, historically had problems as a single-currency area, from early chaos before the Constitution to the clash between agricultural and banking interests over the gold standard in the late nineteenth century.
While the euro faces strong headwinds, the dollar’s early sailing wasn’t always smooth, either.
The eurozone countries must first deal with the sovereign-debt crisis, reduce their fiscal deficits, and strengthen the woefully undercapitalized banking system.
But, if the eurozone is to survive and prosper beyond the current crisis, it will also need comprehensive structural reforms to boost internal labor mobility and defuse the pressures caused by economic adjustment among nations and regions.
Whether citizens will support politicians who propose the labor, tax, and other reforms needed to enhance mobility, and whether such reforms will be sufficient to overcome linguistic and cultural barriers, are open questions.
Successive generations of post-war European political leaders initiated the European Union and then currency union in order to knit countries so closely together that another major war between them would become impossible.
Whether monetary union was necessary to accomplish that aim is debatable.
Despite the considerable advantages of a common currency (price transparency, lower transaction costs, and inflation credibility, to name a few), the difficulty of macroeconomic management of such diverse economies looms larger than ever.
The euro was always a big gamble, a grand experiment.
Historical efforts at monetary union have sometimes collapsed, and sometimes they have survived multiple crises.
The future of the eurozone may be cloudy, but it will not be dull.
A Tale of Two Defaults
BRUSSELS – Once upon a time, there was a country plagued by large deficits, high inflation, and decades of economic stagnation.
When economic problems once again became particularly acute, the country’s leadership embraced a radical approach to achieving price stability.
A new currency was introduced and pegged to the US dollar at a one-to-one exchange rate.
A new law stipulated that this quasi-monetary union was to last forever.
Moreover, the economy was opened, state enterprises were privatized, and the country participated in an important regional free-trade initiative.
Initially, the new arrangement worked very well.
Growth returned, and confidence among foreign investors was such that large inflows of foreign direct investment, especially in the banking sector, arrived.
But, after about 10 years, the success story turned bitter.
The region’s dominant trading partner devalued, and the US dollar appreciated considerably.
The country thus had problems exporting.
It developed external deficits and growth slowed.
Moreover, fiscal policy had not been kept under control, resulting in increasing public debt.
International investors were initially quite willing to finance the government, but risk premia started to increase when the deficits became chronic.
The difficulties intensified when risk aversion in international financial markets increased markedly, owing to other emerging-market defaults.
When the risk premia threatened to become unbearable, the international community responded with large financial support packages, financed principally by the International Monetary Fund and some friendly countries.&#160;
The first rescue package envisaged a resumption of growth, a decline in the fiscal deficit, and structural reforms.
None of this was achieved, as the economy deteriorated under the impact of the fiscal measures, which were not offset by a surge in exports, because wages could not be lowered to gain competitiveness.
One year later, risk premia were even higher than before, and a second bailout package was put together, followed by a large “voluntary” debt rescheduling.
But none of this was enough to restore the confidence of international investors, who were not convinced that the government could service its debt in the face of mounting social resistance and an economy that continued to contract.
Even worse, the country’s savers lost trust in their own government, and started to withdraw their deposits.
As the deposit flight accelerated, the economy went into a tailspin and social tensions exploded.
The government fell, and one of its fleeting successors announced a cessation of payments to foreign bondholders and an end to the currency peg.
The country was Argentina, which took about 10 years to move from its hard exchange-rate peg to the dollar, introduced in 1991, to its messy default at the turn of 2001-2002.
The Greek experience – so far, at least – looks like a replay of the Argentine drama.
Greece also had a history of fiscal problems and inflation, which were supposed to be cured by admission to the European Union’s Economic and Monetary Union (EMU) in 2001 (coincidentally, just as Argentina was preparing to default).
Its first decade in EMU was also characterized by rapid economic growth, fueled mainly by abundant and cheap capital inflows.
But during this first decade, a key underlying problem emerged as Greece lost competitiveness relative to Germany, just as Argentina had lost competitiveness to Brazil.
While Argentina had been hit by the fallout from the emerging-market debt crisis of the late 1990’s, Greece is now being hit by the increase in risk aversion since the financial crisis of 2008.
As with Argentina a decade ago, Greece no longer looks solvent to international investors when they consider the country’s slow growth and higher risk premia.
Their skepticism seems justified, since the usual indicators of debt sustainability look much worse for Greece than they did for Argentina.
The Greek fiscal and external deficits are about three times larger, and the accumulated debt level is more than twice that of pre-default Argentina.
The first large bailout package for Greece has also met a fate similar to Argentina’s.
One year on, risk premia are even higher, a second package is being put together, and private creditors are being asked to roll over their bond holdings “voluntarily.”
Greece is also receiving much more foreign financial support than Argentina did.
With the two rescue packages, Greece has been promised official credits worth €230 billion – more than 100% of its GDP.
On top of this, Greece has received €90 billion from the ECB (at an interest rate of 1.25%).
This huge funding has so far saved the Greek banking system from collapse, and it constitutes the key advantage of joining a real monetary union as opposed Argentina’s ‘quasi-monetary union’ with the USD.
But what happens if, like in Argentina, deposit flight continues and accelerates?
If Greek savers withdraw only one-half of their remaining deposits, the ECB will have to lend another €100 billion to Greek banks to keep them afloat.
Indeed, Greece might ultimately require more than €400 billion in official support – almost 200% of its GDP today.
If Greece were to follow the Argentine script and be forced to leave the eurozone after a messy default, its nominal GDP is likely to be halved.
In that case, the Greek government’s debt to its eurozone partners would be equivalent to 400% of its GDP, very little of which would be repaid.
Argentina defaulted on its private debt, but at least it repaid all its official debt.
Karl Marx famously wrote that history repeats itself as farce.
In the case of Greece, history might turn out more like a much larger version of Argentina’s tragedy.
A Tale of Two Dictatorships
Myanmar and Pakistan are both Asian countries whose military rulers are in trouble.
But they are heading in opposite directions, because, whereas Pakistan understands why Asia is rising, Myanmar does not.
Asia is rising because Asian countries are increasingly opening their doors to modernity.
Starting with Japan, this modernizing wave has swept through the four “Asian Tigers” (South Korea, Taiwan, Hong Kong, and Singapore), some ASEAN countries (Malaysia, Indonesia, Thailand, and Vietnam), and then to China and India.
Now, it is moving into Pakistan and West Asia.
I was in Pakistan during one of its more exciting weeks.
Exiled former Prime Minister Nawaz Sharif sought to return, but was promptly sent back into exile.
The world expected a political eruption. Instead, the country carried on calmly.
Pakistan did not erupt because Pakistan’s elite is focused on modernization.
Led by Prime Minister Shaukat Aziz, who was formerly with Citibank, the country has carried out dramatic structural reforms, matching best practices in leading emerging-market economies.
This explains high economic growth rates.
Pakistan has welcomed foreign trade and investment.
And, just as the success of overseas Indians in America inspired Indians in India, Pakistan stands to similarly benefit from its own successful diaspora.
But this opening to modernity extends beyond economics and finance.
Yes, thousands of madrasas remain open and Islamic fundamentalism is strong. But this has not completely changed the fundamental texture of Pakistan’s society.
One sight at LUMS, a leading private university in Lahore, heartened me: how women were dressed.
When I visited Malaysian campuses as a young man in the 1960’s, few Malay Muslim women wore the hijab .
Today, on the same campuses, almost all do.
By contrast, at LUMS (which has the look and feel of Harvard Business School), only about 5% of female students wore the hijab , a remarkable expression of social freedom.
There has also been an explosion of free media in Pakistan.
An astonishing number of Pakistani TV stations openly discuss the activities of Sharif and the other exiled former prime minister, Benazir Bhutto.
Indeed, many elements of an open society are in place, including – as the world learned in March – an independent judiciary.
Myanmar, by contrast, broadcasts no information on the dissident Aung San Suu Kyi, and would never allow the reinstatement of a Chief Justice fired by its generals, as Pakistani President Pervez Musharraf did in March, let alone demonstrations in the streets in the Chief Justice’s favor.
Of course, there is much silent resentment about the enormous political and economic space occupied by the Pakistan military, and a danger of a backlash if the military does not learn to share more space with civil society.
I met many retired army generals occupying key posts.
Fortunately, they seemed to have a temperament closer to Colin Powell’s than to either Than Shwe or Maung Aye , the two closed military minds who have cut off Myanmar from the world.
America’s decision to engage, rather than isolate, Pakistan has also helped.
I have no doubt that closer American re-engagement helped to nudge Pakistan in the right direction.
Many members of Pakistan’s elite have been educated in American universities – another leading indicator of a country’s orientation.
Just imagine how different international relations would be if American leaders could visit Myanmar (or even Iran) with equal ease and have friendly discussions about agreements and disagreements.
Myanmar’s generals deserve to be condemned for their brutal crackdown on civilian protestors and Buddhist monks.
The Western world will rush to demand more sanctions and more isolation.
But to what avail?
Myanmar has effectively isolated itself for more than 50 years.
What can even more isolation achieve?
A courageous Western leader might confront Myanmar’s leaders with a threat that would really frighten them: deeper engagement.
Myanmar’s generals genuinely believe that they are protecting Burmese “purity” by shutting out the world.
Imagine the impact if as many Myanmar generals visited America as Pakistani generals do.
A brave young Myanmar intellectual, Thant Myint-U (the grandson of former United Nations Secretary General U Thant) asks, “What outside pressure can bring about democratic change?
And why, after nearly two decades of boycotts, aid cutoffs, trade bans, and diplomatic condemnation, are Myanmar’s generals apparently more in charge than ever before?”
I was in Pakistan as a state guest.
But my real mission was to reconnect with my ethnic Sindhi roots, as I had never visited the country where my parents were born.
Only those who understand the pain of the partition of British India in 1947 will appreciate the powerful symbolism of a child of Hindu parents being welcomed back warmly to Muslim Pakistan.
Those cultural ties helped me understand the Urdu and Sindhi being spoken, and also to feel the deep urge to modernize in the Pakistani soul – an urge that exists alongside the urge to reconnect with Pakistan’s rich cultural past.
I left Pakistan feeling hopeful, because I saw the strong desire to join today’s rising Asia.
If a similar impulse could be implanted into Myanmar, both its people and the world would benefit.
A Tale of Two Elections
LONDON – Individual elections do not always enhance democracy – a useful reminder that the ballot box is only one part, albeit a central one, in any free, plural society.
Of course, there are also magnificent examples of elections that strengthen both the stability and the institutions of a community.
We have just witnessed an example of the second kind in India, the world’s largest and greatest democracy, where 420 million voters there returned a Congress-led government with a solid majority.
It was in many respects a personal triumph for Prime Minister Manmohan Singh.
His victory shows that it is possible to succeed in politics through decency, honesty, and high intelligence.
Sonia Gandhi and her family should also take credit for putting at the forefront of their campaign a vision of an inclusive society, which rejects divisions on the basis of caste, ethnicity, language, and religion.
The result should help India to continue – not without occasional turbulence – its journey toward becoming a high-growth economy that raises the standard and quality of life for the poor.
I wish we could look forward in Europe to a similarly healthy democratic experience next month when voters throughout the European Union elect new members of the European Parliament.
Since 1979, these MEPs have been elected direct rather than indirectly from national parliaments.
But turnout for these elections has been falling in several countries.
There is a danger that the number voting in June will be lower than ever before.
Moreover, in the current grim economic conditions across Europe, voters who do turn out are all too likely to take the opportunity to punish the major parties and vote for fringe and even extremist politicians.
There are particular circumstances that may encourage this electoral response.
First, everywhere there is a sense of disgust at the way the recent boom seemed to privatize gains while the subsequent bust socialized losses.
A few rich individuals appeared to gain and all taxpayers to lose.
This has spread a sense of unfairness.
Second, globalization has been the target for populist criticism.
It is usually defined to mean everything we dislike – from changes to our traditional way of life to loss of jobs.
It is a brave politician who points out how much liberalizing trade and opening up markets have increased our overall prosperity.
Third, in Britain at least, the entire political class has been discredited by a sleazy scandal about the expenses that many parliamentarians have paid themselves.
Analogies with pigs, snouts, and troughs fill the pages of British newspapers.
But there is another reason for the lack of interest in the EU elections.
The European Parliament has power, but it deals with issues that, while important to voters, do not top their list of concerns.
The EU’s member states retain power over the most sensitive political issues, including taxes, health, education, pensions, the labor market, and foreign policy.
So the questions that dominate national campaigns have little impact on European elections.
The European Parliament deals with the important areas where individual countries have pooled their sovereignty, like trade, the creation of a pan-European market, and the biggest environmental issues.
But these are not often the questions that trigger the most passionate interest.
In addition, the European Parliament’s detachment from national political debates means that it has less political legitimacy than is desirable.
Indeed, those who worry about the creation of a European superstate can rest easy.
There will be no such entity, because there is no European electorate; the electorate remains French, Belgian, Latvian, Greek, and so on.
They all vote at the same time, for the same institution.
But what does an Italian know – or care, for that matter – about British politics?
Look at our television programs.
We know far more about Europe’s football than we do about Europe’s politics. “The beautiful game” brings people together more effectively and reliably than the European Parliament is able to do.
That is no criticism of those who work – often very hard – in the European Parliament.
We have created a political body that has power to hold European institutions to account but has no obvious European electorate to which it can itself be held accountable.
A parliament without a people inevitably increases the sense of frustration that many European voters feel about the process of making Europe-wide policy choices in their name.
If the Lisbon Treaty is ratified later this year, one of the changes should result in national parliaments becoming more involved in European decision-making.
But we need to look country-by-country at what else we can do to tie Europe’s own parliament into national politics.
Unless we do that better, fewer people will vote for MEPs, more of them will be elected simply on a protest vote and represent Europe’s murky extremes, and the whole practice and principle of European democracy will be discredited.
A Tale of Two Terminals
BEIJING – Ever since it opened recently, Terminal 5 of London’s Heathrow Airport has been plagued with failures.
On the other side of the globe, Terminal 3 in Beijing, which opened for full operations just one day before Terminal 5, has been operating almost without a glitch.
The media, unsurprisingly, have feasted upon the failures of T5 in London, while neglecting the successes of T3 in Beijing.
By all measures, Beijing’s T3 surpasses London’s T5.
Whereas T5 can handle only 12,000 bags an hour (when it handles them at all) and 30 million passengers per year, T3 can handle 20,000 bags an hour and 50 million passengers.
While T5 will mostly service British Airways, T3 will service Air China and two dozen other airlines.
At one million square meters, T3 in Beijing is the largest terminal in the world, but was much less costly to build than T5 in London.
Using the most recent exchange rates, T3 cost only $3.86 billion compared with $8.6 billion for London’s T5.
Furthermore, T3 took less than four years to complete, whereas T5 took almost 20 years.
But to call T3 a success for socialism and T5 a failure of capitalism would be to miss a fundamental point.
After all, if China’s political system can still be called socialism, it is at best “socialism with Chinese characteristics,” which embodies an increasing amount of market-oriented economic activity and greater economic openness and transparency.
It would be similarly misleading to attribute T3’s success to China alone.
After all, T3 was designed by a Briton, and has incorporated the most recent architectural and operational trends, styles, and standards in the world.
T3 in Beijing is just one of many projects China has recently built to improve its transportation infrastructure.
In addition to having become the world’s industrial park, China now has more mobile phone subscribers than the combined populations of the United States, the United Kingdom, Canada, Australia and New Zealand, and the number of Internet users has just surpassed that in the US.
All of this development raises a fundamental question: how should we make sense of the explosive productivity growth that has become China’s new hallmark?
Those who cling to old ideological stereotypes face an almost impossible task in reconciling China’s rapid growth with what they condemn as China’s failing system.
The truth is that ever since the end of the 1970’s, China has become convinced that peace and stability are the most important preconditions for its development.
Thus, anything that may distract China from its focus on peace, stability, and development has been strongly resisted.
This may help explain why T3 in Beijing is such a success, and why Chinese are now more united than ever before in condemning attempts to hijack or sully the Olympics for ulterior motives.
I hope that when millions of overseas passengers pass through T3, including those who do so during the Beijing Olympics, they will pause and reflect upon the distance China has traveled over the past three decades in its reform and opening to the outside world. Granted, China still has further to go, and many people may find fault with much in the country.
But they should not refuse to acknowledge that China’s mission to turn a nation of 1.3 billion poor people into a developed country through peace and free trade is one of the great, honorable, and most difficult sagas in human history.
Following the disturbances in Tibet and the troubles affecting the Olympic torch’s progress around the world, some voices abroad are showing a greater inclination to dismiss, vilify, humiliate, or even split China.
But it would be best for all to pause a moment, contemplate T3 in Beijing, consider what it represents, and reflect on what an accomplishment the quick completion of such an iconic structure is for an emerging country like China.
A Thai Spring?
BANGKOK – The thunderous results of Thailand’s general election on July 3 will seem familiar to anyone attuned to the political upheaval in the Middle East and North Africa.
Entrenched incumbent regimes everywhere are under severe stress from advances in information technology, shifts in demographics, rising expectations, and the obsolescence of Cold War exigencies.
In the absence of a willingness and ability to use violent repression, regime survival can be achieved only through concessions, accommodation, and periodic reinvention.
With 47 million voters and turnout at 75%, Thailand’s latest election results pose a decisive challenge to the country’s long-established regime.
The Pheu Thai party, led by Yingluck Shinawatra, the youngest sister of exiled fugitive former Prime Minister Thaksin Shinawatra, secured a resounding triumph, winning 265 seats in the 500-member assembly, while the ruling Democrat Party mustered just 159.
The return to power of Pheu Thai is extraordinary – and not only because Yingluck will be Thailand’s first female prime minister.
The establishment-aligned courts dissolved the party’s two previous governments, and banned scores of its leading politicians from office for five years.
Pheu Thai’s victory thus suggests that a previously marginalized electorate has been permanently awakened.
A similar majority of the Thai electorate voted for Thaksin’s parties and their pro-poor populist platforms in January 2001, February 2005, April 2006, and December 2007, defying a military coup, a coup-induced constitution, judicial interventions, and army coercion and repression.
The recent election marked a profound break from the past.
In the second half of the twentieth century, Thai elections seemed to alternate with military coups.
Voters were bought and sold like commodities. After elections, voters hardly ever saw or heard from their MPs, who typically went on to engage in corruption and graft in Bangkok – eventually losing legitimacy and paving the way for military coups.
A new constitution and elections invariably ensued.
This vicious cycle of coups, constitutions, and elections defined Thai politics for decades.
That pattern reflected Cold War imperatives.
The pillars of the Thai state – nation, religion, and the king – struck a unifying, collective chord, and the resulting stability enabled economic development.
While growth was so concentrated that popular resentment simmered, communism was kept at bay.
Challenges to the established order, with the military-monarchy-bureaucracy triumvirate as its anchor, were repeatedly put down.
Back then, Thai schoolchildren sang martial songs each morning, and Thais knew their place in the rigidly elitist pecking order, which was reinforced by socialization and indoctrination in classrooms and living rooms, where only state-controlled media could enter.
Thais were more like obedient subjects than informed citizens.
Dissenting views found little traction.
The rise of Thaksin’s Thai Rak Thai party in 2001 changed all that.
The party pursued a scientific approach to elections, relied on expensive polling by foreign experts, and offered a clear agenda and strong leadership.
It was the first post-Cold War party to capture Thais’ collective imagination.
The voices of neglected swaths of the electorate, particularly in the rural north and northeast of the country, began to count.
Vote-buying became increasingly insufficient.
A bond between party and voters – a bond based on policy – took root.
By 2001, the Cold War was long over.
Political leaders who dissented from the status quo could no longer easily be jailed on communism-related charges.
The advent of the Internet had made it harder for the authorities to shape Thai minds, as media sources multiplied and the resulting diffusion of information undermined the effectiveness of state propaganda.
Moreover, new international norms had come to the fore: external powers that previously turned a blind eye to coups, military dictatorships, and repression now rallied around democracy and human rights.
Thailand’s demographics also changed.
The Cold War curriculum of induced unity and stability has no relevance for today’s schoolchildren; indeed, most university students nowadays were born after the Cold War ended.
These factors fostered a new political environment, and Thaksin, who was a telecommunications tycoon at the time, was well positioned to seize the opportunity.
He overhauled the bureaucracy, delivered on his promises to the poor, mapped out an industrial strategy, and re-designed an overstretched foreign policy agenda, among other innovative measures.
Of course, Thaksin’s rule had a dark underside: corruption, legislated conflicts of interest, cronyism, human rights violations, and abuse of power, among other evidence of misrule.
Such is Thaksin’s mixed legacy. The opportunities, hopes, and dreams delivered to the downtrodden and the vision and plans for Thailand’s future were enmeshed with his own venality.
But, while Thaksin committed many infractions, his gravest “sin” was to have changed the way Thais think and behave.
Some see this change as usurpation; others view it as Thailand’s deliverance into the twenty-first century.
Thaksin’s adversaries in Thailand’s entrenched regime were unwilling to accede to his policy innovations and populism.
For them, doing so would be tantamount to admitting that most people in this hospitable, well-endowed kingdom had been kept poor by design all along.
For his part, Thaksin has sought to portray the recent election results as being all about him.
But he is best viewed as a self-serving, unwitting agent of political modernization.
It is these twenty-first-century dynamics and changes, underpinned by an increasingly assertive citizenry, with which the Thai establishment must come to terms if the country is to move forward.
Athens, China
BEIJING – While parts of the world are dealing with the aftermath of the financial crisis or an emerging sovereign-debt crisis, China is coping with the risk of overheating and/or an asset bubble.
Many factors may be pushing China’s economy in this direction.
One of the most worrying is the same which fueled the current crisis in the eurozone: mushrooming public debt.
In the eurozone, the problem is member countries’ sovereign debt; in China, the problem is borrowing linked to local governments.
In the eurozone, a bloated social-welfare system, particularly for the rapidly growing population of retirees, and the economic slowdown caused by the financial crisis are key components of the structural debt problem.
In China, local officials increased borrowing in order to ensure that their regions’ economic growth rates remain at double-digit levels.
There are, no surprise, commonalities between China and the eurozone.
Obviously, debt accumulates wherever people want to spend more than they have saved.
But a more specific similarity is that highly indebted eurozone countries and Chinese provinces and counties have been spending too much of a common currency.
Because these funds are not issued or controlled by any member country or local government, eurozone members and Chinese local governments cannot relieve their debt problems through devaluation.
So, in both cases, when a debt is defaulted upon or loans become non-performing, the negative consequences are felt by the entire financial and monetary “zone” – the entire EU and all of China.
To avoid such an internal “sovereign debt crisis,” China’s Budget Law, adopted in 1994, forbade local governments from borrowing autonomously, either by issuing bonds to the public or by getting credits from banks.
In theory, this means that local governments cannot finance their deficits by increasing their debt levels, because they can borrow only from the central government or other central authorities.
But the Budget Law did not end the problem.
While local governments have been unable to borrow, locally controlled state-investment companies can.
So it is no surprise that a huge volume of bank loans has passed through the local branches of state-owned banks to finance local public-investment projects.
These borrowings caused a surge in non-performing bank loans in the early and mid-1990’s, when total non-performing loans hit 40% of GDP.
This caused a credit crunch and prolonged deflation in the late 1990’s, as the central government tried to clean up the mess.
Due to privatization of state-owned enterprises and improved financial regulation, including bank supervision and risk control, since 2000 both central and local budgets have basically been in good order.
The ratio of total public debt to GDP was less than 22% in 2007-2008, before the global financial crisis.
There was still some borrowing by local governments, of course, but on a limited scale (totaling 3-4% of GDP), owing to institutionalized surveillance of lending.
Then came the financial crisis, with the central government adopting fiscal stimulus and relaxing monetary policy.
Local governments were encouraged to increase their spending on public infrastructure projects in order to maintain growth.
As a result, the volume of bank credits financing local investments increased six-fold in 2009 alone.
Indeed, total borrowing by local government now amounts to roughly $900 billion, up from $150 billion year on year and the equivalent of almost 20% of GDP.
This level of borrowing poses a new type of financial risk for China.
But how big and dangerous is that risk?
I believe that it remains manageable.
Some local borrowing can be justified by the central budgetary allocation to local projects.
Moreover, some local spending took place in regions that will continue to enjoy high growth in tax revenues for the foreseeable future, thus ensuring that the debts will be serviced.
Perhaps only one-third of the total volume of loans is problematic; the rest may or will continue to perform.
The most important change that may keep the problem manageable is that China’s monetary authorities have been putting the brake on the growth of these debts since late last year.
In general, local borrowing windows are closed, and inspections are underway to gain an accurate picture of the situation.
With economic growth continuing, the potential risk posed by this debt will diminish.
Chinese officials are drawing lessons from this heavy debt burden, as they fear the prospect of local governments creating an internal “Greek crisis” for the rest of China.
The authorities recognize the need for strict fiscal discipline and financial regulation.
The leverage of any public entity must be monitored, supervised, and restricted.
Of course, Chinese local governments have never had total financial or fiscal autonomy.
Indeed, ever since the Qin Dynasty united the country and established a centralized regime some 2,000 years ago, accountability for debt has been treated as a central government problem.
Those who advocate fiscal decentralization and deregulation in China should think about establishing real local fiscal accountability first.
China’s current legal framework contributed to fiscal balance and financial stability in the past, and it continues to play a positive role.
Otherwise, China might already have experienced its own localized “sovereign debt” crisis and, perhaps, hyper-inflation.
But when local governments are barred from debt finance, they look for other means.
For example, they try to squeeze as much as possible out of land sales, thereby pushing up housing prices and helping to inflate asset bubbles.
Given the negative consequences of this approach, it might be wise for the central government to consider establishing, for the short-run, quotas or ceilings for total local government borrowing.
But, in the long run, China’s fiscal and financial stability will be ensured only by systematic institutional reform of central-local government relationships.
A Theory of European Citizenship
There is something tragic about Europe's current development.
Democracy's march across the continent, and the formation of a single market across much of Europe, have created unprecedented stability, security, and prosperity.
The new single currency, the euro, and the European Union's promise to admit as many as ten new members in 2004, are powerful indicators of ongoing integration.
Yet, the ability of European institutions to accommodate deeper and broader integration is increasingly undermined by the persistence of a contradictory and long-obsolete ideal: the nation-state as the basis of political legitimacy and sovereignty.
It is largely because the idea of common European citizenship is often understood by analogy to that of national citizenship that further European integration engenders so much fear and opposition.
The nation-state in the traditional sense presupposed a citizenry that was created as competing collective identities decayed.
Venetians became Italians, Bavarians became Germans, and so on.
Nation-builders throughout Europe promoted - with varying degrees of success, to be sure - the emergence of a dominant culture, an official language, and an identity based partly on distinctions vis-à-vis neighboring states, peoples and cultures.
National minorities everywhere faced expulsion or enormous official pressure to assimilate.
A European nation-state in this sense was untenable even for the original six members of the European Community - all of them highly industrialized countries with similar social and political traditions and institutions.
It is no more feasible today for the EU's 15 members, and further enlargement means that the multitude of collective identities, cultures, languages, religions, and worldviews will become greater still.
The singular "people" that defines citizenship in a traditional nation-state could be forged only by plunging Europe into appalling repression and war lasting generations, if not centuries.
Of course, European integration has been driven from the outset precisely by the shared historical memory of the terrible suffering wrought by aggressive nationalism.
But without an alternative to the nation-state as the basis of citizenship, the legitimacy and effectiveness of EU institutions have come under growing strain.
Witness, for example, Ireland's veto of the institutional reforms adopted at the EU's Nice summit in December 2000 - reforms without which enlargement cannot go forward.
Similarly, opinion polls show that support for EU membership has fallen rapidly even in many candidate countries.
Political leaders such as Vaclav Klaus in the Czech Republic and Viktor Orban in Hungary welcome the common market, but argue that their nation-states did not re-gain their
Yet free movement of goods and services, labor, capital, and ideas (the single market's "four freedoms") makes irrelevant much of what traditional European nation-states do - namely, defending these freedoms within a smaller territory.
With the EU's internal borders reduced to purely administrative boundaries, this task has passed to institutions that wield immense preemptive authority over member states.
An alternative must therefore be found to a definition of citizenship that regards these institutions as merely some sort of formalized representation of member states' common political will.
What should an alternative conception of European citizenship look like?
The US model of political identity, shaped by a legacy of immigration and voluntary cultural integration, cannot be simply transposed to Europe, where distinct traditions, cultures, and attitudes are so deeply entrenched.
But a conception of citizenship that is
Indeed, this is the
Assuming that you are rational, you must calculate that you may be a member of a cultural minority.
Obviously, you will not choose rules that define citizenship in terms of a particular cultural identity.
On the contrary, you will seek to hedge your bets by ensuring that citizenship is constituted by individual rights of participation in collective projects, backed up by a legal system that guarantees these rights.
Citizenship in this sense views political sovereignty and legitimacy as features of institutions that foster
European citizenship understood in this way is compatible with a multitude of collective identities ranging from family or friendship groups to professional associations and corporations, regionally defined communities, and shared cultural, political and religious affinities. Such a conception stabilizes social cooperation within Europe because it reflects a basic normative consensus on the design of institutions and thus orients individual behavior toward preserving these institutions.
In fact, a well-developed conception of democratic citizenship will always emphasize individual rights.
Citizenship is not constituted by groups, but by individuals interacting
A “Third Way” for Confronting Russia
PARIS – “Let’s engage Russia if we can, but contain it if we must.” These two alternatives already defined Western strategy toward Russia in the mid-1990’s.
Since then, Russia may have changed dramatically, but not our questions about it. What do you do when your big neighbor widens the gap that exists between its culture, which is European, and its political system, which is becoming increasingly “Asian,” at least in the bad old sense of “Oriental despotism”?
Should the best answer to the return of Russia’s imperial ambitions be a modern version of a Holy Alliance of stability designed to contain the world’s new maverick?
Or is a latter-day Yalta Conference, aimed at redrawing the political boundaries of Europe, necessary?
Could the answer be a bit of both?
If Russia is becoming what revolutionary France was under Napoleon, or reverting to Soviet form – shorn of a totalitarian ideology but with an appetite for conquest and re-conquest – what is needed is not the “league of democracies” advocated by some conservatives in America.
What is needed, instead, is a “stability league” that includes prominent actors like China, India, and other countries that are more interested in economic growth than in “rocking the boat” of the international system.
Such a strategy implies, first of all, a solid partnership with China, not because it is evolving in the direction of democracy, but because it is a status-quo power.
Such a strategy could lead to the opening of negotiations with Iran, and of course to a further closing of ranks within NATO.
The message to the Kremlin here would be crystal clear.
“Do not fool yourself. Nationalism and imperialism will lead you nowhere; you cannot expand geographically without serious costs to your economic growth and your personal enrichment.
Europe may be weak and divided, America may no longer be what it was, but with your falling population and the sad state of your economy beyond oil and gas, you simply are not equipped to be in the league of great global powers.
China is; you are not.”
But the containment argument fails, because the Kremlin can still make mischief around the world by acting with Syria or Venezuela in an irresponsible manner.
More importantly, rallying the world solely against Russia would mean taking Russia’s great power pretensions too seriously.
For example, many Asians believe that Russia is a problem for Europe, but no longer for the world.
At the Cold War’s end, Japan remained obsessed with Russia as the heir to the Soviet Union.
Today, the Japanese are so concerned with China that they have little time for fears about Russia.
The other alternative to a rebirth of “containment” would consist in accepting the Russian argument, or more precisely, Russian “emotions.”
It would mean saying, in effect, “We have unnecessarily humiliated you over the last ten years.
From NATO enlargement to the grant of independence to Kosovo, we have deliberately ignored your sensitivities and your interests.
Let’s sit down together like Churchill, Roosevelt, and Stalin at Yalta and redesign a twenty-first-century map of Europe.
What do you want back?
What do we keep?”
This approach might recognize Russia’s droit de regard on the future evolution of the Caucasus.
Indeed, while talking tough under the guidance of Nicolas Sarkozy’s France, which currently holds the EU presidency, Europe has de facto resigned itself to Georgia’s dismemberment.
Russian troops are to remain in South Ossetia and Abkhazia.
The West is not about to declare war on Russia for the sake of a Georgia whose credibility has been greatly eroded by its president’s irresponsible behavior.
As for Ukraine, it may one day become part of the European Union, but its future is not in NATO.
Yet, between all-out containment, which is very unlikely and not necessarily desirable or realistic, and accommodation which borders on appeasement, which would be dangerous for Europe’s future, a third way, based on a few firm principles, must be found.
These principles are clear.
First, Ukraine’s territorial integrity is not negotiable.
This has been said many times, but repetition does not diminish its importance.
Russia without Ukraine is a manageable nation-state;
Russia with Ukraine is an unmanageable empire.
Second, even if the West condemns Georgia’s irresponsibility and incorporates into its policy Russia’s sensitivities on the complex historical feelings related to its ex-imperial territories, the Kremlin’s shameless brutality is unacceptable.
After all, this is Europe more than six decades after World War II, and nearly 20 years after the collapse of the Soviet Union.
The use of force to settle scores and impose one nation’s will upon another cannot be accepted passively.
In the short term, time may be on Russia’s side.
In the long run – economically, demographically, politically, strategically – time is on “our” side, if we stick to our values and our principles.
At Home in Guantánamo Bay
GUANTÁNAMO BAY – I write this from the United States Detention Center at Guantánamo Bay, where I have been held without charge for almost seven years.
My detention here is the result of being in the wrong place at the wrong time.
More than two years ago, I was notified that I was cleared for release. I would have been happy about this news if I did not come from Uzbekistan, a country with one of the worst human rights records in the world.
It is not safe for me to go home.
My journey to Guantánamo began in December 1998, after I finished my mandatory service in the Uzbek army.
Uzbekistan, a former Soviet Republic, is a poor country without many employment opportunities.
After several months of job hunting, I joined my brother in a business venture buying and selling apples, honey, and other goods in neighboring Tajikistan.
I lived in a community of Uzbeks, and met my wife, Fatima, another Uzbek, while living there.
We had a child, and my mother came from Uzbekistan to join us.
Unfortunately, there were some in Tajikistan who didn’t like having a bunch of Uzbeks living in their country.
So, one day, in November 1999, the Tajik authorities rounded up 200-300 Uzbeks and said they were taking us back to Uzbekistan.
Instead, they dumped us in Afghanistan.
There, we met a group of Afghan Uzbeks who helped us to settle in Mazar-i-Sharif.
I began working as a traveling salesman, selling goat’s milk, hens, roosters, and sheep.
In the fall of 2001, when fighting broke out between the Taliban and the Northern Alliance, I could not travel and was stranded at a roadside teahouse for several weeks.
One day, Northern Alliance soldiers came to the teahouse and offered to give me a ride to Mazar-i-Sharif.
Instead, they drove me to Bagram Air Base and handed me over to the Americans stationed there.
I found out later that the Americans were offering bounties of several thousand dollars for Taliban and “foreign fighters.”
At first, I was happy to be in American hands.
I held the US in high regard and figured that it would be only a matter of time before they realized that I was innocent and let me go.
But they didn’t.
They held me in Bagram, then Khandahar, and eventually Guantánamo Bay.
The Americans now realize that I ended up here by mistake and have told me that they want to let me go.
But where can I go?
Members of the Uzbek security service visited me here at Guantánamo and accused me of being a member of the Islamic Movement of Uzbekistan.
When I told them that I didn’t know anything about this group, they warned that once I was back in their custody, they would make me cooperate.
It is not hard to imagine what those ways are.
Torture, beating, and other mistreatment of Uzbek detainees are widespread.
Sometimes people who are taken into Uzbek custody are never heard from again.
I am not alone.
I am one of several dozen of the Guantánamo who cannot return to our native countries because we would likely be tortured and abused.
Our only hope of getting out of this prison is that another country decides to provide safe haven to men like us – men who did nothing wrong and never should have been detained here in the first place.
A Thousand to One
HAIFA – The celebrations in Israel over the release of the kidnapped soldier Gilad Shalit come after the Israeli government concluded that diplomatic rarity, an agreement with Hamas.
It is as if the government had brought back an Israeli who had been sent to Mars.
Of course, other Israeli soldiers and civilians have been held captive in Arab states or abducted by terrorist organizations and other militant groups over the years.&#160;And Israel has been willing in the past to barter hundreds or thousands of detainees in exchange for the release of just a few of its citizens.&#160;But, for as long as I can remember, popular enthusiasm has never been so overwhelmingly supportive of such a deal as it is now, with the joy virtually exploding across the country after the news of Shalit’s pending release began to circulate.
One reason for this outpouring of enthusiasm is clear: the Shalit family’s remarkable ability to keep alive interest in his cause throughout the five years since his abduction.
Indeed, the Israeli public consistently supported the idea of the government reaching agreement with Hamas for the soldier’s release.
Many Israelis, from all social classes, joined the campaign for Shalit’s release.
Demonstrations and meetings were organized.&#160;Posters were hung everywhere to remember the number of days of his ordeal.&#160;But the Shalit family is given the most credit: they left their home in a small village in Galilee to camp out for more than a year near the prime minister’s residence in Jerusalem, reminding the Israeli public of the victim’s suffering and pushing the government to accept Hamas’s conditions.
But, despite deep popular sympathy, not a few Israelis – on both the left and the right – opposed the exchange of one soldier for a thousand or more Palestinian prisoners, some of whom perpetrated terrorist attacks that killed dozens of people.
Some consider the Palestinian prisoners’ release a mistake, legally and ethically, and a shocking injustice to the families of their victims.
Others, more numerous, deplore the disparity in numbers in the swap.
Unlike the first group, they would be ready to accept the release of one Palestinian prisoner – even if he were responsible for the most brutal terrorist attack – but not a thousand of them.
But there is another way to look at the disparity.
Israel achieved remarkable results in the wars fought against far more populous Arab countries in 1948, 1967, and 1973.
Its soldiers are well trained and rely on advanced technologies and military abilities that are superior to those of the Arab countries – and far better than those of Palestinian militant groups.
By demanding the release of more than 1,000 prisoners in exchange for one soldier, Hamas is conceding the stark military reality of this imbalance: thousands of their prisoners, fighting with knives, explosive belts, and primitive rockets, are worth only one Israeli soldier.
Israel is, of course, resigned to its numerical inferiority, and will continue to train its soldiers in order to overcome this deficit.&#160;As a result, one prisoner in exchange for a thousand Palestinian prisoners is neither a humiliation nor a surrender, but an acceptable agreement that acknowledges, even on behalf of the enemy, the military capacity of Israeli soldiers.
There are also those who vigorously oppose the prisoner exchange with Hamas because some of the released prisoners will return to terrorism against Israel, as has happened after past exchanges.&#160;The release of one Israeli soldier in exchange for such men could therefore endanger many lives in the future.
But many of the released prisoners will be transferred to the Gaza Strip, a territory that is completely separate from Israel, where they might join Hamas’s militant forces but will not be able to execute terrorist attacks against Israel.
Likewise, other prisoners will be expelled to the West Bank, and will not come into contact with the Israeli population, neither in the settlements nor in Israel.
Indeed, those remaining in the West Bank will be under the supervision not only of Israeli security forces – who know everything they need to know – but also of the Palestinian Authority.&#160;In recent years, the Palestinian Authority has effectively prevented acts of terrorism and violence against Israelis, with the aim of stabilizing the situation in the West Bank in order to prepare for the establishment of an independent Palestinian state.
The 70 or so prisoners who will return to the West Bank could also be influenced by the positive atmosphere created by the Palestinian Authority as it awaits the resumption of negotiations to achieve a two-state (and two-population) solution.
Finally, a gleam of hope might arise from necessity.
Perhaps – just perhaps – one or even two of the released Palestinians will be willing to cooperate – and to lead others into cooperating – with an enemy that had been their jailer.
From South Africa to Burma, there are clear and positive precedents for such a turn of events.
A Time to Build
Any good international investment banker knows that the end of April is a bad time to come peddling his services, for that is when the world’s finance ministers return home from the IMF meetings in Washington, chastened that risks to the global economy could spill over into their own backyards.
Ministers are too busy recovering from their trauma to think about paying fat fees for big new international bond issues.
Who wants to build up debt if there might be a financial crisis around the corner? Better to keep socking away US Treasury bills, even if the return is far lower than on most other investments.
Or is it?
With today’s global economy in the middle of a sustained and increasingly balanced expansion, has the time come to start considering upside risks?
In particular, should governments, especially those that are endlessly building up dollar reserves, instead start thinking about how to build up their roads, bridges, ports, electric grids, and other infrastructure?
Has the time come to start laying the groundwork to sustain future growth, especially in poorer regions that have not yet shared in today’s prosperity?
Don’t get me wrong, I am not arguing for fiscal profligacy.
But the balance of risks has shifted over the past few years.
Yes, within the next three to five years, there will probably be another global recession.
And, yes, there will probably be another rash of financial crises – perhaps in Central Europe, which now looks like Asia did before its 1997 crisis.
Recent jitters about Iceland’s gaping trade deficit and Brazil’s new finance minister rippled around the world, reminding global investors that while many emerging markets are gradually moving towards investment-grade status, most are not there yet.
But the risks are two-sided, and sound economic policy is just as much about capitalizing on good times as avoiding bad ones.
Economic gurus at places like the World Bank have developed a ridiculously long list of steps that countries should take to raise their growth rates (the so-called “extended Washington Consensus”).
Like maintaining good health, it is not enough to concentrate on a single component.
But if there is one area where obvious opportunities exist, and where policy can really make a difference, it would have to be infrastructure investment.
India’s infrastructure problems are legendary, with airports and railroads that are comically inadequate.
However, aside from a few countries – including China, of course, but also Spain – low infrastructure spending is epidemic.
Even the United States has infrastructure that is hobbled by neglect, with collapsing bridges and a dangerously overburdened electrical grid.
Land-rich Brazil, too, is a case study in the consequences of under-investment.
Its infrastructure systems might be adequate to support the country’s tepid 3-4% growth rates, but they are hardly adequate to support the 6-7% rates that it ought to be enjoying amidst the current global boom.
Russia, despite Siberia’s massive oil and gas riches, isn’t even investing enough to support healthy growth in its energy industries, much less human development in the country’s impoverished areas (including hapless Siberia).
True, government infrastructure spending is often wasted.
My hometown of Boston recently managed to spend an astounding $15 billion dollars to move a few highways underground. And that so-called “Big Dig” looks like a model of efficiency next to many of Japan’s infamous bridges to nowhere.
But there are ways to waste less.
Transparency in procurement works wonders.
So, too, does private sector involvement.
The Nobel laureate economist William Vickrey argued tirelessly in favor of privately financed toll roads.
Private oversight can often produce better and more efficient construction, and, in theory, toll roads help alleviate traffic congestion.
(Ironically, Vickery died while sitting in a traffic jam.)
Even China, which has added more than 50,000 kilometers of roads and dozens of airports over the past five years, makes use of private financing.
True, countries that have not cleaned up their fiscal act, such as India, must not recklessly plunge ahead with big government projects without counterbalancing reforms to ensure sustainability.
Fiscal prudence and stable inflation rates are cornerstones of today’s relatively healthy global economic environment.
But for countries that have scope to invest more, particularly those that are holding a surfeit of precious development dollars in idle US Treasury bills, the time may be ripe to reassess the balance of risks.
The IMF is absolutely right to remind ministers each April of downside risks.
Countries’ need for better infrastructure is no license to throw prudence out the window.
But when the world’s finance ministers recover from their April shock therapy, they also need to look at the opportunities.
A Time to Dare
NEW YORK – The upcoming G-20 meeting is a make-or-break event.
Unless it introduces practical measures to support the countries at the periphery of the global financial system, global markets will suffer another round of decline, just as they did after United States Treasury Secretary Timothy Geithner’s failure in February to produce practical measures to recapitalize America’s banking system.
The current financial crisis is different from all the others we have experienced since World War II.
On previous occasions, whenever the financial system came to the brink of a breakdown, the authorities got their act together and pulled it back from the brink. This time the system actually broke down in the aftermath of Lehman Brothers’ collapse last September, and it had to be put on artificial life support.
Among other measures, both Europe and the US have effectively guaranteed that no other important financial institution will be allowed to fail.
This step was necessary, but it produced unintended adverse consequences: many other countries, from Eastern Europe to Latin America, Africa, and Southeast Asia, could not offer similarly convincing guarantees.
Abetted by the determination of national financial authorities at the center of the world economy to protect their own institutions, capital fled from the periphery.
Currencies fell, interest rates rose, and credit default swaps soared.
When the history of this crisis is written, it will be recorded that – in contrast to the Great Depression – protectionism first prevailed in finance rather than trade.
The International Financial Institutions (IFIs) are now faced with a novel task: to protect the periphery countries from a storm that emanated from the center.
They are used to dealing with governments; now they must learn to deal with the collapse of the private sector.
If they fail to do so, the periphery economies will suffer even more than those at the center.
Countries on the periphery tend to be poorer and more dependent on commodities than the more developed world, and they must repay more than $1.4 trillion in bank loans in 2009 alone. These loans cannot be rolled over without international assistance.
British Prime Minister Gordon Brown recognized the problem and placed it on the G-20’s agenda.
But, in the course of preparations, profound attitudinal differences have surfaced, particularly between the US and Germany.
The US has recognized that only using the credit of the state to the fullest extent possible can reverse the collapse of credit in the private sector.
Germany, traumatized by the memory of hyperinflation in the 1920’s and the consequent rise of Hitler in the 1930’s, is reluctant to sow the seeds of future inflation by incurring too much debt.
Both positions are firmly held and can be buttressed by arguments that are valid from the point of view of the country concerned.
But the controversy threatens to disrupt the April 2 meeting.
It should be possible for each side to respect the other’s position without abandoning its own
As things stand now, the G-20 meeting will produce some concrete results: the resources of the International Monetary Fund are likely to be effectively doubled, mainly by using the mechanism of the New Arrangement to Borrow (NAB), which can be activated without resolving the vexing question of reapportioning voting rights in the IFIs.
This will be sufficient to enable the IMF to come to the aid of specific countries in trouble, but it will not provide a systemic solution without conditionality.
Such a solution is readily available in the form of Special Drawing Rights (SDR).
The mechanism exists and has already been used on a small scale.
SDRs are highly complicated and difficult to grasp, but they boil down to the international creation of money.
Countries that are in a position to create their own money do not need them, but the periphery countries do.
Rich countries should therefore lend their allocations to the countries in need.
This would not create a budget deficit for rich countries.
Recipient countries would have to pay the IMF a very low interest rate: the composite average treasury bill rate of all convertible currencies.
They would have free use of their own allocations, but the IFIs would supervise how the borrowed allocations are used to ensure that the borrowed funds are well spent.
It is difficult to think of a scheme where the cost/benefit ratio is so favorable.
In addition to the one-time increase in the IMF’s resources, there ought to be substantial annual SDR issues, say, $250 billion, as long as the global recession lasts.
To make the scheme counter-cyclical, the SDR issues could be callable in tranches when the global economy overheats.
It is too late to agree on issuing SDRs at the upcoming G-20 meeting, but if it were proposed by President Barack Obama and endorsed in principle by the majority of participants, it would be sufficient to give heart to the markets and make the meeting a resounding success.
A Time to Experiment
CAMBRIDGE – The world economy enters 2009 with more uncertainty (and anxiety) than at any time in recent memory.
Although the financial crisis appears to be contained in the United States and Europe, its full repercussions will not be clear for some time.
The advanced countries are in for the worst economic downturn since the Great Depression.
But how long and deep will this recession be, and how badly will it affect emerging and developing nations?
We don’t have the answers to these questions, in part because the consequences will depend on what actions policymakers take.
The right responses will ensure that the world economy can begin to recover by late 2009.
Poor policy choices, on the other hand, will at best delay recovery and at worst do permanent damage.
Here is a list of things to watch for.
Will the US response be “bold” enough?
Barack Obama has promised that it will be, echoing at least part of Franklin D. Roosevelt’s famous call for “bold, persistent experimentation” at the height of the Great Depression in 1932.
Obama has a first-rate group of economists on his side, which ensures that he will not do anything silly.
But America’s circumstances are sufficiently exceptional that he will need advisers who are willing to try new, untested ideas – in other words, experimentation à la FDR.
In particular, he will need to go beyond Keynesian fiscal-stimulus policies to heal the deep wounds to economic confidence that lie at the root of the current crisis.
So far, confidence-building measures have been limited to financial markets, through public guarantees, liquidity support, and capital injections.
But workers who worry about being laid off are unlikely to go spend, regardless of how much money fiscal stimulus puts in their pockets.
Just as banks are hoarding cash, households will try to preserve wealth by increasing their saving.
So incentives targeted directly at preserving employment will have to be part of the solution.
Will Europe get its act together?
This could have been Europe’s moment.
After all, the crisis originated in the US and left American policy focused on its domestic troubles, opening up room for global leadership by others.
Instead, the crisis demonstrated the deep divisions within Europe – on everything from financial regulation to the requisite policy response.
Germany has dragged its feet on fiscal stimulus, stymieing what should have been the second leg of a globally coordinated fiscal action plan.
If Europe wants to pull its weight on the global stage, it will have to act with greater unity of purpose and shoulder a greater share of responsibility.
Alas, the best that can be hoped for at this stage is that Europe will not undermine the global fiscal stimulus that even the International Monetary Fund, the guardian of fiscal orthodoxy, regards as absolutely essential.
Will China hold together?
Even though a weak US response is the biggest risk on the economic side, what happens in China may well have deeper and more lasting consequences on the broader historical canvas.
For China is a country of enormous hidden tensions and cleavages, and these may erupt into open conflict in difficult economic times.
Experts on China differ on the rate of economic growth needed to create employment for the millions of Chinese who flock into the country’s cities every year.
But it is virtually certain that China will fall short of this threshold in 2009.
This explains the almost continuous stream of measures that emanate from Beijing these days: increased public spending, monetary easing, pressure on state enterprises to expand activity, subsidies to exporters, partial convertibility of the remninbi to spur trade with neighboring countries, and so on.
If social tensions rise, China’s government is likely to respond with greater repression, which will bode ill both for its relations with the West and for its medium-term political stability.
Experience shows that democracies hold the edge over authoritarian regimes when it comes to handling the fallout from crises.
It was democratic India (in 1991) and South Korea (in 1997-1998) that turned around their economies quickly, while Pinochet’s Chile (in 1983) and Suharto’s Indonesia (in 1997-98) fell into deeper quagmires.
Authoritarian regimes lack the institutions of conflict management that democracies provide.
So tensions spill over into the streets and take the form of riots and protests.
However the Chinese leadership responds, future generations may remember 2009 less for its global economic and financial crisis than for the momentous transformation that it caused in China.
Will there be enough global economic cooperation?
When domestic needs become paramount, global economic cooperation suffers.
But the costs of protectionism in trade and finance are especially large at moments like these.
The Great Depression was aggravated by the trade barriers that countries imposed to protect domestic employment.
This will be a temptation this time around as well.
And banks – whether explicitly nationalized or not – will be under pressure to prioritize domestic borrowers.
So far, the IMF has reacted with newfound vigor, establishing a much-needed short-term lending facility, which may well need to be expanded if emerging markets come under greater pressure.
The World Trade Organization, meanwhile, has wasted valuable time on the irrelevant Doha round.
It should have focused its efforts on monitoring and implementing the G-20’s commitment not to raise trade barriers.
Policymakers need to shed received wisdom and forget useless dichotomies such as “markets versus government” or “nation-state versus globalization.”
They need to come to grips with the reality that national regulations and international markets are inextricably linked with – and in need of – each other.
The more pragmatically and creatively they act, the more quickly the world economy will recover.
A Time to Spend
BERKELEY – The central insight of macroeconomics is a fact that was known to John Stuart Mill in the first third of the nineteenth century: there can be a large gap between supply and demand for pretty much all currently produced goods and services and types of labor if there is an equally large excess demand for financial assets.
And this fundamental fact is a source of big trouble.
A normal gap between supply and demand for some subset of currently produced commodities is not a serious problem, because it is balanced by excess demand for other currently produced commodities.
As industries suffering from insufficient demand shed workers, industries benefiting from surplus demand hire them.
The economy rapidly rebalances itself and thus returns to full employment – and does so with a configuration of employment and production that is better adapted to current consumer preferences.
By contrast, a gap between supply and demand when the corresponding excess demand is for financial assets is a recipe for economic meltdown.
There is, after all, no easy way that unemployed workers can start producing the assets – money and bonds that not only are rated investment-grade, but really are – that financial markets are not adequately supplying.
The flow of workers out of employment exceeds the flow back into employment.
And, as employment and incomes drop, spending on currently produced commodities drops further, and the economy spirals down into depression.
Thus, the first principle of macroeconomic policy is that because only the government can create the investment-grade financial assets that are in short supply in a depression, it is the government’s task to do so.
The government must ensure that the money supply matches the full-employment level of money demand, and that the supply of safe savings vehicles in which investors can park their wealth also meets demand.
How well have the world’s governments performed this task over the past three years?
In East Asia (minus Japan), governments appear to have been doing rather well.
Shortage of demand for currently produced goods and services and mass unemployment no longer loom as the region’s biggest macroeconomic problems.
Flooding their economies with liquidity, maintaining export-friendly exchange rates, and spending to employ workers directly and boost the supply of safe savings vehicles have made the Great Recession in East Asia less dire than it has been elsewhere.
In North America, governments appear to have muddled through.
They have not provided enough bank guarantees, forced enough mortgage renegotiations, increased spending enough, or financed enough employment to rebalance financial markets, return asset prices to normal configurations, and facilitate a rapid return to full employment.
But unemployment has not climbed far above 10%, either.
The most serious problems right now are in Europe.
Uncertainty about how, exactly, the liabilities of highly leveraged banks and over-leveraged peripheral governments are to be guaranteed is shrinking the supply of safe savings vehicles at a time when macroeconomic rebalancing calls for it to be rising.
And the rapid reductions in budget deficits that European governments are now pledged to undertake can only increase the likelihood of a full double-dip recession.
The broad pattern is clear: the more that governments have worried about enabling future moral hazard by excessive bailouts and sought to stem the rise in public debt, the worse their countries’ economies have performed.
The more that they have focused on policies to put people back to work in the short run, the better their economies have done.
This pattern would not have surprised nineteenth-century economists like Mill or Walter Bagehot, who understood the financial-sector origins of industrial depression.
But it does seem to surprise not only a great many observers today, but also a large number of policymakers.
Atlas Slumps
If the world is to have a decent economic recovery, an upturn will depend on America getting off its back and continuing to fulfill its role as global importer of last resort.
No other country is capable of picking up the slack if America's economy remains soft.
There is some optimism about Japan getting on its feet again, but over the past, vastly disappointing, decade, too many pseudo-recoveries have been glimpsed in Japan to justify such hopes.
Europe also seems likely to disappoint.
Projections of European growth continue to decline, yet the outlook for government policy is for reduced spending and increased taxes as the fiscal stability and growth pact bites.
Moreover, the European Central Bank appears helpless because it is bound by the self-imposed fetters of its inflation target.
Nor are emerging markets yet large enough to play a meaningful role in the balance of total global demand.
So America remains the world economy's last best hope.
But this is worrisome for two reasons.
First, America cannot run enormous (and growing!) current-account deficits forever: at some point the desire of foreign investors to hold ever-increasing shares of their wealth in America must wane and then reverse.
When that happens, the dollar will fall and the stimulus provided to the world by America's demand for imports will come to an end.
Second, there are no signs that the US government either understands or has the will to stimulate the American economy sufficiently to produce rapid economic growth.
Consider US monetary policy.
America's Federal Reserve has pushed the short-term safe interest rates it controls down to remarkably low levels: 1.25% per year.
Short-term interest rates cannot be pushed much lower.
More importantly, would the limited amount that interest rates can yet be cut do much to boost demand?
Not likely.
Long-term interest rates could be pushed significantly lower if the Federal Reserve were to undertake the unprecedented step of mammoth purchases of long-term government bonds.
But would the Fed take that unprecedented step without a severe domestic crisis?
A situation in which the US muddles through with growth that is positive but slower than the growth rate of potential output--today's conditions--is unlikely to prompt drastic action from the Fed.
However, US growth that is positive but slow is of little help to the rest of the world.
Now consider fiscal policy.
The baroque structure of US government has always been hostile to the effective exercise of fiscal policy.
Attempts to use fiscal policy to stabilize the economy usually show up too late to help, no matter the situation.
Fortunately, such efforts have usually been too small in magnitude to do significant economic destruction.
Until now.
Whatever tax-law changes the US Congress approves this summer are unlikely to have big effects on the flow of purchasing power to households until April, 2004.
Similarly, whatever spending increases the US Congress approves this fall will not have significant effects on government spending until the summer and fall of 2004.
But this time, slow stimulus is amplified by failures in the design of the Bush economic program.
Even the conservative-minded " Economist" observes that the Bush Administration's proposals are not a short-term economic stimulus: they simply do "not provide the short, sharp boost for which many political leaders, including Mr Bush himself, have been calling."
If and when the proposed tax cuts are fully phased in, they will not provide the $1,000 a year boost to the income of 90 million households that the Bush Administration implies they will.
Instead, they will likely provide something like an additional $250 a year to the incomes of typical households--and much larger windfalls for households with annual incomes exceeding $200,000.
But these are the people least likely to take their tax cuts and spend them to boost aggregate demand.
Looking further out, US fiscal policy's long-run problems will become increasingly visible and urgent: there is not even a hint of a plan for reconciling the long-term costs of the social insurance state with American taxpayers' limited patience with high taxes.
For most of the 1990s, the world economy did remarkably well, despite large-scale financial crises, the spread of AIDS in stagnating Africa, and the problems of transition economies.
This was due to sound economic policy in the US (starting with the Bush-Mitchell-Foley tax increase of 1990), as well as some extraordinarily good luck in America.
There are no signs that wise economic policy in the US will continue in the first decade of the new century.
If global prosperity is to return, America's economic luck will have to be even better than it was in the 1990s.
The rest of the world economy would do well to play it safe and start making its own luck.
A Tribute to Evil
In May, the world will mark the 60th anniversary of the end of World War II in Europe.
But instead of happily preparing for that occasion, the Baltic countries of Estonia, Latvia, and Lithuania – which scarcely 15 years ago regained the independence they lost in WWII – are uneasy.
The heads of state of all three countries have been invited to participate in the parades to be held in Moscow to celebrate the Red Army’s victory over Nazi Germany.
But the host of the celebration, Russia, in the guise of the Soviet Union, itself caused the war – the bloodiest in European history – whose end is being commemorated.
Of course, the USSR instigated the war in tandem with Adolf Hitler, but its responsibility is undeniable.
By holding these celebrations in Red Square, and thus highlighting the Soviet victory, today’s Russia is also celebrating its gains in that war.
One of those gains was my country, Lithuania, whose incorporation into Stalin’s empire was accompanied by countless tragedies.
Unlike Germany, Russia has never recognized its responsibility for the war and the mass graves of the innocent.
Thus, a former captive nation is now being invited to celebrate its captivity.
This is why almost all Lithuanians – indeed, most residents of the Baltic countries – feel queasy at the prospect of their leaders marking this anniversary in Moscow.
But Estonians, Latvians, and Lithuanians are not the only Europeans who should feel this way.
When Stalin offered Hitler his friendship in the spring of 1939 – formally concluded that summer in the Molotov-Ribbentrop Pact – Nazi aggression was assured of not being knifed in the back from the East and so was left with free hands to do as Hitler pleased in the West.
The Pact came after the pogroms of “Kristallnacht” in Germany, so its Soviet initiators knew pretty well to what destiny they were consigning the Jews of Poland and Lithuania, which, in accord with the first secret Protocol signed by Ribbentrop and Molotov on August 23, 1939, were to go to Hitler.
A month later, in equal secrecy, Hitler sold Lithuania to Stalin.
The other countries situated between Germany and the USSR were similarly sentenced to disappear as nations – sooner or later.
Their peoples were treated practically as though they did not exist; the aggressors’ only concern was territory.
The death sentences and torturing that were then imposed on almost entire nations and millions of people are, it now appears, to be silently accepted and noisily celebrated on May 9 in Moscow.
Some Russian officials want to unveil a monument Stalin to crown the festivities.
When Hitler’s Wehrmacht struck West, the USSR duly supported Germany in its war against Poland, France, Belgium, the Netherlands, Luxembourg, Denmark, Norway, and the United Kingdom.
As a result, cities in those countries were flattened and people killed not only by the Nazis, but also by their Soviet ally, which invaded Poland and supplied the Wehrmacht with the material it needed for its war against the West.
In return, Stalin’s USSR was given a free hand to attack Finland and to occupy Estonia, Latvia, and Lithuania, as well as a part of Romania.
In law, when two criminals seal a contract with the blood of their victims, that act remains a crime, even if the two criminals later have a falling out and spray bullets at one another.
The same applies to the two greatest European criminals of the twentieth century.
We must not forget the crimes that Hitler and Stalin committed together as de facto allies only because they later turned on each other.
The blood of WWII’s victims calls for justice and fairness, but most of all it demands honesty about who and what caused their tragic fate.
If those who gather in Moscow on May 9 do anything to validate Soviet war crimes, they will show themselves insensitive to the silent cries of WWII’s tens of millions of dead innocents.
The only real winner would be the spirit of that evil.
A Tribute to James Wolfensohn
Over the past decade, the global economy has achieved unprecedented prosperity built on trade, international capital flows, and technological innovation.
Amidst this undeniable progress, however, remain widespread poverty, disease, and illiteracy.
In a world made smaller by modern telecommunications, satellite TV, and the Internet, the vast challenges of development that we continue to face confront us everyday.
Perhaps no individual has done more to raise the alarm – earning deserved credit for many successes and understanding all too clearly the remaining shortcomings – than James Wolfensohn, the outgoing President of the World Bank.
As Managing Director of the IMF, I have had the privilege of working closely with Jim Wolfensohn, seeing up close a man with an extraordinary mission: the sustainable reduction of global poverty.
Wolfensohn left a successful business career to lead the global campaign against poverty.
It is perhaps the ultimate tribute to his commitment and tenacity that his efforts over the past 10 years have attracted criticism as well as praise, for he has stood at the center of every major campaign aimed at alleviating the economic ills of our generation.
Wolfensohn led the World Bank onto the cutting edge of every important development debate, and was at the forefront of the effort to combat HIV/AIDS, as well as other deadly diseases that threaten so many impoverished countries.
He has been a forthright spokesman for women’s rights and a champion of environmental concerns, as well as a formidable advocate in arguing for debt reduction for the most heavily indebted nations.
He also has placed the World Bank at the center of the effort to help rebuild nations emerging from devastating civil conflict, from Bosnia to Sierra Leone to East Timor.
As World Bank president, Wolfensohn argued consistently that the world cannot be divided into “haves” and “have-nots.”
Poverty anywhere means poverty everywhere, and equitable growth is needed for the stability and security of all.
Indeed, that is the true meaning of globalization.
At the same time, Wolfensohn made a big contribution to development work by arguing that poverty must be treated as a multidimensional problem.
It is now widely accepted that financial assistance alone will not bring about effective poverty reduction.
Rather, sustainable, pro-poor growth is the key, requiring political stability – that is, peace and security for individuals – good governance, and ownership of policies by all stakeholders.
Under Wolfensohn, the World Bank followed through on this comprehensive and coordinated approach in a concrete fashion, making significant inroads into global poverty.
In the last 10 years, the Bank was the largest external financier of primary education, basic health care, HIV/AIDS programs, and programs aimed at protecting the environment and biodiversity.
This agenda goes to the heart of improving human dignity and maintaining sustainable development.
Wolfensohn’s insistence that corruption be confronted as part of the development process was another valuable step forward.
It used to be that even mentioning corruption in some official circles was considered taboo.
But corruption poses the single largest obstacle to growth and development in many countries, especially as it diverts resources from the poor.
The World Bank insisted that corruption be seen as a cancer, and that fighting it be made synonymous with fighting poverty.
Indeed, outspokenness was a hallmark of Wolfensohn’s tenure.
Many a government minister, Bank officer and NGO representative has experienced his blunt criticism, as well as his effusive praise.
The IMF has not been immune to this treatment.
The strength of the Bretton Woods institutions lies in intellectual diversity, and the Fund benefited from Wolfensohn’s honesty, as well as from his commitment to Bank-Fund cooperation, which progressively deepened during the past decade.
The work of our two institutions — in areas as diverse as poverty reduction strategies, debt relief, and the unheralded joint program to analyze financial sectors in our member countries — strengthened the global economy.
Ultimately, development is about people.
Jim Wolfensohn’s greatest strength has been his genuine caring for the world’s poor.
His legacy will include a World Bank that is firmly committed to a world free of poverty.
The poor around the world may feel poorer from losing him as their champion and advocate.
In fact, their prospects are brighter because of his work over the past decade.
A Triumph for “Old Europe”
Italy may have defeated France to win the World Cup, but the real winner was the “Old Europe” that Donald Rumsfeld once derided.
After all, who would have predicted a World Cup final between France and Italy?
It looks as if the national teams of the two “sick men of Europe,” felt obliged to change their countries’ images in the world.
In the Italian case, following the corruption scandals that have nearly sunk Il Calcio, Italy’s premier football league, the national team had to rehabilitate the game in the eyes of their fellow citizens.
More globally, however, it is as if “Old Europe” had decided that it was time to set the record straight and prove more dynamic than the world’s emerging forces.
Indeed, in the new global balance, where football has become much more than sport, Europe is back with a vengeance.
What has been unfolding in front of our eyes in the last four weeks has been a modern and reduced version of the balance-of-power system that dominated Europe and the world in the eighteenth and nineteenth centuries.
If football and its culminating moment, the World Cup, has become the universal religion of the global age, this is above all because it fulfills, in a non-spiritual way, contradictory instincts in human nature.
Football magnifies the cult of the individual and the glorification of the hero, but it is also a celebration of the cooperative team spirit.
More than any other collective activity, it channels the search for identity and identification that dominates our age.
Thanks to the World Cup, one is a citizen of the world, enjoying a spectacle together with billions of others on “Planet Soccer.”
Even in Washington, where I arrived at the beginning of the tournament, I was greeted at the airport by television screens showing the game.
The program was in English, but the advertisements were in Spanish.
In terms of football at least, the Hispanic community’s influence has brought the United States closer to Europe (though not, of course, in its team’s performance on the pitch).
At the same time, during the World Cup, fans are not only universal; they are also unique, and they can express their difference with impunity, sometimes in the most assertive, aggressive, and, unfortunately, occasionally racist manner.
In a world of “multiple identities,” to choose one’s team is in part to decide who one is.
From this standpoint, this year’s World Cup has not only witnessed the triumph of European nations – all semi-finalists were European for the first time since 1982 – but also the absence of even a glimmer of European emotions.
In my country, France, most supporters were clearly motivated more by post-colonial references than by European allegiance.
African teams, except when they were playing against France, were favored over those from the European Union.
As I watched the Croatia-Australia match early in the tournament, I surprised myself, too, as I realized that my emotions were with the Australian team, whatever that could mean, given that there were so many Croatians playing for Australia.
This deep search for identification should not be confused with a simple surge of nationalism.
Reality is more complex.
And this is not only because many coaches of the national teams are, like in the good old days, “foreign mercenaries,” with this Cup’s Swiss guards including the Brazilian coaches of Japan and Portugal, the Swedish coach of England, and the French coach of Tunisia.
The Cup’s explosions of proud nationalism hide more tortured realities.
Nostalgia is not what it used to be.
In 1998, when France won the Cup for the first time, the three colors of the French flag (blue, white, and red) were celebrated alongside with the three colors (“black, white, and
Indeed, after the violent episodes of the last year, France’s immigrant communities have a very different message to deliver: “Without us, you would not have had this World Cup success.
Do you believe you can continue to ostracize the communities from which your soccer heroes come?”
From ping-pong diplomacy with China to the united German Olympic team that competed in 1990 before actual reunification, sport has prefigured political developments, and politicians everywhere have seized on the importance of the World Cup.
Football success has become part of countries’ “soft power.”
France may not have the military might of the US or the growth rate of China and India, but its team reached the World Cup championship, raising its standing in the eyes of billions of people – and perhaps giving a reprieve to its unpopular government.
But sport can also become a kind of gigantic, distracting screen behind which nasty regimes do outrageous things – the very opposite of the Olympic and World Cup spirit.
As the world was watching the football games in Germany, North Korea was testing long-range missiles and Palestinians in the governing Hamas launched attacks on Israel that prompted a bloody invasion of Gaza.
The World Cup is drama, excitement, a dream, but it is also a form of “global escapism.”
Football may explain the world, but it does not improve it.
And now we are back to reality.
Attacking French Hopelessness
As French cities have burned, other countries have been very severe in judging France.
Embassies have issued warnings to tourists and their citizens living in France; television news programs have shown hours of footage of burning cars.
Other countries’ governments, it seems, have been trying to distance themselves from the problem, fearing a contagion that they know is likely to spread.
Mayors across Europe, however, have responded more moderately, feeling and showing solidarity with the plight of their French colleagues.
They know that their cities are also vulnerable to urban violence, in so far as they have pockets of social inequality, including marginalized and excluded young people.
The specificity of the French situation is that the revolt is targeted against the state, and more precisely against the police forces.
Unlike recent riots in the United Kingdom, which were inter-ethnic, the confrontations in France put their participants face to face with the police.
Indeed, there is no specific religious or ethnic character to these riots, in so far as youth from various ethnic backgrounds have taken part.
Minority youth are, to be sure, over-represented among those involved.
This is easily explained by their geographic segregation, higher levels of unemployment, higher school dropout rates, and disproportionately frequent interactions with the criminal justice system.
But, in view of the diversity of the young people convicted so far, it would be a mistake to say that these riots are the result of Muslim radicalization.
There is absolutely no indication so far that organized networks or religious groups are manipulating these youth.
Of course, this is not to say that Muslim radicals will not exploit the disarray if a satisfying resolution is not found rapidly.
The rioting may not be organized - no clear leaders or political demands have emerged. Yet these violent acts can be viewed as a political conflict in the sense that young people are directly challenging the state by attacking its representatives.
The violence seems to be proportional to these disenfranchised young people’s sense of perceived injustice and the lack of opportunities for them to express themselves.
In this sense, France is paying the price for the lack of continuity, coherence, and appropriate funding given to social development policies over the past 30 years.
Although these policies have undoubtedly helped residents of disadvantaged neighborhoods, they have not been sufficiently ambitious to dampen resentment.
One example of overly timid policies involves policing.
In the last few years, France has distinguished itself from other European nations by gradually abandoning community-based policing, which the government considers too “social” and prevention-oriented.
While European police forces place prevention at the top of their agendas, France has chosen to treat it as a marginal goal.
As a result, tensions between the police, who are increasingly perceived as “outsiders,” and residents have grown to all-time highs.
In the absence of a community-based approach, interactions with law-enforcement authorities are now limited to tense, conflict-ridden situations, reinforcing the confrontational atmosphere between rebellious youth and the police.
At the same time, the fact that police agents must intervene in places with which they are not familiar severely impedes their effectiveness.
In the current violence, the police have unfortunately been placed in the position of sole representative of the state.
But all public actors, not just the police, must respond to urban problems.
First and foremost, mayors should be mobilized as mediators, because they are on the front line in implementing urban policy.
When these policies fail, citizens hold mayors responsible.
But mayors are also the most knowledgeable about communication links within their communities, and are thus the most capable of organizing effective partnerships to address and resolve local issues.
The events in France also point to the need, at the European level, to reinforce policies against discrimination and that promote social equality.
Although these policies must be implemented at a local level, they should be catalyzed and supported by European institutions.
Efforts in this area already exist, but it has become increasingly urgent that these efforts be strengthened.
Equality and social cohesion form the backbone of liberty, justice, and security for European cities.
This is why Europe’s mayors call upon European institutions to focus on social cohesion with the same commitment that has been invested until now in asylum and border controls.
Xi in Russia
MOSCOW – The atmospherics surrounding Xi Jinping’s coming trip to Russia – his first visit to a foreign country as China’s new president – remind me of a slogan from my early childhood in the late 1950’s: “Russia-China, Friendship Forever.”
Is that slogan more valid now?
After China opened up its economy and Russia emerged from the Soviet Union, bilateral relations entered a new stage.
Goodwill now prevails, but some of the old suspicions linger – and some new ones have emerged.
Xi’s visit is not expected to usher in any breakthroughs.
A few deals to export Russian hydrocarbons to China can be expected, but not much more.
Nonetheless, the visit will highlight several important features of the bilateral relationship.
For starters, both the Russian and Chinese governments can afford to downplay the significance of their ties with the United States.
China views Russia as its strategic rear – and perhaps a base – in its escalating rivalry with the US (though not yet as an ally).
Russia’s leaders view Sino-American competition as a welcome addition to their country’s strategic weight, which, unlike China’s, is not being augmented by robust economic growth.
The more the US challenges the inevitable expansion of China’s “security perimeter,” the better for Russia, or so the Kremlin’s strategists appear to believe.
Meanwhile, the Sino-Russian relationship has achieved an unprecedented degree of warmth.
The Chinese are doing almost everything possible to placate Russian concerns.
The old border disputes have been silenced.
The volume of trade is growing rapidly.
Moreover, there has been no Chinese demographic expansion into Siberia, though many journalists and pundits have been peddling that story.
The number of Chinese residing in Russia – whether officially or clandestinely – amounts to 300,000.
Many more Chinese lived in the Russian Empire before the 1917 revolution.
But, beneath the surface, unease in the bilateral relationship persists, partly for historical reasons.
Nationalist Chinese remember imperial Russia’s conquests, while many Russians have a morbid fear of the “yellow peril,” even though the Mongols conquered and reigned in China, while they were eventually repelled from Russia (not to mention that the Chinese never invaded Russia).
The more important reasons for the unease are the negative demographic trends in Russia’s far-eastern Trans-Baikal region, and the fear – shared by all of China’s neighbors – of overweening Chinese power.
Indeed, the pundits have a point: if the current economic near-stagnation in Siberia persists, the world will witness a second, epic edition of Finlandization, this time in the east.
That might not be the worst scenario a country could face, but it is not the most pleasant prospect for Russians, given their deeply ingrained sense of their status as a great power.
This scenario is not inevitable, and it certainly will not be on the minds of Xi and Russian President Vladimir Putin when they meet in Moscow.
China is in the throes of an identity crisis as it faces an almost inevitable economic slowdown and the need to implement a new growth model.
Russia, meanwhile, is clearly suffering from an even deeper identity crisis.
It somehow survived the post-Soviet shock, and has now recovered.
Yet, for the last six years or so, Russia has been in a kind of limbo, with no strategy, no goals, and no elite consensus on a vision for the future.
For Sino-Russian relations, such fundamental uncertainties may be a blessing.
Both leaders can count on the other not to create additional problems, and even to help passively on geopolitical questions.
On Syria, for example, the two countries have shown that we are indeed living in a multipolar world.
And those new oil and gas deals will buttress both economies.
In the long term, Sino-Russian relations will depend largely on whether Russia overcomes its current stagnation and, among other steps, starts to develop the vast water and other resources of the Trans-Baikal region.
To do so, capital and technology will be needed not only from China, but also from Japan, South Korea, the US, and Southeast Asian countries.
The Trans-Baikal region could relatively easily expand ties with the resource-hungry Asian economies, to the benefit of all.
Even the labor problem is solvable, with millions of workers from former Soviet Central Asia – and perhaps from a gradually liberalizing North Korea – able to take part in the ambitious development that will be needed.
But the first step is to start to create conditions in the region that make living and working there attractive to Russians.
The Asia-Pacific Economic Cooperation summit in Vladivostok last year created a mere enclave of development.
A growth strategy for the whole region is yet to come.
If it does not, the current Sino-Russian entente cordiale is almost certain to sour.
Russia will start to feel vulnerable, and will be pushed toward either geopolitical brinkmanship or submission to China’s will.
At this point, however, relations between China and Russia appear to be far better than the mythical friendship of my childhood.
A Two-State Solution for Palestine?
In 1947 Palestinian Arabs and their allies rejected a UN proposal to partition Palestine into a Jewish state and an Arab state, just as ten years before they rejected a similar partitioning proposed by the Peel Commission.
More recently, both at Camp David and at Taba in Egypt, Arab negotiators again rejected proposals that would have led to the creation of a Palestinian state alongside Israel.
Apparently, many Palestinian Arabs, and much of the Arab world, continue to think that they can do better than a two-state solution.
After decades of conflict, it seems that the Arabs have not given up their goal of making all of Palestine into an Arab state.
True, Arab leaders differ over tactics.
From time to time Arab negotiators enter into discussions about the mundane issues that prospective neighboring states would need to resolve, such as political boundaries, security arrangements, and economic relations.
It is possible that at some point the Arabs will agree among themselves that the creation of a Palestinian state that claims to be committed to peaceful coexistence with Israel will be a useful tactic.
American and European governments seem willing to use the carrot of economic aid to encourage this development, in the way that the US pays off Egypt and Jordan to acquiesce in the existence of Israel.
But, unless the Arabs reconcile themselves to the permanent reality of a Jewish state in Palestine, the creation of a Palestinian Arab state will not provide more than the temporary palliative of a tenuous truce between Arabs and Jews.
The Zionist project of creating a Jewish state in Palestine entails a return of the Jewish people to their ancestral homeland, a land in which Jews lived since biblical times and which the Diaspora never abandoned.
Whether or not this historical justification for Israel's creation is convincing, the important fact is that the Palestinian Arabs and their allies do not buy it.
Arabs express their disdain for Zionism by equating the Zionist project to the creation of a colony, to which millions of Jewish settlers have come.
According to this equation the conflict between Jews and Arabs replicates the conflicts between colonial settlers and indigenous peoples.
If the Arabs believe their own argument that Zionism is colonialism, with themselves as the victims, then, whether or not anybody else accepts this view, the lessons that the Arabs glean from colonial experiences become relevant to prospects for peace between Arabs and Israelis.
Over the years Israeli governments encouraged Arabs to participate in Israel's economy.
This policy, which Israelis view to be benevolent, supposes that economic integration of Arabs and Jews is possible without modifying the Zionist concept of Israel as a Jewish state.
But, from the Arab perspective this policy reinforces their equating of Zionism to colonialism.
Arab rhetoric often takes the colonial experiences of Algeria and South Africa as models for their conflict with Zionism.
These analogies are important because in both Algeria and South Africa, colonialism failed.
Descendants of the European settlers in Algeria fled back to Europe.
In South Africa, Blacks achieved political dominance over the descendants of British and Afrikaner settlers, large numbers of whom remain as a tolerated minority.
A permanent end to the conflict over Palestine will not be possible until the Palestinian Arabs and their allies become convinced that the failure of colonialism in countries like Algeria and South Africa is not a relevant lesson for them.
In other words Arabs will have to become convinced that they can neither subjugate the Jews nor drive the Jews out of Palestine.
The negotiating formula of "land for peace" and "breakthroughs" like the Oslo accords failed to dampen the conflict because the Arabs understandably interpret Israeli concessions as signs of weakness.
Unfortunately, the Israelis can show the Arabs that they cannot destroy Israel only by enduring the violent war of attrition that the Arabs are pursuing.
Moreover, there seems no obvious way to speed up the process of convincing the Arabs that Israel is here to stay except by making this war of attrition as costly as possible for them.
But suppose a two-state solution were achieved in the not-too-remote future.
In thinking about this possibility we are drawn to the example of Ireland, where a two-state solution has worked.
Having secured an independent Irish state, Catholics in the Republic of Ireland came to accept the existence of a settler enclave in Northern Ireland.
But, the Irish story has not had a happy ending.
The Catholic minority in Northern Ireland, whose position seems similar to that of the million Arabs who are Israeli citizens, eventually revolted against the dominant Protestants, with decades of violence resulting.
Even if a Palestinian state committed to peaceful coexistence were created, down the road Israel may be unable to avoid the fate of Northern Ireland.
A UN Consensus
“When you say everything is a priority, then you are saying you don’t really have any priorities.” Those were the words of US ambassador to the United Nations John Bolton as he attempted my challenge to establish concrete priorities for the world.
Political recognition of the importance of priorities is a crucial development.
Politicians avoid creating prioritized ‘to do’ lists that could upset groups whose interests do not come first.
It is simpler to declare that every challenge is a ‘top priority’.
The UN spends billions of dollars promoting human rights, protecting the environment, fighting disease and reducing poverty.
The organization’s budget is vast but – like all budgets – limited.
Yet, choices about battling humanity’s biggest challenges are rarely founded in a principled framework of prioritization.
Decisions are mired in a constant battle for resources between competing interest groups, countries and organizations.
UN Deputy Secretary-General Mark Malloch Brown has pointed out that there is distrust between representatives of populous developing nations and those from wealthier states – a stand-off he calls “numbers versus pocketbooks”.
This backdrop makes this week’s achievement all the more remarkable.
I gathered UN ambassadors from the US, China, India, Pakistan, Tanzania, Zambia, Russia, Egypt, Thailand and Vietnam in a project called Copenhagen Consensus.
I asked them to set priorities for the world.
The ambassadors – who together represent about half of the world’s population – listened to climate change experts tell them that global warming is a vital issue and that the Kyoto Protocol could be used to tackle it.
They heard from health experts who said that communicable diseases were rampant and that mosquito nets would be a great way to combat malaria.
Other experts told them that two-and-a-half billion people lack access to sanitation but investment in relatively simple projects could drastically reduce that number.
All important problems.
Each should be tackled.
But with limited resources, we need to commit to solving some problems before others.
It makes sense to first invest in the areas that achieve the greatest benefits.
The essential question put to the ambassadors was: if you had an extra $50 billion, how should it be spent to achieve the most ‘good’ possible?’
The ambassadors considered the expert evidence and debated the pro and cons of each option before putting together a prioritized ‘to do’ list of solutions to the world’s greatest challenges (See List).
They concluded that the world’s top solutions are better health, cleaner water, more education and less hunger.
The burden of disease ruins lives and entire communities.
Nine out of ten deaths from communicable diseases in the developing world are avoidable.
The world could fight back with general health services in at-need areas along with more focused efforts to combat HIV and malaria.
The ambassadors found that providing clean drinking water and sanitation to the billion people lacking such amenities was crucial.
They also concluded that without a constant focus on education, other gains could not be sustained.
They decided that dealing with malnutrition is also a crucial priority.
Eight hundred million people are chronically undernourished while three and a half billion lack micronutrients.
But choosing the issues at the top of a priority list is the easy part.
Asking politicians to choose what shouldn’t come first was the real test.
The ambassadors showed courage.
They concluded that although migration, corruption and conflicts are vital, these should not come first on the global priority list.
The evidence led them to believe that proposed solutions to financial instability and global warming – while both important topics – are not the right investments to start with.
The UN ambassadors’ first attempt at a deliberate prioritization shows that this approach could be used on a much bigger scale.
It could help to put the organization back on track and assist it to focus on doing the best things first.
As John Bolton pointed out, the UN has 9,000 mandates, which means 9,000 top priorities, which essentially means
Thailand’s ambassador pointed out that using the Copenhagen Consensus prioritization framework could help the UN to ensure better, more effective utilization of scarce resources in tackling top issues.
Zambia’s ambassador believed that “all member countries of the UN would benefit from going through a similar process, becoming more aware of the need to prioritize.” Perhaps it is now time to convene all of the UN member countries and ask them the hard but vital question: given that we can’t do it all, what should we do first?
List of priorities, outcome document from Copenhagen Consensus by UN ambassadors, June 16-17 2006 at Georgetown University:
challenge
opportunity
1
Communicable Diseases
Scaled-up basic health services
2
Sanitation and Water
Community-managed water supply and sanitation
3
Education
Physical expansion
4
Malnutrition and Hunger
Improving infant and child nutrition
5
Malnutrition and Hunger
Investment in technology in developing country agriculture
6
Communicable Diseases
Control of HIV/AIDS
7
Communicable Diseases
Control of malaria
8
Malnutrition and Hunger
Reducing micro nutrient deficiencies
9
Subsidies and Trade Barriers
Optimistic Doha: 50% liberalization
10
Education
Improve quality / Systemic reforms
11
Sanitation and Water
Small-scale water technology for livelihoods
12
Education
Expand demand for schooling
13
Malnutrition and Hunger
Reducing Low Birth Weight for high risk pregnancies
14
Education
Reductions in the cost of schooling to increase demand
15
Sanitation and Water
Research to increase water productivity in food production
16
Migration
Migration for development
17
Corruption
Procurement reform
18
Conflicts
Aid post-conflict to reduce the risk of repeat conflict
19
Sanitation and Water
Re-using waste water for agriculture
20
Migration
Guest worker policies
21
Sanitation and Water
Sustainable food and fish production in wetlands
22
Corruption
Grassroots monitoring and service delivery
23
Corruption
Technical assistance to develop monitoring and transparency initiatives
24
Migration
Active immigration policies
25
Subsidies and Trade Barriers
Pessimistic Doha: 25% liberalization
26
Corruption
Reduction in the state-imposed costs of business/government relations
27
Climate Change
The Kyoto Protocol
28
Conflicts
Aid as conflict prevention
29
Corruption
Reform of revenue collection
30
Financial Instability
International solution to the currency-mismatch problem
31
Conflicts
Transparency in natural resource rents as conflict prevention
32
Conflicts
Military spending post-conflict to reduce the risk of repeat conflict
33
Financial Instability
Re-regulate domestic financial markets
34
Conflicts
Shortening conflicts: Natural resource tracking
35
Financial Instability
Reimpose capital controls
36
Financial Instability
Adopt a common currency
37
Subsidies and Trade Barriers
Full reform: 100% liberalization
38
Climate Change
Optimal carbon tax
39
Climate Change
Value-at-risk carbon tax
40
Climate Change
A carbon tax starting at $2 and ending at $20
A Universal Library
MELBOURNE – Scholars have long dreamed of a universal library containing everything that has ever been written.
Then, in 2004, Google announced that it would begin digitally scanning all the books held by five major research libraries. Suddenly, the library of utopia seemed within reach.
Indeed, a digital universal library would be even better than any earlier thinker could have imagined, because every work would be available to everyone, everywhere, at all times.
And the library could include not only books and articles, but also paintings, music, films, and every other form of creative expression that can be captured in digital form.
But Google’s plan had a catch.
Most of the works held by those research libraries are still in copyright.
Google said that it would scan the entire book, irrespective of its copyright status, but that users searching for something in copyrighted books would be shown only a snippet.
This, it argued, was “fair use” – and thus permitted under copyright laws in the same way that one may quote a sentence or two from a book for the purpose of a review or discussion.
Publishers and authors disagreed, and some sued Google for breach of copyright, eventually agreeing to settle their claim in exchange for a share of Google’s revenue.
Last month, in a Manhattan court, Judge Denny Chin rejected that proposed settlement, in part because it would have given Google a de facto monopoly over the digital versions of so-called “orphan” books – that is, books that are still in copyright, but no longer in print, and whose copyright ownership is difficult to determine.
Chin held that the United States Congress, not a court, was the appropriate body to decide who should be entrusted with guardianship over orphan books, and on what terms.
He was surely right, at least in so far as we are considering matters within US jurisdiction.
These are large and important issues that affect not only authors, publishers, and Google, but anyone with an interest in the diffusion and availability of knowledge and culture.
So, while Chin’s decision is a temporary setback on the way to a universal library, it provides an opportunity to reconsider how the dream can best be realized.
The central issue is this: how can we make books and articles – not just snippets, but entire works – available to everyone, while preserving the rights of the works’ creators?
To answer that, of course, we need to decide what those rights are.
Just as inventors are given patents so that they can profit from their inventions for a limited time, so, too, authors were originally given copyright for a relatively short period – in the US, it was initially only 14 years from the first publication of the work.
For most authors, that would be enough time to earn the bulk of the income that they would ever receive from their writings; after that, the works would be in the public domain.
But corporations build fortunes on copyright, and repeatedly pushed Congress to extend it, to the point that in the US it now lasts for 70 years after the creator’s death.
(The 1998 legislation responsible for the last extension was nicknamed the “Mickey Mouse Protection Act” because it allowed the Walt Disney Company to retain copyright of its famous cartoon character.)
It is because copyright lasts so long that as many as three-quarters of all library books are “orphaned.”
This vast collection of knowledge, culture, and literary achievement is inaccessible to most people.
Digitizing it would make it available to anyone with Internet access.
As Peter Brantley, Director of Technology for the California Digital Library, has put it: “We have a moral imperative to reach out to our library shelves, grab the material that is orphaned, and set it on top of scanners.”
Robert Darnton, Director of the Harvard University Library, has proposed an alternative to Google’s plans: a digital public library, funded by a coalition of foundations, working in tandem with a coalition of research libraries.
Darnton’s plan falls short of a universal library, because works in print and in copyright would be excluded; but he believes that Congress might grant a non-commercial public library the right to digitize orphan books.
That would be a huge step in the right direction, but we should not give up the dream of a universal digital public library.
After all, books still in print are likely to be the ones that contain the most up-to-date information, and the ones that people most want to read.
Many European countries, as well as Australia, Canada, Israel, and New Zealand, have adopted legislation that creates a “public lending right” – that is, the government recognizes that enabling hundreds of people to read a single copy of a book provides a public good, but that doing so is likely to reduce sales of the book.
The universal public library could be allowed to digitize even works that are in print and in copyright, in exchange for fees paid to the publisher and author based on the number of times the digital version is read.
If we can put a man on the Moon and sequence the human genome, we should be able to devise something close to a universal digital public library.
At that point, we will face another moral imperative, one that will be even more difficult to fulfill: expanding Internet access beyond the less than 30% of the world’s population that currently has it.
A Universal Revolution
NEW YORK – The most important contribution of the Universal Declaration of Human Rights, adopted by the United Nations General Assembly 60 years ago, on December 10, 1948, was to assert a powerful idea: rights are universal.
Rights do not depend on membership of a particular community or citizenship in a certain state.
They do not derive from a social contract.
Rather, because rights are universal, they are attributes of all human beings.
Indeed, they are part of what makes us human.
Each of us may enjoy rights.
Those who exercise power may do so only in limited ways. The limits are set by rights.
It is, of course, possible to trace the concept of universal rights at least as far back as seventeenth-century English thinking about natural law.
The concept was partially embraced in the French Declaration of Rights of 1789 and, to a greater extent, in Thomas Jefferson’s language in the same era about “inalienable rights.” It also shaped the thinking of those in England who led the anti-slavery struggle of the second half of the eighteenth century, the first human rights movement.
Yet the Universal Declaration marked a giant step forward, as the world’s governments – with abstentions from the Soviet bloc states, Saudi Arabia, and apartheid South Africa, but with no votes in opposition – agreed that rights should take precedence over state power.
One way to think about the six decades that have elapsed since the adoption of the Universal Declaration is as a struggle to implement its promises.
For a long time, it was a losing struggle, marked especially by the spread of both communist and anti-communist tyrannies.
Things began to change in the 1980’s with the fall of military dictatorships in Latin America and in such East Asian countries as the Philippines and South Korea, and with the growing number of people engaged in the struggle for human rights in the Soviet empire.
By the end of the decade, many Soviet bloc regimes had collapsed.
A factor that contributed to their demise was a shift in thinking that transformed the conflict between East and West away from one that emphasized economic systems. Instead, it was the contrast between totalitarianism and respect for rights that completely discredited the oppressive regimes linked to Moscow and helped to bring them down.
South Africa’s largely peaceful transition to a multi-racial democracy in the early 1990’s was a further advance for rights.
But the last decade of the twentieth century was also indelibly stained by ethnic cleansing in ex-Yugoslavia and genocide in Rwanda, and during the current decade the tide has seemed to turn against the rights cause.
Powerful states such as China and Russia are not limiting themselves to authoritarian rule at home, but are also supporting those in other countries engaged in similar practices.
The same is true of lesser powers such as Iran and Venezuela.
Moreover, the United States has been squandering much of its capacity to promote human rights internationally. In responding to the terrorist attacks on its own soil on September 11, 2001, the US has resorted to such measures as prolonged indefinite detention without charges, trials before military commissions lacking due process safeguards, and cruel, inhuman, and degrading treatment of detainees, including torture.
Other governments and intergovernmental bodies have not filled the gap left by the US.
The new UN Human Rights Council has so far disappointed those who hoped that it would be a more principled and effective body than its discredited predecessor, the UN Human Rights Commission.
The European Union has been a positive force in promoting rights in those countries aspiring to membership, but it has not demonstrated a capacity to exercise influence worldwide.
Today, the most effective force promoting human rights is global public opinion, informed and mobilized by the large and growing nongovernmental human rights movement, which, as in the recent war between Georgia and Russia, has focused international attention on violations of the laws of armed conflict that protect noncombatants.
It has also led the way in creating international criminal tribunals that prosecute and punish those who commit war crimes, crimes against humanity, and genocide.
These achievements are not stopping war, but they are reducing the number of terrible human rights violations that accompany armed conflict.
It is, of course, dismaying that 60 years after the adoption of the Universal Declaration of Human Rights, so many governments disregard the principles that they endorsed so long ago.
Yet without the legitimacy derived from the Universal Declaration and its role in promoting compliance, the nongovernmental human rights movement could not have developed into a global force.
The fact that the movement continues to secure advances even in difficult times is an indication of the enduring significance of what was achieved in 1948 when the world’s governments declared that rights are universal.
Should Europe be Fracking?
BRUSSELS – The global energy community is abuzz with excitement about hydraulic fracturing, or “fracking,” a newish technology that has opened formerly inaccessible reserves of gas trapped in underground shale formations.
The boom in this so-called shale-gas production has allowed the United States to become almost self-sufficient in natural gas.
Europe, by contrast, is clearly lagging.
Exploration is proceeding only hesitantly and shale-gas production has not even started, prompting many observers to lament that Europe is about to miss the next energy revolution.
Should Europeans be worried?
Critics of Europe’s apparent lack of enthusiasm for fracking miss two key points.
First, Europe’s geology is different from that of America.
There is a huge difference between potential deposits hidden somewhere in large shale formations and recoverable reserves that can actually be produced economically.
In fact, estimates by the International Energy Agency suggest that the most significant recoverable reserves of shale gas are in the US and China, not Europe.
Moreover, even these estimates are really not much more than educated guesses, because only in the US have shale formations been subject to intense exploration over a period of decades.
This process is starting in Europe only now.
Poland appears to have Europe’s most favorable geology, and it might become a significant producer on a local scale in about ten years.
This is a fortunate coincidence, because shale-gas production would probably make it politically easier to phase out Poland’s economically and environmentally irrational subsidies to local coal production (and consumption).
Fracking would also be a strategic boon, because it would diminish the country’s dependence on Russia for gas.
But pro-fracking critics of the European Union miss a second point: the EU has no authority over the development of shale gas in Europe.
Licensing and regulation of exploration and production are decided at the national level.
One must admit, however, that in Europe the “Nimby” phenomenon (not in my backyard) is a much more serious obstacle than it is in the US.
While it might be true that Europeans are too sensitive to environmental concerns, incentives also play a role.
In particular, whereas ownership rights over natural resources in the US typically belong to the individual owner of the land under which the resources lie, in Europe ownership belongs to the state.
As a result, Europeans, facing uncertain environmental consequences while receiving none of the revenues, tend to oppose fracking nearby.
In the US, by contrast, local residents benefit handsomely from being able to sell their ownership rights to gas companies – a strong counter-balance to fears of environmental costs.
But private versus state ownership of natural resources is not the only institutional factor underlying the US gas boom.
A seldom-mentioned reason is that shale-gas development in the US has benefited from important tax incentives – a model that Europe has no reason to emulate.
Governments certainly have a role to play in supporting the development of new technologies, such as fracking; but, once the technology has been developed, there is no reason why one form of gas production should be subsidized via tax breaks.
But the most crucial – and almost always overlooked – point about fracking is that shale gas, like all hydrocarbons, can be used only once.
The real issue is thus not whether shale gas should be developed in Europe, but when it should be used: today or tomorrow.
Europe is already a heavy user of gas, but its consumption is stagnating (along with its economy).
Despite the hype about the shale-gas revolution, the extraction cost of (onshore) conventional gas remains below that of shale gas.
Moreover, an existing pipeline network implies that this conventional gas can be brought to Europe at a low marginal cost.
From an economic (and environmental) standpoint, fracking is thus unlikely to bring large benefits for Europe: shale gas might simply substitute for plentiful conventional gas.
In an environment of ultra-low interest rates, the economic cost of being late is low.
The best option for Europe might be to wait and let the market operate.
Fracking is not yet a mature technology, and thus it is very likely to improve over time.
Maybe Europe will become a leader in “advanced fracking” when the shale-gas deposits in the US have already been exhausted.
Austere Growth?
WASHINGTON, DC – The German government’s reaction to newly elected French President François Hollande’s call for more growth-oriented policies was to say that there should be no change in the eurozone’s austerity programs.
Rather, growth-supporting measures, such as more lending by the European Investment Bank or issuance of jointly guaranteed project bonds to finance specific investments, could be “added” to these programs.
Many inside and outside of Germany declare that both austerity and more growth are needed, and that more emphasis on growth does not mean any decrease in austerity.
The drama of the ongoing eurozone crisis has focused attention on Europe, but how the austerity-growth debate plays out there is more broadly relevant, including for the United States.
Three essential points need to be established.
First, in a situation of widespread unemployment and excess capacity, short-run output is determined primarily by demand, not supply.
In the eurozone’s member countries, only fiscal policy is possible at the national level, because the European Central Bank controls monetary policy.
So, yes, more immediate growth does require slower reduction in fiscal deficits.
The only counterargument is that slower fiscal adjustment would further reduce confidence and thereby defeat the purpose by resulting in lower private spending.
This might be true if a country were to declare that it was basically giving up on fiscal consolidation plans and the international support associated with it, but it is highly unlikely if a country decides to lengthen the period of fiscal adjustment in consultation with supporting institutions such as the International Monetary Fund.
Indeed, the IMF explicitly recommended slower fiscal consolidation for Spain in its 2012 World Economic Outlook.
Without greater short-term support for effective demand, many countries in crisis could face a downward spiral of spending cuts, reduced output, higher unemployment, and even greater deficits, owing to an increase in safety-net expenditures and a decline in tax revenues associated with falling output and employment.
Second, it is possible, though not easy, to choose fiscal-consolidation packages that are more growth-friendly than others.
There is the obvious distinction between investment spending and current expenditure, which Italian Prime Minister Mario Monti has emphasized.
The former, if well designed, can lay the foundations for longer-term growth.
There is also the distinction between government spending with high multiplier effects, such as support to lower-income groups with a high propensity to spend, and tax reductions for the rich, a substantial portion of which would likely be saved.
Last but not least, there are longer-term structural reforms, such as labor-market reforms that increase flexibility without leading to large-scale lay-offs (a model rather successfully implemented by Germany).
Similarly, retirement and pension reforms can increase long-term fiscal sustainability without generating social conflict.
A healthy older person may well appreciate part-time work if it comes with flexibility.
The task is to integrate such work into the overall functioning of the labor market with the help of appropriate regulation and incentives.&nbsp;
Finally, particularly in Europe, where countries are closely linked by trade, a coordinated strategy that allows more time for fiscal consolidation and formulates growth-friendly policies would yield substantial benefits compared to individual countries’ strategies, owing to positive spillovers (and avoidance of stigmatization of particular countries).
There should be a European growth strategy, rather than Spanish, Italian, or Irish strategies.
Countries like Germany that are running a current-account surplus would also help themselves by helping to stimulate the European economy as a whole.
Slower fiscal retrenchment, space for investment in government budgets, growth-friendly fiscal packages, and coordination of national policies with critical contributions from surplus countries can go a long way in helping Europe to overcome its crisis in the medium term.
Unfortunately, Greece has become a special case, one that requires focused and specific treatment, most probably involving another round of public-debt forgiveness.
But insufficient and sometimes counterproductive actions, coupled with panic and overreaction in financial markets, have brought some countries, such as Spain, which is a fundamentally solvent and strong economy, to the edge of the precipice, and with it the whole eurozone.
In the immediate short run, nothing makes sense, not even a perfectly good public-investment project, or recapitalization of a bank, if the government has to borrow at interest rates of 6% or more to finance it.
These interest rates must be brought down through ECB purchases of government bonds on the secondary market until low-enough announced target levels for borrowing costs are reached, and/or by the use of European Stability Mechanism resources.
The best solution would be to reinforce the effectiveness of both channels by using both – and by doing so immediately.
Such an approach would provide the breathing space needed to restore confidence and implement reforms in an atmosphere of moderate optimism rather than despair.
The risk of inaction or inappropriate action has reached enormous proportions.
No catastrophic earthquake or tsunami has destroyed southern Europe’s productive capacity.
What we are witnessing – and what is now affecting the whole world – is a man-made disaster that can be stopped and reversed by a coordinated policy response.
Austerity and Debt Realism
CAMBRIDGE – Many, if not all, of the world’s most pressing macroeconomic problems relate to the massive overhang of all forms of debt.
In Europe, a toxic combination of public, bank, and external debt in the periphery threatens to unhinge the eurozone.
Across the Atlantic, a standoff between the Democrats, the Tea Party, and old-school Republicans has produced extraordinary uncertainty about how the United States will close its 8%-of-GDP government deficit over the long term.
Japan, meanwhile is running a 10%-of-GDP budget deficit, even as growing cohorts of new retirees turn from buying Japanese bonds to selling them.
Aside from wringing their hands, what should governments be doing?
One extreme is the simplistic Keynesian remedy that assumes that government deficits don’t matter when the economy is in deep recession; indeed, the bigger the better.
At the opposite extreme are the debt-ceiling absolutists who want governments to start balancing their budgets tomorrow (if not yesterday).
Both are dangerously facile.
The debt-ceiling absolutists grossly underestimate the massive adjustment costs of a self-imposed “sudden stop” in debt finance.
Such costs are precisely why impecunious countries such as Greece face massive social and economic displacement when financial markets lose confidence and capital flows suddenly dry up.
Of course, there is an appealing logic to saying that governments should have to balance their budgets just like the rest of us; unfortunately, it is not so simple.
Governments typically have myriad ongoing expenditure commitments related to basic services such as national defense, infrastructure projects, education, and health care, not to mention to retirees.
No government can just walk away from these responsibilities overnight.
When US President Ronald Reagan took office on January 20, 1981, he retroactively rescinded all civil-service job offers extended by the government during the two and a half months between his election and the inauguration.
The signal that he intended to slow down government spending was a powerful one, but the immediate effect on the budget was negligible.
Of course, a government can also close a budget gap by raising taxes, but any sudden shift can significantly magnify the distortions that taxes cause.
If the debt-ceiling absolutists are naïve, so, too, are simplistic Keynesians. They see lingering post-financial-crisis unemployment as a compelling justification for much more aggressive fiscal expansion, even in countries already running massive deficits, such as the US and the United Kingdom.
People who disagree with them are said to favor “austerity” at a time when hyper-low interest rates mean that governments can borrow for almost nothing.
But who is being naïve?
It is quite right to argue that governments should aim only to balance their budgets over the business cycle, running surpluses during booms and deficits when economic activity is weak.
But it is wrong to think that massive accumulation of debt is a free lunch.
In a series of academic papers with Carmen Reinhart – including, most recently, joint work with Vincent Reinhart (“Debt Overhangs: Past and Present”) – we find that very high debt levels of 90% of GDP are a long-term secular drag on economic growth that often lasts for two decades or more.
The cumulative costs can be stunning.
The average high-debt episodes since 1800 last 23 years and are associated with a growth rate more than one percentage point below the rate typical for periods of lower debt levels.
That is, after a quarter-century of high debt, income can be 25% lower than it would have been at normal growth rates.
Of course, there is two-way feedback between debt and growth, but normal recessions last only a year and cannot explain a two-decade period of malaise.
The drag on growth is more likely to come from the eventual need for the government to raise taxes, as well as from lower investment spending.
So, yes, government spending provides a short-term boost, but there is a trade-off with long-run secular decline.
It is sobering to note that almost half of high-debt episodes since 1800 are associated with low or normal real (inflation-adjusted) interest rates.
Japan’s slow growth and low interest rates over the past two decades are emblematic.
Moreover, carrying a huge debt burden runs the risk that global interest rates will rise in the future, even absent a Greek-style meltdown.
This is particularly the case today, when, after sustained massive “quantitative easing” by major central banks, many governments have exceptionally short maturity structures for their debt.
Thus, they run the risk that a spike in interest rates would feed back relatively quickly into higher borrowing costs.
With many of today’s advanced economies near or approaching the 90%-of-GDP level that loosely marks high-debt periods, expanding today’s already large deficits is a risky proposition, not the cost-free strategy that simplistic Keynesians advocate.
I will focus in the coming months on the related problems of high private debt and external debts, and I will also return to the theme of why this is a time when elevated inflation is not so naïve.
Above all, voters and politicians must beware of seductively simple approaches to today’s debt problems.
Weimar 2013?
NEW YORK – The worst crisis of capitalism since the Great Depression of the 1930’s has reawakened grim memories on both sides of the Atlantic.
The ghost of Franklin Delano Roosevelt haunts Barack Obama’s United States.
Historical arguments over whether FDR’s New Deal worked now form an important part of American debates over current monetary and fiscal policy in general, and the US Federal Reserve’s policy of quantitative easing in particular.
In Europe, where national economic failure once led to the collapse of democracy itself, people are now asking if it could happen again.
Some see another Weimar moment, reminiscent of the belt-tightening and surging unemployment that characterized Heinrich Brüning’s Germany and helped to bring the Nazis to power.
At first sight, the reasons to dismiss this scenario seem overwhelming.
If the European Union has done one thing, it is to make war between France and Germany unthinkable.
Thus, the entire geopolitical context is far less threatening than it was in the 1930’s.
Moreover, the ideological extremes that excited and polarized the continent back then are hardly in vogue today.
Discredited by the collapse of the USSR and the Soviet bloc in Eastern Europe, communism is effectively moribund, and its core constituencies – where communist parties manage to hang on – are aging and incapable of reproducing themselves.
As for fascism, its political heirs in countries like Italy and France must contend with the stigma of the past.
Vivid memories of total war and genocide, frequently revived, hinder any revival of the totalitarian parties of the right.
This is also why we are unlikely to see the return of military regimes in southern Europe or anywhere else; the suffering that they caused is too vivid in the collective memory.
The last thing the Portuguese or Greek armies want to do is assume responsibility for governing.
Then there is the most fundamental – and hence easily overlooked – difference of all.
In the 1930’s, politics attracted the masses because people believed in the future.
Millions marched for the great causes of the day, and hundreds of thousands joined political parties – often for life.
Today’s marches and demonstrations are a feeble reminder of those times, while parties everywhere are hemorrhaging members.
But it would be rash to conclude that the interwar crisis has nothing to teach us. Quite the contrary.
In the 1930’s, the US and Britain were among the few countries in the world where multi-party democracy survived.
Almost everywhere else veered sharply to the right.
In Germany and Italy, fascist parties came out on top, while elsewhere, dictators were backed by armies or kings.
Analyzing these events much later, historians constructed elaborate typologies to distinguish between fascist and merely authoritarian regimes.
These differences were not trivial.
But much more important was what the fascist and authoritarian regimes shared – all were beneficiaries of a sweeping collapse of the legitimacy of democratic politics.
They all thereby indicated that democracy is not some kind of natural condition, nor some end-point of history whose stability and permanence can be taken for granted.
On the contrary, democracy’s strength lies not just in its character, but in its achievements as well.
Its popularity can ebb quickly when it becomes associated with crippling and systemic failure, whether on the battlefield – as in France in 1940 – or in the corporate boardroom and on the factory floor.
Those who doubt that this could happen again should consider the European country hardest hit in the current crisis – Greece.
After the colonels’ junta there fell in 1974, a democratic system sprang up.
Two main parties began to alternate in power and European integration acted as a stabilizer for domestic politics.
It is not doing so now.
On the contrary, Greece’s creditors – and its own politicians – have handled the crisis in a way that has thrown the entire constitutional achievement of the past four decades into doubt.
Indeed, the political turmoil caused by the crisis has broken the back of the old two-party system.
Between 2010 and 2012, the center-left PASOK was in government, doing whatever it took to preserve Greece’s membership of the euro and ward off formal default.
The result was that its electoral support plunged from 44% to 12%.
It is now a wizened and humiliated husk of a party.
The entire center left is in flux, and new parties will probably come and go.
The center-right New Democracy has also lost ground, though not as badly.
But a new force has emerged on its flank: Golden Dawn, a frankly neo-Nazi party that is spreading violence on the streets and in public life, and seeing its popular support increase as a result.
The catalyst of Golden Dawn’s sudden rise is not Greece’s large population of illegal immigrants – their presence predates the rightward shift by many years – but rather the massive rise in poverty and unemployment over the last three years and, above all, growing popular anger with the political class as a whole.
In short, the crisis has produced a deep delegitimization of Greece’s democratic politicians and their supposed achievements.
This is not Weimar.
But it does illustrate how rapidly in early twenty-first-century Europe democracy has been undermined through the endless application of the economics of austerity, and by the failure of political leadership at home and abroad.
What might replace democracy is another matter.
Austerity and the Modern Banker
WASHINGTON, DC – Santa Claus came early this year for four former executives of Washington Mutual (WaMu), a large US bank that failed in fall 2008.
The Federal Deposit Insurance Corporation (FDIC) had brought a lawsuit against the four, actions that included taking huge financial risks while “knowing that the real estate market was in a ‘bubble.’” The FDIC sought to recover $900 million, but the executives have just settled for $64 million, almost all of which will be paid by their insurers; their out-of-pockets costs are estimated at just $400,000.
To be sure, the executives lost their jobs and now must drop claims for additional compensation.
But, according to the FDIC, the four still earned more than $95 million from January 2005 through September 2008.
So they are walking away with a great deal of cash.
This is what happens when financial executives are compensated for “return on equity” unadjusted for risk.
The executives get the upside when things go well; when the downside risks materialize, they lose nothing (or close to it).
At the same time, their actions – and similar actions by other bankers – are directly responsible for both the run-up in housing prices and the damaging collapse that followed.
That collapse has impacted non-bankers in many negative ways, including through the loss of more than eight million jobs.
It is also leading to austerity – taxes are increasing and government spending is falling at the local and state level around the country.
A difficult fiscal conversation still lies ahead at the federal level, but cuts and contractions of various types seem likely.
Some people argue that Americans need to tighten their belts.
That’s an interesting discussion, particularly at a time with unemployment is still above 8% (with recent declines largely the result of many jobless workers’ decision to stop looking and drop out of the labor force altogether).
Precipitate austerity is hardly likely to help the economy find its way back to higher employment levels.
But what about government support for the big banks?
Is this contracting in the light of our current fiscal pressures?
Unfortunately, it is not; much government support remains, implicitly through allowing banks to be “too big to fail,” and explicitly through various kinds of backing provided by the Federal Reserve.
The rationale – or perhaps we should call it ideology – behind supporting big banks is that they are needed for the economy to recover.
But this position looks increasingly doubtful when the banks are sitting on piles of cash while creditworthy consumers and businesses are reluctant to borrow.
The same situation exists in Europe today, where the reality is even starker.
Banks are receiving ever-larger bailouts, while countries that borrowed are cutting social programs and face rising social tensions and political instability as a result.
Countries like Greece, Italy, and arguably Portugal over-borrowed, and now their citizens face severe consequences.
But the bankers face no consequences whatsoever for over-lending.
To be sure, some major European financial institutions may now face difficulties, and – who knows – perhaps some of their executives will end up being fired.
But does anyone think that the people who ran European banks into the ground will leave their positions with anything less than considerable wealth?
There is no real austerity – now or possibly in the future – for leading bank executives.
The protesters of “Occupy Albany” issued a powerful consensus statement recently, which reads in part:
“The interests of those who purchase influence are rewarded at the expense of the People, from whom the government’s just power is derived.
We believe that this failure in our system is at the core of many interconnected issues we face as a society, and its resolution is key to a just future.
We therefore demand true democracy, decoupled from the corrosive influence of concentrated economic power, and we call all who share in this common goal to stand with us and take action toward this end.”
Big banks represent the ultimate in concentrated economic power in today’s economies.
They are able to resist all meaningful reform that could really change their compensation schemes.
Their executives want to get all the upside while facing none of the true downside.
But capitalism without the prospect of failure is not any kind of market economy.
We are running a large-scale, nontransparent, and dangerous government subsidy scheme for the benefit primarily of a very few, extremely wealthy people.
Jon Huntsman, a candidate for the Republican presidential nomination, is addressing this directly – insisting that we should force the largest banks to break up and to become safer.
No other candidate for the presidency is seriously confronting this issue head-on: just saying “we’ll let them fail” is no kind of answer when the failure of megabanks would cause so much damage.
We should learn from both the WaMu and the Occupy movement.
In both cases, the lesson is the same: concentrated financial power is a gift that keeps on giving – but not to you.
Back to the Brink for the Eurozone?
ISTANBUL – When European Central Bank President Mario Draghi announced in late July that the ECB would “do whatever it takes” to prevent so-called “re-denomination risk” (the threat that some countries might be forced to give up the euro and reintroduce their own currencies), Spanish and Italian sovereign-bond yields fell immediately.
Then, in early September, the ECB’s Council of Governors endorsed Draghi’s vow, further calming markets.
The tide of crisis, it seemed, had begun to turn, particularly after the German Constitutional Court upheld the European Stability Mechanism, Europe’s bailout fund.
Despite the ECB’s imposition of conditionality on beneficiaries of its “potentially unlimited” bond purchases, financial markets across Europe and the United States staged a major rally.
It seems, however, that the euphoria was short-lived.
Yields on Spanish and Italian government bonds have been inching up again, and equity investors’ mood is souring.
So, what went wrong?
When I welcomed Mario Draghi’s strong statement in August, I argued that the ECB’s new “outright monetary transactions” program needed to be complemented by progress toward a more integrated eurozone, with a fiscal authority, a banking union, and some form of debt mutualization.
The OMT program’s success, I argued, presupposed a decisive change in the macroeconomic policy mix throughout the eurozone.
There has been some progress, albeit slow, toward agreement on the institutional architecture of a more integrated eurozone.
The necessity of a banking union is now more generally accepted, and there is a move to augment the European budget with funds that could be deployed with policy or project conditionality, in addition to ESM resources.
(Germany and its northern European allies, however, insist that this be an alternative to some form of debt mutualization, rather than a complement to it.)
The ESM, supported by the ECB, could become a European version of the International Monetary Fund, and the new funds in the European budget could become, with support from the European Investment Bank, Europe’s World Bank.
All of this will take time, but there is some movement in the right direction.
Where there has been virtually no progress at all is in the recalibration of the macroeconomic policy mix.
The prevailing strategy in Europe remains simply to force internal devaluation on the southern countries, with excessive austerity aimed at causing severe wage and price deflation.
While some internal devaluation is being achieved, it is producing so much economic and social dislocation – and, increasingly, political upheaval – that there is no supply response, despite the accompanying structural reforms.
Indeed, the deflationary spiral, particularly in Greece and Spain, is causing output to contract so rapidly that further spending cuts and tax increases are not reducing budget deficits and public debt relative to GDP.
And Europe’s preferred solution – more austerity – is merely causing fiscal targets to recede faster.
As a result, markets have again started to measure GDP to include some probability of currency re-denomination, causing debt ratios to look much worse than those based on the certainty of continued euro membership.
While all of this is happening in Europe’s south, most of the northern countries are running current-account surpluses.
Germany’s surplus, at $216 billion, is now larger than China’s – and the world’s largest in absolute terms.
Together with the surpluses of Austria, the Netherlands, and most non-eurozone northern countries – namely, Switzerland, Sweden, Denmark, and Norway – northern Europe has run a current-account surplus of $511 billion over the last 12 months.
That is larger than the Chinese surplus has ever been – and scary because it subtracts net demand from the rest of Europe and the world economy.
Inflicting excessive austerity on the southern European countries while limiting their exports by restricting effective demand in the north is like administering an overdose to a patient while withholding oxygen.
The political and economic success of southern Europe’s much-needed structural reforms requires the proper dose and timing of budgetary medicine and buoyant demand in the north.
The northern countries argue that permitting wage growth and boosting domestic demand would reduce their competitiveness and trade surplus.
But that misses the entire point: surplus countries must contribute no less than deficit countries to global and regional rebalancing, because the world economy cannot export to outer space.
This argument was always emphasized when the Chinese surplus was deemed excessive, but it is virtually ignored when it comes to northern Europe.
If conservative politicians and economists in Europe’s north continue to insist on the wrong overall macroeconomic policy mix in Europe, they could yet bring about the end of the eurozone, and, with it, the end of the European project of peace and integration as we have known it for decades.
This is not to argue against the need for vigorous structural and competitiveness-enhancing reforms in the south; it is to give those reforms a chance to succeed.
Austerity Politics, Then and Now
PRINCETON – Britain’s policy of fiscal consolidation, recently announced by Chancellor of the Exchequer George Osborne, sent shock waves around the world.
Osborne argued that Britain was on the brink: that there was no alternative to his policy if the country was to avoid a massive crisis of confidence.
Other countries, such as Greece, needed to have a full-blown crisis in order to prompt such adjustment measures, whereas Britain was acting prudently and preemptively.
If Britain, with a relatively low share of public debt to GDP (64.6%) is worried, the implication is that many other countries should be much more concerned.
But drastic attempts at fiscal consolidation immediately evoke memories of the Great Depression.
Andrew Mellon, the United States Treasury Secretary at the time, talked about liquidating workers, farmers, stocks, and real estate in order “to purge the rottenness out of the system.”
In Britain back then, Philip Snowden, a small man with a narrow, pinched face, who needed a cane to walk, seemed to want to remake the British economy in his physical image.
Given these historical analogies, a slew of heavyweight Keynesian critics are warning that the world is about to repeat all the disasters caused by bad fiscal policy in the 1930’s.
But this interpretation of the Great Depression, common though it is, is misguided.
In the first place, the critics get their history wrong.
US President Herbert Hoover’s administration did not initially respond to the depression by emphasizing the need for fiscal austerity.
On the contrary, Hoover and other figures argued in a perfectly modern, Keynesian fashion that large-scale public-works programs were needed to pull the economy out of the trough.
Moreover, today’s Keynesians ignore the urgency behind the depression-era concern with balanced budgets.
When the Hoover administration did swing to fiscal tightening, it was responding to pressures from the capital and foreign-exchange markets, which in turn were responding to the crises in Latin America and Central Europe, where public finances had been a major part of the problem.
Beginning in September 1931, the markets became nervous about the US, causing large outflows from American banks – and thus from the dollar.
The Depression had rendered capital markets incapable of absorbing large quantities of government (or, indeed, any other) debt.
As a result, fiscal consolidation appeared to be the only way to restore confidence.
Great Britain in 1931 already grasped this logic.
Snowden was worried that any attempt by the British government to borrow would fail, which would constitute an “admission of national bankruptcy.”
That September, concerns about public debt and the British government’s ability to enforce austerity led to a run on the pound.
Rather than trying to mount a last-ditch defense of the fixed exchange rate, the government, at the suggestion of the Bank of England, agreed to abandon the gold standard and devalue the pound.
A third problem with the conventional Keynesian interpretation is that the balanced-budget approach during the Great Depression did actually work.
It calmed markets, and Britain’s departure from the gold standard freed monetary policy from its previous constraints, and allowed a monetary stabilization.
The country was no longer subject to imported deflation via the fixed exchange rate.
But an equally important part of the recovery process was that Britain had left gold with a more or less balanced budget.
That was why monetary policy could be managed with greater flexibility.
The balanced budget thus allowed Britain to have a strong recovery, ensuring that the 1930’s were a much better decade for the British economy than the 1920’s had been.
Finally, those who view the Great Depression as fundamentally a product of tight fiscal policies and “Treasury orthodoxy” overlook the much greater culpability of a fixed exchange-rate regime for the transmission of bad monetary policy, and thus for fueling the contraction.
The major question today should be whether the failure of capital markets (and the implications for government debt) after 2007 has been as severe as during the Great Depression.
At the moment, there has not been widespread revulsion against all government debt, and some countries today clearly have better access than others to capital markets, enabling them to finance their deficits externally.
The debate about room for fiscal maneuver in practice soon becomes a debate about whether countries that have easily financed debt in the past can automatically continue to do so.
We are still in the last stages of a bubble in government debt that arose in the first stage of the financial crisis from the “flight to security” of US Treasuries.
When that bubble collapses, it will hit not just the weaker countries – the equivalent of sub-prime mortgages – but also stronger creditors.
In the Great Depression, one of the big surprises was the devastating abruptness with which markets turned on the US.
In the late summer of 1931, the dollar, alongside the French franc, appeared to be the strongest currency in the international system.
That precedent should serve as a warning of how vulnerable governments and their finances can rapidly become, and of how fiscal policy can stand in the way of a monetary approach oriented toward stability.
Greece in the spring of 2010 sent a wake-up call to Great Britain.
The British response should prompt other industrial economies, above all the US, to tackle their long-term fiscal weaknesses.
Austerity under Attack
BRUSSELS – Europe seems to be obsessed with austerity.
Country after country is being forced by either the financial markets or the European Union to start cutting its public-sector deficit.
And, as if this were not enough, 25 of the 27 EU member states have just agreed on a new treaty (called a “fiscal compact”) that would oblige them never to have a cyclically adjusted budget deficit of more than 0.5% of GDP.
(For comparison, the United States’ budget deficit in 2011 was close to 8% of GDP).
But, as the European economy risks falling into recession, many observers are asking whether “austerity” could be self-defeating.
Could a reduction in government expenditure (or an increase in taxes) lead to such a sharp decline in economic activity that revenues fall and the fiscal position actually deteriorates further?
This is highly unlikely, given the way our economies work.
Moreover, if it were true, it would follow that tax cuts would reduce budget deficits, because faster economic growth would generate higher revenues, even at lower tax rates.
This proposition has been tested several times in the US, where tax cuts were invariably followed by higher deficits.
In Europe, the concern today is instead with the debt/GDP ratio.
The worry here is that the GDP drop resulting from “austerity” might be so large that the debt ratio increases.
This matters, because investors often use the debt ratio as an indicator of financial sustainability.
Thus, a lower deficit might actually heighten tensions in financial markets.
However, a lower deficit must lead over time to a lower debt ratio, even if this ratio worsens in the short run.
After all, most models used to assess the economic impact of fiscal policy imply that a cut in expenditure, for example, lowers demand in the short run, but that the economy recovers after a while to its previous level.
So, in the long run, fiscal policy has no lasting impact (or only a very small one) on output.
This implies that whatever short-run negative impact lower demand may have on the debt ratio should be offset later (in the medium to long run) by the rebound in demand that brings the economy back to its previous output level.
Moreover, even assuming that the impact of a permanent cut in public expenditure on demand and output is also permanent, the GDP reduction remains a one-off phenomenon, whereas the lower deficit continues to have a positive impact on the debt level year after year.
Notice that this conclusion was reached without any recourse to what Paul Krugman and others have derided as the “confidence fairy.”
In the US, it might indeed be unreasonable to expect that a lower deficit translates into a lower risk premium – for the simple reason that the US government pays already ultra-low interest rates.
But, even without any confidence effects, the bipartisan Congressional Budget Office has concluded that, while cutting the US deficit does lower demand, it still leads reliably to a lower debt ratio.
This should be all the more true for eurozone countries, like Italy or Spain, that are now paying risk premia in excess of 3-4%.
For these countries, the confidence fairy has become a monster.
The decisive question then becomes: What matters more, the impact of deficit cutting on the debt/GDP ratio in the short run or in the long run?
Prospective buyers of Italian ten-year bonds should look at the longer-term impact of deficit cutting on the debt level, which is pretty certain to be positive.
Of course, some market participants might not be rational, demanding a higher risk premium following a short-term deterioration of the debt ratio.
But those concentrating on the short term risk losing money, because the risk premium will eventually decline when the debt ratio turns around.
Abandoning austerity out of fear that financial markets might be short-sighted would only postpone the day of reckoning, because debt ratios would increase in the long run.
Moreover, it is highly unlikely that Italy, for example, would pay a lower risk premium if it ran larger deficits.
It would be dangerous for the eurozone’s highly indebted countries to abandon austerity now.
Any country that enters a period of heightened risk aversion with a large debt overhang faces only bad choices.
Implementing credible austerity plans constitutes the lesser evil, even if this aggravates the cyclical downturn in the short run.
Mengimani Perubahan Iklim (No Agnostics in the Climate Foxhole)
SYDNEY – Baru-baru ini dalam penerbangan yang saya tempuh dari Los Angeles ke Sydney selama 14.5 jam, saya berkesempatan membaca kumpulan tulisan kolumnis Charles Krauthammer yang berjudul Things that Matter.
Cocok sekali sebagai bacaan selama perjalanan yang melelahkan.
Selama beberapa tahun terakhir saya sering membaca dan menyukai tulisan Krauthammer, namun ada satu hal dalam buku beliau yang menurut saya sangat meresahkan: cara beliau menggambarkan dirinya sebagai seorang “agnostik” perubahan iklim.
Beliau mengatakan “nalurinya yakin bahwa melepaskan karbon dioksida dalam jumlah besar ke atmosfer tidak akan menghasilkan kebaikan,” akan tetapi di saat yang sama beliau “sangat percaya bahwa seseorang yang meyakini akibat dari tindakan tersebut hanya bicara omong kosong.”
Kata yang menurut saya paling menjengkelkan adalah “agnostik” – bukan saja karena Krauthammer adalah ilmuwan terlatih, namun juga karena istilah tersebut digunakan berulang kali oleh mantan Perdana Menteri Australia John Howard ketika beliau berbicara di hadapan sekelompok penyangkal perubahan iklim (climate-change deniers) di London pada akhir tahun 2013. Howard berkata kepada sekelompok orang skeptis ini, “salah satu permasalahan dalam debat ini timbul karena beberapa orang fanatik yang terlibat dalam gerakan tersebut memandangnya sebagai pengganti agama.”
Sebagaimana diketahui oleh Howard dan Krauthammer juga, topik mengenai perubahan iklim bukan persoalan agama, tapi ilmu pengetahuan.
Berdasarkan survei di tahun 2013 atas sejumlah publikasi tinjauan sejawat mengenai perubahan iklim, sekitar 97% ilmuwan mendukung pandangan bahwa manusia mengakibatkan perubahan iklim.
Siapapun yang familiar dengan proses ilmiah pasti paham bahwa peneliti dididik untuk tidak bersepakat atau menentang hipotesa dan kesimpulan orang lain.
Kesepakatan yang dicapai atas kebesaran ini ibaratnya sama dengan memperoleh fakta ilmiah yang diakui.
Mengingat bahwa Krauthammer bahkan mengakui atmosfer yang terisi penuh oleh karbon dioksida “tidak akan berakibat baik,” langkah logis berikutnya dalam perdebatan ini ialah menentukan cara terbaik untuk mengatasi masalah.
Sebagai seorang ahli ekonomi, saya memilih sistem cap-and-trade berdasarkan lelang guna menetapkan harga karbon.
Namun saya juga memahami adanya potensi manfaat dalam upaya-upaya pengaturan seperti penetapan target energi terbarukan, larangan penggunaan bohlam pijar, dan perintah penggunaan biofuel.
Namun saya tidak bisa terima jika seseorang memilih diam tetapi mengklaim orang lain yang mengada-ada, saat kita justru menawarkan solusi.
Beruntungnya opini-opini bernada sama dengan Krauthammer semakin jarang ditemui.
Tentunya masih ada penolakan, contohnya Perdana Menteri Australia Tony Abbott, yang menggantikan pajak karbon (carbon tax) dengan rencana memungut pajak dari warga negaranya untuk membayar pencemar agar mengurangi emisi.
Sebagai suatu kebijakan, gagasan ini tidak adil, tidak efisien, dan tidak mungkin bisa menurunkan emisi pada laju yang cukup untuk memenuhi persyaratan perjanjian internasional tentang perubahan iklim yang diharapkan bisa dicapai di Paris bulan Desember nanti.
Pertanda pasti terjadinya perubahan mentalitas adalah meningkatnya pengakuan lembaga keuangan bahwa pinjaman dan investasi bisa jadi terlalu sering terpapar risiko-risiko perubahan iklim.
Risiko ini meliputi bencana alam, bertambahnya frekuensi cuaca ekstrim, upaya pemerintah mengurangi emisi gas rumah kaca, dan dampak negatif revolusi teknologi pada energi terbarukan, efisiensi energi, dan teknologi alternatif.
Menurut organisasi Asset Owners Disclosure Project, yang saya ketuai, 500 asset owners global terkemuka sangat terkena bahaya perubahan iklim.
Lebih dari setengah investasi mereka dilakukan pada industri-industri yang terpengaruh dampak buruk perubahan iklim; kurang dari 2% yang berinvestasi pada industri rendah-karbon.
Sebagai akibatnya terdapat risiko investasi dan properti tersebut menjadi “terdampar”, seiring dengan kebijakan atau keadaan pasar menurunkan nilai infrastruktur,, properti lain, dan cadangan bahan bakar fosil.
Ketika krisis keuangan global terjadi di tahun 2008, Hank Paulson, Menteri Keuangan Amerika Serikat, pernah memperingatkan dengan menyampaikan bahwa risiko-risiko krisis keuangan yang diakibatkan oleh iklim dapat mengkerdilkan risiko-risiko krisis subprima.
Harga batubara, contohnya, merosot hingga setengah dari tingkat tertinggi dan bisa menurun lagi.
Dampaknya adalah saham perusahaan-perusahaan batubara turun sebesar 90%, sehingga asset owners berebut ingin melepaskannya.
Sebaliknya, investasi pada perusahaan seperti Tesla Motors – kini telah mengembangkan baterai yang dapat diisi ulang diperuntukkan bagi pemakaian di rumah, yang dapat mengarah pada kenaikan besar-besaran jumlah rumah tangga yang beralih ke penggunaan tenaga surya – terlihat jauh lebih menarik.
Seiring dengan penyerapan kesadaran ini ke dalam pasar, asset owners tengah melindungi taruhan mereka (hedging their bets) dengan menambah investasi mereka pada industri dan perusahaan rendah karbon seperti Tesla.
Ke depannya kondisi ini akan menciptakan dampak signifikan pada dana investasi global.
Krauthammer mungkin merasa saya bicara omong kosong, namun saya yakin bahwa segera nantinya beliau – dan orang lain yang berpandangan sama dengannya – akan terkejut.
Austria: Values and Responsibilities
VIENNA: The formation of a new government coalition in Austria has given rise to international criticism.
As Federal Chancellor of the Republic of Austria I take those concerns very seriously.
However, in studying international media reports, I cannot but notice that Austria has repeatedly been described in a rather undifferentiated and unbalanced way; a way that stands in sharp contradiction to the realities in our country.
Over the last fifty years, Austria has always been a responsible and reliable partner in Europe and the entire international community.
It will continue to live up to her traditional values and responsibilities, based on democracy, the rule of law, respect for human rights, openness, tolerance, humanitarian solidarity, a sense of duty and reliability.
These principles are reiterated in the Preamble to the Government Program.
It was signed, on 3 February 2000, in the presence of Federal President Thomas Klestil, by myself and the chairman of the Austrian Freedom Party, Jörg Haider - who remains Governor of Carinthia and did not join the Federal Government.
This document is binding on both of us as signatories, on our respective political parties, and on their democratically elected representatives.
It will guide the future work of the Coalition Government.
Austria is strongly committed to the principles of liberty, democracy, respect for human rights, and the rule of law that are common to all EU member states.
Significantly, two thirds of the Austrian electorate cast their votes in favor of membership in the European Union in 1994.
This support was considerably higher than in any of the other fourteen member states when they were joining the European Union.
In Austria's view, the Transatlantic Partnership, which has always been characterized by mutual respect and trust, will also have a special significance in ensuring future peace, stability, and prosperity.
Austria takes pride in its international solidarity with the victims of political repression, war, and expulsion.
We opened our doors in 1956 and 1968 during the crises in Hungary and Czechoslovakia, and again in the 1990s when more than 100 000 refugees from the Balkans found a new home in our country.
As a proportion of Austria=s population of about 8 million, the number of Balkan refugees alone would be equivalent to over 1 million refugees in Germany and over 3 million in the United States.
Thus, over the last decades, Austria - more than most other countries - has demonstrated her profound social and humanitarian responsibility.
Austria's past calls for an intensely critical and sensitive approach to injustice, murder, and terror under the Nazi regime.
We have taken important steps to deal with this past, and the new Federal Government will continue on this path without hesitation.
Based on the findings of the interim report of the Austrian Historians' Commission, we will seek prompt compensation for former forced laborers, and we expect the companies concerned also to recognize their responsibilities.
To expedite matters, I have appointed a special representative for the question of forced and slave labor under the Nazi regime.
Mrs. Maria Schaumayer, the former head of the Austrian central bank, will head a new office to handle the issue of compensating the victims.
Among my government=s other commitments, compensation of aging victims of the Holocaust, who live in difficult financial circumstances, will be among our highest priorities in the next few months.
The Austrian Government will also support open access to archives in federal agencies and advocate a similar policy for non-governmental entities.
We will encourage Austrian insurance companies to participate in the work of the International Commission on Holocaust Era Insurance Claims.
We will seek to improve the practical application of the Art Restitution Law of 1998 and encourage similar restitution steps among local and regional governmental bodies.
My Government is deeply committed to the protection of human rights and to combating racism and discrimination.
We have a highly developed national human rights legislation and practice, as well as a strong and independent judiciary.
Austria is party to practically all major international human rights treaties and has traditionally played an active part in their drafting.
We have not only ratified the European Human Rights Convention, we also made it a part of our own Constitution.
This means that anyone residing in Austria can file a complaint to the European Court for Human Rights, whose judgements are binding on the government.
Austria is also constitutionally bound by the International Convention on the Elimination of All Forms of Racial Discrimination.
As Federal Chancellor of the Republic of Austria I will do my utmost do ensure the strict implementation of the Preamble and the Government Program (which can be found on the website of the Austrian Federal Government http://www.austria.gv.at.)
I myself and the other members of the Austrian Federal Government expect to be judged according to our performance rather than on the basis of prejudice.
Russia and China: The Movie
NEW YORK – The times we live in are often most clearly reflected in the mirror of art.
Much has been written about post-communism in Russia and China.
But two recent films, Jia Zhangke’s A Touch of Sin, made in China in 2013, and Andrey Zvyagintsev’s Leviathan, made in Russia in 2014, reveal the social and political landscapes of these countries more precisely than anything I have seen in print.
Jia’s movie is episodic; four loosely linked stories about lone acts of extreme violence, mostly culled from contemporary newspaper stories.
Leviathan is about a decent man whose life is ruined by the mayor of his town in collusion with the Russian Orthodox Church and a corrupt judiciary.
Both films are visually stunning, despite their stories’ bleakness.
The dark skies over the northern Russian coast in Leviathan look ravishing, and Jia even manages to make the concrete and glass jungle of Shenzhen, the monster city between Guangzhou and Hong Kong, look gorgeous.
The other thing both films share is a fascination with mythical stories, the Book of Job in Leviathan, and martial-arts fiction in A Touch of Sin.
Real estate plays a major part in both movies.
In the first episode of A Touch of Sin, the local boss has become a private-plane-owning billionaire by stripping and selling all of his region’s collective assets.
Everything in this new China – where the Chinese Communist Party (CCP) still rules, but the ideas of Karl Marx are as dead as they are in Russia – is for sale, even the trappings of its Maoist past.
In one scene, we see prostitutes in a nightclub titillating overseas Chinese businessmen by parading up and down in sexy People’s Liberation Army uniforms.
The story of Leviathan focuses on the house built by a simple mechanic named Nikolay.
He is robbed of his property by the corrupt mayor, who is paid by the Orthodox Church for the right to build a new church on Nikolay’s land.
Nikolay is disposed of by having him framed for his wife’s murder and tried by a crooked court.
The importance of real estate in both films is no coincidence.
Property, construction, and land are the common currencies of power in mafia societies – in China and Russia no less than in Sicily.
One reason China has been transformed into a gigantic building site, with huge new cities emerging almost overnight, is that this drives a red-hot and highly corrupt economy, ruled by a Leninist party that has monetized political power by asset-stripping and construction.
It is irrelevant that President Vladimir Putin’s United Russia Party, unlike the CCP, makes no claim to any form of Marxist ideology.
The way both governments operate is quite similar: party bosses, tycoons, and corrupt bureaucrats divide the spoils, while promoting chauvinism and “traditional values” – whether those of the Orthodox Church or Confucianism.
Judges are bought or intimidated to ensure that bosses remain above the law.
Putin’s party was elected in Russia, as was President Recep Tayyip Erdoğan’s Justice and Development Party in Turkey, Prime Minister Viktor Orbán’s Fidesz in Hungary, and President Abdel Fattah el-Sisi’s military regime in Egypt.
The CCP was not.
But this, too, is largely irrelevant.
What these governments share is the fusion of capitalist enterprise and political authoritarianism.
This political model is now seen as a serious rival to American-style liberal democracy, and perhaps it is.
But during the Cold War, authoritarian capitalism, usually under military regimes, was anti-Communist and very much on America’s side.
South Korea’s strongman, Park Chung-hee, current President Park Geun-hye’s father, was in many ways a pioneer of the type of society that we now see in China and Russia.
So was Chile’s General Augusto Pinochet.
Because the dictatorships in America’s client states ended more or less when the Cold War did, and were replaced by liberal democracies, many were lulled into the comforting belief that liberal democracy and capitalism would naturally – even inevitably – come together everywhere.
Political freedom is good for business, and vice versa.
This great twentieth century myth has now been shattered.
Orbán claimed earlier this year that liberal democracy was no longer a viable model.
He cited China and Russia as more successful countries, not for ideological reasons, but because he thinks that they are more competitive in today’s world.
There are reasons to doubt this, of course.
The Russian economy is far too dependent on oil and other natural resources, and the legitimacy of China’s one-party system could collapse quickly in an economic crisis.
The way that illiberal regimes use the law for their own ends will not inspire the confidence of investors, either – at least not in the long run.
And yet, for now, the societies depicted so acidly in Leviathan and A Touch of Sin continue to look good in the eyes of many people who are disillusioned with Europe’s economic stagnation and America’s political dysfunction. Western businessmen, artists, architects, and others who need large amounts of money for expensive projects enjoy working with authoritarian regimes that “get things done.”
Illiberal thinkers on the far right and left admire strongmen who stand up to America.
A Touch of Sin has been shown to great acclaim all over the world, but not in China.
Leviathan, by contrast, has been submitted as the official Russian entry for the Oscars.
Perhaps China’s rulers are less sure of themselves than Putin.
Or perhaps Putin is just a bit cannier.
His followers in Russia are unlikely to see, let alone be influenced by, an art film, and this sliver of Russian free expression might just persuade foreigners that there is still some liberalism left in Putin’s authoritarian democracy – at least until that, too, ends up as a shattered illusion.
Authoritarians at the Gate
Last Thursday, judges at Indonesia's Central Jakarta Court sentenced me to one year in prison.
As the editor-in-chief of Tempo Weekly Newsmagazine , I am guilty, according to the court, of defaming a business tycoon named Tomy Winata by implying his possible involvement in a fire at Jakarta's South-East Asia textile market, and of fomenting riots by disseminating lies.
Does my case, and others like it, portend the end of yet another short-lived experiment with democracy in Indonesia?
The "riot" that I allegedly fomented occurred in March last year, when almost two hundred thugs claiming to be Winata's followers attacked Tempo's office, threatened to burn down the building, harassed staff, and injured one reporter.
Trying to help resolve the situation peacefully, I was persuaded to negotiate at the Central Jakarta Police Station, but found to my horror that the mob leaders controlled the station.
I was punched and kicked as the police looked the other way.
Fortunately, many journalists came to our rescue with tape recorders and cameras rolling.
Their broadcasts caused a public outcry, which forced our parliament to organize a public hearing.
The National and Jakarta police chiefs were called and, under massive public pressure, the leaders of the mob were criminally charged.
But Winata himself eluded police investigation, merely by claiming publicly that his followers acted without his prior knowledge and consent.
He then filed criminal charges of his own, against Ahmad Taufik, who wrote the article, Teuku Iskandar Ali, who edited it, and me.
The yearlong court proceedings were marked by a series of suspicious developments, all favoring Winata.
First, the case built by the police and state prosecutor contained documents that were so blatantly falsified that the police indicted two officers.
But the court rejected our request that proceedings be delayed until the legality of the state's case could be clarified.
The case against the officers involved appears to be going nowhere.
On the contrary, one of them has been promoted to command the newly formed (and US-funded) Jakarta Anti-Terror Unit.
The other has reportedly been sent to the police staff school for advanced training.
Then, in the sixth month of the case, the Head Judge in the three-judge panel was suddenly promoted to become the head of a city court an hour from Jakarta.
One of my lawyers noted that in his 35 years experience at the court, he had never seen a Head Judge replaced in an ongoing case.
In fact, despite her promotion, the judge continued to preside over another case in the same building.
A judge who had previously ruled against Tempo in Winata's civil suit filled her vacancy.
Finally, when Winata testified, he perjured himself by denying that Tempo had interviewed him.
A recording of the telephone interview was played in court; sworn testimony was heard from the reporter who conducted the interview and from two editors who witnessed it; the official record from the telephone company was submitted as evidence of the call; and an expert witness concluded that the voice on the recording belonged to Tomy Winata.
But the judges denied Tempo's request that Winata be arrested and tried for perjury, telling us to report it to the police, which we did.
The judges then denied our request for a postponement of the court decision until Mr. Winata's perjury case was resolved.
Given such flawed proceedings, my conviction and prison sentence come as no surprise.
But I remain hopeful that we will prevail in the end, when higher courts hear Tempo's appeal.
Indonesia's courts are cleaner at the top, and the Head of the Supreme Court is a staunch advocate of democracy and press freedom.
Tempo's case could become a landmark victory for our democracy, like the US Supreme Court's famous decision in The New York Times v. Sullivan .
By raising the bar for defamation charges, that decision ensures that American journalists can hold public officials accountable.
No country knows better than Indonesia that free speech and a free press are proven indicators of democratic development, and that criminalizing journalists is an early symptom of authoritarianism.
Indonesia was a liberal democracy in the 1950's, before President Sukarno, supported by the military, began a crackdown on the press in 1956.
With critical voices silenced, consolidating unchecked power became easier and, in July 1959, Sukarno decreed the beginning of "Guided Democracy."
For the first few years after Sukarno's fall in 1966, all the benefits of genuine democracy, including freedom of the press, were restored (except for the communists).
But President Suharto's regime began another press crackdown in the early 1970's, ultimately banning various media and jailing many journalists.
With the press under control, other political rights were quickly curtailed and Indonesian democracy failed again.
Since Suharto's fall in 1998, Indonesia has become the third largest democratic country in the world and the largest democratic Muslim community in history.
Two parliamentary elections and two direct presidential elections - including the latest presidential run-off - have been free, fair, and peaceful, proving that Islam and democracy can coexist.
Democracy's enemies, however, never rest.
Radical Islamic groups have engaged in indiscriminate bombings, while groups with strong authoritarian tendencies have made inroads into President Megawati's inner circle.
But Mrs Megawati has just been defeated in her bid for reelection.
Will newly elected President Susilo continue to prosecute journalists?
Will my conviction, and the trials and convictions of other journalists, mark the beginning of the end of Indonesia's hard-won third democracy?
The answer lies in the support that Indonesian pro-democracy activists can generate domestically and internationally.
To lose Indonesia - a potential beacon of hope to all pro-democracy activists in the world Muslim community - would be a terrible defeat.
Automatic Savers
People are fascinated by wealth.
They enjoy watching the wealthy, savoring the thought of their fine homes, luxurious vacations, fancy cars, and gourmet dining.
But if you infer from this that people spend a lot of time planning the lifetime accumulation of their own wealth, you would be wrong.
Most people do not seem to think very hard about how much to save from their income, or about how big the differences in their wealth could be in their later years if they just adjusted their saving rate today.
Most people just pay off their mortgage, make the mandatory contributions to their state or private pension (if they have one), and keep some money for short-run contingencies.
That’s about it.
The economist Frank Ramsey, in a famous article published in 1928, said that people have a “weakness of the imagination” about how their actions today affect their own future.
He said that if people thought about it correctly, they might well conclude that they should save half their income.
That way, the accumulated wealth might make them very happy in their later years.
But, mostly, they don’t even think about that possibility.
Richard Thaler, a contemporary economist, spoke in 1980 of an “endowment effect.”
Even though people may admire other things, they act as if they are mostly happy enough with whatever they already have, and lack the will to consider real change.
One of the biggest challenges governments face is humans’ apathy about future saving.
Thoughtful leaders recognize that the problem is there and tangible, not to be ignored.
Yet it is hard to fit solutions into either a traditional liberal or traditional conservative political philosophy.
Since 1955, Singapore has taken a direct approach: a compulsory national saving plan, which generates very high saving rates.
The contribution rate for the Central Provident Fund is now 34.5% for people with higher incomes.
The United States has no compulsory saving plan, and it has an abysmally low – in fact, negative – personal saving rate.
But the government is loath to consider a mandatory saving plan.
Instead, it is taking steps to overcome the individual inertia that inhibits saving.
The US Pension Protection Act of 2006 encourages employers to enroll employees automatically in a personal saving plan for old age.
This differs fundamentally from Singapore’s scheme, since employers are not required to do so, and, while enrolled employees’ paychecks are deducted without their consent, they can drop out of the plan at their own request.
New Zealand’s recent “KiwiSaver” plan and the United Kingdom’s Pensions Act of 2007 are similarly based on automatic enrollment for employees with free opt-out provisions.
Nevertheless, according to Brigitte Madrian of Harvard University, automatic enrollment in savings plans is critically important, even if the employee is completely free to drop out.
If employers tell their new employees that a pension saving plan is available, and even promise to match employees’ contributions, a significant fraction of employees still will not participate.
But if employers actually enroll their employees automatically in the plan, telling them that they can drop out at any time simply by notifying the employer, a large majority of employees will just accept the plan.
Moreover, it appears that whatever contribution rate the employer chooses tends to be accepted passively by the employee, as does whatever investment allocation (between stocks and bonds, for example) is established.
The research of Madrian and her colleagues suggests that the new pension plans will improve saving in the countries that adopt them.
Maybe these countries could do even better by adopting a compulsory saving plan, but they are not about to do so.
So, although they won’t succeed in raising saving on the scale that Singapore has, they can make real progress.
The best reason not to make savings plans compulsory is that different people face very different circumstances that only they know about.
Some people love their work, and never want to retire; for them, saving is less important.
Some people want to spend a lot now on education, or psychotherapy, or whatever else is important to them now, and so want to postpone saving until later.
The fundamental problem is that while some people postpone saving for sensible reasons, and will resume saving later, many others fail to save for no good reason, and are unlikely to make up for it later.
A government saving plan that is based on automatic, though not compulsory, enrollment has the ability to deal with this problem, if only imperfectly.
Automatic enrollment creates a saving plan that is sensible for the typical person.
People who are not paying attention and are just not active will simply remain in the plan, while those who want badly enough to opt out can do so by writing a letter.
These saving plans show that there are methods other than outright compulsion to overcome human inertia.
One hopes that, in the future, such plans will be adopted on a large enough scale that we can devise a variety of new programs that serve both inertial and active individuals well.
Automation, Productivity, and Growth
BERLIN – It seems obvious that if a business invests in automation, its workforce – though possibly reduced – will be more productive.
So why do the statistics tell a different story?
In advanced economies, where plenty of sectors have both the money and the will to invest in automation, growth in productivity (measured by value added per employee or hours worked) has been low for at least 15 years.
And, in the years since the 2008 global financial crisis, these countries’ overall economic growth has been meager, too – just 4% or less on average.
One explanation is that the advanced economies had taken on too much debt and needed to deleverage, contributing to a pattern of public-sector underinvestment and depressing consumption and private investment as well.
But deleveraging is a temporary process, not one that limits growth indefinitely.
In the long term, overall economic growth depends on growth in the labor force and its productivity.
Hence the question on the minds of politicians and economists alike: Is the productivity slowdown a permanent condition and constraint on growth, or is it a transitional phenomenon?
There is no easy answer – not least because of the wide range of factors contributing to the trend.
Beyond public-sector underinvestment, there is monetary policy, which, whatever its benefits and costs, has shifted corporate use of cash toward stock buy-backs, while real investment has remained subdued.
Meanwhile, information technology and digital networks have automated a range of white- and blue-collar jobs.
One might have expected this transition, which reached its pivotal year in the United States in 2000, to cause unemployment (at least until the economy adjusted), accompanied by a rise in productivity.
But, in the years leading up to the 2008 crisis, US data show that productivity trended downward; and, until the crisis, unemployment did not rise significantly.
One explanation is that employment in the years before the crisis was being propped up by credit-fueled demand.
Only when the credit bubble burst – triggering an abrupt adjustment, rather than the gradual adaptation of skills and human capital that would have occurred in more normal times – did millions of workers suddenly find themselves unemployed.
The implication is that the economic logic equating automation with increased productivity has not been invalidated; its proof has merely been delayed.
But there is more to the productivity conundrum than the 2008 crisis.
In the two decades that preceded the crisis, the sector of the US economy that produces internationally tradable goods and services – one-third of overall output – failed to generate any increase in jobs, even though it was growing faster than the non-tradable sector in terms of value added.
Most of the job losses in the tradable sector were in manufacturing industries, especially after the year 2000.
Although some of the losses may have resulted from productivity gains from information technology and digitization, many occurred when companies shifted segments of their supply chains to other parts of the global economy, particularly China.
By contrast, the US non-tradable sector – two-thirds of the economy – recorded large increases in employment in the years before 2008.
However, these jobs – often in domestic services – usually generated lower value added than the manufacturing jobs that had disappeared.
This is partly because the tradable sector was shifting toward employees with high levels of skill and education.
In that sense, productivity rose in the tradable sector, although structural shifts in the global economy were surely as important as employees becoming more efficient at doing the same things.
Unfortunately for advanced economies, the gains in per capita value added in the tradable sector were not large enough to overcome the effect of moving labor from manufacturing jobs to non-tradable service jobs (many of which existed only because of credit-fueled domestic demand in the halcyon days before 2008).
Hence the muted overall productivity gains.
Meanwhile, as developing economies become richer, they, too, will invest in technology in order to cope with rising labor costs (a trend already evident in China).
As a result, the high-water mark for global productivity and GDP growth may have been reached.
The organizing principle of global supply chains for most of the post-war period has been to move production toward low-cost pools of labor, because labor was and is the least mobile of economic factors (labor, capital, and knowledge).
That will remain true for high-value-added services that defy automation.
But for capital-intensive digital technologies, the organizing principle will change: production will move toward final markets, which will increasingly be found not just in advanced countries, but also in emerging economies as their middle classes expand.
Martin Baily and James Manyika recently pointed out that we have seen this movie before.
In the 1980’s, Robert Solow and Stephen Roach separately argued that IT investment was showing no impact on productivity.
Then the Internet became generally available, businesses reorganized themselves and their global supply chains, and productivity accelerated.
The dot-com bubble of the late 1990s was a misestimate of the timing, not the magnitude, of the digital revolution.
Likewise, Manyika and Baily argue that the much-discussed “Internet of Things” is probably some years away from showing up in aggregate productivity data.
Organizations, businesses, and people all have to adapt to the technologically driven shifts in our economies’ structure.
These transitions will be lengthy, rewarding some and forcing difficult adjustments on others, and their productivity effects will not appear in aggregate data for some time.
Avatar and Empire
NEW YORK – Do nations have psychological processes – even Freudian processes, such as collective egos that can be injured, and repressed guilt feelings that can well up from the collective unconscious – just as individuals do?
I believe that they do.
I also believe that just as an individual’s dreams and slips of the tongue reveal his or her repressed knowledge, so a culture’s “dreamwork” – its films, pop music, visual arts, and even in the resonant jokes, cartoons and advertising images – reveal the signs of this collective unconscious.
Moreover, a nation’s “irrational dreamwork” often reflects its actual condition more truthfully than its “ego” – its official pronouncements, diplomatic statements, and propaganda.
So take this theory with you when you see James Cameron’s Avatar , and watch for two revealing themes: the raw, guilty template of the American unconscious in the context of the “war on terror” and late-stage corporate imperialism, and a critical portrayal of America – for the first time ever in a Hollywood blockbuster – from the point of view of the rest of the world.
In the Hollywood tradition, of course, the American hero fighting an indigenous enemy is innocent and moral, a reluctant warrior bringing democracy, or at least justice, to feral savages.
In Avatar , the core themes highlight everything that has gone wrong with Americans’ view of themselves in relation to their country’s foreign policy.
The hero, Jake Sully, is crippled from combat in a previous American conflict, but is not well cared for by his own country; if he does his job of genocide properly, “the corporation” will reward him with proper medical treatment.
He signs on, essentially, as a corporate contractor – shades of Blackwater’s massacre of civilians in Baghdad’s Nisour Square.
The enterprise is a “mission” in which the soldiers fight not “for freedom” but “for a paycheck.”
They take their direction from corporate bureaucrats in waging war against the indigenous people, whose sacred land is sited on vast reserves of “unobtainium,” which the corporation wishes to secure at all costs.
The soldiers are portrayed as being manipulated by their leaders – through vicious racism and religious derision – into brutal action against the non-aggressive “hostiles.”
When the villain, the American military leader of the attack, plans to bomb flat the indigenous people’s sacred tree, he boasts that he will blow such a massive hole in their “racial memory” that they won’t come “within a thousand clicks” of the place again.
Even the machinery of US military combat is portrayed non-heroically.
Instead of the classic images of the US Cavalry courageously sweeping down on the savages, or of decent American doughboys bravely clearing out nests of Nazis, bored technocrats, insulated by immense layers of technology, firebomb green valleys, slaughtering enemy warriors and defenseless women and babies while sipping coffee and casually fiddling with touch screens.
The characters’ lines (all quotes are approximate) are those that never pierce the bubble of American self-regard with respect to Iraq and Afghanistan. “You should not be here!” exclaims the indigenous heroine, and eventual love interest, Neytiri, as if she is speaking of the entire US enterprise overseas.
“You are like a baby.” Gesturing at the mayhem caused by the destructive but self-regarding hero, before he “goes native,” she says, “This is your fault.
They should never have had to die.”
Later, as Sully starts to become sympathetic towards those whom he has been sent to betray, he tells the bureaucrats: “If people are sitting on something you want, you call them the enemy.”
The indigenous people are an amalgam of echoes from all the great wars of empire that have troubled the recent American conscience.
Although they are physically a fantasy sci-fi mix of blue skin and cat-like movement, they are culturally a mix of Native Americans and Vietnamese, with Arabic accents thrown in.
They have qualities that Americans would do well to emulate.
They respect their environment, whereas the Americans must “return to a dying planet,” because, as the indigenous people put it, “they have killed their own mother.”
Sully’s journey is not one of conquest but of awakening to his and his people’s true relationship to others: “What am I, the bad guy?” he laughs at first, as if that were impossible.
In the end, however, he tries to warn his own imperialist team of the futility of their brutal approach: “What do we have to offer them?
Light beer?
Blue Jeans?
They will never leave the Hometree [their sacred land].
We have nothing that they want.”
Ironically, Avatar will probably do more to exhume Americans’ suppressed knowledge about the shallowness of their national mythology in the face of their oppressive presence in the rest of the world than any amount of editorializing, college courses, or even protest from outside America’s borders.
But I am not complaining about this.
Hollywood is that powerful.
But, in the case of Avatar , the power of American filmmaking has for once been directed toward American self-knowledge rather than American escapism.
Can We Feed the World?
LONDON – In the 1960’s, the Green Revolution – which included the development of high-yielding crop varieties, the expansion of irrigation infrastructure, and the distribution of modern fertilizers and pesticides to developing-country farmers – bolstered agricultural production worldwide.
But chronic hunger remains pervasive, particularly in developing countries, which are affected most by crop shortages and food-price volatility.
By 2050, the global human population is expected to exceed nine billion.
Achieving food security means ensuring that all people have consistent, affordable access to the right nutrients, despite land and water limitations, climate change, and the growing prevalence of resource-intensive Western-style diets that accompany rising incomes.
Surmounting these challenges will not be easy.
But, by taking concerted action to encourage innovation, strengthen market linkages, and support smallholder farmers and women, developing countries can build productive, stable, resilient, and equitable agricultural sectors, achieve sustainable economic growth, and guarantee food security for all.
First, the public and private sectors must ramp up investment in research and development, as well as in the extension and adoption of effective, accessible, and affordable technologies – whether conventional, intermediate, or new platform – according to each country or region’s individual needs.
Given that little suitable land remains unused, and that much of what is being farmed is increasingly degraded and eroded, investment in sustainable intensification (systems for increasing crop yields, while using fewer resources and minimizing environmental damage) is crucial.
For example, conservation agriculture, which aims to reduce or eliminate the need for damaging and labor-intensive interventions like mechanical soil tillage, can increase yields while protecting vulnerable areas from erosion and improving soil fertility.
In Zambia, research conducted by local governments, in collaboration with the anti-poverty charity Concern Worldwide, found that new hybrid seeds produced roughly four to five tons of maize per hectare, compared to Africa’s average of one ton per hectare.
Moreover, smallholder farmers – who are essential to productive, stable, resilient, and equitable agricultural development – should be given the needed tools and support to capture more benefits from value chains, while minimizing risk.
This requires building and maintaining fair and efficient input and output markets that connect them – as well as larger-scale farmers – physically and virtually to opportunities to increase their incomes.
The Alliance for a Green Revolution in Africa has worked with governments, international organizations, charitable foundations, private industry, and farmers’ groups to train and support more than 5,000 agrodealers in eastern and western Africa as they open stores to sell key inputs in small, affordable quantities.
As a result, farmers can travel shorter distances to acquire needed supplies.
In one area of Kenya, farmers who had to travel 17 kilometers to reach an agrodealer in 2004 had to travel only four kilometers three years later.
At the same time, smallholder farmers need easier access to markets to sell their crops for a fair price, rather than relying on expensive middlemen or inefficient government bodies.
An alternative would be to establish some form of cooperative or contract-based farm association that can negotiate fair prices.
Governments must also develop and implement policies aimed at ensuring that those who are typically marginalized from the formal food industry – women, young people, ethnic minorities, and non-landowners – have reliable access to adequate nutrition and opportunities to participate in agricultural production.
As farmers, mothers, educators, and innovators, women provide a critical link between food production, consumption, and future progress on food security.
Indeed, giving female farmers access to the same resources as their male counterparts could reduce the number of undernourished people worldwide by 100-150 million.
Finally, political leaders must consistently pursue this agenda at the international, regional, national, and local levels.
To that end, they must honor their commitments – made through international institutions, such as the G-8, the G-20, and the African Union – to increasing investment in agricultural development and to combating global hunger.
Likewise, they must offer sustained support to ongoing national initiatives, thus encouraging further investment and cooperation.
John Kufuor, Ghana’s president from 2001 to 2009, exemplified such leadership, boosting investment in agricultural research, farmer education, and infrastructure projects, such as roads, warehouses, and cold storage.
As a result, the proportion of people living in poverty fell from 51% in 1991-92 to 28.5% in 2005-06.
Over the last 25 years, Ghana’s agricultural sector has grown at an average annual rate of 5%.
Such experiences provide grounds for optimism.
By investing in and spreading innovative technologies, strengthening market linkages, encouraging visionary leadership, and targeting those most in need – and thus with the most potential – we can feed the world.
Less of an Ass
PARIS – “If the law supposes that,” says Mr. Bumble in Oliver Twist, “the law is a ass – a idiot.” For decades, Britain’s libel laws had been living down to Mr. Bumble’s expectations.
But freedom of expression worldwide received a boost – and Britain’s reputation for commonsense was somewhat restored – in April, when Parliament adopted legislation revising the country’s libel law.
Previously, corporations and individuals all over the world who claimed that they had been defamed – even if those suing or those who allegedly defamed them had little or no connection to the United Kingdom – would bring lawsuits for libel in the British courts.
The practice was widely known as “libel tourism.”
Many plaintiffs who brought such lawsuits – Russian and Ukrainian oligarchs, Arab princes, African dictators, and unscrupulous bosses – had little chance to prevail.
But the point was not to win.
Often, their targets had much fewer resources, which meant that a libel suit requiring both sides to spend substantial amounts could be effective in silencing critics even if it did not succeed.
Within the United Kingdom itself, the law meant that many important issues could not be fully debated.
The passage of libel reform is attributable to a campaign launched more than three years ago by three organizations: English PEN, a writers association;
Index on Censorship, a bimonthly journal that has monitored censorship worldwide and published the works of censored writers for the past four decades; and Sense About Science, an organization that promotes scientific knowledge and understanding.
The targeting of scientific journals and scientists for exposing charlatans was a leading factor in generating public support for reform of the UK’s libel law.
The cases involving science included a costly lawsuit against Nature, one of the world’s best-known and most widely respected scientific journals.
Nature had to contend with a libel suit for pointing out that a physics journal had published many articles by its editor, and that these articles had not been subjected to peer review.
Though Nature defended itself successfully, the suit cost it a lot of money and tied up many of its staff members for long periods.
Other libel suits involved unproven cancer therapies.
The science case that probably played the most significant role in the campaign was a suit filed by the British Chiropractic Association against science writer Simon Singh for an article he published in The Guardian in 2008, in which he discussed “bogus treatments.”
Singh won his case, but it cost him dearly in time and legal expenses.
One of the cases that illustrated the kind of “tourism” encouraged by the law involved a suit by a Saudi businessman against an American author who said in her book that the businessman had provided financial support to Al Qaeda.
Apparently, 23 copies of the book were sold in the United Kingdom.
That provided a sufficient nexus for the British courts to accept jurisdiction.
Though the American author did not hire British counsel and did not try to defend herself in the UK, she was ordered to pay damages, arousing outrage in the United States.
The US Congress adopted legislation, signed by President Barack Obama, making such judgments unenforceable in American courts.
The revised British law continues to place the burden of proof on the defense.
But the standard that must be met has been changed.
The new law permits an author or publisher who is sued to invoke a “public interest” defense.
Moreover, corporations, charities, and other institutions filing libel suits will now have to show that they suffered financial damage.
Singh argues that this requirement by itself would have prevented the suit against him by the British Chiropractic Association from going forward.
And libel tourism will be drastically reduced by a new rule that excludes suits from outside the European Union if it cannot be shown that the UK is the most appropriate place to bring the case.
British law firms that have apparently made a lot of money representing libel plaintiffs from around the world impeded adoption of the new law through intense lobbying.
The scientists, writers, and anti-censorship activists who led the campaign were assisted in Parliament by Lord Lester, a well-known British civil liberties lawyer, who introduced a Private Members’ Bill in 2010, and eventually by endorsement of reform by all three major political parties.
Nearly 400 years ago, in 1644, John Milton published his Areopagitica, an essay denouncing a measure in Parliament for licensing the press that was intended, among other things, to suppress libelous publications.
That essay is widely regarded as the start of the worldwide movement for freedom of speech and the press.
Last month’s victory by scientists, writers, and anti-censorship campaigners suggests that the movement launched by Milton still has life in his own country.
A Vital and Enduring Alliance
In recent years, many experts and commentators have said that the Atlantic Alliance would crumble or become irrelevant.
As a former ambassador to the North Atlantic Treaty Organization (NATO), I can say from experience that such dire predictions are nothing new.
As America’s current Secretary of Defense, it is clear to me that the transatlantic partnership is as relevant and essential as ever.
Consider the historic events that have taken place in the past year and the role played by the United States and Europe.
NATO added seven new members – nations eager to contribute to the Alliance in powerful ways.
In Afghanistan, eight million voters, 40% of them women, chose their first democratically elected President in 5,000 years.
In the Palestinian Authority, a democratically elected president offers the hope of a new chance for peace.
In Ukraine, ordinary citizens demonstrated the depth of their commitment to free and fair elections.
In Iraq, Saddam Hussein’s former subjects braved threats and voted for the first time with ballots that offered a choice of 70 political parties, rather than only one.
Across the country, voters arrived on crutches and in donkey carts, passing by posters that threatened: “You vote, you die.”
What a damaging blow to the extremists, whose ideology the voters so clearly rejected.
While there have been differences over Iraq, such issues among longtime friends are not new.
Consider just a few of the divisions that have come up among NATO allies over the past decades.
In the 1960’s, France decided to pull out of the NATO integrated command and asked NATO forces to leave its territory.
In the 1980’s there was profound disagreement and controversy over President Ronald Reagan’s decision to deploy medium-range missiles in Europe.
In fact, as NATO Ambassador in the 1970’s, I had to fly back to testify against legislation in the US Congress to withdraw America’s forces from Europe in the middle of the Cold War.
Our Atlantic Alliance has navigated through some choppy seas over the years, but we have always been able to resolve the toughest issues.
That is because there is so much that unites us: common values, shared histories, and an abiding faith in democracy.
Today, we also share a common enemy.
Extremists have targeted all civilized societies across the globe: in New York and Washington;
Madrid; Beslan;
Bali; and more. They do not seek an armistice with the civilized world.
They will not negotiate a separate peace. They would like nothing better than for America and Europe to be at odds, rather than working together.
The arrests of numerous terrorist suspects last month by French and German authorities made clear that no one nation can do the critical work necessary to win the struggle against extremists.
Often quietly, America and European nations are sharing intelligence, capturing terrorists, and disrupting their finances.
As a result, some three-quarters of known al-Qaeda leaders have been killed or captured, and others are on the run.
Nor can any one nation stop the proliferation of dangerous weapons.
This is why some 60 nations have joined the Proliferation Security Initiative in an effort to keep deadly weapons from dangerous regimes.
In 2003, German, Italian, British, and American authorities confiscated nuclear equipment bound for Tripoli, leading to Libya’s decision to open its weapons inventories to inspectors.
Every NATO nation has personnel serving in the International Security Assistance Force in Afghanistan, which just changed command from a French to a Turkish general.
One of NATO’s newest members, Lithuania, is taking leadership of a Provincial Reconstruction Team – joining other European nations in contributing to Afghanistan’s stability and progress.
Indeed, more than half of all NATO nations have had forces in both Afghanistan and Iraq.
As the Iraqi people take more steps along the challenging road to democracy, more NATO countries have agreed to help train Iraqi security personnel by providing funds or equipment and by establishing a war college and military academies.
Members of NATO share much more than an alliance; we are united by ties of blood and purpose, a heritage of liberty, and a calling to confront extremists’ violence – and defeat it.
In the 60 years since World War II came to an end, we have counted on each other in times of peril and challenge.
I am old enough to remember both the rise and fall of the Berlin Wall, and the ascent and collapse of Nazism, of Fascism, and of Soviet Communism.
Together the members of NATO have helped to protect Kosovo and recently brought aid to the victims of a devastating tsunami.
Great achievements are possible when the Atlantic community is united.
That unity need not mean a uniformity of tactics or views, but rather a union of purpose.
Those who cherish free political systems and free economic systems share similar hopes.
Working together, those hopes can become realities for many more people.
Avoiding the Terrorists\u0027 Trap
A Vote against Voting in Pakistan
ISLAMABAD &#45;&#45; As Pakistan gears up for its parliamentary election on February 18, many observers hope that the vote will usher in a period of stability and calm by lending popular legitimacy to the government.
But sometimes democracy is best served by refusing to participate.
The upcoming election, to be held under the illegal Provisional Constitutional Order (PCO) implemented following President Pervez Musharraf’s state of emergency on November 3, is such a case, which is why my party and its coalition partners are boycotting the vote.
To be sure, contesting the election would provide my party with a great opportunity to take issues to the people.
In fact, my party’s support has been growing, with opinion polls now indicating that it is the second most popular in the frontier province – and gaining ground in every other province.
But elections by themselves don’t bring democracy.
Zimbabwe’s president, Robert Mugabe, loves elections.
Egyptian President Hosni Mubarak has been holding elections for 27 years.
Uzbekistan’s Islam Karimov has been in power for 30 years, and has just been “elected” to a fresh seven-year presidential term.
Elections are meaningful only if they are perceived to be free and fair, which requires independent referees.
When my party started eleven years ago, we called ourselves the Movement For Justice.
We demanded an independent judiciary, because we believed that democracy and prosperity are impossible without the rule of law, and that the rule of law requires a judiciary that can act as a constraint on the government.
Having gone to university in western countries, we were inspired by the American system of check and balances.
So it is a shock to us that the US State Department keeps talking about free and fair elections and abolishing the state of emergency, but without mentioning the reinstatement of the judges – including the Chief Justice of the Supreme Court – that Musharraf illegally dismissed.
If the judges are not reinstated, how can there be free and fair elections?
Who decides what is free and fair?
Musharraf?
This is where the battle lines are now drawn, and where the future of the country will be decided.
If the Chief Justice and the judges are reinstated, we can move toward a genuine democratic system.
But if Musharraf manages to get his own PCO judges established in the country, then we will head toward a period of turmoil.
After all, how can the party of a man who has less than 5% support win the election now without rigging it?
Unfortunately, most of the political parties have failed to stand up for the democratic process.
Major parties like the Pakistan Muslim League (Nawaz) have decided to participate, following the lead of the late Benazir Bhutto’s People’s Party.
And, of all the major parties that are contesting the election, only the PMLN is demanding the reinstatement of the judges.
Fortunately, the people of Pakistan – students, opinion makers, and, above all, lawyers – are standing up for the judges, doing the work that should have been done by political parties.
We see lawyers marching, getting beaten up, filling the jails, and yet remaining resolute.
They are suffering huge financial losses by boycotting the courts, and yet they are determined that the Chief Justice must be reinstated.
So the dividing line in Pakistan is not between liberals and extremists, but between those who support the status quo and those who oppose it.
Parties that call themselves democratic are not only going along with Musharraf in this fraudulent election, but are also helping to restore the status quo.
The solution to dysfunctional democracy is not military dictatorship, but more democracy.
Pakistanis understand democracy, because we have a democratic culture.
Our founder was a great constitutionalist, and Pakistan came into being through the vote.
The problem has been that because we have lacked an independent judiciary, we have not had an independent election commission.
So all our elections, except for one in 1970, have been rigged.
India, with which Pakistan shares a similar background, went through 40 years of dysfunctional democracy with a one-party system.
But in the last 16 years it has begun to reap the fruits of genuine democratic competition, because an independent judiciary and electoral commission gives people confidence that their vote can make a difference.
Until we have the same in Pakistan, no election can be free and fair.
For two and a half years, I supported Musharraf and believed his promises to bring genuine democracy to Pakistan.
I’ve learned my lesson about Musharraf.
But, more importantly, no military dictator can succeed where Musharraf has so clearly failed.
Winston Churchill once said, “War is too serious a business for generals.”
The same is true of democracy.
A Wake-Up Call for the ECB
Federal Reserve Chairman Ben Bernanke has allowed global stock markets to railroad him into a whopping 75-basis-point cut in interest rates just one week before the regularly scheduled meeting of the Fed’s decision-making Open Market Committee.
European Central Bank President Jean-Claude Trichet would never allow this to happen to the ECB – he manipulates markets; markets don’t manipulate him.
Indeed, with America’s economy in apparent freefall, Trichet is threatening euro-zone trade unions with pre-emptive interest-rate hikes unless they behave as he sees fit.
These threats may be proving counter-productive to the achievement of price stability in the euro-zone economy, the central bank’s primary objective.
For example, to make his threats of an interest-rate hike in the midst of a global slowdown credible, the ECB president is using his press conferences to tell the world how strong European growth is.
Besides being at odds with reality, the claim of strong growth actually encourages the trade unions to ask for even higher wages.
And why shouldn’t they if things are as good as Trichet claims?
Trichet also makes his job more difficult for himself by talking up Europe’s inflationary threat.
His colleague on the ECB Governing Council, Bundesbank president Axel Weber, seems to have gotten the message that the more ECB officials talk up inflationary fears, the more the trade unions will ask.
So he recently toned down his rhetoric by warning that euro-zone inflationary pressures should not be “over-dramatized.”
How true!
The essential economic reality confronting the ECB today is that the American economy is falling headlong into a serious slump – Bernanke’s surprise cut speaks volumes to this.
It defies economic logic to think that the global economy – including Europe – will escape its consequences.
As European growth slows, so will inflationary pressures.
So Trichet should relax, stop threatening others, and let the economic slowdown do the work for him.
Even with sticky wages and prices in Europe, the global slowdown will reduce energy, commodity, and food prices on world markets, all of which are important factors behind currently elevated European inflation levels.
The crude oil price already has dropped substantially from its highs at the beginning of the year.
But the evolving slowdown is not the only reason the threat of a wage-price spiral in Europe is overblown.
Germany is facing a key wage negotiation with public-sector unions.
Even if the unions win large wage increases – which is very likely and entirely justifiable given their past restraint – this will have only a negligible effect on Europe’s price stability.
Increased public-sector wage costs mean increased government spending on wages.
If this is financed by cutbacks elsewhere in the budget, the main consequence will be only a re-distribution of government spending, which is not necessarily inflationary.
Nor is it inflationary if the wage increases are financed by higher taxes.
Only if the budget surplus diminishes would there be an inflationary impact, and that would not be due to a wage-price spiral, but to an increase in net government demand, which actually might not be a bad thing for an economy facing a potentially severe economic slowdown.
In the United States, it should be remembered, the need for a fiscal stimulus developed, so it seems, out of the blue.
The same may happen in Europe, especially given the ECB’s refusal to cut interest rates.
A decent settlement with public-sector workers could give Germany a “backdoor” fiscal stimulus just at the right moment – when aggregate demand is flagging.
The real problem with a generous wage settlement with public-sector unions is that private-sector unions could use it to get more than their productivity gains warrant.
Contracts with the metal and chemical workers also are coming up for negotiation this year in Germany, and union leaders are talking tough.
Berthold Huber, the head of Germany’s huge IG Metall engineering union, recently promised his rank and file “a mega year” for pay increases.
But the global slowdown, which takes the fangs out of the strike threat, will keep private-sector workers in line no matter how much their leaders may rant and rave. Everyone, including bellicose trade unionists, tends to become more reasonable when the economy turns south.
Rather than encourage the unions with exaggerated talk of strong European growth and inflationary excess – and disrespect them with threats and interventions – Trichet should speak softly and let nature take its course.
A War on Tolerance
AMSTERDAM &#45;&#45; When “tolerance” becomes a term of abuse in a place like the Netherlands, you know that something has gone seriously wrong.
The Dutch always took pride in being the most tolerant people on earth.
In less feverish times than these, no one could possibly have taken exception to Queen Beatrix’s speech last Christmas, when she pleaded for tolerance and “respect for minorities.”
But Geert Wilders, leader of the right-wing, anti-Muslim Freedom Party, was so disgusted by the Dutch queen’s “multi-cultural rubbish” that he wanted her to be stripped of her constitutional role in the government.
Wilders, a popular rabble-rouser whose party occupies nine seats in the Dutch parliament, compares the Koran to Hitler’s Mein Kampf, wants to stop Muslims from moving to the Netherlands, and thunders that those who are already in the country should tear up half the Koran if they wish to stay.
Tolerance towards Islam is cowardly appeasement in his eyes.
He thinks that Europe is in peril of being “Islamized.” “There will soon be more mosques than churches,” he says, if true Europeans don’t have the guts to stand up and save Western civilization.
Notwithstanding his call to ban the Koran, Wilders and his admirers claim to believe in unfettered free speech as a Western birthright.
Beatrix stated that the right to free speech does not automatically mean the right to offend.
Wilders disagrees.
No criticism of Islam, however offensive, should ever be hampered by political correctness.
Wilders uses every opportunity to test Muslims’ (often very limited) tolerance.
His latest provocation is a short film denouncing Islam, which is yet to be shown, but has already caused panic all around.
Remarkably for a Dutch politician – and a minor one, at that – news of Wilders’s antics has reached the world press.
So Dutch embassies are bracing themselves for violent demonstrations, and the government is considering special security measures.
Some commentators suggest that Wilders, born and raised as a Catholic in a provincial Dutch town, is, like his Muslim enemies, a true believer, driven by the goal of keeping Europe “Judeo-Christian.”
Perhaps, but this is probably a red herring.
His war on Islam is also, and perhaps even mainly, a war on the cultural and political elites, the Dutch intellectual establishment, the Eurocrats of Brussels, and the liberal-minded queen.
Indeed, his speeches are studded with references to arrogant elites who are out of touch with the feelings of the common man. “Tolerance” is seen as weak and elitist, typical of people who live far removed from the harsh realities of the street, where violent and unruly foreigners menace upstanding Dutch folks.
This notion of the elitist appeaser is not confined to the Netherlands.
In Israel, the educated Jewish activists who criticize Israeli abuses against Palestinians, the peaceniks who believe that negotiation is better than violence and that even Arabs have rights, are called, with a knowing sneer, “beautiful souls.”
The common man, rooted in the real world, supposedly knows better: uncompromising toughness, the hard line, is the only way to get results.
In the United States, the word “liberal,” in the mouths of populist radio hosts and right-wing politicians, has become almost synonymous with “effete East Coast snob” or, worse, “New York intellectual.”
Liberals, in this view, are not only soft, but are somehow distinctly un-American.
The association of elites with foreignness, tolerance, and metropolitan cities is nothing new.
Elites often can speak foreign languages, and big cities are traditionally more tolerant and open to mixed populations.
Modern populism – American politicians running, or pretending to run, “against Washington,” or French populists speaking for “deep France” – is invariably hostile to capital cities.
Brussels, the capital of the European Union, stands for everything populists, whether left or right, hate.
And Muslim immigrants live in Amsterdam, London, or Marseilles, not in the kind of small towns where right-wing populists find most of their support.
Still, the politics of resentment works best when it can tap into real fears.
There are reasons for people to feel anxious about economic globalization, pan-European bureaucracy, the huge and not always effectively controlled influx of immigrants, and the aggression of radical political Islam.
These anxieties have too often been ignored.
There is a sense among many Europeans, not just in the Netherlands, that they have been abandoned in a fast-changing world, that multi-national corporations are more powerful than nation-states, that the urban rich and highly educated do fine and ordinary folks in the provinces languish, while democratically elected politicians are not only powerless, but have abjectly surrendered to these larger forces that threaten the common man.
Tolerance is seen as not just weak, but as a betrayal.
The Muslim threat is, of course, not a fantasy.
A small number of ideological extremists has inflicted real violence in the name of Islam, and will continue to do so.
But the popular resentment of Islam goes deeper and wider.
Wilders, and others like him, are not just attacking Islamic extremists.
His success is based on that sense of tolerance as betrayal.
And, as so often happens, the loathing of elites has found an outlet in the loathing of outsiders, who look different and whose ways are strange.
We must fight Islamic extremism, but not by tapping into the darkest gut feelings of the unthinking mob.
Nothing good ever came from that.
A Warrant of Hypocrisy
LONDON – Earlier this month, the International Criminal Court (ICC) upheld the request of the court’s chief prosecutor to issue an arrest warrant for Omar el-Bashir, the President of Sudan, charging him with war crimes and crimes against humanity.
Bashir responded by expelling foreign aid agencies looking after the refugee camps in Darfur.
This is the first time that a sitting head of state has been indicted for war crimes, with reaction around the world mainly divided between those who hailed the move as a great step for international justice and those who condemned it as colonialism.
Both positions are hopelessly buried in intellectual and moral fog.
The warrant was no leap forward.
From the legal point of view, it makes no difference whether the accused is a sitting or former head of state.
But it makes an enormous practical difference that an incumbent ruler can do a lot more future damage to his people than an ex-ruler, and therefore should be given no incentive to retaliate.
As a result of Bashir’s policies, 300,000 people are estimated to have died and 2.7 million displaced in Darfur.
The expulsion of the aid agencies has put over a million Darfuris at risk of epidemics and starvation.
According to the statute that established the ICC, the prosecutor is required to ensure that any prosecution is in the interests of the victims as well as of justice.
But, to lawyers like the ICC prosecutor, the abstract claims of justice are more vivid than any concrete duty of protection.
In this case, justice comes with poisoned arrows.
Emboldened by the warrant and its elusive suggestion of international support, the Darfuri rebels, the Justice and Equality Movement, have walked out of peace talks with Sudan’s government.
Meanwhile, Bashir, with little to lose, will no doubt take the opportunity to attack his enemies.
The counter-argument is that the threat of indictment will deter rulers from wicked behavior.
But the law will deter only if its sanctions are credible.
A law that cannot be enforced deters no one.
In fact, it weakens respect for law.
Moreover, while the fear of being hauled off to The Hague may have
Whatever the attractions of giving criminals “nowhere to hide, whatever the consequences,” the consequences cannot be ignored when the criminals are heads of state.
The policy of never negotiating with terrorists cannot be scaled up to state level when hundreds of thousands of lives are at stake.
The charge of colonialism, meanwhile, is simply reflex: colonialism no longer exists.
The charge that international law is
In the Nuremberg trial of 1946, which laid the basis of current international law, the main charge against the Nazi leaders was that of “planning and waging aggressive war.”
Prohibition of war except for self-defense is embedded in the United Nations Charter.
But the ICC’s creators deemed the waging of aggressive war – which the International Military Tribunal at Nuremberg called “the supreme international crime” – to be outside the court’s jurisdiction.
This guaranteed legal immunity for the leaders who carried out the invasion of Iraq.
The charge of selective application also applies to the Bashir warrant.
Bashir stands accused of war crimes and crimes against humanity.
The latter were first defined in the Nuremberg principles of 1950 to include murder, extermination, enslavement, deportation and “other inhumane acts.”
In 1998, these other acts were clarified to mean false imprisonment, torture, rape, persecution of a group, enforced disappearance of persons, and apartheid.
It comes as no surprise, then, to read in the
The answer is simple: where the interests of a UN Security Council member or one of their clients are at stake, the court’s jurisdiction ends.
The ICC is like a cobweb: small flies get stuck, but wasps and hornets get through.
Until the United States ratifies the ICC treaty, the Court is bound to seem to many to be little more than a politicized kangaroo court.
Without American support, it has little hope of earning legitimacy, let alone doing its job effectively.
The Security Council has the power to defer the warrant for Bashir’s arrest for renewable periods of one year.
It can do this indefinitely, and it seems likely that it will.
The idea is that deferring the warrant will give the Security Council leverage over Sudan.
Gareth Evans, a former Australian Foreign Minister, has called it “a powerful diplomatic tool,” while the
If this proves true, the ICC and its sponsors have muddled justice with diplomacy.
If the world can dispense justice only at the expense of the weak and to the advantage of the strong, it should stick to the older tools of crime prevention: force and negotiation, and leave justice out of it.
A Watershed Doctrine for America
LOS ANGELES – As the United States stumbles through its economic challenges at home, the pressure of world events will not subside.
But America’s ability to address them has changed.
Its fiscal weakness limits its ability to act as global policeman.
Despite the relatively costless overthrow of the Qaddafi regime, America’s prolonged interventions in Afghanistan and Iraq have severely strained the public’s tolerance for an active foreign policy.
Nonetheless, the US seems destined to remain the world’s most important actor for the foreseeable future.
But today it is an actor without a script – it lacks a strategic guide comparable to the Cold War’s containment doctrine to prioritize policy.
Quite simply, the ad hoc policymaking that directed interventions in the Balkans, Somalia, southwest Asia, and the Middle East in the past two decades will not suffice in this new era of limitations.
This suggests that the US should seek out an overarching strategy to discipline its impulses to fight wars of choice or engage in nation-building efforts.
President Barack Obama’s 2010 National Security Strategy nurtures broad policy aspirations – “[n]ow we must position the United States to champion mutual interests among nations and peoples” – but falls short as a practical guide.
I suggest an alternative strategy, one already embedded in America history, though largely unrecognized.
But making explicit what lies implicit can sharpen US decision-making.
I call this strategy the “Watershed Doctrine.”
A watershed is a tipping point, a turning point, a game changer.
When the US has confronted a “negative watershed” – a lethal threat to the country – it committed meaningful financial and human resources in order to address the risks.
Positive watersheds – opportunities to engineer seismic shifts in international or regional political affairs through nation-building, or to use economic and military assistance to prevent plausible negative watersheds – demand an equal level of commitment.
The Watershed concept provides policymakers with a standard to use – or at the very least to debate.
It is an organizing tool for policymaking: Is an international challenge a watershed or not?
If so, get involved.
If not, stay out.
We find watersheds throughout American history.
The War of 1812 and the Civil War are clear examples.
Had American forces not expelled the British from US territory in the first, and had Abraham Lincoln and the Union not prevailed in the second, the country would have been balkanized and unable to become the dominant power of the twentieth century.
By contrast, America’s flirtation with colonialism in the Spanish American War, its involvement in Mexico, Central America, and the Caribbean throughout the twentieth century, and, arguably, World War I, were not watersheds for the US.
But America’s inability after the Great War to overcome Old World politics at Versailles and isolationism at home marked a failed opportunity to promote a positive watershed.
That failure placed the world on the path to the negative watershed posed by Nazi Germany and Imperial Japan.
Nothing foreordained that the US and its allies would prevail.
Had the Axis’s negative watershed succeeded, the US would have become a far different country.
A positive watershed, under-appreciated today, developed in the years immediately after World War II with the political transformation of Germany and Japan.
America’s remarkable investment of resources in this outcome made both countries stable, peaceful democracies, thereby eliminating them as adversaries and turning them into vital bulwarks against the next harbinger of a negative watershed, the Soviet Union.
Unlike the battle against the Axis, the US fought the Cold War in many ways, on many fronts, and over many decades – using politics, economics, and nuclear deterrence, as well as limited armed action, to ensure the USSR’s containment.
In time, the US had to accept that each political contest or military battle lost was not a watershed as long as its core interests in Europe, the Far East, and Latin America were not threatened.
Through trial and error – backed by a durable political and economic system – the US prevailed and the Soviet Union disintegrated.
The rise of Islamic fundamentalism poses another historic challenge, though one that is far more inchoate than any that the US has faced before.
In other times, the challenge would not even be called a watershed.
But the risk that weapons of mass destruction could be turned against the US makes it so.
Then there is the “Arab Spring,” a potential positive watershed that calls upon the US to decide how deep a political, economic, and military commitment it ought to make to nurture positive results.
Today, the US is a more sober and realistic country than it was in the heyday of the early post-Cold War period.
But, in the aftermath of setbacks in regions where it intervened, and with heightened economic distress at home, the US finds itself uncertain about how to respond to changing global events.
Pursuing a “Watershed Doctrine” might provide the right answer.
A Way out of Tibet’s Morass
NEW YORK – China has survived the 50th anniversary of the failed uprising by Tibetans against Chinese rule in 1959 without major protests.
But, to keep Tibetans off the streets, China’s government had to saturate the entire Tibetan plateau with troops and secretly detain in unmarked jails hundreds of people for “legal education.”
Those moves suggest that Tibet has become an increasingly serious concern for China’s rulers, one that they have not yet found ways to handle without damaging their standing in Tibet and around the world.
A year ago, Chinese and Western intellectuals competed in dismissing popular interest in Tibet as a childlike confusion with the imaginary Shangri-la of the 1937 film Lost Horizon .
But after more than 150 protests in Tibet against Chinese rule over the past 12 months, concerns about the area seem anything but fanciful.
Indeed, Tibet could soon replace Taiwan as a factor in regional stability and an important issue in international relations.
The areas populated by Tibetans cover a quarter of China; to have such a large part of the country’s territory under military control and cut off from the outside world weakens the Communist Party’s claims to legitimacy and world power status.
Last year’s protests were the largest and most widespread in Tibet for decades.
Participants included nomads, farmers, and students, who in theory should have been the most grateful to China for modernizing Tibet’s economy.
Many carried the forbidden Tibetan national flag, suggesting that they think of Tibet as a separate country in the past, and in about 20 incidents government offices were burned down.
In one case, there were even attacks on Chinese migrants, leading to 18 deaths.
It is hard not to see these events as a challenge to China’s rule.
The government’s reaction was to blame the problem on outside instigation.
It sent in more troops, hid details of protestors’ deaths, gave a life sentence to an AIDS educator who had copied illegal CDs from India, and for months banned foreigners and journalists from the Tibetan plateau.
In November, Chinese officials, live on national TV, ridiculed Tibetan exiles’ proposals for negotiation.
They canceled a European summit because of a meeting between French President Nicolas Sarkozy and the Dalai Lama, and regularly imply that Tibetans are terrorists.
On March 28, Tibetans in Lhasa had to celebrate “Serf Emancipation Day” to endorse China’s explanation for its take-over 50 years ago.
But such class-struggle terminology reminds people of the Cultural Revolution and, since such language would be unimaginable in inland China today, only makes Tibet seem more separate.
Although both sides claim to be ready for dialogue, they are talking at cross-purposes: the exiles say that talks must be based on their autonomy proposals, while China says that it will discuss only the Dalai Lama’s “personal status” – where he would live in Beijing should he return to China.
Visceral sparring matches are continuing, with the Dalai Lama recently describing Tibetans’ lives under China as a “hell on earth.”
He was almost certainly referring to life during the Maoist years rather than the present, but his remarks enabled China to issue more media attacks and raise the political temperature further.
Western governments have been accused of interference, but it is unlikely that any want to derail their relations with China, especially during an economic crisis.
Last October, British Foreign Minister David Miliband was so anxious to maintain Chinese good will that he came close to denouncing his predecessors’ recognition of Tibet’s autonomy 100 years ago.
But foreign concerns about the status of China’s mandate in Tibet are understandable: Tibet is the strategic high ground between the two most important nuclear powers in Asia.
Good governance on the plateau is good for everyone.
China could help to lessen growing tensions by recognizing these concerns as reasonable.
The Dalai Lama could cut down on foreign meetings and acknowledge that, despite China’s general emasculation of intellectual and religious life in Tibet, some aspects of Tibetan culture (like modern art, film and literature) are relatively healthy.
Western observers could accept the exiles’ assurances that their proposals on autonomy are negotiable and not bottom-line demands, rather than damning them before talks start.
All sides would gain by paying attention to two Tibetan officials in China who dared to speak out last month.
A retired prefectural governor from Kardze told the Singapore paper
The Party has so far been following a more conventional strategy: last week it sent a delegation of officials to the US (the first ever sent, it said, to have been composed solely of Tibetans – a fact that one might expect them to have been embarrassed to admit) and had its leader, Shingtsa Tenzin Choedak, tell journalists that Tibetans enjoy freedom of religion.
As anyone who has worked in Tibet recently knows well, this was an inexactitude: since at least 1996, all Tibetans who work for the government and all Tibetan students in Tibet have been forbidden any Buddhist practice, even though it is illegal under Chinese law to stop people from practicing an official religion.
China’s government could improve the situation overnight by sacking the officials responsible for such illegal policies, and by apologizing to Tibetans for having overlooked such abuses for 15 years.
And it could start reassessing its Tibetan policies instead of increasing controls and allegations.
Until then, China’s quest for international respect is set to remain elusive and Tibet is likely to stay on the world’s agenda.
A Weak Start for START
LOS ANGELES – A strange sense of déjà vu is gripping Washington these days, as the debate over ratification by the United States Senate of the New Strategic Arms Reduction Treaty (New START) with Russia heats up.
Spats have broken out between the Obama administration, future presidential contenders, senators, and arms control and defense experts.
There may not be nostalgia for the Cold War in any of this, but much of that era’s mindset can be perceived again in the arguments being knocked about.
The Senate must decide whether New START enhances American security.
Unfortunately, whatever the decision -- which has been delayed perhaps until late Fall to allow Obama’s administration more time to muster support for the treaty -- the US and Russian governments will continue to place each other in the nuclear crosshairs for the foreseeable future.
New START builds on a legacy of strategic nuclear arms limitation that goes back to the 1970’s.
Former US Secretary of State Henry Kissinger captured the allure in recent testimony: “The subject of nuclear arms control grew out of the seemingly paradoxical effort of those who had created the largest and most destructive arsenals to avoid by negotiation the ultimate consequences of their own decisions.”
Over the years “avoiding…the ultimate consequences” through limitations butted against the bitter legacy of the surprise attacks suffered by both the US and Russia in World War II.
After the war, each adopted a “never be surprised again” policy, and so went on to invest trillions of dollars in a multitude of hardened, mobile, and concealed nuclear weapons to deter the other.
The result produced tens of thousands of nuclear warheads.
In time, strategic arms control treaties became the measure of the political relationship.
With the Soviet Union’s collapse, a unique opportunity to end the nuclear competition emerged.
While elimination did take place in the former Soviet Republics, the Kremlin hung on to its nuclear arsenal – the last vestige of Russia’s former superpower status.
Likewise, US administrations have remained wedded to the Bomb.
As a result, the “nuclear hostage” relationship of the Cold War continued, capped in 2002 by the Strategic Offensive Reduction Treaty, which set the upper limit on warheads at 2,200 by 2012.
In the spring of 2009, speaking in Prague, Obama advanced a bold ambition: a world without nuclear weapons.
But his audacity confronted a world in which the Bomb remained at the heart of many countries’ deterrence strategies.
Obama muddled his message further by admitting that he did not expect to see abolition in his lifetime.
Nonetheless, New START marks a step in the direction of disarmament.
It would limit each country to 1,550 strategic warheads on 700 deployed delivery vehicles.
Verification relies on 18 on-site inspections, notification of forces in and out of service, missile-test flight information and other data exchanges, plus a consultative commission to iron out compliance.
Were the US Senate to fail to ratify New START, the treaty’s proponents argue that the US would lose predictability about Russia’s nuclear activities, resulting in greater distrust and risk of miscalculation, making both sides less secure.
But arms-control skeptics take issue with this.
Throughout the Cold War, they viewed restraints on America’s development and fielding of nuclear weapons as compromising national security.
Fears that the Soviet Union would cheat reinforced their position.
And cheating did indeed upset the broader superpower relationship.
Today, similar apprehensions stoke opposition to New START.
To allay such concerns, the Obama administration committed to a multi-year increase in the budgets of the US military’s nuclear-weapons laboratories.
And in the April 10 release of the Nuclear Posture Review, Obama’s administration warned nuclear-armed states and others tempted to violate the Nuclear Non-Proliferation Treaty that they would remain nuclear targets.
Missile defense has become another bone of contention.
The language in the preamble to New START states that the agreement will not “undermine the viability and effectiveness of the strategic offensive arms of the Parties.”
Critics contend that the clause, along with the Kremlin’s implied warning that it could withdraw from the treaty unilaterally were America’s defenses to become too robust, provides the Kremlin with leverage to impede deployment of any strategic missile-defense system.
The Obama administration repeatedly denies such claims, along with others that the treaty’s verification provisions remain insufficient.
It scoffs at assertions that Russia would cheat by multiplying warheads on bombers or new rail-based missile carriers, arguing that the Kremlin would want to avoid America’s compensatory response.
But Obama’s team does concede one point: New START fails to curtail Russia’s large numerical advantage in tactical nuclear weapons.
Arguing that short-range devices pose no risk to the American homeland, US negotiators plan to press for reductions in follow-on talks.
Despite the claims by both the Bush and Obama administrations that Russia and the US are no longer adversaries, it seems that the rapprochement has not translated into elimination of mutual nuclear targeting.
The result, even if new START is ratified, should satisfy no one.
A Window of Opportunity for European Defense
MADRID – With budgets exceptionally tight in Europe nowadays, worries about European defense have been growing.
Paradoxically, however, developments in 2010 offer hope for the future.
The defense agreement signed in November by France and the United Kingdom is composed of two treaties, which cover joint deployment of their armed forces, nuclear deterrence, and improved equipment and communications.
This initiative has the firm political backing of both countries’ leaders, and expresses a clear determination to unite against common threats.
Implemented correctly, these treaties could become a hopeful precedent for the entire European Union.
By transcending strictly national limits, these treaties chart the future path of European defense and will help determine the course of Europe’s relations with the United States and NATO.
To better judge the treaties’ worth, we must remember the context in which they were conceived.
In 1998, the Saint Malo Declaration by French President Jacques Chirac and British Prime Minister Tony Blair indicated both countries’ determination to reinforce the EU’s security and defense capabilities.
Originally reluctant to accept a Europe with autonomous military capacity, the United Kingdom had learned from the intervention in Kosovo that the EU must be able to respond to crises rapidly and efficiently.
The Saint Malo Declaration signaled that the EU’s leading military powers were prepared to develop their own defense policy, though one not fully autonomous of NATO.
Indeed, through the Berlin Plus agreements, which facilitate use of NATO resources for missions undertaken under the European Defense and Security Policy (ESDP), NATO recognized the ESDP’s maturation over the past decade.
Indeed, the EU has undertaken 24 missions in Europe, Africa, and Asia, differing in nature, scope, and aims, and combining military and civilian means.
Today, the EU is being asked to conduct complex missions in adverse circumstances.
In doing so, Europe must draw on the lessons of its past successes.
We Europeans need to respond favorably, quickly, and effectively.
Defense missions must be more adaptable, prompt, multinational, and multi-instrumental.
They must be focused on stability and security, regardless of the security situation or the nature of the conflict.
Yet it is clear that European defense is now struggling mightily with public financing.
Moreover, the latest Eurobarometer poll shows that defense is the last thing that Europeans are worried about.
It is precisely here that the Franco-British agreement becomes vitally important.
The treaties mark an attempt to balance action and ambition in a context of economic crisis, fiscal consolidation, large-scale defense transformations, increasing interdependencies, and global threats – from terrorism and nuclear proliferation to climate change, resource scarcity, and epidemics – that are impossible to tackle unilaterally.
It also sets a precedent for the UK, preparing the way for future prime ministers to make advances in this direction.
Reinforcing both countries’ military capacities indirectly reinforces those of the EU.
The quest for synergies and efficiency that is implied by the agreement could well become a driving force for the European Defense Agency.
The British may now consider the EDA a defense expenditure, but, when better defined, it could represent a source of savings for every EU country.
Moreover, the agreements foresee cooperation on cyber-security, terrorism, satellite communications, and maritime security, which are also key elements of the Lisbon Treaty.
Likewise, the joint expeditionary forces established under the treaties could lead to the eventual creation of a wider structure, as they already contemplate “bilateral cooperation with NATO, the European Union, the United Nations, or other operations.”
Solidarity and agreement on political objectives are the pressing concerns of our age.
The new pact between France and the UK could be a historic step toward rationalizing defense spending rather than toward demilitarizing Europe.
It all depends on the path chosen.
In times of financial crisis, EU member states are unlikely to increase defense spending.
But if France and the UK understand how much their projection of power is linked to that of Europe, if they make cooperation reciprocal and expand it to other European countries – according to the formula foreseen in the treaties – we could eventually see an EU with the ability to assume the defense role expected of it by the global community.
By forcing greater efficiency and collaboration, misfortune can yield benefit.
This path can also ease US concerns about lower European defense spending.
The Franco-British treaties do not address commitments to NATO, a key US interest, because any reduction in the number of European troops deployed abroad inevitably implies a greater economic burden for the US.
The Franco-British agreement does, however, imply progress toward joint European military action, both in Europe and on the international scene, which will encourage the US.
So will the fact that the initiative comes from Europe’s two major military powers (whose combined defense spending represents half of the Continent’s total), both of which have permanent seats on the UN Security Council.
All of this is part of the transatlantic community’s continuing transformation from a set of organizations designed to defend territory against a known aggressor to something more flexible and dynamic.
Establishing joint management and overhauling conventional defense capacities will be a two-pronged challenge: functional, owing to the traditional schema of defense organizations, and political, inasmuch as a cession of state sovereignty will be required.
Another, equally important challenge is cooperation between NATO and Russia, which agreed at NATO’s Lisbon summit in November to collaborate on the Alliance’s anti-missile defenses.
This relationship must be based on cooperation that benefits both sides, and that respects certain common principals of governance and non-interference.
But coordinating and sharing capacities can help both partners deal with the new nature of conflicts.
Here, the EU can exercise leadership, for this is a political process that has only just begun.
As British Prime Minister David Cameron said of the agreement with France: “This is the beginning of something new, not an end in itself” – words that echo those of Jean Monet, one of the Union’s founding fathers, on cooperation in the West.
The Franco-British agreement in 2010 was one hopeful sign for 2011 and beyond: a step along the arduous but necessary path toward greater European security.
A World Bank for a New World
NEW YORK – The world is at a crossroads.
Either the global community will join together to fight poverty, resource depletion, and climate change, or it will face a generation of resource wars, political instability, and environmental ruin.
The World Bank, if properly led, can play a key role in averting these threats and the risks that they imply.
The global stakes are thus very high this spring as the Bank’s 187 member countries choose a new president to succeed Robert Zoellick, whose term ends in July.
The World Bank was established in 1944 to promote economic development, and virtually every country is now a member.
Its central mission is to reduce global poverty and ensure that global development is environmentally sound and socially inclusive.
Achieving these goals would not only improve the lives of billions of people, but would also forestall violent conflicts that are stoked by poverty, famine, and struggles over scarce resources.
American officials have traditionally viewed the World Bank as an extension of United States foreign policy and commercial interests.
With the Bank just two blocks away from the White House on Pennsylvania Avenue, it has been all too easy for the US to dominate the institution.
Now many members, including Brazil, China, India, and several African countries, are raising their voices in support of more collegial leadership and an improved strategy that works for all.
From the Bank’s establishment until today, the unwritten rule has been that the US government simply designates each new president: all 11 have been Americans, and not a single one has been an expert in economic development, the Bank’s core responsibility, or had a career in fighting poverty or promoting environmental sustainability.
Instead, the US has selected Wall Street bankers and politicians, presumably to ensure that the Bank’s policies are suitably friendly to US commercial and political interests.
Yet the policy is backfiring on the US and badly hurting the world.
Because of a long-standing lack of strategic expertise at the top, the Bank has lacked a clear direction.
Many projects have catered to US corporate interests rather than to sustainable development.
The Bank has cut a lot of ribbons on development projects, but has solved far too few global problems.
For too long, the Bank’s leadership has imposed US concepts that are often utterly inappropriate for the poorest countries and their poorest people.
For example, the Bank completely fumbled the exploding pandemics of AIDS, tuberculosis, and malaria during the 1990’s, failing to get help to where it was needed to curb these outbreaks and save millions of lives.
Even worse, the Bank advocated user fees and “cost recovery” for health services, thereby putting life-saving health care beyond the reach of the poorest of the poor – precisely those most in need of it.
In 2000, at the Durban AIDS Summit, I recommended a new “Global Fund” to fight these diseases, precisely on the grounds that the World Bank was not doing its job.
The Global Fund to Fight AIDS, TB, and Malaria emerged, and has since saved millions of lives, with malaria deaths in Africa alone falling by at least 30%.
The Bank similarly missed crucial opportunities to support smallholder subsistence farmers and to promote integrated rural development more generally in impoverished rural communities in Africa, Asia, and Latin America.
For around 20 years, roughly from 1985 to 2005, the Bank resisted the well-proven use of targeted support for small landholders to enable impoverished subsistence farmers to improve yields and break out of poverty.
More recently, the Bank has increased its support for smallholders, but there is still far more that it can and should do.
The Bank’s staff is highly professional, and would accomplish much more if freed from the dominance of narrow US interests and viewpoints.
The Bank has the potential to be a catalyst of progress in key areas that will shape the world’s future.
Its priorities should include agricultural productivity; mobilization of information technologies for sustainable development; deployment of low-carbon energy systems; and quality education for all, with greater reliance on new forms of communication to reach hundreds of millions of under-served students.
The Bank’s activities currently touch on all of these areas, but it fails to lead effectively on any of them.
Despite the excellence of its staff, the Bank has not been strategic or agile enough to be an effective agent of change.
Getting the Bank’s role right will be hard work, requiring expertise at the top.
Most importantly, the Bank’s new president should have first-hand professional experience regarding the range of pressing development challenges.
The world should not accept the status quo.
A World Bank leader who once again comes from Wall Street or from US politics would be a heavy blow for a planet in need of creative solutions to complex development challenges.
The Bank needs an accomplished professional who is ready to tackle the great challenges of sustainable development from day one.&nbsp;
A World of Convergence
WASHINGTON, DC – For almost two centuries, starting around 1800, the history of the global economy was broadly one of divergence in average incomes.
In relative terms, rich countries got even richer.
There was growth in the poorer countries, too, but it was slower than rich-country growth, and the discrepancy in prosperity between rich and poor countries increased.
This “divergence” was very pronounced in colonial times.
It slowed after the 1940’s, but it was only around 1990 that an entirely new trend could be observed – convergence between average incomes in the group of rich countries and the rest of the world.
From 1990 to 2010, average per capita income in the emerging and developing countries grew almost three times as fast as average income in Europe, North America, and Japan, compared to lower or, at most, equal growth rates for almost two centuries.
This has been a revolutionary change, but will this 20-year-old trend continue?
Will convergence remain rapid, or will it be a passing phase in world economic history?
Long-term projections based on short-term trends have often been mistaken.
In the late 1950’s, after the Soviet Union launched the first spacecraft, eminent Western economists predicted that Soviet income would overtake that of the United States in a few decades.
After all, the Soviet Union was investing close to 40% of its GDP, twice the ratio in the West.
Later, in the 1980’s, Japan’s spectacular growth led some to predict that it would overtake the US, not only in per capita terms, but even in terms of some measures of “economic power.”
These kinds of projections have often been based on simple extrapolations of exponential trends.
Over two or three decades, substantial differences in compound growth rates quickly generate huge changes in economic size or per capita income.
Will the recent predictions of rapid ongoing global convergence similarly turn out to be wrong, or will most of the emerging countries sustain a large positive growth differential and get much closer to the advanced economies’ income levels?
Understanding the phenomenon of “catch-up” growth is key to answering this question.
Trade and foreign direct investment have made it much easier for emerging countries to absorb and adapt best-practice technology invented in the advanced economies.
The information revolution, allowing much easier access to and diffusion of knowledge, has accelerated the process.
Once they developed the basic institutions needed for a market economy and learned how to avoid serious macroeconomic policy mistakes, emerging countries started benefiting from catch-up growth.
Those with very high investment rates, mostly in East Asia, grew faster than those with lower investment rates; but, overall, catch-up growth probably has been adding 2-4 percentage points to many emerging and developing countries’ annual growth rates.
At the same time, population growth decreased, adding at least another point to the pace of per capita growth.
This process will likely continue for another decade or two, depending on where in the process particular countries are.
It is true that catch-up growth is easier in manufacturing than in other sectors, a point recently emphasized by Dani Rodrik of Harvard University, and it may be that a good portion of it has been exhausted in manufacturing by the best-performing firms in emerging countries.
But there is still a lot of “internal” room for catch-up growth, as less efficient domestic firms become more competitive with more efficient ones.
The dispersion of “total factor productivity” – the joint productivity of capital and labor – inside emerging countries has been found to be large.
Moreover, sectors such as agriculture, energy, transport, and trade also have catch-up-growth potential, through imports of technology, institutional know-how, and organizational models.
Of course, temporary disturbances, a worsening of global payments imbalances, or macroeconomic policy mistakes, including those made in advanced economies and affecting the entire world economy, could undermine global growth. But the underlying “convergence differential,” owing to catch-up growth, is likely to continue to reduce the income gap between the old advanced economies and emerging-market countries.
The Soviet Union never was able to build the institutions to allow for catch-up economic growth.
Japan slowed down after it had basically caught up. China, India, Brazil, Turkey, and others may have firms operating close to the world’s technological frontier, but they still have a lot of unused catch-up potential.
The more that these countries can invest while ensuring macroeconomic stability and balance-of-payments sustainability, the faster they can adopt better technology and production processes.
In that case, they can continue to catch up, at least for the next decade or more.
The convergence process is going to slow, but not yet.
A World of Multiple Reserve Currencies
BERKELEY – The competition for reserve-currency status is conventionally portrayed as a winner-take-all game.
There is room, in this view, for just one full-fledged international currency.
The only question is which national currency will capture the role.
Market logic, it is argued, dictates this result.
For importers and exporters, quoting prices in the same currency – say, the dollar – as other importers and exporters avoids confusing one’s customers.
For central banks, holding reserves in the same currency as other central banks means holding the most liquid asset.
With everyone else buying, selling, and holding dollars, it pays to do the same, since markets in dollar-denominated assets will be the deepest.
While it is always possible that there could come a tipping point at which everyone migrates from one currency to another, the network-based nature of the international monetary system, it is said, leaves room for only one true international unit.
But this premise is wrong, for three reasons.
First, the notion that importers, exporters, and bond underwriters will want to use the same unit as other importers, exporters, and bond underwriters holds less weight in a world where everyone has a mobile phone that can compare currency values in real time.
Once upon a time, comparing prices in dollars and euros might have been beyond the capacity of all but the most sophisticated traders and investors.
Nowadays, “Currency Converter” is one of the Apple app store’s top ten downloads.
Second, the sheer size of today’s global economy means that there is now room for deep and liquid markets in more than one currency.
Finally, the view that there can be just one international and reserve currency at any point in time is inconsistent with history.
Before 1914, there were three international currencies: the British pound, the French franc, and the German mark.
The dollar and the pound then shared international primacy in the 1920’s and 1930’s.
Today, currencies other than the dollar account for 40% of identified international reserves.
The implication is that the dollar, the euro, and the renminbi will share the roles of invoicing currency, settlement currency, and reserve currency in coming years.
To be sure, all three currencies have their critics.
Willingness to hold the dollar may be undercut by concern with America’s twin fiscal and external deficits.
Uncertainty about whether the European Union will hold together could limit the use of the euro.
And, although China is aggressively promoting international use of the renminbi in trade settlements, it has a long way to go before its currency is attractive as a vehicle for foreign investment and holding reserves.
But the very fact that there are questions about all three currencies means that none of them will obviously dominate.
There will be an international market for all three.
Some worry about the stability of this world of multiple international currencies.
They shouldn’t: a more decentralized international monetary system is precisely what is needed to prevent a replay of the financial crisis.
Countries seeking additional reserves will not be forced to accumulate only – or even mainly – dollars.
No one country will be able to run current-account deficits and use foreign finance to indulge in financial excesses as freely as the United States did in recent years.
This will make the world a safer place financially.
Will exchange rates between the major currencies be dangerously unstable?
Will those responsible for managing central-bank reserves, seeking to maximize returns, shift erratically between those currencies?
The fear underlying such questions rests on a misunderstanding of the behavior of central-banks reserve managers.
Reserve managers do not have the high-powered financial incentives of hedge fund managers to seek to maximize returns.
They do not have to exceed their previous high-water mark in order to draw a paycheck.
They have social responsibilities, and they know it.
This means that they have less incentive to herd – to buy or sell a currency just because everyone else is buying or selling it.
They can adopt a longer time horizon, because, unlike private fund managers, they do not have to satisfy impatient investors.
Compared to private investors, then, central-bank reserve managers are more likely to act as stabilizing speculators.
The result will be to make the exchange rates between the three international currencies more stable, not less.
The world economy of the twenty-first century is becoming more multipolar.
There is no reason why the same should not be true of its international monetary system.
In the end, that will be a good thing.
A World of Regions
NEW YORK – In almost every part of the world, long-festering problems can be solved through closer cooperation among neighboring countries.
The European Union provides the best model for how neighbors that have long fought each other can come together for mutual benefit.
Ironically, today’s decline in American global power may lead to more effective regional cooperation.
This may seem an odd time to praise the EU, given the economic crises in Greece, Spain, Portugal, and Ireland.
Europe has not solved the problem of balancing the interests of strong economies in the North and those of weaker economies in the South.
Still, the EU’s accomplishments vastly outweigh its current difficulties.
The EU has created a zone of peace where once there was relentless war.
It has provided the institutional framework for reuniting Western and Eastern Europe.
It has fostered regional-scale infrastructure.
The single market has been crucial to making Europe one of the most prosperous places on the planet.
And the EU has been a global leader on environmental sustainability.
For these reasons, the EU provides a unique model for other regions that remain stuck in a mire of conflict, poverty, lack of infrastructure, and environmental crisis.
New regional organizations, such as the African Union, look to the EU as a role model for regional problem-solving and integration.
Yet, to this day, most regional groupings remain too weak to solve their members’ pressing problems.
In most other regions, ongoing political divisions have their roots in the Cold War or the colonial era.
During the Cold War, neighbors often competed with each other by “choosing sides” – allying themselves with either the United States or the Soviet Union. Pakistan tilted towards the Americans;
India towards the Soviets.
Countries had little incentive to make peace with their neighbors as long as they enjoyed the financial support of the US or the USSR.
On the contrary, continued conflict often led directly to more financial aid.
Indeed, the US and Europe often acted to undermine regional integration, which they believed would limit their roles as power brokers.
Thus, when Gamal Abdel Nasser launched a call for Arab unity in the 1950’s, the US and Europe viewed him as a threat. The US undercut his call for strong Arab cooperation and nationalism, fearing a loss of American influence in the Middle East.
As a result, Nasser increasingly aligned Egypt with the Soviet Union, and ultimately failed in the quest to unite Arab interests.
Today’s reality, however, is that great powers can no longer divide and conquer other regions, even if they try.
The age of colonialism is finished, and we are now moving beyond the age of US global dominance.
Recent events in the Middle East and Central Asia, for example, clearly reflect the decline of US influence.
America’s failure to win any lasting geopolitical advantage through the use of military force in Iraq and Afghanistan underscore the limits of its power, while its budget crisis ensures that it will cut its military resources sooner rather than later.
Similarly, the US played no role in the political revolutions underway in the Arab world, and still has not demonstrated any clear policy response to them.
President Barack Obama’s recent speech on the Middle East is a further display of America’s declining influence in the region.
The speech drew the most attention for calling on Israel to return to its 1967 borders, but the effect was undercut when Israel flatly rejected the US position.
The world could see that there would be little practical follow-up.
The rest of the speech was even more revealing, though it drew little public notice.
When Obama discussed the Arab political upheavals, he noted the importance of economic development.
Yet when it came to US action, the most that the US could offer financially was slight debt relief for Egypt ($1 billion), scant loan guarantees ($1 billion), and some insurance coverage for private investments.
The real message was that the US government would contribute very little financially to the region’s economic recovery.
The days when a country could depend on large-scale American financing are over.
We are, in short, moving to a multi-polar world.
The Cold War’s end has not led to greater US dominance, but rather to the dissemination of global power to many regions. East Asia, South Asia, Latin America, and the Middle East have new geopolitical and economic influence.
Each region, increasingly, must find its own path to economic development, energy and food security, and effective infrastructure, and must do so in a world threatened by climate change and resource scarcity.
Each region, therefore, will have to secure its own future.
Of course, this should occur in a context of cooperation across regions as well as within them.
The Middle East is in a strong position to help itself.
There is a high degree of economic complementarity between Egypt and the oil-rich Gulf States.
Egypt can supply technology, manpower, and considerable expertise for the Arab region, while the Gulf provides energy and finance, as well as some specialists.
The long-delayed vision of Arab economic unity should be returned to the table.
Israel, too, should recognize that its long-term security and prosperity will be enhanced as part of an economically stronger region.
For the sake of its own national interests, Israel must come to terms with its neighbors.
Other regions also will find that the decline of US power increases the urgency of stronger cooperation between neighbors.
Some of the greatest tensions in the world – say India and Pakistan, or North and South Korea – should be defused as part of region-wide strengthening.
As the EU shows, ancient enmities and battle lines can be turned into mutually beneficial cooperation if a region looks forward, to resolving its long-term needs, rather than backward, to its long-standing rivalries and conflicts.
A World of Trouble
So you thought this year was bad!
2009 began with the flattening of Gaza.
Unemployment is surging in many countries, even though we can detect the first signs of recovery from the recession.
Many bankers, meanwhile, are back to the trough as though nothing had happened.
Greed was just taking a temporary break.
Pakistan is hit hard by a wave of monstrous Taleban attacks, and in Afghanistan NATO troops die and are terribly injured in large numbers.
The “Peace Process” in the Middle East becomes ever more clearly the great oxymoron in international relations.
Preparations for the climate change conference in Copenhagen are dominated by charges and recriminations.
Even President Barack Obama, of whom miracles were expected, turns out to be no more than a very talented mortal.
He receives the Nobel Peace Prize in the hope that maybe he can make next year better.
He’ll certainly have his work cut out.
Will 2010 see a recovery shaped like a “V” or a “W,” or will there simply be an anemic tilt towards a very distant prospect of better times? I suspect the latter, with unemployment and cuts in public spending – certainly in much of Europe and the United States – constraining economic confidence.
Let’s be clear about what is happening.
The deliberate undervaluation of China’s currency, and the fall in the dollar, are both putting a squeeze on the export prospects of the European Union members and other countries like Canada and Mexico, and China’s covert and not so covert export subsidies and import barriers exacerbate the problem.
American exasperation has probably been curbed by its need to borrow so much money – much of it from China.
But Obama’s recent tariffs on tire imports may be a sign of things to come.
Chinese behavior will put increasing political pressure on those of us in Europe and the US who are delighted about China’s economic success and who argue for free trade.
Weaker economies will also feel the pinch.
I hope that China’s sophisticated economic managers understand that either their country’s behavior will have to change, or we are likely to face a massive trade conflict and disruption of global commerce.
The patience even of free traders will wear thin in 2010.
Rows about the short-term costs of dealing with climate change won’t make it any easier to keep markets open.
But failure to act now will only raise the price of delayed action at some moment in the future.
While the most hopeful outcome of the Copenhagen summit – a global pact limiting carbon emissions – has now been all but ruled out, the second-best outcome – negotiations on specific measures continue within a framework of general goodwill – would not be a disaster.
Anything short of that would be very bad news.
In either of these two more optimistic scenarios, one consequence will be the transfer – actual or putative – of considerable sums of money from developed to emerging or developing countries to cover some of their costs for emissions abatement and environmental protection.
Now just imagine the problems that legislators in developed democracies will face when they must explain why billions of dollars and euros should be handed over to China, whose deliberately undervalued currency is costing their constituents their jobs.
Obama’s commitment to substantial nuclear disarmament bodes well for the Nuclear Non-Proliferation Treaty Renewal Conference in 2010.
But, even with progress there, the problems created by the threat of nuclear weapons development in North Korea and Iran will remain.
American and European diplomatic engagement with Iran is welcome.
But what happens if this brings either no Iranian commitment to refrain from weaponizing nuclear power, or no acceptance of tough monitoring of such a pledge?
China and Russia seem unlikely to support any further sanctions against Iran if diplomacy fails.
China’s energy relationship with Iran grows ever stronger, and Russia continues to see its mission internationally as making trouble wherever it can.
This is just a little of what 2010 perhaps has in store – and no mention yet of Israeli settlement building on the West Bank, Pakistan’s struggle against murderous extremists, and NATO’s bloody difficulties in propping up a discredited and corrupt Afghan regime in order to prevent the country from falling back into the hands of the Taliban and Al-Qaeda.
Still, however gloomy the outlook, we do stagger on – the flowers still bloom, the breeze stirs the trees, the birds sing, and children laugh.
The rest of us can enjoy life while Obama does the heavy lifting.
A World Restored?
BERLIN: Like old battle horses feeling young as the bugle sounds, Cold War strategists are feeling the adrenalin mount as missile defense becomes front page news.
True, the defense against missiles which Bill Clinton (reluctantly) and George W. Bush (enthusiastically) are proposing – with massive support from America’s Congress – is different from Ronald Reagan’s Star Wars dream of twenty years ago: NMD is supposed to catch only a modest number of warheads, not provide complete protection against enemy missiles.
Nevertheless, the issue rekindles old debates over deterrence, mutual assured destruction and nuclear arms control, and revives the rivalry between the nuclear powers just when nuclear weapons had lost much of their relevance.
Amazingly, debate is heating up even though it is uncertain that NMD will work.
Even if it does work, it will be ten to fifteen years, possibly longer, before NMD is operational.
So tempers are rising over something which, if and when it happens in the distant future, may or may not have much impact.
Normally cautious governments are positioning themselves now as if the future were around the corner.
What explains this odd behavior?
Not blind faith in technology.
After all, the history of missile defense is a tale of technology constantly disappointing its advocates in and out of government.
No one in his right mind can assume that something never achieved before, namely destroying a small number of warheads in flight, will happen over night.
Of the three tests so far conducted, one failed almost, two entirely, which is why President Clinton left the matter to his successor.
If President Bush, as he has hinted, now favors a different design, it will take even more time to develop the architecture and devise a test program.
Nobody can be sure that it will work either.
Governments are worried now, not because of capabilities, but because of America’s real or imagined intentions.
While Americans claim that NMD is not directed against anyone, that all the US wants is to protect its citizens against states like Iraq or North Korea, almost everyone else thinks differently: Russians fear that America wants to cement its military superiority (and Russia's inferiority) forever; the Chinese are concerned that NMD signals American readiness to help Taiwan remain independent;
Because political intentions, not technical capabilities matter, NMD creates problems now: it pushes Russia into confrontation, heightens Chinese nervousness, and underpins a European sense of estrangement from the US.
Damage is done from the word go while the end of the road remains obscured.
Inflating this political damage is the fact that, thirty years ago, the US and the then Soviet Union renounced effective defense against strategic nuclear missiles.
Normally, a US defense project in its infancy would not cause the excitement NMD generates.
But the 1972 ABM Treaty prohibits, for the indefinite future, systems to protect either country against such nuclear attack.
As the US proceeds with NMD, it will either have to violate the Treaty or give six months notice to quit, something both signatories are entitled to do if they feel their vital security interests demand it.
In the eyes of many, that would amount to America opting out of the structure of nuclear arms control built in the latter part of the Cold War.
The Bush Administration argues that, because the Cold War is over, the formal disappearance of the ABM Treaty would not mean a loss of nuclear stability.
But stability is as much a matter of political perceptions as of technical calculations.
By limiting strategic missile defense, the old treaty provides a certain predictability of deterrence for all nuclear weapon states.
Its disappearance would affect all other arms control agreements.
Russia threatens to scrap all of them once the US leaves the ABM-Treaty.
While this threat lacks credibility (it would harm Russian interests most) it has a certain logic.
The main question NMD poses is not how to prepare for a future world of missile defense but how to dampen today’s political concerns.
Such efforts are getting discretely underway.
Legal experts in Washington suggest that modest preparations for building missile and radar sites do not violate the ABM-Treaty and so do not yet require a US notice to quit.
For now, the Bush Administration will await the outcome of tests before deciding.
Both Moscow and Washington hint at possible deep cuts in their offensive nuclear arsenals.
Skeptical European allies are being mollified by US assurances of close consultation.
The most important of confidence-building measures, a modification of the ABM-Treaty to allow for limited missile defense, is being explored.
Russia’s early "nyet" may not be the last word.
So political turmoil with Russia and Europe might be calmed.
But what about China?
In contrast to Europe and Russia, China is not party to an alliance (as is Europe) or to a network of arms control treaties through which political solutions can evolve (like Russia), factors that contribute to Asian instabilities and Chinese sensitivity.
Here confidence can only be built through the approach taken by the US to China.
Regrettably, there are no indications yet that the problem is recognized in Washington as a serious one.
All this comes as a disappointment to old Cold War strategists.
While brushing up the vocabulary and abbreviations of the age of superpower deterrence, they discover that such a world has gone.
Missile defense is not a threat to US-Russian strategic stability; its mishandling is a threat to political predictability.
By announcing its determination to go ahead with a distant NMD, the US has created political turbulence which it must address now if major damage is to be avoided.
A Year of Anniversaries and Uncertainties
ALBERTA – As China enters the “Year of the Ox,” there is much to reflect on from the past 12 months and even more to speculate about regarding the coming year.
2008 began with devastating snowstorms that paralyzed most of central and southern China’s transport system, interrupting lives and causing severe material damage.
Then came the riots in Tibet, which caught the government off guard, followed by embarrassing protests over China’s Olympic torch relay in several Western and Asian countries.
Then, as Chinese were wondering why 2008, a year of supposed good fortune marked by the lucky number eight, had started with so much misfortune, a deadly earthquake struck Sichuan province, killing 80,000 people and leaving millions homeless.
Emerging more united from this tragedy, the country welcomed the world to the long-anticipated Olympics, which were remarkably successful, but were soon superseded by the tainted-dairy-product scandal in which many babies became ill, and some died.
In contrast to last year, when the rush home for the lunar New Year celebration was hampered by freak storms, this year millions of migrant workers have already returned to their rural homes.
Many will be staying there, because the global economic downturn has hit China hard, costing them their jobs.
Littered with a host of extremely sensitive anniversaries, 2009 could prove even more dramatic and unpredictable than 2008.
Fast approaching is not only the March anniversary of last year’s disturbances in Tibet, but also the 50th anniversary of the Tibetan unrest in 1959 that led to the exile of the Dalai Lama and his supporters.
Since the riots last spring, China’s government has taken many pro-active measures, even adopting a “Serf Liberation Day,” to defend its record in Tibet of the past 50 years, while continuing to talk with the Dalai Lama’s representatives.
But it has also implemented heavy-handed police and military controls.
Then comes the 20th anniversary of the June 4 crackdown on the Tiananmen Square student demonstrations.
Calls to re-evaluate the official response began when President Hu Jintao and Premier Wen Jiabao came to power seven years ago.
But recently the pressure has intensified, especially with the publication of “Charter 08,” a manifesto signed by hundreds of Chinese intellectuals, journalists, lawyers, and ordinary citizens, condemning the government’s human rights record and demanding more democratic reform, press freedom, governmental transparency, and societal openness.
Although neither Hu nor Wen were directly involved in the crackdown, they nonetheless must tread carefully.
Doing everything possible to avoid a repeat of the 1989 scenario may well be the Communist Party leadership’s top priority in 2009.
And, given the economic slowdown, widening income disparity, rising unemployment, and growing popular discontent over corruption, China’s leaders will have their hands full.
Of course, the inspiration for almost every political reform movement in China is the May 4th Movement of 1919, when Chinese students protested against a weak and corrupt government and called for China to strengthen itself by adopting two key Western ideals: democracy and science.
As the 90th anniversary approaches, China has made great strides in science, but still has a long way to go in terms of democracy.
This year also marks the 50th anniversary of the Great Leap Forward, when 20-40 million Chinese died of starvation, as well as the tenth anniversary of the government’s ban on Falun gong, an organization of self-claimed religious and meditation practitioners that has challenged the Communist Party’s legitimacy.
Though largely discredited inside the country, this militant movement still has a following around the world, and further protests may come at any time and in unpredictable forms.
While some of the plethora of anniversaries that China’s leaders must confront are potentially very destabilizing, several have, and will, work in their favor.
For example, the 30th anniversary of China’s reform movement and the establishment of diplomatic relations between China and the United States has been a much-celebrated event this January.
More importantly, October will mark the 60th anniversary of the founding of the Peoples’ Republic of China, an occasion that the Party will commemorate in grand style.
After all, the Middle Kingdom has re-emerged as the world’s third-largest economy (having recently replaced Germany), sent astronauts into space, dispatched advanced naval destroyers to the Horn of Africa, and become the largest holder of US foreign debt.
China will want to flex its muscles and proclaim to the world that the Party has delivered the goods to its people, while making the country strong and prosperous.
As the worst recession since the1930’s continues, both the American and Chinese economies are bound to suffer further setbacks.
There is no guarantee that protectionist and xenophobic sentiment in America will not hit China-US relations, or that the economic downturn will not fuel new unrest in China.
The world should not misjudge the effect of such troubles on China.
Nor should it forget China’s fierce display of nationalism in response to Western protests of the Olympic touch relay, the extraordinary patriotism that swept the country in response to the Sichuan earthquake, and the national pride evinced by the Olympic Games.
But, in 2009, it would not hurt if China’s leadership also took note of the need to continue assuring the world of its commitment to a “peaceful rise,” and to do so by boldly addressing some of the unresolved issues that this year’s anniversaries will highlight.
A \
The drubbing that many governments suffered in the recent elections to the European Union Parliament places them in a difficult position as they maneuver ahead of this week's EU Summit.
Only an incurable optimist can hope that the summit will bring glory to any of them.
The summit has two purposes: to finalize the text of a new EU Constitution, and to appoint the next President of the Commission.
These negotiations will be much harder in view of the spectacular repudiation of a number of key governments at the ballot box, together with the potent rise of protest and Euroskeptic parties in several member states.
The problem for Europe's leaders is that their own repudiation by voters does not necessarily carry the same message as the rise of the Euroskeptic parties.
The record slump in the vote for Gerhard Schröder's governing Social Democrats in Germany has little to do with his policy towards Europe, but a great deal to do with the perceived failure of his economic policies - and the persistence of low growth and high unemployment - at home.
Despite nationalist parties' success in France, the same is true of the setback for President Jacques Chirac's centre-right party.
In Britain, by contrast, where the economy is strong and unemployment low, the main factor behind the collapse in the vote for the governing Labor Party has been anger with Tony Blair's determination to go to war in Iraq beside George Bush.
Nevertheless, the rise of Euroskeptic parties, in a number of countries including Britain, France, Belgium, Poland, and the Czech Republic, has worrying implications for a summit meeting whose purpose is to take European integration a small but unmistakable step forward.
In Britain, in particular, the spectacular surge of the UK Independence Party (UKIP) can only strengthen the government's long-standing latent Euroskepticism.
The proposed constitution will contain a Charter of Fundamental Rights, which is intended to enhance the political and moral legitimacy of the EU.
But will it really enhance the rights of EU citizens?
Or, as the British government insists, will it merely be a declaratory document that only describes rights already existing under national legislation in the member states.
The draft constitution would enhance the policymaking powers of the Union, with a bit more majority voting in the Council of Ministers, and a stronger role for the European Parliament.
But, despite Tony Blair's one-time declaration that he would take Britain "into the heart of Europe," he remains viscerally opposed to the prospect of further integration, and he will resist any new encroachment on British sovereignty in his "red line" areas of tax, foreign policy, and EU budget finance.
Blair's Euroskepticism is understandable insofar as it chimes with the British mood.
Opinion polls consistently show that British voters are unenthusiastic about the EU, and the picture is confirmed by the latest Eurobarometer poll, conducted throughout the Union for the Commission - but before the recent enlargement from 15 to 25 member states.
One question always asked in this poll is whether voters tend to trust or mistrust different institutions, such as national parliaments, national governments, and the European Union.
Overall, the general level of trust in the European Union is not high: only 41% of voters tend to trust the EU, whereas 42% tend not to trust it.
But in Britain, the figures are dramatically different: only 19% trust the EU, while 55% distrust it.
By contrast, the European Parliament has a better reputation than the EU as a whole: the average EU-wide level of trust in the European Parliament is 54%, whereas in Britain it is 30%.
Across the EU, 48% think EU membership is a good thing; in Britain, this figure falls to 29%.
On virtually every question, British voters are less enthusiastic about the EU than voters in any other country.
One might think that Britons' aversion to the EU would be reflected in support for, and pride in, their national institutions.
Not so.
British trust in the European Parliament may stand at only 30%; but trust in the Westminster Parliament is much lower, at only 19% - the lowest figure in the EU.
Trust in the national government is a bit higher, but still only 25%, while trust in national political parties is only 10%.
Both figures are, again, the lowest in the EU.
Voters in other states have more confidence in EU institutions, but their opinion of their own institutions is also low.
In France, 57% trust the European Parliament, but only 29% trust the French parliament; while the corresponding figures for Germany are 51% and 23%.
But the puzzle in the poll is that, even if Europe's voters are unenthusiastic about the EU and its existing institutions as they stand now, 65% of them would support a common foreign policy for Europe, and 72% would support a common defense and security policy; even in Britain, there is 52% support for the idea of a common defense policy.
This may be a reaction to the American-led war in Iraq; but Tony Blair will exclude it precisely for that reason, and a common European defense policy without Britain makes little sense.
The predicament for Europe's leaders at this week's summit is that they stand at the cusp of an unstable process of European integration.
With the accession of 10 new members, the EU must become more integrated if it is to function.
But it is not at all clear that those governments that would normally support more integration can sell it to their disillusioned electorates.
Tony Blair has promised a referendum on the new EU constitution, which he cannot possibly win.
The central question will be whether Europe's "leaders" deliberately play for failure, in the hope that the problem will go away.
A Yukos Autopsy
Yukos, once Russia’s leading oil company and a favorite of international investors, is in its death throes.
At what many perceived to be a rigged auction, the company’s best assets were sold off to a previously unknown bidder and are now back in the hands of the Russian state.
The shell of what remains continues to challenge the company’s fate, notably in a Houston, Texas courtroom.
But these spasms will not revive the corpse.
What matters now is whether Russia’s economy will share Yukos’s fate.
The damage to Russia’s economic growth prospects from the Yukos affair may yet prove temporary, barring a repeat performance with other companies.
But whether the Yukos affair proves to be an isolated case, as the Kremlin insists, depends on a reading of Russian President Vladimir Putin’s motives.
One possibility is that Putin is not sincere about his aim of doubling Russia’s GDP in a decade.
Recent opinion polls suggest that this is the view of much of Russia’s cynical public.
On this view, the privatizations of the 1990’s were a scam serving only the powers that be.
But any reversal of those privatizations – such as the effective expropriation of Mikhail Khodorkovsky and his Menatep partners in Yukos – signifies not the dawn of social justice but rather a new group of bosses “expropriating the expropriators,” as Lenin used to say.
A less nihilistic view is that the Yukos affair suggests above all a series of improvisations by Putin rather than a coherent agenda.
This is somewhat reassuring.
Much evidence points to the affair originating not in a systematic nationalization project, but rather in the Kremlin’s perception that Khodorkovsky aimed to use his wealth to privatize the Russian state itself.
Such “state capture” occurred in Russia in the late 1990’s and to an even greater extent under the Kuchma regime in neighboring Ukraine which, ironically, Putin tried to preserve.
Neutralizing the perceived threat from Khodorkovsky meant depriving him of the means to achieve his ambitions by separating his Menatep Group from Yukos’s future cash flows.
The massive tax claims against Yukos used for this purpose were precisely that – the means rather than the end.
Had the goal been mere recovery of tax arrears, there would have been no need to break up the company: Yukos could have settled even these colossal liabilities on a civilized installment schedule.
To be sure, expropriating Menatep made shares in Yukos – a company that by 2003 attracted more domestic and foreign savings than any other in Russia – virtually worthless.
But this seems like collateral damage from the pursuit of an overriding political objective.
Much now depends on whether the same is true of the other major outcome, which is that Yukos’s principal asset – Yuganskneftegaz – is now in state hands, while its remaining units appear doomed to nationalization.
Is this another incidental by-product of the campaign against Khodorkovsky, or is it part of the core Kremlin agenda?
Nationalization certainly seems to appeal to the powerful faction comprising Putin’s former KGB colleagues and associates from his native St. Petersburg, one of whom last year became the chairman of Rosneft, the wholly state-owned oil company which acquired Yuganskneftegaz.
But if the influence of these so-called
Even the nationalization of Yukos’s assets may reflect little more than the absence of alternative buyers, given the obvious political obstacle passing those assets on to other domestic private-sector players (i.e., oligarchs), and the legal and reputational barriers to foreign investors.
So the interpretation that best fits the facts so far is that the political aim of separating Khodorkovsky and Menatep from Yukos led in practice to nationalization, but that this was not the underlying goal.
There is no green light for opportunistic predators in and around the Kremlin who now control Yuganskneftegaz to grab other companies’ assets at will.
If so, the damage caused by the Yukos affair should be minimal.
Yet, even on the assumption that Putin has no plans to nationalize key natural resource companies, he clearly desires strong state control over these “commanding heights” of the economy.
That in itself will result in overall GDP growth falling below potential, owing to the inferior productivity and greater corruption in the major companies that the state controls or heavily influences.
In a speech marking the state gas monopoly Gazprom’s tenth anniversary in 2003, Putin stated his position explicitly, speaking of the company as one of the few strong geopolitical levers left to Russia after the Soviet collapse.
Putin’s geopolitical preoccupations could be accommodated by sensibly preserving state ownership of pipeline infrastructure in the hydrocarbons sector, while allowing private companies to extract, process, and sell Russia’s oil and gas.
Instead, Putin has allowed Gazprom’s management to block proposals from his own government on the long overdue unbundling of the company.
Putin has sought an economic transformation of Russia similar in kind, if not in degree, to China’s boom.
The prize is higher living standards for Russia’s long-suffering people and a recovery in the country’s international standing.
Despite uncertainty about Putin’s intentions, that prize is not out of reach.
Indeed, at this point the only action more harmful than the Yukos affair would be another Yukos affair.
Backing the Right Horse in Pakistan
Turkey’s Imprisoned Press
PARIS – According to two pro-government newspapers in Turkey, Star and Yeni Akit, as well as Prime Minister Recep Tayyip Erdoğan himself, those who denounce the state of press freedom in Turkey are “terrorists.”
That is the term that they were using last week to denounce the New York-based Committee to Protect Journalists and the Paris-based Reporters Sans Frontières, both of which have issued reports saying that Turkey has imprisoned even more journalists than Iran and China.
Last October, the CPJ reported that there were 76 journalists imprisoned in Turkey, including 61 who were in jail for their journalistic work.
While the latter number declined to 49 by December, after some of those held were freed by the courts, that is still a lot of journalists to hold in prison.
The situation is especially dismaying, given that, for several years, Turkey’s human-rights performance had been improving dramatically under Erdoğan’s leadership.
The use of torture had declined sharply.
The cultural rights of the large Kurdish minority, including the right to use their own language, had advanced greatly.
Military control over the civilian government had been ended.
And more.
Yet, as Erdoğan and his moderate Islamist Justice and Development Party have consolidated their power and their control of the country, their tolerance for dissent has declined.
Today, Internet freedom has largely disappeared.
Legislation provides for mandatory filtering of content, and many Web sites have been blocked for reasons that range from facilitating the use of drugs or stimulants to offenses under the Law on Crimes against Atatürk (the founder of the modern Turkish state and Turkey’s national hero).
Though it is the Turkish government that is to blame for the precipitous decline in press freedom, the policies of the European Union and the United States have been contributing factors.
The EU had indicated that performance on human rights would be a key factor in determining whether Turkey would be admitted as a member.
Yet it was during the period of rapid progress on human rights that Europe seemed to turn its back on the country.
This outcome undermined those in Turkey who had promoted human-rights reforms.
Their claims that progress would lead to accession were shown to be false, and an important incentive for officials was eliminated.
If the process leading to EU accession is put back on track, it will greatly aid the effort to ensure that Turkey becomes an open society.
The US government, for its part, tends to speak softly when it comes to human-rights abuses in Turkey.
During the Cold War, Turkey’s strategic value, given its geographic proximity to the Soviet Union, outweighed other concerns.
Today, geography still plays a role, though it is Turkey’s contiguity with Syria, Iraq, and Iran that has left the US reluctant to make a fuss about press freedom.
The US has supported Turkey’s accession to the EU, but its efforts would have more credibility in Europe if it also pressed Turkey to address its shortcomings.
The situation is far from hopeless.
Turkey has a lively civil society, with proudly independent institutions that include some renowned universities.
The period of rapid progress is not in the distant past.
Europe would strengthen itself economically and militarily if Turkey became a member, and it should revive accession negotiations on the same basis as other member states if Turkey meets the political criteria, including press freedom.
With John Kerry’s arrival as Secretary of State, the US ought to recognize that such a large Islamic country in a troubled neighborhood should show leadership on human-rights issues.
As a role model for the region, it is especially important that Turkey should practice press freedom.
If Europe and the US do their part, Erdoğan may be persuaded to resume the role of human-rights reformer that he played during his first several years in office.
Back to Afghanistan
While the unremitting violence in Iraq grabs the world’s headlines, Afghanistan still struggles for peace.
The country’s parliament is packed with warlords, the drug trade is thriving, and violence is on the rise.
This week, world leaders have an opportunity to steer developments onto a new and more hopeful path when they meet in London to forge a new compact with Afghanistan.
The compact builds on the 2001 Bonn Agreement, which laid the framework for a democratic Afghanistan but left much to be done to overcome that war-torn country’s tragic legacy.
The need for renewed attention to Afghanistan could hardly be greater.
Decades of neglect coupled with foreign intervention left the country in ruins, with reverberations across the world.
It is now in everyone’s interest to help Afghanistan rebuild.
The drug trade exemplifies the far-reaching impact of domestic instability.
Last year, the value of drugs produced in Afghanistan – the world’s largest supplier of opiates – is estimated to have reached up to 25% of GDP.
Security, too, remains a serious concern.
In 2005, more than 125 Coalition troops were killed, while suicide bombing emerged as a new and increasingly common tactic of the insurgency.
Corruption is rampant, with government officials accused of cronyism and drug trafficking.
Several members of the newly elected parliament are known warlords with bloody records.
With international aid poorly coordinated and the United States reducing its troop strength, many Afghans believe that the outside world is abandoning them.
But the massive scale of the challenges facing Afghanistan should not overshadow the opportunities for positive change.
The Bonn process established the principle of democratic accountability, gave Afghanistan its first directly elected president, and provided a new constitution that – approved after genuine debate and compromise – created a legitimate central government.
It also paved the way for a parliament in which over a quarter of the members are women – this in a country where, just five years ago, women were not even allowed to leave the house without a male relative.
Moreover, most of the 20,000 village councils were elected through secret ballot.
In a nod to the importance of the councils to realizing change at the most local level, the World Bank and its partners have adopted a highly innovative program that channels rural development aid through the councils, which have been empowered to decide how the funds will be spent.
At the national level, the government recently approved a new development strategy that goes far to advance a vision for Afghanistan’s future stability and growth.
Public opinion reflects widespread support for the latest changes.
A recent poll shows that Afghans overwhelmingly favor their country’s new direction – backing the participation of women in public life and international intervention against al Qaeda, the Taliban, and the drug economy.
But Afghanistan’s potential for progress must be bolstered by concerted international action.
At the London Conference, world leaders should support the counter-narcotics strategy recently approved by the Afghan government, which would reduce economic dependence on opium production, punish traffickers and dealers, and provide sustainable economic alternatives for poppy farmers.
Afghanistan is grappling with the world’s biggest narcotics problem and donors must commit to a long-term drug control strategy.
The conference should follow up on a resolution by the European Parliament to consider whether Afghanistan should become one of the countries licensed to produce opium for medical purposes.
Furthermore, instead of pouring hundreds of millions of dollars into technical assistance and short-term capacity-building programs, the London conference should strive to help meet the Afghan government’s benchmark for equipping young people with the skills and education necessary to lead their nation to a future of peace and prosperity.
International support could help educate 40,000 Afghans each year in urgently needed fields, such as engineering, management, agriculture, law, and economics.
Judicial reform is another pressing issue.
Currently, the judiciary is incapable of trying a case of petty theft much less of ensuring human rights.
A Supreme Court dominated by conservative factions has selected judges and prosecutors, and Afghans have little legal redress in a system that allows local commanders, who hold sway over the judiciary, to act with impunity.
Without a viable legal system, foreign investment will remain elusive.
Even Afghan expatriates in the Gulf states, who have invested roughly $5 billion in regional and global trading networks, are reluctant to invest in their homeland.
Reform is nonetheless clearly possible.
Last month, the Afghan leadership finally adopted – albeit half-heartedly – a transitional justice plan that could remove from power the biggest war criminals who have consolidated their grip on the country over the past five years.
Implementation of this plan would not only give a boost to the rule of law, but also would enhance security and lead to better governance.
Failure to act would mean a betrayal of the Afghan people, who in 2001 welcomed the US army and NATO forces as liberators.
For their sake, and ours, we must not let them down.
Back to the Future, Courtesy of Argentina
President Nestor Kirchner of Argentina is often portrayed as an anti-capitalist radical for proposing a "haircut" of over 90% on the value of Argentina's defaulted external debt.
But, whatever his motives, the anxiety that led up to Argentina's last minute deal with the IMF to repay $3.1 billion owed the global lender may serve to help to rescue what capitalism is really about: the appropriate judgment of risk.
Economic development involves financial flows and the buildup of debt.
In a domestic setting, bankruptcy and default are common.
Indeed, one characteristic sign of economic vitality is the frequency of bankruptcy, for business failures indicate a willingness to gamble and take risks on innovation.
Today, there is a higher level of bankruptcy in the United States than in the European Union, and it is easier for bankrupt Americans to embark on new ventures.
As a result, Americans are more prepared to be innovative.
But in the history of international finance over the past sixty years, bankruptcy and default are almost unheard of.
One consequence is that international markets are not as dynamic as they might be, and prosperity not as widespread.
In the 19th century, and in the interwar and depression years of the 20th century, international default came in buckets.
Borrowing countries such as Argentina or the Ottoman Empire regularly defaulted.
They were then punished for a few years by not having access to international capital markets.
Lenders to defaulting countries were also punished, as their instruments (mostly bonds) became worthless.
The market thus punished bad risks.
In some cases, as in the Ottoman Empire or Egypt, creditors restructured finances by force or the threat of it.
But gunboat diplomacy was not necessarily a part of the resolution of debt problems.
Argentina, for example, reached a voluntarily negotiated agreement in 1893.
Such a system worked as long as events in one country did not have a negative impact on other borrowers and there was no systemic risk or systemic contagion.
When Argentina defaulted in the 1890's, European investors simply discovered a new fashion: investment in Russia.
After Russia's crisis of 1901, investors turned to the US and Australia.
The Great Depression of the late 1920's and early 1930's put an end to such behavior, which was suitable for a moderately crisis-prone world. Crises were no longer moderate.
The defaults of that time were not confined to one country, but swept across the globe in a contagious panic that destroyed financial systems in lending as well as borrowing countries.
Politicians reacted by devising an international financial system after WWII in which default and bankruptcy were more or less impossible.
Since there were no substantial capital flows for a long time, this did not matter at first.
Then, in the 1970's, capital flows started up again, and there were again threats to the stability of the system.
Latin America had a big debt crisis that broke out in 1982, but in fact there were almost no defaults (with the exception of Peru and, for a few months in late 1987, Brazil).
Instead of defaulting, countries arranged rescue packages with the IMF.
Money from the international financial institutions was complemented by new money that creditor banks were supposed to put up as part of the price of being "rescued" by the IMF.
The IMF was given a privileged legal position, and only devastated and wrecked "failed states" such as Sudan would default on loans from the Fund.
The notion of "concerted lending" was applied in the big Mexican crisis of 1994-95 and in the East Asian crisis of 1997-8.
The whole point of crisis management was to avoid risks to the system and thus bankruptcy.
But in the second half of the 1990's, this system began to unravel.
The sums required from the international financial institutions were so large that it began to be possible for currency speculators to envisage circumstances in which there would be no help.
Private-sector lending became hard to mobilize, because there were many more creditors than in the bank-dominated world of the 1980's, when negotiations could be conducted by just a few big players.
The first major shock came with Russia's default and devaluation of August 1998.
After that, the IMF began to encourage some countries to renegotiate debt rather than seek new money, at least if they were relatively small scale borrowers such as Ukraine or Pakistan and thus could not endanger the whole system.
The second major shock came with Argentina's currency collapse of 2002-3, after which Argentina's government demanded an extremely large debt write-off.
Argentina's other threat, not to repay the IMF, challenged the old system just as profoundly and seemed for some to be a justified response to years of bad policy advice from the IMF and the G-7 countries.
In the 21st century, we are returning to the ways of the 19th century.
Our aim should be to invent financial mechanisms for segmenting and spreading risk, so that one bad case no longer has the potential to destroy the whole system.
By being less concerned with preventing default, we can make risk and reward more congruent with each other.
Creditors in cases like that of Argentina need to be made to pay a penalty.
Argentina's current actions may drive us back to the 19th century more quickly than some investors would like.
But that lost world was a world of unquestioned dynamism and growth.
Back to the Great Game in Kazakhstan
BRUSSELS – Those who oppose Western rapprochement with Kazakhstan cite the country’s lack of political and human rights.
But, while Kazakhstan has not gone down the “color revolution” route to democracy that other post-Soviet republics like Ukraine and Georgia have followed, its timidity about reform does not justify isolation.
After all, the West is not deterred in the slightest from dealing with authoritarian Russia and communist China.
Moreover, Kazakhstan, though a Muslim majority country, has established the type of secular, multi-ethnic, and multi religious polity that the West is seeking to encourage throughout the Muslim world.
But the principal reasons for the West not to isolate Kazakhstan are geostrategic.
The Kazakhs are keen to sell their oil and gas to the West at the very moment that the European Union is anxious to shed its dependence on Russian supplies.
Yet the window of opportunity for an EU-Kazakh partnership may be closing.
Kazakhstan’s historical ties to Russia and its geographical proximity to China have caused a keen competition between those two countries for influence.
It is vital that Europe join in this “great game” for influence and draw Kazakhstan’s political orientation westwards.
There are signs that Europe is finally waking up to the possibilities that Kazakhstan offers.
Indeed, two recent developments may help anchor Kazakhstan as a Western ally.
The first is the country’s election to the annual rotating chairmanship of the Organization for Security and Cooperation in Europe (OSCE) in 2010.
Kazakhstan had lobbied for years for this opportunity in the face of fierce opposition from Britain and other EU countries.
Its selection to lead the OSCE is seen as a reward for President Nursultan Nazarbayev’s policy of engagement with the West.
Russia is deeply suspicious of the OSCE – the Kremlin recently restricted the number of OSCE observers for Russian elections – so Kazakhstan’s future stewardship hints that the Kazahks are anxious to move closer to the West, and unafraid to challenge their former masters in the Kremlin.
In the long term, the European Neighborhood Policy (ENP), the EU’s blueprint for relations with states on its periphery, offers the best chance for nurturing this relationship.
The ENP is designed to forge a “circle of friends” around the EU based on shared interests in security, economic development, the rule of law, and respect for human rights.
The European Parliament has, for now, rejected the idea that Kazakhstan could one day become an ENP member.
But this narrowness of vision will have to be overcome if Kazakhstan is not to be lured into either the Chinese or Russian orbits.
Kazakhstan is a suitable partner for the ENP in every respect.
The country’s southwest edge is on the same longitude as the countries of the south Caucasus and Turkey, all of which are already ENP countries or in the case of Turkey an EU candidate.
This alone makes a strong geographical case for Kazakhstan’s ENP status.
There are of course concerns about freedom of speech and a lack of media diversity, but conditions in Kazakhstan are no worse than in, say, Azerbaijan, its ethnic Turkic cousin, which is fully in the ENP.
Moreover, Kazakhstan is already in formal talks with the EU about human rights issues.
But it is Kazakhstan’s strong secular tradition, inherited from its Soviet past, and a very large European Christian minority (approximately 40% of its 15.2 million people) that make it a society that the West needs to encourage, given the Islamic arc of instability upon which it sits.
Drawing Kazakhstan westward would help embed this secular tradition.
The challenge is clear.
Russia and China will not wait for the EU to make up its mind about whether Kazakhstan is a worthy partner.
Kazakhstan already plays a key role in the Shanghai Cooperation Organization (SCO), a group that comprises Central Asian countries, along with Russia and China.
The SCO focuses on regional security, economic ties, and cultural cohesion in much the same way as the OSCE and EU do.
There is little doubt that the SCO is an instrument for Russia and China to make the case for a multi-polar world based on regional security blocs that counterbalance American strategic hegemony.
It would therefore be tragic if the EU missed the opportunity to tie Kazakhstan firmly to the West.
There may not be many more chances.
Back to the Politics of Cultural Despair
Some years ago the historian Fritz Stern wrote a book about Germany entitled The Politics of Cultural Despair.
He used the example of three (now forgotten) bestselling authors of the late nineteenth and early twentieth centuries to show the deep aversion of many Germans to the modern world, notably to market economics and democratic politics.
For Stern, this was part of the cultural soil in which National Socialism flourished.
Much has changed since the Nazi era.
The murderous triumph and bloody defeat of the politics of cultural despair was followed by an economic miracle that made Germany one of the world’s most prosperous countries, with nearly six decades of increasingly stable democracy.
Yet there are still traces within Germany of an attitude that finds modern economics distasteful and the opening of all frontiers to a globalized world frightening. “Pure capitalism” and “globalization” evoke horrific images.
Swarms of capitalist “locusts” threaten to descend on defenseless, hardworking people, to quote the unfortunate metaphor used in a recent speech by Franz Müntefering, the chairman of the governing Social Democrats.
Of course, revulsion for liberal economies and global markets is not confined to Germany.
A similar sentiment formed one of the motives for the French and perhaps even the Dutch to reject the European Union’s Constitutional Treaty, which some regarded as too “Anglo-Saxon” in its economic liberalism.
For many, the alternative to capitalism and globalization is an idyllic image of a “European social model,” which no one has yet defined.
Indeed, it would be difficult to do so.
Social policies in Europe – like everything else – vary widely, and popular attitudes cover a spectrum, from tired protectionism and longing for subsidies in some of “old Europe” to the free-market enthusiasm of more recent EU members in the West (Ireland and Portugal) and the East (Poland and Slovakia).
In fact, Europe’s much-vaunted social model is more a dream than a reality, the dream of a cozy world in which a benevolent state looks after us.
This world has ceased to be viable in large part for reasons of demography, as ever more claimants for assistance make costs unaffordable.
Some people – and even a few politicians – are drawing the right conclusions from this.
They know that ultimately we all must rely on our own initiative and effort, and they make use of the opportunities of open markets.
But others in Europe treat such attitudes like a cartoon whose caption could be in French or German: “Self-reliance is absolutely important, we depend on politics for it”.
Behind such differences lie deep political and cultural traditions concerning the role of the state in everyday life.
This is where the United States really is different from France and Germany, while Britain has a similar tradition of distrusting the state rather than relying on it.
In a different way, this is true of Italy as well.
Italy has long had a large Communist Party, and the left may be in power again; but there is no gut antagonism to the freedoms that capitalism encourages.
Poland is another country in which individual initiative flourishes – to the point that the apocryphal “Polish plumber” came to epitomize the threats posed by globalization in France.
Needless to say, there are no such hang-ups in many of the high-growth economies of Asia.
True, in India the inertia of an indigenous version of Fabian socialism had to be overcome; but this has happened.
In fact, new models to square the circle of economic growth, social cohesion, and political liberty may be emerging in some of the countries that have grasped the mantle of globalization.
The entrenched anti-capitalist, anti-globalization mood elsewhere is a source of concern.
After all, Fritz Stern wrote his book to warn of the dangers posed by a romantic abhorrence of modernity. High, often long-term unemployment and cuts in social benefits nurture, but do not cause such attitudes; their deep-seated cultural roots matter far more.
So do their consequences.
A sense of frustration that results from anti-capitalist, anti-globalization sentiment leads to a lethal combination of Arcadian dreams (“France to the French”) and the reality of ruthless, if seductive, leaders on the right (Jean-Marie Le Pen in France) and the left (Oskar Lafontaine and his new party in Germany).
Prosperity and liberty will be the victims, unless those who grasp the opportunities of the new world prevail.
Back to Utopia?
PARIS – France no longer claims center stage in world history, but it remains influential beyond its national borders.
From the eighteenth century on – including Charles de Gaulle’s epic role in World War II, decolonization in Africa, and the May 1968 student revolt – France has been a frequent bellwether of deep societal changes across Europe.
Will its recent presidential election continue that tradition?
François Hollande, bland and bureaucratic, campaigned on a promise to be a “normal” president, unlike the colorful incumbent, Nicolas Sarkozy – and, indeed, unlike all of his predecessors since the Fifth Republic was established in 1959.
Hollande’s victory thus may be a sign that democratic countries have become reluctant to be led by flamboyant or charismatic presidents or prime ministers.
Indeed, across Europe, no democracy is currently led by a strong or charismatic personality.
Italy remains under an interim administration, but there, too, voters appear to have turned their backs on a rococo ruler. Europe has no Sarkozy or Silvio Berlusconi, but also no Margaret Thatcher, Helmut Kohl, or José Maria Aznar.
At a time of economic and institutional crisis in Europe, all European leaders appear to be, well, extremely normal.
For many, the victory of normalcy over charisma should be cause for celebration.
Democracy is about normal citizens electing normal men and women to lead them for a limited period according to established rules.
But the trend toward normalcy among European leaders coincides with a remarkable absence of vision and strategy.
If any of these normal leaders have a long-term strategy for Europe (can anyone imagine such a thing from EU Council President Herman Van Rompuy or the Union’s foreign-policy supremo, Catherine Ashton?), they are remarkably unable to convey it.
In Hollande’s case, the rare glimpses of a comprehensive vision recall France’s successful social democracy of the 1960’s: a strong welfare state, together with abundant public investment to revive economic growth and boost employment.
Hollande’s reference point seems to be the post-war idyll of his youth, a time of rapid growth, demographic recovery, scarce immigration, and scant global competition.
In other words, Hollande will try to entice other European leaders with a vision for a world that no longer exists.
This politics of nostalgia is troubling, not only because France and Europe confront severe economic challenges, but also because France and other democracies are confronted with real challenges to their legitimacy.
In hindsight, the 2012 French Presidential election could well be remembered not so much for Hollande’s victory and the triumph of normalcy, but as the decisive step in populist parties’ long march to power.
In the first round of the French presidential election, the far left, a motley collection of anti-capitalists and radical environmentalists garnered 14% of the vote.
On the far right, Marine Le Pen’s National Front, the political heir of French fascism, won 18%, the party’s best result ever.
In other words, one-third of French voters are now attracted to candidates with extreme ideologies that share an anti-liberal rejection of the euro, capitalism, and globalization.
Both sides find their roots in an idealized past: the French Revolution and its egalitarian promise for the far left, and the French Empire and its domination of the world’s non-white peoples for the far right.
Moreover, both extremes are strongly nationalistic.
Persuaded as they are that France should act alone, they would close the economy to foreign competition, suppress financial markets, and send immigrants back to their homelands.
The convergence goes beyond their agendas’ common irrationality.
Both the far left and the far right find their core constituency among the vast number of French who feel economically insecure and politically disenfranchised – in essence, all those who perceive themselves as having no opportunity in an open society.
Hollande’s brand of normalcy does not appeal to these populist voters.
But to dismiss them would be unwise, because their utopian aspirations are based on genuine and legitimate anxieties.
Slow growth and globalization have divided all European societies – and the United States – into two new classes: those whose education and social capital enable them to cope with today’s globalized economy, and those stuck in low-paid, often transient jobs (and thus most directly affected by competition from legal and illegal immigrants).
No mainstream European leader, including Hollande, even mentions this new division.
Indeed, both Hollande and Sarkozy represented those adapted to globalization and viewed the rest as a reservoir of voters to be seduced, not as a new underclass.
This superficial understanding of populism makes the French presidential election an ominous symptom of Europe’s blind leadership.
A façade of normalcy cannot withstand the real dangers threatening the foundations of European societies.
Bailout Blues
NEW YORK – It doesn’t take a genius to figure out that the United States’ financial system – indeed, global finance – is in a mess.
And now, with the US House of Representatives having rejected the Bush administration’s proposed $700 billion bailout plan, it is also obvious that there is no consensus on how to fix it.
The problems in the US economy and financial system have been apparent for years.
But that didn’t prevent America’s leaders from turning to the same people who helped create the mess, who didn’t see the problems until they brought us to the brink of another Great Depression, and who have been veering from one bail-out to another, to rescue us.
As global markets plummet, some version of the rescue plan will almost certainly be put to another vote in Congress. Unless the plan is markedly different from the current one, while it may help Wall Street,  what about the economy?
What about taxpayers, already beleaguered by unprecedented deficits, and with bills still to pay for decaying infrastructure and two wars?
In such circumstances, is there any bailout plan that can work?
To be sure, the rescue plan that was just defeated was far better than what the Bush administration originally proposed.
But its basic approach remained critically flawed.
First, it relied – once again – on trickle-down economics: somehow, throwing enough money at Wall Street would trickle down to Main Street, helping ordinary workers and homeowners.
Trickle-down economics almost never works, and it is no more likely to work this time.
Moreover, the plan assumed that the fundamental problem was one of confidence.
That is no doubt part of the problem; but the underlying problem is that financial markets made some very bad loans.
There was a housing bubble, and loans were made on the basis of inflated prices.
That bubble has burst.
House prices probably will fall further, so there will be more foreclosures, and no amount of talking up the market is going to change that.
The bad loans, in turn, have created massive holes in banks’ balance sheets, which have to be repaired.
Any government bailout that pays fair value for these assets will do nothing to repair that hole.
On the contrary, it would be like providing massive blood transfusions to a patient suffering from vast internal hemorrhaging.
Even if a bailout plan were implemented quickly – which appears increasingly unlikely – there would be some credit contraction.
The US economy has been sustained by a consumption boom fueled by excessive borrowing, and that will be curtailed.
States and localities are cutting back expenditures.
Household balance sheets are weaker. An economic slowdown will exacerbate all our financial problems.
We could do more with less money.
The holes in financial institutions’ balance sheets should be filled in a transparent way.
The Scandinavian countries showed the way two decades ago.
Warren Buffet showed another way, in providing equity to Goldman Sachs.
By issuing preferred shares with warrants (options), one reduces the public’s downside risk and ensures that they participate in some of the upside potential.
This approach is not only proven, but it also provides both the incentives and wherewithal needed for lending to resume.
It avoids the hopeless task of trying to value millions of complex mortgages and the even more complex financial products in which they are embedded, and it deals with the “lemons” problem – the government gets stuck with the worst or most overpriced assets.
Finally, it can be done far more quickly.
At the same time, several steps can be taken to reduce foreclosures.
First, housing can be made more affordable for poor and middle-income Americans by converting the mortgage deduction into a cashable tax credit.
The government effectively pays 50% of the mortgage interest and real estate taxes for upper-income Americans, yet does nothing for the poor.
Second, bankruptcy reform is needed to allow homeowners to write down the value of their homes and stay in their houses.
Third, government could assume part of a mortgage, taking advantage of its lower borrowing costs.
By contrast, US Treasury Secretary Henry Paulson’s approach is another example of the kind of shell games that got America into its mess.
Investment banks and credit rating agencies believed in financial alchemy – the notion that significant value could be created by slicing and dicing securities.
The new view is that real value can be created by un-slicing and un-dicing – pulling these assets out of the financial system and turning them over to the government.
But turning them over to the government at market value doesn’t improve banks’ balance sheet; to do that requires overpaying for the assets, a transfer of wealth from ordinary taxpayers to the banks..
In the end, there is a high likelihood that if such a plan is ultimately adopted, American taxpayers will be left on the hook. In environmental economics, there is a basic principle, called “the polluter pays principle.”
It is a matter of both equity and efficiency. Wall Street has polluted the economy with toxic mortgages.
There is a growing consensus among economists that any $750 billion bailout based on Paulson’s plan won’t by itself do the trick of resuscitating our economy.
If so, the huge increase in the national debt and the realization that even $700 billion is not enough to rescue the US economy will erode confidence further and aggravate its weakness.
But it is impossible for politicians to do nothing in such a crisis.
So we may have to pray that a agreement crafted with the toxic mix of special interests, misguided economics, and right-wing ideologies that produced the crisis can somehow produce a rescue plan that works – or whose failure doesn’t do too much damage.
Getting things right – including a new regulatory system that reduces the likelihood that such a crisis will recur – is one of the many tasks to be left to the next administration.
Debt-Friendly Stimulus
NEW HAVEN – With much of the global economy apparently trapped in a long and painful austerity-induced slump, it is time to admit that the trap is entirely of our own making.
We have constructed it from unfortunate habits of thought about how to handle spiraling public debt.
People developed these habits on the basis of the experiences of their families and friends: when in debt trouble, one must cut spending and pass through a period of austerity until the burden (debt relative to income) is reduced.
That means no meals out for a while, no new cars, and no new clothes.
It seems like common sense – even moral virtue – to respond this way.
But, while that approach to debt works well for a single household in trouble, it does not work well for an entire economy, for the spending cuts only worsen the problem.
This is the paradox of thrift: belt-tightening causes people to lose their jobs, because other people are not buying what they produce, so their debt burden rises rather than falls.
There is a way out of this trap, but only if we tilt the discussion about how to lower the debt/GDP ratio away from austerity – higher taxes and lower spending – toward debt-friendly stimulus: increasing taxes even more and raising government expenditure in the same proportion.
That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government has borrowed) declines.
This kind of enlightened stimulus runs into strong prejudices.
For starters, people tend to think of taxes as a loathsome infringement on their freedom, as if petty bureaucrats will inevitably squander the increased revenue on useless and ineffective government employees and programs.
But the additional work done does not necessarily involve only government employees, and citizens can have some voice in how the expenditure is directed.
People also believe that tax increases cannot realistically be purely temporary expedients in an economic crisis, and that they must be regarded as an opening wedge that should be avoided at all costs.
History shows, however, that tax increases, if expressly designated as temporary, are indeed reversed later.
That is what happens after major wars, for example.
We need to consider such issues in trying to understand why, for example, Italian voters last month rejected the sober economist Mario Monti, who forced austerity on them, notably by raising property taxes.
Italians are in the habit of thinking that tax increases necessarily go only to paying off rich investors, rather than to paying for government services like better roads and schools.
Keynesian stimulus policy is habitually described as deficit spending, not tax-financed spending.
Stimulus by tax cuts might almost seem to be built on deception, for its effect on consumption and investment expenditure seems to require individuals to forget that they will be taxed later for public spending today, when the government repays the debt with interest.
If individuals were rational and well informed, they might conclude that they should not spend more, despite tax cuts, since the cuts are not real.
We do not need to rely on such tricks to stimulate the economy and reduce the ratio of debt to income. The fundamental economic problem that currently troubles much of the world is insufficient demand.
Businesses are not investing enough in new plants and equipment, or adding jobs, largely because people are not spending enough – or are not expected to spend enough in the future – to keep the economy going at full tilt.
Debt-friendly stimulus might be regarded as nothing more than a collective decision by all of us to spend more to jump-start the economy.
It has nothing to do with taking on debt or tricking people about future taxes.
If left to individual decisions, people would not spend more on consumption, but maybe we can vote for a government that will compel us all to do that collectively, thereby creating enough demand to put the economy on an even keel in short order.
Simply put, Keynesian stimulus does not necessarily entail more government debt, as popular discourse seems continually to assume.
Rather, stimulus is about collective decisions to get aggregate spending back on track.
Because it is a collective decision, the spending naturally involves different kinds of consumption than we would make individually – say, better highways, rather than more dinners out.
But that should be okay, especially if we all have jobs.
Balanced-budget stimulus was first advocated in the early 1940’s by William Salant, an economist in President Franklin Roosevelt’s administration, and by Paul Samuelson, then a young economics professor at the Massachusetts Institute of Technology.
They argued that, because any government stimulus implies higher taxes sooner or later, the increase might as well come immediately.
For the average person, the higher taxes do not mean lower after-tax income, because the stimulus will have the immediate effect of raising incomes.
And no one is deceived.
Many believe that balanced-budget stimulus – tax increases at a time of economic distress – is politically impossible. After all, French President François Hollande retreated under immense political pressure from his campaign promises to implement debt-friendly stimulus.
But, given the shortage of good alternatives, we must not assume that bad habits of thought can never be broken, and we should keep the possibility of more enlightened policy constantly in mind.
Some form of debt-friendly stimulus might ultimately appeal to voters if they could be convinced that raising taxes does not necessarily mean hardship or increased centralization of decision-making.
If and when people understand that it means the same average level of take-home pay after taxes, plus the benefits of more jobs and of the products of additional government expenditure (such as new highways), they may well wonder why they ever tried stimulus any other way.
Balancing Asia\u0027s Rivals
OXFORD – George W. Bush is approaching the end of his presidency mired in low popularity ratings, which partly reflects his policies in the Middle East.
But Bush leaves behind a better legacy in Asia.
American relations with Japan and China remain strong, and he has greatly enhanced the United States’ ties with India, the world’s second most populous country.
In 2005, Secretary of State Condoleezza Rice prepared a visit to Delhi by Bush the following year in which he announced a major agreement on US-Indian civilian nuclear cooperation, as well as a variety of measures for commercial and defense cooperation.
The nuclear cooperation agreement was criticized in the US Congress for not being strict enough on non-proliferation issues, but it looked likely to pass.
In India, the Communist Party, a small (but important) member of Prime Minister Manmohan Singh’s ruling coalition, has blocked the agreement.
But, as one Indian friend explained to me, this is mainly symbolic politics for India’s Left.
Even if the nuclear agreement fails, the improvement in US-India relations is likely to continue.
Some attribute this to the fact that India and the US are the world’s two largest democracies.
But that was true for much of the Cold War, when they frequently talked past each other.
More importantly, with the end of the Cold War, the Soviet Union was no longer available as an Indian ally, and the US began to assess India and Pakistan in terms of separate interests, rather than as a pair linked in a South Asia balance of power.
As Evan Feigenbaum, the top State Department official for South Asia recently said, “the world of 2008 is not the world of 1948.
And so India really has the capacity, and, we think, the interest, to work with the United States and other partners on a variety of issues of global and regional scope.” This change began under the Clinton administration and is likely to continue regardless of who is elected president in 2008.
Personal contacts between Indians and Americans have increased greatly.
There are now more than 80,000 Indian students studying in the US, and many have stayed to establish successful companies.
The Indian diaspora in the US constitutes roughly three million people, many of whom actively participate in politics.
For example, Louisiana’s governor is of Indian origin, and has been mentioned as a possible running mate for John McCain.
In addition, India’s economy has begun to grow by 8% annually, making it more attractive for foreign investment.
Trade between India and American is increasing, and reached $26 billion (11% of India’s total trade) in 2006.
In addition to these practical reasons for the improvement in bilateral relations, the rise of China poses a strategic consideration.
As Bill Emmott, the former editor of The Economist argues in his new book The Rivals , “where Nixon had used China to balance the Soviet Union, Bush was using India to balance China.
Like Nixon’s move, with hindsight Bush’s approach to India made perfect sense.” And the concern is reciprocated on the Indian side.
As a senior foreign ministry official told Emmott in 2007, “the thing you have to understand is that both of us [India and China] think that the future belongs to us.
We can’t both be right.”
Official pronouncements stress friendly relations between India and China, and some trade analysts argue that, given their rapid growth, the two giant markets will become an economic “Chindia.”
When Chinese Premier Wen Jiabao visited India in 2005, he signed eleven agreements, including a comprehensive five-year strategic cooperation pact.
In addition, Wen announced that China would support India’s inclusion as a permanent member of an expanded United Nations Security Council, and oppose Japan’s inclusion, which the US supports.
As Singh put it during Wen’s visit, “India and China can together reshape the world order.”
The two countries’ recent rapprochement marks a considerable change from the hostility that bedeviled their relations following their 1962 war over a disputed border in the Himalayas.
Nevertheless, strategic anxiety lurks below the surface, particularly in India. China’s GDP is three times that of India, its growth rate is higher, and its defense budget increased by nearly 18% last year.
The border dispute remains unsettled, and both countries vie for influence in neighboring states such as Myanmar.
China’s rise has also created anxiety in Japan, again despite professions of good relations during Chinese President Hu Jintao’s recent visit to Tokyo.
Thus, Japan has increased its aid and trade with India.
Last year, the US suggested quadrilateral defense exercises including US, Japanese, Indian, and Australian naval units, but the newly elected Australian Prime Minister Kevin Rudd has pulled his country out of such arrangements.
Rudd wisely believes that the right response to China’s rise is to incorporate it into international institutional arrangements.
Or, as Robert Zoellick, currently the president of the World Bank, put it when he was a State Department official, the US should invite China to become a “responsible stakeholder” in the international system.
Improved relations between India and the US can structure the international situation in a manner that encourages such an evolution in Chinese policy, whereas trying to isolate China would be a mistake.
Handled properly, the simultaneous rise of China and India could be good for all countries.
Balancing China’s High Savings
BEIJING – China’s national savings rate has been very high in recent years, amounting to 52% of GDP in 2008 (the most recent year for which statistics are available), and is often blamed for today’s global imbalances.
Countries that save too much export too much, according to conventional wisdom, resulting in high trade surpluses and growing foreign-exchange reserves.
But this is not always true.
For instance, if I save $100, but at the same time I invest $100 in my factories’ fixed assets, I am “balanced domestically” and not running an export surplus with anyone.
Such an example captures China’s recent economic situation.
In late 2009 and in early 2010, China’s savings rate might well have remained at 50% of GDP had its trade surplus not narrowed significantly compared to previous years.
Indeed, China recorded a trade deficit in part of this period, as high investment in fixed assets (owing to government stimulus policies enacted in the wake of the global financial crisis) fueled domestic demand for goods in the same way that higher consumer spending would.
Only when a country invests less in fixed assets than the amount that it saves will the “surplus savings” show up in the trade balance.
The same logic can be applied to the US economy, but in the opposite way: even if the US wants to consume a lot and does not save, it may not run trade deficits if it does not invest much.
It runs a trade deficit only when it invests a lot while simultaneously not limiting consumption.
Savings are, of course, no bad thing.
If Americans and Europeans had saved more, they might not have created the global imbalances that fueled the financial crisis, or the worldwide sovereign-debt problems that have since emerged.
And savings are particularly good for developing countries.
One of the most daunting challenges for poor countries is the need to accumulate investment capital under conditions of low savings without incurring too much foreign debt.
Even for a developing economy with per capita income of $3,000, such as China, building wealth in the middle classes remains a central issue.
Spurring faster growth of small- and medium-size enterprises through relatively high investment in physical assets and R&amp;D programs, improved infrastructure, and more rapid urbanization, all of which require a lot of savings to invest, is vital.
In any meaningful international comparison, China’s per capita stock of physical capital is still 8-10 times lower than in advanced countries like the United States and Japan.
Without relatively high savings, a developing country like China may never catch up.
If a developing country has high savings (despite efforts to increase current consumption) as a result of structural factors, the best strategy is not to reduce savings through short-run “external shocks,” such as dramatic exchange-rate appreciation, which may kill export industries overnight.
Rather, savings should be channeled even more – and more efficiently – to domestic investment in order to avoid large external imbalances.
For example, China should use its current high savings to build up the country’s infrastructure and speed up urbanization, thereby laying a firmer foundation for future development.
Savings could remain high, even as current consumption grows slowly, while the trade balance would be held in check by higher demand for imported capital goods.
Moreover, investment in public infrastructure and urban facilities will not create industrial “over-capacity”; instead, it will provide long-term public consumption durables that households and companies will use for years to come.
If China continues on this path, its external surplus will decrease further, other conditions being equal.
Of course, a country must deal with a savings rate that is “too high” even if it is not necessarily the main cause of external imbalances.
That is certainly the challenge for China in the long run.
A savings rate of 50% of GDP is too high under any circumstances, and household consumption equivalent to 35% of GDP is too low.
But this can and should be addressed by domestic policies aimed at bringing about structural change, not by external policies like exchange-rate appreciation.
Without domestic structural change, currency appreciation would not only undermine exports, but might also decrease imports, owing to higher unemployment and lower income.
China must recognize that high savings will not provide stable growth over the long run.
High domestic investment may for the time being prevent “surplus savings” from creating too much upward pressure on the external balance, but, given trends in China’s terms of trade, growth without an increase in domestic consumption is unsustainable over the long run.
High investment may cause economic overheating and increase the price of capital goods in the medium term, eventually triggering inflation.
So bringing the savings rate down is necessary if domestic and external balances are to be achieved.
Meanwhile, China’s so-called “export-oriented growth policy” itself may not be wrong for a developing country, because international trade in general creates more jobs and brings more income.
But if exports continue to grow in the absence of consumption-led import growth, distortions occur and the trade surplus and foreign reserves increase.
China has adopted some policies to reduce its trade surplus, such as lowering import tariffs, withdrawing tax rebates for exported goods, and gradual exchange-rate appreciation.
But what China really needs is a greater effort to promote domestic consumption and lower the savings rate.
Balancing the World’s Imbalances
Good times – and these are good times for the global economy – are rarely the moment for concrete initiatives to deal with difficult problems.
It is against this backdrop that I find welcome this weekend’s announcement by a group of major economies acknowledging their shared responsibility for the orderly resolution of global imbalances while sustaining robust growth.
For the past year, China, the euro zone, Japan, Saudi Arabia, and the United States have been discussing these plans among themselves and with the IMF.
Behind the somewhat forbidding label of “multilateral consultation” are discussions that are the first of their kind, and that have proved to be a promising tool for dealing with an issue of global importance.
These five economies are relevant to global imbalances in different ways: either on account of their current account deficits or surpluses, or because they represent a very large share of world output.
They all agree that resolving these imbalances is in each of their interests.
But they also recognize that it is a multilateral challenge and a shared responsibility for them all.
Over the last year, partly reflecting past policies in these countries, the imbalances have shown signs of stabilizing and, indeed, even of improving slightly.
But these countries must signal that policies will continue to ensure a progressive and orderly reduction in imbalances together with sustained growth.
Otherwise, the global economy will remain at risk from renewed protectionist pressures and economic or political events that might trigger a disorderly resolution of the imbalances and undermine growth.
The five economies spelled out their policy plans in considerable detail to the semi-annual meeting of the IMF’s membership, which gave them a warm welcome.
This is the first time such plans have been presented together.
As Gordon Brown, the chairman of the Fund’s International Monetary and Financial Committee, noted, these plans are fully in line with the medium-term approach to solving imbalances that the Fund’s membership has consistently supported:
China has elevated the reduction of external imbalances to a major national objective in 2007.
It intends to boost domestic demand and is committed to moving gradually toward greater exchange rate flexibility.
Euro-zone countries reaffirmed their intention to press ahead with structural reforms across a broad front, in product, labor, and financial markets.
Japan plans to accelerate labor market reforms, strengthen competition, and advance fiscal consolidation to sustain domestic confidence.
Saudi Arabia is boosting its spending on social and infrastructure investments substantially, as well as expanding oil sector capacity.
And the US is taking steps to balance its budget, boost private savings, and enhance energy efficiency.
The US also intends to strengthen capital market competitiveness and ensure that it remains an attractive environment for foreign investment.
Just as global imbalances were not built up overnight, nor will they be solved quickly.
The aim of multilateral consultation was not to seek to solve imbalances in one fell swoop, but rather to solidify agreement on a medium-term approach that could reduce imbalances gradually over time.
The policies outlined by the participants will, when implemented, constitute a step in that direction.
Publication of their plans sends an additional signal of their commitment and provides a valuable roadmap with which to assess progress, and thus help build confidence that all countries are working to reduce imbalances.
The IMF, for its part, will monitor these plans regularly as part of our responsibility to provide policy analysis and advice.
The countries have made it clear that their future policy plans will continue to be consistent with the strategy called for by the IMF’s membership.
The five participants and the rest of our members, as well as we at the Fund, all agree that this has been a fruitful exercise.
An indicator of success is that a second multilateral consultation, aimed at fostering dialogue on how financial globalization and innovation influence growth and stability, is under consideration.
Like the first round of talks, this consultation would occur between a group of economies that have special relevance to the issue.
The Return of the Balkan Question
PARIS – “One must Europeanize the Balkans, in order to avoid the Balkanization of Europe.”
I wrote those words with the French political scientist Jacques Rupnik in 1991, just as war was breaking out among Yugoslavia’s successor states.
The fighting would last until the end of the decade, claim thousands of lives, and twice require the intervention of NATO (in Bosnia in 1995 and Serbia in 1999).
Nearly a quarter-century later, the Balkans continue to constitute a threat to European peace, just as they did on the eve of World War I and at the end of the Cold War, when Yugoslavia’s implosion led not only to Europe’s first war since 1945, but also to the return of genocidal murder.
The recent fighting in Macedonia, which left eight police officers and 14 Albanian militants dead, raises the specter of renewed violence.
It is difficult to know whether the bloodshed represents the festering of an old, unhealed wound or something new, a backlash against a majority-Slav government that seems bent on embracing ethnic chauvinism.
What is clear is that the region remains an explosive and confused reality, one capable of threatening Europe’s stability, already on a knife’s edge following Russia’s adventurism in Ukraine.
The region is a volatile mix of rising nationalism, deep economic frustration, and disillusionment about progress toward membership in the European Union.
The potential for a plunge into chaos obliges us to consider once again how best to handle the Balkan tinderbox.
When I was in Belgrade recently, the gunplay in Macedonia was the talk of the town. Some of my Serbian interlocutors decried the West’s blindness.
In particular, they criticized the EU, NATO, and the Organization for Security and Cooperation in Europe for describing the upsurge in violence as a series of “isolated incidents.”
From the Serbs’ perspective, attacks by Albanian nationalists were more likely the beginning of an attempt to enlarge their territory at the expense of their Christian neighbors, beginning with the weakest.
It is views like these that, along with the violence, risk reinforcing the deep ambivalence within the EU about the prospect of any new enlargement.
The precedent of Greece, hardly a poster child for European accession, seems especially relevant when applied to its northern neighbors, which are similarly plagued with high rates of corruption and unemployment.
And some in the EU are put off by the seeming affinity of the Orthodox Church and its adherents toward Vladimir Putin’s Russia, or by the region’s large Muslim population.
These European apprehensions partly reflect failure by the continent’s leaders to capitalize on the sometimes-spectacular successes of enlargement, Poland being the most notable example.
Instead, the exigencies of domestic politics have induced many European leaders to underscore the difficulties and accentuate the failures of expansion.
With such a cold wind blowing from the West, it is little wonder that Europhilia has begun to give way in places like Belgrade to a pining nostalgia for the Yugoslav era. “At that time, we were respected,” was how a retired Serbian diplomat put it to me.
Similar sentiments are evident in Bosnia, and even in Croatia, an EU member since 2013.
During the communist era, Yugoslavia provided a sharp contrast with the Soviet bloc.
Economically and socially, its citizens were far better off than those of Central Europe.
Today, their fortunes have flipped.
Poland is booming, while Yugoslavia’s successor states (with the exception of Slovenia) are struggling, victims of the unhealed wounds of the distant and recent past – including former Yugoslav and Serbian President Slobodan Milošević’s cynical atavism in winning and maintaining power.
It has been years since the EU looked so distant, so aloof.
The decision by European Commission President Jean-Claude Juncker to abolish the post of Commissioner for Enlargement has been seen as highly symbolic, leaving many in search of an alternative model.
The Russian re-conquest of Crimea provides a gleeful talking point for ultra-nationalist Serbs bemoaning the loss of Albanian-majority Kosovo.
Meanwhile, the Gazprom office in central Belgrade offers a large, visible proof of Russia’s energy presence in the country.
The truth, of course, is that there is no “Russian model” for the Balkans beyond the use of brute force.
Ever-closer ties with Europe remain the best way forward for the region’s residents and the EU alike.
In a time of severe economic crisis, European ideals remain, in spite of everything, the only efficient antidote to virulent nationalism.
For the Balkans, as for the rest of Europe, the EU is the only alternative to a future as bad as the worst of the past.
Bangladesh Goes Taliban
Is Bangladesh headed into the black hole that consumed Afghanistan under the Taliban?
Fears are mounting, as official and fundamentalist religious forces now seem to operate with impunity – and the apparent support of local police, the ruling Bangladeshi National Party, and local authorities.
For many years Bangladesh was an exception in the Islamic world, pursuing an independent course in a peaceful, secular, and democratic fashion.
Traditionally, under Bengali Sufi mystical teachings, the majority Muslim population lived peacefully with other religions, and Bangladesh had a good record on education and civil rights for women.
Until recently, Muslim fundamentalists were discredited, because militias such as “al-Badr” and “Razakar” had supported atrocities against civilians during the civil war of 1971.
That began to change in 2001, when Prime Minister Begum Khaleda Zia, the widow of the assassinated military strongman General Zia, replaced secularism in the Constitution with the “Sovereignty of Allah.”
Encouraged by this change the BNP’s junior coalition partner, Jamaat-e-Islami, which has links with the militias and remains close to Pakistan, has been calling for imposition of Sharia (Islamic law).
The BNP appears to view religious extremism as a tool to break the power of the opposition Awami League, which is largely supported by the secular and urban middle classes.
Similarly, the massive rise in the number of madrassas (religious schools) financed by Saudi and Gulf money – totalling roughly 64,000 and operating under the same fundamentalist Deobandi Islam that inspired the Taliban – is part of a clear effort to change Bangladesh’s culture of religious tolerance.
The danger inherent in Bangladesh’s course is very real.
Indian intelligence officials allege that the leader of a BNP coalition partner, Mufti Fazlul Haque Amini, maintains ties to the banned armed Islamist group Harkat-ul-Jihad-al-Islami, or Huji, which in turn is allegedly linked to Al Qaeda.
In 1999, Huji members attempted to assassinate the moderate poet Shamshur Rahman with an axe.
Forty-four Huji members were arrested, two of whom claimed to have been sent from South Africa and Pakistan by Osama Bin Laden to distribute money to the extremist madrassas.
Bangladeshi migrant workers in the Gulf States who return home imbued with radical Wahhabi and Salafi teachings fan the fires even more.
Competing for influence among radical Islamist leaders in northwestern Bangladesh is Bangla Bhai, who in 2004 attempted an Islamist revolution in several provinces bordering India.
Supported by local police and 10,000 followers, the rebellion ended only after a government crackdown.
The NGO Taskforce against Torture has documented over 500 cases of torture and intimidation by radical Islamists, who also have murdered supporters of the Communist Party, such as Abdul Kayyam Badshah.
Indeed, Hindus, Christians, and Buddhists have been targeted as well, and religious extremists more recently have attacked Sufi shrines deemed to be idolatrous, and even Bengali cultural events that unite all religions in a common identity.
For example, during Ramadan prayers last October, a mob of a 1,000 people razed a mosque of the Ahmadiyya Muslim community.
The 100,000 members of this Muslim sect, which believes that Muhammad was not the last prophet, have been declared infidels, and the government outlawed their publications until the ban was reversed by the Bangladeshi High Court.
Hindus, Ahmadiyyas, and tribal people in the Chittagong hills, fearful for their safety, have been leaving the country in droves.
The atmosphere of violence is palpable in other ways.
Sheikh Hasina, the Awami League’s leader and the daughter of the Bangladesh’s founding father, survived a grenade attack last summer that killed at least 20 people and injured hundreds more.
The killers have never been apprehended.
Britain’s High Commissioner in Bangladesh was wounded in a similar bomb attack this May.
To its credit – albeit under pressure from donor countries – the Bengali authorities seem to sense that their country is drifting toward becoming a failed state and are making greater efforts to arrest Islamist killers, despite some of them being part of the ruling coalition.
Two radical Islamist groups have also been banned.
But piecemeal arrests will not be enough to reverse the drift if a culture of intolerance is allowed to fester.
One encouraging note is that annual economic growth has been a steady 5% for the past few years.
But now many Bangladeshis fears for their livelihoods, owing to unlimited Chinese textile imports following the end of quotas last year.
Economic deterioration in Bangladesh would only worsen inter-communal tensions and provide a fertile breeding ground for jihadis, but the reforms needed to head off decline are often blocked by political infighting and opposition boycotts.
The world cannot afford a second Afghanistan in Bangladesh, where Huji members are believed to have given sanctuary to many Taliban fighters after the fall of their regime.
Pressure from India will not be enough to force the Bengali government to adhere to the tolerant form of Islam that the country pursued during its first three decades of independence.
All of Asia’s powers, including China and Japan, will have to play a part in stopping Bangladesh’s drift into fanaticism and chaos.
The rest of the world should support them before it is too late.
Banishing Starvation
VIENNA – Of the world’s almost seven billion people, about one billion are starving, owing to a long list of unfortunate local events and circumstances, together with steadily increasing demand, unpredictable weather patterns, and poor financial management.
And food shortages could grow much worse, as world population is expected to reach nine billion by 2050 or earlier.
But, with the right programs, we can produce enough food for everyone.
Indeed, by taking the right actions now, we can eradicate starvation.
To meet expected demand over the next 20 years, global food supplies must increase by an estimated 50%.
So we need sustainable agriculture-led growth to increase supplies and keep prices affordable while also boosting the incomes of poor farmers in developing countries.
This can be achieved through a program for subsistence farmers that not only improves productivity, but also reduces weather dependency and provides simple financing instruments to encourage investment in new technologies and equipment, increased land ownership, and easier access to local markets.
Lifting subsistence farmers out of their precarious position would be equivalent to halving the number of hungry people.
But it’s a program that can be achieved only if international organizations like the United Nations Food and Agriculture Organization (FAO) work hand-in-hand with national governments and with private donors and partners.
The European Union and other developed countries are already intent on tackling the problem of global food security, and could easily tailor their own schemes to become part of this wider program.
For example, the EU supports the growth of agriculture and rural development through two types of instruments.
Geographical initiatives, like the European Development Fund (EDF), support implementation of agricultural policies in the African, Caribbean, and Pacific countries (the Development Cooperation Instrument provides similar support in Latin America, Asia, and South Africa).
Such programs already add up to significant spending – the current EDF, which runs from 2007-2013, has set aside more than €1 billion to support agriculture, rural development, and food security in Africa alone.
The second type of instrument is emergency funding to deal with unforeseen events, such as natural disasters, market breakdowns, and political instability.
The EU’s ad hoc €1 billion Food Facility, created in 2008 for rapid response to soaring food prices in developing countries, is a good example.
Its objectives also include boosting agriculture in the short to medium term in selected countries.
As part of an FAO project in Burkina Faso, the EU’s Food Facility has helped to provide high-quality seeds to 100,000 vulnerable farmers, benefiting roughly 700,000 people amid the growing food crisis in the Sahel region.
With EU support worth €18 million, this operation will improve food security for around 860,000 rural households, or more than six million people.
Similarly, two Food Facility projects in Mozambique, worth a total of €2.5 million, are benefiting almost 50,000 farmers and nearly 300,000 rural families by increasing agricultural production, improving conditions for commercializing products, and addressing food security issues that affect rural households.
Beyond these financial instruments, we need to improve on the status quo by investing in the research and development needed to modernize agriculture and reduce the risk of crop failures.
Better, environmentally sustainable livestock production systems need to be developed, and we must boost investment in capacity-building, services training, market access, and efforts to strengthen supply chains.
Equally important is research into the most effective measures to combat cross-border animal and plant diseases.
Agriculture, after all, must be viewed in the context of the wider eco-system, which also means developing improved methods for conserving resources such as soil, forests, and fisheries.
To tackle global food security successfully, we must change the way we treat rural development, which requires adopting a much more bottom-up approach.
Again, I think that the EU is leading the way in developing countries with development policies that promote broad-based rural economic growth by boosting primary production and increasing its efficiency.
Indeed, by promoting agricultural practices and technologies that are environmentally sustainable and raise rural incomes, these policies also stimulate rural non-farm activities.
But problems at the top of the food system must be addressed as well.
An important step would be better regulation of global financial markets in order to end the derivatives speculation that forces food prices up.
Moreover, the World Trade Organization’s Doha Round of global trade negotiations desperately needs to be concluded, and the EU has made a number of positive moves in this direction by proposing vast changes to its export subsidies regime.
European spending on export refunds has declined considerably in recent years – from 30% of agricultural expenditure in the early 1990’s to less than 1% today (if rural development is excluded).
This huge drop results from successive reforms of the EU’s Common Agricultural Policy, owing to commitments made by the EU to the WTO and to other developments on world markets.
Last year, Europe’s spending on export refunds dropped by more than 40% from 2009, to just €400 million.
With more and more subsistence farmers being driven off their land by pressures far beyond their control, we need to find better ways to balance the needs and rights of rural and urban populations.
Unless we begin to do so, succeeding generations will fail to realize an environmentally sustainable world where people live in dignity.
Bankers without Borders
FRANKFURT – At the height of the financial crisis in 2008-2009, it seemed as if Western banks would pull up their foreign stakes and go home, leaving financial markets much more fragmented along national lines.
But, as a new report by Deutsche Bank Research shows, banks’ cross-border business – direct or via branches or subsidiaries – has now broadly stabilized.
During the crisis, the level of banking activity fell particularly strongly in capital-intensive areas such as traditional lending to the private sector.
The effect was especially pronounced in lending to non-financial companies, whereas lending to households – an area with traditionally lower internationalization – remained more robust.
In part, the decline was due to increased holdings of foreign public debt relative to private debt.
Prior to the crisis, banks had often been net sellers of foreign government bonds, but they significantly increased their purchases during 2008-2009.
With the onset of the European sovereign-debt crisis in 2010, banks’ appetite for public debt fell again.
In contrast to lending activities, banks’ commitment to foreign markets has remained virtually unaffected with respect to purely intermediary activities such as investment banking and asset management.
Interbank relationships, as well as investment-banking operations, are already highly international.
The deep cross-border links between financial institutions and the activity of globally active investment banks only took a brief hit from the crisis.
By contrast, the importance of foreign markets for asset managers remains very limited and has not changed significantly since 2007.
Despite the recent setback, banks’ presence in foreign markets today is much greater overall than it was a few years ago.
One reason is that revenue growth usually goes hand-in-hand with macroeconomic growth, which increasingly is found in emerging-market countries, rather than in many banks’ mature Western home markets.
Moreover, private and public-sector debt levels tend to be much lower in the emerging economies.
At the same time, geographically diversified institutions outperformed even during the recent global crisis, because they were less vulnerable to downturns in individual regions.
And, at least until a certain stage of growth, economies of scale and scope beckon, with expansion abroad often the only way to increase size, given already-saturated domestic markets.
Of course, integrated financial markets also benefit banks’ clients by enabling institutions to provide broader and higher-quality financial services at lower prices.
Furthermore, strong international financial partners are indispensable to multinational corporations, which often need global cash management or support for large-scale transactions.
Given these advantages, the pace of internationalization has been swift.
As recently as 2001, Europe’s top 20 banks still generated more than half of their revenues at home.
By 2010, this share had fallen by 10 percentage points, to 42% – a remarkable decline that was interrupted only briefly by the financial crisis.
Interestingly, most large European banks’ prime investment destination was other European markets, not other parts of the world, raising Europe’s contribution to total revenue to nearly 30%, from less than 20% a decade ago.
There may be two explanations for this: for one thing, Asia’s share in European banks’ revenues has probably risen.
And, while this reflects changes in relative importance, European banks’ business volumes might have increased in absolute terms even in the US, though at a slower pace than elsewhere.
Overall, the outlook for post-crisis international banking has turned positive.
But regulation could change that.
In the current environment, with a renewed focus on regulating markets, institutions, and financial instruments, some international differences in scale, scope, and application of the new rules may be inevitable.
But, without a broadly consistent approach, the authorities risk creating a legal patchwork that would make cross-border banking less efficient, more expensive, and more difficult to conduct.
Apart from discouraging banks from investing abroad, outright restrictions on foreign banks’ market access cannot be ruled out, either.
The rapid growth in intra-European banking relations in the past decade was made possible to a large extent by the abolition of formal and informal barriers to foreign service providers.
Though this environment may not be fundamentally at risk, the current trend towards increasing capital requirements for international banks – reflected, for example, in calls for the establishment of independent subsidiaries with autonomous capital and liquidity pools – is clearly worrisome.
Nonetheless, given the relatively favorable outlook for cross-border banking, Western banks’ presence in emerging markets could strengthen further, while banks domiciled in these regions might start looking beyond national borders.
Traditional lending and deposit-taking still offers much growth potential – and may become more attractive relative to investment banking or asset management as a result of new regulation.
In that case, banking will become more like other industries that have benefited themselves and their customers by evolving into truly global networks.
Ban Ki-moon and the Age of Sustainable Development
NEW YORK – The world can breathe easier with the reelection this month of United Nations Secretary-General Ban Ki-moon to a second term in office.
In a fractious world, global unity is especially vital.
During the past five years, Ban Ki-moon has embodied that unity, both in his unique personal diplomacy and in his role as head of this indispensable global organization.
Winning re-election to lead the UN is no straightforward matter.
As head of an organization of 192 member states, the Secretary-General inevitably feels the powerful crosscurrents of global divisions.
On almost any issue, the Secretary-General is likely to find himself between contending groups of countries.
Yet Ban has inspired global confidence in his leadership to the point of securing an uncontested and unanimous second mandate.
The consensus in favor of Ban’s re-election is all the more striking because it includes the so-called P-5, the five permanent members of the UN Security Council – the United States, the United Kingdom, China, France, and Russia.
These five powerful countries owe their UN pre-eminence to the post-World War II settlement, when they were allies in victory.
Under the UN Charter, all five must endorse the election of every Secretary-General.
Ban Ki-moon has maintained the strong backing of all five permanent members.
I have the honor to serve as the Secretary-General’s Special Adviser on the Millennium Development Goals.
In that capacity, I see the Secretary-General in action in all parts of the world.
It is a rewarding experience, one that gives me great hope for ultimate success in resolving global problems such as poverty, environmental threats, and violent conflict.
The world’s many problems make their way to the Secretary-General’s office day and night.
Whether the issues are war and peace; revolutions and coups; natural disasters; epidemics; disputed elections; or the grinding challenges of hunger, poverty, climate change, and mass migration, the crises inevitably demand the Secretary-General’s attention.
It is a workload that boggles the mind, and demands the round-the-clock commitment of the Secretary-General and his team.
During a recent trip with Ban to Egypt and Tunisia, I watched in awe as he deftly backed the democratic changes underway in those two countries while simultaneously dealing with many other upheavals in the region.
Ban generously and inspiringly offered his support to the brave youth leaders in both countries who are at the forefront of the political changes set in motion this year.
From his first days in office, Ban emphasized that many or most of the world’s greatest challenges come down to a simple yet stark reality: we are now a crowded, interconnected, global society, with seven billion people struggling to find a foothold on a highly vulnerable planet.
The challenges of feeding the world, keeping it safe from epidemic diseases such as malaria and AIDS, and combining economic progress with local and global environmental safety are the defining challenges of our time.
War and violence often have as underlying causes hunger, poverty, and environmental degradation, such as human-induced climate change.
We are, in short, in a new global era, which may be defined as the Age of Sustainable Development, in which our security, even our survival, will depend on the world forging a triple commitment: to end extreme poverty; to ensure human rights for all; and to protect the natural environment from human-induced crises of climate change, destruction of biodiversity, and depletion of fresh-water reserves and other vital resources.
Ban has tirelessly emphasized the need to put sustainable development at the center of our thinking.
The challenges of poverty, resource depletion, climate change, and human rights will dominate Ban’s second term, and the work of those who will follow him as Secretary-General.
In 2012, world governments will reunite in Rio de Janeiro, 20 years after the historic conference at which they signed the first comprehensive treaty to fight human-induced climate change.
Far too little has been accomplished since, and, behind the scenes, Ban is working relentlessly to clear the bottlenecks and avert climate disaster.
At the start of the third millennium, Ban’s predecessor, Kofi Annan, brought the world’s leaders together to adopt the Millennium Development Goals, which established ambitious targets to be achieved in the fight against poverty, hunger, and disease by 2015.
Ban has been a tireless champion of the MDGs, and has initiated several highly creative campaigns to enlarge worldwide engagement with them.
This past year, for example, Ban launched a bold new global initiative, “Every Mother, Every Child,” to improve health care for women and children.
He has championed the fight against HIV/AIDS, tuberculosis, and malaria, bringing many global leaders and public figures to the cause.
Under Ban’s leadership, remarkable progress is being made, though as he emphasizes, even faster progress is both possible and needed.
In 2015, the Secretary-General will help guide the world towards even bolder commitments in the fight to end extreme poverty and deprivation in the coming two decades.
There is a great personal satisfaction in Ban’s own story, one that gives hope for all.
When Ban travels to Africa’s impoverished regions, he mingles with villagers and recounts his own upbringing amid the poverty and deprivation of Korea in the 1950’s – and how, by committing itself to hard work, education, modern science, and shared values, South Korea became one of the world’s richest and most successful countries.
Ban’s rise from poverty to global leadership parallels his country’s trajectory.
It is a story of decency, commitment, and generosity that has won global confidence, and that can help to guide the world at a time of unprecedented risks and unique opportunities.
हैती के लिए नई आशा
न्यू यॉर्क – हाल ही में लॉस पल्मास, हैती के ग्रामीण समुदाय के भ्रमण के दौरान मुझे उन परिवारों से बातचीत करने का अवसर प्राप्त हुआ जो 2010 के भूकंप के बाद वहां फैली हैजे की महामारी से सीधे-सीधे प्रभावित हैं. एक आदमी ने मुझे बताया कि इस महामारी ने न केवल उसकी बहन की जान ले ली बल्कि उसकी सास भी नजदीकी अस्पताल तक ले जाते वक्त मर गई. इस अस्पताल तक पैदल जाने में घंटों लग जाते हैं. अब वह और उसकी पत्नी अपने पांच अनाथ भतीजे-भतीजियों को पाल रहे हैं.
हैती में आज इस तरह की कहानियां आम हैं. सचमुच पूरे देश में हजारों लोग इस महामारी का कहर झेल रहे हैं. बुरे वक्त और त्रासदी को सहना उनकी नियती बन गई है.
लेकिन आशा की कुछ किरणें भी हैं. समुदाय के बीच बढ़े समन्वय और स्वच्छता प्रथाओं में परिवर्तन से लॉस पल्मास तथा पड़ोसी गांव जैकब के स्त्री, पुरुष और बच्चों को हैजा से मुक्ति मिली है. पिछले कुछ सालों से महामारी का प्रकोप कम हुआ है तथा आबादी को अन्य जल-जनित बीमारियों के संक्रमण का खतरा कम हुआ है. मिसाल के तौर पर एक परिवार जिससे मैं मिला उसने गर्व के साथ मुझे अपना नया वाटर फिल्टर दिखाया.
संपूर्ण स्वच्छता अभियान की सफलता में समुदाय-नीत रवैया अहम भूमिका निभाएगा. मेरी यात्रा के दौरान हैती के प्रधानमंत्री लॉरेंट लामोथे और मेरे द्वारा लॉस पल्मास में इस अभियान की शुरूआत की गई थी. उम्मीद है कि टिकाऊ स्वच्छ पैखानों के निर्माण में परिवारों के निवेश को प्रोत्साहन देने, वहनीय मूल्यों पर उन्नत स्वच्छता उत्पादों व सेवाओं को उपलब्ध कराने तथा विद्यालयों और स्वास्थ्य केंद्रों में पर्याप्त जल तथा स्वच्छता अवसंरचना सुनिश्चित कराने से अगले पांच साल में ऊंचे खतरों वाले इलाकों में बसे तीस लाख लोगों की स्वास्थ्य परिस्थितियों में सुधार आएगा. गांव से चलने से पूर्व हमने वहां नए सुरक्षित जल संसाधन की प्रतीकात्मक प्रथम आधार शिला भी रखी.
यह अभियान हैती से हैजा के उन्मूलन के लिए संयुक्त राष्ट्र द्वारा समर्थित व्यापक कार्यवाई में नवीनतम कदम है. हाल ही में संयुक्त राष्ट्र तथा हैती सरकार ने एक उच्च-स्तरीय समिति का गठन किया. इस समिति को एक व्यापक रणनीति के क्रियांन्वयन का कार्य सौंपा गया है जिसमें हैजा की रोकथाम व प्रतिक्रिया के सभी पहलु तथा परिवारों व समुदायों को वृहत सहायता उपलब्ध कराना शामिल है.
इसके अलावा हैती के स्वास्थ्य मंत्रालय तथा पैन-अमेरिक��� हेल्थ ऑर्गनाइजेशन/विश्व स्वास्थ्य संगठन मिलकर एक व्यापक टीकाकरण अभियान के द्वितीय चरण की शुरूआत कर रहे हैं. संयुक्त राष्ट्र द्वारा वित्तपोषित इस अभियान में उन इलाकों के छह लाख लोगों को हैजा के टीके लगाए जाएंगे जहां इस बीमारी का सर्वाधिक प्रकोप है. दो लाख लोगों को अगले कुछ महिनों में तथा तीन लाख लोगों को इस साल के अंत तक टीके लगाए जाएंगे. पिछले साल प्रथम चरण के दौरान एक लाख लोगों को प्रतिरोधात्मक टीके लगाए गए थे.
इन प्रयासों की बदौलत इस महामारी से मरने वालों की संख्या में काफी हद तक कमी आई है. इस साल के पहले कुछ महिनों के दौरान हैजा से ग्रस्त लोगों तथा इसके कारण होने वाली मौतों की संख्या 2013 की इसी अवधि की तुलना में लगभग 75% घटी है और महामारी फैलने की शुरूआत से लेकर अब तक सबसे निचले स्तर पर पहुंच गई है.
यह निश्चित है कि पश्चिमी गोलार्द्ध में हैजा के सर्वाधिक संभावित मामले अकेले हैती में पाए जाते हैं. ज्ञान व संपदा से संपन्न दुनिया में यह अस्वीकार्य है. लेकिन यह देश सफलता के मार्ग पर अग्रसर है. जिस तरह दुनियाभर में अन्य अत्यंत कठिन परिवेशों में हैजा का सफाया हुआ है उसी तरह यह हैती से भी मिटाया जा सकता है.
लेकिन अंशतः इस देश के प्रति संयुक्त राष्ट्र की प्रतिबद्धता की बदौलत हैती तथा अन्य क्षेत्रों में भी स्थिति में सुधार आ रहा है. सन् 2004 से संयुक्त राष्ट्र का स्थिरता मिशन (मिनस्टाह) हैती में सुरक्षा परिवेश को सुधारने, राजनीतिक प्रक्रिया को समर्थन देने, सरकारी संस्थानों को सुदृढ़ करने तथा मानव अधिकारों की रक्षा के लिए कार्य कर रहा है. इसने 2010 के भूकंप के बाद से देश को स्थिर करने तथा पुनर्निर्माण में बड़ी भूमिका निभाई है.
मिनस्टाह के प्रयासों की बदौलत - तथा संयुक्त राष्ट्र की अन्य एजेंसियों के सहयोग से सुरक्षा हालात में भारी सुधार आया है. इसमें सशक्त न्यायिक व्यवस्था और अधिक प्रभावी राष्ट्रीय पुलिस बल का बड़ा योगदान है. इसी दौरान प्राथमिक विद्यालयों में नामांकन की दरें बहुत अधिक बढ़ी हैं. ये 1993 में 47% से बढ़ कर आज 90% के करीब आ गई हैं.
लेकिन नाजुक राजनीतिक व सामाजिक स्थिति, कमजोर अर्थव्यवस्था तथा गहन वित्तीय तंगी के चलते हैती की निरंतर प्रगति निश्चितता से कोसों दूर है. अपने विकास के लक्ष्यों को हासिल करने के लिए अवसरों में सुधार लाने हेतु हैती को इस साल के अंत तक अपने यहां विधायिका तथा स्थानीय चुनावों को संपन्न कराना चाहिए. ये चुनाव लंबे समय से लंबित हैं. हैती के नेताओं को अपने दलगत राजनीतिक मसलों से ऊपर उठ कर अपने मतभेदों को दूर करना चाहिए ताकि निष्पक्ष चुनाव कराए जा सकें, कानून का शासन स्थापित हो सके, मानव अधिकारों की रक्षा हो सके और देश में लोकतंत्र की बुनियाद मजबूत हो सके.
अंतर्राष्ट्रीय समुदाय का निरंतर समर्थन भी आगे अनिवार्य बना रहेगा. सबसे जरूरी है कि अपनी 10 साल की 2.2 अरब डॉलर की राष्ट्रीय हैजा उन्मूलन योजना के लिए हैती को आर्थिक सहायता चाहिए. अभी तक 44.8 करोड़ डॉलर का मात्र 40% ही हैती को मिल पाया है. यह रकम अग्रिम चेतावनी, त्वरित प्रतिक्रिया, जल, स्वच्छता तथा टीकाकरण में पहले दो साल के दौरान निवेश के लिए जरूरी है. यह रकम कुल प्रस्तावित सहायता की मात्र 10% है.
हैजा महामारी से पार पाने तथा समावेशी आर्थिक विकास के लक्ष्यों को हासिल करने के लिए जरूरी गुण लगाव तथा संकल्प हैती के लोगों में कूट-कूट कर भरे हैं. लेकिन इसके लिए अंतर्राष्ट्रीय समुदाय - विशेषकर इस क्षेत्र में कार्यरत अंतर्राष्ट्रीय वित्तीय संस्थानों को उनका साथ देने के लिए कमर कसनी पड़ेगी.
लॉस पल्मास में मैंने जो मेजबानी और प्रेम पाया उससे मैं अत्यंत प्रभावित हुआ. लेकिन मैं यह भी समझता हूं कि हैती के लोग आशा करते हैं कि उनकी सरकार और संयुक्त राष्ट्र उस दिन किए गए वादों को जरूर पूरा करेंगे. यदि हर कोई अपनी भूमिका को बखूबी निभाए तो हम हैती वासियों को ज्यादा स्वस्थ व अधिक संपन्न भविष्य दे पाएंगे जिसके वे हकदार हैं.
Ban Ki-moon’s Hushed Power
NEW YORK – Days after Sri Lanka’s government defeated its long-time foe, the Tamil Tigers, in May, United Nations Secretary-General Ban Ki-moon flew into the country’s capital, Colombo, for a 24-hour visit to urge its president to open up its refugee camps to international aid groups.
This was another urgent trip by Ban to a war-torn capital, as part of his regular duties as the UN’s chief representative, seeking to uphold peace and restore global comity.
But who really knew much about this latest foray into a troubled region by the UN chief?
Not many.
Ban, who has just marked the half-way point in his five-year term in office, has so far been unable to attract a large worldwide audience for his activities. This is due, in part, to stylistic reasons, but also to the vagaries of UN diplomacy.
Still in his quiet way, Ban is spending more than a third of his time on the road, and has accomplished much over the past 30 months.
In Darfur, he managed to get African Union peacekeepers into Sudan’s killing zone in his first year in office through intensive behind-the-scenes diplomacy.
Though the political process has since stalled, he has pushed for more peacekeepers and helicopters.
In Kosovo, Ban was able to lower the temperature on the boiling issue of the province’s independence.
He persuaded the European Union and the United States to allow continued UN oversight in Kosovo while gradually permitting self-governance – all without triggering dangerous confrontations with the two states which oppose its breakaway, Serbia and its close ally, Russia.
In Myanmar, despite bitter resistance from the military regime, Ban pressured the authorities to let in humanitarian aid after Cyclone Nargis devastated the country last year.
His public and private entreaties, including dozens of phone calls and meetings, saved perhaps a half-million lives.
Today, he continues his call for the release of the democracy leader, Aung San Suu Kyi.
In Haiti, which still suffers from underdevelopment, political turmoil, and the effects of destructive hurricanes, Ban appointed former US President Bill Clinton as his Special Representative to help deal with the country’s plight.
This followed two visits he made to Haiti over the past 18 months and a donor’s conference he sponsored in April that sought to raise $300 million in aid and investment.
More recently, Ban took an active role in the Gaza crisis.
He has regularly defended the Palestinians’ rights to a state, but he also condemned Hamas’s rocket attacks on southern Israel.
During the fighting in Gaza, he publicly demanded a halt to the warfare and requested that Israel open Gaza’s borders to relief aid.
He also visited the UN compound in the center of Gaza to express the UN’s grave concern over its bombing.
Ban has taken a leadership position on the problem of global warming.
He tackled the issue at the Bali Conference of 2007, made it one of his central concerns at the UN, and will attempt to forge a new agreement among all global states at the UN Conference in Copenhagen in December 2009.
And he has moved forward in the health field.
He accelerated efforts to eliminate the world’s most dangerous ancient scourge, malaria, by naming a special adviser on the disease, and by forging innovative partnerships within the UN system that have brought together private industry, foundations, and non-governmental organizations.
His campaign has already helped to reduce the incidence of malaria.
The problem for Ban is his diffident manner, which stands in stark contrast with that of his predecessor, Kofi Annan, a larger than life secretary-general who dominated the scene through his flair, eloquence, and star power.
Ban, by contrast, is neither charismatic nor an inspirational speaker – indeed, his English is not as good as Annan’s.
In his own way, though, he is an engaging, polite man, hip to contemporary cultural icons, and even given to singing at public occasions with wry lyrics and verses.
Nonetheless Ban is sometimes criticized for not doing more, not listening enough, or deferring too much to the Big Five countries on the Security Council.
One of the main complaints is that communicating with him can be difficult.
Ban invariably nods his head in polite agreement without giving clear guidance.
Others say he has yet to prove he is a good manager and must push harder for internal management reforms at the UN.
Ban, in turn, has openly chastised member states for not giving him sufficient resources.
But, wherever the truth may lie, few critics take into account that he, like all former UN chief executives, has to deal with the reality that he possesses only moral power, not economic, military, or political power.
Still throughout his tenure, Ban has consistently displayed progressive instincts on issues, despite the fact that his candidacy was originally championed by an authoritarian Chinese government and a right-wing, UN-bashing American envoy to the organization, John Bolton.
In the end he should be measured by what he has accomplished rather than by personal foibles or flatness of style.
Banking on the IMF
CHICAGO – The biggest financial nightmare looming over the world economy is the insolvency of a large international bank.
Be it because of a sovereign default or because of large losses accumulated under complacent accounting rules, the insolvency of a large bank (particularly a European bank) is far from a remote possibility.
Even if it were a remote possibility, the 2008 financial crisis has taught us that rare events occur.
What makes this possibility the financial nightmare of choice, worse than the collapse of Lehman Brothers in 2008, is the fear that many sovereign states have already shot all their bullets and would thus be powerless to intervene.
Credit default swaps (CDS) of major southern European banks trade slightly lower than the CDS of their sovereign states, indicating that the market does not perceive the latter as able to support the former.
Unfortunately, almost two years after Lehman’s collapse, little has been done to address this risk.
The United States Congress is about to finalize a bill that will grant resolution authority over major US financial institutions to a newly formed systemic council.
The procedures to trigger this intervention, however, are complex and the funding is sufficiently opaque that the bill will not eliminate collateral damage from a large bank failure even for US institutions, let alone for international ones, whose unwinding would require coordination by several states, with varying degree of solvency.
To minimize the risk of an unruly collapse, it is necessary to approve an international resolution mechanism with authority over all major international financial institutions.
The goal would not be to rescue banks and their creditors, but to minimize the disruption that an uncontrolled default might cause.
This institution should be an international version of the US Chapter 11 Bankruptcy Code.
But, while the goal of Chapter 11 is to save the ongoing value of a firm, the goal of the international resolution mechanism should be to preserve the ongoing value of the counterparties of insolvent financial institutions.
The first problem to resolve in approving this mechanism is who should have this authority.
The obvious answer is the International Monetary Fund.
Created after WWII to finance temporary imbalances of the members of a fixed-exchange rate system, the IMF has been in search of a cause since the demise of the dollar exchange-rate system in 1971.
More importantly, through its numerous rescues of sovereign states, the IMF has acquired expertise in debt restructuring, while developing a reputation for toughness and impartiality, which would be very useful in these situations.
The IMF also has the unique advantage of being the only depositary of international reserves.
In the absence of an international fiscal authority, the IMF is the organization that comes closest to being one.
When a large financial institution is insolvent, the IMF should take it over, guaranteeing its short-term obligations, but wiping out the shareholders and repaying the long-term creditors only after all the other creditors (including the IMF itself) are repaid.
Some people would scream that this is tantamount to nationalization, but it is no more a nationalization that the US Chapter 11 bankruptcy process is.
Takeover by an international organization has three advantages over a domestic solution.
First, it makes certain that the cost (if the losses exceed the combined value of equity and long-term debt) is shared by the international community and not only by the country where the institution is located, making the intervention credible even when the sovereign state is not.
Second, by removing decision-making power from the national government that hosts an insolvent institution, this solution minimizes the potential distortions created by the lobbying power of the incumbent bankers.
Would you trust the Greek government to run a Greek bank in a non-corrupt way after a government takeover?
The IMF would be better.
Finally, thanks to IMF involvement, even less advanced countries would be able to take advantage of the best international expertise to address the problem.
If a major oil spill in Haiti were threatening the Gulf of Mexico, wouldn’t we want the best technology (and not just the technology available in Haiti) to try to contain it?
Why should it be any different in financial markets?
The last problem to be resolved is the trigger.
In the case of the US resolution authority, this has been a very controversial issue.
The fear was that powerful banks would exploit national government help, asking for intervention too soon.
Two safeguards can avoid this problem in the international context.
First, rigid rules that wipe out shareholders and penalize long-term creditors are a clear deterrent from bankers’ point of view.
Second, because IMF intervention would reduce the influence of powerful domestic insiders, early intervention would be less attractive to them.
The trigger should be the domestic government itself.
Refusing international help in such instances would mean electoral suicide for any government that faces a major bank collapse.
There are few areas in which government intervention is known to create value: reducing the devastating effects of a bank run is one.
Only a government that is sufficiently powerful, in terms of legal authority and solvency, can do so.
Unfortunately, in the international arena these two conditions are almost never met.
Empowering the IMF to take over failed international banks would fill this gap – and chase away our worst nightmare.
Central Bank Confidential
LONDON – In 1993, the economists Alberto Alesina and Larry Summers published a seminal paper that argued that central bank independence keeps inflation in check, with no adverse consequences for economic performance.
Since then, countries around the world have made their central banks independent.
None has reversed course, and any hint that governments might reassert political control over interest rates, as happened recently in India, are met with alarm in financial markets and outrage among economists.
In truth, however, there are many degrees of independence, and not all nominally independent central banks operate in the same way.
Some monetary authorities, like the European Central Bank, set their own target.
Others, like the Bank of England (BoE), have full instrument independence – control over short-term interest rates – but must meet an inflation target set by the government.
There are differences, too, in how central banks are organized to deliver their objectives.
In New Zealand, the bank’s governor is the sole decision-maker.
At the US Federal Reserve, decisions are made by the Federal Open Market Committee (FOMC), whose members – seven governors and five presidents of the Fed’s regional reserve banks – enjoy varying degrees of independence.
The ECB does not publish voting records and seeks consensus at the meetings of its General Council.
By contrast, the BoE’s Monetary Policy Committee (MPC) has nine members, four of whom are appointed from outside the bank, and all votes are individually recorded; nobody is allowed to hide behind an institutional view.
The Fed does not keep a voting record, but “dissents” from its major decisions are noted (these were almost unheard of when Alan Greenspan was Chairman, but have since become more common).
There are differences, too, in the relationship between policymakers and their staff, which also influences a central bank’s independence.
At the Fed, the staff present their own economic forecasts to the FOMC, without input from the policymakers who set the interest rate.
At the BoE, the MPC is responsible for official forecasts, which it publishes in its Inflation Reports.
That is helpful in influencing expectations, because a range of different views from the central bank could confuse the private sector; but it carries the risk of institutional groupthink.
Groupthink can be particularly dangerous if the central bank is also the banking supervisor, as the 2008 global financial crisis demonstrated.
In 2006, every central bank that published a financial stability report (in other words, most of them) concluded that their country’s banking system was in fine shape: well-capitalized and endowed with robust governance and strong risk management.
It seems unlikely that not a single central bank analyst was the least bit worried about the massive growth in credit and leverage at the time.
Economists at the Bank for International Settlements – an organization of central banks – were laying out the risks very starkly.
And yet not a dissenting voice was heard from the world’s small army of central bank economists.
Central banks may have been independent vis-à-vis their countries’ governments, but internally it was very difficult to stray from the party line.
There is, of course, a balance to be struck between tight institutional discipline and letting a hundred intellectual flowers bloom.
A central bank is not a university economics department, where diversity is almost invariably a source of strength.
External observers are bound to try to read policy messages between the lines of any publication, which may not always help the bank to achieve its objectives.
That said, there is clearly room for allowing more heterodox thinking.
So it is encouraging that the BoE is experimenting with a platform that enables a wider variety of views to be heard: a blog called Bank Underground (a reference to the Tube station beneath the Bank’s headquarters) that publishes posts by junior staff challenging – or supporting – prevailing policy.
In a matter of weeks, Bank Underground already has established itself as a fertile source of provocative ideas.
One post in the middle of August (when the Bank’s top cats were certainly away, allowing free rein to the mice) pointed to some of the weaknesses in banks’ internal capital models, which are at the heart of the Basel 3 capital-requirements regime.
The author, a BoE employee named Tobias Neumann, argued that incorporating more data into the models could lead them to pick up noise and mistake it for an important signal.
As a result, he concluded, highly complex models may regularly yield misleading information.
Another post, published in July, explicitly challenged the BoE’s “official” view that as the economy recovers, we can expect non-financial companies to begin to run down their cash balances to fund investment.
The authors, Katie Farrant and Magda Rutkowska, suggest that corporate behavior may have changed as a result of the financial crisis, as difficulties in accessing bank financing led them to increase their cash buffers permanently.
If true, this has important implications for the financial system, and especially for banks.
In its short life, Bank Underground has already proved its worth.
The BoE’s governor, Mark Carney, deserves great credit for allowing us to peer through a small crack in the Old Lady of Threadneedle Street’s façade (assuming, of course, that the blog is not a wholly unlicensed initiative!).
Perhaps we will eventually see the emergence of a rival Fed Subway blog, though I am not optimistic about the prospects for an ECB U-Bahn blog anytime soon.
In the meantime, I plan to spend more time underground.
Bank Regulation’s Capital Mistake
MEDFORD, MASSACHUSETTS – Imagine that the arguments triggered by the Hindenberg disaster were about the fire extinguishers and parachutes that airships should carry, rather than about the design flaws that might cause them to ignite.
Unfortunately, today’s debates about banking reform have just this character.
Reversing the robotic gigantism of banking ought to be the top priority for reform.
Bankers were once supposed to know every borrower, and to make case-by-case lending decisions.
Now, however, banks use models conjured up by faraway financial wizards to mass-produce credit and a range of derivative products.
Mass-production favors the growth of mega-banks, so, unlike the misjudgments of lending officers, these behemoths’ defective models have had disastrous consequences.
Radical proposals that would help restore a more resilient system, offered by the likes of Governor of the Bank of England Mervyn King, have been smothered by noisy discussion of measures that do nothing to address modern banking’s fundamental defects.
Consider the seemingly heated debate over how much capital banks should hold.
Regulators have proposed steep hikes: a Bank of England study, for example, suggested a more than three-fold increase.
Bankers, who may really be worried about their own bonuses, warn that higher capital requirements will force them to curtail lending, thus impeding economic growth.
In fact, this is all a pointless charade.
Yes, the principle of regulating bank capital seems sensible.
Borrowing increases risk in any business: you can’t go bankrupt if you have no debt.
Heavy borrowing also encourages owners and managers to go for broke, because it’s the creditors who bear most of the downside risk.
Prudent lenders therefore try to limit both how much a business can borrow and the other risks it can take.
But creditors don’t have an incentive to place tough limits on banks.
Because runs on banks can trigger widespread distress, governments explicitly guarantee insured deposits and implicitly guarantee all the other debts of mega-banks.
Governments that guarantee bank liabilities, however, must then also demand that bankers exercise more prudence than they might on their own.
Yet focusing mainly on how much banks borrow while ignoring other, more serious recklessness is a bad regulatory bet.
Bank regulation, like lending, was once decentralized and judgment-based.
Regulators relied mainly on examination of individual loans rather than capital-to-asset ratios.
A typical bank exam would include scrutiny of every single business loan and a large proportion of consumer loans.
Capital adequacy was a matter of judgment: examiners would figure out how large a buffer a bank ought to have, taking into account its specific risks.
Regulators then shifted to edicts requiring banks to maintain a specified capital cushion, thick enough to cover potential losses.
This approach presupposes that bank assets and exposures can be accurately measured.
In fact, the financial statements of mega-banks are impenetrable works of fiction or wishful thinking.
The problem goes beyond deliberate obfuscation.
J.P. Morgan and Deutsche Bank have paid substantial sums to settle charges ranging from bribery to illegal foreclosures to abetting tax evasion.
Ruling out the connivance of top executives raises an alarming question: Does Jamie Dimon, J.P. Morgan’s highly regarded CEO, have as little grasp of the exposures embedded in his bank’s nearly $80 billion derivatives book as Tony Hayward, the hapless ex-CEO of BP, had of the hazards of his company’s ill-fated rig in the Gulf of Mexico?
Indeed, ignorance about what is actually at risk makes debates about the right formula for capital buffers surreal.
Moreover, the use of mechanistic rules to determine capital adequacy has also inadvertently encouraged systemic imprudence.
Limits on borrowing that make it difficult to earn an adequate return on equity encourage banks to load up on riskier, high-profit-margin loans – and requiring banks to hold more capital for supposedly riskier categories of assets exacerbates the problem.
For example, under the internationally-agreed Basel Committee rules that were in place before the 2008 crash, capital requirements for business loans were five times higher than for mortgage-backed securities that had AA or AAA ratings.
Banks naturally avoided traditional business loans (which would have to be backed by more capital), and instead loaded up on the highest-yielding – and thus riskiest – AA or AAA mortgage- backed securities that they could find.
The global banking system and economy was thus vulnerable to the mistakes of the three main rating agencies and their flawed risk models.
Encouraging banks to turn loans kept on their books into securities also helped reduce the overall level of caution in the extension of credit.
Additionally, strategies to circumvent the Basel rules made banks more complex and difficult to manage and supervise.
Smarter capital requirements – better Basel rules – aren’t the answer.
Rigid, top-down uniformity is essential in the specification of weights and measures and the issuance of currency and coin.
Bank lending and regulation, by contrast, must incorporate local knowledge, because, in a dynamic, unregimented economy, each borrower, loan, and bank is different (though some general guidelines can help).
The seemingly objective top-down approach ignores the idiosyncratic nature of risk and assumes that one mortgage loan is like the next.
We can no longer afford to rely on old-fashioned examination for mega-banks loaded with mass-produced risks.
And because stockholders or raiders can’t force streamlining, governments must require these banks to shed activities that no one can manage or regulate and stick to hands-on case-by-case lending.
With huge profits and bonuses at stake, mega-banks won’t readily abandon their model-based businesses; but, unless that happens, placing most of our bets on top-down rules would be reckless folly.
Banks, States, and Financial Crises
PRINCETON – The most recent phase of the financial crisis, since the collapse of Lehman Brothers in September 2008, has been characterized by large bank losses and the continued threat of bank collapses.
The size of the calamity raises the question of whether small countries can really afford bank bailouts.
But the definition of “small” keeps changing: a few months ago, small meant Iceland, then it meant Ireland, and now it means the United Kingdom.
The aftermath of the banking crisis requires thinking about not only the most appropriate form of banking legislation, but also the appropriate size of the state.
There has always been uncertainty about the best design of a banking system, and there has always been competition between different sorts of banking regulation.
On the one hand, there is the idea – which defined banking for much of American history – that banks should be close to the risks that they must judge.
This ideal grew out of Andrew Jackson’s titanic struggle with Nicholas Biddle and the Second Bank of the United States.
Populism was pitted against the financiers, and populism won.
As a result, most nineteenth-century US banks did not have branches, and were limited to one state.
The alternative approach was that of Canada, which, because of its roots in secure British rule, had much less fear of political centralization, and was prepared to tolerate a nation-wide banking system.
Canada’s large banking system distributed risk more widely, and fared better in episodes of financial panic, whether in 1907 or in 1929-1933.
The larger-bank principle has two chief attractions.
First, it promises more effective risk management, because large banks are less exposed to a single sort of customer (in contrast to rural American banks, which suffered when American farmers suffered).
Second, it lends itself much more effectively to long-term strategic thinking about the overall direction of the national, or even the international, economy.
But larger banks can get into trouble when these two principles get mixed up.
The idea of the larger bank reached its high point in continental Europe, and especially in Germany, whose big banking system developed out of trade finance and into industrial finance in the late nineteenth century.
By that time, countries were looking with eager interest at financial models developed elsewhere.
After the 1907 panic, the US Congress convened a National Monetary Commission, whose most interesting and attractive potential model for the US was German-style universal banks, which were imitated in Russia, Japan, Italy, and Egypt.
By 1931, even Britain found it hard to resist the German model.
It, too, conducted an official inquiry, establishing the Macmillan Committee to hear evidence about how poorly British banks served British industry, and how the German model did a much better job at converting savings into industrial finance.
The Great Depression ended this imitative surge in which the universal bank appeared to triumph.
By an unfortunate coincidence, the Macmillan Committee produced its report on July 13, 1931, the day that Germany’s most dynamic universal bank, the Darmstädter Bank, failed.
By the 1990’s, however, emulation of other banking models was back in fashion.
Financial empire building drove late twentieth-century globalization.
There was a competitive race across the Atlantic and – to a lesser extent – the Pacific.
Indeed, gradual integration of the potentially vast European capital market, and the creation of cross-border European banks as a result of mergers, made it look as if a new European breed of superbanks was emerging.
Likewise, Japan responded to its banking crisis by creating very large merged institutions, while the US repealed much of the depression-era legislation that restricted banking.
Finally, after Mexico’s 1994-95 peso crisis and the 1997-1998 Asian financial crisis, the US exported its new banking model to the emerging-market economies.
Spanish and US banks moved heavily into Latin America.
The appeal here was the opportunity for strategic vision, most clearly seen and pursued by Robert Rubin, first as Treasury Secretary in the Clinton administration and then as an adviser to the new giant of US banking, Citigroup, which emerged out of a 1998 merger.
But the new superbanks were inherently vulnerable because of the vast diversity and complexity of their transactions.
Long before the emergence of the sub-prime mortgage problem, Citigroup was damaged by the behavior of its London traders, who tried to manipulate the European government bond market, and by its Tokyo traders.
It is much simpler for a transnational manufacturing corporation to implement controls to ensure product quality.
By contrast, in a company whose business is financial intermediation, millions of judgments are made independently, and their implications may be serious enough to threaten the entire firm.
When the strategy goes wrong, the recriminations begin.
Traditional mid-sized European states cannot afford to have a strategic vision for their banks. But, even for the US, the notion of a world held together by Citigroup’s business plan is simply too costly.
There is a danger that in the push to nationalize banks as a consequence of the financial crisis, governments will see it as their duty to implement strategies.
The strategic vision of a bank shaping the economic fortunes of a country, or the whole world, is as flawed as was the idea of central economic planning.
In this sense, 2007-2009 is the capitalist equivalent of the communist demise of 1989-1991.
Ban the Common Bond
FRANKFURT – With the deepening of the global financial crisis, spreads between the government bonds of different European Monetary Union (EMU) countries for a while widened dramatically.
Relative to German bonds, the spreads in February of secondary-market yields of government bonds with maturities of close to ten years were 141 basis points for Italy, 257 for Greece, and 252 for Ireland, compared to just 32, 84, and 25 basis points, respectively, in 2000.
In EMU’s early years, long-term interest rates in euro-zone countries more or less converged to the low levels seen in countries like France, Germany, and the Netherlands before the euro’s introduction.
Italy and Greece enjoyed huge declines in the cost of servicing their public debt in comparison to pre-EMU days.
For many people, the introduction of the euro meant not only that currency risk – i.e., the risk of devaluation – had disappeared, but also that all euro-zone members now belonged to an economic area of monetary stability and, thanks to the discipline of the Stability and Growth Pact, of fiscal stability.
Moreover, before the crisis, differences in long-term interest rates among EMU members were around 25 basis points, despite unfavorable fiscal developments in some EMU countries.
But today, countries with rising budget deficits, like Ireland, along with countries with high levels of public debt, like Greece and Italy, are at risk to pay substantially higher rates on their government bonds.
Risk-averse investors may now demand higher risk premia for buying bonds from countries seen as weak debtors.
On the other hand long-term interest rates in countries with stronger fiscal positions – France, Germany, and Finland – have enjoyed low rates as a consequence of a “flight to quality.”
This rise in long-term interest rates has hit the countries with sharply deteriorating fiscal positions hardest.
It is even suggested that some countries might abandon EMU if this process continues – a threat that, if carried out, would amount to economic suicide.
It comes as no surprise, then, that the idea of a common European bond is becoming popular as a way to counter the risk of rising EMU interest-rate spreads.
The main idea is to reduce the risk premia paid by debtors with lower fiscal credibility.
But this can be achieved only by implicit or explicit guarantees from EMU countries with sound public finances.
A “true” pan-European bond would have to entail a joint guarantee by all countries of the full bond issue, with the “strongest” guaranteeing the “weakest,” which supporters of a bond idea suggest constitutes true European solidarity.
A common bond would eliminate the interest-rate spread between bonds issued by different euro-zone countries, so the question that must be addressed is what effect its issuance would have on the level of the interest rate, and more importantly on future fiscal policy and the euro itself.
A common euro-zone bond certainly implies that countries like France and Germany would have to pay higher interest rates, ultimately resulting in higher tax burdens for their citizens.
Moreover, once the markets expect substantial amounts of the common bond to be issued, interest rates on the huge stock of existing – purely national – bonds of solid countries would be likely to increase substantially.
No one can possibly know in advance exactly how big this “bill” might be, though that question – important as that is – misses the crucial point: a common bond would be the first step down a slippery slope to bail-outs, and thus to the end of the euro area as a zone of stability.
To see why, recall that the immediate trigger for rising interest-rate spreads was financial markets’ growing concerns about the solidity of some euro-zone countries, owing to dramatic deterioration in their current and expected fiscal positions.
A common bond would be no cure for a lack of fiscal discipline; on the contrary, it would be no more than a placebo for a “weak” country, but it would also be harmful because it would foster the illusion that it is possible to get out of fiscal difficulty without undertaking fundamental reform.
Encouraging weak countries to prolong their reliance on budget deficits by holding out the hope of a de facto bail-out would be very costly for EMU’s more solid countries, while undermining EMU’s hard-won credibility as an area of stability and fiscal soundness.
And this latter cost would have to be paid by all euro-zone countries.
A pan-European bond would also have serious political repercussions.
Any policy that forces countries that opted for fiscal solidity to pay for those with large deficits and high debt levels would strongly undermine public support for the euro zone. “Solidarity” in the true sense means that all euro-zone countries should comply with EMU’s fundamental rules by adhering to the Stability and Growth Pact and the “no bail-outs” principle.
Countries tempted to undermine these principles by failing to fulfill their solemn commitments only demonstrate their own lack of solidarity.
Barack Obama and American Power
CAMBRIDGE – One of the first challenges that President Barack Obama will face is the effects of the ongoing financial crisis, which has called into question the future of American power.
An article in The Far Eastern Economic Review proclaims that “Wall Street’s crack-up presages a global tectonic shift: the beginning of the decline of American power.”
Yet the dollar, a symbol of American financial power, has surged rather than declined.
As Kenneth Rogoff, a Harvard professor and former chief economist of the IMF notes, “It is ironic, given that we just messed up big-time, that the response of foreigners is to pour more money into us.
They’re not sure where else to go.
They seem to have more confidence in our ability to solve our problems than we do.”
It used to be said that when America sneezed, the rest of the world caught a cold.
More recently, many claimed that with the rise of China and the petro-states, an American slowdown could be decoupled from the rest of the world.
But when the United States caught the financial flu, others followed.
Many foreign leaders quickly switched from schadenfreude to fear – and to the security of US treasury bills.
Crises often refute conventional wisdom, and this one reveals that the underlying strength of the American economy remains impressive.
The poor performance of Wall Street and America regulators has cost America a good deal in terms of the soft power of its economic model’s attractiveness, but the blow need not be fatal if, in contrast to Japan in the 1990’s, the US manages to absorb the losses and limit the damage.
The World Economic Forum still rates the American economy as the world’s most competitive, owing to its labor-market flexibility, higher education, political stability, and openness to innovation.
The larger question concerns the long-term future of American power.
A new forecast for 2025 being prepared by the US National Intelligence Council projects that American dominance will be “much diminished,” and that the one key area of continued American superiority – military power – will be less significant in the competitive world of the future.
This is not so much a question of American decline as “the rise of the rest.”
Power always depends on context, and in today’s world, it is distributed in a pattern that resembles a complex three-dimensional chess game.
On the top chessboard, military power is largely unipolar and likely to remain so for a while.
But on the middle chessboard, economic power is already multi-polar, with the US, Europe, Japan and China as the major players, and others gaining in importance.
The bottom chessboard is the realm of transnational relations that cross borders outside of government control.
It includes actors as diverse as bankers electronically transferring sums larger than most national budgets, as well as terrorists transferring weapons or hackers disrupting Internet operations.
It also includes new challenges like pandemics and climate change.
On this bottom board, power is widely dispersed, and it makes no sense to speak of unipolarity, multipolarity, or hegemony.
Even in the aftermath of the financial crisis, the giddy pace of technological change is likely to continue to drive globalization, but the political effects will be different for the world of nation-states and the world of non-state actors.
In inter-state politics, the most important factor will be the continuing “return of Asia.”
In 1750, Asia had three-fifths of the world population and three-fifths of the world’s economic output.
By 1900, after the industrial revolution in Europe and America, Asia accounted for just one-fifth of world output.
By 2040, Asia will be well on its way back to its historical share.
The rise of China and India may create instability, but it is a problem with precedents, and we can learn from history about how policies can affect the outcome.
A century ago, Britain managed the rise of American power without conflict, but the world’s failure to manage the rise of German power led to two devastating world wars.
The rise of non-state actors also must be managed.
In 2001, a non-state group killed more Americans than the government of Japan killed at Pearl Harbor.
A pandemic spread by birds or travelers on jet aircraft could kill more people than perished in World Wars I or II.
The problems of the diffusion of power (away from states) may turn out to be more difficult than shifts in power between states.
The challenge for Barack Obama is that more and more issues and problems are outside the control of even the most powerful state.
Although the US does well on the traditional measures of power, those measures increasingly fail to capture much of what defines world politics, which, owing to the information revolution and globalization, is changing in a way that prevents Americans from achieving all their international goals by acting alone.
For example, international financial stability is vital to American prosperity, but the US needs the cooperation of others to ensure it.
Global climate change, too, will affect the quality of life, but the US cannot manage the problem alone.
And, in a world where borders are becoming increasingly porous to everything from drugs to infectious diseases to terrorism, America must mobilize international coalitions to address shared threats and challenges.
As the world’s largest economy, American leadership will remain crucial.
The problem of American power in the wake of the financial crisis is not one of decline, but of a realization that even the most powerful country cannot achieve its aims without the help of others.
Fortunately, Barack Obama understands that.
Barack Obama, Israel’s True Friend
HAIFA – How do you tell a true friend?
By the fact that he believes and has confidence in you, cares about your true needs, and honestly tells you your mistakes, which he tries to help you correct.
That is the kind of friend I want at my side, not one who automatically approves of whatever I do, declares his love for me, and accepts me as I am.
Ever since its great military victory in the Six-Day War of 1967, when it repelled the combined armies of Egypt, Syria, and Jordan, which had openly proclaimed their desire to destroy the Jewish state, Israel has been in the throes of an ideological and military confusion resulting from the conquests it made during that conflict.
Following the Six-Day War, Israel did not consider the conquered lands as something to be traded for peace, and thus induce the Arab world and the Palestinians to recognize its legitimacy and ensure the demilitarization of Palestinian territories after their restitution.
Instead, Israel – either because of its distrust of its enemies and of their commitment to respect any future peace agreement, or because of a desire to annex some of the territories – began to pursue a policy of settlements.
But, in doing so, it created a reality that is difficult to reverse.
Israel’s non-military settlements are, and have always been, irrelevant to the country’s security.
On the contrary, because the settlements are located in the heart of the Palestinian population, they are convenient targets for terrorist attacks and require special defensive measures, including the deployment of large military forces engaged in patrolling and surveillance.
Even on the Golan Heights, where there is no Syrian presence, the settlements, located only a few kilometers from enormous Syrian troop concentrations, create a heavy burden, because, in the event of war, the Israeli army would be forced to evacuate them quickly, as was the case during the Yom Kippur war of October 1973.
The settlements intensify Palestinian hatred toward Israel.
In addition to occupying Palestinians’ land, using their water, and imposing limits on their freedom of movement, the settlements symbolize Israel’s intention to remain, and thus its reluctance to concede independence to the Palestinian people, even if they were to recognize Israel’s legitimacy and show themselves disposed to peaceful coexistence.
Israel has invested great financial resources in the settlements, often ignoring important needs in Israel proper.
The settlers, predominantly supporters of religious-nationalist movements and parties, often flaunt an attitude of superiority in their relations with Israeli authorities, pretending to have a special status with respect not only to Palestinians, but also to other Israeli citizens.
Indeed, a substantial number of them don’t even recognize the Israeli state’s legal authority.
The greatest problem with the settlements is that if they continue to expand, the two-state solution will be compromised and, sooner or later, lead to a unitary state – one populated by two ethnic groups – between the Jordan River and the Mediterranean Sea.
Because simple demographic implies that Palestinians would gradually come to constitute a majority, a unitary state is a recipe for the end of Israel.
The majority of Israelis understand this.
But, like an incorrigible drug addict, they are unable to say, “Enough.
We have made a mistake, and we have to remedy it before it’s too late.”
To be sure, when a peace treaty was signed with Egypt, Jewish settlers were forcibly evacuated from the Sinai.
Similarly, when Jewish communities in the Gaza Strip became unsupportable, the leader of the right, Ariel Sharon, forced out the 9,000 settlers who lived there among 1.5 million Palestinians – a dramatic event that has left deep scars on both sides.
But there are 250,000 Israeli settlers in the West Bank.
Any attempt to evacuate them could escalate into a civil war.
The world, including the United States, disapproves of the Israeli settlements.
But, despite past US administrations’ opportunity to make their influence felt, they preferred to permit Israel, an allied, friendly state, to do what it wanted.
So a moment of truth has arrived.
Barack Obama, a wise and courageous leader, is – I have no doubt about it – not merely interested in improving America’s image in the eyes of the Muslim world.
He also seeks Israel’s welfare and security, and says to us, “Enough.
Stop harming yourselves and your own future.
Even if you don’t believe in Palestinians’ real desire for peace, their capacity to hold terrorist organizations at bay, or their renunciation of the alleged right of return, you can always protect your security with a military presence in Palestinian territories rather than prejudicing the future peace and the two-state solution by expanding useless settlements.”
With such a clear and direct appeal to the Israeli government, America’s president not only expresses what a majority of Israelis know.
He also proves his profound friendship for the Jewish state.
Barack Obama’s American Revolution
For eight years, George W. Bush has managed to incarnate and reinforce all the prejudices and negative stereotypes the world has of the US.
He has antagonized the world more than any other American president before him, seriously damaging America’s “soft” power by inefficient and excessive use of its “hard” power.
Reconciling the United States with itself and the world should thus be the twin priorities for America’s next president.
If there is one candidate who can accomplish this, who can contribute, in a split second, to restoring America’s international reputation, it is Barack Obama.
Exceptional periods sometimes create exceptional leaders.
Without the French Revolution, Napoleon Bonaparte would have remained a gifted and frustrated junior military officer.
Likewise, the current period in America and its relations with the world have been truly exceptional, requiring a leader who can fundamentally challenge a global majority’s view that America has become arrogant, impotent, and selfish.
Of course, diehard anti-Americans will never be persuaded, but they remain a minority, with the possible exception of the Muslim world.
The silent majority is ready to be convinced that there is life after Bush.
Why is Obama so different from the other presidential candidates, and why could he make such a large difference internationally?
After all, in foreign policy matters, the next president’s room for maneuver will be very small.
He (or she) will have to stay in Iraq, engage in the Israel-Palestine conflict on the side of Israel, confront a tougher Russia, deal with an ever more ambitious China, and face the challenge of global warming.
If Obama can make a difference, it is not because of his policy choices, but because of what he is.
The very moment he appears on the world’s television screens, victorious and smiling, America’s image and soft power would experience something like a Copernican revolution.
Think of the impression his election would make not only in Africa, but in Asia, the Middle East, and even Europe.
With its rise to global supremacy, America had become the incarnation of the West, and the West was seen as “white.”
Power in America shifted first from the East Coast to the West Coast, and then to the South.
But if a shift across America’s racial divide is not truly revolutionary, then what is?
Of course, to reduce Obama to the color of his skin is a grave oversimplification, even if he has been keen to emphasize his “black roots.”
In fact, African-Americans do not fully support him.
With his white mother and his African father, he does not fit any African-American precedent.
But that is another reason why Obama is exceptional: the complexity of his identity makes him truly universal, a global candidate for a global age.
By virtue of his unique personal history, he can bridge Africa, America, and even Asia – where he studied as a young boy in a Muslim school – thereby reviving the universal image and message of America.
But, above all, what makes Obama unique, given what the US has been through during the Bush years, is the nature of the message he embodies, which is best summed up in the title of his book The Audacity of Hope .
If America can move from a culture of fear to one of hope – and again incarnate hope for the world – it will require a leader who embodies the American dream: modern and armed with a humanistic religious message, in contrast to the anxious irrationalism of the Christian conservative movement that fueled Bush’s political base.
Regardless of whether Obama can deliver on his promises, America will not regain the stature it had between 1941 and 2000.
With or without Obama, the “American century” will not be repeated.
But Obama can learn from the early mistakes made by Jimmy Carter in the mid-1970’s.
Neo-isolationism is not an option, but restraint – based on confidence and wisdom – is.
The world needs a more modest and confident America.
For a European who has been deeply troubled and saddened by America’s evolution in the last decade, Obama, of all the declared presidential candidates, seems to come closest to incarnating such an America.
Jimmy Carter Obama
PARIS – “How many divisions does the Pope have?” Joseph Stalin famously quipped when told to be mindful of the Vatican.
In an updated lesson in realpolitik, Russian President Vladimir Putin recently was happy to count Pope Francis as an ally in opposing American military intervention in Syria.
Presenting himself as the last pillar of respect for international law, Putin offered ethics lessons to the United States – and specifically to President Barack Obama.
With the US-Russian agreement, signed in Geneva on September 14, to place Syria’s chemical weapons under international control, Russia has returned to the global scene – and not only because of its nuisance value.
Could Putin one day receive, like Obama before him, a Nobel Peace Prize?
Has not Foreign Minister Sergei Lavrov, who proposed the deal, already entered the pantheon of great Russian diplomats, as the successor of Karl Nesselrode, the Russian envoy to the 1814-1815 Congress of Vienna and to the Congress of Paris in 1856?
Of course, Russian diplomacy has performed extremely well recently, but it does not stand on its own merits alone.
Russia’s diplomats would have gained little without America’s foreign-policy malaise – a victim of Obama’s vacillation and of Americans’ hostility to any new military adventure, however limited its scope – and Europe’s deep internal divisions.
Yes, Russia is emerging from its humiliation following the collapse of the Soviet Union.
Heir to an imperial tradition that has shaped its national identity, Russia is resuming in the Middle East a role and status more in tune with the one it had from the Czarist era to Soviet times.
But Russia is no match for the US militarily and no match for China economically, and its soft power is virtually non-existent.
If Russia can provoke America – whether by granting political asylum to the “traitor” Edward Snowden, for example, or by resisting Western diplomacy in the Middle East – it is not because it has become a great power once again, but simply because America is no longer the great power that it once was.
The Syrian crisis has made that plain.
Recent US diplomacy has seemed amateurish and naive.
Obama’s handling of the Syrian crisis increasingly evokes Jimmy Carter’s handling of the Iranian hostage crisis 33 years ago, particularly the failed operation in 1980 to rescue the Americans abducted following the takeover of the US embassy in November 1979.
Then, too, hesitation seemed to prevail over determination, contributing to the failure of the mission.
Carter was a somewhat bland engineer, whereas Obama is a charismatic lawyer.
Yet they seem to share a fundamental indecisiveness in their approach to world affairs.
Carter had difficulty choosing between the muscular line of his national security adviser, Zbigniew Brzezinski, and the more moderate approach of his secretary of state, Cyrus Vance.
By contrast, there are no fundamental disagreements among Obama’s closest foreign-policy advisers – Susan Rice, the national security adviser, Samantha Power, who succeeded Rice as US Ambassador to the United Nations, and Secretary of State John Kerry.
Instead, it is Obama himself who seems to be constantly hesitating.
The divisions are not among his advisers, but within his own mind.
As a good lawyer, Obama weighs the pros and cons, aware that it is impossible to do nothing in the Syrian crisis but remaining viscerally disinclined to leap into any foreign entanglement that would distract attention from his agenda of domestic reform.
More important, he seems to lack a coherent long-term strategic vision of America’s role in the world.
Neither the currently fashionable “Asian pivot” nor the “Russian reset” four years ago constitute the beginning of a grand plan.
In such a context, the return of global realpolitik can only benefit Russia and harm the US, despite America’s many advantages in terms of hard and soft power.
The agreement on Syria’s chemical weapons struck by Russia and the US could one day be remembered as a spectacular breakthrough in the field of arms control.
But it is more likely to be perceived as a grand deception – remembered not for helping Syria’s people, but mainly as a sign of America’s growing international weakness.
In that case, the agreement will not only damage America’s reputation, but will also undermine global stability.
Weakness is weakness, whether one is in Moscow, Beijing, Tehran, or Pyongyang.
Barack Obama’s Missing Freedom Agenda
On his second full day in office, President Barack Obama made a major gesture toward restoring the Constitution and the rule of law by signing two executive orders: one closed the prison at Guantánamo Bay, and the other restored America to the company of civilized nations by closing so-called “black sites” that facilitated state-sanctioned torture.
Nice start, and the credit goes both to Obama and to the millions of Americans who stood up and took risks to fight against gathering tyranny.
But it is not enough.
There is a speech that we still need to hear, detailing five tasks that, in order to repair the damage to liberty caused by the previous administration, he must pursue as quickly as he handled the first two executive orders.
Its substance should be something like the following:
“My fellow Americans, the Founders had the wisdom to guarantee our freedoms in many ways.
They could not guarantee our souls.
That is up to us and how we act.
“In every major religion, a version of the following question is asked: what does it profit us to gain wealth and power if we lose our moral values?
In the past eight years, we have colluded with acts that jeopardized the very soul of our nation.
The greatest crime we committed or tolerated was the savaging of our cherished Constitution.
“Without our Constitution, America is just another world power made great by wealth and weapons instead of by values and convictions; so we are at risk of collapse when our wealth and weapons fail us.
It is our Constitution that is our true wealth and the true guarantee of our nation’s endurance.
“After closing Guantánamo Bay and forbidding torture, we must repeal the Patriot Act, thereby restoring the Constitution’s restraints against warrantless wiretapping and surveillance.
“Second, though we have closed the prisons, we must seek the forgiveness of our fellow nations for the horrors that we committed or with which we colluded by engaging in state-sanctioned torture and “extraordinary rendition” of detainees to countries that torture. I am appointing a commission to establish a truth and reconciliation process to put the accounting of these horrors before our own consciences and before the world.
“Third, we must have a special prosecutor to prosecute the culpable.
Many in the military or the intelligence services now fear criminal liability for actions they took at the behest of those at the top of the chain of command.
But the proper course of action is that taken in Nuremberg, The Hague, Sierra Leone, and after the Bosnian conflict: prosecute those who designed, approved, and implemented the policy of torture and rendition, however high the chain of commission goes – including the lawyers who justified legal perversions that led to torture and murder – rather than targeting those farther down the chain of command.
“Fourth, let us once again outlaw the presence of the military on our streets, as the Founders intended.
On October 7, 2008, more than 3,000 American troops were deployed from Iraq to the United States, in violation of Posse Comitatus, which has protected us from military policing for a century, and in violation of the Insurrection Act, which protected us for the century before that.
Today, there are 20,000 soldiers – not accountable to the people, but only to the executive – on our streets.
“The danger of that situation is why the Founders adopted the Second Amendment, which is meant to restrict domestic policing to militia – the National Guard and civilian police – that are answerable to the people.
America is neither a battlefield nor a police state, so we should send our soldiers to the actual front or else back home to their families.
“Finally, we must ensure that this darkness never descends again.
Half of American children grow up with no civic education. Half of states no longer teach civics – the study of our Republic and how it works – in middle school.
So half of incoming American college students don’t know what our democracy is, let alone how to defend it when it is threatened.
I call on states throughout the land to re-institute the study of US civics so that we will produce citizens who understand our legacy and can defend liberty and the Constitution when it is threatened.
“Join me in accomplishing these next five tasks, and we can look at ourselves in the mirror again, recognizing ourselves as true Americans.”
Qaddafi’s Long Shadow
ANTALYA – The recent coup attempt in Libya, led by General Khalifa Hiftar, has finally pierced the illusion that the country’s dysfunctional central government, whose power is limited to the capital, Tripoli, can rule effectively.
But determining how to bring peace and stability to Libya’s deeply fragmented society will require more than an assessment of this government’s mistakes; it will demand careful consideration of former leader Colonel Muammar el-Qaddafi’s failures – and his successes.
Hiftar believes that the key to solving Libya’s myriad crises lies in establishing a strong national army capable of subduing the Islamists who are destabilizing the country.
Others continue to advocate for national reconciliation.
But neither solution addresses what is really driving events in Libya: the legacy of Qaddafism.
Given that Qaddafi ruled Libya for more than four decades, his is a legacy that cannot simply be ignored.
That means not only recognizing the vital link between his policies and today’s problems, but also ensuring that what should be preserved is not sacrificed in the rush to efface his memory.
Qaddafi used strong security services and paramilitary revolutionary committees to safeguard his rule, leaving state institutions dysfunctional and fragmented.
Indeed, Qaddafi’s belief that the bureaucracy impeded the transmission of his message to the masses spurred him to dismantle ministries periodically and place privileged personal relationships above institutional hierarchies.
Lacking unified leadership, Libyans reverted to tribal and regional allegiances, at the expense of a shared national identity.
This atomization of the state and society continues to impede Libya’s ability to establish effective and credible government.
With the right approach, however, there is hope.
The problem is that Libya’s leaders have so far done more to perpetuate fragmentation and dysfunction than to ameliorate it.
In its two years in power, the parliament, known as the General National Congress (GNC), has empowered non-state actors, with ministries bypassing the army to task militias with security operations.
Hiftar recognizes the problem with this approach – indeed, it spurred him to initiate the coup; but his proposed solution is equally flawed.
After all, Libya’s security forces have already proved to be more likely to facilitate than fight cronyism.
Moreover, instead of eliminating Qaddafi’s highly politicized judicial system – for example, separate courts, administered by the revolutionary committees, could try any Libyan without due process – his successors have embraced it.
In 2012, a United Nations report revealed that “the vast majority” of an estimated 8,000 conflict-related detainees were being held outside of the state’s purview.
Militias have taken advantage of this system to strong-arm prosecutors into issuing arrest warrants.
And militias based in the city of Zintan continue to refuse to hand over Qaddafi’s son, Saif al-Islam, to the central authorities.
Finally, the corruption that was endemic in Qaddafi’s regime endures, with ministry officials accepting bribes, for example, in exchange for contracts.
For their part, the militias that overthrew Qaddafi have released prisoners in exchange for ransom payments.
If Libya is to escape its current predicament, its leaders must transform the governance structures that Qaddafi built to create a fair and credible system based on the rule of law.
That requires, first and foremost, efforts to strengthen and modernize institutions, guided by Western examples.
At the same time, Libya’s leaders must recognize and build upon the few positive aspects of Qaddafism.
For starters, Qaddafi managed to unify a country that, since the Greek invasion in the seventh century BC, had been divided between a coastal strip linked to the larger Mediterranean basin and an isolated hinterland that even Benito Mussolini’s brutal regime could not secure.
Qaddafi thus took the first step – intentional or not – toward creating a modern nation-state.
The challenge now is to overcome the divisions that remain within the population – no easy task in a vast country with a sparsely inhabited interior populated mostly by ethnic minorities and reclusive tribes.
The most important positive component of Qaddafi’s legacy, however, was the partial emancipation of women.
As a modernizer seeking to mobilize his entire population, Qaddafi promoted women’s social and economic inclusion by expanding education for girls, granting women the right to divorce, and appointing female judges and ministers.
Though Qaddafi’s female guards were mocked as the trappings of his eccentricity, they actually represented his desire to liberate women.
Here, too, Qaddafi’s successors have failed.
Back in 2012, for example, the head of the interim government, Mustafa Abdel-Jalil, declared his intention to lift restrictions against polygamy.
Later, he ordered Sarah Elmesallati, the host of the ceremony at which power was transferred to the GNC, to leave the stage halfway through her presentation because she was not wearing a headscarf.
Ordinary Libyans have also advocated keeping women on a short leash.
A college-age Libyan woman’s father recently denied her the opportunity to accept a scholarship from the US State Department to attend a training workshop in Washington, DC, because he could not accompany her overseas.
Libya’s leaders – and their Western benefactors – have no choice but to consider and address the effects of Qaddafi’s legacy on public attitudes and official behavior.
But they must also accept that only modernization of Libya’s state and society – the agenda that Qaddafi pursued, albeit in a perverted form – will ensure the country’s survival.
Barbarians at the Gate?
Europe's lumpen outsiders are becoming insiders as the Continent's political pendulum swings to the right.
After the Netherlands and France, Germany may be next (German elections are due in the autumn, and the center-right candidate - Minister/President Stoiber of Bavaria - is now the favorite).
Spain, Austria, Italy, Denmark, Portugal are already ruled by center-right governments.
This swing does not simply mark the return of traditional conservative parties and policies - smaller governments, more attention to the interests of capital - to power.
Something new is at work.
What's new is the fact that many of today's center-right governments are supported by populist or nationalist parties.
In Italy, the Netherlands, Austria, and Denmark, the government is either a coalition or a minority government propped up by the pivotal support of populist right-wing parties.
In France the government is composed of mainstream center-right politicians. Yet, President Chirac owes his victory to the success of the far right National Front.
This is a decisive novelty.
In the past, Europe's political contests were waged between left wing parties representing the interests of labor, and right wing parties representing the interests of capital.
Centrist parties that represented the middle classes and moderated the ideological extremes of left and right were pivotal.
Nowadays, ideological differences between left and right are blurred. So a new breed of politicians and a new constituency of voters hold the balance of power.
The successes of populist/right wing parties can largely be attributed to the failures of left-leaning governments.
Europe's disappointing economic performance lies at the root of this.
European unemployment remains high, and productivity growth (and hence living standards) has slowed since the mid-1990s.
Even non-economically-minded voters perceive the striking difference with the US, where productivity growth has skyrocketed since the mid-1990s and unemployment is far lower.
Some voters are beginning to think that their cherished European welfare state may be to blame.
Many European voters also feel threatened and unprotected.
A common slogan is that Europe's social model trades less economic growth for more social protection and less risk.
But this idea does not convince everyone.
Large groups of "outsiders" (young unemployed and first time job seekers, temporary workers, shopkeepers and other self-employed) do not see these supposed benefits because they lack a stable and protected job, or do not qualify for unemployment insurance, or are too young to benefit from public pension systems.
These voters also complain about crime, and of the deteriorating quality of life in their cities.
Many "outsiders" supported right-wing populist parties in the latest elections; their votes are critical for the survival of the new center-right governments in many European countries.
These "outsiders" were often neglected in Europe's traditional political competition, and their demands received little or no attention.
Across Europe, they have suddenly become political arbiters.
What these newly influential voters want is clear: less immigration, crackdowns on crime, more economic opportunities, but also more protection against economic risk and international competition.
Politicians representing these voters lack experience in government, sometimes are technically unprepared for governance, and are suspicious of technocrats and bureaucrats, particularly those in Brussels.
On many issues, the positions of populist parties conflict with the traditional pro-capital and pro-market platforms of established center-right parties.
Not all of this is black.
Some of the demands of these voters are sensible and will improve policymaking.
Most of Europe, for example, needs better crime prevention and a serious effort at cracking down on illegal immigration.
But in other important policy choices, populist parties could lead Europe astray.
Of course, most European countries need to rethink the foundations of their welfare state.
Working life needs to be lengthened, public pensions are often too generous, labor markets too rigid.
Traditional pro-capitalist right-wing parties would welcome such reforms.
Yet, welfare state reform is not a priority of right-wing populists.
But the biggest risks are to European integration.
The new populist and nationalist parties are suspicious of Europe in general, and of EU enlargement in particular.
This hostility comes at the wrong moment in time, with Europe engaged in ambitious and difficult constitutional reforms.
European enlargement, moreover, although imminent, is not a done deal.
Negotiations for enlargement are still under way.
The Convention on the Future of Europe is discussing ways to integrate new policy areas, such as internal security, immigration, elements of a common foreign policy and of external security.
But the Convention's outcome is unpredictable.
The opposition posed by this newly empowered political constituency could be decisive.
Traditional center-right parties have been pro-Europe.
European integration has rarely been affected by the left/right divide.
That holiday from serious politics may be over for good.
Barbarians or Geniuses at the Gate?
MUNICH – Europe is currently experiencing a huge wave of migration between its east and west. This movement resembles the Great Migrations (Völkerwanderung) that marked Europe between the fourth to sixth centuries.
Within the first year of Romania’s accession to the EU on January 1, 2007, for example, roughly a million Romanians migrated to Italy and Spain.
More than 800,000 East Europeans have become workers in the United Kingdom over the past four years, most coming from Poland.
Indeed, in the last two years alone, 1.5 million Poles emigrated, and overall probably more than two million have done so since Poland’s EU accession in 2004.
On a smaller scale, the migration of Ukrainians to the Czech Republic, Bulgarians to Turkey, and British citizens to Spain is also noteworthy.
Because Germany still restricts the immigration of dependent workers from eastern EU countries, most of its immigrants come as self-employed or economically inactive people.
In Munich, the number of self-employed tilers increased in 2004 and 2005, the first two years after the first eastern enlargement wave, from 119 to 970.
But despite restrictions, by 2005 Germany had absorbed 37% of all migrants from Eastern Europe that came before and after eastern EU enlargement, whereas Italy had absorbed 22%, Greece 11%, Switzerland 8%, and the UK only 3%.
In the same year, 13% of the population living in Germany was foreign born, more than in Britain (10%), France (7%), Spain (5%), or Italy (3%).
The immigration waves of the last two years to Britain, Spain, and Italy will have significantly changed these figures, but the information needed to update the statistics is not yet available.
Nowadays, people move faster than statistical offices can count them.
Before the EU’s eastern enlargement, many studies predicted the likely migration waves.
The forecasts of the proportion of East Europeans who were expected to move west within a 15 years ranged from 2.5% to 6%.
Given that about 5% of the Polish population has now emigrated within a period of only four years, despite immigration restrictions by important target countries, these estimates were much too cautious.
Before enlargement, it was politically incorrect to discuss possible waves of migration to the West, as EU politicians saw this as an obstacle to the enlargement process.
Now that enlargement has taken place, it is easier to discuss migration objectively.
This immigration is not an invasioni barbariche, as Italians refer to the Völkerwanderung, although the orders of magnitude are comparable.
As migrants move between markets with well-defined property rights, immigration in principle is beneficial for both the immigrants and the target country.
The immigrant receives a higher wage than at home, and the target country benefits from cheap labor, which creates more value than it costs.
But in practice, immigration is often not as beneficial as it could be, because the target country has a rigid wage structure that prevents the additional jobs needed to employ the immigrants from being created.
If, for example, a target country provides minimum wage guarantees and replacement incomes for the domestic unemployed, immigrants simply force domestic residents into the care of the welfare state.
This is not a problem of immigration as such, but of poorly designed domestic social and labor market institutions.
To be on the safe side, host countries often try to limit immigration to skilled workers, because they join segments of the labor market in which sufficient downward wage flexibility provides immigrants with additional jobs.
But countries have so far had mixed success in attracting skilled immigrants.
The most successful countries in this regard have been the Anglo-Saxon countries (Canada, Ireland, Australia, the United States, and the UK, in that order), as well as Denmark and Norway.
More than one-third of immigrants to these countries have tertiary education, with Canada and Ireland at 45%.
In the more unsuccessful countries – Italy, Austria, Germany, France, Portugal, and the Netherlands – the proportion of immigrants with a tertiary education is below a quarter.
In Italy, the share is just 11% – the lowest in the available statistics.
The brain drain to the Anglo-Saxon countries, the US in particular, is astounding.
The graduating classes of top American universities are packed with foreign students, and 27% of physicians practicing in the US today come from abroad.
America’s postwar growth and dynamism largely resulted from skilled immigrants.
Before and after World War II, many skilled people came from Europe, Germany in particular; in recent decades, Asian immigrants dominate, with India, Pakistan, and the Philippines occupying the top ranks.
Today’s brain drain is not only from emerging and developing countries to richer countries, but also from European countries to the US.
In most research disciplines, European-born “superstars” work and teach in the US rather than in Europe, and, according to a study by Gilles Saint-Paul, it is the superstars in particular who generate growth and prosperity for a country.
Of course, people with a decent tertiary education are also important for a country’s economy, and here the loss of some European countries is substantial.
While only 3% of Spanish and 4% of French people with tertiary education live abroad, 7% of Italians and 9% of Germans do.
Surprisingly, Ireland and the UK lead in this category, with 34% and 17%, respectively.
This may reflect the high interchange in both directions between the Anglo-Saxon countries, or replacement migration in which skilled people arrive from elsewhere as the domestic skilled migrate to other Anglo-Saxon countries.
The European landscape will change as rapidly in the course of this century as it did at the time of the Völkerwanderung.
History will have many tales to tell about what this really meant for the Continent.
At the moment, though, the casual observer is still rather clueless.
Barrels, Bushels, and Bonds
CAMBRIDGE – The prices of hydrocarbons, minerals, and agricultural commodities have been on a veritable roller coaster.
While commodity prices are always more variable than those for manufactured goods and services, commodity markets over the last five years have seen extraordinary, almost unprecedented, volatility.
Countries that specialize in the export of oil, copper, iron ore, wheat, coffee, or other commodities have been booming, but they are highly vulnerable.
Dollar commodity prices could plunge at any time, as a result of a new recession, an increase in real interest rates in the United States, fluctuations in climate, or random sector-specific factors.
Countries that have outstanding debt in dollars or other foreign currencies are especially vulnerable.
If their export revenues were to plunge relative to their debt-service obligations, the result could be crises reminiscent of Latin America’s in 1982 or the Asian and Russian currency crises of 1997-1998.
Many developing countries have made progress since the 1990’s in shifting from dollar-denominated debt toward foreign direct investment and other types of capital inflows, or in paying down their liabilities altogether.
But some commodity exporters still seek ways to borrow that won’t expose them to excessive risk.
Commodity bonds may offer a neat way to circumvent these risks.
Exporters of any particular commodity should issue debt that is denominated in terms of the price of that commodity, rather than in dollars or any other currency. Jamaica, for example, would issue aluminum bonds;
Nigeria would issue oil bonds; Sierra Leone would issue iron-ore bonds; and Mongolia would issue copper bonds.
Investors would be able to buy Guatemala’s coffee bonds, Côte d’Ivoire’s cocoa bonds, Liberia’s rubber bonds, Mali’s cotton bonds, and Ghana’s gold bonds.
The advantage of such bonds is that in the event of a decline in the world price of the underlying commodity, the debt-to-export ratio need not rise.
The cost of debt service adjusts automatically, without the severe disruption that results from loss of confidence, crisis, debt restructuring, and so forth.
The idea is not new.
So, why has it not been tried before?
When one asks finance ministers in commodity-exporting debtor countries, they frequently reply that they fear insufficient demand for commodity bonds.
That is a surprising proposition, given that commodity bonds have an obvious latent market, rooted in real economic fundamentals.
After all, steel companies have an inherent need to hedge against fluctuations in the price of iron ore, just as airlines and utilities have an inherent need to hedge against fluctuations in the price of oil.
Each of these commodities is an important input for major corporations. Surely there is at least as much natural demand for commodity bonds as there is for credit-default swaps and some of the bizarrely complicated derivatives that are currently traded!
It takes liquidity to make a market successful, and it can be difficult to get a new one started until it achieves a certain critical mass.
The problem may be that there are not many investors who want to take a long position on oil and Nigerian credit risk simultaneously.
A multilateral agency such as the World Bank could play a critical role in launching a market in commodity bonds.
The fit would be particularly good in those countries where the Bank is already lending money.
Here is how it would work.
Instead of denominating a loan to Nigeria in terms of dollars, the Bank would denominate it in terms of the price of oil and lay off its exposure to the world oil price by issuing that same quantity of bonds denominated in oil.
If the Bank lends to multiple oil-exporting countries, the market for oil bonds that it creates would be that much larger and more liquid.
This pooling function would be particularly important in cases where there are different grades or varieties of the product (as with oil or coffee), and where prices can diverge enough to make an important difference to the exporters.
An alternative for some commodity exporters is to hedge their risk by selling on the futures market.
But an important disadvantage of derivatives is their short maturity.
A West African country with newly discovered oil reserves needs to finance exploration, drilling, and pipeline construction, which means that it needs to hedge at a time horizon of 10-20 years, not 90 days.
Another disadvantage of derivatives is that they require a high degree of sophistication –both technical and political.
In the event of an increase in a commodity’s price, a finance minister who has done a perfect job of hedging export-price risk on the futures market will suddenly find himself accused of having gambled away the national patrimony.
This principal-agent problem is much diminished in the case of commodity bonds.
If the international financial wizards can get together and act on this idea now, commodity exporters might be able to avoid calamity the next time the world price of their product takes a plunge.
The World Bank should take up the cause.
Barroso Overboard?
BRUSSELS – It is time for José Manuel Barroso to start selling himself.
His chances of being re-appointed as President of the European Commission depend on the case he makes.
Until the global financial crisis broke, Barroso looked fairly certain to get a second five-year term.
Now, it is becoming increasingly hard to find diplomats or policymakers who support him.
French President Nicolas Sarkozy is said to have been disappointed by Barroso’s performance during last autumn's financial meltdown, and German Chancellor Angela Merkel also seems to have fallen silent on the matter of his future.
No one doubts that Barroso is in an awkward position.
The European Commission has few powers of its own with which to confront the recession as it spreads throughout the European Union; most powers belong to the European Central Bank.
But the Commission does have a voice with which to rally people, and it is for their silence that Barroso and his fellow commissioners are being rebuked.
The perceived lack of leadership from the Commission at this time of deepening economic gloom is just the tip of the iceberg.
The events of recent months have crystallized more deep-seated concerns.
When Barroso, the former Portuguese prime minister, was awarded the EU post by his fellow heads of government, he appeared to be a dynamic new broom who would sweep away the cobwebs left by his predecessor, Italy’s Romano Prodi.
But, with the passage of time, the Barroso-led Commission has also come under fire for being unadventurous and lacklustre.
Even before the clouds of recession began to gather, Euroskepticism was on the rise, with the Commission blamed, rightly or wrongly, for the EU’s failure “to reach out to the citizen.”
The job of Commission President is arguably among the most difficult in the world.
The institution has been in near-imperceptible decline for almost 20 years, thanks to the rise of the European Parliament and the way EU member governments have whittled away its authority while consolidating their own powers as the EU’s true legislators.
Yet the head of the Commission is called upon to be the dynamic public face of Europe.
The Commission’s own internal culture of cautiousness and red tape is a constraint that nobody in Brussels much likes to talk about.
It is not a structure that is conducive to political coups de theâtre , and most of the Commission’s work is the relentless grind of EU regulation and re-regulation.
But the bottom line is that at a time when everyone is asking, “What is Europe doing?”, the Commission’s responses have seemed inadequate.
For reasons that are now obscure, there is an unwritten rule that Commission presidents must be drawn from the ranks of past or current prime ministers.
This has in large part accounted for Barroso’s high hopes of getting a second term.
There was, it appeared, no other credible candidate to challenge him.
For his part, Barroso is widely seen as having avoided controversy throughout 2008 in order not to risk offending any governments that might have been inclined to block his reappointment.
That seeming passivity is now his greatest problem.
France’s presidency of the EU during the second half of 2008 showed that dynamic leadership is a quality widely appreciated by the European public.
With his sense of showmanship, Sarkozy almost effortlessly eclipsed Barroso when handling the Russia-Georgia crisis in August, followed by the EU’s responses to the autumn crisis of cascading bank collapses.
The Commission was left on the sidelines.
What is to be done?
France’s successful presidency has intensified doubts about the effectiveness of the Commission and its president, so much so that even in Paris concerns are being voiced that the Brussels executive must somehow be strengthened if it is not to become a mere secretariat.
EU governments have wanted a pliable Commission, but now the cost could be the death of the “community method” that protects the EU against national frictions.
Barroso needs to respond to all these doubts.
If he is to reassure EU national leaders that they should re-appoint him, then he needs to signal that his second term can hold out fresh promise.
He is good at giving upbeat speeches, but this will not be enough.
Some sort of plan is needed.
When he arrived in Brussels in 2004, Barroso was repeatedly asked whether he had a “big idea” for Europe’s future.
Back then, he did not need one to be appointed.
This time, he must produce one if he is to save his skin.
Minimum Wage or Living Income?
LONDON – Most rich countries now have millions of “working poor” – people whose jobs do not pay enough to keep them above the poverty line, and whose wages therefore have to be subsidized by the state. These subsidies take the form of tax credits.
The idea is a very old one.
England implemented its “Speenhamland” system – a form of outdoor relief intended to offset rising bread prices – during the Napoleonic Wars.
In 1795, the authorities of Speenhamland, a village in Berkshire, authorized a means-tested sliding scale of wage supplements.
The supplements that families received varied with the number of children and the price of bread.
But the scheme was criticized for allowing employers to pay below-subsistence wages, because the taxpayer would make up the difference.
In 1834, the Speenhamland system was replaced by the New Poor Law, which confined relief to workhouses, under conditions sufficiently odious to force people back into the labor market.
Then, in the twentieth century, the Speenhamland principle was revived – and by none other than the free-market liberal Milton Friedman.
In 1962, Friedman proposed a “negative income tax,” whereby people earning below a certain threshold would receive supplemental income from the government, rather than paying taxes to it.
The idea was to get people off the dole and back to work.
It was implemented as the Earned Income Tax Credit in the United States and the Working Families Tax Credit in the United Kingdom.
At the same time, there have been efforts to raise the level of earned income by setting minimum-wage legislation.
But the minimum wage has never reached the floor set for a “living income” and has not, therefore, appreciably reduced the bill for wage subsidies.
In 2008, about 5.5 million working families in the UK received tax credits, including working and child credits, housing benefits, and local tax benefits.
Austerity policies have reduced this number to 4.3 million.
Given that there were 11.4 million working households in the UK in 2012, this means that an astonishing 38% did not receive a “living wage.”
Or, to put it another way: the market-clearing wage was unable to provide a living income for 38% of working families.
In his July 8 budget announcement, Chancellor of the Exchequer George Osborne proposed to cut £12 billion ($18.6 billion) from the welfare bill over the next four years as part of his deficit-cutting plan.
Of this, £9 billion will come from cutting the tax subsidies for working families.
To offset this cut, Osborne proposed to raise the minimum wage from £6.50 per hour to £9 per hour over the same period.
The increase will fall on employers, not the public purse, and so the reduction in credits and benefits is a net gain for Her Majesty’s Treasury.
An analysis by the Institute for Fiscal Studies has concluded that while the Treasury will save £12 billion, the gross increase in pay from the higher minimum wage amounts to only £4 billion.
As Paul Johnson, head of the IFS, put it: “There is simply not enough money going into the new minimum wage to anywhere near compensate in cash terms people on tax credits.”
But even if the minimum wage were raised sufficiently to offset the withdrawal of tax credits, transferring more of the cost of labor from taxpayers to employers would be the wrong strategy.
The reason is that for many – perhaps most – people, work will be a declining source of income.
After all, one prediction on which we can confidently rely is that automation will make increasingly large inroads into the world of human work.
Up to 50% of existing jobs may be at risk in the next 20 years.
It is at least an open question whether enough new jobs can be found to replace them, or, indeed, whether it is desirable to continue producing more and more products simply to provide human employment at ever shrinking wages.
As robots increasingly replace human labor, humans will need incomes to replace wages from work.
Whereas tax credits point in the direction of replacement incomes, raising the minimum wage points in the opposite direction, by making income more dependent on jobs.
In fact, focusing on the minimum wage would almost certainly speed up the automation process.
Previous evidence that minimum-wage legislation does not reduce the demand for labor might not stand up against the rapidly falling cost of automating the production of goods and services.
In short, if Osborne is serious about his pledge to provide a “living income” for all, he should be moving toward the idea of a “basic” or “citizen’s” income, independent of the job market.
A simple way forward would be to provide all citizens an unconditional tax credit, which could be built up gradually as the rewards from work fall.
Both free-market and socialist thinkers have long advocated implementing a basic-income scheme.
But the idea has always fallen foul of two objections: societies are too poor to afford it, and it would be a disincentive to work.
The first objection is surely no longer true of the advanced economies, while the second is irrelevant, given that the goal is not to strengthen the incentive to work, but to enable people to live without work.
An unconditional basic income would make part-time work a possibility for many who now have to work full-time at non-living wages.
And all workers would begin to gain the freedom to make the same choices regarding how much to work, and under what conditions, that owners of substantial capital now have.
Russia’s European Prospects
MOSCOW – In 1966, Charles de Gaulle’s vision of a Europe “that stretched from the Atlantic to the Urals” was provocative.
Today, Russian President Vladimir Putin has advanced an even more ambitious goal: “a common market stretching from the Atlantic to the Pacific.”
In the race toward globalization, the stakes are high for both Russia and Europe.
If Russia continues on its current path toward becoming solely a raw-materials producer, it will not only become increasingly vulnerable to global energy-price fluctuations, but its scientific, cultural, and educational potential will decay further, eventually stripping the country of its global clout.
If Europe, for its part, fails to respond to the challenges of the twenty-first century, it will face chronic economic stagnation, rising social tension, and political instability.
Indeed, as industrial production migrates to East Asia and innovation remains in North America, Europe risks losing its position in the most attractive international markets.
As a result, the European project itself could be called into question.
To avoid these outcomes, Russia and Europe must identify where their interests converge, and work to establish a mutually beneficial partnership in those areas.
But, in order to foster such a partnership, they must first alter their negative perceptions of each other.
Many Russians do not regard Europe as a political and economic partner, or even as an ally.
In their view, Europe has already lost the battle for innovation and economic development, and is gradually becoming an “industrial museum.”
Russia, they argue, should form partnerships with more dynamic countries.
Likewise, many Europeans believe that, while a partnership with Russia might be an asset now, it would corrode Europe’s economies and politics in the long run.
If Europe wants to lead and prosper, according to this view, it should limit its ties with Russia as much as possible.
Ongoing disputes between Russia and the European Union reflect this mutual distrust.
Russians accuse Europeans of taking too long to liberalize visas, blocking Russian energy companies’ access to Europe’s downstream markets, instigating anti-Russian sentiment in the post–Soviet era, and trying to interfere in Russia’s domestic politics.
Meanwhile, Europeans have serious reservations about Russia’s human-rights record, legal system, failure to adhere to European values, and position on international crises, especially in the Middle East.
As a result, the prospect of closer cooperation remains distant.
Without a fundamental reset, relations between Russia and Europe will continue to decay, eventually becoming characterized by benign neglect.
Despite their common geography, history, and economic interests, their strategic trajectories will diverge.
An alternative scenario relies on the powerful unifying impact of human capital, the defining factor in the quest for global influence.
Human capital – not natural resources, production capacity, or financial reserves – should constitute the foundation of Russian and European development policies.
Cultivating human capital requires a supportive cultural environment, a well-developed educational system, and research and innovation centers.
Many argue that, in both Russia and Europe, such social infrastructure has become so costly that it is hindering the development of a more efficient and dynamic economy.
Only by dismantling the welfare state, critics contend, can progress be made.
But curtailing social programs in both Europe and Russia would jeopardize human capital, their most valuable comparative advantage.
By enhancing the welfare state’s efficiency, economic progress can occur without sacrificing this crucial source of long-term growth.
Given their strong traditions of building human capital – and their motivation to continue to do so – Russia and Europe have much to offer one another.
By focusing on the areas in which their modernization agendas overlap – from education to public health to environmental protection – they can identify ways to increase their human capital’s efficiency.
While Europeans have reason to criticize Russia’s shortcomings, they should also recognize that only two decades ago, Russia’s political, economic, social, and legal systems underwent a fundamental shift, which significantly affected its people’s psychology, self-perception, and behavior.
Given Europeans’ complicated experience with European Union enlargement, they should understand the challenges that accompany such a profound change.
With this understanding should come recognition that Europe’s current policy of demanding that Russia “mature” as a condition for cooperation is counterproductive.
Russia will mature much more slowly in isolation than it will if it is integrated into European institutions.
Some progress has already been made.
For example, participating in the Council of Europe has helped Russia to improve significantly its prison system.
Likewise, launching initial public offerings on European stock exchanges has strengthened Russian corporations’ governance, social responsibility, and treatment of minority shareholders.
In short, more interaction, not less, should be actively encouraged.
Of course, Russia will probably not become a full NATO member in the foreseeable future, owing to the many structural, technical, and psychological obstacles blocking its path.
But political integration is feasible.
Greater political cooperation would provide a context for discussing issues like the future of Afghanistan, international terrorism, and nuclear proliferation, as well as for creating joint initiatives and strategies that address crucial issues affecting both powers.
The institutional integration of Russia into greater Europe will require strong commitment from both sides.
Beating the Oil Barons
WASHINGTON, DC – Over the past eighteen months, oil prices have more than doubled, inflicting huge costs on the global economy. Strong global demand, owing to emerging economies like China, has undoubtedly fueled some of the price increase.
But the scale of the price spike exceeds normal demand and supply factors, pointing to the role of speculation – and underscoring the need for policy action to clean up the oil market.
Reflecting their faith in markets, most economists dismiss the idea that speculation is responsible for the price rise.
If speculation were really the cause, they argue, there should be an increase in oil inventories, because higher prices would reduce consumption, forcing speculators to accumulate oil.
The fact that inventories have not risen supposedly exonerates oil speculators.
But the picture is far more complicated, because oil demand is extremely price insensitive.
In the short run, it is technically difficult to adjust consumption.
For instance, the fuel efficiency of every automobile and truck is fixed, and most travel is non-discretionary.
Though higher airline ticket prices may reduce purchases, airlines reduce oil consumption only when they cancel flights.
This illustrates a fundamental point: in the short run, reduced economic activity is the principle way of lowering oil demand.
Thus, absent a recession, demand has remained largely unchanged over the past year.
Moreover, it is relatively easy to postpone lowering oil consumption.
Consumers can reduce spending on other discretionary items and use the savings to pay higher gasoline prices.
Credit can also temporarily fill consumer budget gaps.
Although the housing boom in the United States – which helped in this regard – ended in 2006, consumer debt continues to grow, and America’s Federal Reserve has been doing everything it can to encourage this.
Consequently, for the time being the US economy has been able to pay the oil tax imposed by speculators.
Unfortunately, proving that speculation is responsible for rising prices is difficult, because speculation tends to occur during booms, so that price increases easily masquerade as a reflection of economic fundamentals.
But, contrary to economists’ claims, oil inventories do reveal a footprint of speculation.
Inventories are actually at historically normal levels and 10% higher than five years ago.
Furthermore, with oil prices up so much, inventories should have fallen, owing to strong incentives to reduce holdings.
Meanwhile, The Wall Street Journal has reported that financial firms are increasingly involved in leasing oil storage capacity.
The root problem is that financial markets can now mobilize tens of billions of dollars for speculative purposes.
This has enabled traders collectively to hit upon a strategy of buying oil and quickly re-selling it when end users accommodate higher prices – a situation that has been aggravated by the Bush administration, which has persistently added oil supplies to the US strategic reserve, further inflating demand and providing additional storage capacity.
Absent a change in trader beliefs, the current oil price spike will be broken only by a recession that exhausts consumers’ capacity to buffer higher prices, or when the slow process of substitution away from oil kicks in.
Thus, economic fundamentals will eventually trump speculation, but in the meantime society will have paid a high price.
Whereas oil speculators have gained, both the US and global economies have suffered and been pushed closer to recession.
In the case of the US, heavy dependence on imported oil has worsened the trade deficit and further weakened the dollar.
This sobering picture calls for new licensing regulations limiting oil-market participation, limits on permissible trading positions, and high margin requirements where feasible.
Sadly, given the conventional economic wisdom, implementing such measures will be an uphill struggle.
But some unilateral populist action is possible.
A major form of gasoline storage is the tanks in cars.
If people would stop filling up and instead make do with half a tank, they would immediately lower gasoline demand.
Given lack of storage capacity, this could quickly lower prices and burn speculators.
Beggaring the World Economy
CHICAGO – Global capital is on the move.
As ultra-low interest rates in industrial countries send capital around the world searching for higher yields, a number of emerging-market central banks are intervening heavily, buying the foreign-capital inflows and re-exporting them in order to keep their currencies from appreciating.
Others have been imposing capital controls of one stripe or another.
In recent weeks, Japan became the first large industrial economy to intervene directly in currency markets.
Why does no one want capital inflows?
Which intervention policies are legitimate, and which are not?
And where will all this intervention end if it continues unabated?
The portion of capital inflows that is not re-exported represents net capital inflows.
This finances domestic spending on foreign goods.
So, one reason countries do not like capital inflows is that it means more domestic demand “leaks” outside. Indeed, because capital inflows often cause the domestic exchange rate to appreciate, they encourage further spending on foreign goods as domestic producers become uncompetitive.
Another reason that countries do not like foreign capital inflows is that some of it might be “hot” (or dumb) money, eager to come in when foreign interest rates are low and local asset prices are rising, and quick to leave at the first sign of trouble or when opportunities back home beckon.
Volatile capital flows induce volatility in the recipient economy, making booms and busts more pronounced than they would otherwise be.
But, as the saying goes, it takes two hands to clap.
If countries could maintain discipline and limit spending by their households, firms, or governments, foreign capital would not be needed, and could be re-exported easily, without much effect on the recipient economy.
Problems arise when countries cannot – or will not – spend sensibly.
Countries can overspend for a variety of reasons.
The stereotypical Latin American economies of yesteryear used to get into trouble through populist government spending, while the East Asian economies ran into difficulty because of excessive long-term investment.
In the United States in the run up to the current crisis, easy credit, especially for housing, induced households to spend too much, while in Greece, the government borrowed its way into trouble.
Unfortunately, though, so long as some countries like China, Germany, Japan, and the oil exporters pump surplus goods into the world economy, not all countries can trim their spending to stay within their means.
Since the world does not export to Mars, some countries have to absorb these goods, and accept the capital inflows that finance their consumption.
In the medium term, over-spenders should trim their outlays and habitual exporters should increase theirs.
In the short run, though, the world is engaged in a gigantic game of passing the parcel, with no country wanting to take the habitual exporters’ goods and their capital surpluses.
This is what makes today’s beggar-thy-neighbor policies so destructive: though some countries will eventually have to absorb the surpluses and capital, each country is trying to avoid them.
So which policy interventions are legitimate?
Any policy of intervening in the exchange rate, or imposing import tariffs or capital controls, tends to force other countries to make greater adjustments.
China’s exchange-rate intervention probably hurts a number of other emerging-market exporters that do not intervene as much and are less competitive as a result.
But industrial countries, too, intervene substantially in markets.
For example, while US monetary-policy intervention (yes, monetary policy is also intervention) has done little to boost domestic demand, it has spurred domestic capital to search for yield around the world. The US dollar would fall substantially – encouraging greater exports – were it not for the fact that foreign central banks are pushing much of that capital right back by buying US government securities.
All this creates distortions that delay adjustment – exchange rates are too low in emerging markets, slowing their move away from exports, while the ease with which the US government is being financed creates little incentive for US politicians to reduce spending over the medium term.
Rather than intervening to obtain a short-term increase in their share of slow-growing global demand, it makes sense for countries to make their economies more balanced and efficient over the medium term.
That will allow them to contribute in a sustainable way to increasing global demand.
China, for example, must move more income to households and away from its firms, so that private consumption can increase.
The US must improve the education and skills of significant parts of its labor force, so that they can produce more of the high-quality knowledge and service-sector exports in which the US specializes. Higher incomes would boost US savings, reducing households’ dependence on debt, even as they maintained consumption levels.
Unfortunately, all this will take time, and citizens impatient for jobs and growth are pressing their politicians.
Countries around the world are embracing shortsighted policies that cater to the immediate needs of domestic constituencies.
There are exceptions.
India, for example, has eschewed currency intervention thus far, even while opening up to long-term rupee debt inflows, in an attempt to finance much-needed infrastructure projects.
India’s willingness to spend when everyone else is attempting to sell and save entails risks that need to be carefully managed.
But India’s example also provides a glimpse of what the world could achieve collectively.
After all, beggar-thy-neighbor policies will succeed only in making us all beggars.
Beggar-Thy-Neighbor Exchange Rates?
GENEVA – When the Swiss National Bank (SNB) recently brought its interest rate down to 0.25%, it announced that it would engage in “quantitative easing,” following in the footsteps of the United States Federal Reserve and the Bank of England.
More surprising was the simultaneous announcement that it was intervening on the foreign-exchange market with the aim of reversing the appreciation of the franc.
Will this be the first salvo in a war of competitive devaluations?
Interest rates are traditionally low in Switzerland.
Like most other central banks confronted with the recession, the SNB has reduced its policy interest rate all the way to the zero lower bound.
Once there, traditional monetary policy becomes impotent, as the interest-rate tool is no longer usable.
This is why central banks are now searching for new instruments.
Quantitative easing represents one such attempt.
It remains to be seen whether it can effectively restore some monetary-policy influence.
However, an important issue is rarely mentioned: in small, open economies – a description that applies to almost every country except the US – the main channel of monetary policy is the exchange rate.
This channel is ignored for one good reason: exchange-rate policies are fundamentally of the beggar-thy-neighbor variety.
Unconventional policies that aim at weakening the exchange rate are technically possible even at zero interest rates, and they are quite likely to be effective at the level of individual countries.
Boosting competitiveness through exchange-rate depreciation may not succeed in raising exports in a situation where world trade is rapidly contracting, but it can cushion the blow by switching demand toward domestically produced goods and services.
The risk is that those countries that suffer from the switch retaliate and depreciate their own currencies.
That could easily trigger a return to the much-feared competitive depreciations that contributed to the Great Depression.
The first casualty would be whatever small scope remains for international policy coordination.
The second would be the world international monetary system.
In fact, one key reason for the creation of the International Monetary Fund was to monitor exchange-rate developments with the explicit aim of preventing beggar-thy-neighbor policies.
This is why the Swiss move comes as a surprise.
It is true that the franc has appreciated in real terms by 8% since the crisis started in August 2007. This is commonly attributed to the currency reputation as a safe haven during troubled times.
What this really means is that the appreciation is neither a consequence of monetary policy nor the other usual factors.
In any case, while the Swiss authorities’ discomfort with the situation is understandable, their decision is disquieting.
The Swiss franc is not the only currency that has appreciated in recent months.
Other small economies have undergone even sharper real appreciations.
For example, Poland and the Czech Republic have seen their currencies go up by close to 30% and 15%, respectively.
Major countries also have undergone currency appreciations – 30% for Japan and 15% for China.
These countries, too, are facing a recession, and, while the interest rate has not yet reached its zero bound everywhere, incentives to depreciate might grow in the near future.
In fact, the incentives are already there.
Some fairly large countries – Korea, Sweden, and the United Kingdom, to name a few – have already undergone some very large depreciations.
In fact, Poland’s currency recently started to depreciate.
None of these countries’ central banks has indicated that it was involved in depreciating its currency.
Of course, statements and intentions may not be identical.
It may be that the SNB merely acknowledges what other central banks do not.
In doing so, however, the SNB is violating a taboo: “Thou shall not engage in competitive depreciations.”
Having promptly achieved depreciation, it may have succeeded.
In that case, the franc will not move much more, in any direction, and there will be no need for further interventions.
Nevertheless, the limited reaction to the SNB move is somewhat surprising.
The move came one week after the IMF concluded its annual Article IV visit to Switzerland, and the report has yet to be released; it could make for unusually interesting reading.
Other central banks have not expressed any view, which may suggest that they do not intend to retaliate, at least at this stage.
They may have been reassured by the SNB’s official statement that the appreciation represented “an inappropriate tightening of monetary conditions,” and that the policy move merely aims “to prevent any further appreciation of the Swiss franc against the euro.”
It may also be that notice has been taken of the precedent, and that those authorities that intend to use it to justify future moves are loathe to criticize it.
In that case, the generalized silence could indicate that all other central banks entertain the possibility of using that option, which would be most worrisome.
Beijing Benefits from Taiwan’s Troubles
Ben Bernanke’s Dream World
BERKELEY – US Federal Reserve Board Chairman Ben Bernanke is not regarded as an oracle in the way that his predecessor, Alan Greenspan, was before the financial crisis.
But financial markets were glued to the speech he gave in Jackson Hole, Wyoming on August 26. What they heard was a bit of a muddle.
First of all, Bernanke did not propose any further easing of monetary policy to support the stalled recovery – or, rather, the non-recovery. Second, he assured his listeners that “we expect a moderate recovery to continue and indeed to strengthen.”
This is because “[h]ouseholds also have made some progress in repairing their balance sheets – saving more, borrowing less, and reducing their burdens of interest payments and debt.” Moreover, falling commodity prices will also “help increase household purchasing power.”
Finally, Bernanke claimed that “the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years.”
Frankly, I do not understand how Bernanke can say any of these things right now.
If he and the rest of the Federal Open Market Committee thought that the projected growth of nominal spending in the US was on an appropriate recovery path two months ago, they cannot believe that today.
Two months of bad economic news, coupled with asset markets’ severe revaluations of the future – which also cause slower future growth, as falling asset prices lead firms to scale back investment – mean that a policy that was appropriate just 60 days ago is much too austere today.
But let me focus on Bernanke’s fourth statement.
Even if we project a relatively rapid economic recovery, by the time this lesser depression is over, the US will have experienced an investment shortfall of at least $4 trillion.
Until that investment shortfall is made up, the missing capital will serve to depress the level of real GDP in the US by two full percentage points.
America’s growth trajectory will be 2% below what it would have been had the financial crisis been successfully finessed and the lesser depression avoided.
There is more: state and local budget-cutting has slowed America’s pace of investment in human capital and infrastructure, adding a third percentage point to the downward shift in the country’s long-term growth trajectory.
After the Great Depression of the 1930’s, the vast wave of investment in industrial capacity during World War II made up the shortfall of the lost decade.
As a result, the Depression did not cast a shadow on future growth – or, rather, the shadow was overwhelmed by the blinding floodlights of five years of mobilization for total war against Nazi Germany and Imperial Japan.
There is no analogous set of floodlights being deployed to erase the shadow that is currently being cast by the lesser depression.
On the contrary, the shadow is lengthening with each passing day, owing to the absence of effective policies to get the flow of economy-wide nominal spending back on its previous track.
Moreover, there is an additional source of drag.
A powerful factor that diminished perceived risk and encouraged investment and enterprise in the post-WWII era was the so-called “Roosevelt put.”
Industrial-country governments all around the world now took fighting depression to be their first and highest economic priority, so that savers and businesses had no reason to worry that the hard times that followed 1873, 1884, or 1929 would return.
That is no longer true.
The world in the future will be a riskier place than we thought it was – not because government will no longer offer guarantees that it should never have offered in the first place, but rather because the real risk that one’s customers might vanish in a prolonged depression is back.
I do not know by how much this extra risk will impede the growth of the US and global economies.
A back-of-the-envelope estimate suggests that a five-year lesser depression every 50 years that pushes the economy an extra 10% below its potential would reduce average investment returns and retard private investment by enough to shave two-tenths of a percentage point from economic growth every year.
As a result, America would not just end this episode 3% poorer than it might have been; the gap would grow – to 7% by 2035 and 11% by 2055.
This is the shape of things to come if steps are not taken now to recover rapidly from this lesser depression, and then to implement policies to boost private capital, infrastructure, and education investment back up to trend.
Perhaps that would be enough to reassure everyone that policymakers’ current acquiescence in a prolonged slump was a horrible mistake that will not be repeated.
The New Loose Nukes
LOS ANGELES – Nobody would dispute the danger inherent in possessing nuclear assets.
But that danger becomes far more acute in a combat zone, where nuclear materials and weapons are at risk of theft, and reactors can become bombing targets.
These risks – most apparent in today’s chaos-ridden Middle East – raise troubling questions about the security of nuclear assets in volatile countries everywhere.
Two recent events demonstrate what is at stake. On July 9, the militant group now known as the Islamic State captured 40 kilograms (88 pounds) of uranium compounds at Mosul University in Iraq.
The captured uranium was not weapons-grade; international inspectors removed all sensitive material from Iraq following the 1991 Gulf War (which is why it was absent when the United States invaded in 2003).
But what international response, if any, would have been initiated if the cache had been highly enriched?
On the same day, Hamas launched three powerful Iranian-designed rockets from Gaza at Israel’s Dimona reactor.
Luckily, two missed the target, and Israel managed to intercept the third.
But the episode represented a serious escalation of hostilities and served as an important reminder of the vulnerability of nuclear reactors in warzones.
In fact, Hamas made similar attempts to attack the Dimona complex in 2012, as did Iraq in 1991, with the aim of releasing the site’s contents to inflict radiological damage on Israel’s population.
(The perpetrators appeared clueless to the fact that certain weather conditions would have concentrated the radioactive debris in the Palestinian-majority West Bank.)
Of course, it is possible that these events are an aberration.
After all, the only conflict so far in which authorities have lost control of sensitive nuclear materials was the Georgia-Abkhazia War in the 1990s, when unknown forces seized a small amount of highly enriched uranium from a research institute.
Likewise, though there have been numerous attacks on nuclear reactors under construction, the sole threat to an operating plant in a combat zone outside of Israel occurred at the start of the fighting in ex-Yugoslavia, when Serbian nationalists considered attacking Slovenia’s Krško power plant and sent warplanes over the site.
The plant’s operators temporarily halted electricity generation to curb the risk of a radiation release, but nothing came of the threat.
Indeed, whenever nuclear assets have been least secure – during the Soviet Union’s collapse, China’s Cultural Revolution, and the Algiers putsch (when a group of mutinous retired generals set their sights on a nuclear device that France was testing in the Algerian desert) – they have not been compromised.
Even in Ukraine today, despite the escalating civil conflict, the country’s 15 nuclear power plants have remained untouched (though even with new defensive measures taken by Ukrainian officials, this could easily change).
It is impossible to know whether this benign pattern will hold.
But recent developments in the Middle East suggest that there are grounds for concern in other volatile countries, namely Pakistan, North Korea, and Iran.
Pakistan has a large nuclear weapons program and faces an expansive jihadi insurgency, which previously attacked military bases suspected of housing nuclear assets.
Though Pakistan has not experienced a nuclear breach, and the government insists that safeguards remain robust, the country’s increasingly frequent and severe bouts of instability raise serious questions about the future.
While North Korea’s nuclear arsenal is much smaller, persistent doubts about the regime’s sustainability make it a matter of grave concern.
In the event of the regime’s collapse – a distinct possibility – it would be difficult to prevent the diversion of its assets, or even the use of its weapons.
For its part, Iran seems relatively stable, at least compared to its neighbors.
But it faces an uncertain political future.
If a power struggle emerges, the large Bushehr reactor could be used as a bargaining chip.
To mitigate such risks, the international community could maintain its traditional policy of sitting tight and hoping that governments retain control of their nuclear infrastructure.
But the United States, for one, is no longer satisfied with this approach.
According to media reports, it has devised a strategy for deploying Special Forces to neutralize Pakistan’s nuclear arsenal in the event that its authorities lose control.
And some government-connected think tanks have explored the possibility of deploying US combat forces to address nuclear risks in North Korea if the regime crumbles.
Such plans, however, are by no means foolproof – not least owing to the difficulties of finding concealed nuclear assets and safeguarding reactors.
Moreover, the American public’s willingness to become enmeshed in yet another risky military venture, when boosting homeland security could suffice, is dubious, at best.
Instead of waiting for a major development to force hurried action, the world’s major powers should engage in a full-throated debate to determine the best approach to address nuclear risks in volatile countries, seeking ways to cooperate whenever necessary.
After all, even rival powers like China and the US or India and Pakistan share an interest in preventing the world’s most dangerous weapons from falling under the control of its most fanatical minds.
Iran’s Nuclear Quandary
LOS ANGELES – When the United States and its allies resume talks over Iran’s nuclear program on November 7-8, the vexing task of crafting Iran’s recent proposal into an enduring agreement will begin in earnest.
There are many obstacles to an agreement, but among the least examined is the legacy of nuclear-disarmament efforts involving Libya and North Korea.
Both cases raise issues that neither Iran nor the US wants to see repeated – but that both will have difficulty avoiding.
For the US, North Korea illustrates how a poor but ambitious country developed the bomb by gaming talks and gaining time.
For Iran, Muammar el-Qaddafi’s 2003 relinquishment of Libya’s weapons of mass destruction demonstrates how a regime, still considered a bête noire by the international community even after normalization of diplomatic relations, arguably forfeited its survival in 2011 by forgoing the chance to build a nuclear deterrent.
Digging further into each case illuminates the challenges faced by Iran and its international interlocutors.
What makes the North Korea precedent particularly troubling is how much Iran has mimicked the regime in Pyongyang.
This naturally prompts questions about whether Iran is using the current round of negotiations as a façade for an ongoing effort to develop nuclear weapons.
Consider parallels ten years apart. In June 1993, following talks with the US and a threat to withdraw from the Nuclear Non-Proliferation Treaty (NPT), North Korea allowed the International Atomic Energy Agency to conduct limited “safeguards activities.”
Then, in October 1994, the US and North Korea entered into the Agreed Framework to freeze North Korea’s nuclear program.
Similarly, in December 2003, after hiding construction of the Natanz uranium-enrichment facility and other plants from the IAEA, Iran agreed to sign – but not ratify – the so-called Additional Protocol, allowing broader application of IAEA safeguards.
Then, in November 2004, in negotiations with European representatives, Iran agreed to suspend nuclear enrichment.
Neither agreement lasted long.
In March 1996, the IAEA reported that North Korea was not complying with efforts to verify plutonium held at the Yongbyon nuclear facility.
On October 9, 2006, North Korea detonated its first nuclear weapon, and the United Nations Security Council adopted Resolution 1718 calling on the country to abandon its program and re-join international denuclearization talks.
Since then, North Korea has responded to incremental tightening of international sanctions with two more nuclear tests, the latest this year under the new leadership of Kim Jong-un.
Likewise, in January 2006, following the collapse of negotiations with European emissaries, Iran broke the IAEA seals on the Natanz facility’s equipment and storage areas.
The following month, the IAEA reported the Islamic Republic to the Security Council for its failure to be forthright about its nuclear program.
Since then, Iran has responded to incremental tightening of international sanctions by building more centrifuges.
The question now is whether the North Korea-Iran parallel stops with Iran’s new president, Hassan Rouhani.
The Libyan legacy confronts Iran with its own conundrum.
Like Iran, Qaddafi’s Libya suffered economic and political isolation for many years during which it attempted to advance a WMD program.
By the late 1990’s, however, it had had enough.
British and American negotiators secretly met with Libyan counterparts to resolve the case of the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, and other terrorism issues.
In the quid pro quo that followed, Qaddafi agreed to eliminate his nascent nuclear program in exchange for an end to pariah status.
This was coupled with a critical demand: no deal without America’s commitment to eschew regime change.
On December 19, 2003, Libya formally renounced all WMD efforts.
Eight years later, pinned down by a US Predator drone and French airstrikes, Qaddafi met his demise.
Without a nuclear deterrent, his regime was helpless when the US reneged on the deal – a lesson that has not been lost on North Korea.
Given this history, Iran has a strong incentive to retain at least a nuclear-breakout option (which would mean completing all but the final steps to weaponization).
Of course, Iran’s leaders may believe that economic isolation is the greatest danger to the regime.
But what happened in Libya has made them fear that Qaddafi’s fate could be theirs, too, without an adequate deterrent.
Indeed, commenting on Qaddafi’s plight in 2011, Supreme Leader Ayatollah Ali Khamenei said, “[T]his gentleman wrapped up all his nuclear facilities, packed them on a ship and delivered them to the West and said, ‘Take them!’ Look where we are, and in what position they are now.”
But today, two years later, Iran must look again at where it is.
As long as crippling economic sanctions remain in place, the government will be unable to have its yellowcake and eat it, too.
Allowing Iran to retain some low-grade enrichment capacity would be a plausible concession – and one that would allow the country’s leaders to save face – but only if linked to Iran’s unfettered disclosure of all nuclear activities to the IAEA and confirmed cessation of any capability that contributes to weaponization.
And, given the stakes, any international agreement with Iran must come with an assured response to cheating, including military action.
With little leverage, Iran’s leaders would then have two options.
They could follow North Korea by sacrificing economic prosperity for nuclear breakout, and hope that US and Israeli talk of “all options” being on the table to stop their efforts is a bluff; or they could pursue economic prosperity by forgoing a nuclear-weapons capacity, and hope that a Libya-style revolt does not envelope the country and doom the regime to a fate like that of Qaddafi.
It is not an easy choice, but it is one that Iran’s leaders cannot postpone for much longer.
Berlin, Birthplace of Modern Asia
NEW DELHI – By marking the Cold War’s end and the looming collapse of the Soviet Union, the fall of the Berlin Wall 20 years ago transformed global geopolitics.
But no continent benefited more than Asia, whose dramatic economic rise since 1989 has occurred at a speed and scale without parallel in world history.
For Asia, the most important consequence of the fall of the Berlin Wall was that the collapse of communism produced a shift from the primacy of military power to economic power in shaping the international order.
To be sure, rapid economic growth also occurred during the Industrial Revolution and in the post-WWII period.
But in the post-Cold War period, economic growth by itself has contributed to altering global power relations.
Another defining event in 1989 was the Tiananmen Square massacre of pro-democracy protestors in Beijing.
If not for the Cold War’s end, the West would not have let China off the hook over those killings.
Instead, the West adopted a pragmatic approach, shunning trade sanctions and helping to integrate China into the global economy and international institutions through the liberalizing influence of foreign investment and trade.
Had the United States and its allies pursued an approach centered on punitive sanctions, as with Cuba and Burma, the result would have been a less prosperous, less open, and potentially destabilizing China.
Indeed, China’s phenomenal economic success – illustrated by its world-beating trade surplus, world’s largest foreign-currency reserves, and highest steel production – owes a lot to the West’s decision not to sustain trade sanctions after the Tiananmen Square massacre.
Having vaulted past Germany to become the world’s biggest exporter, China now is set to displace Japan as the world's second largest economy.
India’s rise as an economic giant is also linked to the post-1989 events.
India was heavily involved in barter trade with the Soviet Union and its communist allies in Eastern Europe.
When the East Bloc unraveled, India had to start paying for imports in hard cash.
That rapidly depleted its modest foreign-exchange reserves, triggering a severe financial crisis in 1991, which in turn compelled India to embark on radical economic reforms that laid the foundations for its economic rise.
More broadly, the emblematic defeat of Marxism in 1989 allowed Asian countries, including China and India, to pursue capitalist policies overtly.
Although China’s economic renaissance had already begun under Deng Xiaoping, the Chinese Communist Party, after 1989, was able publicly to subordinate ideology to wealth creation.
That example, in turn, had a constructive influence on surviving communist parties in Asia and beyond.
Geopolitically, the post-1989 gains extended far beyond the West.
The Soviet Union’s sudden collapse was a strategic boon to Asia, eliminating a menacing empire and opening the way for China rapidly to pursue its interests globally.
Russia’s decline in the 1990’s became China’s gain.
For India, the end of the Cold War triggered a foreign-policy crisis by eliminating the country’s most reliable partner, the Soviet Union.
But, as with its 1991 financial crisis, India was able to emerge with a revamped foreign policy – one that abandoned the country’s quixotic traditions and embraced greater realism and pragmatism.
Post-Cold War India began pursuing mutually beneficial strategic partnerships with other key players in Asia and the wider world.
The new “global strategic partnership” with the United States – a defining feature of this decade – was made possible by the post-1989 shifts in Indian policy thinking.
Of course, not all post-1989 developments were positive.
For example, the phenomenon of failing states, which has affected Asian security the most, is a direct consequence of the Cold War’s end.
When the Cold War raged, one bloc or the other propped up weak states.
But, with the Soviet Union’s disappearance, the US abandoned that game.
As a result, dysfunctional or failing states suddenly emerged in the 1990’s, constituting a threat to regional and international security by becoming home to transnational pirates (Somalia) or transnational terrorists (Pakistan and Afghanistan), or by their defiance of global norms (North Korea and Iran).
Asia has suffered more casualties from the rise of international terrorism than any other region.
Moreover, two decades after the Berlin Wall fell, the spread of democracy has stalled.
Between 1988 and 1990, as the Cold War was winding down, pro-democracy protests erupted far from Eastern Europe, overturning dictatorships in countries as different as Indonesia, South Korea, Taiwan, and Chile.
After the Soviet disintegration, even Russia emerged as a credible candidate for democratic reform.
But, while the overthrow of totalitarian or autocratic regimes shifted the global balance of power in favor of the forces of democracy, not all the pro-democracy movements succeeded.
And the subsequent “color revolutions” in places like Ukraine only instilled greater caution among the surviving authoritarian regimes, prompting them to implement measures to counter foreign-inspired democratization initiatives.
Aside from the retreat of democracy in Russia, China – now the world’s oldest autocracy – is demonstrating that when authoritarianism is entrenched, a marketplace of goods and services can stymie the marketplace of political ideas.
Twenty years after communism’s fall, authoritarian capitalism has emerged as the leading challenger to the spread of democratic values.
Berlusconi Fiddles While Italy Declines
Italy now looks as unsettled and decrepit as Britain did when Margaret Thatcher assumed power 24 years ago. Fiat wallows in crisis; university rectors resign en mass; judges attend the opening session of the judicial year carrying copies of the constitution as a warning to the government.
When he returned to power, Silvio Berlusconi promised bold Thatcherite reforms to set things right.
His reforms, however, have been few and insipid, aimed mostly at benefiting himself, says Ferdinando Targetti.
Italy is in economic decline.
Its share of exports in world markets is contracting.
On the list of "most competitive countries" prepared by the World Economic Forum, Italy has fallen in one year from 26 th place to 39 th .
Unemployment is higher than the EU average (9% against 7.6% ).
Inflation is nearly twice that of France and Germany, though all three countries use the euro.
The ratio of debt to GDP (110%) is almost twice the European average and growing.
Fiat's crisis may see the country lose its last great internationally competitive industrial enterprise.
In response, Italy's President has asked the entrepreneurial classes to help shore up the country's competitiveness.
Unions should return to the policy they adopted during the successful struggle against inflation in the 1990s.
The state must improve public services, strengthen the educational system, and devote greater resources to research and development.
The government must reform social welfare and pensions.
The entire political spectrum, indeed, must recognize the country's predicament and find common ground for legislation.
But this will be impossible so long as Prime Minister Berlusconi dominates Italian politics.
Berlusconi is a new phenomenon on the European right.
In recent decades, mainstream right-leaning parties in most Western countries evolved from a defense of tradition (sometimes with a tinge of nationalism) to a more liberal worldview favoring a limited role for the state and greater individual responsibility.
Coming from the pinnacle of Italian business, Berlusconi might have been expected to conform to this pattern.
In fact, however, Berlusconi represents political extremism and programmatic ambiguity.
Berlusconi's extremism manifests itself in several ways.
First, he thinks of politics as a soccer match.
On one side are the "good guys," the Azzurri (the Italian national team, in their blue shirts), led by a manager who, because he was successful in business, is convinced he will be successful at managing the state.
On the other side are the bad guys, the Reds, who, because they are politicians, do not know what it means to work.
Berlusconi's vision of democracy--more populist than liberal--is that everything is allowed to those who win, even changing laws to favor the prime minister's special interests.
His government has done so at least three times. It passed a law making it easy for politicians to ignore conflicts of interest, authored tendentious legislation on media ownership (Berlusconi controls much of Italy's media), and effectively got the Prime Minister off the hook on a series of criminal indictments.
But Berlusconi is also a master of ambiguity, someone who appeals to liberal values while pursuing an anti-liberal, populist, and corporatist agenda.
Giulio Tremonti, Berlusconi's Economy and Finance Minister and ideologue of the alliance with Umberto Bossi's xenophobic Lega Nord , declared in a recent interview: "Let's be done with the utopia of privatization.
The right does not remain static and it does not reject the idea of state intervention."
According to Tremonti, what Italy needs are a "new European protectionism" against unfair competition from developing countries and a rightwing "New Deal" that rejects independent enforcement of antitrust laws in favor of corporatist ideas.
In reality, Italy's government has done little on the economic front, and what it has done it has gotten wrong.
The Prime Minister often speaks about pension reform, but has failed to offer any new proposals.
He has not supported any major privatizations; indeed, he tried to restore to government hands control of energy and banking.
The only economic policy put into effect took the form of industrial subsidies.
To finance this, the government passed a series of amnesties, forgiving penalties for past tax evasions, allowing underground business to come above ground without paying its obligations, and allowing Italians to bring capital illicitly stashed abroad back into the country.
In the last budget, revenue from amnesties amounted to eight billion euros, and the fiscal reductions for businesses were 7.5 billion euros.
To finance measures that require permanent outlays with one-time revenues presages a new spike of public debt--a policy criticized by the European Commission and the IMF.
Another of Berlusconi's economic wheezes is decriminalization of accounting fraud, something his government launched just when the world, in particular America, was establishing harsher punishments for dishonest managers and other fiduciaries.
As to Fiat, Berlusconi's government failed to put forward a Thatcherite scheme aimed at bringing in foreign capital to salvage both it and other declining industrial enterprises.
Instead, he backs a plan by a group of Italian financiers to pry control of Fiat from the dominance of the Agnelli family.
Fiat controls one of Italy's great newspapers, Corriere della Sera , which may become more friendly to Berlusconi with an ownership change approved by him.
Berlusconi's programmatic ambiguity and political extremism are polarizing Italy and radicalizing the opposition.
Growing numbers of people, even moderates, are moving into active opposition.
In this climate, Italy's decline will be difficult to arrest.
Berlusconi on the Boil
Silvio Berlusconi was elected as Italy's prime minister after campaigning on a platform of reinvigorating the economy through tax cuts and liberalization.
After three years in office, he has not delivered on his economic agenda and his government is in shambles.
What went wrong?
Italy's economic ills are well known.
At the risk of over-simplifying, they can be grouped under three headings:
· Weak public finances . When Italy joined the European Monetary Union, its primary budget surplus (tax receipts in excess of government spending, excluding interest payments) was about 5% of national income.
In 2004, the surplus will shrink to about 1.5% - before the tax cuts that Berlusconi promised for next year.
Excessive social welfare spending (mainly public pensions) and the cost of servicing the public debt drain resources from more productive government spending and impose a high tax burden.
The government has failed to take any meaningful action, and the problem is getting worse.
Unsurprisingly, the rating agency Standard &amp;
Poor's recently downgraded Italian public debt.
· Declining competitiveness . Italy's most dynamic producers are small manufacturing firms in traditional sectors with relatively low technological content.
With these firms now exposed to foreign competition from low-cost producers in Asia and Eastern Europe, Italy's share of world exports has been shrinking in recent years.
Italy has a few large corporations, mainly in services, utilities, or sectors shielded from competition.
These monopolistic producers act like a distorting tax on the rest of the economy.
Smaller but more competitive manufacturing firms lack the resources to expand in more advanced technological sectors.
The volume of private and public R&amp;D spending is one of the lowest among industrial countries.
As a result, Italy is receiving immigrants with relatively low skills, while many of its most productive young graduates emigrate to the US, the UK, or other European countries.
The government has done little to remedy this.
Liberalization attempts in energy and public utilities have faltered, perhaps also because the government pockets monopoly rents through dividends from public enterprises.
Privatization has stalled.
· The Mezzogiorno . Labor productivity is traditionally much lower in Italy's south than in the rest of the country.
But centralized wage negotiations impose the same salary everywhere.
So many in the South remain poor and out of work, particularly the young.
Early on, the government proposed legislation to increase labor market flexibility and relax constraints on firing rules.
But its strategy of dividing the trade unions failed and some of the proposed legislation was eventually withdrawn.
Why has the government achieved so little, despite a large majority in Parliament, widespread backing among the population, and supportive media?
The main reason is government infighting.
In a well functioning democracy, electoral competition between government and opposition induces the government to pursue efficient policies.
Not so in Italy, where the main site of electoral competition has always been within the governing coalition.
Each government party is afraid of losing votes to its coalition partners, and undermines or blocks whatever the government is trying to do.
The result is policy paralysis, until time has run out for everyone.
The same problems led to the collapse of the previous government (a left-wing coalition led by current EU Commission President Romano Prodi), and they would certainly continue under a new government if a left-wing coalition was voted into office at the next election.
Unstable coalition governments have been typical of Italy's postwar politics.
In an attempt to solve the problem, a mixed electoral system was introduced in the early 1990's, with about three quarters of the seats assigned under plurality rule in single member districts and the rest allocated under proportional representation.
But the hope that this would ensure greater stability has been unfulfilled.
The residual proportional component of the electoral system has kept many political parties alive.
Because all of them compete for these proportional seats, government infighting remains acute.
A logical solution would be to scrap the proportional component of the electoral system altogether, and move decisively toward a two-party political system under fully majoritarian elections.
But that is unlikely.
On the contrary, the smaller centrist parties that scored a victory in the recent European Parliament elections are now demanding a return to full proportionality.
If they get it, matters will most likely go from bad to worse.
Under the current system, Italian governments achieve little, but at least they last longer.
A return to full proportionality would probably mean a return to rapid government turnover, which carries with it the risk that policy horizons will also become shorter.
As Italians know all too well, government instability inevitably breeds financial volatility.
Berlusconi’s Silent Majority
Italy’s Taxing Election
MILAN – A winter election is not to Italian tastes.
But, on February 24-25, up to 50 million voters will go to the polls to elect a new parliament, delivering Italy’s 62nd government in the last 65 years.
Since November 2011, Italy has been led not by a politician, but by an academic economist and a former European Union commissioner, Mario Monti.
His emergency technocratic government, supported by the left and right, was a masterstroke of outgoing President Giorgio Napolitano.
Napolitano’s move was crucial, filling Italy’s need to replace the inefficient and scandal-ridden Silvio Berlusconi, in whom fellow leaders and global markets had lost all confidence, with an internationally respected figure.
Under Monti’s leadership, reforms were finally initiated and markets were calmed.
To enhance the credibility of public finances, Monti’s government substantially increased taxes, particularly on real estate, while preserving the already record-high income-tax rate.
The tax plan highlighted that Italy, like Japan, is a country of public debt and private wealth.
As the economist Marco Fortis points out, Italian family wealth is still, if not for long, second to none in Europe.
Beyond growing international credibility, two major changes to the Italian political landscape have shaped the election campaign.
The first is Monti’s surprise resignation in December, after losing the backing of Berlusconi’s party.
While he will not run as a candidate (he is already a senator for life), he formed a centrist coalition – affiliated with neither the left nor the right – to contest the election, and has declared his willingness to resume his leadership role if the coalition is victorious.
The second change is that, after almost two decades of striving for a workable political system dominated by the center-left and center-right parties, Italy is experiencing a remarkable dispersion of forces.
The ballot will include dozens of competing parties, most of which will not win parliamentary seats, owing to a 2005 electoral law requiring at least 4% of the national vote to enter the Chamber of Deputies (the lower house) and 8% on a regional basis to enter the Senate.
According to public-opinion polls, the center-left Democratic Party, led by Pier Luigi Bersani, along with some more left-leaning allies, has the support of roughly 33% of the electorate, down since late January, while backing for Berlusconi’s center-right coalition has risen to 28%.
Meanwhile, Monti’s centrist grouping has only 16% support, while the populist Five Star Movement, founded by the comedian Beppe Grillo in 2009, has 17% backing – a figure that could go higher if those who previously stayed at home decide to cast a protest vote.
The real battle, therefore, is between the Bersani and Berlusconi coalitions.
Most observers believe that Bersani will carry the day, thanks to the much-criticized electoral law, which will give him control of the lower chamber if he wins a majority – regardless of how many people vote or how slim the margin.
The law favored Berlusconi in 2008; it is likely to benefit Bersani now.
But, in order to govern, Bersani would need both chambers, and he is unlikely to muster 50.1% in the Senate.
At the same time, with Monti’s coalition failing to gain traction, reflecting the historically limited appeal of classic bourgeois parties in Italy, many observers are wondering what his role in the next government will be.
For Bersani, creating a coalition with Monti may well be the key to gaining control of the upper house and, in turn, of the government.
Amid these plans and predictions, a growing banking scandal has reminded Italians that, in politics, luck can sometimes make the difference.
When Monte dei Paschi di Siena – Italy’s third-largest bank – revealed that it faced losses of up to €720 million ($970 million) from complex derivatives deals carried out in 2006-2009, support for Bersani’s coalition slipped, owing to the PD’s long-standing ties to the bank.
Given that Italians tend to vote against, rather than for, issues, mistrust of the PD has translated into increased support for Berlusconi’s coalition.
Another issue with the potential to undermine the PD’s standing is the party’s advocacy of a new wealth tax.
Italians already shoulder heavy taxes: an individual taxpayer with annual income of €50,000 pays €15,000 in income tax; with two children, that total drops by only €1,000.
By contrast, a French taxpayer with the same income pays only €9,000; with two children, the tax bill plummets to €3,000, and a €1.5 million fortune would mean an additional wealth tax of only €4,230.
In other words, with or without children, the French citizen’s annual tax payment would be smaller than that of the Italian taxpayer with no additional wealth.
In this context, a new wealth tax could be a dangerous proposition for the PD.
One feature of Italy’s turbulent politics remains consistent: the control exercised by entrenched interests, and the dominance of a bloated and inefficient bureaucracy.
With less than one-fifth of the population of the United States, Italy’s parliament has twice as many members as the US Congress, and they are among the world’s best-compensated and most privileged MPs.
Meanwhile, Italy’s top bureaucrats are the highest paid in history, according to OECD data, with several retired officials drawing larger pensions than former US presidents receive.
The salaries of Italy’s military chiefs of staff and chief of police are almost triple those of their American counterparts.
But prospects for political reform do not inspire optimism.
While Grillo’s supporters may ignite fireworks in protest of these gilded giveaways for a few months, a consistent assault leading to genuine reform seems doubtful.
More broadly, the outcome of Italy’s election will undoubtedly have a far-reaching impact on a still-fragile eurozone, though the nature of that impact remains impossible to predict – unless Berlusconi returns to power, in which case the consequences will be all too clear.
Bernanke Meets the Press
CAMBRIDGE – At the United States Federal Reserve’s recent and first-ever public press conference, Chairman Ben Bernanke gave a spirited defense of the Fed’s much-criticized policy of mass purchases of US government bonds, also known as “quantitative easing.”
But was his justification persuasive?
Most economists viewed his performance as masterful.
But the fact that the dollar has continued to slide while gold prices have continued to rise suggests considerable skepticism from markets.
One of the hardest things in central banking is that investors often hear a very different message from that which the central bank intends to send.
The Fed, of course, has been forced to turn to “QE,” as traders call it, because its normal tool for fine-tuning inflation and growth, the overnight interest rate, is already zero.
Yet US economic growth remains sluggish, and is accompanied by stubbornly high unemployment.
QE has been blamed for everything from asset-price bubbles to food riots to impetigo.
Everyone from foreign finance ministers to cartoon satirists (check out the video “quantitative easing explained”) to Sarah Palin has ripped into the policy.
Critics insist that QE is the beginning of the end of the global financial system, if not of civilization itself.
Their most telling complaint is that too little is known about how quantitative easing works, and that the Fed is therefore taking undue risks with the global financial system to achieve a modest juicing of the US economy.
Whether or not the critics are right, one thing is clear: with the Fed lagging other global central banks in the monetary-tightening cycle, and with rating agencies contemplating a downgrade of America’s credit score, the US dollar’s purchasing power has sunk to an all-time low against the currencies of America’s trading partners.
Bernanke’s defense was robust and unequivocal. He argued that QE is not nearly as unconventional as its critics claim.
If one looks at how it has affected financial conditions, including long-term interest rates, volatility, and stock prices, QE looks an awful lot like conventional interest-rate policy, which we think we understand.
Thus, concerns about QE’s supposed ill effects are wildly overblown, and there is nothing especially challenging about eventually reversing course, either.
Bernanke dismissed complaints about commodity prices and emerging-market inflation, arguing that these phenomena had far more to do with lax monetary policies and overly rigid exchange rates in fast-growing developing economies.
The Fed chairman’s comments come at a critical and sensitive moment.
Over the next year or so, the Fed is likely to enter a tightening cycle, raising interest rates on a steady and sustained basis.
It does not want to rush, because the US economy is still weak, with first-quarter growth a lackluster 1.8%.
But it cannot wait too long, lest inflation expectations drift to a dangerously high level, forcing the Fed to move aggressively – and at the cost of considerable economic pain – to wring inflation out of the system.
In unwinding QE, Bernanke must avoid another landmine, namely an unwelcome collapse in asset prices.
Many savvy Wall Street traders are convinced that QE is just the old “Greenspan put” on steroids.
The cult of the “Greenspan put” stemmed from the previous Fed chairman’s avowed belief that the Fed should not try to resist a sharply rising stock market, except to the extent that such a market undermines the long-term stability of prices for ordinary goods.
But if the stock market collapses too quickly, the Fed should worry about a recession and react aggressively to cushion the fall.
Are traders right?
Is QE merely the sequel to the “Greenspan put”?
It is certainly the case that today’s super-low interest rates encourage investors to pour funds into risky assets.
The Fed probably would argue that it is the job of regulators to make sure that asset bubbles do not induce too much borrowing and an eventual debt crisis, though of course monetary policy has to be in the mix.
Given the sluggish recovery, Bernanke could have gone even further and argued that the Fed is the one who has it right. Other advanced-economy monetary authorities, such as the European Central Bank, might be over-reacting to short term inflation volatility.
However, perhaps not wanting to cause problems for his foreign counterparts, Bernanke took a more cautious approach, merely defending the Fed’s policy as the right choice for America.
In defending the Fed’s policy, Bernanke had to be careful not to say anything that might overly alarm investors.
Indeed, there is already reason enough for them to be nervous: after all, the Fed’s epic easing of financial conditions must eventually be followed by exceptionally painful tightening.
Will the economy be ready when the time comes?
Explaining the inevitable shift to tightening could prove a far greater challenge than explaining the exceptional accommodation of quantitative easing.
The Fed must always remember that no matter how calm and rational its analysis may be, it is dealing with markets that can be anything but calm and rational.
Precisely because so much emotion has been invested in QE, the psychological effects of returning to normalcy are going to be perilous and unpredictable.
Bernanke’s the One
BERKELEY – William McChesney Martin, a Democrat, was twice reappointed to the job of Chairman of the United States Federal Reserve by Republican President Dwight D. Eisenhower.
Paul Volcker, a Democrat, was reappointed once by the Reagan administration (but not twice: there are persistent rumors that Reagan’s treasury secretary, James Baker, thought Volcker was too invested in monetary stability and not invested enough in producing strong economies in presidential years to elect Republicans).
Alan Greenspan, a Republican, was reappointed twice by Bill Clinton.
And now Barack Obama has announced his intention to re-nominate Republican appointee Ben Bernanke to the post.
As this history suggests, it is more remarkable for a US president not to reappoint a Fed chairman named by the opposite party than to reappoint one who wishes it.
Reagan’s failure to reappoint Volcker and Jimmy Carter’s failure to reappoint Arthur Burns are the main exceptions. The Fed chairmanship is the only position in the US government for which this is so: it is a mark of its unique status as a non- or not-very-partisan technocratic position of immense power and freedom of action – nearly a fourth branch of government, as David Wessel’s recent book In Fed We Trust puts it.
The reason, I think, that American presidents are so willing to reappoint Fed chairmen from the opposite party is closely linked to one of the two things that a president seeks: the confidence of financial markets that the Fed will pursue non-inflationary policies.
If financial markets lose that confidence – if they conclude that the Fed is too much under the president’s thumb to wage the good fight against inflation, or if they conclude that the chairman does not wish to control inflation – then the economic news is almost certain to be bad.
Capital flight, interest-rate spikes, declining private investment, and a collapse in the value of the dollar – all of these are likely should financial markets lose confidence in a Fed chairman.
And if they occur, the chances of success for a president seeking re-election – or for a vice president seeking to succeed him – are very low.
By reappointing a Fed chair chosen by someone else, a president can appear to guarantee financial markets that the Fed is not too much under his thumb.
And that can be a very valuable asset for an incumbent Fed chair – one that no other candidate could match.
But US presidents seek more than just a credible commitment to financial markets that the Fed chair will fear and fight inflation.
They seek intelligence, honor, and a keen sense of the public interest and the public welfare.
Presidents’ futures – their ability to win re-election, to accomplish other policy goals, and to leave a respectable legacy – hinge on the economy’s strength.
It may or may not be true, especially these days, that what is good for General Motors is good for America and vice versa, but certainly what is good economically for America is good politically for the president.
It is here, I think that President Barack Obama has lucked out.
Ben Bernanke is, I think, a very good choice for Fed chair because he is so intelligent, honest, pragmatic, and clear-sighted in his vision of the economy.
He has already guided the Fed through two very tumultuous years with only one major mistake – the bankruptcy of Lehman Brothers.
Bernanke’s deep knowledge of the Great Depression and of financial crises is exactly what America – and the world – needs in a Fed chair now.
And his commitment not to err on the side of underestimating either the difficulty of the situation or the value of keeping employment high would make him, I believe, one of the best possible choices for the position, even if he were not now the incumbent.
चीन के शहरी भविष्य की तस्वीर
बीजिंग. लगभग 10 करोड़ चीनी घोर गरीबी में जीवन यापन करते हैं और मोटे तौर पर साढ़े 27 करोड़ आबादी रोजाना 2 डालर से कम खर्च कर पाती है. चीन में गरीब लोगों की ज्यादातर आबादी देहाती इलाकों में रहती है. इस उम्मीद में कि शहरों में अच्छे वेतन वाले काम पाना आसान है. गरीबों का शहरों की ओर पलायन जारी है कि शहरों में उनका जीवन बेहतर हो जाएगा. वस्तुतः पिछले करीब साढ़े तीन दशक से लगभग 50 करोड़ चीनी आबादी शहरों में आकर बस गई है. इससे जहां 1980 के दशक चीन की कुल आबादी में शहरी आबादी की तादाद 20 प्रतिशत से भी कम थी वहीं अब यह लगभग आधी, यानी 50 फीसद हो गई है.
2030 तक चीन की 70 फीसद आबादी शहरों में रह रही होगी.
निसंदेह चीन के शहरीकरण ने उस देश की शानदार प्रगति और तीव्र रूपांतरण में अतुलनीय योगदान दिया है. इसके शहरों ने सस्ती जमीन और सस्ता श्रम उपलब्ध कराया जिसका फायदा उठाकर स्थानीय सरकारों ने भारी मात्रा में पूंजी निवेश को आकर्षित किया और नए-नए रोजगारों का निर्माण किया.
लेकिन अब इस व्यवस्था के चरमराने के संकेत दिखने लगे हैं. पूंजी-निवेश और निर्यात के बल पर पनपा चीनी विकास मॉडल अब अपनी ऊर्जा खोने लगा है. घिचपिच बसे शहरों की हदें अपने पांव पसार रही हैं. उनकी जमीनें छिनती जा रही हैं और बदले में उन्हें पर्याप्त मुआवजा भी नहीं मिल रहा है. दरअसल ये जमीनें स्थानीय सरकारों के लिए गिरवी रखकर कर्ज लेने में बहुमूल्य संसाधन हैं (जो अब जीडीपी के 30% के बराबर है).
इसके अलावा शहरी व देहाती इलाकों के बीच चौड़ी होती खाई ने चीन की आमदनी व संपदा संबंधी विषमता को और बढ़ा दिया है. खासकर हुकाऊ (चीन की आधिकारिक घरेलु पंजीकरण प्रणाली में प्रयुक्त दस्तावेज) रखने वाले शहरियों और प्रवासियों के बीच जिनके पास हुकोऊ नहीं है. हालांकि प्रवासियों के वेतन भत्तों में काफी तेजी आई है, लेकिन सार्वजनिक सेवाओं (जिन्हें पाने के लिए शहरी हुकोऊ जरूरी है) में वि��मता के कारण यही असंतुलन कायम है. इससे प्रवासियों की संतानों का भविष्य खतरे में पड़ गया है और भविष्य में प्रवास पर इसका प्रतिगामी असर पड़ सकता है.
शहरों के पर्यावरण पर भारी दबाव पड़ रहा है. हालांकि शहरी प्रदूषण को कम करने के उपाय किए जा रहे हैं लेकिन फिर बढ़ते शहरीकरण लोगों को सांस लेने के लिए शुद्ध हवा नहीं मिल पाती. इसका मानव जीवन पर और अर्थव्यवस्था पर गहरा असर पड़ने लगा है. मानव जीवन महंगा हो रहा है जबकि उनकी उत्पादकता घट रही है.
चीन के प्राधिकारियों को इस समस्या का आभास है. इसलिए उन्होंने नए ‘जनोन्मुखि’ शहरीकरण मॉडल की शुरूआत की है जो ज्यादा कारगर, समावर्ती और प्रर्यावरण की दृष्टि से ज्यादा निर्वहनीय होगा. हाल ही में विश्व बैंक और चीन की राज्य परिषद् के विकास अनुसंधान केंद्र द्वारा जारी संयुक्त रिपोर्ट में बताया गया है कि इस योजना को अमली जामा कैसे पहनाया जाएगा. इसके सफलतापूर्वक किर्यान्वयन से चीन के शहरीकरण के अगले दौर में निश्चित ही गरीबों की जिंदगी में काफी सुधार आएगा.
सबसे पहले तो प्राथमिकता के आधार पर योजना में भूमि नीतियों को सुधारा जाएगा. चीनी संविधान के तहत शहरी जमीन सरकार की मिल्कियत होती है और ग्रामीण जमीन कलेक्टिव्स (सहकारी समीतियों) के अधीन होती है. हांलाकि पिछले तीन दशकों में जमीन सुधारों के द्वारा जमीन पर व्यक्तियों और उद्योगों के स्वामित्व को मान्यता दी गई है, लेकिन गांवों में भूस्वामित्व अधिकार शहरों के मुकाबले कमजोर ही रहे हैं.
नई योजना में माना गया है कि किसानों के भूस्वामित्व अधिकारों को मजबूती प्रदान कर और शहरी विकास के लिए भूमि अधिग्रहण करने की स्थानीय सरकारों की शक्तियों को नियंत्रित कर, शहरों को कहीं अधिक सुडौल और कार्यक्षम बनाया जा सकता है, खासकर ऊर्जा उपयोग के मामले में. इस सुधार से खेती योग्य जमीन को एकजुट करने में मदद मिलेगी जिससे बेहतर कृषि तकनीकों का इस्तेमाल हो सकेगा.
भूमि सुधार से संपदा के वितरण में भी मदद मिलेगी क्योंकि सशक्त भूस्वामित्व अधिकारों से देहाती जमीन के भाव बढ़ेंगे. एक अनुमान के मुताबिक, पिछले बीस साल में किसानों को उनकी जमीन के बदले में जो मुआवजा मिला वह बाजार भाव से 2 खरब दुआन (322 अरब डालर) कम था. यह 2013 में चीन के सकल घरेलु उत्पादन का मात्र 4 प्रतिशत था. यदि चीन के सकल घरेलु उत्पादन के अनुरूप दरों में निवेश किया जाए तो यह बिना भुगतान किया मुआवजा 5 खरब दुआन या सकल घरेलु उत्पादन के लगभग 10 प्रतिशत के बराबर होगा.
दूसरे, हुकोऊ प्रणाली में सुधार से श्रमिकों की उत्पादकता बढ़ सकती है, आमदनी में विषमता घट सकती है और शहरीकरण की गति तेज हो सकती है. ग्रामीण क्षेत्रों से शहरों की ओर भारी पलायन के बावजूद यह अब भी उस स्तर से कम है जिसकी चीन के आकार और आमदनी स्तर से उम्मीद की जाती है. दो-तिहाई शहरी आबादी जिसके पास शहरी हुकोऊ नहीं है सार्वजनिक सेवाओं से वंचित रखने का एक मतलब यह भी है कि करीब इतनी ही आबादी अभी भी गांवों से बंधी है. अन्यथा वे कब का गांव छोड़ चुके होते. इस प्रणाली से जहां लोगों को शहरों में ज्यादा आमदनी तलाशने से हतोत्साहित किया गया वहीं ग्रामीण श्रमिकों की उत्पादकता और भत्ते भी कम रहे.
तेजी से फैल रहे किसी भी शहर को सार्वजनिक सेवा के अवरोधों का सामना करना पड़ता है, पर इनसे पार पाया जा सकता है. मसलन, जापान और दक्षिण कोरिया अपने तेजी से फैल रहे शहरी इलाकों में सार्वजनिक सेवाओं का विस्तार किया वह भी प्रवास को नियंत्रित किए बगैर. जैसा कि विश्व बैंक चीन सरकार की रिपोर्ट में कहा गया है. चीन भी सार्वजनिक सेवाओं को निवास स्थल से जोड़ कर, बजाए उन्हें मूल निवास से जोड़ने के, ऐसा कर सकता है. और फिर जब प्रवासियों की संतानें शहरों में अपने माता-पिता के पास आ सकें और अच्छी शिक्षा पा सके तो अगली पीढ़ी के पास गरीबी से बचने के लिए बेहतर अवसर होंगे.
प्रवास के नियमों को आसान बनाने से न केवल शहरों में नये अवसर पैदा होंगे बल्कि इससे कृषि के कायांतरण को भी गति मिलेगी क्योंकि कृषि कार्यों के लिए जो श्रमिक बचेंगे उन्हें उत्पादकता और भत्ते बढ़ाने के लिए नई तकनीकें अपनानी पड़ेंगी.
लेकिन भूमि व हुकोऊ सुधारों को लागू करने के लिए चीन की वित्तीय प्रणाली में आमूल-चूल बदलाव लाने होंगे. किसानों के लिए मजबूत भूस्वामित्व अधिकारों से शहरी प्राधिकरणों को भूमि-परिवर्तन से होने वाली आमदनी बंद हो जाएगी जिसका वे शहरों में नए प्रवासियों को सार्वजनिक सेवाएं देने में उपयोग करते हैं और अधिक आप्रवास का अर्थ होगा इन सेवाओं के लिए अधिक मांग.
इसलिए शहरों को आमदनी के नए स्त्रोतों की तलाश करनी होगी. संपत्तीकर या व्यक्तिगत आयकर पर स्थानीय अधिकार उन लोगों को निशाना बनाएंगे जिन्होंने शहरी जीवन से सबसे ज्यादा लाभ कमाया है. पर्यावरणकर तथा अन्य लेतियों यथा गाडि़यों के पंजीकरण की ऊंची फीस, प्रदूषणकर तथा सेवाओं की बेहतर लागत वसूली -- से भी मदद मिल सकती है और साथ ही शहरी पर्यावरण संबंधी समस्याओं से निपटा भी जा सकता है. इसके अलावा कई बड़ी बचतें भी संभव हैं. अगले 15 साल में चीन के शहरों ने ढांचागत संरचना पर $5.3 खरब खर्च करने पड़ेंगे. लेकिन ज्यादा घने व सुगठित शहरों में इन खर्चों में से $1.4 खरब (2015 के जीडीपी का 15%) तक बचाए जा सकते हैं. इस धन का उपयोग बेहतर स्वास्थ्य सेवाएं, शिक्षा तथा नए प्रवासियों के लिए सस्ते मकान बनाने में उपयोग किया जा सकता है.
इस तरह सरकारी नीति में शहरों के भौतिक फैलाव व अवसंरचना पर ध्यान देने की बजाए सार्वजनिक सेवाओं के बेहतर व सुसंगत वितरण की ओर बदलाव से चीन के नागरिकों खासकर गरीबों को भारी लाभ मिलेगा. इस लक्ष्य को हासिल करने से ही सच्चे अर्थों में जनोन्मुखि शहरीकरण का सपना साकार होगा. आखिर चीन के जिम्मेदार नेताओं-अधिकारियों का भी तो यही सपना है.
बर्ट हॉफमैन विश्व बैंक में पूर्वी एशिया व प्रशांत क्षेत्र के लिए चीफ इकोनॉमिस्ट हैं.
निर्बाध आधारिक संरचना
वाशिंगटन, डीसी – एक सामान्य आँकड़े पर विचार करें। विकासशील विश्व में हर महीने, पाँच मिलियन से भी अधिक लोग शहरी इलाकों में स्थानांतरण कर जाते हैं, जहाँ पर नौकरियाँ, स्कूल, और सभी तरह के अवसर अक्सर आसानी से उपलब्ध होते हैं। परंतु जब लोग स्थानांतरण करते हैं, तो बुनियादी सेवाओं - पानी, बिजली, और परिवहन - की ज़रूरतें उनके साथ चलती हैं, जिससे आधारिक संरचना की माँग में तेज़ी से वृद्धि होती है।
यह वास्तविकता केन्या से लेकर किरिबाती तक - उस हर स्थान पर साफ दिखाई देती है जहाँ तीव्र गति से हो रहे शहरीकरण, व्यापार और उद्यमशीलता को समर्थन देने की आवश्यकता, और जलवायु परिवर्तन की चुनौतियों का सामना करने के प्रयासों के फलस्वरूप आधारिक संरचना में भारी कमी दिखाई दी है। और यह वह कमी है जो उन्नत अर्थव्यवस्थाओं के सामने भी आती है।
सरल शब्दों में कहा जाए तो यह ज़रूरी है कि विश्व भर में आधारिक संरचना का निर्माण और आधुनिकीकरण दीर्घ-कालीन वैश्विक विकास की रणनीति का हिस्सा हो। इसी कारण जी-20 वित्त मंत्रियों की इस वर्ष हाल ही में सिडनी, ऑस्ट्रेलिया में पहली बार हुई बैठक में एकमात्र रूप से आधारिक संरचना में निवेश को एक ऐसे तत्व के रूप में स्वीकार किया गया जो सुदृढ़, धारणीय, और संतुलित सुधार के लिए महत्वपूर्ण है।
चूंकि जी-20 वित्त मंत्रियों की बैठक अगले महीने वाशिंगटन डीसी में किए जाने की तैयारी हो रही है, इसलिए एक सावधानी टिप्पणी करना उचित होगा: विकास को बढ़ावा देने और नौकरियों का सृजन करने के लिए मात्र आधारिक संरचना के निवेश में वृद्धि करना पर्याप्त नहीं है।
वित्तीय संकट के आरंभ में, उन्नत और उभरते-बाज़ार की अर्थव्यवस्थाओं ने "लगभग-तैयार" आधारिक संरचना परियोजनाओं में पैसा लगाया ताकि अल्पावधि आर्थिक विकास और नौकरियों के सृजन को बढ़ावा दिया जा सके। अब संकट को देखते हुए आधारिक संरचना चुनौती के संबंध में कार्रवाई करना और कठिन हो गया है। उभरती और विकासशील अर्थव्यवस्थाओं में सरकारी बजट सीमित होते हैं, जबकि निजी क्षेत्र का योगदान औसत रूप से कुल आधारिक संरचना निवेश के 15% से कम होता है।
वास्तव में, उभरती अर्थव्यवस्थाओं में आधारिक संरचना निवेश के वित्तपोषण में मुख्य चुनौती यह है कि बहुत से वाणिज्य बैंक (मुख्यतः यूरोपीय) जिनकी पहले उल्लेखनीय उपस्थिति थी अब पीछे हट गए हैं – और जब तक वे अपने संकटग्रस्त तुलन-पत्रों को दुरुस्त करके कठोर विनियामक मा���कों को पूरा न कर लें, उनके वापस आने की संभावना नहीं है।
अतः वित्तपोषण की अपूर्ण आवश्यकताएँ बहुत अधिक हैं। उभरती और विकासशील अर्थव्यवस्थाओं के मामले में, अनुमान है कि विकास के लक्ष्यों को पूरा करने के लिए 2020 तक वार्षिक निवेश के रूप में 1-1.5 ट्रिलियन डॉलर की अतिरक्त राशि की आवश्यकता होगी। ग्रीनहाउस गैस उत्सर्जनों को कम करने या जलवायु परिवर्तन के अनुकूल होने के लिए किए जानेवाले व्यय से इन देशों की आधारिक संरचनाओं की आवश्यकताओं की लागतों में प्रत्येक वर्ष 170-220 बिलियन डॉलर का इज़ाफा होगा।
स्पष्ट रूप से जी-20 का इस बात पर बल देना उचित है कि इन आवश्यकताओं की पूर्ति किया जाना कितने लोगों के लिए कितना महत्वपूर्ण है। उदाहरण के लिए, उप-मरुस्थलीय अफ़्रीका की 69% से अधिक जनसंख्या को बिजली उपलब्ध नहीं है; दक्षिण एशिया में 65% लोगों को गड्ढे वाले शौचालय उपलब्ध नहीं हैं; और लैटिन अमेरिका और कैरिबियन में 40% ग्रामीण लोगों को बारह-मासी सड़कें उपलब्ध नहीं हैं।
लेकिन हम यह भी जानते हैं कि आधारिक संरचना में निवेश को प्रोत्साहित करने के लिए धन के अतिरिक्त और भी बहुत कुछ चाहिए होता है। कुछ देशों को आधारिक संरचना पर किए गए अपने खर्च से भारी लाभ प्राप्त होते हैं जबकि कुछ को मुश्किल से कोई लाभ मिलता है। जी-20 के लिए विश्व बैंक समूह द्वारा तैयार की गई पृष्ठभूमि टिप्पणी में बताया गया है कि सरकारों को आधारिक संरचना परियोजनाओं के चयन, गुणवत्ता और प्रबंधन, और साथ ही अंतर्निहित निवेश वातावरण की गुणवत्ता पर अधिक ध्यान देना चाहिए।
निवेशों को प्राथमिकता देना, अच्छी आयोजना, और सुदृढ़ परियोजना प्रारूप से विकास और नौकरियों के सृजन पर नए और आधुनिकीकृत आधारिक संरचना के प्रभाव में उल्लेखनीय वृद्धि हो सकती है और साथ ही दुर्लभ संसाधनों से मिलनेवाले लाभों में वृद्धि हो सकती है। बेहतर निवेश आयोजना से आधारिक संरचना को अनुपयोगी और कम 'हरित' प्रौद्योगिकियों में फँसाने से बचने में भी मदद मिल सकती है।
हाँ, यह सब कहना आसान है पर करना मुश्किल है। जैसा कि मैंने सिडनी में सुना था, बहुत से विकासशील देशों को परियोजनाओं की पहचान करने, उन्हें तैयार करने, और उनका कार्यान्वयन करने में वास्तविक कठिनाइयों का सामना करना पड़ता है। तकनीकी, वित्तीय, आर्थिक, और पर्यावरणीय संभावना अध्ययनों और दीर्घ-कालीन योजनाओं की लागत कई मिलियन डॉलर जितनी अधिक हो सकती है।
विश्व बैंक समूह विकासशील देशों को इन क्षेत्रों में उनकी क्षमता का निर्माण करने में मदद करता आ रहा है। लेकिन और भी बहुत कुछ किया जाना चाहिए ताकि देश अधिक मज़बूत सार्वजनिक-निवेश कार्यक्रम को समर्थन देनेवाली एक ऐसी सुदृढ़ परियोजना पाइपलाइन विकसित कर सकें जो निजी क्षेत्र से भारी संसाधनों को जुटाने की किसी रणनीति के लिए महत्वपूर्ण होती है।
और आज के आर्थिक वातावरण में निजी वित्त को आकर्षित करना अनिवार्य है क्योंकि ऐसा कोई और आसान तरीका नहीं है जिससे सार्वजनिक निधियों से आधारिक संरचना के अंतराल को भरा जा सके। ऐसा करने के लिए उचित नियंत्रण, पूर्वानुमेय मूल्य संरचनाओं और एक विश्वसनीय विनियामक वातावरण को सुनिश्चित करना भी आवश्यक होगा।
देशों के पास समय नहीं है कि वे उसे बर्बाद करें। गरीब लोगों के लिए मूलभूत सेवाएँ उपलब्ध करने, नौकरियों और अवसरों का सृजन करने, बाज़ारों तक पहुँच को सक्षम करने और हमारे सतत विकासशील शहरों में धारणीय विकास सुनिश्चित करने में मदद करने में आधारिक संरचना की अनूठी भूमिका के फलस्वरूप नीति निर्माताओं के लिए शीघ्रतापूर्वक और निर्णायक रूप से कार्रवाई करना आवश्यक होता है।
The Best Ways to Fight Extreme Poverty
COPENHAGEN – In 1950, people in South Korea and Pakistan earned roughly the same amount of money annually.
Today, the two countries are scarcely comparable.
South Korean’s per capita income has grown 23-fold since then, while Pakistan has experienced only a three-fold increase.
How we can help more of the world’s poorest countries emulate South Korea’s success is one of the most important questions facing the world today.
Better economic outcomes mean empowering entire populations with better health, more education, longer life, and less vulnerability to challenges like natural disasters.
Many of the United Nations’ proposed 169 development targets for the next 15 years are, at their heart, concerned with poverty reduction.
But not all targets are equally good.
The Copenhagen Consensus Center, of which I am director, recently asked 60 teams of economists to evaluate the benefits and costs of these proposed targets, which will come into force to replace the Millennium Development Goals in September.
One of the least desirable targets seems laudable at first: full employment for all.
Unfortunately, this is a dream, not a target.
Economies need some unemployment to allow workers to change jobs, and most governments already focus on job creation.
Research suggests that politicians and interest groups would use a full-employment target to support expensive, protectionist policies that generate great jobs for some but drive many into the informal economy.
So it would probably end up doing less good than it would cost, and it is certainly not the way to reduce extreme poverty.
About 14.5% of the world’s population, or one billion people, live on less than $1.25 a day.
So why not end extreme poverty by simply transferring enough resources to this billion people to get them to at least $1.26 a day?
The world’s poorest would be able to feed and educate their children better and become healthier.
But, in addition to the financial cost, there would be huge administrative challenges, along with corruption and institutional deficiencies.
When these factors are weighed against the benefits in monetary terms, each dollar spent ending extreme poverty with cash transfers would achieve about $5 worth of social value.
That is not a bad return at all, but there are many better ways to help.
One possibility is to triple mobile broadband penetration in developing countries.
This would provide small-scale businesspeople such as farmers and fishermen with market information, enabling them to sell their goods at the highest price – and to boost productivity, increase efficiency, and generate more jobs.
Our research shows that the benefits, added up, would be worth $17 for every dollar spent – making it a very good development target.
An even better intervention addresses migration.
More than 200 million people today work outside their home countries.
As rich countries age, they need more workers.
At the same time, people from developing countries are more productive in a developed country.
Easing restrictions on migration would allow young people from developing countries to expand industrialized economies’ diminishing workforces – and generate the taxes needed to pay for care for the elderly.
Such migration would also be good for the developing countries, because migrant workers send home remittances.
In total, every dollar spent on increased migration would produce more than $45 of social good – possibly more than $300.
While in today’s political climate, increasing migration might be difficult to achieve, it is worth pointing out how effectively it could help the world’s poorest.
The single development target that would have the biggest impact on global prosperity would be the completion of the Doha trade round.
Lowering trade barriers would mean that all countries could focus on doing what they do best, making everyone better off.
Moreover, freer trade would accelerate economic growth, owing to increased innovation and knowledge exchange.
Heavy reliance on trading in a global market was one of the main reasons that South Korea has developed so rapidly and essentially eradicated its poverty in the last 65 years.
Economic models indicate that a successful Doha round would make the global economy $11 trillion richer each year by 2030, with most of the benefits going to developing countries.
Each person in the developing world would earn $1,000 more per year, on average.
The number of people living in extreme poverty would fall by 160 million.
For every dollar spent, mostly to pay off Western farmers blocking the current negotiations, the world would achieve more than $2,000 of benefits, making free trade a phenomenal investment.
Each of these proposals – full employment, cash transfers, broadband rollout, freer migration, and lower trade barriers – is covered by at least one of the UN’s 169 development targets.
And herein lies the problem.
Trying to do 169 different things at once would be foolhardy.
It would mean spending too much time and resources on lower-return priorities, instead of focusing on the targets that promise the biggest impact on the world’s poorest.
In fact, our research shows that there are 19 phenomenal targets that – like freer trade – should be prioritized above all of the others.
The final decision about which targets will become global policy will affect the flow of trillions of dollars over the next 15 years.
In September, when world leaders gather in New York, they need to focus on the smartest ways to boost global prosperity.
Better Red than Dead?
Will the inexorable rise in medical costs around the world someday pose a major challenge to contemporary capitalism?
I submit that in the not-so-distant future, moral, social, and political support for capitalism will be severely tested as would-be egalitarian health systems face ever-rising costs.
Rising incomes, population aging, and new technologies for extending and enhancing life, have caused health costs to rise 3.5% faster than overall income for many decades now in the United States.
Some leading economists project that health expenditures, which already constitute 16% of the US economy, will rise to 30% of GDP by 2030, and perhaps approach 50% later in the century.
Other rich and middle-income countries, although typically spending only half what the US does today, won’t lag far behind.
Countries in Europe and elsewhere have shielded their citizens from a part of this rise by piggybacking on US technological advances.
Ultimately, though, they face the same upward cost pressures.
Hasn’t the start of the twenty-first century marked the death of all other ideologies, with China’s raw capitalism putting pressure on gentler forms in Europe and elsewhere?
The problem is that attitudes towards healthcare are fundamentally different.
Many societies view healthcare as a right, not a luxury.
When medical expenses constituted only a small percentage of income, as was typically the case 50 years ago, an egalitarian approach to healthcare was a small extravagance.
The direct and indirect costs were relatively minor and affordable.
But as health expenses start taking up a third of national income, healthcare socialism starts becoming just plain Marxism: to each according to his needs.
Even China’s authoritarian capitalism will someday feel the pressure, as its rural populations, who currently have little access to doctors or hospitals, eventually explode with discontent.
One often hears about rising healthcare costs in the context of future government budget projections, with old-age health costs expected to dominate growth in government expenditures in coming years.
But a careful look at the projections by, say, the US Congressional Budget Office, show that the aging of our societies is only a part of the problem, and not the larger part.
The real issue is whether societies are willing to provide elderly people with equal access to ever newer and improved medical techniques.
A change on the horizon that will exacerbate current frictions is the growing importance of individualized health care.
For most of modern history, relatively inexpensive public health precautions, such as providing clean drinking water and routine vaccinations, have been the main factor pushing up life expectancy.
Public health measures have trumped the importance of individual care.
But today, the balance is shifting.
Heart operations are already a major factor in extending life in many rich countries.
Sophisticated X-ray diagnostic techniques such as CT scans make it possible to detect many cancers at a treatable stage.
Some drug researchers predict that with continuing advances in understanding the human genome, doctors may eventually be able to predict illnesses 15-20 years in advance, and begin prophylactic treatment immediately.
(With some experts predicting that individuals will routinely live beyond 110-115 years by mid-century, one might wonder what all this will do to other social conventions such as marriage, but I will leave this thought to another day.)
In addition to reducing mortality, new medical techniques can also have a huge effect on the quality of life.
Roughly 250,000 hip replacements are performed in the US each year.
Under-60 patients are becoming more important as newer artificial joints prove their capacity to withstand more active lifestyles.
At $6,000, the average cost of a hip replacement is only a thousandth the cost of what it supposedly took to implant a bionic arm, eye, and two legs on the fictional “The Six Million Dollar Man” in the popular mid-1970’s TV show.
Of course, hip replacement patients don’t get super-human speed, strength, and vision – at least not yet.
If Tour de France officials think they have big problems now with steroids, just wait ten years.
In principle, greater use of market mechanisms to allocate health care can slow or even temporarily reverse the rise in healthcare costs.
But improved efficiency has its limits.
Ultimately, the evidence suggests that societies spend ever-larger fractions of their income on health over time, in contrast to food expenditures, for example, which fall as countries become wealthier.
Spending pressures, in turn, lead to acceleration of innovation.
This raises long-term well being all around, but exacerbates short-term inequalities and frictions.
I am not arguing against healthcare capitalism, but warning that support will become fragile, far more so than for, say, globalization nowadays.
Most countries rely far too much on command and control, and provide far too few incentives for patients and providers to make efficient choices.
Nevertheless, it remains to be seen whether healthcare pressures will ultimately cause the current trend towards free (and freer) market capitalism to reverse, with a very large chunk of the economy reverting to a more socialist system.
Some societies might decide that it is better to be red than dead.
Better than Basel
ROME – The Basel Accords – meant to protect depositors and the public in general from bad banking practices – exacerbated the downward economic spiral triggered by the financial crisis of 2008.
Throughout the crisis, as business confidence evaporated, banks were forced to sell assets and cut lending in order to maintain capital requirements stipulated by the Accords.
This lending squeeze resulted in a sharp drop in GDP and employment, while the sharp sell-off in assets ensured further declines.
My recent study with Jacopo Carmassi, Time to Set Banking Regulation Right, shows that by permitting excessive leverage and risk-taking by large international banks – in some cases allowing banks to accumulate total liabilities up to 40, or even 50, times their equity capital – the Basel banking rules not only enabled, but, ironically, intensified the crisis.
After the crisis, world leaders and central bankers overhauled banking regulations, first and foremost by rectifying the Basel prudential rules.
Unfortunately, the new Basel III Accord and the ensuing EU Capital Requirements Directive have failed to correct the two main shortcomings of international prudential rules – namely, their reliance on banks’ risk-management models for the calculation of capital requirements, and the lack of supervisory accountability.
The latest example highlighting this flaw is Dexia, the Belgian-French banking group that failed in 2011 – just after passing the European Banking Authority’s stress test with flying colors.
The stunning opacity of solvency ratios encouraged regulators to turn a blind eye to banks’ excessive risk-taking.
The problem is that the Basel capital rules – whether Basel I, II, or III – are of no help in separating the weak banks from the sound ones.
Indeed, more often than not, the banks that failed or had to be rescued in the wake of the 2008 financial crisis had solvency ratios higher than those of banks that remained standing without assistance.
Compounding the problem, the diversity in banks’ capital ratios also indicates a dramatic distortion of the international playing field, as increasingly competitive conditions in financial markets have led to national discretion in applying the rules.
Meanwhile, the opacity of capital indicators has made market discipline impossible to impose.
Thus, large banks are likely to continue to hold too little capital and to take excessive risks, raising the prospect of renewed bouts of financial instability.
In order to overcome these shortcomings in international banking regulations, three remedies are needed.
First, capital requirements should be set as a straightforward ratio of common equity to total assets, thereby abandoning all reference to banks’ own risk-management models.
The new capital ratio should be raised to 7-10% of total assets in order to dampen risk-taking by bankers and minimize the real economic impact of large-scale deleveraging following a loss of confidence in the banking system.
Second, new capital ratios with multiple and decreasing capital thresholds, which trigger increasingly intrusive corrective action, should serve as the basis for a new system of mandated supervisory action.
Supervisors should be bound by a presumption that they will act.
They could argue that action is not necessary in a specific case, but they would have to do so publicly, thus becoming accountable for their inaction.
In order to eradicate moral hazard, the system must have a resolution procedure to close banks when their capital falls below a minimum threshold.
Finally, solvency rules should be complemented by an obligation that banks issue a substantial amount of non-collateralized debt – on the order of 100% of their capital – that is convertible into equity.
These debentures should be designed to create a strong incentive for bank managers and shareholders to issue equity rather than suffer conversion.
These three measures, if applied to all banks, would eliminate the need for special rules governing liquidity or funding (which would remain open to supervisory review, but not to binding constraints).
There would also be no need for special restrictions on banking activities and operations.
The most remarkable feature of the policy deliberations on prudential banking rules so far has been their delegation to the Basel Committee of Banking Supervisors and the banks themselves, both of which have a vested interest in preserving the existing system.
Governments and parliaments have an obligation to launch a thorough review of the Basel rules, and to demand revisions that align them with the public interest.
Betting the House
Homeowners around the world effectively gamble on home prices.
Their risks today are often big due to real estate bubbles in such glamour cities as London, Paris, Madrid, Rome, Istanbul, Moscow, Shanghai, Hangzhou, Sydney, Melbourne, Vancouver, Los Angeles, Las Vegas, Boston, New York, Washington, D.C., and Miami.
Those bubbles may keep expanding, or may burst, leaving many homeowners mired in debt.
The risk to home prices in the aftermath of a bubble is real and substantial. In the last cycle of real estate busts, real (inflation-corrected) home prices fell 46% in London in 1988-95, 41% in Los Angeles in 1989-1997, 43% in Paris in 1991-98, 67% in Moscow in 1993-97, and 38% in Shanghai in 1995-1999.
All of these drops were eventually reversed, and all of these markets have boomed recently.
But this does not guarantee that future drops will have a similar outcome.
On the contrary, the future real value of our homes is fundamentally uncertain.
Most homeowners are not gambling for pleasure.
They are just buying real estate because they need it.
But, because they do nothing to protect themselves against their real estate price risks, they are unwitting gamblers.
In fact, home buyers in most countries do nothing to protect themselves – short of selling their homes – because there is nothing to be done.
A market for real estate derivatives that can help balance these risks is only just beginning to appear.
Well-developed markets for real estate derivatives would allow homeowners to kick the gambling habit.
A liquid, cash-settled futures market that is based on an index of home prices in a city would enable a homeowner living there to sell in a futures market to protect himself.
If home prices fall sharply in that city, the drop in the value of the home would be offset by an increase in the value of the futures contract.
That is how advanced risk management works, as financial professionals know.
But the tools needed to hedge such risks should be made available to everyone.
Attempts to set up derivatives markets for real estate have -- so far -- all met with only limited success.
In May 2003, Goldman, Sachs & Co. began offering cash-settled covered warrants on house prices in the United Kingdom, based on the Halifax House Price Index and traded on the London Stock Exchange.
In October 2004, Hedgestreet.com began offering “hedgelets” on real estate prices in US cities – contracts that pay out if the rate of increase in home prices based on the OFHEO Home Price Index falls within a pre-specified range.
My former student Allan Weiss and I have been campaigning since 1990 for better risk management institutions for real estate.
In 1999, we co-founded a firm, Macro Securities Research, LLC, to promote the development of such institutions, working with the American Stock Exchange to create securities that would allow people to manage real estate as well as other risks.
These will be long-term securities that pay regular dividends, like stocks, whose value is tied – either positively or negatively ­– to a real estate price index.
Early this month, the Chicago Mercantile Exchange announced that it will also work with us to explore the development of futures markets in US metropolitan-area home prices.
We hope to facilitate the creation of such markets in other countries as well.
Because even many financially sophisticated homeowners will find direct participation in derivative markets too daunting, the next stage in the development of real estate risk management will be to create suitable retail products.
For example, the derivative markets should create an environment that encourages insurers to develop home equity insurance, which insures homeowners not just against a bust but also against drops in the market value of the home.
Such insurance ­should be attractive to homeowners if it is offered as an add-on to their existing insurance policies.
Derivatives markets for real estate should also facilitate the creation of mortgage loans that help homeowners manage risks by, say, reducing the amount owed if a home’s value drops.
Such products should appeal to homebuyers when the mortgage is first issued.
Insurance companies and mortgage companies ought to be willing to offer such products if they can hedge the home-price risks in liquid derivative markets.
Creating these retail products will require time, experimentation, and some real innovation.
Over the next decade, we might expect that a broad spectrum of insurance, lending, and securities companies will become involved.
As these retail products start to take shape, they will spur increased activity in the derivative markets.
As the new risk-management industry develops, its components will gradually boost each other.
These developments offer hope that current and future homeowners will be spared the agony of worrying about the vicissitudes of the real estate market.
They will be able to leave the game of real estate speculation to professionals and rest assured about the value that they have accumulated in their homes.
That is good news, because there is a pretty strong chance that we are going to see major price declines in a number of cities around the globe in the next few years, and these price declines will cause real pain to many homeowners.
But if the momentum toward better risk management continues, it will be the last real estate cycle in which homeowners are unable to protect themselves.
Betting With the House’s Money
Many people have been asking why the dollar hasn’t crashed yet.
Will the United States ever face a bill for the string of massive trade deficits that it has been running for more than a decade?
Including interest payments on past deficits, the tab for 2006 alone was over $800 billion dollars – roughly 6.5% of US gross national product.
Even more staggeringly, US borrowing now soaks up more than two-thirds of the combined excess savings of all the surplus countries in the world, including China, Japan, Germany, and the OPEC states.
Foreigners are hardly reaping great returns on investing in the US.
On the contrary, they typically get significantly lower returns than Americans get on their investments abroad.
In an era in which stock and housing prices are soaring, the central banks of Japan and China are holding almost two trillion dollars worth of low-interest bonds.
A very large share of these are US treasury bonds and mortgages.
This enormous subsidy to American taxpayers is, in many ways, the world’s largest foreign aid program.
If America’s competitive position is so weak, what magic is holding up the dollar?
Most sober analysts have long been projecting a steady trend decline in the dollar against the currencies of America’s trading partners, especially in Asia and emerging markets.
So why hasn’t more adjustment taken place already?
The first answer, of course, is that the trade-weighted dollar has fallen – by more than 15% in real terms since its peak in early 2002.
Yet the US deficits have persisted, and even risen, since then.
The real driving force has been two-fold.
First and foremost, America’s government and consumers have been engaged in a never-ending consumption binge.
On the consumer side, this is quite understandable.
With over 80% home ownership, the epic boom in housing prices of the last ten years has spread deep into the American middle class.
Equity holdings are somewhat more concentrated, but many middle class Americans have still benefited indirectly through their pension funds.
Overall, after almost 25 years of stunning prosperity, punctuated by only two mild recessions, most Americans feel pretty confident about their economic situation.
Unemployment is at a cyclical low, and the economy appears to be less volatile than at any point in modern history.
So it is not surprising that private consumption continues to hold up even as US economic growth has shifted into lower gear.
People have enjoyed such huge capital gains over the past decade that most feel like gamblers on a long winning streak.
By now, they see themselves as playing with the house’s (or their houses’) money.
It is less easy to rationalize why the US government is continuing to run budget deficits despite a cyclical boom.
When a fiscally responsible government launches a war, it typically cuts back on other domestic expenditures and raises taxes.
The Bush administration did the opposite.
It may not be good economics, but the strategy proved to be good politics, for a time.
Unfortunately, it is unlikely the new Democratic majority in Congress will do much about it.
Of course, it takes two to tango.
In order for the US economy to run deficits with the world, other countries must be willing to spin off a counterbalancing supply of savings.
Ben Bernanke, the US Federal Reserve chairman, once famously pinned the whole US current account deficit on a “global savings glut.”
But it would be more accurate to say that there is global investment shortfall, with investment trending downwards despite the upward trend in global growth.
This investment shortfall is due to many factors, but perhaps the main one is that there are substantial medium-term institutional roadblocks to investment in many developing countries, where long-term returns now seem to be by far the highest.
The net result is that money is being parked temporarily in low-yield investments in the US, although this cannot be the long-run trend.
What then is future of the dollar?
As long as the status quo persists, with strong global growth and stunning macroeconomic stability, the US can continue to borrow and run trade deficits without immediate consequence.
Over time, the dollar will still decline, but perhaps by no more than a couple of percent per year.
Nevertheless, it is not hard to imagine scenarios in which the dollar collapses.
Nuclear terrorism, a slowdown in China, or a sharp escalation of violence in the Middle East could all blow the lid off the current economic dynamic.
In principle, one can also think of scenarios in which the dollar shoots up, but overall these seem less likely.
In sum, the fact that the US trade balance has defied gravity for so many years has made it possible for the dollar to do so, too.
But some day, the US may well have to pay the bill for its spendthrift ways.
When that day arrives, Americans had better pray that their creditors will be as happy to accept dollars as they are now.
Between Pax Americana and Pax Africana
War and peace exist in Africa for reasons that are not always internal to Africa.
Conflicts in other parts of the world often have huge repercussions across Africa.
Four times as many Kenyans as Israelis died in November 2002 in the terrorist attack on the Paradise, an Israeli hotel in my hometown of Mombasa.
Was this but another moment of blood-stained convergence between the politics of the Middle East and the politics of Islam in Africa?
Here we must distinguish between national and international terrorism.
Much of the terrorism in Africa in the second half of the 20 th century targeted the colonial powers and the European minority regimes that were their legacy.
Kenya, for example, won its independence partly in an anti-colonial war of liberation in which both the British colonial forces and the Mau Mau movement resorted to terrorism.
In retrospect, "national" terrorism in Africa was a form of warfare that must be judged within its political and moral context, and by its ultimate results.
Kenya's Mau Mau war delivered independence in 1963; the Algerian revolution liberated that country in 1962; anti-colonial wars in Angola, Mozambique, and Guinea-Bissau destroyed the Portuguese empire in 1974; the anti-UDI struggle in Rhodesia (Zimbabwe) ended white rule; and the anti-apartheid struggle in South Africa finally triumphed against the apartheid racial order.
Unlike anti-European guerilla war and anti-colonial terrorism in Africa, anti-American and anti-Zionist terrorism in the Middle East has led nowhere.
Yet its brutality has often caught Africa in the crossfire.
In order to kill twelve Americans in an attack on the US Embassy in August 1998, Middle Eastern terrorists killed some two hundred Kenyans in Nairobi.
Far more Tanzanians than Americans were killed and wounded when the US Embassy in Dar es Salaam was targeted at the same time.
Sudan bore the brunt of US retaliation, when President Bill Clinton ordered the bombing of an apparently harmless pharmaceutical factory near Khartoum as retaliation for an Osama bin Laden sponsored terrorist attack.
Indeed, violence between Americans and Middle Easterners has been spilling over into Africa for decades.
Before Clinton, President Ronald Reagan ordered the bombing of Tripoli and Benghazi in Libya in 1986 in retaliation for the bombing of a German disco in which several Americans were killed.
Similarly, many Africans were killed at the World Trade Center on September 11, 2001--Senegalese hawkers, Nigerian investors, Ethiopian or Eritrean drivers, Ghanaian students, Egyptian and South African tourists, and others.
Security forces throughout the continent subsequently opened their doors to the US Federal Bureau of Investigation and Central Intelligence Agency.
At that moment, Pax Americana entered Africa, forging an alliance with the governments and people long struggling to establish a Pax Africana .
The FBI reportedly arrived in Tanzania with the names of 60 Muslims selected for interrogation.
The Kenyan authorities, eager to please the US, were tempted to hand over Kenyan citizens on the slightest encouragement.
The terrorist attacks on New York and Washington of September, 2001 and their aftermath may exacerbate tensions not only between pro-Western and anti-Western schools of thought in Africa, but also between Christians and Muslims.
A demonstration by Nigerian Muslims in Kano against the US war in Afghanistan provoked stone throwing by Nigerian Christians.
Churches and mosques were soon being burned in communal riots.
Moreover, efforts by the US to unite African governments against terrorism may merely bolster authoritarianism.
The pressure on African governments to enact legislation against terrorism may pose new threats to civil liberties at the very moment when democratization is gathering momentum.
In the war on terror, it seems, Africa's dictators may find it easier to justify continuing tyranny.
Because the thousand-year-old city of Mombasa historically had a superb natural harbor, it was fought over many times--by Arabs, the Portuguese, Zanzibaris, the Mazrui, the British, and others.
There was a time when it was called "Mvita," the Isle of War.
Even now, the Swahili dialect of Mombasa is called Ki-mvita, and its people coined the proverb "Ndovu wawili wakipigana, ziumiazo na nyasi" [When two elephants fight, it is the grass that suffers].
Since the attack on the Paradise hotel, Mombasa has not reverted to its ancient identity of Mvita, the Isle of War, because only a single elephant, the US, with its protégé, Israel, exists.
But when even a lone elephant does a war dance, the grass still feels the pain.
Mombasa's anguish, economic as well as in terms of security, may have only just begun.
Speedy action is needed to restore the sense of dignity of Coastal and Muslim Kenyans before Kenyan Islam is radicalized into a Black Intifada.
Even speedier action is needed to solve the Israeli-Palestinian conflict, both for its own sake, and because its repercussions destabilize other parts of the world.
But will American resources help to strengthen Pax Africana , or will American power simply turn it into a handmaiden of Pax Americana ?
How can we avoid the Americanization of Pax Africana ?
One solution is for the African states to evolve a common position and shared rules of engagement in the war on terrorism.
Ideally, the US should deal with a South Atlantic Treaty Organization, consisting of African states that are allied against terrorism, rather than cutting bilateral deals with individual African countries.
Above all, if Africa is to escape the crossfire of international terrorism, the trend towards establishing US military bases on the continent must be stopped.
Beware of FDI Protectionism
NEW YORK – During their most recent meetings, the G-8 took a strong stance against protectionist measures in the area of foreign direct investment (FDI), echoing calls for a moratorium in such measures issued earlier by the G-20.
Both were right to do so.
According to the United Nations Conference on Trade and Development, only 6% of all the changes in national FDI regulations around the world between 1992-2002 were in the direction of making the investment climate less welcoming.
That figure doubled to 12% of all regulatory changes in 2003-2004, and almost doubled again, to 21% of all FDI regulatory changes, in 2005-2007.
In Latin America, for example, some 60% of all FDI regulatory changes in 2007 were unfavorable to foreign investors.
Overall, countries that had implemented at least one regulatory change that made the investment framework less welcoming in 2006-2007 accounted for some 40% of world FDI inflows during that period – an impressive figure that demonstrates that something very dubious is afoot.
And these data refer to formal changes in laws and regulations; no data are available on the extent to which unchanged laws and regulations are implemented in a more restrictive manner, increasing informal barriers to the entry and operations of foreign firms.
Of course, not every measure that makes the climate less welcoming for foreign direct investors is protectionist.
Basically, there are two situations that should qualify.
In the case of inward FDI, protectionism involves new official measures that are used to prevent or discourage investors from coming to or staying in a host country.
For outward FDI, protectionism involves measures that require domestic companies to repatriate assets or operations to the home country, or that discourage certain types of new investments abroad.
But the definition of FDI protectionism can become more complicated, because measures taken in the interest of legitimate public policy objectives – for example, protecting national security or increasing FDI’s contribution to the host economy – are not necessarily instances of it, even if they make the foreign-investment climate less hospitable.
Nevertheless, even with this caveat, there has been a rise of FDI protectionism that predates the current financial crisis and recession.
This suggests that a reevaluation of the costs and benefits of FDI was already underway, led, interestingly enough, by developed countries, which in the past had championed liberalization of entry and operational conditions for foreign investors and their protection under international law.
For some countries, like the United States, this reevaluation is grounded in national security concerns (largely undefined) that arose in the aftermath of the terrorist attacks of September 11, 2001.
But there also seems to be a bit of a reaction against the “new kids on the block,” namely multinational enterprises from emerging markets, especially when these are state-owned and seek to enter the US market through mergers and acquisitions.
Hence the strengthening of the active screening mechanism of the Committee on Foreign Investment in the US.
In the case of some other developed countries (for example, Canada, France, Germany), national security concerns extend to economic considerations and the protection of “national champions.”
In these countries, too, screening mechanisms have been strengthened, and China and Russia, as well as some other emerging markets, are following suit.
In some of these cases, legitimate public-policy objectives may well be involved.
But the boundary line between such objectives and protectionism can be a very fine one.
The financial crisis and recession may dampen the rise of FDI protectionism, as countries seek capital to shore up local firms and increase investment to help them promote economic recovery.
But the global downturn may also accentuate protectionism, especially if nationalistic impulses gain the upper hand, perhaps stimulated by fire-sales of domestic assets (as we saw during the Asian financial crisis).
The bottom line is that the investment climate for foreign direct investors is becoming less welcoming.
While this is certainly not the dominant approach toward FDI, we need to be vigilant that it does not become so.
What would be helpful in this respect is an objective FDI Protectionism Observatory that monitors FDI protectionist measures and names and shames countries that adopt them.
Beware of Symbols
Argentina's crisis has been heating up for a long time. So long has the country been in crisis, indeed, that the question is no longer if it may boil over, but when.
The origins of Argentina's crisis date back to decisions taken in 1991, in the fight to contain the steep inflation that marked the death throes of the military junta.
In that year, Domingo Cavallo, who already held the post of Secretary of the Treasury, took the highly symbolic decision to fix the value of the peso to the dollar through a fixed exchange rate.
Moreover, he executed this decision in another highly symbolic way, by setting the rate of exchange at one peso for one dollar.
As symbolism, this was fine.
The new ``hard'' peso marked the end of Argentina's inflationary era, a time when the country showed itself, time and again, as incapable of controlling either its budget, its currency, its inflation or its exchange rate.
This was to be the beginning of a new era, one in which a responsible, modern Argentina opened itself in a disciplined way to the United States and the world.
But, as the ancient Greeks taught, the gods destroy by granting us our wishes or fulfilling them too completely.
Without any doubt, Argentina's currency reform of a decade ago forms the roots of today's crisis.
The reason is almost obvious: Argentina is not the United States, and the peso is not the dollar.
Argentina is a little economy of the Southern hemisphere; the US is a large and diversified economy of the Northern hemisphere.
Argentina exports cows and raw materials; America exports high tech and services.
Argentina trades with Brazil, America with Japan.
Argentina must struggle to attract capital; America sucks in capital from all over the world.
For the two countries to have the same exchange rate is a crime against logic; it proved itself also a crime against Argentina.
Until 1999, everything seemed to prove Domingo Cavallo right.
Argentina's growth was fast, its inflation disappeared fast, too.
Then, the inevitable boomerang occurred: a bitter combination of shocks shattered Argentina's growth: Brazil devalued its currency, the Real, by around 50%; the cost of raw materials, prime Argentine exports, fell sharply.
All this, while the dollar was appreciating briskly, reflecting the boom of America's Clinton years.
That combination was lethal.
De facto, since 1999, growth has been negligible and Argentina has endured a thorough crisis.
This current financial crisis, which now dominates everything in Argentina, is more recent and almost tangential.
Under the influence of the recession, the budget deficit has ballooned and the creditors of Argentina's government have concluded that they would not get their money back.
In reality, the budgetary situation is not so bad: despite today's recession, Argentina's budget deficit, save for interest payments, is only about 1% of GDP.
The national debt-GDP ratio is less than 60 %, which is the average within the European Union.
Signor Cavallo, who returned to the Treasury Department in order to save his baby, is right when he asserts that the budgetary problems are simply not as awful as many people believe.
But Argentina's creditors, fearful of default, are demanding interest rates so high (around 50 % today) that there is no hope that the government can borrow at such rates.
So default no longer seems a question of ``If'' but of ``When.''
This financial crisis will probably mark the end of the Cavallo experiment, which was promoted around the world.
But the main crisis still ahead for Argentina is the economic one, which itself has lasted since 1999.
Finding a route out of it will not be easy, for no escape seems obvious: Argentina's debt is now expressed in dollars and, as in Asia in 1997, a devaluation will increase the weight of the debt.
Argentina now has just as good a chance to make things worse as to make them better.
In economics (as in most other fields of human existence), it is better to beware of symbols.
Beware of Wounded Lions
CAMBRIDGE – G-20 leaders who scoff at the United States’ proposal for numerical trade-balance limits should know that they are playing with fire.
The US is not making a demand as much as it is issuing a plea for help.
According to a recent joint report by the International Monetary Fund and the International Labor Organization, fully 25% of the rise in unemployment since 2007, totaling 30 million people worldwide, has occurred in the US.
If this situation persists, as I have long warned it might, it will lay the foundations for huge global trade frictions.
The voter anger expressed in the US mid-term elections could prove to be only the tip of the iceberg.
Protectionist trade measures, perhaps in the form of a stiff US tariff on Chinese imports, would be profoundly self-destructive, even absent the inevitable retaliatory measures.
But make no mistake: the ground for populist economics is becoming more fertile by the day.
The new US Congress is looking for scapegoats for the country’s economic quagmire.
And, with a president who has sometimes openly questioned rigid ideological adherence to free trade, anything is possible, especially in the run-up to the 2012 presidential election.
If trade frictions do boil over, policymakers may look back on today’s “currency wars” as a minor skirmish in a much larger battle.
In light of America’s current difficulties, its new proposal for addressing the perennial problem of global imbalances should be seen as a constructive gesture.
Rather than harping endlessly on China’s currency peg, which is only a small part of the problem, the US has asked for help where it counts: on the bottom line.
True, today’s trade imbalances are partly a manifestation of broader long-term economic trends, such as Germany’s aging population, China’s weak social safety net, and legitimate concerns in the Middle East over eventual loss of oil revenues.
And, to be sure, it would very difficult for countries to cap their trade surpluses in practice: there are simply too many macroeconomic and measurement uncertainties.
Moreover, it is hard to see how anyone – even the IMF, as the US proposal envisions – could enforce caps on trade surpluses.
The Fund has little leverage over the big countries that are at the heart of the problem.
Still, even if other world leaders conclude that they cannot support numerical targets, they must recognize the pain that the US is suffering in the name of free trade.
Somehow, they must find ways to help the US expand its exports.
Fortunately, emerging markets have a great deal of scope for action.
India, Brazil, and China, for example, continue to exploit World Trade Organization rules that allow long phase-in periods for fully opening up their domestic markets to developed-country imports, even as their own exporters enjoy full access to rich-country markets.
Lackluster enforcement of intellectual property rights exacerbates the problem considerably, hampering US exports of software and entertainment.
A determined effort by emerging-market countries that have external surpluses to expand imports from the US (and Europe) would do far more to address the global trade imbalances over the long run than changes to their exchange rates or fiscal policies.
Emerging markets have simply become too big and too important to be allowed to play by their own set of trade rules.
Their leaders must do more to tackle entrenched domestic interests and encourage foreign competition.
Germany might rightly argue that it has followed a relatively laissez-faire attitude towards trade, and that it should not be punished, despite its chronic surpluses.
After all, it has stood by as the euro has soared recently.
Nevertheless, Germany is a huge winner from global free trade, and it is hardly without tools and means to reduce its surpluses – for example, by pressing to de-regulate its highly rigid product markets.
Given all its recent economic challenges, it is remarkable how, so far, the US has remained steadfast in its support of free trade.
Even in cases where its rhetoric has sent mixed messages, US policies have been decidedly liberal.
Consider the long-suffering US-Colombia free-trade negotiations.
Although one would never know it from listening to the Congressional debate, the main effect of an agreement would be to lower Colombian barriers on US goods, not vice versa.
Colombian goods already enjoy virtual free entry to the US market, while Colombian consumers would benefit enormously if their country were to reciprocate by opening its markets to US goods and services.
This has not happened – one of countless examples of obstacles faced by US companies around the world.
All should be eliminated.
American hegemony over the global economy is perhaps in its final decades.
China, India, Brazil, and other emerging markets are in ascendancy.
Will the transition will go smoothly and lead to a global economy that is both fairer and more prosperous?
However much we may hope so, the current rut in which the US finds itself could prove to be a problem for the rest of the world.
Unemployment in the US is high, while fiscal and monetary policies have been stretched to their limits.
Exports are the best way out, but the US needs help.
Otherwise, simmering trade frictions could suddenly throw globalization sharply into reverse.
It wouldn’t be the first time.
Beyond Bin Laden
NEW YORK – The killing of Osama bin Laden by United States special forces constitutes a significant victory over global terrorism.
But it is a milestone, not a turning point, in what remains an ongoing struggle with no foreseeable end.
The significance of what was accomplished stems in part from Bin Laden’s symbolic importance.
He has been an icon, representing the ability to strike with success against the US and the West.
That icon has now been destroyed.
Another positive consequence is the demonstrated effect of counter-terrorism operations carried out by US soldiers.
As a result, some terrorists, one hopes, will decide to become former terrorists – and some young radicals might now think twice before deciding to become terrorists in the first place.
But any celebration needs to be tempered by certain realities.
Bin Laden’s demise, as welcome as it is, should in no way be equated with the demise of terrorism.
Terrorism is a decentralized phenomenon – in its funding, planning, and execution.
Removing Bin Laden does not end the terrorist threat.
There are successors, starting with Ayman al-Zawahiri in Al Qaeda, as well as in autonomous groups operating out of Yemen, Somalia, and other countries.
So terrorism will continue.
Indeed, it could even grow somewhat worse in the short run, as there are sure to be those who will want to show that they can still strike against the West.
The best parallel that I can think of when it comes to understanding terrorism and how to deal with it is disease.
There are steps that can and should be taken to attack or neutralize certain types of viruses or bacteria; to reduce vulnerability to infection; and to reduce the consequences of infection if, despite all of our efforts, we become ill.
Disease is not something that can be eliminated, but often it can be managed.
There are obvious parallels with terrorism.
As we have recently witnessed, terrorists can be attacked and stopped before they can cause harm; individuals and countries can be defended; and societies can take steps to bolster their resilience when they are successfully attacked, as on occasion they inevitably will be.
These elements of a comprehensive counter-terrorism strategy can reduce the threat to manageable, or at least tolerable, levels.
But tolerable is not good enough when it comes to protecting innocent life.
We want to do better.
The answer is to be found in the realm of prevention.
More must be done to interrupt the recruitment of terrorists, thereby reducing the threat before it materializes.
Most terrorists today are young and male.
And, while the overwhelming majority of the world’s Muslims are not terrorists, many of the world’s terrorists are Muslim.
It would help enormously in this regard if Arab and Muslim political leaders spoke out against the intentional killing of men, women, and children by anyone or any group for political purposes.
There is also a pivotal role here for religious leaders, educators, and parents.
Terrorism must be stripped of any legitimacy that it may be viewed as having.
One potential positive development here stems from the political changes that we are seeing in many parts of the Middle East.
There is a greater chance than before that young people will become more integrated in their own societies (and less susceptible to the appeal of extremism) if they enjoy greater political and economic opportunity.
Pakistan will most likely prove critical in determining the future prevalence of terrorism.
Unfortunately, while it is home to some of the world’s most dangerous terrorists, it is decidedly less than a full partner in the struggle against it.
Some parts of the Pakistani government are sympathetic to terrorism and unwilling to act against it; other parts simply lack the capacity to act against it effectively.
Capacity is much easier to provide than will.
The outside world can and should continue to provide assistance to help Pakistan acquire the strength and skills required to tackle modern-day terrorists.
But no amount of external assistance can compensate for a lack of motivation and commitment.
Pakistani leaders must choose once and for all.
It is not enough to be a limited partner in the struggle against terror;
Pakistan needs to become a full partner.
There will be Pakistanis who protest against the recent American military action, arguing that it violated Pakistan’s sovereignty.
But sovereignty is not an absolute; it involves obligations as well as rights.
Pakistanis must understand that they will forfeit some of those rights if they do not meet their obligation to ensure that their territory is not used to shelter terrorists.
If things do not change, the sort of independent military operation carried out by US soldiers will become less the exception than the rule.
This is not nearly as desirable an outcome as Pakistan joining what should be a common international effort.
At stake is not only assistance, but Pakistan’s own future, for, in the absence of genuine commitment to counter-terrorism, it is only a matter of time before the country falls victim to the infection that it refuses to treat.
Beyond Fukushima
VIENNA – Nuclear power has become safer since the devastating accident one year ago at Fukushima, Japan.
It will become safer still in the coming years, provided that governments, plant operators, and regulators do not drop their guard.
The accident at Fukushima resulted from an earthquake and tsunami of unprecedented severity.
But, as the Japanese authorities have acknowledged, human and organizational failings played an important part, too.
For example, Japan’s nuclear regulatory authority was not sufficiently independent, and oversight of the plant operator, TEPCO, was weak.
At the Fukushima site, the backup power supply, essential for maintaining vital safety functions such as cooling the reactors and spent fuel rods, was not properly protected.
Training to respond to severe accidents was inadequate.
There was a lack of integrated emergency-response capability at the site and nationally.
Human and organizational failings are not unique to Japan.
Fukushima was a wake-up call for all countries that use nuclear power.
It prompted serious soul-searching and recognition that safety can never be taken for granted anywhere.
Key causes of the accident have been identified.
Indeed, governments, regulators, and plant operators around the world have begun learning the right lessons.
A robust international nuclear safety action plan is being implemented.
As a result, the likelihood of another disaster on the scale of Fukushima has been reduced.
What, exactly, has changed?
Perhaps most importantly, the worst-case assumptions for safety planning have been radically revised.
At Fukushima, the reactors withstood a magnitude 9.0 earthquake – far more powerful than they were designed to tolerate.
But the plant was not designed to withstand the 14-meter-high tsunami waves that swept over its protective sea wall less than an hour later.
In the aftermath of Fukushima, defenses against multiple severe natural disasters, including earthquakes and tsunamis, are being strengthened at nuclear facilities all over the world.
Measures are being taken to improve preparedness for prolonged power outages, protect backup power sources, and ensure the availability of water for cooling even under severe accident conditions.
Global nuclear safety standards are being reviewed.
National and international emergency-response capabilities are being upgraded.
Plant operators and national regulators are being scrutinized more critically.
Countries are opening their plants to more –amp#160;and more thorough – international safety reviews.
Despite the accident, global use of nuclear power looks set to grow steadily in the next 20 years, although at a slower rate than previously forecast.
The reasons for this have not changed: rising demand for energy, alongside concerns about climate change, volatile fossil-fuel prices, and the security of energy supplies.
It will be difficult for the world to achieve the twin goals of ensuring sustainable energy supplies and curbing greenhouse gases unless nuclear power remains an important part of the global energy mix.
The International Atomic Energy Agency expects at least 90 additional nuclear-power reactors to join the 437 now in operation globally by 2030.
Although some countries abandoned or scaled back their nuclear energy plans after Fukushima, major users of nuclear power, such as China, India, and Russia, are going forward with ambitious expansion plans.
Many other countries, mainly in the developing world, are considering introducing nuclear power.
Nuclear safety is of the utmost importance to both established users and newcomers.
It matters to countries that have decided to phase out nuclear power, because their plants will continue to operate for decades and will need to be decommissioned, with nuclear waste stored safely.
And it matters to countries that are firmly opposed to nuclear power, as many of them have neighbors with nuclear-power plants.
Countries planning new nuclear-power programs must recognize that achieving their goals is a challenging, long-term undertaking.
They need to invest considerable time and money in training scientists and engineers, establishing genuinely independent, well-funded regulators, and putting in place the necessary technical infrastructure.
Some countries still have shortcomings in this regard.
Nonetheless, contrary to popular perception, nuclear power has a good overall safety record.
New reactors being built today incorporate significantly enhanced safety features, both active and passive, compared to the Fukushima generation of reactors.
But, in order to regain and maintain public confidence, governments, regulators, and operators must be transparent about the benefits and risks of nuclear power – and honest when things go wrong.
The fact that an accident such as Fukushima was possible in Japan, one of the world’s most advanced industrial countries, is a reminder that, when it comes to nuclear safety, nothing can be taken for granted.
Complacency can be deadly.
The safety improvements seen in the past 12 months can only be a start.
We must not slip back into a “business as usual” approach as Fukushima recedes from memory.
Beyond Revolutionary Disillusion
PRAGUE - All revolutions, in the end, turn from euphoria to disillusion.
In a revolutionary atmosphere of solidarity and self-sacrifice, people tend to think that when their victory is complete, paradise on Earth is inevitable.
Of course, paradise never comes, and – naturally - disappointment follows.
That seems to be the case in Ukraine today, as its people prepare to vote for a new parliament little more than a year after their successful Orange Revolution.
Post-revolutionary disillusion, especially after the revolutions against communism - and in Ukraine's case revolution against post-communism - is rooted in psychology.
New circumstances imposed new challenges for most people.
Formerly, the state decided everything, and many people, particularly in the middle and older generation, began to see freedom as a burden, because it entailed continuous decision-making.
I have sometimes compared this psychological ennui to my own post-prison situation: for years I yearned for freedom, but, when finally released, I had to make decisions all the time.
Confronted suddenly with many options every day, one starts to feel a headache, and sometimes unconsciously wants to return to prison.
This depression is probably inevitable.
But, on a societal scale, it is eventually overcome, as new generations grow up.
Indeed, 15 years after the disintegration of Soviet Union, a new catharsis seems underway, and Ukraine’s Orange Revolution was part of that.
As Ukraine so clearly shows, the process of self-liberation from communism was, by definition, associated with a gigantic privatization.
Naturally, members of the old establishment, with their inside knowledge and connections, gained much of the privatized property.
This "inevitable" process poisoned political life and the media, which led to a strange state of limited freedom and a mafia-like environment.
The shadings differed from country to country in the post-communist world, but the new generations rising in these societies now seem to be fed up with it.
Ukraine’s Orange Revolution, as well as Georgia’s Rose Revolution, seems to confirm this.
While revolutions in the late 1980’s and early 1990’s were directed against totalitarian communist regimes, nowadays they aim to get rid of this mafia-type post-communism.
But to make the change irreversible, a truly independent and incorruptible judiciary is essential.
Too often in politically connected cases, suspicions and charges of wrongdoing are not pursued to an unambiguous conclusion.
This is understandable: the communist justice system was manipulated to serve the regime, and thousands of judges cannot be replaced overnight.
Although it is clear that a return to the old Soviet Union is not possible, some blame Russian influence for the disillusion in Ukraine.
Yes, there are some alarming elements in Russian policy, mostly because Russia has never really known where it begins and where it ends.
It either owned or dominated many other nations, and now it is only with grudging reluctance dealing with the loss of them all.
Some of Russian President Vladimir Putin’s statements seem to recall the Soviet era with nostalgia.
Indeed, he recently called the disintegration of the Soviet Union a tragic mistake.
But Soviet nostalgia has far more to do with Russia’s traditional Great Power ambitions than with communism.
Russia, I believe, should clearly say – and the international community should clearly say to Russia – that it has defined borders that will not be questioned, because disputed borders lie at the core of most conflicts and wars.
On the other hand, I don’t want to demonize Putin.
He may lower oil prices for someone close to him, like Belarus’ dictator Alexander Lukashenko, and insist on a market price for someone else, but that’s basically all he can do.
I don't envision any serious conflict beyond that.
The promise of Western integration is one reason that conflict seems impossible, for it is a question of geography as much as shared values and culture.
Ukraine belongs to a united European political entity; the values that Ukraine endorses and that are embedded in its history are European to the core.
The Czech experience shows that implementing all of the European Union’s norms so as to be ready to qualify for membership takes some time.
But in principle, Ukraine can succeed as well.
Much the same is true for Ukraine and NATO.
Partnerships based on shared rules, standards, and values are the heartbeat of modern security.
Moreover, NATO in a way defines the sphere of a civilization, which of course doesn’t mean that NATO’s community is better than any other.
But it’s a community that is good to belong to – provided that people want it and that it makes historical sense for them.
NATO membership carries obligations, because situations may arise – and we have already experienced them – when NATO follows a United Nations appeal and conducts an out-of-area military intervention where, for example, genocide is being committed.
In other words, NATO membership, like EU membership, comes at a price.
However, I think that the advantages far outweigh any possible disadvantages.
It is up to Ukrainians to decide this for themselves and thus to overcome post-revolutionary disillusion.
Beyond the Carbon Crusade
COPENHAGEN – At its heart, much of the debate over climate change deals with just one divisive and vexing question: How big should cuts in carbon emissions be?
This narrow focus makes the debate unconstructive.
Everybody wants to prevent global warming, and the real question is: How can we do that best?
We should be open to other ways to stop warming – such as cutting carbon emissions in the future instead of now, or focusing on reducing emissions of other greenhouse gases.
Global warming will create significant problems, so carbon reductions offer significant benefits.
Cutting carbon emissions, however, requires a reduction in the basic energy use that underpins modern society, so it will also mean significant costs.
The prominent climate economist Professor Richard Tol of Hamburg University has analyzed the benefits and costs of cutting carbon now versus cutting it in the future.
Cutting early will cost $17.8 trillion, whereas cutting later will cost just $2 trillion.
Nonetheless, the reduction in CO2 concentration – and hence temperature – in 2100 will be greater from the future reductions.
Cutting emissions now is much more expensive, because there are few, expensive alternatives to fossil fuels.
Our money simply doesn’t buy as much as it will when green energy sources are more cost-efficient.
Tol strikingly shows that grand promises of drastic, immediate carbon cuts – reminiscent of the call for 80% reductions by mid-century that some politicians and lobbyists make – are an incredibly expensive way of doing very little good.
All the academic models show that, even if possible, limiting the increase in global temperature to 2oC, as promised by the European Union and the G-8, would cost a phenomenal 12.9% of GDP by the end of the century.
This would be the equivalent of imposing a cost of more than $4,000 on each inhabitant every year, by the end of the century.
Yet, the damage avoided would likely amount to only $700 per inhabitant.
The real cost of ambitious, early, and large carbon-cutting programs would be a reduction in growth – particularly damaging to the world’s poor – to the tune of around $40 trillion a year.
The costs would also come much sooner than the benefits and persist much longer.
For every dollar that the world spends on this grand plan, the avoided climate damage would only be worth two cents.
It would be smarter to act cautiously by implementing a low carbon tax of about $0.5 per ton – about 0.5 US cent per gallon of gas or 0.1 euro-cent per litre of petrol – and increase it gradually through the century.
This would not cut carbon emissions spectacularly, but nor would it be a spectacular waste of public funds.
Each dollar would avoid $1.51 of global warming damages – a respectable outcome.
Taxing fossil fuels to reduce carbon emissions is a sensible part of the solution to climate change, but it is not the only or best way to prevent warming.
There are other ways to cut carbon from the atmosphere.
One of these is protecting forests, since deforestation accounts for 17% of emissions.
If we are actually serious about grand promises to keep global temperature rises below 2ºC, we obviously need to find ways of making this cheaper.
Professor Brent Sohngen of Ohio State University points out that forests could be important: including forestry in the control of greenhouse gases could somewhat reduce costs.
Moreover, although politicians focus nearly exclusively on cutting carbon emissions, CO2 is not the only gas causing warming.
The second-biggest culprit is methane.
Cutting methane is actually cheaper than cutting carbon.
And because methane is a much shorter-lived gas than CO2, we can prevent some of the worst of short-term warming through its mitigation.
Agricultural production accounts for half of anthropogenic methane, but wastewater systems, landfills, and coal mining also create the gas.
Professor Claudia Kemfert of the German Institute for Economic Research (DIW) argues that spending $14 billion to $30 billion to reduce methane would create benefits – from the reduction in warming – between 1.4 and three times higher.
We could also put a bigger focus on reducing black carbon, considered responsible for as much as 40% of current net warming and one-third of Arctic melting.
Black carbon is essentially the soot produced by diesel emissions, and – in developing countries – by the burning of organic matter to cook food and stay warm.
It can be eliminated with cleaner fuels and new cooking technologies.
Doing so would yield other benefits as well.
Sooty pollution from indoor fires claims several million lives each year, so reducing black carbon would be a life-saver.
A team of economists led by David Montgomery estimates that spending $359 million could realistically slash 19% of black carbon emissions.
This would have a significant cooling impact on the planet, and would save 200,000 lives from pollution.
The net annual benefits would run into several billion dollars, which equates to $3.60 worth of avoided climate damage for each dollar spent.
Costs and benefits matter.
The best solution to climate change achieves the most good for the lowest cost.
With this as our starting point, it is clear that a narrow focus on short-term carbon emission cuts is flawed.
The most pertinent question of all is: Why don’t we choose a solution to global warming that will actually work?
Beyond the Death Penalty Debate
China’s decision to execute the head of its drug regulatory agency has rekindled international debate about capital punishment.
It is an age-old question, one that harks back to Plato, who in his “Laws” saw the need to punish by death those who commit egregious crimes.
Supporters of capital punishment usually put forward three arguments to justify state-sanctioned killing of those who take the life of another.
First, there is the old law of “an eye for an eye, a tooth for a tooth.”
In the words of Immanuel Kant, not some Texas governor, no other “penalty is capable of satisfying justice.”
Then there is a utilitarian argument: capital punishment deters many criminals from murder.
Furthermore, killing murderers prevents recidivism: if released from prison, they might kill again.
The third argument is also utilitarian, although of a lower quality: the state saves money by killing murderers instead of keeping them in prison for life at the expense of the community.
Abolitionists respond with two ethical arguments.
First, in a modern democracy, punishment must be not only retributive, but should also try to rehabilitate the criminal in order to enable him to live in society with other human beings.
But, while this is a compelling argument, those who know modern prisons recognize that many inmates are not susceptible to improvement – a fact that cannot be attributed only to conditions of detention.
The second ethical argument is based on the commandment “thou shalt not kill” which also enjoins the state from killing.
But this argument is undermined by the fact that the state can resort to lethal force to prevent serious crimes, or to fight a war or rebellion.
Opponents of the death penalty also rely on utilitarian arguments.
The death penalty is irreversible.
If a convict turns out to be innocent, his execution cannot be undone.
Moreover, abolitionists assail the deterrent effect of the death penalty.
Thucydides, in recounting the Athenians’ discussion of what penalty to impose on the rebellious Mytilenians, noted that “the death penalty has been laid down for many offenses, yet people still take risks when they feel sufficiently confident; it is impossible for human nature, once seriously set upon a certain course, to be prevented from following that course by the force of law or by any other means of intimidation whatsoever.”
Criminologists have shown, statistically, that in US states where convicts are executed, serious crimes have not diminished.
Other criminologists argue that this finding, if well-founded, should then apply to any criminal law: every day, criminal prohibitions are infringed; yet if we did not have such prohibitions, crimes would be even more rampant.
In their view, capital punishment serves at least to restrain the homicidal leanings of human beings.
So the death penalty debate boils down to an exchange of conflicting ethical and utilitarian views.
But we should not sit idly by and refrain from taking sides.
I, for one, believe that the death penalty radically negates the doctrine of human rights, which is founded on respect for life and the dignity of human beings.
But, whether or not you oppose the death penalty, two lessons can be drawn from the debate.
First, the fight for human dignity and respect for life, as with any struggle for human rights, is set in motion and tenaciously pursued by members of civil society, by individuals more than by states.
It was a representative of the Age of Reason, Cesare Beccaria, who first advocated in 1764, in a few pages of a seminal booklet, the abolition of capital punishment.
Indeed, it is thanks to a few thinkers and activists that states have gradually moved away from age-old tenets.
As Tommaso Campanella, a great philosopher who spent much time in prison and was tortured because of his ideas, wrote a few centuries ago, “history is changed first by the tongue and then by the sword.” Nowadays, it is associations such as Amnesty International and Hands Off Cain that push states to abolish capital punishment.
The second lesson is that the death penalty debate should not absorb all our attention.
If we intend to abolish the gallows, we should also fight for the prevention of crime and against the inhumanity of many prisons.
After all, what is the point of suggesting imprisonment as an alternative to electrocution, if inmates are subjected to inhuman and degrading treatment?
How can we ignore that a high number of inmates commit suicide – self-inflicted capital punishment – to escape the inhumanity of their imprisonment?
How can we ignore that many states today kill not only through legal punishment, but also by murdering and massacring in international or civil wars, or by allowing starvation?
In short, opposition to the death penalty cannot be an end in itself, for it is only one element of a more general fight for human dignity.
Beyond the Gaza Ceasefire
TEL AVIV – Finally, the long-sought truce between Israel and Hamas in the Gaza Strip has become a reality.
Reaching this uneasy state has not been easy.
For months, wise and responsible people had exhorted Israel to accept the ceasefire that the Hamas leadership in Gaza had proposed.
But Israel’s government, using all kinds of pretexts, stubbornly resisted.
“A truce would weaken Palestinian President Abu Mazen,” officials claimed, as if the construction of new Israeli settlements in East Jerusalem and the refusal to dismantle previous illegal ones had not already weakened him.
Or they argued that “Hamas does not recognize the state of Israel,” as if other ceasefire agreements with the Arab states and the PLO in the last 60 years had been based on recognition of Israel, rather than on a simple ethical principle that has guided Israel for many years, namely to gain, for us and our enemies, a pause in hostilities.
In the end, however, logic prevailed over escapism and hesitation, a ceasefire was signed, and we can only regret all the time that was lost and the unnecessary suffering on both sides.
In this war, which has been going on for nearly a century, it is important to keep one principle in mind: the Palestinians are Israel’s neighbors and will live side by side with Israelis forever.
Because of this simple fact, the military considerations are very different from those in a conflict between countries that are distant from each other.
Memories of spilled blood, be it Israeli or Palestinian, remain vivid in the hearts of both peoples.
An immediate break in the hostilities is therefore more important than a chimerical long-term “capitulation.”
The launch of five Qassam rockets into Israel five days after the signing of the truce suggests its precariousness.
So can it last and evolve into something durable?
Opponents of the truce predict, – indeed, wish – that it will be short-lived.
But even skeptics nourish many hopes.
To be sure, if this new truce is merely technical, if efforts are not made to stabilize and consolidate it, it could become just one another in a long string of bitter episodes.
But all who had feared a “great Israeli offensive” in Gaza should make every effort to strengthen the truce and create a climate for relaxing tensions that could, with time, lead to a peace agreement with the Palestinian Authority.
So what should be done to bring this about?
Above all, border crossings between Israel and the Palestinian territories should be reopened for the sick, for students, and for families whose members were separated by the blockade.
Second, a generous (and, with time, growing) quota should be set for Palestinian laborers to work in Israel – indeed, they must be allowed to work in the very agricultural centers around Gaza which were the most affected by the rocket attacks.
Palestinians working in Israel are good for both sides, and better than the foreigners who come from distant lands and live an isolated life in Israel, solitary and under constant threat of expulsion.
Palestinian workers, who go back home every night, do not become alienated from their normal life.
Future workers from Gaza, having a moral right to earn their living in Israel, will become natural supporters of the maintenance of the truce.
Furthermore, past industrial projects that fell victim to the hostilities should be revived and made more legitimate in the eyes of Hamas through the participation of the Arab state.
The killing by Israel of Hamas terrorists in the West Bank should also be stopped – or at least limited as much as possible – and the Palestinian Authority should be permitted to deal with them in their own way.
Above all, we must assure that the armistice has its own dynamic.
In a state of war, people get used to the status quo and cannot imagine anything else.
But when tensions relax, the idea of taking up arms again becomes painful and unsupportable inasmuch as it means a return to the familiar and terrible experience of suffering.
So this truce must be seen not as a piece of paper with some legal significance, but as a young plant that needs to be tended to, watered, nursed, and protected, so that it grows into a strong and robust tree that cannot be uprooted with an occasional Qassam rocket or a stray grenade.
Beyond the Gender Gap
Last Spring, The Economist trumpeted “womanpower” as the driving force for the world economy.
But if Europe’s economy is to become more competitive and innovative, it is not enough that women enter the labor market in droves.
To reap the full fruits of women’s talents, they must be in more top jobs, too, both in the public and private sector.
Women in Western Europe have long since bridged the education gap with their male peers.
Women not only outnumber men at universities; they also outperform them, most notably in math, physics, and information science.
But female students’ academic achievements have not increased women’s presence in top jobs.
In Europe, the percent of women on corporate boards remains in single digits, as is true of the top ranks of government and academia.
While in the United States almost one out of five corporate officers are women, in mainland Europe the female to male ratio on company boards is one to twenty or worse.
The situation is only slightly better in science.
One of every ten professors in Europe is a woman. In the US, the ratio is – once again – more favorable to women, with more than 20% of professors at American universities being female.
Europe cannot afford to waste valuable human capital at a time when China and India are on the rise and its own population is aging.
The first baby boomers have reached retirement age, and the labor force will soon be shrinking in most parts of Europe.
To cover the costs of aging and maintain its position as an economic power, Europe must increase overall labor participation considerably.
Not only can and must fathers assume a greater role in child rearing; a large part of homemaking is perfectly suitable to be met by the market.
As economists Ronald Schettkat and Richard Freeman have pointed out, career women do not necessarily work more hours per week than women with part-time jobs or stay-at-home moms.
Instead, they tend to outsource activities like grocery shopping, cooking, and cleaning.
If women in Europe work more hours in better quality jobs, it will stimulate demand for service jobs like cleaning and child care, thus reducing unemployment among low-skilled workers.
Moreover, the increased supply of high-quality female labor will not incur additional healthcare and pension costs, unlike labor immigration.
Women use those benefits anyway, whether they are stay-at-home moms or perform paid work outside the home.
Because people live longer and procreate less, raising and caring for children requires less of a parent’s life than it used to.
Women should be able to aspire to top jobs without squandering their fertility, and their success would encourage women in lower-ranking positions, because female managers tend to implement more gender-conscious hiring policies and serve as strong role models.
Obstacles to the professional advancement of educated women in Europe is rooted in corporate culture, gender biases, and stereotyping, rather than outright discrimination.
Group dynamics prevent company boards that consist solely of males from including women, even if members individually would support such a decision.
Moreover, those women who do reach higher-ranking positions are susceptible to a visibility-vulnerability spiral, owing to their minority status.
As long as women are perceived to be the weaker sex, men and women alike will project their own feelings of vulnerability onto the female candidate.
Such exclusionary group dynamics can be overcome only by attaining a critical mass of women in high-ranking positions.
The benefits of doing so would be enormous.
Studies show that companies with more women in senior management are more profitable than those with few women at the top.
Diversified management means better management.
Including more women in top positions, both in the public and private sector, changes decision-making processes fundamentally, because women tend to play down the importance of formalities and communicate directly, thereby overcoming organizational blockages.
A decisive pro-women strategy would thus create new momentum for Europe, allowing it to compete with the United States and Asia.
At the start of this year, Norway enacted legislation that requires that both sexes be represented by at least 40% on all corporate boards.
Companies that do not meet the new gender rules, which also apply to the public sector – risk being dissolved by court order.
Spain’s prime minister, José Zapatero, recently proposed similar standards for gender balance in business and politics.
Norway has set an excellent example – one that all of Europe should follow as the best way to transcend the culture of gender bias and stereotyping that is still prevalent in many companies and institutions.
But women, too, must adjust.
The reality is that top jobs require more than two workdays a week, and they do not coincide with school hours.
Assuming the responsibilities that have long belonged to men requires that women let go of the tasks that have prevented them from advancing beyond low-ranking positions.
Beyond the Sino-Japanese Rivalry
China's government has sentenced two of its citizens to life in prison for their role in securing prostitutes for hundreds of male Japanese visitors in the southern city of Zhuhai last autumn.
The Chinese government is also pressuring Tokyo to turn over the Japanese businessmen who allegedly requested the prostitutes.
This story made headlines around the world, and fits well with how the world press typically covers Sino-Japanese relations.
Regrettably, such incidents recur with enough regularity to feed the media machine that continues to stir a nationalism rooted in conflicting historical memories.
Japanese Prime Minister Junichiro Koizumi's annual visits to the Yasukuni Shrine - which is widely viewed as a symbol of Japan's former militarism - is a conspicuous example of this.
The publicity that the press gives to these visits has helped impede an invitation to Koizumi from China's leaders for a state visit.
Recently, the discovery of mustard gas canisters left behind by Japanese forces during World War II has also served to keep memories of the Imperial Japanese Army's wartime conduct alive among older Chinese.
Moreover, rival Sino-Japanese claims to the Senkaku (or Diao Yutai) Islands resurfaced last year when the Japanese government leased three islets in the chain from private parties.
The action, purportedly undertaken to reduce the prospect of landings and demonstrations by Japanese right-wingers, set off a brief, though frenzied, reaction in China, as well as in Hong Kong and Taiwan.
Meanwhile, differences over Taiwan also foster tensions periodically, such as when former Taiwanese President Lee Teng-hui sought to visit Japan for medical treatment.
But this is not the whole story.
Although such incidents reveal a troubling level of mistrust between the Chinese and Japanese that is not merely a product of media coverage, it is noteworthy that both governments have worked consistently, diligently, and with considerable success to resolve such problems and contain their political fallout.
Of course, official relations between the two countries are marked by much political and economic competition - some of it healthy, some of it a possible harbinger of future strategic rivalry.
The competitive strain in Sino-Japanese relations is especially visible in energy politics.
Demand for oil in Asia is growing rapidly, and with China and Japan increasingly dependent upon imports, each has naturally sought to improve its energy security by diversifying sources of supply.
Both countries covet access to Russian reserves, especially those located in the Angarsk fields of Siberia.
Last spring China appeared to have locked up a Russian commitment to build a pipeline to service the China market at Daqing.
Japan, however, raised the ante with new offers of financial incentives.
Its bid for an alternative pipeline to Nakodka to serve Japanese, Korean, and other markets remains alive, creating another point of competitive friction.
In their rivalry for leadership in promoting Asian regional cooperation, meanwhile, China has taken an early lead.
Two years ago, China trumped Japan by offering a Free Trade Agreement to the members of the Association of Southeast Asian Nations, while front-loading its own tariff concessions.
More recently, China, along with India, signed an ASEAN-proposed Treaty of Commerce and Amity, while the Japanese hesitated.
In addition, China has served as the principal broker in talks between the US and North Korea on nuclear issues, in which Japan has a huge stake.
But this backdrop of contention and competition masks emerging collaborative aspects of Sino-Japanese relations that are profoundly important, but which, unfortunately, seem to the world's media to be too mundane to "sell."
For example, trade and investment flows continue to expand rapidly.
Bilateral trade topped $100 billion in 2003, as Japan's exports to China increased by more than 10%, fuelled by semiconductors, electrical equipment, and automobiles.
Meanwhile, China replaced the US as Japan's biggest source of imports, and is now one of the few non-members of the Organization of Petroleum Exporting Countries with which Japan runs a trade deficit.
Similarly, direct investment by Japanese firms is increasing as they relocate production facilities to China to capitalize on lower labor costs and high-quality engineering talent.
Even the 20% cut in Japan's Official Development Assistance for China scarcely harmed their smooth economic ties.
Of course, there is no assurance that today's expanded commerce will preclude eventual strategic rivalry, or succeed in erasing lingering wartime animosity.
But both countries now place a premium on extending their economic interdependence.
China sees economic ties as a way to hasten its modernization.
Japan sees them as a way to enhance its international competitiveness, and to provide China with incentives for geopolitical moderation.
Most importantly, a new generation of leaders in both countries seems less hung up on divisive memories.
They may also see in Europe's surge toward economic integration a model for themselves and an inducement to intensifying regional cooperation.
Pragmatic leaders in both countries clearly recognize the benefits of diplomatic collaboration on issues that affect the region, such as North Korea's nuclear ambitions.
Ultimately, the historical wounds that have long divided China and Japan, and the more current diplomatic flashpoints that the global media inevitably trumpet, only tell part of the Sino-Japanese story.
There are economic and geopolitical rivalries between China and Japan that dwarf in importance the high-profile insults to national pride that make headlines.
But there are also compelling economic and political inducements toward cooperation that prevent these rivalries from developing into full-blown crises.
Big Brother Google?
MOSCOW – “Google violates its ‘don’t be evil’ motto.” To Google’s credit, if you Google that sentence, you can find reference to a debate on that claim that I took part in recently.
As it happens, I have a complex relationship with Google.
I have fed at its trough many times – as a personal guest; as an advisory board member of Stop Badware, an NGO it sponsors; and as a speaker at its events.
I also sit on the board of 23andMe, co-founded by the wife of Google co-founder Sergey Brin.
But I also sit on the boards of Yandex in Russia, one of a small number of companies around the world who beat Google in their local markets, and of WPP, a worldwide advertising/marketing company famous for its rivalry with Google.
Finally, I’m suspicious of concentrations of power of any kind.
So I welcomed the chance to clarify my thinking.
I took the con side of the debate: Google does not violate its motto.
However, I do think there is a danger that someday it could.
The danger lies in the concentration of information – arguably a concentration of power – that Google represents.
Google doesn’t merely point users to existing information on the Web; it also collects information that it doesn’t share about its users’ behavior.
If you can use patterns in Google searches to track flu outbreaks and predict a movie’s commercial prospects, can you also use it to forecast market movements or even revolutions?
Even if Google uses personal information only for their benefit (whatever that means), it represents an attractive target for governments.
In fact, Google generally fights government requests for personal information.
(It was Yahoo, not Google, that gave personal information to China’s government, which then jailed a blogger.)
Google has become a de facto gatekeeper of information, to the extent that if your site is not highly ranked by Google, you are like the tree falling in the forest with no one to hear it.
It doesn’t matter that people seeking information are free to bypass Google and use other tools; they don’t.
So how does information equal power?
The active power that information provides is typically the threat of exposure.
Such information gives you power primarily in a secretive, opaque world where access to information is limited.
But generally, the free flow of information reduces the concentration of power.
So, rather than suppressing or regulating the information that Google uncovers, we are better off making it more freely available.
A Google that is accountable to its users – searchers, advertisers, investors, and governments – is likely to be a better outfit that does more good in today’s relatively open market.
In short, there is no regulatory system that I trust more than the current messy world of conflicting interests.
Whatever short-term temptations it faces – to manipulate its search results, use private information, or throw its weight around – Google, it is clear, could lose a lot by succumbing to them in a world where its every move is watched.
Meanwhile, Google is not merely avoiding evil; it actively fights against it.
For example, Google fights censorship – by doing, not by shouting.
Rather than stand on the sidelines and proclaim censorship evil, it is picking its way through the landmines in China – competing with a politically well-connected rival and politely letting its users know that they aren’t always getting the whole picture.
In short, Google is changing expectations about what people can know – even in the United States, where formal censorship is absent, but government obfuscation, opaque corporations, and the like are not. Moreover, in countries where Google is criticized for blocking access to information, it points out the information’s absence when something is blocked – letting people know that it exists but that they can’t have access to it.
On the other hand, every time someone in China Googles something and gets an answer – a product’s good and bad points, the details about someone the government does not like – he must wonder, “Why can’t I get this kind of information about everything?” With Google, people start to expect answers about everything .
A little transparency inevitably leads to more.
Rather than demand an end to censorship now – an impossible dream – Google is working to make that happen by eroding government control over information.
Moreover, from a purely practical point of view, Google makes the world more efficient.
Buyers and sellers can find one another, schoolchildren can find information needed for their homework, and sick people can find health information.
The real threat of evil, I think, lies in the temptations of “international governance” – say, a sinister multilateral government body called the World Information Center.
Nice as it sounds, the reality is likely to be ridden with bureaucracy, susceptible to control by the worst of the world’s governments rather than its best ones, and incapable of innovation.
Take, for example, ICANN, the body that sets policy for the Domain Name System.
I was its founding chairman, and I don’t think anyone considers it a success.
Its saving grace is that it is widely considered illegitimate and therefore has little power.
By contrast, Google is effective at what it does, and therefore has the legitimacy of results.
But it has little coercive power, because anyone is free to try an alternative.
Its only option is to be better than the competition.
The fact that these issues are being debated is a good sign in itself – keeping Google and its watchers on guard.
Fortunately, a wary press corps, powerful governments, and nervous competitors watch its every move, hoping the company to fight its many temptations.
Abuse of power is evil, but power itself is not.
Big Brother, Tibet, and the Sichuan Earthquake
Shanghai – Tight media control of the unrest in Tibet has been followed by what, to some, looks like far more open coverage of the devastating earthquake in Sichuan province.
Is this a change in China’s media strategy, or just a short term change in tactics?
This question stands out in view of Chinese public opinion in the latter phase of the Tibet crisis.
Much to the consternation of the Western media, Chinese people worldwide lashed out against its allegedly biased coverage of the Tibetan riot.
Throngs of Chinese expatriates and students took to the streets, protesting the prejudice they perceived in Western media reports.
Angry youngsters even founded Web sites such as anti-cnn.com to express their outrage.
Western reporting, once commended for its veracity, now seems discredited across China, although sympathetic coverage of the loss of life in Sichuan may have redeemed the Western media somewhat.
Even Chinese liberals admit that Western journalists blundered badly in Tibet, using cropped images and false captions as evidence of China's heavy-handed rule.
One sarcastic posting on China's popular Web portal Tianya even went so far as to say that “CNN is of the same ilk as CCTV (China Central Television).
Both talk grandiosely and profusely about impartiality.
Ironically, both turn out to be hypocrites.”
One can argue that this trend bodes ill for China.
But pessimism is misplaced.
Much of the Chinese wrath is directed at biased reports, not at Western media in general.
And when one looks more closely at how Chinese responded, both to the unrest in Tibet and the Sichuan earthquake, one sees tangible signs that the Chinese are embracing a greater degree of free speech.
Despite a news blackout during the riots in Lhasa, for example, Chinese Internet users managed to dodge the country’s censorship.
Much as they loathed domestic publications for blindly following the guidelines of Xinhua, China’s state news agency, they were similarly contemptuous of Western media that mishandled the story.
As a result, those Chinese who use the Internet as a source for news awakened to the fact that no account – Chinese or Western – is flawless.
Such skepticism, which is a fundamental attribute of the democratic mind, may have played a role in pushing the government toward more openness in Sichuan.
Indeed, the fact that many school buildings were flattened in Sichuan prompted an outcry from ‘netizens,’ who grilled local officials about whether it substandard building codes or even a notorious “toufuzha construction scandal,” namely, jerry-built projects, that had led to the disproportionate number of dead pupils.
Under mounting public scrutiny, government officials felt compelled to promise that those responsible will be brought to justice.
Unlike in the past, when Chinese Internet users passively received information, years of exposure to concepts such as human rights and democracy have emboldened them to challenge entrenched yet dubious views, even if it means iconoclasm.
Chinese audiences are as fed up with the glowing encomiums broadcast by CCTV as they are with the simplistic, context-free reporting of Western media.
Caught in the middle, Chinese increasingly sift for the truth on their own.
Many, indeed, tried to present to the outside world their own version of the Tibet story, rebutting the orthodox narrative – be it Chinese or Western – and posting comments and footage on YouTube and the BBC's bulletin board.
Moreover, due to their repeated queries for explanation, a few Western media outlets eventually owned up to their mistakes.
After China’s government became aware that independent grassroots movements could convince ordinary Chinese where government propaganda had failed, it lifted its initial ban on reporting on Tibet.
“Net nannies” – as China’s Internet censors are often dubbed – blocked sensitive articles less frequently.
China’s government has apparently begun to appreciate the limitations of cover-ups and stonewalling, and perhaps also the merits of allowing some room for free speech.
This thirst for unbiased information highlights the dramatic change that the Internet has brought to China’s political landscape.
Nowadays, the government no longer monopolizes information and the right to process it.
Insightful bloggers attract considerably more clicks than do official mouthpieces.
A “virtual civil society” is in the making.
But can Web activism mature into a full-blown campaign for free speech without being manipulated by the government or blindfolded by Western media?
The answer may prove to be mixed.
Admittedly, the fierce popular backlash against Western media was partially motivated by nationalist ardor, which played into the government’s hands.
The Internet can foster more demagoguery than sober analysis.
But the best way to prevent this is to create an environment in which opposing views can clash freely, enabling truth ultimately to triumph.
On the government’s part, the more open media in Sichuan may be mere posturing to appease critics after the Tibet upheaval and the scuffle over the Olympic torch.
The government’s willingness to address squarely questions about shoddy infrastructure will be a key test of the genuineness of its supposed new found tolerance of freeish speech.
Although free speech is no panacea for China’s woes, only when it is established will the country’s progress be sustainable.
Despite the watchful eyes of Big Brother in Beijing, the Internet is sowing the seeds of free speech in China.
That may be the most important lesson of the crisis in Tibet and Sichuan.
Big Countries, Small Wars
LONDON – US President Barack Obama has vowed to avenge the murder of J. Christopher Stevens, America’s former ambassador to Libya.
How he proposes to do this is unclear – historical precedent is of little use.
In 1864, the Emperor of Abyssinia took hostage the British consul, together with some missionaries, in the country's then-capital, Magdala.
Three years later, with Emperor Tewodros still refusing to release them, the British dispatched an expeditionary force of 13,000 troops, 26,000 camp followers, and 44 elephants.
In his book The Blue Nile, Alan Moorehead described the expedition thus: “It proceeds first to last with the decorum and heavy inevitability of a Victorian state banquet, complete with ponderous speeches.”
After a three-month journey through the mountains, the British reached Magdala, released the hostages, and burned the capital to the ground.
Emperor Tewodros committed suicide, the British withdrew, and their commander, Lieutenant-General Sir Robert Napier, was made Baron Napier of Magdala.
Today's great powers have relied on similar methods, also heavy with rhetoric, against puny opponents, but with far less convincing results.
The United States put 500,000 troops into Vietnam in the 1960’s, but withdrew before North Vietnam overran the South in 1975.
The Russians began pulling their 100,000 troops from Afghanistan in 1987, after nine years of fighting had failed to subdue the country.
Now, 25 years and $500 billion later, roughly 100,000 NATO troops, mainly American, are about to leave Afghanistan, with the Taliban still controlling much of it.
Meanwhile, the US has withdrawn 150,000 troops from Iraq, after nine years of frustration.
The evidence is clear: big countries can lose small wars.
So, if massive use of force fails, how is a big country, believing that its interests or moral duty compel it to intervene in the affairs of a small one, to do so successfully?
Gillo Pontecorvo’s brilliant 1966 film The Battle of Algiers spelled out the dilemma for the occupying colonial power.
The FLN (National Liberation Front) uprising against French rule in Algeria started in 1954 with assassinations of policemen.
The French at first responded with orthodox measures – more police, curfews, martial law, etc. – but the insurgency spread amid growing atrocities by both sides.
In 1957, the French sent in paratroopers.
Their commander in the film, Colonel Mathieu (based on General Jacques Massu), explained the logic of the situation from the French point of view.
The way to crack the insurgency was not to antagonize the people with oppressive, but “useless” measures; it was to take out the FLN’s command structure.
Eliminate that and the result would be a leaderless mass.
This required the use of torture to identify and locate the leaders, followed by their capture or assassination.
Torture was illegal, but, as the Colonel explained, “If you want France to stay, you must accept the consequences.”
Colonel Mathieu is the unsung hero of current counter-insurgency orthodoxy, which requires a minimum military presence in the target country, mainly of intelligence agencies like the CIA and “special forces.”
Through “rendition,” a captured suspect can be handed over to a friendly government to be tortured, and, on the basis of the information thus gathered, “kill lists” can be compiled.
The killing of Osama bin Laden last year required an actual hit squad to verify its success, but normally assassinations can be left to drones – unmanned aircraft, mainly used for surveillance, but which can be armed with computer-guided missiles.
Not surprisingly, the US is the leading developer and user of drones, with a fleet of 7,500.
An estimated 3,000 drone killings have taken place, mostly in Pakistan, but also in Yemen and Somalia.
The other half of the counter-insurgency strategy is to win the “hearts and minds” of populations that are susceptible to terrorist propaganda.
The Americans did this in Vietnam by pouring in consumer goods and building up infrastructure.
They are doing the same in Iraq and Afghanistan.
The civilian side of “nation building,” it is reckoned, will be made easier by the absence of a heavy-handed foreign military presence.
Trying to win hearts and minds is certainly an improvement over bombing or shooting up the local population.
But the new way of conducting “asymmetrical warfare” does raise uncomfortable ethical and legal issues.
The United Nations Convention on Torture explicitly forbids “cruel, inhuman, or degrading treatment or punishment,” so their use must be denied.
Also, assassination by drones inevitably leads to the killing of innocent civilians – the very crime that defines terrorism.
Even putting aside moral and legal questions – which one should never do – it is doubtful whether the strategy of torture and assassination can achieve its pacifying purpose.
It repeats the mistake made in 1957 by Massu, who assumed that he faced a cohesive organization with a single command structure.
Relative calm was restored to Algiers for a couple of years after his arrival, but then the insurgency broke out again with redoubled strength, and the French had to leave the country in 1962.
Today, the international community similarly misconceives the nature of the “war” that it is fighting.
There is no single worldwide terrorist organization with a single head.
Insofar as Al Qaeda still exists at all, it is a Hydra that sprouts new heads as fast as the old ones are cut off.
Trying to win “hearts and minds” with Western goods simply corrupts, and thus discredits, the governments established by those intervening.
It happened in Vietnam, and it is happening now in Iraq and Afghanistan.
We are being driven slowly but ineluctably to the realization that the people whom we are fighting will, to a significant extent, inherit the shattered countries that we leave behind.
They are fighting, after all, for their peoples’ right to (mis)manage their affairs in their own way.
Blame the French Revolution for having bequeathed to us the idea that self-government is always better than good government.
Big Green Jobs Machine
NEW YORK – Amid the pressures of the global financial crisis, some ask how we can afford to tackle climate change.
The better question is: how can we afford not to?
Put aside the familiar arguments – that the science is clear, that climate change represents an indisputable existential threat to the planet, and that every day we do not act the problem grows worse.
Instead, let us make the case purely on bread-and-butter economics.
At a time when the global economy is sputtering, we need growth.
At a time when unemployment in many nations is rising, we need new jobs.
At a time when poverty threatens to overtake hundreds of millions of people, especially in the least developed parts of the world, we need the promise of prosperity.
This possibility is at our fingertips.
Economists at the United Nations call for a Green New Deal – a deliberate echo of the energizing vision of United States President Franklin Roosevelt during the Great Depression of the 1930’s.
Thus, this week the UN Environment Program will launch a plan for reviving the global economy while dealing simultaneously with the defining challenge of our era – climate change.
The plan urges world business and political leaders, including a new US president, to help redirect resources away from the speculative financial engineering at the root of today’s market crisis and into more productive, growth-generating, and job-creating investments for the future.
This new “Green Economy Initiative,” backed by Germany, Norway, and the European Commission, arises from the insight that the most pressing problems we face are interrelated.
Rising energy and commodity prices helped create the global food crisis, which fed the financial crisis.
This, in turn, reflects global economic and population growth, with resulting shortages of critical resources – fuel, food, and clean air and water.
The commingled problems of climate change, economic growth, and the environment suggest their own solution. Only sustainable development – a global embrace of green growth – offers the world, rich countries as well as poor, an enduring prospect of long-term social well-being and prosperity.
The good news is that we are awakening to this reality.
We have experienced great economic transformations throughout history: the industrial revolution, the technology revolution, and the era of globalization.
We are now on the threshold of another – the age of green economics.
Visiting “Silicon Valley” in California last year, I saw how investment has been pouring into new renewable-energy and fuel-efficiency technologies.
The venture capital firm that underwrote Google and Amazon, among other archetypal entrepreneurial successes, directed more than $100 million into new alternative energy companies in 2006 alone.
In China, green capital investment is expected to grow from $170 million in 2005 to more than $720 million in 2008.
(In just a few short years, China has become a world leader in wind and solar power, employing more than a million people.)
Globally, the UN Environment Program estimates that investment in low-greenhouse-gas energy will reach $1.9 trillion by 2020.
The financial crisis may slow this trend.
But capital will continue to flow into green ventures.
I think of it as seed money for a wholesale reconfiguration of global industry.
We can already see its practical expression.
More than two million people in the advanced industrial nations today find work in renewable energy.
Brazil’s bio-fuels sector has been creating nearly a million jobs a year.
Economists say that India, Nigeria, and Venezuela, among many others, could do the same.
In Germany, environmental technology is expected to quadruple over the coming years, reaching 16% of manufacturing output by 2030 and employing more people than the auto industry.
Mexico already employs 1.5 million people to plant and manage the country’s forests.
Governments have a huge role to play.
With the right policies and a global framework, we can generate economic growth and steer it in a low-carbon direction.
Handled properly, our efforts to cope with the financial crisis can reinforce our efforts to combat climate change.
In today’s crisis lies tomorrow’s opportunity – economic opportunity, measured in jobs and growth.
Most global CEOs know this.
That is one reason that businesspeople in so many parts of the world are demanding clear and consistent environmental policies.
It is also the reason that global companies like General Electric and Siemens are betting their future on green.
But it is important that the global public recognize this fact, perhaps nowhere more so than in the US. When the next American president takes office, voters and elected officials alike should be reassured by studies showing that the US can fight climate change by cutting emissions at low or even no cost, using only existing technologies.
We know that the poorest of the world’s poor are the people most vulnerable to climate change.
They are also the most vulnerable to the shocks of the financial crisis.
As world leaders, we are morally bound to ensure that solutions to the global financial crisis protect their interests, not just the citizens of wealthier nations.
Those left behind by the previous boom – the so-called “bottom billion,” living on less than $1 a day – must be brought into the next economic era.
Again, a solution to poverty is also a solution for climate change: green growth.
For the world’s poor, it is a key to development.
For the rich, it is the way of the future.
Big Ideas from Small Countries
CAMBRIDGE – Two decades ago, many people thought that the lesson of the 1980’s was that Japan’s variant of capitalism was the best model, and that other countries around the world should and would follow it.
The Japanese model quickly lost its luster in the 1990’s.
A decade ago, many thought that the lesson of the 1990’s was that the United States’ variant of capitalism was the best model, and that other countries should and would follow.
The American model lost its attractiveness in the 2000’s.
So, where should countries look now, in 2010, for models of economic success to emulate?
Perhaps they should look to the periphery of the world economy.
Many small countries there have experimented with policies and institutions that could usefully be adopted by others.
Costa Rica in Central America and Mauritius in Africa each pulled ahead of its regional peers some time ago.
Among many other decisions that have worked out well for them, both countries have foregone a standing army.
The results in both cases have been a political history devoid of coups, and financial savings that can be used for education, investment, and other good things.
A panoply of innovations has helped Chile to outperform its South American neighbors.
Chile’s fiscal institutions insure a countercyclical budget.
Many governments increase spending excessively in booms, and then are forced to cut back in downturns, thereby exacerbating the cyclical swings.
There are two key elements to Chile’s fiscal institutions:
● A structural budget balance rule allows deficits only to the extent that the current price of copper is below its 10-year equilibrium or output is below its long-term trend.
● Two panels of technical experts are the ones to judge trends in copper prices and output, respectively, insulated from the political processes that can otherwise succumb to wishful thinking.
These institutions are particularly worthy of imitation by other commodity-exporting countries, in order to defeat the so-called “natural-resource curse.” Even advanced countries such as the US and UK could learn something from Chile, given that in the last expansion they evidently forgot how to run countercyclical fiscal policy.
Singapore achieved rich-country status with a unique development strategy.
Among its many innovations were a paternalistic approach to saving and use of the price mechanism to defeat urban traffic congestion (an approach later adopted by London).
Other small advanced countries also have lessons to offer.
New Zealand led the way for much of the world’s central banks with inflation targeting, along with many liberalizing reforms in the late 1980’s.
Perhaps its Labor Party should be given credit for pioneering the principle that center-left governments can sometimes achieve economic liberalization better than their center-right opponents.
Ireland showed the importance of foreign direct investment.
Estonia led the way in simplifying its tax system by means of a successful flat tax in 1994, followed by Slovakia and other small countries in Central and Eastern Europe and elsewhere (including Mauritius again).
Mexico pioneered the idea of Conditional Cash Transfers (the OPORTUNIDADES program – originally PROGRESA – which was launched in 1998).
CCT programs have subsequently been emulated by many countries in Latin America, Asia, and Africa.
Mexico’s innovation was really two revolutions in one.
First, there was the specific policy idea of making poverty benefits contingent on children’s school attendance (an idea which has been embraced even in New York City).
Second, and perhaps more importantly, the Mexicans implemented the methodological idea of conducting controlled experiments to find out which policies work and which don’t work in developing countries (which has fed into the exciting Randomized Control Trials movement in the field of development economics).
Also in the 1990’s, largely thanks to the leadership of then-President Ernesto Zedillo, Mexico adopted non-partisan federal electoral institutions that in 2006 proved able to resolve successfully a disputed election.
(By contrast, it turned out in November 2000 that the US had no such mechanism in place, other than the preferences of political appointees.) More recently, the current president, Felipe Calderón, has shut down the entrenched electric utility and pursued much-needed tax, pension, and other reforms.
In highlighting some very specific institutions that could be usefully adopted elsewhere, I do not mean to suggest that they can be effortlessly translated from one national context to another.
Nor do I mean to suggest that these examples are entirely responsible for the economic success of the countries where they are found.
(Indeed, a few of these countries have recently been wrestling with severe problems.)
But a country does not have to be large to serve as a model for others.
Small countries tend to be open to trade.
Often, they are open to new ideas – and freer than large countries to experiment.
The results of such experiments – even those that fail – include useful lessons for all of us.
Big Lies about Central Banking
An independent central bank focused exclusively on price stability has become a central part of the mantra of "economic reform."
Like so many other policy maxims, it has been repeated often enough that it has come to be believed.
But bold assertions, even from central bankers, are no substitute for research and analysis.
Research suggests that if central banks focus on inflation, they do a better job at controlling inflation.
But controlling inflation is not an end in itself: it is merely a means of achieving faster, more stable growth, with lower unemployment.
These are the real variables that matter, and there is little evidence that independent central banks focusing exclusively on price stability do better in these crucial respects.
George Akerlof, who shared the Nobel Prize with me in 2001, and his colleagues have argued forcefully that there is an optimal rate of inflation, greater than zero.
So ruthless pursuit of price stability actually harms economic growth and well being.
Recent research even questions whether targeting price stability reduces the tradeoff between inflation and unemployment.
A focus on inflation may make sense for countries with long histories of inflation, but not for others, like Japan.
America's central bank, the Federal Reserve, is mandated not only to ensure price stability, but also to promote growth and full employment.
There is broad consensus in the US against a narrow mandate, such as that of the European Central Bank.
Today, Europe's growth languishes, because the ECB is constrained by its single-minded focus on inflation from promoting economic recovery.
Technocrats and financial market players who benefit from this institutional arrangement have done an impressive job of convincing many countries of its virtues, and of the need to treat monetary policy as a technical matter that should be put above politics.
That might be the case if all that central bankers did was, say, choose computer software for clearing payments.
But central banks make decisions that affect every aspect of society, including rates of economic growth and unemployment.
Because there are tradeoffs, these decisions can only be made as part of a political process.
Some argue that in the long run there are no tradeoffs.
But, as Keynes said, in the long run, we are all dead.
Even if it were impossible to lower unemployment below some critical level without fuelling inflation, there is uncertainty about what that critical level is.
Accordingly, risk is unavoidable: monetary policy that is too loose risks inflation; if it is too tight, it can cause unnecessary unemployment, with all the suffering that follows.
During America's growth boom in the 1990s, the Clinton Administration believed that it was worth risking pushing the unemployment rate lower, especially when the social gains--declining welfare roles, reduced violence--were added to the direct economic benefits.
By contrast, the IMF urged tighter monetary policy, because it put far less weight on the cost of unemployment, seemingly no weight on the ancillary social benefits of reducing it, and much greater weight on the costs of potential inflation.
The economic analysis of Clinton's Council of Economic Advisers turned out to be right; the models of the IMF (and the Fed) were wrong.
America secured a much lower rate of unemployment without inflation--eventually unemployment fell to below 4%.
But that is not the point: the point is that no one could be sure.
A calculated risk is always unavoidable.
Who bears it varies with different policies, and that is a decision that cannot--or at least should not--be left to central bank technocrats.
While there is a legitimate debate about the degree of independence accorded to central banks and other decision-making bodies, within a democracy, the perspectives of those whose well-being is affected by the decisions taken should be represented in the process.
Workers, for instance, who have much to lose if the central bank pursues an excessively tight policy, do not have a seat at the table.
But financial markets--which do not have much to lose from unemployment, but are affected by inflation--are typically well represented.
And yet financial markets hardly have a monopoly on technical competency.
Indeed, many in the financial community have little understanding of the intricate workings of the macroeconomic system--as evidenced by their frequent mistakes in managing it.
For example, most US recessions since 1945 were caused by the Fed stepping on the brakes too hard.
Similarly, central banks adopted monetarism with a fervor in the late 1970's and early 1980's, just as empirical evidence discrediting the underlying theories was mounting.
Whatever the merits of a common currency, those in Europe deliberating about adopting the Euro should consider whether to tie their fortunes to an institutional arrangement whose flaws are increasingly apparent.
Likewise, developing countries need to consider not only the central bank's independence, but also its mandate and representativeness.
They need to balance concerns about economic efficiency with those of democratic accountability.
In many new democracies, citizens are bewildered.
The virtues of the new regime are first praised, but then they are told that the macroeconomic policy decisions about which they care most are too important to be left to democratic processes.
Citizens are warned against the risks of populism (meaning the will of the people?).
There are no easy answers.
But in too many countries, nor is there democratic debate about the alternatives.
Big Money Merges with Big Brother
PARIS – All over the world, Internet users entertain romantic delusions about cyberspace.
To most of us Web surfers, the Internet provides a false sense of complete freedom, power, and anonymity.
Every once in a while, of course, unsolicited messages and ads that happen to be mysteriously related to our most intimate habits intrude.
They remind us that we Internet users are, indeed, under constant virtual surveillance.
When the watchers have only commercial motives, such “spam” feels like a minor violation.
But in China or Russia, the Internet is patrolled not by unsolicited peddlers, but by the police.
So Russian human-rights activists and the environmental organization Baikal Environmental Wave should not have been surprised when, earlier this month, flesh and blood policemen – not Internet bots – confiscated their computers and the files stored within them.
In the time of the Soviet Union, the KGB would have indicted these anti-Putin dissidents for mental disorders.
This supposedly being a “new Russia,” cyber-dissidents are accused of violating intellectual property rights.
You see, they were using Microsoft-equipped computers and could not prove that the software had not been pirated.
By confiscating the computers, the Russian police could supposedly verify whether or not the Microsoft software that the activists were using had been installed legally.
On the surface, Microsoft and Prime Minister Vladimir Putin’s police look like strange bedfellows.
But are they?
Microsoft’s authorized representatives declared that they could not oppose the Russian police actions, because the Seattle-based company had to abide by Russian law.
Such an ambiguous declaration can be interpreted either as active support for the Russian police or as passive collaboration.
Moreover, in previous cases, Microsoft assisted the Russian police in their investigations of non-governmental organizations.
Clearly, human-right activists in Russia cannot and should not count on Microsoft as an ally in their efforts to build a more open society. But Microsoft’s ambiguous – at best – behavior is part of a pattern.
Indeed, the record of Internet companies in authoritarian countries is both consistent and grim.
Yahoo set the pace in pioneering the active collaboration of Internet and high-tech firms with political repression.
In 2005, Yahoo gave the Chinese police the computer identification code for a dissident journalist, Shi Tao.
Shi Tao had sent a message in praise of democracy, which the censors had detected.
Following Yahoo’s lead, the police arrested him.
Shi remains in jail to this day.
At that time, Yahoo’s managers in the United States, like Microsoft in Russia, declared that they had to follow Chinese law.
Shi Tao, in his jail cell, was undoubtedly pleased to learn that China is ruled by law, not by the Communist Party.
After all, the rule of law is what Shi Tao is fighting for.
Google, at least for a short while, seemed to follow different guidelines in its Chinese business, appearing to adhere to its widely proclaimed ethical principle, “Don’t be evil.”
To protest against censorship, the Silicon Valley-based company relocated from mainland China in 2009 to the still relatively free Hong Kong.
On the Hong Kong-based search engine, Chinese internauts could read about Taiwan, the Tiananmen Square massacre of 1989, or the Dalai Lama.
On Google.cn, these sources, along with the results of searches using many other forbidden terms, simply did not appear.
Google’s move seemed to reconcile its proclaimed libertarian philosophy with its business ethics.
But that reconciliation did not last long: Google, after all, had accepted censorship from the beginning of its efforts in China, in 2006, in order to gain entry into the Chinese market.
After six months of life in Hong Kong, money talked: Google reinstated its mainland China service, and with the same level of censorship as before.
In the end, Google, not the Chinese Communist Party, lost face.
Yahoo, Google, and Microsoft have thus followed a strikingly similar road: access to lucrative markets trumped ethical anxiety.
The tools that they provide are politically neutral.
Dissidents try to use them to pursue a democratic agenda.
Police use them to detect and repress dissidents.
Either way, Microsoft, Yahoo, and Google make money – just like, say, IBM, which in the 1930’s sold its computing machines to the Nazi regime: the Nazis used these machines to make the destruction of their victims routine and bureaucratic.
Should we be shocked that Internet companies put profits ahead of morals?
After all, they are ordinary, profit-seeking corporations, just like the IBM of Hitler’s era.
Internet companies may, more than most, hide their true motives behind ersatz, democratic-sounding slogans, but in the end they are advertising products like any other. In advertising or self-promotion, the choice of words is determined by customer expectations, not by managers’ philosophy, as they mostly have none.
Capitalism is always a trade-off: we must live with unethical behavior by money-making corporations that provide us with useful new tools.
These tools can be used by Iranians fighting dictatorship, or by Tibetan dissidents trying to save their culture.
They also can be used to compute the number of exterminated Jews, to arrest a Chinese dissident, or to break a human-rights group in Russia.
Microsoft in Russia or Google in China teach us that capitalism is not ethical: it is only efficient.
Entrepreneurs are greedy by definition: if they were not, they would go bankrupt.
An open society will never be created or sustained by righteous entrepreneurs or be the mere byproduct of political engineering.
Liberty, as always, remains the endeavor of vigilant, free men and women.
जेफ़री सैश का महत्व क्यों है
सिएटल – बोनो अर्थशास्त्री के अनुसार ज़ेफ़री सैश एक ऐसा "चरमराता पहिया है जो बहुत शोर करता है।" मेरे लिए सैश अर्थशास्त्र के बोनो हैं - ऐसा व्यक्ति जिसके पास प्रभावशाली मेधा, जुनून, और प्रतिपादन की शक्तियाँ हैं और जो अपनी प्रतिभाओं का उपयोग धरती के सबसे ग़रीब लोगों के लिए आवाज़ उठाने के लिए कर रहा है। इसलिए मुझे इस बात से आश्चर्य नहीं हुआ कि किसी पत्रकार को सैश किसी पुस्तक के लिए दमदार मुख्य पात्र लगा - और पाठकों को अंतर्राष्ट्रीय विकास के संभावित शुष्क विषय की ओर आकर्षित करने का अच्छा तरीका लगा।
द आइडियलिस्ट, वैनिटी फ़ेयर में लेखिका नीना मुंक ने सैश और उसकी मिलेनियम ग्राम परियोजना (MVP) - जो 120 मिलियन डॉलर की प्रदर्शन परियोजना है - का सूक्ष्म चित्र खींचा है जिसका उद्देश्य दुनिया को यह दिखाना है कि भारी मात्रा में लक्षित सहायता के ज़रिए अफ़्रीकी गाँवों को ग़रीबी से बाहर निकालना संभव है। मुंक के लिए सैश की शानदार विशेषताओं की क़ीमत पर, उसके नकारात्मक गुणों पर अत्यधिक बल देकर उसका कैरीकैचर बनाना आसान, और शायद बिक्री की दृष्टि से ज़्यादा लाभदायक होता। लेकिन उन्होंने ऐसा नहीं किया।
मुंक ने पुस्तक के लिए शोध करने, सैश को अच्छी तरह से जानने, और 15 मिलेनियम गाँवों में से दो में लंबी अवधि तक रहने में छह साल लगाए। सैश और उनकी टीम जो कुछ करने की कोशिश कर रहे हैं उसके महत्व और मुश्किल की वे स्पष्ट रूप से सराहना करती हैं।
अंतर्राष्ट्रीय विकास के बारे में ज़्यादातर पुस्तकों के विपरीत, मुंक की पुस्तक बहुत पठनीय है और लंबी नहीं (260 पृष्ठ की) है। मैंने अपनी फ़ाउंडेशन में सबको बताया है कि मेरे विचार से इसे पढ़ने के लिए समय निकालना लाभदायक होगा। यह मूल्यवान - और, बीच-बीच में, हृदय विदारक - सचेत करने वाली कहानी है। जबकि कुछ मिलेनियम गाँव परिवारों को उनके स्वास्थ्य और उनकी आय में सुधार में मदद करने में सफल रहे, लेकिन जिन दो गाँवों - डेर्टु, केन्या और रुहीरा, युगांडा - में मुंक ने अध्ययन करने में सबसे ज़्यादा समय बिताया – उनमें सैश की कल्पना पूरी तरह साकार नहीं हो सकी।
जब सैश ने पहली बार परियोजना की योजना बनानी शुरू की, तो वे सहायता के लिए फ़ाउंडेशन में आए थे। हम पहले से कोलंबिया विश्वविद्यालय के पृथ्वी संस्थान में उनके प्रयासों के बड़े समर्थक थे और हमें लगा कि उनके द्वारा ग़रीब द��शों की ज़रूरतों पर ध्यान केंद्रित किया जाना अमूल्य होगा।
उनका बातचीत का तरीका लुभावना था। वे स्वास्थ्य, शिक्षा, और कृषि, सभी क्षेत्रों में एक साथ गहन प्रयासों के लिए ध्यान केंद्रित करने के लिए थोड़े-से गाँव ले रहे थे। उनकी अवधारणा थी कि ये उपाय इतने मिले-जुले रूप में होंगे कि वे एक बढ़िया उत्थान चक्र शुरू करेंगे और गाँवों को हमेशा के लिए ग़रीबी से बाहर निकाल देंगे। उन्होंने महसूस किया कि आप स्वास्थ्य पर ध्यान दिए बिना, बस उर्वरक पर ध्यान केंद्रित करते हैं, या आप शिक्षा में सुधार करने में मदद किए बिना बस टीकाकरण प्रदान करते हैं, तो सहायता की अनंत आपूर्ति के बिना प्रगति स्थायी नहीं बन सकेगी।
सैश के दृष्टिकोण के बारे मेरे सहयोगियों की और मेरी बहुत-सी चिंताएँ थीं। हमने इस बारे में उनके अनुमानों पर सवाल किए कि लाभ कितनी जल्दी साकार हो जाएँगे, जब MVP वित्तपोषण क्रमशः समाप्त हो जाएगा तो क्या होगा, प्रति व्यक्ति उच्च लागत की भरपाई के लिए सरकारें कितना योगदान करेंगी, और प्रगति को मापना कितना संभव होगा (इस संभावना के मद्देनज़र कि MVP सहायता आना शुरू होते ही आसपास के क्षेत्रों से लोग बड़ी संख्या में उनके गाँवों में आने लगेंगे)। इसलिए हमने सीधे MVP में निवेश न करने का फ़ैसला किया, हालाँकि हमें उनके अन्य कामों में सहायता करते रहने में ख़ुशी थी।
अब क्योंकि परियोजना योजना के अनुसार नहीं चली, तो मैं इसकी आलोचना नहीं करूँगा। हमारी खुद की ऐसी बहुत-सी परियोजनाएँ रही हैं, जिनमें इच्छित परिणाम नहीं मिले। प्रभावी समाधान दे पाना मुश्किल होता है चाहे आप सभी संभावित आकस्मिकताओं और अनपेक्षित परिणामों की योजना भी क्यों न बना लें। लगभग हर तरह के निवेश - कारोबारी, परोपकारी, या कोई अन्य - में मुश्किल आने और ग़लत कदम उठाने पर जानबूझकर जोखिम लेने की स्वाभाविक प्रवृत्ति होती है। मैंने ऐसा किया है, और मैं सोचता हूँ कि ज़्यादातर दूसरे लोगों ने भी ऐसा ही किया है।
तो ग़लती कहाँ हुई? पहली बात तो यह थी कि सैश ने जिन गाँवों को लिया उनमें सब तरह की समस्याएँ आईं - सूखे से लेकर राजनीतिक अशांति तक। दूसरी बात यह थी कि MVP ने आदर्शवादी "सपनों का क्षेत्र" का दृष्टिकोण अपनाया। MVP के नेताओं ने किसानों को ऐसी कई नई फसलों में बदलने के लिए प्रोत्साहित किया जिनकी अमीर देशों में माँग थी, और विशेषज्ञों ने ज़मीन पर किसानों की उर्वरकों, सिंचाई, और बेहतर बीजों का इस्तेमाल करके अच्छी फसल की पैदावार करने में मदद करने का अच्छा काम भी किया।
लेकिन MVP ने इसके साथ-साथ इन फसलों के लिए बाज़ार के विकास में निवेश नहीं किया। मुंक के अनुसार, "कुल मिलाकर, अनन्नास का निर्यात नहीं किया जा सका, क्योंकि परिवहन की लागत बहुत ही ज़्यादा थी। जाहिर तौर पर, अदरक के लिए कोई बाज़ार नहीं था। और, जापान से ख़रीदारों की कुछ आरंभिक रुचि के बावजूद, कोई भी केले का आटा नहीं ख़रीदना चाहता था।" किसानों ने फसलें उगाईं, लेकिन ख़रीदार नहीं आए।
बेशक, सैश को पता है कि बाज़ार की गतिशीलता को समझना महत्वपूर्ण है; वे दुनिया के सबसे बुद्धिमान अर्थशास्त्रियों में से एक हैं। लेकिन जिन गाँवों का चित्र मुंक ने पेश किया है, उनमें ऐसा लगता है मानो सैश ने ब्लाइंडर लगाए हुए थे।
वारेन बफ़ेट का कहना है कि "विंडशील्ड की तुलना में रियरव्यू मिरर हमेशा ज़्यादा साफ़ होता है।" इस रियरव्यू मिरर के माध्यम से, हम देख सकते हैं कि परियोजना के पास कभी भी ऐसा आर्थिक मॉडल नहीं था जो MVP के डॉलर ख़त्म हो जाने के बाद भी सफलता को बनाए रख सकता।
स्वास्थ्य, कृषि, बुनियादी ढांचा, शिक्षा, और व्यापार में लगाई गई आरंभिक राशि - ये सभी हस्तक्षेप तभी सार्थक होते हैं, अगर उन्हें समय पर सावधानीपूर्वक किया जाता है। लेकिन मुझे इस बात का आश्चर्य है कि सैश देश की बजट राशियों में से इतना कम क्यों हासिल कर सके, और यह कि उन्होंने सरकारों को यह समझाने का प्रयास क्यों नहीं किया कि घरेलू स्तर पर इसी तरह के और उपायों के वित्तपोषण के लिए अतिरिक्त कराधान का प्रावधान करना ज़रूरी है।
रियरव्यू मिरर के माध्यम से, हम यह भी देख सकते हैं कि सैश के अनेक विचार बिल्कुल सही साबित हुए हैं। मुंक ने 2007 में अंतर्राष्ट्रीय सहायता दाताओं के साथ उनकी लड़ाई का वर्णन किया है जो कीटनाशक से उपचारित मच्छरदानी वितरित करने से मना कर रहे थे क्योंकि उन्होंने बाज़ार-आधारित दृष्टिकोण का पक्ष लिया जिसमें हर मच्छरदानी के लिए लोगों को थोड़ी-सी राशि का भुगतान करना होगा। विनम्रता से कहा जाए, तो सैश ने मुफ़्त मच्छरदानियों के लिए अपने मामले को आगे बढ़ाने की प्रक्रिया में अपना कोई दोस्त नहीं बनाया।
अधिकाधिक कठोर आक्षेप लगाकर, उन्होंने संभावित सहयोगियों की नाराज़गी मोल ली जो उतनी ही शिद्दत से मलेरिया को दूर करना चाहते थे, जितना वे स्वयं चाहते थे। लेकिन इतिहास दिखाएगा कि सैश बिल्कुल सही थे। तब से हमने देखा है कि - बाज़ार मॉडलों की तुलना में - मुफ़्त मॉडल से मच्छरदानियों का बहुत व्यापक वितरण हुआ - और मलेरिया में बहुत अधिक कमी आई।
अंत में, मुझे उम्मीद है कि ग़रीबी से लड़ने वाले MVP के अनुभव को देखकर निवेश करने और जोखिम लेने से पीछे नहीं हटेंगे। उद्यम पूँजी की दुनिया में, 30 % की सफलता दर को शानदार ट्रैक रिकॉर्ड माना जाता है। अंतर्राष्ट्रीय विकास की दुनिया में, आलोचक हर ग़लत कदम को इस बात के सबूत के रूप में पेश करते हैं कि सहायता का मतलब है, पैसा नाली में बहाना। जब आप ग़रीबी और बीमारी से लड़ने जैसा कोई मुश्किल काम कर रहे होते हैं, तब अगर आप ग़लती करने से डरेंगे तो आप कभी भी कुछ सार्थक हासिल नहीं कर सकेंगे।
मैं सैश की प्रशंसा करता हूँ कि उन्होंने इसके लिए अपने विचारों और प्रतिष्ठा को दाँव पर लगाया। आखिरकार, वे एक सत्र में दो कक्षाओं को पढ़ाने और कुर्सी पर बैठकर अकादमिक पत्रिकाओं में सलाह देने जैसा अच्छा जीवन भी बिता सकते थे। लेकिन यह उनका तरीका नहीं है। वे अपनी आस्तीनें चढ़ाते हैं। वे अपने सिद्धांतों को अमल में लाते हैं। वे उतनी ज़्यादा कड़ी मेहनत करते हैं जितना मेरी जानकारी में कोई दूसरा व्यक्ति कर सकता है।
मुझे लगता है कि सभी अथक विचारकों और कर्मठ व्यक्तियों की तरह, सैश अपने ग़लत क़दमों से सीखेंगे और मज़बूत विचारों और दृष्टिकोणों के साथ वापस लौटेंगे। सैश हमेशा ऐसा चरमराता पहिया बने रहेंगे जो बहुत शोर करता है - और यह दुनिया इसके लिए बेहतर जगह होगी।
Bin Laden Made News, Not History
LONDON – Ten years after 9/11, the instant history is being written.
In the French newspaper Le Monde, a highly intelligent commemorative supplement dubbed the period “The Decade of Bin Laden.”
But is that right?
In the ten years since 9/11, the combined GDP of Brazil, Russia, India, and China (the BRICs) rose from 8.4% of the global economy to 18.3%.
Anglo-Saxon-style capitalism crashed.
Moreover, it was the decade when Internet access went global – from 360 million people in 2000 to more than two billion people today.
It was a time when the war in Iraq divided the world, but also when a civilian surge for freedom finally hit the Middle East, as millions of Muslims turned for inspiration to democratic governance, not global jihad.
None of this was the doing of Osama bin Laden.
To be sure, Al Qaeda was (and is) a new and serious kind of threat.
Born of 30 years of tumult in the Muslim world, Al Qaeda has a worldview, not just a local view.
It aspires not just to change, but to revolution.
Indeed, the notion of a “war on terror” in reply was misguided in part because it allowed people to think that Al Qaeda was just another terrorist group like the IRA, the Baader-Meinhof Gang, or the Red Brigades.
It wasn’t – and isn’t.
But it also aggrandized Bin Laden’s claim to be a world historical figure.
The fight – led by the United States, with the rest of the West providing lower-key support– has weakened Al Qaeda’s influence and capacity.
But it has also been an enforced detour from the vital diplomatic task of building new rules and institutions for an interdependent world.
I don’t see any alternative to our determination, in 2001, to drive the Taliban from control of Afghanistan.
The tragedy is that, once that battle was won, the peace was lost.
The Bonn Conference of December 2001, which was called to draft a new Afghan constitution, excluded the vanquished.
Whereas America built its own democracy from below, on federalist principles, Afghanistan had imposed upon it one of the most centralized states in the world – despite being one of the world’s most decentralized societies.
Tragically, the signals from former Taliban in their southern Afghan stronghold of Kandahar were misread.
The Taliban, who demanded to be left alone in exchange for staying out of politics, were driven into Pakistan, where they reconvened.
The new security threat called for a military response, though the struggle should have been predominantly political and diplomatic.
The best way to understand the current situation comes from an analogy offered by former US Secretary of State Madeleine Albright.
Foreign policy during the Cold War, she says, was like steering within the Panama Canal; after the fall of the Berlin Wall, it was like steering within the English Channel – plenty of water on all sides, but land visible, too.
Today, foreign policy is like being on the open seas, with no rules beyond countries’ 200-mile maritime borders, and no land in sight.
If that is right, we face urgent tasks – the first being to reassert diplomacy’s place in international politics.
The late US statesman Richard Holbrooke once said to me that America since 9/11 had suffered a “militarization of diplomacy.”
We now need the opposite.
In a world of asymmetric threats, we should follow the US defense department’s field manual: in counterinsurgency, politics require primacy.
Second, we must rethink our notions of a balance of power, because they no longer concern just states, but also peoples.
As the Arab Spring has shown, the ubiquity of information means that future coalitions need to be formed at the micro level, in the villages and valleys of places like Afghanistan and Pakistan, rather than only at the macro level of managing the global system.
Third, we are entering an era of resource scarcity.
Aside from the atomic bomb, this is the most dangerous security development in two centuries.
If you think the blame game in Europe over Greece is bad, just wait for arguments about who is causing drought and food-price inflation.
These are not just “environmental” questions.
They are questions of justice and responsibility, and stronger regional and international institutions are needed to address them.
Finally, the West must rediscover the joys of multilateralism and shared sovereignty.
That is tough when, in Europe, nobody wants to pay Greece’s bills.
But multilateralism is a global insurance policy against abuse of power by any state.
The problem is not that the European Union and other multilateral institutions are too strong; it is that they are too weak.
Indeed, regional institutions in the Arab world, Africa, Latin America, and East Asia are still in their infancy – and need to grow up fast.
Over the past few centuries, there have been three systems of international order: economic and military domination; a balance of power; and shared sovereignty.
They can coexist, as they more or less did in the years after 1945 in various parts of the world.
But America today is on the back foot, economically and militarily.
New powers like China and India are rising, not risen, mixing assertiveness with emphasis on their continued “developing” status.
Europe, where shared sovereignty has been embraced, is struggling to solve its own problems, never mind becoming a global player.
So no one is in charge.
This is all the more problematic at a time when the world’s states and people are more intertwined than ever, as ideas, information, finance, migrants, and problems flow ever more seamlessly across borders.
A century ago, the Nobel Peace Prize laureate Norman Angell argued in The Great Illusion that economic security enables military expansion, not vice versa.
In fact, neither is achievable without political vision.
That is the most important lesson of the post-9/11 decade.
Bin Laden’s Ghost
LONDON – Osama bin Laden’s death in his Pakistani hiding place is like the removal of a tumor from the Muslim world.
But aggressive follow-up therapy will be required to prevent the remaining Al Qaeda cells from metastasizing by acquiring more adherents who believe in violence to achieve the 'purification' and empowerment of Islam.
Fortunately, Bin Laden’s death comes at the very moment when much of the Islamic world is being convulsed by the treatment that Bin Laden’s brand of fanaticism requires: the Arab Spring, with its demands for democratic empowerment (and the absence of demands, at least so far, for the type of Islamic rule that Al Qaeda sought to impose).
But can the nascent democracies being built in Egypt and Tunisia, and sought in Bahrain, Libya, Syria, Yemen, and elsewhere, see off the threats posed by Islamic extremists?
In particular, can it defeat the Salafi/Wahhabi thought that has long nurtured Osama bin Laden and his ilk, and which remains the professed and protected ideology of Saudi Arabia?
The fact is that before the US operation to kill Bin Laden, Al Qaeda’s symbolic head, the emerging democratic Arab revolutions had already, in just a few short months, done as much to marginalize and weaken his terrorist movement in the Islamic world as the war on terror had achieved in a decade.
Those revolutions, whatever their ultimate outcome, have exposed the philosophy and behavior of Bin Laden and his followers as not only illegitimate and inhumane, but actually inept at achieving better conditions for ordinary Muslims.
What millions of Arabs were saying as they stood united in peaceful protest was that their way of achieving Arab and Islamic dignity is far less costly in human terms.
More importantly, their way will ultimately achieve the type of dignity that people really want, as opposed to the unending wars of terror to rebuild the caliphate that Bin Laden promised.
After all, the protesters of the Arab Spring did not need to use – and abuse – Islam to achieve their ends.
They did not wait for God to change their condition, but took the initiative by peacefully confronting their oppressors.
The Arab revolutions mark the emergence of a pluralist, post-Islamist banner for the faithful.
Indeed, the only people to introduce religion into the protests have been rulers, such as those in Bahrain, Yemen, Libya, and Syria, who have tried to use fear of the Shia or Sunni “other” to continue to divide and misrule their societies.
Now that the US has eradicated Bin Laden’s physical presence, it needs to stop delaying the rest of the therapeutic process.
For the US has been selectively – and short-sightedly – irradiating only parts of the cancer that Al Qaeda represents, while leaving the malignant growth of Saudi Wahabism and Salafism untouched.
Indeed, despite the decade of the West’s war on terror, and Saudi Arabia’s longer-term alliance with the US, the Kingdom’s Wahhabi religious establishment has continued to bankroll Islamic extremist ideologies around the world.
Bin Laden, born, raised, and educated in Saudi Arabia, is a product of this pervasive ideology.
He was no religious innovator; he was a product of Wahhabism, and later was exported by the Wahhabi regime as a jihadist.
During the 1980’s, Saudi Arabia spent $75 billion for the propagation of Wahhabism, funding schools, mosques, and charities throughout the Islamic world, from Pakistan to Afghanistan, Yemen, Algeria, and beyond.
The Saudis continued such programs after the terror attacks of September 11, 2001, and even after they discovered that “the Call” is uncontrollable, owing to the technologies of globalization.
Not surprisingly, the creation of a transnational Islamic political movement, boosted by thousands of underground jihadi Web sites, has blown back into the Kingdom.
Like the hijackers of 9/11, who were also Saudi/Wahhabi ideological exports (15 of the 19 men who carried out those terror attacks were chosen by Bin Laden because they shared the same Saudi descent and education as he), Saudi Arabia’s reserve army of potential terrorists remains, because the Wahhabi factory of fanatical ideas remains intact.
So the real battle has not been with Bin Laden, but with that Saudi state-supported ideology factory.
Bin Laden merely reflected the entrenched violence of the Kingdom’s official ideology.
Bin Laden’s eradication may strip some dictators, from Libya’s Muammar el-Qaddafi to Yemen’s Ali Abdallah Saleh, of the main justification they have used for their decades of repression.
But the US knows perfectly well that Al Qaeda is an enemy of convenience for Saleh and other American allies in the region, and that in many cases, terrorism has been used as a pretext to repress reform.
Indeed, now the US is encouraging repression of the Arab Spring in Yemen and Bahrain, where official security forces routinely kill peaceful protesters calling for democracy and human rights.
Al Qaeda and democracy cannot coexist.
Indeed, Bin Laden’s death should open the international community’s eyes to the source of his movement: repressive Arab regimes and their extremist ideologies.
Otherwise, his example will continue to haunt the world.
The Price of Biodiversity
DHAKA – We humans do not only share the planet with a range of other species, including plants, animals, and even microbes; we also depend on them for our survival.
Can we determine the economic value of protecting the natural world?
Some people will balk at the idea of putting a price tag on biodiversity, viewing its protection as an obvious imperative.
But they would undoubtedly also agree that preventing human death and suffering, while providing food, water, and an education to all, is vital.
The reality is that there are simply not enough resources to do everything.
Hard choices have to be made.
Fortunately, economics can help us determine how to do the most good with the resources we have.
This is particularly relevant today, as the world's 193 national governments work to establish the Sustainable Development Goals to guide global development efforts for the next 15 years.
The SDGs will be modeled on the Millennium Development Goals, which were agreed in 2000 and focused on objectives like lowering maternal and infant mortality, eradicating poverty, and improving access to primary education.
So far, a huge number of potential SDG targets have been proposed, some of which relate to biodiversity.
But, though trillions of dollars will be spent on the SDGs, there are simply not enough resources to complete every project.
That is why world leaders must focus on the targets that will have the greatest impact.
My think tank, the Copenhagen Consensus, is working with more than 60 top economists and several Nobel laureates to identify which targets promise the highest return on investment.
Preserving biodiversity, it turns out, is not only desirable; according to three new studies by the economists Anil Markandya, Luke Brander, and Alistair McVittie, it also makes good financial sense, at least for some projects.
Protecting forests is a good place to start, with every dollar spent bringing benefits worth about $10.
Some of the resources that forests provide – such as timber, firewood, and tourism – can be valuated relatively easily.
But the value of others – such as the wide range of animal species they support and their intrinsic worth to people – is more difficult to quantify.
In attempting to do so, economists have conducted surveys to find out how much people would be prepared to pay to protect forests and the animal species they support.
Forests also serve as an enormous “carbon sink," storing atmospheric carbon dioxide for many decades or centuries; thus, protecting forests would help to mitigate climate change.
Moreover, forests absorb intense rainfall, thereby reducing the risk of flooding.
The 2010 flooding in Pakistan, for example, would have been far less devastating if so many trees from upper slopes had not been felled.
The conclusion is thus that each dollar spent on conserving forests would yield $5-15 worth of social good, including tangible benefits, such as from logging or carbon capture, and “soft" gains, like preserving forests' intrinsic beauty.
Conserving the world's wetlands – which also provide valuable services, including protection of coastal areas and river valleys from flooding – is also sensible, providing a tenfold return on each dollar spent.
But protecting coral reefs would bring the highest returns, amounting to an extraordinary $24 worth of benefits for every dollar spent.
Like forests, coral reefs provide multiple services – including tourism and fish nurseries, which help to sustain commercial fishing – and have an intrinsic value to people.
To reduce the loss of coral reefs by half would cost about $3 billion each year – and yield at least $72 billion in benefits.
Not all projects aimed at protecting biodiversity are a smart use of public resources.
Creating additional nature reserves, for example, might sound like a great way to protect more species' natural habitats, but the economic benefits would not cover the nearly $1 trillion in costs.
Doubling the area of protected coastal land and bringing substantial areas of open ocean into reserves is a particularly formidable task.
Clearly, protecting coral reefs is a much better use of limited resources.
Though the SDGs will aim largely to improve daily life for the very poor, a cool-headed economic assessment suggests that there are also smart biodiversity targets that should be considered.
If world leaders take advantage of cost-benefit analysis to separate the wheat from the chaff, the next 15 years could be a boon for global development – including the preservation of biodiversity.
Pangan di Era Biofuel
ROMA – Dalam beberapa tahun terakhir, biofuel (bahan bakar nabati) telah menjadi pokok perdebatan.
Bagi sejumlah pihak, sumber energi terbarukan yang dihasilkan dari bahan organik ibaratnya sama dengan tongkat sihir dalam perjuangan melawan perubahan iklim.
Namun yang lainnya memandang biofuel sebagai ancaman terhadap keberlangsungan hidup, sebab tanaman yang digunakan untuk menghasilkan biofuel harus bersaing dengan lahan pertanian dan air yang sebaliknya dapat dimanfaatkan untuk memproduksi pangan.
Akan tetapi ini merupakan dikotomi yang salah.
Pilihannya bukanlah antara pangan atau bahan bakar.
Kita dapat memanfaatkan keduanya.
Jika diterapkan dengan baik, biofuel dapat menjadi sarana yang efektif untuk meningkatkan keamanan pangan melalui penyediaan sumber energi berkelanjutan dan terjangkau bagi petani miskin.
Di beberapa negara-negara land-locked di Afrika, harga bensin mencapai tiga kali lipat dibandingkan rata-rata harga global, sehingga harga bahan bakar merupakan salah satu hambatan utama menuju pertumbuhan pertanian. Perluasan penggunaan biofuel di kawasan ini dapat mendorong produktivitas dan menciptakan kesempatan kerja baru, khususnya di wilayah pedesaan.
Dampak ini bisa diperluas jika tambahan permintaan akan bahan baku untuk biofuel dapat dipenuhi oleh petani keluarga dan produsen skala kecil.
Biofuel menjadi kemutlakan dan penggunaan biofuel akan terus meningkat.
Pada tahun 2013, biofuel menyumbang 3% dari total bahan bakar alat transportasi yang digunakan di seluruh dunia, berdasarkan laporanFood and Agricultural Organization (FAO) dan OECD.
Meskipun angka ini dinilai akan tetap stabil, kita dapat memperkirakan bahwa produksi biofuel akan meningkat sesuai nilai absolut seiring dengan perluasan pasar global untuk bahan bakar alat transportasi.
Sesungguhnya produksi biofuel global diperkirakan akan berlipat ganda di tahun 2013 dibandingkan dengan tingkat produksi tahun 2007.
Jika prediksi ini terbukti, maka biofuel akan menghabiskan 12% bijian-bijian kasar, 28% tebu, dan 14% minyak sayur.
Seiring dengan meningkatnya produksi jenis bahan bakar nabati ini, kita memerlukan kebijakan, program, dan kapasitas yang dapat menjamin penggunaan berkelanjutan, sehingga tidak mengacaukan pasar pangan atau membahayakan keamanan pangan, dimana kedua hal ini harus selalu menjadi prioritas pertama.
Para pemrakarsa biofuel barangkali akan terkejut melihat rendahnya kontribusi biofuel terhadap keseluruhan pasokan bahan bakar dunia.
Mesin pertama buatan Rudolf Diesel, dirancang pada akhir tahun 1800an, digerakkan oleh bahan bakar yang dihasilkan oleh minyak kacang.
Henry Ford pernah menjelajahi seluruh Florida berharap bisa membeli beberapa bidang tanah untuk menanam tebu, meyakini bahwa Amerika Serikat tidak akan mentolerir polusi yang diakibatkan pembakaran bahan bakar fosil atau ketergantungan yang tidak terlihat (implicit dependency) terkait dengan impor minyak untuk memperoleh bensin.
Daya tarik biofuel baru kembali pulih dalam beberapa dekade terakhir dikarenakan upaya-upaya menjamin produksi energi yang lebih terjangkau, menghasilkan pendapatan, dan mengurangi ketergantungan seperti yang dulu diperingatkan oleh Henry Ford.
Akhir-akhir ini, kekhawatiran akan polusi, perubahan iklim, dan keterbatasan bahan bakar fosil menimbulkan lonjakan permintaan – suatu kondisi yang harus dikendalikan.
Fleksibilitas adalah kunci upaya-upaya menaikkan tingginya kepercayaan bahwa biofuel dapat mendongkrak produktivitas pertanian, mempercepat pembangunaan di pedesaan, dan menaikkan keamanan pangan.
Sebagai contoh, pembuat kebijakan harus meredakan tekanan kompetitif antara pangan dan bahan bakar dengan merumuskan rencana untuk mengatasi ketidakstabilan harga pangan.
Lembaga berwenang dapat mewajibkan agar persentase biofuel yang dicampur bahan bakar fosil dinaikkan jika harga pangan turun dan diturunkan jika harga pangan melonjak.
Kebijakan ini akan menjadi semacam stabilisator otomatis.
Permintaan akan produk-produk pertanian yang ditujukan kepada petani-petani miskin akan tetap solid meskipun harga pangan merosot, dan konsumen pun akan terlindungi dari lonjakan harga yang ekstrim.
Target nasional pun dapat dirancang agar lebih fleksibel.
Jika arahan penggunaan biofuel diterapkan selama beberapa tahun, bukan hanya satu tahun, maka pembuat kebijakan dapat mempengaruhi permintaan untuk meminimalisasi tekanan pada harga pangan.
Pada akhirnya, di tingkat individual, fleksibilitas lebih besar dapat diperkenalkan di SPBU melalui penggunaan kendaraan bahan bakar fleksibel seperti yang digunakan di Brasil.
Jika kendaraan dilengkapi dengan mesin yang dapat digerakkan oleh bahan bakar fosil atau dicampur dengan biofuel pada jumlah tinggi, maka konsumen dapat beradaptasi dengan perubahan harga dengan beralih jenis bahan bakar.
Tidak mudah untuk mencapai keseimbangan ini.
Akan tetapi jika kita mengumpulkan pengetahuan bersama, melibatkan petani kecil di negara-negara berkembang dalam upaya ini, serta menjaga fokus kita pada pengentasan kemiskinan dan perlindungan terhadap kaum rentan, kita bisa memiliki lebih banyak bahan bakar, lebih banyak pangan, dan kemakmuran yang lebih luas bagi seluruh penduduk dunia.
Biology’s Armaments Race
Biology\u0027s Clash of Civilizations
Last summer, at a meeting outside Aspen, Colorado, several dozen physicists gathered to celebrate what the journal Nature described as the "growing feeling that their discipline's mindset will be crucial to reaping the harvest of biology's post-genomic era."
In fact, with genetics set to improve everything from human health to agriculture, physicists and mathematicians worldwide are pouring into the life sciences.
Biology is where the scientific action--and the money--will be in the coming century.
But this is not the first time that physicists and mathematicians have looked to biology for new fields to plow, and the history of such efforts has been fairly dismal.
Biologists and physicists have different goals and traditions, and they look for different kinds of answers, because they ask different kinds of questions.
My first glimpse of this disciplinary divide came many years ago while teaching a course on mathematical methods in biology.
After introducing a biological problem with 11 variables, I used a simple method called dimensional analysis to demonstrate that only three needed to be studied empirically; the relations among the rest of the variables could be inferred logically.
"But you haven't done the experiments," the students complained, "so how can you know?"
I've been thinking about that question ever since.
As a theoretical physicist, I had been trained to trust only mathematical and logical arguments and to view experimental evidence as fallible.
But to many, if not most, biologists, experimental evidence, however fallible, still provided a surer path to truth.
Where, in a purely deductive argument, was there room for nature's surprises, for mechanisms that look nothing like what we imagine in our initial assumptions?
Philosophers of science have traditionally approached questions concerning what counts as knowledge, explanation, and theory as if they could be answered universally.
But the communication gap between experimental and mathematical biologists suggests that the answers depend on specific disciplinary cultures.
Consider the interdisciplinary efforts--and ultimate failure--of Nicolas Rashevsky, a Russian theoretical physicist who emigrated to the US in 1924.
Rashevsky wondered whether a similar mechanism might account for the division of biological cells and the onset of instability in liquid droplets.
Soon, he set out to build "a systematic mathematical biology, similar in its structure and aims to mathematical physics."
By 1940, he had published his magnum opus, Mathematical Biophysics , established a program by the same name at the University of Chicago, and founded the Bulletin of Mathematical Biophysics .
But by 1954, Rashevsky had lost his grants and budget, and today little remains of his institutional and scientific efforts.
The main criticism against him was that he failed to engage with practicing biologists.
But Rashevsky did make at least one early effort to interest biologists in his work.
In 1934, he presented a "physico-mathematical" analysis of the forces acting on an idealized spherical cell, a model that he argued was sufficient to explain cell division.
When the biologists objected that not all cells are spherical, Rashevsky responded that the theory must first be applied to the simplest cases.
E. B. Wilson, the proverbial giant of cell biology, had the last word, concluding in a brief paper following Rashevsky's presentation that mathematics may be helpful in studying the growth of populations, but not individuals.
Wilson's colleague, Eric Ponder, was even more pointed, saying that what is required "is more measurement and less theory."
By the early 1950's, however, biologists still could not explain how an organism reproduces its characteristic form from one generation to another.
In 1952, Alan Turing--best known for his work on computation and the mind--proposed a mathematical model consisting of a pair of equations describing the reaction and diffusion of two imaginary chemicals.
His model, which he admitted was "a simplification and an idealization," aimed to highlight the "features of greatest importance" in an embryo's development.
He emphasized that the reactions he described bore no resemblance to those in nature.
They reflected only the desire "that the argument be easy to follow."
Turing appears here as a caricature of the mathematical physicist.
Like Rashevsky, he had been steeped in mathematical and physical scientists' belief that an imaginary construction making no pretense to literal truth can nonetheless capture the "features of greatest importance" and hence serve a useful explanatory function.
But experimental biologists ask a different question: not whether organisms could grow as an imaginary model suggests, but whether they do .
On this score, Turing's reaction-diffusion model has been greatly disappointing.
Over the last 20 years, molecular biologists have found that the progressive activation of a hierarchy of genes--which play no role in Turing's model--defines an organism's final structure and form.
More broadly, the best explanations of how biological systems solve particular problems come from experimental genetics, not mathematics and logic.
Physicists and mathematicians nonetheless have reason to celebrate.
Since 1983, the proportion of funding for mathematical and computational research that comes from the Biological Division of the US National Science Foundation has increased about 50-fold.
To their credit, many new programs in mathematical biology encourage researchers coming from the mathematical sciences to become practicing biologists themselves.
Meanwhile, "user-friendly" computer programs enable biologists to build their own mathematical/theoretical models.
The net effect could be a new disciplinary culture that transforms the aims, methods, and epistemological basis of research.
Theoretical biology's models will be formulated not in a few simple equations, but in a complex of algorithms, statistical analyses, and simulations.
And, recognizing the ever present possibility of exceptions, they will aspire to "generalities" rather than "laws," leaving room for accidental particularities of biological structure.
Biology is not physics, and to ignore its evolutionary history is to invite irrelevance.
Biomedicine’s Democratic Revolution
SEATTLE – Very soon, it will be economically feasible to sequence human genomes and collect massive amounts of different types of health data as standard medical practice.
Already, there are remarkable examples of how these new genetic data are changing our thinking about disease and diagnosis.
Consider the Beery twins, born in 1996 in San Diego, California.
They suffered from chronic vomiting, seizures, and muscle weakness, sending them and their parents on an odyssey of medical examinations and tests.
The first diagnosis was cerebral palsy.
Then they received a diagnosis of dystonia, a rare neurological disorder.
But treatments based on these diagnoses did not alleviate the children’s symptoms.
Frustrated, their parents had the twins’ genomes sequenced.
The results revealed that the twins had been incompletely diagnosed.
Their previously diagnosed dystonia was being caused by a genetic mutation that was interfering with the neurotransmitter serotonin.
The twins’ doctors found that the dystonia could be fully treated with a readily available serotonin replacement.
So why haven’t success stories like that of the Beery twins, together with the Internet’s power and increasingly affordable collection of molecular data, led to the construction of a knowledge network of disease?
Why aren’t scientists and doctors turning in droves to data-intensive science in order to build better “disease maps”?
One possible answer is that there are still technical barriers that block the construction and use of such networks.
With our ability to generate ever-rising oceans of molecular data – now approaching the zetabyte scale (that’s a one followed by 21 zeros) – comes the challenge of storing and deciphering this information.
But scientists and software engineers regularly face such daunting challenges, and, with DNA serving as the reference language of modern biomedical research, the technical barriers to constructing disease networks will be short-lived.
Cultural barriers are the real stumbling block.
As humans, we are highly evolved to adjust to our surroundings: we tend to adapt to a culture, well-conceived or not, and lose sight of its failings.
But when we glimpse an alternative, our culture’s inadequacies (and even insanities) are immediately apparent, which may prompt a cultural shift, collective action, and change.
The fall of the Berlin Wall in November 1989 and, more recently, the Arab Spring are clear examples of this dynamic.
Similarly, the example of the Beery twins shows us that an alternative to symptom-based medicine can be realized: the advent of genomics technology can change not just what is known, but, more importantly, how we think of ourselves.
But, in order to build the disease networks of tomorrow, we will need to move beyond the current linear approaches to science and to how scientists work.
We all like a good story that unfolds in a straightforward way, but the story of disease plays out across a poly-nodal information network, similar to what an air traffic controller might track in the skies above a major airport. Biomedical researchers’ “lock and key” and linear-pathway representations are incomplete, and should be supplemented with disease maps that can now be built using molecular data.
We must also build the infrastructure and cultivate the relationships needed to share disease maps with basic researchers, practicing doctors, drug developers, and even the public at large.
And that could prove to be even more difficult, because the current closed nature of the medical-information system and its self-directed incentive structure block such sharing.
Patents, trademarks, and competition for resources (people, money, and accolades) seal off information and prevent molecular data from being analyzed and shared.
Rewards in biomedical research go to “solo workers,” and do nothing to acknowledge the work that can be done only by multi-functional groups.
Despite these imposing obstacles to progress, there are reasons to believe that a cultural shift is afoot: researchers from geographically distant labs are forming non-traditional “federations” to combine their data sets, work on them collaboratively, and post the results for other scientists to analyze.
And public-private partnerships between drug developers, basic researchers, and patient groups that share information pre-competitively (that is, with no or limited patent filings) are an increasingly popular way to translate scientific findings into potentially meaningful clinical benefits.
But a few successful federations, competitions, and partnerships may not be enough to transform biomedical research.
Disruptive change may be required, and here each of us can make a profound difference.
Patient groups are already organized; their members can report their symptoms online and self-enroll in clinical trials.
We can already obtain portions of our own genetic information and use it to make informed medical decisions, join existing patient groups, or create new ones.
We can provide our genetic samples to data-driven trials to learn about our likelihood to respond to particular therapies.
We can even organize to self-fund future studies or join only those studies that give us the legal right to say how and where our data are used.
In other words, patients can and should stop being the passive “sick” and actively engage to pressure clinicians, researchers, and drug developers to adapt or perish.
Democratized medicine represents the fullest flowering of the biomedical information revolution.
There are few worthier goals than a future in which citizen-patients are active participants in managing their own health.
जैवऔषधिकरण की क्रांति और प्रतिक्रिया
स्‍टैनफ़ोर्ड – पौधों से औषधियाँ प्राप्त करना कोई नई बात नहीं है। एस्पिरिन को पहली बार अठारहवीं सदी में विलो वृक्ष की छाल से अलग किया गया था। और मॉरफीन, कोडीन और रेशा संपूरक मेटाम्‍यूसिल जैसी कई अन्य साधारण औषधियाँ दुनिया भर की वनस्पतियों से परिशोधित करके बनाई जाती हैं।
अभी हाल ही में, वैज्ञानिकों ने ऐसी तकनीकें ईजाद की हैं जो इस प्रक्रिया को एक कदम आगे ले जाती हैं। इनमें आनुवंशिक अभियांत्रिकी के उपयोग द्वारा कृषि फसलों को उच्च गुणवत्तायुक्त औषधियों का संश्‍लेषण करने के लिए उत्प्रेरित जाता है। “जैवऔषधिकरण” नामक इस प्रौद्योगिकी की भारी संभावना लगभग 15 वर्ष पहले देखी गई थी जब केले, टमाटर और तंबाकू में पैदा किए गए टीकों और दवाओं के क्‍लीनिकल परीक्षण किए गए थे। दुर्भाग्‍यवश क़ानून बनानेवालों में जोखिम से बचने की भारी प्रवृत्ति के कारण इस मामले में कोई प्रगति नहीं हुई।
जैवऔषधिकरण का एक शुरूआती उदाहरण बायोटेक कंपनी वेंट्रिया बायोसाइंस द्वारा ऐसे धान का उत्‍पादन करना था, जिसमें दो मानव प्रोटीन, लैक्‍टोफेरिन और लाइसोज़ाइम शामिल थे। उगाई गई फसल की कटाई के बाद इसके दाने का प्रसंस्करण करके प्रोटीन का निष्‍कर्षण और परिशोधन किया जाता है और इसका उपयोग दस्तों के उपचार के लिए मौखिक खुराक के रूप में पुनर्जलीकरण घोल के तौर पर किया जाता है। यह विकासशील देशों में पाँच वर्ष से कम आयु के बच्‍चों के लिए दूसरे नंबर की संक्रमणकारी जानलेवा बीमारी है, इससे अधिक जानलेवा केवल श्‍वसन संबंधी रोग हैं।
इस प्रोटीन की संरचना और क्रियात्‍मक गुण वही होते हैं जो कुदरती तौर पर स्‍तन के दूध में पाए जाते हैं, और इनका निष्‍कर्षण ठीक वैसे ही किया जाता है जैसे सामान्‍य तौर पर बैक्‍टीरिया और खमीर जैसे जीवों से औषधिवाले प्रोटीनों का निष्‍कर्षण करने के लिए किया जाता है। पेरू में किए गए एक अनुसंधान से पता चला है कि वेंट्रिया के धान निष्‍कर्षित प्रोटीनों से युक्त पुनर्जलीकरण घोल की मौखिक खुराक दस्तों की अवधि को घटाती है और इनकी पुनरावृत्ति की दर को कम करती है - यह लाभ विकासशील देशों के लोगों के लिए चमत्‍कार के समान है।
परंतु क़ानून बनानेवाले चमत्‍कारों को रोक सकते हैं, और रोजाना रोकते ही रहते हैं। सन 2010 में जब वेंट्रिया ने यू्.एस. खाद्य एवं औषधि प्रशासन से यह स्वीकार करने के लिए अनुरोध किया था कि इन प्रोटीनों को “सामान्‍यत: सुरक्षित माना जाता है” (यह एक कानूनी जुमला है), तो उसे इसका कोई जवाब नहीं मिला। कंपनी एफ.डी.ए. की स्वीकृति के बिना इस उत्‍पाद का विपणन करने की इच्‍छुक नहीं थी, अत: यह औषधि अनुपलब्‍ध रही, और यह बहुत दुःख की बात थी कि विकासशील देशों के बच्चों को एक जीवन-रक्षक उपचार से वंचित रहना पड़ा।
यहाँ तक कि जैवऔषधिकृत पौधों के क्षेत्र परीक्षण को भी समस्‍याजनक पाया गया है। सन 2003 में यू.एस. कृषि विभाग ने औषधियाँ बनाने के लिए निर्मित फसलों का परीक्षण करने के लिए भारी भरकम नए नियमों की घोषणा कर दी। इन क़ानूनों का तथाकथित उद��देश्‍य खाद्य की आपूर्तियों को औषधियों के संदूषण से बचाना था, विशेष रूप से उस स्थिति में जब उन्हें तैयार करने के लिए खाद्य फसलों का उपयोग किया जाता है। लेकिन खाद्य उद्योग की ये चिंताएं अतिरंजित हैं कि जैवऔषधिकृत पौधे उनके उत्‍पादों को दूषित कर सकते हैं। और वैसे भी जोखिम को कई तरीकों से कम किया जा सकता है, जाहिर तौर पर इसके लिए तंबाकू जैसे अ-खाद्य पौधों का उपयोग किया जा सकता है।
वस्‍तुत: यदि जैवऔषधिकृत पौधे खाद्य फसलों को संदूषित कर सकते हैं, तो भी उपभोक्‍ता जिस मात्रा में कॉर्न फ़्लैक्‍स, पास्‍ता या टोफू का इस्‍तेमाल करते हैं, उसमें संस्‍तुत औषधियों की हानिकारक मात्राएँ अत्‍यंत कम होंगी। जीन प्रवाह एक दीर्घकालिक प्रक्रिया है, जिसे किसान भली-भांति समझते हैं। वे सैकड़ों फसलें उगाते हैं, जिनमें सभी वस्‍तुत: भिन्न-भिन्न तकनीकों द्वारा आनुवंशिक रूप से उन्नत की गई होती हैं। इनका नतीजा यह है कि उन्‍होंने अपने व्‍यावसायिक कारणों से आवश्‍यकता पड़ने पर खेत में विरोधी परागण संबंधी संदूषण से बचने की सूक्ष्‍म रणनीतियाँ भी विकसित की हैं।
यदि कुछ फसलें संदूषित हो भी जाती हैं, तो भी अंतिम खाद्य उत्‍पाद में मानव स्‍वास्‍थ्‍य पर बुरा असर डालने के लिए पर्याप्त मात्रा में सक्रिय औषधि तत्‍वों के मौजूदगी की संभावना बहुत ही कम होगी। जैवऔषधिकृत पौधों को कटाई के बाद बड़े ढेर में मिलाने के बाद उस ढेर में औषधियाँ की सांद्रता अत्‍यंत कम हो जाएगी। उसके बाद इनके सक्रिय तत्‍व को पिसाई और अन्‍य प्रसंस्‍करणों, और फिर पकाए जाने के दौरान सलामत रहना होगा, और उसे मौखिक खुराक में भी सक्रिय रहना होगा, जबकि प्रोटीन औषधियाँ अकसर सक्रिय नहीं रह पाती हैं, क्‍योंकि वे पेट में जाकर पच जाती हैं।
यह सब घटित होने की संभावना बेशक शून्‍य नहीं है। लेकिन अनेक कारकों का संयोजन, जिसमें प्राकृतिक चयन, किसानों का अपने व्‍यावसायिक हितों को ध्यान में रखना, और जवाबदेही संबंधी सरोकार इस संभावना के प्रतिकूल हैं। इसमें कठिनाइयों की सूची बहुत लंबी है, और इसका असर लगभग यकीनी तौर पर अत्‍यंत कम होगा। जब आप इसकी तुलना औषधि उद्योग की भावी विशाल सफलता, या कम-से-कम उच्‍च मूल्‍य के यौगिकों का उत्‍पादन कम लागत की किसी नई विधि से करेंगे, तो कानून बनानेवालों का असंभावित घटनाओं के घटने संबंधी पूर्वाग्रह गलत सिद्ध होता दिखाई देगा।
जैवऔषधिकरण हमें बहुत कुछ दे सकता है। परंतु यदि हम जैसा बोएंगे वैसा ही काटना पड़ेगा, तो हमें दुनियाभर के क़ानून बनानेवालों से तर्कसंगत और विज्ञान-आधारित नीतियों की अपेक्षा करनी होगी। अफसोस की बात है कि नोबल पुरस्‍कार प्राप्त अर्थशास्‍त्री स्‍वर्गीय मिल्‍टन फ्राइडमैन की एक उक्ति उद्धृत करनी पड़ रही है कि यह वैसा ही है जैसे हम अपनी बिल्लियों से भौंकने की उम्‍मीद करें।
Biotech\u0027s Brave Old World
Skeptics about agricultural biotechnology lambaste it as unproven, untested, unnatural, and uncontrollable.
Nothing could be farther from the truth.
On the contrary, neither biotechnology nor genetic engineering are new, and consumers, government, and industry all have had long, extensive, and positive experience with both.
Early biotechnology--the application of biological systems to technical or industrial processes--dates to 6000 B.C., when the Babylonians used specialized microorganisms in fermentation to brew alcoholic beverages.
Genetic engineering can be dated from man's recognition that animals and crop plants can be selected and bred to enhance desired characteristics.
Early biologists and agriculturists carried out selection for desired traits, generating poorly understood changes in the organisms' genetic material.
Put another way, "nature" didn't give us seedless grapes, the tangelo (a tangerine-grapefruit hybrid), and fungus-resistant strawberries: farmers and plant breeders did.
During the past half-century, better understanding of genetics at the molecular level has added to the sophistication of the genetic improvement of all manner of organisms.
Opponents of biotech repeatedly raise dire warnings of the movement of "rogue genes" between the modified crop and wild (or domesticated) relatives.
But, at the risk of mixing metaphors, this is a red herring.
Gene flow is ubiquitous.
All crop plants have relatives somewhere, and some gene flow commonly occurs if the two populations are grown close together.
Gene flow from wild relatives to crop plants may even be encouraged by subsistence farmers to maintain the broad genetic base of the varieties that they plant using seed harvested from an earlier crop.
Such gene flow does not occur when farmers buy their seeds from seed producers, of course, but in that case gene flow in the other direction is still possible, with genes from the cultivated crop ending up in the wild relative.
That is most likely if genes from the crop confer a selective advantage on the recipient, an occurrence that is uncommon with gene-splicing, where most often the added gene places the recipient at a natural di sadvantage.
The worst-case scenario would be gene transfer from plants engineered for enhanced resistance to certain herbicides.
Once the gene has been transferred to the wild relative, there will be a strong selection pressure to maintain it there if the same herbicide is used, making the weedy wild relatives more difficult to control.
But even this scenario raises no issues of ecological or food safety.
For if the use of one herbicide were compromised, farmers would simply use another.
Gene transfer is an age-old concern for farmers.
Growing hundreds of crops, virtually all of which have been genetically improved, the practitioners of "conventional" agriculture in North America meticulously developed strategies for preventing pollen cross-contamination in the field--when and if it is necessary for commercial reasons.
A good example is Canola--the genetically improved rapeseed developed by Canadian plant breeders a half-century ago.
The original rapeseed oil was harmful when ingested because of high levels of erucic acid.
After conventional plant breeding led to the development of rapeseed varieties with low concentrations of erucic acid, canola oil became the most commonly consumed oil in Canada.
But high-erucic acid rapeseed oil is still used as a lubricant and plasticizer.
So the high- and low-erucic acid varieties of rapeseed plants must be carefully segregated in the field and thereafter.
Canadian farmers and processors accomplish this routinely and without difficulty.
These applications of conventional biotechnology, or genetic engineering, represent monumental scientific, technological, commercial, and humanitarian successes.
But the techniques they were relatively crude and recently have been supplemented--and in many cases replaced--by "the new biotechnology," a set of enabling techniques that enable genetic modification at the molecular level.
The prototype of these techniques, variously called gene-splicing or genetic modification ("GM"), is a more precise, better understood, and more predictable method for altering genetic material than was possible previously.
An authoritative 1989 analysis of genetic technologies by the US National Research Council summarized the scientific consensus: "With classical techniques of gene transfer, a variable number of genes can be transferred, the number depending on the mechanism of transfer; but predicting the precise number or the traits that have been transferred is difficult, and we cannot always predict the [traits] that will result. With organisms modified by molecular methods, we are in a better, if not perfect, position to predict [their traits]."
The desired "product" of gene-splicing may be the engineered organism itself--a bacteria to clean up oil spills, a weakened virus used as a vaccine, or a papaya tree that resists viruses--or it may be a biosynthetic product of the cells, such as human insulin produced in bacteria, or oil expressed from seeds.
Gene-spliced plants have for several years been grown worldwide on more than 100 million acres annually.
More than two-thirds of processed foods in the US contain ingredients derived from gene-spliced organisms.
There has not been a single mishap that resulted in injury to a single person or ecosystem.
Thus, both theory and experience confirm the extraordinary predictability and safety of gene-splicing technology and its products.
The new gene-splicing techniques have yielded many important new research tools and commercial products, and have only begun to change the way we do biological research and to increase the choices available to farmers, food producers, physicians, and consumers.
But they are merely an extension, or refinement, of the kinds of genetic modification that preceded the era of "new bio-technology."
So welcome to Biotech's Brave Old World.
The Power to Develop
CANBERRA – Trade-offs are an inherent part of life.
We all recognize this from our private budgets.
To fix the roof, we may have to accept a less extravagant summer vacation.
When we pick a cheaper wine, we can splurge on dessert.
Trade-offs also pervade environmental policy: Cutting more of one pollutant, for example, leaves fewer resources to address other issues.
For example, coal is phenomenally polluting, but it also provides for cheap and reliable power, which drives development. Over the past 30 years, China has lifted 680 million people out of poverty, mostly through the use of coal.
The average Chinese has become more than 13 times richer.
At the same time, Beijing and numerous other Chinese metropolises are experiencing debilitating smog, reminiscent of London in the 1950’s.
About 1.2 million Chinese die prematurely each year because of outdoor air pollution.
Measurements from Beijing show that upwards of 16% of the air pollution comes from coal.
The World Bank estimates that China’s total annual air-pollution costs – based on what Chinese themselves indicate they are willing to pay to reduce their risk of dying – could be as high as 4% of GDP.
And yet the Chinese trade-off has been phenomenally beneficial.
In 1982, the average Chinese earned $585 a year; last year, she earned $7,958.
Meanwhile, the annual per capita environmental cost is $318.
So, not surprisingly, most other developing countries would gratefully seize the opportunity to replicate China’s growth pattern – including its pollution.
Of course, the Chinese could do more to cut air pollution.
It is estimated that meeting the World Health Organization’s interim standards could reduce damages by $80 per capita.
But that pales in comparison to the $600 increase in per capita income in 2013.
Nonetheless, many who live in rich countries confidently declare that this trade-off is not in the interest of the poor.
The United States, the United Kingdom, and other European countries announced this year that they will not support international finance for coal-fired power plants in developing countries.
These countries abstained in 2010 when the World Bank helped finance South Africa’s Medupi coal-fired power plant.
Today, they would vote it down.
But Medupi will provide 10% of South Africa’s electricity and prevent rolling blackouts.
As the South African finance minister, Pravin Gordhan, explained, “to sustain the growth rates we need to create jobs, we have no choice but to build new generating capacity – relying on what, for now, remains our most abundant and affordable energy source: coal.”
The US government even acknowledged that, without a coal-fired power plant, South Africa’s “economic recovery will suffer, adversely impacting electrification, job creation, and social indicators.”
Energy poverty is even more acute for the three billion people – almost half of the world’s population – who burn dung, cardboard, and twigs indoors to cook and keep warm.
The WHO estimates that while outdoor air pollution in developing-country cities may be ten times higher than in advanced-country cities, average indoor air pollution, caused by burning wood and dung, is a hundred times higher.
Indeed, indoor air pollution kills 3.5 million people each year, making it the world’s deadliest environmental problem.
The world’s three billion energy-poor people need cheap electricity to cook and keep warm.
And, for the foreseeable future, that electricity will be generated by fossil fuels.
Some environmental campaigners argue for cleaner stoves.
But, while this might be part of the solution, it is essentially telling the poor to live with slightly less polluting open fires in their homes.
Moreover, studies indicate that even significant air-pollution reduction starting at high levels will have only a minor impact.
Others claim that renewables are the way to go.
Green energy, especially wind, can indeed help African countries, for example, get some electricity to remote, rural areas; but the grid will do the most good for the most people.
According to a recent World Bank study, distributed renewable energy “will be the lowest cost option for a minority of households in Africa, even when likely cost reductions over the next 20 years are considered.” Popular solar lights cost almost $2 per kWh.
Using hydro, gas, and oil, the grid cost for the main population centers in Ethiopia, Ghana, and Kenya will likely be $0.16-25 per kWh.
In South Africa, where coal powers 90% of electricity, the cost is just $0.09 per kWh.
True, electricity from coal will cause extra air pollution.
But pollution from indoor air pollution, which would disappear with electrification, accounts for 16% of outdoor air pollution.
Even assuming (unrealistically) that coal produces all of the world’s air pollution, we could generate 250 kWh/year with coal for every one of the three billion energy-poor people and still end up with lower air pollution.
Moreover, it is easy and fairly cheap to cut coal pollution 90% or more with scrubbers.
For many opponents of coal, the issue is global warming. According to Christiana Figueres, the United Nations climate chief, coal-fueled development has “an unacceptably high cost to human and environmental health.”
She argues that we need to close 75% of the planet’s coal-fired power plants, including all of South Africa’s, because they emit too much CO2. Al Gore’s climate adviser, James Hansen, argues that if we allow developing countries to “come up to the level of the developed world, then the planet is done for.”
Yes, the world needs to address global warming (mainly through higher investments in green research and development, and by promoting exploitation of cheap, less-polluting shale gas).
But global warming will cause damage worth possibly 1-5% of GDP by the end of the century, when the UN expects developing-world incomes to have risen by 1,400-1,800%.
Meanwhile, poverty is killing millions right now, with an impact on global GDP that is likely an order of magnitude higher.
And too many people, however well-intentioned, are unwilling to acknowledge the tradeoffs needed to improve poor people’s lives.
The Realism of Global Optimism
PRAGUE – Read a newspaper or watch the evening news, and the world always seems to be getting worse.
One problem after another is put under a spotlight.
The more death, destruction, and despair, the better.
As one Danish journalism textbook puts it: “A good story is usually bad news.”
Only occasionally do we get uplifting, things-are-getting-better stories.
When we do, they feel like a guilty pleasure.
As a result, we often think that the world is in worse shape than it is – even if we think our own lives are improving.
Consider this: Since 1978, American consumers have been asked whether their current financial situation is better or worse than it was a year earlier.
Over the past 25 years, an average of 38% have said they are doing better, while 32% have said they are doing worse.
But, when asked the same question about the overall US economy, an average of 47% have said it is doing worse, compared to 38% who think it is doing better.
More people think their lives are improving, while others are doing worse, probably because of journalists’ persistent bias in favor of bad news.
The phenomenon is not limited to the United States.
Since 1977, Gallup International has asked people around the world whether they believe their lives will be better next year than they were the year before.
For 2014, almost 50% of those surveyed said that their lives will be better, with just 20% saying they will be worse off.
Yet, asked for their opinion of how the world economy will fare, the score is almost even, with 32% believing that it will be better, and 30% that it will be worse.
So it is worth stepping back and recognizing that many indicators point to a world that is improving.
New data from the World Bank show that the proportion of extremely poor people has more than halved over the last 30 years, from 42% of the global population in 1981 to 17% in 2010.
While 1.2 billion people in the developing world still live on less than $1.25 per day – a problem that we certainly must address – the rate of extreme poverty has never been lower.
Economists estimate that in 1820, more than 80% of all people were extremely poor.
Similarly, consider the amazing improvements in education.
Illiteracy today still afflicts 20% of the world’s population, but that is down sharply from an estimated 70% in 1900.
In the prosperous West, rapid increases in literacy were achieved early in the twentieth century.
In developing countries, similarly large (and continuing) gains were made from 1970 to 2000, with China recording the biggest improvement.
The costs of poor education are substantial.
For example, Pakistan and South Korea started with about the same level of education and income in 1950.
Today, the average South Korean has 12 years of education, whereas the average Pakistani has fewer than six.
South Korea’s per capita income grew 23-fold over this period, compared to Pakistan’s three-fold growth.
Together with the Copenhagen Consensus, economists have attempted to assess the cost of illiteracy.
We estimate that if there had been no illiteracy in 1900, the world would have been $240 billion richer (in inflation-adjusted terms), equivalent to about 12% of global GDP at the time.
So, the global illiteracy problem in 1900 can be said to have cost the world 12% of GDP.
Today, the cost of global illiteracy is down to 7% of GDP.
By 2050, when illiteracy will reach about 12%, the cost will have dwindled to just 3.8% of GDP.
Likewise, war carries a high economic and human cost.
But, while the images of it that we see are more immediate and vivid than ever, our perception of ubiquitous conflict is wrong.
In the twentieth century, conflict killed 140 million people, including 78-90 million in the two world wars.
The good news, which is not often publicized (precisely because it is good), is that scenarios in which military spending is higher, the same, or lower in the future suggest that the high military costs of the twentieth century have been turned into what looks like a permanent peace dividend.
World War I cost about 20% of global GDP, and WWII cost almost twice as much.
When examining the cost of conflict, the Copenhagen Consensus economists estimate the actual costs of global military expenditure.
If one also takes into account the lives lost in battle, the estimates increase by about 50%.
According to these estimates, annual military costs in the twentieth century averaged about 5% of GDP.
Yet, since the Korean War peak of 7%, global costs have declined steadily, reaching 3.5% in 1980 and about 1.7% today.
Even a pessimistic outlook suggests an increase only to about 1.8% by 2050; under a more optimistic scenario, military costs could decline further, to 1.6% of GDP.
There are still plenty of problems in the world, as the news media point out every day.
And we do need to focus on eliminating poverty, stamping out illiteracy, and promoting peace.
But we also need to remember that the world is a better place overall than we think.
The Davos Apocalypse
FORT LAUDERDALE – At the World Economic Forum’s annual meeting in Davos last month, leading participants called for a rapid shift to cleaner energy to tackle climate change.
There is something unsettling about the global power elite jetting into an exclusive Swiss ski resort and telling the rest of the world to stop using fossil fuels.
The apocalyptic bombast is even more disturbing.
According to Angel Gurría, Secretary-General of the OECD, “our planet is warming dangerously,” and we need to act now “to avoid catastrophe”; the United Nations climate chief, Christiana Figueres, maintains that global warming means that “the world economy is at risk.”
Former UN Secretary-General Kofi Annan takes the prize for the most extreme rhetoric, claiming that not curbing global warming is “a terrible gamble with the future of the planet and with life itself.”
Yet, the rhetoric is unconvincing.
Yes, global warming is real and man-made.
But creating panic and proposing unrealistic policies will not help in tackling the problem.
Both Annan and Gurría cited Typhoon Haiyan in the Philippines last November as evidence of increased climate-change-related damage.
Never mind that the latest report by the UN Intergovernmental Panel on Climate Change (IPCC) found that “current datasets indicate no significant observed trends in global tropical cyclone frequency over the past century” and reported “low confidence” that any changes in hurricanes in recent (or future) decades had anything to do with global warming.
Annan and Gurría also neglected to note that global Accumulated Cyclone Energy, an index for total hurricane activity, is hovering at the lowest values seen since the 1970’s.
Indeed, the trend for strong hurricanes around the Philippines has declined since 1951.
Similarly, Gurría tells us that Hurricane Sandy, which slammed into New York City in 2012, is an example of inaction on climate change, costing the United States “the equivalent of 0.5% of its GDP” each year.
In fact, the US currently is experiencing the longest absence of intense landfall hurricanes since records began in 1900, while the adjusted damage cost for the US during this period, including Hurricane Sandy, has fallen slightly.
Figueres claims “that current annual losses worldwide due to extreme weather and disasters could be a staggering 12% of annual global GDP.” But the study she cites shows only a possible loss of 1-12% of GDP in the future, and this is estimated not globally but within just eight carefully selected, climate-vulnerable regions or cities.
By contrast, according to the IPCC, “long-term trends in economic disaster losses adjusted for wealth and population increases have not been attributed to climate change.”
On the contrary, the bulk of peer-reviewed economic evidence indicates that, up to around 2050-2070, the net global economic impact of rising temperatures is likely to be positive.
Although global warming will create costs stemming from more heat-related deaths and water stress, they will be outweighed by the benefits from many fewer cold-related deaths and higher agricultural productivity from higher levels of CO2.
Global warming is a long-term problem.
Most models indicate that the cost toward the end of the century will be 1-5% of world GDP.
This is not a trivial loss; but nor does it put “the world economy at risk.”
For comparison, the IPCC expects that by the end of the century, the average person in the developing world will be 1,400-1,800% richer than today.
Such incorrect statements by leading officials reinforce wasteful policies based on wishful thinking.
Figueres sees “momentum growing toward” climate policies as countries like China “reduce coal use.”
In the real world, China accounts for almost 60% of the global increase in coal consumption from 2012 to 2014, according to the International Energy Agency.
While Figueres lauds China for dramatically increasing its solar-power capacity in 2013, the increase in China’s reliance on coal power was 27 times greater.
Figueres’s weak grasp on the facts has led her not only to conclude that China is “doing it right” on climate change, but also to speculate that China has succeeded because its “political system avoids some of the legislative hurdles seen in countries including the US.”
In other words, the UN’s top climate official seems to be suggesting that an authoritarian political system is better for the planet.
The fact remains that global wind and solar power usage in 2012 cut, at most, 275 million tons of CO2, while soaking up $60 billion in subsidies.
With the electricity worth possibly $10 billion, the average cost of cutting a ton of CO2 is about $180.
The biggest peer-reviewed estimate of the damage cost of CO2 is about $5 per ton.
This means that solar and wind power avoid about $0.03 of climate damage for every dollar spent.
Compare this to smarter technological solutions.
In the short run, the US shale-energy revolution has replaced high-polluting coal with cheaper, cleaner natural gas.
This has cut about 300 million tons of US emissions – more than all the world’s solar and wind power combined – and at the same time has profited Americans by saving them $100 billion in energy costs.
In the long run, current investment in green research and development will help drive the price of future renewable energy below that of fossil fuels, enabling a choice that is both environmentally and economically sound.
In the meantime, even dramatic cuts in CO2 emissions will have very little impact on hurricanes 50-100 years from now.
Lifting billions of people out of poverty, however, would not only be intrinsically good; it would also make societies much more resilient in the face of extreme weather, whether caused by global warming or not.
Unfortunately, as we saw at Davos, the global climate debate is polluted with myths and wishful thinking.
If we want to do more good at lower cost, we should start by cleaning it up.
The Environment of Poverty
COPENHAGEN – Despite gains in life expectancy, expanded access to education, and lower rates of poverty and hunger, the world has a long way to go to improve the quality of people’s lives.
Almost a billion people still go to bed hungry, 1.2 billion live in extreme poverty, 2.6 billion lack access to clean drinking water and sanitation, and almost three billion burn harmful materials inside their homes to keep warm.
Each year, ten million people die from infectious diseases like malaria, HIV, and tuberculosis, along with pneumonia and diarrhea.
Lack of water and sanitation is estimated to cause at least 300,000 deaths each year.
Malnourishment claims at least 1.4 million children’s lives.
Poverty is one of the main killers.
It is why children do not receive proper nutrition and live in neighborhoods with unclean water and inadequate sanitation.
And it is why an entirely preventable disease like malaria kills 600,000 people each year; many are too poor to buy drugs and bed nets, while governments are often too poor to eradicate the mosquitos that carry the disease or contain and treat outbreaks when they occurs.
But some of the most lethal problems are environmental.
According to the World Health Organization, about seven million deaths each year are caused by air pollution, with the majority a result of burning twigs and dung inside.
Previous generations’ use of lead in paints and gasoline is estimated to cause almost 700,000 deaths annually.
Ground-level ozone pollution kills more than 150,000 people per year, while global warming causes another 141,000 deaths.
Naturally occurring radioactive radon that builds up inside homes kills about 100,000 people every year.
Here, too, poverty plays a disproportionate role.
No one lights a fire every night inside their house for fun; they do so because they lack the electricity needed to stay warm and to cook.
While outdoor air pollution is partly caused by incipient industrialization, this represents a temporary tradeoff for the poor – escaping hunger, infectious disease, and indoor air pollution to be better able to afford food, health care, and education.
When countries become sufficiently rich, they can afford cleaner technology and begin to enact environmental legislation to reduce outdoor air pollution, as we now see in Mexico City and Santiago, Chile.
One of the best anti-poverty tools is trade.
China has lifted 680 million people out of poverty over the past three decades through a strategy of rapid integration into the global economy.
Extending free trade, especially for agriculture, throughout the developing world is likely the single most important anti-poverty measure that policymakers could implement this decade.
But it is also encouraging that the world is spending more money to help the world’s poor, with development aid almost doubling in real terms over the past 15 years.
This has boosted resources to help people suffering from malaria, HIV, malnutrition, and diarrhea.
And, though the data are somewhat inconsistent, it is clear that the world is spending more on the environment.
Aid for environmental projects has increased from about 5% of measured bilateral aid in 1980 to almost 30% today, bringing the annual total to about $25 billion.
That sounds great.
The world can increasingly focus aid on the main environmental problems – indoor and outdoor air pollution, along with lead and ozone pollution – that cause almost all environment-related deaths.
Unfortunately, that is not happening.
Almost all environmental aid – about $21.5 billion, according to the OECD – is spent on climate change.
There is no doubt that global warming is a problem that we should tackle smartly (though our track record so far has not been encouraging).
But doing so requires cheap green energy, especially in the developed world, not spending aid money to reduce developing countries’ emissions of greenhouse gases like CO₂.
Indeed, there is something fundamentally immoral about the way we set our priorities.
The OECD estimates that the world spends at least $11 billion of total development money just to cut greenhouse-gas emissions.
A large part of this is through renewable power like wind, hydro, and solar.
For example, Japan recently granted $300 million of its development aid to subsidize solar and wind power in India.
If all $11 billion were spent on solar and wind in the same proportion as current global spending, global CO₂ emissions would fall by about 50 million tons each year.
Run on a standard climate model, this would reduce temperatures so trivially – about 0.00002oC in the year 2100 – that it is the equivalent of postponing global warming by the end of the century by a bit more than seven hours.
Of course, climate campaigners might point out that the solar panels and wind turbines will give electricity – albeit intermittently – to about 22 million people.
But if that same money were used for gas electrification, we could lift almost 100 million people out of darkness and poverty.
Moreover, that $11 billion could be used to address even more pressing issues.
Calculations from the Copenhagen Consensus show that it could save almost three million lives each year if directed toward preventing malaria and tuberculosis, and increasing childhood immunization.
It could also be used to increase agricultural productivity, saving 200 million from starvation in the long run, while ameliorating natural disasters through early-warning systems.
And there would be money left over to help develop an HIV vaccine, deliver drugs to treat heart attacks, provide a Hepatitis B vaccine to the developing world, and prevent 31 million children from starving each year.
Is it really better to postpone global warming by seven hours?
Even if we continue spending $11 billion to avoid an increase in greenhouse gases for a hundred years, we would postpone global warming by less than one month by the end of the century – an achievement with no practical impact for anyone on the planet.
Why does the world consciously choose to help so ineffectively?
Could it be that environmental aid is not primarily about helping the world, but about making us feel better about ourselves?
Winds of Vanity
COPENHAGEN – Copenhagen, Denmark’s capital, wants to be the world’s first CO2-neutral city by 2025.
But, as many other well-meaning cities and countries have discovered, cutting CO2 significantly is more difficult than it seems, and may require quite a bit of creative accounting.
More surprisingly, Copenhagen’s politicians have confidently declared that cutting CO2 now will ultimately make the city and its citizens wealthier, with today’s expensive green-energy investments more than paying off when fossil-fuel prices rise.
But how can deliberately limiting one’s options improve one’s prospects?
These sound more like the arguments of green campaigners – and they are most likely wrong.
The first challenge that Copenhagen faces in reaching its zero-emissions goal is the lack of cost-effective alternatives for some sources of CO2, particularly automobiles.
Denmark already provides the world’s largest subsidy to electric cars by exempting them from its marginal 180% car-registration tax.
For the most popular electric car, the Nissan Leaf, this exemption is worth $85,000 (€63,000).
Yet, just 1,536 of Denmark’s 2.7 million cars are electric.
There is also the challenge inherent in wind-generated electricity: ensuring that the city can continue to run when the wind is not blowing.
To address this problem, Copenhagen has had to devise an electricity-generation strategy that enables it sometimes to run on coal-fired power when necessary, without creating net emissions.
The city’s plan is to build more than 100 wind turbines within the greater Copenhagen area and in the shallow waters around it.
With a combined output of 360 megawatts, which will feed electricity into the grid, these turbines will more than cover Copenhagen’s electricity needs – and the surplus can be used to offset the city’s remaining CO2 emissions, including from the city’s millions of non-electric cars.
Copenhagen’s success thus depends on the surrounding areas not aiming for CO2 neutrality.
After all, the whole accounting exercise works only if others are still using fossil fuels that Copenhagen’s unpredictable wind power can replace.
In this sense, Copenhagen is hogging the chance to feel righteous.
The city’s political leaders promise that this strategy for attaining carbon neutrality “provides an overall positive economic picture and will lead to economic benefits for Copenhageners” based on the expectation that prices for conventional energy sources like coal, oil, and gas will rise in the coming years.
But the often-heard justification for this assumption – that humanity is rapidly depleting these scarce resources – is inconsistent with real-world events, as innovation has effectively expanded oil, gas, and coal reserves to unprecedented levels in recent years.
Consider Copenhagen’s wind-turbine plan, the single largest expected source of savings.
The total cost of construction and maintenance is projected to be $919 million.
Even assuming a very large carbon tax, this amounts to a rather paltry $142 million, meaning that the project’s value – $261 million in savings – stems largely from the $1.04 billion saved on electricity payments.
While that sounds impressive, it depends on a massive 68% increase in the price of fossil-fuel-produced electricity by 2030. And Copenhagen is not alone in making such assumptions; the United Kingdom’s Department of Energy & Climate Change estimates a 51% price increase by 2030.
It is likely that these projections are unrealistic.
Look at the long-term price trends of coal and gas, which power the vast majority of global electricity production.
Despite a recent increase, real coal prices have been trending downward since the 1950s.
In the United States, the shale-gas revolution, facilitated by the development of hydraulic fracturing (“fracking”), has brought prices to their lowest levels since natural gas gained prominence after the oil crises of the 1970s. With many more countries set to tap shale-gas reserves over the next decade, this downward trend will most likely continue, helping to lower the price of electricity generation further.
That is why Aurora Energy Research recently projected a significant decline in electricity prices for the next three decades.
Fracking technology has also enabled the US to tap its large shale-oil reserves, making it the world’s largest petroleum producer, ahead of Saudi Arabia.
Citigroup estimates that, by 2020, oil will cost just $75 per barrel, and the former head of international forecasting at the OECD suggests that the number could be closer to $50.
This is inconvenient for climate mandarins in the UK and Copenhagen alike, because it reduces clean energy’s allure.
Even if fossil-fuel-powered electricity prices remain constant, Copenhagen’s wind turbines become a net drain.
If Aurora’s forecast proves correct, Copenhagen’s wind project would become a massive failure, costing 50% more than the saved electricity is worth.
Instead of allowing politicians to spend public money on feel-good climate projects based on distant – and unreliable – predictions, citizens should encourage their leaders to invest those funds in clean-energy research and development, with the goal of making renewables inexpensive enough to overcome fossil fuels in the market.
Initiatives like Copenhagen’s, however wonderful they sound, are ultimately little more than costly vanity projects.
The Climate-Policy Trap
ROME – Today’s policies to combat climate change cost much more than the benefits they produce.
Unfortunately, bad political choices often make these policies even less cost-effective.
Consider the European Union’s 20-20 policy, which targets a 20% reduction in CO2 emissions below 1990 levels by 2020.
It is important to examine this approach, not only because the EU is pursuing the world’s largest and most ambitious climate policy, but also because other climate policies suffer from similar shortcomings.
The most cost-efficient way to achieve the 20% target would be to operate a single, EU-wide carbon-market, which would cost the EU about $96 billion annually by 2020.
But the benefits to the entire world would be much lower.
Indeed, the only peer-reviewed overview of EU climate policy estimates that it can avoid climate-related damage of about $10 billion per year.
So, for every dollar spent, the EU stands to avoid about ten cents of damage.
This does not mean that climate change is not important; it means only that the EU’s climate policy is not smart.
Over the course of this century, the ideal EU policy would cost more than $7 trillion, yet it would reduce the temperature rise by just 0.05oC and lower sea levels by a trivial nine millimeters.
After spending all that money, we would not even be able to tell the difference.
Advocates of the EU’s policy often argue that we should pursue such policies nonetheless, because there is a risk that global warming will be much more severe than currently expected.
But, though this argument is valid in principle, economic models show that this risk has only a moderate effect on the best policy.
Moreover, the absence of any temperature rise over the past 10-17 years has made such worse-than-expected outcomes extremely unlikely.
The real risk concerns the potential for bad political choices to make climate policies worse than necessary.
The EU did not just implement a single carbon market in order to meet its target for CO2 emissions.
Instead, the EU made a bad deal a lot costlier through a host of partly contradictory policies.
For example, the EU demanded that renewables like wind and solar account for 20% of energy supplies by 2020, though this is by no means the cheapest way to cut emissions.
In fact, putting up a wind turbine cuts no extra CO2, because total emissions are already capped under the EU-wide carbon-trading scheme.
It simply means that when Great Britain installs a wind turbine, it becomes cheaper to burn coal in Portugal or Poland.
Taking into account such poor policies and averaging all macroeconomic models, the EU is more likely to pay around $280 billion per year to avert $10 billion in damage.
In other words, the poor design of EU climate policies triples the cost and prevents only three cents of climate damage per dollar spent.
But it gets worse, because these models still assume that the EU picks the cheapest renewables to fulfill its requirements.
Instead, most EU countries give higher subsidies to the most costly renewables.
For example, cutting a ton of CO2 with on-shore wind turbines in Germany probably costs about $35, avoiding about 14 cents of climate damage per dollar.
But offshore wind turbines cost about $150 per ton of CO2, avoiding just three cents of climate damage per dollar.
Biofuels are even less efficient, costing more than $300 per ton of CO2 avoided, while doing just over one cent of good per dollar.
And solar takes the absolute prize, costing more than $800 per ton of CO2 to do less than a cent of good per dollar spent.
These prices are not unique to Europe.
China pays $38 per ton of CO2 avoided with wind power, for example, while the US pays around $600 for cutting a ton of CO2 with biofuels.
Moreover, when the EU decides to cut its domestic emissions, part of the reduction simply migrates elsewhere.
If making a product in the EU costs more because of higher energy costs, the product will likely be made somewhere else, where energy is cheaper, and then imported into the EU.
In fact, new studies show that 38% of the EU carbon cuts leak elsewhere, meaning that European climate policy avoids not three cents of climate damage per dollar spent, but less than two.
From 1990 to 2008, the EU cut its emissions by about 270 million metric tons of CO2.
But it turns out that the increase in imports from China alone implied an almost equal volume of extra emissions outside the EU.
Essentially, the EU had simply shipped part of its emissions offshore.
Finally, the negative effects of poor climate policies are not just financial.
Biofuels, for which the EU alone is now paying more than $10 billion annually to do less than one cent of good for every dollar spent, also take up fields that otherwise would have produced food.
That means that food production moves elsewhere, often to farmland created by cutting down forests, which releases more CO2 and damages biodiversity.
It also drives up food prices, which so far has pushed at least 30 million poor people into starvation, with another 40-130 million expected to be starving by 2020.
We need a smarter approach to tackling climate change.
Rather than relying on cutting a few tons of incredibly overpriced CO2 now, we need to invest in research and development aimed at innovating down the cost of green energy in the long run, so that everyone will switch.
For now, our current climate policies are poor – and our politicians consistently find ways to make them even poorer.
They may please farmers and other interest groups, but overall they simply drive up costs and reduce already-minimal benefits.
A Better World Is Here
COPENHAGEN – For centuries, optimists and pessimists have argued over the state of the world.
Pessimists see a world where more people means less food, where rising demand for resources means depletion and war, and, in recent decades, where boosting production capacity means more pollution and global warming.
One of the current generation of pessimists’ sacred texts, The Limits to Growth, influences the environmental movement to this day.
The optimists, by contrast, cheerfully claim that everything – human health, living standards, environmental quality, and so on – is getting better.
Their opponents think of them as &nbsp;“cornucopian” economists, placing their faith in the market to fix any and all problems.
But, rather than picking facts and stories to fit some grand narrative of decline or progress, we should try to compare across all areas of human existence to see if the world really is doing better or worse.
Together with 21 of the world’s top economists, I have tried to do just that, developing a scorecard spanning 150 years.
Across ten areas – including health, education, war, gender, air pollution, climate change, and biodiversity – the economists all answered the same question: What was the relative cost of this problem in every year since 1900, all the way to 2013, with predictions to 2050.
Using classic economic valuations of everything from lost lives, bad health, and illiteracy to wetlands destruction and increased hurricane damage from global warming, the economists show how much each problem costs.
To estimate the magnitude of the problem, it is compared to the total resources available to fix it.
This gives us the problem’s size as a share of GDP.
And the trends since 1900 are sometimes surprising.
Consider gender inequality.
Essentially, we were excluding almost half the world’s population from production.
In 1900, only 15% of the global workforce was female.
What is the loss from lower female workforce participation?
Even taking into account that someone has to do unpaid housework and the increased costs of female education, the loss was at least 17% of global GDP in 1900.
Today, with higher female participation and lower wage differentials, the loss is 7% – and projected to fall to 4% by 2050.
It will probably come as a big surprise that climate change is expected to be mostly an increasing net benefit – rising to about 1.5% of GDP per year – in the period from 1900 to 2025.
This is because global warming has mixed effects; for moderate warming, the benefits prevail.
On one hand, because CO2 works as a fertilizer, higher levels have been a boon for agriculture, which comprises the biggest positive impact, at 0.8% of GDP.
Likewise, moderate warming prevents more cold deaths than the number of extra heat deaths that it causes.
It also reduces demand for heating more than it increases the costs of cooling, implying a gain of about 0.4% of GDP.
On the other hand, warming increases water stress, costing about 0.2% of GDP, and negatively affects ecosystems like wetlands, at a cost of about 0.1%.
As temperatures rise, however, the costs will rise and the benefits will decline, leading to a dramatic reduction in net benefits.
After the year 2070, global warming will become a net cost to the world, justifying cost-effective climate action now and in the decades to come.
Yet, to put matters in perspective, the scorecard also shows us that the world’s biggest environmental problem by far is indoor air pollution.
Today, indoor pollution from cooking and heating with bad fuels kills more than three million people annually, or the equivalent of a loss of 3% of global GDP.
But in 1900, the cost was 19% of GDP, and it is expected to drop to 1% of GDP by 2050.
Health indicators worldwide have shown some of the largest improvements.
Human life expectancy barely changed before the late eighteenth century.
Yet it is difficult to overstate the magnitude of the gain since 1900: in that year, life expectancy worldwide was 32 years, compared to 69 now (and a projection of 76 years in 2050).
The biggest factor was the fall in infant mortality.
For example, even as late as 1970, only around 5% of infants were vaccinated against measles, tetanus, whooping cough, diphtheria, and polio.
By 2000, it was 85%, saving about three million lives annually – more, each year, than world peace would have saved in the twentieth century.
This success has many parents.
The Gates Foundation and the GAVI Alliance have spent more than $2.5 billion and promised another $10 billion for vaccines.
Efforts by the Rotary Club, the World Health Organization, and many others have reduced polio by 99% worldwide since 1979.
In economic terms, the cost of poor health at the outset of the twentieth century was an astounding 32% of global GDP.
Today, it is down to about 11%, and by 2050 it will be half that.
While the optimists are not entirely right (loss of biodiversity in the twentieth century probably cost about 1% of GDP per year, with some places losing much more), the overall picture is clear.
Most of the topics in the scorecard show improvements of 5-20% of GDP.
And the overall trend is even clearer.
Global problems have declined dramatically relative to the resources available to tackle them.
Of course, this does not mean that there are no more problems.
Although much smaller, problems in health, education, malnutrition, air pollution, gender inequality, and trade remain large.
But realists should now embrace the view that the world is doing much better.
Moreover, the scorecard shows us where the substantial challenges remain for a better 2050.
We should guide our future attention not on the basis of the scariest stories or loudest pressure groups, but on objective assessments of where we can do the most good.
The Trouble with Universal Education
COPENHAGEN – With the deadline for the United Nations Millennium Development Goals fast approaching, the world is gearing up to establish a new set of goals for the next 15 years.
Given limited resources, policymakers and international organizations must ask themselves: Where can we do the most good?
Should a larger share of the $2.5 trillion that will be directed toward development aid over that period, and of developing-country budgets, be directed toward health, the environment, food, water, or education?
With these questions in mind, the Copenhagen Consensus (which I direct) asked some of the world’s top economists to assess the economic, social, and environmental costs and benefits of many different targets.
Education for all was among the goals that were assessed.
The importance of education is indisputable.
The problem is that the international community’s credibility in promising universal education has been compromised; it has pledged to achieve this goal in at least 12 UN-sponsored declarations since 1950.
For example, UNESCO promised in 1961 that, by 1980, primary education in Africa would be “universal, compulsory, and free.”
Yet, when the time came, about half of primary-school-aged children in Africa were still not attending school.
When target dates pass, the goals are simply reformulated on a new timeline, and more money is thrown at the problem, with little consideration of how, exactly, it should be spent.
And, in fact, the goal of ensuring primary and secondary education for all could well end up costing more than the entire global aid budget for education.
With 60 million children still out of school, the international community should not simply postpone the same universal-education target until 2030.
Instead, it is time to abandon this unrealistic goal in favor of an achievable, targeted, and cost-effective approach.
As the economist George Psacharopoulos recommended in a recent paper, the highest priority should be what works best: early education, especially preschool.
The most obvious reasons why earlier education makes for a better starting point is that people are most receptive to knowledge when they are young.
Moreover, at younger ages, there are fewer cultural barriers to education for girls, and there is less pressure for children to contribute labor.
Finally, preschool education is less expensive to deliver than higher-level schooling.
The longer-term effects of early learning are less apparent but more profound. Though students who attended preschool do not perform better than their peers in primary school, they do tend to earn more as adults.
This suggests that preschool provides a qualitative boost to children’s social skills or emotional development that enables them to take better advantage of economic opportunity later in life.
Of course, the precise return on investment in expanded preschool education is difficult to discern.
But, in order to prioritize development targets – within and outside of the realm of education – estimates must be made.
First, there is the straightforward work of adding up the costs of education, such as teacher training and compensation, school construction and maintenance, and even the opportunity cost of child labor.
Then there is the more ambiguous process of assessing the benefits, which, though difficult to quantify, are convincing enough that many economists champion early education.
Based on the most extensive data available, Psacharopoulos determined that the most effective target would be to halve the proportion of children who are not attending preschool in Sub-Saharan Africa, which would yield social and economic benefits of $33 per dollar spent.
This goal, which focuses on a single challenge-plagued region, may seem modest; but it is also realistic and achievable – and the potential returns are massive.
As targets become more ambitious, they lose their impact.
For example, the pursuit of universal primary education in Sub-Saharan Africa would yield a lower, but still significant, $7 of social and economic benefit for every dollar spent.
And efforts to achieve universal primary education worldwide would cost far more, with each dollar spent bringing just $4 worth of benefits.
The same type of comparison must be made for other important goals, such as improving the quality of education – a surprisingly difficult objective to achieve, as many developed countries have learned from their poor performance in the OECD’s international assessment.
While money allocated to, say, reducing class sizes has very little impact, investment in institutional changes – such as the introduction of monitoring and evaluation systems, centrally administered examinations, and incentives for teachers – could result in $3-5 of good per dollar spent.
As for vocational training, the jury is still out.
But it has been identified as less profitable than general secondary education, making it an inferior investment option.
Efforts to make university affordable for all are even more problematic.
Given that children from wealthier households are more likely to pursue higher education, directing limited public resources, including tax revenues, toward reducing its cost amounts to a subsidy for the wealthy, at the expense of the poor.
A better approach would be to introduce tuition fees for the wealthy and scholarships for the poor.
Maximizing the impact of scarce resources on the lives of the world’s poorest people demands tough choices.
In an ideal world, universal, high-quality education at all levels would be worth pursuing.
But, amid competing demands for basic necessities like health care and potable water, narrower, more cost-effective education targets are essential.
Instead of aiming to improve billions of people’s circumstances slightly – at high cost – with the same promises that have been made since 1950, the international community should aim first to transform the lives of millions of children in Sub-Saharan Africa.
This approach, if applied to all of the goals included in the international community’s next development agenda, would ensure that the world of 2030 is a much better place.
The Poverty of Renewables
MIAMI – According to UN Secretary-General Ban Ki-moon, “Climate change harms the poor first and worst.” This is true, because the poor are the most vulnerable and have the least resources with which to adapt.
But we often forget that current policies to address global warming make energy much more costly, and that this harms the world’s poor much more.
Solar and wind power was subsidized by $60 billion in 2012.
This means that the world spent $60 billion more on energy than was needed.
And, because the total climate benefit was a paltry $1.4 billion, the subsidies essentially wasted $58.6 billion.
Biofuels were subsidized by another $19 billion, with essentially no climate benefit.
All of that money could have been used to improve health care, hire more teachers, build better roads, or lower taxes.
Forcing everyone to buy more expensive, less reliable energy pushes up costs throughout the economy, leaving less for other public goods.
The average of macroeconomic models indicates that the total cost of the EU’s climate policy will be €209 billion ($280 billion) per year from 2020 until the end of the century.
The burden of these policies falls overwhelmingly on the world’s poor, because the rich can easily pay more for their energy.
I am often taken aback by well-meaning and economically comfortable environmentalists who cavalierly suggest that gasoline prices should be doubled or electricity exclusively sourced from high-cost green sources. That may go over well in affluent Hunterdon County, New Jersey, where residents reportedly spend just 2% of their income on gasoline.
But the poorest 30% of the US population spend almost 17% of their after-tax income on gasoline.
Similarly, environmentalists boast that households in the United Kingdom have reduced their electricity consumption by almost 10% since 2005.
But they neglect to mention that this reflects a 50% increase in electricity prices, mostly to pay for an increase in the share of renewables from 1.8% to 4.6%.
The poor, no surprise, have reduced their consumption by much more than 10%, whereas the rich have not reduced theirs at all.
Over the past five years, heating a UK home has become 63% more expensive, while real wages have declined.
Some 17% of households are now energy poor – that is, they have to spend more than 10% of their income on energy; and, because elderly people are typically poorer, about a quarter of their households are energy poor.
Deprived pensioners burn old books to keep warm, because they are cheaper than coal, they ride on heated buses all day, and a third leave part of their homes cold.
In Germany, where green subsidies will cost €23.6 billion this year, household electricity prices have increased by 80% since 2000, causing 6.9 million households to live in energy poverty.
Wealthy homeowners in Bavaria can feel good about their inefficient solar panels, receiving lavish subsidies essentially paid by poor tenants in the Ruhr, who cannot afford their own solar panels but still have to pay higher electricity costs.
The list goes on.
In Greece, where tax hikes on oil have driven up heating costs by 48%, more and more Athenians are cutting down park trees, causing air pollution from wood burning to triple.
But climate policies carry an even larger cost in the developing world, where three billion people lack access to cheap and plentiful energy, perpetuating their poverty.
They cook and keep warm by burning twigs and dung, producing indoor air pollution that causes 3.5 million deaths per year – by far the world’s biggest environmental problem.
Access to electricity could solve that problem, while allowing families to read at night, own a refrigerator to keep food from spoiling, or use a computer to connect with the world.
It would also allow businesses to produce more competitively, creating jobs and economic growth.
Consider Pakistan and South Africa, where a dearth of generating capacity means recurrent blackouts that wreak havoc on businesses and cost jobs.
Yet the funding of new coal-fired power plants in both countries has been widely opposed by well-meaning Westerners and governments.
Instead, they suggest renewables as the solution.
But this is hypocritical.
The rich world gets just 1.2% of its energy from hugely expensive solar and wind technologies, and we would never accept having power only when the wind was blowing.
Over the next two years, Germany will build ten new coal-fired power plants to keep the lights on.
In 1971, 40% of China’s energy came from renewables.
Since then, it has powered its explosive economic growth almost exclusively with highly polluting coal, lifting 680 million people out of poverty. Today, China gets a trifling 0.23% of its energy from wind and solar.
By contrast, Africa gets 50% of its energy today from renewables – and remains poor.
A new analysis from the Center for Global Development quantifies our disregard of the world’s poor.
Investing in renewables, we can pull one person out of poverty for about $500.
But, using gas electrification, we could pull more than four people out of poverty for the same amount.
By focusing on our climate concerns, we deliberately choose to leave more than three out of four people in darkness and poverty.
Addressing global warming effectively requires long-term innovation that makes green energy affordable to all.
Until then, wasting enormous sums of money at the expense of the world’s poor is no solution at all.
Global Warming’s Upside-Down Narrative
NEW YORK – When politicians around the world tell the story of global warming, they cast it as humanity’s greatest challenge.
But they also promise that it is a challenge that they can meet at low cost, while improving the world in countless other ways.
We now know that is nonsense.
Political heavyweights from US Secretary of State John Kerry to UN Secretary General Ban Ki-moon call climate change “the greatest challenge of our generation.”
If we fail to address it, Kerry says, the costs will be “catastrophic.”
Indeed, this has been the standard assertion of politicians since the so-called Stern Review commissioned by the British government in 2006.
That report famously valued the damage caused by global warming at 5-20% of GDP – a major disruption “on a scale similar to those associated with the great wars and the economic depression of the first half of the twentieth century.”
Tackling climate change, we are told, would carry a much lower cost.
The president of the European Commission promised that while the European Union’s climate policies are “not cost-free,” they would amount to just 0.5% of GDP.
Indeed, politicians of all stripes have reiterated the Stern Review’s finding that global warming can be curtailed by policies costing just 1% of world GDP.
Climate policies, moreover, are said to help in many other ways.
US President Barack Obama promised that policies to combat global warming would create five million new green jobs.
The EU claimed that green energy would help “improve the EU’s security of energy supply.”
With the completion of the latest report by the United Nations Intergovernmental Panel on Climate Change (IPCC), we can now see that this narrative is mostly wrong.
The first installment of the IPCC report showed that there is indeed a climate problem – emissions of greenhouse gases, especially CO₂, lead to higher temperatures, which will eventually become a net problem for the world.
This result was highly publicized.
But the report also showed that global warming has dramatically slowed or entirely stopped in the last decade and a half. Almost all climate models are running far too hot, meaning that the real challenge of global warming has been exaggerated.
Germany and other governments called for the reference to the slowdown to be deleted.
The second IPCC installment showed that the temperature rise that we are expected to see sometime around 2055-2080 will create a net cost of 0.2-2% of GDP – the equivalent of less than one year of recession.
So, while the IPCC clearly establishes that global warming is a problem, the cost is obviously much less than that of the twentieth century’s two world wars and the Great Depression.
Again, not surprisingly, politicians tried to have this finding deleted.
British officials found the peer-reviewed estimate “completely meaningless,” and, along with Belgium, Norway, Japan, and the US, wanted it rewritten or stricken.
One academic speculated that governments possibly felt “a little embarrassed” that their previous exaggerated claims would be undercut by the UN.
The third installment of the IPCC report showed that strong climate policies would be more expensive than claimed as well – costing upwards of 4% of GDP in 2030, 6% in 2050, and 11% by 2100. And the real cost will likely be much higher, because these numbers assume smart policies, instantly enacted, with key technologies magically available.
Again, politicians tried to delete or change references to these high costs.
British officials explained that they wanted such cost estimates cut because they “would give a boost to those who doubt action is needed.”
Green jobs have been created only with heavy subsidies, costing a similar number of jobs elsewhere.
Indeed, each extra job created cost more than $11 million in the US.
And facile claims that renewable sources can boost energy security look a lot less convincing after the crisis in Ukraine;
Europe now understands that only large and stable energy supplies matter.
Climate change has been portrayed as a huge catastrophe costing as much as 20% of world GDP, though brave politicians could counter it at a cost of just 1% of GDP. The reality is just the opposite: We now know that the damage cost will be perhaps 2% of world GDP, whereas climate policies can end up costing more than 11% of GDP.
What makes this story all the more amazing is that experts have known almost all of these facts for a long time.
The Stern Review was produced by bureaucrats and never subjected to peer review.
Economists knew that the damage costs had been extensively massaged, and that the estimates were outliers compared to the academic literature.
The unfathomably low projections for policy costs were artifacts of ignoring most liabilities, again contradicting the academic literature.
The media, eager for breathless headlines, share the blame with politicians for this state of affairs.
Following the release of the Stern Review, one British newspaper reportedly wrote: “Act now or the world we know will be lost forever.”
We live in a world where one in six deaths are caused by easily curable infectious diseases; one in eight deaths stem from air pollution, mostly from cooking indoors with dung and twigs; and billions of people live in abject poverty, with no electricity and little food.
We ought never to have entertained the notion that the world’s greatest challenge could be to reduce temperature rises in our generation by a fraction of a degree.
The solution is to stop applauding politicians who warn of catastrophe and promote poor policies.
Instead of subsidizing inefficient solar and wind power with little benefit, we need to invest in long-term green innovation.
And we need to give more attention to all of the other problems.
The Economics of Violence
COPENHAGEN – What is the biggest source of violence in our world?
With the brutal conflicts in Syria, Ukraine, and elsewhere constantly in the news, many people would probably say war.
But that turns out to be spectacularly wrong.
Getting it right matters if we are to find cost-effective solutions to this and other global problems.
Obviously, everyone would like to stop wars and violence, just as we would like to end poverty, hunger, and global warming, while providing education to all.
But, given limited resources, the international community can only do so much.
We have to prioritize, which is what an economic analysis of costs and benefits can do.
The international community is working on new development goals for the next 15 years, and the Copenhagen Consensus has asked some of the world’s leading economists to give their assessment of the smartest targets they can choose.
Is reducing violence a goal worthy of resources that would otherwise be spent on, say, reducing hunger?
And, if so, which forms of violence should be targeted?
A study by James Fearon of Stanford University and Anke Hoeffler of Oxford University’s Center for the Study of African Economies argues that societal violence – homicides and especially violence against women and children – is a much bigger problem than civil wars.
Nine people are killed in interpersonal violence for every battlefield death in a civil war, and one child is killed for every two combatants who die.
In 2008, there were 418,000 homicides around the world, with far too many countries recording a murder rate of more than 10 per 100,000, which the World Health Organization regards as an epidemic.
A single homicide in America costs the individual and society $9.1 million.
If we scale this by national income across the world, this single category of violent crime costs 1.7% of global GDP.
Of course, this is not a direct financial loss to the global economy, but a way of expressing the impact.
If murders could be eliminated, societies around the world would be better off in ways that can be valued at 1.7% of GDP.
Compare this to the much lower cost of civil wars, which are equivalent to about 0.2% of global GDP.
But this is still much less than the biggest source of violence of all: violence against women in the home.
Based on studies published in Science, 28% of all women in Sub-Saharan Africa reported experiencing violence in the past year at the hands of their partners or family.
This includes women subjected to beatings, forced marriage at an early age, sexual assault, “honor” crimes, and female genital mutilation.
A conservative estimate puts the welfare cost of intimate partner violence alone at $4.4 trillion, or 5.2% of global GDP.
The second-largest source of violence is the abuse of children, 80% of which is inflicted by parents.
The definition of what constitutes child abuse varies by culture; but about 15% of children suffer each month from what the UN calls severe physical punishment.
This includes being slapped on the face, head, or ears, and a quarter of these children are beaten with some kind of implement repeatedly and as hard as possible.
Every month, some 290 million children endure such suffering.
The welfare cost is $3.6 trillion, or 4.2% of global GDP.
A tiny fraction of international aid funding currently goes toward reducing societal violence and improving criminal justice systems.
The enormous cost borne by society and individuals seems to cry out for action.
Unfortunately, there is still little hard evidence about where resources should best be focused.
All we can say is that the money spent to reduce violence might be better targeted.
Considerable amounts of aid are directed toward “fragile states” to help stop or prevent civil war, but only 0.27% of international aid goes to projects with a “crime prevention” component.
Other programs may help in indirect ways, but there obviously is much room for improvement.
Some solutions, it is clear, do work very well.
Stronger social services can reduce violence against children.
Studies in Washington State show that home visits from trained staff can reduce child abuse, improve children’s quality of life and physical and mental health, and reduce child-welfare and litigation costs.
A dollar spent on this program produces benefits of $14, making it a highly cost-effective policy.
In many cases, changes in social attitudes are needed.
To reduce violence against women and girls, one program in Uganda, called SASA!
(Kiswahili for “Now!”) promotes the view that partner violence is unacceptable, and has helped to halve the rate of it.
This is a fantastic outcome, of course, though there has been no analysis of how cost-effective it is.
There are other examples of countries taking effective action.
In 1993, Bogota suffered 80 murders per 100,000 people.
By taking an integrated approach – limiting the hours during which alcohol can be sold, reclaiming public space, and improving the police and justice systems – the homicide rate was reduced to 21 per 100,000 in 2004.
That is still high, but it is far below the rate of 55 per 100,000 in Detroit.
Alcohol is a factor in many assaults, and controlling its availability could have a significant part to play, as the findings in Bogota suggest.
In the United Kingdom, a pilot study on stronger enforcement of existing rules showed that assaults could be reduced in a very cost-effective way, with the benefits outweighing the costs by 17 to one.
While we still don’t know enough, two points are certain. First, domestic violence against women and children imposes a social cost of $8 trillion each year, making it a huge – and vastly underreported – global issue.
Second, there are solutions that can help to tackle some of these problems very cost-effectively.
That is why reducing domestic violence belongs on the short-list for the world’s next set of development goals.
Black Bears and Television Junkies
This summer, friends who live a few kilometers from us in rural Montana in the western US had to interrupt their dinner when a black bear suddenly came out of the trees.
They went indoors to watch as it came up to the picnic table, licked the dishes clean, and then drank two cans of beer.
Over the following days, the bear turned over the garbage cans of two neighbors and terrorized children and pets.
Forest Service rangers set up a cage and put some bacon inside, soon catching and transporting the bear 30 kilometers into the wilderness.
The bear was tagged before it was released, to show that it had been causing trouble. “Unfortunately,” said the ranger, “that bear may be back here even before our truck returns.
Once they develop a taste for bacon and beer, you can't keep them away.” If a tagged bear is caught two or more times causing disruption, the rangers have orders to shoot it.
It is easy to feel sorry for an animal that discovers tasty food and can’t resist getting more the easy way.
The bear has no idea that its days are numbered unless it remains in the forest and hunts in the traditional way for its meals.
But that bear was following the wisdom natural selection had programmed in its genes: food that is high in proteins and sugars is good for you, and the less energy you expend getting it, the better.
That much the bear knows well.
It had no chance to learn – and probably never will – that picnic tables and garbage cans are defended by forest rangers with orders to kill.
How much luckier we humans are, knowing what is good and bad for us.
We cannot be trapped so easily by things that taste good but will cause our downfall.
But, in reality, most of us are no different from that bear.
Most people are aware that high-fat diets, too much alcohol, smoking, promiscuous sex, and recreational drugs, while pleasant, can ruin one's health.
Yet we can’t resist the lure of the garbage can and its delights.
But at least we have had clear warnings about the dangers of such habits, so people who want to use such knowledge can avoid being trapped.
There are other potentially harmful pleasures in the environment that are less known, but not less destructive than those that are.
One of the most seductive of these pleasures – and thus one of the most dangerous – is television.
Television is attractive to the architecture of the human nervous system: our brains are built to absorb information and follow rapid changes in the sensory field.
TV provides these in easily digestible, sumptuously prepared morsels.
Constant change and the appearance of excitement absorb viewers’ attention.
The Sistine Chapel cannot compare with it – most children will become bored after ten minutes by the frescoes of Michelangelo, but will watch a detergent commercial with riveted interest.
All of this applies just to the way the medium works, without taking content into consideration.
The content in turn reinforces the seductive qualities of the medium by offering generous helpings of sex, violence, easy comfort, and other material that we are genetically prepared to respond to, but that in large doses detract from the ability to lead productive and serene lives.
Indeed, by now the evidence that television watching is a dangerous habit has grown to such proportions that it is a wonder that stronger warnings and effective prevention have not been adopted.
Among the many findings is that watching too much television induces passivity, both at the level of neural functioning and of behavior and that it interferes with learning and reduces political and civic participation.
It also encourages aggressive behavior in children and produces negative moods such as sadness and loneliness.
Nor is there any evidence of benefits to counterbalance these negative effects.
When television was in its infancy, many thinkers ­ and not surprisingly, television producers – painted the future of the medium in glowing terms: TV would keep us informed, cultured, and entertained; it would strengthen family life and civic virtues.
None of this happened.
Even the informational value of television turned out to be a dream: individuals and communities that watch TV often know much less about what is happening in the world than comparable audiences that do not.
The only clearly positive effect of TV watching is that people feel relaxed while doing it, and many people are willing to exchange that relaxation for the more enjoyable and useful things they might be doing instead.
Like the bear that learned to fill his stomach comfortably, they feel satisfied to be entertained without having to exert themselves.
Of course, television can be nice when consumed in small doses and with discernment.
Like drinking a glass or two of wine, it helps digestion and lightens the mind.
But those who spend hours watching it each evening, with less and less control over their attention, and deriving progressively less enjoyment from what they watch, risk becoming as besotted as an alcoholic who only feels alive when he blots out reality.
No bear, if it knew what we do, would fall into that trap.
Blair’s EU disaster
When voters in France and the Netherlands turned down the proposal for a Constitution for the European Union, the world knew that the European project was in deep trouble.
Last week’s bruising battle over the medium-term future of the Union’s budget has confirmed that verdict with a vengeance.
It also brought to a sorry close the UK’s six-month presidency of the European Council, confirming Britain’s long-standing reputation as the odd-man-out in the European Union.
The two events are intimately connected.
French and Dutch voters did not say why they voted against the planned Constitution.
But many commentators believe that they were protesting against what they perceived as the precipitate admission of ten new member states, mainly much poorer countries from Central and Eastern Europe.
In particular, voters were afraid that their jobs would be lost to hordes of Eastern immigrants, exemplified in the image widely quoted at the time, of the low-cost Polish plumber.
The irony, of course, was that most of the 15 old member states had refused to give the new members full and immediate access to the Western job markets.
But in any event, it was too late to protest: the ten Eastern states had already been granted membership of the Union.
But now the 25 member states must deal with the financial consequences of that enlargement, not just in the overall size of the European Union budget for the next seven years, but in who pays and who benefits.
In particular, the central issue is how far the old member states are willing to pay to boost the less developed economies of the new members.
In the event, it turned into a three-way battle between Britain, France and the new member states.
Traditionally, a large majority of the budget has gone either on agriculture or on the development of backward regions.
In practice, this has meant large flows of money either to big agricultural producers, like France, or to poorer member states, like Greece and Portugal.
On both counts, the new member states expected to benefit substantially from the EU system.
In the past, the big loser from the EU system, in budgetary terms, was the UK; for while agriculture accounted for two thirds of all EU spending, the UK had a small farm sector, and therefore received small farm payments.
The British long complained of the unfairness of these rules, especially in view of the fact that the UK was one of the relatively poorer member states; and in 1984, Margaret Thatcher’s Conservative government demanded, and got, a massive rebate on its net contribution to the EU budget.
Today, the situation has changed in three important respects.
EU farm policy has started to be reformed, and its share of the EU budget has fallen from over 60% to 40%;
Britain has for several years enjoyed significantly faster economic growth than most other member states, so that it is now one of the richer EU countries, even compared with France and Germany; and the new member states are so much poorer than even the poorest of the old members, that they have an unanswerable moral case for a generous share of whatever budget could be negotiated.
When negotiations started six months ago, it was Britain’s turn to take over the Presidency of the European Council.
Tony Blair, British Prime Minister, electrified the world of European politics by telling the European Parliament that he was a “passionate pro-European”.
This was a message for which Britain’s European friends had long been hoping, and for which they had waited in vain since Blair’s election in 1997.
Certainly, he had never expressed any such sentiment inside the British Isles during the previous eight years.
Since Britain had been one of the most insistent advocates of enlargement of the EU to the candidates from Central and Eastern Europe, one might have expected that the Blair government would have wished to be correspondingly generous to the new-comers in the conduct of the budgetary negotiations.
At first, this seemed to be the British government’s chosen tactic.
Against all expectations, it struck a morally advantageous posture by offering to surrender some part of its budget rebate, but only if the rest of the European Union (i.e. France, in particular) would agree to fundamental reforms of EU farm policy.
It took some time before the British came to understand that since President Jacques Chirac is a beleaguered lame-duck President, who will remain in office but not in power until 2007, he is in no position to agree to any such bargain.
So when the British came to terms with this harsh reality, they played out the lamentable end-game of their management of the negotiations with small-minded cheese-paring and logic-chopping offers, all designed primarily to safeguard narrow British interests, mainly at the expense of the new member states.
It is a sad conclusion to a presidency, launched six-months ago, with Blair’s claim that he was a “passionate pro-European”.
Yet the full text of his speech tells it all.
Blair is in favour of Europe; but not this Europe.
He wants to be a part of a political Europe; but only if the other member states follow Britain’s model of economic and social reform.
The problem is that economic and social reform are purely national responsibilities, and do not lie within the competence of the Union; if there is to be economic and social reform in France and Germany, that is a matter exclusively for French and German voters and politicians.
It could only be a European matter, if the EU were a real federation.
Is Blair a federalist, then?
Heavens, no!
He is merely an unthinking nationalist, living in terror of the nationalist yellow tabloid press.
So why does he say he is a passionate pro-European?
Because he has not thought about the question for one moment.
Blair’s European Dilemma
Tony Blair has achieved a remarkable third successive electoral victory.
But his sharply reduced majority in the House of Commons, and his damaged personal reputation, mean that his political position is seriously weakened.
As a result, he will be poorly placed to handle the challenges ahead, the most intractable of which will be the European Union’s new Constitution.
The Constitution, adopted by the 25 member states last year, is not, in itself, a big deal.
It introduces some significant improvements for majority voting in the Council of Ministers. It gives some more powers to the European Parliament.
It includes a Charter of Fundamental Rights.
It might help harmonize the foreign policies of the member states.
But it is no revolutionary document.
According to normal British constitutional practice, the government would be expected to ratify this Constitution by a vote in the House of Commons; and, until the recent general election, the government’s huge majority should have been more than sufficient.
But Blair, beset by controversy over the unpopular and possibly illegal war in Iraq, thought he could avoid trouble at Westminster by postponing ratification until 2006 (that is, a comfortably long time in the future), and proposing that it be carried out by popular referendum.
Unfortunately, as things stand, this is a referendum that Blair will not win, because all polls show a large and solid majority against the European Constitution.
Blair’s government may hope to be rescued by outside events.
France will hold a referendum on the Constitution for the end of this month, and a French “No,” the British seem to think, might make their problem go away.
For the general expectation is that if France rejects the Constitution, the Constitution would be dead, and no British referendum would be needed.
If this is Blair’s calculation, he is mistaken.
Moreover, it is the kind of mistake that the British have been making in relations with Europe for the past half-century.
Some recent French polls now show a majority in favor of the Constitution.
But even if the French do vote “No,” that will not solve the British problem: on the contrary, it will precipitate a major political crisis, in France and across Europe, concerning the future of the EU – the type of crisis that the British have spent fifty years trying to evade.
For if the Constitution is indeed dead, what happens next?
None of the leading members of the Union will be interested in Britain’s views on this question.
When Tony Blair swept to power in 1997, he was widely welcomed throughout Europe as the most pro-European British Prime Minister since Edward Heath a quarter of a century earlier.
He spoke French and seemed at ease with Britain’s neighbors across the Channel; more importantly, he seemed to sympathize with European integration.
Eight years on, Europe knows better.
It is now clear to all that Blair is fundamentally opposed to the idea of a more politically integrated Europe.
Not only has he kept Britain out of the single European currency over the past four years, he made it clear during the election campaign that he does not expect the UK to join the Euro during the next five years either.
Occasionally Blair flirts with the idea of more European cooperation on foreign policy and defense.
But the past three years proved in practice that he prefers subservience to the war policy of President Bush to any sense of community with Europe.
In short, Blair is as opposed to the European project as all his predecessors.
One fundamental difference between France and Britain is that most of the mainstream political elite in France has long been broadly pro-European.
If the French electorate votes “No,” it will be much less a vote against the Constitution than a protest vote against President Jacques Chirac, or an expression of anxiety about the implications of the EU’s enlargement to Central Europe.
By contrast, Blair cannot win a referendum on the Constitution, not only because it is opposed by virtually all the popular press, but also because neither he nor any major political leader in Britain has ever had a good word to say about European integration.
The crisis over the Union’s future direction triggered by a French “No” vote could last for some time.
But if the British imagine that the Constitution will just die, and that that will be the end of the story, they are deceiving themselves.
On the contrary, they will find themselves embroiled, like the rest of Europe, in a fundamental debate about the objectives of the Union.
They will then be forced to make public and explicit choices about the sort of Europe that they want, and this will put them at odds with their neighbors.
In the end, the French and other leading member states are likely to explore alternative ways of working towards a more politically integrated Europe.
The most plausible institutional mechanism for this alternative way forward will be the existing grouping of those member states that have wanted to belong to a more united Europe by joining, or seeking to join, the euro zone.
If the Constitution is rejected, the British, having chosen to stay out of that grouping, may find that they have maneuvered themselves into an even more remote outer circle of Europe.
Blaming Islam is Too Easy
The terrorist attacks in America and the war against the Taliban have incited wide speculation about the relationship between culture and economic development.
Most pointedly, is the Islamic world thwarted from modernizing because its culture is trapped in the Middle Ages?
Is poor economic development in much of the Middle East and Central Asia the result of cultural practices that are hostile to economic growth?
The usual charge is that the Islamic world missed the advances of the European Enlightenment, when the state and religion were separated, modern scientific ideas were adopted, and cultural attitudes towards women modernized.
As a result, it is alleged, the Islamic world cannot cope with the demands of modernization, either in technology or in cultural practices, such as the granting of rights to women, which is necessary for economic success in the modern world.
As always with crude generalizations, elements of truth are intermixed with a mass of confusion.
The truth is that certain cultural practices support economic modernization.
These include a tendency towards greater equality between men and women and their roles in society; a culture that rewards educational attainment with high social status; the secularization of many aspects of modern life, including the preeminence of modern science; and cultural practices that favor social mobility in the choice of occupations.
The falsehood is to believe that some cultures are static and inimical to change, while others are somehow uniquely modern.
In all parts of the world, cultures have had to adjust to the changes in economic organization, technology, and scientific knowledge of the past two hundred years.
In Western Europe and the US, for example, the cultural acceptance of social and economic equality between men and women has involved a long process of political struggle and evolving social norms.
The pace of change has varied markedly within regions and across cultural sub-groups.
The Islamic world, which stretches over 15,000 kilometers, dozens of countries, and more than 1 billion followers of the faith, is similarly subject to widespread cultural variation.
Islamic countries in the Mediterranean region (such as Morocco, Tunisia, Egypt, and Turkey) are culturally and politically distinct from Islamic countries in the Arabian Peninsula (such as Saudi Arabia, Yemen, and Oman), which differ from Islamic countries in Central Asia (such as Afghanistan, Pakistan, Tajikistan), Southeast Asia (such as Indonesia and Malaysia) and Sub-Saharan Africa (such as Mali and Chad).
Consider one example: the number of children per woman in society, known as the ``total fertility rate.''
In societies where women are not allowed to work and are expected to remain home and raise children, the number of children is very high.
Economic growth tends to suffer: when poor households have many children, the education given to each child also tends to be reduced.
In some parts of the Islamic world, most notably in the Arabian peninsula, the fertility rate remains very high.
A woman in Yemen will on average give birth to more than 7 children in her lifetime.
In Saudi Arabia, the average is over 6 children.
In other parts of the Islamic world, the fertility rate is far lower and has declined in recent decades, signaling a major shift in cultural norms.
In Tunisia, the average fertility rate has dropped from 6.2 in the 1970s to 2.3 today, just slightly above the 2.0 average in the US.
Similarly, in Turkey the fertility rate fell from 5.2 in the early 1970s to 2.7 in the late 1990s.
In Indonesia, the decline in fertility rates was about the same.
Women have entered the labor force in these societies in much greater number, delivering economic gains and improvements in their social status.
We can therefore note that in Islamic societies like Tunisia, Turkey, Indonesia, and Malaysia, economic growth and cultural change has proceeded rapidly in the past generation.
Some of these countries have been among the world's fastest growing economies in recent decades.
Islamic culture has neither been a barrier to growth, nor has it been static.
As in other parts of the world, culture in these countries has shown its vibrancy and also its capacity to adjust to changing conditions.
In the Arabian peninsula, cultural change has been slower, as has economic development.
Causation probably runs in both directions here: cultural factors may have impeded economic growth, while poor economic performance (say, bad economic policies and over-dependence on oil) may have slowed the adaptation of cultural practices to the needs of a modern economy.
In very remote places like Afghanistan or Chad, weak connections with the world economy also delayed the process of social change.
These examples should warn us away from three current tendencies. The first is to give easy labels to complex and diverse societies.
The idea of a single conservative ``Islamic world'' is as mistaken as a single modern ``Western society.''
Diversity is very high; cultural practices vary widely.
Simplistic labels reflect more prejudice than understanding.
The second tendency is to believe that culture is somehow static and unchanging.
Cultures everywhere change in response to technological developments, economic growth, and - of course - globalization.
The third tendency is to believe that culture is the key to economic development.
Economic development is determined by many factors, including geography, politics, international relations, and culture.
Cultural differences across societies are often more the outcome than the cause of differences in economic development.
Blatant Benevolence
PRINCETON – Jesus said that we should give alms in private rather than when others are watching.
That fits with the commonsense idea that if people only do good in public, they may be motivated by a desire to gain a reputation for generosity.
Perhaps when no one is looking, they are not generous at all.
That thought may lead us to disdain the kind of philanthropic graffiti that leads to donors’ names being prominently displayed on concert halls, art museums, and college buildings.
Often, names are stuck not only over the entire building, but also on as many constituent parts of it as fundraisers and architects can manage.
According to evolutionary psychologists, such displays of blatant benevolence are the human equivalent of the male peacock’s tail.
Just as the peacock signals his strength and fitness by displaying his enormous tail – a sheer waste of resources from a practical point of view – so costly public acts of benevolence signal to potential mates that one possesses enough resources to give so much away.
From an ethical perspective, however, should we care so much about the purity of the motive with which the gift was made?
Surely, what matters is that something was given to a good cause.
We may well look askance at a lavish new concert hall, but not because the donor’s name is chiseled into the marble façade.
Rather, we should question whether, in a world in which 25,000 impoverished children die unnecessarily every day, another concert hall is what the world needs.
A substantial body of current psychological research points against Jesus’s advice.
One of the most significant factors determining whether people give to charity is their beliefs about what others are doing.
Those who make it known that they give to charity increase the likelihood that others will do the same.
Perhaps we will eventually reach a tipping point at which giving a significant amount to help the world’s poorest becomes sufficiently widespread to eliminate the majority of those 25,000 needless daily deaths.
That is what Chris and Anne Ellinger hope their Web site, www.boldergiving.org , will achieve.
The Web site tells the story of more than 50 members of the 50% League – people who have given away either 50% of their assets or 50% of their income in each of the last three years.
Members of the league want to change expectations about what is a “normal” or “reasonable” amount to give.
They are a diverse group of people.
Tom White ran a big construction company, and started giving millions to Paul Farmer’s efforts to bring health services to Haiti’s rural poor.
Tom Hsieh and his wife, Bree, made a commitment to live on less than the national median income, currently $46,000 a year.
As Hsieh, who is 36, earned more, they gave away more, mostly to organizations helping the poor in developing countries.
Hal Taussig and his wife have given away about $3 million, amounting to 90% of their assets, and now live happily on their social security checks.
Most donors see giving as personally rewarding.
Hsieh says that whether or not his giving has saved the lives of others, it has saved his own: “I could easily have lived a life that was boring and inconsequential.
Now I am graced with a life of service and meaning.”
When people praise Hal Taussig for his generosity, he tells them, “Frankly, it’s my way of getting kicks out of life.”
The 50% League sets the bar high – perhaps too high for most people.
James Hong started www.hotornot.com , a Web site that allows people to rate how “hot” other people are.
It made him rich.
He has pledged to give away 10% of everything he earns over $100,000.
Hong’s Web site, www.10over100.org , invites others to do likewise.
So far, more than 3,500 people have.
Hong sets the bar low.
If you earn less than $100,000, you don’t have to give away anything at all, and if you earn, say, $110,000, you would be required to give away only $1,000 – less than 1% of your income.
That is not generous at all.
Many of those earning less than $100,000 can also afford to give something.
Still, Hong’s formula is simple, and it starts to bite when earnings get really big.
If you earn a million dollars a year, you have pledged to give $90,000, or 9% of what you earn, which is more than most rich people give.
We need to get over our reluctance to speak openly about the good we do.
Silent giving will not change a culture that deems it sensible to spend all your money on yourself and your family, rather than to help those in greater need – even though helping others is likely to bring more fulfillment in the long run.
Bleed the Foreigner
PRINCETON – Today, the world is threatened with a repeat of the 2008 financial meltdown – but on an even more cataclysmic scale.
This time, the epicenter is in Europe, rather than the United States.
And this time, the financial mechanisms involved are not highly complex structured financial products, but one of the oldest financial instruments in the world: government bonds.
While governments and central banks race frantically to find a solution, there is a profound psychological dynamic at work that stands in the way of an orderly debt workout: our aversion to recognizing obligations to strangers.
The impulse simply to cut the Gordian knot of debt by defaulting on it is much stronger when creditors are remote and unknown.
In 2007-2008, it was homeowners who could not keep up with payments; now it is governments.
But, in both cases, the lender was distant and anonymous.
American mortgages were no longer held at the local bank, but had been repackaged in esoteric financial instruments and sold around the world; likewise, Greek government debt is in large part owed to foreigners.
Because Spain and France defaulted so much in the early modern period, and because Greece, from the moment of its political birth in 1830, was a chronic or serial defaulter, some assume that national temperament somehow imbues countries with a proclivity to default.
But that search for long historical continuity is facile, for it misses one of the key determinants of debt sustainability: the identity of the state’s creditor.
This variable makes an enormous difference in terms of whether debt will be regularly and promptly serviced.
The frequent and spectacular early modern bankruptcies of the French and Spanish monarchies concerned for the most part debt owed to foreigners.
The sixteenth-century Habsburgs borrowed – at very high interest rates – from Florentine, Genovese, and Augsburg merchants.
Ancien régime France developed a similar pattern, borrowing in Amsterdam or Geneva in order to fight wars against Spain in the sixteenth and seventeen centuries, and against Britain in the eighteenth.
The Netherlands and Britain, however followed a different path.
They depended much less on foreign creditors than on domestic lenders.
The Dutch model was exported to Britain in 1688, along with the political revolution that deposed the Catholic James II and put the Dutch Protestant William of Orange on the English throne.
Indeed, the Glorious Revolution enabled a revolution in finance.
In particular, recognition of the rights of parliament – of a representative assembly – ensured that the agents of the creditor classes would have permanent control of the budgetary process.
They could thus guarantee – also on behalf of other creditors – that the state’s finances were solid, and that debts would be repaid.
Constitutional monarchy limited the scope for wasteful spending on luxurious court life (as well as on military adventure) – the hallmark of early modern autocratic monarchy.
In short, the financial revolution of the modern world was built on a political order – which anteceded a full transition to universal democracy – in which the creditors formed the political class.
That model was transferred to many other countries, and became the bedrock on which modern financial stability was built.
In the post-1945 period, government finance in rich industrial countries was also overwhelmingly national at first, and the assumptions of 1688 still held.
Then something happened.
With the liberalization of global financial markets that began in the 1970’s, foreign sources of credit became available.
In the mid-1980’s, the US became a net debtor, relying increasingly on foreigners to finance its debt.
Europeans, too, followed this path.
Part of the promise of the new push to European integration in the 1980’s was that it would make borrowing easier.
In the 1990’s, the main attraction of monetary union for Italian and Spanish politicians was that the new currency would bring down interest rates and make foreign money available for cheap financing of government debt.
Until the late 1990’s and the advent of monetary union, most government debt in the European Union was domestically held: in 1998, foreigners held only one-fifth of sovereign debt.
That share climbed rapidly in the aftermath of the euro’s introduction.
In 2008, on the eve of the financial crisis, three-quarters of Portuguese debt, half of Spanish and Greek debt, and more than 40% of Italian debt was held by foreigners.
When the foreign share of debt grows, so do the political incentives to impose the costs of that debt on foreigners.
In the 1930’s, during and after the Great Depression, a strong feeling that the creditors were illegitimate and unethical bloodsuckers accompanied widespread default.
Even US President Franklin Roosevelt jovially slapped his thigh when Reichsbank President Hjalmar Schacht told him that Nazi Germany would default on its external loans, including those owed to American banks, exclaiming, “Serves the Wall Street bankers right!”
In Europe today, impatient Greeks have doubtless derived some encouragement from excoriations of bankers’ foolishness by German Chancellor Angela Merkel and French President Nicolas Sarkozy.
The economists’ commonplace that a monetary union demands a fiscal union is only part of a much deeper truth about debt and obligation: debt is rarely sustainable if there is not some sense of communal or collective responsibility.
That is the mechanism that reduces the incentives to expropriate the creditor, and makes debt secure and cheap.
At the end of the day, a collective, burden-sharing Europe is the only way out of the current crisis.
But that requires substantially greater centralization of political accountability and control than Europeans seem able to achieve today.
And that is why many of them could be paying much more for credit tomorrow.
Blind in Gaza and Jerusalem
LONDON – I spent the New Year in Sydney, watching the fireworks above the iconic bridge welcome in 2009.
The explosions over Gaza that night were not intended to entertain, but rather to break Hamas and discredit it in the eyes of Palestinians.
It was the latest resort to terrible violence in order to resolve how to share in peace what Christians still like to call the Holy Land.
Mahatma Gandhi criticized the biblical justification of retribution, “an eye for an eye, a tooth for a tooth.”
Followed through to its end, he argued, it would mean that all were blind.
And so it has proved in Palestine and Israel.
Blind in Gaza, blind in Jerusalem.
Much of what has happened was predictable, as well over 1,400 men, women, and children have died and more than 4,000 have been injured.
First, the United States justified the Israeli assault and blamed everything on Hamas, just as it used to pin all responsibility for whatever went wrong on Yasir Arafat and Fatah.
Second, despite French President Nicolas Sarkozy’s welcome high-profile diplomacy, Europe has been irrelevant, if not quite invisible.
As Israeli officials point out, Europeans are always there for the photo opportunity.
The Quartet’s peacemaker, Tony Blair, is as unctuously nugatory as ever.
He appears on CNN , but has he actually visited Gaza since his appointment in the summer of 2007?
No.
Third, as usual, Israel has accused of anti-Semitism those who have dared to criticize its disproportionate response to Hamas’s indefensible rocket attacks and its collective punishment of Palestinians. An Italian cardinal, who admittedly spoke intemperately, was accused of using the language of Holocaust denial.
By that standard, does my unqualified criticism of Hamas’s rocket attacks make me an Islamophobe?
Coincidentally, the deadly attack on Gaza came at the same time that a clutch of America’s most distinguished would-be Middle East peacemakers published books about how the task should properly be tackled. It all sounded a bit like a series of job applications – the war for President Barack Obama’s ear.
One thing all these experts could agree on is that President George W. Bush was a disaster.
American policy might as well have been made in Likud’s headquarters.
Even at the end, when the United Nations Security Council voted on Gaza, Bush was happy to humiliate Condoleezza Rice at Israeli Prime Minister Ehud Olmert’s bidding.
These “wise men,” advisers one and all to President Bill Clinton and other presidents, all seem to concede that the failure of the proposed Camp David accord in 2000 could not, after all, be laid solely at Arafat’s door.
Former Israeli premier Ehud Barak should carry his share of the blame.
Moreover, they all criticize the Clinton-era practice of routinely clearing America’s policy positions first with Israel, which is hardly likely to win Arab confidence or support.
The American diplomats’ arguments about process did not on the whole carry over into disagreement about the content of a peace deal.
All more or less agree on this.
Two states.
Security guarantees for Israel.
A Palestinian state within the 1967 borders, adjusted by agreement through mutual land swaps.
An end to most West Bank settlements.
No “right of return” for Palestinian refugees, but financial compensation for them.
Some system of joint or international sovereignty over Jerusalem’s holy places and the division of the city so that it can become the capital of two states.
Of course, this is what should happen.
And I suppose that it is conceivable that it could still happen with the help of welcome new mediators like Qatar and Turkey, whose prime minister called Israel’s attack “a serious crime against humanity.”
But I have begun to wonder whether it will really be possible to achieve peace on this basis.
Fatah, and Palestinian moderates like President Mahmoud Abbas, have been totally discredited.
Palestinians on the whole have been further radicalized.
Hamas, whose engagement and support is essential for any settlement, has sworn revenge.
Every day, new Palestinian sorrows strike heaven in the face.
The widows and the mothers of the dead weep and cry out for bloody justice. Should we be surprised?
Had the British government pursued peace and the destruction of the IRA in Northern Ireland by bombing Catholic Derry, would that have alienated or won over Catholic opinion?
On the Israeli side, which political leaders really want a Palestinian state and are prepared to take the political risks associated with trying to establish one?
Which of them are strong enough to deal with the West Bank settlers?
There will be no peace settlement otherwise.
Which leaders will teach the facts of life to the more extreme members of the Jewish diaspora in America?
Who among Israel’s leaders understands that reconciliation is more important that retribution and revenge?
However tough things looked in the past, I have never felt such a sense of despair about Palestine and Israel.
Reason has been drowned in blood.
It seems as though the politics of hope have given way to the politics of the cemetery.
Poor Palestine.
Poor Israel.
Who is there now who can still light a candle in the dark?
Block Benefits, Not Immigrants
As EU enlargement approaches, people across Western Europe fear a flood of job-seeking immigrants from the postcommunist accession countries.
Indeed, if all eight of the top East European candidates (excluding Bulgaria and Romania) join by the target date of 2004, the EU population's will soar by about 75 million people.
When Spain and Portugal joined the EU two decades ago, emigration to existing member states was lessened by the fact that many immigrants had arrived from these countries during Europe's go-go 1960s.
But migration from Eastern Europe in those years was blocked by the Iron Curtain.
Now the income gap between eastern applicants and the EU is three times as large as the disparity with the Iberian peninsula was.
Munich's Ifo Institute expects about 2.5--3.3 million migrants to Western Europe during the 15 years following EU enlargement.
These are big numbers, but there is little or no reason for fear-not if today's EU members prepare.
Unlike immigration from non-European countries, East European immigrants share a similar cultural background and will assimilate easily.
In principle, with flexible labor markets, migration creates welfare gains for all countries.
Emigration countries gain because their nationals can earn an income in Western Europe that, for all but the most marginal migrant, is more than sufficient to compensate for the loss of domestic value added and the subjective and objective costs of migration.
Immigration countries gain because all but marginal migrants produce more value added than they get back in wages.
While blue-collar workers incur income losses, their losses will be overcompensated by the gains of landowners, capital owners, entrepreneurs and white collar workers.
Sadly, today's EU labor markets are too inflexible to achieve this result.
If immigration countries suffer from chronic unemployment because wages are overly generous and rigid, as seems the case in most West European countries, migrants who find work will simply displace nationals from their jobs.
Here migration will result in a welfare loss.
Migrants gain.
So, too, family members staying home who receive money transfers.
But migrants produce no additional value added for the countries into which they immigrate, but incur migration costs and their contribution to domestic value added is missing.
The EU wants to solve this problem by limiting migration for a transition period of up to seven years.
This is a second-best solution.
The best solution is to make Western labor markets flexible by opening the system of collective wage bargaining, dismantling labor market regulation, and reforming the welfare state.
If workfare replaces welfare, wages will become more flexible enabling EU labor markets to absorb immigrants more efficiently.
But even with these measures, social benefits may artificially increase the incentive to migrate.
If immigrants gain welfare benefits in addition to wages, more will be lured into coming than necessary, and marginal migrants would create welfare losses for the EU equal to the benefits.
Given that immigrants usually enter countries that redistribute resources from above-average to below-average incomes, such benefits are likely even if immigrants work and pay taxes and social security contributions.
Excluding taxes and contributions paid and transfers and public goods received, the Ifo Institute reckons that the average immigrant to Germany receives a net 2,300 euros annually.
One way to curtail this problem is to delay full integration of immigrants into the welfare system of a host country for a few years-a reform advocated by the Scientific Advisory Committee to Germany's Federal Finance Ministry.
Immigrants could come and work, pay taxes and social contributions, and gain free access to the public goods of the host country.
They could also receive the full contribution-financed social transfers that the welfare state provides.
But they would not be granted tax-financed social benefits.
Temporary exceptions could include supplemental social assistance, housing benefits or the "export" of family benefits to children living in the home country.
The exceptions would have to be tailored by each country so that the net cost of all transfers of public resources to and from immigrants is zero.
Politicians and lawyers may dislike this solution, because it undermines the EU's principle of social inclusion for employment and resembles arrangements that currently apply to EU citizens who live in other member countries without working there.
Instead, bureaucrats and politicians prefer a quota system, whereby bureaucrats, not the market, select who immigrates.
Such a system may formally fit better with the idea of social inclusion, but violates the basic right of free migration granted in the Treaty of Rome.
Only people that bureaucrats deign to select are fully included, while others who want to come but are not allowed to do so face discrimination.
A policy of partial, delayed integration is preferable to quotas, not only in view of the Treaty of Rome but also on economic grounds.
It allows for fine-tuning and self-selection of migration flows, yielding far better results than even the most well-meaning bureaucrats could ever achieve.
Moreover, it would reduce the fiscal burden on taxpayers in immigration countries, thereby preventing a competitive dismantling of West European welfare states driven by the aim of warding off expensive immigration.
Partially delayed integration rather than transition periods or quotas is a market-oriented solution that can maintain Europe's welfare states and enable it to grow and develop to its true potential.
Block the Commission\u0027s Competition Policy Now
Last December, the European Commission published a Green Paper that contains proposals to reform the EU's rules on mergers.
Reactions and comments on these proposals by interested parties are due in Brussels by March 31 st .
Afterwards, the Commission will draft new merger control rules to replace the current ones which date back to 1990.
Since the new rules on controlling mergers will come in the form of a regulation, not a directive, they will take effect immediately, most likely before this summer, and will not need to be ratified by national parliaments.
As of the end of February, barely a handful of comments on the Green Paper had been received: it would be a crime if business and public opinion, both in Europe and in the United States, overlooked the March 31 st deadline and let this opportunity to speak up go by.
In the absence of strong criticism, the Commission will feel it legitimate to go ahead with a set of proposals that is deeply unsatisfactory.
If this happens, another ten years may pass before the regulation is modified.
The new merger control rules go some way toward fixing a number of quirks in the Commission's current procedure for evaluating mergers.
The possibility of stopping the clock on the proceedings for a couple of weeks gives a company some time to negotiate remedies with the Commission, while preserving certainty in the timetable, which constitutes the main advantage of Europe's competition rules.
The proposals also clarify Brussels' jurisdiction in relation to national competition authorities: mergers requiring a review by three or more national authorities will go automatically to Brussels.
This currently only happens if a company meets complex turnover thresholds.
Here, on the technical side, one important issue remains unresolved: contrary to what happens in the US, the European regulator lacks the authority to impose the break-up of a company as a remedy against its dominant market power.
For example, when UPS complained to Brussels about Deutsche Post cross-subsidizing its courier services the Commission limited the remedy to imposing an accounting separation between the market and non-market activities of the German Post Office, something very different from a break-up.
It did so because, in the absence of a change in regulations dating to 1962 (a change that has been proposed by the Commission but not yet approved by the European Council), Brussels lacks the authority to force break-ups.
Without this authority, it is natural for the European regulator to be unusually suspicious of mergers: if a new company created by a merger were, sometime in the future, to rise to a dominant position, the regulator may lack the power to intervene.
So it is deemed better to kill a potentially dangerous baby before it is born.
But all of this is, in the end, small beer.
The new rules fall short of addressing the main drawback of European competition policy, which is institutional, not technical: the Commission remains simultaneously prosecutor, judge, and jury of all merger cases. ``In-house hearing officers,'' the Commission's internal review process, are a joke, and a company's right to appeal to the European Court of Justice is a mockery in merger cases (though less so in the case of an action for market abuse), given the timing of the Court's rulings.
In America, an independent judge rules from the first stage of the process, which guarantees that decisions are both timely and fair.
The Commission claims that the institutional structure for competition rulemaking is enshrined in the EU's core Treaties and could be changed through regulation.
Fair enough, but we are not idiots.
Last summer the Commission issued a White Paper on European Governance, a background document for the Constitutional Convention chaired by Valery Giscard d'Estaing now underway in Brussels, a body expected to review the ``governance of Europe,'' that is the powers of the Union and the way it uses them.
That White Paper, while proposing that some powers be transferred from the Commission to independent authorities, explicitly rules out any change in the governance of mergers: ``Creation of autonomous EU regulatory agencies will improve the way rules are applied and enforced across the Union.
[Such agencies, however] cannot be given responsibilities for which the Treaty has conferred a direct power of decision on the Commission, for example in the area of competition policy.''
But isn't it the Convention's task to draft a new Treaty?
One is under the impression that the Commission did not choose its timing by chance.
By moving fast on a few technical improvements of the merger control rules, and introducing them ahead of the Convention, the Commission acted as if it were hoping that the institutional structure of competition policy would not become an item on the agenda of the Convention: we just fixed it, let's wait and see how the new rules work out , it seems to be saying.
The Commission should not be allowed to get away with this ingenious plan.
It is offering small beer, certainly not enough to buy the silence of business and public opinion.
The new regulation should be blocked, at least until the Commission commits to put forward a serious proposal for the overhaul of the institutional setting of European competition policy.
The fact that competition policy is the only tooth that bites in Brussels should not be an excuse for preserving a system that defies democracy and seriously lacks transparency.
Block Thinking
“Multiculturalism” has become a suspect term almost everywhere in the world nowadays, and particularly in Europe.
People say things like: “I used to be for openness and toleration of difference, but now I see where it’s leading.”
Almost every reason for toleration’s apparent fall into disrepute concerns Islam.
Even simple requests, like that of schoolgirls to wear headscarves in class, are suddenly freighted with immense political significance and treated as issues that must be resolved at the highest level of government.
People – and their elected leaders as well -- often have the feeling that such seemingly innocent proposals are in fact part of an ominous “hidden agenda.”
That agenda is “Islam,” which many imagine to include all the terrible things that we can read about in the press every day: the stoning of adulterous women under Sharia law in northern Nigeria, the amputation of thieves’ hands in Saudi Arabia, honor killings of women who refuse arranged marriages in Pakistan (or even northern English cities like Bradford and Manchester), the willingness to justify suicide bombings.
If you reply that the girls who want to wear headscarves to school aren’t living in Nigeria or Saudi Arabia, and almost certainly don’t share the extreme Wahhabi views found in those countries, you will be met with a look of almost indulgent pity, a look of the type reserved for the terminally naïve.
Or you will be told stories about how Saudi trained imams are twisting the girls’ arms, turning them into unwilling stalking-horses for “Islam.”
Indeed, it is virtually impossible nowadays to talk about headscarves as an issue in its own right.
All the sociological evidence about the girls’ motives, which are in fact very varied, is swept aside as irrelevant.
All that matters is the threat posed by Islam.
This is a classic example of what I call “block thinking,” which seems to have made huge strides in Europe in recent years.
John Bowen’s recent book Why the French Don’t Like Headscarves documents this shift.
Block thinking fuses a varied reality into one indissoluble unity, and in two ways.
First, different manifestations of Islamic piety or culture are seen as alternative ways of expressing the same core meaning.
Second, all Muslims are then seen as endorsing these core meanings.
The possibility that a girl wearing a headscarf might in fact be rebelling against her parents and their kind of Islam, and that others might be deeply pious while being utterly revolted by gender discrimination or violence, is lost from view.
Block thinking is an age-old phenomenon, and we all do it to some degree.
But, while in another age we might have been indulgent about its consequences, today it has explosive potential, because people who think in this manner are prime recruits for seeing the world in terms of Samuel Huntington’s theory of the “clash of civilizations.”
What’s worse, the way such people then act tends to edge us closer to Huntington’s nightmare scenario.
By treating all the varied segments of Islam as nothing more than parts of a unified threat to the West, they make it harder for Muslims to stand out and criticize their own block thinkers – people like Osama bin Laden, who are building their own unified enemy, composed of “Christians and Jews.”
Block thinkers on each side give aid and comfort to block thinkers on the other side, and with each exchange they pull us closer toward an abyss.
So how can we stop this madness?
Block thought persists in part because its critics on each side are unknown to those on the other side.
Indeed, how many times does a critic of European block thought meet this kind of response: “But where are the Muslims who are criticizing extremist Islam?”
Of course, one isn’t likely to meet them in the drawing rooms of Paris journalists or the wider European professional political class.
But explaining that to block thinkers will never have the impact of a real connection to the multi-faceted discourse that is actually taking place on the other side.
The real question, then, is this: Where are the crossover figures who can provide that urgently needed connection?
Blood Politics
LONDON – The race for the leadership of the British Labour Party isn’t normally a world-shaking event.
But the recent contest between two brothers – David and Ed Miliband – not only provided the material for a riveting family drama; it also illustrated some peculiarities of democratic cultures that often go un-noted – and the strange relationship between the personal and the political that is built into the hierarchy of democratic protocol.
Politics, or at least the exercise of power, was traditionally a family affair.
Kings typically hankered after male heirs, because power was vested through filial lineage, and distributed through tribal affiliations.
Hereditary power did not necessarily make for warm and open family relations.
Henry VIII was willing to execute two wives and overturn Christendom in pursuit of a son.
There are examples, in polygamous societies, of royal concubines murdering each other’s children in order to assure the predominance of their genetic line.
The Ottomans introduced the practice of “judicial royal fratricide,” supposedly to prevent civil war.
Whether it involved absolute loyalty or murderous rivalry, traditional politics was rarely divorced from personal passion.
Not so in modern Western democracies, where personal passions are, at least in theory, supposed to be completely separate from the impersonal representation of group interests.
Democracy, in its Greek origins, began with the creation of a public sphere distinct from the family and its intense emotions.
But modern democracies – especially those conducted on the Anglo-Saxon model – take this further, by attempting to separate not only the private from the public, but the person from the politician.
The division is in a sense inscribed in the democratic spectacle.
After presidential debates in the United States or Britain, the contenders, who may have been accusing each other of the most unforgivable of sins, shake hands vigorously and give each other genial and encouraging smiles.
No matter how much Barack Obama may have loathed the views of George W. Bush, he had to be initiated into state secrets by the former president, in a confidential – and undoubtedly genial – meeting. In parliamentary debates, fierce ideological battles may be the order of the day, but ad hominem attacks are off limits.
This is undoubtedly to the good, and necessary to the conduct of orderly democratic life; but to those not used to it, the ability to combine enmity with bonhomie can seem counterintuitive.
Indeed, it may be that the transition from passionate to impersonal politics is one of the most difficult challenges facing democratizers everywhere.
In pre-1989 Eastern Europe, for example, politicians’ ideological positions were seen as inseparable from their moral, or human, self.
Those who were on the wrong side of the political divide were not only guilty of erroneous views; they were seen as wrong in their essence, and therefore to be condemned and hated.
The idea that you could treat political enemies jovially, and perhaps have a drink with them after hours – or enter into a coalition government with them – can seem not only unnatural, but even a bit indecent, in such circumstances.
Indeed, in some young democracies, or more volatile cultures, the suspension of personal feeling is not always successfully maintained.
Just last year, one could witness fistfights in parliaments ranging from Iraq to Taiwan, Turkey, and, most spectacularly, Ukraine.
To us, such behavior looks untoward, or even uncivilized; to the participants, it is probably experienced as a natural overflow of righteous feeling.
Clearly, parliamentary brawls are not a desirable modus operandi.
But how far can the separation between person and politician be taken – and to what extent do we really give it credence?
The Miliband race was an extreme example of what might be called counter-nepotism – the attempt to abstract the politician from all private attachments.
As the two brothers sat on platforms together, challenging each other’s views, they tried to maintain the double fiction that, on the one hand, there was no special bond between them, and, on the other, that their sometimes fierce disagreements did not taint their fraternal affections.
For a while, everybody played politely along; but the tricky double-think involved in this was exposed when the younger brother, Ed, won the leadership, by a razor-thin margin, in a last-minute upset.
Suddenly, this didn’t seem quite right.
In the media, comparisons to Esau’s theft of Jacob’s birthright and to various Shakespearean tragedies began to abound.
David Miliband’s decision to retreat from front-line politics made it evident that a symbolic beheading had taken place – and one wonders if Ed Miliband won’t be haunted, and therefore hampered, à la Macbeth, by the psychological violence he committed.
In judging candidates for high office, we are encouraged to eschew “personality politics,” and to disregard such aspects of politicians’ identities as their spiritual lives, their private behavior (unless obvious transgressions are committed), and their appearance and aesthetic tastes.
In practice, few of us can manage to compartmentalize our perceptions – and, perhaps, doing so would not be desirable.
We may not want politicians to be driven by self-interest, but we need to acknowledge that they have selves, which are formed by a multitude of factors – and passions.
In other words, if we do not want to reduce our vision of politics to policy processing, we need to remember – if only for the sake of fuller and more realistic judgment – that politicians are human, too.
Blowback in Mexico’s Drug Wars
MEXICO – Drug trafficking has existed in Mexico for decades.
But trade in illegal narcotics did not seriously threaten Mexico’s stability or provoke conflict with the United States until the mid-1980’s, when Colombian cocaine began to flood across Mexico to the US.
By that time, Mexican police institutions were in a state of decomposition, making them fertile ground for the drug traffickers to corrupt. And so they have.
The dismantling of Colombia’s Cali and Medellin cartels in the 1990’s created a vacuum that Mexico’s cartels were able to fill, ultimately consolidating their position in the drug trade.
Still, the levels of drug-related violence in Mexico remained relatively low.
This “dealers’ peace” can be explained by the Mexican government’s policy of tolerance, which sought a degree of equilibrium between the drug cartels and the state in terms of trafficking routes and the territories that the cartels infiltrated.
This secret truce was maintained even after Mexico’s first open democratic presidential election in 2000, when the long-ruling Institutional Revolutionary Party was ousted from power.
Then former President Vicente Fox ordered a crackdown.
As drug lords were arrested, the equilibrium between gangs was destroyed, paving the way to a war between the Sinaloa and Gulf cartels – the two largest – which has generated enormous violence, as well as sharp US protests because of the impact of the fighting along the border.
When President Felipe Calderón took office in 2006, he inherited rising violence, with drug traffickers controlling parts of the country.
He responded by quickly launching a frontal assault on the cartels, with the support of the army.
Calderón’s offensive increased his popularity, but it also provoked a new rise in violence, as the drug gangs not only battled government forces, but also settled accounts among themselves.
The US government complained again, but at the same time the Bush administration delivered a $1.4 billion aid package, the so-called “Merida Initiative,” to fight the traffickers.
In 2008, Mexico’s government decided to attack the drug cartels’ operational nerve centers.
But this only accelerated the gangs’ fragmentation, provoking a new and extraordinary increase in violence.
Indeed, over 5,000 people were killed by organized drug criminals last year, more than double the death toll in 2007.
The violence has also become crueler.
Since 2007, many of the cartels’ victims have been decapitated – a tactic clearly aimed at intimidating their enemies.
And, as the grotesqueness of the violence has grown, so has pressure for a more effective strategy.
Some critics of Calderón’s government now say that it is time to change strategy, perhaps even returning to the pre-Fox policy of tolerance.
Nevertheless, public-opinion polls still show broad backing for Calderón’s strategy.
But the question is how long this support will last.
The government insists that drug-related violence is concentrated in just three of the country’s 32 states, but the problem has spread to most of the country.
Of course, most victims are traffickers.
But the country’s rampant violence has created an environment of insecurity that complicates everyday life for many Mexicans.
Ultimately, this may turn public opinion against Calderón’s policy – a development that some drug trafficking groups are encouraging with anonymous posters, and by sponsoring popular protests in northern Mexico that demand the army’s return to its barracks.
But, at least in the short term, there seems to be no alternative to Calderón’s strategy.
After all, while his policy of confrontation has generated high levels of violence, tolerance of the drug cartels corrupted state institutions, sowing the ground for the problem in the first place.
So it seems that the government’s only option is to continue the war, hoping that its longer-term effort to strengthen state institutions’ capacity and integrity will eventually prove effective.
But corruption remains a profound and persistent threat to this effort, and if the government cannot reduce it significantly – especially among its anti-drug forces – a return to tolerance is inevitable.
Blue Europe, Red Asia
PARIS – Could Europe be a Democratic “blue state” and Asia a Republican “red state”?
American presidential elections provide a near perfect test to understand the difference between European and Asian worldviews, even if the two continents are far from united internally.
If you want America to lead by the power of example, you favor Barack Obama; if you want to be reassured by the continuation of America’s power in a traditional security sense, you probably prefer John McCain.
Whereas a majority of Europeans – with the exception of those who for historical and geographic reasons are obsessed with the return of the “Russian bear” – support Obama, a majority of Asians, particular among the elite, seem to support McCain.
This difference stems above all from strategic considerations, but it probably also contains a cultural dimension.
In Asia, Indonesia may look “European” in its Obama craze, but it essentially constitutes an anomaly, easily explainable by Obama’s brief Indonesian upbringing.
Otherwise, and for very different reasons, a majority of Asian elites are awaiting the growing possibility of an Obama victory with some bewilderment and even apprehension.
For example, Japanese elites tend to favor continuity over change.
In their mind, the hard power of the United States is more important than its soft power, and their vision of an America “bound to lead” is largely unchanged.
For them, the US is above all the strategic counterweight needed to balance China.
But the Chinese, too, may very likely be favoring McCain, for the opposite reason.
The decline of America’s image and influence in the world does not annoy them.
As Asia’s leading power, China has seized the mantle of “hope” from the US.
America could regain it under Obama, but not under McCain.
Why favor change, when continuity works so well for you?
Indian elites reach the same conclusion for different reasons.
The Bush years are seen positively, for they coincide with the consolidation of India’s international status and emergence as America’s key diplomatic partner in Asia.
In Singapore, ideological considerations reinforce strategic interests.
A very conservative regime naturally tends to prefer a Republican candidate over a Democrat.
But, beyond strategic considerations, something else must be mentioned (with prudence).
It is too early to say that the “yellow man’s burden” is about to replace Rudyard Kipling’s “white man’s burden” in world history.
Asians are slow to acknowledge that power entails international responsibility.
But Asians who have more than caught up with the West may have difficulty adjusting to the idea that the US would for the first time in history not be headed by a white president.
How can you define yourself to the West, when the West has so spectacularly and visibly changed its appearance, if not its essence?
In Europe, the reverse is true.
The complex essence of Barack Obama is an absolute plus.
For the former colonial countries, who have no equivalent to Obama, to support him fully is a sort of exorcism, if not redemption.
America is once more paving the way for what Europeans should be able to achieve one day with their own minorities: a land of dreams made possible.
In a more classical sense, the depth of anti-Bush sentiment in Europe explains the depth of pro-Obama feeling and Europeans’ relative distancing from McCain’s candidacy.
Europeans have felt oppressed by America’s excessive demonstration of hard power.
They would not mind an America that was more modest abroad and more ambitious at home.
They are in fact secretly wishing that in these tough economic times, at least part of the “culture of hope” incarnated by Obama would reverberate on them and transform them for the better.
They do not want the US only to protect them, but to transform them.
The perception that Obama can transform the view that the US and the West have of themselves is an important factor in the emotional gap that may exist between Asia and Europe on the eve of America's presidential election.
On that count, Asia tends to be a status quo continent, while Europe is a revisionist one.
For many Europeans, a reinvention of America is Europe’s last hope.
It is a noble hope, but also a dangerous one, for dreams can easily turn into nightmares.
That might very well happen if America’s next president fails to redress the financial and economic threats facing his country, and thus the rest of the world.
BMW\u0027s and Chinese Justice
In most places, the name "BMW" implies luxury and exclusivity.
But in China, the brand has unwittingly found itself enmeshed in tales that illustrate the powerlessness of ordinary Chinese against the powerful and corrupt.
The first scandal occurred last year, after a tractor filled with green onions scraped the side of a BMW in Harbin.
The drivers of both the tractor and the metallic-silver luxury car were 45-year-old women, but any similarity between them ended there: the former was a peasant, the latter the wife of a wealthy businessman.
After a confrontation between the two, the wealthy wife drove her BMW into the growing crowd of spectators on the roadside, killing the peasant woman and injuring 12 others.
The case went to the local court, where the judge ruled it an "accidental traffic disturbance" and gave the driver a two-year suspended sentence.
The judge's ruling spurred rumors that he went easy on her because her husband was related to senior provincial officials.
It quickly became a story of "rich versus poor," widely cited as an example of high-level corruption.
Over the next few months, newspapers and television stations ran with the story as it snowballed into a national obsession.
Alarmed by the public reaction, the Harbin magistrate ordered the case reopened, only to have the suspended sentence confirmed when the case was closed this March.
The big BMW story of late 2003 resurfaced quietly, before being buried again forever.
That same month, a lottery scandal threw the BMW brand into the limelight once again.
Lottery officials in Shaanxi province rejected a winning ticket, calling it a fake and denying its bearer, a 17-year-old security guard named Liu Liang, the grand prize of a $58,000 BMW and 120,000 yuan ($14,510) in cash.
Liu became so angry about being accused of fraud and denied the car that he climbed atop a high advertising billboard and threatened to jump as a show of innocence.
But the story didn't end when police officers managed to talk him down.
News broadcasts covered his continued insistence that he did not forge his ticket, along with the lottery center's claims that their rejection of the ticket was legitimate.
The police finally stepped in and, after a careful investigation, announced that they had found the true criminal: Yang Yongming, a private businessman whom the local lottery administration had contracted to organize ticket sales.
Yang had conspired with the government officials directing the lottery, who were arrested for malfeasance, to fraudulently obtain the top prizes.
In June Liu Liang finally got what he deserved - a BMW-325i sedan and a sincere apology from the lottery center.
If the first scandal was a tragedy, the second was more like a farce.
But both offer keys to understanding contemporary Chinese psychology.
The outcry after the first BMW case was not really about the light sentence given to a rich woman, but about the lack of confidence ordinary people have in China's judicial system.
In China, power, money, and connections trump the law.
Even as they are becoming ever more litigious, many Chinese believe that they have no hope of securing justice against the powerful.
The apathetic response of the dead peasant woman's husband to the $10,000 in compensation he received was telling.
"I don't care about the verdict and whether it is justice or not," he said.
The most harmful consequence is the public's loss of trust in the system.
Social trust is not something you can buy with money.
If an entire society believes that you cannot depend on legal rights for protection - that one must instead rely on a web of relationships with those who have power and influence - questions about whether such a society is livable or desirable will remain.
Similarly, in the second BMW case, people didn't blame a corrupt businessman; they ascribed culpability to the lottery center, a government body.
So instead of mistrusting one person, they grew suspicious of an institution - even of government itself.
When a stubborn teenager went up against the mighty lottery authority with its army of auditors and inspectors and initial alibis, this individual, not the system, was the clear winner of the public's admiration.
Liu Liang may have been just a working-class kid, but there was wisdom in his words that there is still a "silent majority" who can affect the workings of China's fragile society.
He refused to settle privately, because he believed that if he let corrupt government officials off the hook, "they'll keep scamming the public."
Thanks to his perseverance and the media's investigation, the fraud was laid bare.
Power corrupts everywhere, but individuals in China such as Liu have come to form a countervailing force.
Even so, such marginal forces do not yet constitute a system for redressing grievances.
While pop music fans in China can listen to whatever they like, including Madonna singing "I'm gonna shake up the system," ordinary Chinese need courage to speak such messages aloud.
As one saying goes, "There is not want of conscience in Chinese, but there is want of courage."
The Age of Bobby Fischer
CAMBRIDGE – The brilliant new Hollywood movie “Pawn Sacrifice” portrays the life of tormented chess genius Robert James “Bobby” Fischer from his early days as a prodigy to his historic 1972 match, at age 29, with Russian world champion Boris Spassky.
Actor Toby Maguire portrays Fischer with remarkable authenticity – indeed, pitch-perfect for those of us who met Fischer in his prime.
The film depicts a match that became a signature event in the Cold War between Russia and the United States.
It also makes one wonder whether a creative genius like Fischer, deeply troubled yet supremely functional at the chessboard, would be able to exist in today’s unforgiving online world.
Fischer certainly got attention back then, but information was filtered very differently than it is today.
Journalists used to lead the way, rather than slavishly following the flow of superficial Internet traffic.
The story of an erratic kid from Brooklyn taking on the Soviet empire in its national sport made good copy for journalists, who understood the significance of the event.
The match garnered front-page headlines in major newspapers around the world on a daily basis for two months, with commentators providing live move-by-move analysis for up to five hours each day.
Back then, there were only a few television channels.
There were no DVD players or pay-per-view services.
Still, that was not the only reason people remained glued to their TV sets to watch the match.
The surreal environment, the amazing chess turns, and the Cold War backdrop made Fischer one of the most famous people in the world that summer.
I won’t humor myself that it was the chess analysis that drew attention, although I was a commentator for public television on the pivotal 13th game.
For the American champion, the match was the consummation of two decades of chasing the title, starting from his days as a child prodigy.
After a lifetime of living in relative poverty for a superstar (even though he frequently appeared on the cover of major magazines), Fischer finally found himself playing in a match with a $250,000 purse.
Of course, it was a pittance compared to the $2.5 million that each fighter was guaranteed in the 1971 Ali-Frazier fight.
But Fischer recognized that US culture marginalizes any pursuit that does not produce big money, so he viewed the six-figure cash prize as the ultimate symbol of advancement in his sport.
For Russia, the match was not about money; it was about hearts and minds.
The chess world had long been the perfect battleground on which to prove the superiority of the Communist system.
Although most Westerners today pretend that we always knew that Russian-style Communism would fail, it was not so obvious back then.
The leading introductory economic textbook of the time, by Nobel laurate Paul Samuelson, was still predicting that Russia might overtake the US as the world’s largest economy.
To be fair, Russians valued chess enormously, even if it did not produce a lot of income.
In many ways, chess was Russia’s national sport.
No wonder Fischer’s quixotic pursuit of the championship led American policy mastermind Henry Kissinger to call Fischer and urge him not to back out, as he had threatened to do.
Whatever his status in the US, Fischer was certainly the most beloved American in Russia.
The majesty of his play transcended propaganda in a country where everyday people could appreciate and understand the innate beauty of the game.
In the run-up to the championship, Fischer trounced two very good opponents with unheard of 6-0 scores, an astonishing result when so many grandmaster games end in draws.
Russian fans were so excited by Fischer’s unprecedented achievement that they reportedly jammed Moscow telephone exchanges to get information.
After a while, operators would simply pick up the line and say “6-0” and hang up.
In the end, even Spassky paid the ultimate tribute to Fischer’s genius, clapping along with the audience after Fischer’s inspired sixth-game victory, as portrayed in the movie.
The American might have been the ultimate chess genius, but the Russian was the class act.
Director Edward Zwick does not shirk from showing the demons that plagued Fischer.
He was justly concerned that the Russians would go to great lengths to prevent him from being champion, but ultimately rational concerns tipped into paranoia, and Fischer started to turn on his closest friends and confidants.
He became anti-Semitic, despite being Jewish himself.
One suspects that in today’s online world, Fischer’s paranoia and personal flaws would have tripped him up long before he became champion.
After Fischer became champion and simply stopped playing competitive chess, his mental illness became much worse.
Though no one can condone Fischer’s virulent rants and dark thoughts in his later years (he died in 2008), it is sad to realize that someone of such towering creativity and genius, who inspired so many people through his chess, might have had his career ended at a much earlier stage today.
We live in a different world.
The Boehner Shock
WASHINGTON, DC – Ever since the financial crisis erupted in 2008, media outlets and specialists alike have devoted much attention to anticipating negative shocks to the global economy.
Today the focus is on the state of the Chinese economy, the timing of the US Federal Reserve’s normalization of interest rates, and the various policies under discussion in the United States’ presidential election campaign.
But the most damaging shocks often hide in plain sight – and then hit precisely when and where almost everyone thought stability would prevail.
One such risk is that political partisanship will cause another disruption to the US federal government’s finances, weakening the American economy and roiling world financial markets.
This warning may seem strange.
After all, the last big partisan fight (in 2013) over funding the government and raising the debt limit gained little for the Republicans who instigated it – other than significant damage to their reputation for responsibility.
And the current Republican leadership, eager to strengthen their party’s electoral chances in 2016, very much wants to project an image of sober good sense.
Yet a major and destabilizing confrontation over public finance now seems unavoidable, particularly following House Speaker John Boehner’s surprise announcement that he will resign his position and his seat in Congress at the end of October.
To see why, one need look no further than the House Ways and Means Committee, whose current chairman, Paul Ryan, is a leader of the hardline Republican insurgents who had scorned Boehner for being too willing to compromise with President Barack Obama and House Democrats.
Ryan’s committee plays an important role in setting America’s fiscal agenda, reflecting both the constitutional requirement that revenue bills originate in the House of Representatives and political realities (the House is traditionally less fractious than the Senate).
Unlike in 2013, the strategy of Ryan and his allies this time around is unlikely to include a threat to default directly on federal government debt.
And Republicans on the committee claim that social security payments will be made on time.
So what other bills do they plan not to pay as part of a showdown over legislation to keep the government funded?
In fact, it is difficult to say exactly what the threat is – and that is part of the problem.
Uncertainty about government contracts and various kinds of payments can have a broad impact on the economy.
The difficulty of working through the full economic implications is precisely what discourages consumers from making purchases and causes firms to postpone investment.
The US Government Accountability Office (GAO) published a helpful report in July that spelled out some of the consequences of the 2013 confrontation over the debt ceiling – including how it pushed up the government’s borrowing costs and the negative impact this had on the economy.
But the Republican majority in Congress simply ignores this type of sensible analysis.
As a result, a partial government shutdown is entirely possible, with the Republicans imposing a form of prioritization on government payments: some people will be paid what they are owed, and others will not.
This will fuel uncertainty, sap economic confidence, and almost certainly hurt the Republicans at the polls in 2016.
So why is it likely to happen?
One reason is to be found in the decentralized nature of American politics, which leaves elected officials relatively unbeholden to party leaders.
Some Republican supporters and donors have obviously moved to the right in recent decades.
But, as James Kwak and I explained in our book on US fiscal policy, White House Burning, the time when the Republican right favored responsible budgets and financial stability has long since passed.
Now the right – increasingly catering to a Southern, rural, and white constituency – cares much more about shrinking the federal government, and in recent years has viewed shutting it down or threatening nonpayment of debts as a way to “starve the beast.”
Moreover, the Republicans’ uncompromising stance has been reinforced by the extreme position taken by many within its congressional delegation that Planned Parenthood – a health-care provider that primarily serves women – must be defunded as a condition of any budget deal.
Boehner’s resignation, though viewed by some as clearing the way for a short-term deal to fund the government, merely underscores the limited ability of any “responsible” Republican leader to control the party’s increasingly fundamentalist caucus.
In the US, as elsewhere, debates about fiscal policy should be open, with clear statements of alternative goals and balanced assessments of how best to pay for what government does.
Unfortunately, a debate and the compromises that follow are not what the Republicans have in mind.
Boehner’s forced departure makes it likelier than ever that the US – and the world – will soon face the prospect of another self-inflicted economic shock, caused entirely by the Republicans’ scorched-earth budget tactics.
Bolivia Divided
Bolivia seems to be in danger of falling apart.
Support for President Evo Morales, who won 53% of the vote in December 2005, represented a demand for democratic coexistence, social change, and national unity.
Two years later, the country is marked by regional, social, ethnic, and ideological divisions, and its government is confused and disoriented.
Morales passed a constitutional reform that included changes in the conception and role of the state, private property, and management of natural resources and taxes.
His opponents have responded by proclaiming their right to self-determination and threatening to boycott the referendum with which he hopes to legalize the reform.
Morales’ sympathizers threaten to erect roadblocks.
Only three of Bolivia’s nine departments support the government, while 60% of the population is concentrated in the six other departments, which account for 70% of the country’s territory and two-thirds of its GDP.
The government’s desire to impose its will on the majority of the country is therefore potentially dangerous.
Indeed, Bolivia, one of Latin America’s poorest countries, has become increasingly polarized.
The conflict is not, as the government claims, between the people and a few oligarchs.
The urban population, already 70% and growing rapidly, has begun withdrawing their support from Morales, except in La Paz, El Alto, and Oruro, and in the most unionized sectors.
Rural peasants and Indians still support him, as do senior military officials.
The erosion of support for the government is due to its inefficiency: inflation is triple official forecasts, and basic foodstuffs and fuel are scarce and their supply irregular.
Investment has been discouraged by the rejection of corporate culture, social and political tension, and uncertainty about the reforms.
Today, Bolivia is being led by its government toward antagonism between Indians and non-Indians, the eastern and western regions, and city and country, exacerbated by insults and actions that are acquiring an increasingly racist and ethnocentric edge.
The identity of Bolivia’s indigenous people, who were historically excluded from political, social, and economic life, is beginning to be seen as a synonym for confrontation, violence, and ethnic aggressiveness.
The government is rapidly isolating itself from the regional, civic, and political opposition that, little by little, has been rising to causes such as autonomy, pluralism, the need for consensus, and freedom of expression.
The official discourse is entrenched in statism and centralism, with growing disregard for democratic principles and procedures.
The government accuses the opposition of advocating the secession of hydrocarbon-rich territories, threatening them with repression.
In turn, the most radical regional opposition groups threaten secession if the central government blocks their demands for greater self-government.
The first consequence of this process has been a transition from legality to arbitrary power.
Key institutions, including the Constitutional Court, the Supreme Court, and the Senate of the Republic, are being eroded.
The Constituent Assembly, which should build national unity and democratic legitimacy, has been turned into a mechanism for division and absolute power.
The government has had the National Congress surrounded by unionists so that only its ardent supporters can enter for the Senate’s sessions.
Similarly, the government cut the department governors’ revenue in order to finance an expanded pension plan and weaken them politically and economically.
The government’s closing of democratic and institutional spaces produces responses of a proportional and equivalent force, which in turn tends to expand the political conflict toward areas where force and violence prevail.
A presidential order recalling the unionist, police, and army troops is urgently needed to avoid greater tragedy (there have already been 30 deaths in the last two years) and create conditions for dialogue and a democratic covenant with regional, civic, and political opposition forces.
Otherwise, the referendum to ratify the government’s proposed “MAS (Movement for Socialism) constitution” will only fuel more strife.
Two-thirds of Bolivians are dissatisfied with the way the Constituent Assembly has carried out its work, and a majority believes that the constitutional text is illegal.
In this conflict, both sides have raised their bets, and their threats could become a reality.
But this is not inevitable, above all because Aymaras and non-Aymaras, Indians and non-Indians, will continue to work to preserve unity in democracy as the basis for a more just future.
Bolivia’s Crisis, Latin America’s Failure
Bolivia is not a typical Latin American country by any definition.
But for Haiti, it is the poorest nation in the Western Hemisphere, and it is even less stable, with a history of more than two hundred coups since independence.
In a region with a strong indigenous past but a scattered and isolated present, Bolivia is, alongside Guatemala, perhaps the only country in Latin America where indigenous peoples make up a majority of the population.
Its topography and ethnic distribution are generating autonomist and even secessionist forces that threaten national unity in more menacing ways than anywhere else.
And, of course, it is, with Paraguay, the only land-locked nation on the sub-continent.
So it would be highly imprudent to extrapolate Bolivia’s current crisis to the rest of Latin America.
It is far too simple to generalize: institutions elsewhere are much stronger, poverty – and particularly extreme poverty – have been diminishing, and the battle over natural resources has been largely settled.
Even in places like Venezuela, with both huge oil reserves and a traditional-minded nationalist government, the status quo allowing for foreign investment in energy resources has survived nearly eight years of President Hugo Chavez.
While the existence of indigenous movements is a reality in many countries, from Chiapas to “Araucania,” from Amazonia to Ayacucho, nowhere in Latin America have they posed a genuine threat to national integrity.
So Bolivia is not a premonitory crisis; nor does the hoary old “domino theory,” to which both Lyndon Johnson and Che Guevara subscribed in the case of Bolivia, seem valid or even half-way reasonable.
Yet Bolivia’s current crisis does point to the “democratic deficit” that plagues Latin America today.
Elected leaders have fallen for one reason or another in Bolivia, Ecuador, and Haiti.
Democracy is either defective or missing in Cuba, Mexico, and Nicaragua, and it is threatened by one cause or another in Venezuela and Colombia.
None of these cases are identical to the others; they include varying degrees of danger, harm, or reconciliation.
The question is what can be done about this state of affairs, which contrasts starkly with the encouraging outlook that prevailed just a few years back.
At the last Organization of American States assembly in Fort Lauderdale, Florida, the United States delegation took a good idea from others and, by its support, essentially sank it.
The story began a couple of years ago, when former Argentine Foreign Minister Dante Caputo and the United Nations Development Program were charged with drafting the Latin American Democracy Report.
They concluded that an early warning system for democratic crises in the region would help generate action before matters got out of control, as in Bolivia today.
Caputo and the UN team then convinced Chilean President Ricardo Lagos to take up the initiative and to promote it with several of his colleagues.
He did, but the initiative did not get very far.
In fact, The UNDP/Latin America Democracy Report, published in 2004, barely mentioned it.
The US and the new Chilean Secretary General of the OAS, Jose Miguel Insulza, resurrected the plan during the OAS meeting in Florida, but it was shot down by Latin Americans’ reasonable fears that the idea was directed against Venezuela, mingled with Latin Americans’ anachronistic fears of violating the sacrosanct principle of non-intervention.
Despite the continent’s failure to agree on the principle, the idea of an early-warning system deserves attention.
Today there may be little that the hemispheric community can do about the situation in Bolivia, and yet it is fraught with danger for everyone.
Evo Morales, the leader of the opposition and of the coca-leaf growers, may be an honest, if misguided, democratic leader, but are his followers untainted by authoritarian desires?
Hugo Chavez may not be financing Morales and Bolivia’s other dissidents, but are Venezuela and Cuba really not tempted to meddle in the country where Che Guevara died leading a guerrilla war nearly 40 years ago?
Bolivia’s Santa Cruz business community may not carry out its threat to secede, but will they prefer to share their region’s oil and gas reserves with the indigenous highland peoples rather than with Brazilian industrialists from São Paulo?
Before events reached these extremes, it might have been a good idea for the OAS (not the US) to get involved.
The region continues to need that involvement – on time, on message, and on a proper democratic platform, one that is distinct from both traditional US intervention and Latin America’s traditional indifference.
Bolivia\u0027s Populist Temptation
In April 2002, violent demonstrations known as the "water war" in Bolivia forced President Hugo Bánzer to cancel the contract with the only international corporation interested in taking on the most ambitious water project ever proposed in the country.
Recently, another major popular upheaval ended a project to export natural gas to Mexico and the United States through a Chilean seaport.
This was the "gas war," which its leaders used to overthrow President Sánchez de Lozada and hold back the modernization process of strengthening institutions, opening markets, and integrating Bolivia into the global economy.
These so-called "wars" are part of the same conflict that prompted the peasant blockades of September 2000, the continuing protests by coca growers against efforts to eradicate their crops because of their role in the cocaine trade, and the withdrawal earlier this year of a progressive tax project.
In essence, these are all part of an ongoing conflict between democracy and populism, with Bolivia's future caught in the crossfire.
Neither side trusts the other, so social wars have replaced meaningful political progress.
As the violence of the social mobilizations and the level of discontent have grown, Bolivia's intellectuals and politicians remain in a state of shock, afraid of contradicting the masses.
For their part, the populists can rouse the masses but fail to offer alternatives.
They are nostalgic for the past and fearful of globalization.
As the two sides collide, the country suffers: the outcome of the water war has meant that the poor still use the same dirty and expensive water, while the result of the gas war could mean that we remain without new export revenues.
Bolivia needs leaders who can move the country beyond social wars that translate into stagnation.
To move forward, both sides need to be realistic about Bolivia's past.
The level of poverty--more visible with Bolivia's urbanization--is enormous, but it was worse before modernization efforts began.
In fact, almost all indicators point to substantial progress made in the 21-year history of Bolivian democracy.
Infant mortality has been cut in half, more citizens than ever enjoy educational opportunities, and electric, telephone, and sanitation services have expanded to serve a greater number of people.
Moreover, the channels leading to higher social and political participation have multiplied.
These advances are the result of audacious institutional reforms and the government's sustained and increased investment in social programs.
They are part of the modern democracy.
None of this progress, however, has been accompanied by the strengthening of our citizens' sense of responsibility to their nation.
In fact, while Bolivians demand the right to the many benefits of democracy, we fail to take seriously any obligation to contribute to the public good.
Many evade or reject paying taxes, in part by appealing for compassion towards the poor.
Leaders of the poor prefer to romanticize the past.
Thus, while ethnic inequities have been dramatically reduced over the past 50 years, the historical memory remains vivid to new generations of the now urban Aymaras and Quechuas people.
They rightly contest the degradation of their ancestors, but also idealize their rural, communitarian nature.
The current state of affairs fails to meet their expectations, especially when contrasted with an idealized version of the past or the new patterns of consumption portrayed in the media.
So expectations outpace reality, with politicians contributing to this by promising more than they can deliver--and thus losing the trust of their constituents.
Malaise has grown ever more acute after many Bolivian political leaders and their supporters, worn down by the regional crisis of the 1990's, expressed doubts over the modernization process.
Institutional reforms meant the government could no longer use public resources with the same discretion as before.
As a result, political parties and social organizations alike attacked reform efforts.
Presidents Bánzer, Quiroga, and Sánchez de Lozada found their authority dwindling while movements against them grew ever more robust.
After the political rebellion and lootings of this past February, Bolivia's Catholic bishops made real and consistent efforts to create a harmonious space for dialogue.
But the most radical indigenous groups rejected the initiative, and the group organizing the coca growers took advantage of the situation, stirring up nationalist sentiments.
This was easily accomplished, given Bolivia's memory of its losses: the loss of its seacoast to Chile in the War of the Pacific in 1879, of coca crops to the US eradication program, and the country's mineral wealth to transnational corporations.
Populists effectively converted these memories into a political force that rejected efforts leading to globalization and an open society.
This conflict continues.
In Bolivia, the populist/communitarian movement is in the saddle, but is failing to do much more than shelve reform projects.
For the underlying conflict to be resolved, Bolivians must become convinced that reform is the right track, the only one, indeed, that leads to progress and authentic development.
Smart Taxation
ROME – An effective tax policy that ensures adequate domestic revenue is a crucial determinant of a country’s ability to pursue development policies.
But tax revenues in most developing countries are low, impeding progress toward more balanced, inclusive, and sustainable economic development that can improve public health and raise standards of living.
Although non-tax revenue may contribute significantly to some countries’ total GDP, the average tax/GDP ratios in low-income and lower-middle-income countries are roughly 15% and 19%, respectively – significantly lower than the OECD average of more than 35%.
To finance development projects, poor and lower-middle-income countries must devise and implement tax strategies to increase domestic revenue.
This entails abandoning the prevailing dogma that taxes should only be increased when absolutely necessary.
This stance assumes that lower tax rates raise the tax/GDP ratio by ensuring better compliance with tax laws, and favors indirect taxation (such as value-added taxes) in order to broaden the tax base to include those with modest incomes.
Meanwhile, direct taxation of corporations and individuals has tended to decline – despite the moot claim that lower direct taxation ensures investment and growth.
As a result, the tax/GDP ratio in most countries in Sub-Saharan Africa and Latin America has stagnated or even fallen.
In many developing countries, total tax revenue is derived from three main sources: domestic taxes on goods and services (sales and excise taxes), direct taxes (primarily on corporations), and, most important, taxes on foreign trade (import duties).
But, as trade liberalization has lowered tariffs and duties, the share of trade taxes has declined, while other sources have not compensated for falling trade revenue.
By contrast, in high-income countries, income taxes (primarily on individuals) comprise the largest proportion of tax revenue (roughly 36%), while domestic taxes on goods and services and social-security contributions each account for slightly more than one-quarter.
Moreover, the share of trade taxes is typically low.
Of course, developing countries should not simply mimic developed economies’ tax systems.
After all, no one-size-fits-all approach exists, even among developing countries.
And tax policy must evolve with changing economic circumstances.
Instead, developing-country leaders must draw on the experiences of both developed countries and their peers to design tax policies that meet the basic requirements of operability, buoyancy, and stability.
This can include broadening the tax base, reducing tax avoidance and evasion, improving tax collection, and developing new, cooperative international taxation strategies.
In many countries, tax reform has already significantly increased the share of direct taxes in overall revenue.
Raising tax rates for the wealthiest citizens in developing a more progressive income tax framework would bolster this progress.
Governments should also work to improve tax compliance and reduce evasion, which requires limiting tax officials’ discretionary authority.
Computerizing tax administration, for example, could help to limit corruption by making it more difficult to tamper with records.
In order to increase personal-income taxes’ share of total revenue, developing countries are already improving their tax administrations in innovative ways, particularly to reach hard-to-tax citizens.
More can be done: Every individual who owns a house or a vehicle, is a member of a club, holds a credit card, passport, driver’s license, or other identity card, or subscribes to a telephone service can be required to file a tax return.
Moreover, excise taxes are a convenient source of revenue in developing countries, as they are primarily levied on products such as alcohol, tobacco, gas, vehicles, and spare parts, which involve few producers, large sales volumes, relatively inelastic demand, and easy observability.
Excise taxes may be levied when goods leave a factory or arrive at a port, simplifying measurement, collection, and monitoring, while ensuring coverage and limiting evasion.
But, despite their robust base and low administrative costs, excise taxes currently amount to less than 2% of low-income countries’ GDP, compared to roughly 3% in high-income countries.
Developing countries must also aim to offset the consequences of globalization.
For example, capital mobility increases opportunities for tax evasion, given that tax authorities’ capacity to monitor their citizens’ overseas incomes is limited, and some governments and financial institutions systematically conceal relevant information.
If dividends, interest, royalties, and management fees are not taxed in the country in which they are paid, they more easily escape notice in the country of residence.
Indeed, some countries – including the United States – impose no taxes on interest from large bank deposits by non-resident aliens.
Globalization may also facilitate legal tax avoidance.
For example, multinational corporations use methods like transfer pricing (book-keeping of goods, services, and resources transferred between a single company’s branches or subsidiaries) to minimize tax liability on their profits from international operations.
Corporate taxpayers take advantage of discrepancies in rules and rates, choosing to do business in countries with more favorable – or lax – tax regimes.
Finally, international competition for inward foreign direct investment may lead governments to reduce tax rates and increase concessions for foreign investors.
With evidence of sudden capital outflows in response to certain tax-policy changes, governments are reluctant to raise income-tax rates – which have fallen sharply since the late 1970’s – or to tax dividend and interest income, for fear of capital flight.
But, as direct-tax concessions have little or no effect in diverting international investment, let alone in attracting such flows, they constitute an unnecessary loss of revenue.
Beggar-thy-neighbor policies will lead to revenue losses for all developing countries, while undermining the possibility of balanced, inclusive, and sustainable development.
Developing-country finance ministries and tax authorities must cooperate with one another and with their OECD counterparts to close existing loopholes and establish effective tax policies that support their shared interests.
With rising public debt worldwide placing fiscal constraints (real and imagined) on global economic recovery, such cooperation is more urgent than ever.
Bombing the US Budget
PARIS – As the United States and the world mark the fifth anniversary of the invasion of Iraq, debates are raging about the consequences – for Iraq, the Middle East, and America’s standing in the world.
But the Iraq war’s domestic impact – the Pentagon’s ever mushrooming budget and its long-term influence on the US economy – may turn out to be its most lasting consequence.
The US Defense Department’s request for $515.4 billion in the 2009 fiscal year dwarfs every other military budget in the world.
And this huge sum – a 5% increase over the 2008 military budget – is to be spent only on the US military’s normal operations, thus excluding the wars in Iraq and Afghanistan.
Since he took office in 2001, President George W. Bush has increased America’s regular military budget by 30%, again not taking into account the cost of the wars he launched.
Last year, America’s entire military and counterterrorism expenditures topped $600 billion.
One can assume that next year’s total spending on military affairs will be even bigger.
Adjusted for inflation, US military spending has reached its highest level since World War II.
Is there any limit to this spending boom?
The US is allocating more money for defense today than it did during the war against Hitler or the Cold War.
The Bush administration seems to think that today’s military threats are graver.
Talk about the so-called “peace dividend” that was supposed to come with the fall of the Berlin Wall has been silenced.
Of course, because the US economy has grown faster than military spending, the share of GDP dedicated to military expenditures has fallen over the years.
The US spent 14% of its GDP on the military during the Korean War (1950-1953, the Cold War’s peak), 9% during the Vietnam War and only 4 % nowadays.
Yet, given the sheer scale of military spending today, one can wonder if it is rational.
The US economy is probably in recession, clouds are gathering over its pension and health-care systems, and its military budget may not make sense even in strategic terms.
America alone accounts for around 50% of the world’s military expenditures, which is historically unprecedented for a single country.
Most other countries don’t come anywhere close.
Indeed, the second-ranked country in terms of total annual military spending, the United Kingdom, lags far behind, at $55 billion, followed by France ($45 billion), Japan ($41 billion), and Germany ($35 billion).
China and Russia, which can be considered strategic rivals of the US, spend $35 billion and $24 billion, respectively (though these figures probably underestimate expenditure, the true amount is certainly still far below the US –level).
Iran, depicted by the Bush administration as a major threat, is a military dwarf, spending $6.6 billion on its military.
Some voices in America are calling for even bigger increases.
Indeed, the Pentagon wants to enlarge the Marine Corps and Special Operations forces.
Since it is increasingly difficult to recruit and retain soldiers, to do so will probably require raising their wages and improving their quality of life.
Disabled soldiers also will cost a lot of money, even if the Pentagon won’t automatically pay everything for them.
But fulfilling the ostensible rationale for this seemingly interminable spending orgy – success in the so-called “war on terror” – does not seem anywhere within reach.
Mike McConnell, America’s Director of National Intelligence, recently admitted to a US Senate panel that al-Qaeda is gaining strength and steadily improving its ability to recruit, train, and even attack the US.
That assessment is stunning, yet few American leaders – Democrats and Republicans alike – appear to be wondering if military power is the best answer to security issues.
Indeed, by relying mainly on military solutions to political problems, the US seems to be increasing rather than reducing the threats it faces.
After all, the dangers that America faces today do not come from nation states, but from non-states actors against whom nuclear weapons and aircraft carriers are useless.
It would be less expensive and more fruitful for America to tackle the Israeli-Palestinian conflict, return to a multilateral approach, and respect the moral principles that it recommends to others.
Likewise, only by adopting such a strategy can the US start to compress the Pentagon’s inflated budget and begin to address its many domestic woes.
Bombs Away
LONDON – One of the most dispiriting features of today’s international debates is that the threat to humanity posed by the world’s 23,000 nuclear weapons – and by those who would build more of them, or be only too willing to use them – has been consigned to the margin of politics.
US President Barack Obama did capture global attention with his Prague speech in 2009, which made a compelling case for a nuclear weapon-free world.
And he did deliver on a major new arms-reduction treaty with Russia, and hosted a summit aimed at reducing the vulnerability of nuclear weapons and materials to theft or diversion.
But nuclear issues still struggle for public resonance and political traction.
It would take a brave gambler to bet on ratification of the Comprehensive Test Ban Treaty by the US Senate any time soon.
The film An Inconvenient Truth won an Academy Award, led to a Nobel Prize for Al Gore, and attracted huge international attention to the disastrous impact of climate change.
But Countdown to Zero, an equally compelling documentary, made by the same production team and making shockingly clear how close and how often the world has come to nuclear catastrophe, has come and gone almost without trace.
Complacency trumps anxiety almost everywhere.
Japan’s Fukushima disaster has generated a massive debate about the safety of nuclear power, but not about nuclear weapons.
Fear of a nuclear holocaust seems to have ended with the Cold War.
Indeed, Hiroshima and Nagasaki seem an eternity ago; new nuclear-weapons states have emerged without the world ending; no terrorist nuclear device has threatened a major city; and possession of nuclear weapons, for the states that have them, seems to be a source of comfort and pride rather than concern or embarrassment.
With only a handful of exceptions, the current generation of political leaders shows little interest in disarmament, and not much more in non-proliferation.
And their publics are not pressuring them to behave otherwise.
Few have worked harder to shake the world out of its complacency than four of the hardest-nosed realists ever to hold public office: former US Secretaries of State Henry Kissinger and George Shultz, former US Secretary of Defense William Perry, and former US Senator Sam Nunn.
In a series of opinion articles over the last five years, they have repeatedly sounded the alarm that the risks of nuclear weapons outweigh any possible usefulness in today’s security environment.
Moreover, they have called for a complete rethinking of deterrence strategy, in order to minimize, and ultimately eliminate, reliance on the most indiscriminately destructive weapons ever invented.
Last week in London, the “gang of four” convened a private meeting with leading think-tank researchers and a worldwide cast of some 30 former foreign and defense ministers, generals, and ambassadors who share their concern and commitment.
But our average age was over 65, and the limits of our effectiveness were neatly described by former British Defence Minister Des Browne: “People who used to be something really want to tackle this issue.
The trouble is that those who are something don’t.”
No quick fix will turn all this around.
Getting the kind of messages that emerged from the London meeting embedded in public and political consciousness is going to be slow boring through hard boards.
But the messages demand attention, and we simply have to keep drilling.
The first message is that the threat of a nuclear weapons catastrophe remains alarmingly real.
Existing global stockpiles have a destructive capacity equal to 150,000 Hiroshima bombs, and in handling them there is an omnipresent potential for human error, system error, or misjudgment under stress.
Pakistan versus India is a devastating conflict-in-waiting, and North Korea and Iran remain volatile sources of concern.
We know that terrorist groups have the capacity to engineer nuclear devices and would explode them anywhere they could; we simply cannot be confident that we can forever deny them access to the fissile material they need to fuel them.
The second message is that Cold War nuclear-deterrence doctrine is irrelevant to today’s world.
So long as nuclear weapons remain, states can justify maintaining a minimum nuclear-deterrent capability.
But that can be done without weapons on high alert, and with drastically reduced arsenals in the case of the US and Russia, and, at worst, at current levels for the other nuclear-armed states.
The third message is that if the existing nuclear powers sincerely want to prevent others from joining their club, they cannot keep justifying the possession of nuclear weapons as a means of protection for themselves or their allies against other weapons of mass destruction, especially biological weapons, or conventional weapons.
Indeed, the single most difficult issue inhibiting serious movement toward disarmament – certainly in the case of Pakistan versus India, and Russia and China versus the US – are conventional arms imbalances, and ways of addressing them must rise to the top of the policy agenda.
The final message is that neither piecemeal change nor sloganeering will do the job.
Nuclear disarmament, non-proliferation, counter-terrorism, and civil nuclear-energy risk reduction are inextricably connected, and they call for sustained commitment around a comprehensive agenda, and detailed argument.
Sound bites and tweets are an unlikely route to nuclear salvation.
Kissinger is no idealist icon.
But he’s always worth listening to, and never more so than with respect to the question that he has been asking for years: When the next nuclear-weapons catastrophe happens, as it surely will, the world will have to respond dramatically.
Why can’t we start right now?
How Scary Is the Bond Market?
NEW HAVEN – The prices of long-term government bonds have been running very high in recent years (that is, their yields have been very low).
In the United States, the 30-year Treasury bond yield reached a record low (since the Federal Reserve series began in 1972) of 2.25% on January 30.
The yield on the United Kingdom's 30-year government bond fell to 2.04% on the same day.
The Japanese 20-year government bond yielded just 0.87% on January 20.
All of these yields have since moved slightly higher, but they remain exceptionally low.
It seems puzzling – and unsustainable – that people would tie up their money for 20 or 30 years to earn little or nothing more than these central banks' 2% target rate for annual inflation.
So, with the bond market appearing ripe for a dramatic correction, many are wondering whether a crash could drag down markets for other long-term assets, such as housing and equities.
It is a question that I am repeatedly asked at seminars and conferences.
After all, participants in the housing and equity markets set prices with a view to prices in the bond market, so contagion from one long-term market to another seems like a real possibility.
I have been thinking about the bond market for a long time.
In fact, the long-term bond market was the subject of my 1972 PhD dissertation and my first-ever academic publication the following year, co-authored with my academic adviser, Franco Modigliani.
Our work with data for the years 1952-1971 showed that the long-term bond market back then was pretty easy to describe.
Long-term interest rates on any given date could be explained quite well as a certain weighted average of the last 18 quarters of inflation and the last 18 quarters of short-term real interest rates.
When either inflation or short-term real interest rates went up, long-term rates rose.
When either fell, so did long-term rates.
We now have more than 40 years of additional data, so I took a look to see if our theory still predicts well.
It turns out that our estimates then, if applied to subsequent data, predicted long-term rates extremely well for the 20 years after we published; but then, in the mid-1990s, our theory started to overpredict.
According to our model, long-term rates in the US should be even lower than they are now, because both inflation and short-term real interest rates are practically zero or negative.
Even taking into account the impact of quantitative easing since 2008, long-term rates are higher than expected.
But the explanation that we developed so long ago still fits well enough to encourage the belief that we will not see a crash in the bond market unless central banks tighten monetary policy very sharply (by hiking short-term interest rates) or there is a major spike in inflation.
Bond-market crashes have actually been relatively rare and mild.
In the US, the biggest one-year drop in the Global Financial Data extension of Moody's monthly total return index for 30-year corporate bonds (going back to 1857) was 12.5% in the 12 months ending in February 1980.
Compare that to the stock market: According to the GFD monthly S&amp;P 500 total return index, an annual loss of 67.8% occurred in the year ending in May 1932, during the Great Depression, and one-year losses have exceeded 12.5% in 23 separate episodes since 1900.
It is also worth noting what kind of event is needed to produce a 12.5% crash in the long-term bond market.
The one-year drop in February 1980 came immediately after Paul Volcker took the helm of the Federal Reserve in 1979.
A 1979 Gallup Poll had shown that 62% of Americans regarded inflation as the “most important problem facing the nation."
Volcker took radical steps to deal with it, hiking short-term interest rates so high that he created a major recession.
He also created enemies (and even faced death threats).
People wondered whether he would get away with it politically, or be impeached.
Regarding the stock market and the housing market, there may well be a major downward correction someday.
But it probably will have little to do with a bond-market crash.
That was the case with the biggest US stock-market corrections of the last century (after 1907, 1929, 1973, 2000, and 2007) and the biggest US housing-market corrections of all time (after 1979, 1989, and 2006).
It is true that extraordinarily low long-term bond yields put us outside the range of historical experience.
But so would a scenario in which a sudden bond-market crash drags down prices of stocks and housing.
When an event has never occurred, it cannot be predicted with any semblance of confidence.
Boom, Bust, and Recovery in the World Economy
NEW YORK – This global economic crisis will go down in history as Greenspan’s Folly.
This is a crisis made mainly by the United States Federal Reserve Board during the period of easy money and financial deregulation from the mid-1990’s until today.
This easy-money policy, backed by regulators who failed to regulate, created unprecedented housing and consumer credit bubbles in the US and other countries, notably those that shared America’s policy orientation.
The bubble has now burst, and these economies are heading into a steep recession.
At the core of the crisis was the run-up in housing and stock prices, which were way out of line with historical benchmarks.
Greenspan stoked two bubbles – the Internet bubble of 1998-2001 and the subsequent housing bubble that is now bursting.
In both cases, increases in asset values led US households to think that they had become vastly wealthier, tempting them into a massive increase in their borrowing and spending – for houses, automobiles, and other consumer durables.
Financial markets were eager to lend to these households, in part because the credit markets were deregulated, which served as an invitation to reckless lending.
Because of the boom in housing and stock market prices, US household net wealth increased by around $18 trillion during 1996-2006.
The rise in consumption based on this wealth in turn raised house prices further, convincing households and lenders to ratchet up the bubble another notch.
This has all come crashing down.
Housing prices peaked in 2006, and equity prices peaked in 2007.
With the collapse of these bubbles, paper wealth of perhaps $10 trillion, or even as much as $15 trillion, will be wiped out.
Several complex things are now happening simultaneously.
First, households are cutting back sharply on consumption, since they feel – and are – vastly poorer than they were a year ago.
Second, several highly leveraged institutions, such as Bear Stearns and Lehman Brothers, have gone bankrupt, causing further losses of wealth (of these failed institutions’ shareholders and creditors) and a further loss of credit that these firms once supplied.
Third, commercial banks also lost heavily in these dealings, wiping out much of their capital.
As their capital declines, so, too, do their future loans.
Fourth, and finally, the failure of Lehman Brothers and near failure of the insurance giant AIG, incited a financial panic, in which even healthy firms are unable to obtain short-term bank loans or sell short-term commercial paper.
The challenge for policymakers is to restore enough confidence that companies can once again obtain short-term credit to meet their payrolls and finance their inventories.
The next challenge will be to push for a restoration of bank capital, so that commercial banks can once again lend for longer-term investments.
But these steps, urgent as they are, will not prevent a recession in the US and other countries hit by the crisis.
The stock and housing markets are unlikely to recover any time soon.
Households are poorer as a result, and will cut back sharply on their spending, making a recession inevitable in the short run.
The US will be hardest hit, but other countries with recent housing and consumption booms (and now busts) – particularly the United Kingdom, Ireland, Australia, Canada, and Spain – will be hit as well.
Iceland, which privatized and deregulated its banks a few years ago, now faces national bankruptcy, because its banks will not be able to pay off foreign creditors who lent heavily to them.
It is no coincidence that, with the exception of Spain, all of these countries explicitly adhered to the US philosophy of “free-market” and under-regulated financial systems.
But, whatever the pain felt in the deregulated Anglo-Saxon-style economies, none of this must inevitably cause a global calamity.
I do not see any reason for a global depression, or even a global recession.
Yes, the US will experience a decline in income and a sharp rise in unemployment, lowering the rest of the world’s exports to the US.
But many other parts of the world that still grow.
Many large economies, including China, Germany, Japan, and Saudi Arabia, have very large export surpluses, and so have been lending to the rest of the world (especially to the US) rather than borrowing.
These countries are flush with cash, and are not burdened by the collapse of a housing bubble.
Although their households have suffered to some extent from the fall in equity prices, they not only can continue to grow, but they can also increase their internal demand to offset the decline in exports to the US.
They should now cut taxes, ease domestic credit conditions, and increase government investments in roads, power, and public housing.
They have enough foreign-exchange reserves to avoid the risk of financial instability from increasing their domestic spending, as long as they do it prudently.
As for the US, the current undeniable pain for millions of people, which will grow next year as unemployment rises, is an opportunity to rethink the economic model adopted since President Ronald Reagan came to office in 1981.
Low taxes and deregulation produced a consumer binge that felt good while it lasted, but also produced vast income inequality, a large underclass, heavy foreign borrowing, neglect of the environment and infrastructure, and now a huge financial mess.
The time has come for a new economic strategy – in essence a new New Deal.
The Great Disconnect
PARIS – Since the second half of 2012, financial markets have recovered strongly worldwide.
Indeed, in the United States, the Dow Jones industrial average reached an all-time high in early March, having risen by close to 9% since September.
In Europe, European Central Bank President Mario Draghi’s “guns of August” turned out to be remarkably effective.
Draghi reversed the euro’s slide into oblivion by promising potentially unlimited purchases of member governments’ bonds.
Between September 1 and February 22, the FTSEurofirst index rose by almost 7%.
In Asia, too, financial markets are up since September, most dramatically in Japan.
Even the Italian elections in late February seem not to have upset markets too much (at least so far).
Although interest-rate spreads for Italian and Spanish ten-year bonds relative to German bonds briefly jumped 30-50 basis points after the results were announced, they then eased to 300-350 basis points, compared to 500-600 basis points before the ECB’s decision to establish its “outright monetary transactions” program.
But this financial market buoyancy is at odds with political events and real economic indicators. In the US, economic performance improved only marginally in 2012, with annual GDP rising by 2.3%, up from 1.8% in 2011.
Unemployment remained high, at 7.8% at the end of 2012, and there has been almost no real wage growth over the last few years.
Median household income in the US is still below its 2007 level – indeed, close to its level two decades ago – and roughly 90% of all US income gains in the post-crisis period have accrued to the top 1% of households.
Indicators for the eurozone are even worse.
The economy contracted in 2012, and wages declined, despite increases in Germany and some northern countries.
Reliable statistics are not yet available, but poverty in Europe’s south is increasing for the first time in decades.
On the political front, the US faces a near-complete legislative stalemate, with no sign of a compromise that could lead to the optimal policy mix: short-term support to boost effective demand and long-term structural reforms and fiscal consolidation.
In Europe, Greece has been able – so far – to maintain a parliamentary majority in support of the coalition government, but there, and elsewhere, hyper-populist parties are gaining ground.
The Italian election results could be a bellwether for Europe.
Beppe Grillo’s populist Five Star Movement emerged with 25% of the popular vote – the highest support for any single party.
Former Prime Minister Silvio Berlusconi, confounding those who had forecast his political demise, re-emerged at the head of a populist-rightist coalition that ended up only 0.3 percentage points away from winning.
In short, we are witnessing a rapid decoupling between financial markets and inclusive social and economic well-being.
In the US and many other places, corporate profits as a share of national income are at a decades-long high, in part owing to labor-saving technology in a multitude of sectors.
Moreover, large corporations are able to take full advantage of globalization (for example, by arbitraging tax regimes to minimize their payments).
As a result, the income of the global elite is growing both rapidly and independently of what is happening in terms of overall output and employment growth.
Demand for luxury goods is booming, alongside weak demand for goods and services consumed by lower-income groups.
All of this is happening in the midst of extremely expansionary monetary policies and near-zero interest rates, except in the countries facing immediate crisis. Structural concentration of incomes at the top is combining with easy money and a chase for yield, driving equity prices upward.
And yet, despite widespread concern and anxiety about poverty, unemployment, inequality, and extreme concentration of incomes and wealth, no alternative growth model has emerged.
The opposition to the dominant mainstream in Europe is split between what is still too often an “old” left that has trouble adjusting to twenty-first-century realities, and populist, anti-foreigner, and sometimes outright fascist parties on the right.
In the US, the far right shares many of the characteristics of its populist European counterparts.
But it is a tribute to the American two-party system’s capacity for political integration that extremist forces remain marginalized, despite the rhetoric of the Tea Party.
President Barack Obama, in particular, has been able to attract support as a liberal-left idealist and as a centrist-realist at the same time, which enabled him to win re-election in the face of a weak economy and an even weaker labor market.
Nonetheless, without deep socio-economic reforms, America’s GDP growth is likely to be slow at best, while its political system seems paralyzed.
Nowhere is there a credible plan to limit the concentration of wealth and power, broaden economic gains through strong real-income growth for the poor, and maintain macroeconomic stability.
The absence of such a plan in the US (and in Europe) has contributed to the decoupling of financial markets from inclusive economic progress, because it suggests that current trends are politically sustainable.
But, while this disconnect could continue for some time if no alternative program emerges, the huge gap between financial markets’ performance and most people’s well-being is unlikely to persist in the longer term.
When asset prices overshoot reality, eventually they have nowhere to go but down.
Why Stimulus Has Failed
NEW DELHI – Two fundamental beliefs have driven economic policy around the world in recent years.
The first is that the world suffers from a shortage of aggregate demand relative to supply; the second is that monetary and fiscal stimulus will close the gap.
Is it possible that the diagnosis is right, but that the remedy is wrong?
That would explain why we have made little headway so far in restoring growth to pre-crisis levels.
And it would also indicate that we must rethink our remedies.
High levels of involuntary unemployment throughout the advanced economies suggest that demand lags behind potential supply.
While unemployment is significantly higher in sectors that were booming before the crisis, such as construction in the United States, it is more widespread, underpinning the view that greater demand is necessary to restore full employment.
Policymakers initially resorted to government spending and low interest rates to boost demand.
As government debt has ballooned and policy interest rates have hit rock bottom, central banks have focused on increasingly innovative policy to boost demand.
Yet growth continues to be painfully slow.
Why?
What if the problem is the assumption that all demand is created equal?
We know that pre-crisis demand was boosted by massive amounts of borrowing.
When borrowing becomes easier, it is not the well-to-do, whose spending is not constrained by their incomes, who increase their consumption; rather, the increase comes from poorer and younger families whose needs and dreams far outpace their incomes.
Their needs can be different from those of the rich.
Moreover, the goods that are easiest to buy are those that are easy to post as collateral – houses and cars, rather than perishables.
And rising house prices in some regions make it easier to borrow even more to spend on other daily needs such as diapers and baby food.
The point is that debt-fueled demand emanates from particular households in particular regions for particular goods.
While it catalyzes a more generalized demand – the elderly plumber who works longer hours in the boom spends more on his stamp collection – it is not unreasonable to believe that much of debt-fueled demand is more focused.
So, as lending dries up, borrowing households can no longer spend, and demand for certain goods changes disproportionately, especially in areas that boomed earlier.
Of course, the effects spread through the economy – as demand for cars falls, demand for steel also falls, and steel workers are laid off.
But unemployment is most pronounced in the construction and automobile sectors, or in regions where house prices rose particularly rapidly.
It is easy to see why a general stimulus to demand, such as a cut in payroll taxes, may be ineffective in restoring the economy to full employment.
The general stimulus goes to everyone, not just the former borrowers.
And everyone’s spending patterns differ – the older, wealthier household buys jewelry from Tiffany, rather than a car from General Motors.
And even the former borrowers are unlikely to use their stimulus money to pay for more housing – they have soured on the dreams that housing held out.
Indeed, because the pattern of demand that is expressible has shifted with the change in access to borrowing, the pace at which the economy can grow without inflation may also fall.
With too many construction workers and too few jewelers, greater demand may result in higher jewelry prices rather than more output.
Put differently, the bust that follows years of a debt-fueled boom leaves behind an economy that supplies too much of the wrong kind of good relative to the changed demand.
Unlike a normal cyclical recession, in which demand falls across the board and recovery requires merely rehiring laid-off workers to resume their old jobs, economic recovery following a lending bust typically requires workers to move across industries and to new locations.
There is thus a subtle but important difference between my debt-driven demand view and the neo-Keynesian explanation that deleveraging (saving by chastened borrowers) or debt overhang (the inability of debt-laden borrowers to spend) is responsible for slow post-crisis growth.
Both views accept that the central source of weak aggregate demand is the disappearance of demand from former borrowers.
But they differ on solutions.
The neo-Keynesian economist wants to boost demand generally.
But if we believe that debt-driven demand is different, demand stimulus will at best be a palliative.
Writing down former borrowers’ debt may be slightly more effective in producing the old pattern of demand, but it will probably not restore it to the pre-crisis level.
In any case, do we really want the former borrowers to borrow themselves into trouble again?
The only sustainable solution is to allow the supply side to adjust to more normal and sustainable sources of demand – to ease the way for construction workers and autoworkers to retrain for faster-growing industries.
The worst thing that governments can do is to stand in the way by propping up unviable firms or by sustaining demand in unviable industries through easy credit.
Supply-side adjustments take time, and, after five years of recession, economies have made some headway.
But continued misdiagnosis will have lasting effects.
The advanced countries will spend decades working off high public-debt loads, while their central banks will have to unwind bloated balance sheets and back off from promises of support that markets have come to rely on.
Frighteningly, the new Japanese government is still trying to deal with the aftermath of the country’s two-decade-old property bust.
One can only hope that it will not indulge in more of the kind of spending that already has proven so ineffective – and that has left Japan with the highest debt burden (around 230% of GDP) in the OECD.
The Dirt on Plastic Waste
NEWARK, NJ – Plastics are everywhere.
Whether used to store leftovers, keep hospital equipment sterile, or insulate a home, plastics are unmatched for their adaptability, durability, and low cost.
Given their seemingly boundless benefits, it is unsurprising that plastics have replaced traditional materials in many sectors – for example, steel in cars, paper and glass in packaging, and wood in furniture.
As a result, annual plastics consumption worldwide has increased from five million tons in the 1950’s to around 280 million tons today.
Roughly half of plastic products, such as packaging, are intended for one-time, short-lifespan (less than six months) applications prior to disposal.
Given that most of these items are not biodegradable, and are not recycled, plastics waste is building up – with serious environmental consequences.
While governments have begun to implement new (and often quite strict) regulations aimed at managing plastics waste – for example, China banned lightweight plastic shopping bags in 2008 – they are inadequate to address the world’s growing plastics-waste problem.
Moreover, most plastic products are made from so-called “petroleum-based commodity thermoplastics.”
Given that a non-renewable resource forms the basis of many plastic products – most of which will not last long – current plastics usage patterns are not sustainable.
Closed-loop recycling, in which plastics waste is used to make another product, thus carries significant environmental benefits, such as reduced energy and oil consumption.
But the process of separating the petroleum-based recyclable plastics from other kinds of plastics and solid waste is difficult, costly, and labor-intensive, so only a small proportion is recycled.
In 1988, the United States Society of Plastics Industry (SPI) developed a coding system in which each kind of resin is labeled with a number, 1-7, to facilitate sorting.
The system has also been used elsewhere, including in Canada and Switzerland, but has not been adopted worldwide and is still confusing to some consumers.
If consumers knew to collect and separate household plastics based on their number, when available, the resulting boost to recycling efforts would demonstrate to government and industry the viability of a more sustainable approach, reduce exposure to rising oil prices, and support growing global demand for plastics.
There are four categories of plastics recycling: primary recycling, in which the plastic is re-used in the same application; secondary recycling, in which material (mixed or contaminated) is used in less demanding applications; tertiary recycling, in which the plastic is converted into monomers or chemicals; and quaternary recycling, in which only energy is recovered through incineration.
Each of these methods recovers a different amount of the embodied energy of the plastic item.
(All of the embodied energy is lost if the plastics are landfilled, a common disposal method worldwide.)
Given the difficulty and expense of separating plastics, the most economically viable option is often secondary recycling of a few commodity thermoplastics – mostly bottles, for which collection infrastructure is already in place.
More economical separation methods are crucial to expanding the scope of plastics recycling, as is the identification of new potential markets for the recyclates.
Such developments would encourage industry to re-use or recycle more parts.
Although all 40 kinds of plastics used in a North American automobile can be recycled, the need to separate and clean them makes using them more expensive than using virgin plastic resins.
This translates into a higher proportion of plastics in the remnants of shredded end-of-life automobiles – a contaminated mixture of plastics and non-plastics that is usually disposed of through some combination of landfilling, incineration, and secondary recycling.
Increasing the proportion of re-used plastics is a crucial step toward more sustainable plastics consumption.
To this end, some automobile manufacturers have adjusted their designs to allow for easy disassembly of parts made of compatible plastics, while governments have set recycling target proportions for end-of-life vehicles.
Such efforts should be intensified.
Furthermore, industry should seek new applications for recycled materials, while minimizing the amount of virgin material used.
And, where possible, manufacturers should “down-gauge” materials (make parts thinner).
Government legislation can be enacted to support such measures, as well as to require plastics manufacturers to get involved in the disposal of plastic items – a responsibility long imposed on packaged-goods manufacturers in Europe.
An example of successful waste management is the reprocessing of PET bottles (made of polyethylene terephthalate) into polyester fibers.
In the last decade, Japan passed several laws obliging both businesses and individuals to separate plastics waste.
This, combined with a lack of landfill space and the country’s expanding population, has enhanced plastics recycling efforts.
As a result, in 2010, Japan recycled 72% of PET bottles, compared to roughly 30% in the US and 48% in Europe.
While incineration and landfilling are still practiced, such high recycling rates underscore the positive impact of targeted policies.
Another promising development is bioplastics, which have begun to compete with petroleum-based products in certain short-lifespan applications – such as packaging and agriculture – over the last two decades.
Given that bioplastics are produced from renewable or “bio-based” sources (cellulose, starch, and glucose) – and, in some cases, through microbial fermentation – they have a lower carbon footprint, contribute less to global warming, and biodegrade to small molecules.
But bioplastics are not a silver bullet for managing plastics waste.
In fact, they may threaten the secondary recycling of petroleum-based plastics, owing to possible contamination during sorting of mixed streams.
And critics have expressed concern about the environmental impact of corn and other crops grown for industrial purposes, such as plastics and ethanol production, not to mention the potential effects on global food prices.
In a world that is reliant on plastics, more sustainable production, consumption, and disposal of plastic products is crucial.
Civil society, industry, and government must work together to increase the share of recycled plastics, thereby ensuring that plastics’ costs do not outweigh their benefits.
Privatizing Development Aid
LONDON – Much has changed about official development assistance (ODA) over the last 50 years.
Since it originated during the Cold War, when members of the OECD’s Development Assistance Committee spent roughly $60 billion annually (an amount that the Soviet Union undoubtedly matched), recipient countries have been called “backward,” “developing,” “southern,” and, lately, “emerging.”
Indeed, what defines a recipient country has increasingly been called into question in recent years.
The United Kingdom is debating whether to discontinue aid to India, the third-largest recipient of capital inflows and the home of the UK’s largest manufacturing employer, the Tata Group.
Likewise, eurozone countries have been looking to long-time aid recipient China, which holds $2.5 trillion of US government debt, to help them overcome their own debt crisis.
Furthermore, development itself has been redefined, with the policy focus shifting to good governance, transparency, accountability, and human rights.
As a result, initiatives aimed at improving health, education, and gender equality have replaced large-scale construction projects.
Now it is time to re-examine the ODA system.
After all, donor countries are mired in debt and stagnation, while some recipient economies are growing 5-7 times faster than they are.
In 1969, Canada’s former prime minister, Lester Pearson, recommended that developed countries should spend 0.7% of their GDP on ODA by 1975, and that they should eventually increase the proportion to 1%.
Although Norway, Sweden, Denmark, the Netherlands, and Luxembourg have achieved the 0.7% target, the global average has actually declined, from 0.5% of GDP in 1960 to 0.3% today.
The UK has pledged 0.7% of its gross national income, but is debating who will receive it.
America’s annual contribution of $30 billion, the world’s highest in absolute terms, amounts to less than 0.25% of its GNI.
But, while international organizations encourage additional ODA spending, donor-country citizens are increasingly resistant.
Critics argue that the money does not reach those who truly need it; that it creates dependency, and thus harms recipient countries; that it is needed at home; and that it generates income primarily for consultants and source-country vested interests.
To be sure, it is widely agreed that aid for disaster relief and assistance to conflict-affected countries are effective.
Moreover, almost 10% of total ODA is allotted for humanitarian relief, which should be similarly uncontroversial.
But the overall impact of ODA remains dubious.
In a report released last March, the UK’s House of Lords Select Committee on Economic Affairs cited disagreement among experts on the issue, with estimates ranging from a 0.5% boost to annual GDP growth in recipient countries to no effect on growth at all.
There are several possible explanations for the fact that development aid has not always translated into GDP growth.
Recipient governments might misuse the aid, preventing it from trickling down to those who would spend or invest it, or the money may be given on the condition that it is spent on goods or services from the donor country.
And, even if development aid does spur GDP growth, this does not necessarily lead to better lives for the poorest citizens, especially in the short term.
While eliminating extreme poverty is undoubtedly an urgent moral imperative, ODA may not be the best way to achieve it.
In fact, there is a strong case for involving the private sector in development assistance.
Over the last two decades – a period when globalization opened up the world financial system – private capital flows have contributed more to developing economies’ growth than has ODA.
Indeed, in 2009, more than $1 trillion in private capital flowed to developing countries – nine times more than total aid.
Moreover, privately funded organizations like Oxfam or Medecins Sans Frontières (Doctors Without Borders) tend to allocate resources more effectively than governments, delivering genuine gains where they are needed most.
Following this model, countries’ aid budgets could be opened up for bids from development NGOs, which would assume responsibility for allocating and delivering the funds as efficiently as possible – and would be required to provide a careful accounting of how they spent the money.
A bolder solution would be direct cash transfers to the poor.
With global aid totaling roughly $130 billon, each of the 1.3 billion people living in extreme poverty (less than $1 per day) worldwide would receive $100 in cash.
Some countries have already experimented with such programs, and India is preparing to begin providing cash transfers to its 300 million poor citizens.
In other words, a global cash-transfer scheme could be very effective, and would be feasible if donor countries pooled their aid budgets.
The simplest – and most radical – solution would be to stop all official aid payments.
Instead, the money could be returned to donor-country citizens through tax deductions or income transfers, and they could decide how to help those in need.
Given the prevalence of poverty and disease, many of these citizens would be motivated to contribute to global poverty-reduction efforts.
Allowing citizens to choose how to donate may help to tackle corruption in countries where politicians often misappropriate ODA, while discouraging wasteful or impractical projects.
In addition, people would be far less likely to complain that their money is being wasted or misused if they chose where it went.
ODA has, at best, a patchy record.
After 50 years of inefficiency, it is time to try something new.
In the near term, at least, cash transfers seem to be the best option.
Only by allowing each recipient to decide how best to use the money can we ensure that development aid actually enables the world’s poorest citizens to improve their lives.
Borlaug and the Bankers
NEW YORK – The recent death of Norman Borlaug provides an opportune moment to reflect on basic values and on our economic system.
Borlaug received the Nobel Peace Prize for his work in bringing about the “green revolution,” which saved hundreds of millions from hunger and changed the global economic landscape.
Before Borlaug, the world faced the threat of a Malthusian nightmare: growing populations in the developing world and insufficient food supplies.
Consider the trauma a country like India might have suffered if its population of a half-billion had remained barely fed as it doubled.
Before the green revolution, Nobel Prize-winning economist Gunnar Myrdal predicted a bleak future for an Asia mired in poverty.
Instead, Asia has become an economic powerhouse.
Likewise, Africa’s welcome new determination to fight the war on hunger should serve as a living testament to Borlaug.
The fact that the green revolution never came to the world’s poorest continent, where agricultural productivity is just one-third the level in Asia, suggests that there is ample room for improvement.
The green revolution may, of course, prove to be only a temporary respite.
Soaring food prices before the global financial crisis provided a warning, as does the slowing rate of growth of agricultural productivity.
India’s agriculture sector, for example, has fallen behind the rest of its dynamic economy, living on borrowed time, as levels of ground water, on which much of the country depends, fall precipitously.
But Borlaug’s death at 95 also is a reminder of how skewed our system of values has become.
When Borlaug received news of the award, at four in the morning, he was already toiling in the Mexican fields, in his never-ending quest to improve agricultural productivity.
He did it not for some huge financial compensation, but out of conviction and a passion for his work.
What a contrast between Borlaug and the Wall Street financial wizards that brought the world to the brink of ruin.
They argued that they had to be richly compensated in order to be motivated.
Without any other compass, the incentive structures they adopted did motivate them – not to introduce new products to improve ordinary people’ lives or to help them manage the risks they faced, but to put the global economy at risk by engaging in short-sighted and greedy behavior.
Their innovations focused on circumventing accounting and financial regulations designed to ensure transparency, efficiency, and stability, and to prevent the exploitation of the less informed.
There is also a deeper point in this contrast: our societies tolerate inequalities because they are viewed to be socially useful; it is the price we pay for having incentives that motivate people to act in ways that promote societal well-being.
Neoclassical economic theory, which has dominated in the West for a century, holds that each individual’s compensation reflects his marginal social contribution – what he adds to society.
By doing well, it is argued, people do good.
But Borlaug and our bankers refute that theory.
If neoclassical theory were correct, Borlaug would have been among the wealthiest men in the world, while our bankers would have been lining up at soup kitchens.
Of course, there is a grain of truth in neoclassical theory; if there weren’t, it probably wouldn’t have survived as long as it has (though bad ideas often survive in economics remarkably well).
Nevertheless, the simplistic economics of the eighteenth and nineteenth centuries, when neoclassical theories arose, are wholly unsuited to twenty-first-century economies.
In large corporations, it is often difficult to ascertain the contribution of any individual.
Such corporations are rife with “agency” problems: while decision-makers (CEO’s) are supposed to act on behalf of their shareholders, they have enormous discretion to advance their own interests – and they often do.
Bank officers may have walked away with hundreds of millions of dollars, but everyone else in our society – shareholders, bondholders, taxpayers, homeowners, workers – suffered.
Their investors are too often pension funds, which also face an agency problem, because their executives make decisions on behalf of others.
In such a world, private and social interests often diverge, as we have seen so dramatically in this crisis.
Does anyone really believe that America’s bank officers suddenly became so much more productive, relative to everyone else in society, that they deserve the huge compensation increases they have received in recent years?
Does anyone really believe that America’s CEO’s are that much more productive than those in other countries, where compensation is more modest?
Worse, in America stock options became a preferred form of compensation – often worth more than an executive’s base pay.
Stock options reward executives generously even when shares rise because of a price bubble – and even when comparable firms’ shares are performing better.
Not surprisingly, stock options create strong incentives for short-sighted and excessively risky behavior, as well as for “creative accounting,” which executives throughout the economy perfected with off-balance-sheet shenanigans.
The skewed incentives distorted our economy and our society.
We confused means with ends.
Our bloated financial sector grew to the point that in the United States it accounted for more than 40% of corporate profits.
But the worst effects were on our human capital, our most precious resource.
Absurdly generous compensation in the financial sector induced some of our best minds to go into banking.
Who knows how many Borlaugs there might have been among those enticed by the riches of Wall Street and the City of London?
If we lost even one, our world was made immeasurably poorer.
विश्वसनीय गरीब?
वाशिंगटन, डीसी – पिछले पाँच वर्षों में, रवांडा और होंडुरास जैसे कई कम आय वाले देशों ने पहली बार, लंदन और न्यूयॉर्क में निजी विदेशी निवेशकों को अपने बांड जारी किए हैं। अभी हाल ही तक ऐसा किया जाना नामुमकिन लग सकता था, इसलिए नए उधारकर्ताओं के प्रारंभिक बांड जारी किए जाने को भारी निवेशक विश्वास के संकेत के रूप में देखा जाना चाहिए। लेकिन इससे कुछ सुपरिचित खतरे की घंटियाँ भी बजनी चाहिए।
लगभग 20 "प्रारंभिक निर्गमों" से तकरीबन 12 बिलियन डॉलर की राशि जुटाई गई है और इसकी ब्याज दर उस दर से औसत रूप से मात्र 4.5 प्रतिशत अंक अधिक है जो संयुक्त राज्य अमेरिका की सरकार पाँच या अधिक वर्षों की परिपक्वता अवधियों पर भुगतान करती है। यह वैश्विक वित्त की विशाल योजना में एक छोटा-सा परिवर्तन है; लेकिन यह देखते हुए कि इनमें से कई उधारकर्ता केवल एक दशक पहले तक संकट या चूककर्ता की स्थिति में थे, और उन्हें ऋण माफी की जरूरत थी, उनकी यह स्थिति विशेष रूप से एक प्रभावशाली बदलाव है।
लेकिन कम आय वाले देशों की निजी उधारदाताओं तक पहुँच के साथ जोखिम जुड़े होते हैं जिनके बारे में उनके आसन्न खतरों के रूप में बढ़ने से पहले, शुरू में ही विशेष रूप से उल्लेख किया जाना चाहिए।
आरंभ करनेवालों के लिए, इनके पुनर्निर्धारण का जोखिम होता है। इन बांडों की चुकौती, विदेशी मुद्रा में, आमतौर पर अमेरिकी डॉलर में, "एकबारगी" भुगतान के रूप में की जानी होती है। इन एकबारगी भुगतानों की राशि बड़ी हो सकती है, विशेष रूप से जब उनकी तुलना पिछले ऋण दायित्वों या भावी निर्यात आयों से की जाए।
1970 के दशक से विकासशील देश के ऋण को ट्रैक करनेवाला विश्व बैंक डेटा यह दर्शाता है कि यदि किसी देश की चुकौतियों की राशि उसके निर्यातों के दसवें हिस्से से अधिक हो तो उस देश के ऋण संकट में पड़ने की संभावना नौ-गुना तक बढ़ जाती है (जो पाँच-में-से-एक मामले में हो सकती है) – यह वह स्थिति है जिसका सामना आज के लगभग एक-तिहाई नए जारीकर्ताओं को उनके बांड देय होने पर करना पड़ सकता है।
गरीब उधारकर्ता इस तरह के वित्तीय दबाव से बच सकते हैं या नहीं, यह कई कारकों पर निर्भर करेगा। एक तो यह कि क्या वे देय होनेवाले बांडों का भुगतान करने के लिए और अधिक बांड जारी कर पाएँगे। दूसरा यह कि क्या वे धन का निवेश बुद्धिमत्तापूर्वक करेंगे ताकि वे तुरंत चुकौती कर सकें। और यह इस पर भी निर्भर करेगा कि क्या अस्थिर आयों वाले देश, विशेष रूप से प्राकृतिक संसाधनों पर निर्भर करनेवाले देश, आयों के अधिक होने पर धन को अलग रख पाएँगे।
एक दूसरे, मध्यम-अवधि के जोखिम में पूंजी प्रवाह की स्थिति को पलटना शामिल है। कम आय वाले देश के बांडों के लिए ऋणदाताओं की रुचि 2008-2009 के वैश्विक वित्तीय संकट के बाद से विकसित अर्थव्यवस्थाओं में भारी मात्रा में नकदी और लगभग-शून्य ब्याज दरों के संयोजन के द्वारा काफी हद तक बढ़ गई है। अपने देश में निवेश करने पर केवल मामूली सा लाभ मिलने के कारण, निवेशकों ने ज्यादा लाभों के लिए जोखिमवाले, "सीमावर्ती" बाजारों की तरफ रुख करना शुरू कर दिया है।
हालाँकि, अभी या बाद में, विकसित अर्थव्यवस्थाएँ कठोर मौद्रिक नीति पर वापस लौट आएँगी, जिससे विकासशील देशों के बांड कम आकर्षक हो जाएँगे। सुदृढ़ समष्टिगत आर्थिक नीतियों वाले उधारकर्ता शायद वैश्विक वित्तीय बाजारों के लिए कुछ आकर्षण रख सकेंगे; लेकिन कम विवेकपूर्ण सरकारें खुद को अचानक अलग-थलग पा सकती हैं।
दुर्भाग्य से, नए बांड जारीकर्ताओं के बीच ऋण प्रबंधन की प्रथाओं की गुणवत्ता में समानता नहीं है। सार्वजनिक उधारों के लिए विवेकपूर्ण ऋण रणनीतियाँ, पेशेवर और स्वतंत्र ऋण कार्यालय, और स्पष्ट कानूनी ढाँचा होना पहले से कहीं अधिक महत्वपूर्ण हो गया है।
निश्चित रूप से, पिछले एक दशक में इस मोर्चे पर महत्वपूर्ण प्रगति हुई है, इसमें से बहुत-सा धन अमीर देशों की सहायता से मिला है। लेकिन इससे पहले कि उधार की यह नई लहर इतनी बड़ी हो जाए कि वह नियंत्रण से बाहर हो जाए, या उसका प्रसार ऐसी राज्य और नगरपालिका सरकारों तक हो जाए जिनकी प्रशासनिक क्षमता कमजोर है, बहुत-कुछ किया जा सकता है और किया जाना चाहिए। यह बात ध्यान देने योग्य है कि किसी देश की ऋण-प्रबंधन की प्रथाओं की गुणवत्ता और उसके ऋण संकट के जोखिम के बीच भारी नकारात्मक सह-संबंध है, क्योंकि कम-जोखिम वाले 90% देशों में अच्छी प्रथाएँ पाई गईं हैं।
एक तीसरा जोखिम यह है कि भावी ऋण परिणामों के बारे में सहमत होना और भी कठिन हो जाएगा। परंपरागत रूप से, कम आय वाले देशों के लेनदार अमीर-दुनिया की सरकारें और बहु-पक्षीय संगठन थे जिनके लिए उस स्थिति में राजनीतिक दृष्टि से उधार देना संभव नहीं होता जब इसका अर्थ यह हो कि उधारकर्ताओं को शिक्षा या स्वास्थ्य जैसी महत्वपूर्ण सार्वजनिक सेवाओं में कटौती करनी पड़ेगी। जिस प्रक्रिया में पहले ही 15 साल लग चुके हैं – और जो अभी भी अधूरी है – 35 सर्वाधिक ऋणग्रस्त गरीब देशों (HIPC) के ऋणों को माफ कर दिया गया है, जिसकी लागत $100 बिलियन से अधिक है।
अलबत्ता, अब कई पूर्व सर्वाधिक ऋणग्रस्त गरीब देश (HIPC) वैश्विक बाजार में निजी निवेशकों को बांड बेच रहे हैं, जो हाल के महीनों में संयुक्त राज्य अमेरिका में न्यायालय के निर्णयों को देखते हुए बहुत अधिक जोखिमपूर्ण हो गया है, जिनके अनुसार बांडधारक ऋण के परिणामों को अस्वीकार करके पूरे भुगतान के लिए दावा कर सकते हैं। यह आशा की जानी चाहिए कि जुटाई गई निधियों का उपयोग अच्छे कार्यों के लिए किया जाएगा, और चुकौतियों के लिए भारी त्याग नहीं करने पड़ेंगे, क्योंकि वर्तमान में नए ऋणों को न केवल रद्द करने के लिए, बल्कि पुनर्व्यवस्थित करने के लिए भी, कोई सहमत क्रियाविधि नहीं है।
यह पूछा जा सकता है कि किसी और के बजाय जोखिम लेनेवाले निजी वैश्विक निवेशकों को आवर्ती जोखिमों, स्थिति पलटने, ऋण प्रबंधन, और परिणामों के बारे में ध्यान क्यों नहीं देना चाहिए। इसका कारण यह है कि सार्वजनिक ऋण के संकट से सबसे अधिक हानि देश के सबसे गरीब लोगों को पहुँचती है जिन्हें बांड जारी करने के बारे में बिल्कुल ज्ञान नहीं होता है, और उनके पास इसका कोई विकल्प भी नहीं होता है। जब कोई देश चूक करता है, तो आर्थिक क्षति से गरीब लोगों की संख्या बहुत अधिक बढ़ जाती है और उनके रहन-सहन की स्थिति बहुत अधिक बिगड़ जाती है। जब अर्जेंटीना ने 2001 में चूक की थी, तो हर पांच नागरिकों में से एक नागरिक गरीबी रेखा के नीचे आ गया था।
वास्तव में, सुदृढ़ ऋण प्रबंधन सुदृढ़ सामाजिक नीति होती है - यह एक ऐसा सबक है जिस पर उधारकर्ताओं और उधारदाताओं दोनों को उधारों का अनुबंध करते समय समान रूप से ध्यान देना चाहिए, उन्हें यह सोचना चाहिए कि अगर इसका ठीक से प्रबंध नहीं किया गया तो यह पहले की गई कल्पना से कहीं अधिक जटिल हो सकता है और इतना अधिक कष्टकर हो सकता है जिसकी किसी ने कभी उम्मीद भी न की हो।
Bottom Dollar
As more time passes with neither the value of the dollar declining sharply nor market forces beginning to shrink America’s current-account deficit – which may well reach $1 trillion this year – two diametrically opposed reactions are emerging.
Most international finance economists are becoming increasingly frightened that a major international financial crisis could erupt.
Indeed, they fear that the scale of that potential crisis is becoming larger and larger.
Others – especially managers of financial assets – are becoming increasingly convinced that economists don’t know very much, and that what they do know is of no use to traders like themselves.
They see little reason to believe that current asset values and trade flows are not sustainable.
After all, they (or some of them) argue, the real GDP of the United States is growing by $400 billion per year, with about $270 billion going to labor and $130 billion to capital.
Even after depreciation, that $130 billion of extra annual income is capitalized at about $1.5 trillion of wealth, so the current-account deficit, even at $1 trillion, is not overwhelmingly large.
We Americans can sell off two-thirds of the increment to our wealth to finance imports and still be $500 billion better off this year than we were last year.
Moreover, the annual interest charged on the extra $1 trillion per year that Americans borrow from the rest of the world is about $50 billion – just one-eighth of annual economic growth, while the trade deficit is financed out of the growth of the value of capital.
So what’s unsustainable?
Why can’t the US current-account deficit remain at its 2006 value indefinitely?
The counterargument hinges on the difference between the current-account deficit and the trade deficit.
The current-account deficit is equal to the trade deficit plus the cost of servicing the net international asset position: the net rent, interest, and dividends owed to foreigners who have invested their capital in the US.
As time passes, deficits accumulate.
As deficits accumulate, the cost of servicing the net international asset position grows.
Thus, in order to keep the current-account deficit stable, the trade deficit must shrink.
And the only way for the trade deficit to shrink substantially is for net imports to fall, which requires either a relatively sharp decline in the value of the dollar, thereby raising import prices, or a depression in the US.
Both outcomes would weaken demand for foreign goods by making Americans feel that they are too poor to buy them.
As a result, holders of dollar-denominated assets should be looking forward to two alternative scenarios.
In one, the value of the dollar will be low; in the other, the US will be in a depression.
In neither scenario does it make sense to hold huge amounts of dollar-denominated assets today.
Therefore, foreign speculators should, any day now, dump their dollar-denominated assets onto the market, and so bring about the dollar decline that they so fear.
But foreign-currency speculators and international investors are not looking forward to either of these scenarios.
They continue to hold very large positions in dollar-denominated assets, which they would not do if they thought the US faced a choice between a cheap dollar and a deep depression.
So, what alternative does the market see?
And why is it so different from the possible scenarios that international financial economists see?
The answer appears to be that there is nobody in the financial centers of New York, London, Tokyo, Frankfurt, and Hong Kong who thinks it is their business to bet on a future flight from the dollar.
Especially in times of crisis – and a sharp fall in US imports would imply a much more severe crisis for Asian and European exporters than it would for the US – the dollar is a currency that you run to, not from.
George Soros can bet on a run on the British pound.
Thai import-export firms can bet on a run on the baht by accelerating their dollar receipts and delaying their dollar payouts.
Everyone can bet on a run on the Argentine peso – a favorite sport of international financial speculators for a century and a half.
But not the dollar.
Not yet.
In other words, the market is betting that the dollar will fall gradually in the next five years, and that the US current-account deficit will narrow without a financial crisis. That is what happened in the late 1980’s, and in the late 1970’s, too.
After all, God, it is said, protects children, fools, dogs, and the United States of America.
But the odds on a soft landing are lengthening with each passing day.
The Emperor’s New Goal
NEW DELHI – Japanese Emperor Akihito and Empress Michiko, in a rare overseas trip, are scheduled to begin a tour of the Indian cities of New Delhi and Chennai on November 30.
The imperial couple’s weeklong visit is likely to mark a defining moment in Indo-Japanese relations, fostering closer economic and security ties between Asia’s two leading democracies as they seek a pluralistic, stable Asian order.
Traditionally, a visit from the Japanese emperor – except for a coronation or royal anniversary celebration – signified a turning point in a bilateral relationship.
While the emperor is merely the “symbol of the state” under Japan’s US-imposed postwar constitution, he retains significant influence, owing to Japanese veneration of the imperial dynasty – the world’s oldest continuous hereditary monarchy, the origins of which can be traced to 660 BC.
Indeed, the emperor’s overseas visits remain deeply political, setting the tone – if not the agenda – for Japan’s foreign policy.
Consider Akihito’s 1992 visit to China – the first such visit by any Japanese emperor.
Chinese leader Deng Xiaoping’s government – grateful for Japan’s reluctance to maintain punitive sanctions over the 1989 Tiananmen Square massacre and eager for international recognition, not to mention Japanese capital and commercial technologies – had extended seven invitations over two years.
Akihito’s trip, which came at the height of Japan’s pro-China foreign policy, was followed by increased Japanese aid, investment, and technology transfer, thereby cementing Japan’s role in China’s economic rise.
The improved diplomatic relationship lasted until the recent flare-up of territorial and other bilateral disputes.
Although no Japanese emperor has visited India before, the bilateral relationship runs deep.
In traditional Japanese culture, India is Tenjiku (the country of heaven).
Today, Japan is India’s largest source of aid and has secured a key role in supporting infrastructure development, financing projects like the Western Dedicated Freight Corridor, the Delhi-Mumbai Industrial Corridor, and the Bangalore Metro Rail Project.
With these natural allies seeking to add strategic bulk to their rapidly multiplying ties, Akihito’s tour is the most significant visit to India by any foreign leader in recent years.
Indeed, it is expected to be one of the last foreign trips for the 79-year-old emperor, who has undergone several major surgeries in the past decade.
Akihito’s travel schedule contrasts sharply with that of Indian Prime Minister Manmohan Singh.
Despite having had open-heart surgery during his first term, India’s 81-year-old leader has sought to offset his low domestic political stock by flying more than one million kilometers on overseas trips – including visits to Japan, China, Indonesia, Russia, Thailand, and the United States in the last six months alone.
The paradox of Akihito’s tour – for which Singh has appointed a special envoy with ministerial rank to oversee preparations – is that Japan is investing substantial political capital to build a strong, long-term partnership with India’s government at a time when India is gripped by policy paralysis.
Japan’s leaders are perhaps counting on the continuity of India’s strategic policies, which would require the Indian government that emerges from next year’s general election to sustain the momentum of cooperation.
But, more important, Japan is adjusting to meet the challenges of a rapidly changing regional environment, characterized by rising geopolitical competition with China.
In a historical reversal, Japan has found itself on the defensive against the increasingly muscular foreign policy of its former colony and old rival.
This situation is forcing the Japanese government to reconsider its postwar pacifism, revise its defense strategy, and increase its military spending.
In this context, Japan knows that a deeper strategic collaboration with India – which is also seeking to blunt increasing military pressure from China – is its best move.
In modern history, Japan has had the distinction of consistently staying ahead of the rest of Asia.
During the Meiji era, in the second half of the nineteenth century, it became the first Asian country to modernize.
It was also the first Asian country to emerge as a world power, defeating Manchu-ruled China and Czarist Russia in separate wars.
And after its defeat in World War II, Japan rose from the ashes to become Asia’s first global economic powerhouse.
With per capita GDP of more than $37,000, Japan still ranks among the world’s richest countries, specializing in the highest-value links of global supply chains.
And income inequality in Japan ranks among the lowest in Asia.
Nonetheless, almost two decades of economic stagnation have eroded Japan’s regional clout.
This raises the question of whether Japan’s current problems –sluggish growth, high public debt, and rapid population aging – presage a similar trend across East Asia.
Similar problems are already appearing in South Korea, while China has been driven to loosen its one-child policy and unveil plans for economic reforms aimed at reviving growth.
For India, Japan is indispensable as both an economic and a security partner.
It is central to India’s “Look East” policy, which has evolved into more of an “Act East” policy, whereby the original strategy’s economic logic has been amplified by the larger geopolitical objective of ensuring Asian stability and a regional balance of power.
It is in this light that Akihito’s historic visit should be viewed.
China’s Borderline Belligerence
NEW DELHI – In recent years, the People’s Liberation Army has been taking advantage of its rising political clout to provoke localized skirmishes and standoffs with India by breaching the two countries’ long and disputed Himalayan frontier.
The PLA’s recent intensification of such border violations holds important implications for President Xi Jinping’s upcoming visit to India – and for the future of the bilateral relationship.
In fact, such provocations have often preceded visits to India by Chinese leaders.
Indeed, it was just before President Hu Jintao’s 2006 visit that China resurrected its claim to India’s large northeastern state of Arunachal Pradesh.
Likewise, prior to Premier Wen Jiabao’s trip to India in 2010, China began issuing visas on loose sheets of paper stapled into the passports of Kashmir residents applying to enter China – an indirect challenge to India’s sovereignty.
Moreover, China abruptly shortened the length of its border with India by rescinding its recognition of the 1,597-kilometer (992-mile) line separating Indian Kashmir from Chinese-held Kashmir.
And Premier Li Keqiang’s visit last May followed a deep PLA incursion into India’s Ladakh region, seemingly intended to convey China’s anger over India’s belated efforts to fortify its border defenses.
Now, China is at it again, including near the convergence point of China, India, and Pakistan – the same place last year’s PLA encroachment triggered a three-week military standoff. This pattern suggests that the central objective of Chinese leaders’ visits to India is not to advance cooperation on a shared agenda, but to reinforce China’s own interests, beginning with its territorial claims.
Even China’s highly lucrative and fast-growing trade with India has not curbed its rising territorial assertiveness.
By contrast, Indian prime ministers since Jawaharlal Nehru have traveled to China to express goodwill and deliver strategic gifts.
Unsurprisingly, India has often ended up losing out in bilateral deals.
Particularly egregious was Prime Minister Atal Bihari Vajpayee’s 2003 surrender of India’s Tibet card.
Vajpayee went so far as to use, for the first time, the legal term “recognize” to accept what China calls the Tibet Autonomous Region (TAR) as “part of the territory of the People’s Republic of China.” That opened the way for China to claim Arunachal Pradesh (three times the size of Taiwan) as “South Tibet” and reinforced China’s view of territorial issues: Whatever area it occupies is Chinese territory, and whatever territorial claims it makes must be settled on the basis of “mutual accommodation and understanding.”
Vajpayee’s blunder compounded Nehru’s 1954 mistake in implicitly accepting, in the Panchsheel Treaty, China’s annexation of Tibet, without securing (or even seeking) recognition of the then-existing Indo-Tibetan border.
In fact, under the treaty, India forfeited all of the extraterritorial rights and privileges in Tibet that it had inherited from imperial Britain.
As agreed in the pact, India withdrew its “military escorts” from Tibet, and conceded to the Chinese government, at a “reasonable” price, the postal, telegraph, and public telephone services operated by the Indian government in the “Tibet region of China.”
For its part, China repeatedly violated the eight-year pact, ultimately mounting the trans-Himalayan invasion of 1962.
In short, China used the Panchsheel Treaty to outwit and humiliate India.
Yet, just this summer, Prime Minister Narendra Modi’s new government sent Vice President Hamid Ansari to Beijing to participate in the treaty’s 60th anniversary celebrations.
Ansari was accompanied by Commerce Minister Nirmala Sitharaman, who, during her stay, signed an agreement allowing China – without any quid pro quo – to establish industrial parks in India.
This will exacerbate existing imbalances in the bilateral trade relationship – China currently exports to India three times more than it imports from the country, with most of these imports being raw materials –thereby exposing India to increased strategic pressure and serving China’s interest in preventing India’s rise as a peer competitor.
The fact that the spotlight is now on China’s Tibet-linked claim to Arunachal Pradesh, rather than on Tibet’s status, underscores China’s dominance in setting the bilateral agenda.
Given India’s dependence on cross-border water flows from Tibet, it could end up paying a heavy price.
Embarrassed by China’s relentless border violations – according to Indian Minister of State for Home Affairs Kiren Rijiju, there were 334 in the first 216 days of this year – India has recently drawn a specious distinction between “transgressions” and “intrusions” that enables it to list all of the breaches simply as transgressions.
But word play will get India nowhere.
A reminder of that came at July’s BRICS summit of Brazil, Russia, India, China, and South Africa, when, yet again, China emerged ahead of India.
The BRICS’ New Development Bank, it was announced, will be headquartered in Shanghai, not New Delhi; India’s consolation prize was that an Indian will serve as the Bank’s first president.
Under pressure from an unyielding and revanchist China, India urgently needs to craft a prudent and carefully calibrated counter-strategy.
For starters, India could rescind its recognition of Chinese sovereignty over Tibet, while applying economic pressure through trade, as China has done to Japan and the Philippines when they have challenged its territorial claims. By hinging China’s market access on progress in resolving political, territorial, and water disputes, India can prevent China from fortifying its leverage.
Moreover, India must be willing to respond to Chinese incursions by sending troops into strategic Chinese-held territory. This would raise the stakes for Chinese border violations, thereby boosting deterrence.
Finally, India must consider carefully the pretense of partnership with China that it is forming through trade and BRICS agreements – at least until a more balanced bilateral relationship emerges.
The International Misrule of Law
NEW DELHI – On the face of it, China’s recent declaration of an air defense identification zone (ADIZ) extending to territories that it does not control has nothing in common with America’s arrest and strip-search of a New York-based Indian diplomat for allegedly underpaying a housekeeper she had brought with her from India.
In fact, these episodes epitomize both powers’ unilateralist approach to international law.
A just, rules-based global order has long been touted by powerful states as essential for international peace and security.
Yet there is a long history of major powers flouting international law while using it against other states.
The League of Nations failed because it could not punish or deter such behavior.
Today, the United States and China serve as prime examples of a unilateralist approach to international relations, even as they aver support for strengthening global rules and institutions.
Consider the US, which has refused to join key international treaties – for example, the 1982 United Nations Convention on the Law of the Sea (UNCLOS), the 1997 UN Convention on the Law of the Non-Navigational Uses of International Watercourses (which has not yet entered into force), and the 1998 International Criminal Court Statute.
Indeed, unilateralism remains the leitmotif of US foreign policy, and this is also reflected in its international interventions, whether cyber warfare and surveillance, drone attacks, or efforts to bring about regime change.
Meanwhile, China’s growing geopolitical heft has led to muscle-flexing and territorial claims in Asia that disregard international norms.
China rejects some of the same treaties that the US has declined to join, including the International Criminal Court Statute and the Convention on the Law of the Non-Navigational Uses of International Watercourses (the first law to establish rules on the shared resources of transnational rivers, lakes, and aquifers).
Indeed, despite their geopolitical dissonance, the world’s most-powerful democracy and its most powerful autocracy have much in common when it comes to how they approach international law.
For example, the precedent that the US set in a 1984 International Court of Justice (ICJ) case filed by Nicaragua still resonates in China, underscoring that might remains right in international relations.
The ICJ held that America violated international law both by supporting the contras in their insurrection against the Nicaraguan government and by mining Nicaragua’s harbors.
But the US prevented Nicaragua from obtaining any compensation by vetoing UN Security Council resolutions that called for enforcement of the ICJ’s judgment.
China still hews to Mao Zedong’s belief that “power grows out of the barrel of a gun.” Indeed, while China ratified UNCLOS, it then reinterpreted the provisions to justify cartographic aggression in the South and East China Seas.
Worse still, China has refused to accept the UNCLOS dispute-settlement mechanism, thereby remaining unfettered in altering facts on the ground.
The Philippines has filed a complaint against China with the International Tribunal for the Law of the Sea.
China, however, has simply refused to participate in the proceedings, as if it were above international law.
Whatever the tribunal’s decision, China will simply shrug it off.
Only the Security Council can enforce an international tribunal’s judgment on a noncompliant state.
But China wields a veto there and will block enforcement of an adverse ruling, just as the US did in the Nicaragua case.
China’s new ADIZ, while aimed at solidifying its claims to territories held by Japan and South Korea, is similarly provocative, because it extends to areas that China does not control, setting a dangerous precedent in international relations.
Japan has asked its airlines to ignore China’s demand for advance notification of flights, even if they are merely transiting the new zone and not heading toward Chinese territorial airspace.
By contrast, the US has advised American carriers to obey China’s prior-notification demand.
There is a reason for this: Although the prior-notification rule in American policy applies only to aircraft headed for US national airspace, in practice the US demands advance notification of all flights through its ADIZ, regardless of their intended destination.
If other countries emulated the example set by China and the US by establishing unilateral claims to international airspace, a dangerous situation would result.
Binding international rules are thus imperative in order to ensure the safety of fast-growing commercial air traffic.
But who is supposed to take the lead when China and the US have pursued a unilateralist approach on this issue?
Now consider the case of the Indian diplomat, Devyani Khobragade, whose treatment India’s national security adviser called “despicable and barbaric.”
True, as a consulate-based diplomat, Khobragade enjoyed only limited diplomatic immunity under the 1963 Vienna Convention on Consular Relations.
But this convention guarantees freedom from detention until trial and conviction, except for “grave offenses.”
Can a wage dispute qualify as a “grave offense” warranting arrest and humiliation?
Would the US tolerate similar treatment of one of its consular officers?
The harsh truth is that the US interprets the Vienna Convention restrictively at home but liberally overseas, in order to shield even the military and intelligence contractors that it sends abroad.
A classic case involved the CIA contractor Raymond Davis, who fatally shot two men in 2011 in Lahore, Pakistan.
Claiming that Davis was a bona fide diplomat with its Lahore consulate, and thus enjoyed immunity from prosecution, the US accused Pakistan of “illegally detaining” him, with President Barack Obama defending him as “our diplomat in Pakistan.”
Despite a widely held belief that the current international system is based on rules, the fact is that major powers are rule makers and rule imposers, not rule takers.
They have a propensity to violate or manipulate international law when it is in their interest to do so.
If universal conformity to a rules-based international order still seems like a distant prospect, an important reason is that countries that should be leading the charge still so often behave like rogue states.
Japan’s Obama Problem
TOKYO – When Japanese Prime Minister Shinzo Abe visited Tokyo’s controversial Yasukuni Shrine last month, Chinese leaders predictably condemned his decision to honor those behind “the war of aggression against China.”
But Abe was also sending a message to Japan’s main ally and defender, the United States.
Faced with US President Barack Obama’s reluctance to challenge China’s muscle-flexing and territorial ambitions in Asia – reflected in Japan’s recent split with the US over China’s new Air Defense Identification Zone (ADIZ) – an increasingly desperate Abe was compelled to let both countries know that restraint cannot be one-sided.
For China and South Korea, the Yasukuni Shrine’s inclusion of 14 Class A war criminals who were executed after World War II has made it a potent symbol of Japan’s prewar militarism, and Abe had long refrained from visiting it – including during his previous stint as prime minister.
He may well have maintained that stance had China not established the ADIZ, which set an ominous new precedent by usurping international airspace over the East China Sea, including areas that China does not control.
(Abe does not appear to have considered the possibility that his pilgrimage to Yasukuni might end up helping China by deepening South Korea’s antagonism toward Japan.)
The Obama administration had been pressing Abe not to aggravate regional tensions by visiting Yasukuni – an entreaty reiterated by Vice President Joe Biden during a recent stopover in Tokyo on his way to Beijing.
In fact, Biden’s tour deepened Japan’s security concerns, because it highlighted America’s focus on balancing its relationships in East Asia, even if that means tolerating an expansionist China as the strategic equivalent of an allied Japan.
Instead of postponing Biden’s trip to Beijing to demonstrate disapproval of China’s new ADIZ, the US advised its commercial airlines to respect it, whereas Japan asked its carriers to ignore China’s demand that they file their flight plans through the zone in advance.
By calling for Japanese restraint, the US stoked Japan’s anxiety, without winning any concessions from China.
Now, the widening rift between the US and Japan has become starkly apparent.
Abe feels let down by Obama’s decision not to take a firm stand on the ADIZ – the latest in a series of aggressive moves by China to upend the status quo in the East China Sea.
For its part, the US government openly – and uncharacteristically – criticized Abe’s Yasukuni visit, with its embassy in Japan releasing a statement saying that the US was “disappointed that Japan’s leadership has taken an action that will exacerbate tensions with Japan’s neighbors.”
Such recriminations do not mean that the US-Japan alliance – the bedrock of America’s forward military deployment in Asia – is in immediate jeopardy.
Japan remains a model ally that hosts a large US troop presence, even paying for the upkeep of American forces on its soil.
Indeed, Abe’s visit to Yasukuni came only a day after he completed a long-elusive, US-backed bilateral deal to relocate America’s airbase in Okinawa to a less populous area of the island.
And he supports Japan’s entry into the US-led Trans-Pacific Partnership, an emerging regional trading bloc that will exclude China.
Nonetheless, a psychological schism between the Abe and Obama administrations has gradually developed.
While the US frets about Abe’s nationalistic stance vis-à-vis China and South Korea, Japanese officials have stopped trying to conceal their uneasiness over Obama’s effort to strike a balance between its alliance commitments and its desire for Sino-American ties.
Biden spent more than twice as much time in discussions with Chinese President Xi Jinping as he did with Abe.
The paradox is that while anxiety over China’s growing assertiveness has returned the US to the center of Asian geopolitics and enabled it to strengthen its security arrangements in the region, this has not led to action aimed at quelling China’s expansionary policies.
As a result, Japan is becoming skeptical about America’s willingness to support it militarily in the event of a Chinese attack on the Japanese-controlled Senkaku Islands (called the Diaoyu Islands in China).
The Obama administration’s contradictory rhetoric – affirming that the US-Japan security treaty covers the Senkakus, while refusing to take a position on the islands’ sovereignty – has not helped.
A wake-up call for Japan was Obama’s inaction in 2012, when China captured the Scarborough Shoal, part of the Philippines’ exclusive economic zone.
In an effort to end a tense standoff, the US brokered a deal in which both countries agreed to withdraw their maritime vessels from the area.
But, after the Philippines withdrew, China occupied the shoal – and, despite a mutual-defense treaty between the US and the Philippines, the US did little in response.
This emboldened China effectively to seize a second Philippine-claimed shoal, part of the disputed Spratly Islands.
Factors like geographical distance and economic interdependence have made the US wary of entanglement in Asia’s territorial feuds.
And, unlike Asian countries, America would not really suffer from a Chinese “Monroe Doctrine” declaring that China would not accept any outside intervention in Asia.
But America’s neutrality on sovereignty disputes threatens to undermine its bilateral security alliances (which, by preventing countries like Japan from turning toward militarism, actually serve Chinese interests).
The Obama administration’s Asian balancing act obfuscates the broader test of power that China’s recent actions represent.
What is at stake are not merely islands in the East and South China Seas, but a rules-based regional order, freedom of navigation of the seas and skies, access to maritime resources, and balanced power dynamics in Asia.
By fueling Japanese insecurity, US policy risks bringing about the very outcome – a return to militarism – that it aims to prevent.
America’s Never-Ending War
NEW DELHI – It is official: US President and Nobel Peace Prize laureate Barack Obama is at war again.
After toppling Libyan ruler Muammar el-Qaddafi and bombing targets in Somalia and Yemen, Obama has initiated airstrikes in the Syria-Iraq belt, effectively declaring war on the Islamic State – a decision that will involve infringing on the sovereign, if disintegrating, state of Syria.
In his zeal to intervene, Obama is again disregarding US and international law by seeking approval from neither the US Congress nor the United Nations Security Council.
Obama’s predecessor, George W. Bush, launched America’s so-called “war on terror” to defeat groups that he insisted wanted to “establish a radical Islamic empire that spans from Spain to Indonesia.” But Bush’s invasion and occupation of Iraq was so controversial that it fractured the global consensus to fight terror, with the Guantánamo Bay detention center and the rendition and torture of suspects coming to symbolize the war’s excesses.
After Obama took office, he sought to introduce a gentler, subtler tone.
Contending in a 2009 interview that “the language we use matters,” he rebranded the war on terror as a “struggle” and a “strategic challenge.”
But the rhetorical shift did not translate into a change in strategy, with the Obama administration moving beyond security concerns to use its anti-terrorism activities to advance America’s broader geopolitical interests.
Thus, instead of viewing the elimination of Osama bin Laden in 2011 as the culmination of the anti-terror “struggle” that Bush launched, the Obama administration increased aid to “good” rebels (such as those in Libya), while pursuing “bad” terrorists more vehemently, including through a “targeted killing” program.
When it comes to terrorist activity, however, such lines are difficult to draw.
For example, Obama initially placed the Islamic State in the “good” category, as it undermined Syrian President Bashar al-Assad’s rule and Iran’s interests in Syria and Iraq.
His position changed only after the Islamic State threatened to overrun Iraq’s Kurdish regional capital, Erbil – home to US military, intelligence, diplomatic, and business facilities. Add to that the beheadings of two American journalists, and suddenly Obama’s team was using Bush’s war rhetoric, declaring that the US is at war with the Islamic State “in the same way that we are at war with Al Qaeda and its affiliates all around the globe.”
America’s war on terror now risks becoming a permanent war against an expanding list of enemies – often inadvertently created by its own policies.
Just as covert aid to Afghanistan’s anti-Soviet rebels in the 1980s contributed to Al Qaeda’s emergence – something that Hillary Clinton acknowledged when she was Obama’s secretary of state – the help that the US and its allies provided to Syrian insurgents after they emerged in 2011 contributed to the rise of the Islamic State.
The US returned to Afghanistan in 2001 to wage an as-yet-unfinished war on the jihadists whom its actions had spawned.
Likewise, it is now launching a war in Iraq and Syria against the offspring of Bush’s forced regime change in Baghdad and Obama’s ill-conceived plan to topple Assad.
It is time for the US to recognize that since it launched its war on terror, the scourge has only spread.
The Afghanistan-Pakistan belt has remained “ground zero” for transnational terrorism, and once-stable countries like Libya, Iraq, and Syria have emerged as new hubs.
Obama’s effort to strike a Faustian bargain with the Afghan Taliban, whose top leaders enjoy sanctuary in Pakistan, indicates that he is more interested in confining terrorism to the Middle East than defeating it – even if it means leaving India to bear the brunt of terrorist activity.
(In fact, Pakistan’s ongoing war of terror against India also sprang from America’s anti-Soviet operation in Afghanistan – the largest in the CIA’s history – as the Pakistani Inter-Services Intelligence siphoned off a large share of the billions of dollars in military aid for the Afghan rebels.)
Similarly, Obama’s strategy toward the Islamic State seeks merely to limit the reach of a barbaric medieval order.
Moments after declaring his intention to “degrade and destroy” the group, Obama responded to a reporter’s request for clarification by stating that his real goal is to turn the Islamic State into a “manageable problem.”
Making matters worse, Obama plans to use the same tactics to fight the Islamic State that led to its emergence: authorizing the CIA, aided by some of the region’s oil sheikhdoms, to train and arm thousands of Syrian rebels.
The US may have some of the world’s top think tanks and most highly educated minds.
But it consistently ignores the lessons of its past blunders – and so repeats them.
US-led policies toward the Islamic world have prevented a clash between civilizations only by fueling a clash within a civilization that has fundamentally weakened regional and international security.
An endless war waged on America’s terms against the enemies that it helped to create is unlikely to secure either steady international support or lasting results.
Nowhere is this more apparent than in the tepid Arab and Turkish response to America’s effort to assemble an international coalition in support of what the Obama administration admits will be a multiyear military offensive against the Islamic State.
The risk that imperial hubris accelerates, rather than stems, Islamist terror is all too real – yet again.
An Afghan Afghanistan
NEW DELHI – As it braces for its upcoming presidential election, Afghanistan finds itself at another critical juncture, with its unity and territorial integrity at stake after 35 years of relentless war. Can Afghanistan finally escape the cycle of militancy and foreign intervention that has plagued it for more than three decades?
Two key questions are shaping discussions about Afghanistan’s post-2014 trajectory.
The first concerns the extent to which Pakistan will interfere in Afghan affairs, such as by aiding and abetting the Afghan Taliban and its main allies, including the Haqqani network and Gulbuddin Hekmatyar’s militia.
This will depend on whether the United States conditions its generous aid to cash-strapped Pakistan on noninterference in Afghanistan.
The second question is whether US-led NATO forces will continue to play any role in Afghanistan.
It is no secret that US President Barack Obama wants to maintain an American military presence in the country – a reversal of his declaration in 2009 that the US sought no military bases there.
Indeed, for several months, the US has been involved in painstaking negotiations with the Afghan government to conclude a bilateral security agreement that would enable the US to maintain bases in Afghanistan virtually indefinitely.
What was supposed to be an endgame for Afghanistan has turned into a new game over America’s basing strategy.
But, despite having finalized the terms of the agreement, Obama failed to persuade Afghanistan’s outgoing president, Hamid Karzai, to sign it.
That means that America’s role in the country can be settled only after the new Afghan president assumes office in May.
And the election’s outcome is far from certain.
While all eight Afghan presidential candidates claim to support the security accord, this may offer little comfort to the US, given that most of the candidates have directly opposed US interests in the past – not to mention that several of them are former or current warlords.
Moreover, there remains the question of how a residual American-led force, even if sizable, could make a difference in Afghanistan, given that a much larger force failed to secure a clear victory over the past 13 years.
Obama has offered no answer.
Nonetheless, there is strong bipartisan support in the US for maintaining military bases in Afghanistan, as a means of projecting hard power, and the increasingly charged confrontation between the US and Russia over Ukraine has boosted that support considerably.
In fact, former Secretary of State Condoleezza Rice explicitly linked Russia’s actions in Ukraine with “talk of withdrawal from Afghanistan, whether the security situation warrants it or not.”
According to Rice, anything less than a residual force of 10,000 American troops will send the message that the US is not serious about helping to stabilize Afghanistan – a message that would embolden Russian President Vladimir Putin further.
What she does not seem to recognize is that America’s deteriorating ties with Russia – a key conduit for US military supplies to Afghanistan – could undercut its basing strategy.
The US is clearly convinced that a continued military presence in Afghanistan is in its interests.
But what would it mean for Afghanistan, a country that has long suffered at the hands of homegrown militant groups and foreign forces alike?
Afghanistan has been at war since 1979, when Soviet forces launched a disastrous eight-year military campaign against multinational insurgent groups.
That intervention – together with the US and Saudi governments’ provision of arms to Afghanistan’s anti-Soviet guerrillas through Pakistan’s Inter-Services Intelligence agency – helped spread militancy and terrorism, which the subsequent US military intervention has kept alive.
As a result, Afghanistan is now at risk of becoming partitioned along ethnic and tribal lines, with militia- or warlord-controlled enclaves proliferating.
In short, foreign involvement in Afghanistan has so far failed to produce positive results.
That is why Afghanistan’s political and security transition would be better served by focusing on three key internal factors:
· Free and fair elections that are widely viewed as reflecting the will of the Afghan people to chart a peaceful future.
· The ability of Karzai’s successor to unite disparate ethnic and political groups – a tall order that can be filled only by a credible and widely respected leader.
· The government’s success in building up Afghanistan’s multi-ethnic security forces.
How next month’s presidential election plays out is crucial.
If threats and violence from the Taliban prevent too many Afghans from casting their vote, the legitimacy of the outcome could be questioned, possibly inciting even more turmoil, which Afghanistan’s fledging security forces would struggle to contain.
To be sure, the security forces have, so far, mostly held their ground, deterring assassinations and keeping Kabul largely secure.
But they have also failed to make significant gains, and US plans to cut aid will make progress even more difficult.
Unable to sustain the current force with reduced aid, the Afghan government will have to try to make it “leaner and meaner.”
Whether it will succeed is far from certain.
That only increases the pressure to maintain a foreign military presence, even though it is unlikely to bring peace to Afghanistan.
In fact, the risk of becoming locked in a protracted, low-intensity war against militancy and warlordism is likely to outweigh any geopolitical advantages that the US would gain from military bases in the country. After all, the terrorist havens and command-and-control centers for the Afghan insurgency are located in Pakistan – undercutting the US military effort to rout the Afghan Taliban since 2001.
All of this points to a clear conclusion: Afghanistan’s future must finally be put in the hands of Afghans.
Outside resources should be devoted to building the governing capacity needed to keep the country united and largely peaceful.
Brains Drains Are Good for You
Societies that take in "brain drained" scientists and others benefit enormously.
Innovative and entrepreneurial French Huguenots contributed mightily to the launch of the Industrial Revolution in Britain.
American universities benefited mightily from refugee German Jews fleeing Adolf Hitler.
Today's Silicon Valley would not be what it is without its brilliant Chinese and Indian entrepreneurs.
The Swiss Federal Institute of Technology in Zurich (ETH) has the highest number of Nobel Prize winners of any institution in the world, no doubt partly due to the fact that 35% of its faculty is foreign.
From Cordoba 1000 years ago to California today, the most intellectually stimulating places are crossroads for bright people from different cultures.
Societies that fail to attract foreign brains stagnate.
Take Japan.
Japan's homogeneity helped create the economic nationalism that drove the country for several decades, but today most of Japan's universities, research institutes and laboratories, think-tanks and elite publications, suffer from sclerotic inbreeding.
Japan's current lethargy is due, in part, to the in-bred languor of Japanese intellectual life.
But aren't countries that export their "brains" impoverished by the process?
It depends.
Spain, for example, saw its best minds drained away for five centuries, notably following Fascism's victory in the Spanish Civil War.
When Franco died in 1975, Spain's future path was not obvious, as evidenced by the attempted coup of February 1981.
Poor, dictatorial, marginalized from Europe, Spain's experience during the last quarter- century is one of history's most successful transition stories, as it became a prosperous, thriving democracy and ceased being a major exporter of brains.
Indeed, many of Spain's best minds have returned home. More importantly, foreign brains now drain to Spain!
Historically, a big exporter of people, per inhabitant, has been Ireland.
Poverty and the rigid social control of a reactionary Roman Catholic Church made the country inhospitable to intellectual life -- to Britain's and America's great advantage, because both received many bright Irish fleeing the stultifying intellectual life of their homeland.
As generally happens, the less intellectually endowed remained behind.
Yet, from Third World poverty levels two decades ago, Ireland has surpassed its former colonial master in GDP per capita .
Becoming a committed European player, fostering foreign direct investment, including venture businesses, promoting financial services and IT resulted in a formidable brain drain reversal for Ireland.
After Chiang Kai-shek retreated to Taiwan in 1949 to form the Republic of China in opposition to Mao's People's Republic, he sought to maintain his dictatorial regime but was made to recognize the importance of building Taiwan's economy so as to strengthen the island.
Thanks to generous US aid --Taiwan was for several decades second only to Israel in the amount of American aid received --Taiwan could send its best university students, especially engineers, to study abroad.
Now Taiwan has the highest proportion of engineers to total population in the world.
Many Taiwanese engineers studied in prestigious American universities, with the result that in Boston people sometimes refer to M.I.T. as "Made in Taiwan" rather than the Massachusetts Institute of Technology.
As late as the 1980s, only two out of ten Taiwanese who studied in the US returned home, due to its bleak social, intellectual and political environment.
Then Taiwan did several things: by establishing science parks, it provided a good environment for R&amp;D; by deregulating, it provided opportunities for entrepreneurs; last, but emphatically not least, by ending the dictatorship and ushering in democracy, it provided the basis for that universal desire of people to pursue their individual freedom and happiness.
In the 1990s, thanks to its returning brains, Taiwan became a high-tech powerhouse.
South Korea's story over the last 50 years parallels Taiwan's story.
The military dictatorship established by Park Chung-hee in 1962 adopted an aggressive economic development policy, partly to contain North Korea.
The Park government recognized the importance of investing in education, including primary, secondary and tertiary.
The problem for a dictator in building universities is that students are needed, and students often protest!
Once Korean students overthrew the dictatorship of Park's successor, Chung Doo-hwan, Korean scientists, engineers, economists, and others, returned home en masse , bringing knowledge acquired in the US with them.
So a brain drain can be a good thing for recipient countries and also for brain exporting countries. Good, that is, if the drain is reversed one day.
Most people everywhere prefer to stay home, or return home, rather than live in permanent exile. Kimchi is simply not as good in Los Angeles as in Pusan, nor is chapathi as good in Manchester as in Hyderabad.
Brain drains put enormous pressure on brain exporting countries to improve their governance, their institutions, and their economic and their social freedoms.
Such improvements are the ultimate test of a successful society.
For this reason especially, but also for many others, the more brains that are drained, the better!
Brave New Financial World
CAMBRIDGE – A huge struggle is brewing within the G-20 over the future of the global financial system.
The outcome could impact the world – and not only the esoteric world of international finance – for decades to come.
Finance shapes power, ideas, and influence.
Cynics may say that nothing will happen to the fundamentals of the global financial system, but they are wrong.
In all likelihood, we will see huge changes in the next few years, quite possibly in the form of an international financial regulator or treaty.
Indeed, it is virtually impossible to resolve the current mess without some kind of compass pointing to where the future system lies.
The United States and Britain naturally want a system conducive to extending their hegemony.
US Treasury Secretary Timothy Geithner has recently advanced the broad outlines of a more conservative financial regulatory regime.
Even critics of past US profligacy must admit that the Geithner proposal contains some good ideas.
Above all, regulators would force financiers to hold more cash on hand to cover their own bets, and not rely so much on taxpayers as a backstop.
Geithner also aims to make financial deals simpler and easier to evaluate, so that boards, regulators, and investors can better assess the risks they face.
While the rest of the world is sympathetic to Geithner’s ideas, other countries would like to see more fundamental reform.
Russia and China are questioning the dollar as the pillar of the international system.
In a thoughtful speech, the head of China’s Central Bank, Zhou Xiaochuan, argued the merits of a global super-currency, perhaps issued by the International Monetary Fund.
These are the calmer critics.
The current president of the European Union’s Council of Ministers, Czech Prime Minister Mirek Topolanek, openly voiced the angry mood of many European leaders when he described America’s profligate approach to fiscal policy as “the road to hell.”
He could just as well have said the same thing about European views on US financial leadership.
The stakes in the debate over international financial reform are huge.
The dollar’s role at the center of the global financial system gives the US the ability to raise vast sums of capital without unduly perturbing its economy.
Indeed, former US President George W. Bush cut taxes at the same time that he invaded Iraq.
However dubious Bush’s actions may have been on both counts, interest rates on US public debt actually fell.
More fundamentally, the US role at the center of the global financial system gives tremendous power to US courts, regulators, and politicians over global investment throughout the world.
That is why ongoing dysfunction in the US financial system has helped to fuel such a deep global recession.
On the other hand, what is the alternative to Geithner’s vision?
Is there another paradigm for the global financial system?
China’s approach represents a huge disguised tax on savers, who are paid only a pittance in interest on their deposits.
This allows state-controlled banks to lend at subsidized interest rates to favored firms and sectors.
In India, financial repression is used as a means to marshal captive savings to help finance massive government debts at far lower interest rates than would prevail in a liberalized market.
A big part of Russia’s current problems stems from its ill-functioning banking system.
Many borrowers, unable to get funding on reasonable terms domestically, were forced to take hard-currency loans from abroad, creating disastrous burdens when the ruble collapsed.
Europe wants to preserve its universal banking model, with banks that serve a broad range of functions, ranging from taking deposits to making small commercial loans to high-level investment-banking activities.
The US proposals, on the other hand, would make universal banking far harder, in part because they aim to ring-fence depository institutions that pose a “systemic risk” to the financial system.
Such changes put pressure on universal banks to abandon riskier investment-bank activities in order to operate more freely.
Of course, US behemoths such as Citigroup, Bank of America, and JP Morgan will also be affected.
But the universal banking model is far less central to the US financial system than it is in Europe and parts of Asia and Latin America.
Aside from its implications for different national systems, the future shape of banking is critical to the broader financial system, including venture capital, private equity, and hedge funds.
The Geithner proposal aims to rein in all of them to some degree.
Fear of crises is understandable, yet without these new, creative approaches to financing, Silicon Valley might never have been born.
Where does the balance between risk and creativity lie?
Although much of the G-20 debate has concerned issues such as global fiscal stimulus, the real high-stakes poker involves choosing a new philosophy for the international financial system and its regulation.
If our leaders cannot find a new approach, there is every chance that financial globalization will shift quickly into reverse, making it all the more difficult to escape the current morass.
Brave New World Dawning
Since 1978, reproductive biologists have helped couples overcome infertility by using increasingly sophisticated techniques for generating and manipulating human embryos in the laboratory.
At the same time, molecular biologists have been working to overcome human disease by deciphering the entire sequence of the human genome and constructing tools to correct genetic and cellular defects.
While reproductive and molecular biologists focus on unrelated medical problems - infertility and disease - combining their technologies produces reprogenetics , which will allow us to design ourselves.
Reprogenetics will enable prospective parents to give their children genes that they themselves do not carry, thereby increasing their offspring's chances for health, longevity, happiness, and success - an appalling prospect for many bioethicists.
But is reprogenetics simply a new and more powerful vehicle to repeat the abhorrent eugenic practices of the past?
Or are reprogenetics and eugenics fundamentally different from one another in terms of both control and purpose?
Eugenics embodies the desire and attempts of a society's leaders to control the breeding practices of its citizens, including the forcible sterilization or murder of those deemed as carrying undesirable genes.
Reprogenetics, by contrast, is concerned with the question of what genes an individual child will receive, not with the vague, unscientific goal of improving a society's gene pool.
Moreover, it gives control to individual prospective parents.
While eugenic practices led to a restriction of reproductive freedom and worse, reprogenetics can do the opposite.
It could help parents have children with a higher likelihood of being healthy, without bringing direct harm to anyone else.
Reprogenetics can be understood as an extension of parents' fundamental motivation and desire: to protect their children and give them all possible advantages in life.
Parents in affluent societies already provide environmental advantages to their children after birth; reprogenetics could allow them to pursue the same objectives before birth.
Of course, neither environmental nor genetic advantages guarantee healthier, happy, successful children.
But the lack of guarantees does not prevent parents from spending $140,000 to send their children to the elite private university where I teach.
If democratic societies allow people to spend money to buy environmental advantages for children, how can they prohibit parents from buying genetic advantages?
If reprogenetics is used to increase chances of health, happiness and success, what could be wrong with it?
Once issues of technical safety are resolved, a fundamental objection to reprogenetics is its inherent unfairness to families unable to afford it.
All modern democratic societies must balance individual autonomy and social justice.
In the US, individual autonomy is of paramount importance.
In most other Western countries, social solidarity looms much larger.
Most European countries try to realize it by providing equal healthcare and educational opportunities to all children.
But the argument that genetic enhancements are immoral because not all children can receive them is flawed.
Children are not biologically equivalent to begin with.
Everyone is born with advantages or disadvantages across a whole range of physical characteristics as well as innate abilities.
Life is not fair.
So, in the future the critical question will be this: "Who decides how genetic advantages are distributed?"
Who decides which child will get the HIV resistance gene and who will be born susceptible to AIDS?
Who will decide which child will have superior protection against cancer and heart disease?
Should the decision be left to the randomness of nature, as it is now?
Should it be determined by the parents' affluence?
Or should it be controlled by a benevolent state that doles out life-enhancing genes to all its newly conceived children?
Unfortunately, provision and regulation of genetic enhancement technology will not be easy.
Unlike healthcare, there are almost no limits to genetic enhancements.
There can always be stronger resistance to disease, greater longevity, more physical prowess, and higher mental capacity.
Furthermore, the innate desire to provide for one's children is so powerful that affluent citizens may buy reprogenetics elsewhere even if their society bans or limits its use.
Today, for example, Europeans travel to the US to purchase human eggs from young women chosen on the basis of their presumed genetic characteristics.
It is, however, possible to envisage an alternative scenario to that of a growing gap between "haves" and "have-nots."
Although such a gap may emerge initially, the cost of reprogenetics is likely to drop sharply over time.
Like computers and advanced telecommunications, it could become affordable to the majority in developed countries.
Ultimately, hyper-human genetic enhancements will become feasible, too, and the economic and social advantages that wealthy countries maintain could be expanded into a genetic advantage.
The divide between wealthy and poor nations could widen further with each generation until a common humankind no longer exists.
A severed humanity could be the ultimate legacy of unfettered global capitalism.
The only alternative to this bleak possibility seems remote today and may never be viable: a single global state in which all children are provided with the same genetic enhancements and the same opportunities for health, happiness, and success.
While this sounds like political fiction in a world where children still die from starvation, reprogenetics sounded like science fiction only thirty years ago.
The course of political development is, for good or bad, far more difficult to predict.
Brazil Breaks Out
The biggest hidden story in international development these days may be Brazil's economic takeoff.
Two years ago, Brazil's economy was left for dead, and the election of Worker Party candidate Luiz Inácio "Lula" da Silva as President was widely expected to trigger financial collapse.
Instead, Lula has governed with remarkable prudence, and Brazil is poised for rapid growth.
But something more fundamental is at play: Brazil may finally be overcoming some of the deepest obstacles to its economic development, obstacles that held the country back for decades.
If so, it could mark not only Brazil's economic ascendancy but also the recovery of other parts of South America.
In January 2002, American right-wingers were terrified of a leftist revolution in Brazil.
Foreign investors were panicking over the prospect that Brazil would fail to roll over its foreign debts.
The IMF, for a change, did a good job, providing interim financing and throwing its political backing behind Lula after the elections.
In turn, Lula adopted orthodox macroeconomic policies and moved to get the budget deficit under control, breaking the panic.
Market projections for Brazil's growth are around 4% for 2004.
But something deeper is at play than the usual waves of euphoria and panic in international financial markets.
Much of the credit for Brazil's turnaround belongs not to Lula but to his predecessor, Fernando Henrique Cardoso, who was Brazil's President from 1992 to 2000.
I credit FHC, as he is widely known, with making four key contributions.
· First, under his leadership, Brazil firmly embraced human rights, not only in the sense of democratic elections, but in terms of economic justice for African-Brazilians and indigenous Brazilians, people who had long been discriminated against.
Like most of Latin America, Brazil was born in the crucible of conquest and slavery.
Even during the 20 th century, neither the indigenous populations nor the African-Brazilian slave descendants had much chance in the economic and social order.
That is changing fast.
Public education is becoming universally available, including for groups that faced harsh discrimination in the past.
Remarkably, indigenous groups also won a hard-fought struggle for land rights in their traditional Amazon homelands.
· Second, Brazil is finally embracing the global knowledge economy.
For most of the 20 th century, Brazilian elites thought that they could get by on natural resources - cattle ranches, coffee plantations, fruit juices, and soybean farms.
Now they know that universal secondary education and extensive university-level training is also needed.
Under FHC's reforms, enrolment rates in secondary education soared, from 15% in 1990 to 71% in 2000.
Equally important, Brazilian universities are seeing an increase in quality and attendance as well.
Most of Latin America, including Brazil, ignored public investments in R&D for decades, while East Asian countries invested heavily.
FHC appointed a series of outstanding Ministers of Science and Technology, and the government finally began spending more on research and development.
Brazil is becoming known not only for orange juice, but for aircraft exports like the Embraer jets that now compete with American and European producers for the regional commuter market.
· Third, Brazil is coming out of its economic shell, competing in world markets rather than protecting national markets.
For decades, due to rampant protectionism, the ratio of Brazil's exports to GNP was one of the lowest in the world.
That is finally changing.
The export/GNP ratio has risen from 8% in 1990 to 13% in 2001, a sign that Brazil is beginning to seek out world markets.
Lula is traveling widely to promote Brazilian exports, another sure sign that Brazil's political economic orientation has become far more international.
· Fourth, Brazil is focusing on the health and productivity of its people.
Under FHC, Brazil pioneered an effective response to the AIDS epidemic by guaranteeing access to antiretroviral medicines and to widespread counseling and viral testing.
The hero of this effort, Dr. Paulo Teixera, is now at the World Health Organization helping to lead the global effort against AIDS.
Brazil has also dramatically improved child health, with mortality rates of young children falling sharply, from 60 per thousand in 1990 to 36 per thousand in 2001.
Brazil's total fertility rate (average number of births per woman) has come down sharply as well, from 2.7 in 1990 to 2.2 in 2001.
With more children surviving to adulthood, poor families are choosing to have fewer children, and to invest more in their health and education.
Population growth pressures are falling, providing a powerful long-term boost to Brazil's economic development.
Brazil's economic turnaround may have powerfully positive effects on its neighbors, especially the struggling countries of the Andean region.
This is the most likely scenario, but it is too early to declare victory.
Brazil still faces huge challenges.
Lula will have to build on the work of FHC.
Macroeconomic stability must be consolidated, with budget deficits brought decisively under control.
The political consensus in favor of universal education, outward-oriented trade, health for all, and a science-and-technology oriented economy must be strengthened.
Brazil must also pay more attention to environmental management, especially in the fragile yet critical Amazon region, if it wants long-term, sustainable economic development.
For Brazil to play a bigger role as regional economic leader, greater cooperation with its neighbors in suitable infrastructure projects and expanded markets will be needed.
Great challenges, indeed, but Brazil seems to be in the mood to meet them.
Brazil\u0027s Baleful Bailout
The International Monetary Fund (IMF) came through last week with a larger rescue package for Brazil than world financial markets expected.
This should have eased fears about Brazil's future.
So far, it hasn't.
After an initial rally, Brazilian interest rates have settled at levels incompatible with long-term solvency.
Its benchmark "C bonds" now yield around 22% in dollar terms.
Brazil's debt equals 60% of GDP, of which 35% falls due within a year.
The IMF has required that Brazil run a "primary surplus" (i.e. interest on government debt is excluded in the budget calculations) of 3.75% on its budget.
But this will clearly not be able to prevent a big further deterioration in the country's debt/GDP ratio, especially as high interest rates push Brazil into recession.
The fact that this package failed to bring relief indicates that something is fundamentally wrong with the international financial system.
Brazil's problems cannot be blamed on anything Brazil has done wrong; responsibility falls squarely on international financial authorities.
Admittedly, Brazil may soon elect a president that global financial markets do not like; but if international financial markets take precedence over democratic choice, the system is undoubtedly flawed.
Under the influence of market fundamentalism, the IMF does not benefit all of its members sufficiently.
In recent years, the so-called "Washington consensus" as espoused by the IMF and World Bank has put its faith in the self-correcting nature of financial markets.
That faith was and is misplaced.
Ever since financial capital began moving freely around the globe, crisis has followed crisis, with the IMF called upon to put together rescue packages of ever larger size.
Market fundamentalists blame this state of affairs on the moral hazard created by IMF bailouts.
In the aftermath of Asia's crisis of 1997, the IMF switched from bailouts to "bail-ins" that shifted more of the risk back to international lenders.
By doing so, the true risks of investing in emerging markets were revealed.
What is the result?
Capital flows have reversed.
Instead of capital flowing to economies on the world's periphery, it is leaving them and flowing to economies at the center.
If stability is to be preserved, financial markets need regulators and a lender of last resort.
But there can be no lender of last resort without a modicum of moral hazard.
Every developed country learned this lesson domestically decades ago, but the world has yet to learn it internationally.
The system we have in place is lopsided.
It is designed to preserve international financial markets, not the stability of emerging economies on the periphery.
That is what rendered the risk/reward ratio of investing in emerging markets so unfavorable.
Once we recognize the problem, solutions can be found.
The Washington Consensus starts by asking how big a budget surplus is needed in order to keep indebtedness within bounds; the higher the interest rates, the bigger the required surplus.
In the case of Brazil, with 22% interest and 4% growth, the primary surplus would have to be 4.8% to keep the debt/GDP ratio from rising - an obvious impossibility.
The right question to ask is this: what level of interest rates can be reconciled with reasonable growth?
A primary surplus of 3.75 % then becomes the maximum, not the minimum, that can be exacted, and it can support real interest rates of not more than 10%.
So the question then becomes: how do you bring interest rates down to that level?
This may require some international credit enhancements or guarantees.
The world's task is to find instruments that can minimize the possibility of moral hazard and yet keep the level of real risk within tolerable bounds.
I suggest that Instead of a traditional IMF package, the central banks of the developed countries should open their discount windows for Brazilian government debt.
Brazilian bonds would rally and confidence would return at the sight of a lender of last resort.
The risk would be minimized by not raising the amount the central banks are willing to lend in line with the rise in market prices.
Commercial banks would soon reinstate their lines of credit for Brazil, which would help ensure a recovery of exports.
(Lifting of the bulk of US tariffs on Brazilian steel would also help here.)
The crisis would then dissolve into thin air.
My proposal would achieve what the recently announced package failed to achieve, and at no higher a price.
It is not too late to adopt it.
Once it is in place, Brazil's incoming president (no matter who he is) would have no reason to contemplate interfering with Brazil's normal debt servicing commitments.
As things now stand, he would be justified in demanding greater international support rather than allow his country to bleed to death as Argentina is now doing.
In political conditions such as those that now prevail in Brazil, markets are right to take into account the possibility of a debt reorganization or even of a default.
But once they do, their actions soon become a self-fulfilling prophecy.
This is why financial markets cannot be left to their own devices.
Brazil’s Institutional Limbo
SÃO PAULO – International investors are watching closely as Brazilians prepare to vote in the second round of the presidential election on October 26.
Their vote will not only decide who will be the country’s next president; it may also determine the future of the Central Bank of Brazil (BCB), and therefore the country’s macroeconomic trajectory.
While the incumbent president, Dilma Rousseff, supports the BCB’s existing institutional framework, her opponents contend that monetary policy is plagued by political interference, which would best be addressed by giving the BCB greater autonomy.
But no candidate has yet advanced a proposal for reform that would reduce the scope for political interference while ensuring greater accountability and promoting financial stability.
If Brazil is to sustain strong and stable economic growth, the central bank will need an overhaul.
Monetary policy has long played an important role in Brazilian politics.
During the democratization process of the 1980s and 1990s, successive governments tried to tame hyperinflation, which reached 2,477% in 1993.
The introduction of the “Real plan,” launched in 1994, managed to suppress annual price growth to an “acceptable” 22% by the following year.
Riding on the plan’s success, its architect, Fernando Henrique Cardoso, a former economy minister, was twice elected President (in 1994 and 1998), underscoring voter concern about price stability.
Today, as central bankers in developed countries fret about the threat of deflation, Brazilian politicians are once again forced to respond to widespread fears about slowing growth and a return to high inflation.
Unfortunately, the presidential candidates’ plans for the BCB fall short of what is required.
Historically, Rousseff’s Workers’ Party (PT) has resisted giving the bank formal autonomy, and she has played a distinctly populist card during the campaign, arguing that BCB autonomy would hand too much control to private bankers.
Marina Silva, the Socialist Party’s candidate, demanded formal bank independence – an argument subsequently adopted by the Social Democratic Party (PSDB) candidate, Aécio Neves, who now faces Rousseff in the election run-off.
But Neves wants de facto, rather than formal, operational autonomy for the BCB.
Like Cardoso, Neves is committed to inflation targeting, creating a primary surplus, and maintaining a floating exchange rate.
While such policies may promote price stability, his proposal neglects the two most important issues for the BCB: legal autonomy and institutional reforms that ensure accountability to citizens.
A legal commitment to BCB autonomy would contribute to currency confidence in a way that informal autonomy cannot.
Legal structures have a direct impact on inflation expectations, because law can provide institutional protection to public goods, such as price and financial stability.
Properly designed and executed, institutional reform could also increase BCB accountability to society at large while guarding against undue political influence and lobbying by the big banks.
The BCB is ripe for reform.
It is a 50-year-old technocratic bureaucracy established under a military dictatorship, with few legal instruments for political and social accountability.
Institutional reform must therefore move beyond the BCB’s inadequate price-stability target, which is set according to a narrow inflation index that fails to reflect the experiences of ordinary Brazilian consumers.
For example, the reported 2013 inflation rate was 5.9% (compared to a 4.5% target); but prices for food, a major share of most households’ budgets, rose by 8.4%, hitting the poor especially hard. The Rousseff administration has kept the reported inflation rate artificially low by suppressing prices for state-run services.
Price stability should be accompanied by other targets, especially financial stability, but also, possibly, employment.
Rousseff thwarted Congress’s attempts to introduce such targets in 2011, and they would, of course, need to be carefully designed to avoid past mistakes.
But, done right, an expanded range of criteria by which to assess BCB policies, by enhancing accountability, would strengthen the legitimacy of granting policymakers legal autonomy.
There is also scope for institutional reform to promote greater financial stability.
The 2008 financial crisis and its aftermath highlighted the consequences of the BCB’s outdated institutional design. The Bank had insufficient legal backing for action needed to stabilize the financial system.
This left then-President Luiz Inácio Lula da Silva, to resort to a series of dramatic measures, including the use of the deposit-insurance fund and state-owned banks to bail out failed financial institutions.
Lula claimed that this ad hoc approach gave Brazil a degree of flexibility lacking in other countries; but it was not cost-free, as he claimed, and the results did not endure.
Rapid expansion of private debt raises other, larger concerns.
Other central banks have recognized the need for new instruments to ensure financial stability; so must the BCB.
Institutional clarity on the BCB’s mandate for financial stability and the instruments at its disposal could help Brazil avoid future crises – or at least weather them more effectively.
Brazil’s presidential election appears to offer two unsatisfying choices: a continuation of the status quo, with the BCB subject to political influence, under Rousseff; or an informally autonomous BCB with an outdated institutional apparatus, under Neves.
Only Silva’s initial proposal included calls for institutional reform of monetary policy and financial regulation; and it is far from certain that her endorsement of Neves in the run-off will sway his view should he win.
Brazil’s Oil Rush
SÃO PAULO – Brazil is poised to take its place among the world’s petro-powers.
Estimates of its newfound oil reserves place it in eighth place among oil-producing nations, ahead of Nigeria as well as Brazil’s rival for influence in Latin America,Venezuela.
Such newfound wealth is normally a source of celebration.
But Brazil’s President Luiz Inácio Lula da Silva, perhaps fearing the infamous “resource curse” that has blighted the development of so many countries blessed with mineral wealth, is determined that the new oil wealth not be turned into “nonsense.”
In 2007, huge oil deposits were discovered off Brazil’s coast.
Modest estimates put these reserves at around 30 billion barrels.
Crédit Suisse and other investment banks say that 50 billion barrels are available.
The discovery is the result of a strategic policy maintained through successive Brazilian administrations, something unusual in Latin America.
In 1989, when the Iraq-Iran war sent shivers among oil-consuming nations, Brazil began to explore for energy both within and beyond its 200-nautical-mile protected zone.
The size of the oceanic areas involved was enormous, thus earning the term “Blue Amazonia.”
The discoveries are the largest oil reserves discovered in the ocean in recent years.
For a while, the US tried to question Brazil’s ownership by trying to force a discussion of the “internationalization” of the oceans and their mineral resources.
But the UN would have none of it, and Brazil’s ownership was recognized.
Lula’s government has thought long and hard about how to manage the oil wealth, and has devised a unique program.
First of all, it wants to spread the wealth by pursuing a new model of regional integration through energy and infrastructure.
It is planning to create a fund, backed 70% by Brazilian financial resources, that will be dedicated to projects such as rehabilitating roads in Uruguay and Paraguay in order to enhance its neighbors’ capacities and correct economic imbalances.
Balanced economic development – national and regional – is essential for Brazil.
Indeed, Lula’s government is planning ways to ensure that the benefits gained from oil and gas are not limited to São Paulo, Rio de Janeiro, Minas Gerais, Parana, and other regions of the developed coast.
It thinks it is essential to locate refineries, industries, and additional energy-generating units in parts of the country that are both suited for such development and in need of it.
An additional benefit of dispersing these productive resources will be greater interaction with Brazil’s South American partners.
Brazil’s new oil reserves will certainly affect regional geo-politics.
Mexico’s oil fields are diminishing, which means that it may need to look for external supplies.
Tensions in the Middle East, and growing rivalry between the US and Venezuela, will make Brazil an attractive supplier.
Brazil is already testing its appeal as an energy power through the actions of its powerful state energy company, Petrobras, which is now as active in Africa as it is in Argentina.
Indeed, Petrobras is now producing 100,000 barrels a day in both Angola and Nigeria, with the oil marketed locally.
But the discoveries place Brazil at a crossroads.
Oil revenues can be controlled by the state to be used, in part, for social programs, as in Venezuela.
Or private capital can be granted a bigger say, and trust placed in the market to provide for society.
This ongoing debate has impeded decisions on the future of deep wells in Blue Amazonia.
Lula’s administration has even thought about creating a new national oil company to deal only with the new fields.
But this idea has created confusion among Brazil’s trading partners and investors, and does not appear to be making headway.
There is an even more complex question.
Brazilian growth will soon to rest on the shoulders of a product that is the main source of global warming.
Indeed, Brazil’s embrace of an oil-fired future reverses its longstanding policy of reliance on bio-fuels.
So Brazil is on a collision course with the future.
The size of the new oil reserves adds even more weight to Brazil’s growing global influence.
But it will no longer be able to condemn the US for not signing environmental treaties, or point a finger at China for its massive output of pollution.
Much less will Brazil be able to demand from its neighbors a commitment to sustainable development.
Oil, it seems, will not only transform Brazil’s economy, but its very role in the world.
Brazil’s Economic Revolution
BRASILIA – Large emerging economies were hit hard in the past year – particularly in the first half – by the crisis in developed countries, with Europe in recession and the United States staging only a meager recovery.
But 2012 will also be remembered as the year when structural changes in the Brazilian economy were consolidated.
The global economic crisis that began in 2008 is similar to the Great Depression of the 1930’s not only in terms of its depth and duration, but also in view of advanced countries’ policy errors and hesitation.
It is worrying that European leaders find it so difficult to agree on fiscal adjustment policies that make room for the stimulus measures needed to revive economic growth.
Until now, European countries with fiscal leeway have insisted on spending and investment cuts that, together with tax increases, have reduced economic activity and increased unemployment, ultimately compromising tax collection – and thus fiscal consolidation.
In the US, despite a slight improvement, uncertainty lingers.
In addition to the risk posed by the “fiscal cliff” in 2013, the main problem remains: the lack of effective counter-cyclical fiscal policies – for example, a public-investment program – to boost economic activity.
Instead, the US has placed all of its chips on monetary easing, unleashing what I have called a currency war, in which global investors, chasing higher yields, flood into emerging countries, driving up their exchange rates.
The poor international environment hit Brazil’s economy mainly via foreign trade, aggressive competition in the Brazilian market, and echoes of the negative expectations prevailing in advanced countries.
To combat the downturn, Brazil’s government implemented measures that are now yielding clear dividends.
The main change was a large reduction in interest rates, in line with an inflation-targeting framework, which has led to a more competitive exchange-rate policy.
This was combined with a counter-cyclical fiscal policy has that kept deficits and public debt under control.
More important, the government’s policies will have a permanent – indeed, revolutionary – impact on Brazil’s economy.
This will become more obvious throughout 2013.
For a long time, Brazil’s interest rates were among the highest in the world.
Besides damaging public accounts and imposing a severe fiscal sacrifice on the country, the abnormally high level of the Selic rate (the Brazilian overnight interbank rate) inhibited the “animal spirits” of entrepreneurship, distorted resource allocation, and impeded the development of the real-estate and capital markets, while causing currency appreciation.
Over time, the persistence of these conditions undermined the competitiveness of domestic industry, impeding sales of Brazilian products not only internationally, but also in the robust and growing internal market.
The government’s macroeconomic stabilization efforts, coupled with policies that increased the country’s growth potential, allowed the interest rate to fall over the last decade.
Nevertheless, until 2011, the Selic remained at levels that were incompatible with the economy’s clear strengths and low risks.
Reducing borrowing costs without unleashing inflation was one of the main challenges faced by President Dilma Rousseff when she took office at the beginning of that year.
The resurgence of crisis conditions, particularly in the eurozone, had halted the resumption of global growth – and provided an added incentive to accelerate domestic reforms.
The process of reducing interest rates – anchored on a solid tax policy and enabled by the removal of institutional obstacles (such as the rule of remuneration of savings accounts) – was extended to the second half of 2012, leading to a real annual rate under 2%.
This resulted in a significant reduction in the interest-rate differential with other countries, which, together with a more active intervention policy in the spot and future markets, brought the exchange rate to a much more competitive level, despite the global currency war.
While these two fundamental changes are here to stay, Brazil’s government has gone even further.
We have pressed ahead on reducing the tax burden by decreasing various rates, particularly on payroll taxes, thereby reducing hiring costs without harming workers’ purchasing power – one reason why Brazil is now one of the world’s few major economies with low unemployment.
The fiscal bureaucracy, too, is being modernized, with the deployment of electronic tax notifications and other administrative reforms boosting revenue collection while diminishing the size of the informal economy.
To accelerate economic growth, the priority has been to stimulate investment and recovery in manufacturing, the sector that was hardest hit by the international crisis.
We have launched a program worth more than $60 billion for highway and railway concessions, to be followed by a similar program for ports and airports.
As a result of these measures, the Brazilian economy is returning to an annual growth rate of around 4%, which should be sustained in 2013.
More important, the structural changes that we have implemented still have much to contribute to future growth.
With low interest rates, price stability, a more competitive exchange rate, a lower tax burden, plentiful resources for investment, and the reduction of electricity tariffs, Brazil is strengthening its potential for more rapid expansion.
Here, it is also important to note our efforts to end the fiscal war among Brazil’s states.
With the ongoing reform of the interstate ICMS (a tax levied on the circulation of goods and services), investors will have greater legal clarity and security.
We will also seek to finalize the unification of the PIS/Cofins taxes, Brazil’s overly complicated – and much-criticized – federal taxes levied on businesses’ invoicing.
With these initiatives, Brazil’s government has sought to ensure that annual growth remains above 4% for many years, regardless of the challenges – which will certainly persist in 2013 – posed by the international environment.
Only through such sustained growth can per capita income approach the levels prevailing in the developed world.
What we hope for most is that rich countries – and not only the BRICs (Brazil, Russia, India, and China) – also contribute to global recovery.
If we act together and pull in the same direction, we all will win.
Bread and Bush-Bashing
London – I feel a little sorry for President Bush.
Whatever his other many failings, he has a pretty good record on aid to poor countries, particularly in healthcare.
True to form, he recently announced a big increase in US food aid – good for the hungry poor and good for American farmers.
This was a faster response than some other countries have made to the global food crisis.
After falling for more than 30 years, food prices have recently soared.
The Economist’s food price index has risen to its highest level since it was started in 1845. As has happened throughout history, rocketing prices and shortages have caused riots from Bangladesh to Bolivia.
The word for bread in Egypt is “aish,” which also means life.
Threats to life bring crowds on to the streets.
What made me feel a little sorry for Bush was the reaction to his announcement.
Bush referred to the reasons for shortages and price hikes.
He did not dwell on the diversion of American corn from food to heavily subsidized bio-fuels.
Nor did climate change feature prominently in his argument, although many experts suggest that this may be the cause of the droughts and floods that have ruined wheat harvests in Australia and vegetable oil production in Indonesia and Malaysia.
Bush pointed his finger primarily elsewhere. Food prices had responded to growing demand.
In Asia, economic growth had stimulated food consumption.
The Chinese and Indians were eating more and eating better.
Over a 20-year period, for example, the Chinese had doubled the amount of meat they eat.
What Bush said is of course true.
But it is only part of the truth.
Globalization has benefited India and China, and the rest of us, too.
One key of the principal reasons for the world’s economic growth from 2000-07, despite wars and terrorist atrocities, was that India and China joined the world economy.
Hundreds of millions of people were lifted out of poverty.
But many Indians are still wretchedly poor.
Too many.
They have a miserable diet – not least when compared with Bush’s Texan neighbors.
Grain consumption per head in India has remained static, and is less than one-fifth the figure for the US, where it has been rising.
I do not imagine you will find too many vegetarians in Crawford, Texas, and the meat consumed by the average American is way ahead of the figure for any other country.
Think of all those T-bone steaks.
Bush’s partial explanation of the world food crisis, accurate as far as it went, brought the anger of India’s media and of many politicians down on his head.
According to India’s Defense Minister, A.K. Anthony, presumably an expert on butter as well as guns, Bush’s statement was “a cruel joke.”
The parliamentary opposition urged Prime Minister Monmahan Singh, who wisely kept his head down, to join in the populist America-bashing.
Later in the “cruel joke” week, Bush’s White House compounded the sin.
According to Bush’s press spokesman, the growth in world demand for oil – in Asia, for example – was one of the causes of the high price of filling the tanks of gas-guzzling Sports Utility Vehicles, as well as more modest family cars, at America’s pumps.
Meanwhile, the US government papered over the fact that Americans, who make up less than 4% of the world’s population, own and drive 250 million of the world’s 520 million cars.
More outrage around the world at American double standards.
Now, all this is more than the knock-about of international politics.
One day soon, Bush and Cheney will be out of office.
But we will still be left with the most difficult global issue we have ever faced: as more of us prosper, how do we deal fairly with some of the economic and environmental consequences?
What do we do about the bottom billion in the world who remain in grinding poverty while the rest of us live better and longer lives?
How do we deal with equity on a global scale when we cannot even deal with it country by country?
This conundrum will lie at the heart of the diplomacy next year to find a successor to the Kyoto agreement.
Can we prevent a calamitous increase in global warming in a way that is fair, that takes account of past and present responsibility, and that does not thwart legitimate hopes for a better life everywhere?
We have never faced a more difficult political task.
Meanwhile, there is a food crisis to solve.
We have already seen many examples of how not to deal with it.
Stopping food exports is stupid.
If we restrict market forces, there will be less food and higher prices.
We should also avoid the cheap political trick of holding down what we pay to poor farmers in order to benefit poor city dwellers.
Why do governments do this?
The answer is obvious: city dwellers riot; in the countryside, people just starve.
The best way to deal with the problem is to subsidize food for the poor; we should not cut the price we pay farmers for growing it.
Having enjoyed a few days of Bush-bashing, India got on with the job of bowing to pre-election political pressures.
The government announced that it was suspending trading in futures markets for a number of farm products.
India has the most economically literate triumvirate of politicians in the world in charge of its economy.
They must know that this measure will have as much effect on food inflation as rain dancing has on the weather.
But politics, alas, is politics.
Breaking the Climate Deadlock
LONDON – On July 9, the leaders of the world’s largest economies will meet in L’Aquila, Italy, at the Major Economies Forum (MEF) to discuss progress towards a new global climate agreement.
In six months, a deal is supposed to be struck in Copenhagen, so the MEF meeting comes at a vital moment.
When many of the same leaders met in April to address the economic crisis, they rightly pledged to do “whatever is necessary.” The same spirit needs to animate the L’Aquila meeting.
There is enormous good will to do so.
The new US administration is supporting strong American action.
China is setting ambitious targets for reducing energy intensity and making massive investments in renewable energy.
India has put forward its own action plan.
Europe has set a goal of cutting emissions by 30% below 1990 levels by 2020 if there is an ambitious global agreement.
Japan has published its proposals for major carbon reductions.
Across the world, commitments are forthcoming.
But practical challenges remain.
What is being asked is that global emissions be less than half their 1990 levels by 2050, having peaked before 2020.
Since emissions from the developing countries are on the whole lower than those of the developed world – and will need to continue to rise in the short-term as they maintain economic growth and address poverty – it has been proposed that developed countries cut emissions by at least 80% relative to 1990 by 2050, with major steps towards this goal over the next decade.
Developing countries will also need to play their part, significantly slowing and peaking emissions growth in the coming decades.
For the US, such commitments would mean cutting emissions to around one-tenth of today’s per capita level, while for China it would mean creating a new low-carbon model of economic development.
For all countries, this is a major challenge – a revolution that implies a huge shift in policy.
The good news is that if we focus on clear, practical, and achievable goals, major reductions can be made in order to ensure that, whatever the precise interim target, the world will fashion a radical new approach within a manageable timeframe.
A new report from the “Breaking the Climate Deadlock” project, a strategic partnership between my office and The Climate Group, shows how major reductions even by 2020 are achievable if we focus action on certain key technologies, deploy policies that have been proven to work, and invest now in developing those future technologies that will take time to mature.
Perhaps the most interesting fact to emerge is that fully 70% of the reductions needed by 2020 can be achieved by investing in three areas: increasing energy efficiency, reducing deforestation, and use of lower-carbon energy sources, including nuclear and renewables.
Implementing just seven proven policies – renewable energy standards (e.g., feed-in tariffs or renewable portfolio standards); industry efficiency measures; building codes; vehicle efficiency standards; fuel carbon content standards; appliance standards, and policies for reduced emissions from deforestation and forest degradation (REDD) – can deliver these reductions.
All seven policies have already been successfully implemented in countries around the world, but they need scaling up.
While cap-and-trade systems or other means of pricing carbon emissions can help provide incentives for businesses to invest in low-carbon solutions, in the short term at least, these seven policy measures – and direct action and investment by governments – are needed to achieve the targets.
In the longer term, we also need technologies such as carbon capture and storage (CCS), expanded nuclear power, and new generations of solar energy, together with the development of technologies whose potential or even existence is still unknown.
The important thing for Copenhagen is that decisions are taken now for investments that will yield benefits later.
For example, the overwhelming majority of new power stations in China and India – necessary to drive the industrialization that will lift hundreds of millions out of poverty – will be coal-fired.
That is just a fact.
So developing CCS or an alternative that allows coal to become clean energy is essential for meeting the 2050 goal.
But we need to invest now, seriously and through global collaboration, so that by 2020 we are in a position to scale up CCS or be ready to deploy other alternatives.
Renaissance of nuclear power will require a big expansion of qualified scientists and engineers.
Electric vehicles will need large adjustments to infrastructure.
Smart grid systems can enable big savings in emissions, but require a plan for putting them into effect.
These measures will take time, but require investment now.
Meanwhile, in the short term, low energy lighting and efficient industrial motors may sound obvious, but we are nowhere near using them as extensively as we could.
So we know what we need to do, and we have tools available to achieve our goals.
MEF leaders can therefore have confidence in adopting the interim and long-term targets recommended by the scientific community: keeping warming to below two degrees Celsius; peaking emissions within the next decade; and at least halving global emissions by 2050 versus 1990.
Developed countries will be able to commit to reducing their emissions by 80% versus 1990 by mid-century, as many have already done, and provide the necessary financial and technology support for developing countries’ adaptation and mitigation efforts.
With that support, developing countries in turn will need to design and implement “Low-Carbon Growth Plans” that significantly slow and eventually peak their emissions growth.
By making these commitments, the MEF leaders, whose countries account for more than three-quarters of global emissions, would lay a firm foundation for success in Copenhagen.
Between L’Aquila and Copenhagen, there will undoubtedly be difficult discussions over interim targets for developed countries.
While such targets are important, what matters most is agreement on the measures that ultimately will set the world on a new path to a low carbon future.
For years, the emphasis has rightly been on persuading people that there must be sufficient “will” to tackle climate change.
But leaders, struggling to cope with this challenge even amidst economic crisis, need to know that there is also “a way.”
Only by combining the two will we succeed.
Fortunately, such a way – immensely challenging but nonetheless feasible – exists.
Breaking the Neoclassical Monopoly in Economics
For 25 years, the so-called “Washington Consensus” – comprising measures aimed at expanding the role of markets and constraining the role of the state – has dominated economic development policy.
As John Williamson, who coined the term, put it in 2002, these measures “are motherhood and apple pie, which is why they commanded a consensus.”
Not anymore.
Dani Rodrik, a renowned Harvard University economist, is the latest to challenge the intellectual foundations of the Washington Consensus in a powerful new book titled One Economics, Many Recipes: Globalization, Institutions, and Economic Growth .
Rodrik’s thesis is that though there is only one economics, there are many recipes for development success.
Rodrik has rendered a major service by stating so openly the claim of “one economics.”
A critic who made the same claim that economics allows only one theoretical approach would be dismissed as paranoid, whereas Rodrik’s standing creates an opportunity for a debate that would not otherwise be possible.
The “many recipes” thesis is that countries develop successfully by following eclectic policies tailored to specific local conditions rather than by following generic best-practice formulas designed by economic theorists.
This challenges the Washington Consensus, with its one-size-fits-all formula of privatization, deregulated labor markets, financial liberalization, international economic integration, and macroeconomic stability based on low inflation.
But, while the many recipes thesis has strong appeal and empirical support, and suggests a spirit of theoretical pluralism, the claim of “one economics” is misguided, for it implies that mainstream neoclassical economics is the only true economics.
Part of the difficulty of exposing this narrowness is that there is a family split among neo-classical economists between those who believe that real-world market economies approximate perfect competition and those who don’t.
Believers are identified with the “Chicago School,” whose leading exponents include Milton Friedman and George Stigler.
Non-believers are identified with the “MIT School” associated with Paul Samuelson.
Rodrik is of the MIT School, as are such household names as Paul Krugman, Joseph Stiglitz, and Larry Summers.
This split obscures the underlying uniformity of thought.
The Chicago School claims that real-world market economies produce roughly efficient (so-called “Pareto optimal”) outcomes on which public policy cannot improve.
Thus, any state intervention in the economy must make someone worse off.
The MIT School, by contrast, argues that real-world economies are afflicted by pervasive market failures, including imperfect competition and monopoly, externalities associated with problems like pollution, and an inability to supply public goods such as street lighting or national defense.
Consequently, policy interventions that address market failures – as well as widespread information imperfections and the non-existence of many needed markets – can make everyone better off.
None of this is about fairness, which is a separate issue.
Indeed, neither the Chicago School nor the MIT School say that market outcomes are fair, because actual market outcomes depend on the initial distribution of resources.
If that distribution was unfair, current and future outcomes will be unfair, too.
Chicago economists seem to believe that real-world outcomes are acceptably unfair and, more importantly, that attempts to remedy unfairness are too costly, because tampering with markets causes economic inefficiency.
They believe that government intervention tends to generate its own costly failures because of bureaucratic incompetence and rent-seeking, whereby private interests try to steer policy to their own advantage.
MIT economists tend to espouse the opposite: fairness is important, the real world is unacceptably unfair, and government failure can be prevented by good institutional design, including democracy.
These differences reflect the intellectual richness of neo-classical economics, but they provide no justification for the claim that there is one economics.
On the contrary, heterodox economists like Thorsten Veblen and Joseph Schumpeter long ago raised many of today’s cutting-edge issues in neoclassical economics, including the role of social norms and the relationship between technological innovation and business cycles.
Heterodox economics includes core theoretical concepts that are fundamentally incompatible with neoclassical economics in either of its two contemporary forms.
These concepts result in significantly different explanations of the real world, including income distribution and the determinants of economic activity and growth.
Moreover, they often result in different policy prescriptions.
The late Robert Heilbronner – one of Schumpeter’s most renowned students – viewed economics as “worldly philosophy.”
Just as philosophers are divided on the nature of truth and understanding, economics is divided on the workings of the real world.
Paradigms should co-exist in economics, just as in other social sciences.
Yet, in practice, the dominance of the belief in “one economics,” particularly in North America and Europe, has led increasingly to a narrow and exclusionary view of the discipline.
This reality is difficult to convey.
One reason is that liberal neo-classical economists like Stiglitz and Krugman share values with heterodox economists, and shared values are easily conflated with shared analysis.
Another reason is that heterodox and MIT School economists also often agree on policy, even if their reasoning is different.
Finally, most people are incredulous that economists could be so audacious as to enforce one view of economics.
The “many recipes” thesis enriches neo-classical economics’ contribution to the development debate, and many of its policy proposals will find support from heterodox economists.
However, it fails to engage the deep intellectual divisions regarding economic development, trade, and globalization, because it refuses to admit the legitimacy of such disagreements.
By repeating the claim of “one economics,” Rodrik inadvertently reveals the censorship embedded in contemporary economics.
The great challenge is not to admit that there are many recipes, but rather to create space for other perspectives on economic analysis and policy.
Break to Avoid a Breakup
The Franco-German axis is proving a nightmare for European unity.
Within a single month, Gerhard Schroeder's Germany and Jacques Chirac's France first destroyed the EU's Stability Pact and endangered European monetary union by demanding--and receiving--special status for French and German fiscal deficits.
Now the axis has crushed hopes of passing a new European constitution in Brussels by demanding the so-called "double majority" rule, which would seriously weaken medium-size and smaller countries' voting power by comparison to what was agreed three years ago in Nice.
European integration can't afford further defeats. Trust has been decimated.
Anger overflows. Small and medium-sized EU countries feel tricked.
Will these countries continue to sacrifice for the common European good when, time after time, the big countries tell them to go to the back of the bus and be grateful for the ride?
It's time for a pause in European integration efforts if only to avoid a complete, irreparable rupture of relations between nations that are supposed to be uniting.
The Germans, in particular, need a time out to reflect upon the wisdom of their recent bullyboy tactics.
Gerhard Schroeder is providing disastrous leadership for Germany.
The country's "new nationalism" will end in tears for both Germany and Europe.
Have today's Germans really forgotten that Europeanism is not the best alternative for Germany--it is the only alternative?
Yet, after last week's Brussels summit ended in failure, the Germans and their French allies are talking up a "two-speed" Europe, with the so-called "pioneer group" of Germany, France, Italy, and the Benelux countries--Belgium, the Netherlands, and Luxembourg--going faster and pursuing deeper integration projects than the others.
A "two-speed" Europe is, however, a euphemism for abandoning or opting out of European integration by Europe's big three.
It would decisively split Europe by allowing the big countries and their satellites to go their own way.
(The Dutch never would go along with this.)
A "two-speed" Europe means the end of the EU as we know it.
Of course, if the big countries are not willing to sacrifice any measure of national sovereignty for the overall European good, then a united Europe is doomed.
That is why the debate over the Stability Pact was so important--and why its demise is so disconcerting: the Germans and the French proved willing to sacrifice little, if anything, for the common European interest.
Now, after the failure to endorse the draft EU constitution, Schroeder bitterly complains that "some nations are representing their national interests and have left the European idea behind."
Take a good look in the mirror, Gerhard.
But, notwithstanding recent defeats, it is far too early to give up on an integrated Europe.
Chirac and Schroeder--and the current weaknesses in France and Germany that created them--will not last forever.
Perhaps improved economic growth will give these countries the strength to throw off their present leaders.
Until France and Germany do change, Europe's game must be a waiting game.
Time can solve Europe's problem.
That's why a pause now makes good sense.
The smaller EU countries also could benefit from a time out.
Even though the big countries are trying to marginalize them at almost every turn, the small countries cannot unite to fight the common enemy.
This is because they often see themselves having more in common with the big countries than the other small ones.
Belgium, for example, is virtually a satellite of France.
The same is true of Luxembourg.
Austria is closer to Germany than Finland, and so on. Unless the small countries unite on a common front, they will continue to prove easy targets of the big nationalistic players.
On the issue of big versus small countries, Europe has a lot to learn from the United States.
Big states comfortably co-exist with small states in the US because America has a bicameral system in which the House of Representatives is based on population, but each state elects two members of the Senate.
The system is very elastic, and has shown itself able to accommodate an increasing number of states.
The coming accession of ten new members to the EU would be made much simpler were Europe to find its own equally flexible system.
The Screening Myth
TORONTO – Breast-cancer screening has long been viewed as one of the most important tools for reducing mortality from the disease.
That is why recent doubts about its effectiveness – intensified by the publication in February of the 25-year follow-up to the Canadian National Breast Screening Study – have come as such a shock.
How can breast-cancer screening, which facilitates early detection of the disease, not prevent deaths from it?
Understanding screening’s limitations requires, first and foremost, an understanding of the process.
A mammogram (x-ray of the breast) is administered to ostensibly healthy people to detect unsuspected disease.
If any abnormalities are found, a diagnostic test is conducted to confirm the presence of the disease.
If the results are positive, treatment begins.
The first limitation of breast-cancer screening is obvious: where effective diagnosis and treatment are not available, screening cannot have any impact.
But there is more to the issue – namely, whether screening ultimately fulfills its intended purpose of reducing breast-cancer mortality rates.
There have been several attempts to evaluate, through observational studies, the impact of screening in the general population.
But such studies, which are based on comparisons between uncontrolled groups, tend to produce biased results.
None has been able to account for differences in treatment.
More important, none has found a reduction in advanced breast cancer in the screened groups – a requirement to deem screening effective.
With observational studies producing inadequate results, scientists turned to a procedure developed years ago to evaluate new tuberculosis drugs: randomized screening trials.
Such trials begin with the selection of women at risk of developing breast cancer, and randomly allocate them to be screened or not.
Any woman in either group who develops breast cancer is treated to the fullest extent possible, following the closest possible treatment plan to other participants in the trial (taking into consideration the stage of the disease at diagnosis).
Researchers follow the women’s progress over many years, with the goal of comparing the two groups’ mortality rates.
In North America, where, for ethical reasons, randomization requires informed consent, only two such trials have been conducted.
The first was in New York in the 1960s, using annual mammograms and breast examinations for the screened group.
The second, the Canadian National Breast Screening Study, which began in the 1980s, also used annual mammograms and breast examinations for the screened group.
But, in the control group, women aged 50-59 also received annual clinical breast examinations, and women aged 40-49 were given a single breast examination.
In Europe, one trial began in the United Kingdom in the 1970s, again using breast examinations and mammography for the screened group.
A more recent British trial, performed on women aged 39-41, used only mammography, as did the largest of all, the Swedish two-county trial.
Though the trial results have been inconsistent, the conclusion is clear: breast-cancer screening does not reduce mortality rates.
The trials that have shown a significant decrease in mortality are usually older, and other factors have compromised the results.
For example, the Swedish two-county trial was randomized by clusters of population groups, and the comparability between the women in the screened and control groups was not confirmed.
Moreover, the trial was conducted before modern breast-cancer treatments were freely available.
More recent trials, such as that conducted in the UK, show at most a non-significant benefit from screening.
The results of the 25-year follow-up of the Canadian trial – which can be considered the most accurate, given that the women were carefully characterized according to risk factors and had access to the most advanced treatments – are even more damning.
Beyond showing no benefit from mammography screening, the Canadian trial highlighted one of the practice’s major disadvantages: over-diagnosis.
Indeed, 22% of those in the screened group were over-diagnosed, meaning that the cancers found would not have become clinically detectable during the woman’s lifetime.
Add to that the in situ cancers – early-stage cancers that have not spread to neighboring tissue – and the number rises to 50%.
To be sure, over-diagnosis is inevitable with good screening tests.
The real problem is the over-treatment that follows, owing to the lack of reliable tests to differentiate observable lesions from those that actually require medical intervention.
Many of the women who believe that their lives were saved by mammography screenings actually had so-called “IDLE” cancers (indolent lesions of epithelial origin), which would not have progressed before they died of other causes.
Meanwhile, the very aggressive cancers, which are most likely to prove fatal, tend to present as “interval” cancers that appear between screenings.
In the deadliest cases, regular screenings would not make much difference.
Efforts to develop new, more sensitive screening tests are thus likely to do more harm than good, as they increase the rate of over-diagnosis, without improving outcomes among women with aggressive cancers.
What breast-cancer patients really need are tests that identify the risk that the disease actually poses, as well as new, lifesaving treatments.
It is time to recognize that breast-cancer screening does not save lives – and to focus on the strategies that will.
Breathe Easy About Beijing
Images of the Beijing skyline seemingly bathed in a soup of smog and haze have been a common sight on the world’s TV screens in recent days and weeks.
Foreign journalists with hand-held air pollution detectors have been popping up on street corners checking levels of soot and dust.
Everyone seems keen to prove that the city’s air will be a decisive and debilitating factor for one of the world’s most high-profile sporting events.
Without doubt Beijing is facing a huge challenge.
There are real and understandable concerns for the health of competitors, especially those in endurance and long-distance events such as cycling and the marathon.
But the current frenzied focus is marked by considerable amnesia.
After all, air pollution was a major concern in Los Angeles 24 years ago, though few now seem to recall the dramatic scene at the end of the women’s marathon, when the Swiss competitor was seen staggering and stumbling from exhaustion, the heat, and, perhaps, the effects of air pollution.
And air quality was also an issue for subsequent Olympic Games in Barcelona, Atlanta, Seoul, and Athens.
So the debate about the Beijing Games deserves more fair play than it has received.
Indeed, real and, one hopes, long-lasting achievements have been made by the Beijing Organizing Committee for the Olympic Games, the city as a whole, the government, and the six provinces concerned.
This is all the more remarkable when set against the city’s double-digit economic growth and the fact that the Games are being staged in a developing country, with all the social, economic, health, and environmental challenges this entails.
For example, some 200 polluting factories have been closed, switched to new kinds of cleaner production, or moved out of the city over the past seven years.
Moreover, as a result of a $17 billion investment, more than 90% of the city’s wastewater is now treated, more than 50% of the city is forested, and natural gas accounts for more than 60% of energy generation, up from roughly 45% in 2000.
Meanwhile, eight new railway lines, covering 200 kilometers and with a daily capacity of close to four million people, have become operational this year, alongside 60 kilometers of bus lines.
New vehicle emission standards meet the most stringent equivalent European standards, and are higher than in the United States.
In addition, 50,000 old taxis and 10,000 buses have been replaced, and 4,000 of the new buses are powered by natural gas – now the largest fleet of its kind in the world.
In recent days, the authorities have also requested businesses to stagger the working day before, during, and after the Games to reduce traffic volumes, alongside a raft of other traffic-cutting measures.
Then there is the attention to eco-detail at the Olympic venues themselves, including the 400,000-square meter Olympic Village, where water reclaimed from the Qinghe sewage treatment plant is being used for heating and cooling systems, resulting in an estimated 60% savings in electricity consumption.
Only time will tell if all these measures will bring air pollution down to acceptable levels.
The United Nations Environment Program will certainly make this a focus of its post-Games report, building on the initial one issued in 2007.
But it is clear that Beijing is striving to be part of the Green Team, embracing environmental standards that are now central to the modern Olympic movement, and that are increasingly part of other big sporting events, such as the Green Goals for the 2006 and 2010 FIFA World Cups.
Increased public awareness, the ability to showcase new and more sustainable ways of managing an urban setting, and the legacy of more environmentally friendly energy, transport systems, and other infrastructure should also not be underestimated.
Humanity is currently engaged in a far-reaching and urgent competition that pits the need to embed a twenty-first century “green economy” against the rapid implosion of our climate and natural life-support systems.
The catalytic and inspirational possibilities of events like the Olympics thus have a wider role to play, one that might just help prevent us from staggering and collapsing under the weight of our environmental degradation.
The Battle for Britain
LONDON – The Islamic State’s attack in Paris in November was the latest crisis to delay Britain’s bid to renegotiate its membership in the European Union, ahead of a planned referendum on whether to maintain the relationship.
First Greece, then refugees, and now terrorism have dominated the diplomatic agenda instead.
On December 3, Conservative Prime Minister David Cameron officially abandoned hopes of clinching a deal with other EU leaders at their summit on December 17-18.
He is now aiming for an agreement in February.
The delay amounts to a serious blow: While the deal itself is unlikely to persuade many undecided Britons to vote to stay in the EU, it is a prerequisite for Cameron to begin campaigning for that outcome.
Well-funded anti-EU campaigners, who have plenty of allies in the media, thus have at least two more months, virtually unopposed, to win over wavering Conservatives.
With polls showing the two sides in a dead heat, the risk of Brexit is rising by the day.
To be sure, security fears in the wake of the Paris attacks could swing some voters toward deciding to stay in the EU.
When people are fearful, they tend to be more risk-averse and thus more likely to stick with the status quo.
Combating cross-border terrorism is also an area where the value of EU cooperation ought to be self-evident.
In a November 10 speech at Chatham House, Cameron emphasized the benefits of EU membership for Britain’s national security.
But the conflation of terrorism, immigration, and EU membership could also push British voters to reject Europe.
Polls suggest that immigration is the top concern among British voters, and the fact that at least one of the Paris terrorists may have entered the EU through Greece posing as a Syrian refugee has accentuated the public’s fears.
That is scarcely a logical reason to leave the EU.
The United Kingdom is outside the Schengen Area, so it retains control over its border, and it has opted out of EU asylum policy, so it will not participate in the Union’s resettlement of Syrian refugees.
But fear can drive people to pull up the drawbridge.
Ominously, in a referendum this month, Danish voters, swayed by similar concerns about refugees and terrorism, rejected proposals for closer cross-border policing cooperation with the EU.
Amid this groundswell of confused emotions, Cameron’s limited objectives for renegotiation, outlined in a letter to European Council President Donald Tusk on November 10, seem almost moot.
Cameron wants to keep Britain in the EU, and so do his EU counterparts, but not at any cost.
Recognizing the limits of his leverage, Cameron has decided to seek relatively modest changes in four areas: competitiveness, sovereignty, safeguards for non-euro members, and migration.
The first demand – for a Europe that enhances “competitiveness” and reduces business regulation – will be the easiest to secure.
His proposal goes with the grain of thinking among EU officials (to the point, regrettably, of echoing their mercantilist language).
Nor should his requests for sovereignty safeguards pose too much of a problem.
Some of them are merely symbolic.
For example, the EU Treaty commitment to “ever closer union” clearly does not apply to Britain, which has a permanent opt-out from the euro and much else; putting this down in writing should be achievable.
Substantive safeguards, such as giving groups of national parliaments the power to veto unwanted EU proposals, are trickier; but here, too, negotiators should be able to finesse a solution.
Cameron’s most important objective is ensuring that euro members cannot gang up on the UK and other non-euro countries.
On vital issues where EU decisions do not require unanimity – notably, the single market – the 19 eurozone countries could forge the qualified majority needed to outvote the nine non-euro members.
This has not yet happened – not least because countries such as Germany and Greece hardly see eye to eye.
But if the eurozone were to become further integrated, with common institutions, it might seek to impose its will on non-euro members.
One solution would be a double-majority voting system requiring the consent of both euro and non-euro members, like the one adopted during the creation of the eurozone’s banking union.
Cameron’s most controversial demands regard immigration.
Britain wants to deny EU migrants access to welfare benefits – including tax credits for low-paid workers – for four years.
But Germany and others object in principle to discriminating against EU citizens, and countries such as Poland and the Czech Republic are vehemently opposed to measures that would disproportionately harm their citizens.
One solution may be to deny Britons access to in-work benefits such as tax credits for four years as well.
A deal is feasible.
But even if Cameron achieves all of his goals, critics looking for big changes, such as quotas for EU migrants, will remain unsatisfied.
And technical issues, such as safeguards for non-euro countries, are unlikely to swing many votes.
Given this, Cameron’s priority should be to complete the renegotiation as quickly as possible, declare victory, and start campaigning vigorously on the broader reasons why Britain should stay in the EU.
Other EU leaders cannot afford to be complacent, either.
The EU is already disintegrating, and the risk of Brexit is very real.
They need to strike a convincing deal by February.
The Brexit Balance Sheet
BRUSSELS – Prime Minister David Cameron’s offer to British citizens to hold a referendum on whether to leave the European Union might have seemed like a reasonably safe gamble just a few years ago.
Most people then probably would have voted to stay.
That was before the Greek crisis created havoc in the eurozone, and the arrival of hundreds of thousands of refugees caused the EU (although not the United Kingdom) to lose control of some of its borders.
Cameron might actually get other European leaders to agree to his demands for reform, without which he has said he would not campaign to keep his country in the EU.
They are not extreme: a guarantee that non-eurozone members gain full access to the single market; less red tape at the EU level; a British exemption from “ever-closer union.”
Despite this reform push, some British Euroskeptics have criticized Cameron for being too soft.
The temptation in Britain simply to abandon what appears to be a sinking ship and go it gloriously alone is growing stronger.
This is understandable.
The question is whether “Brexit” would be as glorious as its proponents like to imagine.
Unleashed from the rule of Brussels, the sirens of Brexit promise, Britain would once again be a beacon of freedom in the world, respected by China, tied to the United States in the bilateral “special relationship,” and all the while retaining friendly commercial ties with the European continent.
Business would boom, the City of London would prosper, and Britons never would be slaves, not of the EU or anyone else.
In fact, things might not work out so well.
As Cameron himself stated after a recent visit to Iceland, the Norwegian option of engaging in free trade with the EU as a non-member is far from ideal.
Norway, like Switzerland, still has to abide by EU single-market rules, without having any say in formulating them.
Norway also pays large amounts of money to the EU budget, and must accept free movement of people (including refugees) across its borders.
As far as the US is concerned, President Barack Obama has already said that he would take Britain more seriously inside the EU than outside it.
Similarly, US Trade Representative Michael Froman recently observed that the US would not be interested in negotiating a separate free-trade deal with Britain.
All this, by the way, assumes that post-Brexit Britain would still be Britain.
The Scots would almost certainly want to break away from England and rejoin the EU as an independent member, giving further encouragement (as if that were needed) to separatists in Catalonia and other frustrated European regions.
England would be left to wave its flag of St. George over Wales and Northern Ireland, a rather sour prospect.
But there are more potential supporters of Brexit: some keen European Unionists who have found the UK’s often-obstructive membership increasingly annoying.
Good riddance, they might say, once the divorce finally comes through; now the true Europeans can finally unite in peace.
This, too, strikes me as misguided.
A Brexit would most likely be as damaging to the EU as it would be to Britain itself.
Contrary to popular perception, the EU is not ruled by the European Commission in Brussels.
National governments still make the most important decisions in the European Council, where leaders wheel and deal to advance their countries’ interests.
Germany, Britain, and France, as the EU’s three major powers, form a crucial balance.
Without Britain, the EU becomes a Franco-German enterprise, with Germany very much the dominant partner, and all the smaller member states squeezed between the two.
This is not really what anybody wants, not even the Germans, who are reluctant hegemons.
Moreover, Britain and Germany are natural allies in balancing the statist tendencies of France.
Britain has in fact had a largely positive impact on the EU. Europe has benefited from Britain’s democratic traditions, its openness to the rest of the world, its impatience with bureaucratic obstruction, and even its skepticism toward abstract utopian schemes.
If any city feels like a European capital now, it is not Brussels, Berlin, or even Paris, but London, home to almost a half-million French citizens, as well as millions of other foreigners.
There is one more reason, however, why Brexit would be a disaster for Europe.
It is generally agreed that European countries cannot cope alone with the major problems of our time, such as climate change, immigration, the challenges of a globalized economy, and, above all, security.
Since 1945, Pax Americana has papered over Europe’s incapacity to manage its own security.
Europeans like to talk about the values of peace and compromise, while US military might takes care of their safety.
This has created a degree of dependency that should be redressed, if only to relieve the Americans of their burden and give Europe the political influence to match its economic clout.
For this to be achieved, the EU must establish a common security policy and military force.
This will be a long and difficult process.
Germany, for obvious reasons, will not take the lead.
Only France and Britain have enough military strength to provide a sound basis for European defense.
Britain could, in this vital matter, be the savior of Europe.
Without it, there is no hope.
Alas, Cameron is singularly ill equipped to make such a positive argument.
He leads a party that is increasingly opposed to any European project apart from trade.
And he would have to battle a folk memory that has lasted several generations: the last time Britain helped to save Europe, it stood very much, and very proudly, alone.
The BRICS Fallacy
MADRID – The recent downgrade of Brazil’s credit rating to junk status was followed by a raft of articles heralding the crumbling of the BRICS (Brazil, Russia, India, China, and South Africa).
How predictable: schadenfreude almost always follows bad news about the BRICS, whose members were once hailed as the world’s up-and-coming economic powerhouses and next major political force.
There is something deeper going on here. The world’s seeming obsession with the BRICS’ perceived rise and fall reflects a desire to identify the country or group of countries that would take over from the United States as global leader.
But, in searching for the “next big thing,” the world ignores the fact that the US remains the only power capable of providing global leadership and ensuring some semblance of international order.
The story of the BRICS is a familiar one.
It began as a technical grouping in 2001, when the British economist Jim O’Neill lumped them together (without South Africa) and gave them their catchy name for the sole reason that they were all large, rapidly growing emerging economies.
But, recognizing that economic power could translate into political influence, the BRICS held their first informal meeting in 2006, and their first leaders’ summit in 2009.
The bloc was going places – or so it seemed.
But seven years, seven summits, and one new member (South Africa joined in 2010) later, the significance of the BRICS remains hotly debated.
The disparities among the BRICS are well known.
China’s economic output is nearly twice that of the rest of the BRICS combined, and roughly 30 times that of South Africa.
Their governance models are vastly different, from India’s robust democracy to Russia’s illiberal model to China’s one-party system.
Russia and China, both permanent members of the UN Security Council, have offered, at best, lukewarm support for the other BRICS’ aspirations to join them.
And then there are its members’ bilateral disagreements, including a heated territorial dispute between India and China.
Nonetheless, the BRICS have acted in concert on more than one occasion.
Last March, amid near-universal condemnation of Russia’s annexation of Crimea, the country’s BRICS counterparts – even those that had long supported the inviolability of borders and non-intervention – abstained from a UN General Assembly resolution affirming Ukraine’s unity and territorial integrity.
Three months later, the BRICS released their “Leaders’ Summit Declaration” condemning the imposition of economic sanctions on Russia by the European Union and the US.
Most concretely, the long-anticipated New Development Bank, run jointly and equally by the five BRICS countries, opened its doors in Shanghai in July.
Clearly, the BRICS are a thing. They are just not the thing.
The BRICS arose at a time when much of the world, especially the advanced economies, was mired in crisis.
The “fall of the West” narrative ran alongside that of the “rise of the rest.”
But the story has not played out quite as anticipated.
Economically, the BRICS are facing serious challenges.
In addition to a well-documented growth slowdown, China has lately experienced considerable stock-market turmoil and currency devaluation.
The Brazilian and Russian economies are contracting; South Africa’s growth has slowed; and India, though maintaining relatively strong growth, must undertake important reforms.
The BRICS have also failed to fulfill their promise of international leadership.
At the beginning of the decade, Brazil showed a certain aspiration, along with Turkey, to press ahead with an alternative nuclear deal with Iran.
But that proposal fell apart, and, amid pressure from corruption scandals and falling commodity prices, Brazil left the global stage.
South Africa and India also continue to punch below their apparent weight internationally (notwithstanding Indian Prime Minister Narendra Modi’s visibility).
As for Russia, the only traditional world leader of the bunch, the Kremlin’s Ukraine policy has done severe damage to the country’s international profile – damage that not even its possible diplomatic coup in Syria can undo.
Only China has displayed an inclination to lead, as exemplified by President Xi Jinping’s visit to Washington, DC last week, which produced major announcements on climate action, cyber security, and international development.
China has also been pursuing initiatives like the Asian Infrastructure Investment Bank and the revitalization of the Shanghai Cooperation Organization.
But China’s growing assertiveness, particularly in the South China Sea, has fueled the perception that it is more of a threat than a leader.
All in all, the BRICS no longer seem to be rising.
At the same time, the core of the West no longer seems to be declining.
Although Europe remains mired in crisis and existential self-doubt, and Japan is still finding its feet after two decades of economic stagnation, the US is as relevant as ever.
Indeed, no major global challenge – from conflict in the Middle East to climate change to global financial regulation – can be confronted without American engagement.
America’s enduring dominance will rile many, and with good reason.
A quarter-century after the Cold War’s end, the world should have arrived at a more equitable and balanced way of getting things done.
But it has not, and no other single power is in a position to take America’s place. Europe is too inward looking;
China inspires too much suspicion; and India, despite showing signs that it is preparing for a greater global role, lacks enough international authority on its own.
As a result, nearly 20 years after former US Secretary of State Madeleine Albright dubbed her country “indispensable,” it remains so.
The imperative now is for the US and the world to recognize this.
Rather than focusing our attention on alternatives to US leadership, we should be emphasizing its importance – an approach that would help to spur the US to rededicate itself to its international responsibilities.
There have been hints that this impulse still exists – notably, the Iranian nuclear deal – but they remain inadequate to the challenges confronting the world.
The international order is at a crossroads.
It needs the US to guide it – with ingenuity, initiative, and stamina – in the direction of peace and prosperity.
Obsessing about who might eventually replace America is bound to get us all lost.
The Bloom Is off the BRICS
STANFORD – A few years ago, pundits and policymakers were predicting that the BRICS countries – Brazil, Russia, India, China, and South Africa – would be the new engines of global growth.
Naive extrapolation of rapid growth led many people to imagine an ever-brighter future for these economies – and, thanks to them, for the rest of the world as well.
But now the bloom is off the rose.
The economies of Brazil and Russia are contracting, while those of China and South Africa have slowed substantially.
Only India’s growth rate has stayed up, now slightly exceeding China’s.
Will the BRICS fulfill their former promise?
Or are continued problems inevitable?
Given that low-income economies typically have little fixed capital (computers, factories, infrastructure) and human capital (education and training) per worker, they tend to have higher potential returns to capital investment.
That means they can grow more rapidly than wealthier economies, until their per capita income catches up.
While China, India, and Brazil still have very large rural populations, they have made great strides in reducing poverty, with several hundred million people (the largest proportion in China), escaping it in the last few decades.
And these countries’ middle classes are growing fast as well.
Rapid progress in the emerging economies has contributed to economic pessimism in Europe and North America.
After all, the developing economies’ combined GDP now exceeds that of the advanced economies – a situation that would have been unimaginable a generation ago.
Moreover, the hundreds of millions of low-cost workers who joined the global labor force when China, India, and Eastern Europe opened their economies are still putting pressure on the wages of all but the most skilled workers in the advanced economies.
As the Nobel laureate economist Paul Samuelson observed in 1948, international trade leads to factor-price equalization, with wages, adjusted for skill levels, equilibrating across countries.
But, for the BRICS, continued rapid progress may become more difficult.
Experience shows that there is a point – usually when per capita income levels reach about $15,000-20,000 (roughly one-third the level in the United States) – when growth tends to slow.
In recent decades, only a few economies – notably, South Korea, Taiwan, and Singapore – have managed to escape the so-called “middle-income trap” and continue to increase their prosperity.
Beyond the problems that almost all developing economies confront – for example, weak institutions and poor governance – each of the BRICS countries faces a unique set of challenges.
For example, Brazil must contend with a recession, low oil prices, and an unprecedented corruption scandal at Petrobras, the state oil company.
Given this, freer trade, such as with the NAFTA countries (Canada, the US, and Mexico), and more hospitable terms for foreign investment, especially in energy, should top President Dilma Rouseff’s agenda.
Russia, too, is feeling the pressure of lower oil prices, both on its current budget and in terms of its ability to pursue further energy-sector development.
Compounding the challenge are the economic sanctions imposed by the US and Europe in response to President Vladimir Putin’s aggressive policies toward Russia’s immediate neighborhood.
Finally, Russia has a staggering demographic problem, characterized by a shrinking population, life expectancy far below the advanced-country average, and a growing brain drain.
India, at least for the moment, has the best short-run economic conditions.
Inflation, a major threat to the economy until recently, is down under the guidance of the Reserve Bank of India’s governor, Raghuram Rajan.
And growth is projected at 7.5% for this year.
But India’s fiscal position remains challenging, and the country’s population, which will soon overtake China’s, remains mostly rural and impoverished.
Despite the looming challenges, Prime Minister Narendra Modi has been slow to implement the promised economic reforms.
Indeed, although he has made some small improvements in regulation, privatization, and cash transfers to the poor, bolder land and labor-market reforms remain elusive.
China, for its part, is attempting a difficult economic rebalancing, from an export-led to a consumption-based growth model.
In poker terms, Chinese President Xi Jinping is attempting to pull an inside straight, gambling that a growing middle class will demand enough manufactured goods to prevent the economy’s immense excess capacity in basic industries from leading to widespread unemployment.
At under 40% of GDP – compared to at least 60% in advanced economies – Chinese household consumption certainly has space to grow.
But China’s economy remains prone to considerable risks.
As occurred in Japan decades ago, China is starting to face lower-cost competition, such as from Vietnam; its stock market is frothy; and Xi’s anti-corruption program, though popular with ordinary citizens, has led to widespread uncertainty about the “rules of the game.”
Finally, South Africa’s problems reflect a loss of confidence in the government, endemic corruption, massive infrastructure needs, and restrictive labor-market and foreign-investment regulation.
And, in terms of reform, President Jacob Zuma is not headed in the right direction.
The BRICS are – and always have been – subject to the same forces as other economies. But, although they have increased their dependence on market forces, their governments continue to dictate too many major economic decisions, increasing the risk of imbalances or even crises.
Their ability to develop institutions that support greater economic freedom, with more reliance on market competition and less on government, will likely be the main determinant of their long-term success.
Bridging the World’s Genetic Divide
Brigitte Bardot and the Wild Dogs of Bucharest
BUCHAREST: Perhaps only our greatest playwright, Eugene Ionesco, could have gotten this story right.
Ionesco’s genius was to portray a world in which the absurd is triumphant.
Imagine the scene: Bucharest, le petit Paris, a city of three million people with wide boulevards and grand bourgeois villas, stands now a city half in ruins.
Poverty runs rampant, orphanages overflow with abandoned children, countless packs of wild dogs roam the streets.
All of this excites little or no interest in the West.
Romania’s politicians appear to be equally indifferent; they have wasted the last ten years in endless fights, while our postcommunist neighbors reinvented their societies and made themselves ready for membership in the EU.
Then Bucharest’s mayor, Traian Basescu, proposes a plan to control the dogs: the city government will put to sleep any dog without an owner.
Suddenly, the West’s interest is kindled.
Not to help us, of course – at least not to help the city that contains armies of feral dogs, making it appear at times like a ghost town in a Sergio Leone cowboy movie.
No, Brigitte Bardot – we still anticipate the arrival of Gerard Depardieu any day now – and other celebrities, people unable to shed a tear for our unwanted orphans or for the mass poverty left behind by Ceausecu, fly into Bucharest (undoubtedly by first class) to protect the wild dogs and denounce our mayor.
Our reality, I suspect, would challenge even Ionesco’s sense of the absurd.
Middle-aged, greying, Bardot arrived in Bucharest not to remind men, high and low, of her charms but to prevent what she called a “canine genocide.”
Yet, despite the harsh rhetoric, when Miss Bardot and Mayor Basescu met, they parted with a kiss. “For 30 years I waited for this,” the Mayor blushed.
Unwilling to discriminate between parties, Miss Bardot later kissed our president, Ion Iliescu.
Her celebrity recognized, the public’s adoration bestowed, she then departed, leaving the wild dogs, and our broken society, to their fates.
The feral dogs of Bucharest are a tawdry legacy of communism, like the many half-built and abandoned blocs of flats dotted across the city and throughout the country.
Decades ago, Bucharest held many tiny houses, with courtyards and small gardens.
People kept watchdogs to protect their properties.
In the 1970s and 1980s, however, most of these homes were forcefully demolished by Ceausescu.
The dictator wanted all socialist citizens to live in socialist flats.
As tens of thousands of people were moved into tiny, standard issue apartments, many dogs were abandoned.
Like Romania’s people, they survived only by daily cunning.
Since 1990, successive mayors promised to tackle the problem of these hundreds of thousands of feral dogs.
But even bigger problems – housing and street crime – also existed, so nothing was done about them.
Besides, many people opposed killing the street dogs.
Every now and then a few were caught, sterilised and released.
But the packs multiplied and multiplied.
Mayor Basescu wants to be the next leader of the Democratic Party (now led by former Prime Minister, Petre Roman) and is said to be preparing to run for president in 2004.
Success as Mayor of Bucharest will boost his chances, and what better way is there for a politician to promote himself than by “cleaning up” some seemingly intractable problem – particularly one that symbolizes ten years of incompetence and despair.
So, all street dogs, the mayor promised, would be caught and quarantined.
The old and sick would be killed by euthanasia; the rest sterilised and vaccinated.
Meanwhile, people would be asked to adopt as many dogs as possible.
Those not adopted would share the fate of the sick and old.
Even before the Bardot visit, demonstrators besieged City Hall in opposition to the plan.
A human rights defender, Gabriel Andreescu, compared the looming fate of the street dogs with the Holocaust and Gulag.
A leading journalist, Cristian Tudor Popescu, reproached animal rights defenders for their moral relativism and insensitivity to human suffering.
Our politicians usually shout at each other, but Basescu cleverly disarmed his critics by talking to representatives from animal rights groups.
He told them that he rejected cruelty to animals, but insisted that it was his duty to promote the interests of people before dogs.
He asked them (many of the representatives were well-to-do women) to set a personal example by adopting a street dog.
Ionesco was no moralist, but even he would not deny one moral to be drawn from this story: when societies avoid taking necessary measures, things only get worse.
For just as the wild dogs of Bucharest multiplied over the years, so too did Romania’s unsolved problems.
Vast social problems demand an entire community’s commitment, not just resolution from above.
Of course, you cannot “adopt” abandoned factories or the unemployed masses in the way that dogs can be adopted.
Nonetheless, a community must and should assume and share its burdens.
One day, Romania might actually learn this lesson.
I doubt, however, that celebrities like Miss Bardot will ever recognize the absurdity of their misplaced priorities – to come to a country where millions live in despair and dire conditions, and show concern for only the wild dogs.
Scotching the Eurozone
LONDON – Which of the following events is more likely to happen this year: Scotland votes to secede from the United Kingdom in its September referendum, or at least one country decides to leave the eurozone?
Conventional wisdom suggests that Scottish independence is possible, albeit not very likely, while any country’s departure from the single currency is fanciful.
But the decisions that Scotland would have to make about its monetary arrangements in the months following a vote for independence are at least as likely to be confronted by some eurozone countries over the next couple of years.
In fact, there is a natural link between the two situations.
An independent Scotland’s continued use of the British pound – the Scottish government’s official position – could be approached in two ways.
The first possibility, which First Minister Alex Salmond appears to have in mind, would entail a monetary union under a central bank accountable both to Scotland and the rump UK.
But the UK government could – and undoubtedly would – veto any such adaptation of the Bank of England’s responsibilities for monetary policy, financial stability, and banking supervision.
Any other conceivable model of monetary union – including one based on a central bank as unaccountable as the European Central Bank – would be subject to the same rejection.
As the journalist Martin Wolf noted recently, “the rest of the UK has surely not escaped the horrors of the eurozone only to create similar horrors for itself at home.”
The alternative for a fully sovereign Scotland would be to continue using the pound without retaining any influence over interest rates or the exchange rate.
This was the path taken by the Irish Free State (later the Republic of Ireland), which used the sterling-pegged “Irish pound” (the punt) for several decades.
Even if the UK disapproved of the arrangement, it could not stop Scotland from adopting it – much as the European Union deplores but cannot stop Montenegro’s unilateral use of the euro.
While the decision would have a significant political downside – that is, immediately diluting Scotland’s newly acquired sovereignty – its economic implications are mixed.
Borrowing the credibility of an established monetary authority – especially one that issues a global reserve currency – would be tactically advantageous for a post-independence Scotland; but the new country would be exposed to the risk of an inflation shock and sterling crisis stemming from the Bank of England’s expansionary monetary policy.
From a fiscal perspective, the case is similarly balanced.
The interest-rate premium that the market would inevitably demand from a young sovereign like Scotland could be minimized by issuing debt in sterling, thereby protecting investors from additional devaluation risk.
But, without its own currency-issuing central bank, Scotland would forego seigniorage (profits from central-bank operations that typically benefit the national treasury).
Perhaps more important, it would have no lender of last resort capable of stabilizing the banking and financial system in a crisis.
All things considered, an independent Scotland would be best served by issuing its own national currency from the outset, empowering the National Bank of Scotland to set interest rates according to domestic economic conditions.
By allowing for exchange-rate flexibility, this approach would also enable the central bank to avoid the twin hazards that arise in a currency union: undervaluation, which produces inflationary pressure, and overvaluation, which demands wrenching internal devaluations (driving down real wages).
To see just how difficult the latter can be, consider the eurozone.
The agony of internal devaluation in the currency union’s weaker economies is increasingly driving voters and financial markets alike to call for a return to their national currencies – a trend that may well come to a head in May’s European Parliament election.
Italy is perhaps the prime candidate to lead an exit from the eurozone, though a political shock could also arise in France, spurring it to negotiate with Germany the dissolution of the monetary union.
But, regardless of who leaves first, any countries trading in the euro for their defunct national currencies would, like an independent Scotland, have to determine the right degree of exchange-rate flexibility.
For example, while a fully floating currency would create a beneficial combination of discipline and flexibility, it might best be delayed in favor of an adjustable (“crawling”) peg to some anchor currencies.
This would buy time to build credibility and, more important, to help keep public debt under control.
An instructive precedent is Slovakia, whose “velvet” divorce from the Czech Republic at the beginning of 1993 led to the creation of a new national currency.
The Slovak koruna was initially kept within pre-defined fluctuation bands around target parities with the Deutsche Mark and the US dollar, before moving to a fully floating exchange rate in 1998.
Furthermore, Slovakia, unlike most of its regional peers, has fulfilled its legal obligation to join the eurozone – an obligation that an independent Scotland would have to take on when, as expected, it sought EU membership.
But a sovereign Scottish government might try to negotiate an exemption to this rule – and, in so doing, join the tide of other European countries seeking a way out of the great blunder that Europe’s monetary union has turned out to be.
Bringing China into the Climate Change Fold
POZNAN – The current economic crisis cast a pall over climate change talks held this month in Poland. While negotiators hoped for concrete progress towards an international climate agreement, the world’s two largest polluters were distracted – the US with preventing a collapse of the financial system in the midst of a presidential transition, China with a slowdown in domestic investment and weakening foreign demand for its manufactured goods.
With American home values and retirement savings falling and Chinese unemployment numbers rising, observers worry that neither America nor China will have much appetite to cut emissions.
The paradox here is that the crisis presents a unique opportunity for the United States and China to strike a deal that would lay the groundwork for a global climate agreement.
Indeed, one of the main goals of the most recent biannual meeting of the US/China Strategic Economic Dialogue (held the week before the climate talks began) was to begin work under the “Ten Year Energy and Environment Cooperation Framework” created earlier this year.
This bilateral initiative comes on the heels of a decade in which America abstained from international efforts to address climate change, concerned that if it acts but China doesn’t, the world will fail to meet its emission-reduction targets and US industry will be disadvantaged.
China has countered that its historic and per capita emissions remain well below US levels, and that to cap aggregate national emissions at the same level as the US would imply a personal carbon budget in San Francisco five times greater than in Shanghai.
The Strategic Economic Dialogue sidestepped this disagreement on burden sharing and focused instead on what the two countries have in common.
Both depend on imported oil for transport and on domestic coal for power generation.
Both have strong state-level governments and balkanized regulatory and energy supply systems.
But the structure of the two countries’ economies, and what drives their energy needs – and thus greenhouse gas emissions – are very different. It is this difference that offers the best chance for addressing climate change head-on.
Economically, the US and China are mirror images, opposite sides of a massive global imbalance.
Americans spend too much and save too little, leaving a $250 billion trade deficit financed by other countries.
Much of this credit comes from China, where firms and citizens save too much and consume too little, leaving a surplus of both goods and capital that flows abroad.
This macroeconomic imbalance is reflected in the two countries’ carbon footprints.
In the US, more than 70% of CO2 emissions come from consumer-related activities, whether gas-guzzling SUVs or power-hungry McMansions.
In China, more than 70% of emissions come from industry.
Steel production alone consumes 18% of the country’s energy resources, nearly twice as much as all Chinese households.
The chemical industry consumes more energy than all private transportation, and aluminum production rivals the commercial sector in terms of electricity demand.
In terms of brokering a climate deal, this imbalance is good news.
It suggests a framework for reducing emissions that respects the development needs of China’s households, addresses US firms’ competitiveness concerns, and adheres to the principle of “common but differentiated responsibilities” embedded in international negotiations.
In recognition of its outsized historic and per capita emissions, the US should agree to economy-wide emissions reductions in line with domestic climate legislation currently being considered.
China should be excused of consumer-related obligations for the time being, but assume commitments on industrial production based on the recognition that effectively reducing emissions in these sectors requires coordinated international action.
China’s leaders are already eager to rein in energy- and pollution-intensive industry for reasons of national security, air and water quality, and simple economic efficiency.
Production of steel, cement, chemicals, paper, and aluminum alone account for nearly half of China’s energy needs and generate nearly half of the air pollution that claims over 300,000 lives and costs the economy close to $100 billion each year.
Yet these five industries combined employ only 14 million people out of a total labor force of 770 million and fewer people than they did a decade ago.
For a country in an employment crisis, investing in energy-intensive industry is a losing strategy.
Using climate policy to discipline these industries would help rebalance the economy while taking a bite out of China’s emissions.
If China imposes a carbon price for its energy-intensive manufacturing industries, the US won’t need to do so at its border, lowering risks to the international trading system on which both countries rely.
The current crisis is already unwinding some of the imbalances that drive both countries’ energy and environment challenges.
US oil demand has fallen 8% as consumers tighten their belts, and electricity demand in China is down by 10% as energy-intensive industries cut production.
A smart response to the crisis can perpetuate these trends.
Future US consumption will be greener, and the cost of climate policy reduced, if the US recovery package includes money to weatherize homes, upgrade the electricity grid, and help the auto industry improve fuel efficiency.
If China consolidates its energy-intensive manufacturing, thereby freeing up investment capital for lighter manufacturing and services, then it will emerge from the crisis with a growth model that pollutes less and employs more.
If the US and China can find agreement on these issues in the midst of crisis, they will pave the way for success when climate negotiators meet again next year in Copenhagen.
Bringing Down the Wall
A quiz for history buffs. Twenty years ago – on June 4, 1989 – three events shaped a fateful year.
Which do you remember most vividly, and which most changed the world?
a) The bloody denouement of the protests on Tiananmen Square.
b) The death of Iran’s revolutionary cleric, Ayatollah Ruhollah Khomeini.
c) The Polish elections.
Few would answer c).
The victory of the famed opposition trade-union movement, Solidarity, in Eastern Europe’s first free election since 1946 was eclipsed by the violent crackdown in Beijing and Khomeini’s tumultuous passing.
Yet no single event did more to bring down communism in Europe – and thus to re-shape the post-war international order.
The next few months will bring all sorts of commemorations of communism’s end, particularly of the fall of the Berlin Wall in November 1989.
To many, it was a glorious moment, emblematic of the West’s victory in the Cold War, and one that seemed to come out of the blue.
But if you watched the Eastern Bloc’s disintegration from the ground, you would know that the process was far longer and more complex than most people realize.
The Polish election was a point of no return, the moment when forces for change became irreversible.
They gathered momentum after a summer of labor strikes, when Poland’s communist chief, General Wojciech Jaruzelski, concluded that the country’s economic troubles were too grim to face alone.
Why not enlist the help of Poland’s opposition, he reasoned, if not to solve the problems, then at least to share the blame for them?
And so, after six months of bargaining, a historic deal was struck.
Poland would hold free and fair parliamentary elections, and Solidarity would compete.
It never occurred to the ruling communists (or to Solidarity) that they might lose.
Never in their wildest dreams did they imagine being driven from power altogether.
Yet that is what happened.
In retrospect, it is astonishing that there should have been any doubt.
Solidarity’s campaign was all chutzpah.
An iconic campaign poster captured the public mood: a picture of a gun-slinging Gary Cooper as the sheriff in the classic western High Noon .
June 4 was the day of reckoning in Dodge City East.
On that bright Sunday morning, as spring turned to summer, voters wasted little time in dispatching Poland’s communists to the abattoir.
On their dying day, Poland’s communists managed one last perversity, a final and unwitting act of utter self-humiliation.
They devised an electoral system whereby Poles would not vote for candidates of their choice, but would cross out those they did not want – which is to say, each and every communist.
Everywhere you looked, people were excising hated autocrats.
Here, at long last, was Poland’s long-awaited popular uprising, revenge for December 1980, when Jaruzelski declared martial law, banned Solidarity, and threw its leaders in jail.
Revolution by deletion!
The pen, at last mightier than the sword, became a weapon of glorious retribution, wielded with style.
Some voters slashed their ballots boldly, decapitating the old regime with flourishing strokes.
Others savored the moment, perhaps puffing a cigarette as they reveled in this or that deletion. “Oh yes, he jailed my cousin.”
Pfft! “Oh, that sponging apparatchik, living high on our penury.”
Pfft! Pfft!
By contrast, the communists’ campaign was all but invisible.
In all of Warsaw, only a couple government candidates bothered to put up posters.
Most counted on the party’s media monopoly to carry their message, such as it was: “Vote Lezek, a good communist.”
To their credit, the regime accepted its inevitable loss with remarkable grace. At three p.m. on the day after the vote, Jaruzelski summoned top party officials.
“Our defeat is total,” he told them. “A political solution will have to be found.”
By that, he meant no violence and no doctoring the ballot count. The communists would have to live with the result.
Twenty years later, I remain mystified.
Those of us covering Eastern Europe knew that Solidarity would win.
We knew, too, that its peaceful victory would be a lesson for the rest of the bloc.
For anti-communists everywhere, the Polish election was extraordinarily encouraging.
Thanks to Poland, what only days before had seemed impossible was, suddenly, possible.
There were other signs.
In May, Hungarian reformers began tearing down the fence along their border with Austria – a hole in the Iron Curtain.
In Moscow, Mikhail Gorbachev spoke of a “Common European House” and repudiated the interventionist Brezhnev Doctrine.
Yet when the Wall tumbled down, experts and world leaders alike were unanimous. “We never saw it coming,” they confessed.
The Cold War had lasted so long that change seemed unimaginable until freedom burst forth.
Bringing Europe’s Last Dictator in From the Cold
Strasbourg – The European Union recently embarked on a policy of “constructive engagement” with Belarus.
None too soon.
Previously, EU policy was to isolate Belarus, which itself was seeking isolation.
That policy achieved almost nothing, save for bolstering the country’s authoritarian leader, President Aleksander Lukashenko.
Belatedly and somewhat reluctantly, EU leaders have now accepted that they need to deal pragmatically with Lukashenko if they want to promote reform in Belarus and shift the country from its tight orbit around Russia.
This realization does not mean that Europe should turn a blind eye to the nature of Lukashenko’s regime.
EU members are rightfully concerned about human rights in a place dubbed by some “the Cuba of the east.”
Political repression and press restrictions remain common in Belarus.
But the same – and perhaps worse – can be said about China, yet the EU has invested much political capital in a strategic, multifaceted partnership with its rulers.
Belarus is the missing link in Eastern Europe’s post-Soviet democratization and reintegration.
European officials have been at pains to prevent the EU’s enlargement from creating new dividing lines between Belarus and its neighbors to the west and north – Poland, Lithuania, and Latvia – that joined the Union in 2004.
In fact, these countries are the biggest advocates of improving relations with Belarus, because of their shared historical, commercial, and familial links.
The EU has also suddenly awakened to the need for a common external energy-security policy, not least to diversify away from Russian supplies.
Given that 20% of Russian gas destined for Europe passes through Belarus, a stable and structured relationship with its government has become a priority.
In turn, Lukashenko has decided for economic reasons that his country needs EU support and can no longer depend exclusively on Russia without paying a heavy political price.
But the thaw in EU-Belarus relations needs to be based on reciprocal, permanent steps.
After all, no EU strategic partnership is unconditional.
But the EU must be ready to respond to the perceptible momentum in Belarus in favor of domestic reform, greater openness, and respect for fundamental democratic rights.
For example, the recent release of political prisoners in Belarus removed at a stroke one of the key reasons for the EU’s hostility towards Lukashenko.
This gesture, together with the free publication of an opposition newspaper, is precisely the kind of move that will entice EU interest in an enhanced relationship.
Similarly, Belarus must, in turn, respond positively to the EU’s steps to normalize relations, one of which should be rescinding travel restrictions against Lukashenko and other senior officials.
Of course, releasing political prisoners does not excuse Lukashenko’s past excesses.
But the political opposition to Lukashenko is hopelessly divided, plagued by infighting, and incapable of mounting any serious challenge to his rule.
Moreover, Lukashenko appears to be genuinely popular.
The country’s rural and elderly population – like those in other former Soviet countries – appears to prize economic stability and social order over democratic development.
Some observers believe that Lukashenko is making cynical overtures to the West in order to elicit more support from Russia, particularly at a time of economic crisis.
But, although Lukashenko is probably playing a divide-and-rule game, he must eventually make a choice.
The closer he moves to the EU, the greater the alarm in the Kremlin.
Russia is hypersensitive about challenges to its influence in what it calls its “near abroad” of former Soviet satellites.
Last summer’s war in Georgia, and the Kremlin’s habitual efforts to destabilize Ukraine’s pro-Western government, serve as warnings for what Lukashenko can expect if he moves precipitately.
With Belarus’s economy crumbling and its export markets withering, Russia could exploit Lukashenko’s vulnerability.
The Kremlin is considering a request from Belarus for $2 billion of credit, but, if this money is forthcoming, Belarus can expect to pay a heavy political price.
Lukashenko may have to adopt the Russian ruble, at least as a reserve currency.
Russia could also insist on greater military cooperation, including the deployment of Russian missiles in Belarus in response to America’s planned missile shield in Poland and the Czech Republic.
Prime Minister Vladimir Putin and President Dmitry Medvedev may also insist on Belarus recognizing the independence, declared following last summer’s war, of Georgia’s Abkhazia and South Ossetia regions, knowing that this would make the EU shrink from further commitments to Belarus.
Belarus’s reliance on cheap energy supplies from Russia could also be used as leverage.
But, with Russia’s economy contracting, Belarus is perhaps in a stronger position than it realizes.
The country needs greater access to global markets and eventual support for admission to the World Trade Organization, which is one of the EU’s greatest selling points and one of Russia’s fundamental weaknesses.
Now is the time for EU leaders to present Lukashenko with a clear alternative to dependence on Russia.
The first step in this process was the inclusion of Belarus in the EU's Eastern Partnership, a new framework for relations with six ex-Soviet republics in Eastern Europe and the Caucasus.
It is premature to invite Lukashenko to the opening summit of this initiative in Prague on May 7.
But, after years of atrophy, EU-Belarus relations finally offer some promise for the future.
Much responsibility rests with Lukashenko, but the EU must make every effort to coax Belarus into the family of European nations, where it belongs.
Bringing It All Back Home
PARIS – Global policymakers regularly congratulate themselves on having avoided the policy errors of the 1930’s during the financial crisis that began in 2008.
Led by US Federal Reserve Board Chairman Ben Bernanke, an economic historian of the Great Depression, they remembered the ideas of John Maynard Keynes and loosened monetary and fiscal policy to avoid the worst.
We are still coping with the budgetary consequences, especially in Europe, but it is true that the world did not end in 2008.
Monetary tightening was not the only major policy error of the 1930’s; so was a retreat into protectionism, symbolized by the Smoot-Hawley tariff increases at the beginning of that decade.
Historians continue to debate the centrality of the Smoot-Hawley law itself, but the subsequent tariff war certainly damaged trade and economic growth, making a bad situation worse.
Today’s statesmen like to say that they have avoided the protectionist error as well, but is that true?
Certainly I do not expect a tariff war to break out in the near term, but there are dangerous indicators of trade trouble ahead.
The Doha round of global free-trade talks has been abandoned, and the World Trade Organization is now languishing by the lake in Geneva, uncertain of its future.
Perhaps Doha was unlikely to achieve much in the current circumstances, but the absence of any continuing dialogue on world trade – at worst, a useful safety valve – adds a new level of risk.
While people are talking, they are less likely to act precipitately.
In the financial arena, there are many signs of a revival of nationalistic approaches to regulation and currency policy.
The crisis challenged the Washington Consensus, which assumed that the world was moving gradually towards free movement of capital and market-determined exchange rates.
Several countries – including Brazil, South Korea, and Turkey – have now imposed capital controls of various kinds.
Even the International Monetary Fund, long the embodiment of the Washington Consensus, has acknowledged that “capital controls are a legitimate part of the toolkit to manage capital flows in certain circumstances.”
American Congressmen view the Chinese as archetypal currency manipulators, but the Swiss have introduced a firm cap on the franc’s appreciation.
These early signs of deglobalization of financial markets have their parallels in commercial banking, with some of the biggest global institutions retrenching rapidly.
Citibank and HSBC had gone further than most in developing a global footprint; indeed, one can hardly get on a plane nowadays without being reminded that the latter is “the world’s local bank.”
But both are closing down in many countries.
Likewise, many other European banks are cutting back their overseas business sharply.
The impact is particularly vivid in trade finance, where European banks have been major participants in Asia.
Now they are in rapid retreat from that market, creating a worrying gap that Asian banks are seeking to fill.
There is more to come.
As they struggle to raise new capital, European banks and insurers are likely to be forced to sell overseas assets.
If this were simply a sign of a new, tighter focus on viable long-term strategies, it might be regarded it as a benign development.
But there are indications that the process is being driven by regulatory change, and in some cases by regulatory protectionism.
Banks are overseen by a “home” regulator in their country of incorporation, and by a series of “host” regulators where they operate.
“Home” regulators and lenders of last resort are increasingly worried about their potential exposure to losses in banks’ overseas operations.
As Mervyn King, the Governor of the Bank of England, acutely observed, “banks are global in life, but national in death.”
In other words, home authorities are left to pick up the tab when things go wrong.
Host regulators are increasingly nervous about banks that operate in their jurisdictions through branches of their corporate parent, without local capital or a local board of directors.
So they are insisting on subsidiarization.
From the banks’ perspective, that means that capital is trapped in subsidiaries, and cannot be optimally used across its network.
So banks may prefer to pull out instead.
A particular version of this phenomenon is at work in the European Union.
In the single financial market, banks are allowed to take deposits anywhere, without local approval, if they are authorized to do so in one European country.
Yet when the Icelandic banks failed, the British and Dutch authorities had to bail out local depositors.
Now regulators are discouraging such cross-border business, leading to a process with the ugly new name of “de-euroization.”
We can only hope that it does not catch on.
Regulators, recognizing the risks of allowing financial deglobalization to accelerate, have been seeking better means of handling the failure of huge global banks.
If banks can be wound up easily when things go wrong, with losses equitably distributed, regulators can more easily allow them to continue to operate globally and efficiently.
So a major effort to construct a cross-border resolution framework is under way.
But it is uphill work, and Daniel Tarullo, a governor of the Federal Reserve, has acknowledged that “a clean and comprehensive solution is not in sight.”
Does all of this amount to a serious threat to the benefits of globalization?
The cautious answer would be that it is too early to say.
Perhaps we are just seeing the beginnings of a changing of the guard, and that HSBC and Citibank will be replaced as global players by China’s ICBC, Brazil’s Itau Unibanco, or Russia’s Sberbank.
But it may be that we are seeing a revival of a less benign Keynesian doctrine: “ideas, knowledge, science....should of their nature be international.
But let goods be homespun wherever it is reasonably and conveniently possible and, above all, let finance be national.”
No Pain, No Gain for Britain?
LONDON – The economic historian Niall Ferguson reminds me of the late Oxford historian A.J.P. Taylor.
Though Taylor maintained that he tried to tell the truth in his historical writing, he was quite ready to spin the facts for a good cause.
Ferguson, too, is a wonderful historian – but equally ready to spin when he shifts into political gear.
Ferguson’s cause is American neo-conservatism, coupled with a relentless aversion to Keynes and Keynesians.
His latest defense of fiscal austerity came immediately after the United Kingdom’s recent election, when he wrote in the Financial Times that, “Labour should blame Keynes for their defeat.”
Ferguson’s argument amounts to that of a brutal disciplinarian who claims vindication for his methods by pointing out that the victim is still alive.
In pleading on behalf of British Chancellor of the Exchequer George Osborne, he points out that the UK economy grew by 2.6% last year (the “best performing of the G-7 economies”), but ignores the damage that Osborne inflicted on the economy en route to this recovery.
There is now much agreement about this damage.
The Office of Budget Responsibility, the independent agency set up by Osborne to assess the government’s macroeconomic performance, has just concluded that austerity reduced GDP growth by 2% from 2010 to 2012, bringing the cumulative cost of austerity since 2010 to 5% of GDP.
Simon Wren-Lewis of Oxford University estimates that the damage might be as high as 15% of GDP.
In a recent poll of British economists by the Centre for Macroeconomics, two-thirds agreed that austerity had harmed the UK economy.
Moreover, Britain is not alone.
In its October 2012 World Economic Outlook, the IMF admitted that, “fiscal multipliers were underestimated across the world.” In plain English: the forecasters underestimated the extent of spare capacity and hence the scope for fiscal expansion to raise output.
Was it an honest mistake?
Or was it because the forecasters were in thrall to economic models that implied that economies were at full employment, in which case the only result of fiscal expansion would be inflation?
They now know better, and Ferguson should now know better as well.
A depressing aspect of Ferguson’s interpretation is his failure to acknowledge the impact of the Great Recession on government performance and business expectations.
Thus, he compares 2.6% growth in 2014 with the 4.3% contraction in 2009, which he describes as “the last full year of Labour government” – as though Labour policy produced the collapse in growth.
Similarly, “At no point after May 2010 did [confidence] sink back to where it had been throughout the last two years of Gordon Brown’s catastrophic premiership” – as though the Brown government’s performance caused business confidence to collapse.
The claim that “Keynes is to blame” for Labour’s election defeat is peculiarly odd.
After all, the one thing Labour’s leadership tried hardest to do in the campaign was to distance the party from any “taint” of Keynesianism.
Perhaps Ferguson meant that it was Labour’s past association with Keynes that had damned them – “their disastrous stewardship before and during the financial crisis,” as he puts it.
In fact, Labour’s most recent governments were determinedly non-Keynesian; monetary policy was geared to hitting a 2% inflation target, and fiscal policy aimed at balancing the budget over the business cycle: standard macro-economic fare before the recession struck.
The most damning charge against their stewardship is that they embraced the idea that financial markets are optimally self-regulating – a view that Keynes rejected.
Keynes was not to blame for Labour’s defeat; in large part, Scotland was.
The Scottish National Party’s crushing victory left Labour with only one seat in the country.
There are no doubt many reasons for the SNP’s overwhelming triumph, but support for austerity is not one of them.
(The Conservatives did as badly as Labour.)
Nicola Sturgeon, First Minister of Scotland and leader of the SNP, attacked the “cozy consensus” around fiscal consolidation in Westminster.
The deficit, she rightly said, was “a symptom of economic difficulties, not just the cause of them.”
The SNP manifesto promised “at least an additional £140 billion ($220 billion) across the UK to invest in skills and infrastructure.”
So if the SNP did so well with a “Keynesian” program of fiscal expansion, is it not arguable that Labour would have done better had it mounted a more vigorous defense of its own record in office and a more aggressive attack on Osborne’s austerity policy?
This is what leaders of the Labour party like Alistair Darling, Gordon Brown’s Chancellor of the Exchequer, are now saying.
But they seem to have had no influence on the two architects of Labour’s election strategy, Ed Miliband and Ed Balls, both now removed from front-line politics.
What the Conservatives did succeed in doing, and doing brilliantly, was to persuade English people that they were only “cleaning up Labour’s mess,” and that, but for austerity, Britain would have “gone the way of Greece” – exactly Ferguson’s view.
One might conclude that all of this is history: the voters have spoken.
But it would be a mistake to accept the Conservative narrative as the last word.
It is basically a tissue of propaganda, with little support in theory and destructive effects in practice.
This might not matter so much had there been a change of government.
But Osborne is back as Chancellor, promising even tougher cuts over the next five years.
And fiscal austerity is still the reigning doctrine in the eurozone, thanks to Germany.
So the damage is set to continue.
In the absence of a compelling counter-narrative, we may be fated to find out just how much pain the victims can withstand.
Brittle Britain
LONDON – Which European country faces the greatest risk of political instability and financial turmoil in the year ahead?
With less than a week to go before the British general election on May 7, the answer is both obvious and surprising.
Once a haven of political and economic stability amid the turmoil of the euro crisis, the United Kingdom is about to become the European Union’s most politically unpredictable member.
Indeed, continuity is the one election outcome that can almost certainly be excluded.
Unless opinion polls are inaccurate to a degree unprecedented in British history, the two parties comprising the government coalition, Prime Minister David Cameron’s Conservatives and the Liberal Democrats, have almost no chance of winning a combined parliamentary majority.
One possibility – with a probability slightly above 50% according to the polls – is that Britain, the birthplace of Thatcherism and the EU’s standard-bearer of neoliberal economics, will soon have a Labour-led government committed to the biggest tax-raising program since the 1970s.
Moreover, because of the peculiarities of the British electoral system and the rise of Scottish and Welsh nationalism, a Labour government’s survival would depend on the support of parties with even more radical economic agendas and dedicated to dismantling the UK.
Another scenario – almost as probable as a Labour-led coalition – is a weak and unstable Conservative government.
To judge by the opinion polls, Cameron’s best hope is to win more parliamentary seats than Labour and try to form a minority government, which could survive as long as the other parties failed to unite against it.
This might be possible, because the Liberal Democrats and Scottish Nationalist Party may see benefits in allowing a weak Conservative government to remain in power, at least for a while.
But a minority Conservative government would create additional uncertainties and risks.
Cameron would be more vulnerable than any leader in postwar British history to blackmail by his own party’s dissidents and extremists, who see it as their historic mission to pull Britain out of the EU.
And a minority government would be unable to pass any controversial legislation that the Scottish Nationalists opposed.
Moreover, Britain’s political institutions might be unable to cope.
The UK’s unwritten constitution is based entirely on tradition and precedent.
That arrangement has always presupposed strong governments with clear mandates.
The constitution is so poorly adapted to coalitions and minority governments that some legal scholars question whether the Queen should address Parliament on behalf of “her” new government if there is a risk that it will be toppled within a few weeks or months.
And yet, although the electoral arithmetic makes a stable centrist government – one that could maintain Britain’s current policies on taxes, economic management, and Europe – almost impossible to imagine, continuity is the outcome that most international business leaders and politicians seem to expect.
The clearest evidence of this can be seen in financial markets.
Although the pound has declined by about 10% from its peak of $1.70 last September, sterling weakness has simply reflected the dollar’s strength.
In the same period, sterling has risen almost 10% against the euro, while British share prices have hit all-time highs and government bonds have generated better returns in Britain than in the United States, Germany, or Japan.
What accounts for this apparent indifference – also evident among European politicians – to the looming political risks in Britain?
Many international observers believe that politics simply no longer matters much in Britain, because the economy is fundamentally sound and growing at a fairly healthy pace.
But this is a dangerously complacent argument.
Yes, Britain recorded the fastest economic growth among the major OECD countries in 2014 and has an unemployment rate of only half the EU average.
But these favorable indicators obscure a source of enormous risk: one of the world’s largest external deficits, financed last year by foreign-capital inflows totaling $160 billion.
The current-account gap, at 5.5% of GDP, is by far the highest among the major OECD countries and is at a level long associated – both in the UK and elsewhere – with the onset of financial crises.
As long as Britain was a haven of political stability and tax policies favorable to foreign investors, it had no problem attracting capital inflows.
But the impending shifts in Britain’s politics and its EU relations are bound to draw attention to the economy’s extreme dependence on foreign finance.
A Labour government, wielding tax proposals specifically designed to hit private foreign investors, would certainly discourage inflows.
But international investors might be equally put off by a weak Conservative government dominated by the party’s Europhobe wing.
In either case, GDP growth is likely to slow as business confidence, consumption, and house prices suffer – either from new taxes under Labour or from uncertainties about EU membership under the Conservatives.
Another reason why international observers may be ignoring such obvious risks is that they have been preoccupied with more dramatic events in Greece and Ukraine.
Politicians, financial analysts, and political commentators have limited time and attention.
They tend to focus on whatever seems to be the biggest and most urgent story, and British politics has not been it.
Then again, many apparently sophisticated analysts may simply be in a state of psychological denial.
Surveys of business and financial opinion in Britain show clear majorities in these groups expecting a sudden swing toward the Conservatives in the closing days of the election campaign, resulting in a stable coalition government and continuity in economic and political conditions.
Such a last-minute shift in voting intentions is possible, but the time for it is running out.
In fact, British public opinion has remained uncannily stable, not only during the official election campaign, but throughout the past 12 months.
There are simply no rational grounds for expecting either the Conservatives or Labour to achieve the decisive victory needed to form a stable government.
The upcoming election will therefore mark the beginning, not the end, of a period of uncertainty for British politics, economics, and finance.
Britain in the Wilderness
LONDON – Europe is once again divided between East and West – only this time the fault line runs through the European Union.
The eastern members – most notably Poland and the Baltic states – are clinging fast to the EU in the face of Russian aggression.
At the other geographic and political extreme, the United Kingdom is threatening to walk out on Europe for good.
Decisions being taken today on Europe's eastern and western peripheries are likely to shape a new balance of power.
It is not difficult to imagine Europe after a British withdrawal: a French-German axis in control, Russia empowered, America bypassing a now-weakened Britain, pro-EU Scotland threatening once again to leave the UK, and England turning inward as Euroskeptics convince themselves that Britain always is strongest when alone.
And, given the effects of UK Euroskepticism so far, no crystal ball is needed to foresee the impact on Britain of withdrawal from the EU.
As former European Commission President José Manuel Barroso put it in December, “I have never seen in all my years in the European Council…a big country as isolated as Britain."
Indeed, the UK is now a fringe player in deciding a European growth strategy; marginal to trade debates that it used to lead; and, despite being a big lender, almost irrelevant to the future of Greece.
And now, though Britain was a signatory of the 1994 Budapest Memorandum guaranteeing Ukrainian independence, only France and Germany attend any serious negotiations.
British ministers want it both ways: “Russia must be countered by even greater European unity," they say.
Dean Acheson, the US secretary of state who was an architect of NATO and the Marshall Plan, famously noted that Britain in the twentieth century lost an empire and never found a new international role.
In the twenty-first century, Britain could lose Europe and find itself once again without a role in the world.
The price of exit would be enormous, putting at risk three million jobs, 25,000 companies, annual exports worth £200 billion ($301.4 billion), and £450 billion of inward investment.
Moreover, London's unique role in bringing together the full range of financial services that serve the continent – the City is home to 250 global banks with 160,000 employees and accounts for 80% of Europe's hedge funds, 78% of its foreign-exchange trades, 74% of its derivatives, and 57% of its private equity – would be jeopardized as well.
There is little evidence to support the anti-Europeans' argument that EU regulations hobble British trade outside of Europe; on the contrary, substantial extra-EU trade and investment opportunities would be lost were Britain to leave.
And their claim that a non-European Britain could effortlessly retain the EU's benefits while ditching its burdens is simply not credible.
Consider the Euroskeptics' favorite examples, Norway and Switzerland.
The Norwegians must pay €2 billion ($2.1 billion) a year for access to European markets.
Switzerland, like Norway, must take a back seat to the EU Commission when trade and investment decisions are made.
The world's largest economy, the United States, needs the North American Free Trade Agreement, and Southeast Asia's rising economies need ASEAN.
Likewise, Britain – which at its peak generated nearly 20% of world economic activity but soon will account for no more than 2.5% – is much stronger as a part of Europe.
EU membership strengthens the UK's competitiveness by enabling it to negotiate the best deals on trade, tax rules, patents, money laundering, corruption, and security with China, India, and the rest of the world.
But economic arguments alone will likely not be enough to persuade a Britain that, in the late journalist and political columnist Hugo Young's words, is caught between the past it cannot forget and the future it cannot avoid.
According to this view, British ambivalence toward Europe may reflect a persistent inability to leave behind the days of imperial grandeur.
Nonetheless, economic insecurity – owing to the rapid pace and, at times, destructiveness of the global economy – evidently is driving much of the public's nostalgia for British sovereignty.
Millions of Britons long for someone or something to protect them from the seemingly alien forces that threaten to steal their livelihoods.
This fear has found its voice in the anti-European UK Independence Party, which has risen in opinion polls by converting economic discontent into a culture war in which foreigners and immigrants – and, indeed, Europe as a whole – are the enemy.
Britain, UKIP's leaders and supporters believe, is not the Britain they once knew.
Though economic statistics must be part of the argument for Europe, such data will not convince those who fear that Britain is becoming a foreign country.
Nor will it be enough to recall the historic benefits of engagement and Britain's distinguished centuries-old role in ensuring that no country ever gained sole mastery of Europe.
What needs to be said is this: Britain is at its best when it sees itself as a leader in Europe.
Just as Britain once led Europe in fighting fascism, supporting democratic aspirations, and charting the continent's response to the global recession of 2008, it should be inside Europe leading from the front ranks.
The Britain that has always championed liberty, tolerance, and social responsibility should be ready once again to lead a progressive movement, spearheading action to fight climate change, resist protectionism, and encourage sustainable growth.
It must lead in mobilizing Europe to make the global economy work for people, protecting them from injustice and inequity.
Globalization needs a human face, and the face of modern Britain can provide it.
Some say that the best way to secure European reform is to threaten to leave.
My experience is that Britain does best when it works to bring people together, set the agenda, promote its values, and champion change.
It is then that Britain can channel its unforgettable past while embracing its unavoidable future.
Britain’s Cultural Kowtow
LONDON – You would think that the British, having practically invented appeasement, and paid a heavy price for it, would know better.
But appeasement of China for commercial gain apparently is not considered morally repellent.
How else could Liu Binjie, China’s censor-in-chief and the point man for silencing the Nobel laureate writer and human-rights activist Liu Xiaobo, be invited to lead a delegation of 21 officially sanctioned writers and dozens of ministerial minions to London to celebrate Chinese literature at the London Book Fair?
Indeed, Liu is the British Council’s guest of honor for the event.
The Council says that it invited officially approved Chinese writers because it wanted to create greater understanding of Chinese literature and promote cultural exchange between the two countries.
But is it really true that the world can or should learn about China only by reading works that are sanctioned by the Chinese Communist Party?
After all, didn’t Boris Pasternak, Alexander Solzhenitsyn, Milan Kundera, and Václav Havel teach the world as much about the repressive societies in which they lived than anything turned out by the Soviet bloc’s official publishers?
The Council’s excuse is a smokescreen, and simultaneously kowtows to Chinese totalitarianism and insults those Chinese writers who have been imprisoned, banned, or forced into exile merely for writing what their conscience demands.
In his “My Statement on Leaving China” (去国宣言), Yu Jie, a writer who left for the United States in order to escape persecution, explicitly declared that he was forced to flee his country in order to write freely.
Before his exile, Yu had been thrown into a dark room and tortured, because Liu Xiaobo won the Nobel Peace Prize in 2010.
Indeed, at the moment the award was handed over in Oslo, several policemen were pummeling Yu’s face, saying, “We are going to beat you to death to avenge the government’s humiliation.”
Today, China is producing literary exiles at a faster rate that the Soviet Union ever achieved.
No British governmental institution would have invited the chief Soviet censor as its guest of honor at an event celebrating Russian literature.
So, why the double standard?
We all know the answer: money.
China has it, and Britain and other Western countries want it.
They want Chinese consumers to buy their products.
British Prime Minister David Cameron wants to change the fact that Britain exports more to tiny Ireland than it does to China.
A little literary appeasement seems a small price to pay.
Today, growing political terror is having a stifling effect on Chinese society.
More than 100 writers have been thrown into prison for publishing political essays on the Internet, and their family members have been monitored, or, like Liu Xiaobo’s wife, have been placed under house arrest.
Last year, the writer Zhu Yufu published a poem online, a verse of which reads: “It’s time Chinese people!/ the square belongs to everyone/ the feet are yours/ it’s time to use your feet and take to the square to make a choice.”
For this, he was detained for “inciting subversion of state power,” and in February was sentenced to seven years in jail.
In repressive societies, good literature is by definition subversive.
With the simplest of words, Zhu was attempting to awaken a nation, and, for China’s dictators, nothing is more subversive or terrifying than the word “choice.”
China is shipping 10,000 titles to the London Book Fair.
That “choice” may seem overwhelming, but it would be safe to bet that not one of these books probes impartially the taboos of Chinese politics and recent history.
In China, thousands of “sensitive words,” including “self-immolating lamas,” “democracy,” “human rights,” “Tiananmen protest,” and even the title of my book Beijing Coma, cannot even be searched online.
This ever-growing list of forbidden words and taboo subjects, drawn up by Liu Binjie and his army of censors, starves the nation’s soul and encages the minds of writers.
The British Council claims that it is showcasing “the amazing breadth and diversity of Chinese literature today.”
But any genuinely diverse discussion would include not only the 21 state-approved writers on the list, but other officially recognized writers on the more critical end of the spectrum, such as Yan Lianke, who was refused permission to attend this year’s London Book Fair three times.
A diverse discussion would also have to include writers who have been completely silenced in China, such as Wang Lixiong, Tan Hecheng, Mo Jiangang, and Yang Jisheng.
The works of these banned writers are packed with vivid detail about contemporary Chinese life.
Their literary power derives from their authors’ courage to ask awkward questions and write with honesty.
The British Council’s decision to ignore them, as well as exiled writers banned from entering China, such as myself, has turned what should be a cultural event into an unprincipled commercial-political transaction.
Britain has not only produced great literature, but has an historic tradition of supporting free speech and providing refuge for persecuted writers.
Not Napoleon, not Tsar Nicholas I, not even Hitler when he was being appeased in the 1930’s, could force Britain to compromise on its commitment to intellectual freedom.
Instead, the task of corrupting a centuries-old humanistic tradition has fallen to the Chinese Communist Party’s ignoble censor-in-chief and engineer of China’s literary exodus – and to the greed of some for Chinese gold.
Britain’s Failed Human Rights Revolution
LONDON – The budget-cutting austerity program of Britain’s new coalition government has been claiming all the headlines, but David Cameron’s cabinet is breaking with its Labour predecessor in another key area as well: human rights.
Indeed, the human-rights experiment that Tony Blair’s Labour government brought to Britain has failed.
Faulted by some for its inability to prevent “illiberal” anti-terrorism measures, the Human Rights Act is criticized by just as many others for hampering counter-terrorism policy.
Indeed, many people mock the very notion of human rights, which is seen as leading to “loony” concessions that favor criminals and terrorists.
Overall, the reaction of both press and public is one of disillusion and/or cynicism.
Britain famously has no written constitution, or, until recently, anything resembling a modern Bill of Rights.
Instead, we have Magna Carta and cricket.
The concept of universal human rights is literally foreign – enshrined in the broad-brush principles of the European Convention on Human Rights, whose court sits in Strasbourg.
Until recently, anyone who wished to bring a human-rights case against the British government had to go to France.
Times changed when Tony Blair came to power in 1997.
With fanfare and idealism – reflected in the slogan “Rights Brought Home” – the Human Rights Act came into effect in 2000.
But the high-minded liberalism of the then-elite had a practical point as well: should the government have any soiled linen, it should be laundered in British courts rather than be aired before a panel of international judges.
Yet the Act is unloved by the British public, which never engaged with the process.
As Tony Blair’s wife, Cherie Booth, herself a human rights lawyer, lamented, “the majority of people feel that human rights are not relevant to their lives.”
There is a lesson here: if it’s not broken, don’t fix it.
Put another way, actions speak louder than words.
When compared with human-rights abuses that truly affect humanity, the complaints dealt with by the British courts are small beer.
Which child goes to what school or what public housing is offered to which asylum seeker will be of concern to many people (and views will differ).
But using the broad brush of “human rights” to resolve such issues trivializes the concept. It also inhibits proper debate.
After all, what responsible public body wants to be accused of violating human rights?
Indeed, the threat of human-rights litigation has made providers of public services overly cautious and defensive.
This has led the popular press to howl that we now live in a costly, bureaucratic, and inefficient “human rights culture” – a charge with profound political resonance.
Before he became Prime Minister, Cameron called for the Human Rights Act to be replaced with something more “British.”
Paradoxically, some deem human rights to be wholly inefficacious where their recognition is most required.
Many MPs who backed the incorporation of the European human-rights convention into British law came to view formal recognition of human rights as a grave inconvenience when faced with Al Qaeda-inspired terrorism.
In short, having brought rights home, the Blair government ended up trying to hide them under the sofa.
This conundrum is symbolized by the debate over detaining terrorism suspects without charge or trial.
Initially, Blair attempted to force through detention without charge for up to 90 days.
Parliament settled on 28 days – still the longest such period in the Western world.
So much, then, for Article 6 of the European Convention, which provides that everyone charged with a criminal offense has the right “to be informed promptly” of the nature of the accusation against him.
So much, also, for Magna Carta, which provides that “No freeman shall be taken or imprisoned…but by lawful judgment of his peers, or by the law of the land.”
Blair’s behavior is not unique.
The fact is that any piece of legislation purporting to embody human rights is entirely vulnerable to a political system in which parliament is supreme.
The Human Rights Act must inevitably yield to subsequent legislation.
All legislation is passed by a simple majority.
And judges cannot strike down legislation.
The result?
Rights brought home one day; detention for a month without charge the next.
Indeed, even when the cause of human rights is being advanced, the Human Rights Act is now overlooked.
In May, in his first major policy speech, Deputy Prime Minister Nick Clegg announced the sweeping away of the “Big Brother” state that Blair had constructed: no more ID cards or national identity register, new restrictions on the storage of DNA, tighter regulation of the closed-circuit television surveillance that had made the British the most monitored people on earth, and so on.
All this and not one mention of “human rights” – an absence that reflects the political sensitivity of human rights in Britain today, and that tacitly acknowledges that when the stakes are high, the Human Rights Act cannot be relied upon.
Where, then, does that leave the Cameron government’s supposed extirpation of Big Brother?
One way forward would be to go further than Blair by ring-fencing certain principles and creating some form of constitutional court to defend them.
But the cost of such rigid rules may be high, and their effectiveness, as witnessed by the vagaries of the United States’ record on human rights, is less fool-proof than is sometimes imagined.
So, perhaps in a mature democracy, human rights should be dignified by actions rather than words.
Instead of introducing more legislation that is tainted both in the popular imagination and in its utility, Britain could, after all, trust its constitution to act as and when required to safeguard liberty and fair play.
For good or ill, democratic sentiment will win out, and Britain’s human-rights record, while imperfect, remains strong.
Britain’s Retreat from Free Speech
NEW YORK – The ordeal of David Miranda – the partner of Guardian columnist Glenn Greenwald detained at London’s Heathrow Airport, interrogated for nine hours, and forced to surrender his electronic devices (some of which allegedly contained documents leaked to Greenwald by the former US intelligence contractor Edward Snowden)– is a shocking demonstration of the changed climate surrounding the press.
So is the fact that state officials threatened Guardian editor Alan Rusbridger with criminal charges and forced Guardian employees to destroy computer equipment at the newspaper’s offices.
But what is most shocking is that all of this happened in the United Kingdom.
As the head of the government that carried out these acts, British Prime Minister David Cameron has betrayed his country’s most noble cultural legacy.
Indeed, Britain essentially invented and gave the rest of the world the idea of free speech.
As far back as the seventeenth century, whenever monarchs or parliamentarians would try to control Britain’s press, British pamphleteers and polemicists would fight back – and often win.
In the face of anti-monarchist revolutionary fervor, Parliament – as Cameron should recall – passed the Licensing Order of 1643, which imposed pre-publication censorship on the British press.
Booksellers protested, and the following year John Milton published “Areopagitica,” a foundational statement of our modern philosophy of the right to free expression.
Returning to British first principles, the House of Commons rescinded legislation suppressing press freedom in 1776.
After that return to sanity, it was hard to convict someone for political speech or writing in Britain.
No law specifically censored political speech, leaving only the much higher legal threshold of “disturbing the King’s peace.”
Despite a flood of Jacobin propaganda from revolutionary France, British parliamentarians remained committed to the idea that freedom of speech and the exposure of ideas to open debate would serve Britain best.
Efforts in 1823 and 1856 to pass laws constraining free speech were shouted down by members of Parliament using very modern-sounding objections: any curtailment of press freedom constituted a “slippery slope,” while one man’s sedition or blasphemy was another man’s common-sense opinion.
British citizens, too, routinely rose up against efforts to curtail press freedom.
Indeed, when the rising power of groups like the Society for the Suppression of Vice began to initiate prosecutions of publishers and booksellers, MPs attacked this behavior for its anti-British nature.
Of course, it is precisely this tradition of free speech and debate that has so often led the British press to “go too far” for the comfort of state officials and citizens alike.
Parliamentarians were offended by press coverage of Queen Caroline’s divorce in 1820, and by newspapers’ mockery of King George IV.
In the 1860’s and 1870’s, they were appalled at how publishers boosted newspaper circulation by reporting on divorce courts (and the scandalous behavior of individual politicians).
Political elites called again and again for curtailment of press freedom.
But Parliament and courts always returned over time to the core British value of free speech and expression.
Will today’s constrictions on journalism in the UK be similarly transient?
In the wake of the hacking scandal at Rupert Murdoch’s News Corp, Parliament pressured the British press into agreeing to a terrifying system of fines of up to a £1 million ($1.6 million) for news “errors.”
The same system (recently put in place in Australia as well) has often been used by less democratically inclined governments to suppress independent, vigorous journalism; in Ecuador, for example, newspapers are regularly fined large sums for criticizing the government.
The establishment of “national security” and “fighting terrorism” as stalking horses for intimidation of journalists who are doing their jobs – exposing government abuses to the light of day – gives the state an even more effective tool to suppress investigative reporting.
Dictators everywhere silence journalists in the name of “national security” by charging those who would investigate their regimes with treason, subversion, or espionage.
The same tactic is now appearing in democracies, too – with the same chilling effect.
Indeed, perhaps the most dismaying aspect of the Snowden story has been the relative silence of other news outlets, in Britain and America, as the national-security state literally comes to the Guardian’s door.
Instead, we have Michael Grunwald, a senior correspondent at Time magazine, posting on Twitter (and then deleting): “I can’t wait to write a defense of the drone strike that takes out Julian Assange.”
Do other British publishers really believe that silence will protect them from the slippery slope?
If the Guardian must stand alone now, next it will be the Daily Telegraph or the Financial Times that will face menacing calls from Whitehall and demands to spike a story or hand over the documents involved in an investigative report.
Britain needs to reestablish the primacy of free speech.
It needs to dismantle the new system of fines that is being developed (a system that, paradoxically, the Guardian’s Rusbridger and the Labour Party – but not Cameron – have eagerly supported), exempt journalists from detention under the Terrorism Act, and forbid prior restraint of publication.
Unfortunately, there is little movement in this direction.
Some MPs signed a letter to Cameron from the Committee to Protect Journalists protesting Miranda’s detention.
But much more needs to be done.
Above all, Cameron’s political future – and that of all UK politicians – should depend on whether he upholds Britain’s tradition of free speech and public debate or continues to betray it.
For their own sake – and for that of Britain – other UK media organizations should stop flirting with censorship and lead this campaign.
Britain’s New Internationalism
TOLEDO, SPAIN &#45;&#45; With President George W. Bush’s grand strategy for the Middle East in ruins, his administration has, however hesitantly, begun to put greater emphasis on resolving conflicts by peaceful means.
The settlement reached with North Korea, whereby it will dismantle its nuclear program, and the Annapolis conference for an Israeli-Palestinian peace – with the participation of Syria, a pivotal member of the region’s “axis of evil” – are two key examples of this trend.
The United States’ staunchest ally since 2001, Great Britain, has already gone down this path, divorcing itself from its servile alliance with a Bush administration that focused on war and confrontation.
Though only a miniature version of America’s imperial predicament, Britain’s current policy, as its new prime minister, Gordon Brown, is defining it, may anticipate the direction taken by the next American president.
Tony Blair’s endorsement of Bush’s Middle East designs showed that an imbalance of power in an alliance always causes the weaker partner to become subservient.
Britain joined America’s Iraq adventure with the same inflated perceptions of its military capacity and diplomatic clout that trapped Bush.
But Britain’s military contribution to the war effort was not indispensable, so Bush did not have to heed Blair’s advice.
As a result, Britain could not serve as a bridge between a doubtful Europe and a belligerent US, as Blair believed, and Britain’s capacity to be a force for good on the world stage was severely damaged.
Like America, Britain has learned the hard way the limits of what sheer military power can achieve, and also the devastating implications of its misuse for its reputation in the Muslim world and beyond.
The scope and virulence of anti-British sentiment in the Muslim world are now second only to that facing the US.
Restoring Britain’s reputation in the region will take years of hard work.
Blair’s legacy has thrown Brown into a confusing oscillation between Britain’s transatlantic tradition and its European connections.
No longer an independent global power, yet unhappy with the London-Washington axis that Blair forged, Brown’s government continues to waffle in its commitment to a united Europe.
Indeed, Brown, for whom America remains “Britain’s most important bilateral relationship,” recently blocked his foreign secretary, David Miliband, from delivering a speech that he considered excessively pro-Europe.
But such uncertainty, common in times of transition, should not overshadow what the end of the Blair-Bush era in Britain holds in store.
Unilateralism and pre-emptive wars are to be replaced by what Brown defines as “an agenda for a hard-headed internationalism,” based on cooperation with multilateral agencies and alliances – the United Nations, NATO, the European Union, and the British Commonwealth.
The new policy seems to shift emphasis to “soft power” strategy aimed at projecting Britain as a global economic and cultural hub.
The City of London, the British Council, Oxfam, and the BBC are now expected to restore the prominence of Britain’s enduring values.
Conspicuously, it is no longer the British, but France’s government under President Nicolas Sarkozy, that is carrying the torch of a possible attack on Iran’s nuclear installations.
But, for Brown’s policy to succeed, it must promote social change and political reform in the Arab world.
That means abandoning Blair’s strategy of confronting the “arc of extremism” with putative “moderates” who, besides offering lucrative markets for arms sales, are in fact autocrats whose conduct has helped fuel the growth of radical Islam.
The “extremists” versus “moderates” language has served only to revive colonial memories in the region and divide it even more deeply.
Post-Blair Britain is becoming a country for which wars that lack international legitimacy can only presage defeat and moral decay.
Of course, international legitimacy can be a vacuous concept when not backed by the capacity to use effective force.
Now incapable of intimidating anyone, Britain has opted for developing its potential to inspire.
Unfortunately, inspiration, too, requires the threat of effective military power to be an effective force for change.
Notwithstanding its many setbacks in recent years, the US remains the only power capable of leading a global strategy that consists in balancing soft and hard power.
May the next American president pursue this course.
Britain’s No-Win Election?
LONDON – With Labour trailing the Conservatives slightly in opinion polls, the British election on May 6 could well produce a “hung” parliament, in which neither major party obtains a majority and the Liberal Democrats hold the balance of power. Depending on which party wins more seats, either Labour’s Gordon Brown or the Conservatives’ David Cameron will become prime minister with the Liberal Democrats’ support.
The surprise is that the Conservatives are not polling far ahead of Labour.
After 13 years in power, Labour started the election with a huge disadvantage: the legacy of Tony Blair.
From being Labour’s most potent asset in 1997, Blair turned into the party’s greatest liability after the Iraq war, and had to be practically forced out in 2006.
His successor, Chancellor of the Exchequer (finance minister) Gordon Brown, was well described by Blair as “clunking.”
A man of charm and humor in private life, he is relentlessly dour in public.
In Britain’s first ever “presidential” television debate the youthful Nick Clegg stole the show for the Liberal Democrats with his freshness and directness.
David Cameron was polished but vague, and the jowly Brown came across as gun loaded with statistics.
But the statistics were not as good as they should have been.
Brown’s reputation for fiscal prudence evaporated with the Great Recession.
Nevertheless, it is the Great Recession that keeps Labour in contention, particularly in the light of the Conservatives’ pledge to start cutting public spending the moment they take power.
This makes people anxious for their jobs.
Most people – bankers and many “experts” excepted – are instinctive Keynesians, even if they have never heard of John Maynard Keynes.
At some level, they understand what Keynes called the “paradox of thrift”: if households and firms are forced to reduce their expenses, and the government simultaneously cuts spending, unemployment will rise, because one person’s spending is another’s income, and the outcome will be less spending and less income all around.
Although there is no real British equivalent of the American revolving door between Washington and Wall Street, the Conservatives are widely considered to be friends of the City of London and soft on rich tax evaders like Lord Ashcroft and Zak Goldsmith. Although the MPs’ expenses scandal – parliamentarians claiming reimbursement for dubious expenses – hit both main parties, the most egregious cases involved wealthy Conservative MPs.
And even though inequality of wealth and income in Britain increased in the 13 years Labour has been in power, this is thought to be something that a left-wing party might seek to correct, whereas there is no similar expectation for a party of the right.
In short, when the power of money is under attack, a party that represents money will have a harder time.
Labour has an obvious interest in fighting the election on their handling of the economic crisis. The Conservatives would have done better to support them on this, while focusing their attack on the government’s economic record as a whole –especially Labour’s addiction to centralization and over-regulation.  But this is going to be difficult to do because their naïve Shadow Chancellor, George Osborne, seems determined to put “cutting the deficit” at the heart of the Conservative program.
Spending cuts, he argues, would restore credibility to Britain’s public finances, thereby quelling the anxieties of businesses, investors, and consumers about future tax increases and inflation.
A more certain future would restore confidence, boosting private investment and ensuring a robust recovery.
Public spending cuts come more naturally to Conservatives, and they have – despite their lack of candor – attempted to make a virtue out of this necessity.
The Conservative manifesto ‘An Invitation to Join the Government of Britain’ is merely a grandiloquent way of saying that under a Conservative government the people will have to look after themselves.
Labour, by contrast, argues that immediate spending cuts would wreck the recovery – that the hole in the economy, not the government budget deficit, is the problem needing most attention.
In practice, both parties are afraid of their convictions.
The Conservatives’ pledge to start cutting the deficit immediately amounts to only a 1% reduction in the coming year.
Any promise of deeper cuts would, they feel, be electoral suicide, even though their model of the economy tells them that the government should be smaller, and that the deficit is unnecessary and even damaging.
Labour’s model of the economy implies maintaining the deficit for as long as needed, and even increasing government spending if the recovery appears to be flagging.
But Labour is too afraid of the markets to say so openly.
So, like St. Augustine, they promise virtue, but not until next year.
In other words, neither major party can afford to blurt out the awkward truth: how much deficit reduction any government can achieve will depend on what happens to the economy over the next five years, and no one can say anything for certain about that.
So the main parties vie with each other in their promises not to cut public services.
Labour will not cut spending on unspecified “front-line services.” The Conservatives will not cut spending on health, international aid, and defense, similarly leaving unclear just where the cuts will be made.
Only the Liberal Democrats are committed to a big cut: scrapping Britain’s nuclear submarines.
Finally, all the parties promise big constitutional changes.
The Conservatives want to reduce the size of the House of Commons by 10%.
Labour wants to reduce the House of Lords’ membership by half and hold referenda on making it wholly elected and on changing the voting system.
The Liberal Democrats want MPs to be elected by proportional representation.
In a hung parliament, Britain’s ancient constitution would become a pawn among the parties as they haggle for a share of power.
In that case, voters would get both more and less than they bargained for.
Britain’s Path of Denial
SANTIAGO – Visit London nowadays and you will notice something strange going on: the worse the British economy tanks, the more fervently Prime Minister David Cameron’s ministers and Tory economists insist that draconian spending cuts are good for economic growth.
Some observers see this as an act of faith (presumably in the virtues of the unfettered market).
Others, such as the economist Paul Krugman, see it as an act of bad faith: the Tories just want smaller government, regardless of the consequences for growth.
The question remains whether there is a non-faith-based argument for cutting back spending to stimulate an economy.
The answer is yes.
In fact, there are two.
Academic research has shown them at work in the past – for example, in Ireland and Denmark during the 1980’s.
Unfortunately for the Tories, neither case for stimulative spending cuts fits Britain’s predicament today.
One argument emphasizes the links between fiscal and monetary policy.
In a country with large fiscal deficits, the central bank may have to keep interest rates high to control inflation.
In this scenario, budget cuts create room for interest rates to fall.
If the country has a floating exchange-rate regime, the currency depreciates, too.
Both of these changes are good for demand and growth.
If their combined impact more than outweighs the initial contractionary effect of expenditure cuts, then the economy may well pick up after a round of fiscal tightening.
But little effort is needed to see that this not the British story today.
The Bank of England’s policy interest rate has remained just above zero for more than two and a half years.
Regardless of the government’s fiscal-policy stance, this interest rate cannot move below zero.
The second case for expansionary fiscal contraction is subtler.
In an economy in which public debt is growing quickly, the longer fiscal adjustment is put off, the larger and costlier it will have to be.
Households and companies understand this and cease to consume or invest in anticipation of the painful spending cuts and tax hikes to come.
So, the argument goes, a courageous Tory government that cuts spending today spares citizens that future pain.
Then, feeling richer and brimming with optimism, the private sector goes on a spending spree and the economy booms.
Put differently: without the budget cuts, Britain would have been Spain – or perhaps even Portugal or Greece.
With the budget cuts in place and the markets reassured, Britain no longer risks resembling an unruly Mediterranean country.
Thus, Britons will soon start spending again and economic growth will ensue.
So far, so good – except that this story, too, does not apply to Britain.
There is no sign of a crisis narrowly averted.
Ten-year yields on British government bonds were at historic lows long before Cameron took office.
If a crisis was imminent, the markets clearly took no notice.
And if the coalition government’s budget cuts had improved expectations about future output, that greater confidence would have shown up in higher equity prices – but there is no evidence of this, either.
In short, private demand in Britain is flatlining rather than surging.
Add to the mix the collapse in public-sector demand that comes from deep budget cuts, and you have all the ingredients necessary for prolonged stagnation.
And stagnation, if not worse, is precisely what recent British economic reports are showing.
The longer this goes on, the more serious the problem will become.
The long-term unemployed will drop out of the labor market.
Firms that invest little will become uncompetitive.
In the jargon of economists, low demand will engender low supply, making a non-inflationary recovery even more difficult to achieve.
What is to be done in Britain?
With the eurozone tumbling from crisis to crisis, salvation will not come from abroad.
At home, all that is left is unconventional monetary policy.
The Bank of England recently injected an additional £75 billion into the economy via so-called quantitative easing.
Now, that is real cash, not just an act of faith.
Britain’s Silent Election
LONDON – Other people’s elections are usually baffling and boring, which is certainly true of the United Kingdom’s coming vote on May 7; indeed, many Britons share the sentiment.
The longest election campaign in UK history has been strikingly short of focus.
Nonetheless, the campaign contains three important pointers for other Western democracies.
The first pointer is that Bill Clinton’s famous campaign slogan from 1992 – “It’s the economy, stupid” – is itself stupid, or at least insufficient.
If it was the economy that would decide Britain’s election, Prime Minister David Cameron would be leading a much more confident campaign.
For the past 18 months or so, the UK has had Europe’s fastest-growing economy, and at times has even outpaced the United States.
The unemployment rate, now 5.6%, has fallen to less than half that of the eurozone.
But favorable economic indicators have made little difference to the standing of Cameron’s Conservatives in opinion polls, and have done nothing to save their coalition partner, the centrist Liberal Democrats, from a severe slump.
Too many voters, it seems, still do not feel better off, and for good reason: average incomes have barely begun to rise, following seven painful years.
So the right slogan in this campaign might be, “It’s the living standards, stupid.” Or, more accurately (though more cumbersomely): “It’s the perception of future living standards, stupid, and the perception of fairness surrounding those prospects.”
This seems to be why, although it has only a small lead of 2-4 percentage points in the polls, the center-left Labour Party has had the best of the campaign.
Labour’s leader, Ed Miliband, was widely derided last year as weak, unconvincing, and unlikeable; but, perhaps benefiting from low expectations, he has looked steadily more credible and statesmanlike as the campaign has gone on.
The second pointer is that foreign affairs, though rarely a major factor in any country’s national elections, can contribute to a general sense of unease about political leadership.
It had been widely assumed that the UK’s continued membership in the European Union would be a leading campaign issue, given the rise of the UK Independence Party and Cameron’s pledge that, if re-elected, he would hold a referendum on the question by 2017.
Indeed, Cameron’s promise is arguably the most consequential issue at stake in the British election: if he remains Prime Minister, there will be a referendum; if Miliband takes over, there will not be.
Britain’s strategic future rests on this choice.
Yet there has been near-silence on this choice.
Both UKIP and its charismatic leader, Nigel Farage, have slipped in opinion polls and have struggled to get attention.
More important, Cameron has said almost nothing about either Europe or immigration; and, though Miliband’s clearly stated pro-EU stance has endeared his candidacy to many business leaders, he, too, has played down the issue.
Perhaps this reflects my own bias, but I suspect that this evasiveness on the part of Britain’s main political parties has weakened support for them, by diminishing their status as valid representatives of the country.
Voters may not list Europe or foreign affairs among the main issues that concern them.
But the daily news about migrants dying in the Mediterranean, the war in Ukraine, Greece’s possible default, the turmoil in Syria, Iraq, Yemen, Libya, and Gaza, Iran’s nuclear program, and more heighten voters’ awareness that their country needs to be defended robustly, by a government with a coherent foreign policy.
And yet Britain’s defense forces are weaker than at any time since the 1930s.
The general perception is that Britain’s voice in international affairs is less influential than at any time since then, too.
Whatever voters think Britain’s foreign and defense policy should be, they believe their country should have one.
The final pointer of the UK election may partly reflect the vacuum in national leadership that such silence epitomizes.
Whatever the result of the election, the most striking phenomenon will be the rise of regionalism, most notably a surge in support for the pro-independence Scottish National Party (SNP).
No one can predict whether the SNP might end up in the paradoxical position of joining a coalition with Labour to govern a country that it was campaigning to leave in last September’s independence referendum.
But the SNP’s likely electoral gain is too large to be explained by secessionist sentiment alone.
The party appears to be attracting many people who voted against independence but who want more regional autonomy and a stronger voice for Scotland in the Westminster Parliament.
The absence of a broader “feel good” factor from economic recovery, resentment of economic inequality, mistrust of national political leaders, and greater faith in localism: these are the main features of Britain’s election campaign.
Whether or not they make Miliband the next prime minister (in a coalition with the Liberal Democrats, the SNP, or both), they are likely to characterize elections elsewhere as well in the years ahead.
The Battle for Britain
BRUSSELS – The outcome of the United Kingdom’s general election this week will set the direction the country will take in its long-term relations with the European Union.
And yet, with the unfortunate exception of the UK Independence Party, the question went mostly unaddressed during the campaign.
But voters know that it could soon move to the center of British politics, regardless of whether the Conservatives are returned to power or are replaced by Labour.
Britain is not quite certain about its role in Europe.
It had hoped that a larger EU would be less integrated.
But the EU’s enlargement in 2004 failed to stop the momentum toward “ever-closer union.”
Of the ten countries that joined then, seven are now in the eurozone.
Whatever problems the UK faces now pale in comparison to those that would emerge if it were to withdraw from the EU.
Indeed, the British people would likely realize only after the fact that the problems they attributed to the EU actually originate at home.
The problem now is that the British stance is strengthening the centrifugal forces now at work in the EU.
Prime Minister David Cameron’s promise to hold a referendum on membership by 2017 if he is re-elected is not helpful in solving the problems that Britain and the rest of Europe face together: the need for higher growth and greater social inclusion amid unprecedented foreign-policy challenges.
Thus there is a certain paradox in Britain’s acting as it does.
The very possibility of “Brexit” contradicts everything that the British had sought to build over the years in Europe, particularly the common market.
Britons of all political stripes should recognize their country’s indispensability in the further development of the common market and in mapping out economic governance in a way that serves everyone’s interests.
At the same time, we must confront the fact that the UK’s deep divisions on Europe will not disappear, regardless of the election’s outcome.
The debate about the EU is too ingrained in British discourse.
That is why it is important to reiterate that the EU member states are not about to agree to any “re-nationalization” negotiations on the Union’s powers that require treaty-level changes affecting the common market’s core components, such as the free movement of people.
Likewise, it must be made clear that the EU will not revise the UK’s terms of membership at the cost of further progress on urgently needed reforms.
But EU-British relations need not be antagonistic.
In fact, the European Commission has been sounding distinctly British in recent months, with promises to limit – and even repeal – parts of European legislation deemed too intrusive or impediments to economic growth.
Indeed, the preparations for negotiations on a new agreement among the EU institutions are less focused on the nature of the output of the legislation than on the sheer number of laws now on the books.
This approach can be promising in terms of the dialogue with the new British government.
And yet, although a new European Treaty might not emerge in the coming years, limiting further integration, the makeshift response to Europe’s economic crisis has fueled calls for a new legal basis for continuing the necessary eurozone reforms.
As a result, work on a new treaty, initiated by the European Parliament Committee on Constitutional Affairs, will soon be taken up by other European institutions.
What will most likely emerge is a eurozone pact that member states can sign and ratify at will, making it impossible to veto.
One step in preparing for a possible withdrawal has been the British government’s decision to undertake a wide-ranging review of the EU’s powers and their impact on the UK.
The purpose of the review was to determine whether the division of competences between the EU and UK was, broadly speaking, appropriate.
The outcome, it must be said, was substantive and objective – which is promising in terms of moving from populist pronouncements to serious dialogue.
Interestingly, the British government’s review does not mention the need to transfer to the national level any of the competences defined by the Treaty of Lisbon, which would require the unanimous consent of the member states (and thus can be ruled out as a possibility).
But some powers could be renationalized at a level lower than primary law, without treaty changes, primarily through a shift in the roles of the EU and the British government in the case of shared powers.
So perhaps achieving the Cameron government’s objective – to remain in a reformed EU after renegotiating the UK’s membership and renationalizing certain European competences – does not actually require treaty modification.
I hope the new British government will view matters this way, because the economic, legal, and political consequences of Brexit would be severe.
Exchanging EU membership for membership in the European Economic Area – along with Norway, Iceland, and Liechtenstein – would mean losing all influence over the shape of the internal market and the EU budget.
So would the Swiss option of concluding bilateral agreements with the EU (which member states, moreover, would be unlikely to accept).
A better governed, more growth-oriented Europe is in the fundamental interest of the UK and the EU alike.
The Digital Road From Poverty
COPENHAGEN – Where should the global community focus its attention over the next 15 years?
Health, nutrition, and education may seem like obvious choices; more surprisingly, there is a strong case for making broadband access a top priority.
Consider this simple fact: Tripling mobile Internet access over the next 15 years could make the developing world $22 trillion richer.
Such improvement in the lives and earning potential of poor people could indirectly help with the other challenges; after all, more prosperous people tend to be healthier, better fed, and more highly educated.
This discussion matters, because the world’s 193 national governments will meet at the United Nations in September to finalize a list of development targets for the world to meet by 2030.
My think tank, the Copenhagen Consensus, has asked 60 teams of economists, including several Nobel laureates, to investigate which targets would do the most good for every dollar spent, to help this meeting make the best choices.
In a new analysis, Emmanuelle Auriol and Alexia Lee González Fanfalone of the Toulouse School of Economics suggest that broadband could be one of the best investments for the future.
Clearly, the rapid rollout of broadband services has transformed the lives of people in the industrialized world; there is every reason to expect that developing countries could benefit at least as much.
Access to market information, for example, can ensure that farmers selling their surplus crops are not cheated by unscrupulous traders, and that fishermen can land their catch at the port offering the best price. A McKinsey report estimates that bringing mobile broadband in the developing world to the levels of the industrial world could add $400 billion annually to global GDP and create more than ten million jobs.
Similarly, the World Bank has shown that a 10% increase in broadband penetration increased GDP growth by 1.4% in low- to medium-income countries. This implies that closing the persistent digital divide between the world’s developed and developing regions could give a big boost to development.
For example, mobile broadband penetration stands at 83% in the former, but only 21% in the latter.
While governments in Europe and elsewhere continue to invest in faster and better broadband, the biggest benefits will always come from providing Internet access to people who do not already have it, most of whom live in developing and emerging countries.
In fact, developing countries can leap-frog the developed world by going straight to mobile broadband, thereby avoiding the need for expensive fiber-optic cables for the “last mile” – or access point – of the network.
Mobile phone use is already spreading rapidly in developing countries, making old-style fixed infrastructure unnecessary; data services can use the same system.
In China, three-quarters of Internet users get online via mobile phones already; in Ethiopia and Uganda, four out of five do.
Thus, given the pervasiveness of mobile telephony and recent technological advances in mobile networks, rolling out mobile broadband seems a cost-effective solution.
The study by Auriol and Fanfalone shows that increasing mobile broadband about three-fold in developing regions – from 21% to 60% – will cost a substantial $1.3 trillion, as a significant amount of extra infrastructure is needed to establish about three billion more Internet connections. But it will also increase GDP growth.
By 2020, the benefits would be almost $500 billion annually, and would continue to rise each year.
Over the coming decades, the total benefit would reach about $22 trillion.
As a result, every dollar spent on mobile broadband in the developing world would yield an estimated gain of $17.
That looks like a really smart investment.
Of course, broadband is such an important enabling technology that it is difficult to predict its full economic impact, which will vary with local circumstances.
What the Auriol-Fanfalone study does show, though, is that rolling out Internet access is money very well spent.
Jobs are created directly in the organization providing the network and indirectly in the supply chain.
Once in place, broadband helps create more jobs in the wider economy.
Companies become more efficient and innovative.
All of these factors increase the pace of economic growth.
Apart from the direct effects on economic growth and job creation, broadband can have some other very important benefits for Least Developed Countries.
Nine hundred million people live in LDCs, and, as Pantelis Koutroumpis of Imperial College London points out, only 6.7% are Internet users.
On the other hand, almost 60% of these people use a mobile phone.
They could profit from smartphones with simple adaptations that can be used in a range of health-screening tests (for example, for cardiovascular disease, HIV and other pathogens, or malaria), with the results being sent straight to hospitals for an immediate response.
The potential benefits of mobile broadband for LDCs extend even further.
Internet access could provide educational material and improve schooling.
And it could enable real time, on-demand transport services for remote areas.
With the Internet now such an important resource in the modern world, broadband has become a vital technology, promising to boost economic growth, lift people out of poverty, and improve their health, nutrition, and education.
When governments finalize the next set of global development targets, there is now a strong case for broadband access to be among them.
Broken Promises
PRINCETON – In 2000, the world’s leaders met in New York and issued a ringing Millennium Declaration, promising to halve the proportion of people suffering from extreme poverty and hunger by 2015.
They also pledged to halve the proportion of people without safe drinking water and sanitation; move toward universal and full primary schooling for children everywhere – girls as well as boys; reduce child mortality by two-thirds and maternal mortality by three-quarters; and combat HIV/AIDS, malaria, and other major diseases.
These pledges, reformulated as specific, measurable targets, became the Millennium Development Goals (MDGs).
Last month, ten years on from that meeting, world leaders returned to New York for a United Nations summit that adopted a document called Keeping the Promise, which reaffirmed the commitment to meeting the goals by 2015.
The UN press release called the document a “global action plan” to achieve the MDGs, but it is more an expression of aspirations than a plan.
What chance do we really have of keeping the promises made in 2000?
As the Yale philosopher Thomas Pogge has pointed out, the task has been made easier by moving the goal posts.
Even before 2000, the World Food Summit, held in Rome in 1996, pledged to halve the numberof undernourished people by 2015.
By contrast, the corresponding MDG was to halve the proportion of the world’s people who are suffering from hunger (as well as of those living in extreme poverty).
Because the world’s population is rising, halving the proportion of people suffering from hunger (and extreme poverty) means that the number will not be halved.
But worse was to come. When the Millennium Declaration was rewritten as a set of specific goals, the baseline for calculating the proportion to be halved was set not at 2000, but at 1990.
That meant that progress already made could contribute to the achievement of the goal.
And the goal became halving “the proportion of people in the developing world,” which makes a big difference, because the developing world’s population is growing faster than the population of the world as a whole.
The net effect of all these changes, Pogge calculates, is that, whereas world leaders pledged in 1996 that by 2015 they would reduce the number of undernourished people to no more than 828 million, now they are pledging only to reduce the number in extreme poverty to 1.324 billion.
Since extreme poverty is responsible for about one-third of all human deaths, this difference effectively means that – if the final promise is actually honored – each year about six million more people will die from poverty-related causes than would have died had the original promise made in Rome been kept.
In any case, according to a recent World Bank/International Monetary Fund report, we are not on track to meet even the scaled-back global target of halving the proportion of hungry people in developing countries.
Rising food prices – possibly related to climate change – have reversed past progress and last year briefly pushed the number suffering from hunger above the one-billion mark.
That this should happen while developed nations waste hundreds of millions of tons of grain and soybeans by feeding them to animals, and obesity reaches epidemic proportions, undermines our claims to believe in the equal value of all human life.
The target of halving the proportion of people in extreme poverty is within reach, but mainly because of economic progress in China and India.
In Africa, after economic stagnation in the 1990’s, a decade of encouraging economic growth is reducing the proportion of the population living in extreme poverty, but not quickly enough to halve it by 2015.
There is better news on achieving gender parity in education, a key to reaching other goals, including lower infant mortality, which often comes about because educated women have fewer children.
We also have a good chance of meeting the target of reducing by half the proportion of people in developing countries without safe drinking water – but to achieve the same with sanitation is proving more difficult.
On health goals, however, we are not even close. Maternal mortality is falling, but not fast enough.
More people with HIV/AIDS are getting inexpensive anti-retroviral drugs and their life-expectancy has increased, but universal access is still far off, and the disease is still spreading, if more slowly than before.
Progress has been made in reducing malaria and measles, and the rate of child mortality has fallen partly as a result, but the goal of a two-thirds reduction will not be met.
For a long time, rich countries have promised to reduce poverty, but have failed to match their words with adequate action.
Of course, some important progress has been made.
Millions of lives have been saved, but millions more could be saved.
To make sustainable progress in reducing extreme poverty will require improvements in both the quantity and quality of aid.
Just a handful of countries – Denmark, Luxembourg, the Netherlands, Norway, and Sweden – have met or exceeded the UN’s modest target of 0.7% of GDP for foreign development assistance.
But, without trade reform and action on climate change, more and better aid will not suffice.
For now, it looks very much as if, come 2015, the world’s leaders will have failed to keep their (watered-down) promises.
That means that they will be responsible for permitting the needless deaths, every year, of millions of people.
Browser Wars II
PRINCETON – Ten years after its birth, Google is threatening to re-open the “Browser Wars” of the 1990’s, when Microsoft’s Internet Explorer eliminated its rival, Netscape’s Navigator.
This time, however, it is Google’s Chrome that promises to transform the economics underlying the entire software industry, and not only because of its technical innovation in linking very different kinds of software to an Internet browser.
In doing so it eliminates the need for a program such as Windows, which previously controlled access to every kind of software.
Google’s new technology is impressive, and will no doubt prove convenient for many consumers once the initial security problems are resolved.
But the fundamental innovation lies elsewhere. Chrome is a breakthrough because it offers a completely novel approach to a dilemma created by the legal and regulatory regime of competition policy in the world’s two major legal jurisdictions, the United States and the European Union.
Between 1995 and 1997, Explorer almost completely eradicated Navigator, although Navigator had initially opened up the World Wide Web for most users and its dominance appeared unassailable.
The major advantage of Explorer was not so much a technical one, but rather that Microsoft’s Windows provided the operating software for the overwhelming majority of personal computers.
As a result, an Internet browser – and, indeed, other media software – could be integrated into the Windows framework as an entire software package.
The ability to have operating systems and software bundled together made life much easier for the average consumer.
You simply got everything you wanted (and probably much more) with the purchase of a computer.
But this also reduced the possibility of choice, of selecting and combining different software.
Microsoft’s critics have complained endlessly about this, claiming that the browser’s integration into the operating system drove out inherently superior software solutions.
For instance, many users preferred the word-processing program WordPerfect to Microsoft’s Word, but the ease of having a bundled solution meant that Word had the advantage of being used more widely, and thus drove its rival into extinction.
Microsoft’s advantage, and its business model, goes back to another protracted legal struggle.
Computer software was originally not a commodity to be bought, but a service.
IBM built up a massively dominant position because it leased a carefully custom-designed and individualized package.
It did not sell anything, computers or software.
IBM’s leasing model seemed to challenge the entire legal philosophy of US competition policy that was established in the New Deal era.
President Franklin Roosevelt had originally wanted to control American business by setting price levels, but when the US Supreme Court rejected this approach, his administration started to use competition policy to challenge the positions of market-dominant companies.
Competition policy, however, faces great difficulty in dealing with industries in which technical breakthroughs can create apparently instant monopolies.
In line with the philosophy of challenging dominant positions, the US Department of Justice in 1969 started a major investigation of IBM, which had just revolutionized business computing with its 360 line.
The case dragged on until it was dismissed in 1982 as being “without merit.”
But so long as the anti-trust case remained a threat, IBM was nervous, and began to back away from its business model.
Microsoft’s current position is a direct outcome of the old anti-trust case pushed against IBM.
When IBM launched its personal computer, it could easily have bundled it together with its own operating software, and in this way maintained its dominance.
But, worried that the US authorities would accuse it of attempting to control a new market, IBM left the Disk Operating System (DOS) for the new PCs to a tiny new company that no one saw as a threat: Microsoft.
Of course, Microsoft ran into its own legal troubles when it took over IBM’s former dominant position, waging long drawn-out court cases on both sides of the Atlantic.
The EU, which has looked increasingly to the US model for competition law, began proceedings against Microsoft in 1993.
The US started only after Microsoft’s victory in the browser wars, with a case beginning in 1998.
Initially, both cases went decisively against Microsoft, with a US ruling in 2000 that would have required the company’s break-up, although this was subsequently overturned on appeal.
Google’s position is so interesting and so powerful because the legal philosophy that challenges any ascendant position, even in an industry that seems naturally to produce monopoly, remains in place.
Leasing software and hardware, as IBM initially did, is problematic.
But so is selling computer services on a one-time basis, in the manner of Microsoft.
By contrast, on the face of it, there cannot be anything wrong with offering services or products for free, and then simply using the resulting advertising possibilities.
Google’s model is a neat example of what might be termed “post-modern economics.”
The amazing story of technical innovation is that it was, and remains, hard for innovators to benefit from radical technological breakthroughs.
Industrial Revolution-era cotton makers in England did not make a great deal of money, even though their products revolutionized personal life and hygiene, and even extended life expectancy.
In our own time, air travel has become much cheaper, but airlines lose money; telephoning is no longer unaffordable, but the telecommunications companies lost fortunes by over-bidding for mobile telephony rights.
Google has taken the logic of loss-making technology to its ultimate culmination of not charging at all for its product.
America’s Enduring Leadership
WASHINGTON, DC – Many observers have cited the crisis in Ukraine as yet another example of American retrenchment and declining global influence.
Some have also interpreted it as evidence of a Russian-led effort to mobilize the major emerging economies – Brazil, India, and China – against the West.
While there is a kernel of truth in both narratives, each is a gross exaggeration, as is the notion that America’s capacity to shape a secure and prosperous international system is in decline.
The US has had a rough few years.
After two long, draining wars, its withdrawal from Afghanistan is inching along slowly.
In Syria, Russian and Chinese intransigence have frustrated its efforts to find a diplomatic solution.
And China’s growing assertiveness in the South and East China Seas is threatening US regional dominance, while raising the risk of a crisis with America’s close ally Japan.
Meanwhile, many of America’s European allies are mired in economic malaise.
And, though the US economy is recovering from the global financial crisis, America’s treasury and reputation has been dealt a severe blow.
Nonetheless, the US remains the most influential global actor – not least because of the strong alliances that it maintains.
All of the attention given to China’s economic rise – and, to a lesser extent, that of India and Brazil – has overshadowed the success of US allies like South Korea, Turkey, Indonesia, and Germany.
In fact, the vast majority of the world’s strongest economies are allied with the US.
Moreover, far from coalescing into a united anti-Western bloc, the emerging powers remain sharply divided.
There are far more overlapping interests between the established and the emerging powers than the “West versus the rest” narrative suggests; indeed, the rising powers often share as many interests with their Western counterparts as they do with each other.
Given this, even the economic powerhouses that are not US allies do not want to upend the existing world order, but rather to gain more space within it, such as through increased authority in international institutions.
After all, they rose precisely by integrating themselves into the global economic system.
Even China, which arguably seeks to curtail US leadership in some domains, has no choice but to cooperate with the US and its allies on many foreign-policy issues.
China can challenge American leadership only if others follow it, and so far it has found few takers.
Only Russia has sought to play a more destabilizing role – during the global financial crisis, in Syria, and now in Ukraine.
To be sure, the emerging powers do share a strong inclination toward rivalry – or at least toward autonomy – which is rooted in what might be called the “psychology of rise.”
But they know that an excessively aggressive stance toward the US would undermine their interest in a stable global economy and the safe passage of their goods and energy through international sea and air routes.
This is particularly true for China, because its domestic stability and international influence depend largely on its ability to maintain rapid economic growth, which demands ever-larger quantities of imported energy and other natural resources.
To ensure unimpeded access to these critical resources, China needs stability in the countries from which it can extract them, in the markets in which it can invest, and in the routes linking China to its suppliers.
But China’s capacity to maintain these conditions is extremely limited – and in some cases (as in the Persian Gulf), it is heavily dependent on US military power.
In short, striking a balance between the impulse toward rivalry and incentives encouraging restraint is the most important dynamic in contemporary international affairs.
And, for now, the global balance is tipping toward restraint.
Of course, the US will invariably face new challenges, all of which are on vivid display in Ukraine.
Countries will be torn between retaining their security ties to the US and building new economic linkages with China.
The complex global systems in which America’s interests are enmeshed will test US diplomacy.
Perhaps the most dangerous challenge is the prospect of emerging powers leaning increasingly toward autonomy, instead of alliance.
China and India may not have been happy about Russia’s actions in Ukraine, but none of the emerging economies could bring itself to vote against Russia in the United Nations General Assembly, even though the vote was ultimately meaningless.
(China took the strongest position in the Security Council by abstaining.)
They are not sticking with Russia; but they are not joining a Western effort to isolate Russia, either.
Ultimately, however, the world’s relentless evolution plays to America’s most important strength: its unique ability to build broad and disparate coalitions.
The range of alliances and relationships that the US has created, including with several of the rising powers, far surpasses that of any other global actor – and will continue to do so for the foreseeable future.
This is perhaps the most enduring feature of American power.
There is no denying that the US no longer enjoys the unrivaled hyperpower status that it did at the end of the Cold War.
But, for the time being, the international system remains America’s to lead.
Bubble Spotting
NEW HAVEN – People frequently ask me, as someone who has written on market speculation, where the next big speculative bubble is likely to be.
Will it be in housing again?
Will it be in the stock market?
I don’t know, though I have some hunches.
It is impossible for anyone to predict bubbles accurately.
In my view, bubbles are social epidemics, fostered by a sort of interpersonal contagion.
A bubble forms when the contagion rate goes up for ideas that support a bubble.
But contagion rates depend on patterns of thinking, which are difficult to judge.
Big speculative bubbles are rare events.
(Little bubbles, in the price of, say, individual stocks, happen all the time, and don’t qualify as an answer to the question.)
And, because big bubbles last for many years, predicting them means predicting many years in the future, which is a bit like predicting who will be running the government two elections from now.
But some places appear a little more likely than others to give rise to bubbles.
The stock market is the first logical place to look, as it is a highly leveraged investment – and has a history of bubbles.
There have been three colossal stock-market bubbles in the last century: the 1920’s, the 1960’s, and the 1990’s.
In contrast, there has been only one such bubble in the United States’ housing market in the last hundred years, that of the 2000’s.
We have had a huge rebound from the bottom of the world’s stock markets in 2009.
The S&amp;P 500 is up 87% in real terms since March 9 of that year.
But, while the history of stock-market prediction is littered with too much failure to try to decide whether the bounceback will continue much longer, it doesn’t look like a bubble, but more like the end of a depression scare.
The rise in equity prices has not come with a contagious “new era” story, but rather a “sigh of relief” story.
Likewise, home prices have been booming over the past year or two in several places, notably China, Brazil, and Canada, and prices could still be driven up in many other places.
But another housing bubble is not imminent in countries where one just burst.
Conservative government policies will probably reduce subsidies to housing, and the current mood in these markets does not seem conducive to a bubble.
A continuation of today’s commodity-price boom seems more likely, for it has more of a “new era” story attached to it.
Increasing worries about global warming, and its effects on food prices, or about the cold and snowy winter in the northern hemisphere and its effects on heating fuel prices, are contagious stories.
They are even connected to the day’s top story, the revolutions in the Middle East, which, according to some accounts, were triggered by popular discontent over high food prices – and which could themselves trigger further increases in oil prices.
But my favorite dark-horse bubble candidate for the next decade or so is farmland – and not just because there have been stories in recent months of booming farmland prices in the US and the United Kingdom.
Of course, farmland is much less important than other speculative assets.
For example, U.S. farmland had a total value of $1.9 trillion in 2010, compared with $16.5 trillion for the US stock market and $16.6 trillion for the US housing market.
And large-scale farmland bubbles are quite rare: there was only one in the US in the entire twentieth century, during the great population scare of the 1970’s.
But, farmland, at least in certain places, seems to have the most contagious “new era” story right now.
It was recently booming, up 74% in real terms in the US in the decade ending with its price peak, in 2008.
And the highly contagious global-warming story paints a scenario of food shortages and shifts in land values in different parts of the world, which might boost investor interest further.
Moreover, people nowadays easily imagine that the housing and farmland markets always move together, because prices in both boomed in recent memory, in the early 2000’s.
But, from 1911 to 2010 in the US, the correlation between annual real growth of prices for homes and farmland was only 5%, and the latest data on farm prices have not shown anything like the decline in home prices.
By 2010, real farm prices in the US had fallen only 5% from their 2008 peak, compared to the 37% decline in real home prices since their peak in 2006.
The housing-price boom of the 2000’s was little more than a construction-supply bottleneck, an inability to satisfy investment demand fast enough, and was (or in some places will be) eliminated with massive increases in supply.
By contrast, there has been no increase in the supply of farmland, and the stories that would support a contagion of enthusiasm for it are in place, just as they were in the 1970’s in the US, when a similar food-price scare generated the century’s only farmland bubble.
Still, we must always bear in mind the difficulty of forecasting bubbles.
And, for daring investors, it is not enough to find a bubble to pile into.
They must also try to determine when to cash out and put their money elsewhere.
Bubbles without Markets
NEW HAVEN - A speculative bubble is a social epidemic whose contagion is mediated by price movements.
News of price increase enriches the early investors, creating word-of-mouth stories about their successes, which stir envy and interest.
The excitement then lures more and more people into the market, which causes prices to increase further, attracting yet more people and fueling “new era” stories, and so on, in successive feedback loops as the bubble grows.
After the bubble bursts, the same contagion fuels a precipitous collapse, as falling prices cause more and more people to exit the market, and to magnify negative stories about the economy.
But, before we conclude that we should now, after the crisis, pursue policies to rein in the markets, we need to consider the alternative.
In fact, speculative bubbles are just one example of social epidemics, which can be even worse in the absence of financial markets.
In a speculative bubble, the contagion is amplified by people’s reaction to price movements, but social epidemics do not need markets or prices to get public attention and spread quickly.
Some examples of social epidemics unsupported by any speculative markets can be found in Charles MacKay’s 1841 best seller Memoirs of Extraordinary Popular Delusions and the Madness of Crowds.The book made some historical bubbles famous: the Mississippi bubble 1719-20, the South Sea Company Bubble 1711-20, and the tulip mania of the 1630’s.
But the book contained other, non-market, examples as well.
MacKay gave examples, over the centuries, of social epidemics involving belief in alchemists, prophets of Judgment Day, fortune tellers, astrologers, physicians employing magnets, witch hunters, and crusaders.
Some of these epidemics had profound economic consequences.
The Crusades from the eleventh to the thirteenth century, for example, brought forth what MacKay described as “epidemic frenzy” among would-be crusaders in Europe, accompanied by delusions that God would send armies of saints to fight alongside them.
Between one and three million people died in the Crusades.
There was no way, of course, for anyone either to invest in or to bet against the success of any of the activities promoted by the social epidemics – no professional opinion or outlet for analysts’ reports on these activities.
So there was nothing to stop these social epidemics from attaining ridiculous proportions.
MacKay’s examples may seem a bit remote to us now.
Some examples that we might relate to better can be found in the communist, centrally planned economies of much of the twentieth century, which also had no speculative markets.
To be sure, events in these economies might seem attributable simply to their leaders’ commands.
But social contagions took hold in these countries even more powerfully than they have in our “bubble” economies.
China’s Great Leap Forward in 1958-61 was a market-less investment bubble.
The plan involved both agricultural collectivization and aggressive promotion of industry.
There were no market prices, no published profit-and-loss statements, and no independent analyses.
At first, there was a lot of uninformed enthusiasm for the new plan.
Steel production was promoted by primitive backyard furnaces that industry analysts would consider laughable, but people who understood that had no influence in China then.
Of course, there was no way to short the Great Leap Forward.
The result was that agricultural labor and resources were rapidly diverted to industry, resulting in a famine that killed tens of millions.
The Great Leap Forward had aspects of a Ponzi scheme, an investment fraud which attempts to draw in successive rounds of investors through word-of-mouth tales of outsize returns.
Ponzi schemes have managed to produce great profits for their promoters, at least for a while, by encouraging a social contagion of enthusiasm.
Mao Zedong, on visiting and talking to experts at a modern steel plant in Manchuria, is reported to have lost confidence that the backyard furnaces were a good idea after all, but feared the effects of a loss of momentum.
He appears to have been worried, like the manager of a Ponzi scheme, that any hint of doubt could cause the whole movement to crash.
The Great Leap Forward, and the Cultural Revolution that followed it, was a calculated effort to create a social contagion of ideas.
Some might object that these events were not really social epidemics like speculative bubbles, because a totalitarian government ordered them, and the resulting deaths reflect government mismanagement more than investment error.
Still, they do have aspects of bubbles: collectivization was indeed a plan for prosperity with a contagion of popular excitement, however misguided it looks in retrospect.
The recent and ongoing world financial crisis pales in comparison with these events.
And it is important to appreciate why.
Modern economies have free markets, along with business analysts with their recommendations, ratings agencies with their classifications of securities, and accountants with their balance sheets and income statements.
And then, too, there are auditors, lawyers and regulators.
All of these groups have their respective professional associations, which hold regular meetings and establish certification standards that keep the information up-to-date and the practitioners ethical in their work.
The full development of these institutions renders really serious economic catastrophes – the kind that dwarf the 2008 crisis – virtually impossible.
Bubble Trouble
The future of the housing boom, and the possible financial repercussions of a substantial price decline in coming years, is a matter of mounting concern among governments around the world.
I learned this first-hand while attending this year’s Jackson Hole Symposium in the remote wilderness of Wyoming, where, ironically, there are almost no homes to buy.
The howls of coyotes and bugling of elk rang out at night. But, by day, everyone was talking about real estate.
This conference has grown to be a major international event for government monetary policymakers, with governors or deputy governors of 34 central banks attending this year.
Roughly two-thirds of these countries have had dramatic housing booms since 2000, most of which appear to be continuing, at least for the time being.
But there was no consensus on the longer-run outlook for home prices.
Of all these countries, the United States appears to be the most likely to have reached the end of the cycle.
According to the Standard &amp;
Poor’s/Case-Shiller US National Home Price Index, US home prices increased 86% in real, inflation-corrected, terms from 1996 to 2006, but have since fallen 6.5% – and the rate of decrease has been accelerating.
That looks like the beginning of the end of the boom, though, of course, one can never be sure.
I presented a bearish long-run view, which many challenged, but no one obviously won the argument.
Nevertheless, an outside observer might have been struck by the weight given to the possibility that the decade-long boom might well suffer a real reversal, followed by serious declines.
There seems to be a general recognition of substantial downside risk, as the current credit crisis seems to be related to the decline in US home prices that we have already seen.
The boom, and the widespread conviction that home prices could only go higher, led to a weakening of lending standards.
Mortgage lenders seem to have believed that home buyers would not default, because rising prices would make keeping up with their payments very attractive.
Moreover, the boom resulted in a number of financial innovations, which may have been good ideas intrinsically, but which were sometimes applied too aggressively, given the risk of falling prices.
Mortgage-backed securities were urged onto investors for whom they were too risky.
As with homebuyers, all would be well, the reasoning went, on the premise that home prices continue to rise at a healthy pace.
At the Jackson Hole conference, Paul McCulley of PIMCO, the world’s largest bond fund, argued that in the past month or two we have been witnessing a run on what he calls the “shadow banking system,” which consists of all the levered investment conduits, vehicles and structures that have sprung up along with the housing boom.
The shadow banking system, which is beyond the reach of bank regulators and deposit insurance, fed the boom in home prices by helping provide more credit to buyers.
Bank runs occur when people, worried that their deposits will not be honored, hastily withdraw their money, thereby creating the very bankruptcy that they feared.
It is no coincidence that this new kind of bank run originated in the US, which is the clearest example of falling home prices in the world today.
When home prices stop rising, recent homebuyers may lose the enthusiasm to continue paying their mortgages – and investors lose faith in mortgage-backed securities.
The US Federal Reserve is sometimes blamed for the current mortgage crisis, because excessively loose monetary policy allegedly fueled the price boom that preceded it.
Indeed, the real (inflation-corrected) federal funds rate was negative for 31 months, from October 2002 to April 2005.
The only precedent for this since 1950 was the 37-month period from September 1974 to September 1977, which launched the worst inflation the US has seen in the last century.
What then helped produce a boom in consumer prices now contributed to a boom in home prices.
But loose monetary policy is not the whole story.
The unusually low real funds rate came after the US housing boom was already well underway.
According to the Standard &amp;
Poor’s/Case-Shiller US National Home Price Index, home prices were already rising at almost 10% a year in 2000 – a time when the Fed was raising the federal funds rate, which peaked at 6.5%.
The rapid increase thus appears to be mostly the result of speculative momentum that occurred before the interest-rate cuts.
Alan Greenspan, the former Fed chairman, recently said that he now believes that speculative bubbles are important driving forces in our economy, but that, at the same time, the world’s monetary authorities cannot control bubbles.
He is mostly right: the best thing that monetary authorities could have done, given their other priorities and concerns, is to lean against the real estate bubble, not stop it from inflating.
The current decline in home prices is associated just as clearly with waning speculative enthusiasm among investors, which is likewise largely unrelated to monetary policy.
The world’s monetary authorities will have trouble stopping this decline, and much of the attendant problems, just as they would have had trouble stopping the ascent that preceded it.
Building a Market Democracy in Iraq
One goal of the recent war in Iraq was to build a lasting market democracy that could serve as an example for the Middle East.
While progress towards this goal has been stymied by the mundane practicalities of restoring law and order, the coalition must eventually take it up.
When it does, it will also have to face the fact that the current distribution of economic power in Iraq is not conducive to democracy or markets, and that outside interim administrations tend to make matters worse.
Start first with the distribution of economic power.
Years of dictatorship and sanctions decimated Iraq's business and professional classes.
Estimates suggest that over 60% of Iraqis depend for their income on government, which will obtain the bulk of its revenues from oil for the foreseeable future.
But when an easily extractable, government-controlled resource accounts for a large share of national output, democracy can suffer.
Consider Venezuela.
Hugo Chavez's government faced a widespread opposition strike, whose intent was not only to demonstrate popular opposition, but also to starve the government of revenue.
Without revenue, such a government cannot pay the army or thugs who keep it in power.
Although it seemed that Chavez would fall, oil saved him.
Few people are needed to extract oil.
With the help of some loyal (and foreign) engineers and enough new workers to replace strikers, the government kept the oil flowing, securing the resources needed to maintain the loyalty of mercenary forces who would otherwise have gone over to the opposition.
The strike is all but over, and the Chavez government is now taking action against its leaders.
It was the same with Saddam Hussein.
Even with Saddam deposed, what is to prevent a successor regime from using oil power to oppress Iraq's people?
Democracy is stable only when it is accompanied by a wide diffusion of economic power, which gives the citizenry the ability to keep a government from becoming arbitrary and tyrannical.
The conditions under which democracies flourish are also the conditions under which free markets prosper.
When people do not fear that a rapacious government will expropriate their wealth, and when an elite that owes its success to the government does not determine market rules, opportunities percolate to everyone.
So how to build the economic basis for a stable democracy in post-war Iraq?
Douglas MacArthur's partially successful policies in Japan after the Second World War offer some guidance.
Japan was perhaps easier to transform because it did not have an abundance of easily extractable natural resources.
But land holdings were concentrated and a few large combines called "Zaibatsus" held industrial power.
MacArthur attacked concentrated economic power under the assumption that large landholders and large firms become pawns of government.
Subsequent reforms expanded and widened the land-owning class, fostering an agricultural revival and making Japanese democracy more stable.
But MacArthur did not have enough time to finish the job.
The need for reliable suppliers during the Korean War forced a compromise with the Zaibatsus.
This partly explains why Japan's domestic market remains uncompetitive despite its vibrant democracy.
Some suggest that Iraq's oil "problem" be dealt with by distributing shares in the state oil company to the people.
This is no solution, because the government will still control oil revenues and determine the dividend.
Without adequate governance, oil revenues will be wasted on grandiose projects, corruption, or rearmament.
Even if the government-owned oil industry is broken up and privatized, whether to foreigners or not, there is no guarantee that a future government cannot regain control.
The best hope for an enduring market democracy in countries like Iraq lies in building the countervailing economic power of professionals and entrepreneurs.
Such people abound in Iraq, however decimated by years of sanctions.
A priority for any interim administration must be to restore and improve educational and healthcare institutions so that they can recover lost ground.
Another priority is to wean people from dependence on government.
Reconstruction could revive the entrepreneurial classes if small contractors and businesses are given opportunities.
The danger is that the interim administration may hand out contracts to those well connected in Washington or the rich westernized Baghdad elite that gets cozy with whatever government is in power.
As Russia's recent experience shows, creating a politically sycophantic business oligarchy makes the prospect of a market democracy more remote.
It is far wiser to distribute contracts widely and ensure that more Iraqi businesses gain access to credit.
Clearly, many old financing institutions are compromised.
The easiest fix is to let foreigners in so that they can channel foreign capital into domestic private ventures.
New domestic financial institutions should also be encouraged.
Such policies would mirror those followed by Napoleon III in France in the 1850's.
Destroying the financial power of the Ancien Regime laid the foundations for the vibrant market democracy France became.
All this will not happen overnight.
Economic institutions must be built, repaired and strengthened.
The interim administration must undertake a delicate balancing act: Iraqis will have to be prevented from choosing how they will be ruled until the economic preconditions are in place for that choice to be genuinely free.
At the same time, Iraqis need to be convinced that the interim administration has their best interests at heart, rather than the interests of American or British businesses.
Success in this balancing act requires leadership, transparent policies, and good communication.
America provided this in postwar Europe and Japan.
It must rise to the challenge again.
Paths to Sustainable Power
NEW YORK – The surest bet on the future of energy is the need for low-carbon energy supplies.
Around 80% of the world’s primary energy today is carbon based: coal, oil, and gas.
We will need to shift to no- or low-carbon energy by mid-century.
The big questions are how and when.
Low-carbon primary energy means three options: renewable energy, including wind, solar, geothermal, hydropower, and biomass; nuclear energy; and carbon capture and sequestration, which means using fossil fuels to create energy, but trapping the CO2 emissions that result and storing the carbon safely underground.
There are three compelling reasons for the world to make the shift to low-carbon energy.
First, higher levels of CO2 are making the world’s oceans acidic.
If we continue with business as usual, we will end up destroying a vast amount of marine life, severely damaging the food chains on which we rely.
Second, CO2 is dangerously changing the world’s climate, even if many Big Oil interests would have us believe otherwise. (So, too, did the tobacco companies spend vast sums on political lobbying and bogus science to deny the links between smoking and lung cancer.)
Third, we face steeply rising prices for fossil fuels, as developing countries’ growth drives up demand and conventional supplies of coal, oil, and gas are depleted.
Sure, we can find more fossil fuels, but at much higher cost and at much greater environmental risk from industrial spills, waste products, leaks, and other damage.
Even the much-heralded shale-gas revolution is a lot of hype –&#160;similar to the gold rushes and stock bubbles of the past.
Shale-gas wells deplete far more rapidly than conventional fields do. And they are environmentally dirty to boot.
The United States has developed many new low-carbon energy technologies, but other countries are currently far more intent, far-sighted, and decisive than the US to put these technologies to large-scale use.
Politically, America is still the land of Big Oil.
Americans are bombarded by industry-funded media downplaying climate change, while countries that are much poorer in fossil fuels are already making the necessary transition to a low-carbon future.
Two neighbors in Europe, Germany and France, are showing the way forward – or, more precisely, the alternative ways forward – to a low-carbon future.
They are going about it in ways that reflect their different resource endowments, industrial histories, and political pressures.
Germany is undertaking the Energiewende, or transition to sustainable energy – a remarkable effort (indeed, unprecedented for a large advanced economy) to meet the country’s entire energy demand with renewable energy, especially solar and wind power.
Meanwhile, France relies heavily on low-carbon nuclear power, and is switching rapidly to electric vehicles, such as the pioneering Renault-Nissan Leaf.
Of the two approaches, Germany’s is the more unusual bet.
After Japan’s nuclear disaster at Fukushima, Germany decided to shut down its entire nuclear power industry and shift entirely to a strategy based on greater energy efficiency (lower energy input per unit of national income) and renewables.
There really is no clear roadmap for such a huge energy transformation, and Germany almost surely will need to rely on a European-wide electricity grid to share clean energy, and eventually on imported solar power from North Africa and the Middle East.
France’s bet on nuclear power is a more proven option.
After all, most of France’s electricity has come from nuclear power for many years.
And, though anti-nuclear sentiment is very strong in Europe – and, increasingly, even in France – nuclear power will remain part of the global energy mix for decades to come, simply because much of Asia (including China, India, South Korea, and Japan) will remain major users of it.
The key point is that France and Germany, and many other European countries – including the Scandinavian countries, with their considerable wind and hydropower potential – are all recognizing that the world as a whole will have to move away from a fossil-fuel-based energy system.
That is the right calculation.
Many will no doubt argue about which alternative – France’s bet on nuclear power or Germany’s solar pathway – is wiser.
But both strategies are probably correct.
Most studies show that deep de-carbonization of the world economy from now to mid-century, a time horizon mandated by environmental realities, will require that all low-carbon options – including greater efficiency and renewables –&#160;be scaled up massively.
One of the highest priorities of the new Sustainable Development Solutions Network, which I direct on behalf of United Nations Secretary-General Ban Ki-moon, will be to elaborate alternative pathways to a low-carbon economy, taking into account the specific conditions of countries around the world.
Different countries will choose different strategies, but we will all need to get to the same place: a new energy system built on low-carbon sources, electrification of vehicles, and smart, energy-efficient buildings and cities.
Early movers may pay a slightly higher price today for these strategies, but they and the world will reap long-term economic and environmental benefits.
By embracing truly sustainable technologies, France, Germany, and others are creating the energy system that will increasingly support the world economy throughout this century.
Building Greater Europe
MOSCOW – Greater Europe is at a crossroads.
Twenty years after the fall of the Iron Curtain, it remains divided, unable to unify into a global force.
Each of the three parts of Greater Europe – Russia, the European Union, and the countries between them – is in crisis.
The causes and forms of these crises differ, but the consequences are almost identical.
Russia has reached the limit of growth derived from its post-communist reconstruction.
Today, it has strengthened its state institutions, overcome economic decline, and regained status as a major actor in world politics.
Yet Russia’s future is questionable.
Soviet resources, in terms both of infrastructure and ideology, are exhausted.
The country’s economy remains unable to make optimal use of relatively high energy-export revenues.
Russian society and its leaders have no clear vision of the future, and the country’s demographic decline offers little hope of a rapid and sustainable turnaround.
This suggests that Russia, unable to compete with the world’s fast-developing countries, will have to direct its efforts towards protecting its waning assets.
The EU gives the outward impression of being a successful project.
Europeans are experiencing an unprecedented period of peace and prosperity; their integration model has now spread to include most of the continent.
But governing the enlarged union has become more difficult and less efficient.
Consolidation is giving way to friction, with more energy needed to overcome the EU’s internal problems.
The EU’s inefficiencies, coupled with changes in the international priorities of some of its member states, have led to a decline in the Union’s political clout.
If this trend continues, the EU’s waning influence will inevitably weaken its economic position and reduce its competitiveness.
The EU’s future enlargement to adjacent territories – the essence of its foreign policy in the last 15 years – will become less and less likely.
In short, the EU will no longer be able to offer attractive membership prospects to neighboring countries, nor will it be able to allocate adequate resources for surrogate membership schemes like the Eastern Partnership.
This dilemma has begun to have a negative effect on the countries that lie between Russia and the EU.
Developments in these countries during the postcommunist years marked a gradual change from Russian to European influence, but that is not irreversible.
The EU and NATO are unable to expand farther, even though they may want to maintain post-Soviet countries’ interest in membership in order to prevent their possible return to Russia’s orbit.
These “intermediate” countries therefore remain in limbo.
The global economic crisis has aggravated this ambiguity, while also markedly reducing the flow of resources that these needy countries receive.
Greater Europe’s three parts are, then, in a state of strategic uncertainty.
The postcommunist transitional agenda is exhausted, without having yielded a sustainable European politico-economic structure.
Although no new project is in sight, two basic scenarios appear possible.
The first scenario is a continuation of the current situation.
Russia and the EU would continue trying to consolidate their positions by competing for influence over their mutual neighbors.
The EU’s greater economic power still attracts other countries, but this power might lose its luster if the EU continues to disappoint them by failing to meet their expectations.
While Russia is not as politically or economically appealing as the EU, it can fall back on reliance on its natural resources to achieve its political objectives in adjacent territories.
Moreover, both the US and China nowadays find Russia to be more strategically interesting than Europe, and that doesn’t go unnoticed in, say, Kiev or Minsk.
Both the EU and Russia have advantages to offer, so competition between them could be fierce.
But this competition is set to occur in a Greater Europe that is becoming marginalized in global terms.
The climate-change conference in Copenhagen last December illustrated this decline, as it was the four main emerging countries – China, India, Brazil, and South Africa – that held the key negotiations in which US President Barack Obama actively intervened.
Russia had a low profile, but the EU, which considers itself the leader of climate policy, was simply informed post factum.
If the political environment continues to develop in this manner, Greater Europe, torn by conflicts rooted in its past, will have to take a subordinate role on the global stage.
In the second scenario, Russia and the EU would pool their efforts and collaborate.
Greater Europe would thus be able to claim a leading role in addressing international issues.
Once Russia and the EU decide to consolidate their efforts, they would inevitably address their neighbors’ difficulties in the context of shared responsibility, not rivalry.
Closer integration with the EU is therefore widely seen as important to the success of Russia’s own economic transformation.
But model of integration followed from the 1990’s up until about 2005 was not a success.
The obstacles hindering its success included Russia’s inability or refusal to transform itself in line with the European model, as well as Europe’s lack of the ambition and imagination needed to launch a new project for the genuine unification of the whole of Europe.
If kept separate, the three parts that make up Greater Europe will become politically marginalized.
Preventing this requires political will, especially within the EU, which all too often seems to favor playing a neutral role.
To work, integration must be balanced and equal, with both Russia and the EU adopting some of each other’s ideas.
This process will occur as the two parties start to identify priority areas for interaction,beginning with oil and gas, as well as military-technical and aerospace cooperation.
Without such a process, Europe will remain divided, with no leadership role in the twenty-first century.
Building on the Euro
The euro is now six years old.
It is past time to consider how it is performing, and whether it has lived up to the expectations that accompanied its birth.
Those expectations were not modest.
By reducing transaction costs and removing exchange-rate uncertainty, the single European currency was expected to lead to fully integrated product and financial markets.
This, in turn, would bring greater gains from trade, stronger competition, larger cross-border capital flows, lower borrowing costs, and more opportunities for sharing risk, all of which were expected ultimately to boost investment and productivity.
Reality has disappointed.
Compared to the five years before the euro’s launch in 1999, productivity growth has since slowed in Italy, Germany, Spain, and the Netherlands, while over the same period it accelerated or remained constant in Denmark, Sweden, and the UK, the European Union members that remained out.
Indeed, with the main exception of France, the euro does not seem to have been a blessing for the countries that adopted it.
Why this disappointment?
Have the expected benefits of the new currency failed to materialize?
Several recent economic studies addressed this question, looking at a variety of indicators.
Here is what emerges:
· The single currency has boosted international trade within the euro area, by about 10%.
Although a larger effect was expected, it remains too early for a complete assessment.
In any case, this is an important positive outcome, because international trade is generally regarded as a key determinant of faster growth and higher efficiency.
· The euro was expected to increase price transparency, thereby strengthening competition in product markets.
No evidence exists that this happened.
Prices did converge during the implementation of the Single Market program, in the early 1990’s, but then price convergence stopped.
· Cross-border investment towards the euro area has increased, although here it is more difficult to disentangle the effect of the single currency from other concomitant events (such as privatizations or corporate mergers).
· Money and bond markets are now fully integrated in the euro area, implying a reduction in the cost of capital for large corporate borrowers.
Retail banking, however, remains segmented by national borders, so that households and smaller producers have not been much affected.
· The euro was expected to acquire an international role, eventually improving Europe’s resilience in the face of economic shocks.
There has been a surge in euro-denominated international bonds, but the liquidity of foreign-exchange markets is no higher for the euro compared to the national currencies it replaced, and the euro remains a long way from challenging the supremacy of the dollar.
Of course, the euro was never just an economic project.
One of its backers’ main motives was to boost Europe’s political integration.
Indeed, the euro has quickly become a symbol of European unity.
When asked, “What does the EU mean to you personally,” 50% of citizens in the 15 countries that were EU members before enlargement in May 2004 say “the euro” – the second most common response (just behind “the ability to travel, study, and work anywhere in the EU”).
Yet, this symbol has not made the EU or the euro area any more popular.
Support for EU membership within the pre-enlargement EU-15 remains where it was in the mid-1990’s (and below the peak reached in 1990), while support for the euro is no higher now than it was in 1997.
To be sure, the introduction of the euro was a true revolution, and we cannot yet see all its effects.
But what is clear is that the revolution took place on shaky national economic foundations, transforming the upper floors of the European economy – financial markets and macroeconomic policy institutions – while leaving intact the ancien underpinnings of supply-side distortions induced by misguided national policies in the 1970’s and 1980’s.
These distortions, not any shortcomings of the single currency, account for the euro area’s dismal economic performance.
The countries that adopted the euro had poor labor-market institutions, bloated pension systems, high taxes on labor income, and inefficient service sectors in the late 1990’s, and they still do now.
The more fundamental problem with the euro is that its adoption has not pushed countries to address these underlying deficiencies.
It was expected that full integration of product and financial markets would expose inefficiencies, steering investment flows away from laggards towards the more efficient countries.
Yet, while reform efforts intensified throughout Europe in the late 1990’s both inside and outside of the euro area, there is little evidence that “ins” enacted more far-reaching and significant supply-side reforms than the “outs.”
Larry Summers, the former US Treasury Secretary and now president of Harvard University, once called the single European currency a “distraction” from the serious supply-side reforms Europe needed to confront.
This judgment may be too harsh, because we do not know whether the EU and the single market would have survived without the single currency.
But one thing is certain: Europe cannot afford other “distractions.”
Overhauling Europe’s shaky supply-side foundations is the key challenge facing the euro revolution, and it is a challenge that needs to be addressed at its national-level roots.
Building on the Global Recovery
The world is a study in contrasts nowadays.
We are haunted by images of terror and warfare.
Yet every region of the globe has experienced some of the strongest economic growth seen in years, inflation remains subdued despite surging oil prices, and financial markets are doing well.
Several economies that recently faced financial crises are rebounding strongly.
At the same time, much more needs to be done to help prevent future crises and reduce poverty.
What do these contrasts mean for the future?
The answer depends crucially on how each country and the international community respond to key policy challenges: addressing global imbalances through macroeconomic policies and long-overdue reform; meeting the costs of aging populations; strengthening defenses against economic and financial crises; and delivering on the pressing imperatives of poverty reduction.
Recently, financial leaders from 184 countries met in Washington at the Annual Meetings of the IMF and World Bank.
This year marks the sixtieth anniversary of the Bretton Woods Conference that established those two organizations as pillars of international economic cooperation.
As IMF Managing Director, my message was one of vigilance and action.
Simply put, the international community must take advantage of the current recovery to broaden efforts to ensure financial and economic stability, and help those countries with limited prospects.
Periods of strong economic growth allow countries to put in place defenses to reduce the likelihood and severity of future downturns.
But such opportunities are all too easy to squander.
In an era of globalized financial markets, when countries can find it hard to cope with rapid cross-border capital flows, there is no time for complacency.
A lesson of the 1990's is that vulnerabilities must be dealt with before they become crises.
The world's rapid economic growth in 2004 shows that the efforts to shore up our defenses since the 1990's has paid off.
But growth has been unbalanced: Europe and Japan - despite some recent gains - are far from reaching their potential, and the United States and China have continued largely to drive the world economy.
One priority is to reduce global payments imbalances.
The US must move to reduce its budget deficit in the medium-term.
Europe and Japan can increase their growth by stepping up the pace of structural reform.
Moves toward increased exchange rate flexibility in China and other Asian countries, supported by financial sector reform, will have domestic and global benefits.
Emerging market countries elsewhere have made considerable reform progress of late, but they must sustain the momentum to guard against potential shocks.
Other challenges loom.
Issues that we once regarded as "medium-term" are becoming more urgent.
Aging populations are forcing many countries to address pressures on their budgets and social security systems.
The problem is imminent in North America, the Euro Area, and Japan.
But, before long, many developing countries will also have to face up to it, and in many cases without a cushion of affluence.
Then there is the energy issue.
High oil prices have resurrected an old vulnerability.
Countries need to reformulate their energy policies - including by boosting production and refining capacity, diversifying energy sources, and giving new impetus to conservation.
A better balance between production and consumption would avoid large swings in oil prices.
The IMF focuses on crisis prevention, and in the past decade encouraged greater transparency and stronger financial systems.
The Fund also actively monitors capital market developments, and is implementing a more systematic assessment of debt sustainability.
There will always be ways to strengthen our work so that we provide well-articulated advice based on a clear understanding and the best analysis of each country.
We need to communicate our positions clearly to policymakers and reinforce incentives for countries to take appropriate corrective actions.
But in the end, the effectiveness of our advice hinges on countries' willingness to act on our recommendations.
Poverty also threatens economic stability.
For all the successes of recent decades, the fact remains that 20% of the world's population still lives on less than $1 a day, while HIV/AIDS and other communicable diseases are ravaging many societies.
Other social indicators offer a bleak picture.
Indeed, most developing countries are likely to fall short of the international community's target of halving poverty by 2015.
In 2002, at the Monterrey Conference, the international community agreed on a framework for reaching that goal.
Developing countries would implement sound economic policies accompanied by good governance.
Industrial countries would increase aid levels and lower trade barriers.
The IMF and World Bank would offer advice, expertise, and financing, with the Fund concentrating on the macroeconomic and financial stability that is crucial to fostering durable growth and poverty reduction.
Some progress has been made on this "Monterrey Consensus."
But international support is falling far below promised levels.
Strong political commitments are needed to provide the aid that is needed to accelerate progress, and to secure success for the Doha trade round that is so crucial for developing countries' longer-term prospects.
The resilience of the global economy in the face of political and economic shocks demonstrates the central relevance of the reform process - and underlines the importance of continuing along this path.
Governments and institutions like the IMF must keep this in mind as they seek to ensure a durable economic recovery that will benefit all of the world's people.
Resilient Pakistan?
ISLAMABAD – Since mid-December, Pakistan has experienced political and economic volatility that is extraordinary even by Pakistani standards.
The fragile political structure that began to be erected following the resumption of civilian government in 2008 is now shaking.
A key source of this unrest is Tahirul Qadri, a Toronto-based Muslim cleric who arrived in Lahore in early December.
Ten days later, he addressed a mammoth public meeting at the city’s Minar-e-Pakistan grounds, where, a year earlier, the cricketer-turned-politician Imran Khan had launched what he not very appropriately termed a political tsunami.
Qadri issued a 20-day ultimatum to the government in Islamabad to purge the political system of rampant corruption, reconstitute the Election Commission, and appoint a caretaker administration to oversee the upcoming vote.
The caretakers, he said, should include technocrats, retired military officers, and judges – and could remain in office longer than the constitutionally permitted 90 days.
Unless the government took these steps, he would lead a million-man march on the capital.
When the government did not oblige, 50,000 people set out on the fabled Grand Trunk Road to Islamabad, taking 36 hours to complete the 300-kilometer trek.
Qadri addressed the marchers repeatedly; liberally mixing political metaphors, he called himself a latter-day Mao Zedong on a journey to launch a system-cleansing jihad and initiate a Pakistani version of the Arab Spring.
On January 10, while Qadri was planning his march, two suicide bombers sent by the extremist Lashkar-e-Jhangvi, a banned Sunni group, attacked the Shia Hazara community in Quetta, killing almost a hundred people.
The Hazaras reacted to the attack by making the coffins of the dead a symbol of protest.
They lined up the dead on Alamdaar Street, which runs through the city’s Shia community, and refused to bury them until the government dismissed inept and corrupt local officials, led by a local nawab who spent more time abroad or in Islamabad than in the provincial capital.
The government succumbed and removed the chief minister and his cabinet, placing the troubled province under the care of the provincial governor.
Five days later, Pakistan’s ever-active Supreme Court ordered the arrest of Prime Minister Raja Pervez Ashraf and 16 other senior government officials for alleged involvement in what was called the “rental power” case.
The case dates back to 2008-2011, when Ashraf, who was Minister of Water and Power at the time, oversaw large contracts to rent power generators, which were needed to ease an electricity shortage that was costing the economy up to 5% of GDP.
Several reports in the print and electronic media suggested that the contracts awarded by Ashraf’s ministry were tainted.
The finance ministry called in the Asian Development Bank, which confirmed that a large amount of money had leaked from the agreements, and that many of the rental units generated much less power than promised.
The Supreme Court took note of the ADB’s findings and started proceedings against Ashraf and other senior officials, including several from the finance ministry.
Ashraf resigned from the cabinet, only to be brought back later as Prime Minister.
In earlier times, crises of much lesser intensity would have brought the military rushing onto the political stage, as happened in 1958, 1969, 1977, and 1999.
Indeed, the army has ruled Pakistan for a total of 33 years since independence in 1947.
But this time the soldiers have remained in their barracks, for the simple reason that an awakened populace, an active civil society, and a free and vibrant media would not tolerate another venture into politics by the army.
After almost five years of democratic rule, Pakistan is on its way to establishing a durable and representative political order.
While it has not produced clean and efficient government, there seems to be considerable comfort in the popular belief that, by working together, Pakistanis will find a way out of the mess in which the country finds itself.
A late-evening meeting of most opposition parties in Lahore on January 16 rejected Qadri’s demands, while telling the government to stay the course toward the general election.
A day later, the government found a face-saving formula to send the preacher-politician – and, more important, his followers – home, promising that the Election Commission will be given the time to determine candidates’ eligibility under the relevant constitutional provisions.
So, in a way, Qadri’s arrival in Pakistan and his intense political activism have served a purpose: he has reinforced the people’s faith in a system that they are continuing to build.
Building Palestine From the Bottom Up
JERUSALEM – As President Barack Obama’s special Middle East envoy, former US Senator George Mitchell, learned during his visit to the region, America’s efforts at Israeli-Palestinian peace-making are running up against three major obstacles.
They will, no doubt, also arise in Obama’s upcoming meetings with the region’s leaders.
The first obstacle – indeed, the issue that stands front and center today – is the ongoing Palestinian civil war, with Hamas controlling the Gaza Strip in defiance of Abu Mazen’s Fatah-led Palestinian Authority.
The Palestinians’ basic failure at nation-building makes any meaningful peace talks with Israel – let alone an agreement – almost impossible at the moment.
With Palestinians unable to agree among themselves on a minimal national consensus, how can peace be established between them and Israel?
Second, with Likud’s Benjamin Netanyahu as prime minister, Israel now has a government which is far less likely to be willing – or able – to make major concessions and evacuate hundreds of thousands of Israeli settlers from the West Bank.
Third, and most significantly, the 1993 Israel-PLO agreement has until now failed to achieve its aim.
Attempts to revive the Oslo peace process – the “Road Map” and the Annapolis process – have similarly failed to achieve more than vacuous declarations and hollow photo opportunities.
The causes of these 15 years of failure should be considered, so that Mitchell’s mission does not become another stillborn effort.
Both the Palestinians and Israel can easily and rightly be blamed for the failure of the Oslo process.
But there is a more fundamental cause at stake, and it should not be overlooked.
The Oslo process tried to build a Palestinian state from the top down: create a Palestinian national authority, hand over territory to it, give it increasing power, arm it and finance it, hold elections, and a Palestinian state would emerge.
Instead, the consequence was a corrupt, militarized Palestinian Authority, with competing security services proved incapable of providing security.
Nor could it conduct credible negotiations with Israel or deliver necessary services to ordinary Palestinians.
Two reasons for this failure stand out: the institutional weakness of Palestinian civil society, which lacks the infrastructure necessary for nation-building; and the impossibility of simultaneous nation-building and peace-making.
There is no precedent anywhere in the world that suggests that such a two-tier process can succeed.
A fundamental change of paradigm is needed: the effort should shift to building a Palestinian state from the bottom up, for which there are encouraging signs, even in the midst of the failure of the top-down process.
In the last two years, former British Prime Minister Tony Blair and US General Keith Dayton have succeeded in effective institution-building in three West Bank districts – Jenin, Bethlehem, and Hebron – turning them into the most peaceful areas in the West Bank, with a minimal Israeli military presence.
Local authorities were supplied with adequate funding and advice; independent chambers of commerce became the backbone of a local commercial middle class, which is interested in keeping the region peaceful, even absent an overall agreement; local police were trained (in Jordan), and now function effectively as police forces, not armed militias; and business relations with adjacent Israeli regions have been renewed.
This empowerment of an effective local leadership was done with much persistence – and little fanfare. But these nuts-and-bolts projects created – for the first time – the building blocks necessary for effective Palestinian nation-building.
Admittedly, this process will take time and patience.
But, until now, it has been the only approach proven to succeed, while everything else has failed.
As Blair recently put it, such a bottom-up process may even go hand-in-hand with Netanyahu’s goal of an “economic peace,” though it would eventually have to go beyond it.
That such an approach would have to include a total halt to Israeli settlement activities goes without saying.
If carefully crafted, it may even be implicitly accepted, albeit without much enthusiasm, by the Israeli government.
The Oslo process has failed; an attempt to revive it – say, by way of the Beirut Arab peace initiative – will merely bring into the open all of the existing disagreements between the two sides, and will not overcome the Palestinian failure at nation-building.
After all the breakdowns in efforts to create a Palestinian state from the top down, only the old-fashioned way – from the bottom up – remains viable.
Building Pax Asia-Pacifica
MANILA – One of the main sources of tension in Asia nowadays are the Spratly Islands in the South China Sea, where the Philippines, Vietnam, China, and others have conflicting claims.
In Chinese media reports, the heightened “unfriendliness” in the region has allegedly arisen from “bad rumors and speculations” on the part of Filipino commentators.
But the reality is starker: the intrusions by Chinese aircraft into Filipino airspace in May;
Will armed conflict result from these recurring – and, it seems, escalating – disputes between the Philippines and Vietnam on one side, and China on the other?
War, of course, is in no one’s interest.
But the risk posed by these disputes is growing, because China’s relations with both the Philippines and Vietnam are at their lowest point in decades.
Given these tensions, it is no surprise that the issue of disputed sovereignty in the South China Sea is almost certain to claim center stage at this month’s ASEAN Regional Forum, and at the East Asia summit in Bali that will follow it.
Last June, I gave the keynote speech at the celebrations marking the 36th anniversary of the establishment of Philippines-China diplomatic relations and the 10th anniversary of Philippines-China “Friendship Day” in the presence of 5,000 of my countrymen and a smattering of Chinese officials.
Yet on that same day, the headlines in Chinese papers were blasting the Philippines for its historic claim to ownership of the Spratly Islands.
Of course, the governments of both countries recognize the need to maintain the stability and cooperation that have made East Asia the world’s fastest growing region.
The same is true of Vietnam’s government and that of the United States.
But there is no institutionalized means to discuss and resolve the dispute, which is taking on greater significance almost daily, owing to the belief that vast mineral and energy resources lay on the sea bed around the Spratlys.
Now is the time for China, the Philippines, Vietnam, other claimants, and the US to take action to begin to diminish these tensions.
What is needed, above all, is a covenant among the leaders of the Asia/Pacific region that will make peaceful dispute resolution binding on all stakeholders, big or small.
Only such a pledge can provide the type of certainty that investors – any investors – will need if the Spratly resources are to be developed.
Certainly, China’s leaders talk as if this is their goal.
In April, at this year’s Boao Forum (the Asian Davos) on Hainan Island, Chinese President Hu Jintao asserted: “Peace and development remain the overriding themes of the times.
The world needs peace, countries deserve development, and people want cooperation....China will always be a good neighbor, good friend, and good partner of other Asian countries.”
It is past time to make those sentiments a reality; more than a pledge to resolve disputes peacefully is needed.
Asia’s governments must also begin to adhere to a far more expansive idea of open regionalism, which means that countries like India should have a voice in Asia/Pacific affairs, and they must respect the Asian interests of countries beyond the region.
The US, for example, should be made welcome to participate – or continue to participate – in peacekeeping and security cooperation.
But how is Asia to reach consensus on this point?
Ever since 1994, when Vietnam’s President Le Duc Anh held the presidency of ASEAN, I have proposed to ASEAN leaders that the Spratlys be demilitarized as a first step toward building trust.
The UN Convention on the Law of the Sea (UNCLOS) and associated international commitments must become the basis for productive dialogues leading to binding covenants.
Joint exploration and development of the resources within and beneath the archipelago could then begin.
More broadly, the urgent task for Asian statesmen over the next 5-10 years will be to replace the region’s Pax Americana, which has guaranteed regional stability for decades, with a more comprehensive Pax Asia-Pacifica that is built on inclusiveness and burden-sharing.
But such an Asia-Pacific peace will be durable only if it is based on a balance of mutual benefits rather than on the balance of power.
Clearly, this concept implies burden-sharing by all Asia-Pacific countries to ensure the region’s harmony and security.
Pax Asia-Pacifica’s institutions will need to be built, as Europe’s peace was built after World War II, on strong, cooperative undertakings among the most powerful countries and regional blocs – the US, China, Japan, India, South Korea, Russia, and the ASEAN 10. The region’s continued economic growth and progress require that we Asians contain our rivalries and avoid the arms buildups that, unfortunately, now seem to be underway.
Built to Bust
BERKELEY – In the mid-2000’s, the United States had a construction boom.
From 2003-2006, annual construction spending rose to a level well above its long-run trend.
Thus, by the start of 2007, the US was, in essence, overbuilt: about $300 billion in excess of the long-run trend in construction spending.
When these buildings were constructed, they were expected to more than pay for themselves.
But their profitability depended on two shaky foundations: a permanent fall in long-term risky real interest rates, and permanent optimism about real estate as an asset class.
Both foundations collapsed.
By 2007, therefore, it was reasonable to expect that construction spending in the US would be depressed for some time to come.
Since cumulative construction spending was $300 billion above trend, it would have to run $300 billion below trend over a number of years in order to return to balance.
So, in 2007, everyone expected a construction-led slowdown.
And, starting that year, construction spending did indeed fall below trend.
But we were expecting a minor decline: a fall in construction spending below trend of $150 billion a year for two years or $100 billion a year for three years or $75 billion a year for four years.
Instead, spending fell $300 billion below trend in 2007 alone, and has remained depressed for four years.
Moreover, there is no prospect of anything like a rapid return to normal levels.
Therefore, when this construction cycle has run its course, the US will first have spent an excess $300 billion, and then fallen short of trend by a cumulative $2 trillion of spending not undertaken.
The net effect will be a construction shortfall in the US of at least $1.7 trillion.
That is a lot of unbuilt houses, apartment buildings, offices, and stores – and it is a truly radical disconnect between the size of the recent construction boom and the size of the current construction bust.
Indeed, this radical disproportion makes nonsense of all arguments that the current distressed state of the overall US economy is in some sense necessary, deserved, or an inevitable consequence of over-exuberant building in the desert between Los Angeles, California and Albuquerque, New Mexico in the mid-2000’s.
Otherwise, the construction-led economic slowdown would not be today’s $1 trillion in annual lost production.
The slowdown would be one-tenth the size of the one the US is now enduring, and it would be largely confined to the construction sector.
And, in that alternative universe, having worked off the entire burden of overbuilding, we would by now have returned to trend levels of production, employment, and demand.
There is one silver lining as we contemplate our macroeconomic wreckage: when incomes, production, and employment in the US return to their trend levels, Americans will demand an extra $1.7 trillion worth of buildings to live in.
And, because those buildings will not be there, construction demand will come roaring back.
If America does recover to the previous long-run trend, the next decade will likely witness a construction boom that puts the mid-2000’s boom in the shade.
But that is not now. And it is not for some years to come.
There is another lesson here.
The economists Kenneth Rogoff and Carmen Reinhart argue that recovery after a financial crisis is almost always slow.
But there is at least one important sense in which America’s current construction bust suggests that they are wrong.
One factor behind slow post-financial-crisis recovery is that nobody knows how the division of labor will be rearranged.
But right now we know a lot about that.
We know that when Americans become confident again – when they believe that they could find new jobs if they lost their current ones, and when they can no longer tolerate doubling-up with their in-laws – they will demand more dwellings than the country has today.
If incomes and demand were normal, we would want a lot more new construction then we do now.
But, even though we can see the magnitude of the construction shortfall and understand how large it will be when recovery is complete, that does not help right now.
Right now, incomes are slack, households have become crowded, and there is a surplus of housing on the market – all because nominal demand is still far below trend.
In 20 years, historians will interview the then-aged monetary, banking, and fiscal policymakers of the 2000’s.
They will ask them why they did not take more aggressive steps to return nominal incomes and demand to trend levels when they were sitting in the hot seats.
I already wonder what their excuses will be.
Rouhani’s Lost Chance
ISTANBUL – Iranian President Hassan Rouhani’s charm offensive has stalled.
It worked well in the United Nations General Assembly last September, when he had something solid to offer – a deal on his country’s nuclear program – raising hopes that Iran’s hardline foreign-policy stance would finally soften.
But UN Secretary-General Ban Ki-moon’s withdrawal of Iran’s invitation to the Geneva II conference on Syria suggests that Rouhani will need more than charm – or even a visit by Turkish Prime Minister Recep Tayyip Erdoğan to Tehran – to end his country’s isolation.
Rouhani has been largely successful in putting his predecessor Mahmoud Ahmadinejad’s tone-deaf leadership firmly in the past.
The Iranian establishment has supported his attempts to open the country up to its regional neighbors, court foreign investment, call for moderation in religious and cultural matters, and even pursue the nuclear deal with the West.
In fact, the nuclear agreement – which seems close to completion – is likely to be Iran’s most important diplomatic achievement since the Islamic Revolution in 1979, providing it with considerable relief both domestically and internationally.
The fact that Supreme Leader Ayatollah Ali Khamenei personally backed the effort makes it all the more promising.
Nonetheless, the regime’s possible rapprochement with the United States remains a source of concern in the Middle East, because it would empower Iran at a time when the US is gradually disengaging from the region.
The question now is whether Rouhani’s moderation toward the West will be accompanied by a change in Iran’s Middle East policy, with all eyes on its policy toward Syria.
Ban rescinded Iran’s invitation to Geneva II under pressure from the US and the Syrian opposition.
After all, since the civil war began in 2011, Iran has provided essential financial and military support for Syrian President Bashar al-Assad’s regime, while mobilizing its Lebanese proxy, the powerful Hezbollah militia, to fight against the rebels in Syria.
Whatever concerns the opposition has about Iran’s allegiances, the country is undoubtedly part of the Syrian equation; indeed, its involvement is critical to reaching any accord.
But Rouhani’s failure to make a decisive statement on Syria – even after a series of leaked photographs of systematic torture and massacre raised the ire of the international community – has not helped the case for keeping Iran in the fold.
Rouhani recently had an opportunity to discuss Iran’s stance.
But, addressing the World Economic Forum in Davos, he squandered it, sticking to platitudes about the need for governments in the region to listen to their citizens and provide young people with “jobs and hope.”
On the subject of despotic rulers, Rouhani offered only the benign observation that they lack the ability to connect with and understand their people.
Rouhani’s recent rhetoric, however positive, falls far short of the expectations that his diplomacy has raised since his UN address last September.
In Davos, the world expected a decisive statement on Syria and other regional problems – not hackneyed nationalist rhetoric about eliminating “biases” against Iran.
Rouhani must have known that his failure to address the humanitarian disaster in Syria would damage his diplomatic strategy, which suggests that he must have had a strong reason.
Two possibilities stand out: either there is no consensus within the Iranian elite for a policy change, or the elite remain united in their determination to continue backing Assad.
Neither alternative is particularly charming, which would explain why he preferred to obscure his country’s position.
To be sure, Erdoğan’s visit to Tehran this week could help to defuse tensions over Syria – a subject on which Turkey and Iran have diametrically opposing views.
But it is unlikely to smooth the divisions among Iran’s elite, much less convince hardliners to stop backing Assad, leaving the visit’s significance uncertain, at best.
In refusing to take a strong position on Syria, Rouhani – like so many other world leaders – is placing his own interests above those of the 2.3 million registered Syrian refugees, the millions more who have been internally displaced, the estimated 130,000 people killed, and the rest of Syria’s long-suffering population.
Worse, he has refused to acknowledge Iran’s own role in the tragedy.
When he said in Davos, “we cannot be indifferent to the pain and suffering of our fellow brethren in the region,” he might as well have been referring to the Assad regime and its partners in crime.
What Syria needs is not rhetoric or charisma; it needs action.
Iran appears incapable of providing it.
That is why Rouhani’s charm offensive will not be enough to persuade Iran’s adversaries that the Islamic Republic is ready to come in from the cold.
The Gulf States’ Widening Gulf
ISTANBUL – President Barack Obama is arriving in Saudi Arabia at a critical moment for the country.
Its recent decision to withdraw its ambassador from Qatar has revealed the gravity of the crisis in the Gulf Cooperation Council (GCC), composed of the Kingdom’s most immediate neighbors.
Indeed, Gulf politics is shifting toward a new balance in the wake of the Saudi-UAE rapprochement and the recent attempt to isolate Qatar.
The UAE and Bahrain have joined Saudi Arabia in downgrading relations with Qatar.
This is an unusual move, considering the Gulf states’ tradition of treating political disagreements as a family matter, to be handled behind the scenes.
Oman is keeping its distance from the situation, while Kuwait has attempted to mediate between Saudi Arabia and Qatar.
Several factors are driving Saudi Arabia’s moves against Qatar, which include a ban prohibiting Saudi intellectuals from contributing to Qatari newspapers.
There is Qatar’s support for the Muslim Brotherhood (in Egypt and elsewhere); the speeches by the Islamic theologian Yusuf al-Qardawi and the broadcasting policy of Qatar-funded Al Jazeera since the Arab Spring; and the credence given to the view that Qatar is hosting Western institutions with the intent of orchestrating a coup in the Kingdom.
That view reflects Saudi Arabia’s tough stance against the Muslim Brotherhood, which it has declared a terrorist organization.
The Kingdom perceives the Brotherhood’s influence in Arab countries, particularly the Gulf states, as a serious threat to its internal stability and survival.
The voluntary abdication by Qatar’s Sheikh Hamad bin Khalifa Al Thani in June 2013, and his replacement as Emir by his son Sheikh Tamim bin Hamad Al Thani, failed to satisfy Saudi expectations of change in Qatari foreign policy.
And now the Kingdom has made it clear that it has reached the limits of its patience.
But Saudi Arabia’s attitude toward Qatar may generate some difficulties for its own policy.
There is considerable transnational movement of goods and services, and billions of dollars of cross-border investment, across the Gulf – economic activity that would be endangered by the GCC’s further disintegration.
The Muslim Brotherhood is not a violent organization, and it has not engaged in illegal activities in the Gulf countries.
Other GCC states, eager to avoid escalating political tensions in their own countries, are unlikely to declare it a terrorist organization.
Even Saudi Arabia’s special relationship with Jordan will not push its government to adopt such a declaration.
For the time being, harsh policies toward the Muslim Brotherhood are likely to be confined to Egypt and Saudi Arabia.
The problem for the Kingdom is that simply “correcting” the Qatari position cannot change the political trajectory within the region – particularly in Syria and Egypt.
Moreover, Saudi Arabia’s imposition of its preferred policies on the GCC, together with the possibility of sanctions on Qatar, risks jeopardizing all that the GCC (which already has fallen into political decline in the wake of the Arab Spring) has achieved over the past 33 years.
Although Qatar’s rulers are concerned about the Kingdom’s growing antipathy toward them, they have shown no indications of submitting to Saudi demands that they change course.
Moreover, given the impact on regional geopolitics of the recent interim nuclear deal between Iran and the West, Saudi Arabia’s alienation of its neighbors is all the more hazardous.
Making matters worse, it is clear that disagreements within the GCC can no longer be resolved behind closed doors, and that member states are unable to air them publicly without risking a diplomatic rupture.
Across the region, minorities are feeling more empowered and citizens are making ever-stronger demands for better government.
There is a burgeoning desire for a future that dispenses with traditional policies based on fear and anger.
In this context, Saudi policy seems to be stuck in the past, and the Kingdom has chosen to adopt a strategy of self-help in order to isolate itself from problems outside its borders, though it continues to regard itself as the region’s power broker.
The sudden rapprochement between Saudi Arabia and the UAE resulted not from the attractiveness of Saudi policy, but from their rulers’ shared perception that there is a dearth of political options.
It would, of course, be wiser to address the real problems facing GCC governments, which range from embittered minorities to economies that are unable to create enough jobs for young people.
But resolving these issues would require an inclusive and accommodating approach, both domestically and regionally, and Saudi Arabia, in particular, is not prepared to take that route.
The Gulf impasse will exacerbate the already-fragile situation in the Middle East.
Regional political realities, transnational interaction, and the common search for a better future should, eventually, prevail over policies geared for repression, discipline, and order.
The GCC should be accustomed to conflicting perspectives on regional design and differing degrees of cooperation across regional actors, and it should draw on these differences as a source of strength.
This crisis may create an opportunity to rethink and recalibrate GCC strategies, based on a more realistic view of regional interdependence, common security, and shared decision-making.
A new mentality in GCC governance could result in the creation of mechanisms of constructive engagement in the region, while maintaining cooperation with international actors.
Clearly, this policy would be more constructive than Saudi Arabia’s desire for a lone-wolf role that merely results in a deadlock within and around the Gulf.
Bulgaria’s Betrayal of Europe
When Bulgaria joined the European Union this past January, I believed that my country had finally left its repressive past behind.
But the recent arrest and threatened deportation of Annadurdy Hadjiev, a dissident from Turkmenistan who sought refuge here, suggests that some things never change.
If Bulgaria sends this man back to Turkmenistan – where he faces certain torture and the threat of a brutal death – our claim to be part of a democratic, rights-respecting Europe will ring hollow.
Moreover, the EU’s image as a defender of human rights around the world will be tarnished by its inability to hold member states to its own standards.
The case evokes memories of the days when the KGB’s influence was pervasive, and dissidents across Eastern Europe and Soviet lands like Turkmenistan lived in fear.
Hadjiev and his family fled to Europe in 2001, escaping one of the world’s most repressive regimes: the absolutist dictatorship of the late Saparmurat Niyazov, who fancied himself “Turkmenbashi,” the father of all Turkmen.
A former deputy chairman of the Central Bank of Turkmenistan and later an outspoken critic of Turkmenbashi’s government, Hadjiev, a senior member of the exiled Watan (Republican) Party, received “humanitarian parole” – a protected category of individuals that falls short of refugee status – when he reached Bulgaria.
But he has since been subjected to violent and arbitrary reprisals in this supposed “safe haven.”
And, although Turkmenbashi died in December, his successor, Gurbanguly Berdymukhammedov, has continued to imprison dissidents, stifle freedom of expression, and scoff at democracy, as February’s rigged elections demonstrate.
Bulgaria’s persecution adds to the anguish and injustice that has befallen Hadjiev and his family.
Last summer, Hadjiev’s brother and sister were arrested after they collaborated on a documentary about Turkmenistan, and were tried on trumped-up charges of weapons possession.
After a perfunctory closed trial, they were sentenced to seven and six years in prison, respectively.
Hadjiev’s sister, the journalist Olgusapar Muradova, died in prison several weeks later, under suspicious circumstances.
Her grown children, who viewed her body, told relatives that they saw evidence of torture and that she had sustained a severe head wound.
(A state-controlled autopsy implied that she had committed suicide.)
Hadjiev’s two other brothers, as well as his brother-in-law and sister-in-law, have been in Turkmenistan’s notorious penal gulag since 2002, when they were sentenced to lengthy prison terms.
In 2003, his elderly father-in-law was beaten by police agents and forced into internal exile.
On February 19, the Bulgarian police arrested Hadjiev with the intention of sending him back to face a similar fate.
This is not the first time he has been arrested in Bulgaria.
After first arriving, Hadjiev and his wife were arbitrarily detained for several days, leaving their 13-year-old daughter without supervision or access to her parents.
The police arrested Hadjiev again in 2002, in response to a Turkmen extradition request.
After the Varna City Court refused to allow the extradition, ruling that the charges were politically motivated, the Bulgarian authorities threatened to deport him.
In 2005, the Hadjievs’ car was incinerated by a bomb-like device, which they interpreted as a warning to cease their defiant challenges to the Bulgarian – and possibly Turkmen – authorities.
The authorities that arrested Hadjiev last month made no pretense of due process: they offered no arrest warrant, and have repeatedly refused him access to relatives and legal counsel.
Moreover, the court has given no explanation of why it is allowing him to be tried on the same embezzlement charge that of which he was acquitted in 2003.
Fortunately, Hadjiev is a fighter.
Since the beginning of his travails in Bulgaria, he has battled the system by confronting the government branches responsible for his persecution.
Indeed, he has sued the very prosecutor in whose hands his current extradition now rests – an act that may be jeopardizing his right to a fair hearing.
My government has pledged its willingness live up to the legal norms that are the core of European Union membership.
By releasing Annadurdy Hadjiev from jail and withdrawing the threat of extradition to Turkmenistan, Bulgaria would unequivocally demonstrate its commitment to fulfilling its obligations.
By granting him political asylum, we can make a resounding statement that authoritarian regimes can no longer count on support within Europe’s borders.
Burma: India’s Bad Neighbor Policy
NEW DELHI – As stage-managed elections ratify the consequences of three decades of military rule in Burma, the perspective from its neighbor India may help explain why there is continued international acceptance of the country’s long-ruling junta.
Burma was ruled as part of Britain’s Indian Empire until 1935, and the links between the two countries remained strong after Burma gained its independence in 1947.
An Indian business community thrived in Burma’s major cities, and cultural and political affinities were well established.
India’s nationalist leader and first prime minister, Jawaharlal Nehru, was a close friend of the Burmese nationalist hero Aung San, whose daughter, the Nobel laureate and opposition leader Aung San Suu Kyi, studied in New Delhi.
For many years, India was unambiguously on the side of democracy, freedom, and human rights in Burma – and in ways more tangible than the rhetoric of the regime’s Western critics.
When the generals suppressed the popular uprising of 1988, nullified the overwhelming election victory by Aung San Suu Kyi’s National League for Democracy (NLD) in 1990, shot students, and arrested the newly-elected leaders, India’s government initially reacted as most Indians would have wanted.
India gave asylum to fleeing students and a base for their resistance movement (along with some financial help), and supported a newspaper and a radio station that propagated the democratic voice.
But then reality intruded.
India’s strategic rivals, China and Pakistan, began to court the Burmese generals.
Major economic and geopolitical concessions were offered to both suitors.
The Chinese even began developing a port on the Burmese coast, far closer to Calcutta than to Canton.
And the generals began providing safe havens and arms to a motley assortment of anti-Indian rebel movements that would wreak havoc in India’s northeastern states and retreat to sanctuaries in the newly-renamed Myanmar.
All this was troubling enough to Indian policymakers, who were being painfully reminded of the country’s vulnerability to a determined neighbor.
The clincher came when large deposits of natural gas were found in Burma, which, it was clear, would not be available to an India deemed hostile to the junta.
India’s rivals were gaining ground in its own backyard, while Indian businesses were losing out on new economic opportunities.
The price of pursuing a moral foreign policy simply became too high.
So India turned 180 degrees.
When Pakistan’s President, Pervez Musharraf traveled to Myanmar to celebrate his country’s new relationship with his fellow generals, India’s Foreign Minister Jaswant Singh soon followed.
The increasingly forlorn resistance operations staged from Indian territory were shut down in the hope of reciprocation from the Burmese side.
And India sweetened the generals’ tea by providing military assistance and intelligence support to their own never-ending counter-insurgencies.
India’s journey was complete: from standing up for democracy, India had graduated to aiding and abetting the military regime in Rangoon (now Yangon).
When monks were being mown down on the streets of Yangon in 2006, the Indian government called for negotiations, muttered banalities about national reconciliation, and opposed sanctions.
India also sent its minister for oil to negotiate an energy deal, making it clear that the country’s real priorities lay with its own national economic interests, ahead of its solidarity with Burmese democrats. (At the same time, Indian diplomats intervened discreetly from time to time on behalf of Suu Kyi, though their effectiveness was limited by India’s unwillingness to alienate the junta.)
All of this was in fact perfectly understandable.
Officials in New Delhi were justified in reacting acerbically to Western critics of its policy. India needed no ethical lessons from a United States and a Britain that have long coddled military dictators in India’s South Asian neighborhood, notably in Pakistan.
Any Indian government’s primary obligation is to its own people, and there is little doubt that the economic opportunities provided by Burmese oil and gas are of real benefit to Indians.
There is also the strategic imperative of not ceding ground to India’s enemies on its own borders.
India confronts an inescapable fact of geopolitics: you can put your ideals on hold, but you cannot change who your neighbors are.
India’s government cannot be blamed for deciding that its national interests in Burma are more important than standing up for democracy there.
The member countries of the Association of South East Asian Nations, on Burma’s eastern flank, have made similar calculations.
But many Indians are asking themselves what such a policy does to India as a civilization.
If that idealistic democrat Nehru had not been cremated, India’s stance toward Burma might cause him to turn over in his grave.
It is a policy that is governed by the head rather than the heart, but in the process India is losing a little bit of its soul.
Burma’s Agony
As the death toll mounts from the cyclone that struck a densely populated area of Burma stretching from the Irrawaddy Delta to the capital city of Rangoon continues to soar, the country’s military dictatorship is pressing ahead with efforts to consolidate its power.
The junta leaders have done little to facilitate recovery efforts in the wake of the disaster.
Indeed, they have announced their intentions to move forward with conducting a national referendum scheduled for Saturday to approve a new constitution, which they hope will entrench their power for decades to come.
Burma’s rulers have said that the vote will be delayed in the areas hardest hit by the cyclone until May 24, but the referendum will still go ahead as planned in other parts of the country.
With this move, the military leaders are putting their sham vote aimed at tightening their repressive grip on power ahead of the well being of the Burmese people.
This should be no surprise.
For nearly five decades, Burma’s military rulers have systematically undermined the interests of their own citizens.
In this latest case, the junta-controlled news media failed to announce warnings about the approaching cyclone.
The entry of United Nations humanitarian personnel, has been delayed due to the government’s refusal to allow aid workers into the country without first applying for visas.
Moreover, the military leaders are dragging their feet on easing restrictions on the import of humanitarian supplies and allowing a UN assessment team into the country.
Some have urged focusing attention on bringing relief efforts to Burma instead of criticizing its government.
But the reality is that the two issues are connected and the magnitude of the disaster has been made worse by the junta’s single-minded objective of preserving its power.
The military leaders have shown that they can mobilize their forces in short order when they want, as evidenced by their violent crack down on thousands of monks and political activists last year.
More than seven months on from this brutal suppression, political activists continue to be imprisoned and tortured.
Human rights groups report that opponents of the junta's proposed constitution have been beaten and intimidated in advance of the vote.
The current pro-military constitution lacks credibility because Aung San Suu Kyi, the Nobel Peace Prize laureate who has spent 12 of the past 18 years under house arrest or in prison, and other democratic and ethnic minority leaders have not been allowed to participate in the drafting process.
Additionally, the new constitution would effectively bar Suu Kyi, from running for president because she was married to a foreigner.
As the only international actor in direct dialogue with both Burma's generals and Suu Kyi, the UN is in a position to press for a genuine process of national reconciliation.
But it’s current approach is not working.
To date, UN Secretary-General Ban Ki-moon has been addressing the crisis through the use of his &quot;good offices,&quot; with Ibrahim Gambari serving as his representative to Burma’s rulers.
In his March 2008 briefing to the UN Security Council, Gambari reported that his most recent visit to the country was &quot;frustrating&quot; and acknowledged that no tangible progress was made.
He was denied meetings with senior government leaders, representatives of ethnic minorities and political opposition groups.
The outcome was a major step backward.
This lack of progress is less a reflection of Gambari's capabilities than of the fact that he has not been empowered by the countries that  hold the most leverage over Burma’s rulers, including China, India, and  Burma's ASEAN neighbors.
The &quot;good offices&quot; approach is effective when the weight of the world is behind it and, put simply, Gambari has not  been given the clout he needs.
Since the countries that carry the most sway with the junta also have strong commercial interests in Burma,  we should not expect any of them to step up and take the lead on their own.
As Secretary-General, Ban has lived up to his self-styled vision of being the consummate diplomat, and has made some important gains in tackling the UN's bureaucratic bloat as well as dealing with the Middle East.
But on other issues, Ban has failed to live up to the critically important precedent set by his predecessor as Secretary-General, Kofi Annan, who transformed the position to promote human rights and assumed the role of the &quot;world's conscience&quot; when necessary.
Burma’s deterioration demands that Ban stop managing and begin to lead.
He should begin by demanding that Burma's government fulfill its responsibility  to protect the country’s citizens and condemn the use of violence and repressive tactics.
Given the Burmese generals' hard line stance to date, it will likely prove to be necessary for Ban to go to Burma to meet face-to-face with its leaders.
One idea is to pressure the generals to agree to multiparty talks based on the North Korean model-an, approach that Ban helped to forge from his days as South Korea’s Foreign Minister.
While the world watches, Burma's generals are consolidating their tyrannical rule as hundreds of thousands of the cyclone’s survivors remain in desperate need of shelter, clean drinking water and medical care.
The situation demands the Secretary-General’s direct involvement.
Without it, the junta will continue to have a free hand to act against the human rights of the Burmese people.
Burma’s Democratic Charade
PRAGUE – On November 7, when Burma’s first general election for almost two decades is to be held, a well-rehearsed script will play out.
The country’s ruling generals will twist what is meant to be a democratic process, whereby the people get to express their will, into a mockery of free expression in which people vote in fear and without hope.
The international community must judge Burma’s generals by their actions, not their words and promises.
The facts on the ground in Burma speak the truth more loudly than all the proclamations from the generals about a free ballot and a democratic transition.
More than 2,100 political prisoners remain in jail in Burma.
Many have been tortured, kept in horrific conditions, and denied medical care.
Attacks against the country’s ethnic minorities continue, with the deliberate targeting of civilians, including children, by the Burmese military and police.
The country’s media remains censored, freedom of expression denied, and the most popular political party in the country, the National League for Democracy, which won elections in 1990, has been forced to disband because it decided not to register for the November elections.
In such conditions, free and fair elections will be impossible.
This so-called democratic transition, a process designed solely by dictators and with input only from the regime’s loyalists, will result in continued dictatorship.
Before Burma’s fate is sealed in a new-model dictatorship, the United Nations must immediately and vigorously embark on a fresh process designed to deliver national reconciliation and democracy to that troubled country.
The international community, East and West, must unite behind a UN-led initiative to start genuine dialogue.
But, for this dialogue to have any real legitimacy, it must include the Nobel Peace Prize laureate Daw Aung San Suu Kyi, who has endured decades of house arrest, and her party, the NLD.
Other democratic opposition groups, and genuine ethnic-minority representatives, also need to be given a voice in the process.
Pressure must be brought to bear to bring Burma’s generals to a negotiating table where real negotiations take place.
All the tools at the disposal of the international community should be used to bring this about.
But responsibility for assisting Burma does not lie solely at the door of the UN.
The pressure on Burma’s generals must also be bilateral and multilateral – and should be reinforced by carefully calibrated economic measures, including targeted financial and banking sanctions.
Action must also be taken to end the impunity with which the Burmese generals have ruled.
The dictatorship stands accused of committing war crimes and crimes against humanity, mostly against the country’s minorities, who chafe at decades of oppression, ostracism, and military misrule. The UN General Assembly should follow the UN Special Rapporteur‘s recommendation to establish a Commission of Inquiry into war crimes and crimes against humanity in Burma.
Moreover, the UN Security Council should impose an arms embargo against Burma, as it has in other countries similarly afflicted by conflict and serious human rights abuses.
Those countries supplying arms to Burma expose themselves to charges of complicity in the war crimes and crimes against humanity committed by the dictatorship.
Dictatorship and human rights abuses will continue in Burma after November 7.
We do not need to wait until after the election to know this.
So there is no excuse for continued inaction.
Now is the time for the world to unite behind the people of Burma, and to help bring them peace and dignity at last.
Burma’s Drug Lord Generals
The news blackout imposed by Burma’s military junta on its decision to forego its turn as chair of the Association of Southeast Asian Nations (ASEAN) next year shows that it has received a severe blow to its prestige.
Indeed, the decision was far from voluntary.
Junta leader Senior General Than Shwe “lost face” and promptly disappeared from public view so completely that some Burmese thought he had died.
The protagonists that pressured the regime into relinquishing the ASEAN chair were not the usual Western human rights campaigners, but Burma’s closest ASEAN neighbors.
This must have made the retreat doubly painful for the generals, as ASEAN was previously one of the junta’s strongest shields against international pressure.
For ASEAN, the episode was a lesson in assertiveness.
It showed that persistent pressure works better than the “constructive engagement” that it had pursued, to no avail, for the eight years since Burma joined the organization.
This shift has been led by an embryonic grouping of elected regional parliamentarians known as the ASEAN Inter-Parliamentary Caucus on Democracy in Myanmar (AIPMC), of which I am a member.
Established last November to spur progress on democratization in Burma, parliamentarians from Thailand, Indonesia, Malaysia, the Philippines, Singapore, and Cambodia took the unprecedented step of crossing national and party lines to review critically ASEAN policy on Burma, seek the release of Aung San Suu Kyi, and disqualify Burma from chairing.
Now, we will move for the suspension of Burma’s membership of ASEAN unless Aung San Suu Kyi and other political prisoners are released and clear progress towards democracy is made through negotiations involving the Aung’s National League for Democracy and representatives of the various ethnic groups.
As elected legislators in ASEAN’s established and budding democracies, the members of AIPMC feel that our voices have merit and legitimacy.
We know that Burma’s political destiny is inextricably linked to that of our own countries.
When Burma joined ASEAN in 1997, there were only 210,000 Burmese refugees and asylum seekers throughout the region.
Now, nearly one million people have fled Burma’s political and economic chaos for neighboring countries, and another million people remain internally displaced.
Our youth are at an all-time high risk of drug addiction from the massive flow of narcotics, particularly amphetamine-type stimulants (ATS), from Burma, while the generals there maintain congenial ties with notorious drug lords.
In mid-September, the UN Office on Drugs and Crime admitted that Burma and China were the world’s top producers of ATS.
Amphetamine drugs produced in eastern Burma seem to be transported with such ease that significant quantities have been found in northeast India, on Burma’s western border.
That, together with the heroin that is trafficked from Burma to India, China, Thailand, and other countries in the region, poses a serious threat to our political and economic security.
It is both tragic and inevitable that the areas of India and China bordering Burma now suffer from those countries’ highest concentration of drug addiction and HIV infection., My own country, Thailand, receives up to 900 million amphetamine pills from Burma every year, and about a third of our regular drug users are below the age of 16.
If this is the impact on Thailand, what about the young people and children of Burma, who have been restricted from access to education, information, and health care?
It is scandalous that drug lords enjoy more freedom to operate than aid agencies, while basic access to food, education, and health care suffers many restrictions, with up to 70% of Burma’s children are chronically malnourished in some border areas.
Indeed, in August, World Food Program Executive Director James Morris revealed that the WFP had delivered only 430 tons of the 5,500 tons of rice earmarked for vulnerable people in Burma’s northern Arakan State because of restrictions imposed by the regime.
Two weeks later, the Global Fund for HIV/AIDS, Tuberculosis, and Malaria pulled its funding for programs in Burma, citing government restrictions that had created “an impossibly difficult environment.”
Preventing aid from reaching those in need is bad enough.
But Burma’s regime actually perpetuates conditions that sustain and worsen the HIV/AIDS epidemic by restricting access to counseling, medication, and other support services.
In order for HIV/AIDS programs to be effective and sustainable, affected communities must have the freedom to organize and empower themselves.
Only then can they be assured access to the resources essential for treatment options.
Aung San Suu Kyi’s eloquent plea, “Please use your liberty to promote ours,” has special resonance for us in AIPMC, who enjoy the benefits of representative democracy.
This is why we feel obligated to call on the highest levels of the international community – including the UN Security Council – to address the question of Burma, for we must show that we are serious about peace, democracy, and human rights.
The courageous people of Burma, like people everywhere around the world, deserve what far too many of us take for granted.
Burma’s Turn
YANGON – Here in Myanmar (Burma), where political change has been numbingly slow for a half-century, a new leadership is trying to embrace rapid transition from within.
The government has freed political prisoners, held elections (with more on the way), begun economic reform, and is intensively courting foreign investment.
Understandably, the international community, which has long punished Myanmar’s authoritarian regime with sanctions, remains cautious.
Reforms are being introduced so fast that even renowned experts on the country are uncertain about what to make of them.
But it is clear to me that this moment in Myanmar’s history represents a real opportunity for permanent change – an opportunity that the international community must not miss.
It is time for the world to move the agenda for Myanmar forward, not just by offering assistance, but by removing the sanctions that have now become an impediment to the country’s transformation.
So far, that transformation, initiated following legislative elections in November 2010, has been breathtaking.
With the military, which had held exclusive power from 1962, retaining some 25% of the seats, there were fears that the election would be a façade.
But the government that emerged has turned out to reflect fundamental concerns of Myanmar’s citizens far better than was anticipated.
Under the leadership of the new president, Thein Sein, the authorities have responded to calls for a political and economic opening.
Progress has been made on peace agreements with ethnic-minority insurgents – conflicts rooted in the divide-and-rule strategy of colonialism, which the country’s post-independence rulers maintained for more than six decades.
The Nobel laureate Daw Aung San Suu Kyi was not only released from house arrest, but is now campaigning hard for a parliamentary seat in April’s by-elections.
On the economic front, unprecedented transparency has been introduced into the budgetary process.
Expenditures on health care and education have been doubled, albeit from a low base.
Licensing restrictions in a number of key areas have been loosened.
The government has even committed itself to moving towards unifying its complicated exchange-rate system.
The spirit of hope in the country is palpable, though some older people, who saw earlier moments of apparent relaxation of authoritarian rule come and go, remain cautious.
Perhaps that is why some in the international community are similarly hesitant about easing Myanmar’s isolation.
But most Burmese sense that if changes are managed well, the country will have embarked on an irreversible course.
In February, I participated in seminars in Yangon (Rangoon) and the recently constructed capital, Naypyidaw, organized by one of the country’s leading economists, U Myint.
The events were momentous, owing both to large and actively engaged audiences (more than a thousand in Yangon), and to the thoughtful and moving presentations by two world-famous Burmese economists who had left the country in the 1960’s and were back for their first visit in more than four decades.
My Columbia University colleague Ronald Findlay pointed out that one of them, 91-year-old Hla Myint, who had held a professorship at the London School of Economics, was the father of the most successful development strategy ever devised, that of an open economy and export-led growth.
That blueprint has been used throughout Asia in recent decades, most notably in China.
Now, perhaps, it has finally come home.
I delivered a lecture in Myanmar in December 2009.
At that time, one had to be careful, given the government’s sensitivities, even about how one framed the country’s problems – its poverty, lack of rural productivity, and unskilled workforce.
Now caution has been replaced by a sense of urgency in dealing with these and other challenges, and by awareness of the need for technical and other forms of assistance.
(Relative to its population and income, Myanmar is one of the world’s smallest recipients of international assistance.)
There is much debate about what explains the rapidity of Myanmar’s current pace of change.
Perhaps its leaders recognized that the country, once the world’s largest rice exporter, was falling far behind its neighbors.
Perhaps they heard the message of the Arab Spring, or simply understood that, with more than three million Burmese living abroad, it was impossible to isolate the country from the rest of the world or prevent ideas from seeping in from its neighbors.
Whatever the reason, change is occurring, and the opportunity that it represents is undeniable.
But many of the international sanctions, whatever their role in the past, now seem counterproductive.
Financial sanctions, for instance, discourage the development of a modern and transparent financial system, integrated with the rest of the world.
The resulting cash-based economy is an invitation to corruption.
Likewise, restrictions that prevent socially responsible companies based in advanced industrial countries from doing business in Myanmar have left the field open to less scrupulous firms.
We should welcome Myanmar’s desire for guidance and advice from multilateral institutions and the United Nations Development Program; instead, we continue to limit the role that these institutions can play in the country’s transition.
Whenever we withhold assistance or impose sanctions, we need to think carefully about who bears the burden in bringing about the changes that we seek.
Opening up trade in agriculture and textiles – and even providing preferences of the kind that are offered to other poor countries – would likely benefit directly the poor farmers who make up 70% of the population, as well as create new jobs.
The wealthy and powerful can circumvent financial sanctions, though at a cost; ordinary citizens cannot so easily escape the impact of international-pariah status.
We have seen the Arab Spring blossom haltingly in a few countries; in others, it is still uncertain whether it will bear fruit.
Myanmar’s transition is in some ways quieter, without the fanfare of Twitter and Facebook, but it is no less real – and no less deserving of support.
Bursting the Bubble
ROME: "Get-rich-quick": for thousands of people around the world, that is what investing in the stock market means nowadays.
Old people invest their savings and pensions from home computers; young men and women give up working for salaries to seek a big pay-off in the stock options on offer from dot.com firms.
Given the global market tumult of the past ten days, examining the historical data about the performance of stock markets is a mandatory sobering experience for investors old and new and everywhere.
In the United States over the past 100 years, investments in stocks delivered an average 6% more than safe investments in short-term government securities.
This differential has been quite stable over time, although between 1947 and 1994 it was slightly higher at 8%.
The numbers are similar in other countries. In Italy between 1961 and 1994, for example, stock investments brought an average return of around 6% more than investments in treasury securities.
Certainly, there have been extraordinary periods, such as the 1950s, when the differential between investing in the stock exchange in Milan and treasury securities climbed to over 22%.
But there were also unlucky periods; in the next decade (1961-1970), when the average differential was -2%.
Higher returns mean higher risks. It is as simple as that.
If, instead of investing in the Standard & Poor index of 500 largest companies quoted on Wall Street, an investor put his savings in small, and often more innovative, companies (the so-called "small caps"), his return would have gone up in the last 50 years by 6% – i.e. by a mere15% over the return on ultra-safe government securities.
But the risks that investor faced would also have doubled, for the volatility of returns on short-term government securities was 3% during the same 50 years, but a whopping 17% for the S&P index, and 30% for small cap stocks.
This 30% figure means that, in any one year, the probability that the return on one's investment was going to be 30% higher than the return on government securities was equal to the probability that it would be 30% lower.
Given that in the same period American government securities brought, net of inflation, a little less than 2% return, this means that the return on small cap stocks had the probability, in any given year of delivering a +32% or -28% return.
In other words, long-term investments in stocks do yield more than investments in government securities, but the heightened volatility means that decades must pass before we can safely conclude that an average stock investment has indeed brought higher returns.
The history of "new economy" stocks is too short to allow anyone to say whether the extraordinary performance of the stock exchanges in more or less all countries over the last few years is a temporary speculative boom, or an irreversible result of the new economy.
Until now, even considering recent gyrations, almost all stock exchanges have been rising at breakneck speed.
Annuals return in Italy, for example, between Christmas and the end of the first quarter of this year was 120%.
But the greater volatility of the last few weeks saw the index of new European stocks lose at least 30% of its value.
Here is a powerful signal that the old relationship between returns and volatility is reasserting itself.
The fear now, however, is that a new generation of investors, including those who invest from their computers at home and who never experienced a negative performance of the market, is underestimating the risks.
In the United States, where the boom has lasted the longest, many observers have no doubt that the market is in a bubble.
Looking at price earning ratios on Wall Street, Robert Shiller, an economist at Yale University and one of the most convinced believers in the bull market, observed recently that stocks have never been more overvalued, not even in the summer of 1929, before the Great Crash.
The data, at least for the American economy, certainly shows that the new economy is generating extraordinary productivity increases.
But in light of historical experience, this may not be all that convincing.
Ours is not the first experience of a technological leap; at the previous turn of the century, the world saw the introduction of the electric engine and of the telegraph – clearly both inventions of comparable significance to the Internet.
Yet, during that period, the differential in returns between stocks and treasury securities was on the order of 6%.
In sum, the lesson of the new economy is not that one becomes rich without any effort, simply by speculating on the stock market.
The new economy teaches us that research, technological innovation, and entrepreneurial spirit in a competitive market – all things that are not plentiful in Europe – have a high payoff.
Europe has imported from the United States some of the negative aspects of the market, such as casino-like speculation.
But it has not yet moved toward the more important features of the American economy, such as deregulation of labor and product markets, and a reduction in the weight of the public sector on the economy.
Market falls in America might quickly be overcome because of the underlying strength of the American economy;
Europe holds no such underlying strength in reserve.
For individual investors, stocks remain personal risks; for Europe as a whole, bursting any speculative bubble may risk economic stability.
Burying Augusto Pinochet
At long last, the age of General Augusto Pinochet in Chile is over.
Thirty-six years after the left took power for the first time with Salvador Allende’s peaceful revolution – one supported by votes rather than armed struggle – Chileans have opted again for real change by i naugurating a socialist and a woman as their president.
“My commitment will be to travel with you on yet another stretch of this great promenade of freedom we have been opening,” Michelle Bachelet said after being elected in January.
Her comment was an explicit reference to Allende’s last speech from the besieged La Moneda palace on September 11, 1973, when he declared that some day, much sooner than later, “we will reopen the great promenades down which free men pass.”
The street euphoria that greeted Bachelet’s victory felt very much like the emotions that gripped Santiago back in 1970, when Allende was elected.
Even the stage from which Bachelet spoke was located at almost the same place from which Allende delivered his historic victory speech 36 years ago.
But the balcony of the Students’ Federation of Universidad de Chile no longer exists, having been replaced by the tall buildings and modern subway stations that have marked the intervening years of Chile’s history.
Indeed, although Michelle Bachelet, like Allende, is a socialist and a physician, today’s Chile is not the country of 1970.
This is not only because Pinochet’s 17 years in power, from 1973 to 1990, dramatically shattered the country’s democracy, with thousands of people executed, missing, or tortured – among them Bachelet’s own father, an air force general who died under torture because he opposed the coup.
The changes go much deeper, which explains how a country with a huge Roman Catholic majority has chosen to be led by a woman who is a socialist, an agnostic, and an unmarried mother.
With Allende’s victory, Chile’s stock exchange and markets were gripped by financial panic.
But this time, the markets were calm, mostly because economists believe that Chile’s GDP will continue growing in 2006 at a brisk 6.3% annual rate.
This change in market sentiment is one of the great achievements of President Ricardo Lagos, Bachelet’s predecessor, who was also a socialist.
So it is small surprise that he left office with more than 75% popular support.
Bachelet’s margin of victory was far larger than the scant 31,000 votes that brought Lagos to power in January 2000.
Back then, many predicted that Lagos wouldn’t last the thousand or so days that Allende ruled before Pinochet launched his coup.
Today, however, nobody is predicting chaos for Bachelet.
Lagos brought Chile free-trade agreements with the United States, the European Union, and China, an unemployment rate of less than 8%, and a growth rate over 6%.
Investment this year could reach a record-high 30% of GDP, and changes in education, health, and justice have transformed society.
Most importantly, Lagos leaves office having erased from the constitution the dictator’s signature.
The new constitution eliminated the so-called “authoritarian enclaves” by subordinating the armed forces to civilian rule and removing their designated senators from Parliament.
As for Pinochet himself, ever since July 2004, when the US Senate revealed his vast secret bank accounts, the once-powerful dictator has become a pariah.
At age 90, he is being prosecuted for his crimes and corruption.
Thus, the general who yearned to see his picture in Chilean history books next to that of our liberator, Bernardo O’Higgins, must now resign himself to dying abandoned even by those who, until only two years ago, revered and honored him.
That is hardly surprising.
After all, one of the reasons Chile’s right hasn’t won an election since 1990, when democracy was restored, has been its silence regarding Pinochet’s crimes and financial misdeeds.
But, in yet another sign of Chile’s transformation, the right-wing candidate that Bachelet defeated, Sebastián Piñera, is a liberal entrepreneur who has never hidden his rejection of Pinochet and his dictatorship.
Piñera’s great challenge will be to use his 46.6% of the vote in January to strengthen his leadership and his effort to build a new right-wing coalition with unimpeachable democratic credentials, thereby enabling it one day to defeat the ruling “Concertación” coalition that Bachelet leads.
Such a reformed right’s opposition to Bachelet will probably focus on her efforts to modify the country’s neo-liberal model as she tackles the country’s persistent knots of poverty and inequality.
If Bachelet, who has already served as Minister of Health and Minister of Defense, is to succeed as president, she must transform this other Chile, where 18% of the population is poor, and 5% indigent.
These are the Chileans for whom a lack of hope might make social unrest seem to be the only alternative.
From now on, the danger of a military comeback will no longer be present to act as a deterrent.
In any case, on March 11, when Michelle Bachelet crosses the presidential sash over her chest, a new Chile will set itself in motion.
The first truly post-Pinochet-era government will have begun.
Bush/Gore: There is a Difference
BOSTON/ROME: Any reader of non-US newspapers could draw two conclusions about America’s electoral campaign: 1. that there is little difference between the two candidates; 2. that a mere detail – a slip of the tongue, a false step, a piece of gossip – could decide the election.
Both conclusions are wrong.
Start with the first.
Differences between Bush and Gore on economic policy are as deep as those between the right and left in France or Italy.
The cleavage lies in a very different visions about the state and it goes beyond questions about how to divide America’s budget surplus between increased spending or cutting taxes.
Bush’s Republicans favor increasing disposable family income (by reducing taxes) and more often leaving to the market, the production of goods and services now publicly provided and paid for by the taxpayer, rather than the user.
Gore’s Democrats prefer more traditional public management and control.
In public education, Bush favors a system of vouchers administered by individual states.
Through such vouchers, citizens are given a subsidy with which they “purchase” education either from a public or private school.
The idea is that market competition among different educational institutions will increase the quality of education.
Democrats oppose vouchers and prefer major federal investments in order to improve the quality of public schools.
On pensions, Bush advocates a mixed system of pensions, with a private component.
The idea is to create more freedom for taxpayers to manage their pension funds, bringing incentives for the allocation of these monies into stocks and bonds.
Gore prefers to maintain the system essentially as it is and to use the budget surplus to eliminate the deficit in the pension system that will open in the second decade of this century, when a wave of baby boomers reaches retirement age.
In other words, Gore sees the pension system as a means to redistribute between rich and poor;
Bush sees it more as a “private” system to accumulate individual pension savings.
A similar difference exists in health policy: Bush prefers fiscal relief for taxpayers so that they can buy private medical insurance;
Gore prefers public management with more public intervention.
In sum, Americans are confronting fundamental differences about the right type of school, pension, and healthcare for the future.
The fact that in the weeks before the elections the candidates court undecided voters by trying to appear as centrist as possible should surprise no one.
The only area where there doesn’t seem to be much difference between the two candidates is foreign policy, and this is a good sign for the world, because it portends stability in America’s posture and, above all, cooperation between the two parties even if one of them were to control Congress and the other the Presidency.
Still, there are differences: Gore is more “interventionist”;
The second point regards the way in which the vote will be decided.
The story of presidential elections in the twentieth century goes like this: if a foreign observer had only the following two pieces of data: 1. economic growth during the electoral year and 2. the name of the incumbent president, the observer could foresee with precision the results of presidential elections, independently of the entire campaign.
An incumbent president running for a second term (like Clinton in 1996) has an advantage; beyond that, strong economic growth in the electoral year favors the party of the incumbent president.
All the rest – scandals large and small, marijuana smoke, and errors of grammar – divert journalists but influence the results little.
Why, then, do candidates spend enormous amounts on campaigning?
For the same reason that Coca-Cola and Pepsi spend millions to compete – if both stopped advertising, their market shares would not change much, even if, obviously, it would change if only one of the two engaged in publicity.
In other words, conservative vote for Republicans and those on the left vote for Democrats on the basis of differences in the party programs, those in the middle go from one side to the other on the basis of the state of the economy and perceptions about the “competence” of the incumbent administration.
After WWII the only two incumbent presidents not reelected were Carter in 1980, who ran in the middle of a recession, and Bush (the father) in 1992, who paid for mediocre economic growth in 1990-1992.
(Had America’s economy come out of recession six months earlier, Clinton would probably not have won in 1992.)
It took the Watergate scandal in 1974 and Nixon’s resignation to make Gerald Ford (who became President upon Nixon’s resignation) lose in 1976.
Eisenhower in 1956, Johnson in 1964, Reagan in 1984, Bush in 1990, and Clinton 1996 (all incumbent presidents or vice presidents) with an economy in good shape would have won even if they hadn’t opened their mouth for the whole electoral campaign.
If this is so, given strong growth in America, Vice President Gore should win easily.
Instead Bush is holding his own.
Two factors work to Gore’s disadvantage.
Many think that the benefits of the “new economy” have little to do with who was in office.
If this is really a “new” economy maybe the economy’s impact on electoral results is also “new”.
The second factor is that the Republicans who control Congress are relatively “extremist” and might lose the legislative elections.
American voter tend to prefer a system that balances the President and Congress.
The expected new power of Democrats in Congress puts Gore at a disadvantage.
Having said all this, if Gore loses on November 7 he will confirm that he is one of the least liked politicians of the 20th century.
Note, indeed, that this is no “Clinton effect”: many polls indicate that Clinton would easily beat Bush.
In sum, an incumbent vice president who loses with an economy such as exists in America today should retire to private life.
If he wins by a hair’s breath, he better work very hard to have any hope in 2004.
Bush Inherits the Wind
The most shocking statement in the aftermath of Hurricane Katrina was President George W. Bush’s remark that “I don’t think anybody anticipated the breach of the levees” that protect New Orleans from flooding.
New Orleans is a city mostly below sea level, and must be protected by levees to keep water out.
Concern that the levees might break in the midst of a powerful hurricane was widespread among scientists, engineers, and emergency-preparedness experts.
Yet Bush apparently did not know of these concerns, even days after the hurricane destroyed the levees and flooded the city.
There is a simple fact on display here, one that goes well beyond this particular hurricane, and even this particular president.
There is a deep disconnect in American politics between scientific knowledge and political decisions.
Bush bears much responsibility for this.
He has proven to be one of America’s least knowledgeable presidents when it comes to science – and one of the most ready to turn science into a political issue.
In recent months, Bush undermined biological theories of evolution in favor of Christian fundamentalist dogmas.
He disdains climate science and public health science when it conflicts with the beliefs – and interests – of his core supporters.
Simply put, Bush’s record on science policy is miserable.
Climate scientists have warned for years that global warming caused by manmade emissions of greenhouse gases will generate more extreme storms.
While there is no scientific way to link a particular hurricane such as Katrina to the long-term trend – in the sense that Katrina might have been bad luck rather than a sign of manmade climate change – the energy of hurricanes throughout the world has been rising markedly.
Bush, alas, led an aggressive effort to discredit climate science rather than to respond to its findings.
He called for delays in reducing greenhouse gas emissions that cause global warming, which in turn causes the energy of hurricanes to rise.
According to the underlying science that Bush ignores, hurricanes take their energy from the warmth of seawater.
That is why hurricanes occur in hot tropical regions, and at the end of the summer months, when the sea surface temperatures are at their annual maximum.
Manmade global warming raises not only air temperatures, but sea-surface temperatures as well.
Higher sea-surface temperatures translate into more powerful storms in the world’s oceans.
Hurricanes are measured according to three dimensions: frequency, intensity, and duration.
The frequency of hurricanes has not changed much, if at all.
The big changes are in hurricanes’ intensity and duration.
Intensity measures a hurricane’s force, which includes wind speeds, and there has been some recorded increase.
The biggest change, however, has been in the duration of hurricanes: how many days each hurricane lasts.
Duration has risen markedly around the world.
The total energy of a hurricane is found by multiplying the intensity of the hurricane by its duration.
This, too, has risen sharply, and more is in store as temperatures rise.
Scientists and engineers who work on climate change stress that governments need to adopt two main responses.
The first, called “mitigation,” means reducing the amount of manmade climate change.
This can be done by changing the world’s energy system to limit emissions of carbon dioxide into the atmosphere – the main driver of manmade climate change.
One option is a shift to non-carbon energy sources, such as renewable energy (solar and wind power) and nuclear energy.
Another option is to combine carbon-based energy (coal, oil, and gas) with new technologies that prevent the emission of airborne carbon.
The second response to climate change, called “adaptation,” requires that we ready ourselves for the climate change now underway and the increased climate change to come in future years.
This means preparing for hurricanes that are more powerful in both intensity and duration.
An attentive national government would surely have realized that the Gulf region of the United States is more vulnerable to high-energy hurricanes.
Indeed, Hurricane Katrina was the third most intense hurricane ever to make landfall in the US.
Such a government would have taken more action to strengthen levees.
The Bush administration’s negligence is especially shocking given the remarkable amount of scientific expertise that exists in the US.
Somehow, scientists have been pushed aside by political operators.
But the US government’s failings are matched in many parts of the world, and certainly in the poorest countries, where scientific expertise is scarce, and where many governments do not have scientific advisory councils to turn to for guidance.
Hurricane Katrina is a wakeup call, not only for the US but for the world.
We are entering a period when good science is vital for our survival.
On a crowded planet with threats to our climate, oceans, forests, food production, and water supply, and with global travel and high population densities increasing the risk of worldwide disease epidemics, we must turn to the best of our scientific and engineering knowledge to find a safe passage.
Bush’s Bad-Faith Energy Policy
One of the more surreal sessions at this year’s World Economic Forum in Davos had oil industry experts explaining how the melting of the polar ice cap – which is occurring faster than anyone anticipated ­– represents not only a problem, but also an opportunity: vast amounts of oil may now be accessible.
Similarly, these experts concede that the fact that the United States has not signed the Law of the Sea, the international convention determining who has access to offshore oil and other maritime mineral rights, presents a risk of international conflict.
But they also point to the upside: the oil industry, in its never-ending search for more reserves, need not beg Congress for the right to despoil Alaska.
President George W. Bush has an uncanny ability not to see the big message.
For years, it has become increasingly clear that much is amiss with his energy policy.
Scripted by the oil industry, even members of his own party referred to an earlier energy bill as one that “left no lobbyist behind.” While praising the virtues of the free market, Bush has been only too willing to give huge handouts to the energy industry, even as the country faces soaring deficits.
There is a market failure when it comes to energy, but government intervention should run in precisely the opposite direction from what the Bush administration has proposed.
The fact that Americans do not pay the full price for the pollution – especially enormous contributions to greenhouse gases – that results from their profligate energy use means that energy is under-priced, in turn sustaining excessive consumption.
The government needs to encourage conservation, and intervening in the price system ­­– namely, through taxes on energy – is an efficient way to do it.
But, rather than encouraging conservation, Bush has pursued a policy of “drain America first,” leaving America more dependent on external oil in the future.
Never mind that high demand drives up oil prices, creating a windfall for many in the Middle East who are not among America’s friends.
Now, more than four years after the terrorist attacks of September 2001, Bush appears to have finally woken up to the reality of America’s increasing dependence; with soaring oil prices, it was hard for him not to note the consequences.
But, again, his administration’s faltering moves will almost surely make matters worse in the immediate future.
Bush still refuses to do anything about conservation, and he has put very little money behind his continuing prayer than technology will save us.
What, then, to make of Bush’s recent declaration of a commitment to make America 75% free of dependence on Middle East oil within 25 years.
For investors, the message is clear: do not invest more in developing reserves in the Middle East, which is by far the lowest-cost source of oil in the world.
But, without new investment in developing Middle East reserves, unbridled growth of energy consumption in the US, China, and elsewhere implies that demand will outpace supply.
If that were not enough, Bush’s threat of sanctions against Iran poses the risks of interruptions of supplies from one of the world’s largest producers.
With world oil production close to full capacity and prices already more than double their pre-Iraq War level, this portends still higher prices, and still higher profits for the oil industry – the only clear winner in Bush’s Middle East policy.
To be sure, one shouldn’t begrudge Bush for having at last recognized that there is a problem.
But, as always, a closer look at what he is proposing suggests another sleight of hand by his administration.
Aside from refusing to recognize the importance of global warming, encourage conservation, or devote enough funds to research to make a real difference, Bush’s grandiose promise of a reduction of dependence on Middle East oil means less than it appears.
With only 20% of US oil coming from the Middle East, his goal could be achieved by a modest shift of sourcing elsewhere.
But surely, one would think, the Bush administration must realize that oil trades on a global market.
Even if America were 100% independent of Middle East oil, a reduction in supply of Middle East oil could have devastating effects on the world price – and on the American economy.
As is too often the case with the Bush administration, there is no flattering explanation of official policy.
Is Bush playing politics by pandering to anti-Arab and anti-Iranian sentiment in America?
Or is this just another example of incompetence and muddle?
From what we have seen over the past five years, the correct answer probably contains more than a little bad faith and sheer ineptitude.
Bush’s Crash Test Economics
Fifteen years ago, the United States was in the midst of what you could call its “Age of Diminished Expectations.”
Productivity gains had stalled, energy prices were high, the backlog of potential technologies that originated in the Great Depression had been exhausted, and waning benefits from economies of scale led nearly every economist to project that economic growth would be slower in the future than it had been in the past.
With productivity growth stagnating for almost two decades, it made sense back then to argue that the US government’s social-insurance commitments (Social Security, Medicare, and Medicaid) were excessive and so had to be scaled back.
That was then, this is now.
The intervening years have seen an explosion of technological innovation that has carried America’s general productivity growth back up to its pre-slowdown levels.
Indeed, today the US economy is standing on the brink of biotechnological and, perhaps, nanotechnological revolutions of vast scale and scope.
Yet the same calls to scale back America’s social commitments are heard.
Social Security’s actuaries may not have fully recognized the impact of today’s technological revolutions, but they have markedly boosted the scale of the system that the US government can afford.
Fifteen years ago, the consensus was that America's Social Security System was in huge trouble, that it needed the equivalent of an engine rebuild.
Today its problems look, as the Brookings Institution economist Peter Orszag says, much more like the equivalent of a slow tire leak: you have to fix it eventually, but it isn’t very hard to do and repair it isn’t terribly urgent.
So why is the Bush administration spending time and energy proposing radical changes to the Social Security System as its signature domestic policy initiative – indeed, as virtually its only policy initiative?
Everyone who worries about America’s weak fiscal position puts Social Security’s relatively small funding imbalance far down the list of priorities.
The highest priority problem is the overall budget’s medium-run outlook, as the Bush tax cuts have opened Reagan-size deficits that threaten to cripple US economic growth.
The second highest priority problem is figuring out what to do in the long term with Medicare and Medicaid.
America must decide the size of its public health programs and how to finance them.
In reality, this is more of an opportunity than a problem: if we did not expect that doctors and nurses will be able to do marvelous things in a generation or two that they cannot do now, we would not be projecting serious fiscal deficits arising from the health programs.
The third most serious problem is to put the US government’s General Fund budget on a sustainable basis, so that the non-Social Security government can finance itself and meet its commitments after the date – around 2020 – when it can no longer borrow from the Social Security Trust Fund.
The bottom line is that Social Security’s long-term funding difficulty, while real, is projected to be much smaller and much further in the future than any of the nearer, larger, and more significant fiscal problems currently facing the US government.
If Social Security is a slow tire leak, then the post-2020 General Fund is an urgent brake job, Medicare and Medicaid are a melted transmission, and the budget deficit is the equivalent of having just crashed into a tree.
What kind of driver, owning a car that has just crashed into a tree, has a burned-out transmission, and needs a brake job, says, “The most important thing is to fix this slow leak in the right rear tire?” George W. Bush is that type of driver.
There are three theories as to why the Bush administration is focusing on Social Security.
The first is simple incompetence: Bush and his inner circle simply do not understand the magnitude and importance of the federal government’s other fiscal problems.
The second is ideology.
For some reason Bush and his people think it is important to undermine the successes of the New Deal institutions established under Franklin Roosevelt.
The third reason is bureaucratic capture: just as the principal aim of Bush’s Medicare Drug Benefit bill of 2003 was to boost pharmaceutical company profits, so the Bush administration’s Social Security proposal will most likely be tailored to the interests of Wall Street.
I don’t see any other, more pressing, reforms – such as raising income taxes to pay for national security – gaining any traction in the Bush regime.
If I had to bet on a cause, I would put my money on sheer incompetence.
After all, that seems to be the common denominator of every policy controlled by his White House.
Bush’s Dying Days in Gaza
PARIS – During a visit to the Middle East, Secretary of Defense Robert Gates warned that enemies of the United States should not use the power vacuum there to try to alter the status quo or to undermine the new American president’s objectives.
But the major challenge in this respect is now coming, ironically enough, from America’s main ally in the region, Israel.
Hardliners in Israel naturally regret the end of the Bush administration, for they know that, even if President Barack Obama does not dramatically change US policy toward Israel once he assumes power, he will not repeat Bush’s unconditional support.
Israeli hardliners saw the “war on terror” and the war in Iraq as their wars, supported Bush’s war-like rhetoric and isolation of Iran, and considered the neo-conservatives their ideological kin.
In particular, they shared the neo-cons’ conviction that military intervention is a legitimate and effective way of achieving political change.
This is what the Israeli government tried to achieve in Lebanon by “smashing Hezbollah” in 2006.
Now it is trying to do the same in Gaza.
In response to Hamas rockets, Israel is now using disproportionate force, just as it did in Lebanon.
The result will probably be the same: at the end of the campaign, Hamas will have increased its popularity in Palestine and in the Arab world.
Indeed, the current military operation follows Israel’s two-year blockade of Gaza, which was supposed to have damaged Hamas, but failed to do so.
It is likely that Obama will consider a Palestinian state to be in America’s fundamental interest.
He will see it as a precondition for altering perceptions of the US in the Arab and Muslim worlds, since restoring America’s credibility will be a major objective of the incoming administration.
Israeli hardliners cannot be sure that, at the end of the day, Obama will not find it necessary to change policies toward Israel in order to achieve this objective, for he considers it to be a strategic concern.
They also know, of course, that any serious engagement with the Palestinian question must imply engaging Hamas in the search for a two-state solution.
The Israeli government is, in short, using the Bush administration’s dying days to implement its military-first policy.
At the same time, it is trying to create a situation that will, in effect, make it more difficult for the new president to achieve his policies in the region.
News reports show that revulsion is spreading through the Arab world, where American and Israeli flags are burned side-by-side.
This war, therefore, will simply make it more difficult to engage with those countries at the very moment such talks are absolutely necessary.
One reason for international suspicion of Hamas has been the support that it receives from Iran.
Obama has vowed to change American policy toward Iran, opening diplomatic channels rather than merely issuing military threats.
Such a change would make it easier to end the isolation of Hamas as well.
America’s renewed engagement with Iran is clearly a policy that will have a far-reaching impact in the Middle East.
Although that strategic change in US policy is also in Israel’s best interests, most Israelis will not see it that way.
An American dialogue with Iran will be a serious blow to the interests of Israeli hardliners, and some of them dream of making it impossible.
Constraining American policy may, therefore, be one of the motivations behind Israel’s incursion into Gaza.
Yet it is a grave challenge to international peace and could spread instability throughout the region.
Were that to occur, Obama’s planned rapprochement with Iran would be strangled in the cradle.
In the days before Obama takes office, while a power vacuum persists in the US, the European Union has a unique role to play in international initiatives to end the violence and the unfolding humanitarian crisis.
For the EU to succeed, it must pursue the policy launched by the French Presidency, giving priority to stopping the war and distancing itself from Israel’s disproportionate use of force.
Negotiating a ceasefire between Israel and Hamas could be the first step toward a permanent end to hostilities and to the blockade of Gaza.
It could, in effect, pave the way for the new Obama administration to convene an international conference to implement the two-state solution for Palestine, which should follow the ceasefire.
Such initiatives should not become bogged down in tortuous negotiations, but should focus on implementing the basic principles for a two-state solution, along the lines proposed by the Clinton administration before it left office eight years ago.
Hamas has already engaged in ceasefire negotiations and should now be brought fully into the peace process, alongside Fatah, but it will, of course, have to abandon its own strategy of force, as expressed through the rockets it has rained down on Israel.
It is a policy that has proved to be ineffective, and that is illegal under international law because it targets Israeli civilians.
Israel, for its part, needs to recognize that, if it wants to act in ways that are consistent with its own democratic values, it must abandon its strategy of violence and disrespect for the basic human rights of the Palestinians, as well as the idea of “Great Israel.”
In short, it must accept a Palestinian state, through deeds as well as words.
Until this happens, dangerous days lie ahead until Obama’s inauguration, and the international community will need strong, level-headed politicians to see it through.
Bush’s Flawed Middle East Peace Plan
That a summit in Damascus of the Middle East’s “axis of evil” – Iran, Hezbollah, Syria, and Hamas – was convened immediately following President George W. Bush’s call for a conference of “moderates” to promote an Israeli-Palestinian peace demonstrates once again how intertwined the region’s problems are.
The Damascus meeting reflects Iran’s view of Israeli-Arab peace as a major strategic threat, because it would condemn it to isolation in a hostile Arab environment free of its conflict with Israel.
The Iranians also sought the meeting to forge an alliance against a possible US attack on their country’s nuclear installations.
America has always known that the Middle East’s problems are interconnected, but for years it got its priorities wrong, because it failed to see that if there was an Archimedean point to the Middle East problem, it was to be found in the Palestinian issue, not the “War on Terror,” Iraq, or the need for Arab democracy.
It took Bush six years of wrongheaded policies to finally admit that “Iraq is not the only pivotal matter in the Middle East.”
Bush’s initiative is a last-ditch effort to salvage America’s position in a region where it is on the defensive on all fronts.
It is especially ironic that, in stark contrast to his own rhetoric, Bush’s call for a Middle East peace conference is a call to wage war against the party, Hamas, that won a democratic election, and to make peace with the loser, Fatah.
Nevertheless, Bush’s initiative is not devoid of virtue.
He has finally acknowledged the failure of the “road map,” and hence the need to skip interim stages and move directly to a final settlement between Israelis and Palestinians.
Moreover, both he and Secretary of State Condoleezza Rice were unusually blunt in warning Israel that its future does not lie in “continued occupation of the West Bank.”
Bush also came as close as he could to endorsing former President Bill Clinton’s peace plan by affirming that “the borders of the past, the realities of the present, and agreed changes” will define his two-state solution.
But Bush’s strategy suffers from serious inconsistencies.
The conference ground rules exclude radical forces – Syria and Hamas – thus encouraging them to persist in their role as spoilers.
It is a fantasy to believe that peace can be concluded without the radicals’ participation.
As long as Hamas and Syria are left out of the United States-led peace process, they are condemned to Iran’s orbit.
The Saudis certainly have an interest in supporting this last ditch American attempt for an Israeli-Palestinian peace, especially now that, for the first time ever, Israel has refrained from opposing an arms deal between the US and Saudi Arabia.
The common fear of Iran is a major consideration here.
However, Saudi Arabia’s willingness to participate in the conference might come with a price too high for Israel to pay: an endorsement of the Saudi peace initiative.
This is the reason Secretary of State Condoleezza Rice was cautious in her reaction to the Saudis’ ambiguous acceptance of their invitation to attend the conference.
Bush was right to call on friendly Arab states to contribute to an Israeli-Palestinian peace.
But how much leverage can he apply when they are so badly needed for his “War on Terror” and for containing Iran?
Though certainly a welcome new idea, Bush’s call for Egypt and Jordan to replace Israel as the gateway for Palestinian exports is most likely to be resisted.
For these “moderate” American allies, peace is about Israeli concessions, not about pulling Israel’s chestnuts out of the fire, certainly as long as it refuses to endorse the Arab peace plan.
The current American initiative sounds reasonable, but it is essentially unrealistic.
Tony Blair, the new envoy of the Quartet (the US, the European Union, the United Nations, and Russia), has called for a “conference with substance.”
But Israel will be required to engage in peace talks only if the Palestinians crack down on terrorism – that is, risk another Fatah-Hamas civil war – and eliminate corruption.
Such a sequence – and a conference whose harmless aim is “to review progress toward building Palestinian institutions, look for ways to support further reforms, and support the effort going on between the parties” – fits perfectly with the Israeli view.
But Palestinian militias have shown time and again that they will not give up the armed struggle before they see a Palestinian state along the lines of the 1967 borders, with Arab Jerusalem as its capital.
This is the fundamental pitfall of a strategy based on driving a wedge between Palestinian President Mahmoud Abbas’s “moderates” and Hamas’s “extremists.”
If Abbas is to prevail, it will not be through “gestures” or a process focusing on “institution building,” however important these may be.
Nothing less than a full-fledged peace agreement that meets the fundamental aspirations of Palestinian nationalism is likely to give him the popular legitimacy needed to confront the radicals.
Bush\u0027s Four Years of Failure
Many around the world are surprised at how little attention the economy is receiving in President Bush's re-election campaign.
But I am not surprised: if I were President Bush, the last thing I would want to talk about is the economy.
Yet many people look at America's economy, even over these past three and half years, with some envy.
After all, annual economic growth - at an average rate of 2.5% - may have been markedly slower than during the Clinton years, but it still looks strong compared to Europe's anemic 1% growth.
But these statistics mask a glaring fact: the average American family is worse off than it was three and half years ago.
Median real income has fallen by over $1,500 in real terms, with American families being squeezed as wages lag behind inflation and key household expenses soar.
In short, all that growth benefited only those at the top of the income distribution, the same group that had done so well over the previous thirty years and that benefited most from Bush's tax cut.
For example, some 45 million Americans today have no health insurance, up by 5.2 million from 2000.
Families lucky enough to have health insurance face annual premiums that have nearly doubled, to $7,500.
American families also face increasing job insecurity.
This is the first time since the early 1930's that there has been a net loss of jobs over the span of an entire presidential administration.
Bush supporters rightly ask: is Bush really to blame for this?
Wasn't the recession already beginning when he took office?
The resounding answer is that Bush is to blame.
Every president inherits a legacy.
The economy was entering a downturn when Bush took office, but Clinton also left a huge budget surplus - 2% of GDP ­­- a pot of money with which to finance a robust recovery.
But Bush squandered that surplus, converting it into a deficit of 5% of GDP through tax cuts for the rich.
The productivity growth that was sustained through the downturn presented both an opportunity and a challenge.
The opportunity: if the economy was well managed, the incomes of Americans could continue to rise as they had done in the 1990's.
The challenge: to manage the economy so that growth would be robust enough to create the new jobs required by new entrants to the labor force.
Bush failed the challenge, and America lost the opportunity because of his wrong choices .
True, the economy was stimulated a little bit by Bush's tax cuts; it was probably stronger in the short run (though arguably not in the long run) than it would have been had there been no tax cuts.
But there were other policies that would have provided far more stimulus at far less cost.
Bush's objective, however, was not to maintain the strength of the economy; it was to push forward a tax agenda that shifted the burden away from those who could best afford to bear it.
Bush's failed policies have not only cost the economy dearly; they have left the economy in a far weaker position going forward.
The non-partisan Congressional Budget Office agrees that even without Bush's new expenditure initiatives and tax proposals, costing trillions of dollars, the deficit will not be eliminated in the foreseeable future - or even cut in half, as Bush has promised.
Expenditures on which America's future economic health depends - on infrastructure, education, health, and technology - will be crowded out, jeopardizing long-term growth.
Because fiscal policy did not stimulate the economy, a greater burden was placed on monetary policy.
Lower interest rates worked (a little), but for the most part by encouraging households to refinance their mortgages, not by stimulating investment.
The increased indebtedness of households is already leading to higher bankruptcy rates, and will likely dampen the recovery.
National debt, too, has risen sharply.
The huge trade deficit provides the spectacle of the world's richest country borrowing almost two billion dollars a day from abroad, contributing to the weak dollar and representing a major source of global uncertainty.
There might be some hope for the future if Bush owned up to his mistakes and changed course.
But no: Bush refuses to take responsibility for the economy, just as his administration fails to take responsibility for its failures in Iraq.
In 2003, having seen that its tax cuts for the rich had failed to stimulate the economy as promised, the administration refused to revise its strategies, but instead just prescribed more of the same medicine.
It now promises to make those tax cuts permanent.
The real risk is that this is one promise that Bush, if re-elected, will try to keep.
At the end of August, I joined nine other American Nobel Prize winners in economics in signing an open letter to the American public.
It is hard to get any two economists - let alone two Nobel Prize winners - to agree on anything.
But in this case our concerns were so grave as to overcome any disagreements.
We wrote: "President Bush and his administration have embarked on a reckless and extreme course that endangers the long-term economic health of our nation….
The differences between President Bush and John Kerry with respect to leadership on the economy are wider than in any other Presidential election in our experience.
President Bush believes that tax cuts benefiting the most wealthy Americans are the answer to almost every economic problem."
Here, as elsewhere, Bush is dead wrong, and too dogmatic to admit it.
Bush’s Gambling Debts
George W. Bush’s economic policies have been based on an extraordinarily reckless gamble that reflects a political coalition of two major forces: the super-rich and evangelical Christians.
As those policies fail, global financial markets are reacting negatively, adding uncertainty to the world economy, and there is little relief in sight, because America is entering a period of prolonged political infighting and stalemate.
The super-rich had one over-riding objective in joining the Bush coalition: tax cuts that overwhelmingly benefited the wealthiest households.
Evangelicals were brought in on the basis of so-called “family values,” meaning opposition to abortion and gay marriage, and promises of active government support for religious activities, including direct payments to religious groups for social services that they provide locally and internationally.
The Bush team believed that they would eventually balance the tax cuts for the rich with reductions in government spending, but they never explained this to the public.
Instead, for four years they pretended that budget deficits were of little concern.
Only after being re-elected did they begin to explain that large budget deficits, caused mainly by lower tax revenues, would require sharp cuts in social security, health care spending, and other areas.
But the majority of Americans, having supported the tax cuts in Bush’s first term because it gave them a little extra cash, do not support the attack on basic government services that has followed.
This opposition extends to Christian evangelicals voters, who tend to live in working-class and middle-class households that depend on many kinds of government social services.
Despite the avowedly “free-market” beliefs of many Christian fundamentalists, as voters they support government-financed pensions, health care, and other public services.
Bush’s tax cutting was irresponsible from the start, but became much more so after September 11, 2001.
The Bush administration raised military spending sharply as it went to war in Afghanistan and Iraq, and as it increased spending on national security at home, without ever explaining to the American people how this would be financed.
The military-plus-security budget soared by more than 2% of GNP, while tax revenues fell by much more.
At the same time, Bush supported expenditure increases for popular items like education and prescription drug benefits, but paid for these services by borrowing the money rather than ensuring sufficient tax revenues.
No sooner did this strategy pay off with a narrow re-election victory – one that strengthened Republican control of Congress – than the dark realities of Bush’s fiscal recklessness started to be recognized.
The annual US budget deficit reached 5% of GNP, with an enormous part of the gap financed each year by Asian central banks, which now hold about $2 trillion in claims against America.
The problem is that Bush’s reckless gamble has now built up considerable political momentum.
As soon as he was re-elected, Bush started to propose cuts in popular government programs, but his own party is rejecting those cuts.
With the Republican-controlled Congress seeking to make the tax cuts for the rich permanent, the world is beginning to realize that America’s budget deficits are now entrenched, with no end in sight.
Because America’s economy is so large, and the dollar so central to global finance, chronic US budget deficits mean huge global repercussions.
The dollar is weakening, as financial markets understand that the US will need to borrow huge sums from abroad for years to come.
More ominously, the willingness of foreign central banks to lend to the US also looks likely to end.
After all, why should the central banks of China, Japan, South Korea, and other Asian countries accumulate vast holdings of US Treasury bills if the dollar is likely to lose value in the years ahead?
In a bizarre, but not unexpected way, America is lashing out at others for its problems.
Huge tax cuts and rising military spending have fueled an enormous rise in imports, and therefore a yawning trade deficit now accompanies America’s weak fiscal position.
But US politicians are blaming China and other countries for “unfair trade,” even threatening them with sanctions.
This response to homegrown problems plays well with voters, but it is ridiculous and ignorant, especially since the US has been depending on China to help finance the fiscal deficits.
In essence, the US is lashing out at its own banker, even as it asks the banker for yet more loans!
When Bush asked for spending cuts at the beginning of the year – including a social security reform that includes cuts in future benefits – world financiers expected that Bush would get his way, or most of it.
Little did they appreciate that American voters, having never actually supported spending cuts, would resist.
As that reality sinks in, economic prospects darken.
Foreigners will become less enthusiastic about continued lending to the US, weakening the dollar further, forcing up US interest rates, and threatening to undermine America’s stock market and consumer spending.
But as the storm clouds gather in the coming year, the political coalition that put Bush in power will stifle progress in undoing the fiscal mess.
Bush’s gamble was a loser from the start, generating costly results – mainly for the US, but for the rest of the world, too – for years to come.
Bush’s Intellectual Torturers
Paris – The top-secret memoranda released by the Obama administration concerning torture practices in CIA prisons shed new light on a fundamental question: how is it that people acting in the name of the United States government could so easily accept the idea of torturing the detainees in their charge?
The newly published documents do not disclose the very facts of torture, which were already well known by whomever wanted to know them.
But they do reveal a great deal of information about how the torture sessions unfolded and how the agents involved perceived them.
What is most striking is the discovery of niggling little rules, outlined in CIA manuals and co-opted by the government’s legal executives.
One would have thought that torture was the result of blunders or unintentional excesses committed on the spur of the moment.
On the contrary, these memos make clear that torture was a tactic formulated in minute detail.
In the Bush administration’s “guidelines,” torture can be divided into three categories, of varying levels of intensity: “baseline” (nudity, dietary manipulation, sleep deprivation); “corrective” (hitting); and “coercive” (water-dousing, box confinement, water-boarding).
For a facial slap, the interrogator was supposed to hit with fingers slightly spread, at equal length between the tip of the chin and the bottom of the corresponding earlobe.
Dousing a naked detainee with water was to last 20 minutes if the water’s temperature measured 5 °C, 40 minutes at 10 °C, and up to 60 minutes at 15 °C. Sleep deprivation could not exceed 180 hours, but could start over again after eight hours rest.
Water immersion in a tub could last up to 12 seconds, no more than two hours a day, for up to thirty days in a row.
Waterboarding could last 40 seconds at most, though two prisoners were subjected to this torment a combined total of 286 times in a single month.
Confinement in a small box could not exceed two hours, but if the prisoner could stand in the box, it could continue up to eight hours at a time, 18 hours a day.
If an insect was introduced into the box, rules governed that, too.
How the torturers were trained is also disclosed.
Most methods were reverse-engineered from the training given to US soldiers preparing to face “long and extreme” situations (which somehow enabled executives to conclude that these ordeals are perfectly bearable).
In other words, the torturers had been tortured themselves.
An intense crash course lasting four weeks followed, enough to instruct them in their new jobs.
The Bush lawyers were the torturers’ necessary partners, whose work was intended to ensure legal impunity.
This was also a novelty: torture does not appear as a breach of a common standard, unfortunate but justifiable.
Here, lawyers fell back on another series of techniques.
In order to circumvent the law, interrogation had to be conducted outside the US, even if that place was an overseas American military base.
The legal definition of torture implies the intentional infliction of severe suffering.
Torturers are thus advised to deny such an intention.
As a result, the goal of a facial slap is not to inflict physical pain, but to induce surprise and humiliation.
The purpose of confinement in a box is not to disorient someone, but to give the detainee a feeling of discomfort.
The torturer must always emphasize his “good faith,” “honest beliefs,” and the reasonable premise for them.
So euphemisms were systematically used: “enhanced techniques” for torture, “interrogation expert” for torturer.
Leaving material imprints is contra-indicated.
To that end, mental damage is preferable to physical injury.
Any video recordings of these sessions, not surprisingly, would be destroyed afterwards.
Various professional groups were involved with torture practices.
Thus, the contagion went well beyond the torturers’ limited circle.
Besides the lawyers legitimating the deeds, psychologists, psychiatrists, doctors (whose presence was mandatory at any session), and scholars also regularly provided moral, legal, or philosophical justifications.
And, while males inflicted torture, degradation in the presence of women enhanced the humiliation.
Who is to be held legally liable for this perversion of the law and basic moral principles?
The volunteer who carries out the task of torture is less liable than the high-ranking civil servant who justified and nurtured it.
And the latter is less liable than the political decision-maker who asked for it.
Friendly foreign governments, especially in Europe, can also be held responsible: although they knew about the torture, and took advantage of the information thus obtained, at no point have they expressed the slightest protest, or even signal their disapproval.
Their silence was tantamount to consent.
Should we therefore prosecute them?
The best democratic punishment for politicians is not to re-elect them.
As for unelected collaborators and enablers, we can hope that they will be sanctioned by their peers: who would like to study with a professor who advocated torture?
Who wants to be treated by a doctor who oversaw it?
If we are to understand why some Americans accepted administering torture so easily, we need not look for some ancestral hatred or fear of Muslims and Arabs. No, the cause is far worse.
The memos that the Obama administration has disclosed teach us that anyone who complies with seemingly noble principles dictated by a “sense of duty” or by the necessary “defense of the homeland,” or who is urged by a basic fear for his own life and welfare, or the lives and welfare of his kin, can become a torturer.
Bush’s Last Chance
Though triggered by the need to devise an exit strategy from the Iraqi quagmire, the Iraq Study Group’s grim report is a devastating indictment of the Bush administration’s entire foreign policy.
The report challenges the core principles of a faith-driven administration and of a president whose political gospel led him to a sharp departure from the culture of conflict resolution in favor of a crusade based on raw power.
A war that cannot be ended is sometimes worse than a war that is lost.
Therefore, the Iraq report is more than a plan to rescue Iraq; it is a road map for extricating America from the mayhem of an unwinnable war.
However much the study group shunned recommendations for a precipitous withdrawal, and avoided strict timetables for disengagement, their report is not only an unequivocal repudiation of Bush’s “stay the course” obsession, but also a counsel to cut and run.
Indeed, there is no realistic chance that the Iraqi army and police will be able to take over combat responsibilities and effective policing any time soon.
The entire security apparatus in Iraq is corrupt and infiltrated by insurgents.
Nor is it at all clear to what degree the Iraqis retain a stake in the idea of a united Iraqi state worth fighting for.
The report practically calls for ending all support to the Iraqi government if it fails to assume its responsibilities.
None of the Middle East’s problems has a military solution, and none can be solved through unilateral action.
The report is therefore right to challenge Bush’s insistence on discarding both Iran and Syria as interlocutors for a more stable regional order.
Iran has the most leverage inside Iraq, and Syria has become a vital crossing point for weapons and insurgents into the Iraqi battlefield.
There is simply no way that Iraq can be stabilized without America moving from a policy of disengagement to one of engagement with these two major regional spoilers.
The report thus stands as a rebuke to Bush’s entire “axis of evil” philosophy.
It refuses to ascribe to Iran’s secretive state an ideological rigidity that might not exist.
Indeed, Iran has shown its ability to behave with startling pragmatism more than once, not least in its links to Israel and the United States during its war against Iraq in the 1980’s, and in its assistance to the Americans in the war against the Taliban in Afghanistan.
But it is not only Iraq that requires regional support groups to reach a modicum of stability.
All the problems of the Middle East – Iraq, the Arab-Israeli dispute, the need for political reforms, and Islamic terrorism – are interconnected.
The interconnectedness of the problems in the outer circle of the region and those pertaining to the Arab-Israeli conflict in the inner circle was shown by the first Bush administration, which, in October 1991, following the first Gulf War, organized a major international conference aimed at securing an Arab-Israeli peace.
Neither the Israeli government nor its intimate ally in the White House can be expected to applaud the Iraq Study Group’s call for a repetition of that logic, for it contradicts everything the Bush administration has championed.
The report’s recommendation for an international conference in the style of the Madrid peace conference is not only a timely indication of the linkage between the Israeli-Arab conflict and the region’s other troubles; it is also a long overdue reminder that bilateral negotiations between the parties can not produce an agreement.
That realization prompted the all-Arab peace initiative of 2002, which established the conditions for an Israeli-Arab comprehensive settlement.
Alas, however bipartisan the Iraq Study Group’s report may be, it is too much to expect that Bush will endorse all of its recommendations and admit the bankruptcy of his entire foreign policy.
In fact, Bush has already expressed his objection to unconditional direct talks with Iran and Syria.
Nor does he seem eager to open a rift with Israel by dragging its government to an international conference, the way his father did with Prime Minister Yitzhak Shamir in 1991.
Bush will find it especially difficult to change his policy with respect to Iran.
In order to ensure that the US is too harassed to be able to threaten it, Iran has consistently obstructed Bush’s mission of regional transformation.
The report urges the president to understand that the spoilers will not cease to be spoilers as a precondition of negotiations, but only as a result of them.
At stake is a painful choice for Bush: to lead America into coexistence with what he considers a repugnant Islamic theocracy.
But Bush does not have many choices if he is to save his presidency from going down in history as an utter failure.
His was a suicidal brand of statecraft from the outset.
If he does not change course in Iraq and beyond, his presidency might draw the curtain on long decades of American hegemony in the Middle East – to the detriment of its closest allies in the region.
Bush’s New Middle East
President George W. Bush’s declaration of “mission accomplished” in Iraq five years ago was as hubristic as his current assessment that the “surge” has “delivered a major strategic victory in the broader war on terror” is a fantasy.
The Iraq adventure is not only the longest and most expensive war in America’s history – the Nobel laureate economist Joseph Stiglitz has advanced a staggering estimate of $3 trillion – but is also the least conclusive.
The war has pulverized Iraqi society, dissolving it into an ethno-sectarian patchwork.
The “surge” will end sooner or later, and the Iraqis, crippled by violence and corruption, will still be incapable of uniting their polity, and, with their military still unable to take over from the Americans, jihadi and inter-ethnic violence is bound to erupt again.
As Iraqi Colonel Omar Ali, the Iraqi battalion commander in Mosul, the main focus of the insurgency today, recently put it, “Without the Americans, it would be impossible for us to control Iraq.”
Wars, as Winston Churchill defined them, are always “a catalogue of blunders.”
History’s judgment of the Iraq war will therefore certainly dwell more on whether it has accomplished its strategic objectives of “reconstructing” a highly dysfunctional Middle East in America’s democratic image and consolidating America’s hegemonic position in the region than on its price in blood and money.
Strategically, the war was an utter failure.
A clear case of imperial overstretch, the war strained America’s military, undermined the America’s moral standing worldwide and its reputation in the Middle East, severely threatened its economy, and showed to both friends and foes the limits of American power.
The most serious unintended consequence of the war is the emergence of a powerful Shia challenge to the West’s Sunni allies in the Middle East.
America’s destruction of Iraq as a regional power handed hegemony in the Persian Gulf – whose centrality to Western interests cannot be overstated – to Iran’s Shia Islamist regime on a silver platter.
On the rubble of Saddam Hussein’s dictatorship, the Americans helped create in Iraq the first Shia-dominated Arab state, which may well become subservient to Iran’s regional ambitions – a calamity of historic dimensions for America’s Sunni allies.
President Mahmoud Ahmedinejad’s recent state visit to Iraq conveyed to the Americans an unequivocal message: the prospects of the United States ever reaching a modicum of stability in Iraq have become dependent on Iran-aligned forces.
America’s difficulties in Iraq and beyond contributed decisively to Iran’s nuclear ambitions.
The Iranians now see themselves as immune from an American attack on their nuclear installations, for America’s troubles in Iraq and the growing opposition to the war in the US are a signal to them that America’s strategy of pre-emptive wars has failed.
But, however radical the Iranian regime might be, it is not suicidal.
Hence, the threat of a nuclear Iran might consist less in its propensity to start a nuclear war with Israel than in its capacity to project its regional power effectively.
A nuclear Iran might even threaten America’s capacity to project conventional military force in the Gulf in times of crisis.
Nor should the possibility be ruled out that Iran might be tempted to back its regional ambitions by supplying nuclear material to proxy terrorist groups.
If anything, America’s debacle in Iraq has only emboldened the challengers of the status quo in the region.
That has also been the result of Bush’s ill-conceived democracy crusade in the Arab world.
Bush discovered to his dismay that any exercise in Arab democracy is bound to usher in anti-Western Islamists, be it the Muslim Brotherhood in Egypt, Shia parties in Iraq, or Hamas in Palestine.
The US eventually had to abandon its fantasies about Western-style Arab democracy, but it ironically left the Iranians carrying the torch of democracy in the region.
After all, Iran was quick to recognize that free elections are the safest way to undermine the Middle East’s pro-American regimes.
The Iraq war also meant that America ignored the Israeli-Palestinian peace process.
The chances that the Bush administration might be able to rally America’s Sunni “moderate” allies in the region to help salvage an Israeli-Palestinian peace are now hostage to an Iranian-led regional axis that includes Hamas, Hezbollah, and Syria.
All are united in their rejection of a Pax Americana in the Middle East, and all have so far shown remarkable resilience in ignoring America’s pre-conditions for a dialogue.
America’s inability to inspire the peoples of the Middle East, all ruled by US-backed autocracies, is not exactly stunning news.
What is news is that American power might also be losing its ability to intimidate them.
Bush’s Old New Plan for Iraq
Last November’s Congressional elections dealt President George W. Bush a sharp rebuff over his Iraq policy.
Shortly after the election, the Iraq Study Group offered a bipartisan formula for the gradual withdrawal of United States troops.
But Bush rejected this, and persists in speaking of victory in Iraq – though it is unclear what that now means.
Perhaps because Iraq will define his legacy, he has proven reluctant to let go at a point when his policy appears to be a disaster.
Now Bush will increase the number of American troops in Baghdad and Anbar Province and try to stabilize both the rising sectarian civil war and the Sunni insurgency.
He has removed generals John Abizaid and George Casey, who were skeptical of a troop “surge,” and moved Ambassador Zalmay Khalizad, who was supposed to negotiate a political agreement in Iraq.
A number of the Democratic lawmakers who control the new Congress disagree with this approach.
Some Democratic activists seek an immediate withdrawal and are pressing for Congress to cut off funding for the war, but that is unlikely.
Congress is reluctant to be portrayed as failing to support troops in the field; while they will criticize, they will not block Bush’s plan.
Bush has long claimed that the number of troops in Iraq was a military decision and that he simply followed the advice of his generals, but now this is clearly not the case.
Ironically, there may once have been a point at which a large increase in troops might have made a difference.
In April and May 2003, polls showed a majority of Iraqis welcoming the overthrow of Saddam Hussein.
But the Bush administration failed to control rioting, disbanded the Iraqi army, and allowed the security situation to deteriorate.
In such chaos, it was difficult to do the reconstruction and development work that could have made Iraqi lives better and attracted support.
It is not easy for a marine or soldier to construct a school or clinic when he is being fired upon, or for Iraqi moderates to risk their lives by being supportive when they have no protection against insurgents.
Many military professionals foresaw this problem.
US Army Chief of Staff Eric Shinseki warned that although it would be possible to win the war with the 160,000 troops that Secretary of Defense Donald Rumsfeld used, it would take double that number to win the peace.
But because Rumsfeld wanted to prove a point about transforming American military strategy, and his neo-conservative advisors had ideological blinders that distorted their appraisal of Iraqi reality, Shinseki’s advice was rejected.
Deputy Secretary of Defense Paul Wolfowitz testified to Congress that Shinseki’s estimate of the number of troops required was “wildly off the mark.”
In fact, it turned out that Rumsfeld and Wolfowitz were the ones wildly off the mark.
Now both are gone, and Bush is turning to troop increases.
Too little, too late.
Is there any reason to believe that an additional five brigades will succeed in stabilizing Baghdad now when similar efforts have failed in the past?
The new American operational commander in Iraq, Lt. General Raymond Odierno, says that the new efforts will be more evenhanded among Sunni and Shiite neighborhoods, and American troops will stay alongside Iraqi troops in areas that have been cleared.
He hopes that with a few months, he can then withdraw American troops to the periphery of Baghdad and leave the policing of the capital to Iraqi forces.
But this assumes that Iraqi forces are up to the task, and that Prime Minister Nouri al-Maliki’s government, which rests upon Shiite militia support, can play a competent and evenhanded role.
Bush administration officials argue that the new plan is “not an open-ended commitment: we are putting real, specific requirements and expectations on the Iraqi government.”
Among the political benchmarks are provincial elections, enactment of an oil law that distributes oil wealth in a way that benefits the Sunnis, and reform of the de-Baathifcation policy, which has been so costly to those who worked in the Iraqi government under Saddam.
But it may be too late for political compromise, and the Maliki government may not be capable of a broad non-sectarian policy.
If Bush’s new military plan is a temporary step to buy time to move in the direction of the Iraq Study Group’s proposals of training Iraqi forces and gradually withdrawing American forces, there may be something to be said for it as one last chance, but only if it is accompanied by the diplomatic advice that the study group also suggested.
It is too late to create a democracy in Iraq.
At best, the overthrow of Saddam removed a threatening dictator, and substituted a tyranny of the majority for the tyranny of a minority.
But the price has been high in terms of Iraqi lives lost in sectarian fighting.
The goal now is regional stability.
Each of Iraq’s neighbors has its own interests, but none will benefit from chaotic violence there, which would increase Iran’s influence, encourage Kurdish separatism to the worry of Turkey, and support Sunni terrorist movements that could spill back into Jordan, Kuwait, Syria, and Saudi Arabia.
The US cannot leave Iraq precipitously, but neither can it solve the problem on its own.
Establishing a contact group of Iraq’s neighbors to help set rules of the road for stabilization and containment will be an important step.
Iraq is not susceptible to a military solution.
Only more politics and diplomacy can salvage US policy.
Bush\u0027s Pseudo-Conservative Revolution
President George W. Bush's administration has, on any objective basis, been a frightening thing to behold.
Strident and self-absorbed by narrow partisanship, administration officials have actually betrayed the conservative ideological cause, dismantling the tried-and-tested institutional foundations of America's economic prosperity and global security.
Start with economic policy and the deliberate unbalancing of the US government's long-term finances.
The aim clearly has been to sharpen the financial crisis of the social-welfare state and bring about a permanent reduction in government wealth re-distribution.
But broken eggs do not necessarily make an omelet: Bush's massive (and still growing) fiscal deficits have stimulated nothing but jitters about a prolonged slowdown in capital formation, household consumption, and economic growth.
Fiscal policy is, of course, only the tip of the iceberg.
Korean steelworkers might well ask whatever happened to the Republican Party's historic commitment to free trade.
African farmers should wonder how it could be Bush--not some left-wing Democrat--who reversed the archconservative Newt Gingrich's proudest achievement: the partial reform of agricultural subsidies.
The security policy of the Bush administration has been worse than frightening; it has been, to borrow one of the president's most frequent utterances nowadays, terrifying.
At the moment, administration insiders are trying to convince elite journalists that Bush did not deceive outsiders about Saddam Hussein's nuclear weapons program.
They are hoping that Americans will forget all the cocksure predictions of a military walkover and cheering crowds lobbing flowers at US and British troops.
Ignore all the lame excuses about the difficulties of assessing conflicting intelligence.
No one in this supposedly conservative administration had ever heard of Machiavelli's 500-year-old warning not to trust exiles? "Such is their extreme desire to return to their homes," Machiavelli wrote, apropos of Ahmad Chalabi and the Iraqi National Congress, "that they naturally believe many things that are not true, and add many others on purpose; so that, with what they really believe and what they say they believe, they fill you with hopes..."
The most terrifying aspect of the Bush administration's foreign policy is the motivating theory of the world that underlies it.
The Bush administration's intellectual allies call the Clinton administration "naïve" for believing that international relations form a positive-sum game in which all sides can win.
They speak explicitly about America's interest in preserving its relative , not just absolute, economic power.
As the University of Chicago's Dan Drezner puts it, the logic of Bush's National Security Strategy is to "prevent other great powers from rising, in order to ensure the long-term growth of freedom, democracy, and prosperity."
But what does it mean to "prevent other great powers from rising"?
What could it possibly mean other than "try to keep China and India desperately poor for as long as possible"?
After all, when China and India close even half the income gap separating them from the industrial core of the world economy, the sheer size of their populations alone will guarantee that they become very great powers.
It is certainly not in the interest of China or India to remain poor.
But it is not in America's national interest, either.
The history of the late 19th and 20th centuries teaches us that there is something uniquely dangerous to world peace and political sanity during the two generations in which cultures pass from a poor, rural, and agricultural economy to a rich, urban, and industrial (or post-industrial) way of life.
The aggressive foreign policy pursued by Wilhelmine Germany, the perverse suffering inflicted on Russia by Lenin and Stalin, the terrors of Mao, the dictatorships of Mussolini and Franco, and the monstrous Nazi regime all occurred during this transition.
So is it really in the interest of the US to try to "prevent other great powers from rising?"
Shouldn't America's leaders be trying to shorten the period that other societies are vulnerable to the evils that made the twentieth century the bloodiest in the history of mankind?
Wouldn't the rest of us rather minimize than maximize the time we might be faced with the problem of containing a Hindu Nationalist India, a Wilhelmine China, or a Weimar Russia?
It is long past time for a complete change of personnel at all levels of the Bush administration.
The world cannot afford to have pseudo-conservatives at high levels of the US government who do not work for global peace and prosperity, but instead for a dangerously wrongheaded geopolitical strategy.
There are many potential replacements for these officials in the Republican Party--sensible, deliberative statesmen who view America's national interest as being the promotion of global economic development, multilateral cooperation, and a world in which the US leads with its principles rather than dominates with its military power.
Such officials staffed the first Bush administration.
Where are they now?
Bush’s Road Map to Failure in the Middle East
Six long years of failed Middle East policies have finally brought President George W. Bush to recognize that the alliance of moderates in the region that he covets can only be forged through an Arab-Israeli peace.
Indeed, only by effectively addressing the Israeli-Arab dispute can he possibly salvage America’s standing in the region.
But the round of peacemaking that America has recently embarked upon not only comes too late in the political life of a lame-duck president who has been defeated at home and abroad; it is also ill-conceived and unconvincing.
Secretary of State Condoleezza Rice’s adamant resistance to engage the Syrians is not exactly wise policy.
The stakes for a peaceful regional order are too high for Israel and the United States to persist in refusing to put Syrian President Bashar al-Assad’s current peace offensive to the test.
The bones of contention that wrecked previous attempts to reach an Israeli-Syrian peace have realistic solutions, as was shown by the back-channel peace talks recently held between an Israeli ex-official and a Syrian with close connections to the regime.
Nor is Rice’s insistence on sticking to the failed “road map” for an Israeli-Palestinian settlement promising.
Susceptible to procrastination and evasion by both sides, the road map was stillborn.
Almost four years after it was first launched, neither of the parties has managed to muster the political will necessary to implement its primary provisions.
Not even the bizarre idea, reserved for the second stage, of a Palestinian state with “temporary borders” is enticing for the Palestinians.
This Gordian knot needs to be cut, not untied.
The concept of interim agreements has now become utterly obsolete, if only because the parties are incapable of paying the political price inherent in an open-ended, piecemeal process.
Instead, what is called for is a sweeping solution to all the core issues.
We now stand at the end of the peace process as we have known it.
From now on, our options will be a violent and unilateral disengagement, such as the one that ushered in the current war in Gaza, and a comprehensive peace plan that will have to be annexed to the road map and validated by an international peace conference.
Only such “reverse engineering,” starting at the end and working backward – and legitimized and monitored by strict international mechanisms – might yet save the prospects for an Israeli/Palestinian peace from ruin.
As the launch of the peace process at the 1991 Madrid International Peace Conference demonstrated, the prospects for peace in the Middle East always needed a concerted international push to exploit windows of opportunity.
Wars in the Middle East, especially those , such as Israel’s recent war against Hezbollah, that ended inconclusively, have almost invariably created the conditions for major political breakthroughs, because they taught the warring parties the limits of power.
Trapped in a momentous struggle between the forces of peaceful change and those committed to Doomsday, the Middle East is once again calling for a major international effort at peacemaking.
The initiators of the 2002 Arab peace initiative likewise understood that a strictly bilateral approach might be inadequate, and instead called to regionalize the solution to the conflict.
Loss of mutual trust between the parties, and their total incapacity to take even the smallest step towards each other, let alone to observe their commitments without prodding by third parties, made (and still makes) an international framework for peace the only way out of the dangerous impasse.
The end of bilateralism stems also from the dysfunctional political systems of both Palestine and Israel.
Today, Palestinian President Mahmoud Abbas is gasping for political air under the smothering control of Hamas. On her recent trip to Israel, Rice had to listen to four different peace plans from the prime minister, the foreign minister, the minister for strategic threats, and the defense minister.
For both Israelis and Palestinians, achieving internal peace might prove as formidable a challenge as establishing peace with each other.
Any reformed peace process is doomed if it is guided by a road map within which, on the core issues, the parties have diametrically opposed views.
But there is no need to reinvent the wheel, because the solution to the Arab-Israeli conflict is embodied in the main peace plans that are already on the table: the Clinton peace parameters, and the all-Arab peace initiative.
Fifteen years after the Madrid Conference began a formal peace process between Israelis and Palestinians, the parties are wiser as to what is inevitable if this tortuous process is to lead to a permanent settlement.
In 1991, they convened on a platform of “land for peace.”
But the Israelis never believed they would have to give back all the land, while the Arabs did not think they might have to offer “all the peace.”
Today, at long last, everyone knows what is meant by “land,” and everyone knows what is meant by “peace.”
Bush’s Second Gulf Disaster
President Bush has asked that Americans not “play politics” at this moment of terrible national disaster.
But asking hard questions of our nation’s leaders is exactly what democracy demands when the government’s response to Hurricane Katrina is widely viewed as “a national disgrace.”
Katrina came with at least two days’ warning, but authorities waited to issue an evacuation order.
There was no transportation for people without cars or money, facilities to house and care for refugees were insufficient, there were no forces in place to deliver desperately needed supplies or to secure order, and there was nowhere near the number of boats, helicopters, and other craft necessary to rescue the stranded.
Hampered by a National Guard with 40% of its people in Iraq, the pace of getting military personnel to the hardest hit areas was inordinately slow.
For four days, there was simply no clear center of command and control.
As a result, countless people suffered and died.
Much of this failure is the result of the Bush administration’s policies, which effectively eroded the capacities of the Federal Emergency Management Agency (FEMA), the government agency primarily responsible for dealing with disasters.
Obsessed with the war on terror as well as an ideology of privatizing the functions of government, the administration systematically sapped FEMA’s long-term ability to prevent disaster or at least cushion the blows when prevention is not possible.
FEMA was downsized and downgraded from a cabinet position, then placed under the Department of Homeland Security.
Its mission of disaster planning and preparation was dropped entirely, and its focus was altered to fight terrorists.
Its leadership had no experience in disaster management.
The past director was one of Bush’s Texas political cronies, and the current director’s qualifications include a stint as commissioner for judges and stewards with the International Arabian Horse Association, where he was asked to resign for “supervision failures.”
Since 2001, billions of dollars were shifted from disaster relief to homeland security and the war in Iraq.
Key disaster mitigation programs were slashed and federal funding for post-disaster relief was cut in half.
The Army Corps of Engineers’ budget for levee construction in New Orleans was gutted, including funds specifically aimed at the Southeast Louisiana Urban Flood Control Project.
Preventive measures to protect people and property were not carried out despite FEMA’s own conclusion in 2001 that a major hurricane hitting New Orleans was one of the three “likeliest, most catastrophic disasters facing this country.”
Believing FEMA to be an “oversized entitlement program” and that the “business of government is not to provide services,” Bush’s first FEMA director instituted new outsourcing requirements as part of a major privatization effort.
This provoked a brain drain as experienced FEMA personnel moved into the private sector
Privatization also left poorer states and poorer communities especially vulnerable.
As money dried up and federal programs were contracted out to private firms at higher rates, only the richest and politically most important states and communities could compete successfully for the scarce federal grants necessary to pay for services.
For example, Florida (with 16 more electoral votes than Louisiana and where the president’s brother governs) received its requested funding to protect its wetlands.
By contrast, a more needy Louisiana (with its staggering 24% poverty rate) was denied its request for flood-mitigation funds in 2004.
With Louisiana’s ability to protect itself weakened and the center of disaster relief badly undermined, an inadequate government response and unnecessary destruction were almost inevitable – with the poor paying the price.
But the failure of this administration runs deeper than its chronic and intentional diversion of resources away from the types of policies that keep people safe from disaster.
Despite scientific evidence demonstrating that the increased intensity and frequency of hurricanes is related to climate change, the Bush administration systematically rejects participation in international climate-protection regimes.
Rather than continue a ban on wetlands development instituted by previous administrations, the Bush administration overturned it.
Because development-provoked erosion has brought the Gulf of Mexico 20 miles closer to land than it was in 1965, hurricanes are able to retain more strength, and their winds and waves pack more speed and destructive power.
Similarly, loss of wetlands threatened New Orleans’ levees, which were built on the assumption that they would have 40 to 50 miles of protective swamp as buffer between the city and the Gulf of Mexico.
Despite every major study showing that a massive coastal restoration program and higher levees were needed to protect New Orleans, the administration permitted federal agencies to stop protecting 20 million acres of wetlands, allowed developers to drain thousands of acres and in 2004 cut funding for holding back the waters of Lake Pontchartrain by more than 80%.
New Orleans is America’s canary in the mineshaft.
Ideologies of privatization that incapacitate effective government, permitting the privileged to save themselves while leaving the poor clinging to roofs, must now be challenged.
This disaster is a chilling reminder of what happens when government fails to protect its citizens, and it is imperative that Americans demand accountability.
Officials who did not do their jobs must be dismissed, and elected officials whose policies aggravated the devastation wrought by Katrina must be removed from office.
We owe this to the dead and to the survivors.
Bush the Negligent Neighbor
After ignoring Latin America for years, President George W. Bush is desperately trying to improve hemispheric relations.
But his just completed trip to Brazil, Uruguay, Colombia, Guatemala, and Mexico came too late.
Years of neglect could not possibly be erased by a trip long in photo opportunities and short in substance.
In the capitals of Latin America, Bush’s visit has been interpreted as a reaction to Venezuelan President Hugo Chávez’s increasing influence and popularity in the region.
Certainly, Chávez seems to have seen it that way, as he consistently heckled Bush from afar.
Before flying to Brazil, Bush said that his administration doesn’t get enough credit for its Latin American policy.
But, in 2007, the United States will provide economic assistance to Latin American and the Caribbean worth $1.8 billion, which is $200 million less than in 2006.
Moreover, almost half of the total comes in the form of military aid, while $716 million will go to one country, Colombia.
In an effort to increase its low popularity in Latin America, the Bush administration recently announced an additional $75 million for education, and $385 million to help finance mortgages for the poor.
Also, the US Navy hospital ship USNS Comfort will make port calls in a number of Latin countries.
But these aid figures are absurdly low from a historical perspective.
During the 1960’s – the years of President John F. Kennedy’s Alliance for Progress – annual aid to the region exceeded $10 billion in today’s dollars.
The first sign that the Bush administration didn’t take Latin America seriously came on January 1, 2002, when Luiz Inácio “Lula” Da Silva was sworn in as Brazil’s president.
The occasion was solemn and charged with symbolism.
After all, Lula was the first trade union leader ever elected to the presidency of a Latin American country.
Numerous heads of state and dignitaries from around the world attended the ceremony.
But Bush was not among them; nor was Vice President Dick Cheney, Secretary of State Colin Powell, or any other prominent member of the US cabinet.
The US delegation, instead, was headed by Robert Zoellick, the US Trade Representative, who, despite being a member of the cabinet, lacked the political stature for which the occasion called.
With his traditional sense of humor, Lula dismissed the slight.
Other Latin American heads of state, however, were not so casual; in fact, they were deeply offended.
According to them, this was a reminder that, with only a few exceptions – Cuba and possibly Mexico – Latin America was not a political priority for the US.
During the years that followed, the US administration’s attitude towards Hispanic undocumented immigrants alienated an increasing number of Latin American voters.
As a result, in country after country they have elected presidents that are openly critical of the US and its policies.
Six years after Lula’s inauguration, and despite Bush’s trip, Latin American politicians continue to believe that their region is being neglected.
It is true, they say, that the Bush administration launched the Free Trade Area of the Americas, but hemispheric free trade looks as distant today as ever.
Moreover, the handful of free-trade agreements signed with individual countries, or groups of countries, are lopsided and overwhelmingly favor US interests.
In order to regain Latin America’s support – and to dent Chávez’s popularity – the Bush administration will need much more than a short trip.
Passing a comprehensive Immigration Bill that normalizes the legal status of millions of Latin American workers in the US may help.
Reducing US agricultural protectionism significantly would be an equally positive measure in drawing the poison out of diplomatic relations.
Bushwhacking Human Rights
If you judge a government on the basis of its good intentions, those who support an American foreign policy that emphasizes the promotion of human rights internationally should cheer President George W. Bush’s reelection.
Indeed, no US president has spoken out more frequently and more forcefully about America’s mission to promote freedom in the world.
The National Security Strategy of the United States, published by the Bush administration in September 2002, is filled with strongly worded commitments to promote human rights.
The Country Reports on Human Rights worldwide, published annually by the State Department, maintain the high standard of accuracy and comprehensiveness that they achieved during the Clinton administration.
Under President Bush, the US has taken robust stands on human rights conditions not only in pariah countries such as Burma, Cuba, and Syria, but also in strategically important countries like Egypt, Uzbekistan, and China.
Yet those who examine the impact of the Bush administration on human rights practices internationally often argue that Bush’s reelection will do long-lasting – perhaps irreversible – damage to the human rights cause.
What explains this apparent contradiction?
There are three principal reasons why the Bush administration’s impact on human rights is so much at odds with its stated intentions.
Iraq comes first.
After official US claims about weapons of mass destruction and about a connection to the terrorist attacks of September 11, 2001, became untenable, Bush increasingly emphasized the argument that America’s invasion was justified to remove a tyrant, Saddam Hussein, and thus to free the Iraqi people.
In essence, this is an argument that the war was justified as a means of promoting human rights.
To those in the other Arab countries of the Middle East and elsewhere who oppose the war, the impact is to make human rights seem a justification, or a pretext, for a projection of American power.
The effect is to increase their distrust of those who preach about human rights, making it much more difficult than ever before for the US to rally support for human rights in much of the world.
The second reason that Bush’s reelection is likely to hurt the human rights cause is that it constitutes an endorsement by the majority of Americans of an administration that is responsible for grave human rights abuses.
America’s moral authority as an advocate of human rights depends on its own respect for human rights.
Under President Bush, that authority has largely evaporated.
The twin symbols are Guantanamo and Abu Ghraib.
Having practiced long-term detentions without charge, trial, or access to family or counsel; having sexually humiliated and tortured prisoners, some of them to death; and having failed to hold accountable any of the high-level officials responsible for the policies that led to those crimes, the US is now seen as a hypocrite when it calls on other governments not to engage in such abuses.
While the war in Iraq and abuses at American detention centers have damaged the cause of human rights in the Middle East and Asia, the third factor in the weakening of human rights – unregulated free trade – has been felt mostly in Latin America.
It is there that the Bush administration has most vigorously asserted its position that the freedom of capital movement is an aspect of human rights.
In the National Security Strategy of September 2002, the Bush administration calls free trade not only a meritorious policy, but also a “moral principle.”
Many Latin Americans have lost faith in democracy because it has not benefited them economically.
They see the US as simultaneously the champion of democracy in the region and as the culprit in their economic woes because of its insistence on the sanctity of capital.
When protecting capital is elevated to a moral principle, or justified as a component of human rights in a region resentful over its sense of economic subjugation, the effect is to foster disillusion with human rights.
President Bush and many of his associates may be sincere in their commitment to the human rights cause.
But perhaps it is such certainty in their good intentions that makes them blind to the damage that they are doing.
Business as Usual with Russia?
BERLIN – Despite continuing tensions over Russia’s invasion of Georgia this August, the European Union will reopen talks with Russia on a new Partnership and Cooperation Agreement (PCA).
A PCA establishes a legal framework for negotiating specific agreements in such areas as trade, justice, and human rights.
The current talks aim to replace the expired 1997 PCA, which remains in force by mutual consent pending a new accord.
At an emergency meeting on September 1, EU leaders refused to continue the PCA talks until Russia removed its combat units from the Georgian separatist regions of Abkhazia and South Ossetia.
The heads of the 27 EU governments also characterized the Kremlin’s decision to recognize the independence of the two breakaway regions as “unacceptable.”
Since then, EU governments have moderated their conditions, describing a simple Russian military withdrawal from Georgian territories outside the two regions as sufficient to resume a dialogue on the PCA, energy security, and other issues.
The EU decision comes at a time when NATO has also sought to renew its engagement with Russia after the Georgia conflict led both parties to suspend many joint programs.
In a speech on September 18 at the Royal United Services Institute in London, NATO Secretary General Jaap de Hoop Scheffer argued that, despite differences over Georgia, Russia and the alliance should cooperate “wherever our interests converge.”
He specifically cited continued cooperation in Afghanistan, where Russia is providing logistical support for the NATO-led International Security Assistance Force, as “a clear indication that common interests can transcend disagreements in other areas.”
In order not to appear intimidated by Russia’s forceful dismemberment of Georgia, NATO governments have publicly reaffirmed their support for Georgia’s territorial integrity and the country’s desire to join NATO eventually.
In private, however, many allied officials have told the media that they are even less inclined than they previously were to deepen NATO’s ties with Georgia, given the risks of becoming entrapped in another Russian-Georgian war.
At present, it seems most Western governments have decided to concentrate on helping Georgia recover economically from the war rather than on punishing Russia directly.
At last month’s International Donors’ Conference in Brussels, they pledged billions of dollars of reconstruction aid.
The EU is also considering negotiating a free-trade area with Georgia and relaxing visa rules for Georgian citizens.
NATO has established a special NATO-Georgian Commission to help coordinate allied support for Georgia’s post-conflict reconstruction.
Even so, Russian and Western officials continue to spar over American plans to deploy ballistic missile defense systems in Poland and the Czech Republic.
In his speech in November to the Russian parliament on the state of nation, President Dmitry Medvedev warned that Russia would deploy short-range Iskander missiles in the Baltic Sea port of Kaliningrad “to neutralize if necessary the anti-ballistic missile system in Europe.”
Medvedev added that Russian electronic equipment would jam the American systems and that the Russian military was preparing additional countermeasures.
NATO and EU leaders denounced the threats, which seemed especially gratuitous coming one day after the American people had elected a new President who has expressed interest in improving relations with Russia.
Russia’s government has also sought to showcase its growing military potential.
In September and October, the country’s strategic forces engaged in their largest nuclear weapons-related exercises since the Soviet Union’s demise.
On October 12, the Russian Navy joined with the Strategic Rocket Forces to conduct a well-integrated exercise involving near-simultaneous testing of three long-range ballistic missiles from separate ground and submarine launch platforms.
Last month, Prime Minister Vladimir Putin also announced yet another increase in Russian defense spending.
Russian military expenditures have increased by double-digit figures in recent years.
This year, the Russian military will spend over $40 billion.
The figure for 2009 could exceed $50 billion.
Although superficially impressive, this surge obscures several key issues.
Much of the growth merely compensates for the exceptionally high inflationary pressures in Russia’s defense sector. In addition, it will take years for the recent budget increases to translate into new equipment.
Although Russian designers can still develop first-class weapons, Russia’s defense companies, which have yet to recover from the traumatic disintegration of the Soviet military-industrial complex, remain unable to manufacture large numbers of the most advanced systems.
Russia’s military also must compete with foreign customers for those few warplanes, tanks, and other sophisticated weapons that are produced.
The long-term sustainability of Russia’s military revival is also unclear. Russia’s government remains dependent on oil and gas exports for revenue, but the prices of these commodities are falling sharply.
Unlike the Soviet Union, Russia is tightly integrated into the world economy, rendering the country vulnerable to the current global financial crisis.
Medvedev recently warned that Russia’s “military-industrial complex is starting to be affected by credit problems,” stoking fears of a return to the paralyzing payment crises that plagued the defense sector during the 1990’s.
Russia’s continuing demographic problems will also make it difficult for the armed forces to become a fully professional military, one that does not depend on poorly motivated conscripts.
Although Medvedev and Putin have apparently adopted a viable power-sharing arrangement, Russia’s stunted political institutions lack the capacity to root out corruption and other inefficiencies.
Comprehensive security-sector reform remains off the political agenda.
Even in the high-priority defense sector, perhaps one-third of government spending is wasted or stolen – a condition that is not conducive to realizing Russia’s great power ambitions.
The Business of Improving Global Health
ZURICH – The dramatic success of the Millennium Development Goals (MDGs) in driving advances in human health will be a hard act to follow.
In just 15 years, child mortality was nearly halved, and malaria deaths declined by 60%.
Today nearly 15 million people worldwide receive treatment for AIDS, helping them continue to be productive members of society, compared to only about 10,000 people in 2000, when the MDGs were launched.
Can the new Sustainable Development Goals (SDGs), just adopted by the United Nations to guide global development efforts for the next 15 years, replicate the MDGs’ success?
The strong track record of the MDGs certainly provides grounds for hope.
But the new health-related goals are broader and more ambitious than before.
And the public-health situation is in many ways more challenging than in 2000.
The new SDGs set a lofty goal: for the first time, world leaders have vowed to reduce premature deaths caused by chronic illnesses such as cancer, heart disease, and diabetes.
This is a tall order at a time of rapid population growth and rapid aging.
Chronic diseases are the main – and growing – cause of death in developed and developing countries alike.
And more than two billion people still lack access to essential medicines.
To achieve the new targets, we must find creative new ways to address the world’s biggest health challenges.
Above all, we must develop new business models that allow society to better harness the know-how, creativity, and drive of private enterprises to help improve public health.
Companies share the responsibility for meeting these new goals, but they also need support from governments and other organizations to ensure the greatest positive impact.
The demographic challenge is daunting.
A billion people joined the human race in just the last 12 years.
Another billion or so will join by 2030, bringing the world’s population to 8.5 billion, according to UN estimates.
The fastest-growing segment of the population is people over 60, a group that is expected to grow by 500 million people, to 1.4 billion, in 2030.
Older people are more likely to develop chronic illnesses, which now account for 63% of all deaths worldwide.
The World Health Organization predicts that the proportion will reach 70% in the next ten years, with most of the deaths occurring in developing countries.
Some 28 million people die from chronic diseases in low- and middle-income countries each year, accounting for roughly three-quarters of all deaths caused by chronic disease globally.
Developing countries’ health systems are already stretched.
They often lack medicines, resources, and know-how to treat chronically ill patients, who may require years or decades of treatment.
For example, there are only four oncologists in Ethiopia, a country of some 97 million people.
Moreover, many developing countries face a double disease burden and must wage a simultaneous battle against infectious diseases such as malaria, tuberculosis, and HIV/AIDS.
Clearly, more resources will be needed to tackle these challenges.
But in the wake of the global financial crisis, development assistance for health from governments and private donors has plateaued at about $35 billion annually, after growing more than 11% per year from 2000-2010.
And less than 2% of that money was directed at combatting chronic diseases.
The long-term nature of chronic diseases, and the complexity of providing better treatment for patients in the developing world, calls for innovative solutions.
Companies possess the capabilities and the global scale to play a stronger future role in addressing public-health challenges and achieving the objectives of the SDGs.
Some corporations are beginning to explore new “social business” approaches that will allow them to meet the needs of people and society in the developing world, while at the same time covering their costs, or even making a small profit.
Moneymaking social ventures are self-sustaining and have the potential to grow, bringing benefits to more and more people.
They are a potentially powerful complement to philanthropy, which has underpinned much recent progress in public health.
My company, for example, is launching a portfolio of 15 essential medicines to treat diseases including diabetes, respiratory illnesses, and breast cancer.
The aim is to make these medicines available to people of modest means in developing countries at a cost to local health systems of $1 per treatment per month.
We will start in Kenya, Vietnam, and Ethiopia.
It is a small first step, and we will learn as we go, with a goal of expanding to 30 countries in a few years.
To overcome the many hurdles to success in low- and middle-income countries, these new types of business ventures will likely need to explore innovative forms of collaboration with governments, non-governmental organizations, and other companies.
Such collaboration has already shown that working across traditional boundaries, making creative use of technology, and developing pragmatic solutions can yield impressive results.
Bringing health care to everyone on the planet is a great challenge.
It will take imagination, cooperation, and hard work.
Greater involvement by business could increase the likelihood of getting there by 2030.
Busted Bailout
CAMBRIDGE – Spend in haste; repent at leisure.
With minds concentrated by fears of another 1930’s-style Great Depression, America’s political leaders developed, virtually overnight, a $700 billion bailout plan to resuscitate the country’s rapidly deflating financial sector.
But, just as stunningly, rank-and-file members of the US House of Representatives have rejected it – at least for now.
Perhaps they were right to be skeptical.
The plan’s central conceit is that government ingenuity can disentangle the trillion-dollar “sub-prime” mortgage loan market, even though Wall Street’s own rocket scientists have utterly failed to do so.
To boot, we have been told that government is so clever that it might even make money on the whole affair.
Perhaps, but let’s not forget that a lot of very smart people in the financial industry thought the same thing until quite recently.
Just a year ago, the United States had five major freestanding investment banks that stood atop its mighty financial sector.
Collectively, their employees shared more than $36 billion dollars in bonuses last year, thanks to the huge profits these institutions “earned” on their risky and aggressive business strategies.
These strategies typically involve far more risk – and sophistication – than the activities of traditional commercial banks.
In mid-August, I had the temerity to predict that risks had come home to roost, and that a large US investment bank might soon fail or be forced into a highly distressed merger.
Little did I imagine that today, there would be no freestanding investment bank left on Wall Street.
Indeed, after years of attracting many of the world’s best and brightest into ultra-high paying jobs, collapsing investment banks are now throwing them out left and right.
One such victim, a former student, called me the other day and asked, “What am I supposed to do now, get a real job?”
This brings us back to the US Treasury’s plan to spend hundreds of billions of dollars to unclog the sub-prime mortgage market.
The idea is that the US government would serve as buyer of last resort for the junk debt that the private sector has not been able to price.
Who, exactly, would the Treasury employ to figure all this out?
Why, unemployed investment bankers, of course!
Let’s ponder this.
Investment bankers have been losing their cushy jobs because they could not figure out any convincing way to price distressed mortgage debt.
Otherwise, their firms would have been able to tap the trillions of dollars now sitting on the sidelines, held by sovereign wealth funds, private equity groups, hedge funds, and others.
Now, working for the taxpayer, these same investment bankers will suddenly come up with the magic pricing formula that has eluded them until now.
Little wonder that academics across the political spectrum have expressed considerable skepticism.
True, the Treasury would take equity stakes in some firms, so there would be some upside potential.
But the main concern centers around the Treasury’s apparent intention to pay more than double the current market price (20-30 cents on the dollar) on the premise that its success in untangling the mortgage market would make any discount seem like a bargain.
Does such nitpicking fail to recognize the urgency of fixing the financial system?
Isn’t any plan better than none?
I, for one, am not convinced.
Efficient financial systems are supposed to promote growth in the real economy, not impose a huge tax burden.
And the US financial sector, in greasing the wheels of the real economy, has been soaking up an astounding 30% of corporate profits and 10% of wages.
Thus, unlike in the 1930’s, the US faces a hypertrophied financial system.
Isn’t it possible, then, that rather than causing a Great Depression, significant shrinkage of the financial sector, particularly if facilitated by an improved regulatory structure, might actually enhance efficiency and growth?
I am not suggesting that the government should sit on its hands.
It needs to provide an expanded form of deposit insurance during this time of turmoil, so that there are no more Northern Rock-style bank runs.
That was a big lesson of the 1930’s.
The government may also need to consider injecting funds more directly into the mortgage sector while the private sector reconstitutes itself.
Certainly, the government must also find better ways to help homeowners and their lenders work out efficient bankruptcy proceedings.
It makes no sense for banks to foreclose on homes when there are workout options whereby people could stay in their homes and banks could recover far more money.
Eventually, after further twists, turns, and huge expenditures, the US will emerge from its epic financial crisis.
The proposal that was defeated was not sufficiently targeted at pruning back insolvent banks, but it will almost certainly not be the last word, regardless of how Congress now proceeds.
Butlers, Bakers, and Capitalists?
The communist revolution that spanned the nineteenth and twentieth centuries was about concentrating government ownership of capital.
Then, in the closing decades of the twentieth century, a counter-revolution swept the world, pushing for just the opposite: disperse capital as widely as possible by getting everybody involved as owners.
Now the counter-revolution is being carried to its logical extreme: if everyone can be an owner, then everyone can be a capitalist, down to the barber, the waiter, and the trash collector.
A specter is haunting us again; this time it is the dream of truly democratizing capitalism.
But turning everyone into a capitalist may be as impossible as the communist dream of turning everyone into an inspired socialist worker.
Interest in the arcane principles of finance has always been an inclination particular to people who love to pore over numerical tables and study mathematical formulas.
These people sometimes make themselves rich, and it would seem nice if everyone could do that.
But the varying talents, foibles, and psychological predilections of men and women make this impossible.
The new spirit of democratic capitalism goes by different names and mobilizes a variety of symbols.
But, however we describe it, the idea that the masses should be owners is growing everywhere.
In Britain, for example, Tony Blair articulates a vision of “a nation of savers and asset-holders.”
His plans have been called “asset-based policies,” a term that has grown in popularity since Michael Sherraden’s 1991 book Assets and the Poor: A New American Welfare Policy .
In the United States, President George W. Bush calls his dream the “ownership society.”
In China, the National People’s Congress in 2004 re-defined entrepreneurs and individual proprietors as “builders of the socialist cause,” and included them in the Patriotic United Front.
Governments around the world are spending money on regulating and monitoring their stock markets so that they are safer for individual investors, and so that investor interest in these markets will grow.
They are also trying to develop their housing finance in order to expand homeownership.
Some are talking about letting people own their social security contributions, in the form of personal retirement accounts, their health care through health savings accounts, and their education through educational savings accounts and school vouchers.
This is an attempt at a real revolution, not a return to an earlier capitalist past.
It is about experimenting with creative new economic institutions that have never been seen before.
The general concept of “ownership” is not by itself a roadmap to a successful new economy, and there are myriad interpretations of how to carry out the revolution.
Revolutions are always experiments, and they are always an adventure.
Some of the new policies seem exemplary.
Tony Blair’s Labor government is implementing a plan that, beginning in April, will establish a personal Child Trust Fund of £250 to £500 for every newborn.
Parents can then make contributions to their child’s trust fund which can grow tax-free, and can choose how to allocate the Fund among investments.
The purpose of the gifts is to “encourage parents and children to develop the saving habit and engage with financial institutions.”
This is a well-designed, small-scale plan that will cost the government fairly little: £500, even invested for twenty years, will not be enough to lift someone out of poverty.
The trust funds’ real promise will consist in educating citizens about investments.
That’s a good start, particularly if Blair’s policy is copied elsewhere.
But other proposals carry bigger risks, notably the privatization of retirement pensions, which is talked about in many countries, and that some – including Great Britain, Chile, Sweden, and Mexico – have already put in place, at least partly.
Bush’s plan to reform Social Security in the US – at least what is known of it – represents the ownership revolution’s cutting edge.
Young people in the US who opt for it would see most of the traditional pension benefit replaced when they retire decades from now with proceeds from personal accounts that they would be free to allocate among a range of investments, including stocks.
Whatever traditional benefit remains would not be enough to live on; retirees would be at the mercy of the markets for the bulk of their income.
The outcome of any such experiment is impossible to foresee, because other countries’ experience can never be a perfect guide to a new system – the situation is never exactly the same in a different environment.
A privatized social security system like the one Bush proposes might turn out very well, assuming that people behave sensibly and/or the stock market keeps going up.
But there is also a higher risk of disaster, owing to a seemingly inborn human tendency to extrapolate past returns.
Investors could create a stock-market bubble, encouraging even more naïve investors to concentrate their personal retirement accounts in the stock market – and leaving them dangerously exposed when it crashes.
There is also a related risk that private accounts would cause a further drop in the personal saving rate.
The saving rate is the lifeblood of any economy, because foreigners cannot be expected to finance capital investment forever.
But all the talk of wondrous returns could spur what psychologists call “wishful thinking bias,” leading people to believe that their personal accounts will be so valuable in the future that outside saving is unnecessary.
Encouraging widespread capital ownership could potentially give rise to good policies.
But do we really want to extend such policies to areas like pensions, health care, and education?
After all, owning capital – whether it is stocks or real estate – entails risks, and the need to insure against these risks is why capitalist countries built traditional safety nets in the first place.
Revolutions are exciting, but we must make sure that we still have a home to return to when the barricades come down and the dust settles.
Calderon’s Cauldron
Under dramatically inauspicious circumstances, Mexico has finally got itself a new president last Friday.
Felipe Calderón has taken the oath of office, braving the wrath of his left-wing opposition, out-smarting the Partido de la Revolución Democrática (PRD) and its leader, Andrés Manuel López Obrador, but nonetheless paying a high price.
Every TV news show and front-page headline in the world ran the same headline: “New Mexican President inaugurated in chaos and fisticuffs.”
Mexico’s institutions withstood – just barely – the onslaught of a virtually insurrectional left-wing opposition, bent in vain on stopping Calderón’s inauguration, and of a resentful Partido Revolucionario Institucional (PRI), increasingly dedicated to allowing Calderón to take office, and then fail miserably.
Calderón impressively overcame apparently insurmountable obstacles on the way to the presidency, yet the struggle to govern and transform Mexico has just begun.
Most Mexican commentators believe that it should be relatively easy for Calderón to improve on the largely self-inflicted failure of outgoing President Vicente Fox’s term.
Mexico needs to grow at roughly twice the rate that it did under Fox (a meager 2% per year).
If Calderón can strengthen law and order, and use his considerable political skills to reach agreement with the PRI on structural economic reforms, he will succeed.
But this view is simplistic.
Fox’s term, along with the four last years of former President Ernesto Zedillo’s mandate, were hardly a failure.
Not since the 1960’s had Mexico undergone ten consecutive years of economic stability, low inflation, low interest rates, a stable currency, and constant, though mediocre growth.
For the first time ever, mortgages, automobile loans, and consumer credit became available to the lower middle class: this year more homes were built and sold, and more cars were bought, than ever before.
Likewise, while Fox can be criticized for not clamping down on protesters and a disruptive, extremist opposition, he never resorted to the bloody repression for which most of his predecessors came to be known.
Moreover, he dragged Mexico out of its archaic foreign policy cocoon, and placed immigration and human rights at the heart of Mexico’s new international agenda.
Nor is Calderón finding it easy to negotiate with the PRI, failing to build a coalition government, which he has repeatedly proclaimed as the solution to the gridlock that has cursed Mexico since 1997.
Whatever the advantages of a cabinet comprising solely members of his Partido Acción Nacional (PAN), this is not what Calderón sought.
Similarly, no deal with the opposition was possible regarding the inauguration ceremony – thus the chaotic, depressing scenes of congressmen fighting it out in their chamber, while Calderón was ushered in through the back door for a rushed ceremony.
Mexico’s economic problems might be similarly more intractable than many commentators seem to believe.
Mexico experienced a “cold-turkey” economic opening under former President Carlos Salinas in 1988-1994; a belated but successful political opening under former President Zedillo in 1994-2000; and, at long last, a true rotation in power thanks to Fox.
But the foundations of the old PRI-corporativist system created in the 1930’s remain untouched, and represent the main and most formidable obstacles to Mexico’s growth and success.
The first pillar of this system is the public and private economic monopolies that dominate the country.
The state-owned oil (Pemex) and electric power (Federal Electricity Commission) companies face no competition.
The private virtual monopolies in telecommunications (Telmex), television (Televisa), cement (Cemex), bread and tortilla manufacturing (Bimbo and Maseca, respectively), banking (Banamex/Citigroup and Bancomer/Banco de Bilbao) may face competition abroad, but not at home.
These monopolies are stronger than ever, and prices, supply, service, and quality all suffer.
The second pillar is formed by the unions that have controlled the Mexican labor movement since the 1930’s.
They enjoy “closed shop” hiring and firing prerogatives, leadership elections by acclamation, mandatory dues without transparency, and immense political power.
The teachers’ union is the largest in Latin America, the oil workers’ union is the richest in Latin America, and the social security employees union has thwarted any attempt at pension or health reform for years.
The third pillar of the system is political monopoly.
For 70 years, the PRI had a complete lock on Mexican politics; now three parties do, and no one else can enter the political arena or gain access to the enormous public subsidies – more than $500 million last year – handed out to these parties without their consent.
The main parties write their own anti-trust legislation, vote their own subsidies, and choose their own elected officials.
The absence of consecutive re-election at any level reinforces the party machines’ power: they pick candidates, whom voters merely ratify at the polls.
So Mexico’s challenges boil down to liberating the labor movement, breaking up the private monopolies and opening the public monopolies to competition, and lowering entry barriers that restrict access to the political arena.
These may not be sufficient conditions for success, but they are certainly necessary ones.
Calderón must strengthen his presidency from the outset.
Taking on the powers that be is perhaps the only way to achieve this, however risky it might appear.
Elected with only 35% of the vote, lacking a majority in Congress, and taking office on the eve of an economic slowdown in the United States, things would be difficult anyway.
Given that roughly a third of the electorate does not think he won fairly, and in view of the precariousness of the rule of law in the country, Calderón’s position is even less enviable.
Caution and patience might not be his best advisors.
California Bad Dreaming
STANFORD – While central governments’ fiscal problems plague many economies, a parallel crisis is enveloping many subnational governments around the world.
From Spain to China to the United States to Italy, these governments – regions, states, provinces, cities, and towns – face immense fiscal challenges.
Higher levels of government are “on the hook” to bail out local insolvent governments, and may even suffer bond downgrades as a result; in Spain, Italy, and China, that role falls to the national government, and for US cities and towns, to their states.
There are many similarities within and among countries in terms of the nature and causes of these local fiscal calamities.
Local officials used growing revenues during the boom to fund pet projects or boost pay and benefits, with little regard to future costs.
In the downturn, revenues and subsidies from the central government collapsed and the bills came due.
Creative accounting gimmicks masked the full extent of the problem.
Now comes the reckoning.
To finance local businesses, Chinese local governments use local-government financing vehicles (LGFVs) to circumvent bans on direct borrowing.
In Spain, housing and employment collapses have hammered revenue.
Rumors of an imminent default swirl around Sicily, whose governor has resigned as borrowing soared after cutbacks from Rome.
A new report from a task force co-chaired by former Federal Reserve Chairman Paul Volcker indicates that unfunded pension and health-care costs make many American states’ medium- and longer-run fiscal prospects bleak.
California’s fiscal crises may also provide lessons for subnational governments around the world.
Three California cities have recently declared bankruptcy: Stockton, the largest American city ever to do so;
Compton is rumored to be next; most observers expect more to follow.
The state faces another large budget deficit, yet Governor Jerry Brown’s budget this year includes a substantial spending increase.
Brown’s ballot initiative this November would raise California’s top personal income-tax rate to 13.3%, the nation’s highest.
According to Brown, the tax hike would be temporary, yet it would last seven years.
Meanwhile, he claims to be tough on California’s notoriously well-paid and powerful public-employee unions by negotiating a 5% pay cut.
But the details reveal a net 1.6% pay cut in exchange for a 5% reduction in work hours.
Cities are declaring bankruptcy to escape the pressure of exponentially rising pension and health costs.
In contrast to the state, cities have even cut back essential services, including 20% reductions in police and fire personnel.
Bankruptcy should allow local governments to renegotiate their bond debt and, perhaps, their retired employees’ pension and health-care costs (that’s up to a bankruptcy judge).
The state would be expected to take over essential public services from bankrupt local governments.
But the state itself is in dire financial straits; one of the cities’ problems is the sharp curtailment of state funds to localities.
Despite these problems, Brown has committed California to a San Francisco-to-Los Angeles high-speed rail boondoggle.
To get the cost projections down to $68 billion from a $100 billion estimate, some existing low-speed rail will be used, likely doubling the time it takes to travel from Los Angeles to San Francisco to 5-6 hours.
California will most likely be unable to pay for the entire project, leaving little use for the first segment in the sparsely populated Central Valley.
And, if the project somehow is completed, it will be a not-so-high-speed rail that will drain badly needed resources from other essential government services for many decades.
These sorry episodes reveal some important lessons.
One-party government weakens accountability and breeds hubris.
The California legislature has been controlled by the Democratic Party for decades, and it takes its cue from its party’s most powerful special interests: public-employee unions, environmentalists, trial lawyers, and teachers’ unions.
They have concocted an extremely progressive social experiment: with 12% of the US population, California has more than 30% of its welfare dependents.
From the mid-1980’s to 2005, California's population grew by 10 million, while Medicaid recipients soared by seven million; tax filers paying income taxes rose by just 150,000; and the prison population swelled by 115,000.
The state income tax is not only uncompetitively high, but the revenues are volatile.
In the economic and stock-market upswing, revenues roll in far more rapidly than incomes rise, owing to the extremely progressive income tax (in good years, the top 1% pays about half the state’s income taxes).
The legislature spends it as if the elevated revenues will continue forever.
Then the inevitable recession and stock-market collapse plunges the state into crisis.
The progressive social experiment has gone so severely off-track that the state cannot even dependably provide essential services, from courts to education, for the most needy.
Not surprisingly, California’s economy, which used to outperform the rest of the US, now substantially underperforms.
The unemployment rate, at 10.8%, is almost one-third higher than the national average, and higher than every other state except Nevada and Rhode Island.
California still has great strengths in technology, entertainment, and agriculture.
But citizens and politicians alike must agree to target services far more carefully; reform the tax system with lower rates on a broader base of economic activity and people (almost half pay no state income tax); and modernize inefficient state programs to spend less and produce far better outcomes.
Not coincidentally, that’s a perfect prescription for bloated, debt-ridden central and subnational governments worldwide.
California Dying
Berkeley – While the new Obama administration is commanding global attention, America’s future may be written – as so many times before – in and by its largest state.
Once the lodestar for American optimism and achievement, California now illustrates the difficulties confronting the United States – and how much more can still go wrong domestically.
The most populous and wealthiest of America’s 50 states, California has long been a beacon of opportunity for talented and enterprising people from all over the world.
One in every four California residents was born in a foreign country.
California’s two most famous industries, Silicon Valley and Hollywood, depend on infusions of talent from abroad.
Its robust agricultural sector is a massive exporter of food, benefiting from the growing appetites of consumers in developing countries.
Yet California’s technological and entrepreneurial might – standing alone, the state would be the world’s eighth largest economy – coexists with a dysfunctional political system that has brought it to the edge of fiscal bankruptcy.
On May 19, the state’s voters, in a special election, rejected an array of tax increases and spending cuts required to balance its budget.
Now, California faces either an embarrassing federal bailout or a prolonged period of rule by judges, who under California law have the power to vacate labor agreements, abrogate contracts, and generally restructure the state’s financial commitments.
For President Barack Obama, California’s crisis imperils his own reform agenda.
Because other American states also face tough fiscal conditions, the political price of bailing out California may be bailing out dozens of other states too.
A massive state bailout, while adding enormously to pressure on Obama’s government, would expose the weak link in the US system of governance.
So-called “unitary” nations such as Britain, France, China, or Kenya, essentially have a single set of government obligations: one national police force, one employer for all public school teachers, one overall pension system, etc.
Making sense of these asymmetries is difficult.
When financial markets concentrate on the fiscal health of the federal government, they miss the extent of government obligations as a whole.
The complexity of American governance threatens the benefits of Obama’s decision to stimulate the economy through deficit spending.
While the national government expands, state governments, such as California’s, contract.
Moreover, California’s crisis is more than an economic one.
California is the most diverse US state; more than half of its 37 million people are non-white.
For believers in the benefits of diversity, California represents the largest social experiment in human history, bringing people of different backgrounds together in a way unimaginable in, say, Germany, China, or Brazil.
California’s governor, Arnold Schwarzenegger, was an immigrant (from Austria) before he was a movie star.
In his six years in office, he has repeatedly tried to bypass a polarized state legislature – even the annual budget requires a two-thirds majority – by appealing directly to voters.
Ballot initiatives were created 100 years ago to empower ordinary citizens, but in recent decades the process has been captured by self-serving elites.
Even as California’s roads fall apart and public institutions decline – the result of too little spending and public workers who are too expensive – the state continues to operate the finest set of public universities in the US.
But the secret of the University of California’s success is its ability to obtain ever-higher amounts of funding from private sources and the federal government.
Disengagement from the California polity also is true of the state’s economic engines.
Intel, the world’s biggest chip maker and a Silicon Valley mainstay, hasn’t built a factory in California for more than 20 years.
Hollywood shoots an increasing number of films elsewhere.
Agriculture relies heavily on illegal workers from Mexico, who live temporarily near the fields and take their earnings back home.
How to forge a single community out of a state so diverse remains an elusive challenge.
Some influential people, including Schwarzenegger, say the state needs a new constitution that would restrict ballot initiatives and make budgets easier to pass.
More radical thinkers insist that California is ungovernable and should be broken into two or even three states.
Creating more Californias would of course require the approval of the federal government in Washington, where elected representatives from California – mainly from Obama’s Democratic Party – have more power today than at perhaps any time in US history.
Nancy Pelosi, the House majority leader, is from San Francisco.
Californians run the two most powerful House committees, Energy and Commerce and Education and Labor.
Two of the most influential senators also come from California.
Why these Washington politicians are idle while their state slides towards ruin says much about what’s broken in American politics.
Schwarzenegger is a Republican, so Democrats privately wish him to fail.
There’s a deeper problem: politicians across the spectrum, beholden to special interests, are habituated to denying serious problems.
Obama will be forced to help craft a compromise to keep the state financially afloat.
Yet as a condition, he may insist that Californians, who are already among the most heavily taxed Americans, pay more.
If Californians refuse, Obama could face a widening revolt – against the idea of expanded government as the chief response to what ails America at home.
Call In the Reserves
The People’s Bank of China and the Bank of Japan – as well as other central banks in Asia – are in trouble.
They have accumulated vast foreign exchange reserves, estimated at more than $2 trillion.
The problem is that almost all of it is in US dollars – a currency that is rapidly losing its value.
All policy options for Asia’s central banks appear equally unattractive. If they do nothing and simply hold onto the dollars, their losses will only increase.
But if they buy more, in an attempt to prop up the dollar, they will only have a bigger version of the same problem.
If, on the contrary, they try to diversify into other currencies, they will drive down the dollar faster and create greater losses.
They are also likely to encounter the same sort of problem with other possible reserve currencies.
The euro has been touted as the replacement for or alternative to the dollar.
Some enthusiastic Europeans encouraged Asians to diversify their reserve holdings.
But the same scenario might well be repeated with the euro in a few years.
Large fiscal deficits and slow growth might convince foreign exchange markets that there is little future in the euro, fueling a wave of selling – and hence losses for central bank holders.
There is a historical parallel to today’s concern about the world’s major reserve currency.
The interwar economy, shattered by the Great Depression of the early 1930’s, offers a whole series of painful, but important, lessons for the present.
In the 1920’s, the world economy was reconstructed around a fixed exchange rate regime in which many countries held their reserves not in gold (as was the practice before the First World War) but in foreign exchange, especially in British pounds sterling.
During the course of the 1920’s, some of the official holders of pounds grew nervous about Britain’s weak foreign trade performance, which suggested that, like today’s dollar, the currency was over-valued and would inevitably decline.
Foreign central banks asked whether the Bank of England was contemplating changing its view of the pound’s exchange rate.
Of course they were told that there was no intention of abandoning Britain’s link to gold, and that the strong pound represented a deep and long commitment (in the same way that US Treasury Secretary John Snow today affirms the idea of a “strong dollar”).
Only France ignored British statements and substantially sold off its sterling holdings.
When the inevitable British devaluation came on September 20-21, 1931, many foreign central banks were badly hit and were blamed for mismanaging their reserves.
Many were stripped of their responsibilities, and the persons involved were discredited.
The Dutch central banker Gerard Vissering resigned and eventually killed himself as a result of the destruction wrought on his institution’s balance sheet by the pound’s collapse.
Some countries that traded a great deal with Britain, or were in the orbit of British imperial rule, continued to hold reserves in pounds after 1931.
During World War II, Britain took advantage of this, and Argentina, Egypt, and India, in particular, built up huge claims on sterling, although it was an unattractive currency.
At the war’s end, they thought of a new way of using their reserves: spend them.
Consequently, these reserves provided the fuel for economic populism.
Large holders of sterling balances – Nehru’s India, Nasser’s Egypt, and Peron’s Argentina – all embarked on major nationalizations and a public sector spending spree: they built railways, dams, steel works.
The sterling balances proved to be the starting point of vast and inefficient state planning regimes that did long-term harm to growth prospects in all the countries that took this course.
Could something similar be in store for today’s holders of large reserves?
The most explicit call for the use of dollar reserves to finance a major program of infrastructure modernization has come from India, which has a similar problem to the one facing China and Japan.
It will be similarly tempting elsewhere.
This temptation needs to be removed before the tempted yield to it.
Reserve holdings represent an outdated concept, and the world should contemplate some way of making them less central to the operation of the international financial system.
To be sure, reserves are important to smooth out imbalances in a fixed exchange rate regime.
But the world has moved since the 1970’s in the direction of greater exchange rate flexibility.
Reserves are also clearly important for countries that produce only a few goods – especially commodity producers – and thus face big and unpredictable swings in world market prices.
Dependency on coffee or cocoa exports requires a build-up of precautionary reserves.
But this does not apply to China, Japan, or India, whose exports are diversified.
Today’s big surplus countries do not need large reserves.
They should reduce their holdings as quickly as possible, before they do something really stupid with the accumulated treasure.
Hamas Rising
GAZA CITY – Hamas, the militant political movement that has ruled Gaza since 2007, has emerged from the latest round of fighting with Israel with its regional status significantly enhanced.
At the same time, the movement faces new questions about its ability to take advantage of the diplomatic opportunities that it has gained.
Hamas’s forceful response to Israel’s military operation in Gaza in November, which included landing rockets near Tel Aviv and Jerusalem, demonstrated its commitment to its core value of steadfastness.
Moreover, in the wake of the eight-day clash, Hamas’s long-exiled leader, Khaled Meshal, who had never before dared to show himself openly to Israel, entered Gaza from Egypt.
Parading triumphantly through the streets, he reinforced the idea – at home and abroad – that Hamas had been victorious.
Beyond Gaza, the rise of political Islam in the Arab Spring countries, particularly Egypt and Tunisia, has created a more Hamas-friendly neighborhood.
Crucially, the negotiations in Cairo that produced a cease-fire with Israel involved direct, high-level diplomatic contact between Egypt and Hamas – a fundamental shift from former Egyptian President Hosni Mubarak’s avowedly anti-Hamas stance.
Visits to Gaza by the Emir of Qatar and Turkey’s foreign minister, as well as by other regional leaders, have further buttressed Hamas’s new stature.
Demonstrating support for Hamas now means building credibility at home, which creates an opportunity to elicit large donations from Arab and Muslim countries to finance Gaza’s reconstruction.
By contrast, Mahmoud Abbas, the president of the Palestinian Authority (PA), who embraces peace negotiations with Israel and disavows armed struggle, is more isolated than ever, despite his success in upgrading Palestine’s status at the United Nations to that of “non-member observer state” days after the fighting in Gaza ended.
Hamas initially reacted skeptically to the statehood bid, but supported it after the cease-fire, owing to its expectation that it will be able to exploit Palestine’s upgraded status.
Nonetheless, recent events, together with the PA’s dwindling resources, have diminished Abbas’s credibility among Palestinians, who increasingly view him as desperate.
Israel’s announcement after the UN vote of new settlements around Jerusalem weakened his standing further.
Indeed, Abbas’s time is running out.
The only question is who will replace him.
Meanwhile, Hamas is seeking to capitalize on its growing popularity by winning elections.
In last October’s municipal elections in the West Bank – the first in six years – the largely secular Fatah party technically retained its authority; but voter turnout of only 55%, following Hamas’s call for a boycott, reflected waning support for the party.
Hamas is now widely seen as the true representative of Palestinian national ambitions, and is set to unite the Palestinians under its flag.
But can Hamas find a basis for negotiations with Israel?
To be sure, Hamas has not abandoned its resistance mantra; even so, it has moderated its stance on the Palestinian-Israeli conflict over time.
Indeed, Hamas’s leaders have expressed support for the establishment of a Palestinian state based on the 1967 borders, with East Jerusalem as its capital.
This gradual shift, combined with Hamas’s endorsement of Abbas’s diplomatic approach in the UN, suggests that Hamas now believes that a military victory over Israel is not possible.
Palestinian and Israeli leaders will have to reconcile their differences and reach a diplomatic settlement.
Signs of Hamas’s shifting perspective are becoming increasingly apparent.
While Meshal maintained a hardline stance in his speech in Gaza (see below), in private discussions he expressed a readiness to accept a Palestinian state based on the 1967 borders.
Meshal even stated that, if Israel reconsidered its attitude toward the Arab Peace Initiative of 2002 – which calls upon the Arab world to recognize Israel’s right to exist in exchange for Israel’s return to its 1967 borders – Hamas would do the same.
But, although Meshal welcomed the idea of future negotiations with Israel, he maintained that the time is not yet right.
Hamas is convinced that Israel understands only the language of force and power, and it will not negotiate until Israel accepts the permanence of Palestinian demands.
Israel may be starting to get the message.
In fact, the recent fighting drove some Israeli politicians, such as Giora Eiland, former Prime Minister Ariel Sharon’s national security adviser, to acknowledge that Hamas is a political reality that can no longer be ignored.
Eiland even advised Israel’s government to recognize Hamas’s rule in Gaza, lift the siege, and negotiate a prolonged cease-fire directly with the movement.
But the success of such an approach depends on Israel’s readiness to engage Hamas, which it continues to regard as a terrorist group, and on the viability of Egyptian mediation.
Here, Israel may come under growing pressure from its principal ally.
Indeed, America’s acceptance of Islamist parties in the region, from Ennahda in Tunisia to the Muslim Brotherhood in Egypt, suggests that skepticism of Islamist groups may be losing ground.
It also raises doubts about whether the United States will maintain its strict policy of isolating Hamas.
Egyptian President Mohamed Morsi’s success in mediating between Israel and Hamas demonstrated that Islamists can be flexible – even when it comes to Israel.
There is room for moderation in both sides’ positions, but their leaders must be given the right platform on which to make the needed adjustments.
Can Asia Free Itself from the IMF?
BERKELEY – There has never been a question about the ultimate purpose of the Chiang Mai Initiative (CMI), the system of Asian financial supports created in 2000 in that Thai city. That purpose, of course, is to create an Asian Monetary Fund, i.e., a regional alternative to the International Monetary Fund, whose tender ministrations during the 1997-98 financial crisis have not been forgotten or forgiven.
So far, however, the CMI has been all horse and no saddle.
Its credits and swaps have never been activated.
The distress following the failure of Lehman Brothers would have been an obvious occasion.
Yet, revealingly, the Bank of Korea, the central bank hit hardest, negotiated a $30 billion foreign-currency swap with the United States Federal Reserve, not with its ASEAN+3 partners.
Now, we are told, ASEAN+3 has achieved another great breakthrough, the so-called Chiang Mai Initiative Multilateralization (CMIM), aimed at turning its bilateral swaps and credits into a regional reserve pool.
The goal was set in 2005, and last month ASEAN+3 finance ministers negotiated the details.
They specified contributions to their $120 billion pool, set down borrowing entitlements, and allocated voting shares.
The agreement on contributions is significant, it is said, because China and Japan will both contribute 32%.
In previous regional agreements, like capital subscriptions to the Asian Development Bank, China had always been treated as a second-rate power and asked to contribute less.
Indeed, China had shunned Japan’s 1997 proposal to create an Asian Monetary Fund precisely because it worried that it would play second fiddle.
That China is now acknowledged as a co-equal means that it will not stand in the way of further cooperation.
Also significant, we are told, is the agreement to make decisions by simple majority, with countries’ votes to be roughly in proportion to their contributions.
This means that no single country can block action, in contrast to the IMF executive board, which makes decisions by consensus, giving large countries like the United States de facto veto power.
But do these new rules really matter?
Disbursing more than 20% of the credits available to a country still requires that it first reach an agreement with the IMF, and 20% of a country’s entitlement is actually less than it contributes to the pool.
This would appear to nullify the very purpose of the arrangement, which is to free Asia from the IMF.
While there is a plan to raise and then eliminate the 20% threshold, this is left to some future, unspecified date.
The reason for the contradiction is straightforward. Countries putting money on the barrelhead want assurances that their resources will not be used frivolously, and they want to know that they will be repaid.
But regional neighbors find it hard to criticize one another’s policies and demand course corrections.
Political sensitivities run especially high in Asia.
Even in Europe, with its long history of cooperation, surveillance and conditionality are outsourced to the IMF.
Revealingly, the Fund, not the European Union, has taken the lead in negotiating emergency assistance packages for Hungary and Latvia.
Delinking the CMIM from the IMF will require Asian countries to undertake hard-hitting reviews of one another’s policies and to demand difficult policy adjustments.
Here ASEAN+3 talks the talk.
Its May agreement included a commitment to establish a regional surveillance unit.
But there is no agreement on where to situate it or how to staff it.
It could be placed within ASEAN’s Secretariat in Jakarta. It could be placed inside the Asian Development Bank in Manila.
It could be given to the “neutral” Northeast Asian country, Korea.
The outcome matters – which is why governments are fighting over it.
Recall how the fateful decision to situate the IMF in Washington, DC enhanced the influence of the US Treasury just down the street.
These dilemmas can be finessed by giving both surveillance responsibilities and the actual power to disburse funds to an independent board insulated from national politics.
Its members, with statutory independence and long terms in office, could function like the monetary policy committee of a central bank.
They could issue a Financial Stability Report that bluntly flags weak policies and financial vulnerabilities.
And they could demand policy adjustments as a condition for disbursing funds.
The IMF could then be shown the door.
This scheme wouldn’t solve all of Asia’s problems.
But it would at least head off one danger, namely the urge to accumulate even more reserves.
Recent volatility reinforces this temptation.
If Asian countries succumb, global imbalances and all their associated problems will return.
Pooling regional reserves as a way of making them go further is a better alternative.
But making this vision a reality requires further bold thinking.
Can A Wimp Disarm Saddam?
The UN's weapons inspectorate chief and Iraq have agreed on tentative terms for the conduct of weapons inspections, which in theory could begin as early as two weeks from now.
But the success of any such deal depends as much on the men who will carry out the inspections as on the details of when, where, and how they are carried out.
Hans Blix will head the UN arms inspectorate charged with searching for, finding, and destroying Saddam Hussein's weapons of mass destruction.
I have known Blix for over forty years.
In 1960 he was my deputy when I was a leader of the Swedish Liberal Youth organization.
Since then I have followed his career closely.
He became Sweden's foreign minister for a year and was later a director general of the International Atomic Energy Agency (IAEA) in Vienna.
Personally, Blix is amiable and has a sense of humor; politically he is weak and easily fooled.
I can think of few European officials less suitable for a showdown with Saddam Hussein.
Indeed, it is with utter disbelief that I watch television news about Blix's negotiations with the Iraqi dictator's henchmen.
The world has been amply warned about Blix's weaknesses because he has a track record of compounded failure.
When Blix headed the IAEA before the Gulf War of 1991, he blithely assured the world, after several inspections, that nothing alarming was happening in Iraq.
He delivered the clean bill of health that Saddam had hoped for when he began hiding his atomic factories and ambitions.
Since then, we have learnt all too unambiguously that Saddam is obsessed with procuring weapons of mass destruction - chemical and biological warheads as well as atomic bombs and the missiles to deliver them.
Former experts of Iraq's nuclear weapons program, who have fled Baghdad for the West, confirmed this.
They told us about determined and costly efforts to obtain doomsday devices.
Indeed, it is now clear that Saddam was but a year away from securing his first atomic bomb when the Gulf War broke out.
After that war, UN inspectors found and destroyed huge amounts of chemical and biological warheads as well as facilities to produce nuclear weapons.
Despite his grave failings as IAEA chief before 1991, Blix once again came to lead UN disarmament inspectors, this time in tandem with another Swede, Ambassador Rolf Ekéus.
Blix, naive and relatively ignorant about technical details -- his field is international law -- is easily mislead.
Even after the Gulf war, he failed to realize that the Iraqi officials, who were again assuring the UN that they were hiding nothing, were but consummate liars.
Indeed, Blix believed that Iraq had no program at all for nuclear arms.
David Kay, perhaps the most effective arms inspector, insisted that he did not trust them.
But Blix reproached Kay for his attitude. You must believe in official information, Blix implied.
The turning point came when Kay initiated inspections of suspect buildings without notifying the Iraqis about his intentions in advance.
This new, aggressive inspection strategy had dramatic consequences: Kay discovered material which confirmed that Iraq was only 12 to 18 months away from producing a nuclear device.
This historic discovery ended up in a confrontation at a parking lot in Baghdad.
UN cars were surrounded by 200 Iraqi soldiers and a mob, ordered out to the scene by Iraqi officials.
For four days and nights the siege continued, as Kay and his colleagues used satellite telephones to fax crucial documents to the West.
Blix had opposed the raid.
Fortunately, Ambassador Ekéus backed it and supported the inspectors during the siege.
I have met a number of experts on Iraq's weapons of mass destruction, and they often compare the two Swedes: "Ekéus is brilliant," they say, "Blix is terrible."
When the current UN inspectorate was being put together in 1999, both Ekéus and Blix were among the candidates being considered to head the new group of inspectors.
Friends of Iraq in Paris and Moscow consulted Baghdad to see whom Saddam would prefer.
France and Russia then suggested Blix.
Surprisingly the Clinton administration accepted that decision.
Saddam's chemical and biological arms, and his determination to get nuclear weapons, are a threat to the world.
The dictator could use these arms himself or make them available to terrorist organizations.
And the issue of war and peace depends on a man repeatedly duped by the Iraqi regime.
The Bush administration probably understands Blix's weaknesses.
My guess is that the US will not allow Blix and the inspectors that he oversees to be deceived by Iraq again.
Regardless of how this crisis develops from this point, the UN has neglected its duties by asking a wimp to lead the inspectors who are supposed to stand up to the brute of Baghdad.
Can Business Be Ethical?
MELBOURNE – Something new is happening at Harvard Business School.
As graduation nears for the first class to complete their Master of Business Administration since the onset of the global financial crisis, students are circulating an oath that commits them to pursue their work “in an ethical manner”; “to strive to create sustainable economic, social, and environmental prosperity worldwide”; and to manage their enterprises “in good faith, guarding against decisions and behavior that advance my own narrow ambitions but harm the enterprise and the societies it serves.”
The wording of the new MBA oath draws on one adopted in 2006 by the Thunderbird School of Global Management, based in Arizona. Nevertheless, the fact that it has been taken up by the world’s most famous business school is significant.
As of this writing, about 20% of the Harvard graduating class have taken the oath.
That will, of course, prompt cynics to ask: “What about the other 80%?” But those who have taken the oath are part of a larger turn toward ethics that has followed the recent flood of revelations of dishonesty and greed in the financial sector.
Business ethics has always had problems that are distinct from those of other professions, such as medicine, law, engineering, dentistry, or nursing.
A member of my family recently had an eye problem, and was referred by her general practitioner to an eye surgeon.
The surgeon examined the eye, said that it didn’t need surgery, and sent her back to the general practitioner.
That is no more than one would expect from a doctor who is true to the ethics of the profession, my medical friends tell me.
By contrast, it’s hard to imagine going to a car dealer and being advised that you don’t really need a new car.
For physicians, the idea of swearing an oath to act ethically goes back to Hippocrates.
Every profession will have its rogues, of course, no matter what oaths are sworn, but many health care professionals have a real commitment to serving the best interests of their clients.
Do business managers have a commitment to anything more than the success of their company and to making money?
It would be hard to say that they do.
Indeed, many business leaders deny that there is any conflict between self-interest and the interests of all.
Adam Smith’s “invisible hand,” they believe, ensures that the pursuit of our own interests in the free market will further the interests of all.
In that tradition, the economist Milton Friedman wrote, in his 1962 book Capitalism and Freedom : “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
For the true believers in this creed, the suggestion that the manager of a business should strive for anything except maximizing value for shareholders is heresy.
But, while the global financial crisis did reveal fraud on a massive scale, the underlying cause of the crisis was not fraud but the failure of the market to knit together the self-interest of those who sold and resold sub-prime mortgages with the interests of the investors in financial institutions that bought them.
The fact that an even larger catastrophe would have resulted had governments not been willing to draw on taxpayer funds to bail out the banks was an additional blow to those who have told us to trust the unregulated market.
The MBA oath is an attempt to replace the Friedmanite view of the social responsibility of business with something quite different: a management profession that commits itself to promoting the long-term, sustainable welfare of all.
The sense of a professional ethic is conveyed by clauses in the oath that require managers to “develop both myself and other managers under my supervision so that the profession continues to grow and contribute to the well-being of society.”
Another clause stresses accountability to one’s peers, a hallmark of professional self-regulation.
As for the ultimate objectives of the managerial profession, they are, as we have seen, nothing less than “to create sustainable economic, social, and environmental prosperity worldwide.”
Can such a code really take hold in the competitive world of business? Perhaps the best hope for its success can be glimpsed in a comment made to a New York Times reporter by Max Anderson, one of the pledge’s student organizers: “There is the feeling that we want our lives to mean something more and to run organizations for the greater good,” he said.  If enough business people would conceive their interests in those terms, we might see the emergence of an ethically-based profession of business managers.
Can Central Banks Still Influence Exchange Rates?
LONDON – On September 16, 1992, a date that lives in infamy in the United Kingdom as “Black Wednesday,” the Bank of England abandoned its efforts to keep the British pound within its permitted band in the European exchange-rate mechanism.
Supporting sterling at the required exchange rate had proved prohibitively expensive for the Bank and the British government.
By contrast, it proved highly remunerative for George Soros.
Since then, the Bank of England has eschewed all forms of intervention in the foreign-exchange markets.
And the episode served to reinforce an international consensus that countries’ monetary policy should focus on domestic price stability while letting exchange rates float freely.
After Black Wednesday, it became conventional wisdom that it was simply impossible to fix both the exchange rate and domestic monetary conditions at the same time.
According to this view, in a market economy with a convertible currency and free capital flows, the exchange rate cannot be manipulated without consequent adjustments to other dimensions of monetary conditions.
Seeking to influence exchange rates using capital controls or direct intervention in currency markets was doomed to failure in anything other than the shortest term.
This consensus has been maintained through a long period in which exchange rates between the major Western currencies have been allowed to find their own level.
But it did not extend to Asia.
The Asian financial crisis of 1997-1998 convinced governments and central banks that countries that maintained exchange controls were able to weather the storm better than countries that embraced liberalization.
It was accepted that maintaining exchange controls required a high level of foreign reserves.
So, in much of Asia, we have seen fixed exchange rates for the last decade or more, the maintenance of some exchange controls on capital flows, and a massive increase in foreign-exchange reserves.
The authorities have tolerated somewhat greater volatility in domestic inflation rates as a consequence.
There are now signs that the consensus reigning in Western central banks for the last two decades is being challenged.
Some economists have begun to argue that central banks need not be so wary of intervening.
For example, Paul De Grauwe of the University of Leuvem has proposed that the European Central Bank should intervene when exchange-rate developments are out of touch with economic reality, in order to send a signal to the markets.
He points to the high volatility of the dollar/euro rate over the last decade, and its adverse consequences for economic activity in Europe.
Politicians, too, are concerned.
French President Nicolas Sarkozy has regularly complained about the damaging consequences of excess currency volatility, and has called for exchange rates and international monetary conditions to be at the top of the G-20 agenda when France assumes the group’s presidency this November.
Sarkozy’s rhetoric suggests that he hankers after new international agreements on exchange rates, and, indeed, perhaps a new global reserve currency.
There have been actions as well as words.
Beginning in March 2009, the Swiss National Bank became the first Western central bank in years to seek to influence its currency’s exchange rate through intervention.
The Swiss were concerned about the franc’s rise, especially against the euro, and intervened heavily in an attempt to hold it down.
It is always difficult, even after the event, to decide how effective an intervention strategy has been.
But the Swiss reported losses of 14 billion francs in the first half of 2010, without succeeding in stemming exchange-rate appreciation.
This episode, which other central banks watched with great interest, tended to reinforce the views of those who are skeptical of monetary authorities’ ability to manage exchange rates.
So where does this leave us?
No doubt the debate will continue, in the G-20 and elsewhere.
The underlying problem remains that, while both central banks and finance ministries are unhappy about the excessive volatility of real and nominal exchange rates, they do not understand very well what causes it.
They may think that, in the long run, parities will reflect developments in relative unit labor costs.
But the long run can be long indeed, and the influence of speculative capital flows can be substantial and sustained.
Intervention skeptics, therefore, remain the strong majority.
While they recognize that Asia’s experience has been rather different, they tend to attribute that to dissimilar capital markets.
They acknowledge that in some circumstances intervention, or at least the readiness to intervene, may be effective, but only if a number of associated conditions are met.
In particular, a country planning to intervene must demonstrate that it has an intimidating stockpile of foreign-exchange reserves, and the readiness to use it.
There must also be a strong political commitment to intervention, and an explicit willingness to accept the consequences for domestic monetary conditions, which may involve an inflation rate that is higher or lower than desired, perhaps for some time.
And it is likely that there will be a need for exchange controls, certainly on short-term capital flows, whether permanently or from time to time.
These conditions do not typically apply in Western countries.
The Swiss have large reserves, but are so interlinked with global capital markets that exchange controls are not a realistic option.
Most other Western countries, certainly the United States and the United Kingdom, are in no position to invest heavily to maintain a particular exchange rate.
The London markets have waited 18 long years already for the Bank of England to appear on their screens, and I suspect their wait will continue for some time yet.
Cancer by the Numbers
PHILADELPHIA – It is difficult to communicate medical risk to a large audience, especially when official recommendations conflict with emotional narratives.
That is why, when the United States Preventive Services Task Force (USPSTF) in 2009 presented its guidelines for breast cancer screening, which recommended against routine screenings for asymptomatic women in their 40’s and biennial, rather than annual, mammograms for women over 50, the public responded with confused fury.
The key to understanding this response is to be found in the nebulous zone between mathematics and psychology.
People’s discomfort with the findings stemmed largely from faulty intuition: if earlier and more frequent screening increases the likelihood of detecting a possibly fatal cancer, then more screening is always desirable.
If more screening can detect breast cancer in asymptomatic women in their 40’s, wouldn’t it also detect cancer in women in their 30’s?
And, if so, why not, reductio ad absurdum, begin monthly mammograms at age 15?
The answer, of course, is that such intensive screening would cause more harm than good.
But striking the proper balance is challenging.
Unfortunately, it is not easy to weigh breast cancer’s dangers against the cumulative effects of radiation from dozens of mammograms over the years, the invasiveness of biopsies, and the debilitating impact of treating slow-growing tumors that would never have proven fatal.
The USPSTF recently issued an even sharper warning about the prostate-specific antigen test for prostate cancer, after concluding that the test’s harms outweigh its benefits.
Chest X-rays for lung cancer and Pap tests for cervical cancer have received similar, albeit less definitive, criticism.
The next step in the reevaluation of cancer screening was taken last year, when researchers at the Dartmouth Institute for Health Policy announced that the costs of screening for breast cancer were often minimized, and that the benefits were much exaggerated.
Indeed, even a mammogram (almost 40 million are given annually in the US) that detects a cancer does not necessarily save a life.
The Dartmouth researchers found that, of the estimated 138,000 breast cancers detected annually in the US, the test did not help 120,000-134,000 of the afflicted women.
The cancers either were growing so slowly that they did not pose a problem, or they would have been treated successfully if discovered clinically later (or they were so aggressive that little could be done).
A related concern is measurement.
Since the patient’s duration of survival is calculated from the time of diagnosis, more sensitive screening starts the clock sooner.
Survival times can thus appear longer, even if the earlier diagnosis had no real effect on survival.
Naturally, individual cases dictate which tests and treatments are best, but an additional concern about frequent screenings is the problem of false positives.
When one is looking for something relatively rare (whether cancer or terrorists), it is wise to remember that a positive result is often false.
Either the “detected” pathology is not there, or it is not the sort that will kill you.
Consider the following hypothetical example.
Assume that the screening test for a certain cancer is 95% accurate, meaning that if someone has the cancer, the test will be positive 95% of the time.
Next, assume that if someone does not have the cancer, the test will be positive only 1% of the time.
Finally, assume further that 0.5% of people – one of every 200 – actually have this type of cancer.
If your doctor tells you that you have tested positive, does this mean that you are likely to have the cancer?
Surprisingly, the answer is no.
A little arithmetic shows why.
Suppose that 100,000 screenings are conducted.
On average, 500 people will have the cancer.
Since 95% of them will test positive, there will be, on average, 475 positive tests.
Of the 99,500 people without cancer, 1% will test positive, yielding 995 false positives out of 1,470 positive tests.
In other words, even if you tested positive for the cancer, the probability that you actually have it is only about 32%.
That answer is decidedly counterintuitive and hence easy to reject.
Most people do not think in terms of probabilities other than “50-50” and “one in a million.”
But, whatever the probabilities, the fact remains that there will generally be a high percentage of false positives when screening for rare conditions.
Moreover, the patients who receive these faulty diagnoses will usually receive further treatments, which often will have harmful consequences.
The “availability heuristic” – a pervasive cognitive bias caused by people’s tendency to estimate the likelihood of a phenomenon by how easily an example of it comes to mind – routinely clouds the issue.
People relate much more readily to a friend dying of cancer than they do to statistics about strangers suffering from the consequences of testing.
But the bottom line is that the ongoing reevaluation of cancer screening is evidence-based.
When it comes to policymaking, decisions must be based on facts and argument, not anecdotes and stories, however compelling those narratives may be.
विकासशील दुनिया के लिए कैंसर की देखभाल
बोस्टन – चार से अधिक दशक पहले, अमेरिकी राष्ट्रपति रिचर्ड निक्सन ने इस बात के शीघ्र और उत्साहजनक परिणामों से प्रेरित होकर कि कीमोथेरेपी, तीव्र लिम्फोब्लासटिक ल्यूकेमिया और Hodgkin लिंफोमा जैसे रोगों का इलाज हो सकता है, “कैंसर के खिलाफ युद्ध” छेड़ दिया। उसके बाद से अधिकाधिक कैंसर रोगियों का उपचार करने और उन्हें ठीक करने के लिए कीमोथेरेपी, शल्य चिकित्सा, और विकिरण का उपयोग करने में लगातार प्रगति हो रही है। लेकिन निम्न और मध्यम आय वाले देशों में, जहाँ कैंसर के रोगी आज सबसे अधिक संख्या में रहते हैं, इन जीवन-रक्षक अनुसंधानों तक पहुँच दूर की कौड़ी बनी हुई है।
संयुक्त राज्य अमेरिका में, स्तन कैंसर के 80% से अधिक रोगी लंबे समय तक जीवित रहते हैं, और कैंसर से पीड़ित 80% से अधिक बच्चे जीवित रहते हैं। हार्वर्ड विश्वविद्यालय में कर्करोग विज्ञानी के रूप में अपने लगभग 40 वर्षों में, मैंने ऐसे हजारों रोगियों का इलाज किया जिन्हें अगर कीमोथेरेपी उपलब्ध नहीं होती तो उनके बचने की उम्मीद बहुत कम होती। जिन रोगियों ने 1970 के दशक में उपचार प्राप्त किया, उनमें से बहुत से आज जीवित हैं और ठीक-ठाक हैं; उनके बच्चे अब प्रजननक्षम वयस्क हैं।
2011 में मैंने जब रवांडा में काम करना शुरू किया तभी मैं इस बात को पूरी तरह से समझ पाई कि मुझे जो उपकरण मिले हुए हैं वे कितने शक्तिशाली हैं और उनके न होने का क्या असर होता है। किगाली में केंद्रीय सार्वजनिक रेफरल अस्पताल में बाल-चिकित्सा कैंसर वार्ड में जाना समय से पीछे चले जाने जैसा था। विल्म्स ट्यूमर, जो एक तरह का गुर्दे का कैंसर होता है और वयस्कों को विरले ही कभी होता है, से ग्रसित रवांडा के बच्चों में पाए गए परिणाम हू-बहू अमेरिका में 80 साल पहले के समान थे, ये उन दवाओं की उपलब्धता से पहले के थे जिनसे आज इस रोगनिदान वाले 90% से अधिक अमेरिकी बच्चे जीवित रहने में सक्षम होते हैं।
रवांडा की स्वास्थ्य मंत्री, एग्नेस बिनागवाहो के अनुसार, उन्हें किगाली का कैंसर वार्ड एक दशक पहले के एचआईवी/एड्स यूनिट जैसा लग रहा था जब वह अस्पताल में शिशु रोग विशेषज्ञ थी। जब एंटीरेट्रोवाइरल थेरेपी नहीं थी, तो डॉक्टर एचआईवी/एड्स के लिए भोजन और आराम करने की सलाह देते थे - जिसका अर्थ संक्रमण का अनिवार्य रूप से मौत की सजा बन जाना होता था।
उस समय, कुछ लोग, चाहे थोड़ी देर के लिए ही सही, ऐतिहासिक भूल का शिकार हो जाते थे। 2001 में एक वरिष्ठ अमेरिकी अधिकारी ने यह दावा किया था कि एचआईवी/एड्स की "जटिलता" और उच्च लागत के कारण, अफ्रीका में इसका इलाज करना असंभव होगा।
लेकिन उनकी - और उनके जैसे विचार रखनेवाले कई अन्य लोगों की भी - यह धारणा गलत सिद्ध हुई। आज, अफ्रीका में दवाओं के उपयोग के साथ उपचार करानेवालों एचआईवी पॉजिटिव रोगियों की संख्या अमेरिका में इस तरह के लोगों की तुलना में बहुत अधिक हो चुकी है। दरअसल, रवांडा एड्स के इलाज के लिए सार्वभौमिक पहुँच प्राप्त करने वाले देशों में पहला देश था।
इस अनुभव के बावजूद, अफ्रीका में कैंसर के प्र��ावी उपचार की संभावना के बारे में इसी तरह का संदेह व्यक्त किया जा रहा है। यह सच है कि कैंसर का उपचार जटिल है। इसके लिए जहाँ पैथोलॉजी, शल्य चिकित्सा, विकिरण, कीमोथेरेपी, और लक्षित दवाओं जैसी विभिन्न प्रकार की नैदानिक और चिकित्सीय क्षमताओं की आवश्यकता होती है, वहीं इन जीवन-रक्षक उपचारों को सुरक्षित रूप से करने के लिए ज्ञान और कौशल का होना भी आवश्यक होता है।
लेकिन बुटारो कैंसर सेंटर ऑफ़ एक्सेलेंस और इसके जैसी अन्य सुविधाओं ने यह साबित कर दिया है कि गरीब, ग्रामीण परिवेश में भी कैंसर रोगियों का सुरक्षित और प्रभावी ढंग से इलाज किया जाना संभव है। रवांडा स्वास्थ्य मंत्रालय, पार्टनर्स इन हैल्थ, और बोस्टन स्थित दाना- फ़ार्बर कैंसर इन्स्टीट्यूट की बदौलत, बुटारो सेंटर द्वारा 3,000 से अधिक कैंसर रोगियों का इलाज किया जा चुका है, जिनमें से ज्यादातर पूर्व राष्ट्रपति बिल क्लिंटन और बिनागवाहो द्वारा जुलाई 2012 में इसे समर्पित किए जाने के बाद से, इस क्षेत्र के बाहर से संदर्भित किए गए हैं। जेफ गोर्डन चिल्ड्रन्स फाउंडेशन, स्तन कैंसर रिसर्च फाउंडेशन, लिवस्ट्रोंग, और निजी दानदाताओं से प्राप्त सहायता भी इस उपलब्धि के लिए महत्वपूर्ण रही है।
सौभाग्य से, कुछ प्रमुख संस्थाओं ने इस प्रयास में तेज़ी लाने के लिए आगे आना शुरू कर दिया है। विश्व स्वास्थ्य संगठन, कैंसर नियंत्रण के लिए अंतर्राष्ट्रीय संघ के साथ मिलकर कैंसर के इलाज के लिए जरूरी दवाओं की विश्व स्वास्थ्य संगठन की मॉडल सूची की दुबारा जांच कर रहा है ताकि इसकी अधिक ठीक तरह से पहचान की जा सके कि कौन से कैंसरों पर इलाज का अधिक असर होता है, और कौन से आबादियों पर भारी बोझ के रूप में हैं।
कैंसर की वैश्विक मृत्यु दरों को कम करने के लिए सबसे कुशल दृष्टिकोण यह होगा कि विकासशील देशों में कैंसर के रोगियों को मौजूदा उपचार मुहैया कराए जाएँ। इसमें कैंसर के इलाज के लिए उस तरह के अंतर्राष्ट्रीय वित्तपोषण को भी जोड़ें, जिसे एड्स राहत के लिए अमेरिकी राष्ट्रपति की आपातकालीन योजना और ग्लोबल फंड के माध्यम से एचआईवी/एड्स के लिए जुटाया गया था, इससे विकासशील देशों में कैंसर से होनेवाली मृत्यु दरों में भारी कमी हो सकती है, और जल्दी भी।
एक दशक से अधिक पहले, अंतर्राष्ट्रीय समुदाय ने यह फैसला किया था कि वे अब आगे से एचआईवी रोगियों के लिए निश्चित मौत को स्वीकार नहीं करेंगे। हमें आज वही प्रतिबद्धता करनी चाहिए कि हर जगह रोगियों को जीवन-रक्षक कैंसर का इलाज उपलब्ध कराएँगे।
Cancer World
PITTSBURGH – In 1971, President Richard M. Nixon launched a “war” against cancer.
But, nearly four decades later, the battle remains focused on highly profitable efforts to develop drugs and technologies to treat the disease while virtually ignoring environmental factors that cause it.
True, cancer deaths have dropped chiefly because of long-delayed – and still poorly supported – efforts to curb smoking.
Successes with screening and treatment of breast, colo-rectal, and cervical cancer have also helped.
But blacks and other minorities in the United States – and elsewhere in the world – do not share in these successes, and environmental factors appear to explain the disparity.
For example, while one in eight Americans is black, one in three is employed in sanitation or other blue-collar jobs.
Moreover, they have half the level of cancer-protective vitamin D as whites, and they are much more likely to live in polluted neighborhoods.
Indeed, cases of cancer that are not tied to smoking or aging are increasing.
Cancer is the leading cause of death in middle-aged persons and children (after accidents), and we can’t explain why, for most forms of cancer, death rates are higher for blacks than they are for whites.
What we can say is that the disease itself is the wrong enemy.
Instead, we should be attacking known environmental carcinogens – not just tobacco, but also radiation, sunlight, benzene, solvents, and some drugs and hormones.
Modern cancer-causing agents like diesel exhaust, pesticides, and other air pollutants are not systematically studied.
When they are considered at all, they are deemed to be the inevitable price of progress.
But most cancers are made, not born, arising from damage to our genes that occurs throughout our lives.
Despite having remarkably similar genes at birth, identical twins do not develop the same cancers.
By age 50, their chromosomal bands are profoundly different from one another.
America’s Centers for Disease Control and Prevention confirm that children’s blood today contains dozens of chemicals that did not exist two decades earlier, including many gene-damaging compounds known to cause cancer and a host of other diseases. Men and women of child-bearing age now carry enough hormone-disturbing compounds in their bodies to impair their fertility.
Women exposed to higher levels of the pesticide DDT before the age of fourteen have a five times higher chances of developing breast cancer when they reach middle age.
Could such compounds play a role in unexplained and growing rates of childhood cancer, testicular cancer, and non-Hodgkin’s Lymphoma throughout the industrial world? Should we wait to find out?
While we are phenomenally successful at keeping young people from dying of cancer today, that success comes as a Faustian bargain.
One of three young women treated with radiation to the chest to arrest Hodgkin’s disease will develop breast cancer by age 32.
Of course, many cancers might not have developed in the first place had these patients not been exposed to other cancer-causing agents in the environment.
Our dependence on many modern conveniences makes us the subject of vast uncontrolled experiments to which none of us is asked to consent.
For example, the long-term safety of mobile phones remains unproven.
Widely publicized studies in the early 1990’s touting their safety excluded business users.
Recent reports from France and Sweden find that those who have used mobile phones for ten or more years have double the risk of brain cancer.
Also troubling is the fact that the limit for microwave emission from mobile phones is 500 times lower in Switzerland and China than in the US.
A way of looking is a way of not looking, runs a Chinese proverb.
The limited nature of evidence on some environmental cancer hazards should not be confused with proof that no harm has occurred: the research is hard to do, and, in the US, very little of it is now funded by the government and private sector.
Moreover, confusion about environmental cancer risks also results from longstanding, carefully cultivated, and well-financed disinformation campaigns inspired by the machinations of the tobacco industry.
We cannot afford to ignore the signs of the importance of the environment for our health.
To address the scourge of cancer, we must complement efforts to detect and treat cancer with new ways to keep people from developing the disease in the first place.
Poison-Proofing China
STANFORD – Last January, China’s environmental authorities barely averted the contamination of nearly three million people’s drinking water after a mining company dumped cadmium – a toxic heavy metal used in the manufacture of batteries, paint, solder, and solar cells – into the Longjiang River.
To stop the contamination from spreading, the local fire department had to add significant quantities of dissolved aluminum chloride, which binds to cadmium and settles on the river bottom.&nbsp;The toxic sediment will eventually be dredged.
Such threats to health and the environment are not uncommon in China.
The water in as many as half of the country’s rivers and lakes is unfit for human consumption or contact.
China has also gained a reputation for food and drug contamination (not to mention lead paint in toys and poisonous toothpaste).
For example, in 2008, the industrial chemical melamine was added to milk products in order to give falsely high readings of milk protein, causing the death of six infants and sickening 300,000 other people.
Similarly, Mengniu, China’s largest dairy company, announced last December that it had destroyed hazardous products at a plant in the Sichuan province after government safety inspectors discovered the carcinogen aflatoxin in a batch of its milk.
(The company denied that any contaminated milk had reached consumers.)
In 2007, melamine was deliberately added to an ingredient in pet food to enhance artificially its protein levels, causing renal failure in hundreds of cats and dogs in North America, Europe, and Africa.
Later that year, diethylene glycol was mislabeled as non-toxic glycerin, then mixed into cold medicine, killing at least 100 people in Panama, including many children.
The following year, crude precursors of the blood-thinning medication heparin were contaminated, causing hundreds of allergic reactions and 19 deaths in the United States, and at least 80 serious adverse health events in Germany.
Eggs contaminated that year with melamine caused kidney stones and renal failure in children.
Internal criticism of the Chinese government’s management of health, safety, and overall quality-of-life issues is growing.
In July 2011, following the highly publicized crash of a supposedly state-of-the-art high-speed train in eastern China, Qiu Qiming, a news anchor for the national broadcaster CCTV, turned the disaster into a metaphor. “While satisfying our need for speed, we might be forsaking many things,” she said.
“China, please slow down.
If you’re too fast, you may leave the souls of your people behind.”
Given the pervasiveness of Chinese-made goods, China’s safety record concerns consumers worldwide.
But Chinese officials’ piecemeal efforts to restore confidence in the country’s exports – for example, establishing limits for trace amounts of melamine in dairy products and tightening quality-control regulations for the dairy industry – are unlikely to reassure foreign consumers or importers.
Indeed, Chinese policymakers seem unable to grasp the importance of crafting appropriate incentives and disincentives.
Rather than adopting the Western model of motivating every link in the supply chain to adhere to specified quality and safety standards, the government continues to rely on top-down policies.
But the decentralized, dispersed nature of many industries, the absence of an effective regulatory infrastructure, and the lack of firm-level inducements undermine the effectiveness of this approach.
In fact, perverse incentives throughout the supply chain facilitate the widespread, systematic contamination of food and drugs.&nbsp;Both milk producers and heparin-precursor suppliers were motivated to add adulterants that would make their products appear to be of a higher quality than they actually were.
To be sure, Chinese authorities face a daunting task.
Only a few decades ago, China was a poor, largely rural country with an agrarian economy and almost no middle class.
Today, it boasts the world’s second-largest economy, a thriving manufacturing sector, and a rapidly growing, prosperous middle class, while more than half of China’s 1.5 billion citizens now live in cities.
Until relatively recently, environmental protection and consumer safety were secondary issues in the United States and Europe.
In 1952, London experienced five days of lethal, particulate-laden smog that killed 12,000 people and sickened more than 100,000.
And, in 1969, America’s heavily polluted Cuyahoga River caught on fire.
Just as Europe and the US have made substantial progress in implementing effective health and environmental policies, China’s quality-control mechanisms can be improved.
But, in tackling the issue, Chinese officials would do well to heed the proverb: “With time and patience, the mulberry leaf becomes a silk gown.”
Can China Rescue Europe?
CLAREMONT, CALIFORNIA – The debt crisis in Europe is no longer a European affair.
Coupled with fears of a double-dip recession in the United States, the European debt crisis is dragging the global economy into another cycle of financial panic and economic recession.
Sitting on the sidelines, emerging-market economies in general, and the so-called BRIC countries (Brazil, Russia, India, and China) in particular, may feel fortunate to be spared this financial maelstrom.
But they should think again.
With closely integrated global financial markets and trading networks, financial crises and economic contractions in the developed economies, which still account for nearly 60% of the world’s GDP, will inevitably undermine emerging-market countries’ prosperity.
Some have thus called upon major emerging countries to step up and use their huge foreign-exchange reserves to purchase the debt of crisis-ravaged countries, such as Greece, Italy, and Spain.
In particular, China, with its $3.2 trillion in foreign-exchange reserves, is seen as a potential white knight coming to the rescue of debt-ridden European nations.
Playing upon such hopes, China has been both coy and demanding.
Without committing itself to any substantive assistance, the Chinese government has publicly demanded that the European Union grant China the coveted status of “market economy” if it expects China to loosen its purse strings.
That status matters, because achieving it will make it more difficult for Chinese firms to be found guilty of dumping goods on overseas markets.
Unfortunately, those who expect China to play a direct role in calming the financial panic in Europe are being unrealistic.
Chinese leaders have been extremely risk-averse in their forays into international financial affairs, and, on the eve of a leadership transition (expected to take place a year from now), no senior official dares to risk his political prospects by advocating bold and controversial action.
Even assuming China’s willingness to help Europe’s troubled economies, it would be able to contribute only a modest portion of the huge amount of financing required to restore confidence in European sovereign debt.
But this does not mean that China can do nothing to help Europe.
While the attempt by Chinese officials to extract a huge concession – market-economy status – is ill-timed and in poor taste, China’s government needs to weigh the significant benefits that it could receive by providing limited but meaningful assistance to Europe in its hour of need.
Indeed, to do so would be in China’s own interest as a key stake-holder in Europe’s economic stability.
The EU is China’s largest trading partner, accounting for $383 billion in merchandise exports in 2010.
So a recession in Europe would cause a slowdown in China’s export-dependent economy as well.
The financial fallout from the debt crisis could also result in huge losses for China.
About $800 billion of China’s foreign-exchange reserves are invested in euro-denominated assets.
A disorderly default, and the resulting downward pressure on the euro, would unavoidably cause Chinese investments to lose value.
China can take three measures to help Europe, but, if they are to succeed, the EU must set aside some of its long-standing suspicions about China.
First, China can help boost the EU’s exports by lowering its administrative trade barriers to products from the EU.
In the short term, this might dampen China’s own growth, but, given China’s mammoth trade surplus with the EU ($230 billion in 2010), this is both long overdue and reasonable.
A 10% increase in the EU’s exports to China (a net increase of $15 billion a year) would help create at least 300,000 jobs and boost Europe’s growth prospects.
Second, China can participate in bank recapitalization in Europe.
At the moment, Europe’s banks desperately need to shore up their balance sheets.
China’s sovereign wealth fund and non-bank financial institutions have been eager to invest in well-established Western banks.
This is a good time to do so, as these banks’ valuations have plunged.
Finally, Europe’s crisis presents an attractive opportunity for China to expand its direct investment there.
In 2010, Chinese direct investment in the EU totaled only $1.3 billion.
Today, when governments and companies in Europe are opening their arms to foreign investors, Chinese companies eager for markets, technologies, and diversification should find rich pickings.
But Chinese money has been viewed with suspicion in Europe, reflecting fears that China has a hidden political agenda.
Such bias has discouraged Chinese capital from making bigger bets on Europe.
It is now time for Europe to gamble on China.
Such measures are likely to boost Europe’s medium-term growth prospects.
While they would most likely have no immediate calming effect on today’s panic-stricken financial markets, they are far superior to watching with folded hands as Europe descends into a financial abyss.
Can Chinese Industry Be Made Safe?
After a massive gas well explosion killed 243 people in southwest China last December, China's State Council and National People's Congress have announced new rules for industrial safety.
The authorities' response follows a now-familiar pattern: high-profile pronouncements in the wake of workplace disaster give way to neglect of basic safety standards.
But if Western experience is any guide, ad hoc responses to high rates of work accidents won't reduce the risks to Chinese workers.
Only the development of basic legal institutions will help make Chinese workplaces safer.
China and other developing Asian economies are experiencing an industrial accident crisis of world-historical proportions.
Official sources report 14,675 industrial-accident deaths in China in 2003, but statistics on workplace accidents are notoriously unreliable, and some observers suggest that the number may be closer to 120,000.
China's coalmines are among the most dangerous places to work in the world.
Chinese garment factories have repeatedly experienced disasters on a par with the infamous Triangle Shirtwaist fire in New York City a century ago, which killed 146 workers, all young women.
Conditions may well get worse before they get better.
Even though China instituted new initiatives in industrial safety at the beginning of 2003, official estimates indicate that industrial accident deaths increased by almost 10% last year.
Yet as the example of the Triangle fire suggests, the China's experience is not unprecedented.
Until the recent Asian accident crisis, the poorest workplace safety record in world history belonged to the United States in the fifty years following the American Civil War.
Coalmines in Pennsylvania in the 1860s - where 6% of the workers were killed each year, 6% crippled, and another 6% temporarily disabled - looked very much like the mines now operating in China's Shaanxi Province.
Industry-wide, one American worker in fifty at the turn of the last century was killed or seriously disabled each year in work-related accidents.
Accidents were the leading cause of death among workers in dozens of hazardous industries.
Of course, American industry is still plagued by serious safety problems.
But seen from a historical perspective, there has been a striking decline in work-related injuries and deaths in the US.
There were 30,000 annual work-related fatalities a century ago; today, the annual average is around 5,000, even as the population has tripled.
What explains this huge improvement in occupational safety in the US?
Increased union membership in the mid-twentieth century clearly helped, as workers bargained and lobbied for improved working conditions.
In recent decades, some of the most dangerous work has been shipped overseas (ironically, much of it to China).
And as Americans have grown wealthier, they have been willing to spend more on safety.
But the deeper historical reasons for improved workplace safety lie in an array of legal institutions developed by workers, employers, lawyers, and lawmakers at the end of the 19th and beginning of the 20th centuries.
American workers' organizations, for example, developed insurance benefits for their members and sought to exercise collective control to improve workplace safety.
American lawyers developed modern accident law that created remedies against negligent employers.
Most importantly, drawing on reforms first implemented in Germany, England, and France, workers' compensation statutes provided compensation for injured workers and created powerful incentives for employers to reduce accident tolls.
In the 1910's, American workplace injuries began to fall in virtually every industry, except coal mining (where injury rates remained high for several decades).
Each of these innovations helped create an institutional infrastructure capable of dealing with the problem of work accidents - and, indeed, with the wider social problems of disability, sickness, old age, and unemployment.
Why?
Because workplace safety and industrial accident compensation turned out to be critical early tests of western legal systems' administrative capacity to deal with the systemic problems of industrial free-market societies.
Of course, what worked for the US may not work for China.
There are many different ways that legal systems can respond to occupational safety problems.
The US, for example, never developed a powerful body of factory inspectors capable of providing effective enforcement of public safety standards.
Other western states, such as Germany, have successfully relied on centralized regulation and social insurance systems ever since Bismarck reformed the German law of accidents in the 1880's.
Unfortunately, China is obstructing all available paths to improved workplace safety.
National safety standards and inspection regimes reflect the underlying pathologies of the Chinese state, in which lower-ranking officials report only positive information up the bureaucratic food chain.
At the same time, limits on workers' ability to organize independent unions have inhibited grassroots forms of safety monitoring.
Even Chinese media have come under fire from officials for uncovering the kinds of workplace hazards that muckraking journalists revealed a century ago in the US.
Lawsuits are apparently increasingly common, but they are notoriously cumbersome, and judges are not independent from factory bosses.
Compensation awards to injured workers and their families are pitifully low and fail to give employers incentives to make their workplaces safe.
The lesson of the US and European experiences is that improving workplace safety depends on the development of basic rule-of-law standards in courts, workplaces, and administrative bureaucracies.
Edicts and exhortations from the State Council are all well and good. But only effective legal institutions, not Party fiat, will reduce Chinese workers' risk of death or injury on the job.
Can Democracy Defeat Terrorism?
The Bush administration provided three major rationales for going to war in Iraq.
Only one remains at all credible: the need to transform the Middle East through democratization and thereby undercut support for terrorists.
But does this argument really have any more basis in reality than the administration’s previous claims of an “imminent” threat from weapons of mass destruction or Saddam Hussein’s alleged support for al‑Qaeda?
With post-invasion inspectors concluding that no WMD stockpiles existed, and intelligence agencies now convinced that the Iraq war’s net effect has been to boost al‑Qaeda recruitment throughout the Islamic world, the Bush administration is understandably emphasizing the claim about democratization.
Indeed, it has become a dominant theme of Bush’s second term.
As Secretary of State Condoleezza Rice put it in a recent speech in Cairo, “Freedom and democracy are the only ideas powerful enough to overcome hatred, division, and violence.”
Cynics view this as merely an argument of convenience, one that has gained in prominence only because the other two rationales for the war collapsed.
More importantly, skeptics also doubt the validity of the administration’s argument linking democracy and reduction of terrorism.
After all, British citizens in one of the world’s oldest democracies carried out the recent terrorist attacks in London.
Similarly, an American citizen carried out the worst terrorist attack in the United States before September 11, 2001.
The skeptics have a point, but they go too far.
For one thing, it is still too early to judge the merits of the argument.
A full assessment of the Iraq war and its effects on the Middle East will take a decade or more. Clearly, the January 2005 election there was a positive step for the region.
In the last six months, there have been national elections in Lebanon and local elections in Saudi Arabia.
Egypt has amended its constitution to allow it presidential election to be contested.
Further elections are scheduled in Iraq and the Palestinian Authority.
As Walid Jumblatt, the Lebanese Druze leader said, “It’s strange for me to say it, but this process of change has started because of the American invasion of Iraq.”
Perhaps that outcome shouldn’t seem so strange.
After all, as the columnist David Brooks recently observed, “If there is one soft power gift that America does possess, it is the tendency to imagine new worlds.”
In other words, the invasion of Iraq, and the subsequent increase in the rhetoric of democracy in the Middle East, may have changed frames of reference about the status quo.
Democracy, however, is more than just elections.
It also requires tolerance of minorities and respect for individual rights, as well as the development of effective institutions for resolving political conflicts in divided societies.
If this occurs in Iraq, it may provide some post hoc legitimization for the war.
But such an outcome remains in doubt.
In the short run, the invasion of Iraq has created an intensifying insurgency and incipient civil war.
The presence of foreign troops creates a stimulus for nationalist and jihadist responses.
The future of Iraq, not to mention democracy there, remains uncertain at best.
Nevertheless, we can still conclude from the Iraqi experience that while the development of democracy can be aided from outside, it cannot easily be imposed by force.
While it is true that Germany and Japan became democratic after American occupation, it required their total defeat in a devastating war, and a seven-year occupation.
Moreover, Germany and Japan were relatively homogeneous societies with some prior experience of democracy.
It is hard to see such conditions repeated in today’s world.
The Bush administration may be correct in arguing that the extremely high costs and risks of promoting democracy are less than the costs and risks of allowing the authoritarian status quo in the Middle east to persist indefinitely.
But democracy is not the only instrument for a transformation that addresses the roots of terrorism.
The development of civil societies, economic growth, and openness to the world are equally important.
So is employing young men, educating young women, and addressing values of liberty and justice, which means ameliorating the sense of indignity in the region that stems from issues like the Israel-Palestine conflict.
Moreover, democracy alone will not convert the current crop of extremist jihadis to peaceful change.
If anything, too rapid a democratic transition may destabilize governments and enhance the extremists’ opportunities to wreak havoc.
But, in the longer term, the slow, steady progress of democratization can provide a sense of hope for moderates, creating a plausible vision of a better future – the essence of soft power – that undercuts the message of hate and violence promoted by the extremists.
Democratization can surely help remove some of the sources of rage that fuel terrorism, but it is only part of the solution.
Can Democracy Take Hold in Ukraine?
Certainly, the diversity of forms of governance used over the centuries by Russia, Poland, Lithuania, and Austria-Hungary when they ruled what is now Ukraine make creating a classic "nation state," with one dominant culture, difficult to imagine.
Consider, for example, the robustness of the Russian language and the strength of the Orthodox Church- Moscow Patriarchate - in Donetsk that is in eastern Ukraine and the robustness of the Ukrainian language and the influence of the Ukrainian Greek Catholic Church in Lviv in the west.
Yet Spain, India, Belgium, and Switzerland are all consolidated democracies that do not fit the classic model of the nation state.
Indeed, multiple but complementary identities are the norm in all four countries.
These multiple identities emerged because the democratic state provided a "roof" of equal rights above all citizens, whatever their religion, language, or culture.
This helped develop a strong sense of identity with the statewide political community.
These profoundly pluralistic countries are not classic "nation states," but rather what I call democratic "state nations."
During the recent presidential election, many suggested that reconciling the "two Ukraines" was impossible.
But polarization has not been a constant factor in the history of independent Ukraine.
On the contrary, Ukraine is closer to being a "state nation" than many people think.
Moreover, its prospects for becoming a consolidated democracy are enhanced by the fact that its political elites - and most ordinary Ukrainians - have eschewed the idea of being a classic "nation state."
Indeed, more than 80% of Ukraine's Russified eastern districts voted for independence in 1991, and the 1999 parliamentary and presidential elections did not split the country nearly as much as the 2004 presidential elections did.
A survey in 2001 of the two supposedly most polarized cities, Donetsk and Lviv, showed convergence in their approval of independent Ukraine, with only 1% of respondents in Lviv and 5% in Donetsk preferring that Ukraine be divided into two or more countries.
As in other "state nations," surveys in Ukraine indicate that common symbols have helped build elements of a common identity.
Both ethnic Russians and ethnic Ukrainians view the tenth-century feudal state known as "Kyiv Rus" very favorably.
Moreover, both groups share the seventeenth-century Cossack warrior Bohdan Khmelnytskyi as their most popular historical figure, and both revile Stalin due to the famines caused by his forced collectivization of agriculture in the 1930's (whereas most ethnic Russians in Russia view Stalin as the heroic state savior of WWII).
These shared attitudes toward Ukrainian symbols and statehood owe much to a recognition that independence will not be well protected by forging a classic nation state, that is, a "Ukrainian Only" state.
Thus, the country's declaration of independence 13 years ago was made in the name of "The people of Ukraine," and citizenship was offered to everyone who was born on the territory of Ukraine, regardless of nationality.
I was invited as an adviser to two constitutional committee meetings in Kyiv in the 1990's.
My impression from the discussions was that both Ukrainians and Russians in Ukraine were acutely aware of the need to avoid ethnic conflict.
In fact, an informal state-building alliance of convenience emerged between key non-communist Ukrainian nationalists and key pro-sovereignty, ethnic Russian communists.
The perception of "two Ukraines" emerged in the presidential election of 2004 partly due to the charge that Yushchenko would eliminate the constitutional guarantee that ethnic Russians could use Russian as their primary language of instruction in schools.
But during his campaign Yushchenko assured Russophones that he would uphold such rights.
Finally, much of what has been described as "secessionism" in the east is in fact regionalism.
Greater legally respected decentralization in Ukraine, especially in Crimea, would be a logical and overdue "state nation" policy.
The other major issue raised during the Orange Revolution concerns presidential powers.
Many Yushchenko loyalists are unhappy that, in exchange for the government agreeing to fairer election rules, Yushchenko agreed to transfer some presidential powers to the parliament.
Not withstanding the self-serving intentions of outgoing President Leonid Kuchma, this historic pact may in the long run produce positive results for Ukraine's democracy and prospects for joining the European Union.
The Ukrainian Constitution of 1996 adopted a model of governance close to the French style semi-presidentialism created by Charles de Gaulle for the Fifth Republic: a directly elected president with significant executive powers and a prime minister responsible to parliament.
This system works best when the president and the prime minister come from the same political party or coalition.
But, as in Russia under President Vladimir Putin, Kuchma vastly increased presidential powers in Ukraine.
Indeed, no real democracy in the world has such unchecked presidential authority.
A look at the eight postcommunist countries just admitted to the European Union is instructive.
Four - Hungary, the Czech Republic, Estonia, and Latvia - are parliamentary.
The other four - Slovenia, Poland, Lithuania, and Slovakia - have directly elected presidents, but none comes constitutionally and politically close to Kuchma's Ukraine.
Like Portugal in the 1980's, they adopted semi-presidential systems that so reduce presidential authority and increase the parliament's powers that they are most accurately described as "parliamentarized semi-presidential" systems.
This is the model toward which Ukraine could be moving, however unwittingly.
If so, the presidency would most likely cease to be a potential source of ethnic polarization, thereby strengthening the common identity that both Ukrainian and Russian citizens are committed to upholding.
Can Developing Countries Carry the World Economy?
CAMBRIDGE – In the early days of the global financial crisis, there was some optimism that developing countries would avoid the downturn that advanced industrial countries experienced.
After all, this time it was not they that had engaged in financial excess, and their economic fundamentals looked strong.
But these hopes were dashed as international lending dried up and trade collapsed, sending developing countries down the same spiral that industrial nations took.
But international trade and finance have both revived, and now we hear an even more ambitious version of the scenario.
Developing countries, it is said, are headed for strong growth, regardless of the doom and gloom that has returned to Europe and the United States.
More strikingly, many now expect the developing world to become the growth engine of the global economy.
Otaviano Canuto, a World Bank vice president, and his collaborators have just produced a long report that makes the case for this optimistic prognosis.
There are many reasons why such optimism is not unreasonable.
Most developing countries have cleaned up their financial and fiscal houses and do not carry high debt.
Governance is generally improving along with the quality of policymaking.
The possibilities of technology transfer through participation in international production networks are greater than ever.
Moreover, slow growth in the advanced economies need not exert a drag on developing countries’ performance.
Long-term growth depends not on foreign demand, but on domestic supply.
Sustained rapid growth is the result of poorer countries catching up to rich countries’ productivity levels – not of growth in the rich countries themselves.
For most developing countries, this “convergence gap” is wider now than it has been at any time since the 1970’s.
So the growth potential is correspondingly larger.
But the good news stops right about there.
Sustained growth requires a growth strategy, and most developing countries do not yet have one that would put them irrevocably on the path of economic convergence.
For too many of these countries, economic growth in the last two decades relied on a combination of two factors: a natural rebound from previous financial crises (as in Latin America) or political conflicts and civil war (as in Africa), and high commodity prices. Neither can be relied on for the productive transformation that developing countries need.
Consider, for example, Latin America’s growth model of the last two decades.
Global competition has whipped many of the region’s industries into shape and fostered significant productivity gains in advanced sectors, but these gains have remained limited to a narrow segment of the economy.
Worse still, labor has been displaced from more productive tradable activities (in manufacturing) to less productive informal activities (services).
In most Latin American countries, structural change has served to reduce rather than promote economic growth.
Because Asian governments have tended to support their modern, tradable sectors to a greater extent, most Asian countries have managed to avoid this malady, and have done much better as a result.
But even the Asian model may be reaching its limits.
China, in particular, needs to confront the fact that the rest of the world will not allow it to run a huge trade surplus forever.
An undervalued currency, which serves to subsidize China’s manufacturing industries, has been a key driver of the country’s economic growth for the last decade.
A significant appreciation of the renminbi will reduce or even eliminate that growth subsidy.
Regardless of developing countries’ growth prospects, there is a deeper question.
Will a world economy in which developing countries have substantially greater weight foster the kind of global governance that sustains a hospitable economic environment?
Emerging-market economies have not yet shown the kind of global leadership that suggests an affirmative answer to this question.
The global institutions of our day – the International Monetary Fund, the World Bank, and the World Trade Organization – are still largely the creation of American leadership at the end of World War II (though they have obviously undergone considerable change since then).
These institutions reflected American interests, but they also codified certain norms of behavior – rule-based decision-making, non-discrimination, multilateralism, transparency – which eventually came to constrain American power as well.
Countries like Brazil, China, India, and South Africa, however, have so far shown little interest in contributing to the construction of global regimes, preferring to remain free riders.
Jorge Castañeda, a former foreign minister of Mexico, goes further, arguing that these countries have systematically opposed global rules, in areas ranging from climate change to international trade.
Lest we be too harsh on developing countries, however, let us also remember that political scientists have long worried that greater diffusion of economic power would produce a less stable world economy.
If the world economy’s center of gravity shifts substantially toward developing countries, this will not be a smooth – and possibly not even a benign – process.
We can be certain of two things: only those countries that adopt growth strategies based on stimulating domestic structural change will do well, and the conundrum of global governance – how to manage a world economy that has become unruly – will almost certainly get worse.
Candor on Cancer Screening
BOSTON – One of today’s most contentious medical debates centers on cancer screening, the benefits of which seem anything but debatable.
Indeed, earlier detection, many believe, logically must give patients an advantage in fighting the disease.
In fact, the evidence does not always support this assumption.
Prostate cancer is a case in point.
Screening entails the mass testing of individuals of a certain age and gender, regardless of family history or personal health, to identify a potential disease state.
For screening to be useful, the test or procedure must readily identify the disease in question, and the subsequent treatment must result in some measurable benefit.
In other words, the screened population must be better off than the non-screened population.
For some health issues – such as elevated cholesterol – screening yields positive results: a simple blood test measures the amounts of good and bad cholesterol in the blood, making it easier to detect related cardiovascular disease, which could lead to heart attacks or strokes.
Those who are screened, diagnosed, and treated experience a lower rate of cardiovascular events.
Screening for prostate cancer, too, requires a blood test – the prostate-specific antigen (PSA) test.
Elevated PSA levels would suggest the presence of prostate cancer, even if no physical abnormalities were detected, so a tissue biopsy would be conducted.
At this point, a diagnosis can be made.
If positive, cancer treatment, such as surgery or radiation, will follow.
And, one hopes, the individual will be cured.
Supporters of screening argue that it helps to detect and treat cancer earlier, when the chances of curing it are highest.
Moreover, younger patients, at least, can better withstand the side effects of cancer treatment.
Proponents also contend that the two-decade decline in the overall incidence of deaths from prostate cancer is the result of increasingly widespread PSA testing.
Indeed, they encourage more vigorous screening programs.
But screening’s benefits are not as straightforward as supporters claim.
To be sure, at-risk men – for example, those with a family history of prostate cancer, African-Americans, or men with enlarged prostates who are treated with 5-alpha-reductase inhibitors (whose failure to lower PSA levels could reflect increased risk of developing prostate cancer) – may want to consider getting tested.
For most healthy men, however, the United States Preventive Services Task Force (USPSTF) – a leading independent panel of experts on prevention and primary care – has publicly recommended against widespread PSA tests.
Several well-managed, randomized, long-term human trials have shown almost no survival benefit for those who are screened, diagnosed, and treated, compared to those who were never screened.
Of the studies cited by the USPSTF, one, conducted in Europe, showed a minor benefit in a subset of men, with no significant quality-of-life improvement.
Another, conducted in the US, showed no evidence that PSA screening improved prostate-cancer survival rates.
In addition, a recent study comparing outcomes for patients whose prostate gland was surgically removed to those for patients who underwent only observation found no differences in survival rates between the two groups.
Because the average age at diagnosis is 71-73, men are likely to die from other causes before prostate cancer claims their life.
And there is no credible evidence that low-grade prostate cancer uniformly progresses to higher-grade cancers, so early treatment is not essential.
Moreover, cancer treatment often carries serious side effects – including urinary incontinence, erectile dysfunction, and, in those who undergo radiation, inflammation of the lower rectum or bladder, as well as underreported effects like fecal incontinence – that can negatively affect patients’ quality of life.
Given that many patients diagnosed with prostate cancer as a result of the PSA test would never suffer any symptoms, such consequences are difficult to justify.
Yet many refuse to give up screening.
Given this, an active surveillance program could be the best way to address the most serious consequence of excessive screening: premature, overly aggressive treatment.
In an active surveillance program, a patient diagnosed with a PSA-prompted biopsy delays treatment.
Instead, he is closely monitored with various follow-up tests.
Only when signs indicate that the cancer is becoming dangerous is treatment initiated.
While this approach is still being studied, the results so far appear promising: men who participate in active surveillance programs are 14 times more likely to die of a cause unrelated to prostate cancer.
As evidence tilts the balance away from widespread PSA testing, a new screening test or biomarker is urgently needed that can distinguish effectively between potentially life-threatening prostate cancers and less dangerous forms.
Likewise, less risky treatments are crucial.
Active surveillance programs are an encouraging prospect for minimizing the negative consequences of PSA testing.
But, without vastly improved screening practices, prostate cancer screening is unlikely to help – and can even do serious harm.
Can Draghi Be Believed?
LONDON – Mario Draghi, the president of the European Central Bank, has repeatedly claimed that the ECB will do everything necessary to save the euro.
Nothing has been formally agreed yet, but the ECB is expected to announce a new government bond-buying program following next week’s meeting of its Governing Council.
Will it work?
To have a significant impact on Italian and Spanish borrowing costs, the latest effort must be big enough to dispel the convertibility risk that underlies the extreme polarization of government bond yields across the eurozone: investors are loathe to hold Spanish and Italian debt, because they fear that both countries might be forced to leave the currency union.
Unfortunately, it is highly unlikely that the ECB will do enough to persuade investors that membership is unequivocally forever, not least because Germany’s Bundesbank opposes any open-ended commitment to capping borrowing costs.
Spain, Italy, and the eurozone periphery face unprecedentedly high real borrowing costs, which are preventing a recovery in investment and hence economic growth.
Without a return to growth, they cannot quell investors’ doubts about their fiscal sustainability and their banks’ solvency.
The Italian and Spanish governments argue that their high borrowing costs largely reflect convertibility risks, and that the ECB should do as much as necessary to address them.
But eurozone members that currently benefit from exceptionally low borrowing costs – Germany, Austria, Finland, the Netherlands, and, to a lesser extent, France – maintain that Italian and Spanish borrowing costs largely reflect these countries’ failure to reform their economies and strengthen their public finances.
There is merit in both positions – but much more in the Spanish and Italian argument.
Opponents of open-ended ECB action argue that Italian and Spanish borrowing costs are not actually that high: interest rates have merely returned to levels seen in the run-up to the introduction of the euro, when investors distinguished properly between the countries that now share the euro.
High borrowing costs are needed to focus minds and instill discipline.
Were the ECB to take aggressive action to bring them down, moral hazard would result: countries would face no punishment for delaying reforms.
In nominal terms, Italian and Spanish borrowing costs are indeed comparable to the levels of the late 1990’s.
But it is the real (inflation-adjusted) cost of capital that is crucial, and for both countries it is much higher now than it was in the run-up to their adoption of the euro.
Moreover, it is erroneous to compare the present with the late 1990’s.
Italy and Spain are at very different points in the economic cycle now than they were then.
In the late 1990’s, both economies were growing (rapidly in the Spanish case), whereas now they face hard times and a mounting risk of deflation.
And countries facing depressions and rapidly weakening inflation typically face very low borrowing costs: investors purchase government bonds for want of profitable alternatives.
This is what we see in the United Kingdom and the United States, where borrowing costs remain at all-time lows, despite both countries’ weak public finances and poor growth prospects.
To be sure, investors must differentiate between eurozone governments, in order to ensure that risk is correctly priced.
The Italian and Spanish authorities acknowledge as much.
But the current spread between the yield on German sovereign debt and that of the Italian and Spanish governments far exceeds what is required to ensure that investors differentiate appropriately.
The polarization of borrowing costs has politically explosive distributional effects: Germany is borrowing and refinancing its existing debt at artificially low interest rates.
According to the Kiel Institute for the World Economy, investor flight from the government debt markets of the eurozone’s struggling members to Germany has already saved the German government almost €70 billion ($88 billion).
Other countries, by contrast, face ruinously high borrowing costs, which are simultaneously increasing the scale of their reform challenges and narrowing their political scope to address them.
The longer Italian and Spanish borrowing costs remain at such elevated levels, the greater the damage to those economies, and the harder it will become to marshal the necessary political support for further reforms.
The Italians and Spaniards are right: the principal reason for the size of the spread between the periphery and Germany is convertibility risk.
Investors are demanding a hefty premium to insure against the chance that Italy and Spain are ultimately forced out of the eurozone – thus bringing that day closer by weakening countries’ fiscal positions and raising their private-sector borrowing costs (which are set by government bond yields).
With private and public consumption in both Italy and Spain set to remain depressed for years to come, economic recovery requires stronger investment and exports.
But the steep fall in the value of Italian and Spanish banks’ holdings of government debt, combined with mounting bad loans as a result of recessions exacerbated by punitive borrowing costs, is forcing the banks to rein in business lending further.
The ECB’s latest program of bond purchases will be big enough to ensure that Draghi does not lose face.
But it will not be big enough to dispel convertibility risk and hence demonstrate the ECB’s credibility as a lender of last resort.
And it is the ECB’s credibility problem, not that of member states, that is the principal reason for unsustainably high borrowing costs in Italy, Spain, and other distressed eurozone countries.
Can Egypt Become a True Democracy?
WASHINGTON, DC – Hosni Mubarak’s resignation as President of Egypt marks the beginning of an important stage in that country’s transition to a new political system.
But will the political transition ultimately lead to democracy?
We cannot know with certainty, but, based on the history of democratic government, and the experiences of other countries – the subject of my book, Democracy’s Good Name: The Rise and Risks of the World’s Most Popular Form of Government – we can identify the obstacles that Egypt faces, as well as the advantages it enjoys, in building political democracy.
Understanding any country’s democratic prospects must begin with a definition of democracy, which is a hybrid form of government, a fusion of two different political traditions.
The first is popular sovereignty, the rule of the people, which is exercised through elections.
The second, older and equally important, is liberty – that is, freedom.
Freedom comes in three varieties: political liberty, which takes the form of individual rights to free speech and association; religious liberty, which implies freedom of worship for all faiths; and economic liberty, which is embodied in the right to own property.
Elections without liberty do not constitute genuine democracy, and here Egypt faces a serious challenge: its best-organized group, the Muslim Brotherhood, rejects religious liberty and individual rights, especially the rights of women.
The Brotherhood’s offshoot, the Palestinian movement Hamas, has established in the Gaza Strip a brutal, intolerant dictatorship.
In conditions of chaos, which Egypt could face, the best-organized and most ruthless group often gets control of the government.
This was Russia’s fate after its 1917 revolution, which brought Lenin’s Bolsheviks to power and condemned the country to 75 years of totalitarian rule.
In the same way, the Muslim Brotherhood could seize power in Egypt and impose a far more oppressive regime than Mubarak’s ever was.
Even if Egypt avoids control by religious extremists, democracy’s two-part anatomy makes swift and smooth progress to a democratic system problematic.
While elections are relatively easy to stage, liberty is far more difficult to establish and sustain, for it requires institutions – such as a legal system with impartial courts – that Egypt lacks, and that take years to build.
In other countries that have become democracies, the institutions and practices of liberty have often emerged from the working of a free-market economy.
Commerce fosters the habits of trust and cooperation on which stable democracy depends.
It is no accident that a free-market economy preceded democratic politics in many countries in Latin America and Asia in the second half of the twentieth century.
Here, too, Egypt is at a disadvantage.
Its economy is a variant of crony capitalism, in which economic success depends on one’s political connections, rather than on the meritocratic free-market competition from which liberty grows.
Egypt suffers from another political handicap: it is an Arab country, and there are no Arab democracies.
This matters, because countries, like individuals, tend to emulate others that they resemble and admire.
After they overthrew communism in 1989, the peoples of Central Europe gravitated to democracy because that was the prevailing form of government in the countries of Western Europe, with which they strongly identified.
Egypt has no such democratic model.
Egypt is, however, better placed to embrace democracy than the other Arab countries, because the obstacles to democracy in the Arab world are less formidable in Egypt than elsewhere.
Other Arab countries – Iraq, Syria, and Lebanon, for example – are sharply divided along tribal, ethnic, and religious lines.
In divided societies, the most powerful group is often unwilling to share power with the others, resulting in dictatorship.
Egypt, by contrast, is relatively homogeneous.
Christians, who make up 10% of the population, are the only sizable minority.
The oil that the Arab countries of the Persian Gulf have in abundance also works against democracy, for it creates an incentive for the rulers to retain power indefinitely.
Oil revenues enable them to bribe the population to remain politically passive, while discouraging the creation of the kind of free-market system that breeds democracy.
Fortunately for its democratic prospects, Egypt has only very modest reserves of natural gas and oil.
The fact that the large protest movement that suddenly materialized has, until now, been a peaceful one also counts as an advantage for building democracy.
When a government falls violently, the new regime usually rules by force, not by democratic procedures, if only to keep at bay those it has defeated.
The cause of democracy in Egypt has one other asset, the most important one of all.
Democracy requires democrats – citizens convinced of the value of liberty and popular sovereignty and committed to establishing and preserving them.
The political sentiments of many of the hundreds of thousands of people who gathered in Cairo’s Tahrir Square over the last three weeks leave little doubt that they do want democracy, and are willing to work and even to sacrifice for it. Whether they are numerous enough, resourceful enough, patient enough, wise enough, and brave enough – and whether they will be lucky enough – to achieve it is a question that only the people of Egypt can answer.
Can Europe Be Saved?
VIENNA – In 2011, Europe’s financial and banking crisis escalated into a sovereign-debt crisis.
A problem that began in Greece ended up raising doubts about the very viability of the euro – and even of the European Union itself.
A year later, those fundamental doubts remain undiminished.
But, if one compares the EU with the United States or Japan (where public debt equals 200% of GDP), the Union’s current poor image is unjustified.
Indeed, employment in the EU as a whole remains high, as do private savings rates.
Moreover, the Union’s trade is in balance with the rest of the world.
One reason for doubt about the euro and the EU is that, since the spring of 2010, Europe’s leaders have rushed from one crisis summit to the next, each time devising supposed solutions that provided too little and arrived too late.
Europe’s leaders have never fully deployed their economic and political firepower.
On the contrary, rather than taming the financial markets, as they once intended, Europe’s leaders continue to be besieged by them.
It should come as no surprise that, with national governments’ parochialism impeding joint EU action, financial markets are using what the communists used to call “salami tactics” to slice away at the Union by attacking its member countries one by one.
Indeed, the European Parliament and the European Commission have been sidelined, while a new management model for Europe has emerged: Germany makes the decisions, France gives the press conferences, and the rest nod in agreement (except the British, who have chosen isolationism once again).
This management structure is neither democratically legitimate nor justified by its performance (which appears to consist of mere reactions to pressure from financial markets).
Indeed, some estimate that, by 2050, Europe will produce only 10% of the world’s GDP, and will comprise just 7% of its population.
By then, not even Germany’s economy will be significant in global terms, to say nothing of the other European economies.
As early as 2012, when the world economy is expected to grow by only 2.5%, the battle for shares of the global pie will become fiercer.
Europe is fighting for its economic survival, but it does not seem to know it.
So, do we Europeans intend to remain relevant in the twenty-first century, which means strengthening our position?
Or are we prepared to undergo a painful decline brought on by nationalist infighting and complacency?
I advocate a strong Europe that embraces the challenges of a relentlessly changing world.
We need a new contract among European nations, generations, and social classes, which implies difficult choices.
We must bid farewell to national egoisms, vested interests, dirty tricks, and assumed certainties.
If Europe wants things to remain as they are, things will have to change dramatically.
First, the EU must become a true democracy – with a directly elected president and a stronger parliament – if pan-European decisions are going to have full legitimacy.
The fiscal pact to which EU members (except the United Kingdom and the Czech Republic) agreed in December 2011 cannot be left to bureaucrats and courts alone.
The European people, the true sovereigns, must ultimately gain the right to make Europe’s policy choices via elections.
Second, we must close the income gap.
The growing divide between rich and poor, stagnating real wages, and deep regional disparities in unemployment are both morally unacceptable and economically counterproductive.
The EU’s increasing income inequality misallocates the purchasing power that its economy desperately needs for growth and employment.
Finally, the welfare state needs a serious overhaul.
Today, the EU allocates a large part of its public spending to pensions and health care for the elderly, while education suffers from underfunding.
A welfare state that focuses mainly on the elderly, and does not provide sufficient opportunities for younger generations, is not sustainable.
Moreover, the inequities created by privilege, such as public-sector pension schemes and discretionary advantages for vested-interest groups, must be addressed.
In order to make these changes, higher taxation of wealth and capital income is inevitable.
But, while these additional tax revenues would improve Europe’s public finances, they would not obviate the need to reform the welfare state.
Indeed, at best, they could facilitate a socially responsible transition to more efficient forms of social protection.
It is also a mistake to believe that austerity measures – the prime focus of Europe’s leaders up to now – will consolidate public finances.
Europe is on the brink of recession.
Governments should therefore restrict spending cuts to those that will not cause the economy to contract.
Likewise, they should increase only those taxes that, when raised, do not reduce consumption, investment, or job creation.
In addition, a “European Marshall Plan” that provides investment in infrastructure, renewable energy, and energy efficiency is needed.
Such an initiative would not only foster growth, but would also lower current-account deficits (because expensive fossil-energy imports could be reduced).
Public finances would be consolidated only by growth, not by austerity.
The European Central Bank must adapt to the fiscal pact’s new rules.
National governments’ vulnerability to the financial markets and their exaggerated interest rates must be reduced.
Only the ECB, by taking on the role of lender of last resort, can stop the eurozone’s capital outflow and restore confidence in Europe’s capacity to solve its own problems.
Europe is running out of time.
The EU’s institutions must exercise their creativity to the fullest – conventional thinking will not be enough to save the Union.
Only when the EU has its head above water again can we embark on the difficult but necessary path of framing and adopting a new treaty for a new Europe.
Can Food Prices Be Stabilized?
CAMBRIDGE – Under French President Nicolas Sarkozy’s leadership, the G-20 has made addressing food-price volatility a top priority this year, with member states’ agriculture ministers meeting recently in Paris to come up with solutions.
Small wonder: world food prices reached a record high earlier in the year, recalling a similar price spike in 2008.
Consumers are hurting worldwide, especially the poor, for whom food takes a major bite out of household budgets.
Popular discontent over food prices has fueled political instability in some countries, most notably in Egypt and Tunisia.
Even agricultural producers would prefer some price stability over the wild ups and downs of the last five years.
The G-20’s efforts will culminate in the Cannes Summit in November.
But, when it comes to specific policies, caution will be very much in order, for there is a long history of measures aimed at reducing commodity-price volatility that have ended up doing more harm than good.
For example, some inflation-targeting central banks have reacted to increases in prices of imported commodities by tightening monetary policy and thereby increasing the value of the currency.
But adverse movements in the terms of trade must be accommodated; they cannot be fought with monetary policy.
Producing countries have also tried to contain price volatility by forming international cartels.
But these have seldom worked.
In theory, government stockpiles might be able to smooth price fluctuations.
But this depends on how stockpiles are administered.
The historical record is not encouraging.
In rich countries, where the primary producing sector usually has political power, stockpiles of food products are used as a means of keeping prices high rather than low.
The European Union’s Common Agricultural Policy is a classic example – and is disastrous for EU budgets, economic efficiency, and consumer pocketbooks.
In many developing countries, on the other hand, farmers lack political power.
African countries adopted commodity boards for coffee and cocoa.
Although the original rationale was to buy the crop in years of excess supply and sell in years of excess demand, thereby stabilizing prices, in practice the price paid to cocoa and coffee farmers, who were politically weak, was always below the world price in the early decades of independence.
As a result, production fell.
Politicians often seek to shield consumers through price controls on staple foods and energy.
But artificially suppressing prices usually requires rationing to domestic households.
(Shortages and long lines can fuel political rage just as surely as higher prices can.)
Otherwise, the policy satisfies the excess demand via imports, and so raises the world price even more.
If the country is a producer of the commodity in question, it may use export controls to insulate domestic consumers from increases in the world price.
In 2008, India capped rice exports, and Argentina did the same for wheat exports, as did Russia in 2010.
Export restrictions in producing countries and price controls in importing countries both serve to exacerbate the magnitude of the world price upswing, owing to the artificially reduced quantity that is still internationally traded.
If producing and consuming countries in grain markets could cooperatively agree to refrain from such government intervention – probably by working through the World Trade Organization – world price volatility might be lower.
In the meantime, some obvious steps should be taken.
For starters, bio-fuel subsidies should be abolished.
Ethanol subsidies, such as those paid to American corn farmers, do not accomplish policymakers’ avowed environmental goals, but do divert grain and thus help drive up world food prices.
By now this should be clear to everybody.
But one cannot really expect the G-20 agriculture ministers to be able to fix the problem.
After all, their constituents, the farmers, are the ones pocketing the money.
(The US, it must be said, is the biggest obstacle here.)
It is probably best to accept that commodity prices will be volatile, and to create ways to limit the adverse economic effects – for example, financial instruments that allow hedging of the terms of trade.
What the G-20 agriculture ministers have agreed is to forge a system to improve transparency in agricultural markets, including information about production, stocks, and prices.
More complete and timely information might indeed help.
But the broader sort of policy that Sarkozy evidently has in mind is to confront speculators, who are perceived as destabilizing agricultural commodity markets.
True, in recent years, commodities have become more like assets and less like goods.
Prices are not determined solely by the flow of current supply and demand and their current economic fundamentals (such as disruptions from weather or politics).
They are increasingly determined also by calculations regarding expected future fundamentals (such as economic growth in Asia) and alternative returns (such as interest rates) – in other words, by speculators.
But speculation is not necessarily destabilizing.
Sarkozy is right that leverage is not necessarily good just because the free market allows it, and that speculators occasionally act in a destabilizing way.
But speculators more often act as detectors of changes in economic fundamentals, or provide the signals that smooth transitory fluctuations.
In other words, they often are a stabilizing force.
The French have not yet been able to obtain agreement from the other G-20 members on measures aimed at regulating commodity speculators, such as limits on the size of their investment positions.
I hope it stays that way.
Shooting the messenger is no way to respond to the message.
Can Global Companies Save Africa?
Multinational companies were a driving force in Eastern Europe’s postcommunist transition, bringing new skills, technology, training, and better working conditions.
They saved the banking systems, modernized telecommunications networks, rebuilt ailing industries, raised the quality of goods, and undermined the cozy vested interests that had robbed ordinary citizens for decades.
But is Eastern Europe an exception?
Can multinational companies bring similar benefits to other needy regions, such as sub-Saharan Africa, where a legacy of colonialism, apartheid, and economic mismanagement create a fundamentally different business environment?
According to one view, Eastern Europe was uniquely positioned to benefit from multinational companies: its workforce was well educated, especially in engineering and sciences, and was thus able to avoid the classic “low-skills, low-wage” trap.
What communism failed to provide – modern management, new technologies, and marketing know-how – was what multinationals could offer.
But in countries like South Africa, Namibia, and Zimbabwe, multinational companies may look very different.
Western governments were typically indifferent, if not hostile, to African liberation movements.
Their big corporations helped entrench racist regimes with notorious contract-labor systems that amounted to little more than slavery.
Moreover, multinational companies that invest in the Czech Republic, Slovakia, Hungary, and Estonia produce cars, high-end electronics, and industrial machinery both for the domestic market and for export.
Ensuring high-quality output and local consumers’ loyalty requires keeping their workforces happy and maintaining a positive public image.
By contrast, African countries often see the worst sides of multinationals: energy, mineral, and precious metal companies go where resources are, not where it’s pleasant to work.
As one former mining manager in the region told me, “The aim was always simple: get the assets out of the ground and out of the country as cheaply and with as little fuss as possible.”
But sub-Saharan Africa’s potential relationship with global corporations need not be so limited.
Sensible macroeconomic policies, coupled with non-violent resolution of political or racial conflicts, as in, say, Namibia, Botswana, or South Africa, can set the groundwork for highly constructive partnerships.
Namibia’s government, for example, while recognizing that the country will never build a strong industrial base, takes a clear, balanced, and determined approach to attracting, and getting the most out of, multinational corporations.
The Ministry of Trade and Industry established a sensible incentive scheme for export-oriented investment and a black empowerment program that encourages investors to help the previously neglected workforce.
It relies on competition, rather than bureaucratic heavy-handedness, to achieve its goals.
Consider diamond mining, Namibia’s biggest industry and export.
The NamDeb mining corporation, a joint venture between the government and De Beers, dominates the industry.
But while the government wants to move beyond low-skilled mining into higher-value processing, De Beers has balked, because it already has well established, cost-effective cutting operations abroad.
Enter Smicor, a subsidiary of Israel’s Leviev group that currently produces only a small proportion of the country’s diamond output but wants more exploration licenses. In 2004, Smicor promised to establish the higher-value diamond-cutting business that the government craves, and has since recruited and trained 400 workers in a new plant in the capital, Windhoek.
Similarly, at the government’s nudging, the mining conglomerate Anglo-American developed a zinc-processing operation at its new Skorpion mine in the Namib desert, creating more skilled jobs for locals.
Drawing benefits from global companies doesn’t always require high-level government negotiations.
Consider Katatura, a shantytown on the outskirts of Windhoek into which the former apartheid regime forced tens of thousands of blacks in the 1950’s and 1960’s.
The district is poor by any reckoning, with 100,000 people crammed into shabby corrugated iron and tarpaulin-covered huts along miles of dirt pathways and hillsides.
Yet every year, new brick houses, some quite substantial, emerge among the hovels.
One young mother, Rosalia, who lives in a small shack with seven children by different fathers, may look destitute to Western eyes, but she has a small business selling dried meat.
Last year, she managed to get electricity connected to her shack, and she invested her savings in a refrigerator to store food and drinks for resale.
Next year, she will expand the hut, and will eventually apply for land and begin to build a brick house.
Her stall is far from ideal; with every gust of wind, sand and dirt blow over the meat.
Poor traders like Rosalia want real shops, and for some, Namibia Beverages, the local bottling operation of Coca-Cola, is answering the call with sturdy iron cabins that are spacious, portable, and easily secured.
Coca-Cola supplies the cabins to traders who sell its products, just as it might provide promotional umbrellas to outdoor cafés in Paris.
Even in the remotest villages on the Angolan border, where Ovambo people live in stick huts, electricity is in short supply, and villagers trek miles each day to fetch firewood and water, a bottle of Coke or Fanta is easy to find.
With their distribution power and detailed knowledge of the market, multinational companies’ influence could surely be leveraged to address many development problems, regardless of a country’s political or economic legacy.
Development groups, governments, consumers, and small entrepreneurs need only work out initiatives that embody their common interests with global firms.
Can Good Emerge From the BP Oil Spill?
CAMBRIDGE – Perhaps it is a pipe dream, but it is just possible that the ongoing BP oil-spill catastrophe in the Gulf of Mexico will finally catalyze support for an American environmental policy with teeth.
Yes, the culprits should be punished, both to maintain citizens’ belief that justice prevails, and to make other oil producers think twice about taking outsized risks.
But if that is all that comes out of the BP calamity, it will be a tragic lost opportunity to restore some sanity to the United States’ national environmental and energy policy, which has increasingly gone off track in recent years.
Why should there be any reason for hope, especially given that US environmental policy has been predicated on the unrealistic belief that relatively small subsidies to new energy technologies can substitute for tax-induced price incentives for producers and consumers?
The fact is, the BP oil spill is on the cusp of becoming a political game-changer of historic proportions.
If summer hurricanes push huge quantities of oil onto Florida’s beaches and up the Eastern seaboard, the resulting political explosion will make the reaction to the financial crisis seem muted.
Anger is especially rife among young people.
Already stressed by extraordinarily high rates of unemployment, twenty-somethings are now awakening to the fact that their country’s growth model – the one they are dreaming to be a part of – is, in fact, completely unsustainable, whatever their political leaders tell them.
For now, it may only be black humor (e.g., the New Orleans waiter who asks diners whether they want their shrimp leaded or unleaded).
But an explosion is coming.
Might a reawakening of voter anger be the ticket to rekindling interest in a carbon tax?
A carbon tax, long advocated by a broad spectrum of economists, is a generalized version of a gas tax that hits all forms of carbon emissions, including from coal and natural gas.
In principle, one can create a “cap-and-trade” system of quantitative restrictions that accomplishes much the same thing – and this seems to be more palatable to politicians, who will jump through hoops to avoid using the word “tax.”
But a carbon tax is far more transparent and potentially less prone to the pitfalls seen in international carbon-quota trading.
A carbon tax can help preserve the atmosphere while also discouraging some of the most exotic and risky energy-exploration activities by making them unprofitable.
Of course, there must be better (far better) and stricter regulation of offshore and out-of-bounds energy extraction, and severe penalties for mistakes.
But putting a price on carbon emissions, more than any other approach, provides an integrated framework for discouraging old carbon-era energy technologies and incentivizing new ones by making it easier to compete.
Advocating a carbon tax in response to the oil spill does not have to be just a way of exploiting tragedy in the Gulf to help finance outsized government spending.
In principle, one could cut other taxes to offset the effects of a carbon tax, neutralizing the revenue effects.
Or, to be precise, a carbon tax could substitute for the huge array of taxes that is eventually coming anyway in the wake of massive government budget deficits.
Why might a carbon tax be viable now, when it never has been before?
The point is that, when people can visualize a problem, they are far less able to discount or ignore it.
Gradual global warming is hard enough to notice, much less get worked up about.
But, as high-definition images of oil spewing from the bottom of the ocean are matched up with those of blackened coastline and devastated wildlife, a very different story could emerge.
Some say that young people in the rich countries are just too well off to mobilize politically, at least en masse.
But they might be radicalized by the prospect of inheriting a badly damaged ecosystem.
Indeed, there is volatility just beneath the surface.
Modern-day record unemployment and extreme inequality may seem far less tolerable as young people realize that some of the most cherished “free” things in life – palatable weather, clean air, and nice beaches, for example – cannot be taken for granted.
Of course, I may be far too optimistic in thinking that the tragedy in the Gulf will spur a more sensible energy policy that attempts to moderate consumption rather than constantly seeking new ways to fuel it.
A great deal of the US political reaction has centered on demonizing BP and its leaders, rather than thinking of better ways to balance regulation and innovation.
Politicians understandably want to deflect attention from their own misguided policies.
But it would be far better if they made an effort to fix them.
A prolonged moratorium on offshore and other out-of-bounds energy exploration makes sense, but the real tragedy of the BP oil spill will be if the changes stop there.
How many wake-up calls do we need?
Can Greece Avoid the Lion?
ATHENS ­­– Even as the European Union and the International Monetary Fund lay the groundwork for a giant first-round bailout, debate is swirling about whether Greece can avoid sovereign default.
Some view Greece as Argentina revisited, noting the stunning parallels with the country that in 2001 set the record for the world’s largest default (in dollar terms).
Others, such as Greek Prime Minister George Papandreou, see the country’s problems as difficult but manageable, and complain of interference from ill-intentioned foreign speculators.
Avoiding default may be possible, but it will not be easy.
One has only to look at official data, including Greece’s external debt, which amounts to 170% of national income, or its gaping government budget deficit (almost 13% of GDP).
But the problem is not only the numbers; it is one of credibility.
Thanks to decades of low investment in statistical capacity, no one trusts the Greek government’s figures.
Nor does Greece’s default history inspire confidence.
As demonstrated in my recent book with Carmen Reinhart This Time is Different: Eight Centuries of Financial Folly , Greece has been in default roughly one out of every two years since it first gained independence in the nineteenth century.
Loss of credibility, if it comes, can bite hard and fast.
Indeed, the historical evidence slams you over the head with the fact that, whereas government debt can drift upward inexorably for years, the end usually comes quite suddenly.
And it can happen to any country, although advanced countries can usually tighten fiscal policy with sufficient speed and credibility that the pain comes mainly in slower growth.
Unfortunately, for emerging markets, adjustment is often impossible without help from the outside.
That is the precipice on which Greece stands today.
A debt crisis is not inevitable.
But the government urgently needs to implement credible fiscal adjustment, concentrating not only higher taxation, but also on rolling back some of the incredible growth in government spending – from 45% of GDP to 52% of GDP – that occurred between 2007 and 2009.
The government must avoid relying too much on proposals for tax increases, which ultimately feed back on growth and sustainability.
It would be far preferable to balance tax increases with some reversal of runaway government spending.
I have Greek friends who say that Greece is not alone.
And they are right. Some countries are almost inevitably going to experience bailouts and defaults.
One of the more striking regularities that Reinhart and I found is that after a wave of international banking crises, a wave of sovereign defaults and restructurings often follows within a few years.
This correlation is hardly surprising, given the massive build-up in public debts that countries typically experience after a banking crisis.
We have certainly seen that this time, with crisis countries’ debt already having risen by more than 75% since 2007.
But, whereas we are likely to see a wave of defaults and IMF programs this time, too, fiscal meltdown does not have to hit every highly indebted country.
Indeed, what a country like Greece should be doing is pulling out all the stops to stay clear of the first and second wave of restructurings and IMF programs.
If it can, then perhaps watching other countries suffer will help convince the local political elite to consent to adjustment. If not, Greece will have less control over its adjustment and potentially experience far greater trauma, perhaps eventually outright default.
There is an old joke about two men who are trapped by a lion in the jungle after a plane crash.
When the first of them starts putting on his sneakers, the other asks why.
The first answers: “I am getting ready to make a run for it.”
I just have to outrun you.”
Greece has yet to put on its sneakers, while other troubled countries, such as Ireland, race ahead with massive fiscal adjustments.
Greece’s new Socialist government is hampered by campaign promises that suggested the money was there to solve the problems, when in fact things turned out to be far worse than anyone imagined. Unions and agricultural groups tie up traffic with protests every other day, hinting at possible escalation.
Most Greeks are taking whatever action they can to avoid the government’s likely insatiable thirst for higher tax revenues, with wealthy individuals shifting money abroad and ordinary people migrating to the underground economy.
Greece’s underground economy, estimated to be as large as 30% of GDP, is already one of Europe’s biggest, and it is growing by the day.
In the case of Argentina, a pair of massive IMF loans in 2000 and 2001 ultimately only delayed the inevitable harsh adjustment, and made the country’s ultimate default even more traumatic.
Like Argentina, Greece has a fixed exchange rate, a long history of fiscal deficits, and an even longer history of sovereign defaults.
Nevertheless, Greece can avoid an Argentine-style meltdown, but it needs to engage in far more determined adjustment.
It is time to put on the running shoes.
Can Green Trade Tariffs Combat Climate Change?
BERKELEY – In recent months, China has taken center stage in the international debate over global warming.
It has surpassed the United States as the world’s largest source of greenhouse gases, and it became developing nations’ diplomatic champion at the recent United Nations climate negotiations in Bali.
Now China may become the target of a full-fledged trade war that could destroy – or perhaps rescue – the chances of bringing rich and poor nations together to fight global warming.
The focus on China intensified late last year, when new data from the International Energy Agency and other research organizations revealed that China had overtaken the US as the largest source of greenhouse gases – and, more ominously, that its emissions are growing at a rate that exceeds all wealthy nations’ capacity to decrease theirs.
Even if China met its own targets for energy conservation, its emissions would increase by about 2.3 billion metric tons over the next five years – far larger than the 1.7 billion tons in cutbacks imposed by the Kyoto Protocol on the 37 developed “Annex 1” countries, including the US.
After the inconclusive end of the UN led Bali talks on the global environment, worry has grown among US and European industries – especially iron, steel, cement, glass, chemicals, and pulp and paper – that any new climate treaty would put them at a big disadvantage against their fast-growing competitors in China.
In response, the US Congress is moving to create a system of trade sanctions that would levy heavy taxes on imports from other major greenhouse gas emitters.
Ironically, the American plan is taking shape even before the US takes any action to reduce its own emissions, inviting charges of hypocrisy, violation of international law, and threatening a major trade war.
The tariff proposal – contained in the central piece of global warming legislation now before Congress – would impose emission controls on domestic industries starting in 2012.
It would also levy punitive tariffs on greenhouse-gas-intensive products imported from countries that lack “comparable action” to that of the US, starting in 2020.
Industrial lobbies and labor unions are pushing hard for these sanctions to take effect more quickly.
European Commission President José Manuel Barroso, French President Nicolas Sarkozy and industrial chambers of commerce strongly advocate a similar tariff system, leading many analysts to predict that the EU will also adopt some sort of green tariff system in the next few years.
Warning of an “all-out trade war” if the sanctions go forward, US Trade Representative Susan Schwab argues that green trade sanctions would violate World Trade Organization rules.
In a recent letter to the House Energy and Commerce Committee, she wrote, “We believe this approach could be a blunt and imprecise instrument of fear, rather than one of persuasion, that will take us down a dangerous path and adversely impact US manufacturers, farmers, and consumers.”
Developing nations’ allies, meanwhile, are warning that the sanctions plan could destroy the chances of a post-Kyoto treaty.
Chinese diplomats have not responded directly, but they have noticeably hardened their stand on climate talks.
In February, China’s top climate negotiator, Yu Qingtai, said at the UN that rich nations, which “caused the problem of climate change in the first place,” must be treated as “culprits,” and developing countries as “victims.”
Despite China’s official hard line, some Chinese environmental officials privately express alarm at run-away carbon emissions, and suggest that foreign green tariffs would actually strengthen their hand in domestic policy struggles over controlling greenhouse gases by helping to win political support for emissions cuts.
Pan Yue, vice-director of the State Environmental Protection Administration, recently argued in a China Daily article in favor of stronger emissions regulations and a more “green-oriented China,” warning that “China’s image among the international community” was in jeopardy.
The growing dispute over trade sanctions brings to the fore not only the fundamental ethical question of whether wealthy nations should bear the burden of emissions reduction alone, but also the strategic question of whether sticks as well as carrots should be used to induce green behavior in developing countries.
Although China may not like it, the international trading system may provide more leverage than any other post-Kyoto mechanism over developing countries’ environmental policies.
Despite the threat of trade wars, trade sanctions could emerge as the most effective means of forcing international action on global warming.
Can Hamas Stay in Power?
With one-third of the Palestinians’ Hamas-led government now under arrest by Israel, the escalation in Israeli-Palestinian relations has moved beyond military confrontation.
A far more fundamental question has come into view: can a Palestinian government that draws its authority from an agreement with Israel stay in power when it is led by an organization committed to the destruction of Israel?
The abduction of an Israeli soldier in the Gaza Strip, as well as the abduction and subsequent murder of an 18-year old Israeli civilian in the West Bank, have brought to the fore that question, which has haunted Israeli-Palestinian relations since Hamas won parliamentary elections in January.
The international community, led by the “Quartet” (the United States, the European Union, the United Nations, and Russia), has put three conditions to the Hamas government if it wishes to achieve international legitimacy and continue to be supported financially.
Hamas must recognize Israel’s right to exist, stop all terrorist activities, and commit itself to carry out all previous international agreements signed by the Palestinian Authority.
These look like reasonable conditions to any outside observer.
To Hamas, however, they appear to undermine its very raison d'etre.
After all, this is an organization committed to the destruction of Israel – its charter calls for a holy war against all Jews – and the establishment of an Islamic state in all of historical Palestine.
Indeed, Article 22 of that charter reveals that Hamas views the Jews (together with the Freemasons and other nefarious organizations like Rotary International and the Lions Club), as responsible for the French and Bolshevik Revolutions, World War I, and World War II.
So it is no great surprise that Hamas rejected the Quartet’s conditions.
At the same time, Palestinian President Mahmoud Abbas (Abu Mazen), who represents Fatah, which lost the January elections, has tried in vain to find common ground with Hamas through an ambiguous text known as “The Prisoners’ Document.”
This document was intended to serve as an implicit acceptance of Israel’s right to exist.
But nothing of the sort appears in the truncated text approved by Hamas.
On the contrary, the text legitimizes continuing attacks against Israeli civilians in the West Bank, making it unacceptable to Israel – and to the international community.
But the current crisis cannot be solved by words alone.
One of the paradoxical results of America’s almost messianic belief in elections as a panacea for all the ills of the Middle East is that Hamas – the winner of democratic elections – has gained a degree of legitimacy that it never had before.
On the other hand, Hamas’s history and current behavior clearly indicate that it regards elections as merely a political tool, and that it is devoid of any commitment to the norms and values underlying democracy.
Fascist and communist regimes of the past, which followed a similar instrumentalist approach to democracy, come to mind here.
Yet, at the same time, the US supports Abu Mazen, trying to undermine the Hamas government, thus casting a shadow on the credibility of its own commitment to democracy.
The current violence may escalate further, and could bring down the Hamas government.
On the other hand, diplomatic means may bring about the release of the Israeli soldier and put a stop to the firing of Qassam rockets from Gaza into Israel – a daily occurrence that has challenged the credibility of the new Israeli government under Prime Minister Ehud Olmert.
But the fundamental problem is that, until now, at every historical juncture, the Palestinians refused to accept a compromise and consequently failed in nation-building.
In 1947, they refused the UN partition plan, which called for the establishments of two states in British Palestine.
In 1993, after the Oslo agreements, the Palestinian Authority established under Yasir Arafat became another militarized authoritarian regime, very much like Syria and Egypt, and did nothing to alleviate the suffering of the Palestinian refugees.
It was this failure that brought Hamas to power.
The current crisis is obviously the first serious test for Olmert and his plans for further withdrawal from Israeli-occupied territories.
But it is an even greater test for the Palestinians: will they once again be led by a radical and fanatical leadership into another national catastrophe?
Or will they finally realize that a future of independence, sovereignty, and dignity is open to them – but only if they grant the Israelis what they rightly claim for themselves?
The international community can urge the Palestinians toward a decision.
But that decision, and its moral costs, remains in the hands of the Palestinians alone.
Can Hezbollah Weather the Arab Spring?
BEIRUT –Three years ago, regional opinion polls showed that the Middle East’s most popular leaders were Hezbollah leader Sayed Hassan Nasrallah, Syrian President Bashar al-Assad, and Iran’s President Mahmoud Ahmadinejad.
People at the time appreciated that they were standing up to Israel in Lebanon and Gaza, and pushing back against aggressive American policies in the region.
With the Arab Spring, regional public opinion has shifted toward prioritizing civil rights and democratic reform over foreign policy.
Today, Assad is reviled, Ahmadinejad’s government is accused of violently suppressing its own pro-democracy protestors, and both Hezbollah and Iran are condemned for continuing to back Assad as he slaughters his own population.
As a result, Hezbollah is no longer the widely popular movement that it once was across the Arab and Muslim worlds, but it remains a highly effective and heavily armed force.
And, in politics, as Machiavelli pointed out long ago, it is more important to be feared than loved.
To be sure, Hezbollah is still grudgingly respected for its ability to stand up to Israel.
But it has lost its halo as a voice for the oppressed and downtrodden, and has exposed itself as a partisan and sectarian party that will side with Iran and its allies even at the expense of human rights and human lives in neighboring Syria.
But Hezbollah’s hard power has, up to now, not been affected by developments in the Arab Spring or Syria.
Its deployment in Lebanon, its fighting capacity, and its thousands of missiles are all still intact.
Hezbollah was initially thrilled at the outbreak of popular revolts against rulers closely allied with the US and the West.
Even Libya’s Colonel Muammar el-Qaddafi was considered a foe for having allegedly ordered the killing of Lebanese Shiite leader Imam Musa Sadr in 1978.
Hezbollah had been in a virtual cold war with Hosni Mubarak’s Egypt since January 2009, when Nasrallah had effectively accused Mubarak’s government of collusion in Israel’s intervention in Gaza, and had called for the “Egyptian people to take to the streets in their millions.”
But, as the revolts proceeded, it emerged that people wanted good government and social justice, and were not enamored of Iran or interested in joining an axis of resistance.
Furthermore, as the Muslim Brotherhood rose in Egypt, Hezbollah’s erstwhile ally, Hamas, drifted away from it and its Syrian and Iranian backers, and found a new footing in Egypt and the Gulf.
But Hezbollah’s disappointment turned to intense concern when Syrians rebelled against Assad.
If his regime falls, Hezbollah is at risk of losing its arms-supply bridge to Iran.
It would be unable to compensate for that loss by relying on Lebanese seaports or Beirut’s airport, because both could easily be blockaded.
It would still have its full first-strike and retaliatory capacity, but, like a bee, it would be able to sting only once.
Without the ability to resupply itself, Hezbollah would emerge from any future war a significantly weakened force.
Within Lebanon itself, Hezbollah is still strong, but its comfort level has declined.
In May 2008, it demonstrated its domestic dominance by taking over the capital, Beirut.
In January 2011, it brought down Saad Hariri’s government and installed one more to its liking.
But, in just the last few weeks, parts of the Sunni north have erupted in armed defiance of Hezbollah and the government that it dominates, and are openly supporting the Syrian rebels.
In a sense, these Sunni groups are creating an armed enclave in northern Lebanon to counterbalance the armed Shia enclaves in Beirut, the south, and the Bekaa region.
Hezbollah has also been shaken by the abduction and continued detention of a dozen Lebanese Shiites – some close to Nasrallah –&nbsp;by opposition forces in Syria.
Hezbollah faces parliamentary elections in the spring of 2013.
If its Christian ally, Michel Aoun’s Free Patriotic Movement, does poorly, or if the ever-shifting Druze leader Walid Jumblatt returns his Progressive Socialist Party to the anti-Syrian alliance of which it was once a part, Hezbollah would lose its parliamentary majority, and hence its ability to form and topple governments.
Perhaps anticipating these domestic vulnerabilities, Hezbollah encouraged and joined the resumption of National Dialogue discussions involving all of Lebanon’s main communities.
Strategically, Hezbollah fears that if Assad falls, and if it loses the ability to resupply itself rapidly and effectively as a result, Israel will take advantage by unleashing another war against it.
With tensions between Israel and Iran, Hezbollah’s patron, unresolved, this fear cannot be discounted.
Even if Hezbollah can adjust to the Arab Spring, it fears the winter with Israel that might follow.
Can High Oil Prices Be Good?
World oil prices crossed $40 a barrel in mid-summer, and have since climbed to the mid-$50's.
Today's oil prices are still only two-thirds the real peak reached during the Iranian Revolution of 1979, and future markets expect the oil price to fall back and settle at perhaps $45 a barrel.
But the current high level of oil prices has led forecasters to start reining in their expectations for economic growth.
"Higher oil prices are here to stay," says the American economic forecaster Allen Sinai. "[T]hat has to subtract growth and could cause core inflation to pick up."
Indeed, according to Sinai, higher oil prices are "the biggest risk...since the bursting of the stock-market bubble in 2000-2001."
Sinai is hardly alone.
If the oil price stays at $40 a barrel, expect it to have next to no effect on short-term world GDP growth.
But if the oil price remains at or near $60 a barrel, expect everyone's forecasts of GDP growth to be reduced by 1% per year.
High oil prices also threaten to slow long-term productivity growth.
With high - and volatile - oil prices, businesses will focus their investments less on boosting productivity and more on maintaining flexible energy usage.
At $40 a barrel, expect oil prices to slow the long-run growth rate of the world's potential output by 0.1% per year.
At $60 a barrel, expect the "measured" long-term rate of potential world output growth to slow by roughly 0.3% per year.
With most shocks to the world economy, we expect central banks to take steps to offset their effects.
When business investment committees become more cautious, we expect to see the Federal Reserve, the European Central Bank, the Bank of England, and others lower interest rates to make the numbers more attractive.
If consumers go on a spending binge, we expect the world's central banks to raise interest rates to cool off construction spending and free up the resources needed to prevent shortage-inducing inflation.
But this economic logic does not apply in the case of increases in oil prices.
Although high oil prices look like a tax on business activity that depresses aggregate demand, they also raise inflation, both directly and indirectly.
Central banks respond to lowered demand by reducing interest rates and to higher expected inflation by raising interest rates.
Because high oil prices both lower demand and raise inflation, central banks respond by doing little or nothing.
The effects of high oil prices thus flow through to the economy without being moderated by the world's central banks leaning against the wind.
Yet if we take a very long-term view, it is not so clear that high oil prices are bad for the world as a whole.
For example, if high oil prices were the result of taxes that were then redistributed to oil users, they would be unambiguously good.
To be sure, most taxes entail heavy "excess burdens": the cost is significantly greater than the value of the revenue raised because of potential taxpayers' myriad attempts at evasion and avoidance.
A tax on oil, however, does not entail excess burdens.
On the contrary, it implies excess benefits .
Shifts to more energy-efficient means of transportation ease congestion.
Attempts to shave costs by economizing on energy use reduce pollution.
Higher prices for oil substitutes spur research into other energy technologies - research that is much needed today if we are to tackle the problems of global climate change tomorrow.
A well-designed tax on oil would also reduce demand, thereby lowering the potential for windfall profits for those who rule or own the ground over the oil deposits.
A little more than a decade ago, Lloyd Bentsen, President Bill Clinton's first Treasury Secretary, tried to ensure precisely that, proposing to use a "BTU tax" to close America's fiscal deficit.
The Republican Party and the American Petroleum Institute sank that proposal.
A decade later, we have high oil prices, but they are not due to a well-designed tax, either in America or elsewhere.
As a result, the price boom is boosting windfall profits for the owners of oil deposits rather than improving countries' public finances.
Can Iraq Be Won?
In moving to topple Saddam Hussein's regime, the Bush administration stakes its case on two critical arguments.
First, President Bush and his senior aides insist that the coming Iraq war is an extension of the military campaign against terrorism.
It would spare America and the world, in the words of Deputy Defense Secretary Paul Wolfowitz, "the danger that Iraq's weapons of mass terror could fall into the hands of terrorists."
Second, the Bush team is pledging to bring democracy to Iraq, a transformation that - it is hoped - will spur democratization across the region.
A peaceful, democratic dawn in Iraq, they assert, would soon break over other authoritarian Arab states as well.
By transforming the political landscape of the Middle East, American officials hope to strike at the root causes of Islamic extremism.
Messrs. Bush, Rumsfeld, Cheney and Wolfowitz like to pose as realists, but just how realistic is such thinking?
Is it based on a sober assessment of the complex realities in Iraq and the region?
Or is it driven by ideology and wishful thinking?
Will a war against Iraq help the US in its fight against terrorists, or will it make Americans more vulnerable?
Despair and alienation have taken hold of the younger generation of Arabs, who represent over 50% of the region's population.
Political repression and the silence of Arab public opinion should worry America and its Arab allies, not reassure them, because it means that there is no way for the public to channel its interests, demands, and frustrations peacefully.
A US invasion of Iraq, with large numbers of civilian casualties, would deepen the sense of victimization and defeat felt by Arab youths and make them inclined to join Al Qaeda-style holy war cells.
Far from undermining militancy and combatting terror, a war will likely play into the hands of Al Qaeda, giving it a new lease on life.
Indeed, militant Islamists, hoping to recover from the devastating blows they have absorbed since the war on terror began, are already positioning themselves to capitalize on the coming war with Iraq.
In the last few weeks, Al Qaeda's propaganda messages have pointed increasingly at the Iraqi crisis.
The organization seeks to reinvent itself as a defender of the Iraqi people.
In this, Al Qaeda finds a receptive audience.
The dominant Arab-Muslim narrative stresses that the coming war has nothing to do with fighting terror.
Rather, it is intended to settle old scores and make Washington the arbiter of Arab destiny and resources, particularly oil.
By attacking Iraq, the US could win the armed confrontation with Hussein, but probably lose the broader - and more vital - political struggle for the future of the country.
American officials do not seem to recognize how difficult, costly, and prolonged the task of creating a peaceful order and a viable democracy in Iraq will be.
There is a lack of appreciation of how deeply entrenched are Iraq's sectarian, tribal, and ethnic loyalties.
A sense of humility and skepticism is missing.
The building blocks and institutions necessary for a functioning polity, let alone a democracy, do not exist.
Since the advent of army rule in 1958, successive regimes have terrorized Iraqis into submission and bled the country white through their military misadventures.
Monitored and oppressed for 45 years, Iraqis have lost faith in the political system and turned inward, to tribalism and religious/ethnic factionalism.
Civil society has been crushed and the middle class decimated--thanks in no small part to the UN-led economic sanctions that have been enforced since 1991.
Of course, reforming and democratizing the Iraqi political system is not impossible.
On the contrary, the Iraqis have suffered more than most and have learned the hard way the perils of authoritarianism and oppression.
They recognize their vested interest in overcoming their divisions and rebuilding their political community.
Iraq also possesses human and material resources that should work in favor of democracy in the long term.
But democracy cannot be delivered to Iraq by an outside power.
Only Iraqis, with international assistance, can transform their country.
This task requires time, patience, hard work, and luck.
It will likely take one or two decades, not just a year or two, the proposed time frame of American military presence in Iraq after the expected ouster of Hussein.
Unless America is willing to police the new order for many years and invest vast political and economic resources in assisting, not imposing, the reconstruction of state and society, Iraq will fracture and descend into chaos.
Its neighbors will be destabilized. New jihadi groups will arise.
Not only will there be no peace and democracy in Iraq, but the West's security interests will be endangered further.
Sadly, this worst case scenario is hardly entertained by American officials, who now seem to be prisoners of their own rhetoric.
Can Italy Survive Berlusconi?
If history seems likely to rank Silvio Berlusconi as an inconsequential Prime Minister of Italy, it will surely remember him as an extraordinary – and extraordinarily bizarre – one.
Promising one thing and delivering another was not so much a weakness of his government as its organizing principle.
Given the erratic nature of Berlusconi’s rule, it is no surprise that, ever since the 2001 election that returned him to power, the center-left l’Unione coalition has won all subsequent elections – administrative, regional, and European.
Yet the left’s prospects in the upcoming parliamentary election are far from certain, and Berlusconi seems far from doomed.
Given the country’s economic conditions, one would think that Italy is ripe for decisive change.
For the last four years, average growth in incomes has been a mere 0.3%, compared to 1.5% in the European Union, and in the past two years public debt has again started to rise.
Moreover, the strategy of Berlusconi’s ruling center-right Casa della Libertà coalition has been to tread water and wait for Europe’s economy to pick up instead of tackling Italy’s structural difficulties.
As a result, the government is criticized not only by the unions, but also by the employers’ association, Confindustria, which in 2001 gave Prime Minister Berlusconi strong support.
Then there is the ongoing conflict of interests between Berlusconi-the-Premier and Berlusconi-the-magnate, who holds public licenses that make him a semi-monopolist in media and TV advertising.
During Berlusconi’s tenure in office, his enormous personal assets have tripled.
While his parliamentary majority has approved many laws that promote his personal interests and have eased some of his legal difficulties, at the beginning of March, Berlusconi was again accused of corruption and tax fraud.
Berlusconi’s ministers have scarcely behaved better.
Two were forced to resign within a month of each other.
Roberto Calderoli, a prominent official in Lega Nord, the third-largest government party, provoked riots in Libya by wearing a t-shirt printed with the infamous cartoons of the Prophet Mohammad.
Francesco Storace, the former Minister of Health and a leading member of Alleanza Nazionale, the second-largest government party, is suspected of organizing political espionage, in an Italian-style Watergate.
But, despite the government’s catastrophic economic and ethical record, opinion polls indicate a lead of only about four percentage points for l’Unione—too small, given the high number of undecided voters, to predict the election’s outcome.
So what is keeping Berlusconi and his coalition in the race?
Above all, Berlusconi’s electoral campaign is aimed, in the manner of President Bush’s 2004 re-election campaign, at energizing his hard-core supporters and mobilizing the growing number of voters who have abstained in recent years.
In doing this he has not hesitated to use his semi-monopoly over television to exalt his government’s alleged accomplishments.
His campaign rhetoric highlights anti-communism with an emphasis not seen in Italy since 1948, coupled with a defense of the family and values cherished by the Roman Catholic establishment, although the Church has so far resisted being drawn into the campaign.
The Berlusconi coalition also benefits from the weakness of l’Unione.
Its leader, Romano Prodi, obtained an extraordinary popular endorsement when more than four million people voted for him in Italy’s first-ever primary elections.
Yet Prodi continues to be a party-less leader of too many parties.
To be sure, the cohesiveness of l’Unione has strengthened: the two major parties (Democratici di Sinistra and Democrazia e Libertà - la Margherita) are united under the symbol of the olive tree, the other parties have endorsed a detailed 280-page government program, and the left-wing Partito della Rifondazione Comunista has given clear signs of moderation and loyalty to the coalition.
For voters, however, a perception of fragility remains.
Finally, the uncertainty of the outcome reflects not so much voters’ behavior, but a change in the electoral system.
During the past decade, Italy has used a majority electoral system corrected by a proportional quota.
Under this system, Casa della Libertà translated a small popular majority in 2001 into a decisive parliamentary majority.
But, with the same result on the horizon this year for l’Unione, the center-right parliamentary majority changed the electoral law just a few months before the end of its term.
This is reminiscent of an army that, fearing defeat on the battlefield, poisons the wells as it retreats.
A proportional system in the absence of individual preferences means that party secretaries, rather than citizens, will choose deputies, and, with no effective electoral threshold, the number of parties will proliferate.
Although the election ballot will be 40 centimeters long to accommodate all the symbols of the old and new parties, it won’t contain the name of even a single candidate.
But the worst problem is that the majority system for the Senate could lead to a different majority gaining control there than in the Chamber of Deputies (the lower house), which may well cause legislative paralysis.
Moreover, President Carlo Azeglio Ciampi’s mandate ends at the same time that parliament dissolves, which means that his successor, elected by the new parliament, would have to nominate a government without a majority in both houses.
Berlusconi and Prodi have ruled out a German-style grand coalition – an outcome that seems especially unlikely following an election campaign in which both contestants have strongly hinted that their opponent has no legitimate right to govern.
At the same time, holding another vote would leave the question of the electoral law unresolved.
The puzzle of Berlusconi’s survival reflects a wider European conundrum.
Many Europeans, not just Italians, are nervous and unsure of where the continent is going.
So it is no surprise that an opportunist and charlatan like Berlusconi continues to get a hearing.
Italians must decide upon the sort of Italy they want if they are to get leaders of the stature they need.
Can Koizumi Save Japan?
Cannabis and the Brain
Across Europe and America, there is a groundswell of debate concerning the legalization of cannibas for personal use.
Indeed, Britain has, to all intents and purposes, practically decriminalized marijuana usage.
As a neuro-scientist, I am concerned about this debate.
One common justification for legalization or decriminalization of cannabis centers around the idea that it does not involve a victim.
But at least four reports in major medical journals (Ramstrom, 1998; Moskowitz, 1985;
Chesher, 1995; and Ashton, 2001), show the contrary. In a study of pilots smoking only a single moderate joint, there was a difference between a placebo control group and those taking cannabis, up to 50 hours after taking the drug.
Other costs to the community are accidents at work or at home, educational under-attainment, impaired work performance and health budget costs.
Another argument for relaxing our attitude to cannabis is that it is non-addictive.
Of course, defining `addiction' is hard, but if one regards it as an inability to give up, then there is strong evidence that cannabis incites dependence.
Recent papers report many users in the US, UK and New Zealand now seek treatment for dependence.
Other papers show that 10% of users want to stop or cut down, but have difficulties doing so, whilst a paper in 1998 reported that 10-15% of users become dependants.
Recently, it was shown that withdrawal symptoms were experienced after only three days of light use.
Heavy users confront a worse situation: Dr Bryan Wells, a rehabilitation expert, comments, ``for the first time I'm beginning to see something that resembles the withdrawal symptoms produced by hard drugs in heavy cannabis users.''
Another argument in favor of relaxed laws on cannabis are its supposed beneficial effects on pain.
So far, that evidence is anecdotal; it is hard to exclude placebo effects.
The results from clinical trials are awaited.
But distinctions should be drawn between recreational drugs and medicines, as they are for opiates.
If cannabis is a pain-killer, then it must have a huge impact on the physical brain.
Indeed, widespread reports exist of the impact of cannabis on the brain, in particular areas concerned with memory (hippocampus), emotion (mesolimbic system), and movement (basal ganglia).
Cannabis affects a variety of chemical systems and it works via its own `receptor,' it's own molecular target.
The fact that there is a naturally occurring analogue of cannabis in the body, as there is for morphine, provides a basic reason to differentiate it from alcohol.
For an agent that affects a variety of transmitter systems, is as though it were a transmitter itself.
Perhaps, not surprisingly, for cannabis has a clear effect on psychology: not only is there euphoria, but often overlooked effects of anxiety, panic and paranoia.
Disorders in psychological performance, attention impairments, and memory deficits are well known.
More disturbing - and less acknowledged - is the fact that these effects can be long-term.
In one recent paper, a comparison of ex-users who used for 9 years and abstained from 3 months to 6 years, were compared with long-term users of 10 years, and short-term users of 3 years. In all cases the frequency of use was 10-19 days per month.
In all cases, all users, irrespective of whether they had given up or not, had attention impairments compared to controls.
Although those who stopped using cannabis partially improved over those continued using cannabis, they were below the level of controls, and this impairment was related to the duration of use.
Most disturbing was the fact that no improvement in performance occurred with increasing abstinence.
No surprise, then, that because these long-term effects seem to be irreversible, there is an effect on brain pathology.
Because much of this data comes from work with isolated systems, and therefore on all brains, an obvious criticism is that you can't extrapolate from such data.
Yet, the evidence suggests that the long-term effects must have a physical basis.
A counter-argument to such thinking is to challenge whoever thinks that there is a `safe' dose of cannabis, with no effect on the brain, to say what that dose might be.
Even a dose comparable to one joint, and analogous levels of the active THC ingredient to that in plasma, can kill 50% of neurons in the hippocampus (an area related to memory) within 6 days.
People, moreover, are unaware that the THC in cannabis remains in the body for over 5 days.
For someone using cannabis routinely, the dose carried in the body is higher than imagined.
It is also easy to underestimate the dose being taken, because there is a wide variety in the strength of cannabis.
Individual variations in body fat and, worryingly, disposition to psychosis, means that you cannot predict how much will affect any person at any time.
Cannabis could well be having a serious effect on the mind, which I define as the personalization of brain circuits that reflect an individual's experiences.
A transmitter-like substance, with such powerful effects, must affect those circuits.
So `blowing your mind' might be exactly what marijuana users do.
Can Radiation Be Good For You?
STANFORD – The earthquake- and tsunami-related problems at Japan’s Fukushima Daiichi nuclear-power plant have inspired endless commentary and speculation.
Unfortunately, much of the debate about the disaster and its implications has been uninformed and problematic.
Radiation levels have increased by as much as 400 times the normal level 12 miles from the Fukushima plant; increased radioactivity has been found in milk, fish, and a variety of vegetables farmed in the region; and drinking water in Tokyo, 140 miles (225 kilometers) from Fukushima, has been declared unsuitable for consumption by infants.
Several countries have banned imports of milk and vegetables from the affected region.
What are we to make of all this?
Radiation at these levels poses a minimal threat to human health for anyone outside the immediate area of the nuclear-power station itself.
Most of the radiation is Iodine-131, which is good news for several reasons.
First, this isotope has a short half-life – only about eight days – so it decays to negligible levels in a short time (in 10 weeks, less than 0.1% is left.)&#160;
Second, it indicates that the source of the radiation is the reactor itself, rather than spent fuel rods (which harbor much longer-lived and more dangerous radioisotopes).
Third, a readily available and effective antidote exists for those at risk: non-radioactive iodine, available in tablets or liquid, which blocks the uptake of I-131 into the thyroid gland.
Moreover, limits for radioactivity in food commonly incorporate orders of magnitude of the margin of safety, and are predicated on long-term ingestion.
And Japan’s limits for radiation exposure are even more conservative (i.e., lower) than those set by international agencies.
Another factor that might mitigate radiation damage is a phenomenon called hormesis – a biphasic dose-response relationship in which something such as a toxic heavy metal or ionizing radiation that is harmful at moderate to high doses may actually produce adaptive beneficial effects at low doses.
In other words, we don’t see a completely linear relationship between the dose of the potential toxin and a deleterious effect; rather we see a distribution that looks something like a “check mark,” with concentration on the horizontal axis and some measure of damage on the vertical axis.
Hormesis is a byproduct of evolution.
From the beginnings of life on earth, organisms have been exposed to potentially harsh conditions, with individual cells commonly exposed to toxic substances such as chemicals and radiation.
In order to avoid early death and extinction, organisms developed complex mechanisms to cope with such environmental hazards, including altering the synthesis of nucleic acids and proteins to activate pathways that protect against or repair damage.
For example, the biologist Paul Z. Myers of the University of Minnesota has described an animal study in which fish embryos experience non-linear toxicity from alcohol, a toxin that causes severe deformities in zebrafish embryos at high doses and prolonged exposure.
According to Myers (http://scienceblogs.com/pharyngula/2011/03/will_radiation_hormesis_protec.php),
“I’ve done concentration series, where we give sets of embryos exposures at increasing concentrations, and we get a nice linear curve out of it: more alcohol leads to increasing frequency and severity of midline and branchial arch defects.
With one exception: at low concentrations of about 0.5% alcohol, the treated embryos actually have reduced mortality rates relative to the controls, and no developmental anomalies.”
In other words, there appears to be a kind of overcompensation that explains the enhanced protective mechanisms that are elicited by small amounts of a toxin.
Protective mechanisms are activated to a greater degree than would be necessary merely to neutralize the threat, resulting in a net beneficial effect.
There are some epidemiological studies that have been touted as offering real-world illustrations of hormesis in humans, but they have palpable shortcomings.
An excellent analysis of them by surgical oncologist David H. Gorski, M.D., Ph.D. (http://www.sciencebasedmedicine.org/?p=11636) was prompted by an American pundit’s outrageous exaggeration of the likely benefits from hormesis in Japan.
She declared that, “the only good news is that anyone exposed to excess radiation from the nuclear power plants is now probably much less likely to get cancer.”
But that would be true only for incremental radiation exposures at extremely low levels.
In light of what we know now – and even with the data that we are likely to have in the near future – we cannot be certain about the exposures.
Some workers at Fukushima are likely to have received higher doses of radiation (not only of I-131, but also of other, longer-lived, more dangerous radioisotopes, such as Cesium-137) than would activate the hormetic response; in March, three workers suffered radiation burns from highly radioactive water that breached their protective clothing.
And people (especially infants or children) exposed to high levels of I-131 before they could be protected by iodine prophylaxis might well have received cancer-inducing doses.
One thing is certain: at all but extremely low doses – perhaps only slightly higher than background levels – radiation causes cancer.
Beyond that, radiation physics and hormesis are very arcane and complex phenomena, and understanding them requires more than superficial knowledge.
If you want to comprehend all the nuances, get a science degree from M.I.T. or the Eidgenössische Technische Hochschule in Zurich.
Otherwise, stay tuned, learn from the experts, and don’t jump to conclusions.
Can Russia Be Great?
CAMBRIDGE – In the 1950’s, many Americans feared that the Soviet Union would surpass the United States as the world’s leading power.
The Soviet Union had the world’s largest territory, the third largest population, and the second largest economy, and it produced more oil and gas than Saudi Arabia.
Moreover, the USSR possessed nearly half of the world’s nuclear weapons, had more men under arms than the US, and had the most people employed in research and development.
It detonated a hydrogen bomb in 1952, only one year after the US, and it was the first to launch a satellite into space, in 1957.
In terms of soft power, communist ideology was attractive in post-World War II Europe, owing to its anti-fascist credentials, and in the Third World because of its identification with popular national-independence movements. Soviet propaganda actively fostered a myth of the inevitability of communism’s triumph.
Nikita Khrushchev famously boasted in 1959 that the Soviet Union would overtake the US by 1970, and by 1980 at the latest.
As late as 1976, Leonid Brezhnev told the French president that communism would dominate the world by 1995.
Such predictions were bolstered by reportedannual economic growth rates of 5-6% and an increase in the USSR’s share of global output, from 11% to 12.3%, between 1950 and 1970.
After that, however, the Soviet growth rate and share of global output began a long decline.
In 1986, Mikhail Gorbachev described the Soviet economy as “very disordered.
We lag in all indices.” A year later, Foreign Minister Eduard Shevardnadze told his officials, “You and I represent a great country that in the last 15 years has been more and more losing its position as one of the leading industrially developed nations.”
What is surprising in retrospect is how wildly inaccurate Western assessments of Soviet power were.
In the late 1970’s, a “Committee on the Present Danger” argued that Soviet power was surpassing that of the US, and the 1980 American election reflected such fears.
Yet in 1991, the Soviet Union collapsed.
The end of the Soviet Union left Russia significantly shrunken territorially (76% of the USSR), demographically (50% of the USSR’s population), economically (45% of the USSR’s output), and in terms of military personnel (33% of the USSR’s armed forces).
Moreover, the soft power of communist ideology had virtually disappeared.
Nonetheless, Russia had nearly 5,000 deployed nuclear weapons, and more than one million armed forces, though its total military expenditure was only 4% of the world total (compared to 40% for the US), and its ability to project power globally had greatly diminished.
In economic resources, Russia’s $2.3 trillion GDP was 14% that of the US at independence, and its $16,000 per capita income (measured in terms of purchasing power parity) was roughly 33% that of the US.
Its economy was heavily dependent on revenue from oil and gas, with high-tech goods representing only 7% of its manufactured exports (compared to 28% for the US).
In terms of soft power, despite the attractiveness of traditional Russian culture, Russia has little global presence.
In the words of Russian analyst Sergei Karaganov, Russia has to use “hard power, including military force, because it lives in a much more dangerous world and has no one to hide behind from it, and because it has little soft power – that is, social, cultural, political, and economic attractiveness.”
Russia is no longer hampered by communist ideology and a cumbersome central-planning system, and the likelihood of ethnic fragmentation, though still a threat, has waned.
Whereas ethnic Russians comprised only 50% of the Soviet Union’s population, they now make up 81% of the Russian Federation.
The political institutions needed for an effective market economy are largely missing, and corruption is rampant.
Russia’s robber-baron capitalism lacks the kind of effective regulation that creates trust in market relationships.
The public-health system is in disarray, mortality rates have increased, and birthrates are declining.
The average Russian male dies at 59 – extraordinarily low for an advanced economy.
Estimates by United Nations demographers suggest that Russia’s population may decline from 145 million today to 121 million by mid-century.
Many Russian futures are possible.
At one extreme, some view Russia as an industrialized banana republic whose corrupt institutions and insurmountable demographic and health problems make decline inevitable.
Others argue that reform and modernization will enable Russia to surmount its problems, and that its leadership is headed in this direction.
Late in 2009, President Dmitri Medvedev issued a sweeping call for Russia to modernize its economy, wean itself from a humiliating dependence on natural resources, and do away with Soviet-style attitudes that he said were hindering its effort to remain a world power.
But, as Katinka Barysch of the Centre for European Reform argues, Russian leaders’ concept of modernization is overly statist, particularly given that public institutions function so badly. “An innovative economy needs open markets, venture capital, free thinking entrepreneurs, fast bankruptcy courts and solid protection of intellectual property,” she argues.
Instead there are “wide-spread monopolies, ubiquitous corruption, stifling state interferences, weak and contradictory laws.”
Dysfunctional government and pervasive corruption make modernization difficult.
Peter Aven, president of Alfa Bank, argues that, “economically, it looks like the Soviet Union more and more.
There is a huge dependency on oil, a need for capital, a need for serious reforms, while the social burden is very strong.
Stagnation is the main threat.” A Russian economist says flatly that, “there is no consensus in favor of modernization.”
Whatever the outcome, because of its residual nuclear strength, its great human capital, its skills in cyber-technology, and its location in both Europe and Asia, Russia will have the resources to cause major problems for or to make major contributions to a globalized world.
We all have an interest in Russian reform.
Can Science Save Europe?
VIENNA– Europe’s current financial squeeze defies easy solutions.
Self-inflicted austerity has met popular restlessness for more tangible measures to revive economic growth and create jobs.
Protesters vividly express widespread frustration with deepening inequality, and condemnation of privileges of a global financial elite comes uncomfortably close to implicating government.
In previous times, such a situation would have been described as pre-revolutionary.
In today’s world, the consequences may seem more benign, but they are no less worrisome: a loss of solidarity, a return to nationalist insularity, and greater scope for political extremism.
Europe’s image has suffered accordingly, notably from the perspective of Asia’s booming economies.
Whereas China, India, and others have enjoyed continuing economic growth and investment in research and innovative capacity, Europe is perceived as being on the brink of decline, economically as well as politically.
Worse still, Europe also seems intent on ignoring its persistent strengths.
Those strengths lie in Europe’s science base, part of the cultural heritage that shapes European identity.
In terms of numbers – whether of scientific publications, researchers, or overall access to high-quality tertiary education – Europe compares favorably with its international partners (which are also competitors).
So why, critics ask, does Europe produce many novel scientific ideas and discoveries, but fail to transform them into marketable products?
In fact, that question is wedded to an obsolete linear model of innovation.
What is lacking in Europe is public and official awareness of where the real potential of European science lies.
Scientific curiosity, given sufficient space and autonomy, remains the most powerful driving force behind the completely unforeseeable transformations in how our societies develop.
In order to understand what science can do for Europe, it is important to clarify what science – that is, curiosity-driven frontier research – cannot do for Europe: deliver results that can immediately be commercialized.
Frontier research, like innovation, is an inherently uncertain process.
One does not know what one will find when working at the cutting edge and attempting to push into unknown territory.
Any short-term economic benefits are welcome byproducts, not the main “deliverables” that can be planned.
Nor will science create much-needed jobs, except for those who work in research organizations and universities.
Instead, cutting-edge research pioneers new ways of working (and models of future workplaces), which require novel skills and knowledge that will diffuse widely into society and transform production and services.
For example, it could lead to more environmentally friendly and resource-efficient uses of natural resources, or to investment in services that are more responsive to human needs and better attuned to human interaction.
Science is the only civic institution with a built-in long-term time horizon –&nbsp;a feature that builds confidence in a fragile future.
Modern science began in Europe 300 years ago with relatively few people – perhaps no more than a thousand when the putative scientific revolution was in full swing.
They began to engage in the systematic inquiry of how the natural world (and to a lesser extent, the social world) functioned.
They obtained new knowledge of how to manipulate and intervene in natural processes.
The experimental practices that they invented spread beyond the laboratories.
Later, they began to underpin and merge with progress in the crafts to drive forward the Industrial Revolution.
The idea that we can only know what we can make gained wide acceptance.
New tools provide new means of investigation, enabling researchers to speed up computation, for example, and hence increase the production of new knowledge.
Science and technology mutually reinforce each other, and both percolate through the social fabric.
This was the case in 1700, and it remains true today.
Let us now look forward towards the future.
According to health statistician Hans Rosling, our planet will probably be home to at least nine billion people by 2050.
Six billion will live in Asia, one billion in Africa, 1.5 billion in the Americas, and 500 million in Europe.
By ensuring that the pursuit of new knowledge remains a high priority, Europe can safeguard the scientific revolution and retain a leading edge globally, despite having fewer people than other regions.
Europe’s scientific institutions are already evolving and adapting to new global challenges.
People working within science and people working with science – ordinary citizens – will assure that the unending quest for human betterment continues to be an important part of European identity.
Science alone will not save Europe.
Rather, a Europe that knows how to put its science to work will not need to be saved.
Can Science Save the World?
CAMBRIDGE – For most people, there has never been a better time to be alive than now.
The innovations that drive economic advances – information technology, biotech, and nanotech – can boost living standards in both the developing and the developed world.
We are becoming embedded in a cyberspace that can link anyone, anywhere, to all the world’s information and culture – and to every other person on the planet.
Twenty-first century technologies will offer environmentally benign lifestyles and the resources to ease the plight and enhance the life chances of the world’s two billion poorest people.
Moreover, the greatest threat of the 1960’s and 1970’s – nuclear annihilation – has diminished.
This threat could recur, however, if there is a renewed standoff between new superpowers.
And there are other risks stemming from humanity’s greater collective impact on the planet, and from the growing empowerment of individuals.
Soon after World War II, physicists at the University of Chicago started a journal called the Bulletin of Atomic Scientists to promote arms control.
The logo on the Bulletin’s cover is a clock, the proximity of whose hands to midnight indicates the editors’ judgment of the precariousness of the world situation.
Every few years, the minute hand shifted, either forwards or backwards.
It came closest to midnight in 1962 during the Cuban Missile Crisis.
When the Cold War ended, the Bulletin’s clock was put back to 17 minutes to midnight.
But the clock has been creeping forward again.
We are confronted by proliferation of nuclear weapons (by, say, North Korea and Iran).
Al-Qaeda-style terrorists might willingly detonate a nuclear weapon in a city center, killing tens of thousands.
Even if the nuclear threat is contained, the twenty-first century could confront us with grave new global perils.
Climate change looms as this century’s primary long-term environmental challenge.
Human actions – burning fossil fuels – have already raised the carbon dioxide concentration higher than it has ever been in the last 500,000 years, and it is rising by about 0.5 % a year.
More disturbingly, coal, oil, and gas are projected to supply most of the world’s growing energy needs for decades to come.
If that continues, the concentration of CO2 will rise to twice the pre-industrial level by 2050, and three times that level later in the century.
The world spends nearly $7 trillion a year on energy and its infrastructure; yet our current research and development efforts are not up to meeting the challenge of climate change.
There is no single solution, but some measures, like better insulation of buildings, would save rather than cost money.
Efforts to economize on energy, storing it, and generating it by “clean” or low-carbon methods deserve priority and the sort of commitment from governments that were accorded to the Manhattan Project (which created the atomic bomb) or the Apollo moon landing.
The top priority should be a coordinated effort by Europe, the United States, and the other G-8+5 countries to build demonstration plants to develop carbon capture and storage (CCS) technology.
This is crucial, because whatever technical advances there may be in solar and other renewable energy sources, we will depend on coal and oil for the next 40 years.
Yet unless the rising curve of annual emissions can be reversed, the CO2 concentration will irrevocably reach a truly threatening level.
Mankind must also confront other global “threats without enemies” that are separate from (though linked with) climate change.
Loss of biological diversity is one of the most severe such threats.
The extinction rate is 1,000 times higher than normal, and is increasing.
Biodiversity is a crucial component of human well-being and economic growth.
We are clearly harmed if fish stocks dwindle to extinction.
Less evidently, there are plants in the rain forest whose gene pool might be useful to us.
The pressures on our planet depend, of course, on our lifestyle.
The world could not sustain its 6.5 billion people if they all lived like present-day Americans.
But it could if even prosperous people adopted a vegetarian diet, traveled little, and interacted virtually.
New technology will determine our lifestyle, and the demands that we make on energy and environmental resources.
Nevertheless, our problems are aggravated by rapid growth in the human population, which is projected to reach eight or even nine billion by 2050.
If the increase continues beyond 2050, one cannot help but be gloomy about most people’s prospects.
There are now, however, more than 60 countries where the fertility rate is below replacement level.
If this were true of all countries, the global population would start to decline after 2050 – a development that would surely be benign.
All of today’s developments – cyber, bio, or nano – will create new risks of abuse.
The American National Academy of Sciences has warned that, “Just a few individuals with specialized skills…could inexpensively and easily produce a panoply of lethal biological weapons.…The deciphering of the human genome sequence and the complete elucidation of numerous pathogen genomes…allow science to be misused to create new agents of mass destruction.”
Not even an organized network would be required; just a fanatic with the mindset of those who now design computer viruses.
The global village will have its village idiots.
In our increasingly interconnected world, there are new risks whose consequences could be widespread – and perhaps global.
Even a tiny probability of global catastrophe is unacceptable.
If we apply to catastrophic risks the same prudent analysis that leads us to buy insurance – multiplying probability by consequences – we would surely prioritize measures to reduce this kind of extreme risk.
The decisions that we will make both individually and collectively in the foreseeable future will determine whether twenty-first century science yields benign or devastating outcomes.
Can Terrorism Be Cured?
Terrorism is likely to define the year 2006 as much as it has ever year since 2001.
Years from now, historians will likely label the opening years of the twenty-first century the “Age of Terrorism.”
As with any new era, we do not yet fully understand what is happening and why.
While most of the world recognizes the problem, there are very different views on its causes and cures.
This much we know: terrorism is fueled by anger and frustration.
Radicals use the inability to attain political objectives peacefully to inspire fanatical action and to justify forms of violence normally considered unacceptable.
Beyond this basic point, however, there is less agreement on why frustration and anger lead to terrorism in some cases but not in others.
Moreover, there are two broad schools of thought as to the appropriate response when they do fuel extremist violence.
One school believes that modern terrorism cannot be eradicated, or that the costs of doing so are unacceptably high.
For this group, the only logical policy is to “ride out the storm” by ending policies which increase anger and frustration, and improving intelligence and defenses.
The second school of thought contends that terrorism can be eradicated by addressing its root causes.
Ironically, its adherents include both George W. Bush and Osama bin Laden.
For bin Laden and those who share his ideas, anger and frustration in the Islamic world stem from outside repression and exploitation of Muslims.
If the repression ends, so, too, will terrorism.
Until then, all means are legitimate when fighting a powerful and wicked enemy.
Terrorism, for bin Laden and his allies, is the only method available to strike at the West effectively.
“It is permissible,” according to bin Laden’s ally in Iraq, Abu Musab Zarqawi, “to spill infidel blood.”
Bush, in contrast, believes that terrorism is rooted in the absence of political and economic opportunity.
Rather than grappling with this, radicals like bin Laden blame outsiders, particularly the United States and Europe.
But the ultimate solution, according to Bush, is the creation of fair and open political and economic systems that can eliminate anger and frustration through peaceful means.
Extremists might still exist, but they would be marginalized, finding few recruits or supporters.
Unfortunately, every approach has shortcomings.
The belief that terrorism cannot be eradicated assumes that the ability to tolerate terrorist attacks – to “ride out the storm” – is greater than the willingness of terrorists to persist, or even escalate the attacks.
By taking an essentially passive position, this approach might merely prolong the Age of Terrorism needlessly.
Moreover, appeasement is based on the dangerous assumption that the extremists’ objectives are limited – that once they attain their stated goals by using violence, they will become responsible members of the world community.
Bin Laden’s position – that terrorism will end when the Islamic world expels outside influence – is ethically and analytically flawed.
On the one hand, it would condemn hundreds of millions to live in repressive Iranian- or Taliban-style theocracies.
On the other hand, the idea that poverty and repression in the Islamic world are engineered from outside simply does not stand up to scrutiny.
Finally, the belief that democracy and economic reform will undercut terrorism is based on a series of assumptions that may or may not prove accurate.
For instance, it assumes that terrorists and their supporters do not understand their own anger.
But extremists say explicitly that their anger is caused by the injustice of the global system and the repressive policies of powerful states.
Closed political systems and stagnant economies in the Muslim world, they contend, are symptoms, not causes.
The Bush position also assumes that fundamental political and economic change is feasible and affordable – that open political and economic systems can be sustained with only modest effort – because the desire for freedom and prosperity is universal.
While true, it is not clear that a willingness to tolerate the freedom of others, which democracy requires, is equally widespread.
In some societies, democracy is simply a way for the majority to repress the minority.
In others, stability or justice is more important than political freedom.
Finally, this perspective assumes that democracies will be willing or able to control radicalism and crack down on extremists.
But history suggests that new, fragile democracies are more likely to attempt to placate radicals than to eliminate them, and that terrorists can exploit democratic governments’ respect for civil rights and the rule of law.
The horrible truth is that failure to eradicate the root causes of terrorism is almost certain to extend the Age of Terrorism, it is not clear that they really can be eradicated.
To appease the extremists might be easy but may not work.
To allow them to win would be to accept the supremacy of evil.
To promote democracy and open government might be the ultimate solution, but it stands on a shaky conceptual foundation of untested assumptions about the nature of the world and diverse cultures.
Unfortunately, the world is at a point where it can see the danger from terrorism but not the cure.
Worse still, a cure may not exist.
Can the Elephant Dance with the Dragon?
TRIVANDRUM, INDIA – It is fashionable these days, particularly in the West, to speak of India and China in the same breath.
These are the two big countries said to be taking over the world, the new contenders for global eminence after centuries of Western domination, the Oriental answer to generations of Occidental economic success.
Indeed, two new books explicitly twin the two countries: Robyn Meredith’s The Elephant and the Dragon: The Rise of India and China and What It Means for All of Us and Harvard business professor Tarun Khanna’s Billions of Entrepreneurs: How China and India are Reshaping their Futures – and Yours .
Both books view the recent rise of India and China as shifting the world’s economic and political tectonic plates.
Some even speak of “Chindia,” as if the two were joined at the hip in the international imagination.
Count me among the skeptics.
It is not just that China and India have little in common, save for the fact that they occupy a rather vast landmass called “Asia.”
It is also that they are already at very different stages of development.
China started its liberalization a decade and a half before India, hit double-digit growth when India was still hovering around 5%, and, with compound growth, has put itself in a totally different economic league from India, continuing to grow faster from a larger base.
Moreover, the two countries’ systems are totally dissimilar.
If China wants to build a new six-lane expressway, it can bulldoze its way through any village in its path.
In India, if you want to widen a two-lane road, you could be tied up in court for a dozen years over compensation entitlements.
When China built the Three Gorges dam, it created a 660-kilometer long reservoir that necessitated displacing two million people – all accomplished in 15 years without a fuss in the interest of generating electricity.
When India began the Narmada Dam project, aiming to bring irrigation, drinking water, and power to millions, it spent 34 years (so far) fighting environmental groups, human rights activists, and advocates for the displaced all the way to the Supreme Court, while still being thwarted in the streets by protesters.
That is how it should be: India is a fractious democracy, China is not.
But, as an Indian, I do not wish to pretend that we can compete in the global growth stakes with China.
But if we can’t compete, can we co-operate?
The two civilizations had centuries of contact in ancient times.
Thanks mainly to the export of Buddhism from India to China, Chinese came to Indian universities, visited Indian courts, and wrote memorable accounts of their voyages.
Nalanda received hundreds of Chinese students in its time, and a few Indians went the other way; a Buddhist monk from India built the famous Lingyin Si temple in Huangzhou in the fifth century.
Southwest India’s Kerala coastline is dotted with Chinese-style fishing nets, and the favorite cooking pot of the Malayali housewife is the wok, locally called the cheen-chetti (Chinese vessel).
But it has been a while since Indians and Chinese had much to do with each other.
The heady days of Hindi-Chini bhai-bhai (“Indians and Chinese are brothers”), the slogan coined by Nehru’s India to welcome Chou En-Lai in 1955, gave way to the humiliation of the 1962 border war, after which it was “Hindi-Chini bye-bye” for decades.
The border dispute remains unresolved, with periodic incursions by Chinese troops onto Indian soil and new irritants such as the anti-Chinese protests by Tibetan exiles who have been given asylum in India.
To speak of a bilateral “trust deficit” might be an understatement.
And yet, there is some good news.
Trade has doubled in each of the last three years, to an estimated $40 billion this year;
China has now overtaken the United States as India’s largest single trading partner.
Tourism, particularly by Indian pilgrims to the major Hindu holy sites in Tibet, Mount Kailash and Lake Mansarovar, is thriving.
Indian information technology firms have opened offices in Shanghai and Hangzhou, and Infosys recruited nine Chinese this year for its headquarters in Bangalore.
There are dozens of Chinese engineers working in (and learning from) Indian computer firms and engineering companies, while Indian software engineers support the Chinese telecoms equipment manufacturer Huawei.
By and large, India is strong in areas in which China needs to improve, notably software, while China excels at hardware and manufacturing, which India sorely lacks.
So India’s Mahindra and Mahindra company manufactures tractors in Nanchang for export to the US.
The key operating components of Apple’s iPod were invented by the Hyderabad company PortalPlayer, while the iPod itself are manufactured in China.
Philips employs nearly 3,000 Indians at its “Innovation Campus” in Bangalore to write more than 20% of the company’s global software, which Philips’ 50,000-strong workforce in China then turns into brand-name goods.
In other words, the elephant is already dancing with the dragon.
The only question is whether political tensions could bring the music screeching to a halt.
There is no doubt that, whatever India’s legitimate differences with China’s Communist regime, cooperation is in the best interests of both peoples.
After all, one plus one doesn’t only equal two; put together properly, it can add up to 11.
Can the Euro be Saved?
NEW YORK – The Greek financial crisis has put the very survival of the euro at stake.&nbsp;
At the euro’s creation, many worried about its long-run viability.
When everything went well, these worries were forgotten.
But the question of how adjustments would be made if part of the eurozone were hit by a strong adverse shock lingered.
Fixing the exchange rate and delegating monetary policy to the European Central Bank eliminated two primary means by which national governments stimulate their economies to avoid recession.
What could replace them?
The Nobel laureate Robert Mundell laid out the conditions under which a single currency could work.
Europe didn’t meet those conditions at the time; it still doesn’t.
The removal of legal barriers to the movement of workers created a single labor market, but linguistic and cultural differences make American-style labor mobility unachievable.
Moreover, Europe has no way of helping those countries facing severe problems. Consider Spain, which has an unemployment rate of 20% – and more than 40% among young people.
It had a fiscal surplus before the crisis; after the crisis, its deficit increased to more than 11% of GDP.
But, under European Union rules, Spain must now cut its spending, which will likely exacerbate unemployment.
As its economy slows, the improvement in its fiscal position may be minimal.
Some hoped that the Greek tragedy would convince policymakers that the euro cannot succeed without greater cooperation (including fiscal assistance).
But Germany (and its Constitutional Court), partly following popular opinion, has opposed giving Greece the help that it needs.
To many, both in and outside of Greece, this stance was peculiar: billions had been spent saving big banks, but evidently saving a country of eleven million people was taboo!
It was not even clear that the help Greece needed should be labeled a bailout: while the funds given to financial institutions like AIG were unlikely to be recouped, a loan to Greece at a reasonable interest rate would likely be repaid.
A series of half-offers and vague promises, intended to calm the market, failed.
Just as the United States had cobbled together assistance for Mexico 15 years ago by combining help from the International Monetary Fund and the G-7, so, too, the EU put together an assistance program with the IMF.
The question was, what conditions would be imposed on Greece?
How big would be the adverse impact?
For the EU’s smaller countries, the lesson is clear: if they do not reduce their budget deficits, there is a high risk of a speculative attack, with little hope for adequate assistance from their neighbors, at least not without painful and counterproductive pro-cyclical budgetary restraints.
As European countries take these measures, their economies are likely to weaken – with unhappy consequences for the global recovery.
It may be useful to see the euro’s problems from a global perspective.
The US has complained about China’s current-account (trade) surpluses; but, as a percentage of GDP, Germany’s surplus is even greater.
Assume that the euro was set so that trade in the eurozone as a whole was roughly in balance.
In that case, Germany’s surplus means that the rest of Europe is in deficit.
And the fact that these countries are importing more than they are exporting contributes to their weak economies.
The US has been complaining about China’s refusal to allow its exchange rate to appreciate relative to the dollar.
But the euro system means that Germany’s exchange rate cannot increase relative to other eurozone members.
If the exchange rate did increase, Germany would find it more difficult to export, and its economic model, based on strong exports, would face a challenge.
At the same time, the rest of Europe would export more, GDP would increase, and unemployment would decrease.
Germany (like China) views its high savings and export prowess as virtues, not vices.
But John Maynard Keynes pointed out that surpluses lead to weak global aggregate demand – countries running surpluses exert a “negative externality” on their trading partners.
Indeed, Keynes believed that it was surplus countries, far more than deficit countries, that posed a threat to global prosperity; he went so far as to recommend a tax on surplus countries.
The social and economic consequences of the current arrangements should be unacceptable.
Those countries whose deficits have soared as a result of the global recession should not be forced into a death spiral – as Argentina was a decade ago.
One proposed solution is for these countries to engineer the equivalent of a devaluation – a uniform decrease in wages.
This, I believe, is unachievable, and its distributive consequences are unacceptable.
The social tensions would be enormous.
It is a fantasy.
There is a second solution: the exit of Germany from the eurozone or the division of the eurozone into two sub-regions.
The euro was an interesting experiment, but, like the almost-forgotten exchange-rate mechanism (ERM) that preceded it and fell apart when speculators attacked the British pound in 1992, it lacks the institutional support required to make it work.
There is a third solution, which Europe may come to realize is the most promising for all: implement the institutional reforms, including the necessary fiscal framework, that should have been made when the euro was launched.
It is not too late for Europe to implement these reforms and thus live up to the ideals, based on solidarity, that underlay the euro’s creation.
But if Europe cannot do so, then perhaps it is better to admit failure and move on than to extract a high price in unemployment and human suffering in the name of a flawed economic model.
Can the Euro Zone Survive Economic Recovery?
CAMBRIDGE – The economic recovery that the euro zone anticipates in 2010 could bring with it new tensions.
Indeed, in the extreme, some countries could find themselves considering whether to leave the single currency altogether.
Although the euro simplifies trade, it creates significant problems for monetary policy.
Even before it was born, some economists (such as myself) asked whether a single currency would be desirable for such a heterogeneous group of countries.
A single currency means a single monetary policy and a single interest rate, even if economic conditions – particularly cyclical conditions – differ substantially among the member countries of the European Economic and Monetary Union (EMU).
A single currency also means a common exchange rate relative to other currencies, which, for any country within the euro zone, precludes a natural market response to a chronic trade deficit.
If that country had its own currency, the exchange rate would decline, benefiting exports and impeding imports.
Without its own currency, the only cure for a chronic trade deficit is real wage reductions or relative productivity increases.
The European Central Bank is now pursuing a very easy monetary policy.
But, as the overall economy of the euro zone improves, the ECB will start to reduce liquidity and raise the short-term interest rate, which will be more appropriate for some countries than for others.
Those countries whose economies remain relatively weak oppose tighter monetary policy.
The contrast between conditions in Germany and Spain illustrates the problem.
The unemployment rate is now about 8% in Germany, but more than twice that – around 19% – in Spain.
And Germany recorded a trade surplus of $175 billion in the 12 months through August, whereas Spain has run a trade deficit of $84 billion in the past 12 months.
If Spain and Germany still had the peseta and the D-mark as their respective currencies, the differences in trade balances would cause the mark to appreciate and the peseta to decline.
The weaker peseta would stimulate demand for Spanish exports and reduce Spain’s imports, which would boost domestic demand and reduce unemployment.
Since the interest rate set by the ECB is now less than 1%, there is little difference between its current monetary policy and what the Bank of Spain would do if it could set its own interest rate. But when the euro zone starts to recover, the ECB might choose to raise the interest rate before a higher rate would be appropriate for Spain, which could exacerbate Spanish unemployment.
Spain and other high-unemployment euro-zone countries might oppose this policy but face monetary tightening nonetheless, because the ECB deems the overall state of the euro zone to warrant higher interest rates.
Spain is not the only country that would have an incentive to leave the EMU.
Greece, Ireland, Portugal, and even Italy are often cited as countries that might benefit from being able to pursue an independent monetary policy and allow their currencies to adjust to more competitive levels.
The widening spreads between the interest rate on German eurobonds and some of the other countries’ euro bonds show that global bond markets take this risk seriously.
For example, while the current yield on 10-year German government eurobonds is 3.33%, the corresponding yield on Greek eurobonds is 4.7% and 4.77% for Ireland’s eurobonds.
These divergent yields reflect the market’s perception of the risk of default or of effective devaluation associated with leaving the euro.
Leaving the EMU would, of course, involve both technical and political issues.
A government that wants to replace the euro with, say, the “new franc” (which is not to suggest that France or Belgium would be likely to abandon the euro) would have to reverse the process by which its currency was originally swapped for euros.
But, having learned to do that once would make it easier to do it again in the opposite direction.
How would the exchange rate be set for the new currency?
The obvious choice would be to start by exchanging one “new franc” for one euro and then leave it to the global currency markets to re-price the new currency.
A country with a large initial trade deficit would expect to see its currency decline relative to the euro, say, to 1.2 “new francs” per euro, which would make its products 20% cheaper than products in other euro countries and would make imports more expensive.
If that causes a rise in the departing country’s price level, the nominal exchange rate would have to decline further to achieve the same real adjustment.
Because individuals from the departing country could continue to hold euros, leaving the EMU would not cause a loss of existing wealth.
But such a country would have to worry about more substantial economic consequences.
Global capital markets would recognize that a country with high unemployment might choose to pursue an inflationary policy or a policy or exchange-rate depreciation. That could lead international investors to withhold funds from a departing country and raise substantially the interest rate on its national debt.
There would also be political problems.
Would a country that leaves the EMU be given a diminished role in EcoFin, the European Economic and Financial Affairs Council?
Would its voice be diminished in European discussions about foreign and defense policy?
In the extreme, would it be forced out of the European Union altogether, thereby losing its trade advantages?
These economic and political risks may be enough to deter current EMU members from deciding to leave.
But remaining in the euro zone could impose significant costs on some of them.
At some point, the inability to deal with domestic economic problems within the EMU framework may lead one or more countries to conclude that those costs are simply too high to bear.
Can the G-8 Survive St. Petersburg?
Russia’s gradual inclusion in the G-8 was supposed to nurture the growth of democracy, foster creation of a free-market economy, and encourage constructive behavior in international relations.
Instead, Russia’s leaders have become more interested in consolidating state power at home and abroad than in promoting democracy, protecting human rights, and cooperating with the West.
The collapse of the USSR, President Vladimir Putin has proclaimed, was the greatest geopolitical catastrophe of the twentieth century.
Obviously, the USSR is not about to be resurrected.
But Putin has moved to reassert state control over strategic sectors of the economy, including oil and gas, communications, pipelines, electricity and banking, as well as limiting political rights, harassing independent groups, and strengthening control over the media.
Moreover, Russia is coming to the fore, firmly and confidently, to regain its Great Power status.
Putin continues to pursue a brutal military campaign in Chechnya while intervening politically in Soviet successor states like Ukraine, Georgia, Moldova, and Belarus and rejecting Western tactics aimed at curbing Iran’s and North Korea’s nuclear ambitions.
Putin’s position is reinforced by strong public support, as well as by the dramatically weakened position of major Western leaders.
George W. Bush and Tony Blair have lost the popularity they enjoyed before the Iraq war, and Blair, together with French President Jacques Chirac, will soon leave the political scene.
Angela Merkel in Germany and Romano Prodi in Italy are ruling with weak coalition governments.
In these circumstances, given Russia’s continuing failure to meet the G-8’s political and economic standards, the upcoming summit in St. Petersburg could produce a backlash, eroding the legitimacy, credibility, and relevance of the world’s most developed countries.
Indeed, Russia and the world may well see in the summit the G-8’s silent approval of Putin’s domestic and foreign policies.
Clearly, there are many who would endorse former Soviet President Mikhail Gorbachev’s recent call on Western countries to stop pressuring Putin over human rights.
According to Gorbachev, Western pressure merely strengthens Putin, “because in essence his position is very close to the aspirations of the people.” Bush has echoed that sentiment, telling CNN ahead of his trip to the summit that admonishing the Russian president in public on matters such as democracy and human rights would be counterproductive.
But can the West afford to remain aloof?
Russia started off its year as G-8 president with a crisis over gas supplies to Ukraine, and even threatened Europe with rerouting its gas exports to Asia.
Putin has placed energy security at the top of the summit’s agenda, but that does not mask Russia’s ambition to dominate European markets by controlling the pipelines that carry its oil and gas, the refineries that process it, and the retail outlets that sell it.
The dilemma facing the West is that it needs Russia’s backing not only on policy toward Iran and North Korea, but also in Afghanistan, Iraq, and the Middle East as a whole.
Unfortunately, Bush’s strategy of democracy promotion has mainly contributed to unease around the world and alienation from Western goals.
Especially in view of the Iraq experience, Putin has won substantial public sympathy by arguing that opposition to Western democracy promotion is resistance not to democracy itself, but to Western intervention against Russian “sovereign democracy.”
Clearly, an ostracized Russia is a dangerous Russia.
But to hold a G-8 meeting in St. Petersburg in an atmosphere of “business as usual” may be even more dangerous.
Bush and European leaders issued a statement after their recent meeting in Austria saying that Russia must honor “democratic freedoms, respect for human rights, civil society and transparency, and a responsible approach to energy security.”
But words alone are not enough.
Nor should it be the end of the story.
The G-8’s seven democratic countries should use the St. Petersburg summit as an opportunity to reaffirm their will to develop close and friendly relations with Russia.
But if their inclusion of Russia is to serve a useful purpose, they must also reaffirm the values that unite them.
Can the IMF Avert a Global Meltdown?
When world financial leaders meet in Singapore this month for the joint World Bank/International Monetary Fund meetings, they must confront one singularly important question.
Is there any way to coax the IMF’s largest members, especially the United States and China, to help diffuse the risks posed by the world’s massive trade imbalances?
This year, the US will borrow roughly $800 billion to finance its trade deficit.
Incredibly, the US is now soaking up roughly two-thirds of all global net saving, a situation without historical precedent.
While this borrowing binge might end smoothly, as US Federal Reserve Chairman Ben Bernanke has speculated, most world financial leaders are rightly worried about a more precipitous realignment that would likely set off a massive dollar depreciation and possibly much worse.
Indeed, if policymakers continue to sit on their hands, it is not hard to imagine a sharp global slowdown or even a devastating financial crisis.
Although Bernanke is right to view a soft landing as the most likely outcome, common sense would suggest agreing on some prophylactic measures, even if this means that the US, China, and other large contributors to the global imbalances have to swallow some bitter medicine.
Unfortunately, getting politicians in the big countries to focus on anything but their own domestic imperatives is far from easy.
Though the comparison is unfair, it is hard not to recall the old quip about the IMF’s relative, the United Nations: “When there is a dispute between two small nations, the UN steps in and the dispute disappears.
When there is a dispute between a small nation and a large nation, the UN steps in and the small nation disappears.
When there is a dispute between two large nations, the UN disappears.”
Fortunately, the IMF is not yet in hiding, even if some big players really don’t like what it has to say.
The IMF’s head, the Spaniard Rodrigo Rato, rightly insists that China, the US, Japan, Europe, and the major oil exporters (now the world’s biggest source of new capital) all take concrete steps towards alleviating the risk of a crisis.
Though the exact details remain to be decided, such steps might include more exchange-rate flexibility in China, and perhaps a promise from the US to show greater commitment to fiscal restraint.
Oil exporters could, in turn, promise to increase domestic consumption expenditure, which would boost imports.
Likewise, post-deflation Japan could promise never again to resort to massive intervention to stop its currency from appreciating.
Europe, for its part, could agree not to shoot its recovery in the foot with ill-timed new taxes such as those that Germany is currently contemplating.
Will the IMF be successful in brokering a deal?
The recent catastrophic collapse of global trade talks is not an encouraging harbinger.
Europe, Japan, and (to a much lesser extent) the US, were simply unwilling to face down their small but influential farm lobbies.
The tragic result is that some of the world’s poorest countries cannot export their agricultural goods, one of the few areas where they might realistically compete with the likes of China and India.
Fortunately for Rato, addressing the global imbalances can be a win-win situation.
The same proposed policies for closing global trade imbalances also, by and large, help address each country’s domestic economic concerns.
For example, China needs a stronger exchange rate to help curb manic investment in its export sector, and thereby reduce the odds of a 1990’s style collapse.
As for the US, a sharp hike in energy taxes on gasoline and other fossil fuels would not only help improve the government’s balance sheet, but it would also be a way to start addressing global warming.
What better way for new US Treasury Secretary Hank Paulson, a card-carrying environmentalist, to make a dramatic entrance onto the world policy stage?
Similarly, the technocrats at the Bank of Japan surely realize that they could manage the economy far more effectively if they swore off anachronistic exchange-rate intervention techniques and switched whole-heartedly to modern interest-rate targeting rules such as those used by the US Federal Reserve and the European Central Bank.
With Europe in a cyclical upswing, tax revenues should start rising even without higher tax rates, so why risk strangling the continent’s nascent recovery in the cradle?
Saudi Arabia, with its burgeoning oil revenues, could use a big deal to reinforce the country’s image as a major anchor of global financial stability.
If today’s epic US borrowing does end in tears, and if world leaders fail to help the IMF get the job done, history will not treat them kindly.
Instead, they will be blamed for not seeing an impending catastrophe that was staring them in the face.
Let’s hope that on this occasion in international diplomacy, the only thing that disappears are the massive global trade imbalances, and not the leaders and institutions that are supposed to deal with them.
Can the Millennium Development Goals be Saved?
NEW DELHI – The target date for fulfilling the Millennium Development Goals is 2015, and the world knows it is not on course to meet those goals.
So world leaders are set to gather at the United Nations to undertake a comprehensive review, with the aim of agreeing on a roadmap and a plan of action to get to the MDG finishing line on schedule.
I was at the UN in September 2000, when world leaders met at the Millennium Summit and pledged to work together to free humanity from the “abject and dehumanizing conditions of extreme poverty,” and to “make the right to development a reality for everyone.”
These pledges include commitments to improve access to education, health care, and clean water for the world’s poorest people; abolish slums; reverse environmental degradation; conquer gender inequality; and cure HIV/AIDS.
It’s an ambitious list, but its capstone is Goal 8, which calls for a “global partnership for development.”
This includes four specific targets: “an open, rule-based, predictable, non-discriminatory trading and financial system”; special attention to the needs of least-developed countries; help for landlocked developing countries and small island states; and national and international measures to deal with developing countries’ debt problems.
Basically, it all boiled down to a grand bargain: while developing countries would obviously have primary responsibility for achieving the MDGs, developed countries would be obliged to finance and support their efforts for development.
This hasn’t really happened.
At the G-8 summit at Gleneagles and the UN World Summit in 2005, donors committed to increasing their aid by $50 billion at 2004 prices, and to double their aid to Africa from 2004 levels by 2010.
But official development assistance (ODA) last year amounted to $119.6 billion, or just 0.31% of the developed countries’ GDP – not even half of the UN’s target of 0.7% of GDP.
In current US dollars, ODA actually fell by more than 2% in 2008.
The UN admits that progress has been uneven, and that many of the MDGs are likely to be missed in most regions.
An estimated 1.4 billion people were still living in extreme poverty in 2005, and the number is likely to be higher today, owing to the global economic crisis.
The number of undernourished people has continued to grow, while progress in reducing the prevalence of hunger stalled – or even reversed – in some regions between 2000-2002 and 2005-2007.
About one in four children under the age of five are underweight, mainly due to lack of quality food, inadequate water, sanitation, and health services, and poor care and feeding practices.
Gender equality and women’s empowerment, which are essential to overcoming poverty and disease, have made at best fitful progress, with insufficient improvement in girls’ schooling opportunities or in women’s access to political authority.
Progress on trade has been similarly disappointing.
Developed country tariffs on imports of agricultural products, textiles, and clothing – the principal exports of most developing countries – remained between 5% and 8% in 2008, just 2-3 percentage points lower than in 1998.
The time has come to reinforce Goal 8 in two fundamental ways.
Developed countries must make commitments to increase both the quantity and effectiveness of aid to developing countries.
Aid must help developing countries improve the welfare of their poorest populations according to their own development priorities.
But donors all too often feel obliged to make their contributions “visible” to their constituencies and stakeholders, rather than prioritizing local perspectives and participation.
There are other problems with development aid.
Reporting requirements are onerous and often impose huge administrative burdens on developing countries, which must devote the scarce skills of educated, English-speaking personnel to writing reports for donors rather than running programs.
And donor agencies often recruit the best local talent themselves, usually at salaries that distort the labor market.
In some countries, doctors find it more remunerative to work as translators for foreign-aid agencies than to treat poor patients.
Meanwhile, donors’ sheer clout dilutes the accountability of developing countries’ officials and elected representatives to their own people.
We must change the way the world goes about the business of providing development aid.
We need a genuine partnership, in which developing countries take the lead, determining what they most acutely need and how best to use it.
Weak capacity to absorb aid on the part of recipient countries is no excuse for donor-driven and donor-directed assistance.
The aim should be to help create that capacity.
Indeed, building human-resource capacity is itself a useful way of fulfilling Goal 8.
Doing so would serve donors’ interest as well.
Aligning their assistance with national development strategies and structures, or helping countries devise such strategies and structures, ensures that their aid is usefully spent and guarantees the sustainability of their efforts.
Donors should support an education policy rather than build a photogenic school; aid a health campaign rather than construct a glittering clinic; or do both – but as part of a policy or a campaign, not as stand-alone projects.
Trade is the other key area.
In contrast to aid, greater access to the developed world’s markets creates incentives and fosters institutions in the developing world that are self-sustaining, collectively policed, and more consequential for human welfare.
Many countries are prevented from trading their way out of poverty by the high tariff barriers, domestic subsidies, and other protections enjoyed by their rich-country competitors.
The European Union’s agricultural subsidies, for example, are high enough to permit every cow in Europe to fly business class around the world.
What African farmer, despite his lower initial costs, can compete?
The onus is not on developed countries alone.
Developing countries, too, have made serious commitments to their own people, and the primary responsibility for fulfilling those commitments is theirs.
But Goal 8 assured them that they would not be alone in this effort.
Unless that changes, the next five years will be a path to failure.
Can the Stability Pact Be Reformed?
The European Commission recently proposed important changes to how the Stability and Growth Pact (SGP) is to be implemented.
Now the Commission and ECOFIN (the committee of euro area finance ministers) are reviewing the proposals, as well as others put forward by member states.
A decision is expected in the first half of 2005, but how the Pact will be revised remains uncertain.
The need for reform is self-evident: with structural factors accounting for 75-80% of aggregate budget deficits for the euro area in recent years, the Pact’s 3%-of-GDP ceiling for national budget deficits has been breached repeatedly since 2002.
Smaller member states, notably Finland and Ireland (as well as Spain) and the two non-euro area countries Denmark and Sweden, have stuck to the principle of fiscal balance or small – though diminishing – surpluses.
But the largest European Union members, including the United Kingdom, France, and Germany, have been unable or unwilling to play by the rules.
Indeed, France and Germany barely escaped financial sanctions in November 2003 for their violations of the Pact.
Although the European Court of Justice later declared that decision invalid, the impasse remains.
So either fiscal behavior or the Pact’s rules must change.
The European Commission’s recent proposals amount to a relaxation of its earlier hard-line stance, providing a catalogue of ways in which the fiscal rules can be made more flexible.
But it is difficult to see how this hodge-podge will “strengthen economic governance” or clarify the Pact’s implementation.
None of the proposals are mutually exclusive, but there are trade-offs.
If, for example, one extends the time period over which member states are required to conform to the rules, there is less need to modify the rules themselves.
If deficits are redefined to exclude certain expenditures, the 3% ceiling can be observed.
But removing some public expenditures from the deficit runs counter to sound execution of fiscal policy.
For example, Germany recently proposed that expenditures undertaken to meet European commitments – such as Rampamp;D spending to support the Lisbon agenda of enhanced productivity – be exempted.
The problem is that allowing public investment to be financed by borrowing would lead to continuing disputes between the Commission and individual member states, because it relies excessively on that blurred distinction.
Others seek to broaden the definition of “exceptional circumstances” to permit the deficit ceiling to be breached in any year with prolonged unsatisfactory GDP growth, not just -2%.
In particular, countries that break the Pact’s deficit ceiling because they overestimated their growth – and hence government revenue – want to be treated more leniently than those who deliberately violate the rules.
This may sound principled, but basing deficit monitoring on targets rather than outcomes merely strengthens an already powerful incentive for governments to rig their forecasts.
Yet an exception might be warranted where a violation of the deficit ceiling has led to fiscal tightening in line with advice from the Commission and endorsed by Ecofin.
Having violated the ceiling in 2002, Germany looked set to do so again in 2003 despite tightening its budget along Commission lines.
When it turned out that Germany’s starting position had been more unfavorable than initially thought and that revenues were again failing, Germany’s government objected to additional consolidation.
Where a country’s fiscal adjustments have been approved by its peers, there should be limits on how much more can be asked of it.
All of this may be beside the point, for it is the threat of financial sanctions under the Pact that inspired governments to seek to reform its rules.
But the Commission now proposes to put the emphasis entirely on peer pressure – naming and shaming offenders.
This may encourage national policy-makers who defend the SGP’s deficit ceiling to continue to do so, but peer pressure will lose some of its effectiveness when the ultimate threat of sanctions disappears.
In short, the Commission’s proposals and the follow-up suggestions put forward by some governments have forced open a Pandora’s Box.
Both the Commission and the euro area countries seem to be hoping that more rapid growth will ease – and ideally resolve – the dilemma that reform of the Pact has put before them.
TABLE 1
GENERAL GOVERNMENT FINANCIAL BALANCES
(% OF NOMINAL GDP)
2000-06
2000
2001
2002
2003
2004p
2005p
2006p
Austria
Belgium
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
-1.7
0.2
7.1
-1.4
1.3
-4.2
4.4
-0.7
6.0
2.2
-2.9
-0.9
0.1
0.6
5.2
-1.5
-2.8
-3.7
1.0
-2.7
6.4
-0.1
-4.4
-0.4
-0.4
0.1
4.3
-3.3
-3.7
-3.8
-0.2
-2.4
2.8
-1.9
-2.7
-0.1
-1.3
0.3
2.1
-4.1
-3.8
-4.6
0.2
-2.5
0.8
-3.2
-2.8
0.4
-1.5
-0.1
1.1
-3.7
-3.9
-5.3
0.0
-2.9
0.8
-3.2
-2.8
0.4
-2.3
-0.9
1.5
-3.2
-3.4
-3.7
-0.2
-3.1
-0.2
-2.4
-3.0
-0.2
-2.2
-1.1
1.8
-3.0
-2.6
-3.3
-0.5
-3.6
-0.5
-1.7
-3.8
-0.2
Euro area
0.1
-1.7
-2.4
-2.8
-2.8
-2.6
-2.4
Denmark
Sweden
United Kingdom
2.5
5.1
3.8
2.8
2.9
0.7
1.6
-0.3
-1.7
1.2
0.1
-3.5
1.2
0.1
-3.5
1.4
0.8
-3.3
1.5
1.2
-3.2
p Projected
Source: OECD Economic Outlook 76 database.
TABLE 2
GENERAL GOVERNMENT CYCLICALLY-ADJUSTED
FINANCIAL BALANCES
(% OF NOMINAL GDP)
2000
2001
2002
2003
2004p
2005p
2006p
Austria
Belgium
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Portugal
Spain
-2.7
-1.1
6.1
-1.9
2.0
-4.2
3.1
-2.5
4.4
-2.9
1.3
-0.1
0.1
5.4
-2.0
-3.4
-4.5
-0.1
-3.3
-1.9
-5.0
-0.3
-0.3
0.6
4.7
-3.2
-3.4
-4.2
-1.2
-2.6
-2.2
-2.4
0.2
-0.7
1.4
2.8
-3.4
-2.7
-5.2
-0.1
-2.2
-1.4
-1.4
0.8
-0.8
0.8
1.3
-3.2
-2.8
-5.8
-0.5
-2.6
-0.7
-1.4
0.7
-1.7
-0.1
1.0
-2.7
-2.5
-3.8
-0.9
-2.9
-0.1
-1.8
0.0
-1.8
-0.6
0.6
-2.7
-2.1
-3.1
-1.0
-3.6
0.2
-2.9
-0.2
Euro area
-1.8
-2.3
-2.3
2.0
-2.2
-2.0
-2.0
Denmark
Sweden
United Kingdom
1.5
3.6
1.0
1.8
2.7
0.3
1.6
-0.1
-1.7
2.4
0.9
-3.4
1.6
0.6
-3.4
1.6
0.3
-3.5
1.3
0.2
-3.4
p Projected
Source: OECD Economic Outlook 76 database.
Can US-Iran Relations Be Revived?
During World War II, Allied soldiers occupied Iran, using the country as a way station to transport supplies from the Persian Gulf to the Soviet Union.
This was Iran’s first exposure to Americans. “They arrived in our country with a certain innocence,” said the respected Iranian historian Kaveh Bayat, “and without any colonial pretenses.”
The Americans’ supply train would regularly pass through my father’s ancestral village, Arak, then a scenic oasis of green gardens and fruit orchards. “Whenever we heard the train coming,” my father once told me, “all the young boys in the village would run as fast as we could through the apple orchard to greet the passing Americans.
They would smile and wave and throw us whatever gifts they happened to have – playing cards, chewing gum, lifesaver candies….For us they were like heroes from another world.”
So much has changed since then.
Iran’s 1979 revolution did away with the pro-American, undemocratic regime of the Shah, bringing in its place the anti-American, undemocratic regime of the clerics.
Relations between the United States and Iran have been officially non-existent since a group of radical students stormed the US embassy in Teheran – 25 years ago this week – taking sixty six Americans hostage for 444 days.
Sixty years ago, Arak was a humble village known to US troops for its grapes; today Pentagon officials hone in on it as an industrial city that is integral to Iran’s worrisome nuclear program.
And yet few countries have a more paradoxical relationship than the US and Iran.
While the Iranian regime continues to be belligerently anti-American, the Iranian people are overtly pro-American.
While the governments in Teheran and Washington appear to be strategic archrivals, in the words of former Secretary of State Henry Kissinger, “there are few nations in the world with which the United States has less reason to quarrel or more compatible interests than Iran.”
Indeed, Iran has likely benefited more than any other country from US-led regime changes in Afghanistan and Iraq, as both the Taliban and Saddam Hussein were the country’s sworn enemies.
But neither side seized the opportunity to build on this common ground, and today US-Iran relations are as antagonistic as they have been in years.
For the US, Iran’s nuclear ambitions, opposition to Israel, and support for extremist groups have become increasingly intolerable in the context of the war on terror.
Iran’s long-standing opposition to relations with the US is a bit more complex.
To be sure, many of Iran’s ruling elites came of age politically during the anti-imperialist and anti-colonialist agitations of the 1960’s and 1970’s, and still cling to that worldview.
Although their revolutionary zeal may have waned over the years, they still tend to share the outlook of the late Ayatollah Khomeini, who likened the relationship between Iran and the US to that “between a sheep and a wolf.”
Ideological rigidity alone, however, does not explain Iran’s often-gratuitous anti-Americanism.
For Iran’s political and military elite, any increased liberalization that would likely result from an opening of ties with the US represents a threat to their interests.
From their perspective, Iran is now a closed party – their party – and the less who join in, the merrier.
With America bogged down in Iraq and oil prices hitting record highs, regime hardliners see little reason to compromise these days.
On the other hand, some influential Iranians – led by former president Hashemi Rafsanjani – recognize that relations with the US are inevitable, given Iran’s need to re-integrate into the international community and face its economic deficiencies.
Moreover, the Iranian people are overwhelmingly in favor of rapprochement.
As author Afshin Molavi wrote in his incisive travelogue Persian Pilgrimages , Iranian youth today are not revolutionary idealists, like those of three decades ago.
Instead, they have concrete demands, like jobs and political and social freedom.
They are desperate to enter the global community and rid themselves of a damaged international reputation.
Today’s Iranian intellectuals have undergone a similar maturation process, dismissing the “utopianist” and “nativist” political ideals of their predecessors.
Referring to Jalal Al-e Ahmad’s 1962 book Gharbzadegi (“West-toxication”), which became one of the manifestos of the 1979 revolution, one secular intellectual in Teheran remarked to me that, “Nobody reads Al-e Ahmad anymore.
On the contrary, we long for interaction with the West.
If it can bring us more economic opportunities, as well as social and political freedoms, let us be ‘West-toxified.’”
Still, despite popular demand in Iran, and common strategic interests, it could be years before America and Iran sit down and make amends.
After 25 years of living without each other, reconciliation will not come immediately.
When it does, there is good reason to believe that Iranians will greet their long lost friends with the same friendliness and exuberance that they did sixty years ago in Arak.
Can We Increase Gross National Happiness?
PRINCETON – The small Himalayan kingdom of Bhutan is known internationally for two things: high visa fees, which reduce the influx of tourists, and its policy of promoting “gross national happiness” instead of economic growth.
The two are related: more tourists might boost the economy, but they would damage Bhutan’s environment and culture, and so reduce happiness in the long run.
When I first heard of Bhutan’s goal of maximizing its people’s happiness, I wondered if it really meant anything in practice, or was just another political slogan.
Last month, when I was in the capital, Thimphu, to speak at a conference on “Economic Development and Happiness,” organized by Prime Minister Jigme Y. Thinley and co-hosted by Jeffrey Sachs, Director of The Earth Institute at Columbia University and Special Adviser to United Nations Secretary-General Ban Ki-moon, I learned that it is much more than a slogan.
Never before have I been at a conference that was taken so seriously by a national government.
I had expected Thinley to open the conference with a formal welcome, and then return to his office.
Instead, his address was a thoughtful review of the key issues involved in promoting happiness as a national policy.
He then stayed at the conference for the entire two and a half days, and made pertinent contributions to our discussions.
At most sessions, several cabinet ministers were also present.
Since ancient times, happiness has been universally seen as a good.
Problems arise when we try to agree on a definition of happiness, and to measure it.
One important question is whether we see happiness as the surplus of pleasure over pain experienced over a lifetime, or as the degree to which we are satisfied with our lives.
The former approach tries to add up the number of positive moments that people have, and then to subtract the negative ones.
If the result is substantially positive, we regard the person’s life as happy; if negative, as unhappy.
So, to measure happiness defined in that way, one would have to sample moments of people’s existence randomly, and try to find out whether they are experiencing positive or negative mental states.
A second approach asks people: “How satisfied are you with the way your life has gone so far?”
If they say they are satisfied, or very satisfied, they are happy, rather than unhappy.
But the question of which of these ways of understanding happiness best captures what we should promote raises fundamental questions of value.
On surveys that use the first approach, countries like Nigeria, Mexico, Brazil, and Puerto Rico do well, which suggests that the answer may have more to do with the national culture than with objective indicators like health, education, and standard of living.
When the second approach is taken, it tends to be the richer countries, like Denmark and Switzerland, that come out on top.
But it is not clear whether people’s answers to survey questions in different languages and in different cultures really mean the same thing.
We may agree that our goal ought to be promoting happiness, rather than income or gross domestic product, but, if we have no objective measure of happiness, does this make sense?
John Maynard Keynes famously said: “I would rather be vaguely right than precisely wrong.”
He pointed out that when ideas first come into the world, they are likely to be woolly, and in need of more work to define them sharply.
That may be the case with the idea of happiness as the goal of national policy.
Can we learn how to measure happiness?
The Center for Bhutan Studies, set up by the Bhutanese government 12 years ago, is currently processing the results of interviews with more than 8,000 Bhutanese.
The interviews recorded both subjective factors, such as how satisfied respondents are with their lives, and objective factors, like standard of living, health, and education, as well as participation in culture, community vitality, ecological health, and the balance between work and other activities.
It remains to be seen whether such diverse factors correlate well with each other.
Trying to reduce them to a single number will require some difficult value judgments.
Bhutan has a Gross National Happiness Commission, chaired by the prime minister, which screens all new policy proposals put forward by government ministries.
If a policy is found to be contrary to the goal of promoting gross national happiness, it is sent back to the ministry for reconsideration.
Without the Commission’s approval, it cannot go ahead.
One controversial law that did go ahead recently – and that indicates how willing the government is to take tough measures that it believes will maximize overall happiness – is a ban on the sale of tobacco.
Bhutanese may bring into the country small quantities of cigarettes or tobacco from India for their own consumption, but not for resale – and they must carry the import-tax receipt with them any time they smoke in public.
Last July, the UN General Assembly passed, without dissent, a Bhutanese-initiated resolution recognizing the pursuit of happiness as a fundamental human goal and noting that this goal is not reflected in GDP.
The resolution invited member states to develop additional measures that better capture the goal of happiness.
The General Assembly also welcomed an offer from Bhutan to convene a panel discussion on the theme of happiness and well-being during its 66th session, which opens this month.
These discussions are part of a growing international movement to re-orient government policies towards well-being and happiness.
We should wish the effort well, and hope that ultimately the goal becomes global, rather than merely national, happiness.
Can We Insure against Tsunamis?
Most of the discussion surrounding how to respond to Asia’s tsunami disaster has focused on government relief programs and official schemes to implement early warning systems.
Little discussion has focused on the promotion of private risk management institutions, notably insurance.
This is unfortunate.
Insurance companies provide professional, finely detailed risk management that respects the complexity of the dangers to be hedged and responds creatively to individual needs.
Promoting private insurance may seem an indirect response to the tsunami disaster, but it is a rational – and powerful – response.
Insurance companies have not penetrated many of the regions that suffered the greatest losses.
According to a study by the Insurance Information Institute, expenditures on non-life insurance in 2003 amounted to only 0.83% of GDP in Indonesia, 1.19% of GDP in Thailand, and 0.62% of GDP in India, compared with 5.23% of GDP in the United States.
Foreign aid is no substitute for insurance.
Charity inspires, reassuring us of our humanity, but it is often capricious.
You wouldn’t want to rely on it.
Indeed, when deciding how much disaster aid to offer, countries often seem to be influenced mainly by their leaders’ concerns about how others will view them.
Charity responds to attention-grabbing events, often neglecting less sensational disasters.
Insurance, on the other hand, is a reliable and venerable institution, its modern form dating back to the seventeenth century.
But insurance and other risk management institutions have been slow to develop, even in advanced countries.
In the US, most people still do not have flood or earthquake insurance.
In California, one of the world’s most unstable geological regions, only one in six homeowners buys earthquake insurance.
A fundamental problem is that insurance is not a concept that comes naturally to most people.
In fact, as psychologists Daniel Kahneman and Amos Tversky have shown, there is a systematic human tendency to downgrade the perceived probability of low-probability events, so that people go about their lives as if the probability of these events’ occurrence is zero.
Similarly, humans tend to accept large downside risks in order to avoid small certain losses, such as insurance premiums.
Insurance companies have faced a slow and difficult process in weaning the public from these tendencies.
Moreover, designing new risk-management products is not easy.
Insurance companies face inherent difficulties in measuring risks, and they must tailor their policies creatively around the human foibles that limit uptake.
Insurers must also be attentive to a wide array of possible moral hazards – perverse incentives to risky behavior – and to problems of selection bias in attracting clients.
To deal with disasters more effectively, countries must find the will to create an environment in which a much more developed private insurance industry can flourish.
In the US, the National Flood Insurance Program of 1968 made it mandatory for those financing construction or improvement of structures within Special Flood Hazard Areas to buy flood insurance.
If not made mandatory, insurance must at least be promoted effectively.
Otherwise, people will build on flood plains in the belief that their government, or the governments of the world, will feel obligated to bail them out, thereby insuring, in effect, bad risks that should not be taken.
Many of the worst outcomes in Asia occurred in tsunami-prone areas, such as the low-lying coastal areas of Sri Lanka.
Private insurance would discourage construction in the most dangerous locations, owing to prohibitively high premiums, while encouraging the adoption of tsunami-resistant building standards in marginal areas.
Fortunately, our international risk-management institutions are steadily improving.
Various catastrophe bonds, covering earthquakes and other disasters, and weather derivatives have begun trading on financial markets in recent years.
The Kyoto Protocol created a mechanism for trading carbon dioxide emissions, which promises to manage the risks of an even bigger potential disaster: global warming.
The markets for these products are still small, but they have strong growth potential, and their further development would enhance insurance companies’ ability to cover risks of major international disasters.
Consider the absence of an early tsunami warning system in the worst affected countries. It is easy to blame people for lack of foresight, but none of the nine hardest hit countries had developed one.
The problem is not individual error. The failure was caused by the absence of appropriate international institutions that would be alert to the broad spectrum of potential disasters.
Discussion of early warning systems for tsunamis has focused on government programs.
But early warning means more than ocean sensors and satellites; it also implies directing construction away from disaster-prone areas and prodding private businesses to develop effective safety and evacuation procedures.
These are normal activities of insurance companies.
Indeed, one of the more striking features of the tsunami disaster was that it caught some of the most glamorous vacation resorts completely unprepared.
The lesson is clear: even high-class businesses are only as professional as the existing institutional infrastructure permits them to be.
The ultimate reason for their lack of preparation is that our insurance industry was not covering their tsunami risks, and hence not offering up-to-date disaster-prevention guidance.
The insurance industry can, and should, respond to the tsunami disaster by accepting the moral imperative to take concerted action to expand risk coverage.
To the extent that governments are involved, they can promote better risk management through responsive regulation and even subsidization of experiments with new private insurance products.
Can We Regulate Systemic Risk?
MILAN – In the past two years, two dangerous episodes of financial instability and sudden changes in market dynamics have hit the world economy.
More are likely, because the global economy is out of balance in several respects as it emerges from the crisis, particularly in terms of sovereign debt and the structure of global demand.
Systemic risks drive most crises, and pose a challenge for several reasons.
First, they are not easy to detect with confidence, and are even more difficult to prove.
Second, predicting the exact timing of a break point (when bubbles burst, markets lock up, and credit freezes) is, and will likely remain, beyond our ability.
Finally, crises are highly non-linear events, which means that they occur without much warning.
Periodic outbreaks of instability impose high social costs on those who had the least to do with causing them.
If repeated, this pattern may erode confidence in financial markets and regulators, which could well lead to heavy-handed regulation, the expansion of the state, and retrenchment from globalization.
But the problem is even more serious.
The financial and economic crisis is morphing into a sovereign debt crisis in advanced countries.
Financial and economic imbalance can lead to dangerous fiscal imbalance, as tax revenues plunge and social insurance and bailout expenditures rise.
The International Monetary Fund suggests that as much as 75% of the “fiscal stimulus” in the advanced countries comprises non-discretionary counter-cyclical measures.
Undetected imbalances and systemic risk make fiscal policies seem prudent when they are not.
Spain, for example, was not running a fiscal deficit coming into the crisis.
But its revenues and expenditures were in part determined by a highly leveraged real-estate bubble.
Extreme fiscal imbalance can also lead to a growth trap in which fiscal consolidation has such a large negative effect on growth as to be self-defeating.
Greece is probably a case in point.
Eventually, the only way out is to reset the value of liabilities via restructuring or inflation.
If systemic risk can cause this kind of cascading sequential imbalance, then the “sovereign” needs to be alert, competent at identifying rising systemic risk, and able to take corrective action early.
We are about to get a comprehensive package of re-regulation focused on capital requirements and leverage, transparency, ratings and other sources of information, incentives, conflicts of interest and limits on the scope of financial firms, consumer protection, and resolution mechanisms.
The hope is that such reforms will reduce the likelihood and severity of systemic risk.
But that doesn’t deal with global imbalances and other contributors to and signs of instability.
In addition and as a complement to re-regulation, we need a comprehensive systemic risk monitor.
Some prominent policymakers and analysts, however, argue that oversight aimed at identifying and stemming systemic risk is futile.
With incomplete models of risk dynamics and a complex and constantly changing global financial system, detection is, they argue, either impossible or so prone to error that the effort would be counter-productive.
Asset bubbles are hard to identify with certainty.
If skeptics are right, then we should accept that we will periodically be out of financial and fiscal balance without knowing it in advance.
Thus, we should also accept the need for much more conservative fiscal positioning than was thought necessary even three years ago.
In statistics and the theory of decision-making under uncertainty, errors are inevitable. There are two kinds.
One error is to reject a true proposition; the other is to accept a false one.
Let’s call them RWT (reject when true) and AWF (accept when false).
The issue can then be framed as follows: in the context of detecting and responding to systemic risk, which of the two types of errors has the higher expected costs?
Opponents of prudential oversight of systemic risk take two different positions.
One is that the AWF error won’t occur, because there are no reliable ex ante signs of rising potential instability.
Looking for them is a waste of resources.
Instability just strikes like lightning.
This seems wrong.
In the 2008 crisis, for example, some analysts issued warning signs, and some investors noted and responded to them.
Admittedly, these warnings did not add up to an ironclad case, and they certainly didn’t predict the timing of the break.
But the signs were there.
A second position accepts that there are warning signs, but that they are so unreliable that responding to them would do more harm than good.
This implies that AWF has a higher expected cost than RWT, because there are a lot of false positives and/or the cure is worse than the disease.
One can accept that there are costs to AWF.
But RWT is costly, too, as we have seen, so the aggregate negative effect of the policy response to false positives (AWF) would have to be large to be convincing.
I am not convinced.
There may be a deeper bias at work.
In business and investing, choices under conditions of uncertainty are made all the time, and mistakes are routine.
By contrast, developed country policymakers’ default stance seems to be that proactive or preemptive measures require a high degree of certainty, owing to a deep-seated belief that financial markets are stable and self-regulating.
If one believes that market instability is rare, then it is reasonable to refuse to act unless there is a compelling case to do so.
In light of experience, the view that the financial system is only exceptionally unstable or on an unsustainable path seems at least questionable.
Based on new theory and experience, we may eventually conclude that policy responses to systemic risk are impossible to devise, and that the costs of the AWF errors are higher than the RWT errors.
But we should at least conduct the experiment, assigning responsibility to a new or existing institution that has access to information, deep analytical talent in both financial and macroeconomic analysis, and is relatively free of conflicts of interest.
The analysis should be made public and could influence perceptions of systemic risk and market behavior, thereby increasing self-regulatory capacity of the system.
Can We Survive the “Anthropocene” Period?
For the past three centuries, humans’ effects on the global environment have escalated.
Most importantly, our emissions of carbon dioxide may cause global climate patterns to depart significantly from their natural course for many millennia to come.
It seems appropriate to assign the term “Anthropocene” to the current, in many ways human-dominated, geological epoch, supplementing the Holocene – the warm period of the past 10–12 millennia.
The Anthropocene Period could be said to have started in the latter part of the eighteenth century, when analyses of air trapped in polar ice showed the beginning of growing global concentrations of CO2 and methane.
This date also happens to coincide with James Watt’s design of the steam engine in 1784.
Mankind’s growing influence on the environment was recognized as long ago as 1873, when the Italian geologist Antonio Stoppani referred to the “anthropozoic era,” defined by a “new telluric force, which in power and universality may be compared to the greater forces of earth.”
In 1926, V. I. Vernadsky similarly acknowledged the increasing impact of mankind on “[t]he direction in which the processes of evolution must proceed, namely towards increasing consciousness and thought, and forms having greater and greater influence on their surroundings.”
Vernadsky and Teilhard de Chardin used the term “noösphere” – the world of thought – to mark the growing role of human brain-power in shaping its own future and environment.
Humans’ rapid expansion in terms of population and per capita use of Earth’s resources has continued apace.
During the past three centuries, the human population has increased ten-fold, to more than six billion, and is expected to reach 10 billion in this century.
As a result, 30–50% of the planet’s land surface is now exploited by humans.
At the same time, the methane-producing cattle population has risen to 1.4 billion, contributing to the increasing rate of destruction of tropical rainforests, which releases carbon dioxide and contributes to faster species extinction.
Land conversion for grazing (and construction), together with crop tillage, has also caused soil erosion at 15 times its natural rate.
Indeed, at its current pace, anthropogenic soil erosion would fill the Grand Canyon in 50 years.
Similarly, dam building and river diversion have become commonplace, as humans’ water consumption has risen nine-fold over the past century, to the point that mankind now uses more than half of all accessible fresh water – roughly two-thirds of it for agriculture.
Fisheries remove more than 25% of the primary production in upwelling ocean regions and 35% in the temperate continental shelf.
Moreover, energy use has grown 16-fold during the twentieth century, causing 160 million tons of atmospheric sulfur-dioxide emissions per year – more than twice the total of natural emissions.
Likewise, more nitrogen fertilizer is applied in agriculture than is fixed naturally in all terrestrial ecosystems, and nitric-oxide production from the burning of fossil fuels and biomass also surpasses natural emissions.
At the same time, of course, human consumption of fossil fuels, together with our agricultural activities, have caused substantial increases in concentrations of “greenhouse” gases – CO2 by 30% and methane by more than 100%.
Indeed, these concentrations are higher than at any point in the past 400 millennia, with more growth to follow, because so far these effects have largely been caused by only 25% of the world population.
The consequences are numerous and profound: acid precipitation, photochemical “smog” and global warming, among others.
Hence, according to the latest estimates by the Intergovernmental Panel on Climate Change (IPCC), Earth will warm by 1.4–5.8 °C during this century.
Many toxic substances are released into the environment, even some that are not toxic but nonetheless are highly damaging – for example, the chlorofluorocarbons that caused the Antarctic ozone hole (and which are now regulated).
Things could have become much worse: the ozone-destroying properties of halogens have been studied since the mid-1970’s.
If it had turned out that chlorine behaved chemically like bromine, the ozone hole would by then have been a global, year-round phenomenon, not just an event of the Antarctic spring.
More by luck than by wisdom, this catastrophic situation did not develop.
Unless there is a global catastrophe – a meteorite impact, a world war, or a pandemic – mankind will remain a major environmental force for many millennia.
As a result, scientists and engineers face a daunting task during the Anthropocene era: to guide us towards environmentally sustainable management.
This will require appropriate human behavior at all levels, and may well involve internationally accepted, large-scale geo-engineering projects to “optimize” climate.
At this stage, however, we are still largely treading on terra incognita .
Capitalism and Skepticism
BALTIMORE – As each new day brings word of another Wall Street bailout even more colossal than the last, one question presents itself with ever-increasing force: why does America’s economy perform so badly under Republican presidents?
The facts are hard to dispute; indeed, the historical record is now so stark that diehard Republicans are probably starting to wonder if there is a curse.
Over the period for which modern statistics are readily available, Democrats have outperformed Republicans by almost every traditional measure of economic performance (per capita GDP growth, unemployment, inflation, budget deficits).
Democrats have even managed to beat the Republicans on their own turf.
Thanks to the profligacy of the current Bush administration (and the prudence of the Clinton administration), average Federal spending as a proportion of GDP under Republican presidents now exceeds that under Democrats during the measured period.
The pattern of Republican deficiency holds up when the span of historical analysis is extended by using stock returns to measure economic performance.
On average, since the inception of the Standard and Poor’s composite stock index in 1926, the reward for putting your money in the market has been about 16 percentage points lower per presidential term under Republicans than under Democrats.
Republican underperformance remains a stubborn fact even when the Great Depression and World War II are left out of the analysis (in the fond hope that they will prove to have been unique experiences).
With the current presidential term lurching to such a calamitous close that the incumbent is probably worried about being remembered as George Herbert Hoover Walker Bush, the correlation between presidential party and economic outcome demands some kind of explanation.
The answer can’t be found in the specific policy proposals of Republicans or Democrats, which have evolved so much over the years that they defy meaningful generalization.
Nor are there clearly identifiable differences in doctrine that should translate into a reasonable expectation of better economic performance under one party than the other.
Perhaps the best explanation has to do with attitudes, not ideology.
Maybe capitalism works better when skeptics restrain its excesses than when true believers are writing, interpreting, judging, and executing the rules of the game.
The Democrats are surely the more skeptical of America’s two parties.
Some evidence can be found in those features of the American economy that we believe others should emulate.
There is now an overwhelming consensus that open, transparent, and accountable mechanisms of shareholder control are essential for the efficient functioning of public corporations.
Virtue is defined by good accounting rules.
But it is instructive to recall that many of those now-universally-admired rules were fiercely resisted when first proposed.
The options backdating scandal that recently caught Apple’s chairman, Steve Jobs, is a microcosm of innovation, prosecution, and reform; now that a rule has been written to prohibit backdating, this particular scam will not happen again.
Thus do accounting rules approach perfection.
What do we learn from this example?
It’s hard to say.
Maybe that capitalism works better when it is being held accountable to some external standard than when left to its own devices.
As the twentieth century recedes in the rear-view mirror, it increasingly seems that, for better or worse, our era’s defining manifesto has been Milton Friedman’s book Capitalism and Freedom .
But that book’s potency originally derived from its fierce independence from contemporary orthodoxies.
Friedman’s voice was a skeptical breath of fresh air at a time when the reigning viewpoint was a kind of smug pseudo-socialism that did not recognize the astounding power of markets to accomplish desirable aims.
Today, however, the reigning Republican orthodoxy is a kind of smug pseudo-Friedmanism that believes that markets left to themselves can do no wrong.
Perhaps it is time for another breath of fresh air.
The book for the new epoch has yet to be written, but I have a proposed title: Capitalism and Skepticism .
Skepticism might not be as bracing as freedom, but it’s something we could have used a bit more of in the past few years.
Capitalism’s Moral Bastards
Recent revelations that many corporate executives have backdated their stock options, ensuring excessive compensation even when their companies perform poorly, are merely the latest in a stream of examples of bad business behavior.
In an era of evaporated pensions and benefits for the rank and file, piggish pay packets for CEO’s have led a cynical public to wonder where big business has gone wrong.
The answer may be quite simple: too many bosses have abandoned basic human values and embraced the credo famously uttered by Gordon Gekko in the movie Wall Street : “Greed is good.”
But a growing body of research concludes that greed is not always good, and that moral values are a necessary element in the conduct of business.
The Gordon Gekkos are predators who take the quick payoff.
Although they do serve a useful purpose by keeping other players on their toes and raising efficiency through competition, market participants for the most part avoid them, preferring to do business with the Warren Buffetts – hard-driving businessmen, but known for fair play and creating long-term value.
Consider the trip to the mall, where shoppers buy goods produced and shipped from around the world.
This decentralized delivery of goods relies on employees working for two weeks before receiving a paycheck, companies offering each other lines of credit, and banks offering bridge loans.
Even though humans have engaged in exchange since before the birth of civilization, the impersonal system of trading is only around 1,000 years old.
While legal remedies exist should this system break down, impersonal trading cannot occur unless most people share the values of fair play and reciprocal cooperation.
Even in impersonal market exchange, we cannot help but personalize transactions, say, with the grocery store cashier who smiles and thanks us, or the store greeter whose only purpose is to make us feel cared for.
This personalization draws upon regions of the brain that evolved when our trading partners were members of small kin-based groups where moral violations were immediately identified and remedied.
Research by primatologists Sarah Brosnan and Frans de Waal at Emory University has shown that monkeys also have what look like moral values.
When two monkeys work for food, a fair split is expected.
If a fair division is not received, it elicits cries of outrage and hurled food by the wronged partner.
Moral values have powerful physiological representations in humans, too, and we feel them strongly when they are violated.
The philosopher Josh Greene and his colleagues at Princeton University have shown that personal moral dilemmas (for example, whether you would directly kill one person to save seven others) use our emotions rather than higher cognition – to the chagrin of many philosophers who claimed otherwise.
The personal aspect of such decisions makes our hearts speed up and our palms sweat.
In neuroeconomics experiments that my lab has conducted, we have found that when a stranger places trust in another by making a considered monetary investment that can either be returned or stolen, our brains release an ancient mammalian hormone called oxytocin.
Oxytocin is what bonds mammals to their offspring, and in humans makes spouses care about and love each other.
We have found that trust causes a spike in oxytocin and begets reciprocation – the sharing of money.
We are “wired” to cooperate, and we find it rewarding in the same way that our brains identify eating a good meal or sex as rewarding.
Oxytocin is active in evolutionarily old areas of our brain, outside of our conscious awareness.
We simply have a sense that sharing with someone who has trusted us is the right thing to do.
We have also found that about 2% of undergraduates we studied are pure non-cooperators.
When they have an opportunity to share money with a stranger who has trusted him or her, non-cooperators keep all the money rather than share the largess.
The technical term in my lab for these people is “bastards.”
Our evidence suggests that bastards’ brains work differently.
Their character traits are similar to those of sociopaths.
They simply do not care about others the way most people do, and the dysfunctional processing of oxytocin in their brains appears to be one reason for this.
Because bastards are out there, we still need government and personal enforcement of economic exchange.
Nevertheless, too much government regulation may “crowd out” moral behavior.
When every offense has an associated penalty, transgressions cease to be moral violations, but are simply a way for wrongdoers to effectively “use the system” while facing some risk of getting caught and paying a fine.
These external penalties can displace the internal sanctions we feel when we do wrong.
At Enron, this was accomplished by breaking down tasks into small chunks so that no one person was ultimately responsible for a decision and could claim ignorance when caught.
Former Enron chief executive Jeffrey K. Skilling excused his behavior at his trial by saying, “I’m not an accountant.”
Many people have been convinced that market exchange diminishes our humanity.
Think of Charlie Chaplin’s film Modern Times , in which the little tramp is literally a cog in the capitalist machine.
That view, a residue of Marxist thinking, is wrong.
On the contrary, working together, and trading with each other in markets, is morality in action.
Capitalism’s New Clothes
MELBOURNE – Is the global financial crisis an opportunity to forge a new form of capitalism based on sound values?
So French President Nicholas Sarkozy and former British Prime Minister Tony Blair appear to think.
At a symposium in Paris last month entitled “New World, New Capitalism,” Sarkozy described capitalism based on financial speculation as “an immoral system” that has “perverted the logic of capitalism.”
He argued that capitalism needs to find new moral values and to accept a stronger role for governments.
Blair called for a new financial order based on “values other than the maximum short-term profit.”
It is surprising how readily politicians of all parties – even strong ideological defenders of the unregulated market – accepted the idea that the state should bail out banks and insurance companies when they got into trouble.
With the exception of a small number of ideologically committed defenders of free enterprise, few were willing to take the risks inherent in letting major banks collapse.
Who knows what the consequences would have been?
Many feared mass unemployment, a tidal wave of bankruptcies, millions of families evicted from their homes, the social safety net strained to the breaking point, and perhaps even riots and a resurgence of the political extremism that brought Hitler to power in Germany during the depression of the 1930’s.
The choice to save the banks from the financial consequences of their own errors indicates a shift in values away from belief in the wisdom of the market.
Evidently, the market got some things – like the value of certain financial securities – horrendously wrong.
But will the downturn also produce a deeper shift in the values of consumers?
It is no accident that the “New World, New Capitalism” symposium was held in France, where some critics have seen the global financial crisis as necessary and desirable precisely because it is producing this change in values.
In the newspaper Le Figaro, a section on how to scale back one’s expenses predicted a “revolution in values” and claimed that people will put family ahead of work.
(Americans think the French, with their shorter working hours and longer summer vacations, already put family ahead of work.)
The French have always been less likely to go into debt – when they pay with plastic, they tend to use debit cards, drawing on funds they already have, rather than credit cards.
Now they see the current crisis as a vindication of the value of not spending money that you don’t have.
That means, in many cases, less luxury spending – something that is hard to reconcile with the image of France as the country of fashion, perfume, and champagne.
But excess is out of style, and there are reports of cutbacks in luxury goods everywhere.
Richemont, the Swiss luxury goods company that owns the Cartier and Montblanc brands, has said that it is facing “the toughest market conditions since its formation 20 years ago.” But does this mark an enduring change in values, or just a temporary reduction, forced upon consumers by investment losses and greater economic uncertainty?
In his inauguration speech, American President Barack Obama said, “The time has come to set aside childish things” and instead to choose the noble idea that “all are equal, all are free, and all deserve a chance to pursue their full measure of happiness.” It would be an excellent thing if the global financial crisis restored a proper sense of what is important.
Could the crisis remind us that we buy luxury items more because of the status they bring than because of their intrinsic value?
Could it help us to appreciate that many things are more central to our happiness than our ability to spend money on fashion, expensive watches, and fine dining?
Could it even, as Obama suggests, make us more aware of the needs of those who are living in real poverty and are far worse off than we will ever be, financial crisis or no financial crisis?
The danger is that the potential for a real change in values will be co-opted, as has happened so often before, by those who see it as just another opportunity to make money.
The designer Nathalie Rykiel is reportedly planning to show the new Sonia Rykiel collection in March not in the usual vast rented area, but in the smaller space of her own boutique. “It's a desire for intimacy, to go back to values,” she told the International Herald Tribune .
“We need to return to a smaller scale, one that touches people.
We will be saying, ‘Come to my house. Look at and feel the clothes.’”
Ah yes, in a world in which ten million children die every year from avoidable, poverty-related causes, and greenhouse-gas emissions threaten to create hundreds of millions of climate refugees, we should be visiting Paris boutiques and feeling the clothes.
If people were really concerned about defensible moral values, they wouldn’t be buying designer clothes at all.
But what are the chances of Nathalie Rykiel – or the affluent elites of France, or Italy, or the United States – adopting those values?
Capitalism versus Democracy
WARSAW: Around the world, democracy is on the march.
Totalitarian and authoritarian regimes have been swept away. Popular resentment against the remaining ones is growing.
But it is too early to declare victory.
For although capitalism is triumphant, we cannot speak of the triumph of democracy.
The connection between capitalism and democracy is far from automatic.
Repressive regimes do not willingly abdicate power and are often abetted by business interests, both foreign and domestic, particularly in countries where resources such as oil and diamonds are at stake.
Perhaps today's greatest threat to freedom comes from an unholy alliance between government and business, such as in Fujimori's Peru, Mugabe's Zimbabwe, Mahatir's Malaysia, and the oligarchs' Russia, where the appearances of democratic process are often observed but state powers are diverted to benefit private interests.
Capitalism creates wealth but cannot be relied upon to assure freedom, democracy and the rule of law.
Business is motivated by profit; it is not designed to safeguard universal principles.
Even the preservation of the market itself requires more than self-interest: market participants compete to win, and if they could, would eliminate competition.
So freedom, democracy and the rule of law cannot be left to the care of market forces; we need institutional safeguards.
Traditionally, protecting the common interest was the task of the nation state.
But state powers shrank as global capital markets expanded.
Since capital can now avoid states that tax and regulate, governments cater to its demands.
In many ways, this is beneficial.
Free competition produces more wealth than state control; globalization prevents states from abusing their power and offers a degree of freedom that no state could provide.
But globalization has its downside: financial markets are unstable; free competition creates and reinforces inequalities nationally and internationally; collective interests, from preservation of peace to human rights and environmental protection, receive short shrift.
To enjoy globalization's benefits we must address these shortcomings on an international scale.
Unfortunately, existing international institutions, like the UN, are ill-suited to safeguard universal interests because they are associations of states, and states jealously guard their interests.
Moreover, the faults of state bureaucracies are multiplied within international bureaucracies.
In today's world, most conflicts occur not between states but within states.
For people living under repressive regimes, outside protection is the only lifeline.
Democratic countries cannot tolerate large scale violation of human rights, and are liable to be drawn into local conflicts.
Even if they refuse to be drawn in, they face an influx of refugees and other forms of contagion.
Once conflict erupts, as Yugoslavia shows, most forms of punitive intervention have unintended adverse consequences.
Trade sanctions foster smuggling and smugglers are usually in cahoots with authorities, so that sanctions strengthen the governments they are supposed to topple.
Military action tends to silence internal opposition to the regime against which it is directed.
Crisis prevention is much to be preferred to intervention; the best way to prevent crises is to foster the development of open societies.
That is what my network of foundations seeks to do.
Open societies allow people with different views, backgrounds, and interests to live together in peace.
Given our human nature, conflicts cannot be avoided, but the chances of crises requiring outside intervention are greatly reduced.
I advocate a concerted effort by developed democracies to foster the development of democracy in less developed parts of the world.
This should take the form of technical assistance and economic incentives.
Economics and politics cannot be separated.
Nobel laureate Amartya Sen makes a convincing case that development should be defined in terms of freedom, not in terms of gross national product.
The global capitalist system has produced a very uneven playing field.
The gap between rich and poor is getting wider.
We must find ways to counteract this because a system that does not offer hope and opportunity to its losers is liable to be disrupted by acts of desperation.
By contrast, economic aid can foster democratic development; it can also be used as leverage against recalcitrant governments.
Unfortunately, there is scant support for this idea.
Foreign aid failed in Africa and the post-communist states, and is in danger of failing in the Balkans.
But that does not mean we should abandon the idea.
Rather, we must examine the reasons for failure and devise better ways.
Foreign aid is all too often directed at satisfying the needs of the donor, not the recipient.
Based on the experience of my foundations in countries like Russia, I assert that outside assistance can be effective.
Recent changes to the global financial architecture in the wake of the international financial crises aim exclusively at imposing greater market discipline.
The goal is to eliminate the moral hazard introduced by the IMF.
This will reduce the danger of excessive capital flows to emerging markets, but the next crisis is likely to arise from inadequate capital flows.
Today's market fundamentalist creed fails to recognize that financial markets are inherently unstable.
By imposing market discipline, it is, in fact, imposing instability.
Global financial markets require a global central bank or some other international financial institutions to keep financial markets on an even keel.
The same applies to the World Trade Organization.
There is a crying need for both labor standards and environmental protection.
But poor countries cannot afford them.
Instead of punitive measures to enforce such standards, poor countries ought to be given incentives, such as tariff relief, to comply.
The Meltzer Commission established by the US Congress recently recommended converting the World Bank from a lender to a World Development Agency.
Splendid, but the Meltzer Commission would shrink the World Bank, returning unused capital to shareholders – a major resource transfer to the rich.
I would put the unused capital to productive use and increase grant-giving activities of the Bank.
The World Bank should also stop insisting that recipient governments guarantee its loans, which gives governments control over which private sector company, local government, or non-governmental organization receives financing.
Such control is detrimental to the evolution of open societies.
Removing this constraint might endanger the Bank's triple A rating, but will make it more effective.
I propose that the world's open societies form an alliance with a dual purpose: fostering both development of open societies in individual countries and the evolution of a global open society.
The first involves development assistance; the second, strengthening international institutions, such as an international central bank and a World Development Agency.
Such an alliance requires the co-operation not only of governments, but also of civil society.
Governments represent the interests of the state, but democratic governments are responsive to the wishes of the electorate.
Only if people believe in an open society that transcends national borders can such a society be brought into existence.
So far, civil society has been mobilized for the destruction of international institutions as in the recent protests against the WTO and World Bank in Seattle and Washington.
We must reverse the trend and start a movement for the creation of a global open society.
The World Forum on Democracy, held in Warsaw June 25 – 27 made a start, but it must be followed up.
Capitalism with Chinese Characteristics
As a final act of his presidency - it will end at the Communist Party meeting beginning November 7 th - China's Jiang Zemin wants businessmen to join the Party leadership.
Marx and Mao are probably spinning in their graves.
Who are these businessmen President Jiang wants to court and how do they operate?
Kenichi Ohmae offers a portrait.
Officially, China remains Communist.
Yet companies in China face far fewer regulations than in Taiwan, Korea, Japan, Germany, France, and Sweden.
Even in comparison with the US, China is a capitalist paradise - so long as you steer clear of the central government.
For example, tariffs (which are set by the central government, but administered locally) are low or nonexistent for companies that take advantage of China's regional systems of tax-free zones and tax benefits.
None of this was conceivable as recently as 1992, when Beijing's proclamation of "one country, two systems" - and the decision to peg the mainland's currency, the Renminbi, to the Hong Kong dollar - unleashed the floodgates of foreign investment.
Money poured into the Shenzhen and Shanghai stock markets, as did direct investment to build factories and offices in tax-free zones.
The trappings of entrepreneurial culture are everywhere.
The face of General Electric's longtime boss Jack Welch is in bookstore windows across China, although his latest book is probably a pirated edition because China still has a way to go on copyright protection.
Many managers attended China's elite foreign language schools (which trained spies during the Cold War era) and then headed to America for an MBA.
Back home, they practice just-in-time manufacturing, 360-degree performance evaluations (including bosses reviewed by subordinates), and re-engineering - all with unmatched resourcefulness and purposefulness.
In fact, more students than ever who left for universities in Japan, the US, and Europe are being lured back.
The Dalian local government constructed an elaborate software development park à la Silicon Valley, where students returning from abroad can rent low-cost office space for startup companies.
They benefit from broadband network environments, introductions to investors and financial angels, and exposure to each other.
Like rival businesses in a single large corporation, other cities are creating their own incubators and lures for talent as well.
As a result, China's reputation for lackluster innovation is changing.
Consider the story of Shenyang-based Neusoft Group, China's largest publicly traded software company, with sales of $134 million last year.
Neusoft began as a low-cost competitor to the Oracle Corporation.
After moving on to produce car audio equipment, Liu Jiren, Neusoft's CEO, began hearing complaints from local hospitals about the high cost of specialized X-ray, MRI, ultrasound, and CT-scanning machines (such as those made by GE, Philips, Siemens, and Toshiba).
Suddenly, a new business was born.
Liu realized that Neusoft could link standard Intel chips and its own imaging software to a range of digital sensors.
Neusoft's equipment looks like little personal computers with sensors attached. But it is inexpensive and adaptable enough that every hospital room can now have its own multipurpose scanner.
In the US or Japan, facing entrenched industry opposition, such a startup might never have gotten off the ground.
But by selling to Chinese hospitals first, Neusoft built up a customer base that will allow it to challenge the existing medical electronics industry worldwide, just as Honda and Toyota challenged the worldwide auto industry in the 1970s.
Nor is Neusoft alone.
Little Swan sells washing machines in 40 countries, while Legend Group is now the world's largest manufacturer of personal computers (mostly sold under other brand names).
Hua Wei, based in Shenzhen with 14,000 employees (70% of whom are engineers), makes routers and telecommunications switches at half the price of most global companies.
Many leading American and European telephone equipment manufacturers fear Hua Wei more than Fujitsu or NEC.
The Chinese have grasped the hidden key to Japan's success in the 1970s and 1980s.
Companies like Toshiba and Sony depended on two regions - Otaku in Tokyo, and Higashi Osaka in Osaka Prefecture -where thousands of manufacturers of precision mechanical and electronic components were clustered.
Today, Otaku and Higashi Osaka are anachronisms.
With modern highways, port facilities, and communications links available, a cellular phone manufacturer in Shenzhen might receive just-in-time deliveries of parts several times a day from suppliers that are only hours away.
Similar manufacturing clusters are sprouting up everywhere in China.
Dalian is becoming a center for software development and Japanese-language back-office work, such as insurance processing and call centers.
Japanese companies also prefer Qingdao, on the Shandong Peninsula, which specializes in production of high-quality processed food.
More than 4,000 Taiwanese manufacturers have set up shop in Xiamen and Dongguan.
Zhongguancun, a former military research zone in Beijing that houses half a million scientists and engineers, is popular with American high-tech companies.
All this clustering resulted in state-of-the-art production and cutting-edge business.
Consider Japan's Fast Retailing Company, which retails high-quality clothing manufactured in China under the Uniqlo brand in its own Japanese outlets.
Fast Retailing charges one-third the price that competitors charge and earns nearly five times the margin.
The verb "to uniqlo-ize" (to cut costs dramatically through Chinese production and eliminating intermediaries) has entered Japan's business vernacular, as in: "Can we uniqlo-ize the housing industry?"
The US confronted something similar in the late 1980s.
It responded by internalizing foreign competitors like Sony, Toyota, Bayer, Nestlé, and DaimlerChrysler - in effect turning them into US companies with US investors, loyalties, and even corporate cultures.
The challenge for the US, Europe, and Japan will now be to internalize Chinese companies and methods in order to galvanize their own to higher levels of productivity and innovation.
Capitalist Meltdown
PARIS – There is a strange foreboding in the world economy.
Newspapers report downward revisions in growth estimates for all the major developed countries: the United States, Germany, France, Japan.
No one, it seems, is being left out.
Indeed, these estimates are roughly half a percentage point lower than those issued only last autumn.
At the same time, newspapers report in bleak terms almost exclusively about banks and financial markets, with little attention to the real economy, as if today’s crisis were purely financial and bound to remain so.
Indeed, some experts, too, believe that the crisis can be resolved simply by refinancing banks, and that the impact on the real economy will be relatively limited.
This is clearly the belief of the European Central Bank, which is pumping hundreds of billions of euros into the banking system to ensure liquidity.
But, unlike the US Federal Reserve, it has not lowered key interest rates, which is what matters most to firms and households.
Other experts, of course, believe that the real economy is in jeopardy, and that the threat of a recession is genuine.
But, unfortunately, hardly any experts can speak with confidence about both finance and macroeconomics.
So what is a non-expert to think?
It is helpful to review where the world economy now stands.
The largest number of defaults on sub-prime mortgages will occur this spring.
So the full impact of the crisis remains ahead of us: 1.3 million American homeowners have already defaulted on their mortgages.
In 2008, another three million will join them.
Moreover, the size of the bad debt threatening banks remains unknown, and could amount to several hundred billion dollars.
The total sum of assets now under threat is even more important, because mortgages have been mixed up with other kinds of securities, and these “packages” have been sold throughout the world.
A US subsidiary of Deutsche Bank, for example, has been barred by an American court from foreclosing on a house because it could not demonstrate ownership.
The global economy is overrun with such poisoned packages.
As a result, banks distrust one another and have mostly stopped lending to each other, which jeopardizes economic activity by severely reducing the availability of credit to businesses.
As a result, recession seems certain.
The quantity of liquidity in the world economy is surprising, and monetary expansion by central banks does not explain it completely.
For more than two decades, shareholders in all the developed countries, unorganized and passive from 1945 until 1975-1980, have recast themselves in the form of pension funds, investment funds, and hedge funds.
Now they are significant and active players (as majorities or strong minorities) in all the big companies of the developed world.
To boost the value of their shares, these shareholders backed the drive to reduce the global volume of the payroll and the number of workers that companies employ.
Indeed, in the last 25 years, the share of direct and indirect wages as a percentage of GDP has fallen by 8% to 11% in all the countries involved.
As a result, precarious employment and job insecurity, which hardly existed between 1940 and 1970, now affect more than 15% of the developed world’s population.
The average real wage has been flat in the US for 20 years, with 1% of the population capturing all of the gains brought about by a 50% growth in GDP during this period.
This “liberated” a lot of liquidity for financial activities, gambling, and speculation.
In France alone over the past 20 years, roughly 2.5 trillion euros have poured into the financial world, which suggests a total of 30-60 trillion dollars for the world economy as a whole.
This has been accompanied by a growing immorality of the system.
Remuneration of company bosses now reaches 300 to 500 times the average salary of rank-and-file employees, up from 40 to one for the century and a half before 1980.
Throughout the world, the number of companies facing legal problems for various types of fraud is growing dramatically.
The worst, sadly, is yet to come.
Because most people’s incomes are stagnant and being eroded as their mortgage payments rise, consumption is bound to fall, yielding lower growth and employment.
A recession will only increase job precariousness and unemployment, creating social tensions that will not, of course, help to ease the financial crisis.
All the ingredients seem to be in place for a long and powerful perfect storm of economic decline and social unrest.
We in the developed world live in democracies.
Every four or five years, the legitimacy of the system needs to be confirmed by elections.
But is the system being so delegitimized by the economic and social turmoil that elections will no longer be viable?
Of course, capitalism remains more compatible with personal freedom than communism ever was.
But it is now blindingly obvious that capitalism is too unstable to survive without strong public regulation.
That is why, after years of being neglected as a viable option, it is time for the social-democratic project to return to the political fore.
Capital Shrugged
LOS ANGELES – Capitalism’s greatest strength has been its resiliency – its ability to survive the throes and challenges of crises and business cycles to fuel innovation and economic growth.
Today, however, more than four years into a credit crisis, a conspicuous enigma calls this legacy into question.
Despite recent hopes of recovery in the US, including an inventory catch-up in the fourth quarter of 2011, real US GDP growth has remained persistently below trend.
Moreover, although seasonally adjusted January employment data have brought the unemployment rate down to 8.3% (while total jobs were actually lost in January), the more realistic rate of “underemployment” remains over 15% and the labor-force participation rate is at a record 30-year low.
And the US is clearly not alone in its malaise, with the eurozone fighting a far more urgent sovereign-debt crisis.
So, why is this time different?
The answer lies in Ayn Rand’s rhetorical invocation of despair in her 1957 epic Atlas Shrugged: “Who is John Galt?”
Simply put, when the state seizes the incentives and drivers of capital investment, owners of capital go on strike.
Rand portrays innovative industrialists as akin to Atlas in Greek mythology, carrying on his back a dystopian world of growing and overbearing collectivist government.
The hero, John Galt, calls for them all to shrug, to “stop the motor of the world” by withdrawing from their productive pursuits, rather than promoting a world in which, under the guise of egalitarianism, incentives have been usurped in order to protect the politically connected from economic failure.
Today, Rand’s fictional world has seemingly become a reality – endless bailouts and economic stimulus for the unproductive at the expense of the most productive, and calls for additional taxation on capital investment.
The shrug of Rand’s heroic entrepreneurs is to be found today within the tangled ciphers of corporate and government balance sheets.
The US Federal Reserve has added more than $2 trillion to the base money supply since 2008 – an incredible and unprecedented number that is basically a gift to banks intended to cover their deep losses and spur lending and investment.
Instead, as banks continue their enormous deleveraging, almost all of their new money remains at the Fed in the form of excess reserves.
Corporations, moreover, are holding the largest amounts of cash, relative to assets and net worth, ever recorded.
And yet, despite what pundits claim about strong balance sheets, firms’ debt levels, relative to assets and net worth, also remain near record-high levels.
Hoarded cash is king.
The velocity of money (the frequency at which money is spent, or GDP relative to base money) continues to plunge to historic lows.
No wonder monetary policy has had so little impact. Capital, the engine of economic growth, sits idle – shrugging everywhere.
Rand, perhaps better than any economic observer, underscored the central role of incentives in driving entrepreneurial innovation and risk-taking.
Whittle away at incentives – and at the market’s ability to communicate them through price signals – and you starve the growth engine of its fuel.
Alas, central bankers, with their manipulation of interest rates and use of quantitative easing, patently neglect this fact.
Interest rates are more than a mere economic input that determines levels of saving and investment.
Rather, as the Austrian economist Ludwig von Mises emphasized, they are a reflection of people’s aggregate time preference – or desire for present versus future satisfaction – not a determinant of it.
Interest rates thus incentivize and convey to entrepreneurs how to allocate capital through time.
For example, lower interest rates and cost of capital raise the relative attractiveness of cash flows further in the future, and capital investment increases – the system’s natural homeostatic response to higher savings and lower consumption.
State manipulation of interest rates, however, does not influence time preference, even though it signals such a change.
The resulting inconsistency creates distortions: as with any price control, capital receives an incentive to flow to investment that is inconsistent with actual supply and demand.
The Fed is purposefully and insidiously distorting the incentive system – specifically, signals provided by the price of money – resulting in mal-investment (and, when public debt is monetized, inflation).
This can continue for a time, rewarding unproductive investments and aspiring oligarch-speculators who presume that the Fed has eliminated risk.
But, as Rand reminds us, at some point the jig is up.
Today, after the largest credit expansion in history, that point has clearly been reached.
Impassive capital now ignores deceptive market signals, and the liquidation of untenable mal-investment percolates through the system as immutable time preferences prevail.
The state, in the long run, simply cannot direct entrepreneurs to lend, borrow, and invest; investment capital will inevitably shrug when faced with oppressive manipulation of free markets.
When that happens, we see the true result of loose monetary policy: not the creation of more economic activity, but the destruction of the natural mechanism of economic coordination and adjustment, robbing the system of its resilience.
In effect, monetary policy has “stopped the motor of the world.”
At the conclusion of Atlas Shrugged, Galt aims to restore the old system anew as the collectivist regime crumbles.
Will something like that, too, happen in our own dystopian world (in which all remaining Republican US presidential candidates seem to favor firing Fed Chairman Ben Bernanke)?
How long must capital wait for the day when, free of distorted incentives, the engine of growth is fueled and humming again?
Capitals of Capital
NEW YORK – Recently, China’s government announced that it wants Shanghai to become a global financial capital equal to London and New York by 2020.
An ambitious goal, which may or may not be achieved.
But China’s aspirations also underscore a worrisome and increasingly pervasive new reality: political officials are making decisions normally left to markets on a scale not seen in decades.
Like the financial crisis itself, this trend is now global.
Political leaders in dozens of countries are making decisions that will drive the performance of local (and global) markets for the foreseeable future.
In China, exports fell by more than 25% in February.
Not to worry, said Premier Wen Jiabao: the Chinese government has “adequate ammunition” to add to its $586 billion stimulus package, a plan meant to create millions of jobs via enormous government investment in transportation, energy infrastructure, housing, and other large-scale projects.
In India, where government is more often considered a drag on commerce than a catalyst of growth, the decisions that move local markets are now more likely to come from bureaucrats in Delhi than from innovators in Mumbai.
In fact, the Congress Party-led government, anxious to appear responsive to public demand for help during an election-year economic slowdown, has pushed forward three stimulus packages since December.
The bottom line: to find out how, when, and where assets will be allocated and wealth generated in dozens of countries across the developed and developing worlds these days, we must now look toward political, not financial, capitals.
This trend will spell trouble for longer-term global economic growth.
First, it’s tough enough for leaders within the Chinese Communist Party elite to agree on economic-policy priorities.
The challenges facing US President Barack Obama as he tries to win support for risky and expensive policy options from quarrelsome Democrats and obstinate Republicans will create some tortured legislative compromises.
That pattern is being repeated elsewhere.
In Russia, Ukraine, Hungary, Pakistan, Turkey, Malaysia, Mexico, Nigeria, and other states, battles among domestic political factions will yield often-incoherent responses to pressing economic problems.
Second, if it’s difficult to forge consensus within one country on how best to promote growth, imagine the same argument on a global scale.
Most politicians craft policy to serve their local constituents and to protect their personal political capital.
Reinvigorating global growth runs a distant second.
In Washington, many Democrats will use these policy debates to capitalize on popular fury at Wall Street, while many Republicans look for an opening to capitalize on hoped-for public anger at the Democrats.
Some within the Chinese Communist Party leadership will support plans to engineer a shift from export-led growth to a model based on domestic consumption.
Others will try to direct state funding toward their personal investment projects.
Factions within the Russian, Indian, Mexican, and South African governments have their own competing political priorities.
With so many political officials crafting crisis responses to solve local problems or to create local opportunities, how likely are they to agree on a unified international approach?
Our first glimpse of the trouble in coordinating an international response to the financial crisis came last November, during the emergency G-20 summit in Washington.
To get the G-8 to agree on priorities is a complicated enough; building consensus within the G-20 is exponentially more difficult, not simply because of the larger number of players involved, but because many of them don’t agree on the most basic rules of the global economic game.
While the April G-20 summit in London produced more economic-policy agreement than expected, this was largely because the most divisive issue – the US and British demand for more global stimulus spending – was removed from the table beforehand.
As a result, the smiling presidents and prime ministers could afford to be more diplomatic than Czech Prime Minister Mirek Topolanek, who, in his role as acting president of the European Union, had warned that Obama’s economic plan would lead others down a “road to hell.”
Topolanek wasn’t at the G-20; his country is not a member.
And, while British Prime Minister Gordon Brown agrees with Obama that the world’s leading industrialized countries must stimulate their domestic economies as much as they can, Bank of England Governor Mervyn King has warned that Britain may already have taken on too much debt for another round of stimulus.
However frightening the global recession, a coordinated and coherent response to it by the world’s political leaders remains highly uncertain at best.
And the increasingly heavy influence of political factors on market performance will likely weigh on global growth for years to come.
Capturing the ECB
NEW YORK – Nothing illustrates better the political crosscurrents, special interests, and shortsighted economics now at play in Europe than the debate over the restructuring of Greece’s sovereign debt.
Germany insists on a deep restructuring – at least a 50% “haircut” for bondholders – whereas the European Central Bank insists that any debt restructuring must be voluntary.
In the old days – think of the 1980’s Latin American debt crisis – one could get creditors, mostly large banks, in a small room, and hammer out a deal, aided by some cajoling, or even arm-twisting, by governments and regulators eager for things to go smoothly.
But, with the advent of debt securitization, creditors have become far more numerous, and include hedge funds and other investors over whom regulators and governments have little sway.
Moreover, “innovation” in financial markets has made it possible for securities owners to be insured, meaning that they have a seat at the table, but no “skin in the game.”
They do have interests: they want to collect on their insurance, and that means that the restructuring must be a “credit event” –&#160;tantamount to a default.
The ECB’s insistence on “voluntary” restructuring – that is, avoidance of a credit event –&#160;has placed the two sides at loggerheads.
The irony is that the regulators have allowed the creation of this dysfunctional system.&#160;
The ECB’s stance is peculiar.
One would have hoped that the banks might have managed the default risk on the bonds in their portfolios by buying insurance.
And, if they bought insurance, a regulator concerned with systemic stability would want to be sure that the insurer pays in the event of a loss.
But the ECB wants the banks to suffer a 50% loss on their bond holdings, without insurance “benefits” having to be paid.
There are three explanations for the ECB’s position, none of which speaks well for the institution and its regulatory and supervisory conduct.
The first explanation is that the banks have not, in fact, bought insurance, and some have taken speculative positions.
The second is that the ECB knows that the financial system lacks transparency – and knows that investors know that they cannot gauge the impact of an involuntary default, which could cause credit markets to freeze, reprising the aftermath of Lehman Brothers’ collapse in September 2008.
Finally, the ECB may be trying to protect the few banks that have written the insurance.
None of these explanations is an adequate excuse for the ECB’s opposition to deep involuntary restructuring of Greece’s debt.
The ECB should have insisted on more transparency – indeed, that should have been one of the main lessons of 2008.
Regulators should not have allowed the banks to speculate as they did; if anything, they should have required them to buy insurance – and then insisted on restructuring in a way that ensured that the insurance paid off.
There is, moreover, little evidence that a deep involuntary restructuring would be any more traumatic than a deep voluntary restructuring.
By insisting on its voluntariness, the ECB may be trying to ensure that the restructuring is not deep; but, in that case, it is putting the banks’ interests before that of Greece, for which a deep restructuring is essential if it is to emerge from the crisis.
In fact, the ECB may be putting the interests of the few banks that have written credit-default swaps before those of Greece, Europe’s taxpayers, and creditors who acted prudently and bought insurance.
The final oddity of the ECB’s stance concerns democratic governance.
Deciding whether a credit event has occurred is left to a secret committee of the International Swaps and Derivatives Association, an industry group that has a vested interest in the outcome.
If news reports are correct, some members of the committee have been using their position to promote more accommodative negotiating positions.
But it seems unconscionable that the ECB would delegate to a secret committee of self-interested market participants the right to determine what is an acceptable debt restructuring.
The one argument that seems – at least superficially – to put the public interest first is that an involuntary restructuring might lead to financial contagion, with large eurozone economies like Italy, Spain, and even France facing a sharp, and perhaps prohibitive, rise in borrowing costs.
But that begs the question: why should an involuntary restructuring lead to worse contagion than a voluntary restructuring of comparable depth?
If the banking system were well regulated, with banks holding sovereign debt having purchased insurance, an involuntary restructuring should perturb financial markets less.
Of course, it might be argued that if Greece gets away with an involuntary restructuring, others would be tempted to try it as well.
Financial markets, worried about this, would immediately raise interest rates on other at-risk eurozone countries, large and small.
But the riskiest countries already have been shut out of financial markets, so the possibility of a panic reaction is of limited consequence.
Of course, others might be tempted to imitate Greece if Greece were indeed better off restructuring than not doing so.
That is true, but everyone already knows it.
The ECB’s behavior should not be surprising: as we have seen elsewhere, institutions that are not democratically accountable tend to be captured by special interests.
That was true before 2008; unfortunately for Europe –&#160;and for the global economy – the problem has not been adequately addressed since then.
Care-Giving and the Moral Impoverishment of Medicine
CAMBRIDGE – Care-giving is understood by economists as a “burden,” by clinical psychologists as a “coping process,” by health-services researchers in terms of health-care costs, and by physicians as a matter of clinical competency.
But, for many people, care-giving is a foundational component of moral experience.
It is a practice of acknowledgement, empathic imagination, witnessing, responsibility, solidarity, and the most concrete forms of assistance.
It is this moral aspect that makes care-givers, and at times even care-receivers, feel more “present” – and thus more fully human.
But, aside from skilled nursing, rehabilitation efforts by occupational and physical therapists, and the practical assistance of social workers and home health aides, care-giving, especially for victims of health catastrophes and end-stage conditions, has relatively little to do with the contemporary practice of medicine.
To illustrate this point, I draw on my personal experience as the care-giver for my wife, who suffers from a severe neurodegenerative disorder that has impaired her memory and motor functions, restricting her independence.
I wake her up in the morning, assist her in toileting, bathing, and dressing, make us breakfast, and help her feed herself.
I assist her in walking, placing her in a chair, and getting into our car.
I am with her nearly all the time to protect her from injuring herself, because she can neither see nor navigate safely on the street or in our own home.
It is disturbing to witness the deterioration of a once elegant, intellectually lively, and highly independent companion of more than four decades.
But our emotional reactions, from frustration and anger to sadness, have been cushioned and sublimated by our work, the long rhythm of our days together, and, above all, by the support of family and close friends.
That concern and responsibility for us is as much a part of care-giving as all the mundane practices I have listed, and amounts to moral solidarity with our struggle.
I give you this personal sketch because it is the best I can do to illustrate what care-giving entails, and why it is so crucial to everyone’s life – and to the human condition more generally.
Care-giving, as illustrated by our case, includes what happens when hope and consolation are abandoned, when theodicy ends, and when all there is to do is to be present with the sufferer, sharing his or her suffering by simply – and usually silently – being there.
In medical schools, however, the curriculum in both the basic science and clinical apprenticeship years places the greatest emphasis on understanding the biology of disease processes and high-technology treatments.
The illness experience gets less and less pedagogic attention as the student progresses from classroom to inpatient ward and clinic.
In the broader system of healthcare, students can readily discern that medicine largely leaves the practical and emotional tasks of care-giving to nurses, social workers, and the patient and his or her network of support.
The structure of service delivery and the funding of health services work to discourage professionals from the art of care-giving, and can, in fact, undermine the practitioner’s efforts.
The result is moral impoverishment of the practice of medicine.
For medical anthropologists, people everywhere live in the flow of interpersonal interactions in local worlds – social networks, families, institutions, and communities.
That is to say, experience, viewed as the flow of words, movements, and emotions between us, is not only local, but also inherently moral, because living our lives is about animating and enacting values.
For patients and families faced with health catastrophes and serious chronic medical conditions, the experience of suffering is not just a personal one, but is strongly influenced by cultural and historical changes in the processes that contribute to moral life being distinctive in different eras and societies.
Faced with a threat of pain, disfigurement, loss of function, and serious disability, individuals and families reframe the experience of suffering within their local moral world by remaking meanings, emotions, and values via ethical, religious, and aesthetic activities.
Doctors are no different from laypersons in drawing on personal and cultural resources –involving imagination, responsibility, sensibility, insight, and communication – to accomplish their care-giving.
And what they engage in is an amalgam of ethical, aesthetic, religious, and practical action.
The physician’s art – now so circumscribed by bureaucratic, political, and economic forces – turns on both the professionalization of these inherently human resources and the impact of their routine use on the doctor’s own moral life.
To prepare for a career of care-giving, medical students and young doctors clearly require something besides scientific and technological training.
Indeed, current professional education can even be seen as enabling the physician as a technical expert, while disabling him or her as a care-giver.
To overcome this trend, we must incorporate the humanities into medical training as a means of rekindling and deepening those human experiences of imagination and commitment that are essential for care-giving, and resisting the bureaucratization of values and emotional responses that causes failure in the physician’s art.
In essence, the practitioner must come to feel that the art of care-giving is as much at stake as the science and technology of diagnosis and treatment.
In my view, what is needed is reform of the very culture of contemporary biomedicine.
We must train students and practitioners in critical self-reflection on that which limits their care-giving; in strategies and techniques aimed at opening a space for the moral acts of care-giving; and in the most concrete and practical acts of assistance, so that they never forget what care-giving actually means.
Caring about Animals in the Era of Foot and Mouth
On British television recently, a tearful farmer spoke of the fact that his sheep were being shot to prevent the spread of foot and mouth disease: "We’re so sorry to see our lambs die – they should be the symbol of spring, of new life.
But now they die due to this awful disease.” Total hypocrisy.
Before you start weeping in sympathy with the farmer, ask yourself one question: what would have been the fate of the lambs if there had been no outbreak of foot and mouth disease?
The farmer would have taken these little symbols of spring away from their mothers, packed them into trucks, and sent them to slaughter.
The symbol of new life would become dead meat.
Then the farmer would have happily banked the cheque he was paid for doing this.
(He'll still get a cheque, since farmers are compensated by government for animals shot to contain the outbreak.)
The lambs may have lost out on a few weeks of life, but they were also spared the distress of separation from their mothers, the misery of transportation, possibly for hundreds of kilometres, and the crowding and terror of the slaughterhouse.
When intensively reared pigs are shot as a disease control measure, they lose even less.
Kept indoors all their lives, on bare concrete without straw for bedding – pigs love straw, but it costs money and makes the floors harder to keep clean – with nothing to do all day except for the short time they are eating, it is hard to see that longer existence brings them any benefits at all.
It's a matter of judgment, and others might disagree, but in my view the lucky factory farmed pigs are those shot on the farm.
The unlucky ones have to live longer.
I've been reading newspaper columns in which writers say how dreadful it is, this mass slaughter of hundreds of thousands of animals.
They question its necessity, noting that the disease poses zero risk to humans, and even in animals, 95% will recover within a week or two – or would, if they were not shot first.
There is even a vaccine for it.
Columnists point out that the real reason for the slaughter is economic.
The disease causes a temporary loss of production, and once foot and mouth disease is established in a country, other countries will prohibit the importation of its meat and dairy products because they don't want the disease to spread it to their animals.
Vaccination, however, doesn't solve the export problem, because it produces false positives on blood tests of animals suspected of having the disease, so the importing countries don't know if they have found an animal with the disease, or an animal that has been vaccinated against it.
To do further tests distinguishing the infected animals from the vaccinated ones is expensive, and not yet proven to be reliable.
To be on the safe side, countries ban the import of vaccinated animals anyway.
So, having demonstrated that the slaughter is unnecessary, it is then said that the slaughter should stop, that it shows the wrong attitude to animals, that we must show them more respect, and not just treat them as a means to our ends.
While they are not vegetarian, some of these columnists say, they are so disgusted with what they have been seeing on television that they have been thinking of giving up meat.
Oh please!
Where have the people been all these years?
You must have known that all these animals were going to get slaughtered anyway?
If you can read, and didn't deliberately turn away from anything that might disturb your comfort, you should also know that the entire animal industry is unnecessary, that we would be healthier, and do less damage to our environment, without it?
These animals are just means to our ends, that is their sole reason for existing.
How can farmers treat them with respect when consumers want cheaper meat and supermarkets are using their immense bargaining power to force producers to use every possible means to cut costs?
Yes, do give up meat.
It's the right decision to make, and better late than never.
But don't give it up because you pity the animals being shot, and don't like the attitude to animals that is conveyed by the fact that all this killing is taking place for mere economic gain.
Give it up because all of this slaughter has at last brought home to you the real truth about the nature of the animal industry today.
The Road to Car Safety
TOKYO – The automobile – long a symbol of freedom, status, and success – is at a crossroads.
For more than a century, cars have enabled billions of people to travel farther, faster, and more efficiently than ever before.
They have helped power the world’s great economies and shaped our modern social and cultural landscape.
But all of this has come at a price: accidents, congestion, pollution, and an uneasy dependence on oil, among other costs.
Our challenge, therefore, is to boost the benefits and reduce (and eventually eliminate) the harm done by our cars, so that the future of motor travel is clean, efficient, safe, and accessible to all.
For our industry to remain an instrument of progress, we must therefore work closely with our peers from other industries and government in three major areas: safety, the environment, and affordability.
Road safety is a grave concern.
More than 3,000 people die in auto-related accidents every day.
Lower-income countries account for only half of all vehicles on the road but suffer more than 90% of the fatalities.
India has four times fewer cars than France, though it suffers 20 times more road-related deaths – that is, 80 times more accidents per car.
But safety is improving.
In Europe, even as the number of vehicles has doubled, the number of road deaths has been halved.
One reason for this is the introduction of technologies such as anti-lock brakes, airbags, and electronic stability control.
Technologies now in development could even eliminate auto-related fatalities altogether.
One such innovation is autonomous driving.
Renault and Nissan are currently working on complementary technologies that can predict, detect, and prevent collisions.
By reducing the stresses of driving in heavy traffic and unfamiliar locations, this technology promises greater protection for both drivers and pedestrians.
It is especially valuable to people with restricted mobility, such as elderly or disabled drivers.
But such breakthrough technologies are not simply invented and then implemented – they need government support in the form of a coherent set of laws and regulations covering their use.
Policymakers must therefore be involved at an early development stage if we are to reach the goal of “zero fatality” roads within our lifetimes.
The auto industry can also make a vital contribution to the environment.
Fifteen years ago, the Renault-Nissan Alliance evaluated the environmental impact of its vehicles over their life cycle.
The study examined the effect of our raw-material usage; the impact of car exhaust on public health, especially in congested urban areas; and the contribution to overall greenhouse-gas emissions – 23% of which come from the auto industry worldwide.
As a result of that evaluation, the Alliance invested more than €4 billion ($5.5 billion) in zero-emission technologies.
Today, ours is the only auto group that mass-produces a full line of zero-emission cars and light commercial vehicles.
Renault and Nissan together have sold more than 100,000 such vehicles worldwide – more than all of the other major carmakers combined.
The broader task is to integrate these vehicles into a more efficient and cleaner power grid – for example, by replacing aging coal-fired power plants with hydroelectric power.
Moreover, local and national governments should work with the automobile industry to integrate zero-emission vehicles into national transport infrastructure.
If this is achieved, we believe it will be possible for cars to have zero impact on the environment in the foreseeable future.
Greater health and safety, however, should not (and need not) come at the expense of developing countries, whose citizens want the fruits of prosperity that developed countries’ citizens have long enjoyed.
In 1999, Brazil, Russia, India, and China accounted for a mere 8% of vehicle sales worldwide; by 2012, their combined sales had reached a staggering 35% of the global total.
And this proportion is sure to rise.
One reason for this extraordinary growth is that carmakers have developed more affordable cars for a new, cost-conscious middle class.
The Alliance’s CMF-A platform, created and manufactured in India, will pave the way for many more affordable vehicles throughout the developing world.
These advances are at the forefront of a growing trend toward “frugal innovation” that is increasingly being adopted in developed markets, too.
It is hard to overestimate the impact that the automobile has had on our political, economic, social, and cultural life over the past century.
The industry’s global sales are greater than the GDP of all but the five largest economies, and it employs more than 50 million people worldwide.
Its future is bound up with that of the world economy.
The challenge now is to reinvent the car so that it remains a proud totem of freedom and safety in the decades ahead.
Cars, Bombs, and Climate Change
COPENHAGEN – For the better part of a decade, I have upset many climate activists by pointing out that there are far better ways to stop global warming than trying to persuade governments to force or bribe their citizens into slashing their reliance on fuels that emit carbon dioxide.
What especially bugs my critics is the idea that cutting carbon is a cure that is worse than the disease – or, to put it in economic terms, that it would cost far more than the problem it is meant to solve.
“How can that possibly be true?” they ask.
“After all, we are talking about the end of the world.
What could be worse – or more costly – than that?”
They have a point.
If we actually face, as Al Gore recently put it, “an unimaginable calamity requiring large-scale, preventative measures to protect human civilization as we know it,” then no price would be too high to pay to stop global warming in its tracks.
But are the stakes really that high?
The answer is no.
Even the worst-case scenarios proposed by mainstream climate scientists – scenarios that go far beyond what the consensus climate models predict – are not as bad as Gore would have us believe.
For example, a sea-level rise of five meters – more than eight times what the United Nations’ Intergovernmental Panel on Climate Change expects, and more than twice what is probably physically possible – would not deluge all or even most of mankind.
Of course, such a rise would not be a trivial problem.
It would affect about 400 million people, force the relocation of 15 million, and imply costly protection of the rest.
But it would certainly not mean the end of the world.
Estimates show that the cost in terms of adaptation would be less than 1% of global GDP.
In other words, the price of unchecked global warming may be high, but it is not infinite.
According to the best global-warming economic models, every ton of carbon dioxide that we put into the atmosphere now will do about $7 worth of damage to the environment.
What this means is that we should be prepared to pay an awful lot to stop global warming, but anything more than $7 a ton would be economically indefensible.
This idea is hard for a lot of people to accept.
If we have a solution to a serious problem like global warming, they argue, how can we possibly say that it is too expensive to implement?
Well, we do exactly that all the time.
There are many potential solutions to serious problems that we do not implement, or that we implement only partially, because the costs associated with them are greater than the benefits.
For example, traffic accidents claim an estimated 1.2 million lives every year.
We have the ability to solve this problem completely, eliminating half a trillion dollars in damages, and sparing untold anguish.
All we have to do is lower the speed limit everywhere to five kilometers per hour.
Obviously, we will not do this.
The benefits of driving moderately fast vastly outweigh the costs.
For a wide variety of social and economic reasons, a world moving at only five kilometers per hour would be utterly unacceptable to most of us – so unacceptable that we are willing to tolerate millions of accidental deaths if that is what it takes to keep us speeding down the highway.
Consider, too, homeland security.
On the one hand, the more we spend on anti-terrorism measures (and the more inconvenience we are willing to tolerate), the safer we feel.
On the other, even though everyone agrees that a successful terrorist attack is unacceptable, there is clearly a limit to how much we are willing to spend (and how much inconvenience we are willing to put up with) to keep ourselves safe.
Why are we willing to calculate costs and benefits when it comes to traffic safety and terrorism, but not when devising policies to deal with global warming?
Perhaps it is because we experience the downside of excessive traffic regulation or security measures every day, while the downside of bad climate policy is more of an abstraction.
It shouldn’t be, for the risks posed by bad climate policy deserve just as much attention as the risks of worse-than-expected climate impacts – maybe more.
Remember how biofuel requirements were supposed to help reduce carbon emissions?
In fact, the artificially inflated demand for ethanol – and for the corn to manufacture it – wound up driving up food prices (which pushed roughly 30 million poor people into the ranks of the malnourished).
It also ate up more arable land, which led directly to the destruction of rain forests and generally created a situation that will result in more CO2 emissions over the next hundred years.
The biofuel lesson is salutary.
If we panic and make the wrong choices in response to global warming, we run the risk of leaving the world’s most vulnerable people – those who will overwhelmingly experience the worst effects of warming – even worse off.
If we are to have a constructive dialogue about the smartest policy responses to global warming, we need to replace our fixation on far-fetched, Armageddon scenarios with realism about the true costs of dealing with this challenge.
Cash Aid for Africa
STOCKHOLM – Europe has made an ambitious commitment to scale up its aid to Africa, and Africa’s challenges call for that greater engagement.
But boosting aid to countries that are already aid-dependent requires clearer delivery mechanisms and a degree of budgetary predictability.
Something new is called for, and cash transfers directly to poor people could be an alternative − but only as a part of a longer-term vision of partner countries’ welfare systems.
The European Union has committed itself and its member states to increase aid flows to 0.56% of GDP by 2010 and 0.7% by 2015 − with a big focus on Africa.
The combined aid commitments of OECD Development Assistance Committee member countries would mean a doubling of official development assistance to Africa between 2004 and 2010 – that is, if they are honored.
It is, after all, fair to question whether donor countries will stick to these commitments and, indeed, whether conditions in partner countries will permit them to.
But a theoretical doubling of African aid by 2010 − with the possibility of even more after that − offers a huge opportunity to combat poverty.
So tackling any obstacles that could inhibit the effective application of these additional resources is a priority.
While Africa’s needs are relatively well known, there are challenges in scaling up aid to tackle them.
This reflects such problems as macroeconomic management, aid-dependency syndromes, absorption capacity, transaction costs, and − related to all of it − the risk of decreasing returns as aid levels rise.
Given the current aid-to-GDP ratios in sub-Saharan Africa − with approximately half of countries yielding ratios of above 10% even before future increases in aid are taken into account − these challenges must be taken seriously.
Donors and their partners agree on a way forward that could, in theory, tackle these challenges.
The agreement is contained in the so-called Paris Agenda, which defines principles of ownership, alignment, and harmonization.
It calls for the improved predictability of aid flows, with budget support and program-based aid as the preferred means of delivering support.
It is an agenda for improved partnerships, reduced transaction costs, and increased efficiency.
It is when the Paris Agenda leaves theory and confronts reality that problems emerge.
Budget support suffers from low credibility, not only among donor taxpayers, but also among citizens in recipient countries.
While it assumes predictable financial flows, such predictability can be spurious.
After all, neither donor countries nor their partners are exempt from such problems as corruption, political crises, armed conflicts, human rights abuses, vested interests, or international power politics.
As a result, placing so many eggs in one basket leaves the business of aid provision looking increasingly risky.
Furthermore, budget support that’s linked to national poverty-reduction strategies also rests on the questionable assumption that the political economy of a partner country works to the benefit of the poorest.
Politics on the donor side is no less complicated, with growing aid budgets often viewed by taxpayers as excessive at a time when the anti-aid lobby is becoming more vocal.
When donors finance 50% or more of a country's national budget, they may sometimes find intervention unavoidable − donors certainly have the power to intervene.
That could mean more conditions being placed on aid, not fewer − even if the rhetoric sometimes appears to suggest the opposite.
Would dispensing aid by making cash transfers directly to the poorest work better?
Experimental schemes have been implemented in Latin America in which child allowances are conditional on school attendance and vaccination.
Cash aid has sometimes replaced food aid in humanitarian crisis situations, and there have been targeted social protection schemes in Zambia, as well as incipient welfare schemes for the elderly in India, South Africa, and Lesotho.
The results so far are very promising.
Poor people spend money reasonably effectively on investment as well as on consumption.
Food and other basic goods are bought – benefiting the local economy – nutrition improves, and kids attend school for longer.
An unconditional child grant scheme in South Africa − with mothers as recipients − even demonstrated the impact in centimeters, because the height-for-age index among children improved in relation to control groups.
Affordability does not appear to be a big hurdle.
Assume, for example, that an annual universal grant of $50 is given to all children below 10 years of age in Mozambique, Malawi, and Zambia − covering roughly 10 million children.
These are three low-income countries with HIV prevalence rates of roughly 15%.
Further assuming a relatively generous 20% administration overhead, the total cost of the scheme would be approximately $600 million – equivalent to a fifth of the reported aid flow to these countries in 2004 and to 3.5-4% of their combined GDP.
It would certainly be costly, but not out of reach if African aid is doubled.
For cash-transfer schemes to work, they must be regular, predictable, and long term.
But, while donors and their taxpayers might be willing to make long-term commitments for such a purpose, there is likely to be rather less appetite for making commitments which would seem to be never-ending.
A formula for burden sharing would be needed that gradually increases domestic financing.
But under no circumstances should these schemes be established as purely donor-driven mechanisms that bypass local budgets and institutions.
Partner countries must be ready to invest in their institutions and develop their own vision of how they want to organize their welfare systems.
Would African partners want this?
Maybe.
In any case, the cash-transfer debate is no longer limited to those in northern development circles.
It has now reached the agenda of some African governments and the African Union.
Cashews and Nutty Policies in Mozambique
Why does Africa continue to perform poorly, despite two decades of structural reform?
Most African governments have liberalized their trade regimes, deregulated their economies, and (by most measures) improved the quality of their policymaking.
Yet the results are anemic.
Western economists and aid agencies complain about inadequate implementation and lack of commitment by African governments.
But shortcomings in the blueprints of reform play a greater role.
Reforms designed without adequate regard to local realities and domestic politics have often produced unintended consequences or backfired.
The case of Mozambican cashews clearly illustrates this.
Historically, the cashew sector constituted a big part of Mozambique's economy, providing income to several million individuals.
In the 1960s, Mozambique produced half of the world's total.
The sector went into long decline thereafter, as a combination of adverse policies and civil war from 1982-1992 brought new tree plantings to a halt.
Following independence in 1975, the government banned the export of raw cashew nuts to stimulate domestic processing.
Mozambique became the first African country to process cashews on a large scale.
By 1980, the country had 14 processing factories.
When the government began to loosen restrictions on raw cashew exports in the late 1980s, workers and employers in these factories took a big hit.
In the early 1990s, the World Bank prevailed on Mozambique to liberalize the cashew sector and to lift the remaining restrictions on exports of raw cashews.
The World Bank hoped that resources would be allocated more efficiently and that the incomes of cashew farmers would grow.
The policy was met with fierce opposition from the domestic cashew-processing industry, which had just been privatized.
The case soon turned into a cause celebre for the anti-globalization movement.
While the World Bank points to the rise in prices as evidence of the gains that accrued to farmers, its opponents point to the processing plants in urban areas which have been shutdown and the thousands of workers who remain unemployed.
Export liberalization did produce many of the consequences expected from it.
However, even under the most favorable assumptions, the magnitude of the benefits was small--both in economic terms and in proportion to the amount of time and energy that Mozambique's government spent on the issue, at the expense of other pressing problems.
In research that I carried out with Margaret McMillan and Karen Horn Welch, we estimated that the efficiency gains generated by the removal of the export restrictions could not have amounted to more than $6.6 million annually, or about 0.14% of Mozambique's GDP.
The additional income accruing to farmers was probably no greater than $5.3 million, or $5.30 per year for the average cashew-growing household.
These were puny amounts for a policy that was a key plank in the World Bank's reform agenda, and that became a bone of contention between the Bank and Mozambique.
Moreover, these numbers overstate the benefits.
The gains from liberalization must be set against the losses that resulted from idling processing plants.
In theory, these plant workers should have found alternative sources of employment.
In reality, many remain unemployed, perhaps because they believed that liberalization would be reversed.
We estimate the annual loss in real income to urban workers to have been around $6.1 million, or 0.12% of Mozambique's GDP, which is roughly equivalent to the direct efficiency gain generated by liberalization.
What went wrong?
The reform paid little attention to some key realities.
First, traders and intermediaries rather than farmers captured most of the benefits.
Second, since the world market for raw cashews is less competitive than that for processed cashews, Mozambique suffered a loss in its external terms of trade.
Third, poor political management of the reform undercut the dynamic gains that could have resulted.
The key to securing dynamic gains was a credible commitment to a new pricing regime--possibly complemented with compensatory programs--that would have made it worthwhile for farmers, entrepreneurs, and workers to undertake costly investments.
Liberalization could have reinvigorated the rural sector by reversing the collapse in cashew tree planting.
In the urban sector, it could have heralded a restructuring of production by promoting more rational investment.
The main failure was that liberalization did not send credible signals about future policies.
So farmers refused to plant trees, cashew processors refused to take their resources elsewhere, and urban workers refused to look for other jobs.
Mozambique's cashew story illustrates several themes now dominant in analyzing development.
First, it highlights the importance of credibility and the need to manage expectations.
The supply responses that will make reform successful are likely to be forthcoming only when a policy change seems lasting.
This underscores the need for creative thinking on credibility-enhancing mechanisms as an integral part of reform.
Second, reform is a "political" problem as well as being a "technical" one.
Had the opposition of urban groups been anticipated, compensatory mechanisms and side-bargains could have been agreed.
Finally, policy reforms that are imposed by multilateral lenders are rarely conducive to desirable outcomes.
The credibility problems that the Mozambique program faced were created in part because liberalization of the cashew sector was viewed as a "World Bank policy"--something the government was doing to qualify for World Bank (and IMF) loans.
Not having full "ownership" of the reform, the government was in a poor position to sell it to a skeptical public.
Puerto Rico in Crisis
WASHINGTON, DC – Puerto Rico ought to be the jewel of the Caribbean.
It is not.
Tourism has been stagnant for decades, even as travelers have flocked to other Caribbean destinations.
European firms doing business in North and South America locate their corporate headquarters in Miami, Panama City, and elsewhere, with almost none choosing Puerto Rico.
And now the island’s economy, after a decade of torpor, is declining at an accelerating rate as people leave for the US mainland.
Public debt has soared, and the government says it cannot pay.
Unlike Greece, Puerto Rico is not a country (which means that it is not eligible for financing from the International Monetary Fund).
Nor is it a US state.
Yet it has features of both: Although it has its own constitution, it is a United States territory, Puerto Ricans are US citizens, and the island is subject to US federal law, except as otherwise stipulated.
The advantages of this hybrid status include the security and predictability of America’s rule of law, eligibility for federal transfer payments, and favorable tax treatment.
Puerto Ricans who are not US government employees do not pay federal income tax, and the island’s bonds are “triple tax-exempt” (free of federal, state, and local taxes).
But there are also disadvantages to this arrangement.
For example, Puerto Rico is subject to the Jones Act, which requires using very costly US-built ships and crews for all sea transport to and from the mainland.
The island must also comply with the federally mandated minimum wage, despite an income level about half that of the poorest US state.
And municipalities cannot benefit from Chapter 9 of the US bankruptcy code.
Puerto Rico’s current troubles trace their origin to the gradual withdrawal, starting in 1996, of earlier exemptions from US corporate taxes for companies located on the island.
Capital-intensive companies, especially pharmaceutical firms, began leaving.
Puerto Rico’s economy recorded little growth after 1996, and real (inflation-adjusted) GDP has been falling for the past decade.
Many Puerto Ricans, unable to find jobs on the island, have migrated to the mainland, with the population and labor force estimated to be shrinking at a rate of 1.5% this year.
Moreover, Puerto Rico’s labor force participation rate is under 40%, compared to 62% on the mainland.
There is plenty of blame to go around for these failures. Puerto Rico and the US government each bear responsibility.
Successive Puerto Rican governments thought that the island’s economy was in “recession” and attempted to spur activity by increasing government spending.
Low interest rates meant that deficits could be financed by floating bonds.
Debt mounted, and markets are now almost entirely closed to more.
Despite efforts to cut expenditures and boost tax receipts, current and prospective obligations (including pension liabilities) far exceed any feasible increase in government revenues.
Given the ease with which Puerto Ricans move to the mainland, raising taxes is unlikely to increase revenues.
The US government also is culpable.
The inapplicability of Chapter 9 makes orderly debt restructuring very difficult.
Moreover, Puerto Rico is covered by the Patient Protection and Affordable Care Act and must pay accordingly, even though the island’s doctors are compensated at a lower rate than those on the mainland (and the Puerto Rican government must bear much of the cost).
The same is true of some other welfare payments.
Low labor force participation is a result of the relatively low productivity of Puerto Rico’s unskilled workers.
Companies cannot compete with firms that pay much lower wage rates on neighboring islands.
A rule of thumb is that a minimum wage that is above 55% of the median wage will impede job creation (and economic growth);
Puerto Rico’s minimum wage is 77% of the median, owing to the federal mandate.
A family of three with one wage earner at the minimum wage can take home about $1,100 per month, while it could get about $1,700 on welfare.
No surprise, then, that people either leave the island or go on welfare and work in the informal economy.
Overcoming Puerto Rico’s crisis will require restoring growth, implementing a sustainable fiscal policy, and debt restructuring.
Accomplishing the first of these would, together with reduction of excessive government expenditures, help to achieve the second.
For the Puerto Rican authorities, this means making the island friendlier to business, including by removing onerous labor-market regulations.
Meanwhile, the US government could exempt Puerto Rico from the Jones Act, extend to it Chapter 9 bankruptcy coverage, and align the island’s welfare and labor requirements with its productivity level.
Each of these policy actions requires political will.
Puerto Rico’s governor, Alejandro García Padilla, has appointed a working group to produce a five-year program to restore growth and fiscal sustainability.
Bills to make Puerto Rico eligible for Chapter 9 are being introduced in Congress.
These and other measures now under consideration promise to improve Puerto Rico’s economic prospects.
But they will require concerted and determined action on all fronts.
Puerto Rico is not Greece; successive governors of the island have introduced budgets they thought were balanced, only to find that inadequate growth led to lower revenues and higher expenditures than had been projected.
But it is a US territory.
The US government should do its part to improve the island’s prospects.
Can Minsk 2.0 Save Ukraine?
KYIV – The new ceasefire agreement for Ukraine was signed in Minsk almost one year to the day after Russian troops – their faces masked, their military insignias removed – invaded Crimea.
In the interim, thousands of Ukrainians have been killed, and hundreds of thousands more have been turned into refugees in their own country.
Russian President Vladimir Putin, determined to restore by force the sphere of influence once held by the Russian/Soviet empire, has shredded the rules that have ensured peace in Europe – indeed, in much of the world – for three generations.
While Russia was launching its bid to subordinate Ukraine, I was in prison, with scant hope of ever regaining my freedom.
The regime of former President Viktor Yanukovych was dancing to the Kremlin's tune, and my confinement ended only because of the courage of the millions of Ukrainians who demanded its ouster.
Yet my freedom has left a bitter aftertaste, because my imprisonment ended only as the war against my country began.
Now, after a year of savagery, sabotage, and mendacity on a scale unseen since Nazi rule in Europe, the leaders of France, Germany, Russia, and Ukraine have agreed on a new road map to peace for our country.
I must hope against hope that the agreement reached in Minsk, unlike the accord signed there in September 2014, succeeds.
The people of Donbas, still bombarded and besieged by Russian troops and their local accomplices, deserve a return to normalcy.
Equally important, our prisoners of war and hostages deserve to be returned to their families.
An early test of the extent of the Kremlin's commitment to the Minsk agreement should be whether it frees Nadiya Savchenko, Ukraine's first woman fighter pilot.
Savchenko has been on a hunger strike in Russia for more than two months to protest her patently illegal incarceration on charges even more ludicrous than those for which I was imprisoned.
Of course I hope that the new agreement will last, finally bringing peace to Ukraine.
But such an outcome is unlikely, given that the agreement lacks any enforcement mechanism, such as the automatic eviction of Russia from the SWIFT financial transfer system should it renege on any aspect of the agreement.
Simply trusting the Kremlin's “goodwill" would be reckless.
Ukraine and its partners need to develop a clear strategy and action plan, in case the latest Minsk agreement is torpedoed.
This should include the provision of defensive lethal assistance to Ukrainian forces; after all, strength deters and weakness provokes.
More broadly, despite the highly charged situation in our country, Ukraine deserves a clear road map out of its current security “grey zone" and toward a Euro-Atlantic future.
We have already paid a high price for our European ambitions; we should not be turned away now.
Moreover, if Ukraine's partners are serious about upholding the rule of law, charges should be filed against Kremlin leaders at the International Criminal Court in The Hague for the numerous war crimes and crimes against humanity that its forces have committed in Ukraine.
Since its invasion of Crimea a year ago, Russia has continuously and gravely violated the United Nations Charter, numerous international treaties, and international humanitarian norms.
We in Ukraine have learned much about ourselves – and about Russia and Europe – during this year of savagery.
We have found in our country's suffering a new and unbreakable national unity, as well as a new determination to embrace root-and-branch reform of our economy, government, and society, because our very independence, not just our European future, depends on it.
If we do not reform, we will be enslaved.
But the earthquake that Russia triggered in Ukraine has also exposed dangerous fault lines across Europe.
Putin has found in Ukraine the perfect tool with which to confound and divide the West.
And his political credo is simple: what he can divide, he can rule.
Indeed, over the past year, we in Ukraine often have watched in disbelief as Europe struggled to confront so clear an act of aggression.
Without the downing of Malaysia Airlines Flight 17 over rebel-held territory (an act that killed all 298 people aboard), it seems doubtful that the United States and the European Union would ever have agreed on the current program of economic sanctions imposed on Russia.
The first fault line that Russia has exposed can be found among Europe's former Soviet bloc countries.
Some, like Poland and the Baltic states, have consistently denounced Russia's actions and have demanded a firm response.
But, elsewhere in the region, leaders were quick to excuse Russia's invasion and annexation of Crimea, or to argue that Russia is simply too powerful to confront.
Appeasement, it seems, is alive and well in countries that should know better.
And then there has been the creation of something akin to a political fifth column across Europe.
The continent's Euroskeptic political parties, on both the left and the right, are holding up Putin's authoritarian nationalism as a model for the type of illiberal regime they would seek to establish should the EU dissolve.
In fact, the Kremlin is financing many of these parties.
Lenin once said that capitalists would sell the ropes with which they would be hanged.
Today, European governments appear willing to allow Putin to buy the votes with which he will destroy the EU.
There are other Kremlin supporters as well, including corporate leaders who want to return to business as usual with Russia, and academic apologists for the Soviet Union who, 25 years after its collapse, see a chance for vindication.
And, with public opinion polls revealing that a significant minority of Europeans are falling in line with Putin's rhetoric, his strategy of dividing the EU and NATO seems to be making real headway.
Let us be clear. What happens in Ukraine – not the financial standoff with Greece – will be the ultimate test of whether European and transatlantic unity endure.
The fault lines extending from Ukraine are undermining the fundamental values that have underpinned Europe's postwar peace and prosperity.
Failure to defend those values in Ukraine will cause them to unravel far beyond our borders.
A West that is divided in this crisis cannot stand.
Celebrating the German Model
If anyone wanted evidence that we are not in the mental and political world of the interwar Great Depression, the German election result and its outcome – a stable government of the center-right - should be a clincher. In interwar Germany, the Depression destroyed German democracy and led to the rise to power of Hitler and the National Socialists; in today’s Germany, the most severe economic crisis since the Second World War produced the reelection of Frau Merkel.
Conventional wisdom claims that incumbent parties and politicians are punished by voters in times of economic distress. Throughout the campaign there was never any doubt about the position or tpopularity of Chancellor Angela Merkel.
The interwar Depression led to the disintegration of liberal economic and political values. In Germany in 2009 not only was there was no swing to political extremism of the right: there was no sign of any support for a radical right.  In the elections for regional parliaments, the small radical right parties (which have never been a feature of national politics) simply disappeared.
The real victor of the campaign, with a vote that jumped up to 14.5% and a position in parliament that will determine the shape of the new coalition government, was the heir of classic German liberalism, the FDP. It campaigned on a promise of tax reduction and of deregulation in order to stimulate the economic growth that Germany needs to get out of the economic crisis.
The real losers of the election were the Social Democrats, with a drop in support of 11% that is without precedent in the very stable history of German electoral behavior. Some on the left claim that the SPD’s catastrophic result was the product of too close an engagement with liberalism and deregulation.  According to this view, the party is now paying the price for Chancellor Gerhard Schroeder’s successful attempts at economic reform in the early 2000’s.  It seems more likely that the party was punished for its lackluster electoral campaign, and for the negativity with which it tried to present the outcome of the election (the center-right coalition) as a threat to social peace in Germany.
In the interwar crisis of democracy, participation in elections surged as voters tried to protest against what the radical parties denounced as “the system”. In Germany in 2009, electoral participation fell by 5%, to 72.5%.  Those voters who were disillusioned by politics simply thought that there was no point in voting.
The only point in common with the interwar results seems to be that economic crisis then as now strengthened the radical left.
But what a difference! Then there was a powerful communist party, closely aligned with the interests and policies of the Soviet Union.  Now the party of protest is unambiguously the party of historical losers: in the East, of Germans who are nostalgic for the planned economy and society of state socialism; in the West, of critics of the SPD who lost a power struggle with Gerhard Schroeder.
It is a party with no coherent program, but rather a compendium of popular and nationalist slogans.
It is a testimony of the responsibility and maturity of the German people that this miscellaneous alliance of the disaffected only attracted 12% of the vote.
If the election is clearly not a victory for political and economic radicalism, it would be equally misleading to interpret it as the triumph of the free market. Throughout the campaign, there was an eerie degree of consensus about the desirability of central features of a distinctly European and more specifically German system of values.
What are those values?
A social market economy, rather than unbridled market capitalism; an export economy built on a large and technically innovative manufacturing base; a large network of small and medium sized enterprise, often family-owned, that is open to the global economy; a sense of environmental responsibility; and a suspicion of financially driven Anglo-Saxon style globalization and corporate capitalism. Indeed the sense that Germany had the opportunity to show off the unique strengths of the “German model” was a key to Merkel’s appeal, and she repeatedly noted what a tough line she had taken against the position of banks.
In coming years, the German government is likely to be more vocal in European and global debates. It is likely to present the German model as something that corresponds more closely to what the world needs in the aftermath of the financial crisis.
Financial activity was concentrated largely in what the Europeans termed “Anglo-Saxon” economies: above all the United States and the United Kingdom, and a few small countries that tried, disastrously, to replicate a model of free-for-all finance such as Iceland and Ireland. But the emerging markets that drive globalization in the early twenty-first century have a similar mix of export orientation and a prominent industrial base of small and medium-sized and frequently family-owned enterprises.  They have the problem today of trying to reconcile dynamic growth and social cohesion that was the problem of Germany in the past, and to which the German social model was and is held up as the answer.
Merkel’s new coalition will sit neatly alongside the new Japanese government of Yukio Hatoyama, which is also dedicated to finding a new and peculiarly Japanese model of economic growth.
These new national visions of economics in the twenty-first century are not simply turning in on themselves, or embarking on aggressive campaigns driven by xenophobic and racial nationalism – that was the world of the twentieth century. In the world of the twenty-first century, models of social organization have to persuade rather than conquer.  The world looks for local or national solutions to global problems.  Frau Merkel won the election because she formulated a clear answer.
Celebrating the Irrational
Three cheers for the new Nobel laureates in economics: Daniel Kahneman of Princeton University, and Vernon Smith of George Mason University in Virginia.
Like many Nobel prizes, these awards recognize not only the seminal work undertaken by Kahneman and Smith, but also the schools of thought they help to lead.
Kahneman, a psychologist, has demonstrated how individuals systematically behave in ways less rational than orthodox economists believe they do.
His research shows not only that individuals sometimes act differently than standard economic theories predict, but that they do so regularly, systematically, and in ways that can be understood and interpreted through alternative hypotheses, competing with those utilized by orthodox economists.
To most market participants - and indeed, ordinary observers -- this does not seem like big news.
Wall Street brokers who peddled stocks they knew to be garbage exploited the irrationality that Kahneman and Smith exposed.
Much of the mania that led to the bubble economy was based on exploiting investor psychology.
In fact, this irrationality is no news to the economics profession either.
John Maynard Keynes long ago described the stock market as based not on rational individuals struggling to uncover market fundamentals, but as a beauty contest in which the winner is the one who guesses best what the judges will say.
This year's Nobel prize celebrates a critique of simplistic market economics, just as last year's award (of which I was one of the three winners) did.
Last year's laureates emphasized that different market participants have different (and imperfect) information, and these asymmetries in information have profound impact on how an economy functions.
In particular, last year's laureates implied that markets were not, in general, efficient; that there was an important role for government to play.
Adam Smith's invisible hand -- the idea that free markets lead to efficiency as if by an invisible hand -- is invisible at least in part because it is not there.
This, too, is not news to those who work day after day in the market (and make their fortunes by taking advantage of and overcoming asymmetries in information).
For more than twenty years economists were enthralled to so called "rational expectations" models which assumed that all participants have the same (if not perfect) information and act perfectly rationally, that markets are perfectly efficient, that unemployment never exists (except when caused by greedy unions or government minimum wages), and where there is never any credit rationing.
That such models prevailed, especially in America's graduate schools, despite evidence to the contrary bears testimony to a triumph of ideology over science.
Unfortunately, students of these graduate programs now act as policymakers in many countries, and are trying to implement programs based on the ideas that have come to be called market fundamentalism.
Let me be clear: the rational expectations models made an important contribution to economics; the rigor which its supporters imposed on economic thinking helped expose the weaknesses many underlying hypotheses.
Good science recognizes its limitations, but the prophets of rational expectations have usually shown no such modesty.
Vernon Smith is a leader in the development of experimental economics, the idea that one could test many economic propositions in laboratory settings.
One reason that economics is such a difficult subject, and why there are so many disagreements among economists, is that economists cannot conduct controlled experiments.
Nature throws up natural experiments, but in most circumstances, so many things change so rapidly that it is often difficult to untangle what caused what.
In principle, in a laboratory, we can conduct controlled experiments, and therefore make more reliable inferences.
Critics of experimental economics worry that subjects bring to experimental situations modes of thought determined outside of the experiment, and thus that the experiments are not as clean and the inferences not as clear cut as in the physical sciences.
Nonetheless, economic experiments provide insights into a number of important issues, such as the improved design of auctions.
Most importantly, the irrationality of market participants, which was the focus of Kahneman's work, has been verified repeatedly in laboratory contexts.
Among the more amusing results that have come out of experimental economics are those concerning altruism and selfishness.
It appears (at least in experimental situations) that experimental subjects are not as selfish as economists have hypothesized--except for one group - the economists themselves.
Is it because economics as a discipline attracts individuals who are by nature more selfish or is it because economics helps shape individuals, making them more selfish?
The answer, almost certainly, is a little bit of both.
Presumably, future experimental research will help resolve the question of the relative importance of these two hypotheses.
The Nobel Prize signifies how important it is to study people and economies as they are, not as we want them to be.
Only by understanding better actual human behavior can we hope to design policies that will make our economies work better as well.
Censor and Sensibility
Most Western journalists fight back when governments threaten their ability to gather the information they need.
Some have gone to jail to protect the identities of anonymous sources and whistleblowers, or have sued governments that deny them access to crucial documents.
Alas, many journalists seem far more willing to fight over their right to gather news than to battle for their right to publish and broadcast the results of their reporting freely.
Indeed, Western journalists and news organizations seem to accept as a fact of life censorship within countries that routinely control the media.
Acquiescing to such censorship might have been necessary when printing presses, delivery trucks, news kiosks, or transmission towers were the only way to get printed publications or broadcast programs to news consumers.
But Internet publishing offers a new – and potentially lucrative – opportunity for the distribution of uncensored information.
Such freedom is not automatic, because even the Internet’s inherent openness can be largely defeated by assiduous government filtering and surveillance.
However, in recent years, sustained research into countermeasures against such third-party interference in Internet communications has begun to add a new factor.
The bulk of this research has not been conducted in university labs or corporate R&amp;D facilities, but spontaneously by teenagers, who use it to share copyrighted music with one another without paying for it.
Western media outlets have covered this story with great interest, yet apparently without realizing that these peer-to-peer technologies have the potential to de-censor the news for more people in countries like China, where any online content that runs counter to the Chinese Communist Party’s current line risks falling victim to the “Great Firewall” of censorship.
Peer-to-peer technologies make filtering more difficult, because they put nearly any consumer of information into the process of transmitting it.
For example, without endangering those in China, news organizations could conclude deals with other companies to ensure that uncensored reports are echoed from one free server to the next, thereby defying China to filter the entire Internet if it wishes to eliminate content.
Of course, news organizations operate as businesses, and defying powerful governments can be a bad business strategy.
That is why there has been so little rebellion, or even remonstration, among media companies when authoritarian governments threaten journalists, editors, and publishers.
It also explains why journalists in those countries have so often bent over backwards to apologize for individual transgressions, rather than stand in defiance.
But news organizations could reach many more people if they worked to circumvent Internet filtering instead of passively relying on those inside the firewall to figure out how to reach beyond blocked sites on their own.
Doing so might even make good business sense.
Building a creative digital distribution system that eludes government censors would help news organizations establish and enlarge their markets.
Indeed, it is not implausible that when a government’s repressive policies diminish, or end through regime change, media outlets that were present and government-approved will fare poorly vis-à-vis offshore counterparts that stayed away and conveyed the truth.
If news outlets in physically remote open societies meet consumers in countries like China halfway, the benefits for both the Chinese and the bottom line could be enormous.
Along with the enterprising teenagers who built Napster, academics like Lorrie Faith Cranor at Carnegie Mellon mapped out the shape of potential new networks with lofty names like “Publius,” through which unpopular views could be circulated outside of easy governmental control.
A team of computer scientists at Stanford and elsewhere created a project called “LOCKSS,” which retains decentralized mirrored copies of documents, and detects corruption or forgery among them, to preserve the integrity of our written histories forever.
Those who consider themselves members of the global free press should collectively strive to construct similar networks over which news and reporting can run free and be available to anyone with an Internet connection.
Building such a network would be far cheaper than constructing even a single new printing plant – and it would be far more effective.
We should consider the front pages of every free nation’s newspapers as a precious set of documents, to be replicated and shared openly throughout the world, especially in countries where heavy state censorship exists.
Thanks to the Internet, the risks in realizing these new distribution networks are really only business risks – and thus are quantifiable and manageable.
They pale in comparison to the risks taken by dissidents in closed societies.
Putting those front pages on a filtered Web site should be only a beginning.
It’s time find a way to circulate those front pages everywhere.
It makes good political sense; it could make good business sense as well.
Eastern Europe’s 25 Years of Transition
WASHINGTON, DC – What a difference 25 years can make.
In 1989, Central and Eastern Europe embarked upon a historic transformation, from authoritarian communism to democratic capitalism.
With memories of the old system already beginning to fade, it seems fitting to look back at the region’s achievements, review the lessons learned, and examine the challenges ahead.
It would be a mistake to assume that the success of the region’s transformation was inevitable.
At the close of the Cold War, Central and Eastern Europe’s economies were burdened by pervasive state ownership and concentrated investments in heavy industry.
Fiscal and monetary policies had focused on boosting industrial growth, without regard to macroeconomic balance, resulting in chronically excessive demand and widespread shortages.
To make matters worse, most of the region – Czechoslovakia being a notable exception – was plagued by unsustainable external debt and soaring inflation.
Meanwhile, few economists or policymakers had the background needed to tackle the complex tasks ahead.
Such was the scale of the necessary transition that neither modern macroeconomics, nor the International Monetary Fund’s nearly 50 years of experience, offered much guidance.
The challenges to be overcome were daunting, and many thought it would be impossible.
Instead, four key ingredients contributed to successful transitions.
First, courageous politicians and policymakers took on the challenge of designing crucial reforms and explaining their consequences to a public that was understandably wary.
They understood the historic nature of the task and embraced the challenge.
Second, the reform strategies focused squarely on the essential: the liberalization of prices to reflect scarcity and facilitate the allocation of resources; stabilization of finances to end shortages and inflation; and privatization of state-owned companies and assets in order to improve corporate governance and performance.
Countries that implemented these policies generally made the quickest and most complete progress.
Third, the allure of rejoining Europe after years of isolation, together with the European Union’s commitment to enlargement, provided a gravitational pull – and a legislative template – that helped policymakers justify and implement difficult reforms.
Unpopular laws sometimes brought down governments, but the ultimate litmus test for any new policy remained: “Will it lead us back to Europe?”
Finally, external support helped the region’s heavily indebted countries face the twin tasks of implementing structural reforms and coping with financial instability.
Financing from the IMF, the World Bank, the European Bank for Reconstruction and Development, and bilateral lenders, along with debt relief from official and commercial bank creditors, helped relieve the pressure.
Technical assistance, capacity building, and support for privatization – of banks, in particular – further smoothed the way.
Overall, the progress has been impressive.
Several Central European countries have achieved per capita GDP levels (measured in terms of purchasing power parity) that place them on the lower rungs of the eurozone’s income ladder.
Standards of living in the region have improved dramatically – even if full convergence with Western Europe is far from achieved.
Unsurprisingly, however, the picture is far from rosy everywhere.
Some countries, especially in the Balkans and the Commonwealth of Independent States, are far from completing the transition and have gone through repeated cycles of hope and crisis.
As elsewhere in the world, growth in the region has slowed sharply since the global financial crisis erupted in 2008.
The pace of reform has slowed in many countries – and reversed in a few.
Geopolitical considerations have complicated matters further, as the conflict in Ukraine demonstrates.
Looking ahead, one can envision two broad scenarios.
In the first, the region risks a cycle of weak growth, retreat from market-oriented policies, and increasing disillusionment.
As a result, convergence with Western Europe could slow, with many countries lagging far behind – a far different outcome from that envisioned during the boom of the mid-2000s, when convergence within a generation seemed almost like a birthright.
In the second, brighter scenario, rapid convergence to advanced-economy income levels continues, supported by a focus on two priorities, detailed in a new IMF report.
A renewed commitment to macroeconomic and financial stability allows governments to rein in persistent deficits and growing debts and address their economies’ increasing volume of bad loans.
Meanwhile, deeper structural reforms improve the business and investment climate, strengthen corporate governance, expand access to credit, free up labor markets, control public expenditure, and bolster tax administration – all of which puts their economies on track for sustained rapid growth.
The IMF, for its part, has been a committed partner to Central and Eastern Europe and its transformation throughout the past 25 years.
It stands ready to help countries in the region make the next quarter-century just as impressive.
Central Asia’s Other Turkmenbashis
A dictator’s sudden death almost always triggers political instability.
But it is doubly dangerous when it poses a risk of region-wide destabilization and a scramble for influence among the world’s greatest military powers – the United States, Russia, and China.
The sudden death in late December of Saparmurat Niyazov, Turkmenistan’s authoritarian president-for-life who declared himself “Turkmenbashi” (Leader of all Turkmens), jeopardizes stability in a country that is an increasingly important supplier of energy to Europe.
Worse, given the absence of a clearly designated successor and the weakness of civil society and other political institutions, his death could have repercussions across Central Asia.
Indeed, Niyazov’s demise highlights the broader problems of Central Asia’s post-Soviet regimes, which, with the exception of Kyrgyzstan, are run by Soviet-era bosses who, while not nearly as eccentric or egomaniacal as Niyazov, tolerate little dissent or opposition.
Most of them are old, some of them are unwell.
So, in the next few years, Central Asia will face leadership change on many fronts, with security apparatuses – which, as in Turkmenistan, have been crucial to buttressing these countries’ regimes – likely to be important players.
How these transitions turn out will matter for several reasons.
First, Central Asia is an important source of energy.
The Caspian region accounts for 2% to 3% of the world’s known oil resources – about equal to that of North Sea oil.
While far smaller than the deposits in Saudi Arabia or Iran, Caspian oil could prove important if oil production falls or is reduced for political reasons elsewhere.
Much of this Caspian oil is in Kazakhstan, giving that country a critical role in the regional energy market.
Moreover, Kazakhstan’s strategic importance has increased as a result of recent revelations that the country’s Kashagan oil field will produce 25% more than initially expected at peak production.
Kazakhstan and Turkmenistan are also major exporters of natural gas.
Russia depends heavily on Turkmen gas for domestic consumption and export abroad, which could prove vital as demand rises over the next decade.
Second, Central Asia’s leadership transitions could tempt outside powers to exploit the resulting instability and spark a struggle for influence.
Because the region was part of both the Soviet Union and the Russian empire, President Vladimir Putin’s Kremlin regards it as part of Russia’s natural sphere of influence.
Putin’s efforts to transform Russia into a major energy power and use energy as a tool of Russian foreign policy make the region all the more strategically significant.
Moreover, China has sought to improve trade and transit ties with Central Asia over the last decade, reflecting its growing interests there.
Not only is the region important for meeting China’s growing energy needs, but the Chinese authorities also are concerned about separatist pressures among the Uighur population in Xinjiang province and the impact of ties with Uighurs in neighboring Kazakhstan and Kyrgyzstan.
Like Russia, China wants a reduction of the US military presence in Central Asia.
Both powers have sought to use the Shanghai Cooperation Organization – a regional grouping that includes Russia, China, Uzbekistan, Kazakhstan, Kyrgyzstan, and Tajikistan – as a vehicle to pressure the US to withdraw its military forces from the region.
However, this cooperation represents a short-term, tactical marriage of convenience rather than a budding new strategic alliance.
In the long run, Russia and China are likely to be rivals for power and influence in Central Asia.
Iran could also view the transitions in Central Asia as an opportunity to expand its regional influence, particularly given its close ethnic and cultural ties with Tajikistan and its long border with Turkmenistan.
And, like China and Russia, Iran has no desire to see the US fill any security vacuum that could emerge as a result of leadership changes in Central Asia.
Pakistan and India – especially the latter – will also watch carefully how the transitions play out.
Both countries have growing strategic interests in the region.
Like China, India views Central Asia as an important future energy supplier.
As a result, India has quietly begun to strengthen its military ties to countries in the region, particularly Tajikistan, where it has a small base.
Finally, the transitions in Central Asia could have a strong impact on US interests.
As long as the US remains involved militarily in Afghanistan, access to facilities in Central Asia will remain important.
With the loss of the use of the base at Karshi-Khanabad in Uzbekistan, access to Manas airfield in Kyrgyzstan has become the main means of re-supplying US troops in Afghanistan from Central Asia.
However, the political situation in Kyrgyzstan is far from stable.
Discontent with President Kurmanbek Bakiyev’s rule is rising.
A leadership change or increased Russian and Chinese pressure on Kyrgyz leaders could precipitate calls for a renegotiation of the agreement regarding access to Manas – or even demands for its termination altogether.
In the nineteenth century, the struggle for mastery in Central Asia between the Russian and British empires was called “The Great Game.”
Today, there are many more players involved, and the stakes – energy security, above all – are far higher now.
America, India, Europe, and Japan will face increasing tension between their short-term military needs in the region and their long-term goal of promoting political reform in order to create more stable and reliable partners.
Indeed, the key challenge in the years ahead will be to find the proper balance between these two objectives.
Given the prospect of further leadership changes and increasing instability, meeting that challenge has never been more important.
Central Asia’s Waking Giant
THE HAGUE – The Shanghai Cooperation Organization (SCO) brings together almost half the world’s population, several members own nuclear weapons, many are big energy suppliers, and it includes some of the world’s fastest growing economies.
Yet few outside Central Asia have heard much about it.
The SCO emerged from the wreckage of the Soviet Union in 1996.
Today, its members are Russia, China, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan, while Mongolia, Iran, Pakistan and India are observers.
Russia and China remain the lead actors.
Since its launch, the SCO’s military exercises have become increasingly ambitious, growing from largely bi-lateral to inclusion of all members.
The SCO is also beginning to work together in the fight against drug trafficking and organized crime.
Until recently, the SCO’s members addressed energy issues only bilaterally.
But, in order to coordinate energy strategies and strengthen energy security, last year the organization launched a club that unites energy-producing and energy-consuming states, transit countries, and private companies.
The SCO promotes free trade, too, and aims to build essential infrastructure such as roads and railways to link its members and boost commerce between them while also harmonizing customs systems and tariffs.
Yet cooperation within the SCO remains focused on national rather than collective objectives, because its members’ interests vary so much.
China, for example, seeks markets for its products and further energy resources, while Russia aims to use the SCO to promote its anti-Western agenda.
The group’s other members – led by China and Kazakhstan – want to strengthen their already robust levels of economic cooperation with the West.
Thus, for example, at the SCO summit in August, Russia did not get the support of other members regarding the Georgia conflict.
These diverging objectives make it hard to believe that the SCO will ever evolve into an eastern version of NATO.
True, its members have held joint military exercises and have expressed a desire to build the SCO into a more mature security organization. But the SCO still lacks many essential elements of a full-grown NATO-style security organization.
The SCO has no integrated military-political structure, and no permanent operational headquarters.
It has no rapid-reaction force and does not engage in regular political deliberations.
NATO’s focus is on external security risks, while the SCO’s members target security issues within their own territories.
It makes sense for the West, particularly the European Union, to seek cooperation with the SCO, as this would also help counter Russia’s attempts to use it as a tool for its anti-Western policies.
It would also prevent the SCO from turning into a militarized entity.
These may look like negative reasons for the EU to engage with the SCO, but there are also ample positive reasons for encouraging cooperation.
Europe needs energy supplies from Central Asia, and Central Asia needs European investment.
Another sphere of mutual interest is Afghanistan.
At present, the EU offers financial support to the Afghan government and helps to train its police and judiciary.
The SCO has established a contact group with Afghanistan. Both sides want to do more, and they might be able to make a greater impact by working together rather than separately.
The EU has money and the SCO organization, most of whose members border Afghanistan, has trained personnel and direct experience in the region.
Cooperation with NATO also looks strategically wise.
Given China’s importance in both military and economic matters, growing energy and trade relations between Central Asia and the West, and the reasonable assumption that Central Asia’s security will continue to have great significance for Western security, cooperation between the SCO, the EU, and NATO looks inevitable.
This is all the more true in view of the common security threats faced by NATO and the SCO in Central Asia, such as Al-Qaeda and Taliban-sponsored terrorism and drug trafficking.
But both NATO and the SCO have so far hesitated to engage in closer contact.
It is hard to discern whether NATO has any opinion at all about the SCO.
At best, NATO seems to regard it as being neither a problem nor an opportunity.
Reaching out to the SCO would certainly seem to support NATO’s stated objectives.
After 9/11, the alliance came to the conclusion that threats may need to be dealt with on a worldwide basis, which explains NATO’s presence in Afghanistan.
As a part of this global strategy, NATO strengthened its relations with partners elsewhere, including in Southeast Asia which is the SCO’s chief area of responsibility.
Perhaps inevitably, the SCO – and Russia and China as its leading members – regards NATO’s increased presence in the region with some mistrust.
As long as NATO remains reluctant to enter into a dialogue with the SCO, such a cautious attitude looks set to linger, and may even intensify.
Consideration also needs to be given, therefore, to the establishment of a NATO-China Council, along the lines of the NATO-Russia Council, and to the creation of arrangements that would facilitate greater cooperation with the SCO as a whole.
Such cooperation would not bridge the main differences between SCO members and the West over issues like democratization and human rights.
Cooperation would also need to comprise much more than mere joint policy development, and should involve the practical pursuit of mutually beneficial, smaller-scale ad hoc projects.
NATO and the SCO could work together on neutralizing anti-personnel mines in Afghanistan, as well as other possible types of confidence-building measures, such as joint police training and counter-narcotics operations.
If security cooperation is to be a success, politically sensitive issues should be avoided, with the emphasis squarely on practical measures.
This approach would serve the interests of the EU, NATO, the SCO’s members, and, not least, Afghanistan.
Celebrity Central Bankers
CAMBRIDGE – Why do the comments of major economies’ central bankers command outsize attention nowadays?
It is not as if they change interest rates all of the time.
Nor have they developed new, more robust models for analyzing the economy.
On the contrary, major central banks’ growth and inflation forecasts in the years since the financial crisis have consistently overestimated both growth and inflation – and by wide margins.
There are many good reasons for the attention lavished on monetary policymakers, including the rise of central-bank independence, public acceptance of the need to appoint highly competent technocrats to oversee the money supply, and the deepening of financial markets.
And many central bankers have been rightly lauded for their role in preventing a global meltdown during the financial crisis.
Even so, given the numerous uncertainties surrounding macroeconomic forecasts and the effects of policy instruments (not least quantitative easing), many academics find it puzzling that central bankers’ speeches and statements generate so much fanfare.
And for all of their heroics during the financial crisis, many central bankers have been far too inflexible in the aftermath, worrying too much about overshooting inflation targets, and too little about deflationary dynamics.
Moreover, central bankers bear a share of the blame for the crisis in the first place, mainly owing to lax regulatory policy.
Many central bankers portray former US Federal Reserve Chairman Alan Greenspan (who served from August 1987 until January 2006) as the culprit, saying that he projected an image of central-bank omnipotence that is not warranted in theory or practice.
But this critique is overblown: Greenspan is long gone, but the focus on central-bank pronouncements is greater than ever.
What, then, is going on?
I would argue that, in addition to all of the factors listed above, three further considerations should be noted.
For starters, the public perception that central bankers are omniscient makes them an attractive whipping boy for politicians.
Moreover, the digital revolution in media has elevated the role of business news, one of the few profit centers for print and broadcast journalism in many countries.
Central bankers’ pronouncements are of interest to businesspeople – especially in the financial sector – and businesspeople are of interest to advertisers.
Finally, and perhaps least appreciated, is the fact that central-bank policy pronouncements are almost unique in having clear and predictable effects on financial markets, at least in the very short run (which can be a day or less).
If Fed officials surprise markets by making more “hawkish” statements (suggesting an upward bias to policy interest rates) than investors were expecting, the dollar will usually appreciate; long-term dollar interest rates will usually rise; and the stock market typically will decline.
True, these effects may be small and transitory.
But, unlike most of the reams of macroeconomic information with which we are bombarded every day, central bankers’ speeches and opinions have relatively foreseeable effects, especially when the bank’s chair, president, or governor speaks, or other officials speak in concert.
And, with trillions of dollars swirling around global financial markets, this predictability creates a fat target, with investors willing to make massive bets when they are pretty sure they are right, even if the profit per dollar is small.
If you think I am exaggerating, consider the coverage of other economic news, say, unemployment, GDP, or the trade balance.
Virtually every story quickly shifts its focus to what the data mean for monetary policy.
Some economic indicators, such as unemployment or inflation data, are indeed immediately important for central banks, because they may directly concern their mandates, and therefore have rather predictable effects.
But much information is simply noise.
This makes policy opinions that come straight from the horse’s mouth almost uniquely valuable.
In short, there are many good reasons why central bankers receive so much media focus, including their relative independence and generally solid performance.
But there are also other reasons having to do with politicians’ need for scapegoats, the media’s struggle to reinvent itself in the Internet age, and central-bank pronouncements’ predictable short-term effects on financial markets.
These other factors have combined to create a bubble around central-bank pronouncements and decisions that grossly exaggerates their economic significance.
Is this a bubble that central bankers should worry about?
The answer is clearly yes.
The news bubble is of particular concern, because it reinforces the idea that central bankers somehow care disproportionately about financial markets, which is generally not the case.
Most central bankers really are targeting growth, inflation, and financial stability, if not necessarily in that order.
The political bubble is an inevitable product of central-bank independence, and preventing monetary policy from becoming a target for elected officials requires constant effort.
The predictability bubble is perhaps the trickiest to navigate, though my instinct is that less would be more.
Exaggerated importance is one kind of bubble that central bankers should always be eager to burst.
The Trouble With Financial Bubbles
LONDON – Very soon after the magnitude of the 2008 financial crisis became clear, a lively debate began about whether central banks and regulators could – and should – have done more to head it off.
The traditional view, notably shared by former US Federal Reserve Chairman Alan Greenspan, is that any attempt to prick financial bubbles in advance is doomed to failure.
The most central banks can do is to clean up the mess.
Bubble-pricking may indeed choke off growth unnecessarily – and at high social cost. But there is a counter-argument.
Economists at the Bank for International Settlements (BIS) have maintained that the costs of the crisis were so large, and the cleanup so long, that we should surely now look for ways to act pre-emptively when we again see a dangerous build-up of liquidity and credit.
Hence the fierce (albeit arcane and polite) dispute between the two sides at the International Monetary Fund’s recent meeting in Lima, Peru.
For the literary-minded, it was reminiscent of Jonathan Swift’s Gulliver’s Travels. Gulliver finds himself caught in a war between two tribes, one of which believes that a boiled egg should always be opened at the narrow end, while the other is fervent in its view that a spoon fits better into the bigger, rounded end.
It is fair to say that the debate has moved on a little since 2008.
Most important, macroprudential regulation has been added to policymakers’ toolkit: simply put, it makes sense to vary banks’ capital requirements according to the financial cycle.
When credit expansion is rapid, it may be appropriate to increase banks’ capital requirements as a hedge against the heightened risk of a subsequent contraction.
This increase would be above what microprudential supervision – assessing the risks to individual institutions – might dictate.
In this way, the new Basel rules allow for requiring banks to maintain a so-called countercyclical buffer of extra capital.
But if the idea of the countercyclical buffer is now generally accepted, what of the “nuclear option” to prick a bubble: Is it justifiable to increase interest rates in response to a credit boom, even though the inflation rate might still be below target?
And should central banks be given a specific financial-stability objective, separate from an inflation target?
Jaime Caruana, the General Manager of the BIS, and a former Governor of the Bank of Spain, answers yes to both questions.
In Lima, he argued that the so-called “separation principle,” whereby monetary and financial stability are addressed differently and tasked to separate agencies, no longer makes sense.
The two sets of policies are, of course, bound to interact; but Caruana argues that it is wrong to say that we know too little about financial instability to be able to act in a preemptive way.
We know as much about bubbles as we do about inflation, Caruana argues, and central banks’ need to move interest rates for reasons other than the short-term control of consumer-price trends should be explicitly recognized.
At the Lima meeting, the traditionalist counterview came from Benoît Cœuré of the European Central Bank.
A central bank, he argued, needs a very simple mandate that allows it to explain its actions clearly and be held accountable for them.
So let central banks stick to the separation principle, “which makes our life simple.
We do not want a complicated set of objectives.”
For Cœuré, trying to maintain financial stability is in the “too difficult” box.
Even macroprudential regulation is of dubious value: supervisors should confine themselves to overseeing individual institutions, leaving macro-level policy to the grownups.
Nemat Shafik, a deputy governor of the Bank of England, tried to position herself between these opposing positions.
She proposed relying on three lines of defense against financial instability.
Microprudential regulation, she argued, is the first line of defense: if all banks are lending prudently, the chances of collective excesses are lower.
But the second line of defense is macroprudential manipulation of capital requirements, to be applied across the board or to selected market segments, such as mortgages.
And, if all else fails to achieve financial stability, central banks could change interest rates.
Because British law assigns capital regulation and interest-rate policy to two separate committees – with different members – within the Bank of England, the Shafik strategy would require some clever political and bureaucratic maneuvering.
Industrial quantities of research, analysis, and debate have been devoted to the causes of the 2008 crisis and its consequences; so it seems odd that senior central bankers are still so sharply divided on the central issue of financial stability.
All those days spent in secret conclave in Basel, drinking through the BIS’s legendary wine cellar, have apparently led to no consensus.
My view is that Caruana had the best of the arguments in Lima, and Cœuré the worst.
Sticking to a simple objective in the interests of a quiet life, even if you know it to be imperfect, is an inelegant posture at best.
We need our central bankers to make complex decisions and to be able to balance potentially conflicting objectives.
We accept that they will not always be right.
However, it is surely incumbent on them to learn from the biggest financial meltdown of the last 80 years, rather than to press on, regardless, with policy approaches that so signally failed.
Central Bankers under Siege
CHICAGO – Poor Ben Bernanke!
As Chairman of the United States Federal Reserve Board, he has gone further than any other central banker in recent times in attempting to stimulate the economy through monetary policy.
He has cut short-term interest rates to the bone.
He has adopted innovative new methods of monetary easing.
Again and again, he has repeated that, so long as inflationary pressure remains contained, his main concern is the high level of US unemployment.
Yet progressive economists chastise him for not doing enough.
What more could they possibly want?
Raise the inflation target, they say, and all will be well.
Of course, this would be a radical departure for the Fed, which has worked hard to convince the public that it will keep inflation around 2%.
That credibility has allowed the Fed to be aggressive: it is difficult to imagine that it could have expanded its balance sheet to the extent that it has if the public thought that it could not be trusted on inflation.
So why do these economists want the Fed to sacrifice its hard-won gains?
The answer lies in their view of the root cause of continued high unemployment: excessively high real interest rates.
Their logic is simple.
Before the financial crisis erupted in 2008, consumers buoyed US demand by borrowing heavily against their rising house prices.
Now these heavily indebted households cannot borrow and spend any more.
An important source of aggregate demand has evaporated.
As consumers stopped buying, real (inflation-adjusted) interest rates should have fallen to encourage thrifty households to spend.
But real interest rates did not fall enough, because nominal interest rates cannot go below zero.
By increasing inflation, the Fed would turn real interest rates seriously negative, thereby coercing thrifty households into spending instead of saving.
With rising demand, firms would hire, and all would be well.
This is a different logic from the one that calls for inflation as a way of reducing long-term debt (at the expense of investors), but it has equally serious weaknesses.
First, while low rates might encourage spending if credit were easy, it is not at all clear that traditional savers today would go out and spend.
Think of the soon-to-retire office worker.
She saved because she wanted enough money to retire.
Given the terrible returns on savings since 2007, the prospect of continuing low interest rates might make her put even more money aside.
Alternatively, low interest rates could push her (or her pension fund) to buy risky long-maturity bonds.
Given that these bonds are already aggressively priced, such a move might thus set her up for a fall when interest rates eventually rise.
Indeed, America may well be in the process of adding a pension crisis to the unemployment problem.
Second, household over-indebtedness in the US, as well as the fall in demand, is localized, as my colleague Amir Sufi and his co-author, Atif Mian, have shown.
Hairdressers in Las Vegas lost their jobs partly because households there have too much debt stemming from the housing boom, and partly because many local construction workers and real-estate brokers were laid off.
Even if we can coerce traditional debt-free savers to spend, it is unlikely that there are enough of them in Las Vegas.
If these debt-free savers are in New York City, which did not experience as much of a boom and a bust, cutting real interest rates will encourage spending on haircuts in New York City, which already has plenty of demand, but not in Las Vegas, which has too little.
Put differently, real interest rates are too blunt a stimulus tool, even if they work.
Third, we have little idea about how the public forms expectations about the central bank’s future actions.
If the Fed announces that it will tolerate 4% inflation, could the public think that the Fed is bluffing, or that, if an implicit inflation target can be broken once, it can be broken again?
Would expectations shift to a much higher inflation rate?
How would the added risk premium affect long-term interest rates?
What kind of recession would the US have to endure to bring inflation back to comfortable levels?
The answer to all of these questions is: We really don’t know.
Given the dubious benefits of still lower real interest rates, placing central-bank credibility at risk would be irresponsible.
Finally, it is not even clear that the zero lower bound is primarily responsible for high US unemployment.
Traditional Keynesian frictions like the difficulty of reducing wages and benefits in some industries, as well as non-traditional frictions like the difficulty of moving when one cannot sell (or buy) a house, may share blame.
We cannot ignore high unemployment.
Clearly, improving indebted households’ ability to refinance at low current interest rates could help to reduce their debt burden, as would writing off some mortgage debt in cases where falling house prices have left borrowers deep underwater (that is, the outstanding mortgage exceeds the house’s value).
More could be done here.
The good news is that household debt is coming down through a combination of repayments and write-offs.
But it is also important to recognize that the path to a sustainable recovery does not lie in restoring irresponsible and unaffordable pre-crisis spending, which had the collateral effect of creating unsustainable jobs in construction and finance.
With a savings rate of barely 4% of GDP, the average US household is unlikely to be over-saving.
Sensible policy lies in improving the capabilities of the workforce across the country, so that they can get sustainable jobs with steady incomes.
Central Europe\u0027s Fractious Right
Is Eastern Europe's political pendulum about to run down?
Across Central Europe since 1989, elections have oscillated between right and left.
Is Hungary's slick young prime minister, Viktor Orban, poised to end all that?
A ruthless program to absorb his political rivals on the right has helped Orban's FIDESZ party become nearly equal in size to his Socialist rivals on the left.
Moreover, infighting among the Socialists has dented one of their biggest political advantages: the hard-headed discipline and political professionalism inherited from their Communist days.
Premier Orban's semi-successful efforts to unify the right under the banner of FIDESZ are unique among Eastern Europe's fractured and fractious rightist parties.
Since Communism's fall, center right parties in the Czech Republic, Hungary, Poland, and Slovakia have suffered from disunity and a lack of vision.
Despite the fact the region is still recovering from decades of communist mismanagement, the political right's fragmentation helped the political left, in some cases represented by former Communists, to win democratic elections regularly.
Some problems faced by Central Europe's right are similar to those the political right faces elsewhere in Europe, where social democratic parties expropriated many formerly liberal ideas to seize a monopoly of the political center.
In Central Europe this effect has been amplified by the fact that, regardless of ideological leanings, rulings parties have had to privatize the economy and, under pressure from the European Union, introduce reform measures that would, in a classical Western system, usually be undertaken by the political right.
Leftist parties in various Central European countries, indeed, have often turned out to be more successful in reforming because they, paradoxically, have greater legitimacy in this respect.
Many people believe that the Socialists would not privatize the economy or slash welfare systems if such measures were not absolutely necessary.
The most serious problem of Central Europe's political right is a lack of identity.
Although right-of-center politicians in Central European countries formally embrace traditional ideologies, for example, liberalism or conservatism, their electorates, unfamiliar with Western political philosophies, do not always understand the real meaning of those terms.
In various surveys, significant segments of Central European electorates describe themselves as ``rightist,'' but years of communist paternalism pushed the region's political center of gravity firmly to the left.
A person may describe him or herself as, for example, a liberal, yet at same time demand that the government continue subsidizing energy, education, or housing.
Under the communist regimes, ideologies became totally instrumental.
As during those years, many people now formally accept ideological labels but identify with them only as long as such an allegiance to a specific political current has tangible short-term benefits for them.
One consequence of this cynical treatment of political ideologies is the wild swings in voters' preferences seen in various Central European countries.
The problem of identity is made even worse by the fact that most Central European nations, where nation-building was retarded by Communism, easily succumb to nationalist sentiments that in turn are misused by some politicians.
Although such politicians often describe themselves as ``rightist,'' their real policies, such as, for, example, those of former Slovak Prime Minister Vladimir Meciar, are in fact demagogic populist or authoritarian.
The situation of the political right in each Central European country is also influenced by experiences that are rooted in history and tradition.
Political developments in Czechoslovakia during the last 20 years of communism set the Czech Republic and Slovakia apart from both Poland and Hungary.
While both the Polish and Hungarian communist parties experienced internal liberalization that allowed relatively large semi-official zones of activity outside communist control, Czechoslovakia after the Soviet-led invasion of 1968 became a rigid neo-Stalinist regime.
When the communist regimes collapsed in 1989, the communist parties of Poland and Hungary transformed themselves into credible democratic-left parties that became formidable opponents of the newly emerging political right.
No strong social democratic party in Czechoslovakia could emerge from the rigid Czechoslovak Communist Party.
In the absence of a credible democratic left party, Czech center-right politicians had the upper hand, and were relatively united, until 1997.
However, lack of a strong opposition corrupted the political right, which splintered into various groupings that cannot find a common language.
In Slovakia, where nationalist sentiments were an important political factor after 1989, the political spectrum has not yet coalesced along standard right-left political axis.
The main political battles occur between nationalist/populist forces, whose outlook have in essence been undemocratic, and forces that struggle for standard democracy.
The threat of return to power by Meciar forced all democrats, leftist or rightist, into one camp.
Even in this situation the political right has been quarrelsome, creating space for Meciar's possible return to power.
Hungary's political right has suffered mainly from differences between conservative and populist forces on the one hand, and traditional, mainly urban, liberals on the other.
Various rightist parties failed to decide whether the modus operandi on the political right should be traditional Western ideologies or a Hungarian brand of nationalist conservatism and populism.
Although the current governing coalition, consisting of conservatives and populists, has been successful, the real reckoning for Hungary's right may still be yet to come.
Poland's right poses the most difficult case.
Its problems originate in the communist era, when a trade union movement, which under normal circumstances should stand to the political left, became the main anti-communist opposition.
As a result, various political groups associated with the Solidarity trade union movement have, since Communism's fall, aspired to represent the political right, confusing the terms of political discourse.
Christian-democratic parties, associated with the Catholic Church, and the liberals have been to some extent marginalized.
The confusion has been made complete by the existence of relatively strong nationalist and populist parties that use the numerous Polish farmers as their electoral base.
As in other postcommunist countries, the main beneficiary of such a lack of unity has been the democratic left.
Central Europe’s Misguided War on Drugs
WARSAW – It was two decades ago this summer that communist rule began to implode from Tallinn in the Baltic to Tirana in the Adriatic, ushering in free elections, market reforms, and expanded civil liberties.
Since then, the countries of Central and Eastern Europe have come a long way.
Many are now members of the European Union.
My homeland, Poland, has a steady economy and a thriving media.
Yet Poland, like many of the other new democracies in our region, remains stuck in the past when it comes to the humane treatment of drug users.
Indeed, throughout the former Soviet bloc, there is a disturbing trend in using outdated, conservative, and heavy-handed policies to address drug abuse.
For example, Gdansk – the birthplace of the Solidarity movement – does not have a single methadone treatment center.
People must travel for three hours to get the medicine that is proven to control cravings and reduce the harms of drug use.
And they are the lucky ones.
Only 5% of opiate users in Poland have access to methadone at all, compared to 40% in Germany.
Instead of focusing on treatment that works, the Polish government chooses to give priority to long-term rehabilitation centers located in the depths of the countryside that have little, if anything, to do with evidence-based medicine.
Poland also chooses to treat possession of even the smallest quantities of drugs as criminal, as evidenced by the fact that 60% of people sentenced for drug possession in Poland are marijuana smokers.
Addressing drug use through criminalization and rehabilitation centers does nothing to curb demand, however, and usage rates have failed to decline.
By driving users underground, criminalization contributes to a deepening public-health crisis.
This pattern persists across Central and Eastern Europe, where governments have also opted to imprison drug users.
In Hungary, for example, the penal code calls for two years imprisonment for personal possession by a drug-dependent person.
In neighboring Slovakia, the penalty for personal possession is, as in Poland, up to three years.
This approach is not only inhumane, but also economically untenable: leaders in these countries should be encouraged to redirect scarce law enforcement, court, and prison resources towards more pressing causes.
Simply put, governments can no longer afford to drain precious time and money that could be better spent elsewhere by locking up people for drug-related offenses.
If Poland and its neighbors are to chart a new way forward, at least three things must happen. First, these countries should look West for alternative, and more humane, drug policies.
A report released recently by the United Kingdom’s Drug Policy Commission correctly calls for a “smarter” drug policy that focuses on addressing associated violence rather than simply making arrests.
Officials in Central and Eastern Europe should pay heed to recent comments by the UK’s Home Office, which said that “harm reduction underpins every element of our approach to tackling this complex issue.”
Portugal recently went a step further in voting to decriminalize recreational drugs, including heroin and cocaine – a move that has led to a significant decline in drug-related deaths and a fall in new HIV infections.
Second, law-makers should listen to their constituents: a recent public awareness campaign by Gazeta Wyborcza , a leading Polish daily newspaper, collected more than 23,000 signatures in five days for a petition calling for changes to the current drug law.
The changes, modeled after Germany’s progressive policies, would stop punishing people for possessing small amounts of drugs for their own use, impose stricter penalties for dealers and provide more effective treatment for drug-dependent people.
In a step forward, a debate in the Polish parliament on the proposed drug law is set to start in September.
Young people should not start their working lives with criminal records because of personal possession.
Finally, at the European level, EU policymakers can help by encouraging member states to decriminalize possession of small amounts of drugs.
By freeing up resources devoted to enforcing policies against low-level users, countries can better tackle serious drug-supply issues and provide people with the effective treatment that they need and deserve.
Central Europe’s Unsentimental Education
BUDAPEST – This month marks the 20th anniversary of the reburial of Imre Nagy, the leader of Hungary’s failed anti-Soviet revolution of 1956.
The reinternment, organized by Hungary’s anti-communist opposition on the 31st anniversary of his execution, drew more than 100,000 attendees, heralding the beginning of the end of the country’s sclerotic regime.
We Hungarians, and Central Europe in general, have come far since those heady times, but the past 20 years have also given us much cause to question the path we took.
Hungary played a special role in the collapse of Communism, accelerating the process by opening its borders for East German refugees.
But democratic transformation in Hungary required an opposition strategy throughout the 1980’s: revolution wouldn’t work, as the Soviet invasion in 1956 showed.
Nor would internal reforms work, because the Soviets would intervene to save the system, as they did in 1968 in Czechoslovakia.
Instead, the new strategy was to sideline the issue of political power.
Rather than attacking Communist rule directly, we would create small islands of freedom, inter-connected social circles and associations, which, when the moment came, could all be connected in order to change the system.
In Hungary, several youth organizations existed and were aware of each other, so the political community that took part in the political changes in Hungary in 1989 was organized on this basis.
History also played a part in the success of the Hungarian transition.
The 1956 revolution was a real one, with barricades.
In no other Central European country did Communists experience the possibility of paying with their own lives for the suffering and oppression that they inflicted on others.
This historical experience was good for reform capability.
A new generation was also needed.
It appeared symbolically on June 16, 1989, when I had the opportunity to speak on behalf of the young generation.
A whole generation felt that the moment had come when Hungarians could at last determine their own future.
So, what kind of future did they determine?
The past 20 years can be divided into three phases.
First, a market economy was created, the rule of law established, and democratic institutions built.
Next, we applied for admission to NATO and prepared for European Union membership, with all of the institutional reforms that these goals implied.
The third phase was one of economic catch-up, which, unlike the first two phases, has not really been successful in Hungary, which today may even be falling back.
But, for Central Europe as a whole, the past 20 years have been the best since the Peace of Westphalia, with Slovakia and Slovenia even joining the euro zone.
Nevertheless, the 20th anniversary of the collapse of communism is overshadowed by the global financial and economic crisis.
And it is now clear that the biggest winners of globalization are no longer the Europeans or the Americans, but the Asians.
The world market is being re-divided – peacefully, because territories and markets are separated, so that no power occupies another power’s territory.
But Europe must nonetheless recognize the need to distinguish clearly between partners, competitors, and opponents, and to formulate a more sophisticated and articulated policy towards Russia, in particular.
For example, we Central Europeans are opponents when we do not accept Russia’s policy of renewing “spheres of interest” and “security zones.”
Moreover, after all that has happened in the past six months, Central Europeans can no longer look up to old countries representing the moral values of Western civilization.
This crisis was not caused by bad luck or some professional misunderstanding, but by character problems, especially in the United States and later Western Europe.
Money was stolen, not merely “mismanaged.”
Investments were not simply bad, but unacceptably risky.
The moral state of business leaders caused this crisis, and you cannot find Central Europeans among those leaders.
Central Europe has found itself in a completely new situation.
Crisis management measures undertaken in the Western world are practically cutting our countries off from the EU market.
In this situation, Central European countries must cooperate to defend their own interests, as well as their dream of a common Europe.
The question for the European elite is whether we believe in the work of the past 20 years, whether we believe in an integrated European market and an ever-widening European Community.
If not, then first the biggest and the strongest countries, and then the Central Europeans, will turn away from the European dream.
Those of us who believe that the past 20 years made sense, and that we are on the right track, are still the majority in Hungary.
Everyone in Europe and the world needs a unified, robust Europe.
If our faith is strong enough, we can survive this crisis without destroying what we have built together by opening our borders, destroying the Wall, unifying Germany, and completing our democratic transitions.
महिलाओं के सबसे बड़े दूसरे जानलेवा ख़तरे को रोकना
जेनेवा – महिलाओं के लिए, इस दुनिया में जीवन को लाने के कार्य का ऐतिहासिक दृष्टि से अर्थ उनके अपने जीवन को खतरे में डालना रहा है क्योंकि प्रसव के दौरान मौत होने की संभावना वास्तविक होती है। लेकिन यद्यपि, गरीब देशों में मातृ मृत्यु को कम करने के मामले में उल्लेखनीय प्रगति हो रही है, परंतु ये लाभ महिलाओं के स्वास्थ्य के खतरों में बढ़ोतरी होने के कारण बेअसर हो सकते हैं। पहली बार, हर वर्ष गर्भाशय ग्रीवा के कैंसर की वजह से होने वाली मौतों की संख्या प्रसव के कारण होनेवाली मौतों से अधिक होने की संभावना है।
यह प्रवृत्ति आंशिक रूप से मातृ मौतों को कम करने के प्रयासों की सफलता को दर्शाती है। 1990 से, महिलाओं की प्रसव के कारण होनेवाली मौतों की संख्या लगभग आधी होकर 2,89,000 प्रति वर्ष हो गई है। तथापि, उसी अवधि के दौरान, गर्भाशय ग्रीवा के कैंसर से होने वाली वार्षिक मौतों में लगभग 40% की वृद्धि होने से इनकी संख्या 2,66,000 हो गई है। हालाँकि देखभाल के बेहतर स्तरों के कारण मातृ मृत्यु दरों में कमी होती जा रही है, गर्भाशय ग्रीवा के कैंसर से होने वाली मौतों में और बढ़ोतरी होने की संभावना है। 2035 तक, इस बीमारी के फलस्वरूप हर वर्ष 4,16,000 महिलाओं के धीरे-धीरे और दर्द से मरने की संभावना है - लगभग ये सभी मौतें विकासशील देशों (ज्यादातर उप सहारा अफ्रीका और दक्षिण एशिया) में होंगी।
त्रासदी यह है कि इन सभी मौतों को लगभग पूरी तरह से रोका जा सकता है। स्क्रीनिंग और इलाज के साथ, ह्यूमन पेपिलोमा वायरस (एचपीवी) के टीकों से गर्भाशय ग्रीवा के कैंसर के अधिकतर मामलों को रोका जा सकता है। लेकिन गर्भाशय ग्रीवा के कैंसर से मरनेवाली महिलाओं में से लगभग 90% विकासशील देशों में हैं, जहाँ उनमें से बहुत अधिक महिलाओं के लिए स्क्रीनिंग सेवाएँ उपलब्ध नहीं हैं, और इलाज तो उससे भी बहुत कम उपलब्ध है।
दुनिया में गर्भाशय के कैंसर से सर्वाधिक संख्या में मौतें होनेवाले देश भारत में, स्वास्थ्य और परिवार कल्याण मंत्रालय में पूर्व अतिरिक्त सचिव के रूप में, मैंने खुद अपनी आँखों से इस बीमारी के प्रभाव को देखा है। विशेष रूप से खौफ़नाक बात यह है, यह उम्मीद को भी पूरी तरह से ख़त्म कर देती है। उदाहरण के लिए, एचआईवी से ग्रस्त महिलाओं के विशेष रूप से इस रोग से ग्रस्त होने की संभावना होती है। फिर भी, एचआईवी के लिए बेहतर उपचार उपलब्ध होने के कारण, महिलाएँ अब केवल गर्भाशय ग्रीवा के कैंसर से मरने के लिए ही एचआईवी से जीवित बच जाती हैं।
2010 में, गर्भाशय ग्रीवा के कैंसर की कुल वैश्विक लागत लगभग $2.7 बिलियन प्रति वर्ष होने का अनुमान लगाया गया था। यदि हम इसके बारे में अभी से कुछ नहीं करते हैं, तो 2030 तक इसके बढ़कर $4.7 बिलियन होने की संभावना है।
सौभाग्य से, टीकों की उपलब्धता अब बढ़ती जा रही है। सुरक्षित और प्रभावी एचपीवी टीके बाज़ार में 2006 से मिल रहे हैं जो एचपीवी टाइप 16 और 18 से रक्षा प्रदान करते हैं, गर्भाशय ग्रीवा के कैंसर के सभी मामलों में से 70% मामले इनके कारण होते हैं। नए स्वीकृत टीके और भी अधिक सुरक्षा प्रद��न करते हैं।
अमीर देशों में, एचपीवी टीकों की कीमत अक्सर प्रति खुराक 100 डॉलर से भी अधिक रखी जाती है। लेकिन वैक्सीन एलायंस, गावी ने निर्माताओं को विकासशील देशों में इसकी कीमतों को कम रखने के लिए राज़ी किया है। हाल ही में, हमने एचपीवी के टीकों के लिए अब तक की सबसे कम कीमत $4.50 प्रति ख़ुराक हासिल की है, जिससे 27 देशों में उन सबसे गरीब लाखों लड़कियों के लिए अवसर खुल गए हैं जिन्हें यह टीका लगाया जाना है। हमारा अनुमान है कि 2020 तक, गावी द्वारा 40 से अधिक विकासशील देशों में 30 मिलियन से अधिक लड़कियों की एचपीवी से रक्षा के लिए टीका लगवाने में मदद की जा चुकी होगी।
टीके के आर्थिक लाभ बहुत अधिक हैं। प्रभावी स्क्रीनिंग और उपचार सेवाओं को स्थापित करने के लिए समय और भारी निवेश की ज़रूरत पड़ती है। और, यह देखते हुए कि उच्च आय वाले देशों को भी कैंसर के उपचारों की लागत को पूरा करने के लिए संघर्ष करना पड़ता है, रोकथाम करना स्पष्ट रूप से कहीं अधिक कारगर विकल्प है। इसके अलावा, गर्भाशय ग्रीवा का कैंसर महिलाओं को आर्थिक दृष्टि से उनके सबसे अधिक उत्पादक वर्षों के दौरान हमला करता है, जब समाज और अर्थव्यवस्था में उनका योगदान सबसे अधिक होता है। रोग सिर्फ जीवनों को नष्ट नहीं करता है; यह परिवारों को भी गरीब बना देता है और आर्थिक विकास को भी हानि पहुँचाता है।
टीकाकरण पर विश्व स्वास्थ्य संगठन के विशेषज्ञों के रणनीतिक सलाहकार समूह द्वारा पिछले वर्ष की गई सिफारिश के फलस्वरूप टीके की वास्तविक लागत और अधिक कम हो जाने की आशा है क्योंकि अब एचपीवी टीके की सिर्फ दो खुराकें ही काफ़ी होंगी जबकि इससे पहले यह माना जाता था कि इसकी तीन खुराकें लेना आवश्यक है। इससे न केवल टीके की खरीद और वितरण की कुल लागत कम हो जाएगी; बल्कि इससे स्वास्थ्य देखभाल कर्मियों और स्वयं लड़कियों को भी आसानी होगी।
डब्ल्यूएचओ और लंदन स्कूल ऑफ़ हाइजीन एंड ट्रॉपिकल मेडिसिन द्वारा जून में प्रकाशित एक अध्ययन में यह अनुमान लगाया गया है कि 179 देशों में 58 मिलियन लड़कियों को टीके लगाए जाने से गर्भाशय ग्रीवा के कैंसर के 6,90,000 मामलों और इस रोग से होनेवाली 4,20,000 मौतों को रोका जा सकेगा। दुर्भाग्यवश, इस अध्ययन से यह भी पता चला है कि जिन 33 देशों में कैंसर को रोकने में एचपीवी टीकों का सबसे अधिक प्रभाव होने की संभावना है, उनमें से 26 देशों ने अभी तक इस टीके को शुरू ही नहीं किया है।
अभी बहुत काम किया जाना बाकी है। हमें स्वयं को सौभाग्यशाली मानना चाहिए कि हम 1990 से अब तक मातृ मृत्यु दर को लगभग आधा कर सके हैं। लेकिन हमें गर्भाशय ग्रीवा के कैंसर के खतरे पर पूरी नज़र रखनी चाहिए। यह आवश्यक है कि हम अभी से कार्रवाई करें ताकि यह सुनिश्चित किया जा सके कि प्रत्येक लड़की को एचपीवी टीकों की सुविधा मिलती है और गर्भाशय ग्रीवा के कैंसर से मुक्त एक स्वस्थ भविष्य मिलता है, चाहे वह कहीं भी रहती हो।
Challenging Europe’s Last Autocrat
The Rowhani Front
WASHINGTON, DC – On June 17, at his first press conference as Iran’s President-elect, Hassan Rowhani broke little new ground in the Islamic Republic’s relations with the West.
On nuclear policy, he said that the “era of suspension is over”: Iran will not accept the suspension of uranium enrichment in upcoming negotiations but will seek to make its nuclear activities more transparent in order to build international confidence.
Moreover, Iran would welcome direct negotiations with the United States if&#160;the US stopped attempting to meddle in Iran’s internal affairs and abandoned its “bullying attitude.”
None of these statements is new.
Does that mean that the world should not expect meaningful change in Iran’s official behavior following Rowhani’s victory?
The general impression before the election was that Iran’s Supreme Leader, Ayatollah Ali Hosseini Khamenei, supported either Saeed Jalili or Mohammad Baqer Qalibaf.&#160;In recent years, Jalili has been the leading Iranian representative in international negotiations over the country’s nuclear program.
That made him the main target of criticism by Rowhani and another candidate, Ali Akbar Velayati, Khamenei’s adviser on international affairs.
According to Rowhani and Velayati, while Iran in recent years has increased the number of centrifuges in use in its nuclear research program, the cost has been an economically devastating array of international sanctions.
Rowhani promised to sustain progress on the nuclear program while adopting stronger and wiser diplomatic measures to prevent the imposition of new sanctions and pave the way for lifting the existing ones.
Jalili had not been a high-profile figure within the country.
For the first time, average Iranians saw him at public events and in the media, discussing not only nuclear policy, but also his ultra-conservative policy agenda for women, youth, and cultural issues.
He ended up appearing even more radical on these topics than outgoing President Mahmoud Ahmadinejad.
As for Qalibaf, the mayor of Tehran, he proudly confessed that he was directly involved in the violent crackdown on student protesters in 2003.
Indeed, he described sitting on the back of a motorcycle with a stick to command police forces to suppress the massive demonstrations.
Rowhani used this against him very effectively.
Conservatives tried to convince their candidates to unite behind a single figure, but weaker candidates did not drop out in favor of a unity candidate.
In particular, there is strong evidence that the Islamic Revolutionary Guard Corps (IRGC) split into two major factions, with one supporting Jalili and the other backing Qalibaf.
For example, Qassem Suleimani, the commander of the Quds Force, a branch of the IRGC, endorsed Qalibaf, who he hoped would receive Khamenei’s full support.
The infighting among conservatives and within the IRGC increased in the last few days before the election.
And, with Rowhani’s surprising first-round victory – and Khamenei’s refusal to endorse either candidate – both IRGC factions lost.
Khamenei was probably wise to step aside and let popular opinion prevail.
Had either Jalili or Qalibaf been elected, the tension within the IRGC might have worsened, becoming difficult for Khamenei to control.
And, by remaining on the sidelines, Khamenei may have been seeking to show the IRGC that there are limits to its power.
Though well connected to the military and security community, Rowhani was clearly considered an outsider.
Indeed, he was not a political figure until now, serving in the military during the Islamic Republic’s first decade and spending the last two mostly in the Supreme National Security Council.
When Ahmadinejad came to power, Rowhani lost his position as the Council’s secretary, but became Khamenei’s personal representative to it – a post that he has held until now.
Whether Khamenei seriously planned for Rowhani’s victory, or simply calculated that the cost of preventing it would be too high, Rowhani can serve Khamenei’s agenda at least as well as any other candidate.
Rowhani’s victory created the impression of a democratic process and relieved the popular anger that has accumulated during the last eight years, especially since the rigged presidential election in 2009.
Indeed, his triumph exposed a rift among Iran’s democratic forces, which were divided over whether to participate in the election, and rendered irrelevant the Green Movement born in 2009.
Rowhani’s efforts to portray Iran’s foreign policy in a democratic light are less convincing.
For example, his call for Syrian President Bashar al-Assad to remain in power until the scheduled 2014 elections is risible, given that Assad typically “wins” Syria’s presidential elections by Soviet-like margins, with more than 95% of the popular vote.
More important for the regime, Rowhani’s victory has bought Iran time on the nuclear issue.
Not only is there less chance of new sanctions, but Rowhani’s electoral legitimacy may well force the P5+1 (the five permanent members of the United Nations Security Council plus Germany) to offer Iran better terms in any nuclear deal.
But Khamenei will face two main challenges related to nuclear policy in the next four years.
First, Rowhani’s victory has delegitimized the policy of resistance that Jalili championed.
Iran’s government can no longer claim that the nuclear program is a national cause with broad support.
Rowhani’s supporters want a better economy and integration into the international community more than they want nuclear glory.
Second, even if Khamenei hands the nuclear portfolio to Rowhani (which is not certain, given that he retained it under Ahmadinejad), the new president must come to terms with the IRGC, whose support – at least tacit – is necessary for any nuclear deal.
To date, Iran’s nuclear program and regional policies have been run by the IRGC and the country’s hard-liners.
They did not win the election, but they have not gone away.
Changing China’s Growth Path
MILAN – China is poised to begin its transition from middle-income to developed-country status.
Relatively few economies (five to be precise, all in Asia: Japan, South Korea, Taiwan, Hong Kong, and Singapore) successfully managed this transition while sustaining high growth rates.
No country of China’s size and diversity has ever done so.
China’s 12th Five-Year Plan, adopted last month, provides the road map it will follow.&nbsp;
Yet it is not really a plan; rather, it is a coherent interconnected set of policy priorities to support the economy’s structural evolution – and thus to maintain rapid growth – over the period of the plan and beyond.
So a great deal is at stake, both internally and externally.
Growth in the world’s emerging economies now depends on China, the main export partner for a growing list of major economies including Japan, South Korea, India, and Brazil.
There are at least five important interconnected transitions embedded in China’s new Five-Year Plan:
· Changing the economy’s growth model or supply side structure, as labor costs rise, global market shares become large enough to limit expansion, and advanced countries’ growth momentum slows for an unknown period of time;
· Rebalancing demand, from investment and exports to domestic consumption;
· Accommodating a rapidly urbanizing population, and ensuring that incentives are structured to bring about as orderly a process of social change as possible;
· Building the institutions necessary for achieving inclusiveness and equal opportunity;
· Assuming international responsibility for stability, growth, and sustainability, including tackling climate change.
The challenge for China is implementation, which means reform and systemic change.
International experience suggests that the balance between planning and markets shifts toward markets as countries becomes richer.
The structural evolution that underpins growth will increasingly be driven by market opportunities and entrepreneurial initiative.
A huge number of new businesses need to be created.
To support this shift, much is required.
Labor-intensive industries in the tradable sector must be allowed to decline.
Many companies may survive, but only by moving to different parts of the global economy or up the value-added chain domestically: up or out.
A rising nominal and real exchange rate can propel structural change; a weak-currency policy is a trap.
The financial sector must be developed in order to create more savings options and supply credit and equity capital efficiently to new and growing businesses, which China needs in order to attract the rural population to cities (even as export sectors move up the skill and value-added hierarchy).
Many of these jobs will be in the domestic, urban, non-tradable service sector.
But urbanization faces another obstacle: the hukou system of residency permits, which restricts mobility and bars migrants (an estimated 200 million people) from becoming full-status urban citizens.
Chinese officials’ reluctance to eliminate hukou quickly reflects their observation of the social consequences of rapid or unbalanced urbanization elsewhere, though problems caused by internal migration in other countries typically reflect the absence of opportunity in rural areas, not the attraction of opportunities in urban areas.
As the scope of the private sector expands, legal structures and policies that support competition, entry and exit, market openness, intellectual property, and social safety nets will also be needed.
The move to higher-value-added links of domestic and global supply chains will require more effective education and expanded investment in the economy’s intellectual and technological underpinnings.
The balance between technology imports and domestic innovation will continue to shift steadily toward the latter.
The Chinese public sector has a huge balance sheet, including land, a vast array of infrastructure, massive foreign-exchange reserves, and major equity positions in state-owned enterprises (SOEs), which account for more than one-half of net fixed assets and one-third of profits in the corporate sector.
In all countries, these assets should be held in trust for citizens and deployed in pursuit of economic and social development.
China has an exemplary record in this area.
Unlike most countries, China has not struggled to get public-sector investment up to levels that support sustained high growth.
But there are now issues.&nbsp;
Investments are justified and support economic and social development when they have high private and social returns.
Elements of the investment portfolio in the public sector and the SOEs are beginning to fail this test.
To be fair, given the SOEs’ legacy costs (stemming from their responsibilities for social services and insurance), together with their financial distress in the 1990’s, it made sense for a while to let them keep their retained earnings and not place additional claims on them through the government budget.
No longer.
If SOEs’ reinvested income is not subject to a high return criterion, growth will eventually slow.
The portion that falls short needs to be redirected to higher-return investments in either the public or private sector, to household income, or to essential public services and social insurance.
The SOEs compete in product and labor markets with the private sector, but less so in capital markets.
While wages and incomes are rising now and appear to have broken the iron grip of the surplus labor pool, the growth pattern requires this structural demand-side shift toward more disposable income, greater government consumption, and high-return investment.
We suspect but do not know that consumption will increase.
Properly recycled savings, including corporate profits, could go back mainly into high-return public- or private-sector investments.
Both contribute to aggregate domestic demand, and the structural shifts on the supply side will be driven by the “right” mix of aggregate demand, with the low-return component on the investment side removed.
Thus, the Five-Year Plan’s goal is to recompose (not expand) aggregate demand in order to sustain growth and avoid the diminishing-returns trap that is the principal risk of China’s current investment pattern.
Changing that pattern will require a restructured financial system that allocates savings efficiently, based on fiscal and capital-market discipline and corporate-governance reform.
Designing that system will be an important part of achieving the high-return investment and expanded consumption that Chinese leaders want – and that China’s economy needs.
Changing Climate Change
The 10 warmest years on record have all occurred since 1990, and 2005 is likely to be the warmest ever.
This year, we’ve gotten a taste of the many kinds of dangers that lie ahead: more extreme hurricanes, massive droughts, forest fires, spreading infectious diseases, and floods.
The climate is changing, and more is yet to come.
The world’s governments will meet in Montreal at the end of November to plot the next steps, including specific measures that the world could adopt if the Bush administration abandoned its willful neglect of this critical issue.
Climate change is equated with “global warming,” but much more than warming is involved.
The rising concentration of carbon dioxide and other greenhouse gases is leading to more extreme storms, higher-intensity hurricanes, rising ocean levels, melting glaciers and ice sheets, droughts, floods and other climate changes.
Even the chemistry of the land and ocean is changing, with the ocean becoming more acidic – thus threatening coral reefs – as a result of higher carbon dioxide.
The specific patterns of change are not known precisely, but the risks of continuing on our current global course are widely appreciated.
Yet the United States has refused to sign the Kyoto Protocol, which does little to change the long-term course of events on the planet, since it calls for only small steps up to the year 2012.
Under the terms of the UN treaty on climate change, the signatories – virtually the whole world - are to gather each year to discuss the treaty’s implementation.
The conference in Montreal - the 11th such meeting - should look beyond 2012, so that the world gets onto a safe and sustainable long-term climate path.
The actions that are needed are difficult to introduce, because they go to the heart of the world’s use of energy, particularly its use of fossil fuels (coal, oil, and gas), which, when burned, release carbon dioxide – the key source of rising greenhouse gases – into the atmosphere.
Yet the world economy depends on fossil fuels, and developing countries will need to use more, not less, of them as their economies grow.
Even if the world runs out of oil and gas in the coming years, coal will prove to be plentiful, and solid coal can be converted at relatively low cost to liquid fuels for automobiles and other uses.
Unfortunately, clean, renewable energy sources that do not emit carbon dioxide, such as wind power and geothermal power, are not yet sufficient.
Solar power can be produced on the required scale but is too expensive under current technologies.
Nuclear power is relatively cheap, and could be plentiful, but poses huge dangers for increased proliferation of nuclear-weapons materials.
So: fossil fuels are plentiful, but harmful; renewable sources like wind are good for the climate but not plentiful.
Solar power is plentiful but not cheap.
Nuclear power is plentiful but not safe.
Improved technologies can offer a way out of this bind, but only if we think and act ahead.
There are two main kinds of technologies that look most promising.
The first is energy conservation through more fuel-efficient vehicles.
New hybrid automobiles, pioneered by Toyota, use both gasoline and electric power to boost gasoline efficiency by approximately two-fold.
A massive changeover to more fuel-efficient vehicles would make a big difference, especially as the numbers of vehicles on the road soars in China, India, and other developing countries.
The second big technology that could make a major difference is called “carbon capture and storage.”
The idea is to “capture” the carbon dioxide that is emitted in power plants and other big factories when fossil fuels are burned, thereby preventing it from entering the atmosphere.
The captured carbon is then pumped into underground storage sites such as empty oil fields and other suitable locations.
All of the key aspects of the technology – capturing the carbon dioxide, putting it into pipelines for shipment, and then depositing it underground – have already been demonstrated, but they have not yet been tried, and proven, on a large scale.
There is strong evidence, however, that it would not cost the world huge amounts to undertake large-scale carbon capture and storage.
The problem is timing.
The changeover of the world’s vehicles to hybrid and other efficient technologies will take decades, not years.
So will the changeover of power plants to carbon capture and storage.
If we procrastinate, the dangers posed by climate change will confront us as we talk, debate, and plan.
The world needs to start acting soon - very soon - if it is to head off the major threats.
All major regions of the world will need to be involved.
Today’s developing countries are not yet major emitters of carbon dioxide, but with economic growth they will become so.
Therefore, all countries, both developed and developing, need to do their part, with rich countries helping poor countries cover the financial costs of adjustment.
Plenty of carbon dioxide will be emitted into the atmosphere as the world’s climate negotiators fly to and from the Montreal meeting.
Let’s press our governments to make real progress when they meet; otherwise they will merely be adding to the problem.
Charisma We Can Believe In
CAMBRIDGE – A leadership transition is scheduled in two major autocracies in 2012.
Neither is likely to be a surprise.
Xi Jinping is set to replace Hu Jintao as President in China, and, in Russia, Vladimir Putin has announced that he will reclaim the presidency from Dmitri Medvedev.
Among the world’s democracies, political outcomes this year are less predictable.
Nicolas Sarkozy faces a difficult presidential re-election campaign in France, as does Barack Obama in the United States.
In the 2008 US presidential election, the press told us that Obama won because he had “charisma” – the special power to inspire fascination and loyalty.
If so, how can his re-election be uncertain just four years later?
Can a leader lose his or her charisma?
Does charisma originate in the individual, in that person’s followers, or in the situation?
Academic research points to all three.
Charisma proves surprisingly hard to identify in advance.
A recent survey concluded that “relatively little” is known about who charismatic leaders are.
Dick Morris, an American political consultant, reports that in his experience, “charisma is the most elusive of political traits, because it doesn’t exist in reality; only in our perception once a candidate has made it by hard work and good issues.”
Similarly, the business press has described many a CEO as “charismatic” when things are going well, only to withdraw the label when profits fall.
Political scientists have tried to create charisma scales that would predict votes or presidential ratings, but they have not proven fruitful.
Among US presidents, John F. Kennedy is often described as charismatic, but obviously not for everyone, given that he failed to capture a majority of the popular vote, and his ratings varied during his presidency.
Kennedy’s successor, Lyndon Johnson, lamented that he lacked charisma.
That was true of his relations with the public, but Johnson could be magnetic – even overwhelming – in personal contacts.
One careful study of presidential rhetoric found that even such famous orators as Franklin Roosevelt and Ronald Reagan could not count on charisma to enact their programs.
Charisma is more easily identified after the fact.
In that sense, the concept is circular.
It is like the old Chinese concept of the “mandate of heaven”: emperors were said to rule because they had it, and when they were overthrown, it was because they had lost it.
But no one could predict when that would happen.
Similarly, success is often used to prove – after the fact – that a modern political leader has charisma.
It is much harder to use charisma to predict who will be a successful leader.
Followers are more likely to attribute charisma to leaders when they feel a strong need for change, often in the context of a personal, organizational, or social crisis.
For example, the British public did not regard Winston Churchill as a charismatic leader in 1939, but, a year later, his vision, confidence, and communication skills gave him charisma, given Britons’ anxiety after the fall of France and the Dunkirk evacuation.
And then, in 1945, after the public’s focus had turned from winning the war to constructing a welfare state, Churchill was voted out of office.
His charisma did not predict defeat; the change in followers’ needs did.
In practice, charisma is a vague synonym for “personal magnetism.”
People vary in their ability to attract others, and their attraction depends partly on inherent traits, partly on learned skills, and partly on social context.
Some dimensions of personal attraction, such as appearance and non-verbal communication, can be tested.
Various studies show that people who are rated as attractive are treated more favorably than unattractive people.
One study finds that a handsome man enjoys an edge over an ugly rival that is worth 6-8% of the vote.
For women, the advantage is close to ten points.
Non-verbal signals account for a major part of human communications, and simple experiments have shown that some people communicate non-verbally better than others.
For example, a Princeton University study found that when people were shown images of two candidates in unfamiliar elections, they could predict the winners seven times out of ten.
A similar study at Harvard, in which people were shown 10-second silent video clips of 58 elections, found that viewers’ predictions explained 20% of the variation in the two-party vote – a more powerful variable than economic performance.
Ironically, the predictions became poorer when the sound was turned on.
In the 2008 election, Americans felt disillusioned by the Bush administration’s war in Iraq, and by the financial crisis that erupted two months before the vote.
Obama was an attractive young candidate who spoke well and projected a sense of hope for the future.
Clearly, this is one reason why Obama gained a reputation for charisma.
But part of his charisma was in the eyes of his followers.
People sometimes say of charisma that “we know it when we see it,” but we are also looking in a mirror.
As the economy worsened, unemployment rose, and Obama had to deal with the messy compromises of governing, the mirror became cloudier.
Charisma tells us something about a candidate, but it tells us even more about ourselves, the mood of our country, and the types of change we desire.
Hard economic times make it difficult to maintain charisma.
Obama faces the continuing challenges of unemployment and a recalcitrant Republican opposition, and Sarkozy must contend with similar problems.
When they are campaigning, however, their rhetoric will be freed from the need to compromise.
This year’s elections will be the true test of their charisma.
Charity in Hard Times
PRINCETON – As I tour the U.S. promoting my new book, The Life You Can Save: Acting Now to End World Poverty , I am often asked if this isn’t the wrong time to call on affluent people to increase their effort to end poverty in other countries.
I reply emphatically that it is not.
There is no doubt that the world economy is in trouble.
But if governments or individuals use this as an excuse to reduce assistance to the world’s poorest people, they would only multiply the seriousness of the problem for the world as a whole.
The financial crisis has been more damaging for the poor than it has been for the rich.
Without in any way minimizing the economic and psychological blow that people experience when they lose their jobs, the unemployed in affluent countries still have a safety net, in the form of social security payments, and usually free health care and free education for their children.
They also have sanitation and safe drinking water.
The poor in developing countries have none of these benefits, which proves fatal for an estimated 18 million of them each year.
That’s a higher annual death toll than during World War II, and it’s easier to prevent.
Of those who die from avoidable, poverty-related causes, nearly ten million, according to UNICEF, are children under five.
They die from diseases like measles, diarrhea, and malaria that are easy and inexpensive to treat or prevent.
We may feel the pain of falling back from a level of affluence to which we have grown accustomed, but most people in developed countries are still, by historical standards, extraordinarily well off.
Have you, in the past week, bought a bottle of water, a beer, or a coffee when tap water was available at no cost?
If you did, that’s a luxury that the world’s poorest billion people can’t afford, because they have to live for an entire day on what you spent on just one of those drinks.
One reason that we can afford to increase the amount of aid we give is that the amount we are giving now is insignificant in comparison to what we spend on other things.
The United States government, for example, spends about $22 billion on foreign aid, while Americans privately donate perhaps another $10 billion.
Compared to the $787 billion stimulus package signed by President Barack Obama last month, that $32 billion is trivial.
It’s also less than $0.25 for every $100 that Americans earn.
Of course, some nations do better: Sweden, Norway, Denmark, The Netherlands, and Luxembourg all exceed the United Nations target of allocating the equivalent of 0.7% of gross national income in foreign aid.
But even $0.70 for every $100 is still not a lot with which to confront one of the great moral problems of our age.
If extreme poverty is allowed to increase, it will give rise to new problems, including new diseases that will spread from countries that cannot provide adequate health care to those that can.
Poverty will lead to more migrants seeking to move, whether legally or not, to rich nations.
When there is eventually an economic recovery, the global economy will be smaller than it would be if all the world’s people could take part in it.
Nor is the global financial crisis a justification for the world’s leaders failing to keep their word.
Nearly nine years ago, at the Millennium Development Summit in New York, the leaders of 180 countries, including all the major affluent nations, promised that by 2015 they would together achieve the Millennium Development Goals.
These goals include halving the proportion of the world’s people living in poverty and ensuring that children everywhere receive a full primary education.
Since that meeting in 2000, the commitments made by most nations have fallen short of what is required, and 2015 is now only six years away.
If we cut back on aid, we will fail to keep our promise, and poorer countries will learn, once again, that rich countries’ actions fall short of their inspiring rhetoric about reducing world poverty.
That is not a good basis for future cooperation between rich and poor countries on issues such as climate change.
Finally, if anything good comes out of this global financial crisis, it will be a reassessment of our basic values and priorities.
We need to recognize that what really matters isn’t buying more and more consumer goods, but family, friends, and knowing that we are doing something worthwhile with our lives.
Helping to reduce the appalling consequences of world poverty should be part of that reassessment.
Charlie and the Anti-Muslim Media Factory
PARIS – It is facile to frame the deadly attack on Charlie Hebdo as an attack on freedom of expression.
Are we supposed to be surprised that a global terror organization known for its brutal disregard for human rights and humane values would attack a media outlet that has specialized in provoking it?
Just as much of the social media in the Arab/Muslim world has made&nbsp;anti-Semitic rants routine, there is a global industry of outlets dedicated to all things anti-Muslim. In any given week, French, European, (and increasingly Indian) journalists, bloggers, tweeters, and others regularly express all sorts of things that are offensive or provocative to Muslims – or at least the most devout and fanatical among them.
There are literally hundreds of websites, radio programs, and TV networks that specialize in anti-Muslim and anti-Islam propaganda.
The Twitter hashtag #killallMoslems has been around since 2011.
While this abundance of offensiveness may comfort those concerned about freedom of expression, it does not give me any comfort as a European Muslim.
Europe’s suspicion of Islam is not new, of course, and one could say that the feeling is mutual.
But the level of anti-Muslim provocation has become unprecedented recently.
In Germany, the so-called Pegida movement now holds weekly anti-Muslim marches in several cities (though, in fairness, even bigger rallies, and almost all of Germany’s political elite, have opposed the Pegida marchers).
Last year, the mayor of Sargé-lès-le Mans, a French town of 3,500 people with 180 Muslim students, sought to impose pork meat on all schools.
A couple of years earlier, then-French President Nicolas Sarkozy joined in a campaign to ban halal meat branding, which became an election issue.
The Swiss, meanwhile, have banned minarets.
The list goes on.
Minorities are easy targets everywhere (certainly, Christians and Jews do not have an easy time nowadays in Muslim-majority countries).
And, given the fear campaign propagated by Al Qaeda and its affiliates, on the one hand, and right-wing racists, on the other, many people are unaware that Muslims are actually a very small minority in all European (and Western) countries.
That is why Charlie Hebdo’s mockery of the sacred beliefs of minorities (Jews, Muslims, and gays alike) is not an act of bravery.
Most people abstain from such provocations not because they are cowards, but because they believe, quite reasonably, that such behavior serves no good or useful purpose.
European Muslims are no less peaceful than their non-Muslim neighbors.
Almost all terrorist acts carried out by Muslims in Europe and other countries have been the work of affiliates of one umbrella organization – Al Qaeda.
Though this organization’s far-reaching influence is worrisome, it is also comforting to know how limited violent ideology is among Muslims, particularly in the West.
Indeed, there are no real homegrown Islamist terrorist organizations of any significance in Europe.
Radicalized European Muslims must look elsewhere.
To be sure, Muslim-majority countries are not known for their affection for free speech.
But, in the wake of the attack on Charlie Hebdo, it is worth noting that, apart from war-torn Iraq and Syria, more journalists are killed each year in the largely Catholic Philippines than in any Muslim-majority country.
Unfortunately, as the horrific murder of 77 people by Anders Breivik in my adopted country of Norway has shown us, it only takes one organization or one individual to commit an atrocity, whatever a society’s level of education and living standards.
Yet, while lone wolves like Breivik are hard to detect, active members of terror organizations are much easier to detect and monitor.
This is where the attacks in Paris become more troublesome.
Here was a case of a catastrophic intelligence and security failure that allowed a group of four who were known to the police to be members of a globally active terrorist organization to operate with relative ease in the French capital.
Why were they on the loose?
Why were they not monitored and stopped earlier?
How many more such people, known to the police, are out there?
This is the discussion that is needed.
Focusing the debate solely on Islam and Muslims and the prospect of religious reform, integration, and co-existence is a way to camouflage failure.
Muslims are already very much part of every sphere of European life, including the security apparatus and the army.
European Muslims are integrated in their societies as professionals, athletes, academics, and civic leaders.
If we European Muslims are expected to identify with our citizenships and other secular identities, then our fellow Europeans should not categorize us by our religious identity.
No one should presume that European Muslims must apologize or explain the actions of a terrorist organization with a cult-like religious ideology, just as no one expected Norwegians to apologize for Breivik.
Al Qaeda and its affiliates have been known to attract disenchanted individuals from among Muslim and non-Muslim Europeans alike.
If we close our eyes, we can think that the Paris attacks exposed a contradiction between Islam and freedom of expression – and between Muslims and Europeans.
If we open them and start looking at cause and effect, we can avoid the abyss to which such willful blindness beckons us.
The Paris attacks targeted innocent people everywhere, and the public deserves answers from those whose job it is to prevent such incidents from happening.
Free Speech for All
COPENHAGEN – The attack on the French magazine Charlie Hebdo was an assault on democracy, on freedom, and on the ideals that underpin all free societies.
As we face the forces of extremism and terror, we must have the courage to speak up for those ideals and to safeguard the right to say what we believe.
But we must also take care to respect the fact that others have the same right.
Charlie Hebdo is not the first publication to have suffered for publishing images which some perceived as offensive to Islam.
In 2005, when I was Prime Minister of Denmark, the Danish newspaper Jyllands-Posten provoked international controversy by publishing twelve sketches of the Prophet Muhammad.
Some Muslims, in Denmark and abroad, accused Jyllands-Posten of blasphemy for publishing an image of the prophet.
Others said that the images were an insult to Islam.
There were calls for reprisals against the newspaper, against my government, and against Danish interests abroad.
Our response was founded on the principle that freedom of speech is one of the pillars on which democracy stands, and that if you undermine it, you undermine democracy itself.
In free countries, every citizen has the right to say what he or she wants, believe what he or she wants, and criticize or mock what he or she wants – in writing, drawings, or any other form of peaceful expression.
Every citizen also has the right to disagree with another’s opinions and to express that disagreement in a peaceful, legal manner.
In 2005, during the cartoons crisis, some commentators and politicians in the Muslim world claimed that the right to free speech had been abused and called for an apology and a condemnation of the cartoons, first from Jyllands-Posten, then from my government.
To be sure, freedom of speech is a right that is best used wisely and responsibly.
But we believed, and I still believe, that it would be neither wise nor responsible to attempt to limit it, and that the correct way to respond to a perceived insult is to present a counterargument, not to mount a terrorist attack.
And, in democracies, you can always take the matter to court.
That principle guided us through the 2005 crisis.
We did not apologize for an independent newspaper’s editorial decisions, despite great pressure from Muslim groups and governments.
Nor did we seek to justify the publication of the cartoons.
We simply stood up for freedom of speech.
Despite the horror and anger we feel at the attacks on Charlie Hebdo, we must all hold fast to that principle, because to limit freedom of expression would be to weaken our own societies.
The attacks on the journalists of Charlie Hebdo were disgusting and despicable, but if we respond to them by abridging the freedom on which our societies rest, we will be playing into the murderers’ hands.
Governments must stand up for the freedom of journalists to write what they want and the freedom of every citizen to support or disagree with what they write.
And journalists must continue to write and draw what they believe.
Self-censorship would undermine their freedom and encourage further pressure on free speech.
In the past few days, some editors decided that the right response to the Charlie Hebdo massacre was to republish the magazine’s cartoons.
Others decided not to.
Still others criticized Charlie Hebdo’s actions.
The editors had the right to make those decisions and to express themselves as they saw fit.
That is the essence of democracy.
The day such decisions are made for fear of reprisal is the day our freedom ends.
For citizens, freedom of speech means having the courage to speak out for what they believe, without resorting to violence – against journalists or against the representatives of any religious belief.
To shoot journalists in cold blood for printing a cartoon is a hideous crime.
But so is attacking a mosque or assaulting a Muslim because of his or her faith.
There is a place for debate, even passionate debate, on the deeply moral question of how to balance freedom of speech with respect for religion.
But the weapons of this debate should be words, not arms – the keyboard, not the Kalashnikov.
Every one of us has the right to our opinion.
None of us has the right to kill those with whom we disagree.
The march of millions in Paris on January 11 was a magnificent expression of solidarity and peace.
Every leader and legislator should strive to live up to those ideals as he or she responds to the threat of extremism.
The terrorist attacks in Paris will, one hopes, be a game changer in the defense of press freedom, and freedom in general, because millions of people have realized what is at stake.
We cannot take freedom of expression for granted.
We must stand up for it and defend it, even –&nbsp;and perhaps especially –&nbsp;when we disagree with what is being expressed.
Charlie Hebdo’s Rights and Wrongs
DAVOS – In the wake of the terrorist attack on the French satirical magazine Charlie Hebdo in Paris, declarations of “Je suis Charlie” have echoed worldwide.
And, indeed, Charlie Hebdo should be free to publish what it likes, without fear of violence, as long as it does not directly incite violence itself.
But does that mean that other news outlets and individuals should republish it?
To be sure, freedom of expression should almost never be repressed, a point that the United States Supreme Court Justice Oliver Wendell Holmes emphasized in a dissenting opinion in a case concerning the US Constitution’s guarantee of free speech.
“[W]e should be eternally vigilant against attempts to check the expression of opinions that we loathe and believe to be fraught with death,” he wrote, “unless they so imminently threaten immediate interference with the lawful and pressing purposes of the law that an immediate check is required to save the country.”
From this perspective, I would have marched with the millions who gathered in Paris, proclaiming “Je suis Charlie.”
And I fully understand the desire to purchase the subsequent issue of Charlie Hebdo, published – with bravery and determination – a week after the attack.
People not just in France, but around the world, want to show their solidarity with the victims and support the fundamental principle of free speech.
But supporting Charlie Hebdo’s right to express whatever message it chooses does not necessarily imply support for its portrayals of the Prophet Mohammed or a willingness to participate in their dissemination.
Support for the principle does not demand endorsement of the practice.
In the days after the attack, it became an act of solidarity to retweet the offending cartoons, rather than simply posting expressions of support.
The Lebanese blogger Gino Raidy wrote, “Please, publish the cartoons again, and again, and again.
Maybe with time, the murderous savages that kill for a drawing in the name of their god, will get it through their thick heads that they can never stop us, and every attempt to only fuels our cause more (sic).”
The passion in Raidy’s appeal is admirable, and the sentiment is understandable.
But the view that defending free speech imposes a duty to disseminate specific content is deeply problematic.
The decision to publish images or words that disrespect or defame others’ deeply held beliefs must be a personal one.
Each individual must be free to make that decision, which is why anti-blasphemy laws violate universal human rights.
The fundamental principle underlying freedom of expression is that speech must be answered with more speech, never with violence, imprisonment, or censorship.
Anti-blasphemy laws not only violate that principle; they can easily be abused as a tool of political power and impoverish their societies by imposing a code of rigid conformity.
But people can choose to avoid speech that others will hear as blasphemy.
Though I will defend the right of individuals to make racist statements, I would not make such statements myself or listen to a speaker making them.
After all, such views undermine many other important principles – namely, those needed to create and sustain an inclusive, tolerant, and peaceful society.
In the case of Charlie Hebdo,the question is whether depictions of the Prophet Muhammad are likely to foster the kinds of debate and behavior that are compatible with the coexistence of Muslims, Christians, Jews, other believers, and atheists in a society that upholds the freedom of worship and expression.
All human beings are entitled to hold something – a place, an idea, an image – sacred.
Desecrating a shrine, defacing a cross, or, in the US, burning a flag, is an aggressive and insulting act, one that causes real pain for believers.
It may incite a conversation, but it does so from a position of profound disrespect.
Charlie Hebdo, of course, used humor precisely to challenge sacred cows.
And its editors bravely and nobly stood by their convictions, even when their lives were threatened.
We should uphold their right to publish.
But to embrace the images they published as a statement of Enlightenment conviction weakens the values that are essential to a civilized society.
The new issue of Charlie Hebdo, which featured another image of the Prophet on its cover, sparked protest marches in Pakistan, Afghanistan, Kuwait, Lebanon, and Tunisia.
Commenting on the intensity of these protests, Iyad El-Baghdadi, a self-described “Islamic libertarian,” aptly tweeted: “Unapologetic hatred is going mainstream everywhere.
I worry for our world.” Mobilizing mass demonstrations around whether you “are” or “are not” Charlie Hebdo invites demagoguery from extreme factions in all societies that gain from fueling sectarian conflict.
The easiest way to compound the tragedy in Paris would be to use the deaths of Charlie Hebdo’s editor, Stéphane Charbonnier, and 11 others to fan the flames of religious hatred.
Surely we can defend people’s right to express themselves without approving or endorsing their views.
In the case of Charlie Hebdo, the decision not to disseminate its cartoons can be driven not by fear, but by respect.
Uniting Against Extremism
LONDON – Governments worldwide are increasingly facing a fundamental question: how to deal with the causes of violent – often religiously motivated – extremism.
They are not short of advice – and from a wide range of sources.
A former Al Qaeda member, for example, recently stated that the UK authorities’ failure to explain properly why it had not intervened in Syria’s civil war risked radicalizing more Muslims.
Meanwhile, London Mayor Boris Johnson suggested removing children from radicalized parents.
Although such ideas have received a somewhat mixed reception, they are a welcome sign of much-needed public debate.
Most people accept the need for security services to respond to terror, particularly in the aftermath of an attack.
Achieving lasting change, however, requires addressing not just the consequences of extremism but also its root causes.
What can be done?
First, governments must start thinking about education as a security issue.
For example, while endlessly worrying about the existence of dangerous material online, we could do more to educate our youth in the critical thinking skills needed to dismiss such content.
This is a new challenge, and it will not be easy.
Before the digital revolution, young people met those from other countries and cultures in relatively restricted circumstances, such as on a holiday abroad or a school exchange program.
Today, however, they can interact with any number of people from anywhere in the world in a matter of seconds on their smart phones.
Many of these connections take place on un-moderated platforms that expose children to a wide variety of opinions, beliefs, and cultures – not all positive or safe.
Unfortunately, there are few sources of good advice to help young people navigate these dangers.
Most parents are barely able to keep up with the evolving technology, let alone oversee their children’s online conversations.
This means that it is up to our education systems to intervene early to help the connected generation interact safely in today’s digital world.
If we can teach children to recognize what they have in common with those from other cultures, we can also help them to resist the prejudices of those who seek to distort the truth and divide people.
The Tony Blair Faith Foundation’s schools program has made an important start in this respect.
It provides a moderated space in which 12-17 year olds worldwide can discuss challenging issues from a variety of perspectives, in a respectful and safe way.
Second, governments should support those groups that are already working on the ground and online to counter extremism.
One approach is to encourage “counter-narratives.”
In countries afflicted by religious conflict, such as Nigeria, this means helping religious leaders to develop strong inter-community relationships.
We know that when people of different religions work together for the good of the wider community, they come to understand one another in a way that helps them resist the call of extremists.
This type of sustained long-term work comes into its own when the worst happens.
For example, in response to attacks last year on a church in Peshawar, Pakistan, local Muslims formed human chains around churches, allowing them to hold services.
Such visible demonstrations of defiance in the face of violence strengthen ties between communities and can prevent the division that extremists try to generate.
The benefits of such inter-community spirit are evident in one of the world’s most diverse cities, London.
Last June’s arson attack on the Somali Bravanese Welfare Association’s center in the city’s Muswell Hill district (which followed the murder of British Army fusilier Lee Rigby by religious extremists) served only to unite its different communities.
London Citizens, a network of local civic institutions, organized Jewish assistance programs for Somali Muslims, including after-school events at Hendon School and Eden School.
Meanwhile, Finchley Reform Synagogue hosted a Ramadan festival, and Finchley United Synagogue hosted an Eid event.
These activities sent a powerful signal to extremists that their attempts to turn religious communities against each other had the opposite effect.
Third, it is essential to remove online extremist content promptly.
YouTube uses sophisticated technical procedures to ensure that the most inappropriate videos are swiftly taken down.
But this is only half the story: we also need to support and promote alternative, credible voices online to counter the extremist narrative.
Of course, this does not mean uploading videos of politicians in suits telling young men not to join the jihad in Syria.
Rather, it means identifying and backing those groups whose anti-extremist messages resonate with the intended audience.
Finally, in these tough economic times, we need to consider cost-effective ways to promote this work globally.
One future source of support for effective but under-resourced groups might be the recently established Global Fund for Community Engagement and Resilience, the first ever public-private global fund to support local, grass-roots efforts to counter extremism.
As the pace of globalization and technological change accelerates, extremists are finding ever more creative ways to spread their message.
Cheap Oil and Global Growth
LONDON – Violent swings in oil prices are destabilizing economies and financial markets worldwide.
When the oil price halved last year, from $110 to $55 a barrel, the cause was obvious: Saudi Arabia’s decision to increase its share of the global oil market by expanding production.
But what accounts for the further plunge in oil prices in the last few weeks – to lows last seen in the immediate aftermath of the 2008 global financial crisis – and how will it affect the world economy?
The standard explanation is weak Chinese demand, with the oil-price collapse widely regarded as a portent of recession, either in China or for the entire global economy.
But this is almost certainly wrong, even though it seems to be confirmed by the tight correlation between oil and equity markets, which have fallen to their lowest levels since 2009 not only in China, but also in Europe and most emerging economies.
The predictive significance of oil prices is indeed impressive, but only as a contrary indicator: Falling oil prices have never correctly predicted an economic downturn.
On all recent occasions when the price of oil was halved – 1982-1983, 1985-1986, 1992-1993, 1997-1998, and 2001-2002 – faster global growth followed.
Conversely, every global recession in the past 50 years has been preceded by a sharp increase in oil prices.
Most recently, the price of oil almost tripled, from $50 to $140, in the year leading up to the 2008 crash; it then plunged to $40 in the six months immediately before the economic recovery that started in April 2009.
An important corollary for commodity-producing developing countries is that industrial metal prices, which really are leading indicators of economic activity, may well increase after an oil-price collapse.
In 1986-87, for example, metal prices doubled a year after oil prices fell by half.
A powerful economic mechanism underlies the inverse correlation between oil prices and global growth.
Because the world burns 34 billion barrels of oil every year, a $10 fall in the price of oil shifts $340 billion from oil producers to consumers.
Thus, the $60 price decline since last August will redistribute more than $2 trillion annually to oil consumers, providing a bigger income boost than the combined US and Chinese fiscal stimulus in 2009.
Because oil consumers generally spend extra income fairly quickly, while governments (which collect the bulk of global oil revenues) usually maintain public spending by borrowing or running down reserves, the net effect of lower oil prices has always been positive for global growth.
According to the International Monetary Fund, the fall in oil prices this year should boost 2016 GDP by 0.5-1% globally, including growth of 0.3-0.4% in Europe, 1-1.2% in the US, and 1-2% in China.
But if growth is likely to accelerate next year in oil-consuming economies such as China, what explains plunging oil prices?
The answer lies not in China’s economy and oil demand, but in Middle East geopolitics and oil supply.
While Saudi production policies were clearly behind last year’s halving of the oil price, the latest plunge began on July 6, within days of the deal to lift international sanctions against Iran.
The Iran nuclear deal refuted the widespread but naive assumption that geopolitics can drive oil prices in only one direction.
Traders suddenly recalled that geopolitical events can increase oil supplies, not just reduce them – and that further geopolitics-driven supply boosts are likely in the years ahead.
Conditions in Libya, Russia, Venezuela, and Nigeria are already so bad that further damage to their oil output is hard to imagine.
On the contrary, with so many of the world’s most productive oil regions gripped by political chaos, any sign of stabilization can quickly boost supplies.
That is what happened in Iraq last year, and Iran is now taking this process to a higher level.
Once sanctions are lifted, Iran promises to double oil exports almost immediately to two million barrels daily, and then to double exports again by the end of the decade.
To do this, Iran would have to boost its total output (including domestic consumption) to six million barrels per day, roughly equal to its peak production in the 1970s.
Given the enormous advances in oil-extraction technology since the 1970s and the immense size of Iran’s reserves (the fourth-largest in the world, after Saudi Arabia, Russia, and Venezuela), restoring output to the levels of 40 years ago seems a modest objective.
To find buyers for all this extra oil, roughly equal to the extra output produced by the US shale revolution, Iran will have to compete fiercely not only with Saudi Arabia, but also with Iraq, Kazakhstan, Russia, and other low-cost producers.
All of these countries are also determined to restore their output to previous peak levels and should be able to pump more oil than they did in the 1970s and 1980s by exploiting new production technologies pioneered in the US.
In this newly competitive environment, oil will trade like any normal commodity, with the Saudi monopoly broken and North American production costs setting a long-term price ceiling of around $50 a barrel, for reasons I set out in January.
So, if you want to understand falling oil prices, forget about Chinese consumption and focus on Middle East production.
And if you want to understand the world economy, forget about stock markets and focus on the fact that cheap oil always boosts global growth.
Cheap Talk in Kashmir
After two years of off-and-on nuclear brinkmanship, India and Pakistan are once again talking about how to settle their differences rather than issuing threats and rattling nuclear sabers.
But do the talks now underway have any better chance of success than the countless failed negotiations that have marked the past fifty years?
On November 25, 2003, India and Pakistan agreed to a cease-fire along the Line of Control (LoC), the international border that divides Indian Kashmir from Pakistani Kashmir, as well as the actual ground control (AGPL) in strategic Siachen region.
The cease-fire thus covers a huge area: the 778-kilometer LoC, the 150-kilometer AGPL and the 198-kilometer international border.
This should pave the way for a meaningful dialogue at the South Asian Association for Regional Cooperation (SAARC) meeting to be held in Islamabad between January 4-5.
Moreover, Pakistan has partly conceded its demand--which dates to the creation of India and Pakistan a little more than half a century ago--for an internationally supervised referendum in Kashmir to determine the province's sovereignty.
A brave concession, no doubt, but India has a more rigorous criterion for believing that Pakistan is truly serious about reaching a peaceful agreement: it wants Pakistan to dismantle the infrastructure of cross-border terrorism--in particular, the training camps for Kashmiri separatists and their international jihadi brethren.
Reining in the violent militants who keep the Kashmiri pot boiling, however, is difficult on both sides.
In India and Pakistan, Kashmir is the national question.
Every Indian and Pakistani government embraces the Kashmiri cause, both as a useful device to divert attention from their failures and because they fear what their publics might do if they were seen as surrendering to the traditional enemy on so vital an issue.
With Pakistan's economy in a tailspin, and with the jihad culture of so many young Pakistanis undermining the country's international credibility, moderate voices are at long last breaking through.
The eminent columnist Amin M. Lakhani recently argued in the Dawn , Pakistan's largest-circulation newspaper, that "Pakistan's singular preoccupation with Kashmir...has been self-defeating.
Domestically, it has thwarted the country's economic, social and political development.
Internationally, [it] has diminished the country's stature and left its reputation smeared.
Even its spiritual development has been warped by the proliferation, popularization, and increase in relative power...of religious groups that represent an intolerant, militant, and gender-based interpretation of Islam."
Lakhani points to the bitter irony that Pakistan's 143 million people have sacrificed much in demanding democratic rights and self-determination for Kashmir's 13 million people, while enjoying precious few of those same rights at home for the past 55 years.
Can Pakistan demand, with a straight face, rights for another people that it constantly denies to its own?
That is the sad and awful question Lakhani asks, but alas he offers no answer.
Undoubtedly, at the forthcoming summit between the leaders of the two countries, India's Prime Minister Atal Behari Vajpayee will not miss any opportunity to ask the same question of his Pakistani counterpart.
Obviously, Pakistani Prime Minister Mir Zafarulla Khan Jamali will be able to offer no satisfactory answer to this question--not when he has to go home and report to his boss, the General-turned-President Pervez Musharraf.
But Vajpayee should try to do more than score points off Musharraf.
That Pakistan may be willing to put aside its demand for an international referendum in Kashmir is the first real sign of compromise to be seen over the issue in decades.
Vajpayee should test Pakistan's seriousness on this point.
There is clearly room for doubt: on December 18, President Musharraf declared that, at the Islamabad SAARC summit, he would demand a UN-sponsored plebiscite in Kashmir.
The very next day, however, Pakistan's Foreign Office spokesman, Masood Khan, claimed that President Musharraf was prepared to drop this demand.
India needs to know if Musharraf is sincere.
If so, the foundation for a real dialogue to defuse the struggle over Kashmir may be possible.
But Musharraf has good reasons to talk out of both sides of his mouth at this stage.
He recently survived two assassination attempts, and Islamists accuse him of entering into a "bargain" with the infidel enemy, India.
Such rhetoric makes it hard to be optimistic about the outcome of the summit.
Musharraf's vulnerable domestic position makes him probably the last man who can resolve with India the core issue of Kashmir.
Seen as too pro-American because of his support of the recent war in Afghanistan, Musharraf needs to burnish his nationalist credentials.
Posturing over Kashmir remains the best way of doing that.
Vajpayee, for his part, has hinted that if Pakistan wants a decent deal, it ought to make one with him, as he might be the last Indian leader for a long time who is willing to compromise even a little on the issue.
The hard men of his nationalist Bharatiya Janata Party (BJP) look likely to do as they are told.
But the BJP has never shown any sign of solicitude towards Pakistan's interests.
So the window of opportunity to talk and compromise may be open only briefly, and, unfortunately, we have probably not seen the end of nuclear brinkmanship.
Checks and Balances in an EU Constitution
There is widespread agreement that the EU would benefit from further centralization of internal security, and of elements of foreign and defense policy.
According to the last Eurobarometer survey of 2001, 73% of EU citizens support a common defense and security policy, and two Europeans out of three believe that the EU should have one common foreign policy.
This high support for centralization of tasks in these areas contrasts with the still lukewarm overall support for the EU as a whole: only 48% support their country's membership in the EU.
But does the EU possess the necessary institutions to make these further steps in integration possible?
This is one of the most difficult but relevant questions to be addressed by the convention that will debate Europe's constitution beginning this March.
In other policy areas, European integration has meant much more than just policy coordination.
Transfer of power from EU member states has always been accompanied by institution building, tailoring the institution to the specific policy area over which integration was needed.
A remarkable feature of this process of integration so far is that it has preserved important dimensions of accountability and control.
But it is important to appreciate the particular way in which accountability for EU decisions has been preserved, and how it differs from political accountability in a representative democracy.
In a representative democracy, elections are the ultimate instrument for holding politicians accountable.
Citizens delegate decisions to representatives (governments, legislators).
If citizens are not satisfied with the decisions they take, that delegation is not renewed: the previous majority loses the election and is replaced by a new government or a new parliamentary majority.
This mechanism cannot work in the EU, at least not under the current European constitution.
Governments are the key decision makers in the Council.
But they are accountable to citizens at home, in national elections, and they are primarily judged for their domestic performance, not for EU decisions.
Other EU policymaking bodies (the European Central Bank or the Commission) are appointed, not elected.
Accountability in the EU has, instead, been achieved through methods that are typical of bureaucratic control, not of politics.
Transfer of power to a EU body has generally been accompanied by a clear operational definition of the policy goals.
EU policymakers (the ECB, the Commission, the majority in the Council) generally have a narrowly defined "mission": price stability, enforcing the single market, holding prices of agricultural commodities stable.
This has two advantages: it limits discretion by the EU policymakers, and hence insures that transfer of power is not abused; it also facilitates post-transfer accountability and control.
The European Parliament, the media, the Council, can blame or approve of the way in which EU decision-making power has been used.
Since EU policymakers have a narrow mandate and their decisions are often inspired by external technical criteria, they can be held accountable for their behavior despite the absence of elections.
This method of bureaucratic control has (so far) worked well in the EU.
It can fruitfully be extended to internal security, where it is possible to define a precise mission for EU policymakers, exploiting the Commission and designing appropriate technical guidelines to achieve clearly defined operational goals.
The method of bureaucratic control cannot, however, work in the new areas where further centralization is urgently needed: foreign policy and defense.
What mandate can be given in the realm of foreign policy?
The only feasible mandate is to pursue the common interest of the EU.
But what does that mean in practice?
If the mandate is so incomplete that it leaves too much room for discretional judgment, there is only one way to hold policymakers accountable: through democratic elections.
Only citizens can tell whether policy decisions are really in their interest.
Unfortunately, this instrument is unavailable at the EU level, or at least it is seriously deficient.
Naturally, limited forms of cooperation are still possible, in foreign and defense policy, through intergovernmental coordination.
They should be pursued as far as possible.
But we should be aware that these forms of cooperation will not take us very far.
One reason is that both defense and foreign policies rely on well-functioning bureaucracies (a diplomatic corps, the military).
How can the Council acquire control over such bureaucracies?
The Commission, not the Council, is traditionally the bureaucratic arm of the EU.
Developing a EU bureaucracy in foreign policy is a first step towards having an effective European foreign policy.
Here, however, the Commission competes with national bureaucracies.
In the realm of foreign policy, it seems difficult to exploit the traditional vertical links between the Commission and national bureaucracies that instead have worked so well in dealing with national policy issues.
We are thus left with a fundamental dilemma.
Europe is now in a situation in which big benefits would come from centralizing foreign and defense policies.
But in these areas, bureaucratic control cannot work.
To centralize these policies, a drastic redesign of the EU political constitution might be needed.
Europe would need to have political institutions more typical of a federation than of a confederation of states.
It is no coincidence that historical episodes of unification of countries coincided with situations in which external threats or a common enemy created large benefits from centralizing defense and foreign policy.
But is Europe capable of jumping to much closer forms of political integration at a time when it is trying to enlarge to the East?
Childhood Lost
The cries of working children can be heard the world over.
The International Labor Organization (ILO) estimates that 90 million children between eight and fifteen years old work in the labor forces of developing countries; worldwide the figure is higher.
They often labor under hazardous conditions, handling poisonous chemicals, inhaling noxious fumes, and hauling excessive weights.
They are usually overworked, underfed, and underpaid--if they are paid at all.
Though many countries have enacted laws forbidding the use--and abuse--of children in the work force, optimism about the conditions faced by working children is unwarranted.
That conclusion stems from an inescapable fact: the families of most working children depend on their labors to survive.
Because child labor means cheap labor, the young are often the most employable in developing and recession-plagued economies.
The director of a medium-size textile enterprise in Bangladesh admits without hesitation that 70% of his employees are between the ages of 13 and 17.
"They provide the same productivity as adults," he says, "but for a fraction of the cost."
Children, of course, are unlikely to organize or complain to authorities when they are overworked and underpaid.
They are not aware of their legal rights.
It verges on slavery when children are locked up without proper lighting, food, and healthcare.
But they don't question long hours and dire working conditions.
Instead, most are grateful to be working at all.
In Asia and the Pacific, children routinely work endless hours, sleep on factory floors and subsist on scanty rations.
Young Indian factory workers who fail to follow instructions are sometimes regret branded with red-hot iron rods, and some teenage Thai prostitutes are disciplined by having acid thrown in their faces.
For thousands of South American, Caribbean, and African children rented out as maids and houseboys, there is no recourse when they are overworked, beaten, and raped.
As an official of Kenya's Child Welfare Society concedes, "There is little we can do to help when a child is ill-treated unless the case becomes known to us or to the police."
Even when an employer is reasonable, working conditions may still prove dangerous.
Children in Central America harvest crops sprayed with pesticides.
Colombian children squeeze through the narrowest shafts of coalmines.
Thai children toil in unventilated factories, working with glass heated to 1,500 degrees Celsius.
Indian children inhale large doses of sulphur and potassium chlorate to fashion flammable powder into matches.
Youthful glassmakers in Brazil breathe toxic silicone and arsenic fumes.
Sometimes the physical damage from such labors is permanent.
Brazilian, Colombian, and Egyptian youngsters who work in brickyards often suffer irreparable spinal damage from carrying heavy loads.
More generally, children who spend long hours in factories all over the world often enter their teens with permanently deformed limbs.
If they live that long.
Thousands of children don't.
In India safety conditions are so neglected in many factories that numerous children have died in electrical fires and chemical explosions.
Laws exist to protect children from hazardous conditions in many occupations, but they are seldom enforced.
The agricultural sector--the largest employer of children in both developing and industrialized countries--is particularly difficult to oversee.
There is little that officials can do to monitor or modify the children's workloads on large farms or small family enterprises.
In fact, parents often appear to be the harshest taskmasters.
Indian fathers still sometimes repay debts by committing their children to bonded labor.
Pakistani parents occasionally maim their children to make them beguiling beggars.
Sadly, families are often the last to protest exploitation of their children.
The ILO contends that children suffer greatly when they are forced to perform as "small adults."
"The child's creativeness and ability to transcend reality are blunted," states one ILO report, "and his whole mental world is impoverished."
The young worker does not learn how to play, or how to read and write; worse, he smokes and, in the Caribbean, he drinks cane rum to keep going, as he doesn't have enough to eat.
In 1973, an ILO convention called for a worldwide minimum working age of 15.
In ten years, only 27 of the ILO's 150 member nations ratified that convention.
Several more countries have laws that set the minimum work age between 12 and 16, but the ILO cautions that few countries "have what could be considered a comprehensive prohibition of dangerous work for young children," and that even fewer have "measures to protect young persons from moral degradation."
Since laws are not the answer to child labor, many experts propose compulsory education as a means to curb it.
But education laws have proved elusive too.
In practically all impoverished societies, parents place wages above education.
As a result, the percentage of dropouts is rising at an alarming rate.
A recent study by UNESCO shows that in developing countries up to 60% of children do not complete primary school.
Relief agencies agree that the total abolition of child labor is an unrealistic goal.
So, for millions of such children, the future holds little promise or hope.
Working children are entitled to something better, regardless of whether they know it.
The Right Food Fight
DRESDEN – To what extent should governments regulate or tax addictive behavior?
This question has long framed public debate about alcohol, tobacco, gambling, and other goods and services in many countries worldwide.
And now, in the United States – arguably the mother of global consumer culture – the debate has turned toward the fight against the epidemic of childhood obesity.
It is ironic that in a world where childhood malnutrition plagues many developing countries, childhood obesity has become one of the leading health scourges in advanced economies.
The World Bank estimates that over a third of all children in Indonesia, for example, suffer from stunted growth, confronting them with the risk of lifetime effects on fitness and cognitive development.
Yet, the plight of malnourished children in the developing world does not make obesity in the advanced countries any less of a problem.
Indeed, though perhaps not on a par with global warming and looming water shortages, obesity – and especially childhood obesity – nonetheless is on the short list of major public-health challenges facing advanced countries in the twenty-first century, and it is rapidly affecting many emerging-market economies as well.
Yet solving it poses much more difficult challenges than the kind of successful public-health interventions of the last century, including near-universal vaccination, fluoridation of drinking water, and motor-vehicle safety rules.
The question is whether it is realistic to hope for success unless the government resorts to far more blunt instruments than it currently seems prepared to wield.
Given the huge impact of obesity on health-care costs, life expectancy, and quality of life, it is a topic that merits urgent attention.
The US leads the world in obesity, and is at the cutting edge of the debate.
Almost everyone agrees that the first line of defense ought to be better consumer education.
First Lady Michelle Obama’s “Let’s Move” educational campaign aspires to eliminate childhood obesity in a generation, though its impact so far remains unclear.
Other efforts include appeals by celebrities like the chef Jamie Oliver and attempts to use peer-based learning, such as the Sesame Street-inspired platform Kickin’ Nutrition (full disclosure: the creator is my wife).
Yet, although education is essential to fight obesity, it is far from clear whether it will be enough in a food environment dominated by large corporations with deep pockets and every incentive to cultivate excessive consumption.
Commercial television programs aimed at children are replete with advertising for processed foods of dubious value to human health.
And, for every celebrity who donates time to fighting obesity, there are a dozen who accept large payments to hawk products, such as ultra-sugary drinks, that are arguably the tobacco of our generation.
It is hard for non-profits to compete with the production values embodied in Beyoncé’s Pepsi commercial or Taylor Swift’s Diet Coke commercial.
The causes of obesity are complex, and the science of understanding human behavior is embryonic; but it is not hyperbole to call the problem an epidemic.
According to the Centers for Disease Control and Prevention, roughly 18% of children aged 6-11 in the US are not just overweight, but obese.
The risks posed by this epidemic are manifold, but the main one is that childhood obesity begets adult obesity, with significantly increased risks of diabetes and heart disease.
Indeed, experts estimate that more than 18% of all adults in the advanced economies are obese.
Even more stunning are estimates that roughly 9% of all Americans – and a similar percentage of adults worldwide – have diabetes.
Yet politicians push back on Big Food at their peril.
When the popular former mayor of New York City, Michael Bloomberg, attempted to ban large sugary drinks, public opinion – not to mention the New York State Court of Appeals – rejected the effort, despite support from medical experts.
Many commentators, even those sympathetic to Bloomberg’s goal, argued that it was wrong to try to legislate consumer behavior so bluntly.
Yet, when one considers other successful efforts to improve public health over the last five decades – for example, smoking bans, seat-belt laws, and speed limits – one finds that legislation typically supplemented education.
A less intrusive approach to influencing food choices might be to institute a retail tax on all processed foods – not just sugary drinks – and an offsetting subsidy on non-processed foods.
In the long run, low-income families (which suffer the most from obesity) would be the greatest beneficiaries.
And, in the short term, any income effects could be offset by increased transfers.
Together with the medical researchers David Ludwig and Dariush Mozaffarian, I have proposed an outline of such an approach.
Obviously, some processed foods are far worse than others.
A more complex breakdown is possible, and other ideas should of course be vetted and discussed.
But our approach has the important practical advantage of simplicity.
What must be understood, above all, is that US consumer culture is dominated by a food industry that exploits people’s natural joy in eating, and transforms it (in many cases) into something that is addictive and destructive.
Any visitor to the US can readily see the pervasiveness of the problem.
The right place to start to address it is by creating a better balance between education and commercial disinformation.
But food is so addictive, and the environment so skewed toward unhealthy outcomes, that it is time to think about broader government intervention.
That should certainly include vastly enhanced expenditures on public education; but I suspect that a long-term solution will have to involve more direct regulation, and it is not too soon to start discussing the modalities.
Children’s Champions
LONDON – The British social reformer, Eglantyne Jebb, once noted that the only international language that the world understands is the cry of a child.
Nearly a century after Jebb founded Save the Children, the 2014 Nobel Peace Prize was awarded to Malala Yousafzai, the 17-year-old campaigner for girls’ education, and child-labor opponent Kailash Satyarthi.
The Nobel Committee thus recognized a global civil-rights struggle against child trafficking, child labor, child marriages, and discrimination against girls.
Given recent and ongoing conflicts in Syria, Iraq, Gaza, and South Sudan, which have devastated so many young lives, the Nobel committee had good cause to highlight children’s suffering.
Schools, which should have been sanctuaries, have become military targets.
Thousands of children in Syria and Iraq have been press-ganged into military service.
Despite the efforts of United Nations relief agencies, the carnage this summer has created an additional one million child refugees.
The vulnerability of children was illustrated only too well six months ago, when the Islamist terrorist group Boko Haram (whose name means “Western education is a sin”) abducted 276 Nigerian schoolgirls.
Even if all of the kidnapped girls are returned safely, as a truce between the group and Nigeria’s government stipulates, there are still 15 million children under the age of 14 worldwide who are forced to work, often in appallingly exploitative environments.
A further ten million school-age girls are married off as child brides each year, while around 32 million girls are denied the right even to an elementary education.
But a worldwide counter-offensive is now underway.
Satyarthi’s Global March Against Child Labor has rescued thousands of boys and girls, as young as eight, working as slave laborers in India’s back streets and sweatshops.
The organization has inspired a worldwide campaign to lift children out of exploitation and into education.
Meanwhile, Yousafzai – following her defiant response to an assassin’s bullet two years ago – has led the fight to end discrimination against girls.
Her impact has been remarkable.
Visiting Pakistan immediately after that attack, I saw angry girls cowed into submission by their fear of the Taliban.
On a return visit a few weeks ago, I addressed some 2,000 girls about education.
Inspired by Yousafzai, they were far from quiescent; on the contrary, they were vocal in their demands for the same rights that boys enjoy.
Hundreds of local child-liberation groups, some in the least promising of places, have emerged to fight for children’s civil rights.
These include the Freed Kamlari Development Forum (which combats girls’ slavery in Nepal); the Upper Manya Krobo Rights of the Child Club; and the Yellow movement, which campaigns for youth rights in Ethiopia.
These young activists may not yet be trending on Twitter or Facebook, or even be household names in their own countries, but support for their cause is growing fast.
Consider the campaign for child-marriage-free zones, which began with schoolgirls in 20 areas of Bangladesh uniting to fight against child marriage.
The movement now operates in Pakistan, India, and Africa.
The success of these groups, led by Plan International, has forced governments to toughen laws against child marriage, and – as in Pakistan’s Sindh province – beef up enforcement and policing.
Yousafzai and Satyarthi would undoubtedly point to thousands of others like them who are protesting against child marriage, labor, and trafficking.
Indeed, for the past two years, the Youth Courage Awards have recognized campaigners – role models for a new generation – who have transformed the prospects for children in their own countries.
They include: India’s Ashwini, a visually impaired champion for disabled children;
Attal, who created a girls school in his family kitchen in Afghanistan;
Shweta who grew up in a South Asian brothel and created a support group for trafficked and abused girls; and Salyne, whose organization, Teach For Lebanon, is helping to educate many of the country’s half-million Syrian and Palestinian refugees.
One Youth Courage award winner, Razia, who at the age of nine was forced to stitch footballs when she should have been in school, started her civil-rights work after&nbsp;Satyarthi&nbsp;rescued her.
She is now leading the campaign in India for the right to education.
The campaign against child exploitation and for education has become global.
The organization A World at School is now circulating the biggest-ever petition in support of the Millennium Development Goal of universal education.
The sad fact is that children are doing more than adults to fight for their own rights.
Nonetheless, the child-liberation movement that Satyarthi, Yousafzai, and others have helped to mobilize is growing by the day, and new, courageous voices are speaking out against injustices that cannot be allowed to persist for another generation.
Chile and the Third Wall
SANTIAGO – Chile celebrated 200 years of independence in 2010.
Only 20 of the 198 countries on Earth have reached that age.
Therefore, it has been, for Chileans, a time of assessment and of asking ourselves a very simple, yet profound, question: have we done things right or wrong?
If we compare ourselves to the rest of Latin America, the truth is that we have done things very well, especially in the last 25 years, during which we went from being one of the poorest countries on the continent to having the highest per capita income in the region.
Yet if we compare ourselves to the more exclusive group of developed countries, the truth is that we still have much to learn from them.
The great goal, the grand mission, the overarching challenge of our generation, the Bicentennial Generation, is just one: for Chile to be the first country in Latin America to be able to say, before the end of this decade, with pride and humility, that it has overcome poverty and become a developed country with real opportunities for material and spiritual advancement for all its children.
Of course, this is a dream that has been extraordinarily elusive in our first 200 years of independence.
So why should now be different?
First of all, unlike any time in the past, this goal has become fully attainable, and is, as a result, a moral imperative.
Chile currently has a per capita GDP of $15,000, after adjusting for purchasing power.
We have set the goal of growing at an average of 6% annually, in order to attain, by 2018, the per capita GDP now enjoyed by European countries such as Portugal and the Czech Republic.
We are also working on doubling the job-creation rate of recent years, with the aim of adding one million jobs in the period 2010-2014.
All indicators demonstrate that we are on the right path.
Despite the devastating effects of the earthquake and tsunami of last February, Chile’s economy is already growing at close to 6%, and we have created nearly 300,000 new jobs in the first nine months of my administration – the highest in our country’s history.
Secondly, these goals are attainable because the world has changed.
The Iron Curtain, which for decades irreconcilably divided the East from the West, is gone.
And globalization and new technologies have torn down the wall that for centuries separated the rich and prosperous countries of the North from the poor and underdeveloped countries of the South.
Yet a third wall remains, less visible than the others but just as harmful, if not more so.
This wall has been with us always, separating rusting spirits who live in nostalgia, fear the future, and believe that only the past was better, from youthful, creative, and entrepreneurial spirits who fearlessly embrace the future and believe that the best is always yet to come.
This wall kept Chile and Latin America from joining the nineteenth-century Industrial Revolution, which is why we remain underdeveloped to this day.
But we need this wall to tumble if we do not want to miss today’s revolution, which is delivering societies based on knowledge, technology, and information.
This revolution will be tremendously generous to those countries that embrace it – and utterly indifferent, even cruel, to those that ignore it or let it pass by.
How will Chile breach this wall?
First, by strengthening the three basic pillars without which development cannot germinate or opportunities flourish: a stable, vital, and participatory political democracy; a social market economy that is free, competitive, and open to the world; and a strong state that is effective in the fight against poverty and in promoting greater equality of opportunities.
Yet not even this will suffice if we are to build on rock and not on sand.
In this twenty-first century, emerging countries like Chile must invest in the pillars of modern society.
I mean developing our human capital, which is our greatest resource; encouraging innovation and entrepreneurship, which are the only truly eternal resources we have on hand; investing in science and technology, which will open up unsuspected opportunities in the future; and promoting more dynamic and flexible markets and societies that will put us ahead, and at the helm, of change, rather than always lagging behind and trying to comprehend and adapt to change.
Those are the pillars that our administration is emphasizing.
As Chile deepens its integration with the world, we are also moving forward with structural reforms through which we will be able to improve substantially the quality of education received by millions of our children and youths; retrain three-quarters of Chilean workers over the next four years; grant universal access to broadband Internet service; double our investment in science and technology; promote innovation and entrepreneurship in the public and private sectors; and reduce the time needed to start up a company to one day – and the cost to zero.
These are some of the many measures that form the goals – and foundation – of my administration.
They are grand, noble, and ambitious goals, but fully attainable for today’s Chile, the Bicentennial Chile, a Chile now viewing the twenty-first century with more optimism and enthusiasm than ever before.
Chile’s Uncertain Future
CAMBRIDGE – When I was in Chile earlier this month, I was impressed by the contrast between the palpable success of its long-standing free-market policies and the current agenda of its leftist president, Michelle Bachelet.
How this contrast is resolved will be important not only to the country’s more than 17 million people, but also to everyone who regards Chile as a model of what sound economic policies have been able to achieve.
Chile’s economic performance has been the strongest in South America.
Its per capita GDP exceeds $22,000 in purchasing-power-parity terms, making its income higher than that of Argentina, Brazil, and Mexico.
It’s no surprise that Chile is considered a developed country – the only South American member of the OECD.
Copper is Chile’s major product and accounts for half of its exports.
Although the government owns Codelco, the world’s largest copper producer, it is Chile’s only publicly owned company.
The company’s revenue varies with the global price of copper, yielding higher government revenues in some years and declines – for example, this year – when the global price is down.
The government follows a wise fiscal strategy that involves budget surpluses in years when copper revenue is high, with the additional funds channeled to a national stabilization fund.
But even with the currently depressed copper price, Chile’s budget deficit is only 2% of GDP.
As a result of Chile’s cautious fiscal strategy, the country has a national debt that amounts to only 16% of GDP – and a sovereign debt rating that is the highest in South America.
Taxes and other government revenues are less than 20% of GDP.
Half of tax revenue is collected with a value-added tax, which is essentially a tax on consumption.
Although there is a tax on corporate income, it is integrated with personal taxes in a way that reduces its adverse effect on investment and production.
Chile is well known for an investment-based pension system.
Employees are required to contribute 10% of their wages to a private pension company of their choice and can then select one of the investment strategies offered by that company.
The government mandates the range of investment strategies, which vary in terms of the share of equities and fixed income that companies may offer.
For those who have worked and contributed during their entire adult life, this produces benefits that are more than 50% of pre-retirement income.
Meanwhile, sound monetary policy, guided by a series of talented central bankers (whose independence is enshrined in Chile’s constitution), has prevented inflation and kept long-term rates relatively low.
Chile’s inflation target is 3% with an acceptable range of plus or minus 1%.
Inflation this year is expected to be 3.9%, and the ten-year bond rate is just 4.4%.
And, by protecting the floating exchange-rate regime, the central bank ensures that Chile does not confront the kind of foreign-debt crisis that has hit other Latin American countries.
Chile is also a devoted free trader.
It has free-trade agreements with more than 20 countries and is a member of the nascent Trans-Pacific Partnership.
The economy has also benefited from its openness to foreign investment, with the stock of foreign direct investment in Chile topping 80% of GDP.
There is also universal literacy, with 98% of the adult population able to read and write.
On average, young people spend an average of 15 years in school from primary through tertiary education.
Chile’s excellent economic performance has been the result of the free-market policies introduced during the military dictatorship of General Augusto Pinochet but confirmed and strengthened by democratically elected governments over the 25 years since he left office.
So, given the success and popularity of these policies, it is surprising that Chile’s voters have elected a president and a parliament that many Chileans now fear could put this approach at risk.
Bachelet’s policy agenda emphasizes three major changes.
A key element would be universal free university education, modeled on European systems.
Paying for this educational reform would require higher tax rates.
And labor laws would be revised to strengthen the role of unions.
Critics of Bachelet claim that this agenda is already depressing business investment and is responsible for relatively slow economic growth.
And they worry that foreign and domestic investors will be discouraged by the new labor rules.
Fortunately, the Chilean public shows no inclination to follow the mistakes of several other South American countries, especially Venezuela, Ecuador, Brazil, and Argentina.
Even Bachelet’s critics agree that Chile’s basic macroeconomic policies will not change: an independent central bank committed to price stability, a free-trade regime with a floating currency, and a fiscal policy that will keep deficits and public debt low.
Bachelet’s term in office will end in 2017.
Under Chile’s constitution, she cannot serve another consecutive term.
The election that year will therefore be an important one to watch.
Chile\u0027s New President, General Pinochet and the Po
SANTIAGO: After a hard-fought electoral battle, Chile has a new president.
On Sunday, Ricardo Lagos, the socialist leader, defeated his conservative challenger Joaquin Lavin, by 190,000 votes, the smallest margin of any presidential election since Chile's return to democracy.
During the five weeks leading to the second-round vote, Mr. Lagos ran an extraordinarily effective campaign.
Stunned by Mr. Lavin's success in the first round, Mr. Lagos was forced to rethink his strategy.
His characteristically intellectual rhetoric was replaced by simple and direct appeals to the electorate.
By surrounding himself by a group of young technocrats, he injected a badly needed sense of modernity into the campaign.
The new members of his team were quick to distance themselves from some of the most controversial and confrontational elements of the Socialist's program, including proposed legislation that would greatly increase the power of labor unions, hurting Chile's ability to compete internationally and reducing its economic growth potential.
What is surprising about the electoral result is not that Mr. Lagos won (after all he was the favorite all along), but that Mr. Lavin was able to mount such an effective challenge.
For the first time since the 1930s, Chile's right emerged as a serious political option with voter appeal.
Mr. Lavin obtained a remarkable 48.7% of the vote by campaigning as an efficient, issue-oriented politician that was not influenced by ideology or the petty political quarrels of the past.
Gradually his campaign captured the imagination of an increasing number of Chileans.
He was particularly effective among women and the young.
If Chile's rightist political parties want to capitalize on Mr. Lavin's popularity, they must show that they have moved away from their bedrock conservative ideology and have become pragmatic, modern, and issue oriented.
If the right fails to convince voters that it has, in fact, moved in this direction, it is likely to go back to its traditional 30% of the vote.
If, on the other hand, it demonstrates that it has embraced the new type of politics espoused by Mr. Lavin, it could make considerable gains in upcoming municipal and congressional elections.
It may even gain the presidency in 2006.
A first key test on whether Chile's right has really changed may come as soon as next week.
During the campaign Mr. Lavin repeatedly said that, irrespective of his age and health, General Pinochet should stand trial in Chile for alleged violations of human rights.
If, as many fear, the United Kingdom releases the General in the next few days, Chile's right-of-center politicians should insist, publicly and forcefully, that Pinochet is brought to justice in his own country.
The right should in fact go even further, demanding that the General gives up his senator-for-life post and the immunity that goes with it.
This would not only remove Pinochet from Chile's political life, but would also permit the courts to greatly expedite the trial against him.
This would allow Chile to address its traumatic past.
What made Mr. Lavin an unusual right-of-center candidate was that he proposed many initiatives that would modernize Chile's political and social institutions.
He suggested, among other things, that designated-senators, an anti-democratic legacy of the military regime, should be abolished, and that Chile's obligatory military draft should come to an end.
Many doubted his sincerity – and that of the political parties that supported him -- and branded the proposals as marketing gimmicks.
Chile's right can show that the skeptics were wrong, by supporting – better yet, by introducing – legislation along these lines in the next few months.
Mr. Lavin himself should take the initiative, and work out with Mr. Lagos a series of legislative initiatives – including some that require a constitutional reform – on which both candidates agreed during the campaign and that would enhance Chile's democratic system.
Mr. Lagos, in turn, should avoid the nostalgic and tired views that dominated the first part of his campaign and pursue, with vigor, the type of modernizing economic reforms that his new and young inner circle support.
If this happens, Chile will enter into the 21st century with great prospects.
It could indeed become an exemplary country, where justice, democracy and economic opportunity flourish.
Chile’s Presidential Minuet
BUENOS AIRES – Chile has been Latin America’s success story since the 1980’s, boasting rapid economic growth, successful integration into the world economy, solid democratic institutions, an effective state bureaucracy, and low levels of corruption.
By most standards, the country is far better off than the rest of the region.
Not surprisingly, Chileans have kept the ruling Christian Democrat-Socialist coalition (the Concertación ) in power for four consecutive terms since 1990, when democracy was restored after 17 years of General Augusto Pinochet’s repressive military rule.
On December 13, however, voters in Chile’s presidential election are likely to make the Concertación candidate sweat.
The Concertación is running Christian Democrat Eduardo Frei, the son of a former president who was president himself from 1994 until 2000.
His opponent is Sebastián Piñera, a tycoon, former senator, and presidential runner-up in 2006 who represents the main opposition forces – Piñera’s moderately conservative Renovación Nacional (RN) and the more rightist Union Democrata Independiente (UDI).
So far, nothing new: the RN and the UDI – which differ mainly in their attitude towards the military government from which they emerged (the RN being the more self-critical) – have been the main challengers in all the previous elections.
But change is coming, in the form of a 36-year-old maverick with no traditional-party backing.
Marco Enríquez-Ominami, with about 20% support in recent polls, is remarkably close to Frei (around 26%), and not terribly far from Piñera (roughly 38%).
The young candidate’s unexpected popular support is rooted within the ruling coalition: his adoptive father is a prominent Socialist senator (his biological father, a leader of the revolutionary left in the 1970’s, was killed by Pinochet’s political police).
Marco himself was elected deputy on the Socialist ticket, but he defected when the party denied him the chance to contest Frei’s nomination in a primary.
With this unique mix of insider knowledge and outsider status, and a freshness that both main candidates lack, Enríquez-Ominami has gone farther than most observers predicted.
Piñera’s lead and the emergence of Enríquez-Ominami are probably expressions of the same phenomenon: fatigue with – and within – the Concertación .
Despite its many successes since 1990, and the high popularity of the current president (Socialist Michelle Bachelet, Chile’s first female chief executive), time is taking a toll.
In recent years, several groups have split from the incumbent parties.
Many voters are following suit, drawn mainly to Enríquez-Ominami.
Frei’s lackluster numbers reflect his own weaknesses (he is notoriously uncharismatic and was the least popular of the four Concertación presidents), as well as the inevitable stress that two decades of uninterrupted rule has placed on the ruling coalition.
As things stand now, the right is likely to win the first round, but with less than 50%.
Even a comfortable Piñera victory could be reversed on the January 17th run-off, as Frei and Enríquez-Ominami are essentially splitting the center-left vote.
Enríquez-Ominami has the popularity and momentum to displace Frei from the run-off, but he may have a harder time defeating Piñera.
The two most likely scenarios, then, are government continuity or predictable change (the right has been expected to capture the presidency for years).
But a third scenario – less predictable change following a victory by Enríquez-Ominami – should not be ruled out, as campaign advertisements will appear in the media only starting November 13.
In terms of Chile’s major policies, however, continuity is almost certain to prevail, even if Enríquez-Ominami wins.
The center-left coalition that defeated Pinochet (in a 1988 plebiscite and his presidential candidate in the 1989 election) has been wise enough to keep, and in some cases deepen, the sound free-market policies inherited from the military government.
Chile boasts orthodox fiscal and monetary management, a very open economy, and a dynamic private sector.
It was also the first country in the world to adopt a fully private pension system, a policy experiment carried out by one of Pinochet’s technocrats (who happened to be Piñera’s brother, José) and largely kept in place since then.
These policies are popular with voters, and they are protected by powerful actors (for example, the strong export-oriented business sector) and by trade agreements with almost all the world’s major economies and regional blocs. Unlike many Latin American countries, in which populist backlashes have followed the liberalizing reforms of the 1990’s, the main challenger in Chile is an even more pro-market coalition.
Beyond the economy, there are, of course, many areas of disagreement.
The Concertación has dealt prudently with the political legacies of the dictatorship, gradually rescinding the self-serving rules that Pinochet created to protect himself, the military, and the right, and making some progress in prosecuting human rights violators.
But many are not happy: the far left – not very strong these days but with an important political tradition – wants more and faster progress on prosecutions, while the recalcitrant right insists on treating Pinochet (who died in 2006) as a national hero.
Moral, ethnic, and environmental issues follow similar ideological lines.
And yet the range of the policy debate is much narrower, and the tone more amiable, than is the case in Chile’s more polarized neighbors, such as Argentina, Bolivia, and Venezuela.
In either of the most probable scenarios, continuity or prudent change, or even if the “outsider” candidate wins, Chile will in all likelihood remain a beacon of democratic stability, economic dynamism, and international engagement in a region too often characterized by political and economic turbulence.
China Adjusts
BAHRAIN – China watchers are waiting to see whether the country has engineered a soft landing, cooling down an overheating economy and achieving a more sustainable rate of growth, or whether Asia’s dragon will crash to earth, as others in the neighborhood have before it.
But some, particularly American politicians in this presidential election year, focus on only one thing: China’s trade balance.
True, not long ago the renminbi was substantially undervalued, and China’s trade surpluses were very large.
That situation is changing.
Forces of adjustment are at work in the Chinese economy, so foreign perceptions need to adjust as well.
China’s trade surplus peaked at $300 billion in 2008, and has been declining ever since.
(Indeed, official data showed a $31 billion deficit in February, the largest since 1998.)
It is clear what has happened.
Ever since China rejoined the global economy three decades ago, its trading partners have been snapping up its manufacturing exports, because low Chinese wages made them super-competitive.
But, in recent years, relative prices have adjusted.
The change can be measured by real exchange-rate appreciation, which consists partly in nominal renminbi appreciation against the dollar, and partly in Chinese inflation.
China’s government should have let more of the real appreciation take the form of nominal appreciation (dollars per renminbi).
But, because it did not, it has shown up as inflation instead.
The natural price-adjustment process was delayed.
First, the authorities intervened in 1995-2005, and again in 2008-2010, to keep the dollar exchange rate virtually fixed.
Second, workers in China’s increasingly productive coastal factories were not paid their full value (the economy has not completed its transition from Mao to market, after all).
As a result, China continued to undersell the world.
But then the renminbi was finally allowed to appreciate against the dollar – by about 25% cumulatively during 2005-2008 and 2010-2011.
Moreover labor shortages began to appear, and Chinese workers began to win rapid wage increases.
Beijing, Shenzhen, and Shanghai raised their minimum wages sharply in the last three years – by 22% on average in 2010 and 2011.
Meanwhile another cost of business, land prices, rose even more rapidly.
As costs rise in China’s coastal provinces, several types of adjustment are taking place.
Some manufacturing is migrating inland, where wages and land prices are still relatively low, and some export operations are shifting to countries like Vietnam, where they are lower still.
Moreover, Chinese companies are beginning to automate, substituting capital for labor, and are producing more sophisticated goods, following the path blazed by Japan, Korea, and other Asian countries in the “flying geese” formation.
Finally, multinational companies that had moved some operations to China from the United States or other high-wage countries are now moving back.
Productivity is still higher in the US, after all.
None of this is news to most international observers of China.
But many Western politicians (and, to be fair, their constituents) are unable to let go of the syllogism that seemed so unassailable just a decade ago: (1) The Chinese have joined the world economy; (2) their wages are $0.50 an hour; (3) there are a billion of them; and (4) Chinese wages will never be bid up in line with the usual textbook laws of economics, so their exports will rise without limit.
But it turns out that the basic laws of economics eventually apply after all – even in China.
Like certain other aspects of the US-China economic relationship, China’s adjustment is reminiscent of Japan with a 30-year lag.
Japan’s trade balance fell into deficit in 2011, for the first time since 1980.
Special factors have played a role in the last year, including high oil prices and the effects of the March 2011 tsunami. But the downward trend in the trade balance is clear.
Even the current account showed a deficit in January.
This development has received relatively little attention in the US and other trading partners, which is curious, given that, two decades ago, Japan’s big trade surplus was the subject of intense focus and worry – just like China’s now.
At the time, some influential commentators warned that the Japanese had discovered a superior economic model, featuring strategic trade policy (among other attractions), and that the rest of us had better emulate them.
Either that, or the Japanese were “cheating,” in which case we needed to stop them.
Most economists rejected these “revisionist” views, and argued that Japan’s current-account surplus was large because its national saving rate was high, which reflected demographics, not cultural differences or government policies.
The Japanese population was relatively young, compared to other advanced economies, but was rapidly aging, owing to a declining birth rate since the 1940’s and rising longevity.
That view has been vindicated.
In 1980, 9% of Japan’s population was 65 or older; now the ratio is more than 23%, one of the highest in the world.
As a consequence, Japanese citizens who 30 years ago were saving for their retirement are now dissaving, precisely as economic theory predicted.
As the national saving rate has come down, so has the current-account surplus.
China faces a similar demographic trend, and also a push to unleash household consumption in order to sustain GDP growth.
As in Japan, the downward trend in China’s saving rate will show up in its current account.
The laws of international economics still apply.
Will China’s Infrastructure Bank Work?
CAMBRIDGE – With China set to lead a new $50 billion international financial institution, the Asian Infrastructure Investment Bank (AIIB), most of the debate has centered on the United States’ futile efforts to discourage other advanced economies from joining.
Far too little attention has been devoted to understanding why multilateral development lending has so often failed, and what might be done to make it work better.
Multilateral development institutions have probably had their most consistent success when they serve as “knowledge” banks, helping to share experience, best practices, and technical knowledge across regions.
By contrast, their greatest failures have come from funding grandiose projects that benefit the current elite, but do not properly balance environmental, social, and development priorities.
Dam construction is a leading historical example.
In general, there is a tendency to overestimate the economic benefits of big infrastructure projects in countries riddled by poor governance and corruption, and to underestimate the long-run social costs of having to repay loans whether or not promised revenues materialize.
Obviously, the AIIB runs this risk.
That said, there are huge infrastructure needs across developing Asia, and it is high time for China to play a greater role in international lending institutions.
Moreover, the official US argument – that China should invest its money in existing institutions, such as the World Bank and the Asian Development Bank, because a Chinese-led bank would likely have governance problems – smacks of hypocrisy.
Good governance?
Is the US prepared to relinquish its historical prerogative to choose the World Bank president?
Likewise, the US worries that China may use the AIIB to advance China’s economic and political interests.
But anyone who is even vaguely familiar with the US approach to multilateral lending knows that no other country has been as adept at exploiting its power and leverage for strategic gain.
With China’s growing importance in the world order, it needs to be given space to forge its own approach to global economic leadership.
Frankly, a relatively small infrastructure bank seems as good a place as any to start.
Besides, China is already pouring money into the developing world, often through highly opaque channels.
To the extent that the AIIB normalizes a portion of Chinese development assistance, and subjects it to scrutiny from the new bank’s advanced-country members, the new bank’s existence should be all for the better.
With its penchant for constant experimentation and improvement, one might even hope that China will draw lessons and apply them to all of its developing-country lending.
Who knows, maybe the existing development banks will learn something.
While the world should generally welcome China’s initiative, the real question is what kind of aid developing Asia needs.
Anyone who has worked in developing countries understands that weak institutions and poor governance are often far bigger obstacles to growth than a lack of funds.
And, however great a project looks on paper, practical implementation is often a sobering experience.
Costs invariably far exceed initial estimates, and planners often woefully underestimate the skills and funding needed to ensure maintenance and repairs.
My interpretation of the World Bank’s record is that its role has been most consistently positive when it helps countries with “soft” development infrastructure: technical assistance and serving as a global knowledge bank.
When its main role has been to provide financial muscle, the results have been less impressive.
In China itself, for example, World Bank money has not been so important quantitatively, yet the Chinese generally credit the Bank for having helpful blueprints and information.
Indeed, a strong case can be made that development aid would be more effective if it took the form of outright grants, rather than loans that ultimately need to be repaid.
Headline aid numbers might seem less impressive, but long-run results would be better.
Moreover, the world is awash in liquidity right now, and even where a government’s own money is inadequate, it is often possible to establish public-private partnerships to build genuinely high-return projects.
Competent government is a far scarcer commodity than cash.
Unfortunately, it is far from clear that the Chinese model of infrastructure development can be exported universally.
China’s strong central government overwhelms opposition from people displaced by new roads, bridges, and dams, and for many years ran roughshod over environmental concerns and workers’ rights.
The parallels to the old Soviet Union are striking.
Some developing countries in Asia work differently.
In democratic India, for example, it took eight years to rebuild Mumbai’s airport, because courts forced the government to respect the rights of squatters on its outskirts.
Given the legacy of problematic loans and projects funded by Western-led infrastructure banks, it is reasonable to ask whether another one is needed, as opposed to reforming existing institutions.
Still, if the AIIB views itself mainly as a knowledge bank, rather than a funding vehicle, it could provide real added value.
We should evaluate the AIIB by how it chooses and fosters projects, not just by how much financing it provides.
Asia’s Multilateralism
NEW YORK – The International Monetary Fund and the World Bank are poised to hold their annual meetings, but the big news in global economic governance will not be made in Washington DC in the coming days.
Indeed, that news was made last month, when the United Kingdom, Germany, France, and Italy joined more than 30 other countries as founding members of the Asian Infrastructure Investment Bank (AIIB).
The $50 billion AIIB, launched by China, will help meet Asia’s enormous infrastructure needs, which are well beyond the capacity of today’s institutional arrangements to finance.
One would have thought that the AIIB’s launch, and the decision of so many governments to support it, would be a cause for universal celebration.
And for the IMF, the World Bank, and many others, it was.
But, puzzlingly, wealthy European countries’ decision to join provoked the ire of American officials.
Indeed, one unnamed American source accused the UK of “constant accommodation” of China.
Covertly, the United States put pressure on countries around the world to stay away.
In fact, America’s opposition to the AIIB is inconsistent with its stated economic priorities in Asia.
Sadly, it seems to be another case of America’s insecurity about its global influence trumping its idealistic rhetoric – this time possibly undermining an important opportunity to strengthen Asia’s developing economies.
China itself is a testament to the extent to which infrastructure investment can contribute to development.
Last month, I visited formerly remote areas of the country that are now prosperous as a result of the connectivity – and thus the freer flow of people, goods, and ideas – that such investments have delivered.
The AIIB would bring similar benefits to other parts of Asia, which deepens the irony of US opposition.
President Barack Obama’s administration is championing the virtues of trade; but, in developing countries, lack of infrastructure is a far more serious barrier to trade than tariffs.
There is a further major global advantage to a fund like the AIIB: right now, the world suffers from insufficient aggregate demand.
Financial markets have proven unequal to the task of recycling savings from places where incomes exceed consumption to places where investment is needed.
When he was Chair of the US Federal Reserve, Ben Bernanke mistakenly described the problem as a “global saving glut.”
But in a world with such huge infrastructure needs, the problem is not a surplus of savings or a deficiency of good investment opportunities.
The problem is a financial system that has excelled at enabling market manipulation, speculation, and insider trading, but has failed at its core task: intermediating savings and investment on a global scale.
That is why the AIIB could bring a small but badly needed boost to global aggregate demand.
So we should welcome China’s initiative to multilateralize the flow of funds.
Indeed, it replicates American policy in the period following World War II, when the World Bank was founded to multilaterize development funds that were overwhelmingly coming from the US (a move that also helped to create a cadre of first-class international civil servants and development professionals).
The World Bank’s assistance was sometimes overburdened by prevailing ideology; for example, the free-market Washington Consensus policies foisted on recipients actually led to deindustrialization and declining income in Sub-Saharan Africa.
Nonetheless, US assistance was, overall, far more effective than it would have been had it not been multilateralized.
Had these resources been channeled through America’s own aid agency, policymaking would have been subject to the vagaries of development thinking (or the absence of reflection) from one administration to another.
New attempts to multilateralize flows of assistance (including the BRICS countries’ launch of the New Development Bank last July) are similarly likely to contribute significantly to global development.
Some years ago, the Asian Development Bank defended the virtues of competitive pluralism.
The AIIB offers a chance to test that idea in development finance itself.
Perhaps America’s opposition to the AIIB is an example of an economic phenomenon that I have often observed: firms want greater competition everywhere except in their own industry.
This position has already exacted a heavy price: had there been a more competitive marketplace of ideas, the flawed Washington Consensus might never have become a consensus at all.
America’s opposition to the AIIB is not unprecedented; in fact, it is akin to the successful US opposition to Japan’s generous New Miyazawa Initiative of the late 1990s, which offered $80 billion to help countries in the East Asian crisis.
Then, as now, it was not as if the US were offering an alternative source of funding.
It simply wanted hegemony.
In an increasingly multipolar world, it wanted to remain the G-1.
The lack of money, combined with America’s insistence on flawed ideas about how to respond to the crisis, caused the downturn to be far deeper and longer than it should have been.
That said, US opposition to the AIIB is harder to fathom, given that infrastructure policy is much less subject to the influence of ideology and special interests than other policymaking areas, such as those dominated by the US at the World Bank.
Moreover, the need for environmental and social safeguards in infrastructure investment is more likely to be addressed effectively within a multilateral framework.
The UK, France, Italy, Germany, and the others who have decided to join the AIIB should be congratulated.
One hopes that other countries, both in Europe and Asia, will join as well, helping to fulfill the ambition that infrastructure improvements can raise living standards in other parts of the region, as they have already done in China.
China and a New Balance of Power
SHANGHAI – The last rival superpower to the United States, the Soviet Union, collapsed in 1991.
But, apart from its military strength, the USSR was never really powerful enough to counterbalance US influence.
In the late 1980’s, Japan seemed capable of challenging America’s industrial leadership, but by the 1990’s it lost its competitive edge.
China might itself wish to be a major force in a multi-polar world, but has been plagued by its lack of overall strength.
Given these realities, China sees the expanding European Union as a likely counterweight to unchecked US power.
In terms of economic output, today’s EU is on par with the US.
But it has yet to build a strong defense system that can respond effectively either to regional contingencies or to global needs.
What would be the strength of such a system if and when it is developed, and how will it compare with that of the US?
In assessing America’s strength, China follows US debates on the merits of a uni-polar or a multi-polar world with keen interest.
Some Americans favor a uni-polar system in which the US dominates.
Such a Pax Americana would cost the country less to sustain, but the world would worry if America adopts a wrong policy, as has been the case in Iraq.
The US certainly has a right to curb terrorists like those who staged the attack on September 11, 2001.
But the “war on terror” did not warrant the decision to attack a sovereign state and topple its government on the flawed presumption that it housed weapons of mass destruction and was linked to the 2001 attacks.
The US went to war despite strong opposition from France, Germany, Russia, China, and other United Nations Security Council members.
France and Germany have since sought to restore good relations with the US, but continue to disapprove of the war.
The Middle East, always a region of concern for Europe, has become even less stable as a result of the war.
American leadership has been one of the war’s casualties.
In China, the concept of an independent European defense – embodied in the European Security and Defense Policy (ESDP), as well as the EU’s Rapid Reaction Force (RRF) and various police missions – is thus generally seen as necessary and effective in a multi-polar world system.
China observes that on most security matters, the ESDP will (for now) mimic American security interests, because the EU and US share fundamental values of human rights and democracy.
Moreover, many EU members have simultaneously pledged their defense capabilities to NATO, which has been led by the US since its creation.
But the ESDP, once fully developed, will not necessarily follow America’s lead unconditionally, especially if American policy continues to deviate from the norm of international law, as in Iraq.
As a result of acquiring a pan-European defense capacity, the Europeans are likely to play a more independent role than at present in managing intra-European security relations and carrying out global missions.
China welcomes this expanded security role for the EU.
Although it remains wary of international intervention by the EU, the substance and pattern of ESDP operations are likely to win China’s respect for several reasons.
First, China’s leaders note that the ESDP gives priority to the legitimacy of its missions.
So far, all ESDP missions have respected international law and governmental arrangements among disputing parties.
Most of its military or police missions have been based on UN Security Council resolutions, and ESDP missions outside Europe have been at the invitation of local authorities.
Of course, ESDP security missions, even those in accordance with Security Council resolutions, may not operate within the UN system – the EU prefers its own independent leadership.
The ESDP does not necessarily require Security Council authorization as a condition for its missions, and it retains an independent role in executing them. However, when compared with the US, the ESDP (in Chinese eyes) cares far more about international legitimacy, backed by the authority of the UN.
Second, the ESDP is concerned with good governance and institution building.
The EU is keen to restore or establish human rights, stability, and prosperity.
Outside Europe, the ESDP acts to enhance governance rather than promote regime change, and the EU has often assisted governments’ efforts to improve security conditions.
Third, the ESDP is open to international cooperation.
The EU works with either non-EU states, such as NATO members like Canada, Norway, and Turkey, or applicants for EU membership.
The ESDP cooperates with the UN and other regional organizations, such as the African Union and ASEAN.
When the EU reaches out, it tends to play a leading role in these collaborations.
There are good reasons to expect that China will continue to accept an independent European security mechanism.
There is little concern, if any, about the ESDP intervening in internal Chinese affairs, such as Taiwan.
Indeed, China wants a strong and independent Europe, and from that vantage point it is not too early for China to envisage a truly multi-polar global system.
China and its Enemies
China and Russia in the New World Disorder
Can Kosovo achieve independence without the tacit consent of Russia, and can there be a humanitarian and political solution to the tragedy in Darfur without the active goodwill of China?
The two crises have nothing in common, but their resolution will depend in large part on whether these two permanent members of the United Nations Security Council use their veto power.
Comparing the respective abilities of Russia and China to block key international initiatives makes no sense in itself, but it does constitute a useful tool for understanding the transformation of the international system that is now taking place as a direct consequence of the relative decline of America’s global power.
From that standpoint, the deepening of chaos in the Middle East poses both opportunities and risks for Russia and China, which may force them to define the roles they want to play and the images they want to project in the world.
The key question is this: Is Russia taking giant steps in the “wrong direction” while China is taking “minuscule” steps in the “right direction”?
Superficially, Russia and China may give the impression that they are pursuing the same path when they both proclaim with pride that they are “back” on the world stage.
But this boast means different things for each country.
For China, a deeply self-confident country, to be “back” simply means regaining the country’s historical centrality in the world after an absence of more than two centuries.
After all, at the end of the eighteenth century, China became the world’s first producer of manufactured goods, and it perceives itself as a center of civilization unequalled by any other in Asia, if not the world.
China’s renewed self-confidence is based on its remarkable economic prowess, which is derived not from natural resources, but from productivity and creativity.
Whatever the huge political, social, and economic tensions may exist, there is a “feel good” factor in China, a sense of progress, with the 2008 Olympics in Beijing figuring as the symbolic moment that will proclaim to the world the scale of the country’s achievements.
Above all, with the exception of the Taiwan issue, China is a satisfied status quo power when it comes to the evolution of the international system – a patient actor that finds it perfectly legitimate to behave and to be seen as the world’s number two power.
By contrast, the Russians remain insecure about their status in the world.
Russia’s explosive “revisionist” behavior on the eve of the recent G8 summit is an indication of the Kremlin’s “unsatisfied” nature.
Because they know they are less potent, particularly in demographic and economic terms, Russians feel they have to do “more.”
For them, to say “Russia is back” means that the humiliating Yeltsin years are over, and that they now must be treated as equals, particularly by the United States.
Russians are nostalgic not for the Cold War as such, but for the international status they lost when it ended.
Now that America is no longer a “hyperpower” with no strategic challengers, Russia has reasserted its status as a “superpower,” a claim that is not necessarily supported by reality.
Unlike the Chinese, the Russians do not create economic wealth, but merely exploit their energy and mineral resources.
Moreover, unlike the Chinese, they have not always been confident of their position in the world.
Torn between Europe and Asia in cultural and political terms, victimized by a dark, narcissistic instinct that pervades their reading of their past and their visions of the future, it should surprise no one that Russia is now behaving like a “revisionist” power.
Unsatisfied with their inner identity, it is only natural that Russians should demand changes that make them feel more secure and proud.
Less than 20 years ago, the Czech Republic and Poland were part of their sphere of influence, so Russians understandably cannot accept the US unilaterally implanting its security system there.
Of course, in their respective judgments on Russia and China, the West – and Europeans in particular – may be demonstrating selective emotions. “We” tend to be less demanding of China than of Russia, because we tend to see Russia as “European” (at least culturally).
As a result, the culture of physical violence and verbal provocation that is gaining ground in Putin’s Russia is deeply disturbing, whereas we tend to judge Chinese misdeeds with a greater sense of distance, if not indifference.
But the differences between Russia and China today may prove to be less significant tomorrow if the deterioration in the Middle East imposes a sense of collective responsibility on all five permanent members of the UN Security Council.
It is one thing for Russia and China to exploit America’s growing difficulties from Gaza to Kabul; but it is quite another if the situation deteriorates to the point of general destabilization in the region.
Indeed, the Middle East’s deepening problems may impose a sense of restraint in Russia and China by forcing them to calculate not in terms of their global “nuisance value” vis-à-vis the West, but in terms of their ability to make a positive and stabilizing contribution to the world order.
China and the Afghan Endgame
BEIJING – Ever since US President Barack Obama decided to begin withdrawing American troops from Afghanistan, global interest in what role (if any) China will play in determining that war-ravaged country’s future has grown dramatically.
After all, China is not merely a neighbor of Afghanistan, but the world’s most important rising power – indeed, a “world power,” as Mike Mullen, Chairman of the US Joint Chiefs of Staff proclaimed in Beijing this past June.
If China proves itself willing to help shore up Afghan President Hamid Karzai’s administration, it will not seek to gain any immediate advantage from the withdrawal of US forces.
But, despite the billions of dollars China has invested in developing Afghanistan’s natural resources, it is hard to see it undertaking a policy of broader and proactive engagement there.
One reason why China is wary of assuming a bigger role in Afghanistan, despite the country’s undoubted importance for regional stability, is that America’s war there has been controversial in China from the outset.
Chinese nationalists believe that the war was undertaken by the US partly in order to place its military near one of China’s most sensitive borders.
Moreover, to supply its Afghan forces, the US deepened its military footprint in Central Asia by renting the Manas Air Base in Kyrgyzstan, which also shares a border with China.
In the eyes of Chinese nationalists, these efforts were all the part of an American conspiracy to encircle China.
Thus, Chinese nationalists can’t wait to see the back of America’s Afghan military presence.
For Chinese strategic realists, any support for America’s efforts to help end the Afghan insurgency should be part of a broader China-US bargain.
China might agree not to undermine America as it withdraws only if the US agrees to rethink its arms sales to Taiwan, or to pull back from its commitment to support Japan’s claims to the Diaoyu/Senkaku islands, the ownership of which China disputes.
Obviously, such deals will be unwelcome in the US.
Given that neither Chinese foreign-policy camp believes that it will get what it wants out of cooperating with the US, both simply want America’s withdrawal to happen as soon as possible, without concern for what Afghanistan will look like afterwards.
For both camps, only great-power politics matters for China’s national security, and if diplomacy cannot influence the balance of power, there is little reason to engage with an issue.
For Chinese liberals, Afghanistan is fraught with ethnic threats.
By recklessly denying China’s request to extradite Uighur extremists to China for trial, the US showed scant regard for an issue of paramount importance – the threat posed to China’s hard-won unity by separatists.
Muslim Uighurs from Xinjiang province were captured in Taliban training campus and jailed at Guantánamo Bay with other international terrorists from 2002 through 2009.
China thought their extradition necessary to undercutting international sympathy for Uighur independence seekers.
But the US worried about the potential for human-rights abuses in China and rejected the Uighurs’ extradition.
Indeed, former President George W. Bush welcomed Rebiya Kadeer, a leader of the exiled Uighur independence movement, to the White House, embittering many Chinese.
And given that the Uighur bastion of Xinjiang is close to China’s borders with Afghanistan and Pakistan, the US was unwise to raise Chinese hackles in this way.
Of course, a stable, orderly, and secular Afghanistan serves China’s interests as much as it benefits the rest of the world.
Yet few Chinese are willing to confess that the US-led Afghanistan war, which removed the Taliban and Al Qaeda from their dominant roles in the country, improved China’s domestic security.
That refusal is clearly the result of the “structural” ambivalence that now exists between the US and China.
The extent to which China will engage Afghanistan positively will depend in large part on whether China rids itself of the prevailing zero-sum mindset and facilitates America’s military withdrawal by doing what it can to stabilize the country.
China can help by stiffening the resolve of Pakistan’s military to move more aggressively to contain Taliban extremists on its territory; open border regions to help resupply NATO forces in Afghanistan; and invest in the country’s infrastructure.
Indeed, China’s relations with Pakistan have assumed greater importance recently, owing to the tensions that now exist between Pakistan and the US.
The Obama administration’s challenge nowadays is to calibrate its recent suspension of some military aid to Pakistan in order to maximize its leverage without pushing the government even closer to the extremists.
By working with the US on Pakistan, China can help secure its own interest in a strong Pakistani campaign against the militants on its territory.
Regardless of the Bush-era disputes with the US over the Uighur prisoners at Guantánamo, China is in a better position to tell its “all-weather” friends in Islamabad that stabilizing Afghanistan is not only an American objective, but a significant Chinese goal as well.
China’s cooperation may not be essential to defeating Al Qaeda and other militants in Afghanistan, but it will be if lasting peace and stability is to be realized.
Chinese and US interests in Afghanistan are unlikely ever to be perfectly aligned, but the two sides can and must learn to cooperate for their own benefit, and that of the region.
The challenge for China is to exert its power and influence in a way that harmonizes with the US, despite widespread displeasure among Chinese at America’s position on a variety of issues, from Taiwan to the East and South China seas.
The Two Innovation Economies
HONG KONG – For 250 years, technological innovation has driven economic development.
But the economics of innovation are very different for those at the frontier versus those who are followers striving to catch up.
At the frontier, the innovation economy begins with discovery and culminates in speculation.
From scientific research to identification of commercial applications of new technologies, progress has been achieved through trial and error.
The strategic technologies that have repeatedly transformed the market economy – from railroads to the Internet – required the construction of networks whose value in use could not be known when they were first deployed.
Consequently, innovation at the frontier depends on funding sources that are decoupled from concern for economic value; thus, it cannot be reduced to the optimal allocation of resources.
The conventional production function of neoclassical economics offers a dangerously misleading lens through which to interpret the processes of frontier innovation.
Financial speculation has been, and remains, one required source of funding.
Financial bubbles emerge wherever liquid asset markets exist.
Indeed, the objects of such speculation astound the imagination: tulip bulbs, gold and silver mines, real estate, the debt of new nations, corporate securities.
Occasionally, the object of speculation has been one of those fundamental technologies – canals, railroads, electrification, radio, automobiles, microelectronics, computing, the Internet – for which financial speculators have mobilized capital on a scale far beyond what “rational” investors would provide.
From the wreckage that has inevitably followed, a succession of new economies has emerged.
Complementing the role of speculation, activist states have played several roles in encouraging innovation.
They have been most effective when pursuing politically legitimate missions that transcend narrow economic calculation: social development, national security, conquering disease.
In the United States, the government constructed transformational networks (the interstate highway system), massively subsidized their construction (the transcontinental railroads), or played the foundational role in their design and early development (the Internet).
Activist states around the world have funded basic science and served as early customers for the novel products that result.
For a quarter-century starting in 1950, the US Department of Defense – to cite one crucial example – combined both roles to build the underpinnings of today’s digital economy.
For countries following an innovative leader, the path is clear.
Mercantilist policies of protection and subsidy have been effective instruments of an economically active state.
In the US, the first profitable textile mills blatantly violated British patents.
And ferociously entrepreneurial private enterprise was supported by a broad array of state investments, guarantees, and protective tariffs, in accordance with the “American System” inspired by Alexander Hamilton and realized by Henry Clay.
The great, neglected German economist Friedrich List, a student of Hamilton’s work, laid out an innovation roadmap for his own country in 1841, in his National System of Political Economy.
It has been used repeatedly: by Japan beginning in the last decades of the nineteenth century; by the Asian Tigers in the second half of the twentieth century; and now by China.
List noted how Britain’s emergence as “the first industrial nation” at the end of the eighteenth century depended on prior state policies to promote British industry. “Had the English left everything to itself,” he wrote, “the Belgians would be still manufacturing cloth for the English, England would still have been the sheepyard for the [Hanseatic League].”
Coherent programs to promote economic catch-up are relatively straightforward.
But the transition from follower to leader at the frontier of the innovation economy is more challenging and elusive.
The US managed the transition roughly between 1880 and 1930, combining the professionalization of management with a speculative taste for new technologies – electrification, automobiles, and radio – and state tolerance of the Second Industrial Revolution’s great industrial monopolies, which invested their super-profits in scientific research.
The post-World War II invocation of national security as the legitimizing rationale for an economically active state extended America’s leadership.
It is not yet clear whether East Asia’s economic powerhouses will succeed in making the transition from follower to frontier.
To begin, the “national champions” of the catch-up phase must be rendered accessible to competitive assault.
More generally, the state’s role must shift from executing well-defined programs to supporting trial-and-error experimentation and tolerating entrepreneurial failure.
And the debilitating “corruption tax” that seems inevitably to accompany economic revolutions must be curbed, as it was in Britain during the nineteenth century and America during the twentieth.
Here is the moment of strategic uncertainty.
The “made in America” digital economy exhibits ample momentum in the private sector.
But leadership of the next new economy – the low-carbon economy – is open.
America is suffering the consequences of a generation-long effort to render the state illegitimate as an economic actor.
Europe is mired in its oxymoronic commitment to “expansionary fiscal austerity.”
Can China manage the economic, cultural, and political transitions necessary to assume the leadership role now up for grabs?
I find it intriguing to go back almost 200 years and consider Britain’s political economy when the First Industrial Revolution was gathering steam.
England in 1820 was governed by a corrupt oligarchy that exercised power in intimate collaboration with a national religious establishment.
Political legitimacy was validated by fear of anarchy, the terrifying reality of which had been observable across the Channel within living memory.
Arbitrary, draconian repression was the rule: under the “Bloody Code” of criminal justice, more than 100 felonies were punishable by death or transportation.
The patent system was notoriously expensive and inaccessible.
England’s rulers sought in vain to keep a lid on the greatest explosion of economic energy and financial wealth in human history.
Over a long generation, England was transformed.
From the Great Reform Act of 1832 to the repeal of the Corn Laws in 1846 – and on to the civil-service reforms initiated in 1853 and the Representation of the People Act of 1867 – Britain pursued its unique path toward a relatively stable and sustainable democratic capitalism.
No doubt China’s own path will be as distinctive as the processes by which it has reached its current moment of opportunity.
Whether or not its path proves to be as progressive as England’s may determine who assumes the mantle of global economic leadership.
China and the Global Financial Crisis
GENEVA – Is China an island of stability in the midst of the gathering global financial storm, or will it, too, soon be sucked into the vortex?
Chinese officials have said that the crisis that began in the United States will not slow down long-planned reforms in China’s financial markets.
They insist that China will go ahead with plans to introduce margin trading, short selling, and futures contracts on share prices.
But China slowed capital-account liberalization after the Asian financial crisis ten years ago, so it is possible that America’s troubles could make China more cautious.
China has played an important role in financing the US budget deficit in recent years, thanks to its effort to manage the renminbi’s exchange rate against the dollar.
China does not want its large current-account surplus to cause the currency to overshoot on the upside, and it may now want to slow the renminbi’s appreciation because of concern about the global economic slowdown.
If so, China would have to expand its foreign exchange reserves by another $300-400 billion, which would allow it to finance the large expansion in the US fiscal deficit. Recent slight declines in the value of the renminbi suggest that China’s exchange rate policy may be changing following its 20% appreciation of the currency since July 2005.
Germany’s finance minister, Peer Steinbrück, has said that the crisis will reduce US financial hegemony and create a more multipolar world. The September 26 edition of The China Daily carried an article asking, “Is the Sun Setting on US Economic Supremacy?”
The article reviewed examples of how foreign investors have lost money in the US market and concluded, “The outbreak of the latest crisis shows that the neo-conservative revolution launched in the 1980’s has already come to an end.” The article attributed the crisis to policies that “called on market forces to be given full play with the scrapping of government controls, especially on the financial market.”
Chinese officials have not yet echoed Steinbrück’s comments, but the US experience will naturally make them more suspicious of Western investment bankers and US-style regulation.
China has so far lost money on two of its major investments in Western financial firms (Morgan Stanley and Blackstone).
It could have helped to contain the current crisis if it had accepted invitations to invest in Lehman Brothers, but, given its previous losses on Wall Street, it declined.
As a result of concern about the global economy, the People's Bank reduced interest rates two weeks ago and joined the coordinated global interest rate cut on October 8 – the first time that China ever participated in a global monetary policy move.
The government also announced plans earlier this month to increase infrastructure spending by $586 billion during 2009 and 2010.
The projected spending increases are equal to 15% of GDP, and are the largest that any country has undertaken so far in response to the financial crisis.
They demonstrate clearly that China is prepared to compensate for export weakness by stimulating domestic demand.
China must now take further action to bolster consumer spending, which slumped to only 36% of GDP in 2007, from over 50% during the 1980’s, owing to the economy’s heavy dependence on exports and capital spending since the late 1990’s.
The Chinese government’s goal will be to keep annual growth above 8% in order to generate sufficient employment to maintain social stability.
It is currently also more sensitive to employment risks than usual, because several thousand small factories in the textile and toy sectors have closed this year as a result of the impact of rising labor costs and the appreciating renminbi on profit margins.
China wants to shift from low value-added, labor-intensive industries such as textiles to higher value-added sectors such as electronics and capital goods.
But it does not want to generate high levels of unemployment as this transition occurs.
China has the resources to cope with the current financial crisis.
Foreign exchange reserves are an immense $1.9 trillion.
Booming tax receipts have provided the government with a fiscal surplus.
The critical issue has been policymakers’ willingness to act promptly, before there is clear evidence of an economic downturn.
The government’s stimulus package demonstrates that it is aware of the risks in the global economy and is prepared to act decisively.
The current crisis marks an important step in China’s evolution as a great economic power.
China has been pursuing a policy of extreme Keynesianism at a time when Europe and the US are also undertaking massive interventions in their financial systems to prevent the current crisis from leading to a global financial collapse.
Thus, there is a growing convergence between Chinese and G-7 economic policy, born of the need to compensate for massive failures in US financial regulation and monetary policy.
The US has been lobbying China for some time for economic policy changes aimed at stimulating domestic demand and open markets.
The irony is that, to compensate for a crisis that America’s own policies have created in global financial markets, the US is now getting what it has long sought from China.
China as a Superpower
YALTA – Given its rapid and successful development, there can be no doubt that the People’s Republic of China will become one of the dominant global powers of the twenty-first century.
Indeed, despite the massive problems that the country is confronting, it could even emerge as the global power.
But it would be a mistake to assume that the reemergence of so-called “XXL powers” like China and India will simply bring a continuation of Western traditions.
We will have to deal with a different type of superpower.
Ever since the European powers set sail at the end of the fifteenth century to conquer the world, historiography and international politics have become accustomed to a certain pattern: military, economic, and technological power is translated into the exercise of influence over other countries, conquest, and even global dominance and empire.
This was particularly true in the twentieth century, when, in the wake of two world wars, the United States and the Soviet Union replaced the European world powers on the global stage.
The Cold War and the period of US global dominance after 1989/1990 followed this pattern as well.
But China’s rise to global power, I believe, will not, owing to its massive population of 1.2 billion people, which threatens to overstretch the structures of any kind of government system and its decision makers.
This is all the more true in times of rapid fundamental change, as is occurring in China now.
The permanent danger of overstretching the country’s internal political structures is unlikely to permit any imperial foreign-policy role.
Insofar as this is true, the United States won’t be replaced as the dominant power unless and until it abdicates that role.
This may sound simple, but it will have far-reaching consequences for the coming century’s international order.
The vital interests guiding Chinese policy are internal modernization, the ruling regime’s political stability and survival, and the country’s unity (which includes Taiwan).
These interests are unlikely to change for a long time.
As a result, China will become a largely inward-looking superpower, which – precisely for that reason – will pursue its foreign-policy interests in a completely unsentimental manner.
Militarily, China will focus primarily on its regional supremacy, because the country’s unity depends on it.
Otherwise, though, the transformation of China’s economy and society will be all-important, because the regime’s stability depends on it.
For the Chinese leadership, this means that a growth rate of about 10% per year will be essential for a long time.
Otherwise, the rapid and fundamental transformation of the country from a largely agrarian to an ultra-modern industrialized society could not proceed without destabilizing the system.
But this focus on internal growth will have massive political consequences, both domestically and in foreign-policy terms.
Domestically, China will be the first country that, due to its sheer size and required GDP growth, is forced to pursue a “green” economy.
Otherwise, China would quickly reach its “limits to growth,” with disastrous ecological and, as a result, political consequences.
Since China will be the most important market of the future, it will be decisive in determining not only what we produce and consume, but how. Consider the transition from the traditional automobile to electric transport.
Despite European illusions to the contrary, this will be decided in China, not in the West. All that will be decided by the West’s globally dominant automobile industry is whether it will adapt and have a chance to survive or go the way of other old Western industries: to the developing world.
In foreign-policy terms, China will attempt to protect its domestic transformation by securing resources and access to foreign markets.
Sooner or later, though, China’s government will come to realize that America’s role as a global regulator is indispensible for China’s vital foreign-policy interests, because China is unable to assume that role, other global players aren’t available, and the only alternative to the US would be a breakdown of order.
This US-Chinese tandem will run far from smoothly, and will do little but ameliorate crises and periods of serious economic and political confrontation, like that which is currently looming over the bilateral trade imbalance.
Strategically, however, China and the US will have to rely on one another for a long time.
This co-dependency will, at some point, also take shape politically, probably to the chagrin of all other international players, particularly the Europeans.
Europe could change the course of this development only if it presented itself as a serious player and stood up for its interests on the global stage.
The “G-2” of China and the US would probably be happy about that.
But Europe is too weak and too divided to be effective globally, with its leaders unwilling to pursue a common policy based on their countries’ own strategic interests.
The Art of Capital Flight
CAMBRIDGE – What impact will China’s slowdown have on the red-hot contemporary art market?
That might not seem like an obvious question, until one considers that, for emerging-market investors, art has become a critical tool for facilitating capital flight and hiding wealth.
These investors have become a major factor in the art market’s spectacular price bubble of the last several years.
So, with emerging market economies from Russia to Brazil mired in recession, will the bubble burst?
Just five months ago, Larry Fink, Chairman and CEO of BlackRock, the world’s largest asset manager, told an audience in Singapore that contemporary art has become one of the two most important stores of wealth internationally, along with apartments in major cities such as New York, London, and Vancouver.
Forget gold as an inflation hedge; buy paintings.
What made Fink’s elevation of art to investment-grade status so surprising is that no one of his stature had been brave enough to say it before.
I am certainly not celebrating the trend.
I tend to agree with the philosopher Peter Singer that the obscene sums being spent on premier pieces of modern art are disquieting.
We can all agree that these sums are staggering.
In May, Pablo Picasso’s “Women of Algiers” sold for $179 million at a Christie’s auction in New York, up from $32 million in 1997.
Okay, it’s a Picasso.
Yet it is not even the highest sale price paid this year.
A Swiss collector reportedly paid close to $300 million in a private sale for Paul Gauguin’s 1892 “When Will You Marry?”
Picasso and Gauguin are deceased.
The supply of their paintings is known and limited.
Nevertheless, the recent price frenzy extends to a significant number of living artists, led by the American Jeff Koons and the German Gerhard Richter, and extending well down the food chain.
For economists, the art bubble raises many fascinating questions, but an especially interesting one is exactly who would pay so much for high-end art.
The answer is hard to know, because the art world is extremely opaque.
Indeed, art is the last great unregulated investment opportunity.
Much has been written about the painting collections of hedge fund managers and private equity art funds (where one essentially buys shares in portfolios of art without actually ever taking possession of anything).
In fact, emerging-market buyers, including Chinese, have become the swing buyers in many instances, often making purchases anonymously.
But doesn’t China have a regime of strict capital controls that limits citizens from taking more than $50,000 per year out of the country?
Yes, but there are many ways of moving money in and out of China, including the time-honored method of “under and over invoicing.”
For example, to get money out of China, a Chinese seller might report a dollar value far below what she was actually paid by a cooperating Western importer, with the difference being deposited into an overseas bank account.
It is extremely difficult to estimate capital flight, both because the data are insufficient and because it is tough to distinguish capital flight from normal diversification.
As the late MIT economist Rüdiger Dornbusch liked to quip, identifying capital flight is akin to the old adage about blind men touching an elephant: It is difficult to describe, but you will recognize it when you see it.
Many estimates put capital flight from China at about $300 billion annually in recent years, with a marked increase in 2015 as the economy continues to weaken.
The ever-vigilant Chinese authorities are cracking down on money laundering; but, given the huge incentives on the other side, this is like playing whack-a-mole.
Presumably, the anonymous Chinese buyers at recent Sotheby’s and Christie’s auctions had spirited their money out of the country before bidding, and the paintings are just an investment vehicle that is particularly easy to hold secretively.
The art is not necessarily even displayed anywhere: It may well be spirited off to a temperature- and humidity-controlled storage vault in Switzerland or Luxembourg.
Reportedly, some art sales today result in paintings merely being moved from one section of a storage vault to another, recalling how the New York Federal Reserve registers gold sales between national central banks.
Clearly, the incentives and motives of art investors who are engaged in capital flight, or who want to hide or launder their money, are quite different from those of ordinary investors.
The Chinese hardly invented this game.
It was not so long ago that Latin America was the big driver in the art market, owing to money escaping governance-challenged economies such as Argentina and Venezuela, as well as drug cartels that used paintings to launder their cash.
So how, then, will the emerging-market slowdown radiating from China affect contemporary art prices?
In the short run, the answer is ambiguous, because more money is leaking out of the country even as the economy slows.
In the long run, the outcome is pretty clear, especially if one throws in the coming Fed interest-rate hikes.
With core buyers pulling back, and the opportunity cost rising, the end of the art bubble will not be a pretty picture.
The Limits of Chinese Soft Power
CAMBRIDGE – China has been making major efforts to increase its ability to influence other countries without force or coercion.
In 2007, then-President Hu Jintao told the Communist Party that the country needed to increase its soft power;
President Xi Jinping repeated the same message last year.
They know that, for a country like China, whose growing economic and military power risks scaring its neighbors into forming counter-balancing coalitions, a smart strategy must include efforts to appear less frightening.
But their soft-power ambitions still face major obstacles.
To be sure, China’s efforts have had some impact.
As China enrolls countries as members of its Asian Infrastructure Investment Bank and doles out billions of dollars of aid during state visits abroad, some observers worry that, when it comes to soft power, China could actually be taking the lead over countries like the United States.
The American sinologist David Shambaugh, for example, estimates that the country spends roughly $10 billion a year in “external propaganda.”
By comparison, the US spent only $666 million on public diplomacy last year.
Yet the billions of dollars China is spending on its charm offensive have had only a limited return.
Polls in North America, Europe, India, and Japan show that opinions about China’s influence are predominantly negative.
The country is viewed more positively in Latin America and Africa, where it has no territorial disputes and human-rights concerns are not always high on the public agenda.
But even in many countries in those regions, Chinese practices like importing labor for infrastructure projects are unpopular.
Combining hard and soft power into a smart strategy, it turns out, is not easy.
A country derives its soft power primarily from three resources: its culture (in places that find it appealing), its political values (when it lives up to them at home and abroad), and its foreign policies (when they are seen as legitimate and having moral authority).
China has emphasized its cultural and economic strengths, but it has paid less attention to the political aspects that can undermine its efforts.
Two major factors limit China’s soft power, as measured by recent international polls.
The first is nationalism.
The Communist Party has based its legitimacy not only on a high rate of economic growth, but also on appeals to nationalism.
Doing so has reduced the universal appeal of Xi’s “Chinese Dream,” while encouraging policies in the South China Sea and elsewhere that antagonize its neighbors.
With, for example, China bullying the Philippines over possession of disputed islands in the South China Sea, the Confucius Institute that China established in Manila to teach Chinese culture can win only so much goodwill.
(China has opened some 500 such institutes in more than 100 countries.) The consequences of the country’s foreign policy can be seen in last year’s anti-Chinese riots in Vietnam following the positioning of a Chinese oil drilling rig in waters claimed by both countries.
The other limit is China's reluctance to take full advantage of an uncensored civil society.
As noted by The Economist, the Chinese Communist Party has not bought into the idea that soft power springs largely from individuals, the private sector, and civil society.
Instead, it has clung to the view that the government is the main source of soft power, promoting ancient cultural icons that it thinks might have global appeal, often using the tools of propaganda.
In today’s media landscape, information is abundant.
What is scarce is attention, which depends on credibility – and government propaganda is rarely credible.
For all of China’s efforts to position the Xinhua news agency and China Central Television as competitors of CNN and the BBC, the international audience for brittle propaganda is vanishingly small.
The US, by contrast, derives much of its soft power not from the government, but from civil society – everything from universities and foundations to Hollywood and pop culture.
China does not yet have global cultural industries on the scale of Hollywood or universities capable of rivaling America’s.
Even more important, it lacks the many non-governmental organizations that generate much of America’s soft power.
In addition to generating good will and promoting the country’s image abroad, non-governmental sources of soft power can sometimes compensate for the government’s unpopular policies – like the US invasion of Iraq – through their critical and uncensored reaction.
China, by contrast, has watched its government policies undermine its soft-power successes.
Indeed, the domestic crackdown on human-rights activists undercut the soft-power gains of the 2008 Beijing Olympics.
And the benefits of the 2009 Shanghai Expo were rapidly undermined by the jailing of Nobel Peace Prize laureate Liu Xiaobo and the television screens around the world broadcasting scenes of an empty chair at the Oslo ceremonies.
Marketing experts call this “stepping on your own message.”
China’s aid programs are often successful and constructive.
Its economy is strong, and its traditional culture is widely admired.
But if the country is to realize its enormous soft-power potential, it will have to rethink its policies at home and abroad, limiting its claims upon its neighbors and learning to accept criticism in order to unleash the full talents of its civil society.
As long as China fans the flames of nationalism and holds tight the reins of party control, its soft power will always remain limited.
China’s Complexity Problem
NEW HAVEN – There are many moving parts in China’s daunting transition to what its leaders call a moderately well-off society.
Tectonic shifts are occurring simultaneously on several fronts – the economy, financial markets, geopolitical strategy, and social policy.
The ultimate test may well lie in managing the exceedingly complex interplay among these developments.
Is China’s leadership up to the task, or has it bitten off too much at once?
Most Western commentators continue to over-simplify this debate, framing it in terms of the proverbial China hard-landing scenarios that have been off the mark for 20 years.
In the wake of this summer’s stock-market plunge and surprising devaluation of the renminbi, the same thing is happening again.
I suspect, however, that fears of an outright recession in China are vastly overblown.
While the debate about China’s near-term outlook should hardly be trivialized, the far bigger story is its economy’s solid progress on the road to rebalancing – namely, a structural shift away from manufacturing and construction activity toward services.
In 2014, the services share of Chinese GDP hit 48.2%, well in excess of the combined 42.6% share of manufacturing and construction.
And the gap is continuing to widen – services activity grew 8.4% year on year in the first half of 2015, far outstripping the 6.1% growth in manufacturing and construction.
Services are in many respects the infrastructure of a consumer society – in China’s case, providing the basic utilities, communications, retail outlets, health care, and finance that its emerging middle class is increasingly demanding.
They are also labor-intensive: in China, services require about 30% more jobs per unit of output than do capital-intensive manufacturing and construction.
Largely for that reason, China’s employment trends have held up much better than might be expected in the face of an economic slowdown.
Urban job growth averaged slightly more than 13 million in 2013-14 – well above the ten million targeted by the government.
Moreover, the data from early 2015 suggest that urban hiring remains near the impressive pace of recent years – hardly the labor-market stress normally associated with economic hard landings or recessions.
Services are also the ingredient that makes China’s urbanization strategy so effective.
Today, approximately 55% of China’s population lives in cities, compared to less than 20% in 1978.
And the share should rise to 65-70% over the next 15 years.
New and expanding cities sustain growth through services-based employment, which in turn boosts consumer purchasing power by trebling per capita income relative to that earned in the countryside.
So, despite all the handwringing over a Chinese crash, the rapid shift toward a services-based economy is tempering downside pressures in the old manufacturing-based economy.
The International Monetary Fund stressed the same conclusion in its recent Article IV consultation with China, noting that labor income is now expanding as a share of GDP, and that consumption contributed slightly more than investment to GDP growth in 2014.
That may seem like marginal progress, but it is actually quite rapid relative to the normally glacial pace of structural change – a process that began in China only in 2011 with the enactment of the 12th Five-Year Plan.
Alas, there is an important catch.
While progress on economic rebalancing is encouraging, China has put far more on its plate: simultaneous plans to modernize the financial system, reform the currency, and address excesses in equity, debt, and property markets.
Meanwhile, the authorities are also pursuing an aggressive anti-corruption campaign, a more muscular foreign policy, and a nationalistic revival couched in terms of the “China Dream.”
The interplay among these multiple objectives may prove especially daunting.
For example, the confluence of deleveraging and the bursting of the equity bubble could create a self-reinforcing downward spiral in the old manufacturing economy that shakes consumer confidence and offsets the emerging dynamism of the new services economy.
Similarly, military adventures in the South China Sea could damage China’s links to the rest of the world long before it is able to count on domestic demand for economic growth.
Ironically, China’s juggling act may prove even more difficult for the authorities to pull off in a market-based, consumer-oriented system.
Caught in the transition from China’s tightly controlled, state-directed model, the government seems to be waffling – for example, by stressing a decisive shift to markets, only to intervene aggressively when equity prices plummet.
Likewise, it is embracing more of a market-based foreign-exchange regime while guiding the renminbi lower.
Add to that a stop-start commitment to reform of state-owned enterprises and China could inadvertently find itself mired in something comparable to what Minxin Pei has long called a “trapped transition,” in which the economic-reform strategy is stymied by the lack of political will in a one-party state.
Under President Xi Jinping’s leadership, there is no lack of political will in today’s China.
The challenge is to prioritize that will in a way that keeps China on the course of reform and rebalancing.
Any backtracking on these fronts would lead China into the type of trap that Pei has long feared is inevitable.
Economic development has always been a daunting challenge.
As warnings about the “middle-income trap” underscore, history is littered with more failures than successes in pushing beyond the per capita income threshold that China has attained.
The last thing China needs is to try to balance too much on the head of a pin.
Its leaders need to simplify and clarify an agenda that risks becoming too complex to manage.
China’s Monetary-Policy Surprise
NEW HAVEN – In economic policy, as in most other areas, actions speak louder than words.
By cutting its benchmark policy interest rates on November 21, the People’s Bank of China (PBOC) has underscored the tactical focus of the government’s stabilization policy, which aims to put a floor of around 7% on GDP growth.
Achieving this goal will be no small feat.
China’s economy is caught in the crossfire of structural and cyclical&nbsp;headwinds.
Structural pressures have&nbsp;arisen from the shift to a new model of services- and consumer-led growth, and cyclical pressures stem from&nbsp;a tough global environment that has&nbsp;put downward pressure on the old model of&nbsp;export and investment-led growth.
The cyclical challenges, in particular, are proving to be more vexing than anticipated.
Though exports have declined considerably from their pre-crisis peak of 35% of GDP, they continue to account for about 24%, leaving China exposed to the global growth cycle – especially to markets in the developed world, where demand is exceptionally weak.
Indeed, 42% of Chinese exports go to Europe, the United States, and Japan – three economies that are flirting with secular stagnation.
And Europe, China’s largest export market, has struggled the most.
Given that development strategies typically&nbsp;begin to fail when economies reach middle-income status – a threshold that China is rapidly approaching – China cannot afford to allow mounting cyclical risks to undermine its structural transformation.
Modern history shows that the easiest way for a developing country to become ensnared in the dreaded “middle-income trap” is to cling to its old model for too long.
The fact is that only structural transformation can lift a middle-income developing country to high-income developed status.
Fortunately, China’s leaders recognize this, and are committed to achieving it.
President Xi Jinping has been spearheading the effort to press ahead with reform and rebalancing.
A year ago, at the Third Plenary Session of the 18th Central Committee of the Chinese Communist Party (CCP), Xi and his team created the country’s most ambitious economic-reform agenda in 35 years.
This, together with the 12th Five-Year Plan that was&nbsp;enacted in 2011, highlights the authorities’ commitment to bolstering the services sector and domestic consumption.
At the same time, China has been shifting responsibility for implementing reform from its antiquated planning apparatus (the National Development and Reform Commission) to a more effective market-based mechanism embedded in the CCP’s structure (the Leading Small Group for Comprehensively Deepening Reforms).
Add to that Xi’s unprecedented anti-corruption campaign, and there is no turning back on China’s road to rebalancing and structural change.
But the risk of cyclical disruptions, such as an unexpected decline in global economic growth, remains.
This raises an important tactical challenge for China. How can it stay the reform course without being derailed by a significant growth slowdown in the short term?
This is not the first time that China has confronted this challenge&nbsp;–&nbsp;nor will it be the last. The Great Recession of 2008-2009 also&nbsp;pushed China to the brink of outright&nbsp;recession.
With global trade collapsing and Chinese export demand having plummeted from 26% annual growth in mid-2008 to a 27% contraction by early 2009, the government moved aggressively to inject CN¥4 trillion ($586 billion) into the economy.
Though this enabled growth to recover by the end of 2009, it also contributed to new problems, including excessive debt, a property-market overhang, and mounting local-government financial risk.
The last thing China needs is more fiscal stimulus.
Today’s cyclical disruption pales in comparison to that of 2008-2009, and, unlike the fiscally reckless developed economies, China recognizes excessive government&nbsp;debt as a legitimate&nbsp;threat to sustainable growth and development.
Moreover, unlike major developed economies, most of which have used up all of their conventional monetary-policy ammunition by reducing their policy interest rates to zero, China has plenty of monetary stimulus on reserve to address cyclical disruptions.
In these circumstances, it makes sense for China to lean more on monetary policy than on fiscal expansion.
Nonetheless, the PBOC’s tactical decision is not without potential pitfalls – not least because interest-rate cuts encourage the extension of more credit at a time when China is trying to wean itself from debt-intensive growth.
A key challenge will be to avoid escalating credit risk, which could undermine the process of reform and rebalancing.
From the start, China’s leaders knew that the interaction between structural transformation and the business cycle would be complex.
As former Premier Wen Jiabao noted nearly eight years ago, China’s economy had become increasingly “unstable, unbalanced, uncoordinated, and unsustainable.”
The longer China delayed addressing its problems, the more intractable the solution became.
Xi and his colleagues are resolute in attempting to solve this problem by staying&nbsp;the&nbsp;course to rebalance the Chinese economy, while remaining acutely aware of cyclical risks.
After all, China’s vulnerability to such risks is rooted in its old growth model, which was allowed to remain in place for far too long.
With the recent monetary easing, the Chinese authorities seem to be drawing a line in the sand to prevent an excessive drop in growth.&nbsp;This&nbsp;suggests that they now&nbsp;view a cyclical disruption as a real threat to the country’s longer-term structural-reform agenda.
To the extent that those fears persist, additional monetary easing can be expected.
China’s Vicious Growth Circle
LONDON – Most economists have a reason to be worried about China’s economy – whether it be low consumption and large external surpluses, industrial overcapacity, environmental degradation, or government interventions like capital controls or financial repression.
What many fail to recognize is that these are merely the symptoms of a single underlying problem: China’s skewed growth model.
That model is, to some extent, a policy-induced construct, the result of a deep-rooted bias toward construction and manufacturing as the leading drivers of economic development.
This predilection harkens back to the Great Leap Forward of the 1950s, when scrap metal was melted to meet wildly optimistic steel-production targets, thereby advancing Mao’s dream of rapid industrialization.
Today, China’s proclivity for industrial production is manifested in large-scale manufacturing and infrastructure projects, encouraged by direct and indirect government subsidies.
By boosting investment and generating tax revenue for local governments, this approach has a more immediate positive impact on GDP than efforts to develop the service sector.
But the model also carries considerable costs.
Indeed, China is now locked in a vicious economic circle, sustained by seemingly unrelated distortionary policies that are, in fact, deeply interconnected, even symbiotic.
One of the most glaring features of this pattern is the disparity between China’s GDP growth, which has averaged nearly 10% annually over the last few decades, and its employment growth, which has amounted to just 1-2% annually.
Clearly, industrialization and export expansion alone cannot absorb China’s massive labor force.
The problem is that rapid labor-productivity growth in the industrial sector – more than 10% per year over the last two decades – is reducing the need to hire more workers.
The service sector, by contrast, experienced much slower labor-productivity growth (about 5% annually over the same period), meaning that it could be far more effective in generating employment growth.
In the United States, about 80% of the total labor force was deployed in the services sector in 2012.
Another consequence of China’s skewed growth model has been a decline in household income as a share of GDP, from 70% in 1990 to 60% in 2009, whereas in the US, for example, the ratio has remained stable, at around 80% of GDP.
In other words, Chinese households are missing out on the benefits of economic growth.
This phenomenon, too, can be blamed largely on distortionary policies.
In order to cap the rise in labor costs, wages were suppressed, growing by only 5% annually over the last 20 years, even as productivity grew at an annual rate of 8.5%.
Meanwhile, financial repression lowered the cost of capital.
In the last decade, the average real (inflation-adjusted) return on deposits has been near zero.
With about 80% of Chinese household savings deposited in banks, this implicit tax on savings has had a major economic impact, reinforcing Chinese households’ tendency to save and thus undermining consumption growth and exacerbating global imbalances.
In this way, China’s distortionary policies have helped to perpetuate a dysfunctional growth model.
Wage suppression, financial repression, and an undervalued exchange rate subsidize exports and production, at the expense of households, which are thus compelled to save, weakening domestic demand.
In order to achieve growth targets, the government thus must depend on exports and investment – an approach that leads to the accumulation of massive reserves, which subsequently need to be sterilized.
Low interest rates help to contain the cost of sterilization at the national level and reduce costs at the firm level – again at the expense of households.
Breaking the cycle will not be easy, but there is no other way to address many of the most pressing problems confronting China’s economy.
Indeed, the current growth model is also taking a heavy toll on the environment, with pollution threatening the population’s health, especially in urban areas.
Moreover, the bias toward manufacturing and export industries leads to a severe misallocation of capital.
Less efficient industrial sectors have accumulated significant excess capacity, destabilizing the entire economy, while more productive, efficient sectors lack access to the resources they need.
Restructuring the economy is perhaps the most urgent – and most difficult – challenge facing China’s leaders today.
Given that the current distortions are interlinked, they may need to be addressed simultaneously.
What Should China Do?
STANFORD – The Chinese government’s heavy-handed efforts to contain recent stock-market volatility – the latest move prohibits short selling and sales by major shareholders – have seriously damaged its credibility.
But China’s policy failures should come as no surprise.
Policymakers there are far from the first to mismanage financial markets, currencies, and trade.
Many European governments, for example, suffered humiliating losses defending currencies that were misaligned in the early 1990s.
Still, China’s economy remains a source of significant uncertainty.
Indeed, although the performance of China’s stock market and that of its real economy has not been closely correlated, a major slowdown is underway.
That is a serious concern, occupying finance ministries, central banks, trading desks, and importers and exporters worldwide.
China’s government believed that it could engineer a soft landing in the transition from torrid double-digit economic growth, fueled by exports and investments, to steady and balanced growth underpinned by domestic consumption, especially of services.
And, in fact, it enacted some sensible policies and reforms.
But rapid growth obscured many problems.
For example, officials, seeking to secure promotions by achieving short-term economic targets, misallocated resources; basic industries like steel and cement built up vast excess capacity; and bad loans accumulated on the balance sheets of banks and local governments.
Nowhere are the problems with this approach more apparent than in the attempt to plan urbanization, which entailed the construction of large new cities – complete with modern infrastructure and plentiful housing – that have yet to be occupied.
In a sense, these “ghost cities” resemble the Russian empire’s Potemkin villages, built to create an impressive illusion for the passing Czarina; but China’s ghost cities are real and were presumably meant to do more than flatter the country’s leaders.
Now that economic growth is flagging – official statistics put the annual rate at 7%, but most observers believe the real number is closer to 5% (or even lower) – China’s governance problems are becoming impossible to ignore.
Although China’s growth rate still exceeds that of all but a few economies today, the scale of the slowdown has been wrenching, with short-run dynamics similar to a swing in the United States or Germany from 2% GDP growth to a 3% contraction.
A China beset by serious economic problems is likely to experience considerable social and political instability.
As the slowdown threatens to impede job creation, undermining the prospects of the millions of people moving to China’s cities each year in search of a more prosperous life, the Chinese Communist Party will struggle to maintain the legitimacy of its political monopoly.
(More broadly, the weight of China’s problems, together with Russia’s collapse and Venezuela’s 60% inflation, has strained the belief of some that state capitalism trumps market economies.)
Given China’s systemic importance to the global economy, instability there could pose major risks far beyond its borders.
China is the largest foreign holder of US Treasury securities, a major trade partner for the US, Europe, Latin America, and Australia, and a key facilitator of intra-Asian trade, owing partly to the scale of its processing trade.
The world has a lot at stake in China, and China’s authorities have a lot on their plate.
The government must cope with the short-term effects of the slowdown while continuing to implement reforms aimed at smoothing the economy’s shift to a new growth model and expanding the role of markets.
Foreign firms are seeking access to China’s rapidly growing middle class, which the McKinsey Global Institute estimates already exceeds 200 million.
But that implies a stable business environment, including more transparency in government approvals, and looser capital controls.
With these goals in mind, China’s government recently engineered a modest currency devaluation – about 3% so far.
That is probably too small to alter China’s trade balance with Europe or the US significantly.
But it signals a shift toward a more market-oriented exchange rate.
The risk on the minds of investors, managers, and government officials is that currency markets – or government-managed currencies buffeted by market forces – often develop too much momentum and overshoot fundamental values.
As China’s government uses monetary policy to try to calm markets, micro-level reforms must continue.
China must deploy new technologies across industries, while improving workers’ education, training, and health.
Moreover, China needs to accelerate its efforts to increase domestic consumption, which, as a share of GDP, is far below that of other countries.
That means reducing the unprecedentedly high savings rate, a large share of which accrues to state-owned enterprises.
If private firms and households are to replace government-led investment as the economy’s main drivers of growth, the state must reduce its stake in major enterprises and allow more profits to be paid directly to shareholders, while providing more of the profits from its remaining shares to citizens.
The shift away from excessive state control should also include replacing price subsidies and grants to favored industries with targeted support for low-income workers and greater investment in human capital.
In addition, China must reduce administrative discretion, introducing sensible, predictable regulation to address natural monopolies and externalities.
Back at the macro level, China needs to reallocate responsibilities and resources among the various levels of government, in order to capitalize on their comparative advantage in providing services and raising revenue.
And the country must gradually reduce its total debt load, which now exceeds 250% of GDP.
Fortunately, in facing the difficult adjustment challenges that lie ahead, China’s $3.6 trillion in foreign-currency reserves can serve as a buffer against unavoidable losses.
But China must also avoid reverting to greater state control of the economy – a possibility glimpsed in the authorities’ ham-fisted response to the correction in equity prices.
That approach needs to be abandoned once and for all, before it does any more damage to China’s quest for long-term stability and prosperity.
A Window on China’s New Normal
CAMBRIDGE – Every year at this time, China’s government organizes a major conference – sponsored by the Development Research Center, the official think tank of the State Council – that brings together senior Chinese officials, CEOs from major Chinese and Western firms, and a small group of international officials and academics.
The China Development Forum (CDF) occurs just after the annual National People’s Congress.
At the forum, speakers, including the finance minister and the head of the central bank, summarize the Chinese leadership’s current thinking.
Officials then listen to comments and suggestions from Western business and academic participants, including a question and answer session with Premier Li Keqiang.
Although I have been attending the CDF’s meetings for more than a decade, I found this year’s conference substantially different from any in the past.
The key difference was the official Chinese recognition that annual real GDP growth has declined permanently from the past three decades’ average rate of nearly 10%.
The official estimate is that real GDP grew 7.4% in 2014, and that the rate will probably slow further, to 7%, this year.
The Development Research Center presented detailed estimates showing that the growth rate will continue to decline, reaching about 6% by the end of the decade.
Virtually every Chinese official referred to this slowdown as their country’s “new normal.”
They all seemed reconciled to slower growth, which was initially surprising, because officials previously argued that China needed rapid growth to maintain employment and avoid political unrest.
They now appear to understand that the declining growth rate will not lead to unemployment, because the slowdown reflects China’s structural shift from export-oriented heavy industrial production to increased production of consumer services, which require more employment to create the same amount of value.
Stronger growth nevertheless remains necessary, because China is still a relatively low-income country with substantial poverty.
Although China’s total real GDP is second only to that of the United States (and might be larger when measured in terms of purchasing power), its per capita income is only about $7,000, or roughly 15% of the US level.
And consumption remains low – only about 50% of GDP when government spending is included, and just 35% when limited to household consumer spending.
So China has a long way to go to reach its leaders’ goal of achieving a “modern prosperous society.”
The Chinese see that the “new normal” requires a shift in their growth strategy from factor-driven growth to innovation-driven growth.
But it is not clear how that increase in innovation will be achieved.
While officials stress reliance on the market, China does not have the venture capital and “angel financing” that facilitates innovation in the US.
The authorities may hope that their plan to insure bank deposits will shift deposits from the three largest banks to many smaller banks around the country, facilitating local startups’ access to financing.
Many other economic problems loom.
Officials acknowledged at the CDF that the biggest risks lie in the financial sector, particularly owing to local governments’ very large liabilities.
In the past, the government dealt with the problems that these liabilities caused for the banking system by injecting funds into the banks.
Environmental problems are another powerful drag on China’s current standard of living.
But they also represent a potential way to increase GDP should overall demand decline significantly.
China acknowledges that high levels of air and water pollution create discomfort and harm the public’s health.
Government spending on remedying environmental damage could absorb substantial funds if demand-side weakness exacerbates the expected supply-side slowdown.
Moreover, the very weak performance of state-owned enterprises, which continue to play a large role in heavy industry and in some service sectors, represents a powerful brake on growth.
Although official policy aims to reduce these firms’ role so that “the market can play the decisive role in resource allocation,” shrinking these firms has proved to be difficult, owing to their strong political backing within the Chinese Communist Party.
At the same time, China maintains restrictions on direct investment by foreigners, limiting both the kinds of firms and the share of joint ventures that they can own.
The official policy is to reduce the barriers to foreign corporate investment, especially in high tech and the service sector.
There were, of course, a number of subjects that remained just below the surface and were not discussed at this year’s CDF.
There was no indication of a slowdown in President Xi Jinping’s anti-corruption campaign, though some private conversations suggested that the campaign has resulted in decision-making delays that are hurting productivity and growth.
There was also no discussion of Chinese cyber theft of Western technology.
When that subject was raised in 2014, Li denied that the Chinese do such a thing, but noted that Chinese firms are hacked by domestic sources.
And, with the CDF’s emphasis on cooperation, there was no discussion of possible military action by the Chinese to stake their disputed territorial claims in the East and South China Seas.
Meetings like the CDF provide a useful window into a country whose importance for the global economy will continue to grow.
The current slowdown to a new normal makes such windows even more important.
China on the Move
BEIJING – The debate is over.
After six years of weighing the options, China is now firmly committed to implementing a new growth strategy.
At least, that’s the verdict I gleaned from the just-completed annual China Development Forum, long China’s most important dialogue with the outside world.
There were no surprises in the basic thrust of the strategy – a structural shift in China’s investment- and export-led growth model toward a more balanced consumer-based and services-led economy.
The transformation reflects both necessity and design.
It is necessary because persistently weak global growth is unlikely to provide the solid external demand for Chinese exports that it once did.
But it is also essential, because China’s new leadership seems determined to come to grips with a vast array of internal imbalances that threaten the environment, promote destabilizing income inequality, and exacerbate regional disparities.
The strategic shift is also a deliberate effort by Chinese policymakers to avoid the dreaded “middle-income trap” – a mid-stage slowdown that has ensnared most emerging economies when per capita income nears the $17,000 threshold (in constant international prices).
Developing economies that maintain their old growth models for too long fall into it, and China probably will hit the threshold in 3-5 years.
Three insights from this year’s China Development Forum deepened my confidence that a major structural transformation is now at hand that will enable China to avoid the middle-income trap.
First, a well-articulated urbanization strategy has emerged as a key pillar of consumer-led rebalancing.
This was emphasized by China’s new senior leaders – Executive Vice Premier Zhang Gaoli and Premier Li Keqiang – in the Forum’s opening and closing remarks, and considerable detail was provided in many of the working sessions.
Urbanization is a building block for consumption, because it provides powerful leverage to Chinese households’ purchasing power.
Urban workers’ per capita income is more than three times higher than that of their counterparts in the countryside.
The urban share of the Chinese population reached 52.6% in 2012 – up nearly three-fold from 18% in 1980, and is expected to rise toward 70% by 2030.
If ongoing urbanization can be coupled with job creation – a distinct possibility in light of China’s emphasis on developing its embryonic labor-intensive services sector – the outlook for household-income growth is quite encouraging.
The pace of urbanization should dispel Western doubts stemming from concerns over so-called ghost cities and chronic over-investment.
According to research by McKinsey & Company, with the annual influx of new urban residents totaling 15-20 million, China will need more than 220 large cities (at least one million people) by 2030, up from 125 in 2010.
Moreover, because urbanization is a capital-intensive endeavor and China’s capital stock per worker – a key driver of productivity growth – is still only 13% of the levels in the United States and Japan, China has good reason to remain a high-investment economy for years to come.
What is new today is the focus on urbanization’s negative externalities – especially the thorny issues of land confiscation and environmental degradation.
A well-developed “eco-city” framework was presented at this year’s Forum to counter both concerns, and features incentives promoting a new urbanization model that stresses compact land usage, mixed modes of local transportation, lighter building materials, and non-carbon energy sources.
The second insight from the 2013 China Development Forum is the new government’s focus on strengthening the social safety net as a pillar of a modern consumer society.
In particular, owing to the hukou (China’s antiquated household registration system), access to public services and benefits is not portable.
As a result, migrant workers – an underclass numbering roughly 160 million – remain shut out of government-supported health care, education, and social security.
Holes in the social safety net have led to high and rising levels of precautionary saving – driving a wedge between increases in labor income and any impetus to discretionary purchasing power.
Significantly, there were strong hints from senior Chinese leaders at the Forum that hukou reform is now under active consideration.
While that would be welcome, such efforts need to be accompanied by an expansion of benefits.
China’s retirement system has only about $430 billion of assets under management (national and local government social security and private-sector pensions).
I pressed newly appointed Finance Minister Lou Jiwei on this point, suggesting that China deploy some of its excess foreign-exchange reserves to fund such an effort – the same tactic used to provide a $200 billion start-up injection for the China Investment Corporation, the sovereign wealth fund that he ran for the previous five and a half years.
Unfortunately, he did not favor this suggestion.
The final – and possibly most important – insight that I took away from the Forum concerned the quality of China’s new leaders.
From President Xi Jinping and Premier Li Keqiang on down, China’s new leadership team is quite sophisticated in terms of analytics, risk assessment, scenario modeling, and devising innovative solutions to tough problems.
Moreover, under the organizational umbrella of the National Development and Reform Commission (NDRC) – the latter-day version of the old central planning apparatus – China has marshaled considerable resources into the formulation of a comprehensive and well-thought-out economic strategy.
But, in the end, it takes more than strong policy and analytical skills to deal with tough economic challenges.
We have seen unfortunate examples of that repeatedly in the West in recent years, and there are no guarantees that China’s newly installed leaders will avoid comparable pitfalls.
Vision and strategy are vital for realizing the “China Dream,” as the country’s new leaders are now calling it.
But it will take courage and sheer determination to tackle what is perhaps the biggest obstacle of all – resistance from deeply entrenched local and provincial power blocs.
On this critical front, strong words must be accompanied by bold action.
Letting China’s Bubble Burst
NEW YORK – The problems with China’s economic-growth pattern have become well known in recent years, with the Chinese stock-market’s recent free-fall bringing them into sharper focus.
But discussions of the Chinese economy’s imbalances and vulnerabilities tend to neglect some of the more positive elements of its structural evolution, particularly the government’s track record of prompt corrective intervention, and the substantial state balance sheet that can be deployed, if necessary.
In this regard, however, the stock-market bubble that developed in the first half of the year should be viewed as an exception.
Not only did Chinese regulators enable the bubble’s growth by allowing retail investors – many of them newcomers to the market – to engage in margin trading (using borrowed money); the policy response to the market correction that began in late June has also been highly problematic.
Given past experiences with such bubbles, these policy mistakes are puzzling.
I was in Beijing in the fall of 2007, when the Shanghai Composite Index skyrocketed to almost 6,000 (the recent peak was just over 5,000), owing partly to the participation of relatively inexperienced retail investors.
At the time, I thought that the greatest policy concern would be the burgeoning current-account surplus of over 10% of GDP, which would create friction with China’s trading partners.
But the country’s leaders were far more concerned about the social consequences of the stock-market correction that soon followed.
Although social unrest did not emerge, a prolonged period of moribund equity prices did, even as the economy continued to grow rapidly.
In 2008, it was a combination of exploding asset prices and excessive household-sector leverage that fueled the global financial crisis.
When such a debt-fueled bubble bursts, its effects are transmitted directly to the real economy via household-sector balance sheets, with the reduction in consumption contributing to a decline in employment and private investment.
It is much harder to find circuit breakers for this dynamic than for, say, that caused by balance-sheet distress in the financial sector.
Yet the Chinese authorities seem not to have learned the lessons of either episode.
Not only did they fail to mitigate the risks, underscored in the 2007 collapse, that new retail investors introduce into the market; they actually exacerbated them, by allowing, and even encouraging, those investors to accumulate leverage through margin buying.
Making matters worse, when the current stock-market correction began in early June, Chinese regulators relaxed margin-buying restrictions, while encouraging state-owned enterprises and asset managers to purchase more stocks.
The authorities, it seems, were more interested in propping up the market than allowing for a controlled price correction.
To be sure, China’s stock-market bubble did not emerge until recently.
Last October, when the Shanghai Composite Index was in the 2,500 range, many analysts considered equity prices undervalued.
Given relatively strong economic growth, rising prices seemed justified until about March, when the market, driven by mostly thinly traded small- and mid-cap stocks, shot to over 5,000, placing the economy at risk.
(And, in fact, many still claimed that the rally was not unsustainable, as the stock market was trading at a forward price-to-earnings ratio of about 15, consistent with its ten-year average, in mid-April.)
But it was a bubble – and a highly leveraged one at that.
While periodic bubbles may be unavoidable, and no bubble is without consequences, a highly leveraged bubble tends to cause far more damage, owing to its impact on the real economy and the duration of the deleveraging process.
This is reflected in the persistently sluggish recovery in the advanced economies today.
Even the United States, which has fared better than most since the crisis, has recorded GDP growth of little more than 10% since the start of 2008; over the same period, China’s economy grew by about 66%.
Of course, with China’s household sector holding a relatively small share of equities compared to real estate, the current stock-market slump is unlikely to derail the economy.
Nonetheless, as in 2007, the prospect that lost savings will trigger social unrest cannot be dismissed, especially at a time when tools like social media enable citizens easily to share information, air grievances, and mobilize protest.
As previous crises have shown, and as the current downturn in China has highlighted, steps must be taken to mitigate market risks.
Specifically, China needs prudential regulation that limits the use of leverage for asset purchases.
Here, the country already has an advantage: relatively high levels of equity and low mortgage-to-value ratios typically characterize real-estate purchases by China’s household sector.
Moreover, once a market correction begins, the authorities should allow it to run its course, rather than prop up prices with additional leverage – an approach that only prolongs the correction.
If Chinese regulators allow the market to correct, sophisticated institutional investors with a long-term value orientation will ultimately step in, enhancing the market’s stability.
In the interim, the use of public balance sheets to purchase enough equity to prevent the market from over-correcting may be justified.
As China’s markets expand – the capitalization of the Shanghai and Shenzhen markets is on the order of $11 trillion – they are increasingly outstripping policymakers’ capacity to manage prices and valuations.
The only practical way forward is for the Chinese authorities to focus on regulatory and institutional development, while following through on their commitment to allow markets to play the decisive role in allocating resources.
Making Space for China
LONDON – When the United Kingdom announced earlier this month that it had agreed to become a founding member of the China-led Asian Infrastructure Investment Bank (AIIB), most of the headlines focused not on the news itself, but on the friction the decision had caused between the UK and the United States.
The White House issued a statement urging the British government to “use its voice to push for adoption of high standards."
And one senior US administration official was quoted accusing the UK of “constant accommodation of China, which is not the best way to engage a rising power."
In fact, it is the US that is advocating the wrong approach.
In the UK, the diplomatic spat served as an occasion for the British press to air criticism from those who believe that the government should adopt a stronger stance on China.
For example, they say that the government should have spoken out more forcefully in support of last year's pro-democracy protests in Hong Kong, and that it should not have distanced itself from the Dalai Lama (as it seems to have done) during Prime Minister David Cameron's visit to China in 2013.
The UK does need to stand up for itself, but there is no reason for it to become confrontational about internal Chinese matters – especially in the case of Hong Kong, where it lost its standing when it agreed to return the city to Chinese control in 1997.
The US, too, would be wise to stop resisting the fact that the world is changing.
The US Congress has yet to ratify a 2010 agreement providing China and other large emerging economies greater voting power in the World Bank and the International Monetary Fund.
In the meantime, the agreement has become obsolete;
China's economy has nearly doubled in size since the deal was struck.
America's reluctance – and that of France, Germany, and Italy – to give the emerging powers an appropriate voice in the established international financial institutions is counterproductive.
It drives the creation of new parallel institutions such as the AIIB and the New Development Bank, founded in 2014 by the BRICS countries (Brazil, Russia, India, China, and South Africa).
In the coming days, I will be visiting China in my role as Chair of the British government's Review on Antimicrobial Resistance, and also as a participant in the Boao Forum for Asia, an event similar to the annual gathering of the World Economic Forum in Davos.
I hope to encourage Chinese policymakers to make the fight against antimicrobial resistance a priority when China chairs the G-20 in 2016.
And though I am not the British ambassador, I will be happy to state my belief that the UK government was wise to join the AIIB, and that the US administration, in voicing its opposition, was not.
China's $10 trillion economy is bigger than those of France, Germany, and Italy combined.
Even if its annual output growth slows to 7%, the country will add some $700 billion to global GDP this year.
Japan would have to grow at something like 14% to have that type of impact on the world.
For anyone who wants to engage in global trade, it is thus vital to identify what China wants.
In the case of the UK, this obviously includes finance (as well as sports, music, fashion, and perhaps health care).
The UK is simply being smart when it promotes its own interests by cooperating with China.
One of the few positive consequences of the 2008 financial crisis was the elevation of the G-20's global role; in principle, it is a far more representative forum for international leadership than the G-7 ever was.
There is, however, a downside to the G-20's emergence: the large number of participants can make it difficult to reach agreements and get things done.
A new G-7 needs to be created within the G-20, thereby providing China with a degree of influence that reflects its economic weight and requires it to assume a commensurate proportion of global responsibility.
Space at the table for China could be obtained if the eurozone countries, signaling their commitment to the common currency, agreed to surrender their individual seats in exchange for one representing the entire monetary union.
The US, too, would finally have to accept China's heightened global role.
Later this year, the IMF will recalibrate the weights in its unit of account, the so-called Special Drawing Rights, which comprises a basket of currencies that currently includes the US dollar, the euro, the British pound, and the Japanese yen.
According to almost every economic and financial criterion, the SDR basket should now include China's renminbi.
The US would be wise to not oppose such a move.
Otherwise, it would risk accelerating the decline of the established international financial institutions.
Similarly, the US Congress should ratify the agreed changes to the governance of the IMF and the World Bank.
By founding the AIIB and the New Development Bank, China and other emerging powers have signaled that they will not wait for their voices to be better heard.
And decisions like that of the UK – and France, Germany, and Italy – show that they are not alone.
China’s New Global Leadership
NEW YORK – The biggest economic news of the year came almost without notice: China has overtaken the United States as the world’s largest economy, according to the scorekeepers at the International Monetary Fund.
And, while China’s geopolitical status is rising rapidly, alongside its economic might, the US continues to squander its global leadership, owing to the unchecked greed of its political and economic elites and the self-made trap of perpetual war in the Middle East.
According to the IMF, China’s GDP will be $17.6 trillion in 2014, outstripping US output of $17.4 trillion.
Of course, because China’s population is more than four times larger, its per capita GDP, at $12,900, is still less than a quarter of the $54,700 recorded in the US, which highlights America’s much higher living standards.
China’s rise is momentous, but it also signifies a return.
After all, China has been the world’s most populous country since it became a unified state more than 2,000 years ago, so it makes sense that it would also be the world’s largest economy.
And, indeed, the evidence suggests that China was larger (in terms of purchasing power parity) than any other economy in the world until around 1889, when the US eclipsed it.
Now, 125 years later, the rankings have reversed again, following decades of rapid economic development in China.
With rising economic power has come growing geopolitical clout.
Chinese leaders are feted around the world.
Many European countries are looking to China as the key to stronger domestic growth.
African leaders view China as their countries’ new indispensable growth partner, particularly in infrastructure and business development.
Similarly, economic strategists and business leaders in Latin America now look to China at least as much as they look to the US.
China and Japan seem to be taking steps toward better relations, after a period of high tensions.
Even Russia has recently “tilted” toward China, establishing stronger connections on many fronts, including energy and transport.
Like the US after World War II, China is putting real money on the table – a lot of it – to build strong economic and infrastructure links with countries around the world.
This will enable other countries to boost their own growth, while cementing China’s global economic and geopolitical leadership.
The number of Chinese initiatives is staggering.
In just the past year, China has launched four major projects that promise to give it a greatly expanded role in global trade and finance.
China joined Russia, Brazil, India, and South Africa in establishing the New Development Bank, to be based in Shanghai.
A new Asian Infrastructure Investment Bank, to be based in Beijing, will help to fund infrastructure projects (roads, power, and rail, among others) throughout the region.
The New Silk Road land belt seeks to connect China with the economies of East Asia, South Asia, Central Asia, and Europe through an expanded grid of rail, highways, power, fiber, and other networks.
And the new 21st Century Maritime Silk Road is aimed at boosting ocean-based trade in East Asia and the Indian Ocean.
All told, these various initiatives are likely to leverage hundreds of billions of dollars in investment over the coming decade, speeding growth in the counterpart countries while deepening their production, trade, and financial linkages with China.
There is no guarantee that all of this will succeed or proceed smoothly.
China faces huge internal challenges, including high and rising income inequality, massive air and water pollution, the need to move to a low-carbon economy, and the same risks of financial-market instabilities that bedevil the US and Europe.
And if China becomes too aggressive toward its neighbors – for example, by demanding rights to offshore oil or territory in disputed waters – it will generate a serious diplomatic backlash.
No one should assume smooth sailing for China (or for any other part of the world, for that matter) in the years ahead.
Still, it is striking that just as China is rising economically and geopolitically, the US seems to be doing everything possible to waste its own economic, technological, and geopolitical advantages.
The US political system has been captured by the greed of its wealthy elites, whose narrow goals are to cut corporate and personal tax rates, maximize their vast personal fortunes, and curtail constructive US leadership in global economic development.
They so scorn US foreign assistance that they have thrown open the doors to China’s new global leadership in development financing.
Even worse, as China flexes its geopolitical muscles, the only foreign policy that the US systematically pursues is unceasing and fruitless war in the Middle East.
The US endlessly drains its resources and energy in Syria and Iraq in the same way that it once did in Vietnam.
China, meanwhile, has avoided becoming enmeshed in overseas military debacles, emphasizing win-win economic initiatives instead.
China’s economic rise can contribute to global wellbeing if its leaders emphasize investment in infrastructure, clean energy, public health, and other international priorities.
Still, the world would be better off if the US also continued to lead constructively, alongside China.
The recent announcement by Presidents Barack Obama and Xi Jinping of bilateral agreements on climate change and clean energy show the best of what’s possible.
America’s perpetual war-making in the Middle East shows the worst.
China Going Forward
BEIJING – China’s per capita income, at $3,800, has now surpassed the threshold for a middle-income country.
But, even as economists and strategists busily extrapolate China’s future growth path to predict when it will catch up to the United States, the mood inside China became somber and subdued in 2010.
Indeed, Premier Wen Jiabao sees China’s growth as “unstable, unbalanced, uncoordinated, and ultimately unsustainable.”
Economic growth, of course, has never been linear in any country.
Throughout history, there are countless examples of middle-income countries becoming stuck in that category for decades and/or eventually falling back to low-income status.
The Nobel laureate economist Michael Spence has pointed out that after WWII, only a handful of countries were able to grow to a fully-industrialized level of development.
China’s progress over the past three decades is a successful variation on the East Asian growth model that stems from the initial conditions bequeathed by a planned socialist economy.
That growth model has now almost exhausted its potential.
So China has reached a crucial juncture: without painful structural adjustment, its economic-growth momentum can suddenly be lost.
China’s rapid growth has been achieved at extremely high cost.
Only future generations will know the true price.
The country’s investment rate now stands at more than 50% – a clear reflection of China’s low capital efficiency. There are two worrying aspects of this high rate.
First, local governments influence a large proportion of investment decisions. Second, investment in real-estate development accounts for nearly one-quarter of the total.
Some local governments are literally digging holes and then filling them in order to create GDP.
As a result, there are simply too many luxurious condominiums, magnificent government office buildings, and soaring skyscrapers.
Hotels in China’s provincial cities can make five-star hotels in Western capitals looked shabby.
China has become one of the most polluted countries in the world.
Dust and smog choke its cities.
All of the country’s major rivers are contaminated.
Deforestation and desertification are rampant.
Drought, floods, and landslides have become commonplace.
Relentless extraction is quickly depleting China’s resource deposits.
With China’s trade-to-GDP ratio and exports-to-GDP ratio already exceeding 60% and 30%, respectively, the economy cannot continue to depend on external demand to sustain growth.
Unfortunately, with a large export sector that employs scores of millions of workers, this dependence has become structural, which implies that to reduce China’s trade dependency and trade surplus is much more than a matter of adjusting macroeconomic policy.
After decades of rapid expansion, China has become the workshop of the global economy.
The problem is that it is no more than a workshop: lack of innovation and creation form the economy’s Achilles’ heel.
For example, in volume terms, China now is the largest car producer in the world, churning out 17 million this year.
But the share of models developed by Chinese carmakers is negligible.
In an era of rapid technological progress, creativity, and innovation, the global economic landscape can change rapidly.
Without a strong capacity for innovation and creativity, even a giant has feet of clay.
And when a giant falls, many are hurt.
Indeed, while China’s living standards have risen dramatically over the past 30 years, the gap between rich and poor has widened sharply.
Income distribution has skewed in favor of the rich for too long, and the government has failed to provide decent public goods.
With the contrast between the opulent lifestyle of the rich and the slow improvement of living conditions for the poor fomenting social tension, a serious backlash is in the making.
If China fails to tackle its structural problems in a timely fashion, growth is unlikely to be sustainable. Any structural adjustment is painful.
But the longer the delay, the more painful it will be.
China’s strong fiscal position today gives it a window of opportunity.
But that window will close fast, because beneficiaries of specific reform policies have morphed into vested interests, which are fighting hard to protect what they have.
What the Chinese public resents most is the collusion between government officials and businesspeople, described by the respected Chinese economist Wu Jianglian as “capitalism of the powerful and rich.”
Breaking this unholy alliance will be the big test for China’s leadership in 2011and beyond.
Under China’s current institutional arrangements, meritocracy is a prerequisite for good governance.
But meritocracy has been eroded by a political culture of sycophancy and cynicism.
So once again, the dialectics of economic development has brought political reform back to the fore.
Abroad, China’s rise has caused admiration, envy, suspicion, and even outright hostility in some corners.
No matter how often Chinese leaders repudiate any hegemonic ambition, wariness about China’s true intentions will remain.
That is understandable: the rise of new powers has always disrupted the established international order.
When this new power is a nation of 1.3 billion people living under an alien political system and ideology, its rise is bound to cause even more uneasiness.
Fortunately, because of globalization, China’s rise is in everyone’s interest, as is the rise of other emerging economies.
In the coming years, in areas such as climate change, global imbalances, and reform of the international monetary system, China should and will play a more active role as a major global stakeholder.
Needless to say, reciprocity will be necessary.
China’s Not-So-New Not-So-Normal
HONG KONG – I just spent a week in China, where I participated in the Boao Asia Forum, a conference similar to the annual gathering of the World Economic Forum in Davos.
The topic of my panel was what President Xi Jinping has called the Chinese economy’s “new normal”: an era of relatively slower growth, following three decades of double-digit economic expansion.
But what strikes me most about China’s economy is how remarkable it is.
Indeed, its performance continues to astound me.
Though it undoubtedly faces plenty of challenges, the key question is how likely they are to bring down the economy.
Of the four BRIC countries – Brazil, Russia, India, and China – Xi’s is the only one that has met my expectations for growth so far this decade.
From 2011 to 2014, the Chinese economy grew at an average annual rate of 8% per year.
If it continues to grow by around 7% for the rest of the decade, as the authorities and many observers expect, it will achieve an average pace of expansion of 7.5%, in line with my projections.
The phrase “new normal” is a clever bit of messaging by China’s leaders, who must explain to the country’s 1.4 billion citizens why the economy will no longer be growing by 10% a year.
But there is nothing normal about an economy that is already twice as large as the next largest, Japan, and will possibly outstrip the European Union within the next five years.
I was in China primarily in my role as Chair of the British government’s Review on Antimicrobial Resistance; but I also sought opportunities to speak to people about the challenges facing the economy.
Many international observers have been worried about the country’s oversupply of housing and the related credit boom, making me wonder whether I have been overly sanguine about these risks.
But my conversations persuaded me that both problems are likely to be manageable.
To be sure, the housing market is in the doldrums.
But, as many pointed out to me, this is partly the result of deliberate government measures to deflate it (also comforting is the fact that consumers are in general not overleveraged).
Some builders will experience problems with credit, and so might some local authorities.
But spending by the central government is such a small percentage of the country’s total GDP that policymakers have a lot of room for maneuver if intervention becomes necessary in these areas.
Foreign observers frequently speculate that the Chinese authorities may be deliberately overstating the economy’s strength.
But it is equally possible that the size of some sectors is being understated.
After spending a few days in Beijing, it was abundantly clear that China is undergoing a boom in Internet use, including as a consumer platform.
Online commerce is offsetting some of the other weaker areas of the economy, and its full impact might actually be underreported in official statistics.
I do worry that the government is not moving fast enough to grant the country’s millions of migrant workers official residency in the cities where they work and live.
Migrants’ continued lack of access to public services might prevent a large rise in consumption as a share of GDP.
But, as I was told during my visit, the central government’s reluctance to move more quickly reflects its wariness of imposing immense fiscal pressures on local authorities.
Another area of serious concern is health care.
At some stage, the central government will have to address the sector’s deficiencies.
I learned about one example when discussing antimicrobial resistance, to which the government has responded by attempting to limit the quantity of antibiotics a patient may take.
The trouble is that many hospitals and doctors rely on drug sales for a large portion of their revenues, which creates a powerful incentive to find ways to circumvent the rules.
Pollution remains a grave challenge as well.
But it must also be noted that China’s carbon dioxide emissions declined notably in 2014, offering what is perhaps the first tangible evidence that the country is making some progress on this front.
Energy efficiency and renewable energy use are both on the rise as well.
Most important, despite the challenges it faces, the Chinese economy’s singular importance is now widely recognized.
The country’s recent international achievements – particular its ability to secure the backing of the United Kingdom, France, Germany, and Italy for its Asian Infrastructure Investment Bank in the face of opposition from the United States – imply a high degree of confidence that China will address its problems successfully.
China’s role within existing international financial institutions could change this year as well.
In December, the International Monetary Fund will consider adding renminbi to the basket of currencies that comprise the Fund’s unit of account, known as Special Drawing Rights, alongside the US dollar, the euro, the British pound, and the Japanese yen.
And the world is still waiting for the US to implement a 2010 reform of the IMF that would strengthen the position of China and other large emerging economies in the institution’s governance structure.
Given the significance of the Chinese economy, continuing to leave this unaddressed is anything but normal.
China in Action on Climate Change
Beijing – Climate change is a serious challenge to humanity and sustainable development, which requires both proactive responses and concerted effort by the international community.
China attaches great importance to tackling climate change.
In 2007, it established the National Leading Group on Climate Change (NLGCC), headed by Premier Wen Jiabao.
That same year, China issued its National Climate Change Program , the first ever by a developing country.
In its National Climate Change Program , China set an objective to lower its energy consumption per unit of GDP by 20% or so of 2005 level by 2010 and in its Mid- and Long-Term Plan for the Development of Renewable Energy , China also sets an objective of increasing the proportion of renewable energy in the primary energy mix to 10% by 2010, and to 15% by 2020.
To achieve such objectives, China has adopted a series of effective policies and measures, achieving remarkable progress.
Firstly, China succeeded in lowering its energy consumption per unit of GDP by 1.79%, 4.04% and 4.59% respectively for 2006, 2007, and 2008, which strongly suggests the prospect of meeting the 20% objective by 2010.
Secondly, between 2006 and 2008, China shut down small thermal power-generation units with a total installed capacity of 34.21 GW, phased out 60.59 million tons of backward steel-making capacity, 43.47 million tons of iron-smelting capacity and 140 million tons of cement-production capacity.
All of these steps reduced pollution markedly.
Thirdly, between 2000 and 2008, China increased its wind power generating capacity from 340 MW to 10 GW, hydropower from 79.35 GW to 163 GW, and nuclear power from 2.1 GW to 9.1 GW.
It has also made great efforts to reduce agricultural and rural greenhouse gas emissions.
Indeed, by the end of 2007, more than 26.5 million rural households were using household biogas digesters, thereby avoiding CO2 emissions by 44 million tons.
Fourthly, China has increased its carbon sinks by promoting reforestation.
China’s forest coverage rate increased from 12% in the early 1980’s to 18.21% today.
For this year, China will complete formulating provincial climate change programs throughout the country, promoting effective implementation of the National Climate Change Program .
Furthermore, in China’s economy stimulus package, 210 billion yuan is allocated for energy conservation, pollutants reduction, and ecosystem protection projects, 370 billion yuan for economic structural adjustment and technology renovation, and 400 billion yuan for new energy-efficient housing that will use environmentally friendly materials.
Besides, 370 billion yuan will be used to improve rural living standards in an environmentally sound manner and sustainable way.
China is making huge efforts to combat climate change despite the fact that it remains a low-income developing country with a per-capita GDP of just about $3,000.
Indeed, by United Nations standards, China still has 150 million people living in poverty.
China has no other choice but to pursue sustainable development in order to meet the basic needs of its people and to eradicate poverty.
In this process, the world is assured that China will make every effort to address climate change.
The international community has great expectations for reaching a positive outcome in Copenhagen.
In China’s view, the key to the success in Copenhagen lies in the realization of the full, effective and sustained implementation of the Convention and its Kyoto Protocol (KP).
Developed country Parties to the KP, collectively, must reduce their greenhouse gas emissions by at least 25-40% below their 1990 level by 2020.
For Non-KP developed countries, they should undertake comparable commitments with quantified emission reduction targets.
Developed countries should also fulfill their obligations under the Convention to provide financial support and technology transfer to enable developing countries to effectively tackle climate change.
In addition, appropriate mechanisms and institutional arrangements should be established for adaptation, financial support and technology transfer.
Developing countries will, in the context of sustainable development and with measurable, reportable, and verifiable support in terms of financing, technology, and capacity-building, take nationally appropriate mitigation actions.
The global financial crisis has undoubtedly exacerbated the challenge of climate change.
But since climate change is a more far-reaching and serious challenge, the world must not waver in its determination and commitment to addressing it.
Indeed, the international financial crisis, if handled properly, may also be turned into an opportunity to reach a win-win solution for both climate protection and economic development.
With a deep sense of responsibility for its own people and the entire human race, China will continue to implement proactive policies and measures to address climate change and make unremitting efforts to the protection of earth system.
China, Inc. Goes Global
NEW YORK – China’s economy is now taking its next great leap forward: parts of its manufacturing sector are now moving up the value-added chain and out of the country.&nbsp;
The China challenge is now a global one.
The reasons are not difficult to fathom. Production costs (wages, office rents, land, capital, etc.) in China’s coastal provinces – where most of the country’s manufacturing and service production, as well as foreign direct investment, are located – have been rising fast.
Since last year alone, minimum wages in nine of twelve coastal provinces (including Beijing) rose by an average of more than 21%.
At the same time, the renminbi is appreciating, making domestic production of export-oriented goods and services even more expensive.
This matters, especially for labor-intensive activities (ranging from toy manufacturing to data-entry services), whether by affiliates of foreign multinational enterprises (which account for more than half of China’s exports) or by local firms, which are losing competitiveness in international markets.
To maintain its export-oriented production base, output must move up the value-added chain, toward more sophisticated products.
Multinational enterprises can do that within their integrated global production networks, which allow them to organize an international intra-firm division of labor.
Any part of these production chains can be located wherever it suits the firms’ international competitiveness best.
And such firms have the experience to scout the globe for the right investment locations.
Domestic Chinese firms, too, need to respond to these pressures.
They are helped in this effort by the rapid deepening of China’s skills and technology base.
This partly reflects training in foreign affiliates, but the main reason has been the Chinese government’s sustained effort to foster education and training, encourage technology transfers from foreign to domestic firms, and, in particular, to build up research and development capabilities.
In short, producers of more sophisticated goods and services in developed and emerging-market countries need to be prepared for growing competition from China.
At the same time, China’s labor-intensive production will increasingly move to countries with lower labor costs – including Bangladesh, India, Indonesia, and neighboring Vietnam (where Chinese firms have already established about 1,000 affiliates), as well as various African countries.
This process has already begun, and has been supported since the beginning of the last decade by the government’s “Going Global” policy, through which it encourages outward FDI from China.
The data bear this out: FDI outflows more than doubled in 2008, to $52 billion, from $23 billion in 2007, and rose even further in 2009 (when world FDI flows collapsed by about 50%, owing to the Western financial and economic crisis), before reaching $68 billion in 2010.&nbsp;
Not counting Hong Kong, this made China the world’s fifth largest outward investor that year.
This development creates new opportunities for other developing countries to reap the trade benefits of inserting themselves into the international division of labor.
These countries’ investment-promotion agencies – indeed, those of all countries, including developed ones – should increasingly target firms in China to lure them to their shores.
In so doing, they should aim not only for big state-owned companies, but also for the rising number of vibrant, private small and medium-size enterprises in China that can be found in all sectors of the economy.
But an important caveat is in order: China has a vast interior that is far less developed than the coastal provinces.
The government is making special efforts to develop these areas in the framework of its “Great Western Development Strategy,” including by building modern infrastructure, promoting high-quality education, supporting science and technology (all key determinants of the location of production), and encouraging investment there.
As a result, firms based in the coastal provinces that have to move their production (and see no need to diversify away from China) can choose to relocate to China’s interior, rather than going abroad.
The pattern is clear: this sort of transition away from labor-intensive manufacturing happened before in today’s developed countries, when firms headquartered in Europe, Japan, and the United States moved production to developing countries.
In Asia, Hong Kong, South Korea, Singapore, and Taiwan were (and have been) among the beneficiaries.
When costs for labor-intensive goods and services became too high in these countries, production was shifted elsewhere.
This relocation of manufacturing has since been accompanied by the off-shoring of services whose information-intensive components have become tradable.
China itself has benefited from today’s open international trade and investment regime, which allows firms to locate production where it is most beneficial for their international competitiveness – and is now beginning to shed labor-intensive industries itself.
Governments need policies to adapt to this global shift in production.
They should help their countries’ firms to adapt to the departure of some producers by establishing training programs, stimulating innovation, and maintaining or creating a competitive environment that encourages “creative destruction” while providing for a social safety net.
Likewise, governments that attract the production that was shed elsewhere need to have policies in place that enable them to benefit as much as possible from this global shift, thereby furthering their own economic development.
Revolusi Energi Terbarukan
SYDNEY – Di Amerika Serikat dan Eropa, keuntungan dari energi terbarukan umumnya dipandang sebagai manfaat bagi lingkungan hidup.
Energi yang dihasilkan dari angin dan matahari dapat menyeimbangkan kebutuhan dari pembakaran bahan bakar fosil, sehingga membantu mengendalikan perubahan iklim.
Akan tetapi di Tiongkok dan India, energi terbarukan dipandang dari sudut yang sangat berbeda.
Transisi yang relatif cepat untuk menghindari penggunaan bahan bakar fosil di kedua negara tidak didorong oleh kekhawatiran akan perubahan iklim, tapi justru lebih dari keuntungan ekonomi yang diyakini akan dihasilkan dari sumber-sumber energi terbarukan.
Memang benar, meskipun keuntungan ekonomis yang dihasilkan energi terbarukan juga menjadi daya tarik bagi negara-negara maju seperti Jerman dan Jepang (keduanya secara cepat beralih dari bahan bakar fosil), manfaat bagi raksasa industri yang berkembang (emerging industrial giants) sangat besar.
Bagi India dan Tiongkok, trajektori ekonomi berdasarkan bahan bakar fosil bisa mengakibatkan malapetaka, ketika upaya-upaya untuk menghasilkan energi yang memadai bagi jumlah penduduk yang sedemikian besar dapat memperburuk ketegangan geopolitik.
Selain dari meningkatnya keamanan energi, perekonomian yang rendah karbon dapat menguatkan produksi domestik dan meningkatkan kualitas lingkungan hidup setempat, misalnya dengan mengurangi asap di perkotaan.
Benar bahwa bahan bakar fosil telah menyumbangkan banyak keuntungan bagi dunia Barat dalam industrialisasi selama 200 tahun terakhir.
Transisi menuju ekonomi berdasarkan karbon (carbon-based economy) akan membebaskan perekonomian dari keterbatasan-keterbatasan sumber daya berdasarkan teori Malthus yang ada sejak lama.
Bagi beberapa negara yang mewakili sebagian kecil populasi dunia, pembakaran bahan bakar fosil memungkinkan terjadinya ledakan pertumbuhan, diikuti dengan perbaikan besar-besaran dari segi produktivitas, pendapatan, kesejahteraan, dan standar kehidupan.
Hampir selama 20 tahun terakhir, Tiongkok dan India memimpin perubahan dalam menyerukan manfaat bahan bakar fosil ke seluruh dunia.
Namun akhir-akhir ini, kedua negara mulai memperlunak pendekatannya.
Ketika penggunaan bahan bakar fosil mereka melebihi batas kemampuan lingkungan hidup dan menantang geopolitik, mereka menempatkan dirinya di barisan terdepan dalam transisi global yang dalam beberapa dekade ke depan dapat menghilangkan penggunaan bahan bakar fosil secara keseluruhan.
Alasan ekonomi yang diutarakan untuk melawan penggunaan sumber-sumber energi terbarukan – energi terbarukan membutuhkan biaya besar, bersifat intermiten, atau tidak cukup terpusat – dapat dengan mudah disanggah.
Meskipun lawan dari energi terbarukan ini adalah satu kelompok, mereka terdorong oleh keinginan untuk mempertahankan status quo yakni bahan bakar fosil dan tenaga nuklir, bukan oleh kekhawatiran bahwa turbin angin dan ladang tenaga surya (solar farm) akan merusak lanskap.
Dalam kondisi apapun, mereka yang ingin menghambat perluasan energi terbarukan kemungkinan besar akan gagal melawan ekonomi sederhana.
Revolusi energi terbarukan tidak digerakkan oleh pajak emisi karbon atau subsidi energi bersih, namun ini merupakan dampak dari pengurangan biaya produksi yang segera akan membuat produksi listrik dari tenaga air, angin, dan surya lebih murah (cost-effective) dibandingkan membakar batubara.
Setiap negara bisa menguatkan keamanan energinya dengan berinvestasi pada kapasitas industrial yang diperlukan untuk membuat turbin angin, sel surya/fotovoltaik, dan sumber-sumber energi terbarukan lainnya semaksimal mungkin.
Ketika Tiongkok dan India mengerahkan economic weight mereka ke dalam revolusi energi terbarukan, keduanya memicu reaksi berantai global yang dikenal dengan “circular and cumulative causation.”
Tidak seperti pertambangan, pengeboran, atau ekstraksi, produsen memperoleh keuntungan dari kurva pembelajaran (learning curves) yang menjadikan produksi semakin efisien dan rendah biaya.
Investasi pada energi terbarukan akan menurunkan biaya produksi, sehingga memperluas pasar bagi pengunaan energi terbarukan dan menciptakan daya tarik lebih untuk investasi lebih besar.
Pada tahun 2009 hingga 2014, mekanisme ini telah menurunkan biaya energi surya fotovoltaik sebesar 80% dan biaya tenaga angin berbasis tanah sebesar 60%, berdasarkan studi yang dilakukan oleh Lazard’s Power, Energy &amp; Infrastructure Group.
Dampak dari begitu cepatnya pemanfaatan energi terbarukan bisa memiliki konsekuensi yang besar seperti yang diakibatkan oleh Revolusi Industri.
Pada abad kedelapan belas, perekonomian Eropa dan Amerika Serikat memulai transisi menuju sistem energi berbasis bahan bakar fosil tanpa sepenuhnya memahami kondisi yang sedang terjadi.
Kali ini, kita dapat melihat banyak hal sedang berubah dan mempersiapkan diri menghadapi hasilnya.
Untuk saat ini, prospeknya terlihat menjanjikan.
Upaya untuk mengurangi emisi karbon dioksida mungkin tidak menjadi pendorong utama dari revolusi energi terbarukan; tapi sangat mungkin bahwa tanpa adanya revolusi, upaya-upaya untuk mengurangi dampak perubahan iklim tidak akan pernah berhasil.
Jika kita mampu menghindari bahaya terburuk akibat pemanasan di bumi, barangkali kita perlu berterima kasih kepada India dan Tiongkok.
China’s International Growth Agenda
MILAN – For most of the past 35 years, China’s policymakers have set their focus on the domestic economy, with reforms designed to allow the market to provide efficiency and accurate price signals.
Though they had to be increasingly aware of their country’s growing impact on the global economy, they had no strategy to ensure that China’s neighbors gained from its economic transformation.
But now China does have such a strategy, or at least is rapidly developing one.
Moreover, it extends well beyond Asia, embracing Eastern Europe and the east coast of Africa.
A key element of China’s strategy is the recently established Asian Infrastructure Investment Bank (AIIB), and to some extent the BRICS’ New Development Bank, established last year by Brazil, Russia, India, China, and South Africa.
Both banks are obvious alternatives – and so rivals – to the Western-dominated World Bank and International Monetary Fund.
Also vital to the new strategy are two prospective modern-day Silk Roads: an overland route through Central Asia to the Black Sea and a “Maritime Silk Road” by which shipping will pass from the South China Sea, through the Strait of Malacca, across the Indian Ocean to East Africa, and from there through the Red Sea into the eastern Mediterranean.
Economists sometimes portray the global economy as a huge bazaar.
But it is not.
It is a network, in which the links are built by expanding the flows of goods, services, people, capital, and – importantly – information.
China’s goal is to create these links, and it has plenty of assets that will allow it to act as a catalyst of global growth and development.
The most obvious asset is China’s large and growing domestic market, to which other economies can gain access via trade and investment.
China will thus be joining the ranks of the advanced countries in providing an export market (and jobs) for countries at earlier stages of economic development.
In addition, because China has built up a capacity to invest that is far larger than its domestic economy can now absorb, it will inevitably seek opportunities abroad, both public and private.
Chinese companies, in particular, will increasingly want to establish their brands internationally.
With the involvement of the AIIB and the New Development Bank, China has developed what amounts to a multinational development strategy.
While there are skeptics, broad support for the AIIB suggests that the benefits outweigh the risks, and that China’s initiatives may help build a network that is open to everyone.
After all, the trade and investment that will follow could not possibly all flow through China.
Meanwhile, by virtue of more than 30 swap arrangements with other central banks (the first was with South Korea in December 2008), China is using its foreign-exchange reserves to help its neighbors and others defend themselves against volatile international capital flows.
This is in tandem with the authorities’ efforts to promote the internationalization of the renminbi, which is rapidly expanding its role in trade settlement.
There are significant efficiency gains to be had by settling transactions in trading partners’ currencies, without the intermediation of, say, the US dollar.
Of course, there is much more to the internationalization of a currency, not least large and liquid domestic financial markets and the establishment of trust and confidence.
This takes time, but China is already applying to the IMF to have the renminbi included in the basket of currencies that determines the value of the Fund’s unit of account, Special Drawing Rights, with a decision likely in late 2015.
Joining the US dollar, the British pound, the euro, and the Japanese yen in the SDR club would be symbolically significant.
More important, as with China’s accession to the World Trade Organization in 2001, which required substantial reforms, fulfilling the conditions for joining the SDR promises to speed progress toward full capital-account liberalization – and thus toward a fully convertible renminbi.
China’s policymakers have long time horizons.
Their strategy will doubtless face obstacles in the coming years.
The question is whether the strategy is worth pursuing now.
The answer almost certainly is yes.
The overland “silk road,” for example, will reduce China’s reliance on sea-lanes, which can be blocked or disrupted, especially at the Strait of Malacca.
More generally, Chinese investment will ease the constraints on the silk road economies caused partly by slow growth and investment shortfalls in advanced economies.
Ultimately, vibrant growing economies in the region will benefit China’s economy and its stature.
Many believe that public-sector investment is a good way (perhaps the best way) to use the global economy’s productive resources and increase its efficiency and growth potential.
But this requires a multinational effort.
China’s leaders surely want international recognition of their country’s global stature.
But they also want China’s rise to high-income status to occur in a way that is – and that is perceived to be – beneficial to its neighbors and the world.
The new external focus of China’s growth and development strategy seems to be intended to make that vision a reality.
China is Okay
NEW HAVEN – Concern is growing that China’s economy could be headed for a hard landing.
The Chinese stock market has fallen 20% over the past year, to levels last seen in 2009.
Continued softness in recent data – from purchasing managers’ sentiment and industrial output to retail sales and exports – has heightened the anxiety.
Long the global economy’s most powerful engine, China, many now fear, is running out of fuel.
These worries are overblown.
Yes, China’s economy has slowed. But the slowdown has been contained, and will likely remain so for the foreseeable future.
The case for a soft landing remains solid.
The characteristics of a Chinese hard landing are well known from the Great Recession of 2008-2009.
China’s annual GDP growth decelerated sharply from its 14.8% peak in the second quarter of 2007 to 6.6% in the first quarter of 2009.
Hit by a monstrous external demand shock that sent world trade tumbling by a record 10.5% in 2009, China’s export-led growth quickly went from boom to bust.
The rest of an unbalanced Chinese economy followed – especially the labor market, which shed more than 20 million jobs in Guangdong Province alone.
This time, the descent has been far milder.
From a peak of 11.9% in the first quarter of 2010, China’s annual GDP growth slowed to 7.6% in the second quarter of 2012 – only about half the outsize 8.2-percentage-point deceleration experienced during the Great Recession.
Barring a disorderly breakup of the eurozone, which seems unlikely, the International Monetary Fund’s baseline forecast of 4% annual growth in world trade for 2012 seems reasonable.
That would be subpar relative to the 6.4% growth trend from 1994 to 2011, but nowhere near the collapse recorded during 2008-2009.
With the Chinese economy far less threatened by export-led weakening than it was three and a half years ago, a hard landing is unlikely.
To be sure, the economy faces other headwinds, especially from the policy-induced cooling of an overheated housing market.
But construction of so-called social housing for lower-income families, reinforced by recent investment announcements in key metropolitan areas such as Tianjin, Chongqing, and Changsha, as well as in Guizhou and Guangdong Provinces, should more than offset the decline.
Moreover, unlike the bank-funded initiatives of 3-4 years ago, which led to a worrisome overhang of local-government debt, the central government seems likely to play a much greater role in financing the current round of projects.
Reports of ghost cities, bridges to nowhere, and empty new airports are fueling concern among Western analysts that an unbalanced Chinese economy cannot rebound as it did in the second half of 2009.
With fixed investment nearing the unprecedented threshold of 50% of GDP, they fear that another investment-led fiscal stimulus will only hasten the inevitable China-collapse scenario.
But the pessimists’ hype overlooks one of the most important drivers of China’s modernization: the greatest urbanization story the world has ever seen.
In 2011, the urban share of the Chinese population surpassed 50% for the first time, reaching 51.3%, compared to less than 20% in 1980.
Moreover, according to OECD projections, China’s already burgeoning urban population should expand by more than 300 million by 2030 – an increment almost equal to the current population of the United States.
With rural-to-urban migration averaging 15 to 20 million people per year, today’s so-called ghost cities quickly become tomorrow’s thriving metropolitan areas.
Shanghai Pudong is the classic example of how an “empty” urban construction project in the late 1990’s quickly became a fully occupied urban center, with a population today of roughly 5.5 million.
A McKinsey study estimates that by 2025 China will have more than 220 cities with populations in excess of one million, versus 125 in 2010, and that 23 mega-cities will have a population of at least five million.
China cannot afford to wait to build its new cities.
Instead, investment and construction must be aligned with the future influx of urban dwellers.
The “ghost city” critique misses this point entirely.
All of this is part of China’s grand plan.
The producer model, which worked brilliantly for 30 years, cannot take China to the promised land of prosperity.
The Chinese leadership has long known this, as Premier Wen Jiabao signaled with his famous 2007 “Four ‘Uns’” critique – warning of an “unstable, unbalanced, uncoordinated, and ultimately unsustainable” economy.
Two external shocks – first from the US, and now from Europe – have transformed the Four Uns into an action plan.
Overly dependent on external demand from crisis-battered developed economies, China has adopted the pro-consumption 12th Five-Year Plan, which lays out a powerful rebalancing strategy that should drive development for decades.
The investment and construction requirements of large-scale urbanization are a key pillar of this strategy.
Urban per capita income is more than triple the average in rural areas.
As long as urbanization is coupled with job creation – a strategy underscored by China’s concomitant push into services-led development – labor income and consumer purchasing power will benefit.
Contrary to the China doubters, urbanization is not phony growth.
It is an essential ingredient of the “next China,” for it provides China with both cyclical and structural options.
When faced with a shortfall of demand – whether owing to an external shock or to an internal adjustment, such as the housing-market correction – China can tweak its urbanization-led investment requirements accordingly.
With a large reservoir of surplus savings and a budget deficit of less than 2% of GDP, it has the wherewithal to fund such efforts.
There is also ample scope for monetary easing; unlike central banks in the West, the People’s Bank of China has plenty of ammunition in reserve.
A growth slowdown is hardly shocking for an export-led economy. But China is in much better shape than the rest of the world.
A powerful rebalancing strategy offers the structural and cyclical support that will allow it to avoid a hard landing.
The Roots of Chinese/Japanese Rivalry
BOSTON – The anti-Japan protests that continue to roil China are just another indication of the rise of a potent Chinese nationalism.
After a century slowly fomenting among Chinese intellectuals, national sentiment has captured and redefined the consciousness of the Chinese people during the last two decades of China’s economic boom.
This mass national consciousness launched the Chinese colossus into global competition to achieve an international status commensurate with the country’s vast capacities and the Chinese people’s conception of their country’s rightful place in the world.
Rapidly, visibly, and inevitably, China has risen.
Indeed, our era will likely be remembered as the time when a new global order, with China at the helm, was born.
Competitive national consciousness – the consciousness that one’s individual dignity is inseparably tied to the prestige of one’s “people” – worked its way into the minds of China’s best and brightest between 1895 and 1905.
In 1895, China was defeated by Japan, a tiny aggressor whom the Chinese dismissively called wa (the dwarf).
China was already accustomed to rapacious Western powers squabbling over its riches, but had remained self-confident in the knowledge of these powers’ irrelevance.
However, the assault from Japan, a speck of dust in its own backyard, shattered this self-assurance and was experienced as a shocking and intolerable humiliation.
Japan’s triumph in 1905 over “the Great White Power,” Russia, repaired the damage to China’s sense of dignity.
From the Chinese point of view, Russia was a formidable European power, one feared by other Western powers.
Its defeat, therefore, was seen as a successful Asian challenge to the West, in which China, its intellectuals felt, was represented by Japan.
Japan thus became the focus of Chinese attention.
Gentlemen-scholars, who would reform and staff the Chinese army and civil service in the early decades of the twentieth century, went to study in Japan.
The Revolution of 1911 was inspired by the example of Japan’s Meiji Restoration; and, because early-twentieth-century Japan was stridently nationalistic, the new China that emerged from its image was constructed on nationalist principles as well.
Thus Japan became the significant “other” for China, the model that was imitated and the anti-model that was resented.
Chinese nationalism borrowed from Japan its concept of the nation, including the very word by which it was expressed (kuoming, from the Japanese kokumin).
The
Kuomintang (the Chinese Nationalist Movement) was explicitly inspired by Japan and fueled by repeated Japanese aggression.
Paradoxically, but not unexpectedly, Mao Zedong’s struggle against the Kuomintang was inspired by anti-Japanese nationalism as well.
As was the case virtually everywhere else, communism in China was nationalism incarnate.
Mao’s speech on the establishment of the People’s Republic plainly expressed the nationalist agenda behind it.
Calling the nation “communist” assured the new People’s Republic of China of the Soviet Union’s support, which was viewed by Mao as more reliable than that of the United States.
But neither the Russian nor the Chinese Communists were ever unclear about the nationalist nature of their respective projects.
The upper echelons of the bureaucracy and intelligentsia in Russia and China were self-consciously nationalist and, throughout Communist rule, shrewdly pursued the supreme nationalist goal: prestige – the power, naked and otherwise, to impose the nation’s will on others.
But national consciousness, particularly in China, was limited to a narrow elite, leaving the masses almost untouched.
This changed dramatically with the Chinese government’s restoration of a capitalist economy.
Much like in Germany in the 1840’s, when the appeal to private enterprise converted the entire middle class to nationalism, the explicit definition of economic power as the central pillar of China’s greatness awakened ordinary Chinese to nationalism’s appeal.
Hundreds of millions now see themselves as sharing in the nation’s dignity, and are eager to contribute to it, as well as to defend it from insult.
Competition for prestige, even when the contest is economic, is not a purely rational undertaking.
So it should be no surprise that old injuries are likely to resurface.
Some Chinese, especially those who are not economically successful, harp bitterly on Japan’s past depredations.
Despite China’s embrace of capitalism and Japanese investment, Japan remains China’s reviled other.
Indeed, a professor in Beijing told me not long ago, “Two in every ten Chinese dislike the US, but nine in every ten hate Japan.”
For the West, there is a silver lining in this nationalist rivalry: neither China nor Japan is a rogue state, and, so long as their quarrels do not lead to the use of unconventional weapons, we may treat the friction between them as an internal Asian quarrel.
Japan, moreover, is likely to let today’s passions over disputed islands in the East China Sea cool down, despite the anti-Japanese outbursts in Chinese cities.
But the West – and the US in particular – is new to dignity games à la Chinois.
If it gets carried away and presumes to talk down to the 5,000-year-old culture of the Sages, the West could become the next object of China’s nationalist resentment.
China Must Do More than Mediate
Despair is dangerous in diplomacy.
But North Korea's latest actions are making much of Asia hopeless.
Only China, long reluctant to flex its diplomatic muscles, now has the power to find a diplomatic solution to the North Korean nuclear problem.
But the question everyone from Tokyo to Seoul and from Washington to Moscow is asking is this: will China act in time?
China's influence on North Korea is uniquely powerful.
China is keeping its increasingly desperate neighbor on life support by providing most of the non-food aid and energy that North Korea receives from abroad.
But to prevent North Korea from realizing a fait accompli in its pursuit of nuclear weapons, China must do more than mediate between North Korea and the US, the role it has so far played.
Instead, it must now prompt North Korea to halt its nuclear development activities and return to the six-party talks with America, Japan, China, Russia, and South Korea that broke up weeks ago.
Recent developments indicate that North Korea's nuclear threat is becoming more serious by the day.
Two weeks ago, North Korea declared that in June it successfully reprocessed some 8,000 spent nuclear fuel rods and now possesses "nuclear deterrence," suggesting that Kim Jong Il's regime may actually be making atomic bombs.
Not only does North Korea show little interest in holding another session of the six-party talks that the Bush administration and the other participants are calling for; it now wants to ban the Japanese from participating.
Kim accuses Japan of introducing unnecessary obstacles and complications into resolution of the nuclear question by raising the sensitive issue of North Korea's abduction of Japanese citizens.
But this is nothing more than a political diversion.
It is inconceivable that multilateral negotiations could result in a breakthrough toward a diplomatic solution while North Korea is actively engaged in pursuing its nuclear weapons program.
It must be clear by now that Pyongyang is determined to keep its nuclear weapons program in order to obtain a credible assurance from the US that its bizarre and repressive regime will be allowed to survive.
Unless America accommodates North Korea's demands for concluding a nonaggression treaty and ending "hostile" policies, Kim's regime is likely to keep its nuclear weapons program as its most effective deterrent against any preemptive US attack--something that the Bush administration, indeed, refuses to rule out.
America's military victory in the war in Iraq probably hardened North Korea's resolve to rely on the nuclear option as its primary means of ensuring regime survival.
But that should not surprise anyone: the North Korean regime has always been committed to making military power the "first priority" in the state budget.
This contrasts sharply with policies pursued by China and Vietnam, Asia's two other communist powers.
In both countries, the leadership places military power last in their national development strategies.
It would be difficult for the US to change the highest priority of its own national security strategy--preempting terrorism and fighting the spread of weapons of mass destruction--especially with another nuclear threat looming in Iran.
Insofar as the goal of preventing the proliferation of nuclear weapons on the Korean peninsula is concerned, the US has thus succeeded by sustaining an ad hoc concert of powers thus far with China, Japan, Russia, and South Korea.
Indeed, in their first-ever joint declaration, Chinese Prime Minister Wen Jiabao, Japanese Prime Minister Junichiro Koizumi, and South Korean President Roh Moo Hyun issued a plea on the sidelines of the ASEAN summit held in Bali on October 8 for a nuclear-free Korean peninsula.
All sides realize that failure to achieve this would most likely result in a nuclear chain reaction with Japan, South Korea, and perhaps even Taiwan embarking on their own nuclear weapons development programs.
That scenario is China's worst nightmare.
So the question now is what can China do to freeze--and, if possible, to reverse--North Korea's nuclear program.
China finds itself in a delicate position, pulled in one direction by its desire to avoid a precipitous North Korean collapse, and in the opposite direction by its overriding need to deepen economic relations with the US, Japan, and South Korea.
This is why at the UN Security Council China opposed any military action or sanctions against North Korea, a country for which it sacrificed almost one million troops during the Korean War in 1950-53.
It is in China's vital national interest to halt North Korea's quest to become another declared nuclear power.
China's success here would not only enhance its own international prestige, but would also contribute immensely to promoting regional stability and prosperity throughout East Asia.
China’s Latest Five-Year Plan
CAMBRIDGE – I was in Beijing last month when the Chinese government released a preliminary summary of its 13th Five-Year Plan.
This is an important document for understanding where China is headed in the 2016-2020 period.
And yet China’s five-year plans just aren’t what they used to be.
The Chinese economy is no longer the state-owned and state-managed system that it was when I first visited more than 30 years ago.
In those days, there was no private enterprise, and it was illegal for anyone but the government or a state-owned enterprise to hire an employee.
Today, only 20% of employees in China work for SOEs.
The rest of the Chinese economy is dynamic, decentralized, and privately owned.
American multinational companies and other foreign firms are an important part of the economic scene.
So the five-year plan is no longer a detailed blueprint for industrial expansion; rather, it provides a picture of what the Chinese leadership hopes will be achieved under the government’s general guidance.
The aim is to improve the overall standard of living – achieving moderately strong growth, raising the share of consumption in GDP, and improving air and water quality – through a combination of Western-style monetary and fiscal policies, state-financed infrastructure development, and changes in environmental and other regulations.
One of the key goals was set back in 2010: doubling real GDP and real personal incomes by 2020.
The government now officially estimates that achieving this target will require average annual GDP growth of 6.5% over the next five years.
Given that China is still a relatively poor country, with per capita GDP only about 25% of the level in the United States, maintaining such a rapid pace of growth certainly is not impossible.
But many observers are skeptical about China’s official GDP data and dubious of its ability to sustain 6.5% growth.
That skepticism reflects a variety of recent news indicating weak output in parts of the Chinese economy – for example, headlines about reduced industrial production, declines in manufacturing exports, and shutdowns in particular industries.
Although I cannot claim to be an expert on Chinese economic statistics, I think these headlines are a natural but misleading consequence of the authorities’ intentional effort to shift China’s economic structure away from industrial expansion and exports toward greater reliance on services and household consumption.
Chinese economic experts say that the output of the service sector is growing fast enough to offset growth in industrial output of 5% or even less, thereby achieving the current overall growth rate of about 7%.
But even if annual growth really is now at about 7%, achieving a 6.5% rate for the next five years will be a challenge, for at least four reasons. For starters, China’s shift from heavy industry to services implies less output per worker and less control by the central government.
At the same time, the environmental policies that are urgently needed to improve air and water quality absorb resources and impede growth.
And President Xi Jinping’s crackdown on corruption has had the side effect of delaying decision-making and inhibiting new projects.
Finally, and perhaps most important, the population of working-age individuals is no longer growing, a result of the 35-year-long policy of restricting most families to no more than one child.
Although the government recently replaced the one-child limit with a two-child limit, it will be nearly two decades before that change can increase the size of the working-age population.
Until then, increasing the growth rate of the effective labor force requires shifting workers from low-productivity employment in agriculture to the urban labor force.
The Chinese government is therefore considering several policies to increase the pace of urbanization, including the creation of several new large cities to accommodate some of the 600 million individuals who still live in rural China.
Similarly, the government will phase out the hukou system of residency permits that now prevents migrants to the cities from obtaining full health care and education benefits.
A third policy change aimed at promoting urbanization will be to allow Chinese farmers to sell their land rights at realistic market prices, thereby increasing their incentive to cash out and move.
And the introduction of a Western-style rental market will allow families without substantial cash or parental support to move to cities (where families currently must purchase their apartments).
Not all of these policies have to succeed in order to keep the urban labor force expanding in the next five years.
If enough of them succeed well enough, 6.5% growth over the next few years might not be out of reach.
China also has a variety of short-run problems.
There is excess capacity in some heavy industries and in residential real-estate markets in some second- and third-tier cities.
Local governments have significant debts that were incurred at the request of the central government in 2007 and 2008 in order to avoid a serious economic downturn.
And there is a large volume of bad loans in some state-owned banks and in the shadow banking system.
Fortunately, the authorities recognize these problems and have strategies – and, more important, the resources – to deal with them.
China’s economy will not grow as strongly over the next five years as it did in past decades.
But if the goals set out in the 13th Five-Year Plan are realized, the Chinese people can look forward to a period of rising consumer spending and an improving standard of living.
China’s Slowing New Normal
MILAN – The world’s two largest economies, the United States and China, seem to be enduring secular slowdowns.
But there remains considerable uncertainty about their growth trajectory, with significant implications for asset prices, risk, and economic policy.
The US seems to be settling into annual real (inflation-adjusted) growth rates of around 2%, though whether this is at or below the economy’s potential remains a source of heated debate.
Meanwhile, China seems to be headed for the 6-7% growth rate that the government pinpointed last year as the economy’s “new normal.”
Some observers agree that such a rate can be sustained for the next decade or so, provided that the government implements a comprehensive set of reforms in the coming few years.
Others, however, expect China’s GDP growth to continue to trend downward, with the possibility of a hard landing.
There is certainly cause for concern.
Slow and uncertain growth in Europe – a major trading partner for both the US and China – is creating headwinds for the US and China.
Moreover, the US and China – indeed, the entire global economy – are suffering from weak aggregate demand, which is creating deflationary pressures.
As central banks attempt to combat these pressures by lowering interest rates, they are inadvertently causing releveraging (an unsustainable growth pattern), elevated asset prices (with some risk of a downward correction, given slow growth), and devaluations (which merely move demand around the global economy, without increasing it).
For China, which to some extent still depends on external markets to drive economic growth, this environment is particularly challenging – especially as currency depreciation in Europe and Japan erode export demand further.
Even without the crisis in major external markets, however, a large and complex middle-income economy like China’s could not realistically expect growth rates above 6-7%.
Yet, in the aftermath of the global economic crisis, China insisted on maintaining extremely high growth rates of 9% for two years, by relying on fiscal stimulus, huge liquidity injections, and a temporary halt in the renminbi’s appreciation.
Had the government signaled the “new normal” earlier, expectations would have been conditioned differently.
This would have discouraged undue investment in some sectors, reduced non-performing loans, and contained excessive leverage in the corporate sector, while avoiding the mispricing of commodities.
Growth would still have slowed, but with far less risk.
In the current situation, however, China faces serious challenges.
Given weak growth in external demand and an already-large market share for many goods, China cannot count on export growth to sustain economic performance in the short run.
And, though support for infrastructure investment by China’s trading partners – especially through the “one belt, one road” policy – may help to strengthen external markets in the longer term, this is no substitute for domestic aggregate demand.
Investment can sustainably drive growth only up to the point when returns decline dramatically.
In the case of public-sector investment, that means that the present value of the increment to the future GDP path (using a social discount rate) is greater than the investment itself.
The good news is that growing discipline seems to be pushing out low-return investment.
And there is every reason to believe that investment will remain high as the economy’s capital base expands.
But, in order to boost demand, China will also need increased household consumption and improved delivery of higher-value services.
Recent data suggest that, notwithstanding recent wage increases, consumption amounts to only about 35% of GDP.
With a high household savings rate of around 30% of disposable income, per capita disposable income amounts to roughly half of per capita GDP.
Expanded social-security programs and a richer menu of saving and investment options could go a long way toward reducing precautionary saving and boosting consumption.
But what is really needed is a shift in the distribution of income toward households.
Without a concerted effort to increase households’ share of total income and raise consumption’s share of aggregate demand, growth of consumer products and services on the supply side will remain inadequate.
Given that services are a significant source of incremental employment, their expansion, in particular, would help to sustain inclusive growth.
Another key challenge concerns China’s slumping property sector, in which construction and prices dropped rapidly last year.
If highly leveraged developers are under stress, they could produce non-performing loans – and thus considerable risk – in both the traditional and shadow banking sectors.
Fortunately, Chinese households’ relatively low leverage means that the kind of balance-sheet damage that occurred in some advanced countries during the crisis, leading to a huge drop in demand, is unlikely, even if real-estate prices continue to decline.
It also means that there remains some space for expanding consumer credit to boost demand.
That is not the only source of hope.
Wages are rising, deposit insurance will be introduced, and deposit rates are being liberalized.
Internet investment vehicles are growing.
New businesses in the services sector – 3.6 million of which were started just last year – are generating incremental employment, thanks partly to a new streamlined licensing framework.
And online platforms are facilitating increased consumption, while expanding market access and financing for smaller businesses.
China’s leaders should aim to accelerate and build upon these trends, rather than pursuing additional fiscal and monetary stimulus.
Public investment is high enough; expanding it now would shift the composition of aggregate demand in the wrong direction.
And, with the corporate sector already overleveraged, a broad-based expansion of credit is not safe.
Any fiscal stimulus now should focus on improving public services, encouraging consumption, and increasing household income.
Accelerating the expansion of state-funded social security could bring down household savings over time.
More generally, China must deploy its large balance sheet to deliver income or benefits that expand what households view as safely consumable income.
Given that private investment responds mainly to demand, such measures would likely reverse its current downward path.
A further slowdown in China is a distinct possibility.
China’s leaders must do what it takes to ensure that such a slowdown is not viewed as secular trend – a perception that could undermine the consumption and investment that the economy so badly needs.
China’s New Normal and America’s Old Habits
NEW HAVEN – China is generating a lot of confusion nowadays, both at home, where senior officials now tout the economy’s “new normal,” and abroad, exemplified by America’s embrace of Cold War-style tactics to contain China’s rise.
On both counts, the disconnects are striking, adding a new dimension of risk to the impact of the “China factor” on a fragile world.
The official view in China is that its economy has already arrived in the Promised Land of the “new normal.”
Indeed, that was the theme of the just-concluded China Development Forum (CDF) – an important platform for debate among China’s senior officials and a broad cross-section of international participants that occurs immediately after the annual National People’s Congress.
Since the CDF’s inception in 2000, the Chinese government has used the event to signal its policy priorities.
In 2002, for example, the CDF focused on the impact of China’s accession to the World Trade Organization – a precursor to a spectacular surge of export-led growth.
In 2009, the emphasis was on China’s aggressive post-crisis stimulus strategy.
And last year’s event addressed implementation of the so-called Third Plenum reforms.
This suggests that China’s “new normal” will be the government’s top priority this year.
But there remains considerable ambiguity as to what exactly the new normal entails – or whether it has even been achieved.
In his keynote speech at the CDF, Zhang Gaoli, one of the seven members of the Politburo Standing Committee (the Chinese Communist Party’s highest decision-making body), declared that the senior leadership has rendered the “strategic judgment that China’s economy has entered the stage of the new normal.” Yet, at the CDF’s wrap-up session, Premier Li Keqiang suggested, a bit less decisively, that China is basically following the world economy in its transition to a new normal.
In short, China’s government is confusing a path with the final destination – a point that I stressed in my remarks to the CDF, in which I argued that China is in the early stages of rebalancing its economy toward services and consumption.
In fact, China is far from settling in to a new normal.
The best way to measure how far China still has to go is to consider the development of its services sector – the infrastructure of consumer demand in an economy.
The good news is that services are now growing faster than any other sector, having reached 48% of GDP in 2014 (thus surpassing the end-2015 target of 47% well ahead of schedule).
The tough news is that this remains significantly lower than the 60-65% share typical of a more “normal” economy.
Given this, it is worrying that China’s leaders believe that the new normal is already at hand.
The notion that this critical transition has occurred risks generating complacency at a time when China should be focused on the wrenching, but essential, process of structural adjustment – one that will take at least another decade to complete.
Continuing the shift to a services-led growth model is important for a number of reasons.
With services in China employing 30% more workers per unit of output than manufacturing and construction, the sector’s expansion will help to preserve social stability, even as economic growth slows to 7%.
Observers in the West, focused largely on the slowdown of headline GDP growth, continue to miss this key point.
Moreover, because the services sector also requires fewer commodities and less energy, this transition will help China address its serious environmental problems.
In the meantime, China faces another, equally daunting challenge: the United States’ growing determination to contain its growing influence.
At this year’s CDF, tensions between the hegemon and the rising power were widely discussed, both in the formal sessions and on the sidelines.
Three developments were especially noteworthy: US resistance to China’s efforts to establish the Asian Infrastructure Investment Bank – a stance now rejected by most of America’s closest allies;
President Barack Obama’s signature trade initiative, the Trans-Pacific Partnership, which excludes China; and yet another effort by the US Senate to enact legislation on currency manipulation that takes dead aim at China.
Combined with ongoing disputes over cyber security and territorial claims in the East and South China Seas – not to mention questions about America’s geostrategic “pivot” toward Asia – these issues have chilled the Sino-American relationship.
It fell to Henry Kissinger, who was present at the dawn of the modern US-China relationship, to put it all into context.
At the CDF, he stressed how different the situation is now, compared to 1972, when he and then-President Richard Nixon first met with Mao Zedong and Zhou Enlai.
Unlike the immediate military threats back then, today’s challenges – such as climate change, cyber security, and global health – can be addressed only through collaborative strategic engagement.
The imperative to cooperate is an inevitable outgrowth of globalization.
As Kissinger emphasized, the Middle Kingdom of China’s dynastic era knew nothing of the Roman Empire, and vice versa.
In today’s world, however, no great power can afford to operate in a vacuum.
They receive instantaneous feedback from one another – especially on shared challenges – whether they like it or not.
In a sense, it is no surprise that the US is bristling over China’s ascendance.
After all, dominant powers have always struggled to cope with rising ones.
Nonetheless, China, burdened by 150 years of perceived humiliation by the West, does not take kindly to that reaction.
As China confronts the challenges of its economy’s shift to a new normal, it will need to find common ground with the US.
And America will need to work to deepen its understanding of China’s transition.
Both countries will have to show leadership, vision, and openness to collaborative engagement.
Sadly, there was little sign of that at this year’s CDF.
China on the Launch Pad
SINGAPORE – Behind a veil of secrecy, China’s development of strategic and tactical missiles is well into its third generation of modernization.
While the development of Chinese long-range missile and nuclear forces has traditionally been characterized as conservative, incremental, and slow, it has taken place against a backdrop of steadily growing official emphasis on the country’s defense-industrial complex, particularly its aerospace sector.
This process has been accelerated by a confluence of defense-industry reforms, comprehensive military upgrading, and integration of innovative operational concepts.
The net effect is a growing capability of China’s strategic missile forces and military space platforms.
Various reports suggest that China is selectively enhancing its strategic and tactical missile capabilities by developing solid-fuel motors; diversifying its range of warheads and increasing their accuracy; deploying missiles with multiple warheads; and upgrading its ballistic-missile defense countermeasures, such as decoys, chaff, jamming, and thermal shielding, and possibly maneuverable reentry vehicles (MaRVs) and multiple independently targetable reentry vehicles (MIRVs).
In particular, China is developing, testing, and deploying a new generation of solid-propellant, road-mobile intercontinental ballistic missiles (ICBMs).
These include the DF-31 and DF-31A, which are equipped with nuclear payloads.
It is also designing and developing new classes of conventional short-range ballistic missiles (SRBMs) and medium-range ballistic missiles (MRBMs), such as the DF-21 – mobile, solid-propellant, longer range, more accurate, and able to exploit vulnerabilities in ballistic missile-defense systems.
As part of its missile and nuclear-force modernization, China is also focusing on developing its sea-launched ballistic missiles (SLBMs) such as the JL-2, testing the DF21-D as an anti-ship ballistic missile (ASBM) for maritime strikes, and further developing its anti-satellite weapon capabilities (ASAT).
The purpose behind China’s continuous modernization of its strategic assets is to enhance the credibility of its deterrent threat by improving the survivability of its nuclear forces.
Thus, China is diversifying its missiles in terms of their strike capabilities and mobility, and formulating innovative anti-access/area-denial asymmetric warfare concepts to close the gap with technologically more advanced adversaries and near competitors – principally the United States, Russia, and Japan.
China’s progress in modernizing its strategic assets and capabilities owes much to the ongoing transformation of China’s defense industries, particularly the aerospace sector, over the past decade.
Since the late 1990’s, China’s government has gradually introduced elements of competition and globalization, with the aim of overcoming the entrenched monopoly of China’s traditional defense-industrial conglomerates.
The reforms have been guided by two broad concepts: the “Four Mechanisms” – competition, evaluation, supervision, and encouragement – and yujun yumin, or identifying military potential in civilian capabilities, with defense industries integrating into the broader civilian economy.
The reforms have essentially enabled China to streamline research and development efforts, as well as technology transfers between selected components of its civil and commercial space programs.
As a result, China has also been able to bypass existing export controls and restrictions on the transfer of sensitive military technologies, particularly aerospace and satellite components and know-how.
Indeed, China’s military use of space is increasingly dependent and interlinked with civilian and commercial space activities, infrastructure, and human capital.
Its space launch vehicles (SLVs) can be used for satellites with a range of applications – including communications, weather, observation, and navigation – which may significantly enhance the effectiveness of China’s military space operations and systems.
While ballistic missiles have generally different rocket engines, basing profiles, and launch methods, their guidance and control systems may use similar components, and SLVs may use stage components based on ballistic missiles.
The trajectory of China’s ballistic missile R&amp;D and production shows a gradual transition from copying and reproducing first-generation Soviet ballistic-missile technologies to adapting and modifying smaller, mobile, solid-propellant ballistic missiles and their follow-on second-generation systems.
China is now an independent producer and technological innovator of selected missile systems and related aerospace technologies.
Ultimately, China views its military, civil, and commercial space programs as being at the forefront of its national defense, economic development, and geostrategic influence.
The rest of the world should regard China’s aerospace capabilities as an important part of its future power projection.
The Sino-Russian Marriage
LONDON – The Chinese are the most historically minded of peoples.
In his conquest of power, Mao Zedong used military tactics derived from Sun Tzu, who lived around 500 BC; Confucianism, dating from around the same time, remains at the heart of China’s social thinking, despite Mao’s ruthless attempts to suppress it.
So when President Xi Jinping launched his “New Silk Road” initiative in 2013, no one should have been surprised by the historical reference. “More than two millennia ago,” explains China’s National Development and Reform Commission, “the diligent and courageous people of Eurasia explored and opened up several routes of trade and cultural exchanges that linked the major civilisations of Asia, Europe, and Africa, collectively called the Silk Road by later generations.”
In China, old history is often called to aid new doctrine.
The new doctrine is “multipolarity” – the idea that the world is (or should be) made up of several distinctive poles of attraction.
The contrast is with a “unipolar” (that is, an American- or Western-dominated) world.
Multipolarity is a political idea, but it is about more than power relations.
It rejects the notion that there is a single civilizational ideal to which all countries should conform.
Different world regions have different histories, which have given their peoples different ideas about how to live, govern themselves, and earn a living.
These histories are all worthy of respect: there is no “right” road to the future.
Eurasia is an idea whose time, it is said, has come around again.
Recent historical research has rescued the old Silk Road from historical oblivion.
The late American sociologist Janet Abu-Lughod identified eight overlapping “circuits of trade” between northwest Europe and China that, under the aegis of a Pax Mongolica, flourished between the thirteenth and fourteenth centuries.
According to Abu-Lughod, Western imperialism superimposed itself on these older circuits, without obliterating them.
Islam continued to spread across geographic and political boundaries.
Chinese and Indian migrations did not stop.
Now a unique conjuncture of economic and political developments has created an opportunity for Eurasia to emerge from its historical slumbers.
In recent years, Western self-assurance was humbled by the financial crisis of 2008-2009 and political catastrophes in the Middle East.
At the same time, the interests of the two potential builders of Eurasia, China and Russia, seem – at least superficially – to have converged.
China’s motive for reviving Pax Mongolica is clear.
Its growth model, based largely on exporting cheap manufactured goods to developed countries, is running out of steam.
Secular stagnation threatens the West, accompanied by rising protectionism sentiment.
And, although Chinese leaders know that they must rebalance the economy from investment and exports to consumption, doing so risks causing serious domestic political problems for the ruling Communist party.
Reorienting investments and exports toward Eurasia offers an alternative.
As China’s labor costs rise, production is being re-located from the coastal regions to the western provinces.
The natural outlet for this production is along the New Silk Road.
The development of the road (actually several “belts,” including a southern maritime route) will require huge investments in transport and urban infrastructure.
As in the nineteenth century, reduction in transport costs will open up new markets for trade.
Russia, too, has an economic motive for developing Eurasia.
It has failed to modernize and diversify its economy.
As a result, it remains predominantly an exporter of petroleum products and an importer of manufactured goods.
China offers a secure and expanding market for its energy exports.
The big transport and construction projects needed to realize Eurasia’s economic potential may help Russia recover the industrial and engineering might it lost with communism’s fall.
This year Russia, Armenia, Belarus, Kazakhstan, and Kyrgyzstan have joined together in a Eurasian Economic Union (EEU), a customs union with a defense component.
The EEU is seen by its advocates as a step toward re-establishing the old Soviet frontiers in the form of a voluntary economic and political union, modeled on the EU – a project to take the sting out of the West’s “victory” in the Cold War.
Official Russian opinion looks forward to “the interpenetration and integration of the EEU and the Silk Road Economic Belt” into a “Greater Eurasia,” which will afford a “steady developing safe common neighborhood of Russia and China.”
On May 8, Putin and Xi signed an agreement in Moscow that envisages the establishment of coordinating political institutions, investment funds, development banks, currency regimes, and financial systems – all to serve a vast free-trade area linking China with Europe, the Middle East, and Africa.
How realistic is this dream?
Russia and China both feel “encircled” by the United States and its allies.
China’s anti-hegemonic aim, expressed in almost inscrutable prose, is to secure “tolerance among civilizations” and respect for the “modes of development chosen by different countries.”
Putin, meanwhile, has ratcheted up his much more explicit anti-American rhetoric since the Ukraine crisis, which he sees as a prime example of Western interference in Russia’s domestic affairs.
Boosting trade flows between Russia and China, and strengthening political and security coordination, will reduce their vulnerability to outside interference and signal the emergence of a new center of world power.
It may be considered a singular success for Western statesmanship to have brought two old rivals for power and influence in Central Asia to the point of jointly seeking to exclude the West from the region’s future development.
The US, especially, missed opportunities to integrate both countries into a single world system, by rebuffing reforms of the International Monetary Fund that would have strengthened China’s decision-making influence, and by blocking Russia’s overtures for NATO membership.
This led both countries to seek an alternative future in each other’s company.
Whether their marriage of convenience will lead to an enduring union – or, as George Soros predicts, a threat to world peace – remains to be seen.
There is an obvious sphere-of-influence issue in Kazakhstan, and the Chinese have been squeezing the Russians for all they can get in bilateral deals.
For the time being, though, squabbles over the New Silk Road seem less painful to the two powers than enduring lectures from the West.
China’s Aborted Openness
China’s state-run Xinhua news agency recently reported on a government investigation into a string of forced sterilizations and abortions in the village of Linyi, Shandong province.
The speed of the investigation – said to have begun days after the kidnapping of Chen Guangcheng, a blind activist who had been a public advocate for the victims – and the candor of the report created the impression of greater government responsiveness and bolder official media.
Is this impression right?
The story in Linyi is the kind of news that propaganda officials usually bury in the Communist Party’s secret files.
According to reports, local authorities in Linyi, seeking to avoid exceeding birth quotas under China’s “one-child” policy, forced several women to undergo abortions and forcibly sterilized many couples with more than one child.
Villagers who hid to avoid the campaign reportedly saw their family members jailed.
Some in Linyi alleged degrading treatment, torture, and extortion.
Why investigate and report this scandal?
The Xinhua reports, I believe, are best read as damage control.
China is trying to secure funding from the United Nations to improve reproductive health – an effort that has been set back by reports of forced abortion.
Central authorities did not investigate the Linyi abuses until news of the harassment of Chen Guangcheng – and his abduction with the help of Beijing police – spread into international media.
Chen had reported the abuses to officials and asked a non-governmental organization, the Citizens’ Rights Defense Group, to investigate.
The group went to Linyi in May.
A month later, the network of Chinese Human Rights Defenders reported the group’s findings and demanded the intervention of the central government’s Family Planning Commission (FPC).
As a volunteer for the network, I was in touch with Chen and followed events closely.
In July, having failed to elicit any government response, Chen began seeking legal aid from prominent lawyers to prepare lawsuits on behalf of the victims, causing alarm among local officials.
Pursued by police, Chen went into hiding.
My “personal safety was threatened,” he wrote on August 30 in the last email I received from him.
Following strenuous international protests over Chen’s kidnapping, the FPC decided to investigate.
Xinhua announced that local officials responsible for the violence might be prosecuted.
Central authorities seemed to sense an immediate need to quell criticism of its controversial population-control efforts.
And Xinhua wasted no time in claiming that the abuses were limited to a few towns.
However, central government authorities have done little to halt intimidation of Linyi’s villagers.
Chen was released from detention but remains under house arrest and was dragged back to the police station on September 2 for unknown reasons.
Police refuse to return Chen’s personal computer and cell phone.
The village, too, is mysteriously without phone service.
Meanwhile, through arrests, threats, and bribery, authorities are forcing villagers to withdraw accounts of abuse and back out of their lawsuits, warning of the dire consequences of cooperating with Chen and the lawyers.
The FPC declines to intervene, citing lack of law-enforcement powers.
On October 10, the villagers’ lawyers were told that the court hearing scheduled that day was canceled.
On their way back to Beijing, thugs reportedly assaulted the lawyers.
Viewed in this context, the belief that the government’s approach to Linyi reflects a new responsiveness to human-rights abuses seems naïve.
If the government were truly becoming more responsive, why have we not seen similar responses to other disputes over the theft of farmland, compromised investors’ rights, or high-level corruption?
In all these cases, authorities have responded with repression, including the hiring of plain-clothes militias to kidnap or beat up people who attempt to publicize problems.
China’s belated bouts of openness about the rural spread of AIDS and the SARS epidemic clearly indicate that the central government regards transparency solely as a matter of expediency.
Others argue that China’s government is simply losing its grip over local authorities.
This prospect is hardly encouraging.
If abuses and repression in the provinces continue no matter how attentive the central government, or how assertive the press might have become, what then?
More likely, however, the central authorities are following a policy that most Chinese know well: neijin waisong, or “controlled inside, relaxed outside.”
Applied here, the policy means consolidating power at home while disarming critics abroad.
I believe that the government’s loss of control in the provinces has been stage-managed.
Chaos provides a cover for crackdowns.
It is too convenient when unidentified strongmen beat and harass activists who question Party rule, and it is too easy for officials to blame an out-of-control “criminal society” when international media start asking questions.
Suspiciously targeted “criminal” assaults have, indeed, occurred in places other than Linyi.
Thugs thrashed civil rights activist Lu Banglie in the Guangdong town of Taishi in early October.
Six villagers in the Hebei village of Dingzhou, protesting government seizure of their land, died after bloody clashes with a gang of toughs in July.
The list goes on.
State media recently started releasing year-end “mass incident” statistics.
Last year, the government said, there were 74,000 such incidents.
Observers marvel that China’s leaders admit to such a staggering number of protests.
But here, again, the government is hiding in plain sight.
State-run media organs have been forced to admit that these protests test the Party’s will to maintain power.
They neglect to tell the real story of how the Party exercises that will, trusting that the admission itself will satisfy us.
We should not be so quick to play along.
Kowtow or Cooperation in Asia?
TOKYO – When an American president’s first overseas trip following his re-election is to Asia, one can be sure that something big is afoot in the region.
Indeed, Barack Obama’s decision to go first to impoverished and long-isolated Myanmar (Burma) attests to the potency of the changes underway in that country – and to US awareness of China’s efforts to shape an Asia that kowtows to its economic and foreign-policy interests.
Events at the ASEAN and East Asian leadership summits in Phnom Penh, the other key stop on Obama’s tour, confirmed this.
At the ASEAN summit’s conclusion, Cambodian Prime Minister Hun Sen, a former Khmer Rouge commander who has ruled his country with an iron fist for three decades, closed the meeting by proclaiming that all of the leaders had agreed not to “internationalize” sovereignty disputes over islands in the South China Sea.
Chinese Prime Minister Wen Jiabao, present at the summit to sign new multi-million-dollar aid agreements with Cambodia, smiled and nodded in agreement at this apparent acceptance of Chinese wishes.
Not so fast, said Filipino President Benigno S. Aquino III. No such agreement had been made.
Hun Sen had mischaracterized the discussions among ASEAN’s leaders.
Japanese Prime Minister Yoshihiko Noda, who was also present in Phnom Penh, agreed with Aquino.
At the summit’s end, Vietnam, Malaysia, Indonesia, Brunei and Singapore joined with Aquino in demanding that Hun Sen’s statement be amended.
All six of these states have been pushing China to negotiate with ASEAN a multilateral process to resolve the South China Sea territorial disputes.
China, dwarfing all of them, prefers bilateral talks.
As Hun Sen’s behavior demonstrates, countries that are overly dependent on Chinese aid and diplomatic backing will harmonize their policies accordingly.
For two decades, Myanmar behaved likewise, until Chinese overreach, particularly the now-abandoned Myitsone dam project, revealed in full the subservient relationship that China envisioned.
Indeed, China’s arrogance – 100% of the power from the proposed dam was to be exported to China – was probably the key factor in precipitating Myanmar’s democratic political transition and new openness to the world.
But Asians must not misconstrue Obama’s visit.
Although the US is certainly undertaking a strategic “pivot” to Asia, America alone cannot construct a viable security structure for the region.
From India to Japan, every Asian country must play its part.
There is no alternative to this approach, because China’s rise has been accompanied by massive social and economic changes – in some instances dislocation – across the entire region.
Asia’s economies have, of course, become much more integrated in recent decades, particularly through production for global supply chains.
But economic integration has not been matched diplomatically.
Even two of the region’s great democracies, Japan and South Korea, which have nearly identical strategic interests, have allowed an old territorial dispute – itself reflecting older unresolved animosities – to block closer cooperation.
China’s prolonged – and apparently contentious – leadership transition, punctuated by the purge of Bo Xilai, suggests that its leaders’ ability to continue to manage the country’s emergence as a great power is not entirely certain.
That makes the absence of a widely accepted regional structure of peace all the more dangerous.
International orders emerge either by consensus or through force.
The great task for Obama, incoming Chinese President, Xi Jinping, Indian Prime Minister Manmohan Singh, the new Japanese and South Korean leaders who will come to power following elections in December, and all ASEAN members is to ensure that consensus prevails in Asia without stoking China’s greatest strategic fear – encirclement.
As everyone in Asia should recognize, whenever communist China has deemed that it faced such a threat, it has resorted to war – in Korea in 1950, India in 1962, the Soviet Union in 1969, and Vietnam in 1979.
But fear of provoking China should not stop Asia’s leaders from seeking a regional security consensus, such as the proposed code of conduct for disputes in the South China Sea.
Only the weakest of Asian states will submit willingly to Chinese hegemony – or, for that matter, to a Cold War-style US-led containment strategy.
Indeed, the idea that Asian countries must choose between a Chinese or American future is false.
But can Asia’s fear of hegemony and China’s fear of military encirclement be reconciled?
Only a shared sense of common purpose can prevent regional militarization.
Some early steps in the right direction are visible.
The United States has joined several other countries in embracing a Trans-Pacific Partnership, a free-trade pact linking the Americas with Asia.
Japan’s ruling party and leading opposition party are coming around to support the idea, and Obama’s invitation to China to join suggests that the US is trying to forge regional consensus where it can.
For now, however, China has other ideas.
It has pressed ASEAN to establish a trade zone that would include China but exclude the US and Japan.
In any case, trade agreements, however beneficial, can do little to defuse Asia’s sovereignty disputes, and it is here – the greatest current source of regional tensions – that a shared common enterprise is not only possible, but also necessary if peace is to be preserved.
After all, no government in the region – whether a democracy like Japan, South Korea, Taiwan, and the Philippines, a one-party state like China and Vietnam, or a tiny monarchy like Brunei – can acquiesce on such issues and hope to survive.
Such diplomatic realism need not lead to zero-sum outcomes, as the example of European integration demonstrates.
Just as the European Coal and Steel Community preceded today’s European Union, all of Asia would benefit from embracing shared development (without any renunciation of sovereignty claims) of the rich maritime resources that, in several cases, are fueling the sovereignty disputes.
China’s and the WTO: Unfinished Business
China’s tortuous road toward membership in the World Trade Organization (WTO) is winding toward its end.
Before China joins, however, the final terms on which it enters the WTO must be negotiated with a group of WTO members acting on behalf of the organization and expressed in a formal agreement, the Protocol of Accession.
Big legal issues that have been put to the side must now be tackled.
When China joins the WTO, it will become committed (like all other members) to policies and practices that have been agreed on by the international community of trading nations and are expressed in the General Agreements on Tariffs and Trade (GATT) and other multilateral treaties.
China’s lengthy negotiations with the US and the European Union over WTO membership largely focused on vexatious economic issues, such as lowering tariffs, ending quotas on exports to China, opening its market to key imports where access has hitherto been excluded or limited, and permitting foreign investment in industries such as telecommunications.
Those bilateral negotiations will benefit other members of the WTO as well, because membership in the WTO obligates China to treat all other members equally.
Too little attention has been paid, however, to other matters that will also affect all WTO members, namely the measures that China must take to raise its level of legality to meet standards set down in the GATT.
A draft of the Protocol of Accession – under negotiation for years but not yet final – contains provisions that could change Chinese law and accelerate the construction of a legal system, a process that only began twenty years ago when Deng Xiaoping launched China’s economic reforms.
China has already agreed to move toward meeting relevant WTO standards, such as Article X of the GATT, which obligates members to apply trade laws in a “uniform, fair and reasonable manner.”
In China, however, such uniformity is unattainable today because the actions of local governments frequently diverge from central government policy.
China’s courts and the salaries of its judges are funded, not by the Beijing, but by local governments, which makes judges and the courts beholden to them.
Fairness and reasonableness are also distant goals, because there is vast disorder among Chinese law-making institutions, central and local alike.
The draft Protocol contains language in which China agrees to establish independent “tribunals… and procedures for the prompt review of all disputes relating to the implementation of laws, regulations, judicial decisions and administrative rulings of general application.”
China cannot meet this standard, either.
Chinese law limits the types of bureaucratic actions that can be challenged by lawsuit, such as abuses of discretion.
Also, Chinese law limits the questioning of administrative rules before they are put into practice.
Although much activity is under way to draft legislation to reform administrative law, these drafts are unlikely to be adopted for years.
These issues are of enormous practical importance for companies doing business with China.
For unless these changes are made, how can businessmen know how to ascertain the lawfulness of the actions of Chinese officials, such as imposing fees or penalties, refusing to award contracts, or imposing conditions on contract approvals?
The draft Protocol does not yet require China to adopt rules to govern administrative procedure or the standards of evidence to be used by administrative agencies.
Nor does it address deficiencies in existing legislation that prevent challenges to the rules on which agencies base their decisions or to the exercise of discretion by bureaucrats.
The Protocol’s current draft, indeed, falls well short of the necessary specificity.
Even if the language of the Protocol is sharpened before China joins the WTO, China’s trading partners should hold realistic expectations about the limited results China can attain even if its reforms are energetic and sincere.
A legal tradition vastly different from the West, and decades of Maoist rule before the Deng era, make rapid change in Chinese legal institutions impossible.
The consequences of this may be severe.
China’s failure to meet GATT standards may catalyze any number of disputes, enough to overload the WTO dispute settlement process, and the processes of obtaining decisions and implementing them could be very time-consuming.
What is to be done?
China’s trading partners and foreign NGO’s can provide needed assistance to China by supporting programs that foster improvements in Chinese legality.
The EU, Canada and the Asian Development Bank are already engaged in such efforts.
Despite past refusal by America’s Congress to fund programs to further the rule of law in China, recent US legislation authorizes modest efforts to provide assistance to increase China’s capacity to meet its obligations as a WTO member.
China’s admission to the WTO will mark another stage of its membership in the international community.
None of this should be greeted with euphoria, for China’s markets will not open magically and China’s governance will not change quickly.
Successful change will require clear expectations and much effort on all sides.
China\u0027s Anonymous Gulag
With rare candor, China's government recently released statistics on people arrested and prosecuted for endangering state security, the most serious political offence in the criminal code.
China's top prosecutor, Han Zhubin, revealed that more than 3,400 people were arrested from 1998 to 2002 for such crimes as subversion, incitement to subversion, espionage, and trafficking in state secrets.
Arrests and prosecutions for endangering state security have risen sharply since September 11, 2001.
In the two-year period that ended on December 31, 2002, more than 1,600 people were prosecuted for endangering state security, most after the terror attacks on the US.
Many of those arrested and prosecuted hail from Xinjiang, an autonomous region in the northwest of the country that is home to a large and restive Muslim population.
China's government has used the war on terror to crack down on those seeking greater autonomy, including those who do so by peaceful means.
This includes people like Rebiya Kadeer, a businesswoman imprisoned for sending newspaper articles to her husband in the US, Tohti Tunyaz, a Ph.D. student in Japan accused of publishing "sensitive documents," and Tursunjan Amat, a poet who recited a pro-independence poem at a public gathering in Urumqi.
Large as the number of such arrests and prosecutions is, the true extent of the government's suppression of independent thought and activity is even greater.
Most members of the Falun Gong and other unauthorized religions are arrested and tried for "using an evil cult to sabotage implementation of the law"--a crime categorized as "disturbing the social order."
Thousands of people are imprisoned for such "evil cult" activities.
Labor leaders are often charged with "organizing an illegal procession" or "disturbing the social order."
Dissidents who attempt to fund their activities by conducting private business sometimes find themselves jailed for economic crimes like fraud and illegal publishing.
Fang Jue, a reformer who served a four-year term for economic crimes, and Jiang Surang, an underground Catholic priest sentenced to six years for illegally publishing Bibles, were both punished in this way.
Dissidents picked up by the police but not formally arrested sometimes wind up in re-education camps or in psychiatric hospitals run by the public security bureau.
Those sentenced to two- or three-year terms of "re-education through labor" are not included in the statistics on endangering state security released by Procurator General Han.
The names of only a few of the thousands arrested for political crimes are known.
An exhaustive search of official and unofficial sources turned up fewer that 150 names of individuals arrested for endangering state security in 1998-2002, a "transparency rate" of less than 5%.
Indeed, we know more about the arrests made after the Tiananmen protests of 1989 than about those arrested today.
What we do know about those arrested is as disturbing as the arrests themselves.
For example, about one-quarter are non-Han Chinese, principally Tibetans and Uyghurs.
China is more than 90% Han.
Sentences for non-Han Chinese are typically longer than those imposed on Han Chinese.
Moreover, almost everyone arrested for endangering state security is convicted.
Appeals, when filed, are routinely rejected.
In the one or two cases of acquittal, another charge is filed and a conviction obtained.
That happened to Yue Zhengzhong, who sent an intercepted letter to the US Embassy praising the 1999 bombing of China's Embassy in Belgrade.
Prosecuted for inciting subversion, Yue was ultimately convicted of "making a false accusation."
He had written that those killed deserved their fate.
Although some of those convicted of endangering state security are charged with violent crimes--for example, two Tibetans were recent sentenced to death for "inciting separatism" and setting off bombs--the great majority involve non-violent speech and association.
Dozens of leaders of opposition groups--most unknown to the outside world--were imprisoned in recent years.
Li Wenshan and Chen Shiqing, leaders of the Chinese Nation's Democratic Party, which has nearly 1,000 members, are serving long sentences in Gansu Province's Linxia Prison.
"Internet dissidents" make up the fastest-growing group of political prisoners.
Last month, Huang Qi, an Internet entrepreneur arrested for posting articles criticizing the Communist Party, and four young intellectuals who made up the "New Youth Study Group" to hold online discussions about political reform, were sentenced to long prison terms.
Scholars, too, feel the heat.
Xu Zerong, a social scientist trained at Harvard and Oxford, is serving a 13-year sentence in Guangdong Province for photocopying materials on Chinese military tactics during the 1950-53 Korean War.
Many hope that the SARS crisis will encourage China's leaders to become more transparent and accountable.
But the way the authorities are handling the epidemic is having the opposite effect.
Internal travel restrictions are used to keep lawyers from representing dissident clients.
Prisons are closed to outside visitors.
Meetings with foreign governments on human rights--during which information is provided on political cases--have been postponed and visits by monitors, including one from the World Psychiatric Association to investigate charges of psychiatric abuse, are on hold.
No one knows when the long-promised visit by the UN Rapporteur on Torture will take place.
We may get a better picture of China's public health system as a result of the SARS crisis, but when it comes to the country's political health, there is little to suggest that criticism will be tolerated or opposition allowed.
Those who attempt to change the way China is governed will be dealt with harshly, their names and fates remaining anonymous.
China\u0027s Anti-Secession Law Boomerangs
The passage of any law by China’s rubber-stamp National People’s Congress is always a mere formality.
But the controversial legislation to outlaw Taiwanese secession has proved anything but routine.
It raised the stakes for the island’s pro-independence camp and increased the risk of a cross-Strait military conflict.
The anti-secession law’s vague language and attempt at softened wording – perhaps geared toward mollifying foreign critics – paradoxically increases rather than decreases the likelihood that China and the United States could be unwittingly and unwillingly drawn into an avoidable military conflict.
By failing to clearly delineate presumed or potential “red lines” for Taiwan, the law leaves open the possibility of substantial miscalculation or misinterpretation.
Despite several weeks of intense US pressure to soften - or even retract - the proposed law, China’s leaders did little more than attempt to reinforce their position that “non-peaceful” (i.e., military) measures would serve strictly as a last resort - which had already been assumed anyway.
The Bush administration’s reaction was uncharacteristically blunt, with its call for “Beijing to reconsider the passage of the law'” – a rather directly worded intrusion into what China considers to be an internal matter.
Taiwan’s December 2004 legislative elections had delivered an unexpected defeat for Chen and his ruling Democratic Progressive Party, or DPP, and the pro-independence camp’s failure to secure a legislative majority was seen as a positive development for relations with the mainland.
Indeed, the start of 2005 saw some movement on improved ties, with the introduction of a hugely successful lunar new year charter-flights program.
This gave rise to serious discussion about instituting permanent direct air links to aid bilateral trade flow.
Now, in the aftermath of the anti-secession law, the future of the charter-flights scheme looks bleak.
Opinion polls in Taiwan reflect public dismay over the Chinese legislation, and this negative sentiment will raise the pressure on President Chen, who recently antagonized some of his more ardent pro-independence supporters by reaching out to the pro-unification opposition People First Party.
A survey by Taiwan’s China Times found that 56% of those polled resented the anti-secession law, with 47% saying that Taiwan should retaliate by either holding a public referendum on the issue or introducing counter-legislation of its own.
There are now serious concerns that the so-called dark greens – the harder-line faction in Taiwan’s pro-independence pan-green political camp – will seize this issue as a stick with which to beat President Chen.
As DPP legislator Hsiao Bi-khim recently said, the anti-secession law “will make it very hard for us to be moderates”.
One of the more frustrating elements of the anti-secession law is the fact that it is an entirely unnecessary provocation.
The absence of laws mandating force to block separatist activity has never stopped Chinese authorities from brutally persecuting individuals and groups who have called for an independent Tibet or Xinjiang.
There is thus little reason to believe that a more explicitly assertive stance is necessary for dealing with the “splittist” government in Taipei.
Missile tests, PLA military exercises and threatening rhetoric have been sufficient deterrents until now.
Mainland officials justify the law in terms of clarifying their policy and establishing a legal premise for invading the island.
In practice, however, the construction of legal foundations could weaken the Chinese government’s operational flexibility when responding to a Taiwanese move toward independence.
The law of unintended consequences dictates that this effort to deny ambiguity to Taiwanese activists could backfire, and instead leave mainland leaders without room to maneuver if Taiwan does attempt to revise the status quo.
This means that the Hu Jintao administration could well have its hands tied, and find itself unable to pursue some kind of compromise solution to a situation that is already fraught with nuance and complexity, and which shows no sign of getting easier to manage with the passage of time.
While outright military conflict is still considered unlikely, the combination of China’s vague “red lines” and non-specific threats will certainly raise the likelihood of miscalculation and misinterpretation on both sides.
More broadly, the fact that the anti-secession law was introduced at all comes as a major disappointment to those who had been impressed by the apparent sophistication and skillfulness of recent Chinese diplomacy.
Coming in the same week as China’s poorly handled removal of Tung Chee-hwa as Hong Kong’s Chief Executive, the anti-secession law episode illustrates that the mainland’s PR savvy has its limits and that Taiwan will remain an emotional and divisive thorn in the side of Sino-US relations.
China\u0027s Asia Strategy
For over a decade, American strategic thinking has focused on China's emergence as a great power in East Asia.
Such thinking is passé.
China already is East Asia's great power.
While America has struggled in Iraq this year, China has spent it on a diplomatic goodwill offensive in Asia.
The result?
In October, one day after President George W. Bush was booed in Australia's parliament, Chinese President Hu Jintao received a standing ovation from the same parliamentarians.
China's emergence as Asia's dominant power, and the overall regional balance of power, are now matters that governments across the Pacific must reckon with carefully.
To be sure, the US remains Asia's power broker, as it has been since the end of WWII.
But diplomacy regarding the Korean peninsula, in which all roads lead to Beijing, has opened the door to China as the new "go-to" guy.
Indeed, the six-party meetings in Beijing earlier this year to discuss North Korea's nuclear challenge confirmed China's emerging great power status, which is also reflected in its increasingly active--and effective--Asian diplomacy.
This includes even Japan, China's traditional rival.
This past May, Chinese President Hu Jintao met with Japan's Prime Minister Junichiro Koizumi in St. Petersburg, Russia.
Hu's move lifted bilateral relations out of the deep freeze, where China's previous leadership had consigned them following Koizumi's repeated visits to the Yasukuni Shrine, where the spirits of Japan's war dead, including Class A war criminals, are enshrined.
Unlike former Chinese president Jiang Zemin, whose history lectures irritated Japan's postwar generations, Hu focused on the future, avoiding the dreaded "Y" word in the meeting with Koizumi.
The Japanese media took note.
In August, Japan's Chief Cabinet Secretary, Yasuo Fukuda, attended ceremonies in Beijing marking the 25th anniversary of the China-Japan Friendship Treaty.
At the same time, China's Foreign Minister, Li Zhaoxing, traveled to Tokyo.
In September, Japan's Defense Minister visited China, resuming high-level defense contacts.
If all goes well, a Koizumi visit to China may be in the offing.
Koizumi has long sought an official visit, only to be stymied by Chinese opposition to his Yasukuni visits.
His interest is understandable.
Last year, Japan's imports from China surpassed those from the US for the first time, while annual exports to China soared by 39.3%.
Even as the SARS epidemic raged in China, Japanese companies kept their long-term investment bets on the promise of low-cost Chinese labor.
China has been equally active to its south and west.
In June, during the ASEAN Summit in Phnom Penh, China announced that it will sign the 1976 Treaty of Amity and Cooperation, ASEAN's founding document.
China's accession to ASEAN represents a major confidence-building step toward Southeast Asia.
It follows China's 2001 proposal for a China-ASEAN free trade area and its active financial support for Thailand and Indonesia during the 1997-98 Asian Financial Crisis.
Talk of a "strategic partnership" is in the air.
Meanwhile in South Asia, after hosting Indian Prime Minister Vajpayee in Beijing, China and India signed a Declaration on Principles for Relations and Comprehensive Cooperation.
India acknowledges in the document that Tibet is part of China and proscribes anti-Chinese activities by Tibetans from Indian soil.
In November, the first ever India-China joint naval exercises were held off the Chinese coast.
If the US is looking to develop a post-Cold War strategic relationship with India to counter Chinese influence in South and Southeast Asia, the recent China-India agreements suggests that an alternative strategic calculus may exist in both China and India.
The US must recognize that, while the countries of the region look to the US to balance--or at least leaven--China's growing influence, they are unlikely to be interested in getting caught up in any containment strategy.
For now, US and Chinese interests coincide on the war on terrorism, on a peaceful resolution of the nuclear question on the Korean peninsula, and on stability in East Asia.
Over the long-term, however, accommodation will be difficult on issues like Taiwan, Korean reunification, and the future of the US alliance structure in Asia.
Moreover, on the fundamental issue of freedom--"the non-negotiable demand of human dignity," in the words of the Bush administration's National Security Strategy--American and Chinese visions conflict.
Clearly, the war on terrorism presented China with opportunities to strengthen both its relations with the US and its ties with nations across the Pacific.
The big question is whether today's cooperation between China and the US will prove to be no more than a diversion from Asia's enduring strategic reality--China's emergence as the region's dominant power.
The safest bet is that Asia's realities outlast the war on terrorism, and that after Afghanistan and Iraq, when the US refocuses on Asia, it will find a very different China in a much-changed region.
China’s Baby Step
Whatever the ultimate economic effects of China’s first modest step towards floating its currency, one has to admire its strategic brilliance.
The genius of China’s mini-move (allowing the Yuan to rise 2% against the dollar) is that no one can tell when or what is going to happen next.
Protectionists in the United States and Europe, itching to slap huge punitive tariffs on Chinese goods, have been caught flat-footed.
They want to keep bathing in press coverage, but if they push their China-bashing too far and too fast, the protectionists will be seen as hindering delicate behind-the-scenes negotiations.
But no one knows whether China’s baby step is the start of something much bigger, as China’s authorities hint one day and deny the next.
By relenting just a little to intense global pressure to revalue its exchange rate, the Chinese leadership has masterfully stifled the growing chorus of demands to rein in its growing trade surplus.
The key question, however, remains whether China is defying market forces at its own risk.
On the surface, at least, the mini-revaluation hardly seems to have compromised China’s ability to bend exchange markets to its will.
Foreign experts had warned that a small Yuan appreciation might be worse than none.
While hardly denting global trade imbalances, a small move would bring in a flood of foreign capital, overwhelming China’s currency defenses and leading to chaos.
So far, that has not happened and, China once again seems to have gone its own way and proved the experts wrong.
But hold the applause.
Perhaps the speculative-inflow scenario will play out, but in slow motion.
After all, China is not a country where investors can just take their money in a heartbeat.
It can hold the fort because it maintains one of the world’s strictest regimes of exchange and capital controls.
Unlike many Latin American and former Soviet-bloc countries, where similar controls are honored mainly in the breach, violating capital controls in China is virtually a capital offense.
But, over the past fifty years, when many other countries, including France and Italy, implemented draconian controls, the result was always the same: eventually, the private sector adapted and eroded the controls’ effectiveness.
Whether by misreporting imports and exports or exploiting corrupt government officials (which China has in ample supply), private capital eventually starts finding its way around the controls if the incentives are strong enough.
Thus, even if the Chinese authorities can somehow keep their capital controls from hemorrhaging as the country’s financial system becomes more sophisticated and decentralized, they will not be able to stop the controls from dying a death of a thousand cuts.
After that, China will be able to keep its exchange rate pegged only by slavishly following US interest-rate policy, which makes no sense for such a large and diverse region.
Indeed, over the longer term, the biggest concern for China is that some day money will be trying to get out.
Even China’s vast reserves will not be enough to stave off a painful devaluation.
It is a lot easier to exit from a fixed exchange rate regime when the pressures on the currency are upwards.
While it may seem hard to imagine that the speculative tide might ever turn against China, exchange-rate pressures can turn in an instant.
Today’s darling currency can be tomorrow’s dog.
Considering China’s huge and growing income inequalities, and its massive disguised rural unemployment, it is easy to imagine a period of political instability that sends investors heading for the exits.
Mix in China’s shaky financial system and the prospect of trade sanctions after an altercation over, say, Taiwan, and it is clear that the Yuan might not always be a one-way bet.
Last but not least, the Chinese authorities desperately need to maintain the country’s breakneck economic growth in order to preserve the Communist Party’s legitimacy.
But, as the economy becomes richer and more complex, there will be no escaping the market imperative in internal credit allocation.
Every other emerging market, even in Asia, has eventually had to cross this bridge.
Indeed, the need to pursue financial liberalization to maintain growth is a central reason why middle-income countries are so prone to financial crises.
That’s why Chinese authorities should move to greater flexibility now, and not wait until it is too late.
So should we expect to see much bigger currency moves in China anytime soon?
Should we ever expect to see wild gyrations in China’s exchange rate of the sort one routinely sees in, say, the Australian dollar or the South African rand?
Neither scenario is very likely.
Only fire-breathing free-market advocates, seemingly oblivious to the fact that China’s shaky financial system cannot survive liberalization overnight, are calling for an extreme version of floating.
But there may well be a lot more to come over the next 12-18 months.
The first round of Yuan revaluation won’t be over until the currency is up against the dollar by at least 10%, and probably more.
China’s first currency move was brilliant only if it is not the last.
China’s Bad Bet Against America
CAMBRIDGE – Chinese-American relations are, once again, in a downswing.
China objected to President Barack Obama’s receiving the Dalai Lama in the White House, as well as to the administration’s arms sales to Taiwan.
There was ample precedent for both American decisions, but some Chinese leaders expected Obama to be more sensitive to what China sees as its “core interests” in national unity.
Things were not supposed to turn out this way.
A year ago, the Obama administration made major efforts to reach out to China.
Secretary of State Hillary Clinton referred to “being in the same boat,” and that China and the United States would “rise and fall together.”
Treasury Secretary Timothy Geithner said he spent more time consulting his Chinese counterparts than those in any other country.
Some observers even referred to a US-Chinese “G2” that would manage the world economy.
The G2 idea was always foolish.
Europe has a larger economy than both the US and China, and Japan’s economy is currently about the same size as China’s.
Their participation in the solution of global problems will be essential.
Nonetheless, growing US-Chinese cooperation within the G20 last year was a positive sign of bilateral as well as multilateral cooperation.
Whatever the concerns regarding the recent events related to the Dalai Lama and Taiwan, it is important to note that the deterioration in US-Chinese relations began beforehand.
Many American congressmen, for example, complain that American jobs are being destroyed by China’s intervention in currency markets to maintain an artificially low value for the yuan.
A second issue was China’s decision not to cooperate at the United Nations conference on global climate change in Copenhagen last December.
Not only did China resist measures that had been under negotiation for the preceding year, but Prime Minister Wen Jiabao’s decision to send a low-level official to meet with and point a finger at Obama was downright insulting.
China behaved similarly when the five permanent members of the UN Security Council (plus Germany) met to discuss sanctions against Iran for violations of its obligations to the International Atomic Energy Agency.
Again, China sent a low-ranking official.
What happened to those promising early signs of cooperation?
Two reasons for the change in Chinese behavior – seemingly inconsistent at first glance, but in fact perhaps mutually reinforcing – seem possible.
First, a political transition is expected in 2012, and, in a period of rising nationalism, no Chinese leader wants to look softer than his rivals.
This helps to explain the recent crackdowns in Tibet and Xingjian, as well as the detention of human rights lawyers.
In addition, China may be approaching an economic transition.
Some Chinese argue that anything less than 8% growth would be inadequate to ensure sufficient job creation and fend off social instability.
But, as America’s savings rate begins to rise, China’s export-led growth model, which has promoted employment in China at the cost of global trade imbalances, may no longer be possible.
If China responds to entreaties to revalue the yuan, it may need to look tough on other issues to appease nationalist sentiment.
The second cause of China’s recent behavior could be hubris and overconfidence.
China is justly proud of its success in emerging from the world recession with a high rate of economic growth.
It blames the US for producing the recession, and now holds some $2 trillion in foreign-exchange reserves.
Many Chinese believe that this represents a shift in the global balance of power, and that China should be less deferential to other countries, including the US.
Certain Chinese scholars are now writing about the decline of the US, with one identifying the year 2000 as the peak of American power.
This overconfidence in foreign policy, combined with insecurity in domestic affairs, may combine to explain the change in Chinese behavior in the latter part of 2009.
If so, China is making a serious miscalculation.
First, the US is not in decline.
Americans and others have been predicting decline regularly over the years: after the Soviets launched Sputnik in 1957; again when Nixon closed the gold window in 1971; and when the American rust-belt economy seemed to be overtaken by Japanese manufacturers in the 1980’s.
But when one looks at the underlying strength of the American economy, it is not surprising that the World Economic Forum ranks the US second (just behind Switzerland) among the most competitive, while China ranks some 30 places below.
Second, the fact that China holds so many dollars is not a true source of power, because the interdependence in the economic relationship is symmetrical.
True, if China dumped its dollars on world markets, it could bring the American economy to its knees, but in doing so it would bring itself to its ankles.
China would not only lose the value of its dollar reserves, but would suffer major unemployment.
When interdependence is balanced, it does not constitute a source of power.
Third, despite Chinese complaints, the dollar is likely to remain the major global reserve currency, owing to the depth and breadth of America’s capital markets, which China cannot match without making the yuan fully convertible and reforming its banking system.
Finally, China has miscalculated by violating the wisdom of Deng Xiaoping, who advised that China should proceed cautiously and “keep its light under a basket.”
As a senior Asian statesman told me recently, Deng would never have made this mistake.
If Deng were in charge today, he would lead China back to the cooperative relations with the US that marked early 2009.
China’s Bad Growth Bet
LONDON – I recently took two trips to China just as the government launched its 12th Five-Year Plan to rebalance the country’s long-term growth model.
My visits deepened my view that there is a potentially destabilizing contradiction between China’s short- and medium-term economic performance.
China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally.
Once increasing fixed investment becomes impossible – most likely after 2013 – China is poised for a sharp slowdown.
Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium.
Despite the rhetoric of the new Five-Year Plan – which, like the previous one, aims to increase the share of consumption in GDP – the path of least resistance is the status quo.
The new plan’s details reveal continued reliance on investment, including public housing, to support growth, rather than faster currency appreciation, substantial fiscal transfers to households, taxation and/or privatization of state-owned enterprises (SOEs), liberalization of the household registration (hukou) system, or an easing of financial repression.
China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors).
When net exports collapsed in 2008-2009 from 11% of GDP to 5%, China’s leader reacted by further increasing the fixed-investment share of GDP from 42% to 47%.
Thus, China did not suffer a severe recession – as occurred in Japan, Germany, and elsewhere in emerging Asia in 2009 – only because fixed investment exploded.
And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50%.
The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem.
China is rife with overinvestment in physical capital, infrastructure, and property.
To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.
Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further.
In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth.
But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.
Eventually, most likely after 2013, China will suffer a hard landing.
All historical episodes of excessive investment – including East Asia in the 1990’s – have ended with a financial crisis and/or a long period of slow growth.
To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption.
The trouble is that the reasons the Chinese save so much and consume so little are structural. It will take two decades of reforms to change the incentive to overinvest.
Traditional explanations for the high savings rate (lack of a social safety net, limited public services, aging of the population, underdevelopment of consumer finance, etc.) are only part of the puzzle.
Chinese consumers do not have a greater propensity to save than Chinese in Hong Kong, Singapore, and Taiwan; they all save about 30% of disposable income.
The big difference is that the share of China’s GDP going to the household sector is below 50%, leaving little for consumption.
Several Chinese policies have led to a massive transfer of income from politically weak households to politically powerful companies.
A weak currency reduces household purchasing power by making imports expensive, thereby protecting import-competing SOEs and boosting exporters’ profits.
Low interest rates on deposits and low lending rates for firms and developers mean that the household sector’s massive savings receive negative rates of return, while the real cost of borrowing for SOEs is also negative.
This creates a powerful incentive to overinvest and implies enormous redistribution from households to SOEs, most of which would be losing money if they had to borrow at market-equilibrium interest rates.
Moreover, labor repression has caused wages to grow much more slowly than productivity.
To ease the constraints on household income, China needs more rapid exchange-rate appreciation, liberalization of interest rates, and a much sharper increase in wage growth.
More importantly, China needs either to privatize its SOEs, so that their profits become income for households, or to tax their profits at a far higher rate and transfer the fiscal gains to households.
Instead, on top of household savings, the savings – or retained earnings – of the corporate sector, mostly SOEs, tie up another 25% of GDP.
But boosting the share of income that goes to the household sector could be hugely disruptive, as it could bankrupt a large number of SOEs, export-oriented firms, and provincial governments, all of which are politically powerful.
As a result, China will invest even more under the current Five-Year Plan.
Continuing down the investment-led growth path will exacerbate the visible glut of capacity in manufacturing, real estate, and infrastructure, and thus will intensify the coming economic slowdown once further fixed-investment growth becomes impossible.
Until the change of political leadership in 2012-2013, China’s policymakers may be able to maintain high growth rates, but at a very high foreseeable cost.
China’s Banking Revolution
One of the greatest challenges China must confront before the WTO treaty enters into force in 2007 is to prepare the country’s banking system for privatization and competition with foreign banks.
The government has established a new agency, Central Hujin Investment Company, to manage and re-capitalize big state-owned banks before they are sold.
Hujin has already injected $60 billion of China’s foreign-exchange reserves into the Bank of China, the China Construction Bank, and the Industrial and Commercial Bank.
The Agricultural Bank will also require new capital, although the government is not yet preparing it for privatization.
The government’s rescue policies appear to be working.
During the past two months, Bank of America has announced a $2.5 billion investment in return for a 9% stake in the China Construction Bank, and The Singapore-based holding company Temasek paid $1.4bn for a 5.1% stake in China Construction Bank.
The Royal Bank of Scotland is leading an investment group that will invest $3.1 billion more in the Bank of China, while Goldman Sachs and Germany’s Allianz are close to an agreement to acquire a 9.9% stake in the Industrial and Commercial Bank for a similar sum.
The government hopes that these foreign investments will set the stage for the banks to go public on stock exchanges in Hong Kong and elsewhere during 2006, whereas foreign banks are investing with an eye to penetrating the enormous Chinese market.
The big three state-owned banks have vast branch networks and employ hundreds of thousands of people.
Foreign banks could never hope to achieve such comprehensive coverage without a local partner.
They will focus initially on sectors such as credit cards but could develop other joint ventures.
HSBC also announced a major investment in Ping An Insurance, which could set the stage for experiments with Bancassurance in the future.
The Bank of Communications listed on the Hong Kong stock market shortly after the HSBC investment, so it has been able to provide the market with more information than have the banks that are still awaiting privatization.
Goldman Sachs is bullish, believing that the bank can record 17% loan growth this year, a 20-basis-point improvement in margins, and significant growth in fee income.
The major concern, however, is evidence of a growing volume of non-performing loans.
The Bank of Communications’ performance suggests that China’s lending boom of 2003 and 2004 could lead to another wave of defaults this year and next.
In 2004, the investment share of GDP rose to 45%—one of the highest levels in recorded financial history—as banks financed a huge expansion of property development and manufacturing capacity.
Now, the largest banks are claiming significant increases in non-performing property loans, while the glut of new industrial capacity implies that some firms may not have adequate profits to service their debts.
Alhough the Bank of China curtailed its lending growth to only 6% last year because of concerns about credit quality, many new local banks have expanded their lending aggressively, and could now suffer huge losses as the economy slows and firms’ solvency weakens.
In these circumstances, privatization will have profound consequences for China’s economy.
The recent capital-spending boom produced a burst of speculative lending in 2003 and 2004 because the banking system was still state-owned and responsive to political pressure—until the government itself imposed credit controls in April 2004 to prevent a sharp upsurge in non-performing loans.
In the next business cycle, China’s banks will be privately owned for the first time since 1949.
They will make loans on the basis of commercial criteria rather than relations with big state-owned companies.
They will be less vulnerable to political pressure from local governments to finance development projects.
They are likely to place much greater emphasis on consumer lending, especially mortgages and credit cards.
With China’s mortgage lending equal to only 10% of GDP, compared to 60-70% in the Anglo-Saxon countries, there is huge opportunity for growth.
The transformation in China’s banking system, coupled with the recent decision to revalue China’s currency, will require major changes in the conduct of monetary policy.
Until recently, an exchange-rate peg dominated China’s monetary policy, with interest rates unchanged for nine years until October 2004, as the government attempted to manage lending through administrative guidance and credit controls.
In the future, China will have to rely more heavily on interest rates to manage monetary policy, using the price of capital, not political considerations, to influence how firms make investment decisions.
The transformation in China’s banking system is complex and difficult because it involves a change in its fundamental nature.
However, barring any major economic bumps, the changes will have a positive impact, as capital allocation becomes more efficient.
Increased emphasis on household lending should also create a better balance in the economy between capital spending and consumer spending than was possible during the expansion of 2002-2004.
China’s Best Hope
2008 will not be remembered chiefly for noble or heroic acts.
Yet, amidst the news reports over the past few months of financial fraud, bloodshed in India and Gaza, and global economic disasters, one item stood out for its bravery and nobility.
On December 10, the 60th anniversary of the Universal Declaration of Human Rights, more than 300 Chinese citizens, ranging from law professors to businessmen, farmers, and even some government officials, put their names to a remarkable document, entitled Charter 08.
The signatories, later joined by thousands more, asked where China was heading in the twenty-first century: “Will it continue with ‘modernization’ under authoritarian rule, or will it embrace universal human values, join the mainstream of civilized nations, and build a democratic system?”
There is nothing incendiary about Charter 08, no call for violent rebellion, no thirst for revenge or retribution.
It merely asks for what citizens of all liberal democracies take for granted: the right to question government policies, protection of human rights, an independent judiciary, and multi-party elections.
The model for Charter 08 was Czechoslovakia’s Charter 77. In 1977, several prominent signatories, such as Václav Havel, were arrested as a result.
Likewise, one of the bravest, most lucid Chinese intellectuals, Liu Xiaobo, was arrested in December for signing Charter 08, and has yet to be released.
Other signers have been interrogated and harassed.
Charter 08 has not received the attention it deserves, perhaps because most people have other, more pressing concerns.
But there is also a tendency, not only in China, to dismiss such calls for democracy as irrelevant, even misguided.
Recent American policies have given the promotion of democracy a bad name.
In China, and other remaining areas of Asian authoritarianism, it has become customary, even among some self-professed “liberals,” to argue that democracy may be fine for Europeans and Americans, but is unsuited to Asian conditions.
China is too big, its culture too different, and its population still too poor and uneducated to support a democratic system.
An alternative to this line of argument is to claim that China has its own kind of democracy, based on a Confucian idea of government benevolence and the Chinese people’s cultural propensity to sacrifice individual rights to collective goods.
To those who take this view – and on this point many Western businessmen are in complete agreement with the Chinese Communist Party – the signatories of Charter 08 are simply out of touch with their own culture.
In terms of its immediate impact, it is true that Charter 08 will hardly make a ripple in the pond of Chinese politics.
The government will not even discuss the Charter’s ideas, let alone do anything to implement them.
But this is no reason to call it irrelevant.
In 1977, few people would have predicted that Havel would one day preside over a Czech democracy.
He and his fellow dissidents were a tiny minority, too.
A liberal-democratic China may not come soon, but after Charter 08 no one can deny that many Chinese desperately want it.
The expression of this desire is especially important now that the world is gripped by a terrifying economic crisis.
Widespread economic distress is never without political consequences.
Xenophobic populism is on the rise in Europe.
President Barack Obama will have a difficult time curbing resentful protectionism in the United States.
Japanese might revert to angry nationalism.
Nowhere, however, are the political and social consequences of an economic slump more potentially destabilizing than in China.
This is because the Chinese Communist Party’s monopoly on power can be justified only by continued rapid economic growth, without which workers and farmers will lose their jobs, and the urban middle classes their chance of increasing prosperity.
The economic boom is the only source of legitimacy that the one-party state has left.
Few people, even Party members, still believe in Marxism-Leninism, let alone Maoism.
And the general discontent with official corruption and political oppression was amply demonstrated in all regions of China in 1989.
The Communist government managed to stay in power after Tiananmen not just through brute force.
A semblance of political legitimacy, especially among the educated middle class, was purchased with the promise of greater wealth.
As long as people felt that they were getting richer, demands for more freedom of speech, better protection of human rights, and the right to vote could be postponed.
But if this arrangement collapses, and increasing material prosperity can no longer be taken for granted, many things could happen – few of them pleasant.
Rural areas and industrial cities might explode in massive riots.
While the government might be able to crush such disturbances with force, a loss of confidence among the middle class would be more serious.
Militant nationalism, partly encouraged by nervous rulers, might be one consequence.
Attempts by the military to stem unrest by taking control of government might be another.
If there were no alternative ideas to one-party authoritarianism, military rule, or nationwide chaos, the future of China would be very bleak indeed.
But there is an alternative.
It has been set out eloquently and persuasively in Charter 08.
If China manages one day to follow the example of South Korea, Japan, and Taiwan, and join the “mainstream of civilized nations” by establishing a liberal democracy, then December 10, 2008, will go down in history as one of the key dates of its conception.
China’s Blackstone Coup
When China National Offshore Oil Company tried to buy America’s UNOCAL two years ago, it set off a political firestorm in the United States.
When Dubai Ports World bought Britain’s P&amp;O Steam Navigation Company, the fact that P&amp;O operated ports inside the US led to more controversy in America.
One would think that a country like the US, with a current account deficit of roughly $800 billion a year, would realize that such a yawning external gap is inevitably financed only by selling off assets, which means that foreigners with money acquire ownership and control of US-based businesses.
But the US – or at least Congress and the media – doesn’t get it.
Americans evidently hope for a world in which they can have feckless deficit-generating fiscal policies, a very low private savings rate, and a moderate rate of investment, all financed by foreign capital whose owners are happy to bear the risks yet have no control over their assets.
One might think that foreign investors would quake in terror at these terms and shy away from dollar-denominated assets.
But this has not been the case.
High oil prices have created huge export revenues for Middle Eastern governments, which still want to park their earnings in American assets.
The same is true of Russia, whose oligarchs, as well as the huge state investment fund that finance minister Alexi Kudrin has created, also want to invest their oil revenues in the US.
As for Asia’s governments, with China in the lead, the US remains the importer of last resort.
The key to their development strategy is to put migrants from the countryside to work making exports destined for the US market.
They doubt that an alternative development strategy based on boosting domestic demand would succeed.
Thus, the real values of their currencies must be kept low relative to the dollar, which means that their reserves now invested in the US must continue to grow.
Someday, of course, this will come to an end.
Perhaps Asian real currency values will rise sharply as a result of a burst of inflation in Asia.
Perhaps the dollar will collapse and there will be a burst of inflation in the US as the Federal Reserve Board decides that temporarily abandoning its price-level peg is a lesser evil than the unemployment fallout that will result from a dollar collapse and interest rate spike.
A government that buys political risk insurance by placing an ever-growing stock of reserve assets in dollar securities guards against some dangers.
But it is exposed to other risks, especially if it confines its investments to that slice of the asset pool, US Treasury and high-grade corporate bonds, that American politicians are comfortable having foreigners own.
Nominal bonds are not well hedged against inflation, and, over the long run, assets that are claims to cash without effective control are highly vulnerable to financial vultures.
Prudent foreign government and private investors would find some way to diversify.
But how?
Buying other countries’ bonds would mean abandoning the goal of keeping real currency values low against the dollar.
Buying up whole enterprises triggers angry speeches in the US Congress.
What are needed are intermediary organizations that will grant a measure of control to foreigners, allow diversification across a wider range of US-located assets, and yet still appear 100% American to US politicians.
Enter the Blackstone Group.
China’s $3 billion investment in Blackstone, while insignificant relative to China’s $1.3 trillion of reserve assets – a sum headed for $1.5 trillion by the end of this year and likely to hit $2 trillion sometime in 2009 – is but a toe dipped in the water, a test run.
At the start of the process, China will have small and indirect ownership stakes in a great many US enterprises, and the odds are that the usual objections will be absent.
China will gain a measure of risk diversification, reduce the price pressure that has kept earnings on its foreign exchange reserves low, and avoid running into political trouble.
Blackstone will gain extra cash to deploy and extra fees.
Some observers think that the US political backlash against foreigners “buying up America” is what will bring the current configuration of global imbalances to an end.
Deals like China’s investment in Blackstone postpone that backlash, but not for long: $3 billion is equivalent to what China accumulates in reserve in less than three working days.
The question following China’s Blackstone investment is this: how far can this process go?
And how much control will US investors ultimately find that they have given up?
China’s Burden
CHENGDU – Last month saw the 50th anniversary of what Tibetan activists like to call Tibetan National Uprising Day, the day in 1959 when Tibetans in Lhasa revolted against Chinese Communist Party rule.
The rebellion was crushed.
The Dalai Lama fled to India, and for at least a decade things became a lot worse: many Tibetans – possibly more than a million – starved to death during Chairman Mao’s Great Leap Forward campaign, temples and monasteries were smashed, sometimes by Tibetan Red Guards, during the Cultural Revolution, and a large number of people died in the violence.
Chinese officials are noticeably jumpy in this year of anniversaries (20 years after Tiananmen).
This March, I was in Chengdu, in Sichuan province, where many Tibetans live.
Even foreign tourists who had no clue about the anniversary were stopped in the streets by policemen looking for signs of rebellion.
The colorful Tibetan district was cordoned off.
Not only was it forbidden to take pictures there; one couldn’t even walk through.
The Chinese press, however, marked the anniversary with effusive articles describing Tibetan joy at being liberated from centuries of feudalism and slavery.
If the China Daily , among other publications, is to be believed, “pre-Liberation” Tibet was a living hell, and Tibetans are now happy and grateful to be citizens of the People’s Republic of China.
Some probably are.
Many are not.
But if Chinese propaganda paints too dark a picture of the Tibetan past, Westerners who sympathize with the Tibetan cause are often too sentimental.
The personal charm of the Dalai Lama, combined with the Himalayan air of superior spiritual wisdom, has promoted a caricature of a mystical, wise, and peace-loving people being crushed by a brutal empire.
It was not for nothing, however, that quite a few educated Tibetans actually welcomed the Chinese Communists in 1950.
The Buddhist clergy was seen, not without reason, as hidebound and oppressive.
Chinese Communism promised modernization.
And that is what China’s government delivered in the last few decades.
Lhasa, a sleepy, rather grubby backwater only 30 years ago, is now a city of huge public squares, shopping centers, and high-rise buildings, connected to the rest of China with a high-speed railway line.
It is true that Tibetans, sparsely represented in local government, may not have benefited as much as the Han Chinese, whose presence in cities, such as Lhasa, as soldiers, traders, and prostitutes is so overwhelming that people worry about the extinction of Tibetan culture, except as an official tourist attraction.
Still, there is no question that Tibetan towns are now more modern – in terms of electrification, education, hospitals, and other public facilities – than they were before.
This is one of the arguments used not only by Chinese officials, but by almost all Chinese, to justify Tibet’s absorption into greater China.
This argument has a long history.
Western (and, indeed, Japanese) imperialists used it in the early twentieth century to justify their “missions” to “civilize” or “modernize” the natives.
Taiwan, under Japanese rule, was in fact more modern than other parts of China.
And the British brought modern administration, as well as railways, universities, and hospitals, to India.
Outside a fringe of nostalgic chauvinists, however, most Europeans and Japanese are no longer so convinced that modernization is sufficient validation of imperial rule.
Modernization should be carried out by self-governing people, not imposed by foreign force.
Tibetans, in other words, should be allowed to modernize themselves.
But the Chinese have another argument up their sleeve, which seems more plausible (and more modern).
They are justly proud of the ethnic diversity of China.
Why should nationality be defined by language or ethnicity? If Tibetans should be allowed to break away from China, why not the Welsh from Britain, the Basques from Spain, the Kurds from Turkey, or the Kashmiris from India?
In some cases, the answer might be: well, perhaps they should.
But ethnicity as the main marker of nationality is a vague and dangerous concept, not least because it leaves all minorities out in the cold.
So are people wrong to support the Tibetan cause?
Should we dismiss it as sentimental nonsense?
Not necessarily.
The issue is not so much Tibetan culture, or spirituality, or even national independence, but political consent.
In this respect, the Tibetans are no worse off than other citizens of the People’s Republic of China.
Historic monuments are being bulldozed everywhere in China in the name of development.
Culture is being sterilized, homogenized, and deprived of independence and spontaneity in all Chinese cities, not just in Tibet.
No Chinese citizen, regardless of whether he or she is Han, Tibetan, Uighur, or Mongolian, can vote the ruling party out of power.
The problem, then, is not mainly one of nationality or discrimination, but of politics.
The Chinese government claims that Tibetans are happy.
But, without a free press, and the right to vote, there is no way of knowing this.
Sporadic acts of collective violence, followed by equally violent oppression, suggest that many are not.
Without democratic reform there will be no end to this cycle, for violence is the typical expression of people without free speech.
This is true not only for Tibet, but also for the rest of China.
Tibetans will be free only when all Chinese are free.
In that sense, if in no other, all citizens of China hang together.
China\u0027s Challenge to Latin America
Relations between China and Latin America and the Caribbean are paradoxical.
While bilateral trade has increased and diplomatic relations have strengthened in the past few years, a lack of knowledge persists between the two regions, and in some cases tensions are growing.
Hardly any major projects between China and Latin America have been initiated by the private, public, or academic sectors, and bilateral institutions do not yet reflect the weight of economic dynamics.
There are two aspects to this paradox.
First, many Chinese enterprises – particularly in basic-goods sectors such as soy, meat, iron, steel, copper, and oil – have initiated activities in Latin America, either through direct investment or by buying products and/or businesses.
To a lesser degree, Latin American enterprises – such as Gruma, Modelo, Embraer, Marco Polo, and Embraco – have successfully introduced themselves in China.
Even so, Latin America remains a secondary economic and commercial partner for China.
In 2006, Latin America and the Caribbean accounted for 3.7% of China’s exports and 4.3% of its imports.
But bilateral trade has been growing at impressive rates, with Chinese exports and imports up by 24.8% and 23.9%, respectively, from 1995 to 2006.
Indeed, for practically all of Latin America’s countries, China is one of the ten main trade partners – and already in second place in several – with rates of growth well above total trade.
Even in the Caribbean and Central American countries – several of which do not have diplomatic relations with China – commerce has been prolific.
Second, China’s large-scale penetration of the United States and European Union markets has, in many cases, displaced Asian and Latin American competitors.
In the case of the US, for example, Latin America’s share of total imports, at roughly 17%, has not grown since 2000.
In fact, major producers like Argentina, Brazil, and Mexico have seen their participation in US imports decrease, whereas China’s increased to 16% 2006, from 3% in 1990.
China represents a strong ideological challenge for the region, particularly for the status quo of economic policy promoted by the majority of multilateral institutions since the 1980’s.
China would seem to fit the profile of “the worst student who got the best job,” with its GDP per capita growing – under “ideologically erroneous” conditions – 17.3 times faster than in Latin America from 1980 to 2005.
Contrary to most of Latin America, China’s public sector is omnipresent, exercised through direct ownership or control of incentives in the private sectors.
Nor has it liberalized labor and product markets, and it maintains strict control over the exchange rate and capital account.
Likewise, it develops five-year plans –and in many cases, such as in science and technology, plans that exceed 15 years.
Even so, with its cheaper labor force and faster technological growth, China has attained higher export competitiveness than Latin America, several of which it has displaced in key sectors, such as thread and dry goods manufacturing, electronics, and furniture, since 2000.
Whereas China exports manufactured products with an increasing level of technological inputs, Latin America continues to export basic goods with a minimum of added value.
China represents a massive challenge even for countries, such as Brazil, that have achieved a significant trade surplus up to now.
So dividing Latin American countries into “winners” and “losers” makes no sense.
Aside from importing basic goods, China exports manufactured goods throughout the region.
According to the Brazil-China Business Council, Brazil will have its first trade deficit with China in 2007, despite growth exports of minerals and agricultural products.
Central America and Mexico have been running bilateral deficits for years, with Mexico’s import/export ratio in 2006 at 16:1.
Latin American countries would thus benefit from an open, non-ideological, and critical analysis of development experiences in the past few decades.
They also need an effective rapprochement – going beyond diplomacy – that implies greater investment in bilateral institutions.
Otherwise, relations between China and Latin America will be far from harmonious, even as their significance continues to grow.
China’s Choice in North Korea
TOKYO – If the most dangerous moment for any dictatorship is when it starts to reform, North Korea looks ready to turn that truism on its head.
Its recent shelling of South Korea suggests that the failing Kim dynasty might set East Asia alight rather than undertake any serious reform.
If peace really is the key component of China’s rise, the Chinese must now rein in their mercurial client.
Trying to understand the “Hermit Kingdom” can be like staring into a black hole.
Some view the bombardment of South Korea’s Yeonpyeong Island as a bid to divert North Koreans’ attention from their country’s collapsing economy, or perhaps from the approaching death of their “Dear Leader,” Kim Jong-il, or to create a synthetic reputation as a military leader for Kim’s son and intended heir, the 27-year-old (or so) “Young General,” Kim Jong-un.
Others view the attack as simply another in a long line of provocations, and thus not to be taken all that seriously.
Hwang Jang-yop, North Korea’s former chief ideologist and its most senior defector to the South, describes North Korea as a mixture of “socialism, modern feudalism, and militarism.”
It has proven to be a lethal combination.
Roughly 1.5 million of North Korea’s 23 million people are estimated to have starved to death over the past decade.
Hunger remains widespread, if not as dire as two years ago.
The standard daily ration is 150-300 grams (5-10 ounces) of corn or rice (equivalent to roughly four slices of dry bread), depending on the location.
Food often remains unavailable in rural areas.
Atop North Korea’s starvation economy sits a personality cult that dwarfs those of Stalin or Mao.
Ubiquitous images of Kim Jong-il and his father, Kim Il-sung, are the official symbols of a secular theocracy based on juche (pronounced choocheh), the Kims’ contribution to the world’s patrimony of totalitarian ideologies.
As with the Church or the divine right of kings, the system cannot be challenged without undermining the infallibility of its perfect leaders.
The third and seemingly scariest component of Hwang’s formula, militarism, may in fact prove to be the system’s Achilles heel.
Maintaining the world’s fifth-largest army in a perpetual state of combat readiness is crushingly expensive for one of its poorest countries, with the military budget claiming an estimated one-third of GDP.
The armed forces operate a parallel economy, with its own mines, farms, and factories, though many soldiers and junior officers still go hungry.
The permanent war footing is just one manifestation of North Korea’s obsession with rugged self-sufficiency.
Juche is autarky raised to the level of philosophy.
The North Koreans consider any reliance on the outside world as a source of weakness, even though their economy would collapse without Chinese handouts.
Because North Korea does not repay loans, it cannot borrow money; because it reneges on deals, it drives away potential partners; and, because it aims for autarky, it cannot specialize or exploit its comparative advantages.
As a result, its annual exports – which include film and television animation, reconditioned cars, and, inevitably, an illicit trade in arms – are worth less than $1 billion.
Not surprisingly, defectors nowadays describe an environment of social breakdown, petty crime, and a Darwinian struggle for survival.
There is despondency and latent unrest. Corruption is rife.
So what is Kim up to with this latest attack on South Korea?
Kim’s main target was surely the six-party talks between his regime and the United States, United Nations, China, Russia, South Korea, and Japan.
Previously, North Korea was offered economic and other inducements to give up its nuclear weapons.
Like Iran, however, Kim wants to have his cake and eat it: eventual acceptance as a nuclear power and all the economic enticements from the US, Europe, Russia, and China to de-nuclearize.
That might seem crazy, especially given the likelihood of another round of economically crippling sanctions following the bombardment.
But Kim’s calculus is different from that of most rulers.
He has always shown scant regard for his people’s plight, and he still expects to get two-thirds or more of the oil and food he needs from China.
In the face of the North’s provocations, South Korean President Lee Myung-bak has demonstrated more of the statesmanship he showed in the recent G-20 summit in Seoul, when he successfully crafted a new focus on development for the group.
President Lee’s allies have rallied, rightly, to his cause, but even we recognize that his restraint cannot be unending.
Much, then, depends on the Chinese, whose self-defeating regional diplomacy has managed to push a listless and defense-shy Japanese government into closer cooperation with the US on security matters, and has inspired South Korea to seek out strategic partnerships with other Asian powers, including India.
One hopes that North Korea’s recent behavior – the sinking of the South Korean warship Cheonan in March, and now the shelling of Yeonpyeong island (which followed a supposedly “accidental” shooting incident in the DMZ in October) – will focus minds in Beijing.
But China, which fears a collapse of the North Korean regime above all, does not want to antagonize Kim.
And China is keen to draw South Korea closer in the game of regional rivalries.
The result could be a new round of efforts by China to manipulate regional suspicion – or worse.
Alternatively, China could shoulder some real responsibility for security in East Asia and close ranks against Kim and his reckless brinksmanship.
That should start with support for a clear condemnation of North Korea by the UN Security Council.
That global effort will almost certainly not succeed without a credible Chinese threat to sever Kim’s economic umbilical cord.
China’s Connectivity Revolution
NEW HAVEN – Long the most fragmented nation on earth, China is being brought together like never before by a new connectivity.
Its Internet community is expanding at hyper speed, with profound implications for the Chinese economy, to say nothing of the country’s social norms and political system.
This genie cannot be stuffed back in the bottle.
Once connected, there is no turning back.
The pace of transformation is breathtaking.
According to Internet World Stats, the number of Internet users in China has more than tripled since 2006, soaring to 485 million in mid-2011 – more than three times that in 2006.
Moreover, China’s rush to connectivity is far from over.
As of mid-2011, only 36% of its 1.3 billion people were connected – far short of the nearly 80% penetration rates seen in South Korea, Japan, and the United States.
Indeed, with the cost of connectivity falling sharply – China’s mobile users are expected to surpass PC users by 2013 – and, with urbanization and per capita incomes also rising sharply, it is not unreasonable to expect China’s Internet penetration rate to cross the 50% threshold by 2015.
That would be the functional equivalent of adding about three-fourths of all existing Internet users in the US.
Nor are the Chinese casual and infrequent Internet users.
Consistent with what the social-network theorist Clay Shirky has dubbed a society’s penchant for unlocking the “cognitive surplus” embedded in net-based activities, survey data from the China Internet Network Information Center suggest that Chinese netizens log an average of 2.6 hours per day online – a full hour longer than the average 15-49-year-old Chinese citizen spends watching television.&#160;
China’s microblogs, or social networks, where usage tends be most intense, were estimated to have approximately 270 million users as of late 2011.
And there is plenty of upside.
Worldwide, about 70% of all Internet users currently engage in some form of microblogging, which is the fastest-growing segment of the Internet.
In China, this share is just 55%.
When it comes to analyzing China, it is always easy to get carried away with numbers – especially those driven by the country’s sheer size.
But the real message here concerns the implications of connectivity, not just its scale.
A key implication is the Internet’s potential to play a significant role in the emergence of China’s consumer society – a critical structural imperative for a long-unbalanced Chinese economy.
With connectivity comes a national awareness of spending habits, tastes, and brands – essential characteristics of any consumer culture.
The consumption share of China’s economy, at less than 35% of GDP, is the lowest of any major country.
Surging Chinese Internet usage could well facilitate the pro-consumption initiatives of the recently enacted 12th Five-Year Plan.
The Internet could also enable freer and more open communications, upward mobility, transparent and rapid dissemination of information, and, yes, individuality.
China’s leadership has been increasingly vocal in raising concerns about growing inequalities that might otherwise hinder the development of what they call a more “harmonious society.”
Online connectivity could be a powerful means to help China come together and achieve this goal.
Finally, there is the Internet’s potential as an instrument of political change.
That is hardly an inconsequential consideration for any country in the aftermath of last year’s Arab Spring, which was facilitated in many countries (especially Tunisia and Egypt) by network-enabled mobilization.
While reform of China’s single-party state has always been viewed as an important objective in modern China – from the so-called Fifth Modernization of Wei Jinsheng in the late 1970’s to recent speeches by Premier Wen Jiabao – meaningful progress has been limited.
Is this likely to change as China embraces the Internet?
China is no exception in requiring leadership, accountability, and responsiveness as conditions of political stability.
Its rapidly expanding Internet community has repeatedly raised national awareness of tough local issues.
This was especially evident in the aftermath of the Sichuan earthquake of 2008, ethnic violence in Xinjiang in 2009, and the high-speed rail crash in Wenzhou in 2011.
As the Arab Spring demonstrated, the Internet can quickly transform local incidents into national flashpoints – turning the new connectivity into a potential source of political instability and turmoil.
But that has been the case only in countries ruled by highly unpopular autocratic regimes.
By contrast, China’s leadership is viewed with a much greater degree of public sympathy.
Their quick and direct response to the recent incidents in Sichuan, Xinjiang, and Wenzhou are important cases in point.
Senior Party leaders – especially Premier Wen – were quick to lead an empathetic national response that was largely effective in countering the outpouring of concern expressed on the Internet.
None of this is to deny the dark side of the Chinese Internet explosion – namely, widespread censorship and constraints on individual freedom of expression.
China’s “SkyNet” team (rumored to be greater than 30,000) is the largest cyber police force in the world.
Moreover, while China is not alone in censoring the Internet, self-policing by many of the nation’s largest portals amplifies official oversight and surveillance.
Recent restrictions on microbloggers – especially denial of access to those who use untraceable aliases – have heightened concerns over Chinese Internet freedom.
Such restrictions, of course, cut both ways – potentially limiting personal expression, but also constraining disguised and reckless vigilante attacks.
Filtered or not, a long-fragmented China now has a viable and rapidly expanding network.
The power of that network – especially insofar as economic, social, and political change is concerned – is hard to predict.
But connectivity adds a new dimension of cohesion to modern China.
That can only accelerate the speed of its extraordinary development journey.
China’s Construction Fetish
NEW HAVEN – As we digest the implications of China’s $586 billion stimulus plan, it is intriguing to ponder why China chooses infrastructure, buildings, and big projects every time growth needs a boost.
Should, or can, China achieve long-term growth only by adding physical structures?
If and when the time comes to pause or change course, will China’s existing political-economic institutions accommodate such a transformation?
During a recent trip to Brazil, my taxi driver complained about Sao Paulo’s bumpy streets and highways.
I responded, “I thought the high oil and iron ore prices had made Brazil boom….Why hasn’t Brazil spent more on its infrastructure?”
He replied, “The Brazilian economy has been doing well.
But, whenever the government has extra money, President Lula likes to give tax rebates and subsidies to people, instead of using it on the roads.
Why?”
“Well,” I said, “Brazil is a democracy.
Imagine you were Lula and had $18 billion at your disposal.
Would you rather spend it on highways, or give each Brazilian $100?”
“Yes, give it to the people, just to win more votes.”
In China, the government is not elected, so winning more votes is not part of the calculation, and returning money to the people is never the choice.
The government doesn’t just spend it, but seems always to favor tangible things like skyscrapers, fancy government buildings, highways, and big industrial projects.
This partly explains not only why democracies such as India and Brazil lag behind China in infrastructure, but also why China is focusing its new stimulus package on transport systems (railroad projects alone will receive more than half of the $586 billion stimulus).
In a non-democracy, officials are held accountable to their superiors, not to voters.
And for one’s superiors, tangible projects are the easiest to recognize.
Indeed, while China’s new stimulus plan overwhelmingly emphasizes infrastructure, it gives short shrift to social programs, such as health care and education, even though they can reduce household saving pressure and increase private consumption.
This type of spending structure is nothing new to China.
In 2007, government expenditure on health care, social security, and unemployment welfare programs totaled about $88 billion, or 15% of the fiscal budget and 2.4% of GDP (far below the typical percentage in both developed and developing democracies).
Brazil’s government spends 4.7% of GDP on health care alone.
China’s government expenditure on education is approximately 3% of GDP, compared to 5.4% in Brazil.
Due to the lack of public oversight on government budgeting, China’s political system is especially biased to favor big physical projects, and, through taxation and state ownership, the government maintains almost full control over much national income and wealth, maximizing the impact of this bias.
The wonderful Olympics sites in Beijing were no accident, but rather a result of the system.
Taxation power is hardly checked by the National People’s Congress or the media.
As a result, from 1995 to 2007, inflation-adjusted government fiscal revenue increased 5.7 times.
In contrast, over the same period, the cumulative increase was 1.6 times for urban residents’ per capita disposable income and 1.2 times for rural peasants’ per capita income.
So, China’s “socialism with Chinese characteristics” is an economy where an increasing share of national income goes to the state.
Despite privatization, there are roughly 119,000 state-owned enterprises today, with a book value of about $4 trillion.
State-owned land is valued at more than $7 trillion.
Combined, these state-owned assets total almost three-quarters of China’s national productive wealth.
With the state owning so much, most of the gains in asset values experienced over the past 30 years have gone into the government’s coffers.
When most households own no productive assets, they cannot share any of the asset appreciation or property income.
For most citizens, wages are the only source of income.
But wages have grown at a far slower pace than GDP.
No wonder domestic consumption cannot grow in a manner commensurate with GDP.
Transforming China from an export-driven economy to one that relies on domestic consumption requires two fundamental reforms.
First, ownership rights to the remaining state assets should be distributed equally to China’s 1.3 billion citizens.
This can be done by putting these assets into national wealth funds and distributing the funds’ shares to citizens at no cost.
Second, the government budgeting process must be opened up through both public hearings in the national legislature and public participation via the media.
Such increased accountability will shift government spending toward programs related to people’s needs and away from physical structures.
Without such structural reforms or returning fiscal surpluses to families through tax cuts and rebates, government investment-based stimulus efforts can provide, at best, a short-term economic boost.
They cannot transform China’s export- and investment-oriented political-economic system.
Indeed, even after the new stimulus package, China will still depend on investment and export for growth.
For 30 years, concentrating resources in the government’s hands through state ownership and taxes has served China well.
It provided a basis for China’s nation-building policy of “Concentrate Resources and Do Big Things.”
Today, however, China has decent infrastructure, impressive buildings, and an excessive industrial base.
What is missing is sufficient private consumption to power endogenous growth.
To correct this, China needs to boost its people’s sense of future financial security and affect a rise in private income commensurate with GDP growth.
Building a nation demands more than steel and concrete.
China’s Consumer Communism
China has changed dramatically since the mid-1980’s.
It’s not just the increase in the number of freeways, billboards, and skyscrapers that disorient long-time visitors.
Even a visit to a bookstore can shock anyone who first came to know China decades ago, when it seemed inconceivable that works by non-Marxist theorists would ever outnumber those by Marxists.
A theatre company has even been allowed to stage “Animal Farm,” George Orwell’s famous anti-authoritarian allegory, once known to socialist-bloc readers only via underground editions.
The changes run deeper, of course.
In the 1980’s, there were no beggars on city streets, and the main social cleavage divided the small number of politically well-connected people, who enjoyed a privileged lifestyle, from everyone else.
Now, there are both beggars and a burgeoning middle class.
It used to be difficult to find anything to do on a Saturday night in Shanghai.
Now, Time magazine calls the city the “most happening” place on earth.
While preparing for my first trip to China twenty years ago, George Orwell’s dark masterpiece, Nineteen Eighty-Four, seemed a useful lens through which to view this “people’s republic.”
Control in China was not nearly rigid enough to make it the embodiment of an all-embracing, authoritarian Big Brother state, but there were parallels, from the disparagement of many forms of “bourgeois” enjoyment and entertainment to periodic propaganda campaigns insisting that two plus two equaled five.
Still, despite all the changes, when foreign commentators nowadays want to spice up a China piece with a literary allusion, Orwell remains the seasoning of choice.
Big Brother is invoked in stories about Internet censorship. When the authorities issue a White Paper on human rights, references are made to Newspeak.
But is this really the best lens through which to see China now?
It is worth considering whether Aldous Huxley, who taught Orwell at school and who wrote another great and portentous piece of political fiction, Brave New World, provides a more relevant perspective.
Huxley’s masterpiece, which had more to say about materialism, mood-control, mass-distraction, and social fragmentation than Orwell’s, offers a new kind of insight into what is really happening in twenty-first-century China.
With its bliss-inducing drug “soma” and sensuous entertainments known as “feelies,” which provided the sort of engrossing distraction now offered by video games and iPods, Brave New World’s perspective adds a new dimension to understanding the durability of the Chinese Communist Party (CCP) as a protean ruling party.
Of course, Newspeak is alive and well in many places, and there are certainly Orwellian echoes in the authorities’ pronouncements and actions.
But Orwell’s critique doesn’t help in explaining the CCP’s surprising ability to retain power long after the demise of most of the socialist bloc, even in the face of widespread protests, including an estimated 74,000 separate incidents across China in 2004 alone.
After reading Nineteen Eighty-Four in 1949, the year of the founding of the People’s Republic of China, Huxley sent his former pupil a letter praising the novel.
He noted the emphasis that it put on rule via “boot-on-the-face” techniques and puritanical distaste for pleasure.
But wasn’t it more likely, Huxley mused, that future ruling elites would strive to keep the governed in line by distracting them with sexual allurement, entertainment, and other forms of pleasure, à la Brave New World?
In many ways, today’s Chinese consumer culture is precisely the kind of palliative that Huxley described.
Another of Brave New World’s strategies for control was to maximize divisions among the populace.
Whereas the main distinction in Nineteen Eighty-Four is between rulers and ruled, in Brave New World, people are divided into different social orders defined by disparate tastes and lifestyles.
The same could be said of China today, where the gaps between rich and poor, urban and rural populations, and coastal and inland culture are so great that it is much harder than before for people from varied walks of life to feel that they share common plights and goals.
Of course, no single novel provides a perfect lens through which to view any society.
Sometimes, such as when violence was recently used to quell South Chinese peasants protesting official land grabs, the CCP still shows its willingness to use “boot-on-the-face” suppression.
Still, there have been more moments lately that favor Huxley’s vision of political order over that of Orwell.
During my first post-1989 trip to China, a bartender introduced me to a phrase that perfectly characterized the new official mood: “Meiyou yundong, shenme dou keyi” (As long as there are no political movements, anything goes).
Orwell’s Big Brother would not have been amused by this remark.
But a member of Brave New World’s ruling elite would have taken it in stride.
China’s Cyber-Warriors
NEW DELHI – The world now accepts that protecting our atmosphere, hydrosphere, lithosphere, and biosphere – the “global commons” – is the responsibility of all countries.
The same norm must apply to cyberspace, which is critical to our everyday life, economic well-being, and security.
At a time when cyber attacks are increasing worldwide, US Secretary of State Hillary Clinton was right to declare that an attack on one nation’s computer networks “can be an attack on all.” Indeed, the attacks are a reminder that, as a new part of the global commons, cyberspace already has come under threat.
Cyberspace must be treated, along with outer space, international waters, and international airspace, as property held in common for the good of all.
And, like ocean piracy and airplane hijacking, cyber-crime cannot be allowed to go unpunished if we are to safeguard our common assets and collective interests.
Naming China among a handful of countries that have stepped up Internet censorship, Clinton warned that “a new information curtain is descending across much of the world.”
Her statement, with its allusion to the Cold War-era Iron Curtain, amounted to an implicit admission that the central assumption guiding US policy on China since the 1990’s – that assisting China’s economic rise would usher in greater political openness there – has gone awry.
The strategy of using market forces and the Internet to open up a closed political system simply is not working.
Indeed, the more economic power China has accumulated, the more adept it has become in extending censorship to cyberspace.
If anything, China has proven that a country can blend control, coercion, and patronage to stymie the Internet’s politically liberalizing elements.
Through discreet but tough controls, Beijing pursues a policy of wai song, nei jin – relaxed on the outside, vigilant internally.
Google is now crying foul over “ a highly sophisticated and targeted attack on our corporate infrastructure originating from China.”
But, despite its corporate motto – “Don’t be evil” – Google itself was instrumental in aiding online censorship in China, having custom-built a search engine that purges all references and Web sites that the Chinese government considers inappropriate.
Now Google itself has become a victim of China’s growing cyber prowess, in the same way that appeasement of Hitler boomeranged onto France and Britain.
China deploys tens of thousands of “ cyber police” to block Web sites, patrol cyber-cafes, monitor the use of cellular telephones, and track down Internet activists.
But the threat to the new global commons comes not from what China does domestically.
Rather, it comes from the way in which the know-how that China has gained in fashioning domestic cyber oversight is proving invaluable to it in its efforts to engage in cyber intrusion across its frontiers.
Canadian researchers have discovered a vast Chinese surveillance system called “GhostNet,” which can compromise computers in organizations abroad through booby-trapped e-mail messages that automatically scan and transfer documents to a digital storage facility in China.
This is what happened when computers of the Tibetan government-in-exile in Dharamsala, India, were attacked last year.
India’s national security adviser recently complained that his office was targeted yet again by hackers. “People seem to be fairly sure it was the Chinese,” he said.
Officials in Germany, Britain, and the US have acknowledged that hackers believed to be from China also have broken into their government and military networks.
The state-sponsored transnational cyber threat is at two levels.
The first is national, with the hackers largely interested in two objectives.
One is to steal secrets and gain an asymmetrical advantage over another country.
Cyber intrusion in peacetime allows the prowler to read the content and understand the relative importance of different computer networks so that it knows what to disable in a conflict situation.
The other objective is commercial: to pilfer intellectual property.
The second level of cyber threat is against chosen individuals.
The most common type of intrusion is an attempt to hack into e-mail accounts.
The targets also can face Trojan-horse attacks by e-mail intended to breach their computers and allow the infiltrators to corrupt or transfer files remotely.
To be sure, if a cyber attack is camouflaged, it is not easy to identify the country from which it originated.
Through the use of so-called “false-flag espionage” and other methods, attacks can be routed through the computers of a third country.
Just as some Chinese pharmaceutical firms exported to Africa spurious medicines with “Made in India” labels – a fact admitted by the Chinese government – some Chinese hackers are known to have routed their cyber intrusion through computers in Russia, Iran, Cuba, and other countries.
But, like their comrades in the pharmaceutical industry, such hackers tend to leave telltale signs.
Then there are many cases in which the attacks have originated directly from China.
It seems unlikely that these hackers, especially those engaged in cyber espionage, pilferage, and intimidation, are private individuals with no links to the Chinese government.
It is more likely that they are tied to the People’s Liberation Army.
In war, this irregular contingent of hackers would become the vanguard behind which the PLA takes on the enemy.
Systematic cyber attacks constitute a new frontier of asymmetrical warfare at a time when the world already confronts other unconventional threats, including transnational terrorism.
With national security and prosperity now dependent on the safekeeping of cyberspace, cybercrime must be effectively countered as an international priority.
If not, cyberspace will become the new global-commons battlefield.
China’s Dangerous Nobodies
Ever since their reinvention by Pierre de Coubertin, the Olympic Games have always been politicized.
The first took place in 1896 in Athens in order to embarrass the Turks still occupying Northern Greece. The Berlin Games in 1936 celebrated the triumph of Nazi ideology.
The Seoul Games in 1988 opened the door to South Korea’s democratization.
This summer’s Olympics in Beijing will be no less political, but will it resemble Berlin or Seoul?
Will it mark the apotheosis of an authoritarian regime or the beginning of its demise?
Many optimistic observers of China, often mollified by their close relations with the Communist regime, bet on a soft transition from despotism toward an open society, but recent events don’t support such a benign interpretation.
Since the beginning of this year, repression of human rights activists, lawyers, and bloggers has been harsher than ever.
The exact number of democratic dissidents who have been incarcerated, or worse, is unknown.
There is no way to account for ignored victims, or why some are condemned to death and shot.
We don’t know how many are sent without trial to “re-education centers.”
In the absence of reliable statistics, let us focus on two iconic figures of China’s pro-democracy movement: Hu Jia and Chen Guancheng.
Last December 27, 20 armed police officers used extreme physical violence to arrest Hu Jia in front of his wife and their two-month-old baby, acting as if he could offer real resistance.
But Hu Jia is a diminutive young man of 34 who suffers from a severe liver ailment.
Moreover, he is a committed believer in non-violence, an admirer of the Dalai Lama, a disciple of the Mahatma Gandhi, and a sincere Buddhist.
Why is the mighty Chinese Communist Party deploying all of its powers to kidnap – no word better describes what happened – such a tiny enemy?
The Party accuses him of “subversion,” but he broke no laws, does not head a counter-revolutionary army, and was not on the verge of toppling the Party.
Hu Jia’s political actions are much more modest than that.
In 2000, he abandoned his studies at Beijing University when he learned that thousands of Henan peasants were dying from AIDS after having sold their blood to local traffickers.
Since the beginning of this epidemic, his main activity has been the distribution of medicine and moral comfort in the doomed villages of Henan.
Hu Jia’s charitable work is not facilitated by the local authorities, who bear some responsibility in this epidemic; moreover, with NGOs being forbidden in China, Hu Jia can act only by himself.
Indeed, if he were to build any kind of organization to support his charity, he would be violating the law.
But the eye-opening tragedy of the Henan victims caused Hu Jia to understand that it arose from the absence of human rights in China.
So he started a Web site that acts as a chat room for Chinese scholars sharing his concern.
This Web site, now closed by the government, has also reported on the fate of Chen Guangcheng.
Chen, a blind peasant and self-taught lawyer, had protested in 2005 against the kidnapping of some 3000 women in his hometown of Linyi.
The women were sterilized or forced into having abortions in order to stabilize the population increase in the region.
As this extreme violence violates Chinese law, Chen petitioned the central government – the only legally recognized form of protest in China.
When carrying his petition to Beijing, escorted by a tiny group of lawyers, Chen was accused of disrupting traffic on the city’s clogged roads and condemned to four years in jail.
Why do such moderate actions, rooted in the Chinese moral tradition, provoke such dramatic repression?
Hu and Chen clearly respect the law.
They don’t call for revolution.
True enough, they talk to foreign journalists who report their actions; however, such contact is not illegal.
But the Party is haunted by the Soviet precedent.
No Chinese Sakharov or Solzhenitsyn will be allowed to tarnish the “success” of the Party.
The incarceration of Hu Jia and Chen Guangcheng is a clear signal that no democratization process will start in China outside of the Party’s control.
When the Chinese leaders mention democracy in official declarations, they mean “organized” democracy, from the top down.
Any attempt at democratization by civil society will thus be crushed in its infancy.
China is clearly not on the path toward a Western-style democracy, and economic growth will not be a prelude to a free society so long as the Party can prevent it.
The regime’s true ambition is to invent an alternative to Western democracy: an enlightened despotism under the tutelage of a meritocratic Communist Party.
The Olympic Games are being designed to promote this alternative model.
How legitimate is this model?
The Party’s 60 million members, nearly all males and city dwellers, would probably approve, as might the 200 million Chinese who share the profits of rapid economic growth.
But what do one billion people living in utter poverty (300 million on less than one dollar a day) and deprived of any rights think of this enlightened despotism?
No one knows, because they cannot express their wishes.
Perhaps Hu Jia and Chen Guancheng represent this silent billion more than the Party does.
That would explain why the Party has crushed them – and why any decent participant in this summer’s Olympics should demand their immediate release.
China’s Decrepit Population
China’s government finally appears to be acknowledging the urgent challenges presented by the country’s aging population.
On December 12, it released a cabinet-level White Paper on the problem – the first of its kind ­– in an effort to grapple with the prospect of rising social-security and healthcare costs, a tightening labor market, and other potential obstacles to continue rapid economic growth.
Looking back, it is ironic that the Chinese government’s draconian “one-child” policy, imposed in 1979, was implemented at the same time as the “open door” policy, aimed at capturing labor-intensive foreign manufacturing investment.
While both policies must be regarded as successes, over the years the family planning program has contributed to an aging population that may diminish China’s attractiveness as a low-cost, labor-intensive manufacturing hub.
During the nearly three decades since the “one-child” policy was introduced, live births have dropped from 22.5 million per year in the early 1980’s to around 16-17 million by the middle of this decade.
Moreover, with the number of elderly growing as a result of rising life expectancy, this low birth rate has pushed the share of those aged 65 and above from 4.9% of the total population to 7.7%.
According to the United Nations Population Division’s (UNPD) “medium-variant” projections, without reform of the “one-child” policy, the share of China’s population aged 15 and below would decline from 24.8% in 2000 to 15.7% in 2050, while the share of those aged 65 and above would soar from 6.8% to 23.6%.
With fewer children to replenish the workforce, the working-age cohort of those 15-64 years old would shrink from 68.4% to 60.7%.
The elderly would thus account for a far greater share of China’s population than in other large emerging economies, such as Brazil, India, Indonesia, and Mexico.
China’s demographic trends hold several adverse implications for its economy.
With a rapidly aging population and a shrinking workforce, tax revenue will contract, while expenditure on pensions and health care will expand, undermining the fiscal position.
Various estimates by private-sector economists and World Bank officials suggest that the government’s accumulated “net implicit pension debt” could balloon to 75-110% of GDP.
Furthermore, the decline in the working-age cohort would squeeze labor supply, fueling wage growth and eroding the country’s economic competitiveness.
Already, in the Yangtze and Pearl River Deltas, where manufacturing activity is the densest, labor shortages have appeared.
In 2004, for example, Guangdong Province had to raise the mandatory minimum wage by as much as 20% to attract workers from other regions.
To hire and retain skilled workers, many foreign-invested enterprises routinely pay above the minimum wage.
But some foreign manufacturers, seeking to cap rising labor costs, are shifting production from China to cheaper destinations such as Vietnam, where average monthly wages for factory workers is $50-60 – half that of China.
Foreign direct investment (FDI) in Vietnam grew by 40% in 2005, led by investors from Japan, South Korea, and Taiwan.
China’s inward FDI fell 1.2% in the first seven months of 2006, after a 0.5% decline in 2005, while combined investment from Japan, South Korea, and Taiwan plummeted 31% in the first half of 2006, compared to the 6.5% decline in 2005.
These figures are only the early warnings of an emerging trend.
In the long run, as labor shortages become acute, China will need to relinquish some low-end, labor-intensive manufacturing activities, which will translate into decelerating export performance and lower economic growth.
Aside from abandoning the “one-child” policy, China could avoid this outcome by climbing the value chain in manufacturing and services, as Hong Kong, Singapore, South Korea, and Taiwan have done.
However, for China to succeed, higher investment in research and development, together with a fundamental overhaul of the educational system, is essential.
According to OECD estimates, China’s current expenditure on R&amp;D amounts to only 1.3% of GDP, compared to 3.2% in Japan and an average of 2.5-2.6% in South Korea, Taiwan, and the United States.
Although the government recently announced that it intends to increase R&amp;D spending to 2% of GDP by 2010, this remains below the OECD average of 2.2%.
As for China’s backward educational system, the large number of university graduates is offset by their overall sub-standard quality.
According to a recent survey by McKinsey &amp;
Company, of the more than three million graduates churned out by China’s universities and colleges every year, less than 10% are suitable for employment with international companies, owing to their deficiencies in practical training and poor English.
In view of these systemic weaknesses, China’s ability to overcome its labor deficit by shifting to an innovation- and productivity-driven economy remains dubious.
China’s Democratic Baby Steps
WASHINGTON, DC – During the state visit to the United States of Chinese President Hu Jintao, President Barack Obama pressed Hu on human rights.
He probably should have asked more about spreading democracy in China, because he might have been surprised by what he heard.
In September 2010, Hu gave a speech in Hong Kong in which he called for new thinking about Chinese democracy.
He said, “There is a need to…hold democratic elections according to the law; have democratic decision-making, democratic management as well as democratic supervision; safeguard people’s right to know, to participate, to express, and to supervise.”
His remarks elaborated on previous comments by Chinese Premier Wen Jiabao, delivered in Shenzhen, the coastal free-enterprise zone where China’s economic revolution began.
Wen said that political reform, including opportunities for citizens to criticize and monitor the government, is necessary to sustain China’s breakneck economic growth.
Otherwise, he argued, the country’s economic gains would be lost.
Wen’s remarks led to speculation that Shenzhen, which set the pace for China’s economic development, could soon become a “special political zone.”
China experts noted that a next step could be direct elections for the chiefs of the Special Economic Zone’s six districts.
Most non-Chinese would be surprised to learn that the country already holds more elections than any other in the world.
Under the Organic Law of the Village Committees, all of China's approximately one million villages – home to roughly 600 million voters – hold local elections every three years.
Critics scoff that local Communist Party officials manipulate these elections.
But, according to research by Robert Benewick, a professor at the University of Sussex in England, village elections have been growing more competitive, with a greater number of independent candidates and increasing use of the secret ballot.
For those elections that have been genuinely competitive, researchers claim to have found evidence of positive effects.
For example, in a study that looked at 40 villages over 16 years, the economist Yao Yang found that the introduction of elections had led to increased spending on public services by 20%, while reducing spending on “administrative costs” – bureaucratese for corruption – by 18%.
And Wen has indicated that village elections might be extended to the next highest government level – township administrations – over the next few years.
China's modest experiments with local elections have been supplemented by exercises in “deliberative democracy.”
These take the form of high-tech town hall meetings.
Chinese officials hired Stanford University professor James Fishkin to draft a representative sample of citizens from Zeguo for an assembly using keypad polling devices and handheld computers to decide how the city should spend a $6 million public-works budget.
The Zeguo exercise was considered hugely successful, and has been replicated elsewhere in China.
Professor Yu Keping, an influential Communist official and author of a prominent book called Democracy Is a Good Thing, is said to have the ear of President Hu.
Professor Yu and others have been nudging democracy forward within the Communist Party itself.
Competitive elections for lower-level party posts have already been held, with votes for provincial and national party congresses showing electoral slates with 15-30% more candidates than positions.
Since the Communist Party has a membership of 73 million people, such a "democratic vanguard" holds great potential.
If internal elections become widespread, the lines of ideological disagreement within elite circles might become more clearly drawn, which could further spur calls for some kind of representative institutional structure.
Rapid change in China already has resulted in a battle of ideas, pitting the coasts and cities against the countryside and inland provinces, and the rich against the poor.
Of course, as Chinese democracy develops, it is unlikely to replicate the Western model.
Confucian-inspired intellectuals like Jiang Qing, for example, have put forward an innovative proposal for a tricameral legislature.
Legislators in one chamber would be selected on the basis of merit and competency, and in the others on the basis of elections of some kind.
One elected chamber might be reserved only for Communist Party members, the other for representatives elected by ordinary Chinese.
Such a tricameral legislature, its proponents believe, would better ensure that political decisions are made by more educated and enlightened representatives, thereby avoiding the rank populism of Western-style elected factions.
It is intriguing to contemplate China embracing some sort of innovative democratic experiment, combining tricameralism with deliberative democracy methods to mold a new separation of powers – and thus a new type of political accountability.
Former Chinese leader Deng Xiaoping was quoted in 1987 as saying that there would be national elections in 50 years.
China’s democratic trajectory generates little fanfare, but it may actually deliver on Deng’s promise ahead of schedule.
China\u0027s Democratic Sham
China is notoriously secretive; its government mechanics inscrutable.
The constitution says that power belongs to the people, but in reality the rights of the people belong to the Communist Party and its leaders, from whom workers and peasants receive scant attention.
The CCP claims to have delivered a democratic revolution, but the country remains one of the world's most undemocratic.
So irreconcilable are these paradoxes that the 16th Party Congress that will convene next week cannot hope but to show itself as a democratic sham.
The highest party posts will change hands at the Congress, including the Chairman of the Central Military Commission, the General Secretary of the Party, and several Politburo Standing Committee members.
According to the CCP Charter, all of those positions (save the leadership of the Military Commission) should be determined by the votes of members of the 16th Central Committee.
The 16th Party Congress should in turn elect the 16th Central Committee, Party Congress representatives should be elected by each provincial party congress, and so on.
In fact, these elections will be characterized by opacity and the absence of any real democratic process.
Indeed, the only elections in China in which truly independent voters choose candidates occur at the village committee level, but this democratic mummery is staged mainly for the benefit of outside observers.
All other Chinese elections share two main characteristics: candidates are selected to preserve party leaders, and the leaders decide the number of candidates.
China holds two types of election: "equal quota elections" and "differential quota elections."
In equal quota elections, the leaders present three candidates, leaving voters the task of picking one.
This is a sacred rule of Chinese politics, one that is considered entirely legitimate.
In the past 50 years, all "elected" officials, including Mao Zedong and Deng Xiaoping, were designated in ways that delivered the illusion of choice but without the element of uncertainty.
After the Cultural Revolution, and despite widespread protest, "differential quota elections" were introduced, albeit in a limited fashion.
The 13th Party Congress, in tune with the rising democratic sentiments of the time, was the first to use the differential system for electing members of the Central Committee.
This constituted a breakthrough in party tactics.
By presenting voters with more candidates than positions, Deng Liqun, a member of the ultra-left Old Guard, was denied a seat.
Deng Xiaoping, at that time the paramount leader, and Chen Yun, another representative of the powerful Old Guard, were furious at this result.
Of course, no one, even in China, thinks of differential quota elections as being truly democratic.
All the candidates remain handpicked by the leadership, even if the least popular figures can be removed.
In the event, the differential system was a short-lived experiment.
Since 1989 the Party has relentlessly consolidated its central leadership, internal party democracy has been suppressed and voting procedures have actually degenerated.
The Party Congress has its origins in the mass gatherings and propaganda campaigns of the Mao era, and can bring together as many as two thousand delegates.
The First and Second Party Congresses had only a few dozen representatives, who possessed the power to question the party's highest officials.
That sort of accountability is long gone.
During its half-century in power, the CCP has developed a method called da hui xiao kai (big conference held small), which breaks the Congress down into myriad small-group sessions.
The forthcoming 16th Party Congress will be comprised of these small-group sessions.
None will have a clear mandate, and any debate will be emasculated.
Delegates are confused about their roles and powers, and the conditions are perfect for creating a silent majority.
Each session is like an afternoon tea party where representatives offer random reflections, praise the correctness of the leadership's reports and attempt to show how conscientiously they have studied them and how deeply they comprehend them.
The suggestions raised by representatives at tea parties are never made a subject for debate by the Congress as a whole.
Instead they are given to the staff members of the Secretariat to "process."
Some minor revisions to the final report might be made, but the procedures of a real parliamentary democracy-proposal, debate, and resolution-remain absent.
The grave realities that confront China-for example, corruption and the ever-widening social gap-will not be raised as matters for debate.
CCP members will never get the chance to address any concerns that they may hold before a wide audience.
They will not get to discuss the protection of citizen's rights, relaxation of harsh media controls, the rights of peasants to migrate or take up jobs in the cities, or whether to tolerate workers who organize independent unions.
So how important will this 16th Party Congress be?
It certainly will not provide a forum for debating any of the long awaited, urgently needed, and unavoidable political reforms that China must launch.
By rescheduling it for November (apparently Jiang Zemin had double-booked himself by promising to travel to Texas to stay with President Bush on his Crawford ranch), the 16th Party Congress, at which the next generation of China's leaders will be anointed, may play second fiddle to a diplomatic visit.
China’s Dollar Problem
CAMBRIDGE – When will China finally realize that it cannot accumulate dollars forever?
It already has more than $2 trillion.
Do the Chinese really want to be sitting on $4 trillion in another five to 10 years?
With the United States government staring at the long-term costs of the financial bailout, as well as inexorably rising entitlement costs, shouldn’t the Chinese worry about a repeat of Europe’s experience from the 1970’s?
During the 1950’s and 1960’s, Europeans amassed a huge stash of US Treasury bills in an effort to maintain fixed exchange-rate pegs, much as China has done today.
Unfortunately, the purchasing power of Europe’s dollars shriveled during the 1970’s, when the costs of waging the Vietnam War and a surge in oil prices ultimately contributed to a calamitous rise in inflation.
Perhaps the Chinese should not worry.
After all, the world leaders who just gathered at the G20 summit in Pittsburgh said that they would take every measure to prevent such a thing from happening again.
A key pillar of their prevention strategy is to scale back “global imbalances,” a euphemism for the huge US trade deficit and the corresponding trade surpluses elsewhere, not least China.
The fact that world leaders recognize that global imbalances are a huge problem is welcome news.
Many economists, including myself, believe that America’s thirst for foreign capital to finance its consumption binge played a critical role in the build-up of the crisis.
Cheap money from abroad juiced an already fragile financial regulatory and supervisory structure that needed discipline more than cash.
Unfortunately, we have heard leaders – especially from the US – claim before that they recognized the problem.
In the run-up to the financial crisis, the US external deficit was soaking up almost 70% of the excess funds saved by China, Japan, Germany, Russia, Saudi Arabia, and all the countries with current-account surpluses combined.
But, rather than taking significant action, the US continued to grease the wheels of its financial sector.
Europeans, who were called on to improve productivity and raise domestic demand, reformed their economies at a glacial pace, while China maintained its export-led growth strategy.
It took the financial crisis to put the brakes on US borrowing train – America’s current-account deficit has now shrunk to just 3% of its annual income, compared to nearly 7% a few years ago.
But will Americans’ newfound moderation last?
With the US government currently tapping financial markets for a whopping 12% of national income (roughly $1.5 trillion), foreign borrowing would be off the scale but for a sudden surge in US consumer and corporate savings.
For the time being, America’s private sector is running a surplus that is sufficient to fund roughly 75% of the government’s voracious appetite.
But how long will US private sector thrift last?
As the economy normalizes, consumption and investment will resume.
When they do – and assuming that the government does not suddenly tighten its belt (it has no credible plan to do so) – there is every likelihood that America’s appetite for foreign cash will surge again.
Of course, the US government claims to want to rein in borrowing.
But, assuming the economy must claw its way out of recession for at least another year or two, it is difficult to see how the government can fulfill its Pittsburgh pledge.
Yes, the Federal Reserve could tighten monetary policy.
But they will not worry too much about the next financial crisis when the aftermath of the current one still lingers.
In our new book This Time is Different: Eight Centuries of Financial Folly , Carmen Reinhart and I find that if financial crises hold one lesson, it is that their aftereffects have a very long tail.
Any real change in the near term must come from China, which increasingly has the most to lose from a dollar debacle.
So far, China has looked to external markets so that exporters can achieve the economies of scale needed to improve quality and move up the value chain.
But there is no reason in principle that Chinese planners cannot follow the same model in reorienting the economy to a more domestic-demand-led growth strategy.
Yes, China needs to strengthen its social safety net and to deepen domestic capital markets before consumption can take off.
But, with consumption accounting for 35% of national income (compared to 70% in the US!), there is vast room to grow.
Chinese leaders clearly realize that their hoard of T-Bills is a problem.
Otherwise, they would not be calling so publicly for the International Monetary Fund to advance an alternative to the dollar as a global currency.
They are right to worry.
A dollar crisis is not around the corner, but it is certainly a huge risk over the next five to 10 years.
China does not want to be left holding a $4 trillion bag when it happens.
It is up to China to take the lead on the post-Pittsburgh agenda.
China’s Evolving Economic System
It is generally agreed that China’s impressive economic achievements during the last three decades are largely the result of the radical reform of its economic system.
While private ownership of firms hardly existed when these reforms started, private firms today account for about 60% of total production.
Ownership, however, is only one dimension of an economic system.
China’s economic system has changed just as drastically in other ways as well.
Decision-making regarding consumption and production has largely been decentralized to individual households and firms, respectively; economic incentives, markets, competition, and internationalization have to a considerable extent replaced command, administrative processes, monopoly, and autarky.
Generally speaking, China’s reform period has been a stark contemporary illustration of the historical lesson that unleashing individual initiative tends to boost economic development.
How, then, should today’s Chinese economy be characterized?
Some observers describe China’s current economic system as “state capitalism”; others (including China’s rulers) call it “market socialism.”
Both labels mislead.
One reason is the domination of private firms on the production side.
Another is the fact that “socialism” usually does not rely upon strong economic incentives and competition, which are the dominant economic factors in today’s China.
In fact, China is a type of mixed economy , with a number of specific features, some of which favor GDP growth, while others have not dragged down the economy to any considerable extent so far.
But this situation is likely to change.
So further reforms will be decisive in determining the Chinese economy’s future performance.
Although internationalization of the economy has served China well, it is unlikely that the current 35% share of GDP claimed by exports and the heavy reliance on foreign technology are sustainable in the long run.
Tension between widespread private ownership of firms and pervasive public ownership of assets is another specific feature of China’s economic system that looks similarly creaky.
For example, by disfavoring lending to private firms, state-owned banks distort the allocation of resources.
Chinese agriculture provides another example of tension between private entrepreneurship and public-sector ownership of assets.
In particular, public ownership of land harms the investment incentives for family farms and reduces their chance of consolidating land holdings in order to exploit economies of scale.
Reducing this tension over ownership of firms and assets is imperative, because the entry and expansion of small private companies will be increasingly important when China’s domestic markets and domestic innovation need to play a greater role.
Thus, for China to gain maximum advantage from private entrepreneurship, it is important to continue shifting the share of financial assets and land holdings out of the public sector.
This would also help address the endemic corruption that is also a specific feature of the Chinese economic system.
Corruption is difficult to reduce drastically so long as politicians and bureaucrats have much “to sell” to firms and individuals – including rationed loans from public-sector banks and regulatory permits of various types.
In rural areas, corruption emanates from frequent expropriation of land-lease contracts held by farmers working on collectively owned land, which local officials then turn over to non-agriculture land developers.
In both cases, reducing corruption will require not only government pep talks against bad ethics, but also institutional reforms, including further deregulation, stronger property rights, and more privately owned assets.
Free media would also help.
No doubt, some types of corruption, including “asset stripping” in connection with the privatization of public-sector firms, has speeded up the emergence of a class of private capitalists and entrepreneurs.
But if corruption becomes a permanent element of China’s economic system, it is likely to both reduce the efficiency of the allocation of resources and damage the legitimacy of private entrepreneurship.
China also needs to shift from its highly “extensive” (resource consuming) growth strategy to a more “intensive” development path.
Although high growth requires large-scale capital formation, the relation between investment in real capital assets and human capital in China seems to be out of proportion.
This is reflected in the current investment ratio for real capital assets of 43% of GDP, compared to 4.3% investment in human capital in the form of education.
China’s growth would be more efficient if these proportions changed in favor of education, including vocational training, which is very poorly developed.
Moreover, eliminating today’s vast wastage of natural resources, which underpins exceptionally high levels of pollution, will require a reformed regulatory framework, including higher user prices for energy, raw materials, and environmental resources.
By shifting to a less resource-dependent development strategy, more resources would be available for improvements in the country’s much neglected social arrangements, particularly among rural citizens and “urban outsiders” (individuals in informal urban sectors).
This includes addressing China’s patchy arrangements for income security, as well as its unevenly distributed provision of social services, such as health and education, in particular, in rural areas.
The case for combining further government withdrawal from the production system with more engagement in the social field is compelling.
China’s leaders seem to be promising this by voicing their concern for domestic entrepreneurship, social arrangements, rural development and environmental protection.
Only time can tell to what extent, and how fast, such promises will be fulfilled.
China’s Evolving Web
HONG KONG – In a recent article, the economist Axel Leijonhufvud defines the market system as a web of contracts.
Because contracts are linked with each other, one default can trigger an avalanche of broken promises, “[making] it possible to destroy virtually the entire web of formal and informal contracts which the market system requires for its functioning.” The state’s role is to protect, enforce, and regulate these contracts and related property rights, as well as to intervene to prevent systemic failure.
This web of contracts – often taken for granted in mainstream economics, to the extent that it becomes almost invisible – embodies the formal and informal rules embedded in the market system that shape and constrain individual and social behavior.
They form the fabric of all human institutions.
Advanced economic systems have very complex webs of contracts, such as financial derivatives.
For Europe, Leijonhufvud argues, this implies a three-pronged approach that focuses on “levels of leverage,” “maturity mismatches,” and “the topology of the web,” – that is, “its connectivity and the presence of critical nodes that are ‘too big to fail.’”
This is because “[t]he web of contracts has developed serious inconsistencies.” To insist that all contracts be fulfilled would “cause a collapse of very large portions of the web,” with “serious economic and incalculable social and political consequences.”
By contrast, emerging markets like China have less sophisticated systems and evolve more complex contractual/institutional links over time, particularly through globalized transactions.
Under China’s planned economy, most contracts were between individuals and the state, whereas more sophisticated market contracts have emerged or re-emerged only over the last 30 years.
Indeed, the widespread use of market contracts with publicly-owned companies was a recent and important adaptation in the move toward a “socialist market economy.”
The web of contracts, however, can also be understood as complex adaptive market systems, which encompass the state and family relations as well.
To understand China’s socialist market economy, it is essential to examine systematically these different forms of contracts and their institutional structures.
Family and kinship contracts, which govern marriage, adoption, cohabitation, inheritance, etc., form the basic unit of human society.
These contracts are the most ancient and remain the foundation of social relationships in China today.
Corporate contracts place the profit-oriented legal person at the center of the transaction and bind all of its stakeholders.
Chinese corporate contracts have grown exponentially over the last 30 years, but they have special characteristics that reflect the primary role of Chinese state-owned enterprises.
Market contracts between producers and consumers – and/or among producers in supply chains – link individuals, families, firms, governments, and public organizations through local or global markets.
Over the last few decades, China has begun to practice modern contract law and joined the World Trade Organization, committing itself to international rules governing trade and investment.
Non-governmental and non-profit civil contracts bind people together for communal, religious, social, and political activities.
These contracts are still relatively new and evolving in China.
Social contracts created by constitutional and administrative laws define the powers and responsibilities of the state and its constituent bodies vis-à-vis individuals and the private sector.
They include the authority to impose taxes and restraints on individuals and private entities through criminal, administrative, and civil law, as well as the state’s obligation to provide public goods and services.
China has strengthened its unitary state with important institutional innovations that have delivered growth and middle-income prosperity, but it still retains the basic five-level administrative structure – central government on top, with provincial, city, town, and village bodies below – that first emerged two millennia ago.
Deciphering the structure of the web of contracts holds the key to understanding how an economy behaves, including its dynamic non-linear adaptation to internal and external forces.
Following the physicist Fritjof Capra, one should regard living organisms, social systems, and ecosystems as an interconnected and interdependent, complex adaptive system.
This means that we should view the economy and society not as rigid hierarchies or mechanical markets, but as networks or webs of life, in which contracts, formal and informal, fulfilled or violated, are the essence of human activity.
Examining webs of contracts should be similar to a biologist’s examination of cell structure and DNA.
China has created four functioning global-scale modern supply chains in manufacturing, infrastructure, finance, and government services, thanks to its evolving, expanding, and complex web of contracts.
But how was China able to build a modern industrial base within a relatively short period of time from its traditional, patrimonial family contracts and archaic constitutional structures?
Through experimentation, adaptation, and evolution – a process that has been described as “crossing the river by feeling the stones” – China has been able to evolve a higher-order, or fifth, supply chain in political decision-making.
This “top-level governance architecture,” as it is known in China, has been essential for coordinating and orchestrating the different supply chains and the overall web of contracts to achieve the delicate balance among individual, family, corporate, social, and national objectives.
This top-level governance architecture is analogous to a computer’s operating system, which orchestrates the other software and hardware components to form a holistic unity.
Such a structure exists in many economies, but, in the Chinese context, where the state plays a central role in the economy, it is critical to the system’s effectiveness.
How it is shaped will depend on how China’s history, culture, institutional context, and evolving web of contracts affect the country’s social fabric.
China’s Excess-Capacity Nightmare
SHANGHAI – Back in 1958, the year of China’s ill-fated “Great Leap Forward,” Chairman Mao had big plans for the steel industry.
While production had been just over five million tons in 1957, he expected the country to catch up with or even surpass the United States by 1962, producing 80-100 million tons per year, and to reach 700 million tons per year by the mid-1970’s, making China the undisputed world leader.
All this was to be accomplished using small “backyard steel furnaces” operated by ordinary people with no particular technical expertise.
Today, Mao’s dream of catching up with the rest of the world has been realized, albeit a bit behind schedule, not only in steel making, where annual capacity has reached 660 million tons, but in many other sectors as well.
In 2008, China ranked first in steel (about half of world production), cement (also about half), aluminum (about 40%), and glass (31%), to take just a few examples.
The country topped the US in auto production in 2009, and remains second only to South Korea in shipbuilding, with 36% of global capacity.
For Beijing’s central planners, however, the size of China’s industrial base has become a cause for alarm rather than celebration.
In a document approved by the State Council on September 26, the National Development and Reform Commission (NDRC) warned of serious excess capacity in a wide variety of sectors.
(The State Council, which includes the premier, vice premiers, and heads of ministries and commissions, is China’s highest executive authority.)
Based on the NDRC’s figures, 2008 capacity utilization rates were just 76% for steel, 75% for cement, 73% for aluminum, 88% for flat glass, 40% for methanol, and 20% for poly-crystalline silicon (a key raw material for solar cells).
The current project pipeline also implies less than 50% utilization for wind-power equipment manufacturers in 2010.
Excess capacity has been a priority for the State Council since 2005, when it issued industry-by-industry restrictions on new projects and targets for shutting down inefficient production.
Since that time, however, the situation has in many cases only gotten worse.
The problem is that much of the so-called “blind” and “redundant” investment that Beijing would like to eliminate has the strong support of local governments, whose primary concern is with generating GDP growth in their jurisdictions, regardless of whether the means of achieving it make any economic sense.
Consider cement production, where, according to the China Cement Association, 38% of capacity consists of “shaft” kilns.
These have been obsolete in most of the rest of the world for over a century, and accounted for less than 3% of production even in 1957, when most of China’s cement plants were imports from Eastern Europe.
Nowadays, however, shaft kilns are a favorite of local governments because they can be built cheaply and quickly and generate growth and employment.
Achieving economies of scale and lessening environmental impacts simply are not priorities.
A similar situation exists in the steel industry, where the central government has made repeated unsuccessful attempts to close small furnaces.
In 2006, for example, the NDRC produced a list of plants that were required to cease operations by the end of the following year.
As the deadline approached in December 2007, a correspondent from Mysteel , a leading local source of information on the sector, visited a number of these mills to see first-hand how they were progressing with the government-mandated dismantling of their equipment.
What he found was a great example of how any such program is likely to work in practice.
One site was still operating 24 hours a day; in others production had been temporarily halted until the deadline passed.
In only a very few cases had any machinery actually been removed.
Local officials and managers had a variety of reasons for not complying with the NDRC’s order. Some expected to expand their plants so that they would no longer be counted as inefficient – a stratagem explicitly prohibited by the regulations.
Where facilities were privately owned, it was felt, perhaps not unreasonably, that removing assets would violate China’s property-rights law.
One formerly state-run enterprise was being operated under a 2001 lease specifying that no workers could be laid off for the next ten years.
And there were also jurisdictions that had canceled the licenses of the operators in question, so that, as one regulator put it, they simply “didn’t exist.”
China ’s excess-capacity problem reveals a serious defect in its “socialist market economy.”
In many industries, neither market forces nor central planning are strong enough to bring about the “creative destruction” of inefficient producers.
As a result, the dream of catching up with the developed countries has to a surprising extent been realized much as Mao imagined – by lower-level cadres using small-scale technology.
If simply leading the world in output is the goal, the Chairman’s vision has been resoundingly vindicated.
But if product quality, environmental protection, and economic efficiency are important as well, this state of affairs is little short of nightmarish.
China’s Exchange-Rate Puzzle
China’s abrupt decision to raise the value of the renminbi (yuan) by 2.1% and to end its peg to the dollar comes after months of pressure from the US.
But the revaluation is likely to be a one-time affair and the free floating of the renminbi is probably not real because a stable currency is very much in China’s interest.
Indeed, the economist Robert Mundell, whose work on optimal monetary zones is credited with laying the theoretical groundwork for the euro, insists that China should maintain its fixed exchange rate as a necessary part of its current phase of economic development.
But, owing to China’s skewed economic structure, its exchange-rate regime presents much more challenging problems than those encountered by Japan and other East Asian economies.
Pegged exchange rates clearly have been essential to East Asia’s economic takeoff, for they work well with the region’s export-oriented development model.
But the effectiveness of a fixed exchange rate is determined by how developments in the export sector influence domestic industries and the national economy as a whole.
If growth in the trade sector boosts that of domestic non-trade sectors, then a fixed exchange rate will not put pressure on the external balance of payments as demand for imports rises.
Under these circumstances, revaluation of the exchange rate will not have a severe impact on an economy’s development.
For example, Japanese economists argue that the Plaza Agreement, which called for “orderly appreciation” of non-dollar currencies against the dollar, was a natural outgrowth of high national income.
This was one of the major reasons for Japan’s acceptance of the change.
But China’s current situation is vastly different.
Pressure for revaluation comes at a stage when per capita national income is merely $1,000, not $10,000 or $15,000, so China still needs a rather long period of rapid economic growth to reach anything like the stage that Japan had achieved when it allowed the yen to be revalued.
Equally important, unlike other East Asian economies during their early take-off stages, the expansion of China’s export sector in the last decade has not been closely linked to the development of its domestic non-trade sector, because the expansion has been fueled mainly by foreign direct investment (FDI).
Most of China 460,000 foreign-owned enterprises are concentrated in manufacturing and assembling, increasing the import-intensiveness of exports and de-linking the external-trade sector from domestic industries.
This helps to widen regional disparities, especially between eastern and western China, with the wealthiest regions being those that have benefited from high concentrations of FDI.
No one should realistically expect the renminbi’s exchange rate to be determined solely by the income level of the relatively prosperous eastern coastal regions.
To be sure, China has accumulated an enormous balance-of-payments surplus, which indicates that the renminbi is greatly undervalued.
But the surplus merely masks the structural problems of China’s domestic economic sectors and poorer regions.
Indeed, if foreign-owned enterprises exports are deducted from the total trade volume, the surplus vanishes, because both the overall balance of merchandise trade and the balance of trade in services normally run deficits.
In short, the isolation of the export sector from the rest of China’s economy, caused by the dominance of FDI, accounts for the illusion of an undervalued renminbi.
Although the expansion of exports has been dramatic, now accounting for 70% of China’s GDP, it has exerted no pull on other economic sectors, because it has been confined to foreign-owned manufacturing and assembling enterprises.
With its huge domestic economy, China would never have been able to accumulate such an enormous external surplus if its growth had not been confined to such enterprises.
Pressure for revaluation stems, therefore, not from the real needs of China economy, but from large imbalances in the United States, particularly its long-standing trade deficit, which exceeds 5% of GDP.
However, dollar supremacy means that the US can sustain a much wider balance-of-payments deficit than other countries.
As long as Asia holds its foreign reserves in dollars China’s desire to maintain a stable value for the reminbi will continue to offer tremendous advantages for trade and economic development.
China’s Expanding Core
TOKYO – China is now engaged in bitter disputes with the Philippines over Scarborough Shoal and Japan over the Senkaku Islands, both located far beyond China’s 200-mile-wide territorial waters in the South China Sea.
Indeed, so expansive are China’s claims nowadays that many Asians are wondering what will satisfy China’s desire to secure its “core interests.”
Are there no limits, or does today’s China conceive of itself as a restored Middle Kingdom, to whom the entire world must kowtow?
So far, China has formally referred to Taiwan, Tibet, and Xinjiang province as “core interests,” a phrase that connotes an assertion of national sovereignty and territorial integrity that will brook no compromise.
Now China is attempting to apply the same term to the Senkaku Islands in its dispute with Japan, and is perilously close to making the same claim for the entire South China Sea; indeed, some Chinese military officers already have.
The Senkaku Islands, located to the west of Okinawa in the East China Sea and currently uninhabited, were incorporated into Japan by the Meiji government in 1895.
At one time, there were regular residents working at a bonito-drying facility.
In 1969, the United Nations Economic Commission for Asia and the Far East (ECAFE) completed a seabed survey of the East China Sea, and reported the possible presence of vast underground mineral resources, including abundant oil and natural gas reserves near the Senkakus.
Two years passed before Taiwan and China claimed sovereignty over the islands, in 1971, but the Japanese government’s stance has always been that Japan’s sovereignty is not in question.
In April, Tokyo Governor Shintaro Ishihara, a famous and articulate patriot, announced that the metropolitan government that he leads plans to acquire four of the Senkaku Islands, which are currently privately owned by Japanese citizens. Donations for the purchase from the people of Japan now exceed ¥700 million ($8.4 million).
China reacted to Ishihara’s proposal with its usual sensitivity: it refused to receive the scheduled visit of Ishihara’s son, who is Secretary-General of Japan’s Liberal Democratic Party, the country’s main opposition party.
Moreover, at a meeting in Beijing earlier this month between Japanese Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao during a trilateral summit with South Korea, Wen mentioned the independence movement in the Xinjiang Uyghur Autonomous Region and the Senkaku Islands in the same breath. “It is important to respect China's core interests and issues of major concern,” he emphasized.
Until that moment, the Chinese government had never applied the term “core interest” to the Senkaku Islands.
Following Wen’s statement, the trilateral summit deteriorated.
While South Korean President Lee Myung-bak held bilateral talks with Chinese President Hu Jintao, talks between Noda and Hu, and a scheduled meeting between Keidanren Chairman Hiromasa Yonekura and Chinese Foreign Minister Yang Jiechi, were also canceled.
The joint declaration issued at the summit was delayed a day, and omitted all references to North Korea – a prime concern of both Japan and South Korea.
China’s brusque treatment of Japan’s leaders probably was intended as a rebuke not only over the Senkaku Islands issue, but also for hosting the Fourth General Meeting of the World Uyghur Congress in Tokyo in May.
Previously, such meetings had been held in Germany and the United States, and this one, which stressed the importance of protecting human rights and preserving the traditions, culture, and language of the Uyghur people, received no official sanction or endorsement from the Japanese government.
If gruff diplomacy was the only manifestation of China’s expansive territorial claims, Asian leaders could sleep more peacefully.
But the fact is that China’s navy is becoming increasingly active in the South China Sea, at the Senkaku Islands and Scarborough Shoal in particular, but also around the Spratly Islands claimed by Vietnam.
Given China’s mushrooming military budget and secretiveness, that assertiveness has set off alarm bells among the other countries bordering the South China Sea.
Moreover, China’s bullying of the Philippines included not only the dispatch of warships to Scarborough Shoals, but also the sudden imposition of import restrictions on Filipino produce.
And China’s reactions toward Japan are far more paranoid since a non-LDP government took power.
The struggles for power within China’s ruling Communist Party over the purge of Bo Xilai, and the blind activist Chen Guangcheng’s escape from detention during economic talks with the US, have made Chinese leaders’ nationalist assertions even more strident than usual.
No official wants to appear soft where China’s supposed “core interests” are concerned.
So far, China has not unleashed the sort of mass demonstrations against Japan and others that it has used in the past to convey its displeasure.
But that probably reflects the jittery state of China’s leaders in the wake of the Bo purge: they cannot guarantee that an anti-Japan demonstration would not turn into an anti-government protest.
China’s real core interests are not in territorial expansion and hegemony over its neighbors, but in upholding the human rights and improving the welfare of its own citizens, which is the world’s core interest in China.
But until China accepts that its territorial claims in the South China Sea must be discussed multilaterally, so that smaller countries like the Philippines and Vietnam do not feel threatened, China’s ever expanding “core interests” will be the root of instability in East Asia.
China’s Financial Fetish
With the drum beating for the development of the costal areas of Tianjin near Beijing, the curtain seems to be rising on yet another “financial center” in China.
When Shanghai sought a similar role several years ago, bankers and investors around the world wondered whether the aim was really for Shanghai to replace Hong Kong as China’s financial heart.
In the current pilot project, Tianjin in China’s north and Shanghai in the south are competing against each other, prompting even more second-guessing.
Once upon a time, no one had any idea about how to create a “financial center.”
A financial center was simply a great metropolis where enormous financial dealings took place.
Cities such as London and New York became known as financial centers only after they had proved themselves in the role.
Policymakers in China seem to be unaware that many major cities have not had the luck to become financial centers.
There is no economic or other theory that explains why a city called a “financial center” should be more valuable or lovely than others.
Why, then, should China make developing global financial centers a vital national goal?
Does China really need its own financial centers of world standing?
Does the world need China to have them?
Or is such a goal necessary because a financial center can determine the fate of a great metropolis?
Nothing in the history of finance, the evolution of cities, or modern economics provides a clear answer.
It is the Chinese who have endowed the term “financial center” with such weight and meaning by trying to dissect the functions of such cities and quantify every detail.
As a result, politicians are prepared to pick a city and order it to create the functions of a financial center, as if such a thing can be constructed like a building – a concept that could not be more off the mark.
Indeed, according to modern development models of finance, whether or not a physical center of finance exists is no longer a meaningful issue.
Owing to historical factors and opportunities, financial transactions were concentrated in cities that were traditionally closely linked to the rise of European and American capitalism.
But what counts nowadays is not where financial transactions physically take place, but rather the growing importance and globalization of finance in the operation of the world economy.
Cities do not become financial centers because they are more “excellent” than other cities, or because they have done something that other cities failed to do.
Instead, once financial transactions begin to concentrate in a place, it becomes hard to move them to other places.
A free-market economy and its legal traditions &#45;&#45; both indispensable to the survival of financial centers – certainly helps them to rise, but that initial rise has always been attributable to historical evolution, not government strategy.
In this sense, China’s effort to deliberately create, through government fiat, global financial centers is both exacting and dogmatic.
There is no doubt that China needs its financial sector to develop soundly in order to ensure sustained economic growth.
And there is now a common understanding in China that meeting this objective requires that the government safeguard financial liberalization.
But progress has been slow, because China’s politicians have put nurturing financial centers – which should be the objective of local governments – at the heart of the country’s financial development.
Indeed, equating financial liberalization with privileges for cities designated as “financial centers” undermines the very goals of liberalization – namely, to reduce government control and to accelerate the development of financial markets.
China’s financial system is failing in that respect, owing to frequent administrative and political intervention.
As a result, Shanghai has been restricted from making the best of its financial functions, and Hong Kong, Asia’s acknowledged financial center, from assisting China’s financial modernization.
What China needs most is a financial sector capable of harnessing the forces of liberalization and globalization to drive economic growth in the decades ahead.
The time has come to cast off the burden of building financial centers, and focus instead on advancing the modernization of Chinese finance.
China’s Five-Year Plan and Global Interest Rates
CAMBRIDGE – China’s new five-year plan will have important implications for the global economy.
Its key feature is to shift official policy from maximizing GDP growth toward raising consumption and average workers’ standard of living.
Although this change is driven by Chinese domestic considerations, it could have a significant impact on global capital flows and interest rates.
China’s high rate of GDP growth over the past decade has, of course, raised the real incomes of hundreds of millions of Chinese, particularly those living in or near urban areas.
And the funds that urban workers send to relatives who remain in the agricultural sector have helped to raise their standard of living as well.
But real wages and consumption have grown more slowly than China’s total GDP.
Much of the income from GDP growth went to large state-owned enterprises, which strengthened their monopoly power.
And a substantial share of China’s output goes abroad, with exports exceeding imports by enough to create a current-account surplus of more than $350 billion over the past year.
China now plans to raise the relative growth rate of real wages and to encourage increased consumer spending.
There will also be more emphasis on expanding service industries and less on manufacturing.
State-owned enterprises will be forced to distribute more of their profits.
The rising value of the renminbi will induce Chinese manufacturers to shift their emphasis from export markets to production for markets at home.
And the government will spend more on low-income housing and to expand health-care services.
All of this will mean a reduction in national saving and an increase in spending by households and the Chinese government.
China now has the world’s highest saving rate, probably close to 50% of its GDP, which is important both at home and globally, because it drives the country’s current-account surplus.
A country that saves more than it invests in equipment and structures (as China does) has the extra output to send abroad as a current-account surplus, while a country that invests more than it saves (as the United States does) must fill the gap by importing more from the rest of the world than it exports.
And a country with a current-account surplus has the funds to lend and invest in the rest of the world, while a country with a current-account deficit must finance its external gap by borrowing from the rest of the world.
More precisely, a country’s current-account balance is exactly equal to the difference between its national saving and its investment.
The future reduction in China’s saving will therefore mean a reduction in China’s current-account surplus – and thus in its ability to lend to the US and other countries.
If the new emphasis on increased consumption shrank China’s saving rate by 5% of its GDP, it would still have the world’s highest saving rate.
But a five-percentage-point fall would completely eliminate China’s current-account surplus.
That may not happen, but it certainly could happen by the end of the five-year plan.
If it does, the impact on the global capital market would be enormous.
With no current-account surplus, China would no longer be a net purchaser of US government bonds and other foreign securities.
Moreover, if the Chinese government and Chinese firms want to continue investing in overseas oil resources and in foreign businesses, China will have to sell dollar bonds or other sovereign debt from its portfolio.
The net result would be higher interest rates on US and other bonds around the world.
Whether interest rates do rise will also depend on how US saving and investment evolves over the same period.
America’s household saving rate has risen since 2007 by about 3% of GDP.
Corporate saving is also up.
But the surge in the government deficit has absorbed all of that extra saving and more.
Indeed, the only reason that America’s current-account deficit was lower in 2010 than in previous years is that investment in housing and other construction declined sharply.
If Americans’ demand for housing picks up and businesses want to increase their investment, a clash between China’s lower saving rate and a continued high fiscal deficit in the US could drive up global interest rates significantly.
China’s Flood Of Protests
Protests in China are nothing new.
By some accounts, Chinese officials currently negotiate upwards of 50,000 “major incidents” annually.
Widespread corruption has bred deep discontent: workers protest the Enron-like bilking of their life savings, townspeople fight against illegal land seizures, and villagers battle injustices – small and large – on a daily basis.
Typically, these protests are local in nature and generally resolved with a combination of payoffs, arrests, and promises of future improvement.
Occasionally, China’s government takes action against local officials whose crimes are considered egregious.
As long as protests remain local, however, they can be managed as isolated cases that won’t pose a broader challenge or spark a movement toward systemic change.
Yet the government’s days of putting out protests like brush fires may be ending.
Over the past year and a half, China’s environmental non-governmental organizations (NGO’s) have organized protests that reach across provincial boundaries, engage Chinese from all social strata, garner support from China’s media, and directly address the issue of failed governance on a national scale.
The catalyst for these broad-based protests is the proposed construction of hundreds of dams throughout western China.
Dam construction in China has never been open to public debate.
China’s environmental activists, meanwhile, have focused on the “politically safe” issues of protecting biodiversity, recycling, and environmental education.
Now, however, these activists have become more assertive, launching campaigns against a number of proposed dams along the Nu and Jinsha Rivers in Yunnan and the Min River in Sichuan.
They still raise traditional issues of biodiversity loss, destruction of sites of natural beauty and cultural importance, and social justice issues surrounding resettlement.
But now they also challenge the shoddy governance and corruption that allow dam construction to proceed unchecked, without environmental impact assessments, as local officials siphon off resettlement funds and ignore the claims of local villagers.
The political stakes are high, and China’s hydropower interests are strong.
Environmental activists who are currently battling to halt damming and flooding in the culturally and scenically renowned region of the Tiger Leaping Gorge in Yunnan are battling hydropower kingpin Li Xiaopeng, son of former Premier Li Peng.
Dam protests can often be volatile.
In October, tens of thousands of villagers protesting inadequate resettlement compensation held a local official captive for several hours before ten thousand People’s Armed Police officers rescued him.
These protests are striking not only for the sensitive nature of the issues they address, but for the broad-based support they have elicited.
While spearheaded by Beijing-based NGO’s, the dam protests involve Chinese from all parts of the country, employ all means of communication, and engage the support of central government officials.
Beijing-based NGO’s are allying with local Sichuan NGO’s to launch Internet campaigns, distribute petitions, and mobilize villagers.
In one case, environmental activists took villagers from a proposed dam site to another town to see firsthand how poorly others had fared in the dam resettlement process.
University students in the regions of the proposed dams have also become engaged through Internet chat groups.
Environmental activists have found allies among officials within China’s State Environmental Protection Administration, Meteorological Administration, and Forestry Bureau.
The dam projects have also become a focal point for a broader political debate within the Chinese media.
Newspapers such as Southern Weekend , China Youth Daily , and even the traditionally conservative China Daily call directly for greater political openness, increased political participation, and for strengthening the rule of law.
Similar environmental protests have evolved into demands for broader political change in other countries.
In the former Soviet Union and its satellite states, environmental activism contributed dramatically to regime change.
In countries like Thailand, Indonesia, and the Philippines, environmental protest has helped spur political reform.
The same may happen in China.
Many of China’s leading environmentalists are former students and intellectual leaders from the Tiananmen protests of 1989 who believe that environmental activism offers an avenue for advancing broader political reform.
Others began apolitically, but have come to believe that there can be no environmental protection without political change.
This shared commitment to systemic reform is putting China’s government to the test.
China’s leaders recognize that their policy options are limited: business as usual, repression, or reform.
Thus far, the government has demonstrated some flexibility while trying to manage this new challenge with traditional means.
Premier Wen Jiabao has stayed the construction of a number of dams until environmental and social impact assessments could be undertaken.
Some have been approved while others have not.
With hundreds of dams still likely to become targets for protest, pressure will only intensify for a more significant response.
The government could launch a broad crackdown on such protests, although this would risk damaging China’s prestige internationally and provoking larger, more violent protests.
The third option is to use environmental protection to justify moving China ahead with real political reform sooner rather than later.
While this is currently an unlikely outcome, as the anti-dam protests gather strength, China’s leaders may realize that if they do not move quickly, they risk being swept away.
China’s Gift to Europe
Europeans are wrong to be angry with China because its currency peg to the US dollar has boosted the euro against most currencies on foreign exchange markets.
On the contrary, they should view the currency peg as a valuable gift.
In New York and other American cities, European shoppers are on a spree.
They’re enjoying first hand the euro’s enhanced purchasing power abroad.
The currency peg has also helped make the euro into an important reserve currency, rivaling the dollar.
Investments from all over the world are flowing into Europe as a result.
It was predictable that China’s currency peg would have this effect.
It forced China to accumulate huge amounts of dollars to stabilize its currency and gave the euro an extra boost as the dollar depreciated.
To protect itself from the declining greenback, China and other countries are converting a portion of their accumulated dollar reserves into euros.
The International Monetary Fund estimates that the euro’s share of foreign exchange reserves rose to 26.4 percent in third quarter of 2007 from 25.5 percent in the second quarter of 2007, and 24.4 percent in the third quarter of 2006.
The euro’s becoming a major reserve currency bestows important economic advantages on the euro-zone economy.
Europeans should thank the Chinese currency peg for the part it is playing in this.
Of course, with an augmented supply of euros, China can be expected to make substantial investments in Europe, which also is a good thing, especially since, in the United States at least, China has demonstrated a preference for investments in financial institutions rocked by the sub-prime crisis.
Europe has plenty of those.
So far, China’s biggest European investment has been in the Belgian financial company, Fortis N.V., where Ping An Insurance recently acquired a 4.2% stake, making it the largest shareholder in the company.
China Development Bank also made an investment in Barclays to bolster its bid for ABN AMRO which, though it failed, helped the Dutch bank get the full value for its assets.
This is only a start.
Merrill Lynch predicts that, as currency reserves climb in countries like China, state-run investment funds will grow to $7.9 trillion, from $1.9 trillion now.
China’s currency peg has also come in handy for Europe in its fight to keep inflation in check, while its monetary policy remains constrained by the sub-prime crisis.
Experts estimate that, in terms of guarding against inflation, the euro’s appreciation has been equivalent to about 35 basis points rise in the interest rate.
The strong euro has helped insulate Europe from skyrocketing oil and commodity prices, which are priced in dollars on the world markets.
The big downside of the currency peg for Europe is supposed to be exports.
That’s what sent French President Nicolas Sarkozy and other high-level European officials scurrying off to China last November—and why many ordinary Europeans continue to think of the Chinese as not playing by the rules.
This is protectionist thinking par excellence.
What makes exports so special?
Why are they more important than cheap imports or the bargains that European shoppers get in New York?
Should Europe give up all the advantages of the currency peg just because it makes European exports more expensive?
Of course not!
Note that it was French President Sarkozy who went to China to protest the currency peg, not German Chancellor Angela Merkel.
German exports are not being substantially damaged by the strong euro—indeed, German costs are so competitive that exporters are confident they can cope with the euro at 1.50 dollars and even higher.
This is not true for France&#45;&#45; but the answer is obvious: reduce costs and France too will be able to cope with the strong euro.
In the final analysis, cutting costs is all the Europeans can do if they want to preserve the competitiveness of their exports.
The Chinese are not going to change their exchange rate regime, which has strategic as well as economic motivations, just because the Europeans are unhappy with the currency peg.
China has given the Europeans a gift.
They should be grateful, rather than foolishly insist that China take it back.
China’s Grand Africa Strategy
Ever since the Berlin conference of 1883, which Belgium’s King Leopold II called “the sharing of Africa’s cake,” the West has assumed exclusive rights over sub-Saharan Africa.
But, while centuries of struggle to end colonial rule and apartheid have not changed this much, now Western influence is being challenged by China, which likewise covets Africa’s rich reserves of minerals and resources.
China is winning goodwill across the continent by tapping into shared anti-colonial resentments – and by treating the continent seriously.
The next meeting, later this year, of the China-Africa Cooperation Forum (CACF), established to promote trade and investment, will include 46 African heads of state, along with China’s leaders.
In any case, Chinese President Hu Jintao, Vice President Zeng Quinghong, and Prime Minister Wen Jiabao visit the continent regularly.
China’s moves to strengthen its African ties have three objectives: to consolidate secure energy and mineral supplies, to curtail Taiwan’s influence on the continent (which harbours six of the 26 countries with which it maintains full diplomatic relations), and to augment China’s burgeoning global authority.
China has invested billions of dollars in African oil production, mining, transportation, electricity production and transmission, telecommunications, and other infrastructure.
In 2004 alone, China’s foreign direct investment in Africa represented $900 million of the continent’s $15 billion total.
For example, Chinese representatives disbursed almost $2.3 billion to acquire a 45% stake in one of Nigeria’s offshore oil fields and promised to invest an additional $2.25 billion in develop the reserves.
Angola, which currently exports 25% of its oil production to China, was granted a $2 billion loan in exchange for a contract to supply China 10,000 barrels of oil per day.
Sudan, which supplies 7% of China’s total oil imports, has benefited from the largest Chinese investments.
The China National Petroleum Corporation holds a 40% stake in the Greater Nile Petroleum Company and has invested $3 billion in refinery and pipeline construction.
Moreover, 4,000 Chinese People Liberation Army troops are deployed in southern Sudan guarding an oil pipeline.
Trade figures tell a similar story of growing influence.
Sino-African trade grew by 700% during the 1990’s, doubled from 2000 to 2003, to $18.5 billion, and then jumped to $32.2 billion in the first 10 months of 2005.
While trade and investment ties with China helped boost the continent’s overall economic growth to a record-high 5.2% in 2005, China also cancelled $10 billion in bilateral debts from African countries.
Yet closer relations have brought controversy.
African countries have become large buyers of Chinese weapons and military equipment.
In so unstable a continent, one saturated with weaponry, pouring in more guns is hardly welcome.
Yet, as Chinese Deputy Foreign Minister Zhou Wenzhong put it, “Business is business, and China separates business from politics.”
Of perhaps greater long-term worry is the support that China providesor Africa’s authoritarian rulers.
Economic growth without social justice merely prolongs the denial of decent living conditions to the majority of Africa’s people for the benefit of a tiny rich minority.
The fact that China, within a decade, has overhauled Africa’s balance of power, relegating the US and the UK to third and fourth place and challenging France for first place as the continent’s main economic and commercial partner, has irked these competitors.
France has stepped up its monitoring of China’s African activities.
To tie Europe closer to Africa, British Prime Minister Tony Blair even proposed eliminating the European Union’s agricultural subsidies under the Common Agricultural Policy.
Africa is the world’s only remaining “soft target” where outside powers can battle it out for access to mineral resources.
But the last thing Africa needs is to be a battleground in an economic and political war.
As Africans know from past experience, countries have no friends, but only interests.
The ongoing Darfur conflict illustrates the problem.
Despite its declared commitment to non-interference, China’s interests in Sudanese oil imply otherwise.
Thus, China threatens to veto any resolution of the United Nations Security Council that might impose sanctions against the Arab ruling class in the Sudanese government, whose troops and government-allied militias are perpetrating genocide against Sudan’s black citizens, using Chinese-made helicopter gunships based at airstrips maintained by Chinese oil companies.
Until China sees its economic interests in Africa as tied to the continent’s political development, such horrors will continue.
Africa’s economy may grow, but Africans will continue to suffer.
China\u0027s Great Internet Firewall
Contrary to popular wisdom, Chinese efforts to control the Internet and other new media are not doomed to fail.
China's government has lost much control over the information and images that now circulate through Chinese society, but it still is capable of preventing any serious challenger from using the media to attack it.
How can this be?
The government demands that Web sites, television programs, and other media meet three general criteria:
They must support, or at least not hinder, China's efforts to sustain economic growth, maintain social order, unify with Taiwan, and secure international respect;
They must support, or at least not question, the Chinese Communist Party's monopoly on political power; and
They must oppose such "negative" social phenomena as "spiritual pollution" (for example, pornography and drug abuse), "bourgeois liberalization" (Western-style democratization), "feudal superstition" (the Falun Gong and other proscribed religions), and "worship of things foreign" (especially American popular culture).
The government's tools for enforcing these criteria are far more effective than most observers realize.
First, it can imprison those who violate its media policy.
For example, in 1998 it sentenced a Shanghai engineer to two years in prison for selling 30,000 Chinese e-mail addresses to an overseas-based dissident newsletter.
In March 2001, it launched a general crackdown on Internet dissent that resulted in numerous people being imprisoned and harassed.
Second, the government can use technical means to deny people access to undesired content.
It has jammed Voice of America broadcasts since June 1989 and in the spring of 2001 began jamming Tibetan-, Uighur-, and Kazakh-language broadcasts from India and Central Asia.
It blocks Chinese Internet surfers from visiting a list of banned Web sites and late last summer it blocked access to the Google and AltaVista search engines.
More recently, it developed a new system that allows surfers to access some sections of formerly banned sites, but deploys packet-sniffing technology to deny access to other sections.
Third, the government enlists cooperation from foreign businesses in exchange for exclusive access to China's gigantic market.
Just as the government persuaded Rupert Murdoch to remove BBC News from STAR-TV in 1994, it convinced Yahoo this year to design a special search engine for China that screens out Web sites dealing with unacceptable subjects.
Companies such as Cisco have been accused of providing the government with advanced technologies designed to make the "Great Internet Firewall" leak-proof.
Fourth, the government distracts attention by supporting "healthy" Chinese Web sites, as well as glitzy but vacuous entertainment-oriented TV programs.
Such circuses--combined with the bread of economic growth--crowds out subversive messages from abroad, especially when combined with nationalistic propaganda designed to inoculate people against whatever subversive media content that might slip through.
So far, China's government has succeeded famously in meeting technological advances that strengthen society with technological advances that strengthen the state.
Nor do Chinese and foreign business people clamor for change.
They don't need to read or hear about the Falun Gong and human rights to make sound investment or purchasing decisions.
All of this suggests that China might evolve into the kind of society whose members spend so much time and money on conspicuous consumption and diversionary entertainment that they lack the psychic energy to reflect upon the issues of freedom, equality, religion, and human rights.
Problems fester in such a society, but don't necessarily explode.
As long as the middle class supports state repression, order can be upheld.
The hope for more liberal democratic change in China seems to lie in a conflict between the rising middle class, rallying on both its own behalf and that of the poor, and the authoritarian state.
Journalists, intellectuals, and entrepreneurs reportedly chafe at government efforts to block access to overseas search engines; one day they might demand freedom of speech more generally.
But nowadays most members of the middle class seem content to exchange complacency for economic growth.
If they become unhappy, they can always console themselves with a pirated DVD.
Some groups, nonetheless, are fighting for the global freedom of the Internet.
One Chinese Internet hacker group, called "Hacktivismo," is researching the development of a technology called "Six-Four" (named after the date of the 1989 Tiananmen massacre) that would allow Chinese netizen s to use the Internet to communicate free from government observation and thus visit banned Web sites safely.
But even in a best-case scenario, these technologies won't be available for many months, if not years, and few people in China are likely to have the desire or ability to use them.
Sadly, China's government has demonstrated amazing adeptness at controlling the Internet in the face of daunting technological challenges--at least to the point of preventing a hard core of sensitive subjects from being discussed openly.
This situation will not change inevitably.
Those who assert that China is on the wrong side of history in its communication policies--and that the Internet means eventual democratization--ought to temper their optimism.
In China, history often takes a very long time.
China’s Great Migration
BEIJING – China’s Henan province has a population of about 100 million – larger than that of most countries.
In China’s administrative system, a province is at the highest level of sub-national government, followed by counties, cities, and townships.
But a township in Guangdong province can easily serve a population of 500,000 to one million – larger than that of many cities outside of China.
Thus, it is difficult to overestimate the importance of regional issues – particularly inter-regional disparities – for China’s politics.
China is divided by nature.
Among the large continental countries, including India and Brazil, only China has a small segment of coastline but vast interior regions.
When the main object of human consumption was food, this was not a problem, because what mattered was land and water.
But in modern industrial, urban, and market-based societies, what may matter increasingly are transport costs, which means that geography can cause deep regional inequalities.
Though such disparities can, of course, have other causes as well, geography does seem to explain a lot.
First of all, it explains why China’s coastal regions developed earlier and faster after the country launched its market reforms and opened to the world.
It was not “preferential” policies or skewed resource allocation by the government that caused China’s coastal cities to boom, but rather their proximity to the ocean, which was and remains the cheapest way to move resources and products.
China may have more and larger high-tech and service industries – sectors that do not depend so heavily on transport – in the future.
But, as China grows increasingly dependent on imports of resource commodities to meet its basic needs, its coast will continue to enjoy a transport-cost advantage.
Thus, regional disparities in terms of economic prosperity may never narrow; indeed, they could often widen.
Lanzhou, the capital city of Gansu province in the west, might never catch up with Suzhou, a well-known manufacturing base near Shanghai.
China’s effort to develop more evenly, despite the permanent in-built advantages of the coast, takes the form of two-way traffic in capital and labor between coastal and interior regions.
Financial transfers flow from the coast to interior regions, via government fiscal allocation or other mechanisms, to improve infrastructure, including transport.
Such investments may not be as profitable as in other regions, but they should be regarded as public goods intended to equalize conditions for growth.
China’s central government has attempted this for the past 10 years through its “Western Development Program.”
Of course, the government’s efforts alone cannot entice industrial investors to “go West,” because public infrastructure spending cannot overcome all problems.
Without a road, you cannot transport resources and finished goods.
But, even with a road, you still must pay for tolls, gasoline, fleet maintenance, and other costs – and it can still take five days to get your goods to the coast if you want to export.
The other “traffic” may, in some ways, be even more important.
This is the labor that flows in the opposite direction, from west to east, promoting the only economic equality a country can ever achieve – equality of per capita income, not of GDP.
A coastal city that produces more GDP and boasts higher productivity and wages will attract more people to share in its prosperity until “marginal productivity” decreases.
As some people migrate to the coast, fewer people will share the interior regions’ resources, causing their per capita income to increase.
This is why mobility is so important to achieving greater social equality.
Most developed countries underwent great domestic migrations as they modernized, with 80% of their populations eventually re-allocated to coastal regions.
China is experiencing this process now.
If China’s authorities continue to encourage domestic migration, the problem of regional disparities will eventually be solved.
The same could be said of the global North-South disparity.
Some people used to argue that as long as one factor of production – i.e., capital – could move freely, the world could be equalized.
But I believe that other factors are also essential One-factor mobility may work well in a theoretical model, but in the dynamic real world, if the income gap cannot be narrowed rapidly enough, conditions that serve to enlarge the gap – such as unfavorable geography – may come to dominate.
This will sustain, if not deepen, global disparities, especially given northern countries’ unwillingness to allow free international migration.
The good news for China now is that the new national Five-Year Plan for 2010-2015 calls for the government not only to encourage domestic migration between regions, but also to improve the conditions for rural people to move and settle in the cities.
The infamous “Hukou” system (the resident registration system that restricts migration) may not be abolished overnight, but will be phased out step by step.
Of course, migration and urbanization will produce social problems and conflict.
But these have occurred in every country at China’s current stage of development, and China, too must go through it.
Otherwise, the country will remain divided forever.
China’s Green Debt
For a decade, the world has wondered when China’s leaders will recognize the staggering environmental crisis confronting their country.
This year, we got an answer: a new Five-Year Plan that makes environmental protection a priority.
A storm of green propaganda has followed, and the government now talks about using “Green GDP” to measure development.
But will all this talk amount to real progress?
While the central government admits to some of the environmental degradation caused by rapid economic growth, the picture it paints is incomplete.
Consider “Green GDP.”
This spring, the State Environmental Protection Administration produced the country’s first official estimate of GDP adjusted downward for environmental losses.
According to these calculations, it would cost $84 billion to clean up the pollution produced in 2004, or 3% of GDP for that year.
But more realistic estimates put environmental damage at 8-13% of China’s GDP growth each year, which means that China has lost almost everything it has gained since the late 1970’s due to pollution.
China’s environmental problems, complex as the causes may be, can ultimately be attributed to our understanding of Marxism.
For most of our recent history, we saw in Marxism only a philosophy of class struggle.
We believed that economic development would solve all our problems.
In the reform period, this misreading of Marx morphed into an unrestrained pursuit of material gain devoid of morality.
Traditional Chinese culture, with its emphasis on harmony between human beings and nature, was thrown aside.
As a result, China’s economy is dominated by resource-hungry and inefficient polluters, such as coal and mineral mines, textile and paper mills, iron and steel makers, petrochemical factories, and building material producers.
Our cities are exploding in size, depleting water resources and creating horrific traffic congestion.
One-quarter of China’s people drink substandard water; one-third of urbanites breathe badly polluted air.
Moreover, the country recently witnessed a spate of environmental accidents.
Indeed, on average, China suffers a major water pollution accident every other day.
Although China has signed the Kyoto Protocol and some 50 other international environmental accords, we do little to honor them.
If we are not serious about upgrading our industrial structure, we will fail when it comes time to fulfill our commitments to cut emissions.
And while the new Five-Year Plan sets fine goals, many provinces have failed even to meet the major environment protection targets of the last Five-Year Plan.
True, China has made the kind of economic advances in three decades that required 100 years in Western countries. But China also has suffered a century’s worth of environmental damage in 30 years.
Unfortunately, unlike Western countries, we cannot afford to wait until our per capita annual GDP reaches $10,000 before tackling our environmental problems.
Our experts predict that the environmental crisis will intensify to a critical stage by the time China’s per capita annual GDP reaches just $3,000.
Making matters worse, while we discarded the finer elements of our traditional culture, we failed to absorb the better aspects of modern civilization.
The concept of a “social contract” based on rights and obligations – the essential values that constitute the most important precondition for effective environmental protection – goes largely ignored.
As a result, environmental protection projects often fail to be included in calculating production costs.
Scarcely anyone bothers to consider the environmental costs to – or rights of – the country’s poor and powerless.
It is imperative that environmental factors figure in China’s macroeconomic planning in a real way.
This requires that a more rational strategy be mapped out in the planning of major industrial projects and energy-hungry enterprises.
Careful studies need to be done to determine available energy, land, mineral, and biological resources before projects proceed.
Land planning must be overhauled, with industrial monopolies broken up and development goals set according to population, resource volume, and the capacity to absorb pollution.
Finally, China needs a new energy strategy.
Industrialized nations have developed and made great use of nuclear, solar, wind, and bio-gas, and other renewable energy resources.
China’s technological capacities in this sector lag behind even other developing nations such as India and Pakistan, and its reliance on coal is one of the greatest threats to the global climate.
For now, there is simply no alternative.
But in the long run, clean energy will be the only way to bring economic growth without doing irreparable environmental damage.
Government cannot solve these problems on its own.
China’s people have the biggest stake in environmental protection, and so must become the driving force.
Local communities, non-governmental organizations, and businesses all must do their part.
They cannot limit themselves simply to “supervision” and appeals to the authorities.
They must expand into other avenues of appeal: public hearings, welfare lawsuits, enhanced media coverage, and other voluntary activities.
But ultimate power does rest with the government.
China’s leaders need to make several concrete moves in order to move beyond rhetoric.
They must give real power to environmental officials to implement existing laws and close gaping legal loopholes.
This can only be done by introducing legal mechanisms to reward those who protect the environment, while making polluters pay, and by helping to unify the environmental watchdogs scattered across different sectors.
Above all, a system needs to be established to monitor officials’ performance in environmental as well as in economic terms.
China is dangerously near a crisis point.
The country’s enormous environmental debt will have to be paid, one way or another.
China must exercise the foresight needed to begin paying this debt now, when it is manageable, rather than allowing it to accumulate and, ultimately, threaten to bankrupt us all.
China’s Growing Growth Risks
BEIJING – If everything goes right for China, it will surpass the United States as the world’s largest economy, in current dollar terms (and more quickly in real terms), by 2021.
Its per capita income will reach that of today’s lower tier of high-income countries.
But, despite its forward momentum, the Chinese economy faces looming risks in the coming decade.
The immediate risk is continuing stagnation, or recession, in Europe.
In the last decade, export growth has accounted for roughly one-third of China’s overall economic growth, and about one-third of Chinese exports went to the European Union.
If the situation in Europe continues to deteriorate, China’s growth will be dragged down.
Over-tightening of domestic macroeconomic policies, especially those aimed at the real-estate market, could heighten the risk of a slowdown, with house prices currently falling across China, owing to stringent government measures.
Indeed, the situation is much like that of the 1997 Asian financial crisis.
In the several years before that crisis hit, China had been combating inflation, and appeared to be headed for a soft landing.
But the combination of crisis and austerity condemned China to several years of deflation and considerably slower growth.
Today, as China looks to the medium term, the government must face the problems created by its pervasive role in the economy.
A new World Bank report singles out lack of reform of state-owned enterprises as the most important impediment to the country’s economic growth.
But that is only a symptom of a deeper problem: the government’s dominant role in economic affairs.
In addition to controlling 25-30% of GDP directly, the government also takes a lion’s share of financial resources.
In recent years, more than one-third of total bank lending has gone to infrastructure, most of which has been built by government entities.
Indeed, recognizing its over-investment in infrastructure, the government recently abandoned several high-speed rail projects that were already under construction.
But government over-investment is also evident in numerous industrial parks and high-tech zones.
China’s investment frenzy reminds many people of Japan in the 1980’s, when high-speed rail links were extended to Japan’s remotest corners.
Most rely on government subsidies to this day.
And, while the subsidies may improve the quality of life for ordinary people in some respects, they also detract from it by suppressing domestic consumption.
Infrastructure investment will inevitably run up against the law of diminishing marginal returns, but consumption growth does not have a limit.
Suppressing consumption thus suffocates future growth, and the share of household consumption in GDP has declined from 67% in the mid-1990’s to below 50% in recent years, with most of the decline reflecting the distortions created by government policies.
China’s government is production-oriented by nature.
The upside is that this has helped to maintain high GDP growth rates.
But the downside is equally pronounced.
One negative consequence is the persistent deepening of income inequality.
The Gini coefficient of per capita income has surpassed 50 (with 100 representing maximal inequality), putting China in the upper quartile of inequality worldwide.
The problem may not be inequality per se, but its consequences, one of which is the bifurcation of human capital.
The return on education is increasing in China, but access to education is becoming increasingly divided socially and geographically.
While education is improving in urban areas, children in the countryside are facing a decline in educational quality, because better teachers find their way to the cities.
Moreover, given the income disparities between cities and rural areas, their education is more expensive than it is for urban families.
As a result, a majority of rural kids will enter the workforce without a university diploma.
Among China’s 140 million migrant workers, 80% have only nine years or less of formal education – far short of what high-income countries require.
Despite officials’ seeming desire to reduce income inequality, China’s government is aggravating it, by – among other things – subsidizing producers, favoring capital-intensive industries, and maintaining a highly inefficient financial sector.
But there are also promising signs of an economic uptick.
The government has just announced new rules for household registration, known as hukou.
Except in large cities, people can now freely choose their hukou after three years of residency.
This will greatly help migrants by ensuring equal access to education for their children.
To change completely the government’s distorting behavior, however, requires more drastic political changes.
The hukou reform is a good start, as it will strengthen migrants’ political rights in local communities.
Given their large numbers, their political participation may force local governments to become more responsive to ordinary people’s needs.
And government responsiveness at lower levels, one may hope, might eventually trickle up to the top.
China’s Happy Mask
BEIJING – China’s “face” may be its Achilles’ Heel.
As it basks in its new status as an economic superpower – the dragon that is outpacing Asia’s tigers as well as the donkeys of the West – China is mistakenly downplaying its own serious structural weaknesses.
The communist leadership finds it hard to mention, let alone emphasize, the country’s problems.
Officials’ preoccupation with commanding respect and not losing face leads them to focus almost exclusively on China’s achievements.
This is a strategy that risks backfiring, because it misunderstands the dynamics of international politics.
Emphasizing China’s meteoric rise means less understanding in the rest of the world of the need to sustain rapid economic development in order to satisfy the expectations of its 1.3 billion inhabitants.
The government knows that it has a political tiger by the tail, but refuses to acknowledge it, either inside China or outside.
Trade tensions continue to mount.
The United States is deeply concerned, following the minimal results of its “strategic economic dialogue” with China in May, and Congress is threatening tough protectionist measures.
The European Union may not be far behind; much will depend on how China presents its case over the coming 18 months as the two sides negotiate a wide-ranging Partnership Cooperation Agreement, which will determine the quality of bilateral relations for the next decade.
German Chancellor Angela Merkel has just visited Beijing, with French President Nicolas Sarkozy likely to follow soon.
Both are surely aware that China’s surging exports last year helped it surpass the US as Europe’s largest foreign supplier.
What they won’t see, of course, are the desperately low living standards of China’s teeming millions, especially the rural poor.
Yet China is in no mood to plead poverty when dealing with the West.
Its aim is to gain as much prestige as possible from the Olympic games in 2008 and the six-month World Expo in Shanghai during the spring and summer of 2010.
It remains to be seen whether the two events will be capable of swinging world opinion in China’s favor and keeping it there.
Indeed, the government’s suspicion of the international media is liable to spark friction when thousands of journalists arrive and inevitably widen their coverage beyond athletics to politics and human rights.
For the time being, sentiment about China’s future remains relentlessly upbeat.
McKinsey consultants have even forecast that the upper middle-class will number 520 million by 2025 – the sort of projection that the communist mandarins welcome as a tribute to their strange hybrid of a market economy and rigid state control.
Yet it is almost certainly the sort of forecast of which they should beware.
The reality of life in today’s China looks very different from the vantage point of a province far from the heady atmosphere of Beijing or Shanghai.
For example, like much of the country, Gansu Province, at China’s geographical center, is grappling with structural and social problems that range from the daunting to the apparently insuperable.
Average annual output per capita is about $900, and incomes among the peasants who make up most of its rural population of 26 million are less than $250.
Gansu’s challenges range from modernizing its heavy industries to resisting desertification and the encroachment of the Gobi desert.
While it has been making slow but steady progress, its future is clouded by worsening water shortages; though it straddles the Yellow River, the water table is dwindling fast.
Back in Beijing, the chief preoccupation is to safeguard 11% GDP growth while assuaging Western governments.
By the end of this year, China’s exports will be 24% higher than in 2006, at $1.2 trillion, and its trade surplus will have grown by 43%.
But trade will probably not be the main worry for China’s international relations.
Trouble seems more likely to come from growing concern in the West over climate change.
Political leaders in EU capitals and the US may be well aware of China’s global economic importance, but the widespread public perception is that its factories are dirty and environmentally harmful.
Rows over product safety and intellectual piracy could all too easily fuel calls for tough new trade limits.
The answer is not for China to step up its public-relations effort.
Instead, it should be revealing its weaknesses and vulnerabilities to gain Western understanding.
That really would be a cultural revolution.
चीन के फौलादी मुक्के के लिए रेशम का दस्ताना
नई दिल्ली – सालों से, चीन चाह रहा है कि वह दक्षिण एशिया को "मोतियों की माला" से घेर ले: यानी वह इसके पूर्वी तट को इसके मध्य पूर्व से जोड़ने वाले बंदरगाहों का नेटवर्क बना ले जिससे इसकी रणनीतिक ताकत और समुद्री पहुँच बढ़ जाए। इसमें आश्चर्य नहीं है कि भारत और अन्य देशों ने इस प्रक्रिया पर गंभीर चिंता व्यक्त की है।
तथापि, चीन अब अपनी इस रणनीति को यह दावा करके छिपाने की कोशिश कर रहा है कि व्यापार और सांस्कृतिक आदान-प्रदान को बेहतर बनाने के लिए यह इक्कीसवीं-सदी का समुद्री रेशम मार्ग बनाना चाहता है। लेकिन यह दोस्ताना लफ्फाजी एशिया की चिंता को बहुत कम दूर कर पा रही है और उसके परे चीन का रणनीतिक लक्ष्य इस क्षेत्र पर प्रभुत्व जमाना है।
और इस चिंता का ठोस आधार भी है। सीधे शब्दों में कहें, तो रेशम मार्ग की पहल के पीछे चीन का इरादा एशिया और हिंद महासागर के क्षेत्र में एक नए प्रकार का हब बनाने का है। वास्तव में, अनेक पड़ोसियों के साथ क्षेत्रीय और समुद्री विवाद भड़काकर, प्रमुख व्यापार मार्गों के साथ-साथ अपना प्रभुत्व स्थापित करने के लिए काम करके, चीन एशिया के भू-राजनीतिक नक्शे को फिर से बनाने की कोशिश कर रहा है।
समुद्री रेशम मार्ग के रणनीतिक आयाम इस तथ्य से रेखांकित होते हैं कि इस विषय पर बहस का नेतृत्व पीपुल्स लिबरेशन आर्मी (PLA) ने किया है। PLA राष्ट्रीय रक्षा विश्वविद्यालय के मेजर जनरल जी मिंग कुई का तर्क है कि यह पहल चीन की "नई छवि" बनाने और "प्रभाव जीतने" में मदद कर सकती है, ख़ास तौर से जब एशिया में यूएस की "धुरी" अपनी "गति खो रही है।"
फिर भी PLA के विशेषज्ञ रेशम मार्ग पहल के "मोतियों की माला" से किसी संबंध को नकारने के लिए उत्सुकता दिखा रहे हैं। इसके बजाय, वे इसकी तुलना चीनी किन्नर एडमिरल झेंग हे के पंद्रहवीं-सदी के अभियानों से करते हैं जिसने अफ़्रीका को जाने वाले खजाने के जहाजों के बेड़े का नेतृत्व किया था। केंद्रीय सैन्य आयोग के सदस्य सुन सिजिंग के अनुसार, झेंग ने "एक इंच भूमि पर" अधिकार किए बिना या "समुद्री आधिपत्य" की इच्छा के बिना प्राचीन रेशम मार्ग का इस्तेमाल किया था (हालाँकि इतिहास साक्षी है कि उसने समुद्री चोक प्वाइंट नियंत्रित करने के लिए सैन्य बल का इस्तेमाल किया था - उदाहरण के लिए, स्थानीय शासकों की हत्या की थी)।
वास्तव में, "मोतियों की माला" समुद्री रेशम मार्ग से बहुत कम अलग है। हालाँकि चीन इस पहल को आगे बढ़ाने के लिए प्रकट रूप से शांतिपूर्ण रणनीति अपना रहा है, लेकिन इसका प्रमुख लक्ष्य परस्पर लाभकारी सहयोग नहीं है; बल्कि यह रणनीतिक वर्चस्व है। दरअसल, रेशम मार्ग राष्ट्रपति झी जिनपिंग के "चीनी स्वप्न" की महत्वाकांक्षाओं का अभिन्न अंग है, जिसका लक्ष्य चीन के अतीत के गौरव और स्थिति को बहाल करना है।
चीन ने, ख़ास तौर से झी के शासन में, अपने पड़ोसियों को पीपुल्स रिपब्लिक पर अपनी आर्थिक निर्भरता को बढ़ाने और उसके साथ अपने सुरक्षा सहयोग का विस्तार करने पर मजबूर करने के ल��ए अक्सर सहायता, निवेश, और अन्य आर्थिक लाभों का इस्तेमाल किया है। झी द्वारा समुद्री रेशम मार्ग विकसित करने के लिए $40 बिलियन की रेशम मार्ग निधि और चीन द्वारा प्रायोजित नए एशियाई बुनियादी सुविधा निवेश बैंक का इस्तेमाल करना इस दृष्टिकोण को दर्शाता है।
पहले ही, न केवल खनिज-संसाधन आयातों और चीनी विनिर्मित वस्तुओं के निर्यात में सुविधा देने के लिए, बल्कि अपने रणनीतिक सैन्य लक्ष्यों को आगे बढ़ाने के लिए चीन इस क्षेत्र के तट पर बसे देशों में बंदरगाहों, रेलमार्गों, राजमार्गों, और पाइपलाइनों का निर्माण कर रहा है। उदाहरण के लिए, चीन ने ग्वादर में बंदरगाह विकसित करने के लिए पाकिस्तान के साथ कई अरब डॉलर का सौदा किया है, और इस बंदरगाह का रणनीतिक स्थान होर्मुज़ जलसंधि के मुहाने पर होने के कारण इसका उद्देश्य सीमित वाणिज्यिक क्षमता से अलग हो जाता है।
पिछली शरद ऋतु में दो बार, चीन की हमलावर पनडुब्बियाँ श्रीलंका के हाल ही में खोले गए कोलंबो बंदरगाह पर, $500 मिलियन के कंटेनर टर्मिनल पर पहुँच गईं – जिसका निर्माण और बहुमत का स्वामित्व चीनी राज्य कंपनियों के पास है। चीन ने अब कोलंबो की रिक्लेम की गई भूमि - जो ऐसा "बंदरगाह शहर" है जो चीन के समुद्री "मार्ग" पर प्रमुख स्टॉप बन जाएगा - पर मोटे तौर पर मोनाको के आकार का विशाल परिसर बनाने के लिए $1.4 बिलियन की परियोजना पर काम करना शुरू किया है।
PLA सैन्य विज्ञान अकादमी के मानद फ़ेलो, झोउ बो मानते हैं कि चीन की ये विशाल परियोजनाएँ चीन को "मज़बूत लेकिन सौम्य" शक्ति के रूप में पेश करते हुए "हिंद महासागर के राजनीतिक और आर्थिक परिदृश्य को मौलिक रूप से बदल देंगी"। यह इसलिए महत्वपूर्ण है क्योंकि नई एशियाई व्यवस्था पूर्वी एशिया के विकास से कम निर्धारित होगी, जहाँ जापान चीन के उदय को अवरुद्ध करने के लिए कटिबद्ध है, और हिंद महासागर की घटनाओं से ज़्यादा निर्धारित होगी जहाँ चीन भारत के दीर्घकालीन प्रभुत्व में सेंध लगा रहा है।
भारत निश्चित रूप से चीन के व्यवहार के प्रति आशंकित है। लेकिन चीन काफी सावधानी से चल रहा है ताकि यह अपने खौफ़नाक मंसूबों को प्रकट किए बिना, अपने लक्ष्य पर आगे बढ़ाना जारी रख सके। अमेरिकी शिक्षाविद जॉन गरवेर ने चीनी नीतिकथा का इस्तेमाल करके इस बात को बहुत अच्छे रूप में पेश किया है: "गुनगुने पानी के पात्र में मेंढक बेहद आरामदायक और सुरक्षित महसूस करता है। लेकिन पानी का तापमान धीरे-धीरे बढ़ने की ओर मेंढक का ध्यान तब तक नहीं जाता, जब तक वह आखिरकार मर कर पूरी तरह पक नहीं जाता है।"
इस रोशनी में देखने पर, यह आश्चर्य की बात नहीं है कि चीन ने भारत को समुद्री रेशम मार्ग पहल में शामिल होने के लिए आमंत्रित किया है । इसका लक्ष्य केवल एक आशंकित पड़ोसी को शांत करने में मदद करना ही नहीं है, बल्कि यूएस और जापान के साथ भारत के रणनीतिक संबंधों के बढ़ने की गति को धीमा करना भी है।
चीन की योजनाओं में रेशम मार्ग आर्थिक, राजनयिक, ऊर्जा, और सुरक्षा के उद्देश्यों का संयोजन है जिससे व्यापार को बढ़ावा देने, रणनीतिक पैठ को मज़बूत करने, और अधिकाधिक शक्तिशाली और सक्रिय पनडुब्बी बल की विस्तृत भूमिका का निर्वाह करने के लिए अनुमति देने से जुड़ी हुई सुविधाओं का व्यापक नेटवर्क तैयार करने की कोशिश हो रही है। इस प्रक्रिया में, चीन का लक्ष्य ऐसी एशियाई व्यवस्था तैयार करना है जिसका आधार यूएस के साथ शक्ति संतुलन न हो, बल्कि उसका अपना नायकत्व हो। केवल लोकतांत्रिक देशों का संयोजन इस रणनीति को रोक सकता है।
China’s Incredible Shrinking Economy
ITHACA, NY &#45;&#45; The World Bank recently announced that the Chinese and Indian economies are 40% smaller than previously estimated.
Since these are the fastest-growing large economies, the Bank’s revision has clipped half a percentage point off world growth over the last five years, according to the IMF.
The new numbers set off a firestorm of debate, and have brought conspiracy theorists out in force.
But when the dust settles, the new data may be less revolutionary than some people believe.
They may also have the unintended benefit of shifting a key policy debate in a more productive direction.
The new data are based on improved estimates of purchasing power parity (PPP).
The basic idea is that, when comparing incomes across countries, variations in purchasing power should be taken into account.
Market exchange rates are not a good indicator of these differences, because they can fluctuate for other reasons.
The World Bank and some other organizations have, collectively, gathered a massive amount of data – covering 1,000 similar products in 146 countries – to construct comparable international prices.
Price levels in China and India, among other developing countries, turn out to be much higher than previously estimated.
Hence, their real per capita incomes are lower relative to other countries.
Despite this massive shrinkage, the reality on the ground is unchanged.
Indeed, people in Beijing and Delhi are showing more equanimity than most would if their incomes were cut by 40%.
The bottom line is that China and India are still large economies, growing rapidly, and consuming massive amounts of resources.
All that has changed is that both countries have been downgraded to smaller roles on the world stage.
But size is not all that matters.
The new PPP data also have implications for evaluating the extent of poverty and the level of a currency’s exchange rate.
This is where the conspiracy theories come in.
The reduction in income levels at international prices means that many more people in China and India are now classified as poor – an automatic boon for the World Bank, whose primary business is to end poverty.
And the fact that China’s market exchange rate was far lower (i.e., more yuan per dollar) than the earlier PPP exchange rate had been interpreted as evidence of huge undervaluation.
The new data, by contrast, show that the exchange rate of the renminbi relative to the dollar is about right.
The calculations can be tweaked, but it is difficult to generate anything close to the dramatic figures of 40-50% undervaluation that had been bandied about by some researchers.
This has fomented accusations that China apologists have cooked the new numbers.
But the conspiracy theories are off the mark.
The World Bank has engaged in a good faith effort to make progress on a hugely complicated matter.
Of course, there remain gaping holes in the data.
For example, the data for China are based on surveys in just 11 cities.
Prices for rural areas – where two-thirds of China’s population still resides – are based on extrapolations from these data.
There is guesswork involved, but at least it’s been done in a systematic way.
In any case, earlier calculations depended on an even greater amount of guesswork.
Whatever one makes of the data, the number of people leading lives of quiet desperation in these countries is unconscionably large.
As for the exchange rate, PPP is only one of many ways to calculate its equilibrium level.
Given China’s massive current account surplus (12% of GDP), the renminbi is still undervalued.
But the degree of undervaluation is not the point.
What China needs is a more flexible exchange rate that can respond freely to market forces.
Otherwise, China’s central bank must focus on keeping the exchange rate stable and doesn’t have a truly independent monetary policy.
More flexibility would help attain more balanced and sustainable growth.
It would allow the central bank to raise interest rates aggressively to control runaway credit and investment growth, and keep inflation in check.
Raising interest rates on bank deposits, which are now negative in real terms, would reduce incentives for individuals to pour money into equity markets or real estate, mitigating the risk of asset market bubbles and boom-bust cycles in the economy.
Trying to determine the “right” level of the renminbi, by contrast, is a fool’s game, and the proposal of a step revaluation to get to that level has become a polemical distraction.
Perhaps the new data will cool the heated rhetoric about undervaluation and currency manipulation, and instead generate a substantive discussion about exchange-rate flexibility and its benefits for China and the world.
China’s Industrial Nightmare
The Western media have a habit of going on feeding frenzies.
Ironically, when it comes to China, the latest frenzy concerns food itself.
The execution this week of the former head of China’s State Food and Drug Administration (SFDA), Zhen Xiaoyu, who accepted almost $1 million in bribes, shows that the frenzy has now seeped into China as well.
First came a spate of stories about pet food laced with melamine (a coal derivative), cough medicine and toothpaste adulterated with diethylene glycol (a sweet-tasting industrial chemical used in anti-freeze and brake fluid), toy trains decorated with lead-based paints, bacteria-infected antibiotics, exploding cell phone batteries, and defective car tires.
Now, attention has now turned to food.
The world press is filled with stories about honey laced with industrial sweeteners, canned goods contaminated by bacteria and excessive amounts of additives, rice wine braced with industrial alcohol, and farm-raised fish, eel, and shrimp fed large doses of antibiotics and then washed down with formaldehyde to lower bacterial counts.
In response, China’s government acted almost instantly.
The General Administration of Quality and Supervision, Inspection, and Quarantine conducted a survey and reported that nearly one-fifth of all products made in China for domestic use did not measure up to safety and quality standards.
At the same time, regulators increased inspections, closed down some 180 food manufacturers and now post the names of violators on their Web site.
Moreover, not only was Zhen Xiaouyu executed, but Cao Wenzhuang, who was in charge of drug registration at the SFDA, was sentenced to death for accepting roughly $300,000 in bribes from drug manufacturers.
Both verdicts were doubtless calculated, as a famous Chinese proverb puts it, to “kill some chickens in order to scare the monkeys.”
But why does this surprise us?
After all, “capitalism with Chinese characteristics” has been a chaotic free-for-all for some time.
Roughly 75% of China’s food is now produced by small, private, and un-licensed operations that are difficult to regulate.
With little knowledge of China’s tectonic changes, foreigners have been investing, buying, trading, and extravagantly praising its amazing, but hell-bent, “economic boom.”
Fear of “China bashing” has made it difficult for so-called “friends of China” to discuss its darker side openly.
The Chinese people themselves, however, have been far from unaware that the purity of their food, medicine, water, and air is in doubt.
The xiadao xiaoxi (back alley news) has long been replete with rumors of things going awry.
One small-time operation ground up sheet-rock and put it in gel-caps to sell as medicine.
A peasant village raided a hospital dumpster to reclaim discarded surgical equipment, wash it in a nearby canal, re-package it in sealed plastic saying “sterilized,” and sell it back to the hospital at cut-rate prices.
It has not helped, of course, that the Communist Party loathes a free press and a robust civil society, both of which are essential information feedback loops in ensuring any country’s well-being.
Nor has it helped that China’s regulatory agencies lag far behind the growth of its economy.
For example, the Beijing office of China’s State Environmental Protection Administration has less than 300 employees, whereas the United States Environmental Protection Administration has over 17,000.
China’s mad rush toward fuqiang (wealth and power) has given it little chance to develop all the compensatory institutions that any truly developed, not to say enlightened, society needs to achieve equilibrium and social health.
But in today’s globalized world, where national boundaries have morphed into synapses for myriad kinds of uncontrollable interactions, each country’s problems have become everyone’s problem.
So, before we in the West becomes too censorious of China’s quality control problems, we should remember our complicity in making China the world’s industrial park and global dumping ground for many toxic industries.
While we may lament the loss of manufacturing jobs through “outsourcing,” we certainly do not lament exporting massive amounts of pollution to China.
China may come to rue the wanton eagerness with which it has embraced industrialization.
Already, the Chinese are beginning to awaken from the infatuation with development that besieged them as they began to emerge from the commodity-starved Cultural Revolution.
In a world of scarcity, more always seemed better.
But now, just as the West began to understand decades ago that the natural environment has limits, China is showing the first signs of entering a post-industrial phase.
So, rather than simply shutting our doors to Chinese products, we might contemplate helping China by opening the doors of our regulatory agencies to Chinese regulators.
To do so would actually help ourselves.
For, even with “strategic competitors” like China, we now live in a global commons in which we share air, water, manufactured goods, and even food.
China’s Internet Dictatorship
Eleven years after its initial connection to the World Wide Web (WWW), China’s access to the Internet is still guarded by firewalls, embedded in its proxy servers, which have proven to be more practical and impenetrable than the Berlin Wall.
Moreover, an increase in the demand for broadband connection has triggered the launch of an $800 million “Jin Dun (Golden Shield) Project,” an automatic digital system of public policing that will help prolong Communist rule by denying China’s people the right to information.
The principle underlying the Golden Shield is that “as virtue rises one foot, vice rises ten.” Aided by systems developed by western intelligence agencies, China has forged a virtual sword that threatens to block the path to democracy.
Internet “gateways” mainly supervise and filter political information in China.
Their technical functions include blocking overseas Web sites, filtering content and key words on Web pages, monitoring email and Internet cafes, hijacking PC’s, sending out viruses, and inter-connecting with the monitoring systems of the Public Security Bureaus.
Rather than heralding a new era of freedom, the Internet is enabling Chinese authorities to perfect totalitarian control in a way that puts the rulers in George Orwell’s 1984 to shame.
Since April 15 of this year, the Golden Shield’s advanced science and technology has been monitoring every thought and action of those Chinese people who use the Internet.
But what Orwell failed to predict is that China’s government has accomplished this with the help of Western democracies.
Today, China is the only country in the world that has enshrined in law the concept of a “Web political criminal.”
Publishing articles on the Internet can amount to “committing an offense,” and “radical views” may result in imprisonment.
The real criminals, the officers of the companies – Nortel, Cisco, and Sun Microsystems – that built this sinister system of mind control, will never get closer to a prison than China’s five-star hotels.
Since the first Chinese Web criminal, Lin Haiyin, was imprisoned for instigating subversive actions in 2000 to the recent arrest of writer Shi Tao, more than 100 independent intellectuals have been imprisoned for expressing their views.
Internet monitoring is also behind the constant rise in the number of Falun Gong practitioners executed by the state – a total of 1,692 as of April 18.
Internet communication in modern China is filled with baits and traps: user-friendly Web page designs, easy-to-click icons and symbolized facial expressions, beautiful female stars in online ads and constantly updated international news induce users to participate and express their own ideas.
But once someone’s fingertips touch the keyboard, the “Kitchen Table Democracy” of the Web no longer exists – he or she may find themselves stepping into a trap, because the Internet Police monitor every word that is typed.
In a country where freedom of expression has been off limits for half a century, the Internet had at first proven to be a godsend: people poured their enthusiasm into it by building Web sites and personal homepages.
Now these people find themselves exposed to the Public Security Bureaus.
For example, the Democracy and Freedom Web site has been either temporarily shut down or blocked 43 times in three years.
Its robust reports on the death of Zhao Ziyang, the reform-minded leader of the 1980’s who was imprisoned for objecting to the Tiananmen Square crackdown of June 1989, ultimately forced it to succumb to the power of the “Golden Shield.”
Today, the average online lifespan of proxy servers in China is a mere 30 minutes, and 17,000 Internet cafes have been shut down.
The online filtering technology is capable of blocking or intercepting the emails of the 80 million or so “Net citizens” in China.
Because Internet chat rooms and personal emails have become essential to many Chinese, the upgrading of Internet supervision is also gaining momentum.
As a result, thinkers today are far more likely to get caught expressing “unsanctioned” ideas than they ever were in the 1980’s and early 1990’s, when underground publications served as the main channel of free expression.
Indeed, although the Internet’s coverage in China has been expanding steadily, the Communist Party’s ability to censor it has grown even faster, thanks to Western technology.
The Party has been dreaming of this kind of oversight ever since its revolutionary days.
Dictatorship is not only safe in China, but, at least for now, it is on the offensive.
But not forever.
Although “the Golden Shield Project” is the Communist Party’s largest single investment in the ideological field since it gained control of China in 1949, it is also likely to be the last big bet before the Party’s collapse.
Like the Berlin Wall, China’s Internet restrictions may be technically sound, even as they defend the indefensible and sustain the unsustainable.
China’s Landing – Soft not Hard
NEW HAVEN – China’s economy is slowing.
This is no surprise for an export-led economy dependent on faltering global demand.
But China’s looming slowdown is likely to be both manageable and welcome.
Fears of a hard landing are overblown.
To be sure, the economic data have softened.
Purchasing managers’ indices are now threatening the “50” threshold, which has long been associated with the break-even point between expansion and contraction.
Similar downtrends are evident in a broad array of leading indicators, ranging from consumer expectations, money supply, and the stock market, to steel production, industrial product sales, and newly started construction.
But this is not 2008.
Back then, global commerce was collapsing, presaging a 10.7% drop in the volume of world trade in 2009 – the sharpest annual contraction since the 1930s.
In response, China’s export performance swung from 26% annual growth in July 2008 to a 27% contraction by February 2009.
Sequential GDP growth slowed to a low single-digit pace – a virtual standstill by Chinese standards.
And more than 20 million migrant workers reportedly lost their jobs in export-led Guangdong province.
By late 2008, China was in the throes of the functional equivalent of a full-blown recession.
Thanks to a massive fiscal stimulus, China veered away from the abyss in early 2009.
But it paid a price for this bank-funded investment boom.
Local governments’ indebtedness soared, and fixed investment surged toward an unprecedented 50% of GDP.
Fears surfaced of another banking crisis, the imminent collapse of a monstrous property bubble, and runaway inflation.
Add a wrenching European crisis to the equation, and a replay of 2008 no longer seemed far-fetched.
While there is a kernel of truth to each of these China-specific concerns, they do not by themselves imply a hard landing.
Nonperforming loans will undoubtedly increase in response to the banking sector’s exposure to some $1.7 trillion of local-government debt, much of which was incurred during the stimulus of 2008-2009.
But the feared deterioration in loan quality is exaggerated.
The reason: With rural-urban migration projected to exceed 310 million people over the next 20 years, there is reason to believe that much of the apparent overhang of housing supply will be steadily absorbed.
Like Shanghai Pudong in the late 1990’s, today’s Chinese “ghost cities” are likely to be teaming urban centers in the not-so-distant future.
Meanwhile, deposit-rich Chinese banks have ample liquidity to absorb potential losses; the system-wide loan-to-deposit ratio is only about 65% – well below earlier pre-crisis levels that were typically closer to 120%, according to a recent analysis by the Xerion team of Perella Weinberg Partners.
Nor is the Chinese property market about to implode.
Yes, a building boom and speculative excesses have occurred.
But a year and a half ago, the government moved aggressively to dampen multiple property purchases – raising down payments to 50% for second homes and to 100% for third homes.
While that halted much speculative activity, house prices have remained at elevated levels – underscoring lingering affordability issues for China’s emerging middle class.
Notwithstanding that problem, major imbalances in Chinese property markets should prove to be the exception over the next two decades.&#160;
While there could be supply-demand mismatches in any given year, with an average of roughly 15 million citizens a year slated to move from the countryside to newly urbanized areas, demand should rise to meet supply.&#160; Meanwhile, there are encouraging signs that property inflation is now cooling: For 46 of 70 major Chinese cities, property prices either declined or stayed flat in August 2011 compared with 31 cities that reported similar conditions in July.
Inflation is always a serious risk in China – especially with headline increases in the country’s Consumer Price Index surging through the 6% threshold this summer.
The government has responded forcefully on four fronts.
First, food inflation, which accounts for about half the recent run-up in overall prices, has been addressed by administrative measures aimed at cutting fertilizer costs and removing bottlenecks to increased supplies of pork, cooking oil, and vegetables.
Second, in an effort to curtail excess bank lending, reserve ratios were increased nine times in the past 11 months.
Third, the rate of currency appreciation has edged up.
Finally – and perhaps most importantly – the People’s Bank of China has raised its benchmark policy rate five times since October 2010.
At 6.5%, the one-year lending rate is now 0.3% above August’s headline inflation rate.
If food inflation recedes further, and the headline inflation rate starts to converge on the 3% core (non-food) rate, the result will be the equivalent of "passive monetary tightening" in real (inflation-adjusted) terms – precisely what the inflation-prone Chinese economy needs.
All of this underscores a potential silver lining.
An increasingly unbalanced Chinese economy cannot afford persistent 10% GDP growth.
Provided that there is no recurrence of the severe external demand shock of 2008 – a likely outcome unless Europe implodes – there is good reason to hope for a soft landing to around 8% GDP growth.
A downshift to this more sustainable pace would provide welcome relief for an economy long plagued by excess resource consumption, labor-market bottlenecks, excess liquidity, a large buildup of foreign-exchange reserves, and mounting inflationary pressures.
For China, there is a deeper meaning to recent global developments.&#160;
A second major warning shot in three years has been fired at this export-led economy.&#160;
First, the United States, and now Europe – China's two largest export markets are in serious trouble and can no longer be counted on as reliable, sustainable sources of external demand.
As a result, there are now major questions about the sustenance of China's long powerful export-led growth model.
Accordingly, China has no choice but to move quickly to implement the pro-consumption initiatives of its recently enacted 12th Five-Year Plan.
Strategic transition is what modern China is all about.
That’s what happened 30 years ago, when economic reform began. &#160;And it needs to happen again today.&#160;
For China, a soft landing will provide a window of opportunity to press ahead with the formidable task of increasingly urgent economic rebalancing.
China’s Lessons for the World Bank
The China Daily recently ran a front-page story recounting how Paul Wolfowitz used threats and vulgarities to pressure senior World Bank staff.
The newspaper noted that Wolfowitz sounded like a character out of the mafia television show The Sopranos .
At the same time, while the Wolfowitz scandal unfolded, China was playing host to the Africa Development Bank (ADB), which held its Board meeting in Shanghai.
This is a vivid metaphor for today’s world: while the World Bank is caught up in corruption and controversy, China skillfully raises its geopolitical profile in the developing world.
China’s rising power is, of course, based heavily on its remarkable economic success.
The ADB meeting took place in the Pudong District, Shanghai’s most remarkable development site.
From largely unused land a generation ago, Pudong has become a booming center of skyscrapers, luxury hotels, parks, industry, and vast stretches of apartment buildings.
Shanghai’s overall economy is currently growing at around 13% per year, thus doubling in size every five or six years.
Everywhere there are startups, innovations, and young entrepreneurs hungry for profits.
I had the chance to participate in high-level meetings between Chinese and African officials at the ADB meetings.
The advice that the African leaders received from their Chinese counterparts was sound, and much more practical than they typically get from the World Bank.
Chinese officials stressed the crucial role of public investments, especially in agriculture and infrastructure, to lay the basis for private-sector-led growth.
In a hungry and poor rural economy, as China was in the 1970’s and as most of Africa is today, a key starting point is to raise farm productivity.
Peasant farmers need the benefits of fertilizer, irrigation, and high-yield seeds, all of which were a core part of China’s economic takeoff.
Two other critical investments are also needed: roads and electricity, without which there cannot be a modern economy.
Farmers might be able to increase their output, but it won’t be able to reach the cities, and the cities won’t be able to provide the countryside with inputs.
The officials stressed how the government has taken pains to ensure that the power grid and transportation network reaches every village in China.
Of course, the African leaders were most appreciative of the next message: China is prepared to help Africa in substantial ways in agriculture, roads, power, health, and education.
And the African leaders already know that this is not an empty boast.
All over Africa, China is financing and constructing basic infrastructure.
During the meeting, the Chinese leaders emphasized their readiness to support agricultural research as well. They described new high-yield rice varieties, which they are prepared to share with their African counterparts.
All of this illustrates what is wrong with the World Bank, even aside from Wolfowitz’s failed leadership.
Unlike the Chinese, the Bank has too often forgotten the most basic lessons of development, preferring to lecture the poor and force them to privatize basic infrastructure, rather than to help the poor to invest in infrastructure and other crucial sectors.
The Bank’s failures began in the early 1980’s, when, under the ideological sway of President Ronald Reagan and Prime Minister Margaret Thatcher, it tried to get Africa and other poor regions to cut back or close down government investments and services.
For 25 years, the Bank tried to get governments out of agriculture, leaving impoverished peasants to fend for themselves.
The result has been a disaster in Africa, with farm productivity stagnant for decades.
The Bank also pushed for privatization of national health systems, water utilities, and road and power networks, and grossly underfinanced these critical sectors.
This extreme free-market ideology, also called “structural adjustment,” went against the practical lessons of development successes in China and the rest of Asia.
Practical development strategy recognizes that public investments – in agriculture, health, education, and infrastructure – are necessary complements to private investments.
The World Bank has instead wrongly seen such vital public investments as an enemy of private-sector development.
Whenever the Bank’s extreme free-market ideology failed, it has blamed the poor for corruption, mismanagement, or lack of initiative. This was Wolfowitz’s approach, too.
Instead of focusing the Bank’s attention on helping the poorest countries to improve their infrastructure, he launched a crusade against corruption.
Ironically, of course, his stance became untenable when his own misdeeds came to light.
The Bank can regain its relevance only if it becomes practical once again, by returning its focus to financing public investments in priority sectors, just as the Chinese leadership is prepared to do.
The good news is that African governments are getting the message on how to spur economic growth, and are also getting crucial help from China and other partners that are less wedded to extreme free-market ideology than the World Bank.
Many African governments at the Shanghai meeting declared their intention to act boldly, by investing in infrastructure, agricultural modernization, public health, and education.
The Wolfowitz debacle should be a wake-up call to the World Bank: it must no longer be controlled by ideology.
If that happens, the Bank can still do justice to the bold vision of a world of shared prosperity that prompted its creation after World War II.
China\u0027s Looming WTO Revolution
China is now an active member of the world economic and political community.
Relative affluence and greater personal freedom exist for many, even as other Chinese citizens are racked by the travails of modernization.
Many anticipate that China's entry into the World Trade Organization (WTO) will speed these trends along and may even precipitate fundamental and legal political change.
Although forward momentum will be slower than many anticipate, the changes exacted by WTO membership will be profound because China's future will be dictated or determined more than ever before by factors beyond Beijing's control.
Moreover, WTO membership will not only prevent backsliding but will raise fundamental questions about national sovereignty and powerful debates about the amount of foreign engagement China is willing to tolerate.
The impact will go beyond economics to affect, deeply, social and political life.
Although some analysts produced doomsday scenarios about increasing unrest from rising unemployment and inequality, liberal intellectuals in China welcome membership in anticipation of a more rule-bound and democratic political order.
In reality, entry will push forward trends set in motion well before China joined the WTO.
The demise of the old economic order will be hastened while the emerging private enterprise and new sectors will become ever more privileged.
In the social realm, WTO entry will increase inequality and the restructuring of the labor force into extremes of wealth and poverty.
In this process, the concentration of foreign direct investment (FDI) along the coasts will also continue to exacerbate regional inequalities.
In 1998, Guangdong province alone received 26.5% of FDI while the entire West of China received 3%.
As a result, those living in Shanghai enjoy a real income twice that of the Northwest and 60% higher than the Southwest.
Already radically different levels of education, resource endowment and skilled labor mean that, with WTO entry, the already privileged coastal areas of China will continue to advance disproportionately over more backward inland areas.
Increased economic competition will also add to unemployment in the state-owned sector while new, private job creation will not match the rising need.
For example, the real unemployment rate in the Northeast is already over 10% and this region will feel the strongest impact from agricultural changes.
While much of China will gain from agricultural diversification, areas such as the Northeast that are overly dependent on grain production will suffer because under the WTO China will import much cheaper and better quality grain for both human consumption and animal fodder, causing rural incomes to decline even further.
Migration to a city will be the only choice for many dispossessed peasants.
It is no surprise, then, that rural and urban unrest is mounting.
China's new leadership must address this rising tide of disaffection when calculating the pace with which to move ahead with WTO compliance.
The CCP must decide how to accommodate the social forces that will benefit from further globalization while disentangling itself from its traditional power base, housed in the failing state-owned sector propped up by the old central planning apparatus.
To deal with the social cleavages that will increase as a result of WTO accession, China will have to develop more participatory and open mechanisms by allowing for a competitive political market place to develop to parallel the economic one.
Doubtless, such changes will be difficult for the CCP to accept.
No less necessary will be further development of a legal and regulatory framework as a means to improve the potential for both domestic and international investment.
Here the major challenge will be for the CCP to accept that WTO membership presumes that disputes will be resolved by an independent, rules-based, supra-national body rather than by party-fiat or through the mediation of local political connections.
Within China, pressure will mount for a more independent judiciary to adjudicate economic issues and create greater transparency in international transactions.
Such changes run counter to current practice and will not be easy for party members to swallow.
The developed economies of the world can facilitate this process.
Sluggish progress may be unacceptable, but outsiders must recognize that the CCP must balance the imperatives of progress against mushrooming social unrest.
China has agreed to implement its WTO commitments in a stunningly short period of time that can only have been agreed to because of extreme American pressure.
But China is too big and too political to be pushed so fast that it is not permitted sufficient time to adapt properly.
Cooler heads must prevail around the world so that China is not taken to WTO dispute mechanisms for each and every insignificant infraction.
In short, there needs to be political maturity exercised by everyone as China integrates with the world economy.
Importantly, those countries who expect China to yield to WTO protocols will have to behave responsibly when demanding it abide by international decisions beyond its own jurisdiction, not all of which will be to its liking.
To date, this has not been a strong suit, particularly for America.
But if disdain is shown for the WTO process, there will be little incentive for China to comply during the difficult months ahead.
China’s Losing Battle Against Corruption
China’s rulers rarely wash their dirty linen in public.
So the arrest of Politburo member and Shanghai Communist Party boss Chen Liangyu on corruption charges has sent shock waves across the country.
Some speculate that the arrest is really part of a power struggle, with President Hu Jingtao demonstrating his authority against a local power broker who had thwarted national policy.
Whatever the truth behind Chen’s fall, and despite the widening corruption probe of other senior government officials, data and evidence recently released by the government and multilateral institutions suggest that the authorities are fighting a rearguard battle against a rising tide of graft.
Consider the grim statistics recently released by the Supreme People’s Procuratorate (SPP).
More than 42,000 government officials on average were investigated for corruption every year from 2002 to 2005, with more than 30,000 per year facing criminal charges.
These startling figures do not include economic crimes outside the public sector.
For example, in 2005 alone, the China Banking Regulatory Commission (CBRC) unearthed irregularities involving misused funds of RMB767.1 billion ($93.7 billion).
The CBRC uncovered 1,272 criminal cases and disciplined 6,826 bank employees (including 325 senior managers).
According to Ye Feng, a SPP Director-General, “[a]lmost every type of financial institution has seen the emergence of criminal cases involving the solicitation of bribes in return for loans.”
Despite the government’s intermittent anti-corruption campaigns, progress has been slow.
On the contrary, as Ye has candidly acknowledged, the number of corruption cases “has continued to rise.”
Indeed, international measures of graft show that the authorities may be reaching a stalemate or even retreating in the fight.
Transparency International’s Corruption Perception Index, the most widely-used benchmark to gauge businessmen’s and experts’ beliefs about the extent of corruption in various countries, ranked China 78th out of 158 countries in 2005 – not much improvement from 2000.
Indeed, among the World Bank’s six “Governance Indicators,” China’s scores on the “Control of Corruption” index have actually slipped in recent years, from -0.20 in 1998 to -0.40 in 2002 and -0.69 in 2005.
In 2005, the World Bank ranked China 142nd out of 204 countries on the “Control of Corruption” index.
While the economic toll of graft cannot be precisely quantified, indirect evidence suggests that the costs are significant.
Multinational executives frequently cite China as their favorite investment destination, but many of them also complain about rampant graft.
According to the World Bank’s “Investment Climate Surveys”, 27% of nearly 4,000 firms doing business in China in 2002-03 described corruption as a “major constraint” on their commercial operations, while 55% reported that they had paid bribes to government bureaucrats and/or local business partners to get things done.
Likewise, Hu Angang, an economics professor at Beijing’s Tsinghua University, has estimated that corruption in 1999-2001 alone caused economic losses worth RMB1,293 billion ($156 billion), or 13.2% of GDP.
Not surprisingly, the financial services sector suffered the most from corruption, losing RMB547 billion (6.25% of GDP).
Fraudulent public expenditure cost 2.4% of GDP, siphoning off privatization proceeds amounted to almost 2.1% of GDP, and smuggling caused losses of more than 1.1% of GDP.
The Chinese government has neither censored nor refuted Hu’s dreadful findings.
The biggest obstacle to fighting graft is the weakness of the judiciary, especially at sub-national levels.
Since most government corruption occurs at the county, township and village levels, it usually involves abuses of power by local officials.
However, since these petty bureaucrats’ power is almost absolute, they also control the channels for addressing grievances.
Indeed, among the World Bank’s six “Governance Indicators,” China’s score on the “Rule of Law” index has also slid in recent years, from -0.28 in 1998 to -0.47 in 2005, when China ranked 124th out of 208 countries in this category.
With little recourse to legal means, an increasing number of frustrated victims of graft resort to extra-legal measures such as strikes, demonstrations, and sit-ins in order to gain media and public attention.
Some even carry their fights to the provincial and central authorities, stoking a sharp rise in the incidents of “public order disturbances” nation-wide.
Whereas the Ministry of Public Security reported only 8,700 such disturbances in 1993, by 2005 the number had jumped ten-fold, to 87,000.
Needless to say, government mishandling of such disturbances, or a decision to repress them with force, would only fuel further social discontent.
In fact, the government’s success in clamping down on corruption, especially at sub-national levels, will be a litmus test of its legitimacy.
To fail would risk igniting a severe political backlash, including a spontaneous escalation of anti-regime activities.
China’s Macro Disconnect
NEW HAVEN – Structural change and rebalancing are formidable undertakings for any economy.
China has been focused on these objectives for five years – seeking to transform a powerful yet unbalanced growth model based largely on exports and investment into one driven increasingly by its consumers.
Success is essential if China is to avoid the dreaded “middle-income trap” – the economic slowdown that most fast-growing developing economies experience when they reach income thresholds comparable to that of China today.
The results have been mixed.
China has been highly successful in its initial efforts to shift the industrial structure of its economy from manufacturing to services, which have long been viewed as the foundation of modern consumer societies.
But it has made far less progress in boosting private consumption.
China now has no choice but to address this disconnect head on.
The performance of China’s services sector has been especially impressive in recent years, with its share of GDP increasing from 44% in 2010 to 51.6% in the first three quarters of 2015, according to official statistics.
That is nearly double the four-percentage-point increase that was initially envisioned in the 12th Five-Year Plan, which is about to come to an end.
The gains have been particularly strong in the distribution sectors – wholesale and retail trade – as well as in finance and real estate.
And China’s shift to services has only just begun.
It should broaden into IT services, healthcare, domestic transportation, and hospitality and leisure, as the sector as a whole climbs toward a 60-65% share of GDP over the next decade.
By contrast, consumer-led growth has been much slower to materialize.
After bottoming out at 36% of GDP in 2010, private consumption’s share of GDP inched up to 38% in 2014 – a two-percentage-point increase that is only about one-fourth the magnitude of the services-led shift in the economy’s structure.
With its prowess in central planning, China has always been adept at engineering shifts in its industrial structure – as the move toward services-led growth attests.
But China apparently is far less proficient in replicating the DNA of a modern consumer culture – specifically, in altering the behavioral norms of its people.
The disconnect between surging services and lagging growth in private consumption has been accompanied by a steady rise in China’s urban saving rate to 30% in 2014 (versus 24% a decade earlier).
This has occurred despite a significant increase in the personal income share of the Chinese economy, driven by services-led employment growth and the income leverage of urbanization.
Chinese families have been reluctant to convert much of this newfound income into discretionary spending.
China’s high and rising urban saving rate in a climate of vigorous per capita income growth reflects a persistent preference for precautionary saving over discretionary consumption.
Unfortunately, this is a rational response to the uncertain future faced by the majority of Chinese families, underscored by the lack of a reliable social safety net.
Moreover, anxiety over inadequate provisions for retirement and health care is set to intensify as a rapidly aging population now enters the most vulnerable phase of its life cycle.
The good news is that the 13th Five-Year Plan (covering the 2016-2020 period), which is to be enacted in March 2016, appears likely to address these concerns explicitly.
Early indications from the Fifth Plenum of the 18th Central Committee of the Communist Party of China, held in late October, suggest that the next plan will focus on the missing piece of consumer-led rebalancing: a strong social safety net.
A proposed consolidation of rural and urban plans for pensions and critical health care is particularly important in this regard, as is the authorities’ commitment to allowing workers to transfer their hukou (residency permits) – and the associated social welfare benefits – wherever they move.
For China’s 270 million migrant workers, benefit portability could be decisive in shifting the balance from fear and precautionary saving to security and discretionary spending.
Equally significant was the Fifth Plenum’s emphasis on using state capital to fund a more robust safety net through an increase in taxes on state-owned enterprises that was proposed a couple of years ago.
But the biggest breakthrough in reshaping societal norms was in family-planning policy – replacing the one-child limit that had been in force since 1980 with a two-child limit beginning in 2017.
Aimed at addressing China’s serious aging problem, the eventual consequences of this long-overdue shift cannot be minimized.
As the family unit, central to China’s Confucian heritage, changes, so will the country’s social and economic character.
Over the past 35 years, China’s powerful growth model has yielded extraordinary progress in terms of economic growth and development.
But speedy implementation of the shift from production to consumption will be vital if the country is to remain on course and avoid the middle-income trap.
That will require resolving the disconnect between the structural shift to services and the behavioral norms that will ultimately shape the spending habits of its people.
And that means overcoming the understandable caution of Chinese households in the face of an uncertain future.
Converting fear into confidence is a daunting task for any society.
China is no exception.
The focus on resolving China’s macroeconomic disconnect, reflected at the Fifth Plenum and a likely precursor of what to expect in the upcoming 13th Five-Year Plan, is thus very encouraging.
China’s Monetary Sterilization
BEIJING – Not long after the United States Federal Reserve Board announced its second round of “quantitative easing” (known as QE2), the People’s Bank of China (PBC), China’s central bank, announced two increases of 0.5 percentage points in the required reserve ratio (RRR) of bank deposits.
The RRR now stands at 18.5%, a historic high, even in global terms.
While the Fed is planning to pump more money into the US economy, the PBC is trying to reduce the amount of money in circulation in China.
Money used by commercial banks to satisfy the RRR, which is held in accounts at the PBC, can no longer be extended as loans.
As a result, more money than ever is now frozen or inactive in China.
It is understandable that the Fed wants to boost demand as long as the US economy remains depressed.
But why has the PBC tightened monetary policy so much?
The Chinese economy is not over-heating.
Growth is still high, at about 10% per year, but has started to moderate.
And, while inflation is a concern – having risen to 4.4% year on year in October, from 3.6% in September – this cannot explain why the PBC raised the RRR three times earlier this year, when inflation was lower.
Instead, the PBC’s policy is preemptive: sterilize over-liquidity and get the money supply under control in order to prevent inflation or over-heating.
At the beginning of the year, the RRR increases could be regarded as part of efforts to correct the over-supply of money that arose from the anti-crisis stimulus package.
But the most recent RRR increases serve mainly to sterilize the “passive money supply” caused by the increase in foreign-exchange reserves.
Indeed, in September alone, China’s foreign-currency reserves increased by almost $100 billion compared to August.
With the global economy recovering, China’s trade surplus began to grow.
Moreover, capital inflows increased significantly, owing to real investment opportunities in the high-growth economy and the expectation of renminbi revaluation.
But rapid growth in foreign-exchange reserves means an increase in the domestic money supply, because the PBC issues RMB6.64 (down 3% since June) for every dollar it receives.
That means that money supply increase by nearly RMB700 billion in September.
The two 50-basis-point RRR increases just locked up the same amount of liquidity.
A country with current-account and capital-account surpluses and increasing foreign-exchange reserves normally sees an excessive money supply and high inflation.
But, while excessive money supply is a reality for China – the PBC now holds more than $2.6 trillion in foreign reserves – inflation has been quite moderate so far, thanks to the sterilization policy.
The RRR is only one example of a textbook sterilization instrument.
Another is to sell off government bonds held by the central bank in order to take money out of circulation – again, just the opposite of what the Fed is now doing.
Because China’s government does not owe much debt to the public, the PBC sold out its holdings of government bonds in 2005.
So it had to create something else to sell.
It created so-called “Central Bank Bills,” which commercial banks are supposed to buy voluntarily.
When they do, the money they pay is also locked up in the PBC’s accounts.
To date, up to 5-6% of total liquidity has been returned to the central bank in this way.
Furthermore, the PBC uses unconventional instruments from time to time, such as “credit ceilings” or “credit quotas” imposed on commercial banks.
This may result in “extra reserves,” which commercial banks cannot use to extend their credit lines.
Credit quotas imposed early this year have left Chinese commercial banks with 2-3% of extra reserves.
Adding up the impact of the PBC’s sterilization efforts, roughly one-quarter of China’s total monetary base is illiquid.
Thus, although China’s total money supply seems excessive, with the M2-to-GDP ratio now at about 190%, the real monetary base is actually much smaller than it appears.
As a result, China’s inflation, as well as asset prices, remain under control.
For how long will this sterilization continue, and how far will it go?
At what point will higher RRR levels cause Chinese commercial banks to begin running losses?
There may be room for further sterilization.
First, unlike in some other countries, Chinese commercial banks are paid reasonable interest rates on required reserves, except for the “extra reserves” that they hold.
So they do not lose much, if anything, from the PBC’s sterilization policies.
Second, China’s central bank still controls interest rates by enforcing a roughly three-percentage-point spread between deposit rates and lending rates.
As a result, Chinese commercial banks can operate longer with a higher RRR than their counterparts elsewhere.
One key issue facing China is how to reduce the current- and capital-account surpluses in order to reduce foreign-exchange holdings.
Yes, further revaluation of the exchange rate is needed, but this can play only a secondary role.
The most important task for China is to reduce the saving rate, which equaled 52% of GDP in 2009.
A number of fiscal, social-security, and tax reforms should be a priority for this purpose.
But it seems that both revaluation and reform will take time.
Meanwhile, the causes of global imbalance on the US side also seem unlikely to disappear any time soon.
And now, with the Fed’s QE2 on the table, conditions may worsen before they improve.
The PBC may have to continue its sterilization for some time in the foreseeable future.
China’s New Currency Policy
CAMBRIDGE – China’s government may be about to let the renminbi-dollar exchange rate rise more rapidly in the coming months than it did during the past year.
The exchange rate was actually frozen during the financial crisis, but has been allowed to increase since the summer of 2010.
In the past 12 months, the renminbi strengthened by 6% against the dollar, its reference currency.
A more rapid increase of the renminbi-dollar exchange rate would shrink China’s exports and increase its imports.
It would also allow other Asian countries to let their currencies rise or expand their exports at the expense of Chinese producers.
That might please China’s neighbors, but it would not appeal to Chinese producers.
Why, then, might the Chinese authorities deliberately allow the renminbi to rise more rapidly?
There are two fundamental reasons why the Chinese government might choose such a policy: reducing its portfolio risk and containing domestic inflation.
Consider, first, the authorities’ concern about the risks implied by its portfolio of foreign securities.
China’s existing portfolio of some $3 trillion worth of dollar bonds and other foreign securities exposes it to two distinct risks: inflation in the United States and Europe, and a rapid devaluation of the dollar relative to the euro and other currencies.
Inflation in the US or Europe would reduce the purchasing value of the dollar bonds or euro bonds.
The Chinese would still have as many dollars or euros, but those dollars and euros would buy fewer goods on the world market.
Even if there were no increase in inflation rates, a sharp fall in the dollar’s value relative to the euro and other foreign currencies would reduce its purchasing value in buying European and other products.
The Chinese can reasonably worry about that after seeing the dollar fall 10% relative to the euro in the past year – and substantially more against other currencies.
The only way for China to reduce those risks is to reduce the amount of foreign-currency securities that it owns.
But China cannot reduce the volume of such bonds while it is running a large current-account surplus.
During the past 12 months, China had a current-account surplus of nearly $300 billion, which must be added to China’s existing holdings of securities denominated in dollars, euros, and other foreign currencies.
The second reason why China’s political leaders might favor a stronger renminbi is to reduce China’s own domestic inflation rate.
A stronger renminbi lowers the cost to Chinese consumers and Chinese firms of imported products as expressed in renminbi.
A barrel of oil might still cost $90, but a 10% increase in the renminbi-dollar exchange rate reduces the renminbi price by 10%.
Reducing the cost of imports is significant because China imports a wide range of consumer goods, equipment, and raw materials.
Indeed, China’s total annual imports amount to roughly $1.4 trillion, or nearly 40% of GDP.
A stronger renminbi would also reduce demand pressure more broadly and more effectively than the current policy of raising interest rates.
This will be even more important in the future as China carries out its plan to increase domestic spending, especially spending by Chinese households.
A principal goal of the recently presented 12th Five-Year Plan is to increase household incomes and consumer spending at a faster rate than that of GDP growth.
The combination of faster household-spending growth and the existing level of exports would cause production bottlenecks and strain capacity, leading to faster increases in the prices of domestically produced goods.
Making room for increased consumer spending requires reducing the level of exports by allowing the currency to appreciate.
Looking back on the past year, the 6% rise in the renminbi-dollar exchange rate might understate the increase in the relative cost of Chinese goods to American buyers because of differences in domestic inflation rates.
Chinese consumer prices rose about 6.5% over the past year, while US consumer prices rose only about 3.5%.
The three-percentage-point difference implies that the “real” inflation-adjusted renminbi-dollar exchange rate rose 9% over the past year (i.e., 6% nominal appreciation plus the 3% inflation difference.)
Although this is how governments calculate real exchange-rate changes, it no doubt overstates the relative change in the prices of the goods that Americans buy from China, because much of China’s inflation was caused by rising prices for housing, local vegetables, and other non-tradables.
The renminbi prices of the Chinese manufactured products that are exported to the US may not have increased at all.
The renminbi-dollar exchange rate is, of course, only part of the story of what drives China’s trade competitiveness.
While the renminbi has risen relative to the dollar, the dollar has declined against other major currencies.
The dollar’s 10% decline relative to the euro over the past 12 months implies that the renminbi is actually down by about 4% relative to the euro.
The Swiss franc has increased more than 40% against the dollar – and therefore more than 30% against the renminbi.
Looking at the full range of countries with which China trades implies that the overall value of the renminbi probably declined in the past 12 months.
The dollar is likely to continue falling relative to the euro and other currencies over the next several years.
As a result, the Chinese will be able to allow the renminbi to rise substantially against the dollar if they want to raise its overall global value in order to decrease China’s portfolio risk and rein in inflationary pressure.
China’s New Economic Model
China’s success since it began its transition to a market economy has been based on adaptable strategies and policies: as each set of problems are solved, new problems arise, for which new policies and strategies must be devised.
This process includes social innovation .
China recognized that it could not simply transfer economic institutions that had worked in other countries; at the least, what succeeded elsewhere had to be adapted to the unique problems confronting China.
Today, China is discussing a “new economic model.”
Of course, the old economic model has been a resounding success, producing almost 10% annual growth for 30 years and lifting hundreds of millions of Chinese out of poverty.
The changes are apparent not only in the statistics, but even more so in the faces of the people that one sees around the country.
I recently visited a remote Dong village in the mountains of Quizho, one of China’s poorest provinces, miles away from the nearest paved road; yet it had electricity, and with electricity had come not just television, but the internet.
While some rising incomes came from remittances from family members who had migrated to coastal cities, the farmers, too, were better off, with new crops and better seeds: the government was selling, on credit, high-grade seeds with a guaranteed rate of germination.
China knows that it must change if it is to have sustainable growth.
At every level, there is a consciousness of environmental limits and the realization that the resource-intensive consumption patterns now accepted in the United States would be a disaster for China – and for the world.
As an increasing share of China’s population moves to cities, those cities will have to be made livable, which will require careful planning, including public transportation systems and parks.
Equally interesting, China is attempting to move away from the export-led growth strategy that it and other East Asian countries have pursued.
That strategy supported technology transfer, helping to close the knowledge gap and rapidly improving the quality of manufactured goods.
Export-led growth meant that China could produce without worrying about developing the domestic market.
But a global backlash has already developed.
Even countries seemingly committed to competitive markets don’t like being beaten at their own game, and often trump up charges of “unfair competition.”
More importantly, even if markets are not fully saturated in many areas, it will be hard to maintain double-digit growth rates for exports.
So something has to change.
China has been engaged in what might be called “vendor finance,” providing the money that helps finance the huge US fiscal and trade deficits, allowing Americans to buy more goods than they sell.
But this is a peculiar arrangement: a relatively poor country is helping to finance America’s War on Iraq, as well as a massive tax cut for the richest people in the world’s richest country, while huge needs at home imply ample room for expansion of both consumption and investment.
In fact, to meet the challenge of restructuring China’s economy away from exports and resource-intensive goods, China must stimulate consumption.
While the rest of the world struggles to raise savings, China, with a savings rate in excess of 40%, struggles to get its people to consume more.
Providing better social services (public health care, education, and nation-wide retirement programs) would reduce the need for “precautionary” savings.
More access to finance for small and medium sized businesses would help, too.
And “green taxes” – such as on carbon emissions – would shift consumption patterns while discouraging energy-intensive exports.
As China moves away from export-led growth, it will have to look for new sources of dynamism in its growing entrepreneurial ranks, which requires a commitment to creating an independent innovation system.
China has long invested heavily in higher education and technology; now it is striving to create world-class institutions.
But if China wants a dynamic innovation system, it should resist pressure by Western governments to adopt the kind of unbalanced intellectual property laws that are being demanded.
Instead, it should pursue a “balanced” intellectual property regime: because knowledge itself is the most important input in the production of knowledge, a badly designed intellectual property regime can stifle innovation – as has been the case in America in some areas.
Western technological innovation has focused too little on reducing the adverse environmental impact of growth, and too much on saving labor – something that China has in abundance.
So it makes sense for China to focus its scientific prowess on new technologies that use fewer resources.
But it is important to have an innovation system (including an intellectual property regime) that ensures that advances in knowledge are widely used.
That may require innovative approaches, quite different from intellectual property regimes based on privatization and monopolization of knowledge, with the high prices and restricted benefits that follow.
Too many people think of economics as a zero-sum game, and that China’s success is coming at the expense of the rest of the world.
Yes, China’s rapid growth poses challenges to the West.
Competition will force some to work harder, to become more efficient, or to accept lower profits.
But economics is really a positive-sum game.
An increasingly prosperous China has not only expanded imports from other countries, but is also providing goods that have kept prices lower in the West, despite sharply higher oil prices in recent years.
This downward pressure on prices has allowed Western central banks to follow expansionary monetary policies, underpinning higher employment and growth.
We should all hope that China’s new economic model succeeds.
If it does, all of us will have much to gain.
China’s New Latin Beat
China’s President Hu Jintao has just returned home from his first trip to Latin America, where he sought new long-term sources of supplies for his country’s booming economy.
These new ties offer Latin America and the Caribbean both a new market and an example of how a dynamic economy can reduce poverty.
But Latin America should also be on its guard.
While China may be a ravenous importer of Latin American commodities, it is also a formidable competitor.
Both the public and private sector throughout the region should take immediate measures to face up to this new competition and to work toward cooperative projects with the Chinese.
Ordinary people in Latin America are only now recognizing China’s importance as a global economic player.
Indeed, until recently, most people took little notice of China.
But China’s soaring growth, seen in contrast with stagnation in Latin America’s economies, has awakened governments and businessmen across the region.
Comparisons between China’s economy and that of Latin America are stunning.
The World Bank estimates that dire poverty in China, calculated as individual income of $1 per day, has been reduced from about 500 million people at the start of the 1980’s to less than 90 million in 2000.
Meanwhile, poverty rates in South America have remained relatively constant.
Economic growth rates reveal the same gap.
From 1978 to 2003, annual real GDP growth in China averaged 8.1% while growth in Mexico – the fastest in Latin America, barely reached 1% a year.
Although growing, China’s trade with Latin America and the Caribbean remains small, representing less than 2% of both exports and imports in 2002.
The nature of that trading relationship differs substantially from country to country.
Brazil and Argentina have, for example, significantly increased agricultural exports to China, while Central America and Mexico have seen their imports from China increase dramatically.
This is important because it illustrates the dissimilar regional impact that trade with China has on Latin America and the Carribean, owing to the export of South America’s basic goods, coupled with the growth of Chinese imports into Mexico.
In the 10 years between 1993 and 2003, China’s and Hong Kong’s exports to Mexico rose from 1.12% of total Mexican imports to 5.8%.
Since 2003, China has become Mexico’s most important trading partner after the United States.
Indeed, Mexico’s trade deficit with China reached $9 billion in 2003.
In the second quarter of 2004, Chinese exports to Mexico grew by 67%, while Mexico’s exports to China fell by 1.3 %.
These changes have also had a severe impact on Mexico’s trade with the US.
Although Latin American and Chinese exports to the US have both grown significantly since 1990, China replaced Mexico in 2003 as the second-leading exporter to the US in value terms after Canada.
Mexico’s competition in the US market from China has increased particularly in light manufacturing – mostly clothing and electronics.
In Central America and Mexico clothing production is vitally important – generating 400,000 and 600,000 jobs, respectively – and represents the heart of Central America’s maquiladoras (free trade zones), which account for more than 70% of regional exports to the US.
Losing this sector of the economy to the hyper-competitive Chinese will be a hard hit, as textile exports are often the first step on the development ladder.
With respect to other goods, including computers, Chinese-made products are set to replace Mexican output in overwhelming numbers.
Mexico’s so-called “Silicon Valley South” companies in Guadalajara have, by their own estimates, already lost more than $500 million worth of projects and approximately 20,000 jobs to Asia, especially to China, and this trend will continue in the short term.
If Latin America fails to deal with its new competitor, the peoples of the region will lose jobs and opportunities to develop as they should.
But there are lessons to be learned and advantages to be gained from China if Latin American governments and businesses are willing to think creatively.
China’s Next Mountain to Climb
MILAN – China is entering a complex set of transitions that will lay the foundations for the advanced-country status that it hopes to reach in the next 25 years.
After three decades of sustained growth and a remarkably successful policy response to the recent global crisis, Chinese self-confidence is soaring.
But the lessons that the government may draw from the crisis may not be the best guides for the long term.
China faces several parallel and related challenges that are crucial for its internal development as well as its global economic relations.
Among these are:
● a major microeconomic restructuring of the economy to anchor the country’s emerging middle income country status;
● a macroeconomic shift to a higher level of household income and consumption and a more rapid expansion of the middle class;
● a reversal of the country’s now rising income inequality; lowering the very high savings level relative to investment and thus reducing the current-account surplus;
● reducing the energy and carbon intensity of future growth;
● assuming greater global responsibilities.
Indeed, China has arrived at a point where its impact on the global economy is systemically important.
But it has reached this point at a much lower level of per capita income than any systemically important predecessor. The reason is that China is, by far, the most populous country to have sustained very rapid growth for 30 years.
So reckoning with the country’s global impact has been added to an already complex policy agenda, at a point when most countries have the luxury of maintaining a largely domestic focus.
China needs to balance these domestic and international priorities, but it has very little historical experience to guide it.
(India will take on this problem in about a decade, as it continues on its rapid-growth path.)
With a per capita income of around $4000 (more with purchasing power adjustments), important parts of China’s economy are already, or are now entering, middle-income status.
This is a difficult transition, during which many countries have lost momentum as structural transformations stall.
For example, China’s labor-intensive export sectors are losing their competitive edge.
They must be allowed to decline or move inland (and eventually decline).
They will be replaced by sectors that rely more on technology and human capital.
In this transition, services will undoubtedly grow.
Higher value-added sectors and functions that are upstream and downstream from processing industries will also need to flourish.
Global brands should start to appear, and government ownership of enterprises will continue to diminish.
Public-sector investment will shift toward education and R&amp;D.
Global and domestic markets, rather than China’s government, will increasingly drive this transition.
Targeting of sectors will decline.
The domestic market and a growing middle class will assume greater prominence.
Urbanization will accelerate with supporting public-sector investment.
Household disposable income is about 60% of national income in China, and the household savings rate is close to 30% of disposable income.
These numbers are low and high, respectively, compared to other countries.
For China, this puts consumption in the range of 40-45% of GDP.
To empower the domestic market to drive income growth, and to accelerate the growth of the middle class, these numbers need to shift.
Household income must rise, and, with more ample provision of social security, insurance, and services, precautionary savings should fall.
Both will support the middle-income transition by expanding the domestic market as a driver of growth, and will help sustain growth in the face of prospectively weaker global demand.
But, most important, rapid growth of the domestic market, especially the service sector, needs to largely replace the export sector as the employment engine pulling the rural population into the modern economy.
As the export sector moves into higher value-added sectors, it will no longer serve this function as effectively as it did in the past.
China ’s corporate sector has financed much of its investment out of retained earnings without having to raise capital from the household sector.
The government continues to own more than 50% of remaining state-owned enterprises, but does not need or use the income.
A big portion of these two income streams (corporate and government) needs to be redirected to the household sector.
High growth and urbanization have caused rapid rises in incomes in urban areas, with smaller increases in the rural areas.
A large group of migrant workers and families (on the order of 150 to 200 million people) are formally still rural, but in fact are marginal urban residents with constrained rights and access to services.
The resulting rise in social tensions is being addressed through expanded provision of rural services, investment in urban infrastructure and service provision, and regularization of migrants’ status.
China has faced daunting challenges in the past – and has generally outperformed the forecasts of skeptics.
But now China must face global pressures and responsibilities as well. These partly reflect China’s sheer size and impact.
But China also faces an external environment that is occasionally hostile to the country’s form of government; that sometimes overlooks or undervalues the rapid rise of millions of Chinese from poverty; that tends to view the global economy as a zero-sum game; and that mistakenly attributes China’s economic success to non-cooperative policies in areas like exchange-rate management.
China must confront the challenge of domestic restructuring to sustain growth, while asserting the right to develop without being penalized because of its size.
But it must also assume greater responsibility for global imbalances, economic and financial stability, and governance, as well as represent the interests of less powerful developing countries.
The rest of the world has a huge stake in the outcome of this complex balancing act.
China’s North Korean Contradictions
BEIJING – The release by WikiLeaks of American diplomatic cables written between 2004 and 2010 contains considerable material on China’s policy toward North Korea.
The leaks supposedly unveil a Chinese readiness to accept the reunification of Korea in favor of South Korea.
This proposition almost beggars belief because it starkly contradicts China’s actions in failing to openly condemn North Korea for its sinking of the South Korean warship Cheonan in March, or for the recent artillery attack on South Korea’s Yeonpyeong Island.
Similarly, rather than demand that North Korea stop its brinkmanship, China’s leaders have called for emergency consultations involving the United States, Japan, Russia, China, the United Nations, and South Korea.
None of these actions suggest a willingness to make the North Korean regime pay the price it deserves for its provocations.
So why doesn’t China move more decisively to rein in North Korea?
The conventional wisdom is that China doesn’t want to lose North Korea as a buffer between it and the US military in South Korea.
Thus China does what it must, shoring up the Kim family dynasty to prevent Korea from reunifying on South Korean terms.
Indeed, the controversy in Chinese eyes is not really about Korean reunification – few in Beijing speculate that the endgame will be otherwise – but to what extent reunification can be achieved without damaging China’s security concerns.
Every time North Korea acts provocatively – testing nuclear bombs, launching missiles, touting its secretive uranium enrichment facilities, and killing South Korean soldiers and civilians – China comes under diplomatic fire.
Its chronic indecisiveness about the North and unwillingness to use its leverage, thus shielding its socialist ally, seems to reveal to the wider world a China obsessed with its own narrow interests.
But these interests are hard to quantify.
The volume of China’s trade with South Korea is almost 70 times that with the North.
Thus, if China truly is the mercantilist power that many in the West claim, it should tilt decisively towards the South.
Moreover, China has no interest in stoking a “new Cold War” in East Asia, so it should be enthusiastic about the cause of denuclearization and thus play a bigger role in curtailing North Korea’s nuclear provocations.
The irony is that Chinese dithering has incited Cold War-type concerns in South Korea, Japan, and the US.
Indeed, given its lack of confidence in China’s readiness and willingness to keep the North in check, South Korea is now seeking even deeper defensive ties with the US, as well as enhancing its political and defense cooperation with Japan.
If North Korea fails to restrain itself, and China’s approach remains tantamount to coddling a dangerous, nuclear-armed state, strategic rivalry across East Asia might revive around a Washington-Tokyo-Seoul axis vis-à-vis a China-North Korea coalition.
Not surprisingly, that prospect offers scant comfort to China.
And yet China seems to turn a blind eye to it all.
Unfortunately, China’s obsolete ideology plays a key role here.
Although China claims that it “normalized relations” with North Korea in 2009, its policies and attitudes toward the North remain mired in a morbid comradeship.
For example, in October, on the 60th anniversary of the start of the Korean War, Chinese Vice President Xi Jinping (the likely successor to President Hu Jintao) dubbed the conflict a glorious fight against a “US-initiated invasion.”
A majority of Chinese dislike Kim Jong-il’s dynastic Leninist regime.
And the two countries have diverged enormously in political, economic, and social terms.
Yet China’s leaders remain incapable of seeming to abandon the North, no matter how odious its behavior.
Their diplomatic values, after all, were shaped by an official emphasis on sympathy for the weak in any struggle against the strong, and by comradely reminiscences about the North – far and away the weakest of the participants in the six-party negotiations over the North nuclear armaments with the US, South Korea, China, Russia, and Japan.
In the end, Chinese outrage at North Korea usually gives way to refusal to play any part in the demise of its neighbor and one-time ally.
More than one Chinese official has told me of holding hearty affection for North Korea’s people.
China’s leaders recognize that North Korea is a huge burden for them, but, like loving parents of a rogue son, they cannot bring themselves to disown him.
These emotional ties, combined with the usual bureaucratic love of the status quo, are the real cause of China’s failure to overhaul its North Korea policy.
Whenever a crisis erupts, China becomes agitated.
But, instead of seeking a new path, it re-traces its old steps.
Indeed, China’s North Korea policy is dominated by inertia rather than sensitivity to its own national interests.
This is not to say that China’s policy on North Korea will never change.
But change will require that China’s leaders find a way out of their psychological ambivalence.
Fortunately, Chinese thinking on North Korea nowadays is no longer monolithic.
Indeed, among China’s elite no foreign-policy issue is more divisive.
Given North Korea’s ability to scare China with its geographic proximity and the prospect of a sudden collapse (with all its security implications, including an influx of refugees), these divisions are likely to grow.
As a result, China’s calculations about North Korea will remain complicated, even as the risks posed by the North’s behavior rise.
China’s fears could be addressed by greater international collaboration, but China must be willing to cooperate as well, and, as we have seen again in recent days, it is unlikely to be forced out of its indecisiveness.
That will only come when it opens its eyes to the real and positive possibilities of such collaboration.
China’s “Peaceful” Rise?
In recent weeks, China announced a 12.6% increase in its defense spending;
America’s CIA director, Porter Goss, testified about a worsening military balance in the Taiwan Strait; and President George W. Bush pleaded with Europeans not to lift their embargo on arms sales to China.
Yet Chinese leaders have spoken of China’s “peaceful rise” or, more recently, its “peaceful development.”
Analysts such as John Mearsheimer of the University of Chicago have flatly proclaimed that China cannot rise peacefully, and predict that “the United States and China are likely to engage in an intense security competition with considerable potential for war.” Optimists point out that China has engaged in good neighbor policies since the 1990’s, settled border disputes, played a greater role in international institutions, and recognized the benefits of using soft power.
But skeptics reply that China is merely waiting for its economy to lay the basis for future hegemony.
Who is right?
We will not know for some time, but the debaters should recall Thucydides’ warning more than two millennia ago that belief in the inevitability of conflict can become one of its main causes.
Each side, believing it will end up at war with the other, makes reasonable military preparations that are read by the other side as confirmation of its worst fears.
In fact, the “rise of China” is a misnomer. “Re-emergence” would be more accurate, since by size and history the Middle Kingdom has long been a major power in East Asia.
Technically and economically, China was the world’s leader (though without global reach) from 500 to 1500.
Only in the last half-millennium was it overtaken by Europe and America.
The Asian Development Bank has estimated that in 1820, at the beginning of the industrial age, Asia accounted for three-fifths of world output.
By 1940, this fell to one-fifth, even though Asia was home to three-fifths of the world’s population.
Rapid economic growth has brought output back to two-fifths of the world total today, and the Bank speculates that Asia could return to its historical levels by 2025.
Asia, of course, includes Japan, India, Korea, and others, but China will eventually play the largest role.
Its high annual growth rates of 8-9% led to a tripling of its GNP in the last two decades of the twentieth century.
Nonetheless, China still has a long way to go and faces many obstacles.
The US economy is about twice the size of China’s; if it grows by only 2% annually, and China’s economy grows by 6%, they could reach parity sometime after 2025.
Even so, they would not be equal in composition or sophistication.
China would still have a vast, underdeveloped countryside, and would not equal the US in per capita income until sometime after 2075 (depending on the measures of comparison.)
China is a long way from posing the kind of challenge to American preponderance that the Kaiser’s Germany posed when it surpassed Britain in the years leading up to World War I.
Moreover, simple projections of economic growth trends can mislead.
Countries tend to pick the low-hanging fruit as they benefit from imported technologies in the early stages of economic take-off, and growth rates generally slow as economies reach higher levels of development.
In addition, China’s economy suffers from inefficient state-owned enterprises, a shaky financial system, and inadequate infrastructure.
At the same time, politics has a way of confounding economic projections.
Creating a rule of law and institutions for political participation has lagged behind economic growth, and growing inequality, massive internal migration, an inadequate social safety net, and corruption could foster political instability.
Indeed, some observers fear instability caused by a weak , rather than a rising, China.
As long as China’s economy does grow, its military power will likely increase, thus making China appear more dangerous to its neighbors and complicating America’s commitments in Asia.
A RAND study projects that by 2015, China’s military expenditure will be more than six times higher than Japan’s, and its accumulated military capital stock will be roughly five times higher (measured at purchasing power parity).
Whatever the accuracy of such assessments of China’s military growth, the outcome will also depend on what the US and other countries do.
The key to military power in the information age depends on the ability to collect, process, disseminate, and integrate complex systems of space-based surveillance, high speed computers, and “smart” weapons.
China and others will develop some of these capabilities, but, according to many military analysts, China is not likely to close the gap with the US soon.
China’s inability to compete with the US on a global basis does not mean that it could not challenge the US in East Asia, or that war over Taiwan is impossible.
Weaker countries sometimes attack when they feel backed into a corner, such as Japan did at Pearl Harbor or China did when it entered the Korean War in 1950.
If, for example, Taiwan were to declare independence, China would likely intervene with armed force, regardless of the perceived economic or military costs.
But it would be unlikely to win such a war, and prudent policy on both sides can make such a war unlikely.
There is no need for the US and China to go to war.
Not every rising power leads to war – witness America’s overtaking of Britain at the end of the nineteenth century.
If China’s rise remains peaceful, it promises great benefits to its own people and to its neighbors – and to Americans.
But, remembering Thucydides’ advice, it will be important not to mistake analysts’ theories for reality, and to continue pointing this out to political leaders and publics.
China’s Perfect Storm
New York – A perfect storm is brewing that could threaten China’s relations with the world.
Although some China bashers in the West and nationalists in China may be rejoicing, the potential deterioration of China’s international relations serves nobody’s interest and threatens to undermine global peace and security.
As the Beijing Olympics approach, what the Chinese seem to want most – that the Games herald China’s return as a leader among nations – appears close to slipping from their grasp.
If things go wrong, China could move to embrace isolation.
The uprising in Tibet, and the government’s response, have highlighted ethnic tensions within China that the Chinese government is having difficulty managing.
Politically unable to accept or sufficiently address the aspirations of the Tibetan protestors, China’s authorities have focused almost exclusively on the narrow law-and-order issues connected with the violence in March.
For many in the West who sympathize with Tibetans’ aspirations for more meaningful autonomy under Chinese sovereignty, China’s crackdown, vilification of the Dalai Lama, and hard-line approach have fueled disenchantment.
Many Chinese, however, came to view pro-Tibetan protests in Paris, London, San Francisco, Delhi, and elsewhere as an effort to sabotage the Olympics and keep China down after almost two centuries of perceived national humiliation.
China has recently suffered other public-relations disasters as well.
The Chinese ship containing arms for the reviled Mugabe regime in Zimbabwe is finally headed home after protests and global condemnation prevented it from delivering its cargo.
British Prime Minister Gordon Brown has called for a full arms embargo of Zimbabwe, a position clearly targeted at the Chinese.
Moreover, the international community continues to pillory China for its arms sales to Sudan, which is believed to have used the weapons in the Darfur genocide.
Moreover, after a seemingly unending litany of stories about tainted Chinese products, a row has now erupted between China and the United States regarding contaminated Chinese heparin, a blood thinner.
Although Chinese authorities have disputed US claims that Chinese-made heparin led to at least 81 American deaths, the scientific evidence has damaged China’s credibility and has strengthened perceptions around the world that Chinese products are unregulated and unsafe.
Finally, growing economic insecurity is creating a backlash against trade and globalization, which may significantly alter attitudes towards China.
As Americans and other Westerners increasingly perceive China as a country unable to address its political problems and addicted to growth at all costs, the Chinese government appears to be reverting to a national narrative of victimization that has poisonous roots in China’s perception of historical events such as the 1899-1901 Boxer rebellion.
If the Olympics turn out to be a public relations disaster – because of potential protests by Tibetan, Uighur, or Falun Gong activists or supporters, a lockdown in China of foreign journalists, or even doping scandals – there is a real chance that the Chinese will blame the West, particularly America.
Because China’s rise is an irreversible fact, all of those who believe that it must become more of a “responsible stakeholder” in world affairs cannot wish for its return to nationalist isolation.
Just as China needs access to world markets, the world needs China to become a full partner in addressing major global challenges.
Both sides owe each other an open and honest dialogue to help realize this outcome.
Western critics of China have every right to protest any aspect of Chinese behavior, and vice versa.
Certainly, America’s actions in Iraq, contribution to global warming, and uneven commitment to multilateral problem-solving leave a much room for criticism of US behavior both.
At the same time, those protesting Chinese behavior must remember that China’s rise has brought hundreds of millions of people out of poverty, and that China is playing a far more positive role in international relations now than at any other time in its recent history.
Chinese leaders must in turn work to prevent China’s national narrative from returning to one of victimization, even if problems surrounding the Olympics emerge, as they likely will.
China’s recent willingness to reopen a dialogue with envoys of the Dalai Lama, and improvement in its relations with Taiwan demonstrate that there is room for creating a more positive environment.
The storm is on the horizon, but there may still be time to prepare to weather it safely.
China\u0027s Political Bedlam
The last time China’s President Jiang Zemin attended the Fortune Global Forum in Hong Kong, Time-Warner CEO Gerald Levin gave him an award named after Abraham Lincoln.
President Jiang returned recently to that global gathering of business leaders but, thankfully, a repeat of that appeasement did not occur.
Even Western bosses keen on China, it appears, are finding it hard nowadays to praise Jiang, as he crushes the Falun Gong spiritual movement by imprisoning or confining its members to psychiatric hospitals.
Forced removal into mental hospitals of many Falun Gong members is central to this campaign.
Overseas Falun Gong support groups have documented well over a hundred such cases.
Estimates of the number being “treated” in this way run to 600.
Three of those sent to mental asylums are reported to have died as a result of their ill treatment.
Little known to the outside world is China’s gulag archipelago of Ankang (“Peace and Health”) institutions.
The twenty-or-more institutions of this type are run by the Ministry of Public Security and are subordinate provincial departments.
Political dissidents and others in similar categories brought before State forensic psychiatrists are often treated as the most “serious and dangerous” of all supposed mentally ill offenders, and face compulsory committal in these secretive institutions.
Chinese forensic psychiatry has gone through several phases.
In the 1950s, Soviet influences (characterized by heretical clinical theories whereby particular forms of political and religious dissent were attributed to specific varieties of “dangerous” mental illness) dominated.
During the Cultural Revolution (1966�76), when human psychology was officially repudiated and “correct” political ideology was equated with mental health, some 50% to 70% of psychiatric appraisals of criminal detainees in areas including Shanghai were categorized as “political in nature.”
The 1980s saw a return to the more low�level psychiatric abuses of the pre�Cultural Revolution era.
At first, the 1990s brought a decrease in politically directed psychiatry.
In the wake of the Tiananmen massacre, however, individual dissidents and other political nonconformists were again committed to special psychiatric hospitals on an involuntary and indefinite basis.
One example is Xue Jifeng, a labor�rights activist detained by police in Zhengzhou, the capital of Henan province, in December 1999 for attempting to meet with other labor activists.
He was committed involuntarily to the Xinxiang Municipal Mental Hospital, where he remained until July 2000.
Mr. Xue was reportedly force�fed psychiatric drugs and held in a room with true mental patients who kept him awake at night and harassed him by day.
Another labor organizer, Cao Maobing, was committed more recently by police to a mental hospital in Jiangsu province.
He was arrested after complaining to foreign reporters, and has since been administered medicine and forced to undergo electric shock therapy.
A coterie of experts, says the hospital’s director, found that Mr. Cao suffers from “paranoid psychosis.”
Why resort to such elaborate and costly measures against political/religious opponents when simpler methods of neutralizing them - such as execution or imprisonment - are available to dictators?
One reason is that in post�Mao China, as in the Soviet Union after Stalin's death, physical liquidation of political enemies was ended by reformist leaders dedicated to curtailing past “excesses.”
But because arrest no longer meant execution but long imprisonment, dissidents acquired a reasonable chance to emerge from prison or labor camps.
As a result, networks of dissidents arose in both the USSR and China after the deaths of Stalin and Mao.
The successors to those dictators, however, found this turn of events to be an unwanted complication in their political “thaws”; more sophisticated mechanisms to induce fear among their peoples were needed, and there are few deterrents to dissident activity more potent than the threat of removal to an institution for the criminally insane.
The outside world is not helpless in fighting against China’s abuse of psychiatry.
In 1983, a protracted campaign by Western psychiatric professional bodies and international human rights organizations led the Soviet All�Union Society of Psychiatrists and Neuropathologists to withdraw from the World Psychiatric Association so as to avoid expulsion.
It was not readmitted until 1989, after years of perestroika and the opening of direct access to Western psychiatric delegations by Soviet forensic�psychiatric institutions.
As a first step in this struggle, the World Psychiatric Association and national professional bodies should demand direct access to the Ankang network and other places of psychiatric incarceration.
Advocacy by local and international psychiatric bodies may also encourage Western governments and the European Union to place the issue of political�psychiatric abuse on the formal agenda of the regular sessions devoted to human rights that are now a staple of Sino�Western relations.
China’s Political Storm
NEW DELHI – As senior leaders are purged and retired provincial officials publicly call for Politburo members to be removed, it has become clear that China is at a crossroads.
China’s future no longer looks to be determined by its hugely successful economy, which has turned the country into a world power in a single generation.
Instead, the country’s murky and increasingly fractured politics are now driving its fate.
One need look no further than the ongoing power struggle in the run-up to this autumn’s planned leadership changes, or official figures showing that rural protests have been increasing at the same rate as China’s GDP.
The sudden downfall of Bo Xilai – and the call from Yunnan Province for the removal of the two Politburo members closest to him – is just one example of the no-holds-barred infighting now taking place in Zhongnanhai, the closed leadership compound in Beijing. Indeed, the internecine squabbles are said to be so vicious that there have been rumors, denied by the regime, that the Communist Party’s congress at which a new president and prime minister are to be anointed this autumn, might be postponed.
The Party’s abrupt vilification of Bo after lauding him for his leadership in Chongqing has fueled public cynicism over his orchestrated downfall and laid bare the leadership’s thin ideological core.
If China is to preserve its gains in global stature, it must avoid a political hard landing.
For the time being, at least five different scenarios are conceivable.
Re-equilibration: The Party protects its legitimacy, keeps the military subordinate, and manages to put a lid on popular dissent.
In other words, the status quo prevails for the foreseeable future.
This is the least likely scenario, owing to deepening internal Party disagreements and rising popular discontent.
Implosion: This likelihood of&nbsp;political disintegration, economic collapse, and social disorder may be no higher than that of re-equilibration.
The government’s fixation on weiwen, or stability maintenance, has resulted in China becoming the world’s only important country whose official internal-security budget is larger than its official national-defense budget.
This underscores the extent to which authorities have to carry out internal repression to perpetuate one-party rule and maintain control over the restive ethnic-minority homelands that make up more than 60% of China’s landmass.
But it may also explain why one self-immolation in Tunisia helped to kindle the Arab Spring, whereas some three dozen self-immolations by Tibetan monks and nuns have failed to ignite a similar popular movement against the Chinese state.
The Soviet Union imploded because the party was the state, and vice versa.
China, by contrast, has established strong institutional capacity, a multi-tiered federal structure, a tradition of civilian leadership turnover every ten years, and a well-oiled, sophisticated security apparatus that has kept pace with technological advances.
Thus, China’s government can pursue a policy of wai song nei jin – relaxed on the outside, vigilant internally.
Guided reform: A process of gradual political change begins, in keeping with outgoing Premier Wen Jiabao’s warning that without “urgent” reforms, China risks turmoil and disruption of economic growth.
Can China emulate the recent example of neighboring Myanmar (Burma), which has initiated significant, if still tenuous, political reforms?
As the political heirs of the country’s Communist revolutionaries, the third-generation leaders that are taking over the reins of power in China may possess a strong pedigree, but they are also scarred and limited by it. These so-called princelings are trapped in the same political culture that led to the death of millions of Chinese and the continuing repression of opponents (real or imagined).
They do not look like political reformers in the slightest.
Great leap backward: A new “Cultural Revolution” erupts, as the clique in power ruthlessly seeks to suppress dissent within and outside the establishment.
As the Dalai Lama recently warned, there are still plenty of “worshippers of the gun” in power in China. Indeed, such is China’s political system that only the strongest advance.
One fallen princeling, Bo, has been accused of cruelty and corruption – traits that are endemic in China’s cloistered but fragmented oligarchy, which values family lineage and relies on networks of allies.
Praetorian takeover: The People’s Liberation Army rules from behind a civilian mask, increasingly calling the shots with government officials, who are beholden to it.
While the civilian leadership has become diffuse (every Chinese leader since Mao Zedong has been weaker than his predecessor), the military has enjoyed greater autonomy and soaring budgets since 1990.
Indeed, the Party, having ceased to be a rigid monolith obedient to a single leader, has become dependent on the military for its political legitimacy and to ensure domestic order.
The PLA’s growing political clout has been manifest in the sharpening power struggle within the Party.
In recent weeks, an unusual number of senior military officers have published articles in official newspapers calling for Party discipline and unity, and alluding to the military’s role in containing the infighting.
Another development is the increasing tendency of military generals to speak out of turn on strategic issues and undercut diplomatic strategy.
The simple truth is that the foreign ministry is the Chinese government’s weakest branch, often overruled or simply ignored by the security establishment, which is ever ready to upstage even the Party.&nbsp;
China’s internal politics has a bearing on its external policy.
The weaker the civilian leadership has become, the more China has been inclined to discard Deng Xiaoping’s dictum tao guang yang hui (hide brightness, nourish obscurity).
China has lately taken more to the spotlight than to the shadows.
Under any plausible scenario, a restrained and stable Chinese foreign policy may become more difficult.
China\u0027s Political Time Warp
On June 1, Dr. Jiang Yanyong, a surgeon at Beijing 301 Military Hospital, and his wife, Dr. Hua Zhongwei, both seventy-two years old, left home to pick up a visa at the American Embassy.
They have not been heard from since.
Family and friends assumed that Public Security Bureau police detained them and that the couple would be released after the June 4 anniversary of the Tiananmen Square massacre of fifteen years ago passed.
But on June 8, unnamed officials asked the doctors' son to collect some personal effects for his parents, including dentures, and deliver them to the authorities.
This was not, of course, the first time someone had been detained without explanation in China, so it was not a good omen.
With China's economy booming, foreign investors flocking, and the country's role in global markets ever more central, the disappearance of this elderly couple hardly caused a break in China's hectic march.
But the disappearance underscores the ongoing imbalance between economic and political reform.
Jiang Yanyong is no ordinary doctor.
He is someone who had long since reached the point in life when he felt compelled by duty and patriotism to step beyond the role of a surgeon and become a public citizen.
His odyssey began on June 4, 1989, when he spent a horrific night trying to save hundreds of wounded and dying victims who flooded through his hospital's eighteen operating rooms as the People's Liberation Army opened fire on its way to Tiananmen Square.
Dr. Jiang, traumatized and anguished, nonetheless kept his silence.
However, as the SARS epidemic flared up in 2003, Dr. Jiang realized in April that Health Ministry reports of only 19 confirmed cases of the disease in Beijing were bogus - he knew of almost ten times that amount. He decided to go public.
His exposé of the SARS epidemic cover-up forced China's government to confront the disease more openly and aggressively, averting a public health catastrophe.
But if Dr. Jiang became a hero in the process, he was also marked as insubordinate, the kind of potentially uncontrollable person that the Chinese Communist Party fears.
Indeed, the Party's worst fears were realized this past March just before the 15th anniversary of the Tiananmen Massacre. As the National People's Congress was meeting, Dr. Jiang broke his silence by writing a long, heartfelt appeal to the leaders of China.
In it, he charged that "a small number of leaders who supported corruption" had resorted to measures on June 4th that were "unprecedented in the world or China" when it used "tanks, machine guns, and other weapons to suppress totally unarmed students and citizens."
In grim detail, his letter described the bloody mayhem that the slaughter brought to his hospital and the hysteria of ordinary people as they arrived to find children and loved ones dead.
Without deference to or fear of the Party, Dr. Jiang castigated China's leaders for the way that they "mobilized all sorts of propaganda to fabricate lies and used high-handed measures to silence the people across the country."
Finally, Dr. Jiang implored the Party to re-assess the 1989 student movement by "reversing its verdict" from "counter-revolutionary rebellion" or "political storm" to "patriotic acts that had the support of the overwhelming majority of the people in Beijing and the country." "Our Party must address the mistakes it has made," he concluded unambiguously.
Before giving his name, address, and phone number, he said, "Of course, I have considered the consequences that I might encounter after writing this letter.
But, I have decided to tell you all the facts."
How does one reconcile an isolated retrograde incident such as the disappearance of an elderly Chinese couple with the hopeful progress of the "Chinese economic miracle" that has so transformed this once seemingly desperate, backward land?
China today is a contradiction.
The tensions between its increasingly open economy and its still closed political system and institutions (established during the Stalin era in the 1950's) make China the most conflicted nation of consequence in the world today.
The old state planner Chen Yuan once cautioned that Chinese reformers had created "a birdcage economy" in which a capitalist bird was growing within a socialist cage.
His inference was that, unless Party leaders were careful, this capitalist bird would literally burst out of its socialist cage, spelling an end to China's Marxist-Leninist revolution.
Indeed, the old socialist economic birdcage has now been largely burst by China's capitalist reforms, releasing with a vengeance a mutant "people's republic" into the global marketplace of consumerism.
But the demolition process that has transformed or razed so many of China's old Stalinist economic institutions has not been matched by a demolition of stultifying political structures.
Although Chinese leaders speak of "One country, two systems" as their formula for governing Hong Kong - and possibly Taiwan some day - their slogan is far more relevant to China itself, given the co-existence of a capitalist economic system within a Leninist political system.
Dr. Jiang Yanyong may become a millionaire, wear any clothes he likes, redecorate his living room, even buy a car, but he cannot inform the public about an epidemic or write government officials an honest letter of admonition.
Does this matter?
That depends on whether one believes that Leninist capitalism is a viable and stable form of government for China over the long term.
China\u0027s Post-Olympic Challenge
NEW YORK – Almost everyone in the world who watched the 2008 Olympics in Beijing was impressed by China’s preparations, the acumen of the Chinese in running such a complex and challenging event, and the rich harvest of medals – especially gold medal – that Chinese athletes won.
It was abundantly evident in the run-up to the Games how important it was to Chinese everywhere to show themselves to advantage.
One got a sense of this when China’s reputation and the Games’ status came under attack during the Tibetan demonstrations and protests against the Olympic torch as it made its tortured progress around the world.
But, when all was said and done, through what turned out to be often Draconian controls, China pulled off quite a feat!
Indeed, it is hard to imagine that the British will care as much, or go to such extremes, for the London Olympics in 2012.
For many years, especially since the Tiananmen Square massacre of 1989, China has felt a deficit of global respect.
This feeling has deeply troubled its leaders and filled its people with a sense that, despite all their economic progress, their proper place in the world was not only eluding them, but being denied to them by the endless criticism of the so-called “developed world.”
For the last two decades, Chinese leaders have been diligently trying to build a new edifice in order to gain some of that missing respect.
This made a successful Olympic Games, when all the world would be watching, an urgent matter.
But, now that the Games have ended, Chinese leaders cannot quite say, “Mission accomplished.”
While China’s achievement is worthy of genuine esteem, its efforts to gain a full measure of international respect and real “great power” status will not succeed until it matches its new economic and military power with a certain essential moral force.
That, in turn, requires a society and a leadership that seeks to be exemplary in all ways that make human beings more human, including respect for truthfulness, openness, tolerance, and people’s right to disagree with their government.
I fear that China’s leaders and people will continue to feel a certain gnawing, inchoate sense of deficiency and incompleteness in their quest for global respect until they find the strength to begin addressing the crucial, but elusive, issue of making China an ethical, as well as an economic and military, power.
For a country steeped in millennia of Confucianism, the need for ethical leadership should be clear.
To fully address the question of the moral and ethical base of a new form of Chinese governance, China’s government and its people must be able to look back freely and come to terms with their recent history: the Great Leap Forward, the Cultural Revolution, the events of 1989, Tibet, and other sensitive issues.
They must also freely be able to discuss the future and what kind of society they wish to see rise from the ashes of Mao’s revolution.
I make these somewhat critical observations about China not with any sense of moral superiority or a wish to relieve myself of the responsibility to level the same critique at my own country’s recent failures.
As most of the world knows, America’s quest to maintain its claim to the title of “greatness,” has, of late, also been elusive.
Arriving from different staring points, both the United States and China now find themselves confronting a similar challenge: restoring global trust and respect.
Their success inevitably requires directly confronting their evident moral failures.
If many of those same viewers who have been impressed by China’s successes in Beijing now also find themselves recoiling at the idea of a stronger and more prideful China, that is understandable.
For strength unalloyed by checks and balances – and by a capacity for self-critical reflection about the rightness and wrongness of state action – can be unnerving.
Many Americans, too, have recently had to learn this.
One hopes that China will derive a new measure of respect and self-confidence from these astounding Games. But one also hopes that China’s successes will enable its leaders to feel strong enough to begin looking honestly at China’s recent past in a more critical way.
Such forthrightness is not easy for any country.
But, having completed such an important step forward, China must now find new, more humanistic ways to continue to re-invent itself.
China’s Recovery and Global Growth
CAMBRIDGE – China is likely to be the first of the major economies to recover from the current global downturn.
Its pace of expansion may not reach the double-digit rates of recent years, but China in 2010 will probably grow more rapidly than any country in Europe or in the western hemisphere.
But, even as China recovers from its current slowdown, it is not likely to provide a similar boost to all of its trading partners.
That lack of spillover will reflect the recovery’s focus on expansion of domestic demand.
There is no doubt that China currently is suffering from the global collapse in demand for a wide range of manufactured products.
The sharp drop in retail sales in the United States and Europe means fewer orders for the goods produced in Chinese factories.
And, while the Chinese yuan has remained more or less unchanged relative to the US dollar in the past year, the dollar’s sharp appreciation relative to the euro and other currencies caused the overall trade-weighted value of the yuan to rise.
This further depressed Chinese exports.
The resulting layoffs of Chinese factory workers has caused second-round declines in local demand for Chinese goods and services, as Chinese households cut back on their spending.
Small firms that exported 100% of their production have been forced to close.
Millions of low-skilled workers who left farms in China’s interior to work in coastal manufacturing centers are now being forced to return to their villages.
The families benefiting from their remittances will now be forced to cut their consumption as well.
The Chinese authorities are determined to reverse the resulting decline in growth in order to reemploy those who have lost their jobs and to create employment for the millions of young people who join the labor force each year.
Failure to do so would not only create hardship for the millions of unemployed, but would also threaten political stability, which depends on the expectation of continuing economic prosperity.
The government’s initial policies aimed at raising aggregate demand focused on major infrastructure spending, including roads and mass transit.
But the more significant strategy is to alter government policies in ways that will lead to higher spending by Chinese consumers, and that raise the level of those government outlays, like health care, which directly benefit Chinese households.
Spending by China’s consumers has lagged behind the Chinese economy’s overall rate of growth for many years.
This reflects the declining share of wages in total GDP and the rising share of savings relative to household incomes.
To raise consumer spending, the Chinese government must reverse both of these trends.
Although private enterprises are the fastest growing part of the Chinese economy, enterprises that are partially or fully owned by the state continue to be major employers.
The government can directly affect wage levels in these firms, thereby altering the general wage level in the economy.
The high saving rate of Chinese households reflects both the normal high rate of saving among younger generations and the fact that older generations had very little income – and therefore did very little saving – when they were young.
The aggregate saving rate of the household sector reflects the difference between the saving of the savers and the dissaving of the dissavers.
Since the saving of younger savers is now high and the dissaving of the older dissavers is low, the net saving rate is high.
Young people have many reasons to save.
The public pension system is unreliable, there is little health insurance available to pay for the high cost of Western-style care, parents must pay tuition for their children’s schooling, there is little credit available for purchases of consumer durable, and buying an apartment requires a large down-payment.
I believe that the government will act on all of these reasons for high saving, making credit more widely available, introducing a health insurance system, and relaxing some of the down-payment requirements.
Premier Wen Jiabao made clear in his recent remarks to the People’s Congress that he will do what it takes to stimulate demand in order to ensure strong growth in China.
I have little doubt about his willingness and ability to do so.
China\u0027s Reforms Stall Again
As the 82 nd anniversary of the founding of the Chinese Communist Party approached last July, the Party's new General Secretary, Hu Jintao, seemed on the verge of announcing a whole new range of reforms.
In a ceremony celebrating the promulgation of the current 1982 constitution, Hu reportedly expressed interest in strengthening constitutional protections against official intrusions in people's lives and in promoting extensive legal reform.
Indeed, he was even rumored to be considering more inner-Party democratization, greater press freedom, strengthening non-Communist political parties, and permitting exiled dissidents to return home.
Such optimistic views were re-enforced when Chinese intellectuals--even some official scholars--began writing and speaking out in favor of re-evaluating controversial Party verdicts on historical incidents (such as the Tiananmen Square massacre).
Similarly, there was an increase in public advocacy on behalf of rural workers (who have been migrating by the tens of millions into China's cities), as well as calls for significant constitutional changes.
For example, legal scholar Cao Siyuan began writing on, lobbying for, and organizing conferences about constitutional reform.
The fact that Cao was detained after the 1989 Beijing Massacre, expelled from the Party, spent time abroad lecturing, and now runs a research consulting firm, seemed no impediment.
Mr Cao was careful to stay within the bounds of moderate reformism, yet he openly called for reform within five areas of governance: the constitution, separation of powers, elections, political parties, and the culture of politics.
For their part, Hu Jintao and Premier Wen Jiabao were even reported to have authorized a top-level body, "The Leading Group On Revising the Constitution," to draft "sweeping changes" that would be considered in March 2004 when the next plenary session of the National People's Congress met.
The proposed changes were reported to include an amendment that would guarantee the same rights to property for private entrepreneurs as for state-owned enterprises, the constitutional right of Party members to choose their leaders, and even some steps toward a multi-party political system.
The Party's evident tolerance toward these ideas was assumed to emanate from Hu Jintao himself.
When Hu also cancelled the traditional closed-door summer caucus of old Party elders that takes place each year at the beach resort of Beidaihe, hopes were raised that political reform might actually burst forth.
However, when none of these issues were raised in Hu's July 1 st speech to the nation, reform-minded Chinese were palpably discouraged.
To the disappointment of many, Hu ended up giving a lackluster oration that, instead of extolling political reform, re-emphasized the dreary notion of the Three Represents--the banal theory advanced by former Party chief Jiang Zemin, which allowed businessmen to be included in the Party.
Then reform-minded intellectuals like Cao Siyuan began to be trailed by Public Security Bureau goons, and members attending a conferences on legal reform organized by Cao were admonished by the Propaganda Department (China's censors) to stop discussing the "three unmentionables," (political reform, constitutional revision, and reversing the verdicts on historical incidents).
It was clear that the reform bandwagon had hit a wall.
Indeed, the Party soon issued a document to think tanks, media outlets and universities banning all public debate on these issues.
What happened?
As so often in the past, this latest reform effort hit the limits of permissible Party tolerance almost before it got going.
It is an old story in China: calls for reform by liberalizers end up antagonizing conservative Party members--in this case, the political faction of Jiang Zemin, who, although not on the Politburo standing committee, still heads the powerful central Military Commission and wields substantial influence.
The reformers were silenced in the name of maintaining stability.
Since the early 1980's China has experienced many iterations of this dynamic.
While it is true that some modest residue of progress often remains after these episodes end, China's current political environment is far more censorious and intolerant now than it was in the mid-1980's.
Indeed, this most recent example of reformus interruptus once again raises the all-important question of whether China can actually undergo a "peaceful evolution," at least so long as the Chinese Communist Party remains in control.
What this pattern suggests is that the Party can rarely choke down more than the smallest dose of political reform, much less outright criticism before reacting in an almost autonomic fashion against it.
While a process of "peaceful evolution" offers the best prospect for change in this mutating "people's republic," the Party's demonstrated inability to countenance even the most modest quotients of political challenge--even with a new generation of leaders in power--does not inspire confidence in the prospect for piecemeal reform.
The failure of this latest mini-reform movement suggests that when it comes to politics, fazhi , or the rule of law, has still made relatively little progress in eclipsing renzhi , the rule of men.
China may be something of a miracle of economic reform, but until changes come in its Leninist governmental system, borrowed from the USSR during the Stalinist era, a truly new New China will never arise.
While one hopes that China will find some way to continue transforming itself peacefully, the Communist Party's continuing intolerance of free expression, and its refusal to allow its people even to discuss in public how their government might be reformed, does not bode well for the future.
China’s Roadmap
China is about to adopt its 11th five-year plan, setting the stage for the continuation of probably the most remarkable economic transformation in history, while improving the well-being of almost a quarter of the world’s population.
Never before has the world seen such sustained growth; never before has there been so much poverty reduction.
Part of the key to China’s long-run success has been its almost unique combination of pragmatism and vision.
While much of the rest of the developing world, following the Washington Consensus, has been directed at a quixotic quest for higher GDP, China has once again made clear that it seeks sustainable and more equitable increases in real living standards.
China realizes that it has entered a phase of economic growth that is imposing enormous – and unsustainable – demands on the environment.
Unless there is a change in course, living standards will eventually be compromised.
That is why the new five-year plan places great emphasis on the environment.
Even many of the more backward parts of China have been growing at a pace that would be a marvel, were it not for the fact that other parts of the country are growing even more rapidly.
While this has reduced poverty, inequality has been increasing, with growing disparities between cities and rural areas, and between coastal regions and the interior.
This year’s World Bank World Development Report explains why inequality, not just poverty, should be a concern, and China’s 11th five-year plan attacks the problem head-on.
The government has for several years talked about a more harmonious society, and the plan describes ambitious programs for achieving this.
China recognizes, too, that what separates less developed from more developed countries is not only a gap in resources, but also a gap in knowledge.
So it has laid out bold plans not only to reduce that gap, but to create a basis for independent innovation.
China’s role in the world and the world’s economy has changed, and the plan reflects this, too.
Its future growth will have to be based more on domestic demand than on exports, which will require increases in consumption.
Indeed, China has a rare problem: excessive savings.
People save partly because of weaknesses in government social-insurance programs; strengthening social security (pensions) and public health and education will simultaneously reduce social inequalities, increase citizens’ sense of well-being, and promote current consumption.
If successful – and, so far, China has almost always surpassed even its own high expectations – these adjustments may impose enormous strains on a global economic system that is already unbalanced by America’s huge fiscal and trade imbalances.
If China saves less – and if, as officials have announced, it pursues a more diversified policy of investing its reserves – who will finance America’s more than $2 billion a day trade deficit?
This is a topic for another day, but that day may not be far off.
With such a clear vision of the future, the challenge will be implementation.
China is a large country, and it could not have succeeded as it has without widespread decentralization.
But decentralization raises problems of its own.
Greenhouse gases, for example, are global problems.
While America says that it cannot afford to do anything about it, China’s senior officials have acted more responsibly.
Within a month of the adoption of the plan, new environmental taxes on cars, gasoline, and wood products were imposed: China was using market based mechanisms to address its and the world’s environmental problems.
But the pressures on local government officials to deliver economic growth and jobs will be enormous.
They will be sorely tempted to argue that if America cannot afford to produce in a way that preserves our planet, how can we?
To translate its vision into action, the Chinese government will need strong policies, such as the environmental taxes already imposed.
As China has moved toward a market economy, it has developed some of the problems that have plagued the developed countries: special interests that clothe self-serving arguments behind a thin veil of market ideology.
Some will argue for trickle-down economics: don’t worry about the poor, eventually everybody will benefit from growth.
And some will oppose competition policy and strong corporate governance laws: let Darwinian survival work its wonders.
Growth arguments will be advanced to counter strong social and environmental policies: higher gasoline taxes, for example, will kill our nascent auto industry.
Such allegedly pro-growth policies would not only fail to deliver growth; they would threaten the entire vision of China’s future.
There is only one way to prevent this: open discussion of economic policies in order to expose fallacies and provide scope for creative solutions to the many challenges facing China today.
George W. Bush has shown the dangers of excessive secrecy and confining decision-making to a narrow circle of sycophants.
Most people outside China do not fully appreciate the extent to which its leaders, by contrast, have engaged in extensive deliberations and broad consultations (even with foreigners) as they strive to solve the enormous problems they face.
Market economies are not self-regulating.
They cannot simply be left on autopilot, especially if one wants to ensure that their benefits are shared widely.
But managing a market economy is no easy task.
It is a balancing act that must constantly respond to economic changes.
China’s 11th five-year plan provides a roadmap for that response.
The world watches in awe, and hope, as the lives of 1.3 billion people continue to be transformed.
China’s Rogue Fireworks
China’s president, Hu Jintao, is currently touring Africa, seeking to secure dependable sources of natural resources, but also to promote China’s “peaceful rise.”
Such tours are designed to give notice that China is emerging on the world stage, as well as to make it look respectable as a major world power.
But China’s quest for international respect is not well served by its embrace of rogue nations like Sudan, Venezuela, and Burma, much less by its secretive military build-up and its recent adventure in outer space.
Indeed, when the Chinese military secretly and recklessly fired a land-based missile into outer space in mid-January and shattered one of China’s aging satellites, the government caused outrage from London to Tokyo to Washington.
After several days of silence in the face of incontrovertible evidence of the launch, China’s leaders reluctantly admitted what China had done, but claimed that the “test was not directed at any country and does not constitute a threat to any country.”
Such denials are becoming unconvincing.
In fact, this dangerous and irresponsible action is yet another key sign that China’s rise as a global power lacks any guarantee that it will be a peaceful nation once it grows strong.
It flatly contradicts the repeated assurances of China’s leaders that China’s rise will bring only “harmony” and peace to the international community.
Lurking behind China’s ambition in space is the spirit of the Cold War, which continues to permeate the inner circles of the military high command, whose adversary is unmistakably the United States.
With the collapse of the Soviet communist regime, the US continues to enjoy a dominant role in space exploration for peaceful and scientific development.
But since the 1980’s, the US has been ambivalent about the ultimate military and civilian utility of its space efforts.
This ambivalence has now been greatly reduced because of China’s recent action, which could precipitate a race to militarize and weaponize outer space.
Should this happen, China would share a large part of the blame.
China’s adventurism and its blithe assumption that it can deal with any international dictator it wishes and disturb the delicate military balance in outer space is emblematic of something sinister and dangerous.
Partly because of the patronizing pampering afforded the Chinese by the developed world, and partly because of China’s relentless, but successful, manipulation of world opinion, China has long been treated as being ”exceptional” when it comes to its international behavior.
As a result, in venues like the United Nations, China enjoys a degree of immunity from criticism for its egregious human rights abuses, as well as for its massive military build-up, one that is unparalleled in recent experience.
Likewise, China’s relations with authoritarian regimes, or even its responsibility for preserving the global environment, are rarely mentioned.
Indeed, China was not asked to bear anything like its rightful share of the burden in curbing carbon emissions under the Kyoto Protocol.
Unsurprisingly, China’s pampered leadership now acts as if the country actually is exceptional and can get away with polluting outer space without rebuke.
The destruction of the Chinese satellite produced roughly 300,000 pieces of debris, causing severe pollution and putting many other spacecraft in the Earth’s orbit in grave danger.
We know this because the last and only time anybody “killed” a satellite with a land-based missile was in 1985, when the US destroyed one of its own satellites, creating a slick of debris that took the American government 17 years to clean up.
There is a danger, given China’s size, that this peculiar “Chinese Exceptionalism” could turn into something truly alarming: a global norm.
For China’s effort to make Internet giants like Google, Yahoo, and Microsoft kowtow to its domestic political controls, and its push in Africa and Latin America to create blocs of nations that pursue economic development while ignoring human rights and environmental conservation, is a poor model for the developing world.
In fact, China’s courtship of resource-rich Third World tyrannies and its recent step toward the weaponization of outer space undermines its carefully crafted new image as a paragon of “harmonious” social development.
So to continue to give China “exceptional” treatment given today’s Chinese behavior will undermine its ability to become a nation capable of exercising responsible global leadership.
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China’s See-No-Evil Diplomacy
Ever since its founding, the People’s Republic of China has adhered to a foreign policy of non-interference in other country’s internal affairs – or so it claims.
But with China’s rapid ascent and ever-closer integration with the outside world, this doctrine has become increasingly anachronistic.
Overseas, China’s role in places like Sudan and Burma not only draws international opprobrium, but also taints its reputation.
By maintaining cozy relations with repressive regimes and protecting them from international sanctions, China risks being seen as their accomplice.
Even when China’s voice could be decisive in resolving crises or preventing bloodshed, instead of acting, its diplomats repeat the old platitudes about non-interference.
The recent “saffron revolution” in Burma presented China with not only a challenge, but also an opportunity to exert its influence.
Yet it failed the test of statesmanship once again by sitting on its hands and merely calling for restraint.
Thanks to China’s collusion, the suffering of Burma’s people continues.
China’s mixture of inaction with a mercantilist approach to its Third World trading partners attests to the hypocrisy of its foreign policy.
For, where access to natural resources is concerned, China is more than willing to discard its non-interference doctrine.
This has not gone unnoticed, as a wave of anti-China movements has spread across Africa.
In Zambia, Chinese mining firms’ indifference to the death of their African employees provoked large protests against China’s presence.
Though China finally pacified the situation by threatening to withdraw investment, doing so meant reneging on the promise not to meddle in other countries’ domestic affairs.
Of course, interference in the internal affairs of another country isn’t inherently evil.
When it is harnessed to promote growth and human rights, interference should be appreciated, regardless of the regime that is doing it.
China’s vast influence over a few fellow dictatorships still holds out the best hope of softening their misrule.
But can China be persuaded to wield its influence constructively, rather than maintaining its pretense of neutrality when its assistance is badly needed?
So far, China’s leaders have not seen the merits of abandoning non-interference.
Their reasons also seem to have a pragmatic ring: they don’t want to cause North Korea to collapse by being too harsh; they fear losing influence in Burma to India or the United States; no one is doing much about Darfur, so to jeopardize the supply of Sudanese oil by pushing the regime in Khartoum appears futile.
But pragmatism has its limits, particularly when it permits dangerous situations to fester.
Indeed, China’s pandering to dictators in its quest for resources contradicts its long-term interest in being acknowledged as a benign and legitimate power and commanding the international respect that it craves.
Had China put pressure on the Burmese junta to stop slaughtering its own people, it would have earned substantial moral credit around the world.
Moreover, the suspicions of China’s neighbors fueled by its rise could be partly allayed by such efforts to improve regional stability.
China now faces a dilemma.
Should its parochial interests give way to more cosmopolitan responsibilities?
How it answers this question will largely determine how the world views it for decades to come.
If China doesn’t want to be seen as complicit in the crimes of its client regimes, then it is time for it to alter its concept of diplomatic interference.
If China maintains its non-interference policy, it will become increasingly difficult to mask that doctrine’s malevolence behind the façade of the country’s “charm offensive.”
China still has a long way to go before it will be perceived as a responsible stakeholder in the world.
Reforming the non-interference doctrine is a necessary step in that direction.
China\u0027s Silent Rural Revolution
When China's National People's Congress (NPC) concluded its annual meeting recently, it voted to enshrine protection of human rights and private property in the constitution.
But other major changes in China's development strategies that appear to be taking place have attracted far less notice.
China's current leadership, one year after coming to power, has criticized "the single-minded pursuit of GDP growth" over the past decade and unveiled a new approach to modernization characterized as "balanced, human-centered, and environmentally friendly."
The change in priorities - and outsiders' tendency to overlook it - is not difficult to understand.
The world is fascinated by China's economic miracle, but it is much less interested in the costs associated with the country's 8-9% annual growth rate in the past 25 years.
For instance, the energy consumption of every unit of Chinese industrial output is close to three times the global average.
In may places, the environment has been devastated almost beyond recovery.
Similarly, a recent Chinese bestseller, A Survey of Chinese Peasants , reveals the tremendous human costs of China's modernization drive.
The book caught the attention of both the elites and the mass public with its heart-breaking stories of the suffering endured by 900 million farmers and its bold criticism of the government's rural policies.
Beyond the glamorous skyscrapers of Beijing, Shanghai, and other urban centers, the majority of Chinese who live in the countryside have gained little from the material progress of the past two decades.
On the contrary, the initial benefits that peasants gained from the rural reforms of the late 1970's and early 1980's have disappeared; real income among farmers has dropped in recent years as their production costs rise and agricultural prices decline.
In most parts of China, farming can no longer sustain a respectable standard of living.
Most worrying is the ever-growing tax burden placed on the rural population.
While average agricultural income grew by 90% in the 1994-97 period, the rural tax burden jumped by 800%.
More than 300 taxes and fees have been imposed on peasants by all levels of government.
For example, some townships demand 14 kinds of fees to register a marriage.
Today, a farmer's annual income is only one-sixth that of an urban dweller's, but he has to pay three times more in taxes.
This comes in addition to many other financial burdens exacted at the local level.
Indeed, 25 years of reforms have changed nothing of China's "one country with two systems" - a model that segregates China's urban centers from its agricultural areas, with development of the former realized at the expense of the latter.
If we use what is called the "Gini coefficient" to measure this income gap, with "0" indicating perfect equality of income distribution and "1" meaning perfect inequality, the number for China is 0.454 in 2002.
This is an internationally recognized level of "absolute disparity."
India, long known for gross disparities between rich and poor, has a Gini coefficient that has hovered around 0.30 to 0.32 over the past five decades.
So today's China is a much less equitable society than India.
A recent study by the Chinese Academy of Social Sciences concluded that China's urban-rural income gap is the worst on earth, maybe only slightly better than Zimbabwe.
The irony here is that China is widely hailed as a success story, while Zimbabwe is generally viewed as a failed state.
Such an unfair distribution of wealth based on economic exploitation, social injustice and political exclusion has caused silent but persistent resistance by Chinese peasants.
They protest, they petition, and they participate in local riots when all other means are exhausted.
Yet little changes.
As a result, the "peasant question" is now threatening social stability and is potentially explosive in a way reminiscent of when Mao organized his revolution around peasant disaffection with the rural policies of the Nationalist government of Chiang Kai-shek.
In response, Premier Wen Jiabao announced a series of measures during the NPC, ranging from phasing out agricultural taxes over the next five years to measures aimed at increasing farmers' income.
But while official attention to rural poverty is music to the ears of the poor, experience shows that such promises are usually inadequate.
Wen's predecessor, Zhu Ronji, also said that his "biggest headache" was how to reduce the rural tax burden and increase peasant income.
Yet the situation only worsened.
China's government must acknowledge that deep income inequality and rural poverty is no longer exclusively an economic problem, but threatens social peace and political stability.
Comprehensive reform is the only way out.
Unless China commits to greater political openness, allowing the poor and disadvantaged to voice their concerns, represent themselves, and monitor policy implementation, it will continue to be jeopardized by a false and perilous prosperity.
China’s Slave Power
When a government-run brick plant in Hongdong County of Shanxi Province was revealed to be using slave labor, a famous episode from a Beijing opera flashed through my mind.
In that opera, a prostitute named Su San, after being sentenced to death, pleads for mercy to unconcerned passersby as she is marched down the main roads of Hongdong County in shackles.
As I click on the Web site of the county government, there is no mention of slave labor or child workers at the brick factory.
All you can find are newsreaders from national television covering the smiling faces of people who come back to Hongdong to seek their roots and pay homage to their ancestors.
There are also reports of visits by high officials to Hongdong.
Indeed, were it not for the 400 fathers who petitioned for the rescue of their kidnapped children who had been sold into slavery, Hongdong County would still remain a tourism hot spot for Chinese people seeking their roots.
As a result of the slave-labor brick plants, as well as reports of an eight-year-old child worker being buried alive and migrant workers killed, Hongdong’s name has become infamous.
Yet despite the scandal, migrant workers and children in school uniforms are still being abducted from other provinces and pushed into monstrous brick plants and coalmines.
Girls are forced into prostitution at a mere $5 a session.
The 400 fathers of the enslaved children, of course, are left to wonder where, precisely, respect for life is in President Hu Jintao’s so-called “harmonious society.”
How many more Chinese children will become slaves in the maw of our capitalist/communist system?
Who is responsible when such crimes happen?
These men simply want their children back, but all the government is doing is watching these anxious fathers with suspicion.
Moreover, these fathers are allowed to demand only their children, not compensation.
After all, the brick factory bosses paid 400 Yuan for each child, so their property rights are at stake.
China is now a society rotten to the core.
For slavery is not confined to Hongdong’s brick plants.
There are such dark spots everywhere in the country.
What makes matters worse is that the state authorities, particularly the police, patrol these slave operations to keep them running.
Four years ago, a college graduate named Sun Zhigang was arrested for walking on the streets of the city of Guangzhou.
He was beaten to death while in custody.
This incident revealed the extent to which the police cooperated in turning ordinary Chinese into slaves.
Media coverage fueled a backlash of overwhelming public revulsion.
But change went only skin-deep.
Human trafficking was transferred from the police to job agencies and the Ministry of Labor Supervision.
State officials themselves are among the worst human traffickers.
And the grimmest statistic of all is that many child slaves who are rescued are resold by officials to another slave-labor plant.
Seven years ago, a lawmaker from Hunan province went to Shanxi province to rescue slave workers from brick plants.
At that time, the rescued workers knelt down and wept.
Fortunately, they were not beaten or buried alive for not showing up for their shift, as has happened to others.
Today, however, that legislator would not be able to rescue a single worker, because the local government and police have learned from past experience how to keep busybodies away.
There are more than 1,000 brick plants and coalmines around China, and most are under the protection of corrupt officials.
Hu Wenhai, a brave man from Shanxi who killed two corrupt officials, said before his execution, “Officials are forcing people to rebel.
I can’t let these assholes squeeze people any more.
I know I’m going to die, but my death will get the attention of those officials.”
So, instead of China being convulsed with rage at news that children are being turned into slaves, the media are censored and the 400 parents of the Hongdong children are blacklisted by the government.
They cannot leave their homes to find their children.
It seems today that in China the daily work of government is to keep people from protecting themselves and their families in an attempt to gloss over the crimes of a “harmonious society.”
The socialism established by Mao Zedong has been replaced by a thoroughly cynical creed.
Organized criminals lead much of the country’s economic development.
The former paradise of the poor has become a living hell for them.
And the corrupt officials?
You can be sure that, this time next year, they will be paying homage to their ancestors, as they tramp over the ground where child slaves were buried alive for daring to proclaim their humanity.
China’s Stability Gambit
BEIJING – The first principle that I learned when I started focusing on China in the late 1990’s is that nothing is more important to the Chinese than stability – whether economic, social, or political.
Given centuries of turmoil in China, today’s leaders will do everything in their power to preserve stability.
Whenever I have doubts about a potential Chinese policy shift, I examine the options through the stability lens.
It has worked like a charm.
Stability was on everyone’s mind at the annual China Development Forum (CDF) held March 17-20 in Beijing.
Hosted by Premier Wen Jiabao, with many ministers of the State Council in attendance, the CDF is China’s most important international conference.
Yet, literally two days before this year’s CDF began, the controversial Bo Xilai was removed as Party Secretary of Chongqing.
As a strong candidate to join the Standing Committee of the Politburo, China’s inner circle of leadership, Bo’s sudden demise was stunning.
There was a palpable buzz in the air as we convened in the Diaoyutai State Guesthouse.
The formal sessions played out predictably, placing great emphasis on the coming structural transformation of China’s growth model – a colossal shift from the all-powerful export- and investment-led growth of the past 32 years to a more consumer-led dynamic.
There is now broad consensus among China’s senior leadership in favor of such a rebalancing.
As one participant put it, “The debate has shifted from what to do to how and when to do it.”
Many of the other themes flowed from this general conclusion.
A shift to services-led growth and an innovations-based development strategy were highlighted.
At the same time, there was considerable concern about the recent resurgence of state-owned enterprises, which has tilted the distribution of national income from labor to capital – a major impediment to China’s pro-consumption rebalancing.
The World Bank and the China Development Research Center (the CDF’s host) had just released a comprehensive report that addressed many aspects of this critical issue.
But the CDF’s formal proceedings never even hinted at the elephant in the chambers of Diaoyutai.
There was no mention of Bo Xilai and what his dismissal meant for China’s domestic politics in this critical year of leadership transition.
While it is easy to get caught up in the swirling tales of palace intrigue that have followed, I suspect that Bo’s removal holds a far deeper meaning.
Chinese officials faced the risk of a dangerous interplay of political and economic instability.
Hit by a second external demand shock in three years – first, America’s subprime crisis, and now Europe’s sovereign-debt crisis – any outbreak of internal political instability would pose a far greater threat than might otherwise be the case.
Bo personified that risk.
He embodied the so-called “Chongqing model” of state capitalism that has been ascendant in China in recent years – government-directed urbanization and economic development that concentrates power in the hands of regional leaders and state-owned enterprises.
I spent some time in Chongqing – a vast metropolitan area of more than 34 million people – last summer.
I left astonished at the scope of the city’s plans.
Orchestrated by Chongqing Mayor Huang Qifan, the principal architect of the spectacular Pudong development project in Shanghai, the goal is to transform the Liangjiang area of Chongqing into China’s first inland urban development zone.
That would put Liangjiang on a par with coastal China’s two earlier showcase projects – Pudong and the Binhai area of Tianjin.
Yet this is the same state-dominated development model that came under heavy criticism at this year’s CDF – and that stands in sharp contrast to the more market-driven alternative that has gained broad consensus among senior Chinese leaders.
In other words, Bo was perceived not only as a threat to political stability, but also as the leading representative of a model of economic instability.
By dismissing Bo so abruptly, the central government has, in effect, underscored its unwavering commitment to stability.
This fits with yet another curious piece of the Chinese puzzle.
Five years ago, Wen famously warned of a Chinese economy that was in danger of becoming “unstable, unbalanced, uncoordinated, and unsustainable.”
I have repeatedly stressed the critical role that Wen’s “Four Uns” have played in shaping the pro-consumption strategy of the “Next China.”
Wen’s critique paved the way for China to face its rebalancing imperatives head on.
But, in their formal remarks to the CDF this year, China’s senior leadership – including Premier-designate Li Keqiang – dropped all explicit references to the risks of an “unstable” Chinese economy.
In short, the Four Uns have now become three.
In China, such changes in language are no accident.
The most likely interpretation is that those at the top no longer want to concede anything when it comes to stability.
By addressing economic instability through pro-consumption rebalancing, and political instability by removing Bo, stability has gone from a risk factor to an ironclad commitment.
There can be no mistaking the Chinese leadership’s core message nowadays.
They are the first to concede that their growth and development strategy is at a critical juncture.
They worry that the “reforms and opening up” of Deng Xiaoping are in danger of losing momentum.
By addressing the interplay between economic and political risks to stability, the government is clearing the way for the next phase of China’s extraordinary development.
I would not advise betting against their commitment to achieving that goal.
China’s Struggle to Slow
BEIJING – At the opening of the annual session of China’s parliament, the National People’s Congress (NPC), Premier Wen Jiabao announced that the government’s target for annual economic growth in 2012 was 7.5%.
With the global economy still struggling to recover, Wen’s announcement of such a significant dip in China’s growth rate naturally sparked widespread concern around the world.
But it is important to note that Wen was expressing a policy rather than forecasting performance.
The purpose of targeting a lower growth rate, he explained, is “to guide people in all sectors to focus their work on accelerating the transformation of the pattern of economic development and making economic development more sustainable and efficient.”
Fixed-asset investment is the most important engine of China’s growth.
As a developing country with annual per capita income of less than $5,000, there is still significant room for China to increase its capital stock.
But the growth rate of investment is too high.
The issue is not whether China needs more investment, but whether China’s absorption capacity can continue to accommodate the rapid investment growth of the past decade.
In this sense, the investment rate, which in China approaches 50% of GDP and is rising, can be regarded as a measure of the stress that fixed investment places on the economy.
It is not entirely an exaggeration to say that the economy’s capacity for investment growth has reached its limit.
The recent high-speed rail debacle is a case in point.
In 2003, China built its first high-speed-rail project.
As a key component of the RMB4 trillion ($630 billion) stimulus package introduced during the 2008-2009 global financial crisis, investment in high-speed-rail construction increased by leaps and bounds.
By the end of 2010, China’s operational high-speed-rail network surpassed 8,000 kilometers, with an additional 17,000 kilometers under construction.
By contrast, all Western countries combined took a half-century to build a total of 6,500 kilometers.
Built in such haste, catastrophe was almost inevitable.
Investment growth that surpasses an economy’s absorption capacity will lead to a rapid deterioration in the efficiency of investment, which in turn will harm long-term growth prospects.
Evidence of this in China today is all too prevalent.
To reverse this trend, some respite in investment growth is not only necessary, but also inevitable in a profit-driven economy.
While China’s investment rate should be brought down to a sustainable level, an equally, if not more, important challenge is to adjust the structure of investment.
For many years, the single most important category of investment in China has been real-estate development, which accounts for roughly 10% of GDP and a quarter of total investment.
But resources need to be allocated to projects that build up human capital, provide public goods, and foster creativity and innovation.
Adjusting the investment structure, however, will inevitably cause investment growth to decelerate, at least in the transitional period, thus leading to a slowdown in overall GDP growth.
International trade has played a pivotal role in China’s economic development over the past 30 years.
However, the global market is no longer able to absorb China’s massive exports, not to mention the immediate impact of economic malaise in Europe and the United States on export demand.
Moreover, rising labor costs and a stronger renminbi will also undermine China’s export sector, causing GDP growth to slow this year.
Few would argue against China’s need for slower but better growth.
The problem is that if China wishes to lower the GDP growth rate to 7.5% in 2012, from 9.2% in 2011, without worsening the growth pattern by raising the high investment rate even further, the annual growth rate of investment must be equal to or less than 7.5%.
A back-of-the-envelope calculation suffices to show that, unless the government is prepared to tolerate a further increase in the investment rate, achieving a GDP growth target of 7.5% implies a significant fall in the growth rate of investment.
To compensate for the negative impact on GDP growth, and with export growth constrained by weak global demand, consumption must rise even more sharply, which is hard to imagine.
In other words, lowering the GDP growth rate to 7.5% without making China’s growth pattern even more irrational is an impossible mission.
So a more likely growth scenario for 2012 is that China’s growth will be lower than in 2011, but still significantly higher than 7.5%.
Correspondingly, its investment-driven growth pattern will be strengthened further, though at a slowing pace.
Otherwise, a policy-induced hard landing would be difficult to avoid.
Indeed, how to achieve a more moderate growth rate without causing a hard landing is one of the most severe challenges confronting the Chinese government.
A hard landing is simply not an option.
With the country’s fiscal position still positive, it is difficult to image that the Chinese leadership would be so headstrong about “accelerating the transformation of the pattern of economic development” as to risk such an outcome.
Even if it is, GDP-obsessed and debt-ridden local governments are likely to strive to achieve the highest possible growth rates for themselves, while paying lip service to Wen’s call for a slowdown.
That is why, despite the official target, most Chinese economists still bet on a growth rate well above 8% for 2012.
China’s Struggling Public Intellectuals
Is China’s political environment loosening up, or is the government cracking down?
It’s hard to tell.
President and Communist Party General Secretary Hu Jintao sometimes seems to be going both ways simultaneously.
For example, Hu has decided to honor the memory of his mentor, former General Secretary Hu Yaobang, in order to burnish his aura as a reformist.
But, in many ways, Hu Jintao’s tenure as the head of the fourth generation of Communist leaders, which began when he became party secretary in 2002, differs sharply from that of his mentor.
Hu Yaobang was a founder of the China Youth League, regarded as a relatively liberal institution in the People’s Republic, who in the 1980’s promoted political reforms and rehabilitated virtually all the victims of the Mao Zedong’s purges.
By contrast, the younger Hu has narrowed the public space for political discourse that had opened up during the latter years of his predecessor, Jiang Zemin, when market pressure was forcing media outlets to be more daring and wide-ranging.
Since taking over, Hu Jintao has arrested a number of outspoken journalists in an effort to rein in the media.
His government has also detained an array of public intellectuals who have been critical of its policies, including cyber-dissidents Liu Di and Shi Tao (who was arrested thanks to Yahoo’s collaboration with the police in identifying him) and freelance writers Yu Jie and Liu Xiaobo.
Military doctor Jiang Yanyong was detained in 2003 after he publicly rebutted the Party’s assertion that the SARS epidemic had been brought under control.
In 2004, he was placed under surveillance when he called on the Party to revise its judgment of the 1989 Tiananmen demonstration.
Hu’s tightening of controls over political discourse and the media intensified with the publication in September 2004 of a list of “Top Fifty Public Intellectuals” in Southern Weekly.
The list, dominated by intellectuals who in the 1990’s had called for freedom of speech and political participation, appeared with the statement: “This is the time when China is facing the most problems in its unprecedented transformation, and when it most needs public intellectuals to be on the scene and to speak out.”
On November 23, 2004, an article in the Shanghai Party Committee’s orthodox Liberation Daily disagreed.
It attacked the concept of “public intellectuals,” claiming that their “independence drives a wedge” between intellectuals and the Party and between intellectuals and the masses.
Hu’s leadership has tried to draw public attention to the growing gap between rich and poor.
But its reaction to the book A Survey of Chinese Peasants, which is based on interviews over several years with farmers in the poor province of Anhui, was a telling reminder that public intellectuals are not welcome to contribute to that effort.
The authors, the husband-and-wife team of Chen Guidi and Wu Chuntao, who spent their early years in the countryside, described in detail the imposition of unfair taxes by local officials and the authorities’ rapacious seizure of land farmed by rural residents.
The increasingly impoverished lives of peasants that the book vividly documented resulted from the very abuses of power that Hu Jintao had declared himself to be against.
Yet, in February 2004, one month after its publication, A Survey of Chinese Peasants was banned.
Hu’s government has also tightened controls over the media.
Reports on peasant and worker demonstrations against corrupt officials and illegal property confiscations have been banned.
Those who dare to protest, such as Beijing University journalism professor Jiao Guobiao, are silenced.
Similarly, Wang Yi, a law lecturer at Chengdu University who called for freedom of speech and association, was barred from teaching.
The liberal journal Strategy and Management was closed down.
Even the editor-in-chief of China Youth Daily, the newspaper affiliated with Hu Jintao’s own China Youth League power base, which had been aggressive in exposing official corruption, was recently detained.
Hu Jintao’s rule is not a return to the Mao Zedong era.
Despite the regime’s vast means of censorship, its embrace of new communications technologies like the Internet make it increasingly difficult for the party to maintain effective control over people’s views.
Moreover, persecution of political dissenters does not now reach far beyond the accused to involve their associates.
While scores have lost their positions and others have been imprisoned, most are briefly detained and then allowed to find other jobs in China’s burgeoning civil society.
By comparison with the late 1990’s, however, the space for political discourse has undeniably narrowed, crushing expectations that the country would continue on a liberalizing course.
Hu Jintao may have made a genuflection to his more liberal mentor, but in the two decades since the elder Hu’s fall from power, even as private space has expanded, China has become a politically far less open society.
Reforming China’s Commanding Heights
MILAN – Chinese President Xi Jinping’s massive anti-corruption campaign has advanced a number of key objectives: It has gone a long way toward restoring confidence in the Communist Party’s commitment to a merit-based system; countered a decades-old pattern of public-sector domination; reduced the power of vested interests to block reform; and bolstered Xi’s popularity among private-sector actors, if far less so with the bureaucracy.
In short, Xi’s effort to root out corruption has empowered both the Party and the reformers.
The question is how far they will take their reform ambitions.
Xi is certainly not finished yet, having outlined a set of legal reforms at last month’s Fourth Plenum of the Communist Party aimed at creating a more level playing field for the public and private sectors.
If implemented properly, the reforms will create a more efficient system for the creation and enforcement of contracts, ease the path for market entrants, and strengthen the application of China’s competition laws.
Greater fidelity to the rule of law will also lead to the creation of a legal and financial infrastructure that reduces fraud in the private sector, including in financial reporting.
That, together with increased access to capital, will help to accelerate the development of the services sector, which is needed to create urban employment.
Better management of China’s considerable public assets – which include $3.5-4 trillion of foreign-exchange reserves, substantial land holdings, and majority ownership of the state-owned enterprises that dominate the economy – would complement these efforts.
Indeed, it could help to boost competition, encourage innovation, strengthen the financial system, and expand access to capital.
The question is how China could achieve this.
As it stands, China’s economy follows, to some extent, the old Leninist “commanding heights” model, with the Party holding all political power and controlling major enterprises and sectors, even as the burgeoning private sector drives growth and employment.
In this context, the kind of “meritocratic professionalism” that China is pursuing is important; but it is no substitute for genuine competition in the public or private sector – at least not if innovation and structural change are the goals.
Of course, Xi could simply declare that China’s version of state capitalism has worked well in the past, and will continue to do so.
But experience with the microeconomic dynamics of advanced economies (where China is headed) makes this a weak stance – and, thus, one that Xi is unlikely to take.
The alternative would be to embark on a sustained program of privatization to shrink the asset side of the state’s huge balance sheet.
But China’s balance sheet has served it well, enabling the extraordinarily high rates of investment that have fueled rapid growth.
Meanwhile, many advanced economies have suffered considerably from their balance-sheet composition, with limited, poorly measured assets and outsize debt and non-debt liabilities.
In fact, given an increasingly unequal distribution of income between capital and labor (as well as across the income spectrum for labor) a larger store of public assets certainly has merit, as it equalizes the distribution of capital and wealth, albeit indirectly.
Not only can public assets be used to cushion shocks and counter adverse trends; they can also help fund an expansion of social insurance.
The problem in China is not the volume of state-owned assets, but their concentration in a few companies and industries – a situation that poses risks to economic performance.
Given this, the logical solution is not to dispose of the state’s asset holdings, but to diversify them over time.
Such an approach would have a number of benefits.
First and foremost, it would reconcile a large state balance sheet with an expanding role for markets, bolstering employment, stimulating innovation, and advancing the economy’s structural transformation.
To this end, public investment in infrastructure, human capital, and the economy’s knowledge and technology base would remain crucial.
Furthermore, the diversification of China’s asset holdings would deepen its financial markets considerably.
Over the next several years, as the traded or tradable share of the state-owned sector’s market capitalization increased from today’s low base of 10-15%, more institutional investors, such as pension funds and insurance companies, would become involved in Chinese equity trading, which is currently dominated by retail investors.
This would augment savings options for an increasingly affluent population and strengthen support for long-term investment and development.
Debt markets would also benefit from such an initiative.
Blurring the line between the private and the state-owned sectors would, over time, reduce the latter’s privileged access to – and overuse of – bank financing, leading to the expansion of corporate bond markets.
With public entities like the social security system and sovereign-wealth funds holding more diversified asset portfolios, incentives would be substantially reduced for market intervention favoring incumbents in which the state owned a large share.
This, along with enhanced enforcement of competition law, would go a long way toward leveling the playing field in markets.
Clearly specified fiduciary responsibilities and governance would help to ensure that publicly held assets were managed to maximize long-term risk-adjusted returns, with the state and citizens as beneficiaries and the market as the arbiter of efficiency and innovation.
The best-managed state-owned enterprises could emerge – or remain – as successful and prominent players, adapting to expanded market competition and combining innovation with economies of scale.
Indeed, public-sector asset management could be “outsourced,” with private asset managers competing for the job.
This would accelerate the development of the asset-management sector, with far-reaching benefits for savers and investors.
China does not have to give up the safety net provided by large asset holdings to allow markets to play a decisive microeconomic role.
It can abandon the commanding heights model and develop its version of “state capitalism” to support the best of both worlds.
All that is needed is a persistently strong government commitment to the public interest – and, of course, a skillfully executed reform strategy.
China’s Threat to Russia
Last week, Russia and China held joint military maneuvers in the presence of both Russian President Vladimir Putin and Chinese President Hu Jintao.
But a new strategic alliance between the two countries is not likely, as it is China that poses the greatest strategic threat to Russia, although many in the Kremlin seem blind to this as they rattle sabers at America and the West.
Indeed, China officially considers several regions in Russia’s Far East to be only “alienated” from it.
China’s territorial claims on Russia are often noted in Chinese grade school geography textbooks, which include a number of Russian Far Eastern regions within China’s borders.
This is consistent with the Chinese strategic concept of “vital space,” which includes all spheres of a state’s strategic activities, on land, at sea, under water, in the air, and in space.
The dimensions of “vital space” are determined by a country’s economic, scientific, technical, social, and military capabilities – in essence, its “total power.”
According to Chinese theorists, the “vital space” of great powers extends far beyond a state’s borders, whereas the “vital space” of weak countries is limited to strategic boundaries that do not always correspond to the borders of their national territory.
Today, China has territorial claims against 11 of its 24 neighbors, including India, Japan, Vietnam, and the Philippines, in addition to Russia.
In China’s relations with all of them, the potential use of military force was and remains an important factor.
In September 2006, China’s People’s Liberation Army (PLA) conducted an unprecedentedly large 10-day exercise, involving the Shenyang and Beijing military districts, the two most powerful of China’s seven military districts.
Shenyang abuts the Russian Armed Forces’ Far Eastern District, and the Beijing district shares a border with Russia’s Siberian Military District.
During the exercises, Shenyang units advanced 1,000 kilometers into the Beijing district, where they engaged in joint war games.
To military observers, the Beijing/Shenyang exercises seemed to be practice for a possible offensive operation against Russia, because exercises on such a scale are undertaken only at the final stage of a multi-year program to train troops to enact specific strategic and operational plans.
The geography of the exercises, and the offensive nature of the tasks undertaken, leaves little doubt that Russia was cast in the role of “potential adversary.”
Such a show of force is an ancient, traditional Chinese political technique.
Paradoxically, these exercises were undertaken during a period when bilateral political and economic ties appeared on the surface to be at their highest point.
Russia has an important place in Chinese geopolitical calculations, as a supplier of both modern weaponry and energy resources needed to continue its modernization.
Therefore, the Chinese are doing everything possible to strengthen their economic and political position in Russia, and to draw Russia into their sphere of influence.
And China is succeeding, most importantly by consistently reinforcing Putin’s anti-American and anti-Western agenda.
While Beijing/Shenyang exercise should have indicated to Russian leaders that China’s intentions toward Russia may not always be benign, Russia’s political and military leadership seem not to sense any threat; on the contrary, they continue to sell the Chinese advanced weapons.
Russia’s current diplomatic tilt, indeed, is clearly against its own long-term national security interests.
China will never be interested in Russia’s economic and political modernization, for it prefers Russia to remain a source of mineral and energy resources and a vast “strategic rear” in its looming challenge with the United States.
Likewise, the Shanghai Cooperation Organization (SCO), which just concluded its annual meeting, is in China’s eyes a tool of regional policy that helps strengthen China’s influence and control over Central Asia’s natural resources at the expense of Russia.
No nation threatens China’s land borders.
China can solve its domestic problems, such as separatism, by itself.
China is militarily self-sufficient and needs military cooperation under the SCO framework only in order to free its hands if any conflict should arise that affects its interests.
In fact, conflict between Russia and China is possible precisely in Central Asia, given the clear differences in the two countries’ economic and political interests in that region.
Aside from control of the region’s energy supplies, water has become a potential source of conflict, given China’s serious shortages.
Yet, while the Chinese clearly understand these contingencies and are preparing themselves to deal with them diplomatically and militarily, the Kremlin remains myopically obsessed with the phantom threat of America.
Thus, as the Kremlin dreams of re-establishing its domination over what Russians refer to as the “near abroad” (Ukraine, Belarus, the Baltic countries, and the other post-Soviet states), China is increasingly looking at Russia as its own “near abroad.”
Will the Kremlin finally wake up to this?
Thirty-six years ago, Richard Nixon and Mao Zedong turned world politics upside down, as both America and China realized that it was the Soviet Union, and not each other, that posed the greater threat.
Vladimir Putin needs his own “Nixon moment.”
Alienating the West is a foolish strategy when the greatest long term threat to Russia comes from the East.
Market Manipulation Goes Global
NEW HAVEN – Market manipulation has become standard operating procedure in policy circles around the world.
All eyes are now on China’s attempts to cope with the collapse of a major equity bubble.
But the efforts of Chinese authorities are hardly unique.
The leading economies of the West are doing pretty much the same thing – just dressing up their manipulation in different clothes.
Take quantitative easing, first used in Japan in the early 2000s, then in the United States after 2008, then in Japan again beginning in 2013, and now in Europe.
In all of these cases, QE essentially has been an aggressive effort to manipulate asset prices.
It works primarily through direct central-bank purchases of long-dated sovereign securities, thereby reducing long-term interest rates, which, in turn, makes equities more attractive.
Whether the QE strain of market manipulation has accomplished its objective – to provide stimulus to crisis-torn, asset-dependent economies – is debatable: Current recoveries in the developed world, after all, have been unusually anemic.
But that has not stopped the authorities from trying.
In their defense, central banks make the unsubstantiated claim that things would have been much worse had they not pursued QE.
But, with now-frothy manipulated asset markets posing new risks of financial instability, the jury is out on that point as well.
China’s efforts at market manipulation are no less blatant.
In response to a 31% plunge in the CSI 300 (a composite index of shares on the Shanghai and Shenzhen exchanges) from its June 12 peak, following a 145% surge in the preceding 12 months, Chinese regulators have moved aggressively to contain the damage.
Official actions run the gamut, including a $480 billion government-supported equity-market backstop under the auspices of the China Securities Finance Corporation, a $19 billion pool from major domestic brokerages, and an open-ended promise by the People’s Bank of China (PBOC) to use its balance sheet to shore up equity prices.
Moreover, trading was suspended for about 50% of listed securities (more than 1,400 of 2,800 stocks).
Unlike the West’s QE-enabled market manipulation, which works circuitously through central-bank liquidity injections, the Chinese version is targeted more directly at the market in distress – in this case, equities. Significantly, QE is very much a reactive approach – aimed at sparking revival in distressed markets and economies after they have collapsed.
The more proactive Chinese approach is the policy equivalent of attempting to catch a falling knife – arresting a market in free-fall.
There are several other noteworthy distinctions between China’s market manipulation and that seen in the West.
First, Chinese authorities appear less focused on systemic risks to the real economy.
That makes sense, given that wealth effects are significantly smaller in China, where private consumption accounts for just 36% of GDP – only about half the share in more wealth-dependent economies like the US.
Moreover, much of the sharp appreciation in Chinese equity values was very short-lived.
Nearly 90% of the 12-month surge in the CSI 300 was concentrated in the seven months following the start of cross-border investment flows via the so-called Shanghai-Hong Kong Connect in November 2014.
As a result, speculators had little time to let the capital gains sink in and have a lasting impact on lifestyle expectations.
Second, in the West, post-crisis reforms typically have been tactical, aimed at repairing flaws in established markets, rather than promoting new markets.
In China, by contrast, post-bubble reforms have a more strategic focus, given that the equity-market distress has important implications for the government’s capital-market reforms, which are viewed as crucial to its strategy of structural rebalancing.
Long saddled with a bank-centric system of credit intermediation, the development of secure and stable equity and bond markets is a high priority in China’s effort to promote a more diversified business-funding platform.
The collapse of the equity bubble calls that effort into serious question.
Finally, by emphasizing a regulatory fix, and thereby keeping its benchmark policy rate well above the dreaded zero bound, the PBOC is actually better positioned than other central banks to maintain control over monetary policy and not become ensnared in the open-ended provision of liquidity that is so addictive for frothy markets.
And, unlike in the West, China’s targeted equity-specific actions minimize the risk of financial contagion caused by liquidity spillovers into other asset markets.
With a large portion of China’s domestic equity market still closed, it is hard to know when the correction’s animal spirits have been exhausted.
While the government has assembled considerable firepower to limit the unwinding of a spectacular bubble, the overhang of highly leveraged speculative demand is disconcerting.
Indeed, in the 12 months ending in June, margin financing of stock purchases nearly tripled as a share of tradable domestic-equity-market capitalization.
While Chinese equities initially bounced 14% off their July 8 low, the 8.5% plunge on July 27 suggests that that may have been a temporary respite.
The likelihood of forced deleveraging of margin calls underscores the potential for a further slide once full trading resumes.
More broadly, just as in Japan, the US, and Europe, there can be no mistaking what prompted China’s manipulation: the perils of outsize asset bubbles.
Time and again, regulators and policymakers – to say nothing of political leaders – have been asleep at the switch in condoning market excesses.
In a globalized world where labor income is under constant pressure, the siren song of asset markets as a growth elixir is far too tempting for the body politic to resist.
Speculative bubbles are the visible manifestation of that temptation.
As the bubbles burst – and they always do – false prosperity is exposed and the defensive tactics of market manipulation become both urgent and seemingly logical.
Therein lies the great irony of manipulation: The more we depend on markets, the less we trust them.
Needless to say, that is a far cry from the “invisible hand” on which the efficacy of markets rests.
We claim, as Adam Smith did, that impersonal markets ensure the most efficient allocation of scarce capital; but what we really want are markets that operate only on our terms.
The Contradictions of China’s Communist Capitalism
BERKELEY – The recent dizzying plunge in the Shanghai and Shenzhen stock exchanges has posed a unique test for China’s Communist rulers.
So long as the markets were rising, the paradox of vigorous capitalist development overseen by the world’s largest and strongest Communist party confounded only academics and old-school Marxists.
As the Chinese Communist Party elite and their relatives, foreign financial institutions, and some Chinese small investors (enabled by margin lending) made money on stocks, no one bothered to comprehend the mutant creature they were milking.
But now, as the realization sinks in that Chinese stock prices will not keep rising indefinitely, the CCP is taking desperate, if clumsy, measures to control the correction.
All new initial public offerings have been halted, and much trading has been curtailed; the central bank has been asked to help the China Securities Finance Corporation induce investors to buy shares and thus stabilize the market.
Indeed, even the country’s sovereign wealth fund has gotten into the act.
But, unlike in other capitalist economies, money is not the only tool at the authorities’ disposal.
If your brokers in China advise you to sell shares, they must be careful not to appear to be rumormongers, subject to official punishment.
And there are reports that sales of large holdings may trigger investigations by the authorities.
Causing public disorder or financial instability can be a serious offense in China, where conspiracy theories about foreigners’ efforts to undermine the economy abound.
What Chinese officials desire is a capitalist stock market without the possibility of large losses that can shake confidence in the CCP’s credibility and control.
But that is a market that no one has yet invented.
The spectacle of a communist regime trying to jack up a casino-like capitalist market is just one of the many contradictions that have been accumulating in almost every corner of China’s economy and politics.
And now, their weight is perhaps becoming too heavy for the Party hierarchy to bear.
Indeed, the composition of the CCP is itself a contradiction.
The revolutionary party of peasants and workers is now dominated by businessmen, college students, and professionals.
One-third of the people listed in the Hurun Report, the Shanghai-based monitor of China’s wealthiest people, are Party members.
The average wealth of the richest 70 members of the National People’s Congress, China’s parliament, far exceeds $1 billion. (The richest 70 members of India’s parliament or even the US Congress, both now controlled by right-wing political parties, are substantially less wealthy.)
Of course, President Xi Jinping’s recent drive against corruption high and low has made many Communist Party plutocrats jittery.
But questions abound as to whether the corruption charges being brought against the so-called “tigers” are a fig leaf for an old-fashioned purge of Xi’s rivals in the Party and the military.
Ordinary Chinese generally support the anti-corruption drive; it is they who usually initiate protests and point fingers at dishonest officials.
But, if such protests attract too much attention, it is more likely that they will be quashed and their leaders repressed than that the corruption will be stopped.
In 2008, for example, following the Sichuan earthquake, thousands of children died when their shoddily built schools collapsed.
For a while, tales of corruption in the schools’ construction dominated even the official news.
In the end, however, it was the protesting parents and teachers of the dead children who were detained and harassed by the state.
What the CCP refuses to recognize is that corruption cannot be rooted out as long as the Party maintains its monopoly on political power; with no organized opposition or functioning civil-society institutions, officials will continue to use their positions of public authority as a vehicle to generate personal wealth.
The Third Plenum of the 18th Party Congress gave primacy to the principle of market competition; but, as a senior Chinese banker commented in a related context some years back: “It’s quite hard to compete when you’re playing against the referee.”
That observation extends to the rule of law and constitutionalism.
Under Xi, the CCP has repeatedly insisted that the rule of law is a “core socialist value” and has pledged to promote the authority of the constitution.
Yet the rule of law in the Party’s eyes is a law that it dictates, interprets, and enforces.
Chinese citizens’ references to the constitution (especially article 35, which guarantees freedom of speech, press, assembly, and association) and constitutionalism in general are routinely censored, and lawyers who cite the constitution in court are frequently detained.
Mao famously speculated on the nature of contradictions in a 1937 essay: “The law of contradiction in things, that is, the law of the unity of opposites, is the fundamental law of nature and of society.”
One wonders, though, if even he could have grasped, much less managed, the contradictions of communist capitalism.
China’s Green Drivers
BEIJING – Earlier this month, China’s government announced another bold move to ease traffic congestion and reduce carbon emissions: the authorities want 60% of all motor-vehicle use in towns and cities to be public transportation, and the government in Beijing is urging regional governments to use more zero-emission and alternative-energy vehicles.
China continues to be the top market for gas-powered vehicles, but it is increasingly clear that its government intends to lead the world in clean-energy vehicles.
The Renault-Nissan Alliance will support China’s ambition.
Nissan entered China in 2003, when Chinese consumers bought 4.5 million cars.
Skeptics said that Nissan was “late to the game” in China: the Chinese car market was supposedly fully saturated.
Back then, the world’s top automotive market was the United States, with Americans buying more than 16 million cars and trucks.
What a difference a decade makes: In 2012, Chinese consumers purchased an estimated 18 million new cars, a 300% increase.
Growth in the Chinese auto sector has silenced the skeptics and exceeded even the most bullish expectations of third-party observers.
Now the world’s biggest car market has declared a new goal: China wants to have the largest number of clean cars.
In April, the State Council, China’s highest administrative authority, unveiled targets aimed at reducing the carbon footprint of the country’s cars.
The State Council wants to produce 500,000 new-energy vehicles – including electric vehicles (EV), plug-in hybrid electric vehicles, and fuel-cell vehicles – by 2015, and is aiming for a production capacity of two million EVs per year by 2020.
Ultimately, China wants a total of five million EVs on the country’s roads, powered by an estimated 10,000 charging stations, by 2020.
As in 2003, some observers say that China’s goals are overly ambitious, because the clean-car market will not grow so quickly.
But China may silence the skeptics once again.
In 2011, the Chinese government earmarked $1.5 billion annually for the industry for the next 10 years, hoping to transform the country into one of the leading producers of zero-emission vehicles.
While China’s aim is to promote domestically produced vehicles, all of the world’s major car manufacturers are working together – and with local partners – to roll out their own EV models and gain leadership in the Chinese market.
China has no choice but to move toward zero-emission cars.
The country relies on coal for about 70% of its energy needs.
In 2011, China’s energy consumption climbed 9.7%, reaching 3.7 billion metric tons of standard coal equivalent – the fastest growth rate since 2007.
China is not only the world’s largest consumer of coal, but also is second only to the US in oil imports – more than five million barrels of oil per dayin 2011, from Saudi Arabia, Angola, Iran, Russia, and other producers.
Reliance on coal and oil has made China the world’s largest source of carbon emissions, and has eroded the quality of life for Chinese citizens.
Indeed, 16 of the world’s 20 worst cities for air pollution are in China.
In 2012, the China Medical Association warned that air pollution could become the country’s biggest health threat, owing to rising rates of lung cancer and cardiovascular disease – particularly in the country’s megacities.
As a result, the Chinese government is taking bold steps to move beyond fossil fuels.
In August, China committed about $290 billion to clean-energy projects.
The authorities want renewable energy to account for one-fifth of its total energy demand by 2015.
China can now generate 6.2 gigawatts of solar power and 68.3 gigawatts of wind power – the equivalent of 50 coal-fired power plants – and has nine of the world’s top ten solar-energy companies, which together produce 65% of the world’s photovoltaic panels.
At the same time, China is implementing stricter fuel-efficiency standards than the United States and many other countries.
For example, the authorities have imposed a 12% tax on gas-guzzlers.
Moreover, China offers incentives of about $8,000 for the purchase of EVs.
This is one of the highest such subsidies in the world, attesting to the authorities’ seriousness about encouraging consumers and fleet owners to switch.
China is also replacing government fleets with EVs.
The city of Shenzhen, in China’s Pearl River Valley, has 2,350 EVs in its municipal fleet.
China is encouraging the use of zero-emission EVs because they are “energy agnostic” – that is, they can consume any kind of fuel that is already in the national grid’s mix, including the growing amount of renewable energy.
So, as China rapidly develops solar power, China’s EVs will become, in essence, solar cars – and wind and hydro cars as those energy sources increase as well.
When electric cars penetrate the market, they will significantly reduce urban smog.&#160;The State Council estimates that achieving the targets for EVs will lower China’s greenhouse-gas emissions by 19% while reducing the country’s reliance on imported oil – both of which are key national policy goals.
China is investing in its future by challenging both its citizens and the auto industry to evolve beyond the internal combustible engine.
The Renault-Nissan Alliance has accepted that challenge, and looks forward to helping the world’s biggest car market become one of the cleanest car markets as well.
China’s Trouble with the Neighbors
BEIJING – China’s “good neighbor” policy is under unprecedented pressure; indeed, it is at its nadir since the Cold War’s end.
One after another, frictions with neighboring countries have arisen recently.
From the territorial disputes with Vietnam and the Philippines in the South China Sea to tensions with Burma (Myanmar) and Thailand, relationships that were sound, if not always friendly, have now soured.
Myanmar’s decision to shelve the Chinese-backed Myitsone Dam project shocked China.
Likewise, the killing of 13 Chinese boat crewmen on the Mekong River in October serves as a stark reminder that China’s presumably peaceful southern land border, which has been untroubled for nearly 20 years, today resembles the most hostile sort of neighborhood.
China’s people and government are especially dismayed by the Mekong killings, which seemed to demonstrate, once again, the government’s inability to protect its citizens from being murdered abroad, despite the country’s newfound global status.
As a result, two compelling questions have arisen: Why do China’s neighbors choose to neglect its interests?
And why, despite China’s rise, do its authorities seem increasingly unable to secure Chinese lives and commercial interests abroad?
Chinese anxiety about these questions forms the atmosphere shaping Chinese policy.
With Muammar el-Qaddafi’s fall from power in Libya, Chinese companies lost investments worth roughly $20 billion, which Libya’s new government has implied are unlikely to be recovered.
Many Chinese were disquieted by their government’s decision to evacuate China’s citizens from Libya, and would have preferred a bolder effort to protect the countries’ commercial assets there.
Similarly, the Chinese government’s later, and quite sudden, about-face in recognizing the rebel Transitional National Council as Libya’s government aroused considerable sneering at home.
After all, China spent valuable political capital to oppose NATO’s airstrikes at the beginning of the intervention, only to end up backing the forces that NATO helped bring to power.
This was China’s utilitarian, commercially-driven diplomacy at its most transparently hollow.
For most Chinese, Libya is a far-away and out-of-reach country, owing to China’s limited capacity to project power.
So the emphasis on restoring Chinese commercial interests is accepted reluctantly if not completely understood.
But Myanmar and the other Mekong River countries are supposed to be the country’s “good neighbors,” and are completely within reach of Chinese power, so public anger over threats to the country’s interests in these places is intense.
Those interests include a new oil pipeline linking Myanmar to Kunming, the provincial capital of Yunnan province.
China is also working on “connectivity” projects – namely, a rail and highway network – aimed at boosting economic and social ties between China and the ASEAN countries.
The Myitsone and Mekong incidents have now cast a shadow over these projects, fueling fear of a chain reaction that could wreck China’s two-decade-long effort to achieve deeper regional integration.
Obviously, Myanmar’s new government does not want to aggravate sentiment in its already-unstable border areas, where rebel groups were using the dam project to rally new supporters.
The new government’s effort to share power with political forces in Myanmar’s volatile regions, and thus weaken local warlords, clearly contributed to the decision to halt construction.
The dam’s Chinese investors, for their part, relied too heavily on the depth of the two countries’ bilateral ties, and so heavily discounted the project’s political risks.
Their behavior also reflects the implied guarantee of official government mercantilism, as well as the complacency of China’s state-owned enterprises, which account for most Chinese overseas investment.
Operating on the assumption that the government will back them – or bail them out if they fail – they can afford to be cavalier.
The Mekong incident tells another grim story.
The river, which links five countries, has been long famous as a setting for trans-national crimes such as drug trafficking, gambling, and smuggling.
China’s booming economy has brought growing interaction between China and the Mekong’s underground economies.
The killing of the 13 Chinese boat crewmen was linked to this trend.
But China can best avoid similar tragedies not by flexing its muscles, but by building greater multilateral cooperation to combat transnational crime along the Mekong.
The Myitsone and Mekong episodes highlight China’s suddenly edgy relations with its southern neighbors.
Its good-neighbor policy, it turns out, has steered China’s regional diplomacy into uncharted waters.
Indeed, China’s neighbors will not be reliably good to Chinese interests unless and until China begins to provide essential public goods – not just commerce, but also full-fledged regional governance based on the rule of law, respect for human rights, and regional economic growth.
Otherwise, ruptures such as those at Myitsone and along the Mekong will recur, deepening China’s sense of isolation and panic.
China Stuck in the Net
There is nothing "virtual" about the problems China's communist rulers confront with the internet.
Although critical to China's goals of modernization and globalization, the internet threatens the political status quo.
So no surprise at the government's often schizophrenic response to it: while broadly encouraging the internet's development, some party factions seek to suppress it by arresting IT entrepreneurs and web dissidents.
Nonetheless, China's more than 35 million internet users - a number that doubles every nine months - have access to a wide variety of previously censored information, including sites that are officially banned.
Staggering changes have already occurred.
When, a little over a year ago, 42 elementary school children and teachers in impoverished Jiangxi (south central China) were killed in an explosion, China's domestic newspapers and internet sites reported the explosion as the result of an appalling child-labor scheme: nine-year-old children had been forced to install detonators in firecrackers so that teachers could sell fireworks to supplement their salaries.
Two days later, Premier Zhu Rongji denied the reports.
He claimed that the explosion was the result of a "deranged man."
Typical of China, state-owned media that carried the original story instantly retracted their reports to parrot the party line.
Atypical of China, however, the true story refused to die.
In internet forums and chat rooms, Chinese citizens continued to express their outrage about what they saw as a government cover up.
Evidence that party leaders were lying, including interviews with witnesses, was posted on the net.
Some websites deleted the information, others refused.
Links to obscure websites with uncensored news about the catastrophe could even be found on the government newspaper's official website, People's Daily.
A few days later, the breaking news from China was astonishing.
"Responding to reports on the internet and elsewhere, Premier Zhu Rongji apologized for an explosion that gutted an elementary school in rural China," read a report.
Zhu said that the government bore "unshirkable responsibility" for the imbroglio and ordered an investigation.
The turnaround was unprecedented. Premier Zhu apologized primarily in response to the public outcry on the internet.
Though still in its infancy, the internet has shown that it has the power to shake China loose from its stagnant, isolated and repressive past.
Historically, information in China was controlled by the Communist Party, making popular opinion irrelevant.
Now the internet provides ordinary Chinese what they never had before: uncensored information.
A voice.
So the Communist Party is trapped in the internet, because the government cannot pull the plug on it without hamstringing the economy.
Furthermore, China will probably need to ease up on the restrictions it has already imposed if it wants to gain all of the internet's benefits; that is, unless the conservative factions who feel most threatened by the internet consolidate their power in the upcoming leadership succession.
When I first visited China a few years ago, US President Clinton had just departed Beijing, where he charmed the Chinese people in an historic televised discussion with President Jiang Zemin.
Since the April 2001 US-China spy-plane crisis, when China demanded an apology and US President Bush refused to give one, the Bush administration has been alienating the Chinese.
The implications go beyond public relations.
The Communist Party is preparing to change its old-guard leadership over the next two years.
Hardliners who feel most threatened by the internet's free flow of information were the people emboldened by the nationalistic waves of anti-American sentiment that swept China.
In the aftermath of the terrorist attack on America on September 11, angry and vengeful messages appeared in some Chinese chat rooms.
"I'm glad that the USA was attacked," read one. "Airplanes?
Why not atomic bombs," read another.
Were these the xenophobic rants of extremist rightists or did they reflect a majority sentiment of the Chinese?
In China, like the US, reactionary groups often congregate on line, but with one important difference. In China, only the educated and relatively privileged can take part in online discussion.
Thus, they can't all be written off as a purely lunatic fringe.
For the first time, as the explosion at Jaingxu school and the response to the attacks of September 11 th proved, China's public can use the internet to both gain information and express views that may influence the government.
Now that popular opinion is emerging as a force in China, the Chinese people as well as its government will need to be wooed by those wishing to influence China.
The internet has provided ordinary Chinese with access to the real story as well as to a public voice, which means that they can be a powerful ally in efforts to effect change in the most populace nation on earth.
China’s Turning Point
NEW HAVEN – In early March, China’s National People’s Congress will approve its 12th Five-Year Plan.
This Plan is likely to go down in history as one of China’s boldest strategic initiatives.
In essence, it will change the character of China’s economic model – moving from the export- and investment-led structure of the past 30 years toward a pattern of growth that is driven increasingly by Chinese consumers.
This shift will have profound implications for China, the rest of Asia, and the broader global economy.
Like the Fifth Five-Year Plan, which set the stage for the “reforms and opening up” of the late 1970’s, and the Ninth Five-Year Plan, which triggered the marketization of state-owned enterprises in the mid-1990’s, the upcoming Plan will force China to rethink the core value propositions of its economy.
Premier Wen Jiabao laid the groundwork four years ago, when he first articulated the paradox of the “Four ‘Uns’” – an economy whose strength on the surface masked a structure that was increasingly “unstable, unbalanced, uncoordinated, and ultimately unsustainable.”
The Great Recession of 2008-2009 suggests that China can no longer afford to treat the Four Uns as theoretical conjecture.
The post-crisis era is likely to be characterized by lasting aftershocks in the developed world – undermining the external demand upon which China has long relied.
That leaves China’s government with little choice other than to turn to internal demand and tackle the Four Uns head on.
The 12th Five-Year Plan will do precisely that, focusing on three major pro-consumption initiatives.
First, China will begin to wean itself from the manufacturing model that has underpinned export- and investment-led growth.
While the manufacturing approach served China well for 30 years, its dependence on capital-intensive, labor-saving productivity enhancement makes it incapable of absorbing the country’s massive labor surplus.
Instead, under the new Plan, China will adopt a more labor-intensive services model.
It will, one hopes, provide a detailed blueprint for the development of large-scale transactions-intensive industries such as wholesale and retail trade, domestic transport and supply-chain logistics, health care, and leisure and hospitality.
Such a transition would provide China with much greater job-creating potential.
With the employment content of a unit of Chinese output more than 35% higher in services than in manufacturing and construction, China could actually hit its employment target with slower GDP growth.
Moreover, services are far less resource-intensive than manufacturing – offering China the added benefits of a lighter, cleaner, and greener growth model.
The new Plan’s second pro-consumption initiative will seek to boost wages.
The main focus will be the lagging wages of rural workers, whose per capita incomes are currently only 30% of those in urban areas – precisely the opposite of China’s aspirations for a more “harmonious society.”
Among the reforms will be tax policies aimed at boosting rural purchasing power, measures to broaden rural land ownership, and technology-led programs to raise agricultural productivity.
But the greatest leverage will undoubtedly come from policies that foster ongoing and rapid migration from the countryside to the cities.
Since 2000, annual rural-to-urban migration has been running consistently at 15-20 million people.
For migration to continue at this pace, China will have to relax the long-entrenched strictures of its hukou, or household registration system, which limits labor-market flexibility by tethering workers and their benefits to their birthplace.
Boosting employment via services, and lifting wages through enhanced support for rural workers, will go a long way toward raising Chinese personal income, now running at just 42% of GDP – half that of the United States.
But more than higher growth in income from labor will be needed to boost Chinese private consumption.
Major efforts to shift from saving toward spending are also required.
That issue frames the third major component of the new Plan’s pro-consumption agenda – the need to build a social safety net in order to reduce fear-driven precautionary saving.
Specifically, that means social security, private pensions, and medical and unemployment insurance – plans that exist on paper but are woefully underfunded.
For example, in 2009, China’s retirement-system assets – national social security, local government retirement benefit plans, and private sector pensions – totaled just RMB2.4 trillion ($364 billion).
That boils down to only about $470 of lifetime retirement benefits for the average Chinese worker.
Little wonder that families save out of fear of the future.&#160;
China’s new Plan must rectify this shortfall immediately.
There will be far more to the 12th Five-Year Plan than these three pillars of pro-consumption policy.
The Plan’s focus on accelerated development of several strategic emerging industries – from biotech and alternative energy to new materials and next-generation information technology – is also noteworthy.
But the emphasis on the Chinese consumer is likely to be the new Plan’s defining feature – sufficient, in my opinion, to boost private consumption as a share of Chinese GDP from its current rock-bottom reading of around 36% to somewhere in the 42-45% range by 2015.
While still low by international standards, such an increase would nonetheless represent a critical step for China on the road to rebalancing.
It would also be a huge boost for China’s major trading partners – not just those in East Asia, but also growth-constrained European and US economies.
Indeed, the 12th Five-Year Plan is likely to spark the greatest consumption story in modern history.
Today’s post-crisis world could hardly ask for more.
But there is a catch: in shifting to a more consumption-led dynamic, China will reduce its surplus saving and have less left over to fund the ongoing saving deficits of countries like the US.
The possibility of such an asymmetrical global rebalancing – with China taking the lead and the developed world dragging its feet – could be the key unintended consequence of China’s 12th Five-Year Plan.
China’s U-Turn
BEIJING – Hope and danger collided at the recently concluded National People’s Congress in Beijing.
The two-week conclave meets annually, and while it is unfair and inaccurate to characterize the Congress as a rubber-stamp exercise, delegates tend, in the main, to jump on the bandwagon of policies constructed by the central government, and by the Communist Party.
The hope was that the Chinese leadership would finally do something – preferably something bold – to forestall further decline in the country’s major economic indicators.
Growth has slowed, exports have plummeted, and unemployment has jumped, and the prevailing view has been that a “blame America first” strategy makes the most sense.
Analysts kept waiting for Chinese officials to salvage capitalism by spelling out a plan to save its economy first.
The danger is that this is exactly what China’s leaders did.
China’s government is divided on a number of matters, but there is a strong, sharp-edged consensus that social stability is at risk unless a robust stimulus package emerges to stave off further job loss.
(Never mind that Chinese history lacks evidence of a clear, causal connection between unemployment and national unrest.)
Premier Wen Jiabao confirmed that a major effort was being made to extend and implement the previously announced four-trillion-yuan plan, and that more funds were available if conditions worsened.
Data on the scope of the stimulus package – for example, investment per province or the number of new projects versus those that more cash would restart or reinvigorate (and these projects versus those that would be shut down) – are difficult to determine.
The transparency and consistency of official figures lags well behind the authorities’ hyped promises about government reform, streamlining of the bureaucracy, and the retreat of the Party apparatus.
Still, it is not what we don’t know about the stimulus plan that is troublesome.
China’s government, as prone to political maneuvering and policy gridlock as any, appears to agree that immediate economic growth is crucial and that an 8% annual rate is essential.
Many officials (and the analysts and advisers who support them) assumed that this magic number represents the minimum rate needed to provide jobs to workers and managers and absorb the more than six million new graduates who spill out of China’s campuses each year in search of employment.
That 8% target will be met, because in China directed objectives are always attained, and often exceeded.
After all, political careers depend on acceding to the demands of the central government.
And yet China’s reliance on economic policies that require the heavy hand of the state to achieve officially decreed targets had been fading.
The government’s renewed focus on such a target is thus another indication that the global economic crisis has strengthened those Chinese officials and intellectuals who advocate a socialist system.
After all, it is much more difficult to make an argument for market economies when they are under siege.
The real danger of the new stimulus package is not ideological but environmental.
What the figure of 8% signals to provincial officials and industrial managers is that the emerging promise of green GDP – wherein a local government had to show not only growth, but also clean and energy-efficient growth – has been abandoned.
Few Party officials really wanted to be troubled by the complexities of such calculations anyway, but either abided by them or paid them lip service, for the sake of maintaining patronage and seeking promotion.
Now, with the Party’s ability to manage the economy seemingly at stake, its stimulus package implies a green light to bypass environmental regulations if jobs or growth targets are in jeopardy.
A big loser here is energy efficiency.
The proportion of new outlays devoted to energy conservation and reduction have been cut almost in half, just when reforms in the price structure of energy use were beginning to kick in. Some measures aimed at redistributing the energy load – such as solar and wind power – have been retained.
But the funding for expanding these efforts will rest largely on provincial officials, who will be reluctant to compel local cadres to disrupt production and lay off even more workers.
Much of politics in China is local, but little of environmental protection is.
There is worse news elsewhere in the new plan.
Nearly every industrial sector that, according to the stimulus package, deserves direct and immediate government support is energy-intensive and polluting (cement and steel, for example) or heavily managed by the state sector, and therefore missing incentives to balance growth with environmental protection (as is the case with the oil industry).
Political lobbies that oversee these sectors and overlap with certain factions in the Party are simply too powerful for nascent interests in society and the bureaucracy to parry.
The recent signal being sent from China’s leadership is that economic revival rests on decreased regard for the environment. This retreat also illustrates how little consensus there is among high-level government officials for making China green.  The danger of the current crisis is not that China’s government is not doing something, but that what it is doing undermines recent hope that China could help to save itself by saving the environment.
China\u0027s Uyghur Dilemma
The Chinese government's participation in the United States-led war against terrorism is based on their real fear of internationally coordinated Islamic terrorism in China.
China's Ministry of Foreign Affairs has accused Uyghur separatist organizations, such as the Eastern Turkestan Information Center and the Uyghur Liberation Front, of being responsible for attacks ranging from the bombing of the Chinese consulate in Istanbul to a March 1997 bus bombing in Beijing.
Now, the Chinese government seeks international support for their domestic crackdown on the Uyghur separatists who they claim have direct links to the Taliban and bin Laden's Islamist inspired organizations.
However, no international Uyghur organization listed by the Ministry of Foreign Affairs acknowledges any responsibility for these earlier violent actions, and since September 11th, most of their expatriate information centers have disclaimed any support for international or domestic violence.
Interestingly, in his last officially broadcast television interview, Osama bin Laden gave his backing to several Islamic liberation struggles, yet he failed to mention the Uyghur independence movement.
Taliban-trained Uyghurs have fought against the Northern Alliance and actively participated in the Chechen Muslim struggle against Russian rule.
In the mid- to late-1990s, international Uyghur organizations claimed indirect responsibility for numerous ``acts of resistance'' against Chinese rule, including bombings of police stations in Kashgar and Khotan, bus bombings in Urumqi and Beijing, and large uprisings in Yining (Khulja), Aktush, and Kashgar.
Nevertheless, though the Chinese government seeks to demonstrate that the Uyghur are a growing domestic threat, they have been unable to cite any recent incidents of domestic Uyghur-related violence.
In the 1950s, the Uyghur and other local populations welcomed the entrance of the People's Liberation Army in what was recognized as a ``peaceful liberation'' of both Xinjiang and Tibet.
In Xinjiang, the locals willingly participated in the political redistribution of land and wealth and looked forward to the end of a three-way civil war that had trapped the region between competing Russian, Chinese Communist, and Chinese Nationalist interests.
Simultaneously, continuing ethnic tensions between Uyghur, Kazakh, Hui, and Han Chinese threatened to tear the region apart along local and tribal lines.
Life changed dramatically in Xinjiang when it, like Tibet, was swept up in the nation-wide leftist and Maoist struggle-campaigns that culminated in the 10-year Cultural Revolution and from 1966-76 wreaked havoc on the entire country.
During this period, domestic migration to Xinjiang was encouraged to ``open the West'' (kaifa xibu), and ``local nationalism'' (difang minzu zhuyi) was repressed.
By 1982, the Han Chinese population stood at 38 percent, while the Uyghurs held a slim majority of 42 percent in their own ``autonomous'' region.
The mid-1980s and late 1990s saw an increased local response to the shifting dynamics of Chinese rule.
Ethnic intellectuals expressed support for Deng Xiaoping's repudiation of radical Maoist politics and the Cultural Revolution.
The media regularly championed Deng's ``market Leninism,'' which sought to loosen state control over economic reform while preserving central power over all political matters.
The relaxation of restrictions on religious and ethnic expression resulted in an explosion of Islamic rituals, mosque building, pilgrimages to Mecca and religious education, and ``ethnic'' festivals spread throughout the social landscape.
In 1991, swelling Uyghur pride in their history and distinct ethno-religious traditions led to ill-founded hopes that with the end of the Soviet Union, the independence of the former Soviet Republics of Central Asia would be extended to China, establishing if not an independent ``Uyghuristan,'' at least perhaps a unified ``Eastern Turkestan,'' that would stand alongside Kazakhstan, Uzbekistan, and Kyrgyzstan as independent Turkic republics.
However, the Uyghur desire for independence met with stiff Chinese resistance.
Compounded by the deepening integration of the region through Chinese migration and extractive development policies, Uyghur protests erupted throughout the late 1990s, eventually leading to isolated bombings, attacks on Uyghur sympathizers to Chinese rule, and violent responses to Chinese police actions against illegal social gatherings and activities.
Such expressions of rebellion were met with swift and severe Chinese crackdowns, culminating in the ``strike hard'' campaign of 1998.
Presently, diminishing Uyghur activism and decreasing political protests suggest a shift toward withdrawal.
Uyghur membership in the Chinese Communist Party has declined, despite a nationwide increase in membership due to CCP placement of supporters in universities and lucrative jobs in the state and semi-private sectors.
Government officials and local newspapers complain of a 20% return rate of Xinjiang students who seek training in other parts of China, amounting to domestic ``brain drain.''
Reports from recent immigrants carried on Uyghur websites around the globe suggest an increasing disenchantment and desire to emigrate.
As the Chinese government seeks international backing for its crackdown on terrorism, local Uyghurs seem less inclined to voice their frustrations than ever before.
This will mean fewer sources of information for a government that hopes to build support for its development goals in the region.
In a ``market Leninist'' system, only economic development can resolve ethnic and class-based tensions.
Yet, withdrawal from participation in that development program may result in ethnic tension and even radicalization of certain dispossessed young Uyghur males.
This pool of frustrated talent may prove fertile ground to international terrorist organizations seeking support for their extremist agendas.
China's ``strike hard'' campaign has done little but alienate its local ethnic populations.
Its war against terrorism must be combined with a policy that gives them hope.
China’s Victimization Syndrome
A contest for China’s soul is now underway in that giant country, pitting two powerful forces and two very different stances toward the outside world against each other.
The outcome will have a major impact on whether China succeeds in becoming a nation capable of having truly constructive and durable relations with the outside world.
On one hand, China’s economic revolution has helped position it in the world as a confident powerhouse of trade, a more responsible global powerbroker, and even as a reassuring military presence.
On the other hand, China remains trapped by a past and a mindset steeped in a sense of victimization, which tempts it to export blame for internal problems.
The main question is whether China can escape the pull of this old psychological syndrome – which kept it preoccupied throughout the twentieth century with debilitating sentiments of weakness, insecurity, and humiliation – and allow itself to be guided by a new outlook on the world, and even on old enemies.
The anti-Japanese demonstrations are a symptom of the old syndrome, fueled by grievances born at a time when China was, indeed, aggrieved and humiliated.
With China’s growing economic clout, rising standard of living, and increasingly respected place in the world, one would hope that the Chinese and their leaders would find a way to let go of the dead.
Yet, even as the luster of the “China miracle” dazzles the world, the Chinese seem loath leave behind their dark feelings of victimization.
Instead of assuming a new national paradigm based on the reality of their accomplishments (national unity, robust international trade, and growing global influence), China’s leaders cling to the old paradigm of their country as victim, the “sick man of Asia” being “cut up like a melon” by predatory imperial and colonial powers like Japan.
That bitter memory of oppression and exploitation lingers in the minds of too many Chinese like the afterimage of a bright light long after it has been turned off.
The Japanese occupation of China was a particularly galling and humiliating period because Japan was an Asian, not a Western, power.
Moreover, like China, Japan was a society steeped in Confucian culture, which many Chinese reformers in the nineteenth and twentieth centuries blamed as a critical impediment to their own country’s development and modernization.
Of course, Japan did occupy China, committed unimaginable savagery, and has since paid no reparations or apologized in a convincing way.
Nevertheless, what benefit does China gain by continuing to raise these issues 60 years later?
What is worth the risk of alienating the world’s second largest economy and one of China’s most important trade partners?
First and foremost, aiding and inciting the expression of popular anger against Japan gives China’s Communist Party leaders a powerful and readily available vehicle for rallying domestic support, thereby legitimizing their own power.
At the same time, the demonstrations represent China’s experience of the world as an unequal place where the weak are inevitably bullied, exploited, and humiliated.
This mindset suggests that, despite the panoramic city skylines, the billboards, and the flashy five-star hotels say otherwise, China has a long way to go before it truly comes to understand and appreciate its actual accomplishments and status.
Indeed, surges of organized anger when China is attacked or insulted are hardly new.
The reaction of China’s leaders to the America’s accidental attack on China’s embassy in Belgrade in 1998, and to the collision of an American spy plane with a Chinese plane over the Pacific, was to permit, if not foment, large anti-foreign demonstrations.
In keeping with this syndrome, Foreign Minister Li Zhaoxing has accused Japan of having “hurt the feelings of the Chinese people” by not apologizing for their crimes, as if he were Minister of Psychology, rather than foreign affairs.
Of course, China’s wounded psyche and the desire for restitution from its former tormentors deserve sympathy.
In this sense, China, like many countries, could be said to have something of a bi-polar personality.
Much of the emotional force of Mao’s revolution derived from the widespread sense of unequal treatment and humiliation by foreign powers, and this revolutionary fervor has never been properly interred.
Just as Mao’s portrait has never been taken down from The Gate of Heavenly Peace, so whole elements of his revolution continue to survive in China’s institutions, ways of thinking, and modes of interacting with the world.
Like recessive genes, they sometimes suddenly re-express themselves.
The role of victim is all too familiar to the Chinese, perhaps even somewhat comforting, for it provides a way to explain (and explain away) China’s problems.
But it is also dangerous, because it derives from China’s old weaknesses rather than its new strengths.
The era of Japanese militaristic and imperialist power has long gone, and the world is beating a path to China’s door.
The last thing the country needs is to remain trapped in the past.
China\u0027s Virtual Revolution
After eight years of explosive growth, there are now almost as many internet users in China as there are members of the 70-million-strong Communist Party.
China's "information elite," the largely urban, educated, professionals who are China's internet surfers, are becoming a force of equal size to the ruling political power base.
What will this new center of power mean for the transformation of Chinese society?
Since the mid-1990s, China's government has promoted the rapid growth of the internet for its economic benefits.
But it has also been developing a sophisticated political and technological system to control online information.
The government employs a host of new legal regulations, a shadowy internet police force, and a powerful hardware-based national information filtering system.
Control also relies on the demography of internet users, most of whom belong to China's economic elite and are more likely to adopt the internet as part of a newfound consumer lifestyle than as a tool for political or social revolution.
What is surprising is that the government's control mechanisms have been largely effective.
But it is also prompting profound social changes that are rooted in a rising rights consciousness within society, something strengthened--and amplified-- not only by the growth of the economy, but by the rapid spread of the internet.
After two and a half decades of market-oriented economic reform, Chinese citizens are increasingly aware of how to protect their economic and social interests by using the language of rights.
When confronting abuses of power, people are increasingly using a new term, "weiquan" (defending rights), to challenge the system.
Another new term, "zhi qing quan" (right to know), has also entered public discourse.
The new terminology inspired by the information technology revolution was especially prevalent after the SARS outbreak last spring, when the government covered up the epidemic until after it had spread throughout China and beyond.
The momentum of this rising demand in China for "rights" can also be seen in the coverage of other major events in the traditional media.
For example, when covering a natural disaster, a major industrial accident, or an urgent public health issue, journalists in the traditional media are not allowed to investigate and report without official sanction.
But the internet is helping to change these rules.
Journalists now learn how to evade government guidelines by distributing and collecting information online, making it more difficult for propaganda bosses to silence the spread of information considered "sensitive."
Ordinary internet users can also write about events they witness and broadcast their reports online, making the suppression of important breaking news almost impossible.
Moreover, the authorities have a difficult time tracking down and punishing people who spread this kind of "subversive" information--a term frequently used by the government to suppress political dissent--online.
Because Chinese internet users are now more likely to find out about a breaking story in real time and question why the official press hasn't covered it, China's conventional media now feel pressure from the public to cover events that they might otherwise dodge.
Online discussion of current events, especially through internet bulletin boards, is another new phenomenon.
One recent survey shows that the number of users registered with China's ten most popular bulletin boards, which focus on news and political affairs, range from 100,000 to 500,000.
Mainly through bulletin boards, email mailing list services and an emerging "Web log" community, the internet has begun to provide an alternative public sphere that did not exist in China a few years ago.
Under the state censorship system, most discussions are limited to politically acceptable topics, such as legal reform and anti-corruption efforts.
However, within these boundaries, internet-enabled activism, such as online petitions, have not only expanded the boundaries of traditional media reporting, but presaged some interesting new political consequences as well.
When college student Sun Zhigang was beaten to death by the police in the southern city of Guangzhou this spring, for example, it inspired a storm of online calls for "weiquan," and provoked debates over the "custody and repatriation system."
That form of "administrative detention," used primarily against migrant workers, was the basis for Sun's detention.
The online protest that ensued undoubtedly played a role in the government's decision to abolish the system and arrest the officials involved in the case.
Despite government efforts to control the internet, a space to support the rising rights consciousness within Chinese society has been carved out.
As the pervasiveness and flexibility of the new medium weakens traditional media censorship, internet-enabled social activism plays an increasingly influential role in China's legal reform and the development of its nascent civil society.
China's 70 million "netizens" may now be in a prime position to guide the transformation of society and determine the country's future.
But the outcome of this grand experiment, which pits an authoritarian government dedicated to controlling politics against an information technology inherently resistant to such controls, is far from certain.
Ultimately, what happens may tell us as much about the inherent nature of the internet in our evolving world as about a changing China.
China’s War on Inequality
BEIJING – A major new target in the “Five-Year Plan for Economic and Social Development” that China just unveiled is to boost the growth rate for household (disposable) income so that it equals the growth rate of the country’s GDP.
The reason is simple: over the past 10 years or so, China’s household income grew more slowly than GDP, making it a smaller and smaller proportion of total national income.
Many important structural problems have resulted from this trend.
Lagging household income has held back private consumption, even though the economy has the capacity to produce more consumer goods.
It has also driven up corporate savings, because firms’ earnings are growing faster than household income and (and, for that matter, faster than overall GDP).
That, in turn, may cause higher investment or asset bubbles, as businesses seek to reinvest their savings somewhere.
And lagging household income clearly contributes to China’s trade surplus, because low domestic consumption tends to keep exports higher than imports.
But there are even more problems related to China’s disproportionately small household income, particularly growing income disparity.
Indeed, not all of China’s “households” have benefited alike from rapid GDP growth.
Some social groups, such as skilled workers, engineers, and financial-sector employees, have seen their wages rise strongly.
Urbanites – people with formal registration as urban residents – have recorded income gains as well, owing to their coverage by the government-run education system and social safety net.
And, as corporate profits have grown, those who share the capital gains in one way or another have also seen their incomes increase faster than the national average.
Those with less education, however, such as migrant workers and farmers, have fared much worse.
The former earn an annual salary (including fringe benefits!) totaling $2,000; the later may earn only half that.
They comprise, in roughly equal parts, the low-income workers who account for up to 65-70% of the total workforce.
Their average income has grown, but more slowly than the 8-10% annual GDP growth rate of the past 20 years.
The target set by the new five-year plan is thus also a policy manifesto to battle these social disparities, which are now a burning issue for the country.
But why did these disparities arise in the first place?
Thirty years ago, 80% of China’s labor force was composed of farmers.
But, while that figure is down now to about 30%, rural education has continued to suffer from inadequate funding and human capital relative to urban, industrializing regions.
That caused rising inequality between the urban privileged and the rural poor.
Geographical differences and government social policies that have been more favorable to urban and industrial sectors may be also be to blame.
But the most fundamental problem is that development does not take place overnight.
It takes a long time to bring education and better-paid jobs to everyone.
During this long period, some get rich first, which means that others lag behind.
Thirty years of rapid growth brought only half of China’s famers (about 200 million people) into the industrial or service sectors, where their wages doubled.
But at least another 150 million famers are still coming into the labor market, competing for higher-paying jobs.
The old generation of farmers may stay put, but younger generations will continue to leave the land, creating a seemingly infinite supply of labor, which suppresses wages in all industries and services for lower-educated workers.
As a result, the income of almost 70% of the labor force cannot increase as fast as their labor productivity, and average household income thus cannot grow as fast as the economy as a whole.
Given China’s massive stock of “surplus labor,” this trend will not reverse itself soon.
Indeed, the situation may worsen for another decade or two before it improves.
This is why the government wants to intervene.
In recent years, the central government has increased its spending on rural compulsory education and poverty relief, and local governments have changed regulations to increase the minimum wage by 20-30% in all 30 provinces.
In the next five years, more efforts in that direction are planned.
The social-security system is to be extended to cover all workers and farmers.
Fiscal and taxation reform is to be accelerated in order to transfer more income from the corporate sector to households and public budgets for social programs, including low-rent housing for the urban poor and more and better services for new immigrants from rural areas.
But none of this will solve the problem.
The best a government plan can do is to prevent the worst.
Government subsidies may (temporarily) redress income disparity in a developed country where farmers account only for 2% of the labor force, or in a country in which low-income groups count for only 10% of the total population.
But in China, where farmers make up 30-35% of the labor force and 70% of the population falls into low-income categories, government can play only a marginal role.
In such circumstances, the old adage that the best social-welfare program is economic growth is all the more applicable.
All the lessons from developing countries from the 1950’s through the 1980’s, and recent lessons from some advanced developed countries, tell us that over-burdening social programs with too great a focus on redistribution may cause large fiscal deficits, debt crises, hyper-inflation, or financial meltdown, with the end result being not a narrowing of disparity but an enlargement.
China must keep these lessons in mind over the next 20-40 years.
Indeed, continued growth and job creation is the only real solution for lifting hundreds of millions of Chinese out of poverty permanently.
China\u0027s Worrisome Nationalism
Nationalist sentiment has been on the rise in China for a decade.
This may be hidden from President Bush when he visits China next month, but it is there all the same.
From 1993 to 2001 a series of abrasive encounters poisoned the atmosphere: the forced boarding of a Chinese merchant ship (wrongly suspected of carrying chemical warfare components to Iran) in the Arabian Gulf;
Cumulatively, these events evoked bitter memories of 19 th century Western imperialism, when ``foreign devils'' subdued and humiliated China, running roughshod over a once-proud people.
Echoes of past humiliations were clearly evident in a spate of popular anti-American books published in the late 1990s with such inflammatory titles as ``China Cannot be Intimidated;'' ``America's Evil Schemes;'' and ``A China That Can Say NO.''
In these and other best-selling publications the 19 th century concept of guochi - ``national humiliation'' - was invoked to express China's righteous indignation at the bullying imperialists.
Nor was this a propaganda ploy, as some suggested.
Though initiated by the government, the guochi revival resonated in Chinese society.
A 1999 public opinion survey of more than 1200 university students in Beijing revealed that fully 75% of well-educated respondents agreed with the statement that, ``The [Belgrade] embassy bombing was a deliberate act of the US Government.''
By the end of the 1990s a majority of Chinese citizens regarded America as their primary adversary.
In this environment, more than a few Chinese reacted to the events of September 11 th with barely disguised satisfaction.
Equally troubling was the near-hysterical tone adopted by many Chinese netizens in the aftermath of the EP-3 incident of April 2001, when websites and chatrooms around the country were flooded with messages demanding that America be made to pay a ``blood debt'' for the death of martyred Chinese fighter pilot Wang Wei.
Evoking the self-righteous outrage of guochi , three young Chinese males engaged in the following exchange of messages on the internet:
Righteous Eagle : The US uttered a few shameful words of apology and our government released 24 pigs....
On the surface it appears that the United States apologized to China, but what commitments did the US assume, really?
They didn't agree to anything....
Who can swallow this?
We need to settle a blood debt but we just let the devils go home?
Gracious : ....My web comrades, how can we face the martyrs who have fought these past several hundred years for national self-respect and the strengthening of the country?
How can we face our ancestors?
I feel so ashamed before you....
Lin Zi ... What difference is there between the China of today and the China of one hundred years ago? ...
As our tears flow down our cheeks, I do not dare believe that this is our country, the China that gave birth to me and raised me....
I would sooner die than go on living like this.
My life belongs to my country.
Do not make the people distrust you, my motherland!
Let's wake you up.
Mother!
Your sufferings are far from over....
These rants display a second major feature of the Chinese cult of guochi : the tendency to blame a weak, feckless Chinese government for not standing up to predatory foreigners.
On many such occasions in the past, from the Boxer Rebellion to the May 4 th Movement (which culminated in the massacre at Tiananmen Square, Chinese patriots angrily accused their own government of betraying the country by colluding with foreign imperialists.
In effect, such feelings of national betrayal served to transform China's cult of national shame from a useful tool of government propaganda into a two-edged sword wielded against the government itself.
Indeed, fearful of popular backlash against its decision to release the crew of the US spyplane without securing either a meaningful American apology or adequate financial compensation, China's government quietly shut down several popular internet sites in the weeks following the spy plane incident - including the chatroom that posted the above-cited messages.
Since September 11 th , the guochi revival has abated somewhat.
In the interest of promoting Sino-American cooperation against terrorism the Chinese government has toned down the emotional content of its anti-American rhetoric.
Last month, for example, the revelation that an American-made Boeing 737, specially outfitted for the use of President Jiang Zemin, was bugged with dozens of listening devices, elicited only a mild from the Chinese government.
No stoning of US embassies; no mass internet hysteria.
Some Chinese scholars now question the wisdom of allowing the bitter anti-foreignism of the 19 th century to poison China's 21 st century diplomacy.
As one influential scholar at Peking University put it: ``For Chinese diplomacy, the most important thing is to walk out of the shadow of the past 100 years of our diplomacy of humiliation and avoid either overreacting to offenses or hiding passively, and instead face the world like a big country.''
Evidently, China's top leader agrees.
Speaking last July on the occasion of the 80 th anniversary of the founding of the Chinese Communist Party, Jiang Zemin proclaimed ``We Have to put an end once and for all to the... diplomacy of humiliation.''
As President Jiang prepares to meet George W. Bush later this month at their long-awaited presidential summit in Beijing, we can only hope he is right.
It is indeed time for China to put guochi to rest and ``face the world like a big country.''
China\u0027s WTO Revolution
China's accession to the World Trade Organization (WTO) is the most important event in the country's history since the inception of its "open door" economic policy a quarter-century ago.
Trade liberalization will benefit consumers, small entrepreneurs, and foreign investors.
But for China's peasants, WTO membership appears to pose a direct and immediate threat to the tremendous gains made since Deng Xiaoping's agricultural reforms in the late 1970s.
The fear felt by China's peasants is understandable because it is deeply rooted in China's history and politics.
Since the founding of the People's Republic in 1949, the peasantry has been the country's most under-represented and manipulated social group, bearing the brunt of the Communists' promotion of heavy industry.
But WTO membership does not come at the expense of agriculture, for it promises to erode rather than reinforce the peasantry's legacy of discrimination and powerlessness.
It is a legacy built on deception.
During China's civil war in the late 1940s, the promise of land reform attracted tens of millions of landless peasants to support the Communists.
After the founding of the People's Republic, they did receive land, only to see it taken back when the new regime embarked on its massive agricultural collectivization drive.
The harshness of the subsequent industrialization campaign culminated in the Great Leap Forward of 1958-60, producing a famine that killed 30 million people, mostly in rural areas.
By the time Mao Zedong died, in 1976, the rural economy was a shambles.
In desperation, village leaders in Anhui province initiated an experiment that returned land to peasants-a de facto privatization that violated official policy.
The government, believing that the situation in the countryside could not get worse, did not stop them.
These village experiments with private ownership were highly successful, boosting agricultural output significantly.
Indeed, it was the peasantry that fired the first shot in the reform campaign that has transformed China in the decades since.
Mindful of the bitter memory of famine (and trade embargoes), China's government remains obsessed with ensuring self-sufficiency in food.
But despite owning the means of production such as land and tools, Chinese peasants have not achieved the social and political status accorded industrial workers in state-owned sectors - people who, according to the constitution, remain the official "vanguard" class.
The government erected trade barriers and adopted other measures to protect China's agriculture, but this reflects its concern for factory workers, not-as in the US and Europe-farmers' political clout.
Inefficient and loss-making state-owned enterprises (SOEs) remain the primary beneficiaries of official economic policy, kept alive on a drip-feed of government subsidies and cheap loans from state-owned banks.
Township and village enterprises (TVEs)-which are owned by and employ mostly former peasants-had to rely on themselves to become the most dynamic and productive sources of China's economic growth.
WTO membership will expose China's agricultural sector to foreign competition.
Rural labor will be displaced and the agricultural sector as a whole may experience net job losses.
But the WTO-induced expansion of non-agricultural labor-intensive sectors, particularly the textile and clothing industries, could absorb these workers.
Today, peasants move to seek new and better employment opportunities created by economic liberalization.
Free internal migration has become a fait accompli, effectively shunting aside China's apartheid-like system of residency permits.
WTO membership will also force the government to cease discriminating in favor of SOEs and against economic sectors with a high degree of private ownership, including agriculture.
China's industrialization strategy in the pre-reform era rejected the notion of "comparative advantage"- the principle that an economy produces some goods more efficiently than others owing to factors such as natural resources, geography, and climate.
Jamaica, say, does not produce frozen salmon or hockey players because investing in industries such as citrus fruit and tourism provides far more certain profits.
The same WTO-induced sectoral adjustment underlies the decline of steel and textiles in advanced countries such as the US.
In China, most SOEs survived because central planners emphasized economic autarky, regardless of cost.
With trade liberalization, the cost of ignoring comparative advantage soars.
China's increasing openness to global competition will eventually jeopardize the SOEs' continued survival and undermine the sustainability of politically biased development schemes.
With the entry of foreign competitors, China's state-owned banks will be forced to base lending policy on the ability of borrowers to service their debts.
The bottom line will replace the Party line in determining how investment is allocated.
With social stability the government's overwhelming priority, fundamental institutional changes are unlikely to come from within.
So accession to the WTO may be just the external catalyst China needs, promising the emergence of a level economic playing field, with respect for and protection of property rights, transparent rules and regulations, free and fair competition, and equal participation.
Although there will be pain, this should benefit many, if not most, social groups.
It will, at long last, liberate the peasantry from the greatest historical burden it bears-the dead hand of a state that dotes on its inefficient industrial proletariat.
China, the Olympics, and Global Leadership
The whole world, it seems, views China as the next great global power. A trip to Beijing does little to dispel that impression.
Out of the welter of dust, noise, welders’ sparks, flotillas of cement mixers and construction cranes, the setting for the 2008 Summer Olympic Games is taking shape.
A visitor feels inconsequential in the chaotic vastness of this epic undertaking.
But looking down on the scene from the half-finished Morgan Centre, the luxury apartment complex (where annual rents are $800,000) and seven-star hotel that is arising beside the Olympic site, one is awestruck not only by the project’s grandeur, but by its design daring.
Below, like some latticed popover, is the Herzog &amp; de Meuron-designed “birds nest” Olympic Stadium.
Beside it is the stunning “water cube,” or Aquatics Center, of Chinese/Australian design.
It is hardly surprising that after the Games, the Chinese Communist Party’s leaders plan to vacate their retro pavilions in Zhongnanhai, the cloistered compound beside the Forbidden City, to move to a new “campus” adjacent to the Olympic Green, China’s new power center.
China’s leaders view the Olympics not only as a national celebration, but also as the greatest national coming-out party in history.
Feeling the Promethian energy unleashed in Bejing, it is easy to believe in China’s aspirations to restore itself to a position of global wealth and power.
Indeed, over the past half-century, when the Chinese have put their minds to it, they have always demonstrated extraordinary fortitude and resolution, whether in embracing Mao’s revolution or in the equally unfettered way in which they are realizing the economic counter-revolution unleashed by Deng Xiaoping.
But, to become a truly “great nation,” China must make two great leaps.
First, it must become more comfortable playing an active and constructive international role.
China is now deeply involved in the world, especially the Third World, because of trade.
But it maintains a nineteenth-century notion of sovereignty – namely, that a country’s national territory, its leaders have an absolute right to do whatever they want without outside “interference.”
This view is not only out of step with international trends, but it also inhibits China from playing a useful role in world crises.
China’s leaders fear that if they begin to pronounce on the domestic record of other nations, much less join in sanctions or United Nations peacekeeping missions, they will help establish a precedent that would allow others to intrude on domestic Chinese affairs.
But the Chinese government has just had a wake-up call in Sudan, from which China imports 50% of its oil.
After doing little to pressure Sudanese strongman Omar al-Bashir into admitting UN peacekeepers to stem the killing in Darfur, China suddenly found the promise of an unsullied Olympics at risk.
The actress Mia Farrow, for example, suggested that the 2008 Olympics might be remembered as “the genocide games.”
This got the Chinese leadership’s attention.
In a matter of days, an emissary was dispatched and al-Bashir relented.
It was an important moment in China’s evolution from a defensive to an offensive player on the international scene.
China’s second challenge concerns its hybrid capitalist/Leninist system of governance, which may not function well enough without democratic feedback and the rule of law.
Party leaders may not become sufficiently attuned to the needs of China’s people to respond to problems like corruption, environmental degradation, or peasant unrest before crises make them unsolvable.
Although hardly democrats, President Hu Jintao and Premier Wen Jiabao already are expending large of amounts of time and resources on divisive social problems in the countryside, where Mao’s revolution started, but where income growth has lagged.
Hu and Wen have cancelled national agricultural taxes, made rural schooling free, launched a new rural medical insurance plan, and guaranteed that, since there is still no title for holding private agricultural land, peasants are entitled to renew their long-term leases.
So China may be edging towards a whole new way of interacting with the world and dealing with its people; its curious authoritarian capitalism may be inching towards some new, and possibly viable, model for long-term development.
But, as Mao always noted, theory should not be confused with practice, and the sustainability of such a model remains untested.
Indeed, no state run by a Communist Party has yet managed to reform itself sufficiently to modernize and develop successfully.
In this, China is a both pioneer and a developmental curiosity.
What kind of nation China aspires to be, and where it is ultimately headed, is still something of a conundrum.
Right now, China’s focus is not on grand political visions for the future, but on grand visions for a Beijing reborn to impress the world.
Beneath the surface are many threatening cracks.
But to drive past the Olympic Green in Beijing will help make many Chinese believe that perhaps the center will hold in this unprecedented and unusual experiment of nation building.
American Leadership in a Multipolar World
LONDON – Giving up the spotlight is never easy.
The United States, like many aging celebrities, is struggling to share the stage with new faces, especially China.
The upcoming meetings of the International Monetary Fund and the World Bank – two institutions dominated by the US and its Western allies – provide an ideal opportunity to change that.
The US must come to terms with the reality that the world has changed.
The longer the US remains in a state of denial, the more damage it will do to its interests and its global influence, which remains substantial, if more constrained than before.
The world no longer adheres to the static Cold War order, with two blocs locked in open but guarded confrontation.
Nor does it work according to the Pax Americana that dominated in the decade after the Soviet Union’s collapse, when the US briefly emerged as the sole superpower.
Today’s world is underpinned by a multipolar order, which emerged from the rise of developing economies – most notably China – as major actors in trade and finance.
The US – not to mention the other G-7 countries – now must compete and cooperate not only with China, but also with India, Brazil, and others through expanded forums like the G-20.
To this end, the US must show leadership and adaptability.
It cannot refuse to support China’s efforts to expand its role in global governance.
Nor should it issue harsh rebukes to its allies when they do not follow suit, as it did when the United Kingdom announced its intention to join the new China-led Asian Infrastructure Investment Bank.
The US seems to be stuck in the Bretton Woods system, the rules-based order – underpinned by the IMF and the World Bank, with the US dollar at its heart – that emerged after World War II.
The Bretton Woods system institutionalized America’s geopolitical supremacy, leaving the old imperial power, the UK, to step aside – a step that it took graciously, if a little desperately, given its grave postwar economic situation.
Over the years, however, the Bretton Woods system, with its mix of liberal multilateralism and market-oriented economic policies, has come to symbolize the Anglo-American dominance of the global economy that much of the world now criticizes, especially since the global financial crisis.
In particular, the Washington Consensus – the set of free-market principles that influences the policies of the IMF, the World Bank, the US, and the UK – has generated considerable resentment, especially after the Asian financial crisis of the 1990s.
Against this backdrop, it is hardly surprising that China has been using its growing global influence to help engineer a new economic order – one in which the US dollar does not reign supreme.
Zhou Xiaochuan, the governor of the People’s Bank of China, China’s central bank, has repeatedly called for a shift toward an international monetary system that allows for the use of multiple currencies for payments and investment.
Such an approach would reduce the risk and impact of liquidity crises, while decoupling the international monetary system from the “economic conditions and sovereign interests of any single country.”
Of course, China believes that its own currency, the renminbi, should eventually play a central role in this new monetary system, so that it reflects China’s role not only as a leading engine of global economic growth, but also as the world’s largest creditor.
Indeed, together with the other systemically important economies (the US, the UK, Japan, and the eurozone) China drives trends that, for better or worse, extend far beyond its borders.
Since 2009, China’s leadership has been pursuing a set of policies that encourage the use of the renminbi in regional trade and reduce its dependence on the dollar in international payments.
But expanding the renminbi’s role in the international monetary system is just the first step toward institutionalizing a multipolar world order.
China has also spearheaded the establishment of new multilateral institutions, with AIIB following on the heels of the New Development Bank, created with other major emerging economies (Brazil, Russia, India, and South Africa).
By taking these steps, China’s leaders have called attention to the inadequacy of the existing international monetary system, and its institutional framework, in today’s complex, multipolar world economy.
In particular, China’s agenda highlights questions about America’s capacity to provide the needed liquidity to support international trade and finance.
To be sure, the US is right to wonder whether the new order that China hopes to build will be as open and rules-based as the American-led order – the one that gave China the market access it needed to achieve its spectacular economic rise.
But the answer to that question can be found only by engaging China on the issue of reform of global governance – not by denying that change is needed at all.
As the US stubbornly pursues a policy of containment toward China – exemplified in its fight against the AIIB’s establishment, its relentless accusations of currency manipulation, and its refusal to ratify IMF reforms that would increase China’s influence – it risks losing its ability to shape what comes next.
The result could be a world of fragmented blocs – an outcome that would undermine not only global prosperity, but also cooperation on shared challenges.
The Spring Meetings of the IMF and the World Bank offer an important opportunity to signal a new approach toward China.
And there could be no more credible signal than US support for the renminbi’s addition to the basket of currencies that the IMF uses to value its international reserve asset, the Special Drawing Right.
America will be in the spotlight once again.
Last Chance for Japan?
NEW HAVEN – Japan is the petri dish for the struggle against the secular stagnation that is now gripping most major developed economies.
And, notwithstanding all of the fanfare surrounding “Abenomics,” Japan’s economy remains moribund.
In the six quarters of Shinzo Abe’s latest stint as prime minister, annualized real GDP growth has averaged just 1.4% – up only slightly from the anemic post-1992 average of 1%.
Abenomics, with its potentially powerful combination of monetary and fiscal stimulus, coupled with a wide array of structural reforms, was supposed to end Japan’s “lost decades.”
All three “arrows” of the strategy were to be aimed at freeing the economy from a 15-year deflationary quagmire.
Unfortunately, not all of the arrows have been soaring in flight.
The Bank of Japan seems well on its way to delivering on the first one – embracing what it calls quantitative and qualitative easing (QQE).
Relative to GDP, the BOJ’s monetary-policy gambit could actually far outstrip the efforts of America’s Federal Reserve.
But the flight of the other two arrows is shaky, at best.
In recent days, Abe has raised serious questions about proceeding with the second phase of a previously legislated consumer-tax hike that has long been viewed as the linchpin of Japan’s debt-consolidation strategy.
Abe has flinched because the economy remains weak, posing renewed risks of a deflationary relapse.
Meanwhile, the third arrow of structural reforms – especially tax, education, and immigration reforms – is nowhere near its target.
Abenomics, one might conclude, is basically a Japanese version of the failed policy combination deployed in the United States and Europe: massive unconventional liquidity injections by central banks (with the European Central Bank apparently now poised to follow the Fed), but little in the way of fundamental fiscal and structural reforms.
The political expedience of the short-term monetary fix has triumphed once again.
Such a gamble is especially problematic for Japan.
With an aging – and now declining – working-age population, it has limited scope for reviving growth.
Japan must either squeeze more out of its existing workforce by boosting productivity, or uncover new sources of demand at home or abroad.
At home, that could mean adding workers, either by boosting female participation in the work force, which, at 63%, is among the lowest in the developed world, or relaxing immigration restrictions.
Unfortunately, there has been little progress on either front.
Moreover, even if the political will to launch third-arrow structural reforms were suddenly to strengthen – a dubious proposition – any productivity payback would most likely take a long time to materialize.
That leaves external demand, which underscores what is perhaps Abenomics’ most serious strategic flaw: It does not take into consideration some of the biggest changes that are likely to occur in the global economy.
That is a great pity, because Japan is well positioned to take advantage of one of the most powerful global trends – the coming rebalancing of the Chinese and US economies.
China appears to be more committed to restructuring than the US – at least for the foreseeable future.
Its Third Plenum reforms provide a cohesive framework for a pro-consumption transformation.
Though America currently remains intent on resurrecting a tired growth model, there is good reason to hope that it, too, will eventually rebalance.
Japan cannot afford to squander these opportunities.
As the main driver of Chinese growth shifts from external to domestic demand, who could benefit more than Japanese exporters?
China is already Japan’s largest export market, leaving it ideally situated to capture additional market share in the coming surge of Chinese demand for consumer products and services.
Likewise, Japan stands to benefit from its technological prowess in environmental remediation – an urgent priority for China in the years ahead.
Japan already has great expertise in many of the solutions to some of China’s toughest problems.
Japan is also likely to gain from a long-overdue rebalancing of the US economy.
A shift in the US – from excessive consumption of goods largely sourced in low-wage developing countries to the capital equipment that an increasingly investment-led economy will require – would play to Japan’s greatest strengths.
As a global leader in sophisticated machinery and the earth-moving equipment needed for infrastructure investment, Japan should be able to to seize these opportunities.
In looking to external demand, Japan should not lose sight of its earlier achievements.
In the 1970s and 1980s, Japan was the envy of the world, owing to an all-powerful export machine that tapped the demand of a rapidly growing global economy.
“Japan, Inc.” still has a good institutional memory of what it takes to draw support from external demand.
It is time to recapture that memory.
Failure to do so would leave Japan, the world’s third largest economy, at risk of being further marginalized by transformations in the world’s two largest, the US and China.
There is one obvious and important caveat: Poor Sino-Japanese relations, owing to unresolved historical grievances, could prevent Japan from realizing the economic benefits implied by China’s economic rebalancing.
The interplay between economics and politics lies at the heart of the rise and fall of great powers.
In a rapidly changing world, underscored by likely shifts in the economic structure of China and the US, Japan cannot afford to lose sight of that fact.
Just as the US and China have much to gain by transforming their economies, Japan is running out of time.
In the grip of two lost decades and counting, this could be Japan’s last chance.
China’s Last Soft Landing?
NEW HAVEN – Once again, China has defied the naysayers.
Economic growth picked up in the final quarter of 2012 to 7.9% – half a percentage point faster than the 7.4% increase in GDP in the third quarter.
This was a meaningful increase after ten consecutive quarters of deceleration, and it marks the Chinese economy’s second soft landing in slightly less than four years.
Despite all the talk about the coming shift to internal demand, China remains heavily dependent on exports and external demand as major drivers of economic growth.
It is not a coincidence that its last two slowdowns followed closely on the heels of growth slumps in its two largest foreign markets, Europe and the United States.
Just as the soft landing in early 2009 occurred in the aftermath of a horrific American-made crisis, this latest one followed the European sovereign-debt crisis.
China has several sources of strength that have enabled it to withstand the tough external shocks of the last four years.
Large buffers of saving (53% of GDP) and foreign-exchange reserves ($3.3 trillion) are at the top of the list.
Moreover, unlike the West, which has used up most of its traditional countercyclical policy ammunition, China has maintained ample scope for fiscal and monetary-policy adjustments as circumstances dictate.
Likewise, a powerful urbanization dynamic continues to deliver solid support for China’s high-investment economy, while enabling relatively poor rural workers to raise their incomes by finding higher-paying jobs in the cities.
Nonetheless, this may be the last time that China can escape an external shock with its growth intact.
Premier Wen Jiabao addressed this possibility nearly six years ago, arguing in March 2007 that the seemingly spectacular Chinese economy had become “unstable, unbalanced, uncoordinated, and ultimately unsustainable.”
Since then, many of China’s inherent strengths have been sapped by all-too-frequent external shocks.
The banking sector is still digging out from the bad loans extended in the aftermath of the global meltdown in 2008.
Finding affordable housing has become an increasingly serious problem for those relocating to cities for the first time.
And corruption scandals and the related risks of political turmoil were unsettling, to say the least, in the months prior to last year’s Communist Party leadership transition.
In other words, the vulnerability implied by Wen’s “Four Uns” has increased significantly.
China’s economy has certainly become more unstable, with major slowdowns in real GDP growth in 2009 and again in 2012.
Its imbalances have gotten worse as well, with the investment share of GDP approaching 50% and private consumption falling below 35% of GDP.
Similarly, China has become more uncoordinated, or fragmented, as its income disparities have continued to widen.
And sustainability is being jeopardized by environmental degradation and pollution, which pose a growing threat to the country’s atmosphere and water supply.
In short, China’s growth model has been stretched as never before.
And, like a piece of fabric, the longer it remains stretched, the longer it will take to return to its former resilient state – and the greater the possibility that it will not spring back the next time something goes wrong.
The message to China’s new leadership is unmistakable: There has never been a more urgent time to get on with the heavy lifting of rebalancing and reform.
Now is the time to implement the measures that will accelerate the transition to a more consumer-led economy.
The agenda is long, but it is hardly a secret.
It includes developing the services sector, funding the social safety net, liberalizing an antiquated residential-permit system (hukou), reforming state-owned enterprises, and ending financial repression on households by lifting artificially low interest rates on savings.
Failure to act quickly on this program would leave China far too vulnerable to the inevitable next shock in a crisis-battered world.
In the absence of rebalancing, any one of several potential tipping points could seriously compromise the economy’s ability to pull off another soft landing: deteriorating credit quality in the banking system; weakening export competitiveness as wages rise; key environmental, governance, and social problems (namely, pollution, corruption, and inequality); and, of course, foreign-policy missteps, as suggested by escalating problems with Japan.
The Chinese economy has come through two major global crises in the past four years.
On the surface, its resilience has been impressive – the first to recover, as Chinese leaders always want to remind the rest of the world.
But, beneath the surface, an unbalanced, unstable, uncoordinated, and unsustainable economy risks losing its capacity for resilience.
Without rebalancing and reforms, the days of the automatic Chinese soft landing may be over.
I have been an optimist about China for 15 years.
I still am.
But the clock is ticking.
Wen Jiabao’s critique six years ago was a powerful diagnosis of the Old China’s flaws that pointed to the Next China’s hopes and dreams.
It remains a blueprint that China’s new leadership cannot ignore.
Time is no longer on China’s side.
The Chinese Economy and Fed Policy
CAMBRIDGE – Janet Yellen’s speech on September 24 at the University of Massachusetts clearly indicated that she and the majority of the members of the Federal Reserve’s Federal Open Market Committee intend to raise the short-term interest rate by the end of 2015.
It was particularly important that she explicitly included her own view, unlike when she spoke on behalf of the entire FOMC after its September meeting.
Nonetheless, given the Fed’s recent history of revising its policy position, markets remain skeptical about the likelihood of a rate increase this year.
The Fed had been saying for several months that it would raise the federal funds rate when the labor market approached full employment and when FOMC members could anticipate that annual inflation would reach 2%.
But, although both conditions were met earlier in September, the FOMC decided to leave the rate unchanged, explaining that it was concerned about global economic conditions and about events in China in particular.
I was unconvinced.
I have believed for some months that the Fed should start tightening monetary policy to reduce the risks of financial instability caused by the behavior of investors and lenders in response to the prolonged period of exceptionally low interest rates since the 2008 financial crisis.
Events in China are no reason for further delay.
Consider, first, domestic economic conditions, starting with the employment picture.
By the time the FOMC met on September 16, the unemployment rate had fallen to 5.1%, the level that the Fed had earlier identified as full employment.
Although there are still people who cannot find full-time jobs, driving the unemployment rate below 5.1% would, according to the Fed, eventually lead to unwanted increases in inflation.
The current inflation picture is more confusing.
The annual headline rate over the past 12 months was only 0.2%, far short of the Fed’s 2% target.
This reflected the dramatic fall in energy prices during the previous year, with the energy component of the consumer price index down 13%.
The rate of so-called core inflation (which excludes energy purchases) was 1.8%.
Even that understates the impact of energy on measured inflation, because lower gasoline prices reduce shipping costs, lowering a wide range of prices.
The point is simple: When energy prices stop falling, the overall price index will rise close to 2%.
And the FOMC members’ own median forecast puts inflation at 1.8% in 2017 and 2% in 2018.
So if the Fed, for whatever reason, wanted to leave the interest rate unchanged, it needed an explanation that went beyond economic conditions in the United States.
It turned to China, which had been much in the news in recent weeks.
China was reducing its global imports, potentially reducing demand for exports from the US.
The Chinese stock market had fallen sharply, declining some 40% from its recent high.
And China had abruptly devalued the renminbi, potentially contributing to lower import prices – and therefore lower inflation – for the US.
But when it comes to the impact of China’s troubles on the US economy, there is less than meets the eye.
China’s import demand is slowing in line with its economic structure’s shift away from industry and toward services and household consumption.
This means that China needs less of the iron ore and other raw materials that it imports from Australia and South America and less of the specialized manufacturing equipment that it imports from Germany and Japan.
The US accounts for only 8% of China’s imports, and its exports to China represent less than 1% of its GDP.
So China’s cut in imports could not shave more than a few tenths of a percentage point from US GDP, and even that would be spread over several years.
As for the stock market – widely viewed as a kind of casino for a small fraction of Chinese households – only about 6% of China’s population own shares.
The Shanghai stock market index soared from 2,200 a year ago to a peak of 5,100 in mid-summer and then dropped sharply, to about 3,000 now.
So, despite the sharp drop that made headlines recently, Chinese shares are up more than 30% from a year ago.
More important, wealth and consumption in China are closely related to real-estate values, not equity values.
Finally, the renminbi’s recent decline against the dollar was only 2.5%, from CN¥6.2 to CN¥6.35 – far below the double-digit declines of the Japanese yen, the euro, and the British pound.
So, on an overall trade-weighted basis, the renminbi is substantially higher relative to the currencies with which it competes.
Even more relevant, the decline of the renminbi and other currencies in the past year has had very little impact on US import prices, because Chinese and other exporters price their goods in dollars and do not adjust them when the exchange rate changes.
While official US data show overall import prices down 11% in the 12 months through August, this is almost entirely due to lower energy costs.
When energy products are excluded, import prices are down only 3%.
So the Fed is right to say that inflation is low because of the sharp drop in energy prices; but it need not worry about the effect of major trading partners’ lower currency values.
And, again, when the price of energy stops declining, the inflation rate will rise close to the core rate of 1.8%.
So, unless there are surprising changes in the US economy, we can expect the Fed to start raising interest rates later this year, as Janet Yellen has proposed, and to continue raising them in 2016 and beyond.
I only hope that it raises them enough over the next 18 months to avoid the financial instability and longer-term inflation that could result from the long era of excessively easy monetary policy.
Chinese Finance Comes of Age
LONDON – The Chinese financial system’s evolution in recent years has been extraordinary.
I have observed its transformation as a member of the International Advisory Council of the China Banking Regulatory Commission (CBRC).
Back in 2002, all of China’s major banks were awash in non-performing loans (NPLs), which in some cases amounted to more than 10% of the total balance sheet.
None of the major banks met even the Basel 1 standards for capital adequacy.
Few financiers in London or New York could have named any bank other than Bank of China, which was often wrongly thought to be the central bank.
And to suggest that the United States Federal Reserve, or the United Kingdom’s Financial Services Authority, might have anything to learn from China’s financial authorities would have been thought absurd.
Less than a decade later, much has changed.
The old NPL problem was resolved, primarily by establishing asset-management companies to take over doubtful assets, and injecting new capital into the commercial banks.
Now, reported NPLs amount to little more than 1% of assets.
Foreign partners have been brought in to transfer skills, and minority shareholdings have been floated.
Current valuations put four Chinese banks in the global top ten by market capitalization.
They are now expanding overseas, fortified by their strong capital backing.
Of course, challenges remain.
Even in China there is no magic potion that can revive a loan to a defunct exporter.
And China’s big banks have lent large sums, willingly or otherwise, to local governments for infrastructure projects – many of them of dubious economic value.
There is an ever-present risk that the property market might one day collapse, though banks would emerge in better shape than have banks in the US and the UK, because much speculative investment has been funded with cash, or with only modest leverage.
The authorities in Beijing, especially the CBRC and the People’s Bank of China (the real central bank), have a good record of managing incipient booms and busts, and I would not bet against their success this time.
They have considerable flexibility, owing to a range of policy tools, including variable capital and reserve requirements and direct controls on mortgage lending terms. They have already been tightening the screws on credit growth for several months, with positive effects.
It would be flattering to think that this turnaround in China’s financial system been attributable to the wise counsels of foreign advisers.
But, while external influences have been helpful in some ways – the stimulus of Basel 1 and 2 strengthened the hands of those in Beijing determined to clean up the banking system – the Chinese now, not unreasonably, treat advice from the City of London and Wall Street with some skepticism.
For example, recent criticism of Asian regulators by US Treasury Secretary Timothy Geithner is viewed across the region with scorn, not to mention incredulity.
A little more humility is in order, given US regulators’ performance in the run-up to the crisis. People who live in glass houses should not throw even rhetorical stones.
The most interesting development is that we can now see increasing convergence in the regulatory philosophies and toolkits in Beijing, London, and New York.
Until the recent near-implosion of Western capitalism, the North Atlantic authorities thought that the end of financial history had been reached.
Financial conditions could be controlled with one tool – the short-term interest rate – deployed exclusively in pursuit of a target, implicit or explicit, for consumer price inflation.
Banks’ capital-adequacy ratios were set globally, and, once set, remained fixed.
Otherwise, the market knew best.
Banks had their own incentives to lend wisely, and controls on lending would necessarily prove ineffective.
By contrast, in China, all aspects of a bank’s business were directly overseen.
Indeed, most banks were under the sway of the central bank.
Now, in Beijing, officials see the advantages of a more hands-off approach, and of institutions with a primarily commercial focus.
But they have not eschewed the use of variable capital and reserve requirements, loan-to-deposit ratios, and thresholds for minimum deposits and maximum leverage as controls on property lending.
Meanwhile, in developed capital markets, we are busily reinventing these “macroprudential instruments,” to use the term now in vogue in Basel.
We can now see the utility of a more flexible toolkit to respond to excessive credit expansion, or asset-price bubbles, where the manipulation of short-term interest rates can be a blunt instrument or, worse, a double-edged sword.
An interest-rate rise might take the heat out of the mortgage market, but it will also chill the rest of the economy.
Regulatory philosophies are converging, too.
Former British Prime Minister Margaret Thatcher’s famous injunction that “you cannot buck the market” was part of the regulatory mindset in the pre-crisis Anglosphere.
And former Fed Chairman Alan Greenspan resisted any attempts to rein in the animal spirits of the wealth creators on Wall Street.
The Chinese were less ideological.
They had no compunction about calling a bubble a bubble, or in intervening to deflate it.
Now, only Sarah Palin reveres Thatcher’s views on all issues, and Greenspan has been airbrushed out of financial history, Chinese-style.
When the G-7 morphed into the G-20 in early 2009, many were understandably worried that, with such a diverse range of participants, coming from such different traditions, it would be difficult to achieve consensus on regulatory matters in the Basel Committee and elsewhere.
These concerns turned out to have been overstated.
The elements of a broader consensus on the future role of financial regulation are in place, as long as Americans like Geithner can resist their constant desire to tell the rest of the world to do as they say, not as they do.
North Korea’s Step Too Far?
BEIJING – After nearly a month of belligerent bluster from North Korea, China appears to have had enough, ending its silence about North Korea’s brinkmanship and suddenly roaring its disapproval of its ally’s reckless threats.
China’s exceptional tough talk does not necessarily mean that it intends to abandon Kim Jong-un’s regime; but, at the very least, it does suggest that a radical shift in China’s policy toward North Korea might no longer be unthinkable.
When Chinese Foreign Minister Wang Yi exchanged phone calls with United Nations Secretary-General Ban Ki-moon on April 6, he expressed China’s rejection of rhetoric and action aimed at destabilizing the Northeast Asian region.
Moreover, Wang made clear that China would not allow “troublemaking on China’s doorstep.”
The next day, Chinese President Xi Jinping, speaking to an assembly of primarily Asian political and business leaders at the annual government-sponsored Boao Forum for Asia, declared that no country “should be allowed to throw a region and even the whole world into chaos for selfish gain.”
Xi did not mention any country by name, but his implicit condemnation of North Korea was clear to all.
Before these official rebukes, there had been much speculation about whether China would risk a fundamental change in its relations with North Korea, the socialist “little brother” that it continues to subsidize heavily.
Following the rare display of open indignation by Xi and Wang, such speculation has now become stronger than ever.
Some ask what “value” Kim’s hermit kingdom provides that prevents China from acting decisively; others wonder to what extent Chinese leaders’ domestic concerns continue to inhibit their willingness to switch course on North Korea.
In fact, China’s leaders have agonized over North Korea’s recent provocations.
They have been struggling to persuade the Kim regime to temper its volatility and accept a “grand bargain”: official recognition and normalization of relations with all of its neighbors, and with the United States, in exchange for denuclearization.
Indeed, this has led to considerable squabbling between the two countries in recent years.
China understands that North Korea’s intractability is rooted in its deep isolation from the world, mass deception of its people, and Kim’s fear of losing control of a country that only his family has ruled.
So the country’s rulers have come to believe that they can gain attention and resources only through provocation.
For China, the Kim regime’s survival can be assured only if it follows China’s lead in reforming and opening up.
But, faced with South Korea’s shining democracy and booming economy, the Chinese model is irrelevant to the North: following it would mean acknowledging the South’s supremacy on the Korean Peninsula, and thus an instant loss of legitimacy.
During the past two decades, North Korea’s leaders have experimented lightly with minimal “reform,” only to retreat from it quickly.
China patiently bore this pattern of intermittent brinkmanship and timid reform, largely owing to its belief that the risks posed by the Kim dynasty could be controlled as long as China did not cut off the regime’s lifeline of oil, food, and other necessities.
More important, China’s leaders believed that by shielding the North from US pressure, it was acting in the interest of its own national security.
But here China’s analysis has been completely wrong, for it underestimates the Kim regime’s unmanageable desperation whenever it believes that its survival in doubt.
Moreover, North Korea does not want to be beholden to any power, including China.
So it exploits China’s goodwill and national-security concerns, and even regards Chinese patronage as its due.
A further complication concerns North Korea’s nuclear aspirations.
The North appears to be convinced that, with nuclear weapons, it can maintain complete diplomatic independence, and that China, fearing nuclear blackmail, will never abandon it.
Now, however, it is North Korea’s turn to make a mistake.
Kim Jong-un’s childish tantrums have genuinely enraged China.
Yes, the country’s leaders have sometimes complained about the heavy burden of subsidizing North Korea; but, until now, they had never shown such open disgust with the North’s performance.
China’s warning that it will not allow North Korean “troublemaking on China’s doorstep” can be considered the equivalent of a “yellow card” in soccer.
China has not decided to abandon North Korea.
But the warning is a stern one for Kim Jong-un: China may send him to the sidelines if he does not change his behavior.
US Secretary of State John Kerry is set to visit Beijing in the coming days.
It is now time for American and Chinese leaders to negotiate a real and viable exit from the current crisis, while productively exploring ways to restart the denuclearization process on the Korean peninsula.
If Kim’s bombast and nuclear threats lead to China-US bonding over a joint North Korea settlement, the entire world will be the safer for it.
Chinese Shadows
NEW YORK – These are interesting times in China.
A senior Communist Party official, Bo Xilai, is brought down – accused of offenses that include wire-tapping other party bosses, including President Hu Jintao – while his wife is investigated for her alleged role in the possible murder of a British businessman.
Meanwhile, a blind human-rights activist escapes from illegal house arrest, finds refuge in the United States’ embassy in Beijing, and leaves the compound only after claims that Chinese authorities in his hometown had threatened his family.
Despite exhaustive press coverage of these events, it is remarkable how little we actually know.
The British businessman’s body was allegedly cremated before any autopsy was conducted.
None of the lurid tales about Bo’s wife have been proven.
And the reasons for her husband’s political disgrace remain murky, to say the least.
Things always tend to get interesting in China before a National People’s Congress, where the Party’s next leaders are anointed.
Leadership change in most democracies is a relatively transparent process; it follows national elections.
To be sure, even open democracies have their share of opaque jockeying and deal-making in what used to be called smoke-filled rooms.
This is particularly true in East Asian countries, such as Japan.
But, in China, everything takes place out of sight.
Because leaders cannot be ousted through elections, other means must be found to resolve political conflicts.
Sometimes, that entails deliberate public spectacles.
The disgrace of Bo, Chongqing’s former Party leader, certainly falls into this category.
A handsome, charismatic populist born into the Party elite, Bo was known as a tough official, whose methods in fighting organized crime – and others who got in his way – were often unrestrained by law.
Bo’s ex-police chief, who is said to have done the dirty work, embarrassed the Party by fleeing to the US consulate in Chengdu in February, after he fell out with his boss.
Despite Bo’s nostalgia for Maoist rhetoric, he is conspicuously wealthy.
His son’s expensive lifestyle as a student at Oxford and Harvard has been described in lavish detail in the press.
In other words, Bo bore all the hallmarks of a gangster boss: corrupt, ruthless towards his enemies, contemptuous of the law, and yet moralistic in his self-presentation.
But the same could be said of most Party bosses in China.
They all have more money than can be explained by their official pay.
Most have children studying at expensive British or American universities.
All behave as though they are above the laws that constrain normal citizens.
What was unusual about Bo was his open ambition.
Chinese party bosses, like Japanese politicians – or, indeed, Mafia dons – are supposed to be discreet in their appetite for power.
Bo behaved more like an American politician.
He liked to throw his weight around in public.
That was enough to annoy other party bosses.
Since factional rivalry inside the Party cannot be handled discreetly, some of Bo’s colleagues felt that he had to go.
The way that party bosses, in China no less than in Japan, get rid of irksome rivals is to bring them down through public scandals, leaked to an obedient press, which then fans the flames.
The appearance of a wicked wife in Chinese public scandals is a common phenomenon.
When Mao Zedong purged his most senior Party boss, Liu Shaoqi, during the Cultural Revolution, Liu’s wife was paraded through the streets wearing ping-pong balls around her neck as a symbol of wicked decadence and extravagance.
After Mao himself died, his wife Jiang Qing was arrested and presented as a Chinese Lady Macbeth.
It is possible that the murder accusations against Bo’s wife, Gu Kailai, are part of such political theater.
In fact, Bo’s fall from grace involves not only his wife, but his entire family.
This, too, is a Chinese tradition.
The family must take responsibility for the crimes of one of its members.
When that individual falls, so must they.
On the other hand, when he is riding high, they benefit, as was the case with many of Bo’s relatives and his wife, whose businesses thrived while he was in power.
There has been a great deal of speculation about the consequences of Bo’s fall, and of the daring escape of the human-rights activist, Chen Guangcheng, after 18 months of house arrest.
Will his flight to the US embassy harden the attitudes of China’s leaders?
Will it force the US to get tougher on human rights in China?
If so, what will follow from that?
Since Bo presented himself as a populist critic of modern Chinese capitalism and an authoritarian promoter of Maoist ethics, his natural enemies inside the Party leadership would seem to be the more “liberal” bosses, who favor free-market capitalism and perhaps even some political reforms.
The current premier, Wen Jiabao, would seem to be this faction’s leader.
He has made speeches about the need for democratic reform, and has been openly critical of Bo.
Chen asked him to investigate abuses against him and his family.
So, could the fall of Bo lead to a more open society, less hostile to dissident voices?
It is possible that Chinese Communists who favor more economic liberalism would also be more receptive to a more open society.
But the opposite could also be true: the wider the disparities in wealth, and the more people protest against economic inequality, the more the regime will crack down on dissidents.
Such repression is not meant to protect communism, let alone what little is left of Maoism.
On the contrary, it is meant to protect the Chinese Communist Party’s brand of capitalism.
That may be why Bo had to be toppled, and certainly why dissidents like Chen, as well as his family, have to suffer so much that refuge in a foreign embassy is their final, desperate option.
Choosing Mr. Europe
BRUSSELS – America’s riveting presidential election campaign may be garnering all the headlines, but a leadership struggle is also underway in Europe.
Right now, all eyes are on the undeclared frontrunners to become the first appointed president of the European Council.
Nobody – not even people closely involved in the process – really knows how the European Union’s leaders are chosen.
There are no formal rules, much less elections; somehow, names just surface in the media to become part of the EU’s mysterious internal bargaining system.
In fact, there are five jobs up for grabs, so a complex but secretive discussion is being conducted between Europe’s chancelleries over who might do what without disturbing the delicate balances between political families or between large and small states.
At the heart of this process is the even touchier issue of whether the people who will take charge of the EU’s main institutions should be strong leaders.
In principle, everyone wants heavy-hitters; in practice, many national leaders resist the idea of a more independent and assertive team in Brussels.
The dilemma is neatly summed-up by the two clear candidates for the top job as “Mr. Europe.”
On the one hand, there’s the safe pair of hands personified by Jean-Claude Juncker, the veteran prime minister of tiny Luxembourg, who knows the ins and outs of the EU’s political machinery and chairs the euro zone’s ministerial set-up.
He won’t make waves, but he won’t make headlines either.
Then there’s Tony Blair.
World famous but controversial, Blair is capable of rallying public opinion and giving the European project the high profile that the EU craves.
But he’s also liable to turn a 30-month ceremonial post as the EU’s figurehead into one with much more political clout than its 27 national leaders might like.
The other four posts will probably be decided as part of a package deal, owing to the need to achieve some sort of balance.
First, there’s the question of whether the European Commission’s current president, former Portuguese Prime Minister Jose Manuel Barroso, should get another five-year term.
His early promise to be the EU executive body’s new broom has turned into a steady-as-she-goes captaincy, and there’s the added question of whether his re-appointment might turn the job into a standard 10-year post for his successors, regardless of their abilities.
The choice for No. 3 job – the foreign policy supremo who will have extra resources and powers to build on the position created by Javier Solana – looks more straightforward.
Solana, the soft- spoken Spaniard who was previously NATO’s secretary-general, looks like the odds-on favorite to take the new job for a few months before handing it over to Carl Bildt, the Swedish foreign minister and ex-premier who gained international stature in the Balkans in the 1990’s.
But nothing is certain.
If Denmark’s prime minister, Anders Fogh Rasmussen were to succeed as a compromise candidate between Juncker and Blair, as is widely suggested, the presence of two center-right Scandinavians would present a problem.
The remaining two posts, president of the European Parliament and the “Mr. Euro” job currently held by Juncker, will also have to contribute to overall balance and reflect the outcome of the European Parliament elections in mid-2009.
The parliament is a further wild card in this wholly undemocratic and unpredictable process.
Under the Reform Treaty – the look-alike successor to the controversial European constitution that creates the post of EU president – the parliament’s 785 members will also have their say.
In years past, only governments could torpedo candidates for Europe’s top jobs, but now the parliament also will be able to reject them.
It’s not at all clear which will have the greater power to decide the outcome.
This uncertainty is beginning to focus attention on the fundamental question of whether the EU can continue to choose its leaders in such a strange and furtive manner.
When the Union was smaller and more modest, inter-governmental horse-trading seemed acceptable, not least because national politicians could downplay the importance of “Europe.”
Today, with the EU eager to play a forceful role on the world stage, a move towards a more open system appears to be inevitable. The EU’s interlocutors in Washington, Beijing, and elsewhere already make it plain that national leaders claiming to speak for Europe lack credibility, as do EU leaders who so evidently have no convincing political mandate.
Two clearly defined schools of thought are emerging.
There are those who argue that these are sensitive and complicated issues beyond most voters’ understanding, and that more democracy would result in either populism or embarrassingly widespread abstentions.
Others believe the EU cannot continue being run along the same lines as in Beijing or even Pyongyang. It’s an issue that will confront any new team chosen by the old methods.
The Pope of Japanese Finance
TOKYO – While the world focuses on the gathering of cardinals in Rome to choose a successor to Pope Benedict XVI, a similar conclave is underway in Tokyo to choose the Bank of Japan’s (BOJ) next governor.
And, as with the deliberations at the Vatican, politics, not doctrinal debate, is underpinning the decision-making process in Japan.
Last December, the president of the Liberal Democratic Party, Shinzo Abe, won back control of the government for the LDP after more than three years in opposition, securing the post of Prime Minister for the second time.
In his election campaign, and since coming to power, Abe has advocated a radical revitalization of the Japanese economy that would end two decades of deflation and growing political and strategic uncertainty.
In anticipation of an LDP-led government (with the New Komeito Party as a junior coalition partner), financial markets began to move toward a weaker yen.
Japan’s stock market reacted favorably as well, rising almost 30% since the vote.
Abe’s three main economic policies, dubbed “Abenomics” by the global press, are known at home as the “three arrows” approach – a reference to the sixteenth-century daimyo (feudal lord) Mori Motonari, who had three sons.
One day, Motonari asked each of them to snap an arrow, which they did without difficulty.
But when he then asked them to snap three arrows, none could do it.
Having demonstrated that what is fragile on its own can be robust in a bundle, Motonari urged his sons to remain united.
The three arrows in Abenomics are fiscal spending, deregulation of cosseted sectors of the Japanese economy, and monetary easing.
The supplementary fiscal spending will span a total of 15 months, focusing on speedy completion of public works required for recovery after the Great East Japan Earthquake of 2011.
The growth strategy will include targeting industries like regenerative medicine, with greater spending, for example, on cell research conducted by Nobel laureate Shinya Yamanaka; it will also feature policies aimed at leveraging the power of women, who are underrepresented in the work force, particularly when compared to other modern economies.
The problem, from the start, was the third arrow.
The BOJ’s current governor, Masaaki Shirakawa, holds very different views on fiscal and monetary policy from those on which Abe campaigned.
Indeed, it was Shirakawa who, as BOJ Executive Director, decided in March 2006 to end – quite prematurely – the quantitative easing that Prime Minister Junichiro Koizumi’s government had implemented at the beginning of 2004.
When a new BOJ governor was chosen in 2008, Shirakawa was initially seen as a dark-horse candidate.
But the nominees presented by the LDP government of Prime Minister Taro Aso (who is now Abe’s finance minister) were repeatedly rejected by the Diet’s upper house, which was controlled by the opposition Democratic Party of Japan.
The DPJ claimed that these candidates were too closely tied to the finance ministry, owing to long careers there, to act independently of it.
But the real reason for their rejection was that the DPJ was intent on bringing down the LDP government, and thus was obstructing it whenever possible.
Uncertainty reigned for a considerable time.
But, in order for Japan to avoid being unrepresented by its central banker at a looming G-7 meeting of finance ministers, an agreement was reached at the last minute to appoint Shirakawa.
Throughout his five-year tenure, Shirakawa has maintained a hawkish policy stance, insisting that monetary easing would have no possible benefit for Japan’s long-stagnant economy.
All that time, he faced consistent political pressure to determine a positive inflation target that would halt the country’s deflationary spiral.
But he resisted ever setting such a “target.”
Only in January of this year, following the LDP’s landslide election victory, did the BOJ set a target of 2% price growth and issue a joint announcement with the government taking aim at deflation.
This is the context in which the BOJ’s next “pope” is being selected.
But, instead of a debate about monetary policy, the only question being asked is whether Shirakawa’s successor will come from the finance ministry, academia, or business.
Abenomics’ goal is to escape two decades of deflation.
Its purpose is not to encourage the depreciation of the yen, despite complaints about the yen’s depreciation.
With Europe’s economy showing no sign of recovery and growing concern about a Chinese slowdown, Japan cannot afford to continue to tread water.
As a responsible international stakeholder, Japan must stimulate its economy to provide an additional catalyst for global growth.
Abe’s government has now announced that Haruhiko Kuroda, the president of the Asian Development Bank and former Vice Minister of Finance for International Affairs, will be its choice to succeed Shirakawa as BOJ Governor.
Despite partisan bickering, the opposition will not resist the appointment of someone with both the vision and the administrative skills to act boldly.
Japan, at long last, will not have to fight deflation with one hand tied behind its back.
Choosing the IMF’s Next Leader
NEW YORK – Sooner than expected, the International Monetary Fund will have a new managing director.
For more than a decade, I have criticized the Fund’s governance, symbolized by the way its leader is chosen.
By gentlemen’s agreement among the majority shareholders – the G-8 – the managing director is to be a European, with Americans in the number two post and at the head of the World Bank.
The Europeans typically picked their nominee behind the scenes, as did the Americans, after only cursory consultation with developing countries.
The outcome, however, was often not good for the IMF, the World Bank, or the world.
Most notorious was the appointment of Paul Wolfowitz, one of the main architects of the Iraq War, to lead the World Bank.
His judgments there were no better than those that got the United States involved in that disastrous adventure.
Having placed fighting corruption at the top of the Bank’s agenda, he left in the middle of his term, accused of favoritism.
Finally, as a new order seemed to emerge in the aftermath of the US-made Great Recession, the G-20 agreed (or so it was thought) that the next IMF head would be chosen in an open and transparent manner.
The presumption was that the outcome of such a process almost surely would be a managing director from an emerging-market country.
After all, the IMF’s main responsibility is to fight crises, most of which have been in developing countries – more than a hundred since the disastrous policies of financial deregulation and liberalization began some 30 years ago.
There were many heroes of these battles in the emerging markets.
Crises need to be carefully managed.
In 1997, the mismanagement of the East Asia crisis by the IMF and the US Treasury transformed downturns into recessions, and recessions into depressions.
The world cannot afford to repeat that performance.
Today, the imminent crisis is in Europe, where the European Central Bank seems to be putting its own balance sheet and those of European banks – loaded with debt from Ireland, Greece, and Portugal – above the well-being of these countries’ citizens.
This debt almost surely needs to be restructured, but, having allowed the banks to leverage themselves beyond any level of prudence and load up on toxic derivatives, the ECB is now warning against any sort of restructuring or write-down.
But it is a bit late for the ECB to describe debt restructuring as “unthinkable.”
The ECB should have done some thinking before it let this state of affairs arise.
Indeed, more than thinking, it should have done some regulating to prevent Europe’s banks from becoming so vulnerable.
Now the ECB needs to think about how to help everyone, not just the bankers who bought the bonds.
The new thinking should put people first, and banks’ shareholders and bondholders second.
Even if the shareholders and bondholders lose everything, with the right restructuring, we can still save the banks and protect taxpayers and workers.
Where the IMF’s next managing director will come down on this issue – and on whether fiscal salvation is to be achieved through austerity, with costs borne by ordinary citizens, even as bankers get only a mild slap on the wrist – is critically important, but hard to predict.
Despite the failure of the IMF’s strategy in East Asia, Latin America, and elsewhere, it still has adherents, even within the emerging markets.
The leadership contest has turned out differently from what many had expected.
Some of the most qualified candidates (in both developed and developing countries) have not received the support of their own governments that the political process seems to require.
Other qualified people from emerging markets have been reluctant to put their hats into the ring – it is a brutal job, with a travel schedule that requires physical stamina to match wisdom and experience.
Much as I would like to see someone from the emerging markets and the developing world head the IMF, the first priority is to choose a leader with the requisite skills, commitments, and understandings in an open and transparent process, someone who will continue along the reform path on which the Fund has embarked.
Realpolitik might mean that there will be senior people from both China and the US in the top management team, but the presumption that the number two position should be filled by an American also has to go.
Whatever the outcome, the IMF, the World Bank, and the international community need to reaffirm their commitment to an open and transparent process – and ask how that process can be improved.
For example, rather than nominations from governments, which often are reluctant to support excellent candidates from opposition parties, an international nominating committee could put forward names.
Similarly, changes in voting procedures (public voting by countries, rather than through constituencies, or a requirement that candidates win the support of a majority of developing and emerging countries) could persuade more emerging-market officials to put their names forward.
What we are seeing now – open campaigning, as opposed to selection behind closed doors – seems to be a move in the right direction.
But one hopes that campaign promises won’t tie the new leader’s hands, as so often happens in electoral politics.
Simplistic ideologies got the world into the mess in which it now finds itself, and simplistic prescriptions (even of the “tough-love austerity” form) will only compound the problems.
One of the leading candidates to be the IMF’s next managing director has turned out to be a Frenchwoman, Christine Lagarde, who, as France’s finance minister, helped lead her country through the Great Recession.
She has been an outspoken advocate of financial-sector reforms, and has won the respect of all of those with whom she has worked.
Politics is not always kind to good candidates.
The world should be thankful that there is at least one.
Where she was born should not be an impediment to her prospects.
Choosing to Learn
STOCKHOLM – The Nordic countries’ economies are performing well, and a part of the reason is that they are gradually reforming their “social model,” adapting it to new realities in ways that respond to people’s demands.
But there is nothing uniquely “Nordic” about this change.
On the contrary, it is one that others can emulate.
Obviously, such a policy requires significant investment in research and development.
Sweden, for example, invests more than any other European country in this area – well above the EU target of 3% of GDP.
Many countries invest less, and even Sweden’s 4% of GDP might not be enough, given higher spending on R&amp;D in China, India, and the United States.
Moreover, large investments in R&amp;D may be of limited use if knowledge can’t be transformed into successful businesses.
That requires adopting policies that cover everything from kindergarten training to collaboration between universities and companies, as well as an overall business climate in which success is rewarded and failure is not treated as a human catastrophe.
America’s success is to a great extent based on this kind of thinking.
Unfortunately, most European educational systems are based on outdated practices and theories.
Although educational possibilities and structures have gradually been diversified, the major shortcoming of most European educational systems remains: students have too few choices, and teachers, if they want to remain in their profession, must adhere to a severely compartmentalized pedagogy.
As with corporate monopolies, the consumers (students) are often seen as a homogeneous mass, where all students can be educated according to the same pedagogical approach.
But schools must be able to meet the needs and abilities of individual children in a way that makes learning a stimulating adventure.
Other countries might find Sweden’s system worth studying.
Its schools are financed by local communities and work within the framework of a national curriculum designed by the parliament and government.
But, while everyone must follow these rules, individual schools are run in a competitive manner.
Anyone – parents, teachers, or even companies – can apply for a license to operate a school.
The National School Board is, in principle, instructed to approve an application if the proposed school is likely to fulfill the national goals and has a solid financial base.
Moreover, private schools are not seen as mere supplements to public schools, but as fully-fledged alternatives, so they need not offer something different.
A community where a private school offers its services must support it with the same amount of money, or vouchers, per student that it provides to public schools.
The amount of financing per student is the same, and schools that receive vouchers cannot charge additional fees.
After this system was adopted in the 1990’s, many non-public schools were established.
The pioneers were often parents’ or teachers’ cooperatives, usually with a special pedagogical philosophy.
Companies operating chains of schools later came to play an important role as well.
As a result, the variety of schools has increased throughout Sweden.
The voucher system means that all students, irrespective of family income, can attend the school of their choice.
Even in rural areas, there is now a wide choice of schools, and it seems that competition has improved the overall quality of Swedish schools, as non-public schools’ very existence has created a demand for reform of public schools.
If there is any difference, it seems that non-public schools often are better than public schools in dealing with children with learning problems.
There are, of course many alternatives to what Sweden has done to revitalize education.
But three features of Sweden’s reform seem particularly important: it was based on a combination of public and market systems; it was general in form, without demanding that non-public schools be special in order to be licensed; and it covered all students.
Sweden’s voucher educational system is probably the most ambitions of its kind in the world.
This is all the more remarkable insofar as the principle of competition on which it relies has taken root in a country where competition within the area of public services has not generally been accepted.
Reuniting the United Kingdom
LONDON – In the end, democracy came to the rescue.
The people of Scotland voted by a comfortable margin of about 10% to remain part of the United Kingdom – not least because of the campaigning of three Labour politicians, Alastair Darling, Gordon Brown, and Jim Murphy.
At times, it seemed that the result would be much closer, or even that we British might engineer the dismemberment of our country, which for centuries has brought together four national communities: England, Wales, Northern Ireland, and Scotland.
The Scots have been part of the British state for more than 300 years, at the heart of the Protestant, imperial, adventuring, outward-looking culture that forged Britain’s identity.
Still, that identity has been fractured; I hope not beyond repair.
In any case, things will never be quite the same again.
Now, the people of England, Wales, and Northern Ireland – not rejected, after all – must behave as well as possible to salvage something workable from the sometimes bitter and divisive arguments.
We have to display magnanimity – a difficult enough virtue to practice at the best of times.
Before trying to rise to this challenge, what can we learn from this walk along the cliff edge?
Despite the huge turnout on polling day in Scotland, referendums are a lamentable way of trying to settle big political issues.
Those who established and developed parliamentary democracy in Britain knew this very well.
Referendums are the favorite device of populists and would-be dictators.
One vote on one day subsumes complex matters with one ballot question, which in any event is frequently not the question that many people actually answer.
Parliamentary democracies should have nothing to do with them.
In the event, we did not dispose of 300 years of shared experience and common prosperity on one Thursday in September 2014.
But there are three reasons why we seemed at times to come so close to that outcome, none of which reflect well on the British political process or, in my view, justify the claim that our future will, and must, be different.
First, while Scottish nationalism has many honorable roots and aspirations, the campaign and its incubation showed a nasty tinge of chauvinism and an occasionally brutish hostility toward pluralism, reflected, for example, in the intimidation of some journalists.
Overall, the English took on the role of what philosophers and social scientists call the “other,” an alien threatening force, in the pro-independence campaign.
The English were every day’s villains.
Now we have to try to forget all of that.
Second, Britain, like other countries in Europe, is suffering from the rise of angry, populist, anti-enlightenment political forces, fueled by conspiracy theories.
In England, the electoral success of the UK Independence Party is one such example.
Demagogues stack prejudices atop half-truths, and any attempt to connect discussion with reality is shot through with contemptuous accusations of dishonesty and self-interest.
Responsible political leaders will have to be more aggressive, bold, and vigorous in confronting such interlocutors.
Finally, as far as policy is concerned, we Britons have deluded ourselves to think that our system of government – increasingly shown to be unrepresentative, inefficient, and over-centralized – could survive with a little tinkering here and there.
This belief has suited the two main political parties.
Labour has sought to avoid a constitutional debate, because any move in the direction of federal institutions requires addressing the party’s over-representation in the UK parliament.
It is unfair to give ever more power to a Scottish parliament while continuing to give Labour, which controls 41 Scottish constituencies in the House of Commons, disproportionate say over what happens in England.
As for the Conservatives, the party has allowed its belief in the union of the country’s constituent parts to foreclose any discussion of how that union can be modernized.
If we are to prevent the UK from rattling to pieces, we have to change the way we govern ourselves.
The pace that Prime Minister David Cameron has now proposed for this process is breathtaking.
Conservatives held a majority of the seats in Scotland less than 60 years ago.
Today, there is one Scottish Conservative MP out of 59 in the UK Parliament, a mark of how the Tories have allowed themselves to be frozen out of some parts of the country.
In some respects, this is the biggest challenge of all to the UK’s political culture.
Conservatives are losing touch with parts of the country where once they were strong – not just Scotland, but also cities and the north of England – and there is a growing disconnect between the party and Britain’s increasingly important minority ethnic groups.
Some of the same problems affect Labour.
Both big parties will have to address these issues as we start on the long and difficult task of reforming a UK that has lost some of the glue of affinity and solidarity that has held it together for so long.
For some British citizens south of the Scottish border, it will be difficult to act with the goodwill now required to recover from the referendum episode.
I do not know how much Alex Salmond, the now-resigned Scottish Nationalist Party leader who pressed for the referendum, is responsible for the surge in his own party’s support; but I suspect that he may, alas, have galvanized all too much nationalist sentiment in England.
I heard one commentator claiming that the referendum campaign was “beautiful.”
Perhaps in the end, we really could “trust the people,” and that is an invigorating thought.
Let others, who oppose democracy in their own countries, take note.
But the campaign did come perilously close at times to being a triumph for un-reason.
The challenge now is to figure out how to banish half-truths and big lies from our politics and restore reason and moderation to our divided land.
What I Learned From Vladimir Putin
LONDON – Is Russian President Vladimir Putin, like most political leaders, predisposed to spinning the truth for his own benefit?
Or does he go far beyond that, governing Russia and dealing with his neighbors and the rest of the world with reckless mendacity, abetted by a supine national media?
Sometimes, in answering questions like this, we can draw not only on what we have heard and seen, but also on personal experience.
I first met Putin in October 1999 in Helsinki, when I was attending a European Union-Russia summit as the EU’s external affairs commissioner.
President Boris Yeltsin canceled his attendance at the last moment; he was “indisposed.”
In his place, Yeltsin sent the new acting prime minister, Vladimir Putin, whose behavior confirmed the wisdom of the observation that you can take the man out of the KGB, but you can’t take the KGB out of the man.
Preparing for the meeting in the early morning, the EU team heard that there had been an explosion in Grozny, Chechnya’s capital, killing several people.
When Putin arrived, we asked him about it.
He claimed to know nothing, but promised to find out by lunch what had happened.
At our lunchtime discussion, he reported that the explosion had been caused by Chechen terrorists who were running their own arms bazaar.
By this time, we knew that the deaths had been caused by a Russian military assault; it subsequently came to light that a wave of Russian ballistic missiles (probably Scuds) had killed more than a hundred people.
Putin had looked us in the eye and lied, almost certainly aware that we knew he was lying.
The communiqué that day made no mention of Chechnya, but enunciated the usual “blah blah” about shared values, belief in democracy, human rights, and the rule of law, and the need for strategic cooperation.
I can recall countless instances of – how can I best put it? – Putin and his colleagues economizing with the truth on a spectacular scale.
On Chechnya, they regularly reported either that they had received no complaints from the EU about humanitarian relief, or that they were complying with the United Nations code on relief efforts; they were duplicitous on both counts.
Similar dissembling characterized negotiations on trade, partnership agreements, the enlargement of the EU to Eastern Europe, and access to Kaliningrad.
Against this background, I find it difficult to believe any of Putin’s account of what has been happening in Ukraine – a view shared by many seasoned observers in Poland and the Baltic states. Putin does not want to preside over a country with a declining population and a footprint that is largely Asian.
To this end, Putin has always resisted Ukraine’s historic turn to the West, about which the EU itself has been standoffish in the past.
The EU was prepared to recognize Ukraine’s “European vocation,” but it did as little as it could to encourage this outcome.
When Ukrainians earlier this year ousted their corrupt president, Viktor Yanukovych, after he backed out of an association agreement with the EU, Russia set out to destabilize the country.
Crimea was annexed on the spurious grounds that it had once been part of Russia – a justification that, if applied elsewhere, could underwrite the violent redrawing of boundaries in much of Europe.
Then came Russia’s fomenting of, and participation in, armed separatists’ effort to take over parts of eastern Ukraine, which led directly to the downing last month of Malaysian Airlines Flight 17 and the death of all 298 people on board.
Though likely an accident, it was an accident that happened only because of Russia’s duplicitous and lethal meddling.
So, though I am saddened by the Putin regime’s behavior, I am not surprised by it.
I do hope to be surprised by the EU’s recognition that what has happened in Ukraine requires Europe to stand up for international decency and the rule of law.
There should be no more happy talk about shared values.
This is a time for steely principle.
That will not be welcomed by Europe’s far right, from Hungary’s Jobbik to France’s National Front.
They love Putin.
But Ukraine has proved a step too far for some of his erstwhile admirers, like Nigel Farage, the leader of the United Kingdom Independence Party.
If Farage had had some first-hand experience dealing with Putin, he might have reached an accurate assessment much sooner.
From Beethoven to Beijing
LONDON – On July 1, 17 years ago, I was sailing on Britain’s Royal Yacht away from Hong Kong where, at midnight the previous day, China assumed sovereignty under the terms of an international agreement with the United Kingdom (tabled at the United Nations) known as the Joint Declaration.
That agreement guaranteed Hong Kong’s way of life for 50 years under Deng Xiaoping’s slogan “One country, two systems.”
The rule of law and the freedoms associated with pluralism – due process and the freedom of speech, assembly, and worship – were to remain the bedrock of Hong Kong’s prosperity and stability.
Fast forward to this year.
On a date that meant so much to me personally as the colony’s last governor, and much more to the citizens of Hong Kong, I attended a magnificent production of Beethoven’s “Fidelio” on the grounds of a country house near Oxford.
Beethoven’s only opera, written in 1805 (the year of Napoleon’s victory at Austerlitz) and rewritten in 1814 (when Napoleon abdicated), is one of the supreme cultural expressions of fundamental human values – freedom and opposition to tyranny – that resonate in every society.
“Fidelio’s” most dramatic moment comes when political prisoners are briefly released from their dungeons. “Oh Heaven!
As they sang of liberty, the setting sun’s rays dazzled the prisoners and the Oxfordshire audience. Nature underlined the importance of the message.
Much of the history of the two centuries since Beethoven composed his opera has centered on that quest for freedom: the fight against colonial powers, the campaigns for basic human rights, the resistance to modern totalitarian and authoritarian regimes.
On the whole, liberty has triumphed.
But the struggle is not yet over; it continues on every continent and takes many forms.
Consider the victims of torture from Central America to Côte d’Ivoire to Pakistan; the legal harassment – not least of journalists – in Egypt; the persecution of gays in Russia and Uganda; human trafficking, prevalent even in developed countries; and the abduction of young Christian women in northern Nigeria.
In many countries, political dissidents (like the captives in “Fidelio”) are locked up – or worse – in defiance of the clear and open procedures that should ensure the rule of law.
The extent to which concern for human rights should be a consideration in setting foreign policy is a contentious issue in most democracies, which often believe that their own record entitles them to lecture others.
Sometimes it does; often it does not.
For example, the United States’ own record, at Guantánamo Bay and elsewhere, has undermined American politicians’ credibility on this subject.
There is also the question of consistency.
One cannot credibly thump the table about human rights in one country, but keep one’s opinions to oneself in another – an all-too-common occurrence when, say, a trade deal might suffer.
A lack of consistency has been one of the European Union’s sins in attempting to establish a value-based foreign policy.
The EU sought to build a partnership of economic and political cooperation in the Mediterranean region, for example, in which financial assistance and trade liberalization would be contractually linked to progress in advancing human rights and developing democratic institutions.
This sensible objective was sabotaged by the tendency to overlook what was actually happening in some countries.
Many suspect that some EU member states, while insisting on robust human-rights clauses in bilateral agreements with countries known to torture prisoners, secretly aided in the rendition of suspected terrorists to these same countries.
I have no doubt that it is in the national interest of democracies to promote freedom and human rights.
Though these values cannot be imposed by force or manufactured like instant coffee, the world is likely to be more peaceful, stable, and prosperous the more that countries treat their own citizens decently.
This is not a prescription for a soggy policy that denies the demands of the real world.
But reliance on realpolitik as the guiding light of foreign policy has a pretty shabby track record.
Realpolitik brought us the bombing of Cambodia and the mass killings under Pol Pot.
Moreover, “realist” assumptions often turn out to be remarkably implausible.
Trade deals often are not secured or sustained by political kowtows.
Countries buy what they need and sell what they can at the best price they can get, regardless of whether another country has or has not written a ministerial communiqué.
Rather, all relevant policies – from aid to political and security cooperation – should be related to strengthening the institutions and values to which one adheres.
All of this brings me back to July 1 of this year.
While I was listening to “Fidelio,”tens of thousands of Hong Kongers (organizers say hundreds of thousands) were demonstrating for liberty.
They want a fair and open system for electing their government, and to defend the freedom and rule of law that make Hong Kong so special and successful, a genuinely liberal – in the classical sense – society.
Eventually, Hong Kong’s people will get what they want, despite China’s objections; freedom invariably wins in the end.
But China’s rulers would take a giant step forward by recognizing that such aspirations are not a threat to the country’s wellbeing.
For now, however, China, a great country and a growing power, is handling its economic affairs with more sophistication and a surer touch than it is addressing its political challenges.
Getting to Yes on Transatlantic Financial Regulation
WASHINGTON, DC – As 2014 gets underway, signs of a fraying regulatory relationship between the European Union and the United States seem to be everywhere.
The US Federal Reserve’s tough new regulations on foreign banks have spurred the European Commission to threaten retaliation.
Progress toward reconciling US and EU rules on derivatives – one of the main causes of the financial crisis – has fallen apart.
And plans by the EU and the United Kingdom to “ring-fence” bank deposits are poised to depart in form and substance from one another and from the newly unveiled Volcker rule in the US.
But the lesson that most observers draw from these increasingly high-profile disputes – that, even in financial regulation, power politics trumps the common good – is incomplete.
After all, regulatory disparities are not just a product of divergent national interests; how effectively diplomacy is practiced and coordinated can play a role as well.
For example, a recent study highlighted the failure of G-20 leaders to define a consistent and achievable roadmap for implementing the financial-reform agenda announced after the 2008 crisis.
For roughly the past decade, heads of state have been calling on regulators to tackle big issues, such as capital standards, along with other matters like over-the-counter derivatives and credit-ratings reforms.
But, during this period, officials have acted more or less at their discretion, leaving problems to be addressed according to different economic and political cycles.
Radical disparities between the rule-making cultures of the US and the EU are exacerbating the problem.
Unlike the US, where independent agencies lead the rule-making process according to Congressional dictates, legislative actors in Brussels and Strasbourg – the European Commission, the European Council, and the European Parliament – set regulatory agendas and write the rules.
And, though EU agencies like the European Central Bank are assuming an increasing share of regulatory responsibility, divergences in decision-making procedures continue to affect the rate and nature of transatlantic coordination.
Making matters worse, market and monetary reforms have occasionally merged, with rule-making becoming partly dependent on the decisions of disparate agencies and institutions.
Meeting enhanced Basel III capital standards, for example, is about more than just rules; it requires the recapitalization of banks – a process that is taking longer in Europe than in the US, partly because the eurozone has had to negotiate funding mechanisms for banks and cash-strapped governments.
Now these delays are raising doubts in the US about the EU’s commitment to reform.
All of these problems reflect the simple fact that policymakers lack suitable tools for conducting regulatory diplomacy in a world of dynamic market reform.
The conventional means for doing so – mutual recognition and substituted compliance – were developed in an environment in which countries would spur each other to raise standards by offering foreigners easier access to domestic markets once regulations in their home countries mirrored their own.
Neither mechanism foresees a situation whereby all countries simultaneously seek to upgrade their financial systems across a variety of sectors.
Meanwhile, the traditional forum for EU-US talks, the Financial Markets Regulatory Dialogue – which brings regulators together at irregular intervals to haggle over lists of divergent regulations one by one – is all too often slow and circumvented.
The good news is that European and American policymakers have options for clearing the structural roadblocks.
They should begin by developing a new “toolkit” to help countries not just meet existing standards, but also work together to improve standards in an environment of rapidly changing markets.
Whether implemented as part of the Transatlantic Trade and Investment Partnership talks or on an informal basis, mutual-recognition and substituted-compliance programs should become more robust, and they should provide procedural mechanisms for coordinating rule-making and administrative processes in real time.
Moreover, coordinating mechanisms should be – to the extent possible – objectives-based processes measured against international commitments and best practices.
Finally, given the interface between financial supervision and monetary relations, the Financial Markets Regulatory Dialogue should be revived alongside G-20 meetings of treasury officials and central bankers.
Instead of relying on the multi-regional Financial Stability Board to hash out differences and set the regulatory pace, EU and US regulators should be encouraged to present joint solutions and reforms for wider international consideration.
Of course, reforming the transatlantic regulatory architecture can do only so much for financial diplomacy, and national interests will always be important.
But, in a world of trillion-dollar capital flows and ever-higher stakes in a sound global financial system, even modest improvements can make a big difference.
Facing Up to Chronic Disease
MONTREAL – Many of us are terrified by the prospect of having a debilitating stroke or a fatal heart attack.
Few of us, however, respond as emotionally to the threat of chronic disease, a vague and elastic term that is mainly useful for organizing health services.
And yet chronic disease has become a major social problem that requires a collective response.
Historically, chronic disease referred to conditions lasting over a long period.
But, with the increasing organization of medicine around specific diseases, the term has come to refer to an open-ended set of conditions including cardiovascular disease, cancer, and diabetes, but not infectious diseases, such as tuberculosis and malaria, or mental illness.
In the nineteenth century, chronic disease was considered problematic in part because sufferers took up scarce beds in hospitals that were increasingly focused on treating acute, curable diseases.
But chronic disease soon became a wider public-health issue as the death toll from cancer, cardiovascular disease, and diabetes seemed to rise. In fact, the initial increase in the number of reported deaths from these diseases most likely reflected better identification and diagnosis.
Filling in death certificates is not an exact science, and doctors focus on causes with which they are familiar.
Over time, though, the incidence of chronic disease almost certainly did rise in developed countries.
As infectious diseases have been brought increasingly under control, more people live into old age, when they become susceptible to long-term illnesses.
As a result, chronic diseases now comprise a large proportion of health-care systems' total caseloads.
Our collective interest in addressing the problem of chronic diseases does not rest only on epidemiological statistics.
It also reflects deep, long-standing concerns about the effects of civilization: urban overcrowding, sedentary lifestyles, unhealthy habits like tobacco and alcohol consumption, overeating, and stress.
Moreover, we have come to believe that most diseases, including previously hopeless conditions, can be prevented, cured, ameliorated, or controlled by scientific medicine, and that even those patients unlikely to benefit have a right to medical care.
As chronic disease has become an increasingly prevalent social problem, it has been dealt with in two ways.
The most common response is disease-specific.
The American Cancer Society and the American Heart Association, as well as the disease-based research institutes of the National Institutes of Health, are notable examples.
An alternative approach is to treat these illnesses as a single, comprehensive problem.
The earliest example occurred in the United States, where a focus on welfare measures and health insurance for vulnerable populations – the elderly, the disabled, and the very poor – led to a strong push to confront the chronic diseases widespread among them.
European countries, preoccupied with national health-care systems that addressed the needs of the entire population, took longer to move toward comprehensive strategies.
Both approaches have given rise to new forms of epidemiological surveillance.
Since the 1950s, for example, the field has been extended to risk factors, a concept that grew out of debates about the health effects of tobacco and studies of cardiovascular diseases with multiple potential causes.
Some risk factors – moderate hypertension and high cholesterol, for example – have themselves become chronic diseases, requiring medical (and sometimes surgical) treatment and further contributing to the rise in illness rates.
A new vision of health care, which has grown out of the US managed-care movement, has recently heightened the relevance of embracing a comprehensive approach to treating these conditions.
Originally intended to cut costs, the goal now is to provide more appropriate care for a new era, the premise being that long-term care for many diseases requires forms of medical organization that are different from those geared toward acute care.
Acute episodes and expensive hospitalization can be avoided by providing expert team support for patient self-care.
The most successful and radical of these initiatives is the Chronic Care Model developed by Edward Wagner, an American doctor.
Less sweeping is the Medical Home Model, also developed in the US, which seeks to create teams of caregivers to provide better access and continuity of care to patients suffering from multiple diseases.
Massive health-care systems cannot shift course easily or quickly.
But efforts like these, by focusing on the need to provide appropriate and less expensive care for chronic diseases, constitute a small step in the right direction.
Chronicle of a Currency Crisis Foretold
CAMBRIDGE – The crisis in Greece and the debt problems in Spain and Portugal have exposed the euro’s inherent flaws. No amount of financial guarantees – much less rhetorical reassurance – from the European Union can paper them over.
After 11 years of smooth sailing since the euro’s creation, the arrangement’s fundamental problems have become glaringly obvious.
The attempt to establish a single currency for 16 separate and quite different countries was bound to fail.
The shift to a single currency meant that the individual member countries lost the ability to control monetary policy and interest rates in order to respond to national economic conditions.
It also meant that each country’s exchange rate could no longer respond to the cumulative effects of differences in productivity and global demand trends.
In addition, the single currency weakens the market signals that would otherwise warn a country that its fiscal deficits were becoming excessive.
And when a country with excessive fiscal deficits needs to raise taxes and cut government spending, as Greece clearly does now, the resulting contraction of GDP and employment cannot be reduced by a devaluation that increases exports and reduces imports.
Why, then, is the United States able to operate with a single currency, despite major differences among its 50 states?
There are three key economic conditions – none of which exists in Europe – that allow the diverse US states to operate with a single currency: labor mobility, wage flexibility, and a central fiscal authority.
When the textile and shoe industries in America’s northeastern states died, workers moved to the West, where new industries were growing.
The unemployed workers of Greece, Portugal, and Spain do not move to faster-growing regions of Europe because of differences in language, history, religion, union membership, etc.
Moreover, wage flexibility meant that substantially slower wage growth in the states that lost industries helped to attract and retain other industries.
And the US fiscal system collects roughly two-thirds of all taxes at the national level, which implies an automatic and substantial net fiscal transfer to states with temporarily falling incomes.
The European Central Bank must set monetary policy for the eurozone as a whole, even if that policy is highly inappropriate for some member countries.
When demand in Germany and France was quite weak early in the last decade, the ECB reduced interest rates sharply.
That helped Germany and France, but it also inflated real-estate bubbles in Spain and Ireland.
The recent collapse of those bubbles caused sharp downturns in economic activity and substantial increases in unemployment in both countries.
The introduction of the euro, with its implication of a low common rate of inflation, caused sharp declines in interest rates in Greece and several other countries that had previously had high rates.
Those countries succumbed to the resulting temptation to increase government borrowing, driving the ratio of government debt to GDP to more than 100% in Greece and Italy.
Until recently, the bond markets treated all euro sovereign debts as virtually equal, not raising interest rates on high-debt countries until the possibility of default became clear.
The need for massive fiscal adjustment without any offsetting currency devaluation will now drive Greece and perhaps others to default on their government debt, probably through some kind of IMF-supported debt restructuring.
The euro was promoted as necessary for free trade among the member countries under the slogan “One Market, One Money.”
In reality, of course, a single currency or fixed exchange rate is not needed for trade to flourish.
The US has annual trade turnover of more than $2 trillion, despite a flexible exchange rate that has seen sharp ups and downs in recent decades.
The North American Free Trade area increased trade among Canada, Mexico, and the US, all of which have separately floating exchange rates.
Japan, South Korea, and other major Asian trading countries have very flexible exchange rates.
And, obviously, only 16 nations within the 27-member EU’s free-trade area use the euro.
Despite its problems, the euro is very likely to survive the current crisis.
But not all of the eurozone’s current members may be there a year from now.
In retrospect, it is clear that some of the countries were allowed to join prematurely, when they still had massive budget deficits and high debt-to-GDP ratios.
Moreover, some countries’ industrial composition and low rates of productivity growth mean that a fixed exchange rate would doom them to increasingly large trade deficits.
For the rest, some mechanism of enhanced surveillance and control may be adopted to limit future fiscal deficits.
But, even with a smaller group of member countries and some changes in budget procedures, the fundamental problems of forcing disparate countries to live with a single monetary policy and a single exchange rate will remain.
Chávez at Bay
SÃO PAULO – The recent opposition victories in Venezuela’s municipal and state elections, together with the international financial crisis, have begun to set limits on the powers of President Hugo Chávez for the first time in the decade he has been in power.
Indeed, the elections demonstrated that Chávez’s control of the country is no longer total.
There is now a solid opposition in Venezuela and less distance between those who rule and those who want to rule.
This is important progress, considering that the opposition is still paying a price for its boycott of the 2005 elections that gave Chávez absolute control of Parliament.
The growing strength and coherence of the opposition is not due to the number of disaffected Chávez supporters alone.
In fact, those who once hoped for the creation of a “third pole” in Venezuelan politics were pushed aside by the traditional polarization between Chávez’s supporters and opponents.
Instead, the opposition grew because of a return to its 1998 and 2001 levels of popular support – around 40% – and because it was able to bring back into the fold some of the abstainers and undecided, including important popular factions.
The opposition is now represented mostly by professional democratic politicians who not only united a wide group of factions, but also displaced the “Salvadores de la Patria” (the Nation’s Saviors) – a group accustomed to leading the opposition from the reception rooms of the capital’s hotels.
The opposition’s new leadership also displaced those who wanted to supplant “populist” leaders with an anti-political discourse.
Thus, the opposition achieved its objective: a beachhead in Venezuelan politics with real and significant popular support.
This political rebalancing – in terms of both votes and institutions – could create higher barriers against any authoritarian deviation, wherever it might come from.
Chávez and his partisans must now learn what it is like to rule within limits.
The president had hoped to repeat his role as Great Campaigner in previous elections, and so personally led his own campaign, ignoring criticism that he was unfairly taking advantage of the powers of his office.
But in the end, that advantage, and his usual verbal threats, mattered less than the desire of voters in some cities and regions to punish his regime because of its mismanagement.
The paradox of this jolting election is that it will actually stabilize politics in Venezuela, at least for now, and will favor a renewal of democracy.
This is important for the opposition, because their new influence is arising at a time when the economic downturn and slumping oil revenues will make it difficult for the government to continue to buy support through subsidies and handouts.
This does not mean that Chávez’s revolutionary and anti-imperialist rhetoric has lost all its appeal.
But it is no longer enough to guarantee his unchecked power.
Indeed, the shadows of militarism that have appeared over the Chávez regime may well have unnerved a majority of Venezuelans, who wonder who the next adversary to be pursued will be.
Nevertheless, it is clear that Chávez will continue with his tropical socialism, proclaiming the value of Venezuela’s participatory democracy and insisting on his anti-imperialist creed.
The opposition, meanwhile, will try to expand on its victory, which, though partial, was significant in its political symbolism.
Between these extremes, Venezuela’s people will watch events develop, unwilling to compromise their democracy or lose the economic privileges they have attained.
Chávez now faces a new electoral reality, one first established in December 2007 when he lost the advisory referendum he had called in order to secure a new Constitution.
The electoral results of November 2008, and a global financial crisis that has strained Chávez’s ability to pay for his radical policies, may now limit his chances to continue dividing a country whose inhabitants, like most people, want to live in a peaceful and prosperous democracy.
Chávez at Home and Abroad
Any observer who reads the world's great international newspapers will probably think that Venezuela is in deep crisis.
With an oddball president who led a failed coup only to return to impose his brand of Cuban socialism cum Latin American tinhorn dictatorship cum political evangelism, poor Venezuela seems destined for a fall.
A paradox, indeed, haunts Venezuela: if people abroad have such a poor view of our country, then perhaps we are going to the dogs, regardless of what we see around us.
Of course, most foreign opinions about a country come from local sources.
A disproportionate share reflects the narrow group of people who speak English, travel abroad, and belong in the top income group - hardly an unbiased sample.
The power of the foreign press is worrisome for those with an interest in Venezuela's welfare, because perceptions affect realities, including foreign investment, risk premiums on debt, tourism and capital outflows.
Few argue that things are all wonderful with President Chávez.
Dogged by a small, disorganized, yet wily and persistent opposition that follows his every step and publicizes his frequent missteps, the President's popularity ratings have plummeted from above 80% in 1999 to half that today.
Any government expects its popularity to erode, especially in a society with as many intractable problems as Venezuela: unemployment, crime, high infant mortality and so on.
President Fox in Mexico, Cardoso in Brazil, De La Rúa in Argentina and Toledo in Peru aren't doing better in terms of popularity, but they seem better citizens of this globalized world and so are not taking the public beating that President Chávez is absorbing.
Chávez's popularity has fallen sharply since September 11 th , both because of his public comments and because of private sector shrieks following the publication of 49 laws issued under special executive powers and after limited consultation with parliament.
Business exasperation with the President's highhandedness led to the announcement of a one-day strike on December 10 th , as well as serious doubts over an international strategy that seemed to favor Osama Bin Laden over George Bush.
Venezuela's pro-American elites sprouted goose bumps when US Ambassador Hrinak was recalled to Washington for ``consultations'' about President Chávez's seeming Castro-style highjinks.
Who else would have shown Afghanistan's dead children on prime-time TV, while denouncing the use of terrorism to counter terrorism?
If the world is either with or against America, Chávez seems to be on the wrong side.
Intellectuals may be able to say the type of things he has said and get away with it, not chiefs of state.
Hard facts appear to support the international press depictions of Venezuela.
Poverty persists after three years of Chávez rule; there is a frightening crime rate and homeless children sniff glue on the streets despite a naive president's oath to house them.
But is Río any better?
The distinction lies in expectations and in Chávez's own silliness in thinking he could change things quickly with a big stick of good intentions and an army of inexperienced (and often opportunistic) followers invading an already pathetic state bureaucracy.
But other facts speak out.
Surveys show that only 25% of Venezuelans rate the government as poor or very poor, even though an overwhelming majority rejects the President's penchant for monopolizing the airwaves once a week, displacing their favorite soap operas.
They think he is overly aggressive, creating unwanted conflict, when what Venezuelans want is peace and calm.
Still, they give him credit - 68% of them - for having the power to resolve the country's principal problems.
It is rarely reported that, after 20 years of inflation averaging 30-40 % per year and with income-crunching peaks set at over 80%, prices have risen less under Chávez.
Indeed, inflation was 13% in 2001.
Venezuelans know that GDP has been growing modestly for two years, with private sector growth at over 5% in 2001.
Automobile sales rose 50%; employment levels improved slightly, especially in the formal sector.
After decades of exchange and price controls, the economy has enjoyed three years of open trade, free currency exchange and free prices.
Stores are full of goods.
Caracas is no Havana.
For the first time in history, the government has saved excess oil earnings for the next rainy day.
Foreign debt is among the lowest in Latin America compared to the size of the economy.
The National Assembly is negotiating a social security law that may turn out to be reasonable; a flap over the education law is giving way to agreements among warring parties.
So why do international financial markets rate Venezuela as riskier than all its neighbors, save for bankrupt Argentina?
It is a puzzle here.
Critics counter that the Chávez government's ``populism'' will cede to crisis when falling oil prices take their toll.
Unsustainable capital outflows bode poorly for future stability, fueled by doubts about Chávez, democracy and the future of capitalism.
Yet, with government spending at some 22% of GDP, charges of socialism fall flat.
These critics say that Chávez's insistence that the State hold the majority of shares in oil production will scare off investors, even though his Hydrocarbons Law is more liberal than the old one, especially where new gas projects and downstream activities are concerned.
The Land Law, although it is not very different from the forgotten one on the books for 40 years, is still portrayed as creating conditions that will starve investment in agriculture and cattle farming and marks a direct assault on private property.
What, then, is the truth about Venezuela?
The truth is that the country is facing difficult changes, zigzagging through complicated negotiations among competing and legitimate interests.
Without a strong opposition, the Chávez government would certainly veer too far left; without Chávez, it would have no keel at all.
Equilibrium requires that outsiders not tip the balance of a ship of state already enduring a rough ride.
Break Up Citigroup
WASHINGTON, DC – America’s presidential campaign is already well underway.
The election is not until November 2016, and very few candidates have formally thrown their hats into the ring, but the competition to promote and develop ideas – both behind closed doors and publicly – is in fully swing.
Earlier this month, Citigroup took advantage of this formative political moment by seizing an opportunity to score a tactical victory – but one that amounts to a strategic blunder.
Using legislative language apparently drafted by Citi’s own lobbyists, the firm successfully pressed for the repeal of some of the 2010 Dodd-Frank financial reforms.
The provision was then passed after it was attached to a last-minute spending bill – a tactic that ensured very little debate in the House of Representatives and none at all in the Senate.
At a stroke, Citi executives demonstrated both their continued political clout in Washington and their continued desire to take on excessive amounts of financial risk (which is what this particular legal change permits).
Lobbying to be allowed to load up on risk is exactly what Citi did during the 1990s and 2000s under Presidents Bill Clinton and George W. Bush – with catastrophic consequences for the broader economy in 2007-09.
As a result, breaking up Citigroup is under serious consideration as a potential campaign theme.
For example, in a powerful speech – watched online more than a half-million times – Senator Elizabeth Warren responded uncompromisingly to the megabanks’ latest display of muscle: “Let’s pass something – anything – that would help break up these giant banks.”
Defenders of the megabanks – Citi, JP Morgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley – dismiss Warren as an avatar of left-wing populism.
But this is a serious misconception; in fact, Warren is attracting a great deal of support from the center and the right.
Senator David Vitter of Louisiana is the most prominent Republican member of Congress in favor of limiting the size and power of the biggest banks, but there are others who lean in a similar direction.
Similarly, the vice chair of the Federal Deposit Insurance Corporation, Thomas Hoenig, a political independent, consistently warns about the dangers associated with megabanks.
And former FDIC Chair Sheila Bair, a Republican from Kansas, argues strongly for additional measures to rein in the biggest banks.
From the perspective of anyone seeking the nomination of either of America’s political parties, here is an issue that cuts across partisan lines. “Break up Citigroup” is a concrete and powerful idea that would move the financial system in the right direction.
It is not a panacea, but the coalition that can break up Citi can also put in place other measures to make the financial system safer – including more effective consumer protection, greater transparency in markets, and higher capital requirements for major banks.
From the left, the emphasis has been on the megabanks’ abuse of power and the great rip-off of the middle class.
From the right, the stress is on the hazards of crony capitalism, owing to the massive implicit government subsidies that these banks receive.
But both left and right agree on the fundamental asymmetry that the recent “Citigroup Amendment” implies: Bankers get rich whether they win or lose, because the US taxpayer foots the bill when their risky bets fail.
Potential Republican presidential candidates have hesitated to take up this issue in public – perhaps feeling that it will inhibit their ability to raise money from Wall Street.
Among the Democrats, however, the opportunity seems to be much more compelling; indeed, avoiding a confrontation with Wall Street might actually create problems for a candidate (as Hillary Clinton may well find out).
The Progressive Change Institute is currently running “The Big Ideas Project,” whereby people can vote on what they regard as the most important policy proposals. Three of the top ten ideas under “Economy &amp;
Jobs” are about imposing greater constraints on the big banks – and there is a sharp upward trend in support for Break Up Citigroup (full disclosure: I suggested this item for the website).
This idea would play well in the Democratic primary elections (which start in early 2016).
And, because it forms the basis for responsible policies, it would attract support from centrists.
And voters on the right like proposals that offer a credible way to end the favoritism – if not outright corruption – that has come to define the relationship between the top levels of government and Wall Street.
“Break up Citigroup, end dangerous government subsidies, and bring back the market.”
Wall Street for President?
WASHINGTON, DC – America’s presidential election is still nearly two years away, and few candidates have formally thrown their hats into the ring.
But both Democrats and Republicans are hard at work figuring out what will appeal to voters in their parties’ respective primary elections – and thinking about what will play well to the electorate as a whole in November 2016.
The contrast between the parties at this stage is striking.
Potential Republican presidential candidates are arguing among themselves about almost everything, from economics to social issues; it is hard to say which ideas and arguments will end up on top.
The Democrats, by contrast, are in agreement on most issues, with one major exception: financial reform and the power of very large banks.
The Democrats’ internal disagreement on this issue is apparent when one compares three major proposals to address income inequality that the party and its allies have presented in recent weeks.
There are only small differences between President Barack Obama’s proposals (in his budget and State of the Union address), those made in a high-profile report from the Center for American Progress, and ideas advanced by Chris Van Hollen, an influential member of Congress.
(For example, Van Hollen recommends more redistribution from higher-income people to offset a larger tax cut for middle-income groups.)
Against this backdrop of programmatic unity, the difference of opinion among leading Democrats concerning Wall Street – both the specifics of the 2010 Dodd-Frank financial reforms and more broadly – stands out in bold relief.
On Dodd-Frank, Democrats – including Obama – are apparently of two minds on the extent to which they should stick up for their own reforms.
In December, the White House agreed to a Republican proposal to repeal a provision of Dodd-Frank that would have limited the risk-taking of the country’s largest banks (in fact, the proposal’s language was drafted by Citigroup).
More recently, however, Obama has threatened to veto any further attempts to roll back financial reform.
And now he is proposing to impose a small tax on the largest banks’ liabilities, which he hopes will encourage “them to make decisions more consistent with the economy-wide effects of their actions, which would in turn help reduce the probability of major defaults that can have widespread economic costs.”
In contrast, the Center for American Progress report devoted very little space to financial-sector reform – in the authors’ view, such issues hardly seem to be a high priority.
Van Hollen does have some concerns – and proposes a financial transaction tax to reduce speculative activities.
But a serious challenge to all of these views has now emerged, in proposals by Senator Elizabeth Warren, a rising Democratic star who has become increasingly prominent at the national level.
In her view, the authorities need to confront head-on the outsize influence and dangerous structure of America’s largest banks.
Warren’s opponents like to suggest that her ideas are somehow outside the mainstream; in fact, she draws support from across the political spectrum.
In last month’s fight against Citigroup’s successful effort to roll back Dodd-Frank, for example, Warren’s allies included the House Democratic leadership, the Independent Community Bankers of America, Republican Senator David Vitter, and Thomas Hoenig (a Republican-appointed vice chair of the Federal Deposit Insurance Corporation).
Warren’s message is simple: remove the implicit government subsidies that support the too-big-to-fail banks.
That single move would go a long way toward reducing, if not eliminating, crony capitalism and strengthening market competition in the financial sector.
This is a message that plays well across the political spectrum.
And growing support for Warren’s ideas helps the Federal Reserve and other responsible regulators in their efforts to prevent big banks from taking on dangerous levels of risk.
The big Wall Street banks have enormous influence in Washington, DC, in large part because of their campaign contributions.
They also support – directly and indirectly – a vast influence industry, comprising people who pose as independent or moderate commentators, edit the financial press, or produce bespoke “research” at think tanks.
These megabanks are making a determined attempt to repeal as much of Dodd-Frank as possible, and the House Republicans seem keen to help them.
This is not an issue that will fade away.
The Democrats need to figure out their policy on Wall Street.
In the past, they have simply gone for the campaign contributions, doling out access and influence in exchange.
It is now obvious that this is not consistent with defending what remains of Dodd-Frank.
Warren offers a plausible, moderate alternative approach to financial-sector policy that would play well in the primaries and attract a great deal of support in the general election.
Citizens versus Extreme Poverty
Twenty years ago, a grass-roots movement led by Rotary International, a voluntary organization with around 1.2 million members in more than 200 countries, decided to attack.
As of the mid-1980’s, there were more than 300,000 cases of polio per year worldwide, despite the disease’s virtual elimination in the richest countries, where vaccination was routine.
Rotary took on the challenge of getting vaccines to the poor, in regions with weak or non-existent public health systems.
Rotarians dreamed not only of reducing the number of polio cases, but of eradicating the disease entirely.
This goal is now within reach.
Rather than wait for politicians to take up the fight against polio, Rotarians led the way.
A few years later, the World Health Organization, and then other international agencies and donor countries, joined the cause, creating a coalition of official and private organizations that now support Rotary’s vision.
By 2006, the number of polio cases had been cut dramatically, to well under 3,000 cases per year.
Complete eradication is in reach, but is still proving elusive, as small outbreaks have plagued one country or another in recent years.
In some cases, such as Northern Nigeria, social resistance to the vaccine has blocked adequate coverage of the population.
Pockets of polio transmission also persist in India, Pakistan, and Afghanistan.
In a few other countries, the disease has been sporadically reintroduced by travelers from regions where polio has not yet been eliminated.
And, in rare cases, the vaccine itself has failed and led to infection.
Still, despite the difficulties of rooting out the very last cases, the progress made against polio has been historic.
More importantly, Rotary’s leadership on polio offers a more general lesson in the fight against extreme poverty, hunger, and disease.
Even when politicians don’t lead, it is still possible for committed individuals and voluntary organizations to change the world.
The key is to link a bold idea with a practical and powerful technology, and then to push the idea and technology forward through mass citizen action.
These same lessons can be applied to the Millennium Development Goals (MDG’s), the targets for fighting poverty, disease, and hunger that the world’s governments adopted in 2000.
The MDG’s are bold but achievable.
For example, they call for reducing by 2015 the proportion of the world’s population that was chronically under-nourished in 1990, and for cutting the child mortality rate by three quarters.
The MDG’s also address the scourges of maternal death in childbirth, lack of access to safe drinking water, and killer diseases such as malaria, tuberculosis, and AIDS.
Just as with polio, the fight against hunger, disease, and lack of access to safe water and sanitation can be carried forward with practical and powerful technologies.
Indeed, these technologies are so powerful that they can enable families currently trapped in poverty to escape it once and for all.
Consider hunger in Africa.
Most of Africa’s farmers, working tiny plots, do not produce enough food to feed their families, much less to earn an income.
The root of the problem is that Africa’s farmers are too poor to obtain the basic modern inputs—including high-yield seed varieties, fertilizers, and small-scale water management systems—that could enable them to double or triple their output of food and cash crops.
The solution is therefore not much more complicated than a polio vaccine.
If organizations like Rotary International can help African farmers to get a 50 kilogram bag of appropriate fertilizer and a 10 kilogram tin of improved seeds, the rise in farm output could be enough to relieve extreme hunger and help farm households begin to earn some income.
Such practical approaches can solve many of the key problems of extreme poverty.
Consider, similarly, the death and illness caused by malaria, which can be reduced very sharply through the use of mosquito nets for beds and anti-malaria medicines.
An anti-malaria bed net costs just $5, lasts five years, and can accommodate two children.
Thus, for just $0.50 per year, each child can be protected by a bed net.
And a $1 medical treatment can cure malaria if the child gets infected despite the bed net.
Yet bed nets and anti-malaria medicines do not reach the people who need them, because the people who need them are too poor.
Fortunately, the American Red Cross and other organizations have been following the Rotary model, using private donations and private volunteers to fill the gap left by our political leaders.
Red Cross chapters across Africa, in partnership with other organizations, are now distributing bed nets free of charge to impoverished families, in the same way that Rotary has been distributing polio vaccines.
The time has arrived for a massive effort by voluntary organizations to take up the MDG’s through private action.
We need not wait for the politicians.
In a short period of time, the world’s citizens can make deep inroads in the fight against disease, hunger, and poverty.
Then the politicians will follow.
The key is practicality, boldness, and, most importantly, a commitment by those who are better off to volunteer their time and money to bring practical help–in the form of high-yield seeds, fertilizers, medicines, bed nets, drinking wells, and materials to build school rooms and clinics—to the world’s poorest people.
Civilized Talk
PARIS – What does it mean to be “civilized”?
Obviously, being highly educated, wearing a tie, eating with a fork, or cutting one’s nails weekly is not enough.
We all know that being “civilized” in this formal way doesn’t prevent people from behaving like barbarians.
Everywhere and at all times, being civilized means being able to recognize and accept the humanity of others, despite their different modes of living.
That may seem like an obvious point, but it is not universally accepted.
The idea of dialogue between civilizations usually gets a good press, but it is also sometimes mocked.
The conclusion of Elie Barnavi’s recent essay Les religions meurtrières (“Murderous religions”) is entitled “Against the dialogue of civilizations.”
His argument is implacable: “There is civilization on one hand and barbarism on the other.
There is no possible dialogue between them.”
But if you look at this line of argument more closely, the flaw in Barnavi’s argument is immediately apparent.
The meaning of the words civilization and culture is very different when they are used in singular and plural forms.
Cultures (plural) are the modes of living embraced by various human groups, and comprise all that their members have in common: language, religion, family structures, diet, dress, and so on.
Civilization (singular) is, on the contrary, an evaluative moral category: the opposite of barbarism.
So a dialogue between cultures is not only beneficial, but essential to civilization.
No civilization is possible without it.
Contrary to what proponents of the idea of a “clash of civilizations” claim, encounters between different cultures usually take place easily and peacefully, because we are psychologically prepared for them.
Everyone is the product of several cultures, even if one has never left his home country, because culture is not only national.
All of us carry within us the culture of our sex, age group, wealth, class, and job.
This plurality of cultures usually does not present any problems for us, because shifting from one cultural code to another is a universal human faculty.
After all, we don’t talk in the same way to every person we meet during the day.
Moreover, cultures related to a given territory are never really “pure”.
As far back as you can go in the history of a country like France, you will find meetings between different tribes and ethnic groups, and thus different cultures: Gallics, Franks, Romans, and many others.
Everywhere we look (except, perhaps, in New Guinea’s deep valleys, where obscure tribes may remain isolated from one another), there are only mixed cultures.
But, while some cultures are proud of their plurality, others try to hide it.
The concept of a dialogue between cultures is sometimes strained, or seems only a pious hope, because we ask it to do the impossible: solve inflamed political conflicts.
Dialogue, as benevolent as it may be, can’t resolve questions related to people’s freedom of movement, or to the sharing of territory or natural resources.
Politics and culture don’t work on the same level: the former governs action, the latter influences mentalities; the former deals with emergencies, the latter can require generations to produce any result.
We should work for this type of dialogue by beginning with simple and modest initiatives.
We need more translations of the ideas and literatures of other countries, more long stays abroad for university students, more teaching of foreign languages and encouragement of study about other cultures, and more confrontation between national memories (say, between France and Algeria).
Some measures of this type already exist in the European Union, but they should be introduced elsewhere: North Africa, the Middle East, India, China, Japan, and Latin America.
The best way to initiate a dialogue is to disregard clichés and generalities, and instead to promote gatherings between human beings.
For the moment, politics has claimed paramount status.
Yet, from another point of view, dialogue prevails over war and the stubborn defense of what one believes to be his identity, because it brings us closer to the vocation of humanity.
The novelist André Schwarz-Bart used to tell this story: A chief rabbi was once asked why the stork, which is called Hassada (affectionate) in Hebrew because it loves its own kind, is classified among unclean animals.
Civil Society and Its New Enemies
PRAGUE - Genuine civil society is the truest fundamental of democracy, a truth often forgotten in the heat of election campaigns.
Although Communism could, every now and then, coexist with private ownership, sometimes with private enterprise, it could never coexist with civil society.
So the most fateful attack that accompanied the installation of Communist power everywhere was an attack on civil society.
The freedom of speech that Communism suppressed overnight could, on its fall, be restored overnight.
Restoration of civil society – the many parallel and mutually complementary ways in which citizens participate in public life – has been far more complicated.
The reason is self-evident: civil society is an intricately structured, very fragile, sometimes even mysterious organism that grew over decades, if not centuries.
After years of virtual non-existence, civil society, therefore cannot be restored from above, or by legal fiat.
Its three pillars – private, voluntary associations, decentralization of the state, delegation political power to independent entities – can only be rebuilt patiently.
In the ten years of postcommunist transition our new political elites take either an apathetic stance towards rebuilding civil society or actively oppose it.
As soon as these elites gained power, they became unwilling to surrender any of the state authority they inherited.
Many democratic, even anti-Communist politicians are now, paradoxically, defending the overblown governmental powers that are relics of the Communist era.
This is why many schools, hospitals, cultural institutions and other establishments remain governed by centralized administrations, although they could have transformed themselves into organizations that the state would watch from a distance or support through transparent procedures.
Debate on decentralization of the state has been dragging on for nine years without any government department displaying the willingness to transfer powers to regions or to municipalities without a fight.
This is why taxation in our country remains excessive: the state has to pay for a thousand things which it would not have to pay if an advanced civil society existed, because citizens would pay for them directly.
This inertia has nothing to do with ideology.
If some politicians seek ideological excuses for their unwillingness to reduce state power, they mostly argue the following: "People have chosen us in an election; it is their will that we rule.
Change is an attack on representative democracy.
Social redistribution of resources is a task for the state, and the central state's responsibility in this field must not be diffused.
Attempts to build or to support any parallel structures not controlled from the center casts doubt on parliamentary democracy itself."
Faith in civil society, indeed, is still interpreted by many as leftism, anarchism or syndicalism; someone has even called it proto-fascism.
At the root of the argument that civil society is an attack on the political system, we find the well known unwillingness to share power.
It is as if the parties are saying: "Governing is our business, so choose between us, but nothing more."
Nonsense: political parties, democratic institutions, work well only when they draw strength and inspiration from a developed, pluralist civic environment and are exposed to criticism from that environment.
It is not the intention of civil society to circumvent parliament or political parties: it aims to enable them to work to the best of their ability.
Without a life-giving background in the form of a diversely structured civil society, political parties as well as political institutions wither, lose inventiveness, and are eventually reduced to dull, closed groups of political professionals.
Civil society generates genuine pluralism, and pluralism – leading to competition – produces quality.
In this respect, there is a similarity between economics and politics.
The more different initiatives are allowed to operate, the greater is the chance that the best and most inventive ones will triumph.
To rely solely on the capacities of central state authorities or of central political bodies to always decide what needs to be done and how, equates power with truth, the most dangerous political conceit of this century.
Moreover, the more stratified civil society becomes, the more it thrives, the more stable is domestic politics.
Civil society protects citizens from being excessively affected by changes at the center of political power.
It absorbs, at lower levels, some of the effects of such change, even disposes of them.
In this way, it actually facilitates political change so that a change of government does not seem a windstorm leaving nothing in its place.
Where civil society is not sufficiently developed every problem filters up to the center of power.
But the more power is left at the center the more favorable are the conditions for such forces to gain control over the country.
Communists knew this very well; it is why they even manipulated associations of bee-keepers.
You need not be an economist to discover that civil society also pays its way.
When things are paid by the state budget, more money must be collected in taxes and substantial sums are consumed by such transfers.
In a system that allows tax deductions for charitable giving, beneficial initiatives get more money than they would get if the same amounts were spent by the state.
Even without deductions, civil society takes its own improving initiatives.
The most important aspects of civil society is yet another thing – it enables people to realize themselves.
Human beings are not only manufacturers, profit makers or consumers.
They are also – and this may be their innermost quality – creatures who want to be with others, who yearn for various forms of coexistence and cooperation, who want to influence what happens around them. People want to be appreciated for what they give to their environment around them.
Civil society is one of the key ways in which our human nature can be exercised in its entirety.
The enemies of civil society know this; it animates their opposition to it.
Civil Society Unbound
MOSCOW – The challenges facing civil-society organizations are greater in Russia than in many parts of the world, but the challenges facing civil society itself are similar everywhere.
Indeed, around the world there is a gap between civil-society organizations and the societies they profess to serve.
Civil-society organizations do not gain power through elections (legitimate or otherwise), but through reaching the broader world.
In short, their goal is to build civil society itself.
They are most successful when people behave as part of civil society without necessarily being “civil-society” professionals.
That is, they will do such things as take care of their own health, engage in public discussions or blog about safety conditions in their community, rate school performance, organize weekly runs for dog owners, care for their local forests or rivers- as part of their lives, not as part of their jobs.
One area of concern for civil society nowadays is the press and new media.
In many places today information is flowing more than ever, but mass media are under both political and financial pressure.
Most people think of a free press as a way to keep track of what governments are doing – and so it is.
That is why the press as a whole, and journalists in particular, are so frequently targeted by the authorities.
When media outlets aren’t owned – and tamed – by the authorities or people close to them, they still face censorship, intimidation, tax audits, and occasionally assassination of their journalists and editors.
In Russia in particular, the situation is mixed.
The government owns or controls most of the mass media – the major newspapers and television stations – but there is an abundance of mostly marginalized publications and radio stations (to say nothing of the Internet) that retain a remarkable degree of independence.
They are not directly censored, but they operate under the chilling knowledge that they can be shut down on vague charges at any moment.
And, of course, most of them are struggling to survive financially.
Yet there’s more to journalism than keeping an eye on the government.
Journalism’s other task is to reflect a society back to itself – to spread an accurate picture of its current situation, to share information about the activities of private citizens and businesses as they build civil society, and to encourage citizens to become active in improving their own lives and developing their communities.
Consider health care.
As far as I’m concerned, the ultimate goal should be not so much a better health care system, but a population so healthy that it hardly needs health care.
Health problems may take you to a clinic, but many of them start with how you behave at home – what you eat and drink, whether you smoke or exercise or sleep enough, etc.
This is the kind of thinking that was driving us at a recent health care working group gathered as part of the recent Civil Society Summit organized in Moscow by the Eurasia Foundation, the New Eurasia Foundation and the CSIS. (I was there as a Eurasia Foundation board member.)
To tackle these problems, we came up with an “open data/information liquidity” project, which will advocate and organize the publication, exchange, aggregation, and analysis of health data – not just general statistics, but specific data about health outcomes in terms of drugs and treatments, hospital performance, and the like.
Of course, many of those statistics are not even collected, yet alone published.
But we can start with what exists, and by so doing create demand for the rest.
In the United States, people are already rating their own doctors at sites such as RateMDs.com and vitals.com; third-party doctor and hospital ratings are available at HealthGrades.com.
Civil-society groups don’t often run hospitals directly, but they can make their performance more transparent.
So there are plans afoot to develop and distribute tools to analyze information, discover correlations (data-mining), and display the results as graphs and charts.
But, again, health really begins at home, so the real victory – and one where such civil-society cooperation may have a more immediate impact – is to give people better data about themselves and what they should be doing for their own health.
That includes everything from nutritional information and baby care, to (ultimately) records of each person’s own health and treatments, and it starts with using new media to reach people where they live, with content that’s relevant. In the Soviet Union, they used to call this “sanitary propaganda,” but it was widely disregarded.
One Russian friend told me, “Whenever we would read an article about the health dangers of butter, we would immediately run out and buy as much butter as we could find, because we knew it meant there would be a butter shortage.”
Today, that type of information is called “healthy lifestyle promotion.”
We are also working on a project along these lines, reaching out to target populations with two-way new media such as the Internet and mobile phones, rather than harangues in newspapers and TV.
Imagine a program where pregnant women could sign up by cell phone for weekly reminders and updates, and to answer questions such as, “Is the baby kicking?”
If not, she could be referred to a local clinic.
When I made those same points in a wrap-up to the Civil Society Summit as a whole, I was interrupted by none other than US president Barack Obama, who was in Moscow for his summit with President Dmitry Medvedev but also took the time to listen our gathering of civil-society organizations.
Obama apologized for arriving late, and added: “That’s why we have civil society.
Clarity about Diamonds
PRINCETON – Diamonds have an image of purity and light.
They are given as a pledge of love and worn as a symbol of commitment.
Yet diamonds have led to gruesome murders, as well as widespread rapes and amputations.
Charles Taylor, a former president of Liberia currently facing war crimes charges at a special court in The Hague, is alleged to have used diamonds to fund rebels in Sierra Leone’s civil war. The case against Taylor represents only one of several examples in which diamonds have facilitated widespread human rights violations.
When diamonds’ role in fueling violent conflict in Africa gained worldwide attention, the diamond industry established the Kimberley Process in order to keep “blood diamonds” out of international trade.
The initiative has met with some success, although it has not completely halted trade in diamonds from conflict-torn countries like the Democratic Republic of Congo.
Recently, however, concern has been expressed – from within the diamond trade – that the scope of the Kimberley Process is too limited, and that consumers have thus been lulled into believing that there are no longer any ethical problems with diamonds.
That is far from the truth.
The problem came to a head this year when the Kimberley Process began to certify diamonds from Marange, in Zimbabwe.
The Marange diamond field, discovered in 2006, is one of the richest ever found.
According to Diamonds and Clubs, a recent report from Partnership Africa Canada, soldiers have press-ganged peasant farmers into working in mining syndicates at Marange.
The soldiers then take half the proceeds.
There have also been extensive beatings and arbitrary detentions.
When Farai Maguwu, a Zimbabwean human rights activist, disseminated information about the abuses, he was arrested (he has since been released).
Zimbabwean authorities claim that the violent human rights abuses have stopped, but the ethical problem with Marange diamonds goes much deeper.
Soon after the field was discovered, the Zimbabwean military took control of the area.
According to the Zimbabwean finance minister, Tendai Biti, four years after the military took over the diamond fields, the national treasury has received not one penny of royalties from the sale of Marange diamonds.
Zimbabwe’s military and political elite has appropriated the diamond field’s immense wealth for itself, with no benefits for the millions of desperately poor Zimbabweans who need the kind of services that the country has the resources to provide.
This is not, of course, the first time that the discovery of resources in an undeveloped country has led to riches for a few rather than greater prosperity for all.
Teodoro Obiang, the dictator of tiny, oil-rich Equatorial Guinea, has an official salary of $60,000, but owns six private jets and a $35 million house in Malibu, as well as other houses in Maryland and Capetown and a fleet of Lamborghinis, Ferraris, and Bentleys.
Most of the people over whom Obiang rules live in extreme poverty, with an average life expectancy of 49 years and an infant mortality rate of 87 per 1,000 live births (in other words, more than one child in twelve dies before its first birthday).
Nigeria and Angola are other glaring examples of countries that have failed to use their oil wealth for the benefit of their people.
Paradoxically, resource-rich developing countries are often worse off than comparable countries that lack those resources.
One reason for this is that large resource endowments provide a huge financial incentive for attempts to overthrow the government and seize power.
Rebels know that if they succeed, they will gain immense personal wealth, be able to reward those who backed their coup, and have enough arms to keep themselves in power, no matter how badly they rule.
Unless, of course, some of those whom they arm are themselves tempted by the prospect of controlling all that wealth.
Thus, the resources that should benefit developing countries instead become a curse that brings corruption, coups, and civil wars.
If we use goods made from raw materials that are obtained from a poor country without the proceeds being used to benefit the people of that country, we become complicit in a particularly iniquitous form of grand larceny.
It is therefore encouraging that concerns about Zimbabwean diamonds are being raised within the diamond trade itself.
The Rapaport Group, an international network of companies providing services to the diamond industry, refuses to list Marange diamonds on its diamond-trading platform, RapNet.
Martin Rapaport, chairman of the group, has called for free access to the diamond fields by non-governmental organizations and industry representatives to monitor the human rights situation.
More significantly, in a speech in Mumbai earlier this year, he laid out requirements for legitimizing Marange diamonds that included some assurance that “the revenues from the diamond sales are distributed legally and in a way that reasonably and fairly benefits the people of Zimbabwe.”
There is a need for higher standards than those set by the Kimberley Process.
If consumers insist on buying only ethical diamonds, traders might be able to push the demand back to their sources.
And, if the diamond industry can put itself on an ethical footing, it might send a message to other industries that deal in resources that are effectively being stolen from some of the world’s poorest people.
Toward a Green New Deal
LONDON – The global agreement reached in Paris last week is actually the third climate agreement reached in the past month.
The first happened at the end of November, when a group of billionaires led by Bill Gates, Mark Zuckerberg, and Jeff Bezos announced the creation of a $20 billion fund to back clean-energy research.
On the same day, a group of 20 countries, including the United States, the United Kingdom, Germany, India, China, and Brazil, agreed to double their investment in green energy, to a total of $20 billion a year.
Of the two pre-Paris announcements, it was that of the Breakthrough Energy Coalition (BEC) – Gates and his fellow entrepreneurs – that grabbed most of the headlines.
This is not surprising, given the strong association in the popular imagination between innovation and the private sector.
If a technological breakthrough is needed in the fight against climate change, whom should we expect to provide it, if not the wizards of Silicon Valley and other hubs of free-market innovation?
“The private sector knows how to build companies, evaluate the potential for success, and take the risks that lead to taking innovative ideas and bringing them to the world,” reads his coalition’s manifesto. “But in the current business environment, the risk-reward balance for early-stage investing in potentially transformative energy systems is unlikely to meet the market tests of traditional angel or VC investors.”
On its own, the free market will not develop new sources of energy fast enough.
The payoff is still too uncertain.
Just as in previous technological revolutions, rapid advances in clean energy will require the intervention of a courageous, entrepreneurial state, providing patient, long-term finance that shifts the private sector’s incentives.
Governments must make bold policy choices that not only level the playing field, but also tilt it toward environmental sustainability.
Then – and only then – will private financing follow.
So far, however, austerity has prevented sufficient public financing.
One hopes that the Paris agreement changes that.
As with the information technology revolution, advances in clean energy will require the involvement of both the public and the private sector.
Because we do not yet know which innovations will be the most important in decarbonizing the economy, investment must be allocated to a wide array of choices.
Long-term, patient finance must also be available to help companies minimize uncertainty and bridge the so-called “Valley of Death” between basic research and commercialization.
The BEC’s argument – that the “new model will be a public-private partnership between governments, research institutions, and investors” – shines a welcome spotlight on the relationship.
Unfortunately, however, aside from Gates and his colleagues, there are few signs that the private sector can be counted on to lead the way.
The energy sector has become over-financialized; it is spending more on share buybacks than on research and development in low-carbon innovation.
The energy giants ExxonMobil and General Electric are the first and tenth largest corporate buyers of their own shares.
Meanwhile, according to the International Energy Agency, just 16% of investment in the US energy sector was spent on renewable or nuclear energy.
Left to their own devices, oil companies seem to prefer extracting hydrocarbons from the deepest confines of the earth to channeling their profits into clean-energy alternatives.
Meanwhile, government R&D budgets have been declining in recent years – a trend driven partly by under-appreciation of the state’s role in fostering innovation and growth, and more recently by austerity in the wake of the 2008 financial crisis.
Tight budgets are straining the agencies that could be driving path-breaking innovation.
The US Defense Advanced Research Projects Agency (DARPA) was a catalyst for the IT revolution.
By contrast, the Advanced Research Projects Agency-Energy (ARPA-E) has a 2015 budget of $280 million – barely a tenth of DARPA’s.
In 1981, energy accounted for 11% of the total US public R&D budget.
Today, it accounts for just 4%.
Meanwhile, problematic demand-side policies are also in crisis, impeding the deployment of existing renewable-energy technologies.
The main public-sector bodies playing a leading role in promoting the diffusion of green-energy technologies are state development banks.
Indeed, Germany’s KfW, the China Development Bank, the European Investment Bank, and Brazil’s BNDES are four of the top ten investors in renewable energy, amounting to 15% of total asset finance.
The public sector can – and should – do much more.
For example, subsidies received by energy corporations could be made conditional on a greater percentage of profits being invested in low-carbon innovations.
After all, it was this kind of condition – imposed on the US telephone company AT&T in the early twentieth century, in exchange for being allowed to retain its monopoly – that led to the creation of Bell Labs, a crucial incubator of innovation.
Similarly, while charitable donations by billionaires certainly should be welcomed, companies should also be made to pay a reasonable amount of taxes.
After all, as the BEC’s manifesto points out, “current governmental funding levels for clean energy are simply insufficient to meet the challenges before us.”
And yet, in the UK, for example, Facebook paid just £4,327 in tax in 2014, far less than many individual taxpayers.
The willingness of Gates and other business leaders to commit themselves and their money to the promotion of clean energy is admirable.
The Paris deal is also good news.
But they are not enough.
If the low-carbon revolution is to be achieved, we will need both the public and private sectors to commit more fully to green innovation, from both the supply and demand sides.
Cleaning Up Economic Growth
British Prime Minister Tony Blair has promised that the G-8 meeting on July 6-8 at Gleneagles, Scotland, which he will chair, will focus on two of the most important and longstanding global problems—Third-World poverty and global warming.
For a long time, these two issues seemed to be at odds.
The developing world understandably does not want to sacrifice its growth for a global public good, especially when the United States, the richest country in the world, seems unwilling to sacrifice even a little of its luxurious life style.
Led by Papua New Guinea and Costa Rica, a group of developing countries, a new rainforest coalition has now come forward with an innovative proposal, not only offering to commit to greenhouse-gas limits, but also showing how this can be done in a way that will promote their development.
Developing countries have long provided a vital global public good: maintaining global environmental assets.
Their rainforests are a vast storehouse of biodiversity, and forests are major carbon sinks, reducing the level of CO2 in the atmosphere.
I served on the International Panel for Climate Change in the mid-1990’s, reviewing the scientific evidence concerning the magnitude of increases in greenhouse gasses and their economic and social consequences.
At the time, there was already overwhelming evidence of a serious problem that needed to be addressed, and data since then ­­– concerning, for example, the rapid melting of the polar ice cap – have strongly reinforced this conclusion.
About a quarter of all greenhouse gas emissions are from land-use change, mainly deforestation, an amount comparable to US emissions from burning fossil fuels (the US is the single largest contributor to greenhouse gas emissions.)
By maintaining their rainforests, tropical countries provide an invaluable global service, one for which they have so far failed to be compensated.
But, especially after the signing of the Kyoto protocol, we can value at least part of these environmental services: carbon sequestration (that is, if they did not maintain their forests, the level of carbon concentrations in the atmosphere would be enormously higher).
The Kyoto Protocol has generated new markets for trading carbon emissions, such as the European Emissions Trading Scheme (ETS).
At current carbon prices, the value of carbon sequestration by tropical rainforests likely equals or exceeds the current level of international aid being provided to developing countries.
In effect, the poor are aiding the rich.
Biodiversity and climatic stability are global public goods.
The benefits of conservation to the world as a whole far exceed the value of exploitation to a country like Papua New Guinea (PNG).
The PNG government would like to do the right thing, to maintain its natural capital for future generations.
But officials there believe that that they have currently no choice.
A huge mistake was made (for a variety of reasons) at Kyoto. While countries can be compensated for planting forests, they cannot be compensated for avoiding deforestation.
Countries like PNG would thus be doubly better off if they cut down their ancient hardwood trees and replanted.
But this makes no sense economically or socially.
These countries should be given incentives to maintain their forests.
(There are, as always, technical issues to be resolved, concerning monitoring and measurement, but these can be overcome easily with modern technologies.)
At the very least, markets like ETS should credit emissions reductions that result from limiting deforestation.
Without such a program, unfortunately, developing countries have neither the means nor incentives to underwrite conservation.
There are some 2.7 billion people in over 60 developing countries that are home to the world’s tropical forests.
Cutting down the hardwood forests – even when they presently receive just 5% of the final price in, say, New York – is the only way people can make ends meet.
Some have suggested waiting to address this issue until 2012, when a revised protocol is supposed to come into effect.
But, can we wait?
At currents rates of deforestation, the combined contributions to greenhouse gas concentrations from Brazil and Indonesia alone would offset nearly 80% of the emission reductions gained from the Kyoto protocol.
What is so impressive about the new rainforest initiative is that it comes from the developing countries themselves; it represents their creativity and social commitment.
For the first time, developing countries seem willing to undertake the kinds of commitments that Europe, Japan, and the other advanced industrial countries (except the US) have made to avoid what could be a global disaster.
Costa Rica, for example, has already shown that a system of paying for the provision of environmental services (like maintaining natural forests) can work in ways that preserve the environment and boost the economy.
Compensating the developing countries for providing these environmental services would be one way of substantially increasing aid – and at the same time, providing these countries with the right market incentives.
From a global point of view, the best use of these resources is to maintain the forests, which is even possible with managed cutting.
This is an initiative around which all countries can and should rally.
In a world divided – between rich countries and the poor, between those focusing on environmental protection and those concentrating on growth – this initiative can unite us all.
The G-8 leaders should heed the call.
Kebimbangan Iklim selama Lima Puluh Tahun
SYDNEY – Pada bulan November 1965, Presiden Amerika Serikat Lyndon B. Johnson menerima laporan pemerintah pertama yang memperingatkan bahaya yang diakibatkan oleh pembakaran bahan bakar fosil dalam jumlah besar.
Lima puluh tahun termasuk waktu yang lama dalam politik, sehingga sungguh menakjubkan betapa sedikitnya upaya yang dilakukan sejak saat itu untuk mengatasi ancaman, dengan tetap menjalankan business as usual.
Dengan uraian yang prediktif, komite penasihat ilmiah Presiden Johnson memperingatkan bahwa pelepasan karbon dioksida ke atmosfer akan menyebabkan kenaikan suhu global yang lebih tinggi, lapisan es mencair dan permukaan air laut meningkat pesat. “Manusia tanpa disadari melakukan eksperimen geofisika secara besar-besaran,” para ilmuwan memperingatkan.
“Selama beberapa generasi manusia membakar bahan bakar fosil yang secara perlahan bertumpuk di bumi selama 500 juta tahun terakhir…perubahan-perubahan iklim yang dihasilkan oleh kenaikan kadar karbon dioksida akan berbahaya dari sudut pandang manusia.”
Ramalan komite ini tidak mengejutkan; keberadaan efek gas rumah kaca telah dikenal dalam ilmu pengetahuan sejak fisikawan Perancis Joseph Fourier mengemukakan pada tahun 1824 bahwa atmosfer bumi berfungsi sebagai insulator yang membatasi penghantaran panas.
Dan pada tahun 1859, fisikawan Irlandia John Tyndall dilakukan percobaan laboratorium yang menunjukkan kekuatan pemanasan karbon dioksida yang kemudian mengarahkan fisikawan Swedia dan penerima Nobel, Svante Arrhenius, untuk memprediksi bahwa pembakaran batubara akan menghangatkan bumi – satu hal yang ia pandang sebagai potensi perkembangan yang positif.
Para penasihat Presiden Johnson tidak begitu optimis.
Laporan mereka secara akurat memperkirakan bahwa jumlah karbon dioksida di atmosfer akan meningkat hampir 25% selama abad ke-20 (jumlah sebenarnya adalah 26%).
Kini, konsentrasi karbon dioksida di atmosfer 40% lebih tinggi dibandingkan awal Revolusi Industri – sejauh ini merupakan kadar tertinggi selama satu juta tahun terakhir, berdasarkan temuan yang diketahui dari pengeboran es Antartika.
Selain itu, komite ilmiah Presiden Johnson membantah keberatan yang terus digunakan sekarang oleh orang-orang yang menolak bahaya perubahan iklim, termasuk klaim bahwa proses alami yang dapat menyebabkan kenaikan jumlah karbon dioksida.
Dengan menunjukkan bahwa hanya setengah dari karbon dioksida yang dihasilkan dari pembakaran bahan bakar fosil tetap berada di atmosfer, komite ini membuktikan bahwa planet bumi tidak berfungsi sebagai sumber gas rumah kaca, tetapi sebuah wastafel yang menyerap setengah emisi kita.
Satu hal yang tidak dapat dilakukan para penasihat Presiden Johnson adalah memberikan prediksi spesifik atas seberapa besar kenaikan karbon dioksida di atmosfer yang akan mempengaruhi suhu global; mereka menyatakan bahwa pertama mereka membutuhkan model yang lebih baik dan komputer yang lebih handal.
Perhitungan tersebut membentuk landasan bagi laporan yang bersejarah berikutnya, yakni “Carbon Dioxide and Climate: A Scientific Assessment,” (Karbon Dioksida dan Iklim: Sebuah Kajian Ilmiah) dirumuskan oleh US National Academy of Sciences.
Lebih dikenal dengan nama Laporan Charney – Jule Charney dari MIT adalah penulis utama – laporan ini merupakan model yang dihasilkan melalui pertimbangan ilmiah yang cermat.
Laporan Charney memperkirakan bahwa pergandaan jumlah karbon dioksida di atmosfer akan memanaskan bumi sekitar 3° Celcius – angka yang sekarang ini terbukti benar.
Laporan tersebut juga memperkirakan bahwa kapasitas panas air laut dapat menunda pemanasan selama beberapa dekade.
Kedua temuan ini konsisten dengan pemanasan global yang ditemukan sejak diterbitkannya laporan tersebut. “Kami telah mencoba namun tidak mampu menemukan efek-efek fisik yang terlewatkan atau dianggap remeh yang bisa mengurangi pemanasan global yang diramalkan akan terjadi…pada tingkatan yang dapat diabaikan,” laporan itu menyimpulkan.
Sejak saat itu, bukti ilmiah semakin kuat; kini, temuan-temuan dasar yang dimuat dalam dua laporan terdahulu sudah didukung oleh lebih dari 97% ilmuwan iklim.
Namun demikian, di balik meningkatnya kesepakatan ilmiah yang berusia 50 tahun, pemanasan bumi terus terjadi.
Kelompok-kelompok pelobi yang berdana besar telah menabur benih keraguan di kalangan masyarakat dan berhasil meremehkan urgensi ancaman.
Sementara itu, geopolitik menghalangi kemajuan respon global yang efektif.
Perundingan iklim internasional yang diharapkan menghasilkan kesepakatan pada Konferensi Perubahan Iklim PBB di Paris pada bulan November dan Desember telah terhambat oleh persyaratan konsensus di antara 195 negara yang berpartisipasi.
Apabila tidak diambil tindakan, miliaran orang akan menderita dampak berupa kekeringan, gagal panen, dan cuaca ekstrim.
Pada akhirnya, kenaikan permukaan laut akan membanjiri kota-kota pesisir besar dan memusnahkan seluruh negara-negara kepulauan.
Tahun-tahun terpanas sejak pendokumentasian dimulai pada abad ke-19 adalah tahun 2005, 2010, dan 2014, dan rekor tahun lalu hampir pasti akan dipecahkan lagi tahun ini.
Sudah saatnya para pemimpin dunia mengakhiri 50 tahun masa kebimbangan.
Mereka harus memanfaatkan kesempatan di Paris, mengesampingkan kepentingan jangka pendek mereka, dan akhirnya bertindak tegas untuk mencegah bencana planet yang akan terjadi.
The Right Price for Preserving Our Climate
WASHINGTON, DC – When world leaders convene in Paris this week for the United Nations Climate Change Conference, their task will be to reach a global agreement on curbing greenhouse-gas emissions.
A successful outcome, demonstrating that countries can work together for the good of the planet, would send a powerful message of hope to the world – and to the people of Paris, who remain unbowed after the recent terrorist attacks.
Climate pledges will be made on the basis of Intended Nationally Determined Contributions (INDCs), or commitments to the reduction of emissions worldwide.
I believe that the price of emissions should be at the center of these pledges.
Achieving a decline in greenhouse-gas emissions at the lowest possible cost requires a revolution in energy use and production.
Gradual, predictable, and reliable increases in energy prices would provide strong incentives for consumers to reduce their energy bills.
At the same time, the right carbon price would enable a smooth transition away from fossil fuels by encouraging investments in technological innovation.
That is why the International Monetary Fund’s staff have recommended a three-part strategy on carbon fuel: “price it right, tax it smart, and do it now.”
First, setting the right price for fossil fuels means taking into account their true environmental costs.
Prices should pass on to end users the full cost not only of production and acquisition, but also of the damage – including air pollution and climate change – caused by intensive reliance on fossil fuels.
A fairer carbon price will drive energy savings and boost demand for cleaner fuels and “greener” investments.
Second, the necessary change in prices would be achieved by taxing energy, using tools that are both practical and efficient.
The best option is to build a carbon charge into existing fuel taxes and apply similar charges to coal, natural gas, and other petroleum products.
The revenue implications would be significant.
If large emitting countries were to impose carbon prices of $30 per ton of CO2, they could generate fiscal revenues amounting to about 1% of their GDP.
These revenues could be used to manage the overall fiscal burden of climate action, as well as to finance cuts in taxes on labor and capital that distort economic activity and harm growth, or to reduce deficits where needed.
In short, carbon pricing is about “smart” taxes, not higher taxes.
Smart taxes should be phased in gradually to allow households and firms time to adjust and for new technologies to come on stream.
Gradual and tailored adjustment is particularly important for developing economies, many of which make little contribution to global emissions.
Time may be necessary, in many cases, to ensure that social safety nets are in place to protect low-income households and to provide retraining programs for workers in energy-intensive industries.
This approach would also allow for climate investments to be financed through private capital flows.
Third, there is no time to lose: policymakers need to act immediately.
Given the slump in energy prices, there has never been a better time to undertake the transition to smart, credible, and effective carbon pricing.
Nor should countries wait for others to move first.
Work at the IMF has shown that a fair amount of carbon pricing is in many countries’ national interest – even ignoring adverse climate effects on other countries – because it would help resolve major domestic environmental problems.
According to the World Health Organization, outdoor air pollution causes more than three million premature deaths a year.
And early action is essential to avoid the need for much more drastic – and costly – efforts later.
Ahead of the Paris summit, more than 160 countries submitted emissions mitigation pledges.
By implementing these commitments, countries will substantially reduce projected future global warming.
The challenge now is to deliver on these pledges.
This is why we need a concerted push for carbon pricing.
In Paris, a select group of leaders who are true champions of carbon pricing will issue a call for action.
The Carbon Pricing Panel, led by the IMF and World Bank, will further increase the policy momentum at the national, regional, and municipal levels.
In addition to public-sector efforts, we also need the robust engagement of financial institutions and markets.
Hedging instruments such as so-called catastrophe bonds can help insure against the increasing risk posed by natural disasters.
Other financial instruments, such as “green” stock indices and “green” bonds, can help reallocate investment to sectors that support environmentally sustainable growth.
Here, too, carbon prices that are predictable and sufficiently high will be essential to guide investment choices.
There is a lot at stake this week in the City of Light.
Paris recently experienced humanity at its worst.
The climate summit will be an opportunity to show it at its best.
Perubahan Iklim dan Gereja Katolik
ROMA – Paus Fransiskus berseru kepada dunia agar kita mengambil tindakan melawan perubahan iklim namun banyak kelompok konservatif di Amerika Serikat merasa sangat marah.
Paus lebih baik mengurusi moral saja, menurut mereka, tidak perlu berspekulasi dalam urusan keilmuan.
Namun seiring dengan debat perubahan iklim yang berkembang di tahun ini, sebagian besar orang akan menilai bahwa pesan Paus Fransiskus bersifat mendesak: kita memerlukan ilmu pengetahuan dan moralitas guna mengurangi risiko perubahan iklim terhadap planet bumi.
Poin pertama yang harus diperhatikan adalah hampir seluruh penduduk Amerika Serikat sepakat dengan seruan Paus Fransiskus untuk mengambil tindakan.
Sayangnya pandangan mereka tidak terwakili di dalam Kongres Amerika Serikat yang membela kelompok perusahaan besar yang disebut Big Coal dan Big Coal, bukan rakyat Amerika.
Industri bahan bakar fosil mengeluarkan uang dalam jumlah besar untuk kampanye anggota Kongres seperti Senator Mitch McConnell dan Senator James Inhofe.
Krisis iklim dunia diperburuk dengan krisis demokrasi di Amerika Serikat.
Dalam suatu survei terhadap penduduk Amerika Serikat yang diselenggarakan bulan Januari 2015, sebagian besar responden (78%) menyatakan bahwa, “jika tidak ada tindakan apapun yang dilakukan untuk mengurangi pemanasan global,” dampaknya di masa depan bagi Amerika Serikat adalah “cukup serius” atau “sangat serius”.
Jumlah responden yang hampir sama (74%) menyatakan jika tidak ada tindakan apapun yang dilakukan untuk mengurangi pemanasan global, generasi berikutnya akan “cukup menderita”, “menderita” atau “sangat menderita”.
Barangkali yang menarik disini adalah 66% responden menyatakan akan “cenderung lebih mendukung” kandidat yang berpendapat bahwa perubahan iklim benar terjadi dan akan mendorong peralihan menuju energi terbarukan, sementara bagi 12% responden lainnya “sedikit kemungkinannya” bagi mereka mendukung kandidat seperti itu.
Pada bulan Maret 2015, survei lain mengamati sikap umat Kristiani yang merupakan 71% penduduk Amerika Serikat.
Survei ini mengumpulkan tanggapan dari tiga kelompok: Katolik, Kristen Protestan yang bukan aliran Injili, dan Kristen Injili.
Perilaku tiga kelompok ini mencerminkan sikap rakyat Amerika secara umum. 69% Katolik dan 63% Kristen arus utama menyatakan bahwa perubahan iklim sedang terjadi, sementara jumlah yang sedikit lebih kecil, yaitu 51% Kristen Injili mengamininya.
Mayoritas pemeluk agama dari masing-masing kelompok juga sepakat bahwa pemanasan global akan membahayakan lingkungan hidup dan generasi masa depan, serta penurunan pemanasan global akan meningkatkan kondisi lingkungan dan membantu generasi masa depan.
Lalu kelompok minoritas mana di Amerika Serikat yang menentang aksi iklim?
Terdapat tiga kelompok utama. Pertama adalah kelompok konservatif pasar bebas yang lebih takut akan intervensi pemerintah dibandingkan perubahan iklim.
Beberapa diantaranya menjalankan ideologinya sampai-sampai menyangkal ilmu pengetahuan yang sudah mapan: oleh karena intervensi pemerintah buruk, mereka mengatakan pada dirinya sendiri bahwa ilmu pengetahuan tidak mungkin benar.
Kelompok kedua meliputi umat beragama yang fundamentalis.
Kelompok ini menyangkal perubahan iklim sebab mereka sepenuhnya menolak ilmu bumi dan menyakini bahwa dunia ini baru diciptakan, meskipun bertentangan dengan banyaknya bukti-bukti fisika, kimia, dan geologi.
Namun kelompok ketiga lah yang sejauh ini paling berkuasa secara politik: kepentingan minyak dan batubara yang menyumbangkan ratusan juta dolar untuk kampanye 2014 lalu.
David dan Charles Koch, pemberi dana kampanye terbesar di Amerika Serikat, keduanya hanyalah pemilik perusahaan minyak yang melakukannya untuk melipatgandakan kekayaan mereka yang luar biasa besar, meskipun menimbulkan kerugian bagi manusia.
Barangkali mereka juga adalah penyangkal perubahan iklim yang sejati.
Lagipula sesuai dengan sindiran yang terkenal dari Upton Sinclair, “Sulit membuat orang paham akan sesuatu ketika pendapatannya bergantung pada ketidakpahamannya.”
Kritik-kritik sayap kanan terhadap Paus Fransiskus mungkin berasal dari tiga kelompok di atas, namun setidaknya mereka menerima sebagian dana dari kelompok ketiga.
Ketika Akademi Pontifikal Ilmu Sains dan Ilmu Sosial dan sejumlah ilmuwan sosial dan ilmu bumi terkemuka dunia bertemu di Vatikan pada bulan April, Heartland Institure yang libertarian dan menerima bantuan dari Koch bersaudara selama bertahun-tahun, melakukan aksi protes yang sia-sia di Alun-alun Saint Peter.
Para ilmuwan yang menghadiri pertemuan di Vatikan lebih berhati-hati untuk menegaskan bahwa ilmu dan kebijakan iklim mencerminkan prinsip-prinsip dasar fisika, kimia, geologi, astronomi, teknik, ekonomi, dan sosiologi, yang merupakan komponen utama yang sudah dipahami dengan baik selama lebih dari 100 tahun.
Tetapi kritik-kritik sayap kanan terhadap Paus Fransiskus tidak hanya salah dalam teologinya namun juga dalam keilmuan mereka.
Klaim bahwa paus sejogjanya harus mengurusi moralitas saja justru mengkhianati kesalahpahaman dasar akan Katolik Roma.
Gereja memperjuangkan penggabungan antara kepercayaan dan logika.
Setidaknya sejak diterbitkannya Summa Theologica (1265-74) oleh Thomas Aquina, hukum alam dan Aturan Emas dipandang sebagai pilar dasar ajaran Gereja.
Sebagian besar orang mengetahui bahwa Gereja menentang pembelaan Galileo atas teori heliosentrisme dari Copernicus, yang mana Paus Yohanes Paulus II membuat permintaan maaf atasnya di tahun 1992.
Namun banyak diantara kita tidak sadar akan dukungan Gereja terhadap ilmu pengetahuan modern, termasuk sejumlah kontribusi penting dalam ilmu biologi, kimia, dan fisika oleh pendeta-pendeta Katolik terkemuka.
Bahkan sebetulnya asal-usul pendirian Akademi Sains Pontifikal dapat diusut ke belakang 400 tahun sebelumnya hingga Akademi Lynx (Accademia dei Lincei) yang melantik Galileo di tahun 1611.
Tujuan Paus Fransiskus tentunya adalah mengawinkan ilmu pengetahuan, baik ilmu alam maupun ilmu sosial, dengan kepercayaan dan moral.
Pengetahuan ilmiah yang diperoleh melalui kerja keras harus digunakan untuk meningkatkan kesejahteraan manusia, melindungi kelompok rentan dan miskin, melindungi ekosistem Bumi yang rapuh, dan menjaga kesetiaan terhadap generasi masa depan.
Ilmu pengetahuan dapat mengungkapkan bahaya-bahaya lingkungan yang diakibatkan oleh manusia; keahlian teknik dapat menciptakan alat untuk melindungi planet; dan kepercayaan dan pertimbangan moral dapat memberikan kebijaksanaan yang praktik (Aristoteles dan Thomas Aquina akan berpendapat yang sama) untuk membuat pilihan yang saleh demi kebaikan bersama.
Pertemuan di Vatikan pada bulan April tidak hanya dihadiri oleh ilmuwan iklim terkemuka di dunia dan penerima Nobel, tapi juga perwakilan senior umat agama Kristen Protestan, Hindu, Yahudi, Budha dan Islam.
Seperti Paus Fransiskus, para pemuka agama dari seluruh agama terbesar di dunia mendorong kita untuk menerapkan kebijaksanaan dari kepercayaan dan ilmu iklim demi memenuhi tanggung jawab moral kita terhadap kemanusiaan dan masa depan Bumi.
The Adaptation Imperative
NAIROBI – In the run-up to the recent United Nations meeting on climate change in Lima, Peru, much of the world’s attention focused on how strongly countries would commit to a framework for cutting greenhouse-gas emissions.
Governments’ commitment to such a framework, after all, is vital to ensure that the agreement to be signed in Paris in December will keep global temperatures from rising more than 2º Celsius above pre-industrial levels.
The good news is that the Lima “Call for Climate Action” made sufficient progress to enable preparations for a comprehensive climate deal in Paris.
But it also left many questions unresolved – a shortcoming that was reflected in discussions on adaptation.
Though the new emphasis on this important topic is welcome, how to deliver the funding, technology, and knowledge that countries, communities, and ecosystems need to adjust to climate change requires further articulation.
Even if we limit the rise in global temperatures, climate change is here to stay.
Communities are already facing more extreme and frequent droughts, floods, and other weather events.
These consequences will only intensify.
Yet the UN Environment Programme’s first adaptation report, released in Lima, showed that the world remains wholly unprepared to cover the costs of adaptation.
And those costs will be far higher than was previously thought.
According to the report, even if the temperature target is met, the cost of adaptation will reach 2-3 times the previously anticipated $70-100 billion per year by 2050 (an increase of as much as fivefold is possible, though less likely).
If global temperatures exceed the two-degree ceiling significantly, adaptation costs could reach double the worst-case figures, placing a crippling burden on the world economy.
If world leaders needed another compelling reason to reach a deal in Paris that keeps global temperatures below the target, this is it.
The burden of adjustment will be borne by everyone.
But it will be heaviest for developing countries, least-developed countries, and Small Island Developing States.
Though international funding will be available, costs will fall largely to countries, with governments forced to divert scarce resources from development projects to adaptation initiatives.
To be sure, the world is making some progress toward addressing adaptation needs.
Adaptation funding from public sources reached $23-26 billion in 2012-2013.
According to a recent assessment by the UN Framework Convention on Climate Change, global financial flows for mitigation and adaptation measures amounted to $340-650 billion in 2011-2012.
Furthermore, pledges at the Lima conference by Australia, Austria, Belgium, Colombia, Norway, and Peru bring the Green Climate Fund to nearly $10.2 billion.
And the impact of climate change is increasingly, though still inadequately, being factored into national and local budgets.
But much more financing will be needed to prevent a funding gap after 2020.
The Green Climate Fund, for example, is supposed to reach $100 billion per year – ten times higher than it is now – in the next five years.
Commitments on adaptation in the Paris agreement would go a long way toward closing this gap.
The international auctioning of emissions allowances and allowances in domestic emissions-trading schemes, a carbon tax, revenues from international transport, a surcharge on electricity transmission, and financial transaction taxes could generate as much as $220 billion per year in additional revenues.
Of course, funding is not the only component of a successful adaptation strategy.
As the adaptation report emphasizes, closing gaps in technology and knowledge is also crucial.
Many technologies that could help countries adapt to the consequences of climate change already exist.
For example, by planting scientifically engineered crops that grow faster, farmers can harvest them before, say, cyclone season, which will become increasingly violent as global temperatures rise.
But there remain significant barriers to adoption – barriers that governments should dismantle through a combination of incentives, regulatory reform, and institutional upgrading.
The benefits of such action would extend beyond increased climate resilience.
Accelerating harvests would mean higher, more reliable production with less labor – a formula for stronger, more stable livelihoods.
Policymakers should thus pursue integrated solutions that combine climate-change adaptation and mitigation with broader societal concerns, including development.
Knowledge would offer similarly monumental benefits.
Science magazine recently published research suggesting that universal education, by giving populations the appropriate intellectual tools and skills they need, is the single most efficient mechanism for adapting to climate change and reducing fatalities associated with extreme weather events.
International support on adaptation – incorporating financing, technology, and knowledge – could go a long way toward advancing countries’ sustainable-development aspirations.
World leaders should recognize this – and establish adaptation as an integral part of the global climate-change agreement to be reached in Paris.
Some argue that the global economy cannot afford adaptation.
But, as the latest evidence shows, delaying action will mean higher costs later.
If we truly want to build a sustainable, prosperous, and equitable future, we cannot afford to wait.
Breaking Europe’s Climate-Change Stalemate
LONDON – Europe has a strong tradition as a leader in the fight against climate change.
Lately, however, the continent has reached an ideological impasse over how to address the problem, with environmental sustainability and growth often portrayed as being mutually exclusive.
If Europe is to remain an environmental leader, as well as a center of innovation and competitiveness, it will have to abandon its ideological rigidness and embrace realistic, pragmatic solutions that can deliver environmental benefits without sacrificing economic development.
The challenges posed by climate change are real, and the consequences of inaction are impossible to ignore.
At the same time, there is a growing demand for energy and a desperate need for a long-term exit from the ongoing economic crisis.
There is no single, easy solution that addresses both of these imperatives.
Reining in global warming while ensuring economic growth will require a balanced portfolio of solutions, including renewable energy and increased energy efficiency.
Essential among such solutions is carbon capture and storage.
CCS technology captures carbon dioxide at the source of its emission, compresses it, and stores it permanently underground.
In doing so, it provides an important bridge between our modern economy, which relies heavily on carbon-intensive fossil fuels, and a future in which CO 2 emissions are greatly reduced.
This provides the means for maintaining a competitive industrial sector while simultaneously combating global warming.
To be sure, as with any innovation, there are questions about the technology's viability.
Some question the scale of the investment needed to install and maintain the systems necessary for capturing and storing CO 2.
It is important to note, however, that these costs pale in comparison with the far greater costs of reducing CO2 emissions without CCS.
According to the International Energy Agency, for example, a ten-year delay in deploying CCS would increase the cost of decarburizing the power sector by €750 billion ($880 billion).
The United Nations Intergovernmental Panel on Climate Change has been unequivocal in its insistence that reducing CO 2 emissions and diminishing dependence on fossil fuels is more urgent than ever.
It has made it clear that CCS, the only technology that can capture at least 90% of the CO2 emissions from the world's largest producers, must be a part of the solution.
Beyond Europe's borders, governments and businesses are already forging ahead.
In Canada, the world's first full-scale CCS project, Boundary Dam, came onstream in October 2014, proving that the technology is viable and ready to be deployed.
The United Arab Emirates has initiated the world's first large-scale CCS project in the iron and steel sector.
China continues to show great interest in the technology, and is collaborating with the United States to develop its CCS capabilities.
Europe cannot afford to lag behind.
Energy-intensive industries directly support four million jobs across the continent.
Investing in CCS would help preserve Europe's economic base by securing and creating jobs and protecting vital industries.
It would help to realize a vision of Europe that supports both sustainability and growth – a vision that is clearly in line with European Commission President Jean-Claude Juncker's priorities of creating jobs, sustaining growth, and developing a competitive energy union.
The continent's largest petroleum companies, and equipment suppliers, are ready to invest what is needed to reduce CO 2 emissions.
But, in order for that to be possible, realistic policies and strategies are needed.
CCS has been recognized at the highest political level as a part of the European Union's 2030 Climate and Energy framework and the European Energy Security Strategy.
But it is time to translate recognition into concrete action.
That, in turn, requires investment incentives, improved carbon pricing, and an upgrade to the emissions trading system.
A game-changing solution presupposes substantial political will; it is essential that European leaders show that they know what needs to be done.
Sustainable growth need not be an oxymoron.
But to achieve it, Europe must overcome the ideological stalemate that is paralyzing the environmental debate.
To reconcile our environmental priorities with continued growth, we must act realistically, pragmatically, and – above all – immediately.
Growth in the New Climate Economy
MILAN – Action to reduce carbon-dioxide emissions and mitigate climate change has long been viewed as fundamentally opposed to economic growth.
Indeed, the fragility of the global economic recovery is often cited as a justification to delay such action.
But a recent report, “The New Climate Economy: Better Growth, Better Climate” released by the Global Commission on the Economy and Climate, refutes this reasoning.
Far from being a detriment to economic growth, the report concludes that efforts to combat climate change could boost growth considerably – and relatively soon.
Anyone who has studied economic performance since the onset of the financial crisis in 2008, understands that damage to balance sheets – such as excess debt and unfunded non-debt liabilities – can cause growth slowdowns, sudden stops, or even reversals.
And those familiar with growth in developing countries know that underinvestment in human capital, infrastructure, and the economy’s knowledge and technology base eventually produces balance sheets that cannot support continued growth.
Climate change is not very different from these unsustainable or defective growth patterns.
It, too, is essentially a balance-sheet problem, based on the stock of CO2 in the atmosphere
On its current trajectory, the world has only 3-4 decades (or less) before atmospheric CO2 reaches levels that disrupt climate patterns, with catastrophic consequences for the environment and, in turn, economic and social systems.
Allowing the world’s “natural capital” – the resources and ecosystems that underpin these systems – to be depleted is essentially another form of destructive underinvestment.
The massive amount of scientific evidence supporting current climate projections makes it unlikely that the world will forego adjustment entirely.
But solving the complex coordination and distributional problems that such adjustments will generate will not be easy, and, convinced that we cannot afford an aggressive mitigation strategy at a time when we are faced with so many other pressing challenges, policymakers could be tempted to defer action on the ground.
“The New Climate Economy” argues that this would be a very bad idea.
The report’s thorough assessment of recent research, experience, and innovation led to the unambiguous conclusion that acting now would be far less costly than waiting.
In fact, acting now is barely costly at all.
Low-carbon paths of economic growth do not look all that different from high-carbon paths – until the latter veers sharply to the precipice of catastrophic failure.
Put another way, the net costs of reducing CO2 emissions – in terms of growth, income, and other measures of economic and social performance – are not all that high in the short and medium term.
Given what we know now about the consequences of the high-carbon path for the natural environment and, in turn, health outcomes and quality of life, those costs could actually be negative.
But there is an important proviso: action must be taken urgently.
The economic costs of action to mitigate climate change rise non-linearly as action is delayed.
If those costs are deferred for 15 years or more, mitigation targets will be impossible to achieve, at any cost.
So how do we move onto the low-carbon path?
The report points out the benefits of constructing the energy-efficient buildings and infrastructure needed to underpin the low-carbon global economy of 2050, incorporating low-carbon strategies into municipal-planning processes, and tapping the efficiency-enhancing potential of the Internet.
Add to that the declining costs of alternative energy sources and relentless technological advancement, and the world’s carbon-reduction goals do not seem so distant – or costly.
After evaluating the technologies, policy options, and analysis included in the report, one might conclude that low-carbon growth paths may be slightly flatter in the short term than their high-carbon counterparts, with higher investment and lower consumption.
Nonetheless, it would be difficult to deem them inferior, given their medium-to-long-term advantages.
The report also sheds light on another important question in the climate debate: Is global cooperation critical to mitigate climate change?
For a given economy, does acting alone yield distinctly inferior growth paths – say, by damaging the competitiveness of its tradable sector?
If the answer is yes, international policy coordination would seem to be a necessary precondition for progress.
This does not appear to be the case.
A substantial portion of a national policy agenda that supports an individual country’s shift to a low-carbon growth path (boosting energy efficiency, for example) will not produce an economic slowdown; such an effort might even lead to higher growth rates than remaining on a high-carbon path would have delivered.
On a first approximation, low-carbon paths are the dominant strategies, implying a completely different and far more favorable view of the incentive structures at work.
This means that, though international coordination will be an important factor in the long-term success of action to mitigate climate change, its complications need not – and should not – hold progress hostage.
Given the difficulty of developing and implementing a global strategy, that is good news.
Scientific evidence has eliminated legitimate doubts about the scale of the risks that climate change poses.
Now, the Global Commission’s analysis has largely refuted the economic arguments for inaction.
Add to that growing public concern about climate change, and the conditions for decisive action may have arrived.
Climate Change Posers
COPENHAGEN – One of the stranger spectacles of the climate change debate was the sight, earlier this month, of NASA climate scientist Jim Hansen marching hand-in-hand with Hollywood actress Darryl Hannah outside the Capitol Coal Power Plant in Washington, DC.
Hansen promised to brave arrest at what was billed as the world’s largest direct-action climate change protest.
Instead, the worst snowstorm in three years reduced the size of the crowd, prevented special guests from arriving, and hindered efforts to use a solar panel to light up a protest billboard.
The police reportedly told the crowd that they didn’t want to arrest anybody who didn’t want to be arrested, and nobody was.
That didn’t stop the protesters from proclaiming the event a success. “VICTORY: THIS IS HOW TO STOP GLOBAL WARMING,” declared the Web site of Capitol Climate Action.
And, indeed, the US House Speaker and Senate Majority Leader called on the Architect of the Capitol to stop using coal for the Capitol Power Plant (albeit days before the rally).
But if stopping global warming were this easy, I – and everybody I know – would be painting placards for the next round of direct action.
Hansen condemns coal-fired power plants as “death factories,” and his belief that coal is evil is widely shared.
It is also obviously wrong.
If we were to stop using coal tomorrow, we would discover that it remains a vital source of life.
Coal accounts for almost half of the planet’s electricity supply, including half the power consumed in the United States.
Coal keeps hospitals and core infrastructure running, provides warmth and light in winter, and makes life-saving air conditioning available in summer.
In China and India, where coal accounts for about 80% of power generation, it has helped to lift hundreds of millions of people out of poverty.
It is little wonder, then, that US Energy Secretary Steven Chu, who two years ago described the expansion of coal-fired power plants as his “worst nightmare,” now calls coal a “great natural resource.”
The vital question is what would replace coal if were to stop using it.
Judging from their chant – “No coal, no gas, no nukes, no kidding” and “Biofuels - hell no!” – the protesters in Washington would rule out many plausible alternatives.
Solar and wind power appear to be acceptable, but both are much less reliable than coal, and much more expensive.
Only about 0.5% of the world’s energy comes from these renewable sources.
Even with optimistic assumptions, the International Energy Agency estimates that their share will rise to just 2.8% by 2030.
One reason is that we don’t know how to store the energy from these sources: when the wind doesn’t blow and the sun doesn’t shine, what powers your computer or the hospital’s operating room?
Moreover, renewables are still costly.
Recently, former US Vice President Al Gore and United Nations Secretary General Ban Ki-moon claimed that, “in the US, there are now more jobs in the wind industry than in the entire coal industry.” Never mind that the numbers were massaged, because they still hold a valuable lesson.
The US gets 50% of its electricity from coal but less than 0.5% from wind.
If it takes about the same manpower to produce both, wind power is phenomenally more expensive.
The equivalent of more than 60 million barrels of oil is consumed in coal every day, and there is no affordable “green” alternative.
There is an ample and cheap supply of coal for several centuries.
We need to accept that much of the world’s cheap coal will be burned – but we should focus on capturing the CO2.
In agreements announced by the Obama administration, the US is working with China and Canada on projects to develop this technology.
The end of fossil fuel’s stronghold will come when we have cheap alternatives, especially in developing countries.
That day will arrive sooner if governments spend a lot more money on low-carbon energy research, which is woefully inadequate.
Every nation should ideally commit to spending 0.05% of GDP exploring non-carbon-emitting energy technologies.
This would cost $25 billion per year – a 10-fold increase in global financing – and create momentum to recapture the vision of delivering a low-carbon, high-income world.
Coal contributes strongly to global warming, but no amount of political theater can alter the inescapable fact that it also provides benefits that we cannot yet replicate with renewable energy.
Braving arrest with Hollywood stars is a diversion.
Declaring true victory over global warming will take a lot more pragmatism, and a lot more work.
Climate Change Realism
NEW YORK – “Wonderful, Wonderful Copenhagen,” a popular song from the 1952 film musical “Hans Christian Andersen,” will probably be played many times this fall, as world leaders will be gathering in the Danish capital in December (and in New York in September) to confront the challenge of climate change.
But, unless international thinking gets considerably more realistic in a hurry, what happens in Copenhagen will be anything but wonderful.
It should come as no surprise that there is little consensus on a comprehensive accord that would have a meaningful impact on the world’s climate.
Governments will not sacrifice near- and medium-term economic growth for long-term environmental benefits.
This is especially true now, given that much of the developed world is in the midst of a painful recession.
The United States, for one, will not accept ceilings that reduce its greenhouse-gas emissions significantly if it means accepting higher costs and taxes that risk slowing economic recovery.
Developing countries are, if anything, even more opposed to such ceilings or “caps.”
Four hundred million Indians still lack electricity; India cannot be expected to rule out greater use of coal if that proves to be the best way to produce electricity for one-third of its citizens.
China, too, is unlikely to agree to “caps” on emissions of any kind, given the relatively low standard of living of most Chinese.
But such a stance dooms prospects for a new global treaty, as developed countries will rightly insist that poorer countries be part of the solution.
The consequences of failure in Copenhagen could be considerable.
In the short run, we may well see climate-related concerns become the newest excuse for increased trade protectionism.
So-called “carbon tariffs” are likely to be introduced to penalize imports from countries or companies deemed not to be doing enough to curb emissions.
World trade is already down sharply as a result of the economic crisis; introducing new tariffs would inevitably reduce trade further, causing the loss of additional jobs and leading to new frictions.
Over time, a failure to reduce greenhouse gas emissions would lead to additional climate change, which in turn would increase the severity of poverty, the scale of internal displacement and migration, the scarcity of water, the prevalence of disease, and the number and intensity of storms.
The result could be more failed states and more conflict between states.
Climate change is as much a matter of security as it is an economic and human concern.
So what should be done?
The most important step for those preparing for Copenhagen is to embrace national policies that increase energy efficiency and reduce greenhouse-gas emissions.
The US has at long last done some of this in adopting new and much higher standards for automobile fuel efficiency.
Regulatory policy can increase the efficiency of appliances, housing, and machinery.
Such reforms should appeal to rich and poor countries alike, as they would reduce spending on energy and dependence on oil imports.
Coordinated national actions are not the same as unilateralism.
There is no unilateral answer to what is a global challenge.
But to describe a challenge as global is not to argue that the remedy is to be found only in an ambitious, formal, and universal treaty.
Such an accord might well be desirable, but it is simply not an option for climate change any time soon.
The goal for the representatives of the nearly 200 countries who will meet in Copenhagen should not be a single sweeping agreement so much as a set of more modest agreements.
Coal is one place to begin, as it will continue to generate the lion’s share of the world’s electricity for decades to come.
Greater sharing of existing cleaner-coal technologies is needed, as is continued development of next-generation clean-coal plants.
Nuclear power is another area requiring attention.
So, too, are renewable forms of power, such as solar and wind.
Here, too, mechanisms are needed for sharing new technologies and helping poorer countries pay for them in exchange for adopting policies that reduce greenhouse-gas emissions.
Moreover, stopping the destruction of forests is essential, given how much carbon is trapped in them.
One objective for Copenhagen should be to create a well-endowed global fund to support policies that discourage the cutting and burning of trees, help countries such as Brazil and Indonesia protect their rain forests, and provide alternative livelihoods to those who currently benefit from destroying them.
Focusing on steps such as these would go a long way toward attaining the often-discussed goal of halving global carbon emissions by mid-century.
But reaching an accord that sets binding ceilings for what each country will be allowed to emit is not an option in Copenhagen.
The consensus simply does not exist.
Smaller steps, however, can and should be taken.
Those who want to master the challenge of climate change now will reject such realism.
But, as is often the case, those who insist on getting everything risk getting nothing.
Membangun Kepercayaan dalam Dana Iklim
WASHINGTON, DC – Dalam waktu kurang dari 80 hari, para pemimpin dunia akan memiliki kesempatan untuk mengesahkan perjanjian yang hanya muncul sekali dalam satu generasi demi perang melawan perubahan iklim.
Konferensi Perubahan Iklim PBB di Paris pada bulan Desember bisa menandai titik balik dalam sejarah dunia: pengakuan bulat atas kebutuhan untuk bertindak guna mencegah dampak yang paling berbahaya akibat pemanasan global.
Supaya kesepakatan ini berhasil dicapai, peserta konferensi harus mengatasi ketidakpercayaan yang telah menyebabkan polarisasi dan kelambanan selama beberapa perundingan sebelumnya.
Pertama-tama, pelaksanaan kesepakatan dengan pembatasan yang kuat pada emisi gas rumah kaca mengharuskan kepatuhan terhadap komitmen yang telah dibuat, termasuk janji oleh negara-negara maju untuk mengeluarkan $100 miliar per tahun pada tahun 2020 untuk membantu negara-negara berkembang mengurangi kontribusinya terhadap perubahan iklim dan beradaptasi dengan pemanasan dunia.
Mengingat besarnya skala tantangan dan kerugian yang ditimbulkan akibat kelambanan atau kurangnya tindakan terhadap kelompok penduduk yang paling rentan di dunia, lembaga keuangan pembangunan dan pihak lain yang berkepentingan harus menunjukkan komitmen mereka untuk mencegah dampak yang paling berbahaya akibat perubahan iklim.
Penerapan komitmen ini memerlukan dedikasi yang diperbarui dan bersifat transparan.
Itu sebabnya Kelompok Bank Dunia sedang mengkaji upaya lain yang dapat dilakukan untuk membantu mengarahkan ekonomi pada jalur yang berkelanjutan.
Dengan menjaga penyerahan rencana aksi nasional dilakukan dengan tepat waktu sebelum pertemuan iklim di Paris, kita bisa merencanakan gambaran menyeluruh pekerjaan kami guna menemukan peluang untuk membantu negara-negara di bidang energi, transportasi, pertanian, kehutanan, manajemen perkotaan dll.
Memang benar, perang melawan perubahan iklim harus dilakukan di berbagai bidang.
Kenaikan suhu global dan iklim yang semakin tidak stabil akan mempengaruhi semua aspek pembangunan dan membahayakan investasi yang ada kecuali mitigasi dan adaptasi strategi yang memadai – juga penting bagi Tujuan Pembangunan Berkelanjutan (SDGs) hasil rumusan PBB yang akan diadopsi akhir bulan ini – mampu ditetapkan.
Bagian dari upaya untuk melawan perubahan iklim harus melibatkan penanganan terhadap sumber-sumber ketidakefisienan ekonomi, seperti subsidi bahan bakar fosil dan penghitungan biaya polusi yang tidak memadai.
Kini terdapat tingginya pengakuan bahwa pembiayaan pembangunan dan pendanaan iklim dapat digunakan untuk mendorong dan mempercepat investasi dari sumber-sumber publik dan swasta.
Terutama sekali perjanjian iklim yang berhasil harus memuat langkah-langkah yang tepat dalam pengelolaan triliunan dolar yang perlu diinvestasikan dalam infrastruktur rendah karbon dan peningkatan ketahanan terhadap dampak berbahaya akibat kenaikan suhu global.
Tindakan ini harus dilakukan dalam cara yang terbuka dan transparan.
Sangat penting bahwa kami memastikan aliran pendanaan yang disalurkan dalam perang melawan perubahan iklim dapat dilacak, sehingga warga dapat menjaga pemerintah dan lembaga-lembaga di negaranya tetap bertanggung jawab.
Untuk mencapai sasaran tersebut, enam bank pembangunan multilateral besar dan Kelompok Pembiayaan Pembangunan Internasional (International Development Finance Club) – sebuah jaringan lembaga pembangunan nasional, regional, dan internasional – telah bersusah payah menyusun prinsip-prinsip umum untuk pelacakan pendanaan iklim.
Prinsip-prinsip ini harus diberlakukan dalam semua proyek yang dimaksudkan untuk membantu negara-negara beradaptasi atau mengurangi dampak perubahan iklim.
Dalam sebuah laporan yang diterbitkan pada bulan Juni, enam bank ini menguraikan bagaimana mereka telah mengeluarkan lebih dari $ 100 miliar untuk pendanaan iklim selama empat tahun sejak pelaporan bersama dimulai.
Pembiayaan dari Kelompok Bank Dunia juga dapat dilacak berdasarkan kebijakan akses kepada informasi.
Konferensi di Paris menawarkan kesempatan untuk membangun jalan yang jelas guna menghindari dampak yang paling berbahaya akibat perubahan iklim; para pemimpin dunia yang menghadiri pertemuan tersebut tidak boleh menyia-nyiakannya.
Dengan menghormati janji-janji mereka secara kredibel dan transparan, negara-negara maju dapat menunjukkan komitmen mereka untuk berusaha dan meningkatkan kemungkinan terwujudnya kesepakatan yang efektif.
Sekarang waktunya untuk berinvestasi dalam perang melawan perubahan iklim.
Tingkat misi kita sudah mengakibatkan dampak yang sangat merusak di seluruh dunia.
Seiring dengan meningkatnya ketidakstabilan dan ketidakpastian akibat perubahan iklim, kerugian yang ditimbulkan akibat kelambanan hanya akan semakin bertambah.
Keeping the Climate-Finance Promise
LONDON – In 2009, the world’s rich countries pledged to mobilize $100 billion a year by 2020 to help poor countries tackle climate change.
Since then, that promise has come to be regarded as a key test of the developed world’s resolve to do its part in the fight against global warming.
Reaching the $100 billion target is important.
Poor countries must believe that rich countries will honor their pledges.
Otherwise, the prospects for an effective international agreement at the United Nations Climate Change Conference in Paris in November and December could be at risk.
Fortunately, there are encouraging signs that the commitment will be honored.
But larger financial flows are needed, particularly from the private sector.
According to the OECD and the Climate Policy Initiative, developed countries collectively mobilized $52.2 billion in 2013 and $61.8 billion in 2014 to help poor countries reduce greenhouse-gas emissions and build resilience against the effects of climate change that can no longer be avoided.
While it is important to note that this figure is only an estimate, it represents a preliminary but credible indicator of climate finance, based on information provided by developed countries.
If one assumes greater leverage for private-sector investment, the number would be higher.
Similarly, conservative assumptions about how much “genuinely extra” money is being spent to fight climate change through overseas aid and the multilateral development banks might have produced a lower figure.
In reaching their estimate, the researchers took into account major investments by both the public and private sectors in a wide range of projects.
Examples include the funding of small-scale renewable energy projects in Uganda by the United Kingdom, Germany, Norway, and the European Union, as well as the African Risk Capacity – supported by the UK and Germany – which offers insurance to governments against drought and other natural disasters.
What the report reveals is the relatively low level of investment by the private sector in projects that will increase poor countries’ resilience (though the authors acknowledge that limited information might mean that the true amount is higher).
This is both a challenge and an opportunity; with the right incentives, a sharp rise in private investment that enhances resilience could go a long way toward meeting the $100 billion target.
Reaching that goal will require increased confidence in the policies and institutions of the countries in which the money is to be spent.
New processes for sharing and reducing risk will be necessary.
In this effort, development banks and bilateral aid institutions have much to offer.
It is crucial that this new climate finance be used to complement the even-larger investments in sustainable development that will be necessary over the next few decades.
A central aim for climate financing should be to establish and implement the policies, regulations, and frameworks that will create the appropriate incentives for investors.
This could provide very large “multipliers.”
According to the Global Commission on the Economy and Climate, some $90 trillion will need to be spent on infrastructure over the next 15 years, mostly in developing and emerging economies that are experiencing rapid growth and urbanization.
If that infrastructure locks in dependence on fossil fuels, it will be very difficult to reduce global emissions of greenhouse gases.
However, if countries invest wisely in the transition to a low-carbon economy, they will stimulate innovation and generate decades of sustainable growth.
Thus, it is important that climate finance be used to foster public and private investment in low-carbon infrastructure and technologies, particularly to lower the cost of capital, which is crucial to scale up projects and encourage renewable-energy adoption.
Furthermore, climate funding provided by rich countries should help improve resilience to climate change in the most vulnerable countries.
It should also be used to avoid deforestation and to protect fragile resources, including oceans and biodiversity.
And it should boost innovation and break new ground for climate action, including novel ways for the public and private sectors to work together, such as projects on carbon capture and storage.
Some of the $100 billion will be channeled through the newly created Green Climate Fund; but the existing multilateral development banks should also play a central role, along with national aid agencies and departments.
Money spent on sustainable development and climate action should be mutually reinforcing.
And finance ministries in developing countries should reaffirm that, in addition to fostering growth and poverty reduction, wise action to mitigate climate change can lower levels of air pollution and raise energy efficiency.
Success will ultimately depend on rich countries’ willingness to live up to their promises.
Their leaders must recognize that financial support for action against climate change in developing countries is not only morally right; it is also in the interest of their constituencies and, indeed, the world community.
A Healthy, Climate-Friendly Diet
BERLIN – This December, world leaders will meet in Paris for the United Nations Climate Change Conference, where they will hammer out a comprehensive agreement to reduce carbon emissions and stem global warming.
In the run-up to that meeting, governments worldwide should note one critical, but often overlooked, fact: the single biggest driver of environmental degradation and resource stress today is our changing diet – a diet that is not particularly conducive to a healthy life, either.
In recent decades, rising incomes have catalyzed a major shift in people’s eating habits, with meat, in particular, becoming an increasingly important feature of people’s diets.
Given that livestock require much more food, land, water, and energy to raise and transport than plants, increased demand for meat depletes natural resources, places pressure on food-production systems, damages ecosystems, and fuels climate change.
Meat production is about ten times more water-intensive than plant-based calories and proteins, with one kilogram of beef, for example, requiring 15,415 liters of water.
It is also an inefficient way of generating food; up to 30 crop calories are needed to produce one meat calorie.
At any given time, the global livestock population amounts to more than 150 billion, compared to just 7.2 billion humans – meaning that livestock have a larger direct ecological footprint than we do.
Livestock production causes almost 14.5% of global greenhouse-gas emissions and contributes significantly to water pollution.
Moreover, livestock production consumes one-third of the total water resources used in agriculture (which accounts for 71% of the world’s water consumption), as well as more than 40% of the global output of wheat, rye, oats, and corn.
And livestock production uses 30% of the earth’s land surface that once was home to wildlife, thereby playing a critical role in biodiversity loss and species extinction.
It took more than a century for the European diet to reach the point at which meat is consumed at every meal, including breakfast.
But, in large parts of Asia, a similar shift has occurred in just one generation.
Meaty diets have created a global obesity problem, including, of all places, in China, whose expanding international clout is accompanied by expanding waistlines at home.
Americans consume the most meat per capita, after Luxembourgers.
Given the size of the US population, this is already a problem.
If the rest of the world caught up to the United States – where meat consumption averages 125.4 kilograms per person annually, compared with a measly 3.2 kilograms in India – the environmental consequences would be catastrophic.
Already, the signs are worrying.
The demand for meat is projected to increase by 50% from 2013 to 2025, with overall consumption still rising in the West and soaring in the developing world, especially Asia.
In order to meet this demand, meat producers have had to adopt an extremely problematic approach to raising livestock.
In order to ensure that their animals gain weight rapidly, meat producers feed them grain, rather than the grass that they would naturally consume – an approach that is a major source of pressure on grain production, natural resources, and the environment.
Making matters worse, the livestock are injected with large amounts of hormones and antibiotics.
In the US, 80% of all antibiotics sold are administered prophylactically to livestock.
Yet this has been inadequate to stem the spread of disease; in fact, with many of the new and emerging infectious diseases affecting humans originating in animals, veterinarians, microbiologists, and epidemiologists have been trying to understand the “ecology of disease” (how nature, and humanity’s impact on it, spreads disease).
Though the environmental and health costs of our changing diets have been widely documented, the message has gone largely unheard.
With the world facing a serious water crisis, rapidly increasing global temperatures, staggering population growth, and growing health problems like coronary disease, this must change – and fast.
For starters, to ease some of the resource pressure, livestock producers should switch to water-saving technologies, including drip irrigation.
At the same time, governments and civil-society groups should promote healthier diets that rely more on plant-based proteins and calories.
According to recent research, if the world stopped producing crops for animal feed or diverting them to biofuels, it could not only end global hunger, but also feed four billion extra people – more than the number of projected arrivals before the global population stabilizes.
Meat consumption actually leads to more greenhouse-gas emissions annually than the use of cars does.
This is not to say that everyone must become vegetarian.
But even a partial shift in meat-consumption habits – with consumers choosing options like chicken and seafood, instead of beef – could have a far-reaching impact.
Indeed, beef production requires, on average, 28 times more land and 11 times more water than the other livestock categories, while producing five times more greenhouse-gas emissions and six times more reactive nitrogen.
Adopting a balanced, largely plant-based diet, with minimal consumption of red and processed meat, would help conserve natural resources, contribute to the fight against human-induced global warming, and reduce people’s risk of diet-related chronic diseases and even cancer mortality.
Just as governments have used laws, regulations, and other tools with great success to discourage smoking, so must they encourage citizens to eat a balanced diet – for the sake of their health and that of our planet.
Climate Hysteria
You would have had to be stuck in deepest Mongolia to avoid hearing that the United Nations’ climate panel, the IPCC, issued a new report last week.
Perhaps even in the depths of Mongolia, you would have heard the dire warnings emitted by journalists.
You would have distilled from these agonized noises that the report concluded that global warming is worse than we had imagined, and that we need to take swift and strong action right now.
You would have been misinformed.
The IPCC has produced a good report – an attempt to summarize what the world’s scientists know about global warming.
Unlike the Bush administration, caught downplaying the science, the IPCC squarely tells us that mankind is largely responsible for the planet’s recent warming.
And, unlike Al Gore, who has travelled the world warning that our cities might soon be under the oceans, it refrains from scaremongering.
But lost among the hype is the unexciting fact that this report is actually no more dire than the IPCC’s last report, issued in 2001.
In two important ways, this year’s effort was actually less dire.
The report reflected the fact that since 2001, scientists have become more certain that humans are responsible for a large part of global warming.
Otherwise, though, this report had a definite sense of déjà vu .
Estimates of temperature increases, heat waves, and cold waves are all nearly identical to those produced six years ago.
The report did, however, contain two surprising facts. Both went unmentioned in most reports.
First, the world’s scientists have re-jigged their estimates about how much sea levels will rise.
In the 1980’s, America’s Environmental Protection Agency expected oceans to rise by several metres by 2100.
By the 1990’s, the IPCC was expecting a 67-centimeter rise.
Six years ago, it anticipated ocean levels would be 48.5 centimeters higher than they are currently. In this year’s report, the estimated rise is 38.5 centimeters on average.
This is especially interesting since it fundamentally rejects one of the most harrowing scenes from Al Gore’s movie An Inconvenient Truth .
In graphic detail, Gore demonstrated how a 20-foot rise in the sea level would inundate much of Florida, Shanghai, and Holland.
The IPCC report makes it clear that exaggerations of this magnitude have no basis in science – though clearly they frightened people and perhaps will win Gore an Academy Award.
The report also revealed the improbability of another Gore scenario: that global warming could make the Gulf Stream shut down, turning Europe into a new Siberia.
The IPCC simply and tersely tells us that this scenario – also vividly depicted in the Hollywood movie The Day After Tomorrow – is considered “very unlikely.”
Moreover, even if the Gulf Stream were to weaken over the century, this would be good , as there would be less net warming over land areas.
So why have we been left with a very different impression of the climate panel’s report?
The IPCC is by statute “politically neutral” – it is supposed to tell us just the facts and leave the rest to politicians and the people who elect them.
This is why the report is a careful and sensible document.
But scientists and journalists – acting as intermediaries between the report and the public – have engaged in greenhouse activism.
Elsewhere calling for immediate and substantial cuts in carbon emissions, the IPCC’s director even declared that he hoped the IPCC report would “shock people, governments into taking more serious action.” It is inappropriate for somebody in such an important and apolitical role to engage in blatant activism.
Imagine if the director of the CIA published a new assessment of Iran, saying “I hope this report will shock people, governments into taking more serious action.”
Climate change is a real and serious problem.
But the problem with the recent media frenzy is that some seem to believe no new report or development is enough if it doesn’t reveal more serious consequences and more terrifying calamities than humanity has ever considered before.
Indeed, this media frenzy has little or no scientific backing.
One of England’s foremost climatologists, Mike Hulme, director of the Tyndall Centre for Climate Change Research, points out that green militancy and megaphone journalism use “catastrophe and chaos as unguided weapons with which forlornly to threaten society into behavioral change.” In his words, “we need to take a deep breath and pause.”
A 38.5 cm rise in the ocean’s levels is a problem, but by no means will it bring down civilization.
Last century sea levels rose by half that amount without most of us even noticing.
The UN tells us that there is virtually nothing we can do that would affect climate change before 2030.
So we have to ask the hard question of whether we could do better by focusing on other issues first – helping real people improve their lives and resilience so they can better deal with the world’s challenges.
When Nobel Laureate economists weighed up how to achieve the most good for the world in a recent project called the Copenhagen Consensus, they found that focusing on HIV/AIDS, malaria, malnutrition, and trade barriers should all be tackled long before we commit to any dramatic action on climate change.
With the world in a fury about cutting greenhouse gasses, it is easy to forget that there are other and better ways to do some good for the planet.
Good decisions come from careful consideration.
The IPCC report provides that.
But the cacophony of screaming that has accompanied it does not help.
Climate Science or Climate Evangelism?
COPENHAGEN – As George W. Bush and Tony Blair learned the hard way, the public does not take kindly to being misled about the nature of potential threats.
The after-the-fact revelation that the reasons for invading Iraq were vastly exaggerated – and in some cases completely fabricated – produced an angry backlash that helped toss the Republicans out of power in the United States in 2008 and may do the same to Britain’s Labour Party later this year.
A similar shift in global public opinion is occurring with respect to climate change.
The process picked up momentum late last year, after hackers leaked thousands of e-mails from a top British research facility showing that some of the world’s most influential climatologists had been trying to disguise flaws in their work, blocking scrutiny, and plotting together to enforce what amounts to a party line on climate change.
More recently, the United Nations’ respected advisory group, the Intergovernmental Panel on Climate Change (IPCC), has been deeply embarrassed by the revelation that some alarming predictions contained in an influential report that it released in 2007 have little or no scientific basis.
Although none of these lapses provides any reason to doubt that global warming is real, is man-made, and will create problems for us, these challenges to the IPCC are taking their toll.
Indeed, recent surveys show that the public is growing steadily less trusting of the scientific consensus on global warming.
The biggest headlines about IPCC errors concern a claim about melting Himalayan glaciers that it made in its 2007 report on the likely impacts of climate change.
“Glaciers in the Himalaya are receding faster than in any other part of the world,” the report noted, adding that “if the present rate continues, the likelihood of them disappearing by the year 2035 and perhaps sooner is very high.” As it happens, this prediction was not based on any peer-reviewed scientific research but was lifted from a report by the World Wildlife Fund, which was repeating an unproven speculation by a single researcher.
This lack of scientific basis did not stop countless global-warming activists from citing the glacier prediction at every opportunity.
When the Indian government suggested last year that the Himalayan glaciers were in better shape than the IPCC claimed, the IPCC’s chairman, Rajendra Pachauri, dismissed India’s objections as being based on “voodoo science.”
Earlier this month, the Indian government reacted to the revelations about the baseless nature of the glacier claim by announcing plans to establish what amounts to its own “Indian IPCC” to assess the impact of global warming.
India’s environment minister, Jairam Ramesh, declared: “There is a fine line between climate science and climate evangelism.
I am for climate science.”
Climate evangelism is an apt description of what the IPCC has been up to, for it has exaggerated some of the ramifications of climate change in order to make politicians take note.
Murari Lal, the coordinating lead author of the section of the IPCC report that contained the Himalayan error, admitted that he and his colleagues knew that the dramatic glacier prediction was not based on any peer-reviewed science.
Nonetheless, he explained, “we thought that if we can highlight it, it will impact policy-makers and politicians and encourage them to take some concrete action.”
The concrete action that they had in mind was getting governments to mandate drastic cuts in carbon-dioxide emissions.
Activists have been pursuing this approach to tackling global warming without success for nearly 20 years, most recently at last December’s failed climate summit in Copenhagen.
The problem is that it is too expensive a solution for politicians and the public to swallow easily –which is why many well-meaning climate scientists have apparently concluded that instead of relying on reasoned discussion, they might as well try to scare us witless.
Consider what the IPCC had to say about extreme weather events such as intense hurricanes.
The cost of such events in terms of destroyed property and economic disruption has been rising steadily.
Every peer-reviewed study has shown that this is not because of rising temperatures, but because more people live in harm’s way.
Nonetheless, in the IPCC’s influential 2007 assessment of climate change, the panel’s Working Group II (charged with assessing the potential impact of global warming) chose to cite one, then-unpublished study that supposedly found that global warming had doubled damage costs over the past 35 years.
In fact, when this study was finally published, it stated categorically that there was “insufficient evidence” to link the increased losses to global warming.
In other words, what Working Group II reported was plain wrong.
Elsewhere in the 2007 assessment, Working Group II claimed that “up to 40% of the Amazonian forests” were at imminent risk of being destroyed by global warming.
The basis for this claim was a single report from the World Wildlife Fund that itself cited only one study, which didn’t even look at climate change, but rather at the impact of human activities like logging and burning.
In similar fashion, Working Group II claimed that “by 2020, in some [African] countries, yields from rain-fed agriculture could be reduced by up to 50%.”
Much quoted since, this alarming statistic turns out to have been based on a single, unreferenced bullet-point from a report by an environmental think tank.
There are numerous other examples of similar shenanigans by Working Group II. Yet, aside from a grudging admission that its predictions about Himalayan glaciers were “poorly substantiated,” the IPCC has yet to acknowledge – much less apologize for – any of the lapses.
If the IPCC is to do to its job properly, it must own up to all of its missteps and clean house.
Nobody expects it to be infallible.
But neither should we tolerate its attempts to scare policy-makers rather than inform them.
Cloning\u0027s Slippery Slope
Sometime in the next two years a human being will likely be cloned.
This may or may not bring shudders of horror, but will certainly not occur outside the law or in some shadowy offshore location.
The medical, scientific, legal and political establishment will fully support the effort.
This clone, however, will never leave the British laboratory in which it was created.
Last January, a form of human cloning called “therapeutic cloning” – or more properly “cell nuclear replacement” – was legalized in Britain.
As with in vitro fertilization, the British appear to have been the first to devise a regulatory scheme for morally contentious technology.
The world is watching what will happen next.
It is rather like a Woody Allen script, but run backwards.
In Allen's 1973 film Sleeper, attempts are made to clone Hitler from his preserved nose.
Today, instead of cloning people from spare parts – or spare cells, as is the case with reproductive cloning – scientists hope to grow those parts by cloning people.
The first part of this procedure is similar to that used to create Dolly the sheep, the first cloned mammal.
The nucleus from a human cell is inserted into an egg that had its nucleus removed.
An embryo forms, but it will not be implanted in a uterus.
Instead, embryonic stem cells will be derived from its inner cell mass.
These cells have the potential to become every cell-type in the body, a potential which may lead to cures for many chronic diseases.
Stem cells cannot become a baby.
While Britain has legalized therapeutic cloning, they are poised to ban reproductive cloning.
They oppose projects such as that of Drs. Severino Antinori of Rome and Panayiotis Zavos of Kentucky in America, who plan to enable infertile men to become fathers by inserting their DNA into an egg from their partner.
Reproductive cloning raises several moral issues – principally those of safety.
Scientists believe that human clones would have defects.
Because the egg that receives the new nucleus has to reprogram it quickly – teaching it to give the instructions necessary to construct an entire human being - genes that should be “turned on” might well be “turned off,” and vice versa.
This probably explains why at least some animal clones have problems with their hearts, lungs, and immune systems.
Weight is a problem too.
Dolly the sheep – although still going strong five years after her birth, and the mother of six (all conceived the old-fashioned way) – has always been plump.
During a trip to the Roslin Institute where Dolly was cloned, I found her, shorn of her fleece and revealing an ample midsection, mournfully staring from behind a sign that said, "hay only."
The Duchess of York, Sarah Ferguson is not the only British celebrity on a diet.
Being overweight is obvious. Other defects may be subtler and, perhaps, insignificant for farm animals.
But where humans are concerned, safety must come first.
Because the defects found in clones are not genetic mutations, pre-implantation diagnosis at the embryo stage will not reveal their existence.
Problems caused by these defects could emerge at any point in the person's life.
We would see a greater range of defects than we do in animals like mice because it is easier to analyze human behavior and physiology.
Therapeutic cloning would probably be safer than reproductive cloning because any reprogramming defects would not affect every cell in the body – just the cells used in therapy.
Thus far, only the UK has legalized therapeutic cloning.
A law passed late last year in Japan permits it but forbids transferring the embryo to the uterus. In March, Denmark’s Council of Ethics endorsed therapeutic cloning.
Will any country that legalizes therapeutic cloning inevitably slide down the so-called slippery slope and end up tolerating reproductive cloning?
The idea behind a slippery slope is that if you do x, which is acceptable, you will end up doing y, which is not.
Indeed, two types of slippery slopes – logical and sociological – exist.
On the logical slippery slope, you slide to the bottom and embrace the morally unacceptable because there is no way to distinguish it from an acceptable practice.
You can slide down the sociological slippery slope from one practice to the other – even if the two are conceptually different – just because the existence of one creates a social climate receptive to the other.
Therapeutic cloning is conceptually distinct from reproductive cloning.
Although the first step is the same, the intent behind the practices is not.
The former would be done in order to save lives by treating diseases now incurable – say, Parkinson's, ALS, and multiple sclerosis.
The latter – creating a person by cloning – would be done for reasons extending from egomania, to confusion between replication and resurrection, to the understandable desire to have a biologically related child.
Will therapeutic cloning make it more likely that people come to accept reproductive cloning?
I don't think so.
Therapeutic cloning is intended to heal the sick.
The cells created through cloning would be an extension of the patient: a means to treat him with cells generated by his own body.
It’s almost like donating a pint of blood for yourself in case you need it for subsequent surgery.
Even though I do not believe in a slippery slope from therapeutic to reproductive cloning, a society’s laws should give voice to its values.
In countries which allow for the former, it is probably a good idea to ban the latter.
Close Encounters with Recessions of the Third Kind
PARIS: Three types of recessions exist.
The first type are those caused by major shocks, say an outbreak of war or a sudden, sharp increase in the price of petroleum.
Recall that the OPEC oil shocks of the 1970's incited two world recessions.
The second category of recessions arise by chance, for example when consumer confidence dips, or businesses become uneasy and cut back on investment and/or inventory.
This was the cause of America’s recession in the early 1990’s.
The third type of recession occurs when imbalances in an economy build up to unsustainable levels before exploding.
This form of recession is sometimes characterized by vast increases in debt (corporate or consumer), or by dizzying stock market or capital asset speculations that eventually come crashing down.
The “popping” of such an asset bubble is what happened in Japan 10 years ago, an event from which that country has not yet recovered.
Recessions of the first type are, almost by definition, largely unpredictable.
Those of the second type are minor and relatively easy to repair if not to avoid.
All that they usually require is a reduction in interest rates or a bit of reflation.
Recessions of the third kind are the most worrying.
Is America facing this third type of recession?
What, indeed, will be the nature of America’s next recession, that is, if America has a recession?
Optimists predict a recession of the second type; pessimists suspect that a third variety recession is lurking in the economic shadows.
Who is right?
The answer depends almost entirely on one single number: the growth rate of American productivity in the future.
After adjusting for inflation, America’s stock exchanges roughly tripled in value in the 1990’s.
Indeed, stock prices doubled compared to profits.
The savings rate for households has gone from 5% of American GDP in 1990 to zero in 2000.
America’s current account balance – the surplus of imports over exports – is now in deficit to the tune of 3% of GDP.
Do these figures reflect alarming imbalances or are they the usual signs of a boom?
If America’s rate of growth in the coming decades remains what it has been over the past thirty years, the answer is simple, and terrifying.
Stock market prices would be much too high.
Households would be behaving in a totally irresponsible manner.
The exterior imbalance would be unjustifiable, indeed, unsustainable.
If America’s annual rate of improvement in productivity turns out to be higher in the next thirty years than they have been over the past three decades, the country’s worries will be few.
High stock market valuations would reflect a radiant future, households would be behaving in a reasonable way, and America would be wise to run a trade deficit in order to invest.
Under such conditions, a mere nudge in interest rates by the Federal Reserve should set right any residual problem; if not, a tax cut will do the trick.
Any recession would likely be short and limited.
What level of improved productivity can America expect in future years?
Productivity growth will probably be higher than before 1995: the soaring growth rates of recent years are not accidents; the high tech explosion is real.
All the same, I still fear that improvements in productivity will turn out to be lower than the prophets of the New Economy promise.
This prospect literally gives me the shivers.
Not only may the future be less radiant, but the adjustments that will be required once reality sets in could set off a nastier recession and a more persistent slowing of the economy than anything predicted today.
Closing Europe’s Defense Deficit
The gap between Europe’s security needs and its military capacities is widening, and most European leaders lack the will to do what is necessary to close it.
Forces built to defend the European heartland from a Soviet attack are unsuitable for the kinds of operations that define today’s post-Cold War environment.
Today, Europe needs improved capacity to combat terrorism and the proliferation of weapons of mass destruction, deal with failed or failing states, contend with regional conflicts, and respond to humanitarian crises.
Yet defense spending across Europe remains flat or in decline.
The problem is more than budgetary.
The fragmented nature of European defense procurement, the Byzantine rules of the European defense trade, and industrial capabilities shaped by the Cold War legacy all sap Europe’s ability to meet its military needs.
Given these hurdles, the obvious way to improve European defense capabilities is by coordinating the efforts of individual countries, the European Union, and NATO to create a set of enhanced collective defense capacities.
The overlap in membership between NATO and the EU makes such defense cooperation both possible and logical, if not unavoidable.
Of course, difficult choices lay ahead.
Political leaders must create incentives and financial headroom for their forces to undergo the necessary changes.
First and foremost, savings generated from restructuring must be reinvested in transforming military forces.
After all, generals will be more inclined to identify efficiencies if they believe that doing so will ultimately enable them to enhance their capabilities.
Political leaders should also seek to stabilize defense budgets by creating separate funds for unforeseen multilateral peacekeeping operations, like the Balkans and Afghanistan, and by putting defense planning on a multi-year rather than an annual cycle.
Such predictable budgets will better enable European leaders to establish defense planning targets that address the priorities of military transformation.
At a minimum, 25% of annual budgets should be allocated toward research, development, and procurement, with no more than 40% spent on personnel.
This won’t be easy, because there is a basic conflict between modernizing an army and the political pressures to maintain military wages and jobs.
But these trade-offs must be made if Europe’s military is to meet the Continent’s security needs.
At the most basic level, governments must take a hard look at conscription and territorial defense forces, which eat up far too much of Europe’s military budgets.
Because no European state can afford to “go it alone,” military reform demands greater integration and information sharing, as control of information will be key in future conflicts.
Pooling of infrastructure (bases and ports) and logistical assets (transport), including training facilities for common equipment, will generate big savings, as individual countries rationalize the long “logistical tails” of manpower and equipment that support armies in the field.
Nations should forge partnerships across national lines with like-minded allies – a model exemplified by the new joint Spanish-Italian Amphibious Force.
Nations that cannot afford to field expeditionary forces capable of performing the full spectrum of 21st-century missions should make greater use of specialization to enhance their contribution to Europe’s collective defense.
But states that specialize in a capability should do so as a part of a “country cluster” to minimize the risk of a nation facing a military challenge that its forces are unprepared to meet.
The EU can help by strengthening its defense planning.
It should articulate more clearly Europe’s future military roles and missions, determine the military capabilities required, identify shortfalls, and develop projects and initiatives to address the most critical gaps.
The EU should also take steps to improve its ability to conduct operations.
New EU “Battlegroups” should be strengthened through regular training and certification, preferably using NATO standards, and the EU Military Committee should hold regular Battlegroup conferences to solicit country contributions to future formations.
For the EU to do its part, larger budgets appear unavoidable.
Battlegroups should be expanded to include naval and air components for missions such as maritime interdiction and close support for ground troops.
Common funding for operations should be increased, and member states should continue to be encouraged to make civilian and police forces as readily deployable in peacekeeping operations as their military.
All of these reforms demand coordination with NATO.
While NATO and the EU have improved their working relations, more steps need to be taken to eliminate mistrust, unhealthy competition, and information-sharing blockages.
The two bodies must expand their strategic dialogue beyond their current focus on the Balkans and Afghanistan.
To do this, the often pre-scripted and stale dialogue between the North Atlantic Council and the EU’s Political and Security Committee should be opened up to include topics such as combating terrorism and the proliferation of WMD, or regions such as Ukraine or Moldova.
This would enable NATO and the EU to assess future scenarios and find ways to work together to prevent and manage crises.
European industry is also a vital factor in European defense integration, but it suffers from fragmented demand, counterproductive intra-European trade regulations, and a mostly outdated Cold-War military infrastructure.
Specialization of military capabilities and industrial efforts by certain member states shows some promise, but needs to be coordinated to avoid redundancy and ensure interoperability.
Moreover, transatlantic defense trade must be used to augment European capabilities at the lowest possible cost.
Both NATO and the EU have roles to play in working with industry to enhance Europe’s defense capabilities.
Greater military integration in Europe will require sustained leadership by heads of government, military officials, and NATO and EU leaders.
This is no small challenge, but there is no viable alternative.
Greater defense integration in Europe is not just an appealing or interesting idea; it is an imperative.
Coexistence or No Existence
Now that the conflict over the cartoons depicting the Prophet Muhammad is dying down, or so I hope, it is clear that the only winners are the extremists -- in the Islamic World and in Europe.
I regret the fact that the controversy started in my own country when a newspaper chose to publish the cartoons in a naïve effort to demonstrate freedom of expression.
It happened last autumn, and at that time I argued publicly against what I regarded as an insensitive act, because it hurt other peoples’ religious feelings.
It was also an unnecessary provocation, and constituted in itself a caricature of our cherished freedom of expression, that is guaranteed in our constitution.
As my father (an old journalist himself) used to say: Freedom of expression provides a right to say what you think, but it is not an obligation to do so!
When the controversy blew up a few weeks ago, a lot of fuel was added to the fire. Many incorrect stories were circulated.
False rumours that the Holy Koran had been burned in demonstrations, false information on the status of Islam in Denmark, incorrect translations of what our Queen had said, etc. This added to the anger, and it led to burning embassies and threats of violence.
The conflict has been called “A Clash of Civilizations.”
It could well deteriorate into that; the potential is there.
But I would still prefer to call it “A Clash of the Misinformed.”
There were so many mistakes on both sides: On one side there was a lack of understanding of the deep religious feelings that were hurt by a show of disrespect.
On the other side people were given exaggerated and even falsified stories of what had actually happened.
The potential for a “clash of civilizations” lies in the deep differences between European and Islamic cultures and traditions.
We should all be aware of those who seek to deepen these differences and turn them into insurmountable gulfs instead of inspirations to a richer life. It is only too easy for them to point to the case of the cartoons and say: Now you see how western-style democracy and freedom of expression mean that you will face ridicule and mockery of your religious faith!
It is easy because freedom of expression was used, when publishing the cartoons, merely to demonstrate itself and therefore became a caricature of itself.
Our globalized world brings us not only economic opportunities but also cultural and spiritual challenges.
Internet and SMS have developed over less than a decade and we still have not made the mental adjustments to the implications of such instantaneous communication.
The Danish cartoonists and newspaper editors that published the cartoons obviously failed to understand that they were not just addressing themselves to a local audience but to other inhabitants of the global village.
If they had realized that, they would not have published the cartoons – as they stated clearly when they made their apology.
The lessons of this unfortunate incident seem to me to be clear: We should all acknowledge that in the modern world it is increasingly necessary for all sensible people to work for mutual respect, tolerance and better understanding.
We must avoid situations where different values are confronted with each other in ways that trigger violence.
Instead we must try to build bridges between religions, ethics and norms.
Call it self-censorship if you wish.
But self-censorship is practised all the time by sensible people.
If you wish to stay in the same room as other people you try not to offend them through unnecessary provocations.
The room we are talking about is no longer the local pond but the global village.
Co-existence is the key.
Some people are unwilling to accept this.
They are not open to values other than their own.
They want confrontations.
You find such people in Europe as well as in the Islamic world.
Unfortunately they are the beneficiaries of the conflict that was triggered by the cartoons in a Danish newspaper.
But if we do not stand up to them we all run a grave risk of repeating some of history’s great mistakes.
The risk was explained in a very small poem by the late Danish poet and philosopher Piet Hein in one of his famous “Grooks” called “That is the question”:
Coexistence
or no existence
Coke Is It in Europe
European leaders need to get serious about Europe’s cocaine problem.
The “white lady” is seducing a steadily growing number of Europeans, and remaining in a state of denial will only worsen the consequences.
Cocaine used to be America’s problem, to the point that the United States started a major campaign against sellers and consumers of crack cocaine in the inner cities, drug traffickers, and suppliers in the Andes.
But now demand for cocaine in most of the world is stable or dropping.
Coca cultivation has been slashed by a quarter in the past five years, and seizures of cocaine have almost doubled.
An impressive 42% of all of the world’s cocaine was seized in 2005.
Only Europe is bucking the trend.
Cocaine use is on the rise, especially in Spain, Great Britain, and Italy.
There is plenty of anecdotal evidence indicating traces of cocaine found on bank notes and in water supplies.
Here are some harder facts.
For the first time, the level of cocaine use in Spain – 3% of the population aged 15 to 64 – now exceeds that in the US. And the United Kingdom is not far behind.
In 2005, 2.4% of the UK population used cocaine at least once, up sharply from 0.6% a decade earlier.
Consider another telling indicator. Ten years ago, 20% of all new clients entering treatment for drug abuse in the Netherlands were addicted to cocaine.
Now it is 40%.
In Spain, the proportion has soared to 42% in 2002, from just 7% in 1995 – and it has no doubt risen again since then.
Europe’s growing cocaine problem is due to several factors.
First, drug users in Europe are switching to cocaine from heroin.
Cocaine is fashionable because it is attractive: white, not dark; sniffed, not injected; consumed in a living room or a fashionable night-club, not in a dark alley.
It is seen as a drug for winners, not losers.
To many it is a symbol of success, until they end up in a hospital or treatment center.
Cocaine use by high-profile entertainers, executives, models, and socialites who flaunt their illicit drug habit certainly does not help. Nor does uncritical reporting by the media.
It seems many Europeans need to be reminded that cocaine is highly addictive and harmful.
That is why it is a controlled substance.
While addicts may be in denial, thinking that they can control their “recreational use,” cocaine, to quote the famous song by J.J. Cale, “she don’t lie.”
Second, too many governments – particularly in rich countries – fail to invest political capital in preventing and treating drug abuse.
They are ill equipped to deal with the problem, so their societies have the drug problem they deserve.
This raises a basic credibility issue: how can Europe urge Colombia and Peru to reduce supply when its own drug habit is driving cultivation?
The solution is to attack the problem at its source by addressing both supply and demand.
Coca crops in Latin America need to be replaced with agricultural crops, and cocaine use in affluent Europe must be reduced.
Solving the cocaine problem is a shared responsibility.
On the supply side, there must be more support for poor farmers in drug-producing countries to give them viable alternatives to growing coca.
Most illicit coca growers are extremely poor.
Crop eradication will not work over the long term if there is no legal economy to replace drugs.
Drug control and development assistance must therefore go hand in hand.
Environmental protection is also at issue. Coca farmers and producers slash and burn forests, polluting streams with toxic chemicals and damaging fragile ecosystems.
The Andean region has less than 1% of the world’s land area, but more than 15% of its plant life.
Vast areas of vegetation are being destroyed for lines of white powder.
At a time of growing concern about climate change, Europeans should be made aware of the long-term destruction done to a precious and fragile habitat for the sake of a short-term high.
But controlling supply is not enough.
If all of Colombia’s farmers stopped growing coca tomorrow, unrestrained demand by the world’s 13 million cocaine users would quickly generate as much cultivation somewhere else.
Clearly, the ultimate challenge is to prevent drug abuse and to treat and rehabilitate drug users successfully.
Sweden is a good example of how to do it right.
Drug use there is a third of the European average – the result of decades of consistent policies (irrespective of changes in government) that combine tough punishment of dealers and comprehensive treatment for users.
The more that can be done to prevent people from becoming cocaine addicts, the less damage these people will do to themselves and their families, the less money will get into the pockets of criminals, insurgents, and terrorists, and the less damage will be done to the environment.
But nothing will be done until Europe wakes up and faces its pandemic.
Cold War Lessons for George W. Bush
President Bush recently drew an analogy between the current struggle against violent jihadi terrorism and the Cold War.
He is right in one respect: waves of terrorism tend to be generational.
Unfortunately, like the Cold War, the current “war on terror” is likely to be a matter of decades, not years.
But Bush missed another lesson implicit in his analogy: the importance of using the soft power of culture.
The Cold War was won by a combination of military power, which deterred Soviet aggression, and the attractive power of Western culture and ideas.
When the Berlin Wall fell in 1989, hammers and bulldozers, not artillery, brought it down.
Unfortunately, Bush has not learned this lesson.
Academic and scientific exchanges during the Cold War played a significant role in enhancing American soft power.
While some American skeptics feared that Soviet scientists and KGB agents would steal American technology, they failed to notice that the visitors vacuumed up political ideas alongside scientific secrets.
Many of these scientists became leading proponents of human rights and liberalization inside the USSR.
Some 50,000 Soviets – writers, journalists, officials, musicians, dancers, athletes, and academics – visited the United States between 1958 and 1988.
Aleksandr Yakovlev was strongly influenced by his studies at Columbia University in 1958.
Yakovlev went on to become a Politburo member and key liberalizing influence on Mikhail Gorbachev.
Oleg Kalugin, who became a high KGB official, said in looking back from the vantage point of 1997, “Exchanges were a Trojan Horse for the Soviet Union.
They played a tremendous role in the erosion of the Soviet system….They kept infecting more and more people over the years.” Yet today, the Bush administration oversees a cumbersome visa program that has cut the number of such exchanges, particularly with Muslim countries.
Popular culture was also important during the Cold War.
Many intellectuals disdain popular culture because of its crude commercialism.
But such scorn is misplaced, because popular entertainment often contains subtle images and messages about individualism, consumer choice, and other values that have important political effects.
American films, for example, include sex, violence, and materialism, but that is not the whole story.
They also portray American life as open, mobile, individualistic, anti-establishment, pluralist, populist, and free.
As the poet Carl Sandburg put it in 1961: “What, Hollywood’s more important than Harvard?
The answer is, not as clean as Harvard, but nevertheless, further reaching.”
The line between information and entertainment has never been as sharp as some intellectuals imagine, and it is becoming increasingly blurred.
Some popular music lyrics can have political effects.
Cultural messages can also be conveyed by the way that sports teams or stars conduct themselves, or in the multiple images purveyed by television or cinema.
Pictures often convey values more powerfully than words.
Even the consumption of fast food can make an implicit statement.
As one Indian family described their visit to McDonald’s, it was stepping out for “a slice of America.”
Although the Soviet Union restricted and censored Western films, those that made it through had devastating political effects.
As one Soviet journalist commented after a restricted showing of films that were critical of American nuclear weapons policies, “They absolutely shocked us….We began to understand that the same thing would happen to us as to them in a nuclear war.”
Soviet audiences watching films with apolitical themes nonetheless learned that people in the West did not have to stand in long lines to purchase food, did not live in communal apartments, and owned their own cars.
All of this discredited the negative views promulgated by the Soviet media.
Even rock and roll played a part.
As one of Gorbachev’s aides later testified, “The Beatles were our quiet way of rejecting ‘the system’ while conforming to most of its demands.”
Czech Communist officials sentenced a group of young people to prison in the 1950’s for playing tapes of “decadent American music,” but their efforts turned out to be counter-productive.
In 1980, after John Lennon was murdered, a monument to him spontaneously appeared in Prague, and the anniversary of his death was marked by an annual procession for peace and democracy.
In 1988, the organizers founded a Lennon Peace Club that demanded the removal of Soviet troops.
Lennon trumped Lenin.
The Cold War was won by a mixture of hard and soft power.
Not all of the sources of soft power were American – witness the role of the BBC and the Beatles.
But it would be a mistake to ignore the role that popular culture played.
One has to be careful in drawing lessons for today.
Eastern European cultures were more similar to Western cultures than are Muslim cultures.
In some fundamentalist circles, and among the terrorists, Western culture evokes repulsion, not attraction.
But even in Iran, where the ruling mullahs describe America as “the great Satan,” the young want to watch American videos in the privacy of their homes.
Polls in the Muslim world show that American culture remains attractive to the moderate majority.
It is American policies that have led to America’s unpopularity.
For a start, Bush could learn to get out of the way and encourage more popular and grassroots contacts.
How to Beat Childhood Cancer
PHILADELPHIA – For a parent, there is perhaps no greater fear than the prospect of losing a child to illness or accident.
And it is childhood cancer that has the greatest potential to catapult a remote fear into an unimaginable reality.
As a pediatric oncologist, having cared for children with cancer and their families for more than 25 years, I know that only a parent who has confronted such a diagnosis truly understands the depth of this fear, as it touches the core of who we are as parents.
I also know that we are treating more children more effectively than ever before – and that we can do much better still.
For a child born in the 1960’s, the diagnosis of the most common form of childhood cancer, acute lymphoblastic leukemia (ALL), meant almost certain death, with a survival rate of less than 10%.
A child with the same diagnosis today has a better than 80% chance of being cured.
Looking at the five-year survival rates for children with ALL from the 1970’s through the 1990’s, one sees an almost linear improvement in cure rates.
This makes the 1970s, 1980’s, and 1990’s look like an era of accelerating discovery and therapeutic development.
But virtually all of the drugs that we use today to cure children with cancer were discovered and approved in the 1950’s and 1960’s.
So, if new drugs did not fuel four decades of progress, what did?
A major driver was a remarkable, sustained scientific collaboration.
In the 1950’s, a group of clinical scientists recognized that, because childhood cancer was a rare disease, no single medical center could study enough patients to make the necessary advances across the spectrum of pediatric oncologic diseases.
The decision to conduct collaborative research across multiple institutions resulted in the development of cooperative group research.
In the fight against childhood cancer, this concept evolved into what is now the Children’s Oncology Group (COG), which unites more than 8,000 experts at more than 200 leading children’s hospitals, universities, and cancer centers across North America, Australia, New Zealand, and parts of Europe.
The COG conducts research across the spectrum of cancers that afflict children, and has approximately 100 clinical trials underway around the world.
With an emerging infrastructure in place for cooperative research, sustained improvement in outcomes partly reflected an ever-increasing understanding that childhood cancers are diverse.
Childhood ALL, for example, is not a single disease, but rather a spectrum of diseases.
Recognition of this diversity led to the study of different treatment regimens in different sub-populations of children with pathologically similar cancers.
Throughout this period, the ability to overcome the most common side effect of cancer drugs, myelosuppression (a decrease in blood counts), improved dramatically.
It began with the ability to transfuse not only red blood cells into anemic patients, but also platelets, reducing the threat of life-threatening bleeding that can accompany cancer therapy.
Equally important, the risks and types of life-threatening infections that come with myelosuppression were increasingly recognized, leading to the development and better use of more effective antibiotics.
Starting in the 1990’s, cytokines, drugs that stimulate bone marrow to produce infection-fighting white blood cells, began to be integrated into cancer treatments, further mitigating the risk of life-threatening infectious complications of care.
As a result of these advances in science and supportive care, the same chemotherapeutic drugs could be delivered much more intensively for children with select types and sub-types of cancer.
With selective intensification, cure rates began to increase steadily.
And yet, while this strategy has indeed resulted in better outcomes, the acute and long-term morbidity of therapy has been substantial.
Children with high-risk cancers who receive dose-intensive chemotherapy have a greater than 80% chance of experiencing at least one severe, life-threatening, or fatal drug-related toxic event over the course of their treatment.
The late effects of cancer treatment include permanent organ and tissue damage, hormonal and reproductive dysfunction, and second cancers.
More than 40% of the estimated 330,000 survivors of childhood cancer in the United States experience a significant health-related complication from childhood cancer and its treatment.
And, despite our advances, cancer in developed countries remains the leading cause of death from disease in children older than one year.
We are, however, entering an era of unprecedented discovery.
The powerful research tools that we now have to uncover the underlying basis of childhood cancers could fundamentally change how we treat children with these dreaded diseases. For a limited number of childhood cancers, there are new drugs that can target the fundamental drivers of malignancy.
The most notable example is the impact of Gleevec (imatinib mesylate) on outcomes for children with an uncommon subtype of leukemia – Philadelphia chromosome-positive ALL.
The addition of this inhibitor to intensive chemotherapy has dramatically improved the outlook for these children, increasing the rate of three-year event-free survival from 35% to 80%.
The development of targeted new agents is likely to affect outcomes for other subtypes of childhood cancer, including anaplastic large-cell lymphoma and other types of leukemias.
Given that childhood cancers are all rare or ultra-rare diseases, the ability of the biopharmaceutical industry to invest resources into development of new treatments is limited at best.
Yet research is needed to identify potential targets for the entire spectrum of childhood cancers.
For some potential targets, public-private partnerships will be needed to develop new therapeutic approaches.
The past 40 years have demonstrated the remarkable return on investment to be gained in collaborative scientific research.
Now we must leverage current scientific opportunities and invest the resources needed to develop more effective, less toxic therapies, thereby improving outcomes for all children with cancer.
Colombia and the International Crisis
BOGOTA – Just five months ago, Colombia’s government was assuring its citizens that they were protected from the international crisis.
Now, analysts predict that the economy will barely grow 1% this year, and that is the best case scenario.
This bleak forecast marks the end of Colombia’s longest cycle of growth in three decades, leaving the country in the same fragile situation as that of many other developing economies.
Of course, a deteriorating economy is not exclusive to Colombia.
Since the middle of last year, the International Monetary Fund has been reducing its projections for growth across Latin America.
Last October, the Fund estimated that growth in the region would reach 3.2% this year; now, it says that growth will barely be positive.
And, most likely, the worst is yet to come: if the Obama administration does not succeed in stabilizing the United States economy in the coming weeks, Latin America will most likely face even steeper declines.
The good news for Colombia is that it is better off than many of its neighbors.
Although projecting concrete figures is a sterile exercise in these worrisome times, most analysts predict that Colombia’s economic performance this year will be inferior to Peru’s, but similar to Chile’s and Brazil’s and better than that of Argentina, Venezuela, and Mexico, a country expected to contract by more than 2%.
This comparatively benign situation reflects Colombia’s relatively favorable macroeconomic conditions.
Although the country was never as protected from the global downturn as its authorities claimed, the country benefits from some factors that do help ease the damage inflicted by the international crisis, especially with regard to the availability of foreign currency in these times of restrictions on external financing.
During the past few years, Colombia has become one of the three most attractive destinations for foreign investment in Latin America, allowing it to cover a significant part of its external financing needs this year.
Moreover, remittances by Colombians working abroad grew 8% in 2008, a surprising result when compared to countries such as Mexico and Ecuador, where remittances have fallen.
In addition, international financial markets perceive Colombia’s economy as being fundamentally sound.
The current risk premium for government borrowing in international markets is very similar to that paid by Peru and Brazil, and much less than that demanded of Argentina, Venezuela, and Ecuador.
But, while Colombia is not as bad off as some of its neighbors, the country will not be able to pull itself out of the crisis easily.
Unfortunately, the authorities do not have much margin for error in working to counteract the damage done by the international crisis.
The government did not set aside resources while things were going well, and now it does not have the fiscal space needed for an aggressive boost to public spending of the type that many other governments are attempting.
Although Colombia’s government announced a few weeks ago a strategy based on important infrastructure work, its impact will be limited: most of the investment was already in the budget last year, and the officials in charge of public works have consistently demonstrated inefficiency when executing large-scale projects.
Meanwhile, the country’s monetary authorities have much more leeway to boost the economy by lowering interest rates at a time when the threat of inflation is diminishing.
In fact, the Bank of the Republic has reduced its interest rates from 10% at the end of last year to 7% at its last meeting in March.
These policies should allow Colombia’s economy to grow – barely – this year, but only as long as the world economy begins to stabilize before the end of the first quarter.
If so, the outlook for Colombia is more favorable in 2010 and 2011, when growth should be close to 3%, thanks to inflows of foreign investment, improvements in security, and a better business environment.
But if the international crisis lasts longer than the first half of 2010, all bets are off, and Colombia will struggle to find its economic footing in a region devastated by generalized contraction.
Colombia at Peace?
BOGOTÁ – The Framework Agreement for the End of the Armed Conflict in Colombia that has just been announced by President Juan Manuel Santos is a historic landmark for his country and all of Latin America.
It is also a tribute to diplomatic resourcefulness and negotiating skill.
The agreement with the Revolutionary Armed Forces of Colombia, better known as the FARC, came after long years of failed attempts by Colombian governments of all political shades to reach an accommodation with the last, and among the most odious, guerrilla movement to have operated in Latin America.
Never before has the FARC – a monumental apparatus of terror, mass murder, and drug trafficking – agreed to discuss disarmament, its fighters’ social and political reintegration, victims’ rights, an end to drug production, and participation in “truth and responsibility” commissions to examine the crimes committed during a half-century of conflict.
But now it has.
This momentous shift reflects the decimation of the FARC following long years of struggle, the resilience of Colombian society, and, perhaps most important, Santos’s brilliant regional policy.
By weakening the so-called Bolivarian Axis (Venezuela, Ecuador, and Bolivia), the FARC guerrillas were left without a supportive regional environment.
As with peace processes in the Middle East and Central America following the Cold War’s end, regional changes created the conditions for the start of the Colombian process.
But, in the Middle East and Central America, external actors – the United States and the Soviet Union – produced the change; in the case of the Colombian process, the change came from within.
Prior to engaging the FARC in secret talks in Cuba, Santos’s regional diplomacy shifted the region’s politics from saber rattling to the hard work of cooperation.
He turned Venezuela and Ecuador, which had long been safe havens for the FARC, into friendly neighbors willing to bring an end to the archaic tradition of revolutionary wars.
In fact, in what is perhaps the most remarkable diplomatic turnaround, Venezuelan President Hugo Chávez has become a key facilitator in the resolution of the Colombian conflict.
The talks with the FARC evolved as regional détente was followed by an ambitious initiative to address the root causes of the Colombian conflict.
Most notably, Santos signed the Victims and Land Restitution Law in June 2011, in the presence of United Nations Secretary-General Ban Ki-moon.
The law provides reparation for the victims of human-rights violations in the course of a 60-year conflict, as well as restitution of millions of hectares stolen from peasants.
The law thus puts Colombia on a path to peace by blunting the FARC’s appeal to land reform to justify its untold atrocities.
The law is undeniably complex, and by no means without shortcomings.
But, if implemented as planned, it could bring about a profound social revolution.
It also represents a novel approach to peace, given that such laws are normally introduced only after a conflict has ended.
In this case, returning land to dispossessed peasants and offering financial reparation to the victims and those who were displaced by the conflict became the way to peace.
Indeed, it was none other than Alfonso Cano, a former FARC leader, who called the law “essential to a future of reconciliation” and a “contribution to a real solution to the conflict.”
Skeptics and opponents of the negotiations do have a case, however.
The FARC’s record in previous peace talks reveals a penchant for manipulating negotiations to gain national and international legitimacy without actually being willing to strike a deal.
Santos could, therefore, have been tempted to choose the Sri Lanka way – a ruthless military onslaught to defeat the insurgents, at the price of major human-rights violations and the destruction of civilian communities.
Instead, Santos opted for the path of least expedience.
After all, war, in Colombia and elsewhere, frequently unites nations, while peace divides them.
The repercussions of a genuine end to the Colombian armed conflict would be felt far beyond the country’s borders.
If Chávez’s Venezuela has become a narco-state in which the regime’s acolytes are drug lords, this reflects their privileged relations with the FARC.
Repercussions would also be felt in Mexico, where drug cartels are tearing apart the country, and the US, the world’s largest source of demand.
West Africa, too, would be affected, having become in recent years the main transit point for South American drugs headed to Europe.
Formidable difficulties still lie ahead, and a final agreement is by no means certain.
But Santos nonetheless has a fair chance of burying, once and for all, the specious mystique of violent revolutionary change that has held back Latin America’s political and economic modernization for so long. &nbsp;
Colombia’s Eternal Agony
Colombia is in better shape today than it has been for years, thanks largely to President Alvaro Uribe’s leadership, but it remains a bizarre place, one facing strange and intractable challenges.
Colombia’s FARC guerrillas have held some of their kidnapping victims for many years.
Child soldiers still linger in paramilitary groups, and there are compromising video recordings of leading Colombian politicians and drug lords.
Perhaps weirdest of all, there are imprisoned guerrillas who refuse to be set free, and a government that insists on liberating them, even against their will.
Uribe was re-elected just over a year ago by a landslide, a tribute to the popularity and effectiveness of his “democratic security” policy of combating both the guerrillas and the country’s generalized violence.
Latin America’s oldest standing two-party system was decimated in that election, as the Polo Democrático presidential candidate won more votes than the Liberal Party’s contender, finally giving electoral expression to left-wing forces that had never been able to see more potential for change at the ballot box than by fighting in the mountains.
Negotiations on Colombia’s Free Trade Agreement (FTA) with the United States had been finalized.
Even the questionable deal Uribe cut with the right-wing paramilitary AUC groups, pardoning up to 30,000 of their members for often horrendous crimes in exchange for their disarmament, appeared successful.
With Uribe in charge, Colombia seemed to be on a roll.
But much of this success has since been squandered, with both Colombia and Uribe now in deep trouble.
The so-called parapolítica scandals have rocked Uribe’s government, forcing the resignation of some cabinet ministers, and embarrassing others, including the president himself.
Photographs, videos, and audio recordings of politicians and paramilitary thugs (including one who boasts of having personally killed more than 300 of his enemies) have discredited a political elite that, while never very popular, has now had some of the worst suspicions that many held about it graphically confirmed.
For years human rights activists and scholars suspected the obvious: the emergence of an enormous, vicious, well-armed, and well-trained parallel army to fight the guerillas was not some spontaneous act.
It was, many believed, a deliberate policy devised and carried out by the official military and the political elite to wage war “off the books.”
The parapolítica or paragate revelations seem to confirm another suspicion as well: the distinction between the paramilitaries and the drug cartels, like that between the guerrillas and the cartels, is a nuanced one.
Unfortunately, these revelations come at the worst possible moment.
Colombia’s FTA with the US was in danger the moment the US Republicans lost their majority in both houses of Congress last November.
Still, it seemed more likely to pass than the other two pending Latin American trade deals with Panama and Peru.
Now it appears that President George W. Bush’s closest ally in the hemisphere will not only have its FTA rejected, owing to human rights concerns in the US House and Senate. Moreover, it might also lose Plan Colombia, the huge – and hugely controversial – American aid program that has funneled tens of billions of dollars into Colombia since the late 1990’s, ostensibly to fight the drug cartels, but also, in fact, to wage counter-insurgency.
Uribe has spent weeks directly and personally lobbying key American legislators, and he is undoubtedly his own best advocate.
But, just as former US Vice-President Al Gore recently refused to share a dais with Uribe in Miami, many members of Congress refuse to approve a trade agreement or an aid package that may link them to a government tainted by egregious human rights abuses, complicity with drug lords, or both.
The US has never really wanted to include human rights issues in trade agreements; at best, and only when forced, US presidents have consented to incorporating labor and environmental chapters.
The European Union thinks differently; in its economic cooperation and free trade agreement with Mexico, for example, it insisted on – and achieved – the inclusion of a “democracy clause” that made its economic benefits conditional on ongoing respect for democratic rule and human rights.
Colombia’s blemished human rights record is affecting its government’s international standing and providing ammunition for those who wish to sabotage the FTA.
For example, protectionist Democrats in the US Congress have been able to insulate themselves from charges of opposing free trade if they scuttle Colombia’s FTA, because they will most likely ratify the deals for Panama and Peru.
Can Uribe survive his current travails?
The answer is almost certainly yes, unless the parapolítica mess reaches him directly, or the US explicitly rejects the FTA and postpones or attaches conditions to renewal of funding for Plan Colombia.
Uribe’s political demise would hurt everyone, but the rejection of the FTA on human rights grounds could set a healthy precedent.
In a region where threats to democracy and human rights are growing, linking trade and economic policy to these considerations is not a bad idea.
Uribe may not deserve such a fate, but history works in strange ways.
Colombia’s New Dawn
MADRID – Trapped since the 1960’s in a protracted armed conflict with the most unscrupulous militias imaginable, and hostage to drug lords who turned the country’s vast rural areas into fiefdoms of crime and untold atrocities, Colombia long projected to the world the image of a country addicted to violence.
But no more.
The Colombian paradox is that violence and the drug economy coexisted with one of the oldest and most genuinely constitutional traditions in Latin America.
Yet a long succession of presidents failed to solve the paradox.
It was Alvaro Uribe’s exceptionally effective administration in 2002-2010 that finally made the difference.
President Uribe’s unwavering fortitude in sticking to his policy of “democratic security” – admittedly, its flaws were rightly and severely criticized by human rights groups – radically changed Colombia’s course and national self-image.
Violence decreased most significantly with the disbanding of the right-wing paramilitaries, and with the decimation in battle of the left-wing FARC guerillas and the decapitation of its leadership.
Colombia’s homicide rate, for years one of the highest in the world, has almost halved since 2002.
Moreover, Colombia is no longer the world’s gold medalist in producing cocaine.
According to a report by the United Nations Office Against Drug and Crime, Colombia’s cocaine output has now reached its lowest level since 2000.
In 2009 alone, the government eradicated more than 165,000 hectares of coca.
Colombia’s new president, Juan Manuel Santos, who as defense minister in Uribe's second government was responsible for the army’s most spectacular exploits against the FARC, is probably the best-equipped politician to build on this success.
An economist with an impeccable ministerial career behind him, and a statesman who made peace with Venezuela within three days of assuming office, thus both averting war and opening huge economic and commercial opportunities – Santos is bent on shifting Colombia’s course from to conflict to peace.
But do not expect Santos to be softer on security matters than Uribe.
Unless the FARC abandons the armed struggle, there will be no peace negotiations.
Nonetheless, Santos is determined to shift from Uribe’s emphasis on “democratic security” to one of “democratic prosperity” – a shift for which Uribe deserves credit.
Over the course of Uribe’s presidency, foreign investment increased 50% and annual economic growth averaged 4%.
Even so, Santos’s “civilian” presidency faces challenges no less demanding than the war against the militias.
With a colossal and diverse geography of 1.2 million square kilometers, Colombia’s dramatically inadequate infrastructure is as much a handicap for economic development as poor security.
To reduce the country’s appalling levels of poverty, Santos will need to focus on an ambitious plan for infrastructure improvement, modernization of agriculture and mining, housing construction, and the introduction of new technologies.
Another major objective is to resolve yet another paradox. Colombia, America’s staunchest and most loyal ally in Latin America, and the third largest recipient of United States aid – after Israel and Egypt – has so far failed to convince the US Congress to sign the kind of free-trade agreement that America has with other countries on the continent.
Much of the congressional opposition stems from worries about an influx of cut-rate Colombian goods, costing US jobs.
This is a legitimate concern, but one that can be resolved through careful negotiations.
Hence, Colombia’s opponents prefer to focus their criticism on the violation of human rights in the course of the government’s fight against the insurgents.
Especially sensitive is the targeted killing of trade-union leaders.
There have, indeed, been many human-rights violations in Colombia.
Most appalling was the army’s murder of thousands of innocent civilians in order to present the deaths as FARC casualties.
But the rule of law did eventually prevail.
Once these atrocities were discovered, the government dealt with them swiftly.
The commanders responsible were fired, and the assassins are being brought to trial before civilian courts.
Unionists continue to be threatened and murdered, but the number of such homicides has fallen at a steeper rate than the general number of homicides in Colombia.
Moreover, a meticulous study conducted by the Center for the Study of Economic Development at the Universidad de los Andes in Bogota has shown that there was no evidence that union members are being systematically killed because of their involvement in union activities.
Frequently the driving motivation is their ideological and political stance, as might be the case for other victims in Colombia’s armed conflict.
This, of course, does not make the killings more palatable.
What US lawmakers should do, however, is to help make the decline in violence irreversible.
A free-trade agreement that enhances the well-being of the Colombian people can be no less effective than military operations in reducing violence and drug traffic, which remains a major US strategic objective.
Colombia’s Perilous Success
Recent months have been very good for Colombian President Alvaro Uribe.
His “Democratic Security” policy now seems to have definitively turned the tables in the country’s fight against the Revolutionary Armed Forces of Colombia (FARC), which have seen their leaders killed and their hostages freed.
Uribe has also proven to be a strong economic administrator, attracting increasing flows of foreign direct investment to Colombia.
But success presents Uribe with a new set of challenges that risk undoing most of his achievements.
The first and most tangible challenge is that Uribe – with popularity ratings of more than 90% following the rescue of 15 high-profile hostages, including former presidential candidate Ingrid Betancourt, in early July – will be more tempted to run for a third term.
This would not be catastrophic per se, but amending the constitution again to favor one of the players would undermine the country’s relatively deep political institutionalization – one of the factors that has helped attract foreign investors.
Changing the rules of the game to prop up personal rule would help perpetuate weaknesses such as a lack of accountability, and prevent important government policies from becoming entrenched as state policies.
One can only hope that Uribe has learned the lessons of doomed third-term experiments in the region – Peru’s Alberto Fujimori and Argentina’s Carlos Menem spring to mind – and leave the presidency on a high note.
If he does, he will probably be remembered as one of Colombia’s most successful and influential presidents, and can look forward to a continuing career as a regional and international statesman.
Perhaps more importantly, were Uribe to step down after his current term, he would still wield considerable proxy power at home, playing an integral role in choosing his successor – whoever he backs stands a very good chance of winning – and boosting his political supporters’ prospects in legislative elections.
If the outcome of the first challenge rests solely on Uribe’s shoulders, two others are tied to the FARC’s reaction to these latest developments – whether it chooses to negotiate or to continue its armed struggle.
Under the first scenario, Uribe faces the danger of being pushed into a “weak” or “unconditional” peace process.
For more than six years, the government has resisted calls to negotiate with the FARC, rejecting the group’s requests for a demilitarized zone, dismissing overtures, and demanding the release of all hostages and a cease-fire as a precondition for talks.
The problem is that a weakened FARC may expose the government to popular pressure to launch negotiations, even if FARC does not declare a cease-fire.
In that case, the FARC might use peace talks – as it has several times in the past – to bid for time, re-arm and regroup.
For the last couple of years, the FARC, many of whose leaders believe that they “win” simply by prolonging the conflict, has been seeking ways – for example, a humanitarian exchange and political recognition – to ease the military pressure that it has faced since Uribe came to power.
The danger, then, is a failure to deliver the knockout blow at a time when the group appears to be disintegrating.
But continuing the fight also poses a serious threat to Uribe’s main success, which has been to improve perceptions of security, including among investors.
The FARC, now wounded and cornered, may decide that its only option is to go on the offensive in order to demonstrate its continuing relevance and remaining strength.
Although the FARC’s capabilities have been seriously degraded over the last six years, and its geographical dispersion has shifted away from the main population centers, a series of high-profile attacks against business and civilian targets in the main cities would suffice to shatter the impression of security in the country.
Worryingly, this might also happen if the FARC splits, with one part deciding to negotiate while hard-line military commanders fight on.
If Uribe stands down, whoever succeeds him will probably maintain most of his policies and continue to work toward improving security in the country.
Investors will know that Colombia is not a one-man show, and that the political system’s vaunted institutionalization and effective checks and balances are real.
Strengthening the state and fostering a stable and growing economy would also provide the best rebuke to the FARC and its bid for time.
Colonization of Palestine Precludes Peace
For more than a quarter century, Israeli policy has been in conflict with that of the United States and the international community.
Israel’s occupation of Palestine has obstructed a comprehensive peace agreement in the Holy Land, regardless of whether Palestinians had no formalized government, one headed by Yasir Arafat or Mahmoud Abbas, or with Abbas as president and Hamas controlling the parliament and cabinet.
The unwavering US position since Dwight Eisenhower’s administration has been that Israel’s borders coincide with those established in 1949, and, since 1967, the universally adopted UN Resolution 242 has mandated Israel’s withdrawal from the occupied territories.
This policy was reconfirmed even by Israel in 1978 and 1993, and emphasized by all American presidents, including George W. Bush.
As part of the Quartet, including Russia, the UN, and the European Union, he has endorsed a “Road Map” for peace.
But Israel has officially rejected its basic premises with patently unacceptable caveats and prerequisites.
With Israel’s approval, The Carter Center has monitored all three Palestinian elections.
Supervised by a blue-ribbon commission of college presidents and distinguished jurists, they have all been honest, fair, and peaceful, with the results accepted by winners and losers.
Hamas will control the cabinet and prime minister’s office, but Mahmoud Abbas retains all authority and power exercised by Yasir Arafat.
He still heads the PLO, the only Palestinian entity recognized by Israel, and could deal with Israeli leaders under this umbrella, independent of Hamas control.
He has unequivocally endorsed the Quartet’s Road Map.
Post-election polls show that 80% of Palestinians still want a peace agreement with Israel and nearly 70% support Abbas as president.
Israel has announced a policy of isolating and destabilizing the new government (perhaps joined by the United States).
The elected officials will be denied travel permits, workers from isolated Gaza barred from entering Israel, and every effort is being made to block funds to Palestinians.
The Quartet’s special envoy, James Wolfensohn, has proposed that donors assist the Palestinian people without violating anti-terrorism laws that prohibit funds from being sent directly to Hamas.
In the short run, the best approach is to follow Wolfensohn’s advice, give the dust a chance to settle in Palestine, and await the outcome of Israel’s election later this month.
Hamas wishes now to consolidate its political gains, maintain domestic order and stability, and refrain from any contacts with Israel.
It will be a tragedy – especially for the Palestinians – if they promote or condone terrorism.
The preeminent obstacle to peace is Israel’s colonization of Palestine.
There were just a few hundred settlers in the West Bank and Gaza when I became president, but the Likud government expanded settlement activity after I left office.
President Ronald Reagan condemned this policy, and reaffirmed that Resolution 242 remained “the foundation stone of America’s Middle East peace effort.”
President George H.W. Bush even threatened to reduce American aid to Israel.
Although President Bill Clinton made strong efforts to promote peace, a massive increase of settlers occurred during his administration, to 225,000, mostly while Ehud Barak was prime minister.
Their best official offer to the Palestinians was to withdraw 20% of them, leaving 180,000 in 209 settlements, covering about 5% of the occupied land.
The 5% figure is grossly misleading, with surrounding areas taken or earmarked for expansion, roadways joining settlements with each other and to Jerusalem, and wide arterial swaths providing water, sewage, electricity, and communications.
This intricate honeycomb divides the entire West Bank into multiple fragments, often uninhabitable or even unreachable.
Recently, Israeli leaders have decided on unilateral actions without involving either the US or the Palestinians, with withdrawal from Gaza as the first step.
As presently circumscribed and isolated, without access to the air, sea, or the West Bank, Gaza is a nonviable economic and political entity.
The future of the West Bank is equally dismal.
Especially troublesome is Israel’s construction of huge concrete dividing walls in populated areas and high fences in rural areas – located entirely on Palestinian territory and often with deep intrusions to encompass more land and settlements.
The wall is designed to surround a truncated Palestine completely, and a network of exclusive highways will cut across what is left of Palestine to connect Israel with the Jordan River Valley.
This will never be acceptable either to Palestinians or to the international community, and will inevitably precipitate increased tension and violence within Palestine and stronger resentment and animosity from the Arab world against America, which will be held accountable for the plight of the Palestinians.
Acting prime minister Ehud Olmert and others pointed out years ago that Israel’s permanent occupation will be increasingly difficult as the relative number of Jewish citizens decreases demographically both within Israel and in Palestine.
This is obvious to most Israelis, who also view this dominant role as a distortion of their ancient moral and religious values.
Over the years, opinion polls have consistently shown that about 60% of Israelis favor withdrawing from the West Bank in exchange for permanent peace.
Similarly, an overwhelming number of both Israelis and Palestinians want a durable two-state solution.
Casualties have increased during the past few years as the occupying forces imposed tighter controls.
From September 2000 until March 2006, 3982 Palestinians and 1084 Israelis were killed in the conflict, and this includes many children: 708 Palestinians and 123 Israelis.
There is little doubt that accommodation with Palestinians can bring full Arab recognition of Israel and its right to live in peace.
Any rejectionist policies of Hamas or any terrorist group will be overcome by an overall Arab commitment to restrain further violence and to promote the well-being of the Palestinian people.
Down through the years, I have seen despair and frustration evolve into optimism and progress and, even now, we need not give up hope for permanent peace for Israelis and freedom and justice for Palestinians if three basic premises are honored:
1. Israel’s right to exist – and to live in peace – must be recognized and accepted by Palestinians and all other neighbors;
2. The killing of innocent people by suicide bombs or other acts of violence cannot be condoned; and
3. Palestinians must live in peace and dignity, and permanent Israeli settlements on their land are a major obstacle to this goal.
Comeback Cancers
LONDON, ONTARIO – Progress is being made against many types of cancer, with more patients surviving longer, thanks to research on two fronts: improved methods for earlier detection, and development of therapies that are more effective and less toxic.
Indeed, it is estimated that there are now more than 10 million cancer survivors in the United States alone, and this number has been steadily increasing.
Similar numbers, in proportion to population sizes, are found in other developed countries.
Cancers that are detected early – when they are small and less likely to have metastasized (spread away from the primary tumor) – are more likely to be treatable with local therapy, whereas successful treatment is ultimately unlikely once metastatic tumors develop.
And improved therapies mean that patients can be treated with drugs that work better (and that patients are more likely to receive the full dose needed).
But our dramatic progress in detecting and treating cancer has also led to growing awareness of the problem of tumor dormancy: a patient appears to be cured, only to have the same cancer return years or even decades later.
In breast cancer or melanoma, for example, recurrences 25 years after initial treatment have been reported.
With a growing number of cancer survivors, we need to understand better the twin processes of tumor dormancy and metastatic cancer recurrence.
While remarkable progress has been made in understanding the biology of cancer – leading in part to the development of new, less toxic drugs – our understanding of the biology of tumor metastasis, and especially the development of metastases after a long period of tumor dormancy, has lagged.
We do know that metastasis is a very inefficient process, with most cancer cells that escape into the blood stream failing to form metastatic tumors in distant organs.
Recent studies – from both the laboratory and the clinic – suggest that many cancer cells that leave the primary tumor may lodge themselves in new organs and go into a dormant state.
We also have evidence that says that these dormant cells may resist most current treatments.
This means that adjuvant cancer therapy, designed to kill presumed micrometastatic disease, may be missing an important fraction of disseminated cancer cells, some of which may eventually wake up.
Moreover, we are beginning to identify molecular mechanisms that regulate the entry of cancer cells into a dormant state, as well as their re-awakening at later times.
Our knowledge of the regulation of tumor dormancy is really in its infancy.
But, given the growing numbers of cancer survivors, the need for this knowledge is becoming more pressing.
Indeed, there is evidence suggesting that tumor dormancy is a valid target for therapy.
For example, in some types of breast cancer, patients may be treated for more than a decade with anti-hormone therapies, and these long-term treatments are working – they are successful at preventing some of the cancer recurrences that occur with shorter treatment.
But, while these long-term therapies are relatively safe, they do have side-effects, and the number of cancer recurrences that they prevent is small.
The challenge today is thus to understand the processes of tumor dormancy and metastasis better, in order to determine more accurately which patients will benefit from long-term therapy.
We have much to learn, and at this stage don’t even know all of the questions to ask.
Would intermittent therapy be as useful as long-term treatment?
Are there features of the primary cancer, or of individual patients, that can help us predict who will develop late recurrences and metastatic disease?
What if late recurrences simply cannot be predicted at diagnosis?
Are there modifiable factors – for example, lifestyle, immune-system status, or environmental conditions – that influence whether or not patients develop late recurrences?
The answers to these questions will require research, and research into metastasis and tumor dormancy is difficult.
It requires patience, development of models, and willingness to undertake long-term studies.
We also need to understand better the prevalence of long-term dormant disease in patients.
How common is the phenomenon we are examining?
It may be that many cancer patients harbor disseminated tumor cells, and not all of these cells are destined to re-awaken.
In some ways, the success of cancer research is fueling pressure to “cure” cancer quickly, steering clinical and laboratory researchers away from the tricky problems of metastasis and long-term tumor dormancy.
This focus ultimately may be shortsighted, as the increasing number of cancer survivors leads to an increase in late recurrences.
Metastases, not the primary tumor, are responsible for most cancer deaths.
If we are to continue to improve on cancer survival statistics, we need to learn how to prevent, delay, or thwart the processes that give rise to metastatic disease.
Coming Out in Africa
The lead story in a recent issue of the Daily Graphic , Ghana's most influential newspaper, was designed to shock: "Four Gay Men Jailed."
Homosexual acts are crimes in Ghana - and across much of sub-Saharan Africa.
Uganda's leader, Yoweri Museveni, is vehemently opposed to homosexuality. So is Zimbabwe's embattled Robert Mugabe.
Namibia's President Sam Nujoma complains that the West wants to impose its decadent sexual values on Africa through the guise of gay tolerance.
Indeed, the global movement to fight discrimination against people living with HIV/AIDS - which first surfaced as a "gay disease" in the United States - has elicited little sympathy for homosexuals in sub-Saharan Africa.
Only in South Africa have gays and lesbians won significant legal protections.
The arrests in Ghana, while typical of African bigotry towards gays, were all the more shocking because gays and lesbians actually thrive in Ghana's capital, Accra.
A country of 20 million people, Ghana is unusually tolerant.
Whites, Asians, and Middle Easterners mix well.
Ghana has never had a civil war - a badge of honor in conflict-prone sub-Saharan Africa - and three years ago staged a peaceful transfer of power from one elected government to another.
Although homosexuality remains taboo, gays seem safe.
Physical attacks against them are rare.
In Accra, a trendy street club named Strawberries is well known as a hangout for gays, and there are a few prominent, if still discreet, clubs where homosexual men and women gather.
One gay man has his own television show, even though his sexual preferences are no secret.
Precisely because gays seem so accepted, the arrests sent a disturbing message.
The paper that reported the story is owned by the government and sells more copies than all other newspapers combined.
In the day following its original report, the Daily Graphic went further in showing its revulsion over gay activities by publishing a lead editorial that blamed Europeans and Americans for "all the reported cases of homosexuality" in Ghana.
The paper alleged that the men had been enticed into such practices by a Norwegian, who gave them money and gifts in exchange for photos of them engaged in homosexual acts.
The Norwegian posted the photos on the Web and supposedly mailed printouts to his Ghanaian friends.
I am neither gay, nor Ghanaian, but I have spent considerable time in Ghana and I reject the argument - heard in other parts of Africa as well - that Western notions of sexuality have perverted Africans.
In my experiences, Africans simply have a moral blind spot on the subject of homosexuality.
Journalists seem especially ignorant.
Last year I worked in Ghana as country director of Journalists for Human Rights, a Canadian group that helps African journalists give voice to the voiceless in their society while raising awareness of human rights abuses.
The editor of the Daily Graphic supported my organization, and I held training sessions for his newspaper's reporters and editors.
The sessions resulted in stories that highlighted mistreatment of women and children and the failures of government agencies to deliver promised services.
But when I complained about bias against gays, the editor responded that gays don't deserve any sort of protection.
Although this example may suggest that Africans are united against homosexuality, they are not; gay advocates are simply terrified of speaking out, frightened that their support will be interpreted as an admission that they are gay.
Two years ago, the silence was broken briefly by Ken Attafuah, who directs Ghana's truth and reconciliation commission, charged with investigating rights violations during two decades of dictatorships.
"It should not be left to gays alone to fight for gay rights, because we are talking about fundamental violations of justice," Attafuah said. "You do not have to be a child to defend the rights of children."
That point is lost in Ghana.
After the gay arrests, I spoke at the University of Ghana about media coverage of homosexuals.
While no one objected to the coverage by the Daily Graphic , no one denounced homosexuality either.
Instead I received a short dissertation from one of the female students on how older married women often proposition her in nightclubs.
Two other females said the same thing happens to them and asserted that lesbianism is widely practiced in Accra, if publicly unacknowledged.
Lesbianism is, of course, a less threatening practice to the men who run Ghana.
No African man is supposed to be gay, and physical contact between men is presumed to be innocent.
Yet contradictions abound.
Once, at a traditional ceremony, in which an infant child receives his tribal name, I watched the proud father and a half dozen male friends dance together before a crowd of well-wishers.
The movements of these men were sexually suggestive, and at times they touched, even held hands.
As I watched, a European next to me explained that such dancing is accepted, so long as the contact between the men is left undefined.
In Ghana and in much of Africa, a culture of silence exists around same-sex love - a culture that many Westerners, raised on a belief in rights and openness - find unacceptable.
Yet the notion of "coming out" may not be a solution for every African homosexual.
Notions of what is right and wrong often collapse under the irreconcilable tensions between tradition and modernity, the individual and the community.
In sub-Saharan Africa, I am reminded of the saying that silence is golden.
Under the cover of silence, gays refrain from provoking the conflicts that a more vocal advocacy of homosexuality would bring.
But the recent arrests in Ghana expose this strategy's true price.
Coming Soon: Capitalism 3.0
CAMBRIDGE ­– Capitalism is in the throes of its most severe crisis in many decades.
A combination of deep recession, global economic dislocations, and effective nationalization of large swathes of the financial sector in the world’s advanced economies has deeply unsettled the balance between markets and states.
Where the new balance will be struck is anybody’s guess.
Those who predict capitalism’s demise have to contend with one important historical fact: capitalism has an almost unlimited capacity to reinvent itself.
Indeed, its malleability is the reason it has overcome periodic crises over the centuries and outlived critics from Karl Marx on.
The real question is not whether capitalism can survive – it can – but whether world leaders will demonstrate the leadership needed to take it to its next phase as we emerge from our current predicament.&#160; &#160;&#160;&#160;&#160;
Capitalism has no equal when it comes to unleashing the collective economic energies of human societies.
That is why all prosperous societies are capitalistic in the broad sense of the term: they are organized around private property and allow markets to play a large role in allocating resources and determining economic rewards.
The catch is that neither property rights nor markets can function on their own.
They require other social institutions to support them.&#160;
So property rights rely on courts and legal enforcement, and markets depend on regulators to rein in abuse and fix market failures.
At the political level, capitalism requires compensation and transfer mechanisms to render its outcomes acceptable.
As the current crisis has demonstrated yet again, capitalism needs stabilizing arrangements such as a lender of last resort and counter-cyclical fiscal policy.
In other words, capitalism is not self-creating, self-sustaining, self-regulating, or self-stabilizing.&#160;&#160;&#160;&#160; &#160;
The history of capitalism has been a process of learning and re-learning these lessons.&#160;
Adam Smith’s idealized market society required little more than a “night-watchman state.”
All that governments needed to do to ensure the division of labor was to enforce property rights, keep the peace, and collect a few taxes to pay for a limited range of public goods.
Through the early part of the twentieth century, capitalism was governed by a narrow vision of the public institutions needed to uphold it.
In practice, the state’s reach often went beyond this conception (as, say, in the case of Bismarck’s introduction of old-age pensions in Germany in 1889). But governments continued to see their economic roles in restricted terms.
This began to change as societies became more democratic and labor unions and other groups mobilized against capitalism’s perceived abuses.
Anti-trust policies were spearheaded in the Unites States.
The usefulness of activist monetary and fiscal policies became widely accepted in the aftermath of the Great Depression.&#160;
The share of public spending in national income rose rapidly in today’s industrialized countries, from below 10% on average at the end of the nineteenth century to more than 20% just before World War II.
And, in the wake of WWII, most countries erected elaborate social-welfare states in which the public sector expanded to more than 40% of national income on average.&#160;
This “mixed-economy” model was the crowning achievement of the twentieth century.
The new balance that it established between state and market set the stage for an unprecedented period of social cohesion, stability, and prosperity in the advanced economies that lasted until the mid-1970’s.&#160;
This model became frayed from the 1980’s on, and now appears to have broken down.
The reason can be expressed in one word: globalization.&#160;
The postwar mixed economy was built for and operated at the level of nation-states, and required keeping the international economy at bay.
The Bretton Woods-GATT regime entailed a “shallow” form of international economic integration that implied controls on international capital flows, which Keynes and his contemporaries had viewed as crucial for domestic economic management. Countries were required to undertake only limited trade liberalization, with plenty of exceptions for socially sensitive sectors (agriculture, textiles, services).
This left them free to build their own versions of national capitalism, as long as they obeyed a few simple international rules.
The current crisis shows how far we have come from that model.
Financial globalization, in particular, played havoc with the old rules.
When Chinese-style capitalism met American-style capitalism, with few safety valves in place, it gave rise to an explosive mix.
There were no protective mechanisms to prevent a global liquidity glut from developing, and then, in combination with US regulatory failings, from producing a spectacular housing boom and crash.
Nor were there any international roadblocks to prevent the crisis from spreading from its epicenter.
The lesson is not that capitalism is dead.
It is that we need to reinvent it for a new century in which the forces of economic globalization are much more powerful than before.
Just as Smith’s minimal capitalism was transformed into Keynes’ mixed economy, we need to contemplate a transition from the national version of the mixed economy to its global counterpart.
This means imagining a better balance between markets and their supporting institutions at the global level .
Sometimes, this will require extending institutions outward from nation states and strengthening global governance.
At other times, it will mean preventing markets from expanding beyond the reach of institutions that must remain national.
The right approach will differ across country groupings and among issue areas.
Designing the next capitalism will not be easy.
But we do have history on our side: capitalism’s saving grace is that it is almost infinitely malleable.
Coming to Grips with History
May 9th will be the mother of all celebrations in Moscow.
The victory over Nazi-Germany 60 years ago will be commemorated and the human sacrifices to this end honoured.
So far, so good.
But some nations will be missing from the party.
Two Baltic presidents have decided to stay home, because their hosts are not willing to concede that there is more to the history of WWII’s end than the victory over Hitler. Their peoples had to face half a century of occupation because of a deal struck before the war’s onset by Hitler and Stalin, the so-called Molotov-Ribbentrop Pact of 1939 that divided Eastern Europe between Nazi-Germany and the Soviet Union.
I have to admire the third Baltic president – Vaira Vike-Freiberga from Latvia – who decided to go to Moscow, honouring what should be honoured, and speaking aloud about what should not be hidden.
By doing so she demonstrates the strong position her country has obtained as a member of NATO and the EU, and she will be the one riding the high moral ground.
It is a pity that the Russian leadership of today has chosen not to condemn the Molotov-Ribbentrop Pact that damaged the development of the whole Baltic Sea region for so many years – and still is a source of political pollution threatening to poison relations between neighbors around the Baltic Sea.
I find it difficult to accept those who tend to describe the Molotov-Ribbentrop Pact as only a measure to build up Soviet national security.
In the Baltic Sea Region we have a particularly difficult history to deal with, if we look at the last 90 years.
After the end of WWI and the old order – “Die Welt von Gestern” – the Baltic region saw bloody revolutions, terrible civil wars, fascism, communism, genocide, occupations, oppression, terrorism, deportations – you name it, in our part of the world we have indeed had our share of all the horrors of the modern history.
When the Cold War ended, it seemed clever to say that this was “the end of History.”
But if we believe that – if we put a lid on history and leave it behind us – we run a risk that history will resurrect itself with all its horrors.
Therefore we must come to terms with history, particularly in the Baltic Sea region, where such a reckoning is a fundamental precondition for building mutual confidence and cooperation.
If you want to open “new chapters” in relations between old adversaries, you cannot simply close “old chapters” by denying or suppressing history.
Nothing good comes out of doing so – and we have seen enough of that in the past.
For too many years the Baltic Sea was a blind alley on the political map of Europe – divided by the Iron Curtain.
It was not a “Sea of Peace” – as the communist propaganda tried to describe it – it was a Sea of Threats, a sea of insecurity and lost opportunities.
To my country – Denmark – WWII’s end meant a return to freedom and democracy, and we could use the rest of the 20th century to strengthen our freedom, bolstering it with affluence.
But to the three Baltic countries the end of WWII led to half a century of occupation and lost opportunities.
We know to day the cause: the secret protocol to the Treaty of Non-aggression between the Soviet Union and Nazi-Germany, signed in 1939 – the Molotov-Ribbentrop Pact – defining the spheres of interest of the two dictatorships in eastern Europe which led to the war with Finland, the occupations of the Baltic countries, the assault on and division of Poland, and probably also the occupations of Norway and Denmark.
In short, this pact with its excrescence had an enormous impact on the history of our region, right up to this day.
That it why it will continue to haunt us, continue to disturb normal relations between the countries in this region with so much unused potential, as long as we do not deal with it in a forthright manner.
Debating, recognizing, denouncing – whatever…. anything but suppressing!
You cannot build lasting future relations between countries that have each in their own way suffered so much, without coming to terms with the past.
It was not until 1989 that the existence of this protocol was officially admitted, thanks to the Glasnost-policy of Mikhail Gorbachev.
But too many people still have difficulties with acknowledging this pact for what it really was.
Such denial is in no one’s interest. Not in the kind of Europe we still have to build – a Europe where big and small countries are assured that they share the same rights and obligations, where minorities feel safe, where basic human rights are accepted as an inextricable part of our political system, and where neighbors are regarded with respect and expectations, not fear and anxiety.
But it is no surprise that coming to terms with history can be damnably difficult.
The Danish philosopher Soren Kierkegaard put his finger on one of the more fundamental problems: “Life must be lived forwards – but can only be understood backwards”.
In order to look forward with confidence, you also have to look back – and understand what went wrong.
Every leader in Moscow May 9th should remember this.
Coming to Grips with Man-Made Climate Change
CAMBRIDGE: This month the United States Government issued a path-breaking report on the impact of long-term climate change on America's society and environment.
We know that human activity is causing serious and complex changes in the global climate, mainly through the effects of burning fossil fuels like oil and gas, and the effects of deforestation.
These activities raise the level of carbon dioxide in the atmosphere, which in turn has many effects: a rise in average temperature, a rise in the water level of the oceans, significant changes in the global patterns of rainfall, and an increase in "extreme weather events" such as hurricanes and droughts.
The new US study is the first systematic attempt to understand the long-term consequences of these climatic trends in a single country.
It is a project of such significance and scope that it should quickly be followed up by similar studies in other parts of the world.
The new report, "Climate Change Impacts on the United States" (available on the website www.gcrio.org) is a remarkable accomplishment, even though it is really only one step in a long-term effort to understand the interactions of climate, environment, and human society.
It was produced by a huge team of scientists working in different disciplines and different parts of the United States.
If there is one main lesson, it is that long-term climate change is for real, and is likely to have major impacts on US society.
If there is a second lesson, it is that those impacts are complex and varied, and depend very much on the characteristics of particular regions.
What is good for one part of the country, or indeed one part of the world, might be a disaster for another.
The report stresses that climate change will have several interacting elements.
The rise of carbon dioxide in the atmosphere B which is the main cause of the long-term climate change B might actually have some directly beneficial effects, since a higher concentration of carbon dioxide can stimulate the faster growth of some types of forests and some crops.
On the other hand, the effects on temperature, rainfall, ocean levels, flooding and droughts, and other climate patterns, will hurt some regions, while even helping some others.
Northern regions, for example, could enjoy a longer growing season for some crops, while more Southerly regions, which are already hot, might suffer from the adverse effects of rising temperatures.
A major novelty of the study is to analyze the impacts of climate change on several different regions of the US, and on several different sectors such as agriculture, health, water management, forestry, and coastal resources (many of which will be submerged or damaged by rising ocean levels and the increased severity of storms).
There are strong hints of what might go right or wrong, but also clear warnings in the report that much more scientific work will be needed to get more accurate results.
For example, the report relies on two different mathematical models of the atmosphere.
These models point in similar directions about long-term trends, but they often give very different specific predictions.
Also, little is known about how fast our societies will be able to adjust to the future changes if we can see them coming.
The problem of climate change is undoubtedly one of the toughest global issues to address.
First, it is truly a global problem.
One country can't protect itself by behaving well (for example using energy efficiently) if other countries are not taking similar actions.
Second, it is a very huge problem, since the climatic changes in the coming decades are likely to be quite sizeable.
Third, it is a very complicated problem.
The scientific understanding of long-term climate change is still very limited, and even when it is understood, the effects of climate on society are complicated.
And fourth, nations are likely to differ widely in their particular interests in this issue.
Some countries are major contributors to the problem; others are major victims.
Victims and perpetrators might not be the same.
It is now vital for other countries to carry out "national assessments" of the effects of long-term climate change, following the example of the US study.
There is good scientific reason to believe that many tropical regions will experience vastly more damage from global warming than will temperate-zone countries like the US.
For example, the effects of global warming on Africa and India could be very severe, even though their economies have contributed very little to the overall problem (since Africa and India use so little energy per person, they also contribute very little to the build up of atmospheric carbon dioxide).
Some regions - especially in the tropics - might be big losers in this process, even though they themselves have done little to cause the problems.
Ironically, it is the poorest countries that have the least resources to carry out the needed analyses.
Donor agencies such as the World Bank should therefore help to fund such studies.
Unless these studies are done, poor countries might find themselves continuing victims of worsening climatic shocks, such as severe hurricanes, droughts, and flooding, without realizing that the events are not accidental, but the result of long-term patterns of global energy use.
By understanding those linkages better, poor countries will have a much better idea of how to prepare for the likely climatic changes in the future, and how better to represent their own interests in the future negotiations over global responses to climate change.
This, in turn, should help us to reach more realistic and sound global responses to this tremendous challenge.
Commercialize the SDR
BERKELEY – Zhou Xiaochuan, the governor of the People’s Bank of China, made a splash prior to the recent G-20 summit by arguing that the International Monetary Fund’s Special Drawing Rights should replace the dollar as the world’s reserve currency.
His reflections elicited nothing if not mixed reactions.
Sympathizers acknowledged the contradictions of a system in which a national unit is used internationally.
Central banks understandably seek more reserves as their economies grow.
But if those reserves mainly take the form of dollars, then their rising demand allows the United States to finance its external deficit at an artificially low cost.
In turn, this allows unsustainable imbalances to build up, leading to an inevitable crash.
Recent events have highlighted this problem – and Governor Zhou thus was right to call for a different system.
But skeptics question whether the SDR could ever replace the dollar as the world’s leading reserve currency, for the simple reason that the SDR is not a currency.
It is a composite accounting unit in which the IMF issues credits to its members.
Those credits can be converted into dollars and other currencies at the Fund, and can be used in official transactions among IMF member countries.
But they cannot be used in the other transactions in which central banks and governments engage.
They cannot be used to intervene in foreign-exchange markets, or in other transactions with market participants.
This means that the SDR is not an attractive unit for official reserves.
This would not be easy to change.
Despite the trials and tribulations of the American economy, dollar securities remain the dominant form of reserves because of the unparalleled depth and liquidity of US markets.
Central banks can buy and sell dollar securities without moving those markets.
There is also the convenience factor: dollars are widely used in a variety of other transactions.
As a result, not even the euro has seriously challenged the dollar as the dominant reserve currency.
Doing so would be even more difficult for the SDR.
But difficult does not mean impossible.
If China is serious about elevating the SDR to reserve-currency status, it should take steps to create a liquid market in SDR claims.
It could issue its own SDR-denominated bonds. Better still, it could encourage other G-20 countries to do likewise.
They would pay a price, since investors in these bonds would initially demand a novelty premium.
But nothing is free.
That price would be an investment in a more stable international system.
Of course, an earlier attempt was made to create a commercial market in SDR-denominated claims.
Back in the 1970’s, there was some limited issuance of SDR-denominated liabilities by commercial banks and SDR-denominated bonds by corporations.
But these efforts ultimately went nowhere.
The dollar being more liquid, its first-mover advantage proved impossible to surmount.
Overcoming that advantage now would require someone to act as market-maker for private as well as official transactions and subsidize the market in its start-up phase.
The obvious someone is the IMF.
The Fund could stand ready to buy and sell SDR claims to all comers, private as well as official, at narrow bid/ask spreads competitive with those for dollars.
The dollar originally acquired international currency status in the 1920’s, when the newly established Federal Reserve started buying and selling dollar acceptances, backstopping the market and enhancing its liquidity.
If the international community is serious about the SDR as an international currency, it will have to empower the IMF to do likewise.
Again, there would be a cost.
The IMF would be using real resources to subsidize the market until private market-makers saw it as attractive to provide those services at comparable cost.
The Fund’s shareholders would have to agree to incur those costs.
But, again, what is this if not an investment in a more stable global monetary system?
Transforming the SDR into a true international currency would require surmounting other obstacles.
The IMF would have to be able to issue additional SDRs in periods of shortage, as when the Fed provided dollar swaps to ensure adequate dollar liquidity in the second half of 2008.
At the moment, countries holding 85% of IMF voting power must agree before SDRs can be issued, which is no recipe for liquidity.
The IMF’s management would also have to be empowered to decide on SDR issuance, just as the Fed can decide to offer currency swaps.
For the SDR to become a true international currency, in other words, the IMF would have to become more like a global central bank and international lender of last resort.
Before the crisis, such ideas would have been dismissed out of hand.
Even now they won’t materialize overnight.
But they are the real implications of Governor Zhou’s remarks.
Common Sense on Capital Controls
SANTIAGO – Few policy debates are stranger than the one concerning capital controls.
Mention the issue to a banker or a mainstream economist and you are likely to get a vehement reply: capital controls do not work, because speculators can evade them at little or no cost, but countries should never adopt such controls, because doing so is very costly.
Am I the only one who finds this logic a bit crooked?
The next stage of the conversation is usually just as strange.
When dealing with surges of potentially destabilizing capital inflows, capital controls are a no-no, but something called prudential regulation is quite okay.
Capital controls, you are likely to be told, discriminate between transactions depending on the country of residence of the parties involved, and that is bad.
Prudential regulation discriminates on the basis of the transaction’s currency of denomination or maturity, and that is good.
If this conversation is taking place at a cocktail party, at this point you would be well advised to ask for another drink.
That has been the state of the debate – until recently.
The big intellectual change has come from the International Monetary Fund, once an outright enemy of capital controls.
In a series of studies, IMF economists have stopped treating the issue as one of good versus evil, and have started treating it as a run-of-the-mill economic choice: capital controls have costs and benefits that can be measured and compared.
The Fund now argues that they should be one more tool for prudent policymakers to use as circumstances require.
Another big change has come from fast-growing emerging-market countries, many of which, facing a wall of money coming their way from slow-growth advanced countries (and mindful of the costs that large and volatile capital flows can bring), have chosen to apply capital controls.
Brazil, Indonesia, South Korea, Thailand, and Taiwan have all recently introduced disincentives to capital inflows.
Other emerging countries, like Peru, have tightened domestic prudential regulations with the same aim in mind.
Those who claim that capital controls are ineffective seldom specifyat what they are presumed to be ineffective.
A recent paper by Marcos Chamon, Atish Ghosh, Jonathan Ostry, and Mahvash Qureshi, economists at the IMF´s Research Department, suggests that capital controls can be effective indeed.
The authors conclude that, by reducing the share of short-term foreign-currency debt in a country’s total liabilities, capital controls can reduce vulnerability to financial crises.
The IMF economists ask how 50 countries fared during the recent world financial meltdown, with performance measured by economic growth in 2008-09 relative to 2003–2007.
Their main finding is that countries with capital controls in place beforehand fared better – their growth rates fell less during the crisis.
This was because they had less leverage to be unwound and less footloose capital that could leave in the event of a global financial squeeze.
This does not mean that capital controls can solve all problems: the same paper shows that they are relatively ineffective at preventing lending booms – another key cause of economic vulnerability.
This should not be surprising, since many factors besides international debt flows can cause domestic banks to throw caution to the wind and start lending recklessly.
But the paper also shows that domestic prudential policies – such as capping home-mortgage loans at a certain percentage of the property’s value, or increasing banks’ capital requirements during economic upswings – can be effective at restraining lending booms.
This suggests that capital controls and prudential policies can complement each other, contrary to what conventional wisdom often assumes.
Nor do these findings suggest that capital controls have no costs.
For example, as the MIT economist Kristin Forbes has documented, they increase the cost of financing for small and medium-size companies.
All aspiring economists are taught the discipline’s cardinal rule: governments (and people, for that matter) should undertake an action to the point where, at the margin, its benefits equal its costs.
Recent research, by carefully quantifying the potential costs and benefits, allows this standard logic to be applied to the question of whether and when to apply capital controls.
For an economist, this is cause for celebration – no cocktail required.
Getting to Normal
BRUSSELS – A financial crisis erupts when a large volume of assets in the financial system suddenly appears to be risky and investors want to get rid of their holdings.
These assets become “toxic” – not simply risky, but carrying a risk that cannot be quantified.
Toxic assets are not traded according to a normal risk-return calculus.
Given that their risk cannot be calculated, their owners just want to sell them – sometimes at any price.
In 2007-2008, this was the case for a class of securities based on residential mortgages in the United States (RMBS, or residential mortgage-backed securities).
During the boom phase, these securities were sold as risk-free, on the assumption that US house prices could not decline, as this had never happened before in peacetime.
But this assumption was shattered when a broad-based decline in real-estate prices began in 2007 and loss rates on mortgages suddenly increased.
As a result, RMBS were found to be much riskier than anticipated.
Initially, there was little basis for re-pricing them rationally, because the event (a peacetime decline in US house prices) was unprecedented.
Moreover, banks and other financial institutions, which held large volumes of RMBS, were ill-equipped to measure the risk, and in some cases would have been bankrupted had they been forced to sell their holdings at the fire-sale prices prevailing at the height of the crisis.
The euro crisis followed a similar pattern.
Until recently, public debt was considered the ultimate safe asset.
Indeed, its risk-free status was embedded in the European Union regulatory framework, which allows banks to hold large volumes of any eurozone country’s public debt without having to put aside any capital to cover potential losses.
As with RMBS, this view that public debt was totally safe was underpinned by the “fact” that no advanced country, at least in the post-1945 era, had ever defaulted.
Investors thus assumed that they did not need to assess the credit risk of eurozone countries’ (national) public debt.
The de facto default by Greece early this year ended investors’ complacency.
The government bonds of peripheral eurozone countries thus became toxic.
Given the unprecedented nature of the Greek default, the market valuation of peripheral debt has been fluctuating widely, still searching for “fundamentals,” such as deficit or debt levels, that could explain the evolution of risk premia over time.
Moreover, many banks had so much public debt on their balance sheets that they would have been bankrupted in the event of a full-blown default.
This led to extreme instability in the eurozone’s banking system.
A financial crisis ends when the doubtful debt either has been socialized, or its valuation has stabilized, and it has migrated to investors who are solvent enough to bear the risk.
This was the case in the US.
The authorities acquired some of the “toxic” assets, which over time became easier to value, as a few years of data on mortgage delinquency rates allowed investors to find ways to measure the risk.
The market prices of most RMBS rebounded as losses due to homeowners simply abandoning their properties were much lower than had been feared at the height of the crisis.
Moreover, holdings of RMBS migrated to institutions that were able to support and manage the remaining risk.
Today, RMBS are no longer considered toxic, allowing the market to function normally again.
In the end, the US authorities even made a small profit on the assets that they had acquired at the height of the crisis.
This pattern can be only partly repeated in the eurozone, where both debt socialization and a return to normal risk assessment appear more difficult.
Limited capacity for debt socialization reflects the EU Treaty’s no-bailout clause, which bars outright mutualization at the eurozone level of (national) public debt.
Moreover, the lending capacity of the new rescue fund, the European Stability Mechanism, is capped at €700 billion ($905.6 billion), which represents only a fraction of the total public debt of the countries potentially needing financial assistance.
Only the European Central Bank could implement true socialization of national debt in the eurozone.
But EU law expressly forbids any form of ECB financing of deficits.
A return to normal risk assessment is also more difficult in Europe.
The European Council has solemnly declared that Greece’s de facto default (orchestrated through so-called “private-sector involvement”) remains an exceptional and unique case.
But the promise of a return to the status quo ante of risk-free public debt is not compatible with the continuing limits on the socialization of national debt.
Indeed, the risk has become more concentrated as banks in the periphery have increased their investment in their own countries’ bonds.
A sovereign default in Europe will never be a mere value to be plugged into some statistical risk model.
These differences imply that the return to normal market conditions will be slower in the case of the euro crisis.
Nevertheless, the crisis should abate somewhat, because the most risk-averse institutions have by now sold their holdings of peripheral countries’ sovereign debt.
Moreover, the ECB has clearly stated that it will not allow the euro to disintegrate.
That guarantee has insured investors against their biggest risk.
Competing over Competition Policy
Egypt’s Economic Siren
NEWPORT BEACH – Facing a turbulent political situation and recurrent street protests, Egypt’s political elite would be well advised to focus on the economic implications of the current turmoil, whether they are in government or in opposition.
Doing so would lead them to recognize seven compelling reasons why a more collaborative approach to solving Egypt’s problems is in the country’s collective interest, as well as in their own individual interests.
First, if the social and political disorder persists, Egypt’s economy will end up with crippling inflation, severe balance-of-payments problems, and a budgetary crisis.
The risk of a vicious, self-reinforcing downward spiral would rise sharply.
But, rather than collapse (in the style of Asian and Latin American economies during the debt crises of old), Egypt’s economy would risk a return to stifling controls and black markets.
Economic efficiency, investment, and employment would take a significant hit, while slower growth would be accompanied by higher prices, including for basic food items.
Most segments of society would be harmed, with the poor, the unemployed, and the young suffering disproportionately.
With that, the legitimate objectives of the revolution that began on January 25, 2011 – inclusive growth, social justice, and human dignity – would prove even more elusive.
Second, no durable economic and financial solutions are possible without cooperatively addressing the country’s political quagmire.
No matter how well intentioned and gifted, technocrats cannot ensure proper policies and deliver optimal outcomes.
They need the backing of a unifying national vision, credible leadership, and citizens’ support.
Third, faced with chronic economic disorder and political instability, Egyptians increasingly lament the “hijacking” of the revolution, fueling mistrust of the country’s governing elites.
Empowered by their success in ousting former President Hosni Mubarak, and then sending the country’s armed forces back to the barracks, many are readily returning to the streets to hold leaders accountable.
Fourth, repeated street protests, combined with a weak police force, fuel small pockets of criminal activity.
Opportunistic thugs foment fear and chaos – real and perceived – that far exceed their number and power, amplifying the country’s general sense of malaise.
Fifth, external financial assistance cannot postpone the day of reckoning forever.
Emergency support from a few friendly governments has so far limited the erosion of Egypt’s foreign-currency reserves at a time of mediocre tourism earnings and growing imports of food and other basic necessities.
Facing external payments obligations, and with the currency under pressure, the government will again seek a proposed $4.8 billion loan from the International Monetary Fund and co-financing from other multilateral and bilateral sources.
But securing this financing is becoming more complicated.
Sixth, the Egyptian economy’s potential, given the proper political context, should not be underestimated.
Current conditions are keeping economic performance well below potential.
This could be addressed promptly; while eliminating inefficiencies and re-orienting institutions that were co-opted by the old system to serve the few rather than the many would increase potential output significantly.
Finally, the country’s political leaders can learn from other countries.
Egypt is not the first country to struggle in the critical revolutionary pivot from a repressive past to a better and more just future.
Nor is it the first country to combine an uncertain political transition with worrisome economic and financial conditions.
It is tempting to dismiss other countries’ experiences, particularly after Egypt’s youth-led grassroots movement delivered something that no one thought possible (toppling in just 18 days a president that had ruled with an iron fist for 30 years).
And some countries do indeed differ from Egypt to such an extent as to make potential lessons misleading.
There is no single transition country that offers a guiding light for Egypt.
But there may be a group of four countries – South Africa, Brazil, Indonesia, and Turkey – whose combined experience is relevant and would resonate among many segments of the Egyptian population when it comes to orderly economic and political transitions.
Each of the four faced what many deemed overwhelming odds.
Yet, by responding properly to their economic and political challenges, they all delivered poverty reduction, greater social justice, and expanded civil liberties.
South Africa under President Nelson Mandela illustrated the upside of channeling popular sentiment away from retribution toward national renewal.
While no single Egyptian leader can credibly convey Mandela’s message of “forgive but don’t forget,” together – working collaboratively and cooperatively – they can help to shift the country’s focus from the rear-view mirror to the road ahead.
Brazil under President Luiz Inácio Lula da Silva demonstrated how basic reforms can be implemented in the context of turmoil caused by a major domestic political transition, fleeing investors, and an inhospitable global context.
In 2004-2008, Brazil, which had been perennially known as the country of the future – as in “always has been and always will be” – recorded 5.5% annual average GDP growth.
It reduced the proportion of citizens living in poverty from some 40% to under 25%. And it improved the 100-point Gini coefficient of income inequality by a full five points.
Finally, both Indonesia (after the Asian financial crisis of 1997) and Turkey (after its 2001 crisis) are recent examples of Muslim-majority countries that decisively overcame economic mishaps while dealing with major domestic political transitions.
The longer Egypt’s current disarray persists, the more its political elites will lose the battle for the hearts and minds of a population whose basic aspirations are summed up by four well-founded demands: bread, dignity, social justice, and democracy.
But, with enlightened leadership and constructive cooperation, Egypt can overcome its current troubles.
In the past, a growing gap between what the country’s governing elites delivered and the population’s legitimate aspirations would have been addressed by imposing further repression.
The new Egypt will not allow this.
The empowerment of ordinary Egyptians has fundamentally changed things.
Egypt’s political elites do not have unlimited time, and current economic trends are making the need to act increasingly urgent.
Compute To Compete
Many Europeans look at globalization and throw up their hands in frustration: the challenge of competitiveness seems so great.
But Europeans have an advantage in today’s global competition, for which we should thank Jean Monnet and Jacques Delors, who created the Single Market before globalization was a buzzword.
For it is open competition within the Single Market that enables Europeans to compete globally.
But this alone will not suffice.
More daring policies are needed.
In 1991, my country, Estonia, was emerging from 50 years of Soviet-imposed backwardness.
I despaired over how long it would take to build the infrastructure needed for Estonian businesses to compete internationally.
Fortunately, the world was just then entering the new era of the information revolution, so by opting for the new infrastructure of information technology, Estonia was soon able to play on a level playing field.
Investment by both the public and private sector permitted Estonia to reach by the mid-1990’s a level of IT that was above the EU average.
By 2000, Estonia’s IT development in government services and sectors like banking had reached a level attained by only a few other countries in Europe.
So a small and once developmentally challenged post-Soviet country was able to overcome seemingly overwhelming obstacles.
But I fear that the steps needed to emulate Estonia’s achievements may not be very welcome elsewhere in the EU.
Increasing government efficiency, reducing paperwork, and eliminating the temptations of corruption through innovative computerization would mean a smaller, leaner public sector.
The same is true for the private sector.
For example, since the late 1990’s, around 98% of all banking transactions in Estonia have been Internet-based, so banks needed fewer tellers and fewer branch offices.
While large numbers of bank employees were laid off, Estonia’s emphasis on IT allowed it to become more competitive, with rising productivity fueling a sustained period of rapid economic growth – 11% in 2006.
But this alone will not be sustainable unless Estonia begins to produce its own innovations.
Now that Estonia’s competitiveness can no longer count on a low-cost labor force, it needs to generate new technologies.
Yes, Estonians invented Skype, the Internet telephone system, but in general Estonia, like the rest of Europe, is falling behind in both innovation and pure science.
Instead innovations come first and foremost from the United States, whose universities and laboratories attract the best and brightest from Europe, India, and China.
Europeans, meanwhile, suffer from their aversion to immigration, their children’s increasing avoidance of math, science, and engineering, and the fact that the EU is closing itself off from internal competition in services, one of the most competitive sectors in the world economy.
Lack of competition within the EU also has security implications.
Given the importance of energy in our lives, it is understandable that many EU countries want to shield their companies from competition, and so oppose liberalizing the energy market.
But the reality is that Europe’s single largest source of energy – Russia – uses energy as a foreign policy tool.
Recall that in May 2006, Viktor Chernomyrdin, Russia’s ambassador to Ukraine, said that Russia would be willing to reduce the price of natural gas it charged Ukraine if that country adopted a less pro-Western orientation.
If we are to avoid seeing the EU subjected to divide-and-rule policies that lead them to jockey for better gas deals, then a common energy policy – overseen by an EU Energy Commissioner with the negotiating heft of the Trade Commissioner – is vital.
Even Germany is a small country when negotiating on its own with Gazprom.
But for Europe to develop a common energy policy comparable to our common trade regime, it will need the sine qua non of external policy: internal liberalization.
That imperative transcends energy.
Europeans worry about their lack of engineers, but they do little to promote science education.
Instead, when they recognize that they are having difficulty competing internationally, they resort to protectionism.
But this is a recipe for further decline in Europe’s competitiveness – one that we must reject sooner rather than later.
Confessions of a Financial Deregulator
BERKELEY – Back in the late 1990’s, in America at least, two schools of thought pushed for more financial deregulation – that is, for repealing the legal separation of investment banking from commercial banking, relaxing banks’ capital requirements, and encouraging more aggressive creation and use of derivatives.
If deregulation looks like such a bad idea now, why didn’t it then?
The first school of thought, broadly that of the United States’ Republican Party, was that financial regulation was bad because all regulation was bad.
The second, broadly that of the Democratic Party, was somewhat more complicated, and was based on four observations:
· In the global economy’s industrial core, at least, it had then been more than 60 years since financial disruption had had more than a minor impact on overall levels of production and employment.
While modern central banks had difficulty in dealing with inflationary shocks, it had been generations since they had seen a deflationary shock that they could not handle.
· The profits of the investment-banking oligarchy (the handful of global investment banks, including Goldman Sachs, Morgan Stanley, and JP Morgan Chase, among others) were far in excess of what any competitive market ought to deliver, owing to these banks’ deep pockets and ability to maneuver through thickets of regulations.
· The long-run market-return gradient – by which those with deep pockets and the patience to take on real-estate, equity, derivative, and other risks reaped outsize returns – seemed to indicate that financial markets were awful at mobilizing society’s risk-bearing capacity.
· The poorer two-thirds of America’s population appeared to be shut out of the opportunities to borrow at reasonable interest rates and to invest at high returns that the top third – especially the rich – enjoyed.
These four observations suggested that some institutional experimentation was in order.
Depression-era restrictions on risk seemed less urgent, given the US Federal Reserve’s proven ability to build firewalls between financial distress and aggregate demand.
New ways to borrow and to spread risk seemed to have little downside.
More competition for investment-banking oligarchs from commercial bankers and insurance companies with deep pockets seemed likely to reduce the investment banking industry’s unconscionable profits.
It seemed worth trying.
It wasn’t.
Analytically, we are still picking through the wreckage of this experiment.
Why were the risk controls at highly-leveraged money-center universal banks so lousy?
Why weren’t central banks and governments willing and able to step up and maintain the flow of aggregate demand as the financial crisis and its aftermath choked off private investment and consumption spending?
More questions arise from the policy response to the subsequent recession.
Why, once the magnitude of the downturn became clear, weren’t governments eager to step in to return unemployment to normal levels, especially in the absence of higher inflation expectations, upward pressure on prices, or even interest-rate increases that would crowd out private investment spending?
And how has the financial industry managed to retain so much political power to block regulatory reform?
Moreover, how to restructure the financial system remains unclear.
The Glass-Steagall Act’s separation of investment from commercial banking greatly benefited the established oligarchy of investment banks, but somehow the entry of competitors from commercial banks and insurers increased financial companies’ profits further.
There were significant profit opportunities for financial intermediaries that could find spare risk-bearing capacity, carve out securities to take advantage of it, and thus take a middleman’s cut from matching risks with investors who could gain from bearing them.
But the advent of derivatives concentrated risk rather than dispersing it, for there was even more money to be made by selling risk to people who did not know how to value it – or, indeed, what risks they were bearing.
And central banks’ failure to regard their primary job to be the stabilization of nominal income – their failure not only to be good Keynesians, but even good monetarists – raises the question of whether central banking itself needs drastic reform.
Back in 1825, the Bank of England’s Governor Cornelius Buller understood that when the private sector had a sudden panic-driven spike in demand for safe and liquid financial assets, it was the Bank’s responsibility to meet that demand and so keep bankruptcy and depression at bay.
How can his successors know less than he did?
It may even be the case that we ought to return to the much more tightly regulated financial system of the first post-World War II generation.
That system served the industrial core well, at least as far as we can tell from the macroeconomic aggregates.
We know for certain that our more recent system has not.
संघर्ष-क्षेत्र के खनिज पदार्थों के बारे में सामान्य बुद्धिमत्ता
लंदन – "तुम्हारी उंगली पर जो हीरा है, बताओ कि वह तुम्हारा कैसे हो गया?" शेक्सपियर का सिंबेलीन पूछता है। “तुम मुझे यातना दोगे,” शरारती याकिमो जवाब देता है, “उस अनकही बात को अनकही रहने देने के लिए, जिसके कह देने पर, तुम्हें यातना मिले।” प्राकृतिक संसाधनों के वैश्विक व्यापार के कुछ भागों के पीछे भी आज यही कहानी है, चाहे वह कही गई हो या न कही गई हो, वह पीड़ा के किसी स्रोत से कम नहीं है।
प्राकृतिक संसाधनों को उन कुछ देशों में विकास में प्रमुख योगदानकर्ता होना चाहिए जिन्हें इनकी सबसे ज्यादा जरूरत है। और इसके बावजूद, दुनिया के सबसे गरीब और सबसे कमजोर देशों में वे इसका बिल्कुल उलट करते हैं।&nbsp; इनमें से बहुत से देशों में, प्राकृतिक संसाधनों के व्यापार से, संघर्ष और मानव अधिकारों के घोर दुरुपयोग को प्रोत्साहन मिलता है, धन मिलता है, और बढ़ावा मिलता है।&nbsp; हीरे, सोने, टंगस्टन, टैंटलम, और टिन जैसे संसाधनों का सशस्त्र समूहों द्वारा खनन किया जाता है, उनकी तस्करी की जाती है, और अवैध रूप से उनपर कर लगाए जाते हैं, और इनसे अत्याचारी सेनाओं और सुरक्षा सेवाओं को बजटेतर आर्थिक सहायता प्रदान की जाती है।
केवल इन चार अफ्रीकी देशों पर विचार करें:&nbsp; सूडान, दक्षिण सूडान, मध्य अफ्रीकी गणराज्य, और कांगो लोकतांत्रिक गणराज्य।&nbsp; कुल मिलाकर, इन संसाधन संपन्न देशों में उप सहारा अफ्रीका की जनसंख्या का केवल 13% से कुछ अधिक हिस्सा है, लेकिन संघर्ष के कारण इस क्षेत्र में आंतरिक रूप से विस्थापित व्यक्तियों का हिस्सा लगभग 55% (और पूरे विश्व में पाँच में से एक) है।&nbsp; लेकिन यह समस्या वैश्विक है, और कोलम्बिया, म्यांमार और अफगानिस्तान जैसे देशों के कुछ हिस्सों में इसी तरह के तरीके मौजूद हैं।
संघर्ष क्षेत्र के संसाधनों में घातक व्यापार उन आपूर्ति शृंखलाओं की मदद से किया जाता है जो यूरोपीय संघ और संयुक्त राज्य अमेरिका जैसे प्रमुख उपभोक्ता बाजारों का पोषण करती हैं, जिनमें नकदी वापस विपरीत दिशा में प्रवाहित होती है। टिन, टैंटलम, टंगस्टन, और सोने जैसे प्राकृतिक संसाधन - सभी ऐसे खनिज पदार्थ हैं जिन्हें दुनिया के कुछ भागों में संघर्ष और मानव अधिकारों के दुरुपयोग से संबद्ध किया जाता है - हमारे आभूषणों, कारों, मोबाइल फोनों, गेम कंसोल, चिकित्सा उपकरणों, और रोजमर्रा के कई अन्य उत्पादों में पाए जाते हैं।
ऐसी जानकारी के लिए स्पष्ट उपभोक्ता माँग मौजूद है जिससे खरीदारों को यह सुनिश्चित करने में मदद मिलेगी कि उनकी खरीदों के फलस्वरूप उन्हें घोर दुरुपयोग में नहीं फँसना पड़ेगा। लेकिन वैश्विक वाणिज्य को बुनियादी मानव अधिकारों से संयोजित करने की जिम्मेदारी सबसे पहले और सबसे अधिक उपभोक्ताओं पर नहीं आती है।&nbsp; संघर्ष की रोकथाम और मानव अधिकारों का संरक्षण करना मुख्य रूप से देशों की जिम्मेदारी है, और इस बात को अधिकाधिक मान��यता मिल रही है कि व्यवसायों को भी अपनी भूमिका का निर्वाह करना चाहिए।
वास्तव में, अब हम एक ऐसे महत्वपूर्ण बिंदु पर हैं जो गैर जिम्मेदाराना कॉर्पोरेट प्रथाओं को सामान्य रूप से व्यवसाय के रूप में देखे जाने को रोकने का एक वैश्विक आंदोलन बन गया है।&nbsp; 2010 के बाद से, संघर्ष के क्षेत्रों में काम करनेवाली कंपनियों को निपटान का एक वैश्विक मानक उपलब्ध रहा है। &nbsp;ओईसीडी इस बारे में मार्गदर्शन प्रदान करता है कि खनिजों को जिम्मेदारीपूर्वक किस तरह प्राप्त किया जाए। उद्योग के साथ निकट सहयोग से विकसित, इसमें ऐसी "विस्तृत सिफारिशें प्रस्तुत की गई हैं जिनसे कंपनियाँ मानव अधिकारों का सम्मान कर सकें और अपने खनिज खरीद के निर्णयों और प्रथाओं के माध्यम से संघर्ष में योगदान करने से बचें।"&nbsp;
संयुक्त राष्ट्र ने भी इसी तरह की आवश्यकताओं का समर्थन किया है। 2011 में, संयुक्त राष्ट्र ने व्यवसाय और मानव अधिकारों संबंधी मार्गदर्शी सिद्धांतों का एक सेट प्रकाशित किया था, जिसके अनुसार जिन कंपनियों के "प्रचालन संदर्भों से मानव अधिकारों के गंभीर प्रभावों के जोखिमों की संभावना हो, उन्हें औपचारिक रूप से यह सूचित किया जाना चाहिए कि वे उनपर किस तरह कार्रवाई करते हैं।"
और फिर भी, उद्योग के कुछ प्रगतिशील अग्रणियों को छोड़कर, मात्र कुछ कंपनियों ने ही इस स्वैच्छिक मार्गदर्शन के लिए प्रतिक्रिया व्यक्त की है। 2013 में, डच शोधकर्ताओं ने यूरोपीय शेयर बाजारों में सूचीबद्ध उन 186 कंपनियों का सर्वेक्षण किया जो संघर्ष क्षेत्र वाले खनिजों का इस्तेमाल करती हैं। 80% से अधिक ने अपनी वेब साइटों पर इसका कोई जिक्र नहीं किया कि उन्होंने संघर्ष के लिए धन देने या मानवाधिकार के दुरुपयोगों से बचने के लिए क्या किया था।&nbsp; इसी प्रकार, व्यापार के लिए यूरोपीय आयोग के महानिदेशक ने यह पाया कि 153 यूरोपीय संघ कंपनियों में से केवल 7% कंपनियाँ ही अपनी वार्षिक रिपोर्टों में या अपनी वेब साइटों पर संघर्ष क्षेत्र के खनिज पदार्थों के बारे में उचित जाँच-पड़ताल करने की नीति का उल्लेख करती हैं।
संयुक्त राज्य अमेरिका ने पहले से ही अगला तार्किक कदम उठाया है।&nbsp; प्रतिभूति और विनिमय आयोग अपेक्षा करता है कि जो कंपनियाँ अपने उत्पादों में टैंटलम, टिन, सोने या टंगस्टन का उपयोग करती हैं वे इन कच्चे मालों के उद्गम की जाँच करें, और यदि यह पाया जाता है कि उनका उद्गम किन्हीं संघर्ष-प्रभावित या उच्च जोखिम वाले क्षेत्रों में हुआ है तो ओईसीडी के दिशानिर्देशों के अनुसार अपनी आपूर्ति शृंखलाओं में जोखिम को कम करें।&nbsp; अफ्रीका के ग्रेट लेक्स क्षेत्र पर अंतर्राष्ट्रीय सम्मेलन के 12 सदस्य देशों ने इसी प्रकार की उचित जाँच-पड़ताल करने की अनिवार्य अपेक्षाओं को पूरा करने के लिए प्रतिबद्धता की है।
यह वैसा ही है जैसा कि होना चाहिए।&nbsp; जिम्मेदारीपूर्ण सोर्सिंग एक कर्तव्य है, विकल्प नहीं।&nbsp; और यहाँ पर, यूरोपीय संघ पिछड़ रहा है।&nbsp; मार्च में, यूरोपीय आयोग ने एक योजना का प्रस्ताव रखा जिसके तहत प्रकटीकरण स्वैच्छिक होना जारी रहेगा, जिसका अर्थ है कि यूरोपीय संघ में प्रवेश करनेवाले खनिजों पर अनिवार्य जाँचों की शर्त लागू नहीं होगी। इसके अलावा, प्रस्ताव कच्चे लौह अयस्क और धातुओं पर विशेष रूप से केंद्रित है, और इसमें मोबाइल फोन, वाहन, और चिकित्सा उपकरणों जैसे वे उत्पाद शामिल नहीं है जिनमें संबंधित खनिज होते हैं।
अब यूरोपीय संसद और यूरोपीय परिषद द्वारा प्रस्ताव की समीक्षा की जा रही है।&nbsp; यह महत्वपूर्ण है कि दोनों संस्थाएँ प्रकटीकरण और अनुपालन को अनिवार्य बनाकर और इसमें तैयार और अर्द्ध-तैयार उत्पादों को शामिल करके व्याप्ति में विस्तार करके यूरोपीय संघ की प्रतिक्रिया को मजबूत करने के लिए इस अवसर का लाभ उठाएँ।&nbsp; इन संसाधनों में व्यापार को बेहतर रूप से नियंत्रित करने मात्र से संघर्ष-प्रभावित क्षेत्रों में शांति नहीं आ पाएगी।&nbsp; लेकिन संघर्ष और मानव अधिकारों के दुरुपयोगों के लिए धन देना व्यवसाय करने की स्वीकार्य लागत नहीं है।
Confronting Fear
WASHINGTON, DC – Even as the squeeze in interbank lending has started to ease after the rescue of financial systems across the advanced countries, falling economic indicators have sent stock markets tumbling.
Pressures on emerging-market countries, which were once thought by many to have “decoupled” from the rest of the world, have intensified as foreign loans are called in and assets sold off.
With fear gripping consumers, companies, and countries worldwide, talk has turned from a moderate advanced-country recession to a major world depression.
A sense of despondency has set in that nothing can be done to stop it.
What is going on?
Were the measures taken two weeks ago to shore up the financial system simply wrong?
Absolutely not.
The provision of liquidity, the recapitalization of banks, more uniform deposit insurance across the advanced countries – these were all correct and necessary measures.
But they were only the first installment on what needs to be done.
In the advanced countries, the fall in asset values and, more generally, fear of what comes next has shattered consumer and business confidence.
Consumption is dropping, and companies are cutting investment.
The financial crisis has created a sharp fall in demand, what economists call a “Keynesian recession.”
To help confidence revive, there is no alternative but to use macroeconomic tools to boost demand and sustain output.
Monetary policy can be used in countries where interest rates remain high, but its effectiveness in a credit squeeze is likely to be limited.
Fiscal policy must, therefore, play a central role.
Fiscal expansion is always risky, as it adds to debt and raises dangers later.
But, given where we are, the benefits exceed the costs in countries with sustainable debt.
Emerging-market countries face an additional problem.
Not only must they contend with the prospect of falling exports and confidence; they also are the latest victims of a financial crisis that started in the United States, traveled to Europe, and now has swept across their borders.
Foreign banks are cutting credit. Foreign investors are repatriating their funds on an unprecedented scale.
Ironically, the measures being taken to resolve the crisis in advanced countries are making it more attractive to bring money home, making life harder for emerging-market countries.
In order to shore up their financial systems and overall demand, emerging-market countries must be ready to take actions similar to those pursued by the advanced countries.
But the recent prosperity of many of these countries has come from access to global capital.
A sudden stop to such flows is a severe blow and raises special challenges that cannot be solved by these countries alone.
So the advanced countries must be ready to provide the required financing, and to do so on an unprecedented scale.
The alternative is the prospect of widespread debt default, banking controls, and protectionism – an outcome that would set back these countries, and the global economy as a whole, for years to come.
The IMF has the wherewithal to commit up to $250 billion.
We have set in motion the internal procedures and facilities that will allow us to provide resources quickly, with conditions limited to the core crisis-policy response at hand.
In addition, the Fund is working on a new liquidity line to provide resources immediately to strongly performing emerging markets with sound policies and fundamentals.
This should give confidence to investors.
But, given the scale of capital flows, I am also urging the governments and central banks of the advanced countries to provide parallel financing to the IMF’s crisis-response programs.
I also am convinced of the need to find ways to bring into play the resources of countries with large reserves.
The Fund will play its part, but all these actions are needed to reinforce the credibility of the coordinated global response to the crisis.
We must also think ahead – especially in regard to low-income countries in Africa.
Because of their limited participation in international financial markets, these countries have, so far, been somewhat shielded from the storm.
But it is an uneasy calm that probably will not last.
Many low-income countries will suffer from the decline in commodity prices.
Others, including those that were becoming the new frontier in emerging markets, may see their access to foreign capital dry up.
They, too, will need help from the international community.
Lending by the IMF and global development banks, and the maintenance of donor aid at current levels, will be essential if we are to avoid new human tragedies.
The dynamics of fear are potentially catastrophic, but these dynamics can be broken.
Whatever the problems in the financial system, the massive improvements over the years in technology, productivity, and social progress – the real fundamentals – are a genuine testament to the power of globalization as a force for good.
It may be too late to avoid a recession in the advanced countries and a slowdown in emerging and low-income countries.
But it is not too late to avoid a global depression.
Confronting the Global Water Crisis
CAMBRIDGE – Around the world, demand for fresh water doubles every 20 years, owing to increasing population and affluence.
Yet pollution, climate change, and seawater intrusion are diminishing supplies of fresh water at similar rates.
So, is a global fresh water crisis looming?
Fortunately, the situation appears to be less alarming.
This is not to deny that the supply of fresh water is getting tight.
Left unattended, major disruptions for human society could occur.
Many argue that water is different from resources such as oil, because there are often no substitutes for water in most uses (particularly growing food).
Moreover, water is an essentially fixed resource, albeit one that renews itself every year.
There are prodigious quantities of water on the globe, but most of it is salty ocean water and brackish groundwater.
There are huge resources of fresh water, but most is in ice sheets and glaciers, with only a small percentage readily available where and when we need it.
The supply of water is also highly variable across regions and within countries, with floods and droughts occurring at irregular times.
One new factor influencing water supplies is rising global temperature.
Although we are not certain about the exact effects, many scientists believe that total annual precipitation will increase, but that its seasonality and the frequency of extremes may also increase.
This would make it difficult to use the existing supply infrastructure of dams, reservoirs, treatment systems, and pipelines without big modifications.
From the writings of the earliest modern commentators on the drivers of socio-economic growth and decline – Adam Smith, Edward Gibbon, Thomas Malthus, David Ricardo, and Karl Marx – we see that concern about exhausting resources is not new.
Malthus and Ricardo were particularly prescient about the roles of population, food, and energy resources.
Malthus postulated a geometric rate of population growth (like compound interest on a bank deposit) and an arithmetic rate of growth (simple interest on a bank account) of food production.
These curves always intersect after a couple of decades, and Malthus predicted widespread famine or violent conflicts: food and population would be aligned with each other by “misery, war, pestilence, and vice.”
Ricardo projected “declining returns” on investments in resources, whereby the best (least-cost) resources are used first, followed by the next best, and so on.
Increasing demand for resources leads to price increases that will continue until the resource becomes too expensive to use.
Of course, these constraints were at work over previous centuries, before Malthus and Ricardo articulated them, but homo sapiens was able to “cheat” by expanding our resource base (colonialism) to bring in cheaper resources and food; by finding substitutes for scarce resources; and by improving our technology so that the same amounts of land and resources could be used more efficiently.
Because the world is now pretty much filled up, there are few opportunities to expand the physical supply of resources.
The real question now facing the planet is whether we can continue improving our technologies or finding cheaper substitutes.
Just because something worked over the past 200 years does not mean that it will necessarily continue to work.
This is the crux of the problem facing global water resources.
But we can avoid a crisis by embracing the following technical and managerial adaptations:
&#160;- Trade virtual water – the amount of water that is embodied in producing a product (usually food) and shipping it somewhere else to be used.
This saves the recipient from using his own water, which can be saved for higher-value activities;
- Conserve irrigation water.
Because agriculture routinely accounts for 75-90% of all water consumed in a country, a 10% efficiency gain would save as much water as all the water used by the country’s municipalities and industry.
Another way of improving irrigation efficiency is by developing crops that produce more food with the same, or less, water.
Research on such genetically modified (GM) foods is well advanced in several of the largest water-scarce countries, such as China and India;
- Exploit advanced desalination.
Modern developments in desalination have brought the cost per unit of desalinated seawater to levels comparable to obtaining fresh water from natural sources (approximately US$0.05 per cubic meter).
- Expand wastewater recycling.
Urban areas typically dispose of about 85% of their fresh-water intake as wastewater, often in neighboring water bodies.
The wastes could be treated and used to replenish groundwater.
Emerging low-water-using sanitation technologies such as urine-separating dry-composting toilets could also significantly reduce urban water demands if properly developed;
- Develop creative pricing policies for urban water and wastewater.
Protecting human and ecosystem health are difficult to price, because they form part of the pervasive externalities associated with water use. Nevertheless, many water uses would respond well to more efficient prices.&#160;
Although avoiding a global water crisis will not be easy, we have at hand policies and technologies that, if properly applied, could see us safely through the next several decades, even in the face of increasing – and increasingly wealthy – populations.
Confronting the UN\u0027s Anti-Human Rights Lobby
UN High Commissioner for Human Rights, Mary Robinson is to be replaced by the Brazilian Sergio Vieira de Mello, a longtime UN diplomat, on September 12 th .
That transition will be a tricky one, because the governments that dominate the UN commission for human rights (CHR) are increasingly trying to protect themselves - and their allies - from any scrutiny or criticism.
During the last annual session of the CHR, held in Geneva last spring, the body voted one by one to ignore severe human rights violations in such places as Russia/Chechnya, Zimbabwe, Iran and Equatorial Guinea.
For several other violators - such as China, Algeria, Uzbekistan, Vietnam and Saudi Arabia - the CHR couldn't even muster the will to put their abuses on its agenda.
It also cut back on several country-specific monitoring mechanisms, compromising one of the most powerful of human rights tools, that of naming and shaming.
This is happening, in part, because countries with vile human rights records - Algeria, Burundi, China, Cuba, the Democratic Republic of Congo, Indonesia, Kenya, Libya, Malaysia, Saudi Arabia, Sudan, Syria, and Vietnam - command a powerful bloc within the CHR.
They compose a near majority on the fifty_three member body.
In 2003, Zimbabwe will joined them and, unless African countries reverse an earlier decision, Libya will chair this body for a year!
Such countries go out of their way to secure seats on the commission and then actively work to build alliances with pliable governments.
In addition, they have developed a number of clever procedural ploys to undermine the commission.
Their resolve to render the commission toothless is not matched by a balancing impulse on the part of the traditional promoters of human rights in the West.
To some extent, this is because - all rhetoric notwithstanding - human rights rank relatively low among these governments' priorities.
Trade often trumps human rights and governments, especially in Europe, are often loath to jeopardize lucrative contacts when governments that violate human rights retaliate at being criticized.
These tendencies have been compounded more recently by the war against terrorism.
Western democracies are unwilling to irritate important allies in the counter-terrorism struggle simply because they might be violating the rights of their own citizens.
During the past year, for the first time in its history, the US was not a member of the Commission (though it will be regaining its seat in 2003).
You might think that America's absence contributed to the CHR's sorry state as, in the past, the US was often principled and outspoken on some issues, in particular regarding certain specific abusive countries.
But you would be wrong.
Increasingly obsessed at the prospect of its own citizens and practices coming under international scrutiny, America has over the past few years contributed to the general erosion of the UN human rights monitoring system.
It adamantly opposed several important and promising new human rights initiatives, notably the International Criminal Court (ICC), and a new anti-torture mechanism.
On the anti-torture protocol, the US sought to derail the creation of a universal system of visits to places of detention, under an optional protocol to the Convention Against Torture.
Here America found itself allied with some strange bedfellows that it normally rebukes as chronic human rights violators - Cuba, China, Iran, Libya, Sudan or Zimbabwe.
Yet, without US support, the initiative was overwhelmingly endorsed in late July by the UN's Economic and Social Council.
Of course, not everything in the UN's human rights picture is uniformly bleak.
The International Criminal Court will be beginning its work soon, and with greater international support than expected, thanks to America's efforts to undermine it.
The universal system of visits to places of detention is gaining ground.
Even at the CHR, there has been some recent progress, for example, on work to establish "disappearances" as an international crime.
Here, countries with fresh memories of repressive rule, such as Latin American and East European nations, have increasingly taken the lead in promoting human rights initiatives and defending the principles. (Latin America, in particular, played a pivotal role in all the situations described above.)
All the same, manipulation by powerful countries and the foes of human rights have left the CHR in bad shape.
Vieira de Mello - who has had a distinguished career in the UN system and is a brilliant diplomat - must be willing and able to draw on his own region and on others to make sure that the UN human rights system serves the victims rather than the violators.
But he will also need to entice the West into becoming more pro-active and the US in particular into re-establishing its role as a constructive rather than destructive force in human rights affairs.
Confused by the Veil
On July 23 millions of Turks will wake up into a new, post-elections Turkey.
What will happen is hard to foresee.
Turkish politics is full of surprises that only foreigners find surprising .
Today, and this seems to surprise most people outside Turkey, it is women, not men, who are at the heart of political debate.
Indeed, in these elections the number of women candidates from all parties has visibly increased and so has female political overall activism.
This election is taking place because when the AKP party, the conservative party now in power, designated Foreign Minister Abdullah Gul as its candidate for president, the country’s secular elite cringed.
Gul was not the issue; the issue was his wife.
Had Gul been chosen as president, Turkey would have had its first headscarf wearing First Lady.
Gul’s wife’s headscarf was interpreted as the symbol of darker changes to come.
If the First Lady wears a headscarf, maintained the secular-minded elite, the whole secular system could be undermined.
What followed was unprecedented political turbulence, including mass demonstrations on a scale never seen before.
There was feverish talk of a possible military takeover, and the army again proved itself to be a seminal political actor.
Through all this, Turkish women were at the forefront. In particular, Turkey’s Westernized, modernized, secular women seemed determined to show their opposition to the existence of “the other” Turkish woman.
Gender issues have always been vital in the Turkish nation-state.
Kemalism (the beliefs associated with the founder of modern Turkey, Musfafa Kemal Atutűrk) is unique among all Muslim reform movements in that it transformed not only the public sphere, but also the private sphere – the domain of mothers, wives, sisters, daughters.
In the 1920’s and 1930’s – the years of Atutűrk’s rule &#45;&#45; the “new Turkish women” became the icon of the modern, secular regime.
The difference between what the French call laicité and secularism is more than a linguistic nuance for Turkey, which adopted its Kemalist system not long after France entrenched its secular republic.
Religious symbols and references have to a large extent been removed from the public sphere here, and religion is thought to be a private matter.
Many Turks who go to the US for the first time are puzzled, indeed, by its religiosity .
It comes as a surprise to see religious symbols and statements at the entrance of public buildings, on money, inside the courtroom.
But in Turkey the headscarf is not seen as a trivial symbol.
Eighty years after the republic’s founding the trouble with headscarved women is that they do not fit into the picture of the ideal modern Turkish woman.
At the first glance there seems to be a huge mental, cultural and political gap dividing Turkey’s women.
Yet if we look closer this gap becomes illusory.
In everyday life the two types of Turkish women are more mixed than they are usually assumed to be.
It is not uncommon for one sister to wear a headscarf while another does not, or a mother to wear a headscarf while her daughters do not.
Sometimes among two best friends, one is covered and one is not.
Any stroll along a crowded Istanbul street will show covered and uncovered women effortlessly &#45;&#45; almost naturally &#45;&#45; mixing.
Why then can’t a similar sisterhood be achieved in the realm of politics?
A recent opinion poll shows that around 60% of women in Turkey cover their heads outside their homes.
But does this mean 60% wear the veil?
Does it mean that they all support Islamic fundamentalism?
The answer to both questions is negative.
As a novelist, when writing in Turkish I can encounter more than eight different words to stand for the headscarf.
Yemeni, türban, eşarp, çarşaf,… Each is different.
Different women wear the headscarf for different reasons.
Some wear it out of habit or for traditional reasons rather than religious ones.
For others the motivation is political.
Not all women wear a headscarf because of religious conservatism.
And not all headscarved women are “ignorant” or “repressed.”
But this complexity is lost due to the concept of “the veil.”
If one makes no distinctions and disregards nuances one will end up believing that 60% Turkish women wear the veil.
The same poll, however, revealed that the percent of women who cover their heads fully and for more political than traditional reasons is no more than 11%.
Paying attention to nuances makes a huge difference– the difference between saying that 60% women wear the veil and saying that 11% do.
This complexity is lost not only on Western observers but also on Turkey’s elite.
Because ideological clashes here seem to center around women’s bodies and clothes perhaps it is time we stopped asking “how should an ideal Turkish woman look?” and start asking “should there be an ideal woman Turkish woman at all?” After all, pluralism is not only a political principle, it is one a free society applies to individuals – male and female – as well.
We in Turkey have been tackling the question of whether Islam can coexist with Western democracy for more than 150 years.
After150 years of Westernization and modernization, the answer we have come up with is a definite “yes.”
Turkey is a complicated country, with multiple dilemmas.
Its women both heal and intensify its tensions.
Congo’s Infinite War
HARARE – Some time ago, the head of the United Nations refugee agency, Antonio Guterres, said of the Democratic Republic of Congo: “Nobody in the outside world feels threatened, and so the international community is not really paying attention.”
Not anymore: currently, Congo’s eastern province of North Kivu is in the headlines almost every day.
Last August, fighting to the north of the provincial capital Goma flared up again, provoking a major humanitarian crisis that has no end in sight.
Like the eight-year civil war (in what was then known as Zaire) that nominally ended in 2002, the current fighting involves many different local groups: not only the Congolese government forces, which oppose the insurgents loyal to the Tutsi General Laurent Nkunda, but also the Rwandan Hutu rebels who were responsible for the genocide in Rwanda in the 1990’s and a jungle force known as the “Mai-Mai” militias.
As always, the main victims are civilians caught in the crossfire.
The renewed fighting, coming eight months after a promising peace initiative known as the “Goma Agreement,” means more civilian deaths and little chance of normality returning to the eastern part of Congo.
Yet, even at times when fighting is less intense Congo suffers from the indirect effects of the war.
A mortality survey conducted by the International Rescue Committee (IRC) and released earlier this year demonstrates that this conflict is the world’s most deadly crisis since World War II: an estimated 5.4 million people have died as a consequence of the war and its lingering effects in the last decade.
Today, a quarter of a million people are on the run, almost half of them on territory under rebel control and with almost no access to aid.
They need food and shelter, clean water and latrines, medical care, and education.
Women and girls need protection from sexual violence, which flares up when families are forcibly displaced.
It may sound strange, but from the point of view of a humanitarian relief agency, it is not important on whose territory civilians in need are, as long as there is access to them.
Aid workers who have been in the country for a dozen years, especially from groups like my own IRC, must work with all parties to the conflict because civilians in need are everywhere.
But aid agencies need access.
The UN peacekeeping force in Congo, MONUC, has a mandate from the Security Council for full intervention in order to provide protection to the civilian population.
So when aid workers are stopped at gunpoint and cannot talk their way through, humanitarian agencies naturally turn to MONUC to guarantee access.
Humanitarian workers are not military strategists, so they cannot judge what kind and what size of deployment of peacekeepers is adequate.
But the aid agencies that work on the ground have first-hand experience of the impact of peacekeepers’ presence, and we have the authority to say that protection of aid workers can be dangerously inadequate.
Indeed, at the height of the fighting for control of the northern town of Rutshuru last October, the IRC teams that were stationed there decided to evacuate temporarily because the risk was simply too great.
Together with other aid agencies, IRC staff formed a convoy and MONUC offered armed vehicles to protect it.
But when armed men stopped the convoy on the road, the Uruguayan peacekeepers from MONUC simply turned around and vanished, leaving the aid workers to their fate.
What followed were many hours of harassment, humiliation, threats with live hand grenades, shots fired at the feet of one of our colleagues, and looting and ransacking of the IRC premises.
Finally, another group of MONUC peacekeepers – this time from India – came to the rescue and helped evacuate the aid workers on helicopters.
Protecting the humanitarian effort now underway is essential to the sheer physical survival of the Congolese displaced in North Kivu, but the only lasting solution is a ceasefire followed by a peace treaty, possibly along the lines of the “Goma agreement.”
Paradoxically, the current fighting and the masses of displaced persons that it produced have helped to draw attention to the crisis.
This moment must be seized not only to beef up MONUC, but, more importantly, to use all existing leverage with the combatants and the governments that back them to get all the parties to return to the negotiating table.
The televised tragedy, and the shortcomings that can be observed close up, can and must be stopped, lest – as often happens with Congo – the crisis disappears from the front pages, while the killing continues unseen.
नई स्वास्थ्य देखभाल निरंतरता
डावोस - पिछले कुछ दशकों में स्वास्थ्य देखभाल उद्योग में नाटकीय रूप से बदलाव आया है। अनुसंधान और विकास ने हमें आश्चर्यजनक नए उपचार, शक्तिशाली निदान, और तेजी से बढ़ रहा अपार ज्ञान दिया है। मेडिकल विशेषज्ञताओं और प्रदाताओं में भारी वृद्धि हुई है। सरकारें और बीमा कंपनियां शक्तिशाली खिलाड़ी बन गई हैं। और रोगी मुखर और सक्रिय उपभोक्ता बन गया है, वह बेहतर विकल्पों की खोज करने के लिए तैयार है, भले ही इसका मतलब विदेश जाना ही क्यों न हो।
लेकिन, स्वास्थ्य देखभाल अधिक प्रभावी तो बन गई है, पर यह अधिक जटिल और महंगी भी हो गई है। आबादियों के बढ़ने और उनकी उम्र बढ़ने से स्वास्थ्य देखभाल प्रणालियों पर बहुत दबाव पड़ रहा है, जो पहले से ही कैंसर और मधुमेह जैसी पुरानी बीमारियों के बोझ से दबी हुई हैं। चिकित्सा संस्थान का अनुमान है कि अकेले संयुक्त राज्य अमेरिका में, प्रति वर्ष लगभग $750 बिलियन – कुल स्वास्थ्य देखभाल के खर्च का लगभग 30% – “अनावश्यक सेवाओं, अत्यधिक प्रशासनिक लागतों, धोखाधड़ी और अन्य समस्याओं पर बर्बाद हो जाता है।” यदि हम यह सुनिश्चित करना चाहते हैं कि भविष्य की पीढ़ियों के लिए स्वास्थ्य देखभाल सस्ती और व्यापक रूप से उपलब्ध हो, तो हमें इस बारे में मौलिक रूप से पुनर्विचार करना होगा कि हम किस तरह इसे प्रदान करें और इसका प्रबंधन करें।
यह महत्वपूर्ण है कि स्वास्थ्य देखभाल को संबद्धता की जरूरत है। चिकित्सा पेशेवरों के लिए दुनिया भर के सहयोगियों के साथ प्रासंगिक डेटा साझा करना सहज हो जाना चाहिए। अस्पतालों में चिकित्सा उपकरणों और प्रणालियों को जानकारी के विभिन्न स्रोतों को आपस में जोड़ने में सक्षम होना चाहिए। उपभोक्ता प्रौद्योगिकी के नए उत्पाद,जैसे शरीर पर पहनने योग्य स्वास्थ्य सेंसर, संभावित चिकित्सा समस्याओं के गंभीर रूप धारण करने से पहले ही चिकित्सकों को उनके बारे में स्वचालित रूप से सतर्क कर सकते हैं। यद्यपि ऐसे नवोन्मेषों के सामने प्रणाली अंतरसंक्रियता और रोगियों की गोपनीयता की रक्षा करने की जरूरत जैसी चुनौतियां होंगी, परंतु यात्रा और बैंकिंग उद्योगों में इंटरनेट के एकीकरण से यह पता चलता है कि क्या कुछ संभव है।
दरअसल, संबद्ध स्वास्थ्य देखभाल पहले से ही हकीकत बनती जा रही है। उदाहरण के लिए, फिलिप्स ने एक ऐसी प्रौद्योगिकी विकसित की है जिससे चिकित्सक प्रोस्टेट कैंसर बायोप्सी से प्राप्त चिकित्सा डेटा को दुनिया भर के सहयोगियों के साथ साझा कर सकते हैं। इससे पहले, बायोप्सी को केवल भौतिक रूप से साझा किया जा सकता था, जिससे प्रोस्टेट कैंसर के सही प्रकार का निदान कर पाना मुश्किल होता था। परिणामस्वरूप, अधिक सुरक्षित रहने के लिए संभवतः सर्जनों और रोगियों ने इनवेसिव सर्जरी का चुनाव किया होगा। अब, दुनिया भर में डॉक्टरों की टीमों के पास एक अतिरिक्त साधन है जिससे वे अलग-अलग रोगियों के लिए अधिक सटीक निदान और उपचार योजनाओं पर एक साथ काम करने में सक्षम होते हैं।
अब पूरा रोगी अनुभव बदल जाएगा क्योंकि बेहतर रोकथाम, शीघ्र निदान, अस्पताल में कम समय के लिए रहना, और लंबे समय तक आत्मनिर्भर बने रहना सामान्य बात हो जाएगी। यदि रोगी अस्पताल में व���पस आते हैं, तो वे अपने महत्वपूर्ण लक्षणों के विकास के बारे में, पहनने योग्य उपकरणों द्वारा प्राप्त किए गए उपयोगी डेटा अपने साथ लाएंगे। वे अपने उपचार के बारे में हो रही प्रगति को खुद ही ट्रैक करते रह सकते हैं, और उनके डेटा को मेडिकल रिकॉर्ड के साथ एकीकृत किया जा सकता है ताकि उनके स्वास्थ्य के बारे में दीर्घकालीन दृष्टिकोण की जानकारी मिल सके, न कि चिकित्सक के पास विज़िट करने के दिन सरसरी तौर पर प्रदान की जानेवाली प्रासंगिक जानकारी। चौबीसों घंटे पेशेवर प्रशिक्षण और सहायता तक पहुंच मिलने के कारण, रोगी अपनी स्वयं की शारीरिक स्वस्थता का प्रबंध करने के लिए और अधिक सशक्त महसूस करेंगे।
संबद्ध स्वास्थ्य देखभाल से भी, विशेष रूप से विकासशील देशों और ग्रामीण क्षेत्रों में, और अधिक लोगों को जीवन-रक्षक उपचार तक पहुंच उपलब्ध हो सकती है। दुनिया में सबसे अधिक शिशु मृत्यु दर वाले देश इंडोनेशिया में, मेडन के ग्रामीण क्षेत्र में दाइयां एक मोबाइल अनुप्रयोग का उपयोग करके गर्भवती महिलाओं से चिकित्सा डेटा इकट्ठा करती हैं। डेटा का विश्लेषण प्रसूति और स्त्रीरोग विशेषज्ञों द्वारा कहीं और किया जाता है, जिससे बीमारी के उच्च जोखिम वाली महिलाओं की पहचान करके उनका इलाज जल्दी किया जा सकता है। युगांडा में, ग्राम स्वास्थ्य केंद्रों में दाइयां दूरदराज के विशेषज्ञों को संपीडित अल्ट्रासाउंड स्कैन भेजती हैं, जिनकी संख्या किसी कुशल स्वास्थ्य कार्यकर्ता द्वारा डिलीवर किए जा सकने वाले नवजात शिशुओं की संख्या से लगभग दोगुनी होती है।
अधिक मोटे तौर पर, संबद्ध स्वास्थ्य प्रौद्योगिकी के फलस्वरूप पेशेवर स्वास्थ्य देखभाल और उपभोक्ता बाजार को एकीकृत किया जा सकेगा। यह एक निरंतरता पैदा करेगा जो स्वस्थ रहने और रोकथाम पर ध्यान केंद्रित करने के साथ शुरू होती है, उपभोक्ताओं को अपने स्वयं के स्वास्थ्य पर अपना नियंत्रण रखने के लिए सशक्त बनाती है, और देशों को अपने नागरिकों के समग्र स्वास्थ्य को बेहतर बनाने के लिए सक्षम बनाती है। यह निरंतरता फिर आगे बढ़कर ऐसे निश्चित निदानों और न्यूनतम इनवेसिव उपचारों की ओर जाएगी, जो गुणवत्ता और लागत के लिए अनुकूलित होंगे, और अंततः यह स्वास्थ्यलाभ और घरेलू देखभाल की ओर जाएगी, इस प्रकार चिकित्सा देखभाल जितना जल्दी संभव हो सकेगा अधिक सुविधाजनक और किफायती अस्पताल से इतर सेटिंग्स के रूप में स्थानांतरित हो जाएगी।
सरकारों, बीमा कंपनियों, चिकित्सा पेशेवरों, रोगियों, और देखभालकर्ताओं को मिलकर काम करने की जरूरत है ताकि यह सुनिश्चित हो सके कि स्वास्थ्य निरंतरता में इस बदलाव को अच्छी तरह से प्रबंधित किया जाता है, ताकि पहुँच का विस्तार किया जा सके, परिणामों में सुधार किया जा सके, और उत्पादकता को बढ़ाया जा सके। साथ में मिलकर, हमारे पास अरबों लोगों के जीवन में सुधार लाने, अधिक स्वस्थ समाज तैयार करने, लागतों में बचत करने, और आर्थिक विकास को बढ़ावा देने के लिए अवसर है।
Connecting the Solutions
WASHINGTON, DC – The world does not need to be reminded of the urgency of this historical moment.
We sense it every day in the news.
One day a major bank, insurance company, or automaker announces a record loss. The next brings word about the impact on nations and peoples least able to cope with these blows – the poorest of the world’s poor.
During the last two years, I have dealt with many crises, from Darfur and the Democratic Republic of Congo to such global challenges as the food crisis and climate change.
But the financial crisis is unique and potentially overwhelming.
What was a purely financial crisis has become an economic crisis, spreading across the globe.
Every projection of growth has been revised downward.
And while there are signs that mature economies are recovering from the panic that froze credit markets, we are by no means beyond the danger zone.
My greatest concern is that today’s financial crisis evolves into tomorrow’s human crisis.
We need to recognize what Martin Luther King, Jr. called the “fierce urgency of now” if we are to safeguard millions of people’s livelihoods and hopes for the future.
Many financial experts have diagnosed the causes of the crisis.
Policymakers have offered prescriptions for solving it.
We hear talk of new banking regulations and even of a new global financial architecture.
All this is desirable.
Yet, while I welcome this debate and fully recognize the need for long-term measures, I am acutely conscious of time.
Immediate problems require immediate responses.
Nor can we allow the financial crisis to become a reason for neglecting other critical issues: unacceptable levels of poverty and hunger, the food crisis, climate change.
For that will only exacerbate the already fragile political and security situation in many of the hardest hit countries.
At the G-20 financial summit in Washington this weekend, I delivered four messages reflecting my conversations with various UN member states.
First, we need a global stimulus package to turn this crisis around.
The IMF recently projected that virtually all global growth in 2009 will come from emerging and developing economies.
Large increases in public and private expenditures will therefore be required in many regions of the world to counteract falling demand.
Second, these financial rescue and assistance packages cannot stop at the borders of the richest countries.
Emerging markets and other developing countries will need oxygen in the form of credit lines and trade financing.
And we must stand against protectionism. Without open trade, growth and development could break down entirely.
Third, some part of our global stimulus should come from commitments that the international community has made on aid.
In today’s environment, fulfilling the Millennium Development Goals (MDGs) is more than a moral imperative. It is a matter of pragmatic economic necessity.
Finally, inclusivity must be our watch-word.
In our interdependent world, these tasks can be met only through reinvigorated multilateralism – one that is fair, flexible and responsive, with leaders coming from all quarters.
While the G-20 nations whose leaders met in Washington account for nearly 80% of world production, trade and investment, more than 170 other countries, representing one-third of the world’s people, were not there.
It is our responsibility to listen to their voices and respond to their concerns.
The next few months will be crucial.
Many of us will meet again in two weeks in Doha to review progress on financing for development.
Six years ago, President George W. Bush and other leaders adopted the ambitious goals that constitute the core of the MDGs.
History will judge us harshly if we fail to live up to these commitments.
I therefore urge all nations, rich and poor, to send their highest-level representatives to Doha with full determination to do what must be done.
In December, our climate change negotiators meet in Poland.
We have one year until they meet in Copenhagen – one year to reach an agreement that all nations can embrace.
The sooner we have such an agreement in place, the sooner we will see the green investments and green growth we so badly need.
The great challenges before us are interrelated: the global economy, climate change, and development.
We need solutions to each that are solutions to all.
Connectivity for All
NEW YORK – It is not every day that one gets to join two global powerhouses to promote a planetary breakthrough, but that is the reality with Connect to Learn (www.connecttolearn.org), a new worldwide initiative to ensure that all children on the planet can attain at least a secondary education.
The telecommunications giant Ericsson and the pop singer Madonna are teaming up to get kids into school and connected worldwide through wireless broadband.
My colleagues and I at the Earth Institute and the Millennium Promise Alliance are joining the effort.
The stakes could not be higher – or the prospects more exciting.
The information-and-communications-technology (ICT) revolution is surely the most powerful single force for economic development in the world today.
It is not just in New York, Shanghai, or Paris that one finds a mobile telephone in the hands of each passerby.
These days, one finds mobile phones in Nairobi taxis and among camel-herders in Northern Kenya.
There are now 4.6 billion mobile subscribers, and the numbers are soaring.
An estimated 250 million subscribers live in Sub-Saharan Africa alone.
The spread of 3G (and soon 4G) offers the prospect of a technological breakthrough in education.
Suddenly, even remote schools can connect to the Internet and to other schools through a solar panel, low-cost computers, and wireless access.
A school that lacked even rudimentary supplies suddenly can have access to the same global store of information as any other place in the world.
When it happens, the results are galvanizing.
Within minutes of going online in a pastoralist community in northeast Kenya, kids were reading about their own community as part of the Africa-wide Millennium Villages Project.
Communities that had little school attendance have seen kids stream in as low-cost interventions, starting with Internet connectivity, in-school meals, and a safe water supply, lead to a surge in schools’ quality, performance, and attractiveness to students and parents.
With modest up-front financing, impoverished and traditional rural communities that had not considered educating girls suddenly see the immense value to the community of educating both boys and girls.
In a Millennium Village in Ethiopia that I recently visited with the country’s health minister, a local father explained to me how he had decided to keep his daughter in school rather than marrying her at age 12 to a neighbor’s son. “I asked my daughter what she wanted to do,” the father explained, “and she told me that she wants to stay in school, so she is continuing in school.”
The health minister turned to me and said that he had never before heard such a conversation in that region: that the father would not only ask the daughter, but happily heed her decision!
We are seeing such rapid changes throughout Africa.
Impoverished communities are cheering the prospect of a rapid ramp-up in girls’ education, if meager resources permit.
On a sunny day in Malawi recently, Madonna and the CEO of Ericsson, Hans Vestberg, attended the groundbreaking for a new girls’ school and launched the new global education initiative.
On the horizon in two directions, spaced at around four kilometers, were the mobile towers to connect the new school with the world.
The promise was not lost on the national government.
The education minister committed to scale up education nationally as rapidly as resources would permit.
Universal secondary education, especially for girls, is transformative for societies attempting to escape poverty, because education changes the demographic dynamics of the country as well.
In the poorest parts of the world where girls are still not in secondary school, they are married at a young age and have 6-8 children on average.
Those who stay in school end up marrying much later, perhaps in their early to mid-twenties, entering the workforce, and having 2-3 children.
The interplay of voluntary fertility reduction and declining poverty are profound and rapid.
When poor families have fewer children, they can afford to invest more per child in health, nutrition, and schooling.
Mothers can spend more time in the job market, breaking long-standing barriers of gender inequality.
Reduced population growth means less pressure on land, water, and biodiversity.
In short, the links between education and reduced fertility, faster economic development, and lower environmental degradation are too powerful and obvious to be ignored.
Connecting kids around the world in shared on-line curricula, and facilitating “social networks” of kids around the world at an early age, will yield far-reaching educational benefits.
At a recent launch of a “school-to-school” link connecting an elementary school in the United States with one in Kenya, young children across an 8,000-mile divide shared a “read-aloud,” and then reflected in amazement and delight that they could share a story with kids in another part of the world.
The Teachers College at Columbia University will watch the school-to-school process carefully, with formal monitoring methods, to assess the value of school experiences in terms of expanded cognitive and ethical learning.
Current estimates suggest that around 300 million school-age children worldwide are deprived of the chance to complete secondary school, largely for economic reasons.
That deficit, which threatens the futures of these kids and their societies, can now be closed at low cost.
A Global Fund for Education, combined with a global voluntary effort to connect kids around the world, offers the chance for a breakthrough that was not realistic even a few years ago.
Such initiatives are another dramatic example of a basic truth of our time: extreme poverty, illiteracy, and death from preventable diseases are anachronistic scourges when we have the technologies and global goodwill to end them.
Conquering Europe’s Debt Mountain
BERLIN – The International Monetary Fund estimates that the crisis-induced net cost of financial-sector support provided by G-20 countries in 2009 amounted to 1.7% of GDP ($905 billion), while discretionary fiscal stimulus amounted to 2% of GDP in both 2009 and 2010.
All the eurozone countries, except Luxembourg and Finland, reported fiscal deficits in excess of 3% of GDP in 2009, while Greece, Spain, and Ireland ran deficits of more than 10%.
Within a single year, eurozone governments’ general debt increased by almost 10 percentage points (78.7% of GDP in 2009, compared with 69.3% in 2008).
As for Germany, the 2010 federal budget features a record-high deficit of well above €50 billion.
Public-sector debt will surpass €1.7 trillion, approaching 80% of GDP.
Interest payments, which consume more than 10% of Germany’s federal budget, will grow along with the mounting debt burden – and even faster if interest rates rise.
Yet the financial crisis and the ensuing recession go only so far towards explaining these high levels of indebtedness.
The truth is that many European and G-20 countries have lived far beyond their means – including Germany, despite its reputation as a paragon of fiscal rectitude.
Even in good times, governments have for too long been spending more than they received.
Perhaps worse, some also spent more than they could easily repay, given their economies’ declining long-term growth potential because of the aging of their populations.
Such profligacy has led to levels of debt that will become unsustainable if we do not act.
This is why Germany decided in 2009 to enshrine strict fiscal rules in its constitution.
The Schuldenbremse, or “debt brake,” requires the federal government to run a structural deficit of no more than 0.35% of GDP by 2016, while Germany’s Länder will be banned from running structural deficits at all as of 2020.
The current federal government will certainly abide by these rules, which implies reducing the structural deficit to approximately €10 billion by 2016 – a reduction of about €7 billion a year.
Welfare benefits account for more than half of Germany’s federal spending this year.
So there is little choice but to cut welfare spending, at least moderately.
But this sort of fiscal consolidation can be achieved only if a majority perceives it as being socially equitable.
Recipients of social and corporate welfare alike, as well as civil servants, must share the sacrifice.
Thus, German corporations will have to contribute to fiscal consolidation through reductions in subsidies and additional taxes on major energy companies, airlines, and financial institutions.
Similarly, civil servants must forego promised pay increases, and the government is looking for annual savings in the federal armed forces of up to €3 billion through structural reforms.
Germany’s binding fiscal rules set a positive example for other eurozone countries.
But all eurozone governments need to demonstrate their own commitment to fiscal consolidation in order to restore the confidence of markets – and of their own citizens.
Recent studies show that once a government’s debt burden reaches a threshold perceived to be unsustainable, more debt will only stunt, not stimulate, economic growth.
Greece’s debt crisis was a clear warning that European policymakers must not allow public debt to pile up indefinitely.
The EU was right to react decisively to ensure the euro’s stability by providing short-term assistance to Greece and establishing the European Financial Stabilization Mechanism.
But, while the EFSF is a necessary step towards restoring confidence, the Greek crisis has revealed structural weaknesses of the European Monetary Union’s fiscal-policy framework that cannot, and should not, be fixed by routinely throwing other countries’ money at the problem.
Indeed, I consider the EFSF to be a stopgap measure while we remedy the fundamental shortcomings of the Stability and Growth Pact, whose fiscal rules lack both substantive and formal bite.
This is why we need a more effective crisis-prevention and crisis-resolution framework for the eurozone, one that strengthens the Pact’s preventive and corrective provisions.
Sanctions for eurozone countries that seriously infringe EMU rules should take effect more quickly and with less political discretion, and also should be tougher.
Germany and France have proposed stricter rules on borrowing and spending, backed by tough, semi-automatic sanctions for governments that do not comply.
Countries that repeatedly ignore recommendations for reducing excessive deficits, and those that manipulate official statistics, should have their EU funds frozen and their voting rights suspended.
Monetary union was intended to be neither a panacea for eurozone members nor a get-rich scheme for financial speculators.
Nor was it meant to be a system of redistribution from richer to poorer countries via cheaper borrowing for governments by means of common Eurobonds or outright fiscal transfers.
It won’t succeed if some countries persistently run deficits and weaken their competitiveness at the expense of the euro’s stability.
EMU was designed to encourage structural reforms.
Profligate members were supposed to be forced by the Stability and Growth Pact, as well as by their peers, to live within their means and thus strengthen their competiveness.
Instead, Germany’s former social-democratic government weakened the pact when doing so was politically convenient, while less competitive eurozone members allowed wages to rise and the public sector to become bloated, and then looked away as easy credit fueled both debt and asset bubbles.
We cannot foster sustainable growth or preempt a sovereign-debt crisis in Europe (or anywhere else) by piling-up more debt.
European countries need to reduce their deficits in a growth-friendly fashion, but reduce them they must.
It can be done: Germany is reducing its debt burden to sustainable levels while strengthening its long-term growth prospects.
Its course of pro-growth deficit reduction, together with its suggestions for strengthening Europe’s fiscal framework, could serve as a blueprint for European economic governance.
Consequences of the Iraq War
The Iraq war's main consequences will not be on the battlefield.
They will come later, and will depend on whether George Bush and Tony Blair can justify their onslaught on a largely defenseless population.
They launched this war for certain declared reasons, all of which were heatedly debated around the world.
If they are vindicated, then the war could conceivably bring a safer world.
If their arguments remain unproved or are disproved, then the war will incite instability.
In that case, a critical step towards healing the world would be their quick departure from office.
The Iraq War was not and could not be justified on the basis that Saddam Hussein was a tyrant.
Justification, if it exists, rests on the danger Saddam's regime posed.
Bush and Blair made four claims:
Iraq possesses weapons of mass destruction;
those weapons pose a grave, immediate threat;
UN inspections were not eliminating that threat;
the threat could best be eliminated by war.
The first claim should be the easiest to verify.
Bush and Blair talked repeatedly about stockpiles of weapons of mass destruction, massive underground and mobile units to produce or launch such weapons, and active programs to obtain nuclear weapons.
It is incumbent upon Bush and Blair to prove their case, and to prove it in the face of worldwide suspicion that the US and UK security agencies might plant phony evidence.
For this reason, independent UN experts should assess any evidence that is uncovered.
If no evidence of such weapons is produced, then both Bush and Blair deserve to be finished politically, no matter what else happens in Iraq.
The second claim will be trickier to prove.
Bush and Blair must show that any weapons of mass destruction that are recovered posed a grave and urgent threat.
We know that Iraq at one time possessed chemical and biological weapons, because the US sold them to Iraq.
The test is not whether traces of those weapons remain, as such traces will be found at disposal sites, but whether those weapons were poised for use in threatening amounts.
If the Iraqis launch an attack with such weapons, this would demonstrate that the weapons were ready for use.
Whether they posed any real threat outside Iraq's borders, or would have been used in the absence of the current war, must still be assessed.
The third claim is hugely contentious.
Bush and Blair should demonstrate that the UN inspection process was failing.
This can be done by showing that the Iraqis were simply hiding the evidence at sites visited by the inspectors and declared free of weapons.
There should be a systematic review of sites that were visited.
There should also be an explanation, if weapons of mass destruction are uncovered at other sites, as to why the inspectors could not have found such weapons in a realistic period of time.
The fourth claim will be subject to wild propaganda on both sides.
Was the war justified in terms of costs and benefits, and was war really the last resort?
This will depend on an objective assessment of the costs of the war in terms of loss of life, destruction of property, economic impact within Iraq, spillovers into other forms of violence such as terrorism, and geopolitical consequences.
To date, Bush and Blair have failed to make the case to the world, with the partial exception of their own countries.
The American people have been treated to a spectacle of jingoism, fear mongering, confusion of Iraq with Osama bin Laden's terrorists, and simple patriotism.
None of this swayed the rest of the world, which views the war with disdain and alarm.
This would change if evidence on the four points is mustered.
When the 13 British colonies in North America launched their own War of Independence, Thomas Jefferson understood that "the decent respect to the opinions of mankind" required an explanation for that war, which he set forth in the Declaration of Independence.
Such an explanation, backed by rigorous evidence, is no less necessary today.
If the arguments for war are not proved, the consequences will be profound.
Propaganda, streets lined with cheering Iraqis, amazement over the prowess of US smart bombs, would not distract us from an awful truth-that Bush and Blair shattered world peace, engaged in massive premeditated killing, and did so against overwhelming global opinion.
Healing today's divided world could start only with fresh political leadership in both the US and UK, and a strong assertion of UN authority.
Given the terrible costs, I hope that this war will prove justified, though I have my doubts based on the current evidence.
If compelling evidence proves that weapons of mass destruction were at hand; that they were poised for use on a threatening scale; that the UN inspectors had poor prospects of uncovering and dismantling those weapons, then we must acknowledge the arguments made by Bush and Blair.
Even in those circumstances, war might well have been unwise compared to a policy of containment.
Still, the war would then at least make some sense.
The horrors of a senseless war are almost too frightening to contemplate.
Conservative Interventionism
BERKELEY – At this stage in the worldwide fight against depression, it is useful to stop and consider just how conservative the policies implemented by the world’s central banks, treasuries, and government budget offices have been.
Almost everything that they have done – spending increases, tax cuts, bank recapitalization, purchases of risky assets, open-market operations, and other money-supply expansions – has followed a policy path that is nearly 200 years old, dating back to the earliest days of the Industrial Revolution, and thus to the first stirrings of the business cycle.
The place to start is 1825, when panicked investors wanted their money invested in safe cash rather than risky enterprises.
Robert Banks Jenkinson, Second Earl of Liverpool and First Lord of the Treasury for King George IV, begged Cornelius Buller, Governor of the Bank of England, to act to prevent financial-asset prices from collapsing. “We believe in a market economy,” Lord Liverpool’s reasoning went, “but not when the prices a market economy produces lead to mass unemployment on the streets of London, Bristol, Liverpool, and Manchester.”
The Bank of England acted: it intervened in the market and bought bonds for cash, pushing up the prices of financial assets and expanding the money supply.
It loaned on little collateral to shaky banks.
It announced its intention to stabilize the market – and that bearish speculators should beware.
Ever since, whenever governments largely stepped back and let financial markets work their way out of a panic out by themselves – 1873 and 1929 in the United States come to mind – things turned out badly.
But whenever government stepped in or deputized a private investment bank to support the market, things appear to have gone far less badly.
For example, the US government essentially authorized J.P. Morgan to act as the country’s central bank in the aftermath of the 1893 and 1907 panics, created the Resolution Trust Corporation at the start of the 1990’s, and, together with the IMF, intervened to support Mexico in 1995 and the East Asian economies in 1997-98.
At the very least, few modern governments are now willing to let financial market heal themselves.
To do so would be a truly radical step indeed.
The Obama administration and other central bankers and fiscal authorities around the globe are thus, in a sense, acting very conservatively, even as they embrace deficit-spending programs, boost the volume of government bonds, guarantee risky private debt, and buy up auto companies.
I understand what they are trying to do, and I am somewhat reluctant to second-guess them. They are all doing their absolute best, and I know that if I were in any of their shoes I would be making bigger mistakes than they are – different mistakes, probably, but bigger ones for sure.
Nevertheless, I do have one big question.
The US government especially, but other governments as well, have gotten themselves deeply involved in industrial and financial policy during this crisis.
They have done this without constructing technocratic institutions like the 1930’s Reconstruction Finance Corporation and the 1990’s RTC, which played major roles in allowing earlier episodes of extraordinary government intervention into the industrial and financial guts of the economy to turn out relatively well, without an overwhelming degree of corruption and rent seeking.
The discretionary power of executives, in past crises, was curbed by new interventionist institutions constructed on the fly by legislative action.
That is how America’s founders, such as James Madison and Alexander Hamilton, envisioned that things would work.
They were suspicious of executive power, and thought that the president should have rather less discretionary power than the various King Georges of the time.
Yet, today’s crisis has not led to the establishment of such financial institutions.
So I wonder: why didn’t the US Congress follow the RFC/RTC model when authorizing George W. Bush’s and Barack Obama’s industrial and financial policies?
Why haven’t the technocratic institutions that we do have, like the IMF, been given a broader role in this crisis?
And what can we do to rebuild international financial-management institutions on the fly to make them the best possible?
Conservatives for Obama
SAN FRANCISCO &#45;&#45; John McCain, the likely Republican presidential nominee for president, likes to say that he was a “foot soldier” in the Reagan Revolution.
So was I, working out of the Hoover Institution at Stanford University.
But, unlike McCain, a good man and a true American hero, I don’t intend to vote Republican this November.
I am voting for Barack Obama.
Meritocracy is at the core of American conservative beliefs.
So let’s face it: George W. Bush has been the worst US president in memory.
His administration has been inept, corrupt, and without accomplishment.
After this performance, why give the Republicans another turn at the helm?
Let’s give the other party a chance, even if its policies are not exactly what conservatives may like.
In America, we call it “throwing the bums out.”
When meritocracy is downgraded, as it has been during the Bush years, bad things happen.
Worst of all, racism has flourished, because productivity and social utility have become less effective in protecting targets of discrimination.
Nowhere is this better illustrated than in America’s current debate over illegal immigration.
It is not so much the illegality of their entrance into the US that riles many conservative Republicans; it’s the migrants themselves, especially Hispanics who can’t speak English.
Never mind that Hispanic migrants are among the hardest-working people in the US.
It is a bitter irony that John McCain, the war hero, is considered a traitor by the conservative wing of his party because he has a compassionate attitude towards undocumented immigrants.
Sadly, the Republican Party has been hijacked during the Bush years by sloganeers using code phrases like “illegal immigration” and “protecting the middle class” to mask their racism, and “economic incentive effects” to justify tax policies that are blatantly tilted to the rich.
Responding to this politics of hate, Obama likes to call himself a “hope monger,” not a “hate monger.”
It’s a great line and it applies.
Hope always sells well in America.
Reagan understood that, and it is one of the reasons he was a great and beloved president, even if some of his policies were flawed.
As Hillary Clinton, Obama’s rapidly fading rival for the Democratic nomination is finding out to her dismay, policies can be an overrated commodity in presidential elections that really matter.
The hope that Obama is holding out for Americans is one of reconciliation – racial, political, between the wealthy and the poor, and between America and its allies.
This is powerful stuff, and dwarfs the narrow technocratic instincts of Mrs. Clinton, whose schoolgirl approach to the campaign has justly earned her defeat after defeat in the primaries.
Just as Reagan had his “Reagan Democrats” who were attracted by his message of hope after the malaise of the Jimmy Carter years, Obama will have his “Obama Republicans,” attracted by the hope of national reconciliation and healing.
Non-Americans must understand that there is yet another revolution brewing in the US, and that Senators Clinton and McCain are both likely to be swept away by it.
When conservative Republicans support liberal Democrats (Obama has been rated the most liberal member of the US Senate), “the times they are a-changin’,” as Bob Dylan wrote 45 years ago.
Moreover, a crucial difference today is that the generational conflict that so characterized the 1960’s – “Your sons and your daughters are beyond your command,” as Dylan put it – is absent.
The young may be taking the lead – what Obama calls “a revolution from the bottom up” – but there is little opposition from today’s parents.
Indeed, I personally know a successful US hedge fund manager who is quite conservative and consistently votes Republican, but who is thinking of supporting Obama.
His daughter dates an African-American, and, to his credit, he believes in racial reconciliation.
True, an Obama victory would certainly increase his own taxes, but some things – for example, the promise of a multi-cultural America – are simply more important.
There appear to be many Republicans and independents who feel the same way.
Obama can lose these people, however, if he forgets that he is a reconciler, not a class warrior, and goes from tilting towards the poor to soaking the rich.
In any case, America’s allies should feel relieved by how the presidential election is shaping up.
America needs Obama, but McCain is a reasonable alternative.
He is no Bush, and conservative Republicans’ hatred of him is his badge of honor.
He would stand up to the haters at home (including those in his own party) and to the terrorists abroad.
That’s a lot better than what we have today.
Consolidation or Competition for Financial Regulators?
How many financial regulatory agencies does a country need?
One?
Two?
Perhaps three or four?
How about two hundred?
Such questions are gaining in urgency as more and more countries, and the European Union itself, debate whether or not to consolidate financial regulation under the umbrella of one all-powerful body.
Financial regulators' activities focus on maintaining the integrity of a country's financial system: its financial institutions and financial transactions.
Their domain encompasses banks, other depository institutions, insurance companies, securities firms, pension funds, finance companies - indeed, just about any entity that conducts financial transactions.
The current trend is for countries to consolidate their financial regulatory apparatus into a single agency, with Britain's Financial Services Agency (FSA) a leading example.
I believe that this trend is a serious mistake which, quite myopically, overlooks the potential for mistakes in regulation.
Though I do not necessarily advocate 200 financial regulatory agencies (more about this below), I believe that a structure involving multiple financial regulators in a country is likely to create a healthier financial system than would a single all-encompassing regulator.
The argument for a single regulator is deceptively simple: after all, a single country has a single national government, so why not have a single regulator for all financial regulation?
If the European Union is to have a single market, the argument continues, then it needs a single financial regulator.
Agency rivalries will be avoided.
No one will be confused as to who is responsible.
There can be ``one stop shopping.'' Government will speak with ``one voice.''
Fine, as far as it goes.
But consider another possibility: suppose that the financial regulator is mistaken in its approach to a particular issue.
A promising financial instrument, capable of improving the efficiency of credit markets, is rejected; or the agency's investigative and review procedures become stultified.
After all, government agencies are not omniscient; they do make mistakes; they can become ossified.
What happens then?
With a single financial regulator, where can a rejected financial innovator turn?
Where is the alternative forum?
How can an agency's procedures be reformed? Where are the competitive pressures for innovative thinking in government?
Now consider the alternative structure of multiple financial regulatory agencies - say, one for banks, another for other deposit institutions, yet another regulator for insurance, another for securities, maybe another for pensions.
Yes, this sounds messy, and may duplicate work or become overly compartmentalized.
But it also creates safety valves, alternative forums, bases of comparison, sources of new ideas, and potential arenas for innovation. Regulatory competition is possible.
Won't this mean a regulatory ``race to the bottom?''
It need not.
There are many aspects of financial regulation - e.g., information requirements, entry limitations, facilities limitations - where more choice and competition will often be beneficial.
An exception may be prudential (safety-and-soundness) standards for banks, insurance companies, and some forms of pension plans, which should be tough, because national governments almost always will bear the losses in the event of failures of these types of financial institutions.
Even here, multiple agencies can lead to beneficial innovations that can reduce the regulatory burden on institutions while maintaining effective levels of safety.
I write from the perspective of a former American financial regulator.
In the US there are three national agencies that regulate commercial banks, one that regulates savings institutions, one that regulates credit unions, one that regulates securities markets, one that regulates commodity and financial options/futures markets, and two that regulate pension funds. In addition , the 50 American states each have separate bank regulators (with overlapping jurisdictions with the national regulators), most have savings bank regulators, all have credit union regulators, all have insurance regulators (which is solely a state responsibility), and all have securities regulators.
Phew!
Of course, this system is a little messy; it does have the problem of duplicated efforts.
(It's nearly impossible to explain the details to anyone who hasn't been an American financial regulator or a lawyer.)
But the system works.
In fact, it works pretty well, though mistakes do occur (as they do in any regulatory system).
Most important, this multiple agency structure ensures regulatory competition - each agency generally wants to expand its domain of chartering and jurisdiction - that is generally beneficial for the financial system and for the health of the American economy.
I am not arguing for the world to replicate the American system of 200-plus regulatory agencies.
Far fewer will suffice for most countries.
But the next time that someone advocates a single financial regulator and its simplicity, remember that there is another side to that coin: where are the safety valves?
Where are the alternatives?
What about errors?
How will innovation occur?
In government (as well as in the private sector) a golden rule is that more competition and less monopoly is likely to be beneficial.
Consolidators versus Stimulators
LONDON – All intellectual systems rely on assumptions that do not need to be spelled out because all members of that particular intellectual community accept them.
These “deep” axioms are implicit in economics as well, but, if left unscrutinized, they can steer policymakers into a blind alley.
That is what is happening in today’s effort, in country after country, to slash spending and bring down budget deficits.
The chief task that John Maynard Keynes set himself in writing his General Theory of Employment, Interest, and Money was to uncover the deep axioms underlying the economic orthodoxy of his day, which assumed away the possibility of persistent mass unemployment.
The question he asked of his opponents was: “What must they believe in order to claim that persistent mass unemployment is impossible, so that government ‘stimulus’ to raise the employment level could do no good?”
Today, despite the Keynesian revolution, the same question demands an answer.
What do people who demand rapid “fiscal consolidation” amid heavy unemployment need to believe about the economy to make their policy coherent?
This question is not trivial, because the fiscal hair shirt has become the favored article of policy clothing among those who now dictate economic affairs.
Prestigious bodies like the G-20, the IMF, and the OECD join the “markets” and economic columnists in demanding that governments liquidate their deficits.
Any other course, they say, spells disaster; balancing budgets as soon as possible is the only way back to prosperity.
A few Keynesian economists stand against this stampede to retrenchment – Paul Krugman, Joseph Stiglitz, and Brad DeLong in the United States;
Martin Wolf, Samuel Brittan, Danny Blanchflower, and I in the UK; and Paul de Grauwe and Jean-Paul Fitoussi in continental Europe.
But we are a small minority.
Indeed, all Western governments, with the exception of the Obama administration, are committed to retrenchment – and Obama cannot get a new stimulus package through Congress.
The question is: what must the cutters and slashers believe to justify their policies?
When I ask this question, I never get a coherent answer; so let me retrace Keynes’s steps.
The first of the implicit assumptions of orthodox theory that Keynes identified was Say’s Law, the doctrine that “supply creates its own demand.” This means that all money earned is bound to be spent, and therefore that at no point in time could there be a “general glut” of commodities.
Keynes pointed out the fallacy here: while the income derived from production is, by definition, equal to the value of production, it does not follow that all this income will be spent.
Some part of it may be “hoarded,” in which case demand may fall short of supply.
Specifically, Keynes denied that saving is simply deferred spending.
In a well-known passage, he wrote: “An act of saving means…a decision not to have dinner today.
But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence…Thus it depresses the business of preparing today’s dinner without stimulating the business of making ready for some future act of consumption.”
“Getting to that realization,” says Krugman, “was an awesome intellectual achievement.” Yet Say’s Law is alive and well among new classical macroeconomists like John Cochrane and Eugene Fama.
It amounts to claiming that the factors of production will always be fully employed, and that, in Cochrane’s words, “if the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment.”
The second classical postulate Keynes identified was that the “real wage is equal to the marginal disutility of labor.”
This means that, in a competitive labor market, real wages will always be instantly adjusted to changes in conditions of demand.
In other words, there can never be involuntary, or unwanted, unemployment.
Keynes denied that real wages are set in the labor market.
Workers bargain for money wages, and a reduction in their money incomes might leave total demand too low to employ all those willing to work.
Yet today most economists model unemployment as “voluntary” – a rational preference for leisure rather than work.
This reinforces the idea that “stimulus” cannot do any good, since workers have as much employment as they want.
Keynes thought that the chief implicit assumption underlying the classical theory of the economy was that of perfect knowledge. “Risks,” he wrote, “were supposed to be capable of an exact actuarial computation.
The calculus of probability…was supposed to be capable of reducing uncertainty to the same calculable status as certainty itself…”
For Keynes, this is untenable: “Actually…we have as a rule only the vaguest idea of any but the most direct consequences of our acts.”
Financial markets, through which investment is made, were always liable to collapse when something happened to disturb business confidence.
Therefore, market economies were inherently unstable.
Today’s “efficient market theory” restored to economics the assumption of perfect knowledge by claiming that all risks are correctly priced.
This means that the “underpricing of risk worldwide,” which Alan Greenspan identified as the root cause of the banking collapse of 2007-08, is impossible.
Yet it happened.
The classical view of the economy, which Keynes set out to demolish, is not only alive, but in recent years has been dominant, feeding the belief that competitive markets can be left to regulate themselves, will always provide as much employment as is wanted, and are immune to large-scale collapse.
This also fuels opposition to government intervention, and to “stimulus” policies, which are supposedly redundant, if not harmful, since the events that require them cannot happen (but do).
Unless we start discussing economics in a Keynesian framework, we are doomed to a succession of crises and recessions.
If we don’t, the next one will come sooner than we think.
Constitutional Politics
A cynic might be tempted to say that when politicians run out of ideas, they turn to making or changing the constitution.
Take the European Union.
Its last big project was the single market as conceived by Jacques Delors, the European Commission's then-President.
That project has still not been completed, but the missing bits are a continuing process, not a new idea.
Since then, the EU has tried a little of this and a little of that: a little common economic policy around the introduction of the Euro, a little common foreign policy around the Iraq war.
None of it has been very successful.
Indeed, none of it has an advocate of the stature of Delors.
So the EU turned to constitution making.
It set up a Convention, which produced a draft treaty, and soon an Intergovernmental Conference will try to take the project to a conclusion.
Chancellor Gerhard Schröder of Germany liked the idea so much that he is now thinking of setting up his own Convention to review Germany's constitutional arrangements.
His target-agreed with the other main parties-is the precarious relationship between Federal authority (notably the power of the purse) and that of the Länder and local governments.
Perhaps the German Chancellor hopes that in the shadows of such an all-party Convention he can quietly slip through "reforms" that are, for the most part, really cuts in public expenditure for social services.
The case of Prime Minister Tony Blair of the UK is even more extreme.
The inventor of New Labour would like to be remembered as the man who squared the circle of sustainable economic growth and a reformed welfare state, the man who reconciled wealth creation and social cohesion.
But the British economy is in a precarious state, and public services remain a mess.
What has changed under New Labour's rule is the British constitution.
Scotland has a parliament, Wales an assembly.
English regions may soon follow.
London and other cities have directly elected mayors.
Ancient institutions, notably the House of Lords, have been "modernized." The judicial system has seen root and branch change.
In fact, Blair is reportedly not very interested in these changes, but it is they-not some beacon of British prosperity and social justice-that are his lasting legacy.
Other European leaders could be added to the list, not least Prime Minister Berlusconi of Italy.
In all these cases, the cynic would be half-right.
Constitutional change is for political leaders a welcome distraction from the much more change-resistant issues of social policy.
But there are at least two exceptions to this suspicion.
One is the establishment of democracy and the rule of law in countries that have recently emerged from dictatorship.
The process requires constitution making of an often complex and painful kind.
The most recent example is Turkey, where a courageous prime minister has confirmed the secular (rather than Islamist) rule of law, sought to modernize the economy, and has kept the military out of the Cabinet.
Turkey wants desperately to be accepted into the EU, whose "Copenhagen criteria," approved in 1993, define what may be called the constitutional prerequisites of membership.
The accession countries of East Central Europe all fulfilled the criteria; Turkey is now following their example.
The other serious issue of a constitutional nature is that of levels of government.
In a globalized world environment, the question of who is responsible for what has become as opaque-if not unanswerable-as it is urgent.
This is all the more true in view of the fact that the migration of decisions to an ill-defined global space is being accompanied by a widespread demand for more direct forms of democracy that can bring decisions closer to people, regions, and local communities.
There are as yet no "Copenhagen criteria" to guide constitution-makers here.
Britain is a good example of the confusions that attend mere pragmatism.
Scotland may have a new (and expensive) government, but what about the English regions?
Are the East Midlands really an appropriate unit of self-government?
In Germany the issue is the distribution of tax revenue.
Central government can easily starve the regions and local communities of their lifeblood.
Who is to prevent it from doing so?
In France and Spain there are small but effective (and sometimes violent) regional movements.
Should the rest of the country simply give in to them?
Where lies the right answer between a Scottish solution and a Chechen non-solution?
The point of asking such questions is to remind ourselves that genuine constitutional politics requires serious thought and careful preparation.
It must never be a substitute for the absence of other ideas.
In that sense, Conventions such as the one led by former French President Valery Giscard d'Estaing for Europe are a good idea.
They just might dissuade politicians who are bereft of ideas from indulging in pet projects that lead nowhere.
Consulting America is Futile
Debating the Confidence Fairy
LONDON – In 2011, the Nobel laureate economist Paul Krugman characterized conservative discourse on budget deficits in terms of “bond vigilantes” and the “confidence fairy.”
Unless governments cut their deficits, the bond vigilantes will put the screws to them by forcing up interest rates.
But if they do cut, the confidence fairy will reward them by stimulating private spending more than the cuts depress it.
Krugman thought the “bond vigilante” claim might be valid for a few countries, such as Greece, but argued that the “confidence fairy” was no less imaginary than the one that collects children’s teeth.
Cutting a deficit in a slump could never cause a recovery.
Political rhetoric can stop a good policy from being adopted, but it cannot stop it from succeeding.
Above all, it cannot make a bad policy work.
I recently debated this point with Krugman at a New York Review of Books event.
My argument was that adverse expectations could affect a policy’s results, not just the chances that it will be adopted.
For example, if people thought that government borrowing was simply deferred taxation, they might save more to meet their expected future tax bill.
On reflection, I think I was wrong.
The confidence factor affects government decision-making, but it does not affect the results of decisions.
Except in extreme cases, confidence cannot cause a bad policy to have good results, and a lack of it cannot cause a good policy to have bad results, any more than jumping out of a window in the mistaken belief that humans can fly can offset the effect of gravity.
The sequence of events in the Great Recession that began in 2008 bears this out.
At first, governments threw everything at it. This prevented the Great Recession from becoming Great Depression II.
But, before the economy reached bottom, the stimulus was turned off, and austerity – accelerated liquidation of budget deficits, mainly by cuts in spending – became the order of the day.
Once winded political elites had recovered their breath, they began telling a story designed to preclude any further fiscal stimulus.
The slump had been created by fiscal extravagance, they insisted, and therefore could be cured only by fiscal austerity.
And not any old austerity: it was spending on the poor, not the rich, that had to be cut, because such spending was the real cause of the trouble.
Any Keynesian knows that cutting the deficit in a slump is bad policy.
A slump, after all, is defined by a deficiency in total spending.
To try to cure it by spending less is like trying to cure a sick person by bleeding.
So it was natural to ask economist/advocates of bleeding like Harvard’s Alberto Alesina and Kenneth Rogoff how they expected their cure to work.
Their answer was that the belief that it would work – the confidence fairy – would ensure its success.
More precisely, Alesina argued that while bleeding on its own would worsen the patient’s condition, its beneficial impact on expectations would more than offset its debilitating effects.
Buoyed by assurance of recovery, the half-dead patient would leap out of bed, start running, jumping, and eating normally, and would soon be restored to full vigor.
The bleeding school produced some flaky evidence to show that this had happened in a few instances.
Conservatives who wanted to cut public spending for ideological reasons found the bond vigilante/confidence fairy story to be ideally suited to their purpose.
Talking up previous fiscal extravagance made a bond-market attack on heavily indebted governments seem more plausible (and more likely); the confidence fairy promised to reward fiscal frugality by making the economy more productive.
With the help of professors like Alesina, conservative conviction could be turned into scientific prediction.
And when Alesina’s cure failed to produce rapid recovery, there was an obvious excuse: it had not been applied with enough vigor to be “credible.”
The cure, such as it was, finally came about, years behind schedule, not through fiscal bleeding, but by massive monetary stimulus.
When the groggy patient eventually staggered to its feet, the champions of fiscal bleeding triumphantly proclaimed that austerity had worked.
The moral of the tale is simple: Austerity in a slump does not work, for the reason that the medieval cure of bleeding a patient never worked: it enfeebles instead of strengthening.
Inserting the confidence fairy between the cause and effect of a policy does not change the logic of the policy; it simply obscures the logic for a time.
Recovery may come about despite fiscal austerity, but never because of it.
Although Krugman invented his discourse for an American readership, it perfectly fits the British case as well.
In his first budget in June 2010, Chancellor of the Exchequer George Osborne warned that “you can see in Greece an example of a country that didn’t face up to its problems, and that’s a fate I am determined to avoid.”
In presenting the United Kingdom’s 2015 budget in March, Osborne claimed that austerity had made Britain “walk tall” again.
On May 7, that claim will be put to the test in the UK’s parliamentary election.
British voters, still wobbly from Osborne’s medicine, can be forgiven if they decide that they should have stayed in bed.
Creative Self-Disruption
LAGUNA BEACH – Like many readers, I still vividly recall when Nokia was the dominant player in mobile phones, with over 40% of the market, and Apple was just a computer company.
I remember when Amazon was known only for books, and when dirty taxis or high-priced limousines were the only alternative to public transport or my own car.
And I recall when the Four Seasons, Ritz Carltons, and St. Regises of this world competed with one another – not with Airbnb.
Now, I may be old, but I am not that old.
These changes happened recently – and fast.
How did they occur?
Will the pace of change remain so rapid – or even accelerate further?
And how should companies respond?
An industry can be transformed by top-down economic, financial, political, and regulatory changes.
But companies like Airbnb, Amazon, Apple, and Uber exemplify a different kind of transformation: agile players invade other, seemingly unrelated industries and brilliantly exploit huge but previously unseen opportunities.
Importantly and counter-intuitively, doing so serves their own core competencies, rather than those of the industry that they seek to disrupt.
Indeed, rather than using existing approaches and processes to compete, these entrants created radical new game plans, rewriting the target industry’s rules.
Their creativity and passion enabled them to subdue – and in some cases even destroy – less adaptable giants remarkably quickly.
Central to these companies’ success has been their understanding of a fundamental trend affecting nearly all industries: individual empowerment through the Internet, app technology, digitalization, and social media.
Most traditional companies, meanwhile, remain focused on their macro environment, at the expense of responding adequately to the new micro-level forces in play.
If existing companies hope to compete in this new environment, shaped by both top-down and bottom-up forces, they will to have to adapt, preempting disruptive new players by figuring out how to disrupt themselves.
Otherwise, they could face a fate similar to Nokia, which was disintermediated by one tech company (Apple) and acquired by another (Microsoft).
In this effort, companies must recognize that both demand and supply factors are or will be driving the transformation of their competitive landscapes.
On the demand side, consumers expect a lot more from the products and services they use.
They want speed, productivity, and convenience.
They want easy connectivity and expanded scope for customization.
And, as the success of services like TripAdvisor show, they want to be more engaged, with companies responding faster to their feedback with real improvements.
On the supply side, technological advances are toppling long-standing entry barriers.
The online car service Uber adapted existing technologies to transform a long-sheltered industry that too often provided lousy and expensive service.
Airbnb’s “supply” of rooms far exceeds anything to which traditional hotels could reasonably aspire.
An existing company would have to be highly specialized, well protected, or foolish to ignore these disruptions.
But, while some well-established companies in traditional industries are already looking for ways to adapt, others still need to do a lot more.
One traditional industry in which progress is being made is the automotive branch, where companies are pursuing digitalization.
Though new entrants could undoubtedly disrupt incumbents’ production platforms – Elon Musk’s Tesla Motors is a clear example – they are rare.
These days, the more pervasive competitive threat comes from companies in other domains that can erode the customer value proposition after the car is sold.
Automotive companies are recognizing that, over time, the digital experience in the cars they produce will command a larger share of the consumer surplus, owing largely to the potential for substantial profit margins and economies of scale.
As a result, they are adapting their vehicles to the new sharing economy, helping people to remain well-connected in the car, expanding the scope of after-sale services, and preparing for the shift away from individual car ownership toward car sharing.
Banks are also adapting, but much more slowly and hesitantly.
If they are to make progress, they must move beyond simply providing apps and online banking.
Their aim should be holistic engagement of clients, who seek not only convenience and security, but also more control over their financial destiny.
In these and many other industries, the competitive landscape is undoubtedly becoming more complicated and unpredictable.
But four general guidelines can help managers effectively adapt their mindsets and business models to facilitate orderly and constructive self-disruption.
· First, companies should modernize core competencies by benchmarking beyond the narrow confines of their industry.
· Second, they should increase their focus on customers, including by soliciting and responding to feedback in an engaging way.
· Third, managers should recognize the value of the data collected in their companies’ everyday operations, and ensure that it is managed intelligently and securely.
· Finally, the micro-level forces that have the potential to drive segment-wide transformations should be internalized at every level of the company.
Companies that apply these guidelines stand a better chance of adapting to what is driving today’s rapid reconfiguration of entire industries.
The bottom line, once again, is supply and demand: More than ever, people want – indeed, feel empowered to expect – cheaper, smarter, safer, and more efficient tools to live a more self-directed life.
Companies that fail to deliver will find that their days are numbered.
Containment Begins at Home
NEW YORK – Earlier this month, Muhammad Youssef Abdulazeez, a 24-year-old US citizen of Middle Eastern descent, opened fire at two military sites in Chattanooga, Tennessee, killing five.
This act of local horror was also one of national significance, for it vindicated the late US diplomat and strategist George F. Kennan’s warning that American foreign policymakers should hold in check their urge to act, especially militarily.
One can never know when the blowback will come, Kennan warned, but it will.
Indeed, unforeseeable consequences were precisely what concerned Kennan when the United States charged into Afghanistan in 2001 and Iraq two years later.
After all, it was no coincidence that many of those the US was fighting in Afghanistan, including Osama bin Laden himself, had been associated with the Mujahedeen, the guerilla-style units of Muslim warriors whom US forces trained as insurgents during the 1979-1989 Soviet occupation.
Likewise, the US had armed Saddam Hussein’s Iraq to go to war with Iran in the 1980s.
Following the terrorist attacks of September 11, 2001, Americans asked, “Why do they hate us?” Yet, though the US has experienced no attack on its soil since then, US President George W. Bush’s administration pursued, virtually unchecked, the destruction of two Muslim countries – and the devastation has continued beyond Bush’s tenure with an ever-intensifying campaign of drone strikes.
These policies have helped push Afghanistan to the precipice of state failure, while opening the way for the Islamic State to take over more than one-third of Iraq’s territory.
The resulting discontent in those countries and across the Muslim world has increasingly been felt in Europe – and now is emerging in the US, too.
To be sure, US criminal investigators have not officially identified the motives of the Kuwaiti-born Abdulazeez, who does not seem to have belonged to a terror network. But there is plenty of precedent for an alienated and disenchanted young man, brought up in the West (Abdulazeez attended high school and college in Chattanooga), to seek a cause worth fighting for – and to find it in the perceived humiliation of Islam by America and the West.
Of course, as soon as the word “Islam” appears, Western media start painting such “lone wolves” as agents of some vast Islamic conspiracy, rather than deeply wounded and desperate individuals.
Such an interpretation makes the act easier to understand: a cog in a terrorist network would be compelled, even brainwashed, to mount such an attack.
But when the attacker is a solitary individual – an American citizen, no less– it raises serious questions about the system from which he or she (though almost always a he in these cases) emerged.
According to some press accounts, Abdulazeez felt a sense of failure at his inability to meet America’s standard of success, of which money is the primary measure. Though he did not appear deeply religious, he allegedly praised the late Anwar al-Awlaki, a US-born al-Qaeda cleric and an advocate of attacks on “hypocritical” America, as a model of triumph over failure.
Another question about the US system stems from the refusal of Abdulazeez’s health insurer to approve his participation in an in-patient drug and alcohol program.
This is far from the first time the US has experienced a mass murder by someone whose mental-health issues, including addiction, had been overlooked.
Does this reflect a systemic failure?
More fundamentally, does it controvert America’s principles?
Rather than considering such questions, the US remains focused on the external scourge of Islamic terrorism.
Kennan recognized this tendency decades ago, when he warned that shortsighted policies at home and abroad had already put America in a vulnerable position.
Instead of basking in its own superiority, he advised, the US should learn from the mistakes of its enemies, including Russia.
In the 2000s, Kennan compared the Bush administration’s “global war on terror” to Russia’s wars against Chechen separatists in the North Caucasus.
When the Soviet Union dissolved in 1991, Boris Yeltsin, Russia’s first president, promised its subjects “as much sovereignty as they can swallow.”
The Chechens, who had sought independence from Russia for centuries, took this promise as an opportunity for self-determination.
But Yeltsin, unwilling to lose any more territories after the Soviet Union’s initial breakup, reneged on his pledge.
In 1993, the first Chechen war erupted.
Russia managed to defeat the separatists and maintain control over Chechnya.
But it was a Pyrrhic victory, given that it drove many disillusioned and angry Chechens toward religious fundamentalism.
As a result, when the second Chechen war began in 1999, the fight was no longer just about Chechen independence from Russia; it was a fight for Islam, waged against Christians everywhere.
Russia, under Yeltsin’s successor, Vladimir Putin, defeated the separatists again, restoring federal control over the territory.
Fifteen years later, Chechen extremists are fighting alongside the Islamic State.
One might object to comparing America’s desire to export democracy at the barrel of a gun to Russia’s imperial death spasms under Yeltsin and Putin.
But, whether we like it or not, there is a strong parallel between them: both countries are perceived to be dictating to Muslims.
And, in fact, it was Kennan who first drew my attention to this similarity, when in a private conversation about 9/11, he noted that, for many Muslims, Russia and the West were becoming indistinguishable.
Both were viewed as secular states antagonistic to Islam.
Kennan warned that, just as the first Chechen war bred national and individual resentment, America’s wars in Afghanistan and Iraq would only fuel more hatred and frustration – which would eventually blow back onto the US.
Containment, not Appeasement
America and the world are focused on whether the Bush administration will adopt the Iraq Study Group’s recommendations for an exit strategy from Iraq.
That is the most pressing immediate question, but America’s leaders should also be thinking ahead.
America needs a post-occupation strategy for Iraq and the Middle East, one grounded in a viable national security strategy for the twenty-first century.
That strategy is containment.
In the run-up to the Iraq invasion, the Bush administration rejected containment as an obsolete Cold War hangover.
The weapons inspectors were pulled out, and America opted for preemptive war.
Bush was portrayed as facing down a new Hitler with Churchillian resolve, and advocates of containment were accused of appeasement.
But now we know that the containment regime worked.
Saddam Hussein’s Iraq was in no position to threaten anyone, let alone the United States.
This was not the first time that containment – a strategy devised by George Kennan, the director of the US State Department’s Policy Planning Staff under President Harry Truman, in response to the Soviet threat after World War II – has been rejected as appeasement.
In the 1952 presidential election campaign, Dwight Eisenhower and his future secretary of state, John Foster Dulles, heaped scorn on containment, calling instead for a “rollback” of the Soviets in Eastern Europe.
Fortunately, once in office, the Eisenhower administration had the sense to stick with containment in Europe, continuing a policy that is widely credited for winning the Cold War.
President John F. Kennedy’s insistence, against much advice, on containment during the Cuban missile crisis saved the world from nuclear war.
This was calculated resolve, not appeasement.
Containment’s goal was to prevent Soviet expansion without saddling the US with unsustainable military obligations.
So long as the USSR did not stage a military attack, containment’s reliance on economic sticks and carrots, competition within the world communist movement, intelligence and diplomacy, and promoting the vitality of the capitalist democracies would guarantee security.
Kennan was right: the dysfunctional features of Soviet system, and its over-extension internationally, would lead to its demise.
When containment has been abandoned, America has paid a high price.
The Eisenhower administration toppled Iran’s elected government in 1953 believing it to be too pro-Soviet.
The hugely unpopular Shah they installed was swept away in the Islamic revolution in 1979.
America made comparable errors in Guatemala and elsewhere in Latin America.
Vietnam was America’s costliest departure from containment.
As Kennan explained, when America goes to war over something less than a vital interest, the adversary – for whom vital interests are at stake – will fight long after the war has become too unpopular at home to sustain.
Bush repeated this mistake in Iraq.
Containment is hardly a relic of the Cold War.
It worked against Libya, leading Muammar Khadafi in the late 1990’s to stop sponsoring terrorism, turn over the Lockerbie bombers for trial, and pay compensation to British and French victims of Libyan-sponsored terrorism.
Claims that he abandoned his nuclear program in response to the US-led invasion of Iraq have been refuted by Flynt Leverett, director for Middle Eastern affairs at the US National Security Council from 2002 to 2003.
According to Leverett, Khadafi’s decision predated the invasion and was a response to an explicit quid-pro-quo to end international sanctions against Libya.
Containment against Libya was not appeasement.
It should have been the model in Iraq, as it now should be the model in Iran.
Instead, defenders of the contemporary equivalent of “rollback” advocate attacking Iran because it is developing nuclear weapons.
This makes about as much sense as it would to attack China in the 1950’s.
One of Kennan’s great insights was that the US is well served by conflict among America’s adversaries.
He welcomed Tito’s rise in Yugoslavia as an internal challenge to Moscow’s hegemony that he hoped others would emulate.
This lesson is lost on the Bush administration, which senselessly alienated Iran in 2002, when moderates had the upper hand there and were cooperating in Afghanistan, and reversed decades of US policy by insisting that any Middle East settlement must accept changed “realities on the ground” in the West Bank.
The administration seems bent on herding adversaries together – transforming Samuel Huntington’s “clash-of-civilizations” dystopia into a self-fulfilling prophecy.
Kennan maintained that the US should work to create a world that no one can dominate, and that the best way to spread democracy is to demonstrate its superiority.
Ramming democracy down people’s throats is self-defeating.
Just as it produced a potent fusion of communism and anti-American nationalism in Southeast Asia and Latin America, it is now producing a similar combination of radical Islam and anti-American nationalism across the Middle East.
Terrorist groups can be minimized if their enabling states are contained.
Defenders of the Bush doctrine claim that this is impossible when they operate out of failed states that cannot police their borders.
But, given that the Bush doctrine has compounded the failed-state problem, this is a bogus argument.
However many failed states there were in the world before America invaded Iraq, there is one more now.
To build a containment regime against terrorism emanating from the Middle East, a date for America’s departure from Iraq must be set.
There is no other way to reverse the widespread perception across the region that the US has imperial ambitions.
The other essential step is to place resolution of the Israel-Palestine conflict at the center of America’s foreign policy agenda.
America must push for a solution that can garner the support of significant majorities of all the peoples between the Jordan River and the Mediterranean.
That is the surest means of protecting and promoting democracy.
The Right Stuff in Foreign Policy
CAMBRIDGE – Some critics complain that US President Barack Obama campaigned on inspirational rhetoric and an ambition to “bend the arc of history,” but then turned out to be a transactional and pragmatic leader once in office.
In this respect, however, Obama is hardly unique.
Many leaders change their objectives and style over the course of their careers.
One of the great transformational leaders in history, Otto von Bismarck, became largely incremental and status quo-oriented after achieving the unification of Germany under Prussian direction.
Likewise, Franklin Delano Roosevelt’s foreign-policy objectives and style were modest and incremental in his first presidential term, but became transformational in 1938 when he decided that Adolf Hitler represented an existential threat.
Transactional leadership is more effective in stable and predictable environments, whereas an inspirational style is more likely to appear in periods of rapid and discontinuous social and political change.
The transformational objectives and inspirational style of a leader like Mahatma Gandhi in India or Nelson Mandela in South Africa can significantly influence outcomes in fluid political contexts, particularly in developing countries with weakly structured institutional constraints.
By contrast, American foreign-policy formation is highly constrained by institutions like Congress, the courts, and the constitution.
Thus, we would expect less opportunity for transformational leadership.
But even the US Constitution is ambiguous about the powers of Congress and the president in foreign policy.
At best, it creates what one constitutional expert called “an invitation to struggle.”
Moreover, much depends on external conditions.
Woodrow Wilson, Franklin Roosevelt, and Harry Truman developed transformational objectives only in response to external events after they entered office.
Crisis conditions can liberate a gifted leader from the accumulated constraints of vested interests and bureaucratic inertia that normally inhibit action in the American system.
Bill Clinton, caught up in the complacent 1990’s, is said to have envied Franklin Roosevelt’s crisis conditions of the 1930’s.
In such situations, action becomes more fluid.
A leader with transformational objectives faces better odds, and an inspirational style is more likely to find responsive followers and to make their role more relevant.
For example, George W. Bush used the crisis conditions after September 11, 2001, in the service of an assertion of executive power, as well as to invade Iraq.
But, while turbulent times may set the stage for transformational leaders, it does not follow that bold and risk-loving leaders are always best suited to address the crises that define such periods.
President George H. W. Bush, unlike his son, was transactional, but implemented a very successful foreign policy.
Whether they are transformational or incremental in their objectives, leaders need certain soft- and hard-power skills to be effective.
Among the soft-power skills are emotional intelligence (self-control and the ability to use emotional cues to attract others); vision (an attractive portrait of the future that balances ideals, objectives, and capabilities); and communication (the ability to use words and symbols to persuade both an inner circle and a broader audience).
For the use of hard-power resources, two skills are particularly important: organizational capacity and a Machiavellian proficiency in bullying, buying, and bargaining to form winning coalitions.
Above all, effective leadership requires contextual intelligence and an intuitive diagnostic ability that helps a leader understand change, set objectives, and align strategies and tactics accordingly.
As Lee Kuan Yew, the founding father of modern Singapore, once told me, a leader must be a quick learner, test reality, be prepared to change his mind as conditions change, and act calmly in a crisis.
Contextual intelligence implies both a capability to discern trends in the face of complexity and adaptability while trying to shape events.
Bismarck once referred to this skill as the ability to intuit God’s movements in history, and seize the hem of His garment as He sweeps past.
More prosaically, leaders with contextual intelligence, like surfers, have the ability to judge and adjust to new waves and ride them successfully.
Leaders of this type not only adapt their style to the situation and to their followers’ needs; they also create flows of information that “educate their hunches.”
This involves the ability to size up group politics and understand the positions and strengths of various stakeholders in order to decide when and how to use transactional and inspirational skills.
It is the self-made part of luck.
This skill is crucial in unstructured situations, when it is often more difficult to ask the right questions than it is to get the right answers.
Leaders with contextual intelligence are good at providing meaning or a road map by defining the problem that a group confronts.
They understand the tension between the different values involved in an issue, and how to balance the desirable with the feasible.
In particular, contextual intelligence requires an understanding of groups’ cultures; the distribution of power resources; followers’ needs and demands; information flows; and timing.
Contextual intelligence is particularly important in foreign policy, because an effective leader must understand the culture and power structure of other societies, and how they interact as an international system.
With years of experience in foreign affairs, George H. W. Bush had excellent contextual intelligence.
With almost no experience in foreign affairs, “W” did not.
That gap proved the difference between the success of the father and the failure of the son.
Controlling Chinese Television
The 2003 World Press Freedom report put out by the group Reporters without Borders ranks China 161st among 166 nations, somewhere between Iran and North Korea.
But Chinese television fare, at least, no longer consists of the prudish melodramas and clumsy indoctrination programs of the Maoist past.
Casual observers of today's freewheeling offerings of sex, crime, drugs, violence, and banal game shows on Chinese TV might come away with the impression that most of the shackles have been removed from televised content.
To be sure, this impression disappears if one focuses on explicit political content.
Viewpoints that deviate in the slightest from Party doctrine are still absent from Chinese TV.
Despite the surface diversity of programming, the monolithic control of political discourse has changed little since the 1950's.
But the sheer volume of China's TV programming makes maintaining such control difficult.
China Central Television (CCTV) alone has 12 channels (many broadcasting 24 hours a day), and employs about 3,000 people.
CCTV falls under the control of the Propaganda Department and the Ministry of Radio, Film, and Television.
Numerous provincial and municipal TV stations are also required to carry some CCTV programming.
This combination represents a vast administrative undertaking.
Given the staggering amount of programming needed to fill the time slots, content monitoring must be implemented with maximum efficiency.
Censorship has been made easier, not more difficult, by the government's decision in the 1990's to shift to a free-market strategy for entertainment products.
Big subsidies to TV stations were mostly discontinued, and the new "sink or swim" approach forced TV outlets to compete for advertising revenues, resulting in programming with greater mass appeal.
Thus, in a strategy mirrored elsewhere in the cultural sphere, the government simply relinquished much control over the moral component of TV content.
The anti-pornography saohuang campaigns carried out in the 1980's and early 1990's are a thing of the past.
Perhaps realizing that an entertained and distracted populace is less likely to complain about public policy, the Party has allowed entertainment programming to follow the Western model, lessening the need for micro-managed censorship.
The result is a de facto separation between news and everything else.
This conveniently allows the authorities to control news programming with an iron hand while relegating the bulk of programming to a looser and less labor-intensive monitoring system.
Of course, given China's highly politicized atmosphere, politics can leak into even the most innocuous areas of discourse, and the many talk shows and audience participation formats necessitate a less intrusive but nonetheless effective system of content regulation.
The first surprise I encountered while working for CCTV as a program planner was how minimal this system is.
Top-down directives and outright censorship are rare.
Few written guidelines outlining forbidden or sensitive topics exist.
No constant memoranda dictate content.
Party officials don't hover over each step of the process, and virtually no cutting of completed products is carried out on Party orders.
On the surface, writers, directors, and performers seem free to plan and produce their shows with little or no supervision or monitoring.
So how does such a system block offending content?
First and foremost, the system is largely reactive.
The department heads and oversight committees that meet to evaluate programming seldom dictate content, but merely pass their complaints and recommendations down to programming heads.
The top-down hierarchy is autocratic and arbitrary; lower levels have little collaborative input and no right of appeal.
Serious breaches can result in reprimands or dismissals.
In effect, the system has become largely self-regulating.
In my experience, 99% of all censorship occurs with the writers and producers themselves.
Sporadic complaints and warnings from above enable them to develop an intuitive sense for the boundaries of acceptable content, so they create shows that are free from offending material from the outset.
The lack of explicit guidelines also keeps content more conservative than it need be, because producers tend to err on the safe side.
Vague but pervasive intimidation is the main factor keeping TV personnel in line.
But another force serves the Party's interests as well: the deep-seated Chinese cultural inertia that stresses collectivist, group-oriented behavior.
In such an atmosphere, inclusion of politically incorrect content is not merely a risky move, but constitutes a breach of social decorum.
Indeed, working daily with Chinese TV creators, I noticed a subtle, almost instinctive tendency to avoid any content or format that is unusual, novel, or unorthodox, never mind subversive.
The exceptions to this state of affairs are when the Party initiates a propaganda campaign, such as the one associated with the turnover of Hong Kong in 1997, or the more recent anti-Falun Gong blitzkrieg.
At such times, directives are issued to produce programming with specific ideological content, and such shows - dubbed renwu (duties) - are perfunctorily overseen by TV producers, after which the more bottom-up mode returns.
Many TV producers have internalized these controls so well that they are an unconscious fact of life, and audiences now entertained by endless costume dramas and soap operas are not clamoring for freer political content.
Barring some catastrophic change, this method of information control can be expected to continue well into the 21st century.
Converting Syria
An Arab-Israeli peace requires a comprehensive approach, because the problems at stake are intertwined.
Not only are key issues such as Jerusalem and Palestinian refugees insoluble without an all-Arab consensus, but any country that is left out of the peace process is bound to persist in its role as a revolutionary power bent on regional destabilization.
Admittedly, Israeli governments have never liked the idea of negotiating peace with all enemies simultaneously, if only because the political costs of the required concessions would be unbearable.
The Israeli strategy of peacemaking therefore oscillates between two visions: while the Israeli left gives priority to the Palestinian problem, the Israeli right prefers pursuing a settlement with the big Arab powers.
The current Israeli-Palestinian peace talks and the American veto on negotiations with Syria indicate that we have returned to the “Palestine first” concept.
But the prospects of success are desperately dim.
With the Americans still refraining from engaging in a Clinton-like level of committed mediation, the parties look to be incapable of meeting each other’s minimal requirements for a settlement.
Their failure would have dire consequences for the entire region.
The Syria-Iran-Hamas-Hezbollah axis would be emboldened in its challenge to American leadership in the region, and, with Palestinian President Mahmoud Abbas humbled and defeated, a third Intifada would be a likely scenario.
It is therefore vitally important to take Syria, an ally of Iran and the patron of spoilers such as Hamas and Hezbollah, out of the war equation.
But this requires that both Israel and the United States change course.
Syria has a keen interest in being invited into an US-led settlement with Israel.
The muted response of the Arab states to Israel’s recent mysterious air raid on its territory reflects its isolation within the Arab world – an isolation with which the Syrians are extremely uncomfortable.
The Ba’athist regime in Damascus is marked by two major formative experiences: Hafez al-Assad’s loss of the Golan Heights to Israel, and his son Bashar’s loss of Lebanon.
Recovering the Golan, gaining recognition of Syria’s special interests in Lebanon, and reconciling with America are thus vital objectives for the regime and the best way that Bashar al-Assad can boost his legitimacy at home.
Syria’s readmission into the Arab consensus and financial support from the Gulf monarchies for abandoning the Shi’a alliance with Iran and Hezbollah would also be significant gains.
Bashar may lack his father’s acumen, but he, too, knows a simple truth: peace with Israel is the price to pay.
The question remains whether Bashar understands that peace is not only about regaining the Golan, but also about normalization of relations with Israel, which his father was reluctant to allow.
The old Assad feared that open borders and the end of the politics of conflict might erode his one-party system.
Peace thus requires a degree of political and socioeconomic change to diminish the appetite for military adventurism.
A Damascene conversion is not only possible, but is also vital for regional peace.
The most realistic scenario is now a three-front war pitting Israel against Syria, Hamas, and Hezbollah.
But a Syrian-Israeli peace would drive a wedge between Syria and Iran, thereby cutting off Hezbollah’s lines of arms supply while allowing the vital task of stabilizing Lebanon to succeed.
The only way to extricate Syria from the fatal Iranian embrace is to draw it into a regional scheme for peace.
Alas, precisely because of their isolation and the Ba’athist regime’s paranoiac nature, the Syrians are unlikely to meet the US condition for peace talks: abandoning their current rogue alliances and their marriage with terror.
But a Damascene conversion can only be the outcome of negotiations, not a prerequisite for them.
The idea that the Arab-Israeli peace process requires choosing between a Syrian or a Palestinian track has proved to be a dangerous fallacy.
Neither the Palestinians nor the Syrians will acquiesce to their exclusion.
A revolutionary force in international relations is one whose level of dissatisfaction with the status quo is such that it works to undermine it at any price.
In addition to reviewing the state of the Israeli-Palestinian negotiations, the November Middle East conference that President George W. Bush has called should begin to build a platform for an Israeli-Syrian negotiating track and a region-wide forum where clear rules of conduct and engagement are agreed by all.
Of course, this conference will not bring an end to the Damascus-Tehran axis.
But if the US exercises a brand of statesmanship different from the one that has so far put it on the defensive on almost every front, it could start to eat away at the foundations of that axis.
Convicts for Export
NEW DELHI – China has devised a novel strategy to relieve pressure on its overcrowded prisons: employ convicts as laborers on overseas projects in the developing world.
The practice has exposed another facet of China’s egregious human-rights record, which, when it comes to the overseas operations of Chinese companies, includes the government’s failure to enforce its own regulations.
China executes three times as many people every year as the rest of the world combined.
Amnesty International has estimated that, in 2007, China secretly executed on average “around 22 prisoners every day.”
In addition to being the world’s leading executioner, China has one of its largest prison populations.
The 2009 “World Prison Population List” compiled by the International Center for Prison Studies at King’s College, London, put the total number of inmates in Chinese jails at 1.57 million – larger than the population of Estonia, Guinea-Bissau, Mauritius, Swaziland, Trinidad &amp; Tobago, Fiji, or Qatar.
The forced dispatch of prisoners to work on overseas infrastructure projects raises new issues regarding China’s human-rights record.
It also adds a new element — the dumping of convicts — to its trade and investment policy, which has been much criticized for dumping goods.
Thousands of Chinese convicts, for example, have been pressed into service on projects undertaken by state-run Chinese companies in Sri Lanka, a strategically important country for China as it seeks to enhance its regional position in the Indian Ocean.
After providing Sri Lanka’s government with offensive weapon systems that helped end the country’s decades-long civil war, China has been rewarded with port-building, railroad, and other infrastructure projects.
Chinese convicts also have been dispatched to the Maldives, where the Chinese government is building 4,000 houses on several different islands as a government-to-government “gift” to win influence.
So far, however, China has failed to persuade the country’s president to lease it one of the 700 uninhabited Maldivian islands for use as a small base for the Chinese navy.
Chinese companies’ operating practice for overseas projects, including in Africa, is to keep the number of local workers to a bare minimum and to bring in much of the workforce from China, some of which comprises convicts “freed” on parole for project-related overseas work.
Convict laborers, like the rest of the Chinese workforce on such projects, are housed near the project site. That way, if any convict worker escaped, he would be easy to find in an alien setting.
In theory, such practices run counter to regulations promulgated by the Chinese commerce ministry in August 2006, in response to a backlash against Chinese businesses in Zambia following the death of 51 Zambian workers in an explosion at a Chinese-owned copper mine.
These regulations called for “local­ization,” including hiring local workers, respecting local customs, and adhering to safety norms.
During an eight-nation 2007 African tour, Chinese President Hu Jintao made a point of meeting with Chinese businesses to stress the importance of corporate responsibility in their local dealings.
Moreover, in October 2006, the State Council – China’s cabinet – issued nine directives ordering that Chinese overseas businesses, among other things, “pay attention to environmental protection,” “support local community and people’s livelihood cause,” and “preserve China’s good image and its good corporate reputation.”
But Chinese regulations are sometimes promulgated simply to blunt external criticism, and thus are seldom enforced, except when a case attracts international attention.
For example, in 2003 China enacted a law on environmental-impact assessments, which was followed in 2008 by “provisional measures” to permit public participation in such assessments.
Yet Chinese leaders remain more zealous about promoting exports and economic growth than in protecting the country’s air and water.
Similarly, the State Council’s 2006 nine directives to Chinese overseas companies have been subordinated to the drive for exports and growth, even when it imposes environmental and social costs on local communities abroad.
Indeed, as part of the government’s “going global” policy, Chinese companies are offered major incentives and rewards for bagging overseas contracts and boosting exports.
The use of convict laborers adds a disturbing new dimension to this strategy.
But even before convicts became part of China’s overseas development effort, some Chinese projects, especially dam-building schemes, were embroiled in disputes with local communities in Botswana, Burma, Pakistan, Ghana, and Sudan.
In fact, several small bombs exploded less than three months ago at the site of Burma’s Myitsone Dam, whose construction by a Chinese company in insurgency-torn Kachin State is displacing thousands of subsistence farmers and fishermen by flooding a wide swath of land.
Chinese companies cannot get thousands of prisoners released on their own, let alone secure passports and exit permits for them.
It is obvious that the practice of pressing convicts into service on overseas projects has been instituted at the instance of the Chinese government.
Until the Chinese government’s treatment of its own citizens and those of other countries is guided by respect for basic human rights and the rule of law, China is unlikely to command the respect that it seeks on the world stage.
Cooperating Over Competition
The Human City
SINGAPORE – The tangled web of international organizations that constitutes global governance has become so remote and ineffective that few count on it to deliver results anymore.
Now, after decades of turf wars and self-marginalization, international organizations must rally around an increasingly pressing global priority: sustainable urbanization.
The world is undergoing an unprecedented and irreversible wave of urbanization, with the share of the global population living in cities set to reach 60% by 2030.
But rapid urbanization is driving up industrial fossil-fuel consumption and household water consumption, and is increasing demand for food in areas where arable land is scarce.
In short, the current urbanization trajectory is not sustainable.
But existing efforts to alter the situation remain woefully inadequate.
While the United Nations General Assembly has tasked its agency for human settlements, UN-HABITAT, with promoting sustainable urbanization, the agency lacks the influence to ensure that this vital issue makes it onto the global agenda.
Moreover, international development players – including UN agencies, NGOs, corporate citizenship programs, and other charitable organizations – rarely coordinate their activities, even though their interventions are increasingly concentrated in densely populated cities.
Given that promoting sustainable urbanization and improving coordination would bolster progress in other priority areas (including women’s rights, climate change, youth unemployment, and literacy), sustainable urbanization must become a bureaucratic priority.
And it must be complemented by a technological disruption, with investments channeled toward developing and distributing innovations that would make cities more livable, efficient, and sustainable.
In fact, many useful innovations, such as energy-generating building materials and zero-emissions transportation, already exist; they simply need to be made accessible to those who need them most.
Devices like small-scale water-filtration systems, portable heart monitors, and low-cost tablet computers are already dramatically improving the lives of the world’s poorest citizens and helping to level the economic playing field.
The future impact of global governance rests on forging new alignments that facilitate the flow of vital knowledge and technologies from an increasingly diverse array of sources to urban populations worldwide.
The tools needed to make urban life more sustainable are no longer flowing only from North to South and West to East.
China has taken the lead in exporting solar photovoltaic cells, while clean-tech parks are arising even in the Arab world.
Governments, companies, supply-chain managers, corporate-citizenship strategists, NGOs, and others should commit to reducing their carbon footprints and to leveraging their resources to contribute to sustainable urbanization.
Opportunities to make such contributions are appearing constantly – and across all sectors.
In construction, for example, contractors are forming partnerships with labs to test materials that better reflect heat while absorbing energy to power cooling systems, and utility companies are leveraging new software tools to deploy smart meters in homes and offices.
Two US cities – New York and Seattle – have raised efficiency standards for new construction to record levels.
Similarly, automobile manufacturers, mobility-services companies, and local governments are working together to advance sustainable transportation by providing incentives for efficient non-ownership of vehicles.
As a result, carpooling is gaining prevalence in cities like Berlin.
Furthermore, MIT has developed the foldable electric CityCar, four of which can fit into a conventional parking space.
At last year’s Rio+20 conference, the eight largest multilateral development banks pledged $175 billion to develop sustainable transportation.
Information technology can also reduce stress on the transportation system.
For example, Singapore is harnessing its near-complete fiber-optic network to reduce urban congestion by introducing a spate of measures encouraging workers to telecommute.
As these measures take effect, self-sufficient satellite towns will likely develop, reducing transportation-related energy consumption further, while fostering a more active civil society.
Singapore is leading the way in another area as well: production and distribution of potable recycled water.
Many cities worldwide are following its example, expanding their water catchment and treatment programs.
Meanwhile, vertical farm experiments – which aim to augment urban food supplies by cultivating crops in skyscraper greenhouses – are proliferating from the American Midwest to Osaka, Japan.
And India has become a leader in converting biomass and food waste into energy.
Of course, the billions of farmers and villagers worldwide should not be forgotten.
Interventions like rural electrification, the provision of drought-resistant seeds and agricultural technology, and the expansion of micro-insurance are vital not only to rural populations’ welfare, but also to catalyze a new “Green Revolution,” without which city dwellers will face severe food shortages.
With new, innovative solutions appearing every day, the real challenge lies in bringing them to scale – and that requires international cooperation.
But the “smartest” cities are not necessarily the most technologically advanced.
Rather, they are the places where technology and public policy support citizens’ welfare and aspirations.
This crucial fact will guide discussion at the New Cities Foundation’s second annual summit in June – the theme of which is “The Human City” – and should be at the heart of sustainable urbanization initiatives.
Making sustainable urbanization a strategic priority might be the only way to overcome the interrelated crises of jobless growth, youth unemployment, and income inequality.
While some factory jobs can be outsourced or automated, robots cannot yet retrofit buildings, install solar PV cells on rooftops, or construct vertical farms.
Even the movement in some cities, such as Singapore and Tokyo, toward driverless subways or cars will demand substantial labor to build and manage the relevant systems.
In the future, as in the past, the most labor-intensive jobs will involve building homes, production facilities, and, in turn, communities.
Coping with Catastrophic Risks
One year after the Indian Ocean tsunami, what are the lessons?
The biggest one is that it was the type of disaster to which policymakers pay too little attention – one that has a very low or unknown probability of occurring, but that creates enormous losses if it does occur.
Great as the death toll, physical and emotional suffering of survivors, and property damage caused by the tsunami were, even greater losses could be inflicted by other disasters of low (but not negligible), or unknown, probability.
For example, the asteroid that exploded above Siberia in 1908 with the force of a hydrogen bomb might have killed millions of people had it exploded above a major city.
Yet that asteroid was only about 200 feet in diameter.
A much larger one (among the thousands of dangerously large asteroids in orbits that intersect the earth’s) could strike the earth and cause the total extinction of the human race through a combination of shock waves, fire, tsunamis, and blockage of sunlight, wherever it struck.
Other catastrophic risks include natural epidemics (the 1918-1919 Spanish influenza killed between 20 million and 40 million people), nuclear or biological attacks by terrorists, certain types of lab accidents, and abrupt global warming.
The probability of catastrophes, whether intentional or not, resulting from human activity appears to be increasing because of the rapidity and direction of technological advances.
The fact that a catastrophe is unlikely to occur is not a rational justification for ignoring the risk of its occurrence.
Suppose that a tsunami as destructive as the one in the Indian Ocean last year occurs on average once a century and kills 250,000 people.
That is an average of 2,500 deaths per year.
If such a toll could be substantially reduced at moderate cost, the investment would be worthwhile.
Educating residents of low-lying coastal areas about the warning signs of a tsunami (tremors and a sudden recession in the ocean), establishing a warning system involving emergency broadcasts, telephoned warnings, and air-raid-type sirens, and improving emergency response systems would have saved many who were killed by the Indian Ocean tsunami.
At the same time, the cost would have been well below any reasonable estimate of the average losses that can be expected from tsunamis.
There are several reasons why such measures weren’t taken in anticipation of a tsunami on the scale that occurred.
First, although a once-in-a-century event is as likely to occur at the beginning of the century as at any other time, it is much less likely to occur in the first decade of the century than later.
Politicians with limited terms of office and thus foreshortened political horizons are likely to discount low-risk disaster possibilities, since the risk of damage to their careers from failing to take precautionary measures is truncated.
Second, to the extent that effective precautions require governmental action, the fact that government is a centralized system of control makes it difficult for officials to respond to the full spectrum of possible risks against which cost-justified measures might be taken.
Given the variety of matters to which they must attend, officials are likely to have a high threshold of attention below which risks are ignored.
Third, where risks are regional or global rather than local, many national governments, especially in poorer and smaller countries, may drag their heels in the hope that larger and richer countries will bear the costs of addressing them.
Knowing this, larger and richer countries may be reluctant to take precautionary measures, as this would reward and thus encourage “free riding.”
Fourth, countries are poor often because of weak, inefficient, or corrupt government, characteristics that may disable them from taking cost-justified precautions.
And the difficulty people everywhere have in thinking in terms of probabilities – especially low probabilities, which they tend to write off – weakens political support for incurring the costs of taking precautionary measures.
An even more dramatic example of neglect of low-probability/high-cost risks is the danger of an asteroid strike, which is analytically similar to the menace of tsunamis.
Indeed, in part because tsunamis are one of the risks of an asteroid collision, the Indian Ocean disaster has stimulated new interest in asteroid defense.
Deflecting an asteroid from its orbit when it is still hundreds of millions of miles from Earth is a feasible undertaking.
Nevertheless, in the United States, the National Aeronautics and Space Administration (NASA) spends only $4 million of its annual budget of more than $10 billion on mapping dangerously close large asteroids.
At the current rate, NASA may not complete the task for another decade, even though such mapping is the key to an asteroid defense because it may give us years of warning.
The fact that a disaster of a particular type has not occurred recently or even within human memory (or even ever) is a bad reason to ignore it.
The risk may be slight, but if the consequences should it materialize are great enough, the expected cost of disaster may be sufficient to warrant defensive measures.
Back to Socialism
LONDON – The remarkable thing about Jeremy Corbyn, the hard-left outsider who stunned the British establishment by capturing the leadership of the Labour Party, is not his alleged lack of patriotism.
Whether he wishes to sing God Save the Queen at public events seems a rather trivial matter.
The remarkable thing about his brand of leftism is how reactionary it is.
Corbyn is an old-fashioned socialist who would like to soak the rich and put transport and utilities back under state control.
His rhetoric of class war suggests a complete break with mainstream social democracy.
Postwar European social democracy was always a compromise with capitalism.
Left-wing ideology, especially in Britain, owed more to certain Christian moral traditions (“more Methodist than Marx”) than to any political dogma.
Labour leaders like Clement Attlee, the first prime minister after World War II, were not opposed to a market economy; they just wanted to regulate markets in such a way that might best serve working-class interests.
During the Cold War, social democracy was Western Europe’s egalitarian alternative to communism.
Attlee, for one, was ferociously anti-communist.
Lip service was paid at Labour Party conferences to the old symbols of socialism.
Party leaders sang the Internationale with teary-eyed nostalgia.
And, until Tony Blair struck it out in 1995, Clause 4 of the party’s constitution still promised “common ownership of the means of production” and “popular control” of industry.
(Corbyn might well try to restore it.)
But when it came to national government, ideological socialists were swiftly shunted aside to make way for more pragmatic operators.
By the time Blair, following the example of his friend US President Bill Clinton, became Prime Minister by promoting the “third way,” socialism seemed to be dead and buried.
Clinton and Blair – who came to power after that other odd Anglo-American couple, Ronald Reagan and Margaret Thatcher, had started to tear at the fabric of social democracy – made compromises of which Attlee would not have dreamed.
The genius of Clinton and Blair was to combine genuine concern for the underprivileged with an unseemly devotion to the fat cats of Wall Street, the City of London, and some murkier places, too.
Blair vacationed with Silvio Berlusconi, Italy’s plutocrat prime minister.
Clinton used his presidential pardon to allow wealthy cronies to elude justice.
And after leaving office, both men swiftly put their reputations in the service of their bank accounts.
One might say that by compromising with capitalism too much, the third-way leaders compromised themselves.
This is one reason why, under Corbyn, the hard left struck back and finally managed to wrest power from the compromisers.
Especially to many young people, Corbyn is the longed-for man of conviction, the “authentic” voice of the people.
Never having had much of an ideology in the first place, the soft-left social democrats, faced with a real socialist, ended up having nothing much to say.
Could Hillary Clinton be similarly punished in her quest to be the Democratic Party’s nominee in next year’s US presidential election?
Could the center left, which she represents, lose control of the party?
In recent opinion polls, her main opponent, Bernie Sanders, who proudly calls himself a socialist, is edging ever closer to Clinton – and is actually leading her in some states.
Like Corbyn, he has the air of authenticity – a politician who says what he thinks, unlike the scripted professionals of mainstream Washington.
And yet there is no Democratic left, including Sanders, that is remotely as hard as the Corbynites.
Compared to Corbyn, Sanders is a moderate.
More important, what a militant faction did to the Labour Party is being done now not to the Democrats, but to the Republicans.
Indeed, the Republican rebels look far more extreme than Corbyn, let alone Sanders.
The Republican Party is in danger of being taken over by fanatics who see compromise in government as a form of villainous treachery.
Forcing the archconservative John Boehner to quit as Speaker of the House for being too soft was an act of war by Republicans against their own party.
Most aspiring Republican presidential candidates are not only extreme, but also more reactionary than Corbyn.
Their favored slogans – “Take back our country” or “Make America great again” – invoke a past when neither the New Deal nor the expansion of civil rights disturbed the peace of upstanding white Christians.
These hard-right Republicans, too, prize “authenticity” – indeed, they prize it above anything else (hence the appeal of Donald Trump).
And they, too, are in angry revolt against party leaders, who are believed to have compromised themselves simply by trying to govern.
It is too soon to predict who will win the Republican nomination.
It is unlikely, but possible, that a hardliner like Ted Cruz, or a rank amateur with deep religious convictions, such as the neurosurgeon Ben Carson, will capture the party.
But capturing the leadership of a political party is still easier than being elected US President.
Few people expect Corbyn to win a national election in Britain, either; that is why his parliamentary party is in such despair.
So Clinton, despite her so far lackluster campaign, and despite a popular perception of inauthenticity, even outright shiftiness, will probably hang on to her party and scrape through in the end.
She will prevail not because her views look any more convincing than those of the center-left professional pols of the Labour Party, but because her opponents look so much worse.
Corporate Crimes and Punishments
Capitalism will not take root around the world if corruption defiles it.
Socialism collapsed a decade ago because it became discredited in the eyes of the peoples who lived under it.
Now capitalism is receiving severe rebukes, with its critics given powerful evidence that they are right in seeing it as a system that works for insiders and their cronies.
After all, isn't Enron's bankruptcy a crystal-clear example of inmates controlling their guards?
If America wants to lead capitalism's global march, it must exorcize a growing culture of corporate crony capitalism.
The choice, of course, is no longer between socialism and capitalism.
Socialism became a mess as great expectations of a workers' paradise were bogged down in bureaucracy.
Without incentives and radical decentralization, economic progress is simply a dream.
So the past century demonstrated time and again, which is why China - nostalgic egalitarian rhetoric notwithstanding - opted for all-out capitalism under its post-Mao rulers.
Did Deng Xiao Peng foresee the vast inequalities that would result?
Possibly.
But Deng wanted higher standards of living for every Chinese, even if inequality resulted.
To function and remain socially acceptable, however, capitalism must be as clean as possible.
Everybody may not get a chance to become rich in a capitalist system, but the system should not be perceived as rigged in ways that allow only insiders to get rich while everyone else pays the bill.
If inequality is one negative aspect of radical capitalism - to some extent mitigated by the public sector - the other one is the potential corruption of capitalist institutions: call it the Enron syndrome.
When American Congressional committees weaken regulatory oversight of their business friends; when accounting firms surrender their independence because of the lure of mega-contracts; when corporate boards can't say no because the fees of board members are stunningly large relative to the effort; and when managers live in a frenzy of self-dealing, the stage is set for capitalism to lose its reputation.
That clearly is the case of late in America.
Capitalism involves a delicate problem of agency and trust; giving managers the green light for entrepreneurship is not enough to make certain that the interests of investors are safeguarded; nor is it enough for stock markets to price securities realistically.
While evidence about the Enron debacle is not fully in, it is fair to say that Enron is both a great moral scandal and a blot on capitalism.
It throws a stark light on the flaws of capitalism's core institutions.
The witch-hunt underway - with politicians, regulators, and even the White House seeking to save their political skins - is, indeed, essential.
Inevitably, it contains populist, anti-business sentiments.
At times, it almost looks as if anti-globalization protesters are taking over.
But in the swing of the pendulum the excesses of yesterday will incite greater scrutiny and a tougher rulebook for business in the future.
All for the good.
Capitalism is a public trust; it works if everybody has a fair chance and corporate theft receives highly visible punishments.
The ritual witch-hunt now underway may be the only way for bosses to regain their bearings.
For the only way capitalism can be made acceptable, and hence deliver growth and prosperity around the world, is to practice this rite of exorcism in public.
Enron bosses will be humiliated; other bosses will (in private) shake their heads at the scale of these purges.
They will argue that all the Congressional and newspaper investigations are excessive; that we should put Enron behind us and move on to the business of making money again.
But to act in such a way will leave those doubtful of capitalism in even greater doubt.
Such, indeed, would create the ultimate moral hazard - a world of corporate crime without punishment.
Some will say that it will be impossible to build good boards of directors if members can be sued; some will ponder what will happen to stocks if hard questions are asked about financial reporting by companies.
A clean sweep, however, will ultimately be good for stocks and certainly much better than cover-up and lingering doubts about what the books really look like.
Capitalism, indeed, has always needed its morality tales.
But distinctions must be made.
The failure of Long Term Capital Management a few years ago provided a lesson about risk management and the need to not be dreamy-eyed about a string of huge returns.
Nothing remotely illegal happened then; there was no government bailout nor facilitation of management's errors.
Investors simply made a mistake out of greed and lost, big time.
By contrast the Enron affair involved impropriety and perhaps criminal conduct of just about anyone coming close to management.
Moreover, it is not yet clear whether or not top Enron managers won't walk away with a bundle of cash while the company's workers lose their retirement assets.
Chinese capitalism, too, is rife with corruption and self-dealing.
The Chinese government's reaction - every so often - is to behead a bunch of obvious and odious villains.
That may seem an extreme solution for Western democracies.
But to imprison corrupt managers, regulators and politicians is an essential element of a functioning and respected capitalism.
Because capitalism redistributes aggressively, it is vital that there be trust, transparency and accountability.
After Enron - standing not just for a single event but a slippage in corporate culture altogether - we will only regain our bearings through the imposition of severe punishment for corporate crimes.
Redefining Business Competence
DURHAM, NORTH CAROLINA – One of the most interesting parts of my job as a business school dean is engaging in candid conversations with leaders across industries.
A few years ago, I started hearing a troubling refrain: business leaders are feeling the type of public disdain once reserved for politicians.
The problem is one of trust – or lack thereof.
The 2014 Edelman Trust Barometer reveals that less than one-fifth of the global public believes that business and government officials will tell the truth when confronted with a difficult issue.
That public sentiment is affecting business worldwide.
The Duke University CFO Magazine Global Business Outlook Survey found that nearly 60% of chief financial officers in the United States believe that a lack of public trust has harmed the business environment.
Those percentages are even higher in other parts of the world.
Given the constant stream of security and data breaches and allegations of financial manipulation involving some of the world’s most respected banks, who can blame the public for feeling this way?
Now, more than ever, we need leaders who can regain the public’s trust.
To do that, we must redefine what it means to be a competent business leader.
Traditionally, society has measured business competence by a person’s intellectual ability to examine problems broadly and deeply.
But, in order to seize global opportunities today, we need to emphasize a new dimension: the ability to create a shared set of values and foster a culture that embraces those beliefs.
Doing so requires taking three, sometimes uncomfortable, steps.
First, business leaders must overcome their fear of learning from others.
That sounds simple, but how many executives can admit that they don’t know everything or that they aren’t the smartest person in the room?
Many business leaders talk a good game about diversity, but surround themselves with people who are just like them.
Working closely with others who think differently can be scary and frustrating.
But the best leaders have the courage to encourage authenticity in both themselves and others.
Second, embrace the ambition of others.
The downfall of many business leaders in recent years has been greed and selfish ambition.
Great leaders are other-directed instead of self-focused.
They adopt a “your success is my success” mentality.
This attitude goes a long way toward developing trust among team members and helps foster strong commitment to a common vision.
It also requires leaders to trust others that they will not abuse the faith placed in them.
Finally, business leaders must value collaboration – and mean it.
Leaders who overcome fear and frustration, embrace the ambition of others, and possess a strong character and sense of purpose are likely to build diverse teams whose members share an identity and common goals but still represent themselves authentically.
Research has shown that such teams outperform others, which means that this approach can lead to a tremendous competitive advantage.
In short, collaboration not only matters; it wins.
Imagine the immense potential we would have to solve some of the world’s toughest challenges if business leaders adopted this strategy.
Consider the global threat posed by Ebola.
Efforts are underway to research, manufacture, and distribute experimental drugs that could treat the disease.
But until now drug companies had largely ignored Ebola, because there appeared to be little profit in developing a drug for populations that could not afford to pay for it.
The New York Times reported last month that United States officials are planning to scale up the production of one experimental drug, but it is still not likely to meet demand.
If some of the brightest minds in business and health care had found a way to encourage the production of an Ebola drug before the outbreak, thousands of lives might have been saved.
The type of leadership that I am advocating poses no threat to a company’s bottom line.
On the contrary, it is the starting point for scaling a business to its full potential.
As former Procter &amp;
Gamble CEO and current US Secretary of Veterans Affairs Bob McDonald is fond of saying, leaders have a responsibility to make sure that their organization can “do well and do good.”
Business can be the common thread that weaves positive change throughout the world.
In order to reach that goal, we need business leaders with the vision, skills, and commitment to make a profit and a difference.
A new standard for business competence that incorporates more than the bottom line will go a long way toward winning back the public’s trust.
Corporate Liability for Human Rights
Wittingly or unwittingly, individuals do things that injure other individuals.
For society to function, it must provide individuals with incentives not to do so, through rewards and punishments, regulations and fines.
By polluting the air, one harms anyone who breathes.
The legal system has an important role here.
If I injure you, you should be able to sue me.
Of course, individuals have a moral responsibility not to injure others.
Indeed, this is perhaps the central moral imperative--do unto others as you would have them do unto you, and do not do unto others as you would not have them do unto you.
Immanuel Kant, with his categorical imperative, provided the philosophical foundations for those who wanted an alternative basis for ethics than that provided by religious aphorisms.
But modern society cannot and does not simply rely on individuals doing the "right" thing.
It provides carrots and sticks.
Motivating corporations to do the right thing is even more difficult.
After all, corporations don't have a conscience; it is only the conscience of those who run the corporation, and as America's recent corporate scandals have made all too clear, conscience often takes a backseat to profits.
America's legal system makes sure that firms that produce a defective, and particularly an unsafe product, are held liable for the consequences.
Firms are in a far better position than consumers to assess the safety of their product; we all benefit knowing that our legal system has provided corporations with incentives to pay attention to the safety of what they produce.
Similarly, environmental laws make firms liable for their toxic wastes, and many countries, including the US, have enshrined the principle that "polluters pay," that is, companies must pay for the damage they cause.
It is a matter both of incentives and social justice.
In other realms, however, we are only beginning to think about what corporate responsibility should mean for our legal system.
In World War II, German corporations were all too willing to profit from the slave labor of those in concentration camps, and Swiss banks were happy to pocket the gold of Jewish victims of Nazi terror.
Recent suits have made them at least pay back some of what they took.
More recently, oil companies have demonstrated little conscience in providing money that feeds guerrilla movements--so long as their own interests are preserved.
When, in Angola, one brave firm, BP, wanted to do the right thing by trying to make sure that oil royalties actually go to the government, rather than to corrupt officials, other oil companies refused to go along.
In the Congo, the profits of mining companies helped maintain the late President Mobuto of Zaire, now the Congo, in power for decades--enabling him to pillage his country, allegedly facilitated by the secret bank accounts that are the specialty of countries like Switzerland, the Cayman Islands, and Cyprus.
World Bank and IMF money also helped sustain Mobuto.
These institutions knew, or they should have known, that their loans and aid was not going to help the country's desperately poor people.
It would only leave them deeper in debt.
Today, we believe that individuals, corporations, and institutions should be held accountable for their actions.
But what should that mean, if it is to be more than rhetoric?
For a start, it means debt forgiveness: international lenders may not be able to compensate fully the damage caused when their money helps maintain odious autocrats in power, but at least the victims should not be burdened by a disastrous financial legacy.
In South Africa, it was arguably the economic pressure brought by sanctions which eventually brought down the racist Apartheid system; but by the same token, it was economic support from the outside--including loans from multinational banks--which kept the system going for so long.
Much the same may be true about Iraq during the 1990's.
Those who contributed to maintaining Apartheid--and especially those who did not adhere to the sanctions after the UN approved them--should be held accountable.
The Truth and Reconciliation process may or may not work to heal South Africa's wounds, but if corporations are to be provided with incentives to do the right thing, they must now pay the price for the profits that they reaped from that abhorrent system.
If corporations had a conscience, they would act, without being forced to do so: they would estimate their profit from the Apartheid system and pay it back to the country, with interest.
For Apartheid's demise has not solved the country's deep economic problems, including an unemployment rate in excess of 25%.
So far, there appears to be no rush to make amends in South Africa, and, as elsewhere, the evidence is meager that the corporate conscience runs very deep.
But it is to be hoped that the West's legal systems will provide an alternative recourse, one that will not only partially redress past injustices, but provide incentives for corporations to think twice before profiting from brutal regimes in the future.
Corrupting the Fight Against Corruption
At its recent annual meeting, World Bank officials spoke extensively about corruption.
It is an understandable concern: money that the Bank lends to developing countries that ends up in secret bank accounts or finances some contractors’ luxurious lifestyle leaves a country more indebted, not more prosperous.
James Wolfensohn, the Bank’s previous president, and I are widely credited with putting corruption on the Bank’s agenda, against opponents who regarded corruption as a political issue, not an economic one, and thus outside the Bank’s mandate.
Our research showed systematic relationships between corruption and economic growth, which allowed us to pursue this critical issue.
But the World Bank would do well to keep four things in mind as it takes up the fight.
First, corruption takes many forms, so a war on corruption has to be fought on many fronts.
You can’t fight the diversion of small amounts of money by weak and poor countries while ignoring the massive diversion of public resources into private hands of the sort that marked, say, Russia under Boris Yeltsin.
In some countries, overt corruption occurs primarily through campaign contributions that oblige politicians to repay major donors with favors.
Smaller-scale corruption is bad, but systemic corruption of political processes can have even greater costs.
Campaign contributions and lobbying that lead to rapid privatizations of utilities – before appropriate regulatory frameworks are in place, and in a manner that produces only a few bidders – can impede development, even without direct kickbacks to government officials.
Life is never black and white.
Just as there is no “one size fits all” policy for economic development, there is no such policy for fighting corruption.
The response to corruption needs to be as complex and variegated as corruption itself.
Second, it’s fine for the World Bank to deliver anti-corruption sermons.
But policies, procedures, and institutions are what matter.
In fact, the Bank’s procurement procedures are generally viewed around the world as a model to be admired.
Indeed, some countries with large dollar reserves – hardly in need of World Bank credit – borrowed from the Bank at far higher interest rates than they were getting from the United States, believing that these procedures would help ensure high-quality projects free of corruption and become standard in other areas.
But success in fighting corruption entails more than just good procurement procedures (avoiding, for instance, single-source non-competitive bidding).
Many other policies and procedures can be enacted that reduce incentives for corruption.
For example, some tax systems are more corruption-resistant than others, because they curtail the discretionary authority of tax officials.
Third, the World Bank’s primary responsibility is to fight poverty, which means that when it confronts a poor country plagued with corruption, its challenge is to figure out how to ensure that its own money is not tainted and gets to projects and people that need it.
In some cases, this may entail delivering assistance through non-governmental organizations.
But seldom will it be the case that the best response is simply to walk away.
Finally, while developing countries must take responsibility for rooting out corruption, there is much that the West can do to help.
At a minimum, Western governments and corporations should not be complicit.
Every bribe that is taken has a payer, and too often the bribe payer is a corporation from an advanced industrial country or someone acting on its behalf.
Indeed, one reason for the so called “natural resource curse” ­– the fact that resource-rich countries do not, on average, do as well as resource-poor countries – is the prevalence of corruption, too often aided and abetted by companies that would like to get the resources they sell at discount prices.
The US under President Jimmy Carter made an important contribution in passing the Foreign Corrupt Practices Act, which made bribery by American companies anywhere in the world illegal.
The OECD’s Convention on Bribery was another step in the right direction.
Making all payments to governments transparent would bring further progress, and Western governments could encourage this simply by tying this requirement to tax deductibility.
It is equally important to address bank secrecy, which facilitates corruption by providing corrupt dictators with a safe haven for their funds.
In August 2001, just before the terrorist attacks on America, the US government vetoed an OECD effort to limit secret bank accounts.
While the government has since reversed its stance on bank secrecy for terrorists, it has not done so for corrupt officials.
A strong stand by the World Bank would enhance its credibility in the war on corruption.
Those who criticize the Bank’s stance on corruption do not do so because they favor corruption.
Some critics worry about corruption in the corruption agenda itself: that the fight will be used as a “cover” for cutting aid to countries that displease the US administration.
Such concerns have found resonance in the seeming incongruity of the Bank’s tough talk on corruption and simultaneous plans to expand lending to Iraq.
No one is likely to certify that Iraq is corruption-free – or even ranks low on corruption internationally.
The most strident criticism, however, comes from those who worry that the World Bank is straying from its mandate.
Of course, the Bank must do everything that it can to ensure that its money is well spent, which means fighting both corruption and incompetence.
But money itself will not solve all problems, and a single-minded focus on fighting corruption will not bring development.
On the contrary, it might merely divert attention from other issues of no less moment for those struggling to lift themselves out of poverty.
Corruption and Liberalization
Corruption is one of Africa's endemic problems.
Indeed, it is a key issue in Nigeria's approaching presidential election, given President Obasanjo's high-minded but failed struggle to curb it.
But the winds of globalization were supposed to blow away the cobwebs of bribery and inefficiency.
Harvard political scientist Devesh Kapur suggests why this is not happening.
Evict the state from direct economic activity, curb its discretionary powers, and both economic efficiency and governance will improve.
Developing countries have been nagged about this for years.
By opening economies to international competition and investment, governments will supposedly become disciplined because they will be watched over by international financial capital.
There is undoubtedly merit in shrinking the size of government and making it less intrusive.
Uganda is a case in point that this can bring early benefits.
Yet official corruption has clearly not declined in the way liberalization's promoters said it would, nor has governance improved markedly for the better in most countries.
Why?
First, opening an economy bids up the price of talent.
In India a decade ago, students who chose careers in public service could expect lifetime earnings of between a fifth to a third of their private sector counterparts.
Today, they get less than 10%.
The highest level civil servant or chief justice of the Supreme Court at the end of their careers is nowadays paid barely half the salary of graduates of India's elite educational institutions, who are snapped up by the global economy.
Of course, talent should go where it is most productive, and higher private-sector wages reflect the potential for higher productivity.
But the lure of high private-sector wages has consequences for the quality of government, as South Africa is discovering.
Second, exposing the arrogance and venality of the state was no doubt necessary to enact liberal reforms.
But these critiques became self-inflicted prophecies.
Treating the state as a house of ill repute makes it difficult for governments to recruit honest, capable individuals.
A well-educated person seeking a career in government can be seen not only as a fool, but as corrupt as well-hardly inspirational!
The quality of any organization, private or public, depends on the quality of the individuals it attracts.
Third, although curtailing the state's role in allocating goods and services that can be provided more efficiently by markets may reduce corruption, it is unrealistic to think that the number of fields in which the state deploys its regulatory powers can be reduced greatly.
In a modern economy the state is active in many non-economic areas, from food safety to building regulations.
Although official corruption is greater when the state is involved in economic activities, shifting the focus of state regulation appears to change only the magnitude of corruption.
The incidence of corruption could well increase.
But the weakest assumption about the benefits of a small state centers around the pace at which institutions develop.
The centrality of institutions in fostering "good governance" is underscored almost everywhere.
Unfortunately, globalization/liberalization and institutional development often work at cross purposes because of their different time horizons.
Indeed, the key factor distinguishing institutional development in the West from that in developing countries is time.
The bedrock economic, social, and political institutions in Western societies took decades, if not centuries, to develop.
Exceptions to this time frame exist-Singapore is one example-but exceptions prove a rule, they do not negate it.
Institution building is painful and laborious ("a slow boring of hard boards," as Max Weber called it), as evidenced in the recurrent crises faced by African countries from Nigeria to Botswana.
Globalization accelerates the pace of economic and social change in developing countries, which means that new institutions must adapt even before they fully take root.
The temporal dimension of institution building and the issue of human capital are also linked.
The reality of successful institution building is that key individuals are critical in the early stages, even if successful institutions may later make particular individuals less indispensable.
But globalization makes it more difficult for developing countries to retain the talented individuals needed for institutional development, because the wages of talented people are set globally; many states, if not most, simply can't afford to pay what it takes to create the institutions they need.
In fact, data on emigration and inequality suggest that developing countries with lower levels of inequality are threatened by "human capital flight," as thousands of their most talented people remain abroad after studying at elite universities-a bane across Africa.
So poor countries must either suffer the loss of people essential to their institutional development or tolerate higher levels of inequality, with the political and economic consequences that follow.
Some of these shortcomings may be improved by reducing the state even more through privatization and out-sourcing.
States could, in theory, reinvent themselves as the political equivalent of Nike-minimizing in-house activities by contracting out ever more of their functions to providers in the global market.
Such out-sourcing may be possible and, to some degree, necessary.
But there are limits to this.
As beguiling as the reforms now being promoted by international organizations sound, countries must be wary of taking short cuts in constructing their institutions.
The path to good governance is more painstaking and bumpier than anyone believed when globalization and liberalization became popular twenty years ago.
Mimicking simplistic fashions is only likely to make the path longer.
Corruption: The Enemy Within
TBILISI: Corruption is a malignant tumor, removable only with pain.
So widespread is it in my country that almost every state initiative seems tainted by corruption, with the result that the implementation of some governmental programs is now highly suspect in the minds of many ordinary people.
Towering levels of corruption damage not only the authority of government at home, but the very standing of Georgia as an independent state abroad.
To maintain that independence, to fulfill our domestic and foreign policy priorities, the suppression of corruption must be my country's most urgent priority.
For eight years I have governed, as president, an independent Georgia.
Ending the civil war that erupted almost simultaneously with Georgian independence, and putting a stop to the bloody conflicts and attempts at secession that followed, required me, at times, to compromise on some issues in order to rescue even more important values – such as the very life of the country.
The eight years of my presidency, indeed, have been devoted to transforming the sick Georgian state of its early years of independence into a healthy one.
Hard choices were made concerning those problems to be solved first and those to be addressed later.
Now, with domestic peace restored, I must declare that nothing is more important for Georgia than combating corruption.
This decision is made more necessary because Georgia's economy is, at last, growing again.
In the first part of this year, GDP increased 5% and industrial output by 11%.
Exports are rising as are after-tax incomes.
With financial panic in retreat, unpaid salaries, pensions, and other basic state obligations are being met.
But this success, and the stability it brings, will be temporary if corruption continues, like corrosive acid, to eat away at the economy and the state.
Up to now we have not been completely inactive in seeking to narrow the "corruption space" within our economy and politics.
A proper, functioning elected legislature has been created, which is very important because democratic oversight is the most reliable anti-corruption watchdog.
Criminal, civil and administrative codes that reflect Georgia's contemporary democratic and market-based reality have replaced the old Leninist norms that were an open invitation to corrupt practices.
The common courts and Supreme Court now have their own independent institutional basis in law.
Many laws on licensing, monopolies, competition, and state purchasing that target the sources of (and opportunities for) corruption are now on the books.
Public disclosure of the wealth of state officials will also help in curbing corruption's intrusions into state activity.
The penal system has been re-organized under the Ministry of Justice.
Indeed, two thousand people have been arrested over the last three years for such crimes as abuse of power and misappropriation of state property.
Six hundred have been imprisoned.
Despite these laws and institutional reforms our anti-corruption drives have, up to now, produced none of the desired results.
Discrete, limited programs failed to create properly functioning state mechanisms.
So pervasive is corruption, indeed, that the fight against it seems impossible when undertaken in terms of separate laws and actions.
Moreover, populist, demagogic campaigns against corruption may gain headlines but in the end they accomplish nothing.
They may even entrench corruption by masking its true causes and culprits.
I could, for example, have increased my popularity during my recent re-election campaign had I ordered the arrest of one or another of our domestic oligarchs.
But such a contrived "show trials" would have delivered no lasting benefits for Georgia.
To fight corruption on the scale that confronts Georgia, the attack must be coordinated and multi-faceted.
My long experience at the wheel of my country convinces me that unprepared actions, uncoordinated campaigns, are superficial and yield only temporary results.
To coordinate this anti-corruption drive I recently signed a presidential decree authorizing a "National Anti-corruption Program" to be headed by Lado Chanturia, Chairman of the Supreme Court of Georgia.
Its uncompromising task is to make certain that no single agency avoids its responsibility in this fight.
Armed with the power to demand from every state office the information it needs, the Commission will systematically root out corruption by reforming the state.
Key elements of the Commission's work include seeking ways to:
• curtail bureaucratic discretion so that opportunities for corruption begin to disappear;
• increase privatization because privatization strengthens constituencies that support legality;
• increase openness, for competition reduces corruption;
• limit regulation to what the administrative and judicial systems can handle, because simplicity, uniformity, and elimination of special exemptions are necessary if abuse of discretionary powers for corrupt purposes is to be eradicated;
• reform the civil service and introduce competitive pressures within government by creating overlapping jurisdictions and enforcement duties.
In this fight, Georgia's independent media must play its role.
The media is Georgian democracy's most notable achievement up to now.
Unfettered, it can assist in the fight against entrenched corruption.
Georgia's renewed independence was born almost a decade ago in a violence Georgians did not seek.
Now that peace has returned and is accepted as a daily aspect of life, let no one doubt Georgia's will to establish the conditions and institutions of an enduring civility and prosperity.
Cory Aquino’s Legacy
MANILA – The death of President Corazon Cojuangco Aquino – &quot;Tita Cory&quot; to most of the 92 million people of the Philippines – left behind a precious inheritance: a legacy of freedom that the Philippines came to share with oppressed peoples around the world. For her revolution was the first of the wave of “velvet revolutions” that liberated countless millions from Manila to Seoul to Johannesburg to Prague, Warsaw and Moscow.  President Aquino’s &quot;People Power&quot; revolution, indeed, is among the proudest moments in my country’s history, and the distinctive contribution of our people to the saga of mankind's long struggle for freedom and dignity.
Cory Aquino motivated ordinary Filipinos to peaks of daring and selflessness at a time when their spirit had almost been broken by a 14-year dictatorship. While her husband Ninoy Aquino lived, she – as the unassuming but caring housewife – was the stabilizing influence that tempered his dynamic personality.  But after the assassination of Senator Ninoy Aquino in August 1983, she stepped resolutely into his role as political leader of my country’s democratic opposition to an entrenched despotic regime.
Devoid of histrionics, without pretension – &quot;simply by telling people what the dictator has done to this country&quot; – she touched the hearts of freedom-loving Filipinos everywhere, the pain of the traumatic murder by the regime of her husband evoking in them memories of their own suffering and thwarted hopes.
It was in her name that concerned Filipinos mobilized families and neighbors to confront the tanks, guns and barbed wire of the dictator's cohorts. And, in God's infinite wisdom, the militancy of common people burst forth in the non-violent revolution that overthrew Ferdinand Marcos.
We the soldiers and policemen who backed her were reinforced by Cory's steel core of values and principles.
In crisis after crisis during her presidency, she exemplified unwavering firmness in the democratic exercise of power as a servant-leader.
Cory provided policy guidance as Commander-in-Chief, but trusted the Defense Department and Armed Forces to carry out their missions in the face of 9 coup attempts which were all frustrated. These mutinies were all death-dealing situations that threatened national stability, and yet she never flinched.
Prayer and spiritual devotion were important components of Cory’s daily endeavors – and a major influence in her decision-making and personal relations. Her inner reserves of faith, indeed, kept her going through every hardship.
Her spiritual strength arose out of her deep and abiding reliance on the grace and boundless mercy of the god she believed in.
In the tumult of the post-revolutionary period, she presided with surprising even-handedness over the unavoidable rivalries among different sides of the political spectrum. More importantly, Cory sparked the momentum for the Philippines to regain a position of respect, dignity and even admiration in the community of nations.
So Cory Aquino's death has, in many ways, orphaned the Filipino nation. We who are left behind owe her the duty of safeguarding her legacy of freedom – and of enriching it with social justice and unity in nation-building.  For until the very end of her battle with cancer, she continued to speak out for individual transformation and, on the part of those elected to lead us, for their selfless stewardship.
The finest tribute Filipinos and other freedom-loving peoples can offer to Cory's memory is for responsible citizens to work towards the vision of an empowered, bountiful future for which she and Ninoy aspired. Irrevocably, their names will forever be intimately intertwined with the peaceful revolution of 1986 which restored our liberty and democracy.
But the liberation she brought to us was just one battle in the generational struggle the people of the Philippines must wage to secure their liberation from poverty, inequity and injustice.
Success in that war is not pre-ordained, but can only be won through willing sacrifice, faithfulness to duty, and concerted action for our people's well-being.
These are the internal wars every nation and society, no matter how big or small, must win. Cory Aquino’s lifetime of service and sacrifice provided the tools and a model for how to win that seemingly eternal struggle.  To sustain such a treasured legacy and defend democracy wherever it is threatened is our collective responsibility.
Could the IMF Have Prevented This Crisis?
WASHINGTON D.C. &#45;&#45; Until recently, the International Monetary Fund’s main job was lending to countries with balance-of-payment problems.
Today, however, emerging countries increasingly prefer to “self-insure” by accumulating reserves (and sharing them through regional pooling arrangements).
As a result, the Fund must change, reinforcing its supervisory role and its capacity to oversee members’ compliance with their obligation to contribute to financial stability.
So its failure to press the United States to redress the mortgage-market vulnerabilities that precipitated the current financial crisis indicates that much remains to be done.
Indeed, in its 2006 annual review of the US economy, the IMF was extraordinarily benign in its assessment of the risks posed by the relaxation of lending standards in the US mortgage market.
It noted that “borrowers at risk of significant mortgage payment increases remained a small minority, concentrated mostly among higher-income households that were aware of the attendant risks,” and concluded that “indications are that credit and risk allocation mechanisms in the U.S. housing market have remained relatively efficient.” This, it added, “should provide comfort.”
Likewise, the problem was not mentioned in one of the IMF’s flagship publications, the Global Financial Stability Report (GFSR), in September 2006, just ten months before the sub-prime mortgage crisis became apparent to all.
In the IMF’s view, “[m]ajor financial institutions in mature...markets [were]...healthy, having remained profitable and well capitalized,” and “the financial sectors in many countries are in a strong position to cope with any cyclical challenges and further market corrections to come.”
The IMF began to take notice only in April 2007, when the problem was already erupting, but there was still no sense of urgency.
On the contrary, according to the IMF, “weakness has been contained to certain portions of the sub-prime market (and, to a lesser extent, the Alt-A market), and is not likely to pose a serious systemic threat.”
Moreover, “the US housing market appears to be stabilizing....Overall, the US mortgage market has remained resilient, although the sub-prime segment has deteriorated a bit more rapidly than had been expected.”
The GFSR confidently noted that “stress tests conducted by investment banks show that, even under scenarios of nationwide house price declines that are historically unprecedented, most investors with exposure to subprime mortgages through securitized structures will not face losses.”
Why has the Fund’s surveillance of the US economy been so ineffective?
Suppose that the vulnerabilities piling up in the US mortgage market – right under the IMF’s Washington-headquartered nose – had taken place in a developing country.
It is, frankly, inconceivable that the Fund would have failed so miserably in detecting them.
The IMF has been criticized for burdening borrowers with unnecessary and sometimes perverse lending conditions, but its highly qualified staff has not been shy in blowing the whistle when it perceived domestic vulnerabilities in other countries.
So why didn’t they scrutinize the US economy with equal zeal?
The answer may be found in the IMF’s governance structure.
Currently, the distribution of power within the IMF follows the logic of its lending role.
The more money a country puts in, the more influence it has.
This may be prompting the Fund to turn a blind eye to the economic vulnerabilities of its most influential members – precisely those whose domestic policies have large, systemic implications.
This “money-for-influence” model of governance indirectly impairs the IMF’s capacity to criticize the economies of its most important members (let alone police compliance with their obligations).
In any event, if its staff’s criticism ever becomes too candid, these countries can always use their leverage to water down the public communiqués issued by the IMF’s board.
The Fund can help to prevent future crisis of this kind, but only if it first prevents undue influence on its capacity to scrutinize, and if necessary criticize, influential countries’ policies and regulations.
This requires a different governance structure in which power is more evenly distributed, so that the IMF can effectively exercise surveillance where it should, not just where it can.
Countdown to Withdrawal from Iraq
How long will the United States maintain a large deployment of troops in Iraq?
That is now the central question of George W. Bush’s second term.
Until recently, the Bush administration answered with an evasive cliché: “as long as it takes and not one day longer.”
The ice began to crack on November 17, when Representative John Murtha, a hawkish Democratic congressman and marine veteran, suggested pulling troops out of Iraq in six months.
Soon after, the Republican-controlled Senate voted for “a significant transition to full Iraq sovereignty in 2006.”
After initial resistance, Bush began to change his rhetoric by suggesting that a troop drawdown would occur sooner than previously expected.
The erosion in public support for Bush’s Iraq policy is stark.
Fifty-four percent of Americans now say that the US erred in sending troops, up from 24% at the start of the war in March 2003.
In part, this reflects the rising casualty rate, with more than 2,100 American soldiers killed thus far.
But it also reflects a growing belief that the war is failing.
As Duke University’s Peter Feaver, an expert on public opinion who is now serving as a White House advisor, recently pointed out, Americans will tolerate casualties when they believe that a war is just and has a reasonable prospect of success.
But citizens now doubt both these points.
The administration is paying the price for overselling the reasons for the war and bungling the post-invasion occupation.
Not surprisingly, Bush’s new rhetoric stresses that he has a “strategy for victory.”
If “victory” remains defined as stable democracy in Iraq, it is unlikely that Bush will have enough time to implement his strategy.
In September, General George Casey, the senior American military commander in Iraq, testified to Congress that modern insurgencies last about a decade, and that the Iraqi army had only one battalion capable of fighting without help from American military forces.
A month later, the influential International Institute for Strategic Studies in London estimated that US troop withdrawals next year were likely to be small, and that it would take at least five years for Iraq to build the 300,000-strong army needed to fight the insurgency on its own.
But, with Congressional elections in 2006 and a presidential election in 2008, five years is too long.
It seems more realistic that the Republican administration will have only 18 months to two years to implement its strategy.
The Democrats, meanwhile, are divided.
Some, like John Murtha and Nancy Pelosi, the minority leader in the House of Representatives, want a short timetable, while others, like Senator Joseph Biden, resists a firm timetable but predicts a withdrawal of 50,000 US troops in 2006, with many of the remaining 100,000 to follow in 2007.
Those of us who believe that invading Iraq was a mistake, and that Bush is guilty of hubris in his failure to plan adequately for the aftermath, face a dilemma: if America withdraws too precipitously, it may compound these mistakes.
Iraq is not like Vietnam, where American departure was followed by stability imposed by an authoritarian government.
In Iraq, the danger is that departure could be followed by civil war and chaos – ideal conditions for terrorists to maintain havens.
Iraq differs from Vietnam in another way as well.
Unlike the North Vietnamese, the Sunni insurgents will have a difficult time taking over a country where they represent only 20% of the population.
Indeed, with Shia Arabs and Kurds making up 80% of the country, the insurgency is focused on only four of Iraq’s 18 provinces.
America’s quandary is that it is both part of the problem and part of the solution.
So long as a large number of American troops remains as an occupying force, they serve as a recruiting tool for insurgents.
As the political scientist Robert Pape has shown in a careful study, resistance to foreign occupation is a prime motivation for suicide bombers.
But, if America leaves too soon, the elected Iraqi government may be unable to cope with the insurgency, sending Iraq the way of Lebanon in the 1980’s or Afghanistan in the 1990’s.
Similarly, if Bush sets a short timetable, he may encourage the insurgents to wait him out.
But, unless he makes it clear that American troops will leave in the near term, he will reinforce the impression of imperial occupation.
The key to resolving this dilemma will be to press for local compromises that involve Sunnis in the political process, and to step up the rate of training of Iraqis to manage their own security.
Even then, success is uncertain.
One failure is already clear: that of the neo-conservative dream of creating a military ally that could serve as a long-term base for American troops in the campaign to transform and democratize the Middle East.
Three elections have produced some degree of legitimacy for the Shia-dominated Iraqi government, but without a sense of community and effective institutions, elections merely create a tyranny of the majority.
That may be better than Saddam Hussein’s tyranny of the minority, but it is hardly modern democracy.
Bush compares his goal in Iraq to the democratization of Japan after World War II.
But Japan was a totally conquered, ethnically homogeneous country with no insurgency, a large middle class, and previous experience of political openness.
Even then, success took seven years.
Instead, Bush should plan on a two-year window to give the Iraqi government as strong a chance as possible before the Americans leave, while emphasizing that Iraqis will thereafter be responsible for their own security and political salvation.
स्थानीय समस्याओं के लिए स्थानीय नवाचार
बोस्टन – ज्यों-ज्यों हम घटिया और नकली दवाओं के खतरे के बारे में और अधिक जानने लगे हैं, यह स्पष्ट होता जा रहा है कि यह उससे कहीं अधिक बड़ी समस्या है जितना कि पहले इसके बारे में सोचा गया था। यह एक ऐसा संकट भी है जिसे विकासशील देशों में अधिक तीव्रता से महसूस किया जा रहा है जिसमें नकली और घटिया दवाइयाँ हर साल 5,00,000 से अधिक लोगों की मृत्यु का कारण बनती हैं और ऐसे रोगों के उत्पन्न होने में योगदान करती हैं जो मौजूदा उपचारों के लिए प्रतिरोधी हैं और इसका लाखों लोगों पर दुष्प्रभाव पड़ता है।
विकासशील देशों में नीति-निर्माताओं द्वारा अपनाए जानेवाले दृष्टिकोण से यह समस्या और भी जटिल हो जाती है जिनकी इसके समाधान अपने देश में खोजने के बजाय विदेशों में खोजने की संभावना अधिक होती है। यह अदूरदर्शिता एक ऐसी भयंकर भूल है जिससे नवाचार और प्रगति बाधित होती है। जब नकली या घटिया दवाओं के फलने-फूलने जैसी अधिक प्रभावित करनेवाली स्वास्थ्य की चुनौतियों की बात होती है, तो स्थानीय समाधानों और स्थानीय नवाचारों के न केवल किसी भी सफल प्रयास में प्रमुख होने की संभावना होती है बल्कि उनमें ऐसे लाभ प्रदान करने की क्षमता होती है जो मूल समस्या से कहीं अधिक बढ़कर होते हैं।
पूरी विकासशील दुनिया में, लेकिन अफ्रीका में अधिक जाहिर तौर पर, दो ऐसे समूह हैं जो घटिया दवाओं के खतरे से निपटने के लिए उपकरणों की खोज करने में रुचि रखते हैं। एक समूह, छात्रों, उद्यमियों, और शोधकर्ताओं का है जो ऐसे समाधान खोजने का प्रयास करता है जो स्थानीय हों, मौलिक हों, और उनके समाज की जरूरतों के अनुरूप हों। इसके सदस्य विचारों को साझा करने के लिए तत्पर और सहयोग करने के लिए उत्सुक होते हैं। हालाँकि इस समूह ने कुछ नवोन्मेषी समाधान दिए हैं, उदाहरण के लिए, घाना के उद्यमी ब्राइट सिमन्स द्वारा नकली दवा की समस्या के समाधान के लिए मोबाइल प्रौद्योगिकी का उपयोग किया जा रहा है तथा इसमें और बहुत से उत्साही स्थानीय आविष्कारकों और उद्यमियों को शामिल होना चाहिए।
दूसरा समूह सरकारी अधिकारियों का है जिसमें नियामक भी शामिल हैं। वे भी घटिया और नकली दवाओं की इस बीमारी के बारे में बहुत अधिक चिंतित हैं, लेकिन वे स्थानीय नवाचार पर भरोसा नहीं करना चाहते हैं। उनके दिमाग में यह होता है कि उच्चस्तरीय प्रौद्योगिकी के रूप में दुनिया के सबसे अमीर देशों में तैयार और विकसित समाधान पहले से ही मौजूद हैं। इस समूह के लिए चुनौती यह होती है कि इन प्रौद्योगिकियों का आयात करने के लिए वित्तीय संसाधन कैसे प्राप्त किए जाएँ।
विकासशील देशों के नेताओं की दृष्टि में, नवाचार का समर्थन करनेवाले पारिस्थितिकी तंत्र को तैयार करने के लिए आवश्यक प्रयास करने की बात करना तो बहुत अच्छा लगता है, परंतु निवेश पर लाभ बहुत कम मिलता है। अनगिनत सम्मेलनों और संगोष्ठियों में मंत्रालय के अधिकारी और सरकारी कार्मिक इस बात पर जोर देते हैं कि समाधानो��� का आयात करने के लिए अलग-से धन उपलब्ध होना चाहिए। दुर्भाग्यवश, अनुसंधान और नवाचार, या स्थानीय उद्यमियों और आविष्कारकों से संपर्क करना उनकी कार्यसूची में कभी शामिल नहीं होता है। देश में उपलब्ध बुद्धि, उत्साह, और ऊर्जा के भारी भंडार का उपयोग करने में उनकी कतई रुचि नहीं होती है।
अधिकारियों के लिए यह बुद्धिमानी की बात होगी कि वे इस पर पुनर्विचार करें। इस बारे में भारी मात्रा में सबूत मौजूद हैं कि स्थायी समाधानों के लिए स्थानीय समर्थन और स्थानीय भागीदारों का होना आवश्यक है। विदेशों से समाधान आयात करने के लिए धन जुटाने से चुनौती के सिर्फ एक हिस्से मात्र पर कार्रवाई होती है।
बहुत से देशों के पास ऐसे उपकरण स्थापित करने, उन्हें चलाने, और उनका रखरखाव करने के लिए संसाधन नहीं होते हैं जिन्हें स्थानीय रूप से तैयार न किया गया हो। चूंकि दुरुपयोग और असावधानी बरतने से उपकरण काम करना बंद कर देते हैं, इसलिए और अधिक धनराशि की आवश्यकता पड़ जाती है या कार्यक्रम ठप्प होकर रह जाता है। यह दृष्टिकोण नवाचार के पारिस्थितिकी तंत्रों का विकास करने में तो विफल रहता ही है, जो बहुत ही निराशाजनक होता है; यह संबंधित समस्या को हल करने में भी बार-बार विफल रहता है।
यद्यपि दवा-गुणवत्ता के परीक्षण के क्षेत्र में सिमन्स जैसे अफ्रीकी उद्यमियों से कुछ समाधान मिले हैं, परंतु ऐसे उदाहरण बहुत विरल हैं, और उनमें से कई क्षेत्र के बाहर के संगठनों की सहायता से विदेशों में विकसित किए गए हैं। अधिकतर मामलों में, इस तरह की किसी पहल में स्थानीय छात्रों को कभी शामिल नहीं किया जाता है। स्थानीय पाठ्यक्रमों में स्थानीय चुनौतियों पर ध्यान केंद्रित नहीं किया जाता है या स्थानीय नवाचार को बढ़ावा नहीं दिया जाता है।
और फिर भी मौलिक और टिकाऊ समाधानों के लिए स्थानीय प्रतिभा महत्वपूर्ण होती है। दरअसल, अनुसंधान की समावेशी संस्कृति का विकास करने पर, स्थानीय नवाचार में ऐसे लाभ प्रदान करने की क्षमता होती है जो हल की जानेवाली विशिष्ट समस्या से कहीं अधिक होते हैं।
कम प्रतिनिधित्व वाले समूहों की भागीदारी को प्रोत्साहित करने तथा शिक्षा और ज्ञान के लिए अवसर पैदा करने से न केवल सद्भावना पैदा होती है बल्कि पारदर्शिता और जवाबदेही को प्रोत्साहन मिलता है। भावी अनुसंधान के लिए सुदृढ़ नींव तैयार करने से अधिक फलदायक सार्वजनिक-निजी भागीदारियों का निर्माण होता है तथा शिक्षाविदों और घरेलू उद्योग के बीच मजबूत संबंध बनते हैं, और इस प्रकार आर्थिक विकास को प्रोत्साहन मिलता है।
सहायता एजेंसियों या दवा कंपनियों जैसे विदेशी संगठनों की स्थानीय नवाचार को बढ़ाने में एक भूमिका होती है। वे इसे आर्थिक रूप से सहायता प्रदान कर सकते हैं, नई साझेदारियाँ कर सकते हैं, और नीति निर्माताओं को इसे अधिक विश्वसनीय बनाने के लिए प्रोत्साहित कर सकते हैं।
इसमें अंतर्राष्ट्रीय समुदाय की भी भूमिका होती है। इस वर्ष संयुक्त राष्ट्र संघ गरीबी उन्मूलन और स्वास्थ्य में सुधार के लिए वैश्विक प्रयासों के अगले चरण की शुरूआत करने के रूप में सतत विकास लक्ष्यों को स्वीकार करेगा। जैसा कि विकासशील देशों में नकली और घटिया दवाओं के खिलाफ लगातार चल रही लड़ाई के उदाहरण से पता चलता है, इसमें सफलता अधिकतर स्थानीय नवाचार से ही मिल सकती है, अन्यथा नहीं।
The Education Antidote to Radicalization
DUBAI – No visitor to the Middle East can avoid noticing the yawning gap between the educational, entrepreneurial, and occupational aspirations of the region’s young people and the harsh reality that deprives so many of them of a positive future.
Indeed, in the Middle East, half of those aged 18-25 are either unemployed or underemployed.
Aggravating this situation is the global refugee crisis, which has displaced some 30 million children, six million from Syria alone, very few of whom are likely to return home during their school-age years.
It should come as no surprise that the group known in the region as Daesh (the Islamic State) believes that it can find fertile ground for recruitment in this vast population of dispossessed and disaffected young people.
Daesh propagandists are misusing social media in the way that their extremist predecessors and contemporaries have sometimes misused mosques – as a forum for radicalization.
The group consistently posts content that challenges the possibility of coexistence between Islam and the West and calls young people to jihad.
The grotesquely violent videos that Daesh produces have shock appeal.
But what really attracts disaffected young people is the invitation to be part of something that seems larger than themselves and the societies in which they live.
Shiraz Maher of the International Center for the Study of Radicalization (ICSR) at King’s College London identifies a common thread of sentiment among recruits: “righteous indignation, defiance, a sense of persecution, and a refusal to conform.”
As a recent Quilliam Foundation report concludes, Daesh plays on the youthful desire to be part of something worthwhile; it is the organization’s utopian appeal that is most alluring to new recruits.
Given this, few would disagree that we find ourselves in a generational battle for hearts and minds that cannot be won by military means alone.
Hard power can eliminate Daesh’s hardcore leaders. But we will need more than that to convince nearly 200 million young Muslims that extremism is, quite literally, a dead end.
There are many examples of under-the-radar operations working to counter extremism across the Indian subcontinent and the Middle East: children’s magazines in Pakistan, videos aimed at teenagers in North Africa, radio stations in the Middle East, and books and publications opposing Al Qaeda.
They can help to expose the truth about life in Daesh – that it is brutal, corrupt, and prone to internal purges – in several ways, including by drawing attention to defections.
As a 2014 report states, “[the very existence of defectors] shatters the image of unity and determination that [the group] seeks to convey.”
But we must be more ambitious if we are to win the war of ideas, sustaining the cultural space that Daesh calls the “the grey zone,” which it longs to destroy. It is a space in which Muslims and non-Muslims can coexist, discover their shared values, and cooperate.
Peter Neumann, the director of the ICSR, has proposed a YouTube contest for videos that explain the failings of Daesh.
“You would receive 5,000 videos in no time,” he says. “Four thousand are junk, but 1,000 of them are effective – 1,000 videos against [Daesh] propaganda.”
The best long-term tool for countering extremism, however, is education.
In Jaffa, Israel, a school run by the Church of Scotland teaches the virtues of tolerance to Muslim, Jewish, and Christian children.
Throughout Lebanon, a common school curriculum championing religious diversity – including the “refusal of any radicalism and religious or sectarian seclusion” – is being taught to Sunni, Shia, and Christian children starting at the age of nine.
The country has also introduced double shifts in its school system to accommodate some 200,000 Syrian refugee children.
If troubled Lebanon, wracked by sectarian violence and religious divides, can champion coexistence and provide Syrian refugees with a chance to study, there is no reason other countries in the region should not follow its example.
The choice could not be clearer.
We can stand by and watch a new generation of web-savvy Muslim youth be deluged with false claims that Islam cannot coexist with Western values.
Or we can recognize that the young people of the Middle East and the rest of the Muslim world share the aspirations of young people in every other part of the world.
All the evidence indicates that the region’s young people want education, employment, and the chance to make the most of their talents.
Countering the Contagious West
NEWPORT BEACH – Imagine for a moment that you are the chief policymaker in a successful emerging-market country.
You are watching with legitimate concern (and a mixture of astonishment and anger) as Europe’s crippling debt crisis spreads and America’s dysfunctional politics leave it unable to revive its moribund economy.
Would you draw comfort from your country’s impressive internal resilience and offset the deflationary winds blowing from the West; or would you play it safe and increase your country’s precautionary reserves?
That is the question facing several emerging-market economies, and its impact extends well beyond their borders.
Indeed, it is a question that also speaks to the increasingly worrisome outlook for the global economy.
The very fact that we are posing this question is novel and notable it its own right.
You can add this to the list of previously unthinkable things that we have witnessed lately.
That list includes, just in the last few weeks, America’s loss of its sacred AAA rating; its political flirtation with a debt default; mounting concern about debt restructurings in peripheral European economies and talk about a possible eurozone breakup; and Switzerland’s dramatic steps to reduce (yes, reduce) its safe-haven status.
The answer to the emerging markets’ question would have been straightforward a few years ago.
It is not today.
In the world of old, the West’s economic malaise already would have pulled the rug from beneath most emerging-market countries.
Indeed, the conventional wisdom – supported by many painful experiences – was that when the industrial countries sneezed, the emerging world caught a cold.
Today, however, several (though not all) emerging-market countries are benefiting from years of considerable efforts to reduce their financial vulnerability by accumulating huge amounts of international reserves.
They have also paid back a significant share of external debt and converted much of what remains into more manageable local-currency liabilities.
This sharp balance-sheet improvement has been instrumental in enabling emerging countries to bounce back strongly from the 2008-2009 global financial crisis, whereas the West continues to hobble along.
Indeed, until the recent renewed downturn in America and Europe, the emerging world’s major policy concern was too much growth, mounting inflationary pressure, and economic overheating.
Today’s emerging countries have considerable policy flexibility and much greater latitude to act than they had in the past.
Accordingly, faced with a weakening global economy, they confront two basic policy choices.
On the one hand, they can compensate for the global weakness by turbo-charging their own internal demand through aggressive fiscal stimulus.
This would shield their populations from the West’s problems and, at the global level, provide a counter-impetus to the deteriorating global outlook.
In the process, they would shift some of the policy emphasis from production to consumption.
They would run down their trade surpluses and, in some cases, allow their currencies to appreciate.
Their international reserves would decline and/or their debt would rise.
On the other hand, these economies can opt for greater self-insurance.
In this scenario, rather than stimulating domestic demand, they would fortify their defenses, positioning themselves for a long and stormy winter for the global economy.
Thus, they would minimize the deterioration in their trade surpluses, maintain competitive exchange rates, and safeguard their foreign reserves and net-creditor positions.
In the process, they would accentuate the pressure on the global economy from the West’s seemingly endless downturn.
I suspect that emerging-market policymakers’ hearts are advocating the former.
After all, a domestic stimulus would help maintain economic growth.
Moreover, a counter-cyclical policy would signal to the world these countries’ willingness to take on global responsibilities.
But I also suspect that their heads are cautioning against spending a lot of money in an attempt to accomplish a difficult, if not impossible, task.
After all, there is little to suggest that emerging economies could counter, effectively and sustainably, a large synchronized slowdown in the West, especially when it comes with the risk of another banking crisis.
My inclination is to believe that the head will prevail – but not completely.
Emerging-market economies will take some steps, including interest-rate cuts, to safeguard domestic growth.
They will also signal willingness to help the West financially.
But such steps, while notable, would prove insufficient to counter fully the slowdown emanating from the West; and it certainly would not materially change the outlook for the United States and Europe.
Despite their strong fundamentals, emerging countries still feel vulnerable in the face of the West’s economic weakness, policy shortfalls, and political paralysis.
Moreover, they know from experience that there are no easy and immediate solutions to the West’s debt overhang and structural impediments to growth.
And they have no illusions about the potential for effective global policy coordination.
In such circumstances, policymakers in emerging markets will eschew boldness for prudence.
They will hope for a short winter for the global economy, but they will plan and position for a long one.
Accordingly, they will show very limited appetite for risking the hard-earned policy gains of the last 10-15 years, and the resilience and self-assurance that has come with those gains.
Having put yourself in their position for a moment, can you blame them?
Counting Iraqi Casualties
In times of war, accurate figures on the civilian death toll are almost always hard to come by.
With few exceptions, demographers and epidemiologists have not applied their expertise to making rigorous, credible estimates of civilian mortality and morbidity.
Sometimes, a lack of professional freedom prevents those who may be most familiar with the data – for example, analysts whose livelihoods depend on the government(s) involved in the conflict – from using their expertise for purposes that could be politically damaging.
But there are other challenges as well.
Isolating the conflict’s impact from that of other interventions (e.g., economic sanctions) may be impossible.
Moreover, the high-quality population data needed for credible estimates may not be available due to their “sensitive nature,” or because they never have been collected (sometimes the case in developing nations), or because refugee movements have made data obsolete.
As a result, the degree of uncertainty in such estimates may be unacceptably high, making them of little real worth.
Consider the different approaches that have been used to examine the Iraq war.
The Iraq Body Count aims to tally only deaths from violence during the current war by creating a data set based on media reports.
If there is no double counting, and if the incidents included in the data were reported correctly, their tally represents a minimum number, because media reports may not be comprehensive.
Another approach estimates the total change in mortality that the war caused (including deaths due to the war’s direct and indirect effects) by calculating the change in the death rate from the pre-war period.
This requires data upon which to base the rise in mortality, usually derived by conducting a household survey on a random sample of the population.
Typically, interviewers ask the head of the household to disclose the number and demographic characteristics of pre-war household members, whether any of the people in the pre-war household had died between the pre-war period and the time of the survey, and the date of any household member’s death.
If household surveys are carried out properly, the number of excess deaths during the war can be estimated within a range of statistical uncertainty.
But, when conducted during wartime, risks abound.
Aside from the risks to interviewers collecting such data during a conflict, these include the selection bias of households in the sample, a lack of credible population data to which to apply the changed mortality rates, and mistaken or misleading accounts by participants.
The survey approach was used twice by a group of researchers based primarily at Johns Hopkins University, who published their results in the medical journal The Lancet .
Their estimates have been lauded, but also questioned because of their misinterpretation of their own figures.
For example, in a summary of the 2004 study, they wrote, “Making conservative assumptions we think that about 100,000 excess deaths, or more, have happened since the 2003 invasion of Iraq.” But the first study yielded very imprecise estimates of the number of deaths, which the authors glossed over.
They should have said, “We can say with 95% certainty that between 8,000 and 194,000 excess Iraqi deaths occurred during the period.”
The group essentially repeated the study in 2006, using a larger sample size.
Again, the researchers had interviewers administer what resembled a typical survey of a random sample of households.
Appropriately, at the end of the article in The Lancet , the authors discuss issues that may have resulted in a sample that in fact did not meet the “random” threshold.
Problems with interpretation also plagued that second effort.
The authors used crude death rates (CDR’s), which reflect the number of deaths per thousand people, in explaining the rise in mortality.
But demographers rarely use CDR’s, thinking instead in terms of age- and sex-specific mortality rates, usually summarized as “life expectancy.”
That being said, the group reported that the CDR increased from 5.5 per thousand people in 2002 to 13.3 per thousand in the post-invasion period (March 2003-March 2006).
To put the pre-invasion figure in perspective, consider United Nations Population Division figures, which are generally considered to be of very high quality.
The UN estimates that Iraq’s pre-invasion CDR was 10 per thousand, not the 5 per thousand estimated from the two studies.
Comparing internationally, the UN reports that Iran’s CDR in the 2000-2005 period was 5.3 per thousand.
Prior to the war, most observers thought that the situation in Iraq was considerably worse than in Iran.
So the pre-war CDR that the two Lancet studies yield seems too low.
It may not be wrong, but the authors should provide a credible explanation of why their pre-war CDR is nearly half that of the UN Population Division.
If the pre-war mortality rate was too low and/or if the population estimates were too high – because, for example, they ignored outflows of refugees from Iraq – the resulting estimates of the number of Iraqi “excess deaths” would be inflated.
More fundamentally, what purpose do these numbers serve?
Certainly, after the dust has settled, numbers play a role in evaluating the costs and benefits (if any), of a war.
But in real time, do the numbers really add to the debate?
Do they really provide us with more information than the Iraq Body Count figures provide?
Do we have the appropriate context to help us interpret the numbers?
The war in Iraq has been exceptionally bloody.
For now, that is about all that statistics can safely tell us.
Cradle of Contradictions
The American-led invasion of Iraq was supposed to begin a process of transformation across the Middle East.
Syrian poet and political analyst Ammar Abdulhamid suggests that a thaw - if not quite change, then perhaps its precursor - is now occurring in Syria.
Life in Syria has never been simple.
The realities, meticulously hidden under a veneer of homogeneity, have always been too complex for even the most discerning of scholars.
The peaceful coexistence between the country's myriad ethnic, religious, and tribal groups is the result of a complex layer of concessions, compromises, tacit agreements, and other pragmatic arrangements perfected over the centuries.
Over the last few months, life has become even more complex, as both the country's ruling elite and civil society advocates seem more bewildered than ever about the country's future.
Each group is focused on determining its particular privileges while preserving the territorial integrity and national unity of a country growing increasingly fractious and fragile.
These developments, of course, follow from the US-led invasion of Iraq, which turned a vague and distant threat into an imposing neighbor whose intentions towards Syria's Baathist regime are anything but friendly.
Consequently, the need for drastic change in the structure and style of a previously reality-impaired regime has finally begun to sink in.
As a result, Syria's various political power centers have embarked on a desperate search for a vision to promote change yet allow the existing order to survive.
Because Syria's rulers have neither the ability nor the know-how to produce such a vision, civil society has been granted some leeway for action.
Clearly, this expansion of civil society's operating arena may even turn into open opposition to Syria's rulers.
The point is to allow for some debate to take place in the hope of producing the sorely needed vision of change.
This will give the outside world the impression that serious change is taking place and that the regime should be given the time to see it through.
Crackdowns, detentions, and illegal trials thus exist hand in hand with a growing tolerance for creative initiatives.
Over twenty NGOs have been formed in the last few months.
Many are charities and often include on their advisory boards one or two members with clear government connections (the daughter of a minister or an army general, or, in a couple of notable instances, the President's wife).
Even so, this development is still significant by Syrian standards, as independent initiatives are traditionally frowned upon.
Of real significance here is the press service, All4Syria (www.all4syria.org), created by the Syrian engineer Ayman Abdul Nour.
The service contains an electronic newsletter that includes Syria-related reports and articles gathered from a variety of sources, often including comments by opposition figures at home and abroad.
In its way, All4Syria has provided an indirect conduit for dialogue between government and opposition, which may not have taken place otherwise.
Although All4Syria's Internet site was recently blocked for unspecified reasons, the newsletter continues to be circulated and Mr. Abdul Nour moves in his usual circles unmolested.
I have been involved with the launch of another initiative, the Tharwa Project (www.tharwaproject.com), which I have long envisioned as one way for the Arab region to address its problems with religious and ethnic minorities.
Although regional in scope and with a colorful international board of advisors, the Tharwa Project (Tharwa means wealth in Arabic) is based in Damascus and will be run from there.
The launch of the Tharwa Project one month ago inadvertently coincided with Kurdish riots that rocked northern Syria.
This, together with the prominence of the advisory board (which includes well-known Egyptian sociologist Saad Eddin Ibrahim, French expert on political Islam Gilles Kepel, and Flynt Leverett, a Brookings Institution Fellow) and the sensitivity of minority rights in general, combined to give the Project national, regional, and international notice.
So far, Syria's authorities have not reacted to the Tharwa Project.
It's probably still too early in the game for that.
But the Project seems to represent the type of activity that can help produce visions for change.
Some in the Syrian government could be aware of this.
Nevertheless, fourteen civil society activists who attempted to organize a special meeting to address the realities of the Kurdish issue in Syria recently received various sentences on charges of working to undermine national unity.
The authorities clearly wish to control the extent of the thaw in Syria's political culture.
But even as such crackdowns continue, more private independent initiatives are bubbling to the surface.
For my colleagues and me, this is the time for hard and continuous work to expand the space of popular participation in the country and region.
We can deliver no judgment at this stage as to where things might be heading.
Everything and anything seems possible.
Still, it is tempting to think that Syria is witnessing a new beginning, and the end of an era whose sins we all bear.
Create Growth-Linked Bonds
A year ago, at the Summit of the Americas, 34 western hemisphere heads of state agreed to promote the creation of government-issued growth-linked bonds whose payout is tied to gross domestic product (GDP).
But progress has mostly stalled.
Only one major proposal related to such bonds, from Argentina, is on the table.
A unique opportunity to strengthen the world’s financial infrastructure and increase economic efficiency for many years to come could be slipping away.
I have argued for growth-linked bonds since my 1993 book Macro Markets .
GDP is the most comprehensive measure we have of an economy’s success.
The simplest form of growth-linked bonds would be a long-term government security that pays a regular dividend proportional to the GDP of the issuing country.
Suppose that the Argentine government issued perpetual bonds that paid an annual dividend equal to one ten-billionth of Argentine GDP, payable in pesos.
Because Argentina’s annual GDP now runs at about 500 billion pesos, one of these bonds today would pay a dividend of 50 pesos (about $17 or €13) a year.
The dividend would rise or fall as the success of Argentina’s economy is revealed through time.
The market for GDP-linked bonds would arrive at a price that makes them attractive to investors, reflecting expectations and uncertainties about the issuing country’s future.
Until there is a market for such bonds, we cannot know what the price will be.
But we can expect that the market for long-term GDP-linked bonds from countries like Argentina, where the future of the economy is uncertain, would be volatile, as investors adjust their expectations of future GDP growth up and down in response to new information.
What will happen to Argentina in the next 25 years?
Argentina’s long-term GDP growth has been disappointing.
In fact, real GDP per capita declined 15% over the 25-year period from 1965 to 1990 – a period that saw some Asian economies quintuple in size.
But the 8% real GDP growth recorded in 2004 might encourage some to expect a surge in economic performance, as has occurred elsewhere in the world.
Could there be another decline in Argentina?
Or a huge growth breakthrough?
Nobody knows.
The economic costs implied by this uncertainty could be reduced if there were a market for growth risk.
Indeed, Argentina’s economy would be better off today if Argentina had borrowed in terms linked to its GDP decades ago rather than at an interest rate denominated in dollars.
Its foreign debt would have declined in line with its GDP, thus sheltering the economy from default and economic disaster.
To be sure, investors would have then lost on their bet on Argentina’s growth, but they would still have been protected against inflation, even if their bonds had not been denominated in dollars (because Argentina’s nominal GDP would have moved up with inflation).
Can we engineer new debt contracts for countries like Argentina?
The stumbling block has been potential investors’ fear that accounting fiascos in emerging countries would render the bonds unsafe.
If you don’t trust the numbers, you can’t trust the debt.
Clearly, more work is needed to improve the quality of the numbers.
In the meantime, we should not give up on trying to create these bonds.
Instead, advanced countries should issue them first.
True, advanced economies are relatively more stable, which means that the bonds would have a less distinctive risk-management advantage.
But the demonstration effect would be immediate.
Once any major country develops a market for GDP-linked debt, the concept will be established, making it much easier for other countries to join in.
The spread of inflation-indexed bonds serves as a historical precedent.
Finland was the first to issue national inflation-indexed bonds, in 1946, in response to massive wartime price growth.
Israel and Iceland were next, in 1955, followed by Brazil, Chile, Columbia, Argentina, the UK, Australia, Mexico, Canada, Sweden, New Zealand, the US, France, Japan, and Italy.
It took a long time, but the contagion of a sound financial idea has been unmistakable.
GDP-linked bonds would also allow hedging the risk of inflation, plus respond to GDP growth.
Some will object that there is little point in creating GDP-linked bonds in advanced countries, because there is little uncertainty about GDP growth there.
However, even in the relative calm of the post-war era, long-term real GDP growth in advanced countries has been rather variable.
For example, US real per capita GDP grew by a factor of 1.87 – that is, nearly doubled in size – from 1961 to 1986, but by a factor of only 1.58 from 1978 to 2003.
Such differences in 25-year growth rates are important: if US GDP grows by a factor of 1.87 over the next 25 years, annual GDP will be $3.6 trillion ($10,000 per person) higher than if it grows by a factor of only 1.58.
Much of today’s debates about the future of old-age pensions hinges on this uncertainty.
If the economy grows rapidly, there will be no problem; if it does not, a pension crisis looms.
Creating a marketplace where such uncertainties are traded and hedged would be a fundamental step toward managing the risks involved.
If personal pension accounts or provident funds are invested in GDP-linked bonds, the payments that retirees receive in 25 years will reflect the growth rate of the economy – and that of the tax base – to that date, which all makes good sense.
Sweden’s pension system recently created a link between national income growth and benefits, but the reforms did not include creating GDP-linked bonds, a natural adjunct to such a scheme.
At a time when many advanced countries run government deficits, GDP-linked bonds would improve risk management and bring down financing costs.
They might also spur developing countries to do what it takes to join that market.
Writing the Future
ADDIS ABABA – What does the future hold for the global economy?
Will living standards rise worldwide, as today’s poor countries leapfrog technologies to catch up with richer countries?
Or will prosperity slip through our fingers as greed and corruption lead us to deplete vital resources and degrade the natural environment on which human well-being depends?
Humanity faces no greater challenge than to ensure a world of prosperity rather than a world that lies in ruins.
Like a novel with two possible endings, ours is a story yet to be written in this new century.
There is nothing inevitable about the spread – or the collapse – of prosperity.
More than we know (or perhaps care to admit), the future is a matter of human choice, not mere prediction.
Despite the ongoing economic crisis in Europe and the United States, the developing world has sustained rapid economic growth.
While the International Monetary Fund forecasts that the advanced economies will grow by just 1.5% in 2013, developing-country growth is projected to reach 5.6%.
Asia’s developing economies, now the world’s pacesetters, are expected to grow by 7.2%, with output in Sub-Saharan Africa set to rise by a healthy 5.7%.
What is happening is both powerful and clear.
Technologies that were once found only in rich countries now belong to the entire world.
Mobile phone coverage in Sub-Saharan Africa, for example, has gone from nearly zero subscribers 20 years ago to around 700 million today.
And those phones are helping to bring banking, health care, education, business, government services, and entertainment to the poor.
Within a few years, the vast majority of the world will have access to wireless broadband.
Yet there is another truth as well.
Last year was the hottest ever recorded in the US.
Droughts afflicted around 60% of US counties, including the breadbasket states of the Midwest and the Great Plains.
In October, an extraordinary “superstorm” smashed into the Atlantic coastline around New Jersey, causing losses of around $60 billion.
Climate problems – floods, droughts, heat waves, extreme storms, massive forest fires, and more – also ravaged many other parts of the world in 2012, including China, Australia, Southeast Asia, the Caribbean, and Africa’s Sahel region.
These environmental disasters are occurring with rising frequency, as they are partly caused by human actions, such as deforestation, coastal erosion, massive pollution, and, of course, the greenhouse-gas emissions that are changing the world’s climate and acidifying the oceans.
What is new is that scourges like climate change – until recently described as a future threat – are now clear and present dangers.
Scientists have even given a name to our era, the Anthropocene, in which humanity (“anthropos” in Greek) is having a large-scale impact on the planet’s ecosystems.
Herein lies our great challenge – the one that will determine whether we follow the path of prosperity or ruin.
The rapidly growing developing countries cannot simply follow the economic-growth path that today’s rich countries traveled.
If they try, the world economy will push the planet beyond safe operating conditions.
Temperatures will rise, storms will intensify, the oceans will become more acidic, and species will go extinct in vast numbers as their habitats are destroyed.
The simple fact is that humanity faces a stark choice.
If the world economy’s current growth patterns continue, we face ecological disaster.
If the world economy embraces a new growth pattern – one that harnesses advanced technologies like smart phones, broadband, precision agriculture, and solar power – we can spread prosperity while saving the planet.
I call today’s growth pattern the business-as-usual option; the smart-technology growth pattern, by contrast, represents the sustainable-development option.
Business as usual can work for a while, but it will end in tears, while the sustainable-development path can lead to long-term prosperity.
So, what will it take to write the happy ending?
First, we must recognize that we, as a global society, have a choice to make.
Business as usual is comfortable.
We think we understand it.
Yet it is not good enough: on our current trajectory, short-term prosperity is coming at the cost of too many future crises.
Second, we must recognize the powerful new tools and technologies that we have at hand.
Using advanced information technologies – computers, satellite mapping, image processing, expert systems, and more – we now have the means to grow more food with less environmental damage; improve public health for rich and poor alike; distribute more electricity with lower greenhouse-gas emissions; and make our cities more livable and healthier, even as urbanization raises their populations by billions in the coming decades.
Third, we should set bold goals for the years ahead – to spread prosperity and improve public health while saving the planet.
Fifty years ago, US President John F. Kennedy said that we should to go to the moon not because it was easy, but because it was hard – it tested the best in us.
In our generation, sustainable development will be our test, encouraging us to use our creativity and human values to establish a path of sustainable well-being on our crowded and endangered planet.
I am proud and honored that United Nations Secretary-General Ban Ki-moon has asked me to help mobilize the world’s expertise as we seek to achieve that goal.
The greatest talents in our societies – in universities, businesses, NGOs, and especially among the world’s young people – are ready to take on our greatest challenges, and are joining the UN’s new Sustainable Development Solutions Network.
In the months and years ahead, these leaders will share their visions of a prosperous and sustainable global society.
Creating the Next Crisis
WASHINGTON, DC -- Informed opinion is sharply divided about how the next 12 months will play out for the global economy.
Those focused on emerging markets are emphasizing accelerating growth, with some forecasts projecting a 5% increase in world output.
Others, concerned about problems in Europe and the United States, remain more pessimistic, with growth projections closer to 4% – and some are even inclined to see a possible “double dip” recession.
This is an interesting debate, but it misses the bigger picture.
In response to the crisis of 2007-2009, governments in most industrialized countries put in place some of the most generous bailouts ever seen for large financial institutions.
Of course, it is not politically correct to call them bailouts – the preferred language of policymakers is “liquidity support” or “systemic protection.”
But it amounts to essentially the same thing: when the chips were down, the most powerful governments in the world (on paper, at least) deferred again and again to the needs and wishes of people who had lent money to big banks.
In each instance, the logic was impeccable.
For example, if the US hadn’t provided essentially unconditional support to Citigroup in 2008 (under President George W. Bush) and again in 2009 (under President Barack Obama), the resulting financial collapse would have deepened the global recession and worsened job losses around the world.
Similarly, if the eurozone had not stepped in – with the help of the International Monetary Fund – to protect Greece and its creditors in recent months, we would have faced further financial distress in Europe and perhaps more broadly.
In effect, there were repeated games of “chicken” between governments and major financial institutions in the US and Western Europe. The governments said: “No more bailouts.”
The banks said: “If you don’t bail us out, there will most likely be a second Great Depression.”
Creditors were protected and financial sectors’ losses were transferred to the domestic government (as in Ireland) or to the European Central Bank (as in Greece).
Elsewhere (the US), the losses were covered up with a great deal of regulatory “forbearance” (i.e., agreeing to look the other way while banks rebuild their capital by trading securities).
And it worked – in the sense that we are now experiencing an economic recovery, albeit one with a disappointingly slow employment rebound in the US and some European countries.
So what is the problem with the policies of 2007-2009, and why can’t we just plan on doing something similar in the future if we ever face a crisis of this nature again?
The problem is incentives – what bailouts imply for attitudes and behavior within the financial sector.
The protection that was extended to banks and other financial institutions since summer 2007, and more comprehensively since the failure of Lehman Brothers and AIG in September 2008, sends a simple signal.
If you are “big” relative to the system, you are more likely to get generous government support when there is system-wide vulnerability.
How big is “big enough” remains an open and interesting question.
Major hedge funds are presumably looking for ways to become bigger and take on “systemic importance.”
Ideally – from their point of view – they will bulk up without attracting regulatory scrutiny, i.e., no ex ante limits on their risk-taking activities will be imposed.
If all goes well, these hedge funds – and of course the banks that are already undoubtedly Too Big to Fail (TBTF) – get a great deal of upside.
Of course, if anything goes wrong, everyone who is TBTF – and who has lent to TBTF firms – expects to receive government protection.
This expectation lowers the cost of credit for megabanks today (relative to their competitors, which are small enough that they are more likely to be allowed to fail).
As a result, all financial institutions gain a powerful incentive to bulk up (and borrow more) in hope of also becoming bigger and therefore “safer” (from creditors’ point of view, not from a social perspective.)
Top US policymakers acknowledge that this structure of incentives is a problem – interestingly, many of their European counterparts are not yet willing even to discuss these issues openly.
But the rhetoric from the White House and the Treasury Department is “we have ended TBTF” with financial reform legislation currently before Congress and likely to be signed by Obama within a month.
Unfortunately, this is simply not the case.
On the critical dimension of excessive bank size and what it implies for systemic risk, there was a concerted effort by Senators Ted Kaufman and Sherrod Brown to impose a size cap on the largest banks – very much in accordance with the spirit of the original “Volcker Rule” proposed in January 2010 by Obama himself.
In an almost unbelievable volte face, for reasons that remain somewhat mysterious, Obama’s administration itself shot down this approach. “If enacted, Brown-Kaufman would have broken up the six biggest banks in America,” a senior Treasury official said.
“If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.”
Whether the world economy grows now at 4% or 5% matters, but it does not much affect our medium-term prospects.
The US financial sector received an unconditional bailout – and is not now facing any kind of meaningful re-regulation.
We are setting ourselves up, without question, for another boom based on excessive and reckless risk-taking at the heart of the world’s financial system.
This can end only one way: badly.
Governments’ Self-Disruption Challenge
LAGUNA BEACH – One of the most difficult challenges facing Western governments today is to enable and channel the transformative – and, for individuals and companies, self-empowering – forces of technological innovation.
They will not succeed unless they become more open to creative destruction, allowing not only tools and procedures, but also mindsets, to be revamped and upgraded.
The longer it takes them to meet this challenge, the bigger the lost opportunities for current and future generations.
Self-empowering technological innovation is all around us, affecting a growing number of people, sectors, and activities worldwide.
Through an ever-increasing number of platforms, it is now easier than ever for households and corporations to access and engage in an expanding range of activities – from urban transportation to accommodation, entertainment, and media.
Even the regulation-reinforced, fortress-like walls that have traditionally surrounded finance and medicine are being eroded.
This historic transformation will continue to gain momentum as it expands in both scale and scope.
But its benefits will not be fully realized unless governments take steps to empower the forces of change, ensure that the massive positive externalities are internalized, and minimize the negative impacts.
Unfortunately, this is proving extremely difficult for many advanced-country governments, partly because the failure to recover fully from the recent crisis and recession has undermined their credibility and functioning.
The emergence of anti-establishment and non-traditional political parties and candidates on both sides of the Atlantic is complicating even the most basic elements of economic governance, such as enactment of an active budget in the United States.
In this context, taking the steps needed to upgrade economic systems, including infrastructure in the US and the incomplete union in Europe, or to meet historical challenges like the refugee crisis, seems all but impossible.
In fact, Western political and economic structures are, in some ways, specifically designed to resist deep and rapid change, if only to prevent temporary and reversible fluctuations from having an undue influence on underlying systems.
This works well when politics and economies are operating in cyclical mode, as they usually have been in the West.
But when major structural and secular challenges arise, as is the case today, the advanced countries’ institutional architecture acts as a major obstacle to effective action.
The political influence of financial donors and lobby groups add to the challenge.
Rather than promoting actions aimed at improving the long-term wellbeing of the system as a whole, these actors tend to push micro objectives, some of which help the traditional, often wealthy elements of the establishment maintain their grip on the system.
In doing so, they block the small and emerging players that are so vital to upgrading and transformation.
All of this serves to complicate an imperative that is relevant not just to governments, but also to companies and individuals that must adapt to changing circumstances by upgrading their structures, procedures, skills, and mindsets.
Few are eager to self-disrupt, a process that takes us out of our comfort zone, forcing us to confront our long-standing blind spots and unconscious biases and adopt a new mindset.
But those who wait until the disruptions are unavoidable – easy to do when governments do not mount a timely response – will miss out on the huge advantages that technology offers.
Even when governments decide to implement policies that enable economic upgrading and adaptation, they cannot do so in isolation.
With technology enabling unprecedented mobility and connectivity, the jurisdictional power of nation-states is being eroded, meaning that a truly effective response – one that unleashes the full benefits of disruptive technologies – is impossible without multilateral cooperation and coordination.
But multilateralism is undergoing a transformation of its own, driven by doubts about the legitimacy of existing structures.
With reforms of the traditionally Western-dominated institutions having stalled, there have been moves to create alternatives;
China’s Asian Infrastructure Investment Bank, for example, competes directly with the World Bank and the Asian Development Bank in some areas.
All of this makes global-level responses more difficult.
Against this background, a rapid and comprehensive transformation is clearly not feasible.
(In fact, it may not even be desirable, given the possibility of collateral damage and unintended consequences.)
The best option for Western governments is thus to pursue gradual change, propelled by a variety of adaptive instruments, which would reach a critical mass over time.
Such tools include well-designed public-private partnerships, especially when it comes to modernizing infrastructure; disruptive outside advisers – selected not for what they think, but for how they think – in the government decision-making process; mechanisms to strengthen inter-agency coordination so that it enhances, rather than retards, policy responsiveness; and broader cross-border private-sector linkages to enhance multilateral coordination.
How economies function is changing, as relative power shifts from established, centralized forces toward those that respond to the unprecedented empowerment of individuals.
If governments are to overcome the challenges they face and maximize the benefits of this shift for their societies, they need to be a lot more open to self-disruption.
Otherwise, the transformative forces will leave them and their citizens behind.
Creative Europe
LJUBLJANA – At the Spring European Council meeting on March 13-14, EU member states’ leaders will launch the second cycle of the Lisbon Strategy for Growth and Jobs, a strategy launched in 2000 with the aim of making the EU the most competitive knowledge-based economy in the world.
The EU’s current economic upturn suggests that the strategy is working, particularly after its renewal in 2005.
But some areas in which Europe could gain a competitive advantage have been neglected.
One such area is creativity.
The Lisbon Strategy owes much to the Austrian economist Joseph Schumpeter, who claimed that profit results from innovation.
This is an appropriate European compromise between the theory that profit comes from exploitation (Marx) and the view that it results from transactions that make both parties happier than they were before (Friedman).
It is also appropriate for an economy where goods and services fulfill people’s needs and where products compete on their technical or functional features.
But in post-industrial societies, consumers look for more in a product than just functionality.
Relatively prosperous Europeans tend not to purchase a car merely to get from point A to point B, shoes to keep their feet dry, a watch just to tell the time, or a bottle of water only to quench their thirst.
We buy things that mean something more to us than what we use them for.
The intangible characteristics that make a product more than simply useful are what differentiate expensive products from cheap products, and include design, brand name, and environmental friendliness.
We may also be willing to pay more for products that are manufactured at home, in a safe workplace, without child labor, etc. These characteristics are intimately linked to the values and morals – to the general culture – prevailing in the market.
Companies apparently recognize this.
According to the popular business writer Daniel Pink, giving meaning or sense to a product or a service is increasingly becoming the main source of added value.
This is all the more true as Asian universities turn out vast numbers of engineers and other knowledge workers who are just as qualified as their European colleagues, and as brilliant in technical design as they are in optimizing the manufacturing process.
Adding value in this non-functional sense is a quintessentially European strength.
It is at least as much an art as it is a science, and it goes beyond technical and business innovation.
World-class design and brands already have a foothold in Europe, where creative industries are stronger that the car industry.
There are good reasons for that.
Europe gave the world Hippocrates, da Vinci, Voltaire, Beethoven, Florence Nightingale, Dostoyevski, Nobel, John Lennon, and many others who have shaped world culture.
Today, Europe is defending the moral high ground when it comes to values such as human rights, peaceful conflict resolution, social welfare, and care for the environment.
Far from being actual or potential obstacles to material success, it is precisely such values that should be celebrated and actively projected into Europe’s economy.
Embedding Europe’s cultural and ethical background in goods and services that reflect these values would not only set the European economy apart from the rest of the world, but would also strengthen these values globally.
Perhaps the most urgent example is Europe’s moral leadership on climate change, which, supported through policies such as the Lisbon Strategy, should be translated into technical leadership and early entry into lucrative markets for low-carbon products.
The “soft power” of goods and services reflects the cultural environment that creative individuals require for their work and growth.
In addition, such goods and services require properly cultivated consumers.
As the urban studies theorist Richard Florida has argued, it is technology and tolerance that attract talents.
Europe should therefore become a magnet for creative people from all over the world and should, based on its rich cultural heritage, raise its own.
Creating meaning and preserving values is probably the one task that Europe has to undertake on behalf of the entire world.
If the EU focuses on infusing its goods and services with Europe’s guiding ideas and values, its economy will reap significant rewards.
This will require an explicit emphasis on ensuring the conditions that promote and sustain creativity, and the updated Lisbon Strategy that is to be launched in March should include a commitment that Europe will move in this direction.
Credit Default Swaps on Trial
CHICAGO – The lawsuit filed by the US Securities and Exchange Commission against Goldman Sachs for securities fraud, charging the bank with misrepresenting the way a collateralized debt obligations (CDO) had been formed, has revived public disgust at credit default swaps (CDS), the instrument used to bet against these CDOs.
Before the 2008 financial crisis, CDSs were an esoteric product, known only to a restricted number of sophisticated investors and specialized academics.
Today, they are a household name, synonymous with unruly speculation, boundless greed, and, ultimately, systemic instability.
Indeed, CDSs are blamed as one of the main causes of the financial crisis.
The legality of Goldman Sachs’ behavior will be determined by a court of law, but CDSs’ odious reputation is jeopardizing the survival of this instrument in the court of public opinion.
Riding the populist wave, several politicians have proposed a ban on CDSs.
The recent Greek crisis has further galvanized the anti-CDS camp.
After all, isn’t it the fault of the CDS market’s avaricious speculators that Greece was on the verge of default and that Greek public employees have had to endure deep wage cuts?
In a word, no.
Far from being the spawn of the devil, CDSs are a useful financial instrument that can improve not only financial stability, but also the way that companies and countries are run.
Banning them will do more harm than good. Any attempt in that direction is detrimental, because it would divert attention from the useful goal of disciplining the CDS market to make it more transparent, stable, and efficient.
One key advantage (if not the key advantage) of capitalism over central planning is the information conveyed by market prices.
When the demand for potatoes at the current price exceeds supply, the price of potatoes rises, signaling scarcity.
Individual farmers do not need any bureaucratic directive to decide whether to plant more potatoes: an increase in prices creates an incentive to plant more potatoes; a decrease in prices is a signal that they should plant less.
The same is true with stock prices.
An increase in the stock price of steel manufacturers suggests an increase in the demand for steel, which induces entrepreneurs to start more steel plants and investors to provide them with the money.
Conversely, a decrease in the stock price of steel manufacturers leads entrepreneurs to liquidate existing plants and dissuades investors from committing more resources to the sector.
Unfortunately, sometimes prices fail to perform this signaling function properly, as the dot-com and housing bubbles in recent years showed.
During the dot-com bubble, prices signaled huge demand in the Internet sector.
For this reason, hundreds of millions of dollars were wasted in advertising improbable companies on TV and building network capacity beyond any foreseeable need.
During the housing bubble, prices signaled a severe scarcity of houses.
So billions of dollars were poured into new developments in remote locations where nobody wants to live.
Given the large misallocation of resources in such cases, it is vital to understand why prices failed to provide an accurate signal to investors.
Why did the United States, with the most developed financial market in the world, experience two major bubbles in less than a decade?
An expansive monetary policy is partly to blame, but the real problem is an institutional setting that favors bullish sentiment.
Pension funds, mutual funds, and investment banks are all long in the stock market.
Shorting a stock is difficult and risky: it is difficult because borrowing stocks is hard to do, and it is risky because shorting has limited upside but infinite downside.
In other words, the traditional securities available to investors make it easier to bet in favor of a company than against it, causing prices to be affected more by irrational exuberance than by panics.
In this respect, CDSs are unique.
Because they function as insurance on borrowers’ ability to meet their obligations, they make it easier to express a negative opinion on a company or a security. To express a negative view via the CDS market, investors do not need to locate securities to borrow (a prerequisite to shorting), and they risk only a limited premium, while they have the opportunity to gain many times that.
It was the CDS market that allowed the negative – and correct – view of the housing market held by John Paulson and others finally to be embedded into market prices.
They made the bubble burst.
While painful for the rest of society, this is healthy.
The longer a bubble lasts, the more damage it causes.
The same reasoning applies to the Greek crisis.
The CDSs on Greece provide a useful signal of the country’s compromised financial situation.
It is thanks to the spike in the CDS market that the Greek government tightened its budget and improved its fiscal position.
Medical tests, too, often bring bad news, but abolishing medical testing does not solve problems, it only hides them, making them worse.
The reason that politicians and corporate managers alike hate CDSs is precisely because CDS rates are so useful and so prompt in exposing their mistakes.
Nobody likes to be found wrong.
For this reason, politicians and powerful businessmen often cajole the press, the credit rating agencies, and even the analysts to portray their actions in a positive light.
As the main source of negative information that is not sensitive to power, the CDS market is feared, and politicians want to eliminate it.
Of course, the CDS market is not perfect.
In fact, it is not really an organized market, but only an informal virtual exchange.
The existing rules are designed not to make it transparent or resilient, but to make it more profitable for large institutions like Goldman Sachs and JP Morgan.
So intervention is needed to formalize the CDS market and force appropriate collateralization, so that no government has to step in to rescue any counterparty.
But regulating the CDS market does not mean banning it.
To do so would only sow the seeds of the next bubble.
The Moral Economy of Debt
LONDON – Every economic collapse brings a demand for debt forgiveness.
The incomes needed to repay loans have evaporated, and assets posted as collateral have lost value.
Creditors demand their pound of flesh; debtors clamor for relief.
Consider Strike Debt, an offshoot of the Occupy movement, which calls itself “a nationwide movement of debt resisters fighting for economic justice and democratic freedom.”
Its Web site argues that “[w]ith stagnant wages, systemic unemployment, and public service cuts” people are being forced into debt in order to obtain the most basic necessities of life, leading them to “surrender [their] futures to the banks.”
One of Strike Debt’s initiatives, “Rolling Jubilee,” crowd-sources funds to buy up and extinguish debt, a process that it calls “collective refusal.”
The group’s progress has been impressive, raising more than $700,000 so far and extinguishing debt worth almost $18.6 million.
It is the existence of a secondary debt market that enables Rolling Jubilee to buy debt so cheaply.
Financial institutions that have come to doubt their borrowers’ ability to repay sell the debt to third parties at knock-down prices, often for as little as five cents on the dollar.
Buyers then attempt to profit by recouping some or all of the debt from the borrowers.
The US student-loan provider Sallie Mae admitted that it sells repackaged debt for as little as 15 cents on the dollar.
To draw attention to the often-nefarious practices of debt collectors, Rolling Jubilee recently canceled student debt for 2,761 students of Everest College, a for-profit school whose parent company, Corinthian Colleges, is being sued by the US government for predatory lending.
Everest College’s loan portfolio was valued at almost $3.9 million.
Rolling Jubilee bought it for $106,709.48, or about three cents on the dollar.
But that is a drop in the ocean.
In the US alone, students owe more than $1 trillion, or around 6% of GDP.
And the student population is just one of many social groups that lives on debt.
Indeed, throughout the world, the economic downturn of 2008-2009 increased the burden of private and public debt alike – to the point that the public-private distinction became blurred.
In a recent speech in Chicago, Irish President Michael D. Higgins explained how private debt became sovereign debt: “As a consequence of the need to borrow so as to finance current expenditure and, above all, as a result of the blanket guarantee extended to the main Irish banks’ assets and liabilities, Ireland’s general government debt increased from 25% of GDP in 2007 to 124% in 2013.”
The Irish government’s aim, of course, was to save the banking system.
But the unintended consequence of the bailout was to shatter confidence in the government’s solvency.
In the eurozone, Ireland, Greece, Portugal, and Cyprus all had to restructure their sovereign debt to avoid outright default.
Rising debt/GDP ratios cast a pall over fiscal policy, and became the main justification for austerity policies that prolonged the slump.
None of this is new.
Creditor-debtor conflict has been the stuff of politics since Babylonian times.
Orthodoxy has always upheld the sacred rights of the creditor; political necessity has frequently demanded relief for the debtor.
Which side wins in any situation depends on the extent of debtor distress and the strength of the opposing creditor-debtor coalitions.
Morality has always been the intellectual coin of these conflicts.
Creditors, asserting their right to be repaid in full, historically have created as many legal and political obstacles to default as possible, insisting on harsh sanctions – garnishment of income, for example, and, at the extreme, imprisonment or even slavery – for borrowers’ failure to honor their debt obligations.
Governments that incurred debt in costly wars have been expected to set aside annual “sinking funds” for repayment.
Morality, however, has not been entirely on the side of the creditor.
In New Testament Greek, debt means “sin.”
But, though it might be sinful to go into debt, Matthew 6:12 supports absolution: “forgive us our debts, as we also have forgiven our debtors.”
The position of debtors was further strengthened by the prohibition of usury – charging unreasonably high interest on money.
Interest-rate caps were abolished in Britain only in 1835; the near-zero central-bank rates prevailing since 2009 are a current example of efforts to protect borrowers.
The truth of the matter, as David Graeber points out in his majestic Debt: The First 5,000 Years, is that that the creditor-debtor relationship embodies no iron law of morality; rather, it is a social relationship that always must be negotiated.
When quantitative precision and an unyielding approach to debt obligations are the rule, conflict and penury soon follow.
In an effort to stem recurrent debt crises, traditional societies embraced the “Law of Jubilee,” a ceremonial wiping clean of the slate. “The Law of Jubilee,” writes Graeber, “stipulated that all debts be automatically canceled ‘in the Sabbath year’ (that is, after seven years had passed), and that all who languished in bondage owing to such debts would be released.”
The moral of the tale is not, as Polonius instructed his son Laertes, “neither a borrower nor a lender be.”
Without both, humanity might still be living in caves.
Rather, we need to limit the supply of and demand for credit to what the economy is capable of producing.
How to do this and maintain freedom of enterprise is one of the great unsettled questions of political economy.
Credit Where Credit is Due
In the old days, when communist central planning suffocated China’s economy, fixed-asset investment was the regime’s measure of economic progress.
The more tons of steel produced, slabs of concrete poured, and gallons of crude oil pumped out of the ground the better.
The consumption-based economy, to which the capitalist West had apparently succumbed, was written off as a paper tiger.
On the surface, nothing much has changed.
China remains obsessed with investing –construction of factories and infrastructure accounted for 41% of GDP and around half of economic growth in 2005.
Moreover, the country’s continuing high levels of fixed-asset investment make sense – building roads, water pipes, metro systems, telecommunication networks, and electronics factories is what a vast and rapidly modernizing country must do.
But the Communist Party leadership has decided that in the next decade hairdressers, accountants, karaoke hostesses, tour guides, and movie directors will be the new pillars of economic performance.
As investment growth slows and export markets endure their unpredictable business cycles and protectionist moods, China will increasingly rely upon consumption for creation of jobs and income – and the service industry is where most consumption occurs.
There is only one problem: Chinese people do not seem to want to consume, at least according to commonly cited data.
National savings amounted to roughly 50% of GDP in 2005, which apparently means that households are so afraid of hospital bills, school fees, and the down-payment on the new apartment they dream of that they save every penny they earn.
But that savings number hides something very critical.
Chinese households do save a lot, about one quarter of their income.
But as Louis Kuijs of the World Bank has pointed out, what sets China apart from many other developing countries is not that households save uniquely high levels of their income, but that enterprises do.
Indeed, private consumption in China has been growing in real terms at an annual rate of around 10% for the last seven years.
This means that getting Chinese households to spend more is not a hopeless mission.
According to the credit card provider MasterCard, by 2010 China’s middle class will number 100 million, each with discretionary spending of $5,590, and 7.5 million affluent people, each with $13,500 to spend.
But why wait until 2010?
If a decent credit culture can be created, people can have access to tomorrow’s income today.
People in their twenties could borrow money to buy a house, start a family, and go on holiday, paying the money back when they are in their fifties and would much rather stay at home and enjoy their grandchildren.
Consumer credit began in China only in the late 1990’s, with regulations allowing banks to offer mortgage loans, which now amount to about 10% of total loans.
According to a recent survey by the People’s Bank (the central bank), households in the ten largest cities spend about 35% of their monthly income on average on mortgage repayments, which is comparable to other countries.
Loans for education and car purchases are now also possible, and 2% of households have credit cards, which is obviously still low compared to 75% in the United States, but there were no such households just five years ago.
Although debit cards remain far more common, banks like China Merchants Bank have been aggressive in issuing real credit cards.
A key problem with the credit card rollout is that the payment system is not yet in place.
UnionPay, the market leader, is expensive for retailers to install, and many shops prefer cash to avoid tax.
However, outstanding credit on cards is growing, more than quadrupling year on year in 2004, to 0.18% of GDP, according to the consulting firm McKinsey.
Several other obstacles must nonetheless be surmounted in order to boost consumption.
First, banks still have few reliable means of checking borrowers’ creditworthiness, including previous loans from other banks.
Educational loans should be booming in urban and rural China, but banks do not know to whom to lend, so they are not.
Second, banks are vulnerable to non-repayment.
The car loan market underwent a mini-boom in 2003-04, but non-repayment rates in excess of 50% forced banks to pull back.
The difficulty of repossession (where did the borrower park the car?) and sale (the used-car market is still in its infancy) meant that most of these bad loans had to be written off.
There is also a dark cloud over the mortgage market following a judgment by the Supreme People’s Court in 2003 that banned the repossession of homes that are a primary residence.
A recent revision of that decision permits banks to repossess homes, but only if they help arrange alternative lower-cost housing – an administrative nightmare for lenders, particularly if a lot of people start defaulting at the same time.
Third, consumers are generally not adept at dealing with interest-rate risk.
Nearly all mortgages have floating rates that vary with the five-year loan rate set by the People’s Bank.
However, late last year, Everbright Bank and some others began offering fixed-rate mortgages.
Take-up has been slow, but the April 2006 surprise hike in bank rates may help to sow greater public awareness of interest-rate risk.
Finally, China needs a greater diversity of financial products.
Until recently, banks could offer only simple savings accounts.
But structured deposits – for example, deposits whose rate of return is linked to the performance of the New York Stock Exchange – are becoming increasingly popular.
Securities investment funds now account for roughly 30% of tradable stock market capitalization, although this represents only 0.9% of GDP, compared to more than 5% in India.
The economic significance of new financial products is likely to grow more rapidly as foreign banks enter the market.
If China’s regulators issue the right licenses, the financial sector will play a key role in nurturing and sustaining the consumer society of tomorrow.
Crime and Punishment, Refugee Style
The horrible murder of Giovanna Reggiani that took place near a Romanian refugee camp in the suburb of Tor di Quinto in Rome shocked both Italy and Romania.
The case gained significance by adding fuel to the fiery public debates now underway not only in Italy but across Europe on the status of refugees and foreign residents.
Some Italians responded violently; some Italian and Romanian politicians, eager to offer quick and tough solutions, made scandalous statements that echoed the xenophobic and totalitarian slogans of the past.
We are encountering, not without irony, a kind of grotesque reverse of the “national pride” seen when cultural and sporting stars are appropriated by the state and presented as part of the collective patrimony.
Although the murder was an individual crime, to compound the tragedy of a crime through measures that target an entire minority is irresponsible, and will have grave moral and social consequences not only for the unjustly punished but also for the punishers.
No minority is, after all, homogenous, which was demonstrated by the fact that the person who alerted the police was a compatriot of the killer and from the same camp of refugees.
Collective punishment also means not only a type of amnesia by Italians and Romanians about what happened under fascism, nazism, communism, but also for their own national histories.
Italians, after all, migrated not only from Italy’s south to its north, but also to other countries looking for a better life.
They, too, know what it is like to be a refugee, an exile, a stranger.
Romania, for its part, has a history not at all admirable in regard to it its “Roma” minority, whose shortcomings and deeds always attract blame but never any real action by the state to improve their condition.
The Roma minority first appeared in Romania in the 14th century, but only in 1856 was its slavery abolished!
Romanian society nowadays is dealing with the consequences of decades of terror and lies, of demagogy and poverty that scarred several generations.
These wounds cannot be instantly healed.
Communism’s fall unleashed a huge surge of human energy, but this started with a bizarre and cynical transfer of privileges and assets within the old “nomenklatura,” and with a new general Darwinian struggle.
Although economic progress is visible across Romania, and a gradual renewal of a civic conscience through the arrival of democracy has appeared, Romania’s burlesque of a political life – despite its European Union membership – shows how persistent its bad old habits of duplicity, inconsistency, fatalism, inertia, and corruption are.
Corruption, indeed, now seems to be the society’s engine.
There remain in Romania today disadvantaged and neglected groups who are pushed to society’s sordid margins.
The Roma population, indeed, has 41% seasonal workers, 33.5 % lack any professional skills, 38.7 % are illiterate.
This is not only a Romanian problem, but has become a problem for all of Europe.
Nicolae Romulus Mailat, the young man of 25 accused of Giovanna Reggianni’s murder, had been interned at age 14 in a school for re-education.
He was later condemned again for theft, but was pardoned a year before arriving in Italy.
Was poverty the cause of his juvenile offenses in Romania and his crime in Italy?
In Dostoievski’s great novel Crime and Punishment , Raskolnikov is pushed to committing his crime not only by his nihilism and rebelliousness, but also by poverty.
His social identity is not the same as Mailat’s, his spiritual “entity” is drastically different, but his double crime is no less abominable.
For now, there is no reason to hope that Mailat will find through his crime a new start towards salvation through suffering and spiritual renewal.
But perhaps we should hear again the words of one of Raskolnikov’s interlocutors when he speaks about the “disgusting Sodome” in which he wanders and says that poverty is not a vice, but misery.
In poverty one still keeps a kind of “innate noble sentiment,” while in misery moral collapse is inherent and disastrous.
Mailat sought escape from his Romanian misery and his Romanian past, but could not imagine that he would find in an Italian refugee camp as much misery as before; that the image in the mirror of his daily new life would be that of a killer.
People who know the frightening neighborhood of Tor di Quinto, where Giovanna Reggiani was killed have harsh words to say about the neglect and indifference of Rome’s city government.
This isn’t, of course, an excuse for this crime or for any crime, but it cannot be ignored.
Although we cannot expect a miraculous reincarnation of the criminal Mailat, we can and must ask for a radical review of the situation that marginalized people like him face.
That review must be done not only by Romanian and Italian states, but by the Roma community in Romania and Italy and also by the European community itself.
For the perpetrator is a member of all these communities.
We hear voices now who are exasperated by the EU’s enlargement and the social tensions it provoked.
Increased migration is, indeed, a daily fact in our centrifugal and global modernity, but it isn’t only a negative one.
The free movement of people doesn’t only mean more social conflict and criminality. It also means a gradual and beneficial cohabitation that began immediately after WWII as a common effort to help out the defeated countries and enhance their chances for democracy and prosperity.
When I visited Barcelona and Madrid last year, I was delighted to receive enthusiastic news about the successes of the growing Romanian community in these cities.
Some Romanian refugees were already candidates for the local elections, praised for their hard work and honesty.
It will happen, I hope, also in other places and not only with Romanians but with all the people ready to face the provocations of our time.
For these are examples not only of individual success, but are victories for the community as well.
Europe deserves to prove that it is a real community, one diverse, democratic, spiritual, free, and prosperous.
Criminal Genes?
Can genes predispose a person to crime?
Some American lawyers are now using such a “genetic defense” as mitigation for convicted murderers.
Are there genes for alcoholism?
Or genes that make you gay, religious, prone to divorce, or even genes that determine how you vote?
If you believe the claims of some of the scientists who call themselves “behavior geneticists”, many aspects of human behavior are in some way laid down by our genes.
Claims of this type have a long, discredited history, stretching back through the eugenics movement of the early 20th century to its acknowledged ‘father,’ Francis Galton, in Victorian England.
But whatever the eugenics movement’s extravagant claims and social crimes, including the forced sterilization of thousands (mainly women) in Europe and the US, today it is supposed to be different.
Today, the claims are supposedly backed by advances in real molecular science, in genetics.
Of course, many social problems run in families; our societies are not egalitarian; people living in poverty tend to rear children who live in poverty.
This doesn’t, however, make poverty genetic.
Similarly the children of rich parents may inherit wealth, but this is social, not genetic inheritance.
Sorting out the influence of genes and environment during the long, complex processes of human development is difficult – indeed, it is never possible to say of any individual, that x% of some aspect of their character is genetic, y % environmental.
The two are indissolubly associated over the many years during which we construct ourselves out of the raw material of genes and environment. What geneticists do try to do is to find a measure of how much of the variation in some trait within a population may be attributed to genes, and whether any specific genes play a part in generating that trait.
While it is possible to do this for diseases where the diagnosis is relatively unambiguous and there is only a single abnormal gene associated with the condition (Huntington’s disease is a good example), this is a far cry from saying that a specific gene causes you to be criminal or alcoholic.
Genes certainly help shape our behavior, but that behavior is profoundly mediated by the processes of development, culture, social environment, and even technology.
It is impossible to speak of genes that ‘determine’ any complex aspect of human thought or action.
Take ‘aggression’.
We use the word to mean many different types of behaviour.
We speak of aggressive businessmen, or aggressive surgery, in positive terms.
But we also speak of men’s aggressive behaviour to their partners or children, aggressive confrontations among football fans, or of police against protestors.
We also speak of waging aggressive war.
Are all these manifestations of the same ‘condition?’
Complicating matters, the same act involving the same genes, muscles and so forth, can sometimes be seen as criminally aggressive and sometimes as doing your duty.
Take the case of the British soldier Lee Clegg who, while on duty in Northern Ireland, shot and killed a teenage joyrider whose car failed to stop at a security check.
Clegg was tried, convicted, and imprisoned for murder but had his conviction quashed and was reinstated – and then promoted – in the army.
So, did he have genes for criminal aggression, or is he a good soldier?
If this ‘aggression phenotype’ is so poorly defined how can we hope to study its genetics?
Sadly, this hasn’t stopped people from trying.
This is illustrated by a research paper‚ published in the journal Science in 1993 by a team led by Han Brunner describing a Dutch family some of whose men were reported as being abnormally violent.
In particular, eight men “living in different parts of the country at different times across three generations showed an ‘abnormal behavioural phenotype.’” The types of behavior included “aggressive outbursts, arson, attempted rape and exhibitionism.”
Can such widely differing types of behavior honestly be subsumed under the single heading of aggression?
Such an assertion, if made in the context of a study of non-human animal behaviour, would not be likely to pass scientific muster.
Yet Brunner's paper was published in one of the world’s most prestigious journals to considerable publicity.
Much attention was devoted to its report that each of these ‘violent’ individuals also carried a mutation in the gene coding for the enzyme monoamine oxidase‚ (MAOA).
Could this mutation be the ‘cause’ of the reported violence?
Brunner subsequently denied the direct link and dissociated himself from public claims that his group had identified a ‘gene for aggression’.
Yet the paper is now widely cited, and what was described in its title as ‘abnormal’ now becomes ‘aggressive behaviour.’
Thus a paper describing mice lacking the monoamine oxidase A enzyme, appeared in Science under the title “Aggressive Behaviour” two years after the Brunner paper.
The authors, primarily a French group headed by Olivier Cases, described mouse pups showing “trembling, difficulty in righting, and fearfulness...frantic running and falling over..(disturbed) sleep...propensity to bite the experimenter...hunched posture...”
Of all these features of disturbed development the authors chose only to highlight aggression in their paper’s title, and to conclude their account by claiming that these results “support the idea that the particularly aggressive behavior of the few known human males lacking MAOA ...is a more direct consequence of MAO deficiency.”
Such evidence‚ slight though it is‚ has become part of the arsenal employed by, for example, the US Federal Violence Initiative, which aims at identifying inner city children regarded as ‘at risk’ of becoming violent as result of predisposing biochemical or genetic factors.
This program, proposed originally by the then director of the US National Institute of Mental Health, Frederick Goodwin, originally ran into a hostility over its potentially racist overtones – ie, repeated coded references to “high-impact inner city” youth.
Not long after, Goodwin left his directorship, and proposals to hold a meeting to discuss his proposals were abandoned several times.
Nonetheless, aspects of the research program continue in Chicago and other cities.
The example of ‘aggression genes’ could be made over and over again in relationship to many of the other claims to explain the genetic roots of abnormal or undesirable human behavior.
Such claims hit the headlines, and now influence social policy initiatives.
Yet uncritical attempts to apply biological science to legislation about the human condition, if we are not careful, may lead us back into the dark days of eugenics.
Criminalizing HIV
JOHANNESBURG – “If the law supposes that,” Mr. Bumble says in Charles Dickens’ novel Oliver Twist, “the law is an ass.” A criminal law that makes it preferable for carriers of HIV not to know that they are infected and capable of spreading it to others, including their loved ones, seems particularly suited to Mr. Bumble’s condemnation.
Yet tragically, in a misguided attempt to thwart the spread of HIV and AIDS, lawmakers in many parts of the world have passed criminal statues that promote ignorance about the disease, punish its victims, and enhance the chances that the virus will infect new victims.
Some countries in Western and Central Africa are enacting poorly drafted policies based on the African Model Law, which makes it a criminal offense for any person infected by the virus to transmit it to someone else or to expose another person to it.
In some jurisdictions, prosecutors can bring charges against pregnant women who are HIV-positive for potentially exposing the virus to their unborn children.
There are, to be sure, rare and dramatic cases in which a person with HIV infects another with the specific intention of inflicting harm.
It is a reality that men infected with HIV or AIDS in some parts of Africa have even raped girls believing that sex with virgins is a cure.
And some women’s rights advocates have supported laws that criminalize transmitting HIV, arguing that these laws would punish men who concealed their HIV-positive status from their sexual partners, including their wives and girlfriends.
But existing criminal laws are more than adequate to allow willing justice systems to mete out appropriate sanctions against people who intend harm.
Criminal laws targeting all HIV carriers, however, are counter-productive and inherently unjust.
These laws effectively make criminals out of millions of the disease’s innocent victims, especially its women victims.
In Zimbabwe, for example, a woman was recently sentenced for exposing her lover to HIV even though she did not infect him.
In Ukraine, human rights lawyers report the troubling case of a woman who was convicted for transmitting HIV to her husband even though he had used a condom, and despite the fact that he asked for the charges to be withdrawn.
Gender bias against women permeates throughout Africa, and women are usually blamed for bringing HIV into a relationship.
This popular misconception springs, at least in part, from the fact that women are more likely to know their HIV status because they are routinely tested for HIV at maternity clinics when they seek pregnancy tests or examinations.
Most men on the other hand—deterred by fear, ignorance, pride, and, sometimes, taboo—refuse to be tested voluntarily.
This skews the outcomes of legal cases because the lack of testing of men makes it nearly impossible for a woman infected with HIV to establish before a court of law that her male sex partner infected her.
Laws criminalizing the transmission of HIV undermine public health because they deter people who are HIV-positive and those at risk of acquiring the virus from seeking testing, counseling, and treatment.
When persons face the possibility of criminal sanctions, not knowing their HIV status can be their most-effective legal defense. Prosecutions will act to deter many people—especially men as well as persons living in areas where HIV treatment is largely unavailable—from being tested because it would expose them to the risk of criminal liability.
Such laws also transform HIV victims into scapegoats for a societal problem for which the governments and broader societies are failing to undertake effective, and sometimes politically or culturally risky, steps that can defeat the disease.
Sadly, these “risky” steps include things as rudimentary as open discussion of the disease, education, and encouraging people, and especially men, to undergo testing.
AIDS has claimed more than 25 million lives since medical scientists first identified it in 1981.
New infections continue to outpace treatment efforts.
Basic precautionary options such as HIV testing, male and female condoms, and sterile syringes for drug injection remain out of reach for the vast majority of those who need them.
This woeful situation demands effective action and not more victims and scapegoats.
Open, informed discussion of the HIV epidemic, education into HIV prevention, distribution of condoms, and other strategies are the only known way of preventing new infections.
The vulnerability of women to HIV should be addressed by protecting their equal right to marital property, enforcing laws against gender-based violence, including rape in marriage, and empowering them to negotiate safer sex with men.
Libor Unplugged
LONDON – Last year’s Libor scandal was a shock to the body politic in London.
Despite all that had gone before, the public and their representatives were stunned to learn that bankers had systematically undermined the foundations of a global market benchmark – one with London in its name to boot – for personal gain.
Britain’s Chancellor of the Exchequer, George Osborne, felt compelled to launch a parliamentary inquiry.
On June 19, after a year’s work, the Parliamentary Commission on Banking Standards finally laid a large egg.
Bankers will certainly regard the outcome as what in England we like to call a “curate’s egg” (served a rotten egg by his bishop, a young clergyman, when asked whether the egg was to his liking, replied that it was “good in parts”).
They will choke on the commission’s recommendation of a new criminal offense for reckless conduct that leads to taxpayer bailouts, reinforced by a new “senior persons” regime that would ascribe all bank functions to a specific individual, who would be held personally liable when things go wrong.
The commission argues that “top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decision-making.”
Its members aim to make that impossible.
If they have their way, behaving recklessly with banking assets will result in a prison sentence, with no Monopoly-style “get out of jail free” card for financial masters of the universe.
I can already hear the sound of lawyers sharpening their pencils: the offense must be defined specifically enough to withstand a human-rights challenge.
But, if implemented, the commission’s proposed regime would certainly be tougher than what is now on offer in New York or other banking centers.
And British MPs are noticeably impatient with what they consider the glacial pace of change in global regulation; they want action now.
If the United Kingdom does proceed in this unilateral way, what would the consequences be for London’s banking industry?
Would New York, Frankfurt, or even Paris receive a competitive boost as international bankers, alarmed at the prospect of time behind bars if their derivative trades blow up again, flee the City?
The commission’s members offer two, somewhat contradictory, answers to that question.
The first is that, frankly, they don’t care. “The risk of an exodus should be disregarded,” the commission says, noting that the advantages of being a global financial center have been accompanied by serious associated risks to the domestic economy.
Unlike the United States, where the financial sector is smaller as a share of GDP, the UK economy has still not recovered the output lost in the post-2008 Great Recession, owing to continued retrenchment in the banking sector.
The commission’s members do recognize that London’s loss of status as a global financial center would be costly in terms of jobs and output, so they developed a second line of argument. “There is nothing inherently optimal,” they say, about a level playing field in international finance.
Attempts to develop a single European financial market have, in their view, forced countries to respond to the failings revealed by the 2008 crisis at the speed of the “slowest ship in the convoy.”
By contrast, the commission argues, “there may be big benefits to the UK as a financial center from demonstrating that it can establish and adhere to standards significantly above the international minimum.”
In addition to the tough new regime of personal accountability, the commission would supplement the Basel standards on bank capital with a tight leverage ratio.
The British government, preoccupied with finding ways to stimulate growth as the next election approaches, will no doubt think hard before making any changes that might drive business offshore.
But the government is caught between a rock and a hard place, hemmed in by a parliament that, strongly backed by a bank-hostile press and public opinion, is eager to enact reforms, and by EU directives to implement a tougher regime.
So, is the Commission right that the government should move quickly on reform and disregard the consequences?
Such evidence as one can find from international surveys suggests that the regulatory changes implemented so far have not driven bankers away.
London has already implemented an approach that is tougher than that of most other financial centers.
Taxes levied on executive bonuses have cost international banks dearly.
Regulators are now appreciably tougher and more intrusive than their counterparts in New York.
Bankers don’t like it, but they have not yet left for more congenial locations.
Nor do they indicate that they will.
Indeed, the latest Z-Yen index of global financial centers showed London maintaining its first-place position – and with its margin over New York unchanged.
The Asian centers are catching up, as one would expect, but they are hardly direct competitors for business that would otherwise be done in London.
Frankfurt and Paris, the most plausible European competitors, languish in tenth and 26th place, respectively.
Rating agencies and shareholders are nervous when they hear that a stricter regulatory environment is not necessarily a disadvantage.
But a regime in which personal responsibility strongly affects individuals in one jurisdiction will give bankers pause for thought, especially in the case of global banks with complex matrix-management systems that enable product heads to be moved elsewhere.
British legislators will need to be satisfied that any new regime captures the right people, in the right way.
However politically appealing the idea of rogue bankers behind bars might be, putting them there is likely to remain very challenging in practice.
Crippling Coalitions
Tony Blair's re-election in Britain last year was a landslide victory for New Labor, giving his party an unassailable majority in Britain's House of Commons.
Gerhard Schröder just scraped across the finish line with an overall majority in the German Bundestag, due to the help of his unloved coalition partner, the Greens, and a few "additional seats" that the electoral system's rules provide.
Which statement is true and which is false?
Strangely, each statement is both true and false.
An astonishing fact about Prime Minister Blair's Labor Party is that it secured 2% less of the popular vote in 2001 than in 1997, and ended up with just over 40% of the total.
Schröder's Social Democrats also lost 2% of the popular vote compared with 1998, and ended up with a little less than 40% of the total.
Moreover, by winning 38.5% of a turnout of 80%, Schröder could claim the support of one-third of the electorate, whereas Blair was elected by a mere quarter (40% of a turnout of 60%).
The difference between these two center-left leaders is not their electoral success, but the electoral system under which they operate.
The British first-past-the-post electoral system provided Blair with a solid majority, whereas the German system of modified proportional voting gives Schröder plus his Green partners a bare (and possibly shaky) majority.
Electoral systems are an evergreen issue of political debate, yet these two examples raise the question anew.
There is much to be said--once again--for the British system.
By translating relative electoral majorities into absolute parliamentary majorities, it enables winning parties to govern rather than enter into permanent negotiations with coalition partners and scramble constantly for parliamentary majorities.
But is the British system fair?
It clearly does not turn parliament into a mirror image of the electorate.
The "Thatcher Revolution" was never supported by more than 43% of those who voted.
(Incidentally, an even smaller proportion of the American electorate explicitly supported the "Reagan Revolution" in the US.)
Mr Blair can use his 40% to join the US in its approach to Iraq, and also to spread the doctrine of "Public Private Partnerships" at home.
Both policies have vocal opponents, not least among his own 40%.
Yet both Blair and Thatcher were able to take bold decisions and implement them.
Notwithstanding powerful adversaries both within and outside parliament, for a crucial period political leaders can take determined, decisive action that is regarded as legitimate in the sense that public support outweighs opposition.
The day will come, however, when the balance tips the other way.
In the US, a wise constitutional amendment forces even popular presidents to retire after two terms.
In the absence of such a rule, Mrs Thatcher was reduced to tears when her party told her that she had to go.
It remains to be seen how Mr Blair will fare, not least in connection with the Euro Referendum.
In the meantime, however, the electoral system makes decisive action possible--and appreciated by the electorate.
This is not the case under proportional representation.
It is often said that Germany in particular needs what one former German president called a push ( Ruck ) to mobilize the dormant forces of its people.
A stagnating economy, high unemployment, an increasingly unaffordable welfare state, will hardly be reformed by a coalition permanently worried about its shaky parliamentary majority.
2
In the face of such problems, some Germans are calling for a "grand coalition" of the two major parties.
But is it right to suspend the democratic interplay of government and opposition in order to solve major problems?
Conversely, is it fair to the electorate if reforms are shelved whenever clear political majorities go missing?
Some might argue that at a time when even major parties can no longer hope to gain the support of more than 50% of the electorate, it is important that parliament reflects the variety of views held by the people who elect it.
However, the counter argument is stronger.
One major purpose that elections serve is to translate popular views into political action.
This requires parliaments that can both legislate and govern.
As long as it remains possible to remove those in power by peaceful means, such as elections, the translation of relative majorities into strong governments is preferable to weak coalitions with numerical majorities.
Electoral systems do not change underlying social forces nor do they guarantee any particular outcome.
Britain has had periods of immobility and stagnation (in the 1950s and 1970s), and Germany has experienced significant change under quantitatively weak government coalitions (Konrad Adenauer's post-1949 administration and Willi Brandt's after 1969).
Still the case for a system that encourages change and opposition rather than stagnation and consensus is strong.
Of course, the main obstacle to electoral reform is the need to persuade those whose jobs depend on maintaining the status quo .
The Disintegration of Europe
LONDON – If a clear signal was needed that the European Union is falling apart at an alarming rate, Hungary’s construction of razor-wire fences along the border with its fellow EU member Croatia is it.
The crisis in the eurozone has, of course, fragmented financial flows, caused economies to diverge, eroded political support for EU institutions, and set Europeans against one another.
Now, as governments erect barriers and reinstate border controls, the refugee crisis is disrupting flows of people and gumming up trade.
And, as the EU unravels, the risk of Britain voting to leave is rising.
It is often argued that the EU progresses through crises, because they focus minds on the overwhelming need for further integration.
But such breakthroughs require at least four ingredients: a correct shared understanding of the problem, agreement on an effective way forward, willingness to pool more sovereignty, and political leaders able to drive change forward.
All four are now lacking.
EU leaders are weak, divided, and seemingly incapable of setting out a credible vision of the future benefits that European integration could provide, without which they cannot rally popular support and convince recalcitrant governments to bear their fair share of current costs.
In the absence of an effective, common response, Europe’s crises fester, feed on each other, and foment unilateralism.
The eurozone and refugee crises have common features that make them tricky to resolve.
Both involve disputes about sharing costs, complicated by a clash of values, at the center of which lies a newly dominant Germany.
The EU is hopeless at burden sharing.
Rather than agree on a fair division of costs, whether of the financial crisis or of welcoming refugees, governments try to minimize their obligations and shift them onto others – thereby increasing the collective costs.
A banking crisis that could have been resolved through a fair and decisive restructuring of unsustainable debts has ballooned into a much greater economic and political crisis that pits creditors against debtors, both within and among countries.
Likewise, EU rules stipulating that refugees should be granted asylum in the first member country they reach have proved both unworkable and unfair; because asylum-seekers mostly arrive in southern Europe and want to head north, Greece and Italy ignore the rules and facilitate their passage.
Transit countries such as Hungary try to divert refugees elsewhere.
Resettling the almost 750,000 people who have sought asylum in the EU this year – still only 0.14% of the EU population – has thus become an existential crisis.
Part of the problem is blinkered decision-making.
EU leaders focus narrowly on limiting short-term financial and political costs, rather than thinking strategically about broader longer-term consequences.
Restructuring Greek debt in 2010 would have implied a financial hit for French and German banks (and the governments that stood behind them), but a much smaller loss than that implied by the mushrooming costs of an enduring crisis.
Likewise, whereas welcoming refugees requires an initial investment of public funds, it can pay dividends as soon as the newcomers start working.
A graying continent needs dynamic young workers to do jobs that locals spurn (or for which they lack the skills), pay for and care for the old, start businesses, and pursue spark new ideas that boost economic growth.
The clash of values also impedes compromise.
Germans insist that debtors have a moral obligation to pay what they owe and atone for their sinful profligacy.
A Slovak prime minister who rejects refugees on the grounds that “Slovakia is built for Slovaks, not for minorities” is hard to buy off.
Even though the EU’s plan to resettle refugees would remove unwanted newcomers from Hungary, Viktor Orbán, the country’s authoritarian and nationalist leader, objects to it in principle, accusing Germany of “moral imperialism” in trying to foist its generous attitude toward refugees on its neighbors.
Until recently, German policymakers sought to atone for the country’s Nazi past by seeking a more European Germany and bankrolling the EU, thus helping to smooth over many disputes.
But, with Germany’s position as creditor-in-chief having thrust it into the driver’s seat, Chancellor Angela Merkel’s administration now seeks to create a more Germanic Europe.
Germany refuses to accept that its beggar-thy-neighbor economic policies – reflected in its massive current-account surpluses – are both a cause of the eurozone crisis and a major impediment to resolving it.
Instead, it bullies others to get its way, wrongly identifying its narrow interests as a creditor with those of the system as a whole.
Merkel has played a much more positive role in the refugee crisis.
Germany unilaterally suspended application of the EU’s asylum rules and pledged to accept all arriving Syrian refugees.
But Merkel’s failure to offer those refugees safe passage has exacerbated the chaos.
Subsequently reimposing border controls within the supposedly border-free Schengen Area set a terrible precedent, prompting Germany’s neighbors to do likewise.
Meanwhile, with the EU increasingly viewed as a source of economic crisis, political turmoil, and unwanted migrants, the risk that Britons will vote to leave in a referendum due before the end of 2017 is rising.
Britain is already semi-detached – outside of Schengen and with opt-outs from the euro and many home-affairs matters (including asylum policy).
With the government now seeking to negotiate even looser membership terms, Britain will end up more estranged from the EU even if it remains a member.
Polls are finely balanced and referendums unpredictable.
At a time of anti-establishment rage and political upheaval, anti-EU campaigners can peddle three fantasies of a post-EU future: a free-market, foreigner-free, or socialist Utopia.
The pro-EU camp, by contrast, has to sell the reality of the EU as it is, warts and all.
Until recently, EU integration seemed inevitable.
It might stall, but it would never go into reverse.
Countries joined; none left.
But with the EU already crumbling, Brexit could turn that dynamic on its head.
That is all the more reason to fix the EU before it is too late.
Cristina Kirchner’s Choice
BUENOS AIRES – Bolstered by Argentina’s economic stability and widespread sympathy for her widowhood, President Cristina Kirchner’s easy re-election has confirmed that she can, indeed, govern a complex, contentious, and at times self-destructive society without her husband, Néstor.
His presidency paved the way for hers, but she is a leader in her own right.
The question now is what kind of leader she will want to be in today’s more difficult domestic and international context.
The Kirchners lifted Argentina out of the deep crisis of 2001, presiding over GDP growth rates similar to those of China.
They partly restored Argentina’s social and political fabric, which had been weakened by the brutal adjustments made during that crisis, which triggered a president’s fall from power, default on the country’s debts, and a dramatic decline in living standards that left more than half of the population below the poverty line.
Their management of the economy, which included a deluge of subsidies, reduced unemployment and poverty.
The opposition underestimates the Kirchners’ achievements, arguing that the international context, particularly high commodity prices – and thus strong export revenues – bailed them out.
While that is true, high export prices alone were no guarantee for success.
But that tailwind may have been squandered, because the Kirchners have yet to make the structural changes – in industry, in the country’s energy policy, in education, and elsewhere – needed to free Argentina from extreme dependence on commodity prices.
As a result, if the price of soy continues to fall, subsidies – a source of corruption and patronage – will be an increasingly heavy burden for public spending.
According to unofficial figures, subsidies already represent 5% of GDP, and only painful adjustments can reduce them.
But what was an emergency remedy has become a long-term policy, because there is no economic activity to take its place.
Few in Argentina, which is enjoying a consumer boom, are worried about inflation.
But prices are already rising at a 20% annual pace, which, if unchecked, will lead to conflict with the powerful Peronist unions.
Moreover, given the country’s history of high inflation ravaging the economy, the problem needs to be addressed soon, before it gets out of hand.
Relations with Brazil expose other difficulties.
Brazilian President Dilma Rousseff’s government, which began its term this year with an understanding that economic growth will slow sharply, devalued the real in order to shore up the country’s competitiveness.
That was bad news for Argentina, because Brazil, its main trading partner, will now buy less and sell more, undermining Argentina’s external position.
In this difficult international context, Cristina Kirchner will need to rebuild relations with the United States and Europe, which have been impaired since the default in 2001. Subsequent actions by her husband’s administration and her own have blocked improvement.
Néstor ridiculed President George W. Bush in front of the world: host to a summit of heads of state, he organized a parallel anti-summit with supporters of Fidel Castro and Venezuelan President Hugo Chávez.
More recently, Cristina’s foreign minister presided over the requisitioning of a US military plane on Argentinean soil.
These spectacles were intended for national consumption, but the Americans deeply resented them.
As for Europe, the Kirchner’s have not yet paid off Argentina’s debt – pending since the default – to the Paris Club of sovereign creditors.
All of this hinders foreign investment and access to international credit.
In the meantime, the US is opposed to concessionary loans for Argentina from the World Bank and the Inter-American Development Bank.
In this context, Argentina’s rich and powerful vote with their wallets and send their dollars overseas.
This year, the outflow is nearly $20 billion – almost a record.
Argentina is a country that lives in an almost continual state of emergency.
Its history has seen many coups, tens of thousands of people missing, a war with Great Britain, bouts of hyperinflation, a brutal economic crisis, default on foreign debt, and its most vulnerable citizens going hungry.
But there is also a theatrical intensity about the Argentine character: we are dramatic like the tango and somber like the novels of Ernesto Sábato.
That exceptional spirit benefited her husband, but the country’s institutions paid a high price.
Néstor convinced Parliament to allow him to modify the budget.
Later, he took the liberty of manipulating official statistics in order to hide inflation.
And, while building a system that would do whatever the government wanted, he began a struggle against critical journalism that continues under his wife.
With hard times approaching, will Cristina try to be a twenty-first-century Evita and create an epic by exploiting Argentines’ flamboyant tendencies, armed with an exceptional power or will she adopt Rouseff’s sensible attitude and combat inefficiency and corruption while strengthening governmental institutions?
If she chooses Rouseff’s approach, she will first have to resist the temptation of perpetual re-election.
She and her husband had hit upon a novel scheme: alternating power between them every four years.
Now a widow, she is exposed to the lame-duck syndrome, since she can’t be re-elected again.
The same Peronist caudillos that have obeyed her until now could start a war of succession if she does not find a way to continue in office.
If she wants to retain power four years from now, she might do just that.
After all, she now holds absolute control over a docile parliament.
In Argentina, as in many Latin American countries, presidents have so much power that other governmental institutions’ authority fades, eradicating the boundaries between the executive and the state.
If the only limits on Cristina are her own, Argentina will not weather the coming storm well.
Croatia after Tudjman
ZAGREB: Franjo Tudjman’s death, like his life, was a bizarre parody of Marshal Tito.
Comparisons between Tudjman and Tito, however, are undermined by anachronism.
In Tito’s day it was still possible to have strongmen in gleaming white uniforms command European states, albeit in the Balkans.
It was possible to establish authority through collectivist myths, to assert your separate road against global trends, to molest neighbors in the teeth of international censure.
No longer.
Retrograde regional satraps are outdated in a uniting Europe.
And, unlike in Tito's time, whenever the West played Tudjman as a proxy for its interests the results were very mixed.
Tudjman probably did not wish to be independent Croatia’s Tito clone, but he could not help himself.
Tito provided the only leadership model that resonated with him.
Under the guise of democratic verbiage and a facade of democratic institutions, Tudjman promoted the monopoly of his nationalist party/movement, the HDZ.
Tudjman’s excuse was that Croatia needed to concentrate power for its struggle with Serbian aggression.
The truth is that he used a negotiated hostility with Slobodan Milosevic to solidify personal rule and a Russian-style plunder of state properties by his coterie of loyalists.
In order to accomplish this with a minimum of fuss he muzzled the press and electronic media.
Despite enmity between Serbia and Croatia, dealing dictator to dictator with Milosevic was simple.
Because both Tudjman and Milosevic believed in ethnically homogeneous states, they fomented forced population transfers (ie, ethnic cleansing) and a division of territory between each other.
The chief victim of their land-grab was Bosnia, which they divided and ravaged through various proxies.
The Dayton agreement represented not so much the defeat of their plans as the international legitimation of their division of Bosnia, with Bosnian Muslim enclaves left in a nervous see-saw with Tudjman's vicious Hercegovinian minions.
The consequence of Tudjman's policies – always projected in a harsh, bullying style – led to Croatia's isolation from Europe and America.
It is not that Tudjman, on occasion, did not prove useful – the Croatian army's blitzkreig in 1995 led to Dayton – but ultimately his arrogance galled more than his cooperation helped.
The tightrope turns that characterized the last several years of his encounter with the West (threats of sanctions for non-cooperation with the Hague war crimes tribunal, holding back Western assistance – EU aid programs, Partnership for Peace, etc.) reflect this bitter antagonism.
It would be a mistake to imagine that Tudjman's style was entirely unrepresentative.
Croatia's economy and traditional access to Europe could have placed it among the first candidates for European integrations had its political and social elite any notion that this was advantageous.
Instead, lack of opposition to Tudjman points to a broad consensus, in which a wink toward Western values disguises fundamental self-satisfaction with things as they are, or were.
This was not a case of mere nationalism but of a class monopoly fearing competition from outside.
Croatia's opposition was for a long time limited to NGO's such as the Helsinki Committee, which challenged the government on the slippery terrain of human and minority rights, an area where the parliamentary opposition kept its collective mouths shut.
In recent years, however, as the political battle shifted to the deteriorating economy, the public accepted more direct anti-Tudjman critiques, allowing parliamentary opposition to follow.
Because Tudjman created a highly-centralized political system with vast prerogatives vested in the president, the opposition's best bet was to stick together in hope of mustering the two-thirds majority needed to change the constitution.
Unfortunately, this course was abandoned in the summer of 1998 when two opposition parties – the Social Democrats (ex-Communists, SDP) and the right-of-center Social Liberals (HSLS) – developed a special relationship that was formalized as a coalition this summer.
In response, other opposition parties, the traditional Croat Peasant Party (HSS), the center-left Liberal Party (LS), the populist Croat National Party (HNS), and the regionalist Istrian Democratic Assembly (IDS), formed their own coalition (the Four).
Formally, the SDP-HSLS and the Four function as a broad opposition alliance (the Six).
In fact, they are bitter rivals and will divide opposition vote at the January 3 elections for the lower house of the Parliament (Sabor).
So it is risky to claim that the opposition will soon rout HDZ.
More likely, there will be ground for various coalition manoeuvres, including between parts of the opposition and HDZ.
Tudjman's death opens the additional question of presidential elections, which must be held within 60 days after his passing.
HDZ has as many candidates as it has factions, and these are numerous.
It is possible that HDZ can win should it nominate Mate Granic, the Western-backed foreign minister.
His moderate reputation is more a matter of style than substance, but it goes a long way outside Croatia.
The question is whether key HDZ leaders prefer losing the presidency (and that is where real power in Croatia lies) to Granic's ascending the throne.
As for the opposition, various presidential ambitions have been manifested, perhaps most especially those of Drazen Budisa (HSLS), a former dissident and political prisoner, and his Social Democratic partner Ivica Racan, the last head of Croatia's Communists.
It is possible that the opposition’s awkward coalition will be tested by their rival presidential dreams.
Croatia's course will be tested by the consequences of Tudjman's death and the forthcoming electoral rounds.
The results might be more complicated than anyone wishes.
Unless the constitution and the political system is reformed, kleptocracy checked, and relations with the West mended, Tudjman-era themes may continue.
That is a luxury that Croatia cannot afford.
Without fundamental change now, there is a real possibility of mass popular protests, and not just against Tudjman's direct heirs.
Crony capitalism American-style
Remember the East Asia crisis? when the US Treasury and its IMF allies blamed that region's problems on crony capitalism, lack of transparency, and poor corporate governance?
Countries were told to follow the American model, use American auditing firms, bring in American entrepreneurs to teach them how to run their companies.
(Never mind that under the leadership of their own entrepreneurs East Asia grew faster than any other region - and with greater stability - over the previous three decades.)
The unfolding Enron scandal brings new meaning to two favorite American sayings: ``What goes around comes around,'' and ``People in glass houses shouldn't throw stones.''
Enron used fancy accounting tricks and complicated financial products (derivatives) to mislead investors about its value.
No transparency here.
It used its money to buy influence and power, shape U.S. energy policy, and avoid regulations.
Crony capitalism is not new; nor is it the province of a single party.
Former US Treasury Secretary Robert Rubin reportedly tried to influence the current government to intervene on behalf of Enron in its hotly contested dispute in India.
In office, he had intervened when the supposedly independent board for setting accounting standards tried to clean up the accounting of senior executives' share options.
Partly thanks to him, this effort to make corporate accounting more transparent was stymied.
America's willingness to provide multi-billion dollar bail-outs to airlines or to create cartels to protect its steel and aluminum industries suggests that free market ideology is but a thin guise for old-fashioned corporate welfare: give to those with the appropriate connections.
To some, the fact that Enron was not bailed out and the problems uncovered, is testimony to the absence of crony capitalism.
I have a different interpretation: it is testimony to the importance of a free press, which may not stop but can curtail abuses.
As the press started taking a closer look at Enron, the number of members of Congress who had accepted money from Enron became clear.
Campaign contributions were not just a matter of public spirit, but an investment.
Like many of Enron's investments, it worked well in the short run, but did not pan out in the long run.
Many lessons emerge.
Some concern politics: the Enron scandal strengthens the case for campaign finance reform, and the need for even stronger laws requiring public disclosure.
Democracies are undermined by corporate interests being able to, in effect, buy elections.
The Bush administration, however, refuses to disclose information which would show the role of corporate interests in setting its energy policy.
Other lessons concern economics, especially the economics of information.
For markets to work, for the appropriate signals for efficient resource allocation to be provided, investors must have as much information as possible.
There are inherent conflicts of interest: owners and managers have a natural incentive to present a picture as rosy as possible.
Auditing is intended to put limits on potential abuses.
But who is to guard the guardians? Who is to audit the auditors?
We rely heavily on incentives .
Auditors desire to maintain their reputation.
But the interlinking of consulting and auditing practices puts other perverse incentives in place: an incentive to please the clients, who dislike unfavorable reports.
Arthur Levitt, the former Chairman of the Securities and Exchange Commission, recognized the conflict: as many within the auditing firms focus on their own short-term interests, the integrity of the audits could be compromised.
He is perhaps the unsung hero of the entire debacle.
But the auditing firms and their corporate clients - not surprisingly, given the cabal that developed - roundly attacked his proposal for separating consulting from auditing.
What Levitt grasped - and what the Enron debacle shows so clearly - is that incentives matter, but that unfettered markets by themselves may not provide the right incentives.
Markets may not provide incentives for wealth creation; they may provide incentives for the kind of shenanigans Enron pursued.
The new economy - and its complicated new financial instruments - enhance the problems of reliable accounting frameworks; they make it easier to obfuscate.
Rather than facing up to the issues, corporate America systematically turns its back - aided and abetted by crony capitalism, American style.
The central issue of our time is finding the right balance between the government and the market.
The status quo will argue that Enron is an exception: that its demise was due to fraud, that we have laws against fraud, and that those who violate these laws should and will bear the consequences.
But much of what Enron did was not illegal.
Its auditors claim that its central practices were within the law; that thousands of firms do the same.
They are right - and that's the problem.
Investors need assurance that information received adequately reflects the economic situation of a firm.
Within the current regulatory and legal environment, with derivatives and other off-balance-sheet liabilities, there is no way for investors to have that assurance today.
We need better standards and stronger laws.
While we will never be able to prevent all abuses, we can get the incentives right.
We can try to inculcate better ethical standards. But we cannot rely on them when so many worldly people see nothing wrong with revolving doors.
They claim to manage conflicts of interest; but we see that they may manage them for their own interests.
But even as evidence for such abuses becomes apparent, new venues for abuse are repeatedly opened up - take the US repeal of the Glass Steagall Act, which separated commercial from investment banking.
Repeatedly, we have seen the consequences of the excesses of deregulation, of unfettered markets.
Now we must resist the temptation to go to the other extreme.
The challenge is: get the balance right.
Crony Central Banking in Hong Kong
HONG KONG – Joseph Yam, the head of the Hong Kong Monetary Authority (HKMA) and a career civil servant, is retiring.
Ordinarily, that should not be a newsworthy event, yet it is, and for good reasons.
Donald Tsang, Chief Executive of Hong Kong’s government, has the opportunity to restore integrity and proper governance in one of the most important statutory bodies in the territory by choosing a person solely on the basis of unimpeachable honesty and competence.
Yam remains a hero to many in Hong Kong, including journalists unschooled in international finance.
To them, he is the guardian of the Hong Kong dollar, which has been fixed at 7.8 to the US dollar for 26 years.
During the 1998 financial crisis, devaluation would have hurt those who owned local real estate but had little earnings or assets in US dollars.
Not surprisingly, Hong Kong’s oligopoly of property tycoons opposed changing the peg despite the currency’s gross overvalue at the time.
The 7.8 exchange rate was maintained at the cost – borne by all citizens – of six years of economic stagnation.
The currency was in theory governed by a rules-based Currency Board, which the British invented for their smaller colonies.
It tied the local currency to the British Pound, giving local authorities no discretion in monetary policy.
While imperial in origin, the rationale behind the Currency Board was sound.
Colonies were short on expertise.
Freedom in money creation or in interest-rate policy could mean economic disaster – as, indeed, it did in many ex-colonies following independence.
Yam was always frustrated by the lack of policy freedom under the Currency Board.
Before the crisis struck in 1998 he put in place measures giving him room to manipulate liquidity and interest rates.
His deviation from the system also created loopholes that he did not know about or thought irrelevant.
This was precisely what the British empire-builders had wanted to prevent.
When, during the 1997-98 Asian financial crisis, global investment professionals turned their attention from Thailand and Korea to Hong Kong, they quickly spotted structural weaknesses in the way the currency was managed.
Local experts had previously warned Yam about this, but he dismissed their argument in a way that one economist who was present at a meeting with him described as “demeaning and contemptuous”. Moreover, they left in shock in realizing Yam, and the financial secretary, Donald Tsang, nominally his boss but without real power, didn’t really understand the experts’ economic reasoning.
Hong Kong ’s government, led by the HKMA, launched an unprecedented intervention, buying up local shares to “defeat” the speculators, but failed to stop the stampede by global investors, including conservative pension and mutual funds.
Finally, with the government about to exhaust its entire foreign reserves, Yam realized that he had to change course.
He wisely accepted his critics’ suggestions, fixing the problems that he had denied existed. He was awarded the highest public-service medal by the then Hong Kong Chief Executive Tung Chi-wah, who was later ousted by Beijing for incompetence.
At this writing, Yam is widely criticized in Hong Kong for failing to protect small investors against the dishonest sales tactics of a number of banks in their selling of toxic Lehman Brothers derivatives disguised as bonds. He denies any responsibility, even though the HKMA oversees all financial institutions.
Yam is the highest-paid civil servant in the world, earning US$1.5 million last year.
His salary is seven times that of the chairman of the US Federal Reserve and nearly 3 times higher than that of his own superior, the Hong Kong Chief Executive.
He claims that he should be rewarded as a fund manager supervising a multibillion-dollar fund in the private sector.
But, whereas private-sector professionals are fired or have their salaries reduced for poor performance, Yam wanted private-sector pay with none of the downside risk.
The HKMA’s Compensation Committee had the sole responsibility for setting Yam’s salary.
But, during his 16-year tenure, Yam put his own appointees on that committee, choosing them from the financial sector that he regulates.
The Committee routinely rubber-stamped his salary demands.
Yam’s retirement presents an opportunity for Hong Kong’s government to redress a major issue of governance.
It should replace the compensation structure by the same civil-service scale applied to the government of which the HKMA is an integral part.
Hong Kong ’s civil servants are already the best paid in the world.
Anyone seeking to compare a public-service job with the private sector in negotiating an employment contract should simply seek work in the private sector rather than for the public good.
Anything else merely opens the door for corruption.
There is much speculation that Hong Kong Chief Executive Donald Tsang is about to appoint a generalist civil servant better known for his personal loyalty than for his financial expertise.
Nor is there any sign that the entire HKMA pay scale should be scrapped.
Either outcome would mean that the Chief Executive has missed an opportunity to send the right signal that Hong Kong stands for good public governance rather than cronyism.
Cross-Border Banking in the Balance
LONDON – The gravity of the eurozone crisis has finally sunk in.
The stakes could not be higher.
Governments and international financial institutions have scrambled to put together a solution within exceedingly tight political and economic constraints.
Many questions have yet to be answered about the design; implementation will be at least as challenging.
Eurozone leaders must now aim to preserve not only the single currency, but also the gains from financial integration in Europe.
No region of the world has benefited more from cross-border banking, yet these achievements are now at risk – and with them the European bank groups themselves.
The threat to cross-border banks comes not only from their deteriorating balance sheets in the face of lower sovereign-debt quality and weaker growth prospects, but also from the policy response itself.
The fact that Europe’s banks need massive amounts of new capital is by now generally accepted.
Yet, despite valiant attempts by the new European Banking Authority to mandate and coordinate the measures that are needed, a European solution must take account of the network of foreign subsidiaries across Europe.
Mobilizing support for European banks will be hard; extending it to subsidiaries will be even harder.
But, unlike the ill-advised exposure to sovereign debt across Europe, cross-border banking through foreign subsidiaries has been beneficial for investors, and for home and host countries alike – nowhere more so than in emerging Central and Eastern Europe, still the most important export market for the eurozone.
For core eurozone banks, this has been a region of extraordinary returns, and it is now integral to their operations.
In emerging Europe, foreign subsidiaries have helped to build financial systems that are less prone to instability, and have helped economies to converge more rapidly with average European income levels.
When the global crisis erupted in 2008, there was no regulatory framework to protect the cross-border networks, and large vulnerabilities, in the form of excessive leverage and foreign exchange, were exposed.
Much has been achieved since then: balance sheets have been strengthened and funding models adjusted.
Along with institutional reforms at the European level –&nbsp;particularly the creation of the European Systemic Risk Board and the European Banking Authority – regulation and supervision have been reinforced in subsidiaries’ host countries.
Some of this might make finance more costly, but it will also make banking operations less risky.
On balance, this is a good thing.
Even so, the threat to financial stability is possibly even graver today than it was in 2008, as the capacity of Western European governments to backstop banking systems is clearly reaching its limits.
Allowing foreign banks’ subsidiaries to become orphaned amid a worsening crisis in home countries would undermine confidence in emerging Europe’s financial systems, which could trigger asset-price declines and precipitous contractions in credit.
Ultimately, this would boomerang back on Western European banks, given their deep financial and real linkages with the region.
In 2008, such a catastrophic scenario was narrowly avoided, owing to policy intervention, including the coordination effort under the so-called Vienna Initiative (in which the European Bank for Reconstruction and Development, among others, was involved).
A new pact to secure the achievements of financial integration is now urgently needed.
Authorities from these banks’ home and host countries must sit down together.
As with the Vienna Initiative, a “Vienna 2.0” would require commitments by all concerned parties.
In responding to the higher capital requirements imposed by authorities, and choosing whether to raise more capital or sell off assets, the banks must take into account the important role that their subsidiaries play in many countries.
For many banks, this happens naturally – their subsidiaries, as important value creators, are critical to their business models.
For some, however, the subsidiaries are smaller relative to the parents’ size – and thus less central to their strategies.
Home countries must also contribute.
Within the eurozone, any recapitalization, guarantees, and other funds offered to parent banks should be made available to subsidiaries in equal measure.
Any restructuring requested in return for capital support should take into account the cross-border nature of the groups and not discriminate against subsidiaries abroad.
Subsidiaries’ host countries, for their part, must reassure parent banks that financial regulation will remain predictable.
Some of the recent abrupt – and at times overly ambitious – measures to tax the industry or redistribute the burden of foreign-currency loans have undermined capital cushions and set back recovery in credit and growth.
All of this requires coordination.
The European Banking Authority has a chance to establish itself.
It must ensure that national interests do not undermine the integrity of the cross-border bank groups.
Ultimately, we need a Europe-wide deposit insurance and bank-resolution authority that can take over and restructure failed banks.
Just as the eurozone has fostered financial development and economic growth among its members, the current crisis now risks inflicting severe collateral damage far beyond its borders.
Any sustainable solution to the crisis must ensure the integrity of the bank groups and respect the interests of these banks’ home and host countries.
Ultimately, it is cross-border banking that is in the balance.
Crouching Tiger or Paper Dragon?
When a senior defense expert recently testified before a US Congressional commission on China's military capability, he detailed the extraordinarily robust weapons program the People's Liberation Army (PLA) has been pursuing.
He pointed particularly to the PLA's increasing number of short-, intermediate- and even long-range ballistic missiles.
But the expert concluded that, despite the alarming number of missiles, they did not constitute a ``buildup.''
Baffled by that conclusion, the Congressmen began asking one question relentlessly: if the existing PLA missiles did not constitute a ``buildup,'' then what number of missiles would?
The inability to answer this question clearly exorcised and angered both the senior expert and the committee.
But this episode illustrates a fundamental and frustrating problem: the more we know about what is going on in China the less we are sure about whether China has actually become a threat.
We know China has doubled and redoubled its defense budget for, among other things, a massive weapons development program, including modernizing a deterrent and second-strike nuclear capability.
Yet we cannot decide whether this build-up is menacing.
The prevailing consensus is not to regard China as a threat.
But there are several serious conceptual flaws in this reasoning.
It fails, for example, to take into account the hostile strategic culture against the US--and against US strategic goals in the Asian and Pacific regions-- that has long been ingrained within the PLA.
Moreover, a cursory glance at the PLA's readiness training, research and development, weapons acquisition, and indoctrination programs shows that Chinese officials are preparing to fight future wars not only against regional powers, but against a superpower.
Its preparations focus not on parity with the US's modern weaponry, but on the development of ``asymmetrical warfare'' theory and capability.
As the 9-11 terrorist attacks on the US brutally reminded us, a lethal threat need not come from equivalent military hardware.
The PLA has spent an inordinate amount of its rapidly growing resources in areas that give it an asymmetrical advantage, such as electronic warfare and human intelligence.
Such tactics are aimed at confronting an enemy that is armed with the most advanced weapons systems, but is vulnerable to sabotage and asymmetrical attack, even latter-day guerilla warfare.
Throughout the PLA's history, a chief tactic has always been to launch asymmetrical attacks on an enemy's command and communication centers, thus obviating direct confrontations where parity in technological development would determine a clearer definition of victory and defeat.
The PLA has never been deterred or become less aggressive when confronted with an enemy possessing more advanced hardware.
This was true of Mao's guerrilla war against the Japanese occupation, the Civil War against Chiang Kai-shek's Nationalists, the Korean War against the US, and even the Vietnam War, where China backed the North.
More recently, PLA officials have been among the most interested observers of the two US-led Gulf Wars.
They have been impressed by US technology and remote firepower, but they have also been searching for US military weaknesses in such a context.
While awed by American hardware, some PLA brass are convinced that if Saddam Hussein had been a better commander, the battle for Baghdad could have been, to quote Zhang Zhaozhong of the Chinese National Defense University, ``George Bush's Stalingrad.''
One aspect often over-looked in foreign assessments of the PLA is its political indoctrination and the level of fanaticism this can create for an actual battlefield scenario.
Despite all the years of stressing ``military modernization,'' the system of indoctrination by Political Commissars remains the soul of PLA units.
We have seen the ferocity of ideologically intoxicated PLA soldiers during the Korean War, and even at Tiananmen Square in 1989.
Finally, China is far from being an Iraq or an Afghanistan.
Despite the obvious imbalance with the US in terms of modern armaments, it would be shortsighted to ignore China's own formidable military hardware.
It has a nuclear first- and second-strike capability; its own satellite communications systems; increasingly sophisticated and numerous aircraft and war ships; a rapidly growing economy to sustain high levels of military investment; as well as its own political and diplomatic points of leverage at places like the UN.
The supposition that China cannot become a threat in the near future, or in the next twenty years, is simplistic, because it ignores basic aspects of China's political system.
The reality is that China has been through a half century of Marxist-Leninist revolutionary indoctrination, which emphasizes the predatory nature of imperialism, colonialism, and capitalism--with America singled out as the leader of oppressive global forces.
This ideology feeds a deep popular perception of China as a wounded, humiliated third-world victim and instills in the ruling Communist Party a powerful sense of unresolved grievance.
It was from this mindset that Mao's theory of guerilla war--the last century's mother of all asymmetrical strategies of warfare--was born.
It would be naive to assume that this mindset, which has become more deeply rooted in the PLA than anywhere else in Chinese society, is a thing of the past.
Whether China will prove to be a paper dragon of little military substance or a crouching tiger with sharp claws remains unresolved.
But, as the saying goes, ``Eternal vigilance is the price of freedom.''
Creativity, Corporatism, and Crowds
NEW HAVEN – Economic growth, as we learned long ago from the works of economists like MIT’s Robert M. Solow, is largely driven by learning and innovation, not just saving and the accumulation of capital.
Ultimately, economic progress depends on creativity.
That is why fear of “secular stagnation” in today’s advanced economies has many wondering how creativity can be spurred.
One prominent argument lately has been that what is needed most is Keynesian economic stimulus – for example, deficit spending.
After all, people are most creative when they are active, not when they are unemployed.
Others see no connection between stimulus and renewed economic dynamism.
As German Chancellor Angela Merkel recently put it, Europe needs “political courage and creativity rather than billions of euros.”
In fact, we need both.
If we are to encourage dynamism, we need Keynesian stimulus and other policies that encourage creativity – particularly policies that promote solid financial institutions and social innovation.
In his 2013 book Mass Flourishing, Edmund Phelps argues that we need to promote “a culture protecting and inspiring individuality, imagination, understanding, and self-expression that drives a nation’s indigenous innovation.”
He believes that creativity has been stifled by a public philosophy described as corporatism, and that only through thorough reform of our private institutions, financial and others, can individuality and dynamism be restored.
Phelps stresses that corporatist thinking has had a long and enduring history, going back to Saint Paul, the author of as many as 14 books of the New Testament.
Paul used the human body (corpus in Latin) as a metaphor for society, suggesting that in a healthy society, as in a healthy body, every organ must be preserved and none permitted to die.
As a public-policy credo, corporatism has come to mean that the government must support all members of society, whether individuals or organizations, giving support to failing businesses and protecting existing jobs alike.
According to Phelps, Pope Leo XIII advocated a corporatist view in his 1891 encyclical Rerum Novarum, and Pope Pius XI amplified these ideas in his 1931 encyclical Quadragesimo Anno.
But, in reading these works, I do not find a clear or persuasive statement of any economic doctrine, except for basic notions of fairness and Christian charity.
In fact, an Ngrams search of books shows that the term corporatism began to become popular only after the mid-1930s, and achieved broad currency by the 1970s and 1980s.
The term seems to have been used most often by critics, often to denounce the defunct Fascist philosophy, or by those extolling elements of a “new” corporatism.
Surely, elements of corporatist thinking persist today.
People who might not stress that the government should protect failing businesses or redundant workers still have sympathies that might often lead to such outcomes.
Historically, an important spur toward corporatist thinking was Gustave Le Bon’s 1895 book The Crowd, which coined the terms “crowd psychology” and “collective mind.”
For Le Bon, “An individual in a crowd” – not only angry mobs on the street, but also other psychologically interconnected groups of people – “is a grain of sand amid other grains of sand, which the wind stirs up at will.”
Le Bon believed that crowds need strong leaders, to distance them from their natural madness and transform them into civilizations of splendor, vigor, and brilliance.
Mussolini and Hitler both took inspiration from his book, and incorporated his ideas into Fascist and Nazi ideology; and those ideas did not die with those regimes.
Still, the word “crowd” has taken on an entirely different meaning – and political valence – in our century.
Crowdsourcing and crowd-funding have created new kinds of crowds, of the sort that Le Bon never could have imagined.
As Le Bon emphasized, people cannot easily do great things as individuals.
They need to operate together within organizations that redirect crowd psychology, facilitate creativity, and are led by people of integrity.
Any such organizational technology, however, is subject to error and requires experimentation.
When the crowd-sourced Wikipedia was started in 2001, its success was not obvious.
Even one of its founders, Jimmy Wales, found it a little hard to believe: “It’s kind of surprising that you could just open up a site and let people work.”
When the United States’ Jumpstart Our Business Startups (JOBS) Act, which facilitated true crowd-funding of enterprises, was signed by President Barack Obama in 2012, it was an experiment, too.
Many critics said that it would result in the exploitation of naive investors.
We still do not know whether that is true, or how well the experiment will work.
But if the JOBS Act does not succeed, we should not abandon the idea, but try to modify it.
Ultimately, we need economic institutions that somehow promote the concerted creative actions of a wide swath of the world’s people.
They should not be corporatist institutions, dominated by central leaders, but should derive their power from the fluid actions of modern crowds.
Some of those actions will have to be disruptive, because the momentum of organizations can carry them beyond their usefulness.
But there must also be enough continuity that people can trust their careers and futures to such organizations.
Acknowledging the need to experiment and design new forms of economic organization must not mean abandoning fairness and compassion.
Crying over Spilt Parmalat
In the war of values between America and much of the world, corporate governance plays a big role.
Different visions of how capitalism is run both reflect and in some cases fuel resentment of the US.
In the 1990's, it looked as if the rest of the world wanted to do business the American way, with active capital markets and company bosses responding to shareholder interests.
This Americanization was often described simply as "globalization."
Then came a backlash, fuelled in large part by the Enron debacle and other corporate scandals.
Much of the world began to turn away from the American way of doing business.
Europeans and Asians claimed with renewed vigor that their capitalist model involved a greater commitment to long-term values and a long-term vision.
Shareholder value was dismissed as a fad and a fraud.
In continental Europe and parts of Asia, there has always been a vision of core business values centered on long-term institutions, especially the family.
The extended family, indeed, remains central even in the large-enterprise sector.
According to one recent calculation, 17 of the biggest 100 companies in Germany are in family hands, 26 in France, and 43 in Italy.
At the beginning of the 21st century, family interests reasserted themselves in continental Europe in a surprising way, ousting managers who seemed to have become too Americanized.
In Germany, the Mohn family dismissed the lead manager of Bertelsmann, Thomas Middelhoff, who wanted to turn a family company into an almost denationalized enterprise.
In France, Jean-Marie Messier was deposed from Vivendi Universal for similar reasons, and the Lagardère dynasty tried to regain control.
Unlike Messier, the Lagardères were seen as deeply French.
President Jacque Chirac's wife, the Prime Minister, and five ministers attended the funeral of Jean-Luc Lagardère in 2003.
Just as Europe was recovering its confidence in its version of capitalism, however, the Parmalat scandal hit.
The scandal looked like an obvious weapon to be used in the war of rival models of business organization: critics portrayed Parmalat as the latest manifestation of a crisis of European-style family capitalism.
Indeed, in Italy, Fiat had long been in a sad decline.
Mediobanca, the financial institution long at the heart of Italian family capitalism, was struggling since the death of its founder Enrico Cuccia and the removal of the man he had designated as his heir apparent.
It tried to redefine itself as a more normal financial institution, less committed to holding long-term strategic stakes in companies.
So are both types of capitalism discredited by a mire of deceit and bankruptcy?
Historically, the resilience of family firms was rooted in the fact that they were good at managing trust when other institutions - the state or the market - were shaky.
The upheavals of the French Revolution and the Napoleonic wars produced great uncertainty, but they also produced business dynasties such as the Rothschilds.
In the aftermath of defeat in WWII, family links provided a way for Japan and Germany to reconstruct business quickly.
They provided a highly efficient means of obtaining information about markets, suppliers, and sources of finance.
This capacity remains attractive whenever a crisis strikes.
But the attraction depends on seeing what is at the core of the family tradition.
The two styles of capitalism can be contrasted as the family firm versus the post-modern firm.
The US-style post-modern firm sees market dominance in terms of branding, or a manipulation of images that gives intellectual hegemony and can lead to market dominance.
As consumers, we recognize the big brands because so much has been invested in them, and we are invited to trust them.
New brands can assert themselves by acquiring symbolic capital.
In the corporate landscape, there is the old, say, Coca Cola, but also alongside it the new, say, Microsoft or Amazon.
Enron aimed at getting a dominant position as the premier energy trader.
Parmalat wanted to do the same for the long-life milk market.
In this vision of how corporations work, the company that isn't globally dominant is an also-ran.
The family firm has a vastly different logic, and often does not want to become too big.
Its strong point is that it aims to be there in the future, while a company with a more flexible ownership structure may more easily disappear.
In the past, the concern with long corporate life was criticized for restricting growth.
If big is better, then it is better to become a post-modern company than remain a traditional one.
Parmalat was a family firm trying to be a post-modern firm, and which simply cheated on the way as it tried to expand fast.
Its problems should not be seen as a test of family capitalism, but rather of the dangers that come from the temptation to break out of the old order.
As the future shape of global capitalism grows increasingly uncertain, family values are as relevant as ever.
Family ownership builds trust and promises a commitment to long-run income and employment.
That, surely, is a model that is beneficial in Europe, Asia, and beyond.
Cry, the Newborn Baby
Each year, four million babies die in their first four weeks of life – over 10,000 deaths a day.
Most of these neonatal deaths go unrecorded and remain invisible to all but their families.
Virtually all (99%) occur in low- and middle-income countries, but most research and funding focuses on high-tech care for the 1% of deaths occurring in rich countries.
The greatest risk of death is at the beginning of life: three-quarters of all neonatal deaths (three million) occur within one week of birth, and at least one million babies die on their first day of life, many at home without any formal healthcare.
Moreover, almost 40% of all child deaths occur in the neonatal period, with Africa and South Asia accounting for two-thirds of the total.
Unfortunately, child survival programs in the developing world have focused primarily on pneumonia, diarrhea, malaria, and vaccine-preventable causes of deaths after the first month of life, while safe motherhood programs have focused primarily on the mother.
Prevention of newborn deaths has thus dropped between the cracks of programs focusing on mothers and on older children.
This represents a tragedy that is as avoidable as it is immense.
A recent series on neonatal issues in the British science journal Lancet estimated that between 41% and 72% of neonatal deaths could be prevented if simple interventions were provided effectively where they are needed most.
In other words, up to three million babies needlessly die each year.
Well known, low-cost, and low-tech interventions do not reach those most in need – for example immunization against tetanus, exclusive breastfeeding, simple care for low-weight babies, and antibiotics for infection.
Such interventions are extremely cost-effective, and packaging these interventions together and linking them with other health programs reduces costs further.
Saving lives requires that mothers and babies in the highest-mortality countries be reached at the time of greatest risk.
Currently, only about half of all women worldwide deliver with a skilled attendant present.
In sub-Saharan Africa, less than 40% of women deliver with skilled care; in South Asia, the figure is less than 30%.
Latin America and Southeast Asia have rapidly increased coverage, but at the current rate of progress in Africa, 50% of women will still deliver without skilled care in the year 2015.
In Ethiopia, a quarter of pregnant women in the highest income group use skilled care at delivery, compared to 1% of the poorest women.
Low-income countries have demonstrated that rapid progress is possible. Sri Lanka, Indonesia, Peru, and Botswana all halved neonatal mortality during the 1990s.
These countries’ success has depended on sustained high-level political commitment to providing high-quality maternal and newborn care.
In particular, integrated planning is essential.
In India, newborn health forms part of the national Reproductive and Child Health Program.
In Ethiopia, newborn care is being incorporated into a new community-based healthcare program.
Of course, there is no “one-size-fits-all” solution.
The numbers and causes of neonatal deaths, the capacity of the health system, and the obstacles faced differ between and within countries, as does support from policymakers and the availability of resources.
The additional cost of maintaining essential newborn health interventions at 90% coverage in the 75 countries with the highest mortality is estimated to be a mere $4.1billion per year.
This would supplement current spending of $2 billion, only about 30% of which is for interventions specifically aimed at newborns, while the majority is for interventions that also benefit mothers and older children.
Even with a weak health system, it is possible to achieve measurable mortality reduction.
But the world needs to act now to generate the political will and financial resources needed to save the lives of up to three million babies who die each year simply because they are born without the basic care that is their right.
Indeed, to continue to fail the world’s at-risk children is to deliver a verdict of wanton inhumanity against ourselves, for we are a knowing party to an entirely preventable mass destruction of human life.
Cuba’s Back
MEXICO CITY – After 47 years, the Organization of American States, at its annual General Assembly, has repealed its suspension of Cuba’s membership.
The so-called ALBA countries (the Spanish acronym for the so-called Bolivarian Alternative for the Americas), which includes Cuba, Venezuela, Honduras, Nicaragua, Bolivia, Dominica, and Ecuador, were able partly to outwit – and partly to “out-blackmail” – Canada, the United States, and the Latin American democracies in getting Cuba rehabilitated.
The OAS did, however, lay down two conditions.
Cuba must explicitly request reinstatement, and a dialogue must be initiated in accordance with the premises of the OAS Charter and other basic OAS documents, and in consonance with the principles on which those documents are based – most importantly, democracy and respect for human rights.
Like many diplomatic compromises, the outcome left everyone a bit happy and a bit disappointed.
Everyone could claim victory, and no one was obliged to acknowledge defeat.
But those compromises are like statistics or skimpy swimsuits: what they show is less important than what they hide.
Two fundamental considerations come to mind, and their ramifications in “up-for-grab” countries in Latin America, such as El Salvador, are particularly significant.
The first consideration involves the ALBA countries’ conduct of foreign policy.
Given that the smaller countries do not act independently of Venezuela, and that Venezuelan President Hugo Chávez does not act without Cuba’s guidance on weighty matters such as these, it is now clear that the Cubans and their allies will cut US President Barack Obama no slack on Latin American issues.
They could have easily let the OAS assembly go by, giving the new American president more time to prepare his Congress and public opinion for a delicate balancing act.
The key issue here is how to lift the now almost fifty-year old US embargo on trade, investment, and travel to Cuba unilaterally, while portraying it as the result of a negotiation.
The ALBA countries decided they would concede nothing to Obama, and attempt, instead, to back him into a corner: either the US would go along with the new OAS consensus, angering both parts of the Cuban-American lobby and the human rights community by abandoning principles and commitments, or the US would have to act alone (perhaps with Canada by its side), leaving it totally isolated in Latin America – the last thing Obama wants.
The ALBA group pushed hard for a vote, or a compromise on its terms, which it could then flaunt to the world and to domestic public opinion.
Obama had no choice but to go along.
The second consideration is that this behavior will continue.
The reason seems clear enough: Cuba needs international aid desperately, and there are not too many places where it can find it.
Hopes that Brazil and China would provide cash to Cuba have been dashed by the international financial crisis and geo-politics.
And Chávez, despite the recent increase in oil prices, can no longer afford to subsidize Cuba as he did during the boom years.
So it seems that the Cubans are hoping to find resources elsewhere, and the only possibility, as remote as it seems, is the Inter-American Development Bank.
In principle, IDB membership requires OAS membership, and therein may lie the reason why Cuba insisted so strongly on returning, and why it was ultimately disappointed in not obtaining unconditional re-admission.
It will nonetheless attempt to have its allies push for some sort of association with the IDB, while at the same time radicalizing its stance elsewhere, as it is now doing in El Salvador.
Indeed, the new Salvadoran president, Mauricio Funes, was elected on the ticket of the FMLN, the party that succeeded the old, hard-left guerrilla group of the 1980’s and 1990’s.
He is a moderate, modern leftist who has openly identified himself with Brazilian President Lula and Barack Obama, as opposed to Chávez.
But his party is as close to Cuba and Venezuela as one can get.
In a showdown over the composition of the cabinet just before his inauguration on June 1, the FMLN old guard won, threatening to take the conflict to the streets.
The Cubans, Nicaraguans, and Venezuelans will not cut Funes any slack, either, believing that history is on their side, and that now is the time to force every issue in sight.
They are probably right, up to a certain point, because the second lesson from the OAS assembly concerns the behavior of the Latin American democracies, mainly Mexico, Brazil, Chile, and Colombia.
They tried to accommodate the US (it is rumored that Obama phoned Lula and asked for his help), but were nonetheless unwilling to break with Cuba and Venezuela to side openly with the US.
They will not do so any time soon, on any issue that may spring up, if it means confrontation with the ALBA countries.
Fidel Castro knows this, and will take advantage of the democracies’ diluted commitment to human rights and democracy.
In each country where conflict is present or emerging (Bolivia, Guatemala, El Salvador, Paraguay, and Ecuador) the hard-left will push hard, the democracies will look the other way, and Obama will either give in (as at the OAS) and pay a domestic political price, or step back from Latin America, for fear of appearing isolated.
A magnificent opportunity for a new start in US-Latin American relations will have been missed.
Cultivating Energy
From climate change to volatile oil prices, all signs point to a looming global energy crisis.
Confronting the growing challenge means that humanity can no longer afford to ignore the inexhaustible resource found in the organic material that the sun provides each day through photosynthesis.
Solar energy enables plants to absorb carbon gas and thereby produce not only oxygen, but also matter that the animal kingdom uses for food – and that our machines can use for energy.
Since the Neolithic (or late Stone Age) period, humans have been cultivating this “biomass” in order to feed itself.
Yet, even in today’s world, its energy potential is ignored.
Beginning with the industrial revolution, humans sought energy from coal, and later from oil and natural gas, but this leads to the exhaustion of non-renewable resources.
Existing alternatives for diversifying energy production are limited.
Nuclear energy presents a number of disadvantages, owing to concerns about safety and disposal of radioactive waste.
Hydroelectric power is already widely used, while wind and solar energy are structurally sporadic and disparately available.
Biomass, on the other hand, has several advantages.
Supplies of it are large and available throughout the world.
Moreover, the technology necessary to convert it into energy – including high-yield burning, gas conversion, and liquefaction into synthetic fuel – has long been mastered.
Widely used during World War II, this technology has since advanced considerably.
Biomass energy, however, is the victim of unfair competition from fossil fuels.
Oil’s price reflects its extraction, refining, and distribution costs, but not that of creating the raw material.
Millions of years and 200 tons of plant matter are necessary to produce one liter of oil, whereas just 15 kilograms of plant matter are required to make one liter of synthetic fuel.
After the oil glut, with oil below $20 a barrel, interest in developing energy from biomass ebbed, attractive only to “green” militants and those interested in fundamental science.
Yet the potential is immense.
The planet’s biomass – forests, pastureland, savannas, and crops – make up productive capital that generates a 10% “return” every year.
Like a battery that runs out and is then recharged by the sun, this supply is renewable indefinitely, as long as it is managed properly.
The annual return on this capital is currently estimated at 60 billion tons, yet only two billion tons is consumed for food purposes and 10 billion tons for energy.
Increasing the responsible use of this energy source would contribute to the fight against climate change by reducing the amount of carbon in the atmosphere and diminishing the amount of fossil fuel required to produce energy.
Moreover, its abundance in southern countries promises to facilitate their economic development.
Considered the “energy of the poor” until today, biomass could become a source of wealth if it is grown and harnessed with the support of the international community.
Thus, “energy crops” could be developed to produce biofuel.
Residue from forest, agricultural, and agro-industrial activities could be collected and converted.
For example, the six million tons of waste produced annually by Niger could theoretically be used to meet that country’s entire energy needs.
However, in many places, energy cropping would certainly compete with food crops.
Long-term estimates project that over a 50-year time horizon, most of the planet’s arable land would have to be used to feed the world and for forest conservation.
Thus, areas dedicated to energy production, particularly biofuel, may not reach the level that societies would wish.
But, while such competition would reveal new global scarcities, it would also bring higher prices, thereby encouraging producers to increase yields and productivity.
Thus, while cultivating energy would create new constraints, it would also open new possibilities for many economic actors.
The farmer and the forest worker could become more involved in the market, the mine engineer could begin to take an interest in crop fields, the banker in plant shares, etc. But, in order to prepare for a scaling up of energy cropping, new policies must be implemented, both in northern and southern countries, in terms of agriculture, land and water management, protection of biodiversity, fuel taxes, and information and awareness-raising.
The ancient Egyptians and the Incas practiced a religion of the Sun, believing it to be at the beginning of all life on Earth.
Science has since proven this to be the case.
Nowadays, when it has become more important than ever that we embrace renewable resources, we should use the Sun to cultivate our energy, just as our ancestors used it to cultivate their food.
Cultural Imperialism and the Ban on DDT
The UN Environment Program (UNEP) is embarked on a misguided campaign to ban the pesticide DDT under its Persistent Organic Pollutants (POPs) Framework Convention.
Tropical countries that sign this convention will seriously damage the health of their peoples.
DDT is the most cost-effective agent ever produced for the control of diseases spread by flies and mosquitoes.
The US National Academy of Sciences estimates that DDT saved 500 million lives from malaria before 1970.
In India, effective spraying virtually eliminated the disease by the 1960s.
The number of malaria cases fell from 75 million in 1951 to 50,000 in 1961, and the number of malaria deaths from a million in the 1940's to a few thousand in the 1960s.
The mosquito nets ubiquitous in my childhood disappeared from urban houses by the time I was at university in the late 1950s.
Then, in the 1970s, largely as a result of an environmental scare promoted by Rachel Carson's book Silent Spring , foreign aid agencies and UN organizations stopped promoting DDT, and its usage declined.
Mosquitoes soon hit back and endemic malaria returned to India.
By 1997 the UNDP estimates that there were 2.6 million malaria cases.
The same story can be told about kala-azar, which is spread by the sand fly.
DDT largely rid India of kala-azar in the 1950s and 1960s.
With the decline in DDT use it returned.
According to the State minister of health in Bihar, kala-azar has since afflicted 12,000 people in 30 districts, killing 408.
Why did DDT fall into disfavor?
The DDT scare started with Carson's claim that its use had devastating effects on bird life.
It was also blamed for causing hepatitis in humans.
But numerous scientific studies showed that these fears were baseless.
DDT was shown to cause death in humans only if eaten like pancakes!
Commission after commission, expert after Nobel prize-winning expert, gave DDT a clean bill of health.
In 1971, Philip Handler, then the president of the US National Academy of Science, called DDT is "the greatest chemical that has ever been discovered."
Yet in 1972, President Nixon's head of the US Environmental Protection Agency banned it.
Most developed countries followed America's lead, with developing countries proscribing its use in agriculture, and some for all purposes.
If both science and economics favor DDT, why has the ban spread?
The environmental movement's supposedly key concept is "sustainable development."
This was endorsed in the report Our Common Future by the World Commission on Environment and Development, whose chair, Norway's then Prime Minister, Gro Harlem Bruntland, now heads the World Health Organization (WHO).
The notion of sustainability asserts that natural capital, such as forests, wildlife, and other natural resources cannot be substituted by manmade capital.
As pesticides are assumed to have adverse effects on natural capital they are inconsistent with sustainable development.
Instead of using them to control bugs, bed nets and drugs to fight the disease should be used.
Advocates of this position go on to deploy the so-called "precautionary principle" to counter the argument that there is no scientific evidence that DDT spraying damages natural capital.
The precautionary principle is a variant on Pascal's famous wager on the existence of God.
As Paul Ehrlich put it in 1968 in his book The Population Bomb , "If I'm right, we will save the world [by curbing population growth].
If I'm wrong, people will still be better-fed, better-housed, and happier thanks to our efforts.
Will anything be lost if it turns out later that we can support a much larger population than seems possible today?"
The late Julian Simon provided a tart response to this bit of weak reasoning.
Simon noted that Pascal's wager was very different: "Live as if there is God, because even if there is no God you have lost nothing.
Pascal's wager applies entirely to one person.
No one else loses if he or she is wrong.
But Ehrlich bets what he thinks will be the economic gains that we and our descendants might enjoy against the unborn's very lives.
Would he make the same wager if his own life rather than other lives were at stake?"
Environmentalists ban DDT because they are willing to sacrifice human lives for those of birds.
This underlying misanthropy is revealed by Ehrlich's statement about India: "I came to understand the population explosion emotionally one stinking hot night in Delhi....
The streets seemed alive with people.
People eating, people washing, people sleeping, people visiting, arguing, and screaming.
People thrusting their hands through the taxi window, begging.
People defecating and urinating.
People clinging to buses.
People herding animals.
People, people, people."
Not surprisingly, many environmentalists argue that, in the words of one: "It may be unkind to keep people dying from malaria so that they could die more slowly of starvation.
[Malaria may even be] a blessing in disguise, since a large proportion of the malaria belt is not suited to agriculture, and the disease has helped to keep man from destroying it--and from wasting his substance on it."
The environmental movement is a new secular Christian creed, for which saving Spaceship Earth has replaced saving souls.
It must be resisted as fiercely as the Christian crusaders of yore.
There is no better place to begin than with countries refusing to join the UNEP Convention or kowtow to its ban on DDT use.
Curing Hereditary Breast Cancer
In developed countries, breast cancer affects about one in ten women, and in many of these countries the disease is on the increase.
But, whatever the reason (or reasons) for the rise in their occurrence, we also know that between 5% and 10% of breast cancers are due to an inherited defect that affects the BRCA1 or BRCA2 genes.
Women carrying a mutated BRCA1 or BRCA2 gene have roughly an 80% risk of developing breast cancer.
A mutation in these genes also leads to an increased risk of developing ovarian tumors.
When the BRCA1 and BRCA2 genes were discovered more than a decade ago, there were high hopes for novel and targeted therapies.
Disappointingly, no new treatments have yet arisen.
As a result, many women with a high level of mutated BRCA1 or BRCA2 genes face the tragic choice of having their breasts and ovaries surgically removed to pre-empt cancer.
Recently, my research group, along with researchers in London, provided some real hope for carriers of mutated BRCA1 or BRCA2 genes. Both research teams describe how the use of a chemical inhibitor can kill tumor cells that have either a BRCA1 or BRCA2 gene defect causing hereditary breast cancer.
This new treatment targets only the tumor cells and is unlikely to affect other healthy cells in the body.
The discovery could also work to prevent hereditary breast cancer cells from growing into tumors.
The chemical inhibitors used in this treatment target the enzyme polymerase (PARP1), which is normally involved in the repair of DNA single-strand breaks – a common form of spontaneous DNA lesions.
Chemical inhibition of the PARP1 protein results in reduced occurrence of these single-strand break repairs.
Unrepaired single-strand breaks are not very toxic to cells.
However, these breaks disrupt and damage the DNA when they are copied as DNA replicates.
The damage arising when copying the DNA is repaired with recombination, involving the BRCA1 and BRCA2 proteins.
But cells with mutated BRCA1 or BRCA2 genes are unable to undergo recombination and are therefore much more sensitive to an increased level of unrepaired single-strand breaks.
The normal cells of women carrying the BRCA1 or BRCA2 mutations can still recombine, because they retain one functional allele—or alternative form—of the gene.
Only those cells losing this remaining functional allele of the BRCA1 or BRCA2 gene will become tumors.
Thus, only the tumor cells will have a non-functional recombination pathway and rely completely on PARP to repair single-strand breaks before copying the DNA.
In our research, we exploit this requirement to specifically target the BRCA1 or BRCA2-defective cancer cells with inhibitors of PARP.
This treatment is unlikely to cause many side effects; prolonged treatments with PARP inhibitors are well tolerated in mice.
We have shown that PARP inhibitors are effective at killing BRCA2-defective breast cancer cells, and that the tumors they cause can fully regress and disappear following treatment with a PARP inhibitor.
The next step is to investigate how efficient this treatment is in human patients.
We are now initiating clinical trials to determine how efficient these PARP inhibitors are in the treatment of metastasized breast tumors.
But caution is in order.
BRCA1 and BRCA2-defective tumors are characterized by a high degree of genetic instability.
It is possible that highly metastasized breast tumors might have acquired additional genetic changes causing resistance to treatment with PARP inhibitors.
Therefore, we suggest that PARP inhibitors might be more useful in the prophylactic treatment of women carrying the gene responsible for this form of inherited breast cancer.
The reason is simple: cells that have recently lost the functional BRCA1 or BRCA2 allele and that will later grow into tumors will also be unable to undergo recombination.
This means that early cancerous cells should be sensitive to PARP inhibitors.
However, unlike fully developed tumors, they are not likely to have acquired many genetic changes and are therefore unlikely to have gained resistance to PARP inhibitors.
Treating women carrying BRCA1 or BRCA2 mutations with PARP inhibitors to kill cancer cells before they grow into tumors is a new and hopeful concept in cancer prevention.
However, the usefulness of this treatment relies on the fact that PARP1 inhibitors are completely non-toxic to humans.
It will also take longer to validate a PARP inhibitor for use as a prophylactic treatment, because the treatment cannot be proven effective in a short time.
Thus, while the use of PARP inhibitors to treat established tumors may be feasible within a few years, we could have to wait at least a decade before a prophylactic treatment for inherited breast cancer is widely available.
Currency Chaos
BRUSSELS – Guido Mantega, Brazil’s finance minister, aptly captured the current monetary Zeitgeist when he spoke of a looming “currency war.”
What had seemed a bilateral dispute between the United States and China over the renminbi’s exchange rate has mutated into a general controversy over capital flows and currencies.
Today, every country seems to want to depreciate its currency.
Japan has resumed foreign-exchange intervention, and the US Federal Reserve and the Bank of England are preparing another large-scale purchase of government bonds – a measure called “quantitative easing,” which lowers long-term interest rates and indirectly weakens the currency.
China is fiercely resisting US and European pressure to accelerate the snail-paced appreciation of the renminbi against the dollar.
Emerging-market countries are turning to an array of techniques to discourage capital inflows or sterilize their effect on the exchange rate.
Only the eurozone seems to be bucking the trend, as the European Central Bank has allowed a rise in the short-term interest rate.
But even the ECB cannot be indifferent to the risks of appreciation, because a strong euro may seriously complicate economic adjustment in countries like Spain, Portugal, Greece, and Ireland.
A world in which every country wants a weaker exchange rate is not without precedent.
It happened in the 1930’s, when one country after another abandoned the gold standard, trying to export its unemployment.
But everyone cannot have a weak currency at the same time, so, in 1944, responsibility for preventing beggar-thy-neighbor depreciation was assigned to the International Monetary Fund, whose Articles of Agreement mandate it to “exercise firm surveillance over the exchange-rate policies” of member countries.
Given this mission, it would seem that the IMF should help extract concessions from China and the rest of the world should declare a truce.
But this would ignore a fundamental asymmetry between advanced and emerging countries.
Both have suffered from the crisis, but not in the same way.
According to the IMF, real output in advanced countries this year will still be below 2007 levels, whereas it will be 16% higher in emerging and developing countries.
Looking ahead, advanced countries will continue to struggle with the fallout of the 2008 crisis, especially with the deleveraging of indebted households and dire public finances.
The IMF also reckons that the advanced countries must cut spending or increase taxes by nine percentage points of GDP on average over the current decade, in order to bring the public-debt ratio to 60% of GDP by 2030.
Emerging countries, however, do not need any consolidation to keep their debt ratio at 40% of GDP.
Asymmetry of this magnitude requires a significant adjustment of relative prices.
The relative price of the goods produced in the advanced countries (their real exchange rate) needs to depreciate vis-à-vis the emerging countries in order to compensate for the expected shortfall in internal demand.
In fact, this will happen whatever the exchange rate between currencies.
The only difference is that, if exchange rates remain fixed, advanced countries will have to go through a protracted period of low inflation (or even deflation), which will make their debt burden even harder to bear, and emerging countries will have to enter an inflationary period as capital flows in, driving up reserves, increasing the money supply, and ultimately boosting the price level.
For both sides, it is more desirable to let the adjustment take place through changes in nominal exchange rates, which would help contain deflation in the north and inflation in the south.
But, compared to July 2007, at the onset of the crisis, exchange rates between advanced and emerging countries have barely changed.
True, some currencies have risen and others have fallen, but on average almost nothing has happened.
The adjustment that needs to take place is blocked.
For each central bank, the question is not what happens to, say, emerging countries as a whole, but what happens to its own currency vis-à-vis competitors.
So Brazil does not want to appreciate vis-à-vis other Latin American countries, Thailand does not want to appreciate vis-à-vis other Asian countries, and no one wants to appreciate vis-à-vis China, which fears that renminbi appreciation would lead labor-intensive industries to migrate to Vietnam or Bangladesh.
Thus, a change that is in everyone’s interest is hampered by lack of coordination.
Quantitative easing in the advanced countries also raises a question of coordination.
QE is a legitimate monetary-policy instrument, but the Fed and the Bank of England would probably not embrace it with such enthusiasm were it not for the anticipated exchange-rate depreciation.
In fact, the ECB’s perceived reluctance to follow suit is likely to add to the expected growth effects of US or British monetary-policy choices, at the expense of the eurozone.
The controversy over China’s exchange-rate policy thus is no mere bilateral US-China trade dispute, but rather a global macroeconomic clash between advanced and emerging countries.
Moreover, the lack of coordination in both advanced and emerging countries suggests that the solution to currency wars is not to declare a truce, but to recognize the nature of the issue and overcome the problems that stand in the way of agreed common solutions.
This is not to say that the renminbi’s exchange rate is a secondary issue.
On the contrary, its importance stems from the fact that China holds the key to global adjustment.
The recent IMF/World Bank annual meetings indicate that this is gradually being recognized, with emerging countries increasingly critical of China’s inflexibility.
So now is the IMF’s moment.
The Fund should propose a conceptual framework for the discussions to be held on exchange-rate problems by providing an objective assessment of the adjustments that are needed, and by facilitating settlement within the multilateral framework.
The IMF cannot substitute for governments’ choices.
But it can help the search for a solution.
How to Fight Currency Manipulation
WASHINGTON, DC – Is it appropriate to use trade agreements to discourage countries from using large-scale intervention in the foreign-exchange market to hold down their currencies’ value?
That is the question of the day in American economic-policy circles.
In recent years, Japan, South Korea, and China have manipulated their currencies to keep them undervalued.
This boosted their exports, limited imports, and led to large current-account surpluses.
But such intervention adversely affects trading partners and is barred under existing international rules.
Unfortunately, those rules have proved completely ineffective.
Now a new opportunity to address the issue has emerged: The Trans-Pacific Partnership – the mega-regional free-trade agreement involving the United States, Japan, and ten other countries in Latin America and Asia.
With the TPP close to being finalized, South Korea and China are watching intently, and other countries may want to join.
US President Barack Obama correctly argues that this is an occasion to set the rules for trade and investment in the twenty-first century.
Yet the US Treasury Department and the US Trade Representative steadfastly refuse to include any language prohibiting currency manipulation in the TPP, for five main reasons – none of which fits the facts.
The first argument is that the International Monetary Fund can deal with instances of currency manipulation.
The IMF does have up-to-date guidelines that define and seek to prevent currency manipulation.
These were adopted not only with America’s assent, but at its insistence, at a time (the mid-2000s) when China’s renminbi was greatly undervalued, contributing to the loss of millions of US manufacturing jobs.
Unfortunately, the IMF cannot enforce its guidelines, because currency manipulators are able to stall action.
This has been the entrenched and continuing pattern, including when I was the IMF’s chief economist (from early 2007 to August 2008).
The second argument made by the US Treasury and the Trade Representative is that no sufficiently precise currency rules can be negotiated.
But there is nothing wrong with the IMF guidelines – both the 2007 and 2012 versions – negotiated by the Treasury itself.
Recognizing this, Congressman Sander Levin – the senior Democrat on the House Ways and Means Committee, which has jurisdiction over international trade – proposes that a TPP currency chapter be based on the IMF guidelines.
These guidelines identify when a country, despite running a large current-account surplus, is pursuing long-term, large-scale purchases of foreign assets, thereby blocking exchange-rate appreciation – exactly the problem we want to prevent.
(I have worked with Levin on some of these issues, but here I am speaking only for myself.)
The third argument against putting anti-manipulation provisions in the TPP is that they would imperil America’s ability to implement monetary stimulus.
But this reflects a thorough misunderstanding of the issue.
A well-designed currency chapter in the TPP would not impede US monetary independence.
Conventional monetary policy operates by altering short-term interest rates, which includes the central bank buying and selling short-term government debt.
No intervention in the foreign-exchange market – buying and selling foreign currency – is involved.
Similarly, the quantitative easing (QE) that has defined many major central banks’ monetary policy in recent years does not involve buying or selling foreign assets.
Under QE, the Federal Reserve buys – and announces that it will buy – assets; the only difference is that these assets are longer-maturity US government debt instruments and mortgage-backed securities of various kinds, all denominated in US dollars.
The fourth argument is that no major country is currently manipulating its exchange rate (the renminbi has appreciated since the mid-2000s), so there is nothing to worry about.
But there is also nothing to stop China or any other country from resuming large-scale currency-market intervention if and when it chooses.
And the lack of diplomatic tension around exchange rates today makes this a good moment to raise the topic.
The final reason cited in support of excluding a currency chapter from the TPP is that the countries negotiating the deal would never agree.
But this argument does not hold up when the participating countries are examined one by one.
Canada, Australia, and New Zealand, developed economies with floating exchange rates, do not want to encourage currency manipulation.
Chile, a middle-income country that has long had sound and responsible macroeconomic policies, does not favor currency manipulation.
Mexico and Peru have much to fear from other countries becoming currency manipulators again.
Likewise, Japan, now running its own version of QE, worries about potential currency manipulation by other countries, such as South Korea and China.
Malaysia and Singapore, having built up a substantial stock of foreign-exchange reserves, should also now be more concerned about currency manipulation by their trading partners.
Vietnam has much more serious TPP issues to resolve, particularly concerning labor rights.
And Brunei Darussalam, with a population of less than 500,000, is unlikely to object.
Currency manipulation is a real problem that causes significant damage.
The TPP deal – if it establishes a dispute-resolution mechanism that can quickly dismiss frivolous claims and home in on genuine cases – may offer the best chance to fix it.
The Currency Manipulation Charade
NEW HAVEN – As the US Congress grapples with the ever-contentious Trans-Pacific Partnership – President Barack Obama’s signature trade legislation – a major stumbling block looms.
On May 22, the Senate avoided it, by narrowly defeating – 51 to 48 – a proposed “currency manipulation” amendment to a bill that gives Obama so-called “fast-track” authority to negotiate the TPP.
But the issue could be resurrected as the debate shifts to the House of Representatives, where support is strong for “enforceable currency rules.”
For at least a decade, Congress has been focusing on currency manipulation – a charge leveled at countries that purportedly intervene in foreign-exchange markets in order to suppress their currencies’ value, thereby subsidizing exports.
In 2005, Senators Charles Schumer, a liberal Democrat from New York, and Lindsey Graham, a conservative Republican from South Carolina, formed an unlikely alliance to defend beleaguered middle-class US workers from supposedly unfair competitive practices.
Stop the currency manipulation, went the argument, and America’s gaping trade deficit would narrow – providing lasting and meaningful benefits to hard-pressed workers.
A decade ago, the original Schumer-Graham proposal was a thinly veiled anti-China initiative.
The ire that motivated that proposal remains today, with China accounting for 47% of America’s still outsize merchandise trade deficit in 2014.
Never mind that the Chinese renminbi has risen some 33% against the US dollar since mid-1995 to a level that the International Monetary Fund no longer considers undervalued, or that China’s current-account surplus has shrunk from 10% of GDP in 2007 to an estimated 2% in 2014.
China remains in the crosshairs of US politicians who believe that American workers are the victims of its unfair trading practices.
While this argument has great emotional and political appeal, it is deeply flawed, because the United States has an insidious saving problem.
America’s net national saving rate – the sum total of household, business, and government saving (adjusted for the depreciation of aging capacity) – currently stands at 2.5% of national income.
While that is better than the negative saving rates of 2008-2011, it remains well short of the 6.3% average of the final three decades of the twentieth century.
Lacking in saving and wanting to grow, America must import surplus savings from abroad.
And to attract that foreign capital, it has no choice but to run equally large balance-of-payments deficits.
So it is no coincidence that the US economy has a chronic current-account deficit.
While this shortfall has narrowed from a peak of 5.8% of GDP in 2006 to 2.4% in 2014, it still leaves the US heavily dependent on surplus foreign savings in order to grow.
This is where the trade deficit comes into play.
The US does not just pluck surplus foreign savings out of thin air.
To attract the capital it needs, America must send dollars overseas through foreign trade.
And it is here that the currency manipulation argument falls apart.
In 2014, the US ran trade deficits with some 95 countries.
In other words, America does not suffer from a small number of bilateral trade deficits that can be tied to charges of currency manipulation by countries like China, Japan, Malaysia, or Singapore.
Rather, the US suffers from a multilateral trade imbalance with many countries, and this cannot be remedied through the imposition of bilateral penalties such as tariffs.
Without fixing its savings problem, restricting trade with a few so-called currency manipulators would simply redistribute the US trade deficit to its other trading partners.
In effect, America’s trade balance is like a water balloon – applying pressure on one spot would simply cause the water to slosh elsewhere.
Moreover, this approach could easily backfire.
For example, assuming that there is no increase in domestic US saving, penalizing a low-cost producer like China for currency manipulation would most likely cause the Chinese piece of America’s trade deficit to be reallocated to higher-cost producers.
That would be the functional equivalent of a tax hike on middle-class families – precisely the constituency that so concerns Congress.
Further complications would arise from putting the verdict on currency manipulation – presumably dependent on some type of “fair value” metric – in the hands of politicians.
This is also the twist that underscores the ultimate congressional hypocrisy.
The charge of currency manipulation is nothing but a foil for the US to duck responsibility for fixing America’s saving problem.
Lacking any semblance of a strategy to boost savings – not just a long-term fix to the federal government’s budget deficit, but also meaningful incentives for personal saving – US politicians have turned to yet another quick fix.
In the end, there is no way around it: If Congress does not like trade deficits, it needs to address America’s saving problem and stop fixating on misplaced concerns over currency manipulation.
None of this is to argue that the US should ignore unfair trading practices.
As a member of the World Trade Organization, the US has ample opportunity to use that body’s dispute-resolution mechanism to adjudicate major problems with its trading partners.
And it has enjoyed success with this approach.
What Congress cannot do is pretend that wrong-footed trade policy is the answer to its inability or unwillingness to refocus its domestic policy agenda.
Of course, it is always easier to blame others than to look in the mirror.
But history has not been kind to major trade blunders.
Just as the Smoot-Hawley Tariff Act of 1930 sparked a global trade war that may well have put the “great” in the Great Depression, Congressional enactment of enforceable currency rules today could spark retaliatory actions that might devastate the free flow of trade that a sluggish global economy desperately needs.
The US Senate was wise in rejecting this dangerous option.
We can only hope that similar wisdom prevails in the House of Representatives.
Currency manipulation legislation is one tragedy that can and should be avoided.
Cut Now, Save Later
WASHINGTON, DC – Central banks around the world have finally reacted to the global financial crisis by engineering a coordinated half-point interest-rate cut.
That is welcome, but far more is needed – and quickly.
If implemented now, steep rate cuts can still have a significant positive effect.
If delayed, their effect is likely to be minimal.
Across the board, the world’s major central banks have been slow to respond to the deepening crisis.
This failure reflects the dominance of conventional economics, which has produced closed-minded group-thinking within the global central banking community.
As a result, central banks failed to see the oncoming financial tsunami, and even after it arrived they continued to fight the last war against inflation.
The European Central Bank and the Bank of England have been the worst offenders.
That is no surprise, as European central bankers are the most conventional in their thinking and have been the most obsessed with inflation.
It also explains why Continental Europe has had such high unemployment rates for so long.
The United States Federal Reserve Board has done a much better job, though it, too, has moved in fits and starts, repeatedly playing catch-up with a crisis that has persistently remained one step ahead of policy.
This pattern reflects the Fed’s own obsession with price stability, which encourages preemptive interest-rate increases to head off inflation, but restrains equivalent preemptive reductions to head off unemployment.
Consequently, the Fed left its interest rate unchanged throughout the summer of 2008, despite the collapse of mortgage giants Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, AIG’s insolvency, and the emergence of global financial-market contagion.
Moreover, Fed policy remained constant despite rapid deterioration in America’s real economy, indicated by accelerating job losses and rising unemployment.
The coordinated rate cut now undertaken by the world’s major central banks begins the process of policy catch-up, but further cuts are needed.
Whereas the bogey of inflation seems finally to have been laid to rest, another myth must still be challenged – that the Fed and other central banks should save their “bullets” for a rainy day and should therefore resist cutting rates.
There is an old saying about monetary policy being useless in recession because the effect of lowering interest rates is like “pushing on a string.”
That happens when confidence and wealth have been destroyed, at which point rate cuts do indeed become useless.
This is because the destruction of confidence undermines the “animal spirits” of capitalism: borrowers are unwilling to borrow and lenders are unwilling to lend.
The destruction of wealth also destroys collateral, which means that even those who wish to borrow cannot.
Meanwhile, insolvencies and foreclosures triggered by excessive interest burdens are not reversed by later rate cuts.
By failing to act in a timely fashion, central banks have allowed a dangerous erosion of confidence and wealth, which is creating “pushing on a string” conditions.
Fortunately, there is still time for decisive rate cuts now to have a robust impact.
But the window of opportunity is closing fast.
If central banks save their “rate cut” bullets for a later day, they may find that their ammunition is useless.
The time to shoot is now.
Lessons from the Fiscal Cliff
CAMBRIDGE – One of the many things I learned from Milton Friedman is that the true cost of government is its spending, not its taxes.
To put it another way, spending is financed either by current taxes or through borrowing, and borrowing amounts to future taxes, which have almost the same impact on economic performance as current taxes.
We can apply this reasoning to the United States’ unsustainable fiscal deficit.
As is well known, closing this deficit requires less spending or more taxes.
The conventional view is that a reasonable, balanced approach entails some of each.
But, as Friedman would have argued, the two methods should be considered polar opposites.
Less spending means that the government will be smaller.
More taxes mean that the government will be larger.
Hence, people who favor smaller government (for example, some Republicans) will want the deficit closed entirely by cutting spending, whereas those who favor larger government (for example, President Barack Obama and most Democrats) will want the deficit closed entirely by raising taxes.
As the economist Alberto Alesina has found from studies of fiscal stabilization in OECD countries, eliminating fiscal deficits through spending cuts tends to be much better for the economy than eliminating them through tax increases.
A natural interpretation is that spending adjustments work better because they promise smaller government, thereby favoring economic growth.
For a given size of government, the method of raising tax revenue matters.
For example, we can choose how much to collect via a general income tax, a payroll tax, a consumption tax (such as a sales or value-added tax), and so on.
We can also choose how much revenue to raise today, rather than in the future (by varying the fiscal deficit).
A general principle for an efficient tax system is to collect a given amount of revenue (corresponding in the long run to the government’s spending) in a way that causes as little distortion as possible to the overall economy.
Usually, this principle means that marginal tax rates should be similar at different levels of labor income, for various types of consumption, for outlays today versus tomorrow, and so on.
From this perspective, a shortcoming of the US individual income-tax system is that marginal tax rates are high at the bottom (because of means testing of welfare programs) and the top (because of the graduated-rate structure).
Thus, the government has moved in the wrong direction since 2009, sharply raising marginal tax rates at the bottom (by dramatically increasing transfer programs) and, more recently, at the top (by raising tax rates on the rich).
One of the most efficient tax-raising methods is the US payroll tax, for which the marginal tax rate is close to the average rate (because deductions are absent and there is little graduation in the rate structure).
Therefore, cutting the payroll tax rate in 2011-2012 and making the rate schedule more graduated (on the Medicare side) were mistakes from the standpoint of efficient taxation.
Republicans should consider these ideas when evaluating tax and spending changes in 2013.
Going over the “fiscal cliff” would have had the attraction of seriously cutting government spending, although the composition of the cuts – nothing from entitlements and too much from defense – was unattractive.
The associated revenue increase was, at least, across the board, rather than the unbalanced hike in marginal tax rates at the top that was enacted.
But the most important part of the deal to avert the fiscal cliff was the restoration of the efficient payroll tax.
I estimate that the rise by two percentage points in the amount collected from employees corresponds to about $1.4 trillion in revenue over ten years.
This serious revenue boost was not counted in standard reports, because the payroll-tax “holiday” for 2011-2012 had always been treated legally as temporary.
It is true that some macroeconomic modelers, including the Congressional Budget Office, forecasted that going over the cliff would have caused a recession.
But those results come from Keynesian models that always predict that GDP expands when the government gets larger.
Entirely absent from these models are the negative effects of more government and uncertainty about how fiscal problems will be resolved.
Another recession in the US would not be a great surprise, but it can be attributed to an array of bad government policies and other forces, not to cutting the size of government.
Indeed, it is nonsense to think that cuts in government spending should be avoided in the “short run” in order to lower the chance of a recession.
If a smaller government is a good idea in the long run (as I believe it is), it is also a good idea in the short run.
Cutting the IMF and World Bank Down to Size
CAMBRIDGE: In recent weeks, debates over the future of the International Monetary Fund and the World Bank have grabbed headlines.
A US Congressional Commission of experts, on which I served, issued a report, dubbed the Meltzer Report (after the Commission’s Chairman, economist Allan Meltzer), calling for dramatic reforms of both institutions.
Then, Trans-Atlantic bickering over the selection of a new IMF Managing Director broke out.
The selection process was unpleasant (for example, developing countries had no real say), but in the end, the excellent choice of German Finance official Horst Kohler emerged.
As another important factor in the debate, US Treasury Secretary Lawrence Summers issued his own calls for modest World Bank reforms, following proposals that he made earlier for modest IMF reforms.
The real debate is about the scope of the two institutions.
During the past 20 years, the IMF and the World Bank played a large role in developing countries and in the postcommunist transition.
Rich countries, especially the US, used the IMF and World Bank as instruments of financial diplomacy.
Both institutions have been used by the US and Europe to get money to favored countries – Mexico, Russia, or East Asia – in times of crisis.
Both the IMF and World Bank have also been empowered to impose strong conditions on the economic programs of countries that turn to it for help.
IMF and World Bank critics, including members of the Meltzer Commission, think that the two institutions are too big, too powerful, and too over-extended.
The IMF tries to manage the economic operations of more than 50 countries.
In many cases, the IMF imposes its programs for years or even decades, far after an economic emergency ends.
It maintains its influence because the US insists that poorer countries should have IMF programs if they are to receive relief on their debt or receive other kinds of financial help from outside the IMF.
The World Bank lends money to dozens of countries in hundreds of programs.
Many World Bank’s recipients, ironically, have normal access to private capital markets, so that World Bank lending is a small part of what those countries can borrow from the rest of the world through normal market mechanisms.
The Meltzer Commission noted that the IMF, with just one thousand or so professional staff, could not and should not try to run dozens of countries’ economic programs.
The result is superficiality, arbitrariness, excessive intrusion into national sovereignty and, as a result of all of this, poor or mediocre results.
It also noted that the IMF and World Bank overlap, so that there was no real accountability for either institution.
If something went wrong, the IMF could attribute responsibility to the World Bank, and vice versa.
The Meltzer Commission recommended scaling back the two institutions, getting each to focus on core responsibilities and thus improve performance.
For the IMF, the main recommendation is that it return to its original responsibility: preserving short-run macroeconomic stability in the world economy by making short-term loans available to member governments in an emergency.
In order to accomplish this narrowing and refocusing of tasks, the IMF should stop imposing itself on dozens of poor countries around the world.
For the World Bank, the Commission recommended that the Bank reduce its lending activities in richer developing countries, and focus attention on poor countries, where needs are urgent.
This would involve scaling back World Bank operations to countries with investment-grade credit ratings that are already able to draw upon private capital for development.
Also, countries with per capita incomes above $4,000 would also be cut back from World Bank loans.
The billions of poorer people in the world would then be the focus of that institution’s help.
To help poorer countries gain independence from the IMF after years of dependency, the Meltzer commission recommended outright cancellation of the debts of the world’s poorest, highly indebted countries.
Part of the reason that many countries turn to the IMF is because governments are bankrupt under the weight of excessive foreign debt.
By canceling debt, it would be possible for countries to restore financial health without the need for continuous IMF "assistance" and control.
Predictably, the US Government and senior management of the IMF and World Bank reacted against these recommendations.
In their arrogance, these institutions feel that they should continue to determine the fates of much of the developing world.
They are not ready to give up any power or responsibility, even if their programs are failing.
Sadly, many developing country governments have grown so dependent on these institutions that they too are afraid to lose their dominant hand, even though the programs are often do more harm than good.
The debate continues, and I predict that some time soon, the IMF and World Bank will cut back on their excessive and arrogant over-reaching of power.
They will have to do so because their programs do not work well enough to justify their claims for authority.
Cyber Insecurity
CAMBRIDGE – In August 2008, Russian troops moved into Georgia.
Observers dispute who fired first, but there was a little noticed dimension of the conflict that will have major repercussions for the future.
Computer hackers attacked Georgian government Web sites in the weeks preceding the outbreak of armed conflict.
The Russia-Georgia conflict represents the first significant cyber attacks accompanying armed conflict.
Welcome to the twenty-first century.
Cyber threats and potential cyber warfare illustrate the increased vulnerabilities and loss of control in modern societies.
Governments have mainly been concerned about hacker attacks on their own bureaucracy’s information technology infrastructure, but there are social vulnerabilities well beyond government computers.
In an open letter to the US president in September 2007, American professionals in cyber defense warned that “the critical infrastructure of the United States, including electrical power, finance, telecommunications, health care, transportation, water, defense, and the Internet, is highly vulnerable to cyber attack.
Fast and resolute mitigating action is needed to avoid national disaster.” In the murky world of the Internet, attackers are difficult to identify.
In today’s interconnected world, an unidentified cyber attack on non-governmental infrastructure might be severely damaging.
For example, some experts believe that a nation’s electric power grid may be particularly susceptible.
The control systems that electric power companies use are thought vulnerable to attack, which could shut down cities and regions for days or weeks.
Cyber attacks may also interfere with financial markets and cause immense economic loss by closing down commercial Web sites.
Some scenarios, including an “electronic Pearl Harbor,” sound alarmist, but they illustrate the diffusion of power from central governments to individuals.
In 1941, the powerful Japanese navy used many resources to create damage thousands of miles away.
Today, an individual hacker using malicious software can cause chaos in far-away places at little cost to himself.
Moreover, the information revolution enables individuals to perpetrate sabotage with unprecendented speed and scope.
The so-called “love bug virus,” launched in the Phillipines in 2000, is estimated to have cost billions of dollars in damage.
Terrorists, too, can exploit new vulnerabilities in cyberspace to engage in asymmetrical warfare.
In 1998, when America complained about seven Moscow Internet addresses involved in the theft of Pentagon and NASA secrets, the Russian government replied that phone numbers from which the attacks originated were inoperative.
The US had no way of knowing whether the Russian government had been involved.
More recently, in 2007, China’s government was accused of sponsoring thousands of hacking incidents against German federal government computers and defense and private-sector computer systems in the US.
But it was difficult to prove the source of the attack, and the Pentagon had to shut down some of its computer systems.
In 2007, when Estonia’s government moved a World War II statue commemorating Soviet war dead, hackers retaliated with a costly denial-of-service attack that closed down Estonia’s access to the internet.
There was no way to prove whether the Russian government, a spontaneous nationalist response, or both aided this transnational attack.
In January 2008, President George W. Bush signed two presidential directives that called for establishing a comprehensive cyber-security plan, and his 2009 budget requested $6 billion to develop a system to protect national cyber security.
President-elect Barack Obama is likely to follow suit.
In his campaign, Obama called for tough new standards for cyber security and physical resilience of critical infrastructure, and promised to appoint a national cyber adviser who will report directly to him and be responsible for developing policy and coordinating federal agency efforts.
That job will not be easy, because much of the relevant infrastructure is not under direct government control.
Just recently, Donald Kerr, the US deputy director of national intelligence, warned that “major losses of information and value for our government programs typically aren’t from spies....In fact, one of the great concerns I have is that so much of the new capabilities that we’re all going to depend on aren’t any longer developed in government labs under government contract.”
Kerr described what he called “supply chain attacks” in which hackers not only steal proprietary information, but go further and insert erroneous data and programs in communications hardware and software – Trojan horses that can be used to bring down systems.
All governments will find themselves exposed to a new type of threat that will be difficult to counter.
Governments can hope to deter cyber attacks just as they deter nuclear or other armed attacks.
But deterrence requires a credible threat of response against an attacker.
And that becomes much more difficult in a world where governments find it hard to tell where cyber attacks come from, whether from a hostile state or a group of criminals masking as a foreign government.
While an international legal code that defines cyber attacks more clearly, together with cooperation on preventive measures, can help, such arms-control solutions are not likely to be sufficient.
Nor will defensive measures like constructing electronic firewalls and creating redundancies in sensitive systems.
Given the enormous uncertainties involved, the new cyber dimensions of security must be high on every government’s agenda.
Cyber War and Peace
CAMBRIDGE – Two years ago, a piece of faulty computer code infected Iran’s nuclear program and destroyed many of the centrifuges used to enrich uranium.
Some observers declared this apparent sabotage to be the harbinger of a new form of warfare, and United States Secretary of Defense Leon Panetta has warned Americans of the danger of a “cyber Pearl Harbor” attack on the US.
But what do we really know about cyber conflict?
The cyber domain of computers and related electronic activities is a complex man-made environment, and human adversaries are purposeful and intelligent.
Mountains and oceans are hard to move, but portions of cyberspace can be turned on and off by throwing a switch.
It is far cheaper and quicker to move electrons across the globe than to move large ships long distances.
The costs of developing those vessels – multiple carrier task forces and submarine fleets – create enormous barriers to entry, enabling US naval dominance.
But the barriers to entry in the cyber domain are so low that non-state actors and small states can play a significant role at low cost.
In my book The Future of Power, I argue that the diffusion of power away from governments is one of this century’s great political shifts. &amp;
Cyberspace is a perfect example.
Large countries like the US, Russia, Britain, France, and China have greater capacity than other states and non-state actors to control the sea, air, or space, but it makes little sense to speak of dominance in cyberspace.
If anything, dependence on complex cyber systems for support of military and economic activities creates new vulnerabilities in large states that can be exploited by non-state actors.
Four decades ago, the US Department of Defense created the Internet; today, by most accounts, the US remains the leading country in terms of its military and societal use.
But greater dependence on networked computers and communication leaves the US more vulnerable to attack than many other countries, and cyberspace has become a major source of insecurity, because, at this stage of technological development, offense prevails over defense there.
The term “cyber attack”covers a wide variety of actions, ranging from simple probes to defacing Web sites, denial of service, espionage, and destruction.
Similarly, the term “cyber war” is used loosely to cover a wide range of behaviors, reflecting dictionary definitions of war that range from armed conflict to any hostile contest (for example, “war between the sexes” or “war on drugs”).
At the other extreme, some experts use a narrow definition of cyber war: a “bloodless war” among states that consists solely of electronic conflict in cyberspace.
But this avoids the important interconnections between the physical and virtual layers of cyberspace.
As the Stuxnet virus that infected Iran’s nuclear program showed, software attacks can have very real physical effects.
A more useful definition of cyber waris hostile action in cyberspace whose effects amplify or are equivalent to major physical violence.
In the physical world, governments have a near-monopoly on large-scale use of force, the defender has an intimate knowledge of the terrain, and attacks end because of attrition or exhaustion.
Both resources and mobility are costly.
In the cyber world, by contrast, actors are diverse (and sometimes anonymous), physical distance is immaterial, and some forms of offense are cheap.
Because the Internet was designed for ease of use rather than security, attackers currently have the advantage over defenders.
Technological evolution, including efforts to “reengineer” some systems for greater security, might eventually change that, but, for now, it remains the case.
The larger party has limited ability to disarm or destroy the enemy, occupy territory, or use counterforce strategies effectively.
Cyber war, though only incipient at this stage, is the most dramatic of the potential threats.
Major states with elaborate technical and human resources could, in principle, create massive disruption and physical destruction through cyber attacks on military and civilian targets.
Responses to cyber war include a form of interstate deterrence through denial and entanglement, offensive capabilities, and designs for rapid network and infrastructure recovery if deterrence fails.
At some point, it may be possible to reinforce these steps with certain rudimentary norms and arms control, but the world is at an early stage in this process.
If one treats so-called “hacktivism” by ideological groups as mostly a disruptive nuisance at this stage, there remain four major categories of cyber threats to national security, each with a different time horizon: cyber war and economic espionage are largely associated with states, and cyber crime and cyber terrorism are mostly associated with non-state actors.
For the US, the highest costs currently stem from espionage and crime, but over the next decade or so, war and terrorism could become greater threats than they are today.
Moreover, as alliances and tactics evolve, the categories may increasingly overlap.
In the view of Admiral Mike McConnell, America’s former director of national intelligence, “Sooner or later, terror groups will achieve cyber-sophistication.
It’s like nuclear proliferation, only far easier.”
The world is only just beginning to see glimpses of cyber war – in the denial-of-service attacks that accompanied the conventional war in Georgia in 2008, or the recent sabotage of Iranian centrifuges.
States have the greatest capabilities, but non-state actors are more likely to initiate a catastrophic attack.
A “cyber 9/11” may be more likely than the often-mentioned “cyber Pearl Harbor.”
It is time for states to sit down and discuss how to limit this threat to world peace.
Can Cyber Warfare Be Deterred?
CAMBRIDGE – Fear of a “cyber Pearl Harbor” first appeared in the 1990s, and for the past two decades, policymakers have worried that hackers could blow up oil pipelines, contaminate the water supply, open floodgates and send airplanes on collision courses by hacking air traffic control systems.
In 2012, then-US Secretary of Defense Leon Panetta warned that hackers could “shut down the power grid across large parts of the country.”
None of these catastrophic scenarios has occurred, but they certainly cannot be ruled out.
At a more modest level, hackers were able to destroy a blast furnace at a German steel mill last year.
So the security question is straightforward: Can such destructive actions be deterred?
It is sometimes said that deterrence is not an effective strategy in cyberspace, because of the difficulties in attributing the source of an attack and because of the large and diverse number of state and non-state actors involved.
We are often not sure whose assets we can hold at risk and for how long.
Attribution is, indeed, a serious problem.
How can you retaliate when there is no return address?
Nuclear attribution is not perfect, but there are only nine states with nuclear weapons; the isotopic identifiers of their nuclear materials are relatively well known; and non-state actors face high entry barriers.
None of this is true in cyberspace where a weapon can consist of a few lines of code that can be invented (or purchased on the so-called dark web) by any number of state or non-state actors.
A sophisticated attacker can hide the point of origin behind the false flags of several remote servers.
While forensics can handle many “hops” among servers, it often takes time.
For example, an attack in 2014 in which 76 million client addresses were stolen from JPMorgan Chase was widely attributed to Russia. By 2015, however, the US Department of Justice identified the perpetrators as a sophisticated criminal gang led by two Israelis and an American citizen who lives in Moscow and Tel Aviv.
Attribution, however, is a matter of degree.
Despite the dangers of false flags and the difficulty of obtaining prompt, high-quality attribution that would stand up in a court of law, there is often enough attribution to enable deterrence.
For example, in the 2014 attack on SONY Pictures, the United States initially tried to avoid full disclosure of the means by which it attributed the attack to North Korea, and encountered widespread skepticism as a result.
Within weeks, a press leak revealed that the US had access to North Korean networks.
Skepticism diminished, but at the cost of revealing a sensitive source of intelligence.
Prompt, high-quality attribution is often difficult and costly, but not impossible.
Not only are governments improving their capabilities, but many private-sector companies are entering the game, and their participation reduces the costs to governments of having to disclose sensitive sources.
Many situations are matters of degree, and as technology improves the forensics of attribution, the strength of deterrence may increase.
Moreover, analysts should not limit themselves to the classic instruments of punishment and denial as they assess cyber deterrence.
Attention should also be paid to deterrence by economic entanglement and by norms.
Economic entanglement can alter the cost-benefit calculation of a major state like China, where the blowback effects of an attack on, say, the US power grid could hurt the Chinese economy.
Entanglement probably has little effect on a state like North Korea, which is weakly linked to the global economy.
It is not clear how much entanglement affects non-state actors.
Some may be like parasites that suffer if they kill their host, but others may be indifferent to such effects.
As for norms, major states have agreed that cyber war will be limited by the law of armed conflict, which requires discrimination between military and civilian targets and proportionality in terms of consequences.
Last July, the United Nations Group of Government Experts recommended excluding civilian targets from cyberattacks, and that norm was endorsed at last month’s G-20 summit.
It has been suggested that one reason why cyber weapons have not been used more in war thus far stems precisely from uncertainty about the effects on civilian targets and unpredictable consequences.
Such norms may have deterred the use of cyber weapons in US actions against Iraqi and Libyan air defenses.
And the use of cyber instruments in Russia’s “hybrid” wars in Georgia and Ukraine has been relatively limited.
The relationship among the variables in cyber deterrence is a dynamic one that will be affected by technology and learning, with innovation occurring at a faster pace than was true of nuclear weapons.
For example, better attribution forensics may enhance the role of punishment; and better defenses through encryption may increase deterrence by denial.
As a result, the current advantage of offense over defense may change over time.
Cyber learning is also important.
As states and organizations come to understand better the importance of the Internet to their economic wellbeing, cost-benefit calculations of the utility of cyber warfare may change, just as learning over time altered the understanding of the costs of nuclear warfare.
Unlike the nuclear age, when it comes to deterrence in the cyber era, one size does not fit all.
Or are we prisoners of an overly simple image of the past?
After all, when nuclear punishment seemed too draconian to be credible, the US adopted a conventional flexible response to add an element of denial in its effort to deter a Soviet invasion of Western Europe.
And while the US never agreed to a formal norm of “no first use of nuclear weapons,” eventually such a taboo evolved, at least among the major states.
Deterrence in the cyber era may not be what it used to be, but maybe it never was.
Cycling and Cancer
The cyclist Lance Armstrong recently celebrated an anniversary.
It has been ten years since he was diagnosed with metastatic testicular cancer, which his doctors believed would kill him.
Based on his inspiring story and his efforts to publicize the disease, Armstrong has become an anti-cancer crusader.
But on examining his foundation’s website ( www.laf.org ) and his writings, a nagging question remains: Did the same tenacity that enabled Armstrong to win seven Tour de France bicycle races help cure his cancer?
Armstrong is careful not to equate cycling with cancer, but he—and his legions of fans—often cannot help but do so.
Such a connection may be highly misleading.
By his early twenties, Armstrong was becoming a force in the racing world, but all was not well.
In 1996, at age 25, Armstrong developed fatigue, testicular pain and a bloody cough.
Doctors diagnosed him with testicular cancer.
More distressingly, Armstrong’s cancer was far-advanced, having spread to his lungs, abdomen and brain.
He was given roughly a 40% chance of survival, which was probably an overestimate.
One doctor told Armstrong’s mother that her son would die.
After undergoing surgery to remove his cancerous testicle, Armstrong became “a student of cancer.” He was treated at Indiana University, perhaps America’s leading center for testicular cancer.
Armstrong chose Indiana because its oncologists said they could treat him without bleomycin, a type of chemotherapy that would have damaged his lungs and ended his cycling career if he survived.
They removed his brain tumors with surgery instead of radiation, which might have caused balance problems.
But the doctors made no bones about what Armstrong was to receive: extremely caustic drugs that would make him sick as a dog.
Armstrong later wrote that “by the fourth cycle [of chemotherapy], I was in the fetal position, retching around the clock.”
Armstrong’s cancer responded extremely well.
He then underwent extensive rehabilitation, gradually regaining strength and confidence.
By 1998, he was again riding his bicycle.
The illness changed Armstrong’s body.
When he resumed serious training, he was leaner and more muscular.
In addition to the emotional advantage that Armstrong believed that cancer gave him, his new body also made him a more effective cyclist.
In 1999, less than three years after his diagnosis, Armstrong won his first Tour de France.
Six more followed, making him the greatest cyclist in history.
For his part, Armstrong has tried to steer clear of facile associations between his Tour de France triumphs and his recovery from cancer. “Good, strong people get cancer,” he has written, “and they do all the right things to beat it, and they still die.”
Still, at times, Armstrong seems to slip into the sort of language he wishes to avoid.
At the close of his second book, Armstrong summarized his history with cancer as: “I got treated, I fought like hell, and I got better.”
When I race I don’t want to lose.
Dying and losing, it’s the same thing.”
More worrisome is the adoption of the same reasoning by those who hear Armstrong’s story. “Lance refused to become a statistic and instead rallied and became cancer’s worst enemy,” wrote a reviewer of his first book.
“Lance beat cancer and then he went on to win 5 Tour de Frances,” a computer programmer wrote on his blog in 2003. “That pretty much means I can overcome whatever ills I have in my life so I can keep going after that.”
The trouble is that data about the “will to live” among cancer patients are not so rosy.
One 1989 study showed that women with metastatic breast cancer who attended support groups survived longer, but these results have not been duplicated.
A recent study showed that a positive attitude did not lengthen the lives of lung cancer patients.
Anecdotally, clinicians can recall “fighters” with cancer who die and others who “give up” but live.
This is a sobering message for Armstrong’s many fans.
After all, we all want to think that hard work always pays off.
Unfortunately, in the world of cancer, this may not be so.
But Armstrong’s legacy is about more than data.
He has educated and provided inspiration to thousands, perhaps millions, of cancer patients and raised money that is being used to finding cures.
Oh, and there are those seven bike races that he won.
Europe’s Perpetual Crisis
ATHENS – The Cyprus bailout deal is a watershed in the unfolding eurozone crisis, because responsibility for resolving banks’ problems has been shifted from taxpayers to private investors and depositors.
But imposing major losses on Cypriot banks’ depositors violates the deposit-insurance guarantee that forms part of the proposed European banking union, while the imposition of capital controls further erodes the monetary union’s foundations.
So, is Europe chasing its tail?
Germany and the other countries of the eurozone core are signaling that debt mutualization within the monetary union is out of the question, and that bailouts of countries or financial institutions will be balanced by “bail-ins” of their creditors.
Increased uncertainty concerning the safety of deposits will push up interest rates and deepen Europe’s recession, and may also trigger capital outflows from the eurozone’s weaker peripheral economies to the core.
The implications of this shift may be far-reaching.
The German model for resolving the debt crisis and returning to internal or external balance relies on fiscal consolidation and structural reforms for the deficit countries.
But, if all countries simultaneously attempt to improve their fiscal or external balances by cutting spending and raising taxes, all will fail, because each country’s austerity implies less demand for other countries’ output, in turn perpetuating both domestic and external imbalances. “Bailing in” creditors will exacerbate these trends.
Moreover, a deep and prolonged recession implies vanishing support for reforms, as governments fail to convince citizens that current sacrifice will ensure a better future.
Privatization, market liberalization, the opening of closed professions, and government downsizing involve conflicts with powerful vested interests, such as businesses in protected industries, public-sector unions, or influential lobbies.
Resolving such conflicts requires social alliances, which are invariably undermined by discontent, civil disorder, and political instability.
The recent Italian election has shown how toxic the association of austerity policies with the pursuit of reform has become.
Anti-austerity anger swept away the reform agenda of Mario Monti’s previous technocratic government, leaving Italy, its future uncertain, to continue muddling through.
The same scenario seems to be emerging in Greece, where the depth of the austerity-induced recession, with output down by 25% over five years and unemployment at 27%, is paralyzing a reform-minded center-right government.
The gaps in the strategy are clear.
First, the eurozone authorities misread the real causes of the debt crisis, which stemmed mainly from a growing competitiveness gap between the core and periphery countries.
The resulting private-sector imbalances culminated in banking problems that were eventually transferred to sovereigns.
Greece’s fiscal profligacy was the exception rather than the rule.
Indeed, in contrast to the United States, eurozone authorities were slow to consolidate the banking system after the global financial crisis erupted in 2008, and failed to sever the ties between sovereigns’ and banks’ balance sheets.
Nor did they push strongly for structural reforms.
Instead, they emphasized harsh austerity, which was to be pursued everywhere.
Second, the effects of austerity were exacerbated by the choice to pursue nominal, rather than structural, fiscal-deficit targets.
Countries with a stronger fiscal position (that is, smaller structural deficits) should be encouraged to adopt more expansionary policies in order to contribute to lifting overall demand.
Moreover, the European Investment Bank’s lending capacity could be increased substantially, and European Union structural funds mobilized, to finance investment projects in the peripheral economies.
Third, the European Central Bank’s announcement last August of its “outright monetary transactions” program – through which it guarantees eurozone members’ sovereign debt, subject to policy conditionality – has contributed significantly to subduing financial turbulence in the eurozone.
But the OMT scheme has not been reinforced by a reduction in key interest rates, which would boost inflation in core countries with external surpluses and thus help to close the competitiveness gap with the periphery.
Crucially, monetary-policy measures do not address the underlying problem of lack of demand.
Last, but not least, the eurozone authorities misread the confidence factor.
In theory, simultaneous fiscal consolidation and supply-side reform facilitates economic recovery, because it increases confidence among consumers and investors, thereby inducing higher spending and production.
But this does not necessarily work in an imperfectly functioning monetary union, such as the eurozone, where the continual appearance of systemic flaws erodes confidence; in such circumstances, the result may be hoarding and capital outflows, rather than increased spending.
The eurozone’s flaws reflect its conceptual distance from the US, which is the only model of a well-functioning monetary union.
Europe’s history rules out emulating the US model.
But, to make the eurozone work, monetary unification should extend to the fiscal and financial fields, thereby creating an integrated economic union.
The longer that European authorities postpone the introduction of Eurobonds, an effective banking and fiscal union, and lender-of-last-resort status for the ECB, the longer the crisis will last.
By effectively defaulting on a deposit-insurance guarantee through its actions in Cyprus, the eurozone backtracked on the planned banking union.
Pursuing a strategy that simultaneously deepens recession and weakens confidence will not resolve the debt crisis.
As funding problems recur in the recession-hit economies, governments may resist “bailing in” and the associated losses.
Civil unrest and political destabilization could erupt into financial and social crises that ultimately threaten the monetary union’s survival.
In short, the “solution” to the Cyprus crisis is no solution at all for the eurozone.
Unless the authorities embrace a growth strategy – and do so quickly – the eurozone’s prospects will become increasingly bleak.
जीवनरक्षक धारणाएं
जेनेवा. उत्तरी नाइजीरिया में 200 से अधिक लड़कियों की दुर्दशा इस बात की निर्मम याद दिलाती है कि अफ्रीका में बच्चे-खासकर लड़कियां कितनी असुरक्षित हो सकती हैं. लेकिन यह जानना भी उतना ही महत्त्वपूर्ण है कि यह स्थिति आधुनिक अफ्रीका की सही झलक नहीं दिखलाती है. अफ्रीका के नेतागण अपने देश के बच्चों की सुरक्षा को लेकर अत्यंत प्रतिबद्घ हैं. अमीर देशों में बच्चों को जैसी सुरक्षा उपलब्ध है वैसी सुरक्षा उपलब्ध कराने के लिए दो महत्त्वपूर्ण घटकों की जरूरत हैः साझेदारी और विश्वास या धारणा.
ऐसा इसलिए है कि हालांकि आतंकवाद एक भीतरी खतरा तो है, पर अफ्रीका के बच्चों को सब से बड़ा खतरा है बीमारी का जिसे नियमित टीकाकरण के जरिये सामान्यतः टाला जा सकता है. सचमुच, आज जहां सारी दुनिया लापता बच्चियों को छुड़ाने के लिए सर्वश्रेष्ठ उपायों पर चर्चा कर रही है, वहीं एक दूसरी मुसीबत सिर उठा रही है. विश्व स्वास्थ्य संगठन ने हाल ही में पोलियो के फैलाव को अंतर्राष्ट्रीय जन-स्वास्थ्य आपातकाल घोषित किया है. अनेक अफ्रीकी देशों से इस भयावह बीमारी का दूसरे देशों में फैलने का खतरा है.
सौभाग्य से आज पोलियो व कई अन्य बीमारियां जो टीकों से रोकी जा सकती हैं से लड़ने के तत्कालिक एवं ठोस उपाय मौजूद हैं. वर्तमान में ये बीमारियां अफ्रीका व अन्य जगहों पर अनगिनत मासूम जिंदगियां छीन लेती हैं. इसके अलावा अफ्रीकी नेतागण मानते हैं कि नियमित टीकाकरण ही बच्चों को लंबे समय तक और स्थायी रूप से बीमारियों से बचाने का सर्वोत्तम उपाय है. इस महीने के आरंभ में नाइजीरिया की राजधानी आबुजा में अफ्रीकी नेताओं की बैठक में ‘इम्युनाइज अफ्रीका 2020 डिक्लेरेशन’ का प्रस्ताव पास किया गया. इसमें इन नेताओं ने अपने देशों के बच्चों के स्वस्थ व सुनहरे भविष्य में निवेश करने की अपनी प्रतिबद्धता दोहराई.
ऐसी घोषणाएं महत्त्वपूर्ण हैं क्योंकि केवल अपने विश्वास के बल पर ही हम सच्चे अर्थों में सकारात्मक परिवर्तन ला सकते हैं. और सचमुच परिवर्तन हो रहा है. सन् 2001 से अफ्रीका में 140 से अधिक टीकाकरण अभियान चलाए गए. इसका श्रेय स्थानीय नेतृत्व को और मेरे संगठन गावी (GAVI) अलाइंस द्वारा दिए गए समर्थन को जाता है. इसके सहयोगी यूनिसेफ, विश्व स्वास्थ्य संगठन व बिल एंड मोलिंडा गेट्स फाउंडेशन भी धन्यवाद के पात्र हैं. इस तरह के कार्य के फलस्वरूप अफ्रीका में टीकाकरण का दायरा बढ़ा है.
1980 में यह 10% था और 2012 में 72% हो गया.
और अब, 2016 से 2020 तक अफ्रीका के 50 से ज्यादा देश गावी व इसके सहयोगियों के माध्यम से बच्चों के टीकाकरण की लागत में 70 करोड़ डॉलर का योगदान देंगे. इससे अफ्रीका गावी में यूनाइटेड कि��गडम, बिल एंड मेलिंडा गेट्स फाउंडेशन तथा नार्वे के बाद चौथा सबसे बड़ा निवेशक बन जाएगा. इस तरह की वचनबद्धता विकास सहायता में बदलाव की सूचक है जो साझेदारी पर निर्मित परोपकार के पारंपरिक मॉडल से हटकर है.
लेकिन इस तथ्य की रोशनी में कि अफ्रीकी देश स्वास्थ्य सेवाओं में पहले ही अरबों डॉलर खर्च कर चुके हैं और इस महाद्वीप की अन्य भी अनेक जरूरतें हैं, टीकाकरण में निवेश करना हमेशा ही स्पष्ट चुनाव नहीं हो सकता है.
सन् 2003 में नार्वे में ऐसी ही स्थिति थी जब स्वास्थ्य व सामाजिक मामलों के मंत्री के तौर पर मैंने सार्वजनिक स्थलों पर धूम्रपान पर पाबंदी लगाने का अभियान चलाया था. उस वक्त इस पाबंदी का घोर विरोध हुआ था और संसार के सबसे घटिया तानाशाहों से मेरी तुलना की जाने लगी थी. पर मैं जानता था कि इस कदम से आने वाले वर्षों में कई जिंदगियां बच जाएंगी. मुझे पूरा विश्वास था कि अगर मैंने कार्यवाई नहीं की तो मतलब था कि मैं अपना काम सही तरीके से नहीं कर रहा था. और इसमें मैं अकेला नहीं था. आयरलैंड के स्वास्थ्य मंत्री मुझसे सहमत थे.
और जैसे-जैसे व्यक्तियों व समाज को मिलने वाले लाभ स्पष्ट होने लगे, 100 से ज्यादा अन्य देशों ने नार्वे और आयरलैंड की इस पहल को अपनाया. आज नार्वे में धूम्रपान करने वालों की तादाद आधी हो गई है. दस में से नौ लोग इस पाबंदी का समर्थन करते हैं. पूर्वदृष्टि का लाभ यही है कि कुछ समाधान स्पष्ट दिख सकते हैं, पर उस समाधान को जमीन पर उतारने के लिए विश्वास का बल चाहिए.
अफ्रीका व दुनियाभर के गरीब देशों में टीकाकरण अभियान के साथ भी आज ऐसी ही स्थिति है. इन देशों के नेतागण यह देख चुके हैं कि रोग-प्रतिरोधक टीकों से क्या हासिल किया जा सकता है. उन्हें आने वाले वर्षों में टीकाकरण से और लाभ भी दिखाई दे रहे हैं. वास्तव में सन् 2000 में अपनी शुरूआत से ही गावी 44 करोड़ लोगों के टीकाकरण में अपना सहयोग दे चुका है. इससे 60 लाख जाने बचाने में मदद मिली है.
अब गावी अलाइंस के साझेदार और दानदाता अगले पांच साल के लिए गावी को धन उपलब्ध कराने की योजना पर विचार करने के लिए इस हफ्ते ब्रूसेल्स में बैठक कर रहे हैं. यहां और अधिक करने का सच्चा अवसर है. गावी के समर्थन से अपनी पहुंच के भीतर हमारे पास 2020 तक आज से दुगुनी तादाद में बच्चों के टीकाकरण का अवसर है. यह संख्या एक अरब तक पहुंच सकती है और आज से 2020 तक 50 लाख से अधिक मौतों को टाला जा सकता है.
अफ्रीकी नेताओं ने अपने संकल्प को दर्शा दिया है. पर ऐसे वक्त में जब अनेक दानदाता देश अपनी छिन्न-भिन्न अर्थव्यवस्था को मजबूत करने के लिए संघर्ष कर रहे हैं, उनके नेताओं को वचनबद्धता और विश्वास दोहराने के लिए समय चाहिए. कोई भी इस कार्य को अकेला नहीं कर सकता है. पर भागीदारी के जरिये हम सचमुच में संसार के सबसे असुरक्षित बच्चों को सुरक्षा प्रदान करने में मदद कर सकते हैं.
A Grand Unified Economic Theory?
NEW YORK – Last month’s US government shutdown – the result of a partisan standoff in congressional budget negotiations – epitomizes the polarization that prevails in modern economic-policy debates.
On one side, John Maynard Keynes’s cohort argues that government intervention can help any economy grow its way out of crisis by spurring aggregate demand and, in turn, raising the employment rate.
A country’s government, Keynesians contend, has the capacity – and responsibility – to solve many, if not all, of its economic problems.
On the opposite side, followers of the Austrian School of economic thought, especially the ideas of Friedrich Hayek, assert that limited government and free enterprise form the only viable path to liberty and prosperity.
The market is the best arbiter of how to allocate scarce resources, and thus should serve as an economy’s main driver.
In recent years, this long-running debate has become increasingly contentious – and the costs of stalemate are mounting.
In order to restore growth in developed economies, while sustaining strong GDP growth and reducing poverty in the developing world, a more unified approach to economic policymaking that draws from both traditions is needed.
Official responses to the global economic crisis highlight the interventionist model’s merits, proving that decisive government action can help to enhance efficiency and clear unbalanced markets, thereby protecting the economy from the demand shortfall caused by falling investment and rising unemployment.
But the free market also has a crucial role to play, with longer-term, incentive-based policies catalyzing scientific and technological advancement – and thus boosting economies’ growth potential.
In determining how to promote innovation without sacrificing social protection, economists and policymakers should take a lesson from the field of physics.
For nearly a century, physicists have attempted to merge the competing ideas of the field’s titans, including Wolfgang Pauli, the first physicist to predict the existence of neutrinos (the smallest particles of matter), and Albert Einstein, who explained the curvature of space-time.
The so-called “theory of everything” would reconcile the inconceivably small with the unimaginably large, providing a comprehensive understanding of the universe’s physical properties.
Policymakers should be working to unite seemingly disparate theories to align policy decisions with the business cycle and the economy’s level of development.
Such an approach should seek to protect economies from the destabilizing impacts of politically motivated policy changes, without impeding governments’ ability to correct dangerous imbalances.
Officials must be at least as vigilant about reducing expenditure and withdrawing stimulus measures during periods of growth as they are inclined to introduce such policies during downturns.
To the extent that this approach reflects the view that policymaking is an art, not a science, that is a good thing: the world needs more flexibility in economic policymaking.
But some might consider it a cause for concern, especially given growing suspicion of incentive-based economic policies in the wake of the global economic crisis.
Many blame the crisis on the decades-long ascendancy of a laissez faire approach to economic policymaking, and rightly credit government intervention with facilitating recovery.
The tremendous economic success of countries like China, where hundreds of millions of people have escaped abject poverty in a single generation, has reinforced support for state-led systems.
In developed countries, too, many advocate a greater role for the state, in order to ensure that promised social benefits are delivered to rapidly aging populations.
In fact, in many countries, the government’s capacity is already strained.
As German Chancellor Angela Merkel has pointed out, though Europe is home to just 7% of the world’s population and produces 25% of the world’s wealth, it accounts for 50% of global welfare payments.
When the United States is included, 11.5% of the global population receives 88% of the world’s welfare payments.
But relegating free-market principles to the past would simply create a new set of imbalances.
Rather than allow extremists to continue to hijack economic-policy debates, policymakers must work to bridge competing schools of thought.
Only then will productive discourse – the kind that does not end in government shutdown – be possible.
Keynes once wrote that he agreed with “almost all” of Hayek’s ideas.
And Hayek found it “reassuring” to know that he and Keynes agreed “so completely.”
This raises the question: What is really preventing economists and policymakers from devising – or even seeking – a unified theory of economics?
Damming China’s Rivers
Of all China’s problems, none will be more critical over the long run than how it resolves the tension between economic development and environmental protection.
Nowhere are consequences of this struggle clearer than in the Himalayan foothills of the southwestern province of Yunnan.
Yunnan is home to three great Asian rivers: the Mekong, the Salween (or Nu), and the Jinsha.
All start on the great Tibetan Plateau and flow in parallel through the northwest corner of the province into Southeast Asia.
They are China’s last pristine rivers, but are now slated for sacrifice to satisfy the country’s insatiable thirst for power.
Plans call for dozens of dams to be placed along their serpentine courses through the mountains of Yunnan.
I had the chance to see one of these rivers – and the proposed site of one of the country’s most controversial dams – on a recent trek through the stunning Tiger Leaping Gorge, north of the town of Lijiang in northern Yunnan.
On its descent from the roof of the world, the Jinsha River, tributary of the mighty Yangtze, cascades through this ten-mile gorge on its way to Shanghai and the East China Sea.
If, or rather when, the river is dammed, it will help power the cities and factories of coastal China.
The sun was high above white-crowned Jade Dragon Snow Mountain when my guide pointed down the gorge at the brown waters churning thousands of feet below.
“That’s where they will build the dam,” Xiao Chun, a 17-year-old Naxi, one of Yunnan’s 22 ethnic minorities, said.
“It will be very bad for us.
There will be a lot of pollution.
I hope it doesn’t happen.”
The dam will have its uses.
Dianchi Lake near the provincial capital, Kunming, is so shrunken and polluted that the city faces a serious water shortage.
Water from the Tiger Leaping Gorge will be diverted to flush out Dianchi Lake, without which Kunming will not prosper.
As China seeks to keep its economic engine running, dams and hyrdopower do represent a cleaner alternative to coal.
China plans to double its hydropower capacity to over 120 GW by 2010 and to build more hydropower-projects for at least another 20 years.
Experts reckon that only a quarter of China’s hydropower has yet been tapped.
Yet the costs may outweigh the benefits.
Northwestern Yunnan is one of the world’s most biologically diverse areas, home to half of China’s animal species and a quarter of its plant species.
Whatever portions of this ecosystem that the dams don’t submerge are certain to be disrupted in potentially disastrous ways.
A more immediate concern is the immense number of people who will need to be resettled when reservoirs inundate the region’s densely populated valleys.
Since 1949, 16 million people have been displaced by reservoirs.
Some 10 million of them still live in poverty.
At Tiger Leaping Gorge, where a mere 100,000 residents will have to be relocated, residents fear that they will be ordered to move up the steep mountainsides to open marginal land at 6,000 to 9,000 feet.
Dam opponents, including vocal indigenous environmental groups, have waged a seemingly successful battle to protect Tiger Leaping Gorge and the Salween (the Nu River).
In early 2005, three years after a new law on environmental impact assessments (EIA’s) was passed, the State Environmental Protection Bureau (SEPA), ordered the halt of 30 large projects, including 26 hydropower plants that had failed to submit proper EIA’s.
Among the suspended projects was the first dam across the Nu/Salween.
These efforts appear to have catalyzed greater environmental sensitivity among the country’s leaders.
The government recently called for more balanced development, even proposing a “green index” to measure growth.
Indeed, Prime Minister Wen Jiabao has declared that he wants to see more “scientific development” in China’s approach to its problems, and even called for a temporary halt of the Salween (Nu) River dam.
Environmentalists were even permitted to take part in a public hearing on the Tiger Leaping Gorge project, a first for China.
Unfortunately, the Communist Party’s tolerance of such civic activity blows hot and cold.
The Party, alarmed by the “color revolutions” that toppled post-Soviet leaders in Georgia, Ukraine, and Kyrgyzstan, is cracking down on domestic non-government organizations for fear that they, too, might become catalysts for popular uprisings.
Support for “green development” inside central government organizations like SEPA offers little assurance of an effective countervailing force.
“We must sharpen our teeth,” Pan Yue, SEPA’s deputy director, said when the agency halted the dam projects.
But China has seen a steady decentralization of power in recent years, making it harder for SEPA to affect policies at the regional and local levels.
Indeed, local governments appear less afraid of Beijing’s bite than before.
When boundaries were negotiated for Three Parallel Rivers Park – designated a UNESCO World Heritage site in 2003 – local authorities won a fight to exclude Tiger Leaping Gorge, knowing that a dam there would triple tax revenues.
China urgently needs to maintain an annual growth rate of over 9% as a bulwark against social disorder.
As a result, however, China is slowly consuming itself, and no major part of China may remain pristine.
Europe’s Lessons for China’s Reformers
BRUSSELS – The most important economic-policy decision of 2013 might well have been taken in November at the Third Plenum of the Chinese Communist Party’s Central Committee, which pledged that the market should be given a “decisive” role in guiding China’s economy.
Because China is now the world’s largest exporter after the European Union, and accounts for about half of global growth, decisions taken in Beijing could have a more important impact on the world economy than those taken in Berlin, Brussels, or Washington, DC.
But, while China’s embrace of the market and opening to the outside world has enabled it to achieve astonishing economic progress over the last three decades, the country might now have reached a level of income at which the problem is no longer “too little market.” On the contrary, some of China’s key problems today require a stronger role for government.
Air and water pollution, for example, can be addressed only by more state intervention, at both the central and local levels. The authorities have now made solving the problem a high priority, and there can be little doubt that China has the resources to do so – much as it created the world’s largest manufacturing sector.
The fight against smog and water pollution plays to the country’s strength: the availability of huge domestic savings to finance the necessary investment in pollution-abatement equipment.
The dilemma for China’s leaders is that meeting the need for more in pollution control and infrastructure makes it more difficult to achieve their goal of shifting the country’s economic-growth model from one based on investment and exports to one based on consumption.
But more consumption today would further aggravate the pollution problem.
As a result, economic rebalancing may be delayed by the more urgent need for environmental investment.
Other areas of the economy require greater government oversight as well. Network industries like telecoms, gas, electricity, and water tend to become monopolistic or oligopolistic if left to market forces alone.
Well-run economies achieve higher levels of welfare not because there is less regulation of these sectors, but because more efficient regulation prevents the emergence of cartels, thereby protecting consumers.
Similar reasoning applies to reform of the state-owned-enterprise (SOE) sector.
The key problem is less the form of ownership (state or private) than it is the need to ensure that these enterprises operate according to market principles and within a competitive environment.
The European experience confirms this.
The Treaty of Rome, which established the common market back in 1957, did not distinguish between state-owned and private enterprises, though vast sectors of the economy (most of the coal and steel industry, and in many countries banking) were in state hands at the time.
Instead, the treaty established internal-market rules that barred governments from giving their companies unfair advantages.
Once local politicians could no longer use the SOEs for their own goals, most member countries decided that they might as well privatize many of them. Of course, downsizing the SOE sector took time; but the direction of the process was never in doubt, because the SOEs’ foreign and domestic competitors naturally provided strong political support for the European Commission’s vigorous policing of state aid.
In China, too, the key issue today is the rules under which the SOEs’ operate.
Instead of large-scale privatization, it might be better to limit state aid and give competitors legal recourse to seek redress if state aid distorts competition.
The area that has attracted the most attention is finance, and for good reason.
In most of the advanced world, investment amounts to little more than 15% of GDP, compared to close to 45% for China.
Financial markets are thus even more important for China than for the US or Europe, and there are clear signs that the productivity of investment has been declining rapidly in China.
The lynchpin of the China’s planned financial-sector reforms – interest-rate liberalization – might not address the problem. In principle, higher interest rates on lending should help to reduce over-investment.
But, in a system with many – often implicit – government guarantees, it is not always the most efficient enterprises that are willing and able to pay more to borrow.
Liberalizing lending rates might merely lead those with government guarantees to outbid smaller and more efficient enterprises, resulting in more misallocation of capital.
This suggests that financial liberalization might be dangerous until even SOEs are subject to a hard budget constraint.
The global economy’s most powerful growth engine does not need simply “more market.”
It needs a stronger regulatory framework to ensure that its markets maximize efficiency and social welfare.
What Makes Greece Special?
BRUSSELS – The euro crisis seems to be largely over.
Risk premiums continue to fall across the board, and two countries – Ireland and Portugal – have already exited their adjustment programs.
They can now finance themselves in the market, and their economies seem to have started growing again.
By contrast, Greece is still having problems fulfilling the goals of its adjustment program and is engaged in seemingly endless negotiations over yet another multilateral financing package.
The problem can be summed up in one word: exports (or, rather, lack of export growth).
The news from Greece these days has been dominated by the announcement that the government achieved a primary budget surplus (the fiscal balance minus debt service) in 2013.
For the first time in decades, the Greek government has been able to pay for its expenditure with its own revenues.
This is indeed a milestone.
But another, much more important news item has received much less attention: Greece exported less in 2013 than in 2012.
This lackluster performance, which followed years of decline in market shares, is difficult to explain, given that all other countries on the eurozone periphery recorded solid export growth.
For example, Portuguese exports increased by about 5-6% per year over the last years, despite challenging external conditions (Spain is its biggest market) and a credit crunch, which made it difficult for exporters to obtain financing.
Neither weak foreign demand nor a lack of financing, therefore, can be the reason for Greece’s poor export performance.
Low competitiveness, too, is not an explanation, as real (inflation-adjusted) wage costs have declined by more in Greece in recent years than in any other eurozone country, with the exception of Ireland.
But it would be strange to conclude from Greece’s experience that wage deflation is a useless tool for improving competitiveness, given the widespread assumption that Germany benefited massively from it.
So the only explanation for Greece’s poor export performance must be that the Greek economy has remained so distorted that it has not responded to changing price signals.
This lack of adjustment capacity is crucial.
In Ireland, Spain, and even Portugal, exports grew strongly when the domestic economy collapsed and wages adjusted.
But these countries were already more flexible and, in some cases, undertook strong reforms.
In Greece, by contrast, there is no evidence that the many structural reforms imposed by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) have led to any real improvement on the ground.
On the contrary, many indicators of efficiency of the way the government and the labor market work have actually deteriorated.
The facile argument that Greece has little to export is irrelevant here.
The problem is not that Greek exports are low, but rather that they have failed to grow, which should have been possible, especially from a low base.
Several years ago, Greek exports of goods and services were equal to those of Portugal.
Today, Portugal is ahead by almost €20 billion ($27.5 billion).
This represents a potential loss of more than 10% of output for Greece.
Lack of export growth thus has made the recession in Greece much longer and deeper than it would have been otherwise.
If Greek exports had increased at the same rate as those of Portugal (or Spain), the recession would have ended by now.
Moreover, the lack of export growth made the fiscal adjustment much more difficult.
Higher exports would not only have yielded directly higher revenues; they would have had a multiplier effect on the domestic economy as well, thereby increasing consumption tax revenues.
Greece now has a balanced current account – quite an achievement after double-digit deficits (as a percentage of GDP) a few years ago.
But, in contrast to other economies on the eurozone periphery, this improvement was achieved entirely through import compression.
This implies that there cannot be any hope for a sustained recovery unless exports start growing.
It is often argued that with less austerity, domestic demand would be stronger.
That might be true, but stronger domestic demand would lead to higher imports, which would need to be paid for with higher export revenues, because the country cannot afford to accumulate more foreign debt.
No exports, no growth: Greece’s debt sustainability ultimately depends on this key parameter.
What went wrong in Greece was not the fiscal adjustment.
On the contrary, austerity was perhaps too successful (and painful).
But it was the wrong target.
The really important target for any country starting an adjustment program with a double-digit current-account deficit must be export growth.
Missing this target is what has set Greece apart.
Unfortunately, there is very little the outside world can to do to ensure that the Greece exports more.
The government can be forced to pass decrees, and Parliament can be pressured to adopt all the reform legislation known to humanity.
But, in the end, it is how reform is applied on the ground, and how the economy responds, that counts.
An adjustment program succeeds or fails at home, not in Brussels or Washington.
The Transatlantic Growth Gap
BRUSSELS – The global financial crisis that erupted in full force in 2008 affected Europe and the United States in a very similar way – at least at the start.
On both sides of the Atlantic, economic performance tanked in 2009 and started to recover in 2010.
But, as the financial crisis mutated into the euro crisis, an economic gulf opened between the US and the eurozone.
Over the last three years (2011-2013), the US economy grew by about six percentage points more.
Even taking into account the increasing demographic differential, which now amounts to about half a percentage point per year, the US economy has grown by about 4.5 percentage points more over these three years on a per capita basis.
The main reason for the gap is the difference in private consumption, which grew in the US, but fell in the eurozone, especially in its periphery.
A retrenchment of public consumption actually subtracted more demand in the US (0.8 percentage points) than in the European Union (0.1 points). This might appear to be somewhat surprising in light of all of the talk about Brussels imposed austerity.
In fact, public consumption in the eurozone has de facto remained fairly constant over the last three years, whereas it has declined substantially in the US.
(The same is true of public investment, though this constitutes such a small proportion of GDP that transatlantic differences could not have had a large impact on growth over a three-year horizon.)
The contraction of private investment in Europe accounts for only a small part (one-third) of the growth gap.
Though the financial-market tensions that accompanied the euro crisis had a strong negative impact on investment in the eurozone periphery, investment demand has also remained weak in the US, minimizing the overall difference.
The resilience of private consumption in the US, the key to the growth gap, is not surprising, given that American households have reduced their debt burden considerably from the peak of more than 90% of GDP reached just before the crisis.
The lower debt burden is also a key reason why consumption is expected to continue to grow much faster in the US than in the eurozone this year and next.
But the crucial question – and one that is rarely asked – is how US households were able to reduce their debt burden during a period of high unemployment and almost no wage gains while sustaining consumption growth.
The answer lies in a combination of “no recourse” mortgages and fast bankruptcy procedures.
Millions of American homes that were purchased with subprime mortgages have been foreclosed in recent years, forcing their owners, unable to service their debt, to leave.
But, as a result of no-recourse mortgages in many US states, the entire mortgage debt was then extinguished, even if the value of the home was too low to cover the balance still due.
Moreover, even in those states where there is full recourse, so that the homeowner remains liable for the full amount of the mortgage loan (that is, the difference between the balance due and the value recovered by selling the home), America’s procedures for personal bankruptcy offer a relatively quick solution.
Millions of Americans have filed for personal bankruptcy since 2008 , thereby extinguishing their personal debt.
The same applies to hundreds of thousands of small businesses.
Of course, there has also been a surge of bankruptcies in the eurozone’s periphery.
But in countries like Italy, Spain, and Greece, the length of a bankruptcy proceeding is measured in years, not months or weeks, as in the US.
Moreover, in most of continental Europe a person can be discharged of his or her debt only after a lengthy period, often 5-7 years, during which almost all income must be devoted to debt service.
In the US, by contrast, the corresponding period lasts less than one year in most cases.
Moreover, the terms of discharge tend to be much stricter in Europe.
An extreme case is Spain, where mortgage debt is never extinguished, not even after a personal bankruptcy.
This key difference between the US and (continental) Europe explains the resilience of the US economy to the collapse of its credit boom.
The excessive debt accumulated by households has been worked off much more rapidly; and, once losses have been recognized, people can start again.
The cause of the transatlantic growth gap thus should not be sought in excessive eurozone austerity or the excessive prudence of the European Central Bank.
There are structural reasons for the eurozone economy’s slow recovery from the financial meltdown in its periphery.
Most important, compared to the US, the excess debt created during the boom years has been much more difficult to work off.
European officials are right to promote structural reforms of EU countries’ labor and product markets.
But they should also focus on overhauling and accelerating bankruptcy procedures, so that losses can be recognized more quickly and over-indebted households can start afresh, rather than being shackled for years.
Restarting Ukraine’s Economy
BRUSSELS – In capitals East and West, one question currently looms large: “Who lost Ukraine?”
The more relevant question is how to stabilize the situation in Ukraine.
Given that little can be done in practice to dislodge Russia from Crimea, the key challenge now is to keep the rest of the country united and to restart its economy, which is now in a state of suspended animation, owing to unsustainable fiscal and external deficits.
The key reform issues are well known: the price of gas must be increased substantially to reflect its cost, subsidies for domestic coal production must be stopped, and governance of the country’s pipelines, which still earn huge royalties for carrying Russian gas to Western Europe, must be overhauled.
All three of these issues are crucial to the fight against corruption.
An energy ministry that decides who can obtain gas at one-fifth of its cost and who cannot is obviously subject to irresistible pressures to distribute its favors to whomever offers the largest bribes or kickbacks.
The same applies to coal subsidies, except that the subsidies go to the most inefficient producers.
The International Monetary Fund will certainly require Ukraine to reform its gas and coal subsidies as a precondition for implementing its package of financial support (of which a substantial contribution comes from the European Union).
The first steps are already being taken, with the authorities recently announcing that household gas prices will rise by 50% next month.
But, while abolishing energy subsidies is absolutely essential to balance the budget and put the economy on a sound footing, these steps also risk hitting eastern Ukraine, which contains a substantial Russophone minority, particularly hard.
Some there might be tempted by the allure of a better life in “Mother Russia,” with its vast resources of cheap energy.
Eastern Ukraine is dominated by old-fashioned energy-intensive coal and steel industries.
But it also harbors some centers of technological excellence, such as the factories that produce important spare parts for Russian military helicopters.
The challenge for policymakers will thus be to ensure that the creation of new jobs in these competitive enterprises keeps pace with the job losses arising from higher gas prices and the elimination of subsidies for coal production.
The EU should support this in two ways.
It should provide special marketing assistance to enterprises that have suddenly lost their Russian markets. And it should open its markets, not only by abolishing its import tariffs on Ukrainian products, which has already been decided, but also by granting a temporary exemption from the need to meet all of the EU’s complicated technical standards and regulations.
Winning the people’s “hearts and minds” is the key to victory in an insurgency.
In the case of eastern Ukraine, winning the support of those who are still nostalgic for the “good old days” must go beyond creating productive jobs that fill their wallets.
Here, too, the EU could help this process along.
For starters, it could alleviate the social hardship that will arise when the price for heating alone exceeds household income.
At the same time, the EU should help to address the cause of extraordinary heating costs: the woeful energy inefficiency of most of the existing housing stock.
The EU should thus quickly implement a targeted program of social support for the “energy poor,” coupled with financial support for investment in energy efficiency.
Experience in Eastern Europe, where energy prices had to be increased substantially in the 1990’s, demonstrated that simple measures – such as better insulation, together with maintenance and repair of the region’s many long-neglected central heating systems – yield a quick and substantial payoff in reducing energy intensity.
Even a slight improvement in Ukraine’s energy efficiency would contribute more to reducing greenhouse-gas emissions than the vast sums currently being spent to develop renewable energy sources.
But, given widespread government corruption and inefficiency, such a program would have to be administered directly by a joint EU-Ukrainian task force.
Nearby member states, especially those whose languages are similar to Russian and Ukrainian, should be able to mobilize quickly the required technical expertise.
Finally, the revenues from the gas pipelines must be returned to the state’s coffers. Here the EU can also play a prominent role by recognizing Russia’s special interest in proper pipeline maintenance and a proper accounting for the gas they carry.
But, as a confidence-building measure, Russia should be invited into a tripartite agreement under which operational control over the pipelines would be entrusted to the European Bank for Reconstruction and Development, an institution in which all parties have a stake. The EBRD would safeguard the legitimate interests of all parties (including Russia), ensuring the proper operation and maintenance of the pipelines and overseeing the distribution of transit fees.
Regardless of whether Ukraine is “lost,” or who lost it, the country can still offer an attractive future for all of its citizens if unavoidable economic reforms can be made compatible with regional cohesion.
The EU can play an important role by opening its market and providing funding and technical assistance in crucial areas.
The Government Europe Deserves?
BRUSSELS – With the final allocation of portfolios within its executive branch, the European Commission, the European Union has completed its change of guard.
The process took almost four months, following the European Parliament election in late May, and the end result was inevitably based on a series of compromises – to be expected for an EU of 28 prickly nation-states.
Indeed, the proper functioning of EU institutions requires that no important constituency (left or right, East or West, and so forth) feels left out.
And the new European Commission looks rather strong, given that more than 20 of its 28 members previously served as prime ministers, deputy prime ministers, or ministers.
People who have held high political office at home find it worthwhile to come to Brussels.
But most attention has focused on the EU’s three top positions: the President of the European Commission, the President of the European Council, and the High Representative for external affairs.
The Commission’s new president, Jean-Claude Juncker, was the first ever to be selected based on his faction’s strong showing in the European Parliament election.
As a seasoned Brussels insider, he was not one to move the crowds.
But sometimes this can be an advantage.
An insider knows best how to reconcile contrasting interests and how to get the institutional machinery moving again, as Juncker showed with his deft handling of the distribution of tasks among the individual Commissioners.
Selecting the president of the European Council required considerable time and horse-trading, with Polish Prime Minister Donald Tusk emerging as the final choice.
But, though Tusk now has an important-sounding position, the European Council President decides nothing.
The president mainly presides over the meetings of the EU’s national leaders, and an incumbent’s influence depends on his or her ability to set the agenda and facilitate compromises.
The experience of the previous incumbent, former Belgian Prime Minister Herman van Rompuy, in dealing with his own country’s fractious coalitions proved very useful when he had to persuade national leaders to make decisions during the euro crisis.
Tusk will have to achieve something similar in the face of the new challenges confronting Europe today, which include Russian aggression in Ukraine, the rise of terrorism in the Middle East, and a stagnant economy at home.
On the EU’s most immediate challenge, posed by Russia, Tusk will have to broker decisions with leaders from countries that feel immediately threatened (like his own) and those for which economic ties with Russia outweigh any threat to European security, which they feel to be remote.
On the economy, he must reconcile the priorities of full-employment Germany with those of Greece and Italy, which remain in the grip of recession and sky-high unemployment.
Being able to converse directly with the Council’s members, mostly in English, might be the biggest immediate challenge, as he admitted immediately.
The appointment of the Italian foreign minister, Federica Mogherini, as High Representative of the Union for Foreign Affairs and Security Policy has been widely questioned, owing to her limited executive experience in foreign policy.
But, since the de facto invasion of Ukraine in late August, her government has changed its position on Russia, and she has sought to convince many critics that she knows the problems facing Europe well (her university thesis, for example, was about political Islam).
But can she lead?
Europe’s foreign service, the European External Action Service (EEAS), is a huge bureaucracy, which must be managed well if it is to be effective.
And, though the head of the EEAS has been dubbed the “EU’s foreign-policy chief,” Mogherini should be seen as its CEO, with key decisions taken by the member states’ leaders when they convene in the European Council.
Her lack of managerial experience is thus her key weakness, and she will have to find a strong team to support her.
But there is at least one encouraging, if hidden, signal from Mogherini’s appointment: The fact that the European Central Bank President Mario Draghi is also an Italian was not an impediment.
This implies that the ECB presidency is not counted among the posts to be distributed according to nationality quotas, and that Draghi’s nationality is not regarded as having influenced his decisions in any way.
Leaders of the EU’s institutions have to be political entrepreneurs if they are to leave a mark on history.
Their decision-making power is limited.
But they can often frame the choices and broker coalitions to push the existing boundaries of European integration.
None of the EU’s top three new faces (Juncker, Tusk, and Mogherini) has a track record in this sense.
Evidently the national bosses like it that way.
The most sobering message from the appointment process is thus that the member states’ leaders will not suffer anyone who might rock the boat and push integration forward.
There will be little movement toward the “ever closer union” envisioned in the Treaty of Rome.
That might come as a relief for those in the United Kingdom and elsewhere who fear domination by Brussels, but it can only dismay those who hope that, despite its sluggish economy and declining population, Europe can become a relevant global actor.
Sanctions and Solidarity
BRUSSELS – The European Union has finally agreed on its “third-level sanctions” against Russia for its actions in Ukraine.
As is usual for the EU, arriving at this point has been a long and difficult process.
A key problem all along has been that, though sanctions serve a common purpose, the costs of implementing them are borne by individual member states.
Moreover, the costs are very concrete and visible, as jobs in enterprises that depend on exports to Russia seem to be at stake.
So it was not surprising that many member states were more concerned about the potential cost of the sanctions on their economies than they were about the overall foreign-policy goal of signaling to Russia that its disregard of international law and norms has consequences.
That is why a common fund to provide compensation for the economic costs of sanctions should be an integral part of the EU’s emerging foreign-policy stance toward Russia.
Creating such a fund would provide a potent symbol of solidarity within the EU, while providing an ideal opportunity to reflect on the nature of the sanctions’ costs.
From an economist’s perspective, a key point is that losing export sales does not represent a cost per se.
For example, if a company that produces a generic consumer good like food, or even cars, sells less in Russia than it did before, one should not necessarily count the reduction as a loss.
After all, if such goods have a global market, a loss of sales in one market can be compensated by higher sales in another.
In fact, a large proportion of Russian imports from the EU are precisely of these generic consumer goods, which are not affected by sanctions.
Thus, reports claiming that sanctions imply a high cost – because EU exports to Russia amounted to €120 billion ($161 billion) last year and represent tens of thousands of jobs – are highly misleading.
An economic loss arises only if a firm produces some specialized good that can be sold only in Russia using labor and capital that are also specialized and cannot be employed to produce something else.
This applies especially to Germany: The famous German Mittelstand often does produce highly specialized goods; but it also prides itself on its flexibility and adaptability.
Given this, there might be a case for compensation in some cases, but it should be strictly limited in time.
It would not be difficult to develop objective criteria for access to an EU “Sanctions Compensation Fund.”
A firm could be eligible for compensation if it operated in the sectors covered by sanctions, and if the product in question had special characteristics that prevented sales from being redirected elsewhere.
A quantitative test of eligibility could be that sales to Russia over the previous three years accounted for more than one-quarter of total sales and diminished by more than a certain percentage this year.
Compensation would take the form of retraining programs for personnel, and maybe refinancing of loans taken to finance specialized machinery.
But there are two sectors in which no compensation is needed: energy and finance.
Why?
For starters, the risk to Europe’s energy imports from Russia is negligible.
Should Russia demand a higher price for its oil, Europe could simply turn to the global market.
Likewise, Russian gas giant Gazprom could increase the price it charges its European customers only by breaking existing contracts.
Moreover, Europe is the only customer for a large share of Russian gas exports, which, at least in the short run, must be transported through the existing pipelines.
Given this, the case for compensation in the energy sector is exceptionally weak.
Only the makers of highly specialized equipment, perhaps for exploration under Siberian conditions, might have grounds for drawing on the compensation fund.
The case for compensation is even weaker in the European financial sector.
Providing the kind of medium- to long-term financing that is now subject to sanctions constitutes an infinitesimal fraction of European banks’ business.
Moreover, as Russia’s political system becomes ever more oppressive, and its legal system ever more arbitrary, rich Russians will be more inclined than they already are to establish a safe base abroad for their wealth and families.
The freedom and rule of law provided by financial centers such as London will become even more attractive.
In 2006, the EU established a “Globalization Adjustment Fund” to cushion those sectors hardest hit by rising imports. Though the Fund initially was allocated only €500 million, a rather modest sum compared to the overall annual EU budget of around €100 billion, its creation was an important signal of the EU’s readiness to compensate those who lose out from a common policy.
A similar political signal is needed today to overcome EU member states’ resistance to decisions that advance a common foreign policy.
Who Won Europe?
BRUSSELS – The fight over who will be the European Commission’s next president is heating up.
Several European Union leaders were recently spotted in a small rowboat on a Swedish lake, reportedly scheming against the frontrunner, and British Prime Minister David Cameron has launched a public campaign to reassert the right of EU member states’ governments to decide who will occupy the EU’s executive arm.
The process of choosing the Commission’s president appears to be a conflict between the voice of the people, as expressed in the results of last month’s European Parliament election, and backroom deal-making by governments.
But reality is more complex, and the genuine democratic mandate did not go to the person who claims to have “won” the election.
In the run-up to the election, the major European party “families” (there are no pan-European parties, only loose alliances of national parties) each nominated a Spitzenkandidat as their choice for President of the European Commission.
The center-right European People’s Party, which gained a narrow plurality of 221 seats in the 751-seat parliament, has claimed victory in the election; and many others, including socialists, greens, and liberals, concur that the EPP’s Spitzenkandidat, Jean-Claude Juncker, has a moral right to be selected as President of the Commission.
In fact, though the EPP won 29% of the seats, versus 24% for the Progressive Alliance of Socialists and Democrats (S&D), the S&D can claim victory.
After all, its affiliated parties at the national level won a greater number of votes – a combined total of 40 million, compared to 39.9 million for parties affiliated with the EPP.
The difference is small, but there can be no doubt that the S&D won the popular vote (24.4% to 23.8%).
Though the election system is purely proportional and the S&D won the popular vote, the reason that it ended up with fewer seats is simple: its affiliated parties won relatively more votes in the larger countries, where it “costs” more voters to gain a single seat.
Conversely, the EPP performed relatively better in small countries, where the vote cost per seat is much lower.
The most extreme example is Luxembourg, Juncker’s home country, where the EPP received almost 38% of the popular vote, versus 11% for the S&D – a difference, in absolute terms, of only about 52,000.
But the EPP obtained two more MEPs than the S&D, which implies a per seat cost of roughly 26,000 votes.
The other extreme is Italy, where the S&D won 41% of the votes, versus 22% for the EPP.
In absolute terms, the difference was more than five million votes, but the S&D won only 14 more MEPs than the EPP.
In Italy, the S&D needed about 370,000 voters to gain one MEP, more than 14 times as many as the EPP needed in Luxembourg.
The EPP’s “victory” was thus due mainly to the fact that the ratio of voters per MEP varies greatly across countries.
A single vote in Italy (and in other large countries) is worth much less than a vote in smaller countries.
The German Constitutional Court recently relied on this fact in a controversial decision striking down the 3% electoral threshold for parties to gain European Parliament seats in Germany (the small far-right National Democratic Party picked up one seat in the European Parliament as a result).
The German court’s rationale was that the European Parliament election is not a true election, because the principle of “one person, one vote” is not respected.
This is not only a problem from the standpoint of democratic principles; the results of the recent election have shown the extent to which it can influence political outcomes.
Juncker came out ahead in the MEP count for only one reason: he obtained his votes in small countries, and votes are de facto weighted by country size.
Thus, the claim that the European Parliament directly represents Europe’s people and that the people have given the EPP’s candidate a direct popular mandate that the member states’ representatives in the European Council should respect rings hollow.
The S&D obtained more votes, giving its Spitzenkandidat, Martin Schulz, a claim to greater democratic legitimacy.
Daniel Ortega: Back in Pink
Daniel Ortega Rides Again
With the left on the march in much of Latin America, it is no surprise that Nicaragua’s Sandinista leader Daniel Ortega is trying to make a comeback.
But Ortega is creating a state of emergency in his party as he tries to diminish the threat posed by Herty Lewites, the former mayor of Managua and the country’s most popular politician.
With one demarche, Ortega dismissed the need for a party primary and designated himself as the Sandinistas’ nominee for next year’s presidential election.
What’s striking about Ortega’s move is that he is ready to risk so much political capital, not only expelling Lewites from the party but canceling his challenger’s permits to hold political rallies and forbidding him to use Sandinista party symbols.
Yet, despite all this, Ortega has yet to diminish Lewites’s ability to rally the masses.
Ortega’s display of raw power is thus merely a reminder of his autocratic ways.
This will be Ortega’s fifth run for the presidency, having lost his last three attempts.
It plays handily into the Bush administration’s recall to office of veterans of the anti-Sandinista “Contra War” of the 1980’s, including Elliot Abrams, John Negroponte, Roger Noriega, Dan Fisk, and Otto Reich.
In a reminder of that confrontation, Ortega accused his old enemies in the United States of drafting a plan to assassinate him.
US Undersecretary of State for Latin America Roger Noriega responded by calling Ortega a “hoodlum.”
Ortega is wagering that attacking Bush will resonate with the Sandinistas and provoke them to close ranks, thereby stifling internal party dissent.
But in an already polarized environment, an Ortega-Bush standoff is nothing more than a self-fulfilling prophecy.
In arguing for his candidacy, Ortega wants supporters to believe that his presidential campaign is part of the wave of recent victories won by the Latin American left.
But this is only half right.
A new Latin American left is developing, but Ortega is not part of it.
In the context of the new Latin American left, Ortega resembles a shoddy imitation of Fidel Castro without the oil wealth of Hugo Chávez.
The standard bearer of Nicaragua’s new left is Lewites.
Like Vázquez, Lagos, Kirchner, and Lula elsewhere in the region, Lewites offers the possibility of a modern and democratic left, socially committed and at the same time capable of orchestrating national solutions while recognizing and negotiating profound differences with the US and the IMF.
These new leaders seek to deal with the US in a manner that avoids alienating a superpower and isolating their countries.
To Ortega, such a posture reeks of betrayal, social democratic aberrations and imperialist tendencies.
But despite Ortega’s anachronistic politics, he has a good chance of winning the election in November 2006.
He has only to keep his party united and the anti-Sandinista vote divided.
Ironically, his principal ally in this adventure will be his old enemy, former President Arnoldo Alemán, who is under house arrest for corruption.
Between them, the two caudillos control 90% of the parliament, the Supreme Court, and the Electoral Commission.
Together, they can keep Nicaragua’s current president, Enrique Bolaños, in check indefinitely.
Alemán, too, faces a rebellion in his Liberal Constitutional Party (PLC), led by former Treasury Minister Eduardo Montealegre, a presidential hopeful popular in the party’s liberal wing.
If Alemán blocks Montealegre’s candidacy in the PLC and pushes him to form another political party, Ortega’s chances for winning the presidency increase sharply.
The business interests that finance political campaigns face a difficult dilemma: Is it preferable to align with a PLC dominated by a corrupt Alemán or support a new democratic force and risk helping Ortega win?
Although a three-way race is pure speculation at this point, it’s clear that it offers Ortega the best of all electoral worlds.
It’s so tempting that Ortega is likely to help rehabilitate Arnoldo Alemán, betting that freeing him will serve his political interests.
The main glitch in this scenario, however, is Lewites.
Polls show that an overwhelming majority of Sandinista voters prefers the former Managua mayor – 72% versus 18% for Ortega.
If Lewites is able to organize nationally and maintain a presence in the streets, he could quickly become unbeatable.
A poll conducted in January projected that in a four-way race, Lewites would come in first, followed by Montealegre.
Ortega would manage only a third-place finish.
Alemán, or his candidate, would run dead last.
If voters continue to lean toward Lewites and Montealegre, the two candidates could elect more deputies to the National Assembly than the Sandinistas and the PLC combined.
Such an outcome would be a welcome end to the dominance of Alemán and Ortega, who have served Nicaraguans poorly.
While it’s premature to make definitive predictions, the Lewites and Montealegre rebellions have already done more in eight weeks to change the country’s political landscape than anything else in the last two years.
As a result, Nicaragua’s people, not its strongmen, may yet choose the next president.
The System is Working
MEDFORD, MASSACHUSETTS – As the latest G-20 meeting of finance ministers starts in Cairns, Australia, the Legion of Gloom is at it again.
Their conventional wisdom is that “the system” – global governance structures ranging from the World Trade Organization and the G-20 to the major central banks – is badly broken and in desperate need of repair.
In fact, the global economic order has worked remarkably well since 2008.
True, the first year of the Great Recession was more severe than the first year of the Great Depression.
But, despite this initial shock, the system responded in a surprisingly nimble fashion.
Compared to previous global downturns triggered by a financial crisis, the global economy bounced back robustly.
Trade and output levels exceeded pre-crisis levels in most countries a few years ago, and global poverty continues to decline rapidly.
One key to this rebound was that, in contrast to the 1930s, the global economy maintained existing conditions: trade barriers remained low, as did restrictions on foreign direct investment, and cross-border exchange continued to spread with the Internet.
As the McKinsey Global Institute noted, with the exception of cross-border finance, global flows are just as robust now as they were before the crisis.
There has even been a partial revamping of key global institutions, from the rise of the G-20 to reform of the International Monetary Fund.
Indeed, the resiliency of markets to geopolitical tensions in Ukraine or the South China Sea has begun to worry some Fed officials.
By any reasonable metric, multilateral institutions and great-power governments did what was necessary to preserve the global economy’s openness.
So why the widespread misperception that the system failed?
Here, we run into a dirty little secret of world politics: many commentators on international politics do not know much about economics or economic policy.
International-affairs professionals frequently talk about “high politics” and “low politics,” and they usually relegate economic issues to the latter category.
This ignorance matters when political commentators try to write about the global economy.
They will naturally rely on the most accessible facts as their guide.
To be fair, some of the most obvious data have indeed suggested fragmentation of the global economic order.
The dormancy of the Doha Round of WTO talks, the public deadlock of some G-20 summits, and stalemates at the United Nations Security Council seem like sufficient evidence to proclaim that the status quo is imperiled – even if facts beyond the headlines belie that consensus.
Consider the kerfuffle over “currency wars.”
In 2010, the Fed began hinting at a second round of quantitative easing, or QE2.
One of the policy externalities of QE – the Fed’s purchase of long-term financial assets – was a depreciating dollar.
Fearing domestic asset-price bubbles and upward pressure on their currencies from an inward rush of capital, many emerging-economy leaders complained loudly about what Brazilian Finance Minister Guido Mantega called an “international currency war.”
Lost in all of the hype was the fact that neither markets nor financial analysts were terribly perturbed about excessive exchange-rate volatility or the possibility of an actual currency war.
After the autumn of 2008, exchange-rate volatility slowly receded toward pre-crisis levels.
Another common reason for the collective misperception is misplaced nostalgia.
Former US National Security Adviser Brent Scowcroft encapsulated the post-crisis conventional wisdom in 2012: “The postwar leaders set up the International Monetary Fund, the World Bank, and the General Agreements on Tariffs and Trade to develop rules of the road.
The new G-20 is but a pale reflection of that once-brilliant institution building.”
But past efforts at building a global order have had their share of futility.
Anyone familiar with the history of the Bretton Woods institutions knows that they experienced as many misses as hits.
Compared to the past, the current order performed well above average.
Perhaps the deepest explanation for the Legion of Gloom’s strength is where they live.
According to the Economist Intelligence Unit, the OECD economies averaged annual GDP growth of 0.5% from 2008 to 2012, whereas non-OECD economies averaged 5.2% growth.
This matters because analysis of the international order remains anchored in the West.
It is a general rule of political science that a faltering economy causes greater distrust in institutions.
A weak economy feeds perceptions that the system is broken, and that those in authority are not to be trusted.
So greater skepticism about all levels of governance in the OECD economies is not surprising.
Analysts might be looking first at their local circumstances, and then extrapolating from that to their assessments of global institutions.
Pessimism about slow national recoveries in the developed world is causing analysts to conflate poor domestic and regional governance with poor global governance.
But the primary causes for domestic economic weakness in Japan, the US, the United Kingdom, and the eurozone are not global in origin.
Japan’s economy had been stagnating for almost two decades when the 2008 crisis erupted.
Likewise, domestic policy stalemates and political uncertainty acted as a significant drag on the US recovery from the Great Recession.
Does the system’s remarkable resiliency since 2008 mean that it can withstand the next crisis?
In theory, yes – many of the post-2008 reforms have been designed to add shock absorbers to the global economy.
But, in international relations, collective misperceptions can create their own reality.
If pundits continue to insist that the system failed, wonks will devote time and effort to figuring out how to fix what is not broken.
Moreover, it is extremely difficult to correct misperceptions once they ossify – particularly if the topic in question is outside a pundit’s range of expertise.
Ironically, the only thing that might stop the system from continuing to work is the low confidence of its greatest proponents.&nbsp;&nbsp;
Can Palestine Win the Peace?
RAMALLAH – The rollout of the war-ending ceasefire agreement between Israel and Palestine last month was impressive.
With almost perfect synchronization, Palestinian President Mahmoud Abbas announced the end of the war on Gaza in a televised broadcast from his Ramallah headquarters, while Hamas leaders called on Palestinians in Gaza to take to the streets to celebrate their supposed victory.
Of course, with more than 2,200 Palestinians – mostly civilians – killed, over 10,000 injured, and thousands of homes, schools, mosques, and other structures destroyed, the war’s outcome can hardly be called a victory.
Nonetheless, this is the first time that Palestinians have been able to create something close to mutual deterrence with the Israelis.
Strengthening Palestine’s position further is the United Nations General Assembly’s recognition of Palestine as a non-member observer state, which Palestinian diplomats can use to exert political pressure on Israel to take their national aspirations seriously.
Palestine’s membership in UN agencies,&nbsp;not to mention the possibility of joining&nbsp;the International Criminal Court,&nbsp;has also boosted its leaders’ bargaining power.
All of these levers – not to mention the tremendous sympathy and support Palestinians have received from international observers – will be essential to ensure that the high price Palestinians paid during the 51-day war was not in vain. But the levers will be useless if the leaders of Hamas and Fatah, the two dominant Palestinian factions, fail to maintain a united front.
The effectiveness of such a cooperative approach was apparent in the Egypt-sponsored indirect talks with Israel.
The unified Palestinian delegation was convenient for Egypt and Israel, both of which consider Hamas a terrorist organization, and for Palestine, because it helped to bring an end to the violence.
And it was a political boon for Abbas, who was able to field a delegation headed by one of his confidants, Azzam al-Ahmad, and thus claim the right to announce the ceasefire.
Having withstood the test of war, the Palestinian unity government that was created less than two months before the conflict began will now become the main vehicle for Gaza’s reconstruction. But Prime Minister Rami Hamdallah will face considerable challenges – beginning with Gaza, where his executive authority is severely limited.
More broadly, the unity government’s success depends on the ability of the Fatah-led Palestinian government and Hamas – and, to whatever extent possible, Islamic Jihad – to cement their cooperation by agreeing on a path toward liberation and freedom. A clear, realistic strategy will be integral to Palestine’s efforts to win support from regional and international actors eager to end the decades-old conflict with Israel.
This will, of course, require compromises from all sides.
Hamas must reconsider its refusal to recognize Israel.
For its part, the Palestinian leadership must pursue active resistance alongside negotiations with Israel, while defending more vigorously Palestinians’ right of return, which it has often ignored in an effort to appease the Israelis.
But establishing a unified strategy is only the first step.
Ordinary Palestinians, who will undoubtedly have to make sacrifices, must be brought on board – especially given the heavy price they incurred during the recent conflict, in which they had no say.
With broad public support, Palestine’s unity government will be able to rally the international community behind its fair and reasonable demands for a truly independent state, free of sieges, separation barriers, and foreign settlements – demands that fall squarely within the realm of basic human rights.
Just as the international community isolated South Africa until it abandoned apartheid, it can put pressure on Israel through boycotts, divestment, and sanctions, while calling upon Israel’s allies to stop providing aid and arms.
If Palestine’s leaders truly want to end the cycle of violence in Gaza, they must begin by resolving their own internal disagreements and present themselves as a cohesive, reliable, and committed negotiating party.
They must band together behind the simple but powerful goal expressed by UN Secretary-General Ban Ki-moon to the General Assembly in New York: “We will build again, but this must be the last time to rebuild.”
For Palestine’s unity government, the time to begin the rebuilding process is now.
If Fatah and Hamas are willing to do what it takes to achieve peace, this may well be their best chance.
Today’s Dark Lords of Finance
LONDON – In his Pulitzer-Prize-winning book, Lords of Finance, the economist Liaquat Ahamad tells the story of how four central bankers, driven by staunch adherence to the gold standard, “broke the world” and triggered the Great Depression.
Today’s central bankers largely share a new conventional wisdom – about the benefits of loose monetary policy.
Are monetary policymakers poised to break the world again?
Orthodox monetary policy no longer enshrines the gold standard, which caused the central bankers of the 1920s to mismanage interest rates, triggering a global economic meltdown that ultimately set the stage for World War II.
But the unprecedented period of coordinated loose monetary policy since the beginning of the financial crisis in 2008 could be just as problematic.
Indeed, the discernible effect on financial markets has already been huge.
The first-order impact is clear.
Institutional investors have found it difficult to achieve positive real yields in any of the traditional safe-haven investments.
Life insurers, for example, have struggled to meet their guaranteed rates of return.
According to a recent report by Swiss Re, had government bonds been trading closer to their “fair value,” insurers in America and Europe would have earned some $40-$80 billion from 2008 to 2013 (assuming a typical 50-60% allocation to fixed income).
For public pension funds, an additional 1% yield during this period would have increased annual income by $40-50 billion.
Investors have responded to near-zero interest rates with unprecedented adjustments in the way they allocate assets.
In most cases, they have taken on more risk.
For starters, they have moved into riskier credit instruments, resulting in a compression of corporate-bond spreads.
Once returns on commercial paper had been driven to all-time lows, investors continued to push into equities.
Approximately 63% of global institutional investors increased allocations in developed-market equities in the six months prior to April 2015, according to data from a recent State Street survey – even though some 60% of them expect a market correction of 10-20%.
Even the world’s most conservative investors have taken on unprecedented risk.
Japan’s public pension funds, which include the world’s largest, have dumped local bonds at record rates.
In addition to boosting investments in foreign stocks and bonds, they have now raised their holdings of domestic stocks for the fifth consecutive quarter.
These allocation decisions are understandable, given the paltry yields available in fixed-income investments, but the resulting second-order impact could ultimately prove devastating.
The equity bull market is now six years old.
Even after the market volatility following the crisis in Greece and the Chinese stock market’s plunge, valuations appear to be high.
The S&P 500 has surpassed pre-2008 levels, with companies’ shares trading at 18 times their earnings.
As long as the tailwinds of global quantitative easing, cheap oil, and further institutional inflows keep blowing, equities could continue to rally.
But at some point, a real market correction will arrive.
And when it does, pension funds and insurance companies will be more exposed than ever before to volatility in the equity markets.
This overexposure comes at a time when demographic trends are working against pension funds.
In Germany, for example, where 20% of the population is older than 65, the number of working-age adults will shrink from about 50 million today to as few as 34 million by 2060.
Among emerging markets, rapidly rising life expectancy and plunging fertility are likely to double the share of China’s over-60 population by 2050 – adding roughly a half-billion people who require support in their unproductive years.
If the combined effect of steep losses in equity markets and rising dependency ratios cause pension funds to struggle to meet their obligations, it will be up to governments to provide safety nets – if they can.
Government debt as a percentage of global GDP has increased at an annual rate of 9.3% since 2007.
In Europe, for example, Greece is not the only country drowning in debt.
In 2014, debt levels throughout the eurozone continued to climb, reaching nearly 92% of GDP – the highest since the single currency’s introduction in 1999.
If pensions and governments both prove unable to provide for the elderly, countries across the continent could experience rising social instability – a broader version of the saga playing out in Greece.
The new Lords of Finance have arguably been successful in many of their objectives since the financial crisis erupted seven years ago.
For this, they deserve credit.
But, when an emergency strikes, large-scale policy responses always produce unintended consequences typically sowing the seeds for the next full-blown crisis.
Given recent market turmoil, the question now is whether the next crisis has already begun.
Darkness at Darfur
Darfur is shorthand for the latest example of a recurring international problem, one that gained headlines a decade ago in Rwanda.
What should the world do when a large number of people are the victims of violence originating from within their own country?
Darfur itself is a region of Western Sudan comprised of Arab and African Muslims.
Conflict erupted in early 2003 when rebels of the Sudan Liberation Movement attacked government troops in an effort to gain greater autonomy and resources for their region.
Sudan government aircraft and government-supported troops (known as jangaweed) retaliated against not only armed rebels but also against civilians deemed to be supporting them.
Villages have been emptied, women raped, non-Arab men killed.
The origins of the current crisis may be in some dispute, but the costs are not.
More than 50,000 men, women and children have lost their lives; more than 1.5 million have been made homeless.
This is arguably genocide, a word used by the U.S. government but by few others to describe what is going on in Darfur.
Meanwhile, world leaders are debating what if anything should be done.
UN Security Council Resolution 1564, passed on 18 September 2004, reserves the bulk of its criticism for the government of Sudan.
But the UN is not yet prepared to go beyond words.
The resolution threatens that the Security Council will consider imposing sanctions against Sudanese leaders or against the country’s important oil sector, but introduces no penalties at this time.
Why the hesitation?
More than anything else it stems from international reluctance to challenge any government over what it is doing within its own territory.
This reflects a widely-held view of sovereignty, one that allows governments to do essentially what they want within their own borders.
Such thinking is inadequate and outmoded.
To begin with, there is a moral element.
There is something wrong in looking the other way when one’s fellow human being is being slaughtered.
We all have some basic obligation to one another.
There are as well pragmatic considerations.
In a global world, what happens within one country can all too easily affect others.
For example, refugees leaving Sudan can strain the stability of neighboring Chad.
Opposition to genocide and other large-scale acts of violence against a population also reflects the established principle that citizens as well as governments have rights.
This principle is enshrined in various international documents, beginning with the 1948 Universal Declaration of Human Rights.
Governments ought not to be allowed to massacre their own people.
And weak governments should not be allowed to permit massacres to take place on their own territory even if they are not themselves carrying out the massacre.
What all this adds up to is a requirement for a concept of state sovereignty that is less than absolute.
To be precise, we need to embrace a contractual approach to sovereignty, one that recognizes the obligations and responsibilities as well as the rights of those who enjoy it.
Such an approach to sovereignty would essentially communicate to governments and their leaders that the rights and protections they associate with statehood are in fact conditional, and that governments and leaders would forfeit some or, in extreme cases, all of these rights and protections if they failed to meet their obligations.
This idea will only have an impact if the international community is prepared to go beyond voicing this principle and accept the necessary consequence: that other states and the world at large have a right and a duty to act to protect innocent life when it is jeopardized on a large scale.
Some movement in just this direction was suggested by widespread international support for the humanitarian interventions in Bosnia, Kosovo, and East Timor.
Another sign of change is the basic document (“Constitutive Act”) of the African Union, the regional organization launched in July 2000 to replace the ineffective Organization of African Unity.
After citing the principle of non-interference by one member state in the internal affairs of another, the document goes on to declare “the right of the Union to intervene in a member state pursuant to a decision of the assembly in respect of grave circumstances, namely war crimes, genocide and crimes against humanity.”
Intervention in such circumstances can take any number of forms, from public rhetoric and private diplomacy to economic and political sanctions to armed intervention.
All of which brings us back to Darfur.
What needs doing?
There is a need for massive assistance to the displaced people of Darfur.
Those who have survived conflict require help if they are not to succumb to disease and starvation.
There is also every reason to renew diplomatic efforts to bring about a lasting cease-fire and, following that, a settlement that addresses the grievances that helped bring about this crisis in the first place.
Two other points require highlighting, though.
First, and consistent with UN Security Council Resolution 1564, countries should provide the African Union with the logistical, material, and financial help it has asked for.
With such support, AU-authorized troops could guard the refugee camps and, over time, protect villages so that men, women and children could return home in safety.
Second, the UN ought to make good on its threat and impose sanctions against the Sudanese government unless it stops using its aircraft to destroy villages and unless it stops supporting the jangaweed.
Criminal indictments for war crimes ought to be issued against specific officials who do not comply.
It is important that the world act, not simply to save the people of Darfur, but to prevent future Darfurs.
A great deal of innocent human life depends on it.
Darwin, the Greatest Psychologist
CORONADO, CALIFORNIA – Most people do not think of Charles Darwin as a psychologist.
In fact, his work revolutionized the field.
Before Darwin, philosophical speculation shaped our psychological understanding.
But even great philosophers – Plato, Aristotle, Hobbes, Hume, Locke, Kant, Schopenhauer, Nietzsche, and others – could only describe current mental events and behaviors; they could not explain their causes.
Darwin provided the profound understanding that evolution has influenced the shape of our minds as strongly as it has the shape of our bodies.
Since humans evolved from the same primate ancestor as modern chimpanzees or gorillas, he suggested one could learn more by comparing human instincts, emotions, and behaviors to those of animals than one can surmise from subjective speculation.
As he put it, “he who understands baboon would do more towards metaphysics than Locke.”
Philosophy is inadequate to understand the roots of human psychology, because self-reflection does not make us aware of the forces that drive most of our reactions to the environment.
Rather, we are subject to inborn tendencies, which develop through the reciprocally influential forces of natural and sexual selection.
Natural selection is the process by which the variants within a species that are best adapted to survive in their environment win the reproductive contest – at least until an even better-adapted variant comes along.
The traits that enable people to feed and protect themselves increase the likelihood that they will live long enough to produce offspring, whom they will be able to feed and protect until maturity.
In a sense, sexual selection is the psychological extension of natural selection.
But, instead of gaining an advantage from traits that enhance one’s ability to survive, one gains an advantage from qualities that potential mates have evolved to find appealing.
Given that humans’ sexual choices determine who reproduces most and, in turn, which physical and psychological features are favored over time, a trait that may not help a person to survive can still provide a reproductive advantage that is passed along to offspring.
In other words, in choosing a mate, one shapes the course of evolution.
Moreover, the principle of sexual selection implies that, in addition to regulating bodily functions, the nervous system indirectly influences the progressive development of bodily and mental structures such as ornamental appendages; cognitive skills like musical ability; and characteristics such as courage and perseverance.
Peacocks have evolved to have long, colorful feathers simply because peahens have evolved to find them attractive.
Darwin explained that such qualities are propagated and enhanced over generations, through “the exertion of choice, the influence of love and jealousy, and the appreciation of the beautiful in sound, color, or form.”
Indeed, while natural selection is blind, sexual selection has an eye for beauty – although the nature of beauty is always in the eye of the beholder.
Given that human psychology has developed through a sometimes-uneasy balance of natural and sexual selection, evolution and psychology influence and interact with each other.
Darwin’s contributions to understanding human psychology involved careful study of child development, which he reported in 1877 in “Biographical Sketch of an Infant.”
For the first three years of his first-born son William’s life, Darwin observed him with the practiced eye of a naturalist, recording developments as diverse as his ability to follow a candle with his eyes to the first manifestations of conscience.
Darwin also pioneered the experimental tools of scientific psychology, such as the use of photographs of facial expressions and surveys to determine the universality of human emotions.
Darwin had already made most of his major psychological discoveries even before he identified natural selection as the mechanism of evolution – but he waited 35 years before publishing his findings.
This decision can be partly attributed to his meticulous approach to research, which entailed carefully collecting and studying evidence before presenting theories.
But Darwin also knew that, if he needed time to accept his own conclusions, the rest of the world was not ready to face such a materialist view of humanity.
He shied away from the inevitable confrontation with critics – among whom were friends and colleagues.
By the time Darwin died, his ideas had gained significant influence among psychologists and neuroscientists – even if they did not always fully realize it.
Sigmund Freud never met Darwin, but most of his mentors were enthusiastic Darwinists.
Just as Isaac Newton revolutionized astronomy and physics by “standing on the shoulders” of his predecessors, Freud built on Darwin’s evolutionary insights in order to understand psychological symptoms, dreams, myths, art, anthropology, and much more.
Freud’s biographer, Ernest Jones, was mistaken in calling Freud “the Darwin of the mind.”
Darwin himself was the Darwin of the mind; Freud was his great popularizer.
Since Darwin, academic psychology has expanded significantly, enriched by the sophisticated tools of cognitive science, cybernetics, and brain imaging.
But most of these developments have been derivative elaborations of Darwin’s grand evolutionary model.
The fundamentals of our conception of human nature can all be found in Darwin’s notebooks, written 175 years ago and before his thirtieth birthday.
My Best Investment
JAKARTA – When I was boy, I dreamed of becoming a doctor.
I was born in Indonesia in the early 1950’s, a time when most families in my country lacked access to health care.
As a result, thousands of children died each year from preventable diseases such as measles, polio, and malaria.
But revolutionary breakthroughs in medicine were starting to turn the tide on these killers, and Indonesia’s doctors were celebrated as heroes.
I wanted to be a hero, too, so I studied hard and enrolled in medical school.
My plans changed, however, when my father got ill.
He was a hard-working man who made pedicabs in Surabaya, and I left university when he could no longer manage the family business.
Ultimately, I became a successful entrepreneur and established a bank that is now one of Southeast Asia’s largest financial institutions.
Looking back, I have no regrets.
Indeed, I know that I have been incredibly blessed.
Millions of children in developing countries in Africa, Asia, and the Western Pacific are forced into extreme poverty when a parent gets sick or dies.
And millions more suffer from diseases that prevent them from leading a healthy and productive life.
That is why I have decided to invest $65 million in the Global Fund to Fight AIDS, Tuberculosis, and Malaria.
When the Global Fund was created a decade ago, HIV incidence was rising around the world, and the drugs used to treat the virus were still prohibitively expensive.
Malaria was killing one million people each year, with mortality concentrated among pregnant women and children under the age of five.
More than two million people were dying from tuberculosis, because they lacked access to low-cost, first-line treatment.
Since then, the Global Fund has played a key role in reversing the course of these epidemics.
Worldwide, HIV incidence has fallen by one-third, and the cost of HIV drugs has dropped more than 99%.
The number of African households that sleep under insecticide-treated bed nets has risen from 3% to 53%, and malaria deaths have fallen by one-third.
And TB mortality has dropped more than 40%.
Altogether, support provided by the Global Fund has saved more than nine million lives – a remarkable achievement.
But the impact of the Global Fund extends far beyond lives saved.
When an HIV-positive mother receives antenatal treatment so that her child can be born HIV-free, we change the future.
When a child is spared cerebral malaria and the lifelong mental disabilities that it can cause, new possibilities are created.
The world becomes a better place when we commit to giving our children a better start.
The Global Fund also plays a critical role in strengthening health care in developing countries.
Its resources have helped to train new generations of doctors, nurses, and technicians, while dramatically improving the overall quality of maternal and child health.
These investments are helping countries take direct ownership of the fight against infectious disease, ultimately reducing their dependence on foreign aid.
For example, support from the Global Fund has helped Indonesia, which has the world’s fourth-highest TB burden, develop an efficient and effective national TB-control program.
As a result, more than one million active cases have been successfully treated, while the incidence of the disease – which has cost Indonesia’s economy millions of dollars in lost productivity – has been driven down.
With technical support like this, Indonesia’s government is creating an affordable and sustainable national health-care system that will be fully financed with domestic resources by 2019.
I believe that the Global Fund is one of the smartest investments that we can make – as many governments have understood from the outset.
The United States has been the Global Fund’s largest supporter, but many others have done their part.
For example, Australia has provided US$410 million to the Global Fund since 2002, an amount that has enabled nearly 200,000 people to receive lifesaving HIV treatment, 80,000 people to receive TB treatment, seven million people to be cured of malaria, and 14 million bed nets to be delivered to families in need.
The Global Fund has brightened the futures of hundreds of thousands of children across Africa and Asia – a heroic achievement that should make donor countries’ citizens proud.
Does Europe Need Britain?
NEW YORK – Many people in the United Kingdom believe that their country can do perfectly well outside the European Union.
Members of the UK Independence Party even think that Britain would do better, as do a considerable number of Conservative “Euro-skeptics.”
They dream of Britain as a kind of Singapore of the West, a commercial powerhouse ruled from the City of London.
That is why Prime Minister David Cameron felt obliged to offer the British people a referendum on a simple question: in or out.
Cameron does not personally want Britain to leave the EU, but he knows that some form of democratic consent is needed for future British governments to settle the matter.
The year of the promised referendum, 2017, is comfortably far away.
Many things may change in the meantime.
If the eurozone forges ahead, what countries outside the zone do may not matter much anymore.
Moreover, other Europeans may end up agreeing with Cameron that ever closer political union in Europe is undesirable – if they have a choice, that is, which is by no means certain.
In the meantime, there is another question to be considered: how many Europeans want Britain to stay in the EU?
The answer depends partly on nationality.
The smaller northern countries, such as the Netherlands, have traditionally wanted Britain to be in.
Without Britain, they would be bossed around by France, and even more so by Germany.
And yet, as memories of World War II fade, more and more people in the Netherlands and Scandinavia feel content to be under Germany’s powerful wings.
But Germany itself would probably prefer to keep its British partner, rather than face the Mediterranean countries alone.
Culture still matters.
And the Germans have much in common with the British – more than they do with the Greeks, or even the Italians.
France is a different matter.
According to a recent poll, 54% of the French would prefer Britain to leave the EU.
This, too, might have something to do with culture.
Britain never was very popular in France.
President Charles de Gaulle blocked British entry into the European Economic Community twice.
Like many French leaders, de Gaulle was deeply suspicious of the “Anglo-Saxons.”
France, in his grandiose view, was the natural guardian of European values, which, according to him, were coextensive with French values.
In 1930, Winston Churchill said of his country: “We are with Europe, but not of it.”
De Gaulle agreed.
As he once put it, somewhat ironically, Britain would lose its identity as a member of a European union, and this would be a great pity.
But culture and nationality, or even Gaullist chauvinism, cannot explain everything.
There is an important political dimension to the pro- or anti-British sentiments in Europe.
The French who said they wanted Britain to leave the EU were largely on the left, while many who held the opposite view were further to the right.
It is not entirely clear why, though it is probably because the right includes neo-liberals, who share the British attitude to business and free trade.
Like leftists everywhere, the French left favors a large degree of state control of the economy, together with technocratic rather than liberal solutions to social and economic problems.
This type of thinking has played a vital role in the development of European institutions.
Jean Monnet, one of the godfathers of European unification, embodied this tendency – a born bureaucrat who distrusted politicians.
Democratic politics is messy and divisive, and riddled with compromises.
Monnet hated all that.
He was obsessed by the ideal of unity.
And he wanted things to get done, uncompromised by political wheeling and dealing.
Monnet and other European technocrats were not exactly opposed to democracy, but in their zeal to unify Europe’s diverse nation-states, they often appeared to ignore it.
The Eurocrats knew what was best for Europe’s citizens, and they knew what needed to be done.
Too much public debate, or interference from citizens and their political representatives, would only slow things down.
Hence the typical EU language about “unstoppable trains” and “irreversible decisions”: citizens are not supposed to question the wisdom of great planners.
This emphasis on planning was one reason why the “European project” always appealed to the left – and not only in France.
The technocratic belief in ideal models is inherently utopian.
Those on the left also shared a deep aversion to nationalism, born of two disastrous European wars.
The British, whose Churchillian nationalism helped them to prevail against Hitler’s attacks, never shared this aversion.
And their deep pride in Britain’s liberal-democratic tradition made them suspicious of meddling Brussels bureaucrats.
Some of this is doubtless the result of chauvinism, even xenophobia.
How can one possibly share political authority with foreigners?
But it would be wrong simply to dismiss British doubts about the European drive toward greater unity.
It is not just a nationalist reaction.
Many Europeans now resent the expanding powers of EU bureaucracy.
British resistance to grand European plans is the democratic grit in an enterprise that could become authoritarian, despite having the best intentions, and should serve as a necessary corrective to the utopianism of the technocrats.
Those who favor European unification should take criticisms of its political flaws very seriously.
Doing so is the only chance to ensure that a united Europe, whatever form it takes, will be democratic, as well as economically beneficial.
That is why Europe needs Britain: not as an offshore center of banking and commerce, but as a difficult, questioning, stubbornly democratic partner.
David Cameron’s Culture War
NEW YORK – British Prime Minister David Cameron’s government has announced some of the most draconian public-sector cuts any developed country government has ever attempted.
Indeed, his minister of education recently declared that funding for Britain’s universities would be slashed by as much as 40%.
But the most shocking aspect of the move is that arts and humanities departments will be targeted more aggressively than science and engineering, which are supposedly better for business.
The war against the arts and humanities is nothing new – though this is the first time that the fight has migrated so directly to Britain.
Ronald Reagan pioneered a wave of policy and propaganda in the United States in the 1980’s that demonized the National Endowment for the Arts.
Ever since, Republican governments in the US have slashed funding for ballet, poetry in schools, and sculpture, while demagogues like former New York Mayor Rudolph Giuliani have gained political traction by attacking controversial visual arts.
But the Cameron government’s approach is more sinister than the old right-wing tactic of taking aim at disciplines that can be derided as effete.
The British cuts reveal a push in developed countries – one that also started in the US – to target the kinds of education that lead to an open, vigorous civil society and a population that is hard to suppress.
In the former Soviet bloc, it was the poets, dramatists, cartoonists, and novelists whose works encoded forbidden themes of freedom, and who were targeted by the secret police.
Today, they are bullied, silenced, and tortured in places like Iran, Syria, China, and Myanmar.
Obviously, neither the US nor Britain has reached that point.
But the attack on the arts and humanities is a giant step in the direction of a pliable, dumbed-down citizenry.
Indeed, the war against the arts and humanities in the US coincided with the emergence of an increasingly ignorant and passive population and a government that serves at the pleasure of corporate interests.
Academics in the arts and humanities are notoriously bad at defending why their work has value.
But, apart from strengthening civil society and the habits of freedom, these disciplines yield bottom-line benefits as well.
Who needs to read closely, seek evidence, and make a reasoned argument – skills that the study of poetry, the novel, history, and philosophy provide?
Who needs to study languages and comparative literature?
For Cameron, evidently, the answer is: no one of importance.
Let us imagine, then, a Britain of tomorrow that includes parliamentarians who don’t know what led to World War I, or what the Enlightenment was; journalists who can’t write compellingly; attorneys and judges who can’t figure out their cases; and spies and diplomats who don’t speak the languages or understand the cultures in which they work.
That Britain will look more like the US of today.
In a heartbeat, Cameron (who himself studied philosophy, politics, and economics at Oxford, having previously attended that bastion of classical education, Eton) has signed away Britain’s global influence.
Having lost its empire, Britain retains outsized global influence simply because of the power of its civilization and the education absorbed by its decision-makers.
That allure is why foreign students from emerging countries around the world flock to Britain, putting millions of pounds annually into the coffers of its universities.
By slashing the funding for the institutions which created that civilization, Cameron has guaranteed that tomorrow’s Britain will be a nation not of world-class politicians, writers, and cultural innovators, but of wonky technocrats raised on bad TV, with little influence beyond their tiny island.
If what has been cut is not restored, Cameron and his ideological heirs will create a nation of quiescent citizens who, like their US counterparts, are better suited to a society whose official policies are more directly aligned to the will of corporate interests.
While the fiscal savings may appear attractive to Cameron in the short term, for the British people – and for the rest of the world, which benefits from Britain’s liveliness, civilization, and tradition of democracy – the cost is far too high.
David Cameron’s Great Expectations
NEW YORK – As I listen to the news coming out of England after the recent wave of urban riots – and as I read Robert Douglas-Fairhurst’s compelling new biography of Charles Dickens, Becoming Dickens – life and art seem to be echoing each other.
In the wake of the riots, British Prime Minister David Cameron has proposed reviving children’s courts, urged harsh sentences and orange jumpsuits for convicts, and floated even more odious ideas.
For example, convicts could be intentionally exposed to public harassment through cleanup assignments, and their families, who have not committed crimes, could be evicted from their state-subsidized housing.
Cameron is also testing arrests for Facebook comments, the suspension of social networks, and more lethal power for police.
In Dickens’ England, the judiciary was not independent, and newspapers were subject to state censorship.
Kids (like Oliver Twist) were punished in ways designed to break them; poor people convicted of relatively minor offenses were transported to Australia, or given publicly humiliating forms of punishment; police had unchecked and violent power over the poor.
I am not endorsing leniency for looters and thugs; but we already know where the raft of punitive legislation that Cameron is proposing, and his efforts to exploit civil unrest to clamp down on civil liberties, would lead the country.
Likewise, we already know what an England without a social safety net – where the poor have no hope and no mobility – looks like.
Public education barely existed for the “lower orders” 150 years ago, and university was a fantasy for them – as it could well be again, with tuition fees set to triple under Cameron.
In Becoming Dickens, Douglas-Fairhurst, rejecting recent “poststructuralist” literary theory, reexamines Dickens and his England within their historical and political contexts.
This approach yields valuable insights – and not a moment too soon.
Such “historicist” interpretations of Victorian London have also appeared recently in the fascinating current exhibit at the Wellcome Collection, “Dirt: The Filthy Reality of Everyday Life,” and in Bill Bryson’s new bestseller, At Home, which examines the social history surrounding a Victorian curate’s manor.
The renewed interest in Victorian social history – what people ate and wore, who worked for whom, etc., as opposed to the history of battles and “great men” – may not be a coincidence.
Western capitalist societies, especially the United Kingdom and the United States, are currently in the process of spooling time backward to the pre-Victorian era, for the benefit of a small group of elites that excludes the working and middle classes who benefited most from the Victorians’ social, economic, and political reforms – let alone the poor.
As a result, it has become urgent to remember that it was the later Victorians who recognized modernity’s moral dimension, originating almost every kind of public reform that we now take for granted as the mark of a civilized society.
Early Victorian reality – destitute street children, raging cholera epidemics, and mounds of uncollected “night soil” in the streets – was a highly “privatized” reality.
In the 1830’s, as Douglas-Fairhust movingly demonstrates, boys and girls who came from economically vulnerable families could find themselves unschooled and working 18 hours a day in blacking factories, like the 12-year-old Dickens.
People who did not pay their creditors were sent – with their families – to debtors’ prisons, as John Dickens, Charles’ father, was for owing 40 pounds.
Elderly people with no means of support died in rags in alleyways, while lower-middle-class families, with no unemployment insurance or welfare benefits, were perpetually in terror of illness or layoff, which would mean "ruin" and, possibly, being turned out into the street.
London in the 1830’s was a city in which a third of women were servants and another third were prostitutes.
A massive gap between the elites and everyone else ensured that the top echelons of literature, business, and politics were managed by the wealthy few, and that the talents that would emerge a generation later, in the wake of wider state-funded education, were suppressed.
And this is more or less what all of England looked like without a social safety net.
In contrast, the later Victorians, from the 1850’s-1880’s, created major public works and public-welfare initiatives, including state-funded infirmary networks and compulsory primary education.
They expanded a system of workhouses and poor relief for the destitute, built up municipal water and sewage systems, municipalized police forces, and oversaw public investment in landmarks that are still with us, such as the Thames Embankment and the Victoria and Albert Museum.
Likewise, with tens of thousands of street children entirely dependent for food on what they could scavenge or steal, the later Victorians established systems of orphanages.
They commissioned the first epidemiological surveys to identify the source of cholera outbreaks – which could wipe out half the population of a neighborhood in a matter of weeks – and built new waterworks to stop the spread of the disease from the filthy Thames and tainted local pumps.
They built the first major public hospitals at a time when home births and other home care spread contagion and death.
In today’s advanced capitalist democracies, most citizens’ obliviousness to this history serves elite interests; otherwise, many more people, if not most, would be screaming bloody murder at increasingly successful efforts to shrink the public sector.
As Cameron and other Western conservatives intensify their efforts to clear a path to the past, it is important to bear in mind that there is nothing novel or innovative about the absence of a welfare state and the privatization of basic services.
We have been there already – indeed, much of what is now being dismantled in Britain was built in the Victorian era because of appalling social conditions for most people.
If today’s conservative political forces remain in power, the dark, dangerous, and ignorant past is where England – and other Western countries – risks returning.
The UK’s Immigration Distraction
LONDON – Do British voters hate foreigners, or merely freeloaders?
That is essentially the question British Prime Minister David Cameron posed in his long-awaited speech on immigration from other European Union countries, delivered last month at the headquarters of the construction-equipment manufacturer JCB.
Cameron’s gamble is that voters do not mind Poles or Lithuanians operating JCB’s machines on construction sites all over the United Kingdom.
What they mind is people immigrating to the UK to take advantage of its welfare benefits.
The speech was Cameron’s answer to the recent defections of two of his Conservative Party MPs to the anti-EU, anti-immigration UK Independence Party, which he fears could steal Conservative votes in the general election next May.
But, as clever as the speech was, it is unlikely to succeed in beating back UKIP – and it leaves the British debate about EU membership focused on the wrong issue.
To be sure, Cameron’s speech was a more statesmanlike gamble than many – even within his own government – had anticipated.
Some of his remarks in recent weeks had suggested that he might reject outright the free movement of EU citizens – one of the union’s founding principles – and dare other European governments to oppose him.
Instead, Cameron emphasized the UK’s enduring desire to be open to the world while restricting EU migrants’ welfare rights.
Specifically, he proposed requiring EU migrants to spend four years working in the UK before becoming eligible for the top-up welfare payments that low-paid British workers receive, and to end benefit payments for migrant workers’ children living in their home country.
Though such moves could be challenged in the European Court of Justice on grounds of discrimination, any cases are unlikely to arise until well after the upcoming election.
The political danger for the Conservatives is that they are misjudging public sentiment.
Perhaps voters have just as much of a problem with foreigners as they do with freeloaders.
If that is the case, reducing immigrants’ welfare benefits will be inadequate.
This is not to say that Cameron should target foreigners.
On the contrary, he must change the conversation to reassure voters that their economic future is bright.
As it stands, the British, like their counterparts elsewhere in Europe, feel overtaxed for spotty public services that are constantly being cut, and are angry that their incomes have been falling for the last five years.
As a result, many resent welfare recipients and fear competition for jobs – a sentiment that is fueling the rise of populist, anti-EU, and anti-immigrant parties across Europe.
The key difference in the UK is that UKIP is gaining ground with voters despite rapid economic growth (more than 3% annually, the highest rate in the EU).
Between now and May, Cameron must persuade voters that the British economy will continue to perform strongly, fueling an increase in real incomes.
A change of subject would also be in the national interest.
By banging on about immigration, Cameron risks making it central to the question of whether Britain should remain in the EU.
He is, after all, the politician who has promised to hold a referendum in 2017, if he is still Prime Minister, on whether to stay or leave, following a period variously described as a “renegotiation” of the UK’s membership and “reform” of the EU’s structure.
He is now making it seem as if immigration will be the key test of that effort.
That is a big problem.
For starters, there is little or nothing that other EU governments can concede on the free movement of people, which is enshrined in the founding document of European integration, the 1957 Treaty of Rome.
In any case, Britain receives more migrants from outside the EU than from other EU countries.
And migrants from Poland, Italy, or France are much more likely than those from Somalia, Syria, or India to return home eventually.
If the British public truly opposes immigration, they are probably referring to non-EU immigration, not the arrival of, say, Italian university graduates.
In fact, there is a far more important issue that should serve as the main focus of the British debate on the EU: the UK’s future status inside the EU as a non-member of the eurozone.
This is what Cameron and Chancellor of the Exchequer George Osborne were focusing on until UKIP surged in the opinion polls.
It is time to renew that focus.
Cameron’s government must recognize that there is only one good reason to wonder whether the UK might be better off leaving the EU: the risk that remaining outside of the eurozone would leave Britain at a serious disadvantage in EU decision-making, even about rules affecting the single market.
It sounds a bit technical, and it is.
But sorting out the relationship between EU members within and outside the eurozone can be done in a fairly short time without new treaties; indeed, progress has already been made on this front.
Cameron and Osborne would then be able to boast that they have procured for the British public the best of both worlds: much faster economic growth than the stagnant eurozone members, together with all of the advantages of EU membership, including access to the single market and enhanced global influence.
That narrative would be far more powerful than a few tweaks to welfare rights for immigrants.
David Cameron and the EU’s Waterloo
PRINCETON – Two hundred years ago this month, at the Battle of Waterloo, Napoleon Bonaparte’s defeat at the hands of an allied army, led by the Duke of Wellington, reshaped Europe’s future.
Britain may now be poised to do so once again.
The United Kingdom, whose new majority Conservative government has pledged to hold a referendum on European Union membership by the end of 2017, perhaps even next year, is not the outlier that it is often portrayed as being.
Indeed, it is at the vanguard of the EU’s institutional atrophy.
Even if it does retain its EU membership, the UK will continue to move steadily away from Europe.
With more attractive commercial opportunities elsewhere, most European countries will follow suit.
For the EU, meeting the UK’s demands – to restrict benefits for migrant workers, limit financial regulation that could hurt the City of London, and disavow the goal of “ever closer union” – would require a fundamental transformation, including utterly unfeasible changes to the treaties that underpin European institutions.
The discussion has thus turned to the possibility of providing the UK with a special status or allowing it to opt out of more EU provisions.
But, given intensifying doubts about the benefits of integration, even that solution would risk unraveling the EU.
By emphasizing that Europe no longer offers an economic dividend, the UK’s move away from the EU will spur ever louder calls for change elsewhere.
Simply put, talk of “Brexit” has exposed Europe’s economic and political fault lines – and there is no going back.
Robert Peston, in his 2005 biography of then-Chancellor of the Exchequer Gordon Brown, described Brown’s “pragmatic view that the EU was a good thing only insofar as it delivered practical benefits of peace and prosperity to Britain.” While the British have been particularly open about the nationalist nature of their support for European integration, other EU members have been no less mindful of their domestic interests.
In the wake of World War II, European countries’ national interests were aligned.
Nonetheless, efforts to establish political unity through a common army failed in 1954, highlighting that economic common ground was the key to European integration.
And, indeed, the 1957 Treaty of Rome, which opened national borders within the new European Economic Community, enabled the rapid proliferation of intra-European trade, thereby contributing to a shared economic recovery.
The material gains of these commercial relationships fostered empathy among Europeans, fueling increased support for – and trust in – shared institutions.
This process began later for the UK, which joined the community in 1973; but it followed a similar trajectory, with British citizens responding to economic gains by supporting increased integration.
Prime Minister Margaret Thatcher, by advocating the 1986 Single European Act, sought to maximize those gains.
In the spirit of the Treaty of Rome, she ensured that the act focused on developing an open and competitive common market, in which all members participated on equal terms.
By contrast, her German counterpart, Chancellor Helmut Kohl, often regarded as one of that generation’s preeminent European champions, offered only lukewarm support for the Single European Act.
He preferred to help steer Europe toward monetary and political union, just when its economy had begun to fall behind the rest of the world.
The result was the 1991 Maastricht Treaty – the point when European integration went into overdrive.
But the Treaty’s architects were so busy playing internal power games that they failed to recognize that monetary union could not stem Europe’s decline, especially as the United States was experiencing rapid productivity growth and Asia’s economic rise had begun.
With Europe’s post-war recovery long complete, the logic of integration had to be rethought.
Unfortunately, that did not happen.
As a result, intra-European trade and support for European institutions, having soared in the previous two decades, began to decline practically before the ink on the Maastricht Treaty was dry.
The eurozone’s protracted crisis, which began in 2008, has exacerbated this trend, with member countries still struggling to restore economic and financial stability – and likely to continue to lag behind the rest of the world in terms of GDP growth.
No institutional framework can survive unless it serves the material interests of its constituency.
In the nineteenth century, when the Tunisian craft guilds failed to adapt to industrialization, they became irrelevant, and the amins, or guild masters, were left as figureheads in shell institutions.
Today, European institutions could face the same fate.
Unencumbered by the euro, and benefiting from long-standing commercial relationships beyond Europe, Britain is in a particularly strong position to push back against EU institutions.
This may be self-serving, but it should not be a surprise; in fact, with businesses throughout Europe seeking markets elsewhere, Britain’s approach may well herald similar developments elsewhere.
European integration in the shadow of WWII was a wise and magnificent achievement.
But, with that historic task now complete, European institutions need a new rationale.
And with the EU, unlike other federations, lacking a common political destiny, that rationale must center on material benefits.
The EU must return to the fundamental driver of its success, pursuing a renewed single-market agenda that reflects the rationale of the Treaty of Rome.
Unfortunately, Europe is so divided nowadays that the ability to achieve such an outcome is not promising, with new initiatives along these lines facing “increasing political resistance.”
If Europeans merely invoke the lofty mantra of “an ever closer union,” their institutions will atrophy.
Without a new unifying objective – one based on shared material gains, not on fear of Vladimir Putin’s resurgent Russia – the European amins will soon be out of business.
Beyond Inflation Targets
EDINBURGH – Over the last three decades or so, central bankers and academics have become increasingly confident that inflation targeting is the key to preserving macroeconomic stability.
But this is virtually impossible to prove, and the 2008 financial crisis suggested to many that monetary policy should focus on more than the prices of goods and services.
So how should a revised mandate for central banks be structured to maintain their focus on low inflation while allowing monetary policy to address other issues when appropriate?
The contribution that inflation targeting makes to macroeconomic stability is difficult to discern for a simple reason: it is impossible to know what would happen if a country’s central bank pursued the opposite course.
Unable to compare outcomes directly, researchers have employed a variety of strategies to identify the impact of inflation targeting, and have typically found it to be substantial (though the effect becomes small or even zero when countries’ starting points are taken into account).
For example, a case study of the United Kingdom for 1997-2007 – a period of full inflation targets and policy independence for the Bank of England (BoE) – indicates considerable improvement from a poor starting point.
The focus on price stability was accompanied by relatively low inflation (compared to the past, as well as to other major economies), strong growth, and little output volatility.
However, over this period the UK also experienced sustained exchange-rate misalignment, which the BoE’s Monetary Policy Committee was unwilling or unable to address within its existing mandate.
The MPC also failed to respond to any of the three bouts of rapid growth in house prices that preceded the financial crisis, arguing that they were structural in nature –caused by the decline in inflation and interest rates since the 1980’s – so a monetary response was not appropriate.
In the run-up to the crisis, the US Federal Reserve Board (an informal inflation targeter) was even more committed than the MPC to this orthodox view – so committed, in fact, that it barely allocated any time or resources to analyzing house-price fluctuations.
So, while inflation-targeting central banks worked hard to nail down inflation expectations in goods and services, they made no effort to influence asset-price expectations.
Indeed, the “Greenspan put” (former Fed Chairman Alan Greenspan’s monetary-policy approach) eliminated the downside risk by setting a floor under asset prices; but it set no ceiling on the upside.
If major banks had had a “lean against the wind” strategy in reserve, that would have influenced expectations and at least partly stabilized asset prices, possibly mitigating – or even averting – the most damaging effects of the financial crisis.
The notion of integrating asset-price concerns into inflation targeting remains a source of significant controversy, with opponents citing the Tinbergen Principle: if policymakers have one instrument, the interest rate, they can pursue only one objective, price stability.
Attempts to pursue multiple objectives, the logic goes, would confuse financial markets and private-sector agents.
But central banks have pursued multiple objectives simultaneously, without bringing about bad outcomes or destroying their own credibility.
Likewise, since 2008, many central banks – under pressure from governments – have been reacting specifically to other developments in the real economy (particularly unemployment), rather than maintaining their single-minded focus on long-term price stability.
This is particularly obvious in the UK, where the government, desperate to see an economic recovery before the 2015 elections, has been pushing the BoE to introduce credit subsidies and, more recently, forward guidance.
As a result, the BoE’s decisions have been attuned to the short-run trade-off between growth and inflation – meaning that it has been making decisions about goals, not just instruments.
What central banks need now is a revised mandate that upholds price stability as the primary, long-term objective, while allowing policymakers to pursue other objectives when appropriate.
Specifically, the central bank should be able to move slowly on price stability if it regards the real economy as unacceptably weak, or if an asset-price misalignment threatens financial stability and cannot be defused quickly by the new macro-prudential instruments.
Under the current arrangements for the BoE, if inflation moves more than one percentage point away from its target (in either direction), the bank’s governor is obliged to write an open letter to the Chancellor of the Exchequer explaining the deviation and providing a plan to eliminate it, including a projected timeline.
A revised remit for the BoE – or, in some form, for other inflation-targeting central banks – could take this requirement further, specifying a primary and long-term target for inflation from which policymakers can deviate if doing so is deemed necessary.
In such cases, the central bank’s governor should be required to write an open letter explaining the bank’s decision, including how long it expects to give priority to the non-inflation objective and how it foresees returning to normal operations.
Such an arrangement would allow the central bank to take a wider view of its responsibilities in a context of transparency and accountability, but in a way that both preserves its anti-inflationary credibility and prevents politically motivated or otherwise inappropriate policy decisions.
A Long-Term Plan for Syria’s Refugees
BEIRUT – After spending just three days with refugees and aid workers in Lebanon and Turkey, the apocalyptic nature of the Syria crisis is all too apparent: more than 100,000 deaths, nine million people displaced, two million children out of school, diseases like polio resurfacing, and neighboring countries struggling to cope with waves of refugees.
Countless heartrending stories of lost husbands, wives, siblings, and children, to say nothing of homes and livelihoods destroyed, provide yet more troubling evidence of how Syria’s civil war has become a regional conflict (as the bombing of Iran’s Beirut embassy suggests).
Anti-Assad rebels are now fighting each other, as jihadists make gains.
Experts no longer talk of the conflict lasting months; they speak in terms of years, or even decades.
Despite heroic efforts by aid agencies like the International Rescue Committee (IRC) to save lives and bring hope to the region, the terrible truth is that it is not possible to protect civilians, especially from snipers and stray missiles, never mind hunger and homelessness.
Warring factions do not even recognize the notion of unaffiliated noncombatants, and flout international norms of war.
In addition to the use of chemical weapons, the United Nations estimates that 2.5 million civilians lack food, water, and medicines, because some towns and villages are too hard to reach, with an estimated 250,000 people completely cut off from outside help.
Syria’s neighbors have been overwhelmed by calls for help.
Lebanon is trying to accommodate nearly one million refugees.
In Turkey, an estimated 200,000 refugees are in official camps, but at least twice that number are struggling alone in towns and cities.
Support from around the world is fitful: only 60% of aid pledges have come in, with only a fraction actually reaching the intended beneficiaries.
Although some agencies have been able to get aid supplies across national borders, they cannot get through the frontlines of the fighting to reach those caught in the crossfire.
International diplomatic efforts must therefore focus on achieving temporary ceasefires to bring in the most urgently needed help, such as polio vaccines for children.
Aid should not be a mere side show to the seemingly endless peace talks taking place in Geneva; as United Nations emergency relief coordinator Valerie Amos insisted, it must be central to those negotiations.
But, with the conflict and its impact expected to drag on for years, agencies must also plan for the longer term.
This includes building capacity in neighboring states, as the World Bank is doing in Jordan and Lebanon, to provide services for refugees.
This can be done in creative ways.
The IRC, for example, is involved in three areas:
· Innovative education: Mainstream school systems in neighboring countries cannot cope with the refugee influx; and, with more than 80% of refugees living in urban areas rather than in camps, there is little point to focusing on camp-based models of teaching.
Instead, a more informal system, supported by networks of local and refugee teachers – a model that was successfully pioneered in Congo and Afghanistan – can provide accredited learning.
· Exploiting technology: Syrians are generally literate, numerate, and technologically sophisticated.
A pioneering social-networking platform called Tawasul (“Connection”), established by the IRC and the non-profit news organization Internews, has been set up to help refugees help one another through the exchange of information and advice.
· Doing business: Syrian refugees are accustomed to working in a market economy, so programs that allow them to trade, and therefore support themselves, should be encouraged.
The IRC is investing in “cash for work” programs that will help refugees (and their hosts) build businesses.
If we are to lessen the horrors of the Syrian conflict and its consequences, we must think not only about emergency action to save lives, but also about meeting longer-term needs that make those lives worth living.
Bringing medical aid into conflict zones, setting up water and sanitation facilities, and protecting victims during harsh winters are crucial to saving lives; but we must also think about how to safeguard the education and livelihoods of those who survive.
अफ्रीकी अभ्युदय में विपुलता की समस्या
न्यूयार्क - अफ्रीका नाटकीय रूप से बदल रहा है - और इसके साथ बाहरी लोगों का इसके प्रति रवैया भी बदल रहा है. आखिरकार संयुक्त राज्य अमेरिका भी अब इस महाद्वीप में चीन, यूरोप और भारत के बराबर दिलचस्पी लेने को तत्पर दीख रहा है. हाल ही में आयोजित अमेरिकी राष्ट्रपति बराक ओबामा की अफ्रीका के 40 राष्ट्राध्यक्षों और 200 से अधिक अमेरिकी व अफ्रीकी शीर्ष व्यापारियों के साथ शिखर वार्ता एक नए, अधिक आत्मविश्वासी मिजाज का संकेत देती है. यह अपने-आप में उत्साहवर्द्धक है. लेकिन जब तक उप-सहारा अफ्रीका के अनेक देश हिंसक झड़पों, गरीबी और भ्रष्टाचार में पिसते रहेंगे तब तक महाद्वीप की आर्थिक क्षमता को पूरी तरह प्राप्त नहीं किया जा सकेगा.
अफ्रीका की आर्थिक वृद्धि और व्यवसायिक अवसर उत्साहवर्द्धक और मन को लुभाने वाले हैं. इस क्षेत्र की 30 करोड़ मध्यमवर्गीय आबादी सालाना 5% से अधिक की दर से बढ़ रही है. महाद्वीप मोबाइल (चल) बैंकिंग में सबसे आगे है. प्रति व्यक्ति उपभोक्ता व्यय भारत व चीन के स्तर के बराबर है. यदि महाद्वीप के सशक्त निजि क्षेत्र की भागीदारी में विदेशी पूंजी निवेश वहां के प्रमुख क्षेत्रों - खासकर शिक्षा, स्वास्थ्य सेवा और अवसंरचना - को लाभ पहुंचा सके तो अफ्रीका में व्यापक पैमाने पर विकास को बढ़ावा मिल सकता है जिसकी लोगों को जरूरत है.
लेकिन निवेश और वृद्धि - ‘‘अफ्रीका उदय’’ - इस कहानी के केवल एक भाग हैं. एक अफ्रीका और भी है जो संघर्ष कर रहा है उन लड़ाइयों और संकट से जो महाद्वीप के बड़े भाग को प्रभावित करते हैं. खासकर, माली से सोमालिया तक फैली पट्टी में रहने वाले करोड़ों लोग इन संघर्षों से अधिक प्रभावित हैं. लाइबेरिया और सिएरा लियोन में इबोला महामारी फैलने से पूर्व तक दक्षिण सूडान, सेंट्रल अफ्रीकन रिपब्लिक (कार) और माली पर नाजुक या विफल राष्ट्रों की लंबी फेहरिस्त में शामिल होने का खतरा मंडरा रहा था. सोमालिया और डेमोक्रेटिक रिपब्लिक ऑफ कांगो (कांगो गणराज्य) पहले ही इस फेहरिस्त में हैं. इन देशों में जारी नस्लीय, धार्मिक, आर्थिक और अन्य किस्मों के संघर्षों के कारण प्रभावी प्रशासन के लक्ष्य नेपथ्य में चले जाते हैं और बुनियादी सेवाओं को प्रदान करना भी मुश्किल हो जाता है.
भारी जनसंहार या शरणार्थी संकट के कारण दुनिया का ध्यान इन देशों की ओर जाता है लेकिन केवल थोड़े समय के लिए. फिर यह ध्यान कहीं और चला जाता है. नतीजतन समस्याएं बढ़ती जाती हैं और जीवन की परिस्थितियां बद से बदतर होती जाती हैं. दुनिया के सबसे नए देश दक्षिण सूडान में स्वतंत्रता संग्राम के दौरान नस्लीय सोच से इतर राजनीतिक एकता बनी रही थी. लेकिन इस साल हिंसक संघर्ष में यह तहस-नहस हो गई. करीब 15 लाख लोग बेघर-बार हो गए और 4 लाख लोगों को भागकर पड़ोसी देशों में शरण लेनी पड़ी.
इस व्यापक आतंक के बीच कोई भी सुरक्षित नहीं है. इसी साल अप्रैल में मेरे संगठन के स्टाफ के दो सदस्य मारे गए जो संयुक्त राष्ट्र के अधीन विस्थापित लोगों के बीच काम कर रहे थे. और अगस्त के शुरुआत में स्थानीय तौर पर तैनात सात सहायता कर्मियों को निशाना बना कर मौत के घाट उतार दिया गया.
मध्य अफ्रीकी गणराज्य में ईसाइयों पर मुसलिम पूर्व सेलेका लड़ाकों द्वारा जितने हमले हो रहे हैं उससे कहीं ज्यादा हिंसक हमले ईसाई और बलाका-विरोधी आतंकवादियों द्वारा जान बचा कर भाग रहे मुसलमानों पर हो रहे हैं. नतीजतन वहां मुसलिम आबादी अनुमानित 15% से गिर कर 5% से भी कम रह गई है. हमेशा की तरह औरतों और बच्चों पर सर्वाधिक अत्याचार हो रहे हैं. केवल गत तीन महीनों में ही मध्य अफ्रीकी गणराज्य की राजधानी बानगुई में अंतर्राष्ट्रीय बचाव कमेटी के केंद्रों में हिंसा व बलात्कार से बचने के लिए शरण लेने वाली औरतों की तादाद में भारी इजाफा हुआ है.
मदद की निहायत जरूरत है पर यह धीमे-धीमे आती है. मध्य अफ्रीकी गणराज्य के लिए 56.5 करोड़ डॉलर की मदद जुटाने वास्ते संयुक्त राष्ट्र की अपील से अभी तक केवल 39% धन ही जुट पाता है. इसी तरह दक्षिण सूडान, जो युद्ध के बाद अकाल झेल रहा है और जहां किसान फसल नहीं बो पा रहे हैं, के लिए संयुक्त द्वारा की गई अपील से लक्ष्य की मात्र आधी धन राशि ही जुट पाई है. दानदाताओं के निरुत्साह - और नीति-निर्माताओं के सामने मौजूद अनगिनत वैश्विक संकटों - के चलते पीडि़तों का नुकसान बढ़ता जा रहा है.
आसन्न संकटों का सामना करने के लिए बेशक मानवीय कार्यवाई अनिवार्य है. लेकिन यह पहचानना महत्त्वपूर्ण है कि जैसे राजनीतिक संकट अकसर मानवीय संकटों को जन्म देते हैं, वैसे ही मानवीय आवश्यकता राजनीतिक अस्थिरता का कारण बन सकती है जिसमें संकटग्रस्त पड़ोसी देशों से लोगों का बड़े पैमाने पर पलायन पूरे क्षेत्र में अस्थिरता पैदा करता है. सचमुच गृह युद्धों का केवल उन देशों में सीमित रहना दुर्लभ है जहां वे शुरू होते हैं.
शरणार्थी समस्याओं की गहरी जड़ें हैं. उदाहरण के लिए, दुनिया के आधे गरीब, नाजुक और संघर्षग्रस्त देशों में रहते हैं. दस साल पहले से यह तादाद 20% ज्यादा है. और 75% शरणार्थी शहरी क्षेत्रों में स्थानीय आबादी के बीच रहते हैं. संकट और अल्प-विकास गहराई से एक-दूसरे से जुड़े हैं.
हमें ज्यादा से ज्यादा आभास है कि किस तरह की मानवीय कार्यवाई से काम चलेगा. विश्वास कायम करने वाली समुदाय-आधारित पहलकदमियां केंद्रीय और बाहरी रूप से चलाई जाने वाली परियोजनाओं से बेहतर हैं. महिलाओं के सशक्तिकरण से ताकि वे खुद को हिंसा से बचा सकें या विस्थापित बच्चों को यह सिखा कर कि वे स्वयं को सदमे से कैसे उबारें, संकट से उबरने के सर्वाधिक प्रभावी उपाय हो सकते हैं. हम यह भी जानते हैं कि सुरक्षा के बगैर कोई विकास नहीं हो सकता है. आज 1 लाख से ज्यादा संयुक्त राष्ट्र व अफ्रीकी संघ के शांति रक्षक संघर्षरत अफ्रीकी देशों में फैले हुए हैं. ऐसे और अधिक शांति रक्षकों की आवश्यकता है, खासकर मध्य अफ्रीकी गणराज्य और दक्षिण सूडान में.
अफ्रीका में आर्थिक निवेश महत्त्वपूर्ण है और दीर्घकालीन नियोजन में इस पर गंभीरता के साथ गौर किया जाना चाहिए. ओबामा प्रशासन का महाद्वीप में व्यवसायिक अवसरों को बढ़ाने का प्रयास सही है. लेकिन केवल इसी से हिंसक संघर्ष की जड़ों को नहीं काटा जा सकता है जिससे आज भी लाखों जानें जा रही हैं. आर्थिक विकास व सुशासन के साथ-साथ मानवीय राहत सुदृढ़ स्तंभ की भांति आनी चाहिए ताकि अफ्रीका की वास्तविक क्षमता को हासिल किया जा सके.
Saving General Petraeus
PRINCETON – The United States has moved from the high of a presidential election to the low of a political sex scandal in one short week.
For many Americans, the election demonstrated what is best about the country, only to be followed by the sadly familiar process of knocking heroes off their pedestals.
For many non-Americans, the election brought the welcome and reassuring victory of Barack Obama, whereas the resignation of David Petraeus as Director of the CIA was an unnecessary, self-inflicted wound.
In fact, both the election and Petraeus’s resignation are pieces of a larger whole: an America that lives up to its promises.
The election reminded many Americans that the US is a country committed to and capable of progress – of moving forward toward an ideal vision.
Obama was supported by a coalition of minorities: African-Americans, Latinos, Asian-Americans, Muslim-Americans, gay and lesbian Americans, and an under-represented majority – women – all of whom perceive continuing inequalities and injustices that need to be remedied.
But the winners were all who believe that America is, in fact, dedicated to “equal justice under law,” the words emblazoned on the pediment of the Supreme Court.
In the election of an African-American president less than a half-century after the end of official racial segregation in much of the country, these Americans see the triumph of the values enshrined in the US Constitution over America’s legacy of social, political, and economic prejudice.
They see a president committed to the advancement of all Americans, regardless of race, gender, creed, ethnic origin, sexual orientation, handicap, or economic status.
They also see a country that truly does reflect the world, attracting immigrants from every nation and giving them an equal chance to succeed as Americans. And they see a president with a vision of a country that can rebuild its infrastructure, reform its health care, strengthen its educational system, and boost its economic prosperity in ways that require all citizens to contribute – and that will, in turn, allow all citizens to flourish.
But how is this vision connected to the resignation of Petraeus, a storied and much-decorated general before he took over the CIA, following the revelation that he had an extra-marital affair?
Judging by my Twitter feed, most foreign observers simply cannot understand why a man serving his country in one of its highest and most sensitive positions should step down over something that happened in his private life – something that directly affects only those involved and their families.
American culture, I explained, judges extra-marital affairs very harshly, so a senior official caught in such a position could easily be subject to blackmail – something that a CIA director, of all people, must avoid.
My foreign interlocutors replied that, with the affair now exposed, the blackmail threat has been removed, so Petraeus should stay in office.
Many Americans agree.
Indeed, Obama himself was reportedly reluctant to accept Petraeus’s resignation.
From my perspective, however, Petraeus did the right thing: resigning was the only course open to him if he is to have any chance of repairing his reputation.
Petraeus, after all, had been General Petraeus, a four-star general who had spent his life in the military, commanding the US missions in Iraq and Afghanistan.
He graduated from – and later taught at – the US Military Academy at West Point, an institution guided by the motto “Duty, Honor, Country.”
In our cynical age, many might scoff at such an old-fashioned motto (or, indeed, at the power of any motto or slogan).
West Point cadets do not.
As General Douglas MacArthur told them in 1962, those three words “build your basic character.
They mold you for your future roles as the custodians of the nation’s defense.
They make you strong enough to know when you are weak, and brave enough to face yourself when you are afraid.”
They teach you, he continued, “to master yourself before you seek to master others; to have a heart that is clean, a goal that is high.”
MacArthur’s rhetoric is stirring; some would say overblown.
The ideals he expressed are lofty; he himself fell short of them on more than one occasion.
But, by and large, the men and women of the US military believe in these ideals and do their best to live up to them, just as US citizens generally believe in their Constitution’s lofty words and seek to correct their national shortcomings.
Petraeus violated his own personal code of honor and duty toward his wife and family – and thus, in his eyes, toward his country, particularly to the men and women whom he was entrusted to lead at the CIA.
When his affair came to light, he faced up to his failure, took responsibility for the consequences, and did what he believed that duty, honor, and country required.
The hubbub of tawdry disclosures and investigations addressing every aspect of a widening scandal may well last for weeks.
In the meantime, Americans can only hope that their national elected representatives show an equal willingness to face up to and take responsibility for their failures, pettiness, and insistence on putting partisanship ahead of the country’s manifest and urgent needs.
These officials must now carry out their most fundamental duty: to govern.
They must be willing to negotiate in good faith and compromise in order to enact laws, solve problems, avert crises, and build faith in the future.
Let us hope that their oaths to defend and uphold the Constitution are more than just words.
मू़ढ़मतियों का पक्षसमर्थन
कॉनकॉर्ड, मैसाचुसैट्स - कल्पना कीजिए कि पक्षसमर्थकों के किसी समूह ने जनता को किसी ऐसे ख़तरे के बारे में सतर्क करने की कोशिश की जिसे वे महसूस करते थे, पर केवल साक्ष्यों से पता चला कि ख़तरा वास्तविक नहीं था, और अपने डर को फैलाकर, यह समूह लोगों को इस तरह व्यवहार करने के लिए प्रेरित कर रहा था जो आम जनता - और आपको - जोखिम में डाल रहा था। आप क्या करेंगे? सरकार को क्या करना चाहिए?
ऑस्ट्रेलिया की सरकार ने इस प्रश्न का उत्तर नाटकीय रूप से दिया है। उसने एक टीकाकरण-विरोधी पक्षसमर्थन समूह की कर-मुक्त धर्मादा हैसियत को इस आधार पर वापस ले लिया है कि टीकों के ख़तरे के बारे में उनकी डर फैलाने वाली गलत जानकारी से लोक स्वास्थ्य, विशेष रूप से बच्चों के स्वास्थ्य को ख़तरा है।
सरकार ने समूह से यह भी अपेक्षा की है कि वह अपना नाम ऑस्ट्रेलियन वैक्सीनेशन नेटवर्क से बदलकर ऑस्ट्रेलियन वैक्सीनेशन-स्कैप्टिक्स नेटवर्क कर ले ताकि पक्षसमर्थक का दृष्टिकोण साफ हो सके। “हम यह सुनिश्चित करना जारी रखेंगे कि वे स्वयं को टीकाकरण-विरोधी पक्षसमर्थन के रूप पेश करते हैं,” यह न्यू साउथ वेल्स के उचित व्यापार मंत्री स्टुअर्ट आइरेस ने कहा। “हम यह सुनिश्चित करना चाहते हैं कि वे कभी भी भ्रामक जानकारी प्रचारित न करें।”
यह वास्तव में ख़तरनाक क्षेत्र है। हालाँकि साक्ष्य से साफ पता चलता है कि टीकाकरण से ऐसे कोई नुकसान नहीं पहुँचते हैं जिनका इसके विरोधी हठपूर्वक दावा करते हैं कि इससे नुकसान होते हैं; किसी सरकार द्वारा बोलने पर प्रतिबंध लगाना चिंताजनक है। किसी भी मुक्त समाज को अपनी सरकार को यह निर्णय करने की अनुमति नहीं देनी चाहिए कि पक्षसमर्थक जिस किसी बात पर विश्वास करते हैं उसके आधार पर कौन-से पक्षसमर्थन समूह क्या कह सकते हैं।
लेकिन इस मामले में ऑस्ट्रेलियाई अधिकारियों की कार्रवाई पूर्णतः उचित, और अनिवार्य, लोक सेवा थी: यह ठोस और सुसंगत चिकित्सीय साक्ष्य पर आधारित लोक स्वास्थ्य और सुरक्षा की रक्षा करने के लिए थी।
साक्ष्य निर्णायक रूप से टीकाकरण-विरोधी पक्षसमर्थकों के इन दावों को खारिज करता है कि बाल्यावस्था में टीकाकरण से स्वलीनता और अन्य दीर्घ-कालीन स्नायुतंत्र विकास संबंधी क्षति पहुँचती है। फिर भी डर फैलानेवालों और लोभी मुनाफाखोरों का एक छोटा लेकिन मुखर स��ूह गलत बयानी और सफेद झूठ बोलकर यह प्रचार करता आ रहा है कि टीकाकरण से फायदा कम होता है और नुकसान ज्यादा।
फलस्वरूप, कुछ समुदायों में टीकाकरण की दरों में कमी हो रही है, विशेष रूप से जिनमें सरकार-विरोधी इच्छास्वातंत्रयवादियों या सादगीपूर्ण जीवन बिताने वाले पर्यावरणवादियों की संख्या बहुत अधिक है। फलस्वरूप, कुछ क्षेत्रों में खसरा और काली खाँसी (कुक्कुर खाँसी) जैसे रोगों के समुदाय-व्यापी "झुंड" प्रतिरक्षा स्तर उन स्तरों से कम हो गए हैं जो उन्हें सामान्य जनता में फैलने से रोकने के लिए आवश्यक हैं। जिन वयस्कों में टीके का असर क्षीण हो चुका है या 100% प्रभावशील नहीं है, वे अधिक संख्या में बीमार पड़ने लग गए हैं। जो शिशु काली खाँसी का टीका लगाए जाने के लिए बहुत छोटे हैं वे भी, बीमार पड़ते जा रहे हैं, उनमें से कुछ तो वास्तव में खाँसी और दम घुटने के कारण मरते जा रहे हैं।
इसलिए ऑस्ट्रेलिया की सरकार का निर्णय साफ तौर पर उचित है। यह सब होते हुए, उन ख़तरों से हमारी रक्षा करना जिनसे हम व्यक्तिगत रूप से स्वयं अपनी रक्षा नहीं कर सकते, हम सरकार को जो कुछ करने का अधिकार देते हैं, उसका प्रमुख हिस्सा है। जब साक्ष्य साफ हो जैसा कि टीकों के मामले में है - और परिणाम उतने गंभीर हों - तो सरकार का यह सुस्थापित प्राधिकार - वास्तव में दायित्व - है कि वह सार्वजनिक सुरक्षा के नाम पर कार्रवाई करे।
लेकिन टीकाकरण तो इस बात का केवल एक उदाहरण है कि पक्षसमर्थक वैज्ञानिक साक्ष्य को नकार कर जनता को किस प्रकार जोखिम में डाल रहे हैं। विचारधारा-आधारित मानव-प्रेरित ग्लोबल वार्मिंग को अस्वीकार करने से जलवायु-परिवर्तक उत्सर्जनों को कम करने या इस भारी संकट के बहुत अधिक स्पष्ट - और ख़तरनाक - परिणामों के लिए तैयारी करने के प्रयासों में बाधा आ रही है। बंदूक स्वामित्व के किसी भी विनियमन के निरंकुश विरोध के फलवरूप, विशेष रूप से संयुक्त राज्य अमेरिका में, घातक हथियारों को उन लोगों के हाथों से दूर रखना मुश्किल होता जा रहा है जो समाज के लिए खतरा पैदा करते हैं।
जैव-प्रौद्योगिकी, विशेष रूप से अनुवांशिकी संशोधित (जीएम) खाद्यों का प्रतिरोध करना एक अन्य उदाहरण है। कुछ अनुप्रयोग मानव स्वास्थ्य को भारी लाभ पहुँचा सकते हैं, लेकिन समाज को उनसे मिलनेवाले लाभ नहीं मिल पा रहे हैं - और परिणामस्वरूप लोगों को को तकलीफ हो रही है और वे मर रहे हैं - क्योंकि बड़ी कंपनियों, वाणिज्यिक कृषि, या आम तौर पर आधुनिक प्रौद्योगिकियों को मूल रूप से नापसंद करने के कारण विरोधी सभी जीएम अनुप्रयोगों को अस्वीकार कर देते हैं।
“सुनहरी चावल” के बारे में सोचें जो एक जीएम संकर किस्म है जिसमें उन गाजरों के जीन्स होते हैं जिनसे विटामिन ए बनता है। एक हालिया अध्ययन से यह पता चला है कि केवल भारत में सुनहरी चावल को यदि 2002 में तब स्वीकार कर लिया जाता जब वह तकनीकी रूप से तैयार था, तो इससे उन लोगों के 1.4 मिलियन विकलांगता-समायोजित जीवन वर्ष बचाए जा सकते थे जो इसके बिना विटामिन ए की कमी के कारण अंधेपन या मौत के शिकार हुए।
अब पक्षसमर्थकों पर हल्ला बोलने का समय है क्योंकि उनके मूल्य-आधारित विचार स्पष्ट वैज्ञानिक साक्ष्य का खंडन करते हैं और आपको और मुझे जोखिम में डालते हैं। वैज्ञानिकों को चाहिए कि वे खुलकर बोलें, जैसा कि उन्होंने हाल ही में इंग्लैंड में किया था, जहाँ पर गेहूँ की एक नई नस्ल का परीक्षण करनेवाले शोधकर्ताओं ने जीएम-विरोधी पक्षसमर्थकों को सार्वजनिक बहस के लिए चुनौती दी थी। पक्षसमर्थकों ने मना कर दिया, परंतु सुनियोजित रूप से क्षेत्र परीक्षणों पर हमले करना जारी रखा जिससे उन कार्यकर्ताओं के प्रति जनता के समर्थन में कमी आई।
आपको और मुझे तथा हमारे साथी नागरिकों को चाहिए कि किस समूह में शामिल होना है या उसकी वित्तीय रूप से सहायता करनी है यह चुनकर उन्हें पीछे धकेल दें। हमें लंबित विधेयक के बारे में सार्वजनिक सुनवाइयों और साक्ष्य में उन्हें खदेड़ने की ज़रूरत है, और बहुत अधिक जोशीली आवाज़ों को हमारे राजनीतिज्ञों और नीति-निर्माताओं पर ऐसे चुनावों के रूप में हावी नहीं होने देना चाहिए जिनमें सबसे अधिक मुखर थोड़ी-सी आवाज़ों को मान लिया जाए, लेकिन समाज उससे होनेवाले लाभ से पूरी तरह वंचित रह जाता है। और, जब साक्ष्य साफ हो और ख़तरा सामने हो, तो सरकारों को चाहिए कि वे उन्हें पीछे धकेल दें, जैसा कि ऑस्ट्रेलिया ने किया है।
किसी भी लोकतंत्र में हमेशा भावनाओं और मूल्यों को अभिव्यक्त करने का अधिकार होना चाहिए। हमें समाज को आगे बढ़ाने के लिए पक्षसमर्थकों के अपार जुनून की ज़रूरत है। लेकिन जब इन जुनूनों के कारण तथ्यों की अनदेखी की जाती है और ये हमें जोखिम में डालते हैं, तो यह पूर्णतः उचित है कि लोक स्वास्थ्य और सुरक्षा के नाम पर आप और मैं और हमारी सरकारें सभी यह कहें कि, “बस, अब बहुत हो चुका।”
A Wrong Turn for Human Rights
NEW YORK – The world has plunged into a period of brutality, with impunity for the perpetrators of violence.
Syria is suffering untold civilian casualties as a divided United Nations Security Council sits on the sidelines.&nbsp;Gaza was pummeled to dust yet again with the world watching on.&nbsp;Iraq is in flames, with no end in sight.
Atrocities are mounting in South Sudan and the Central African Republic, which are also being swept by an epidemic of sexual violence.
Even Europe is not immune: a civilian aircraft was shot down over a conflict zone in eastern Ukraine, and officials were prevented from investigating.
Twenty-five years after the fall of the Berlin Wall, and more than a decade after the establishment of the International Criminal Court (ICC), shockingly little is being done to stop these abuses, and the prospects of the victims ever getting justice, let alone bringing the perpetrators to account, seem ever more remote.
For many years, the world seemed to be progressing toward greater recognition of human rights and demands for justice.
As democracies emerged in Latin America and Central and Eastern Europe in the 1980s and 1990s, these issues assumed increasing importance.
Although wars, conflicts, and atrocities continued, the global powers tried, and occasionally managed – albeit chaotically and usually late – to stop the killing.
Moreover, the international community created frameworks for justice to deal with the consequences of violence, a move that was scarcely imaginable during the Cold War.
New UN-backed international and hybrid tribunals were created to bring to account perpetrators of atrocities in the Balkans, Rwanda, Sierra Leone, and Cambodia.
The ICC, with jurisdiction over atrocities committed in 122 member states, was established to try cases referred to it by state parties or the Security Council (even though three permanent members – the United States, Russia, and China – have not ratified or acceded to the Rome Statute, which places parties under ICC jurisdiction).
In addition, many governments, with UN support, created mechanisms for transitional justice at home, including more than 40 “truth commissions” (such as in Argentina, El Salvador, East Timor, Morocco, and South Africa), reparation programs, and prosecutions.
None of these efforts has been perfect, but they have given victims a voice and recognized their suffering, while signaling to culprits that their crimes will not be forgotten.
Such measures have also deeply affected, and in some cases transformed, public discourse for the better.
Today, however, the international community appears to be backsliding on its human-rights commitments.
The world’s emerging powers lack any sense of urgency in addressing abuses, preferring the pursuit of narrower, short-term interests to investing in long-term peace and justice.
Without robust support from the international community, the institutions of justice are coming under pressure – and losing their momentum.
Several countries have attacked the ICC;
African Union members want heads of state to be immune from prosecution, thus undermining a fundamental principle of the court.
To be sure, many states undergoing political transition are doggedly pursuing some form of justice.
For example, justice and human rights are at the heart of the historic peace talks in Colombia.
Despite the collapse of the Arab Spring, Tunisia is pressing ahead with reforms, including the creation of a Truth and Dignity Commission.
But these societies may find it difficult to address adequately their troubled pasts without the support of international institutions.
Elsewhere, the fight for human rights might become virtually impossible.
Indeed, it will be hard enough to defend the human-rights gains made since the end of the Cold War, much less to expand them.
Fortunately, governments’ growing reticence about progress on human rights – if not outright obstruction – will not stop civil-society groups from continuing their fight for justice.
Groups like is Argentina’s Mothers of Plaza de Mayo and the Mothers of Srebrenica have always bravely led the way; they will, no doubt, continue to do so.
But the absence from this process of key governments, especially the emerging powers, threatens to end the world’s all-too-brief era of accountability.
It is time for the international community to redouble its resolve, regain its sense of purpose, and reaffirm, in both word and deed, its commitment to human rights and a more just world.
Davos Man’s Depression
NEW YORK – For 15 years, I have attended the World Economic Forum in Davos. Typically, the leaders gathered there share their optimism about how globalization, technology, and markets are transforming the world for the better.
Even during the recession of 2001, those assembled in Davos believed that the downturn would be short-lived.
But this time, as business leaders shared their experiences, one could almost feel the clouds darkening.
The spirit was captured by one participant who suggested that we had gone from “boom and bust” to “boom and Armageddon.”
The emerging consensus was that the IMF forecast for 2009, issued as the meeting convened, of global stagnation – the lowest growth in the post-war period – was optimistic.
The only upbeat note was struck by someone who remarked that Davos consensus forecasts are almost always wrong, so perhaps this time it would prove excessively pessimistic.
Equally striking was the loss of faith in markets.
In a widely attended brainstorming session at which participants were asked what single failure accounted for the crisis, there was a resounding answer: the belief that markets were self-correcting.
The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing.
So did inflation targeting: the excessive focus on inflation had diverted attention from the more fundamental question of financial stability.
Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory; now, the crisis provided further skepticism.
While no one from either the Bush or Obama administrations attempted to defend American-style free-wheeling capitalism, European leaders argued for their “social market economy,” their gentler form of capitalism with its social protections, as the model for the future.
And its automatic stabilizers, with spending automatically increasing as economic woes increased, held out the promise of moderating the downturn.
Most American financial leaders seemed too embarrassed to make an appearance.
Perhaps their absence made it easier for those who did attend to vent their anger.
But business leaders from the “real” sector and the few labor leaders who work hard at Davos each year to advance a better understanding of the concerns of working men and women among the business community were particularly angry at the financial community’s lack of remorse.
A call for the repayment of past bonuses was received with applause.
Indeed, some American financiers were especially harshly criticized for seeming to take the position that they, too, were victims.
The reality is that they were the perpetrators, not the victims, and it seemed particularly galling that they were continuing to hold a gun to the heads of governments, demanding massive bailouts and threatening economic collapse otherwise.
Money was flowing to those who had caused the problem, rather than to the victims.
Worse still, much of the money flowing into the banks to recapitalize them so that they could resume lending has been flowing out in the form of bonus payments and dividends.
The fact that businesses around the world were not getting the credit they need compounded the grievances expressed at Davos.
This crisis raises fundamental questions about globalization, which was supposed to help diffuse risk.
Instead, it has enabled America’s failures to spread around the world, like a contagious disease.
Still, the worry at Davos was that there would be a retreat from even our flawed globalization, and that poor countries would suffer the most.
But the playing field has always been unlevel.
How could developing countries compete with America’s subsidies and guarantees?
So how could any developing country defend to its citizens the idea of opening itself even more to America’s highly subsidized banks?
At least for the moment, financial market liberalization seems to be dead.
The inequities are obvious.
Even if poor countries were willing to guarantee their deposits, the guarantee would mean less than that from the United States.
This partly explains the curious flow of funds from developing countries to the US – from whence the world’s problems originated.
Moreover, developing countries lack the resources to engage in the massive stimulus policies of the advanced countries. Making matters worse, the IMF still forces most countries that turn to it for help to raise interest rates and lower spending, worsening the downturns.
And, to add insult to injury, banks in advanced countries, especially those receiving aid from their governments, seem to be pulling back from lending in developing countries, including through branches and subsidiaries.
So the prospects for most developing countries – including those that had done everything “right” – are bleak.
As if all this were not enough, as the Davos meeting opened, America’s House of Representatives passed a bill requiring American steel to be used in stimulus spending, despite the G-20’s call to avoid protectionism in response to the crisis.
To this litany of concerns we can add the fear of borrowers that the massive American deficits would drain the supply of global savings, and worries of holders of US dollar reserves, that America may be tempted to inflate away its debt. At Davos, those who trusted the US not to inflate away its debt intentionally worried that it might happen unintentionally.
There was little confidence in the none-too-deft hand of the US Federal Reserve – its reputation marred by massive monetary-policy failures in recent years – to manage the massive buildup of debt and liquidity.
President Barack Obama seems to be offering a needed boost to American leadership after the dark days of George W. Bush; but the mood in Davos suggests that optimism and confidence may be short-lived.
America led the world in globalization.
With American-style capitalism and America’s financial markets in disrepute, will America now lead the world into a new era of protectionism, as it did once before, during the Great Depression?
Deadlock in Durban
NEW YORK – The 17th conference of the UN Framework Convention on Climate Change, popularly known as COP-17, is taking place in Durban, South Africa, at a critical moment, as the historic 1997 Kyoto Protocol is set to expire next year.
But, like the climate-change conferences in Copenhagen in 2009 and in Cancún in 2010, COP-17 can be expected to spend much and produce little.
Indeed, the extravagance of these conferences seems to grow, rather than shrink, as their dismal results become more apparent.
COP-15 in Copenhagen lasted 12 days, and is estimated to have attracted 15,000 delegates and 5,000 journalists.
The carbon emissions created by so many people flying to Denmark was real, while the emissions targets that the conference sought remained beyond reach.
That will be true in Durban as well – and on an even greater scale.
The real problem is that the expectations concerning meaningful action on climate change, as opposed to gimmicks such as US President Barack Obama’s last-minute arrival and minuscule gestures in Copenhagen, are now lower than ever.
There are two problems that cannot be wished away.
First, the United States under Obama’s ineffective leadership has drifted yet further into a “What’s in it for me?” attitude on key issues requiring international action.
In place of what the economist Charles Kindleberger once called an “altruistic hegemon,” the America that the world now faces is what I call a “selfish hegemon.”
Thus, the US has virtually pulled out of the Doha Round of multilateral trade negotiations, with Obama acquiescing to greedy business lobbies that will not settle unless more of their demands are met.
But not only has Obama abandoned Doha; he has also seriously endangered the multilateral trading system by diverting US efforts and resources to discriminatory bilateral trade deals and, most recently, to the Trans-Pacific Partnership, which will principally aid countries that are worried about an aggressive China and seek political security rather than increased trade.
The same is true of environmental action: after Australia’s belated ratification of the Kyoto Protocol in 2007, the US remains the only country that has not ratified the agreement.
The second problem is that the sheer weight of the US in international affairs, though diminished nowadays, has nonetheless led to a corruption of the principles that should underpin a new climate-change treaty to succeed the Kyoto Protocol.
For example, unlike the World Trade Organization, whose dispute-settlement mechanism imposes penalties for abandoning negotiated reductions of trade barriers, the targets for emission reductions are not binding and enforceable commitments.
The US has not agreed to accept such sanctions for failing to meet emissions targets; but, without penalties, the exercise is largely futile and only encourages cynicism about the effort to combat climate change.
Moreover, abandoning the Kyoto Protocol’s exemption of developing countries from obligations for current emissions, the US has insisted on obligations from China and India that reflect a common form of “taxation” of emissions.
But there are persuasive reasons why these countries insist that the obligations must instead reflect per capita emissions, a criterion that would require far greater emission cuts by the US than its leaders now contemplate.
Besides, these countries correctly argue that the tradeoff between action on climate change and poverty reduction is more compelling for them at their level of per capita income, unless they can access newly emerging technologies at low cost.
This demand suggests that the US should subsidize the flow of technology to India and China from US firms holding patents, which is highly impractical.
That is where the $100 billion Global Climate Change Fund, promised at the Cancún COP-16 conference, comes in.
Unfortunately, even environmental icons like Al Gore in the US are so heavily invested in new green technology that their self-interest is tied up in this fund being spent on developing privately owned new technologies that are protected by patents.
The new “Green Revolution” seeds that the Nobel laureate agronomist Norman Borlaug developed with public money were freely available to all users anywhere.
The technology developed by the money spent from the Global Climate Change Fund also should be equally available to all, including India and China, which would then enable them to agree to more emissions cuts.
Indeed, even the contributions to the Fund should have reflected the past damage by the developed countries over the course of a century of carbon emissions – an obligation based on the well-established tort principle that the US has accepted for domestic pollution.
But here, too, the US has rejected the idea outright.
Several such sensible ways to design the Kyoto Protocol’s successor treaty have been undermined by efforts to accommodate inappropriate US-led demands and objections, resulting in the impasse that became evident at the COP conferences in Copenhagen and Cancún.
Those who do not believe in magic know better than to hope that it will somehow disappear in Durban.
Death and Tobacco Taxes
A global killer is ripping through the world’s poorer countries largely unchecked.
Within 25 years, it will cause 10 million deaths a year worldwide –more than malaria, maternal deaths, childhood infections, and diarrhea combined .
Over half of the dead will be aged 30 to 69, losing about 25 years of life expectancy.
The culprit?
Tobacco.
The same addiction that became the top preventable cause of death in Western countries has made big inroads in developing countries.
Smoking killed 100 million people in the twentieth century, mostly in developed countries.
On current trends smoking will kill about one billion people in the twenty-first century, mostly in developing countries.
In India, smoking triples the risk of death from tuberculosis in men and women and may even contribute to the spread of tuberculosis to others.
About 1 million people per year will soon die from smoking in China and India.
Perhaps 150 million young adults will be killed by tobacco in these two countries alone, unless there is widespread cessation.
But the death tolls of the past need not become the world’s future.
We know how to control tobacco use.
Cessation by the 1.1 billion current smokers is needed to lower tobacco deaths over the next few decades.
Reduced uptake of smoking by children would save lives chiefly after 2050.
Quitting works: even those who stop smoking in their 40’s lower their risk of death remarkably, and those who quit in their 30’s have death risks close to lifelong non-smokers.
Tobacco tax increases, dissemination of information about the health risks of smoking, smoking bans in public, complete bans on advertising and promotion, and cessation therapies are effective in helping smokers to quit.
Tobacco taxes are probably the single most cost-effective intervention for adult health in the world.
A tripling of the excise tax would roughly double the price of cigarettes (as has happened in New York City), preventing about three million deaths per year by 2030.
Most OECD countries began to take tobacco control seriously in the last two decades, and have decreased male tobacco deaths since.
But effective tobacco control measures are not underway in developing countries.
Taxes are about 80% of the street price of cigarettes in Toronto, but less than 30% in Beijing or Delhi.
In many countries, tobacco taxes have fallen in real terms.
Knowledge of the health risks from smoking is low: 61% of Chinese smokers in 1996 thought tobacco did them “little or no harm.”
Opposition from the tobacco industry is an obvious obstacle to tobacco control.
Spurious economic arguments against higher taxes have been debunked in the West, but are still commonly repeated in the finance ministries of developing countries.
Money not spent on tobacco would be spent on other goods and services.
Indeed, even sharply reduced demand for tobacco would not mean unemployment in most countries.
Tax hikes lower consumption and raise revenue in the medium-term: a 10% higher tax means about 7% higher revenue over the medium term.
These funds are a precious resource in fighting poverty.
In China, a 10% higher price would reduce consumption by 5% and raise enough excise revenue to pay for a basic health package for 33 million poor rural Chinese.
Even in the face of smuggling, higher taxes reduce consumption and raise revenue.
Smuggling is abetted by the tobacco industry in order to gain market share and scare finance ministers into lowering taxes.
But governments can counter it in several ways: local language warnings with a prominent tax stamp on cigarette packs are one example.
Another common argument against tobacco control – that if people are not harming others, governments should not interfere with their individual decisions – is at odds with both common sense and the evidence.
Most smokers become addicted as adolescents or young adults, when shortsightedness and lack of information make rational decisions difficult.
In countries with good information about tobacco risks, by the time child smokers become adults, more than 80% wish they never started.
Recently, no less than William F Buckley has argued that nicotine addiction cannot be dismissed as free choice.
Moreover, recent economic research finds that higher taxes are justified on welfare grounds, because the costs to smokers are huge (even though the external costs to others might be small), and that higher cigarette taxes do not hurt the poor (since the self-control value of higher taxes helps the poor more).
Nobel laureate Amartya Sen wisely reminds us that “it is important that the practical case for tobacco control is not dismissed on the basis of an incomplete libertarian argument.” The agenda is clear.
Governments must take tobacco seriously as a leading killer of adults worldwide.
International poverty goals must include tobacco control.
Developing countries must not be fooled by the empty economic arguments that paralyzed control efforts in the West for so long.
The Gates Foundation can fund action and research.
There are hopeful signs: more than 160 countries have signed the World Health Organization’s global tobacco control treaty, and the Caribbean heads of state have recently declared they want to tackle tobacco together.
About 150-180 million tobacco deaths would be avoided before 2050 if the proportion of adults in developing countries who quit smoking increases from below 5% today to 30-40% by 2020 (like current quit rates in Canada).
Because control policies deter children from starting, even greater benefits can be expected beyond 2050.
Benjamin Franklin once said, “In this world, nothing can be said to be certain, except death and taxes.”
Yet we have a tax that could prevent hundreds of millions of premature deaths.
It is time to use it.
Death by Renminbi
WASHINGTON, DC – Over the last several weeks, the dollar’s depreciation against the euro and yen has grabbed global attention.
In a normal world, the dollar’s weakening would be welcome, as it would help the United States come to grips with its unsustainable trade deficit.
But, in a world where China links its currency to the dollar at an under-valued parity, the dollar’s depreciation risks major global economic damage that will further complicate recovery from the current worldwide recession.
A realignment of the dollar is long overdue.
Its overvaluation began with the Mexican peso crisis of 1994, and was officially enshrined by the “strong dollar” policy adopted after the East Asian financial crisis of 1997.
That policy produced short-term consumption gains for America, which explains why it was popular with American politicians, but it has inflicted major long-term damage on the US economy and contributed to the current crisis.
The over-valued dollar caused the US economy to hemorrhage spending on imports, jobs via off-shoring, and investment to countries with under-valued currencies.
In today’s era of globalization, marked by flexible and mobile production networks, exchange rates affect more than exports and imports.
They also affect the location of production and investment.
China has been a major beneficiary of America’s strong-dollar policy, to which it wedded its own “weak renminbi” policy. As a result, China’s trade surplus with the US rose from $83 billion in 2001 to $258 billion in 2007, just before the recession.
So far in 2009, China’s surplus has accounted for 75% of the total US non-oil-goods trade deficit.
The under-valued renminbi has also made China a major recipient of foreign direct investment, even leading the world in 2002 – a staggering achievement for a developing country.
The scale of recent US trade deficits was always unsustainable, and the dollar has therefore fallen against the yen, euro, Brazilian real, and Australian and Canadian dollars.
But China retains its under-valued exchange rate policy, so that the renminbi has appreciated relatively less against the dollar.
When combined with China’s rapid growth in manufacturing capacity, this pattern promises to create a new round of global imbalances.
China’s policy creates adversarial currency competition with the rest of the world.
By maintaining an undervalued currency, China is preventing the US from reducing its bilateral trade deficit.
Furthermore, the problem is not only America’s.
China’s currency policy gives it a competitive advantage relative to other countries, allowing it to displace their exports to the US.
Worse still, other countries whose currencies have appreciated against the renminbi can look forward to a Chinese import invasion.
China’s currency policy means that dollar depreciation, rather than improving America’s trade balance and stanching its leakage of jobs and investment, may inadvertently spread these problems to the rest of the world.
In effect, China is fostering new imbalances at a time when countries are struggling with the demand shortfall caused by the financial crisis.
The dollar is part of an exchange-rate Rubik’s cube.
With China retaining its under-valued currency policy, dollar depreciation can aggravate global deflationary forces.
Yet a mix of political factors has led to stunning refusal by policymakers to confront China.
On the US side, a lingering Cold War mentality, combined with the presumption of US economic superiority, has meant that economic issues are still deemed subservient to geo-political concerns.
That explains the neglect of US-China economic relations, a neglect that is now dangerous to the US, given its weakened economic condition.
With regard to the rest of the world, many find it easy to blame the US, often owing to resentment at its perceived arrogance.
Moreover, there is an old mentality among Southern countries that they can do no wrong in their relationships with the North, and that they should exhibit solidarity with each other regarding those relationships.
Finally, all countries likely have been shortsighted, imagining that silence will gain them commercial favors from China.
But that silence merely allows China to exploit the community of nations.
The world economy has paid dearly for complicity with and silence about the economic policies of the last 15 years, which have culminated in the deepest and most dangerous recession since the 1930’s.
It will pay still more if policymakers remain passive about China’s destructive currency policy.
Death-Defying Europe
As the European Union prepares to celebrate the 50th anniversary of the Treaty of Rome later this month, the EU is widely perceived to be on its knees.
European integration, is felt to have, somehow met its Waterloo in 2005, when Dutch and French referendums unexpectedly torpedoed the draft EU constitution.
Media stories have focused on the paralysis that is said to have gripped EU decision-making, but the reality is different.
Far from suffering an irreversible decline in its fortunes, the EU has been has been conducting business as usual, quietly getting on with the job of constructing new policies and projects.
Take a look at some recent headlines.
The EU is putting together an energy and environment strategy that aims to end the self-defeating competition within Europe for oil and gas, while also establishing Europe as global leader in the effort to halt climate change.
The Union’s common foreign and security policy may not yet mean that Europe speaks to the world with one voice, but it is taking shape and has already healed some of the wounds inflicted by disagreements over the war in Iraq.
Of equal importance, Europe’s economic integration continues to move ahead, with the euro buoyant and a single marketplace for financial services now coming into sight.
The starting point for the EU’s unhappy bid to create a shared constitution had been fears that its decision-making mechanisms were being overloaded by the accession of so many new members, first in May 2004 and again at the beginning of this year.
The constitutional treaty was originally designed to streamline the system, and it was only later that it was over-enthusiastically expanded into the lengthy and pompous document that is now a dead letter.
Yet there are signs that the EU machine has so far been coping rather well without the constitution.
The volume of EU rule-making last year was almost exactly the same as 10 years ago.
During 2005 and 2006, the flow of EU directives, regulations, and associated reports, green papers, and communications continued at the same rate as the 2,800 a year chalked up in 1996, when Jacques Delors was at the helm of the European Commission and the EU project was being widely hailed as unstoppable.
Brussels is nowadays a government town akin to Washington, D.C, even if it is also a place where complex negotiations among the Union’s 27 members grind forward only slowly.
On top of all this, the European economy is looking brighter.
In Germany, the EU’s economic locomotive, unemployment is down and business confidence is up.
And throughout the EU, the positive effects of the enlargement strategy that has brought in 10 ex-communist countries over the past three years looks to be generating a new self-confidence.
None of this should be surprising.
It would take a good deal more than a hiccup in the EU’s delicate political process to bring integration to a standstill, let alone put it into reverse.
The global pressures pushing European nations closer together are as strong as ever, so the impasse over the EU’s constitutional treaty was never going to push Europe off course for very long.
The path ahead is far from clear, of course.
But a consensus does seem to be emerging on how the EU’s future will pan out.
Diplomats and policy analysts are generally agreed that key elements of the failed constitution will be rescued from the wreckage and turned into something along the lines of the “mini-treaty” that Nicolas Sarkozy, the front-runner in the French presidential race, proposed last autumn at a Friends of Europe meeting in Brussels.
The details are still anyone’s guess, but the consensus view is that the EU will have many of the constitution’s most important procedural mechanisms by sometime next year.
The EU is far from being out of the woods.
Creating coherent policies is unremittingly difficult when there are so many nations, each with a different political culture.
But the idea that the constitutional crisis is holding everything back is mistaken.
The much greater problem has been that EU governments have been concentrating so hard on the details of “building Europe” that they have neglected broader strategic questions.
There is little or no discussion of where Europe is heading and what sort of Europe its people want.
It is strange but true that even American unilateralism under President George W. Bush has not provoked a genuine debate over Europe’s future role in the world.
The EU’s problem is not its so-called “constitutional crisis,” but rather its lack of a recognizable political identity.
Death in Lhasa
PRAGUE – On April 8, two Tibetans, Lobsang Gyaltsen and Loyak, were sentenced to death by the Municipal Intermediate People’s Court in Lhasa.
Both men were convicted of committing arson that caused death against Chinese owned businesses. Another two Tibetan activists, Tenzin Phuntsok and Kangtsuk, received a suspended death sentence, and a third, Dawa Sangpo was sentenced by the same court to life imprisonment.
These latest verdicts are the first death sentences meted out by Chinese courts to those who took part in protests that swept Lhasa and other Tibetan cities in the spring of 2008.
Since these trials took place in complete isolation from the rest of the world, with no impartial observers or foreign journalists present, it is to be doubted, strongly, that the defendants received anything remotely like a fair trial in accordance with international judicial standards.
We therefore appeal to the authorities of the People’s Republic of China to rescind the decision to execute these protesters, and to provide them with an opportunity to be re-tried in a judicial process that is more in keeping with the international standards that China says that it adheres to.
And the first standard that must be met is that the trial, first of all, must be verifiable and open to international observation.
But beyond the grim fates of the Tibetans that have now been sentenced by the Tibetan court to death or life imprisonment for the protests that took place a year ago, we are also concerned about the hundreds of other detained protesters who have yet to be tried by the Municipal Court in Lhasa.
Indeed, it is our belief that the recent death sentences could mark the onset of an avalanche of highly doubtful Court rulings in Tibet, which could lead to a worrying number of executions in that tense and troubled region.
If China is to gain an international position of respect commensurate with its position in the world economy, as well as to benefit from its rise to pre-eminence among the world economic powers, it is vital that China’s representatives in Tibet acknowledge the need for due legal process for all of its citizens, including its ethnic minorities.
Tied to that sense of due process of law is a call for the Chinese leadership to allow representatives of the international community to have access to Tibet and its adjoining provinces.
For these provinces have now been, for the most part, cut off from international observation ever since the protests that wracked Tibet last spring.
Only by making its rule in Tibet more transparent for the rest of the world can the government of the People’s Republic of China dispel the dark shadows of suspicion that now hang over Tibet. Only by allowing an international presence to report, dispassionately and truthfully, on what is happening in Tibet, will China’s government dispel the idea that its continued rule there means that even more severe human rights abuses will be inflicted on members of China’s ethnic minorities.
Deaths of the Poor and Responsibilities of the Rich
In a shocking book of last year entitled " Late Victorian Holocausts ," Mike Davis described the British Empire's attitude to famines in India and elsewhere.
When monsoons failed, millions of Indians faced imminent death.
Food could have been transported by rail within British India to save many starving people, but the British believed in a hands-off, laissez faire policy.
Starvation was part of nature.
Actually, British attitudes were even more shocking.
British officers believed that they were being brave by not being swayed by "emotions"!
They congratulated themselves on their stiff upper lips.
Unbelievable nowadays?
No, for the US is doing something similar.
America has idly stood by as millions of Africans die of AIDS.
Recently, the US Treasury Secretary and Health Secretary visited Africa and looked dying people in the eye.
Such people are dying not because early death is inevitable, but because they cannot afford the medicines to keep themselves alive.
If every American gave $10 per year to this cause, over 1 million Africans could be saved from AIDS death each year, with money left over to fight the disease.
As recent studies show, if the 1 billion people in the rich world gave $10 per year, the resulting total of $10 billion could finance a serious battle against AIDS, TB, and malaria.
The new Global Fund to Fight AIDS, TB, and Malaria was started this year, but rich countries contributed less than one-tenth of the money it needs.
In its first months of operation the Fund committed all of the money that it received from rich countries.
Neither the US nor Europe has stepped forward with more money.
Every excuse is made to avoid giving what is needed.
Senior US officials continue to say that there is no infrastructure to dispense medicines, even as these officials visit hospitals that possess the necessary doctors, clinics, nurses, and pharmacies.
As doctors patiently explain, what they are missing is medicine, because they lack the money to buy needed drugs.
When US Treasury Secretary Paul O'Neill visited an AIDS clinic in Soweto, South Africa, doctors told him that they could increase by ten times the number of people treated with AIDS drugs if sufficient money was available.
Twenty-two years into the AIDS pandemic the Bush Administration insists that it won't let emotion push it into action.
We need a plan, says the US; we cannot throw money at the problem.
As in the late 19 th century, we have the spectacle of the world's superpower treating indifference as a sign of seriousness!
The truth is simpler.
Africans barely count in American politics.
Africans don't vote; they don't buy US products; they don't threaten violence.
They are simply poor, hungry, and disease-ridden.
Few rich countries do better than the US.
I single out America not because it is unique in its neglect, but because it is unique in its capacity to lead.
Europe and Japan have also avoided the financial contributions to AIDS control that could keep millions of HIV-infected Africans alive.
In coming months, rich countries will face three opportunities to mend their ways.
In early June, the UN's Food and Agriculture Organization will host the World Food Summit.
With nearly 900 million chronically hungry people around the globe, the Summit presents an opportunity to reverse the collapse of financial assistance for food production to poor countries.
As with AIDS, a few dollars per person of assistance for agriculture each year could spare millions from hunger.
Later in June, rich countries will hold their annual G-7 Summit.
They have promised to make Africa its centerpiece.
More money for Africa rather than more soothing words will be the true test of the summit.
In August, political leaders from the entire world will gather in Johannesburg for the World Summit on Sustainable Development.
Rich countries will once again have a chance to be true partners of the poor.
The rich may feel that clever words will absolve them of responsibility, but the hungry and dying stand witness to the tragic realities.
Debt and America’s Decline
MILAN – Italians and other Europeans have serious problems addressing their own national debts, public and private, so it may seem immodest for a European to discuss America’s growing and grave debt problem.
But the fiscal realities on both sides of the Atlantic nowadays are very similar, and only lingering trust in the promise of America keeps alive the expectation among some Europeans that some grand American coup de théâtrewill resolve the country’s dire debt situation.
Of course, many Americans recognize the scale of the country’s debt burden.
Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff and thus America’s highest ranking military officer, recently said, “The greatest danger to American security comes from the national debt.” Four Americans out of ten agree with him, whereas less than three in ten deem terrorism or Iran more dangerous.
America’s Great Power status has always been tied to its level of debt.
Indeed, it was the absence of debt that marked the United States’ emergence as a world power between 1914 and 1917.
The US went from owing $3 billion (mostly to Great Britain) to being a net creditor for about the same amount, thanks to $6 billion in war credits given to the Western Allies.
A further $3 billion in credits for European post-war reconstruction cemented America’s status as the world’s premier creditor nation, with its surplus equal to roughly 8% of GNP at the time.
This shift meant that the US had essentially replaced Britain as the heart of the world’s financial and monetary system.
Previously, thanks to the gold standard and Britain’s political stability, the City of London had been the world’s key source of capital and financial guarantees for more than a century.
The new era began suddenly in January 1915, when, after a few months of deep uncertainty, gold started to be shipped to New York in increasing quantities.
A few months earlier, the veteran Boston financier Henry Lee Higginson had sketched in a letter to President Woodrow Wilson what America’s new strategy should be. “This is our chance to take first place,” he wrote.
America’s financial house had to be put in order, all debts repaid, and, as London had done for a long time, confidence had to be maintained, which meant guaranteeing the dollar’s convertibility into gold.
Alone among the world’s great nations, the US did manage to guarantee dollar convertibility throughout the Great War.
With peace, the dollar and Wall Street became the dominant force on the world’s financial landscape.
The financial-market rules established after 1933 by President Franklin Roosevelt’s New Deal enabled the dollar to replace the British pound at the center of the international system.
America’s role as the world’s banker went unchallenged for the next 40 years ago, until President Richard Nixon decoupled the dollar from gold.
Yet, even without the gold standard, America’s economic might, together with the recycling of petrodollars, kept the dollar on top.
Indeed, the US remained the world’s premier creditor nation until 1986-1987, when it became a debtor nation again.
In the two decades that followed, America’s debt usually was around $3 trillion, rising or falling with the exchange rate of the dollar.
Starting in 1990, the US began to import more and more capital, particularly from Asia.
In the 2000’s, China became the prime source of debt financing, and Americans were happy, because it enabled the US Federal Reserve to keep interest rates low.
There were some who foresaw danger.
The Swedish economist Axel Leijonhufvud foresaw asset-price inflation – houses in particular – and a worsening of credit quality.
Financial innovation soon made that prediction come true.
It is enough to remember that in 2008 there were only 12 public companies in the world with AAA credit ratings, but more than 60,000 – mostly American – triple-A structured financial products.
The US, the world’s banker, had mutated into the world’s hedge fund.
With that change, the banker’s traditional imperative to maintain fidelity and trust – to “keep faith,” as Higginson put it – was forgotten.
And it is in America’s public debt that the debris of its financial system’s broken promises are collected, just as Italy’s massive public debt reflects its past national prodigality.
The figures for the US are staggering.
Public debt includes not only the federal government’s current $13.2 trillion, but another $3 trillion owed by America’s states, counties, and cities.
In addition, there is the $3.9 trillion in debt owed by America’s government-backed housing-finance agencies (Fannie Mae, Freddie Mac, and others), which currently underwrite more than 90% of all US mortgages.
As a result, America’s public debt has reached roughly 140% of GDP.
The US Congress is well aware of what these numbers portend, but its members have chosen to avert their eyes.
Indeed, the president is no longer required to provide the usual five-year forecast of the country’s fiscal position. A one-year perspective is now deemed sufficient.
So, where does that leave the world economy?
There is no newly emerging Great Power that can assume responsibility for global finance, as there was in 1914.
Back then, Wall Street was ready for the job.
Someday, Shanghai and Hong Kong might be ready, but that possibility is of little help now.
Debt and Delusion
NEW HAVEN – Economists like to talk about thresholds that, if crossed, spell trouble.
Usually there is an element of truth in what they say. But the public often overreacts to such talk.
Consider, for example, the debt-to-GDP ratio, much in the news nowadays in Europe and the United States.
It is sometimes said, almost in the same breath, that Greece’s debt equals 153% of its annual GDP, and that Greece is insolvent.
Couple these statements with recent television footage of Greeks rioting in the street. Now, what does that look like?
Here in the US, it might seem like an image of our future, as public debt comes perilously close to 100% of annual GDP and continues to rise.
But maybe this image is just a bit too vivid in our imaginations.
Could it be that people think that a country becomes insolvent when its debt exceeds 100% of GDP?
That would clearly be nonsense.
After all, debt (which is measured in currency units) and GDP (which is measured in currency units per unit of time) yields a ratio in units of pure time.
There is nothing special about using a year as that unit.
A year is the time that it takes for the earth to orbit the sun, which, except for seasonal industries like agriculture, has no particular economic significance.
We should remember this from high school science: always pay attention to units of measurement.
Get the units wrong and you are totally befuddled.
If economists did not habitually annualize quarterly GDP data and multiply quarterly GDP by four, Greece’s debt-to-GDP ratio would be four times higher than it is now.
And if they habitually decadalized GDP, multiplying the quarterly GDP numbers by 40 instead of four, Greece’s debt burden would be 15%.
From the standpoint of Greece’s ability to pay, such units would be more relevant, since it doesn’t have to pay off its debts fully in one year (unless the crisis makes it impossible to refinance current debt).
Some of Greece’s national debt is owed to Greeks, by the way.
As such, the debt burden woefully understates the obligations that Greeks have to each other (largely in the form of family obligations).
At any time in history, the debt-to-annual-GDP ratio (including informal debts) would vastly exceed 100%.
Most people never think about this when they react to the headline debt-to-GDP figure.
Can they really be so stupid as to get mixed up by these ratios?
Speaking from personal experience, I have to say that they can, because even I, a professional economist, have occasionally had to stop myself from making exactly the same error.
Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity – or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories.
What is really happening in Greece is the operation of a social-feedback mechanism.
Something started to cause investors to fear that Greek debt had a slightly higher risk of eventual default.
Lower demand for Greek debt caused its price to fall, meaning that its yield in terms of market interest rates rose.
The higher rates made it more costly for Greece to refinance its debt, creating a fiscal crisis that has forced the government to impose severe austerity measures, leading to public unrest and an economic collapse that has fueled even greater investor skepticism about Greece’s ability to service its debt.
This feedback has nothing to do with the debt-to-annual-GDP ratio crossing some threshold, unless the people who contribute to the feedback believe in the ratio.
To be sure, the ratio is a factor that would help us to assess risks of negative feedback, since the government must refinance short-term debt sooner, and, if the crisis pushes up interest rates, the authorities will face intense pressures for fiscal austerity sooner or later.
But the ratio is not the cause of the feedback.
A paper written last year by Carmen Reinhart and Kenneth Rogoff, called “Growth in a Time of Debt,” has been widely quoted for its analysis of 44 countries over 200 years, which found that when government debt exceeds 90% of GDP, countries suffer slower growth, losing about one percentage point on the annual rate.
One might be misled into thinking that, because 90% sounds awfully close to 100%, awful things start happening to countries that get into such a mess.
But if one reads their paper carefully, it is clear that Reinhart and Rogoff picked the 90% figure almost arbitrarily.
They chose, without explanation, to divide debt-to-GDP ratios into the following categories: under 30%, 30-60%, 60-90%, and over 90%.
And it turns out that growth rates decline in all of these categories as the debt-to-GDP ratio increases, only somewhat more in the last category.
There is also the issue of reverse causality.
Debt-to-GDP ratios tend to increase for countries that are in economic trouble.
If this is part of the reason that higher debt-to-GDP ratios correspond to lower economic growth, there is less reason to think that countries should avoid a higher ratio, as Keynesian theory implies that fiscal austerity would undermine, rather than boost, economic performance.
The fundamental problem that much of the world faces today is that investors are overreacting to debt-to-GDP ratios, fearful of some magic threshold, and demanding fiscal-austerity programs too soon.
They are asking governments to cut expenditure while their economies are still vulnerable.
Households are running scared, so they cut expenditures as well, and businesses are being dissuaded from borrowing to finance capital expenditures.
The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial – and often irrelevant – constructs that they are.
Debt and Democracy
PRINCETON – The European Union’s sovereign-debt crisis constitutes a fundamental threat not only to the euro, but also to democracy and public accountability.
At the moment, Europe’s woes and dilemmas are confined to relatively small countries like Greece, Ireland, and Hungary.
But all of them look as if their governments have cheated on fundamental articles of the democratic contract.
The rotating presidency of the EU is about to shed a spotlight on one of these countries.
Hungary’s turn at the EU helm comes at a time of fierce debate over Prime Minister Victor Orbán’s alteration of constitutional law and suppression of press freedom, as well as a new round of worries about the country’s financial sustainability.
Hungary has many reasons to be sensitive to the issue of the political consequences of debt.
After all, Hungary still holds the world record for hyperinflation, with the currency debased by 1027 in the 1940’s, paving the way for the imposition of Communist dictatorship.
The EU’s debt arithmetic is uncertain and precarious.
Fiscal consolidation in the Mediterranean countries might just do the trick, and allow – at great cost – a return to normal financing arrangements.
But if market nervousness persists and interest rates remain high relative to rates for secure German debt, the debt burden will rapidly become unsustainable.
So it might be a good idea for the EU to prepare a mechanism that spells out how debt can be trimmed.
Many economists have argued this case on the basis of arithmetic calculation.
But the European Central Bank, notably by ECB board member Lorenzo Bini Smaghi, has elegantly spelled out the case against debt reduction – a case that is politically significant and deeply moral.
Indeed, the principle of not reneging on public debt is deeply intertwined with the development of legal security, representative government, and modern democracy.
In the wake of the Glorious Revolution of 1688, when Britain revolted against the spendthrift Stuart dynasty, the British government adopted a new approach to debt.
Voting on budgets in Parliament – a representative institution – ensured that the people as a whole were liable for the obligations incurred by their government.
A constitutional approach limited the scope for wasteful spending on luxurious court life (and on military adventure), which had been the hallmark of early modern autocratic monarchy.
The lesson of 1688 was reinforced by the next European revolutionary wave.
In the aftermath of the French Revolution and Napoleon, France was heavily in debt, and the revolutionary regimes had discredited themselves through paper-currency (assignat) inflation.
After the Congress of Vienna returned King Louis XVIII to the French throne, his advisers debated whether or not to recognize the debt incurred by Napoleon.
The decision not to default contributed to the legal security needed for the French economy to catch up with Britain’s industrial revolution.
The experience of wartime inflations and de facto defaults in the twentieth century made the theme of responsible finance a crucial part of a new European consensus.
A foundation of the European integration process was recognition of the importance of a stable currency to political legitimacy.
Indeed, the EU’s critical French-German axis was held together by the conviction that political order in a democracy depended on the security of debt.
In Germany, the expropriation of two generations of middle-class bond holders was seen as the outcome of the Kaiser’s war, and then of Hitler’s war – in other words, a result of democratic failure.
After inflation and unstable government, Charles de Gaulle rebuilt the French political system, but also the idea of the French nation, by championing currency stability.
He explicitly went back to the legacy of Napoleon, and argued that France could be stable only with a strong currency.
The financial revolution that swept the world over the last two decades seemed to sever the link between representative government and public finance.
Derivatives and other complex financial instruments seemed to offer a way to circumvent citizens’ responsibility for expenditure to which they had consented.
In other words, modern government finance had come to resemble sub-prime mortgages, which created the illusion of universal home ownership; rules and limits no longer applied.
Countries could practice generosity on the never never.
The apparently hard rules of the EU’s Maastricht Treaty and its Growth and Stability Pact, which impose a 3%-of-GDP ceiling on fiscal deficits and 60% on government debt, encouraged ingenious accounting to shift expenditure for purely cosmetic purposes.
The financial revolution went in parallel with the effective disenfranchisement of Europeans.
For the past 20 years, it looked as if power was being shifted to a technocratic elite.
Behind-the-scenes accounting tricks were accompanied by behind-the-scenes political tricks.
Citizens, unsurprisingly, complained about the declining legitimacy of EU institutions.
Similarly, in guaranteeing the debt of Irish banks in September 2008, the Irish government did something that no responsible government should have contemplated.
It took responsibility for obligations that amounted to a multiple of Ireland’s national income, driving up government debt to more than 1,300% of GDP.
Prime Minister Brian Cowen, who still defends this action, is likely to be massively punished in the next elections.
But Cowen’s actions were symptomatic of a broader failure: the fundamental link between the liability of citizens and taxpayers and the responsibilities of government had been broken.
The idea of shifting some part of EU members’ existing government debt to a European bond may be technically appealing, but it will work only if there is a return to the British principles of 1688 (or the principles of the American Revolution).
Taxpayers across the EU must have the sense that they control what they owe – and that they will not be held responsible for the mistakes and frauds of the unholy alliance between irresponsible finance and irresponsible government.
Deception by the Boatload
NEW DELHI – China’s announcement that its first aircraft carrier is ready to set sail as early as the end of this month has refocused attention on the country’s naval ambitions.
So, too, has the Pakistani defense minister’s disclosure that his country recently asked China to start building a naval base at its strategically positioned port of Gwadar, on the Arabian Sea.
Both revelations underscore China’s preference for strategic subterfuge.
After it bought the 67,500-ton, Soviet-era Varyag carrier – still little more than a hull when the Soviet Union collapsed – China repeatedly denied that it had any intention to refit it for naval deployment.
For example, Zhang Guangqin, Deputy Director of the Chinese State Commission for Science, Technology, and Industry for National Defense, said in 2005 that the Varyag was not being modified for military use.
However, work to refit the carrier had already begun in Dalian, China’s main shipyard.
In order to deflect attention from the real plan, the state-run media reported plans to turn the Varyag into a “floating casino” near Macau.
And, to lend credence to that claim, the two smaller Soviet-era aircraft carriers that were purchased with the Varyag in 1998-2000 were developed into floating museums.
The first official acknowledgement that China was turning the Varyag into a fully refurbished, deployable aircraft carrier came this month, just when it was almost ready to set sail.
And the acknowledgement came from General Chen Bingde, the chief of the People’s Liberation Army, in an interview with Global Times, the Communist Party’s hawkish mouthpiece.
Subterfuge is also apparent in China’s plans at Gwadar, where a Chinese-built but still-underused commercial port opened in 2007.
From the time construction of the port began, Gwadar was widely seen as representing China’s first strategic foothold in the Arabian Sea, as part of its strategy to assemble a “string of pearls” along the Indian Ocean rim.
It was known that Gwadar, which overlooks Gulf shipping lanes and is near the Iran border, would eventually double as a naval base.
Yet, all along, China continued to insist that Gwadar’s only role was commercial.
Not surprisingly, then, Pakistani Defense Minister Ahmed Mukhtar’s public comments about a naval base at Gwadar deeply embarrassed China’s government.
At the end of a recent visit to Beijing with Pakistani Prime Minister Yousaf Raza Gilani, Mukhtar reported that the Chinese government was more than happy to oblige whatever requests for assistance the Pakistani side made, including reaching an agreement to take over operation of the Gwadar port after the existing contract with a Singaporean government company expires.
China also made a gift to Pakistan of 50 JF-17 fighter jets.
More importantly, Mukhtar disclosed that Pakistan had asked China to begin building the naval base.
“We would be…grateful to the Chinese government if a naval base is…constructed at the site of Gwadar for Pakistan,” he announced in a statement.
He later told a British newspaper in an interview: “We have asked our Chinese brothers to please build a naval base at Gwadar.”
After Pakistan revealed the plans for a naval base, China responded with equivocation, saying that “this issue was not touched upon” during the visit.
Given China’s proclivity for strategic stealth, even its work on the Gwadar port was launched quietly.
Moreover, China does not wish to deepen the concerns that it aroused in Asia last year by openly discarding Deng Xiaoping’s dictum, tao guang yang hui (“conceal ambitions and hide claws”).
On a host of issues, including its territorial claims in the South China Sea and against Japan and India, China spent 2010 staking out a more muscular position.
On these issues, too, the gap between Chinese officials’ words and actions is revealing.
For example, China persisted with its unannounced rare-earth embargo against Japan for seven weeks while continuing to claim in public that no export restrictions had been imposed.
Like its denials last year about deploying Chinese troops in Pakistani-held Kashmir to build strategic projects, China has demonstrated a troubling propensity to obscure the truth.
The Global Times, however, has not been shy about advertising China’s interest in establishing naval bases overseas.
In a recent editorial, “China Needs Overseas Bases for Global Role,” the newspaper urged the outside world to “understand China’s need to set up overseas military bases.”
The insurrection against Pakistani rule in the mineral-rich southern province of Baluchistan may impede China’s plan to turn Gwadar into an energy transshipment hub to transport Gulf and African oil to western China by pipeline.
But the insurgency is no barrier to China’s use of Gwadar to project power in the Middle East and East Africa, and against peninsula India.
Indeed, to get into the Great Power maritime game, China needs Gwadar to redress its main weakness – the absence of a naval anchor in the Indian Ocean region, where it plans to have an important military presence.
What was touted as a floating casino is now being launched as the floating centerpiece of China’s growing naval prowess.
In fact, with a second and larger aircraft carrier currently under construction, it may not be long before China displays its naval capabilities by dispatching a carrier battle group to the Indian Ocean – if not basing one at Gwadar.
Decision Time for the Eurozone
ATHENS – Germany’s arguments against introducing Eurobonds, expanding the eurozone’s bailout fund, and instituting a comprehensive system of economic governance are transparent and easy to understand.
But are they right?
The Germans fear that such innovations would lead to a rise in domestic borrowing costs, and to direct and indirect fiscal transfers to poorer countries.
Moreover, they warn of the moral hazard generated by relieving over-indebted countries from the pressure to put their public finances in order.
Third, they cite treaty-related and constitutional difficulties in establishing rules and procedures that would simulate a “fiscal union.”
Finally, the need to move ahead with European unification in order to legitimize the inevitable infringement of over-indebted countries’ sovereignty might eventually infringe upon German sovereignty as well.
On the other hand, refusing to accept the growing consensus that fiscal union is the key to resolving the debt crisis exposes the eurozone, and Germany, to serious risks.
Sticking to half-measures exacerbates markets’ impatience and provokes increasingly determined speculative attacks, not only on the weaker peripheral countries, but also on core AAA-rated countries – like France and, eventually, Germany itself – whose banking sectors hold large volumes of peripheral countries’ debt.
Indeed, weakening banking conditions are emerging as a major threat to the eurozone’s recovery and stability.
In the event of sovereign defaults, moreover, the cost of bailing out the banks may far exceed the cost of issuing Eurobonds or instituting a reasonable transfer regime.
Investors need to be reassured that debt-service costs are under control, and that debt volumes and deficit limits are firmly monitored in order to minimize default risks and strengthen banks’ ability to lay the groundwork for sustainable growth.
In fact, the emerging systemic risk concerning the sustainability of the eurozone produces a vicious circle.
Systemic risk raises doubts about the solvency of over-indebted countries, which means that these countries’ efforts to consolidate their fiscal position and promote reform do not lead to improvement in financial conditions, which is essential for overcoming the crisis and promoting recovery.
As a result, fiscal consolidation becomes increasingly difficult to achieve, inviting renewed speculative attacks.
Moreover, viewed from a wider perspective, economic and social turbulence on Europe’s southern periphery will constitute a geopolitical risk.
That risk would be exacerbated by the eruption of a major default-related crisis within the eurozone, which might not be contained and, through a Lehman-like domino sequence, could jeopardize the entire edifice.
The eurozone’s dilemmas, and the pros and cons of proposed solutions, can be debated endlessly.
It could be argued, for example, that Eurobonds would allow eurozone members to pool their financial strength and, by enhancing the attractiveness of the euro as a reserve currency, hold down borrowing costs to such an extent that AAA-rated countries are not overburdened.
Legal problems could also be overcome in the short term by designing Eurobonds to include credit guarantees, repayment priorities, and the use of specific tax streams as collateral.
Proposals to limit moral hazard, meanwhile, would do so by limiting Eurobonds to 60% of GDP – the eurozone’s current ceiling for member states’ public debt.
A more substantial constraint would be to establish a tougher disciplinary regime on fiscally profligate countries as part of a reinforced institutional framework.
Political problems, however they are addressed, should be weighed against the vulnerability of European banks.
Germany’s banks today are the most highly leveraged of any of the major advanced economies, while at the start of the crisis they held close to one-third of all loans made to the public and private sectors of Greece, Portugal, Ireland, Spain, and Italy.
So long as the eurozone’s systemic risk is not addressed, sovereign defaults are not unlikely, leading to extended bank bailouts that could carry unacceptable costs.
In that case, a full-blown banking crisis could bring about a depression in the eurozone and, perhaps, globally.
Europe-wide bank recapitalization is essential in the short term to contain the cost arising from possible sovereign defaults.
However, addressing the eurozone’s deeper defects cannot be postponed endlessly.
Of course, in the midst of so much uncertainty, it is remarkable that the over-indebted countries’ consolidation efforts remain broadly on track; but the European Central Bank’s continued bond-buying and liquidity support is only a temporary palliative.
An impasse is inevitable, so playing for time is not a solution.
By contrast, a combination of Eurobonds, a fully-fledged debt facility, enhanced powers for the ECB so that it can act as a lender of last resort, and solid economic governance would work.
In the longer term, radical reforms in capital, product, and labor markets will also be needed, complemented by a stronger and more cohesive investment strategy at the European level, aimed at boosting competitiveness and restoring growth prospects.
European competitiveness does not have only a global dimension.
Large discrepancies exist within the eurozone, reflected in structural trade imbalances between the core and the periphery that lie at the heart of the debt crisis.
The eurozone’s cohesion and future growth depend critically on creating a framework – through grants and loans – for investment capital to flow to the poorer countries in order to close the competitiveness gap.
To borrow a phrase from the financial world, the euro is too big to fail.
Decisions should be taken sooner rather than later, so that the eurozone itself shapes events, rather than being commanded by them.
Decision Time for the Global Economy
MILAN – In the dog days of summer, Milan is quieter than many European cities.
The locals are away, and, unlike Paris or Rome, tourists do not take their place.
Here and elsewhere, people, businesses, governments, and markets take a break, decompress, and reflect.
Europe’s economic problems will still be here, waiting for us, in September.
And when summer ends, uncertainty about key issues will be the order of the day –&#160;and not only in Europe.
Largely unanticipated protest movements in Turkey and Brazil have raised questions about the economic and social sustainability of emerging-market growth.
The fires in Bangladeshi garment factories have raised new questions about the governance of global supply chains.
In the United States, the Federal Reserve hinted at “tapering” its quantitative-easing policy later in the year, and a kind of global carry trade based on monetary conditions in advanced countries started to unwind as a result, causing credit tightening and market turbulence in emerging economies.
This is probably only a preview of the complexity of the exit from the post-crisis assisted-growth model that has prevailed in the US, Europe, and now Japan.
A possible political impasse in the US in September over the budget and debt ceiling complicates the outlook further.
And yet much of the current uncertainty is set to dissipate.
In the coming months, highly consequential policy decisions (or their absence) in systemically critical parts of the global economy will be revealed, with significant effects on growth rates, asset prices, and overall confidence.
For starters, China’s new leadership has moved away from outsize fiscal and monetary stimulus and accepted an economic slowdown, betting on structural change, systemic reform, and sustainable longer-term growth. The key signals will come from the Chinese Communist Party’s plenary meeting in the early fall.
China’s reforms will either support the economic shift, boosting sentiment and lifting growth forecasts, or they will fall short and disappoint, with attention most likely to be focused on the size and nature of state intervention in markets.
Either way, with the future of the global economy’s principal growth engine at stake, the effects will be felt worldwide.
In the US, economic deleveraging has proceeded significantly further than it has in Europe.
The US is adjusting structurally and generating real (inflation-adjusted) GDP growth (though well below its potential annual rate of 3-3.5%).
The tradable sector is expanding and is not dependent on leverage to generate aggregate demand.
One can think of the US economy as an 8-cylinder engine running on five, owing to residual deleveraging, fiscal consolidation and drag, public-sector investment shortfalls, and questions about the financial health and security of middle-income households (the backbone of domestic aggregate demand).
Part-time employment is spreading and may become the labor market’s new normal.
Then there is the question of the Fed’s assisted-growth model.
Is the US economy ready to grow without abnormal policy support?
It seems clear that tapering the Fed’s monthly purchases of long-term securities later this year would cause a realignment of asset values in financial markets.
How this spills over into the real economy is yet another source of uncertainty.
But, despite some transitional market turbulence, the overall effect will likely be positive.
The beneficial effect on the risk-return options available to investors/savers (including pension funds) will outweigh the higher cost of debt; indeed, an important subset of growth engines in the tradable sector is not dependent on low-cost debt.
The same cannot be said of Europe, where Germany’s general election in September is viewed as a key barometer of continuing commitment to the euro.
The European Central Bank’s “outright monetary transactions” program – though conditional, limited to short-term government debt, and so far unused – appears to have stabilized eurozone sovereign-debt markets, albeit in a low- or zero-growth environment.
But the OMT program is dependent on German support.
The question is how long this can last, given southern Europe’s growth and employment challenges (and an apparent lack of understanding among policymakers and the public that there are no short-term solutions).
In Italy, the debate centers on taxes in general, and the rather miniscule property tax in particular.
The income tax (and thus the tax on employment) is high.
But the country is relatively wealthy, especially in terms of property assets on household balance sheets.
So higher taxes on property and lower taxes on income would contribute to the creation of a more dynamic, competitive economy.
But that is far from the current focus of public debate.
The key liberalizing reforms that would enhance the economy’s flexibility and pace of adjustment are simply not on the agenda (owing to an underlying lack of trust among voters).
This is important because the private sector in Italy (and in Spain) cannot match the structural flexibility found in the US (and in Germany since its reforms in 2003-2006).
Think now of an 8-cylinder engine running not on five cylinders, but on two or three at best.
(Admittedly, the Spanish labor market reforms enacted earlier this year may start to lift employment and improve competitiveness and growth on the economy’s tradable side, which is constrained largely by low productivity, not weak demand.)
But the default option in the context of political gridlock – a halting, slow-growth strategy, focused excessively on fiscal austerity and featuring high unemployment (especially for the young) – is unlikely to remain workable for long.
At some point, the political agenda will either shift toward real reform, or sentiment will shift substantially against the euro.
Fortunately, this uncomfortable uncertainty will not last much longer – in Europe or elsewhere.
China’s leaders will make their choices, as will German voters.
The Fed will clarify the direction of US monetary policy.
Markets will adjust and settle down.
Distortions will begin to unwind.
Without dismissing the downside risks, I remain cautiously optimistic about the global economy’s prospects.
With greater clarity in terms of Chinese and US policy, both economies should gain momentum.
That will give developing countries (many of which face difficult domestic policy choices) a tailwind, while making the substantial challenges in Europe and Japan easier to address.
From Memory to Denial in Russia
LONDON – My most painful experience in Russia was a visit to Perm-36, the only one of Stalin’s forced-labor camps to have been preserved, in 1998.
I was in Perm, a city in the Urals, to take part in a seminar of the Moscow School of Political Studies.
Founded by the remarkable Lena Nemirovskaya, the school’s purpose was to introduce young post-communist Russians to democracy, self-government, and capitalism.
One bitterly cold March day, I joined a few friends on a trip to the former camp.
Built in the early 1940s as a “regular” labor camp, Perm-36 was converted into a concentration camp for political prisoners in 1972.
The last prisoners were released in 1987, three years into Mikhail Gorbachev’s rule.
Now it was being restored as a Gulag Museum by Memorial, a human-rights group founded by the dissident physicist Andrei Sakharov, to remind Russians of their totalitarian past.
We were shown around the maximum-security wing.
Surrounded by a barbed-wire perimeter, it had housed the political prisoners, mostly from the non-Russian Soviet republics, who were considered to be “particularly dangerous recidivists.”
After a Ukrainian television crew filmed the site in 1989, part of it was deliberately destroyed.
It was obvious that the prisoners had been subject to psychological torture and extreme physical hardship.
The tiny radiator in each cell could hardly have dented the October-to-April frost.
The prisoners slept on wooden planks or iron bunks.
Their clothes and bedcovers were made of cotton, not wool, and an open hole served as the cell’s lavatory.
Our guide, Maya, explained that the authorities liked to put together prisoners who got on each other’s nerves.
During the day, they were moved across the corridor to identical cells in which they uselessly worked making iron implements.
For one hour each day, they were allowed into an “exercise block,” a nine-foot (2.7 meters), tin-lined cube, with a barbed-wire roof and a guard post on top.
The only other “recreation” was a weekly show of propaganda films.
Of the 56 “dangerous recidivists” held in Perm-36 in the 1980s, seven died.
One was the Ukrainian poet and nationalist Vasyl Stus.
The authorities called it a suicide, but survivors say that, for fun, the guards unscrewed one of the wooden planks from the wall and dropped it on Stus’s head as he lay sleeping.
As Maya recounted the grisly story, I watched the faces of the two young male guards who accompanied us.
Their expressions were as frozen as the ground outside.
Were they thinking about football or about making love to their girlfriends?
Given enough vodka, would they, too, have been capable of murder for fun?
The answer, I fear, is probably yes.
Evil systems never seem to struggle to find the zombie henchmen they need.
Organizations like Memorial and the Moscow School of Political Studies have no place in Vladimir Putin’s Russia.
Officially, they are deemed “foreign agents” and have been subject to so much legal harassment that it is almost impossible for them to function.
“The new presentation,” write Mikhail Danilovich and Robert Coalson, “is devoted not to the repressive forced-labor practices of the Stalin era but to the timber production at the plant and to its contribution to the Soviet victory in World War II.” And, after 20 years, the Moscow School of Political Studies has been forced to suspend its Russian operations.
The fate of the museum and the school is part of the wider clampdown on freedom of expression and behavior in Putin’s third presidential term.
Dissidents are routinely dubbed deviants, fifth columnists, and traitors, as the regime leads a drive for national unity based on religion, tradition, and paranoid rhetoric.
This represents a major shift from Russia’s early post-Soviet days.
The liberal Russia’s Choice party, led by the country’s first democratic prime minister, Yegor Gaidar, received 15.5% of the vote in the 1993 general election, and with its allies formed the largest bloc in the Duma.
At the time, this was regarded as a catastrophic failure.
Today, liberal candidates cannot even get into the Duma.
How has this come to pass?
Why have the hopes of Gorbachev’s glasnost been so cruelly snuffed out?
A widespread view is that Russia is simply reverting to type: freedom was never more than a fleeting vowel in its historical alphabet.
But this is a facile explanation.
True, Russian liberalism has contributed to its own demise, by its incompetence and factionalism.
But the West did not help.
In the 1990s, it failed to put money behind the economic reforms that it sponsored.
Expanding NATO into the Baltic States in 2002 – the Alliance’s first enlargement into former Soviet territory – was a catastrophic mistake, which made it almost impossible for a Russian to be both patriotic and pro-Western.
By both omission and commission, the West cut the ground from under Russian political liberalism, enabling the ascendancy of Putinism.
So far, Putin has displayed an accurate sense of limits.
He allows Russians to dream of greatness without getting them into serious trouble.
Under his leadership, Russia has shrugged off sanctions, forged a new alliance with China, and annoyed – but not openly challenged – the West in Syria.
But those who know Putin say that he brooks no argument; he is the only one setting the limits.
And no one can maintain supreme power for as long as he has without being corrupted.
For the moment, Putinism is the only game in town.
But, although the forces represented by Memorial and the Moscow School of Political Studies have been marginalized, they have not been eradicated.
A New Macroeconomic Strategy
NEW YORK – I am a macroeconomist, but I dissent from the profession’s two leading camps in the United States: the neo-Keynesians, who focus on boosting aggregate demand, and the supply-siders, who focus on cutting taxes.
Both schools have tried and failed to overcome the high-income economies’ persistently weak performance in recent years.
It is time for a new strategy, one based on sustainable, investment-led growth.
The core challenge of macroeconomics is to allocate society’s resources to their best use.
Workers who choose to work should find jobs; factories should deploy their capital efficiently; and the part of income that is saved rather than consumed should be invested to improve future wellbeing.
It is on this third challenge that both neo-Keynesians and supply-siders have dropped the ball.
Most high-income countries – the US, most of Europe, and Japan – are failing to invest adequately or wisely toward future best uses.
There are two ways to invest – domestically or internationally – and the world is falling short on both.&nbsp;
Domestic investment comes in various forms, including business investment in machinery and buildings; household investment in homes; and government investment in people (education, skills), knowledge (research and development), and infrastructure (transport, power, water, and climate resilience).
The neo-Keynesian approach is to try to boost domestic investment of any sort.
Indeed, according to this view, spending is spending.
Thus, neo-Keynesians have tried to spur more housing investment through rock-bottom interest rates, more auto purchases through securitized consumer loans, and more “shovel-ready” infrastructure projects through short-term stimulus programs.
When investment spending does not budge, they recommend that we turn “excess” saving into another consumption binge.
Supply-siders, by contrast, want to promote private (certainly not public!) investment through more tax cuts and further deregulation.
They have tried that on several occasions in the US, most recently during the George W. Bush administration.
Unfortunately, the result of this deregulation was a short-lived housing bubble, not a sustained boom in productive private investment.
Though policy alternates between supply-side and neo-Keynesian enthusiasm, the one persistent reality is a significant decline of investment as a share of national income in most high-income countries in recent years.
According to IMF data, gross investment spending in these countries has declined from 24.9% of GDP in 1990 to just 20% in 2013.
In the US, investment spending declined from 23.6% of GDP in 1990 to 19.3% in 2013, and fell even more markedly in net terms (gross investment excluding capital depreciation).
In the European Union, the decline was from 24% of GDP in 1990 to 18.1% in 2013.
Neither neo-Keynesians nor supply-siders focus on the true remedies for this persistent drop in investment spending.
Our societies urgently need more investment, particularly to convert heavily polluting, energy-intensive, and high-carbon production into sustainable economies based on the efficient use of natural resources and a shift to low-carbon energy sources.
Such investments require complementary steps by the public and private sectors.
The necessary investments include large-scale deployment of solar and wind power; broader adoption of electric transport, both public (buses and trains) and private (cars); energy-efficient buildings; and power grids to carry renewable energy across large distances (say, from the North Sea and North Africa to continental Europe, and from California’s Mojave Desert to US population centers).
But just when our societies should be making such investments, the public sectors in the US and Europe are on a veritable “investment strike.”
Governments are cutting back public investment in the name of budget balance, and private investors cannot invest robustly and securely in alternative energy when publicly regulated power grids, liability rules, pricing formulas, and national energy policies are uncertain and heavily disputed.
In the US, public investment spending has been slashed.
Neither the federal government nor the states have political mandates, funding strategies, or long-term plans to catalyze investment in the next generation of smart, clean technologies.
Both neo-Keynesians and supply-siders have misunderstood the investment paralysis.
Neo-Keynesians see investments, public and private, as merely another kind of aggregate demand.
They neglect the public-policy decisions regarding energy systems and infrastructure (as well as the targeted R&amp;D to promote new technologies) that are needed to unleash smart, environmentally sustainable public and private investment spending.
Thus, they promote gimmicks (zero interest rates and stimulus packages), rather than pressing for the detailed national policies that a robust investment recovery will require.
The supply-siders, for their part, seem utterly oblivious to the dependence of private investment on complementary public investment and a clear policy and regulatory framework.
They advocate slashing government spending, naively believing that the private sector will somehow magically fill the void.
But, by cutting public investment, they are hindering private investment.
Private electricity producers, for example, will not invest in large-scale renewable energy generation if the government does not have long-term climate and energy policies or plans for spurring construction of long-distance transmission lines to carry new low-carbon energy sources to population centers.
Such messy policy details have never much bothered free-market economists.
There is also the option of using domestic saving to boost foreign investments.
The US could, for example, lend money to low-income African economies to buy new power plants from US companies.
Such a policy would put US private saving to important use in fighting global poverty, while strengthening the US industrial base.
Yet here, too, neither the neo-Keynesians nor the supply-siders have exerted much effort to improve the institutions of development finance.
Instead of advising Japan and China to raise their consumption rates, macroeconomists would be wiser to encourage these economies to use their high savings to fund not only domestic but also overseas investments.
These considerations are reasonably clear to anyone concerned with the urgent need to harmonize economic growth and environmental sustainability.
Our generation’s most pressing challenge is to convert the world’s dirty and carbon-based energy systems and infrastructure into clean, smart, and efficient systems for the twenty-first century.
Investing in a sustainable economy would dramatically boost our wellbeing and use our “excess” savings for just the right purposes.
Yet this will not happen automatically.
We need long-term public-investment strategies, environmental planning, technology roadmaps, public-private partnerships for new, sustainable technologies, and greater global cooperation.
These tools will create the new macroeconomics on which our health and prosperity now depend.
America’s Overrated Decline
CAMBRIDGE – With the approach of the US Congressional elections, questions about the health of America’s political institutions and the future of its global leadership have become rampant, with some citing partisan gridlock as evidence of America’s decline.
But is the situation really that bad?
According to the political scientist Sarah Binder, the ideological divide between America’s two main political parties has not been as large as it is now since the end of the nineteenth century.
Despite the current gridlock, however, the 111th Congress managed to pass a major fiscal stimulus, health-care reform, financial regulation, an arms-control treaty, and revision of the military policy on homosexuality.
Clearly, the US political system cannot be written off (especially if partisan gridlock is cyclical).
Nonetheless, today’s Congress is plagued by low legislative capacity.
Though ideological consistency has more than doubled over the last two decades, from 10% to 21% of the public, most Americans do not have uniformly conservative or liberal views, and want their representatives to meet one another halfway.
Political parties, however, have become more consistently ideological since the 1970s.
This is not a new problem for the US, whose constitution is based on the eighteenth-century liberal view that power is best controlled by fragmentation and countervailing checks and balances, with the president and Congress forced to compete for control in areas like foreign policy.
In other words, the US government was designed to be inefficient, in order to ensure that it could not easily threaten the liberty of its citizens.
This inefficiency has likely contributed to the decline in confidence in American institutions.
Today, less than one-fifth of the public trusts the federal government to do the right thing most of the time, compared to three-quarters in 1964.
Of course, these figures surged occasionally during that period, such as after the September 11, 2001, terrorist attacks; but the overall decline is considerable.
The federal government is not alone.
Over the last several decades, public confidence in many influential institutions has plummeted.
From 1964-1997, the share of Americans who trusted universities fell from 61% to 30%, while trust in major companies fell from 55% to 21%.
Trust in medical institutions dropped from 73% to 29%, and in journalism from 29% to 14%.
Over the last decade, confidence in educational institutions and the military has recovered, but trust in Wall Street and large corporations has continued to fall.
But these ostensibly alarming figures can be misleading.
In fact, 82% of Americans still consider the US to be the world’s best place to live, and 90% like their democratic system of government.
Americans may not be entirely satisfied with their leaders, but the country is certainly not on the brink of an Arab Spring-style revolution.
Moreover, though party politics have become more polarized in recent decades, this follows the 1950s and early 1960s, when the escape from the Great Depression and victory in World War II fueled unusually high confidence in US institutions.
In fact, the sharpest decline in public trust in the government occurred in the late 1960s and early 1970s.
Moreover, declining trust in the government has not been accompanied by significant changes in citizens’ behavior.
For example, the Internal Revenue Service is among the government institutions that inspire the least public confidence; yet there has been no major surge in tax evasion.
In terms of controlling corruption, the US still scores in the 90th percentile.
And though voting rates in presidential elections declined from 62% to 50% in the latter half of the twentieth century, they stabilized in 2000, and rose to 58% in 2012.
The loss of confidence that Americans have expressed may be rooted in a deeper shift in people’s attitudes toward individualism, which has brought about decreased deference to authority.
Indeed, similar patterns are characteristic of most post-modern societies.
This social shift probably will not influence US institutions’ effectiveness as much as one might think, given America’s decentralized federal system.
In fact, gridlock in the national capital is often accompanied by political cooperation and innovation at the state and municipal levels, leading citizens to view state and local governments, as well as many government agencies, much more favorably than the federal government.
This approach to governance has had a profound impact on the mentality of the American people.
A 2002 study indicated that three-quarters of Americans feel connected to their communities, and consider their quality of life to be excellent or good, with nearly half of adults participating in a civic group or activity.
That is good news for the US.
But it does not mean that America’s leaders can continue to ignore the political system’s shortcomings, such as the gerrymandered “safe seats” in the House of Representatives and obstructive processes in the Senate.
Whether such sources of gridlock can be overcome remains to be seen.
And there is legitimate reason to doubt America’s ability to maintain its “hyperpower” status, not least owing to the rise of major emerging economies.
But, as the conservative author David Frum notes, over the last two decades, the US has experienced a swift decline in crime, auto fatalities, alcohol and tobacco consumption, and emissions of sulfur dioxide and nitrogen oxide, which cause acid rain – all while leading an Internet revolution.
Given this, dire comparisons to, say, the decline of Rome are simply unwarranted.
Deconstructing Saleh
LONDON – Ali Abdullah Saleh is finished as Yemen’s president.
Popular democratic protests that started on a small scale in mid-February outside Sanaa University have widened to encompass the whole country.
The continuity and strength of the demonstrations clearly indicate that the regime’s days are numbered.
Tribal leaders have joined the protesters.
Even close allies who belong to Saleh’s own Hashid tribe, such as Ali Mohsen al-Ahmar, have abandoned him.
Now, even his long-term protector, the United States, seems to be abandoning him.
Saleh, who has been in power since 1978, knows that his time is up.
“They are falling like leaves in autumn,” he recently said of the regime’s defectors.
Resignations have increased: ambassadors, ministers, significant media figures, and army generals.
It is the last group that is decisive: when senior military and security personnel abandon an authoritarian regime in the face of popular pressure, its days are numbered.
Yet Saleh retains the loyalty of the interior ministry, the Republican Guard, and part of the air force.
Still, clashes between the army and the Republican Guard are further eroding the regime’s coherence.
Like other dictators in their political death throes – former Egyptian President Hosni Mubarak and Libya’s Col. Muammar el-Qaddafi, for example – Saleh has warned of the dangers the world would face if he is forced to depart: the Muslim Brotherhood, al-Qaeda attacks, Iranian regional hegemony, and the breakup of Yemen.Après moi le déluge seems to be the sole justification he can offer for his continued rule.
His desperation mounting, Saleh has ordered deadly attacks on protesters, evidently believing that his considerable skill at political manipulation would see him through.
But, when he declared a state of emergency on March 23, the number of protesters in the streets doubled.
Given his regime’s obvious lack of legitimacy, Saleh is playing a dangerous game; the sooner he leaves, the better for Yemen’s stability and security.
Indeed, all Yemenis – Houthis, Harak, and even al-Hashids – appear united in their opposition to Saleh’s ailing regime and in their quest for civil and human rights.
Members of hundreds of tribes have erected tents in “Change Square” in Sanaa.
Perhaps more remarkably, in a country containing more than 12 million guns, the protesters have not fired a shot.
Then, on the eve of the Yemeni opposition’s planned “Friday of Departure” protests in late March, the United States resuscitated Saleh’s rule.
Defense Secretary Robert Gates declared that, “the fall of Saleh would pose a real problem for US counterterrorism work.”
Saleh, emboldened by Gates’ remarks, immediately appeared on television and ordered all opponents to leave Yemen, as if millions of Yemenis would simply desert the country, leaving him and his family to reside in peace.
Since 2009, the US has showered Saleh’s government with military aid.
But the US knows that al-Qaeda is an enemy of convenience for Saleh, and that the danger to the US from post-Saleh chaos in Yemen is exaggerated.
Democracy does not coexist with al-Qaeda.
On the contrary, the rising threat of radicalization stems from delaying Saleh’s departure.
America’s credibility, already low in Yemen, has hit rock bottom; its leaders’ words are no longer taken at face value.
The gap between US rhetoric and policies has widened.
The Obama administration relied on the language of human rights in Libya, but it was content to ignore the democratic demands of millions of Yemenis.
The reality is that the US has known for weeks that it cannot save Saleh’s regime.
Its concern for Saleh’s political survival is closely linked to its guardianship of the Saudi regime, which fears that ferment in Yemen could give Saudi Arabia’s own Shia, Zaidi, and Ismaili populations dangerous ideas about democratic reform, if not threaten the very existence of the Saudi state.
After all, Saudi Arabia’s southern tribes and Yemen’s northern tribes are historically the same people, while the Shia in the Kingdom’s oil-rich Eastern Province are protesting in political harmony with the Shia of Bahrain.
Not surprisingly, Saleh tried to reach for the familiar Saudi lifeline, sending his foreign minister to Riyadh to plead for the sort of help the Saudi king provided to Bahrain.
But the Saudis, having backed Saleh financially, and having sent troops to Yemen in 2009 to help him wage war against the Houthis, now consider him beyond saving.
Instead, they are betting on potential new alliances within Yemen to deal with their unpredictable neighbor.
Finally, the US now appears to have concluded that Saleh’s regime cannot be revived.
The most compassionate measure that the US, and Saudi Arabia, should take is a form of political euthanasia.
A young Yemeni protester put this case succinctly: “America, stop administering life support to Saleh and deal with us directly.
Yemen is the Yemeni people.
We are Yemen.
Saleh is only your crony.”
Deepening NAFTA
The good news about NAFTA is that there is little news about NAFTA.
That quiet, so different from the protests that greeted the North American Free Trade Area's creation a decade ago, reflects NAFTA's clear achievement in facilitating and integrating economic exchange among its three partners.
Next week's meeting between the Mexican and American presidents should take advantage of this success to push NAFTA forward in creative new ways.
Luckily, a road map for NAFTA exists.
When the then President-elect Vicente Fox of Mexico traveled to the United States and Canada in the fall of 2000, he carried a bold proposal: after eight years it was time for Canada, the US and Mexico to establish a longer-term goal of creating a North American Community.
Although his unorthodox suggestion met with skepticism, his ideas established an agenda that NAFTA's three partners should pursue.
Why fix what is not broken?
Because, from Mexico's perspective, NAFTA has not yet achieved one of its key goals: to deliver the benefits of free trade to all of the country's regions and sectors.
For NAFTA to realize its full potential and move the convergence process, opening borders to trade and reducing tariff barriers are not enough.
Since its founding in 1994, NAFTA has been characterized (at best) by a bilateral management of issues and problems.
Too often, the US has taken a unilateral approach.
Trilateral or sub-regional cooperation is our goal.
As it stands, Mexico and Canada have been limited to dealing with the US on an individual basis because the three countries - for different reasons - prefer to keep separate bilateral links with their neighbors.
The result of this is to neglect the overall North American perspective while giving preference to a domestic or bilateral vision that sometimes fails to promote the larger objective of integration.
To promote a regional perspective, Mexico, Canada, and the US must consider establishing an institutional forum where such discussions can take place and where recommendations to governments can emerge.
This is especially the case as the three countries assess the feasibility of common migration policies, border development and infrastructure, shared natural resources, environmental protection, economic and social policy coordination, and other issues of common concern.
Several concrete proposals have been advanced on how to achieve this.
At a minimum, a North American Commission or coordinating mechanism should be set up to begin the process.
While the European Commission model may not be what NAFTA needs, the governments of Canada, Mexico, and the US should establish a permanent mechanism for channeling ideas and proposals, and transforming those ideas into action.
One area ripe for an institutional mechanism is energy.
North America shares one of the richest and most varied energy resource pools in the world.
Having excluded energy from the original NAFTA talks, Canada and Mexico are now willing to engage with the US on a common energy strategy.
Indeed, talks on the subject have taken place among ministers from the three countries.
As each advances its domestic energy strategy, identifying synergies can help in rationalizing and making optimum use of what energy resources are available.
Another example of the new regional agenda can be found in the aftermath of the attacks of September 11 th .
Protecting North America and securing its borders has become a major priority in the fight against international terrorism and there must be a common response.
Having created a functioning, regional, open trade area, the three countries must ensure that the new imperative to secure borders does not obstruct legitimate flows of goods, services and people.
A NAFTA-wide security perimeter could transform internal borders in much the same way that the Schengen Agreement transformed borders within much of continental Europe.
The re-casting of the bilateral agenda on migration between Mexico and the US, well underway prior to 9/11, must be reconciled with America's new concept of homeland security.
While some argue that the fight against terrorism is the natural enemy of regularizing migration, others agree that now more than ever the countries of North America need to address this issue trilaterally.
Migration, security, energy, labor and the other issues that make up the North American agenda must be discussed, managed and implemented in trilateral bodies with the expertise necessary to identify, harmonize and eventually converge policy-making for the region.
This requires greater communication between and among decision-makers in all three NAFTA members.
The agenda and timetable for convergence must be set by NAFTA's elected leaders, but implementation should be in the hands of a new commission.
Possible subjects for that commission's agenda include: financial, fiscal and customs harmonization; transport infrastructure; natural resources and regional development.
There are, of course, many other issues, some of which already receive intensive cooperative efforts, especially in the fields of combating organized crime, drug and human trafficking, and the cross-border flow of contraband.
In any case, problems need to be identified so that opportunities for cooperation are created.
Today's challenge is to renew NAFTA by adding the concept of partnership to it.
Although recognizing that much still divides us, major common goals do provide a solid foundation for future cooperation.
All three countries now find themselves at a juncture favorable to building a North American Commission to address the needs of the North American Community.
We should seize the moment and proceed with negotiations to create such a forum.
Defaulting to Big Government
WASHINGTON, DC – Leading United States congressmen are determined to provoke a showdown with the Obama administration over the federal government’s debt ceiling.
Ordinarily, you might expect House Republicans to blink at this stage of the negotiations, but there is a hardline minority that actually appears to think that defaulting on government debt would not be a bad thing.
These representatives – with whom I've interacted at three congressional hearings recently – are convinced that the US federal government is too big relative to the economy, and that drastic measures are needed to bring it under control.
Depending on your assessment of “Tea Party” strength on Capitol Hill, at least a partial debt default does not seem as implausible as it did in the past – and recent warnings from ratings agencies reflect this heightened risk.
But the consequences of any default would, ironically, actually increase the size of government relative to the US economy – the very outcome that Republican intransigents claim to be trying to avoid.
The reason is simple: a government default would destroy the credit system as we know it.
The fundamental benchmark interest rates in modern financial markets are the so-called “risk-free” rates on government bonds.
Removing this pillar of the system – or creating a high degree of risk around US Treasuries – would disrupt many private contracts and all kinds of transactions.
In addition, many people and firms hold their “rainy day money” in the form of US Treasuries.
The money-market funds that are perceived to be the safest, for example, are those that hold only US government debt.
If the US government defaults, however, all of them will “break the buck,” meaning that they will be unable to maintain the principal value of the money that has been placed with them.
The result would be capital flight – but to where?
Many banks would have a similar problem: a collapse in US Treasury prices (the counterpart of higher interest rates, as bond prices and interest rates move in opposite directions) would destroy their balance sheets.
There is no company in the US that would be unaffected by a government default – and no bank or other financial institution that could provide a secure haven for savings.
There would be a massive run into cash, on an order not seen since the Great Depression, with long lines of people at ATMs and teller windows withdrawing as much as possible.
Private credit, moreover, would disappear from the US economic system, confronting the Federal Reserve with an unpleasant choice.
Either it could step in and provide an enormous amount of credit directly to households and firms (much like Gosbank, the Soviet Union’s central bank), or it could stand by idly while GDP falls 20-30% – the magnitude of decline that we have seen in modern economies when credit suddenly dries up.
With the private sector in free fall, consumption and investment would decline sharply.
America’s ability to export would also be undermined, because foreign markets would likely be affected, and because, in any case, if export firms cannot get credit, they most likely cannot produce.
The Republicans are right about one thing: a default would cause government spending to contract in real terms.
But which would fall more, government spending or the size of the private sector?
The answer is almost certainly the private sector, given its dependence on credit to purchase inputs.
Indeed, take the contraction that followed the near-collapse of the financial system in 2008 and multiply it by ten.
The government, on the other hand, has access to the Fed, and could therefore get its hands on cash to pay wages.
With the debt ceiling unchanged, this would require some legal sleight of hand.
But the alternative would clearly be a collapse of US national security – soldiers and border guards have to be paid, the transportation system must operate, and so on.
Issuing money in this situation would almost certainly be inflationary, but the Fed might conclude otherwise, because the US has never been in this situation before, credit is now imploding, and the desperate credit-expansion measures implemented in 2008 proved not to be as bad as the critics feared.
So this is what a US debt default would look like: the private sector would collapse, unemployment would quickly surpass 20%, and, while the government would shrink, it would remain the employer of last resort.
The House and Senate Republicans who do not want to raise the debt ceiling are playing with fire.
They are advocating a policy that would have dire effects, and that would accomplish the opposite of what they claim to want, because a default would immediately make the government more, not less, important.
The only law that Congress cannot repeal is the law of unintended consequences.
Defeating Communism Isn\u0027t Enough for Ukraine
NEW YORK: Leonid Kuchma may have trounced his nearest contender -- the Communist Petro Simonenko -- but his recent election to a second five-year term as Ukraine's president is no victory for democracy.
Nor is it a victory for Ukraine.
Indeed, Kuchma seems to have torn a page from Boris Yeltsin's 1996 campaign manual, employing strong-arm tactics to intimidate and silence the opposition, as well as a tainted privatization process to buy support from Ukraine's powerful and corrupt oligarchs.
While election day itself was relatively free from fraud and thuggery, the process leading up to the ballot was fraught with abuse.
President Kuchma's administration has proved a jealous overseer of Ukraine's media, particularly the electronic outlets.
Out of four national television stations, two are directly controlled by Kuchma, and a third by his allies.
The fourth, STB, initially tried to present a balanced picture but was intimidated by tax police raids and forced to become yet another pro-government organ.
In this environment of intimidation, those who yet dared oppose the President got a clear warning through official channels.
Partisan abuse of the country's administrative structures to discourage dissent is widespread, particularly the use of tax collectors to harass opponents.
On November 1, the day after the first round of voting that later pitted Kuchma against Simonenko, three governors were unceremoniously dismissed when returns in their oblasts did not favor Kuchma.
While opponents are silenced and maginalized, the President's supporters grow richer and more powerful.
Victor Pinchuk, a powerful figure from Kuchma's home town of Dnipropetrovsk, and the boyfriend of the President's daughter, secured a profitable metalworks in a September round of privatization.
And Oleksander Volkov, who headed one of Kuchma's campaign teams is a key figure in the President's camp, with access to inside information despite the fact that investigators in Brussels have frozen his foreign assets and Ukraine's own Parliament has repeatedly targeted him as part of an "anti-mafia" campaign.
The result for ordinary Ukrainians has been disappointing.
They voted for Kuchma not because they approve of his policies -- his administration's economic record is dismal -- but because they did not want to see a return of communism.
Young people, who this time turned out in droves, voted for Kuchma because he promised them market reform and integration with Europe.
Their hopes should not be dashed.
President Kuchma must move fast to use his 56% victory at the polls to distance himself from greedy oligarchs and institute long-promised economic and political reform.
The President needs to be put on notice that the Western governments that have supported him will not tolerate a continuance of the status quo.
A bloated, inefficient, and corrupt government has been able to survive with international help provided largely on account of Ukraine's geopolitical position.
But a system of crony capitalism that enriches a tiny elite while the vast majority of the country's 50 million beleaguered citizens live in poverty and are bullied by bureaucrats cannot be sustained in the long run.
The West must make it clear that Ukraine's geopolitical position isn't enough to guarantee continued support.
The most important action that can be undertaken is to make continued assistance conditional on political and economic reform.
Ukraine has $3.1 billion in debt payments coming due in the year 2000.
Most of that is owed to the International Monetary Fund, which is rightly insisting on a more transparent privatization process, administrative reform, deregulation, anti-corruption and other measures before allowing the country to borrow new cash or roll over its current debt.
Further assistance should also be made conditional on greater freedom of the mass media and an end to intimidation.
Political conditions are as important as this or that economic target.
I have been deeply committed to helping the development of democracy and open society in Ukraine for over a decade.
I established a nonprofit foundation there in 1989, two years before the country became independent in 1991.
I shall continue my support for that foundation.
And I urge other donors to maintain or increase their support for building an open society in Ukraine.
But financial support to the government must be strictly conditioned on performance.
The weeks ahead will be decisive.
Kuchma has appointed Yevhen Marchuk, a former KGB man who was a presidential candidate, to head Ukraine's National Security Council.
Will Marchuk begin to clean the stables as many Ukrainians hope?
He needs to break the stranglehold of the crony capitalists if he is to survive in his position.
Or will he be co-opted by corruption as Kuchma himself has been?
In that case it is better to withdraw support than to allow the same disreputable tactics to be used in two years time when the next parliamentary elections are due.
Defeating North Korea’s Nuclear Blackmail
North Korea’s announcement that it possesses nuclear weapons has fuelled a diplomatic frenzy.
To persuade North Korea to return to the six-party talks – with China, Japan, the US, Russia, and South Korea – on defusing the nuclear threat on the Korean peninsula, Japan, the US, and South Korea have now offered to expand the scope of the talks to allow North Korea to raise any issue that concerns it.
This could be a grave mistake.
The talks ground to a halt in June 2004, when the North Koreans pulled out, citing the allegedly hostile policies of the US and Japanese governments.
Now they claim to have manufactured nuclear weapons for self-defense.
Although there had been several unofficial statements by Kim Jong-Il’s regime admitting that North Korea possessions nuclear arsenal, the announcement was the first official confirmation.
What lay behind the declaration was the regime’s recognition that a second-term Bush administration would not soften its demand for a complete repudiation of its nuclear program, but would instead continue to pursue policies aimed at isolating and stifling North Korea.
The same goes for Japan, whose stance on the abduction of its citizens by North Korean agents in the 1970’s and 1980’s was also cited by the Kim regime last June as a reason for walking out of the six-party talks.
With this in mind, the North Koreans’ motives in playing the nuclear trump card are clear, and the timing couldn’t have seemed more advantageous for them: force the Americans into making concessions while the situation in Iraq leaves the US with no room for maneuver, and undercut the rising call in Japan for economic sanctions against North Korea over the abduction issue.
Thus, whereas North Korea’s announcement of its nuclear capability strongly condemned Japan and the US, it did not mention China, Russia, and South Korea, which had been more conciliatory during the six-party talks.
Indeed, in withdrawing from the six-party talks, North Korea did not completely abandon the possibility of resolving the nuclear standoff through dialogue.
Rather, North Korea’s aim was to postpone the six-party talks as long as possible in order to force direct bilateral negotiations with the US, in which it would presumably extract energy assistance and other aid while demanding a security guarantee for “Dear Leader” Kim Jong-il.
America didn’t budge on bilateral negotiations, and its response to North Korea’s recent announcement that it possesses nuclear weapons likewise emphasized the need to revive the six-party talks.
Japan adopted a similar stance.
Like Japan, the Bush administration’s relatively moderate stance toward North Korea has changed since the talks broke down last year.
The US seems to be tightening its diplomatic encirclement of North Korea with a view to shifting the nuclear discussion to the UN Security Council.
Moreover, the Japan-US Security Consultative Committee brought together the countries’ foreign and defense ministers in Washington in February to discuss common strategic objectives related to the reformation of US forward forces.
This includes US forces in Japan, which will focus on responding to North Korean nuclear and ballistic-missile threats, as well as new threats posed by international terrorism and China’s military build-up.
Remaining in step with each other on security issues is essential if Japan and the US are to maintain a firm alliance to ensure the stability of the Asia-Pacific region.
The Japanese government has also been searching for effective measures to respond to North Korea’s consistently insincere attitude on regional and bilateral issues, including the abduction cases.
Militarily, Japan revised its law on the Self-Defense Forces to establish procedures for ballistic missile defense, with a strong focus on North Korea.
The decision, coming at the cabinet’s regular meeting on February 15th, was not intended to coincide with Kim Jong-il’s 63rd birthday the following day.
But it did show that Japan’s government, having long suspected that North Korea already possessed nuclear weapons, would not be intimidated into a fundamental policy change by confirmation of the threat.
The revision establishes the future direction of Japan’s military posture by delegating greater authority to the commanders of the Self-Defense Forces to initiate defensive actions against immediate threats.
According to South Korean news reports, in addition to its existing mid-range Nodong missiles, North Korea has improved its Scud missiles, extending their range to reach Japan’s main islands.
If North Korea is, indeed, continuing to develop not only its nuclear arsenal, but also various types of ballistic missiles, in defiance of international commitments, it is truly a rogue state.
As for the nuclear issue, Japan’s policy toward North Korea should continue to emphasize solidifying ties with the US and strengthening cooperation with China, South Korea, and Russia, making every effort to promote early resumption of the six-party talks.
But dialogue with the Kim regime cannot be an end in itself.
Negotiation is necessary, and it must be sufficient, but progress will be impossible if North Korea is allowed to turn its mere participation in the six-party talks into a bargaining chip.
Defeating Terrorism through Global Prosperity
Defending India\u0027s Growth
As India worries about instability among its neighbors, defense spending will likely rise in the year ahead.
Because approximately 20% of India's expenditures already go to defense, there is a risk that the government's budget deficits may hit unmanageable levels, threatening the hard won growth of the last decade.
Even before America and its allies began their bombing campaign against Afghanistan's terrorist infrastructure, India's expenditures on defense were rising fast.
In the fiscal year ending in March 2002 the government budgeted 731.4 billion rupees (US$15.2) for defense, up 12% from the previous fiscal year.
Coming atop an already bloated government deficit, India's government now faces hard choices if it is to maintain its reputation for economic reform.
Early in the 1990s, India moved away from the dozy statist system bequeathed by Nehru by adopting market-friendly policies.
These reforms put the economy on a higher growth trajectory, with average real GDP growth hitting 6% over the last decade, compared to under 4% average annual growth in previous decades.
Inflation remained in single digits throughout the 1990s and, despite mushrooming fiscal deficits, economic growth became more stable.
The global technology boom helped here, as India created its own ``new economy'' that had a big impact on the structure of India's exports.
High tech exports surged from 16% annual growth in 1995-96 to 53.5% in 2000-01.
Still, as in so many other countries, high tech was no magic bullet.
Old-fashioned infrastructure bottlenecks lingered, cramping private sector expansion.
Even though reform bolstered economic growth by improving productivity in the non-agricultural economy, scant progress was made in raising the living standards of the poor.
Over 65% of Indian workers continue to earn their livelihood on the land, yet as the economy adjusted to the 1990's reforms, the amount of capital available for government investment in agriculture fell.
Instead of becoming more modern, agriculture remained as dependent as ever on erratic monsoon rains and became even more volatile in its production.
Neglect of agriculture should, perhaps, have been expected in the government's rush to modernize; what was unexpected was the government's increasing reliance on dubious fiscal strategies.
Fiscal deficits have been growing at unsustainable levels.
Domestic indebtedness, indeed, was 36.8% of GDP in the fiscal year ending March 2001 compared to 25.7% in 1997-98.
The combined fiscal deficit of the central and state governments now exceeds 10% of GDP, a key risk in the eyes of international rating agencies.
Both Standard and Poor's and Moody's downgraded India's sovereign creditworthiness by revising the outlook on long-term foreign-currency debt from stable to negative, and from positive to stable respectively.
Trimming the deficit is now the government's biggest challenge, yet it consistently fails even to make the cuts promised in past budgets.
Moreover, it has proven unable to speed the pace of privatization (which would add to government revenue), partly due to barriers thrown up by India's bureaucracy.
These problems, however, are not made in Delhi exclusively.
Indeed, India's central government has (for the most part) managed to hit its deficit targets in recent years.
Instead, state finances are an increasing drain on overall government finance, as they have deteriorated extensively.
This deterioration in government finances is not due to declining revenues, but to sharp increases in expenditures (such as wages, subsidies, interest payments and defense spending), which do little to boost growth in the way that government capital expenditures can.
This growing fiscal deficit, however, has created a higher monetized deficit, inciting greater inflationary pressures.
For a while, the government dodged trouble by turning to an improved local bond market, which helped reduce borrowing from the central bank.
But state incursions into the capital markets are now crowding out the private sector's ability to borrow.
Indeed, the government's market borrowing as a ratio of its total financing needs increased to 66.5% in the current fiscal year, compared to 20.6% in fiscal 1991-92.
If India is to maintain the faster growth it achieved over the past decade, it must get its fiscal house in order by cutting government expenditures on consumption and speeding up privatization.
But with the non-agricultural sectors of the economy declining and external trade and the balance of payments weakening because of the global economic slowdown, fiscal prudence will be harder to accomplish.
Because of this downward spiral in economic activity, banks are now flush with liquidity, which is supporting a rally in the domestic bond market, as the slump in domestic demand drags down demand for bank credit (see the chart below).
At a time of economic downturn, domestic banks find government bonds a safe place to park their money, making it less difficult for the government to finance its mounting fiscal deficit.
The government can, of course, live with current conditions, but why not aim for something bolder and better?
At the core of India's reform agenda lay a reorientation of the government's role in the economy: to improve efficiency by minimising unnecessary state intervention, thus freeing the private sector to raise long-term economic growth.
Because that agenda remains unfinished, now is not the time for India to merely consolidate its decade of reform.
Although the lax monetary policy environment of recent years has proven to be relatively efficient in supporting growth, greater fiscal discipline will be needed if increased private investment is to be attracted.
Faster liberalisation, too, is essential, if India is to achieve the growth rates - say, of between 7%-8%, that can begin to improve the lives of its poor.
Only growth on that scale can provide the government with the money it needs to increase spending on education and health at the same time it increases defense spending, and only investments in human capital can sustain the long-term growth India craves.
Defending Japanese Defense
Japan’s government and National Security Council plan to revise the country’s National Defense Program Outline (NDPO) by the end of this year.
A draft of proposed changes submitted to Prime Minister Junichiro Koizumi assigns three key tasks to the Self-Defense Forces (SDF): effective response to new threats, participation in international peacekeeping activities, and defense against invasion.
Today’s complex security environment, with terrorist attacks by non-state actors occurring alongside traditional state-to-state wars, demands a nimble, integrated strategy.
The draft revision of the NDPO seems to recognize this, emphasizing the need for Japan’s own defense efforts, cooperation through the Japanese-US alliance, and contributions to multilateral missions.
Moreover, the National Security Council has indicated the need to introduce a new plan for multi-functional flexible defense forces.
Unfortunately, key components of Japan’s emerging security strategy remain vague and contradictory.
For example, while the likelihood of an invasion threat is judged to be low, the Defense White Paper of 2004 argues that the SDF’s “most fundamental function” is to prepare for the worst, because sufficient defensive power cannot be developed overnight.
In other words, Japan will clearly assert its will to defend the nation, and to prevent invasion in combination with the Japan-US security system.
On the other hand, the National Security Council proposes “scaling down the size of defense forces,” implying mitigation of the will to defend.
Indeed, the failure to suggest any possibility of an “emergency expansion” of the SDF compounds this anxiety.
To be sure, the government is ultimately responsible for determining the appropriate scale of defense power in line with fiscal considerations.
But it is also the responsibility of the government to prepare a detailed and realistic policy aimed at securing the necessary level of defense capability in the event of unforeseen threats.
Japan’s government should thus give a clear indication of a true will to defend the country’s security.
Of course, defense capability cannot be judged solely according to force levels.
The draft NDPO’s vision of a new, more adaptable, mobile, flexible, and multi-purpose SDF, with advanced technological resources and information gathering capacity, calls for a fundamental reassessment of the existing organization and equipment.
In conformity with the international community’s efforts to secure peace and stability, the draft also creates a core unit within each of the military branches, and establishes an integrated operational system.
The military reorganization that the NDPO envisages is far-reaching.
Japan’s ground forces are to reorient their current structure, which is geared to combat capability in response to large-scale invasion, toward increased adaptability for military action in less severe circumstances.
The navy is to shift its focus away from the anti-submarine warfare (ASW) capability of the Cold War era, creating a structure aimed at defending islands, monitoring and responding to ballistic missiles, and combating illegal spy ship activities.
The air force is to continue its monitoring activities in neighboring airspace and maintain response readiness against air attack, while modifying invasion response tactics somewhat as the likelihood of an attack from the air diminishes.
One problem is the dilution of ASW capability.
Japan needs to develop well-balanced defense forces with the capacity needed to respond to new threats, such as the rapid build-up of China’s navy, especially its submarine forces.
The importance of ASW capability in the Western Pacific has not waned. On the contrary, recent illegal violation of Japanese territorial waters by Chinese nuclear submarines suggests that, rather than being reduced, ASW capability should be built up further.
If Japan does decide to scale down its defense forces in this respect, a bold and qualitative change is inevitable.
In particular, this could mean the introduction of what has so far been viewed as somewhat taboo equipment, such as light aircraft carriers or nuclear submarines.
In this age of uncertainty, when even the nature of the threats that nations face is uncertain, Japan’s strategic and military planners must continue to seek ways to adapt the SDF to today’s myriad current threats.
But they must do so in a way that provides genuine direction, and that Japan’s people, military, and neighbors find convincing.
Defining Terrorism
Every age has its enemies.
In the mid-20th century, Fascists were the evildoers.
After WWII, Communists became civilization's nemesis.
Now terrorists have become the designated masters of malevolence.
The word "terrorism" appears in law books and legislation around the world. Various civil sanctions apply to "terrorist organizations," and it can be a crime to assist one.
But it is not always easy to determine who "they"--the terrorists--are.
Whether organizations are terrorist or not is largely a determination motivated by politics.
The UN repeatedly passes resolutions against terrorism, but cannot agree on how to define the term.
Official definitions of terrorism are unpersuasive.
The US Congress, for example, defines terrorism as including a motive to coerce or intimidate a population or influence a government.
But this formula does not clearly cover even the terrorist attacks of September 2001. If the motive of the airline hijackers was simply to kill infidels, their attack would fall outside the Congressional definition.
It is a mistake to try to define terrorism in the same way that we define theft or murder.
There are too many contested issues.
A better approach is to identify the issues that arise in thinking about terrorism and clarify why people experience terror from certain acts of violence.
Then we can define terrorism with reference to all these variables, but without making any one of them decisive.
The three primary points of controversy are: the identity of the victims, the perpetrators, and the relevance of a just cause.
Must terrorism's victims be civilians?
Some think so, but Al Qaeda blew up the USS Cole and most people regarded the killing of the sailors onboard a terrorist attack.
The same logic applies in the guidelines for President George W. Bush's military tribunals, which treat those who attack military personnel and civilians alike.
There is a similar question about the perpetrators.
Can terrorists be soldiers or state agents?
Islamic states within the UN favor this position, and I think they are right.
The International Criminal Court will prosecute heads of states for war crimes.
By the same logic, state officials should bear responsibility for acts of terrorism committed under their authority.
The most controversial issue in defining terrorism is captured by the slogan: "One person's terrorist is another's freedom fighter."
The problem is whether a good cause justifies using horrendous means.
Islamic states think that it does, which puts them at odds with Western opinion.
Those who opt for terror always believe their cause is just.
Sometimes it is, sometimes not.
No American would be happy about branding the Boston Tea Party an act of terrorist aggression against British property.
Nor would any Frenchman accept a description of the maquisards of the French Resistance as terrorists.
Yet both committed acts of violence against property and people, and so do meet the conventional tests of terrorism.
There are other troubling borderline cases.
What about the Stern gang's blowing up of Jerusalem's King David Hotel in order to liberate Palestine from the British?
Is there good terror and bad terror?
For some the political cause counts heavily, but in fact there are only a few historical cases in which most people actually disagree.
Behind the phenomenon, the nagging question remains: why is terrorism different, why does it require a special definition, why are we more afraid of this form of violence than other criminal acts?
One reason is that terrorism is typically organized activity.
In July 2002, when an Egyptian opened fire and killed two people waiting in line at the El Al counter at Los Angeles International Airport, the FBI decided that the suspect was not a terrorist because he was acting alone.
Terrorists are organized, and the group can continue even after the individual is caught.
That makes them more frightening than ordinary criminals.
Another reason for our greater fear of terrorism is that whereas ordinary criminals prefer secrecy, terrorists crave publicity.
Effective terrorism always captures headlines.
It is unexpected, with great shock value.
Like good theater, terrorism always acts out some moral drama, and to strike terror in the public mind, terrorists must act in public, without guilt or remorse.
But suppose we try to define the attacks of September 11, 2001, as terrorism by using the following formula: a violent, organized, and public attack by private parties on other civilians, without guilt, regardless of the justice of the cause.
Sometimes the victims are military and the perpetrators are states, sometimes the cause appears to be just, and sometimes one person with enough weapons but no organization might wreak terror.
A conspiracy to lace letters with anthrax might incite private terror.
Some terrorists might feel remorse and guilt about their actions.
These counter-examples should not be surprising.
Many definitions face this problem.
The great 20 th century philosopher Ludwig Wittgenstein proposed a different approach to troublesome definitions: explaining concepts by the analogy of "family resemblances."
Family members might share many physical features, such as height, skin tone, or hair color.
Each member might share some of the common characteristics, but not all of them, with other members.
There may be no single common feature, but all are readily identified as members of the same family.
The same can be said of terrorism.
At least six features are relevant, but exceptions occur in each of the six.
Complex definitions with built-in exceptions may make lawyers uncomfortable, but in the real world, they are perhaps the best we can devise.
Deflation and Democracy
PRINCETON – The history of finance is partly the history of a struggle for a stable, secure way to measure value. And, like any quest for certainty in our unpredictable world, it was doomed to failure.
The latest financial crisis powerfully highlights this vulnerability, as it destroys any sense that we can put an accurate price on assets.
Most people are now convinced that this shortcoming is inherent in the financial system.
But uncertainties about value also expose deep problems in the political order.
In the past, metallic money provided an inconvenient and unsatisfactory solution to the question of value.
It was inconvenient because gold was awkward for everyday transactions, and silver had too little value for major transfers.
Moreover, metallic money was prone to unpredictable shifts in value with the discovery of new supplies.
The arrival of silver from the New World in the sixteenth century triggered sustained inflation.
The discovery of gold in California in the mid-nineteenth century, and in Alaska, South Africa, and Australia 50 years later, also produced mild inflation, while the absence of such new discoveries in the 1870’s and 1880’s led to mild deflation.
Consequently, many economists and politicians concluded that paper money could be more easily controlled and more stable.
This innovation, which was dependent on high-security paper-making and printing techniques, transformed the twentieth century.
But it initially produced a much less stable outcome, because of the strong temptation of political abuse.
Instead of moderate inflation, most of the twentieth century was wildly inflationary, as governments over-issued currency.
In the last two decades of the twentieth century, however, an intellectual revolution occurred. Entrusting monetary policy to an independent central bank promised to be a perfect way to counter the political pressure to print money.
At the United States Federal Reserve, Paul Volcker engineered a sustained and successful process of disinflation beginning in 1979.
Europe learned the same lesson with the move to monetary union and the creation of the European Central Bank to manage its new currency, the euro.
As a result, people assumed that the problem of monetary stability had been solved, and that they could pile up assets and then use them as collateral to borrow ever-larger sums.
But the large-scale destruction of financial assets because of underlying uncertainty about the extent of losses in the wake of the sub-prime crisis, and especially after the bankruptcy of Lehman Brothers, shook that assumption.
Deflation that emanates from the financial sector is lethal.
It is more difficult to deal with than inflation, in part for the technical reason that interest rates can be reduced only to zero.
The closer to zero they fall, the more problematic monetary policy becomes.
The policy instruments no longer work.
Central banks have expanding balance sheets, but prices continue to fall and uncertainty rises.
There is a further reason why deflation is such a threat, and why policymakers setting out to eliminate it have a much tougher task than inflation fighters: all prices do not move down; in particular debts do not adjust because they are fixed in nominal terms.
Inflation and deflation of debts produce very different outcomes.
Inflation reduces the value of debt, which for many people and companies feels like slowly sipping champagne, producing a nice buzz of light-headed excitement as they are unburdened.
Deflation, on the other hand, increases debt, and feels like being smothered by a lead blanket.
In the interwar Great Depression, the economist Irving Fisher accurately described the process of debt deflation, in which lenders, worried by the deterioration of their asset quality, called in their loans, pushing borrowers to liquidate assets.
That, in turn, merely drove down prices further, leading to more credit rationing, bankruptcies, and bank failures.
The political response to deflation is to call for a stronger state.
Dealing with deflation is impossible within the bounds of normal market operations.
Only the state is reliable enough to take on all debt, which private institutions are too risk-intolerant to hold.
But economists’ abstract description of the resulting state intervention as an expansion of “aggregate demand” conceals the fact that the government conducts specific expenditures and makes political decisions that rescue specific businesses and individuals.
In the climate of scarcity that characterizes debt deflations, the specificity of bailout operations inevitably leads to intense political debate. We see this in the current discussion about the distributional effects of rescuing the automobile industry; or the worry that hedge funds, which are widely blamed for today’s financial malaise, should have access to the Fed’s emergency credit lines.
Currently, parallels are being drawn to Japan’s experience in the 1990’s – a “lost decade” in economic terms that also undermined the legitimacy of the ruling Liberal Democratic Party.
The Great Depression produced more alarming outcomes, as the political response to deflation throughout Central Europe and Latin America destroyed the prevailing order, including several democracies.
Statism has been a characteristically twentieth-century response to new uncertainty.
Its inadequacy may lead to the formulation of a much older answer: revulsion against the market economy, accompanied by indiscriminate condemnation of debt and debt instruments.
Indeed, as governments scramble to respond to the current crisis, we should remember that deflation tends to produce not only radical anti-capitalism, but also a profound hostility to any kind of economic or political organization.
Deflation Doldrums?
CAMBRIDGE – The rate of inflation is now close to zero in the United States and several other major countries.
The Economist recently reported that economists it had surveyed predict that consumer prices in the US and Japan will actually fall for 2009 as a whole, while inflation in the euro zone will be only 0.6%.
South Korea, Taiwan, and Thailand will also see declines in consumer price levels.
The prospect of falling prices reflects the collapse of industrial production, the resulting high level of unemployment, and the dramatic decline in commodity prices.
Industrial production is falling at double-digit rates in the negative-inflation countries, and the price index for all commodities is down more than 30% over the past year.
Deflation is potentially a very serious problem, because falling prices – and the expectation that prices will continue to fall – would make the current economic downturn worse in three distinct ways.
The most direct adverse impact of deflation is to increase the real value of debt.
Just as inflation helps debtors by eroding the real value of their debts, deflation hurts them by increasing the real value of what they owe.
While the very modest extent of current deflation does not create a significant problem, if it continues, the price level could conceivably fall by a cumulative 10% over the next few years.
If that happens, a homeowner with a mortgage would see the real value of his debt rise by 10%.
Since price declines would bring with them wage declines, the ratio of monthly mortgage payments to wage income would rise.
In addition to this increase in the real cost of debt service, deflation would mean higher loan-to-value ratios for homeowners, leading to increased mortgage defaults, especially in the US.
A lower price level would also increase the real value of business debt, weakening balance sheets and thus making it harder for companies to get additional credit.
The second adverse effect of deflation is to raise the real interest rate, that is, the difference between the nominal interest rate and the rate of “inflation.”
When prices are rising, the real interest rate is less than the nominal rate since the borrower repays with dollars that are worth less.
But when prices are falling, the real interest rate exceeds the nominal rate.
This is exacerbated by the fact that borrowers can deduct only nominal interest payments when calculating their taxable income.
Because the US Federal Reserve and other central banks have driven their short-term interest rates close to zero, they cannot lower rates further in order to prevent deflation from raising the real rate of interest.
Higher real interest rates discourage credit-financed purchases by households and businesses.
This weakens overall demand, leading to steeper declines in prices.
The resulting unusual economic environment of falling prices and wages can also have a damaging psychological impact on households and businesses.
With deflation, we are heading into unknown territory.
If prices fall at a rate of 1%, could they fall at a rate of 10%?
If the central bank cannot lower interest rates further to stimulate the economy, what will stop a potential downward spiral of prices?
Such worries undermine confidence and make it harder to boost economic activity.
Some economists have said that the best way to deal with deflation is for the central bank to flood the economy with money in order to persuade the public that inflation will rise in the future, thereby reducing expected real long-term interest rates.
That advice would lead central banks to keep expanding the money supply and bank reserves even after doing so no longer lowers interest rates.
In fact, the Federal Reserve, the Bank of England, and the Bank of Japan are doing just that under the name of “quantitative easing.”
Not surprisingly, central bankers who are committed to a formal or informal inflation target of about 2% per year are unwilling to abandon their mandates openly and to assert that they are pursuing a high rate of inflation.
Nevertheless, their expansionary actions have helped to raise long-term inflation expectations toward the target levels.
In the US, the interest rate on government bonds now rises from 1.80% at five years to 2.86% for 10-year bonds and 3.70% for 30-year bonds.
Comparing these interest rates with the yields on government inflation-protected bonds shows that the corresponding implied inflation rates are 0.9% for five years, 1.3% for 10 years and 1.7% for 30 years.
Ironically, although central banks are now focused on the problem of deflation, the more serious risk for the longer term is that inflation will rise rapidly as their economies recover and banks use the large volumes of recently accumulated reserves to create loans that expand spending and demand.
Defusing Iran’s Oil Weapon
Like North Korea, the Iranian government will not shy from a showdown over its nuclear program.
Why should it?
A nuclear weapon is the ultimate guarantee that the United States can never do to Iran what it did to Iraq.
Moreover, this struggle with the US rallies much-needed domestic support.
What, then, can the US do to undermine Iran’s position?
As the world’s fourth largest oil exporter, Iran has profited mightily from the tripling of global oil prices over the last four years.
Its economic stability is dependent on oil revenues, so it is here that Iran’s rulers are vulnerable.
American diplomats are never going to persuade the UN Security Council to impose sanctions on Iran’s energy exports.
But the Bush administration can seek ways to contain global energy prices – and it should begin by refusing to be baited into escalating tensions whenever Iranian President Mahmoud Ahmadinejad pleases.
Ahmadinejad has proven resourceful in driving the diplomatic conflict.
His government has rejected international calls to halt uranium enrichment, ignored UN-imposed deadlines, armed Iraqi militias, supplied Hezbollah with weapons for attacks on Israel, denied the Holocaust, and staged military exercises near the Strait of Hormuz, through which 40% of the world’s sea-traded oil passes.
All these provocations add upward pressure on oil prices, enriching the Iranian government.
When Supreme Leader Ayatollah Ali Khamenei hinted that Iran could play the oil card, US Secretary of State Condoleezza Rice dismissed the idea.
“Let’s just remember that Iran is some 80% dependent on oil in its budget,” she said, so it is “not really able to live with a disruption.”
But if Iran pulls modest amounts of its oil from international markets, price increases are likely to offset (perhaps completely) any loss in revenue from the supply cut.
In addition, threats to the Strait of Hormuz would allow Iran to force prices up without any reduction in output.
It is not an accident that virtually every public move Iran’s government has made in the international arena over the past year has added risk to energy markets.
At times, the US has effectively – if unintentionally – undercut Iran’s position.
This summer, the Bush administration offered Iran direct talks.
In September, Bush made an unexpectedly low-key speech to the UN General Assembly.
Resistance to sanctions from Russia, China, and France has persuaded US officials to “allow more time for diplomacy” before pushing for punitive action in the Security Council.
All of these choices helped return slack to energy markets.
Oil prices have fallen from above $78 per barrel in mid-July to less than $60 in early October.
The drop – due in no small measure to an easing of tensions over Iran’s nuclear program – is costing the Iranian government money, compounding the regime’s domestic problems.
Inflation in Iran is rising, perhaps to as high as 20%.
On October 1, Khamenei called on Ahmadinejad to address the growing problem.
There are price freezes on certain subsidized goods and services, and rising inflation makes these subsidies even more expensive for the government.
Indeed, the government indicates that it may begin rationing gasoline.
Unemployment stands at about 12%, and is probably twice as high among young people.
The US can undermine the Iranian regime by avoiding statements and actions that help drive energy prices higher and bolster Iran’s economy.
Administration officials should lower the political temperature.
They should again offer Iran direct talks.
Bush should invite Ahmadinejad to Washington. Better yet, invite him to Crawford.
Make him breakfast.
Washington can also press the Saudis, who control virtually all of the world’s spare capacity, to keep their output high to contain prices.
Saudi Arabia’s ruling Sunnis are more threatened than is the US by Iran’s support for a shift in the regional balance of power toward Shia Muslims.
Yes, Ahmadinejad will probably find a way to re-escalate the conflict.
No one can stop Iran from threatening the Strait of Hormuz.
But no one can blame the US for that when Bush is offering to talk.
Iran probably needs two or three years to develop a nuclear weapon.
How strong will Ahmadinejad’s domestic position be then?
If the US does not provide him with threats that help rally domestic support, his failure to revitalize Iran’s economy will erode his standing at home.
Lower oil prices would mean less money to spend on domestic projects that buoy his popularity – or on the nuclear program.
If cutting into Iran’s oil income fails to weaken Ahmadinejad, the US would retain military options.
But undermining his domestic standing by limiting Iran’s revenues stands a better chance of succeeding than diplomatic efforts to persuade the regime to suspend uranium enrichment voluntarily, or coercive sanctions.
Easing tensions will not win Bush points with those who prefer a muscular strategy.
But the administration’s confrontational approach is failing, because it is precisely what Iran’s rulers want.
Defusing Russia’s Energy Weapon
COPENHAGEN – As winter approaches, many people in Central and Eastern Europe remember the chill caused last winter by Russia’s deliberate cut-off of gas supplies.
That shutdown was a harsh reminder that gas is now the Kremlin’s primary political instrument as it seeks to re-establish its privileged sphere of interest in what it thinks of as Russia’s “near-abroad.”
If Russia is allowed to continue imposing Moscow rules on Europe’s energy supplies, the result will be costly – not only for Europe, but for Russia as well.
So it is past time that the European Union stopped treating energy as a bilateral issue, with some of the larger member states trying to protect their own narrow interests at the expense of the common European good.
The EU urgently needs to build a common energy policy and a single market for natural gas.
Until both are established, there is a grave risk that Russia will use new blockades to continue the kind of divide-and-rule policy that the world has witnessed since Vladimir Putin came to power.
The planned Nord Stream gas pipeline on the bottom of the Baltic Sea is a good example of the problems that everyone in Europe is facing.
The pipeline has been established as a Russian-German-Dutch consortium, but it is the Russian energy giant Gazprom that is in the driver’s seat with 51% of the shares.
Nord Stream will enable Russia to deliver natural gas directly to Germany without using the existing land-based connections.
At first glance, there seems to be no problem.
But the real reason Russia wants to build Nord Stream – which is more expensive than the existing gas-pipeline network – is that it will enable Russia to interrupt gas supplies to EU member countries like Poland, the Baltic states, and neighbors like Ukraine, while keeping its German and other West European customers snug and warm.
Countries that have good reason to fear a Russian manufactured chill have loudly proclaimed that Nord Stream is politically rather than economically motivated.
After all, it would be much cheaper to expand existing land pipelines than to build undersea.
Moreover, Russia’s ability to meet future gas demand from commercially viable reserves suggests that Nord Stream could be used to cut off gas sales to unfavored clients.
Yet these concerns have been pushed aside by the powerful pro-Nord Stream lobby, led by former German chancellor Gerhard Schröder, who, having approved Nord Stream while in office, was quickly hired by Gazprom after he left it.
In most democracies, such a move would have quickly received prosecutorial attention.
But no serious investigation of the propriety of Schröder’s dealings was ever launched, perhaps because of the scale and importance of German-Russian economic ties.
This November, Nord Stream was given a surprising go-ahead by three Scandinavian countries that will lend their seabed to the project: Denmark, Sweden, and Finland.
They seem to regard the case as a “technical issue,” and are now satisfied because environmental guarantees have been given.
But Nord Stream is no “technical issue.”
The concerns of countries that fear being left out in the cold must be addressed, which is why it is necessary to establish a single EU market for natural gas.
That way, no one would be left exposed to Russian pressure.
Europe undoubtedly needs Russian gas, but fears that this gives Russia a monopolistic stranglehold over Europe are exaggerated.
Russia’s share of total EU gas imports is just above 40% today, compared to 80% in 1980.
Moreover, Russian gas represents only 6-7% of the EU’s total primary energy supply.
So, in general, dependence on Russian gas should not be feared.
The problem is that some countries in the eastern part of the EU are much more dependent on Russian gas than the average figures suggest.
Thus, they must be guaranteed the kind of solidarity that is fundamental to EU membership.
Last year’s experience with interrupted gas supplies did have one benefit: new life was blown into plans for alternative routes, like the Nabucco pipeline that is to bring Azeri gas to Europe through Turkey.
An early warning system on potential supply cuts has also been agreed between Russia and the EU.
And it looks like Ukraine’s Prime Minister Yulia Tymoshenko has charmed Prime Minister Putin into concluding a new gas deal.
Yet anxiety remains high in the countries most exposed to new supply cuts.
It is in Russia’s own interest that the EU deal with it as a united entity.
Continued fear and uncertainty about Russian gas supplies would undoubtedly lead the most exposed EU countries to seek to protect themselves by blocking EU-Russia negotiations on new partnership and cooperation agreements.
In his State of the Nation speech this November, Russian President Dmitri Medvedev stressed the need for modernization of the Russian economy.
Closer cooperation with the EU is the most obvious way to make this possible.
But, so long as Russia is perceived as an energy blackmailer and not a partner, such cooperation will be impossible.
Defusing the Nuclear Arms Race
BERLIN – As the recent UN and Washington summits have demonstrated, nuclear arms control and disarmament are among the top issues on the world’s political agenda.
They are likely to remain so for the foreseeable future.
Indeed, 2010 will determine whether US President Barack Obama’s vision of a nuclear-free world will remain a distant but achievable hope, or must be abandoned.
No one should be under any illusions. Even if all of the world’s nuclear-weapon states embrace the vision of a world free of the threat of nuclear conflict, nuclear weapons will remain with us for two decades at least, and even that would require the most favorable conditions for disarmament.
This year is crucially important.
The agreement signed in early April in Prague between Russia and the United States on the reduction of strategic nuclear weapons and possibly on further cuts was accompanied by the publication of the US Nuclear Posture Review, identifying the nuclear capabilities that Obama’s administration wishes to preserve for the next four years.
The Nuclear Non-Proliferation Treaty review conference will begin the work of adapting the NPT to our rapidly changing world.
Many policymakers hope that 2010 will bring clarity on the North Korean and Iranian nuclear programs.
There are roughly 23,000 nuclear weapons today, which is 40,000 fewer than at the Cold War’s height. &nbsp;These weapons’ total yield is greater than 150,000 Hiroshima-size nuclear explosions.
Nuclear disarmament is therefore still urgently needed, and prominent politicians in the US and Germany have produced the US-led Global Zero initiative and createdthe International Commission on Nuclear Non-Proliferation and Disarmament (ICNND), sponsored by Australia and Japan and co-chaired by former Foreign Ministers Yoriko Kawaguchi and Gareth Evans.
The US, Russia, France, the United Kingdom, and China – all NPT signatories – possess nine-tenths of the world’s nuclear weapons, while India, Pakistan, and probably Israel possess around 1,000.
North Korea presumably has a few, and Iran is most likely pursuing a nuclear-weapons program.
Obama and Russian President Dmitri Medvedev have agreed to reduce their strategic arsenals to 1,550 weapons each – far more than the 1,000 that Obama had in mind, but nonetheless a huge step that could bring about further cuts.
But the road to global nuclear disarmament will be long and bumpy.
To begin with, the capacity to dismantle and destroy nuclear warheads is limited, and likely to remain so.
Current capacity is roughly 500 weapons annually in both Russia and the US, which means that the total of 2,000 weapons each that the ICNND Report suggests for the year 2025 cannot be fully implemented much before 2028.
Then, there is the risk that other countries, particularly in the Middle East, will follow the example of North Korea and Iran.
The ICNND report Eliminating Nuclear Threats, released late last year, proposes meeting these challenges with a comprehensive agenda for reducing nuclear risks.
As the German ICNND Commissioner, I believe that this report is the first and only one so far to suggest precise and feasible steps towards a nuclear-free world.
The report consists of 20 proposals to be decided on at this year's NPT review conference, and ends with proposed decisions to be taken after 2025.
It leaves no room for doubt that a nuclear-free world is achievable without any risk to the security of individual states, provided that for the next 20 years or so there is sustained political will around the world, particularly in the nuclear-weapon states.
In addition, the report proposes a declaration by these states that the sole purpose of nuclear weapons is to deter others from their use, coupled with an obligation not to increase their stockpiles.
For the 2025 timeframe, the aim is to reduce the global nuclear stockpile to 2,000, or less than 10% of today’s total.
A “No First Use” declaration should be collectively agreed upon, in conjunction with corresponding verifiable force structures, deployments, and readiness status.
As supplementary steps, the report suggests negotiating limitations on missiles, strategic missile defense, space-based weapons, and biological weapons, as well as holding talks on eliminating conventional weapons imbalances."
Achieving this ambitious agenda by 2025 would usher in the last phase in the quest for a nuclear-free world, and requires, first and foremost, political conditions that reliably rule out regional or global wars of aggression.
Nuclear weapons would thus become superfluous.
Only then could they be banned and their total elimination begin.
In parallel, mandatory measures would penalize any states attempting to circumvent the ban, as well as individuals involved in producing nuclear weapons.
Obama’s vision could thus become reality 20 years from now, provided that the US and Russia take the first steps this year.
Immediate further cuts must include sub-strategic weapons, with the few remaining American nuclear weapons in&nbsp;Europe withdrawn in exchange for the elimination of the still substantial Russian stockpile.
But the withdrawal of American nuclear weapons from Europe is by no means the first step towards nuclear disarmament.
To suggest it as an opening move could damage European security and jeopardize transatlantic cohesion, so the message has to be “no” to unilateral withdrawal, but “yes” to including these weapons in future arms-control negotiations.
Withdrawal of these weapons would not mean the end of nuclear deterrence for Europe, as deterrence will remain necessary until the last nuclear weapon is dismantled.
But the sole purpose of retaining some degree of deterrence will be to deter the use of nuclear weapons.
Europe perhaps benefited more than any other part of the world from nuclear deterrence, because it helped to preserve peace during the Cold War and prevented nuclear proliferation.
But the time has now come to join Presidents Obama and Medvedev in bringing about disarmament.
Indeed, without the US and Russian examples, the world would see more, not fewer, nuclear-weapon states.
De Gaulle at the Barricades
LONDON – By coincidence, this is a busy year for round-number anniversaries for France’s greatest leader since Napoleon.
Charles de Gaulle was born 120 years ago in Lille. He died 40 years ago at his home in Colombey-les-deux-Églises, expiring of a heart attack as he played solitaire one evening.
Seventy years ago, he delivered his celebrated call to resistance over the BBC after flying to London from France as it collapsed in June 1940.
This year also marks a much less noted anniversary, an occasion on which de Gaulle showed how his rare combination of determination, political skill, and rhetorical ability could be brought to bear to face down determined opposition.
It was a central moment in the establishment of the Fifth Republic, which continues to this day.
The war in Algeria played the key role in enabling de Gaulle to return to power in May 1958, at the age of 67.
Though his memoirs paint a characteristic portrait of a leader who knew what he was doing, research for my new biography shows that his policy towards the crisis across the Mediterranean combined hope and frustration.
He hoped that France could dominate the National Liberation Front (FLN) militarily, and was frustrated at the extremely messy political situation on the ground and the difficulty of persuading the settlers that maintaining the status quo was untenable.
In 1958, he told a crowd in Algiers made up mainly of pieds noirs Europeans “Je vous ai compris” (“I have understood you”).
But, by 1960, euphoria had given way to rancor among those whom he had used to regain office but who now saw him as a traitor to be neutralized along with the regime he had brought into being.
The catalyst for what came to be known as “Barricades Week” was an interview published in the German newspaper Sueddeutsche Zeitung with the parachute general Jacques Massu, in which he said that part of the army regretted having called de Gaulle back to power, did not understand his policy, and was disappointed that he had become “a man of the left.”
Massu, a convinced Gaullist, should have known better than to say such home truths publicly, whatever his own frustrations.
He was promptly sidelined to a command in provincial France.
After a stormy meeting with de Gaulle at the Élysée Palace, Massu telephoned his chief of staff, Colonel Antoine Argoud, who had been pressing for a coup.
A general strike was called, and militant students threw up barricades in the center of Algiers.
When police attacked with tear gas, pieds noirs opened fire.
In the ensuing gun battle, 14 members of the security forces and eight demonstrators were killed, and 200 people were wounded.
“The hour has come to bring down the regime,” the extremist ideologue, Jean-Jacques Susini declared.
“The revolution will start from Algiers and reach Paris.”
De Gaulle was at Colombey, but returned immediately to Paris.
An official who saw him in the corridor of the palace recalled him muttering: “What a business!
What a business!”
At a cabinet meeting, he insisted that the challenge to the new republic had to be put down.
The prime minister, Michel Debré, was sent to Algiers, but the rebels treated him contemptuously, and he flew back empty handed.
Rumors flew of the creation of a shadow government by extremists in Paris.
Members of the presidential military staff were told to carry handguns.
Summoning Massu’s successor, General Jean Crépin, de Gaulle told him, “The Europeans do not want the Arabs to make a choice, [but] the Muslims do not want to be Bretons.
If the army collapses, it is Algeria France which collapses.”
The decisive moment came when de Gaulle, in military uniform, went on television to demonstrate his mastery of the new medium. “Well, my dear and old country, here we are again facing a heavy test,” he said.
Insisting that self-determination was the only way ahead, he called on the army to reject even passive association with the insurrection and instructed it to re-establish public order.
If the state bowed before the challenge it faced, “France would be no more than a poor, broken toy floating on an ocean of uncertainty,” he warned.
Within 15 minutes of the General’s face fading from the screen, 40 army units in Algeria declared their loyalty.
The men at the barricades were persuaded to leave their stronghold; the insurrectionary leaders were either detained or escaped to Spain.
The defeat of the military revolt was the first time that the republican authority of Paris had been asserted over the pieds noirs who had helped to bring down the Fourth Republic.
De Gaulle’s firmness and rhetoric – aided, it must be said, by the fumbling of the rebels – established the primacy of the state.
The next day, de Gaulle’s face was drawn, but he was resolute and full of energy.
Ministers who sympathized with the settlers, notably the long-time Gaullist Jacques Soustelle, were sacked.
The National Assembly granted de Gaulle the power to rule by decree for a year.
Trade unions held a symbolic one-hour strike to back the government.
An opinion poll gave the General 75% backing.
The Fifth Republic was safe, and a historic page had been turned.
The disdain felt by de Gaulle, a man of the north, for the emotional settlers across the sea had deepened.
Two years later, after de Gaulle’s steeliness repulsed a second uprising, the Evian peace agreements between France and the FLN brought Algeria’s independence.
Demand or Supply?
CHICAGO – Economics is all about demand and supply.
Typically, the two are equal, and, if not, powerful forces push them towards each other.
But, with high and persistent levels of unemployment in the United States, there is a real question about the nature of the problem: is aggregate demand too low, or are there problems with supply?
President Barack Obama’s administration seems to think that the problem is one of demand, and has passed stimulus measure after stimulus measure, reducing taxes and increasing transfers and government spending in order to boost consumption and investment.
The Federal Reserve is of a similar mind, not only maintaining rock-bottom short-term interest rates, but also embarking on an adventurous policy targeting long-term rates.
Some progressive economists want even more.
Why have these policies not worked thus far in bringing down unemployment, even though the growth recovery is well under way?
The progressive economist says that stimulus worked, staving off a much deeper recession – if not worse – but that the measures were too timid to generate a robust recovery.
The conservative economist responds that it is precisely because the government has become so free with taxpayers’ money that households, fearful of future taxes, are hunkering down and increasing savings.
Moreover, the increasingly activist government has left businesses uneasy about future regulatory and tax measures, and thus reluctant to invest.
The truth probably lies somewhere in between.
Government spending – especially on unemployment benefits, aid to states, and some construction projects – probably helped avert a more wrenching downturn, but continued red ink worries households, which are also trying to rebuild savings and reduce debt after a spending binge.
The regulatory uncertainty created in areas such as health care makes it difficult not only for the health-care industry to make long-term investment decisions, but also for businesses to make long-term hires.
Nevertheless, before rushing to judgment about current policy, we should recognize the trend in recent US recoveries of slow job growth.
From 1960 until 1991, recoveries from recessions in the US were typically rapid.
From the trough of the recession, the economy recovered the lost jobs in eight months on average.
The recoveries from the recessions of 1991 and 2001 were very different.
For instance, in 2001, it took just one quarter for output to recover, but 38 months for jobs to come back.
Explanations abound.
Some economists argue that, unlike past recessions, in which workers were temporarily laid off from an industry only to be rehired as the recovery picked up, job losses starting in 1991 were more permanent.
Matters were exacerbated by firms’ postponement until a recession of hard choices about closing unviable plants and shedding workers.
As a result, unemployed workers had to find jobs in new industries, which took more time and training.
Others suggest that the Internet has made it easier for firms to hire quickly.
So, rather than hire in a panic at the first sign of recovery, as they did in the past, for fear that they will be unable to do so later and lose sales, firms today would rather ensure that the recovery is well established before hiring.
Hence also the growth in temporary hires today.
Regardless of what the right explanation is, the history of recent recessions suggests that we should not be surprised that the job recovery is taking time.
There is, however, an aspect of the problem that is different this time: layoffs in construction.
Therein lies an additional explanation for tepid job growth, as well as a salutary lesson about policy.
In the last boom, construction jobs expanded significantly, with investment in housing as a share of GDP increasing by 50% from 1997 to 2006.
As my colleague Erik Hurst and his co-authors have shown, states that had the largest rise in construction as a share of GDP in 2000-2006 tended to have the greatest contraction in that industry in 2006-2009.
These states also tended to have the largest rise in unemployment rates between 2006 and 2009.
The unemployed comprise not only construction workers, but also ancillary workers, such as real-estate brokers and bankers, as well as all those who work on houses, such as plumbers and electricians.
So the job losses extend far beyond those in the construction industry.
It is hard to believe that any increase in aggregate demand will boost the housing market – which, remember, was buoyed by visions of steady price appreciation that few seem likely to hold today – sufficiently to re-employ all these workers.
Hurst estimates that this “structural” unemployment may account for up to three percentage points of total unemployment.
In other words, were it not for construction, the US unemployment rate would be 6.5% – a far healthier situation than today.
Policymakers should remember that the housing boom was fueled by easy monetary policy, which sought to expand job growth as the US recovered from the last recession.
Indeed, high-school graduation rates dropped in Las Vegas as people left school for readily available unskilled construction jobs.
Now those uneducated unemployed are experiencing more than three times the unemployment rate of college graduates.
It will be very hard for them to return to the workforce.
The lesson for policymakers is clear: instead of constantly trying to boost spending and potentially creating problems for the future, a more sustainable way to improve job growth is to facilitate the “re-skilling” of the unemployed, especially those who were in construction-related jobs.
Eventually, better labor-force supply will create healthier and more sustainable demand.
Demilitarizing Muslim Politics
ISLAMABAD – Can Muslim governments free themselves from their countries’ powerful militaries and establish civilian control comparable to that found in liberal democracies?
This question is now paramount in countries as disparate as Egypt, Pakistan, and Turkey.
To predict how this struggle will play out, it helps to understand the region’s past.
Since Islam’s founding in the seventh century, it has maintained a tradition of deep military engagement in politics and governance.
Indeed, Islam’s increasing military prowess helped it to spread rapidly around the world.
The military was responsible for Islam’s implantation throughout the Middle East, as well as in Persia, Southern Europe, and the Indian sub-continent.
And once a Muslim state was established in newly conquered lands, the military became integral to its governance.
The military’s incorporation into the state was most prominent in the Ottoman Empire, whose rulers created a new type of military force that drew its manpower mostly from Islamic-ruled parts of Europe.
These Janissaries (Christian boys conscripted to serve in Ottoman infantry units) were either recruited from Europe or abducted from countries under Ottoman control.
Janissaries were not allowed to marry or to own property, which prevented them from developing loyalties outside of the imperial court.
But, after these restrictions were removed in the sixteenth century, and up until their extermination in the nineteenth century, the Janissaries became extremely powerful in Istanbul (and even established their own dynasty in Egypt).
Military domination in Muslim countries survived right up to the fall of the Ottoman Empire in the early twentieth century.
The colonial powers that filled the vacuum left by the declining empire had their own militaries, and therefore did not need local forces to govern.
But when Europeans withdrew from the Muslim world in the twentieth century, these forces rushed back in to wrest control of politics.
The military rose to power in Egypt, Pakistan, and other Arab countries in the early and mid-twentieth century.
In Turkey, the military proclaimed itself the guardian of the secular Republic of Turkey, founded in 1923 by Mustafa Kemal Atatürk, himself a military man.
Today, the revolutions rocking much of the Muslim world are bedeviled by Islam’s military past.
In the first phase of these popular uprisings, those who had been politically and economically excluded began to demand inclusion and participation.
Now a second phase is underway, marked by a serious effort to divest the old military establishment of its power.
This struggle is manifesting itself in different ways in Egypt, Turkey, and Pakistan.
In Egypt, the military’s takeover of the political transition after the ouster of former President Hosni Mubarak is unacceptable to Muslim and secular forces alike.
Most Egyptians want the soldiers to leave politics and return to their barracks.
Essam el-Erian, whose Islamist Freedom and Justice Party recently won the most seats in Egypt’s parliamentary elections, recently said that the Muslim Brotherhood (to which the party is closely tied), does not expect the military rulers to relinquish power voluntarily.
They will have to be persuaded to leave, and, if that does not work, forced out.
The parliament’s first step in ultimately removing them would be to defend its authority to choose the members of a planned 100-person constitutional assembly.
Meanwhile, in Turkey, the Justice and Development Party, which has strong roots in the country’s Islamic tradition, is now seeking to limit the military’s role.
The armed forces, however, claim a constitutional mandate to protect the Republic’s secular traditions.
And Turkey’s generals have intervened in politics several times to defend Kemalism – Atatürk’s secular ideology of modernization that pushed Islamic Turkey towards European-style liberalism.
But, of the three countries, Turkey has most successfully demilitarized its politics.
The charismatic prime minister, Recep Tayyip Erdoğan, having won three consecutive elections, has been able to exert his authority over the military.
Controversially, he has jailed the army’s top general, İlker Başbuğ, whom Turkish prosecutors have accused –&#160;many say implausibly – of plotting to overthrow the government.
Finally, Pakistan’s military, which has governed the country for half of its 64-year history, is fighting hard to retain influence over policymaking.
Humbled by its inability to control United States military operations, including the one that killed Osama bin Laden, the army is struggling to play a hand in the country’s evolving relations with India and the US.
Nevertheless, wary of provoking widespread hostility, military leaders have indicated recently that they have no intention of intervening in politics.
Since the Arab Spring began, four long-established regimes have been removed, while others are under increasing pressure, giving ordinary Arabs hope that their demands will no longer be ignored, and that those who govern will be mindful of citizens’ needs.
But that – the real revolution – will happen only when true representatives of citizens, rather than the military, begin to set their countries’ political course.
Syria’s No-Solution Solution
MADRID – Syria is a blood-soaked shambles.
Four years of civil war have left more than 200,000 dead, one million wounded, and 6.7 million people internally displaced.
Another 3.8 million are living as refugees outside the country, and 13 million (out of a pre-war population of 20 million) are in need of humanitarian assistance.
Two illustrious United Nations special envoys – Kofi Annan and Lakhdar Brahimi – have resigned in the face of Syria's self-perpetuating spiral of violence.
But, against this bleak background, there is reason for cautious optimism.
Kurdish forces recently succeeded, after months of heavy fighting, in expelling the Islamic State from the border town of Kobane.
Moreover, the new UN envoy, Staffan de Mistura, has initiated a pragmatic and determined “Aleppo first" strategy, which aims to freeze military operations in the shattered city and facilitate the entry of aid.
Could this mark a turning point for Syria?
When the crisis in Syria erupted, nobody predicted how serious, protracted, and complex it would turn out to be.
For starters, observers underestimated citizens' ever-deepening sense of hopelessness, which has driven them to support jihadi groups or the Assad regime.
The conflict is also unique in its asymmetry, stemming from the numerous and disparate actors involved.
There are only two conventional armies: the Kurdish fighters and the forces loyal to President Bashar al-Assad.
The opposition comprises factions dependent on foreign sponsors.
Indeed, the “nationalist" opposition is merely an assortment of factions responsible for protecting small territories, and the “Free Syrian Army" is little more than a fantasy.
The stark reality is that the best-organized groups are the jihadists: the Islamic State, Jabhat al-Nusra, and the Islamic Front.
De Mistura's plan aims to stabilize the situation by shifting the policy focus away from a relentless military campaign – an approach that is benefiting only the Islamic State.
The plan's emphasis on Aleppo – which is not only a commercial hub and Syria's largest city, but also represents a sort of microcosm of the country – distinguishes it from the shaky cease-fires that have been implemented in Homs and elsewhere in the country.
The strategy's main strength is that it is not, in itself, a peace project.
Instead of requiring that any or all factions surrender or relinquish their weapons, it calls only for the cessation of heavy fighting, to allow for the delivery of humanitarian aid and prevent Aleppo's total collapse.
Such a freeze – guaranteed by an effective enforcement mechanism – would present an important opportunity to make progress in confidence-building.
Recent talks in Cairo and Moscow produced small, but not negligible, steps in that direction.
The objective should be to initiate a productive dialogue – and, ultimately, achieve consensus – among relevant actors.
In this proxy war, no solution will be possible without the agreement of the factions' main sources of support – Iran, Saudi Arabia, and Qatar.
Likewise, Turkey must not only address the inflow of refugees, security concerns along its border with Syria, and its position as a transit country for jihadists; it must also develop a coherent policy toward the Islamic State that is not subsumed in official anxiety over demands by the country's Kurdish minority.
Other powers will also have a key role to play.
Support by the United States for de Mistura's initiative symbolizes a quiet – and constructive – shift by President Barack Obama's administration from its demand that Assad step down immediately.
The European Union's policy toward Syria, however, remains confused, with member states having managed to agree only to create a “regional trust fund" to address the crisis.
Given the EU's strong interest in a more stable Syria, rooted in its geographical proximity, it is time for European leaders to take an unequivocal stance on Syria.
But a lasting solution to the conflict ultimately comes down to the Syrians.
In fact, the foundations for the kind of Syrian-led political solution that is needed were laid with the 2012 Geneva I Communiqué.
At that time, successive rounds of negotiations failed, owing to an all-or-nothing mentality, based largely on the mistaken assumption that Assad, like Tunisia's Zine el-Abidine Ben Ali and Egypt's Hosni Mubarak, would be ousted relatively quickly.
But de Mistura has made it clear that he aims neither to build a lasting peace with Assad nor to establish Assad's departure from power as a precondition for peace.
The solution lies between these two options, and the West – especially Europe – must accept that.
Placing unrealistic demands on a Syrian peace process is a sure route to failure.
Pragmatism is essential, even if it means that some relevant actors, including the EU, have to swallow their pride.
The stability of the region and the lives (and what is left of the livelihoods) of the Syrian people depend on it.
Democracy Versus Growth?
PRINCETON – Europe’s ongoing malaise has reignited the old debate over which form of government produces better economic performance.
Are authoritarian regimes, with their ability to ram through unpopular choices, more effective at generating growth?
Or does liberal democracy, with its built in checks and balances, yield greater material prosperity?
It is a discussion in which the supporting evidence seems to have oscillated from one side to the other in recent decades.
In the 1980s, economic performance in Chile, under General Augusto Pinochet’s dictatorship, and in Singapore, under the more benign but nonetheless authoritarian Lee Kuan Yew, was impressive.
Meanwhile, the democratic countries of the industrialized world struggled against recession and stagnation.
In Europe, this gave rise to the term “Eurosclerosis.”
Democracies, according to political scientists, were vulnerable to growth-constraining special interests.
Authoritarian regimes – at least those not committed to pillaging their countries – might be better positioned to implement policies that ensure long-term economic success.
This view crumbled with the fall of the Berlin Wall.
The collapse of Communism and the renunciation of central planning in Eastern Europe gave rise to a new line of thinking, as large numbers of voters demonstrated that they were ready to accept temporary sacrifices if they were linked to a realistic and non-corrupt reform program.
In Latin America, left-wing politicians embraced market principles as the best way to satisfy their constituents’ aspirations, and growth resumed.
For much of the 1990s, democracies seemed to have the upper hand.
But the tug of war continues.
Since the beginning of this century, China’s supercharged economic growth once again seemed to highlight the benefits of authoritarianism.
The Chinese Communist Party’s success in navigating the turbulence of the global economic crisis with barely a shudder has attracted the attention of others who would follow its example.
Leaders like Russia’s Vladimir Putin, Turkey’s Recep Tayyip Erdoğan, Egypt’s Abdel Fatah el-Sisi, and Hungary’s Viktor Orbán claim that the price of economic stability and growth might sometimes be the suspension of democracy.
The seemingly endless euro crisis has led some European leaders to give credence to that viewpoint.
At the start of the crisis, Jean-Claude Juncker, now President of the European Commission, is reputed to have said, “We all know what to do, we just don’t know how to get re-elected after we’ve done it.”
In May 2010, the European leaders decided that they could not enforce reform in Greece on their own, and called in the International Monetary Fund less as a financial resource than as a disciplining mechanism.
More recently, German Finance Minister Wolfgang Schäuble sparked controversy when, evidently drawing inspiration from that experience, he said that “France would be glad if someone could force the parliament” to reform.
The truth, of course, is that authoritarian systems – whatever their short-term successes in holding the line against irresponsible policies – are unsustainable in the long run.
A lack of accountability inevitably produces corruption and inefficiency – problems with which China is now wrestling.
The challenge for democracies is to develop mechanisms that allow them to set policies that are sustainable in the long term while safeguarding the democratic process itself.
The public consensus supporting difficult reforms in Eastern Europe in the 1990s demonstrates that voters are able to understand and accept tradeoffs when they have no perceived alternative.
(Likewise, the crisis in Greece shows that voters will refuse to make sacrifices if they think there is another way out).
Parliamentary debate is an effective way to set long-term priorities; but politicians need to ensure that the decisions taken are carried out without excessive tinkering or backtracking.
In the aftermath of the Great Depression, for example, there was a widespread consensus in the United States that excessive congressional interference was responsible for the disastrous hike in import barriers under the Smoot-Hawley Tariff.
Trade policy, it was decided, was better delegated to the president, an office better insulated from electoral pressures.
Similarly, the European debate over appropriate fiscal frameworks might be most appropriately settled by a referendum, following public debate on a long-term and sustainable strategy.
But the implementation of the decision would be best entrusted to the member states.
Whether at the European level or in individual member states, the authority for ensuring long-term economic growth should be precisely and clearly delegated to agencies that derive their legitimacy from the democratic process, while being protected from its baser whims.
The sustainable alternative to democratic decision-making is not authoritarianism; it is the implementation of mechanisms that ensure that cool-headed deliberation is not undermined by the heated response to an immediate crisis.
A Democratic Hurricane
NEW YORK – Nothing concentrates the mind like a full-blown crisis.
Like millions of other people in New York City, I heard Hurricane Sandy rattling my windows and battering my doors.
I was luckier than many.
Rattling is all it did.
For many years, experts have been warning that such storms would overwhelm the city’s antiquated urban infrastructure.
Salt water came streaming into open subways.
Damage to the power supply reduced a third of Manhattan to a pre-modern state of darkness.
And that was just New York.
In parts of New Jersey, many people fortunate enough still to have a house are cut off by rivers of raw sewage lapping at their doors.
No one can say with certainty that this particular storm was caused by global warming, but almost all experts agree that the effects of polar-ice melt and sea-level rise will make future storms worse.
And yet neither candidate in the United States’ presidential campaign bothered to mention the potentially catastrophic consequences of climate change.
In this sense, Hurricane Sandy was like gun violence.
Throughout the campaign season – and despite several highly publicized mass shootings in this period – neither President Barack Obama nor his challenger, Mitt Romney, wished to discuss the problem of laws in many states that allow almost anyone to carry lethal weapons and spray death around at random.
The reason, of course, is that there are not enough votes to be gained in addressing these matters.
Even if a majority of Americans agree that climate change is real, future disasters seem a long way off, or might happen somewhere else, so why worry about them now?
Perhaps more should be done to protect New York, among many other places, against future flooding, but, as a former city official told an interviewer: “Until things happen, people aren’t willing to pay for it.”
Does this point to a serious weakness in the democratic system?
Most voters, after all, think about their immediate interests – less taxation, more jobs, lower gasoline prices, and so on – and not about planning for the future, which is, in any case, unpredictable.
We want to feel good right now.
And that is precisely the sentiment to which democratically elected politicians will cater.
The future will take care of itself.
There is something to be said for this attitude.
The kind of politics that imposes sacrifices for the sake of future utopias has caused immense human suffering in the service of a variety of impossible ideals.
Better, then, to stick to the here and now.
Yet postponing, for the sake of immediate gratification, a certain degree of planning for the future collective good can be as disastrous as indulging in utopian schemes.
Perhaps there are some non-utopian ways of transcending selfish interests and doing what is necessary.
For example, in various countries, voters have been tempted to elect business tycoons: enough with politicians bickering over selfish interests – let the can-do strongmen take charge and run countries like corporations.
Silvio Berlusconi was one such figure.
Mitt Romney, in a milder, less flamboyant manner, has appealed to these sentiments as well: he knew how to run an investment company, so why not the US federal government?
In practice, however, such tycoon politicians have their own interests and gratifications to pursue.
Berlusconi did indeed run Italy the way he runs his companies: like a private fiefdom, promoting cronies, intimidating critics, and paying people vast sums of money in exchange for their slavish devotion.
And, two years after the earthquake in L’Aquila in 2009, which killed hundreds of people, nothing much had been done to reconstruct the city, despite an initial flurry of publicity stunts showing Berlusconi, posing in a fireman’s hat, personally taking charge.
What about the more serious-minded technocrats who run the Leninist-capitalist People’s Republic of China?
The “Chinese model,” combining a capitalist economy with authoritarian government, has frequently been hailed as superior to the messy, dithering, compromising ways of liberal democracies.
With no need to concern themselves about elections, China’s leaders can afford to plan for the longer term and do what is necessary without being impeded by petty selfish interests or a carping press.
These arrangements have indeed made it possible for China to build entire cities in a matter of years, as well as high-speed railways, opera houses, stadiums, industrial parks, massive dams, and whatnot.
Many people have been lifted out of poverty, and those with the right political connections have become enormously rich.
But the lack of transparency in this type of autocracy has also led to massive corruption and huge blunders, not to mention the growing signs of ecological ruin.
Chinese critics of the government, or even those who simply wish to report mistakes or wrongdoing, are silenced with a heavy hand: beatings in police stations, draconian jail sentences, or even murder.
That is what happened to the parents who openly expressed their anger about the ill-constructed school buildings that collapsed in the 2008 Sichuan earthquake, killing their children.
The children died because corrupt local officials had allowed developers to enrich themselves by using inferior building materials.
Despite its flaws, a system in which elected officials are held publicly accountable and can be voted out of office is still preferable to rule by tycoons or technocrats.
And, sometimes, radical changes are made, even in democracies, though a severe crisis often is required to mobilize voters behind a collective push for essential reform, as was true of the Great Depression in the 1930’s, which led to Franklin Roosevelt’s New Deal.
Perhaps Hurricane Sandy will spur US citizens and politicians to take climate change seriously – and to implement public policies aimed at protecting America’s cities and coastlines.
Democracy at Bay
Is the democratic tide reversing?
Little more than a decade ago, people spoke of the end of history, of the final, unchallengeable triumph of free markets and democracy.
But public opinion in a number of countries now seems to be turning against democracy, argues Bronislaw Geremek, Poland's former foreign minister, and proposes ways in which this trend might be reversed.
Eight of the countries that will enter the European Union in May 2004 were until recently governed by totalitarian dictatorships and enslaved by another nation.
The return of governments based on the will of the majority of their citizens seemed for decades an unattainable dream in these countries, much as it remains a dream for the citizens of Burma under the rule of its military junta.
Democracy has undoubtedly achieved success around the world.
Yet, stunningly, support for democracy is eroding almost everywhere.
The Pew Global Attitudes Project for 2003 highlights countries in which few people recognize the importance of elections: 28% in Jordan, 37% in Russia, 40% in Indonesia.
Given the choice between a democratic government and a strong leader, 70% of Russians, 67% of Ukrainians, and 44% of Poles and Bulgarians opt for the latter.
(This choice is especially common among people in the lowest income brackets).
In Latin America, only in Venezuela is support for democracy unambiguously dominant (79%).
In other Latin American countries, support for a strong leader either is stronger or nearly as strong as support for democracy.
An opinion poll in Israel shows that the majority of Israelis opt for democracy, but there is a downward trend there as well.
Five years ago, 90% of Israelis supported democracy; today the number is 77%.
Suicide bombers, the prolonged state of tension, and the overall weakening of the hope for peace have slashed support for democratic government.
In Asia, people in most countries still believe that a ¡°good democracy¡± is more important than a ¡°strong economy.¡± The opposite is true, however, in democratic Indonesia, where 69% prefer a strong economy.
Even in a number of European countries with old democratic traditions, a wave of populist, radical political parties opposed to minorities and immigrants has achieved success, sometimes even winning elections.
In other European countries, which have only recently embarked on the democratic path, a truly stunning change of mood is visible.
In Russia's recent parliamentary elections, which were - regardless of various reservations - conducted according to democratic standards, parties advocating political and economic freedom suffered painful defeat, while parties proclaiming hostility to the rule of law and modern pluralist democracy were successful.
In December's parliamentary election in Serbia, the extreme nationalist Radical Party achieved the greatest success, and people being tried before the International War Crimes Tribunal in The Hague, such as Vojislav Seslj, the Radicals' founder and long-time leader, and Slobodan Milosevic, were elected to parliament.
These results demonstrate the grave dangers that young democracies face, as well as the fragility of democratic culture.
They are also a failure of human beings: democratic values do not function without citizens; there can be no democracy without democrats.
This poses dramatic questions about the place of democratic values in international affairs, about the effectiveness of action in support of democracy, and about the way in which democracy is to be understood.
Three sets of issues are worth noting.
First, almost no one disputes the claim that democracy serves the cause of peace, but little is being done to make democracy - together with human rights - a basis of the international order.
A step was made in this direction in June 2000, when the Community of Democracy, bringing together more than half of the member states of the United Nations, was created in Warsaw.
The creation of that body was an important step, because it introduced a set of criteria that must be fulfilled by countries that want to call themselves democratic.
The organization promised to monitor the behavior of members and thus create a chance for coordinated support of the democratic order.
It amounted to an agreement that the continuing absence of democracy in many parts of the world is a disgrace.
Second, as the Pew poll suggests, today's weakening of democratic culture usually takes the form of nostalgia for strong leadership - a clear incitement to launching coups.
The weapons of shame and international opprobrium should be mustered to make it impossible for any democratic nation to legitimize a coup in another democratic country.
It should become a principle of international relations that democracy and democratization must be supported in all situations; that democratic societies should forego any opportunistic benefits that may come from supporting the enemies of democracy.
Third, democracy should not be reduced to mere respect for majority decisions.
Nowadays, a more telling test of the vitality of a democracy is respect for the rights of minorities, recognition of the supremacy of the principles of the rule of law, and the acceptance of legal equality among citizens.
Pericles, in his speech about democracy, as recorded by Thucydides, expressed a timely thought: ¡°Guided by tolerance in private life, we respect the law in public life; we obey all laws, especially those unwritten ones, laws that defend those to whom injustice is being done, and laws the transgression of which brings universal disgrace.¡± That ancient sense of the potent power of shame should be employed today, lest the democratic tide continue to run out.
Democracy Begins At Home
The Bush administration has put expansion of democracy at the center of its foreign policy.
This is a far nobler calling than simply expanding American hegemony.
The question is, does Bush really mean it, and does he genuinely understand what democracy means?
The Bush administration praised Saudi Arabia’s municipal elections, but what about the rights of women—including their voting rights?
It welcomed (if it did not actively participate in) the toppling of Venezuela’s democratically elected leader, but it continues to support Pakistan’s military dictator.
It criticizes Russian President Vladimir Putin, but only after he goes against business interests.
And it may raise concerns about media concentration in Russia, but remains silent about media concentration in Italy.
There is a taint of hypocrisy in a more fundamental sense.
The Bush administration is right to emphasize the importance of elections, without which democracy is inconceivable.
But democracy entails more than periodic elections, and the legitimacy of elections depends on the public’s confidence in the electoral process itself.
In this respect, the last two American presidential elections have hardly been models for the world.
Former President Jimmy Carter, whose Atlanta center monitors elections around the globe, has raised questions about whether America’s recent election lives up to the standards the United States should uphold.
Where former President Bill Clinton sought to ensure that all Americans who are entitled to vote are registered to vote, the Republicans have tried to reverse these advances, putting obstacles in the way both of registration and voting.
Modern technology makes it easy to have a paper trail for voting machines, at little cost; yet several states chose not to provide this minimal safeguard.
Beyond elections, citizens can provide an effective check on government only if they are well informed.
That is why right-to-know laws are so important.
Of course, politicians prefer to work in secrecy, without oversight.
No one can imagine hiring a worker, but allowing him not to inform his employer about what he is doing on the job.
Politicians work for the citizenry, which has the right to know what their employees are doing.
Citizens have the right to know how their money is being spent and who is being consulted to form policy.
They have the right to know whether Enron and the oil companies are shaping energy policy.
They have the right to know why America, and the world, was misled by false claims about weapons of mass destruction in Iraq.
My research has focused on the consequences of asymmetries in information for the functioning of the economy.
But a lack of accurate information has equally, if not more, severe consequences for political processes.
The decision to go to war in Iraq is the most dramatic example of this, but there have been many others in America under Bush.
Providing drug benefits under Medicare, America’s health-care program for the aged, may have been the right decision.
But restricting government’s ability to bargain with the drug companies was a pure give-away, and nothing justifies providing grossly distorted information about the costs—now estimated to be in excess of 1.1 trillion over the next decade.
This is three times the amount original projected by the Bush administration.
Today, the Bush administration is engaged in a disinformation campaign about an impending social security crisis.
While something should be done, the magnitude of the problem hardly foreshadows a crisis.
On the contrary, the system could almost surely be put on a solid footing for the next 75 years with a fraction of what was spent on the 2001 and 2003 tax cuts.
Good information requires not just the right to know, but also the right to tell—a diversified media.
There are, as we noted, justified complaints about the lack of diversity in television broadcasting in Russia, yet Bush has not opposed efforts by America’s Federal Communications Commission to weaken laws on media concentration.
Democracy also requires recognizing the rights of individuals.
Undermining any individual’s rights jeopardizes everyone’s rights.
Yet under Bush, the US has undermined basic civil rights, such as habeas corpus, which guarantees individuals recourse to judicial review when the state detains them.
The extended detention of dozens of individuals in Guantanamo—without charge and without trial—is a basic abrogation of this right.
Fortunately, even if Bush does not understand such basic principles, America’s courts do, and they are now, albeit belatedly, forcing his administration to abide by them.
Finally, of what value is the right to vote without recognition of the right to a certain minimal standard of living, as enshrined in the Universal Declaration of Human Rights?
In countries where much of the population lives below subsistence level, buying votes is all too easy.
But the only economic rights the Bush administration recognizes are intellectual property rights, putting the interests of drug companies ahead of those with life threatening diseases, and the free mobility of capital, which has had such devastating effects on many countries.
America’s democracy remains the envy of much of the world, and it is good that the Bush administration now champions the expansion of democracy forcefully.
But the administration would be far more credible, and have far more success, if it took a closer look at home, if it examined its own practices more honestly, and if it engaged in a broader discussion of what democracy really means.
Democracy Comes Second
Democracy is slowly spreading around the world.
From the Middle East to Latin America and Asia, many autocracies are taking gradual steps towards more democratic and accountable forms of government, or have become fully-fledged and well functioning democracies.
The US administration is determined to consolidate political freedoms in many developing countries under its sphere of influence; indeed, expansion of democracy has become a cornerstone of American foreign policy.
There are many reasons to celebrate the current democratic wave.
Democracy is associated with less injustice and abuse, with basic civic and political freedoms, and with greater sensitivity by governments for the true priorities of its citizens.
But how important is democracy for economic success?
Not much, the empirical evidence suggests.
This might appear surprising. After all, is it not true that virtually all rich countries have democratic forms of government, while the poorest countries (mainly in Africa) are non-democracies?
Indeed, throughout the world, democracy is strongly correlated with higher per capita income.
But this correlation goes missing when one looks at the dimension of time rather than space.
Countries that become democracies do not, on average, achieve faster economic growth after their political transition; and, vice versa, democracies that fail and relapse into autocracy do not, on average, do worse than before.
The positive correlation between income and democracy that one sees across countries could be due to reverse causation: democracy is more likely to persist as a country grows richer.
It could also be due to special historical or cultural circumstances: some societies are just more successful than others, both in terms of economic development and with regard to their ability to develop and maintain democratic political institutions.
Whatever the reason for the observed positive cross-country correlation between income and democracy, it should not be confused with causality.
Being democratic does not seem important in securing economic success.
Of course, there are many different kinds of democratic transitions, and lumping them all together might be misleading.
An important distinction in practice concerns the interaction between the economic and the political system.
A democracy born in an open economic environment, with a well functioning market system, widespread foreign direct investment, and sizeable international trade, is likely to consolidate economic liberalism, stabilize expectations, and hence lead to more investment and faster growth.
Conversely, if an economy is tightly controlled by the state, has protectionist barriers against foreign imports and capital movements, or relies on rents from exhaustible resources to obtain foreign currency, transition to democracy can be plagued by populism and struggles for redistribution, hurting economic growth.
Empirical evidence supports the idea that the success of a democracy depends on the openness of the underlying economic system at the time of political transition.
In the post-WWII period, the more successful episodes of democratic transitions have been preceded by widespread economic reforms that extended the scope of the market and facilitated international integration.
Examples include Chile and South Korea in the late 1980’s and Mexico in the mid-1990’s.
Conversely, when democratic transition was attempted in a fragile and closed economic environment, the outcome was much worse.
This applies to the episodes of democratization in Latin America and the Philippines in the mid-1980’s, but also to Turkey in the early 1980’s and Nepal in 1990.
The contrast between China and Russia also fits this pattern very well.
China first opened its economic system to the rest of the world, and only now is it thinking (a bit too slowly) about political reform.
Russia instead jumped into democracy, and only then worried about replacing socialism with a market system.
There was probably no other way to do it in Russia, but the Chinese path seems much more likely to lead to lasting economic success.
This does not mean that democracy is unimportant.
But the sequence of reforms is critical for successful economic development, with economic reforms coming first.
When an open and well functioning market system is in place, democracy has a much better chance to lead to lasting prosperity.
An important reason for this is that, in order to create a successful market system, the state must respect basic individual rights: the rule of law, private property, and the enforcement of justice.
These fundamental rights are part and parcel of democratic government. But when it comes to economic development, these fundamental rights are more important than other purely political aspects of democracy, such as universal suffrage and genuine political competition.
This is how the Western world became democratic in the nineteenth and twentieth centuries. Economic liberalism came first, political liberalism later.
But today’s young democracies have to do everything much faster.
They don’t have the luxury of restricting suffrage to property owners, or to more educated citizens.
Nevertheless, we should remember the lessons of history. Political reforms are more likely to be successful if they are preceded by economic reforms.
We should insist that Egypt or Pakistan improve their market system, apply the rule of law, and open their economies to international trade and capital movements.
Allowing free elections and true political competition is also critically important, but this should follow economic reforms, not precede them.
Democracy Disconnected
Something has happened to democracy in the sense of popularly elected government, and it has happened all over the world.
Somehow people have lost faith in elections.
Turnout is declining in many countries; in the case of elections to the European Parliament, the level of voter participation is so risibly low as to call into question the legitimacy of the result.
But turnout apart, we have become accustomed to accepting that parties or candidates who receive 25% of the popular vote are "winners."
From Holland and Finland to Argentina and Japan, majority governments are formed with minority support.
Nor are the apparent exceptions proof to the contrary.
Few American Presidents have been supported by much more than 10% of eligible voters: half of the US's eligible voters, indeed, are not even registered to vote; of those who are registered, half do not vote; of those who do vote, less than half vote for the winning candidate.
Even Tony Blair's "landslide" majority in Britain's House of Commons rests on shaky ground: Labour received just over 40% of the vote with a 60% turnout at the last election in 2002.
So only 24% of the total electorate supported Blair's party.
In most countries, this is clearly very different from what elections looked like twenty, let alone fifty, years ago.
What has happened?
One answer must be that voters distrust political parties.
Electoral democracy operates in most countries through the intermediary of organizations which put up candidates representing specific bundles of policy options, a "manifesto" or a "platform."
For a number of reasons, however, this time-honored practice no longer works.
Ideological party platforms have lost their force; voters do not accept the specific bundles offered by parties but want to pick and choose.
Moreover, political parties have become "machines" made up of highly organized cadres of insiders.
The paradox here is that parties have become more tribal having lost their ideological distinctiveness.
It is more important to belong than to have a certain set of beliefs.
Such developments removed parties from the ambit of voters.
Because most people don't particularly want to belong to a party, playing the party game becomes a minority sport.
This increases the public's suspicion of political parties, not least because--like all professional sports--playing the game is expensive.
If the cost is borne by the taxpayer, it is resented.
But if parties are not state-supported, they must find funds through channels that are often dubious, when not illegal.
Many of the great political scandals of recent decades began with the financing of parties and candidates.
Other indices--such as sharply declining membership rolls--confirm that parties have become unpopular.
Yet parties remain indispensable to elective democracy.
The result is an evident disconnection of the visible political actors from the electorate.
Because parties operate in parliaments, the disconnection affects one of the crucial democratic institutions.
People no longer think of parliaments as representing them and thus vested with the legitimacy needed to take decisions on their behalf.
At this point, a second, quite separate, development comes into play.
People are more impatient than ever.
As consumers they are used to instant gratification.
But as voters, they must wait before they see any results delivered by the choice they made at the ballot box.
Sometimes they never see the desired results.
Democracy needs time, not just for elections, but for deliberation and the exercise of checks and balances.
The consumer-voter, however, will not accept this and therefore turns away.
There are alternatives, but each has its own problems as a democratic solution.
Direct action by demonstrations has become a regular and often effective occurrence.
For the less mobile it can be replaced by electronic expressions of views, from Internet chat-rooms to e-mails to political leaders.
Then there are non-governmental organizations, often undemocratic in their own structures and yet more closely connected, it seems, to citizens.
Beyond these, of course, is the possibility of switching off altogether and leaving politics to the professionals so as to concentrate on other dimensions of life.
The latter is the most risky, because it supports the creeping authoritarianism that is a sign of our times.
But the other signs of disconnection also create a highly unstable condition in which one can never tell how representative the prevailing views are.
Some want to cut through the tangle with more direct democracy.
But lasting connections between leaders and governed can not be created by reducing public debate to simple referendum alternatives.
There is much to be said for holding on to the classical institutions of parliamentary democracy and trying to reconnect them with the citizenry.
After all, unpopular parties and falling electoral turnout may merely be passing phenomena.
New parties may arise and breathe more life into elections and representative government.
But this will probably not be enough to restore the popular legitimacy that elected governments have lost.
So rethinking democracy and its institutions must be a top priority for all to whom the constitution of liberty is dear.
Democracy in Distress
PARIS – Is democratic time too slow to respond to crises, and too short to plan for the long term?
At a time of deepening economic and social crisis in many of the world’s rich democracies, that question is highly relevant.
In Italy, for example, Prime Minister Mario Monti has the necessary and legitimate ambition to carry out comprehensive reform.
He is both competent and honest, but faces a quasi-structural impediment: whereas leaders once had three years to convince voters of their policies’ benefits, they now have three hours to convince global financial markets to back their approach.
Caught between Italian legislators who, deep down, do not understand that change and markets in quest of near-immediate certainties, can Monti transcend his natural prudence and act with sufficient clarity and decisiveness?
In the United States, too, the political system is becoming increasingly dysfunctional.
The political philosopher Francis Fukuyama goes so far as to say that “vetocracy” could triumph over democracy, regardless of who wins the 2012 presidential election.
The separation of powers, a principle established by the US founders under the influence of philosophers such as Montesquieu, is leading today to near-paralysis.
Democracies suffer not only from their slow reaction time at moments of crisis, but also from the difficulty that they face in projecting themselves into the future and planning for the long term.
On both sides of the Atlantic, political leaders know what they must do for their countries, but don’t know how to get re-elected if they actually do it.
They seem to be structurally condemned to short-termism.
But it is not because democracies have a “time problem” that their era seems to some to be over.
China is rightly proud to be able to project itself into the twenty-second century.
But China owes that quality of long-term thinking much more to its culture than to the nature of its political system.
Chinese think long term because they are Chinese, not because they are not democrats.
China’s leaders can, of course, react to events without much regard for Chinese public opinion.
After all, the great majority of Chinese do not dream of democracy, even if something like a civil society is emerging, generating new interests and demands that can no longer be totally controlled or manipulated, as in the past.
But that is precisely the weakness of non-democratic regimes in a global age dominated by transparency: Who dreams of becoming a Chinese citizen, or even a citizen of Singapore?
In the aftermath of North Korea’s hereditary succession, strategic thinkers rightly emphasize China’s key role in shaping the peninsula’s future.
But, despite the scenes of hysteria that followed the death of the “Great Leader” Kim Jong-il, most North Koreans probably dream of joining democratic South Korea (even if many South Koreans fear that prospect).
The majority of Chinese may not want to be governed like Westerners, but it would be wrong to assume that their only ambition is to spend like Westerners.
The more successful they are, the more individualistic they will become and the more they will expect the respect and consideration of those who govern them.
By contrast, if China’s economic growth slows, which is likely in the coming years, protest against corruption – a source of fragility for any regime – will escalate.
Indeed, it is important to bear in mind that, ahead of the upcoming Chinese leadership transition, new occupants for only the top two posts have been chosen, and that through a process of gradual anointment by roughly a hundred people at most.
The current crisis in the advanced countries, which may very well lead to a global recession (if it is not already doing so), not only reveals the many maladies of democratic regimes, but also acts as their incubator and accelerator.
And yet the crisis may turn out to have an even greater impact on non-democratic systems that seem to be more efficient, but are in reality much more fragile.
We see this in mounting unrest in both Russia and China.
Contrary to what one might think, democracy is more resilient than the alternatives in the long run.
This will remain true as long as democrats remain convinced of it.
Non-democratic models cannot truly challenge democracy.
Only the misbehavior of democrats can do that.
Bring Back Egypt’s Elected Government
NEW YORK – Putting an end to Egypt’s deepening polarization and rising bloodshed requires one urgent first step: the reinstatement of Mohamed Morsi as Egypt’s duly elected president.
His removal by military coup was unjustified.
While it is true that millions of demonstrators opposed Morsi’s rule, even massive street protests do not constitute a valid case for a military coup in the name of the “people” when election results repeatedly say otherwise.
There is no doubt that Egyptian society is deeply divided along sectarian, ideological, class, and regional lines.
Yet the country has gone to the polls several times since the February 2011 overthrow of Mubarak’s 30-year rule.
The results have demonstrated strong popular support for Islamist parties and positions, though they also make clear the country’s schisms.
In late 2011 and early 2012, Egypt held parliamentary elections.
Morsi’s Freedom and Justice Party, created by the Muslim Brotherhood, secured a plurality, and the two major Islamist blocs together received roughly two-thirds of the vote.
In June 2012, Morsi defeated his rival Ahmed Shafik, Mubarak’s final prime minister, by a margin of 52-48% to win the presidency.
In a national referendum in December 2012, a 64% majority of those voting approved a draft constitution backed by the Muslim Brotherhood (though turnout was low).
The secular argument that Morsi’s lust for power jeopardized Egypt’s nascent democracy does not bear scrutiny.
Secular, military, and Mubarak-era foes of the Muslim Brotherhood have used every lever at their disposal, democratic or not, to block the Islamist parties’ democratic exercise of power.
This is consistent with a decades-old pattern in Egyptian history, in which the Brothers – and Islamist political forces in general – were outlawed, and their members imprisoned, tortured, and exiled.
Claims that Morsi ruled undemocratically stem from his repeated attempts to extricate the popularly elected parliament and presidency from anti-democratic traps set by the military.
After the Islamist parties’ huge victory in the 2011-2012 parliamentary elections, the military leadership and the Supreme Court (filled with Mubarak-era judges) worked to derail the new parliament and prevent it from establishing an assembly to draft a new constitution.
The key action came in June 2012, when the Supreme Court, staffed entirely with Mubarak-era holdovers, nullified the results of the parliamentary elections on specious grounds.
The military was set to reassert full legislative powers.
Morsi’s subsequent victory in the presidential election therefore set up an epic battle over the future of the parliament and the constitution, as Morsi attempted to protect the democratically elected parliament while the military fought to dissolve it.
In the end, Morsi insisted that the elected parliament create a constitutional assembly, which produced the draft approved in the December 2012 referendum.
As is typical of political revolutions, Egypt’s economic situation has gone from bad to worse in the course of these power struggles.
Revolutions tend to confront new governments with steeply rising social demands (for wage increases and higher welfare spending, for example) at a time of capital flight, financial turmoil, and deep disruptions of production.
In Egypt’s case, the crucial tourist sector contracted sharply after the revolution.
Unemployment soared, the currency depreciated, and food prices rose dangerously.
None of this is surprising, and little of it can be managed by a new government that lacks experience, market confidence, and full control of the levers of power.
Historically, outside parties have thus played a decisive role.
Will foreign governments and the International Monetary Fund extend vital finances to the new government, or will they let it flounder and drown in a tsunami of currency depreciation and inflation?
Here, the feckless West – torn between its democratic rhetoric and its antipathy to the Islamists – showed its hand.
The result was equivocation and delay, rather than commitment and assistance.
The IMF has talked with the Egyptian government for two and a half years since Mubarak’s overthrow without so much as lending a single cent, sealing the Egyptian economy’s fate and contributing to public unrest and the recent coup.
It appears from press reports that the West finally gave the green light to the Egyptian military to overthrow Morsi, arrest the Muslim Brotherhood’s leadership, and repress the Islamist rank and file.
US President Barack Obama’s unwillingness to stand up for Egypt’s elected leaders, or even to label their overthrow a “coup” (thereby protecting the continued flow of US funds to the Egyptian military), shows that when push came to shove, the West sided with the anti-Islamists in subverting democracy.
Of course, in classic Orwellian fashion, the West did so in democracy’s name.
The coup and the West’s complacency about it (if not complicity in it) could devastate Egypt.
The Islamists are neither a marginal political group nor a terrorist force.
They represent a large part of Egypt’s population, perhaps half or more, and are certainly the country’s best-organized political force.
The attempt to repress the Muslim Brotherhood and to deny Morsi the presidency to which he was elected will most likely lead to massive violence and the strangulation of democracy, however the West and Egyptian anti-Islamists try to justify their actions.
At this point, the correct course for the West would be to call on Egypt’s military to reinstate Morsi; to offer prompt financing to help stabilize the Egyptian economy; and to support true pluralism, not the kind that reverts to military coups when elections produce inconvenient results.
True pluralism means accepting the strength of Islamist political forces in the new Egypt and other countries in the region.
Short of this, the West will most likely end up as an accomplice to Egypt’s continuing downward spiral into violence and economic collapse.
Democracy in Inaction at the World Bank
James Wolfensohn, the president of the World Bank, has announced his intention to leave, and the search is on for a new head of the world’s most important multilateral organization promoting development.
The choice is especially important now, when poverty in the Third World is finally being recognized as our greatest problem and challenge.
The World Bank’s designation as a “bank” understates its importance and its multifaceted roles.
It does lend money to countries to undertake a variety of projects, and to help them through crises (such as the $10 billion it provided to Korea in 1997-1998).
It has been, and is, playing a vital role in post-conflict reconstruction around the world.
But the Bank also provides grants and low-interest loans to the poorest countries, particularly for education and health, and advises these countries on development strategies.
It has often joined with the IMF in strong-arming countries into accepting this “advice”: unless they do, they will not only be cut off by the IMF and the World Bank, but also by other donors, and capital markets will be discouraged from providing funds.
Sometimes – its critics will say often – the advice provided by the IMF and World Bank is misguided.
This was certainly true in the 1980’s and early 1990’s, when right-wing ideology dominated, producing a one-size-fits-all prescription entailing privatization, liberalization, and macroeconomic stability (meaning price stability), with little attention to employment, equity, or the environment.
The term “bank” is a misnomer in a second sense: while the World Bank refers to its members as “shareholders,” it is hardly a private bank.
On the contrary, the World Bank is a global public institution.
But, while the G-7 countries, which dominate voting at the Bank, all declare their commitment to democracy and good governance – and espouse promoting them as one of their central objectives – there is a yawning gap between what they preach and what they practice.
Indeed, the entire process of choosing these international institutions’ leaders is a historical anachronism that undermines their effectiveness and makes a mockery of the G-7 countries’ commitment to democracy.
This process, established at the outset 60 years ago, is framed by an agreement that an American would lead the World Bank and a European would lead the IMF.
The American president would choose the Bank’s head, and Europe would collectively decide on the IMF leader, with the understanding that the other side would exercise its veto only if a candidate were totally unacceptable.
Within the United States, all major presidential appointments must be ratified by the Senate; even if rejections are rare, the vetting process is important, for the president knows that he can go only so far.
But the presidency of the World Bank is a rare presidential plum – an appointment that is not subject even to Congressional hearings.
How can advice on democratic reforms be taken seriously when the multilateral institutions that offer it do not subscribe to the same standards of openness, transparency, and participation that they advocate?
Why should the search for Wolfensohn’s successor be limited to an American (and especially an American loyal to a particular political party)?
Why is the search process going on behind closed doors?
Shouldn’t these international public institutions be looking for the best-qualified person, regardless of race, religion, gender, or nationality?
The two names that have been floated so far ­– presumably leaked as trial balloons – are particularly disturbing.
To put it bluntly, given the World Bank’s importance, consideration of either putative US candidate, Assistant Defense Secretary Paul Wolfowitz or former Hewlett-Packard CEO Carleton Fiorina, have been highly controversial around the world.
Even if convention allows the American president to appoint the World Bank’s head, the organization’s success depends on the confidence of others.
Neither Wolfowitz nor Fiorina have any training or experience in economic development or financial markets.
Of course, some past appointees turned out to be far better than anticipated; they rose to the occasion, despite qualifications that, in any open and objective selection process, would never even have left them on the short list.
They proved that there is always a chance of outperforming.
But this does not outweigh the risk of underperforming, which is why the best policy is to look for the best candidate.
There are some absolutely first-rate individuals who could step into the job, people who have shown their command of economic development, their intellect and personal integrity, and their political and managerial skills.
Such potential candidates include former Mexican president Ernesto Zedillo, a Yale Ph.D. who now teaches there and has been strongly supported in an editorial in the Financial Times;
Arminio Fraga, a Princeton Ph.D. and former head of Brazil’s central bank; and Kemal Dervis, a former World Bank vice-president who has taught at Princeton and successfully managed one of Turkey’s crises as finance minister.
Why should the world settle for anything less than candidates of this caliber?
It is time that the G-7 countries back up their democratic rhetoric with action.
Many stood up to the US as it pushed for the war in Iraq.
They were right to be skeptical about US claims of an imminent danger from weapons of mass destruction.
What is at stake here is no less important: the lives and well being of billions in the Third World depend on a global war on poverty.
Choosing the right general in that war will not assure victory, but choosing the wrong one surely enhances the chances of failure.
Democracy in Latin America
Democracy in Tea Party America
BERKELEY – When the French politician and moral philosopher Alexis de Tocqueville published the first volume of his Democracy in America in 1835, he did so because he thought that France was in big trouble and could learn much from America.
So one can only wonder what he would have made of the Republican National Convention in Tampa, Florida.
For Tocqueville, the grab for centralized power by the absolutist Bourbon monarchs, followed by the French Revolution and Napoleon’s Empire, had destroyed the good with the bad in France’s neo-feudal order.
Decades later, the new order was still in flux.
In Tocqueville’s imagination, at least, the old order’s subjects had been eager to protect their particular liberties and jealous of their spheres of independence.
They understood that they were embedded in a web of obligations, powers, responsibilities, and privileges that was as large as France itself.
Among the French of 1835, however, “the doctrine of self-interest” had produced “egotism…no less blind.”
Having “destroyed an aristocracy,” the French were “inclined to survey its ruins with complacency.”
To the “sick” France of 1835, Tocqueville counterposed healthy America, where attachment to the idea that people should pursue their self-interest was no less strong, but was different.
The difference, he thought, was that Americans understood that they could not flourish unless their neighbors prospered as well.
Thus, Americans pursued their self-interest, but in a way that was “rightly understood.”
Tocqueville noted that “Americans are fond of explaining…[how] regard for themselves constantly prompts them to assist each other, and inclines them willingly to sacrifice a portion of their time and property to the general welfare.”
The French, by contrast, faced a future in which “it is difficult to foresee to what pitch of stupid excesses their egotism may lead them,” and “into what disgrace and wretchedness they would plunge themselves, lest they should have to sacrifice something of their own well-being to the prosperity of their fellow-creatures.”
For Tocqueville, France’s sickness in 1835 stemmed from its Bourbon patrimony of a top-down, command-and-control government, whereas America’s health consisted in its bottom-up, grassroots-democratic government.
Give the local community enough control over its own affairs, Tocqueville argued, and one “will see at a glance…the close tie which unites private to general interest.” It was “local freedom which leads a great number of citizens to value the affection of their neighbors and of their kindred, perpetually brings men together, and forces them to help one another, in spite of the propensities which sever them.”
Nearly two centuries have passed since Tocqueville wrote his masterpiece.
The connection between the general interest and the private interest of individual Americans has, if anything, become much stronger, even if their private interest is tied to a post office box in the Cayman Islands.
Indeed, no private-equity fortunes were made over the past generation without investing in or trading with the prosperous North Atlantic industrial core of the world economy.
But the mechanisms that individuals can use to join with their immediate neighbors in political action that makes a difference in their lives have become much weaker.
If, say, 25% of the 1,000 households in the 30-block Brookside “fiberhood” in Kansas City, Missouri, pre-subscribe, Google will provide all 1,000 with the opportunity to get very cheap, very fast Internet service very soon.
But that is the proverbial exception that proves the rule.
And the Republicans gathered in Tampa to celebrate the rule – to say that the America that Tocqueville saw no longer exists: Americans no longer believe that the wealth of the rich rests on the prosperity of the rest.
Rather, the rich owe their wealth solely to their own luck and effort.
The rich – and only the rich – “built” what they have.
The willingness to sacrifice some part of their private interest to support the public interest damages the souls and portfolios of the 1%.
Perhaps the moral and intellectual tide will be reversed, and America will remain exceptional for the reasons that Tocqueville identified two centuries ago.
Otherwise, Tocqueville would surely say of Americans today what he said of the French then.
The main difference is that it has become all too easy “to foresee to what pitch of stupid excesses their egotism may lead them” and “into what disgrace and wretchedness they would plunge themselves.”
Democracy on the Nile?
The surprise decision by Egyptian President Hosni Mubarak to propose a constitutional amendment that would allow direct and competitive presidential elections may be a giant step for democracy in Egypt and the Arab World.
Westerners used to pluralistic democracy may find it hard to understand what a potentially huge shift this will be in a country accustomed to military rule for over 50 years.
Under the current system, Egyptian citizens can only show up on the day of a presidential referendum every six years and say yes or no to the single name that appears on the presidential ballot.
This explains why someone like Mubarak always received over 90% of the vote, albeit amid indifferent turnout.
Syrian and Iraqi strongmen have done even better with this system, no doubt because they demanded that the names and addresses of voters be put at the bottom of each ballot.
Many people have long argued that democratization in the Middle East will not get far until Egypt becomes fully engaged in the process.
Egypt could not truly set out on a path of democratization without first amending its constitution – to downsize the Pharaonic powers of its president and set limits on his term in office.
Mubarak, after all, is already in his 24th year as president.
So the announcement that he wants competitive presidential elections is an important first step.
The regime may assume that it will be able to use the process to its own advantage, but events may not be that easy to control once people begin to feel empowered.
The democratic genie is out of the bottle.
In any case, Egypt is not the only country in this troubled region that is now embarking on the road of democracy.
Turkey at one end of the Middle East and Morocco at the other are already well on their way.
The real groundswell this time seems to have come from the close timing and positive outcomes of recent elections in Iraq, Palestine, and to a lesser degree in Saudi Arabia.
The unprecedented demonstrations against Syria’s occupation of Lebanon following the assassination of its former prime minister, Rafiq al-Hariri, show no signs of abating.
Egyptian opposition groups, too, have staged increasingly bold marches and other forms of civil disobedience in the last few weeks.
The catalyst for their anger was the arrest and detention of the ailing opposition leader Ayman Nour at the end of January.
The government’s heavy-handed behavior reinvigorated the homegrown “Kifaya” (Enough) movement, which has demanded an end to the Mubarak regime.
Suddenly the popular wisdom that Egyptians are passive and afraid to act did not seem to be holding up.
An alliance of local, regional, and international forces is uniting against tyranny-as-usual on the banks of the Nile.
The recent wave of popular pressure appears to have shaken the regime.
Only a month ago, Mubarak dismissed demands for constitutional reform as “futile.”
But, whatever combination of events brought about his change of heart, election initiative should be welcomed.
It is a necessary – but insufficient – first step for overhauling Egypt’s stagnant political system.
Egyptians are already wary of token reforms à la Tunisia, where longstanding President Zine El Abidin Bin Ali created a caricature of a constitutional amendment that appeared to open the door for competitive presidential elections, but then staged a sham contest with a few handpicked “opponents.”
In previous Tunisian presidential referenda, Bin Ali routinely received 99% of the vote; he now got 96%.
Let us hope that Mubarak is more serious about electoral reform.
As a measure of sincerity, he needs to order the immediate release of Ayman Nour and take steps to terminate the 24-year-long state of emergency, which effectively prevents political campaigning from taking place.
Mubarak should also endorse a limit of no more than two successive five-year terms for any president.
Equally necessary are confidence-building measures, including open and equal access to the media, which are now state-controlled.
I have announced that I intend to contest this upcoming presidential election as a way of opening debate on these essential reforms.
But I would gladly go back to my life as a private citizen once guaranteed a free and open election this fall.
If seriously implemented, these steps will transform Mubarak’s legacy.
Along with events in Lebanon, Iraq, and Palestine, it may well usher in an Arab spring of freedom, one long overdue.
Democracy or Finance?
LONDON – “Shorting” is a tactic well known among the financial cognoscenti.
It means betting against an asset with borrowed money in the expectation of making a profit when its value goes down.
A speculator can “short” a government by borrowing its debt at its current price, in the hope of selling it later at a lower price and pocketing the difference.
For example: on January 1, 2010, I think to myself that the game will soon be up for the Greeks.
I borrow, at face value, €10 million of the Greek government’s 2016 bond, which is then trading at €0.91, from Goldman Sachs for six months.
For this, I have to pay Goldman Sachs the yield that it would receive from the bond – around 5% annually at that price, so about 2.5%, or €250,000 – during the six-month term.
I immediately sell that bond in the market, for €0.91, so I get € 9.1 million (€0.91 x €10 million at face value).
Fortunately, my bearish view comes to fruition in May, when the full extent of the country’s fiscal problems becomes clear.
By June 30, when I am due to return the €10 million in face-value Greek 2016 bonds to Goldman Sachs, the bond is trading at only around €0.72.
So I go into the market, buy €10 million at face value for at €0.72, or €7.2 million, and return the bond certificates to Goldman Sachs as per our agreement.
My profit for correctly taking this bearish view is therefore €1.65m – the €9.1m I got by selling the bonds when I borrowed them on January 1, minus the €7.2m that I had to pay to repurchase them on June 30, minus the €250,000 in interest that I had to pay Goldman Sachs for the six-month loan.
Voilà – a successful “short” trade.
Of course, a single short seller cannot “make” the price of an asset (unless he is George Soros, whose famous bet against the British pound in 1992 made him a billionaire and forced Britain out of the European exchange-rate mechanism).
But if a bunch of speculators decide (rightly or wrongly) that a government’s debt is overpriced, they can force down its price, thereby forcing up its yield (the interest rate that the government must pay).
If the attack persists, speculators can force a government to default on its debt, unless it can find a way to finance its borrowing more cheaply.
The bailout fund created last year by the International Monetary Fund and the European Central Bank to enable Greece and other distressed sovereigns, like Ireland and now Portugal, does exactly that, but on the condition that they implement austerity programs to eliminate their deficits over a short period of time.
“Eliminating the deficit” means, quite simply, eliminating a lot of jobs, in both the public and private sectors, whose existence depends on the deficit.
The economic and human costs of deficit reduction in a weak economy are appalling, and the targets won’t be met, either, because the spending cuts will erode the government’s revenue as aggregate demand falls.
So what is the role of elected politicians in the face of a speculative attack?
Is it simply to accept the market’s will and impose the requisite pain on their people?
This would be a reasonable conclusion if financial markets always, or even usually, priced assets correctly.
But they do no such thing.
The financial collapse of 2007-2009 was the result of a massive mispricing of assets by private banks and ratings agencies.
So why should we believe that the markets have been correctly pricing the risk of Greek, Irish, or Portuguese debt?
The truth is that these prices are “made” by herd behavior.
John Maynard Keynes pointed out the reason many years ago: “the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.”
When you don’t know what to do, you do what the next person does.
This is not to deny that some governments have been living beyond their means, and that shorting their debt is how financial markets hold them accountable.
But, in the last resort, it is voters, not markets, which hold governments to account.
When these two accounting standards diverge, the popular standard must prevail if democracy is to survive.
The tension between democracy and finance is at the root of today’s rising discontent in Europe.
Popular anger at budget cuts imposed at the behest of speculators and bankers has toppled leaders in Ireland and Portugal, and is forcing the Spanish prime minister into retirement.
Of course, there are other targets: Muslim immigrants, ethnic minorities, bankers’ bonuses, the European Commission, the ECB.
Nationalist parties are gaining ground.
In Finland, the anti-European True Finns party has shot up from nowhere to the brink of power.
So far, none of this has shaken democracy, but when enough people become vexed at several things simultaneously, one has the makings of a toxic political brew.
Nationalism is the classic expression of thwarted democracy.
For politicians, the important thing is not to avoid taking hard decisions, but to do so of their own volition and at their own pace.
When an elected government is under assault from the bond markets, it is essential for the political class to remain united.
It is natural for opposition politicians to want to exploit a government’s difficulties to win power.
But a fiscal crisis calls for political self-restraint.
Opposition parties should refrain from shorting their government politically at a time when markets are doing so financially.
Ideally, there should be a time-limited all-party agreement on a plan of action, which would represent the limit of what is politically feasible.
Unfortunately, political disunity in the face of financial pressure always ends up being far more damaging to democracy and the economy than instinctive patriotism.
Democracy, Responsibility, and Honor
Hardly a day goes by on which we do not hear of a government minister somewhere resigning his or her office.
In a sense, this is hardly surprising. After all, the twenty-five member states of the European Union alone employ hundreds of ministers between them - and even more if junior ministers are included.
But why do ministers resign?
More interestingly still: why do some not resign although there seem to be compelling reasons for some to do so?
In the absence of empirical research, generalizations must be guesswork.
Ministers frequently resign because they find themselves involved in scandals, often connected in recent times with financing political parties.
In Italy, one encounters several ghosts of such past misdeeds.
Sometimes ministers resign for what they call "personal reasons."
Such reasons may conceal more compelling factors, as the recent resignation of American CIA Director George Tenet suggests.
But Tony Blair lost one of his best and most loyal cabinet friends, Alan Milburn, because he genuinely wanted to spend more time with his family.
Blair also lost his ministers of foreign affairs and of development assistance, Robin Cook and Clare Short, respectively.
In their case, it was a serious policy disagreement - over the Iraq war - that made them go, and Mr. Cook certainly remains a politician-in-waiting.
Yet Geoff Hoon, Prime Minister Blair's defence minister, as well as his American counterpart, Donald Rumsfeld, remain in office.
Neither, to be sure, is clearly involved in a manifest scandal, nor do they disagree with the policies set by their leaders.
On the contrary, they not only support these policies but stubbornly defend even their aberrations, like the mistreatment of prisoners of war.
These ministers institute investigations, they move generals sideways or even into premature retirement, they haul perpetrators before military tribunals; but they apparently see no reason to respond to those members of Congress or Parliament, let alone of the public, who wonder whether it is not time for the ministers themselves to go.
The case of crimes in Iraq is particularly dramatic, but less obvious cases make the same point.
The German minister of transport, for example, presided over a catastrophic and costly failure of a road toll system that he had proudly announced.
But even he may stay in office to try again, having blamed others - in this case private companies - for the debacle.
If something unacceptable happens without a minister's direct involvement, he or she can get away with it, or so it seems, by pointing a finger at the bureaucrats or contractors who are responsible for implementing an approved policy.
Was it always thus?
One would like to think not.
In any case, two ethical concepts come to mind, neither of which is much in vogue these days when talking about government: responsibility and honor.
Both values are, or at least used to be, part of the ethics of governance.
Responsibility concerns the fact that ministers are accountable for everything that happens within their sphere.
In fact, they alone are accountable in the strict sense. In parliamentary systems, they can and must appear before the elected representatives of the people and explain what happened.
Because they alone are directly accountable, it is not enough for a minister to point to and name the miscreants in any particular case.
Civil servants cannot defend themselves in the same way; they have to be defended by their ministers.
If something of such severity has happened that a minister finds it impossible to defend them, they may have to pay the penalty, but the minister still must assume responsibility.
It is proper to assume that Secretary Rumsfeld did not condone, let alone order, the abuse of Iraqi prisoners.
There may be the vexing question of whether instructions or reports passed over his desk that contained relevant information.
But, either way, the minister is ultimately and uniquely responsible for what happened under his command.
He cannot escape this responsibility even if the perpetrators are identified and prosecuted.
This is where the second ethical concept, honor, comes into play.
This may seem an old-fashioned term. What it says in Rumsfeld's case is that there may be no legal or constitutional obligation for a responsible minister to resign over the Iraqi abuse scandal; but once upon a time it would have been regarded as a matter of honor that he does resign.
Such a step not only demonstrates that the minister in question is fully aware of the burden of his responsibility, but also that he puts the integrity of democratic institutions above his personal interest, let alone the electoral prospects of those whom he served.
Democracy is a precious but also a precarious set of values.
If we want to persuade others to subscribe to it, we do well to demonstrate that we not only believe in elections and majorities but also in the virtues of responsibility and honor.
Democracy’s Drama in Terrorism’s Theater
CAMBRIDGE – President George W. Bush was famous for proclaiming democracy promotion as a central focus of American foreign policy.
He was not alone in this rhetoric.
Most US presidents since Woodrow Wilson have made similar statements.
So it was a striking departure when US Secretary of State Hillary Clinton testified to Congress earlier this year about the “three D’s” of American foreign policy – defense, diplomacy, and development.
The “D” of democracy was glaringly absent, suggesting a fundamental policy change by President Barack Obama’s administration.
Both Bill Clinton and George W. Bush frequently referred to democracy’s benefits for security.
They cited social-science research showing that democracies rarely go to war with each other.
But, more carefully stated, what scholars have shown is that liberal democracies almost never go to war with each other.
Indeed, it might be that a liberal constitutional culture is more important than the mere fact of competitive elections.
While free and fair elections are important, liberal democracy is more than “electocracy.”
Elections in the absence of constitutional and cultural constraints can produce violence, as in Bosnia or the Palestinian Authority.
And illiberal democracies have in fact gone to war with each other quite recently, as Ecuador and Peru did in the 1990’s.
In the eyes of many critics at home and abroad, the Bush administration’s excesses tarnished the idea of democracy promotion.
Bush’s invocation of democracy to justify the invasion of Iraq implied that democracy could be imposed at the barrel of a gun.
Democracy came to be associated with its particular American variant, and took on an imperialist connotation.
Moreover, Bush’s exaggerated rhetoric was often at odds with his practice, giving rise to charges of hypocrisy.
He somehow found it easier to criticize Zimbabwe, Cuba, and Burma than Saudi Arabia and Pakistan, and he quickly toned down his initial reproach of Egypt.
There is a danger, however, in over-reacting to the Bush administration’s policy failures.
Democracy is not an American imposition, and it can take many forms.
The desire for greater participation grows as economies develop and people adjust to modernization.
Nor is democracy in retreat.
Freedom House, a non-governmental organization, listed 86 free countries at the beginning of the Bush years, a total that increased slightly, to 89, by the end of his term.
Democracy remains a worthy and widespread goal, which should be distinguished from the means chosen to attain it.
There is a difference between assertive promotion of democracy and more gentle support.
Avoiding coercion, premature elections, and hypocritical rhetoric does not rule out a patient policy of economic assistance, quiet diplomacy, and multilateral efforts to support the development of civil society, the rule of law, and support for well-managed elections.
Equally important to the foreign-policy methods used to support democracy abroad are the ways in which we practice it at home.
When we try to impose democracy, we tarnish it.
When we live up to our own best traditions, we can stimulate emulation and generate the soft power of attraction.
This approach is what Ronald Reagan called the “shining city on the hill.”
For example, many people both inside and outside the US had become cynical about the American political system, arguing that it was dominated by money and closed to outsiders.
The election of Barack Hussein Obama in 2008 did a great deal to restore the soft power of American democracy.
Another aspect of America’s domestic practice of liberal democracy that is currently being debated is how the country deals with the threat of terrorism.
In the climate of extreme fear that followed the attacks of September 11, 2001, the Bush administration’s tortured legal interpretations of international and domestic law tarnished American democracy and diminished its soft power.
Fortunately, a free press, an independent judiciary, and a contentious legislature helped to bring such practices into public debate.
Obama has proclaimed that he will close the Guantánamo detention facility within a year, and he has declassified the legal memos that were used to justify what is now widely regarded as torture of detainees.
But the problem of how to deal with terrorism is not just a question of the past.
The threat remains with us, and it is important to remember that people in democracies want both liberty and security.
In moments of extreme fear, the pendulum of attitudes swings toward the security end of that spectrum.
Abraham Lincoln suspended the right of habeas corpus during the Civil War, and Franklin Roosevelt interned Japanese-American citizens during the early days of World War II.
When some of the more reasonable members of the Bush administration are asked today how they could have taken the positions that they did in 2002, they cite the anthrax attacks that followed 9/11, the intelligence reports of an impending attack with nuclear materials, and widespread public fear of a second attack.
In such circumstances, liberal democracy and security are in tension.
Terrorism is a form of theater.
It works not by sheer destruction, but rather by dramatizing atrocious acts against civilians.
It is like jiu jitsu: the weaker adversary wins by leveraging the power of the stronger against itself.
Terrorists hope to create a climate of fear and insecurity that will provoke liberal democracies to harm themselves by undercutting their quality in terms of their own values.
Preventing new terrorist attacks while understanding and avoiding the mistakes of the past will be essential if we are to preserve and support liberal democracy both at home and abroad.
That is the debate that the Obama administration is leading in the US today.
Democracy versus the Eurozone
BRUSSELS – The European Union is a voluntary quasi-federation of sovereign and democratic states in which elections matter and each country seeks to determine its own destiny, regardless of the wishes of its partners.
But it should now be apparent to everyone that the eurozone was designed with a very different institutional arrangement in mind.
Indeed, that design gap has turned out to be a major source of the monetary union’s current crisis.
Last October, Greece’s then-prime minister, George Papandreou, proposed a popular referendum on the second rescue package that had just been agreed at the EU’s summit in Brussels.
He was quickly told off by German Chancellor Angela Merkel and former French President Nicolas Sarkozy, and Greeks never voted on it.
But, less than a year later, the referendum is de facto taking place anyway.
In a union of democracies, it is impossible to force sovereign countries to adhere to rules if their citizens do not accept them anymore.
This has profound implications: all of those grandiose plans to create a political union to support the euro with a common fiscal policy cannot work as long as EU member countries remain both democratic and sovereign.
Governments may sign treaties and make solemn commitments to subordinate their fiscal policy to EU rules (or to be more precise, to the wishes of Germany and the European Central Bank).
But, in the end, the “people” remain the real sovereign, and they can choose to ignore their governments’ promises and reject any adjustment program from “Brussels.”
In contrast to the United States, the EU cannot send its marshals to enforce its pacts or collect debt.
Any country can leave the EU, and thus the eurozone, when the perceived burden of its obligations becomes too onerous.
Until now, it had been assumed that the cost of exit would be so high that it would never be considered.
That is no longer true, at least for Greece.
But, more broadly, EU commitments have now become relative, which implies that jointly guaranteed Eurobonds cannot be the silver bullet that some hope.
As long as member states remain fully sovereign, no one can fully reassure investors that in the event of a eurozone breakup, some states will not simply refuse to pay, or at least refuse to pay for the others.
It is not surprising that bonds issued by the European Financial Stability Facility (the eurozone’s rescue fund) are trading at a substantial premium over German debt.
All variants of Eurobonds come with supposedly strong conditionality.
Countries that want to use them must follow strict fiscal rules.
But who guarantees that these rules will actually be followed?
François Hollande’s victory over Sarkozy in France’s presidential election shows that an apparent consensus on the need for austerity can crumble quickly.
What recourse do creditor countries have if the debtor countries become the majority and decide to increase spending?
The recently agreed measures to strengthen economic-policy coordination in the eurozone (the so-called “six pack”) imply in principle that the European Commission should be the arbiter in such matters, and that its adjustment programs can formally be overturned only by a two-thirds majority of the member states.
But it is unlikely that the Commission will ever be able to impose its view on a large country.
Spain’s experience is instructive in this respect.
After the recent elections there, Prime Minister Mariano Rajoy’s new government announced that it did not feel bound by the adjustment program agreed to by the previous administration.
Rajoy was roundly rebuked for the form of his announcement, but its substance was proven right: Spain’s adjustment program is now being made more lenient.
The reality is that the larger member states are more equal than the others.
Of course, this is not fair, but the EU’s inability to impose its view on democratic countries might actually sometimes be for the best, given that even the Commission is fallible.
The broader message from the Greek and French elections is that the attempt to impose a benevolent creditors’ dictatorship is now being met by a debtors’ revolt.
Financial markets have reacted as strongly as they have because investors recognize that the “sovereign” in sovereign debt is an electorate that can simply decide not to pay.
This is already the case in Greece, but the fate of the euro will be decided in the larger, systemically important countries like Italy and Spain.
Only determined action by their governments, supported by their citizens, will show that they merit unreserved support from the rest of the eurozone.
Democracy Without Democrats
The philosopher Karl Popper had ample reason to propose a precise definition of democracy.
Democracy, he said, is a means to remove those in power without bloodshed.
Popper's preferred method, of course, was the ballot box.
Popper's definition avoids theological disputes about the "rule of the people," and whether such a thing can actually exist.
It also spares us the attempt to stick all kinds of possibly desirable objectives into the definition, like equality in social as well as technical terms, a general theory of the actual process of "democratisation," or even a set of civic virtues of participation.
But Popper's definition of democracy does not help when it comes to a question that has become topical in many parts of the world: what if those removed from power believe in democracy, whereas those who replace them do not?
What in other words, if the "wrong" people are elected?
There is no shortage of examples.
In Europe, parties of dubious democratic pedigree have done well in recent years: Jörg Haider in Austria, Christoph Blocher in Switzerland, Umberto Bossi in Italy, Jean-Marie LePen in France - the list is long.
At best, the electoral victories of such groups make the formation of responsible governments difficult; at worst, they foreshadow actively antidemocratic movements capable of getting a majority by election.--
This is what has happened or is happening in many parts of the world.
Two recent examples stand out.
One is found in the postcommunist countries of East and Southeast Europe, a surprising number of which have elected members of the old nomenklatura under a new guise.
The most extreme current case is Serbia, where a big part of the electorate gave their votes to men standing trial for war crimes in The Hague.
The other example is Iraq.
What if the American dream of bringing democracy to that troubled country ends in its citizens electing a fundamentalist movement to power?
The mere thought of such examples leads to the clear conclusion that democracy is not just about elections.
In fact, of course, the early advocates of democracy had all kinds of things in mind.
John Stuart Mill, for example, regarded "nationality," a cohesive society within national boundaries, as a precondition for democracy.
Another precondition for Mill was the ability and desire of citizens to make considered choices.
Today we no longer take such virtues as given.
They were probably exercised by only a minority of people even at the time when Mill wrote on representative government.
Today democracy has to mean "elections plus" - but plus what?
There may be some technical measures that can be taken, like banning parties and candidates who campaign against democracy, or whose democratic credentials are weak.
This worked in postwar Germany, but then traumatic memories of the Nazis and the relative weakness of antidemocratic movements helped.
A more relevant example may well be Turkey, where Islamist movements were dissolved by the courts; when they reappeared in a different guise, they had to undergo severe tests.
Yet one can easily see the problems: who judges the eligibility of candidates and how are such judgements enforced?
What if the groundswell of support for an antidemocratic movement is so strong that the suppression of its organisation leads to violence?
In a sense it might be better to let such movements have a go at government and hope that they will fail - as have most of the current European groups of an antidemocratic ilk.
But that too is risky.
When Hitler came to power in January 1933, many if not most German democrats thought: "Let him!
He will soon be exposed for what he is and above all for what he is not."
But time is relative: "soon" came to mean twelve years that included a savage war and the Holocaust.
Active citizens who defend the liberal order must thus be its safeguard.
But there is another, and a more important element to safeguard, which is the rule of law.
The rule of law is not the same as democracy, nor does one necessarily guarantee the other.
The rule of law is the acceptance that laws given not by some supreme authority, but by the citizenry, govern all - those in power, those in opposition, and those outside the power game.
The rule of law is the strongest feature of Turkey today.
It has rightly been the prime objective of the High Representative for Bosnia, Paddy Ashdown.
It is something that must be defended; so-called "enabling laws" that suspend the rule of law are the first weapon of dictators.
But it is harder to use the rule of law to undermine law than it is to use popular elections against democracy.
"Elections plus" must mean, therefore, democracy plus the rule of law.
At the risk of offending many friends of a democratic persuasion, I have now concluded that the rule of law should come first when constitutionalism is brought to an ex-dictatorship, and democracy second.
Incorrupt independent judges are even more influential than politicians elected with massive majorities.
Lucky are those countries that have both, and that nurture and protect them!
Democratic Alliances
America's foreign alliances have become an issue in this year's presidential election campaign.
Senator John Kerry, the Democratic candidate, has accused President George W. Bush of neglecting and offending America's allies, particularly in Europe.
A Kerry administration, he claims, will restore respect for America in the world.
Anti-Americanism is not new in Europe, but views of America have generally been more positive in the past.
During the Cold War, the United States not only pursued far-sighted policies like the Marshall Plan, but also represented freedom and democracy.
Admiration for American values does not mean, of course, that others want to imitate all the ways Americans implement them.
While many Europeans admire America's devotion to freedom, they prefer policies at home that temper the liberal economic principles of individualism with a robust welfare state.
Despite all the rhetoric about "old" and "new" Europe, at the end of the Cold War opinion surveys showed that two-thirds of Czechs, Poles, Hungarians, and Bulgarians perceived the US as a good influence on their respective countries, but fewer than a quarter wanted to import American economic models.
Popular culture can often be an important source of "soft" power.
Simple items like blue jeans, cola, or Hollywood movies helped produce favorable outcomes in at least two of the most important American objectives after 1945.
One was the democratic reconstruction of Europe after WWII, and the other was victory in the Cold War.
The Marshall Plan and NATO were crucial instruments of economic and military power, but popular culture reinforced their effect.
The dollars invested by the Marshall Plan helped achieve US objectives in reconstructing Europe, but so did the ideas transmitted by American popular culture.
Today, about two-thirds of the people polled in ten European countries say they admire America for its popular culture and progress in science and technology, but only a third think the spread of American customs in their country is a good idea.
The US doesn't have to make others look like little Americans, but it does have to live up to its core values in order to use its soft power effectively.
This is why the examples of the prisons at Abu Ghraib and Guantanamo Bay have been so costly.
It is also why a free press that reports these problems, congressional hearings that investigate them, and a recent set of Supreme Court decisions that give detainees legal recourse are also so important.
America is not perfect, but as long as it abides by its core values, it can overcome its mistakes and regain its soft power in democratic countries.
For example, America was extraordinarily unpopular at the time of the Vietnam War, yet it recovered its soft power within a decade, and it is interesting to consider why.
Part of the answer may be that when students were marching in the streets protesting, they did not sing the "Internationale"; they sang "We Shall Overcome."
America's democratic values will be the key to success in restoring its soft power.
Some skeptics argue that this emphasis on values is the wrong explanation of how changes occur in world politics, and that the real problem between Europe and the US is structural.
With the demise of the Soviet Union, according to this argument, the bi-polar balance of power vanished and America became the world's only superpower, engendering resentment and envy - and hence a difficult time for US-European relations.
If European resentment is inevitable, some US leaders say, then the proper response is to shrug it off.
Popularity is ephemeral and should never guide national policy.
The US, in these leaders' view, can act without the world's applause.
America doesn't need permanent allies and institutions, they say, because a coalition of the willing will suffice.
As Secretary of Defense Donald Rumsfeld has put it, "The issues should determine the coalition, rather than the coalition determining the issues."
But it is a mistake to dismiss America's declining attractiveness so lightly.
America's recovery from unpopular policies in the past, such as the Vietnam War, took place against the backdrop of the Cold War, in which allied countries feared the Soviet Union as a greater evil.
Moreover, while America's status as the world's sole superpower is a structural fact, wise policies can soften the sharp edges of this reality.
After WWII, America was able to use soft power resources and co-opt others into a set of alliances and institutions that lasted sixty years. When we recall the Cold War, it is important to remember that America's strategy of containment combined the deterrent of its hard military power with the attractiveness of its soft cultural power, which eroded confidence and belief in Communism behind the Iron Curtain.
The Bush administration's emphasis on promoting democracy in the Middle East suggests it understands the importance of values in foreign policy.
Nevertheless, the administration refuses to be held back by institutional restraints.
It advocates soft power, but focuses only on the substance and not enough on the process.
The only way to achieve the type of transformation in the Middle East that the Bush administration seeks is by working with others and avoiding the backlash that arises when America acts as a unilateral, imperial power.
Democracy cannot be imposed in any reasonable time by force alone.
It takes time to set down roots, as the successful cases of Southeast Asia demonstrate.
The Bush administration's impatience with institutions and allies thus undercuts its own objectives.
The irony is that it was the US that built some of the longest lasting alliances and institutions the modern world has seen, and that were central to American power for over half a century.
Democratic Hysteria
BERKELEY – In the political impasses that recently paralyzed the world’s two largest democracies, India and the United States, both countries’ usually clear-sighted leaders, to paraphrase William Butler Yeats, lacked all conviction, while the misguided and the shallow were full of passionate intensity.
Indeed, that passion shows little sign of waning.
In the US, the economically illiterate, seeing misery all around from lost jobs, foreclosed homes, and the ever more apparent decline in America’s international status, are distilling their frenzy from obsolete advocates of fiscal rectitude, while clutching their Bibles and espousing a juvenile understanding of the US constitution.
But their efforts are only digging a bigger hole for the US economy, making recovery much more difficult.
Even their tax-averse sponsors, while appreciative of the rabble’s efforts to protect their wealth, are now fearful of the impact of these wayward ideas on the investment climate and equity prices.
President Barack Obama, elected with a great deal of goodwill and hope in 2008, is now caught like a deer in the headlights.
He knows that what the economy needs in the short run is different from what needs to be done to manage public debt in the long run, but he is unable to provide decisive leadership.
His misguided efforts at compromise only fuel his opponents’ frenzy.
In India, Prime Minister Manmohan Singh, who once enjoyed a strong reputation for integrity and intelligence, has been similarly paralyzed, acting erratically in the face of an equally demagogic populist movement – the anti-graft crusade led by a fasting activist, Anna Hazare – which just ended in a frantic and uneasy compromise.
Hazare, egged on by a flag-waving and indignant urban middle class and sensation-seeking media, tries mightily to claim Mahatma Gandhi’s mantle; he is good at mimicking Gandhi’s piety, but lacks his root wisdom.
Low-level corruption (the police, courts, and government clerks) has always been widespread in India.
The type of corruption that has increased in recent years is partly a consequence of rapid economic growth.
Public resources, like land, minerals, and hydrocarbons, and the telecommunications spectrum, have shot up in value, and in the scramble to control them, businessmen seek shortcuts.
Another reason for rising corruption is the soaring expense of elections, with politicians raising money from business as part of a quid pro quo.
Both India and the US have little public financing of elections, and large business donations that are legal in the US are often illegal (and hence given underhandedly) in India.
But, instead of addressing the structural causes of rising corruption, India’s anti-graft movement bemoans a supposed weakening of ethical values and demands additional agencies with draconian powers to monitor and punish.
The urban middle classes, impatient with the slow processes of democracy, latch on to holy men and their magic potions.
Just as in the US, public rage is somehow directed away from the rich bribe-givers and onto venal politicians.
In both countries, the long-run implications of such angry populist movements for the health of democratic institutions need to be pondered.
This is particularly true for India, where elections are vigorous and common people participate in them more enthusiastically than in the US, but other democratic institutions remain weak and sometimes dysfunctional, and the judiciary is too slow and occasionally corrupt.
To loud cheers from the crowds, the populists damn elected politicians as thieves and looters, but in the process disparage the institutions and processes of representative government.
In the not-too-distant past, widespread denigration of this sort in Africa, Latin America, and other parts of South Asia often made it easier for populist authoritarianism to take hold.
Indeed, the widely heard slogan “Anna is India, India is Anna” reminds some of the dark days of Indira Gandhi’s emergency rule in 1975-1977, when her followers raised the slogan of “Indira is India”.
But the slogan-mongers overlook India’s extreme diversity.
Many members of ethnic minorities, including the country’s 150 million Muslims, openly oppose the Hazare movement.
One Dalit (the lowest level of India’s old caste system) leader expressed his fear that Anna’s success might inspire some majoritarian leader to rouse an even larger movement to rescind the protective rights and affirmative-action policies that have brought the lower castes some dignity.
And some NGO leaders object that their own, very different anti-corruption agenda is being pre-empted by Hazare’s demands.
In a populous country, it is not difficult to attract a large crowd.
The electronic media are particularly attracted to colorful crowds waving flags and espousing nationalist causes.
As one journalist pointed out, when 400,000 people (far more than Hazare’s followers in Delhi) marched in Kolkata in May 1998 to protest against the government’s nuclear tests, the media barely noticed.
Even when movements have near-universal support (which is not the case with the recent political movements in the US or India), there is a fundamental tension between democracy’s procedural and participatory aspects.
Apart from electoral reform, outlets for political participation and expression of public grievances must be balanced by institutions and procedures that are partly insulated from the rough-and-tumble of politics.
Of course, representative government does sometimes become unresponsive, particularly between elections, but direct democracy is not the solution.
The US state of California, which has become increasingly dysfunctional since a 1978 popular referendum capped property taxes, can attest to that.
Nor is it an answer to demand hasty enactment of legislation in the face of a threat to cause public disorder by starving oneself to death, as Anna Hazare has done.
Most citizens in the world’s two largest democracies understand that democracy does not offer magic solutions.
One of the most lamentable developments of our time is that so many are now prepared to try unhealthy palliatives and short cuts.
Democratic Inequality
CHICAGO – Why did the household savings rate in the United States plummet before the Great Recession?
Two of my colleagues at the University of Chicago, Marianne Bertrand and Adair Morse, offer an intriguing answer: growing income inequality.
Bertrand and Morse find that in the years before the crisis, in areas (usually states) where consumption was high among households in the top fifth of the income distribution, household consumption was high at lower income levels as well.
After ruling out a number of possible explanations, they concluded that poorer households imitated the consumption patterns of richer households in their area.
Consistent with the idea that households at lower income levels were “keeping up with the Vanderbilts,” the non-rich (but not the really poor) living near high-spending wealthy consumers tended to spend much more on items that richer households usually consumed, such as jewelry, beauty and fitness, and domestic services.
Indeed, many borrowed to finance their spending, with the result that the proportion of poorer households in financial distress or filing for bankruptcy was significantly higher in areas where the rich earned (and spent) more.
Were it not for such imitative consumption, non-rich households would have saved, on average, more than $800 annually in recent years.
This is one of the first detailed studies of the adverse effects of income inequality that I have seen.
It goes beyond the headline-grabbing “1%” debate to show that even the everyday inequality that most Americans face – between the incomes of, say, typical readers of this commentary and the rest – has deep pernicious effects.
Equally interesting is the link that the study finds between income inequality and pre-crisis economic policy.
Republican Congressmen from districts with higher levels of income inequality were more likely to vote for legislation to expand housing credit to the poor in the years before the crisis (almost all Democrats voted for such legislation, making it hard to distinguish their motives).
And the effect of spending by the rich on non-rich households’ spending was higher in areas where house prices could move more, suggesting that housing credit and the ability to borrow against rising home equity may have supported over-consumption by the non-rich.
I was most fascinated, though, by the difference in legislators’ response to inequality now and in the past.
In a study of the congressional vote on the McFadden Act of 1927, which sought to boost competition in lending, Rodney Ramcharan of the US Federal Reserve and I found that legislators from districts with a highly unequal distribution of land holdings – farming was the primary source of income in many districts then – tended to vote against the act.
More inequality led legislators, at least in that case, to prefer less competition and less expansion in lending.
And we found that counties with less bank competition experienced a milder farmland boom, and therefore a smaller bust in the years before the Great Depression.
The obvious lesson to be drawn from these episodes is the importance of unintended consequences.
In the early twentieth century, a congressional district’s rich landowners were likely to own the local banks as well, or to be related to, or friends with, bank owners.
They benefited from limiting competition and controlling access to finance.
Representatives voted on behalf of their districts’ powerful interests.
They preferred less competition in credit markets not out of concern for the unwitting farmers, but in order to defend powerful lenders’ profits.
It worked, but an unintended collateral effect was to protect these districts from getting carried away by the financial frenzy.
Why did twenty-first-century legislators behave differently?
The cynical, and increasingly popular, view is that they were again voting their pocketbooks – all financial legislation in the run-up to the 2008 crisis was supposedly driven by the financial sector’s appetite for more customers to devour with teaser loans and dubious mortgages.
But, if voting was influenced by the financial sector, the supposed party of the plutocrats, the Republicans, should have voted in unison for the bill.
Instead, they split on the basis of whose non-rich constituents were more desirous of obtaining finance.
Twenty-first-century legislators seemed to be more democratic, responding to their voters’ possibly misguided wishes, rather than primarily to powerful financial interests.
Indeed, once the unintended consequences of their actions – more financial duress for the non-rich after the crisis – became clear, Bertrand and Morse show that the legislators in unequal districts moved against the financial sector to protect their constituents, voting to set limits on interest rates charged by “payday” lenders (who lend to over-indebted lower-income borrowers at very high interest rates).
Of course, such legislation will have unanticipated consequences, which future studies will unearth, but the intent behind it cannot be doubted.
We should not come away from these episodes thinking that expanding access to finance is bad.
In general, expanding access is beneficial (just not before a crisis!), but finance is a powerful tool that has to be used sensibly.
Access is good; excess is bad.
But there is a more important point: while there are many gaps between the intent and consequences of legislation, legislators do seem ultimately to care more about their less-moneyed constituents than they did in the past.
Democracy is stronger.
In these cynical times, that is encouraging.
Democratizing Capitalism
Capitalism is the world's engine of growth.
But its very dynamism--its "creative destruction"--tends to produce great uncertainties.
Unsuccessful firms are tossed aside to make way for new and better firms, and individuals who become economically less productive (often through no fault of their own) can also be "discarded" by the market, their careers interrupted and their investments cut to a fraction of their previous value.
This uncertainty has been at the root of demands for the state to intervene and protect the individual against the market's mercilessness.
Beginning with Bismarck's social security system in 19 th century Germany, through the American New Deal of the 1930's, to the social-democratic policies of postwar Europe, many countries created a "mixed" welfare state in which governments control and temper market forces, providing an extensive "safety net" for individuals.
But despite its achievements, many people believe that the welfare state comes at too high a price in terms of dampening economic dynamism.
The prospect raised by today's new technologies in finance and information is that some of the "market failures" at the root of state involvement in the economy may cease to exist.
Indeed, the "creative destruction" that generates unacceptable risk to individuals is poised to deliver the means for tempering these same risks.
In fact, the most important capitalist mechanisms for blunting the impact of risk on individuals--insurance, diversification, and hedging--have been around for centuries.
But broader application of these tools has accelerated with the advent of new information technology, which also allows us to apply these tools without undermining people's incentive to work.
Indeed, the world seems to be entering an age in which the basic principles of finance will be integrated into the world capitalist economy, and our lives, in a more thoroughgoing way than ever before.
Aided by advanced information technology, financial institutions will be democratized and made available to everyone, which will go a long way toward solving today's problems of increasing inequality and declining economic vitality.
An example of recent progress illustrates what I mean.
For most middle-class people in developed countries, the home they own is their most valuable asset.
Although the postwar population boom and heavy regulation meant that real estate prices in many countries went up more often than down, a sudden collapse of the property market--such as happened in Japan a decade ago--may dramatically reduce the value of most people's savings.
Such a financial "hit" may affect their consumption patterns, complicate their retirement plans, and even bring them to the brink of indigence.
Yet, until recently, one could insure one's home against fire or other damage, but not against a loss in market value.
That is changing.
Two recent developments indicate the shape of things to come, although neither has attracted much notice.
First, in October 2001, the spread-betting firm City Index created futures markets on home prices in the United Kingdom.
In May 2003, the investment bank Goldman Sachs created options markets for home prices, for the UK as a whole and for Greater London, with both to be traded on the London Stock Exchange.
Theoretically, homeowners can use these new instruments to protect themselves against their home losing value.
But these instruments are rather sophisticated--too sophisticated, in fact, for most homeowners to embrace.
Second, in July 2002, the city of Syracuse, New York, in conjunction with the Neighborhood Reinvestment Corporation, the Yale School of Management, and Realliquidity, LLC, created home equity insurance that pays out if an index of city home prices declines.
Like the British options and futures market for home prices, this novel insurance policy is also, for the time being, a limited development, made possible by new information technology in the form of electronic databases of home prices and characteristics.
Someday, these two institutions will be brought together in one country.
Regulators permitting, insurance companies will then be able to write policies against loss of home value for individuals, and then will be able protect themselves against the risk to which these policies expose them by taking offsetting positions in the futures or options markets.
This should make them willing to offer such policies to millions of people in different localities.
Home equity insurance will clearly not solve all the problems of individual risk, but it will solve a very big one.
Moreover, it is only one example of the democratization of finance now underway.
Further advances along these lines will follow.
Many risks are gradually being added to the list of those that can be insured against.
The types of risks traded on electronic marketplaces are steadily expanding.
Trading platforms are being improved to allow more complex trading.
Databases are rapidly improving in depth, and are becoming more deeply integrated with personal financial-planning Web sites.
Even systems of taxation and social welfare are more sophisticated in using new tools of insurance, finance, and information technology.
As a result, our mechanisms for dealing with risk can become increasingly differentiated and complex.
With modern computers and information technology, it will be possible to deal individually with a million different risks.
The combined effect of many different financial innovations will be to blunt the impact of capitalist risk on our individual lives, helping to reduce economic uncertainty and inequality.
Democratizing the Millennium Development Goals
PARIS – On September 20-22, world leaders gather in New York to encourage progress towards meeting the United Nations’ Millennium Development Goals – a set of eight objectives, ranging from eradicating extreme poverty and hunger to reducing child mortality and achieving universal primary education, that are to be achieved by 2015.
The summit’s purpose is to take stock of successes and failures, and to move towards “concrete strategies for action.”
But this summit would do the entire world a great service by acknowledging what has gone so wrong with the MDGs, and choosing a radically different approach.
The MDGs, as they are currently conceived, address the symptoms of poverty and underdevelopment, but mostly ignore the deeper causes.
They draw attention to 18 targets in total – those for which data are most easily compiled.
But the result is that the MDGs may divert attention from the mechanisms that produce underdevelopment – rather like the drunken man searching for his keys under the lone streetlamp because the light is better there.
Instead of vowing to support humanitarian objectives and throwing money at poverty’s symptoms, the rich countries must recognize the urgency of removing the obstacles to development that they have the power to address.
Each year, for example, developing countries miss out on $124 billion in revenue from offshore assets held in tax havens.
By not closing down such tax havens, we actively encourage corrupt elites in these countries to continue cheating their populations.
Moreover, the current system of international trade is deeply inequitable: it exposes developing countries to unfair competition, and discourages diversification of their economies.
These countries face a burden of foreign debt – estimated at $500 billion for poor countries – that is simply incompatible with the pursuit of development goals.
Addressing these issues is vital for development objectives to have any chance to succeed.
Yet, although Goal 8 is to achieve a global partnership for development, and although some progress has been made on the debt issue, too little in fact has been done to give this initiative concrete meaning.
Another major deficiency of the MDGs is their failure to recognize human rights as essential to any sustainable development strategy.
But human rights are not just symbols; they are also tools.
They are valuable because they are operational.
The world’s one billion hungry people do not deserve charity: they have a human right to adequate food, and governments have corresponding duties, which are enshrined in international human rights law.
Governments that are serious about making progress on development objectives should be asked to adopt a legislative framework for the realization of economic and social rights such as the right to food or the right to health care.
That framework should be designed through a participatory process involving civil society. It should define which actions should be taken, by whom, within which timeframe, and with which resources.
The intended beneficiaries of these actions should be defined as rights-holders.
Accountability mechanisms should be established, allowing victims to hold governments responsible for their failure to take action.
This removes the stigma of charity, and it is empowering for victims.
Instead of being helped because they have unsatisfied needs, they are granted remedies because their rights are being violated.
The framework also should include a non-discrimination requirement, ensuring that we focus our attention on the most vulnerable groups – not just the well-connected, the literate, and the favorites of the regime, and not just groups for which quick wins can be achieved.
Because participation should be ensured in the process, the people whom we seek to support will co-design and co-improve the systems that are meant to serve them.
They become actors rather than passive recipients of aid, and aid is more effective as a result.
All democratic revolutions begin with human rights.
The MDG summit is missing an opportunity to begin this much-needed revolution in our understanding of economic development as well.
Demystifying the Chinese Economy
WASHINGTON, DC – China had an advanced and prosperous civilization for millennia until the eighteenth century, but then degenerated into a very poor country for 150 years.
Now it has resurged to become the world’s most dynamic economy since launching its transition to a market economy in 1979.
What drove these fateful changes?&nbsp;
In my recent book Demystifying the Chinese Economy, I argue that, for any country at any time, the foundation for sustained growth is technological innovation.
Prior to the Industrial Revolution, craftsmen and farmers were the main source of innovation.
With the largest population in the world, China was a leader in technological innovation and economic development throughout most of its history because it had a large pool of craftsmen and farmers.
The Industrial Revolution accelerated the pace of Western progress by replacing experience-based technological innovation with controlled experiments conducted by scientists and engineers in laboratories.
This paradigm shift marked the coming of modern economic growth, and contributed to the global economy’s “Great Divergence.”
China failed to undergo a similar shift, owing primarily to its civil-service examination system, which emphasized the memorization of Confucian classics and provided little incentive for elites to learn mathematics and science.
The Great Divergence had a silver lining: developing countries could use technology transfers from advanced countries to achieve a faster rate of economic growth than the countries that were at the industrial vanguard.
But China failed to exploit this benefit of backwardness until the transition from a command economy began in earnest.
In the wake of the communist takeover in 1949, Mao Zedong and other political leaders hoped to reverse China’s backwardness quickly, adopting a big push to build advanced capital-intensive industries.
This strategy enabled China to test nuclear bombs in the 1960’s and launch satellites in the 1970’s.
But China was still a poor, agrarian economy; it held no comparative advantage in capital-intensive industries.
Firms in those industries were not viable in an open, competitive market.
Their survival required government protection, subsidies, and administrative directives.
These measures helped China establish modern, advanced industries, but resources were misallocated and incentives distorted.
Economic performance was poor.
Haste made waste.
When China’s market transition started in 1979, Deng Xiaoping adopted a pragmatic, dual-track approach, rather than the “Washington Consensus” formula of rapid privatization and trade liberalization.
On the one hand, the government continued to provide transitory protection to firms in priority sectors; on the other, it liberalized the entry of private enterprises and foreign direct investment into the labor-intensive sectors that were consistent with China’s comparative advantage but were repressed in the past.
This approach enabled China to achieve stability and dynamic growth simultaneously.
Indeed, the benefits of backwardness have been breathtaking: 9.9% average annual GDP growth and 16.3% annual trade growth over the past 32 years – a stellar achievement that holds valuable lessons for other developing countries.
Now China is the world’s largest exporter and its second largest economy, and more than 600 million people were pulled out of poverty.
Yet China’s success has not come without cost.
Income disparities have widened, owing in part to the continuation of distortionary policies in various sectors, including the domination of China’s four large state-owned banks, the near-zero royalty on mining, and monopolies in major industries, including telecommunications, power, and financial services.
Because such distortions (a legacy of the dual-track transition) result in income disparities, they ultimately repress domestic consumption and contribute to China’s trade imbalance.
Those imbalances will remain until China completes its market transition.
I am confident that, notwithstanding the headwinds blowing from the eurozone crisis and the slump in demand worldwide, China can continue its dynamic growth.
In 2008, China’s per capita income stood at 21% of the US level (measured in purchasing power parity), and was similar to Japan’s per capita income in 1951, South Korea’s in 1977, and Taiwan’s in 1975.
Annual GDP growth averaged 9.2% in Japan from 1951 to 1971, 7.6% in South Korea from 1977 to 1997, and 8.3% in Taiwan from 1975 to 1995.
Given the similarities between these economies’ experience and China’s post-1979 development strategy, it is likely that China can maintain 8% growth in the coming two decades.
Some may think that the performance of a country as unique as China, with more than 1.3 billion people, cannot be replicated.
I disagree.
Every developing country can have similar opportunities to sustain rapid growth for several decades and reduce poverty dramatically if it exploits the benefits of backwardness, imports technology from advanced countries, and upgrades its industries.
Simply put, there is no substitute for understanding comparative advantage.
De-Nationalizing the ECB’s Executive Board
The European Central Bank’s chief economist, Otmar Issing, may not be scheduled to retire until May 2006. But behind the scenes, maneuvering and politicking over his replacement are already in full swing.
If current practices are maintained, the choice for this key post will be made on the basis of nationality, not merit.
The only certainty about Mr. Issing’s successor at the present moment is that he or she will be a German.
This is because the big countries are acting as if they “own” seats on the Executive Board – that there is a “German chair”, a “Spanish chair”, an “Italian chair”, and so on.
They are getting away with their power grab even though it goes against the Maastricht Treaty, which excludes nationality as a criterion for membership on the Executive Board.
The pattern has been all too obvious.
First, there was the controversial appointment of the Spaniard Jose Manuel Gonzales-Paramo to replace his countryman Domingo Solans on the Executive Board in May 2004.
In May of this year, Lorenzo Bini-Smaghi will replace another Italian, the retiring Tommaso Padoa-Schioppa.
These appointments set a bad precedent, regardless of the merits of the individual members in question.
Current practice is blatantly unfair, because it excludes candidates from small countries from competing for the vacated seats.
This practice is also unwise.
Some of the best people serving the ECB – or who have served in the past – are from small countries.
Preventing small countries – as well as other big ones – from competing for specific vacant seats reduces the Executive Board’s potential competency.
Giving big countries permanent seats on the Executive Board also makes it easier for their politicians to control the ECB through the appointments process.
It is much more difficult to appoint a political puppet to the Board in a system of open competition than under the current scheme.
The last thing the ECB needs is a political crony of German Chancellor Gerhard Schroeder assuming Mr. Issing’s key post.
Of course, opening up the competition for Executive Board portfolios to all member countries does not guarantee the most qualified and politically independent person gets the job; it only increases the probability of such an outcome.
After all, member governments would still pick the candidates, and there can be no escaping politics in what is essentially a political process.
If member governments are intent on bad candidates, it will be impossible to avoid them.
Still, an open competitive process, even with all the inevitable political horse-trading and compromise that this entails, will most likely result in better Executive Board members than under the current system.
Aware of the danger that Schroeder may pick a dubious candidate for Issing’s post, senior ECB officials are already quietly discussing ways to outmaneuver him.
One proposal currently making the rounds in Frankfurt is to split Issing’s current portfolio in two, transferring part of the chief economist’s responsibilities to another Board member.
Another is to decouple the economics portfolio from the “German chair” altogether.
The question is whether Germany will respond by claiming that it “owns” Issing’s portfolio as well as his chair.
So far, the big countries have been able to get away with their power grab because the small ones have been too disunited to launch an effective counterattack.
Belgium, for example, complains constantly about its lack of representation on the Executive Board, but it has been more interested in demanding equal treatment with the Netherlands in the ECB than pursuing a common strategy with its neighbor to counter the big countries’ unwarranted assumption of permanent seats.
The new EU members from Central and Eastern Europe, in particular, have a big stake in how the issue plays out.
Many of the new members will be small countries who will introduce the euro someday and will want to have a seat on the Executive Board.
If that is not possible because the original big countries have locked up most of the six seats on the Board for themselves, public opinion in Europe – which is broader than German, French, Spanish, and Italian opinion – could turn against the ECB.
For this reason alone, the competition for the limited seats on the Executive Board must be an open one.
Denying Democracy in Hong Kong
This week marks the 15th Anniversary of the promulgation of Hong Kong’s constitution, the Basic Law, by China’s National People’s Congress.
The Basic Law supposedly established a political framework to accord with the late Deng Xiaoping’s policy of “one country, two systems,” with Hong Kong’s people ruling Hong Kong with a high degree of autonomy.
Under this policy, Hong Kong’s capitalist system, the rule of law, and its people’s freedoms and way of life were to be preserved.
It provided for a popularly elected Chief Executive and Legislative Council.
Indeed, apart from defense and foreign affairs, Hong Kong was to be master of its own house.
But, despite its promise of universal suffrage, the Basic Law restricts democratic development during the first ten years after the handover of Hong Kong to China.
As a result, full democracy is to be permitted only in 2007.
I said in my maiden speech in the Legislative Council in 1985 that the policy of “one country, two systems” cannot work without democracy.
As Deng once said of China: “With a good system, even evil men cannot do evil.
But without a good system, even good men cannot do good, but may be forced to do evil.”
For Hong Kong, the only good system is democracy.
For under a democratic system, those in power realize that it is the people who put them in office, and they will be voted out if they are perceived to be serving Beijing’s interests rather than Hong Kong’s.
Of course, Deng’s policy can work only if Beijing wants it to work.
Indeed, not only must China refrain from interfering in Hong Kong’s internal affairs, but it must encourage the people of Hong Kong to defend their much smaller system.
Unfortunately, Beijing has other ideas.
On July 1, 2003, the sixth anniversary of the handover, nearly a million people took to Hong Kong’s streets in a peaceful protest against an anti-subversion bill that would have eroded freedom of the press, of religion, and of association.
The demonstration led to a postponement of the bill, and ultimately to its withdrawal, as well as to the resignation of the Secretary for Security, who was responsible for it.
But that demonstration also spurred a major change in China’s policy towards Hong Kong.
Until then, interference from China was covert and subtle, so that the public perception was that Hong Kong’s Chief Executive, Tung Chee-hwa, was in charge.
After the demonstration, China’s government adopted a hands-on approach, letting the people of Hong Kong know who the boss really is.
Thus, on April 26, 2004, China announced its unilateral decision that Hong Kong is not to have democracy in 2007 without saying when Hong Kong will have it.
Then came Tung’s resignation as Chief Executive in March.
The popular belief is that Tung was sacked or pressured to step down.
Tung was handpicked by former Chinese President Jiang Zemin in 1996 and was openly endorsed by Jiang for a second term in 2002.
But he was not popular because the public viewed him as a puppet of China and a crony of big developers, particularly Li Ka-shing, Hong Kong’s richest person.
Although the election of the next Chief Executive will not take place until July, China has let it be known that our present Chief Secretary, Donald Tsang, is the chosen one.
Moreover, although the Basic Law prescribes a five-year term for the Chief Executive, China is insisting that the winner will only serve for the remainder of Tung’s term, until June 30, 2007.
The clear message is that after almost eight years of Chinese rule, China’s leaders do not trust anyone in Hong Kong to govern for five years.
This, surely, is the greatest indictment of China’s Hong Kong policy since 1997.
But the solution lies in changing the system, not just the leader.
The way forward is not more control or suppression, but more trust and democracy.
The latter leads to the full implementation of Deng’s policy, enshrined in the Basic Law, of “one country, two systems,” while the former turns the Basic Law into a worthless piece of paper.
In 1984, British Prime Minister Margaret Thatcher, said of the impending handover of Hong Kong, “The eyes of the world are on us.” That may or may not be true today, but at least the people of Taiwan are watching.
Depression Economics
BERKELEY – A decade ago, the 2008 Nobel laureate in economics, Paul Krugman, wrote a little book entitled The Return of Depression Economics . It sank like a stone.
The East Asian financial crisis of 1997-1998 was sharp but short and quickly cured once the IMF realized that feckless governments were not the problem and then United States Treasury Secretary Robert Rubin parachuted the New York banks into South Korea’s economy.
The collapse, not long after, of the dot-com bubble in 2000-2001 brought on not a depression but merely an output decline so mild as to barely warrant the name “recession.”
Now Krugman is back with a revised and expanded version of his book, and, sadly, the timing is perfect.
For there is a much better case to be made today than there was in 1998 that we should be thinking in terms of “depression economics.”
But the book does not tell us what “depression economics” is supposed to replace.
So let me try my hand at defining non-depression economics:
· Short-run economic policy should be left in the hands of the central bank, with the legislature and the executive focusing on the long run and keeping their noses out of year-to-year fluctuations in employment and prices;
· Central banks’ highest priority should be to maintain their credibility as guardians of price stability, and only then turn their attention to keeping the economy near full employment, which they should do by influencing asset prices – upward when unemployment threatens to rise, and downward when an inflationary spiral looms;
· Central banks should influence asset prices through normal open-market operations – by buying and selling short-term government securities for cash, thus changing the “safe” interest rate and the price of longer-duration assets;
· While the central bank should stand ready to intervene to prevent bank runs, it should let the financial sector run itself with a light regulatory hand, viewing itself not as a chaperone but rather as the designated driver in the case of speculative excess.
This is the doctrine that Krugman argues is no longer sufficient for our age.
And he has a very good case.
Nearly all of these principles are, today at least, honored more in the breach than in the observance.
Today, short-run economic policy cannot just be left to the central bank alone.
For one thing, its balance sheet is not big enough.
At a minimum, the central bank now needs the assistance of that part of the government that taxes and borrows.
Moreover, the highest priority for central banks can no longer be to maintain their credibility as guardians of price stability, but rather their credibility as guardians of the financial system’s stability and soundness.
Once that highest goal has been achieved, central banks can turn their attention to trying to keep the economy near full employment.
One principle does remain true: central banks should try to keep the economy at near full employment by pushing asset prices up when unemployment threatens to rise.
But central banks today are influencing asset prices through a very large number of channels and procedures other than conventional open-market operations: they are trying to affect not just duration discounts but risk, default, and information-driven discounts as well.
Nor is it any longer accepted that such actions will be sufficient.
Fiscal stimulus is needed as well.
Non-depression economics eschews fiscal policy, on the grounds that central banks’ tools are powerful enough and their decision-making more effective and technocratic than that by legislatures.
But in today’s prevailing conditions, we cannot afford this perspective.
Finally, central banks still stand ready to intervene to prevent bank runs.
But the presumption in favor of light financial-sector regulation now has few defenders.
The consensus view is rather that of William McChesney Martin, who served as US Federal Reserve Chairman from 1951 to 1970: a good central bank prevents speculative excess by “taking away the punchbowl before the party really gets going.”
Higher Education Misconceived
CAMBRIDGE – Ever since economists revealed how much universities contribute to economic growth, politicians have paid close attention to higher education.
In doing so, however, they often misconceive universities’ role in ways that undermine their policies.
For example, US President Barack Obama has repeatedly stressed the need to increase the percentage of young Americans earning a college degree.
This is undoubtedly a worthwhile aim that can contribute to national prosperity and help young people realize the American Dream.
Yet economists who have studied the relationship between education and economic growth confirm what common sense suggests: the number of college degrees is not nearly as important as how well students develop cognitive skills, such as critical thinking and problem-solving ability.
Failure to recognize this point can have significant consequences.
As countries embrace mass higher education, the cost of maintaining universities increases dramatically relative to an elite system.
Given that governments have many other programs to support – and that people resist higher taxes – finding the money to pay for such an effort becomes increasingly difficult.
Universities must therefore try to provide a quality education to more students while spending as little money as possible.
Accomplishing all three objectives – quality, quantity, and cost efficiency – simultaneously is difficult, and the likelihood of compromise is great.
With graduation rates and government spending easy to calculate, educational quality, which is difficult to measure, is likely to be the objective that slips.
No one need know – and thus no one can be held accountable – when graduation rates rise but the hoped-for economic benefits fail to materialize.
A second misconception by policymakers is that the only important benefit from a college education is the opportunity that it gives graduates to find a middle-class job and contribute to economic growth and prosperity.
But, while this contribution is important, it is not the only one that matters.
Apart from finding a first job, college graduates seem to adapt more easily than those with only a high school degree as the economy evolves and labor-market needs change.
They also tend to vote at higher rates, engage in more civic activities, commit fewer crimes, educate their children better, and get sick less frequently by adopting healthier lifestyles.
Researchers estimate that these additional benefits are worth even more than the added lifetime income from a college degree.
If policymakers overlook them, they run the risk of encouraging quicker, cheaper forms of education that will do far less to serve either students or society.
These misconceptions are clearly evident in government leaders’ speeches over the past two decades.
As former President Bill Clinton remarked in his State of the Union address in 1994: “[W]e measure every school by one high standard: Are our children learning what they need to know to compete and win in the global economy?”
The same attitudes are manifest in other countries as well.
A telling example is the shift in jurisdiction over British universities since 1992 from the Department of Education and Science to the Department for Education and Employment, and, in 2009, to a new Department for Business, Innovation, and Skills.
This shrunken conception of the role of higher learning is unprecedented.
It ignores what were long regarded as the most essential aims of education: strengthening students’ moral character and preparing them to be active, informed citizens.
In light of this tradition, the recent shift to material objectives comes as something of a surprise.
John Maynard Keynes prophesied in the 1920’s that as countries grew wealthier, people’s preoccupation with money and possessions would diminish.
Instead, just the opposite has occurred.
Granted, democratic political leaders must be responsive to the people, and money and jobs are clearly on people’s minds.
According to a recent survey, among first-year university students in the United States in 2012, 88% cited getting a better job as an important reason for attending college, and 81% listed “being very well off financially” as an “essential” or “very important” goal.
But it is also true that 82.5% of these freshmen sought “to learn more about things that interest me” as an important reason for attending college, and 73% wanted “to gain a general education and appreciation of ideas.”
Among the objectives they considered “essential” or “very important,” 51% mentioned “improving my understanding of other countries and cultures,” 45.6% cited “developing a meaningful philosophy of life,” and substantial fractions listed such goals as “becoming a community leader,” “helping to promote racial understanding,” and “becoming involved in programs to clean up the environment.”
In the end, surveys suggest that what people want most is not wealth so much as happiness and the satisfaction that comes from a full and meaningful life.
Money helps, but so do other things, such as close human relationships, acts of kindness, absorbing interests, and the chance to live in a free, ethical, and well-governed democratic society.
A stagnant economy and lack of opportunity are undoubtedly problems, but so are low voting rates, civic apathy, widespread disregard for ethical standards, and indifference to art, music, literature, and ideas.
It is the responsibility of educators to help their students live satisfying, responsible lives.
However well or badly universities perform this task, their efforts to succeed at it are worth fighting for and deserve their governments’ recognition and encouragement.
After all, as Louis Brandeis observed: For good or ill, “our government is the potent, the omnipresent teacher.”
If our leaders regard education merely as a means to jobs and money, no one should be surprised if young people eventually come to think of it that way, too.
Designer Diets?
Throughout our lives, we are exposed to a complex mixture of food compounds.
Intricate biochemical processes extract from food the energy and other useful components that enable us to grow and function.
Many compounds, seemingly unimportant in the past, are now recognized as influencing our health.
For example, lycopene from cooked tomato sauces may help prevent prostate cancer.
Everyone, indeed, knows that food can have a positive or negative impact on health.
Food may never cure any particular disease, but diets rich in fruits and vegetables, cereals and plant-sourced oils offer protection from many cancers, cardiovascular disease, and other illnesses associated with old age.
The problem, for scientists and consumers alike, is that the benefits are not the same for everyone.
So we need to understand how what we eat interacts with our bodies – or, more specifically, our genes – to affect our health.
This is the science of nutrigenomics.
The long-term aim of nutrigenomics is to define how the whole body responds to food using so called “systems biology.”
Every cell in your body (except mature red blood cells) – there are about 50 trillion in an adult – contains copies of your DNA, which are coiled up tightly to form 46 separate bundles called chromosomes.
These chromosomes are stored in the core of the cell (nucleus), and there are 22 matching pairs, one of each pair from each of your biological parents, plus an X-chromosome from your mother and either an X- or Y-chromosome from your father;
XX makes you a girl and XY a boy.
DNA stores information that is vital to the growth, repair, replacement, and correct functioning of our cells.
It consists of two strings – formed from phosphate and sugar – along which four unique chemical compounds (DNA bases) are attached.
There are about three billion bases, and the sequences in which they occur is our genetic code, or human genome.
Within the genetic code, there are 30,000-40,000 highly organized regions called genes.
Genes are the basic unit of heredity, and, unless you are an identical twin, the combination of genes inherited from your parents is unique to you.
The genes that you have make up your genotype.
The resulting product, for example eye color, is your phenotype.
Genotyping can be used to determine which genes you have, but it cannot always predict your phenotype.
The inheritance of some characteristics, including eye color, is simple.
The majority of phenotypes are, however, the product of complex multi-gene interaction, environment, and lifestyle choices.
This includes our risk of developing a host of age-related diseases.
Genes code for proteins, the body’s workers, which are not made directly from DNA, because they do not speak the same language.
Ribonucleic acid (RNA) acts as an interpreter in a process called transcription (the reading of genes).
Translation from RNA creates three-dimensional proteins from combinations of 22 essential amino acids – essential only because our bodies are not able to make them, so they must be obtained from our diet instead.
The proteins that are produced, their quantities, and their characteristics collectively form the proteome, and their activities, in combination or in response to signals from within the body or external to it, form our metabolism.
Such is the complexity of nutrigenomics that it is no longer possible for nutritional researchers to work alone.
Expertise in a wide variety of different areas – molecular and cell biology, mathematics and statistics, nutrition and diet, food chemistry, and social science – is fundamental to progress.
To this end, 22 leading groups have united to create The European Nutrigenomics Organization, or NuGO.
Funded by the European Commission, NuGO gives scientists from organizations that usually compete for funding and the best researchers their first real opportunity to work together.
Difficulties stemming from professional jargon, organizational structure, and distance are more than offset by the benefits of integrating nutrigenomics facilities and expertise to ensure cooperative use of knowledge and its application in nutritional research.
Nutrigenomics is not the Holy Grail of nutrition, but neither is it irrelevant to all but the worried-but-wealthy few that will be able to afford the new food products when they arrive.
Determining the structure of DNA and the sequence of the human genome has revolutionized biology and medicine.
It has created new specialties and advanced our understanding of disease.
But rarely does this knowledge allow us to control outcomes – prevention rather than cure.
Indeed, in the twenty-first century, we still cannot describe health except in terms of the absence of disease.
Today’s new technologies enable health to be identified in terms of patterns of gene expression, protein production, and metabolic response.
Applied to nutrition, nutrigenomics will allow us to understand, and perhaps more importantly, to manipulate our individual response to existing foods so as to benefit our health.
For some people, this will mean expensive genetic testing and designer diets, but for most, it will mean realistic advice based on visibly demonstrable phenotypes – a tendency to gain weight, for example, or an intolerance or allergic response to certain food types.
Above all, nutrigenomics holds out the promise of providing the healthy independence that everyone hopes for in later years.
Designing Regulatory Failure
PRAGUE – At the close of last year, European Union finance ministers gave the green light to a new supervisory architecture for the EU’s financial markets. Now it is up to the European Parliament to address this hypersensitive issue, the most controversial part of which is the powers and responsibilities to be given to the three new pan-European supervisory agencies for banking, securities, and insurance.
The parliament’s decision will be far-reaching, and will affect European finance for many years to come. Although some complain that December’s compromise on financial regulation does not go far enough, there is a case to be made that the opposite is true.
The springboard for this fundamental policy shift was the report issued in early 2009 by former French central banker and IMF chief Jacques de Larosière. But his report ignored many vital issues that were then largely overlooked in the subsequent debate on financial reform.
As the crisis that began in 2008 has shown, there are too many, rather than too few, supervisory and regulatory institutions overseeing European financial markets – almost 70 in the EU as a whole. De Larosière and the political debate he fostered completely gave up on first simplifying and consolidating institutions at the national level, and only then perhaps building a supranational body on that pared-down foundation.
What a mistake. If we merely add new institutions to EU countries’ already Byzantine arrangements, we will fail to address the effectiveness, flexibility, and smoothness of information transfer through the EU-level supervisory system.
Recall the beginnings of the crisis: the British bank Northern Rock, for example, is now seen as a notorious example of how poor communication and information sharing among just three national authorities can easily make matters worse.
The new regulatory model also fails to address a persistent weakness of the single European financial market: how to pay the costs (or “share the burden”) when a multinational bank fails.
We Europeans may proudly say that we have a single financial market, but it is configured for good times only. In bad times, it is national taxpayers who pay for any financial-sector trouble, because there is no pan-European taxpayer or plausible burden-sharing models.
Last June, it was agreed at the EU level that European institutions’ decisions should not impinge on member states’ control of fiscal policy. How this can be reconciled with pan-European regulation is hard to say.
Many day-to-day cross-border services, ranging from freight transport to hairdressing, face major barriers and restrictions. Yet if the provider of such a service goes bankrupt or runs into difficulties, there is little likelihood that any national government would be called on to bail it out.
By contrast, banks and others can use European “passports” to provide financial services – which do have significant public-finance implications – throughout the EU.That is a nice idea, but it is half-baked: it fails to specify which taxpayers should be on the hook if something goes wrong and savers want their money back, as with the Icelandic banks in the United Kingdom, the Netherlands, or even Switzerland.
With these crucial issues unresolved, we are creating a Europe-wide system that violates the golden rule of any institutional design: decisions should be made by those who bear responsibility and who ultimately must pay.
How disturbing, then, that these institutions’ powers may be increased still further. The three new agencies will not only enforce common technical standards, which may eventually become binding throughout the EU if endorsed by the European Commission, but will also be allowed to settle disputes between national supervisors.
More important, should the Council declare a state of financial emergency – such as the one we are in currently – the EU agencies might exceptionally be given a position of predominance over national supervisory authorities. Needless to say, “disputes” and “emergencies” are exactly the future situations likely to matter most to national policymakers and taxpayers.
If decisions about systemically important national financial institutions are made at the European level in good times, while in bad times national taxpayers pick up the tab, the whole EU will lose. In good times, we probably would not be able to tell the difference, but the grim reality is that such an arrangement would be unlikely to prevent another crisis.
Deterring Arab Democracy
CAMBRIDGE – The lack of democracy in the Arab world results from an unholy alliance between Western interests and local autocrats, justified by what both sides claim to be the region’s “cultural specificity.”
In a nutshell, it has been much easier for the West to do business in the post-colonial Middle East with un-democratic regimes, which have found Western support and recognition useful in marginalizing local liberal and democratic forces, even as it paved the way for the rise of Islamist radicalization.
Sticks as well as carrots have been used – by both sides – to maintain this alliance.
For example, the Western emphasis on reform and democracy in recent years has been used more often than not as a threat, a typical message being: “Help us in Iraq or we will press for democracy and human rights in your own country.”
Two other major issues have sustained the trade-off: Israel and the rise of the Islamist movements.
The Arab public overwhelmingly regards Israel as an alien and illegitimate entity imposed by force on Palestinian land with Western support.
If this perception was channeled democratically and allowed to shape Arab countries’ policies toward Israel, any peace negotiations would be even more complicated than they are now.
So it is far easier for authoritarian regimes like Egypt and Jordan (and in the future perhaps Syria), where there is no need for parliamentary agreement, to launch negotiations and sign peace agreements with Israel.
Likewise, in Morocco, Tunisia, Mauritania, Qatar, Oman, and Bahrain, where various low-level contacts and Israeli representations exist, undemocratic regimes can define whatever relationship with Israel they choose.
The rise of radical Islamism has been no less obstructive when it comes to Arab democracy.
Decades of unholy alliance between Arab autocrats and the West have seen radical Islam emerge as a “salvation” force.
If free and fair elections were to be held in any Arab country, Islamists would come to power.
That was the case in Algeria in 1991-92, in Iraq in 2005, and in the West Bank and Gaza in 2006.
Other countries, such as Jordan, Morocco, Kuwait, Yemen, and Bahrain, have created more limited space for democracy.
There, too, Islamists have immediately filled it.
The West has wasted decades, missing countless chances to establish regimes that could empower Arab liberal and democratic forces.
The West’s blind support for autocratic Arab rulers has reduced all hope of peaceful change.
The democratic process has lost its aura and its thrust, not least because democratization seems to lead to the rise of political movements the West finds unacceptable.
The whole notion of democracy has been eroded and discredited, with the radicalization that engulfs many Muslim societies now spilling over into their emigrant communities in the West.
When US President George W. Bush’s administration launched its Middle East Partnership Initiative for democratization in 2002, it turned out to be too little too late – and it died too soon.
The allocated budget was just $29 million, but its rapid death can also be ascribed to its short-sighted design – and to Barack Obama, who has shown little interest in the issue.
Obama’s praise of Egypt’s Hosni Mubarak as a man with whom one could do business demoralized Egyptian opposition groups, which have been struggling against the long-serving autocrat and his efforts to ensure that his son, Gamal Mubarak, succeeds him.
The US is not the only guilty party.
Europe has played a major role in retarding democratic reform in Libya and Saudi Arabia.
Libya has become a Mecca for European leaders trying to win multi-billion dollar oil and investment deals.
The rehabilitation of the Qaddafi regime has never included any push to ease political repression in Libya.
An even more telling case is Saudi Arabia.
No European leader risks antagonizing the Saudis by raising the issue of democracy and human rights.
Saudi women remain prohibited from driving cars, traveling on their own, and working or studying without the permission of a male relative.
Saudi society, and those of some other Gulf States, lacks minimum levels of political freedom and participation.
The status quo is excused by Arab regimes in the name of cultural specificity – the same pretext used by Western governments to justify their “value-free” policies toward these regimes.
Add together all the trade-offs between the West and the Arab regimes, along with the Israeli and Islamist factor, and the conclusion at which one arrives is as inescapable as it is alarming: the West cannot afford democracy in the region.
Devaluing Life
In August 2001, President George W. Bush told Americans that he worried about “a culture that devalues life,” and that he believed that, as President of the United States, he has “an important obligation to foster and encourage respect for life in America and throughout the world.”
That belief lay behind Bush’s denial of federal government funds for stem-cell research that could encourage the destruction of human embryos.
Although the Bush administration acknowledged that some scientists believe stem cell research could offer new ways of treating diseases that affect 128 million Americans, this prospect evidently did not, in Bush’s view, justify destroying human embryos.
Last month, the military forces that this same president commands aimed a missile at a house in Damadola, a Pakistani village near the Afghanistan border.
Eighteen people were killed, among them five children.
The target of the attack, Al Qaeda’s number two man, Ayman al-Zawahiri, was not among the dead, although lesser figures in the terrorist organization reportedly were.
Bush did not apologize for the attack, nor did he reprimand those who ordered it.
Apparently, he believes that the chance of killing an important terrorist leader is sufficient justification for firing a missile that will almost certainly kill innocent human beings.
Other American politicians took the same stance.
Senator Trent Lott, a conservative Republican – and a prominent opponent of abortion – said of the attack: “Absolutely, we should do it.”
Indeed, it would be hard for the current administration to say that it wouldn’t do the same thing again, because it has done it many times before.
On November 1, 2001, American planes bombed Ishaq Suleiman, a group of mud huts, because a Taliban truck had been parked in one of the streets.
The truck left before the bomb hit, but 12 local villagers were killed and 14 were injured.
There are many more such stories of innocent lives being lost in the war in Afghanistan.
In Iraq, too, American attacks have taken the lives of many civilians.
Again, one of many examples will suffice.
On April 5, 2003, a civilian neighborhood in Basra was bombed.
The target was General Ali Hassan al-Majid, known as “Chemical Ali” because of his use of chemical weapons against Iraqis.
One bomb hit the home of the Hamoodi family, a respected, educated family, none of whose members belonged to the ruling Baath Party.
Of the extended family of 14, ten were killed, including an infant, a two-year-old baby, a 10-year-old boy, and a 12-year-old girl.
Four months later, Majid was captured alive; the bombs had missed their intended target.
This consistent pattern of readiness to inflict civilian casualties – often when striking targets that are not of vital military significance – suggests that Bush and other pro-life American leaders have less concern for the lives of innocent human beings in Afghanistan, Iraq, and Pakistan, than they have for human embryos.
This is a bizarre set of priorities.
No parents grieve for a lost embryo in the way that they would grieve over the death of a child.
No embryos are capable of suffering, or have hopes or desires for the future that are abruptly cut off by their death.
It might be possible to justify the loss of innocent human life in Damadola by a utilitarian calculation that killing Al Qaeda’s leaders will, in the long run, save a larger number of innocent human beings.
After all, if they remain at large, they may succeed in carrying out further terrorist attacks that take hundreds or even thousands of innocent lives.
Bush, however, cannot rely on that argument, for it is precisely the kind of justification that he rejects when it comes to destroying embryos in order to save, in the long run, those dying from diseases for which we currently have no cure.
Other moralists will say that the difference between destroying embryos for research purposes and killing civilians in military attacks is that the former is deliberate killing, whereas the latter deaths are “collateral damage” – unintended, if foreseeable, side-effects of a justifiable act of war.
We can grant that it was not the primary intention of those who planned and authorized the attack on Damadola to kill innocent people.
We can also accept that al-Zawahiri is undoubtedly a dangerous foe, still active in a terrorist movement, and that he is a legitimate military target.
Perhaps this particular attack can be justified on those grounds.
Nevertheless, the doctrine that it is acceptable to take actions that will foreseeably kill innocent people can have the effect of leading us to treat more lightly than we should the deaths of those killed.
That, it seems, is what has happened somewhere in the American chain of command.
The presence of a Taliban truck does not justify bombing a village in which civilians are going about their daily lives.
Killing innocent people in order to bring a kind of rough justice to “Chemical Ali” – a particularly nasty member of Saddam’s military elite, but one who at the time of the raid was no longer in command of military forces – is wrong.
A culture that allows – and even endorses – such tactics is not one that is genuinely committed to encouraging respect for life.
We can be quite sure that American forces would not have acted in the same way if the civilians nearby had been other Americans.
Developing Countries and the Global Crisis
NEW YORK – This year is likely to be the worst for the global economy since World War II, with the World Bank estimating a decline of up to 2%.
Even developing countries that did everything right – and had far better macroeconomic and regulatory policies than the United States did – are feeling the impact.
Largely as a result of a precipitous fall in exports, China is likely to continue to grow, but at a much slower pace than the 11-12% annual growth of recent years.
Unless something is done, the crisis will throw as many as 200 million additional people into poverty.
This global crisis requires a global response, but, unfortunately, responsibility for responding remains at the national level.
Each country will try to design its stimulus package to maximize the impact on its own citizens – not the global impact.
In assessing the size of the stimulus, countries will balance the cost to their own budgets with the benefits in terms of increased growth and employment for their own economies.
Since some of the benefit (much of it in the case of small, open economies) will accrue to others, stimulus packages are likely to be smaller and more poorly designed than they otherwise would be, which is why a globally coordinated stimulus package is needed.
This is one of several important messages to emerge from a United Nations Experts Commission on the global economic crisis, which I chair – and which recently submitted its preliminary report to the UN.
The report supports many of the G-20 initiatives, but it urges stronger measures focused on developing countries.
For instance, while it is recognized that almost all countries need to undertake stimulus measures (we’re all Keynesians now), many developing countries do not have the resources to do so.
Nor do existing international lending institutions.
But if we are to avoid winding up in another debt crisis, some, perhaps much, of the money will have to be given in grants.
And, in the past, assistance has been accompanied by extensive “conditions,” some of which enforced contractionary monetary and fiscal policies – just the opposite of what is needed now – and imposed financial deregulation, which was among the root causes of the crisis.
In many parts of the world, there is a strong stigma associated with going to the International Monetary Fund, for obvious reasons.
And there is dissatisfaction not just from borrowers, but also from potential suppliers of funds.
The sources of liquid funds today are in Asia and the Middle East, but why should these countries contribute money to organizations in which their voice is limited and which have often pushed policies that are antithetical to their values and beliefs?
Many of the governance reforms proposed for the IMF and the World Bank – affecting, most obviously, how their heads are chosen – finally seem to be on the table.
But the reform process is slow, and the crisis will not wait.
It is thus imperative that assistance be provided through a variety of channels, in addition to, or instead of, the IMF, including regional institutions.
New lending facilities could be created, with governance structures more consonant with the twenty-first century.
If this could be done quickly (which I think it could), such facilities could be an important channel for disbursing funds.
At their November 2008 summit the G-20 leaders strongly condemned protectionism and committed themselves not to engage in it.
Unfortunately, a World Bank study notes that 17 of the 20 countries have actually undertaken new protectionist measures, most notably the US with the “buy American” provision included in its stimulus package.
But it has long been recognized that subsidies can be just as destructive as tariffs – and even less fair, since rich countries can better afford them.
If there was ever a level playing field in the global economy, it no longer exists: the massive subsidies and bailouts provided by the US have changed everything, perhaps irreversibly.
Indeed, even firms in advanced industrial countries that have not received a subsidy are at an unfair advantage.
They can undertake risks that others cannot, knowing that if they fail, they may be bailed out.
While one can understand the domestic political imperatives that have led to subsidies and guarantees, developed countries need to recognize the global consequences, and provide compensatory assistance to developing countries.
One of the more important medium-term initiatives urged by the UN Commission is the creation of a global economic coordinating council, which would not only coordinate economic policy, but would also assess impending problems and institutional gaps.
As the downturn deepens, several countries may, for example, face bankruptcy.
But we still do not have an adequate framework for dealing with such problems.
And the US dollar reserve-currency system – the backbone of the current global financial system – is fraying.
China has expressed concerns, and the head of its central bank has joined the UN Commission in calling for a new global reserve system.
The UN Commission argues that addressing this old issue – raised more than 75 years ago by Keynes – is essential if we are to have a robust and stable recovery.
Such reforms will not occur overnight.
But they will not occur ever unless work on them is begun now.
अफ़्रीका के चिकित्सीय प्रतिभा पलायन को रोकना
ऑक्सफ़ोर्ड – लगभग 300 स्वास्थ्य कर्मियों को त्रिनिदाद और टोबैगो भेजने की युगांडा की योजना के बारे में सचमुच असमंजस की स्थिति बनी हुई है। इस योजना में कथित तौर पर युगांडा के 11 पंजीकृत मनोचिकित्सकों में से चार मनोचिकित्सक, 28 रेडियोलॉजिस्टों में से 20 रेडियोलॉजिस्ट, और 92 बाल-रोग विशेषज्ञों में से 15 बाल-रोग विशेषज्ञ शामिल हैं। इसके बदले में, कैरेबियन देश (जिसमें चिकित्सक-रोगी अनुपात युगांडा की तुलना में 12 गुना अधिक है) युगांडा को हाल ही में पता लगाए गए अपने तेल क्षेत्रों का दोहन करने में मदद करेगा।
युगांडा के विदेश मंत्रालय का कहना है कि यह समझौता कौशल और प्रौद्योगिकी के हस्तांतरण के माध्यम से विदेशों में देश के हितों को बढ़ावा देने के इसके जनादेश का हिस्सा है, और साथ ही अपने नागरिकों के लिए रोज़गार प्राप्त करके विदेशी मुद्रा अर्जित करने का एक अवसर भी है। लेकिन युगांडा के अंतर्राष्ट्रीय दाता इससे आश्वस्त नहीं हैं; संयुक्त राज्य अमेरिका ने इस पर घोर चिंता व्यक्त की है, और बेल्जियम ने युगांडा के स्वास्थ्य देखभाल क्षेत्र को विकास सहायता देना बंद कर दिया है।
मेरे दो दोस्तों ने विदेश जाने के लिए आवेदन किया है, इनमें से एक स्त्री रोग विशेषज्ञ है और दूसरा बाल रोग विशेषज्ञ। अगर मैं अभी भी युगांडा में उनके साथ काम कर रहा होता, तो मैं भी इस पलायन में शामिल होने के लिए लालायित होता। युगांडा के स्वास्थ्य देखभाल पेशेवर प्रतिभाशाली और उच्च योग्यताप्राप्त हैं। लेकिन उन्हें अक्सर भारी व्यक्तिगत त्याग करके भयावह स्थितियों में काम करना पड़ता है। तो इसलिए इसमें कोई आश्चर्य नहीं है कि वे हतोत्साहित हो जाते हैं और कहीं और व्यावसायिक अवसरों की तलाश में रहते हैं। वे जानते हैं कि यथास्थिति अब खत्म होती जा रही है, और कोई बदलाव होना ज़रूरी है।
मुझे भी यह मालूम था। 2009 में, जब मैं युगांडा में मुलागो नेशनल रेफरल अस्पताल में काम कर रहा था, तो मैं देश की इस मुख्य तृतीयक संस्था का मात्र छठा न्यूरोसर्जन बनने वाला था। हमें कभी-कभी उस हालत में बड़े आपरेशनों को रद्द करना पड़ जाता था जब हमारे थियेटर में खराब सीवेज सिस्टम के कारण गंदगी फैल जाती थी जबकि यहाँ के वातावरण का स्वच्छ बने रहना ज़रूरी था। हमारे यहाँ स्टाफ़ की बहुत अधिक कमी थी। एक बार, लगातार कई रात पालियाँ करने के दौरान मैं इतना थक गया था कि किसी एचआईवी पॉज़िटिव रोगी का रक्त लेते समय, मैंने गलती से अपने आप को सुई चुभो ली थी। एक महीने के लिए मेरा पोस्ट-एक्सपोज़र (पीईपी) नामक एंटीरेट्रोवायरल उपचार किया गया और दवा के दुष्प्रभावों के कारण मुझे काम से अवकाश लेना पड़ गया था। इस बीच, मेरी पीड़ा को और बढ़ाते हुए, सरकार ने हमारे वेतन के भुगतान में देरी कर दी थी - और यह पहली बार नहीं हुआ था।
युगांडा और त्रिनिदाद और टोबैगो के बीच हुए समझौते से विश्व स्वास्थ्य संगठन के स्वास्थ्य कार्मिकों की अंतर्राष्ट्रीय भर्ती के वैश्विक कोड का उल्लंघन होता है, जिसका उद्देश्य उन देशों से कर्मियों की भर्ती करने को हतोत्साहित करना है जिनमें स्वास्थ्य देखभाल कर्मियों की भारी कमी है। युगांडा के थिंक टैंक, सार्वजनिक नीति अनुसंधान संस्थान, ने इस योजना को "राज्य स्वीकृत प्रतिभा पलायन" कहा है। यह सरकार को अपने निर्णय को वापस लेने के लिए मजबूर करने के प्रयास में अदालत में ले गई है।
लेकिन सच्चाई यह है कि शायद युगांडा अनजाने में एक नवोन्मेषी नीति पर पहुँच गया है। यदि इस योजना पर ठीक से अमल किया जाता है, तो इससे स्वास्थ्य देखभाल क्षेत्र और देश दोनों को इस रूप में लाभ हो सकता है कि अतिरिक्त धन जुटाया जा सकेगा, चिकित्सा कर्मियों के कौशल और प्रेरणा को बल मिलेगा, और प्रवासियों के साथ आदान-प्रदान के लिए एक मॉडल तैयार होगा। जिन अन्य विकासशील देशों को स्वास्थ्य देखभाल कर्मियों को बनाए रखने के संबंध में इसी तरह की चुनौतियों का सामना करना पड़ रहा है, वे युगांडा के अनुभव से सीख सकते हैं।
बेशक, इस प्रकार की बड़े पैमाने पर भर्ती से विकासशील देशों की स्वास्थ्य देखभाल प्रणालियों पर भारी प्रतिकूल प्रभाव पड़ सकता है। लेकिन इस बात को भी स्वीकार किया जाना चाहिए कि स्वास्थ्य देखभाल कर्मियों को बिगड़ती हुई प्रणाली में जकड़े रखने में समझदारी नहीं है। कोई ऐसा तरीका होना चाहिए जिससे चिकित्सकों को इस बात के लिए प्रोत्साहित किया जा सके कि वे अपने देश की स्वास्थ्य देखभाल प्रणाली में योगदान करें जिसमें उन्हें अपने निजी और पेशेवर लक्ष्यों को प्राप्त करने का अवसर भी प्रदान किया जाए।
इसे कारगर बनाने के लिए, प्राप्तकर्ता देश को स्वास्थ्य देखभाल पेशेवरों की भर्ती को पूरी तरह से सरकार के माध्यम से करने के लिए सहमत होना पड़ेगा। फिर वह देश अपने कर्मियों की विदेशी आय पर कर लगा सकेगा और प्राप्त होनेवाले राजस्व का उपयोग अपनी स्वास्थ्य देखभाल प्रणाली को विकसित करने के लिए कर सकेगा।
इसके अलावा, किसी भी समझौते में भर्ती किए गए स्वास्थ्य देखभाल कर्मियों के लिए शिक्षा और व्यावसायिक विकास के अवसर उपलब्ध करने के बारे में स्पष्ट रूप से प्रावधान होना चाहिए। प्राप्तकर्ता देश अपने मेडिकल स्कूल खोल सकते हैं और नए भर्ती होनेवालों को स्वास्थ्य देखभाल प्रशिक्षण दे सकते हैं, या वे वापस अपने देश में स्वास्थ्य देखभाल शिक्षा और छात्रवृत्ति कोष में भुगतान करने में मदद कर सकते हैं। इस तरह, युगांडा जैसे विकासशील देश न केवल अधिक स्वास्थ्य देखभाल पेशेवरों को प्रशिक्षित किया कर सकेंगे, बल्कि उनके पास इतनी निधियाँ भी उपलब्ध होंगी कि वे कर्मियों को प्रशिक्षण के लिए विदेशों में भेज सकेंगे।
इस तरह के कार्यक्रमों का प्रभाव दूरगामी हो सकता है, क्योंकि चिकित्सा पेशेवरों की कमी केवल उप-सहारा अफ्रीका तक ही सीमित नहीं है। इतने सारे योग्य डॉक्टरों के यूनाइटेड किंगडम और अमेरिका में प्रवास करने के फलस्वरूप, विकसित देशों सहित, शेष विश्व को भी जबरदस्त चिकित्सा प्रतिभा पलायन का सामना करना पड़ रहा है। लगभग 35,000 यूनानी चिकित्सक जर्मनी में प्रवास कर गए हैं, जबकि बुल्गारिया से “चिकित्सकों का पलायन जारी है,” और इसे हर वर्ष 600 चिकित्सकों से हाथ धोना पड़ रहा है (यह संख्या देश के मेडिकल स्कूल के स्नातकों की वार्षिक संख्या के बराबर है)।
लेकिन विकासशील देशों को सबसे बड़ी चुनौती का सामना करना पड़ता है। अस्सी प्रतिशत देश जिनमें कुशल स्वास्थ्य कर्मियों का घनत्व प्रति 10,000 व्यक्ति 22.8 से कम है, अफ्रीका में हैं, और अन्य 13% दक्षिण-पूर्व एशिया में हैं। इस तरह की कमियों के प्रभाव हाल ही में पश्चिम अफ्रीका में आए ईबोला संकट के दौरान स्पष्ट हो गए थे।
समस्या यह है कि युगांडा और अन्य देशों में तथाकथित प्रतिभा पलायन स्वास्थ्य देखभाल कर्मियों की इस कमी का कारण नहीं है। यह उन स्वास्थ्य देखभाल प्रणालियों का लक्षण मात्र है जो पहले से ही संकट में हैं। अंतिम समाधान पेशेवरों को विदेशों में काम करने से हतोत्साहित करना नहीं है; बल्कि यह सुनिश्चित करना है कि उन्हें बेहतर प्रशिक्षण मिलता है और काम करने की अधिक अनुकूल परिस्थितियाँ उपलब्ध होती हैं। इस तरीके से, हम स्वास्थ्य देखभाल पेशेवर हाथ में लिए गए काम, अपने लोगों को स्वास्थ्य देखभाल प्रदान करने, पर ध्यान केंद्रित कर सकते हैं।
Blood Quest
WASHINGTON, DC – In most developed countries, patients can be confident about the safety of blood transfusions.
The problem is that maintaining a steady, uncontaminated supply of donor blood is not always easy.
Is it possible to ensure an adequate supply of safe blood once and for all?
Today’s blood supplies, often donated by volunteers, can be contaminated with HIV and other infectious agents.
And donor blood must be kept in cold storage, where it has a 28-day shelf life.
Given fear of contamination – and military interest in a more durable supply – research into synthetic alternatives has long been a medical priority.
The idea of using blood substitutes was first advanced in the seventeenth century, and continues to attract researchers today.
Several products that could revolutionize transfusion medicine have already been developed in the pursuit of shelf-stable, portable, one-type-fits-all blood substitutes, which could replace standard blood transfusions in extreme situations, such as on the battlefield.
But, after more than three decades of active research and development, no clinically viable product has obtained regulatory approval, owing to the significant scientific challenges.
Blood is a complicated stew of plasma proteins, red blood cells, platelets, and other cellular components.
These elements perform crucial functions, such as transporting oxygen, nutrients, and immunoglobulins (which defend against infection), and regulating water content, temperature, and pH level.
In the early twentieth century, researchers began to examine hemoglobin – the protein responsible for carrying oxygen from the respiratory organs to the rest of the body – in red blood cells.
They found that, when isolated from aging cells – whether from human or cow blood, or from genetically engineered sources – free hemoglobin can be rejuvenated, chemically stabilized, and re-infused as a blood “substitute” that can carry oxygen as effectively as red blood cells, but for a much shorter time.
(Non-hemoglobin synthetic blood substitutes, known as fluorocarbons, have proved to be less effective oxygen carriers.)
But free hemoglobin can wreak havoc in the human body, causing hypertension, cardiac arrest, or even death.
Indeed, in almost all living creatures, hemoglobin is encapsulated in red blood cells, which protect the body from the protein’s negative effects (and, in turn, protect hemoglobin from the body’s digestive enzymes).
Experts nonetheless believe that hemoglobin-based products can be used to save the lives of trauma patients, as well as to treat patients who object to donated blood on religious grounds (for example, Jehovah’s Witnesses).
Hemoglobin contains hemes, chemical compounds that contain iron – a transition metal that can undergo oxidation, or “rusting” processes.
Outside of red blood cells, “good” ferrous iron – the only oxygen-carrying form – is oxidized uncontrollably to form the “bad” ferric and “ugly” ferryl forms of hemoglobin.
When released into a person’s circulatory system, hemoglobin in these higher oxidation states eventually self-destructs, damaging molecules in surrounding tissue.
Given that these mischievous forms of hemoglobin are difficult to study in living systems, researchers have largely ignored them.
Instead, they have focused on strategies for preventing the kidneys from filtering the infused hemoglobin; the hemoglobin from leaking through the blood-vessel walls; and synthetic hemoglobin from destroying nitric oxide (a gas produced in blood vessels that helps them to dilate and increase blood flow).
Some researchers consider the reaction with nitric oxide the most problematic, because it raises blood pressure.
But progress has been made in finding ways to control these oxidation reactions.
Researchers (including at my laboratory) have investigated how the body naturally handles the occasional release of hemoglobin from aging red blood cells and from cells affected by blood diseases, such as hemolytic anemia.
They have found that the body’s first line of defense against hemoglobin oxidation is a process of reduction, in which molecules like uric acid or ascorbic acid (vitamin C) impede oxidation by reducing the iron to a less oxidizing species.
Moreover, a host of blood proteins are specialized scavengers of hemoglobin or its fragments.
They reduce its toxicity and safely clear it for further processing within specialized cells called macrophages.
For example, haptoglobin tightly binds to hemoglobin subunits, while hemopexin captures the heme when the hemoglobin releases it.
Some recent therapeutic possibilities include the co-infusion of haptoglobin with hemoglobin in circulation or with vitamin C – additives that hold promising implications for the development of safe and effective blood substitutes.
Researchers must build on this progress.
Safe blood substitutes and new therapeutic options that make blood transfusion more effective would significantly improve treatment in challenging situations.
Development Aid for Development’s Sake
Almost daily, the United States and Europe brandish threats to impose economic sanctions or cut off development assistance unless some vulnerable government accepts their political strictures.
The most recent threats are towards the new Hamas-led government in Palestine.
Other recent examples include threats vis-à-vis Chad, Ethiopia, Haiti, Kenya, Bolivia, Uganda, and long-standing sanctions against Myanmar.
Such tactics are misguided.
The use of development aid as a political stick merely deepens the suffering of impoverished and unstable countries, without producing the political objectives sought by donors.
To understand why requires taking a long-term view of geopolitics, particularly the gradual decline of US and European global domination.
Technology and economic development are proliferating across Asia and the developing world, while the spread of literacy and political awareness during the past century made national self-determination by far the dominant ideology of our age, leading to the end of colonialism.
Nationalism continues to produce powerful political “antibodies” to American and European meddling in other countries’ internal affairs.
The failure to understand this lies behind repeated US foreign policy debacles in the Middle East, at least since the toppling of the Shah of Iran in 1979.
The US naively continues to view the Middle East as an object of manipulation, whether for oil or for other purposes.
In the Middle East, the Iraq war is widely interpreted as a war for US control of Persian Gulf oil – a rather plausible view given what we know about the war’s true origins.
Only incredible hubris and naiveté could bring US (and UK) leaders to believe that Western troops would be greeted as liberators rather than as occupiers.
The politicization of foreign aid reflects the same hubris.
Even as the US rhetorically champions democracy in the Middle East, its first response to Hamas’s victory was to demand that the newly elected government return $50 million in US aid.
Hamas’s doctrines are indeed unacceptable for long-term peace, as even some Arab states, such as Egypt, have made clear.
But cutting aid is likely to increase turmoil rather than leading to an acceptable long-term compromise between Israel and Palestine.
A newly elected Palestinian government should be treated, at least initially, with legitimacy.
Later, if it behaves badly by sponsoring terror, policies can change.
An aid cutoff should be a policy of last resort, not a first strike.
Aid cutoffs regularly fail to produce desired political results for at least two reasons. First, neither the US nor European countries have much standing as legitimate arbiters of “good governance.”
Rich countries have long meddled, often with their own corruption and incompetence, in the internal affairs of the countries that they now lecture.
The US preaches “good governance” in the shadow of an unprovoked war, congressional bribery scandals, and windfalls for politically connected companies like Halliburton.
Second, US and European threats to cut off aid or impose sanctions are in any case far too weak to accomplish much besides undermining already unstable and impoverished countries.
Consider the recent threats to cut Ethiopia’s aid, which is on the order of $15 per Ethiopian per year – much of it actually paid to US and European consultants.
It is sheer fantasy to believe that the threat of an aid cutoff would enable the US and Europe to influence the course of Ethiopia’s complex internal politics.
An aid cutoff to Ethiopia would nonetheless lead to a lot of death among impoverished people, who will lack medicines, improved seeds, and fertilizer.
Indeed, the track record of on-again-off-again aid is miserable.
Stop-and-go aid has left Haiti in an unmitigated downward spiral.
The decade-long sanctions against Myanmar have not restored Aung San Suu Kyi to power, but have deepened the disease burden and extreme poverty in that country.
Threatened aid cutoffs in Kenya, Chad, and elsewhere would make desperately bad situations worse.
None of this is to suggest that the US and Europe should abide every move by every corrupt dictator.
But realism in international economic affairs requires accepting that official development assistance can help achieve the broad political objectives of stability and democracy only in the long run.
The most reliable path to stable democracy is robust and equitable economic progress over an ample period of time.
The overwhelming standard for supplying official development assistance should therefore be whether official assistance actually promotes economic development.
As such, it must be reliable, predictable, and directed towards development needs in ways that can be monitored, measured, and evaluated.
Can the aid be monitored and measured?
Is it being stolen?
Is it supporting real development needs, such as growing more food, fighting disease, or building transport, energy, and communications infrastructure?
If development aid can be directed to real needs, then it should be given to poor and unstable countries, knowing that it will save lives, improve economic performance, and thus also improve the long-term prospects for democracy and good governance.
Development Aid in Five Easy Steps
NEW YORK ­­– Every country, rich and poor, should ensure universal coverage of primary health care, including safe childbirth, nutrition, vaccines, malaria control, and clinical services.
Each year, nearly nine million children die of conditions that could be prevented or treated, and nearly 400,000 women die because of complications during pregnancy.
Almost all of these deaths are in the world’s poorest countries.
Ending these deaths would not only reduce suffering, but would also unleash economic prosperity in impoverished and unstable societies.
The greatest barrier to doing so is that the poorest countries can’t afford universal primary health care, even though the cost per person is very low.
Using immunizations, modern medicines, state-of-the-art diagnostics, mobile phones, and other new technologies, universal primary health care is now highly effective and very inexpensive, costing around $54 per person per year in the poorest countries.
Yet, because of their very low incomes, the poorest countries can afford only around $14 per person from their national budgets.
Financial help from abroad is needed to cover roughly $40 per person per year.
With approximately one billion impoverished people still lacking primary health care, the total sum needed is around $40 billion per year. Foreign donors – including the United States, the European Union, and Japan – are currently contributing around one-third of that, roughly $14 billion per year.
The remaining annual financial gap is therefore about $26 billion.
With that money, the lives of many millions of mothers and children would be saved each year.
This is not a lot of money for the rich countries, but they fail to come up with it.
The most obvious gap is in the Global Fund to Fight AIDS, Tuberculosis, and Malaria, a global initiative to help the poorest countries fight these killer diseases. The Global Fund is desperately short of money, yet the Obama administration and other governments are not responding to the financial need.
The rich countries could easily come up with the money.
First, the US could end its expensive and failed war in Afghanistan, which is costing around $100 billion per year.
If the US gave a tiny fraction of that $100 billion in development aid for Afghanistan, it would be far more successful in achieving peace and stability in that war-ravaged country.
For example, the US could give $25 billion in development aid each year and another $25 billion for global health, and still save $50 billion each year to reduce the US budget deficit.
Afghanistan, and hence the US, would be far safer, the world would be far healthier, and the US economy would benefit enormously.
A second approach would be to tax the big international banks, which are earning excessive profits on their speculative trading.
Even after Wall Street nearly wrecked the world economy, the US government coddled and protected it, enabling its return to huge profits – perhaps $50 billion – last year.
The bankers again paid themselves huge bonuses – more than $20 billion for 2009.
This money should have gone to the world’s poorest people rather than to the bankers, who certainly did not earn it.
It is time for an international tax on bank profits – perhaps implemented as a levy on international financial transactions – which would raise tens of billions of dollars each year.
In pressing the case for such a tax, the developing countries should not accept the meager excuses offered by the US and other countries in order to protect their bankers.
A third approach would be to obtain increased contributions from the world’s richest people.
Several of them, including Bill Gates, George Soros, Warren Buffett, and Jeffrey Skoll, are already mega-philanthropists, committing huge sums for the world’s good.
Yet other billionaires have yet to make comparable donations.
According to the most recent Forbes list, there are 1,011 billionaires in the world, with a combined net worth of $3.5 trillion dollars.
This means that if each billionaire would contribute 0.7% of their net worth, the total sum would be $25 billion per year.
Just imagine, 1,000 people could ensure primary health care for one billion impoverished people.
A fourth approach should be to look to a company like Exxon-Mobil, which earns billions of dollars each year in Africa but, according to one of the company’s online reports, spent only around $5 million per year on malaria control programs in Africa from 2000 to 2007.
Exxon-Mobil could and should be funding much more of the continent’s urgently needed primary health services, either out of royalties paid by the company or out of corporate philanthropic donations.
Fifth, new donor countries, such as Brazil, China, India, and Korea, have the vision, energy, economic dynamism, and diplomatic interest to expand their donor support in the poorest countries, as well as in the poorest parts of their own countries.
If the US and Europe are too neglectful to do their part, the emerging economies can and will pick up part of the slack.
Fortunately, these new donors are becoming trusted partners in Africa.
The rich world says that it lacks the money to do more, but what it lacks is imagination, not resources.
The US should divert its wasteful military spending to new health financing.
The world should implement a global bank tax.
The billionaires should step up their philanthropy.
The oil companies should pay more.
New donor countries like China can fill the financing gap left by the traditional donor countries.
The money is there.
The needs are urgent.
The challenge is one of morality and vision.
Financing the Fight Against Climate Change
PARIS – Climate change is already wreaking havoc throughout the developing world.
Vietnam, for example, has reported that natural disasters, some of them exacerbated by climate change, have caused annual losses equivalent to 2% of its GDP.
In agriculture-dependent countries like Ethiopia, longer droughts and more frequent flooding are threatening livelihoods and food supplies.
As the international community gears up for the United Nations Climate Change Conference in Paris in December, identifying and streamlining sources of financing for the fight against climate change must be a top priority.
Development banks like the French Development Agency (AFD), where I am CEO, are well placed to contribute.
For starters, development banks can finance projects that benefit both development and the environment.
Global warming is now a vital factor to consider when planning any development project.
For example, the effects of climate change can pose critical risks to infrastructure – agricultural irrigation, public transportation, or nearly anything else.
Meanwhile, rising incomes – a goal of any development effort – nearly always means increased consumption of natural resources and energy, resulting in more emissions and further warming.
Such interlocking relationships between global warming and development explain why the French government requires that at least 50% of the funding provided by the AFD be directed toward development projects that also have a positive impact on the environment.
Examples include wind farms in Ethiopia, better forest management in Madagascar, nationwide climate plans in Indonesia and Vietnam, and clean urban transport in Colombia.
Development banks can also play an important role in designing financial tools that allow private investors to contribute to the fight against climate change.
But today’s funding challenge is no longer just about quantity.
Though potential sources for climate-friendly development financing now include pension funds, insurance companies, foundations, and sovereign wealth funds, what is often missing are mechanisms to ensure that investments are channeled into well-targeted and effective projects.
One solution is “green” (or “climate”) bonds.
These instruments have all the characteristics of conventional bonds, but they are backed by investments that contribute to sustainable development or the fight against climate change.
Until recently, only a few organizations or governments, including the World Bank, the American state of Massachusetts, and the French region of Île de France, issued green bonds, and generally the amounts involved were modest.
But in the past two years, other players have entered the market, and volumes have skyrocketed.
In 2014, emissions of green bonds exceeded the total in all previous years combined.
Indeed, demand is outstripping supply.
The latest bond offers were all oversubscribed – and the trend is likely to continue.
The insurance industry has committed to double its green investments, to $84 billion, by the end of 2015.
And in September, three major pension funds from North America and Europe announced plans to increase their holdings in low-carbon investments by more than $31 billion by 2020.
As the market for these bonds expands, they must be better labeled and certified.
Today, harmonized standards do not exist.
The quality of the assets backing the bonds depends solely on issuers’ goodwill and technical skills.
Specific guidelines and rating methods need to be developed.
In this context, the recent decision by a coalition of institutional investors to measure and disclose the carbon footprint of at least $500 billion in investments is a step forward.
In September, the AFD issued €1 billion ($1.2 billion) in climate bonds, with one goal being to contribute to the development of concrete quality standards.
With the help of a major agency that rates corporate social responsibility, we were able to provide investors with solid information – and an accountability process – about the portfolio’s direct impact on greenhouse-gas emissions.
Indeed, the projects financed by these bonds were required to meet stringent criteria, including a prior analysis of their carbon footprint, proof of a clear and significant impact on climate change, and a design that is aligned with the broader strategies being pursued by local actors and countries.
Climate bonds have the potential to empower countries and institutions as they move toward meeting enforceable commitments to reduce CO2 emissions.
However, if they are to be effective, they will require clear guidelines and a reliable framework for assessment.
As leaders from countries and institutions from around the world prepare to meet in Paris in December, getting the financing right should be a top priority.
Development beyond 2015
PARIS – It is now halfway to the target date of 2015 for the Millennium Development Goals (MDGs) – the ambitious blueprint, backed by the entire development community, for development in the world’s poorest countries.
In the wake of the global financial crisis, which is about to hit the developing world, it is time to ask the right questions about the international community’s commitment to achieving these goals.
Sadly, we know that most countries will not meet the objectives by 2015.
And the global food and financial crises threaten to stymie recent progress.
If the global poverty reduction target is met, it will be due to high growth in emerging countries such as China or India rather than to a decline in absolute poverty in the neediest countries.
This is worrisome, because it is a symptom of two more significant ills.
First, the international community seems to be suffering from schizophrenia: whereas all countries solemnly affirmed their commitment to the MDGs, few have provided the means to achieve them.
The reality is that aid increased only slightly over the 2000-2006 period: because of massive debt write-offs, the substantial increase in official development assistance did not translate into new and available funds on the ground.
The MDGs were meant to help international solidarity move from a logic of inputs (how much aid do we give?) to one of outputs (what concrete impact are we aiming for?).
But with deliverable aid levels remaining practically constant, and given strong population growth, notably in Africa, the international community has not given itself sufficient means to reach its ambitious targets.
Second, this poor performance shows how short-sighted the international community can be.
Global responsibility to assist developing nations goes far beyond the MDGs – in both time and scale.
The pace of sustainable development is necessarily slow.
In areas such as health or education, the acceleration needed to meet the targets in many countries would be faster than anything we have witnessed in history.
While more action is needed to accelerate progress, a failure to achieve the MDGs by 2015 would not mean that they are worthless, or that aid is inefficient.
Achieving these goals is an important step on the slow path to lasting development.
Thus, by focusing on the (arbitrary) date of 2015, we fail to perceive the fundamental change that the MDGs represent.
By aiming for targets that are far out of reach of the poorest countries’ public finances, the international community has agreed to substitute itself for those states in providing essential social services through long-term financial transfers.
The current global inequalities in living standards are close to those that existed within our own societies over a century ago.
Globalization has generated a new global market, but also global risks that beg for collective management.
No single economic space has ever been created without the parallel establishment of solidarity mechanisms to handle these risks and care for those left behind.
What is at stake with the MDGs is the creation on a global scale of the same sort of public redistribution mechanisms that were progressively established in the world’s richest societies over the course of the twentieth century.
As most of today’s financial, environmental, or sanitary crises are unpredictable and ignore borders, it is in everyone’s interest to create a global “social safety net” that will span an indefinite period of time.
If we accept the logic behind the more pragmatic and ambitious philosophy of international aid that underpins the United Nations’ “Millennium Declaration,” we must quickly adapt our instruments to ensure more sustainable and predictable modes of financing.
This is one of the main aims of global taxation mechanisms, such as the International Finance Facility initiative and the Airplane Tax.
We also need instruments that are better suited to delivery of long-term international transfers.
Finally, we must find ways to nurture stronger and more vigorous economic growth, a prerequisite to solid investment in social sectors.
Beyond the MDGs semi-success or semi-failure by 2015, the key question is whether the international community will be able to overcome its myopia and schizophrenia.
It must accept the idea of a long-term international redistribution policy to assist those who are excluded from the benefits of globalization, and give itself the means to implement this ambitious policy.
Otherwise, any success in the battle on poverty is bound to be short-lived.
Development in Reverse
CAMBRIDGE – One does not have to spend much time in developing countries to observe how their economies are a mish-mash, combining the productive with the unproductive, the First World with the Third.
In the modern, more productive parts of the economy, productivity (while typically still low) is much closer to what we observe in the advanced countries.
In fact, this “dualism” is one of the oldest and most fundamental concepts in economic development, first articulated in the 1950’s by the Dutch economist J.H. Boeke, who was inspired by his experiences in Indonesia.
Boeke believed in a stark separation between the modern, capitalist style of economic organization that prevailed in the West and the pre-capitalist, traditional mode that predominated in what were then called “underdeveloped areas.”
Although modern industrial practices had penetrated underdeveloped societies, he thought it unlikely that they could make substantial inroads and transform such societies wholesale.
When contemporary economists think of economic dualism, they think first and foremost of the Nobel laureate Sir W. Arthur Lewis.
Lewis turned Boeke’s idea on its head, arguing that labor migration from traditional agriculture to modern industrial activities is the engine of economic development.
Indeed, for Lewis, the coexistence of the traditional alongside the modern is what makes development possible.
To take an extreme example, labor productivity in Malawi’s mining sector matches that of the United States economy as a whole.
If only all of Malawi’s workers could be employed in mining, Malawi would be as rich as the US!
Of course, mining cannot absorb so many workers, so the rest of the Malawian labor force must seek jobs in considerably less productive parts of the economy.
The dualistic nature of developing societies has become more accentuated as a result of globalization.
Certain parts of their economies, such as export enclaves, high finance, and hyper-stores, have experienced substantial increases in productivity by linking up with global markets and accessing frontier technologies.
Other sectors have not had similar opportunities, and the gaps between them and the “globalized” sectors have widened.
These gaps are problematic, but, as Lewis emphasized, they also constitute a potential engine for economic growth.
The trick is to ensure that the economy undergoes the right kind of structural change: a shift from the low-productivity to the high-productivity sectors.
In successful economies, such as China and India, the movement of workers from traditional agriculture to manufacturing and modern services accounts for a substantial part of overall productivity growth, just as Lewis predicted.
In many other parts of the world, however, we have observed a rather curious and unwelcome development in recent decades – structural change in the wrong direction.
Modern, high-productivity industries have come to employ a smaller share of the economy’s labor force, while informal and other low-productivity activities have expanded.
For example, since around 1990, structural change in the typical Latin American and Sub-Saharan African country has undermined rather than boosted growth.
By contrast, most Asian countries continue to behave in typical Lewisian fashion.
This difference in patterns of structural change accounts for the bulk of the difference in recent growth rates between Latin America and Sub-Saharan Africa, on the one hand, and Asia, on the other.
This conclusion might seem to fly in the face of the experience of countries like Argentina, Brazil, and Chile, where many firms in the modern parts of the economy (including non-traditional agriculture) have experienced undeniable growth.
What has not been sufficiently understood is that much of this growth has come through rationalization of operations and technological upgrading – and thus at the price of job creation.
Overall productivity in the economy is not helped much when firms become more productive by shedding workers, who end up in informal activities characterized by substantially lower productivity.
My research with Maggie McMillan of Tufts University and the International Food Policy Research Institute shows that countries with a strong comparative advantage in natural resources are particularly prone to fall into the trap of growth-reducing structural change.
For these countries, globalization is a mixed blessing.
The natural-resource industries that globalization promotes have limited capacity to absorb employment out of traditional sectors.
Globalization therefore entrenches dualism, rather than helping to overcome it.
Appropriate policies can help.
One lesson is to avoid premature collapse of import-competing industries that employ substantial numbers of people before sufficient employment opportunities have emerged in more productive industries.
Asian countries, for instance, have typically liberalized at the margin (through export subsidies or special economic zones), spurring new export industries without pulling the rug from under the rest.
Second, the exchange rate is vitally important.
Competitive currencies promote and protect modern tradable industries that employ a substantial share of the labor force.
We found in our research that countries with competitive currencies were much more likely to experience growth-enhancing structural change.
Finally, flexible labor-market policies seem to be important, too.
Legal requirements that significantly increase the costs of hiring and firing labor discourage employment creation in new industries.
Structural change does not automatically accelerate economic development.
It needs a nudge in the appropriate direction, especially when a country has a strong comparative advantage in natural resources.
Globalization does not alter this underlying reality.
But it does increase the costs of getting the policies wrong, just as it increases the benefits of getting them right.
Diagnosis as Public Policy
When we think about medical diagnosis, we usually think in terms of science.
The conventional (and accurate) wisdom is that diseases are named and classified on the basis of scientific research.
For example, the roughly decennial revisions of the World Health Organization’s International Classification of Diseases (ICD) partly reflect advances in scientific understanding of diseases and injuries.
The cataloging and naming of diseases is a condition of scientific research, as well as its product.
Indeed, how are doctors to explain and control disease without a common language for the phenomena that they observe?
The ICD comprehends the entire spectrum of human disease and injury, and its updates reflect the best new knowledge as well as set the stage for the next wave of medical advances.
But the formal classification of diseases has another aspect, one that concerns a variety of important social functions. It provides a set of disease names and numeric codes for assigning and tracking health-care expenditures and services.
Governments, insurance companies, and patients use these names and codes in accounting and budgeting.
The ICD code also frames eligibility for related social goods like hospital care, medical retirement, claims for disability compensation, hospice care, and home health care, to name a few.
From the doctor’s perspective, diagnostic classifications like the ICD provide the official language to be used in medical records, discussions with patients and their families, and in billing for services.
For patients, diagnostic classifications provide the framework for understanding their own and others’ disease processes.
Finally, diagnostic classification provides politicians the language for building or dismantling health programs.
Clearly, the public and social character of diagnostic classifications of disease extends to private organizations.
Consider organizations that regulate medical licenses or administer medical emergency relief funds. (In the non-medical area, think of business organizations that regulate trade or educational commissions that accredit schools).
Government is hardly alone in creating the formal rules, principles, and guidelines that structure and regulate public life.
Public policy is defined by the public’s interest in the policy, not who made it.
At least in democratic societies, such policies should be accountable to the public, and the classification of diseases, since it serves many of the functions of public policy should be no different.
It turns out that psychiatry, in particular, has exhibited leadership and innovation in recognizing the public-policy aspects of diagnostic classification.
Both the ICD classification of mental disorders, and its American counterpart, the American Psychiatric Association’s Diagnostic and Statistical Manual of Mental Disorders (DSM) efforts have taken pains to make diagnostic classification accountable as examples of public policy.
Both organizations have included diverse representation on their working committees, invited input from “outsiders” to the professions and collaborated with related institutions and organizations in preparing their classification revisions.
In my view, the classification of mental disorders, as a form of public policy making, poses exceptional challenges.
A primary challenge is posed by the nature of mental illness itself.
Mental illness invades the mind and the self, the same domains where political beliefs and social interests reside.
The history of world psychiatry is peppered with diagnoses of mental illness based on political dissent.
Public policy concerning mental illness must, therefore, consider carefully the potential for imposing unjustified social and political values on people in the guise of the classification of disease.
On the other hand, psychiatric public policy must also take into consideration the feeble social and political status of the severely mentally ill.
Public policy concerning the mentally ill should empower, not marginalize.
The latter point, however, is where the current puzzles reside for psychiatric diagnosis as public policy.
As the WHO begins to plan the ICD eleventh edition and the American Psychiatric Association begins to plan the fifth edition of the DSM, one wonders how to ensure additional moral, social, and political accountability in what traditionally have been viewed as the instruments and products of science.
Should patients and their families be directly involved in the development of classifications?
If so, how?
If not, how can the needs of scientific credibility and public accountability be met?
While psychiatry may be leading the debate about these problems, other medical specialties cannot be far behind.
As scientific progress broadens the range of options regarding health, the trappings of social, political, and moral choice will increasingly infiltrate medical diagnoses.
Debates about reproductive freedom and “cosmetic” enhancements – such as the use of growth hormone to “treat” short stature – already occupy the news.
How will the associated conditions be classified?
By whose authority and with what accountability?
What social values will be advanced?
Classifying disease should reflect the best collaborations between science and politics.
With thoughtfulness and perseverance, psychiatry’s current deliberations about diagnosis as public policy will provide a road map for the broader medical debates lurking ahead.
Dictating Limits to Dictatorsdd75f80346f86f9414bc2e16
Robert Mugabe is an aging tyrant who is single-handedly destroying Zimbabwe's economy and social stability.
Like many other tyrants, he seems ready to do anything to extend his 22 years in power, including resorting to violence and rigging elections.
His corrupt cronies and military officials who benefitted during his lawless regime stand by him - not only to preserve their own corrupt incomes, but also out of fear of the retribution that might follow their fall from power.
Despite protests from the US and Europe, Mugabe has so far had his way despite his thuggery.
Tyranny is of course one of the oldest political stories.
But in an interconnected world, isn't it possible for the international community to do more to restrain tyrants in order to ensure a more stable global environment?
A tricky question, no doubt.
No country is ready to cede political sovereignty to outside powers or electoral monitors.
Yet the high costs of tyranny spill over to the rest of the world, in the forms of uncontrolled disease, refugee movements, violence, and criminality.
The world has a stake in preventing the continued misrule of Mr. Mugabe and others like him.
One plausible idea is regional monitoring - that a country's neighbors would help forestall such tyranny.
This is plausible, since neighbors are the biggest direct losers when instability spills across borders.
Yet neighbors are also the most fearful of challenging one of their own.
So far, the Southern African Development Community (SADC) has been acquiescent in the face of Mugabe's abuses.
If that silence continues, it will gravely undermine SADC institutions, and will cast a deep pall over the most important leader in SADC, South Africa's President Thabo Mbeki.
Sanctions offer another approach.
America, Europe, and other democracies should not continue to do ``business as usual'' with Zimbabwe.
Mugabe and his henchmen have stashed millions of dollars abroad in the past year according to plausible press accounts.
These accounts should be frozen, despite the difficulty in doing so in a world rife with secret banking and nominee accounts that disguise true ownership.
Mugabe's phony elections, moreover, should go unrecognized, and Mugabe denied a welcome as a legitimate head of state in international gatherings.
Sanctions, however, are clumsy, costly, and often ineffective.
They are insufficient to stop abuses (after all, sanctions were threatened before the elections) and risk pushing Zimbabwe's economy deeper into crisis, hurting millions of innocent people, especially during a period of intensifying hunger and drought.
Sanctions are also unlikely to secure wide acclamation.
Africans will no doubt feel that Africa is being singled out unfairly when such abuses exist throughout the world.
An alternative approach, giving positive inducements to a tyrant to leave office, might work in some circumstances.
Some long-time leaders have been coaxed from office through blandishments, high-profile international positions, or even amnesties and comfortable exiles in safe locations.
A more general, perhaps more powerful approach, is for the international community to agree on general, enforceable political standards.
One such standard, which might conceivably win international consent, would be an ``international term limit'' on heads of government.
The world community would agree that no individual should serve as the head of government (president, prime minister, or other equivalent position) for more than ``X'' years.
International agencies such as the World Bank and the IMF would automatically stop making loans to countries where the head of government exceeds that limit.
Many countries already have such limits.
In America, presidents are limited to two terms in office.
In other countries, there is a single presidential term, usually of 5 to 8 years.
The world as a whole might agree on a weaker, but globally acceptable minimum standard, say a term limit of no more than 20 years.
Any head of government who stays in power for more than two decades would automatically lose international recognition.
Even non-democracies such as modernized China could accept this rule, because it would apply to heads of government, not ruling parties.
China routinely rotates the highest executive positions, as it realizes that a change of power prevents tyrants from gaining excessive power, a lesson learned painfully during Mao's long and often disastrous reign.
Corruption is limited by the frequent alternation of power, since tyrants typically need many years to build up systems of mega-corruption, usually involving family and business associates.
An international term limit, of course, could infringe the right of a real democracy to keep a popular leader for more than 20 years.
Some parliamentary leaders of Western democracies have approached to this limit, such as Helmut Kohl and his 16 years in office in Germany.
But even in strong democracies, the final years of a long rule are typically the worst.
Kohl's last years, for example, were marked by electoral corruption.
Given the incredible advantages that incumbents have over challengers in nearly every political system, a firm time limit would strengthen even the strongest of existing democracies.
An international term limit would have put Zimbabwe (and its neighbors) on notice early on: Mugabe's continued rule after 22 years would be tantamount to international isolation.
Mugabe's challengers would have been given the upper hand in the political conflict, and it might have been taken for granted inside Zimbabwe and the SADC that Mugabe would not and should not contest this round of elections.
In looking at the roster of long-serving heads of government in the second half of the twentieth century - such as Stalin, Mao, Franco, Kim Il Sung, and Ceausescu - it is clear that an enforced international term limit would have spared the world considerable grief and turmoil.
In our much more democratic and interconnected world, it is possible that a clear international norm limiting time in power could spare the world from dictatorship and destabilization in the future.
Did America Really Kill the Trade Talks?
It is appalling that the world has decided to blame the United States for the crushing end to five years of global trade talks last month (the so-called “Doha round”).
I am the first to admit that the US under President George W. Bush has not covered itself with multilateral glory in recent years.
But accuse America of sabotaging the trade talks?
Give me a break.
Has anybody noticed that for more than a decade now, US imports have been averaging several hundred billion (thousand million) dollars more than exports?
Do people seriously believe that the US has accomplished its majestic trade deficit by shutting its doors to foreign goods?
On the contrary, through its low tariffs and general lack of import restrictions, the US has turned itself into an international shopping theme park.
Americans buy more foreign-made refrigerators, cars, clothing, computers – you name it – than anyone else.
Happily for world exporters, the same binge mentality that makes a whopping two-thirds of Americans either overweight or obese seems to extend to all their purchasing habits.
Since the start of this decade, neither recession nor hurricanes nor sky-high oil prices have seemed to dent their appetites.
The simple fact is that even if US trade negotiator Susan Schwab had refused to make a single “concession,” and if Europe, Japan, and the big emerging markets had kept their best offers on the table, the US would still remain more open than all but a few small countries.
True, in the endgame of the talks, the US caved in to its wealthy and powerful agribusiness lobby.
But that was only after five years of intransigence by Europe’s even more powerful farm lobbies.
And this is not to mention emerging market politicians’ failure to grasp that unilaterally reducing their excessive import restrictions would be a good idea even if rich countries sat on their hands.
What does last month’s trade fiasco mean?
Old hands know that global trade deals often rise out of the ashes of failed talks.
Unfortunately, such an outcome seems improbable now, especially since the US is unlikely to rejoin the talks anytime soon.
The opposition Democratic Party seems poised to take up growing wage inequality as a central issue in this year’s mid-term US congressional elections and in the 2008 presidential election.
To be sure, we economists have found that globalization appears to have played a far lesser role in growing wage inequality than have technological advances.
Even so, the explosion of exports coming out of low-wage regions like China and India is at least a piece of the puzzle.
The last thing that Bush’s Republicans want is to appear indifferent to the plight of the middle classes.
So, unfortunately, even if Europe came to its senses and emerging markets showed greater enthusiasm for liberal trade, we may not see a big global deal until the next decade.
How bad would that be?
After all, many Asian countries have achieved impressive export-led growth under the current system.
And bilateral or regional trade deals can chip away at some of the barriers in the current global system.
For example, a fundamental problem is that the nature of global trade is constantly evolving, and existing agreements have only limited capacity to adapt.
Services like education, banking, accounting, and insurance account for an ever larger share of global output (now roughly two-thirds), and further expansion requires significant changes in existing agreements.
Even if Asia has succeeded by relentlessly exporting manufactures, today’s poorest countries, especially in Africa, can realistically export only agriculture and textiles.
But these are precisely the range of goods that remain most protected under existing agreements.
Bilateral deals can help, but they can also lead to higher trade barriers for everyone else.
The current state of affairs is all the more depressing because global economic growth in the past four years has been the fastest since the early 1970’s.
Rapidly expanding global trade, combined with an ever-freer and faster exchange of people and ideas, has been a cornerstone of this growth, particularly of the strong productivity gains that underlie it.
Absent further trade agreements, there is a big risk that the pace of globalization will slow, with profound consequences for global poverty and welfare.
Outside Africa, the people who will suffer the most are those in countries like Brazil, India, China, and Mexico, whose leaders rightly took on rich-country farm subsidies, but wrongly failed to recognize the profound costs of the developing world’s own import restrictions.
So for now, the world must hope that Americans continue gorging on foreign imports.
Wallis Simpson, the controversial US-born Duchess of Windsor, once famously quipped, “You can never be too rich or too thin.”
Fortunately for everyone, America’s motto nowadays is “You can never be too rich or too large.”
When Americans finally decide to go on an import diet, as they will someday, the world’s hypocrisy over the failed global trade talks will become apparent to all.
Did Development Fail in Kenya?
Nairobi &#45;&#45; A month ago, Kenya fell prey to a sudden burst of post-electoral violence that has left over 1000 dead and hundreds of thousands displaced.
The intensity and scale of the violence have stunned the world.
Of course, Kenya had lived through tense electoral periods before, and few people who know Africa were blind to the many difficulties the country continued to face.
But things seemed to be going well recently.
This year’s campaign was exceptionally peaceful, and millions of citizens voted on December 27 – at times walking and queuing for hours to cast their ballot.
Perhaps more fundamentally, Kenya was unanimously seen as the “good student” of development, sometimes referred to as a symbol of an African renaissance.
The “Kenya vision 2030 framework,” a set of ambitious macroeconomic, legal, and constitutional reforms, was being implemented in close partnership with the World Bank.
Cherished by the donor community, Kenya received almost $1 billion of official development assistance in 2006 – up by 250% since 2002.
Its booming horticulture and tourist industries were hailed as models for other African states in their efforts to integrate into world trade.
The country’s economic expansion, which averaged 5.5% in the last four years and fuelled the progress of neighboring economies, appeared to prove that vigorous growth is possible in Africa even without mineral or fossil resources.
Today, this economic miracle is up in the air.
All is not lost, and there are strong reasons to believe that Kenyans will surmount the current political crisis and put the country back on its promising track.
Nevertheless, as we sit on the brink of the abyss, it is worth re-examining our assumptions that since poverty breeds conflict, socio-economic development must foster political stability and reduce recourse to violence.
The first lesson we should draw from this month of civil strife is that development, however well-managed, cannot solve everything.
Some tensions are deeply ingrained in societies, and peace requires more than any development agency can deliver.
Parallel to the growth agenda, there is a specific role for bilateral and multilateral diplomacy to play in support of improved governance.
In fact, development itself generates a number of strains on societies that lie at the very roots of conflict.
Fast-paced changes of identity caused by urbanization, the empowerment of women or exposure to foreign media tend to weaken traditional norms and social networks.
And, at least initially, economic growth tends to increase inequalities within a country, as some communities or individuals benefit from rising income and others don’t.
By displacing traditional centers of power, development can nurture collective resentment.
Ethnic manipulation is a small step away, which many political leaders are disposed to take.
None of this, however, disproves the link between development and peace, or inverts the correlation.
At both the micro and the macro level, development projects and economic growth can do much to alleviate some of the structural causes of political violence.
But development professionals, whose first duty is to “do no harm,” should be more conscious of the complex strains brought upon developing societies.
In Kenya too, this sensitivity has not sufficiently infused our organizations and projects.
Ultimately, the enhanced economic activity that development generates is the only way to reduce inequalities, particularly in a context of rapid demographic growth: it is easier to work on a fairer distribution of a growing pie than of a shrinking one.
Moreover, fast-paced but ill-distributed economic growth can be accompanied by programs that focus on those who are left behind, thereby mitigating grievances.
It is no coincidence that much of Kenya’s ongoing violence is occurring in the slums of its large cities.
Had more attention been given to the country’s most glaring inequalities in access to water, shelter, or jobs, this population might not have chosen violence as an instrument of change.
Let us draw the right lessons from Kenya: socio-economic progress remains our best tool to prevent conflict in the long run.
But the relationship between growth and political stability is subtler and less linear than we like to believe.
Development is no miracle solution to violence, and may create its own set of grievances – particularly when done without regard to the abrupt changes it brings to societies.
Kenya isn’t an illustration of development failing, but of development at work: complex, powerful, and yet fragile.
Did Hezbollah Win?
In the immediate aftermath of the October War of 1973, the Arab world rejoiced because the myth of Israeli invincibility had been shattered by Egypt’s crossing of the Suez Canal and the Syrian offensive that swept across the Golan Heights.
In Israel, there was harsh criticism of political and military chiefs alike, who were blamed for the loss of 3,000 soldiers in a war that ended without a clear victory.
Prime Minister Golda Meir, Defense Minister Moshe Dayan, Israel Defense Forces (IDF) Chief of Staff David Elazar, and the chief of military intelligence were all discredited and soon replaced.
Only afterwards did a sense of proportion take hold, ironically by the Egyptian and Syrian leaders before anyone else.
While commentators in Israel and around the world were still mourning or gloating over Israel’s lost military supremacy, both Egyptian President Anwar Sadat and Syrian President Hafez Al-Assad soberly recognized that their countries had come closer to catastrophic defeat than in 1967, and that it was imperative to avoid another war.
That lead to Sadat’s peace and Assad’s 1974 cease-fire on the Golan Heights, which has never been violated since.
It is easy to read the 1973 war only in retrospect.
Israel had been caught by surprise, because good intelligence was misinterpreted in a climate of arrogant over-confidence.
The frontal sectors, left almost unguarded, were largely overrun.
The Egyptians had an excellent war plan and fought well, and Syrian tanks advanced boldly, attacking in wave after wave for three days and nights.
Within 48 hours, Israel seemed on the verge of defeat on both fronts.
But as soon as the IDF was fully mobilized and the reservist brigades that make up nine-tenths of its strength were ready to deploy for battle, the Israelis stopped both the Egyptian and Syrian armies in their tracks and began their own advance almost immediately.
The war ended with Israeli forces 70 miles from Cairo, and less than 20 miles from Damascus, their success obscured by the shock of the surprise attack, emotional over-reactions, and the difficulty of seeing clearly through the fog of war.
It is the same now with the Lebanon war and the gross misperceptions that have followed.
No one should be surprised the latest anti-tank missiles can penetrate even the heaviest and best protected of battle tanks.
But Israel’s tanks did well enough in limiting Israeli casualties.
Likewise, the lack of defenses against short-range rockets with small warheads is simply common sense.
They are just not powerful enough to justify spending billions of dollars for laser weapon systems the size of football fields.
More serious misperceptions are equally obvious.
For example, instead of dismissing Sheikh Hassan Nasrallah’s boasts of victory, many commentators around the world repeat and endorse his claim that Hezbollah fought much more bravely than the regular soldiers of Arab states in previous wars.
But in 1973, after crossing the Suez Canal, Egyptian infantrymen by the thousand stood their ground unflinchingly against advancing Israeli battle tanks.
They were in the open, flat desert, with none of the cover and protection that Hezbollah had in their stone-built villages in Lebanon.
What is true is that the Israelis lacked a coherent war plan, so that even their most purposeful bombing came off as brutally destructive (though with a deterrence payoff, as Syria’s immobility showed).
Similarly, Israel’s ground actions were hesitant and inconclusive from start to finish.
A fully developed contingency plan – a sophisticated blend of amphibious, airborne, and ground penetrations to reach swiftly and deeply behind the front, before rolling back and destroying Hezbollah positions one by one from the rear, all the way to the Israeli border – was never implemented.
The contingency plan remained on the shelf because of the lack of casualties among Israeli civilians.
It had been assumed that thousands of Hezbollah rockets fired in concentrated barrages – which cancel out the inaccuracy of unguided rockets and powerfully compound blast effects – would kill many civilians, perhaps hundreds each day.
That would make a large-scale offensive by more than 45,000 soldiers a compelling necessity, justifying politically the hundreds of casualties it would have cost.
Hezbollah, however, distributed its rockets to village militias that were good at hiding them from air attacks, sheltering them from artillery, and from probing Israeli unmanned air vehicles, but that were incapable of launching them effectively in simultaneous launches against the same targets.
Instead of hundreds of dead civilians, the Israelis were losing one or two a day.
Even after three weeks, the total was less than in some one-man suicide bombings.
That made it politically unacceptable to launch an offensive that would kill young soldiers and family men.
Indeed, nor would such an offensive have eradicated Hezbollah, because it is a political movement in arms, and not just an army or a band of gunmen.
For that very reason, the outcome of the war is likely to be more satisfactory than many now seem to believe.
Unlike Yasser Arafat, who fought for eternal Palestine and not for actual Palestinians, whose prosperity and safety he was always willing to sacrifice for the cause, Nasrallah has a political constituency centered in southern Lebanon.
Having implicitly accepted responsibility for starting the war, Nasrallah has directed Hezbollah to focus on rapid reconstruction in villages and towns, right up to the Israeli border.
Nasrallah’s power base is now a hostage of Hezbollah’s good behavior.
He can hardly afford to start another round of fighting that would destroy everything again.
Did Humans Invent Modernity?
Fossil remains and genetic data suggest that modern humans come from Africa, and in the last decade anthropologists, archaeologists, linguists, and other scientists have tended to identify our species' biological origin with the origin of modern intelligence.
The idea is quite simple.
The process that produced our species in Africa granted it a number of advantages - syntactical language, advanced cognition, symbolic thinking - that favored its spread throughout the world and determined its eventual evolutionary success.
If, however, such advantages were dramatic and mainly determined by biological change, we should expect to find them reflected in the material culture produced by these early, anatomically modern populations.
Complex technologies, regional trends in the style and decoration of tools, use of pigments, abstract and representational depiction, burials, grave goods, and personal ornaments are among the more common long-lasting creations that attest to the complex symbolic nature of ethnographically recorded human cultures.
Specifically, we should find such archeological evidence at sites in Africa from between 200,000 and 100,000 years ago.
But what we see instead is a gradual emergence of behavioral innovations in and outside Africa between 300,000 and 20,000 years ago.
Moreover, anatomically modern populations shared a number of these innovations with Neanderthals, which many anthropologists and geneticists consider a different species, or a human type inherently incapable of reaching our cognitive level.
For example, elongated stone blades are found not only at Neanderthal sites in Europe and the Near East, but also at sites inhabited by Moderns in the Near East and Africa since at least 100,000 years ago.
Blade technologies then disappeared and reappeared cyclically in these areas, and in some regions, such as Australia, they only appeared a few thousand years ago.
Similarly, standardized tools produced by both Neanderthals and Moderns appeared 80,000 years ago.
Pigments, probably used in symbolic activities such as tattooing or body painting, are found at Southern African sites since 300,000 years, but also at contemporaneous and more recent Neanderthal sites in Europe.
The intentional character and symbolic significance of burials prior to 30,000 years ago, especially those of Neanderthals, remain the subject of intense debate.
But there is enough evidence to believe that both anatomically modern humans and Neanderthals began burying their dead 100,000 years ago - and probably before, as suggested by the recent dating at 160,000 years of a Neanderthal burial site at Tabun, Israel.
To be sure, sophisticated bone tools, such as harpoons, spear points, and awls, seem to have appeared in Africa 90,000 years ago, much earlier than in the rest of the world.
This also applies to such artifacts of modern humans as personal ornaments, with recently discovered shell beads dated at 75,000 years ago.
But these innovations do not seem to have been widespread.
Bone tools and beads are virtually absent from sites in Africa and the Near East inhabited by modern humans beginning 100,000 years ago, and few abstract engravings on bone and on fragments of ochre are found at African sites dated to 75,000 years ago.
Depictions of animals, human beings, and other natural features do not occur in the three records - Africa, Europe, and the Near East - before 40,000-30,000 years ago, and they appear much later in some areas than others.
In sum, certain behavioral innovations seem to appear in Africa between 10,000 and 30,000 years before Neanderthals express them.
But I doubt that this gap is evidence of different cognitive abilities.
After all, it took 7,000 years for agriculture to arrive in England from the Near East, and nobody would argue that the cognitive abilities of Mesolithic hunter-gatherers from England were inferior to those of early agriculturalists.
This suggests that the trajectory of we "moderns" in our transformations since the end of the Ice Age has varied enormously in material culture.
Future archaeologists would do well not to seek an explanation of this variation in terms of visible differences in our skeletal biology!
"Modern" behavior may have appeared in different regions and among different groups of humans, much as would happen later in history with the inventions of agriculture, writing, and transport.
More fundamentally, behavior is certainly a significant component in determining a species' adaptation, geographic range, and mate-recognition system - all of which contribute to the maintenance of species boundaries.
But this does not imply that modern behavior must have developed in a single species.
Very close species may have similar behavioral systems and, in the case of our close predecessors, the shared features probably included many traits we have preferred to consider the monopoly of our species, including symbolic behavior.
The most important implication of believing that cultural modernity emerged in more than one species is that it largely eliminates the dichotomy that Western thought has traditionally detected between the natural world and human culture.
The archaeology of early modern and Neanderthal populations suggests that we are not the chosen people who received from God the light, the divine mandate to go forth, multiply, and eliminate their subhuman neighbors.
This is a liberating, as well as a humbling, prospect.
If the fact that we are the only human species left on earth is the result of an historical accident rather than Darwinian competition, we can open our minds and accept that we share some of our "culture" with both our living and no longer living relatives.
Our modernity is probably a part of their legacy as well.
Did the Poor Cause the Crisis?
WASHINGTON, DC – The United States continues to be riven by heated debate about the causes of the 2007-2009 financial crisis.
Is government to blame for what went wrong, and, if so, in what sense?
In December, the Republican minority on the Financial Crisis Inquiry Commission (FCIC), weighed in with a preemptive dissenting narrative.
According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many into taking out subprime mortgages that they could not afford.
This narrative has the potential to gain a great deal of support, particularly in the Republican-controlled House of Representatives and in the run-up to the 2012 presidential election.
But, while the FCIC Republicans write eloquently, do they have any evidence to back up their assertions?
Are poor people in the US responsible for causing the most severe global crisis in more than a generation?
Not according to Daron Acemoglu of MIT (and a co-author of mine on other topics), who presented his findings at the American Finance Association’s annual meeting in early January. (The slides are on his MIT Web site.)
Acemoglu breaks down the Republican narrative into three distinct questions.
First, is there evidence that US politicians respond to lower-income voters’ preferences or desires?
The evidence on this point is not as definitive as one might like, but what we have – for example, from the work of Princeton University’s Larry Bartels – suggests that over the past 50 years, virtually the entire US political elite has stopped sharing the preferences of low- or middle-income voters.
The views of office holders have moved much closer to those commonly found atop the income distribution.
There are various theories regarding why this shift occurred.
In our book 13 Bankers, James Kwak and I emphasized a combination of the rising role of campaign contributions, the revolving door between Wall Street and Washington, and, most of all, an ideological shift towards the view that finance is good, more finance is better, and unfettered finance is best.
There is a clear corollary: the voices and interests of relatively poor people count for little in American politics.
Acemoglu’s assessment of recent research on lobbying is that parts of the private sector wanted financial rules to be relaxed – and worked hard and spent heavily to get this outcome.
The impetus for a big subprime market came from within the private sector: “innovation” by giant mortgage lenders like Countrywide, Ameriquest, and many others, backed by the big investment banks.
And, to be blunt, it was some of Wall Street’s biggest players, not overleveraged homeowners, who received generous government bailouts in the aftermath of the crisis.
Acemoglu next asks whether there is evidence that the income distribution in the US worsened in the late 1990’s, leading politicians to respond by loosening the reins on lending to people who were “falling behind”?
Income in the US has, in fact, become much more unequal over the past 40 years, but the timing doesn’t fit this story at all.
For example, from work that Acemoglu has done with David Autor (also at MIT), we know that incomes for the top 10% moved up sharply during the 1980’s.
Weekly earnings grew slowly for the bottom 50% and the bottom 10% at the time, but the lower end of the income distribution actually did relatively well in the second half of the 1990’s.
So no one was struggling more than they had been in the run-up to the subprime madness, which came in the early 2000’s.
Using data from Thomas Piketty and Emmanuel Saez, Acemoglu also points out that the dynamics of the wage distribution for the top 1% of US income earners look different.
As Thomas Philippon and Ariell Reshef have suggested, this group’s sharp increase in earning power appears more related to deregulation of finance (and perhaps other sectors).
In other words, the big winners from “financial innovation” of all kinds over the past three decades have not been the poor (or even the middle class), but the rich – people already highly paid.
Finally, Acemoglu examines the role of federal government support for housing.
To be sure, the US has long provided subsidies to owner-occupied housing – mostly through the tax deduction for mortgage interest.
But nothing about this subsidy explains the timing of the boom in housing and outlandish mortgage lending.
The FCIC Republicans point the finger firmly at Fannie Mae, Freddie Mac, and other government-sponsored enterprises that supported housing loans by providing guarantees of various kinds.
They are right that Fannie and Freddie were “too big to fail,” which enabled them to borrow more cheaply and take on more risk – with too little equity funding to back up their exposure.
But, while Fannie and Freddie jumped into dubious mortgages (particularly those known as Alt-A) and did some work with subprime lenders, this was relatively small stuff and late in the cycle (e.g., 2004-2005).
The main impetus for the boom came from the entire machinery of “private label” securitization, which was just that: private.
In fact, as Acemoglu points out, the powerful private-sector players consistently tried to marginalize Fannie and Freddie and exclude them from rapidly expanding market segments.
The FCIC Republicans are right to place the government at the center of what went wrong.
But this was not a case of over-regulating and over-reaching.
On the contrary, 30 years of financial deregulation, made possible by capturing the hearts and minds of regulators, and of politicians on both sides of the aisle, gave a narrow private-sector elite – mostly on Wall Street – almost all the upside of the housing boom.
The downside was shoved onto the rest of society, particularly the relatively uneducated and underpaid, who now have lost their houses, their jobs, their hopes for their children, or all of the above.
These people did not cause the crisis.
But they are paying for it.
Dignity or Decline?
TOKYO – Kokka no Hinkaku, The Dignity of a State, is the title of a recent book by the Japanese mathematician Masahiko Fujiwara that has sold three million copies.
Talk about the book in Japan is so fervid that the term “dignity” (hinkaku) has become a buzzword.
That Japan’s dignity is now a central issue should surprise no one.
For this is a moment when Japan must chart its course – either decline or dignity – as a “state” (kokka) in relation to its giant neighbor, China.
The issue of relations with China crystallized in September, when the Japanese Coast Guard arrested the captain of a Chinese trawler after his ship hit two Japanese patrol boats near the Senkaku Islands, which are part of Japan and within its territorial waters.
Tension between Japan and China – which claims the islands – immediately soared.
For many years, Japanese governments have taken a “let-sleeping-dogs-lie” approach to territorial disputes over the islands, ignoring repeated provocations by China (and Taiwan).
But that ended with the election of September 2009, which ushered in the pro-China administration of Prime Minister Yukio Hatoyama.
Hatoyama was naïve enough to declare publicly his intention of turning the East China Sea into a Chinese-led “Sea of Fraternity.”
He also earned the distrust of the United States, Japan’s most important ally, by advocating the relocation outside Japan of a US air base on Okinawa.
Diplomatic realism was not restored after Hatoyama’s fall from power earlier this year.
Instead, his successor, Naoto Kan, continues to believe that Japan can somehow opt out of history and a turbulent region.
Speaking at the United Nations plenary meeting this September, Kan said that his government seeks to achieve a “society in which human suffering is reduced a minimum.”
National security is treated as a low-grade issue.
Meanwhile, China is following its own definition of “dignity,” which looks to almost everyone in Asia – other than Kan’s government – as a right to dominate.
Indeed, China no longer even tries to hide its desire for hegemony in the Pacific.
China appears to have seen the standoff over the Senkaku Islands as a test of wills – a test Kan’s government failed abysmally.
In retaliation for Japan’s refusal to release the trawler captain, China hinted that it might recall its ambassador from Tokyo, suspended bilateral ministerial-level exchanges, and canceled a tour to Japan for about 10,000 Chinese.
More ominously, the Chinese arrested four employees of Fujita, a Japanese construction company, on suspicion of espionage.
The four were in China for a project commissioned by the Japanese government to dispose of chemical weapons abandoned by the Japanese military after World War II.
Chinese officials also suggested the possibility of banning exports to Japan of rare-earth elements – raw materials crucial for many Japanese manufacturing processes – and appear to have done so informally.
Inexperienced and diplomatically inept, Kan’s administration buckled, releasing the trawler captain early.
His government then sought to pin the blame on the local prosecutor who had formally arrested the captain.
This display of weak-kneed diplomacy appalled many Japanese, and popular support for Kan’s administration has plummeted.
The de facto export ban on rare-earth elements – often referred to as “industrial vitamins” – struck a terrible blow to Japanese companies, which rely on China for 97% of their supply.
Among a variety of rare-earth elements, neodymium and dysprosium are widely used as a magnetic material for motors in environmentally friendly vehicles and home appliances, while erbium is used as a dopant in optical fibers and cerium as an abrasive for polishing liquid crystal display (LCD) glass.
The “rare-earth threat” is not confined to Japan, as China accounts for over 90% of the world’s production, roughly 120,000 tons.
But this shouldn’t be a threat at all, because the world has ample reserves of these elements.
Indeed, rare-earth elements are “rare” only in the sense that they are distributed in small quantities and must be extracted from ores, a time-consuming process.
Rare-earth mines are found throughout the world.
China dominates the global market simply because it has fairly abundant rare-earth ores close to the surface.
Of course, China also has abundant cheap labor to process ore.
Rare-earth ores in southern China – all except for those in Inner Mongolia – contain radioactive substances that pose significant threats to human health and the environment.
Other countries might worry about the health risk to workers in rare-earth processing, but that does not appear to be true of China.
In the face of aggressive price cutting by Chinese rare-earth producers, many mines in the US and elsewhere in the world were shut down over the years.
Even before the trawler incident, China was trying to regulate rare-earths, defining them as a strategic resource.
Chinese officials say that concern over the overexploitation and illicit export of rare earths prompted them to regulate the industry more closely.
But this regulation, when combined with China’s aggressive pricing, suggests a desire to assert monopoly control, and the de facto ban of rare-earth exports to Japan looks like an effort to test the benefits of this looming monopoly.
China’s move, however, put the rest of the world on alert.
Many countries are now planning to develop their own or alternative sources of rare-earth elements, and to accelerate efforts to develop technologies that are free of them.
But China has another motive for tightening the noose on rare-earth exports: it wants to force high-tech firms to operate in China, so that local companies can absorb their technologies.
A senior official of a Chinese company has said that, even though rare-earth exports have been restricted, Japanese companies can secure their supply by launching operations in China.
If there is a response to such blackmail that could preserve Japan’s dignity, the Kan government is unlikely to find it.
Diplomacy’s Darkest Hours
MADRID – Diplomacy is not having its finest hour nowadays. Quite the contrary: resistance to diplomatic solutions is a common thread in most of today’s major conflicts.
Afghanistan will continue to bleed until the allies finally recognize that only by engaging the Taliban do they stand a chance of ending the war.
But the West will also have to recognize that conflicts with a potent cultural and religious component are simply not susceptible to a military solution – a realization that points toward ending the ostracism of political Islam – Hamas and Hezbollah, for example.
Meanwhile, Iran’s unstoppable rush to develop nuclear weapons could prove to be a monument to the international community’s failure to stem the atomic tide in the region.
The Israeli-Palestinian conflict continues to be the diplomatic charade that it has been for many years now.
And nothing has attenuated the tensions between Israel and both Syria and Lebanon.
History teaches that diplomacy all too frequently produces results only when backed by overwhelming power.
Such was the existentialist worldview of US President and Nobel Peace Prize laureate Theodore Roosevelt, a major advocate of American expansionism: “A just war is, in the long run, far better for a man’s soul than the most prosperous peace.”
Indeed, the list of Nobel Peace Prize laureates is not lacking in men – Roosevelt, George Marshall, Menachem Begin, Anwar Sadat, Yitzhak Rabin, Yasser Arafat, and Henry Kissinger – who either ended up recognizing the limits of military power or were simply following Clausewitz’s dictum that war is the continuation of politics by other means.
Conflicts start to be ripe for diplomatic solutions only when the parties get trapped in an unbearably painful mutual deadlock.
Without such a deadlock, neither United Nations resolutions, nor premature peace initiatives can cut short the dynamic of war.
It is only then that formulas for power-sharing – such as those in Northern Ireland, Lebanon, Guatemala, or Iraq – emerge as a realistic alternative.
It was NATO’s robust military intervention, not European diplomacy, that created the conditions for the end of genocide and ethnic cleansing in the former Yugoslavia.
Martti Ahtisaari fully deserved his Nobel Peace Prize for articulating a diplomatic solution to Kosovo’s drive for independence.
But this could not be achieved before Serbia was militarily humbled.
However encouraging, Czechoslovakia’s peaceful “velvet divorce” into two states has not been the norm in Europe or elsewhere.
If it were not for the 1973 Yom Kippur War, Israel and Egypt would never have reached a peace settlement.
And it was the first Gulf War and Palestinian Intifadah that created the conditions for the 1991 Madrid Peace Conference and the subsequent Oslo Accords.
After Rabin’s assassination, the notion has been gaining ground that any Israeli-Palestinian accord would be the “peace of the exhausted,” not Rabin’s “peace of the brave.”
But the Israeli-Palestinian conflict is nonetheless sui generis: either the parties’ six-decade mutual deadlock is not unbearable enough, or they prefer to pay the price of conflict rather than compromise their national ethos.
Such is now the loss of hope in a negotiated solution that those who advocate an internationally imposed solution seem to be gaining ground.
Internal conflicts that end not with mutual deadlock but with an overwhelming victory by one of the parties hardly ever produce diplomatic solutions.
Long years of mediation and endless peace proposals in the Sri Lanka conflict failed to end the war and the devastation of entire Tamil communities. “Peace” came about only with the total and unconditional defeat of the Tamil Tiger rebels.
Likewise, the failure of Chechnya, Biafra, Tibet, or the Kurdish areas of the Middle East to reach independent statehood is attributable entirely to their military impotence.
By contrast, Eritrea, East Timor, and parts of the former Yugoslavia achieved independence by exhausting their occupiers and/or their internal rivals.
There are few cases where diplomacy actually succeeded in preventing war.
Almost invariably, the greatest diplomatic successes have followed, rather than preceded, bloodshed.
In 1919, John Maynard Keynes told the statesmen of post-World War I Europe to abandon their vindictive patriotism for the sake of building a future of peace based on European integration.
Alas, it took another world war to convince European leaders of the validity of Keynes’s approach.
The European Union – an empire built through diplomacy and consensus – emerged out of the ashes.
One should, however, resist falling back on fatalism.
Colombia’s new president, Juan Manuel Santos, showed genuine courage in cutting short a march to war with Venezuela and calming down the entire Bolivarian axis (Venezuela, Ecuador, and Bolivia) by reviving the region’s diplomatic channels.
His was a truly revolutionary shift from the politics of saber-rattling to the hard work of establishing regional peace.
To be sure, much hope still lies in popular diplomacy, in civil society mobilizing for peace.
Frequently, governments need to be coaxed into accepting the inevitability of compromise, thanks to pressure from below.
Civil society’s support for bridging the psychological gap between Catholics and Protestants in Northern Ireland helped pave the way to peace.
And Israel’s withdrawal from Lebanon in May 2000, after 18 years of useless military occupation, largely reflected the immense impact of the “Four Mothers’ Movement” on Israel’s government.
But popular diplomacy alone never forces political leaders to end wars and make peace.
Official diplomacy begins where the battlefield ends.
Unfortunately, in today’s most consequential militarized conflicts, that boundary is still nowhere in sight.
Disarming the Middle East
TEL AVIV – Israel’s desperate plea that the world act to curtail what its intelligence service describes as Iran’s “gallop toward a nuclear bomb” has not gotten the positive response that Israel expected.
With the United Nations sanctions regime now having proven to be utterly ineffective, and with international diplomacy apparently futile in preventing the Iranians from mastering the technology for enriching uranium, Israel is being boxed into a corner.
What was supposed to be a major international effort at mediation is deteriorating into an apocalyptic Israeli-Iranian showdown.
This is an intriguing anomaly, for, notwithstanding Iranian President Mahmoud Ahmadinejad’s vile anti-Semitic rhetoric, the implications of Iran’s emerging power extend far beyond the Jewish state.
Indeed, it affects the entire Arab world, particularly the vulnerable Gulf countries, and even Afghanistan and Pakistan.
The United States, as a major Middle East power, and Europe also have an interest in stemming the tide of nuclear proliferation that now threatens the Middle East.
For a nuclear Iran would open the gates to an uncontrolled rush for the bomb across the region.
The international system’s failure to address effectively the nuclear issue in the Middle East stems mostly from the Russia-US divide, to which wrongheaded American strategy has contributed mightily.
Russia cannot want a nuclear Iran.
But in its quest for leverage against what it perceives as hostile American policies, and as way to bargain for a more acceptable security framework with the West, the Russians refuse to join America’s leadership in international efforts to curtail Iran’s nuclear ambitions.
Russia holds the key not only to Iran’s diplomatic isolation, but also – through the weapons transfers that it has already pledged to Iran – to the Iranian government’s capacity to protect its nuclear installations.
In October 2007, Vladimir Putin became the first Russian leader since Leonid Brezhnev to visit Iran, bringing along five leaders of the Caspian Sea states.
Since then, Putin has sought to expose the bankruptcy of America’s policy of isolating Iran.
Russia probably can tame the Iranian regime, but it will do so only in exchange for America’s respect for its interests in the former Soviet Republics, and possibly also a revision of post-Cold War strategic agreements.
But, even if abandoned by the Russians, it is highly unlikely that Iran will give up its nuclear ambitions unless its regional concerns are addressed.
Iran’s nuclear drive reflects a broad national consensus, the result of a deep-seated sense of vulnerability and betrayal.
The Iranians remember how the international community remained indifferent when Saddam Hussein attacked with chemical weapons in the 1980’s.
Nor is the presence of America’s formidable might in today’s Iraq comforting to them.
Iran believes that it is the victim of an international double standard – acceptance of Pakistan’s and India’s nuclear status, not to mention Israel’s – which only fuels its sense of discrimination and its resolve to pursue its ambitions.
By exposing the inadequacy of the Nuclear Non-Proliferation Treaty, Iran, a signatory, has signaled to Israel that the regional order can no longer be based on Israel’s nuclear monopoly as a non-NPT member.
Hence, the solution lies not only in forcing NPT members like Iran and Syria to comply with their commitments, but in creating a broader regional security and cooperation architecture in the Middle East.
But it is highly unlikely that the Arabs will agree to such a system so long as Israel refuses to address her own nuclear capabilities.
Any regional security architecture will have to be premised on the Middle East becoming a zone free of all weapons of mass destruction, including nuclear, chemical, and biological weapons.
The Middle East retains the infamous distinction of being the only region in the world to have used such weapons since the end of World War II.
Indeed, Arab states have both developed and used chemical and biological weapons – not against Israel, so far, but against others in the region.
Iraq used them against Iran, Egypt in its war in Yemen of the 1970’s, and Iraq against its own Kurds.
In 1993, Israel signed the international treaty banning chemical weapons, but did not ratify it because of the Arab states’ refusal to follow suit as long as Israel maintained its nuclear advantage.
The international community must recognize that the Middle East security equation is not a simple linear one involving Israel versus the Arab world.
The proliferation of nuclear weapons in a region that has seen fit to use weapons of mass destruction before threatens everyone.
So a concerted effort is needed by outside powers such as the US and Russia, not to act as spoilers of each other’s policies in the region, but to create a WMD-free zone.
Such a regional system cannot be built in a political vacuum.
A major effort to assist in the solution of the region’s major political disputes is a vital prerequisite.
The nuclear clock is ticking.
Dispersing the Terrorist Storm
WARSAW – On September 11, 2001 at three p.m., Warsaw time, I was talking on the telephone with Poland’s Consul General in New York.
She informed me that two planes had hit the World Trade Center.
That moment, I realized, was more than just a plane crash.
The United States, the world, indeed our very lives, were about to change fundamentally.
Ten years later, it is clear that the fanatics behind those attacks miscalculated in two central respects.
They regarded Western democracies as weak – unwilling or unable to respond to their evil extremism.
And they expected Muslim communities and countries around the world to rise up and mobilize behind their millenarian worldview.
But, far from being uncertain or indecisive, the democratic world responded with unrelenting determination to terrorist outrages of all shapes and sizes.
Across Europe and in America, new arrangements have been set up to pool information about possible terrorist attacks and take the speedy (and sometimes robust) action needed to prevent or disrupt them.
Where possible, we work closely with India, Russia, Pakistan, the Gulf states, and other key international partners.
The institutions and policies established by the European Union are a vivid example of the unobtrusive benefits of modern cross-border integration.
EU member states share highly sensitive intelligence and police information as never before, thereby increasing public security while upholding world-class legal and democratic standards.
These operational measures have been complemented by carefully calibrated policies that aim to acknowledge social diversity but reduce the political space available for intolerance and bigotry.
Success does not come easy.
Most of Al Qaeda’s leaders are dead, but our democracies rightly experience impassioned debates about means and ends, and about the balance between individual freedom and state authority.
In the current difficult global economic climate, public concerns about immigration and access to jobs inevitably grow more acute, increasing the risk that rival forms of lumpen populism and associated tensions will emerge.
Above all, the West’s effective crackdown on domestic extremism has tended to drive would-be terrorists – now often based in remote parts of the world, where they hope to operate with impunity – to higher levels of technical sophistication.
As a result, painful policy dilemmas arise, and they can divide even the closest allies.
How best to respond if some states cannot or will not take the necessary steps to thwart terrorist planning on their territory?
How to deal with evidence of terrorist planning gleaned from states suspected of practicing torture?
The sheer nihilistic irrationality of terrorism strains and tests our own beliefs like nothing else can.
Yet the terrorist blows inflicted on New York, London, and Madrid over the past decade have not shaken Western democracies.
Our societies are more resilient, open, and diverse than ever.
That said, we are not doomed to succeed.
Even well-intentioned social policies can have unwelcome consequences.
Above all, we should be grateful to the police forces and intelligence agencies whose unflagging hard work and dedication far away from the public eye help keep us safe.
The 9/11 terrorists’ second blunder was to believe that their terrorist attacks would inspire irresistible surge in anti-Western Islamist extremism.
In some parts of the world, radicalization of this sort did take place.
Yet, since 9/11, most victims of Islamist-inspired terrorist extremism – often in the vile form of suicide attacks – have been Muslims, in Iraq, Pakistan, and elsewhere.
Terrorist groups have to resort to organized crime to fund themselves.
In short, far from leading some sort of worldwide Islamist revolution, the violent fanaticism of Al Qaeda and other organizations now resembles a repulsive, but manageable, form of ideological toxic waste.
And the focus this year has shifted decisively away from it.
Millions of people in North Africa and the Middle East have started to demand a normal society with basic democratic rights and, above all, the rule of law.
They welcome measured and respectful US, European, and wider support.
Faced with this unexpected challenge, some desperate rulers, above all now in Syria, have been using repressive, even terrorist methods against their open people.
European pressure on President Bashar al-Assad’s regime is intensifying.
In Libya, Col. Muammar el-Qaddafi’s appalling tyranny has collapsed; the EU will be generous in helping the Libyan people start to build a modern pluralist society.
Poland’s initiative to create a European Endowment for Democracy could play a leading role here, and with Europe’s own unfinished business of democratization in Belarus and elsewhere, like backsliding Ukraine.
Few people decide to commit terrorist outrages.
Of those who do, a minute fraction actually tries to carry them out, and only a tiny number of those succeed.
But the main lesson of 9/11 is that in any free society a tiny number of people can exploit their freedom and do vast damage, especially when the underlying motivation is incoherent. This is exemplified in very different ways by the murderous killing spree in Norway in July, and now by WikiLeaks’ disgraceful release of huge numbers of unredacted diplomatic cables.
The terrorism threat ten years from now probably will be even more diverse and unpredictable.
In Europe various homegrown “single issue” extremist groups need close monitoring.
In each case, we see obsessive people arrogating to themselves the right to decide others’ fate, and using modern technology for their harmful purposes.
By its very nature, this sort of disaggregated but highly focused threat is almost impossible to identify and intercept in advance.
Of course, the democratic world cannot build a bomb-proof house.
But we can minimize risk by remaining vigilant and upholding at all times the values on which our societies are based.
Dissecting the Poverty Trap
Without exception, population growth in rich countries has slowed to a crawl.
Average fertility rates in Europe and North America, for example, have fallen to 1.5 to 3 births per woman.
By contrast, average fertility rates in the world's poorest countries--say, Somalia, Yemen, and Uganda--are vastly higher, reaching more than seven births per woman.
Must countries produce fewer children if they want to accumulate more wealth?
All available historical and contemporary evidence suggests that they must.
Rich countries' transition from subsistence economies to sustained growth and prosperity was conditioned on a profound demographic shift--occurring in the 19 th century in Western Europe and throughout the 20 th century in East Asia--in which fertility rates fell dramatically.
The last two decades have witnessed similarly sharp fertility declines in poor countries that are now showing solid signs of economic progress.
In Egypt, for example, fertility rates declined from 4.8 to 2.9 children per woman in the last 15 years.
During the last decade, Egypt's average annual per capita income grew by 2.6%.
During the same period, Tunisia's rate of population growth fell by more than 50%, to a European level of slightly more than two children per woman, while per capita income grew at an impressive annual rate of 3%.
Botswana's incredible annual per capita income growth of approximately 13% in the last decade was accompanied by a decrease from nearly six children per woman to less than four.
Why is rapid population growth bad for a country's standard of living?
The math is simple: more people means that (on average) everyone gets less.
A growing population dilutes not only the accumulation of physical capital, but also human capital.
The quality of children in poor households goes down as their quantity goes up, because poor families with many children are unable to invest enough in the education of each child to ensure that future adults benefit from a key determinant of economic success.
One reason that the poor have high fertility rates and invest little in education is because raising children in poor countries is cheap.
Children go to work at relatively young ages, and the prevalence of low wages--particularly for women--means that the cost of parental time is negligible relative to other opportunities.
Most important, the cost of educating a child relative to the cost of having additional low-educated children is very high in poor countries.
In other words, families in rich countries, who are relatively well educated, have a comparative advantage in "child quality," whereas parents in poor countries have a comparative advantage in "child quantity."
For example, while the ability of a mother to feed her child is not highly related to her level of human capital, her effectiveness in helping her children with their school homework increases with her own level of education.
As a result, poverty in poor countries persists over long periods of time.
Poor people with little education choose high fertility rates and thus low quality children.
These children grow up to be poor adults, and the cycle goes on, viciously.
In addition, the negative impact of low child quality on economic performance is amplified by the diluting effect of population growth on the accumulation of physical capital.
What can be done to break this pattern?
Policies such as tax benefits for large families, child allowances, and subsidized day care and meals--all of which reduce the cost of raising children--may be attractive in the short term.
But they have a negative impact on income in the long run because they encourage households to increase fertility rates.
What is needed is precisely the opposite: an increase in the cost of child quantity.
Increasing the cost of raising a child creates a powerful incentive for households to reallocate resources towards improving child quality through higher investment in education.
This change in relative costs can release a country from the trap of poverty, setting the stage for a demographic transition and economic advancement.
A revealing example of the effect of policy on fertility patterns comes from the poorest groups in Israel.
Fertility rates among Israel's ultra-Orthodox Jews are exceptionally high, averaging six births per woman.
But in the 1950s and 1960s, before the introduction of generous child allowances to large families, fertility rates among the same group were significantly lower--just three children per woman.
Moreover, as a result of the benefits, fertility rates among Israeli Bedouins have remained probably the highest in the world, at nearly eight children per woman.
The implications of this may at first glance seem inhumane, but they are straightforward and unavoidable.
Canceling, or even reversing, policies that reduce the cost of bearing a high quantity of children would contribute to higher living standards over the long run.
Public schooling, too, can release people from the poverty trap, because highly educated people have a comparative advantage in raising quality children.
Policies that encourage economic growth therefore include reallocating government resources or foreign aid from programs that reduce the cost of raising children to financing for public education.
All it takes is one generation to break the cycle of choosing quantity over quality.
Even temporary improvement in educational opportunities could permanently affect the level and distribution of skills in the economy.
Divest in a Better Future
SEATTLE – Sometimes the best measure of a movement’s momentum is the reaction of its critics.
When, in early October, the Australian National University (ANU) announced that it would sell its shares in seven fossil-fuel and mining companies, it triggered a chorus of criticism from the country’s conservative politicians.
These nominal champions of the free market were quick to tell the university what it should do with its money.
The Treasurer of Australia, Joe Hockey, disparaged the ANU’s decision as being “removed from reality.”
Others chimed in, calling it “a disgrace,” “very strange,” and “narrow-minded and irresponsible.” Never mind that the sums involved were relatively small – making up less than 2% of the university’s estimated $1 billion portfolio.
As the drive to divest from fossil fuels picks up speed, such panicky responses are becoming increasingly common.
The outrage of Australia’s conservatives reminds me of the reaction I received when I testified before the US Congress in 2013 that we should “keep our coal in the ground where it belongs.”
David McKinley, a Republican congressman from West Virginia, in the heart of America’s coal country, replied that my words “sent a shiver up [his] spine,” then changed the subject to the crime rate in Seattle, where I was Mayor.
Even ExxonMobil appears shaken.
The company recently published a long, defensive blog post responding to what it described as a “full-throated endorsement” of fossil-fuel divestment by Mary Robinson, United Nations Secretary-General Ban Ki-moon’s special envoy for climate change.
The fossil-fuel industry clearly sees the divestment movement as the political threat that it is.
When enough people say no to investing in fossil-fuel production, the next step has to be keeping coal, oil, and gas in the ground.
That is a necessary step if we are to head off the most dangerous consequences of climate change.
To prevent world temperatures from rising above the 2º Celsius threshold that climate scientists believe represents a tipping point beyond which the worst effects could no longer be mitigated, we will need to leave approximately 80% of known fossil-fuel reserves untapped.
Oil and coal companies and their political allies warn us of fiscal catastrophe if we do that – as if heat waves, droughts, storms, and rising seas did not bring their own fiscal and social catastrophes. As Mayor of Seattle, I supported the creation of energy-efficient buildings, the development of solar, wind, and hydroelectric power, and a shift toward walking, biking, and public transit as alternatives to driving – strategies that can help to build a more resilient economy and provide viable alternatives to fossil fuels.
But they cannot prevent the worst of global warming, particularly if they result in coal and oil simply being sold elsewhere.
As imperfect as our governance systems are, at some point the public and its leaders may demand that we confront the truth about global warming.
At that point, they will put in place the regulatory or legal controls needed to reduce fossil-fuel use dramatically.
If you are a prudent and cautious investor, contemplate that possibility for a moment.
Stock values in the fossil-fuel industry – which are based on the assumption that companies will be able to extract and burn all known reserves – will plummet.
Investing in these companies, it turns out, is extraordinarily risky.
As anyone who receives investment statements knows, “past performance is no guarantee of future performance.”
That reality implies another compelling case for divestment.
To be sure, some will claim that the world will never change and that we will continue to depend on fossil fuels forever.
But one has only to look to Seattle, where gay couples marry in City Hall and marijuana is sold in licensed retail outlets, to see the human capacity to reexamine deeply held assumptions.
The prudent investor, and the wise business leader, will look where the economy is headed, not where it has been.
The ANU’s decision looks like a sage one to anyone not in thrall to oil and gas companies, and it will only look wiser with the passing of time.
Good on them.
When I put Seattle on the path to divestment in 2013, my decision was well received by the young people who will have to live with the consequences of global warming, as well as the general public.
As the political pressure mounts, the university’s administrators need only listen to the students.
We need more courage like that shown by the ANU.
Its leaders bucked the power of coal and oil interests, which wield enormous power in Australia.
Divided Asia Stands
Why can't Asia unite even for the sake of its own security?
For decades, Western experts have complained about the failure of the Association of Southeast Asian Nations (ASEAN) to learn the value of collective security from Europe's post-War experience.
ASEAN's leaders have ignored the lessons offered first by the Common Market, and then the European Union.
The benefits of these models are supposedly so obvious that it seems incomprehensible that ASEAN's leaders cannot see them.
East Asia's apparent disarray over a response to North Korea's nuclear démarche brings these complaints into the open once again.
A North Korea with nuclear bombs surely poses a common threat to all Asians.
Everybody, it is said, should help the US put Kim Jong Il in his place.
The fact that North Korea's close neighbors seem unable to grasp this seems to confirm that Asian disunity is not just stupid, but chronic and willful.
But history and geography matter in assessing the nature of a threat. Different traditions in tactical and strategic thinking also matter--to say nothing of the unique way Europeans forged their current cooperative arrangements out of aggressive nation-states that shared a common civilization.
Nothing in Asia's history, however, remotely compares to Europe's half-century of division and veritable occupation by two rival superpowers.
So it is no surprise that Asia's leaders do not look to Europe for solutions to their regional problems.
Of course, human beings and nation states do often behave in similar ways.
When threatened, countries tend to group together against a common enemy.
When the world was divided into two camps during the Cold War, deciding who was an enemy and who a friend seemed easy.
Alliances were established along pro-American or pro-Soviet lines.
But even then, things in Asia were not so clear-cut.
A jagged line loosely joining Tokyo to Jakarta via Seoul, Taipei, Hong Kong, Bangkok, Kuala Lumpur, and Singapore was sufficient to sustain international cooperation.
But that cooperation was nothing like a lasting alliance.
Why?
There are many layers of explanation.
At one level, Asian history has been dominated by rival elites from China, "Turkestan," India, Persia, "Arabia", Japan, and Java (to name but a few examples) who claimed to lead separate indigenous cultural entities.
This differs markedly from Europe's shared Greco-Roman-Christian civilization.
Throughout Asian history, the continent's ancient foundations of power were more sharply divided from one another--and over much longer time spans--than in Europe.
Modern history, however, did teach Asians that disunity led to European triumphs over them.
In the 20 th century, leaders advocating unity against the colonial and imperial powers emerged.
But the Europeans, who controlled over half the globe, seemed able to disrupt any temporary gains.
Europe's approach was two-pronged.
First, it aimed to keep Asia divided insofar as the West was concerned.
This was relatively easy during the Cold War, as Asia's postcolonial elites were forced to choose sides in a conflict of ideologies.
Today's global war against terrorism permits this approach to be modified to create new divisions.
Second, Asia was brought under the rubric of a single interdependent global economy in which the West holds the key technological and financial cards.
That strategy has proved remarkably successful.
Over the past decade, Asia moved from division between two superpowers to something that could be described as dominance by one super-economy.
Either way, no regional unity on politics and security has arisen.
The only prospect for a feeble identity of interest is the emergence of some form of economic regionalism, pursued by Asian leaders through free-trade agreements.
Asian disunity can be overcome only if Asia as a whole confronts a common enemy.
The West will do everything possible to prevent Asians from viewing Westerners as that enemy.
In fact, most calls for Asian unity are concerned with uniting Asia with the West (often equated with the interests of the whole world) against some part of Asia, whether it be Iraq, Iran, North Korea, or Myanmar.
Given that most Asian leaders believe Asian disunity made the West all-powerful in the first place, these calls are treated with understandable caution.
What, then, of the future?
It will take time for Asia's leaders to shed the burdens of the past, in some cases especially where relations with the West are concerned.
In the meantime, if the global economy continues to integrate, will the prospect of Asian unity be enhanced or hindered?
Much depends on whether the West retains its sway in other parts of the world.
If that dominance continues through increasingly powerful networking technologies, the chances of Asia creating a distinct unity of its own are slim.
It is in this context that we can see why Asian leaders appear two-faced or unreliable in the eyes of Europe and the US.
Asia cannot afford to unite against the West.
But Asia equally cannot afford to divide itself by ostracizing one of its parts.
For that way lies permanent dependence on the West.
Divided Europe Stands
In coming meetings of the G8 (the world's club of rich industrial countries plus Russia), four members--Germany, France, Italy, and the UK--will participate both individually and as members of the European Union, whose President also attends to represent the EU as a whole.
But shouldn't the EU have only a single representative?
Regardless of whether these meetings are productive, unitary EU participation would be of supreme symbolic value: it would affirm a common European stance in international relations and international economic policy.
The main argument in favor of such a change is that joint participation by the EU would increase Europe's weight in international relations, especially vis-a-vis the US.
After all, a key reason for European integration in the first place was precisely to provide a more powerful voice for Europe in the international arena.
The EU's member countries share strict rules on fiscal policy, a common currency (except, for the moment, the UK, Sweden, and Denmark), a common trade policy, a common antitrust policy, and common market polices, just to name a few.
So why not having a single representative at the G8 meetings.
Indeed, Germany, France, Italy, and the UK basically share a common stance on international economic policy, so why not present a united front to the world where these issues are concerned?
There are two possible answers.
One is that despite occasional shows of unity, European countries retain very different views on foreign policy and do not want to delegate this prerogative.
Consider, for example, the recent strained relationship with the US.
Although the UK remains very close to its transatlantic ally, France is extremely critical, regardless of the color of its government.
Italy's position, on the other hand, pivots 180 degrees depending on who is in power.
Germany has recently taken a more anti-American stance (perhaps for electoral reasons), but it is beginning to like flexing its independent foreign-policy muscles.
The risk is that agreeing on a common foreign policy would either be impossible or would lead to the adoption of a minimum common denominator that would leave Europe ineffective and weak.
Alternatively, taking a strong position based on, say, majority voting within the EU may lead to very strained relations between member states.
The European Union may soon have 25, or more, members.
Agreeing upon a united foreign policy will become even more difficult, if not downright impossible.
Reaching a consensus on relatively small diplomatic and international issues may be feasible, but suppose that America pushes forward militarily against Iraq, after consultation with the European allies seeking their approval.
It is very plausible that, even here, agreement on how to respond to the US request would be impossible.
In fact, profound disagreements on foreign policy among EU members represent one of the main reasons why the EU can not and should not become a federal state in the traditional sense.
Indeed, perhaps foreign policy should not be one of the policy areas delegated and agreed upon by all EU members.
In a more general sense, can such a united policy ever be "fair" in global terms.
Estonia once it joins the EU will be represented at the G8 meeting, while, say Korea will have no voice simply because it is not a member of the common market and single currency union?
Obviously the role of Estonia in deciding the position of the EU representative at G8 meeting would be small, but, again, its participation would be a matter of symbols more than substance.
The second answer is more cynical.
Perhaps the heads of states of the four European countries would lose a major photo opportunity and have no inclination to delegate it to a representative of the EU.
The different preferences and policy choices among existing members in some areas, especially foreign policy, are very deep and in all likelihood will remain so.
These differences are also likely to multiply and become more pronounced in an enlarged Europe.
There is, indeed, a trade-off between EU enlargement and deepening of policy coordination.
This is an important point that seems to be missed in the current European debate about institution building and constitution writing.
The cynical answer about photo opportunities may or may not be correct.
But it underscores that decisions about what to delegate to the EU are often the result of short-sighted conflicts between national and European bureaucracies rather than the product of a carefully thought-out institutional design.
These are some of the key questions that the European constitutional convention has to address.
So far it has offered precious few answers.
Divided We Fall
LONDON – Politics trumped sensible economics in the United States this summer, when Congress and President Barack Obama could not agree on taxes, entitlements, deficits, or an investment stimulus.
Europe’s leaders were also paralyzed – ruling out defaults and devaluations, as well as deficits and stimulus.
And, having run negative real interest rates, printed money, plowed in liquidity, and subsidized commercial banks, central bankers everywhere – most recently US Federal Reserve Chairman Ben Bernanke – appear to have concluded that they, too, have reached the limit of what they can do.
As a result, few people today doubt that the world is drifting, rudderless and leaderless, towards a second downturn.
The pre-summer debate about whether we faced a “new normal” of slower growth has been resolved: nothing now looks normal.
Muddling through has failed.
Unable to conclude a global trade deal, climate-change agreement, growth pact, or changes in the financial regime, the world is likely to descend into a new protectionism of competitive devaluation, currency wars, trade restrictions, and capital controls.
But this is not a time for defeatism.
Countries claiming to have reached the limit of what they can do really mean that they have reached the limit of what they can do on their own.
The way forward to sustained growth and employment is not through a flurry of one-off national initiatives, but rather through global policy coordination.
That was the goal back in April 2009, when the G-20 set itself three critical tasks.
The first, preventing a global depression, was achieved.
The other two – a growth pact, underpinned by a reformed global financial system – should now be the main items on the G-20’s agenda when it meets.
In 2010, the International Monetary Fund estimated that a coordinated approach to macroeconomic, trade, and structural policies could achieve 5.5% higher global GDP, create 25-50 million additional jobs, and lift 90 million people out of poverty.
But a global growth pact looks even more indispensable today, given the world economy’s structural problems and huge imbalances between production and consumption.
It may seem strange to describe the greatest financial crisis since the 1930’s as a symptom of a bigger problem.
But, when historians look back on the wave of globalization after 1990 – which has brought two billion new producers into the world economy – they will find a turning point around 2010.
For the first time in 150 years, the West (America and the European Union) was out-manufactured, out-produced, out-exported, out-traded, and out-invested by the rest of the world.
Indeed, by the early to mid-2020’s, the Asian consumer market will be twice the size of the US market.
Today, however, the West and Asia remain mutually dependent.
Two-thirds of Asia’s exports still end up in the West, and south-south trade accounts for just 20% of global turnover.
Put another way, ten years ago the US engine could drive the world economy, and ten years from now the emerging-market countries stand to take over that role, particularly given the rising purchasing power of their middle classes.
But, for now, America and Europe cannot expand their consumer spending without increasing exports, while China and the emerging markets cannot easily expand their production or consumption without the guarantee of strong Western markets.
So, first, we must restore the broad vision of global cooperation contained in the G-20 growth pact (which has since been downgraded to what the IMF now calls “an in-depth analysis of…those countries identified as having large imbalances”).
But a broader and deeper agenda is needed: China should agree to raise household spending and consumer imports;
India should open its markets so that its poor can benefit from low-cost imports; and Europe and America must boost competitiveness in order to increase their exports.
The G-20 was also adamant in 2009 that future stability required a new global financial regime.
David Miles of the Bank of England predicts three more financial crises in the coming two decades.
And, if the BoE’s Andrew Haldane is right that rising pressures in Asia threaten future turmoil, the West will regret its failure to entrench global capital-adequacy and liquidity standards and a more transparent early-warning system.
The problem is already evident.
Europe’s banking-sector liabilities are nearly five times higher than in the US, at 345% of GDP.
Germany’s banks are leveraged at 32 times their assets.
So, not only is bank recapitalization essential for financial stability, but so is a reformed euro, built on fiscal and monetary coordination and an enhanced role for the European Central Bank in supporting individual governments (not individual banks) as lender of last resort.
The G-20 will not achieve growth and stability without a renewed focus on long-term debt reduction.
But there is also a short-term imperative to avoid a cycle of decline.
So we should draw on Robert Skidelsky’s national investment bank proposals to equip our infrastructure – not least our environment – for future challenges and to stimulate growth and job creation.
One model is the European Investment Bank, which, with €50 billion of capital, has been able to invest €400 billion.
But there is perhaps a deal to be done with the Chinese on investing their reserves and with Western multinationals on the tax treatment of repatriated profits.
Finally, as the Nobel laureate economist Michael Spence has shown, growth is now a necessary but insufficient condition for job creation.
Today’s epidemic of youth unemployment, in particular, requires new approaches – a development bank, for example, to help employ the bulging youth population in the Middle East and North Africa, and training and apprenticeship programs elsewhere.
The G-20’s growth compact must be a jobs compact, too.
The G-20, which represents 80% of world output, came into its own in 2009 as the only multilateral body able to coordinate global economic policy.
Unfortunately, its member states soon abandoned that goal and defaulted to national solutions.
Predictably, going it alone has proven futile in ensuring economic recovery.
The G-20’s time has come again.
The sooner French President Nicolas Sarkozy calls the G-20 together to act, the better.
DNA: Oracle or Nemesis?
NEW YORK: Throughout history, shamans and soothsayers, wizards and witches have tried to read and tame the future.
Today, geneticists have joined the prediction business.
If scientists can decode the genetic code and read the instructions, so the argument goes, they will find the key to human ailments and predict our predispositions.
Based on research, biotechnology companies have invested in sequencing technologies and developed predictive tests to identify those who are asymptomatic, but genetically predisposed to a growing number of genetic diseases and more common disorders such as certain types of cancer.
Some scientists, indeed, are convinced that genetic tests will eventually help predict behavioral tendencies and personality traits – including predispositions to mental illness, homosexuality, addiction, even risk taking, timidity, and religiosity.
In futuristic scenarios, they promise that genetic information will enhance control over both behavior and disease.
Genetic tests differ significantly from other clinical tests.
They can be used to detect a condition in healthy people who have no reason to suspect they are at risk.
They provide probabilistic information about a person’s predisposition to a disease that may or may not occur far in the future; they provide information that implicates not only the future of the individual but of family members as well.
There are among the many dangers that lurk here and many parties have less than a detached interest in this issue.
Some people hope that predictive information will open therapeutic possibilities.
But even when genetic tests correctly predict that a person is at risk, there may be little or no benefit from that knowledge.
Despite decades of promises, tests are available far in advance of therapies.
On the other hand, once identified, a genetic predisposition to a debilitating disease for which there is no cure may immediately expose a person to stigmatization and discrimination.
A person “predisposed” to cancer, say, may have the biological qualities that heighten the odds of developing cancer, but many variables will influence the actual expression of the disease.
In its social meaning, however, a predisposition is often defined as equivalent to having the disease.
In a non-clinical context, individuals at risk in the future may be regarded as deserving differential treatment before it is known whether or not the disease will ever occur.
Carrying the trait for a disorder, they can be labeled as “persons at risk” and deemed unsuited for normal activities.
Genetic labeling may create an underclass of individuals whose genes condemn them to discrimination.
For this reason, many people who know they are at risk for a disease because of their family history have chosen not to be tested.
Among people at risk for Huntington's Disease, for example, about 15% spurn taking the test that would provide definitive information.
Individuals considering genetic testing thus face difficult questions.
Of what use is genetic information about a disease when there are no therapeutic options?
Should a healthy woman diagnosed as susceptible to breast cancer undergo a prophylactic mastectomy?
Should children and other family members who may also be at risk be informed?
What are the implications of genetic screening for family planning?
Eliminating genetic conditions ultimately depends on controlling reproduction.
But policies of gene selection that may reduce the burden of disease border on the nightmare of eugenic controls.
While the patient may derive limited or no benefit from testing, others may have great interest in administering it.
Predictive information allows various organizations to reduce costs or increase profits.
The rising cost of medical care and insurance, for example, encourages insurance companies to try to weed out those who may have “unprofitable,” i.e., reimbursable, illnesses.
The need for profit encourages employers to give genetic tests to workers to discover who may be most productive, or who may be prone to illness that might lead to costly claims for compensation.
Companies using toxic materials want to anticipate which workers may be genetically sensitive to toxic exposure.
Schools, motor vehicle bureaus, adoption agencies, mortgage lenders, organ transplant registries all have a stake in information about genetic predispositions.
But above all, pressures from a biotechnology industry that stands to profit from the proliferation of tests drives the expansion of genetic testing.
There are more than 450 research programs in America developing genetic tests.
The commercial stakes are growing as it becomes possible to test for predisposition to common diseases such as breast cancer and heart disease where the potential market is immense.
Genetic prediction marks the intersection of scientific possibilities, economic interests, and consumer hopes and expectations.
The ability to predict a growing number of complex and common diseases encourages testing, but also creates ethical dilemmas.
The institutional interest in the predictive information from genetic tests conflicts with the rights and interests of individuals.
Efforts to predict predisposition to behavior (as opposed to disease) will only compound these conflicts.
Today genetic tests yield probabilities and uncertain, inadequate information.
But even if perfected, how should this information be used?
Can we avoid the creation of a genetic underclass?
Should we be seeking “genetic fixes” or ways to re-engineer the genes we pass on to our children?
As we seek to control disease, can we afford to mandate controls over reproduction?
Such questions will have increasing salience in light of the concerns about economic efficiency and cost containment that are shaping the efforts of today's shamans to read, assess, and tame the future in this, the age of biotechnology.
Do Antioxidant Supplements Work?
NIS, Serbia – The influence of diet on health has been known since the Ancient Greeks.
Our bodies simply cannot synthesize many essential compounds, so our health partly depends on what we eat and drink.
Antioxidants, which are believed to help protect us against both cancer and heart disease, are one such element that must import into our bodies.
Studies have shown that there is a significant positive association between a higher intake of fruits and vegetables and reduced risk of chronic disease.
Fruits and vegetables are sources of numerous micronutrients, and some, including b-carotene (a precursor of vitamin A), vitamin C, vitamin E, and selenium, have potential as antioxidants.
But what specifically makes fruits and vegetables so beneficial is not clear.
The main role of antioxidants is to prevent oxidative damage to cellular components, so it has been proposed that dietary antioxidants decrease such damage and with it the risk of disease.
This has stimulated interest in the possible preventive potential of antioxidant supplements.
Indeed, consumption of antioxidant supplements in developed countries has become widespread.
More than one-third of adults in developed countries now ingest antioxidant pills, which is much easier than eating fruits and vegetables.
But will the benefits be the same?
As with any therapeutic intervention, the most convincing and direct proof of the preventive efficacy of antioxidant supplements requires randomized, controlled clinical trials.
Such trials eliminate the problems of participants’ dietary record and controls the effects of both known and unknown confounding factors.
So far, many studies have been conducted to verify the supposed beneficial effects of antioxidant supplements.
But, while the results of epidemiological studies have been almost uniformly positive, the results of clinical trials have remained largely inconclusive.
Some clinical trials were terminated prematurely because harmful effects of antioxidant supplements were observed.
Indeed, the overwhelming evidence currently calls into question the preventive effect of antioxidant pills.
On the contrary, they may be harmful, leading to an increased risk of mortality in people consuming them.
There are several possible explanations for the negative effect of antioxidant supplements.
First, the “free radicals” that anti-oxidants act against perform a dual biological function.
Free radicals are produced continuously in all cells as part of their normal functioning.
In moderate concentrations, they are essential mediators of reactions by which our bodies eliminate unwanted cells.
By eliminating free radicals from our body, we interfere with important defensive mechanisms for eliminating damaged cells, including cancerous cells.
So antioxidant substances can also harm people.
Whereas our diets typically contain safe levels, highly concentrated antioxidant supplements can be hazardous.
In fact, the amounts of antioxidants that lend protection are not known and probably differ among individuals.
People exposed to increased oxidative stress may have elevated antioxidant requirements.
Moreover, antioxidant supplements in pills are synthetic and biochemically unbalanced compared to their naturally occurring counterparts.
Nor are they subjected to the same rigorous toxicity studies as other pharmaceutical agents.
Indeed, we still lack substantial information on how our bodies metabolize them and how they interact with one another.
As a result, it is still unclear whether dosage, duration of use, or parallel intake of other agents determine differences in their effect.
It also is unclear whether oxidative stress is a primary cause or a secondary phenomenon of chronic diseases, as well as of the aging process.
In most human disease, oxidative stress is merely a symptom.
So the link between oxidative stress and disease should not be overemphasized.
There are still many gaps in our knowledge of the mechanisms of action of antioxidant supplements.
Basic issues concerning the efficacy and safety of consuming relatively high doses of antioxidant supplements need to be resolved.
Results of ongoing clinical trials and further studies are required to improve our knowledge.
In the meantime, we know that antioxidants can cause unwanted health consequences.
So the optimal source for antioxidants is diet, not supplements.
In short, we should stop taking pills and eat more fruits and vegetables.
Do Central Banks Have an Exit Strategy?
SINGAPORE – A year into the global financial crisis, several key central banks remain extraordinarily exposed to their countries’ shaky private financial sectors.
So far, the strategy of maintaining banking systems on feeding tubes of taxpayer-guaranteed short-term credit has made sense.
But eventually central banks must pull the plug. Otherwise they will end up in intensive care themselves as credit losses overwhelm their balance sheets.
The idea that the world’s largest economies are merely facing a short-term panic looks increasingly strained.
Instead, it is becoming apparent that, after a period of epic profits and growth, the financial industry now needs to undergo a period of consolidation and pruning.
Weak banks must be allowed to fail or merge (with ordinary depositors being paid off by government insurance funds), so that strong banks can emerge with renewed vigor.
If this is the right diagnosis of the “financial crisis,” then efforts to block a healthy and normal dynamic will ultimately only prolong and exacerbate the problem.
Not allowing the necessary consolidation is weakening credit markets, not strengthening them.
The United States Federal Reserve, the European Central Bank, and the Bank of England are particularly exposed.
Collectively, they have extended hundreds of billions of dollars in short-term loans to both traditional banks and complex, unregulated “investment banks.”
Many other central banks are nervously watching the situation, well aware that they may soon find themselves in the same position as the global economy continues to soften and default rates on all manner of debt continue to rise.
If central banks are faced with a massive hit to their balance sheets, it will not necessarily be the end of the world.
It has happened before – for example, during the 1990’s financial crises.
But history suggests that fixing a central bank’s balance sheet is never pleasant.
Faced with credit losses, a central bank can either dig its way out through inflation or await recapitalization by taxpayers.
Both solutions are extremely traumatic.
Raging inflation causes all kinds of distortions and inefficiencies.
(And don’t think central banks have ruled out the inflation tax.
In fact, inflation has spiked during the past year, conveniently facilitating a necessary correction in the real price of houses.)
Taxpayer bailouts, on the other hand, are seldom smooth and inevitably compromise central bank independence.
There is also a fairness issue.
The financial sector has produced extraordinary profits, particularly in the Anglophone countries.
And, while calculating the size of the financial sector is extremely difficult due to its opaqueness and complexity, official US statistics indicate that financial firms accounted for roughly one-third of American corporate profits in 2006.
Multi-million dollar bonuses on Wall Street and in the City of London have become routine, and financial firms have dominated donor lists for all the major political candidates in the 2008 US presidential election.
Why, then, should ordinary taxpayers foot the bill to bail out the financial industry?
Why not the auto and steel industries, or any of the other industries that have suffered downturns in recent years?
This argument is all the more forceful if central banks turn to the “inflation tax,” which falls disproportionately on the poor, who have less means to protect themselves from price increases that undermine the value of their savings.
British economist Willem Buiter has bluntly accused central banks and treasury officials of “regulatory capture” by the financial sector, particularly in the US.
This is a strong charge, especially given the huge uncertainties that central banks and treasury officials have been facing.
But if officials fail to adjust as the crisis unfolds, then Buiter’s charge may seem less extreme.
So how do central banks dig their way out of this deep hole?
The key is to sharpen the distinction between financial firms whose distress is truly panic driven (and therefore temporary), and problems that are more fundamental.
After a period of massive expansion during which the financial services sector nearly doubled in size, some retrenchment is natural and normal.
The sub-prime mortgage loan problem triggered a drop in some financial institutions’ key lines of business, particularly their opaque but extremely profitable derivatives businesses. Some shrinkage of the industry is inevitable.
Central banks have to start fostering consolidation, rather than indiscriminately extending credit.
In principle, the financial industry can become smaller by having each institution contract proportionately, say, by 15%.
But this is not the typical pattern in any industry.
If sovereign wealth funds want to enter and keep capital-starved firms afloat in hopes of a big rebound, they should be allowed to do so.
But they should realize that large foreign shareholders in financial firms may be far less effective than locals in coaxing central banks to extend massive, no-strings-attached credit lines.
It is time to take stock of the crisis and recognize that the financial industry is undergoing fundamental shifts, and is not simply the victim of speculative panic against housing loans. Certainly better regulation is part of the answer over the longer run, but it is no panacea.
Today’s financial firm equity and bond holders must bear the main cost, or there is little hope they will behave more responsibly in the future.
Do Economic Sanctions Work?
CAMBRIDGE – With Western economic sanctions against Russia, Iran, and Cuba in the news, it is a good time to take stock of the debate on just how well such measures work.
The short answer is that economic sanctions usually have only modest effects, even if they can be an essential means of demonstrating moral resolve.
If economic sanctions are to play an increasingly important role in twenty-first-century statecraft, it might be worth reflecting on how they have worked in the past.
As Gary Hufbauer and Jeffrey Schott note in their classic book on the topic, the history of economic sanctions goes back at least to 432 BC, when the Greek statesman and general Pericles issued the so-called “Megarian decree” in response to the abduction of three Aspasian&nbsp;women.
In modern times, the United States has employed economic sanctions in pursuit of diverse goals, from the Carter administration’s efforts in the 1970s to promote human rights, to attempts to impede nuclear proliferation in the 1980s.
During the Cold War, the US also employed economic sanctions to destabilize unfriendly governments, especially in Latin America, though they do not appear to have played more than a minor role, even where regime change eventually occurred.
Economic sanctions on Serbia in the early 1990s did not deter the invasion of Bosnia.
Certainly, the US government’s symbolic punishment of chess legend Bobby Fischer (for playing a match in Belgrade that violated sanctions) provided no relief for the besieged city of Sarajevo.
The old Soviet Union played the sanctions game as well – for example, against China, Albania, and Yugoslavia.
It, too, did not have much success, except perhaps in the case of Finland, which ultimately bent its policies to gain relief from sanctions imposed in 1958.
Most modern cases of sanctions pit a large country against a small country, though there are a few cases involving countries of equal size, such as the long quarrel, from the 1950s to the 1980s, between the United Kingdom and Spain over Gibraltar.
As Hufbauer and Schott, among others, have illustrated, the effects of sanctions are often fairly disappointing – so much so that many scholars have concluded that such measures often are imposed so that governments can appear to domestic audiences to be “doing something.”
Certainly, severe US sanctions on Cuba failed to bring the Castro regime to heel; indeed, President Barack Obama’s move to reestablish full diplomatic relations may have more effect.
But sometimes sanctions do work.
The strong international consensus to impose sanctions on South Africa in the 1980s eventually helped bring an end to apartheid.
Likewise, sanctions have helped bring Iran to the bargaining table, though it is not clear how long its government will be willing to defer its nuclear ambitions.
And the Russian economy today is in big trouble, though this might be described as a lucky punch, with the real damage being done by an epic collapse in global oil prices.
Some in Russia, where the price collapse has hit government revenues hard, claim that the US and Saudi Arabia are conspiring to bring Russia to its knees.
But that gives US strategists far too much credit.
A more likely culprit for the steep price decline is a combination of the shale-energy revolution in the US and the sharp slowdown in Chinese growth.
China’s slowdown has helped precipitate a broad-based fall in commodity prices that is having a devastating effect on countries like Argentina and Brazil, with which the US authorities presumably have little quarrel.
One of the major reasons economic sanctions have fallen short in the past is that not all countries have complied.
Indeed, significant differences of domestic opinion in the imposing country often undermine sanctions as well.
Moreover, countries imposing sanctions must be prepared to address their own vulnerabilities.
North Korea is perhaps the most noxious regime in the world today, and one can only hope that its cruel government collapses sometime soon.
The Kim regime has clung to power despite being subject to severe economic sanctions, perhaps because China, fearing a united Korea on its border, has not yet been willing to withdraw its support.
Yet it is easy to forget that there are different viewpoints in international relations, even in the most extreme situations.
Though North Korea’s alleged attack on Sony Pictures’ computers has been rightly condemned, it must be admitted that from the perspective of the North Korean elite, their country simply applied economic retaliation much like anyone else does.
Sony Pictures had produced a satire poking fun at North Korea’s leader, the “Young General” Kim Jong-un.
This was an intolerable affront, to which the elite responded with economic sabotage rather than military action.
Let us also not forget that Russia, too, has deployed cyber attacks in the service of foreign-policy goals.
Indeed, Russia has far more formidable hackers than North Korea (though much of the top talent currently is employed in mafia rings, rather than in strategic operations).
In a world where nuclear proliferation has rendered global conventional war unthinkable, economic sanctions and sabotage are likely to play a large role in twenty-first-century geopolitics.
Rather than preventing conflict, Pericles’s sanctions in ancient Greece ultimately helped to trigger the Peloponnesian War.
One can only hope that in this century, wiser heads will prevail, and that economic sanctions lead to bargaining, not violence.
Does Austerity Promote Economic Growth?
NEW HAVEN – In his classic Fable of the Bees: or, Private Vices, Publick Benefits(1724), Bernard Mandeville, the Dutch-born British philosopher and satirist, described – in verse – a prosperous society (of bees) that suddenly chose to make a virtue of austerity, dropping all excess expenditure and extravagant consumption.
What then happened?
The Price of Land and Houses falls;
Mirac’lous Palaces, whose Walls,
Like those of Thebes, were rais’d by Play
Are to be let; . . . .
The building Trade is quite destroy’d
Artificers are not employ’d; . . .
Those, that remain’d, grown temp’rate strive
Not how to spend, but how to live . . .
That sounds a lot like what many advanced countries have been going through, after financial-crisis-induced austerity plans were launched, doesn’t it?
Is Mandeville a genuine prophet for our times?
Fable of the Bees developed a wide following, and generated substantial controversy, which continues to this day.
The austerity plans being adopted by governments in much of Europe and elsewhere around the world, and the curtailment of consumption expenditure by individuals as well, threaten to produce a global recession.
But how do we know if Mandeville is right about austerity?
His research method – a long poem about his theory – is hardly convincing to modern ears.
Harvard economist Alberto Alesina recently summarized evidence concerning whether government deficit reduction – that is, expenditure cuts and/or tax increases – always induces such negative effects: “The answer to this question is a loud no.”
Sometimes, just maybe, the austerity program boosts confidence in such a way as to ignite a recovery.
We have to examine the issue with some care, understanding that the issue that Mandeville raised is really a statistical one: the outcome of government deficit reduction is never entirely predictable, so we can ask only how likely such a plan is to succeed in restoring economic prosperity.
And the biggest problem here is accounting for possible reverse causality.
For example, if evidence of future economic strength makes a government worry about economic overheating and inflation, it might try to cool domestic demand by raising taxes and lowering government spending.
If the government is only partly successful in preventing economic overheating, it might nonetheless appear to casual observers that austerity actually strengthened the economy.
Likewise, the government’s deficit might fall not because of austerity, but because the stock market’s anticipation of economic growth fuels higher revenues from capital-gains tax.
Once again, we would see what might appear, from looking at the government deficit, to be an austerity-to-prosperity scenario.
Jaime Guajardo, Daniel Leigh, and Andrea Pescatori of the International Monetary Fund recently studied austerity plans implemented by governments in 17 countries in the last 30 years.
But their approach differed from that of previous researchers.
They focused on the government’s intent, and looked at what officials actually said, not just at the pattern of public debt.
They read budget speeches, reviewed stability programs, and even watched news interviews with government figures.
They identified as austerity plans only those cases in which governments imposed tax hikes or spending cuts because they viewed it as a prudent policy with potential long-term benefits, not because they were responding to the short-term economic outlook and sought to reduce the risk of overheating.
Their analysis found a clear tendency for austerity programs to reduce consumption expenditure and weaken the economy.
That conclusion, if valid, stands as a stern warning to policymakers today.
But critics, such as Valerie Ramey of the University of California at San Diego, think that Guajardo, Leigh, and Pescatori have not completely proven their case.
It is possible, Ramey argues, that their results could reflect a different sort of reverse causality if governments are more likely to respond to high public-debt levels with austerity programs when they have reason to believe that economic conditions could make the debt burden especially worrisome.
That may seem unlikely – one would think that a bad economic outlook would incline governments to postpone, rather than accelerate, austerity measures.
And, in response to her comments, the authors did try to account for the severity of the government’s debt problem as perceived by the markets at the time that the plans were implemented, finding very similar results.
But Ramey could be right.
One would then find that government spending cuts or tax hikes tend to be followed by bad economic times, even if the causality runs the other way.
Ultimately, the problem of judging austerity programs is that economists cannot run fully controlled experiments.
When researchers tested Prozac on depressed patients, they divided their subjects randomly into control and experimental groups, and conducted many trials.
We cannot do that with national debt.
So do we have to conclude that historical analysis teaches us no useful lessons?
Do we have to return to the abstract reasoning of Mandeville and some of his successors, including John Maynard Keynes, who thought that there were reasons to expect that austerity would produce depressions?
There is no abstract theory that can predict how people will react to an austerity program.
We have no alternative but to look at the historical evidence.
And the evidence of Guajardo and his co-authors does show that deliberate government decisions to adopt austerity programs have tended to be followed by hard times.
Policymakers cannot afford to wait decades for economists to figure out a definitive answer, which may never be found at all.
But, judging by the evidence that we have, austerity programs in Europe and elsewhere appear likely to yield disappointing results.
Does Capitalism Have a Future?
NEW YORK – As 2008 came to a close, many Europeans began to speak about the end of capitalism.
They forget that capitalism in Europe had already once given way – often violently – to statism and corporatism in the 1930’s, to be revived in only a handful of countries in the 1980’s.
In view of the current financial crisis – the latest in a series that capitalism has seen – it is fair to ask whether the benefits of capitalism, if any, still exceed the costs.
Although Marx confessed considerable admiration for capitalism, it is now suggested that the good in it – entrepreneurship – can be genetically engineered in another sort of system without the destructiveness to which capitalism is predisposed.
Capitalism was first admired for being “progressive,” as Marx put it.
When productivity rose, it did not fall back again.
In fact, with the emergence, piece by piece, of finance capitalism, circa 1820, productivity took off in one European country after another – Great Britain, Belgium, France, Germany, and Austria.
Productivity sped up even more – began rising even earlier – in the United States.
The paltry historical data available for analysis suggest that, around 1820 or so, wages (adjusted down for bouts of inflation in prior decades and up for deflation in subsequent decades) took off in a similar fashion.
Nowadays, there is a respectable body of opinion that questions whether growth in productivity beyond the towering levels seen today is of any great value compared to the fearsome costs that are taken as given in most discussion.
But, in my thinking and empirical research, this fashionable hypothesis cannot stand.
First of all, Europeans think of capitalism as the “free market” – laissez-faire.
But capitalism means openness to bottom-up innovation.
Capitalism does not per se threaten anyone’s welfare benefits.
The fashionable hypothesis denies even the most obvious benefit.
I concede that the salaries of my overpaid friends are high enough to meet virtually all of their foreseeable needs.
Even my own salary suffices to meet my own.
But increases in productivity almost always lead to increases in pay across the economy.
And increases in the general pay level have a social value that is of huge benefit.
These increases make it possible for more people to shun dull, tedious, or onerous work in favor of stimulating, engaging, and mind-expanding work.
The “dark Satanic mills” of Marx’s era are gone thanks to greater productivity, not greater state regulation.
The other difficulty with that fashionable hypothesis is that most of the alleged costs are illusory or trumped up.
The idea that a well-functioning capitalism makes for a weak job market, leading to higher unemployment and lower participation in the labor force, cannot be substantiated.
On the contrary, the innovations stimulated and facilitated by capitalism create jobs – in new companies started to develop new ideas, in marketing, and in managements that must keep abreast of new organizations and tools.
The idea that ordinary people are anguished by the thought that other people have extraordinary wealth is also cultivated in fashionable circles without the presentation of any evidence.
Most people are practical enough to see that when, say, they have to go to the hospital for tests, what matters is whether the right kind of diagnostic machine is there for them, not whether there is a better machine for others somewhere else.
True, capitalism creates disruption and uncertainty. But we should not lose sight of the other side of that coin.
Capitalism is unique in stimulating entrepreneurs to dream up new commercial ideas and develop them for the market, and generating excitement for consumers in discovering the new.
Perhaps the greatest accomplishment of capitalism was in transforming the workplace from one of routine, and thus boredom, into one of change, mental stimulus, challenge, problem solving, exploration, and sometimes discovery.
True, the assembly line, a brain-numbing experience, was a feature of capitalism from the pin factor that Adam Smith wrote about in 1776 until Henry Ford’s giant plants in the 1920’s.
But communist Russia and socialist Europe could not afford to do without assembly lines, either.
And, thanks to productivity growth, an ever larger share of jobs lay outside factories as well as farms.
By the end of the nineteenth century, Europe, from Vienna and Berlin to Paris and London, was already celebrating the transformation of business life.
Of course, they saw that this excitement and engagement came at some cost in inconvenience and anxiety.
But the majority did not wish to return to the tranquility of the past.
Yet return they did, though not intentionally, when statist and corporatist changes in the institutions of the economy curbed innovation and ambition, with the result that the workplace in Europe became once again as stultifying as it had been in the past.
Today, sophisticated and well-meaning people suggest that we can revive entrepreneurship, but in a way that imbeds it in a new economy oriented toward social investment – to combat global warming, to develop energy savings, and so forth.
The trouble with that type of thinking, I believe, is that it will bureaucratize the economy, putting much of expenditure in government agencies and putting many companies on government contracts.
In itself, that may be no problem.
But it will be if it stifles the ability of individuals to create innovations for an open marketplace.
There was a natural experiment in the 1930’s that tested this thesis: the newly bureaucratized economies of Western Europe were heavily out-innovated by the relatively unbureaucratized US economy.
So, while 2008 was a year of challenge for the world economy, I am sure that those countries that value innovation are well advised to keep capitalism.
Does Clinton Deserve Credit for US Prosperity?
CAMBRIDGE: A pivotal question to be debated in this year’s US presidential election is whether American prosperity resulted from Clinton Administration policies or from deeper changes arising from new technology and globalization.
In short, should Bill Clinton or Bill Gates get the credit for America’s boom?
The economic successes of Clinton’s eight years are undoubted.
America enjoys its longest continuous economic expansion in history, now more than nine years old.
Economic growth averaged 3.6% per year between 1992-1999, far above the 2.9% per year growth between1980-92.
15 million jobs were created between 1992 and 1999; the unemployment rate, now 4%, is the lowest in 30 years.
The stock market’s performance is legendary, with capital gains totaling 7 trillion dollars since the start of 1996.
No government, of course, could be fully responsible for such large trends.
Still, the Clinton Administration was more than a bystander.
For President Clinton took a favorable inheritance B the results of the policies of previous governments, as well as global trends and innovations in science and technology B and skillfully fashioned an economic governance well designed for a knowledge based economy.
His Administration deserves much credit, both for policies followed and mistakes avoided.
First the inheritance.
A good starting point was the end of the Cold War which enabled the US to reduce military spending by around 2.5% of GDP (comparing 1990 and 2000), a saving worth around $225 billion per year.
This helped Clinton reduce the budget deficit in a rather painless manner.
The second inheritance was a flexible, deregulated economy with fairly low marginal tax rates, a legacy of the Reagan-Bush era.
The third inheritance was low inflation.
When Clinton came to office there was no need for heroic stabilization policies.
The battle against high inflation was won ten years earlier.
So Clinton and the Federal Reserve Board under Alan Greenspan could pursue economic growth without worrying about the economy overheating.
The first distinct accomplishment of the Clinton Administration was to adopt some key mainstream choices of economic policymaking.
When Clinton came to office in 1993, he had to make several key choices:
1. promote free trade, in line with policies of the Reagan and Bush administrations, or turn more protectionist as his trade-union allies urged?
2. reduce the budget deficit, in line with mainstream economic thinking, or boost government spending, as many left-of-center economists were arguing?
In both cases, pressures from the Republicans as well as from centrist Democrats helped to pull the Clinton Administration onto the correct track: supporting free trade despite powerful protectionist allies in the Democratic Party; supporting budget deficit reduction instead of large fiscal spending programs.
Clinton Administration support for the North American Free Trade Agreement with Mexico, completion of the Uruguay Round on multilateral trade, and recent agreement to admit China into the World Trade Organization, are all accomplishments in support of global trade.
More recently, Clinton defended the economic mainstream against attack by conservative Republicans, who pushed for deep tax cuts that would undermine the fiscal surpluses of recent years.
These Conservatives also pressed for sharp cuts in government spending that would hurt the poor.
Clinton held the line against these excesses as well.
Clinton’s Administration has done much more, however, than defend the economy against ideological extremists.
It fashioned, bit by bit, a kind of “industrial policy” for the new Knowledge Economy.
Clinton understood earlier than most politicians, and economists as well, that US economic strength derived from a combination of basic science, technological innovation, and high-quality education.
His Administration therefore shaped a role for government that supports the generation and diffusion of knowledge in all spheres of knowledge creation.
First, America increased the level of government support for science, reaching a sum of around $85 billion in this year’s budget.
Government-supported research shaped scientific advances in information technology and biotechnology, two critical fields in which the US has the global scientific lead.
Second, Clinton policies fostered development and expansion of the internet as a core strategy of economic growth.
Clinton pushed for, and achieved, a period of tax holidays on electronic commerce.
His administration shaped the regulatory environment to achieve rapid adoption of internet-based activities and championed government programs to help get schools and libraries connected to the internet.
It even advocated liberalization of work permits for foreign workers skilled in internet technologies.
Third, Clinton pushed expansion of various programs to support higher education.
The share of US students going on to higher education after secondary school is now 67%, up 10% over the preceding decade.
The Administration recognized that higher education is the sine qua non for a successful high-technology economy.
The basic lessons of US success should be recognized: macroeconomic stability; budgetary prudence; global trade, competition and de-monopolization in telecommunications and finance; and an active industrial policy geared towards a knowledge-based economy, building upon science, research and development, information technology, and higher education.
All of this depends, as well, on continuing reduction of global tensions.
This is not to say that all is now right with US policymaking or that the path ahead is risk-free.
The run-up in stock market prices in recent years was partly a financial bubble, and there may be a price to pay for it.
Moreover, despite US economic successes at home, America has neglected its moral and practical responsibilities as an aid giver to poor countries.
This is a sad counterpoint to American successes at home.
Does “Curing” Cancer Kill Patients?
TAMPA – Patients and politicians increasingly demand a “cure” for cancer.
But controlling the disease may prove to be a better strategy than striving to cure it.
The success of antibiotics 50 years later seemed to validate Ehrlich’s idea. So influential have medicine’s triumphs over bacteria been that the “war on cancer” continues to be driven by the assumption that magic bullets will one day be found for tumor cells if the search is sufficiently clever and diligent.
Yet lessons learned in dealing with exotic species, combined with recent mathematical models of the evolutionary dynamics of tumors, indicate that eradicating most cancers may be impossible.
Trying to do so, moreover, could worsen the problem.
In 1854, the year Ehrlich was born, the diamondback moth was first observed in Illinois.
Within five decades, the moth had spread throughout North America.
It now infests the Americas, Europe, Asia, and Australia.
Attempts to eradicate it using chemicals worked only fleetingly.
In the late 1980’s, biologists found strains that were resistant to all known insecticides.
So farmers abandoned their efforts to eliminate the moth.
Instead, most now apply insecticides only when infestation exceeds some threshold level, with the goal of producing a sustainable and satisfactory crop.
Under the banner of “integrated pest management,” hundreds of invasive species are now successfully controlled by strategies that restrict the population growth of pests but do not attempt to eradicate them
The ability of tumor cells to adapt to a wide range of environmental conditions, including toxic chemicals, is similar to the evolutionary capacities demonstrated by crop pests and other invasive species.
As in the case of the Diamondback moth, successful eradication of disseminated cancer cells is rare.
But despite the paucity of success, the typical goal in cancer therapy remains similar to that of antimicrobial treatments – killing as many tumor cells as possible under the assumption that this will, at best, cure the disease and, at worst, keep the patient alive for as long as possible.
Some types of cancer – for example, Hodgkin’s lymphoma, testicular cancer, and acute myeloid leukemia – can be consistently cured using aggressive chemotherapy.
But these malignant cells seem to be particularly responsive to “treatment.”
Just as invasive species adapt to pesticides, most cancer cells adapt to therapies.
Indeed, the parallels between cancerous cells and invasive species suggest that the principles for successful cancer therapy might be found not in the magic bullets of microbiology but in the evolutionary dynamics of applied ecology.
Recent research suggests that efforts to eliminate cancers may actually hasten the emergence of resistance and tumor recurrence, thus reducing a patient’s chances of survival.
The reason arises from a component of tumor biology not ordinarily investigated: the cost of resistance to treatment.
Cancer cells pay a price when they evolve resistance to chemotherapy.
For example, to cope with toxic drugs, a cancer cell may increase its rate of DNA repair, or actively pump the drug out across the cell membrane. In targeted therapies, in which drugs interfere with the molecular signaling needed for proliferation and survival, a cell might adapt by activating or following alternative pathways.
All these strategies use up energy that would otherwise be available for invasion into non-cancerous tissues or proliferation, and so reduce a cell’s fitness.
The more complex and costly the mechanisms used, the less fit the resistant population will be.
That cancer cells pay a price for resistance is supported by several observations. Cells in laboratory cultures that are resistant to chemotherapies typically lose their resistance when the chemicals are removed.
Lung cancer cells that are resistant to the chemotherapy gemcitabine are less proliferative, invasive, and motile than their drug-sensitive counterparts.
Although resistant forms are commonly found in tumors that haven’t yet been exposed to treatment, they generally occur in small numbers.
This suggests that resistant cells are not so unfit that drug-sensitive cells completely out-competed them, but that they struggle to proliferate when both types are present.
Our models show that in the absence of therapy, cancer cells that haven’t evolved resistance will proliferate at the expense of the less-fit resistant cells.
When a large number of sensitive cells are killed, say, by aggressive therapies, resistant types can proliferate unconstrained. This means that high doses of chemotherapy might actually increase the likelihood of a tumor becoming unresponsive to further therapy.
So, just as judicious use of pesticides can control invasive species, a therapeutic strategy designed to maintain a stable, tolerable tumor volume could improve a patient’s prospects for survival by allowing sensitive cells to suppress the growth of resistant ones.
To test this idea, we treated a human ovarian cancer, grown in mice, with conventional high-dose chemotherapy.
The cancer rapidly regressed but then recurred and killed the mice.
Yet when we treated the mice with a drug dose continuously adjusted to maintain a stable tumor volume, the animals, though not cured, survived for a prolonged period of time.
Designing therapies to sustain a stable tumor mass rather than eradicate all cancer cells will require a strategy that looks beyond the immediate cytotoxic effects of any one treatment.
Researchers will need to establish the mechanisms by which cancer cells achieve resistance and what it costs them.
They will need to understand the evolutionary dynamics of resistant populations, and design strategies to suppress or exploit the adapted characteristics.
Of course, cancer researchers should not abandon their search for ever-more-effective cancer therapies, even for cures.
But it may be time to temper our quest for magic bullets and recognize the cold reality of Darwin’s evolutionary dynamics. Medicine’s goal of a glorious victory over cancer may need to yield to our recognizing that an uneasy stalemate may be the best that can be achieved.
Does Debt Matter?
LONDON – Europe is now haunted by the specter of debt.
All European leaders quail before it.
To exorcise the demon, they are putting their economies through the wringer.
It doesn’t seem to be helping.
Their economies are still tumbling, and the debt continues to grow.
The credit ratings agency Standard &amp;
Poor’s has just downgraded the sovereign-debt ratings of nine eurozone countries, including France.
The United Kingdom is likely to follow.
To anyone not blinded by folly, the explanation for this mass downgrade is obvious.
If you deliberately aim to shrink your GDP, your debt-to-GDP ratio is bound to grow.
The only way to cut your debt (other than by default) is to get your economy to grow.
Fear of debt is rooted in human nature; so the extinction of it as a policy aim seems right to the average citizen.
Everyone knows what financial debt means: money owed, often borrowed.
To be in debt can produce anxiety if one is uncertain whether, when the time comes, one will be able to repay what one owes.
This anxiety is readily transferred to national debt – the debt owed by a government to its creditors.
How, people ask, will governments repay all of the hundreds of billions of dollars that they owe?
As British Prime Minister David Cameron put it: “Government debt is the same as credit-card debt; it’s got to be paid back.”
The next step readily follows: in order to repay, or at least reduce, the national debt, the government must eliminate its budget deficit, because the excess of spending over revenue continually adds to the national debt.
Indeed, if the government fails to act, the national debt will become, in today’s jargon, “unsustainable.”
Again, an analogy with household debt readily suggests itself.
My death does not extinguish my debt, reasons the sensible citizen.
My creditors will have the first claim on my estate – everything that I wanted to leave to my children.
Similarly, a debt left unpaid too long by a government is a burden on future generations: I may enjoy the benefits of government extravagance, but my children will have to foot the bill.
That is why deficit reduction is at the center of most governments’ fiscal policy today.
A government with a “credible” plan for “fiscal consolidation” supposedly is less likely to default on its debt, or leave it for the future to pay.
This will, it is thought, enable the government to borrow money more cheaply than it would otherwise be able to do, in turn lowering interest rates for private borrowers, which should boost economic activity.
So fiscal consolidation is the royal road to economic recovery.
This, the official doctrine of most developed countries today, contains at least five major fallacies, which pass largely unnoticed, because the narrative is so plausible.
First, governments, unlike private individuals, do not have to “repay” their debts.
A government of a country with its own central bank and its own currency can simply continue to borrow by printing the money which is lent to it.
This is not true of countries in the eurozone. But their governments do not have to repay their debts, either.
If their (foreign) creditors put too much pressure on them, they simply default.
Default is bad. But life after default goes on much as before.
Second, deliberately cutting the deficit is not the best way for a government to balance its books.
Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend.
This will make it harder, not easier, for it to cut the deficit.
The British government already must borrow £112 billion ($172 billion) more than it had planned when it announced its deficit-reduction plan in June 2010.
Third, the national debt is not a net burden on future generations.
Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders.
This may have disagreeable distributional consequences.
But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built.
Future generations will be worse off, having been deprived of assets that they might otherwise have had.
Fourth, there is no connection between the size of national debt and the price that a government must pay to finance it.
The interest rates that Japan, the United States, the UK, and Germany pay on their national debt are equally low, despite vast differences in their debt levels and fiscal policies.
Finally, low borrowing costs for governments do not automatically reduce the cost of capital for the private sector.
After all, corporate borrowers do not borrow at the “risk-free” yield of, say, US Treasury bonds, and evidence shows that monetary expansion can push down the interest rate on government debt, but have hardly any effect on new bank lending to firms or households.
In fact, the causality is the reverse: the reason why government interest rates in the UK and elsewhere are so low is that interest rates for private-sector loans are so high.
As with “the specter of Communism” that haunted Europe in Karl Marx’s famous manifesto, so today “[a]ll the powers of old Europe have entered into a holy alliance to exorcise” the specter of national debt.
But statesmen who aim to liquidate the debt should recall another famous specter – the specter of revolution.
Does Growth Have a Future?
MILAN – What can we expect as the world’s economy emerges from its most serious downturn in almost a century?
The short answer is a “new normal,” with slower growth, a de-risked and more stable core financial system, and a set of additional challenges (energy, climate, and demographic imbalances, to name a few) with varying time horizons that will test our collective capacity to improve management and oversight of the global economy.
Lower growth is the best guess for the medium term.
It seems most likely, but no one really knows.
The financial crisis, morphing quickly into a global economic downturn, resulted not just from a failure to react to growing instability, risk, and imbalance, but also from a widespread pre-crisis inability to ”see” the rising systemic risk.
These defining characteristics will condition the responses and the results in coming years.
There are countervailing forces.
The high-growth countries (China and India) are large and getting larger relative to the rest.
That alone will tend to elevate global growth compared to the world where industrial countries, and the US in particular, were in the growth driving seat.
The current crisis has come to be called a “balance-sheet recession” of global scope and tremendous depth and destructive power because of its origins in the balance sheets of the financial and household sectors.
Extreme balance-sheet destruction is what made it distinctive. In the future, central banks and regulators will not be able to afford a narrow focus on (goods and services) inflation, growth, and employment (the real economy) while letting the balance-sheet side fend for itself.
Somewhere in the system, accountability for stability and sustainability in terms of asset valuation, leverage, and balance sheets will need to be assigned and taken seriously.
Financial re-regulation should and will emphasize capital, reserve, and margin requirements; limiting systemic risk buildup by constraining leverage; eliminating fragmented and incomplete regulatory coverage and regulatory arbitrage (a huge challenge internationally); and a focus on transparency.
Isolating and further constraining a portion of the banking system, so that the channels of credit intermediation are less prone to complete and simultaneous breakdown, also seems likely.
Relative to the recent past, the cost of capital will increase, debt will be more expensive and less ubiquitous, and risk spreads will not return to pre-crisis compressed levels.
Assets bubbles will not disappear, but they will be less likely to be turbocharged by leverage.
American consumers will save more and spend less, abandoning the pattern of the last few years.
The large hole (on the order of $700 billion or more) in global aggregate demand will have to be filled over time by a compensating increase in consumption in surplus economies, such as China and Japan.
The longer this takes, the greater the incentives at the national level to capture a share of global demand via protectionist measures.
The recent increase in protectionist measures is an understandable political price for a range of stimulus packages in advanced and developing countries.
But such measures may increase – and will be harder to phase out over time – in the context of a shortfall in aggregate demand.
This is the forward-looking version of the global imbalance issue.
Its resolution via coordinated policy action (or a failure to resolve it through such action) will have a huge impact (for good or ill) on the multinational incentive structure surrounding the global economy – and hence on its likely growth.
Responsibility for overseeing the global economy is passing rapidly from the G-7/8 to the G-20, as it should.
The latter accounts for 90% of global GDP and two-thirds of the world’s population, so this shift is highly desirable – indeed, essential.
But there is a risk that the interests of the remaining one-third of the world’s people (and the majority of the small countries) will not be adequately represented as the international architecture for managing the global economy evolves.
In the current crisis, a substantial fraction of countries outside the G-20 are essentially defenseless: small relatively poor economies, no fiscal capacity for stimulus, and inadequate reserves to offset the capital outflows that occurred to shore up damaged balance sheets in advanced markets.
Within the G-20 countries, there are mechanisms that attend to the interests of the most vulnerable citizens.
In the global economy, the most vulnerable are whole countries.
Inattention to their interests is not just a moral issue, but a potentially explosive social and economic one.
As a result, the world’s international economic institutions will need to be strengthened in terms of governance and resources so that they can act as circuit-breakers in the event of future financial and economic turbulence.
Entering the crisis, the International Monetary Fund was underfunded, and it continues to lack credibility and trust in certain systemically important parts of the world.
It is now in the process of being better funded, but we are eight months into a crisis in which international capital flows became volatile and were driven largely by emergency responses rather than underlying economic fundamentals.
Thus, there remains the central question of trust and confidence in the system, which have been badly damaged and will take time to rebuild.
At the moment, the majority view in most countries is that the financial system failed badly, but that the incentives and dynamics of the broader market-based system in a relatively open global architecture remain the best avenues for wealth creation, poverty reduction, and the expansion of opportunity.
There are, of course, dissidents, and the balance could shift quickly.
It is not inconceivable that the baby will be thrown out with the bath water.
There is no magic bullet for today’s crisis.
Pragmatic, steady progress at the national and international levels in improving the regulatory architecture and increasing our collective ability to avoid non-cooperative behavior and suboptimal equilibria, is the best course to follow.
It is the course we are on.
But for now, it is a journey without a clearly defined, widely accepted endpoint.
Does Inequality Kill?
Does Islam Threaten Democracy?
Is Islam incompatible with multicultural democracy?
Many people point to the fact that few Muslim societies are democratic and conclude that Islam must be inherently undemocratic.
They point to Muslim rhetoric suffused with hatred of the West, and deduce that Muslims cannot be good citizens of Western democracies.
Britain, with around 1.6 million Muslims in a population of 58.7 million, provides an excellent place to test these notions.
Three quarters of British Muslims come from the Indian subcontinent, mainly rural Pakistan and Bangladesh.
This is important because some of their difficulties in settlement arise not from religion but from unfamiliarity with modern life.
So far, Britain has seen only four Muslim riots, compared to about eight race-related riots by Afro-Caribbeans.
One concerned Salman Rushdie's novel The Satanic Verses ; the others were triggered by police insensitivity and white racist marches.
With the qualified exception of the first, all riots were local, relatively minor, and lasted barely a day or two.
So Britain's Muslims have presented no major problems of law and order.
But Muslims' presence in British society has presented other challenges.
One is a ``clash of practices,'' including demands for Halal meat for Muslim schoolchildren, Muslim dress, prayer time, female circumcision, polygamy, and arranged marriages.
Female circumcision and polygamy are banned, and Muslims accept this.
Muslims also generally respect ``Western values'' such as equality, freedom of expression, tolerance, peaceful resolution of differences, and respect for majority decisions.
Indeed, equality among races is an important Muslim value and practice.
Equality of the sexes poses the gravest difficulties--particularly because Muslim girls in Britain increasingly assert it.
Similarly, after some theological debate, British Muslims have widely accepted that they owe unreserved loyalty to Britain.
However there is some ambiguity about what they should do when the claims of the state clash with those of the umma (the worldwide community of Islam).
For example, Muslims objected to the 1991 war against Iraq, but did not mount public protests.
The government urged the country to respect Muslims' ``understandable sympathies for their fellow-religionists,'' and tensions were avoided.
A small number of young Muslims later fought with the Taliban.
But most British Muslims condemned them, insisting on loyalty to Britain.
Most Muslims also approved when the police raided and confiscated weapons at the Finsbury Park mosque in London, whose Imam had long preached hatred of the West and support for terrorists.
Moreover, Muslims eagerly participate in public affairs, voting at a rate not much different from the rest of the population.
There are 150 local Muslim councillors and eight mayors, slightly fewer than other ethnic minorities, but not alarmingly so.
There are four Muslims in the House of Lords and three in the House of Commons, more than for some other ethnic minorities.
Indeed, in formal and informal ways, Islam is increasingly interpreted in a manner that brings it closer to the central values of British democracy.
A distinctively British brand of Islam is beginning to emerge, just as France, Germany, the Netherlands, and Spain are producing their own forms of Islam.
``British'' Islam obviously clashes with some aspects of the Islam with which immigrants arrived.
But religion does not operate in a vacuum.
Its influence is mediated by many other factors.
When Muslims find themselves living in democracies, they adjust.
Political survival is one reason: when in a minority, the option of pressing for an Islamic state, with all its undemocratic potential is closed.
Others welcome the opportunity in a democracy to pursue legitimate interests, and even to protest.
The main problem for Muslims is not democracy, but coping with a multicultural society.
Muslims are convinced of the absolute superiority of Islam, which is reflected in the constant invocation and desperate desire to revive past glory, as well as a positive duty to convert followers of other religions.
They may marry non-Muslims, but do not allow others to marry their women, and expect those marrying within Islam to convert to it.
This cannot be attributed to the current widespread feeling among Muslims that their identity is under threat.
Even in the self-confident Ottoman Empire, where Jews and Christians enjoyed considerable tolerance, followers of these religions were second-class citizens.
While free to convert to Islam, they were forbidden to convert Muslims or marry their women.
Muslim attitudes towards multiculturalism are consequently one-sided.
They welcome it because it gives them the freedom to retain their religious identity and to familiarize others with their beliefs.
But they resent it because it denies their superiority and exposes them and their children to other religions and secular cultures.
Islam and Europe have long shaped one another's cultural identity.
Each has been the other's ``other,'' and their sometimes friendly, sometimes hostile, relations have bonded them more deeply than either realizes.
But with the exception of Spain and parts of Eastern Europe, they have until very recently interacted at a distance and outside Europe's boundaries.
They now need to find new ways of coexisting and cultivating civic amity.
Britain's experience shows that there are strong reasons for optimism.
Does Legalizing Prostitution Work?
AMSTERDAM – Prostitution is virtually the only part of the personal services industry in the Netherlands that works.
One can’t get a manicure in Amsterdam without booking an appointment two weeks in advance, but men can buy sex anytime – and at an attractive price.
The legalization of prostitution in October 2000 merely codified a long-standing Dutch tradition of tolerance towards buying and selling sex.
But is legalization the right approach?
Even in the Netherlands, women and girls who sell their bodies are routinely threatened, beaten, raped, and terrorized by pimps and customers.
In a recent criminal trial, two German-Turkish brothers stood accused of forcing more than 100 women to work in Amsterdam’s red-light district ( De Wallen ).
According to the attorney who represented one of the victims, most of these women come from families marred by incest, alcohol abuse, and parental suicide.
Or they come from countries in Eastern Europe or Southeast Asia and have fallen victim to human trafficking, lured by decent job offers or simply sold by their parents.
These women are Amsterdam’s leading tourist attraction (followed by the coffee shops that sell marijuana).
But an estimated 50-90% of them are actually sex slaves, raped on a daily basis with police idly standing by.
It is incomprehensible that their clients are not prosecuted for rape, but Dutch politicians argue that it cannot be established whether or not a prostitute works voluntarily.
Appalled by their daily routine, police officers from the Amsterdam vice squad have asked to be transferred to other departments.
Only this year, the city administration has started to close down some brothels because of their ties to criminal organizations.
According to a study published in the American Journal of Epidemiology , the average age of death of prostitutes is 34.
In the United States, the rate at which prostitutes are killed in the workplace is 51 times that of the next most dangerous occupation for women, working in a liquor store.
Other studies show that nine out of ten prostitutes urgently want to escape the job.
Almost half have attempted suicide at least once.
In 1999, the Swedish government decriminalized the sale of sex, but made it an offense to pimp or to buy sex.
Under Sweden’s so-called “Sex Purchase Law,” paying for sex is punishable by fines or up to six months in prison, plus the humiliation of public exposure.
According to the Swedish authorities, the number of prostitutes in Sweden has dropped 40% as a result.
Human trafficking rings tend to avoid Sweden, because business has gone sour.
Norway, a country that has a reputation to lose when it comes to women’s rights, carefully compared the Swedish and Dutch models and concluded that Sweden’s was the one to follow.
It has now changed its legislation accordingly.
The success of the Swedish approach is not so surprising.
According to a study in California, most men who bought sex would be deterred by the risk of public exposure.
For example, 79% said that they would be deterred if there was a chance that their families would be notified.
And a whopping 87% said that they would be deterred by the threat that the police might publish their photographs or names in the local newspaper.
Most of these men showed pathological behavior towards women.
One in five admitted to having raped a woman, while four out of five said that going to prostitutes was an addiction.
Prostitution is often dubbed “the oldest profession.”
But this is merely a way of justifying the exploitation of mostly vulnerable women (there is also a much smaller number of male prostitutes in the Netherlands, but they are not pimped out like female prostitutes).
It takes leadership and a vision of true gender equality to put an end to prostitution.
The Swedish practice of naming and shaming is quite un-Dutch.
But, for some men, part of the pleasure of buying sex may be the humiliation conferred on the woman involved.
For others, like former New York Governor Eliot Spitzer, the promise of discretion and anonymity may be the most appealing aspect of buying sex.
In any case, pillorying the clients is both a just punishment and an effective deterrent.
Does the UN Still Matter?
With 192 members and a mandate that covers everything from security to refugees to public health, the United Nations is the world’s only global organization.
But polls in the United States show that two-thirds of Americans think the UN is doing a poor job, and many believe it was tarnished by corruption during the Iraq oil-for-food program under Saddam Hussein.
Many also blame the UN for failing to solve the Middle East’s myriad problems.
But such views reflect a misunderstanding of the UN’s nature.
The UN is more an instrument of its member states than an independent actor in world politics.
True, UN Secretary General Ban Ki Moon can make speeches, convene meetings, and propose actions, but his role is more secretary than general.
Sometimes likened to a “secular Pope,” the UN Secretary General can wield the soft power of persuasion but little hard economic or military power.
What hard power the UN has must be begged and borrowed from the member states.
And when they cannot agree on a course of action, it is difficult for the organization to operate.
As one wag has put it, “We have met the UN and it is us!” When blame is assigned, much of it belongs to the members.
Consider the oil for food program, which was designed by member states to provide relief to Iraqis hurt by sanctions against Saddam’s regime.
The secretariat did an inadequate job of monitoring the program and some corruption was involved.
But the much larger sums that Saddam diverted for his own purposes reflected how the member governments designed the program, and they chose to turn a blind eye to the abuse.
Yet the program’s problems are portrayed in the press as “the UN’s fault.
The cost of the entire UN system is about $20 billion, or less than the annual bonuses paid out in a good year on Wall Street.
Of that sum, the secretariat in New York accounts for a mere 10%.
Some universities have larger budgets.
Another $7 billion supports UN peacekeeping forces in places like the Democratic Republic of Congo (DRC), Lebanon, Haiti, and the Balkans.
The rest – more than half – is spent by the UN’s specialized agencies, which are located around the world and often play an important role in managing global trade, development, health, and humanitarian assistance.
For example, the UN High Commission for Refugees helps to alleviate the problems of displaced persons, the World Food Program provides assistance to malnourished children, and the World Health Organization supports the public health information systems that are crucial for dealing with threats from pandemics like avian flu.
The UN does not have the resources to solve the problems in new areas like AIDS or global climate change, but it can play an important convening role in galvanizing the actions of governments.
Even in the area of security, the UN retains an important role.
The original 1945 concept of collective security, by which states would band together to deter and punish aggressors, failed because the Soviet Union and the West were at loggerheads during the Cold War.
For a brief moment after a broad coalition of countries acted together to force Saddam Hussein out of Kuwait in 1991, it looked like the original concept of collective security would become “a new world order.”
Such hopes were short-lived.
Consensus within the UN proved unachievable on both Kosovo in 1999 and Iraq in 2003.
Skeptics concluded that the UN had become irrelevant for security questions.
Yet in 2006, when Israel and Hezbollah fought to a stalemate in Lebanon, states were only too happy to turn to a UN peacekeeping force.
Ironically, peacekeeping was not specified in the original charter.
It was invented by the second Secretary-General, Dag Hammarskjold, and Canadian Foreign Minister Lester Pearson after Britain and France invaded Egypt in the Suez crisis of 1956.
Since then, UN peacekeeping forces have been deployed more than 60 times.
There are now roughly 100,000 troops from various countries wearing UN blue helmets around the world.
Peacekeeping has had its ups and downs.
Bosnia and Rwanda were failures in the 1990’s, and then Secretary General Kofi Annan proposed reforms to deal with genocide and mass killings.
In September 2005, the states in the UN General Assembly accepted the existence of a “responsibility to protect” vulnerable peoples.
In other words, governments could no longer treat their citizens however they wanted.
A new Peace-building Commission was also created to coordinate actions that could help prevent a recurrence of genocidal acts.
In East Timor, for example, the UN proved vital in the transition to independence, and it is now working out plans for the governments of Burundi and Sierra Leone.
In the DRC, peacekeeping forces have not been able to curb all violence, but they have helped to save lives.
The current test case is the situation in Sudan’s Darfur region, where diplomats are trying to establish a joint peacekeeping force under the UN and the African Union.
In the poisonous political atmosphere that has bedeviled the UN after the Iraq War, widespread disillusionment is not surprising.
Ban Ki Moon has a tough job.
But, rather than calling the UN into question, states are likely to find that they need such a global instrument, with its unique convening and legitimizing powers.
While the UN system is far from perfect, the world would be a poorer and more disorderly place without it.
Dog Days For The Super Dollar
CAMBRIDGE &#45;&#45;
Is the United States’ position as the world’s dominant superpower at risk if the dollar loses its super-currency status?
Maybe not, but Americans will certainly find global hegemony a lot more expensive if the dollar falls off its perch.
Until now, Americans have been raking in profits by borrowing cheaply from pliant foreigners and investing the money in high-yield foreign equities, land, and bonds.
Counting capital gains, Americans have profited to the tune of $300 billion to $400 billion annually in many recent years – an amount roughly equivalent to the entire US military budget.
Former French president Valéry Giscard d’Estaing once famously complained about America’s “exorbitant privilege.”
D’Estaing was incensed that the US seemed to be able to flood the world with dollar currency and debt without ever seeming to pay a price in terms of higher inflation or interest rates.
At least half the $800 billion US currency supply is held abroad, mainly in the world’s underground economy.
But the really big bucks come from the fact that places like the People’s Bank of China and the Bank of Japan passively hold enormous volumes of low-interest US debt, while Americans romp around the world with venture capital, private equity, and investment banks, reaping huge gains.
It has been a great ride for the US, and America’s financial supremacy has certainly eased the burden of being a superpower.
But, between the sub-prime US mortgage crisis and the dollar’s ongoing decline, America’s exorbitant privilege now looks a bit shaky.
The dollar is already down 25% over the past five years, and if the US tips into recession – a 50/50 chance right now &#45;&#45; the dollar is going to drop a lot more.
Foreign investors are already reshuffling their portfolios, moving into euros, pounds, and even emerging-market currencies like the Brazilian real and the South African rand.
Controversial “sovereign wealth funds,” which invest funds for governments in the Middle East, Asia, Russia, and elsewhere, are just one manifestation of the search for alternatives to low-yielding, rapidly depreciating, dollar bonds.
Even without any portfolio shift, Americans shouldn’t expect their recent luck to hold up in the future.
If there is a global downturn, any region that is long stocks and short bonds is going to get burned.
Unfortunately, faced with the growing risks to the dollar’s status, American policymakers, rather than nursing the country’s premier export, seem to be more interested in milking it.
The US government itself has taken advantage by running vast deficits.
The Federal Reserve appears to care about exchange rates only to the extent that they affect growth and inflation, and right now the weak dollar is helping US exports.
Last but not least, US tax policy hardly encourages private-sector savings, especially giving the preferential tax treatment of real estate.
Professor Maury Obstfeld of the University of California at Berkeley and I have been warning for some time that without pro-active policy adjustments, the dollar is vulnerable to a sharp collapse, with many attendant risks.
Unfortunately, that scenario now seems to be unfolding.
This year alone, the dollar’s value has fallen by another 10% in purchasing power terms against America’s major trading partners, and it could fall at the same rate in 2008 – or faster if global investors decide to cut and run.
When the Chinese premier, OPEC heads of state, and the world’s richest supermodel all express concern about the dollar, you can be sure we are in for a bumpy ride.
The good news for Americans is that there is enormous inertia in the world trading and financial system.
It took many decades and two world wars before the British pound lost its super-currency status.
Nor is there any obvious successor to the dollar yet.
Indeed, the sub-prime crisis has made the European financial system look just as vulnerable as that of the US.
Likewise, while the Chinese Yuan might be king in 50 years, China’s moribund financial system will prevent it from being crowned anytime soon.
A huge share of world trade is denominated in dollars, even if some OPEC presidents, such as Venezuela’s Hugo Chávez, openly preach mutiny.
Central banks still hold more than 50% of their foreign exchange reserves in dollars.
But danger signs abound.
Unless the US gets its act together soon, it may find the value of its super-currency franchise much diminished.
American voters, who are famously loathe to increase taxes, might start thinking a lot harder about the real economic costs of their country’s superpower status.
Doing Better on Climate Change
Los Angeles – Tackling global warming, we are often told, is the defining task of our age.
An army of pundits tells us that we need to cut emissions, and cut them immediately and drastically.
But this argument is clearly losing the battle for hearts and minds.
Global warming has now become the lowest-priority policy problem among Americans, according to a new Pew survey.
Another Pew survey showed that China, the world's biggest emitter, cares even less than the US about global warming. Just 24% of Chinese regard global warming as a very serious problem, making China the world's least concerned country.
In the UK, an Opinium survey shows that most voters think green taxes are mainly for raising cash rather than the environment, and 7 out of 10 are not willing to pay more in taxes to combat climate change.
At the same time, the proposed solutions for the problem of global warming have been awful.
In Rio de Janeiro in 1992, politicians from wealthy countries promised to cut emissions by 2000, but did no such thing.
Leaders met again in Kyoto in 1997 and promised even stricter carbon cuts by 2010, yet emissions keep increasing, and Kyoto has done virtually nothing to change that.
What is most tragic is that when leaders meet in Copenhagen this December, they will embrace more of the same solution: promises of even more drastic emission reductions that, once again, are unlikely to be fulfilled.
Measures that consistently over-promise and under-achieve at vast cost do not win hearts and minds in the best of times.
And this is manifestly not the best of times.
Fortunately, we have a much better option, with a much better chance of success: we should make low-carbon energy sources like solar power become a real, competitive alternative to old energy sources, instead of the preserve of rich people who want to feel “greener.”
We should therefore invest on an effective scale in inventing new technology.
Contrary to what one would imagine, the Kyoto Protocol has not prompted this research.
Indeed, research investment has plummeted since the 1980’s and has actually not increased since, even among Kyoto-participating countries.
Investing heavily in research and development of low-carbon energy, solar power, or other new technologies would become cheaper than fossil fuels much more quickly.
Economic estimates show that for every $1 spent, we would do $16 worth of good.
Every country should agree to spend 0.05% of its GDP on low-carbon energy R&amp;D. The total global cost would be 15 times higher than current spending on alternative energy research, yet six times lower than the cost of Kyoto.
An agreement of this nature could be the new Kyoto treaty for the world – the principal difference being that this protocol would actually make a difference and stand a good chance of global acceptance.
Why not do both: invest in R&amp;D, but still promise to cut carbon emissions now?
Kyoto-style policies can only ever be an expensive distraction from the real business of weaning us off fossil fuels.
There are two fundamental reasons why a focus on reducing carbon emissions is the wrong response to global warming.
First, using fossil fuels remains the only way out of poverty for developing countries.
Coal provides half of the world’s energy.
In China and India, it accounts for about 80% of power generation, and is helping Chinese and Indian laborers enjoy a quality of life that their parents could barely imagine.
Capping emissions means, effectively, ending this success story for hundreds of millions of people.
There is no “green” energy source that is affordable enough to replace coal in the near future.
Instead, our upsized research will make green energy cheaper than fossil fuels by mid-century.
Second, immediate carbon cuts are expensive – and the cost significantly outweighs the benefits.
If the Kyoto agreement had been fully implemented throughout this century, it would have cut temperatures only by an insignificant 0.2°C (0.3°F), at a cost of $180 billion every year.
In economic terms, Kyoto only does about 30 cents worth of good for each dollar spent.
And deeper emissions cuts like those proposed by the European Union – 20% below 1990 levels within 12 years – would reduce global temperatures by only one-sixtieth of one degree Celsius (one-thirtieth of one degree Fahrenheit) by 2100, at a cost of $10 trillion.
For every dollar spent, we would do just four cents worth of good.
The saddest thing about the global warming debate is that nearly all of the key protagonists – politicians, campaigners, and pundits – already know that the old-style agreement that is on the table for Copenhagen this December will have a negligible effect on temperatures.
Unless we change direction and make our actions realistic and achievable, it is already clear that the declarations of “success” in Copenhagen this December will be meaningless.
We will make promises.
We will not keep them.
And we will waste another decade.
Instead, we must challenge the orthodoxy of Kyoto.
We can do better.
Doing Good Efficiently
COPENHAGEN – Policymakers can concoct many excuses not to invest in global aid and development projects.
Three weeks ago, I joined a group of five Nobel laureates and three distinguished economists to undermine one of those excuses, by providing information about where money can achieve the most good.
For each issue examined, we focused on benefits relative to costs.
To guide our thinking, we asked ourselves: if we had, say, an extra $75 billion to spend, where could we achieve the most good?
We put each challenge on an equal footing.
Massive media hype about some problems was irrelevant.
At the bottom of our list were the least cost-effective investments the world could make, with the best places to spend money at the top.
The lowest place (see list) was given to dealing with climate change through cuts in CO2 emissions.
This finding was based in part on research by a lead author for the Intergovernmental Panel on Climate Change – the group that shared last year’s Nobel Peace Prize – who noted that spending $800 billion over 100 years solely on mitigating emissions would reduce inevitable temperature rises by just 0.2 degrees Celsius by the end of this century.
Even taking into account some of the key environmental damage from warming, we would lose money on the investment, with returns of just $685 billion.
That does not mean that the planet should ignore climate change.
A better response would be to increase dramatically research and development into low-carbon energy– an option that gained a respectable mid-placed ranking on our list.
It makes little sense for the world to impoverish itself by embracing a poor solution to one problem when there are more pressing challenges that can be resolved at smaller expense.
Similarly, we gave a low ranking to solutions to the challenge of outdoor air pollution.
Many measures used in the developed world to reduce vehicle-caused smog – including particulate filters and “inspection and maintenance” schemes – are prohibitively expensive in the developing world.
We could get slightly higher benefits by focusing on indoor air pollution.
One and a half million people die each year from the effects of using solid fuel on poor stoves without ventilation.
Getting improved stoves to half the people affected would cost $2.3 billion.
Our top-ranked solutions were in areas that we don’t hear much about.
Unglamorous interventions like de-worming would allow children to be better nourished; lowering the cost of schooling would see children and nations benefit.
We concluded that there would be high benefits from providing micronutrients – particularly vitamin A and zinc – to undernourished children in South Asia and Sub-Saharan Africa.
These help prevent neonatal death.
The cost is tiny: reaching 80% of the world’s 140 million or so undernourished children would require a commitment of around $60 million annually, while the economic gains would eventually clear $1 billion a year.
Providing iron and iodized salt is another top investment.
Fortifying products with iron costs as little as $0.12 per person, per year.
We know that iron deficiency leads to cognitive and developmental problems.
For $286 million we could get iodized salt and fortified basic food items to 80% of those in the worst-affected areas, with benefits estimated to be roughly nine times that sum.
A solution of a different sort is the removal of trade barriers.
Even accounting for the costs to short-term losers (say, particular industries or workers with certain skills), the overall long-term benefits can be large.
Unless the economies of developing countries grow, they will remain mired in poverty.
By reducing trade barriers, per capita income will grow, enabling poor countries to address other problems by themselves.
This was the second Copenhagen Consensus.
While our bottom-ranked solutions remained more or less the same as four years ago, the top-ranked item in 2004, prevention of HIV/AIDS, was rated lower this time because of subsequent progress.
This project provides a sound basis on which to measure and compare different uses of scarce resources.
It might be fashionable to talk about just a couple of the globe’s challenges, but we could achieve a lot more if we focused first on where our spending would be most rational.
RANKING WORLD INVESTMENTS
1. Micronutrient supplements for children (vitamin A and zinc)
2. The Doha development agenda
3. Micronutrient fortification (iron and salt iodization)
4. Expanded immunization coverage for children
5. Improving agricultural technology
6. De-worming and other school-based nutrition programs
7. Lowering the price of schooling
8. Increasing and improving girls’ education by paying mothers to send them to school
9. Community-based nutrition promotion
10. Support for women’s reproductive role to reduce gender inequity
11. Low-cost heart attack drugs for developing countries
12. Malaria prevention and treatment
13. Tuberculosis identification and treatment
14. R&amp;D in low-carbon energy technologies to combat global warming
15. Bio-sand filters for household water treatment
16. Pumps and wells to improve water coverage in rural areas
17. Conditional cash transfers to increase the number of children receiving education
18. Peace-keeping in post-conflict situations to reduce the risk of civil war
19. HIV “combination” prevention package
20. Total sanitation campaign to reduce the number of “open defecation” areas
21. Improving surgical capacity at district hospital level
22. Microfinance to women to reduce gender inequity
23. Improved stove intervention to reduce indoor air pollution
24. Large, multipurpose dam in Africa to improve water coverage
25. Inspection and maintenance of diesel vehicles to reduce outdoor air pollution
26. Low-sulfur diesel for urban road vehicles to reduce outdoor air pollution
27. Diesel vehicle particulate control technology to reduce outdoor air pollution
28. Tobacco tax to reduce heart disease and cancer
29. A package of R&amp;D and mitigation to combat global warming
30. Mitigation of carbon emissions to reduce global warming
Doing Poorly by Doing Good
KIEL – The new catchphrase in business seems to be “do well by doing good.” In other words, undertaking socially responsible activities boosts profits.
For example, Pepsi bolsters its bottom line by shifting to more nutritious, healthier food.
Yet, in much of the world, doing well still implies that you must be up to no good, especially if you are dealing with the poor.
A recent case in point is the imbroglio in Andhra Pradesh in India, where the administration has moved to curb microfinance.
Microfinance has become the darling of development enthusiasts.
After all, who could be against an activity that produces uplifting stories like the cell phone ladies of Bangladesh, who lift themselves out of poverty by obtaining loans to buy phones and then selling minutes to others in the village.
The benefits of microfinance are in danger of being over-hyped – there are not that many successful micro-businesses that the poor can start solely with the help of loans, because skills and management abilities are also often necessary.
Nevertheless, the benefits are real: while there is little evidence that microfinance sets substantial numbers of poor people on the path to riches, it does help the poor save, smooth consumption, deal with emergencies, and expand existing businesses.
These are not trivial benefits.
One problem the poor often have in accumulating savings is lack of easy access to savings accounts where they can deposit money.
The money is kept in a tin at home, and is easily spent when a neighbor is in difficulty, or the ne’er-do-well cousin comes calling.
By taking a loan from a micro-financier to buy a needed asset, and then making regular mandatory weekly payments out of her income, the housewife borrows to save – she no longer has spare cash lying around for others to fritter away.
The “asset” that is purchased need not be a physical asset.
In India, a big portion of college dues is paid at the beginning of the year.
Households whose members have steady jobs borrow from micro-financiers to pay the fees, and then spend the rest of the year repaying the loan.
That way, they do not have to cut spending substantially in the months before the fee is due, but can instead smooth spending over the year.
This is helpful when people live at the margin – where cutting spending means foregoing food or medicines.
Emergency loans are equally important.
When children fall sick, parents do not have the time to apply for a loan from a state-owned bank (perhaps the only alternative source of loans for the poor other than the moneylender).
Usually, the bank takes months to process the application, and may demand a bribe even in the unlikely event it is willing to take on the credit risk.
The micro-financier, confident of being repaid, is willing to extend the emergency loan quickly and with little bureaucracy.
Finally, while I am skeptical that microfinance alone can promote a lot of successful entrepreneurship, it certainly can be helpful in allowing a farmer to buy more cattle or a tractor, or allowing a village shopkeeper to expand inventory.
Thus, it also helps expand incomes.
But, despite all these benefits, politicians are generally unwilling to accept that money can be earned honestly from those at the bottom of the income pyramid.
If micro-financiers are making profits off the poor, it must be because they are bilking them.
Suspicions are further reinforced by politicians’ underlying paternalism – the poor do not know what is good for them and are easily fooled.
Of course, the fact that micro-financiers charge the very poor relatively high interest rates exacerbates the perception that they are gouging society’s most vulnerable members.
But micro-financiers may have no choice: given the small size of the loans, the costs of processing them and collecting payments are relatively large, driving up the break-even interest rate.
Matters came to a head in August this year, when an initial public offering in India of SKS, a microfinance institution started by Vikram Akula, a graduate of the University of Chicago’s Booth School of Business, raised roughly $ 350 million.
The IPO valued the company at $1.6 billion.
Such a high valuation can be justified if SKS provides a better service than the competition, but darker interpretations are possible.
If SKS is doing so well, the official thinking went, it must be up to no good.
So the authorities acted.
The Andhra Pradesh administration accused the industry of charging usurious interest rates, urging the gullible poor to over-borrow, and then driving some delinquent borrowers to commit suicide.
It imposed severe curbs on the industry in October.
The widespread belief among micro-financiers is that the curbs were imposed not because the industry was exploitative, but because it offered an alternative to political patronage.
Politicians gained influence and popular support by directing state-owned banks to make loans to favored constituencies.
By threatening this source of power, the microfinance industry created a powerful opponent, who found an opportune moment to strike.
The truth probably lies somewhere in the middle – the microfinance sector has made some mistakes, which politicians have exaggerated in an effort to destroy an industry that undermines them by making the poor more independent.
There is a lesson to draw from all this.
There is money to be made at the bottom of the income pyramid, and businesses can do immense good while making that money by giving the poor choices that they have never had.
But skepticism that money can be made off the poor extends well beyond the politician.
It is incumbent on industries that deal with the poor to be transparent about how they earn their money – and to make the case for their activities strongly and publicly.
Like Caesar’s wife, microfinance has to be above suspicion.
Dollar Diplomacy and Japan’s Lost Decades
TOKYO – A specter is haunting China’s exchange-rate regime: the long-running dispute between the United States and Japan throughout the 1980’s and early 1990’s over the value of the yen.
That dispute ended only when Japan’s economy entered its “lost decades,” which has made the Chinese determined not to repeat the experience.
Of course, history – particularly financial history – never repeats itself exactly.
But the arguments being heard about the renminbi today certainly give rise, at least for Japanese, to a strong sense of déjà vu.
Now, as then, the United States Congress is the focal point of American anger.
Today, it is preparing retaliatory legislation against China in response to pressure from many in the US who argue that an artificially weak renminbi is contributing to global imbalances, in particular to America’s massive bilateral trade deficit.
They are also frustrated that the US Treasury has not “named and shamed” China by designating it a currency manipulator.
But, based on Japan’s experience, the Chinese do seem to have good reasons to be wary of US pressure to revalue the renminbi.
Indeed, the economists Ronald McKinnon and Kenichi Ohno have singled out US pressure for yen appreciation as a key source of the Japanese economy’s long-term deflation and stagnation – the so-called “lost decade” of economic malaise that is now well into its second.
The US and China have engaged simultaneously in dispute and dialogue for several years – again reminiscent of what Japan went through with the US in the 1980’s and 1990’s.
Just as China has its “Strategic Dialogue” with the US, so Japan had the “Structural Impediments Initiative” (1989-1990) and “Framework Talks” (1993-1995).
And for China now, as for Japan then, the undercurrent for these discussions is US frustration with bilateral current-account deficits.
Both structural factors and the exchange rate are discussed.
But the weight give to the exchange rate is higher today in the US-China dispute, because, whereas Japan had a “managed float” exchange-rate regime in the 1980’s and 1990’s, the Chinese exercise much tighter control over the renminbi.
Chinese officials agonize over the US pressure.
If they yield to it, the Chinese economy, they argue, may fall into the same deflationary trap that ensnared Japan after the yen’s appreciation in the 1980’s – under US pressure – inflated a catastrophic asset-price bubble.
But if they continue to resist, China may face hot trade disputes with the US, which could be even messier.
Like Japan in the 1980’s, China must defend itself from US claims that the renminbi’s weakness is the source of the imbalances between the two countries.
Currency appreciation, Japan argued then and China argues now, is unlikely to result in a significant current-account adjustment, which requires addressing not only China’s high savings rate, but also low savings in the US.
How the situation will develop in the near future can be gleaned from the recent past.
China instituted a flexible exchange rate from July 2005 to the summer of 2008, and the renminbi gradually appreciated against the dollar – cumulatively by more than 20%.
Whereas the peg to the dollar was resumed during the global financial crisis, in June China announced a return to flexibility.
The renminbi fluctuated without a clear trend until mid-September, when it appreciated sharply, apparently in response to increased US pressure stemming from the impending congressional vote.
In one respect, then, the dispute appears set to follow a path similar to the US-Japan case.
It will be prolonged and occasionally very tense, but eventually result in appreciation of the renminbi.
But there is a crucial distinction to be made between the two cases: Japan needs the US to ensure its security, while China does not.
Moreover, the size of China’s economy will surpass that of the US in about 15 years.
So time is on China’s side.
But there is a more fundamental issue: the Chinese authorities, in arguing that it was a mistake to allow the yen to appreciate, may be misinterpreting what happened in Japan – and thus overestimating the risk posed by currency appreciation.
For Chinese officials who believe that yen appreciation was the source of Japan’s chronic economic malaise, the Plaza Accord of September 1985 – a concerted effort by the US, the United Kingdom, France, West Germany, and Japan to depreciate the dollar – is Exhibit A. The yen soared from ¥240:$1 in September 1985 to ¥200:$1 the following December.
The real dilemma for Japan arrived in March 1986, when the yen neared its then record high, ¥178: $1.
Japan responded by intervening in the opposite direction – dropping interest rates, selling yen, and buying dollars.
That proved decisive.
Keeping interest rates low discouraged capital inflows and encouraged asset-price inflation.
The ensuing bubble in Japanese housing and equity prices inflated and burst not because Japan succumbed to US pressure to allow the yen to appreciate, but because Japan, in the end, resisted that pressure.
So, if China is to draw the correct lesson from the Japanese experience, it must know what really happened in Japan back then.
What China should be carefully watching is whether there are signs of overheating in the domestic economy, and whether asset prices are rising sharply.
Allowing the renminbi to appreciate would be a good way to prevent both.
The Dollar Joins the Currency Wars
NEW YORK – In a world of weak domestic demand in many advanced economies and emerging markets, policymakers have been tempted to boost economic growth and employment by going for export led-growth.
This requires a weak currency and conventional and unconventional monetary policies to bring about the required depreciation.
Since the beginning of the year, more than 20 central banks around the world have eased monetary policy, following the lead of the European Central Bank and the Bank of Japan.
In the eurozone, countries on the periphery needed currency weakness to reduce their external deficits and jump-start growth.
But the euro weakness triggered by quantitative easing has further boosted Germany’s current-account surplus, which was already‎ a whopping 8% of GDP last year.
With external surpluses also rising in other countries of the eurozone core, the monetary union’s overall imbalance is large and growing.
In Japan, quantitative easing was the first “arrow” of “Abenomics,” Prime Minister Shinzo Abe’s reform program.
Its launch has sharply weakened the yen and is now leading to rising trade surpluses.
The upward pressure on the US dollar from the embrace of quantitative easing by the ECB and the BOJ has been sharp.
The dollar has also strengthened against the currencies of advanced-country commodity exporters, like Australia and Canada, and those of many emerging markets.
For these countries, falling oil and commodity prices have triggered currency depreciations that are helping to shield growth and jobs from the effects of lower exports.
The dollar has also risen relative to currencies of emerging markets with economic and financial fragilities: twin fiscal and current-account deficits, rising inflation and slowing growth, large stocks of domestic and foreign debt, and political instability.
Even China briefly allowed its currency to weaken against the dollar last year, and slowing output growth may tempt the government to let the renminbi weaken even more.
Meanwhile, the trade surplus is rising again, in part because China is dumping its excess supply of goods – such as steel – in global markets.
Until recently, US policymakers were not overly concerned about the dollar’s strength, because America’s growth prospects were stronger than in Europe and Japan.
Indeed, at the beginning of the year, there was hope that US domestic demand would be strong enough this year to support GDP growth of close to 3%, despite the stronger dollar.
Lower oil prices and job creation, it was thought, would boost disposable income and consumption.
Capital spending (outside the energy sector) and residential investment would strengthen as growth accelerated.
But things look different today, and US officials’ exchange-rate jitters are becoming increasingly pronounced.
The dollar appreciated much faster than anyone expected; and, as data for the first quarter of 2015 suggest, the impact on net exports, inflation, and growth has been larger and more rapid than that implied by policymakers’ statistical models.
Moreover, strong domestic demand has failed to materialize; consumption growth was weak in the first quarter, and capital spending and residential investment were even weaker.
As a result, the US has effectively joined the “currency war” to prevent further dollar appreciation.
Fed officials have started to speak explicitly about the dollar as a factor that affects net exports, inflation, and growth.‎ And the US authorities have become increasingly critical of Germany and the eurozone for adopting policies that weaken the euro while avoiding those – for example, temporary fiscal stimulus and faster wage growth – that boost domestic demand.
Moreover, verbal intervention will be followed by policy action, because slower growth and low inflation – partly triggered by a strong dollar – will induce the Fed to exit zero policy rates later and more slowly than expected.
That will reverse some of the dollar’s recent gains and shield growth and inflation from downside risks.
Currency frictions can lead eventually to trade frictions, and currency wars can lead to trade wars.
And that could spell trouble for the US as it tries to conclude the mega-regional Trans-Pacific Partnership.
Uncertainty about whether the Obama administration can marshal enough votes in Congress to ratify the TPP has now been compounded by proposed legislation that would impose tariff duties on countries that engage in “currency manipulation.”
If such a link between trade and currency policy were forced into the TPP, the Asian participants would refuse to join.
The world would be better off if most governments pursued policies that boosted growth through domestic demand, rather than beggar-thy-neighbor export measures.
But that would require them to rely less on monetary policy and more on appropriate fiscal policies (such as higher spending on productive infrastructure).
Even income policies that lift wages, and hence labor income and consumption, are a better source of domestic growth than currency depreciations (which depress real wages).
The sum of all trade balances in the world is equal to zero, which means that not all countries can be net exporters – and that currency wars end up being zero-sum games.
Dollars and Depression
The falling dollar has emerged as a source of profound global macroeconomic distress.
The question now is how bad that distress will become.
Is the world economy at risk?
There are two possibilities.
If global savers and investors expect the dollar’s depreciation to continue, they will flee the currency unless they are compensated appropriately for keeping their money in the US and its assets, implying that the gap between US and foreign interest rates will widen.
As a result, the cost of capital in the US will soar, discouraging investment and reducing consumption spending as high interest rates depress the value of households’ principal assets: their houses.
The resulting recession might fuel further pessimism and cutbacks in spending, deepening the downturn.
A US in recession would no longer serve as the world’s importer of last resort, which might send the rest of the world into recession as well.
A world in which everybody expects a falling dollar is a world in economic crisis.
By contrast, a world in which the dollar has already fallen is one that may see economic turmoil, but not an economic crisis.
If the dollar has already fallen – if nobody expects it to fall much more – then there is no reason to compensate global savers and investors for holding US assets.
On the contrary, in this scenario there are opportunities: the dollar, after all, might rise;
US interest rates will be at normal levels; asset values will not be unduly depressed; and investment spending will not be affected by financial turmoil.
Of course, there may well be turbulence: when US wage levels appear low because of a weak dollar, it is hard to export to America, and other countries must rely on other sources of demand to maintain full employment.
The government may have to shore up the financial system if the changes in asset prices that undermined the dollar sink risk-loving or imprudent lenders.
But these are, or ought to be, problems that we can solve.
By contrast, sky-high US interest rates produced by a general expectation of a massive ongoing dollar decline is a macroeconomic problem without a solution.
Yet so far there are no signs that global savers and investors expect a dollar decline.
The large gap between US and foreign long-term interest rates that should emerge from and signal expectations of a falling dollar does not exist.
And the $65 billion needed every month to fund the US current-account deficit continues to flow in.
Thus, the world economy may dodge yet another potential catastrophe.
That may still prove to be wishful thinking.
After all, America’s still-large current-account deficit guarantees that the dollar will continue to fall.
Even so, the macroeconomic logic that large current-account deficits signal that currencies are overvalued continues to escape the world’s international financial investors and speculators.
On one level, this is very frustrating: we economists believe that people are smart enough to understand their situation and capable enough to pursue their own interests.
Yet the typical investor in dollar-denominated assets – whether a rich private individual, a pension fund, or a central bank – has not taken the steps to protect themselves against the very likely dollar decline in our future.
In this case, what is bad for economists is good for the world economy: we may be facing a mere episode of financial distress in the US rather than sky-high long-term interest rates and a depression.
The fact that economists can’t explain it is no reason not to be thankful.
Do Low Interest Rates Ensure High Asset Prices?
Asset prices– stocks, commercial real estate, and even oil – are, historically, at high levels around the world.
Although history is often a good predictor of future trends, every now and then something fundamental changes that makes for a new pattern.
The important question now is whether today’s high asset prices are the result of some such fundamental development, or whether bubbles have formed.
One oft-heard justification for high asset prices is that real (inflation-adjusted) long-term interest rates are very low.
But investors should be wary of this argument.
It may sound plausible, but it is hardly conclusive, and, more importantly, it certainly does not tell us that high prices are sustainable.
It is, of course, true that real long-term interest rates have declined quite markedly – not suddenly and not only recently, but at a fairly steady pace for more than twenty years.
According to the IMF, world real long-term interest rates peaked at nearly 7% on average in 1984, and fell to just below 2% by 2004.
There were some ups and downs along the way, but the overall trend has been downward, and the magnitude of the decline – nearly five percentage points – is striking.
Ben Bernanke, the Chairman of President George W. Bush’s Council of Economic Advisors and a likely candidate to succeed Alan Greenspan as the Federal Reserve’s chairman in January, has called the decline in real interest rates over just the last decade a “global savings glut.” It is not that there is “too much” saving around the world today, but that the amount of saving has been high enough that returns, as measured by real interest rates, are a lot lower than they once were.
In a March 2005 speech, Bernanke argued that this “glut” helps explain several features of the American economy, possibly including the enormous fiscal and trade deficits.
Low real long-term rates mean that any long-term asset that pays, say, $100 a year in real terms would have been worth a real $1,429 in 1984, when it yielded 7%, but would have to be worth a real $5,000 now, when it yields just 2%.
A decline in long-term rates of such magnitude would thus appear to imply massive price inflation for real assets, justifying the high prices we are in fact seeing.
Case closed, according to some advocates of pricey investments.
But there are holes in this case.
We have to look at the reasons that real interest rates were so much higher 10 or 20 years ago, and think about what that means, and we also have to look at the broader history of asset prices and their relation to real interest rates.
Twenty years ago, real short-term interest rates were exceptionally high by historical standards because the major central banks of the world wanted to combat what was seen at the time as inaction against spiraling inflation.
It took the courage – or recklessness, depending on your point of view – of US Federal Reserve Chairman Paul Volcker to send the world into recession in 1981-2 in order to break the back of inflation.
That recession was destructive, but it had one silver lining: an inspiration to the world that an independent central bank can take tough measures to ensure price stability.
But, while the worldwide recession of 1981-2 brought inflation down rapidly, nominal long-term interest rates did not fall immediately, for the world’s markets were still not convinced.
Hence, real long-term rates remained quite high in the mid-1980’s.
Gradually, with lenders becoming increasingly confident in subsequent years that low inflation was here to stay, real long-term interest rates began heading south.
But this history means that the true real long-term interest rate was not as high in the 1980’s as our measures show, because long-term inflation expectations must have been much higher than the one-year inflation rate was at the time.
Holders of long-term bonds, for example, must have thought that inflation would come roaring back after the effects of the 1981-2 global recession had passed.
The inflation-indexed bond markets were not well developed in the 1980’s.
But we do know that in 1984 the best-developed such market (in the United Kingdom) was quoting long-term real interest rates of only around 3% – far below the IMF’s figure.
Even if we were to accept that real rates were genuinely very high in the mid-1980’s, then the logical conclusion would be that the stock and housing markets should have been even lower in the 1980’s, not that real prices should be very high in 2005.
In fact, if one takes a longer view of real interest rates in the US, calculated by subtracting the previous year’s inflation from the nominal government bond yield, one finds that, while they are much lower than 20 years ago, they are not low by historical standards.
The average real long-term government interest rate in 1891-1979 – a period ending just before Volcker oversaw soaring growth in borrowing costs – was a mere 1.25%, which is very close to the real long-term interest rate today.
In short, we simply shouldn’t read too much into the decline in real long-term interest rates over the last 20 years.
Historically, real rates have jumped around a lot, showing little correlation with asset prices.
Whatever their other benefits, the low rates we see around the world now hardly amount to insurance against future drops in asset prices.
Domestic Spying and Chinese Politics
Corruption charges are flying between Prime Minister Zhu Ronghi, China's number three leader, and Li Peng, the country's second leading politician.
Those charges are, invariably, produced by China's domestic surveillance agencies.
But China's secret policemen are already working overtime nowadays, trying to keep up with China's millions of internet users.
None of this zeal is new in China.
Paranoia, informers, and domestic spying are so essential to Communist rule that few people are ever surprised at the extent of secret police operations here.
Still, domestic spying did not arrive in China either with the computer revolution or Mao's Communist one.
Indeed, the darkest moments in China's long history often coincide with massive domestic spying systems; usually these herald not only renewed tyranny but instability as well.
China's secret policemen, indeed, have deep roots.
The Ming Emperor Cheng Zu's internal espionage agency (1403-1424) was known as the Dong Chang or "Eastern Workshop."
Staffed by eunuchs, it reported to the emperor directly.
Cheng Zu used the Dong Chang to bypass other state organs and persecute countless innocent people who had offended him.
Cheng Zu's regime marked one of the darkest times in China's long history.
The Nationalist government of Chiang Kai-shek believed in domestic spying as well, and practiced it both before and after the Communist takeover of 1949, with Chiang's spies harshly suppressing any and all signs of domestic dissent.
Nationalist "white terror" continued even after Chiang Kai-shek and his armies escaped to Taiwan.
Only the flowering of Taiwan's democracy in recent years saw a decrease in domestic spying.
After being victimized by Chiang Kai-shek's spies, China's Communist rulers created a vast spying apparatus of their own.
Mao, indeed, called domestic spying "an invisible magic weapon."
Today, although Mao's socialist economy is shrinking, his spy networks remain as potent as ever.
Indeed, Jiang Zemin, China's president and paramount leader, relies on spies from the Public Security Bureau and the Bureau of National Security to maintain his rule.
As well as suppressing political dissent, these operatives play vital roles in the Party's internal power struggles.
Such spying is necessary, says Jiang, in order to uphold the "stability" of Communist rule in the face of vast and unsettling economic reforms.
Like Saturn devouring his children, however, Chinese spying devours Central Committee members and dissidents alike.
Cheng Kejie, a high Party official executed for corruption last year, was long under special surveillance by the Public Security Bureau.
The purge of a former mayor of Beijing, Chen Xitong, and his cronies, also on charges of corruption, could not have happened without evidence gathered by official spies.
Indeed, it is widely believed that President Jiang and his confidante Zeng Qinghong obsessively gather politically embarrassing evidence against corrupt officials in order to blackmail these officials into subservience.
A telling case here surrounds Bao Tong, a former Politburo member who ran afoul of the President's inner circle.
Bao is now under around-the-clock surveillance by eighteen state agents who have even set up a guard post in front of his house.
This is all happening despite Party claims that Bao retains all his citizenship rights.
Lately, Ms. He Qinglian, a well-known author, journalist, and critic of China's reforms has been watched daily by as many as twelve agents.
Government spies have hacked into her personal computer to download her files and documents and have forced their way onto her server to censor her emails and monitor and control her Internet access. "Internet spies" of this type now flock to the many Internet cafes found in China's major cities.
Since the era of Emperor Cheng Zu's Dong Chang domestic spying has been a sign of insecurity, not self-confidence.
Domestic spying is growing and taking new forms nowadays because China's leaders, unsettled by the changes their own economic reforms have unleashed, bluntly refuse to consider democratic reforms.
This failure is progressively undermining the regime's legitimacy and the Central Committee knows it.
Making matters worse are the repeated demonstrations of President Jiang's profound lack of personal self-confidence.
China's president achieved and consolidated his power by relying on a small coterie drawn from his Shanghai political base. The narrow circle of Jiang's supporters reminds many people of unpopular emperors like Cheng Zu.
Jiang's increasing dependence on internal spying and the "security apparatus" may also be due to Jiang's close relations with his confidante Zeng Qinghong, the son of Zeng Shan, who was Minister of the Interior in charge of domestic espionage in the earliest days of Communist rule.
Under his father's tutelage, Zeng Qinghong learned to use spy networks to entrench Communist and personal power.
Given what happened in the former Soviet Union and its East European satellites, the paranoid fears about losing power are unlikely to vanish among Chinese leaders soon.
Jiang and his colleagues understand that governance-by-spying, through eviscerating personal responsibility and civil society, left behind moribund economies and discredited governments across the former Soviet world.
Instead of slackening domestic spying in order to prepare the Chinese people for the ever increasing personal responsibility that a modern economy demands, however, Jiang remains obsessed only with maintaining Communist and personal power.
That failure may one day make China's inevitable postcommunist transition as corrupt and chaotic as that seen in the most violent and backwards of former Soviet states.
The African Paradox
PARIS – Earlier this month, the trial of Pascal Simbikangwa, accused of complicity in the genocide in Rwanda, in which 800,000 people were killed between April and July 1994, began in Paris.
Unfortunately, mass killings in Africa continue.
In South Sudan, Africa’s newest state, massacres of civilians are still taking place, particularly around the city of Bor.
And French military intervention in the Central African Republic has not put an end to severe inter-communal violence there.
Yet, paradoxically, even as such episodes continue to occur in Africa, perhaps on a larger scale than anywhere else in the world, the continent has also become a beacon of hope.
Indeed, the perpetuation of extreme violence contrasts starkly with Africa’s favorable demographic profile, and its economic – and even political and social – progress in recent years.
One way to think about this paradox is in terms of the closing of a four-century-long parenthesis.
Since the seventeenth-century, Africa has been mainly an object of history.
Its people were first treated by the slave trade as mere commodities, necessary for economic growth elsewhere.
Then colonial powers carved up the continent artificially and arbitrarily, masking their greed behind noble-sounding goals: theirs was a “civilizing” mission.
Later, during the first half of the twentieth century, Africa offered the blood of its inhabitants, and then recourse to its territories, to a European continent in the throes of two world wars.
And, in the second half of the twentieth century, after a brutal anti-colonial struggle, Africa’s newly independent countries became proxy battlegrounds in the Cold War.
Today, by contrast, Africa is in the process of returning as a subject of history. With more than one billion inhabitants, representing 18% of the world’s population, Africa is regaining the place it occupied at the beginning of the sixteenth century.
Then, with 100 million people, it represented 20% of the world’s population. By the middle of the nineteenth century, after more than 200 years of colonialism and slavery, Africa’s population had fallen to 95 million – just 9% of the world total – whereas other continents had experienced a large population increase over the same period.
Economically, Sub-Saharan Africa has experienced a decade of 5-6% average annual GDP growth.
In Tanzania, growth this year should be around 7%. At a time when the major emerging economies – with the exception of China – are facing a sharp slowdown, Africa, with its untapped energy resources and precious raw materials, including rare earth minerals, has naturally become a focus of investors’ attention.
But, though Africa can be described as the continent of hope, it is unlikely to become the “New Asia” – that is, a long-term dynamo of global growth – for a combination of cultural, political, geopolitical, and perhaps psychological reasons.
Asia has experienced the historical continuity of great empires.
China is the best illustration of this phenomenon.
It is a reemerging power, not an emerging one, a decisive factor that explains Chinese confidence.
Asia’s long history of rivalry and competition among its various powers has also been an important factor in its recent economic success.
The dynamic of competition and emulation among China, Japan, and South Korea has not existed in peacefully reconciled post-WWII Europe; there is nothing like it in Africa, either.
Nigeria is not Africa’s equivalent of what China is for Asia.
And post-apartheid South Africa, for all its progress, has not fulfilled the expectations placed on it, and remains unlikely to become the continent’s gendarme.
Colonialism and the slave trade constituted a historical rupture for Africa.
Beyond the human toll – including 10-15 million direct victims – absolute subjugation begot a unique loss of confidence.
Who today can name Africa’s great empires and kingdoms?
Who knows where the worlds’ gold came from before its discovery in Latin America in the sixteenth century?
Africa must find the confidence it desperately needs in the way others look at it.
The problem is that others are abysmally ignorant about the continent’s pre-colonial past.
One may criticize the cynicism of the Chinese, but it is China that has contributed more than any other country to the transformation of Africa’s self-image.
Today, it is Africans themselves who hold their continent’s future in their hands.
And, as Africa returns as a subject, rather than an object, of world history, it appears to embody all the fears and hopes of humanity.
Everything is there in extreme form: desertification, mass movements of populations, and, yes, genocidal violence – but also the hope for new forms of economic growth, if not new modes of governance.
The Trauma of France’s Jews
PARIS – “Death to the Jews!”
In Paris and other French cities, the hate-filled words ring out.
Attacks on synagogues have taken place for the first time since the Dreyfus Affair at the end of the nineteenth century.
In suburban areas near Paris, such as the town of Sarcelles, known for its climate of religious and ethnic tolerance, groups of young people have deliberately targeted Jewish properties.
Faced with the spectacular rise of anti-immigrant populism in France, and now with anti-Zionist demonstrations (which often coincide with an updated version of anti-Semitism), the French Jewish community is anguished and puzzled.
Some of its members are quietly asking themselves whether there is a future for them in the land of human rights.
French Jews are rediscovering the dual trauma that they experienced during the twentieth century: the death-camp deportations of World War II and their flight from Algeria following its independence in 1962.
It is to be expected that these episodes color – and tend to exacerbate – the emotions of the present.
French descendants of Eastern European Jews have not yet fully come to terms with a continent – including Vichy France – that they still associate with the Holocaust, whereas Jews from the Maghreb tend to resent the fact that even in France, they remain surrounded by “Arabs.”
Indeed, a significant portion of the Jewish community in the south of France votes for the far-right National Front, which, under the leadership of Marine Le Pen, has concentrated its xenophobia on Muslims.
In this tense setting, it comes as no surprise that the question of whether anti-Semitism has returned to France, after a seven-decade hiatus, is making international headlines.
British and American media reports have made comparisons to the Nazi era, with some even referring, in the aftermath of attacks on French synagogues, to a French Kristallnacht.
Such hyperbole must be firmly rejected, for it offends the memory of those who suffered as a result of Vichy France’s collaboration with Nazi Germany.
After the Gestapo arrested my father in Nice in 1943, he was escorted by French gendarmes to the transit camp at Drancy, in the Paris suburbs, before being deported to Auschwitz.
In 2014, by contrast, the French state defends the synagogues and denounces any form of anti-Semitism.
But even if the French state is not anti-Semitic, anti-Semitism does exist in France – and probably more so recently than in the postwar period.
And the worsening situation in the Middle East has, of course, played a key role in this, particularly the shocking images from Gaza.
The asymmetrical war being waged there by Israel seems disproportionate to a majority of world opinion, not just Arabs and Muslims.
To be sure, no state can passively accept rocket attacks on its cities.
And, yes, Hamas deliberately chooses to place its military arsenal in highly populated areas under the involuntary protective shield of innocent civilians – or those Israeli officials sometimes refer to, with barely concealed mistrust, as the “uninvolved.”
But the strategy of terror used by the Israeli authorities to deter further attacks or to restore a temporary “quiet” has been costly not only in terms of Palestinian lives lost and Israeli soldiers killed; it has also contributed to the deterioration of the security of Jews around the world. In France, too, many of them express – often quietly – both their deep love for what Israel is and their deep concern for what Israel is now doing.
It is one thing to say that the Middle East conflict should not be exported to France.
It is another to recognize the inevitable impact of images of dead Palestinian women and children on communities in France that feel close to Palestine the way that Jews feel close to Israel.
If the images from Gaza seem to resonate so much in France, it is partly a matter of sheer numbers: the largest Muslim community in Europe faces the largest Jewish community in Europe.
But it is not only a question of numbers.
The young thugs who have attacked synagogues come mostly from the ranks of the unemployed and frustrated.
They vent their rage at a system that does not integrate them.
They even resent the Republic’s commemoration of Jews’ suffering during WWII.
For them, past horror is abstract; only the present horror can be felt.
The encounter between the images of today’s Middle East and the discontent of Muslim minorities (sometimes influenced by radical fundamentalist ideologies) should not be allowed to obscure traditional French anti-Semitism, white and bourgeois, which still lingers and is never far beneath the surface. Thanks to the Internet, it, too, has begun to emerge more often.
But the French state does what it has to do to repress and contain anti-Semitism.
Comparisons to Nazi-era Europe do nothing to reassure a community that, despite all of the major historical differences between then and now, cannot quite shake the feeling that it is dancing on the rim of a volcano.
Turkey’s Lost Illusions
PARIS – “Day by day, Europe is moving further away from Turkey,” Egemen Bağış, Turkey’s Minister for European Union Affairs, declared last week.
But the reverse is equally true: With a mixture of disillusion and defiance, Turkey has been distancing itself from Europe in recent years.
In reality, nearly three years after the beginning of the “Arab Spring,” Turkey is more in search of itself than it is of Europe, even if it needs Europe more than Turks are willing to admit.
What is Turkey today, what are its values, and what is its destiny in a highly fluid regional environment?
The Arab Spring was initially seen as a great opportunity for Turkey, an ideal setting in which to highlight the country’s economic success, democratic political model, and indispensable strategic role in the region.
The inheritors of one of the world’s great empires were proving to the world that Islam and modernity were perfectly compatible – an inspiring example for Arab countries like Egypt.
Instead, Turkey’s role inspired reservations among Egyptians; after all, the Ottoman Empire had ruled over Egypt.
And, on the Turkish side, there was a sense of superiority vis-à-vis the Arab world.
The collapse of the Soviet Union awakened “neo-Ottoman” Turkish ambitions in the Caucasus and Central Asia, and revolution in the Middle East seemed to offer the heirs (if not orphans) of a long-dead empire an opportunity to avenge its loss.
If a lazy and fearful Europe did not want Turkey, so much the worse for Europe; history was offering more glorious alternatives to the Turks.
Whereas Turkey could appear too Oriental and too religious in Brussels or Paris, when viewed from Cairo or Tunis, it looked like an ideal Muslim bridge to the democratic West and economically dynamic Asia.
Moreover, Turkey could play some powerful cards, owing to its “good neighbor” policy with two partners and rivals, Iran and Syria, as well as its support for the short-lived presidency of Mohamed Morsi in Egypt.
Unfortunately, Turkish elites’ hopes (if not expectations) were not realized.
The Arab revolutions ended up exposing Turkey’s own weaknesses and contradictions, further aggravated by Prime Minister Recep Tayyip Erdoğan’s repressive policies and overweening political style.
This became clear in the demonstrations that spread this spring from Istanbul’s Taksim Square to much of the rest of the country (though the protests had more in common with Brazil’s recent unrest or the revolt in Paris in 1968 than with the popular movements in Egypt or Tunisia).
What characterizes Turks today is not so much pride and hope in their country’s expanding influence as fear of its disintegration.
The Kurdish problem preoccupies Turks, as does their growing sense that they are losing control of two essential issues – the Syrian and Iranian crises.
In recent months, Turkey’s government has adopted an increasingly tougher stance toward Syrian President Bashar al-Assad’s regime, convinced that it can only fall.
The agreement recently reached by the United States and Russia is, from this standpoint, frustrating news: For the price of destroying its chemical arsenal, the regime may have saved itself.
So Turkey must wonder what purpose is to be served by courting the West.
Why resume, under US pressure, a nearly normal dialogue with Israel if the outcome is to be abandoned, if not betrayed, by American policy?
Similarly, Iranian President Hassan Rouhani’s moderate rhetoric, together with possible progress on Iran’s dispute with the West over its nuclear program, has left Turkey with a sense of uselessness, if not isolation.
How can a country perceive itself, and be perceived by others, as a key regional actor if it finds itself marginalized at the critical moment?
History is moving in the Middle East, but not in the direction that Turkey would prefer.
And, with their country’s economic growth faltering, its government hardening, and its diplomatic performance a source of growing disappointment, many Turks now openly wonder what happened.
But, far from engaging in an open and positive self-examination, they are too often retreating into a strident nationalism that is all the more defensive to the extent that it reflects a growing lack of self-confidence.
Turkey’s current challenge is to overcome lost illusions.
And that means that Turks may need Europe more than they are willing to admit, even to themselves.
But is Europe today any more ready and willing than it was yesterday to engage in serious talks with Turkey?
Europe’s Anti-Europeans
PARIS – In 2005, two founding members of the European Union, France and the Netherlands, rejected by popular referendum the EU’s proposed constitutional treaty.
Two far-right parties from these countries, the French National Front and the Dutch Freedom Party, have now formed an alliance ahead of the European Parliament elections in May 2014.
They hope to attract likeminded parties in other EU countries and form a parliamentary bloc powerful enough to slay “the monster of Europe,” as Geert Wilders, the Freedom Party’s leader, calls the EU.
It is no accident that France and the Netherlands have taken the lead in this sordid venture.
Both countries are in the midst of a deep identity crisis that is mutating into disdain for Europe, foreigners, migrants, and all who represent the “other.”
And both countries are experiencing an increase in popular suspicion toward traditional political elites.
In this environment, the upcoming European Parliament elections seem tailor-made for extremist parties, with recent public-opinion polls suggesting that the National Front will come out on top in France.
European elections leave most citizens indifferent, which translates into low voter turnout – except among those who, defined by what they oppose, wish to express their anger and frustration with the status quo.
Marine Le Pen, the National Front’s leader, is shrewd and efficient, running on a straightforward message: “Europe is against the people, so the people must mobilize against Europe.”
Her strategy is to enter the mainstream of French politics by shedding all traces of past anti-Semitism, thereby turning the National Front into a seemingly legitimate alternative to a decadent traditional right, which has suffered a prolonged bout of infighting since Nicolas Sarkozy’s defeat in the 2012 presidential election.
In the Netherlands, Wilders – more a one-man show than the leader of a real party – has already been in government, thereby providing a veneer of legitimacy to Le Pen simply by forming an alliance with her.
Interestingly, the main Danish and British anti-European parties have refused to follow suit, refusing to enter into a pact with a party that was and probably remains anti-Semitic at its core.
And yet what ultimately unites Europe’s far-right parties is similar to what underlies the Tea Party’s rise within America’s Republican Party: covert racism and xenophobia.
Though the Tea Party’s followers – a group that one early opinion poll identified as 89% white and just 1% black – claim to oppose government spending above all else, they accept government help for themselves.
What they cannot accept is a black president and government spending on “others.”
Likewise, though Europe’s populists use their opposition to “Brussels” as a rallying flag, their ideology retains the atavism that motivated their forebears.
Today’s far-right forces may be more anti-Muslim than anti-Semitic – Wilders may even be sincerely pro-Israel – but they maintain the anti-humanist, cynical, and racist worldview of their predecessors in the 1930’s.
Of course, a country like France is not returning to the politics of the 1930’s, if only because the memories of the country’s military and moral collapse in 1940 have not faded.
But the vicious racist attacks on the justice minister, Christiane Taubira, who is black, would have been unthinkable in past decades.
And, throughout Europe, the loss of taboos and the belief that anything can be said – and anyone insulted – has led to an increase in racist incidents that are only superficially isolated.
Europe is not about to turn fascist; yet it would be dangerous to ignore that it is going astray, or to attribute recent developments solely to economic hard times and high unemployment.
More fundamental causes, political as well as ethical, are at work.
For example, Germany fares better than other European countries in its resistance to populism, not only because its economy is strong and its history constitutes a form of vaccination.
Germans can also thank the mettle and competence of their political leaders, including Chancellor Angela Merkel and her predecessor, Gerhard Schröder.
The best response to today’s unholy alliance of populist/racist parties is courage, determination, and clarity of position.
Any alliance by mainstream conservative parties with far-right forces will turn out to be a guarantee of defeat – moral as well as political.
That was true in Europe’s past, just as it is true for America’s Republicans today.
The Containment Debate, Round Two
PARIS – At the Cold War’s outset, there was an intense debate in the United States between those who wanted to contain communism and those who wanted to roll it back. Was it sufficient to fix limits on the Soviet Union’s ambitions, or was a more aggressive stance, sometimes described as “containment plus,” necessary?
The recent spat between US President Barack Obama and his former secretary of state (and possible successor), Hillary Clinton, seems to have revived that debate.
But are its terms of reference useful today, as the West faces the simultaneous challenges of the Islamic State in the Middle East and a revisionist Russia?
Are Western leaders right to assume that the two challenges are distinct, and that containment will suffice in the case of Russia, while rollback is absolutely necessary in the case of the Islamic State?
The West needs Russia as much as Russia needs the West, the thinking goes, whereas no one (to say the least) needs a sanctuary for Islamist fanatics in the heart of the Middle East.
That is why Russia must be persuaded to change course through a combination of economic sanctions, strategic unity, and diplomatic engagement; by contrast, the Islamic State’s ambitions cannot be contained, so they must be suppressed.
But the West needs to rethink its strategy, because the two challenges are not entirely distinct.
Had Obama not failed to enforce his chemical-weapons “red line” in Syria a year ago, following an attack on a suburb of Damascus, Russian President Vladimir Putin probably would not have been as daring as he was in Ukraine.
Likewise, helping the Kurds to confront the Islamic State could send the right message to the Kremlin.
Confronting this dual challenge presupposes a combination of long-term, coordinated strategic thinking and pedagogical skill.
Leaders must explain and clarify.
To say, “I don’t do stupid things,” as Obama did recently in an interview with the New York Times, is not enough, given the complexity, urgency, and scale of the threats America and the West are facing.
The simplicity of the Cold War left little need for explanation.
The West had only one opponent, and both sides understood the rules of the game (that is, the logic of the balance of terror).
Above all, the “Soviet mind” was relatively easy to decipher.
The complexity of today’s challenges consists not only in there being more than one, but also in the difficulty of understanding the “jihadi mind.”
Of course, one can say that the Islamic State’s dream of restoring a Sunni caliphate is as anachronistic as Putin’s neo-imperial ambition.
One can also say that both Putin and the Islamic State have drawn much of their strength from the West’s weakness, particularly its failure to have enforced clear and credible limits to their actions.
But, if Putin and the Islamic State have benefited from the West’s confusion, hesitation, and division in dealing with them, they are not paper tigers.
If they were, the West would need only to wait for its adversaries to collapse under the weight of their own contradictions: Russia’s overestimation of its means, and, in the case of the Islamic State, the consequences of its appallingly cruel behavior.
That scenario seems optimistic at best.
Though the Islamic State is resistible, it represents a much bigger challenge than Al Qaeda ever did.
It has set for itself a concrete territorial goal, and has ample financing, sophisticated weapons, and a highly competent military command.
At the same time, it would be as dangerous to overestimate the Islamic State’s capabilities today as it was to underestimate them yesterday.
The same logic applies to Putin’s Russia.
The seizure of Crimea was a swift, well-executed move, but the same tactics have not worked in the more complex and divided context of eastern Ukraine.
By winning Crimea the way that it did, Russia may well have lost Ukraine.
In his classic treatise Strategy: The Indirect Approach, B.H. Liddell Hart, reflecting on his World War I experiences, insisted on the foolhardiness of direct attacks on an entrenched enemy.
Today, Liddell Hart would probably encourage the West to concentrate its efforts on helping the Kurdish fighters in the Middle East and aiding Ukraine’s government in Eastern Europe.
That dual effort should be pursued without idealizing these partners.
They are not “good” simply because the West is backing them; but they are, in any case, infinitely better than the forces they are resisting.
Be it containment or rollback, the rules of the game should be clear.
By setting limits to “them,” the West will define – with newfound clarity – who and what it is.
France’s Little Big Man
PARIS – National stereotypes do not fade easily, especially if those with the greatest influence seem to be doing their best to justify them.
Consider the case of France.
To outsiders, the land of Molière is a country where political leaders’ extramarital relationships are tolerated, while badly needed economic reforms are not.
But the world could be in for a surprise – or at least half a surprise.
When it comes to politicians’ liaisons, continuity may prevail in France; but on the issue of reform, change may be around the corner.
President François Hollande has announced measures that, if implemented, would amount to a peaceful revolution: a major reconciliation with the industrial and business world that even his more energetic predecessor, Nicolas Sarkozy, dared not attempt, despite – or precisely because of – his more conservative inclinations.
The reality of change, however, has been hampered by the stereotype of continuity.
Hollande’s daring pledge of €30 billion ($40.6 billion) in tax cuts to boost the economy has been hijacked, at least in part, by revelations about his private life.
Public-opinion polls following the publication of photographs of a helmeted Hollande riding on a scooter behind one of his bodyguards to an assignation with a movie actress suggest that the French are mildly interested.
But the reality is more nuanced.
The French are not morally shocked by such revelations.
Though former President François Mitterrand’s second family was virtually a state secret, known only to a select elite and hidden from the public by a reverential press, his mistress and their daughter attended his funeral.
And Sarkozy’s tumultuous private life at the beginning of his presidency was on open display.
Unlike the British and the Americans, the French are much less obsessed with sex than they are with financial scandal.
Public-opinion surveys reveal an interesting dualism: the French want maximum freedom in the private sphere and maximum protection in the public sphere.
Thus, the French do not criticize Hollande on the ground of ethics, but on the ground of politics.
The president of “la Grande Nation,” political heir of the Sun King and General de Gaulle, has made a fool of himself: he looked simply ridiculous on his scooter.
Victor Hugo coined the formula “Napoleon le petit” to describe Napoleon III.
Will Hollande, who seems to take so much inspiration for both his public and private life from his mentor and model, France’s first-ever Socialist president, one day be described as “Mitterrand le petit”?
Vaudeville may be a French specialty, like bread, cheese, and wine, but it does not strengthen the dignity and credibility of an already spectacularly unpopular presidency.
Hollande wanted to be a “normal president.”
In the stolen images of him en route to a tryst, he seems to be outdoing himself.
And French humorists – and even politicians – have been quick to play on his vulnerability.
Hollande may be in love with another woman; it does happen.
But, if he is, it could not have been revealed at a worse moment, precisely when he was intent on steering the country onto a new, courageous, and badly needed course.
One may regret the disappearance of boundaries between private and public life in our global Internet age, but one must adjust to it – and Hollande clearly has not.
Of course, the key question is why Hollande waited 18 months before doing the right thing and helping the French economy by alleviating the tax burden that had been reducing French enterprises’ competitiveness.
The official answer is that deteriorating global economic conditions left no other choice.
For some, including me, Hollande was from the start a true social democrat.
But, having campaigned as a socialist, and with his own camp’s deep divisions leaving him no real majority in parliament, he could not afford to reveal his pro-industry orientation (he continues to denounce the financial sector) without a significant delay.
Whether one calls that realism or lack of political courage, a year and a half has been lost, seriously hampering France and its economy.
Now, however, the country may at long last be headed in the right direction.
But it is likely to have a weaker president at the helm.
Hollande now has three years to prove that, animated by the right ideas, he can transform his image – and that of France – with economic results, if not by his personal behavior.
The Congress of Vienna Revisited
PARIS – Two hundred years ago, on September 25, 1814, Russia’s Czar Alexander I and Friedrich Wilhelm III, the King of Prussia, were greeted at the gates of Vienna by Austria’s Emperor Franz I. The start of the Congress of Vienna ushered in the longest period of peace Europe had known for centuries.
So why has its anniversary all but been ignored?
True, the Congress of Vienna is mostly viewed as marking the victory of Europe’s reactionary forces after the defeat of Napoleon.
Yet, given today’s growing global confusion, if not chaos, something like “Proustian” nostalgia for the Congress may not be out of order.
Here, after all, was a meeting that, through tough but successful negotiations, reestablished international order after the upheavals caused by the French Revolution and the Napoleonic Wars.
Can we apply any of its lessons today?
To answer that question, we should consider not just the 1815 Treaty of Vienna, but also the 1648 Peace of Westphalia and the 1919 Treaty of Versailles, each of which in its own way brought to an end a bloody chapter in European history.
The treaties signed in 1648 concluded nearly a century of religious warfare by enshrining the principle of cuius regio,&nbsp;eius religio (“whose realm, his religion”).
The Congress of Vienna reinstated the principle of the balance of power, based on the belief that all parties shared a common interest transcending their respective ambitions, and re-established the Concert of Nations, which for two generations stopped territorial and ideological revisionism of the type seen from 1789 to 1815.
By contrast, the Treaty of Versailles, too harsh to be honored and too weak to be enforced, paved the way for World War II.
Of the three treaties, the one produced by the Congress of Vienna offers a sort of mirror image to help us understand the specificity of our current conditions.
In Vienna, the European powers were among themselves.
Their feeling of belonging to a great and unified family was reinforced by the common aristocratic origins of their diplomats.
The cultural “other” was not an issue.
Of course, the ambition today cannot be to recreate that world (or to reestablish an anachronistic Westphalian order of religious separation), but rather to devise a new order predicated on different assumptions.
Indeed, one of the keys to our current global disorder is that, in contrast to the Congress of Vienna – or, for that matter, the parties of 1648 – the international system’s main actors are not united by a common will to defend the status quo.
The main actors fall into three categories: open revisionists, like Russia and the Islamic State; those ready to fight to protect a minimum of order, such as the United States, France, and Great Britain; and ambivalent states – including key regional players in the Middle East, such as Turkey and Iran – whose actions fail to match their rhetoric.
In such a divided context, the alliance of “moderates” created by US President Barack Obama to defeat the Islamic State – a group that includes Saudi Arabia, Qatar, and the United Arab Emirates – is weak at best.
A multicultural coalition is probably a requirement of legitimate military action in the Middle East; the dilemma is that unless Obama’s regional coalition broadens considerably, his current allies’ enthusiasm for US military intervention is likely to diminish quickly.
Or perhaps something like the “bipolar hegemony” of Great Britain and Russia after 1815 (though other players like Austria, Prussia, and France mattered) could be reconstituted, with the US and China substituting for Great Britain and Russia.
This seems to be Henry Kissinger’s ultimate dream – a dream that one can glimpse in his latest book, Germanically entitled World Order: Reflections on the Character of Nations and the Course of History.
But can we depend on that dream’s realization?
At a time when we are confronted by Russian expansionism and the extremism of messianic thugs, the lessons from the Congress of Vienna may seem distant and irrelevant.
Yet one is obvious: States possess common interests that should trump national priorities.
China, India, and Brazil are stakeholders in the world system, which means that they, too, need a minimum of order.
But that implies that they also contribute to maintaining it.
China’s interests, for example, would be best served not by playing Russia against the US, but by choosing the party of order over the party of disorder.
A gathering of the modern equivalents of Metternich, Castlereagh, Alexander I, and Talleyrand is also a dream: there are none.
But, in confronting today’s growing disorder and escalating violence, the leaders we have would do well to draw some inspiration from their forebears, who 200 years ago this week opened the way to nearly a century of peace.
Donald Rumsfeld and Smart Power
Donald Rumsfeld, America’s Secretary of Defense, recently spoke about the Bush administration’s global war on terror. “In this war, some of the most critical battles may not be in the mountains of Afghanistan or the streets of Iraq, but in newsrooms in New York, London, Cairo, and elsewhere.
Our enemies have skillfully adapted to fighting wars in the media age, but for the most part we have not.”
The good news is that Rumsfeld is beginning to realize that the struggle against terrorism cannot be won by hard military power alone.
The bad news is that he still does not understand soft power – the ability to get what you want through attraction rather than coercion.
As The Economist commented about Rumsfeld’s speech, “until recently he plainly regarded such a focus on ‘soft power’ as, well, soft – part of ‘Old Europe’s’ appeasement of terrorism.”
Now Rumsfeld finally realizes the importance of winning hearts and minds, but, as The Economist put it, “a good part of his speech was focused on how with slicker PR America could win the propaganda war.”
In other words, in blaming the media for America’s problems, Rumsfeld forgot the first rule of marketing: if you have a poor product, not even the best advertising will sell it.
Rumsfeld’s mistrust of the European approach contains a grain of truth.
Europe has used the attractiveness of its Union to obtain outcomes it wants, just as the US has acted as though its military pre-eminence could solve all problems.
But it is a mistake to count too much on hard or soft power alone.
The ability to combine them effectively is “smart power.”
During the Cold War, the West used hard power to deter Soviet aggression, while it used soft power to erode faith in Communism behind the iron curtain.
That was smart power.
To be smart today, Europe should invest more in its hard-power resources, and America should pay more attention to its soft power.
During President George W. Bush’s first term, Secretary of State Colin Powell understood and referred to soft power, whereas Rumsfeld, when asked about soft power in 2003, replied “I don’t know what it means.”
A high price was paid for that ignorance. Fortunately, in his second term, with Condoleezza Rice and Karen Hughes at the State Department and Rumsfeld’s reputation dented by failures that in the private sector would have led to his firing or resignation, Bush has shown an increased concern about America’s soft power.
Of course, soft power is no panacea.
For example, soft power got nowhere in attracting the Taliban government away from its support for Al Qaeda in the 1990’s.
It took hard military power to sever that tie.
Similarly, North Korean dictator Kim Jong Il likes to watch Hollywood movies, but that is unlikely to affect his decision about whether to give up his nuclear weapons program.
Such a choice will be determined by hard power, particularly if China agrees to economic sanctions.
Nor will soft power be sufficient to stop Iran’s nuclear program, though the legitimacy of the Bush administration’s current multilateral approach may help to recruit other countries to a coalition that isolates Iran.
But other goals, such as promoting democracy and human rights, are better achieved by soft power.
Coercive democratization has its limits, as the US has learned in Iraq.
This does not mean that Rumsfeld’s Pentagon is irrelevant to American soft power.
Military force is sometimes treated as synonymous with hard power, but the same resource can sometimes contribute to soft power.
A well-run military can be a source of attraction, and military cooperation and training programs can establish transnational networks that enhance a country’s soft power.
The US military’s impressive work in providing humanitarian relief after the Indian Ocean tsunami in 2004 helped restore America’s attractiveness, and enhanced its soft power.
But the misuse of military resources can also undercut soft power.
The Soviet Union possessed a great deal of soft power in the years after World War II.
But the Soviets’ attractiveness as liberators was destroyed by the way they later used their hard power against Hungary and Czechoslovakia.
Brutality and indifference to “just war” principles of discrimination and proportionality can also destroy legitimacy.
The efficiency of the initial American military invasion of Iraq in 2003 created admiration in the eyes of some foreigners.
But this soft power was undercut by the inefficiency of the occupation, the mistreatment of prisoners at Abu Ghraib, and the policy – initiated by Rumsfeld – of detainment without hearings at Guantánamo.
To be sure, no one expects that we can ever attract people like Mohammed Attta or Osama bin Laden.
We need hard power to deal with such cases.
But today’s terrorist threat is not Samuel Huntington’s clash of civilizations. It is a civil war within Islam between a majority of normal people and a small minority who want to coerce others into a accepting a highly ideological and politicized version of their religion.
We cannot win unless the moderates win. We cannot win unless the number of people the extremists recruit is lower than the number we kill and deter.
Rumsfeld may understand this calculus in principle, but his words and actions show that he does not know how to balance the equation in practice.
Doing so – and thus being in a position to win the war – is impossible without soft power.
The Trumping of American Politics
WASHINGTON, DC – As Republicans and Democrats go through the long process of selecting a nominee for next year’s presidential election, both parties face the same question. Will the anti-establishment – even anti-political – mood now dominating the contest last?
For once, Labor Day (the first Monday in September) was not the presidential race’s demarcation point: the overall themes had already been set.
Revulsion at government and traditional politicians hit the presidential contest like a tornado in the summer, flattening the campaigns of some who were once seen as serious contenders.
Among Republicans this sentiment is, of course, no surprise, given their party’s steady rightward drift and consistent antipathy toward President Barack Obama.
But it suited a wealthy, noisy braggart who barreled into the race attacking conventional politicians as “stupid” and insisting that he alone could get things done.
Those who wrote off Donald Trump as a “buffoon” failed to see that he has shrewdly read the Republican zeitgeist, and that he knows precisely where to stick the knife into competitors.
His depiction of former Florida governor Jeb Bush as a man of “low energy” has done real damage to a candidate whom many had assumed – even before he formally entered the race – would be the favorite.
“The Donald” (no one has better name recognition than the former TV personality) has pitched his appeal both to American patriotism and the country’s dark side.
His slogan, “Make America Great Again,” is aimed at those who are frustrated that the US can no longer impose its will on an increasingly confusing world.
For them, and for Trump, Obama is to blame: he doesn’t stand up to foreign leaders (Binyamin Netanyahu might disagree); he withdrew from Iraq too soon (though the timetable was set by his Republican predecessor); he even “apologizes” for America.
Trump plays to America’s persistent veins of racism and nativism: he vows somehow to round up and deport some 11 million undocumented aliens and fortify America’s border with Mexico by building a wall – paid for by Mexico.
His striking narcissism (everything he does is “outstanding, great, terrific, the best”) is both his trademark and his policy.
Around mid-August, as Trump’s poll numbers rose even after public statements that would have brought down mere mortal candidates, it dawned on the pundits that he was no summer infatuation.
It became evident that he might win the first nominating contest, the Iowa caucuses, and that he was leading in the second, New Hampshire, and other states.
It was no longer laughable to say that he could be the Republican nominee.
But the “anti-system” mood of this election campaign is not confined to the Republicans.
Bernie Sanders the socialist and Donald Trump the plutocrat are addressing much the same impulse.
Speaking in clear, declarative sentences, Sanders sets forth an idealistic conception of government policy that appeals to a great many people on the growing left of the Democratic Party.
By contrast, Jeb Bush and the Democrats’ presumed nominee, Hillary Clinton, embody traditional politics.
Both come across as focus-grouped, packaged, and cautious, whereas Trump and Sanders are seen by their followers as “telling it like it is.”
Sanders appeals to the popular frustration with the compromises made by America’s leaders, including the centrist Bill Clinton.
Hillary Clinton, trying to straddle the divide between the two wings of the Democratic Party, is increasingly leaning to the left as Sanders draws enormous crowds, something she has yet to accomplish.
Moreover, her campaign is struggling to escape the quagmire produced by revelations that she conducted official business on a private email server during her tenure as Obama’s Secretary of State.
Meanwhile, Trump’s appeal among Republicans is across the board: moderates and conservatives, college-educated, Evangelicals, men and women.
When two far-right activists in Boston beat a homeless Latino man, with one saying that they had acted in Trump’s name, the candidate commented that some of his followers are “passionate.”
A poll of Trump supporters found that 66% believe that Obama is a Muslim, and 61% that he was not born in the US (a claim that Trump continued to trumpet long after it had been disproved).
Trump’s closest Republican rival, Ben Carson, a renowned neurosurgeon, also has no political experience and says outlandish things.
But Carson says them quietly, which may be why his favorability rating in Iowa is higher than that of his Republican competitors (pulling even with Trump in one poll).
Carson has said, for example, that people enter prison as heterosexuals and come out gay; that America is like Nazi Germany in suppressing ideas and opponents; and that the president need not enforce the Supreme Court’s recent landmark decision legalizing gay marriage.
Trump and Carson, along with two other candidates running as political outsiders – Ted Cruz, a senator from Texas, and former Hewlett-Packard CEO Carly Fiorina – currently account for around 60% of support among Iowa Republicans.
Bush and the rest of the field, including Rand Paul, Scott Walker, and Marco Rubio – all one-time darlings of the political press – are floundering.
To recover ground, some, especially Walker, have fallen into the trap of trying to out-Trump Trump.
But there’s only one Trump, and his candidacy is causing conniptions on the part of Republican Party officials, particularly given his campaign’s open hostility toward Latinos.
Following Obama’s re-election, in 2012, Republican leaders commissioned a study that showed that the party’s nominee will have to win more Latino votes than ever to win the White House.
There is scant chance of that if Trump is the party’s standard-bearer.
So far, Trump has defied the laws of political gravity.
But it remains possible that his candidacy will crash as some of his rivals drop out and leave their supporters (and wealthy backers) to crystallize around someone they see as a more viable alternative.
That would be a relief to Republican Party leaders, who recently obtained Trump’s vow (easily undone) not to mount an independent presidential campaign should he fail to win the party’s nomination.
In the meantime, both party establishments have reason to be nervous.
With Sanders now polling well ahead of Clinton in New Hampshire, serious commentators have begun speculating that Americans will ultimately be asked to choose between Sanders and Trump.
Clowns on the Campaign Trail
NEW YORK – Donald Trump, the real-estate tycoon and reality-show host, also known as “The Donald,” is unlikely to be the next president of the United States.
He is loud, crude, ignorant about most things, and looks absurd in his puffed up blond comb-over hairdo.
Even ardent Republicans have dismissed him as a “rodeo clown,” and his campaign as a “circus.”
The Huffington Post covers Trump’s campaign strictly as entertainment news.
Yet, for the moment, Trump is leaving all his rivals for the Republican presidential nomination in the dust.
Even in US politics, which can be very strange, this is extraordinary.
What explains Trump’s popularity?
Are all his supporters “crazies,” as Senator John McCain, perhaps unwisely, called them?
Trump’s critics argue that he is playing to the basest instincts of disaffected voters, who hate foreigners (especially Mexicans), distrust bankers (or anyone with a higher education, for that matter), and still can’t get over the election of a president whose father was black.
Trump, in the comedian Jon Stewart’s words, is “America’s id,” or at least the id of a large number of mostly white, mostly older, mostly small-town Americans.
Now, all this may be so.
But Trump is part of a wider phenomenon throughout the democratic world.
Disaffected voters can be found everywhere, whether in the US, Europe, or India.
But they are not only turning away from mainstream political parties and following populists who promise to clean out the corrupt elites from the centers of power; they also share a taste for political entertainers, or clowns if you like.
Beppe Grillo, a real professional comedian, now leads the second largest political party in Italy.
His aim is to overturn the country’s political establishment and upset the European Union by taking Italy out of the euro.
In a sense, of course, Italians already voted three times for a clownish figure as prime minister.
Silvio Berlusconi, another real-estate billionaire, who began his career as a crooner on a cruise ship, was even more outrageous than Trump, as well as a master of the mass media – literally so, as he owned most of it in his country.
As is true of The Donald, many people, especially men, liked him not despite his outrageous statements and behavior, but because of them.
A television comic named Victor Trujillo, but better known as Brozo the Creepy Clown, became the most influential political commentator in Mexico.
In the Netherlands, not normally a country known for clownish politicians, the surge of populism was first led by Pim Fortuyn, a flamboyantly gay man who staged provocative, and always richly entertaining, public appearances.
Again, his talent for shocking statements was an asset, not a hindrance.
After his violent death in 2002, Geert Wilders, a former punk rocker with a pile of dyed platinum blond hair, shone brightest in the Dutch populist firmament.
Apart from peculiar hairstyles (the balding Berlusconi has his head painted), the new populists have several things in common.
Whether billionaires or not, they share a prickly hostility to so-called elites, from whom they feel socially excluded.
Wilders and Trump, among others of their ilk, also play on popular anti-immigrant sentiment.
Trump called Mexicans in the US “rapists.”
Wilders wants to ban the Koran and stop Muslims from moving to his country.
But this, too, is part of the same resentment against elites, who are blamed for allowing foreigners to arrive in the first place.
In Europe, antipathy to immigrants, or Islam, can quickly switch to hostility toward the European Union, which is seen as yet another bastion of entrenched elites.
This is what Wilders and Grillo have in common.
But I think there is a more basic reason why political clowns are doing so well.
Many people are fed up with the professional political class.
In the past, politicians of the left often came from the trade unions, while conservatives were rich businessmen or landowners.
Social classes had their own interests, which were represented by parties divided by clear ideological differences.
Increasingly, however, people see no difference between politicians from one party or another.
They are lumped together under such rubrics as “Washington,” “Brussels,” or “Wall Street.”
This perception is exaggerated, especially in the US.
The country really would be a different place under a Republican president, especially with a Republican majority in both houses of Congress.
But it is certainly true in many places that ideological differences have largely collapsed.
Social democrats govern in coalition governments with laissez-faire conservatives.
Neoliberalism reigns.
More and more, politics looks like a rigged system whereby members of the same political class compete for jobs, rather than for the victory of ideas, or on behalf of larger collective interests.
Trumpism, then, or Grilloism, is a revolt against the professional politicians.
Trump is not just trying to run against a Democrat for the presidency; he is running against his own party’s establishment as well.
His supporters are disgusted with the compromises made in Washington between leading Republicans and Democrats.
To them, bipartisan cooperation is not necessary to the governance of a large and diverse country; it is a form of corruption.
That is why they voted five years ago for Tea Party politicians, who preferred a government shutdown to a negotiated deal with Democrats.
And that is why they are cheering for a showy loudmouth like Trump.
But, without compromise, a democracy becomes ungovernable.
The US is in grave danger of this now.
Even though Trump will not become the next president, the populist damage has already been done.
Genetics for the People?
LONDON – “Your genetic information should be controlled by you,” declares an advertisement for the American direct-to-consumer (DTC) genetic-testing firm 23andMe.
Amid the current furor over electronic eavesdropping, the notion that individuals should decide who can access their personal data is particularly appealing.
But whether 23andMe is practicing what it preaches remains dubious, at best.
In fact, even some “techno-libertarians,” who believe that government should not regulate new developments in biotechnology, have supported the US Food and Drug Administration’s decision – outlined in a scathing letter to 23andMe CEO Anne Wojcicki last November – to prevent the firm from marketing its tests pending further scientific analysis. “I’d like to be able to argue that the [FDA] is wantonly standing in the way of entrepreneurism and innovation by cracking down on 23andMe,” wrote Matthew Herper in Forbes.
According to the FDA, 23andMe’s marketing of an unapproved Personal Genome Service (PGS) violated federal law, because, after six years, the firm still had not proved that the tests actually work.
23andMe is also coming under fire from its users.
Just five days after the FDA sent its letter, a California woman, Lisa Casey, filed a $5 million class-action lawsuit against the firm, alleging false and misleading advertising.
Doubts about 23andMe’s PGS go back a long way.
In 2008, the American Society of Clinical Oncology commissioned a report that declared that the partial type of genetic analysis offered by 23andMe had not been clinically proved to be effective in cancer care.
Two years later, the US Government Accountability Office concluded after a lengthy investigation that DTC genetic tests provide “misleading” results – a situation that is complicated further by “deceptive marketing.”
What 23andMe offered was a $99 test for some 250 genetically linked conditions, based on a partial reading of single nucleotide polymorphisms (SNPs) – points where individuals’ genomes vary by a single DNA base pair.
Given that DTC genetic tests target only a fraction of the human genome’s three billion markers, and various companies sample different SNPs, different tests may return disparate results for the same customer, who might then make serious medical decisions based on inaccurate information.
In this context, it is unsurprising that even those who oppose regulation in general see the need for it in the case of DTC testing.
But the issue goes beyond inaccuracy.
As the journalist Charles Seife has pointed out, the retail genetics test is “meant to be a front end for a massive information-gathering operation against an unwitting public.” Indeed, when 23andMe customers log in to their accounts, they are invited to fill out surveys about their lifestyle, family background, and health, adding epidemiological value to the genetic data, which are then used by the firm’s research arm, 23andWe.
In providing this information, 23andMe’s customers are building a valuable “biobank” for the company.
Given that the United States decided not to create a national biobank like the United Kingdom’s, owing to the high set-up costs – estimated at about a billion dollars – 23andMe may well view its growing biobank as saving it a massive outlay.
Some 60% of 23andMe customers have agreed to provide the requested information.
Of course, one could argue that they are not “an unwitting public,” but altruistic volunteers – so generous, in fact, that, beyond paying for the service, they hand over the value of their subsequent labor in providing epidemiological data.
Tom Sawyer pulled off that business strategy when he persuaded his friends to pay him for the privilege of taking over his hated chore, painting the picket fence.
But most scientific research subjects either receive compensation or contribute their time free of charge; they do not pay to participate.
“The long game here is not to make money selling kits, although the kits are essential to get the base level data,” says board member Patrick Chung. “Once you have the data, [23andMe] does actually become the Google of personalized health care.”
That is exactly the problem, according to Seife.
The massive corporate data store that Google has accumulated through all of our individual searches has become its most valuable asset. “By parceling out that information to help advertisers target you, with or without your consent, Google makes more than $10 billion every quarter,” Seife writes.
In other words, users have become the product.
But it also includes a less prominently displayed qualifier: “If you do not give consent…we may still use your Genetic and/or Self-Reported Information for R&D purposes.”
In other words, commercial use of non-identifiable information is still allowed without donors’ explicit consent.
That is what worries libertarians – and anyone else who is concerned about the expansion of online efforts to gather information about individuals.
As a 23andMe blog post by Wojcicki puts it, “Wikipedia, YouTube, and MySpace have all changed the world by empowering individuals to share information. We believe this same phenomenon can revolutionize health care.”
But if individuals share information involuntarily, it is the company – not its customers – that will be empowered.
Donor Funds are Needed for Poverty, Not Iraq
America wants the world to pledge billions of dollars to Iraq's reconstruction at a donor's meeting to be held in October in Madrid.
The world's answer should be an unequivocal "No!"
Iraq's long-term reconstruction does not need foreign financial assistance.
What it needs is a political settlement, and that will be possible only with the withdrawal of America's occupying army.
The billions of dollars that the US seeks should be directed towards true global emergencies, such as the fight against AIDS and hunger.
The Bush Administration probably launched its war against Iraq because it intended to make the country a new base for long-term military operations in the Gulf region.
After the terrorist attacks on the US of September 2001, it wanted to withdraw troops from Saudi Arabia, and it presumably chose Iraq as its new long-term base of operation.
This, I believe, is why America is so opposed to a quick transfer of sovereignty to Iraqis.
A truly sovereign Iraq might well tell the US to withdraw from the country.
As long as America remains an occupying force in Iraq, political stability there is unlikely. Without political stability, Iraq's economic recovery is unlikely, too.
The US is seen by many Iraqis as a colonial occupier, and is therefore the target of attack not only by loyalists of Saddam Hussein, but by Iraqi nationalists of various sorts, as well as by Arab fighters from neighboring countries.
The attacks against the US occupation are destroying the Iraqi economy as well as lives.
The attackers have successfully stopped the flow of a large part of Iraq's oil exports.
The oil pipeline in the north to Turkey has been repeatedly bombed, and functions sporadically if at all.
The oil fields in the South do not have enough electricity to operate at capacity because the power grid is also the target of repeated bombings.
Indeed, Iraq is reportedly pumping 1-2 million barrels of oil a day rather than the 2-3 million barrels that the country could quickly achieve in peaceful circumstances.
This shortfall in oil earnings, not the lack of foreign assistance, is the real cause of Iraq's financial crisis.
Each reduction of one million barrels per day translates into lost revenues of around $30 million per day at today's world market price of $30 per barrel.
This implies that if Iraq increased its oil exports by one million barrels a day--which it could quickly achieve with a cessation of attacks on its infrastructure--it would have around $10 billion per year in additional revenues to begin reconstruction.
Iraq's oil production could probably rise to around five million barrels per day within three years.
That would represent an extra 3-4 million barrels per day on top of today's production, or roughly $30-40 billion per year--enough not only to restore basic services, but to achieve big improvements in living standards and economic growth in the medium term.
At that level of production, Iraq would be a middle-income country, with a gross national product per person of several thousand dollars per year, including non-oil production.
In short, Iraq would not need official development assistance at all.
The biggest costs in Iraq are not for reconstruction but for US troops.
America is paying an astounding $51 billion per year to station 140,000 troops in the country, a staggering cost of around $360,000 per soldier per year.
The US could save itself tens of billions of dollars per year by withdrawing its troops from Iraq.
If the US were then to give just a fraction of the financial saving to Iraq in 2004, there would be plenty of incremental revenues to run the Iraqi Government and to support the recovery of oil production.
In addition to the shocking waste of lives and money from the Iraq war, America has done the world another great disservice.
By focusing global attention on an economic crisis that does not really exist, it has diverted public attention from serious crises that do.
The world would stand up and cheer if the US called upon the October donor meeting to address truly life-and-death issues like the battle against AIDS and hunger.
Consider the battle against AIDS, TB, and malaria. Around eight million impoverished people will die of these three preventable and treatable diseases in 2004.
In 2001, the world created a Global Fund to Fight AIDS, TB, and Malaria.
Yet for fiscal year 2004, the Bush Administration is committing $71 billion to Iraq and just $200 million for the Global Fund.
For every dollar that it is giving to the Global Fund, the Bush Administration is committing $350 to Iraq.
These are grotesquely distorted priorities.
Worse, the US is encouraging other donor countries to misspend as well.
It's time for the world to tell America some hard news. Other countries won't pay for America's occupation of Iraq.
The US has to make clear that it plans to withdraw its troops quickly and entirely.
Moreover, the US should stop wasting so much money on military spending and redirect its efforts towards the world's poorest people.
That's a financial effort that the world can and should join.
Don Quixote, Dissident
It is now four centuries since the birth of a masterpiece whose author and hero both seem younger than we do.
The simplest explanation for this may be found in Flaubert’s words about Don Quixote : “I found my origins in this book, which I knew by heart before I learned how to read.”
This is the unmistakable stamp of greatness in a writer.
Hunting after his own ghost – an obvious sign of inner unhappiness – Hidalgo searched for a place where dreams, reality, sainthood, love, and justice coexist.
In their burlesque approach to humanity, Don Quixote and Sancho Panza are the most enduring and endearing clownish couple in world literature.
It is no surprise, then, that for the last 400 years Don Quixote and Panza have bred many relatives and successors, including countless buffoonish boss-and-servant couples.
Even the history of the circus is focused on such a pairing: the vain, dignified White Clown and Augustus the Fool, the humble loser who is kicked in the pants by his stiff, pompous partner.
For an East European like myself, it is not easy to ignore the history of the circus – or history itself.
The solemn Communist Manifesto announced the specter of the Great Utopia haunting Europe, but failed to warn us of the bloody tyranny.
The gullible Sancho Panza was meant to adopt the revolution’s deceptive dogma as entitlement to wage a brutal war against all.
The dream of improving the world disguised a farce that affected not only a single life, as in Cervantes’ story, and affected not only the misleading army of buffoons believed to be missionaries. This dream destroyed generations of victims.
In the world circus, the poet looks like a Knight of the Sorrowful Countenance, and Augustus the Fool appears ill-equipped for everyday life.
Like Don Quixote – and Cervantes himself – the artist dreams of other rules and rewards than his fellow men, who are content to digest their everyday lives.
In the socio-political arena, Augustus the Fool faces the Clown of Power.
Cervantes’ political parody can be read in many twentieth-century East European stories.
Its incomparable vitality and language, for example, find their way into the work of the Soviet writer Andrei Platonov.
A communist who considered himself an honest proletarian writer, but called by Stalin, the Red Clown of Power, “svoloc” (scoundrel) and “balagancik” (buffoon), Platonov lived a lifelong ordeal.
His carnivalesque odyssey of totalitarianism displays a world of misery, boredom, and obedience in its dark journey to an unreachable paradise.
The communist Knight, the new “caballero de la triste figura,” a kind of enlightened idiot, blinded by his loyalty to the unreal and by his harsh political correctness, considers Lenin a new Moses.
He rides the Rosinante of the Proletarian Force, falls in love with the dead Rosa Luxemburg in her role as Comrade Dulcinea and has intercourse with a locomotive.
In today’s free-market carnival, nothing seems visible unless it is scandalous and nothing is scandalous enough to be memorable.
So we pay homage to Cervantes at a time when we routinely co-habit with a very different outrageousness: religious fanaticism and terrorism, political manipulation, the cacophony of perverted simplification, the belligerent marriage between a new messianism and an aggrandizing quixotic blindness.
So long as we celebrate Cervantes, however, perhaps all is not lost.
Don\u0027t Bet on a Quick US Recovery
Whither the US economy?
Every piece of good news suggesting that America's recession is about to end is followed by bad news suggesting otherwise.
The Federal Reserve Board's current monetary policy reflects this ambiguity: it is neither lowering nor raising interest rates.
The meanderings of the stock market are a similar indication of uncertainty.
Much of the discussion of the US economy is of little help, for it is focused on the wrong question: when did the recession start and end?
Recessions typically are defined by whether GDP has fallen .
But what is of real concern is the gap between the economy's potential and its actual performance.
In these terms, the American economy's performance is likely to remain dismal. Increases in measured productivity mean that the economy's potential growth rate is now somewhere between 3.5-4% annually.
(There have been changes in the way we correct for price changes, so that what we measure today as 4% actually represents what we used to measure as a substantially smaller number.)
Even when America grows at 0.5%, a gap of 3% in a $10 trillion economy means a loss of output of $300 billion--an enormous amount by any definition.
The shortfall, in turn, implies rising unemployment.
Given the huge gap, the US will have to grow in excess of its long run potential in order to get back to utilizing its resources fully.
Even with the surprisingly strong growth numbers for the first quarter of the year, most forecasters see growth over 2002 as a whole falling short of its long run potential, and by a significant amount, implying that unemployment will rise.
There is a simple interpretation of what has been happening to the US economy.
The recession of 2001 combined an inventory downturn with an investment downturn.
The first is now over; the second--the result of overinvestment in high technology and telecommunications, the sectors that were so important in the boom of the late 90s--may last considerably longer.
There remains a considerable capacity overhang--such as fiber optic lines that remain dark, having yet to see any light pass through them.
Merely lowering interest rates did not, and will not, lead firms to invest more in these sectors.
The good news--and the bad--is that the pace of technological change in these sectors is sufficiently fast that much of the equipment may become obsolete well before it is worn out, or even used, enabling new investment to start faster than it otherwise would.
Meanwhile, the US cannot expect much relief from exports, given the global economic slowdown, or from consumer spending.
Typically, a rebound in consumption helps to reinvigorate the economy; but consumption has, almost miraculously, sustained the economy as investment has fallen, and thus there is little scope for a rebound.
The risks are mainly on the downside.
There is a significant chance that with Americans' savings rate at dismally low levels - sustained last year by car purchases and home refinancing - consumer spending may moderate.
Some of the sales in 2001, moreover, reflected purchases that would have been postponed until this year were it not for special offers inducing consumers to buy cars earlier than they otherwise would.
Even Americans can consume only so many new cars.
On the contrary, a high level of indebtedness now afflicts US households.
This sharp deterioration in the US fiscal position means that long-term interest rates have fallen little, even as short-term interest rates reached record lows.
Rising unemployment adds to a sense of economic insecurity, and may further weaken consumption.
Record levels of military expenditures are the only major source of expansion, and while such expenditures may be necessary and do stimulate the economy in the short run, they do not enhance its long-term competitiveness and strength.
After initially believing that its economy was so strong that it would not only be unaffected by America's slowdown but also maintain robust growth, Europe has turned to looking to the US recovery to lift it out of its malaise.
I think this is a risky strategy; if a strong US recovery is not around the corner, then Europe needs to act on its own, using the standard counter-cyclical tools of monetary and fiscal policy.
The threat today is not inflation, but unemployment.
It is unemployment and economic insecurity that breed xenophobia and support for extreme rightist movements across the continent.
Unfortunately, Europe's hands are partially tied by a central bank that focuses on capping inflation, and a Stability Pact that, as customarily interpreted, limits the use of deficit spending as an economic stimulus. The challenge going forward will be to reinterpret these strictures.
The prospect of sustained long-term growth and social justice requires that Europe's new institutions retain sufficient flexibility to reshape themselves as they confront new problems.
Don’t Blame The Euro
Who’s he kidding?
Maroni’s nostalgia for the lira is little more than a transparent-- and irresponsible-- election ploy by Italy’s Northern League, an attempt to divert blame for the country’s present economic troubles onto Romano Prodi, former EU Commission president and center left candidate in the forthcoming general elections.
A return to the lira would be “economic suicide” for Italy according to ECB chief economist Otmar Issing.
The euro has made Italian government bonds as good as German government bonds, because the ECB is willing to accept both on an equal basis as collateral for ECB loans.
This has dramatically reduced the cost of borrowing for the Italian government.
Has the Italian minister thought for a minute how his government would pay for all its public spending on welfare, and other items, if Italy’s interest rates no longer were subsidized by the ECB?
Perhaps Maroni wants to go back to the lira so that Italy can de-value it.
This suggests an important advantage of the euro for Germany, where misplaced nostalgia for the deutsche mark -- no doubt aided by the steady invective against the common currency by government officials -- is growing.
The euro stops countries like France and Italy from playing their old protectionist game of devaluing their currencies at German expense.
Because of this, the competitive advantages Germany recently gained from its economic reforms are being protected by the euro from offsetting currency devaluations inside the euro-zone.
This is good news.
Improved competitiveness facilitated by the euro bodes well for Germany’s medium term economic prospects.
The German public — hungry for economic recovery and tired of excuses -- has not been fooled by the euro and ECB bashing of its present government, and handed German Chancellor Gerhard Schroeder a decisive defeat in the recent North Rhine-Westphalia elections.
(Had they been fooled, perhaps they would have been more forgiving.)
Jacques Chirac -- another of Europe’s great euro and ECB bashers -- also suffered a severe personal reversal at the polls when the French rejected the EU Constitution.
The public seems to be saying to the on-their-way-out leaders of the Franco-German alliance: Stop the excuses, and start getting our economies working again.
Does anyone really believe the French would have voted No had France’s economic growth rates been double or triple their current levels?
The same is true in the Netherlands where the EU Constitution was also rejected.
Unlike the French, however, the Dutch have not been euro bashers even though, as a medium sized country, the Netherlands do have some legitimate grievances against the EU—namely, how the so-called “Stability Pact” to control fiscal deficits is being enforced.
Holland has played by the stability pact rules but, so far, the big countries -- France, Italy and Germany-- have been getting a free pass from the responsible authorities.
This is neither fair nor smart -- and no doubt contributed, to some extent, to the Dutch No vote.
France, on the other hand, has been the beneficiary of this discrimination — yet it bashes the euro and votes No into the bargain.
The good news for Europe is that the big country politicians — Schroeder in Germany, Chirac in France and Silvio Berlusconi in Italy — all are on the way out.
The path will soon be clear for a new set of leaders to get Europe’s economic growth engines going again.
The bad news is that all three politicians are lame ducks unlikely to undertake the reforms Europe so badly needs before their final goodbyes.
This is a point made most recently by former ECB president Wim Duisenberg in a CNN interview -- Europe must wait before its dormant growth engine re-ignites.
In the meantime, the euro has come down in the foreign exchanges, and there has been scare talk in some quarters -- correctly labeled as “absurd” by Otmar Issing and Bundesbank president Axel Weber -- that the “European project” is in danger.
As the currency declined, Asian central banks have been seen buying euros hand over fist to bolster their euro reserve assets.
Smart money is buying the euro — not bashing it.
Don\u0027t Block Our Medical Future
We are at the juncture between the old medicine and the new - still mired in the limitations of the old but able to see on the horizon something utterly different in conception.
That way is so new, so revolutionary, so transforming, that it deserves the name it has received.
We are entering the world of regenerative medicine.
We will remake ourselves - rebuilding and replacing the parts of our bodies that let us down; the parts that have sickened, degenerated or ceased to function.
Medicine of the 21 st century will have a new paradigm as the focus turns inward, to understand and harness the ways our bodies function on the molecular and cellular levels.
Unlike today's other profound biomedical revolution - a high tech affair involving decoding our genome - stem cell research is a much more low-tech enterprise.
It's not lack of scientific tools that is the main impediment; it is restrictive laws and public policies.
The first fruits of these revolutions will not come next week or next year, so it is important not to raise public expectations unrealistically.
How to precisely direct the transformation of embryonic stem cells down predictable and desirable pathways remains unknown.
But we could see some applications entering clinics in five years or so.
These could address such hitherto intractable diseases as Parkinson's disease and diabetes, or even such scourges such as end stage heart failure.
A stem cell can come from an embryo, fetus or adult.
It has two properties.
Under the right conditions it can reproduce itself and it can also give rise to the specialized cells that make up the tissues and organs of the body.
Human embryonic stem cells are "pluripotent," which means that they have the potential to develop into all basic tissue types and hence to provide a virtually limitless source of cells for transplantation.
Another kind of stem cell is also in the news - the adult stem cell.
These are found in major organs and they both self-renew and give rise to specialized cells.
There have been stunning advances in getting these cells to change their destiny - transforming blood cells into nerve cells, for example.
Such evidence fuels the moral debates about embryo research.
Those opposed to embryonic stem cell research believe in the absolute sanctity of the human embryo.
As this is a minority view, they often couch their arguments in scientific rather than moral terms.
In testimony before the UK's House of Lords Select Committee on Stem Cell Research, one "expert" actually stated that not only were adult stem cells just as promising as embryonic stem cells (untrue, according to the prevailing scientific consensus) but they were even better - more versatile, more malleable.
Of course, embryo research involves legitimate moral concerns, and it is the British who subjected these concerns to the earliest and the most sustained examination.
That is only fitting because it was in the UK that a new and problematical moral construct - the embryo in a dish - came into being in 1978, with the birth of the first "test tube" baby, Louise Brown, the product of in vitro fertilization.
There were no moral paradigms to deal with the extra corporeal embryo.
Abortion ethics is of little help, although the opponents are often but not always the same.
No, a new way of thinking was required and Britain provided that with the Warnock Report of 1984.
Its conclusions were enshrined in the Human Fertilisation and Embryology Act of 1990.
Under British analysis, the embryo outside the body did have moral status, but only after the appearance of the so-called primitive streak on or about the 14 th day of development.
Before that, it could not be said to be a unique, identifiable future person; it might still split and become twins.
Embryo research was allowed for purposes such as improving the efficiency of IVF.
It was only a small step for the British to allow stem cell research as a permissible purpose.
Most people approve of in vitro fertilization, but it is the technology that gives the infertile the chance to be parents that also poses moral questions.
IVF is inefficient so extra embryos are produced in case they are needed.
These are frozen and many if not most are discarded.
Improving IVF also requires embryo research.
Does it make any moral sense to say that embryos destined to be destroyed should not be used for life saving stem cell research?
Embryonic stem cells are derived from an early embryo called blastocysts at about the 5 th day.
At this point, the embryo is a hollow ball of about 100 cells, none of which can be identified as destined to become any particular part of any particular human being.
Stem cell research requires a sensible, predictable policy environment in order to flourish.
Paradoxically, given its enormous impact on basic research in biological sciences, the United States is not leading this effort and, perhaps, is not even a major player.
For more than twenty years, anti-abortionists have so frightened America's Congress that it left the field of assisted reproduction unregulated at the national level.
So there is no policy framework within which to situate stem cell research or reproductive or therapeutic cloning.
Into this vacuum has stepped President Bush.
But his belief in the absolute sanctity of the early embryo is not shared by a majority of Americans.
The President's stem cell policy - developed without consulting Congress - impedes US science and cruelly prolongs the agony of millions of sick and suffering people.
Scientists elsewhere must forge ahead without America.
Their work - their dreams - will change all of our lives for the better.
Don’t Count on Global Governance
CAMBRIDGE – Everybody agrees that the world economy is ill, but the diagnosis apparently depends on which corner of it you happen to inhabit.
In Washington, accusing fingers point to China, blaming its currency policy for causing large trade imbalances and “destroying jobs” in the United States.
Go to Seoul or Brasilia, and you will hear complaints about the US Federal Reserve’s hyper-expansionary monetary policies, which are leaving emerging markets awash in hot money and raising the specter of asset bubbles.
Ask in Berlin, and you will get an earful about the absence of fiscal probity and structural reforms elsewhere in Europe or in the US.
The fault, dear Brutus, is neither in our stars nor in ourselves. Thanks to globalization, it lies in our trade partners!
Self-serving as it may seem, this viewpoint is not without some merit.
As economies become intertwined, decisions taken in one part of the world reverberate in other parts, often producing unintended consequences.
The fires of the US sub-prime mortgage crisis were stoked not just by domestic regulatory failures, but also by a global “saving glut,” which sent banks on a wild goose chase for yield.
The US crisis promptly turned into a global meltdown thanks to the commingling of balance sheets across jurisdictions.
The absence of global institutions – acting as lender of last resort or serving up coordinated fiscal stimulus – aggravated the crisis and delayed the recovery.
And now, go-it alone fiscal, monetary, and exchange-rate policies are spilling across national borders, threatening currency wars and protectionism.
How we deal with these challenges is the greatest economic question of our time.
One approach, favored by technocrats and most policymakers – at least until domestic politics intrudes – is to seek solace in ever-greater global governance.
Global problems, after all, require global solutions, which means strengthening international organizations like the International Monetary Fund, increasing the effectiveness of global forums such as the G-20, and negotiating stricter international codes and standards (as has occurred with capital-adequacy requirements, for example).
Another approach is to recognize that global governance is bound to remain incomplete, and to moderate the side-effects through a more cautious form of economic globalization. This strategy entails throwing some sand in the wheels of the global economy in order to expand room for domestic policy and limit the impact of adverse spillovers from other countries’ actions.
This option may seem protectionist, but it could ultimately ensure a more durable globalization.
Many of the world economy’s troubles today originate from our unwillingness to recognize that domestic policy objectives will ultimately trump global responsibilities, no matter how much we pretend that they can be subsumed under international commitments.
Consider a couple of examples.
The Uruguay Round of the World Trade Organization was widely hailed as a great achievement, because it brought subsidies and many other types of industrial policies practiced by developing nations under strict international discipline. But WTO restrictions simply led governments to pursue similar objectives through other means.
This had some fatuous implications in the case of China.
Once China became a member of the WTO in 2001, it could no longer rely on explicit tariffs and subsidies.
So it began to promote its industries through an undervalued currency instead.
China’s current-account surplus rose by leaps and bounds, stoking global macroeconomic imbalances and, with them, tensions in the US-China economic relationship.
The world economy would have been better off with fewer restrictions on the use of industrial policies by China (and other developing countries).
And, looking ahead, if the rest of the world wants China to accept greater multilateral oversight of its trade balance, there will have to be a quid pro quo of some kind – perhaps an exemption from WTO rules on subsidies.
Similarly, when emerging markets opened themselves up to financial globalization, they reasoned that capital flows would facilitate their economic development.
They thought that appropriate macroeconomic policies and prudential regulations (along with support from international financial institutions) would help them deal with any adverse effects.
But financial markets have turned out to be fair-weather friends: nowhere to be seen when most needed.
That has forced developing countries into costly attempts to protect their economies from financial markets’ fickleness.
Worse still, they have had to adopt strategies – such as currency intervention and accumulation of foreign-exchange reserves – that export financial instability to others.
It would have been better to avoid all this by exercising much greater caution in opening up to global finance in the first place.
Those who advocate greater global governance warn us that, without tighter international economic rules, a free-for-all will leave all countries worse off.
But it is a mistake to imagine the world economy as if it were like, say, global climate – with its health and stability ultimately depending on the pursuit of universal instead of parochial objectives.
Economists teach the virtues of open trade because it benefits us – not because it benefits others.
Exposing the domestic economy to global markets – unlike curbing emissions at home – brings its own rewards.
A world economy made up of countries that pursue their own national interests will perhaps not be hyper-globalized, but it will, by and large, be an open one.
Certainly, the global economy needs some traffic rules where there are clear cross-border spillovers.
But the balance between national prerogatives and international rules must make a virtue of political reality. If we veer too far toward global governance, we will end up with meaningless rules that beg to be flouted.
Don’t Cripple the Tigers
COPENHAGEN – This December, global leaders will meet in Copenhagen to negotiate a new climate change pact to reduce carbon emissions.
Yet, the way that it has been set up, it will inevitably fail.
The best hope is that we use this lesson finally to deal with this issue in a smarter fashion.
The United States has made it clear that developing countries must sign up to substantial reductions in carbon emissions in Copenhagen.
Developing nations – especially China and India – will be the main greenhouse gas emitters of the twenty-first century – but were exempted from the Kyoto Protocol because they emitted so little during the West’s industrialization period.
Europe, too, has grudgingly accepted that without developing nations’ participation, rich nations’ cuts will have little impact.
Some would have us believe that getting China and India on board will be easy.
According to former US Vice President Al Gore, “developing countries that were once reluctant to join in the first phases of a global response to the climate crisis have themselves now become leaders in demanding action and in taking bold steps on their own initiatives.”
But Gore’s fellow Nobel laureate, Rajendra Pachauri, the chair of the United Nations’ Intergovernmental Panel on Climate Change, is not so sure.
He recently told an Indian audience, “of course, the developing countries will be exempted from any such restrictions, but the developed countries will certainly have to cut down on emissions.”
It is likely that Pachauri is right and Gore is wrong: neither China nor India will commit to significant cuts without a massive payoff.
Their reasons are entirely understandable.
The biggest factor is the massive cost and the tiny reward.
Reducing emissions is the only response to climate change that environmental campaigners talk about, despite the fact that repeated attempts to do so – in Rio in 1992 and in Kyoto in 1997 – failed to make a dent in emission levels.
Some believe that past agreements did not go far enough, but Kyoto actually turned out to be overly ambitious.
Ninety-five percent of its envisioned cuts never happened.
Yet, even if Kyoto were fully implemented throughout this century, it would reduce temperatures by an insignificant 0.3°F (0.2oC), at an annual cost of $180 billion.
China and India are enjoying swift growth that is helping millions of people lift themselves out of poverty. India’s External Affairs Minister Pranab Mukherjee recently said, “India is very concerned about climate change, but we have to see the issue in the perspective of our imperative to remove poverty so that all Indians can live a life of dignity.”
And Chinese Premier Wen Jiabao recently said, “it’s difficult for China to take quantified emission reduction quotas at the Copenhagen conference, because this country is still at an early stage of development.
Europe started its industrialization several hundred years ago, but for China, it has only been dozens of years.”
Some environmental campaigners argue that, given the effects of global warming, every nation must act.
But if one takes a closer look at China, this argument disintegrates.
Climate models show that for at least the rest of this century, China will actually benefit from global warming.
Warmer temperatures will boost agricultural production and improve health.
The number of lives lost in heat waves will increase, but the number of deaths saved in winter will grow much more rapidly: warming will have a more dramatic effect on minimum temperatures in winter than on maximum temperatures in summer.
There are few arguments for China and India to commit to carbon caps – and compelling reasons for them to resist pressure to do so.
Kyoto’s successor will not be successful unless China and India are somehow included.
To achieve that, the European Union has made the inevitable, almost ridiculous proposal of bribing developing nations to take part – at a cost of €175 billion annually by 2020.
In the midst of a financial crisis, it seems unbelievable that European citizens will bear the financial burden of paying off China and India.
The sadder thing, though, is that this money would be spent on methane collection from waste dumps in developing nations, instead of on helping those countries’ citizens deal with more pressing concerns like health and education.
There is an alternative to spending so much to achieve so little.
Cutting carbon still costs a lot more than the good that it produces.
We need to make emission cuts much cheaper so that countries like China and India can afford to help the environment.
This means that we need to invest much more in research and development aimed at developing low-carbon energy.
If every country committed to spending 0.05% of its GDP exploring non-carbon-emitting energy technologies, this would translate into $25 billion per year, or ten times more than what the world spends now.
Yet, the total also would be seven times cheaper than the Kyoto Protocol, and many times cheaper than the Copenhagen Protocol is likely to be.
It would ensure that richer nations pay more, taking much of the political heat from the debate.
Decades of talks have failed to make any impact on carbon emissions.
Expecting China and India to make massive emission cuts for little benefit puts the Copenhagen meeting on a sure path to being another lost opportunity.
Yet, at the same time, the Chinese and Indian challenge could be the impetus we need to change direction, end our obsession with reducing emissions, and focus instead on research and development, which would be smarter and cheaper – and would actually make a difference.
Don’t Feed the Dragon
The European Union, after a three-year spat with President Bush, is keen to be regarded as a world player to be reckoned with.
Many EU leaders see newfound respect coming in the form of a “strategic partnership” with China that is designed to balance the power of the United States.
Some want that partnership to include trade in advanced weaponry—witness the recent push to remove the EU’s 15-year-old ban on arms sales to China.
Although America objects strongly, a number of Europeans shrug off any opposition.
But China is no ordinary trading partner.
If not openly committed to opposing Western values and interests, China’s interests in cowing Taiwan and in asserting regional hegemony across Asia certainly are not those of Europe and the West, not to mention Japan, India, and the rest of Asia.
Indeed, China stood with Russia, Belarus, and a few other despotic regimes in prematurely recognizing the thuggish, ballot-stuffing Viktor Yanukovych as President of Ukraine.
This should come as no surprise, as the Chinese government does not plan to hold free and fair elections soon.
Indeed, perhaps Ukraine’s Orange Revolution, with those thousands of protesters in Kiev’s Independence Square served as a potent reminder to China’s leaders of the Tiananmen Square protests 15 years ago, and – in contrast to Ukraine – their own strategy of brutal repression.
If not as dark as 15 years ago, China’s human rights record remains abysmal.
The British Foreign Office’s annual human rights report for 2004, the most comprehensive in the EU, condemns China’s extensive use of the death penalty (even for such crimes as corruption, pimping, drug offenses, and tax fraud), its systematic torture of dissidents, and its restrictions on freedom of speech – including the Internet – and religion.
All of these abuses are raised repeatedly at EU-China summits, to little or no avail.
So is this the time to end the arms ban imposed by both Europe and America after the Tiananmen Square massacre in 1989?
China’s human rights record is not the only problem.
It is bad enough that no mechanism exists to prevent China’s government from using EU arms for internal repression.
But nor does any mechanism exist that would stop China from re-exporting the weapons to places like North Korea.
Indeed, China has a track record as a serial proliferator, having helped Pakistan build its atomic bomb.
Its role in providing missile and rocket propulsion materials to Iran remains unclear.
Yet France and Germany, with Britain and Italy not far behind, say such criticism is outdated.
(They are strongly opposed by Holland, the Scandinavian countries, and the former Communist countries of Eastern Europe, which are familiar with communist repression.)
Supporters of lifting the arms export ban argue that this litany of sins does not reflect China’s real improvements in human rights and penalizes European armaments jobs to the benefit of Russia, which enjoys a lively arms trade with its neighbor (something it might one day regret).
For France, lifting the embargo is also an important symbol, one that recognizes China’s role in fighting Islamist terrorism.
Libya had such EU restrictions lifted last October ostensibly for joining the fight against terrorism and abandoning its weapons of mass destruction.
In addition, those in favor of reviving EU-China arms trade see such sales as a stabilizer in bouts of political turbulence and are loath to let bad politics interfere with good business.
China apologists claim that the 1998 EU Code of Conduct on Arms Exports is sufficient to limit arms sales.
But they conveniently ignore the fact that the Code of Conduct is voluntary and thus not enforceable.
This is why the European Parliament voted across party and national lines in November against lifting the ban until the EU Code of Conduct is made binding.
Can anything pull the Atlantic alliance’s policies on arms exports together?
Trade with a country with China’s human rights record must not only make economic sense; it must also fit the wider aims of foreign policy.
That means, above all, avoiding trade that makes it more difficult to pursue those aims.
Just as American presidents looked foolish when they bent US foreign policy to the dictates of American wheat farmers in the 1970’s and 1980’s, European governments that are prepared to mortgage Asian security to a restless China also command no respect.
The lesson is clear: security interests must come before business interests.
So transatlantic coordination is needed, to ensure that any trade of sophisticated arms and weapons-related technologies with China does nothing to enhance China’s military power, and that competition between Western producers of goods that may legitimately be sold to China does not damage Western political unity.
In the Cold War era, there was a mechanism for such trade.
From 1949 until the fall of the Berlin Wall, the Consultative Group Coordinating Committee (Cocom) monitored and controlled the export of Western technology to the Soviet Union.
It did so by a gentlemen’s agreement, and with reasonable success.
Cocom provided an opportunity to settle squabbles and plug loopholes quietly.
Something similar is urgently needed now.
Don’t Follow The Fed
The US Federal Reserve faces a dilemma, for it needs to continue raising interest rates in the face of a hurricane-devastated economy.
The Fed’s failure to raise rates earlier thus holds a powerful lesson for the European Central Bank: after a prolonged period of monetary stability at unusually low interest rates, waiting too long to raise rates to more normal and appropriate levels holds dangerous consequences.
The Fed was late in beginning the interest-rate normalization process, and it is now paying a price.
The ECB must not make the same mistake, even bearing in mind that the two central banks operate in different milieus and under different constraints.
Warning signs of impending inflation abound across the euro zone.
Money-supply growth has been well above target levels for some time now, indicating excess liquidity.
September headline inflation, at 2.6%, is above the ECB’s 2% target ­– as is the latest forecast for 2006 inflation (updated forecasts will be released at the beginning of December).
“The period of wage moderation may be coming to an end,” warns Otmar Issing, the ECB’s chief economist, implying that soaring energy prices may now be feeding through into the overall price level (so-called “second-round effects”).
In these circumstances, there is no good reason to wait to raise interest rates.
The longer energy prices remain at their current lofty levels, the greater the probability that inflationary expectations will increase and that second-round effects will materialize.
Further procrastination on interest-rate normalization by the ECB could well lead to a nasty bout of inflation.
This would be disastrous for Europe’s economic recovery, as the ECB would have no choice but to slam down hard on the monetary brakes.
No one wants this.
Better a 50-basis-point increase now – thereby allowing the economic recovery to continue by keeping inflation in check – than triple or quadruple that figure down the road.
The old adage that “an ounce of prevention is worth a pound of cure” applies with particular force to monetary policy.
Judging from the outcome of last month’s meeting of the ECB’s Governing Council, that “ounce of prevention” appears to be right around the corner for the euro-zone economy.
Indeed, the pace of ECB warnings about the risks of inflation has quickened in recent months – the earlier “We are vigilant” became “We are particularly vigilant” in September, which became “Strong vigilance with regard to upside risks to price stability is warranted” in October.
The Governing Council is in danger of running out of adjectives – as well as credibility – if it does not act soon.
The tone of ECB President Jean-Claude Trichet’s comments in the Q & A section of the press conference following the October meeting was unusually hawkish.
Trichet appeared to be calling for a pre-emptive approach when he said, “We must not allow second-round effects to materialize.” For the first time, the ECB president was willing to admit publicly that the Governing Council had discussed the pros and cons of a rate hike at the meeting.
Nonetheless, current interest rates were described as “still appropriate” in October, signaling that the ECB has not yet reached a decision to bite the bullet.
To be sure, an unexpected slowdown in economic activity or a strong rise in the value of the euro could postpone the inevitable rate hike.
But what seems clear is that the ECB used the October press conference to warn politicians, trade unions, and the markets that its long period of monetary-policy inactivity is coming to an end.
The exit process has begun.
Not everyone is happy with this news.
Politicians – like Jacques Chirac in France, Silvio Berlusconi in Italy, and ECOFIN (the finance ministers of the European Union’s member states) – continue to press for fixed, even lower, interest rates.
But it’s easy for politicians to be irresponsible about monetary policy.
They are not the ones who will be blamed for soaring prices, nor are they the ones who will have to force the inflation genie back into the bottle.
By constantly pushing for lower interest rates than the ECB can deliver, politicians set the central bank up as a scapegoat for Europe’s poor economic performance.
Europe is doing badly, they argue, not because of their own failure to lead the structural reform process, but because interest rates are too high.
At the same time, the ECB does not need to go nearly as far as the Fed, which has raised interest rates in increments of 25 basis points at 12 consecutive meetings, with still more to come.
For the ECB, an increase of 50 basis points could do the job at this point – after which rates could probably be put on hold for some time.
The Fed waited too long to start the normalization process, and, because it was more aggressive in lowering rates in the downward phase of the interest-rate cycle, it has had to be more aggressive in raising them in the upward phase.
This is not the type of volatile monetary policy that Europe wants or needs.
Don’t Forget Wim Duisenberg’s Legacy
The most surprising and controversial thing about last December’s rate hike by the European Central Bank was that, after two and a half years of keeping interest rates at exceptionally low levels, the bank ventured an increase of only 25 basis points with no promise of more to come.
Political pressure on Europe’s central bank may be the reason for that timid move.
Jean-Claude Trichet, the current ECB president, may be in the same job but not the same environment as his predecessor Wim Duisenberg, who famously remarked, “I hear the politicians, but I don’t listen.”
Political pressure on the ECB today is much greater than in Duisenberg’s time.
The political environment is much more hostile.
Some of this pressure may be seeping through and affecting ECB policy decisions.
This is an extremely negative development ­– and one of the central bank’s biggest challenges for 2006.
Not only will politicians’ influence be towards monetary excess, which of course is a serious enough matter for a bank whose primary mandate is price stability, but also the excess will constitute a serious barrier to structural reform, which is essential for European prosperity in a competitive global economy.
Increasingly, Europe’s politicians regard excess liquidity and economic reform as substitutes for one another.
The more the bank gives on liquidity, the less the politicians will do on reform.
Duisenberg recognized this linkage and held firm.
The ECB’s paltry rate hike in December, together with the supine promise of no plans for further monetary tightening, demonstrates that Trichet is no Duisenberg.
Europe’s finance ministers have played a clever game with the ECB.
Even though they were already resigned to a 25-basis-point rate increase, the politicians made a big show of being opposed to it, aiming to prevent what they really feared and what was certainly more warranted: a 50-basis-point hike and a warning of more on the way.
Their strategy worked.
Luxembourg’s finance minister, Jean-Claude Juncker, diplomatically declared after the December meeting that, “The result could have been worse.”
Indeed, even the markets were fooled, giving the ECB a good grade for its unremarkable rate hike.
Inflationary expectations, as measured by the rates on certain market instruments, actually fell after the hike, indicating increased confidence that the ECB will keep a lid on price pressures.
Although the meager rate hike was presented as a consensus of the ECB’s Governing Council, it soon became apparent that the decision had been controversial.
Some Council members, unhappy with Trichet’s dovish stance at the December press conference, made their displeasure known via the press soon after.
In an interview with Frankfurter Allgemeine Zeitung, for example, Bundesbank president Axel Weber made it clear that future rate hikes were very much on the table.
Others spoke out as well, and the futures markets quickly predicted another 25-basis-point rate hike in March.
The consensus alleged at the December press conference simply did not exist.
With political pressures encroaching on the bank’s policy decisions and a faux consensus, it is not surprising that there is now nostalgia in Frankfurt for earlier times and for Wim Duisenberg, even among his former critics.
Duisenberg’s great skills – under-appreciated by the press and public alike – were genuine consensus-building in a potentially divisive body and, in Trichet’s own words, “an exceptional ability to keep his nerve in some highly demanding and extremely hostile environments.”
In particular, the stubborn Dutchman understood the extreme danger if Europe’s top monetary authority became too cozy with Europe’s politicians, especially at a time when many EU finance ministers view economic reform and excess liquidity as being essentially the same thing.
Wim Duisenberg died last year, but his values, philosophy, and wisdom must not be allowed to die with him.
The New Year provides a perfect opportunity for Jean-Claude Trichet to resolve that, despite the more trying circumstances in which he must operate, his own policies and procedures will more faithfully reflect Duisenberg and his legacy.
Europe deserves no less.
Don\u0027t Let America Bankrupt International Bankruptcy Reform
I am a frequent IMF critic, so when the IMF gets something right, I should acknowledge it.
The IMF has, at last, recognized the failure of its big bailout policies - failures all too evident in Thailand, Indonesia, Korea, Russia, Brazil, and most recently, in Argentina.
Three cheers for the IMF.
Big bailouts allowed countries to briefly maintain over-valued exchange rates, which in turn allowed the rich in these countries to get their money out at more favorable terms than they might have done otherwise.
These bailouts also allowed Western banks that engaged in imprudent lending to get repaid.
Meanwhile, as overvalued exchange rates - even if maintained for only a short period - further depressed the economy, the country was left with the burden of repaying billions of dollars in IMF loans.
Nowhere was the problem more evident than in the 1998 Russian bailout, where only after the "failure" - after the ruble's devaluation - did growth resume.
The billions lent to Russia quickly wound up in the Swiss and Cyprus bank accounts of Russia's oligarchs.
All of this was evident at the time the money was lent in July 1998, but it is Russia's people that today must pay for the IMF's mistakes.
Argentina provided the coup de grace to the IMF's big bailout strategy.
I, and others, had argued for years for a greater reliance on standstill agreements, restructurings, and bankruptcy.
Finally , the IMF has come around.
But it should have been clear all along that the IMF, as a major creditor, could not itself be the bankruptcy judge.
The conflicts of interest were glaring.
The IMF has now listened.
Whether one agrees with the recent proposals made by Ann Krueger, the IMF's deputy managing director, is not the issue: the fact is that the IMF now recognizes the potential conflict of interest, and has proposed alternative procedures that might deal with the problem.
Regrettably, the US Treasury immediately threw cold water on the proposals.
John Taylor, undersecretary of Treasury for International Affairs, and a former colleague of mine at Stanford University (as was Ann Krueger), suggested that matters ought to be left to the market.
All that is needed, he suggests, are "collective action" clauses that allow the majority (or a supermajority) of a group of bondholders to impose their will on a minority, so as to prevent scavengers who, in the past, bought up small stakes in a bond issue and used their position to extract large concessions for themselves.
Taylor is a distinguished macro-economist, but he has paid little attention either to recent developments in economic theory or experiences in economic policy in the arena of bankruptcy.
Collective action clauses are important, but they are not enough.
The IMF long advocated the "hands-off, market-oriented" approach to bankruptcy resolution, and it has mostly been a disaster.
Korea and Malaysia ignored IMF advice and, instead, their governments took an active role.
There followed extensive restructuring, and those economies recovered fast.
Countries that relied on IMF advice fared far less well.
Economic theory holds that there are incentives for some market participants to delay a resolution, and these are particularly costly in situations such as those in East Asia and Argentina, where corporate distress is prevalent and where the economy faces a major economic downturn.
The existence of such negative incentives is why bankruptcy law in America allows bankruptcy judges discretion to force recalcitrant creditors to accept a resolution that is in the broader interest.
Why should principles that make sense within countries - like the US - not be applied in the international arena?
As the IMF now recognizes, there needs to be some form of an international arbiter.
The question is, what guidance should be given to this international bankruptcy referee?
The issue is far from academic.
The US has experienced a fierce debate over bankruptcy reform, demonstrating that there is no simple answer to the appropriate design of bankruptcy law or regulation.
Bankruptcy is not a matter than can simply be delegated to technocrats as much as the IMF would like to give the impression that such is the case.
There are efficiency issues; but there are also distributional concerns.
The IMF, linked as it is to financial markets, is likely to push for a set of rules that favor those interests.
More balance is needed.
The principles of America's Chapter 11 bankruptcy law - the provision which allows rapid reorganization of firms in ways that maintain its economic activity, should underlay whatever rules are adopted.
The fact that America can veto even these modest IMF proposals illustrates a fundamental weakness of current international economic arrangements.
In the UN, five countries hold a veto - largely a historical anachronism.
India - once a British colony, does not;
France does.
Whatever one's attitude to these arrangements, the notion that a single country can exercise effective veto power seems inconsonant with basic democratic principles.
Were America less bent on pursuing unilateralist policies, in pushing against an international rule of law , this might not make much of a difference.
But the Bush Administration not only ignores basic principles of economics, but also the basic principles underlying international cooperation.
There needs to be a new way of dealing with crises.
The big bailout strategies, associated with the Clinton-era IMF of Michel Camdessus, Stanley Fischer, Larry Summers, and Robert Rubin, failed abysmally.
An alternative is demanded.
America's proposal to rely on minor modifications in current arrangements, while relying on the market, though it is a position long advocated by financial markets, will not suffice.
The IMF has been trying to create an alternative.
The world cannot allow America to veto its efforts.
Don’t Save the Press
LJUBLJANA - Throughout history, political leaders have supported existing communication technologies in order to defend the system in which they rule.
Today, too, governments may be tempted to protect newspapers and public TV on the pretext of “saving democracy as we know it.”
But efforts to block technological change have been futile in the past, and they would be unwise today.
Instead, the political system (and the media) must adapt to the new reality.
Faced with an existential crisis as new technologies lure away their readers and viewers, traditional news media – just like bankers, car manufacturers, and solar electricity producers – are increasingly turning to governments for help.
But, such is the undertone, their cause is nobler.
The media are a cornerstone of democracy.
Left to the blogs and tweets, without journalists to report the news, how can citizens decide what politics to support?
Such thinking reflects an age-old fear: as Plato put it, citizens would get “ information without proper instruction and, in consequence, be thought very knowledgeable when they are for the most part quite ignorant .”
Political rulers, too, have never liked new communication technology, because the political system in which they rule is adapted to the existing technology.
Scarcity of parchment required all decision-making to be concentrated in a court consisting of a handful of people.
When cheap paper and printing presses – the first true mass-communication technology – challenged this system, the Catholic Church and the monarchs defended the parchment-based monopoly.
They failed.
Print, paper, and newspapers enabled the rise of new types of political systems based on expanded popular participation.
The transition was not smooth, but those who understood the signs of the times early gained a historical head start.
It is not a coincidence that Benjamin Franklin had a background in printing and newspaper publishing.
The liberal-democratic political system that resulted from the American Revolution was well aligned with the emerging information technology of the time.
In the “scarce bandwidth” media of the past, in which space and time were limited, the media had to select stories worthy of reporting.
Mass media could report few big stories in which a few big actors took center stage.
In stories about politics, these big actors were political parties.
Indeed, it is not just traditional mass media that are in trouble.
High-circulation newspapers correlate with high-circulation political parties.
We are right, they are left; we think this, they think that: condensed narratives fit easily on a newspaper’s front page or into the tighter constraints of broadcast journalism.
This created a mutually reinforcing symbiosis between the old mass media and old mass political movements, one hostile to the entry of new players.
Newspapers and broadcast organizations, like political parties, were expensive to set up, but, once established, they benefited from economies of scale – operating costs remained relatively fixed as circulation (or party membership) grew.
They maintain a keen interest in the public’s eyes and ears – and thus in each other.
Unfortunately for both, their main strengths – transmitting information and connecting people – happen to be what the Internet does best.
Blogs and social-networking platforms encourage seamless, cost-free association – the most efficient form of organization imaginable.
No newspaper or broadcast news program can hope to report on what every Facebook group is up to.
So it probably would not take much for politicians to be persuaded that the press is essential to democracy, and that its survival – like that of public television in many countries – depends on government support.
Advertising revenue would be replaced by government subsidies, raising predictable questions about the impact on content.
The alternative is to focus on what communication technology cannot do:
In 1990s, Bill Gates said, “In the next century, leaders will be those who empower others.” Deciding whom to empower, and whom to allow to participate, rather than deciding to save the existing media technology, will determine the future of political parties and the systems in which they govern.
Don’t Shut the Door on Africa
VIENNA – These days, a dollar won’t get you very far in a rich economy.
But in a poor country like the one I come from, Sierra-Leone, even half a dollar can save a life or feed an entire family.
Every penny invested in Africa counts today and to secure Africa’s future.
Experts are unanimous: the financial, food and energy crisis will hammer the “bottom billion” – the poorest in some 60 countries that survive on around a dollar a day – the hardest.
Because of the crisis, many African countries are likely to miss the 2015 deadline for the Millennium Development Goal of poverty reduction.
The continent has made some significant socio-economic gains over the last decade.
I’ve seen this for myself during recent travels to Benin, Ghana, Ethiopia, Egypt, Namibia, Nigeria, Senegal, and South Africa.
These gains include, to name a few: free-market reforms, liberalization of economies, the steady introduction of pro-business environments, empowerment of women, education.
But most of these gains are now seriously threatened.
The financial crisis has dealt a blow to remittances.
Migrants are losing their jobs or struggling to set aside cash for their relatives back home.
The World Bank's latest global economic outlook suggests remittances will fall by 5% to 8% this year.
But this is just the tip of the iceberg of the tens of millions that can be tracked.
Foreign companies are pulling back capital, drying import and export financing.
Trade is declining.
The unemployment rate, especially among disadvantaged groups – young people and women – is staggering.
In Sierra-Leone alone, over 60% of the country’s youth are jobless.
A failure to help the &quot;bottom billion&quot; could fuel mass migration and global insecurity.
Ignoring the poorest nations means postponing a much larger crisis which will lead to famine, unrest, and massive migration.
Poverty is also an incubator for diseases, and the flow of legal and illegal migrants will carry them to rich nations.
Poverty is not just ‘their’ problem.
It is ‘our’ problem too.
If developing countries collapse, there will be millions knocking on our front doors, and the first port of call will be Europe.
Such mass migration will severely hurt already strained social relations in some countries and lead to unpredictable consequences.
Only a coordinated global response can guarantee that in the long run people from the poorest billion will visit Europe as tourists and business partners, not as asylum seekers.
Africa needs to do its share.
It needs investments to shift away from a dependence on a donor-driven agenda and peasant-driven agriculture, and learn to compete on a global level.
It can generate sustainable growth through industrialization, and by creating a single market.
It needs to promote production and trade, expand agribusiness and agro-industries, and create wealth and new jobs.
Agribusiness development can stimulate broader economic growth, boost regional trade, and at the same time enhance food security, and reduce poverty.
Globalization has been good to many in the developing world.
At this critical moment, we can’t allow this to fade away.
We need to make this a more inclusive process, and make sure that:
· financial resources keep flowing to Africa and the developing world so they continue integrating into the global economy;
· protectionism is avoided and markets stay open;
· the poorest nations can grow out of poverty through trade;
· there is good governance of natural resources to fuel broader and inclusive development
The abundance of relevant experiences from the newly industrialized countries in Asia and elsewhere can show African countries how to galvanize their economies, accelerating the process of wealth creation and poverty reduction on the continent.
And last but not least. Development without access to energy won’t happen.
This crisis could help formulate a new approach: increase access to reliable, affordable and renewable energy services for sustainable development, promote energy efficiency to make sure economic growth does not raise energy demand and environmental degradation, including climate change.
Africa has great hydropower potential but only 7% has been exploited so far.
Africa’s natural gas reserves amount to about 8% of global reserves.
It has 10% of global oil reserves.
But it requires major investments to develop both traditional energy means and renewable ones.
It is still unclear exactly how much of the $1 trillion pledged at the London G20 summit will find its way to Africa.
That’s why we need to keep an eye on the figures and keep reminding world leaders of the needs of those in the developing world that live in their shadow.
This will set policy priorities straight, put strategies in place to avert a human catastrophe, and help Africa secure its rightful place at the global economic table.
Doomsday for the Dollar?
The United States' current-account deficit reached 5.7% of GDP in the second quarter of 2004.
Yet the dollar remains at a relatively high value: less than 20% below its early 2001 highs and more than 10% higher in real terms than in the early to mid-1990's.
As the US current-account deficit rose over the past half-decade, international economists have lined up to predict doom: returns on assets invested in the US are relatively low, so at some point - probably all at once - holders of dollar-denominated securities will realize that the risk of suffering a major crash in value is not being adequately compensated.
Once portfolio investors start selling their dollar-denominated securities, a stampede will follow, causing the dollar's value to crash and triggering the first major global financial crisis of the twenty-first century.
Fred Bergsten of the Institute for International Economics calls this situation "a disaster in the making."
How far will the dollar have to fall?
The first historical rule of thumb is 10% on the dollar for each percent of GDP's worth of unsustainable current-account deficit.
The second historical rule of thumb is that currencies on the decline tend to overshoot: near the bottom, international currency speculators require a substantial risk premium out of the fear that the currency crash might trigger something even worse.
So when will this promised dollar collapse and crisis come?
Bergsten says, "Soon."
But Bergsten is probably wrong about that.
The late Rudiger Dornbusch - who used to write this column - used to say that unsustainable situations lasted longer than economists who believed in market rationality and equilibrium could imagine possible. They then tended to collapse more quickly than anyone could believe.
In his view, currency overvaluations go through five stages:
· First, short-term speculators seeking higher returns, or investors overanxious for safety, drive a currency's value to unsustainable levels.
· Second, trend-chasers keep buying because the returns have been so good in the recent past, thus pushing the overvaluation to a height and duration that orthodox economists cannot explain.
· Third, highly intelligent economists, puzzled by the duration of the overvaluation, evolve theories of why things are different this time, and why this time the overvaluation is perhaps sustainable after all.
· Fourth, market bulls, encouraged by theories of a "new economy" that justify the extraordinarily good returns seen in the recent past, keep buying and keep the currency suspended above economic fundamentals even longer.
· Fifth, the supply of eager purchasers and trend-chasing investors comes to an end, producing a crash that resembles the collapse of a Ponzi scheme.
In the past six months, the current round of the US dollar cycle entered stage three.
Louis Uchitelle of The New York Times quotes the highly intelligent Catherine Mann commenting on the "co-dependent relationship…between the US and its trading partners," which might "last for quite some time," because "the US and its main trading partners have a vested interest in the status quo."
Japan, China, and other export-oriented East Asian economies are indeed eager to keep the value of the dollar relatively high, and their central banks have piled up close to $2 trillion in dollar-denominated assets.
China's government regards the threat of capital losses on its dollar-denominated securities as less important than the need to maintain near-full employment in coastal manufacturing cities like Shanghai.
After all, the ruling communist oligarchs have grown accustomed to a comfortable lifestyle.
The last thing they want is mass unemployment and urban unrest to call their positions into question.
But if international currency speculators get the scent of near-inevitable profits from an ongoing dollar decline in their nostrils, all Asian central banks together will not be able to keep the dollar high.
Only the Federal Reserve can do that - and the Federal Reserve is very unlikely to sacrifice the jobs of American workers on the altar of the strong dollar.
There may yet be a soft landing, whether slow or fast: during the last major dollar cycle, between 1985 and 1987, the dollar fell by 40% without ever causing panic, major bankruptcies, or a demand by investors for a substantial dollar risk premium to compensate them for holding assets denominated in a declining currency.
But the historical rule of thumb is that the chances of a fast, hard landing have now surpassed 25%, and continue to climb.
Double-Dip Days
NEW YORK – The global economy, artificially boosted since the recession of 2008-2009 by massive monetary and fiscal stimulus and financial bailouts, is headed towards a sharp slowdown this year as the effect of these measures wanes.
Worse yet, the fundamental excesses that fueled the crisis – too much debt and leverage in the private sector (households, banks and other financial institutions, and even much of the corporate sector) – have not been addressed.
Private-sector deleveraging has barely begun.
Moreover, there is now massive re-leveraging of the public sector in advanced economies, with huge budget deficits and public-debt accumulation driven by automatic stabilizers, counter-cyclical Keynesian fiscal stimulus, and the immense costs of socializing the financial system’s losses.
At best, we face a protracted period of anemic, below-trend growth in advanced economies as deleveraging by households, financial institutions, and governments starts to feed through to consumption and investment.
At the global level, the countries that spent too much – the United States, the United Kingdom, Spain, Greece, and elsewhere – now need to deleverage and are spending, consuming, and importing less.
But countries that saved too much – China, emerging Asia, Germany, and Japan – are not spending more to compensate for the fall in spending by deleveraging countries.
Thus, the recovery of global aggregate demand will be weak, pushing global growth much lower.
The global slowdown – already evident in second-quarter data for 2010 – will accelerate in the second half of the year.
Fiscal stimulus will disappear as austerity programs take hold in most countries. Inventory adjustments, which boosted growth for a few quarters, will run their course.
The effects of tax policies that stole demand from the future – such as incentives for buyers of cars and homes – will diminish as programs expire. Labor-market conditions remain weak, with little job creation and a spreading sense of malaise among consumers.
The likely scenario for advanced economies is a mediocre U-shaped recovery, even if we avoid a W-shaped double dip.
In the US, annual growth was already below trend in the first half of 2010 (2.7% in the first quarter and estimated at a mediocre 2.2% in April-June).
Growth is set to slow further, to 1.5% in the second half of this year and into 2011.
Whatever letter of the alphabet US economic performance ultimately resembles, what is coming will feel like a recession.
Mediocre job creation and a further rise in unemployment, larger cyclical budget deficits, a fresh fall in home prices, larger losses by banks on mortgages, consumer credit, and other loans, and the risk that Congress will adopt protectionist measures against China will see to that.
In the eurozone, the outlook is worse.
Growth may be close to zero by the end of this year, as fiscal austerity kicks in and stock markets fall.
Sharp rises in sovereign, corporate, and interbank liquidity spreads will increase the cost of capital, and increases in risk aversion, volatility, and sovereign risk will undermine business, investor, and consumer confidence further.
The weakening of the euro will help Europe’s external balance, but the benefits will be more than offset by the damage to export and growth prospects in the US, China, and emerging Asia.
Even China is showing signs of a slowdown, owing to the government’s attempts to control economic overheating.
The slowdown in advanced economies, together with a weaker euro, will further dent Chinese growth, bringing its 11%-plus growth rate towards 7% by the end of this year.
This is bad news for export growth in the rest of Asia and among commodity–rich countries, which increasingly rely on Chinese imports.
An important victim will be Japan, where anemic real income growth is depressing domestic demand and exports to China sustain what little growth there is.
Japan also suffers from low potential growth, owing to a lack of structural reforms and weak and ineffective governments (four prime ministers in four years), a large stock of public debt, unfavorable demographic trends, and a strong yen that gets stronger during bouts of global risk aversion.
A scenario in which US growth slumps to 1.5%, the eurozone and Japan stagnate, and China’s growth slows below 8% may not imply a global contraction, but, as in the US, it will feel like one.
And any additional shock could tip this unstable global economy back into full-fledged recession.
The potential sources of such a shock are legion.
The eurozone’s sovereign-risk problems could worsen, leading to another round of asset-price corrections, global risk aversion, volatility, and financial contagion.
A vicious cycle of asset-price correction and weaker growth, together with downside surprises that are not currently priced by markets, could lead to further asset-price declines and even weaker growth – a dynamic that drove the global economy into recession in the first place.
And one cannot exclude the possibility of an Israeli military strike on Iran in the next 12 months.
If that happens, oil prices could rapidly spike and, as in the summer of 2008, trigger a global recession.
Finally, policymakers are running out of tools.
Additional monetary quantitative easing will make little difference, there is little room for further fiscal stimulus in most advanced economies, and the ability to bail out financial institutions that are too big to fail – but also too big to be saved – will be sharply constrained.
So, as the optimists’ delusional hopes for a rapid V-shaped recovery evaporate, the advanced world will be at best in a long U-shaped recovery, which in some cases – the eurozone and Japan – may be long enough to stretch into an L-shaped near-depression.
Avoiding double dip recession will be difficult.
In such a world, recovery in the stronger emerging markets – the great hope for the global economy – will suffer, because no country is an island economically.
Indeed, growth in many emerging-market economies – starting with China – is highly dependent on retrenching advanced economies.
Fasten your seat belts for a very bumpy ride.
Do What We Did, Not What We Say
Today, many emerging markets, from Indonesia to Mexico, are told that there is a certain code of conduct to which they must conform if they are to be successful.
The message is clear: here is what advanced industrial countries do, and have done.
If you wish to join the club, you must do the same.
The reforms will be painful, vested interests will resist, but with enough political will, you will reap the benefits.
Each country draws up a list of what to be done, and each government is held accountable in terms of its performance.
In all countries, balancing the budget and controlling inflation are high on the list, but so are structural reforms.
In the case of Mexico, for example, opening up the electricity industry, which Mexico's constitution reserves to the government, has become the structural reform of the day demanded by the West.
So analysts--mindlessly one is tempted to say--praise Mexico for its progress in controlling its budget and inflation, but criticize it for lack of progress in electricity reform.
As someone who was intimately involved in economic policy making in the US, I have always been struck by the divergence between the policies that America pushes on developing countries and those practiced in the US itself.
Nor is America alone: most other successful developing and developed countries pursue similar "heretical" policies.
For example, both political parties in the US now accept the notion that when a country is in a recession, it is not only permissible, but even desirable , to run deficits.
Yet all over the world, developing countries are told that central banks should focus exclusively on price stability.
America's central bank, the Federal Reserve Board, has a mandate to balance growth, employment, and inflation--and it is a mandate that brings it popular support.
While free marketers rail against industrial policy, in the US the government actively supports new technologies, and has done so for a long time.
The first telegraph line was built by the US Federal Government between Baltimore and Washington in 1842; the Internet, which is so changing today's economy, was developed by the US military.
Much of modern American technological progress is based on government-funded research in biotechnology or defense.
Similarly, while many countries are told to privatize social security, America's public social security system is efficient (with transactions costs a fraction of private annuities), and customers are responsive to it.
It has been pivotal in almost eliminating poverty among America's elderly.
While the US Social Security System now faces a problem with under-funding, so do a large fraction of America's private pension programs.
And the public pension system has provided the elderly with a kind of security--both against inflation and the vagaries of the stock market--that the private market to date simply has not.
Correspondingly, many aspects of American economic policy contribute significantly to America's success, but are hardly mentioned in discussions of development strategies.
For more than a hundred years, America has had strong anti-trust laws, which broke up private monopolies in many areas, such as oil.
In some emerging markets, telecom monopolies are stifling development of the Internet, and hence economic growth.
In others, monopolies in trade deprive countries of the advantages of international competition, while monopolies in cement significantly raise the price of construction.
The American government also played an important role in developing the country's financial markets--by providing credit directly or through government-sponsored enterprises, and by partially guaranteeing a quarter or more of all loans.
Fannie Mae, the government-created entity responsible for providing mortgages for middle-class Americans, helped lower mortgage costs and played a significant role in making America one of the countries with the largest proportion of private home ownership.
The Small Business Administration provided the capital to help small businesses--some of which, like Federal Express, have grown into major businesses creating thousands of jobs.
Today, US Federal Government student loans are central to ensuring that all Americans have access to a college education, just as in earlier years, government finance helped bring electricity to all Americans.
Occasionally, America has experimented with free-market ideology and deregulation--sometimes with disastrous effects.
President Ronald Reagan's deregulation of the Savings and Loan Associations led to an infamous wave of bank failures that cost American taxpayers several hundred billion dollars and contributed to the economic recession of 1991.
Those in Mexico, Indonesia, Brazil, India and other emerging markets should be told a quite different message: do not strive for a mythical free-market economy, which has never existed.
Do not follow the encomiums of US special interests, whether in the corporate or financial arena, because, although they preach free markets, back home they rely on the US government to advance their aims.
Instead, developing economies should look carefully, not at what America says, but at what it did in the years when America emerged as an industrial power, and what it does today.
There is a remarkable similarity between those policies and the activist measures pursued by the highly successful East Asian economies over the past two decades.
Down and Out in the United States?
For most of the past decade the world has been lectured to by Americans who proclaimed the perfection of the US economy: its focus on competition, loose labor regulation, and a modest social safety net, all of which supposedly delivered dynamism and high growth rates.
Continental Europeans were told to follow the US model and liberalize their labor markets, so that businesses that want to hire can do so without losing money and so that unemployed workers who find new jobs won't see their wages offset by cuts in welfare-state benefits.
Japanese were told to socialize the losses their banking system incurred when Japan's bubble burst, then re-privatize those parts of it that could still succeed as going concerns and liquidate the rest.
East Asia's Tigers were told to abandon the German-Japanese financial system based on universal banking and adopt the Anglo-American model based on liquid financial markets.
They were also admonished to do a better job at regulating their financial system.
Other developing countries were told that their trade barriers, their love of inflationary finance, their failure to curb tax evasion, and their lack of governments strong enough to enforce property and contract rights against local notables, organized bandits, and - most important - their own functionaries were keeping them from participating in the new globalized economic cornucopia.
Now it's "pay back" time, when the world lectures America about how to fix its no-longer-perfect economy.
But can this criticism be constructive, not a bout (pleasurable, of course) of Schadenfreude ?
The most obvious piece of advice is that America's financial system should follow more faithfully the advice its advocates dispensed to others.
In some countries, corporate managers are disciplined by the representatives of large universal banks who sit on corporate boards and vote large blocks of shares.
In many countries, managers' leashes are also held by families of plutocrats who exercise control through pyramids of companies and special classes of stock.
America's model of corporate governance was supposed to rely on the following set of factors:
· managerial failures were supposed to trigger hostile takeovers;
· even before a takeover occurs, managers were supposed to be disciplined by fears of a revolt by their boards of directors, especially when the directors think that the company might be become a target of a hostile takeover;
· managers were to pursue good performance at all costs, because their stock options and other performance-related compensation made their own fortunes tied to that of shareholders and the corporation.
Within those constraints, American managers were supposed to exercise considerably more discretion than their foreign counterparts, so that they could use their business judgment without being shackled and second-guessed.
Combined, all of this was supposed to deliver dynamism.
But for this system to work solid information about under-performing companies must be available to investors and the link between the pay of top managers and company performance must be real.
Instead, what evolved was a lax accounting system and a "heads you win, tails your options will be re-priced and you still win" method of managerial compensation.
No surprise, then, that bosses who couldn't legitimately show the market strong profits cooked the books, often with the help of their supposedly independent accountants.
As things stand, it is in no one's short-term interest, certainly not in the short-run interest of accounting firms that make more money from consulting contracts than from doing a company's books, to allow accurate information - if it is bad - to leak into the market.
Other countries must then tell America that the state can't stand back and let the market do this job: accurate business information is a governmental responsibility.
Moreover, the greed of bosses cannot be the sole determinant of managerial remuneration.
Unfortunately, America now has an administration keen to downplay the importance of timely reporting of insider stock sales (the President himself failed to do that when he was in business), the timely reporting of changes in the accounting treatment of a company's unrealized revenues (something that did happen at Halliburton when it was run by Vice President Cheney), and of executives' duty to know about the fraud committed by their subordinates (unlike what happened when current Army Secretary White was running Enron's energy trading operations).
Outsiders should also remind America that its population is aging and that big savings will be needed to pay for the looming retirement of the baby boomers.
Two years ago "Save Social Security" (America's state pension system) was a political mantra.
The huge federal budget surplus was supposed to provide the means to do that.
President Bush's tax cut, however, squandered the surplus.
Huge deficits reappeared.
Outsiders must remind America that its pension system is a ticking time bomb that must be defused.
Third and last, the past two decades saw America change from a largely middle-class society of the same genus as Europe's social democracies into a creature with extremes of wealth unseen since before World War I. One driving force behind this is America's retreat from its unique emphasis on education.
Declining public school quality, downward pressure on funding for public higher education, and a failure of political will to make higher education affordable for everyone has produced a growing education gap among those who can and cannot afford quality education.
So while the economic case for greater private and public investment in education is stronger than ever, most individuals can't save enough to pay for it, and education - despite all the talk of politicians - is not the federal priority it should be.
After lording it over the world for so long, Americans should accept today's rebukes with grace.
But if the rest of the world really wants to help, it should lecture America along the lines I suggest.
Some of us might listen.
The Year of Betting Conservatively
NEW YORK – The upswing in global equity markets that started in July is now running out of steam, which comes as no surprise: with no significant improvement in growth prospects in either the advanced or major emerging economies, the rally always seemed to lack legs.
If anything, the correction might have come sooner, given disappointing macroeconomic data in recent months.
Starting with the advanced countries, the eurozone recession has spread from the periphery to the core, with France entering recession and Germany facing a double whammy of slowing growth in one major export market (China/Asia) and outright contraction in others (southern Europe).
Economic growth in the United States has remained anemic, at 1.5-2% for most of the year, and Japan is lapsing into a new recession.
The United Kingdom, like the eurozone, has already endured a double-dip recession, and now even strong commodity exporters – Canada, the Nordic countries, and Australia – are slowing in the face of headwinds from the US, Europe, and China.
Meanwhile, emerging-market economies – including all of the BRICs (Brazil, Russia, India, and China) and other major players like Argentina, Turkey, and South Africa – also slowed in 2012.
China’s slowdown may be stabilized for a few quarters, given the government’s latest fiscal, monetary, and credit injection; but this stimulus will only perpetuate the country’s unsustainable growth model, one based on too much fixed investment and savings and too little private consumption.
In 2013, downside risks to global growth will be exacerbated by the spread of fiscal austerity to most advanced economies.
Until now, the recessionary fiscal drag has been concentrated in the eurozone periphery and the UK.
But now it is permeating the eurozone’s core.
And in the US, even if President Barack Obama and the Republicans in Congress agree on a budget plan that avoids the looming “fiscal cliff,” spending cuts and tax increases will invariably lead to some drag on growth in 2013 – at least 1% of GDP.
In Japan, the fiscal stimulus from post-earthquake reconstruction will be phased out, while a new consumption tax will be phased in by 2014.
The International Monetary Fund is thus absolutely right in arguing that excessively front-loaded and synchronized fiscal austerity in most advanced economies will dim global growth prospects in 2013.
So, what explains the recent rally in US and global asset markets?
The answer is simple: Central banks have turned on their liquidity hoses again, providing a boost to risky assets.
The US Federal Reserve has embraced aggressive, open-ended quantitative easing (QE).
The European Central Bank’s announcement of its “outright market transactions” program has reduced the risk of a sovereign-debt crisis in the eurozone periphery and a breakup of the monetary union.
The Bank of England has moved from QE to CE (credit easing), and the Bank of Japan has repeatedly increased the size of its QE operations.
Monetary authorities in many other advanced and emerging-market economies have cut their policy rates as well.
And, with slow growth, subdued inflation, near-zero short-term interest rates, and more QE, longer-term interest rates in most advanced economies remain low (with the exception of the eurozone periphery, where sovereign risk remains relatively high).
It is small wonder, then, that investors desperately searching for yield have rushed into equities, commodities, credit instruments, and emerging-market currencies.
But now a global market correction seems underway, owing, first and foremost, to the poor growth outlook.
At the same time, the eurozone crisis remains unresolved, despite the ECB’s bold actions and talk of a banking, fiscal, economic, and political union.
Specifically, Greece, Portugal, Spain, and Italy are still at risk, while bailout fatigue pervades the eurozone core.
Moreover, political and policy uncertainties – on the fiscal, debt, taxation, and regulatory fronts – abound.
In the US, the fiscal worries are threefold: the risk of a “cliff” in 2013, as tax increases and massive spending cuts kick in automatically if no political agreement is reached; renewed partisan combat over the debt ceiling; and a new fight over medium-term fiscal austerity.
In many other countries or regions – for example, China, Korea, Japan, Israel, Germany, Italy, and Catalonia – upcoming elections or political transitions have similarly increased policy uncertainty.
Yet another reason for the correction is that valuations in stock markets are stretched: price/earnings ratios are now high, while growth in earnings per share is slackening, and will be subject to further negative surprises as growth and inflation remain low.
With uncertainty, volatility, and tail risks on the rise again, the correction could accelerate quickly.
Indeed, there are now greater geopolitical uncertainties as well: the risk of an Iran-Israel military confrontation remains high as negotiations and sanctions may not deter Iran from developing nuclear-weapons capacity; a new war between Israel and Hamas in Gaza is likely; the Arab Spring is turning into a grim winter of economic, social, and political instability; and territorial disputes in Asia between China, Korea, Japan, Taiwan, the Philippines, and Vietnam are inflaming nationalist forces.
As consumers, firms, and investors become more cautious and risk-averse, the equity-market rally of the second half of 2012 has crested.
And, given the seriousness of the downside risks to growth in advanced and emerging economies alike, the correction could be a bellwether of worse to come for the global economy and financial markets in 2013.
Down with Debt Weight
LONDON – Nearly four years after the start of the global financial crisis, many are wondering why economic recovery is taking so long.
Indeed, its sluggishness has confounded even the experts.
According to the International Monetary Fund, the world economy should have grown by 4.4% in 2011, and should grow by 4.5% in 2012.
In fact, the latest figures from the World Bank indicate that growth reached just 2.7% in 2011, and will slow this year to 2.5% – a figure that may well need to be revised downwards.
There are two possible reasons for the discrepancy between forecast and outcome.
Either the damage caused by the financial crisis was more serious than people realized, or the economic medicine prescribed was less efficacious than policymakers believed.
In fact, the gravity of the banking crisis was quickly grasped.
Huge stimulus packages were implemented in 2008-9, led by the United States and China, coordinated by Britain, and with the reluctant support of Germany.
Interest rates were slashed, insolvent banks were bailed out, the printing presses were turned on, taxes were cut, and public spending was boosted.
Some countries devalued their currencies.
As a result, the slide was halted, and the rebound was faster than forecasters expected.
But the stimulus measures transformed a banking crisis into a fiscal and sovereign-debt crisis.
From 2010 onwards, governments started to raise taxes and cut spending in response to growing fears of sovereign default.
At that point, the recovery went into reverse.
As Carmen Reinhart and Kenneth Rogoff tell it in their masterly book This Time is Different, there is no secure way of short-circuiting a deep banking crisis.
The crisis originates with “excessive debt accumulation,” which makes economies “vulnerable to crises of confidence.”
Commercial banks have to be bailed out by governments; then governments have to be bailed out by commercial banks.
In the end, both have to be bailed out by central banks.
All of this, according to Reinhart and Rogoff, involves a “protracted and pronounced contraction in economic activity.”
They reckon that the average length of post-war crises has been 4.4 years – the time it takes for the necessary “de-leveraging” to occur – after which the crisis of confidence is over and economic growth revives.
However, there is something missing in the story.
Recovery from the Great Depression took about 10 years, more than twice the post-war average.
Reinhart and Rogoff offer a couple of reasons for the difference in recovery rates: the slow policy response to the Great Depression and the gold standard, which meant that individual countries could not export their way out of depression.
In other words, fiscal policy and the monetary-policy regime have a decisive influence both on the depth of the collapse and how long before the economy recovers.
It is also significant that big financial collapses occurred again in the 1970’s, after being virtually absent in the 1950’s and 1960’s, when the Keynesian system of managed economies and the Bretton Woods system of managed exchange rates was in place.
The major post-war crises that Reinhart and Rogoff consider run from 1977 to 2001.
They occurred because regulation of banks and controls on capital movements were lifted; they were shorter than in the 1930’s because the policy responses were not idiotic.
Indonesian president Susilo Bambang Yudhoyono emphasized that point earlier this month, boasting to British Prime Minister David Cameron that Indonesia’s successful recovery plan after the 1998 collapse was inspired by John Maynard Keynes. “We must ensure that the people can buy; we must ensure that industries can produce…”
Today, many governments, especially in the eurozone, seem to have run out of policy options.
With fiscal austerity all the rage, they have given up ensuring that “people can buy” and “industries can produce.”
Central banks have been handed the job of keeping economies afloat, but most of the money that they print remains stuck in the banking system, unable to arrest stagnating consumption and falling investment.
Moreover, the eurozone itself is a mini-gold standard, with heavily indebted members unable to devalue their currencies, because they have no currencies to devalue.
So, given that Chinese growth, too, is slowing, the world economy seems destined to crawl along the bottom for some time yet, with unemployment rising in some countries to 20% or more.
With fiscal, monetary, and exchange-rate policies blocked, is there a way out of prolonged recession?
John Geanakoplos of Yale University has been arguing for big debt write-offs.
Rather than waiting to get rid of debt through bankruptcies, governments should “mandate debt forgiveness.”
They could buy bad loans from lenders and forgive part of the principal payable by borrowers, simultaneously reducing lenders’ collateral requirements and borrowers’ debt overhang.
In the US, the Term Asset-Backed Securities Loan Facility (TALF) program and the Public-Private Investment Program (PPIP) were in effect debt-forgiveness schemes aimed at sub-prime mortgage holders, but on too small a scale.
But the principle of debt forgiveness clearly has applications for public debt as well, especially in the eurozone.
Those who fear excessive public debt are the banks that hold it.
Junk public bonds are no safer for them than junk private bonds.
Both lenders and borrowers would be better off from a comprehensive debt cancelation.
So would citizens whose livelihoods are being destroyed by governments’ desperate attempts to de-leverage.
Philosophically, the debt-forgiveness approach rests on the belief that creditors share culpability for defaults with debtors, since they made the bad loans in the first place.
As long as the borrower has not misled the lender at the time of taking the loan, the lender bears at least some responsibility for the transaction.
In 1918, Keynes urged the cancelation of inter-Allied debts arising from World War I. “We shall never be able to move again, unless we can free our limbs from these paper shackles,” he wrote.
Down With Human Rights
The relationship between the United Nations and the human-rights movement has always been ambiguous.
On the one hand, human-rights ideology – and it is an ideology, every bit as much as Communism was or neo-liberalism is today – is profoundly legalist, claiming legitimacy from treaties and other international and national instruments.
These include, as “first among equals,” the UN’s 1948 Universal Declaration of Human Rights.
The modern human-rights movement was born out of the UN, and in many ways it has never entirely left home.
On the other hand, the UN is more a bully pulpit for the promulgation of the high ideals of human rights, equality, and personal and economic freedom than it is a way station on the road to world government (no matter what some conservative extremists in the United States imagine).
Indeed, at its institutional core, the UN is an inter-governmental body whose officials, from the most junior staffer to the Secretary General, serve at the pleasure of its member states – above all, its powerful member states.
As a result of this profound contradiction between ambition and mandate, the UN often seems to impede the advance of human-rights goals as much as it realizes them.
Doubters need only recall the unwillingness of Secretary General after Secretary General, from U Thant to Kofi Annan, to meet with – or, in some cases, even to permit on the UN’s premises – victims of human rights violations who had the misfortune of being born in powerful countries.
For all the UN’s intellectual commitment to the furtherance of human rights, it knows better than to incite the displeasure of the Chinese or the Russians by receiving activists from Tibet or Chechnya.
In fairness, no UN Secretary General has paid greater homage to the ideals of the human-rights movement, or attempted, at least rhetorically, to associate the UN with those ideals, than Kofi Annan.
Rhetoric is not reality, of course, and the UN’s declarations have often seemed far removed from its daily practice.
But words are not without consequences, and there is little question that human rights has occupied a higher place in international deliberations during Annan’s tenure than ever before.
Moreover, Annan’s appointee as UN High Commissioner for Human Rights, former Irish President Mary Robinson, was instrumental in many developing countries’ adoption of a human-rights agenda, which previously was often viewed as a flag of convenience for Western meddling.
People close to Annan say that he hoped to build on these successes during the UN’s recently concluded summit. In March, he wrote that “the Organization [must] take the cause of human rights as seriously as those of security and development.”
Among his key proposals was the replacement of the largely discredited UN Commission on Human Rights – a body that has no mechanism for excluding even notorious human-rights violators like Libya, Cuba, or Zimbabwe – with a new Human Rights Council, where such embarrassments would in theory not be tolerated.
It is generally agreed that the summit was largely a failure.
Annan himself conceded as much in the speech he gave at the opening of the 60th UN General Assembly.
There are many reasons for this.
There was the US government’s eleventh-hour decision to table hundreds of objections to the final Summit Declaration, effectively reducing it to a series of lowest-common-denominator platitudes.
There was also skepticism among developing countries about whether a stronger UN commitment to human rights was what Annan claimed it to be or, instead, merely a moral flag of convenience – or worse, a legal warrant for Western military intervention.
A great deal of attention has been paid to the stratagems of John Bolton, the fiercely anti-UN diplomat whom President Bush recently appointed US ambassador to the UN, and rightly so.
But what has tended to get lost in these discussions are the malign synergies between a Third World suspicious that so-called humanitarian interventions are only colonialism redux and a unilateralist US administration wedded to the concept of pre-emptive war against enemies that it equates with states that violate human rights.
Because the Bush administration, as its officials repeatedly insist, placed the installation of democratic, human-rights-oriented regimes, by force if necessary, at the core of US foreign policy, those who see only aggressive imperialism in America’s interventions in Afghanistan and Iraq view human rights in a more skeptical light.
In a sense, the UN, Annan, and the human-rights activists who have been perhaps his biggest backers, are caught in the crossfire.
All of this brings to mind one of the great Spanish director Luis Buñuel’s late films.
The pre-credit sequence shows a group of Spanish guerrillas during the insurgency against Napoleon being led to a wall where they are to be executed by firing squad.
At the head of the firing party, a French soldier carries the Tricolor forward. On it are the great words, “Liberty, Equality, Fraternity.”
The guerrillas are led to the wall, and, just as the soldiers are raising their guns to their shoulders, one insurgent shouts, “Down with liberty!” We have not progressed very far, it seems.
Down with the Eurozone
NEW YORK – The eurozone crisis seems to be reaching its climax, with Greece on the verge of default and an inglorious exit from the monetary union, and now Italy on the verge of losing market access.
But the eurozone's problems are much deeper.
They are structural, and they severely affect at least four other economies: Ireland, Portugal, Cyprus, and Spain.
For the last decade, the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) were the eurozone's consumers of first and last resort, spending more than their income and running ever-larger current-account deficits.
Meanwhile, the eurozone core (Germany, the Netherlands, Austria, and France) comprised the producers of first and last resort, spending below their incomes and running ever-larger current-account surpluses.
These external imbalances were also driven by the euro’s strength since 2002, and by the divergence in real exchange rates and competitiveness within the eurozone.
Unit labor costs fell in Germany and other parts of the core (as wage growth lagged that of productivity), leading to a real depreciation and rising current-account surpluses, while the reverse occurred in the PIIGS (and Cyprus), leading to real appreciation and widening current-account deficits.
In Ireland and Spain, private savings collapsed, and a housing bubble fueled excessive consumption, while in Greece, Portugal, Cyprus, and Italy, it was excessive fiscal deficits that exacerbated external imbalances.
The resulting build-up of private and public debt in over-spending countries became unmanageable when housing bubbles burst (Ireland and Spain) and current-account deficits, fiscal gaps, or both became unsustainable throughout the eurozone's periphery.
Moreover, the peripheral countries’ large current-account deficits, fueled as they were by excessive consumption, were accompanied by economic stagnation and loss of competitiveness.
So, now what?
Symmetrical reflation is the best option for restoring growth and competitiveness on the eurozone's periphery while undertaking necessary austerity measures and structural reforms.
This implies significant easing of monetary policy by the European Central Bank; provision of unlimited lender-of-last-resort support to illiquid but potentially solvent economies; a sharp depreciation of the euro, which would turn current-account deficits into surpluses; and fiscal stimulus in the core if the periphery is forced into austerity.
Unfortunately, Germany and the ECB oppose this option, owing to the prospect of a temporary dose of modestly higher inflation in the core relative to the periphery.
The bitter medicine that Germany and the ECB want to impose on the periphery – the second option – is recessionary deflation: fiscal austerity, structural reforms to boost productivity growth and reduce unit labor costs, and real depreciation via price adjustment, as opposed to nominal exchange-rate adjustment.
The problems with this option are many.
Fiscal austerity, while necessary, means a deeper recession in the short term.
Even structural reform reduces output in the short run, because it requires firing workers, shutting down money-losing firms, and gradually reallocating labor and capital to emerging new industries.
So, to prevent a spiral of ever-deepening recession, the periphery needs real depreciation to improve its external deficit.
But even if prices and wages were to fall by 30% over the next few years (which would most likely be socially and politically unsustainable), the real value of debt would increase sharply, worsening the insolvency of governments and private debtors.
In short, the eurozone's periphery is now subject to the paradox of thrift: increasing savings too much, too fast leads to renewed recession and makes debts even more unsustainable.
And that paradox is now affecting even the core.
If the peripheral countries remain mired in a deflationary trap of high debt, falling output, weak competitiveness, and structural external deficits, eventually they will be tempted by a third option: default and exit from the eurozone.
This would enable them to revive economic growth and competitiveness through a depreciation of new national currencies.
Of course, such a disorderly eurozone break-up would be as severe a shock as the collapse of Lehman Brothers in 2008, if not worse.
Avoiding it would compel the eurozone's core economies to embrace the fourth and final option: bribing the periphery to remain in a low-growth uncompetitive state.
This would require accepting massive losses on public and private debt, as well as enormous transfer payments that boost the periphery’s income while its output stagnates.
Italy has done something similar for decades, with its northern regions subsidizing the poorer Mezzogiorno.
But such permanent fiscal transfers are politically impossible in the eurozone, where Germans are Germans and Greeks are Greeks.
That also means that Germany and the ECB have less power than they seem to believe.
Unless they abandon asymmetric adjustment (recessionary deflation), which concentrates all of the pain in the periphery, in favor of a more symmetrical approach (austerity and structural reforms on the periphery, combined with eurozone-wide reflation), the monetary union's slow-developing train wreck will accelerate as peripheral countries default and exit.
The recent chaos in Greece and Italy may be the first step in this process.
Clearly, the eurozone’s muddle-through approach no longer works.
Unless the eurozone moves toward greater economic, fiscal, and political integration (on a path consistent with short-term restoration of growth, competitiveness, and debt sustainability, which are needed to resolve unsustainable debt and reduce chronic fiscal and external deficits), recessionary deflation will certainly lead to a disorderly break-up.
With Italy too big to fail, too big to save, and now at the point of no return, the endgame for the eurozone has begun.
Sequential, coercive restructurings of debt will come first, and then exits from the monetary union that will eventually lead to the eurozone’s disintegration.
Dracula and the Class Struggle
Dream House No More?
BRUSSELS – The financial crisis that began in 2007 had its roots in excesses in the housing market that remained unresolved in 2010 – and that will continue to roil economies in 2011 and beyond.
Everybody now knows about America’s dodgy “sub-prime” mortgages (the term says it all).
But it is all too easy to forget that the development of this market was initially welcomed, because it enabled even people who would not normally qualify for a mortgage loan to aspire to homeownership.
Sub-prime mortgages made the American dream come true.
Of course, billions of others around the world share the same dream.
But the way housing finance is organized differs enormously from country to country, and these differences explain the recent global imbalances and financial crashes.
In developed economies, construction can add only a relatively small amount each year to the existing stock of housing.
With populations stagnating (or declining in many parts of Europe and Japan), the existing stock of housing is exchanged among different parts of the population, and typically bequeathed from old to young.
The situation is different in emerging economies, where the quantity and quality of the existing stock of housing is woefully inadequate.
Moreover, most of the existing housing tends to be in rural areas, whereas most of the jobs are in the cities.
This is why urbanization means a huge building boom in emerging economies.
China, as usual, is the most extreme example, now accounting for more than one-half of global cement consumption.
The dream of homeownership is thus very much alive – and is a powerful economic force – in the emerging world.
But mortgage markets remain underdeveloped in most emerging economies.
This means that young Chinese couples will first have to save a large part of their income as a down payment for their dream house (typically an apartment in a high-rise).
The absence of “no money down” mortgages might be more important than Confucian ethics in explaining China’s high savings rate.
One sure way to reduce the savings rate in China would be to develop an American-style mortgage market there.
The Chinese and others should, however, bear in mind that an increase in housing prices does not make a country richer.
Of course, every homeowner will feel richer if his property’s price goes up.
But if the price of all housing goes up, the country as a whole is no better off; after all, people have to live somewhere, so, other things being equal, cashing in on higher house prices would merely mean paying more for one’s next home.
Housing booms thus create only an illusion of wealth, though it is compelling enough to induce excessive consumption, as occurred in the United States over the last decade.
Conversely, a crash in house prices does not destroy any real wealth (the houses still stand).
On the contrary, a crash makes the dream of ownership more affordable, which benefits first-time buyers – typically the young and less well-off.
But, from an economic point of view, the share of homeowners versus tenants is not very important.
If the rental market is well developed (as in, say, Germany), most families might elect not to own.
But Germans still own indirectly the houses they live in through their investments with life-insurance companies and savings societies, which own and manage a large proportion of the country’s housing estates.
By contrast, from an economic point of view, many American households really rent their homes from the Chinese government.
They might be proud homeowners on paper, but their mortgage was probably underwritten by quasi-governmental institutions like Fannie Mae and Freddie Mac, which in turn rely heavily on capital from China for their own refinancing.
The real danger arises when everyone is convinced that investing in real estate is the best way to secure one’s own future because house prices can only go up.
This induces lenders to provide not only NINJA (no income, no job, no assets) mortgages, but also generous loans to real-estate developers to build ever larger mansions and housing estates.
As long as a boom lasts, everybody benefits.
But when the bubble bursts, the NINJAs cannot service their debt and builders go into bankruptcy.
Lenders find that the collateral (half-finished or empty houses) is worth almost nothing, resulting in huge losses in the banking system (as the US found out in 2008).
In extreme cases, as in Ireland (one hopes not in Spain), the need to save the banking system can bankrupt an entire country.
Housing booms can last a long time, typically more than a decade.
The downside is that housing busts last equally long, because houses are such a durable good.
Once too many houses have been built, the existing overhang depresses the market for a very long time, and unemployed construction workers are usually unable to find jobs elsewhere.
The last decade saw the peak of an unprecedented housing boom in most of the rich world.
The bust, with its banking problems and unemployment, is likely to last for most of the coming decade, depressing growth in all those countries which looked so strong in 2008.
By contrast, the emerging economies have barely started their own boom, which is underpinned by the spillover of liquidity from the US.
The emerging world’s boom might well stretch over the entire next decade, as hundreds of millions of homes are built.
The next bust can be avoided only if emerging markets manage the dream of homeownership better than the US and Europe.
Drunk on Corruption
My friend Boris was leaving my house drunk. So I suggested that he not drive.
He asked why. "You are under the influence," I said.
"Aren't you afraid of the police?" "No," Boris replied, "I have a document with Benjamin Franklin's face on it.
This always helps me."
He showed me his driver's license with a $100-dollar bill tucked beside it.
Obviously, I knew that the police take bribes, but was concerned that Boris might bump into one who wasn't corrupt.
"No way," argued Boris. "To be a traffic policeman you must pay off your boss.
If you don't take bribes, how can you pay off the boss?
Half of Moscow's drivers use licenses bought illegally.
Idiots who try to do things honestly drown in bureaucratic minutia.
Pay $100 bucks and you can drive around with no brakes!"
Bribery and embezzlement have always existed in Russia, before Lenin's October Revolution and after.
But never at so titanic a level as today.
Bribes are taken by everyone, everywhere, and for everything.
Only those not offered bribes, said Boris, don't take them.
Bribery flourishes in most institutions, and the fight against it always ends in disaster or surrender.
Police, prosecutors, and customs officials, even the Kremlin: no one and nothing is immune.
Recently, I visited a dacha village in one of Moscow's prettiest suburbs.
It was luxurious, but similar to a gulag with its high perimeter fences and guards.
Examining the pretentious homes so tastelessly decorated, I asked who owned them and was told that one house was that of a deputy mayor of Moscow, another housed a famous singer, another the son of the Moscow prosecutor.
But the most eye-catching estate belonged to a modest officer from the tax services.
Corruption now threatens Russia more than the war in Chechnya.
In fact, the Chechen war would not have lasted as long as it has if it weren't for corrupt generals, officers, clerks, and policemen who sell weapons and supplies to the rebels.
Russian TV recently showed a bus shuttling from Grozny to Moscow, the very bus that brought to Moscow the 120 kilograms of explosives used in the siege of the Dubrovka theater where so many died in the attempt to rescue the hostages.
A female bus passenger kept the explosives covered with an acid-dipped cloth to prevent inspection sniffing dogs from sensing it.
An unnecessary precaution.
No one checks buses nowadays.
The driver, who didn't know what he was carrying, said that he was stopped 50 times on the journey.
But it was always the same.
A policeman would ask, "Do you know the price?" "Sure I do," the driver would reply, pay the bribe, and go on.
Without the bribe, the bus would have been delayed for hours at each stop, days for the whole journey.
The Chechen War goes on and on not only because the Chechen rebels have Al-Qaida and the whole 'Terrorist International' as allies, but because they have an ally in Russian corruption.
Policemen, military and civil bribe-takers and thieves, who first tax the Chechen civilians or simply steal from them, sell arms and explosives to the terrorists, reveal military maps of mine fields, and supply the rebels with fake documents.
In May this year during the Kaspiisk city explosion terrorists used arms that were purchased from Russian Army officers.
The rebels have modern weapons.
From where?
In the mountains, where the rebels hide, there are no gun-shops.
But the 80,000 Russian soldiers opposing the rebels do have ammunition warehouses, from which arms are stolen and sold.
Not only arms: some junior officers sell their own men into slavery.
Russian corruption has reached catastrophic levels, yet no serious fight has been launched against it.
Harsher punishment for bribery?
This merely brings higher priced bribes.
The harsher the punishment, the more you pay to avoid it.
No official wants to fight corruption because they are themselves corrupt.
So the so-called 'simple people' look at this phenomenon with understanding.
They say of their mayor: Sure he steals, but look how much he has done for the city!
Ordinary people also dislike honest workers.
Why?
A train ticket costs 100 rubles.
But if you pay a small bribe, you travel for 50 rubles.
Both passenger and conductor profit.
One honest babushka once told me that she bought a ticket and tried to board the train.
The conductor stopped her, saying that ticketed passengers were not allowed on the train!
For millions of Russians corruption is the normal way of life.
If you don't want your son drafted into the army, pay off a military registrar and he will cross your son's name off the list or bribe a doctor to file an "unfit for military duty" certificate.
For a price you can get into any college, no matter your credentials.
You can drive drunk, speed, ignore red lights - provided Ben Franklin is there to be given to the police.
Alexander Menshikov, Peter the Great's minister, understood the impossibility of winning the fight against corruption.
When Tsar Peter, sickened by Russia's corruption, decided to hang his bribery-taking officials, Menshikov said, "Your Majesty, you risk losing all your subjects."
In the centuries since then, the situation has become ever more grim.
Uprooting corruption may leave a state without subjects.
But if we don't stop the march of corruption, the subjects will soon be left without a state.
Dry China
ANSHUN, GUIZHOU PROVINCE, CHINA -- The Huangguoshu Waterfall in China’s southwestern Guizhou Province is a magnificent sight, when there is water.
The largest waterfall in Asia, it plunges over a sheer cliff more than 200 feet high in a thundering display of foam, mist, and rainbows.
Unfortunately, this wonder of nature has recently suffered an indignity.
Each evening, it gets turned off as if it were a garden fountain.
This part of China’s southwest, known for its abundant rainfall, mountains, underground rivers and caves, and tropical flora, has recently been gripped by a drought that many say is the worst since the Ming Dynasty.
So, after all the tourists that irrigate this poor region with precious income leave the viewing platforms below the falls, authorities close the sluice gates that dam the White Water River on the dangerously low upstream reservoir, and the falls cease.
Then, each morning, before the tourists reappear, they unceremoniously open the gates again, so that the eerily silent falls suddenly revive in a simulacrum of normalcy.
The disturbance to so elemental a part of this region’s natural architecture is a measure of only one of the many kinds of severe weather aberrations – from floods and droughts to unseasonal blizzards and massive dust storms – that have been unsettling China of late.
No one can say with any certainty what the causes are.
To try to compensate for these perturbed weather patterns, Chinese officialdom has launched an unprecedented array of costly projects.
These include the titanic $55 billion South-North Water Transfer Project, a massive engineering effort to construct three canals to bring water from China’s normally wet south to its arid north; a widespread campaign to dig ever-deeper wells; a nationwide tree-planting campaign; and even an extensive effort at “weather modification.”
According to Zheng Guoguang, the Director of the China Meteorological Administration, “Science and technology will answer the prayers of those living through the harshest drought in decades.”
He says that two-thirds of China’s almost 3,000 counties have tried artificial methods to induce more rainfall, sometimes resulting in lawsuits over rights to mine passing clouds for water.
Such efforts, Zheng reports, have involved some 6,533 cannons, 5,939 rocket launchers, and numerous aircraft in an attempt to seed clouds across one-third of China’s landmass with dry ice, ammonia, and silver iodide.
But can science and technology really solve problems that are not caused by China alone?
More and more scientists are beginning to suspect that global warming has caused the radically changed patterns of precipitation now seen across China.
If true, China will never resolve droughts such as the current one in Guizhou by itself, regardless of how many large-scale engineering projects the government undertakes, or how well organized remedial efforts are.
After all, global problems demand global solutions.
When Chairman Mao still reigned supreme, one of his most vaunted principles was zili gengsheng, or “self-reliance.”
Since China had been bullied, invaded, semi-colonized, and even occupied during most of his formative years, he was deeply suspicious that any foreign country – even a “fraternal” Communist ally – could ever be relied upon to leave China alone, much less actually help it.
As a result, the Party leadership became steeped in suspicion and distrust toward the outside world, especially toward the so-called “great powers.”
Even today, with Mao’s revolution long gone and globalization having knit a new fabric of inter-dependence around China, there remains, particularly among older leaders, a residual wariness about relying on collaboration with outsiders, especially when it comes to “core interests.”
But it is not just world markets that have enmeshed China in a new commons.
Issues such as nuclear proliferation and the global environment – and especially climate change – have also snuck up on China’s leaders (and everyone else).
Like it or not, leaders everywhere are now enfolded in an inescapable web.
So, despite China’s predilection for aloofness, cooperation is not merely an option, but a necessity.
And that means that China also must reconsider its rigid notion of sovereignty.
This is a difficult adjustment for any country to make, especially one like China, which has a history of imagining itself as being at the center of the world while also remaining an inviolable entity that can close its doors whenever it chooses to do so.
That time is past.
China’s leaders have been committed to a process of “opening” for more than a generation.
But they remain neuralgic about any hint of outside interference, including even the suggestion that their nation’s business might also be the business of other peoples, and vice versa.
The drought in Guizhou, whatever its cause, is a reminder that the fate of China’s people has become inextricably linked to what happens elsewhere, and that no country can opt out or find unilateral solutions separate from the global commonweal any longer.
Dump the Lisbon Agenda
As soon as he takes office as President of the European Commission, Durao Barroso - Portugal's former Prime Minister - should devote urgent attention to restoring order and focus to the European Union's economic policies.
The thickest file on his desk concerns the Lisbon agenda, an ambitious programme approved in 2000 by the EU heads of state and government with the goal of making the Union "the most competitive and dynamic knowledge economy" by 2010.
All major fields of economic policy are covered: innovation and entrepreneurship, welfare reform and social inclusion, skills and employability, gender equality, labour and product market liberalisation, and "sustainable" development.
All of these are worthy goals, to be sure, but they belong intrinsically to the sphere of national political decisions.
Indeed, under the European Treaties, the Union has no competence to enact legislation and policy in these domains, nor powers to enforce them.
But the European Council, spurred by the European Commission, invented a new policy approach - called "open coordination" - in order to impinge on these fields.
Open coordination entails the definition of common goals at the EU level, voluntary compliance by the member states, and peer review of results within the European Council.
Inevitably, open coordination has failed to deliver on its promises.
Moreover, the delusion that the European Council can somehow call growth and productivity into being has provided a diversion to national politicians who are unwilling to push for unpopular decisions back home.
My first suggestion to Barroso, therefore, is to scrap the Lisbon agenda.
Only this will make it clear that responsibility for national economic performance lies with national policy-makers.
This brings me to the subject of macroeconomic coordination at the EU level.
The Maastricht Treaty envisaged a simple policy framework for economic and monetary union.
Monetary policy was centralized and entrusted to an independent central bank, while fiscal policy was left to the member states.
National governments were made subject - under the excessive-deficit procedure - to the twin constraints that fiscal deficits should not exceed 3% of GDP and government debt should remain below 60% of GDP (or at least tend towards that value).
Later on, the Stability and Growth Pact added a requirement that, over the medium term, government accounts should be "close to balance."
Essentially, this aimed to prevent irresponsible budgetary policies after the euro's launch, while leaving sufficient room for cyclical oscillations of the deficit within the 3% limit.
The credibility of this apparatus was badly damaged by the November 2003 public controversy between the Commission and the Ecofin Council over the application of the excessive-deficit procedure to France and Germany.
This does not mean that it should be abandoned.
On the contrary, a common external constraint on fiscal behavior is needed as a joint safeguard against an unsustainable accumulation of public debt that could affect financial stability and inflation throughout the EU - a risk aggravated by the impact of aging populations on pension systems.
Such a constraint also provides a welcome anchor for domestic decision-making in member states with weaker political systems.
But the system needs to be reviewed.
I would not listen to those who advocate excluding investment from fiscal deficits: this would only offer new incentives for creative accounting and unsustainable accumulation of debt.
Instead, the emphasis should shift from annual deficits to debt sustainability.
The debt criterion, for example, could be supplemented by a limit on the (trend) growth rate of public spending, which would be kept below that of nominal GDP.
The Commission's powers to initiate action when there is a risk of excessive deficits should be strengthened - provided, of course, that the Commission never again forgets that surveillance of national policies is a task that requires political judgment and cannot be left to accountants and lawyers.
Finally, top priority should be assigned to completing the Single European Market, in which the Union has powerful legal instruments to pry open markets and sustain competition.
The best therapy for reinvigorating growth is both direct, by increasing competitive pressure, and indirect, by triggering the necessary adaptation in national employment, welfare, and education policies.
The job is far from finished.
State aid to ailing companies remains ubiquitous, and common rules designed to ensure free circulation of goods and services are not fully respected by the member states - public procurement and energy markets being prime examples.
Moreover, most markets for services - securities trading, wholesale and retail distribution, business services, and local utilities - remain sheltered from competition and free circulation rules.
Empirical evidence indicates that these distortions in the market for services, which account for about two thirds of GDP, underlie most of the EU's productivity gap with the United States.
In recent years the European Council has not devoted sufficient attention to these tasks, which require full and continuing commitment by member states to transpose and implement Community directives.
All too often, the Commission has favored enacting new legislation and creating new spending programs over the effective administration of what already exists.
So Barroso should forget the high-flying platitudes of the Lisbon agenda and focus instead on effective completion of the Single Market and keeping the member states' fiscal policies in order.
Let national governments take responsibility for their countries' economic performance.
Dying for Free Trade
Last year was a bad one for free trade.
The Doha Round was supposed to make agriculture the centerpiece of negotiations to assuage the deep frustrations of developing countries.
But, instead of breathing life into free trade in food, rural protectionism in rich countries seems to have killed the Doha Round – and, with it, potentially the whole multilateral trading regime.
Agriculture has always presented the greatest challenge to free-trade doctrine and its promise of empowering the poor, for it is one of the most distorted areas of global trade.
In 2004, OECD countries spent more than four times their official development aid budgets on support for domestic farmers.
In 2000, the World Bank estimated that OECD agricultural protectionism cost the developing world $20 billion in welfare losses annually.
Most galling, agriculture is a small and declining part of these “rich club” economies, and the richer and larger they are, the less significant agriculture is and the more resources are wasted on rural welfare.
The practical challenge comes from agriculture’s two advantages that insulate the rural sector from global market forces and turn even the most urbane, liberal politicians into its defenders.
First, farming is geographically concentrated and farmers vote on agricultural policy above everything else, greatly enhancing the power of their votes – something that few, if any, urban consumers do.
Second, protectionists have developed populist but logically questionable arguments that agricultural staples cannot be treated as tradable commodities subject to competition.
Domestic farmers are portrayed as irreplaceable defenders of the social fabric and traditional values.
On top of this, farming is presented as analogous to the military.
Just as no government should outsource national security to untrustworthy foreigners, nor should any government permit the national food supply to rely on the supposed vagaries of foreign production.
We accept paying a high and inefficient cost for national defense against what are often unknown enemies.
Agricultural protectionists, through the language of food security and food self-sufficiency, claim that the same holds true for food.
Japan has long been the paragon of rich-country agricultural protectionism.
Its electoral system heavily favors rural voters.
Farmers are well organized politically, and the Ministry of Agriculture, Forestry, and Fisheries (MAFF) has been a fierce defender of agricultural protectionism.
Food security arguments resonate well in Japan, owing to memories of shortages during World War II and its aftermath.
Ironically, Japan now offers a seed of hope for agricultural liberalization.
The country’s declining number of voters are lining up in favor of cheaper, imported food.
Japan’s demographic crisis is particularly acute in rural areas, where the average age of farmers is surpassing the retirement age.
One enterprising village recently sold itself entirely to a waste disposal firm after it could no longer find any young people willing to return to bucolic bliss.
Despite decades of immense government support, Japan’s rural sector cannot even aspire to feed its declining population.
Food self-sufficiency in staple cereals now stands at 28% on a calorie supply basis, with no signs of growth.
Farming, fishing, and forestry now account for less that 2% of the total economy and less than 4% of the workforce.
The rapid aging and decline of Japan’s rural population is fundamentally shifting Japan’s approach to food.
The MAFF is wistfully abandoning the cherished goal of food autarky.
Its latest strategic plan calls for a self-sufficiency ratio of 45% by 2015 and focuses instead on “securing the stability of food imports” through diversification and free-trade agreements.
For decades, the MAFF’s power meant that Japan’s trading partners would not even contemplate free-trade discussions.
Now the Japanese government, supporting the reformers at the MAFF, is using free-trade deals and negotiations with competitive exporters like Thailand and Australia to pursue agricultural consolidation.
Even more galling for the MAFF’s traditionalists, their food security argument is being turned on its head.
Leveraging Japan’s inability to feed itself, trade negotiators now argue that Japan needs to open up to imports or face being shut out of global food markets by fast-growing giants like China.
Deepening these fears, China’s free-trade deals in Southeast Asia give agriculture priority.
While the logic of this argument is shaky, it taps into deep Japanese concerns about China’s rise.
The rich countries face a similar demographic challenge, while the rest of the world waits to see how their responses will reshape the global economy.
Japan, due to its advanced demographic decline, is the bellwether, yet other traditional rural protectionists like France and South Korea are not far behind.
France now has half the number of farmers it had 20 years ago.
That is good news for farmers and consumers around the world.
Rich and aging countries may finally become promoters, rather than opponents, of free trade in food.
Dying in Court
UTRECHT – Gloria Taylor, a Canadian, has amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig’s disease.
Over a period of a few years, her muscles will weaken until she can no longer walk, use her hands, chew, swallow, speak, and ultimately, breathe.
Then she will die.
Taylor does not want to go through all of that.
She wants to die at a time of her own choosing.
Suicide is not a crime in Canada, so, as Taylor put it: “I simply cannot understand why the law holds that the able-bodied who are terminally ill are allowed to shoot themselves when they have had enough because they are able to hold a gun steady, but because my illness affects my ability to move and control my body, I cannot be allowed compassionate help to allow me to commit an equivalent act using lethal medication.”
Taylor sees the law as offering her a cruel choice: either end her life when she still finds it enjoyable, but is capable of killing herself, or give up the right that others have to end their lives when they choose.
She went to court, arguing that the provisions of the Criminal Code that prevent her from receiving assistance in dying are inconsistent with the Canadian Charter of Rights and Freedoms, which gives Canadians rights to life, liberty, personal security, and equality.
The court hearing was remarkable for the thoroughness with which Justice Lynn Smith examined the ethical questions before her.
She received expert opinions from leading figures on both sides of the issue, not only Canadians, but also authorities in Australia, Belgium, the Netherlands, New Zealand, Switzerland, the United Kingdom, and the United States.
The range of expertise included general medicine, palliative care, neurology, disability studies, gerontology, psychiatry, psychology, law, philosophy, and bioethics.
Many of these experts were cross-examined in court.
Along with Taylor’s right to die, decades of debate about assistance in dying came under scrutiny.
Last month, Smith issued her judgment.
The case, Carter v. Canada, could serve as a textbook on the facts, law, and ethics of assistance in dying.
For example, there has been much debate about the difference between the accepted practice of withholding life support or some other treatment, knowing that the patient is likely to die without it, and the contested practice of actively helping a patient to die.
Smith’s ruling finds that “a bright-line ethical distinction is elusive,” and that the view that there is no such ethical distinction is “persuasive.”
She considers, and accepts, an argument advanced by Wayne Sumner, a distinguished Canadian philosopher: if the patient’s circumstances are such that suicide would be ethically permissible were the patient able to do it, then it is also ethically permissible for the physician to provide the means for the patient to do it.
Smith also had to assess whether there are public-policy considerations that count against the legalization of physician assistance in dying.
Her decision focuses mainly on the risk that vulnerable people – for example, the aged or those with disabilities – will be pressured into accepting assistance in dying when they do not really want it.
There are conflicting views about whether legalization of voluntary euthanasia in the Netherlands, and of physician assistance in dying in Oregon, has led to an increase in the number of vulnerable people being killed or assisted in dying withouttheirfull, informed consent.
For many years, Herbert Hendin, a psychiatrist and suicide expert, has asserted that the safeguards incorporated in these laws fail to protect the vulnerable.
He gave evidence at the trial.
So, too, on the other side, did Hans van Delden, a Dutch nursing home physician and bioethicist who for the past 20 years has been involved in all of the major empirical studies of end-of-life decisions in his country.
Peggy Battin, the most prominent American bioethicist working on assisted dying and euthanasia, also took the stand.
In this dispute, Smith comes down firmly on the side of van Delden and Battin, finding that “the empirical evidence gathered in the two jurisdictions does not support the hypothesis that physician-assisted death has imposed a particular risk to socially vulnerable populations.” Instead, she says, “The evidence does support Dr. van Delden’s position that it is possible for a state to design a system that both permits some individuals to access physician-assisted death and socially protects vulnerable individuals and groups.”
(The most recent Dutch report, released after Smith handed down her judgment, confirms that there has been no dramatic increase in euthanasia cases in the Netherlands.)
Smith then declared, after considering the applicable law, that the provisions of the Criminal Code preventing physician assistance in dying violate disabled people’s right not only to equality, but also to life, liberty, and security.
She thus opened the door for physician assistance in dying for any grievously and irremediably ill competent adult, under conditions not very different from those that apply in other jurisdictions where physician assistance in dying is legal.
The decision will almost certainly be appealed, and the final outcome seems likely to depend on the appellate judges’ interpretations of Canadian law.
But Smith’s verdict on the ethics of assistance in dying – and of the facts regarding jurisdictions, like the Netherlands and Oregon, that have it – seems likely to stand for a long time to come.
Dying to Grow?
STANFORD – We are constantly bombarded with information about the purported risks or protective effects of one or another food, dietary supplement, chemical, drug, or activity.&#160;
In July, for example, an article in The Annals of Internal Medicine reported that people who work at least 11 hours a day have a 67% higher risk of having a heart attack or dying from heart disease than those who work 7-8 hours a day.
However, the study cannot conclude that long work hours cause cardiac disease.
In fact, one of the most common misunderstandings about scientific studies is the critical difference between correlation and causation.
Working long days might be only a marker for being at higher risk of heart disease.
For example, it could be that highly stressed people with Type A personality who think that bacon cheeseburgers and creamy sauces are staple foods, and who already have an increased, long-term risk of heart disease, also tend to work longer hours.
Studies that show an association between a factor and a health effect should be regarded as no more than a preliminary result that points researchers toward further research and analysis.
But even professional regulators, who should know better, sometimes get sidetracked by this sort of misapprehension, and overreact.
Last December, the US Food and Drug Administration issued a public Drug Safety Communication about results from a large study conducted in France – the Santé Adulte GH Enfant, or SAGhE, study – which found an increased risk for death with biosynthetic human growth hormone therapy relative to the general French population.&#160;
There were 93 deaths in the treated group, compared with the 70 expected from a statistical calculation.
One news article reported the study and FDA alert with this headline, “Are children dying for an inch or two?” – language guaranteed to terrify the tens of thousands of patients (and the innumerable body-builders and athletes who use the drug off-label) who have taken the hormone over the past 26 years.
This brings us back to the conundrum of correlation versus causation.
The French study compared all patients who took growth hormone to the general population.
But the two groups are not at all comparable: kids who receive the drug are far from normal.
Growth hormone is given to children for various kinds of short stature. These include growth-hormone deficiency of unknown cause or as a result of impairment of the pituitary gland’s ability to produce the hormone, owing to traumatic injury or irradiation to treat cancer.
It is also administered to children who fail to grow because of chronic renal insufficiency or significant genetic abnormalities, including Turner syndrome, Noonan syndrome, and Prader-Willi syndrome.
These kids are severely impaired.
Turner syndrome, a chromosomal abnormality in which all or part of one of the sex chromosomes is absent, manifests itself in several ways.
These include characteristic physical abnormalities (most often non-functioning ovaries, which results in the absence of menstrual cycles and sterility) and various other health problems, such as congenital heart disease, low thyroid hormone levels, and autoimmune diseases.
Similarly, Noonan syndrome, a relatively common genetic disorder, is marked by abnormal development in various systems of the body that causes unusual facial characteristics, short stature, and cardiac abnormalities.
Prader-Willi syndrome is characterized by poor muscle tone, low levels of sex hormones, and a defect in the part of the brain that controls feelings of satiety or hunger, which leads to overeating and obesity.
Thus, to expect the same death rate in such patients as in the general population would be like blaming insulin for decreased longevity in diabetics (who suffer cardiac and renal disease more frequently than non-diabetics).
In fact, it would be big medical news if there were no increase in deaths in patients treated with growth hormone, because that would imply that the drug actually provides a life-prolonging effect in a population expected to die prematurely.
Another finding in the SAGhE study arouses skepticism about a cause-and-effect relationship between the drug and the increased death rate: the mortality came from causes that are mechanistically and physiologically quite different – mainly bone cancers, cardiovascular diseases, and cerebrovascular events.
A more narrow, unimodal manifestation of toxicity would be more persuasive in establishing causation.
American regulators jumped the gun.
The European Medicines Agency was more measured, saying in a statement, “Based on this observational study alone, the risk cannot be associated with certainty to the growth hormone treatment.
The results need to be confirmed and complemented with further analyses.”
There is a reproducible, undeniable association between fires and fire engines, but that doesn’t mean that the latter cause the former.
If you or a loved one has taken (or is taking) human growth hormone under a physician’s supervision, you shouldn’t lose sleep over it.
Dysfunctional Disarmament
GENEVA – As the United Nations Conference on Disarmament begins a seven-week session in Geneva, its future is on the line.
Whereas countries and civil-society initiatives are on the move, the Conference has stagnated.
Its credibility – indeed, its very legitimacy – is at risk.
The “CD,” as it is informally known, has long served as the world’s only multilateral forum for negotiating disarmament.
Its many impressive accomplishments include the Biological and Chemical Weapons Conventions, the Nuclear Non-Proliferation Treaty, and the Comprehensive Nuclear-Test-Ban Treaty.
Much of this progress was achieved during the Cold War, proving that it is possible to create global legal norms even in times of deep political division.
Yet today, all is not well at the CD.
It operates under a consensus rule, and its member states have different priorities.
Some want negotiations on nuclear disarmament; others want to ban the production of fissile material for weapon purposes; and still others insist that such a treaty should also cover existing stocks.
Some want a treaty on security guarantees for non-nuclear-weapon states to assure them against the threat or use of nuclear weapons; others want a treaty to prevent an arms race in outer space.
But, instead of compromise and the give-and-take of good-faith discussions, there has been paralysis.
There was a brief glimmer of hope in 2009, when the sense of paralysis led the Conference to consensus on a program of work.
Unfortunately, that agenda was never implemented.
As a result, the CD has failed to make any substantive progress for 15 years.
We simply must not let one lost decade turn into a second.
The CD’s future is in the hands of its member states.
But the disarmament and non-proliferation agenda is too important to let the CD lapse into irrelevancy as states consider other negotiating arenas.
Last September, I convened a high-level meeting at the UN to consider ways to revitalize the CD’s work and to advance multilateral disarmament negotiations.
The participants – who included dozens of foreign ministers – were unanimous in stressing that membership of the CD is a privilege.
So is the consensus rule.
Just one or two countries should not be able to block the organization’s work indefinitely.
The message was clear: no more business as usual.
The CD’s member states must recognize that the Conference’s future is at a critical juncture.
Continued stalemate increases the risk that some like-minded countries might take up the matter elsewhere.
After all, the deadlock has ominous implications for international security; the longer it persists, the graver the nuclear threat – from existing arsenals, from the proliferation of such weapons, and from their possible acquisition by terrorists.
I have urged the CD to adopt an agenda based either on the consensus that was forged in 2009, or on an alternative arrangement.
Upon my request, the UN’s entire membership will take up the matter in a first-of-its-kind General Assembly meeting this July.
That schedule makes the CD’s current session crucial to its future.
Reaffirming the CD’s agenda offers the prospect of renewed negotiations on disarmament issues.
Prior agreement on the scope or outcome should not be a precondition for talks – or an excuse to avoid them – but rather a subject of the negotiations themselves.
The current stalemate is all the more troubling in view of recent momentum on other disarmament tracks, including last year’s successful NPT Review Conference and heightened attention to nuclear security.
With the world focused so intently on advancing disarmament goals, the CD should seize the moment.
Shakespeare once wrote that “there is a tide in the affairs of men.” The tide of disarmament is rising, yet the CD is in danger of sinking.
And it will sink unless it fulfills its responsibility to act.
Early Retirement for the Eurozone?
NEW YORK – Whether the eurozone is viable or not remains an open question.
But what if a breakup can only be postponed, not avoided?
If so, delaying the inevitable would merely make the endgame worse – much worse.
Germany increasingly recognizes that if the adjustment needed to restore growth, competitiveness, and debt sustainability in the eurozone’s periphery comes through austerity and internal devaluation rather than debt restructuring and exit (leading to the reintroduction of sharply depreciated national currencies), the cost will most likely be trillions of euros.
Indeed, sufficient official financing will be needed to allow cross-border and even domestic investors to exit.
As investors reduce their exposure to the eurozone periphery’s sovereigns, banks, and corporations, both flow and stock imbalances will need to be financed.
The adjustment process will take many years, and, until policy credibility is fully restored, capital flight will continue, requiring massive amounts of official finance.
Until recently, such official finance came from fiscal authorities (the European Financial Stability Facility, soon to be the European Stability Mechanism) and the International Monetary Fund.
But, increasingly, official financing is coming from the European Central Bank – first with bond purchases, and then with liquidity support to banks and the resulting buildup of balances within the eurozone’s Target2 payment system.
With political constraints in Germany and elsewhere preventing further strengthening of fiscally-based firewalls, the ECB now plans to provide another round of large-scale financing to Spain and Italy (with more bond purchases).
Thus, Germany and the eurozone core have increasingly outsourced official financing of the eurozone’s distressed members to the ECB.
If Italy and Spain are illiquid but solvent, and large-scale financing provides enough time for austerity and economic reforms to restore debt sustainability, competitiveness, and growth, the current strategy will work and the eurozone will survive.
In the process, some form of fiscal and banking union may also emerge, together with some progress on political integration.
But, however important the fiscal and banking union elements of this process may be, the key is whether large-scale financing and gradual adjustments can restore sustainable growth in time.
This will require considerable patience from governments and publics in the core and periphery alike – in the former to maintain large-scale financing, and in the latter to avoid a social and political backlash against years of painful contraction and loss of welfare.
Is this scenario plausible?
Just consider what must be overcome: economic divergence and deepening recessions; irreversible balkanization of the banking system and financial markets; unsustainable debt burdens for public and private agents; daunting growth and balance-sheet costs in countries that pursue internal devaluation and deflation to restore competitiveness; asymmetrical adjustment, with moral-hazard risks in the core and insufficient financing in the periphery fueling incompatible political dynamics; fickle and impatient markets and investors; austerity fatigue in the periphery and bailout fatigue in the core; the absence of conditions for an optimal currency area; and serious difficulties in achieving full fiscal, banking, economic, and political union.
If a gradual process of disintegration eventually makes a eurozone breakup unavoidable, the path chosen by Germany and the ECB – large-scale financing for the eurozone periphery – would destroy the core central banks’ balance sheets.
Worse still, massive losses resulting from the materialization of credit risk might jeopardize core eurozone economies’ debt sustainability, placing the survival of the European Union itself in question.
In that case, surely an “orderly divorce” now is preferable to a messy split down the line.
Of course, a breakup now would be very costly, requiring an international debt conference to restructure the periphery’s debts and the core’s claims.
But breaking up earlier could allow the survival of the single market and of the EU.
A futile attempt to avoid a breakup for a year or two – after wasting trillions of euros in additional official financing by the core – would mean a disorderly end, including the destruction of the single market, owing to the introduction of protectionist policies on a massive scale.
So, if a breakup is unavoidable, delaying it implies much higher costs.
But politics in the eurozone does not permit consideration of an early breakup.
Germany and the ECB are relying on large-scale liquidity to buy time to allow the adjustments necessary to restore growth and debt sustainability.
And, despite the huge risk implied if a breakup eventually occurs, this remains the strategy to which most of the players in the eurozone are committed.
Only time will tell whether betting the house to save the garage was the right move.
Tahun Bumi
STOCKHOLM – Tanggal 22 April dunia akan memperingati 45 tahun perayaan Hari Bumi, hari yang ditetapkan pada tahun 1970 untuk menarik perhatian atas kesulitan-kesulitan dalam bidang lingkungan hidup.
Kita belum pernah menemui tantangan yang sedemikian besarnya atau lebih mendesak dibandingkan dengan kondisi terkini.
Gabungan antara perubahan iklim, hilangnya keanekaragaman hayati dan pengikisan sumber daya alam mendorong planet bumi menuju titik kritis, bahkan melebihi titik dimana tujuan-tujuan seperti pembangunan berkelanjutan dan pengentasan kemiskinan akan jauh lebih sulit untuk diwujudkan.
Sejak tahun 1970, ilmuwan sudah mengetahui bahwa aktivitas manusia tidak hanya menjadi pemicu utama perubahan lingkungan hidup di bumi, tetapi juga mendorong planet melebihi batas kemampuan alaminya.
Jika kita tidak membuat perubahan besar secara cepat, dampaknya akan sangat buruk.
Pemimpin global nampaknya sudah mengakuinya ketika mereka mencapai kesepakatan pada lima tahun yang lalu untuk membatasi pemanasan global abad ini pada suhu 2º Celsius di atas tingkat pra-industrial – melebihi itu maka kita berisiko menciptakan dampak perubahan iklim yang lebih dahsyat.
Namun belum ada tindakan tegas yang diambil untuk mengurangi emisi gas rumah kaca.
Di sisi lain, nyata sekali bahwa emisi meningkat tajam; sebagai akibatnya, tahun lalu merupakan tahun terpanas yang pernah tercatat dalam sejarah.
Bumi kita saat ini berjalan pada jalurnya untuk menghabiskan sisa “anggaran” emisi karbon dioksida, dimana jumlahnya sekarang kurang dari satu triliun ton, hanya dalam 25 tahun.
Dampaknya adalah perubahan yang merupakan malapetaka seperti kenaikan permukaan laut yang tidak dapat dikendalikan. gelombang panas yang membahayakan, dan kemarau panjang yang mengakibatkan kesulitan-kesulitan yang belum pernah terjadi sebelumnya dalam hal keamanan pangan, ekosistem, kesehatan, dan infrastruktur.
Tentunya tidak mengherankan lagi bahwa penduduk miskin dan paling rentan yang akan terkena dampak terburuk.
Kita perlu mengubah kecenderungan ini.
Hari Bumi harus menjadi peringatan – bahkan sebagai pemicu – atas kebutuhan planet bumi, yaitu tindakan tegas dan berkesinambungan.
Untungnya tahun 2015 ini menandai awal perubahan menuju perbaikan.
Tahun ini, pemimpin negara-negara dunia akan menghadiri tiga pertemuan untuk memetakan jalur baru bagi planet kita.
Bulan Juli nanti, mereka akan bertemu di Addis Ababa, Ethiopia untuk menghadiri Konferensi untuk Pendanaan bagi Pembangunan (Conference on Financing for Development).
Pada bulan September akan diselenggarakan pertemuan untuk menyepakati Tujuan-tujuan Pembangunan Berkelanjutan (Sustainable Development Goals), yang akan mempedomani upaya-upaya pembangunan hingga tahun 2030.
Pada bulan Desember, pemimpin negara akan bertemu di Paris untuk merundingkan perjanjian perubahan iklim global yang baru.
Hasil yang diperoleh dari ketiga pertemuan tersebut akan membentuk warisan dari generasi ini, baik untuk lingkungan hidup maupun terhadap pertumbuhan ekonomi dan pembangunan.
Dengan menerapkan dekarbonisasi perekonomian global dan membatasi perubahan iklim, pemimpin negara-negara dunia dapat membuka gerbang inovasi, mendukung kebangkitan industri dan penciptaan lapangan pekerjaan baru, serta menciptakan peluang-peluang ekonomi yang luas.
Semuanya tergantung pada kita untuk mendorong pemimpin politik agar melakukan tindakan yang diperlukan demi menjamin pencapaian hasil.
Sama halnya dengan kita menuntut pemerintah untuk menangani risiko-risiko terkait dengan terorisme atau epidemi, kita pun harus memberikan tekanan besar pada pemerintah supaya bertindak sekarang demi menjaga lingkungan hidup dan mengendalikan perubahan iklim.
Dalam hal ini komunitas ilmiah memiliki tanggung jawab khusus untuk berbagi penelitian mereka dan dampak-dampak potensial yang termuat di dalamnya.
Ini lah alasan mengapa saya dan 16 orang peneliti lainnya di Earth League – mewakili beberapa lembaga akademik terkemuka dunia seperti Potsdam Institute on Climate Impact Research, Earth Institute, Tsinghua University, dan Stockholm Resilience Centre – telah menerbitkan “Earth Statement”, rumusan yang memuat delapan unsur penting dalam keberhasilan perjanjian iklim global yang akan disepakati di Paris pada bulan Desember nanti.
· Pertama, perjanjian harus menegaskan komitmen negara untuk membatasi pemanasan global di bawah suhu 2°C.
· Kedua, perjanjian perlu mengakui sisa anggaran global atas emisi karbon dioksida.
· Ketiga, perjanjian harus menetapkan landasan bagi transformasi ekonomi secara fundamental, dengan segera memulai deep decarbonization untuk membentuk masyarakat nihil karbon pada tahun 2050.
· Keempat, keseluruhan 196 negara dalam Konvensi PBB tentang Perubahan Iklim harus merumuskan rencana aksi emisi yang sejalan dengan deep decarbonization melalui kepemimpinan negara-negara yang lebih maju.
· Kelima, negara harus mengembangkan inovasi dalam teknologi bersih dan menjamin akses universal bagi solusi teknologi yang ada.
· Keenam, pemerintah harus sepakat untuk mendukung adaptasi perubahan iklim dan mengatasi kerugian dan kerusakan yang terkait.
· Ketujuh, perjanjian harus memuat ketentuan-ketentuan untuk melindungi carbon sinks dan ekosistem yang vital.
· Kedelapan, guna membantu negara-negara berkembang melawan perubahan iklim, donor harus menyediakan dukungan tambahan pada tingkat yang setidaknya sebanding dengan bantuan pembangunan global yang sekarang.
Kabar baiknya adalah kedelapan tujuan ini sifatnya realistis dan dapat diwujudkan; bahkan sejumlah kemajuan sudah dicapai.
Tahun lalu, total emisi karbon dioksida year on year dari sektor energi untuk pertama kalinya tidak berubah (karena ketiadaan krisis ekonomi).
Laporan terkini menunjukkan bahwa emisi di Tiongkok, sebagai emitor terbesar emisi gas rumah kaca dunia, juga tidak bertambah dari tahun 2013 hingga 2014.
Kini arusnya mulai berbalik.
Dekarbonisasi sudah dimulai dan tuntutan akan terciptanya dunia yang bebas dari bahan bakar fosil semakin besar – karena tidak hanya hal itu dapat mengendalikan perubahan iklim tetapi juga menjadikannya lebih maju secara teknologi, demokratis, berdaya tahan, sehat dan dinamis secara ekonomi.
Sekarang adalah waktu yang tepat untuk beralih menuju jalur yang lebih berkesinambungan, nihil karbon (zero-carbon).
Melalui perjanjian internasional yang tepat, dunia akan dapat mencapainya.
Demi planet kita dan semua orang yang hidup di dalamnya, mari jadikan tahun 2015 sebagai Tahun Bumi.
Blinded by the Light
NEW YORK – On the evening of March 23, 1.3 billion people will go without light at 8:30, and at 9:30, and at 10:30, and for the rest of the night – just like every other night of the year.
With no access to electricity, darkness after sunset is a constant reality for these people.
On the same evening, another billion will participate in the environmental event “Earth Hour” by turning off their lights from 8:30-9:30.
The organizers say that they are providing a way to demonstrate one’s desire to “do something” about global warming.
But the stark reality is that Earth Hour teaches all the wrong lessons, and actually increases CO2 emissions.
It may inspire virtuous feelings, but its vain symbolism reveals exactly what is wrong with today’s feel-good environmentalism.
Earth Hour teaches us that tackling global warming is easy.
Yet, by switching off the lights, all we are doing is making it harder to see.
Notice that you have not been asked to switch off anything really inconvenient, like your heating or air conditioning, television, computer, mobile phone, or any of the myriad technologies that depend on affordable, plentiful energy electricity and make modern life possible.
If switching off the lights for one hour per year really were beneficial, why would we not do it for the other 8,759?
Hypothetically, switching off the lights for an hour would cut CO2 emissions from power plants around the world.
But, even if everyone in the entire world cut all residential lighting, and this translated entirely into CO2 reduction, it would be the equivalent of China pausing its CO2 emissions for less than four minutes.
In fact, Earth Hour will cause emissions to increase.
As the United Kingdom’s National Grid operators have found, a small decline in electricity consumption does not translate into less energy being pumped into the grid, and therefore will not reduce emissions.
Moreover, during Earth Hour, any significant drop in electricity demand will entail a reduction in CO2 emissions during the hour, but it will be offset by the surge from firing up coal or gas stations to restore electricity supplies afterwards.
And the cozy candles that many participants will light, which seem so natural and environmentally friendly, are still fossil fuels – and almost 100 times less efficient than incandescent light bulbs.
Using one candle for each switched-off bulb cancels out even the theoretical CO2 reduction; using two candles means that you emit more CO2.
Electricity has given humanity huge benefits.
Almost three billion people still burn dung, twigs, and other traditional fuels indoors to cook and keep warm, generating noxious fumes that kill an estimated two million people each year, mostly women and children.
Likewise, just a hundred years ago, the average American family spent six hours each week during cold months shoveling six tons of coal into the furnace (not to mention cleaning the coal dust from carpets, furniture, curtains, and bedclothes).
In the developed world today, electric stoves and heaters have banished indoor air pollution.
Similarly, electricity has allowed us to mechanize much of our world, ending most backbreaking work.
The washing machine liberated women from spending endless hours carrying water and beating clothing on scrub boards.
The refrigerator made it possible for almost everyone to eat more fruits and vegetables, and simply to stop eating rotten food, which is the main reason why the most prevalent cancer for men in the United States in 1930, stomach cancer, is the least prevalent now.
Electricity has allowed us to irrigate fields and synthesize fertilizer from air.
The light that it powers has enabled us to have active, productive lives past sunset.
The electricity that people in rich countries consume is, on average, equivalent to the energy of 56 servants helping them.
Even people in Sub-Saharan Africa have electricity equivalent to about three servants.
They need more of it, not less.
This is relevant not only for the world’s poor.
Because of rising energy prices from green subsidies, 800,000 German households can no longer pay their electricity bills.
In the UK, there are now over five million fuel-poor people, and the country’s electricity regulator now publicly worries that environmental targets could lead to blackouts in less than nine months.
Today, we produce only a small fraction of the energy that we need from solar and wind – 0.7% from wind and just 0.1% from solar.
These technologies currently are too expensive.
They are also unreliable (we still have no idea what to do when the wind is not blowing).
Even with optimistic assumptions, the International Energy Agency estimates that, by 2035, we will produce just 2.4% of our energy from wind and 0.8% from solar.
To green the world’s energy, we should abandon the old-fashioned policy of subsidizing unreliable solar and wind – a policy that has failed for 20 years, and that will fail for the next 22.
Instead, we should focus on inventing new, more efficient green technologies to outcompete fossil fuels.
If we really want a sustainable future for all of humanity and our planet, we shouldn’t plunge ourselves back into darkness.
Tackling climate change by turning off the lights and eating dinner by candlelight smacks of the “let them eat cake” approach to the world’s problems that appeals only to well-electrified, comfortable elites.
Focusing on green R&amp;D might not feel as good as participating in a global gabfest with flashlights and good intentions, but it is a much brighter idea.
Earth is Enough
COPENHAGEN – According to conventional wisdom, we are voraciously using the world’s resources and living way beyond Earth’s means.
This narrative of decline and pessimism underlies much of today’s environmental discourse, and is often formulated in a simple fashion: by 2030, we will need two planets to sustain us, owing to higher living standards and population growth.
If everyone managed to live at American living standards today, we would need almost five planets.
But this received wisdom is fundamentally wrong.
Environmental campaigners use the so-called “ecological footprint” – how much area each one of us requires from the planet – to make their point.
We obviously use cropland, grazing land, forests, and fishing grounds to produce our food, fiber, and timber, and we need space for our houses, roads, and cities.
Moreover, we require areas to absorb the waste emitted by our energy use.
Translating all these demands into a common unit of physical area gives us an opportunity to compare it with Earth’s productive area – and thus to get a sense of how sustainable we are.
For more than a decade, the World Wildlife Fund and several other conservation organizations have performed complicated calculations to determine individual “footprints” on the planet.
Their numbers show that each American uses 9.4 hectares of the globe, each European 4.7 hectares, and those in low-income countries just one hectare.
Adding it all up, we collectively use 17.5 billion hectares.
Unfortunately, there are only 13.4 billion hectares available.
So the WWF points out that we are already living beyond Earth’s means, using around 30% too much.
And it will get worse.
They tell us that the recent financial crisis “pales in comparison to the looming ecological credit crunch,” which could presage “a large-scale ecosystem collapse.”
This message is being seared it into the public consciousness.
The British newspaper The Observer used the headline “Wanted: New Earth by 2050”; according to the BBC, Earth is “on course for eco-crunch”; and The Washington Post was horrified by the four extra planets needed, and urged us to use more canvass shopping bags and energy-saving light bulbs.
The message has been received loud and clear.
We are using up too much of the planet’s area. But wait a minute.
How can we do that?
How can we actually use more area than there is on earth?
Obviously, any measure that tries to aggregate many different aspects of human behavior will have to simplify the inputs; the ecological footprint is no different.
For example, when we talk about American lifestyles needing five planets, we assume that technology is frozen, whereas it is likely that worldwide land-use productivity will increase dramatically.
Likewise, organic farming actually leaves a larger footprint than its conventional cousin.
Yet, despite such shortcomings, it is clear that areas we use for roads cannot be used for growing food, and that areas we use to build our houses takes away from forests.
This part of the ecological footprint is a convenient measure of our literal footprint on earth.
Here, we live far inside the available area, using some 60% of the world’s available space, and this proportion is likely to drop , because the rate at which the earth’s population is increasing is now slowing, while technological progress continues.
So no ecological collapse here.
There is just one factor that keeps increasing: our carbon emissions.
It is not at all obvious to anybody how to convert CO2 to area.
The WWF and some researchers choose to get around this by defining the area of emissions as the area of forest needed to soak up the extra CO2.
This now makes up more than 50% of the ecological footprint, and will grow to three-quarters before mid-century.
In essence, we are being told that we ought to cut emissions to zero, and to plant trees to achieve that, meaning that we would have to plant forests today on 30% more than all of the available land, and plant forests on almost two planets by 2030.
This is unreasonable.
Is it really necessary for us to cut all emissions?
Just cutting about half of all emissions would reduce greenhouse gas concentrations in the medium term.
More importantly, planting forests is one of the least area-efficient low-tech ways to cut carbon.
Solar cells and wind turbines require less than 1% of the area of forests to reduce CO2, they become increasingly efficient, and they can often be placed on non-productive land (such as wind turbines at sea and solar panels in deserts).
Measured this way, the scary eco-crunch disappears.
Due to technology, the individual demand on the planet has already dropped 35% over the past half-century, and the collective requirement will reach its upper limit before 2020 way below any overdraft.
Translating CO2 into an illogical and inefficient measure of forest cover seems intended mainly to ensure that an alarming message results.
In the scientific literature, a leading modeler acknowledges that most modelers regard this method as “hard to defend.”
Two other research teams have pointed out that the ecological footprint “itself is nothing more than an important attention-grabbing device,” and that “it is less a scientific measure than one designed to raise public awareness and influence politics.”
When we really examine the “ecological footprint” calculations, we discover that the only thing the world is running out of is space to plant a colossal amount of imaginary forest that we wouldn’t have planted anyway, to avoid CO2 emissions that we can prevent through much smarter and cheaper means.
That our profligate consumption requires five planets is a catchy story, but it is wrong.
The planet we have is more than enough.
East Asia\u0027s Historical Shackles
TOKYO – Diplomatic relationships in East Asia have long been held hostage by history.
But the region’s “history problem” has been intensifying lately, with growing nationalism among major actors like China, Japan, and South Korea fueling disputes over everything from territory and natural resources to war memorials and textbooks.
Can East Asian countries overcome their legacy of conflict to forge a common future that benefits all?
Consider the relationship between America’s closest East Asian allies, Japan and South Korea.
Though historical disagreements have long hampered bilateral ties, the increasingly nationalistic stance of Japanese Prime Minister Shinzo Abe and South Korean President Park Geun-hye has aggravated festering tensions.
If they fail to work together to stem the revival of bitter historical disputes, their relationship will remain frozen, playing into China’s hands.
And nobody plays the history card with quite as much relish as China, where President Xi Jinping is also relying on nationalism to legitimize his rule.
Last year, China introduced two new national memorial days to commemorate China’s long battle against Japanese aggression in World War II: “War against Japanese Aggression Victory Day” on September 3 and “Nanjing Massacre Day” on December 13.
What would happen if countries like Vietnam and India dedicated days to remembering China’s aggression toward them since 1949?
By reinforcing negative stereotypes of rival countries, such squabbles over history and remembrance sow fragmentation and instability, and have certainly fueled the region’s recent territorial disputes.
Indeed, the politicization of history remains the principal obstacle to reconciliation in East Asia.
Repeated attempts to rewrite history –&nbsp;sometimes literally, through textbook revisions – along nationalist lines make it nearly impossible to establish regional institutions.
This should not be the case.
Japan and South Korea, for example, are vibrant democracies and export-oriented economic powerhouses, with traditionally close cultural ties and many shared values.
In other words, they are ideal candidates for collaboration.
US President Barack Obama recognizes this potential, and has promoted increased strategic cooperation between South Korea and Japan in order to underpin a stronger trilateral security alliance with the US that can balance a rising China.
But Japan and South Korea refuse to let go of history.
To be sure, there is some truth to South Korea’s accusation that Japan is denying some of its past behavior.
But it is also true that Park&nbsp;– who has refused to meet formally with Abe until he addresses lingering issues over Japan’s annexation of Korea –&nbsp;has used history to pander to domestic nationalist sentiment.
Indeed, adopting a hardline stance has enabled her to whitewash some inconvenient family history: Her father, the dictator Park Chung-hee, collaborated with the Japanese military while Korea was under colonial rule.
Abe, too, has stoked tensions, particularly by visiting Tokyo’s Yasukuni Shrine – a controversial memorial that honors, among others, Class A war criminals from World War II.
Though Abe visited the shrine only once – in December 2013 – he felt compelled to do so in response to China’s unilateral declaration of an air-defense identification zone, covering territories that it claims but does not control.
Of course, the divergences between Japanese and South Korean historical narratives go back further than WWII.
More than a century ago, the Korean activist Ahn Jung-geun assassinated Japan’s first prime minister, Hirobumi Ito, at the railway station in the Chinese city of Harbin, cementing Ahn’s status as a hero in Korea and a terrorist in Japan.
Ito’s image can be seen on Japan’s 1,000-yen note; Ahn has appeared on a 200-won postage stamp in South Korea.
Last year, Park asked Xi to honor Ahn.
Xi seized the opportunity to drive a wedge between America’s two main Asian allies, and built a memorial to Ahn.
Japan responded by blasting China for glorifying a terrorist and propagating a “one-sided” view of history – a move that, Japan asserted, was “not conducive to building peace and stability.”
Such conflicts have a clear catalyst: Asia’s rising prosperity.
As their economies have expanded, Asian countries have gained the confidence to construct and exalt a new past, in which they either downplay their own aggressions or highlight their steadfastness in the face of brutal victimization.
All countries’ legitimizing narratives blend historical fact and myth.
But, in some cases, historical legacies can gain excessive influence, overwhelming leaders’ capacity to make rational policy choices.
That explains why Park has sought closer ties with China, even though South Korea’s natural regional partner is democratic Japan.
One source of hope stems from Abe’s landslide victory in the recent snap general election, which gives him the political capital to reach out to Park with a grand bargain: If Japan expresses remorse more clearly for its militaristic past, South Korea will agree to leave historical grievances out of official policy.
Japan and South Korea cannot change the past.
But they can strive to shape a more cooperative future.
As a Russian proverb succinctly puts it, “Forget the past and lose an eye; dwell on the past and lose both eyes.”
East Asia’s Nationalist Fantasy Islands
TOKYO – They don’t look like much, those few uninhabited rocks in the East China Sea between Okinawa and Taiwan, and a couple of tiny islets in the Sea of Japan, inhabited by a few token fishermen and some South Korean Coast Guard officials.
The former, called the Senkaku Islands in Japan, and the Diaoyu Islands in China, are claimed by China, Japan, and Taiwan; the latter, called Takeshima in Japan, and Dokdo in Korea, are claimed by South Korea and Japan.
These tiny outcroppings have little material value, and yet the dispute over their ownership has led to a major international dustup.
Ambassadors have been recalled.
Massive anti-Japanese demonstrations have been held all over China, causing damage to Japanese people and properties.
Threats fly back and forth between Tokyo and Seoul.
There has even been talk of military action.
The historical facts actually appear quite simple.
Japan grabbed the islands as part of its empire-building project after the Sino-Japanese war in 1895 and the annexation of Korea in 1905.
Prior sovereignty is unclear; there were fishermen from Japan in Takeshima/Dokdo, and some awareness of the Senkaku/Diaoyu in imperial China.
But no formal claims were made by any state.
Things became more complicated after World War II.
Japan was supposed to return its colonial possessions, but the United States took over the Senkaku Islands along with Okinawa, before returning both to Japan in 1972.
The Koreans, still enraged at Japan for almost a half-century of colonization, took the Dokdo islands without worrying about the move’s legality.
Given the brutality of the Japanese occupations of Korea and China, one is naturally inclined to sympathize with Japan’s former victims.
The fiery emotions inspired by this dispute – some Koreans even mutilated themselves in protest against Japan – suggest that the wounds of the Japanese war in Asia are still fresh.
Indeed, South Korean President Lee Myung-bak has used the occasion to demand a formal apology for the war from the Japanese emperor, and financial compensation for Korean women who were forced to serve Japanese soldiers in military brothels during the war.
Unfortunately, the Japanese government, despite much circumstantial and even documentary evidence supplied by Japanese historians, now chooses to deny the wartime regime’s responsibility for this ghastly project.
Not surprisingly, that stance has further inflamed Korean emotions.
And yet it would be too simple to ascribe the current dispute entirely to the open wounds of the last world war.
Nationalist feelings, deliberately stirred up in China, Korea, and Japan, are linked to recent history, to be sure, but the politics behind them is different in each country.
Since the press in all three countries is almost autistic in its refusal to reflect anything but the “national” point of view, these politics are never properly explained.
The Communist government in China can no longer derive any legitimacy from Marxist, let alone Maoist, ideology.
China is an authoritarian capitalist country, open for business with other capitalist countries (including deep economic relations with Japan).
Since the 1990’s, therefore, nationalism has replaced Communism as the justification for the one-party state, which requires stirring up anti-Western – above all, anti-Japanese – sentiment.
This is never difficult in China, given the painful past, and it usefully deflects public attention from the failings and frustrations of living in a dictatorship.
In South Korea, one of the most painful legacies of the Japanese colonial period stems from the Korean elite’s widespread collaboration at the time.
Their offspring still play an important part in conservative politics in the country, which is why Korean leftists periodically call for purges and retribution.
President Lee is a conservative, and relatively pro-Japanese.
As a result, the Japanese view his recent demands for apologies, money, and recognition of Korean sovereignty over the islands in the Sea of Japan as a kind of betrayal.
But, precisely because Lee is regarded as a pro-Japanese conservative, he needs to burnish his nationalist credentials.
He cannot afford to be tainted with collaboration.
His political opponents are not the Japanese, but the Korean left.
The use of the war to stoke anti-Japanese feelings in China and Korea is annoying to the Japanese, and triggers defensive reactions.
But Japanese nationalism is also fed by anxieties and frustrations – specifically, fear of rising Chinese power and Japan’s total dependency on the US for its national security.
Japanese conservatives view their country’s post-war pacifist constitution, written by Americans in 1946, as a humiliating assault on Japanese sovereignty.
Now that China is testing its growing power by claiming territories, not just in the East China Sea, but also in the South China Sea, Japanese nationalists insist that Japan must act as a big power, and be seen as a serious player, fully prepared to defend its sovereignty, even over a few insignificant rocks.
China, Korea, and Japan, whose economic interests are closely entwined, have every reason to avoid a serious conflict.
And yet all three are doing their best to bring one about.
For entirely domestic reasons, each country is manipulating the history of a devastating war, triggering passions that can only cause more damage.
Politicians, commentators, activists, and journalists in each country are talking endlessly about the past.
But they are manipulating memories for political ends.
Eastern Europe’s Crisis of Shame
BERLIN – As thousands of refugees pour into Europe to escape the horrors of war, with many dying along the way, a different sort of tragedy has played out in many of the European Union’s newest member states.
The states known collectively as “Eastern Europe,” including my native Poland, have revealed themselves to be intolerant, illiberal, xenophobic, and incapable of remembering the spirit of solidarity that carried them to freedom a quarter-century ago.
These are the same societies that clamored before and after the fall of communism for a “return to Europe,” proudly proclaiming that they shared its values.
But what did they think Europe stands for?
Since 1989 – and particularly since 2004, when they joined the EU – they have benefited from massive financial transfers in the form of European structural and cohesion funds.
Today, they are unwilling to contribute anything to resolve the greatest refugee crisis facing Europe since World War II.
Indeed, before the eyes of the entire world, the government of Hungary, an EU member state, has mistreated thousands of refugees.
Prime Minister Viktor Orbán sees no reason to behave otherwise: the refugees are not a European problem, he insists; they are a German problem.
Orbán is not alone in this view.
Even Hungary’s Catholic bishops are following Orbán’s line, with Laszlo Kiss-Rigo, Bishop of Szeged-Csanad, saying that Muslim migrants “want to take over,” and that the Pope, who has called on every Catholic parish in Europe to take in a refugee family, “doesn’t know the situation.”
In Poland, a country of 40 million people, the government initially expressed a readiness to accept 2,000 refugees – but only Christians (Slovakia proposed a similar stipulation).
Refugees are not an Eastern European problem, a Polish journalist told National Public Radio in the United States, because these countries did not participate in the decision to bomb Libya (neither did Germany).
Have Eastern Europeans no sense of shame?
For centuries, their ancestors emigrated in droves, seeking relief from material hardships and political persecution.
And today their leaders’ heartless behavior and callous rhetoric play to popular sentiment.
Indeed, the electronic version of Poland’s largest newspaper, Gazeta Wyborcza, now publishes a stunning notice at the end of every article about refugees: “Because of the extraordinarily aggressive content of remarks advocating violence, contrary to the law, and calling for racial, ethnic, and religious hatred, we will not allow readers to publish comments.”
Not so long ago, in the immediate postwar years, Eastern European Jewish Holocaust survivors fled from the murderous anti-Semitism of their Polish, Hungarian, Slovak, or Romanian neighbors to the safety of displaced persons camps in, of all places, Germany.
“Safe Among the Germans” proclaimed the title of an important book by the historian Ruth Gay about these 250,000 survivors.
Now Muslim refugees and survivors of other wars, having found no refuge in Eastern Europe, also are fleeing to safety among the Germans.
In this case, history is not a metaphor.
On the contrary, the root cause of the Eastern European attitudes now on grim display is to be found in World War II and its aftermath.
Consider the Poles, who, deservedly proud of their society’s anti-Nazi resistance, actually killed more Jews than Germans during the war.
Although Poland’s Catholics were cruelly victimized during the Nazi occupation, they could find little compassion for the fate of Nazism’s ultimate victims.
In the words of Józef Mackiewicz, a conservative, anti-Communist Polish writer with impeccable patriotic credentials: “During the occupation there was not, literally, a single person who would not have heard the saying – ‘One thing Hitler has done correctly is to wipe out the Jews.’
But one should not talk about this openly.”
Of course, there were Poles who helped Jews during the war.
Indeed, the number of Polish “Righteous Among Nations,” recognized by Israel’s Yad Vashem for their wartime heroism, is the largest among all European countries (unsurprisingly, given that prewar Poland had Europe’s largest Jewish population by far).
But these remarkable individuals typically acted on their own, against prevailing social norms.
They were misfits who, long after the war had ended, insisted on keeping their wartime heroism a secret from their neighbors – afraid, it seems, that their own communities would otherwise shun, threaten, and ostracize them.
All occupied European societies were complicit to some degree in the Nazi effort to destroy the Jews.
Each made a different contribution, depending on country-specific circumstances and conditions of German rule.
But the Holocaust played out most gruesomely in Eastern Europe, owing to the sheer number of Jews in the region and the incomparable ruthlessness of the Nazi occupation regimes.
When the war ended, Germany – because of the victors’ denazification policies and its responsibility for instigating and carrying out the Holocaust – had no choice but to “work through” its murderous past.
This was a long, difficult process; but German society, mindful of its historical misdeeds, has become capable of confronting moral and political challenges of the type posed by the influx of refugees today.
And Chancellor Angela Merkel has set an example of leadership on migrants that puts all of Eastern Europe’s leaders to shame.
Eastern Europe, by contrast, has yet to come to terms with its murderous past.
Only when it does will its people be able to recognize their obligation to save those fleeing in the face of evil.
Eastern Europe’s Ostrich Policy on HIV
CARDIFF, CALIFORNIA – Russia and Ukraine account for roughly 90% of the 1.5 million people estimated to be infected with HIV in Central and Eastern Europe.
On a recent trip to these countries, and despite repeated requests, no politician or public-health official in either country would meet with me.
None returned the phone calls, faxes, or e-mails that I sent after I returned home.
Both countries have epidemics driven by injecting drug users (IDUs) who share needles and syringes, the most efficient way to transmit HIV.
Yet proven methods exist to slow the spread of HIV by IDUs.
If IDUs inject heroin or related opiates – as is primarily the case in Eastern Europe – establishing opiate substitution programs with methadone or buprenorphine can dramatically slow HIV transmission.
The success of such programs also depends on establishing needle/syringe exchanges at convenient locations, both to provide clean equipment and to draw users into the healthcare system.
As the third leg of the stool, IDUs need counseling.
This trio of policies forms the foundation of what’s known among health-care professionals as the “harm-reduction package.”
Russia and Ukraine, however, spend no money on harm reduction.
International aid supports harm-reduction efforts in both countries on a modest scale: most of the money comes from the Global Fund to Fight AIDS, Tuberculosis, and Malaria.
But Russia, owing to a rise in its national income, no longer is eligible for HIV/AIDS Global Fund grants.
A group of non-governmental organizations (NGOs) in Russia that has run a harm-reduction effort with Global Fund money received assurances from the government that it would continue to bankroll the work once that money ran out.
But last fall the government reneged, and the Global Fund issued the group an emergency grant for two years.
Cash-strapped Ukraine, which remains eligible for Global Fund help to combat HIV/AIDS, also relies entirely on NGOs – most created by affected communities –&#160;to run its harm-reduction programs.
Aside from shaky funding, the harm-reduction efforts in Russia, and to a large degree in Ukraine, lack a fundamental tool: opiate-substitution treatment.
Russia bans the use of methadone outright. “There is no evidence that use of methadone and buprenorphinefacilitates treatment of drug addicts,” declared Olga Krivonos, head of the Department of Medical Aid and Healthcare Development at Russia’s Ministry of Healthcare and Social Development, in March 2009.
Ukraine, which legalized the import of methadone only in December 2007, had a mere 5,000 people receiving it when I visited.
“There is a large body of scientific evidence on the effectiveness of substitution treatment vis-à-vis HIV/AIDS,” concluded the World Health Organization, the United Nations Office on Drugs and Crime, and the Joint United Nations Program on HIV/AIDS in a 2004 policy brief.
The US Institute of Medicine weighed in on the issue in a 2007 report: “Given the strong evidence of its effectiveness in treating opioid dependence, opioid agonist maintenance treatment should be made widely available where feasible.”
The popular explanation for lack of action in Russia and Ukraine is that their governments view IDUs as criminals, rather than people with a disease, and adopt an informal let-them-rot policy.
Indeed, police regularly harass users (and people who help them), making matters worse.
Many countries outside the region take a similar stance.
But it’s more complicated in Eastern Europe.
A leftover Soviet distrust of outsiders colors many opinions, and there’s an oft-repeated claim that the culture is different: an intervention that works in the West might fail in the East.
There is also a suspicion that dirty capitalist pigs want to profit from the sale of opiate substitutes, regardless of whether they work.
This is as silly as contending that antiretroviral drugs won’t work in the region, and that treating HIV is all a giant plot on the part of big pharmaceutical companies.
Humans are humans.
Harm reduction works everywhere, and the main financial benefactors are the countries themselves, which see reduced spread of HIV, drops in crime, and people returning to work.
Playing ostrich about harm reduction does not harm only IDUs.
HIV-infected IDUs of course have sex with non-users.
Pregnant HIV-infected IDUs transmit the virus to their babies, and sometimes – shockingly often in Russia – abandon their newborns, relinquishing them to the state.
The people infected by IDUs also can infect others sexually, further fortifying the bridge into the “general” population.
In July, Vienna hosted the 18th International AIDS Conference, attracting nearly 20,000 people.
Speakers included Austrian President Heinz Fischer, Bill Clinton, Bill Gates, and South Africa’s Deputy President Kgalema Motlanthe.
Organizers held the meeting in Vienna specifically because it is “the gateway to Eastern Europe,” and they hoped to involve the region more than ever.
For the first time, all proceedings were translated into Russian.
But no high-level Russian or Ukrainian official attended.
A “Vienna Declaration,” endorsing harm reduction – and emphasizing drug policy based on science, not ideology – was launched at the meeting, and gathered more than 10,000 signatories.
But the most influential Eastern European signatory was the First Lady of Georgia, a country whose estimated 2,700 HIV-infected people account for just 0.018% of the regional total.
Judging by their governments’ indifference, the remaining 99.982% of the HIV-infected people in Eastern Europe – and all those they place at risk of harm – can just rot.
East Timor’s Example
MANILA &#45;&#45; East Timor, now known as Timor-Leste, is the world’s newest democracy.
It may have a population of less than one million, but it has a proud, heroic history and a rich culture built up over centuries of diverse ethnic and colonial influences.
The island attracted Chinese and Malay traders in the fifteenth century.
The Portuguese arrived not long after, and stayed 400 years.
Now it is attracting attention as an example of United Nations-led nation-building.
The UN Integrated Mission in Timor-Leste (UNMIT), headed by Atul Khare, consists of a civilian staff of 1,568, of which 334 are volunteers, and a police commissioner, Rodolfo Tor, with 1,623 police personnel from 39 countries.
UNMIT’s main job is a difficult one: bringing about national reconciliation.
While peaceful parliamentary elections were held on June 30, an atmosphere of apprehension has prevailed ever since.
Neither the former ruling party, Fretilin, nor the newly formed CNRT, led by Xanana Gusmão, the hero of the resistance to Indonesia’s occupation, won an outright majority.
At first, the UN, like many Timorese, including José Ramos-Horta, the country’s Nobel Laureate president who won election last May, had hoped that a national unity government could be formed.
But a month-long attempt to broker an inclusive government failed.
So, in August, Ramos-Horta ended the deadlock by swearing in Gusmão, a long-term political ally and former president, as prime minister.
Gusmão had forged a coalition with three other centre-left parties.
Together they won a narrow 51% majority of the popular vote, giving them 37 of the 65 seats in parliament.
Gusmão’s main rival, Mari Alkatiri, Fretilin’s leader and a former prime minister, denounced Ramos-Horta’s decision.
Fretilin, he said, would not cooperate with an “illegal and unconstitutional” government.
The constitution is open to interpretation, and he argues that Fretilin, which won the largest share of the vote (29%), should have been asked first to form a government – even a minority one.
Fretilin at first sought to fight the decision through non-violent means.
But some of its supporters began venting their anger on the streets.
Groups of angry marauding young men armed with stones and slingshots ran amok, setting up roadblocks and torching buildings.
But this did not last long, thanks to both the UN and the democratic processes it is helping to nurture.
Of course, Timor Leste has been in something of a political limbo since last year, when clashes between rival factions in the security forces led to a brief breakdown of law and order.
But with security now mainly in the hands of UN police and Australian and New Zealand peacekeepers, the political process is being given a chance to work itself out.
Gusmão will now need to prove himself at the head of an inexperienced government.
One big test will be whether the estimated 100,000 displaced people, amounting to 10% of the population, many living in tent camps, feel safe enough to return home.
If Fretilin persists in its decision to obstruct the government, instability will persist.
This is where the Association of Southeast Asian Nations (ASEAN) can help.
At the top of the agenda at ASEAN’s Leaders Summit in Singapore this month is the adoption of a Charter to embody its “One Vision, One identity, One Community” concept for Southeast Asia.
Timor-Leste is still only an observer in the ASEAN family, but it appears able to grasp – far better than Myanmar, an ASEAN member state – the need for a rules-based ASEAN that stands for democratic governance even in the most difficult of circumstances.
Indeed, the Timorese people have consistently shown that what they want from their government is openness, dialogue, and majority voting under the rule of law.
Myanmar’s people want the same, but their country is being pushed towards collapse by years of political and economic crisis, and might well become ASEAN’s pariah, like Africa’s Zimbabwe.
That should stand as a warning to Timor Leste’s clashing factions, lest any of them conclude that repression and dictatorship are the best solution.
जीने के लिए मरना
फ्रीटाउन, सिएरा लियोन – तब मैं सिएरा लियोन में ओला ड्यूरिंग चिल्ड्रन्स हॉस्पिटल की आपातकालीन इकाई में कार्यरत एक युवा चिकित्सा अधिकारी था जब मैंने मलेरिया से गंभीर रूप से पीड़ित एक बच्चे की माँ को ज़बर्दस्त झूठ बोलने की सलाह दी थी। उसकी बेटी मरियम्मा को जीवन-रक्षक रक्त चढ़ाने की जरूरत थी। लेकिन उसकी माँ के पास स्क्रीनिंग टेस्ट करवाने के लिए भुगतान करने और रक्तदाता को मुआवज़े की रकम देने के लिए पैसे नहीं थे। मैंने कई बच्चों को उस स्थिति में मरते हुए देखा था जब उनके माता पिता बेचैनी से आवश्यक धनराशि इकट्ठा करने की कोशिश में लगे होते थे।
मरियम्मा की जिंदगी बचाने का दृढ़ संकल्प कर, मैंने उसकी माँ से कहा कि वह घर जाकर अपनी बेटी की मौत हो जाने की घोषणा कर दे। मैं जानती थी कि इससे उसके रिश्तेदारों के मन में सहानुभूति जाग उठेगी, और वे अंतिम संस्कार को ठीक तरह से करने के लिए अपने थोड़े-बहुत साधनों से जैसे-तैसे जुगाड़ कर लेंगे। उसकी माँ इसके लिए मान गई, और जब वह छह घंटे बाद लौटी, तो उसने मेज पर काफी पैसे डाल दिए जो मरियम्मा की पूरी देखभाल करने, खून चढ़ाने और मलेरिया और कीड़ों के संक्रमण के इलाज के सभी खर्चों को पूरा करने के लिए काफी थे। कुछ दिनों बाद, मैंने चार साल की उस बच्ची को अस्पताल से छुट्टी दे दी जो अभी भी कमजोर थी पर उसके स्वास्थ्य में सुधार हो रहा था।
हालाँकि मरियम्मा के रिश्तेदार उसकी बीमारी से बिल्कुल नहीं पसीजे थे, परंतु वे उसकी मौत पर पसीज कर हरकत में आ गए थे। पश्चिम अफ्रीका में इबोला की महामारी के दौरान भी यही चीज़ बहुत बड़े पैमाने पर हुई थी।
यह माना जाता है कि इस महामारी ने पहले तो दिसंबर 2013 में गिनी के वन क्षेत्रों में अपने पैर पसारे, और फिर धीरे-धीरे सिएरा लियोन और लाइबेरिया में फैल गई। अंतर्राष्ट्रीय समुदाय इस बीमारी को इन तीन देशों में फैलते हुए देखता रहा जिसमें गांवों के गांव नष्ट हो गए, पूरे के पूरे परिवारों का सफाया हो गया, और उनकी अर्थव्यवस्थाएँ ठप हो गई थीं। लेकिन, शुरू में इस पर ज्यादा ध्यान नहीं दिया गया। अंतर्राष्ट्रीय समुदाय इस सच्चाई की ओर से तब तक आँखें मूँदे बैठा रहा जब तक यह महामारी इतनी अधिक नहीं फैल गई कि अब उसकी और अधिक अनदेखी कर पाना संभव नहीं रह गया था। तथापि, तब तक एक बड़ी त्रासदी को दूर करने के लिए बहुत देर हो चुकी थी।
हम अभी भी पश्चिम अफ्रीका में इबोला आपदा की पूरी व्यापकता को जानने की कोशिश कर रहे हैं। बीमारी की चपेट में आने के डर से, स्कूलों को बंद कर दिया गया था, विद्यार्थी और शिक्षक घर पर रहने लग गए थे। दरअसल, बहुत से कामगार भी घरों पर रहने लग गए थे जिससे रेस्तरां, बार, और होटलों ने काम करना बंद कर दिया था और अर्थव्यवस्था ठप पड़ गई थी। निजी क्षेत्र की लगभग आधी नौकरियाँ खत्म हो गई थीं। किसानों के स्वयं-अलगाव के कारण कृषि उत्पादन में 30% की कमी हो गई थी।
लोगों का सामाजिक जीवन भी ठप हो गया था। कई जिलों में कर्फ्यू लगा दिया गया था, और लंबी दूरी की यात्रा को हतोत्साहित किया गया था। कई शहरों में, अपने घर में किसी आगंतुक को स्वीकार करने का मतलब भारी जुर्माने का जोखिम उठाना हो गया था।
बहरहाल, यह बीमारी शहरी क्षेत्रों में भी जंगल की आग की तरह फैलने लग गई थी और इसने इन तीनों देशों को अपनी चपेट में ले लिया था और यह दूसरे देशों में भी फैलने लग गई थी। अब तक, अकेले सिएरा लियोन में ही 8,500 से अधिक संक्रमणों और 3,500 लोगों की मृत्यु होने की सूचना प्राप्त हुई है।
स्वास्थ्य क्षेत्र संभवतः इससे सबसे अधिक प्रभावित हुआ है। 220 से अधिक स्वास्थ्य देखभाल कर्मियों की मृत्���ु हो जाने पर प्रत्येक 10,000 नागरिकों के लिए केवल 3.4 कुशल स्वास्थ्य कार्मिक बच गए हैं। इबोला का डर बढ़ जाने के फलस्वरूप बहुत से नागरिकों ने स्वास्थ्य सेवाओं का उपयोग करना बंद कर दिया, यह इससे पता चलता है कि अस्पतालों या क्लीनिकों में जन्म लेनेवाले बच्चों की संख्या में 23% की कमी हुई, बुनियादी टीके लगवानेवाले बच्चों की संख्या में 21% की कमी हुई, और मलेरिया का इलाज करवाने वाले बच्चों की संख्या में 39% की कमी हुई। परिणामस्वरूप, इन देशों में टीकों से रोकी जा सकनेवाली बीमारियों, मलेरिया, मातृ एवं शिशु मौतों, और तीव्र कुपोषण की स्थिति फिर से उत्पन्न हो गई है। यह देखते हुए, स्थिति अभी और भी खराब हो सकती है।
लेकिन सिएरा लियोन ने स्थिति को संभालना शुरू कर दिया है, और उसने द्वि-वर्षीय पुनरुत्थान योजना आरंभ की है। उसकी पहली प्राथमिकता इबोला के मामलों की संख्या को शून्य तक लाना और उसे वहीं स्थिर रखना है। इसका मतलब उन स्थितियों को बदलना है जिनके कारण यह शुरू में इतनी तेजी से फैल गया था।
पहला उपाय स्वास्थ्य देखभाल प्रणाली का पुनर्निर्माण करना है। योजना में यह अपेक्षा की गई है कि देश भर के 40 अस्पतालों और 1,300 प्राथमिक स्वास्थ्य देखभाल सुविधाओं में स्वास्थ्य देखभाल सेवाओं को बहाल किया जाए ताकि बच्चों और माताओं को आवश्यक देखभाल, टीकाकरण, और टीबी, एचआईवी/एड्स, और मलेरिया जैसी बीमारियों के लिए उपचार नि: शुल्क प्राप्त हो सके। इसके अलावा, स्वास्थ्य देखभाल प्रणाली को और अधिक सुरक्षित बनाने और उसमें विश्वास को बहाल करने की दृष्टि से इस योजना में बेहतर संक्रमण नियंत्रण पद्धतियों को अपनाने और कुशल कार्यकर्ताओं के एक नए संवर्ग को प्रशिक्षण दिए जाने की आवश्यकता पर बल दिया गया है। और इसमें सामुदायिक समूहों के साथ घनिष्ठ सहयोग भी शामिल है जिन्हें रोग निगरानी और प्रतिक्रिया के कार्य में लगाया जाना चाहिए।
इबोला की स्थिति के बाद का सुधार, इतना शीघ्र, आसान, या सस्ता नहीं होगा। अकेले सिएरा लियोन में ही इसकी लागत $1.3 बिलियन आने का अनुमान है जिसमें से $896.2 मिलियन अभी तक प्राप्त किए जाने बाकी हैं। इस अंतराल को पाटने के लिए, हमें अपने अफ्रीकी भागीदारों और व्यापक अंतर्राष्ट्रीय समुदाय से मदद की जरूरत है।
कई साल पहले, झूठ की मदद के बिना, मरियम्मा की मृत्यु हो गई होती। आज हमें झूठ की जरूरत नहीं है। हमें स्थानीय, राष्ट्रीय, क्षेत्रीय और वैश्विक स्तर पर, वास्तविक कार्य, खुले संप्रेषण, और आपसी जवाबदेही की जरूरत है। हम पहले ही यह देख चुके हैं कि आवश्यक स्वास्थ्य देखभाल सेवाओं की कमी किस तरह किसी देश को बर्बाद कर सकती है, हजारों लोगों के जीवन को लील सकती है, और अनेक लोगों की जिंदगी को तबाह कर सकती है।
हम इबोला का मुकाबला करने के लिए एक देश के रूप में इकट्ठे हुए थे, और हम भविष्य में होनेवाली महामारियों को रोकने के लिए प्रतिबद्ध हैं। लगातार मिल रहे अंतर्राष्ट्रीय सहयोग से, हम इसे करके रहेंगे।
Ebola and Innovation
BOSTON – Lives are not all that have been lost in the ongoing Ebola crisis.
In recent discussions about how to combat the virus, the methodical rigor of science and medicine has given way to hyperbolic politics and public hysteria.
To be sure, informed, data-driven public policy to manage the current outbreak must remain a top priority.
But it is equally important to take stock of the epidemic’s lessons and to ensure that we are prepared for the emergence of other diseases.
Two major lessons should be learned from the current Ebola outbreak.
First, the fight against a single disease must not come at the expense of strengthening an entire health-care system.
Countries with fragile health systems may be able to tackle a given ailment with the help of NGOs and foreign governments, but they are likely to be dangerously unprepared when confronted with unexpected outbreaks of new diseases.
In Liberia, for example, the prevalence of malaria in children under the age of five declined from 66% in 2005 to below 32% in 2011.
Nonetheless, when the Ebola virus entered Liberia from neighboring Guinea earlier this year, the country’s health-care infrastructure was quickly overwhelmed.
More than 2,000 Liberians have died of the disease, and the virus remains rampant.
Similarly, unless they strengthen the health-care system as a whole, other countries that have performed well in some areas – say, the fight against Ebola – could still face large death tolls and long-term economic turmoil.
The second lesson that the Ebola epidemic holds concerns major gaps in our ability to develop new methods and technologies to fight the virus and other diseases like it.
Our policies and approaches have too often been reactive, not proactive.
As a result, affordable and easy-to-use protective equipment for frontline health-care workers and point-of-care tests that are quick, reliable, robust, and cost-effective have been hard to find.
The public and non-profit sectors should support innovations that are not only focused on solving immediate problems, but that also address potential future challenges.
The United States Agency for International Development, the White House Office of Science and Technology, the Centers for Disease Control and Prevention, and the Department of Defense have declared Ebola a “Grand Challenge for Development” and have launched an effort to sponsor practical, cost-effective innovations to treat and prevent it.
This is an important step in the right direction, but such efforts need to start well before an outbreak if they are to have a significant impact.
New technologies require time to be tested before they can be deployed in the field, and scaling up to large-scale production is a major challenge for any new invention.
The Ebola crisis has shown that we need to think about developing our ability to innovate at the most basic level.
Just as health-care systems in the developing world need to be strengthened, we also need to build up our capacity to develop new solutions for similar challenges when they arise.
Engineering schools often fail to provide students with knowledge or understanding of the challenges faced by those outside of the developed world.
Medical students and public-health professionals sometimes study or do internships in places where the disease burden is high; but a minuscule number of similar opportunities are available to engineers and technologists.
As a result, talented scientists and engineers are often grossly unaware of problems that need to be solved, and even those that might be motivated to do so are unlikely to apply their training to address new and emerging threats.
Developing technology takes time and commitment.
In addition to promoting awareness of global challenges in science and engineering schools, and providing opportunities for students to start addressing them in the field, we need to establish mechanisms that will foster and sustain the ideas that this process brings forward.
By creating research grants that do not expire as soon as an outbreak is under control, we would substantially increase our portfolio of solutions to manage the next epidemic better.
When faced with the next Ebola-like challenge, our ability to meet it will depend on the strength of local institutions and our ability to develop the right tools with which to fight it.
There is no telling how many lives may depend on the steps we take now.
Ebola and Inequality
NEW YORK – The Ebola crisis reminds us, once again, of the downside of globalization.
Not only good things – like principles of social justice and gender equality – cross borders more easily than ever before; so do malign influences like environmental problems and disease.
The crisis also reminds us of the importance of government and civil society.
We do not turn to the private sector to control the spread of a disease like Ebola. Rather, we turn to institutions – the Centers for Disease Control and Prevention (CDC) in the United States, the World Health Organization (WHO), and Médecins Sans Frontières, the remarkable group of doctors and nurses who risk their lives to save those of others in poor countries around the world.
Even right-wing fanatics who want to dismantle government institutions turn to them when facing a crisis like that caused by Ebola.
Governments may not do a perfect job in addressing such crises, but one of the reasons that they have not done as well as we would hope is that we have underfunded the relevant agencies at the national and global level.
The Ebola episode holds further lessons.
One reason that the disease spread so rapidly in Liberia and Sierra Leone is that both are war-ravaged countries, where a large proportion of the population is malnourished and the health-care system has been devastated.
Moreover, where the private sector does play an essential role – vaccine development – it has little incentive to devote resources to diseases that afflict the poor or poor countries.
It is only when advanced countries are threatened that there is sufficient impetus to invest in vaccines to confront diseases like Ebola.
This is not so much a criticism of the private sector; after all, drug companies are not in business out of the goodness of their hearts, and there is no money in preventing or curing the diseases of the poor.
Rather, what the Ebola crisis calls into question is our reliance on the private sector to do the things that governments perform best.
Indeed, it appears that with more public funding, an Ebola vaccine could have been developed years ago.
America’s failures in this regard have drawn particular attention – so much so that some African countries are treating visitors from the US with special precautions.
But this just echoes a more fundamental problem: America’s largely private health-care system is failing.
True, at the top end, the US has some of the world’s leading hospitals, research universities, and advanced medical centers.
But, though the US spends more per capita and as a percentage of its GDP on medical care than any other country, its health outcomes are truly disappointing.
American male life expectancy at birth is the worst of 17 high-income countries – almost four years shorter than in Switzerland, Australia, and Japan.
And it is the second worst for women, more than five years below life expectancy in Japan.
Other health metrics are equally disappointing, with data indicating poorer health outcomes for Americans throughout their lives.
And, for at least three decades, matters have been getting worse.
Many factors contribute to America’s health lag, with lessons that are relevant for other countries as well.
For starters, access to medicine matters.
With the US among the few advanced countries that does not recognize access as a basic human right, and more reliant than others on the private sector, it is no surprise that many Americans do not&nbsp;get the medicines they need.
Though the Patient Protection and Affordable Care Act (Obamacare) has improved matters, health-insurance coverage remains weak, with almost half of the 50 US states refusing to expand Medicaid, the health-care financing program for America’s poor.
Moreover, the US has one of the highest rates of childhood poverty among the advanced countries (which was especially true before austerity policies dramatically increased poverty in several European countries), and lack of nutrition and health care in childhood has lifelong effects.
Meanwhile, America’s gun laws contribute to the highest incidence of violent deaths among advanced countries, and its dependence on the automobile underpins a high rate of highway fatalities.
America’s outsize inequality, too, is a critical factor in its health lag, especially combined with the factors mentioned above.
With more poverty, more childhood poverty, more people without access to health care, decent housing, and education, and more people facing food insecurity (often consuming cheap foods that contribute to obesity), it is no surprise that US health outcomes are bad.
But health outcomes are also worse in the US than elsewhere for those with higher incomes and insurance coverage.
Perhaps this, too, is related to higher inequality than in other advanced countries.
Health, we know, is related to stress.
Those striving to climb the ladder of success know the consequences of failure.
In the US, the rungs of the ladder are farther apart than elsewhere, and the distance from the top to the bottom is greater.
That means more anxiety, which translates into poorer health.
Good health is a blessing.
But how countries structure their health-care system – and their society – makes a huge difference in terms of outcomes.
America and the world pay a high price for excessive reliance on market forces and an insufficient attention to broader values, including equality and social justice.
Ebola in America
NEW YORK – Until Thomas Eric Duncan brought Ebola into the United States, the disease was largely dismissed as an exotic pestilence of concern mainly to impoverished West Africa, and those who dared to volunteer there.
And its transmission to two nurses responsible for Duncan’s care – likely resulting from several breaches of medical protocol – has focused intense scrutiny on US preparedness for a possible outbreak.
President Barack Obama even announced last week the appointment of an “Ebola Czar” to manage the detection, isolation, and control of the virus in the US.
Medical and public health experts had been assuring the public that there was little cause for fear.
The Centers for Disease Control and Prevention (CDC) and other health agencies were working behind the scenes, painstakingly tracing anyone who may have come into contact with Duncan and quarantining those who might transmit the disease.
Transmission in the US was nearly impossible, owing to the strength of the US health system, it was thought.
But, as recent events have illustrated, robust health agencies should not be taken for granted.
In fact, over the past decade, the government has slashed budgets at several top health agencies, including the CDC, the National Institutes of Health (NIH), and state and local health departments.
Between 2005 and 2012, for example, the CDC&nbsp;lost 17% of its funding, and officials recently reported that funding allocated for Ebola-type health emergencies is $1 billion less than it was in 2003.
The challenges faced at the state and local levels may be even greater.
Some 23% of local health departments reported that public health preparedness programs were reduced or even eliminated in 2011, while a further 15% reported similar cuts in 2012.
In 2014 alone, the Hospital Preparedness Program, which links regional hospitals with local health departments to prepare for potential public health emergencies, suffered $100 million in budget cuts.
These reductions have already left their mark.
The Hospital Preparedness Program was designed specifically to train health personnel on disease containment in the setting of unforeseen epidemics, such as Ebola.
Had it been adequately funded, perhaps the two nurses now infected would still be healthy.
The NIH, which funds important advances in our understanding and treatment of diseases like Ebola, has also suffered cutbacks.
Its budget has stagnated for most of the past decade, except for years when it was dramatically reduced, such as in 2013.
This has forced productive research laboratories to close, putting potentially life-saving research – like that on an Ebola vaccine – on the back burner.
One explanation for the drastic budget cuts of recent years is that public health institutions usually operate with little fanfare and out of the public eye.
At their best, they prevent disease without a trace, leaving little visible evidence of their crucial function.
Hence, funding for public health has been a tough sell in good economic times, and is one of the first targets for retrenchment.
But global health emergencies like the current Ebola epidemic highlight the folly of these fiscal priorities.
Though we may not lean too heavily on our health infrastructure typically, its importance becomes all too apparent when disease and death come knocking at our door.
Indeed, though the threat of a serious Ebola outbreak in the US remains minimal, that is no reason for complacency.
As the number of cases in West Africa rises, so does the potential for outbreaks outside of that context.
And when members of the international community cannot contain the epidemic, the richest and most powerful actor, namely the US, has an obligation to step in and try to do so.
But budget cuts have damaged America’s ability to fulfill this obligation, and thus may cost more than policymakers bargained for.
In late September, Obama committed $88 million and 3,000 troops to support the fight against Ebola in Liberia.
But his decision came only after the epidemic had been smoldering for many months, with 6,000 Ebola cases confirmed and many more believed to be undetected.
Had CDC funding been at an appropriate level, US support – in the form of highly trained public health professionals, rather than ground troops – might have been deployed much earlier and been more effective.
Ironically, the CDC and its leadership have come under intense scrutiny over the mishandling of Duncan’s care and the Ebola transmissions that resulted from it.
However, had the same lawmakers who are now deriding the CDC listened to pleas for more support and warnings of the consequences of poor funding over the past several years, perhaps the US would not be in the situation in which it finds itself today.
The guiding principle of public health is to prevent disease before it strikes, and this requires long-term investment in institutions that can protect us.
Our collective health and wellbeing are evidence of such institutions’ effectiveness.
Fortunately, the Ebola outbreak is unlikely to expose Americans fully to the poor fiscal choices of the past decade.
But the disease’s sudden appearance on the global scene serves as a stark reminder of what can happen if we do not remain vigilant.
The next epidemic could be just around the corner.
इबोला से सभी मोर्चों पर लड़ाई
पेरिस – पश्चिम अफ्रीका में इबोला के प्रकोप के बारे में संयुक्त राज्य अमेरिका और यूरोप में मीडिया कवरेज को देखते हुए, यह निष्कर्ष निकाला जा सकता है कि प्रभावित देशों में स्थितियों में धीरे-धीरे सुधार हो रहा है। यद्यपि यह महामारी अब सुर्खियों की खबर नहीं रह गई है लेकिन इसका वायरस अभी तक समाप्त नहीं हो पाया है। इसके विपरीत, यह एक गंभीर वैश्विक स्वास्थ्य खतरा बना हुआ है।
मैंने हाल ही में फ्रांस के राष्ट्रपति फ्रेंकोइस हॉलैंडे के साथ, गिनी की राजधानी कोनाक्री की यात्रा की, और फिर इस देश के वन क्षेत्र के एक ग्रामीण जिले मसेंटा का दौरा किया जो उस स्थान के नजदीक है जहाँ से महामारी शुरू हुई थी। दोनों ही स्थानों पर, मैंने अपनी आँखों से वायरस के विनाशकारी प्रभाव: दुख, भय, निराशा, और, अंतत: मौत को देखा। यहाँ तक कि मामूली लक्षण भी भारी हो गए हैं और इसका परिणाम यह हुआ: किसी ने भी हाथ नहीं मिलाए।
सच तो यह है कि इबोला वायरस फैल रहा है - और तेज़ी से फैल रहा है। यह ठीक है कि लाइबेरिया में इस पर काबू पा लिया गया है, लेकिन यह केवल लाइबेरिया में ही हुआ है, और वहाँ भी यह सुनिश्चित करने के लिए कोई उपाय नहीं है कि यह दुबारा नहीं फैलेगा।
इबोला ऐसे तरीकों से फैल रहा है जो उन सबसे अलग हैं जिन्हें हम पहले देख चुके हैं। यह वायरस इन्फ्लूएंजा जैसे दूसरे कई वायरसों जितना तेजी से नहीं फैलता है जिन्होंने इससे पहले महामारियों के फैलने की मात्रा को सीमित किया था, विशेष रूप से इसलिए कि इनका फैलाव ग्रामीण क्षेत्रों तक सीमित था। लेकिन इस बार, वायरस शहरों और कस्बों में प्रवेश कर गया है, जिससे यह विशेष रूप से खतरनाक हो गया है। उच्च जनसंख्या घनत्व न केवल इबोला बल्कि किसी भी वायरस के पनपने के लिए अनुकूल वातावरण का निर्माण करता है। पश्चिम अफ्रीका में बड़े पैमाने पर गरीबी, दुर्लभ चिकित्सा संसाधनों, और भीड़ भरे शहरी क्षेत्रों का खतरनाक संयोजन अत्यंत घातक हो सकता है।
इस वर्ष इबोला से लगभग 7,500 लोगों के मरने की सूचना मिली है। 16,000 से अधिक लोगों के संक्रमित होने की सूचना मिली है। ये अनुमानित आँकड़े हैं, और हालाँकि वे महामारी की गति और प्रतिक्रिया के प्रयासों के प्रभाव के बारे में महत्वपूर्ण जानकारी प्रदान करते हैं, परंतु अधिकारियों ने आगाह किया है कि वास्तविक आँकड़े संभवतः इससे बहुत अधिक हैं।
स्वास्थ्य एक वैश्विक सार्वजनिक कल्याण का विषय है। अधिकतर देशों में, स्वास्थ्य के अधिकार को संविधान या कानून में समाहित किया गया है। विश्व स्वास्थ्य संगठन (डब्ल्यूएचओ) के अनुसार, इस अधिकार में “उचित गुणवत्ता की स्वास्थ्य देखभाल, समय पर, स्वीकार्य रूप से, और किफायती दर पर उपलब्ध होना” शामिल है। लेकिन, इबोला जैसे वायरसों के मामले में कुछ देश ही, यदि कोई हों तो, ऐसी गारंटियाँ जारी कर सकते हैं।
नैतिकता की दृष्टि से, अंतर्राष्ट्रीय समुदाय के लिए यह अनिवार्य है कि वह अपनी संस्थाओं, प्राधिकारियों, साधनसंपन्न व्यवसायों, और व्यक्तियों - और साथ ही अपने ज्ञान और धन - के साथ, इबोला के प्रसार को रोकने के लिए आवश्यक साधनों का उपयोग करे। इस अनिवार्यता की विशुद्ध रूप से स्वयं अपने हित की दृष्टि से भी उतनी ही आवश्यकता है। यदि वायरस पर जल्दी काबू नहीं पाया जाता है, तो हर किसी को - हर देश को - जोखिम होगा।
अच्छी खबर यह है कि इबोला पर काबू पाया ज�� सकता है। आखिरकार, इसका नाश किया जा सकता है। अगर हमें किसी तरह इस लक्ष्य को हासिल करना है, तो वायरस को समझना चाहिए और उसका निदान किया जाना चाहिए। इसके प्रसार को रोका जाना चाहिए, और इलाज प्रस्तुत किया जाना चाहिए।
हालाँकि इबोला के लिए चिकित्सीय रूप से कामयाब कोई टीका नहीं है, पर यह स्थिति शीघ्र ही बदल सकती है। मार्च में वायरस के फैलने के बाद से, एक स्वतंत्र, गैर-लाभ अनुसंधान संगठन इंस्टीट्यूट पेस्टेयर ने यह समझने के लिए काम किया है कि वायरस को किस तरह रोका जा सकता है और कौन सा इलाज प्रस्तुत किया जा सकता है। हमारे शोधकर्ता यह समझने के लिए कि महामारियाँ कैसे विकसित होती हैं, वायरस के प्रसार पर नज़र रख रहे हैं, और हम स्थानीय वैज्ञानिक और चिकित्सा कर्मियों को सशक्त करने के लिए काम कर रहे हैं। हमें उम्मीद है कि 2015 में चिकित्सीय परीक्षणों के लिए दो वैक्सीन प्रतिरक्षाजन तैयार हो जाएँगे।
इंस्टीट्यूट पेस्टेयर का इबोला कार्य बल पश्चिम अफ्रीका में ज़मीन पर और फ्रांस में प्रयोगशाला में वायरस से लड़ाई कर रहा है, यह वायरस का अध्ययन इस बात का पता लगाने के लिए कर रहा है कि यह कैसे फैलता है, और यह इस प्रकोप को रोक और नए प्रकोपों को न होने देने के लिए चिकित्सा समाधान खोजने के लिए कोई कसर नहीं छोड़ रहा है । मेडिसिन्स सैन्स फ्रंटियर्स और रेड क्रॉस और रेड क्रीसेंट सहित डब्ल्यूएचओ और गैर सरकारी संगठनों के साथ मिलकर, इंस्टीट्यूट पेस्टेयर वायरस और उसके कारणों से लड़ने के लिए प्रतिबद्ध है।
दुनिया भर के देशों ने एकदम तत्काल स्वरूप की चिंताओं से निपटने के लिए वित्तीय और अन्य प्रकार की सहायता देने: प्रभावित लोगों और समुदायों की मदद करने का वायदा किया है। कई देश पहले से ही इबोला वायरस के कारणों, प्रसार, और उपचार के अनुसंधान के लिए योगदान कर रहे हैं। एक अंतर्राष्ट्रीय "इच्छुकों का गठबंधन" स्थापित किया गया है, और हम सभी देशों, संबंधित संगठनों, रुचि रखनेवाले व्यवसायों, और योग्य व्यक्तियों से इसमें शामिल होने के लिए अनुरोध कर रहे हैं। हम सब मिलकर, इबोला का अंत कर सकते हैं और हम इसका अंत देखेंगे।
इबोला और उसके बाद
वाशिंगटन, डीसी - संयुक्त राज्य अमेरिका और यूरोप ने अपनी सरहदों के भीतर इबोला वायरस के कुछ छिटपुट मामलों के प्रति बहुत ही अधिक प्रतिक्रिया दिखाई है। घबराहट भरी ये प्रतिक्रियाएँ निरर्थक नहीं हैं। बुनियादी वैज्ञानिक सिद्धांतों का उल्लंघन करके, वे जन-स्वास्थ्य पर अनिवार्य कार्रवाई के लिए मौलिक नैतिक मानदंडों की अवहेलना करती हैं। और जब नागरिकों की इबोला से रक्षा करने की बात हो - भले ही भविष्य में इस तरह के स्वास्थ्य के वैश्विक संकटों के उभरने को रोकने की बात न भी की जाए - तो इन प्रतिक्रियाओं के परिणाम प्रतिकूल भी हो सकते हैं।
बहुत ज़्यादा प्रतिक्रिया करने के कारण असफलता के बेहद खराब उदाहरण यूएस में सामने आए हैं, जहाँ प्रारंभिक प्रतिक्रिया गिनी, लाइबेरिया तथा सिएरा लियोन से आनेवाले यात्रियों की ज़्यादा स्क्रीनिंग करने के रूप में सामने आई। ज़्यादा समस्या की बात यह थी कि अनेक राज्यों ने इबोला से त्रस्त देशों से यूएस लौटने वाले स्वयंसेवक स्वास्थ्य कार्यकर्ताओं के लिए 21 दिन तक अनिवार्य रूप से सबसे अलग रहना या संगरोध निर्धारित किया। सौभाग्य से, संगरोध के आदेशों के ख़िलाफ़ राजनीतिक प्रतिक्रिया के फलस्वरूप कुछ राज्यों के राज्यपालों ने उनमें ढील दे दी।
अब विकसित देशों के लिए यह समझने का समय आ गया है कि इबोला से अपने नागरिकों की रक्षा करने का सबसे अच्छा तरीका यह है कि पश्चिम अफ़्रीका में वायरस को फैलने से रोकने में मदद की जाए। इसके लिए सबसे पहली और सबसे प्रमुख बात यह है कि सबसे ज़्यादा प्रभावित तीन देशों में इबोला के प्रति निरंतर "अत्यधिक प्रतिक्रिया" हो। ऐसी प्रतिक्रिया को पर्याप्त (और महत्वपूर्ण) वित्तपोषण; सुप्रशिक्षित डॉक्टरों, नर्सों, और सामुदायिक स्वास्थ्य कार्यकर्ताओं; और निदान, उपचार, संपर्क की पहचान करने, और संक्रमित व्यक्तियों के अलगाव के लिए बेहतर स्थानीय क्षमता का सहारा मिलना चाहिए।
अब और समय बर्बाद नहीं किया जाना चाहिए। निश्चित रूप से, साहसिक नेतृत्व की कमी के कारण पहले ही वर्तमान इबोला प्रकोप के लिए प्रभावी अंतर्राष्ट्रीय प्रतिक्रिया में बहुत ज़्यादा देरी हो चुकी है, जिससे इस संकट की लागत में बहुत अधिक बढ़ोतरी हुई है।
इबोला के प्रसार को रोकने के अतिरिक्त, अंतर्राष्ट्रीय समुदाय को मौजूदा संकट के सबक को भविष्य के स्वास्थ्य के संभावित ख़तरों के बारे में शीघ्र, सुदृढ़, और साक्ष्य-आधारित कार्रवाई पर बल देने वाली विश्वसनीय प्रतिक्रिया के विकास पर लागू करना चाहिए। इस लक्ष्य के लिए, तीन महत्वपूर्ण पहल शुरू की जानी चाहिए।
सर्वप्रथम, विश्व स्वास्थ्य संगठन को आपातकालीन आकस्मिकता निधि निर्धारित करनी चाहिए जिसे "अंतर्राष्ट्रीय चिंता की सार्वजनिक स्वास्थ्य आपात स्थिति" की घोषणा करते ही उसे अतिरिक्त क्षमता के लिए नियोजित करना चाहिए। अगर इबोला के उभरने पर उसके प्रति भारी आरंभिक प्रतिक्रिया शुरू करने के लिए ऐसा वित्त-पोषण उपलब्ध होता, तो डब्ल्यूएचओ के पास समय पर अंतर्राष्ट्रीय आपात स्थिति की घोषणा करने के लिए भारी प्रोत्साहन होता।
वास्तव में, डब्ल्यूएचओ की समीक्षा समिति ने 2011 में ठीक इसी तरह की निधि के लिए कम-से-कम $100 मिलियन राशि की सिफ़ारिश की थी। हालाँकि यह आसानी से जुटाई जा सकनेवाली राशि थी और अंतर्राष्ट्रीय स्वास्थ्य सहायता के 0.5% से भी कम थी लेकिन डब्ल्यूएचओ इसे स्थापित करने में विफल रहा। इस फ़ैसले की गलती अब पीड़ादायक रूप से स्पष्ट हो गई है, क्योंकि सच तो यह है कि आकस्मिक निधि काफ़ी अधिक अर्थात $500 मिलियन तक होनी चाहिए।
संकट पर प्रतिक्रिया की प्रभावी रणनीति का दूसरा स्तंभ आपातकालीन आरक्षित कार्यबल है - जिसे डब्ल्यूएचओ ने राष्ट्रीय सरकारों के सहयोग से स्थापित किया था – जिसमें सुप्रशिक्षित स्वास्थ्य पेशेवर होते हैं जो कम-संसाधन की स्थितियों में तुरंत नियोजन के लिए तैयार रहते हैं। इससे कमज़ोर स्वास्थ्य-देखभाल प्रणालियों वाले देशों को – जो रोग फैलने की दृष्टि से ख़ास तौर से अतिसंवेदनशील होते हैं - स्वास्थ्य के संकटों को जल्दी से नियंत्रण में लाने के लिए ज़रूरी मानव संसाधन उपलब्ध हो जाएँगे।
निश्चित रूप से, ऐसे उपायों से अपनी स्वास्थ्य-देखभाल प्रणालियों को मज़बूत बनाने और अपनी आबादियों की सुरक्षा करने के लिए देशों की ज़िम्मेदारी कम नहीं हो जाती। यही कारण है कि भविष्य में वैश्विक स्वास्थ्य संकट को रोकने की दिशा में अंतिम और सबसे महत्वपूर्ण क़दम अंतर्राष्ट्रीय स्वास्थ्य प्रणाली कोष का निर्माण करना है ताकि आपात स्थितियों में प्रभावी ढंग से प्रतिक्रिया करने और सामान्य समय में व्यापक स्वास्थ्य सेवाएँ प्रदान करने, दोनों के लिए क्षमता हासिल करने के राष्ट्रीय प्रयासों का समर्थन किया जा सके। ऐसी निधि अंतर्राष्ट्रीय स्वास्थ्य विनियमों की रूपरेखा में ठीक बैठेगी जिस पर 2005 में सहमति हुई थी, और यह सभी लोगों के पास स्वास्थ्य का अधिकार होना चाहिए के सिद्धांत पर आधारित सार्वभौमिक स्वास्थ्य-देखभाल के कार्य को आगे बढ़ाएगी।
सरकारों से भी अपेक्षा होगी कि वे इन लक्ष्यों को हासिल करने के लिए पर्याप्त घरेलू निधियाँ आबंटित करें, उदाहरण के लिए, अफ़्रीक़ी देशों के राष्ट्र-प्रमुख राष्ट्रीय बजट के कम-से-कम 15% को स्वास्थ्य क्षेत्र के लिए आबंटित करने की 2001 आबुजा घोषणा की प्रतिज्ञा को पूरा करें। लेकिन, कम आय वाले देशों के लिए, सतत अंतर्राष्ट्रीय कोष की सहायता मिले बिना मज़बूत स्वास्थ्य-देखभाल प्रणालियाँ स्थापित करने की दिशा में महत्वपूर्ण प्रगति करना लगभग असंभव होगा।
इस बात पर विचार करते हुए कि इस तरह की निधि का निर्माण करने के लिए कम आय वाले देशों में बड़े पैमाने पर अरबों डॉलर का निवेश करना होगा, ज़रूरी राजनीतिक समर्थन पैदा करने के लिए इसमें सामाजिक जुड़ाव महत्वपूर्ण है। इस अर्थ में, एड्स के प्रति वैश्विक प्रतिक्रिया - जो अमेरिकी राष्ट्रपति की एड्स राहत के लिए आपातकालीन योजना द्वारा प्रेरित हुई थी और एड्स, क्षय रोग, और मलेरिया से लड़ने के लिए वैश्विक कोष उपयोगी मॉडल के रूप में काम कर सकती है।
स्वास्थ्य-देखभाल के मज़बूत बुनियादी ढाँचे की स्थापना करने के अतिरिक्त, राष्ट्रीय सरकारों को अपनी आबादी को स्वास्थ्य सेवाएँ प्रदान करने के लिए जवाबदेही वाली प्रणालियाँ विकसित करने की ज़रूरत होगी। इसमें संसाधनों का निष्पक्ष और पारदर्शी नेतृत्व, भ्रष्टाचार-रोधी सुरक्षा उपायों, प्रगति की निगरानी के लिए साधन, सभ्य-समाज की भागीदारी, और विफलताओं के लिए जवाबदेही शामिल हैं।
इन उद्देश्यों को आगे बढ़ाने के लिए, एक अंतर्राष्ट्रीय गठबंधन वैश्विक स्वास्थ्य की रूपरेखा के सम्मेलन के लिए ज़ोर दे रहा है, जिसका लक्ष्य स्थानीय, राष्ट्रीय और वैश्विक स्तरों पर स्वास्थ्य के लिए सुशासन को बढ़ावा देना है। स्वास्थ्य का अधिकार के सिद्धांत पर आधारित संधि, निधियों के आबंटन और अन्य ज़िम्मेदारियों के लिए स्पष्ट दिशा-निर्देश प्रदान करेगी।
पश्चिम अफ़्रीका की इबोला महामारी से अंतर्राष्ट्रीय स्वास्थ्य नीति में कार्रवाई संबंधी सुधार करने की प्रेरणा मिलनी चाहिए, जिससे त्वरित प्रतिक्रिया के उपायों और स्वास्थ्य-देखभाल के मज़बूत बुनियादी ढाँचे की आवश्यकता पर बल दिया जा सके। इन लक्ष्यों को हासिल करने के लिए मापनीय, स्थायी निधि प्रदान करने के लिए रूपरेखाएँ तैयार करना विवेकपूर्ण और किफ़ायती निवेश है – ऐसा निवेश जो सभी के हित में है। यह एक ऐसी मानवीय प्रतिक्रिया है जो दुनिया भर में बहुत अधिक लाभ देगी, अब भी और भविष्य में भी।
लोगों के लिए विकास
न्यूयार्क – पश्चिम अफ्रीका में इबोला महामारी ज़िंदगियों को तबाह कर रही है, समुदायों को नष्ट कर रही है, और बच्चों को अनाथ बना रही है, और इसकी दर इस क्षेत्र में एक दशक से अधिक पहले समाप्त हुए क्रूर नागरिक युद्धों की तुलना में कहीं अधिक है। लाइबेरिया में, अब 60% बाजार बंद हो चुके हैं; सिएरा लियोन में, 10,000 एचआईवी मरीजों में से केवल पाँच में से एक का अभी भी एंटी-रेट्रोवायरल उपचार चल रहा है; और गिनी की सरकार ने बताया है कि इस संकट की वजह से उन्हें $220 मिलियन के वित्तीय घाटे का सामना करना पड़ रहा है। अगर इसके प्रकोप को शीघ्र रोका नहीं जाता है, तो लाइबेरिया और सिएरा लियोन में शांति बहाल होने के बाद, और गिनी का लोकतांत्रिक संक्रमणकाल शुरू होने के बाद जो बहुत-से आर्थिक और सामाजिक लाभ हासिल किए गए थे, वे मिलने बंद हो सकते हैं।
ये तीनों देश कमजोर, विभाजित बने हुए हैं, और जैसा कि वर्तमान संकट से उजागर हुआ है, इन्हें खास तौर से नुकसान पहुँचने की संभावना हो सकती है। अधिक व्यापक तौर पर, इस क्षेत्र के मौजूदा संकट से यह सोचने की प्रेरणा मिलनी चाहिए कि दुनिया किस तरह विकास का समर्थन करती है और उसे आगे बढ़ाती है।
इन देशों के कमजोर होने का एक महत्वपूर्ण कारण उनकी आबादियों में निवेश का लगातार न होना है, जिसके फलस्वरूप आम नागरिक आर्थिक विकास के लाभों का फायदा नहीं उठा पाए हैं। दरअसल, हालाँकि गिनी, लाइबेरिया, और सिएरा लियोन की अर्थव्यवस्थाओं का इबोला के फैलने से दस साल पहले - क्रमशः 2.8%, 10%, और 8% की औसत वार्षिक दरों पर - तेजी से विकास हुआ था - परंतु उनकी आबादियों को अपने दैनिक जीवन में कोई सुधार दिखाई नहीं दिया। विदेशी प्रत्यक्ष निवेश का 65% से अधिक अंश खनन और वन-कटाई में लगाया गया है जो कम रोजगार पैदा करने और धन को चंद लोगों के हाथ में केंद्रित करने के लिए बदनाम हैं।
इसी तरह, हालाँकि लाइबेरिया और सिएरा लियोन में उनके गृह युद्धों के समाप्त होने के बाद उनकी स्वास्थ्य सेवाओं में सुधार हुआ है, गुणवत्ता और व्याप्ति पश्चिम अफ्रीकी मानकों से बहुत कम रही है। जब इबोला ने धावा बोला, तब लाइबेरिया के पास अपने चार मिलियन नागरिकों के लिए केवल 120 डॉक्टर थे। इनमें लगातार फैलती जा रही शहरी मलिन बस्तियों - जो अर्द्ध-नियंत्रित, भीड़-बहुल, और स्वच्छता रहित हैं - को भी शामिल करना चाहिए, और इसमें कोई आश्चर्य नहीं है कि इन देशों ने महामारी को रोकने के लिए संघर्ष किया है।
इन तीनों देशों में इबोला से होनेवाला खतरा स्वास्थ्य देखभाल से कहीं अधिक है। इस पूरे क्षेत्र में, संघर्ष के इतिहास और खराब शासन की विरासत के फलस्वरूप, सरकारों और राज्य संस्थाओं के प्रति भारी अविश्वास फैल चुका है, जैसा कि 2012 एफ़्रोबैरोमीटर सर्वे में उल्लेख किया गया है। दरअसल, इन देशों में किसी स्थापित सामाजिक अनुबंध का न होना राजनीतिक सत्ता और प्रभावी शासन को स्थापित करने में मुख्य बाधा रही है।
इसके अतिरिक्त, इस माहौल से इस प्रकार की बेबुनियाद धारणाओं के प्रसार के लिए अनुकूल स्थितियाँ पैदा हुई हैं कि स��कार और सहायता कार्यकर्ता नागरिकों को संक्रमित करने की साजिश रच रहे हैं। बहुत से लोग इस बात से इनकार करते हैं कि इबोला वायरस का कोई अस्तित्व है, वे दावा करते हैं कि उनकी सरकारों ने अंतर्राष्ट्रीय समुदाय से अतिरिक्त धन जुटाने के लिए इसका आविष्कार किया है जो उन्हें कभी नहीं मिल पाएगा।
इस तरह के शक और भय के कारण परिवार अपने मृत लोगों को छिपा देते हैं और रात को उनकी अंत्येष्टि कर देते हैं, यहाँ तक कि कुछ समुदाय तो इससे भी आगे बढ़कर स्वास्थ्य कार्यकर्ताओं पर हमला भी कर देते हैं। इन सबके कारण इस रोग के प्रसार को रोकना बहुत ही कठिन होता जा रहा है।
जहाँ बेहद संक्रामक और घातक वायरस, अपने नेताओं पर अविश्वास करनेवाले गरीब और अलग-थलग पड़े लोगों का विनाश कर रहा हो, वहाँ व्यवसाय का सामान्य रूप से चलते रहना काफी नहीं है। इबोला के वर्तमान प्रकोप को रोकने और इस तरह की महामारियों को रोकने का एक मात्र तरीका यही है कि उन मूलभूत सामाजिक और राजनीतिक कमजोरियों को दूर किया जाए जिन्होंने वायरस को पनपने दिया है।
इसका समाधान यह है कि स्वास्थ्य देखभाल, शिक्षा, और अन्य सार्वजनिक सेवाओं में निवेश को बढ़ाकर, लोगों को विकास के प्रयासों के केंद्र में रखा जाए। इसके साथ ही, रोजगार सृजन में तेजी लाने के लिए कठोर प्रयास किए जाने चाहिए। सहायता का विश्वसनीय ढाँचा और पर्याप्त आर्थिक अवसर मिलने पर, परिवारों - और उसके फलस्वरूप देशों - में अधिक लचीलापन आता है।
संयुक्त राष्ट्र विकास कार्यक्रम सहित, जो संस्थाएँ इबोला के खिलाफ लड़ाई में सबसे आगे हैं, वे समुदायों को इस रोग के खिलाफ एकजुट कर रही हैं, चिकित्सा टीमों का समर्थन कर रही हैं, और जीवित बचे लोगों और संक्रमित लोगों के परिवारों को त्रासदी से निपटने के लिए सहायता प्रदान कर रही हैं। हालाँकि ये प्रयास अधिक महत्वपूर्ण नहीं हो सकते, इन कमजोर देशों के रक्षा तंत्रों को मजबूत करने के लिए उन्हें अधिक दीर्घकालीन रणनीति के द्वारा समर्थित किया जाना चाहिए।
इबोला को पराजित कर दिया जाएगा, लेकिन इसके प्रकोप ने जिन कमजोरियों को उजागर किया है उनसे नीति निर्माताओं द्वारा ध्यान दिए जानेवाले मुद्दों में बुनियादी बदलाव को प्रेरित किया जाना चाहिए। आज वैश्विक सोच में जिस विकास दृष्टिकोण को प्रमुखता दी जा रही है उसमें सामाजिक प्रगति की तुलना में आर्थिक विकास और राज्य निर्माण पर अधिक जोर दिया जाता है। लेकिन किसी समाज के लचीलेपन को प्रोत्साहित करने और अवैयक्तिक संस्थाओं पर विश्वास करने की योग्यता को बढ़ावा देने का एकमात्र तरीका यही है कि इनमें जो लोग सम्मिलित हैं उन्हें साधन - और आत्मविश्वास - दिया जाए जो उन्हें समृद्ध होने के लिए चाहिए।
Diseases Without Borders
DAVOS – Today’s world seems more risk-laden than ever.
The increasingly visible effects of climate change, rising geopolitical tensions, state crisis and collapse, inadequate or unequal economic opportunities, and the spread of infectious diseases – to name just some of the highest-profile threats – have created an environment of great uncertainty.
Will 2015 be the year when these risks come to a head, or the moment when world leaders come together to develop real strategies for mitigating them?
This week, I am joining leaders from the worlds of business, government, politics, the arts, and academia at the World Economic Forum in Davos, Switzerland, to discuss the risks that the world faces.
Of course, determining which challenges merit the most attention will not be easy.
That is where the WEF’s annual Global Risks reports can help.
Drawing on the perspectives of roughly 900 experts and decision-makers from around the world who participate in the WEF’s global risks-perception survey, this year’s report found that, for the first time in its ten-year history, economic risks are taking a backseat to environmental and geopolitical concerns.
Specifically, participants rated interstate conflict with regional consequences as the top risk, in terms of likelihood, facing the world in 2015, with extreme weather events coming in second.
The top risks in terms of impact were water crises and the spread of infectious diseases.
The point, of course, is not simply to highlight how much danger the world currently faces.
By illuminating experts’ top-rated risks, the report highlights important opportunities for action.
According to WEF founder Klaus Schwab, 2015 can be a “year of destiny for humankind.”
Indeed, if global leaders – from multilateral organizations, governments, the private sector, and civil-society groups – seize opportunities for closer cooperation, long-simmering risks can be cooled before they boil over.
One area where concerted, collaborative action can make a major difference is the spread of infectious diseases.
During the meeting in Davos, officials will discuss the creation of a new global pandemic emergency facility that would enable countries to respond quickly to crises within their borders by providing them with the needed funds.
To understand how badly the world needs this capacity, one need look no further than the ongoing Ebola pandemic, which has ravaged West African societies, claiming thousands of lives and upending many more.
A rapid and determined response could have done much to contain the virus.
But the international response was delayed and inadequate.
Indeed, six months into the crisis, just 30 medical-response teams were treating and caring for patients on the ground in Guinea, Liberia, and Sierra Leone.
The shortage of health workers, facilities, and supplies prevented many people from receiving treatment, allowing the virus to spread further.
Fear of the disease’s seemingly inexorable spread hampered trade, business activity, and travel in the affected countries.
In December, the World Bank downgraded its growth estimates for the formerly fast-growing economies of Guinea, Liberia, and Sierra Leone, which are now expected to lose $1.6 billion in income in 2015.
In order to become better prepared to tackle future pandemics, the world must invest now in strengthening public-health systems, bolstering developing countries’ disease-prevention capacity, and establishing new and flexible financing instruments.
A global pandemic emergency facility could mobilize public and private resources and frontload financing, so that when a global health emergency arises, funding is in place to support an immediate response at scale.
As the Ebola crisis has demonstrated, passing the hat once a pandemic has taken hold is far too time-consuming and carries huge economic and, more important, human costs.
Such a global resource could underpin the development of a comprehensive strategy to address the next outbreak, including a plan for putting health workers and supplies on the ground quickly.
It could even provide a market signal for producers of vaccines and drugs.
The WEF’s Global Risks report emphasizes the need for robust plans to face the threat of pandemics.
This is especially urgent in light of the rapid growth of cities and informal settlements – where infectious diseases can spread more easily – in developing countries.
We need to start creating those plans now.
After all, we do not know when the next pandemic will strike.
We cannot eliminate global risk.
We can, however, make our economies and societies more resilient and thus better equipped to minimize the impact of the threats we face.
In this sense, forward-thinking initiatives like the global pandemic emergency facility are crucial to making the world a safer place for all of us.
वैश्विक स्वास्थ्य के तीन ख़तरे
सैन फ्रांसिस्को – पश्चिमी अफ़्रीका में इबोला के गंभीर प्रकोप ने राष्ट्रीय और वैश्विक दोनों स्तरों पर स्वास्थ्य प्रणाली को मज़बूत बनाने की अनिवार्यता को उजागर किया है। हालाँकि इबोला ने दुनिया का ध्यान प्रणालीगत कमियों पर केंद्रित किया है, लेकिन यहाँ लक्ष्य उन स्थायी महामारियों का मुकाबला करने पर होना चाहिए जो दुनिया भर में लोगों को चुपचाप मृत्यु और दुख के आगोश में ले रही हैं।
इबोला निस्संदेह बहुत भारी व्यथा का कारण बना है। लेकिन यह पहली – या सबसे अधिक विनाशकारी महामारी नहीं है - जिसका दुनिया ने सामना किया है। वास्तव में, चेचक को मानवता के लिए सबसे भयंकर रोग के रूप में जाना जाता रहा है; जब तक एडवर्ड जेनर ने 1796 में इसके लिए टीका विकसित नहीं कर लिया, तब तक यह यूरोप में मृत्यु का प्रमुख कारण बना रहा। एक अनुमान के अनुसार 1980 में इसके उन्मूलन से पहले, इसने 300-500 मिलियन लोगों की जान ले ली थी।
चौदहवीं सदी के ब्यूबोनिक प्लेग ने 75-100 मिलियन लोगों की जान ली थी - यह संख्या यूरोप की जनसंख्या के आधे से ज़्यादा थी। 1918 की इन्फ़्लूएंजा महामारी के दौरान लगभग 75 मिलियन लोगों, या दुनिया की आबादी के 3-5%, की मृत्यु बस कुछ ही महीनों में हो गई थी - जो प्रथम विश्व युद्ध में मारे गए लोगों की संख्या से दुगुनी थी।
दुनिया लगातार एचआईवी/एड्स से संघर्ष कर रही है, जिसके कारण अब तक 40 मिलियन से ज़्यादा लोगों की मृत्यु हो चुकी है और आज इसने इतने ही लोगों को संक्रमित किया हुआ है, और इस महामारी के शिकार 95% लोग विकासशील देशों के रहनेवाले हैं। एचआईवी/एड्स के लिए अत्यधिक प्रभावी रेट्रोवायरल-रोधी उपचार केवल तभी विकसित किए गए जब ये रोग उन्नत देशों में लोगों को प्रभावित करने लगे - ये ऐसे उपचार हैं जिन तक रोग से पीड़ित ज़्यादातर ग़रीब लोगों की पहुँच नहीं है या जो उसका ख़र्च बर्दाश्त नहीं कर सकते।
इसी प्रकार, इबोला के प्रकोप के प्रति सरकारों, बहुपक्षीय संगठनों और गैर-सरकारी संगठनों की काफ़ी तत्परता से प्रतिक्रिया करने में विफलता इस तथ्य को दर्शाती है कि इस रोग ने ग़रीब देशों को ही तबाह किया है। लेकिन, दुनिया के अभूतपूर्व ढंग से जुड़े होने के समय में, यह सुनिश्चित करने में हर किसी की हिस्सेदारी है कि ऐसी महामारी पर कार्रवाई करने के लिए पर्याप्त स्वास्थ्य देखभाल प्रणालियाँ और संरचनाएँ मौजूद हों। इसे प्राप्त करने के लिए अपेक्षित निवेश उपलब्ध करने की ज़रूरत है; आखिरकार, रोग के प्रकोपों के ख़िलाफ़ रक्षा की पहली पंक्ति प्रभावी राष्ट्रीय स्वास्थ्य प्रणालियाँ और निगरानी की चुस्त व्यवस्था है।
वर्तमान में, इबोला केवल स्वास्थ्य का संकट ही नहीं है, बल्कि यह मानवीय, आर्थिक और राजनीतिक संकट भी है। निश्चित तौर पर, कुछ प्रगति तो हुई है। इबोला आपातकालीन प्रतिक्रिया के लिए संयुक्त राष्ट्र के मिशन की “70/70/60” योजना – 70% इबोला रोगियों को अलग-थलग करना और यह सुनिश्चित करना कि 70% अंत्येष्टियाँ 60 दिन के भीतर सुरक्षित रूप से कर दी जाती हैं – को अधिकांशतः लागू कर दिया गया है, जिससे नए मामलों की संख्या में काफी हद तक कमी हुई है। लेकिन लोग अभी भी इससे पीड़ित हैं और मर रहे हैं – यह अकसर विश्वसनीय जानकारी तक पहुँच या पर्याप्त उपचार न होने के कारण होता है।
बेशक, जब लोगों के स्वास्थ्य की सुरक्षा की बात आती है, तो जनता की रक्षा करने और व्यक्तिगत अधिकारों के अतिक्रमण के बीच महीन अंतर होता है। यही कारण है कि जन-स्वास्थ्य के सभी उपायों को सर्वप्रमुख रूप से वैज्ञानिक तथ्यों पर फ़ोकस करना चाहिए, और भाव���ात्मक या घबराहट की प्रतिक्रियाओं से बचना चाहिए।
इस संदर्भ में, इबोला प्रभावित देशों से यात्रियों को अनिवार्य रूप से अलग-थलग करना स्पष्ट रूप से नीति की विफलता थी - ठीक वैसे ही जैसे तब हुआ था जब अधिकारियों ने 1350 में यूरोप की ब्लैक डेथ को या 1665 में लंदन के प्लेग को सीमित करने की कोशिश की थी। भय-आधारित रणनीतियों पर समय बर्बाद करने के बजाय, अंतर्राष्ट्रीय समुदाय को तथ्य-आधारित, ठोस, और सामूहिक कार्रवाई सुनिश्चित करने के लिए मानव और वित्तीय संसाधनों का लाभ उठाना चाहिए। ऐसा संयुक्त उपाय संभव है; वास्तव में, यह पहले भी हुआ है।
सदी बदलने पर, एड्स, क्षय रोग, और मलेरिया से लड़ने के लिए वैश्विक कोष, बिल और मेलिंडा गेट्स फ़ाउंडेशन, और GAVI, वैक्सीन एलायंस जैसी संस्थाओं की स्थापना, वैश्विक स्वास्थ्य में नए सिरे से सुधार के लिए प्रयासों के साथ हुई। संयुक्त राष्ट्र की सहस्राब्दि विकास लक्ष्यों के प्रति प्रतिबद्धता – जिनमें पोषण, मातृ और शिशु स्वास्थ्य, और संक्रामक रोगों को शामिल करने वाले, स्वास्थ्य संबंधी चार लक्ष्य शामिल हैं - दुनिया भर के स्वास्थ्य में सुधार करने के लिए राजनीतिक सहमति परिलक्षित करती है। इस संस्थागत संरचना ने इनमें से अनेक क्षेत्रों में काफ़ी प्रगति करने में सुविधा दी है; उदाहरण के लिए, 1990 के बाद से पाँच साल से कम उम्र में मृत्यु दर 49% तक कम हो गई है।
लेकिन अभी भी बहुत कुछ किया जाना बाकी है। दक्षिण पूर्व एशिया और उप सहारा अफ्रीका जैसे क्षेत्रों में, मातृ एवं शिशु स्वास्थ्य और संक्रामक रोग प्राथमिकताएँ बने हुए हैं। वास्तव में, उच्चतम बाल मृत्यु दर वाले जो दस देश हैं वे सभी उप-सहारा अफ्रीका में स्थित हैं; पश्चिम अफ्रीका में पैदा हुए किसी बच्चे के पश्चिमी यूरोप में पैदा हुए बच्चे की तुलना में एक से पाँच साल की उम्र से पहले मरने की 30 गुना अधिक संभावना होती है।
यहां तक कि देशों के भीतर, भारी असमानता बनी हुई है। उदाहरण के लिए, ग्युरेरो और नुएवो लिओन के मैक्सिकन राज्यों में नगरपालिकाओं के बीच शिशु मृत्यु दर में दस गुना अंतर है।
इसके अलावा, विशेष रूप से कम आय वाले देशों में, शहरीकरण, लोगों की उम्र बढ़ने, मोटापे, आलस्यपूर्ण जीवन शैली, धूम्रपान करने और शराब पीने जैसी शहरी प्रवृत्तियों के फलस्वरूप अनिर्दिष्ट महामारियों के आक्रमण ने पुराने गैर-संचारी रोगों (एनसीडी) की वृद्धि को बढ़ावा दिया है। अधिकांश देशों में वयस्कों के लिए, कैंसर, मधुमेह और हृदय रोग विकलांगता और मौत के प्रमुख कारण बन गए हैं।
इबोला जैसे उभरते संक्रामक रोग अधिक प्रतिरोधक हो सकते हैं, लेकिन पुराने गैर-संचारी रोगों (एनसीडी) का स्वास्थ्य पर पड़नेवाला प्रभाव, उनकी उच्च और बढ़ती सामाजिक और आर्थिक लागतों के अलावा है, काफी अधिक है। और अधिक समय बर्बाद नहीं किया जा सकता। नीति निर्माताओं को तंबाकू, शराब, और मोटापा बढ़ानेवाले खाद्य पदार्थों की खपत जैसे जोखिम वाले कारकों के प्रसार को रोकने के लिए कार्रवाई करनी चाहिए।
दुनिया को तीन तरह की स्वास्थ्य चुनौती का सामना करना पड़ रहा है: हमें ऐसी धारणीय राष्ट्रीय और वैश्विक स्वास्थ्य प्रणालियों का निर्माण करना चाहिए जो इबोला जैसे संकटों के बारे में जल्दी और प्रभावी ढंग से प्रतिक्रिया कर सकते हैं; संक्रामक रोगों को समाप्त करना चाहिए या उन पर नियंत्रण करना चाहिए; और पुराने गैर-संचारी रोगों (एनसीडी) की चुपचाप बढ़ती महामारी से निपटने के लिए कार्रवाई करनी चाहिए। इन तीनों मोर्चों पर सफल होने के लिए, हमें स्वास्थ्य के बुनियादी ढांचे, प्रबंधन, और कार्मिकों में निरंतर निवेश करने की जरूरत है।
इसका हल समानता है। इसका मतलब यह है कि स्वास्थ्य देखभाल और शिक्षा तक पहुँच में सुधार किया जाए। लेकिन इसका मतलब यह भी है कि उन गंभीर सामाजिक विषमताओं के संबंध में कार्रवाई की जाए जिनका विस्तार सार्वजनिक स्वास्थ्य की कार्य-सूची से बाहर है। 2015 के बाद के विकास लक्ष्यों को तैयार करते समय, दुनिया के नेताओं को यह याद रखना चाहिए कि स्वास्थ्य एक बुनियादी मानव अधिकार है।
Helping the ECB Cross the Rubicon
PARIS – Eurozone monetary officials are expected to make history when they gather for the European Central Bank’s next policy-setting meeting on January 22.
Observers anticipate that ECB President Mario Draghi and his colleagues will finally cross the Rubicon and announce the launch of a large-scale program of quantitative easing (QE) – in other words, high-volume purchases of government bonds.
Though the ECB has resisted QE for more than five years, even as other major central banks embraced it, Executive Board member Benoît Coeuré has already called it the “baseline option.”
On the face of it, the ECB has many reasons to launch QE. For two years, inflation has consistently failed to reach the 2% target.
In November, the annual price growth was just 0.3%, while the recent collapse in oil prices will generate further downward pressure in the coming months.
Even more important, inflation expectations have started to de-anchor: forecasters and investors expect the undershooting of the target to persist over the medium term.
Low inflation is already a serious obstacle to economic recovery and rebalancing within the eurozone.
Outright deflation would be an even more dangerous threat.
Moreover, financial markets consider QE so likely that the largest part of its bond-rate and exchange-rate consequences have already been priced in.
Should the ECB disappoint expectations, bond and foreign-exchange markets would confront an abrupt and damaging unwinding of positions: long-term interest rates would rise, stock markets would sink, and the exchange rate would appreciate.
That is not what Europe needs as it struggles to achieve in a year the growth that the United States has already recorded in a single quarter.
Yet hesitations are palpable.
Jens Weidmann, the president of the German Bundesbank, remains openly skeptical.
Though Weidmann does not deny the risk of deflation, he argues that the consequences of recent price data may be less serious than believed, while those of full-fledged QE could be more serious than assumed.
Several of his colleagues share his reservations.
It is important to understand why there is still no agreement in Frankfurt on the best possible course of action.
At a time when the US data seem to validate the Federal Reserve’s strategy, why is the ECB hesitating?
Contrary to conventional wisdom, the issue is not one of pure doctrine.
Yes, the Bundesbank fiercely opposed the ECB’s conditional support of debt-distressed eurozone members and backed legal challenges to Draghi’s innovation, the outright monetary transactions (OMT) scheme.
But German officials do not dispute the legitimacy of wholesale bond purchases for monetary-policy purposes, and that there can be circumstances that require QE.
Orthodoxy rules out providing ECB support to a particular country, because this would violate the separation between monetary and fiscal policy: The authority to commit public resources to the benefit of a particular country belongs exclusively to parliaments, not the central bank.
But a wholesale purchase of government bonds does not raise similar concerns.
Unlike in 2012, when the OMT was announced, the objective of QE is not to help governments keep market access.
In principle, QE has nothing to do with sovereign solvency.
It is a monetary instrument that the central bank must rely on when its policy interest rate has hit the zero lower bound and thus cannot be pushed lower.
The debt level of the government is irrelevant to the decision to use it.
But, by lowering long-term interest rates, central-bank purchases of government debt can help contain government debt service.
In this way, QE can keep solvent a government that otherwise would be insolvent – a nightmare scenario for a central bank.
Japan is a case in point.
The Bank of Japan already holds government securities worth 40% of GDP, and it is committed to annual purchases worth 16% of GDP within the framework of Prime Minister Shinzo Abe’s economic revitalization agenda.
The mammoth size of the BOJ program implies that it has taken full control of the market for government paper.
With annual purchases amounting to twice the deficit, it has become hard to speak of a “market” for government debt.
In fact, the BOJ sets the price.
Such a situation can make the central bank hostage to the government’s behavior.
The BOJ’s action is predicated on Abe’s commitment to restoring the sustainability of public finances once deflation has been defeated and the economy has returned to growth.
Should Abe fail to deliver, the BOJ would be trapped.
If it stopped buying government debt, it could trigger a sovereign crisis and reduce the value of its own portfolio (especially if it started selling the bonds on its balance sheet).
But continuing its purchases would tighten the government’s grip.
Trust in the government is therefore vital for any central bank that embarks on QE.
This trust is missing in Europe.
Despite an accumulation of legal texts and procedures, the EU fiscal framework lacks credibility and does not give the ECB confidence that governments will continue to pursue sustainability after its bond purchases shelter them from market pressure even further.
Moreover, unlike its counterparts, the ECB does not face a single interlocutor, and none of the governments that hold it accountable is or feels in charge of the eurozone as a whole.
This is a deeply unfavorable situation, which explains why the ECB, once obsessed with the risk that governments would coalesce to assail its independence, has turned into the staunchest advocate of fiscal-policy coordination.
Concern is therefore understandable.
But it does not diminish the need for bold unconventional action against deflation, and it should not prevent the ECB from launching QE.
The parallel with Japan highlights the need for governments to behave responsibly, individually and collectively.
Europe’s elected national leaders have a large role to play, and they must not eschew their duties.
The more confidence they give to the ECB, the more effective QE will be.
Stability and Prosperity in Monetary Union
FRANKFURT – There is a common misconception that the euro area is a monetary union without a political union.
But this reflects a deep misunderstanding of what monetary union means.
Monetary union is possible only because of the substantial integration already achieved among European Union countries – and sharing a single currency deepens that integration.
If European monetary union has proved more resilient than many thought, it is only because those who doubted it misjudged this political dimension.
They underestimated the ties among its members, how much they had collectively invested, and their willingness to come together to solve common problems when it mattered most.
Yet it is also clear that our monetary union is still incomplete.
This was the diagnosis offered two years ago by the so-called “Four Presidents” (the European council president in close collaboration with the presidents of the European Commission, the European Central Bank, and the Eurogroup).
And, though important progress has been made in some areas, unfinished business remains in others.
But what does it mean to “complete” a monetary union?
Most important, it means having conditions in place that make countries more stable and prosperous than they would be if they were not members.
They have to be better off inside than they would be outside.
In other political unions, cohesion is maintained through a strong common identity, but often also through permanent fiscal transfers between richer and poorer regions that even out incomes ex post.
In the euro area, such one-way transfers between countries are not foreseen (transfers do exist as part of the EU’s cohesion policy, but are limited in size and are primarily designed to support the “catching-up” process in lower income countries or regions).
This means that we need a different approach to ensure that each country is permanently better off inside the euro area.
This implies two main things.
First, we have to create the conditions for all countries to thrive independently.
All members need to be able to exploit comparative advantages within the Single Market, attract capital, and generate jobs.
And they need to have enough flexibility to respond quickly to short-term shocks.
This comes down to structural reforms that spur competition, reduce unnecessary red tape, and make labor markets more adaptable.
Until now, whether or not to carry out such reforms has largely been a national prerogative.
But in a union such as ours they are a clear common interest.
Euro area countries depend on one another for growth.
And, more fundamentally, if a lack of structural reforms leads to permanent divergence within the monetary union, this raises the specter of exit – from which all members ultimately suffer.
In the euro area, stability and prosperity anywhere depend on countries thriving everywhere.
So there is a strong case for sharing more sovereignty in this area – for building a genuine economic union.
This means more than beefing up existing procedures.
It means governing together: shifting from coordination to common decision-making, and from rules to institutions.
The second implication of the absence of fiscal transfers is that countries need to invest more in other mechanisms to share the cost of shocks.
Even with more flexible economies, internal adjustment will always be slower than it would be if countries had their own exchange rate.
Risk-sharing is thus essential to prevent recessions from leaving permanent scars and reinforcing economic divergence.
A key part of the solution is to improve private risk-sharing by deepening financial integration.
Indeed, the less public risk-sharing we want, the more private risk-sharing we need.
A banking union for the euro area should be catalytic in encouraging deeper integration of the banking sector.
But risk-sharing is also about deepening capital markets, especially for equity, which is why we also need to advance quickly with a capital markets union.
Still, we have to acknowledge the vital role of fiscal policies in a monetary union.
A single monetary policy focused on price stability in the euro area cannot react to shocks that affect only one country or region.
So, to avoid prolonged local slumps, it is critical that national fiscal policies can perform their stabilization role.
To allow national fiscal stabilizers to work, governments must be able to borrow at an affordable cost in times of economic stress.
A strong fiscal framework is indispensable to achieve this, and protects countries from contagion.
But the crisis experience suggests that, in times of extreme market tensions, even a sound initial fiscal position may not offer absolute protection from spillovers.
This is a further reason why we need economic union: markets would be less likely to react negatively to temporarily higher deficits if they were more confident in future growth prospects.
By committing governments to structural reforms, economic union provides the credibility that countries can indeed grow out of debt.
Ultimately, economic convergence among countries cannot be only an entry criterion for monetary union, or a condition that is met some of the time.
It has to be a condition that is fulfilled all of the time.
And for this reason, to complete monetary union we will ultimately have to deepen our political union further: to lay down its rights and obligations in a renewed institutional order.
Ecb Is Now Europe’s Anchor
The European Central Bank is making its reputation at this time of turmoil and crisis.
Barely a month after the rejection of the European Union Constitution in France and the Netherlands, the EU Summit in Brussels ended in a surprisingly acrimonious orgy of national egoisms and no deal. Then the terrorists struck in London.
With all this trouble, the ECB is showing itself to be an “anchor of stability” by steadfastly sticking to its mandate of insuring price stability.
Europe suffers from a profound crisis of confidence.
Its economy, for example, cannot recover properly because consumers, lacking confidence in the ability of their political leaders to solve the economy’s manifold economic problems (budget deficits, pensions, etc.), are saving for a rainy day they feel is just around the corner—and businessmen are reluctant to invest, because they don’t trust government to make the necessary economic reforms.
The public’s lack of confidence in the EU’s political leadership is totally justified.
Instead of actually doing something constructive about Europe’s essential problem --reforming expensive welfare states to ensure global competitiveness--Europe’s political leaders are hiding behind straw man arguments about “ultra liberal Anglo Saxon models,” and pressuring the ECB to lower interest rates as if European economic weakness were Frankfurt’s fault.
Europe’s finance ministers portray the ECB as closed to dialogue.
When testifying before the EU Parliament’s Economic and Monetary Affairs Committee, Luxembourg prime minister and Euro-group chairman Jean-Claude Juncker said there should be “open and frank” talks between the euro-group ministers and the ECB—and French finance minister Dominique de Villepin said the same thing.
According to a knowledgeable ECB source, however, Europe’s finance ministers regularly meet in secret with the ECB leadership for a mutual and frank exchange of views on monetary policy and other issues.
The dialogue already exists though the public does not know it. Such disingenuousness does little to boost confidence in Europe’s political leadership.
The ECB has done all it can for growth by giving Europe a prolonged period of monetary stability at record low interest rates.
Does anyone really believe consumers are holding back on spending —and businessmen postponing their investments—in anticipation of that next drop in interest rates?
To paraphrase Keynes, you can lead a horse to water but you can’t make him drink.
“The last thing Europe needs now is an interest rate cut,” says one influential member of the ECB Governing Council in a candid assessment of the current situation. Capitulating to outside political pressure is no one’s definition of an “anchor of stability.”
The euro would collapse, and the ECB finished as a creditable central bank.
Moreover, ECB chief economist Otmar Issing predicts long- term interest rates would go up—not down—as inflationary expectations increased.
So cutting interest rates would not only be stupid—it would be crazy.
But the ECB is not going to cut rates even though, for public relations reasons of keeping the political wolves at bay, it deceptively hints it might.
Don’t be fooled by such feints. The ECB is holding fast and, in doing so, demonstrates to Europe’s peoples that there is at least one EU institution they can trust.
This is vital.
History shows political turmoil often leads to inflation, which only fuels further turmoil.
Europeans can bet their last euro the ECB will not let the fledgling common currency be ravaged by inflation because their political leaders, having failed to do their jobs, now fear they might lose them.
Indeed, the courage currently demonstrated by the ECB in sticking to its guns should serve as a model for Europe’s future politicians.
Once they realize they can’t bully the ECB into unwanted and self-destructive interest rate cuts, EU leaders actually might summon up the will to lead—which is, after all, what they have been elected to do.
Is the ECB Doing Enough?
FRANKFURT – Konrad Adenauer, Germany’s first chancellor after World War II, famously said: “Why should I care about the things I said yesterday?”
So, as 2014 winds down, it is worth asking ourselves, with the benefit of hindsight: Have we at the European Central Bank reacted swiftly enough to maintain price stability in the face of threats, as our mandate requires?
I think the answer is yes.
We noticed that our monetary policy was no longer having the effect on private borrowing costs to which we were accustomed.
It was obvious that the lending channels in the banking system had become dysfunctional; excessively restrictive borrowing conditions were suppressing demand.
In response, the ECB did precisely what any central bank would have done: we acted to restore the relationship between our monetary policy and the cost of borrowing, aiming to bring down the average rate that households and firms have to pay.
In June, we introduced a series of targeted longer-term refinancing operations (known as TLTROs) to provide funding for banks at very low fixed rates for a period of up to four years.
The TLTROs were designed to maximize the chances that banks would pass on the funding relief to borrowers.
Our programs to purchase asset-backed securities and covered bonds were tailored to help lubricate further the transmission of lower funding costs from banks to customers.
Together, these measures offer a powerful response that addresses the root causes of impaired bank lending, thereby facilitating new credit flows to the real economy.
And tentative evidence suggests that they are delivering some initial tangible benefits to the euro area’s economy.
At the same time, inflation has continued trending down.
In November, annual inflation in the euro area fell to a cyclical low of 0.3%, largely owing to the sharp fall in oil prices since the end of the summer.
But falling core inflation (which excludes volatile energy and food prices) also points to weak aggregate demand.
And, indeed, the ECB’s latest staff projections entail a notable downgrading of the macroeconomic outlook.
Falling oil prices and the prospect of a prolonged period of low inflation also seem to have affected inflation expectations.
Given the potency of the recent oil-price shock, the risk is that inflation may temporarily slip into negative territory in the coming months.
Normally, any central bank would welcome a positive supply shock. After all, lower oil prices boost real incomes and may lead to higher output in the future.
But we may not be able to celebrate.
After all, because well-anchored inflation expectations are indispensable for medium-term price stability, monetary policy must respond to a risk of de-anchoring.
That is why the ECB Governing Council has reiterated its unanimous commitment to use additional unconventional instruments within its mandate should it become necessary to address a prolonged period of low inflation, or should the monetary stimulus fall short of our intention to move our balance sheet toward its size in early 2012.
This would imply altering the scope, pace and composition of our measures early next year, and staff from the ECB and national central banks have stepped up technical preparations for further measures, if needed, with a view to implementing them in a timely manner.
If we were to judge that the economy is in need of further stimulus, one option could be to extend the ECB’s outright asset purchases to other asset classes.
But it is important to remember that asset purchases are not an end in themselves.
They are an instrument, not a target, of monetary policy.
An important criterion for the choice of additional measures should be the extent of their influence over broad financing conditions in the private economy.
For example, purchases of bonds issued by euro-area non-financial corporations (NFCs) would probably have some direct pass-through effect on firms’ financing costs.
But, compared to other asset classes, the market for NFC bonds is relatively thin.
It would be a different matter if we were to decide to buy bonds issued by euro-area sovereigns – the only market where size would generally not be an issue.
Interventions in this market would likely entail a stronger signal that the ECB is committed to maintaining an accommodative monetary policy for an extended period of time.
The effectiveness of interventions in the sovereign-bond market – that is, their ability to lower the borrowing costs of households and firms further – will also rest on the state of the banking sector.
Higher capital ratios, lower exposure to bad loans, and more transparent balance sheets increase the chances that the ECB’s quantitative impulses will be transmitted to the wider economy.
That is why the completion of the ECB’s comprehensive assessment of banks’ balance sheets and the start of Europe-wide banking supervision will help revitalize sluggish lending in the euro area.
In particular, increased clarity and transparency about banks’ balance sheets, together with a better-capitalized banking sector, will create a more supportive lending environment.
But a decision to purchase sovereign bonds would also need to build on and factor in the institutional specificities of the euro area, including the limits set by the EU Treaty.
We take these limits very seriously.
The year ahead will be challenging and rife with uncertainty.
But if the past holds any lesson, it is that, if our ability to fulfill our mandate is at risk, we will not hesitate to act.
The New Philosophers
PRINCETON – At the recent meeting of G-20 finance ministers in Australia, US Treasury Secretary Jack Lew noted “philosophical differences with some of our friends in Europe,” before urging Europeans to do more to boost their anemic growth rate.
The terminology is striking, and underscores the difficulty of Europe’s search for a way out of its current malaise.
Canada’s finance minister, Joe Oliver, joined the call for fiscal expansion in Europe – a position for which there seems to be some support within the European Central Bank.
Indeed, ECB President Mario Draghi has advocated higher spending by more fiscally strong countries like Germany.
And ECB Executive Board member Benoit Coeure, together with his former colleague Jörg Asmussen, currently Germany’s deputy labor minister, recently suggested that Germany should “use its available room for maneuver to promote investments and reduce the tax burden of workers.”
In fact, most of the world believes that Germany should adopt a more expansive fiscal policy.
According to this view, austerity is counter-productive, because it induces slowdowns and recessions that make long-term fiscal consolidation more difficult.
But Germans – as well as some other Northern Europeans, and perhaps some Chinese economists – remain reticent.
They believe that responding to calls for stimulus would simply lead to more such calls, creating a log-rolling, pork-barrel dynamic in which any hope for fiscal consolidation is ruled out.
The stimulus-versus-austerity debate is an old one.
In the 1970s and 1980s, the United States regularly called on Germany and Japan to act as locomotives for the global economy.
But, until recently, the divergences were viewed in terms of interests, not “philosophies.”
Americans wanted additional demand for their goods and higher prices, while the Germans and Japanese defended their export industries.
The problem today, as Lew’s recent statement highlighted, stems from deeply entrenched differences between the opposing sides’ belief systems, with ideological questions about fairness and responsibility trumping pragmatic discussion of the best way forward for everyone.
As the historian Robert Kagan argued in 2002, Americans and Europeans do not only have different worldviews; they occupy entirely different worlds.
Philosophical differences are extremely difficult to reconcile.
Just as Platonists and Aristotelians struggled against one another for millennia, Kantians and utilitarians have been at one another’s throats for centuries.
Such deep theoretical conflicts have real-world consequences, as they impede constructive debate and cooperative action in crisis situations.
Fundamental ideological divisions over the 2003 Iraq war have strained global politics for more than a decade.
Modern political processes and structures are simply not well suited for conducting – much less settling – philosophical disputes.
Democratic institutions are designed for making deals between competing interests, with parliaments specializing in finding the right combination of concessions to enable agreement on a generally accepted solution.
Likewise, international forums like the G-20 exist precisely to persuade a large number of vastly different countries to set aside philosophical questions for the sake of their shared economic, political, or security interests.
Philosophies do not just give a little here and there, blurring over the difficult bits in the hope that everything will work out in the end.
Imagine asking a Kantian to add just a bit of utilitarian calculation to the categorical imperative.
Of course, resolving a philosophical debate is not impossible.
It was standard pre-modern practice to overcome such differences with a formal disputation.
In the early sixteenth century, the German princes attempted to settle the philosophical challenge presented by Protestant reformers by engaging Martin Luther to debate a prominent orthodox Catholic theologian, Johannes Eck.
There are not that many modern varieties of this sort of practice, but the 1944 United Nations Monetary and Financial Conference at Bretton Woods comes close.
By systemically engaging with the economic issues involved in building a viable international system, experts created a new global economic and political order.
In a sense, central banks have begun to resemble medieval philosophical faculties, with discussions addressing the issues underlying policy decisions, rather than just the policies themselves.
In the ECB, for example, a debate is underway to determine under which conditions deviation from fiscal orthodoxy might be stabilizing in the long term.
How that debate is resolved could lead to a new kind of international cooperation.
At a time when political processes are stalled on both sides of the Atlantic, the US Federal Reserve and the ECB have been engaging in a series of policy innovations, feeling their way toward a solution that could promote and sustain economic recovery.
On this basis, the ECB is recasting itself as the incubator of a new intellectual and philosophical synthesis.
But central banks’ new role as supreme arbiters of policy truth is fraught with hazard.
Given that the solutions that emerge from their disputations and analyses will be the product of technocratic – not democratic – processes, they are likely to trigger populist backlashes.
Moreover, the policy approaches that central banks produce may be too complex and interlinked to function efficiently.
In particular, the attempt to make expansionary policies conditional on the implementation of a host of microeconomic reforms is problematic.
If only some parts of a complex package linking fiscal leeway with structural reform are realized, the outcome is likely to disappoint – or even prove counterproductive.
When it does, the old philosophical divisions are likely to resurface.
The ECB’s Faulty Weapon
BRUSSELS – With inflation in the eurozone stubbornly remaining on a downward trajectory, pressure on the European Central Bank to do “something” to prevent outright deflation is growing.
This “something” is usually understood to be massive asset purchases, or quantitative easing (QE).
But would QE actually do the trick?
The discussion has so far followed easily predictable national patterns: Creditor countries do not object to deflation, because it increases the real value of their investment, whereas debtor countries’ repayment burdens would grow heavier.
In a closed economy, to every credit there must a corresponding debt.
But consider individual countries: some run a large foreign debt, while others maintain a large creditor position.
The United States and Germany are at opposite extremes of the creditor-debtor scale.
The US, benefiting from the “exorbitant privilege” of issuing debt denominated in its own currency, has run current-account deficits for more than 30 years.
The total foreign debt of US residents (most of which is in US dollars) is above $7 trillion.
This implies that any reduction in US interest rates would benefit the country as whole, relative to creditor countries, like Germany, where interest income would fall.
Within the eurozone, where until recently external accounts were nearly balanced, a similar creditor/debtor spectrum has emerged, with Germany and the Netherlands at one end, and much of the eurozone south at the other.
This partly explains both the hostile stance toward QE adopted in the German financial press and the over-indebted periphery countries’ increasingly desperate calls for more action by the ECB.
In the eurozone, however, QE is a questionable response to such calls. QE is a special instrument used when a central bank’s short- and medium-term policy rates are already at zero and it wants to lower long-term interest rates.
This implies that QE can be effective only in economies in which changes in long-term (market) interest rates play an important role in the private sector.
But this is not the case in Europe, where most investment is financed via bank loans that typically do not have long-term maturities – often less than five years – because banks themselves have little secure long-term financing.
Moreover, the interests rates charged on these loans are not linked to market rates, but rather to the bank’s refinancing cost, which is already close to zero.
In the eurozone, lower long-term rates for government bonds are thus unlikely to improve the corporate sector’s financing conditions and boost investment demand.
By contrast, in the US, a much larger proportion of investment is financed by issuing bonds, which can have a longer maturity than bank loans.
Moreover, these bonds are priced as spreads on the government-bond yield curve, implying that QE will have an immediate impact on enterprises’ financing costs.
For households, the main impact of lower interest rates is felt through mortgages.
But most of southern Europe relies mainly on floating rates.
This implies that QE would not reach, say, Spanish households, whose mortgages are indexed to short-term rates, which are already close to zero.
In the US, households have a prepayment option on their mortgages should interest rates fall.
Moreover, mortgages are usually securitized.
This implies that a fall in the rate at which bundles of mortgages can be sold on the market can have a strong impact on household spending, because lower long-term rates typically lead to waves of mortgage refinancing, leaving households with lower monthly payments – and thus higher disposable income.
When the central bank buys large amounts of bonds, all asset prices, including housing, tend to increase.
Here, too, the US, where higher house prices stimulate consumption, is a misleading example for Europe.
Owner occupancy rates are high in the US, and the financial system allows households to extract the equity in their homes relatively cheaply, either by second liens or by refinancing the entire mortgage.
This is not possible in most of Europe, and especially not in Germany, where loan-to-value limits remain conservative, refinancing is costly, and most banks would frown on any attempt to cash in on “home equity” to finance a vacation or a new car.
Moreover, higher house prices and rents distribute income from poorer households (which typically rent) to richer households (which own the houses).
But the poor have a much higher propensity to spend than the rich.
A housing boom in a nation of renters might actually lead to lower aggregate consumption.
Differences in financial structure thus matter profoundly in the effort to prevent deflation.
Though QE might work in a debtor economy with a flexible financial system like the US, it could backfire in a creditor economy with a conservative financial system.
This, rather than the fear that the ECB might end up buying the bonds of untrustworthy governments, is the real argument against QE in the eurozone.
The Lemmings of QE
NEW HAVEN – Predictably, the European Central Bank has joined the world’s other major monetary authorities in the greatest experiment in the history of central banking.
By now, the pattern is all too familiar.
First, central banks take the conventional policy rate down to the dreaded “zero bound.”
Facing continued economic weakness, but having run out of conventional tools, they then embrace the unconventional approach of quantitative easing (QE).
The theory behind this strategy is simple: Unable to cut the price of credit further, central banks shift their focus to expanding its quantity.
The implicit argument is that this move from price to quantity adjustments is the functional equivalent of additional monetary-policy easing. Thus, even at the zero bound of nominal interest rates, it is argued, central banks still have weapons in their arsenal.
But are those weapons up to the task?
For the ECB and the Bank of Japan (BOJ), both of which are facing formidable downside risks to their economies and aggregate price levels, this is hardly an idle question.
For the United States, where the ultimate consequences of QE remain to be seen, the answer is just as consequential.
QE’s impact hinges on the “three Ts” of monetary policy: transmission (the channels by which monetary policy affects the real economy); traction (the responsiveness of economies to policy actions); and time consistency (the unwavering credibility of the authorities’ promise to reach specified targets like full employment and price stability).
Notwithstanding financial markets’ celebration of QE, not to mention the US Federal Reserve’s hearty self-congratulation, an analysis based on the three Ts should give the ECB pause.
In terms of transmission, the Fed has focused on the so-called wealth effect.
First, the balance-sheet expansion of some $3.6 trillion since late 2008 – which far exceeded the $2.5 trillion in nominal GDP growth over the QE period – boosted asset markets.
It was assumed that the improvement in investors’ portfolio performance – reflected in a more than threefold rise in the S&amp;P 500 from its crisis-induced low in March 2009 – would spur a burst of spending by increasingly wealthy consumers.
The BOJ has used a similar justification for its own policy of quantitative and qualitative easing (QQE).
The ECB, however, will have a harder time making the case for wealth effects, largely because equity ownership by individuals (either direct or through their pension accounts) is far lower in Europe than in the US or Japan.
For Europe, monetary policy seems more likely to be transmitted through banks, as well as through the currency channel, as a weaker euro – it has fallen some 15% against the dollar over the last year – boosts exports.
The real sticking point for QE relates to traction.
The US, where consumption accounts for the bulk of the shortfall in the post-crisis recovery, is a case in point.
In an environment of excess debt and inadequate savings, wealth effects have done very little to ameliorate the balance-sheet recession that clobbered US households when the property and credit bubbles burst.
Indeed, annualized real consumption growth has averaged just 1.3% since early 2008.
With the current recovery in real GDP on a trajectory of 2.3% annual growth – two percentage points below the norm of past cycles – it is tough to justify the widespread praise of QE.
Japan’s massive QQE campaign has faced similar traction problems.
After expanding its balance sheet to nearly 60% of GDP – double the size of the Fed’s – the BOJ is finding that its campaign to end deflation is increasingly ineffective.
Japan has lapsed back into recession, and the BOJ has just cut the inflation target for this year from 1.7% to 1%.
Finally, QE also disappoints in terms of time consistency.
The Fed has long qualified its post-QE normalization strategy with a host of data-dependent conditions pertaining to the state of the economy and/or inflation risks.
Moreover, it is now relying on ambiguous adjectives to provide guidance to financial markets, having recently shifted from stating that it would maintain low rates for a “considerable” time to pledging to be “patient" in determining when to raise rates.
But it is the Swiss National Bank, which printed money to prevent excessive appreciation after pegging its currency to the euro in 2011, that has thrust the sharpest dagger into QE’s heart.
By unexpectedly abandoning the euro peg on January 15 – just a month after reiterating a commitment to it – the once-disciplined SNB has run roughshod over the credibility requirements of time consistency.
With the SNB’s assets amounting to nearly 90% of Switzerland’s GDP, the reversal raises serious questions about both the limits and repercussions of open-ended QE.
And it serves as a chilling reminder of the fundamental fragility of promises like that of ECB President Mario Draghi to do “whatever it takes” to save the euro.
In the QE era, monetary policy has lost any semblance of discipline and coherence.
As Draghi attempts to deliver on his nearly two-and-a-half-year-old commitment, the limits of his promise – like comparable assurances by the Fed and the BOJ – could become glaringly apparent.
Like lemmings at the cliff’s edge, central banks seem steeped in denial of the risks they face.
The ECB and Its Critics
PARIS – In Northern Europe, especially Germany, the European Central Bank’s decision to embark on quantitative easing (QE) has triggered an avalanche of indictments.
Many are unfounded or even baseless.
Some are confusing.
Others give greater weight to speculative dangers than to actual ones.
And few point to real problems, while ignoring potential solutions.
Judging by the criticism, one might consider zero inflation a blessing.
But if that were true, central banks around the world would have set it as a target long ago.
Instead, all of them define price stability as low, stable, but positive inflation.
That is because zero inflation has three overwhelmingly negative consequences. First, it erodes the effectiveness of standard monetary policy (because if interest rates went much below zero, depositors would withdraw cash from banks and put it in safes).
Second, it makes relative wages (of, say, manufacturing versus services employees) more rigid, because wage contracts are generally set in euro terms.
And, third, it increases the burden of past debts and makes exiting from a private or public debt crisis even more painful.
But, say the critics, there is no reason to worry, because the eurozone’s near-zero inflation is merely the result of the sharp drop in oil prices.
Unfortunately, there is indeed plenty of reason to worry.
Consumer price inflation in the eurozone has been below target for 22 consecutive months – long before the price of oil started collapsing.
Cheaper oil is a boon for growth; but it also lowers long-term inflation expectations, which are the true target of monetary policy.
Then there is the critics’ claim that below-target inflation is needed to restore competitiveness.
This is just confusing.
It is true that rebalancing competitiveness within the eurozone has not yet been completed, and that some countries thus need to record below-average inflation to cut above-average costs.
But this is not true of the eurozone as a whole.
Eurozone-wide competitiveness depends on product quality and the euro exchange rate, which is flexible.
Inflation is irrelevant in this respect.
Nonetheless, the ECB’s critics fear the sorcerer’s apprentice: monetary initiatives like QE will ultimately cause runaway inflation.
This reasoning is strange, at best.
If the critics’ point is that central banks make mistakes, it seems worth pointing out that the mistake made in the eurozone was to let inflation reach excessively low levels.
Now the ECB is reacting with force, but, as Japanese policymakers have found, exiting from deflation is far from easy.
ECB President Mario Draghi may fail to bring inflation back to 2%.
Or he may overshoot.
Nobody knows.
But it is odd to claim that a speculative danger should prevent the ECB from fighting one that is all too real.
Then comes the claim that QE is illegal.
But the ECB’s primary responsibility is to achieve and maintain price stability.
When conventional interest-rate policy becomes impotent, its duty is to rely on other instruments.
The purchase of government bonds is explicitly authorized by the EU Treaty.
This is not to say that QE has no downside.
It probably will create asset-price bubbles.
Ultra-low interest rates lift asset prices in two ways: they increase the present value of the future income stream of a stock or a fixed-income bond; and they make credit and property purchases more affordable.
So asset-price inflation is likely, and policymakers will have to contain it through regulatory tools, such as credit limits.
Moreover, QE probably will increase inequality.
The rise in the price of stocks, bonds, and land will increase their owners’ wealth.
Obviously, those without property will not benefit.
But the ECB’s monetary initiative will also help reignite growth and create jobs, thereby benefiting the poor.
It is governments’ task to address the rise in inequality resulting from QE, and they have an instrument for that: taxation.
When the United States Federal Reserve embarked on QE, it was accused of exporting its problems, because aggressive monetary easing inevitably weakens the currency.&nbsp;The same charge is now being leveled against the ECB.&nbsp;But this is misleading.
Ultimately, the US recovery helped its trade partners more than it hurt them.
In today’s world of global monetary interdependence, the rule of the game is that every currency union should pursue its own price stability.
The ECB has not departed from this standard.
Another major concern in Germany is that QE could be a backdoor means of creating Eurobonds.
But a Eurobond is a pact among issuers offering each other mutual guarantees.
The ECB, however, is not an issuer; it is an independent agency, and the decision to buy is its own.
Furthermore, 80% of the risk will be borne by national central banks individually.
Northern European opposition to Eurobonds reflects moral-hazard concerns that monetary activism will discourage structural reforms.
But, in the current context of protracted stagnation, the TINA (there is no alternative) argument for reform is losing strength by the day.
Absent a visible payoff, reform fatigue is setting in.
The new policy mix should combine macro-level support and micro-level change.
The argument that QE will destroy fiscal discipline cannot be rejected out of hand, because both its proponents and its adversaries seem to agree that its days are over.
But, though it is true that ECB bond purchases will shelter governments from market pressure, such pressure was already fairly ineffective.
It is governments’ job to uphold their end of the bargain and ensure that they do not shirk their responsibilities.
This is what the EU’s “fiscal compact” is for.
Finally, German critics complain that the ECB’s monetary policy is not geared to German economic conditions.
This is both true and unavoidable.
The ECB is responsible for the eurozone as a whole.
Its monetary policy cannot be perfectly suited to all members’ needs all of the time.
For the euro’s first ten years, the ECB’s policy was too lax for Spain; now it is too lax for Germany.
The ECB’s New Macroeconomic Realism
NEW YORK – The European Central Bank has finally launched a policy of quantitative easing (QE).
The key question at this stage is whether Germany will give the ECB the freedom of maneuver needed to carry out this monetary expansion with sufficient boldness.
Though QE cannot produce long-term growth, it can do much to end the ongoing recession that has gripped the eurozone since 2008.
The record-high stock-market levels in Europe this week, in anticipation of QE, not only indicate growing confidence, but are also a direct channel by which monetary easing can boost both investment and consumption.
But some observers, such as Nobel Laureate Paul Krugman and former US Treasury Secretary Larry Summers, continue to doubt whether QE can really be effective.
As Krugman recently put it, a “deflationary vortex” is dragging down much of the world economy, with falling prices causing an inescapable downward spiral in demand.
The World Bank and International Monetary Fund seem to agree, as both recently lowered their growth forecasts a few notches.
Pessimists argue that the world economy suffers from an insurmountable shortage of aggregate demand, leading to a new “secular stagnation.”
Monetary policy is seen to be relatively ineffective, owing to the notorious zero lower bound (ZLB) on nominal interest rates.
With policy interest rates near zero, the argument goes, central banks are more or less helpless to escape the deflationary vortex, and economies become stuck in the infamous liquidity trap.
In this scenario, the demand insufficiency feeds on itself, pushing down prices, raising real (inflation-adjusted) interest rates, and lowering demand further.
This perspective has been prominent among Keynesian economists in the United States and the United Kingdom since 2008.
Krugman argues that Japan was only the first of the major economies to succumb to chronic deflation, back in the 1990s, and has now been followed by the European Union, China, and most recently Switzerland, with its soaring franc and falling prices.
The US, in this view, remains near the vortex as well, prompting the Keynesians’ repeated calls for more fiscal stimulus, which, unlike monetary policy, is seen by the pessimists to be especially efficacious at the ZLB.
In my view, the pessimists have exaggerated the risks of deflation, which is why their recent forecasts have missed the mark.
Most notably, they failed to predict the rebound in both the US and the UK, with growth rising and unemployment falling even as deficits were cut.
Without a proper diagnosis of the 2008 crisis, an effective cure cannot be prescribed.
The pessimists believe that there has been a large decline in the will to invest, something like the loss of “animal spirits” described by Keynes.
Even with very low interest rates, according to this view, investment demand will remain low, and therefore aggregate demand will remain insufficient.
Deflation will make matters worse, leaving only large fiscal deficits able to close the demand gap.
But the causes of 2008’s deep downturn were more specific, and the solutions must be more targeted.
A large housing bubble preceded the 2008 crisis in the hardest-hit countries (the US, the UK, Ireland, Spain, Portugal, and Italy).
As Friedrich Hayek warned back in the 1930s, the consequences of such a process of misplaced investment take time to resolve, owing to the subsequent oversupply of specific capital (in this case, of the housing stock).
Yet far more devastating than the housing bubble was the financial panic that gripped capital markets worldwide after the collapse of Lehman Brothers.
The decision by the US Federal Reserve and the US Treasury to teach the markets a lesson by allowing Lehman to fail was a disastrously bad call.
The panic was sharp and severe, requiring central banks to play their fundamental role as lenders of last resort.
As poorly as the Fed performed in the years preceding the Lehman Brothers’ collapse, it performed splendidly well afterward, by flooding the markets with liquidity to break the panic.
So, too, did the Bank of England, though it was a bit slower to react.
The Bank of Japan and the ECB were, characteristically, the slowest to react, keeping their policy rates higher for longer, and not undertaking QE and other extraordinary liquidity measures until late in the day.
Indeed, it required new leaders in both institutions – Haruhiko Kuroda at the BOJ and Mario Draghi at the ECB – finally to set monetary policy right.
The good news is that, even near the ZLB, monetary policy works.
QE raises equity prices; lowers long-term interest rates; causes currencies to depreciate; and eases credit crunches, even when interest rates are near zero.
The ECB and the BOJ did not suffer from a lack of reflationary tools; they suffered from a lack of suitable action.
The efficacy of monetary policy is good news, because fiscal stimulus is a weak instrument for short-term demand management.
Ironically, in an influential 1998 paper, Krugman explained why.
He argued at that time, and rightly in my view, that short-term tax reductions and transfers would be partly saved, not spent, and that public debt would multiply and create a long-term shadow over the fiscal balance and the economy.
Even if interest rates are currently low, he noted, they will rise, thereby increasing the debt-service burden on the newly accumulated debt.
With all major central banks pursuing expansionary monetary policies, oil prices falling sharply, and the ongoing revolution in information technology spurring investment opportunities, the prospects for economic growth in 2015 and beyond are better than they look to the pessimists.
There are rising profits, reasonable investment prospects for businesses, a large backlog on infrastructure spending almost everywhere in Europe and the US, and the opportunity to finance capital-goods exports to low-income regions, such as Sub-Saharan Africa, and to meet the worldwide need for investment in a new, low-carbon energy system.&nbsp;
If there is a shortfall of private investment, the problem is not really a lack of good projects; it is the lack of policy clarity and complementary long-term public investment.
European Commission President Jean-Claude Juncker’s plan to finance long-term investments in Europe by leveraging relatively small amounts of public funds to unlock large flows of private capital is therefore an important step in the right direction.
Obviously, we should not underestimate the capacity of policymakers to make a bad situation worse (for example, by pressing Greek debt service beyond the limits of social tolerance).
But we should recognize that the main threats to growth this year, such as the unresolved Greek debt crisis, the Russia-Ukraine conflict, and turmoil in the Middle East, are more geopolitical than macroeconomic in nature.
In 2015, wise diplomacy and wise monetary policy can create a path to prosperity.
Broad recovery is within reach if we manage both ingredients well.
The Drag on E-Cigarettes
RENNES – Michael Russell and Murray Jarvik, two pioneers of smoking-cessation research in the 1970s, would probably have welcomed the development of the electronic cigarette or “personal nicotine vaporizer” (PNV).
Beyond serving as a temporary aid for people attempting to quit smoking cigarettes, such new nicotine-delivery systems could act as long-term alternatives to tobacco – making it possible to eliminate tobacco consumption almost entirely.
We have long known that people smoke for the nicotine, but die from the smoke.
Indeed, the vast majority of cigarette-related diseases and deaths arise from the inhalation of tar particles and toxic gases, including carbon monoxide.
Though nicotine replacement therapy (NRT) has helped many smokers quit, the cigarette habit remains pervasive in many countries.
The use of nicotine in non-combustible forms like smokeless tobacco, or PNV, would enable millions of current smokers to reduce considerably the harm that their nicotine consumption is doing to their health.
In Sweden, the widespread use of snus – a smokeless tobacco product with a lower concentration of carcinogenic nitrosamines – has contributed to a dramatic decline in the incidence of lung cancer, to the world’s lowest levels.
The benefits of phasing out tobacco consumption could not be more compelling.
That is why PNVs should be actively promoted as an alternative to tobacco products, aided by endorsements from health authorities, tax advantages, and support from the anti-smoking movement.
But, so far, none of this has occurred, largely because nicotine is viewed as a highly addictive and toxic substance, with even smokers hesitating to try NRT or PNV for this reason.
In fact, nicotine has been the primary target of anti-tobacco campaigns for more than three decades.
But nicotine is only partly responsible for tobacco dependence.
Other substances from tobacco smoke – such as monoamine oxidase inhibitors, which have antidepressant effects –reinforce tobacco dependence, but are absent from vaporized nicotine.
That may be why PNV user surveys suggest that nicotine is less addictive in its vaporized form.
In reality, nicotine is a relatively safe drug at dosages that a smoker or “vaper” inhales, with similar effects to caffeine.
Moreover, smokers and PNV users control very precisely, on a puff-by-puff basis, the dose of nicotine they consume, virtually eliminating the risk of overdose.
In fact, a lethal dose of nicotine is a lot higher than the 30-60 milligrams that many scientific papers claim.
After reviewing case reports of nicotine intoxications and suicide attempts, the pharmacologist Bernd Mayer found that the lethal dose of nicotine in humans must be somewhere between 500-1000 mg of absorbed – not just ingested – nicotine.
Given that one of the first symptoms of intoxication is vomiting, and that 70% of the remaining nicotine in the digestive tract is metabolized by the liver before it reaches other organs, absorbing that much nicotine is not easy.
With minimal health risks compared to tobacco smoking, PNVs face only one real barrier to use: smokers’ willingness to switch.
But, even on this front, the devices have had considerable success, with PNV use increasing exponentially in the last few years.
Though, in an ideal world, people would simply be able to quit using nicotine altogether, experience suggests that many smokers cannot – or do not want to – give it up, and will continue to smoke if there is no safe and acceptable alternative.
If smokers are willing to accept PNVs as a viable option, high-risk tobacco use could become a thing of the past.
So far, converted smokers have taken the lead in promoting the shift to PNVs, sharing their experiences online, in Internet forums and on Facebook and Twitter.
They are spreading the news that, for the first time in history, people can quit smoking without giving up the pleasure they derive from nicotine.
Meanwhile, health authorities and governments have adopted a fear-based approach, scrambling to regulate – or even ban – PNVs.
The European Union’s Tobacco Products Directive and the United Kingdom’s Medicines and Healthcare Products Regulatory Agency plan to introduce strict regulations of PNV sales and use, based on drug legislation, even though the devices are neither tobacco nor medical products.
Even the World Health Organization has released a report expressing serious concern about the marketing and use of electronic nicotine-delivery systems.
Such opposition is not based on scientific evidence.
Indeed, an increasing number of scientific publications show that PNV use is much safer than smoking tobacco.
In January, a group of scientists (including me) sent a letter to the European Commission imploring it to implement evidence-based, proportionate regulation that allows users of PNVs to identify the product and dosage that suits them.
“If wisely regulated, electronic cigarettes have the potential to make cigarettes obsolete and save millions of lives worldwide,” we wrote. Excessive regulation, by contrast, “will contribute to maintaining the existing levels of smoking-related disease, death, and health-care costs.”
Russell once declared, “It is nicotine that people cannot easily do without, not tobacco.”
He was right.
And it is tobacco smoke, not nicotine, that kills.
That makes PNVs the ideal solution.
Masa Depan yang Menua
MUNICH – Penuaan yang dialami masyarakat kita merupakan salah satu kisah sukses terbesar di abad ke-20.
Usia lebih dari tiga dekade telah ditambahkan ke dalam kehidupan ratusan juta penduduk selam\a seratus tahun terakhir.
Hal ini merupakan pencapaian yang layak dirayakan; akan tetapi kita perlu menyadari bahwa seiring dengan bertambahnya umur panjang akan timbul konsekuensi ekonomi jangka panjang yang signifikan – dan banyak masyarakat mengalami penuaan dengan cepat.
Tahun lalu OECD memberikan peringatan bahwa kita sedang mengalami penuaan dengan laju yang tidak pernah terjadi sebelumnya dan kondisi ini dapat menurunkan pertumbuhan ekonomi tahunan global dari rata-rata 3,6% di dekade ini menjadi 2,4% di tahun 2050 hingga 2060.
Negara-negara OECD khususnya akan mengalami double demographic shock.
Tidak hanya masyarakatnya akan menjadi tua dengan cepat; semakin berkurangnya kesenjangan pendapatan antara negara-negara maju dengan negara-negara berkembang menciptakan kemungkinan menurunnya aliran perpindahan penduduk, menyusutkan jumlah tenaga kerja sebesar 20% di eurozone dan 15% di Amerika Serikat.
Peneliti demografi membagi negara ke dalam empat kategori, berdasarkan jumlah populasi di atas usia 65 tahun: young (kurang dari 7% penduduk berusia 65 tahun atau lebih), aging (7-13%), aged (14-20%), dan super-aged (lebih dari 20%).
Kini, hanya tiga negara – Jerman (21%), Italia (22%) dan Jepang (26%) – termasuk kategori masyarakat super-aged.
Dalam lima tahun ke depan, ketiga negara ini akan diikuti oleh Bulgaria, Finlandia, Yunani dan Portugal.
Dalam satu dekade berikutnya, Eropa pun akan semakin mengalami penuaan, bersama dengan 17 negara lainnya seperti Austria, Perancis, Swedia, dan Britania Raya yang diperkirakan akan menjadi super-aged, serta Kanada, Kuba dan Korea Selatan.
Dalam kurun waktu itu, tantangan-tantangan dari cepatnya penuaan yang terjadi pada masyarakat akan muncul utamanya di negara-negara maju.
Tetapi pada tahun 2040 nanti sekitar 55 negara juga akan berjuang mengatasi tingginya jumlah penduduk lanjut usia, ketika Amerika Serikat, Tiongkok, Singapura, Thailand dan Puerto Riko juga masuk ke dalam kategori super-aged.
Hal lain yang menjadikan fenomena ini semakin mengagumkan adalah kecepatan terjadinya pergeseran ini.
Ketika Perancis berpindah dari yang awalnya negara muda (young) menjadi negara yang mengalami penuaan (aging) di tahun 1850, perbudakan masih dianggap sah di Amerika Serikat, bohlam belum diciptakan, dan Jerman belum menjadi negara yang bersatu. Membutuhkan tambahan waktu 130 tahun bagi Perancis untuk menjadi aged society di tahun 1980.
Perancis diperkirakan akan menjadi super-aged di tahun 2023.
Selama beberapa tahun, Jepang dipandang memiiki populasi aging yang tercepat di dunia.
Jepang beralih dari negara yang memiliki populasi termuda di antara negara-negara G-7 pada awal tahun 1960an hingga menjadi negara tertua di tahun 2008.
Tetapi jika perkiraan ini terbukti benar, beberapa negara akan mengalami transformasi yang serupa bahkan dalam waktu satu dekade lebih cepat.
Memang benar bahwa kini negara dengan laju aging tercepat di dunia adalah Korea Selatan, negara ini menjadi aging society di tahun 1999, diperkirakan menjadi aged di tahun 2017, dan akan menjadi super-aged di tahun 2027.
Dengan kata lain, Korea Selatan akan mengalami transformasi ini dalam waktu kurang dari tiga dekade, sementara itu Perancis membutuhkan waktu hampir 175 tahun.
Meskipun Korea Selatan mungkin akan mengalami penuaan yang tercepat, perubahan ini akan terjadi pada sekelompok negara serupa seperti Bangladesh, Singapura, Thailand dan Vietnam.
Iran, masih dianggap negara muda, adalah salah satu pesaing yang tengah memperebutkan gelar negara dengan laju penuaan tercepat.
Penuaan (aging) merupakan hasil dari kenaikan angka harapan hidup dan penurunan tingkat kesuburan.
Laju penurunan tingkat kesuburan ini sangat dramatis di seluruh dunia; di Iran, angkanya sungguh menakjubkan, penurunan dari rasio awal yakni tujuh anak per ibu di tahun 1984 menjadi 1,9 di tahun 2006.
Kondisi seperti ini tentu memiliki dampak jangka panjang seiring dengan berkurang jumlah penduduk usia kerja dan melonjaknya jumlah penduduk lanjut usia.
Iran diperkirakan akan tetap menjadi negara muda hingga tahun 2020 namun dalam waktu kurang dari 30 tahun negara ini akan menjadi super-aged.
Dengan demikian apapun dampak negatif yang mungkin timbul akibat dari penuaan ini, penting untuk kita pikirkan alternatifnya.
Negara-negara seperti Sierra Leone, Lesotho, Republik Afrika Tengah dan Zimbabwe memiliki angka harapan hidup terendah di dunia.
Negara-negara ini menghadapi banyak tantangan – kelaparan, korupsi, konflik, kurang akses pada air bersih dan pendidikan, AIDS, dan Ebola – namun cepatnya penuaan tidak menjadi salah satu permasalahan bagi mereka.
Penuaan penduduk dengan cepat bisa jadi merupakan suatu masalah namun secara umum permasalahan semacam ini cenderung cukup baik.
The Middle East’s Arc of Prosperity
PRINCETON – As Egypt trembles on the brink of civil war, with alarming levels of violence and hardening divisions on all sides, it is hard to find a truly bright spot anywhere in the Middle East or North Africa.
Syria’s agony continues unabated; sectarian attacks in Iraq are becoming more frequent and deadly; the threads of Lebanon’s fragile peace are fraying;
Jordan is awash in refugees; Libya’s militias are running rampant and distorting its politics;
Tunisia faces political crisis; and Turkey’s star as the embodiment of Islamic democracy has dimmed.
Yet even with this litany of problems, US Secretary of State John Kerry has decided to focus on Israel and Palestine.
His justification – “if not now, never” – is almost certainly true.
But there is another, equally strong (albeit often overlooked) rationale: the tremendous potential for an Israeli-Palestinian-Jordanian economic zone that would drive the entire region’s growth and development.
In the immortal words of James Carville, Bill Clinton’s campaign manager in 1992, “It’s the economy, stupid.”
The dismal failure of Middle Eastern and North African economies to deliver the prosperity that their people desperately want is a constant factor pushing people into the streets.
It is not the only factor, but rising food prices helped to spread revolutionary fervor from a small group of activists to much of Egypt’s population in 2011, and again this year in June, when the most frequent grievance against former President Mohamed Morsi concerned not his ideology but his indifference to ordinary Egyptians’ needs.
Against this backdrop, Israel and the Palestinian territories are relatively stable places.
Israel’s high-quality infrastructure could easily be extended to the West Bank and Gaza if security could be assured, and a young generation of entrepreneurs and technologists has grown up on both sides of the border.
Forbes magazine reports that “hundreds of Israeli[s] and Palestinians are becoming actual business partners and colleagues in startups that are slowly transforming the Palestinian economy, at least in the West Bank.”
This is most true in high-tech industries, the sector in which the Middle East lags the most.
The author of the Forbes article describes a scene in Ramallah that is “indistinguishable from one in Austin or San Francisco,” where “twentysomething Palestinians sip cocktails, their laptops open, their smartphones on.”
All of this activity is taking place against the odds.
Alec Ross, a former senior adviser for innovation to former US Secretary of State Hillary Clinton, argues that the best way to reinvigorate the peace process is to provide 3G Internet connectivity to the West Bank.
He quotes a young woman in the audience at Palestine Polytechnic University, who said, to loud applause, “We must have a better economy to have better lives, and we must have 3G to have…a better economy.”
Without high-speed Internet, foreign investment and indigenous entrepreneurship are almost impossible.
The human capital for rapid economic growth is there (roughly 2,000 Palestinians graduate every year with technical skills, yet only 30% of them find a way to use such skills in a paying job), as is the will and the investment capital; but the necessary infrastructure is lacking.
A vision of a very different Palestine, and of the Israel beside it, is not hard to find.
In 2005, the Rand Corporation, a US research institute, developed the “Arc,” a genuinely inspiring plan to build a transportation corridor that would link Palestine’s principal business and population hubs in the West Bank, then curve across Israel into Gaza, where a long-planned airport and seaport would be built.
The concept behind this vision is that the size and population density of a future Palestine will be roughly the same as in extended urban regions like the San Francisco Bay area or greater Cairo.
Thus, the West Bank should be viewed as “an integrated urban region of independent but connected cities.”
Anyone who spends nine minutes watching the video presentation of the Arc will see that its potential is nothing short of breathtaking.
While Palestine would gain economically, Israel would gain politically and socially.
The costs of not reaching a peace settlement may not show up in Israel’s economic statistics or in formal diplomatic interactions.
But young Israelis, in particular, are increasingly aware of the invitations to meetings and conferences that they do not receive – and of the increasing frequency with which their own are not accepted, even by sincere friends of Israel.
Bernard Avishai, a distinguished Israeli professor of business and government who divides his time between Israel and the US, notes that whatever Israel’s young people may think of the Palestinians, they “expect to fly off from Ben-Gurion Airport and land, accepted, in the Western world.”
Now they know that the stakes are rising.
So are the opportunities.
Whereas the Israeli-Palestinian conflict has long been an island of violence and turmoil in a relatively stable (if oppressed) region, now the tables are turned.
An Israel and Palestine that could resolve their differences and live side by side as democracies would become an island of stability and sanity in a sea of political disorder and economic retrenchment.
Add a free-trade agreement, or even a customs union with Jordan, and you have the makings of a Middle Eastern Benelux (the grouping of Belgium, the Netherlands, and Luxembourg that formed the economic kernel of what became the original European Community).
A late summer night’s dream?
Perhaps.
But, Iran aside, all of the region’s major players – Saudi Arabia and its fellow Gulf states, Turkey, and both sides in Egypt – have plenty of reasons to want to see it realized.
And Israelis and Palestinians themselves, with actual or potential civil war on three of their four borders, need no reminders of what could happen if they do not start spreading peace from the inside out.
Economic Crisis and Regional Integration
PRINCETON – Everyone now knows that we are in the worst economic crisis since the 1930’s.
The protectionist responses are sadly familiar: protests against foreign workers, demands for trade protection, and a financial nationalism that seeks to limit the flow of money across national frontiers.
In the 1930’s, however, economic nationalism was not the only show in town.
Many people started to think of regional integration as the answer to depression.
But the sort of integration that occurs in times of economic crisis is often destructive.
The most unattractive versions of 1930’s regionalism came from Germany and Japan, and represented nothing less than a practical extension of their power over vulnerable neighbors, which were forced into trade and financial dependence on the basis of Germany’s Grosswirtschaftsraum or its Japanese equivalent, the Greater East Asia Co-Prosperity Sphere.
As a consequence of the horrors of the 1930’s, there remains substantial suspicion of concepts like “Greater East Asia.”
In the second half of the twentieth century, Europe had the chance to build a much more benevolent form of regionalism.
But today, the European Union is stymied by having squandered the chance to build stronger institutions when times were better and tempers less strained.
The EU is suffering from a number of problems that have been widely discussed for many years, but never seemed to be that urgent.
Suddenly, in the face of the economic crisis, these problems have become major sources of political instability.
There is a common monetary policy in the euro-zone countries, and an integrated capital market with financial institutions that are active across national frontiers.
But banks are regulated and supervised nationally – as they must be, because any rescue in the event of a large bank failure becomes a fiscal issue, with the cost borne by taxpayers in individual states rather than by the EU as a whole.
But this set-up makes little sense in the face of the economic logic of European integration.
The second obvious problem is the smallness of the EU’s budget relative to those of the member states.
The vast part of government activity takes place on a national level.
But different governments have different degrees of fiscal room for maneuver.
Italian, Greek, or Portuguese public debt is so high that any attempt to use fiscal spending as part of a strategy to combat the economic crisis is doomed to fail.
But Ireland, with previously modest deficit and debt levels, also suddenly and unexpectedly faces the same kind of issue, owing to the government’s need to take over private debt from the banking sector.
France and Germany, by contrast, have an inherently strong fiscal position.
So only the EU’s strongest countries can really do anything against the sharply worsening recession.
Moreover, the whole idea of Keynesian demand stimulus was developed, again in the 1930’s, in the context of self-contained national economies.
Keynesians filled up the warm water of fiscal stimulus in a national bathtub.
When the national bathtub has holes, and other people benefit from the warmth, the exercise loses its attraction.
In any case, it only ever worked for the larger states.
The smaller states could not do Keynesianism in a hand basin.
There are ways to fix both the banking and the fiscal problem.
Control of banking is the simplest.
The European Central Bank clearly has the technical and analytical capacity to take on general supervision of European banks, using the member central banks as information conduits.
The fiscal problem could be dealt with by issuing generally guaranteed European bonds, which might be a temporary measure, restricted to the financial emergency.
Both bank regulation and fiscal policy require a great deal more Europeanization.
The most obvious way is to use existing mechanisms and institutions, in particular the ECB or the European Commission.
The difficulty with such a suggestion is that it would imply a relative weakening of the national states, including the largest, Germany and France.
They would most likely resist, and try to stay in their own bathtubs.
Indeed, the crisis has turned France and Germany once more into the key players of the European process.
But the more the crisis affects them, the more they think largely in national terms.
From the perspective of Berlin or Paris, there should be no systematic Europeanization. Instead, the large states are now promoting informal groupings to look for worldwide solutions.
Overtones of the 1930’s are amplified, clearly exposing the Union’s predicament, because of an odd coincidence: the Czech Republic now holds the EU’s rotating presidency.
The Czechs, probably the people with the most vivid historical memory of the bad regionalism of the 1930’s, succeeded France, the European country that today is the least constrained in asserting its national interest.
The clash of two visions of Europe is eroding the political stability of an area that once represented the best model and greatest hope for benign regionalism.
सामाजिक प्रगति का महत्व क्यों है
कैंब्रिज - आर्थिक विकास ने पिछली आधी सदी में करोड़ों लोगों को ग़रीबी से बाहर निकाला है तथा और बहुत-से लोगों के जीवन में सुधार लाया है। फिर भी यह अधिकाधिक स्पष्ट होता जा रहा है कि मात्र आर्थिक प्रगति के आधार पर मानव विकास का मॉडल अधूरा है। ऐसा समाज सफल नहीं हो सकता जो बुनियादी मानवीय ज़रूरतों पर कार्रवाई करने, लोगों को अपने जीवन की गुणवत्ता में सुधार लाने में सक्षम बनाने, पर्यावरण की रक्षा करने, और अपने अनेक नागरिकों को अवसर प्रदान करने में विफल रहता है। समावेशी विकास के लिए आर्थिक और सामाजिक प्रगति दोनों की ज़रूरत होती है।
केवल सकल घरेलू उत्पाद पर ध्यान देने से क्या नुक़सान हो सकते हैं, यह 9 अप्रैल को शुरू किए गए 2015 सामाजिक प्रगति सूचकांक (एसपीआई) के निष्कर्षों से स्पष्ट होता है। MIT के स्कॉट स्टर्न और गैर-लाभ वाली संस्था सोशल प्रोग्रेस इम्पेरेटिव के सहयोग से तैयार किया गया एसपीआई, 133 देशों के निष्पादन का मूल्यांकन सामाजिक और पर्यावरण के विभिन्न आयामों के आधार पर करता है। यह सामाजिक प्रगति को मापने के लिए, और सकल घरेलू उत्पाद से स्वतंत्र रूप से सामाजिक प्रगति को मापने के लिए विकसित किया गया पहला सबसे व्यापक ढाँचा है।
देश के सामाजिक निष्पादन के 52 संकेतकों के आधार पर, एसपीआई सरकार और व्यापार जगत के नेताओं के लिए देश के निष्पादन के लिए बेंचमार्क निर्धारित करने और उन क्षेत्रों को प्राथमिकता देने के लिए व्यावहारिक साधन प्रदान करता है जहाँ सामाजिक सुधार सबसे ज़्यादा ज़रूरी है। इस प्रकार एसपीआई समावेशी विकास के लिए रणनीति के मार्गदर्शन के लिए व्यवस्थित, और अनुभवजन्य आधार प्रदान करता है।
डेटा से प्रकट होता है कि इसमें कोई आश्चर्य नहीं है कि सामाजिक प्रगति के कई पहलुओं में आय में वृद्धि के साथ सुधार होने की प्रवृत्ति होती है। नॉर्वे जैसे ज़्यादा अमीर देश (जो इस साल के एसपीआई में शीर्ष स्थान पर हैं), आम तौर से कम-आय वाले देशों की तुलना में बेहतर सामाजिक परिणाम प्रस्तुत करते हैं।
लेकिन चौंकाने वाला निष्कर्ष यह है कि सकल घरेलू उत्पाद सामाजिक प्रगति का एकमात्र निर्धारक बिल्कुल नहीं है। उदाहरण के लिए, कोस्टा रिका ने सामाजिक प्रगति में इटली से ऊँचा स्तर हासिल किया है, जबकि उसका प्रति व्यक्ति सकल घरेलू उत्पाद इटली के मुकाबले मुश्किल से एक तिहाई है।
और कोस्टा रिका कोई अकेला मामला नहीं है। अमीर से ग़रीब देशों के समूचे परिदृश्य में, हम न्यूज़ीलैंड और सेनेगल जैसे उदाहरण देखते हैं, जो संयुक्त राज्य अमेरिका और नाइज़ीरिया जैसे दूसरे देशों की तुलना में अपने आर्थिक विकास को सामाजिक प्रगति में बदलने में कहीं ज़्यादा सफल रहे हैं। चीन और भारत सहित, तेज़ी से बढ़ रही उभरती अर्थव्यवस्थाओं में से अनेक, अभी तक सामाजिक प्रगति का वह स्तर हासिल करने में सफल नहीं हो पाई हैं जो वे अपनी आर्थिक प्रगति के फलस्वरूप प्राप्त कर सकती हैं।
जहाँ आर्थिक विकास और सामाजिक प्रगति के बीच असंतुलन होता है, वहाँ अक्सर राजनीतिक अस्थिरता और अशांति पैदा होती है, जैसा कि रूस और मिस्र में हुआ है। इन और अन्य देशों में सामाजिक प्रगति में कमी आर्थिक वृद्धि को भी कम कर देती है, जो मानवीय ज़रूरतों के संबंध में कार्रवाई करने, सामाजिक पूँजी का निर्माण करने, और अपने नागरिकों के लिए अवसर पैदा करने में विफल रहते हैं। आर्थिक विकास के लिए उचित आधार तैयार करने के लिए, देशों को केवल आर्थिक संस्थाओं में ही नहीं, बल्कि सामाजिक प्रगति में भी निवेश करना चाहिए।
मैंने स्वयं यह अनुभव किया है और देखा है कि रवांडा ने अपने आर्थिक विकास की रणनीति के अभिन्न अंग के रूप में सामाजिक प्रगति में कैसे निवेश किया है - जिसमें लिंग समानता, एक ही दशक में बाल मृत्यु दर में 61% की कमी, और प्राथमिक स्कूल में 95% नामांकन शामिल हैं। सामाजिक प्रगति के इन और अन्य आयामों में सुधार के बिना रवांडा का सकारात्मक आर्थिक निष्पादन संभव नहीं हो पाता।
इस तरह सामाजिक प्रगति पर ध्यान केंद्रित करने से बेहतर विकास रणनीतियों का मार्ग प्रशस्त होता है, और उन विवादास्पद उपायों के लिए राजनीतिक समर्थन की भूमिका तैयार होती है जो कभी-कभी समृद्धि बढ़ाने के लिए ज़रूरी होते हैं। पारंपरिक आर्थिक संकेतकों के साथ, सामाजिक निष्पादन के कठोर उपाय, ऐसा गुणयुक्त चक्र शुरू करने के लिए महत्वपूर्ण होते हैं जिनसे सकल घरेलू उत्पाद का विकास ऐसे तरीकों से सामाजिक और पर्यावरण निष्पादन में सुधार करता है जिनके फलस्वरूप और ज़्यादा आर्थिक सफलता प्राप्त होती है। और, सकल घरेलू उत्पाद बनाम आय की असमानता जैसी संकीर्ण बहसों से बचकर, एसपीआई ऐसा अनिवार्य साधन प्रदान करता है जिससे ऐसा व्यवहार्य एजेंडा तैयार किया जा सकता है जो ठीक वैसा ही काम करे।
2013 में एसपीआई का बीटा संस्करण जारी किए जाने के बाद से इसमें रुचि तेज़ी से बढ़ी है। इसके निष्कर्षों को दुनिया भर के लाखों नागरिकों के बीच साझा किया जा रहा है, जिससे नागरिकों के हाथ ऐसा साधन आ गया है जिससे वे अपने नेताओं को जवाबदेह ठहरा सकते हैं।
इसके अलावा, सामाजिक प्रगति में सुधार लाने के लिए, 40 से ज़्यादा देशों में रणनीतिक पहल चल रही हैं। उदाहरण के लिए, पराग्वे ने 2030 के लिए समावेशी राष्ट्रीय विकास योजना के मार्गदर्शन के लिए एसपीआई को अपनाया है। और एसपीआई का इस्तेमाल न केवल राष्ट्रीय स्तर पर किया जा रहा है, बल्कि क्षेत्रीय और नगर निगम के अधिकारियों द्वारा भी किया जा रहा है। ब्राज़ील में पारा जैसे राज्यों और साथ ही लातिन अमेरिका में बोगोटा और रियो डी जनेरियो और यूएस में मैसाचुसेट्स राज्य के सोमरविले जैसे शहरों ने एसपीआई का इस्तेमाल विकास की सफलता के उपाय के रूप में शुरू कर दिया है।
इस साल, यूरोपीय आयोग द्वारा पूरे यूरोप में क्षेत्रीय एसपीआई शुरू कि जाएँगे। और कोका कोला और नैचुरा जैसी कंपनियाँ, अपनी सामाजिक निवेश रणनीतियाँ सूचित करने और सार्वजनिक और निजी साझेदारों के साथ सहयोगात्मक संबंध स्थापित करने के लिए एसपीआई का इस्तेमाल कर रही हैं।
आधी सदी से भी ज़्यादा समय से सकल घरेलू उत्पाद आर्थिक विकास का मार्गदर्शन करनेवाला बेंचमार्क रहा है। एसपीआई का उद्देश्य राष्ट्रीय निष्पादन के मूल मीट्रिक के रूप में इसका पूरक होना है (इसे प्रतिस्थापित करना नहीं)। सामाजिक प्रगति का मूल्यांकन नागरिकों और नेताओं को इसकी पूरी तस्वीर पेश करता है कि उनका देश किस रूप में विकास कर रहा है। और इससे समाजों को बेहतर विकल्प चुनने, मज़बूत समुदाय बनाने, तथा लोगों को और ज़्यादा भरपूर जीवन बिताने में सक्षम करने में मदद मिलेगी।
Fanatics, Charlatans, and Economists
DAVOS – Throughout the world, it seems, crisis is gripping national politics.
In election after election, voter turnout has hit historic lows.
Politicians are universally reviled.
Mainstream parties, desperate to remain relevant, are caught in a vice, forced to choose between pandering to extremism and the risk of being overwhelmed by populist, anti-establishment movements.
Meanwhile, not since the end of World War II has money played such an important role in politics, trumping the power of ideas.
In the United States, for example, the sound of billions of dollars flowing into election-campaign coffers is drowning out the voices of individual voters.
In parts of the world where the rule of law is weak, criminal networks and corruption displace democratic processes.
In short, the pursuit of the collective good looks sadly quaint.
The trouble began at the end of the Cold War, when the collapse of a bankrupt communist ideology was complacently interpreted as the triumph of the market.
As communism was discarded, so was the concept of the state as an agent around which our collective interests and ambitions could be organized.
The individual became the ultimate agent of change – an individual conceived as the type of rational actor that populates economists’ models.
Such an individual’s identity is not derived from class interests or other sociological characteristics, but from the logic of the market, which dictates maximization of self-interest, whether as a producer, a consumer, or a voter.
Indeed, economics has been placed on a pedestal and enshrined in institutions like central banks and competition authorities, which have been intentionally separated and made independent from politics.
As a result, governments have been confined to tinkering at the margins of markets’ allocation of resources.
The 2008 global financial crisis, the resulting recession, and rapidly widening income and wealth inequality have punctured the glib triumphalism of economics.
But politics, far from rising to take its place, continues to be discredited, as mainstream leaders – particularly in North America and Europe – call on economic theories to justify their policy choices.
The pursuit of individual attainment is the hallmark of our time, eclipsing the collective dimension of human destiny.
And yet the deep human need to be part of a group has yet to disappear.
It lingers, but without a credible outlet.
National projects ring hollow, and the so-called international community remains an abstraction.
This unfulfilled desire for community may be felt particularly acutely by young people – including, for example, young jihadists.
Indeed, nationalist politicians and religious leaders have been the first to spot the vacuum, and they are rapidly filling it.
Pope Francis, Vladimir Putin, Abu Bakr al-Baghdadi, and Marine Le Pen have little in common.
But they share one insight: There is a deep longing for the creation of communities defined by shared values, not functional needs.
The crisis of national politics has consequences that echo far beyond the borders of individual countries.
National chauvinism and religious fundamentalism are here to stay, and with them the terrorism that extremists of all stripes embrace, because both phenomena are ideally suited to the age of the individual: They provide imaginary answers to personal angst, instead of political answers to collective challenges.
These movements’ amorphous nature – often channeled through charismatic leaders – allows each individual to project onto them his or her dreams, making them difficult to counter within the framework of traditional politics.
But this strength can also be a weakness.
When tasked with managing territories and governing populations, these movements begin to face the same bothersome logistical and organizational constraints as their rivals.
As a result, bureaucracy is constantly at their heels, leaving them in perpetual need of upheaval and renewal.
If politics is to retake the field of values from the fanatics, the charlatans, and the economists, it must be rebuilt from the ground up.
More than half of the world’s population now lives in cities, and any political renaissance must counterbalance the appeal of vast virtual communities with resilient urban societies.
Citizens must become reengaged with the political process, educated in public affairs, and provided with real (not merely virtual) platforms to air their differences and debate alternative views.
Furthermore, institutions that provide bridges between states and the global community, such as the European Union, must be strengthened and refocused.
In particular, their technical functions must be clearly distinguished from their political roles.
But, above all, politicians must stop trying to shore up their diminished credibility with the pretense of economic science.
Politics begins where contemporary economics ends – with ethics and the attempt to create a justly ordered society.
The Messy Politics of Economic Divergence
LAGUNA BEACH – The world is increasingly characterized by divergence – in economic performance, monetary policy, and thus in financial markets.
Global divergence has already contributed to stock-market volatility, unprecedented declines in advanced economies' government bond yields, and outsize currency movements.
And the trend is not abating, placing increasing pressure on already-strained political systems.
The world's systemically important economies can be placed into four categories.
The first group includes countries like India and the United States, where economic recovery is broadening, enabling them to overcome financial imbalances.
The second group is exemplified by China, which is achieving a soft landing onto a growth path that, while lower than in recent years, remains adequate to support continued progress toward high-income status and financial stability.
The third group includes economies – such as Brazil, several eurozone countries, and Japan – that are not growing fast enough, and face downside risks.
And, finally, the fourth group consists of economic and financial wildcards like Greece and Russia – countries that could succeed in restoring growth and financial stability, but could just as easily implode, sending shock waves across Europe and beyond.
This divergence is as much a political phenomenon as it is an economic and financial one.
Overcoming it – and ensuring steady, financially stable global growth – will require responsive national policymaking and multilateral coordination.
Unfortunately, today's rather messy national and international political environments have so far precluded such an approach.
Nonetheless, experimental monetary policies in advanced economies – such as the large-scale asset purchases initiated this month by the European Central Bank – have slowed the vicious circle of subpar economic performance and muddled politics. But it is far from clear that this will continue, especially given the US Federal Reserve's gradual exit from such policies, which puts America on a different path from most of the other advanced economies.
Moreover, market forces have gained an ever-larger role in reconciling global economic divergence, leading to dramatic shifts in exchange rates.
The list of such currency movements – which so far has included the euro's 25% fall against the dollar, a record low for the Mexican peso, and disorderly depreciations of the Brazilian real and other emerging-economy currencies – is getting longer by the day.
Even healthy economies like South Korea are keen to weaken their currencies, leaving the US alone in its willingness to tolerate significant currency appreciation.
On their own, currency markets will not bring about the growth-enhancing global economic rebalancing that is needed.
Better policies at the national, regional, and global levels are also essential – and that requires better politics.
Too many political leaders around the world remain unable – or unwilling – to fulfill their economic-governance responsibilities.
This is particularly regrettable, given that there is a broad consensus regarding the technical components of the required policy response: structural reforms to revamp growth engines, efforts to rebalance aggregate demand, and the elimination of debt overhangs.
(The eurozone must also work to complete the essential underpinnings of its historic integration project.)
What is missing is implementation.
But governments seem unlikely to overcome their dysfunction anytime soon.
In the US, Congress and the executive branch are locked in a stalemate.
Europe's political systems are being shaken by the rise of populist parties, many of which are winning support with an anti-European platform.
In the emerging world, Brazil's government has faced multiple corruption scandals.
And Russia's leadership remains committed to its disruptive regional adventures, regardless of their devastating impact on its economy.
In most, if not all, of these cases, we see examples of a broader phenomenon: what might be called governing by inertia – a “can't, won't, and shouldn't" mentality, to paraphrase the economist Mark Blyth, that blocks effective policymaking.
As policy inertia prolongs sluggish growth and impairs job creation, it becomes even more difficult to abandon.
Given how hard it is for governments to initiate a shift to a new policymaking mode (that is, to disrupt themselves), pressure will build from the outside.
In a democracy, this tends to occur through the fragmentation of traditional parties and the emergence of non-traditional parties – some offering genuine alternatives, and others relying on fear and prejudice.
The global economy is at a critical juncture.
Most economists agree on what is needed to avoid another round of lost growth opportunities, inadequate employment, financial instability, and worsening inequality.
Central banks and markets cannot achieve an orderly global rebalancing on their own.
As difficult as it may be, politicians need to pursue comprehensive policy responses.
The longer they delay, the less effective their efforts will be.
As bad politics block economic opportunity, public trust in governments will continue to erode – with serious potential consequences for political systems, and the economies they administer, worldwide.
Happiness Is Equality
LONDON – The king of Bhutan wants to make us all happier.
Governments, he says, should aim to maximize their people’s Gross National Happiness rather than their Gross National Product.
Does this new emphasis on happiness represent a shift or just a passing fad?
It is easy to see why governments should de-emphasize economic growth when it is proving so elusive.
The eurozone is not expected to grow at all this year.
The British economy is contracting.
Greece’s economy has been shrinking for years.
Even China is expected to slow down.
Why not give up growth and enjoy what we have?
No doubt this mood will pass when growth revives, as it is bound to.
Nevertheless, a deeper shift in attitude toward growth has occurred, which is likely to make it a less important lodestar in the future – especially in rich countries.
The first factor to undermine the pursuit of growth was concern about its sustainability.
Can we continue growing at the old rate without endangering our future?
When people started talking about the “natural” limits to growth in the 1970’s, they meant the impending exhaustion of food and non-renewable natural resources.
Recently the debate has shifted to carbon emissions.
As the Stern Review of 2006 emphasized, we must sacrifice some growth today to ensure that we do not all fry tomorrow.
Curiously, the one taboo area in this discussion is population.
The fewer people there are, the less risk we face of heating up the planet.
But, instead of accepting the natural decline in their populations, rich-country governments absorb more and more people to hold down wages and thereby grow faster.
A more recent concern focuses on the disappointing results of growth.
It is increasingly understood that growth does not necessarily increase our sense of well-being.
So why continue to grow?
The groundwork for this question was laid some time ago.
In 1974, the economist Richard Easterlin published a famous paper, “Does Economic Growth Improve the Human Lot?
Some Empirical Evidence.”
After correlating per capita income and self-reported happiness levels across a number of countries, he reached a startling conclusion: probably not.
Above a rather low level of income (enough to satisfy basic needs), Easterlin found no correlation between happiness and GNP per head.
In other words, GNP is a poor measure of life satisfaction.
That finding reinforced efforts to devise alternative indexes.
In 1972, two economists, William Nordhaus and James Tobin, introduced a measure that they called “Net Economic Welfare,” obtained by deducting from GNP “bad” outputs, like pollution, and adding non-market activities, like leisure.
They showed that a society with more leisure and less work could have as much welfare as one with more work – and therefore more GNP – and less leisure.
More recent metrics have tried to incorporate a wider range of “quality of life” indicators.
The trouble is that you can measure quantity of stuff, but not quality of life.
How one combines quantity and quality in some index of “life satisfaction” is a matter of morals rather than economics, so it is not surprising that most economists stick to their quantitative measures of “welfare.”
But another finding has also started to influence the current debate on growth: poor people within a country are less happy than rich people.
In other words, above a low level of sufficiency, peoples’ happiness levels are determined much less by their absolute income than by their income relative to some reference group.
We constantly compare our lot with that of others, feeling either superior or inferior, whatever our income level; well-being depends more on how the fruits of growth are distributed than on their absolute amount.
Put another way, what matters for life satisfaction is the growth not of mean income but of median income – the income of the typical person.
Consider a population of ten people (say, a factory) in which the managing director earns $150,000 a year and the other nine, all workers, earn $10,000 each.
The mean average of their incomes is $25,000, but 90% earn $10,000.
With this kind of income distribution, it would be surprising if growth increased the typical person’s sense of well-being.
That is not an idle example.
In rich societies over the last three decades, mean incomes have been rising steadily, but typical incomes have been stagnating or even falling.
In other words, a minority – a very small minority in countries like the United States and Britain – has captured most of the gains of growth.
In such cases, it is not more growth that we want, but more equality.
More equality would not only produce the contentment that flows from more security and better health, but also the satisfaction that flows from having more leisure, more time with family and friends, more respect from one's fellows, and more lifestyle choices.
Great inequality makes us hungrier for goods than we would otherwise be, by constantly reminding us that we have less than the next person.
We live in a pushy society with turbo-charged fathers and “tiger” mothers, constantly goading themselves and their children to “get ahead.”
The nineteenth-century philosopher John Stuart Mill had a more civilized view:
“I confess I am not charmed with the ideal of life held out by those who think…that the trampling, crushing, elbowing, and treading on each other's heels, which form the existing type of social life, are the most desirable lot of human kind….The best state for human nature is that in which, while no one is poor, no one desires to be richer, nor has any reason to fear being thrust back, by the efforts of others to push themselves forward.”
That lesson has been lost on most economists today, but not on the king of Bhutan – or on the many people who have come to recognize the limits of quantifiable wealth.
The Age of Vulnerability
NEW YORK – Two new studies show, once again, the magnitude of the inequality problem plaguing the United States.
The first, the US Census Bureau’s annual income and poverty report, shows that, despite the economy’s supposed recovery from the Great Recession, ordinary Americans’ incomes continue to stagnate.
Median household income, adjusted for inflation, remains below its level a quarter-century ago.
It used to be thought that America’s greatest strength was not its military power, but an economic system that was the envy of the world.
But why would others seek to emulate an economic model by which a large proportion – even a majority – of the population has seen their income stagnate while incomes at the top have soared?
A second study, the United Nations Development Program’s Human Development Report 2014, corroborates these findings.
Every year, the UNDP publishes a ranking of countries by their Human Development Index (HDI), which incorporates other dimensions of wellbeing besides income, including health and education.
America ranks fifth according to HDI, below Norway, Australia, Switzerland, and the Netherlands.
But when its score is adjusted for inequality, it drops 23 spots – among the largest such declines for any highly developed country.
Indeed, the US falls below Greece and Slovakia, countries that people do not typically regard as role models or as competitors with the US at the top of the league tables.
The UNDP report emphasizes another aspect of societal performance: vulnerability.
It points out that while many countries succeeded in moving people out of poverty, the lives of many are still precarious.
A small event – say, an illness in the family – can push them back into destitution.
Downward mobility is a real threat, while upward mobility is limited.
In the US, upward mobility is more myth than reality, whereas downward mobility and vulnerability is a widely shared experience.
This is partly because of America’s health-care system, which still leaves poor Americans in a precarious position, despite President Barack Obama’s reforms.
Those at the bottom are only a short step away from bankruptcy with all that that entails.
Illness, divorce, or the loss of a job often is enough to push them over the brink.
The 2010 Patient Protection and Affordable Care Act (or “Obamacare”) was intended to ameliorate these threats – and there are strong indications that it is on its way to significantly reducing the number of uninsured Americans.
But, partly owing to a Supreme Court decision and the obduracy of Republican governors and legislators, who in two dozen US states have refused to expand Medicaid (insurance for the poor) – even though the federal government pays almost the entire tab – 41 million Americans remain uninsured.
When economic inequality translates into political inequality – as it has in large parts of the US – governments pay little attention to the needs of those at the bottom.
Neither GDP nor HDI reflects changes over time or differences across countries in vulnerability.
But in America and elsewhere, there has been a marked decrease in security.
Those with jobs worry whether they will be able to keep them; those without jobs worry whether they will get one.
The recent economic downturn eviscerated the wealth of many.
In the US, even after the stock-market recovery, median wealth fell more than 40% from 2007 to 2013.
That means that many of the elderly and those approaching retirement worry about their standards of living.
Millions of Americans have lost their homes; millions more face the insecurity of knowing that they may lose theirs in the future.
These insecurities are in addition to those that have long confronted Americans.
In the country’s inner cities, millions of young Hispanics and African-Americans face the insecurity of a dysfunctional and unfair police and judicial system; crossing the path of a policeman who has had a bad night may lead to an unwarranted prison sentence – or worse.
Europe has traditionally understood the importance of addressing vulnerability by providing a system of social protection.
Europeans have recognized that good systems of social protection can even lead to improved overall economic performance, as individuals are more willing to take the risks that lead to higher economic growth.
But in many parts of Europe today, high unemployment (12% on average, 25% in the worst-affected countries), combined with austerity-induced cutbacks in social protection, has resulted in unprecedented increases in vulnerability.
The implication is that the decrease in societal wellbeing may be far larger than that indicated by conventional GDP measures – numbers that already are bleak enough, with most countries showing that real (inflation-adjusted) per capita income is lower today than before the crisis – a lost half-decade.
The report by the International Commission on the Measurement of Economic Performance and Social Progress (which I chaired) emphasized that GDP is not a good measure of how well an economy is performing.
The US Census and UNDP reports remind us of the importance of this insight.
Too much has already been sacrificed on the altar of GDP fetishism.
Regardless of how fast GDP grows, an economic system that fails to deliver gains for most of its citizens, and in which a rising share of the population faces increasing insecurity, is, in a fundamental sense, a failed economic system.
And policies, like austerity, that increase insecurity and lead to lower incomes and standards of living for large proportions of the population are, in a fundamental sense, flawed policies.
Inspiring Economic Growth
NEW HAVEN – In his First Inaugural Address, during the depths of the Great Depression, US President Franklin Delano Roosevelt famously told Americans that, “The only thing we have to fear is fear itself.” Invoking the Book of Exodus, he went on to say that, “We are stricken by no plague of locusts.”
Nothing tangible was causing the depression; the problem, in March 1933, was in people’s minds.
The same could be said today, seven years after the 2008 global financial crisis, about the world economy’s many remaining weak spots.
Fear causes individuals to restrain their spending and firms to withhold investments; as a result, the economy weakens, confirming their fear and leading them to restrain spending further.
The downturn deepens, and a vicious circle of despair takes hold.
Though the 2008 financial crisis has passed, we remain stuck in the emotional cycle that it set in motion.
It is a bit like stage fright.
Dwelling on performance anxiety may cause hesitation or a loss of inspiration.
As fear turns into fact, the anxiety worsens – and so does the performance.
Once such a cycle starts, it can be very difficult to stop.
According to Google Ngrams, it was during the Great Depression – around the late 1930s – that the term “feedback loop” began to appear frequently in books, often in relation to electronics.
If a microphone is placed in front of a loudspeaker, eventually some disturbance will cause the system to produce a painful wail as sound loops from the loudspeaker to the microphone and back, over and over.
Then, in 1948, the great sociologist Robert K. Merton popularized the phrase “self-fulfilling prophecy” in an essay with that title.
Merton’s prime example was the Great Depression.
But the memory of the Great Depression is fading today, and many people probably do not imagine that such a thing could be happening now.
Surely, they think, economic weakness must be due to something more tangible than a feedback loop.
But it is not, and the most direct evidence of this is that, despite rock-bottom interest rates, investment is not booming.
In fact, real (inflation-adjusted) interest rates are hovering around zero throughout much of the world, and have been for more than five years.
This is especially true for government borrowing, but corporate interest rates, too, are at record lows.
In such circumstances, governments considering a proposal to build, say, a new highway, should regard this as an ideal time.
If the highway will cost $1 billion, last indefinitely with regular maintenance and repairs, and yield projected annual net benefits to society of $20 million, a long-term real interest rate of 3% would make it nonviable: the interest cost would exceed the benefit.
But if the long-term real interest rate is 1%, the government should borrow the money and build it.
That is just sound investing.
In fact, the 30-year inflation-indexed US government bond yield as of May 4 was only 0.86%, compared with more than 4% in the year 2000.
Such rates are similarly low today in many countries.
Our need for better highways cannot have declined; on the contrary, given population growth, the need for investment can only have become more pronounced.
So why are we not well into a highway-construction boom?
People’s weak appetite for economic risk may not be the result of pure fear, at least not in the sense of an anxiety like stage fright.
It may stem from a perception that others are afraid, or that something is inexplicably wrong with the business environment, or a lack of inspiration (which can help overcome background fears).
It is worth noting that the US experienced its fastest economic growth since 1929 in the 1950s and 1960s, a time of high government expenditure on the Interstate Highway System, which was launched in 1956.
As the system was completed, one could cross the country and reach its commercial hubs on high-speed expressways at 75 miles (120 kilometers) an hour.
Maybe the national highway system was more inspirational than the kinds of things that Roosevelt tried to stimulate the US out of the Great Depression.
With his Civilian Conservation Corps, for example, young men were enlisted to clean up the wilderness and plant trees.
That sounded like a pleasant experience – maybe a learning experience – for young men who would otherwise be idle and unemployed.
But it was not a great inspiration for the future, which may help to explain why Roosevelt’s New Deal was unable to end America’s economic malaise.
By contrast, the apparent relative strength of the US economy today may reflect some highly visible recent inspirations.
The fracking revolution, widely viewed as originating in the US, has helped to lower energy prices and has eliminated America’s dependency on foreign oil.
Likewise, much of the rapid advance in communications in recent years reflects innovations – smartphone and tablet hardware and software, for example – that has been indigenous to the US.
Higher government spending could stimulate the economy further, assuming that it generates a level of inspiration like that of the Interstate Highway System.
It is not true that governments are inherently unable to stimulate people’s imagination.
What is called for is not little patches here and there, but something big and revolutionary.
Government-funded space-exploration programs around the world have been profound inspirations.
Of course, it was scientists, not government bureaucrat, who led the charge.
But such programs, whether publicly funded or not, have been psychologically transforming.
People see in them a vision for a greater future.
And with inspiration comes a decline in fear, which now, as in Roosevelt’s time, is the main obstacle to economic progress.
China’s Growth Challenge
BEIJING – Throughout the just concluded 18th Congress of the Chinese Communist Party ubiquitous television screens in trains and metro stations broadcast a live feed of the Chinese assembly.
Beijing’s busy people, however, seemed not to pay close attention: for them, it was business as usual.
The Chinese public’s indifference to their country’s ceremonial transition of power is hardly surprising.
All critical decisions were taken well ahead of the Congress, behind closed doors, with very little input from outsiders.
This apparently seamless transition, however, is widely expected to usher in a complex and potentially difficult decade for China – and for the rest of the world.
China is at a turning point.
With more than 100 million people still below the official poverty line and per capita income currently just over $6,000 in nominal terms, robust economic growth must be maintained.
Outgoing President Hu Jintao indicated that China’s total GDP and per capita income should double by 2020, which will require 7.5% average annual growth.
Is this feasible?
Recent improvements in data for industrial production, fixed investment, and retail sales suggest that the Chinese economy, which had slowed in recent quarters, may already be on the mend.
But the authorities remain cautious, given that China’s economic outlook depends heavily on external conditions, which is the source of most current uncertainty.
However, as things stand, most independent economists expect 7-7.5% annual GDP in 2013-2017, while the International Monetary Fund forecasts a more optimistic 8.2-8.5% rate during this period.
As we heard repeatedly during the Congress, China’s leadership reckons that its biggest policy challenge in the coming years will be the shift from export-led growth to an economic model based more firmly on domestic consumption.
This has now become a matter of urgency, as the United States and Europe are unlikely to provide much support to Chinese exports.
Indeed, China is now expected to undershoot its 10% growth target for trade in 2012, even though exports to emerging-market economies were up by more than that in the first nine months of the year.
Income growth and a lower household savings rate are essential to the shift in China’s growth model, and each presupposes key reforms.
For example, improving the provision of health care, education, and care for the elderly, and bringing it into line with the needs and expectations of the emerging middle class should encourage more households to allocate a larger share of their income to consumption.
Likewise, increasing the interest rates paid on bank deposits would enable savings to decline without loss of income.
At the same time, as China proceeds along the path toward a market-based economy established more than 30 years ago by Deng Xiaoping, policymaking has become more complex.
The economy needs to be steered in the desired direction without triggering instability, making correct sequencing and coordination of policy measures essential.
As some Chinese colleagues told me, the success of reforms in the next decade will depend more than ever on good design.
In particular, the new leadership will have to attend to the linkages between the real economy and the expanding financial sector as it overhauls state-owned companies and liberalizes the banks.
From commodities to financial assets, price formation should become more market-based and transparent, while capital allocation should become more efficient and the scope for rent-seeking and corruption should be reduced.
Moreover, as the renminbi’s internationalization continues at a steady pace, domestic liberalization should occur in tandem with deeper global integration.
In the coming years, the key issue, reflected in Hu’s Congress-opening speech, will be the relationship between the state and the market.
But reforms will continue to be top-down and gradual, especially in the financial sector, where most efforts will be concentrated in the next decade.
Many Chinese seem to believe that market discipline will bring fair competition and contribute to closing the widening gap between rich and poor.
China’s income distribution has become highly skewed: at 0.438, the Gini coefficient, which measures income inequality, puts the country closer to the United States than to northern Europe’s egalitarian societies (with the exception of the United Kingdom).
And the unjust allocation of resources, which has enriched so many politically well-connected individuals and families, has become more difficult to bear.
A key question for the next decade, therefore, is whether the Chinese authorities’ growth targets will be enough to preserve social cohesion as further economic and political reforms are gradually implemented.
As the economic pie grows less rapidly, greater fairness will be crucial to social stability.
This much seems clear to the new leadership.
Whether they will be able to engineer the necessary institutional shifts remains to be seen.
The Limits to Panic
COPENHAGEN – We often hear how the world as we know it will end, usually through ecological collapse.
Indeed, more than 40 years after the Club of Rome released the mother of all apocalyptic forecasts, The Limits to Growth, its basic ideas are still with us.
But time has not been kind.
The Limits to Growth warned humanity in 1972 that devastating collapse was just around the corner.
But, while we have seen financial panics since then, there have been no real shortages or productive breakdowns.
Instead, the resources generated by human ingenuity remain far ahead of human consumption.
But the report’s fundamental legacy remains: we have inherited a tendency to obsess over misguided remedies for largely trivial problems, while often ignoring big problems and sensible remedies.
In the early 1970’s, the flush of technological optimism was over, the Vietnam War was a disaster, societies were in turmoil, and economies were stagnating.
Rachel Carson’s 1962 book Silent Spring had raised fears about pollution and launched the modern environmental movement;
Paul Ehrlich’s 1968 title The Population Bomb said it all.
The first Earth Day, in 1970, was deeply pessimistic.
The genius of The Limits to Growth was to fuse these worries with fears of running out of stuff.
We were doomed, because too many people would consume too much.
Even if our ingenuity bought us some time, we would end up killing the planet and ourselves with pollution.
The only hope was to stop economic growth itself, cut consumption, recycle, and force people to have fewer children, stabilizing society at a significantly poorer level.
That message still resonates today, though it was spectacularly wrong.
For example, the authors of The Limits to Growth predicted that before 2013, the world would have run out of aluminum, copper, gold, lead, mercury, molybdenum, natural gas, oil, silver, tin, tungsten, and zinc.
Instead, despite recent increases, commodity prices have generally fallen to about a third of their level 150 years ago.
Technological innovations have replaced mercury in batteries, dental fillings, and thermometers: mercury consumption is down 98% and, by 2000, the price was down 90%.
More broadly, since 1946, supplies of copper, aluminum, iron, and zinc have outstripped consumption, owing to the discovery of additional reserves and new technologies to extract them economically.
Similarly, oil and natural gas were to run out in 1990 and 1992, respectively; today, reserves of both are larger than they were in 1970, although we consume dramatically more.
Within the past six years, shale gas alone has doubled potential gas resources in the United States and halved the price.
As for economic collapse, the Intergovernmental Panel on Climate Change estimates that global GDP per capita will increase 14-fold over this century and 24-fold in the developing world.
The Limits of Growth got it so wrong because its authors overlooked the greatest resource of all: our own resourcefulness.
Population growth has been slowing since the late 1960’s.
Food supply has not collapsed (1.5 billion hectares of arable land are being used, but another 2.7 billion hectares are in reserve).
Malnourishment has dropped by more than half, from 35% of the world’s population to under 16%.
Nor are we choking on pollution.
Whereas the Club of Rome imagined an idyllic past with no particulate air pollution and happy farmers, and a future strangled by belching smokestacks, reality is entirely the reverse.
In 1900, when the global human population was 1.5 billion, almost three million people – roughly one in 500 – died each year from air pollution, mostly from wretched indoor air.
Today, the risk has receded to one death per 2,000 people.
While pollution still kills more people than malaria does, the mortality rate is falling, not rising.
Nonetheless, the mindset nurtured by The Limits to Growth continues to shape popular and elite thinking.
Consider recycling, which is often just a feel-good gesture with little environmental benefit and significant cost.
Paper, for example, typically comes from sustainable forests, not rainforests.
The processing and government subsidies associated with recycling yield lower-quality paper to save a resource that is not threatened.
Likewise, fears of over-population framed self-destructive policies, such as China’s one-child policy and forced sterilization in India.
And, while pesticides and other pollutants were seen to kill off perhaps half of humanity, well-regulated pesticides cause about 20 deaths each year in the US, whereas they have significant upsides in creating cheaper and more plentiful food.
Indeed, reliance solely on organic farming – a movement inspired by the pesticide fear – would cost more than $100 billion annually in the US.
At 16% lower efficiency, current output would require another 65 million acres of farmland – an area more than half the size of California.
Higher prices would reduce consumption of fruits and vegetables, causing myriad adverse health effects (including tens of thousands of additional cancer deaths per year).
Obsession with doom-and-gloom scenarios distracts us from the real global threats.
Poverty is one of the greatest killers of all, while easily curable diseases still claim 15 million lives every year – 25% of all deaths.
The solution is economic growth.
When lifted out of poverty, most people can afford to avoid infectious diseases.
China has pulled more than 680 million people out of poverty in the last three decades, leading a worldwide poverty decline of almost a billion people.
This has created massive improvements in health, longevity, and quality of life.
The four decades since The Limits of Growth have shown that we need more of it, not less.
An expansion of trade, with estimated benefits exceeding $100 trillion annually toward the end of the century, would do thousands of times more good than timid feel-good policies that result from fear-mongering.
But that requires abandoning an anti-growth mentality and using our enormous potential to create a brighter future.
Economic Growth’s Many Recipes
CAMBRIDGE, MA. &#45;&#45; Development “big think” has always been dominated by comprehensive visions about transforming poor societies.
From the so-called “Big Push” to “Balanced Growth,” from the “Washington Consensus” to “Second Generation Reforms,” the emphasis has been on wholesale change.
Today’s fashion in development is no different.
The prevailing obsession with the “governance” agenda entails a broad-based effort to remold institutions in developing societies as a prerequisite for economic growth.
The United Nations Millennium Project involves a large-scale, coordinated big push of investment in human capital, public infrastructure, and agricultural technologies.
But there have also been iconoclastic dissenters from such comprehensive approaches, among whom Albert Hirschman was without doubt the most distinguished.
Indeed, Hirschman’s seminal contributions have now been recognized by the United States Social Science Research Council, which this year established a prize in his honor.
Hirschman’s interests shifted away from economic development over the course of his illustrious career.
But when he was still involved in development debates, he would frequently remind his contemporaries that any country that had the capacity to undertake comprehensive programs would not be underdeveloped to begin with.
Indeed, he once chided John Kenneth Galbraith for enunciating a long list of prerequisites for foreign aid to be effective.
If developing countries could meet these conditions, he wrote, they would be in a position to send foreign aid to the United States!
Hirschman believed that the possibilities for economic development are not nearly as constrained as comprehensive theories would lead us to believe.
The imbalances specific to underdevelopment create opportunities that policymakers can seize on.
Instead of relying on fads emanating from abroad, we need to experiment and look for the unique solutions that will allow us to circumvent ingrained social structures that inhibit growth.
Hirschman’s central insights on development have held up extremely well.
The key lesson of the last half-century is that policymakers must be strategic, rather than comprehensive.
They have to do the best with what they have instead of wishing they could transform their society wholesale.
They need to identify priorities and opportunities, and work on them.
They must seek sequential, cumulative change rather than a single, all-inclusive breakthrough.
Successful countries do share some common features.
They all provide some degree of effective property rights protection and contract enforcement, maintain macroeconomic stability, seek to integrate into the world economy, and ensure an appropriate environment for productive diversification and innovation.
But how these ends are achieved differs.
For example, greater integration with world markets can be achieved via export subsidies (South Korea), export-processing zones (Malaysia), investment incentives for multinational enterprises (Singapore), special economic zones (China), regional free trade agreements (Mexico), or import liberalization (Chile).
The best-designed policies are always contingent on local conditions, making use of pre-existing advantages and seeking to overcome domestic constraints.
That is why successful reforms often do not travel well.
Reforms, after all, are not hothouse plants that can be transplanted at will in any soil.
Moreover, generating economic growth requires hitting the right targets, not doing everything at once.
What matters at any point in time is to alleviate a society’s immediate binding constraints – another reason why different policies are needed for different places.
China was constrained by poor supply incentives in agriculture in the late 1970’s.
Today’s Brazil is constrained by inadequate supply of credit. El Salvador is constrained by inadequate production incentives in tradable goods.
Zimbabwe is constrained by poor governance.
These problems all require different methods for unlocking growth.
What we need is selective, well-targeted reforms, not a laundry list.
Countries run into trouble when they do not use high-growth periods to strengthen their institutional underpinnings.
Two kinds of institutions in particular need shoring up: conflict management institutions to enhance economies’ resilience to external shocks, and institutions that promote productive diversification.
Growth collapsed in Africa in the late 1970’s because of the weakness of the former, and fizzled in Latin America after the first half of the 1990’s because of the weakness of the latter.
This line of thinking has vast implications for the design of appropriate global economic arrangements.
Hirschman would be aghast at the extent of intrusion into domestic policymaking that the World Trade Organization or the International Monetary Fund engage in nowadays.
As international bureaucracies with a penchant for “best practices” and common standards, these institutions are woefully unsuited to the task of seeking innovative, unique pathways suited to each country’s particular circumstances.
But Hirschman also would no doubt chide developing country governments for not living up to their responsibilities and for passing on the buck so freely to these external agencies.
For, ultimately, it is up to each country to say, “Thanks, but no, thanks; we’ll do it our way.”
Many economists were skeptical about Hirschman’s approach because they could not quite fit it into the economics they had been trained to practice.
But, over the years, economics has become richer, too.
Dynamic models have become much more common, an economics of the “second-best” has flourished, political economy has become mainstream, and behavioral economics has thrown the “rational actor” into doubt.
As a result, Hirschman looks less and less the maverick that he fancied himself to be.
Conventional wisdom may finally be catching up with him.
Half-a-Loaf Growth
MILAN – At a time of lackluster economic growth, countries around the world are attempting to devise and implement strategies to spur and sustain recovery.
The key word is strategy: to succeed, policymakers must ensure that measures to open the economy, boost public investment, enhance macroeconomic stability, and increase reliance on markets and incentives for resource allocation are implemented in reasonably complete packages.
Pursuing only some of these objectives produces distinctly inferior results.
China provides a telling example.
Before Deng Xiaoping launched the policy of “reform and opening up” in 1978, the country had relatively high levels of public-sector investment.
But the centrally planned economy lacked market incentives and was largely closed to the global economy’s major markets for goods, investment, and technology.
As a result, returns on public investment were modest, and China’s economic performance was mediocre.
China’s economic transformation began with the introduction in the 1980s of market incentives in the agricultural sector.
These reforms were followed by a gradual opening to the global economy, a process that accelerated in the early 1990s.
Economic growth surged ahead, and returns on public investment soared, reaching an annual growth rate above 9% of GDP, shortly after the reforms were implemented.
The key to a successful growth strategy is to ensure that policies reinforce and enhance one another.
For example, boosting returns on public investment – critical to any growth plan – demands complementary policies and conditions, in areas ranging from resource allocation to the institutional environment.
In terms of effectiveness, the policy package is more than the sum of its parts.
Of course, the specific portfolio of policies varies depending on the stage of a country’s development; early-stage growth dynamics are distinctly different from those in middle-income and advanced countries.
But the imperative is the same.
Just as a developing China achieved rapid growth only when a comprehensive policy package was implemented, the advanced countries struggling to restore sustainable growth patterns today have found that incomplete policy packages produce slow recoveries and below-potential growth and job creation.
Consider the post-crisis performance of the European Union and the United States.
Though both have had their share of problems, the US is performing somewhat better (though it still faces major challenges in generating middle-income employment).
The difference is not that the US launched a large fiscal stimulus focused on public-sector investment; no such stimulus was implemented, though many economists, including me, believe that it would have generated a faster recovery and stronger long-term growth.
Nor is the difference greater political effectiveness; few would say that the US government is functioning well nowadays, given rising partisanship and sharp disagreement about its proper role.
The US economy has benefited from two factors: its greater structural flexibility and dynamism relative to Europe, and the broader mandate of the US Federal Reserve, which has pursued a far more aggressive monetary policy than has the European Central Bank.
Though analysts differ on the relative importance of these two factors – and, indeed, it is difficult to weight them – it is safe to say that both played a role in facilitating the US recovery.
Europe is now placing a large bet on an increase in public-sector investment, using a combination of EU-level funding and national investment programs, perhaps augmented by a modification of the EU’s fiscal rules.
Given that public-sector underinvestment is a common cause of subpar growth, this is a step in the right direction.
But public investment is not enough.
Without complementary structural reforms that encourage private investment and innovation – and thus enable economies to adapt and compete in a global, technology-driven economy – a public-investment program will have a disappointingly weak impact on growth.
Instead, debt-financed public investment will produce a short-run stimulus, at the cost of longer-term fiscal stability.
The problem is that structural reforms are notoriously difficult to implement.
For starters, they face political resistance from short-run losers, including the companies and sectors that existing rigidities protect.
Moreover, in order to ensure that such reforms ultimately benefit everyone, there must be a strong culture of trust and a determination to prevent more flexible arrangements from leading to abuses.
Finally, structural reforms require time to take effect.
This is particularly true in the eurozone, whose members abandoned a crucial tool for accelerating the process – exchange-rate adjustments to account for different economies’ productivity levels – when they adopted the common currency.
ECB President Mario Draghi recently argued that, because individual EU countries’ growth-retarding policies have negative external effects, perhaps they should not have unimpeded control in certain policy areas.
Though member countries’ financial supervisory authority is already being limited through centralization of bank regulation and resolution mechanisms, Draghi’s suggestion is more far-reaching.
One wonders if Draghi’s proposal is politically feasible in the EU context.
Even if it were, would it be necessary?
All economies have sub-units across which economic productivity, growth, and dynamism vary considerably.
Indeed, differentials in the quality of governance and policies seem persistent, even in economies that perform pretty well overall.
Perhaps part of the answer is to prevent sub-units – in the EU’s case, member countries – from falling short on reforms.
But centralization carries its own costs.
Given the risk inherent in betting on policy convergence, labor mobility – which enables highly valuable human capital, especially well-educated young people, to leave lagging regions for those that offer more and better employment opportunities – could prove to be a critical tool for adjustment.
As it stands, labor mobility is imperfect in the EU.
But, with language training and the implementation of something like the Lisbon strategy for growth and jobs (which aimed to create an innovative “learning economy,” underpinned by inclusive social and environmental policies), mobility could be enhanced.
But more fluid labor mobility is no panacea.
As with every other element of a growth strategy, mutually reinforcing efforts are the only way to achieve success.
Half a loaf may be better than none, but half the ingredients do not translate into half of the hoped-for results.
A Year of Divergence
LAGUNA BEACH – In the coming year, “divergence” will be a major global economic theme, applying to economic trends, policies, and performance.
As the year progresses, these divergences will become increasingly difficult to reconcile, leaving policymakers with a choice: overcome the obstacles that have so far impeded effective action, or risk allowing their economies to be destabilized.
The multi-speed global economy will be dominated by four groups of countries. The first, led by the United States, will experience continued improvement in economic performance.
Their labor markets will become stronger, with job creation accompanied by wage recovery.
The benefits of economic growth will be less unequally distributed than in the past few years, though they will still accrue disproportionately to those who are already better off.
The second group, led by China, will stabilize at lower growth rates than recent historical averages, while continuing to mature structurally.
They will gradually reorient their growth models to make them more sustainable – an effort that occasional bouts of global financial-market instability will shake, but not derail.
And they will work to deepen their internal markets, improve regulatory frameworks, empower the private sector, and expand the scope of market-based economic management.
The third group, led by Europe, will struggle, as continued economic stagnation fuels social and political disenchantment in some countries and complicates regional policy decisions.
Anemic growth, deflationary forces, and pockets of excessive indebtedness will hamper investment, tilting the balance of risk to the downside.
In the most challenged economies, unemployment, particularly among young people, will remain alarmingly high and persistent.
The final group comprises the “wild card” countries, whose size and connectivity have important systemic implications.
The most notable example is Russia.
Faced with a deepening economic recession, a collapsing currency, capital flight, and shortages caused by contracting imports, President Vladimir Putin will need to decide whether to change his approach to Ukraine, re-engage with the West to allow for the lifting of sanctions, and build a more sustainable, diversified economy.
The alternative would be to attempt to divert popular discontent at home by expanding Russia’s intervention in Ukraine.
This approach would most likely result in a new round of sanctions and counter-sanctions, tipping Russia into an even deeper recession – and perhaps even triggering political instability or more foreign-policy risk-taking – while exacerbating Europe’s economic malaise.
Brazil is the other notable wild card.
President Dilma Rousseff, chastened by her near loss in the recent presidential election, has signaled a willingness to improve macroeconomic management, including by resisting a relapse into statism, the potential benefits of which now pale in comparison to its collateral damage and unintended consequences.
If she delivers, Brazil would join Mexico in anchoring a more stable Latin America in 2015, helping the region to overcome the disruptive effects of a Venezuelan economy roiled by lower oil prices.
This multi-speed economic performance will contribute to multi-track central banking, as pressure for divergent monetary policies intensifies, particularly in the systemically important advanced economies.
The US Federal Reserve, having already stopped its large-scale purchases of long-term assets, is likely to begin hiking interest rates in the third quarter of 2015.
By contrast, the European Central Bank will pursue its own version of quantitative easing, introducing in the first quarter of the year a set of new measures to expand its balance sheet.
The Bank of Japan will maintain its pedal-to-the-metal approach to monetary stimulus.
Of course, there is no theoretical limit on divergence.
The problem is that exchange-rate shifts now represent the only mechanism for reconciliation, and the divide between certain market valuations and their fundamentals has become so large that prices are vulnerable to bouts of volatility.
For the US, the combination of a stronger economy and less accommodative monetary policy will put additional upward pressure on the dollar’s exchange rate – which has already appreciated significantly – against both the euro and the yen.
With few other countries willing to allow their currencies to strengthen, the dollar’s tendency toward appreciation will remain strong and broad-based, potentially triggering domestic political opposition.
Moreover, as it becomes increasingly difficult for currency markets to perform the role of orderly reconcilers, friction may arise among countries.
This could disturb the unusual calm that lately has been comforting equity markets.
Fortunately, there are ways to ensure that 2015’s divergences do not lead to economic and financial disruptions.
Indeed, most governments – particularly in Europe, Japan, and the US – have the tools they need to defuse the rising tensions and, in the process, unleash their economies’ productive potential.
Avoiding the disruptive potential of divergence is not a question of policy design; there is already broad, albeit not universal, agreement among economists about the measures that are needed at the national, regional, and global levels.
Rather, it a question of implementation – and getting that right requires significant and sustained political will.
The pressure on policymakers to address the risks of divergence will increase next year.
The consequences of inaction will extend well beyond 2015.
Messed-Up Macro
ITHACA – Until a few years ago, economists of all persuasions confidently proclaimed that the Great Depression would never recur.
In a way, they were right.
After the financial crisis of 2008 erupted, we got the Great Recession instead.
Governments managed to limit the damage by pumping huge amounts of money into the global economy and slashing interest rates to near zero.
But, having cut off the downward slide of 2008-2009, they ran out of intellectual and political ammunition.
Economic advisers assured their bosses that recovery would be rapid.
And there was some revival; but then it stalled in 2010.
Meanwhile, governments were running large deficits – a legacy of the economic downturn – which renewed growth was supposed to shrink.
In the eurozone, countries like Greece faced sovereign-debt crises as bank bailouts turned private debt into public debt.
Attention switched to the problem of fiscal deficits and the relationship between deficits and economic growth.
Should governments deliberately expand their deficits to offset the fall in household and investment demand?
Or should they try to cut public spending in order to free up money for private spending?
Depending on which macroeconomic theory one held, both could be presented as pro-growth policies.
The first might cause the economy to expand, because the government was increasing public spending; the second, because they were cutting it.
Keynesian theory suggests the first; governments unanimously put their faith in the second.
The consequences of this choice are clear.
It is now pretty much agreed that fiscal tightening has cost developed economies 5-10 percentage points of GDP growth since 2010.
All of that output and income has been permanently lost.
Moreover, because fiscal austerity stifled economic growth, it made the task of reducing budget deficits and national debt as a share of GDP much more difficult.
Cutting public spending, it turned out, was not the same as cutting the deficit, because it cut the economy at the same time.
That should have ended the argument.
But it did not.
Some economists claim that governments faced a balance of risk in 2010: Cutting the deficit might have slowed growth; but not committing to cut it might have made things even worse.
The Keynesian remedy, the argument went, ignored the effect of fiscal policy on expectations.
If public opinion believed that cutting the deficit was the right thing to do, then allowing the deficit to grow would annul any of its hoped-for stimulatory effect.
Expecting that taxes would have to rise to “pay for” the extra spending, households and companies would increase their saving.
Fearing sovereign defaults, bond markets would charge governments punitive interest rates on their borrowing.
And here was the clincher: By committing themselves to fiscal tightening, finance ministers gave themselves scope for some fiscal loosening.
Proclaiming fiscal virtue enabled them to practice fiscal vice.
They could create a fiscal illusion by cutting less than they promised.
Most finance ministers did exactly that.
This is part of the mess into which macroeconomics has gotten itself.
Once beliefs and expectations are introduced into economics, as is surely reasonable, the results of fiscal policy become indeterminate.
Too much depends on what people think the results of the policy will be.
In the economists’ lingo, policy results are “model-dependent.”
The Nobel laureate economist Paul Krugman has poured scorn on what he calls the “confidence fairy,” the claim that fiscal policy must command the support of the bond markets.
But to show that actual policy made things worse does not mean that a better policy was actually available.
The right policy’s success may depend on the public’s expectations of its effects.
The unanswered question is why the public should have the wrong expectations.
If fiscal policy is in a muddle, so is monetary policy.
Central banks have tried to avoid the confidence fairy by printing money – technically, by buying government bonds on the secondary market.
The extra money is expected to percolate through the economy, quickening activity.
The European Central Bank has just started a €1.1 trillion ($1.17 trillion) bond-purchase program to bypass the German veto on fiscal expansion.
But the effects of so-called quantitative easing also depend on expectations.
If giving businesses extra cash makes them more confident, they will spend more.
If they mistrust the policy, they will hoard the cash.
The results of quantitative easing in the United States and the United Kingdom have been equivocal.
Governments, it is true, could get their money cheaper as yields fell.
But banks were not lending the money made available to them, partly because they used it to pay down their own debts, and partly because of low demand for loans.
The main positive effect of quantitative easing was on asset prices – chiefly financial assets.
But greater wealth for the rich does not necessarily produce much extra spending.
It does increase inequality and threaten asset bubbles, which could lead to a new financial crash.
So we enter the post-crisis era without any settled view on the right macro policy for either recovery or prevention of future meltdowns.
Great hopes are pinned on better financial regulation to stop excessive credit creation.
But what is “excessive”?
Will central banks continue to target 2% inflation?
Or should they rely on a “nominal income” target?
What should the new fiscal rules be, and how – in the eurozone – should they be enforced?
Economists debate whether market economies are naturally stable.
As a Keynesian, I firmly believe that market economies need to be stabilized by policy.
But Keynesians have to face the uncomfortable truth that the success of stabilization policies may depend on the business community having Keynesian expectations.
Economic Reality Fights Back
Almost every day, we learn of yet another greedy US corporate chief executive who conspired with accountants, lawyers, and investment bankers to defraud the investing public.
But beyond the scandals, the public should be more aware of the erratic nature of today's financial markets.
Exchange rates and stock market prices deviate enormously from long-run fundamental values, which can cause major dislocations in the real economy of jobs, production, and investment.
And yet the financial analysts that discuss these trends in the media have failed to assess them realistically.
Take the case of the US dollar, whose value against the Euro is now plummeting.
From the mid-1990s until very recently, the dollar strengthened sharply against European currencies.
When the Euro was introduced in January 1999, it traded at $1.17.
It then steadily lost value, bottoming out at around $0.83, before climbing back in recent days to near-parity with the dollar.
For academic economists, the Euro's recent rise is no surprise.
Currency exchange rates have a tendency to return to long-run average values following large deviations.
Thus, the enormous strength of the dollar in recent years implied an eventual reversal.
That reversal is now underway.
Of course, if two economies have persistently different rates of inflation, then the exchange rate between their currencies will not tend to return to its historic level.
But US and European inflation rates have been roughly the same.
It is also possible that the exchange rate will not return to the long-run average if one economy is hit by a huge structural change.
But such changes occur less frequently than is often supposed or alleged.
The past, if interpreted with care, therefore remains a good guide to the future.
Listening to the financial pundits, however, it often seems that history no longer matters.
When the dollar strengthened against the Euro after 1999, the investment analysts came up with one explanation after another for why the trend would continue.
They hailed the strength of the US economy, bemoaned the alleged weaknesses of the European economy, and claimed that the Euro was mismanaged.
In short, they over-interpreted short-term market movements, simplistically portraying them as long-term trends.
Unfortunately, financial analysts are usually poorly trained in economics.
Their job is to say something clever for the television cameras.
They do not trade on fundamental information, but on the latest gossip and fads.
Of course, if such fads are common, and if they do not last forever, a smart investor can profit handsomely from them, say, by selling the dollar short in recent months.
Some investors do succeed at this, but it is tougher than it sounds.
As the great British economist John Maynard Keynes warned seventy-five years ago, "markets can remain irrational longer than you can remain solvent."
In other words, even if you know that the dollar will eventually fall, you could go bankrupt before you can prove your case if everyone else continues betting that it will rise.
So it is often safer to run with the crowd, even if you think the crowd is running in the wrong direction.
For the same reason, Keynes famously described the stock market as a beauty contest in which each judge chooses not the most beautiful contestant according to his own views, but rather the contestant that he believes will be chosen by the other judges!
Indeed, when US equity prices reached astronomical levels in the late 1990s, the pundits and investment bankers trotted out their silly explanations and theories.
We now know that some of those explanations were deliberately fraudulent.
Many brokerages sought to boost investment banking fees from companies whose shares they pushed on an unwitting public.
But more generally, the pundits simply ran with the crowd.
As equity prices soared, they invented theories to justify the rise.
Deeper analysis would have told them instead that the rise would be short-lived.
A few analysts got it right.
Economist Robert Schiller of Yale explained very clearly and at book length why US equity prices would fall.
Leading economic columnist Martin Wolf of the Financial Times distinguished himself again by warning, stubbornly and correctly, that the US stock market would eventually reverse to more normal historical levels.
But the real economic costs imposed by the crowd mentality have been high.
The excessive boom of the US stock market led to over-investment in the United States and a subsequent US recession when the bubble finally burst.
The strength of the dollar has similarly distorted investment decisions, and the same kinds of exaggerated swings in exchange rates in emerging markets have contributed to the boom-bust cycles in Asia and Latin America in the past five years.
So what should be done?
Clearly, the leading investment banks should become much more serious about training and licensing their analysts to provide knowledge rather than nonsense in their public pronouncements.
The responsible media should scrutinize economic trends critically, rather than pandering to mass opinion.
And academic economists should be more steadfast in explaining how financial market prices reflect fundamental economic values, even if this is not necessarily true in the short term.
Finally, tightened financial market regulation could perhaps slow some of the hot-money flows that exaggerate the booms and busts.
Alas, Keynes stressed these same deficiencies long ago, so we should not expect any miraculous changes in behavior now.
Investor, beware!
A World of Underinvestment
MILAN – When World War II ended 70 years ago, much of the world – including industrialized Europe, Japan, and other countries that had been occupied – was left geopolitically riven and burdened by heavy sovereign debt, with many major economies in ruins.
One might have expected a long period of limited international cooperation, slow growth, high unemployment, and extreme privation, owing to countries’ limited capacity to finance their huge investment needs.
But that is not what happened.
Instead, world leaders adopted a long-term perspective.
They recognized that their countries’ debt-reduction prospects depended on nominal economic growth, and that their economic-growth prospects – not to mention continued peace – depended on a worldwide recovery.
So they used – and even stretched – their balance sheets for investment, while opening themselves up to international trade, thereby helping to restore demand.
The United States – which faced considerable public debt, but had lost little in the way of physical assets – naturally assumed a leadership role in this process.
Two features of the post-war economic recovery are striking.
First, countries did not view their sovereign debt as a binding constraint, and instead pursued investment and potential growth.
Second, they cooperated with one another on multiple fronts, and the countries with the strongest balance sheets bolstered investment elsewhere, crowding in private investment.
The onset of the Cold War may have encouraged this approach.
In any case, it was not every country for itself.
Today’s global economy bears striking similarities to the immediate post-war period: high unemployment, high and rising debt levels, and a global shortage of aggregate demand are constraining growth and generating deflationary pressures.
And now, as then, the level and quality of investment have been consistently inadequate, with public spending on tangible and intangible capital – a critical factor in long-term growth – well below optimal levels for some time.
Of course, there are also new challenges.
The dynamics of income distribution have shifted adversely in recent decades, impeding consensus on economic policy.
And aging populations – a result of rising longevity and declining fertility – are putting pressure on public finances.
Nonetheless, the ingredients of an effective strategy to spur economic growth and employment are similar: available balance sheets (sovereign and private) should be used to generate additional demand and boost public investment, even if it results in greater leverage.
Recent IMF research suggests that, given excess capacity, governments would probably benefit from substantial short-run multipliers.
More important, the focus on investment would improve prospects for long-term sustainable growth, which would enable governments and households to pursue responsible deleveraging.
Likewise, international cooperation is just as critical to success today as it was 70 years ago.
Because the balance sheets (public, quasi-public, and private) with the capacity to invest are not uniformly distributed around the world, a determined global effort – which includes an important role for multilateral financial institutions – is needed to clear clogged intermediation channels.
There is plenty of incentive for countries to collaborate, rather than using trade, finance, monetary policy, public-sector purchasing, tax policy, or other levers to undermine one another.
After all, given the connectedness that characterizes today’s globalized financial and economic systems, a full recovery anywhere is virtually impossible without a broad-based recovery nearly everywhere.
Yet, for the most part, limited cooperation has been the world’s chosen course in recent years, with countries believing not only that they must fend for themselves, but also that their debt levels impose a hard constraint on growth-generating investment.
The resulting underinvestment and depreciation of the global economy’s asset base are suppressing productivity growth and thus undermining sustainable recoveries.
In the absence of a vigorous international re-investment program, monetary policy is being used to prop up growth.
But monetary policy typically focuses on domestic recovery.
And, though unconventional measures have reduced financial instability, their effectiveness in countering widespread deflationary pressures or restoring growth remains dubious.
Meanwhile, savers are being repressed, asset prices distorted, and incentives to maintain or even increase leverage enhanced.
Competitive devaluations, even if they are not policymakers’ stated objectives, are becoming increasingly tempting – though they will not solve the aggregate-demand problem.
This is not to say that sudden “normalization” of monetary policy is a good idea.
But, if large-scale investment and reform programs were initiated as complements to unconventional monetary-policy measures, the economy could move onto a more resilient growth path.
Despite its obvious benefits, such a coordinated international approach remains elusive.
Though trade and investment agreements are being negotiated, they are increasingly regional in scope.
Meanwhile, the multilateral trade system is fragmenting, along with the consensus that created it.
Given the level of interconnectedness and interdependence that characterizes today’s global economy, the reluctance to cooperate is difficult to comprehend.
One problem seems to be conditionality, with countries unwilling to commit to complementary fiscal and structural reforms.
This is especially evident in Europe, where it is argued, with some justification, that, without such reforms, growth will remain anemic, sustaining or even exacerbating fiscal constraints.
But if conditionality is so important, why didn’t it prevent cooperation 70 years ago?
Perhaps the idea that severely damaged economies, with limited prospects for independent recoveries, would pass up the opportunity that international cooperation presented was implausible.
Maybe it still is.
If so, creating a similar opportunity today could change the incentives, trigger the required complementary reforms, and put the global economy on course to a stronger long-term recovery.
A Growth Pact for America
NEW YORK – America, once again, will have a divided government, with the Democrats holding the White House, and the Republicans controlling both houses of Congress.
But that does not necessarily mean that the final two years of Barack Obama’s presidency need to be defined by stalemate and mutual recrimination.
The electorate’s desire for change and fear of continuing slow growth, which pushed the Republicans to their victory in this week’s mid-term congressional election, will invariably prompt discussion about new policy options designed to raise growth, employment, and incomes.
Of course, America’s experience with divided government can leave one pessimistic about the two parties’ ability to compromise; but, as Mexico recently demonstrated when its three big parties agreed on a market-oriented “Pact for Mexico,” even bitterly opposed political parties can overcome their suspicions to embrace needed reforms.
The list of potential policy actions that could benefit the United States – trade liberalization, comprehensive regulatory reform, and immigration and education reform, among others – is long.
But only two policies are particularly promising for such a “Pact for America”: federal infrastructure spending and corporate-tax reform.
Enactment of these reforms would generate a win for each side – and for both.
But such a bipartisan consensus requires removing both the left and the right’s ideological blinders, at least temporarily.
On the left, a preoccupation with Keynesian stimulus reflects a misunderstanding of both the availability of measures (shovel-ready projects) and their desirability (whether they will meaningfully change the expectations of households and businesses).
Indeed, to counteract the mindset forged in the recent financial crisis, spending measures will need to be longer-lasting if they are to raise expectations of future growth and thus stimulate current investment and hiring.
The right, for its part, must rethink its obsession with temporary tax cuts for households or businesses.
The impact of such cuts on aggregate demand is almost always modest, and they are poorly suited for shifting expectations for recovery and growth in the post-financial-crisis downturn.
Politics complicates matters further, because the exclusively short-term focus on the fiscal impact of spending and revenues clashes with policies whose benefits accumulate over time.
While such benefits may not appear to be “stimulus,” their mounting effect better serves the objective of raising expectations of future demand and growth.
But the concerns of serious people, whether on the left or the right, are not so different.
Will economic growth accelerate sufficiently to boost job and income growth?
Can the barriers that exclude many Americans from recovery and future prosperity be removed?
Federal infrastructure spending and corporate-tax reform should top the list of policies capable of attracting bipartisan agreement, because they promise significant long-term productivity, income, and employment gains, while also supporting short-term growth.
A commitment to a multi-year federal infrastructure-spending program, for example, could increase demand, private investment, and employment, even though projects may not be immediately available.
And such a program, normally proposed by Democrats, can and should be crafted to secure Republican support as well.
To that end, an infrastructure program should give states and localities a key role in selecting the projects to be funded, and these governmental units should have “skin in the game” by funding part of the costs.
Policymakers should also give serious consideration to regulatory reforms that would reduce the expense of new projects and assure their timely completion.
An infrastructure program oriented in this way – as opposed to a grab bag of politically expedient shovel-ready projects – should be able to muster conservative support.
And, done properly, federally funded infrastructure projects should provide substantial benefits to lower-income Americans.
Better transport infrastructure, for example, would not only create jobs, but would also reduce the costs of commuting to work.
Corporate-tax reform also offers a good opportunity for bipartisan agreement, especially given that Obama and congressional leaders of both parties have expressed interest.
While gains from fundamental tax reform – say, replacing the current tax system with a broad-based consumption tax – are large, on the order of 0.5-1 percentage point per year of economic growth for a decade, corporate-tax reform would also boost growth.
Reducing the tax rate for companies substantially, while eliminating targeted business-tax preferences and broadening the corporate-tax base, would increase both investment and workers’ wages.
Allowing multinational companies to repatriate overseas profits without paying additional US tax would also bolster investment and job creation at home.
Given that recent research shows that much of the burden of corporate taxation is borne by workers in the form of lower wages, Democrats should embrace tax reform as a way to support income growth.
One could add to such a reform further support for low-income Americans by increasing the Earned Income Tax Credit for single workers.
Given their policy objectives, conservatives should support a well-crafted federal infrastructure program, and liberals should support corporate-tax reform.
But changes in the political process would help move matters ahead.
Because the payoffs from infrastructure spending and tax reform do not fit neatly within the five-year or ten-year budget window used by America’s fiscal scorekeepers, measuring more completely the benefits from such policies is vital to attracting political support.
Moreover, any increase in spending on infrastructure or any revenue loss from tax reform should be offset elsewhere.
For example, future growth in Social Security benefits or the home-mortgage-interest tax deduction could be scaled back for more affluent individuals, as progressive indexation, proposed by conservatives in the US, and the adjustment of mortgage-interest tax deductions in the United Kingdom, started during the Thatcher administration, attest.
Clearly, the economy is Americans’ top concern.
Its leaders must respond with a policy agenda focused on reviving growth now and sustaining it in the future.
But that can happen only if enough legislators in both parties, and the president, remove their intellectual and political blinders and reach the long-term compromises needed to create jobs and increase incomes.
Economics for Parrots
BERKELEY – It is said that the early nineteenth-century British economist J.R. McCulloch originated the old joke that the only training a parrot needs to be a passable political economist is one phrase: “supply and demand, supply and demand.”
Last week, US Federal Reserve Chairman Ben Bernanke said that McCulloch’s economics – the economics of supply and demand – was in no way discredited by the financial crisis, and was still extraordinarily useful.
It’s hard to disagree with Bernanke’s sentiment: economics would be useful if economists were, indeed, likeMcCulloch’s parrots – i.e., if they actually looked at supply and demand.
But I think that much of economics has been discredited by the manifest failure of many economists to be as smart as McCulloch’s parrots were.
Consider the claims – rampant nowadays in the US – that further government attempts to alleviate unemployment will fail, because America’s current high unemployment is “structural”: a failure of economic calculation has left the country with the wrong productive resources to satisfy household and business demand.
The problem, advocates of this view claim, is a shortage of productive supply rather than a shortage of aggregate demand.
But it should be easy – at least for an average parrot – to tell whether a fall in sales is due to a shortage of supply or a shortage of demand.
If a fall in sales is due to a shortage of demand while there is ample supply, then, as quantities fall relative to trend, prices will fall as well.
If, on the other hand, the fall in sales is due to a shortage of supply while there is ample demand, then prices will rise as quantities fall.
Which do we see now?
There are no places in the US economy where wages or product prices are rising more rapidly than expected.
There are no places where a shortage of qualified labor or of available capacity is sufficiently great to induce managers to pay more than they have been used to paying for good hands or useful machines.
McCulloch’s parrot would call this conclusive.
The coexistence of high unemployment with falling inflation and no bottleneck-driven price or wage spikes tells us that “structural” supply-side explanations of America’s current high unemployment are vastly overblown.
Or consider the claims – also rampant these days – that further government attempts to increase demand, whether through monetary policy to alleviate a liquidity squeeze, banking policy to increase risk tolerance, or fiscal policy to provide a much-needed savings vehicle, will similarly fail.
These measures, too, are supposedly doomed because they all involve increasing governments’ liabilities, and financial markets are at a tipping point with respect to sovereign debt.
If governments that have already tapped-out their debt-bearing capacity now issued more debt or money or guarantees, they would deal a mortal blow to confidence.
Once again, an adequately trained parrot, unlike many economists nowadays, would ask whether the economic problems that current levels of government debt are causing reflect too much public debt supplied by governments or too much public debt demanded by the private sector.
If the problem were that supply is too great, then new emissions of government debt would be accompanied by low prices – that is, by high interest rates.
If the problem were that demand is too great, then new emissions of government debt would be accompanied by high prices – that is, by low interest rates.
Guess which one the US and many other countries have?
For a parrot, that’s a no-brainer: the public-debt problem is not that governments have issued so much debt that investors have lost confidence, but that governments have issued too little debt given the enormous private-sector demand for safe places to park wealth.
The problem, the parrot would say, is that households and businesses are still trying to build up their stocks of safe, high-quality assets, and are switching expenditures from buying currently-produced goods and services to increasing their shares of an inadequate supply of government liabilities.
When economic historians examine the Great Recession, their overwhelming consensus is likely to be that its depth and duration reflected governments’ refusal to try to do more, not that they tried to do too much.
They will agree with the parrots that falling inflation showed that the macroeconomic problem was insufficient demand for currently produced goods and services, and that the low level of interest rates on safe, high-quality government liabilities showed that the supply of safe assets – whether money provided by the central bank, guarantees provided by banking policy, or government debt provided through deficit spending – was too low.
The question that will be a mystery to them is why so many economists of our day did not know how to say: “supply and demand, supply and demand.”
Economics in Crisis
BERKELEY – The most interesting moment at a recent conference held in Bretton Woods, New Hampshire – site of the 1945 conference that created today’s global economic architecture – came when Financial Times columnist Martin Wolf quizzed former United States Treasury Secretary Larry Summers, President Barack Obama’s ex-assistant for economic policy.
"[Doesn’t] what has happened in the past few years,” Wolf asked, “simply suggest that [academic] economists did not understand what was going on?”
Here is the most interesting part of Summers’ long answer: “There is a lot in [Walter] Bagehot that is about the crisis we just went through.
There is more in [Hyman] Minsky, and perhaps more still in [Charles] Kindleberger.”
That may sound obscure to a non-economist, but it was a devastating indictment.
Bagehot (1826-1877) was a mid-nineteenth-century editor of The Economist who published a book about financial markets, Lombard Street, in 1873.
Summers is certainly right: there is an awful lot in Lombard Street that is about the crisis from which we are now recovering.
Minsky (1919-1996) is best approached not through his collected essays, entitled Can “It” Happen Again?, but rather through the use Kindleberger (1910-2003) made of his work in his 1978 book Manias, Panics, and Crashes: A History of Financial Crises.
Asked to name where to turn to understand what was going on in 2008, Summers cited three dead men, a book written 33 years ago, and another written the century before last.
He talked about “the revolution in finance as it was realized that asset prices show large volatility that does not reflect anything about fundamentals,” but added that “macroeconomics [did not] keep up with [this] revolution.” As a result, “to the great detriment of contemporary macroeconomics,” his fellow economists did not understand asset prices, manias, panics, and liquidity.
For Summers, the problem is that there is so much that is “distracting, confusing, and problem-denying in…the first year course in most PhD programs.”
As a result, even though “economics knows a fair amount,” it “has forgotten a fair amount that is relevant, and it has been distracted by an enormous amount.”
I think that Summers’ judgments are fair and correct.
And I count myself among those who had forgotten and been distracted, even though I have always assigned Lombard Street to my economic history courses and Manias, Panics, and Crashes to my macroeconomics classes, and have always paid close and respectful attention to Eichengreen, Akerlof, and Shiller.
But I was shocked by how large a panic was produced by what seemed to me – and still does – relatively small losses (in terms of the size of the global economy) in subprime mortgages; by the weakness of risk controls at the major highly-leveraged banks; by how deep the decline in demand was; by how ineffective the market’s equilibrium-restoring forces have been at rebalancing labor-market supply and demand; and by how much core-country governments have been able to borrow to support demand without triggering any run-up in interest rates.
It is the scale of the catastrophe that astonishes me.
But what astonishes me even more is the apparent failure of academic economics to take steps to prepare itself for the future.
“We need to change our hiring patterns,” I expected to hear economics departments around the world say in the wake of the crisis.
The fact is that we need fewer efficient-markets theorists and more people who work on microstructure, limits to arbitrage, and cognitive biases.
We need fewer equilibrium business-cycle theorists and more old-fashioned Keynesians and monetarists.
We need more monetary historians and historians of economic thought and fewer model-builders.
We need more Eichengreens, Shillers, Akerlofs, Reinharts, and Rogoffs –&#160;not to mention a Kindleberger, Minsky, or Bagehot.
Yet that is not what economics departments are saying nowadays.
Perhaps I am missing what is really going on.
Perhaps economics departments are reorienting themselves after the Great Recession in a way similar to how they reoriented themselves in a monetarist direction after the inflation of the 1970’s.
But if I am missing some big change that is taking place, I would like somebody to show it to me.
Perhaps academic economics departments will lose mindshare and influence to others – from business schools and public-policy programs to political science, psychology, and sociology departments.
As university chancellors and students demand relevance and utility, perhaps these colleagues will take over teaching how the economy works and leave academic economists in a rump discipline that merely teaches the theory of logical choice.
Or perhaps economics will remain a discipline that forgets most of what it once knew and allows itself to be continually distracted, confused, and in denial.
If that were that to happen, we would all be worse off.
Economics in Denial
PARIS – In an exasperated outburst, just before he left the presidency of the European Central Bank, Jean-Claude Trichet complained that, “as a policymaker during the crisis, I found the available [economic and financial] models of limited help.
In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools.”
Trichet went on to appeal for inspiration from other disciplines – physics, engineering, psychology, and biology – to help explain the phenomena he had experienced.
It was a remarkable cry for help, and a serious indictment of the economics profession, not to mention all those extravagantly rewarded finance professors in business schools from Harvard to Hyderabad.
So far, relatively little help has been forthcoming from the engineers and physicists in whom Trichet placed his faith, though there has been some response.
Robert May, an eminent climate change expert, has argued that techniques from his discipline may help explain financial-market developments.
Epidemiologists have suggested that the study of how infectious diseases are propagated may illuminate the unusual patterns of financial contagion that we have seen in the last five years.
These are fertile fields for future study, but what of the core disciplines of economics and finance themselves?
Can nothing be done to make them more useful in explaining the world as it is, rather than as it is assumed to be in their stylized models?
George Soros has put generous funding behind the Institute for New Economic Thinking (INET). The Bank of England has also tried to stimulate fresh ideas.
The proceedings of a conference that it organized earlier this year have now been edited under the provocative title What’s the Use of Economics?
Some of the recommendations that emerged from that conference are straightforward and concrete.
For example, there should be more teaching of economic history.
We all have good reason to be grateful that US Federal Reserve Chairman Ben Bernanke is an expert on the Great Depression and the authorities’ flawed policy responses then, rather than in the finer points of dynamic stochastic general equilibrium theory. As a result, he was ready to adopt unconventional measures when the crisis erupted, and was persuasive in influencing his colleagues.
Many conference participants agreed that the study of economics should be set in a broader political context, with greater emphasis on the role of institutions.
Students should also be taught some humility.
The models to which they are still exposed have some explanatory value, but within constrained parameters.
And painful experience tells us that economic agents may not behave as the models suppose they will.
But it is not clear that a majority of the profession yet accepts even these modest proposals.
The so-called “Chicago School” has mounted a robust defense of its rational expectations-based approach, rejecting the notion that a rethink is required.
The Nobel laureate economist Robert Lucas has argued that the crisis was not predicted because economic theory predicts that such events cannot be predicted.
So all is well.
And there is disturbing evidence that news of the crisis has not yet reached some economics departments.
Stephen King, Group Chief Economist of HSBC, notes that when he asks recent university graduates (and HSBC recruits a large number of them) how much time they spent in lectures and seminars on the financial crisis, “most admitted that the subject had not even been raised.”
Indeed, according to King, “Young economists arrive in the financial world with little or no knowledge of how the financial system operates.”
I am sure they learn fast at HSBC.
(In the future, one assumes, they will learn quickly about money laundering regulations as well.)
But it is depressing to hear that many university departments are still in denial.
That is not because students lack interest: I teach a course at Sciences Po in Paris on the consequences of the crisis for financial markets, and the demand is overwhelming.
We should not focus attention exclusively on economists, however.
Arguably the elements of the conventional intellectual toolkit found most wanting are the capital asset pricing model and its close cousin, the efficient-market hypothesis.
Yet their protagonists see no problems to address.
On the contrary, the University of Chicago’s Eugene Fama has described the notion that finance theory was at fault as “a fantasy,” and argues that “financial markets and financial institutions were casualties rather than causes of the recession.”
And the efficient-market hypothesis that he championed cannot be blamed, because “most investing is done by active managers who don’t believe that markets are efficient.”
This amounts to what we might call an “irrelevance” defense: Finance theorists cannot be held responsible, since no one in the real world pays attention to them!
Fortunately, others in the profession do aspire to relevance, and they have been chastened by the events of the last five years, when price movements that the models predicted should occur once in a million years were observed several times a week. They are working hard to understand why, and to develop new approaches to measuring and monitoring risk, which is the main current concern of many banks.
These efforts are arguably as important as the specific and detailed regulatory changes about which we hear much more.
Our approach to regulation in the past was based on the assumption that financial markets could to a large extent be left to themselves, and that financial institutions and their boards were best placed to control risk and defend their firms.
These assumptions took a hard hit in the crisis, causing an abrupt shift to far more intrusive regulation.
Finding a new and stable relationship between the financial authorities and private firms will depend crucially on a reworking of our intellectual models.
So the Bank of England is right to issue a call to arms.
Economics and Its Critics
MUNICH – There is much to criticize in economics nowadays.
For example, the profession focuses far too little on political issues and far too much on beating students to death with mathematics.
But much current criticism of the profession is based on misunderstanding and ignorance.
Consider Adam Smith’s concept of the “invisible hand,” which implies that a market equilibrium is efficient if perfect competition prevails and well-defined property rights exist.
Contrary to what many critics suppose, mainstream economists do not assume that these ideal conditions are always present.
On the contrary, economists tend to use these conditions as a benchmark for analyzing market failures.
Like sniffer dogs, they search the economy for such defects and ponder how they can be corrected through intelligent state intervention.
In this respect, economists are like doctors, who have to know what a healthy body looks like before they can diagnose disease and prescribe treatment.
A good doctor does not intervene arbitrarily in the body’s processes, but only in cases where there is objective proof of a disease and an effective treatment can be prescribed.
Environmental regulation addresses a particularly striking example of market failure.
Markets are generally efficient if companies’ revenues correctly reflect all the benefits that their output bestows on third parties, while their costs reflect all the harms.
In this case, maximizing profit leads to maximizing social welfare.
But if production entails environmental damage for which companies do not pay, incentives are distorted; companies may turn a profit, but they function inefficiently in economic terms.
So the state “corrects” firms’ incentives by levying fines or issuing bans.
Another malady that economists sometimes diagnose might be called “Keynes disease.”
If demand is too weak, it can lead to a sharp drop in employment (because wages and prices are rigid in the short term).
The disease can be cured with injections of public, debt-financed stimulus – like giving a cardiac patient doses of nitroglycerine to keep his heart going.
Contrary to what many think, there is no fundamental bias against this medicine in mainstream economics today.
But stimulus cannot be seen as a universal remedy.
Many ailments that may afflict an economy are chronic, not acute, and thus call for other types of treatment.
Trying Keynesian therapy to resolve, say, the structural problems currently affecting the countries of southern Europe would be like trying to cure a broken leg with heart medicine.
Nitroglycerine addresses the risk of circulatory collapse.
In economic terms, that is what was needed following the 2008 global financial crisis.
But long-term use of such medication can be fatal.
Here and elsewhere, ideology causes conceptual confusion.
For example, Smith viewed competition as a basic condition of the invisible hand’s operation, because monopolies and oligopolies exploit consumers and restrict production.
But only competition among providers of similar products is beneficial.
Competition among providers of complementary goods or services is harmful, and can be even worse than a monopoly.
(That is why train drivers and pilots, for example, should be forced into monopoly unions that represent all of the other employees of their respective companies.)
The market failures that initially give rise to public-sector intervention tend to recur internationally, which means that competition between states is usually not efficient, either.
Examples include competition between welfare states to deter economic migrants, the race to the bottom in taxation, and regulatory rivalry in the banking and insurance sectors.
Competition, contrary to what many on the right believe, is not always good.
Of course, ideology often overwhelms terminology on the left as well.
Consider “neoliberalism,” a term of derision for many because it has come to be viewed as a doctrine of deregulation and pure laissez-faire.
But in Europe, at least, neoliberalism has a very different meaning.
It was coined by Alexander Rüstow, who in 1932 proclaimed the end of old liberalism and called for a new liberalism featuring a strong state that lays down a solid legal framework within which firms operate.
Homo economicus, the rationally acting egoist who populates economists’ models, has recently attracted criticism as well, because all too often he does not represent the real behavior of individuals.
Behavioral experiments have shown conclusively the limited predictive value of this artificial construct.
But homo economicus was never intended to be used for forecasting; its real purpose is to make it easier to distinguish between market failures and mental failures.
Economists seek to detect collective irrationality, and economic models that assume individual rationality facilitate that.
By ensuring that policies respond to flaws in the rules of the game, not to individuals’ fallibility or irrationality, this “methodological individualism” saves us from dictatorial paternalism.
Banks that grant risky loans on too little equity illustrate the analytical value of homo economicus particularly clearly.
Their profits are privatized, but any losses exceeding their equity are dumped on their creditors, or, even better for them, on the taxpayers.
This asymmetry turns banking into a casino: The house always wins.
Banks choose particularly risky investment projects, which may be profitable but are economically damaging.
The problem is not caused by human irrationality; on the contrary, it arises precisely because bankers are acting rationally.
As we know from environmental regulation, preaching common sense or ethics to bankers will not help; but changing bankers’ incentives – by, say, requiring higher equity-asset ratios – would work wonders.
Economists and Democracy
CAMBRIDGE – I have been presenting my new book The Globalization Paradox to different groups of late. By now I am used to all types of comments from the audience.
But at a recent book-launch event, the economist assigned to discuss the book surprised me with an unexpected criticism. “Rodrik wants to make the world safe for politicians,” he huffed.
Lest the message be lost, he then illustrated his point by reminding the audience of “the former Japanese minister of agriculture who argued that Japan could not import beef because human intestines are longer in Japan than in other countries.”
The comment drew a few chuckles.
Who doesn’t enjoy a joke at the expense of politicians?
But the remark had a more serious purpose and was evidently intended to expose a fundamental flaw in my argument.
My discussant found it self-evident that allowing politicians greater room for maneuver was a cockamamie idea – and he assumed that the audience would concur.
Remove constraints on what politicians can do, he implied, and all you will get are silly interventions that throttle markets and stall the engine of economic growth.
This criticism reflects a serious misunderstanding of how markets really function.
Raised on textbooks that obscure the role of institutions, economists often imagine that markets arise on their own, with no help from purposeful, collective action.
Adam Smith may have been right that “the propensity to truck, barter, and exchange” is innate to humans, but a panoply of non-market institutions is needed to realize this propensity.
Consider all that is required. Modern markets need an infrastructure of transport, logistics, and communication, much of it the result of public investments.
They need systems of contract enforcement and property-rights protection.
They need regulations to ensure that consumers make informed decisions, externalities are internalized, and market power is not abused.
They need central banks and fiscal institutions to avert financial panics and moderate business cycles.
They need social protections and safety nets to legitimize distributional outcomes.
Well-functioning markets are always embedded within broader mechanisms of collective governance.
That is why the world’s wealthier economies, those with the most productive market systems, also have large public sectors.
Once we recognize that markets require rules, we must next ask who writes those rules.
Economists who denigrate the value of democracy sometimes talk as if the alternative to democratic governance is decision-making by high-minded Platonic philosopher-kings – ideally economists!
But this scenario is neither relevant nor desirable.
For one thing, the lower the political system’s transparency, representativeness, and accountability, the more likely it is that special interests will hijack the rules.
Of course, democracies can be captured too.
But they are still our best safeguard against arbitrary rule.
Moreover, rule-making is rarely about efficiency alone; it may entail trading off competing social objectives – stability versus innovation, for example – or making distributional choices.
These are not tasks that we would want to entrust to economists, who might know the price of a lot of things, but not necessarily their value.
True, the quality of democratic governance can sometimes be augmented by reducing the discretion of elected representatives.
Well-functioning democracies often delegate rule-making power to quasi-independent bodies when the issues at hand are technical and do not raise distributional concerns; when log-rolling would otherwise result in sub-optimal outcomes for all; or when policies are subject to myopia, with heavy discounting of future costs.
Independent central banks provide an important illustration of this.
It may be up to elected politicians to determine the inflation target, but the means deployed to achieve that target are left to the technocrats at the central bank.
Even then, central banks typically remain accountable to politicians and must provide an accounting when they miss the targets.
Similarly, there can be useful instances of democratic delegation to international organizations.
Global agreements to cap tariff rates or reduce toxic emissions are indeed valuable.
But economists have a tendency to idolize such constraints without sufficiently scrutinizing the politics that produce them.
It is one thing to advocate external restraints that enhance the quality of democratic deliberation – by preventing short-termism or demanding transparency, for example.
It is another matter altogether to subvert democracy by privileging particular interests over others.
For instance, we know that the global capital-adequacy requirements produced by the Basel Committee reflect overwhelmingly the influence of large banks.
If the regulations were to be written by economists and finance experts, they would be far more stringent.
Alternatively, if the rules were left to domestic political processes, there could be more countervailing pressure from opposing stakeholders (even though financial interests are powerful at home, too).
Similarly, despite the rhetoric, many World Trade Organization agreements are the result not of the pursuit of global economic well-being, but the lobbying power of multinationals seeking profit-making opportunities.
International rules on patents and copyright reflect the ability of pharmaceutical companies and Hollywood – to take just two examples – to get their way.
These rules are widely derided by economists for having imposed inappropriate constraints on developing economies’ ability to access cheap pharmaceuticals or technological opportunities.
So the choice between democratic discretion at home and external restraint is not always a choice between good and bad policies.
Even when the domestic political process works poorly, there is no guarantee that global institutions will work any better.
Often, the choice is between yielding to domestic rent-seekers or to foreign ones.
In the former case, at least the rents stay at home!
Ultimately, the question concerns whom we empower to make the rules that markets require.
The unavoidable reality of our global economy is that the principal locus of legitimate democratic accountability still resides within the nation state.
So I readily plead guilty to my economist critic’s charge.
I do want to make the world safe for democratic politicians.
And, frankly, I wonder about those who do not.
Economists’ New World Order
Most academic economics rely on concepts laid down at the beginning of the twentieth century by the British economist Alfred Marshall, who said that “nature does not make leaps.”
Yet we economists find ourselves increasingly disturbed by the apparent inadequacy of the neo-Marshallian toolkit that we have built to explain our world.
The central bias of this toolkit is that we should trust the market to solve the problems we set it, and that we should not expect small (or even large) changes to have huge effects.
A technological leap that raises the wages of the skilled and educated will induce others to become skilled and educated, restoring balance so that inequality does not grow too much.
So a country where labor productivity is low will become an attractive location for foreign direct investment, and the resulting increase in the capital-labor ratio will raise productivity.
Wherever one looks, using Marshall’s toolkit, one sees economic equilibrium pulling things back to normal, compensating for and attenuating the effects of shocks and disturbances.
Marshall’s economics has had a marvelous run, and has helped economists make sense of the world.
Yet there is a sense that progress and understanding will require something new – an economics of virtuous circles, thresholds, and butterfly effects, in which small changes have very large effects.
Perhaps this has always been so.
By the standards of centuries ago, we live in a world of unbelievable wealth.
Within two generations human literacy will be nearly universal.
Yet three centuries ago there was also technological progress, from the mechanical clock and the watermill to the cannon and the caravel, and on to strains of rice that can be cropped three times a year in Guangzhou and the breeding of merino sheep that can flourish in the hills of Spain.
But these innovations served only to increase the human population, not raise median standards of living.
Today, if we divided up equally what we produce worldwide, would it give us a standard of living ten times that of our pre-industrial ancestors?
Twenty times?
A hundred times?
Does the question even have meaning?
David Landes likes to tell the story of Nathan Meyer Rothschild, the richest man in the world in the first half of the nineteenth century, dead in his fifties of an infected abscess.
If you gave him the choice of the life he led as the finance-prince of Europe or a life today low-down in the income distribution but with thirty extra years to see his great-grandchildren, which would he choose?
No doubt, we live today in an extraordinarily unequal world.
There are families today near Xian, in what was the heartland of the Tang Dynasty Empire, with two-acre dry wheat farms and a single goat.
There are other families throughout the world that could buy that wheat farm with one day’s wages.
Marshall’s economics – the equilibrium economics of comparative statics, of shifts in supply and demand curves, and of accommodating responses – is of almost no help in accounting for this.
Why, worldwide, did median standards of living stagnate for so long?
Why has the rate of growth undergone an acceleration that is extraordinarily rapid over so short a period?
Where is the economics of invention, innovation, adaptation, and diffusion?
Not in Marshall.
And why is today’s world so unequal that it is hard to find any measures of global distribution that do not show divergence at least up until the 1980’s?
It has been generations since economists Robert Solow and Moses Abramovitz pointed out that Marshall’s toolkit is a poor aid for understanding modern economic growth.
The real sources of growth are not to be found in supplies and demands and the allocation of scarce resources to alternative uses, but in technological and organizational change – about which economists have too little to say.
Economic historians like Ken Pomeranz rightly point out that before the Industrial Revolution, differences in median standards of living across the high civilizations of Eurasia were relatively small.
A peasant in the Yangtze Valley in the late seventeenth century had a different style of life than his or her contemporary peasant in the Thames Valley, but not one that was clearly better or worse.
Two centuries later that was no longer the case: by the end of the nineteenth century, median living standards in Britain and other countries to which the Industrial Revolution had spread were, for the first time in recorded history, light-years above any neo-Malthusian benchmark of subsistence.
The early industrial-era economic accomplishments occurred despite the loss of a substantial proportion of national income to support a corrupt, decadent, and profligate aristocracy.
They occurred despite a tripling of the population, which put extraordinary Malthusian pressure on the economy underlying natural resource base, and despite the mobilization of an unprecedented proportion of national income for nearly a century of intensive war against France, a power with three times Britain’s population.
How, exactly, did these accomplishments occur?
What were the small differences that turned out to matter so much?
Economists are now awakening to the realization that the most interesting questions they face were always beyond the reach of Marshall’s toolkit.
Clearly, economics – if it is to succeed and progress – must be very different in a generation from what it is today.
Economizing Life and Death
Have you ever sat at the deathbed of a statistical life? “Statistical lives” are what politicians save, or let die, or kill, when they decide on resource allocations for health care.
Health care is not the only area where political decisions are matters of life and death.
Environmental programs to reduce air pollution, educational efforts to publicize the adverse effects of smoking, traffic measures that lower the risk of car accidents: many policies save lives – and omit other lives that would have been saved if the money had been spent otherwise.
So, if you have ever sat at somebody’s deathbed, the answer may very well be yes: you sat at the deathbed of a statistical life.
Even so, we say that John died from cancer, not that he died from a policy decision to stop payment for cancer screening.
We say that Mary died in a car accident, not that she was a casualty of the Road Traffic Act.
In short, we do not usually identify policy decisions as the causes of individual deaths.
This would be quite different if the identities of future victims were known at the time such decisions are taken.
Imagine that they were known, and that the individual victims of policy decisions would somehow stare into the faces of decision makers just as if they were being held at gunpoint.
Policy making, I am sure, would suddenly halt.
In fact, the analogy of holding victims at gunpoint is misleading, because in public decision-making we can hardly claim that everything is all right as long as we don’t pull the trigger.
Given that everything that happens is somehow a consequence of decision-making, the distinction between killing someone and letting her die is unconvincing.
So perhaps decision makers, faced with the victims of previous policies and the future victims of current ones, would simply be happy that at last they could allocate resources in an optimally efficient way.
That seems unlikely.
Indeed, the thought experiment of turning statistical lives into identifiable lives highlights an important point about policy-making: much, if not all, of the appeal of “efficient” resource allocation depends on the anonymity of the victims.
Full anonymity explains why efficiency rules – say, leaving the most “expensive” patients untreated when resources are scarce – meet with no protest.
Such anonymity also holds for those who are left untreated in “triage” – the sorting of casualties when natural or man-made disasters strike.
But, for the same reason, efficiency rules often do meet with protest when they are used or proposed for rationing medical services in everyday medicine.
It is part of the everyday life of many citizens – even part of their identities – that they suffer from an expensive health problem.
Under an efficiency regime, they might as well bear a target on their foreheads.
What about young and healthy citizens?
Many will develop expensive health problems in the future. But their future is unknown, as is the fate of future disaster victims.
Why should they not fully embrace efficient resource allocation?
Many statistical lives – your own, perhaps – could be saved by excluding future payment for some expensive medical treatment (say, hemodialysis) for those who are now healthy and reallocating the funds to cheap but effective prevention programs.
Since there is no fairness problem here, would it not simply be irrational to reject efficiency?
After all, saving statistical lives does save individuals.
Whether or not you see a distinction between statistical lives and individual lives depends on whether you accord value not only to when you die, but also to how you die.
Dying is hard.
But it is our fate as humans, and it is usually accepted with dignity when the hour comes.
Nevertheless, as long as we see a chance to escape death, we run from it, and we expect those who take care of us to look for the escape routes.
So here is a difference: when you die from lack of medical care, there is an escape route.
It is clearly marked, but nobody helps you get to it.
They stand idly by, abandoning you to death.
By contrast, when you die from the absence of prevention policies, you may be dying sooner than you otherwise would, but you are not being left to die.
This is why sitting beside, and even lying on, the deathbed of a statistical life may be more tolerable after all.
Perhaps a maximally extended life expectancy is of higher value to you than living in a society where doctors do not leave curable patients to die if they cannot pay for the required treatment out of their own pockets.
But there is nothing irrational in deciding otherwise.
It all depends on a value judgment – one of the many value judgments societies must make with respect to modern medicine.
The higher the technical capabilities, and the costs, of modern medicine become, the more contested this particular value judgment will be.
Economy, Insure Thyself
NEW HAVEN – The basic principle of financial risk management is sharing.
The more broadly diversified our financial portfolios, the more people there are who share in the inevitable risks – and the less an individual is affected by any given risk.
The theoretical ideal occurs when financial contracts spread the risks all over the world, so that billions of willing investors each own a tiny share, and no one is over-exposed.
The case of Japan shows that, despite some of our financial markets’ great sophistication, we are still a long way from the theoretical ideal.
Considering the huge risks that are not managed well, finance, even in the twenty-first century, is actually still rather primitive.
A recent World Bank study estimated that the damage from the triple disaster (earthquake, tsunami, and nuclear crisis) in March might ultimately cost Japan $235 billion (excluding the value of lives tragically lost).
That is about 4% of Japanese GDP in 2010.
Given wide publicity about international charitable relief efforts and voluntary contributions to Japan, one might think that the country’s economic loss was shared internationally.
But newspaper accounts suggest that such contributions from foreign countries should be put in the hundreds of millions of US dollars – well below 1% of the total losses.
Japan needed real financial risk sharing: charity rarely amounts to much.
Insurance companies operating in Japan repaid some of the losses.
The same World Bank study estimates that total claims accruing to insurers in Japan might ultimately cost these companies $33 billion.
Clearly, the insured risks were a small part of the total risk.
Moreover, much of that risk, even if insured, continues to be borne in Japan, rather than being spread effectively to foreign investors, so Japan is still alone in bearing the costs.
Before the disaster, Japan issued about $1.5 billion in earthquake-related catastrophe bonds as a risk-management device: the debt is canceled if a precisely defined seismic event occurs.
This design helped spread the earthquake risk from Japan to foreign investors, who could accept the risk and were enticed by higher expected yields.
Unfortunately, $1.5 billion is little better than what charity could do – and still only a drop in the bucket compared to the extent of the damage.
Worse yet, even this triple disaster often did not fit the definition of the seismic event defined by the bond indentures.
We need far more – and better – catastrophe bonds.
Of course, compared to Japan’s two “lost decades” since 1990, even this year’s triple disaster pales in significance.
Japanese real per capita GDP growth averaged 3.9% a year in the 1980’s, but only 1.4% since 1990.
If real per capita GDP growth had continued after 1990 at the rate of the 1980’s, Japan’s economy would be 60% larger than it is today – implying losses in the trillions of dollars.
Japan could have insulated itself from a good deal of the effects of GDP fluctuations if it had managed this risk accordingly.
Though no country has ever practiced risk management on such a massive scale, it is important to consider such an innovation now.
I (among others) have been arguing for years that countries should cover their risks by issuing a different kind of national debt, tied to their own GDP or a similar measure of economic success.
In its simplest form, the securities could be shares in GDP.
My Canadian colleague Mark Kamstra and I have proposed issuing shares called “trills,” which would pay a dividend each year equal to a trillionth of that year’s GDP, in domestic currency.
If the Japanese government had issued trills in 1990, when Japan’s nominal GDP was ¥443 trillion, the dividend paid to investors the first year would have been ¥443.
Every year thereafter, the dividend paid would fluctuate in response to changes in GDP.
Investors around the world would take on Japanese GDP risk in return for an expected yield, just as with catastrophe bonds.
The trills would most likely have sold for a very high price in 1990, perhaps with a dividend yield under 1%.
After all, people in 1990, witnessing recent high growth rates, would have expected Japanese GDP to grow rapidly in subsequent decades.
In 2010, when GDP was still only ¥479 trillion, the same trills would pay a dividend of ¥479, not much larger than the initial yield and no doubt disappointing many investors.
So, with lower growth expectations, the trills would likely have a much lower price now.
That lower price would be a bane to investors but a boon to Japanese, compensating them for the losses that they have suffered.
When considering today’s concern about Japan’s high public debt-to-GDP ratio, now at 202% on a gross basis, one needs to reflect that the ratio would most likely be profoundly lower if Japan had in the past financed more of its deficit spending with trills instead of conventional debt, and issued them to investors around the world.
A lower debt burden would certainly help Japan deal with its economic slowdown.
There is nothing we can do now to compensate for failures to manage risks in the past.
But disasters and economic crises can have a silver lining if they spur fundamental innovation by forcing us to think about how to manage risks in the future.
Edmund Phelps’s Journey
The winner of this year’s Nobel prize for economics, Edmund Phelps, is a giant in the field.
His contributions have been, and remain, so important as that they have altered traditional ways of thinking.
According to the social science citations index, he ranks well among the most important economists since Adam Smith.
Economists working on the macro economy, its micro foundations, exogenous and endogenous growth theory, the formation of expectations and problems of information and discrimination all refer back to Phelps.
After a brilliant secondary education, Phelps entered Amherst College in Massachusetts without any specific idea about which discipline to embrace or which career to follow.
He was passionate about philosophy but, at the insistence of his father, took classes in economics.
As nearly always happens, Phelps’s choice of vocation came after meeting an important professor, in this case the Harvard economist James Nelson.
After some hesitation, Phelps decided to pursue graduate education.
Paul Samuelson admits that he agreed to do a conference at Amherst with the sole aim of recruiting Phelps to MIT.
But Phelps chose Yale, where he came into direct contact with James Tobin and Thomas Schelling.
He wrote his thesis under Tobin’s supervision.
With Ph.D. in hand, Phelps spent a year at the Rand Corporation in Los Angeles before returning to Yale.
He spent another year at MIT, where he taught with Robert Solow and met Samuelson and Franco Modigliani.
Stints at the University of Pennsylvania and Columbia University followed.
By this point, Phelps had already acquired an international reputation through his work on the golden rule of capital accumulation (he was 28).
This concept now appears in the toolbox of every economist, is taught in all classes on growth, and serves as a reference in all works on the macro economy.
Later, Phelps developed a long-term growth theory based on education and technical advances.
However, this contribution was so far ahead of its time that the profession did not discover its importance until a quarter-century later, when theorists were developing endogenous growth theories.
Phelps was also 10 to 20 years ahead of the profession when he developed the theories of wage efficiency and inflation targeting, which are now considered to be the state of the art concerning the labour market and monetary management.
In the late 1960’s and early 1970’s, Phelps’s encounters with Amartya Sen, John Rawls, and Kenneth Arrow at Stanford revived his philosophical streak.
He had extremely valuable intellectual conversations with Rawls, prompting him to write several essays on the theory of economic justice and publish a book on the subject in 1974 – a book still used today.
Phelps was behind the modern reworking of the macro economy – and, according to Samuelson, the micro economy, too.
His research programme consisted of introducing the imperfection of information and knowledge into economic theory, which he then reformulated, giving serious consideration to agents’ expectations.
In Microeconomic Foundations of Employment and Inflation Theory , a famous work that he published and to which he made three major contributions, he set the scene for what would become the greatest revolution in economic theory of the last 50 years.
It is to Phelps that we owe the theory of the natural unemployment rate – a cornerstone of modern macroeconomic theory and economic policy that Milton Friedman rediscovered a year later, albeit heuristically.
Phelps was also responsible for the “island parable,” which helped explain why monetary policy can have temporary real effects as a result of imperfect information.
The bulk of Phelps’s current work consists of a new reworking of structuralist theory, in an effort to show how changes in interest rates and asset prices affect the equilibrium unemployment rate over the medium term.
Phelps’s new theory provides a logical backdrop against which we can assess the consequences of fluctuations in share prices, exchange rates, and, more generally, the value of physical assets and human capital under the powerful influence of new technologies and innovation.
These are, of course, the main phenomena that economic theory struggles to explain nowadays.
So it is easy to understand why Phelps still leads the way.
Indeed, we can expect his new theoretical framework to become a reference point in a decade or two.
When recommending an Indian mathematician to a Harvard colleague, Ludwig Wittgenstein wrote that: “scientific geniuses generally have one great idea in their life; he has had two.”
Teaching Economic Dynamism
NEW YORK – Business leaders often argue that the widening education gap – the disparity between what young people learn and the skills that the job market demands – is a leading contributor to high unemployment and slow growth in many countries.
For their part, governments seem convinced that the best way to close the gap is to increase the number of students pursuing degrees in the so-called “STEM” subjects (science, technology, engineering, and mathematics).
Are they right?
The short answer is no.
Indeed, the two main arguments underpinning claims that inadequate education is to blame for poor economic performance are weak, at best.
The first argument is that the lack of appropriately skilled workers is preventing companies from investing in more advanced equipment.
But that is not how economic development usually works.
Instead, firms begin to invest, and either workers respond to the possibility of higher wages by acquiring (at their own cost) the required skills, or firms provide their current and future employees with the relevant training.
The second argument is that it is increasingly difficult for the United States and other advanced countries to match the gains that developing countries have achieved by investing heavily in upgraded equipment, targeted higher education, and skills training.
But, again, this contradicts traditional trade dynamics, in which one country’s success does not imply hardship for another.
In theory, of course, a simultaneous shift in several countries toward STEM-focused secondary and higher education – with large concomitant productivity gains – could diminish the competitiveness of an economy that made no such effort.
But this scenario is highly unlikely, at least in the foreseeable future.
In fact, the proliferation of highly specialized universities in Europe has failed to buttress economic growth or employment.
And the conversion of comprehensive universities into specialized institutes for science and technology in the Soviet Union and communist China did nothing to avert economic disaster in those economies.
(China’s top universities now offer two-year programs that emulate the structure of American liberal arts colleges.)
But the case for STEM education is even more fundamentally flawed, because it treats an economy as an equation.
According to this logic, job creation is a matter of slotting humans into identifiable opportunities, and economic growth is a matter of increasing the stock of human or physical capital, while exploiting scientific advances.
This is a dark view of modern economies, and a depressing blueprint for the future.
To lay the foundation for a future based on ideas and invention, businesses and governments should consider how new products and methods emerged in some of history’s most innovative economies: the United Kingdom and the US as early as 1820, and Germany and France later in the nineteenth century.
In these economies, innovation was powered not by global scientific progress, but by the population’s dynamism – their desire, capacity, and latitude to create – and willingness to allow the financial sector to steer them away from unpromising pursuits.
The fact that innovative ideas have arisen largely from the dynamism of people belies the conclusion that all economies require widespread STEM-focused education.
Though a larger STEM base can benefit some economies, most advanced countries already have sufficient capacity in these fields to apply foreign technologies and engineer their own.
What economies need instead is a boost in dynamism.
The problem is that the historically most innovative economies have lost much of their former dynamism, despite retaining an edge in social media and some high-technology sectors.
And others – for example, Spain and the Netherlands – were never particularly dynamic.
Meanwhile, the emerging economies that are supposed to be filling the gap – notably, China – are still falling short of the levels of innovation required to offset the declining benefits of technology transfer.
In other words, economies today lack the spirit of innovation.
Labor markets do not need only more technical expertise; they require an increasing number of soft skills, like the ability to think imaginatively, develop creative solutions to complex challenges, and adapt to changing circumstances and new constraints.
That is what young people need from education.
Specifically, students must be exposed to – and learn to appreciate – the modern values associated with individualism, which emerged toward the end of the Renaissance and continued to gain traction through the early twentieth century.
Just as these values fueled dynamism in the past, they can reinvigorate economies today.
A necessary first step is to restore the humanities in high school and university curricula.
Exposure to literature, philosophy, and history will inspire young people to seek a life of richness – one that includes making creative, innovative contributions to society.
Indeed, studying the “canon” will do more than provide young people with a set of narrow skills; it will shape their perceptions, ambitions, and capabilities in new and invigorating ways.
In my book Mass Flourishing, I cite some key figures who articulate and inspire modern values.
The humanities describe the ascent of the modern world.
Countries worldwide can use the humanities to develop or revive the economies that drove this ascent, while helping individuals to lead more productive and fulfilling lives.
The Lost Generations
NEW YORK – A country’s economic success depends on the education, skills, and health of its population.
When its young people are healthy and well educated, they can find gainful employment, achieve dignity, and succeed in adjusting to the fluctuations of the global labor market.
Businesses invest more, knowing that their workers will be productive.
Yet many societies around the world do not meet the challenge of ensuring basic health and a decent education for each generation of children.
Why is the challenge of education unmet in so many countries? Some are simply too poor to provide decent schools.
Parents themselves may lack adequate education, leaving them unable to help their own children beyond the first year or two of school, so that illiteracy and innumeracy are transmitted from one generation to the next.
The situation is most difficult in large families (say, six or seven children), because parents invest little in the health, nutrition, and education of each child.
Yet rich countries also fail.
The United States, for example, cruelly allows its poorest children to suffer.
Poor people live in poor neighborhoods with poor schools.
Parents are often unemployed, ill, divorced, or even incarcerated.
Children become trapped in a persistent generational cycle of poverty, despite the society’s general affluence.
Too often, children growing up in poverty end up as poor adults.
A remarkable new documentary film, The House I Live In, shows that America’s story is even sadder and crueler than that, owing to disastrous policies.
Starting around 40 years ago, America’s politicians declared a “war on drugs,” ostensibly to fight the use of addictive drugs like cocaine.
As the film clearly shows, however, the war on drugs became a war on the poor, especially on poor minority groups.
In fact, the war on drugs led to mass incarceration of poor, minority young men.
The US now imprisons around 2.3 million people at any time, a substantial number of whom are poor people who are arrested for selling drugs to support their own addiction.
As a result, the US has ended up with the world’s highest incarceration rate – a shocking 743 people per 100,000!
The film depicts a nightmarish world in which poverty in one generation is passed on to the next, with the cruel, costly, and inefficient “war on drugs” facilitating the process.
Poor people, often African-Americans, cannot find jobs or have returned from military service without skills or employment contacts.
They fall into poverty and turn to drugs.
Instead of receiving social and medical assistance, they are arrested and turned into felons.
From that point on, they are in and out of the prison system, and have little chance of ever getting a legal job that enables them to escape poverty.
Their children grow up without a parent at home – and without hope and support.
The children of drug users often become drug users themselves; they, too, frequently end up in jail or suffer violence or early death.
What is crazy about this is that the US has missed the obvious point – and has missed it for 40 years. To break the cycle of poverty, a country needs to invest in its children’s future, not in the imprisonment of 2.3 million people a year, many for non-violent crimes that are symptoms of poverty.
Many politicians are eager accomplices to this lunacy.
They play to the fears of the middle class, especially middle-class fear of minority groups, to perpetuate this misdirection of social efforts and government spending.
The general point is this: Governments have a unique role to play to ensure that all young members of a generation – poor children as well as rich ones – have a chance.
A poor kid is unlikely to break free of his or her parents’ poverty without strong and effective government programs that support high-quality education, health care, and decent nutrition.
This is the genius of “social democracy,” the philosophy pioneered in Scandinavia, but also deployed in many developing countries, such as Costa Rica. The idea is simple and powerful: All people deserve a chance, and society needs to help everybody to secure that chance.
Most important, families need help to raise healthy, well-nourished, and educated children.
Social investments are large, financed by high taxes, which rich people actually pay, rather than evade.
This is the basic method to break the intergenerational transmission of poverty.
A poor child in Sweden has benefits from the start. The child’s parents have guaranteed maternity/paternity leave to help them nurture the infant.
The government then provides high-quality day care, enabling the mother – knowing that the child is in a safe environment – to return to work.
The government ensures that all children have a place in preschool, so that they are ready for formal schooling by the age of six.
And health care is universal, so the child can grow up healthy.
A comparison of the US and Sweden is therefore revealing.
Using comparable data and definitions provided by the Organization for Economic Cooperation and Development, the US has a poverty rate of 17.3%, roughly twice Sweden’s poverty rate of 8.4%.
And America’s incarceration rate is 10 times Sweden’s rate of 70 people per 100,000.
The US is richer on average than Sweden, but the income gap between America’s richest and poorest is vastly wider than it is in Sweden, and the US treats its poor punitively, rather than supportively.
One of the shocking realities in recent years is that America now has almost the lowest degree of social mobility of the high-income countries.
Children born poor are likely to remain poor; children born into affluence are likely to be affluent adults.
This inter-generational tracking amounts to a profound waste of human talents.
America will pay the price in the long term unless it changes course.
Investing in its children and young people provides the very highest return that any society can earn, in both economic and human terms.
The Snowden Time Bomb
PRINCETON – In the aftermath of the global financial crisis, world leaders repeated a soothing mantra. There could be no repeat of the Great Depression, not only because monetary policy was much better (it was), but also because international cooperation was better institutionalized.
And yet one man, the American former intelligence contractor Edward Snowden, has shown how far removed from reality that claim remains.
Prolonged periods of strain tend to weaken the fabric of institutional cooperation.
The two institutions that seemed most dynamic and effective in 2008-2009 were the International Monetary Fund and the G-20; the credibility of both has been steadily eroded over the long course of the crisis.
Because the major industrial economies seem to be on the path to recovery –&#160;albeit a feeble one – no one seems to care very much that the mechanisms of cooperation are worn out. They should.
There are likely to be many more financial fires in various locations, and the world needs a fire brigade to put them out.
The IMF’s resources were extended in 2009, and the organization was supposed to be reformed in order to give emerging markets more voice.
But little progress has been made.
The Fund was the centerpiece of the post-1945 global economic system.
It subsequently played a central role in the management of the 1980’s debt crisis and in the post-communist economic transition after 1989.
But every major international crisis since then has chipped away at its authority.
The 1997-1998 Asian financial crisis undermined its legitimacy in Asia, as many governments in the region believed that the crisis was being exploited by the United States and US financial institutions.
The post-2007 Great Recession discredited the IMF further for three reasons. First, the initial phase of the crisis looked like an American phenomenon.
Second, the IMF’s heavy involvement in the prolonged euro crisis looked like preferential treatment of Europe and Europeans. In particular, the demand that, because the world was focused on Europe, another European (and another French national) should succeed the IMF’s then-managing director, Dominique Strauss-Kahn, was incomprehensible to the large emerging-market countries.
Eventually, as in the Asian crisis, European governments and the European Commission fell out with the Fund and began to blame its analysis for having confused and unsettled markets.
On the big issues underlying the global financial crisis – the problem of current-account imbalances and deciding which countries should adjust, and reconciling financial reform with a pro-growth agenda – the IMF cannot say much more, or say it more effectively, than it could before the crisis.
The G-20 was the great winner of the financial crisis.
The older summits (the G-7 or, with the addition of Russia, the G-8), as well as the G-7 finance ministers’ meetings, were no longer legitimate.
They consisted of countries that had actually caused the problems; they were dominated by the US; and they suffered from heavy over-representation of mid-sized European countries.
The G-20, by contrast, brought in the big emerging markets, and its initial promise was to provide a way to control and direct the IMF.
The new mood of global economic regime change was captured in the official photograph that was widely used in coverage of the most successful of the G-20 summits, held in London in April 2009.
In the short term, the London summit mitigated financial contagion emanating from southern Europe; gave the World Bank additional resources to deal with the problem of trade finance for emerging-market exports; appeared to give the IMF more firepower and legitimacy; and seemed to catalyze coordinated fiscal stimulus to restore confidence.
But only the more technical of these four achievements – the first two – stood the test of time.
Everything else that was agreed at the London summit turned sour.
The follow-up summits were lame.
The idea of coordinated fiscal stimulus became problematic when it became obvious that many European governments could not take on more debt without unsettling markets and pushing themselves into an unsustainable cycle of increasingly expensive borrowing.
And yet, however limited the London summit’s achievements proved to be, the summit process itself was not fully discredited until Snowden’s intelligence revelations.
It may be that leaders and their staffs were naive in believing that their communications were really secure.
But Snowden’s revelations that the London summit’s British hosts allegedly monitored the participants’ communications make it difficult to imagine that the genuine intimacy of earlier summits can ever be recreated.
And, with the espionage apparently directed mostly at representatives of emerging economies, the gulf between the advanced countries and those on the rise has widened further.
World leaders appear partly ignorant and partly deceptive in responding to the allegations.
They are probably right to emphasize how little they really know about surveillance.
It is in the nature of complex data-gathering programs that no one really has an overview.
But the lack of transparency surrounding data surveillance and mining means that, when a whistleblower leaks information, everyone can subsequently use it to build their own version of how and why policy is made.
The revelations thus encourage wild conspiracy theories.
The substantive aftermath of the London summit has already caused widespread disenchantment with the G-20 process.
The Snowden affair has blown up any illusion about trust between leaders – and also about leaders’ competence.
By granting Snowden asylum for one year, Russian President Vladimir Putin, will have the bomber in his midst when he hosts this year’s summit in Saint Petersburg.
The Snowden Effect
MADRID – The continued leaking of classified information by the former US National Security Agency contractor Edward Snowden has provoked heated debate about privacy and international law, which, unfortunately, has overshadowed the geostrategic dimension of his actions.
In fact, Snowden’s revelations about US surveillance programs, and his own ongoing struggle to avoid extradition, reveal much about President Barack Obama’s conception of US foreign relations.
More than any other incoming American president in recent memory, Obama raised expectations worldwide.
Yet he has proved to be mainly, if not solely, interested in domestic issues, resulting in a foreign policy of reaction.
The Snowden affair highlights three elements of this: US-Russia relations, US influence in South America, and US relations with Europe.
The Kremlin’s handling of the affair is indicative of the tense state of US-Russia relations.
In the aftermath of the bilateral relationship’s ill-fated “reset,” Russia has been eager to maintain its global position as a foil to the US, causing many people on both sides to revert to a Cold War mentality.
By falling into this trap, the US has provided President Vladimir Putin with endless fodder to score political points and solidify his domestic position.
Putin regards anti-Americanism as an effective tool for short-circuiting domestic discontent.
Developments like the US Congress’s enactment of the Magnitsky Act, portrayed in Russia as an American provocation, have allowed the Kremlin to rally support at home with retaliatory measures such as a ban on foreign adoptions, while providing cover for a crackdown on domestic opponents.
Following the NATO-led intervention in Libya in 2011, which the Kremlin regarded as another example of Western overreach, Russia has been more aggressive in asserting itself internationally, mainly in opposition to the US.
This is most obvious in Russia’s dogged support for Bashar al-Assad’s regime in Syria.
And Russia’s refusal to hand over Snowden, under the pretext of strict adherence to the law, has allowed Putin to poke Obama in the eye once again – this time while posing as a defender of legality and human rights.
This coup de théȃtre was magnified by Putin’s cynical claim that Russia would allow Snowden to stay only if he stopped leaking information “aimed at inflicting damage on our American partners.”
Presumably, Putin would not object to the infliction of such damage behind closed doors, during a debriefing with the Russian security services.
Moreover, the Snowden affair reinforces the perception that the US is losing its sway in South America.
With few notable exceptions, such as US Ambassador to Brazil Tom Shannon, US diplomacy has lacked a strategic vision for Latin America.
Barack Obama’s 2008 election created high expectations in this region, too; but his administration’s approach has been reserved, at best, and often obtuse.
While China’s influence in Latin America has soared, the US has remained aloof.
Obama’s visit in May was presented as an effort to reinvigorate relations in the context of the rise of the Asia-Pacific region.
Unfortunately, the chickens of Obama’s first term have already come home to roost.
For example, the US is far and away Ecuador’s largest trading partner, accounting for more than a third of its foreign trade.
Yet, facing the possibility that Ecuador might grant Snowden asylum, the US felt the need to scramble, with Vice President Joe Biden personally pleading America’s case to Ecuadorian President Rafael Correa, even after Obama announced that he would not engage in “wheeling and dealing” over the extradition.
The threat by US officials to cut off aid to Ecuador, which would amount to a measly $12 million in 2014, further evinces a clumsy approach.
America’s traditional sources of influence – its soft power, regional alliances, and financial leverage – appear to be running dry.
The message to the world is clear: the US is not the regional power that it should be.
Finally, turning to Europe, Obama’s flippant attitude concerning alleged US surveillance of the European Union and its member states shows that American exceptionalism is alive and well.
Instead of acknowledging the legitimacy of European concerns, he shrugged them off as a frivolity: “[I] guarantee you that in European capitals, there are people who are interested in, if not what I had for breakfast, at least what my talking points might be should I end up meeting with their leaders.”
The US certainly has an interest in gaining deeper analytical insight into its European allies’ decision-making than can be gained by simply calling, say, German Chancellor Angela Merkel.
Accepting that spying is realistically part of the US toolkit, we Europeans expect it to be conducted responsibly.
By dismissing European concerns about how such surveillance is carried out, Obama has demonstrated one of America’s worst habits – that of patronizing Europe.
In fact, Europeans have raised serious questions about US intelligence practices.
These range from the lack of professionalism implied by allowing contractors to conduct such sensitive work to America’s hands-off approach toward certain allies, like the United Kingdom and New Zealand, while relegating many of its other allies – including most of the European Union – to surveillance-worthy status.
The bitter irony is that, at this suddenly inauspicious moment, Europe and the US are launching their most significant joint project since the creation of NATO – a transatlantic free-trade agreement.
For the sake of its success, is it really too much to ask of the US that it play its part internationally with a bit more skill and professionalism, and that it treat its partners with respect?
Egypt after Morsi
BERLIN – Egypt lies at the heart of the Arab revolution, even if the original spark occurred in Tunisia.
But Egypt – with its strategic location, stable borders, large population, and ancient history – has been the principal power of the Arab world for centuries, defining the movement of history there like no other.
This implies that the overthrow of Egypt’s democratically elected president, Mohamed Morsi, will have much broader repercussions.
Was Morsi’s ouster a classic counterrevolution in the guise of a military coup?
Or did the coup prevent a total takeover of power by the Muslim Brotherhood, and thus avert Egypt’s economic collapse and chaotic descent into religious dictatorship?
No one should deny that what happened in Egypt was a military coup, or that forces from former President Hosni Mubarak’s regime have returned to power.
But, unlike in 2011, when the few pro-Western liberals and huge numbers of urban, middle-class youth rallied against Mubarak, now the same groups support the coup, lending it a certain (democratic?) legitimacy.
Nonetheless, the overthrow of a democratically elected government by the military cannot be glossed over.
So what options does Egypt now have?
Will it repeat the Algerian tragedy, in which the military canceled an election to prevent Islamists from assuming power, leading to an eight-year civil war that claimed up to 200,000 lives?
Will the country return to military dictatorship?
Or will Egypt end up with something like a Kemalist “democracy” of the type that long prevailed in Turkey, with a civilian government but the military pulling the strings?
All three alternatives are possible, though it is impossible to predict which one will come to pass.
But one thing already can be said for certain: the basic distribution of power within Egyptian society has not changed.
The Western-oriented liberals do not have any real power and stand, as we are seeing now, on the army’s shoulders.
We should not forget that Morsi’s opponent in the presidential election in 2012 was Ahmed Shafik, a former general and the last Mubarak-era prime minister – certainly no liberal.
A victory by either the Brotherhood or the military would not be a victory for democracy.
Hamas, which has ruled Gaza since 2006, may serve as an example of what the Brotherhood wants: undivided power, including over the military.
Likewise, the Egyptian army’s hold on power, beginning in the 1950’s, resulted in a decades-long military dictatorship.
But there is a third and new factor now in play, one that does not measure power in the same way as the military and the Brotherhood.
Through their leadership of the protests for two years, urban middle-class youth have gained their own legitimacy, and, with their technological and linguistic capacities, are able to dominate global debate about Egypt.
These young people want progress, not power; they want the future to resemble the life that they see on the Internet and in the West.
If this movement were channeled into institutional politics, it would significantly affect Egypt’s internal distribution of power.
Egypt’s unfolding drama will be framed by the triangle of contradictions and demands among these three groups.
And it should not be forgotten that, along with young people’s sense that they lacked a future under the nationalistic military dictatorships of the past, mass poverty was the second trigger of the 2011 revolution.
Underlying the contradiction between the military and the Muslim Brotherhood is not only the question of religion, but also all of the social problems, including inequality, that riddle Arab societies. The Brotherhood has effectively assumed a role similar to that of left-wing European political parties in the nineteenth century.
Whoever wants to weaken the Brotherhood has to address the urgent social issues that it raises and try to solve them.
This means that whatever solution ultimately prevails will be measured according to whether it can solve the economic crisis (particularly the lack of job opportunities for the young) and deepening mass poverty.
The chances of this are slim.
Throughout the Arab world, nationalism constricts societies and retards cooperation, the dismantling of tariffs, and the creation of an economic community. And yet the economies of the Arab countries in crisis are too small to succeed on their own; even if everything goes well, they cannot offer their large and young populations hope of a positive future.
They need enhanced cooperation, which, given a common language, would rest on a stronger foundation than it does in Europe.
In Egypt, the West should work with all three leading political forces – the military, the Brotherhood, and the urban young – because no short-term solution will come in the form of one option.
The worst approach would be to marginalize or even persecute the Muslim Brotherhood and political Islam again.
More broadly, with Syria’s civil war destabilizing Lebanon and threatening to do the same in Jordan, and with Iraq plagued by similar sectarian violence, the military coup in Egypt appears to herald the end of the Arab revolutions, at least for the time being.
Everywhere, the signs are pointing backwards.
But we should not be deceived.
Even if the struggle for power seems decided, this does not mean a return to the former status quo.
When the revolutions of 1848 in Europe were rolled back the following year, everything was nonetheless different, as we now know.
The monarchies remained in power for decades, but the Industrial Revolution and the advent of democracy had become unstoppable.
We also know, however, that this led Europe to a future that was anything but serene.
The Arab world might not be so deeply affected, but the near future there will certainly be neither peaceful nor stable.
Egypt Holds Its Breath
CAIRO – “You are the authority, above any other authority.
You are the protectors, whoever seeks protection away from you is a fool...and the army and the police are hearing me,” said Egypt’s president-elect, Mohamed Morsi, to hundreds of thousands in Tahrir Square.
A man imprisoned following the “Friday of Rage” (January 28, 2011) took the presidential oath in Tahrir on a “Friday of Power Transfer” (June 29, 2012).
But he almost did not.
Ten days earlier, on June 19, I was with a group of former Egyptian MPs in Tahrir Square.
One received a phone call informing him that a senior Muslim Brotherhood leader was coming to announce that the group was being blackmailed: either accept the constitutional addendum decreed by the Supreme Council of the Armed Forces (SCAF), which practically eviscerated the presidency, or the presidential election’s outcome would not be decided in the Brothers’ favor.
“The talks were about to collapse, but they resumed,” said the former MP. “Hold your breath.”
The victory of the Brotherhood’s Morsi in Egypt’s first free presidential election is a historic step forward on Egypt’s rocky democratization path.
His challenger, former President Hosni Mubarak’s last prime minister, Ahmed Shafiq, had no chance of winning a clean vote, despite the support of a huge state-controlled propaganda machine and various tycoons. “How many people can they trick, convince, or buy?
We don’t have that short a memory,” a taxi driver told me when I asked whether he would vote for Shafiq.
Indeed, the Egyptian revolution has defeated Mubarak’s regime and its remnants three times since January 2011: first with Mubarak’s ouster, then in the parliamentary elections held earlier this year, and now with Morsi’s victory.
And yet a military-dominated regime remains a real possibility.
The series of decisions by the ruling SCAF just before the presidential vote clearly indicated that the military has no interest in surrendering power.
The most radical of these decisions was to dissolve parliament, for which 30 million Egyptians voted, based on a ruling by a SCAF-allied Supreme Court.
The junta then assumed legislative authority, as well as the power to form a constitutional assembly and veto proposed constitutional provisions.
It also formed a National Defense Council (NDC), dominated by the military (11 army commanders versus six civilians – assuming that the interior minister is a civilian).
Meanwhile, efforts to clamp down on protests have continued.
The justice minister, a Mubarak-era holdover, granted powers to the military intelligence and military police authorities to arrest civilians on charges as minor as traffic disruption and “insulting” the country’s leaders.
Now the hard part begins for Morsi, who confronts an intense power struggle between the beneficiaries of Mubarak’s status quo – generals, business tycoons, National Democratic Party bosses, senior judges, media personnel, and senior state employees – and pro-change forces, whose largest organized entity is the Brotherhood.
The junta certainly has no intention of abandoning its vast economic empire (with its tax-free benefits, land ownership and confiscation rights, preferential customs and exchange rates, and other prerogatives).
It has also no intention of surrendering its veto power, including over national security, sensitive foreign policy (specifically regarding Israel and Iran), and war making – hence the NDC.
In the absence of a compromise – and forces that can guarantee its terms – polarization can lead to bad outcomes, ranging in seriousness from Spain in 1982 to Turkey in 1980, and, most worryingly, Algeria in 1992, when the military regime’s nullification of an Islamist electoral victory touched off a prolonged and brutal civil war.
Although Egypt’s generals are by no means as threatened as their Algerian counterparts were in December 1991, they do have enough power to flip the tables. Depending on the outcome of the ongoing negotiations between SCAF and Morsi, the size of protests in Tahrir Square and elsewhere, and the degree of pressure from the international community, a deadly confrontation cannot be ruled out.
The most likely scenario, however, looks something like Turkey in 1980: an undemocratic, military-dominated outcome, but no serious bloodshed.
In this scenario, the current constitutional assembly would be dissolved, and SCAF would form a new one to its liking. It would strongly influence the constitutional drafting process in order to enshrine its privileges.
In other words, SCAF, not the elected president, would remain the dominant actor in Egyptian politics – an outcome likely to generate continuing resistance from pro-change forces.
The best outcome – resembling Spain in 1982 – is the most optimistic.
After the Spanish Socialist Workers Party (PSOE) won parliamentary elections and formed a government in October of that year, the right-wing military establishment accepted the new democratic rules of the game and foiled a coup attempt that sought to block the advance of the left.
The PSOE also realigned the party along more moderate lines, renounced Marxist policies, and led a comprehensive reform program, El Cambio (the change).
In Egypt, a similar scenario would enhance the prospects of democratic transition.
But the SCAF leadership shows no inclination to emulate the Spanish generals.
The Muslim Brotherhood’s leadership, for its part, usually takes a risk-averse, gradualist approach to crisis management.
Confronted by a revolutionary situation, however, that approach could be hard to maintain.
Further progress toward democratization would require Morsi to keep intact the broad coalition of Islamists and non-Islamists that brought him to the fore – and to sustain its mobilization capacity in Tahrir and elsewhere.
Successful transitions from military to civilian rule in Turkey, Spain, and elsewhere partly reflected sustained American and European support.
But, perhaps more than that, Morsi will need tangible achievements on the economic and domestic-security fronts to shore up his legitimacy at home.
Otherwise, Egypt’s generals will not be returning to their barracks anytime soon.
Showdown in Egypt
LONDON – With massive anti-government protests across Egypt on June 30 – a year to the day after Egyptians elected their first-ever civilian president – a diverse and decentralized movement has challenged President Mohammad Morsi’s hold on power as never before.
Hundreds of thousands were mobilized to take to the streets, with many storming and burning down the Cairo headquarters of the ruling Muslim Brotherhood.
At the end of the day, the president was given an ultimatum.
The first “revolutionary” statement of Egypt’s new grassroots Tamarod (rebel) movement demanded that Morsi leave within two days or face a march on the presidential palace.
“In the name of 22 million citizens, we declare that Mohammad Morsi is no longer the legitimate President of Egypt.” The protesters then appealed to “the institutions of the state, the army, the police, and the judiciary to side with the popular will.”
The army has spoken, issuing an ultimatum of its own to Morsi: Address the protesters’ demands or face a military solution to the crisis.
As the day ended, Morsi’s office declared that it had not been consulted prior to the army’s statement, and tens of thousands of the president’s supporters demonstrated in several cities simultaneously at midnight.
So what will happen next?
And what impact will the Tamarod movement and the army intervention have on Egypt’s precarious democratization process?
The path to today’s crisis was predictable.
Morsi won the presidential election with only 51.7% of the vote, while the other 48.3% included very powerful forces, including figures from the Mubarak regime and their supporters.
Opposition to Morsi hardened following the annulled November 2012 constitutional declaration, by which he had sought sweeping powers – allegedly to protect the country’s infant elected institutions against a politicized judiciary.
The lack of tangible material gains for ordinary Egyptians also fueled public anger.
All of the presidential candidates had made wild promises; but the absence of significant achievement, such as resolving the country’s chronic shortages of gas and electricity, helped to fuel the massive anti-Morsi mobilization.
Incompetence during a political transition has a high price.
But Morsi is not entirely without accomplishments or supporters.
Last August, he culled the leaders of the Supreme Council of the Armed Forces (SCAF).
On the economic front, the Egyptian Central Bank’s report for the period of July 2012 to March 2013 indicates that the balance-of-payments deficit fell from $11.2 billion to $2.1 billion, owing to rising tourism revenues and debt forgiveness.
This improvement did not trickle down to ordinary citizens, and there was no effective media and communication strategy to capitalize on it.
But Morsi’s core supporters remain committed.
Whereas only a few hundred showed up to support the fraudulently elected Mubarak during the revolution, hundreds of thousands of Egyptians rallied for two consecutive weeks in Rab‘a al-‘Adawiyya square, near the presidential palace, to express their solidarity with Morsi.
If Morsi survives in office, he will have to rely on the army to guarantee his government’s safety.
He will also need a massive show of strength from his supporters.
But this would mean returning the army to the center of politics – and thus sacrificing the gains from Morsi’s imposition last August of greater civilian control.
And the army’s ultimatum indicates that the military is moving in the direction of a coup.
Mobilization of Morsi’s Muslim Brotherhood and other Islamist supporters is also risky.
Indeed, the revolutionary step of steering once-armed Islamists toward electoral and constitutional politics could be reversed in ongoing power struggle.
If Morsi does not remain in power, much will depend on how he is removed.
Reliance on street mobilization and army intervention to bring down an elected leader who has support on the ground is unlikely to lead to a positive outcome.
On the contrary, that pattern – seen in Spain in 1936, Iran in 1953, Chile in 1973, Turkey in 1980, Sudan in 1989, and Algeria and Tajikistan in 1992 – usually leads to military dictatorships, civil wars, or both.
But there is also Charles de Gaulle’s precedent of a peaceful exit by an elected president.
The massive protests in France in 1968 led to an early parliamentary election, which de Gaulle’s supporters won decisively.
But de Gaulle later resigned of his own volition, over an issue of minor importance.
The problem with this precedent is that Morsi does not have de Gaulle’s background, and Egypt’s chaotic political transition of 2013 is far from France’s consolidated democracy of 1968.
French Gaullists did not face persecution; several Egyptian opposition figures have already vowed that Morsi and the Muslim Brothers will.
That raises the stakes of political survival considerably, especially given the absence of any credible guarantor of constitutional norms and behavior.
Moreover, a possible replacement for Morsi is not very clear.
Parts of the opposition speak of a transitional “presidential council.”
But that idea failed once already, during the SCAF’s rule (February 2011-June 2012), owing partly to the lack of popular mobilization behind a uniting figure(s), but mostly because of the egos – indeed, megalomania – of the politicians involved.
Morsi will almost certainly not be removed without the involvement of the army and the security establishment.
And the winners will probably try their best to block the Islamist forces from a comeback, implying another cycle of no-holds-barred political – and perhaps physical – combat, in which democracy serves as a mask to legitimize the exclusion, and possibly the destruction, of one’s political opponents.
Egypt’s Dead Men Walking
CAIRO – Mass death sentences are usually associated with regimes like those of Adolf Hitler’s Nazis or Pol Pot’s Khmer Rouge.
But Egypt’s military rulers have now joined the ranks of such regimes, staging circus-like trials in which the outcome is foreordained.
One such trial, in March 2014, produced 529 death sentences; another, in April, yielded 683 death sentences.
And the trend shows no signs of slowing.
Last month, 107 people – including Mohamed Morsi, Egypt’s first freely elected president – were handed death sentences for their alleged role in a mass “prison break” during the January 2011 uprising against former President Hosni Mubarak.
Morsi was also accused of “colluding with foreign militants” – that is, Hezbollah and Hamas – in order to free political prisoners in Egypt.
Soon after, the six defendants in the so-called “Arab Sharkas” case – who were handed death sentences in October 2014 for allegedly attacking security posts – were executed, despite a local and international outcry against the flawed trial.
According to Ahmed Helmi, a lawyer for four of the six men, the government wanted to “send a message following Morsi’s verdict” that it would carry out such sentences.
His clients and the others, he concluded, were just “scapegoats.”
Overall, civilian courts have handed down more than 1,000 death sentences since Egypt’s military overthrew Morsi in July 2013.
The profiles of the “convicts” raise eyebrows: Emad Shahin, for example, is a world-renowned academic who has taught at Harvard and the American University in Cairo;
Sondos Asem is a promising young scholar and political activist.
Making matters worse, extra-judicial killings by the security services and elements in the military are rampant.
The most dramatic of these episodes accompanied the coup in July 2013, when Egyptian police and army opened fire on crowds protesting Morsi’s ouster in Cairo’s Rab’a Square, killing more than 1,000 protesters in less than ten hours.
More recently, Islam Atito, an engineering student at Cairo’s Ain Shams University who supported the outlawed Muslim Brotherhood, was found dead in the desert on the outskirts of Cairo.
Egypt’s interior ministry claimed that Atito had been involved in the “assassination” of a police officer and was killed in a firefight with security forces during a raid on his “hideout.”
But according to the student union of the university’s engineering faculty – whose members collectively resigned in protest against the killing – Atito was arrested during a final exam on the university campus.
The government, it is claimed, had Atito abducted and murdered in response to his activism.
As a human-rights lawyer monitoring the case notes, this is just one of several such cases – none of which is being seriously investigated.
These judicial and extra-judicial killings reflect the depth of Egypt’s current crisis.
The “hawks” who control the security and military establishments seem intent on restoring a Mubarak-style regime, but with one key difference: they believe that Mubarak did too little to repress the opposition.
For Egypt’s current leadership, the brutal tactics employed by the likes of Libya’s Muammar el-Qaddafi and Syria’s Bashar al-Assad are more likely to work in the Egyptian context than in those countries.
After all, the probability of international intervention (as in Libya) is nil, and the likelihood of a full-fledged armed revolution (as in Syria) is extremely limited.
But relying on force to subdue dissent in a country where 70% of the population is under the age of 30 will be a major challenge, if not resulting in a bloodbath.
The brutal policies of Egypt’s hawks have also transformed the opposition.
At a 2013 sit-in protesting Morsi’s ouster, the Muslim Brotherhood’s Supreme Guide, Mohamed Badie, declared, in what became a rallying cry for the movement, “Our peacefulness is stronger than their bullets.”
But, with Badie having since been sentenced to death in multiple cases (including one related to attacks on police stations in the southern province of Minya), the phrase has become the subject of bitter mockery among young political activists, including Brotherhood members.
Rassd, a Brotherhood-affiliated news website, recently published a letter (link in Arabic) by the group’s former secretary-general, Mahmoud Ghozlan, asserting that the “revolution” will continue to be non-violent.
But it also published harsh criticism of Ghozlan’s position by young Brotherhood activists – a notable development for an organization in which dissent is rarely publicized.
In fact, anger among younger members has become so acute that the Brotherhood has allegedly changed some 65% of its leadership, according to Ahmed Abdel-Rahman, the head of the Egyptian Muslim Brotherhood Administrative Office Abroad (a new body that organizes the thousands of Brotherhood members now in exile).
The organization has also adopted a harsher line, having publicly stated that the “reformist” approach that its government took after winning parliamentary and presidential elections in 2011 and 2012 was “wrong”, and that excluding non-Islamist revolutionary youth groups was a “major mistake.”
Given Egypt’s mass death sentences, extrajudicial violence, and the dominance of hawks in the security and the military establishments, together with the rhetorical, behavioral, and organizational changes within the Muslim Brotherhood, the chances of reconciliation are fading by the day.
In an environment in which “compromise” is regarded as a dirty word, Egypt’s future appears to be far from bright.
Egypt Needs a President, Not a Pharaoh
Egypt is undergoing a heated nationwide debate over political reform.
The central issue is a demand by all opposition parties and civil society groups to amend the 1971 constitution and abolish the 23-year-old State of Emergency that was imposed following Anwar Sadat's assassination in 1981.
Such demands are not new.
But President Hosni Mubarak and the ruling National Democratic Party have been stonewalling since the mid-1980's.
What makes the demands for reform more pressing this time are ominous developments in Egypt, the region, and in the wider world.
At home, concern about Mubarak's age (76) and deteriorating health has grown.
Mubarak's ill health, widely rumored for years, was never officially acknowledged until November 2003, when it could no longer be covered up.
While speaking to Parliament, Mubarak fainted before millions of TV viewers.
Although he returned an hour later and delivered the rest of his speech, Egyptians began to demand greater transparency regarding the president's health as well as other state affairs.
Meanwhile, Egypt's sagging economy, high unemployment rate, and rampant corruption have driven many Egyptian youngsters to despair.
More than one half of living Egyptians were born since Mubarak assumed office.
According to a recent report by the UN Development Program, roughly half of those between 15 and 30 years old dream of emigrating to Europe, North America, or Australia.
There are weekly reports of would-be illegal Egyptian immigrants drowning in the Mediterranean.
A few weeks ago, several youngsters suffocated to death while being deported back to Egypt across the Libyan desert in overloaded trucks.
The incident caused an uproar that compelled the authorities to arrest, interrogate, and try the Egyptian police officers in charge.
Regional and international events have also emboldened the Egyptian opposition, not only to press for reform, but to focus on amending the constitution's articles that pertain to the presidency.
Mubarak has been re-elected four times, and rumors have persisted that he will either seek a fifth six-year term or establish a "hereditary republic" and groom his 41-year old son, Gamal, to succeed him, like Syria's Hafez al-Assad and son, Bashar.
The opposition battle cry is "No" to Mubarak's re-election and "No" to passing the presidency to Gamal.
Many Egyptians may not have major misgivings about Gamal Mubarak per se, but they find it mortifying that, after 24 years of the father, they might be stuck with another 24 or more years of the son.
The current constitution was adopted in October 1971, and has 211 articles, 30 of which concern the presidency.
The president is nominated by two-thirds of the People's Assembly, and endorsed in a plebiscite that allows only for a simple "Yes" or "No."
A simple majority of the ballots is required to win a six-year term, which is renewable indefinitely by the same process.
These lax procedures contrast jarringly with the president's powers.
The president is the head of state and commander-in-chief; officiates over the Supreme Judiciary Council, the Supreme Police Council, and the Cabinet of Ministers; and can appoint and recall one or more vice-presidents at his sole discretion.
He also appoints the prime minister and senior ministers, and must approve all other ministers, ambassadors, and state representatives.
He can call general elections, declare war, impose a state of emergency, and issue decrees that have the force of law.
There are no checks and balances on these powers.
A single article stipulates that, "Accusation of the President of committing grand treason or any other criminal act may be made upon a motion submitted by at least one-third of members of the People's Assembly and approved by two-thirds."
The president is then suspended from carrying out his duties, and the vice-president fills in until the accusation is resolved.
But Mubarak has never enacted the law essential to implementing this article or appointed a vice-president, despite repeated popular demands to do so.
The result has been a de facto "imperial presidency," with Mubarak likened to the god-king Pharaohs of ancient Egypt.
No other head of state in modern times enjoys as much power.
A more apt analogy popular in Egypt compares Mubarak to Leonid Brezhnev, who for two decades presided over the Soviet Union's stagnation and decline.
Egypt's status as a regional power under Mubarak has similarly weakened steadily.
On the economic front, annual foreign investment inflows have plummeted from $3 billion in the mid-1990's to a minuscule $300 million in 2003.
Demands for reform are now focused on introducing direct presidential elections with two or more contenders, and limiting presidents to two consecutive terms in office.
It is no less important to reduce the presidency's sweeping powers and formulate viable mechanisms for enforcing the accountability of all public officials without exception.
Should Mubarak and his government fail to recommend constitutional amendments that satisfy these demands, ever more Egyptians will desert the regime and risk their lives in search of salvation in other lands.
Egypt on Jordan’s Mind
AMMAN – The behavior of Jordan’s Royal Court in the days following the official announcement of the victory of the Muslim Brotherhood’s Mohamed Morsi in Egypt’s presidential election tells an intriguing story.
At first, Jordan’s King Abdullah II hesitated to sign a long-sought-after election law.
This was followed by approval of the law, a request for its revision, and a surprise official meeting with the leader of Hamas.
During the past year, King Abdullah has been adamant that Jordanians should vote in free and fair elections no later than the end of 2012.
Constitutional changes were adopted.
An independent election commission was created by law.
And a respected Jordanian jurist who had been a judge at the International Court of Justice was reprimanded for dragging his feet in getting the election law passed.
So why did the king wait four days after both houses of parliament passed the law to sign it, and why did he immediately ask for changes?
The law, which establishes a largely majoritarian system based on single-member districts, with only 17 of the parliament’s 140 seats to be elected according to national party lists, was approved by Jordan’s Senate just hours before Egypt’s independent election commission declared Morsi the winner.
People to whom I spoke in Jordan’s government and palace say that they were led to believe that the post would go to Mubarak’s last prime minister, Ahmed Shafiq.
Morsi’s victory changed everything.
Jordan’s Muslim Brotherhood boycotted the country’s parliamentary election in 2010, arguing that the government “did not provide any guarantees of its integrity.”
In the 2007 election, the Brotherhood accused the government of “fraud,” and opposed the majoritarian electoral system.
Senior officials in Jordan have been slowly walking back from the comprehensive political reforms that were promised in the initial euphoria of the Arab Spring.
Many, including former Prime Minister Awn Khasawneh, believe that this reflects a belief among senior Jordanian officials that the Arab Spring has run its course in Jordan and the region.
After all, popular protests have failed to gather steam;
Bashar al-Assad’s regime has held firm in Syria; and Egypt, with neither a constitution nor a parliament, has apparently veered from democracy, if not descended into chaos.
But Khasawneh, who had encouraged Islamists to join the political process, and forged a rapprochement with the Palestinian Islamic movement Hamas, warns that it is a mistake to write off the Arab Spring.
In May, shortly after his resignation, he warned Jordanian leaders of complacency in the reform process.
His last word after being replaced by a conservative was to remind Jordan’s leaders that spring is a season that always returns.
With the announcement of Morsi’s victory in Egypt, spring seems to have returned to Jordan more quickly than even Khasawneh had expected.
The Islamic Action Front, the Brotherhood’s political party in Jordan, continued to reject the majoritarian electoral system, which favors tribes over political parties and other important social groups.
In particular, owing to the relative insignificance of national party lists, Jordanians of Palestinian origin, who comprise nearly half the electorate, receive only a small percentage of elected officials.
The King’s approval of the law will allow the newly established election commission to begin its work.
But now he wants the parliament to make the law more representative as well.
Indeed, he welcomed Hamas leader Khaled Mashal in an official meeting that included a royal lunch, meetings with Prime Minister Fayez Tarawneh, and, most important, talks with the head of Jordan’s intelligence service, which in 1999 had recommended the expulsion from Jordan of Mashal and four other senior Hamas officials.
The decisions to improve the election law and receive Mashal are not aimed solely at persuading Jordan’s own Islamists to join the political process.
Like other Arab countries, Jordan, with seven million people, looks up to Egypt, its most populous and powerful Arab neighbor.
And, economically, Jordan is still dependent on Egypt for natural gas, which is delivered at reduced rates.
Jordan seems to have read the political tea leaves and concluded that it makes more sense to improve relations with Egypt’s rising leaders than it does to fight them.
And better relations with Egypt presuppose closer ties with Morsi and the Muslim Brotherhood.
Egypt’s Broken Economy
WASHINGTON, DC – Egyptians’ political aspirations have dominated the country’s public life since the fall of President Hosni Mubarak last year.
Unfortunately, as those aspirations are addressed, the economy has entered a steep decline, jeopardizing one of the revolution’s main goals, namely improvement in Egyptians’ living standards and welfare.
Indeed, the populist rhetoric of Egyptian politicians threatens to undo the economic reforms undertaken by the Mubarak regime.
In 2004, a major reform program was launched under former Prime Minister Ahmed Nazif.
It was aimed at removing bureaucratic constraints to growth by restructuring the financial sector, streamlining business regulations, liberalizing foreign trade, and reducing the government’s role in the economy.
The 2004 reforms, with their elimination of restrictions on access to foreign exchange and reduction of import tariffs, gradually improved the business and investment climate.
Coupled with favorable international conditions, Egypt’s annual GDP growth rate rose to 7.2% in 2008, from 4.1% in 2004, and remained at 5% in 2009-2010, despite the global recession.
The new measures also helped to attract large capital inflows and foreign direct investment, underpinning a dramatic rise in foreign-currency reserves, from $14.8 billion in 2004 to more than $36 billion by the end of 2010.
In 2011, the situation worsened on virtually all fronts.
Annual growth fell to about 0.5%, and inflation remained in double digits.
The unemployment rate reached 12.4% in the fourth quarter, up from 8.9% in the same period of 2010.
The current-account balance deteriorated rapidly, owing to the loss of more than $4 billion in tourism revenues and a sharp fall in remittances by Egyptian workers abroad.
The fiscal deficit widened to 10% of GDP, causing government debt (including external debt), which had been falling steadily, to rise to 76% of GDP.
The most striking development, however, was the loss of international reserves in the year following the Tahrir Square revolution.
The International Monetary Fund estimates that foreign-currency reserves fell by half, to $18 billion, by December 2011, owing partly to the worsening current-account balance, but, more importantly, to withdrawal from Egypt by foreign and domestic investors alike.
In the face of large and growing external imbalances, the Central Bank of Egypt (CBE) chose to defend the Egyptian pound during last year’s political and economic turmoil.
The CBE allowed the exchange rate, which is formally defined as a “managed float,” to depreciate by only 3%.
Keeping the currency relatively stable was considered a higher priority than preventing the loss of foreign reserves.
Today, Egypt not only remains vulnerable to unstable domestic politics; owing to the depletion of its international reserves – at a rate of roughly $2 billion a month since last October – the country now also faces the threat of a currency crisis.
Moreover, this almost certainly underestimates the extent of the losses, because it does not exclude inflows of $3.5 billion since November of last year from auctions of US-dollar-denominated treasury bills.
In addition, the Egyptian military gave a $1 billion loan to the government, and another $1 billion was received through grants from Saudi Arabia and Qatar, bringing the loss of reserves since December 2010 closer to $22 billion.
The other source of international reserves, tourism, brought in only $8 billion, down sharply from $12 billion in 2010.
Egypt continues to import almost double what it exports, resulting in a trade deficit of over $10 billion by the end of 2011.
As a result, Egypt’s financing must continue to grow: the country now needs to borrow about $14-15 billion to plug its estimated financing gap of $24 billion.
Much depends on when, or whether, external aid materializes, which is contingent on approval of Egypt’s renegotiated $3.2 billion IMF loan.
If finalized, the IMF program could trigger further aid packages by the World Bank and other international donors.
If the aid arrives, Egypt could begin to address some of its financing problems, but it is still in need of a long-term strategy to spur sustainable growth.
Egypt’s economy is facing continued risks, owing to capital flight, rising inflation, unemployment, and populist policies.
Even with the availability of external finance, Egyptian leaders must look for ways to engage the private sector in reviving the country’s economy.
Unfortunately, the latest political incident involving the democracy-promoting activities of American NGOs has cooled bilateral relations and threatens the $1.3 billion in military assistance that Egypt receives annually from the United States.
This may have an impact on other donors, as well as the international financial institutions, particularly the IMF and the World Bank.
Egypt’s transition from populist economic policies to anti-American populism exemplifies the impact that political uncertainty can have on economic developments.
The upcoming presidential election in May and the formation of a democratically elected government, one hopes, will calm the political turmoil and lead to economic stabilization and revival.
Otherwise, Egyptians’ hard-won political gains may well be lost.
Egypt the Peacemaker?
TEL AVIV – Before the current fighting between Israel and Hamas in Gaza escalates further, a ceasefire must be negotiated.
Of course, like previous ceasefires, any truce is likely to be temporary, inevitably undermined by the forces that perpetuate Israel’s armed conflict with Hamas.
Nonetheless, with Syria consumed in civil war and the wider Middle East already unsteady, a ceasefire is essential both for saving lives and preserving today’s uneasy regional peace.
Much depends on Egypt, which is best placed to broker an agreement.
But assessing the prospects of any diplomatic effort requires understanding the protagonists’ perspectives and agendas.
Israel does not have a comprehensive policy toward Gaza.
Former Prime Minister Ariel Sharon took a courageous step by withdrawing unilaterally from Gaza and dismantling the Israeli settlements there.
But he fell ill before these measures could be fitted into a larger effort to address the Palestinian issue.
His successor, Ehud Olmert, began negotiating a final-status agreement with the Palestinian Authority’s president, Mahmoud Abbas.
But this did nothing to end the violence emanating from Gaza, which has effectively seceded from the Palestinian Authority and become a Hamas-controlled proto-state.
Israel’s Operation Cast Lead in the winter of 2008-2009 re-established deterrence and brought a period of relative calm; but it has been clear since the start of 2012 that the parties were once again on a collision course.
During his first term as Israel’s prime minister, Binyamin Netanyahu refused to continue to negotiate with the Palestinian Authority on Olmert’s terms, and never considered holding talks with Hamas.
He agreed to swap Palestinian prisoners for an abducted soldier, Gilad Shalit; but, for Netanyahu, as for most Israelis, negotiating with an organization whose blatantly anti-Semitic charter rejects Israel’s right to exist is pointless.
From Netanyahu’s point of view, the Gaza problem has no satisfactory solution.
His aim is to obtain and maintain calm along the border.
Israel provides electricity, water, and passage to Gaza, but also maintains a siege intended to prevent imports of larger, more lethal weapons.
Israeli leaders were aware of Hamas’s buildup of medium-range missiles, mostly smuggled through Sinai in underground tunnels, but continue to argue that, absent the siege, Iran and others would supply more (and more sophisticated) weapons.
In fact, Israel discovered over the last few years that Gaza contained enough rockets and missiles to paralyze its south.
Major Israeli cities were hit several times.
During Operation Cast Lead, rockets struck perilously close to Tel Aviv and Ben Gurion Airport.
For Israeli leaders, it was only a matter of time before Tel Aviv could and would be hit.
For its part, Hamas, the Muslim Brotherhood’s Palestinian branch, seeks to consolidate its control over Gaza and use it as a base from which to take control of the West Bank and the Palestinian national movement.
This outcome would be comparable to the Brotherhood’s takeover in Egypt, further establishing its ascendancy in the region.
Recent events appear to have emboldened Hamas.
Although the conflict between Iran and its Sunni rivals and the Syrian civil war forced it to loosen ties with Iran and Syria and move into the Sunni fold, in many respects this has been a comfortable shift.
Hamas feels more confident next to an Egypt dominated by its parent movement.
The Emir of Qatar paid a visit to Gaza as a reward for Hamas’s break with Iran and left a check.
But Hamas is not alone in Gaza.
Its hegemony is challenged by the more radical Islamic Jihad (which remains allied with Iran) and a host of Salafi and jihadi groups, some connected to radical elements in Sinai, which complicates Hamas’s relations with Egypt.
Moreover, these groups have frequently initiated attacks on Israel from Gaza or through Sinai, generating cycles of violence that have embarrassed Hamas.
At the same time, pressure from these more radical groups may have forced Hamas itself to become more aggressive in recent months, perhaps bolstered by the knowledge that its arsenal of dozens of Fajr-5 rockets could hit the Tel Aviv area should Israel retaliate on a larger scale.
The change in Egypt’s politics and policies had a similar effect: Hamas calculated that Israel would not jeopardize its fragile relationship with Egypt by launching another ground operation in Gaza.
Hamas was taken by surprise when Israel attacked, killing its military leader, Ahmed al-Jabari, and destroying most of its Fajr-5 arsenal.
It responded with massive shelling of southern Israel, and managed to send several missiles toward Tel Aviv and one toward Jerusalem.
Air raid sirens were finally heard in Israel’s two largest cities.
In response, Israel is visibly preparing for a large-scale ground operation.
There is no appetite in Israel for a second Operation Cast Lead; but nothing less than a stable, long-lasting ceasefire is acceptable.
Such a truce is possible.
Israel’s assault scored impressive initial successes, while Hamas can take pride in having reached Tel Aviv with its missiles, an achievement that eluded Hezbollah in the 2006 Lebanon War.
Moreover, Egypt, Hamas’s patron and senior ally, maintains a relationship and channels of communication with Israel, and does not want to sever all ties – not least because to do so would provoke a confrontation with the United States, which underwrites the Egyptian army.
In fact, Egyptian President Mohamed Morsi is seeking more financial aid from the US and the International Monetary Fund, and wants his coming visit to Washington, DC, to be a success.
He also wants to restore Egypt’s position as a major regional force.
Playing the peacemaker would serve him well on all counts.
So Morsi is juggling.
He has denounced and warned Israel, recalled Egypt’s ambassador to Tel Aviv, and sent his prime minister to Gaza.
But, so far, he has not crossed a single red line.
There is little time to act.
More fighting will bring additional actors into the picture (including Turkey).
If the US and Europe choose to remain inactive, they must at least encourage Egypt to play its role.
Egypt’s major obstacle is Hamas’s insistence on an end to the Israeli siege and targeted killings as part of a ceasefire agreement.
The challenge for Egyptian leaders is to persuade Hamas to settle on lesser terms without further fighting.
Egypt’s Innocent Murderers
CAIRO – “Bashar should abandon power and retire safely in Egypt.
The general-prosecutor is murder-friendly,” a friend, referring to Syrian President Bashar al-Assad, told me as we watched former Egyptian President Hosni Mubarak’s trial in the Police Academy’s criminal court.
Although Mubarak and his interior (security) minister, Habib al-Adly, were handed life sentences at the conclusion of their trials, the generals who ran Egypt’s apparatus of repression as deputy interior ministers were acquitted.
Hasan Abd al-Rahman, head of the notorious, Stasi-like State Security Investigations (SSI);
Ahmad Ramzi, head of the Central Security Forces (CSF);
Adly Fayyid, the head of Public Security; Ismail al-Shaer, who led the Cairo Security Directorate (CSD);
Osama Youssef, the head of the Giza Security Directorate; and Omar Faramawy, who oversaw of the 6th of October Security Directorate, were all cleared of any wrongdoing.
Lawyers for Mubarak and al-Adly will appeal their life-sentences, and many Egyptians believe that they will receive lighter sentences.
The verdicts sent an unmistakable message, one with serious consequences for Egypt’s political transition.
A spontaneous cry was heard from the lawyers and the families of victims when they were announced: “The people want to cleanse the judiciary.”
Indeed, many Egyptians – including senior judges – do not view the judiciary as an independent institution. “This is a major professional mistake.
Those generals should have been handed life-sentences like Mubarak,” said Zakaria Abd al-Aziz, the former elected head of the Judges Club. “The killing went on for days, and they did not order anyone to stop it.
The Ministry of Interior (MOI) is not the only place that should be cleansed.
The judiciary needs that” as well.
The verdicts certainly reinforce a culture of impunity within the security services.
The SSI and its departments were responsible for many human-rights violations, including mass-torture and extra-judicial killings, throughout Mubarak’s 30-year rule.
When protestors stormed the SSI headquarters and other governorates in March 2011, torture rooms and equipment were found in every building.
Unlawful detentions, kidnappings, disappearances, systematic torture, rape, and inhuman prison conditions have all been documented since the 1980’s by human-rights organizations and a few Egyptian courts.
Acquitting the heads of the SSI and the CSF (the 300,000-strong institution that acted as the “muscle” of Mubarak’s regime), after a revolution sparked by police brutality, led directly to renewed protests in Tahrir Square. “We either get the rights of the martyrs, or die like them,” chanted hundreds of thousands in Tahrir and other Egyptian squares.
Sit-ins, reminiscent of the 18 days of January and February 2011 that ended Mubarak’s rule, have already started.
A third consequence of the verdicts concerns the empowerment of an anti-reform faction within the MOI.
Based on my year-long research on Egyptian security-sector reform, this faction is already the most powerful.
“We have to save face,” said General Abd al-Latif Badiny, a deputy interior minister who was fired under al-Adly. “[M]any officers and commanders refused to torture detainees and were against corruption, but we need a revolutionary president to empower us and clean the ministry.”
Badiny was reappointed after the revolution, but then reprimanded in November 2011, following clashes between demonstrators and police that left more than 40 protesters dead. “He was advocating dialogue with protesters, whereas al-Adly’s men wanted a harsh crackdown.
They got their way in the end,” says Major Ahmad Ragab, the spokesperson of the reformist General Coalition of Police Officers (GCPO), which seeks to establish an official police syndicate and reform the security services along apolitical, professional lines.
The verdicts will significantly affect two other processes: revolutionary forces’ capacity to mobilize, and thus to place pressure on the ruling Supreme Council of Armed Forces (SCAF), and the presidential elections.
The objectives of those protesting the verdicts in Tahrir and other squares include: a judicial purge; a law that would ban Mubarak’s senior officials from holding political posts for ten years; new trials for al-Aldy’s generals; and removal of the general prosecutor (who was appointed by Mubarak).
There are also calls, still undeveloped, for greater unity ahead of the presidential run-off election on June 16-17.
Such appeals range from demanding an immediate transfer of power to a coalition of revolutionary presidential candidates (although the mechanism is vague) to the formation of a united presidential front in the runoff, with Mohamed Morsi of the Muslim Brothers (MB) as President and left-leaning Nasserist Hamadin Sabahi and liberal-leaning moderate-Islamist Abdel Moneim Aboul Fotouh as Vice-Presidents.
MPs have already called on the three figures to come to the parliament and negotiate a coalition.
The verdicts are likely to boost support in the runoff for Morsi, who split the Islamist vote with two other candidates in the election’s first round.
Moreover, a significant share of the non-Islamist revolutionary vote will go to Morsi, owing to the absence of other revolutionary alternatives.
The common saying in Tahrir is: “We’ve got differences with Morsi, but we’ve got blood with [Ahmed] Shafiq,” Mubarak’s last prime minister and Morsi’s opponent in the runoff.
Pro-revolution, non-Islamist, and non-MB candidates received almost 9.7 million votes in the first round of the presidential election.
The majority of these voters will probably now support Morsi, as opposed to staying home (the general drift before the verdicts).
The MB must still decide for inclusiveness if it wants to attract the support of Aboul Fotouh and Sabahi voters in the runoff against Shafiq.
But, for now, Tahrir and other squares are once again uniting the pro-change forces, whether Islamist or not.
The key challenge for Egyptian revolutionaries is to sustain that unity, establish a leadership coalition, translate their chants into concrete demands, and maintain the pressure during implementation.
Egypt’s New Old Government
CAIRO – Egypt’s first-ever freely elected president, the Muslim Brotherhood’s Mohamed Morsi, has appointed his first cabinet, and guess what? It is crammed with officials from the old regime.
Morsi’s government clearly reflects the balance of power between the president and the Supreme Council of the Armed Forces (SCAF).
But it also reflects the strategy of the Muslim Brothers to shift that balance.
Thirty-five ministers were chosen by the new prime minister, Hisham Qandil, seven of whom (including Qandil) were ministers in the previous SCAF-appointed government.
Five ministries – information, higher education, youth, labor, and housing – were given to the Muslim Brothers’ Freedom and Justice Party (FJP).
Other pro-revolution figures secured several cabinet portfolios as well: education, legal and parliamentary affairs, industry and foreign trade, and most importantly, the justice ministry.
The “power” ministries – interior and defense – were kept under the control of figures associated with the former regime.
Field Marshal (and SCAF leader) Hussein Tantawy retained his post as Defense Minister, and General Ahmed Gamal al-Din was appointed to head the interior ministry, whose brutal behavior sparked the revolution.
Gamal al-Din’s uncle, Abd al-Ahad Gamal al-Din, was the ruling National Democratic Party’s parliamentary majority leader during the 2000’s.
His nephew was a hardliner during negotiations to release political prisoners, as well as during talks to end the street clashes of November 2011.
He was also a witness in the “Giza Officers Trial,” in which 17 policemen were accused of killing and injuring protesters in January 2011.
He defended the policemen, claiming that the victims had been killed in “self-defense.”
Nonetheless, Ashraf al-Banna, a co-founder of the reformist General Coalition for Police Officers (GCPO), remains hopeful: “He was an effective deputy [minister of interior]...[so] we expect some reforms.
The situation in the ministry is unsustainable.”
But others, like the members of the more revolutionary Officers but Honorable Coalition, accuse Gamal al-Din of being a member of a powerful anti-reform faction in the ministry, dubbed “al-Adly’s men” (after former Interior Minister Habib al-Adly).
As for the pro-change forces, Minister of Information Salah Abd al-Maqsud, a leading figure in the Muslim Brothers’ media wing, will control a sector that continues to attack the group and Morsi, even after his electoral victory.
The new youth minister, Osama Yassin, another leading Muslim Brother, was the de facto “security chief” in Tahrir Square during the 18 days that toppled former President Hosni Mubarak.
He belongs to the so-called “iron organization,” a strong, committed faction led by Khairat al-Shater, the Brotherhood’s first deputy chairman (deputy general guide).
Likewise, higher education went to Mostafa Mossad, an FJP member who was in charge of the education portfolio during Morsi’s campaign.
The labor ministry went to Khaled al-Azhary, a Brother who was deputy head of the Workers Union and a victim of police brutality in 2010.
For the Brothers, of course, everything could change if the government is dissolved after the upcoming parliamentary election.
But, even if that happens, the experience, data, and knowledge gained will be of immense value to the Brotherhood.
Four other ministries went to pro-revolution and Islamist figures.
Mohamed Mahsoob, a leading figure in the moderate Islamist al-Wasat Party who campaigned against the return of Mubarak-era officials, became Minister of Legal and Parliamentary Affairs.
Hatem Saleh, the deputy chairman of the Civilization Party, which joined the Muslim Brotherhood’s electoral coalition in the last parliamentary election, was named Minister of Industry and Foreign Trade.
The religious endowment ministry, which influences the country’s main Islamic institution, al-Azhar, went to another of the Brothers’ allies, Talaat Afifi, the deputy head of the Islamic Legal Body for Rights and Reform, which comprises more than a hundred of Egypt’s leading Islamist scholars and activists.
Finally, Ahmed Mekki, the former deputy head of the Court of Cassation, Egypt’s highest appeals court, will lead the justice ministry, which is in need of real change.
Mekki is a strong proponent of judicial independence, and was dubbed “the revolution’s representative” in Qandil’s government.
Overall, only ten of the 35 ministries went to pro-change forces, with the other ministers a combination of old-regime figures and technocrats without any publicly declared political affiliation.
But the choice of the ten ministries was strategically clever, given the Muslim Brotherhood’s coming battles with SCAF.
All of these ministries represent low-cost, soft power: official institutions that can enhance pro-change forces’ capacity to mobilize, give them religious legitimacy, and remove the threat of judicial repression as they strengthen unofficial networks on the ground.
But the SCAF side is applying a similar strategy: strengthening its hold over the key power ministries.
For example, in last week’s annual personnel changes at the interior ministry, many of those expected to be removed, owing to accusations of corruption, complicity in repression, or both, were not.
A few were even promoted.
The struggle for Egypt thus continues.
Einstein the Realist
OXFORD – It was recently discovered that the universe’s expansion is accelerating, not slowing, as was previously thought.
Light from distant exploding stars revealed that an unknown force (dubbed “dark energy”) more than outweighs gravity on cosmological scales.
Unexpected by researchers, such a force had nevertheless been predicted in 1915 by a modification that Albert Einstein proposed to his own theory of gravity, the general theory of relativity.
But he later dropped the modification, known as the “cosmological term,” calling it the “biggest blunder” of his life.
So the headlines proclaim: “Einstein was right after all,” as though scientists should be compared as one would clairvoyants: Who is distinguished from the common herd by knowing the unknowable – such as the outcome of experiments that have yet to be conceived, let alone conducted?
Who, with hindsight, has prophesied correctly?
But science is not a competition between scientists; it is a contest of ideas – namely, explanations of what is out there in reality, how it behaves, and why.
These explanations are initially tested not by experiment but by criteria of reason, logic, applicability, and uniqueness at solving the mysteries of nature that they address.
Predictions are used to test only the tiny minority of explanations that survive these criteria.
The story of whyEinstein proposed the cosmological term, whyhe dropped it, and whycosmologists today have reintroduced it illustrates this process.
Einstein sought to avoid the implication of unmodified general relativity that the universe cannot be static – that it can expand (slowing down, against its own gravity), collapse, or be instantaneously at rest, but that it cannot hang unsupported.
This particular prediction cannot be tested (no observation could establish that the universe isat rest, even if it were), but it is impossible to change the equations of general relativity arbitrarily.
They are tightly constrained by the explanatory substance of Einstein’s theory, which holds that gravity is due to the curvature of spacetime, that light has the same speed for all observers, and so on.
But Einstein realized that it is possible to add one particular term – the cosmological term – and adjust its magnitude to predict a static universe, without spoiling any other explanation.
All other predictions based on the previous theory of gravity – that of Isaac Newton – that were testable at the time were good approximations to those of unmodified general relativity, with that single exception: Newton’s space was an unmoving background against which objects move.
There was no evidence yet, contradicting Newton’s view – no mystery of expansion to explain.
Moreover, anything beyond that traditional conception of space required a considerable conceptual leap, while the cosmological term made no measurable difference to other predictions.
So Einstein added it.
Then, in 1929, Edwin Hubble discovered that the universe is expanding, consistently (within the observational accuracy of the day) with unmodified general relativity.
So Einstein dropped the cosmological term.
His doing so had nothing to do with Hubble being less blunder-prone; nor was Einstein deferring to Hubble’s superior prophetic abilities.
It was just that the problem that the term was intended to solve no longer existed.
The new observations did not refute the existence of a cosmological term.
They merely made it a bad explanation.
Then, in 1998, came those new observations of a universe whose expansion is accelerating.
As a result, the cosmological term that has been “reinstated” to account for the new observations is not quite the one that Einstein proposed and retracted.
It is larger, for it now has to explain not just why the universe isn’t collapsing, but why its expansion is accelerating.
Einstein’s remark about having “blundered” is as misleading as the idea that he is “right after all.”
The cosmological term is not something that should never have been proposed.
Its introduction represented progress in understanding reality – as did its abandonment in light of Hubble’s discovery and its reinstatement in revised form to account for the new observations.
Likewise, the mid-twentieth century “Bohr-Einstein debate” about quantum theory is often misinterpreted as a personal clash between wizards.
So counter-intuitive are quantum theory’s predictions that, under the leadership of one of its pioneers, Neils Bohr, a myth grew that there is no underlying reality that explains them.
Particles get from A to B without passing through the intervening space, where they have insufficient energy to exist; they briefly “borrow” the energy, because we are “uncertain” about what their energy is.
Information gets from A to B without anything passing in between – what Einstein called “spooky action at a distance.”
And so on.
What these paradoxical interpretations have in common is that they abandon realism, the doctrine that a physical world, existing in reality, accounts for all of our experience.
Anti-realism remains popular and appears in various guises in textbooks and popular accounts of quantum theory.
But Einstein insisted that physical phenomena have explanations in terms of what he called “elements of reality.”
Fortunately, a minority of physicists, myself included, likewise side unequivocally with realism, by adopting Hugh Everett’s multiple-universes interpretation of quantum theory.
According to this view, no particles exist where they have insufficient energy to be; it is simply that in some universes they have more energy than average, and in others, less.
All alleged “paradoxes” of quantum theory are similarly resolved.
So, while most accounts say that Bohr won the debate, my view is that Einstein, as usual, was seeking an explanation of reality, while his rivals were advocating nonsense.
Everett’s interpretation doesn’t make Einstein a demigod.
But it does make him right.
Elections are Not Enough
There can be no liberal order without political democracy, but today we are frequently reminded that political democracy alone does not guarantee a liberal order.
Free and fair elections may lead to the ascendancy of a president of Iran who wants to “wipe Israel off the map of the Middle East.”
Or to a president of Venezuela whose intolerance of the business class causes jubilation in the streets, but emigration by those whose initiative is crucial for the welfare of the people.
Less damaging, yet problematic, is the election – as in Poland – of a minority government that ruthlessly pursues its members’ personal interests and breaks all promises of cooperation made before the polls.
In other words, elections are not enough if one wants to bring democracy to the world.
Elections can lead to illiberal democracies and worse.
They must be embedded in a much more complex institutional framework, which I would describe as the liberal order.
The first feature of the liberal order is that democracies must not tolerate those who set out to destroy democracy.
Some countries, like Germany, have laws that make it possible to ban political parties whose programs are recognizably anti-democratic.
In the past, the law has been used to curb parties of both the extreme left and the extreme right.
This has clearly contributed to preventing any sign of a possible return to the totalitarian ways of the twentieth century.
However, it is not always evident when people and parties stand for election what they are going to do if they win.
This is where rules that impose term limits on officeholders, such as the Twenty-Second Amendment of the United States Constitution, have their place.
Many constitutions contain such a rule, and even President Vladimir Putin of Russia has stated that he will abide by it.
Let us hope that this will in fact be the case.
Elsewhere, notably in many of the Soviet Union’s other successor states and in Latin America, those in power have often simply changed the constitution – including rules on term limits – to their advantage.
This is where the second pillar of a liberal order comes into play: the rule of law.
It cannot be said too often that democracy and the rule of law are not the same thing.
There are lawless democracies and undemocratic “states of law” (Rechtsstaat).
The constitution of liberty requires both, and the rule of law is the more difficult of the two to establish and maintain, for it requires not just a constitution but, almost more importantly, an independent judiciary that is sensitive to violations of constitutional and other legitimate rules.
It is extremely important that Iraq held elections to a constitutional assembly.
This has produced – albeit with a certain amount of external pressure notably on behalf of the Sunnis – a document that may provide the basis for the rule of law.
But the task of finding, appointing, and accepting independent judges remains.
It will be particularly difficult in an environment in which the sharia – that is, Islamic religious law administered not by judges but by priests – is never far away.
The rule of secular law is the most delicate prerequisite of a liberal order.
Even then, we know from history that it takes but one Enabling Law to unhinge the rule of law and replace it by an ideological tyranny, as happened when Hitler came to power in Germany.
This is where the third element of a liberal order comes into play: civil society.
A plurality of civic associations and activities – regulated but not controlled by the state, and free to express its views and even to demonstrate its (diverse) sentiments publicly – is the most powerful pillar of a liberal order.
A vibrant civil society will mobilize when the rule of law is violated, and it can also check the illiberal inclinations of democratic majorities.
The near-universal availability of information makes it much easier than it was in earlier times for the voluntary non-governmental organizations that form civil society to emerge.
However, there is no ultimate guarantee against the abuse of power, especially if that power is democratically gained.
The international community must therefore recognize that it is not enough to promote, organize, or monitor elections in hitherto undemocratic countries.
The program of spreading the liberal order requires a much more sophisticated approach.
Above all, it requires international agencies and groupings that remain alert to the risks of illiberal democracies.
Elections Are Venezuela\u0027s Last Chance
Venezuela is mired in a dangerous stalemate.
President Hugo Chávez clings to power despite the obvious failings of his government: severe economic deterioration and dangerous political polarization.
The opposition, tainted by their botched coup of April 2002, now seeks to force Chávez from office through a costly general strike.
Both sides justify their intransigence with one-sided interpretations.
His sympathizers glorify Chávez as a defender of the poor besieged by a selfish, coup-plotting elite.
His fiercest opponents demonize Chávez as an autocrat pursuing a Cuban-style revolution and destroying democracy.
Both interpretations are flawed.
The Chávez government has not helped Venezuela's poor in any significant way.
On the contrary, his belligerent rhetoric and inept governance scared off investors, inciting economic decline and boosting unemployment and poverty.
Now Chávez lacks majority backing even among the poor.
The opposition comprises most of Venezuela's organized civil society, not only business, but also trade unions, professional associations, and NGOs.
So Venezuela's polarization does not pit "the poor" against "the oligarchy," but a populist against civil society.
The opposition's view--shared by rightists in the Bush administration--is equally unconvincing. Rather than initiating a revolution, Chávez merely spouts fiery rhetoric.
While his democratic credentials are dubious, he has not acted in an openly authoritarian fashion.
True, he has systematically concentrated power in his own hands and has undermined governmental checks and balances.
But while harassing the opposition, he has not overturned the minimal principles of democracy.
Indeed, he now invokes his formal democratic legitimacy to fend off demands for his resignation.
But Chávez's insistence on the inviolability of the current constitution is hypocritical.
Four years ago, Chávez deviated from the old constitution by using a plebiscite to engineer a new one, tailor-made for him.
Now he invokes that charter to block calls for a plebiscite on his continuation in office.
The paradox here is that Chávez's earlier example may provide the solution to today's standoff.
As Chávez used para-constitutional means to advance a desire for change in 1999, so the international community should not be confined by the present constitution in pressing to resolve a crisis that is ruining the country.
In fact, the Latin American members of the "group of friendly nations" trying to mediate this conflict can draw on interesting experiences to design such a solution.
After all, confrontations like this are not unusual in Latin America's rigid presidential systems.
When chief executives with fixed terms of office lose political support, they cannot be removed through a no-confidence vote, as in parliamentary systems.
Presidential systems therefore risk lengthy stand-offs that threaten democracy--as in Venezuela today.
But over the last decade, Latin American politicians have made presidential systems more flexible by finding innovative ways to remove unpopular presidents.
One of Chávez's discredited predecessors was impeached on flimsy charges of malfeasance; Ecuador's Congress declared a disastrous chief executive "mentally incompetent"; in Peru, an autocratic president, after months of domestic and international pressure, was forced into exile.
While politicians interpreted the law with a good deal of creativity in these instances, they usually did so to ensure the survival of fragile democracies facing a crisis.
As long as these maneuvers do not proliferate and turn into easy ammunition for the opposition of the moment, they may provide a safety valve for presidential systems.
International monitoring can also safeguard against frivolous use of such mechanisms.
It is to be hoped that the group of friendly nations can help design an innovative solution to Venezuela's standoff.
To be acceptable to both sides, such a solution must deviate from the favorite proposals of each.
The opposition prefers an "up-or-down" vote on Chávez's continuation in office, which it would most likely win--and which Chávez will never accept.
Chávez insists on the recall referendum mechanism included in his constitution, which the opposition cannot tolerate: removing the president in this way would require a larger absolute number of votes than Chávez garnered in the last election.
But rising abstention makes this virtually impossible.
Both proposals are thus politically unfeasible.
Only a democratic mechanism for conflict resolution that has an uncertain outcome has any chance of being adopted.
That mechanism is an election, to be held as soon as possible (realistically, by this summer).
Both sides will have to work hard if they want to win.
The fractious opposition will need to go beyond rejection of Chávez, elaborate a program for the country's reconstruction, and unite behind an attractive candidate.
President Chávez will need to clarify the content and meaning of his "Bolivarian Revolution."
Since Chávez is a skilled campaigner and the opposition so far lacks unity, he will have a realistic chance of winning--which should make a new contest acceptable to him.
Pressure from the group of friendly nations may induce both sides to accept this last chance to avoid a political and economic meltdown.
Elections can be made legitimate through a constitutional amendment shortening the presidential term, as proposed by Jimmy Carter in his recent mediation effort.
Since this is designed to defuse an exceptional crisis, it would not become a precedent that encourages frivolous attacks on Latin America's democratically elected governments.
An election now in Venezuela will save, not undermine, democracy.
Elections Without Winners
When football matches – at least those that must produce a winner – end in a draw, a penalty shoot-out must resolve the matter, as this World Cup has demonstrated so dramatically.
The shoot-out’s individual competition for heroism or misery is really alien to such a team game as football, but it is accepted as a necessary way to resolve the stalemate.
But when it comes to elections – which ideally should always produce a winner – there is no such device.
Yet quite a few recent elections have ended in at least a near-stalemate.
Mexico’s presidential election is only the latest example.
Several weeks ago, the general election in the Czech Republic yielded a total impasse, with the left and right each gaining 100 lower-house seats and no resolution in sight.
In Italy, a curious rule that provides for the grouping which has a handful of votes more than the other to get a bonus of several dozen seats in the lower house.
Romano Prodi’s government must operate on a razor’s edge in the Senate.
There are other recent examples, including, perhaps most notoriously, the 2000 presidential election in the United States.
Why are we suddenly experiencing so many close results in democratic elections?
How should we best deal with them?
And what do they do to the legitimacy of the governments that result from them?
The first question is the hardest to answer.
To the committed observer, it does not appear that democratic countries’ electorates are so evenly divided along class or similar lines as to cause political stalemate.
On the contrary, electorates everywhere seem more volatile than anything else, with voters prepared to change their preferences from one poll to the next.
Often, they want change – just that.
Nor is there any sign that political ideology has made a return among ordinary people.
Yet nowadays divisions between candidates for office are deeper than ever – and are even sharper among party activists.
This is certainly true in Latin America, where a wave of leftist populism has swept many countries.
Several Europe countries, too, have revealed a less dramatic left-right split, with Spain and Italy – though not Poland and the Czech Republic – moving somewhat to the left.
But the real issue is not so simple.
Increasingly, the divisiveness of democratic polities reflects a combination of undecided voters, motivated by ephemeral sentiments, and the emergence of political activists, often focused on narrow issues, who exploit electoral volatility for their purposes.
So what can be done in practical terms when division leads to stalemate?
One solution is to form a grand coalition, as in today’s Germany.
It is amazing to watch how quickly Christian Democrats and Social Democrats have forgotten their electoral promises and agreed on a program of higher taxation.
One may doubt whether this will increase popular confidence in the political class, but for now, at least, the arrangement is working.
Another possibility is to turn razor-thin majorities into one-sided governments that remain centrist in policy.
This is what has happened in Italy, and it may well occur in the Czech Republic.
In Latin American countries, on the other hand, an all-or-nothing attitude seems to prevail, with 50.1% of the popular vote regarded as being sufficient to stage a revolution of sentiment, if not of policy.
What does this do to the legitimacy of governments, and of political institutions in general?
As long as winners with razor-thin majorities, once in office, steer a middle course, they are more likely to remain acceptable to an electorate that is more volatile than divided.
By contrast, grand coalitions are, in the long term, likely to raise doubts about the system and encourage radical groups.
The same may also be true if narrow winners adopt a radical agenda, as some think George W. Bush has done in America and many feared Andrés Manuel Lopéz Obrador would do in Mexico.
Yet, as long as such leaders respect the democratic constitution, they are not likely to get very far; the next election will dislodge them.
Playing divisive games with an electorate that is not deeply divided never succeeds for long.
The real question is whether an uncertain electorate is prepared to defend democratic constitutions if an extremist who wins by a hair tries to overturn it and usher in a new era of tyranny.
There is currently no such risk in Europe.
However reluctantly, Silvio Berlusconi accepted in the end that he had lost, if just by a whisker, as did Viktor Orban in Hungary.
But one conclusion is perhaps more compelling than ever.
Britain’s last election also produced a narrow outcome.
However, seats in parliament, not percentages of the vote are what matters, owing to Britain’s winner-take-all electoral system based on single-member constituencies, which encourages political parties to gravitate to the center.
A volatile electorate can replace last time’s winner, but both can try to persuade voters and govern without having to go to extremes to gain a majority.
The first-past-the-post system is still the most effective method of ensuring orderly change.
Electric Cars and Sustainable Development
NEW YORK – The key to climate change control lies in improved technology.
We need to find new ways to produce and use energy, meet our food needs, transport ourselves, and heat and cool our homes that will allow us to cut back on oil, gas, coal, nitrogen-based fertilizer, and other sources of the climate-changing greenhouse gases.
There are enough good options available to suggest that the world can accomplish the goal of controlling climate change at a reasonable cost (perhaps 1% of global income per year) while enabling the world economy to continue to grow and raise living standards.
One of the most exciting developments on the horizon is the new generation of electric automobiles.
In the earliest days of the automobile in the late nineteenth century, many kinds of cars competed with each other – steam, battery, and internal combustion engine (ICE).
The gasoline and diesel-powered internal combustion engines won the competition with the success of the Model T, which first rolled off of the assembly line in 1908.
One hundred years later, competition is again stirring.
The age of electric vehicles is upon us.
The Toyota Prius, a hybrid-electric vehicle first introduced in Japan in 1997, marked an initial breakthrough.
By connecting a small generator and rechargeable battery to the braking system of a standard car, the hybrid augments the normal engine with a battery-powered motor.
Gasoline mileage is sufficiently enhanced to make the hybrid commercially viable, and gasoline-saving vehicles will become even more commercially viable when consumers are taxed for the carbon dioxide they emit from their vehicles.
Much more innovation is on the way, led by General Motors’ plug-in hybrid vehicle, the Chevy Volt, at the end of 2010.
While the Prius is a normal ICE automobile with a small motor, the Volt will be an electric vehicle with an engine alongside.
The Volt’s battery will be a cutting-edge, high-performance lithium-ion battery, which promises a range of 40 miles per charge and a six-hour recharge time drawing from a normal wall socket.
Based on typical driving patterns, the Volt will get so many miles on the battery that it will achieve around 230 miles per gallon of gasoline!
Larry Burns, the visionary head of GM’s research and development until his recent retirement, sees the electric vehicle as much more than an opportunity to save gasoline, important as that is.
According to Burns, the electric-vehicle age will reshape the energy grid, redefine driving patterns, and generally improve the quality of life in urban areas, where most of the world’s population will live and drive.
First, there will be many types of electric vehicles, including the plug-in hybrid, the all-battery vehicle, and vehicles powered by the hydrogen fuel cell, essentially a battery fed by an external source of hydrogen.
These different vehicles will be able to tap into countless energy sources.
Solar, wind, or nuclear power – all free of CO2 emissions – can feed the power grid that will recharge the batteries.
Similarly, these renewable energy sources can be used to split water into hydrogen and hydroxyl ion, and then use the hydrogen to power the hydrogen fuel cell.
Second, the storage capacity of the vehicle fleet will play an important role in stabilizing the power grid.
Not only will battery-powered vehicles draw power from the electricity grid during recharging, but, when parked, they can also feed additional power back into the grid during periods of peak demand.
The automobile fleet will become part of the overall power grid, and will be managed efficiently (and remotely) to optimize the timing of recharging from, and returning power to, the grid.
Third, electric-powered vehicles will open up a new world of “smart” vehicles, in which sensor systems and vehicle-to-vehicle communications will enable collision protection, traffic routing, and remote management of the vehicle.
The integration of information technology and the vehicle’s propulsion system will thereby introduce new standards of safety, convenience, and maintenance.
These are visionary ideas, yet they are within technological reach.
But implementing these concepts will require new forms of public-private partnership.
Automakers, utility companies, broadband providers, and government road builders will each have to contribute to an integrated system.
All of these sectors will require new ways of competing and cooperating with the others.
The public sector will have to put forward funding to enable the new generation of vehicles to reach commercialization – through R&amp;D outlays, consumer subsidies, and support for complementary infrastructure (for example, outlets for recharging in public places).
The new age of the electric vehicle exemplifies the powerful opportunities that we can grasp as we make our way from the unsustainable fossil-fuel age to a new age of sustainable technologies.
Our climate negotiators today bicker with each other because they view the climate challenge only in negative terms: who will pay to reduce fossil-fuel use?
Yet Burns’ vision for the automobile reminds us that the transition to sustainability can bring real breakthroughs in the quality of life.
This is true not only in automobiles, but also in the choice of energy systems, building designs, urban planning, and food systems (remembering that food production and transport account for around one-sixth of total greenhouse gas emissions).
We need to rethink the climate challenge as an opportunity for global brainstorming and cooperation on a series of technological breakthroughs to achieve sustainable development.
By harnessing cutting-edge engineering and new kinds of public-private partnerships, we can hasten the worldwide transition to sustainable technologies, with benefits for rich and poor countries alike – and thereby find the basis for global agreements on climate change that have so far proven elusive.
The Political Importance of Elizabeth Warren
WASHINGTON, DC – Financial reform in the United States and worldwide hangs in the balance.
The problems that brought us the terrible crisis of 2007-08 have not been fixed.
Some underlying weaknesses are actually worse than they were a decade ago, including the problem of “too big to fail” global megabanks.
Europe is backtracking on financial reform issues; its policymakers are too preoccupied with holding the eurozone together.
In the US, there will be no new legislation under the current Congress – and probably not for a long while to come.
The Dodd-Frank Act of 2010 may turn out to be a framework for effective regulation, or it might become another set of empty promises.
So far, implementation has been slow.
Implementation depends on regulators – some of whom are very good, while others remain in thrall to the big Wall Street banks.
The issues are detailed and technical, and the financial lobby has deployed a small army of highly paid experts on a mission of delay, dilution, and diversion.
The process is still subject to political supervision, but many politicians are easily bamboozled when the conversation really gets into the weeds.
This is why newly elected Senator Elizabeth Warren of Massachusetts is already proving so effective.
Warren has worked hard on financial-sector issues over many years.
She had the key ideas that led to the creation of the Consumer Financial Protection Bureau, and she helped get that agency on its feet.
But she has also been engaged with all of the other practical details of financial reform for as long as anyone – in part due to her experience as chair of the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP).
Warren is now bringing this expertise to bear where it is needed most – directly on senior regulators.
In her most high-profile intervention to date, she castigated leading officials at a Senate Banking Committee hearing on February 14, beginning with a simple question: When was the last time you took a big bank to trial?
All relevant regulators were present: Mary Miller, Under Secretary for Domestic Finance at the Treasury Department;
Dan Tarullo, Governor of the Federal Reserve System;
Marty Gruenberg, Chairman of the Federal Deposit Insurance Corporation (FDIC);
Tom Curry, Comptroller of the Currency;
Richard Cordray, Director of the Consumer Financial Protection Bureau;
Elisse Walter, Chairman of the Securities and Exchange Commission; and Gary Gensler, Chairman of the Commodity Futures Trading Commission.
Their answers ranged from unimpressive to downright evasive.
(The Fed, the Treasury, and the Office of the Comptroller of the Currency bear most responsibility, together with the Department of Justice, which was not at the hearing.)
Then Warren hit them where it hurt. “There are district attorneys and United States attorneys out there every day squeezing ordinary citizens on sometimes very thin grounds and taking them to trial in order to make an example, as they put it.
I’m really concerned that ‘too big to fail’ has become ‘too big for trial.’” After the video of Warren’s statement went viral, more than 13,000 people signed a petition demanding real accountability.
The conventional narrative – comforting to the big banks and their friends in the Obama administration – is that the Treasury has done everything within its power to reform the system.
In this account, anyone now complaining about, for example, the lack of legal charges against the banks is some form of dangerous demagogue.
But 12 Federal Reserve Bank presidents are pushing for more progress on money market reform.
The Special Inspector General for TARP, based within the Treasury, continues to express reservations about the consequences of unconditional bailouts.
Credible figures, such as Richard Fisher (Dallas Fed president), Tom Hoenig (FDIC), and Jeremiah Norton (FDIC) speak publically about the continuing problems posed by “too big to fail.”
Jeremy Stein, a relatively new appointment to the Board of Governors of the Federal Reserve, recently gave a speech explaining why dangerous incentive problems within large financial institutions will not be fixed by regulation.
Yet a senior Department of Justice official recently said that criminal charges could not be brought against big financial institutions, because experts tell him that to do so would damage the economy.
In other words, equality before the law – a fundamental principle of American justice – has vanished.
The political power of global megabanks is out of control.
They aim to run Washington just as effectively as they did in the run-up to the 2007-2008 crisis.
Sensible officials resist this, but they need political cover – elected representatives who will support them on Capitol Hill.
The group of core senators pushing for financial reform is already strong, including Sherrod Brown, Jeff Merkley, Carl Levin, and Jack Reed.
And now Elizabeth Warren is working hard with her Senate colleagues – Democrat and Republican – to bring responsible, well-informed pressure to bear on regulators and prosecutors.
As Christy Romero, TARP’s current Special Inspector General, put it in written testimony submitted for the February 14 hearing, our largest financial institutions “…continue to be dangerously interconnected.
And, in fact, they have only gotten bigger in the past four years.”
A broad coalition of reformers is hammering home this point at every opportunity.
The political narrative is changing – and Warren is leading the way.
El Salvador’s Democratic Test
Back in his radical days, Ken Livingstone, the former mayor of London, famously quipped that if voting changed anything, they would abolish it.
It turns out that in Latin America, elections really do shake things up.
The latest proof: Mauricio Funes, the standard bearer of the FMLN – until not long ago a Marxist guerilla movement – has just prevailed in El Salvador’s presidential election.
This is remarkable in a country that for as long as anyone remembers has been ruled, by hook or by crook, by a reactionary oligarchy.
If the Salvadoran left’s close electoral victory is peacefully accepted – as it has been so far – it means that Latin America has truly come a long way.
Whether this profound change will be seen as a key moment in the consolidation of democracy in El Salvador, or as the beginning of a slide toward instability, will depend on Mr Funes’ ability to balance two complex and contradictory imperatives: calling for moderation across the political spectrum while implementing the deep social transformations that El Salvador sorely needs.
With nearly half the population below the poverty line, the country’s pervasive inequalities underlie its tumultuous political history, soaring crime levels, and massive outward migration.
By all accounts a reasonable man, Funes faces an uphill battle in preaching moderation.
He will preside over a deeply polarized country, where conservative forces find themselves outside the presidential palace for the first time ever.
If the vicious tone of his opponent’s campaign offers any indication, Funes cannot count on the good will of those who have yet to learn how to behave like a loyal opposition.
More important, perhaps, is the new president’s relationship with his own allies.
A political newcomer who did not participate in El Salvador’s civil war, Funes, along with all the FMLN’s congressional candidates, was handpicked as presidential nominee, behind closed doors by the party’s Political Commission, where diehard Marxist cadres still roam unchecked.
The allegiance of the FMLN’s congressional caucus lies primarily with the party’s traditional structure and only accidentally with Funes.
Even more forbidding are the constraints that Funes faces in pursuing a social reform agenda.
To begin with, the FMLN is short of a congressional majority, which remains in the hands of its right-wing opponents, ARENA and its long-time allies, the small PCN.
Funes’ administration seems to be doomed to political gridlock, a chronic ailment of Latin America’s presidential regimes.
Moreover, the current economic downturn is creating especially severe problems for the Salvadoran economy.
Remittances from the United States accounted for roughly 17% of GDP in 2008, more than the country’s total exports.
This vital source of capital is falling at an alarming rate – 8.4% year on year in January.
Unsurprisingly, El Salvador’s economic growth forecast for 2009 has been cut to barely 1%.
The real problem, however, is less the economic contraction than the very limited room for maneuver that the government enjoys in a country that dollarized its economy in 2001.
In the face of plummeting remittances and foreign investment, Funes will rapidly discover that dollarization without dollars is no fun.
Funes is a moderate voice in a country where there are few of them.
He needs all the help he can get.
The US, which still has significant clout over what happens in El Salvador, would do well to welcome his election and offer him tangible support for key social reforms.
The stakes are high.
Confronted with daunting obstacles and a disloyal opposition, Funes may well decide to cater to FMLN hard-liners and pursue his reform agenda with no patience for democratic checks and balances, as other leftist leaders in Latin America, such as Ecuador’s Rafael Correa and Bolivia’s Evo Morales, have done.
For Funes, choosing that path would be a historic mistake.
It would endanger the single most important – if slightly ironic – legacy of the FMLN’s armed struggle: the creation of a liberal democracy in El Salvador.
Democracy is a priceless bequest.
If, amidst the indifference of the world, Funes chose to play fast and loose with it, Livingstone would be proven wrong: voting can change much, and sometimes for the worse.
Embracing Science
Long-term economic progress comes mainly from the invention and spread of improved technologies.
The scientific revolution was made possible by the printing press, the industrial revolution by the steam engine, and India’s escape from famine by increased farm yields – the so-called “Green Revolution.”
Today’s era of globalization emerged with the spread of computers and the Internet.
Thus, when we seek solutions to some of the world’s toughest problems, they, too, are likely to be found, at least in part, in new technologies that can resolve old and seemingly intractable problems.
Consider poverty in Africa.
Every conceivable explanation has been given, usually focusing on what Africans do wrong.
But a visit to Africa’s villages makes clear that the problems have more to do with the struggle for survival under difficult physical conditions than with any special problems that are unique to African societies.
Africa’s farmers produce roughly one-third or less food per hectare of farmland than their counterparts around the world, resulting in massive hunger, which is exacerbated by a heavy disease burden.
Malaria poses a unique challenge, owing in large part to Africa’s mosquito species, which are especially adept at transmitting the disease.
Other tropical parasitic diseases imply similarly extraordinary burdens in Africa.
Add the practical difficulties of broken-down roads and few cars and trucks, and economic isolation follows.
So the challenges of survival are enormous.
Yet practical solutions are at hand, because simple and low-cost technologies can address specific problems.
Low farm yields can be addressed through improved seed varieties specially adapted for African conditions, combined with technologies for replenishing soil and managing water.
Malaria can be controlled through newly designed long-lasting mosquito nets and a new generation of effective medicines.
Other tropical diseases also can be controlled, and practical technologies for safe drinking water can dramatically reduce diarrheal diseases.
Mobile phones, local wireless Internet, and more paved roads could do much to break the economic isolation of Africa’s villages.
Donor countries incessantly ask Africans to change their trade policies, government institutions, public administration, and more.
Some of these changes are important, but the role of the rich countries has been lopsided, focusing on everything except how to finance and introduce practical technologies to solve practical problems.
The rich countries’ mistakes wouldn’t matter if African countries had enough money to adopt the needed technologies on their own, but Africa is so poor that it must get financial help to escape poverty.
The development challenges in Africa are just one example of how tough societal problems can be addressed by the design and spread of improved technologies.
The same will be true of how the world best addresses manmade climate change – another of those seemingly intractable global problems.
Right now, rich countries are changing the world’s climate by emitting billions of tons of carbon dioxide each year from the use of coal, oil, and natural gas.
In future years, China and India also will make massive contributions to increased carbon dioxide in the atmosphere.
Yet no country, rich or poor, is keen to cut its energy use, owing to concern that to do so would threaten jobs, incomes, and economic growth.
New technologies will provide a key part of the solution.
Already, “hybrid” automobiles, which combine gasoline and battery power, can roughly double fuel efficiency, cutting carbon dioxide emissions by half.
Similarly, engineers have developed ways to capture the carbon dioxide that results from burning coal in power plants and store it safely underground.
This new technology, called “carbon capture and sequestration,” can cut by 80% the carbon dioxide emitted during the production of electricity.
The costs appear relatively small.
Consider also the depletion of ocean fisheries through over-fishing.
Global demand for fish consumption is growing, and so, too, is the global capacity to catch fish, driving some species to the point of extinction.
Improved aquaculture, in which fish are grown at manmade fishponds and reservoirs is still far from being a perfect technology, mainly for environmental reasons, yet it is enormously promising.
On a recent visit to Africa, a senior agricultural scientist said that in today’s world, the scientist is closer than ever before to the farmer, but farther away than ever from the policymakers.
Politicians don’t understand science, and rarely seek the advice of scientists and engineers in addressing major issues.
Everything is viewed as politics and votes, not as technical problems requiring technological expertise, which is why Africa’s poverty is so often attributed to corruption rather than to ecological challenges.
It is easy to dismiss the suggestion that technology can save the day.
After all, technological advance also requires good governance, market forces, effective universities, and more.
Politics will still play its role.
Nevertheless, it’s time to recognize that governments are ill-equipped to understand the sophisticated technological challenges and opportunities facing the world, and that new ways are needed to ensure that science and technology are given the prominence needed to address a wide range of increasingly urgent global problems.
Now is the time for every major international agency and national government to assume responsibility for gaining the scientific and technological expertise that they will need in the twenty-first century.
Embracing the Empire
Bernard Kouchner, France’s new foreign minister, has a long and distinguished record as an advocate of intervention in countries where human rights are abused.
As a co-founder of Doctors Without Borders, he stated that “we were establishing the moral right to interfere inside someone else’s country.” Saddam Hussein’s mass murder of Iraqi citizens is why he supported the war in Iraq.
One should always be careful about attributing motives to other people’s views.
But Kouchner himself has often said that the murder of his Russian-Jewish grandparents in Auschwitz inspired his humanitarian interventionism.
One may or may not agree with Kouchner’s policies, but his motives are surely impeccable.
The fact that many prominent Jewish intellectuals in Europe and the United States – often, like Kouchner, with a leftist past – are sympathetic to the idea of using American armed force to further the cause of human rights and democracy in the world, may derive from the same wellspring.
Any force is justified to avoid another Shoah, and those who shirk their duty to support such force are regarded as no better than collaborators with evil.
If we were less haunted by memories of appeasing the Nazi regime, and of the ensuing genocide, people might not be as concerned about human rights as they are.
And by no means do all those who work to protect the rights of others invoke the horrors of the Third Reich to justify Anglo-American armed intervention.
But the term “Islamofascism” was not coined for nothing.
It invites us to see a big part of the Islamic world as a natural extension of Nazism.
Saddam Hussein, who was hardly an Islamist, and Iranian President Mahmoud Ahmadinejad, who is, are often described as natural successors to Adolf Hitler.
And European weakness, not to mention the “treason” of its liberal scribes, paving the way to an Islamist conquest of Europe (“Eurabia”) is seen as a ghastly echo of the appeasement of the Nazi threat.
Revolutionary Islamism is undoubtedly dangerous and bloody.
Yet analogies with the Third Reich, although highly effective as a way to denounce people with whose views one disagrees, are usually false.
No Islamist armies are about to march into Europe – indeed, most victims of Revolutionary Islamism live in the Middle East, not in Europe – and Ahmadinejad, his nasty rhetoric notwithstanding, does not have a fraction of Hitler’s power.
The refusal of many Muslims to integrate into Western societies, as well as high levels of unemployment and ready access to revolutionary propaganda, can easily explode in acts of violence.
But the prospect of an “Islamized” Europe is also remote.
We are not living a replay of 1938.
So why the high alarm about European appeasement, especially among the neo-conservatives?
Why the easy equation of Islamism with Nazism?
Israel is often mentioned as a reason.
But Israel can mean different things to different people.
To certain evangelical Christians, it is the holy site of the Second Coming of the Messiah.
To many Jews, it is the one state that will always offer refuge.
To neo-conservative ideologues, it is the democratic oasis in a desert of tyrannies.
Defending Israel against its Islamic enemies may indeed be a factor in the existential alarmism that underlies the present “war on terror.”
A nuclear-armed Iran would certainly make Israel feel more vulnerable.
But it is probably overstated as an explanation.
Kouchner did not advocate Western intervention in Bosnia or Kosovo because of Israel.
If concern for Israel played a part in Paul Wolfowitz’s advocacy of war in Iraq, it was probably a minor one.
Both men were motivated by common concerns for human rights and democracy, as well as perhaps by geopolitical considerations.
Still, Islamist rhetoric, adopted by Ahmedinejad among others, is deliberately designed to stir up memories of the Shoah.
So perhaps the existential fear of some Western intellectuals is easier to explain than their remarkable, sometimes fawning trust in the US government to save the world by force.
The explanation of this mysterious trust may lie elsewhere.
Many neo-cons emerged from a leftist past, in which a belief in revolution from above was commonplace: “people’s democracies” yesterday, “liberal democracies” today.
Among Jews and other minorities, another historical memory may also play a part: the protection of the imperial state.
Austrian and Hungarian Jews were among the most fiercely loyal subjects of the Austro-Hungarian Emperor, because he shielded them from the violent nationalism of the majority populations.
Polish and Russian Jews, at least at the beginning of the communist era, were often loyal subjects of the communist state, because it promised (falsely, as it turned out) to protect them against the violence of anti-Semitic nationalists.
If it were really true that the fundamental existence of our democratic Western world were about to be destroyed by an Islamist revolution, it would only make sense to seek protection in the full force of the US informal empire.
But if one sees our current problems in less apocalyptic terms, then another kind of trahison des clercs comes into view: the blind cheering on of a sometimes foolish military power embarked on unnecessary wars that cost more lives than they were intended to save.
Escape from the World Bank
PHILADELPHIA – The elephants in the room at the annual International Monetary Fund/World Bank meeting in Lima, Peru, were the China-inspired Asian Infrastructure Investment Bank (AIIB) and New Development Bank (or “BRICS Development Bank,” as it was originally called).
Will these new institutions behave like the World Bank or the more conventionally “bank-like” European Investment Bank (EIB)?
Above all, will they be vehicles to promote – or, paradoxically, constrain – China’s interests?
The reality is that over the next decade, these new institutions will not be huge lenders.
The paid-in capital of each is $10 billion; so, even with an equity-to-loan ratio of 20% (the current floor for the World Bank), each will be able to lend only about $50 billion over the next decade – not chump change, but hardly a game changer – unless they “crowd in” substantial private investment.
What matters is that the larger emerging markets are putting substantial capital into institutions that will be dominated by China – an indication of how frustrated they are with the World Bank and the IMF.
The World Bank is like an old ship: in its seven decades, all kinds of barnacles – sticky budgetary accretions and transaction costs – have accumulated on its hull, steadily impeding its speed and performance.
In the 2015 financial year, the EIB lent more than twice the amount provided by the Bank, but with one-sixth the staff.
Whether measured by flows (loan disbursements) or stock (loans outstanding), the World Bank is massively over-staffed, with a much higher administrative budget than the EIB.
When the Bank was formed, the key governance mechanism was a resident Board of Directors that reported to a Board of Governors – usually finance ministers or equivalent senior authorities from member countries.
Over time, new offices proliferated: an Office of Internal Audit, an Independent Evaluation Office, an Inspection Panel, a Chief Ethics Officer, and an Office of Institutional Integrity.
Most of this bureaucratic growth was the result of pressure from developed countries, which timed their efforts with the periodic replenishment of the International Development Association (the World Bank’s window for soft loans).
Criticism from well-organized Western NGOs put more pressure on the Bank, deflecting attention from any real structural changes in the institution’s governance.
And savvy Bank presidents have known that the best way to deflect political pressure is to add yet more bells and whistles – especially when they are visible and loud.
Around two decades ago, there was an Ombudsman and a World Bank Administrative Tribunal to address internal staff grievances.
Now there is a whole paraphernalia of “Internal Justice Services”: the Respectful Workplace Advisers, an Office of Mediation (presumably an Office of Meditation will follow), Peer Review panels, an Office of Ethics and Business Conduct, and an entire Integrity Vice-Presidency.
To paraphrase the comedian Fred Allen, “On ships they call them barnacles; at the World Bank, they attach themselves to desks and are called vice presidents.” And, after the last reorganization, there are more than two dozen of them.
Meanwhile, the Bank’s extreme risk-averse culture reflects a rational response to critics who make a huge fuss about every project or program failure.
Critics who take failures in commercial projects in stride find the Bank sloth-like compared with the private sector and become indignant when its projects fail.
Yet, instead of making the case that risk is intrinsic to economic development and developing a risk-balanced portfolio of projects (and loans priced accordingly), the Bank pretends that it can be infallible.
As a result, the best has become the enemy of the good.
Risk aversion has gone hand in hand with skewed institutional priorities, as is evident in the Bank’s budget.
In the 2015 financial year, $623 million was allocated to “Client Engagement,” while nearly 1.5 times that amount, or $931.6 million, went to “Institutional, Governance & Administration” (the remaining $600 million, for “Program and Practice Management,” is ostensibly for supporting lending operations).
Expenses for the Executive Board alone were $87 million.
The Bank loudly proclaims the virtues of research – and then spends almost as much – $44 million – on “External and Corporate Relations.”
Many of the challenges facing the World Bank come from the pressures placed on it by its larger shareholders.
Because they refuse to cede power to smaller shareholders, or to allow a substantial increase in resources to meet much greater global needs, emerging economies had little choice but to create their own institutions.
The World Bank will not disappear: there are too many vested interests (including academics and NGOs) eager for a share of other people’s money.
But the Bank’s performance epitomizes how even well designed and well-built ships slow down as the barnacles build up, until they must cede the way to newer vessels.
Emerging Hope from Africa
German Chancellor Angela Merkel has put Africa squarely on the agenda of next week’s G8 Summit.
We in Liberia and across Africa welcome her leadership, and are grateful for the G8’s support for Africa, particularly its commitments in recent years to reduce debt burdens, double aid by 2010, expand trade access, and fight HIV/AIDS.
Strong efforts by Africans, coupled with the investments of the G8 and other partners, are paying off in important ways that are often unnoticed by the outside world.
Consider three major historical trends.
First, in 1989, there were just four democracies in Africa.
Today, there are at least 18, including South Africa, Mozambique, Tanzania, Benin, Mali, Ghana, Senegal, with Liberia the most recent to join the group.
Second, economic policies have greatly improved.
With few exceptions, gone are the days of dual exchange rates, hyperinflation, and extensive trade barriers.
Third, for many countries, the 25-year-old debt crisis is finally over, allowing much higher investment in health, education, and infrastructure.
These three trends overlap in a group of about 15 African countries that are strongly committed to accountable governance and sensible economic policies.
These countries are putting more kids in school, vigorously fighting diseases, and creating new economic opportunities for the poor.
Average incomes have increased by 25% over the last decade – a far cry from the zero growth of the past.
Their recovery is still fragile, but it is real and tangible, and it is providing new hope across the continent.
Most of the credit for these changes goes to Africans who demanded an end to the misrule of the past.
But the commitments by the G8 and other key partners – such as the Nordic states and the Netherlands – also have played a critical role.
The dual challenges are to sustain this progress in countries where it has started, and to initiate it in others.
The G8 can take four steps towards these ends.
First, it can ensure that its members are on track to double aid to Africa by 2010.
While progress has been made, it appears several countries are falling behind on this pledge.
Second, it can focus new resources in critical areas such as education, malaria, agriculture, and infrastructure, and ensure that most funding goes to well-governed countries.
Third, it can complete the process of debt relief for countries that have not received it, and help protect poor countries from predatory commercial creditors.
Finally, it can expand market access for African exporters, especially by redoubling efforts to complete the Doha round of global trade talks.
My own country, Liberia, embodies Africa’s emerging hope and the progress that can be made through a commitment to good governance and strong international support.
Just four years ago, we were enmeshed in a brutal 14-year civil war that claimed 270,000 lives, destroyed the fabric of our communities, and reduced average income by over 80%.
Liberia was Africa’s basket case.
Today, the war is over.
Through two rounds of free and democratic elections in 2005, the people of Liberia courageously chose peace, reconciliation, and development over ethnic divisions and violence.
Since then revenues have doubled, the economy is growing by 8% per year, school enrollment is up 50%, and electricity and water have been restored to parts of Monrovia for the first time in 15 years.
Families are being reunited, and, after years of suffering, there is finally hope for the future.
Liberians have made tremendous sacrifices.
But Liberia’s dramatic turnaround would not have been possible without the support of the United Nations’ peacekeepers, the G8, the European Union, and other partners around the world.
Nevertheless, our recovery remains fragile, and our success is far from assured.
It will take years to rebuild physical infrastructure, establish strong institutions, and heal the wounds of war.
As has been the case in some other countries, a return to conflict remains a threat if a clear peace dividend does not quickly materialize throughout the country.
The stakes for Liberia and for the region could not be higher.
But the challenges are enormous, and we will be unable to meet them without strong international support to help rebuild schools and clinics, put children back in school, and provide the foundation for vibrant private-sector growth.
With this support, in a few years we will be able to stand on our own two feet again.
Debt relief is at the heart of the support we need.
Our external debt exceeds $4 billion, more than 3,000% of annual exports.
Most of this is accumulated interest on loans borrowed by rapacious dictators of the past.
We have met all of the conditions asked by the international community to start the debt relief process, but creditor countries have not yet agreed on the financing.
We hope that the G8 can help finalize these arrangements, and can help us ensure that the costs of debt relief are shared among all creditors, including those from the private sector.
The people of Liberia are grateful for the strong support we have received as we have moved from the crisis of the past to the opportunity of the present.
We hope you will continue to stand with us as we fight to secure peace, provide basic freedoms, and create the opportunity to rebuild our lives.
Emerging Infectious Diseases
Today’s bio-diversity crisis is not just one of lost habitats and extinct species.
It is also a crisis of emerging infectious diseases (EID’s), such as HIV in humans, Ebola in humans and gorillas, West Nile virus and Avian Influenza in humans and birds, chytrid fungi in amphibians, and distemper in sea lions.
There is every reason to take these events seriously, because EID’s appear to have a long evolutionary history.
This is because many pathogens are capable of infecting a range of hosts, but evolved in places where only some of those hosts live.
Pathogens also have specialized means of transmission from host to host.
If, for example, a pathogen is transmitted by an insect that lives in the tops of trees, susceptible hosts will not be infected if they never leave the ground.
For humans, HIV, Ebola, West Nile virus, and Avian flu are only the latest in a long line of EID’s.
When our ancestors moved out of the African forest onto the savannah more than a million years ago, they rapidly became effective predators.
Sharing prey with pre-existing carnivores, they acquired tapeworms that originally inhabited only hyenas, large cats, and African hunting dogs.
When humans began to move out of Africa, they carried some of their pathogens to new areas, where they switched over to native hosts while native pathogens took up residence in the newly arrived humans.
Agriculture and urbanization subsequently exposed us to yet more pathogens.
If doctors were around back then, they would have called all these occurrences EID’s.
Geographical restriction and specialized transmission mean that in most time periods, most pathogens occur in a small number of host species, often only one, but retain the ability to infect more.
But climate change alters everything.
Species move out of their areas of origin and ecosystems change.
Pathogens come into contact with susceptible hosts that they have never before encountered, and that never had the opportunity to evolve resistance.
As a result, EID’s are not just possible; they are inevitable.
Indeed, every episode of climate change has produced them.
Anticipating a problem is always more effective in terms of time and cost than responding to a crisis, no matter how viable the response.
Unfortunately, we usually fight existing diseases but neglect looking forward.
For example, white-tailed deer living in northwestern Costa Rica host six species of tick.
None of the ticks is known to carry Lyme Disease, which has never been reported in Costa Rica.
As a result, there are no public health advisories about Lyme Disease there.
But some of the ticks are closely related to known carriers, and thus are potential carriers themselves.
This debilitating – and difficult to diagnose – illness could thus be introduced to Costa Rica inadvertently by something as simple as an asymptomatic eco-tourist.
The information about Costa Rican deer ticks comes from an inventory of parasites of vertebrates in northern Costa Rica, but it is the only inventory of its kind ever undertaken.
We must do better.
More than 50% of the species on this planet are parasites of some form, including pathogens affecting humans, livestock, crops, and wildlife.
But, relative to our overall knowledge of biodiversity, we have documented less than 10% of the world’s pathogens.
The remaining 90% are potential EID’s.
We face a potential crisis, therefore, that stems from our fundamental ignorance about the biosphere, for it is impossible to be proactive about species of pathogens whose existence has not been documented.
This makes many pathogens “evolutionary land mines” awaiting us as we relocate to novel habitats, move species around, and alter existing ecosystems.
Nevertheless, most resources are still being allocated for responses to known EID’s rather than to assessing the risk of potential EID’s.
Simply put, we must complete the global inventory of species. Now.
Five hundred thousand years of experience in hunting and gathering, coupled with cheaper and faster molecular analysis, performed by faster and cheaper computers makes this task economically feasible.
Rapid identification using genetic “bar codes” can increase the rate of discovering species and determining the transmission dynamics of potential EID’s.
Pathogens have highly specialized transmission modes, and groups of closely related species tend to be very similar.
All species of malaria, for example, are transmitted by mosquitos.
Once classified, we will then be able to make predictions about two closely related species based on incomplete information about either, buying time and saving money.
Finally, this information should be digitized and made freely available over the Internet to all concerned researchers and parties.
If EID’s were rare, management through crisis response might be cost-effective.
But EID’s are not rare at all.
Rather, they are a common outcome of geographic dispersal associated with large-scale environmental changes.
So we must cease being ignorant and reactive, and become informed and proactive.
As a common sports adage puts it: never change a winning game, but always change a losing one.
Emerging Lessons from the Crisis
ITHACA, NY – The US financial system is careening on the edge of a meltdown.
All that has kept the much-vaunted font of global capitalism from sliding into cataclysm is the US government, which has effectively become the guarantor and lender of last resort.
How could things have come to such a pass in a financial system once touted as being the deepest and most sophisticated in the world?
Where will it end?
What effects will this have on the world financial system?
It is difficult to answer these questions with much conviction while we are still in the midst of the crisis.
Indeed, every passing day now seems to bring worse news—even weekends no longer provide respite from the steady stream of gloom!
Whatever the final outcome, one thing is certain– the rest of the world will no longer be enthusiastic about adopting the free-market principles that guided US financial development.
While desperate times may call for desperate measures, massive US government intervention will also make it difficult in the future to make the case that the state should stay out of the workings of the financial system.
No doubt the satisfying emotion of schadenfraude – pleasure at the pain of others – is coursing through the minds of central bankers and policymakers in emerging markets, who for long bore the brunt of US hectoring about free-market principles.
They are probably also saying their hosannas for having resisted financial innovations to some degree or another, thanking that for the fact that their economies have not yet been pummeled by the unfolding crisis to as great an extent as the US.
Unfortunately, these lessons – if taken literally – may end up being the wrong ones for emerging market economies to be drawing.
Unfortunate because the real lesson to be taken from this crisis is that the abnegation of certain free-market principles may in fact have led to the mess the US now finds itself in.
Financial development, moreover, is ultimately going to be important for these economies to sustain high growth rates and allow a broader swath of their populations to participate in and benefit from the development process.
What went wrong in the US?
A key problem with Fannie Mae and Freddie Mac, for instance, was that their regulator failed to do its job of uncovering the massive accounting fraud embedded in their books.
That and the implicit guarantee of government backing (which finally turned explicit) allowed these two institutions to expand enormously, including into exotic financial transactions that they had no business being involved in.
The roots of the US crisis, of course, go back to the years when Alan Greenspan was chairman of the US Federal Reserve.
Then, money was easy and regulation light.
The famous ninja (no income, no job and no assets) mortgage loans were as clear a sign of regulatory negligence as any.
But these obvious signs of malfeasance were all too easily ignored when times were good and in the face of the current US administration's hostility towards regulation.
Clearly, financial innovation without effective regulation does not work well.
In the new world of more sophisticated financial markets, dangers lurk in hidden places.
Today’s crisis indicates that a set of rigid rules allows resourceful financial institutions to mask riskiness in their portfolios or shift things around to make standard risk metrics appear better than they really are.
It is impractical to devise a regulatory framework that accounts for every specific financial instrument and institution.
Rather, it makes more sense to develop a “principles-based” framework that can adapt to financial- market evolution and adopt a broader approach to managing systemic risks.
Clearly, that was lacking.
The crisis also confirms that some types of government involvement in financial markets – especially through implicit backing of ostensibly “private” institutions – generate bad outcomes that end up with taxpayers inevitably footing the bill.
The real lessons from the Fannie and Freddie debacle should be about the dangers of implicit government guarantees coupled with moral hazard and weak regulation, and the risks that lurk even in advanced financial systems.
These risks are greater in less-developed financial systems, and the costs of cleaning up the messes could also be proportionately larger for poorer economies.
One thing the crisis does show is that fraud, corruption, and government interference can eat away at the foundations of even the deepest financial systems, especially when these problems are compounded by a regulatory system that is too narrow and rule-bound in its outlook and that, at times, turns a blind eye to obvious rot in the system.
Now that, at least, is a lesson the emerging markets definitely should take away from the financial crisis.
Emerging Markets and Global Financial Reform
BERKELEY – It is fitting that the upcoming G-20 summit is being held in Pittsburg, an old industrial center of an advanced industrial country, for the advanced countries have been allowed to set the agenda for strengthening financial systems.
Other than schadenfreude , emerging markets have brought little to the table.
The United States is emphasizing higher capital requirements.
The Europeans are pushing for reform of compensation practices in the financial sector.
While both proposals have merit, whether they will be enough to stabilize our dangerously unstable financial systems is at best dubious.
What emerging markets can add to this agenda is, to put it charitably, unclear.
They have said little about how they would reform financial systems.
They can argue that this is not their problem – that the crisis of the last two years has been centered in the advanced economies, and that it is these countries’ financial systems that need to be fixed.
But the agenda set at Pittsburgh will shape, for better or worse, not just the US and European financial systems, but also the global financial system.
Financial markets are too integrated – and will remain so, like it or not – for whatever rules are established not to profoundly affect emerging markets.
China, Brazil, and Russia have offered ambitious proposals, which may bear fruit in 10 or 20 years, to make the International Monetary Fund’s Special Drawing Rights a true international currency.
But they have not said how they would reform financial systems and policies now.
The first priority should be international banks.
Until now, the international regime, led by the IMF and OECD, has pushed countries to allow foreign banks to enter their markets.
It would be understandable if emerging markets, having seen deep problems in the conduct of foreign banks, now insist on domestic ownership and control of financial institutions.
But a blanket policy would be a mistake.
Contrary to concerns that foreign banks would cut and run at the first sign of trouble, in the current crisis they maintained a remarkable degree of support for their subsidiaries in emerging markets.
Other things being equal, cross-border lending fell less in countries with significant foreign-bank presence than in emerging markets where foreign ownership of banks was not dominant.
If anything, domestic banks with shallower pockets were more likely to cut back in the crisis.
Some will say that Baltic and Southeast European countries were fortunate that responsible Swedish and Austrian banks, rather than their toxic US and British counterparts, had entered their markets.
But this observation points to what is needed: a regime that defines the conditions to be met before a country’s banks are allowed in.
The home country must put a cap on leverage, limit acceptable liquidity and funding practices, and have a resolution regime for winding up complex financial institutions.
Otherwise, emerging markets should be able to say that banks from that country will not be allowed to enter.
The second priority should be defining a strict emerging-market standard for regulating foreign banks after they are allowed in.
Other positive aspects notwithstanding, the presence of foreign banks is associated with currency mismatches.
In Central and Eastern Europe, foreign banks extended euro- and Swiss franc-denominated corporate, home, and car loans to firms and households with incomes in local currency, which added to corporate and household financial distress when local currencies tanked.
Austrian, Italian, and Swiss regulators, seeing that their banks’ assets and liabilities were in their own currencies, looked the other way.
The implication is that emerging markets, while encouraging foreign banks’ entry, should at the same time strictly regulate such banks’ local lending practices.
And, since strict regulation, if adopted unilaterally, might simply cause foreign banks to shun a country, emerging markets need to put up a united front.
Finally, emerging markets need to redouble their efforts to build bond markets, but on a local basis.
Countries with more developed bond markets experienced less negative fallout from the crisis, since their large firms retained access to non-bank sources of finance.
But opening those markets to foreign investors, which has been the dominant strategy for developing them, was a mixed blessing.
South Korea, the Asian country with the largest share of foreign investment in its securities market, also experienced the sharpest price and exchange-rate declines as those investors, mainly hedge funds, were forced to deleverage and repatriate their funds.
Encouraging participation by foreign investors is a quick way to jump-start local bond market activity.
But recent experience suggests that quickest is not best.
Regulations limiting foreign participation to prudent levels should be part of the new international regime.
The next chair of the G-20 will be South Korea.
Emerging markets should start preparing now to ask it for the floor.
The Great Emerging-Market Bubble
LONDON – Something has gone badly wrong in the emerging economies that were supposed to be shaping, even dominating, the future of the world.
The search for culprits is under way: commodity prices, fracking, US interest rates, El Nino, China, these and others lead the field.
But the answer is simpler and more traditional.
It is politics.
Look at Brazil.
There an economy once tipped for ever-lasting boom has barely grown for more than two years, and is currently shrinking.
Falling prices for its commodity exports haven’t helped, but Brazil’s economy was supposed to be about far more than just harvests and extractive industries.
Or look at Indonesia.
That economy is still expanding, but at a rate – 4.7% annually in the latest quarter – that is disappointing in terms both of previous expectations and of population growth.
The same can be said of Turkey, where growth has sagged to 2.3% in the latest quarter – which at least beats population growth but is meager compared with the country’s go-go years of 2010 and 2011, when it expanded by 9%.
Or South Africa, where economic progress has constantly been too slow, whether in boom years for gold and other resources or busts, to make any real dent in poverty levels.
Then there is China itself, whose slowdown is everybody else’s favorite explanation for their own sluggishness.
There, private economists are back enjoying their favorite pastime during periods of economic stress, namely trying to construct their own indices for GDP growth as at such times they do not believe the official statistics.
Officially, Chinese growth is rock-steady at 7% per year, which happens to be the government’s declared target, but private economists’ estimates mostly range between 4% and 6%.
One mantra of recent years has been that, whatever the twists and turns of global economic growth, of commodities or of financial markets, “the emerging-economy story remains intact.”
By this, corporate boards and investment strategists mean that they still believe that emerging economies are destined to grow a lot faster than the developed world, importing technology and management techniques while exporting goods and services, thereby exploiting a winning combination of low wages and rising productivity.
There is, however, a problem with this mantra, beyond the simple fact that it must by definition be too general to cover such a wide range of economies in Asia, Latin America, Africa, and Eastern Europe.
It is that if convergence and outperformance were merely a matter of logic and destiny, as the idea of an “emerging-economy story” implies, then that logic ought also to have applied during the decades before developing-country growth started to catch the eye.
But it didn’t.
The reason why it didn’t is the same reason why so many emerging economies are having trouble now. It is that the main determinants of an emerging-economy’s ability actually to emerge, sustainably, are politics, policy and all that is meant by the institutions of governance.
More precisely, although countries can ride waves of growth and exploit commodity cycles despite having dysfunctional political institutions, the real test comes when times turn less favorable and a country needs to change course.
That is what Brazil has been finding so difficult for the past four disappointing years.
Unable to keep inflation under control without causing a recession, the country has, since 2010, got stuck not because of bad luck, or any loss of entrepreneurial spirit in its private sector, but because of political failings.
Brazil’s government has been unwilling or unable to cut back its bloated public sector, has been mired in vast corruption scandals, and yet its president Dilma Rousseff continues to evince a fondness for just the sort of state-led capitalism that leads to exactly these problems.
The democracies of Brazil, Indonesia, Turkey, and South Africa are all currently failing to perform what is a basic task for any political system: to mediate smoothly between competing interest groups and power blocs in order to permit a broader public interest to prevail.
By that is meant essentially a public interest in allowing the economy to evolve flexibly, so that resources move from uses that have become unprofitable to ones that have a higher potential.
A clogged up economy, one that does not permit such creative destruction and adaptation to new circumstances, is one that will not grow sustainably.
Is this something that democracies, especially immature ones with fragile institutions of the rule of law and freedom of speech, are simply bad at, when compared with authoritarian regimes?
Certainly, what these stumbling economies are guilty of is a failure to learn from Singapore, a system whose managed democracy is celebrating its 50th anniversary this year, and which has successfully avoided the sort of interest-group sclerosis and corruption that is holding back Brazil, for example.
One comfort, perhaps, for the democrats is that right now China is failing to learn the Singaporean lesson, too.
Its current slowdown appears to arise from a failure by the Communist Party to challenge the monopoly powers of state-owned enterprises and to free up new sectors for private enterprise.
No matter.
It is not a question of whether democracy or authoritarianism is best.
The bottom line is that unless emerging economies can ensure that they remain flexible and adaptable, they will not continue to “emerge.”
And the determinant of that flexibility and ability to adapt lies in political institutions and their willingness to challenge interest groups, mediate social conflicts, and maintain the rule of law.
Emma Bonino and The War For Europe\u0027s Future
CAMBRIDGE: Everybody agrees: Europe needs a revolution of its economic structure.
But how to achieve this is another matter altogether.
Advocates of the status quo note that there is no crisis, so why rush?
They place their faith in a gradual restructuring and, above all, in the myriad high-tech companies now being started by the young.
Somehow, they reckon, the information revolution will arrive in a European way.
From here it is but a short step to proclaiming that the American model cannot work in Europe because it is socially reprehensible and, in any case, poised to crash any day now.
On the other side of the debate, Europe's desperate reformers see no way to trim, roll back or blow up the Continent's obsessive bureaucracies and consensual politicians.
In today's Europe they see only hints of a possibility – a glass far less than half full – for reform and restructuring, and are impatient at Europe's slow progress.
True, Europe is moving at a painfully slow pace, but the attack on the State and its allies in an ossified supply side and the dinosaurs of industrial stake holders, is widening.
New fronts in this war are opening every day.
But this is not an issue of sweeping moves that will change the world from one day to the next.
The devil is in the details, and that is where the attack must focus.
A wonderful example is the referendum promoted by Emma Bonino, Italy's star political renegade.
Among many issues, the referendum she put forward proposes three measures: end automatic tax withholding; end judicial power to reinstate dismissed workers; end automatic withholding of union dues from pay checks.
Three cheers for Emma Bonino; never mind if she fails.
Rome was not built in a day and it will take many such assaults to reform it!
At first sight it seems unreasonable, indeed irresponsible, to undermine the all-too difficult task of collecting taxes by taking away the device of automatic withholding.
It is hard enough to collect taxes, so how can societies possibly go back to a world where the tax office has to run after the taxpayer?
True, withholding makes tax collection easier and that is the point.
The referendum's advocates believe that making it much harder for the state to tax will force governments to retrench on the currently untouchable spending front.
This is an old idea from the California tax revolt of twenty-five years ago that was an important part of America's supply side revolution.
Milton Friedman always said: take away the government's tax revenues and that way, and only that way, can you get spending cuts.
There is no better way to undermine taxation then to make government work hard to get its money.
So, let people get their paychecks and then force the government to come and take the money from them.
Only when the difference between gross and after-tax income becomes painfully obvious will tax payers revolt against the taxes they bear.
Only when they figure out very concretely that half of the days they work are for the government will they really start agitating about big government.
Here, indeed, is a wonderful plot to force the State to retrench, but Italians shouldn't get their hopes up too early, for Italy's supreme court ruled that taxation is not for the people to decide.
The proposal about union dues works just the same way.
At present dues are automatically withheld and hence workers have basically no clue as to how much they pay for their union.
But if it becomes a matter of individual worker choice – do I send a check or do I keep the money? – union revenues and membership and power will shrink very rapidly.
If one believes that less overweening unions and a smaller state are the first steps toward a better supply side in Europe, this referendum item deserves praise.
The third issue highlighted by Ms. Bonino is the quaint Italian labor law that allows a dismissed worker to go to court and seek reinstatement.
It is obvious that this measure creates havoc in business and leads to deeply unproductive outcomes.
There is no issue here of weakening workers' rights but rather one of redressing a now grotesquely even playing field.
The proposed alternative of separation payments but no recourse to the courts is the right economic answer, or at least it goes in the right direction.
It will be interesting to watch status-quo Italian politicians face up to these issues.
There are no supply-siders in Italy except the referendum-rebels; in Italy everybody near government is playing the end game of accepting the existing system and getting the maximum out of it.
The central bank stands in the way of cross border financial mergers; union bosses stand in the way of free choice for workers; business leaders have too much to gain from the State to see their interest in rocking the boat.
Yet, over the next few years Italy ultimately cannot avoid the road laid out by the referendum.
Economic performance has been horrible for two decades; the system is grinding to a halt.
The stock market, rightly looking ahead, already sees prospects for change.
Italy's politicians and administrators, as always and as elsewhere in Europe, are missing the message.
In the meantime, even if the referendum is held and eventually lost under the combined onslaught of bureaucrats, politicians and union bosses, the modernization revolution is alive.
Endgame in Kosovo
In the coming months, a fundamental decision will be made that will challenge the capacity of the international community, particularly Europe, for conflict resolution.
The issue is Kosovo’s status – the last unresolved piece of the bloodstained Balkans puzzle.
For Serbs and Albanians alike, Kosovo is a place haunted by history.
But the world must not allow their freighted narratives about the past to cloud our actions to build a better future.
In the 1990’s, following its atrocities in Bosnia, Slobodan Milosevic’s Serb regime abolished Kosovo’s long-standing autonomy, suppressing the rights of the province’s overwhelming Albanian majority.
Instead of simply watching in horror, as it did at the start of the Bosnian war, NATO decided to intervene before Milosevic’s forces could again devastate one of the constituent ethnic groups of the former Yugoslavia.
Security of the European Union and Europe’s moral responsibility after the crimes of World War II were at stake.
Following NATO’s intervention, the United Nations Security Council unanimously adopted Resolution 1244, placing Kosovo under UN administration.
Since 1999, the international community’s policies with regard to Kosovo have had wide international support, including from Russia.
Now the time has come to resolve Kosovo’s status permanently.
Otherwise, the stability that the UN has brought to Kosovo, and the region, will not last.
Unemployment is now running at over 40% in Kosovo and breeds political volatility.
Without access to sovereign lending from the World Bank or the IMF, Kosovo’s economy will continue to stagnate.
Resolving Kosovo’s status is also a necessity for the province’s Serb minority, who continue to live in uncertainty, not knowing whether to look to Belgrade or Pristina for protection of their rights.
It would free both Serbia and the EU to move forward on Serbia’s domestic reforms and international integration.
The UN Special Envoy for the Kosovo Future Status Process, former Finnish President Martti Ahtisaari, has now, after 14 months of intensive negotiations with Belgrade and Pristina, presented his settlement proposal to the Security Council.
Ahtisaari’s bold proposal, which recommends Kosovo’s independence with initial supervision by a strong international civilian and military presence, is the only viable option for the international community, and for Europe in particular.
Reintegrating Kosovo into Serbia is not tenable.
Since the end of the conflict in June 1999, Serbia has not exercised any governing authority over Kosovo.
Under UN administration, legitimate Kosovar institutions for managing domestic affairs have been created.
With these institutions in place, Kosovo’s people expect greater self-government.
Sadly, Belgrade’s vision of Kosovo returning to Serbian rule – albeit with autonomy – ignores these realities.
Indeed, Serbia has no viable strategy for integrating Kosovo’s two million people into Serbian political institutions and public life.
The UN simply cannot solve Kosovo’s structural problems, namely the need to develop a viable economy and to begin engagement with the EU – the most powerful motor for reform and economic development in the region.
But this does not mean that the international community and the EU should now leave Kosovo to its own devices.
Relations between Kosovo’s Albanian majority and Serb minority remain uneasy.
So it is imperative that strong safeguards are put in place to protect minorities, particularly the Serbs.
International supervision of Kosovo’s independence by a strong international civilian and military presence will be critical to ensure that it fulfills its obligations under the settlement proposal.
What is now required is the will to adopt and implement Ahtisaari’s plan.
In the coming weeks, the Security Council will decide Kosovo’s status, but it is the EU that will have to coexist with both Kosovo and Serbia.
In fact, Kosovo’s fate is intertwined with the EU’s own.
A strong and stable Kosovo will require a cohesive and united Europe.
If the EU is divided on an issue lying at its geographic heart – and at the heart of its interests – its credibility as a foreign policy actor on matters beyond its borders will suffer dramatically.
And only a united EU can bring Russia on board for a harmonized policy towards the Balkans.
This means that the EU cannot leave Serbia to its own devices, either.
The EU must make it clear that it is ready to support Serbia – and the region as a whole – in realizing its European aspirations.
European security is hinged on Serbian integration, just as Serbian aspirations hinge on the EU.
But the price of the EU’s support cannot be changed: the major war criminals Ratko Mladic and Radovan Karadzic must be delivered to the International Criminal Tribunal for the former Yugoslavia (ICTY) in The Hague.
Today, as yesterday, the first step towards Serbia’s European integration is full cooperation with the ICTY.
Serbia has a bright future with the EU, but getting there requires that it break with its own past – on both Kosovo and the atrocities of the Milosevic era.
Ending India’s Rape Culture
NEW YORK – The crime seems incomprehensible.
A 23-year-old physiotherapy student is dead, 12 days after having been raped for more than an hour by six men in a bus traveling on main roads in the Indian capital.
Her internal injuries from the iron rod that her attackers used were so severe that doctors had to remove her intestines in their effort to save her life.
Indians, it seems, have had enough.
Dozens of large and increasingly angry demonstrations have been held to demand that the government ensure women’s security and stop treating rapists with impunity.
While the authorities have sought to quell the protests – cordoning off central New Delhi and subjecting the rest of the city to traffic restrictions – violence has escalated.
After a policeman died, live ammunition was fired into the crowds – killing a journalist, Bwizamani Singh, and provoking a rebuke from Reporters without Borders.
It is not simply the high rate of rape in India that is driving the protests’ virulence.
In a passionate speech, Kavita Krishnan, Secretary of the All India Progressive Women’s Association, spoke to the deeper issue behind the protests: the blame-the-victim culture in India around sex crimes.
She notes that government and police officials recently insisted that most rapists cannot be prosecuted in India, because, as one official put it, they are known to the women attacked.
Other officials have publicly suggested that victims themselves are “asking for it” by their use of freedom of movement.
This return to pre-feminist discourse is not confined to India.
Italy is having a similar debate about whether women’s clothes and behavior invite rape.
Even in Sweden, activists complain, rapes in which the men know their assailants go unprosecuted, because the victims are not seen as “good girls.”
Krishnan assailed the fact that the conviction rate for rape prosecutions in India has fallen from 46% in 1971 to just 26% today (which, it should be noted, is higher than the conviction rates in the United Kingdom, Sweden, and the United States).
Indeed, the fact that most rapes are committed by men who are known to the victim should “only make it easier to apprehend the rapist.”
Instead, women who go to the police are urged not to file a complaint.
“Strange people will begin to assemble at the station out of nowhere to ‘explain’ to you” why that advice is correct.
The problem, Krishnan points out, starts at the top.
In the midst of the protests, Delhi Police Commissioner Neeraj Kumar sparked further outrage by suggesting that women carry chili powder to deter would-be rapists.
And, at a press conference, he said that women should not roam around without male escorts.
Otherwise, whatever happens to them is their own fault.
Now, with the protests continuing in the aftermath of the victim’s death, officials are emphasizing the need for measures to guarantee the “safety and security” of women.
But, as Krishnan notes, “the word ‘safety’ with regard to women has been used far too much.”
Indian women have heard it all their lives. “It means,” she says, “You behave yourself.
You get back into the house.
You don’t dress in a particular way.
Do not live by your freedom….
A whole range of patriarchal laws and institutions tell us what to do in the guise of keeping us ‘safe.’”
The six men accused of the bus attack have been arrested and charged with murder, and the government has ordered an inquiry into how rape cases are handled.
But the government’s critics remain skeptical of official intentions, noting that only 600 rapes per year are reported in the capital, despite the thousands that are estimated to occur annually.
The deeper truth underlying the protests can be found on blogs, where young Indian men and women bemoan the fact that travel guidebooks routinely warn women about pervasive sexual harassment in India, and advise them to move around in groups.
Movies, religion, music, and women themselves are all blamed for male sexual violence against women, but rapists are not held responsible.
A “male-cosseting culture,” as one blogger put it, in turn supports a rape culture.
The connection between rape, male privilege, and female sexual vilification was one of the key insights of feminists in the 1970’s – an insight that they thought had been successfully applied to cultural debate about rape, and to law.
In India – as in Italy, Sweden, and around the world – women and men who support freedom of movement and safety from sex crimes are being forced to refight that battle.
One hopes that the protests in India will inspire the West to emulate the protesters’ lack of complacency.
In the developing world, women are in special jeopardy.
Their embrace of autonomy and mobility risks putting them in conflict with a law-enforcement establishment and media that still view women through a pre-feminist lens: “good girls” who stay at home should not be raped, while “bad girls” who stake a claim to public space are fair game.
Ending Institutionalized Childhood
BUDAPEST – In September of this year, the Bulgarian prosecutor launched a homicide investigation into the deaths of 238 children with disabilities, who had been living in state institutions in Bulgaria.
The children died over the past decade from malnutrition and starvation, treatable infections, pneumonia, “accidents,” and neglect.
Of the 238 cases, 149 children died in the institutions where they lived rather than in a hospital, raising alarm about why, on the brink of death, a child was not transferred immediately to a hospital intensive-care unit.
Abuse and neglect are not unique to Bulgaria.
Successive governments across central and eastern Europe are responsible for a systemic failure to provide adequate support to families with disabled children, often resulting in abandonment and institutionalization.
Without a stimulating family or family-like setting, such children cannot develop their full potential.
Institutions cause deterioration in a child, even where neglect and abuse are absent.
The rate of institutionalization of children with disabilities has remained stable, but is set to be reversed.
In November, representatives of member states of the World Health Organization’s Europe region met in Bucharest, where they signed the “European Declaration on the Health of Children and Young People with Intellectual Disabilities and their Families.”
The declaration commits governments to improving the health care of children with intellectual disabilities to enhance lifelong development, as well as inclusion and full participation in society, and sets out ten priorities for action, which include empowering children, protecting them against harm and abuse, and transferring care from institutions to the community.
This is the first intergovernmental agreement to incorporate the 2006 UN Convention on the Rights of Persons with Disabilities (CRPD), a legally-binding human-rights treaty.
The declaration applies the CRPD in a specific geographic region (Europe), for a specific target group (children with intellectual disabilities), and for a cluster of specific rights (the rights to health and to live in the community with appropriate support).
There are 53 states in the WHO-Europe region, which stretches from Iceland to Uzbekistan, and 48 have signed or ratified the CRPD.
Children with intellectual disabilities often experience syndrome-specific risks, sensory or physical impairments, and other health issues, including epilepsy, heart disease, and respiratory disease.
Frequently, these conditions are not diagnosed, or are diagnosed late as a result of health-care professionals’ ignorance of what to look for, or their inability to communicate with non-verbal people.
Head banging or screaming can, for example, be misinterpreted as being part of the intellectual disability rather than an expression of discomfort or depression – a phenomenon known as “diagnostic overshadowing.”
Unfortunately, annual health checks that screen for physical and mental-health changes and epilepsy are not routine in many countries.
There is no effective training for health-care and social-welfare professionals that covers the special health needs of people with intellectual disabilities, and no monitoring of health systems.
People with intellectual disabilities are under-researched, their physical and mental health problems unarticulated and unidentified – and thus their special needs left unaddressed.
Despite some efforts by governments in the 1990’s, institutions remain the default official response to children with disabilities and their families across Central and Eastern Europe.
In 2005, the last year for which we have statistics, UNICEF estimated that “at least 317,000 children with disabilities in the region live in residential institutions, often for life.” The majority of children in institutions have developmental delay or intellectual disabilities, which institutions themselves can cause or worsen.
Institutionalization is often based on good intentions and carried out in the name of therapy, care, and protection.
But children in institutions are denied education, despite evidence showing that every child can learn and develop.
They are denied rehabilitation and recreational activities.
Many spend their days lying in bed, where they develop major health problems including bedsores, muscle atrophy, spinal deformities, and breathing disorders.
Living in the community with access to both specialized and mainstream services is not merely a policy goal; the CRPD clarifies that this is a matter of fundamental human rights.
In tough economic times, there is a tendency to sacrifice human rights, but preventing institutionalization of children or adults with disabilities is no longer open to negotiation.
Lack of resources is no excuse, either.
There is money floating around the system that needs to be redirected to community alternatives.
Political will is also cost-free, and governments need to introduce management and financial incentives for modernizing services and shifting their focus from institutions to families and community-based care.
Children and adults with disabilities, together with their advocates, should be involved in the planning, implementation, and monitoring of policies and services.
Inclusion through support for families and community-based care will ensure that service delivery meets human needs and complies with the rule of law.
Ultimately, it is government’s responsibility to respect, protect, and fulfill human rights.
In signing the Bucharest Declaration, governments have committed to stopping new admissions to institutions by developing community-based services.
Empirical evidence supports this transition, and international human-rights obligations compel such a move.
States are obliged to report on implementation of the Bucharest Declaration in 2015.
For children in institutions, five years is a long time to wait.
Ending International Occupation
To state the obvious, military/political occupations and international oversight of a country are never welcome to the people who are being occupied and/or overseen.
For a while, they grin and bear it, sometimes recognizing the necessity of the loss of sovereignty that they are enduring.
But their tolerance inevitably fades - and fast.
In Bucharest recently, I was discussing the oversight role of the Organization for Security and Cooperation in Europe (OSCE) in my country, Albania, with an expert from that body.
He was surprised to learn that the number of OSCE employees in Albania is equal to that of the entire staff of the OSCE's Vienna headquarters.
The sheer scale of the OSCE's operations in Albania is not what troubles me.
What is troubling is the seeming permanence of its mission.
Indeed, who is to decide when the OSCE's mission in Albania is over?
The question is, of course, broader than that of the OSCE in Albania.
With UN administrators still holding sway in Kosovo and Bosnia years after their savage wars ended, and with talk of a UN mission to replace the US occupation administration in Iraq, when should an international administration be terminated and oversight of a country returned to its citizens?
Let there be no mistake: the OSCE played a positive role in stabilizing Albania.
Its presence throughout the country in 1997 helped keep Albania united at a time of near civil war.
But 1997 is a long time ago, and Albania has changed dramatically.
Its democracy is secure; its economy improving.
Yet, despite these far-reaching changes, the dynamics of the OSCE's presence have scarcely budged.
Indeed, the OSCE still sticks its nose and fingers into pretty much every aspect of Albanian political life.
The problem with such intrusive oversight is that political issues that incite the strongest passions -- such as determining electoral lists -- are suppressed when an international body offers and imposes its own solutions.
But suppression won't make these issues go away; it only lets them fester.
Albanian problems now demand homemade Albanian compromises.
For most issues, I suspect that Kosovo and Bosnia are experiencing similar side effects due to their occupations.
A stultifying form of international oversight that offers only fiat or imposed conciliation paralyzes their domestic political development.
Even more than in Albania, opportunities to develop the habits of compromise that make democratic politics workable are denied to the people.
In Albania, instead of developing and strengthening our infant democratic institutions, the OSCE, in its desire to see its policies implemented, often seeks to bypass or override them.
This retards the country's political stabilization and democratic consolidation.
Indeed, on some issues, shades of the old imperial strategy of "divide and rule" can be seen, with the OSCE pitting one Albanian institution or political party against another.
Of course, the OSCE's presence in Albania does have political backing from large portions of the country's electorate.
Until 2000, the government tended more to rely on the advice of the OSCE, but even since 2001, it has tried to buttress its position by claiming that it gets along better than ever with the OSCE and its mission.
When an Albanian minister tried last year to raise the question of the duration of the OSCE's mission, the opposition leapt to the OSCE's defense.
Nonetheless, there is a creeping perception that the OSCE is becoming too deeply engaged in picking winners and losers in Albanian politics - a perception underpinned by wider questions of sovereignty.
Is the OSCE's presence retarding the country's independence and economic vitality by creating an image of a protectorate, a country unable to forge international agreements or join powerful international bodies on its own volition?
Is it the OSCE's presence, and not Albania's government, that is now keeping the country what it has long been, a hermit kingdom?
I do not attribute any malign or sinister purposes to the OSCE presence in Albania, unless one considers inertia malign.
But saying that a body means well and saying that it is actually doing any good are two different things.
Worst of all, the OSCE's bureaucratic nature means that it will never have an incentive to leave because the first duty of a bureaucracy is to perpetuate itself.
Of course, an effective OSCE mission, confined to Tirana and comprised of experts that the country still needs, would be useful.
But Albania no longer needs the OSCE's staff to be scattered throughout the country to monitor every aspect of its political life.
The reality is that the OSCE has achieved its goals.
It is time for it to take a bow and go home to Vienna.
That's a lesson other occupying international agencies should keep in mind.
Ending Nuclear Evil
CAPE TOWN – Eliminating nuclear weapons is the democratic wish of the world’s people.
Yet no nuclear-armed country currently appears to be preparing for a future without these terrifying devices.
In fact, all are squandering billions of dollars on modernization of their nuclear forces, making a mockery of United Nations disarmament pledges.
If we allow this madness to continue, the eventual use of these instruments of terror seems all but inevitable.
The nuclear power crisis at Japan’s Fukushima power plant has served as a dreadful reminder that events thought unlikely can and do happen.
It has taken a tragedy of great proportions to prompt some leaders to act to avoid similar calamities at nuclear reactors elsewhere in the world.
But it must not take another Hiroshima or Nagasaki – or an even greater disaster – before they finally wake up and recognize the urgent necessity of nuclear disarmament.
This week, the foreign ministers of five nuclear-armed countries – the United States, Russia, Britain, France, and China – will meet in Paris to discuss progress in implementing the nuclear-disarmament commitments that they made at last year’s Nuclear Non-Proliferation Treaty (NPT) review conference.
It will be a test of their resolve to transform the vision of a future free of nuclear arms into reality.
If they are serious about preventing the spread of these monstrous weapons – and averting their use – they will work energetically and expeditiously to eliminate them completely.
One standard must apply to all countries: zero.
Nuclear arms are wicked, regardless of who possesses them.
The unspeakable human suffering that they inflict is the same whatever flag they may bear.
So long as these weapons exist, the threat of their use – either by accident or through an act of sheer madness – will remain.
We must not tolerate a system of nuclear apartheid, in which it is considered legitimate for some states to possess nuclear arms but patently unacceptable for others to seek to acquire them.
Such a double standard is no basis for peace and security in the world.
The NPT is not a license for the five original nuclear powers to cling to these weapons indefinitely.
The International Court of Justice has affirmed that they are legally obliged to negotiate in good faith for the complete elimination of their nuclear forces.
The New START agreement between the US and Russia, while a step in the right direction, will only skim the surface off the former Cold War foes’ bloated nuclear arsenals – which account for 95% of the global total.
Furthermore, these and other countries’ modernization activities cannot be reconciled with their professed support for a world free of nuclear weapons.
It is deeply troubling that the US has allocated $185 billion to augment its nuclear stockpile over the next decade, on top of the ordinary annual nuclear-weapons budget of more than $50 billion.
Just as unsettling is the Pentagon’s push for the development of nuclear-armed drones – H-bombs deliverable by remote control.
Russia, too, has unveiled a massive nuclear-weapons modernization plan, which includes the deployment of various new delivery systems.
British politicians, meanwhile, are seeking to renew their navy’s aging fleet of Trident submarines – at an estimated cost of £76 billion ($121 billion).
In doing so, they are passing up an historic opportunity to take the lead on nuclear disarmament.
Every dollar invested in bolstering a country’s nuclear arsenal is a diversion of resources from its schools, hospitals, and other social services, and a theft from the millions around the globe who go hungry or are denied access to basic medicines.
Instead of investing in weapons of mass annihilation, governments must allocate resources towards meeting human needs.
The only obstacle we face in abolishing nuclear weapons is a lack of political will, which can – and must – be overcome.
Two-thirds of UN member states have called for a nuclear-weapons convention similar to existing treaties banning other categories of particularly inhumane and indiscriminate weapons, from biological and chemical arms to anti-personnel land mines and cluster munitions.
Such a treaty is feasible and must be urgently pursued.
It is true that nuclear weapons cannot be uninvented, but that does not mean that nuclear disarmament is an impossible dream.
My own country, South Africa, gave up its nuclear arsenal in the 1990’s, realizing it was better off without these weapons.
Around the same time, the newly independent states of Belarus, Kazakhstan, and Ukraine voluntarily relinquished their nuclear arms, and then joined the NPT.
Other countries have abandoned nuclear-weapons programs, recognizing that nothing good could possibly come from them.
Global stockpiles have dropped from 68,000 warheads at the height of the Cold War to 20,000 today.
In time, every government will come to accept the basic inhumanity of threatening to obliterate entire cities with nuclear weapons.
They will work to achieve a world in which such weapons are no more – where the rule of law, not the rule of force, reigns supreme, and cooperation is seen as the best guarantor of international peace.
But such a world will be possible only if people everywhere rise up and challenge the nuclear madness.
Ending the Financial Arms Race
CAMBRIDGE – People often ask if regulators and legislators have fixed the flaws in the financial system that took the world to the brink of a second Great Depression.
The short answer is no.
Yes, the chances of an immediate repeat of the acute financial meltdown of 2008 are much reduced by the fact that most investors, regulators, consumers, and even politicians will remember their financial near-death experience for quite some time.
As a result, it could take a while for recklessness to hit full throttle again.
But, otherwise, little has fundamentally changed.
Legislation and regulation produced in the wake of the crisis have mostly served as a patch to preserve the status quo.
Politicians and regulators have neither the political courage nor the intellectual conviction needed to return to a much clearer and more straightforward system.
In his recent speech to the annual, elite central-banking conference in Jackson Hole, Wyoming, the Bank of England’s Andy Haldane made a forceful plea for a return to simplicity in banking regulation.
Haldane rightly complained that banking regulation has evolved from a small number of very specific guidelines to mind-numbingly complicated statistical algorithms for measuring risk and capital adequacy.
Legislative complexity is growing exponentially in parallel.
In the United States, the Glass-Steagall Act of 1933 was just 37 pages and helped to produce financial stability for the greater part of seven decades.
The recent Dodd-Frank Wall Street Reform and Consumer Protection Act is 848 pages, and requires regulatory agencies to produce several hundred additional documents giving even more detailed rules.
Combined, the legislation appears on track to run 30,000 pages.
As Haldane notes, even the celebrated “Volcker rule,” intended to build a better wall between more mundane commercial banking and riskier proprietary bank trading, has been hugely watered down as it grinds through the legislative process.
The former Federal Reserve chairman’s simple idea has been co-opted and diluted through hundreds of pages of legalese.
The problem, at least, is simple: As finance has become more complicated, regulators have tried to keep up by adopting ever more complicated rules.
It is an arms race that underfunded government agencies have no chance to win.
Even back in the 1990’s, regulators would privately complain of the difficulty of retaining any staff capable of understanding the rapidly evolving derivatives market.
Research assistants with one year of experience working on derivatives issues would get bid away by the private sector at salaries five times what the government could pay.
Around the same time, in the mid-1990’s, academics began to publish papers suggesting that the only effective way to regulate modern banks was a form of self-regulation.
Let banks design their own risk management systems, audit them to the limited extent possible, and then severely punish them if they produce a loss outside agreed parameters.
Many economists argued that these clever models were flawed, because the punishment threat was not credible, particularly in the case of a systemic meltdown affecting a large part of the financial system.
But the papers were published anyway, and the ideas were implemented.
It is not necessary to recount the consequences.
The clearest and most effective way to simplify regulation has been advanced in a series of important papers by Anat Admati of Stanford (with co-authors including Peter DeMarzo, Martin Hellwig, and Paul Pfleiderer).
Their basic point is that financial firms should be forced to fund themselves in a more balanced fashion, and not to rely so heavily on debt finance.
Admati and her colleagues recommend requirements that force financial firms to generate equity funding either through retained earnings or, in the case of publicly traded firms, through stock issuance.
The status quo allows banks instead to leverage taxpayer assistance by holding razor-thin equity margins, relying on debt to a far greater extent than typical large non-financial firms do.
Some large firms, such as Apple, hold virtually no debt at all.
Greater reliance on equity would give banks a much larger cushion to absorb losses.
The financial industry complains that efforts to force greater equity funding would curtail lending, but this is just nonsense in a general equilibrium setting.
Nevertheless, governments have been very timid in advancing on this front, with the new Basel III rules taking only a baby step toward real change.
Of course, it is not easy to legislate financial reform in a stagnant global economy, for fear of impeding credit and turning a sluggish recovery into a full-blown recession.
And, surely, academics are also to blame for the inertia, with many of them still defending elegant but deeply flawed models of perfect markets that create an illusion of safety for a system that is in fact highly risk-prone.
The fashionable idea of allowing banks to issue “contingent capital” (debt that becomes equity in a systemic crisis) is no more credible than the idea of committing to punish banks severely in the event of a crisis.
A simpler and more transparent system would ultimately lead to more lending and greater stability, not less.
It is high time to restore sanity to financial-market regulation.
Ending the Islamic Democracy Deficit
Despite encouraging signs, it is impossible to ignore a "democracy deficit" in the Muslim world, especially the Arab part of it.
Only one of every four countries with Muslim majorities has a democratically elected government.
Worse yet, the gap between Muslim countries and the rest of the world is widening.
Democracy and freedom expanded over recent decades into Latin America, Africa, Europe, and Asia, but the Muslim world continues to struggle.
By the reckoning of Freedom House, a think-tank devoted to monitoring democracy worldwide, the number of "free" countries around the world increased by nearly three dozen over the past 20 years.
Not one has a Muslim majority.
This phenomenon has been noted within the Muslim world as well.
In the summer of 2002, a team of Arab scholars produced the Arab Human Development Report , written on behalf of the UN Development Program and the Arab Fund for Economic and Social Development.
It portrays an Arab world lagging behind other regions in key measures, including individual freedom and women's empowerment, as well as economic and social development.
Disturbing trends, such as a demographic youth "bulge" combined with high youth unemployment rates--reaching almost 40% in some places--highlight potentially explosive social conditions.
The Arab world faces serious problems that can only be met by more flexible, democratic political systems.
The second Arab Human Development Report , issued in 2003, underscores the close relationship between the Arab world's educational shortcomings and its lack of democracy.
Democracy requires an informed citizenry able to question its government.
A well-educated citizenry is also essential if young men and women are to acquire the skills needed to perform the sort of jobs today's global and competitive world demands.
Alas, instead of progress, what we see is a cycle of inadequate educational opportunity leading to a lack of economic opportunity.
Neither freedom nor prosperity can develop in such conditions.
Muslims cannot blame the United States for their lack of democracy.
Still, America does play a large role on the world stage; and in many parts of the Muslim world, particularly in the Arab world, successive US administrations--Republican and Democratic alike--have not made democratization a priority.
At various times, the US avoided scrutinizing the internal workings of friendly countries in the interest of ensuring a steady flow of oil; containing Soviet, Iraqi, and Iranian expansionism; addressing issues related to the Arab-Israeli conflict; resisting communism in East Asia; or securing military bases.
By failing to foster gradual democratization--and yielding to a "democratic exception" in parts of the Muslim world--America missed an opportunity to help these countries adapt to the stresses of a globalizing world.
Continuing this policy is not in America's interest.
According to the Bush administration's 2002 National Security Strategy, US policy will be more actively engaged in supporting democratic trends globally, with no exception for the Muslim world.
This commitment was made with the full knowledge that democracies are imperfect and terribly complicated.
Leaders in some Muslim states contrast democratic systems with their more orderly arrangements and point with satisfaction to the seeming stability that alternatives to democracy provide.
But stability based on authority alone is illusory and ultimately impossible to sustain.
Iran, Romania, and Liberia illustrate that rigid authoritarian systems cannot withstand the shocks of social, political, or economic change, especially at the pace that characterizes today's world.
Any doubt that promoting democracy now receives greater emphasis in US foreign policy was removed by President Bush's speech of last November, in which he made clear that the Muslim world's democratic deficit is not tied to religion, but to "failures of political and economic doctrines."
President Bush also made clear that Americans had learned from the past. "Sixty years of Western nations excusing and accommodating the lack of freedom in the Middle East did nothing to make us safe--because, in the long run, stability cannot be purchased at the expense of liberty.
As long as the Middle East remains a place where freedom does not flourish, it will remain a place of stagnation, resentment, and violence ready for export."
So the US now actively supports the extension of democracy throughout the Arab and Muslim worlds, not simply for humanitarian reasons, or for theoretical reasons, but from self-interest.
History shows that societies where opportunity is safeguarded tend to be societies that are good international citizens.
But, like medical doctors' Hippocratic oath, America and others must pledge to do no harm in promoting democracy.
Unrestrained zeal to make the world better could make it worse.
Promoting democracy must be undertaken with humility, care, and wisdom.
Many models of democracy exist; and some models cannot be exported.
Moreover, mere elections should never be confused with democracy.
Rather, what distinguishes democracy from other systems is a distribution of power both within government and within society.
Until such a balance exists, elections can threaten freedom by concentrating too much authority in one person or body without providing adequate checks and balances, including independent media.
Not surprisingly, this takes time, resources, and effort.
Finally, political reform must go hand in hand with economic and educational reform for all the citizens in a society, including the 50% who happen to be women.
No country can succeed if it denies itself the talents of half of its people.
True, democracy can only be built and maintained from within, by a country's people and leaders.
Outsiders, however, can and should help.
There is a role for governments, international organizations, corporations, universities, and journalists--from the US, but also from Europe and countries in Latin America, Asia, and Africa where democracy has taken root.
Indeed, it is difficult to imagine a more important task for established democracies than helping other countries join their ranks.
Ending the Nation-State Myth
NEW YORK – This fall, thousands of college students will be taught a myth presented as fact.
It is a myth that has helped fuel wars and may hinder finding solutions to the world’s biggest problems.
Though the origin of this myth is cloudy, science has proven its falsity, and a globalized world has rendered it anachronistic.
I am talking about the nation-state.
The nation-state myth conflates two ideas, one that is concrete, the state, and one that is fuzzy, the nation.
The utility of the state is clear.
It is a necessary organizing principle that allows people to pool their resources for the common good and mobilize against common threats, whether they are floods or invading armies.
The state is also the final arbiter of law.
State power is even on the rise, partly as a backlash to globalization and as a result of growing wealth from energy markets.
But the nation-state as a basis for statecraft obscures the nature of humanity’s greatest threats.
Pollution, terrorism, pandemics, and climate change are global phenomena.
They do not respect national sovereignty, and, therefore, they necessitate global cooperation.
The origin of the nation-state idea is unclear.
Most agree that it offered a way to consolidate and legitimize a state’s rule over a group of people, whether defined by a common language, culture, or ethnicity.
The problem is that the contours of a cultural community rarely coincide with a political entity.
Nor does the ideal of national unity account for internal diversity and conflict.
Identities within nations are fluid, even from minute to minute.
About 15 years ago, I spent a summer in France’s Loire Valley.
As many travelers to France will attest, people in the French countryside believe that they, not Parisians, constitute the “true” France.
This division of core and periphery is common in many countries.
But I also noticed that a person’s identity would change during the course of a conversation.
“We French” would give way to “We Gauls,” “We Latins,” “We Bretons,” “We Franks,” or “We Europeans” depending on the topic.
This ever-changing identity was startling, but, on second thought, it made sense: after all, Charles de Gaulle famously said that it is difficult to govern a country with 246 types of cheese.
China is often thought to be governed by the Han majority.
But this group is linguistically, culturally, and even genetically diverse.
As the author Ian Buruma recently mused, it is not clear what people mean by “China.”
Taiwan is an independent state but is officially part of China.
Chinese culture and language has spread all over the world. “China” is much more than just a nation-state, Buruma concludes.
Taiwanese scholar Lee Hsiao-feng has recently argued that the concept “Chinese” is a meaningless word that was fabricated to justify rule over minorities.
It is difficult to imagine a nation that is confined to one state or a state that contains one nation.
Some argue that Japan is an example of a nation-state.
In countless heated discussions, I have reminded many Japanese that the Japanese people actually comprise Ainu, Koreans, Chinese, Filipinos, and Ryuku.
Their response is always: “Yes, but we want to believe that there is a Japanese people.” They even have a field of study devoted to examining what it means to be Japanese.
Like religion, the nation-state myth requires a leap of faith.
Japanese scholar Yoshihisa Hagiwara argues that since it is not grounded in fact, the nation-state myth is bound to dissolve, giving way to an understanding that we are merely individuals who are part of a global community.
He laments that the Japanese are especially fond of the idea of “Japaneseness,” making it possible that Japan may become the “last hero” of a dying ethos.
Expressions of this notion appear frequently in popular culture.
A recent credit card commercial depicts a father and son traveling to Norway to trace their family’s origins.
After bonding over local beer, food, sweaters, and swimming, they discover their family is actually from Sweden.
If I were to take that trip, I might have gone to Ireland to discover that my Irish ancestors were originally from Scotland.
But where were the Scots from?
Just across another sea, perhaps. The origin myth continues
If policymakers are to address today’s problems, they must think more broadly.
One place to start may be to reexamine the concept of the nation-state, which students around the world are taught is the basic unit of international relations.
Beyond the core Realist theories of balance of power, an introduction to ethics in international affairs – moral philosophy, human rights, and the role of non-state actors – should be mainstreamed in international relations curricula.
As the philosopher Peter Singer showed in his book
Ending the Never-Ending War on Drugs
SAO PAULO – The war on drugs is a lost war, and 2011 is the time to move away from a punitive approach in order to pursue a new set of policies based on public health, human rights, and common sense.
These were the core findings of the Latin American Commission on Drugs and Democracy that I convened, together with former presidents Ernesto Zedillo of Mexico and César Gaviria of Colombia.
We became involved with this issue for a compelling reason: the violence and corruption associated with drug trafficking represents a major threat to democracy in our region.
This sense of urgency led us to evaluate current policies and look for viable alternatives. The evidence is overwhelming.
The prohibitionist approach, based on repression of production and criminalization of consumption, has clearly failed.
After 30 years of massive effort, all prohibitionism has achieved is to shift areas of cultivation and drug cartels from one country to another (the so-called balloon effect).
Latin America remains the world’s largest exporter of cocaine and marijuana.
Thousands of young people continue to lose their lives in gang wars.
Drug lords rule by fear over entire communities.
We ended our report with a call for a paradigm shift.
The illicit drug trade will continue as long as there is demand for drugs.
Instead of sticking to failed policies that do not reduce the profitability of the drug trade – and thus its power – we must redirect our efforts to the harm caused by drugs to people and societies, and to reducing consumption.
Some kind of drug consumption has existed throughout history in the most diverse cultures.
Today, drug use occurs throughout society.
All kinds of people use drugs for all kinds of reasons: to relieve pain or experience pleasure, to escape reality or enhance their perception of it.
But the approach recommended in the Commission’s statement does not imply complacency.
Drugs are harmful to health.
They undermine users’ decision-making capacity.
Needle-sharing spreads HIV/AIDS and other diseases.
Addiction can lead to financial ruin and domestic abuse, especially of children.
Cutting consumption as much as possible must, therefore, be the main goal.
But this requires treating drug users not as criminals to be incarcerated, but as patients to be cared for.
Several countries are pursuing policies that emphasize prevention and treatment rather than repression – and refocusing their repressive measures on fighting the real enemy: organized crime.
The crack in the global consensus around the prohibitionist approach is widening.
A growing number of countries in Europe and Latin America are moving away from a purely repressive model.
Portugal and Switzerland are compelling examples of the positive impact of policies centered on prevention, treatment, and harm reduction.
Both countries have decriminalized drug possession for personal use.
Instead of leading to an explosion of drug consumption, as many feared, the number of people seeking treatment increased and overall drug use fell.
When the policy approach shifts from criminal repression to public health, drug users are more open to seeking treatment.
Decriminalization of consumption also reduces dealers’ power to influence and control consumers’ behavior.
In our report, we recommend evaluating from a public-health standpoint – and on the basis of the most advanced medical science – the merits of decriminalizing possession of cannabis for personal use.
Marijuana is by far the most widely used drug.
There is a growing body of evidence suggesting that the harm it causes is at worst similar to the harm caused by alcohol or tobacco.
Moreover, most of the damage associated with marijuana use – from the indiscriminate incarceration of consumers to the violence and corruption associated with the drug trade – is the result of current prohibitionist policies.
Decriminalization of cannabis would thus be an important step forward in approaching drug use as a health problem and not as a matter for the criminal justice system.
To be credible and effective, decriminalization must be combined with robust prevention campaigns.
The steep and sustained drop in tobacco consumption in recent decades shows that public information and prevention campaigns can work when based on messages that are consistent with the experience of those whom they target.
Tobacco was de-glamorized, taxed, and regulated; it has not been banned.
No country has devised a comprehensive solution to the drug problem.
But a solution need not require a stark choice between prohibition and legalization.
The worst prohibition is the prohibition to think.
Now, at last, the taboo that prevented debate has been broken.
Alternative approaches are being tested and must be carefully reviewed.
At the end of the day, the capacity of people to evaluate risks and make informed choices will be as important to regulating the use of drugs as more humane and efficient laws and policies.
Yes, drugs erode people’s freedom.
But it is time to recognize that repressive policies towards drug users, rooted as they are in prejudice, fear, and ideology, may be no less a threat to liberty.
Ending the Silent Russo-European War
There has been little mutual trust lately between the governments of Russia and the European Union.
European politicians viewed Russia’s recent parliamentary and presidential elections skeptically.
Diplomatic relations between Britain and the Kremlin are at a low since Alexander Litvenenko, a critic of the Russian government, was murdered – allegedly by a Russian agent – in London in 2006.
Such mistrust poses an obvious threat to trade and investment between Russia and the EU.
Russia’s trade with the EU between January and August 2007 reached $173.3 billion, or 51.6% of its foreign trade turnover.
More than a half of Russia’s goods are sold in Europe, and two of its top three trade partners are European: Germany, with turnover of $31.9 billion, and the Netherlands, $28.3 billion.
Similarly, European countries account for 75% of direct investment in Russia.
Britain ranks first, pouring in more than $15 billion in the first half of 2007, despite the Litvinenko case and the tit-for-tat expulsion of diplomats during this period.
Nevertheless, the volume of foreign investment falls short of what Russia needs, for its economy is unbalanced.
More than half of its exports are oil and gas, with the rest mainly chemicals and agricultural products.
Petrodollars are Russia’s main resource for the development of an information-based society.
EU countries will continue to demand energy, and Siberian deposits are far from exhausted.
As a result, diversification of Russia’s economy seems a distant prospect – all the more so because Russia’s bureaucracy, together with the state’s interest in “strategic” areas of the economy, repels foreign business.
Indeed, Europeans constantly reproach Russia for the increasing level of state interference.
Russia’s relations with the EU are governed by an agreement signed in June 1994 concerning trade, business and investment, competition issues, protection of intellectual, industrial, and business property, and financial cooperation.
Over time, economic cooperation between the two sides has grown more complex, and a new legal framework is needed.
But the European Commission is unable to start working on a new agreement until it has a mandate from the 27 EU member states.
Such a mandate has not yet been secured.
At the same time, conditions for Russian investment in the EU are far from perfect.
Investors face political discrimination and administrative and technical barriers, especially concerning the power industry.
Some EU “open” tenders have turned out to be closed to Russian companies.
Economic nationalism is growing.
Foreign investment is limited in sectors that the EU considers to be strategically and politically important.
Russian companies have had to face anti-dumping claims. European branches of Russian banks face over-regulation and expensive certification procedures.
In September 2007, a move by the European Commission to prevent foreign companies from controlling European energy transport networks was an example of a skirmish in this “silent war.”
The commission’s order to “unbundle” energy companies into transport and distribution units is hardly likely to encourage foreign energy companies working in the EU to seek structural reforms in the Russian economy.
Business leaders in Europe and Russia are beginning to seek a bold way out of this impasse: a common economic space between Russia and the EU.
But free trade and closer integration can be achieved only if supported by national governments.
Russia’s new Minister for Economic Development and Commerce, Elvira Nabiullina, said recently that European business “is Russia’s main partner on international markets,” and that cooperation “is one of the cornerstones of Russian foreign economic policy.”
She points to the government’s promise to create a comfortable environment for business by continuing institutional reforms and assisting in the development of financial markets.
Such statements are encouraging.
But Russian business needs a comprehensive action plan, which should include cutting bureaucracy, implementing real administrative reform, freeing the economy from excessive state control, and radical measures to combat corruption.
Russia also has to become integrated into the international economic system, accepting the rules applied by the rest of the world.
Russia’s eventual accession to the World Trade Organization will be crucial to this development, and its accession needs to be promoted more actively by Europe as well as by Russia.
The long-delayed new trade and investment agreement will be less relevant once Russia is in the WTO, whose rules take precedence over those of regional economic organizations.
The legitimacy of European laws limiting the scope of Russian business activity in Europe and contradicting WTO regulations would immediately be questioned.
Russia’s business leaders are ready to work for the creation of a common economic space between Russia and the EU.
For Russia, such integration would provide a real spark for economic and social modernization.
Russia’s government will, of course, have the final word in this matter.
But it is unlikely to balk at a policy that treats Russia fairly.
Ending the Tragedy of Darfur
The critical conditions that continue to prevail in Darfur are causing immense suffering to its people.
Both sides of the conflict – the government of Sudan and its allied forces, as well as all the opposition groups in Darfur – must understand that civilians should no longer fall victim to their political disputes.
The Sudanese government’s consent to the deployment of the hybrid United Nations/African Union mission, which aims to keep peace in the region, is of course a welcome development.
But the mandate of this mission must be strong enough to allow for full protection of the civilian population.
Moreover, the force must have sufficient manpower, capacity, and funding to put this vital objective into practice efficiently.
The countries and institutions that have committed additional funds in order to help secure the success of this mission – notably France, Spain, and the European Commission – should all be applauded.
It is important for international actors to assure Sudan’s government that the UN/AU mission will not strive for regime change in the country or otherwise exceed its peacekeeping mandate.
At the same time, the Sudanese government must be fully aware that only by adhering to past commitments and by cooperating in helping to prepare, deploy, and maintain the mission will the international community be encouraged to continue its support.
As for the Darfur opposition, the recent efforts by some of its leaders to overcome fragmentation and re-unify their movement are a welcome development.
It is essential that all major opposition groups achieve agreement about their aims and negotiating positions.
Only then can they act as credible partners of the international community and the Sudanese government.
All parties to the conflict must realize that, ultimately, there is no way to end their dispute other than through an equitable and sustainable peace agreement endorsed by all stakeholders.
The return of internally displaced persons and due care for them must be a core component of any such arrangement.
Responsible people around the globe, particularly politicians and journalists, must remain focused on Darfur.
For the grievances and harm suffered daily by millions of victims and refugees remain as gruesome as ever, notwithstanding the fatigue from the prolonged conflict that some may perceive.
Now that there are signs of possible stabilization in the months to come, it is time to start preparing for increased volumes of international reconstruction and development assistance, in addition to humanitarian aid.
Economically advanced countries in particular should meet their global responsibility and help Darfur move toward renewal and prosperity.
This increased assistance should emerge from an extension or re-focusing of national development cooperation programs.
Additionally, international arrangements aiming at effective use of synergies should be carefully explored.
In facilitating the complex relations between the international community and the local actors in Darfur, the UN currently plays an indispensable role and must be actively supported.
China in particular should use its considerable influence in Sudan to bring the country’s decision-makers to a definitive peaceful settlement of the dispute.
Moreover, because Darfur is emblematic of wider difficulties in the world, the international community must look beyond the immediate circumstances of the conflict and increase efforts to deal with the threats that have played a role in the disaster, such as climate change and environmental degradation.
Indeed, the accelerating expansion of deserts will likely lead to a decrease of agricultural yields from the surrounding areas, acute deterioration of the availability of water, and possibly to further conflicts and displacement of people.
Similar conditions exist – or may begin to exist – in several locations worldwide.
So the global nature of this problem must be recognized and addressed in places where environmental degradation is already bringing about a dangerous deterioration in peoples’ lives.
Where such damage looms as a threat, early prevention is required.
The End of Iran’s Islamic Revolution
STONY BROOK – The nuclear deal reached in July by Iran and its international interlocutors marks an obvious turning point in the Islamic Republic’s relations with the outside world, particularly with the United States.
But why has it taken so much longer for the US to come to terms with Ayatollah Ruhollah Khomeini’s revolution in Iran than it did with Mao Zedong’s revolution in China?
Of course, one explanation for the prolonged bilateral freeze is the warped discourse of what George W. Bush foolishly called the “global war on terror,” in which Iran, along with Iraq and North Korea, was cast as part of an international “axis of evil.”
As a result, US officials viewed any move toward diplomatic normalization as unacceptable “appeasement.”
But the Bush administration’s moralistic foreign policy merely reinforced America’s stance since Iran’s 1979 Islamic Revolution.
And it is in the history and course of that revolution that a fuller and more compelling explanation of recent events is to be found.
Forget the French Revolution as a model: the so-called Thermidorian Reaction, when moderates ended Robespierre’s Reign of Terror, was an exception to the pattern of modern revolutions.
The typical pattern during our living memory is that the hardliners come after the moderates.
In the Soviet Union, for example, it was hardliners after World War II who strove to export Marxist-Leninist revolution, condemning the world to decades of cold war.
So, too, with Iran.
After Khomeini’s death in 1989, the pragmatic Ali Akbar Hashemi-Rafsanjani became President, followed by the reform-minded Mohammad Khatami.
But the hardliners struck back.
When Khatami’s reform program was ineffective, Mahmoud Ahmadinejad, an obscure officer of the Basij militia, was elected Mayor of Tehran in 2003 (after just 12% of the city’s voters turned out), and then defeated Rafsanjani in 2005 to become President.
Ahmadinejad, a fanatical devotee of Khomeini, the revolution’s first imam, was a reminder of the revolution’s populist inception.
To promote an aggressive nuclear policy was to vindicate Khomeini’s battle against America, “the Great Satan.”
Only when Iran’s voters lost patience with Ahmadinejad’s incompetence and elected Hassan Rouhani in 2013 could the Islamic Revolution be said to be over.
Could America have avoided the waste of the Ahmadinejad years?
His predecessors had made serious efforts to improve relations with the US.
Encouraged by the victory of the US-led coalition in the 1991 Gulf War against Iraq (the Islamic Republic’s arch-enemy), in 1995 Rafsanjani sent very clear signals to the US of a willingness to restore diplomatic ties.
The Clinton administration ignored Rafsanjani’s effort, and the following year the US Congress unanimously passed the Iran and Libya Sanctions Act.
Admittedly, Bill Clinton and his advisers had plenty of reasons for skepticism.
Rafsanjani was at least partly hostage to hardline opponents keen to sabotage his foreign-policy initiatives with precisely timed acts of terror in France, Germany, and Argentina.
But Clinton and his secretary of state, Madeleine Albright, took seriously the proposal by Khatami, Rafsanjani’s successor, at the UN General Assembly in 2000 for a “dialogue of civilizations” to open what he called “a crack in the wall of mistrust” between Iran and the US.
Sadly, Iran’s Supreme Leader, Ayatollah Ali Khamenei, forced his president and foreign minister to avoid the planned handshakes with their American counterparts.
Worse was to follow for those hoping for better US-Iran relations.
First, there was Bush’s “axis of evil” speech in 2002.
Then, in February 2005, just as the hardline Ahmadinejad was about to begin his first term as president, Bush formally rejected a nuclear deal that had been painstakingly negotiated by Rouhani (then Khamenei’s representative in Iran’s Supreme National Security Council) and signed in late 2004 by France, Germany, and Britain.
As Iran scanned the strategic horizon, it seemed obvious that the US had invaded Iraq because Saddam did not have any weapons of mass destruction.
This made Ahmadinejad’s insistence on Iran’s nuclear “rights” popular with the Iranian masses and the middle class alike.
Despite popular disenchantment with the Ahmadinejad era, that sentiment still prevails in Iran.
But the nuclear accord reached last month is the product of a different political context: President Barack Obama was eager to make a deal with Iran part of his legacy, and this time, Rouhani, as President, was able to negotiate with the full backing of Khamenei, with whom (unlike Khatami) he has worked closely.
But there is a deeper reason for the success of the nuclear negotiations: Khomeini’s Islamic revolution of 1979 has finally ended – and Khamenei knows it.
He must also know that the export of Islamic revolution from Shia Iran has lost its allure, replaced in the Sunni world first by the global jihad of al-Qaeda and now by the so-called Islamic State and caliphate of Abu Bakr al-Baghdadi.
For Iran, what counts now is no longer ideology but national interest and realpolitik.
That is why it finds itself currently backing the opponents of revolutionary Islam: Bashar al-Assad against the Islamists in Syria and the Houthis against al-Qaeda in Yemen.
And it is why it finds itself not only signing a nuclear accord with the Great Satan but also tacitly cooperating with it against the Islamic State, their common enemy.
End Taiwan’s Isolation
BRUSSELS – As protests over China’s crackdown in Tibet and the debate about Kosovo’s unilateral declaration of independence continue to fester, the injustice of Taiwan’s ongoing international isolation has barely stirred a flicker of interest, despite Taiwan’s recent presidential election and referendum on United Nations membership.
This neglect is not only shortsighted, but may also prove dangerous.
This seeming double standard can be explained partly by a sense of guilt: the West has, for the most part, embraced Kosovo’s independence in an effort to assuage its own culpability for not preventing Slobodan Milosevic’s campaign of ethnic cleansing there.
Taiwan, on the other hand, does not grab our attention, because it is stable and flourishing economically.
It has not been under Chinese central government rule for more than 100 years – indeed, since it was conquered by Japan at the end of the nineteenth century – and it has never been part of the People’s Republic of China.
Taiwan is, de facto, an unrecognized independent state with a vigorous democracy and high standards of human rights.
Because Taiwan has not allowed itself to become a victim, the world simply does not feel guilty about it, and so ignores it.
But perhaps we should feel some guilt.
Taiwan deserves great credit for standing on its own two feet, despite the international isolation imposed.
China blocks it from participating fully in the international arena, whether through the World Trade Organization, the Olympics, or the UN’s specialized agencies, including the World Health Organization.
To its shame, China allows its political goal of excluding Taiwan from membership in all international organizations to trump even urgent public health concerns.
The small number of countries that recognize Taiwan diplomatically is dwindling constantly, owing to a mixture of Chinese pressure and blandishments.
On top of all this, Taiwan’s 22 million people go about their daily business knowing that thousands of Chinese missiles are ready to be launched at them at a moment’s notice.
It is not for me to say that Taiwan should be recognized as an independent country.
To all intents and purposes, Taiwan is independent already, though without formal recognition.
Equally, there are plenty of Taiwanese who would like their island eventually to reunify with China, particularly if China democratizes and ceases to be a one-party communist dictatorship.
However, we cannot deny that Taiwan’s people are unjustly being refused their place in the wider world.
The international community should do more to usher Taiwan into the international mainstream.
Western powers have always been champions of human rights and self-determination within the bounds of international law.
The campaigns that the West waged throughout the 1980’s in solidarity with democratic forces in Soviet-dominated Eastern Europe helped bring about the end of communist domination.
A similar commitment to the democratic rights of Taiwanese could have salutary effects in China.
Moreover, Taiwan is a natural ally of any party that espouses the values of pluralist politics, free markets, and human rights.
It seems particularly short-sighted, indeed hypocritical, for the United States and Britain to seek to spread democracy and human rights throughout the world while failing to recognize and reward the Taiwanese, a people who have embraced these concepts wholeheartedly.
The message that unquestioning recognition of “One China” is sending is that we appreciate you more if you are a big communist dictatorship than if you are a small multi-party democracy.
For the record, there are clear precedents for divided countries to enter the UN as separate states and then eventually to reunify: West and East Germany, North and South Yemen, and perhaps one day the two Koreas.
Ultimately, is for Taiwan and China to regulate and resolve their relations.
There are already some positive signs of a bilateral thaw as a new administration prepares to take office in Taiwan, with high-level talks taking place between China’s President Hu Jin Tao and Taiwan’s Vice-President-elect Vincent Siew.
The democratic world has an obligation to support this process – not only because Taiwan deserves its support, but also because engaging more with Taiwan could potentially be a powerful instrument of leverage for broader change in China.
End the Silence Over Chechnya
It is extremely difficult for an honest observer to break through the closed doors that separate Chechnya from the rest of the world.
Indeed, no one even knows how many civilian casualties there have been in ten years of war.
According to estimates by non-governmental organizations, the figure is between 100,000 (that is, one civilian out of ten) and 300,000 (one out of four).
How many voters participated in the November 2005 elections?
Between 60 and 80%, according to Russian authorities; around 20%, reckon independent observers.
The blackout imposed on Chechnya prevents any precise assessment of the devastating effects of a ruthless conflict.
But censorship cannot completely hide the horror.
Under the world’s very eyes, a capital – Grozny, with 400,000 inhabitants – has been razed for the first time since Hitler’s 1944 punishment of Warsaw.
Such inhumanity cannot plausibly be described as “anti-terrorism,” as Russian President Vladimir Putin insists.
The Russian military leadership claims to be fighting against a party of 700 to 2,000 combatants.
What would be said if the British government had bombed Belfast, or if the Spanish government bombed Bilbao, on the pretext of quelling the IRA or the ETA?
And yet the world remains silent in the face of the looting of Grozny and other Chechen towns and villages.
Are Chechen women, children and all Chechen civilians less entitled to respect than the rest of mankind?
Are they still considered human?
Nothing can excuse the seeming indifference displayed by our worldwide silence.
In Chechnya, our basic morality is at stake.
Must the world accept the rape of girls who were kidnapped by the occupying forces or their militias?
Should we tolerate the murder of children and the abduction of boys to be tortured, broken, and sold back to their families, alive or dead?
What about “filtration” camps, or “human firewood”?
What about the villages exterminated to set an example?
A few NGO’s and some brave Russian and Western reporters have witnessed countless crimes.
So we cannot say “we did not know.”
Indeed, the fundamental principle of democracies and civilized states is at issue in Chechnya: civilians’ right to life, including the protection of innocents, widows, and orphans.
International agreements and the United Nations Charter are as binding in Chechnya as anywhere else.
The right of nations to self-determination does not imply the right of rulers to dispose of their people.
The fight against terrorism is also at stake.
Who has not yet realized that the Russian army is actually behaving like a group of pyromaniac firefighters, fanning the fires of terrorism through its behavior?
After ten years of a large-scale repression, the fire, far from going out, is spreading, crossing borders, setting Northern Caucasus ablaze and making combatants even more fierce.
How much longer can we ignore the fact that, in raising the bogeyman of “Chechen terrorism,” the Russian government is suppressing the liberties gained when the Soviet empire collapsed?
The Chechen war both masks and motivates the reestablishment of centralized power in Russia – bringing the media back under state control, passing laws against NGO’s, and reinforcing the “vertical line of power” – leaving no institutions and authorities able to challenge or limit the Kremlin.
War, it seems, is hiding a return to autocracy.
Sadly, wars in Chechnya have been going on for 300 years.
They were savage colonial conflicts under the Czar and almost genocidal under Stalin, who deported the whole Chechen population, a third of which perished during their transfer to the Gulag.
Because we reject colonial and exterminating ventures, because we love Russian culture and believe that Russia can bloom in a democratic future, and because we believe that terrorism – whether by stateless groups or state armies ­– should be condemned, we demand that the world’s blackout on the Chechen issue must end.
We must help Russia’s authorities escape from the trap they set for themselves and into which they fell, putting not only Chechens and Russians, but the world at risk.
It would be tragic if, during the G8 summit scheduled for St. Petersburg, Russia, in June 2006, the Chechen issue were pushed to the side.
This dreadful and endless war needs to be discussed openly if it is to end peacefully.
Energizing Europe
In France’s pre-presidential electoral campaign, European affairs are mentioned or whispered, but almost never debated.
France is mostly concerned with its own problems, particularly the supposed malfunctioning of its political class and the apparent laziness of the French public, which is blamed for weak economic growth, especially when compared to the United States.
France needs a debate on European Union affairs, but only as long as it does not degenerate – as is common in Europe – into self-flagellation.
But the germ of such a debate exists, and it sounds very different from that which dominated the failed constitutional referendum campaign in France two years ago.
The operation of European institutions – the European Central Bank, the European Commission, and the Stability Pact – is facing severe criticism, but not in the name of a nostalgia for national sovereignty.
Europe is not being rejected; instead, the criticism has been in the spirit of improving European institutions in the name of the common good.
Both of the major candidates for the French presidency, Ségolène Royal and Nicholas Sarkozy, have called for the creation of an economic government for the euro zone.
Of course, such a “government” already exists in the form of the European Central Bank.
But what is needed is an institutional framework that would establish greater political responsibility concerning the primary economic objectives that Europe should pursue – full employment and growth – and that would at least partly close the democratic deficit implied by the ECB’s takeover of monetary policy from euro-zone states.
A moment of seeming political disunity, such as exists today, may not seem the right one to initiate such a project. But, historically, Europe has succeeded when, at moments of danger, it has initiated irreversible processes that outweigh any other consideration.
Europe’s founding fathers understood this when they hatched the idea of creating the European Coal and Steel Community: encouraging old enemies to pool some of the most powerful tools of war under the pretext of advancing their economic interests was a strategy of rare intelligence.
We now live in a similar moment of uncertainty and danger, and this time, too, there is a project, both economic and political, that can unite the Union: energy independence, a key factor in national sovereignty.
Today, there is nothing on a pan-European scale that guarantees the responsibility of each member state to ensure the security of its future supplies.
The European Commission is weary of trying to build a single energy market, which has required it to persuade governments that they must dismantle their existing monopoly operators – a prerequisite to competition.
Although member states appear to have resigned themselves to this, they fervently resist other European firms taking control of their “national champion” companies.
To be sure, governments cannot escape their responsibilities to their citizens, and only the most naïve technocrat believes that the market alone can ensure energy independence.
At the same time, however, purely bilateral negotiations between individual EU members and oil- and gas-producing countries weakens the member states’ bargaining power, as well as undermining Europe’s geopolitical weight in world affairs.
Yet, fortunately, there is no need for resignation.
There is an obvious solution, similar to the Coal and Steel Community implemented by our founding fathers: a European energy, environment, and research community (E3RC).
It is a mistake to believe that ecological concerns can be addressed only through negative growth.
In fact, the opposite is true.
New energy and environmental technologies will undoubtedly drive growth in the future.
But only if research is doubled to create new energy-efficient technologies will we eventually consume less energy overall and more energy in an environmentally friendly way.
The ecological disasters that today’s economic activity has already produced and the catastrophic potential of those to come have at last brought home the fact that energy policy and environmental protection cannot be separated.
As it is, the E3RC would pursue two directly related objectives: European energy independence, which would be helped by new energy and environmental technologies, and Europe’s increased bargaining power in global markets.
Its creation would also send out a new message to the European public: competition alone is not the only thing on Europe’s horizon.
Above all, the EU requires cooperation.
Energy Independence in an Interdependent World
CAMBRIDGE – When President Richard Nixon proclaimed in the early 1970’s that he wanted to secure national energy independence, the United States imported a quarter of its oil.
By the decade’s end, after an Arab oil embargo and the Iranian Revolution, domestic production was in decline, Americans were importing half their petroleum needs at 15 times the price, and it was widely believed that the country was running out of natural gas.
Energy shocks contributed to a lethal combination of stagnant economic growth and inflation, and every US president since Nixon likewise has proclaimed energy independence as a goal.
But few people took those promises seriously.
Today, energy experts no longer scoff.
By the end of this decade, according to the US Energy Information Administration, nearly half of the crude oil that America consumes will be produced at home, while 82% will come from the US side of the Atlantic.
Philip Verleger, a respected energy analyst, argues that, by 2023, the 50th anniversary of Nixon’s “Project Independence,” the US will be energy independent in the sense that it will export more energy than it imports.
Verleger argues that energy independence “could make this the New American Century by creating an economic environment where the United States enjoys access to energy supplies at much lower cost than other parts of the world.” Already, Europeans and Asians pay 4-6 times more for their natural gas than Americans do.
What happened?
The technology of horizontal drilling and hydraulic fracturing, by which shale and other tight rock formations at great depths are bombarded with water and chemicals, has released major new supplies of both natural gas and oil.
America’s shale-gas industry grew by 45% annually from 2005 to 2010, and the share of shale gas in America’s overall gas production grew from 4% to 24%.
The US is estimated to have enough gas to sustain its current rate of production for more than a century.
While many other countries also have considerable shale-gas potential, problems abound, including water scarcity in China, investment security in Argentina, and environmental restrictions in several European countries.
The American economy will benefit in myriad ways from its change in energy supply.
Hundreds of thousands of jobs are already being created, some in remote, previously stagnating regions.
This additional economic activity will boost overall GDP growth, yielding significant new fiscal revenues.
In addition, the lower energy-import bill will cause America’s trade deficit to narrow and its balance-of-payments position to improve.
Some US industries, such as chemicals and plastics, will gain a significant comparative advantage in production costs.
Indeed, the International Energy Agency estimates that the additional precautions needed to ensure shale-gas wells’ environmental safety – including careful attention to seismic conditions, properly sealed shafts, and appropriate waste-water management – add only about 7% to the cost.
With respect to climate change, however, the effects of greater reliance on shale gas are mixed.
Because natural-gas combustion produces fewer greenhouse gases than other hydrocarbons, such as coal or oil, it can be a bridge to a less carbon-intensive future.
But the low price of gas will impede the development of renewable energy sources unless accompanied by subsidies or carbon taxes.
At this stage, one can only speculate about the geopolitical effects.
Clearly, the strengthening of the US economy would enhance American economic power – a scenario that runs counter to the current fashion of portraying the US as being in decline.
But one should not jump to conclusions.
A balance of energy imports and exports is only a first approximation of independence.
As I argue in my book The Future of Power, global interdependence involves both sensitivity and vulnerability.
The US may be less vulnerable in the long run if it imports less energy, but oil is a fungible commodity, and the US economy will remain sensitive to shocks from sudden changes in world prices.
In other words, a revolution in Saudi Arabia or a blockade of the Strait of Hormuz could still inflict damage on the US and its allies.
So, even if America had no other interests in the Middle East, such as Israel or nuclear non-proliferation, a balance of energy imports and exports would be unlikely to free the US from military expenditures – which some experts estimate run to $50 billion per year – to protect oil routes in the region.
At the same time, America’s bargaining position in world politics should be enhanced.
Power arises from asymmetries in interdependence.
You and I may depend on each other, but if I depend on you less than you do on me, my bargaining power is increased.
For decades, the US and Saudi Arabia have had a balance of asymmetries in which we depended on them as the swing producer of oil, and they depended on us for ultimate military security.
Now the bargains will be struck on somewhat better terms from America’s point of view.
Likewise, Russia has enjoyed leverage over Europe and its small neighbors through its control of natural gas supplies and pipelines.
As North America becomes self-sufficient in gas, more from various other regions will be freed up to provide alternative sources for Europe, thereby diminishing Russia’s leverage.
In East Asia, which has become the focus of US foreign policy, China will find itself increasingly dependent on Middle Eastern oil.
American efforts to persuade China to play a greater role in regional security arrangements may be strengthened, and China’s awareness of the vulnerability of its supply routes to US naval disruption in the unlikely event of conflict could also have a subtle effect on each side’s bargaining power.
A balance of energy imports and exports does not produce pure independence, but it does alter the power relations involved in energy interdependence.
Apakah kekurangan energi benar terjadi?
MARTIGNY, SWISS – Apabila kita mampu menyimpan dan memanfaatkan energi dari cahaya matahari yang menyinari bumi selama dua menit saja, energi tersebut cukup untuk menjalankan kendaraan, menerangi dan menghangatkan gedung, dan memenuhi seluruh kebutuhan listrik kita selama satu tahun.
Singkatnya, kita umat manusia tidak sedang menghadapi kekurangan energi.
Kita justru menghadapi tantangan teknis dalam menyimpan energi dan menyalurkannya kepada konsumen, dan salah satu cara paling efisien untuk mengatasi kesulitan tersebut ialah berinvestasi pada teknologi penyimpanan energi yang lebih baik.
Beberapa permasalahan di dunia saat ini mungkin berasal dari penggunaan energi, mulai dari konflik karena pasokan minyak dan kekhawatiran akan emisi gas rumah kaca, hingga hilangnya produktivitas dan output yang diakibatkan oleh kekurangan atau pemadaman listrik.
Di sejumlah kawasan termiskin di dunia, kekurangan energi melumpuhkan pembangunan ekonomi.
Secara global, lebih dari 1,3 miliar penduduk dunia tidak memiliki akses terhadap listrik; dan sekitar 2,6 miliar penduduk tidak mampu mengakses alat memasak modern.
Lebih dari 95% diantaranya berada di Sub-Sahara Afrika atau kawasan berkembang di Asia dan 84% tinggal di wilayah pedesaan.
Pada awal pemilihan presiden di Nigeria belakangan ini, seorang wanita ditanya harapannya atas apa yang harus dipenuhi calon presiden.
Satu kata jawabnya: “Penerangan”.
Energi yang tidak dapat diandalkan atau tidak tersedia merupakan permasalahan bagi sebagian besar negara-negara di Afrika dan sub kontinen India, serta beberapa negara lainnya di Asia.
Berdasarkan laporan dari International Energy Agency, penyempurnaan pada sektor energi akan menghasilkan perbaikan yang setara dengan satu dekade pembangunan/peningkatan pendapatan per kapita pada beberapa negara-negara termiskin di dunia.
Krisis energi global diperburuk dengan rendahnya inovasi.
Berdasarkan studi yang dilakukan laboratorium milik pemerintah Amerika Serikat, Lawrence Livermore National Laboratory, lebih dari 60% energi yang kita gunakan sebetulnya hilang selama periode antara waktu energi dihasilkan dan saat dikonsumsi.
Hal ini meliputi ketidakefisienan dalam konversi bahan bakar fosil menjadi listrik, kehilangan energi selama transmisi, perilaku konsumen yang boros, dan pentingnya memiliki cadangan untuk mencegah pemadaman listrik.
Pembaruan inovasi sangat diperlukan, bentuk-bentuk inovasi yang dapat menghilangkan pemborosan (waste), mengurangi polusi, dan memperluas akses perolehan energi di seluruh dunia. Upaya ini berarti berfokus pada teknologi yang dapat meningkatkan efisiensi, seperti komunikasi nirkabel, komunikasi antar peralatan (machine-to-machine), meteran listrik cerdas, dan manajemen produksi yang lebih baik.
Berbagai sumber energi terbarukan, termasuk tenaga surya dan angin, berada pada posisi yang tepat untuk berkontribusi pada produksi energi yang dibutuhkan oleh negara-negara ekonomi maju dan berkembang.
Akan tetapi karena matahari tidak bersinar setiap saat dan angin tidak selamanya bertiup, energi yang dihasilkan dari sumber tersebut tidak stabil dan tidak tersedia secara terus-menerus.
Kondisi seperti ini akan terus menjadi persoalan, kecuali dan hanya jika kita mampu menyimpan energi dari sumber-sumber terbarukan secara efisien.
Beberapa studi yang dilakukan US Western Electricity Coordinating Council menyimpulkan bahwa penemuan cara-cara terbaik dalam penyimpanan energi dapat mengurangi keseluruhan pemborosan (waste) hingga 18% dan meningkatkan efisiensi penggunaan listrik hingga 11%.
Metode-metode penyimpanan energi yang lebih baik juga akan mempermudah penyaluran energi ke daerah-daerah sulit dijangkau yang saat ini tidak terlayani, serta memaksimalkan pemanfaatan sumber-sumber energi yang jumlahnya terbatas.
Salah satu metode penyimpanan energi yang sudah teruji adalah penggunaan kapasitas berlebih untuk memompa air ke dalam reservoir, sehingga dapat digunakan di kemudian hari untuk menggerakkan turbin saat permintaan sedang tinggi.
Namun pendekatan semacam ini hanya bermanfaat di daerah pegunungan, sehingga tidak cocok diterapkan sebagai solusi massal.
Potensi penelitian meliputi grid-scale battery yang bisa mengisi ulang dan mengeluarkan daya puluhan ribu kali lebih besar dan memiliki data analytics untuk memaksimalkan penggunaan baterai dan menjadikan grid seefektif mungkin.
Menghasilkan energi saja tidak cukup, kita juga harus menggunakannya secara efisien, dan penerapan teknologi penyimpanan termutakhir, sekaligus tercanggih, secara massal merupakan unsur penting dalam solusi ini.
Menjamin pasokan energi global tersedia secara stabil, efisien, mudah diakses, dan terjangkau akan memerlukan waktu.
Akan tetapi sejumlah terobosan semakin dekat dan menjadi tugas kita untuk berupaya keras mewujudkannya.
Engaging the Islamists
The massive victory of Hamas in the Palestinian parliamentary elections stunned much of the world, but the outcome should not have been so surprising.
Indeed, Hamas’s moment of triumph is part of a growing regional pattern.
Four years ago, Turkey’s Islamic-oriented Justice and Development Party won a plurality in parliamentary elections and formed a government.
A month later, a similarly named Islamic party in Morocco, Parti de la Justice et du Development (PJD), finished third in legislative elections.
Last December, the Muslim Brotherhood in Egypt (legally banned since 1954) scored equally impressive results, garnering 20% of the popular vote and 88 seats in the Parliament, making it the main opposition bloc to Mubarak’s ruling National Democratic Party (NDP).
Hezbollah in Lebanon and Shiite parties in Iraq have also performed well in elections.
Despite this democratic endorsement, most Western governments have been reluctant to engage with these parties or to prepare for Islamists coming to power through the ballot box.
The irony is obvious: Islamists, who seem suspicious of democracy as a Western plot, took President George W. Bush’s promotion of democracy in the Muslim world more seriously than America’s autocratic friends – and possibly more seriously than Bush himself.
In his first press conference after Hamas’s victory, Bush was visibly at a loss for words in responding to this “unexpected development.”
The truth is that over the last three years, some regional insiders, including me, had several lengthy discussions with Bush’s advisors on the National Security Council (NSC) and in the State Department.
We urged the Bush administration to formulate a consistent policy that engages the region’s Islamists who are willing to rule by democratic principles.
Some of this debate was widely publicized.
Part of America’s reluctance to deal with Islamists reflected concern over the reaction of autocratic regimes, some of which are long-time allies.
This fear proved not only unwarranted, but also counterproductive, for it has not stopped the march of the Islamists in the Arab Middle East.
Now it is time for a fresh and bold approach toward all contending political forces in the Muslim world.
First, America and the West must stop supporting autocrats with aid, trade, and arms.
Second, there must be a push to expand the public space for the Muslim world’s democrats, so free media and independent judiciaries to protect press freedom need to be boosted.
Third, an active dialogue that engages the Islamists, no matter how difficult, must begin and continue.
The West needs to establish clear and consistent rules of engagement.
It is legitimate and imperative to make resumption of aid to Palestinians contingent on Hamas’s recognition of Israel’s right to exist and on its commitment to all international agreements previously signed by the PLO and the Palestinian Authority.
In an earlier step toward recognition by the world community, the PLO had to revamp the Palestinian Covenant, which called for the destruction of Israel.
There is no reason why Hamas would not follow that precedent, if the demand to do so were made relentlessly.
In fact, all militant liberation movements have renounced violence in due time, from the IRA to the Sandinistas to the African National Congress.
Likewise, Israel must reciprocate every gesture of good will from Hamas, however psychologically difficult this may be.
After all, in 1947 similar Jewish “freedom fighters” blew up the King David Hotel, killing tens of British officers.
Until the 1970’s, these Zionist guerillas were wanted as terrorists by British authorities. Then one of them, Menachem Begin, was elected Prime Minister of Israel and became a partner in peace with Egypt’s President Anwar Sadat.
Sadat himself was a suspected terrorist, according to Egyptian authorities, for having plotted and taken part in assassinating a prominent political figure.
But both Sadat and Begin became respected worldwide for taking risks for peace and won a joint Nobel Peace prize.
So, for Hamas as well as for America, the West, and Israel, it is futile to look back in anger and frustration.
Instead, they all should look forward to creating anew the more positive legacies of Sadat, Begin, Rabin, and even Ariel Sharon.
If those leaders could disavow their own violent pasts and take practical steps toward peace in the region, why can’t Hamas?
A New Century’s New Technologies
DAVOS – This year’s World Economic Forum meeting in Davos, Switzerland, addresses threats to geopolitical stability and human life, and seeks ways to accelerate the design of more effective political, economic, and technological tools to address them.
Among this generation’s most daunting challenges are food, water, and energy shortages; climate change and rising sea levels; and the spread of new, drug-resistant diseases.
Humanity has faced threats to its existence and the health of the planet before, yet we have managed to avoid the apocalypse, or at least postpone it, through ingenuity and invention.
This year’s Davos meeting will offer a glimpse of where the next life-, planet- and economy-saving discoveries and products will come from, and where we should invest our talents and treasure to fuel the next generation of transformative technologies.
An accelerating convergence of the biological, physical, and engineering sciences promises a stunning array of new technological solutions.
Imagine a coal-fueled power plant that emits only water and clean air.
Inside the plant, designer yeast cells transform the carbon dioxide released during the coal’s combustion into raw materials for floor tiles and other construction supplies.
Or imagine a simple and inexpensive urine test that can diagnose cancer, eliminating the need for a surgical biopsy.
And, when cancer treatment is needed, its toxic punch hits cancer cells selectively, with far fewer damaging side effects.
Or imagine a future with plentiful food and fuel crops.
Through improved seed stocks and more efficient water management, we can have crops that require less water, grow at higher density, and thrive in wider temperature ranges.
And data-driven agriculture supply chains will move them more effectively to the market.
These advances will enable us to feed and provide power – at a lower economic and environmental cost – to the anticipated 2050 population of nine billion people.
These and other innovations are emerging from the convergence of biology and engineering that is now upon us.
A new generation of scientists, engineers, and clinicians, educated more broadly than their predecessors, speak the languages of both and are working together in unprecedented ways.
They are conversing across disciplines – not only engineering and biology, but also chemistry, physics, mathematics, and computation – and setting new paths for innovation, from initial discovery to the launch of advanced applications in the marketplace.
The technologies on which many of us depend today arose from a parallel convergence of discoveries in physics and engineering in the early twentieth century.
In 1900, the world did not have ready access to electricity, automobiles and aviation, or telecommunications.
In much of the world, we now take these conveniences for granted; indeed, we regard them as necessities.
What began as esoteric explorations of the workings of the physical world – the nature of electromagnetism and the atomic structure of matter, for example – became, in the hands of inventors and innovators, telecommunications, new drugs, medical imaging and devices, nuclear power, the computer chip, and the Internet.
There are now more connected mobile devices than there are people on the planet.
The products of electronic and digital industries will continue to expand their impact, with “big data,” the “Internet of things,” and the “industrial Internet” becoming increasingly prevalent.
Beyond the extension of these twentieth-century technologies, we can also anticipate a new set of transformational industries – as yet nameless – as we advance into the new millennium.
At the same time, just as the twentieth century’s convergence of physics and engineering transformed our lives, the accelerating convergence of biology and engineering is driving unprecedented discoveries that promise to create another platform for innovation, the rise of new industries, and economic growth.
The manufacture of fuels and pharmaceuticals already relies on purpose-developed microbes that create sophisticated biological products.
New manufacturing processes will incorporate specially designed microbes and computer-characterized compounds into an array of products.
Likewise, the dramatic reduction in the cost of gene sequencing, from roughly $40 million per human genome in 2003 to about $5,000 today, together with a rapid increase in computational power, is boosting the speed, accuracy, and robustness of medical diagnostic tests.
That promises not only more timely and effective therapies for cancer, but also similar advances against other currently intractable diseases.
The industries and economic drivers of the twenty-first century will arise from the increasingly combined efforts of biology and engineering.
It is this convergence that will help deliver the technological solutions needed to supply enough clean energy, food, and water, as well as better health, to sustain the world’s nine billion people in 2050.
Engineering Financial Stability
NEW HAVEN – The severity of the global financial crisis that we have seen over the last two years has to do with a fundamental source of instability in the banking system, one that we can and must design out of existence.
To do that, we must advance the state of our financial technology.
In a serious financial crisis, banks find that the declining market value of many of their assets leaves them short of capital.
They cannot raise much more capital during the crisis, so, in order to restore capital adequacy, they stop making new loans and call in their outstanding loans, thereby throwing the entire economy – if not the entire global economy – into a tailspin.
This problem is rather technical in nature, as are its solutions.
It is a sort of plumbing problem for the banking system, but we need to fix the plumbing by changing the structure of the banking system itself.
Many finance experts – including Alon Raviv, Mark Flannery, Anil Kashyap, Raghuram Rajan, Jeremy Stein, Ricardo Caballero, Pablo Kurlat, Dennis Snower, and the Squam Lake Working Group – have been making proposals along the lines of “contingent capital.”
The proposal by the Squam Lake Working Group – named for the scenic site in New Hampshire where a group of finance professors first met to devise ideas for responding to the current economic crisis – seems particularly appealing.
To me, the group’s work has exemplified the creative application of financial theory to find solutions to the crisis.
(I am a member, but I am not the source of its important contingent-capital idea.)
The group calls their version of contingent capital “regulatory hybrid securities.”
The idea is simple: banks should be pressured to issue a new kind of debt that automatically converts into equity if the regulators determine that there is a systemic national financial crisis, and if the bank is simultaneously in violation of capital-adequacy covenants in the hybrid-security contract.
The regulatory hybrid securities would have all the advantages of debt in normal times.
But in bad times, when it is important to keep banks lending, bank capital would automatically be increased by the debt-to-equity conversion.
The regulatory hybrid securities are thus designed to deal with the very source of systemic instability that the current crisis highlighted.
The proposal also specifies a distinct role for the government in encouraging the issuance of regulatory hybrid securities, because banks would not issue them otherwise.
Regulatory hybrid securities would raise the cost of capital to banks (because creditors would have to be compensated for the conversion feature), whereas the banks would rather rely on their “too big to fail” status and future government bailouts.
Some kind of penalty or subsidy thus has to be applied to encourage banks to issue them.
The theory of “debt overhang” – the intellectual origin of the proposal – explains why troubled banks are reluctant to issue new equity: the benefits accrue mostly to the bank’s bondholders and dilute existing shareholders.
But the proposal does not follow directly from modern finance theory.
It is a real innovation, with no prior precedent.
Why wasn’t the idea of contingent capital seized upon in earlier crises?
Wasn’t the same problem of debt overhang prominent in the banking crises of the Great Depression, for example?
I think that part of the reason must be that the problem was poorly understood then, so that contingent capital could not be well articulated and lacked the force of argument that would allow it to be impressed upon government policy makers.
Moreover, there is a fundamentally creative element to innovation: it results from an intellectual process that takes time, and that in retrospect always seem inexplicably slow or episodic.
The Financial Stability Board (FSB), headed by Mario Draghi, publicly stated in its September 2009 report to the G-20 that it was studying contingent capital proposals.
The FSB was created in April 2009 at the G-20’s London summit as the successor to the Financial Stability Forum.
Its member organizations are the G-20’s central banks and top regulatory agencies.
The G-20’s member states are committed by the G-20 statement that they signed to implement the FSB’s conclusions on a worldwide basis.
As a result, the FSB is in a unique position to make innovation happen.
In its recent reports, the FSB has concentrated on capital requirements, on closing legal loopholes that allow banks to evade them, and on improving accounting standards.
The FSB has already facilitated a number of proposals that would help make our financial system more secure.
Contingent capital, a device that grew from financial engineering, is a major new idea that might fix the problem of banking instability, thereby stabilizing the economy – just as devices invented by mechanical engineers help stabilize the paths of automobiles and airplanes.
If a contingent-capital proposal is adopted, this could be the last major worldwide banking crisis – at least until some new source of instability emerges and sends financial technicians back to work to invent our way of it.
The Great Bank Escape
STANFORD – This year has proven to be yet another replete with futile efforts to manage the outsize grip that banks and bankers have on the world economy.
The global financial system remains distorted and dangerous.
Since the 1980’s, “shareholder value” has increasingly become the focus of corporate governance.
Managers and board members often receive stock-based compensation, which gives them equity ownership rights and, in turn, creates a powerful incentive to maximize the market value of their companies’ shares.
But actions taken in the name of shareholder value often benefit only those whose wealth is closely tied to the company’s profits, and may actually be harmful to many shareholders.
Despite their claims that they are pursuing shareholder value, the actions of top managers, in particular, often reflect only their own interests, rather than those of shareholders who often hold the great majority of the shares.
This discrepancy can be seen clearly in the banking sector.
Before 2007, banks enjoyed high returns and soaring stock prices.
But excessive indebtedness and losses on the risky investments that had been made triggered the global financial crisis and led to the failure, or near-failure, of many major financial institutions.
Banks with substantial overhanging debt reduced lending, and, despite the massive intervention of governments and central banks, the crisis dragged down the global economy.
As a result, since 2008, shareholders have lost substantially on their investments in banks.
The crisis – together with the prolonged economic downturn that followed – caused diversified shareholders to lose on their other investments, too.
Furthermore, many bank shareholders have suffered from the disruption in lending, either directly or via their businesses or employers.
Some have even lost their jobs.
And, along with other taxpayers, they incurred some of the cost of the bailouts.
And yet, despite large losses on their holdings in 2007-2008, top bankers fared significantly better than most of their shareholders did in 2000-2008.
Even executives of the failed investment banks Bear Stearns and Lehman Brothers walked away with hundreds of millions of dollars in compensation, while the companies’ shareholders, who received some dividends along the way, fared much worse – not even considering their other crisis-related losses.
To safeguard their interests, bankers have lobbied relentlessly against regulations that would require them to rely less on borrowing and more on retained earnings or new equity to fund their lending and investments.
They cite the need to deliver high returns for shareholders, implying that tighter regulations undermine shareholders’ interests.
But safer, less indebted banks are better able to continue lending without becoming distressed or needing support.
As a result, they are less likely to destabilize the global financial system or impose harm on most shareholders and the public.
Bankers also claim that higher equity requirements would restrict credit and hinder economic growth.
But their arguments are flawed and misleading.
For example, they use return on equity as their primary measure of profitability, but neglect to distinguish between ROE and shareholder value.
In fact, in the single-minded quest for higher returns, bankers might expose shareholders to excessive risk, without compensating them adequately.
And bankers neglect to acknowledge the role of government guarantees and subsidies in making so much borrowing possible and attractive.&#160;
Contrary to bankers’ claims, increasing equity requirements significantly, and thus safeguarding the financial system’s stability, is in the public interest – including the interest of most shareholders.
By contrast, preserving the status quo, or implementing inadequate regulation, would allow bankers to continue to profit at the expense of others.
Small shareholders cannot easily influence banks’ decisions, especially on complex risk-related issues.
And banks’ boards of directors, which wield ultimate control, are not legally required to consider the broader impact of their actions on others.
Instead, their narrow perspective – which tends to coincide with executives’ preferences even at the expense of other shareholders – dictates their decision-making.
Even from banks’ narrow standpoint, higher equity requirements would cost less than other proposed regulations.
And such requirements would reduce the likelihood that strong banks would be called upon to finance the resolution of failed institutions.
(Of course, these considerations are less relevant if bankers expect to succeed in blocking all regulation aimed at reducing excessive risk-taking, and to be bailed out in a crisis.)
As matters stand, bankers continue to benefit fully from the upside of their investments, while sharing the downside with creditors and taxpayers – and sometimes with shareholders.
Although some progress has been made in improving regulation and enforcement, industry lobbies have largely succeeded in delaying essential reforms needed to ensure global financial stability.
JPMorgan Chase’s CEO Jamie Dimon reportedly told his daughter that a financial crisis “happens every five to seven years.”
Last month, the bank paid $1.1 billion in dividends, reducing its ability to absorb future losses on its investments.
If policymakers and regulators do not strengthen their reform efforts, taxpayers and shareholders – not bankers like Dimon – will be the ones who suffer the consequences of the next crisis as well.
Enlightenment on Trial
Ugly debates about religion and science usually seem to be confined to the United States.&#160;
In recent months, however, such debates have begun to spread – first to Europe and then around the world.
Science, it seems, is drifting into political dangers it has not faced since before the Enlightenment.
Europe began its own American-style debate on the origins of life when Cardinal Christoph Schönborn of Vienna cast doubt on the acceptability of Darwinism and evolutionary theory to people who see themselves as faithful Roman Catholics.
The Cardinal argued that evolution is the work of God and that evolutionary theory should be interpreted in that light and no other.
With Cardinal Schönborn’s intervention, the peace between science and religion that in Old Europe had held almost since the Enlightenment – and at least since the historically hard-won eviction of the Church from politics in the late nineteenth and early twentieth centuries – seemed suddenly to have been broken.
Revealed truth, the Cardinal seemed to say, must be accorded primacy over the truths science reveals through reason.
This is not to say that religious sentiment or, in the case of Germany, bitter historical experience stemming from the Nazi era, had not informed other European debates, say, on the ethics of stem-cell research.
Indeed, the religious background of Europe’s nations clearly manifested itself in various European laws on such research, with the United Kingdom and Sweden being the most liberal and Italy, Austria, and Poland the most restrictive.
But none of these debates directly challenged the role of science in society or posed, as Cardinal Schönborn did, the idea that religion and science are potentially incompatible.
Following the Cardinal’s declaration, many pointed to the US as a warning sign of the dangers inherent in politicizing science through religion.
They noted that President Bush had sided openly with those who want to make evolutionary theory optional in schools’ science curricula.
The reason that such pseudo-science has prevailed in so many American schools is directly related to America’s tremendously decentralized school system, which allows committed local groups of the religious-minded to reshape the curriculum.
The power of faith-based movements in the US is undeniable, and their influence in other areas where science and politics meet, including the availability of certain drugs – the so-called “morning after” pill being one example – is growing.
It is unlikely that European schools, because of their structure, can be invaded by “creationism.”
Yet Europe should not think itself immune to this problem.
When dogmatic faith enters politics, compromises on controversial issues, which are indispensable in a democracy, become difficult to achieve.
This is because fundamental values – as opposed to, say, the distribution of material resources – are seen as being non-negotiable.
The danger is that scientific decisions with a scientific-technical component are no longer subject to study or rational argument, but instead are fought over by various interest groups, with some invariably claiming that their taxes should be used to fund only research that is compatible with their values.
Debates about the nature and benefits of science are not confined to the US and Europe.
When South Korea’s National University announced the first-ever successful cloning of a dog, the news triggered arguments about science and society throughout Asia.
Although the language of religion was not used overtly, the debate in Asia reflected the same fears that science is somehow “out of control” and far too powerful.
One key reason for this is the fact that China is pouring vast resources into research and development.
Between 1995 and 2002, it doubled the percentage of its rapidly growing GDP that it invests in R&amp;D, with biotechnology and other high-tech fields enjoying the highest priority.
Science, it seems, is becoming a partner in the unnerving development of a new global superpower.
Today, science belongs to a rapidly globalizing world.
It is perceived as a motor of economic growth, but also as a threat to our security and beliefs.
Cultural worldviews and religion, of course, will continue to shape the overall cultural and value context within which science and technology interact.
But values are subject to change, often in response to past experience and fears about the future.
It took centuries for science to carve out its sphere of autonomy, always a relative one, from politics and religion alike.
This autonomy has served science well, and independent and accountable science has served society and the economy well.
If this beneficial relationship is to be maintained, scientific independence – from both religious dogmatism and governmental intervention – must be defended.
Who would have thought that, at the dawn of the twenty-first century, the old Enlightenment debates would still be so potent?
Ennobling Democracy
WARSAW &#45;&#45; Ever since democracy appeared in ancient Athens, it has generated suspicion among those who believe that humanity’s highest purpose is virtue, not freedom.
In the Eighth Book of The Republic , Plato rather unceremoniously defines political leaders in a democracy as “those who deprive the rich of their estates to distribute them among the people, at the same time taking care to reserve the larger part for themselves.” Of course, Plato’s disdain for democracy is never far from the surface of his prose, yet he has a legitimate point: how, after all, can high ethical standards be ensured when democratic elections tend to reward self-interest and the lowest common denominator?
The citizens of today’s free societies are (almost always) democrats out of conviction, custom, and habit.
Only a small minority exhibit populist tendencies that, if they gained power, could lead a society from democracy to dictatorship.
Nevertheless, today’s democratic citizens mostly lack confidence in the public sphere, and are suspicious of their own economic and political elites.
Among the youngest voters, indeed, this impulse is very strong, with their participation in elections falling sharply.
In Europe, this apathy is often seen as a reaction to the slowdown of what once looked like an unending postwar economic boom.
But this is really only part of the story.
Of course, if we could guarantee rapid and universal economic growth, democracy’s other weaknesses would probably be forgotten.
But we can’t, instead what is offered is a hollow vision of the common good that consists merely in successive rounds of cuts in state expenditures.
It is little wonder, then, that democratic citizens nowadays focus increasingly on the low ethical standards of their national elites.
Subconsciously, citizens expect their leaders to display the ancient leadership virtues of disinterestedness, courage, and devotion to service.
But what they see is small-mindedness and the pursuit of narrow self-interest.
Moreover, the dramatic democratization of mores in the last 20 years has resulted in a tremendous increase in ordinary human curiosity about people in the limelight: who our leaders are, how they live, and what they really believe.
Former French President François Mitterrand was probably the last European statesman who was treated by his nation like a monarch of old.
His numerous personal failings and indiscretions were never publicly judged.
Today, tabloid media show us everything, and subject everything to public judgment.
So the heads of our democracies are treated like a famous person living next door.
The door is open, and we don’t like what we see.
During a recent hearing before a Polish parliamentary investigative committee, a state functionary responded to the simplest questions of fact by repeating the phrase, “I don’t remember.” When pressed about his failing memory, he impatiently responded, “Why am I expected to remember things in a country in which the president does not remember whether he graduated from university?”
The former Polish president, Aleksander Kwasniewski, had, it seemed, provided a perverse lesson in virtue when, having been caught lying about his educational credentials, protested that he did not remember whether he had actually defended his master’s thesis as required to receive his degree.
In such an environment, can public ethics be revived?
French President Nicolas Sarkozy, as one of his first initiatives, proposed a ban on “golden parachutes” for departing managers of firms traded on the stock exchange, in order to halt the practice of taking huge severance payments without the consent of shareholders.
Sarkozy correctly assumed that managers of publicly-traded firms, much like politicians, are public figures who should be held to a minimum ethical standard of behavior.
In Switzerland, Thomas Minder, the head of the cosmetics company Trybol, is fighting the same battle, and demanding a national referendum.
In Germany, the Federal Constitutional Court has ordered parliamentarians to reveal their outside income – often from lobbying activities on behalf of big business – on the Internet.
In Poland, where for many years such practices have been considered criminal, a proposed law would require full financial transparency for politicians and high state functionaries.
British Prime Minister Gordon Brown, for his part, has proposed lifting the immunity that past prime ministers enjoyed in connection with the sale of peerages.
Even if these initiatives are motivated by party rivalry, they nevertheless pose an essential question: do we know how to ennoble our democracy?
Can we impose on ourselves a corset of higher ethical standards, thereby refuting Plato’s objections to democracy, which are no less our own?
Europe can take the lead in writing ethics back into politics.
The reform treaty that is to be adopted in 2009 is aimed at overcoming the EU’s supposed “democratic deficit.”
But rendering Europe’s political institutions accountable to citizens is only half the battle.
Preserving the democratic life of the EU and its member states implies a duty – which should be enshrined in the treaty – to uphold standards of official behavior that today’s citizens demand.
E Pluribus Unum for Europe’s Bank Supervisors
STOCKHOLM – The European Union lacks an efficient supervisory framework for its vast financial industry, and the gap between what is needed and what exists is widening.
To pave the way towards European financial integration, the Financial Services Action Plan (FSAP) was launched in 1999 with the aim of creating a regulatory framework for a single financial area.
The European Commission, hoping to speed things up, published a White Paper on financial services policy covering 2005-2010.
There has been clear progress on integration, as financial institutions across Europe have begun to realize the benefits of economies of scale.
Yet the industry has acted more quickly than regulators and supervisors have been able to respond.
At first, banks’ cross-border operations were small, which meant that that they were mainly supervised in their own countries.
But, over the last decade, major European banks have acquired foreign banks through such mergers as the acquisition by Spain’s Banco Santander of the UK’s Abbey National, Italy’s UniCredito of Austria’s Hypovereinsbank and Holland’s ABN-AMRO.
This raised questions about prudential supervision, chiefly whether sufficient resources exist to check whether the institutions are financially sound.
Nordea, for example, was created by merging four major national banks, and some 70% of its business is outside its legal domicile, Sweden.
This is a process that is likely to accelerate.
Changes in the way banks are organized have put extra pressure on supervisors.
Banks have begun to de-centralize essential functions, re-locating market and treasury operations, liquidity and capital management, and risk management, for example, in different countries.
Banks nowadays create products and IT platforms to serve their customers in all their countries of operation; so separate prudential assessments of units in these cross-border groups, be they subsidiaries or branches, is hardly rational.
More than 60% of banking assets in Europe are now in the hands of fewer than 50 multi-national European banks.
In Eastern Europe, most new EU members’ banking sectors are owned by banks based elsewhere in the EU.
In short, the main part of Europe’s banking assets, liabilities, and risks are concentrated in these large banks.
The current de-centralized supervisory framework, with several independent “host” supervisors for subsidiaries and the parent bank’s home supervisor as primus inter pares , is clearly unsatisfactory.
Capital adequacy and liquidity risks should be assessed on a group level, rather than country by country; how capital and risks are divided between countries is less important.
Under EU law, the home supervisor deals with a bank’s operations as a whole – meaning the parent company and its subsidiaries.
But the tools and powers available for home country supervisors are inadequate.
Recent attempts to remedy this under the Capital Requirements Directive have been disappointing, even though it was plainly the best that could be achieved politically given EU countries’ differing views on prudential supervision.
Host community supervisors look at business units in isolation from the international group to which they belong.
They have their own national rules and regulations to apply, and every financial supervisory authority (FSA) in Europe has its own practices and traditions.
Even when implementing directives, EU member countries are often tempted to “gold-plate” them by introducing extra rules.
This adds to their complexity and cost, and compounds inefficiency.
Europe’s financial industry wants a cost-effective, transparent, and competitively neutral supervisory framework that will foster market integration, create greater financial stability, and provide for crisis management.
But Nordea’s recent history suggests that this is likely to take time.
The regulatory infrastructure includes supervision, deposit guarantee, the lender of last resort, and emergency liquidity assistance.
These are interlinked, and stakeholders include central banks, FSAs, national treasuries, and deposit guarantee funds.
Nordea tried to get the deposit guarantee rules changed to create a level playing field in which a cross-border merger would not distort competition between banks.
The Commission showed sympathy and understanding, but in the end it passed the problem on to national governments.
EU member governments obviously want to minimize the risk of being called on to save a cross-border bank in trouble.
So who would have to take the lead in such a situation?
Would it be the home country FSA, with its responsibility for consolidated supervision, even though it would have only limited powers?
Would host supervisors try to ring-fence the losses to include only those in their own country?
What role should central banks and national treasuries play in a cross-border European banking collapse?
Is it even possible to deal with such a situation on a purely national basis?
To pose these questions is to conclude that there is no practical alternative to a European FSA with the sole authority to supervise multinational financial institutions, including all their subsidiaries and branches within the EU and globally.
This would not spell the end of national supervisors, as many national FSAs would likely work as partners of the European supervisor.
National banks would continue to be supervised by national FSAs, and consumer protection would also remain subject to national supervision.
The problem is that currently there is a lack of convergence and coherence between national supervisors.
And that is because perceived national interests still have the upper hand over the wider interests of an integrated European marketplace.
The Stock-Bond Disconnect
CAMBRIDGE – How should one understand the disconnect between the new highs reached by global equity indices and the new depths plumbed by real interest rates worldwide?
Several competing explanations attempt to reconcile these trends, and getting it right is essential for calibrating monetary and fiscal policy appropriately.
The most popular explanations downplay risk factors in a way that can be dangerously misleading.
For example, the “secular stagnation" theory claims that low interest rates tell the true story.
The global economy is suffering from a chronic demand shortfall, which can be remedied through sustained growth in government spending.
According to this view, soaring stock markets merely reflect low discounting of future profits.
Moreover, labor's share of profits seems to have fallen markedly in recent decades across the world's eight largest economies, with the possible exception of the United Kingdom.
Conversely, capital's share of profits has been rising, which of course raises the value of equities (though, stock prices have continued to rise in countries like the US and the UK where labor shares have begun at least a cyclical recovery, and where interest-rate hikes may soon be on the horizon).
Proponents of secular stagnation argue that government spending as a share of GDP, which has more than doubled in most advanced economies since the 1950s, should continue to rise.
Although one can readily agree that high-yielding government investments in education and infrastructure are especially justified today, the idea that demand permanently constrains supply in a significant way is dubious.
More refined studies of the recent recession suggest that the lasting so-called “hysteresis" effects on unemployment have been limited, at least in the US.
Another possible explanation of low interest rates is financial repression.
The European Central Bank and the Bank of Japan, like the Federal Reserve before them, are gluttonously buying bonds.
At the same time, a host of new regulations to promote financial stability are forcing banks, pension funds, and insurance companies to stock up on government securities.
Thus, today's low interest rates are more a reflection of distortions in financial markets than of low growth expectations.
Proponents of the financial repression explanation essentially view low interest rates as a hidden tax on bondholders, who receive a lower interest rate than they would otherwise.
This is not necessarily a bad thing, given that all taxes are distorting, and that there really is no way to deal with today's outsize debt burdens that does not impinge on growth in some way.
But the financial repression tax is not nearly as progressive as a more general wealth tax would be, because lower-income households typically have a smaller share of their assets in equities.
In any event, it is unclear how financial repression can be the whole story.
The fall in bond yields has extended to a far broader range of debt than just government paper.
Other factors are contributing to today's ultra-low interest-rate environment as well.
Adverse demographics and declining labor-supply growth in most advanced economies are undeniably important.
The puzzle, though, is that this trend has played out in a very gradual and predictable way, whereas the decline in interest rates has been more rapid and somewhat unexpected (certainly by central banks).
And it is difficult to argue that weak demographics is the main driver of strong stock prices, though some have tried.
Curiously, heightened risk and fears of further disruptions – not just another financial crisis, but also geopolitical instability and pandemics – do not seem to carry much weight in current policy discussions, though the idea has been around.
Though bonds are hardly a perfect hedge against such risks, they typically beat stocks (except, perhaps, in cases of global conflagration, when both fare badly).
In recent work with Carmen and Vincent Reinhart, we show that even relatively minor shifts in disaster risk – say, a rise from a normal 2-3% to 3-4% – can lead to a massive decline in global real interest rates, even taking them well into negative territory.
This can be the case even if expected growth is strong.
But the policy implications of this are not straightforward.
If the government has superior information and analysis, and correctly assesses that public fear is not justified, then of course it makes sense to take advantage of the information – by issuing more debt, for example.
If, on the other hand, the public is basically right about heightened disaster risks, the policy issues become much more complex.
The problem is that the government likely faces high costs if a disaster strikes, which implies a high option value to preserving fiscal space for when it is most needed.
The idea that hyper-low interest rates are merely symptoms of deficient demand or financial repression is dangerously simplistic.
Surely heightened public concern about the risk of future economic catastrophe in the wake of the financial crisis is still playing an important role, reinforced by lingering fragility in the eurozone and rising instability in emerging markets.
This makes the public understandably more cautious.
But if the risks that might help explain the price trends for stocks and bonds are real, policymakers, too, should be careful not to throw caution to the wind.
Pakistan’s Polio Tipping Point
ISLAMABAD – Early this month, tragedy struck Pakistan’s polio eradication campaign once again with the killing of two more polio workers and a policeman on patrol with the vaccination teams.
The latest murders in Pakistan preceded the killing of nine polio workers in Nigeria, and follow the slaying of another nine Pakistani health workers in December and the New Year’s Day murders of development workers affiliated with public-health efforts.
The continued targeting of such brave workers is posing a severe challenge to these countries’ public-health communities and their collective ambition to reach every child with lifesaving vaccines.
For Pakistan, the irony is that the country has been a success story for polio eradication, with the number of cases falling from 197 in 2011 to 58 in 2012.
Despite recent challenges, Pakistan put vaccinators back on the job in 28 districts, where 12 million children needed to be reached.
Widespread public support for polio eradication efforts has been reflected in a parliamentary resolution.
The Ulema Council, a group of influential clerics, has given its backing as well.
The most recent report by the Independent Monitoring Board of the Global Polio Eradication Initiative, released in November 2012, acknowledged Pakistan’s recent progress – in stark contrast to the bleak outlook of its previous report.
But it is critical that the country’s upcoming election does not jeopardize recent gains, particularly during the current low-transmission season, which is the best opportunity to stop the disease in its tracks.
All political factions must remain committed to the eradication drive if it is to succeed.
Indeed, despite progress in 2012, we have not been able fully to interrupt the spread of the poliovirus in Pakistan, owing primarily to obstacles affecting program implementation and management.
These challenges must be addressed through stronger governance at all levels, particularly given that state authority has been badly eroded in roughly a quarter of the country, where complex factors have created distrust in the name of ethnicity, politics, and religion, resulting in a massive breakdown in law and order.
Moreover, Pakistan shocked the global public-health community last year by adopting a constitutional amendment that led to the abolition of the national health ministry.
Unfortunately, the sudden devolution of health responsibilities to the country’s provinces occurred without adequate preparation or oversight.
The simultaneous scaling back of the local-government system, along with the divisive politics of coalition governments in Pakistan’s fragile democracy, continues to undermine implementation of the polio eradication program.
The resulting shortcomings in the country’s provincial health systems have manifested themselves not just in the inability to eradicate polio, but also in a recent measles outbreak, which has killed more than 300 children.
At the same time, local governments’ difficulties are having an adverse effect on provision of clean water and proper sanitation, which are vitally important for polio eradication and public health more broadly.
There have also been cases of refusal by parents to vaccinate their children, typically at the behest of clergy members, owing to the belief that such public-health efforts are in fact a covert sterilization program.
Indeed, refusal to vaccinate accounts for 2% of the children who are missed.
A recent smear campaign aimed at discrediting polio vaccination, in which several MPs publicly took part, has complicated matters further.
Daunting as all of this may be, stalling vaccination is not an option.
It is well established that when vaccination is impeded, the number of cases rises drastically, as was shown in Nigeria in 2003, where a ten-month delay led to the infection of thousands of people domestically, and to reinfection in more than 20 other countries.
A similar outcome was observed in Pakistan’s Swat Valley after the militant takeover of 2009 rendered the region inaccessible for months.
This month’s decision to hold back vaccination in Karachi after health workers there were threatened, though understandable, is nonetheless a cause for serious concern in this respect.
As in Nigeria, vaccination delays will be highly detrimental for neighboring countries.
Nomadic populations move freely back and forth across the vast and porous Afghanistan-Pakistan border.
In 2011, a polio outbreak in China was traced back to Pakistan.
India, polio-free for the last two years, is well aware that lasting domestic success depends on eradication efforts elsewhere.
Potential international risks go beyond the immediate neighborhood.
Already, Pakistan is responsible for the recent appearance of wild poliovirus in Egypt.
Fortunately, there is no evidence of transmission, but we may not be so lucky in the future.
Indeed, the risk that Pakistani pilgrims could carry the problem with them on the 2013 Hajj, the largest annual congregation of Muslims, is not just a theoretical threat.
A worst-case outcome there could set back the fight against polio by decades.
The scale of the challenge, and hence the multifaceted response that is needed, must not be underestimated.
Polio today has become an example of the complex problems plaguing Pakistan’s state and its society.
Pakistan must increase its efforts on polio eradication for reasons that go beyond fulfilling a global health promise (which is reason enough in its own right).
Success would be a sign of Pakistan’s ability to conquer complex challenges, and it would provide a blueprint for further development interventions.
In eradicating polio, Pakistan would not just play its part in eliminating the disease worldwide.
It would also reclaim its own global prestige and potential for progress in other areas.
Erdoğan’s Choice
ISTANBUL – “Turkish democracy is at a turning point,” Prime Minister Recep Tayyip Erdoğan announced after winning a crucial vote in a referendum to change Turkey’s constitution. “We are sitting an important exam.”
Erdoğan is right, but it is he who must pass the test.
If the plebiscite victory emboldens him and his allies to step up their tactics of judicial dirty tricks and media manipulation – used to great effect in recent years – the prospects for Turkey are bleak.
The country will descend deeper into authoritarianism, political divisions will become irreconcilable, and yet another political rupture may become inevitable.&#160;
Too few people in Europe and the United States comprehend the extent to which Erdoğan’s government has undermined the rule of law and basic freedoms – all in the name of “deepening Turkish democracy.” Government prosecutors have mounted a series of sham trials, charging hundreds of military officers, academics, and journalists with membership in an armed terrorist organization aiming to topple the Erdoğan government.
In a separate but related prosecution, they used fabricated evidence to accuse nearly 200 active and retired military officers of planning a coup in 2003, during the early days of Erdoğan’s first government.
Erdoğan and his ministers have been cheerleaders for these prosecutions.
Their supporters in the media have spewed a stream of disinformation and leaked wiretaps to discredit and embarrass the accused.
Meanwhile, the country’s largest independent media group has been brought to heel by huge, politically motivated tax fines.
Erdoğan’s strategy has been to whip up frenzy around these cases to solidify his traditional, religious/conservative base, but also to gain the backing of domestic liberals.
The prosecutions have allowed him to position himself as the protector of Turkish democracy against the coup plotters allegedly still running rampant among the military and secularists.
The prosecutions entail indictments that are thousands of pages long and include annexes that take up several bookshelves.
This, along with media disinformation, has made it difficult for outsiders to penetrate the cases and separate fact from fiction.
But as soon as we engage with the details of the prosecutions, a shocking picture emerges: some of the key evidence in the cases is clearly planted, while much of the rest remains circumstantial at best.
For example, the alleged 2003 coup plot was supposedly discovered when CDs containing detailed preparations (including assassination teams and plans to bomb two mosques) were delivered to a virulently anti-military newspaper.
Of the hundreds of senior officers serving at the time, none has acknowledged any knowledge of these plans.
Indeed, it is patently clear that people intent on framing military officers authored the documents in question many years later, in 2008 at the earliest.
In addition to major internal contradictions and inconsistencies, the coup plot documents are full of references to entities that did not even exist in 2003, as well as to developments that took place later.
The prosecutors have shown little interest in these discrepancies, doing their best to send the alleged conspirators to jail (and keep them there) even before the trial starts.
Erdoğan has fanned the flames by claiming that he was aware of such coup plans at the time, but that he disregarded them.
A dramatic book that was published just before the referendum on the constitution sheds light on who is behind these machinations.
It claims that followers of Fethullah Gulen – the influential US-based spiritual leader – have effectively wrested control of the national police and large parts of the judiciary.&#160;
The Gulen movement is independent from Erdoğan’s Justice and Development Party (AKP), but the two have long been closely allied, and now it has become a state within a state, employing extra-legal means, including illegal wiretaps and fabricated evidence, to go after perceived opponents.
Accusations against the Gulen movement are not new in Turkey, but what made the book a bombshell is that its author is a distinguished police chief, well known for his courage and incorruptibility – as well as his closeness to the Gulenists and to Erdoğan’s government.
No friend of the army, he pursued rogue elements within the military in a famous investigation several years ago.
So he cannot be accused of harboring ultra-secularist or ultra-nationalist sympathies.&#160;
This, along with his inside knowledge of the workings of the police and the prosecutorial branch, give his revelations a credibility that earlier accounts had lacked.
Tellingly, the police chief went to his governmental superiors prior to the book’s publication, appealing personally to a minister.
But the government refused to investigate and did nothing with the information.
The most benign explanation for this behavior is that it is a consequence of the AKP’s own long history of persecution by the military and secular old guard.
The AKP has been under constant threat of a ban through much of its existence, and Erdoğan was jailed for reciting a poem with religious imagery.
Perhaps the dirty tricks are largely defensive, meant to ensure that the old guard never threatens the AKP’s existence again.
If so, the referendum’s outcome should convince Erdoğan that the balance of power in the country has changed for good, and that the days of strong-arm tactics by the secular establishment are gone forever.
Here is a chance for Erdoğan and his allies to back off from their gross violations of the rule of law and build the democracy that they so fervently claim as their goal.
An important first step would be to restore confidence in the integrity and independence of the judiciary and law enforcement.
The amended constitution expands the constitutional court and the supreme council of judges and prosecutors.
The exam that the government must sit is to use its new powers to appoint widely-respected, impartial members – rather than divisive satraps – to these bodies.
Erdoğan’s Economic Revolution
ISTANBUL – Since 2002, the Justice and Development Party (AKP) has been governing Turkey with remarkable success in economic terms.
Indeed, its record is almost unique in Turkey’s modern history, comparable only with the rule of the Democratic Party (DP), which came to power in the 1950’s, at the start of multi-party parliamentary democracy in Turkey, and ran the country for a decade.
The era of DP rule is ingrained in Turkey’s public consciousness as one of phenomenal growth and expanding freedoms.
With the mandate it received in the June 12 election, and almost 42 years after the DP was deposed by a military junta, the AKP has emerged to set new benchmarks in Turkey’s development.
Indeed, unlike the DP’s leader, Adnan Menderes, who was brutally executed following a sham military trial, the AKP’s Recep Tayyip Erdoğan, who will now begin his third term as Prime Minister, appears to have secured democratic political control of Turkey’s military and bureaucracy.
Both institutions’ ability to challenge the results of elections appears at an end.
Turkey’s latest transformation began with the severe economic, political, and social turmoil of 2001, which then-Prime Minister Bülent Ecevit called a “crisis of the Turkish state.”
That year marked the last gasp of the authoritarian/bureaucratic regime that emerged in the early 1920’s, and that had become so isolated from the public that its legitimacy had evaporated.
Over the years, that system had been captured by self-interested rent-seekers.
Tension, and at times open confrontation, between a modernizing elite and ordinary people regarding the nature, function, and design of the state undermined the very capacity to govern.
A political pendulum of reform and reaction, and of populist and pragmatic cabinets, weakened the republic for most of its history.
Unlike Japan, for example, with its de facto one-party government for most of the period since 1945, the lifespan of Turkish governments averaged around 14 months between 1960 and 2000.
Whereas political stasis supported a development miracle in Japan, the inertia created by Turkey’s self-interested establishment resulted in a discouraged society with unfulfilled expectations.
With much of its immediate neighborhood convulsed in revolutionary change and in search of a viable road forward, understanding how Turkey moved from cronyism to economic dynamism is vitally important.
First, Erdoğan’s government recognized that change can deliver greater stability than inertia, which invariably breaks down chaotically as economic decline and political infighting take hold.
Second, Turkey shows that an external anchor, such as membership in the European Union or pressure from the International Monetary Fund, can be decisive in triggering change and, therefore, in enhancing prosperity.
But the best way to understand what Erdoğan’s government has gotten right is to examine what went wrong in the “lost decade” of the 1990’s.
That decade was characterized by low and unstable growth; low per capita GDP, at around $3,400 dollars; dramatically low productivity; an unsustainable fiscal and financial position in both the public and private sectors; average annual inflation of 70% for more than two decades; a lack of competitiveness, reflected in 10% unemployment; and widespread corruption.
Partly as a result of these factors, Europeans tended to refer to Turkey as “too big, too poor, and too unstable” for full EU membership.
Weary with crisis, Ecevit’s administration embarked on a comprehensive reform package– spearheaded by Minister for the Economy Kemal Dervis – that included a flexible exchange-rate system with a dedicated inflation-targeting regime.
With this macroeconomic groundwork laid, greater economic, and soon political, stability followed.
In 2003 came the formation of the AKP’s first single-party government, which enthusiastically backed the country’s IMF-based stabilization program.
Turkey’s adoption of a road map for full membership in the EU also created a strong impulse to follow through on painful reforms.
Exceptionally favorable economic conditions worldwide at this time no doubt helped significantly, but the real credit must go to a government that stuck to its liberalizing instincts.
This consistency has paid off.
From 2002-2007, Turkey experienced its longest period of uninterrupted economic growth, which averaged 6-7% year on year, while annual inflation has plummeted (it now stands at 3.9%).
Moreover, the economy proved resilient following the global financial crisis, with growth recovering rapidly.
Indeed, annual real GDP rose by 9% in 2010.
And, despite Turkey’s fast-growing population, per capita GDP has tripled since 2002, reaching $10,500 in 2010.
As a result, Turkey is projected to graduate from “middle-income” status and enter to the league of rich countries by 2012.
Not surprisingly, Turkey’s capacity to attract foreign direct investment is now comparable to other fast-growing emerging-market economies.
But serious problems remain.
The ever-rising current-account deficit (6.8% of GDP in 2010) will require a second round of reforms.
And unemployment remains stubbornly high, though employment is now more widespread than it has ever been.
For the first time in its modern history, Turkey not only resisted a serious global economic crisis, but also decoupled itself from the rest of Europe by rebounding strongly in 2010.
This economic prowess, together with the government’s “zero problem” foreign policy, have helped make Turkey a leading regional power.
Turkey’s achievements form a case study in successful economic development.
The question now is how Turkey will use its rapidly growing economic power.
Erdoğan the Peacemaker?
ISTANBUL – Turkey’s Prime Minister Recep Tayyip Erdoğan has taken on a daunting challenge.
After participating in the nuclear-security summit in South Korea at the end of March, he went to Tehran to urge Iran’s leaders to make a deal during the next round of nuclear talks between Iran and the United Nations Security Council’s five permanent members (Britain, China, France, Russia, and the United States) plus Germany.
And Erdoğan will host those talks in Istanbul in mid-April.
Erdoğan last traveled to Tehran in May 2010 to finalize an agreement that he had negotiated under which Iran was to send large quantities of its low-enriched uranium to Turkey in exchange for nuclear fuel for Iran’s research reactor.
The deal, mediated by Turkey and Brazil, was presented to the rest of the world as a groundbreaking confidence-building initiative.
But the US and its allies quickly rejected the agreement as an Iranian ploy designed to halt the growing momentum for additional sanctions.
Turkey’s insistence on pressing ahead with the deal caused tension with the US and fueled criticism at home and abroad that Erdoğan’s government was shifting away from its long-standing alliance with the West.
The memory of this short-lived crisis with the US is still fresh in Turkish government circles.
So why, despite having burned his fingers two years ago, is Erdoğan taking up the issue again?
What did he hope to accomplish in Tehran?
Much has changed in the Middle East during the past two years, and not to Turkey’s advantage.
As a result, Turkey is now seeking to contain a rapidly deteriorating regional security situation.
Events in Syria are forcing Turkish authorities to accept the harsh reality of the Assad regime’s resilience – and now its hostility towards Turkey.
Iraq, another of Turkey’s neighbors, faces the risk of a protracted sectarian power struggle following withdrawal of US troops.
Given this, Turkey’s main objective now is to prevent a military intervention against Iran.
From Turkey’s perspective, an Israeli or American strike against Iran’s nuclear facilities would destabilize the region further, as Iran would undoubtedly retaliate by fueling sectarian tensions and undermining the prospects of a settlement in both Syria and Iraq.
As a result, Turkey wants to prolong, at all costs, the time available for diplomacy.
But Erdoğan’s specific objective was more modest this time than it was in 2010, because Turkey does not want to play the role of mediator and will not seek to negotiate the details of an agreement.
Instead, Erdoğan emphasized to his Iranian counterparts the international community’s resolve to bring transparency to Iran’s nuclear program, and insisted on the importance of concrete progress in the next round of the nuclear talks.
He warned that Iranian intransigence would doom the talks to failure, raising the prospects of yet another military confrontation in the Middle East.
In particular, Erdoğan stressed the need for Iran to offer a gesture of goodwill about its nuclear program.
The Iranian regime should, at the very least, commit itself to halt uranium enrichment at 20%, a figure short of the threshold needed to produce weapons.
Having had direct meetings with both Iranian President Mahmoud Ahmadinejad and Supreme Leader Ayatollah Ali Khamenei, Erdoğan was in a unique position, as a prime minister of a NATO country, to convey these critical messages to a regime whose top-level decision-making processes remain as opaque as ever to the West.
Paradoxically, however, Erdoğan’s task, while more modest than in 2010, is also more difficult, owing to the prospect of new sanctions on Iran, including a ban on oil exports, that are to enter into force in July.
Advocates of sanctions argue that they are having a crippling effect on the Iranian economy.
The value of the Iranian rial has fallen by 50% against the US dollar since the beginning of the year, and the country is suffering from a severe shortage of foreign exchange.
So now is not the time to pull back.
Moreover, US President Barack Obama, facing an election in November, does not wish to be accused of being soft on Iran, making it difficult for the West to reciprocate potential Iranian overtures.
Yet Erdoğan’s best ally in his risky gambit may be the US consumer.
Faced with rising gasoline prices as a result of the ongoing crisis with Iran, Americans’ concerns about the cost of driving have contributed to Obama’s shaky popularity ratings.
Thus, the Obama administration may find it more politically expedient to seek a deal with Iran.
If Iran displays a real willingness to compromise, the West should hold off on the new sanctions.
It will soon become clear whether Erdoğan’s visit succeeds.
If Iran decides to engage the international community with concrete confidence-building measures at the next round of multilateral talks, Erdoğan will take much of the credit for giving diplomacy a last chance – and quite possibly for averting a disastrous military confrontation in the Middle East.
Turkey’s Critical Election
ISTANBUL – In very few democracies could such a small shift in votes lead to outcomes as different as the ones that could result from Turkey’s general election on June 7.
A swing of less than 1% of the national vote could decide whether the ruling Justice and Development Party (AKP) is forced to form a coalition government – Turkey’s first after 13 years of single-party rule – leaving it unable to fulfill President Recep Tayyip Erdoğan’s longstanding desire to strengthen the presidency.
Turkish elections have been boring affairs since the AKP came to power in 2002.
The party’s results have been all but preordained: landslide victories and majority governments.
This year, however, the outlook is different: the results are far from certain, and the stakes could hardly be higher.
Riding on the outcome is not only Erdoğan’s political future, but also the potential for a long-term settlement with the country’s Kurds and the long-term soundness of Turkish democracy itself.
The uncertainty this time around is attributable to the predominantly Kurdish Peoples’ Democratic Party (HDP).
Kurdish political parties shied away from contesting past elections, owing to their fear of failing to clear the 10% popular-vote threshold needed to enter the parliament.
Instead, Kurdish politicians would run as independent candidates, who are not subject to the threshold.
Once safely in office, they would reunite under the banner of a party.
This year, however, the Kurdish political movement has decided to field its candidates as members of a single party.
This electoral strategy, though risky, could yield large rewards, with the outcome holding significant implications for the party’s immediate fortune – as well as for Turkey’s long-term prospects.
The HDP’s failure to clear the 10% threshold would open the way for an overhaul of the country’s political system.
With the Kurds and their candidates excluded from the parliament, the AKP would have to do only slightly better than polls are predicting to maintain its political dominance.
If the party is able to secure more than 45% of the national vote, the quirks in Turkey’s electoral law will give it more than 330 representatives in the country’s 550-seat legislature.
Such a result would give Erdoğan the power to put in place the presidential system of governance that he has long sought.
The AKP’s parliamentary majority would allow the party to draft a new constitution unilaterally and put it to a referendum within a year.
At the same time, the country’s southeastern regions could become vulnerable to civil unrest, as the Kurdish movement – faced with a total lack of national political representation during a time of institutional transition – agitates for greater local autonomy.
If, on the other hand the HDP can reach the 10% threshold, its fortunes – and Erdoğan’s – will swing in the other direction.
The party’s candidates would command a sizable minority delegation in parliament, and the AKP would likely become the senior partner of a coalition government.
Far from securing a dominant position, Prime Minister Ahmet Davutoğlu would be forced to choose between aligning his party with the HDP or the conservative Nationalist Movement Party (MHP).
A grand coalition with the main opposition party, the center-left Republican People’s Party (CHP), though theoretically possible, is not congruous with Turkey’s political culture.
Such a result would empower the executive, headed by Davutoğlu, to the detriment of the presidency.
With the possibility that Erdoğan could become an executive president no longer realistic, his power would quickly begin to wane.
Even assuming that the AKP remained the country’s largest party, the balance of power in Turkish politics would start to turn against him.
In liberal democracies, national elections are intended to provide the winning side with a popular mandate to govern and to set policy priorities until the next election.
Only rarely do they hold implications that will last longer than a single electoral cycle.
But that is the case today in Turkey, where the outcome of the upcoming popular vote is likely to determine the rules of political life for years to come.
The HDP is currently polling at around 10%.
A little nudge in either direction could make all the difference in the world.
Erdoğan’s Second Chance
ISTANBUL – The outcome of Turkey’s latest general election – voters have gone to the polls twice in the last five months – reveals important insights into the nature of the country’s democracy and the preferences of its citizens.
The first of Turkey’s two parliamentary elections this year, in June, was widely viewed as a referendum on President Recep Tayyip Erdoğan’s efforts to strengthen the powers of his office.
The result was clear.
Erdoğan’s Justice and Development Party (AKP) received just 41% of the vote, costing it the majority it had enjoyed since coming to power in 2002.
On November 1, however, after negotiations following the June elections resulted in a hung parliament, Turks voted again, and the outcome could not have been more different.
This time, the election was predominantly perceived as a referendum on the continuation of single-party rule, and the AKP won 49% of the vote, providing it with a comfortable majority.
In the run-up to the latest election, Erdoğan and the AKP emphasized the importance of the party’s parliamentary majority for Turkey’s political stability.
The opposition countered with the argument that a coalition government would counter the country’s deep political polarization, while helping to establish stronger checks and balances.
The promise of stability proved to be the more resonant message.
The political instability following June’s inconclusive election had been compounded by a sharp decline in domestic and regional security.
A renewed campaign of violence by the separatist Kurdistan Workers’ Party (PKK) and attacks by the Islamic State, including suicide bombings in Ankara that killed more than 100 people, created a backdrop that reinforced the AKP’s message.
The outcome of the vote attests to the ineffectiveness of Turkey’s parliamentary opposition, which once again failed to make a dent in the AKP’s popularity, almost as if they had set out to disprove the theory that electorates simply tire of long-serving governments.
Instead the AKP obtained its landslide victory – a major achievement after 13 years of uninterrupted rule – by siphoning voters from its competitors.
The party received nearly five million more votes than it did in June, corresponding to a 20% increase in its popularity.
Two opposition parties, the conservative Nationalist Movement Party (MHP) and the predominantly Kurdish Peoples’ Democratic Party (HDP), together lost three million votes, while the center-left Republican People’s Party (CHP) held its ground, finishing second with 25% of the vote.
Voters punished the nationalist MHP severely for its obstructionism following the June election, when it refused all offers to join a coalition government.
With 12% of the popular vote, compared to 16% in June, the MHP lost almost half of its parliamentary seats.
The HDP was handicapped by its inability to distance itself from the PKK, which a large section of the electorate regards as being responsible for the upsurge in domestic violence.
Indeed, the HDP seemed at risk of failing to obtain the 10% of the vote it would need to enter parliament, an outcome that would have provided the AKP with a majority large enough to amend the constitution on its own.
In the end, HDP ended with 10.75% of the vote, down from 13% in the June elections, preventing Erdoğan from securing the compliant parliament he would need to establish an executive presidency.
Nonetheless, Turkey’s new government has been provided with a broad enough mandate to address some of the country’s most difficult and imminent policy challenges – most notably the peace process with the Kurds.
A previous effort had been suspended ahead of the election, as the PKK returned to violence and the AKP’s leadership adopted increasingly nationalist and hawkish rhetoric.
With the election over, however, there is hope that the new government will restart the negotiations.
If successful, the talks would have a major impact not only domestically, but also on the ongoing fight against the Islamic State.
The AKP’s majority will also enable it to continue to recalibrate the country’s foreign policy.
Turkey’s policies following the Arab Spring had led to a loss of influence and friends in the region; but recently the country has begun to adapt its approach to the realities on the ground.
For example, Turkey has lifted its objections to a role for Syrian President Bashar al-Assad in negotiations to end the civil war in Syria.
Similarly, a new commitment to the struggle against the Islamic State has eliminated a core point of friction with Turkey’s Western partners.
The main trap the new government must avoid is a return to a heavily paternalistic style of governance.
The AKP should take comfort in its large majority and start to view minority views and even peaceful dissent more benignly, in a way that befits a country negotiating accession to the European Union.
The lesson of the two elections is clear: Turkey’s voters want a strong, stable government, but not one that runs roughshod over its opponents.
Turkey’s Failed Bureaucratic Coup
ANKARA – Last week, Turkish Prime Minister Recep Tayyip Erdoğan intensified his government’s response to the corruption investigations that have been roiling the country since December, restructuring the leadership of the judiciary and police.
But it would be a mistake to view this as a fight between the executive and the judiciary, or as an attempt to cover up charges that have led to the resignation of three ministers.
What is at issue is the law-enforcement authorities’ independence and impartiality.
Indeed, amid charges of fabricated evidence, Erdoğan now says that he is not opposed to retrials for senior military officers convicted of plotting to overthrow his government.
The recent developments reflect the widening rift between Erdoğan’s government and the Gülen movement, led by Fethullah Gülen, a self-exiled Islamic preacher currently residing near Philadelphia.
The Gülen movement was an important backer of the governing Justice and Development Party (AKP) and its efforts to establish civilian control over the military during the AKP’s first two terms in office.
Now, however, the movement appears to have been plotting a coup of its own.
Many members of the judiciary and the police force associated with the wave of corruption charges brought against government officials, businessmen, and politicians’ family members are connected with the Gülen movement.
What started out as an investigation into alleged graft soon became an opposition-supported smear campaign.
Turkey’s current struggles raise important questions about the appropriate relationship between bureaucrats and elected officials in a pluralist democracy.
Answering them will require a debate that transcends issues like the separation of powers and judicial independence and elucidates the appropriate relationship between politics and religion.
For that, understanding the historical context of the current crisis is crucial.
When Turkey became a democracy in 1950, the previous system’s secular Kemalist elites attempted to harness the power of the military and the bureaucracy to control the elected government.
In fact, the Turkish military, with the judiciary’s support, explicitly intervened in the civilian government’s functioning in 1960, 1971, 1980, and 1997, each time in the name of protecting secularism.
In response, various religious groups, including the Gülen movement, encouraged their followers to take positions in the bureaucracy and the military.
In the 1990’s, military-backed secularist governments struck back, attempting to purge religious bureaucrats and military leaders: those who did not consume alcohol, or whose family members wore headscarves, were immediately suspected.
With the normalization of Turkish democracy following the AKP’s victory in 2002, restrictions on the recruitment, employment, and promotion of religious citizens in the upper echelons of the bureaucracy were eliminated – a process that especially benefited members of the Gülen movement, with its extensive education, media, and business networks.
Gülen followers – who claimed to support liberal democracy and the tolerant, modern form of Islam embraced by the AKP – seemed like natural allies of Erdoğan’s government.
For a decade, Gülen-connected companies played a widely acknowledged – and appreciated – role in Turkey’s economic growth and development, while Gülen-movement schools trained students to pursue public-service jobs.
As long as bureaucrats were recruited and promoted based on merit, the AKP had no problem accepting the over-representation of Gülen followers in certain branches of government.
This acceptance was rooted in the belief that Gülen members would adhere to the fundamental requirement in a pluralist democracy that bureaucrats – whether Muslims in Turkey, Mormons in the United States, or Buddhists in Japan – do not allow their religious convictions to trump their commitment to public service and the rule of law.
What the government did not imagine was that a new vision of bureaucratic tutelage over the civilian government would emerge.
Although Gülen followers have disagreed with several of the government’s policies, they largely backed the AKP in the last three elections.
What drove them to reject the party completely was a policy debate on restructuring “cram schools” – expensive private institutions that prepare high-school seniors for their university entrance examinations.
The Gülen movement operates at least one-quarter of these schools, which form a key component of the movement’s multi-billion-dollar education network and help it recruit new members.
The movement’s members thus viewed the debate over cram schools as a direct challenge to their influence.
But their reaction was disproportionate – not least because the government’s plans were not finalized.
Moreover, the proposal had nothing to do with the Gülen movement; the government was responding to citizens’ complaints about having to pay extravagant fees to prepare their children for free public universities.
And the Gülen movement was not exactly caught off-guard; cram-school representatives had been engaged in a dialogue with education-ministry officials for some time.
As in any democracy, public criticism of Turkey’s government policies is normal and healthy.
But attempts by Gülen-aligned members of the judiciary and the police force to blackmail, threaten, and illegally bargain with the government are unacceptable.
Now, it is up to the courts to discern the truth about corruption among Turkey’s so-called “public servants.”
But all of the signs point to a coordinated political crusade by Gülen followers, including the chief prosecutors involved in the recent corruption cases and the pro-Gülen media that have steadfastly defended the prosecutors’ impartiality (despite the many irregularities – such as extensive unauthorized wiretaps – that have come to light).
Moreover, a coordinated group within the judiciary is suspected of planting evidence – allegations that have led to the calls for military personnel to be retried.
To be sure, this does not mean that there were no coup attempts by members of the military in the past or cases of corruption by politicians and bureaucrats.
The point is that Turkey needs judicial reforms that eliminate the possibility of organized cliques manipulating their constitutional powers to advance their own narrow goals.
This is a red line for any pluralist democracy.
Individual citizens should be free to live according to their beliefs; but an unaccountable theological vision must not be allowed to shape their behavior as civil servants and bureaucrats.
More generally, the debate about the Gülen movement should serve as an opportunity to clarify the relationship between religion and politics, while reminding the Turkish public – and Muslim-majority countries throughout the region – of the core democratic values that have enabled Turkey to develop and thrive.
Escape from Moscow
Communism’s fall gave the nations of the former Soviet bloc a chance to turn towards democracy, a market economy, and the rule of law.
Some countries cut ties decisively with the communist past; others were less successful, a few failed catastrophically.
Moldova and Georgia were in the last category until recently.
Their economic and political failures were in large part due to secessionist movements – actively supported by Russia – that aimed at keeping both countries in the Kremlin’s “sphere of influence.”
When bloody conflicts erupted in Transdnistria, Abkhazia, and South-Ossetia, Russia turned its military presence into “peace-keeping” forces as a means of maintaining control.
It has long been feared that these so-called “frozen conflicts” could suddenly turn hot.
Not only has this not happened, but we can now talk of solutions, as both Georgia and Moldova have begun to achieve breakthroughs to a market economy and democracy.
The European Union’s “neighborhood policy” has also helped.
The starting point for these developments was Georgia’s “Rose Revolution” three years ago.
From coming perilously close to being a failed state, Georgia has turned towards the West.
The success of the various “color revolutions” in former Soviet-bloc countries also ignited change in Moldova, where President Vladimir Voronin launched reforms aimed at moving closer to the EU.
These changes sparked new initiatives in Georgia and in Moldova to restore, peacefully, their territorial integrity.
Estonia’s experience suggests how Georgia and Moldova should shape their policies vis-à-vis Russia.
When Estonia gained independence in 1991, Moscow sought to portray Estonia as a land with huge economic problems, unsuitable for investment.
Estonia was indeed poor, and its main exports were scrap metal and timber, but its economy was growing.
Russia supported a so-called “autonomy-movement” in northeast Estonia, which is populated mostly by ethnic Russians who settled there during Soviet times.
When Estonia resisted, Russia imposed sanctions and cut off gas supplies.
The few Estonian products allowed into Russia were heavily taxed, and Russia even threatened military intervention.
But Estonia kept its nerve.
Russian sanctions actually helped Estonia re-direct its economy westward.
Meanwhile, Western Europe did its utmost to integrate the Baltic states – Lithuania, Latvia, and Estonia − while seeking to avoid conflict with Russia.
A 1994 free-trade treaty with the EU enabled Estonian products to find new markets, and Estonia eventually became one of the most successful postcommunist transition countries, joining the EU and NATO in 2004.
When Georgia gained independence in 1991, it did not receive the same sort of help from Western Europe.
True, Georgia seemed a less appealing partner than the Baltic states. The 1990’s were marked by coups, countercoups, and civil wars, with two regions – Abkhazia and South Ossetia – essentially breaking away with Russian support.
The country has done its best to live down it dismal past.
Since the Rose Revolution, the economy has been reformed, the army has been strengthened, and the country’s leadership is young, dynamic, and eager to move the country forward.
Georgia’s 12% flat-rate income tax – probably the lowest in the world – has boosted the national budget.
The government has raised pensions and increased social support.
Corruption is decreasing and judicial reform has started.
The economy grew by 8% in 2005 and more than 10% in 2006.
Georgia has tried to defuse tensions over Abkhazia and South Ossetia, but Russia accuses Georgia of aggression and ethnic cleansing.
Its main goal is to inhibit Western support for Georgia, and to prevent reconciliation with the breakaway regions.
Russia, and to some extent the United States, are the powers that matter in Georgia.
Europe must show that it matters, too.
Estonia demonstrated – at independence and again during the recent crisis over the movement of a Soviet-era memorial – that with determination and strong support, Russian pressure can be resisted.
Europe must understand that Georgia does not need humanitarian aid, but trade.
Just as a free-trade deal with Europe allowed Estonia to find new markets, it can be the means through which Georgians are able to help themselves.
Georgia can reasonably hope that it will achieve real independence, but what about Moldova, Europe’s poorest country and one threatened by Russia more than the Estonians – or, indeed, the Georgians – ever were?
Moldova’s lack of success at reform was partly the result of Russian-supported secessionist movements.
It made a wretched start at independence when the industrial region of Transdnistria – populated by Russian and Ukrainian speakers who feared that the majority of Moldovans, who are of Romanian descent, planned closer ties with Romania – declared independence.
Civil war followed, and in 1992 Russian troops entered Transdnistria, where they remain.
Transdnistria’s independence has never been recognized, either by Moldova or internationally.
It is said to be lawless and corrupt.
Moldova is deeply in debt, unemployment is high, and its once well-regarded wine industry is in decline.
Russia occasionally cuts off its gas, and many of its four million people have left the country.
Only Russia can solve the problem.
Moldovan officials have made five fruitless visits to Moscow to plead with President Vladimir Putin to explore a solution and withdraw Russian troops.
A desperate Voronin has turned for help to the EU’s “border assistance mission,” but an EU initiative would need Russian cooperation.
Unfortunately, the West appears to lack up-to-date knowledge about the situation in Moldova.
In April, for example, the EU and the US too learned of a proposed peace deal only from a leaked report in Germany.
That deal would appear to favor Russia, with Moldova recognizing Transdnistria as a legitimate entity.
If Russia has trumped the West, the precedent for Georgia and other weak post-Soviet states would be a dire one.
Escaping from the Deflation Trap
Deflation will be the overriding topic when America's Federal Reserve Board meets on June 24th.
Michael Woodford, one of the world's leading authorities on central banking, offers a strategy to break the grip of falling prices.
Alan Greenspan's recent speech to a conference of bankers in Berlin--admitting the desirability of "insurance" against the risk of deflation in the US, even if it has not yet appeared--focused attention on a crucial issue.
What can be done to stabilize an economy when nominal interest rates cannot be lowered any further, but prices still fall and the output gap--the difference between what it can produce and what it actually does produce--remains wide?
What was a theoretical curiosity raised by John Maynard Keynes in the 1930's has become the fundamental issue confronting policymakers in the world's largest economies.
Japan poses the clearest example of this problem.
Growth there remains anemic, and deflation lingers, suggesting a need for monetary stimulus.
But the benchmark interest rate in Japan has been essentially zero for the past four years, so the standard form of monetary stimulus--reducing short_term nominal interest rates--is unavailable.
With the Fed's operating target now only 1.25% and signs of recovery in the US fragile, many now fear that the US is poised to confront a similar situation.
The recent cut in the ECB's policy rate amid warnings of possible deflation in Germany lead some to fear that the euro zone may be equally at risk.
Some economists recommend fundamental changes in the way monetary policy is conducted to avoid ever reaching this "zero bound" on interest rates.
Paul Krugman, for example, calls deflation a "black hole": once you fall into it, monetary policy becomes ineffective because no amount of monetary expansion can further reduce interest rates.
So policymakers must prevent deflationary expectations from ever taking root by targeting a sufficiently high inflation rate at all times.
But what if it's too late, and the zero interest_rate bound is reached while prices are falling?
Is there any point in having an inflation target that cannot be met?
Kunio Okina, director of the Bank of Japan's Institute for Monetary and Economic Studies, resists inflation targeting for this reason.
He argues that "because short_term interest rates are already at zero, setting an inflation target of, say, 2% wouldn't carry much credibility."
Wrong.
The "zero bound" on short_term rates does represent an important constraint on what monetary stabilization can achieve, but it is a more modest barrier than deflation pessimists insist.
Monetary policy is far from powerless to mitigate a contraction in economic activity when deflation strikes, or when an economy flirts dangerously with it.
The key is to create the right kind of expectations regarding how monetary policy will be conducted in the longer term.
For expectations regarding policy in the future determine the severity and duration of the output gap that results from hitting the zero bound now .
If the Bank of Japan, for example, were to commit itself to a target path for a broad price index, and credibly commit to keeping interest rates low until that target is reached, this commitment would influence investor behavior.
For the more that prices fall, the greater should be the confidence in future inflation, and hence perceptions of lower real interest rates.
A commitment to a price-level target path above the current level would imply a commitment to keep nominal interest rates low for a time in the future, even after prices begin to rise again.
A commitment to hold down nominal interest rates for a longer period of time should stimulate aggregate demand immediately.
This is true even when current rates cannot be lowered any further--and even if inflation expectations remain unaffected--owing to the effects of the expected future path of short rates on current long-term interest rates and on the exchange rate.
The fact that an official price_level target is not hit immediately need not impugn such targets.
The existence of an official target is crucial, even when it is not being reached, because it allows the private sector to judge how close the central bank is to a point at which it would feel justified in abandoning its zero_interest_rate policy.
The current gap between the actual and target price levels should shape private_sector expectations regarding how long interest rates are likely to remain low.
But why should the private sector believe that the central bank is serious about hitting its price_level target, if all that is observed in each period is a zero nominal interest rate and another target shortfall?
Ideally, the best way to make its policy credible would be for the central bank to demonstrate its commitment to the price_level targeting framework before the zero bound is reached.
In practice, and especially when deflationary fears are already present, managing private_sector expectations demands considerable subtlety.
The private sector is likely to scrutinize the bank's current actions for clues to its future behavior.
So "signaling" effects, such as shifts in the central bank's portfolio towards long_term securities, could help make the bank's price-level target credible.
If, say, the central bank starts buying long_term bonds from the private sector at below_market interest rates, this should help convince the public that the bank intends to stick to a future low interest_rate policy.
Such asset shifts would work because the level of long_term interest rates is an indicator of the markets' faith in the central bank's commitment to maintaining low short_term rates once inflation returns .
So, if the private sector is skeptical about the bank's commitment, long_term rates will be too high.
But if the bank buys long-term bonds, it will tend to show that skepticism is unwarranted.
The stabilizing effect of such asset purchases is due not to any mechanical consequence of the shift in portfolio balances, but to a change in private_sector expectations regarding future interest_rate policy.
Any central bank facing deflation should commit itself in advance to a price-level target and pursue actions that convince the private sector that the commitment is genuine.
Only that change in private expectations will make the bank's policy effective.
Escaping George Bush’s Future
It always comes back to oil.
The continuing misguided interventions in the Middle East by the United States and the United Kingdom have their roots deep in the Arabian sand.
Ever since Winston Churchill led the conversion of Britain’s navy from coal to oil at the start of the last century, the Western powers have meddled incessantly in the affairs of Middle Eastern countries to keep the oil flowing, toppling governments and taking sides in wars in the supposed “great game” of energy resources.
But the game is almost over, because the old approaches are obviously failing.
Just when one is lulled into thinking that something other than oil is at the root of current US and UK action in Iraq, reality pulls us back.
Indeed, President Bush recently invited journalists to imagine the world 50 years from now.
He did not have in mind the future of science and technology, or a global population of nine billion, or the challenges of climate change and biodiversity.
Instead, he wanted to know whether Islamic radicals would control the world’s oil.
Whatever we are worrying about in 50 years, this will surely be near the bottom of the list.
Even if it were closer to the top, overthrowing Saddam Hussein to ensure oil supplies in 50 years ranks as the least plausible of strategies.
Yet we know from a range of evidence that this is what was on Bush’s mind when his government shifted its focus from the search for Osama bin Laden to fighting a war in Iraq.
The overthrow of Saddam was the longstanding pet idea of the neoconservative Project for a New American Century, which was already arguing in the 1990’s that Saddam was likely to achieve a stranglehold over “a significant proportion of the world’s oil supplies.”
Vice President Dick Cheney reiterated these fears in the run-up to the Iraq War, claiming that Saddam Hussein was building a massive arsenal of weapons of mass destruction to “take control of a great portion of the world’s energy supplies.”
Cheney’s facts were obviously wrong, but so was his logic.
Dictators like Saddam make their living by selling their oil, not by holding it in the ground.
Perhaps, though, Saddam was too eager to sell oil concessions to French, Russian, and Italian companies rather than British and US companies.
In any event, the war in Iraq will not protect the world’s energy supplies in 50 years.
If anything, the war will threaten those supplies by stoking the very radicalism it claims to be fighting.
Genuine energy security will come not by invading and occupying the Middle East, or by attempting to impose pliant governments in the region, but by recognizing certain deeper truths about global energy.
First, energy strategy must satisfy three objectives: low cost, diverse supply, and drastically reduced carbon dioxide emissions.
This will require massive investments in new technologies and resources, not a “fight to the finish” over Middle East oil.
Important energy technologies will include conversion of coal to liquids (such as gasoline), use of tar sands and oil shale, and growth in non-fossil-fuel energy sources.
Indeed, there is excellent potential for low-cost solar power, zero-emitting coal-based technologies, and safe and reliable nuclear power.
Solar radiation equals roughly 10,000 times our current energy use.
We tap that solar power in many fundamental ways – food production, wind power, hydroelectric power, solar heating, solar-thermal electricity, solar panels – but the possibilities for greatly increased use of inexpensive, widely available, and environmentally friendly solar power are huge.
Coal, like solar energy, is widely available.
It is already inexpensive, but it is a solid rather than a liquid, a major pollutant, and a source of greenhouse gas emissions.
Yet all of these problems can be solved, especially if we make the needed investments in research and development.
Gasification of coal allows for the removal of dangerous pollutants, and coal can already be converted to gasoline at low cost; a South African company is beginning to bring that technology to China on a large scale.
Nuclear power, both fission-based and fusion-based, is yet another possibility for vast, reliable, secure, and environmentally safe primary energy.
Here, too, there are technological obstacles, but they seem surmountable.
Of course, there are also major political, regulatory, and security considerations, all of which need to be addressed properly.
It is ironic that an administration fixated on the risks of Middle East oil has chosen to spend hundreds of billions—potentially trillions—of dollars to pursue unsuccessful military approaches to problems that can and should be solved at vastly lower cost, through R&amp;D, regulation, and market incentives.
The biggest energy crisis of all, it seems, involves the misdirected energy of a US foreign policy built on war rather than scientific discovery and technological progress.
Escaping the Fossil Fuel Trap
MILAN – There are many problems with fossil fuels.
They are expensive and a source of political and supply volatility.
As consumption rises globally, the costs associated with them will probably rise sharply.
Worst of all, they carry large and unsustainable costs in terms of carbon emissions.
Indeed, their contribution to rising levels of CO2 in the atmosphere is beginning to overshadow the other problems.
But use of fossil fuels, and hence higher CO2 emissions, seems to go hand in hand with growth.
This is the central problem confronting the world as it seeks to forge a framework to combat climate change.
Compared to the advanced countries, the developing world now has both low per capita incomes and low per capita levels of carbon emissions.
Imposing severe restrictions on the growth of their emissions growth would impede their GDP growth and severely curtail their ability to climb out of poverty.
The developing world also has a serious fairness objection to paying for climate-change mitigation.
The advanced countries are collectively responsible for much of the current stock of carbon in the atmosphere, as well as for a significant (though declining) share of the world’s annual emissions.
As a consequence, the developing world’s representatives argue, the advanced countries should take responsibility for the problem.
But a simple shift of responsibility to the advanced countries by exempting developing countries from the mitigation process will not work.
To be successful, a strategy of fighting climate change must be not only fair, but also effective.
If developing countries are allowed to grow, and there is no corresponding mitigation of the growth in their carbon emissions, average per capita CO2 emissions around the world will nearly double in the next 50 years, to roughly four times the safe level, regardless of what advanced countries do.
Advanced countries by themselves simply cannot ensure that safe global CO2 levels are reached.
Just waiting for the high-growth developing countries to catch up with the advanced countries is even less of a solution.
So the world’s major challenge is to devise a strategy that encourages growth in the developing world, but on a path that approaches safe global carbon-emission levels by mid-century.
The way to achieve this is to decouple the question of who pays for most efforts to mitigate climate change from the question of where, geographically, these efforts take place.
In other words, if the advanced countries absorb mitigation costs in the short run, while mitigation efforts lower emissions growth in developing countries, the conflict between developing countries’ growth and success in limiting global emissions may be reconciled – or at least substantially reduced.
These considerations suggest that no emission-reduction targets should be imposed on developing countries until they approach per capita GDP levels comparable to those in advanced countries.
While such targets should be self-imposed by advanced countries, they should be allowed to fulfill their obligations, at least in part, by paying to reduce emissions in developing countries (where such efforts may yield greater benefits).
A crucial corollary of this strategy is large-scale technology transfer to developing countries, allowing them both to grow and to curtail their emissions.
The closer these countries get to being included in the system of restrictions, the greater incentive they will have to make their own additional investments to mitigate their emissions.
The world has already accepted the basic principle that the rich should bear more of the cost of mitigating climate change.
The Kyoto Protocol established a set of “common but differentiated responsibilities” that imply asymmetric roles for advanced and developing countries, with the obligations of developing countries evolving as they grow.
The ingredients for such a grand bargain are fairly clear.
The advanced countries will be asked to reduce their CO2 emissions at a substantial rate, while emissions in developing countries can rise to allow for rapid, catch-up economic growth.
The goal is not to prevent developing countries’ growth-related emissions, but to slow their rise and eventually reverse them as these countries become richer.
The best way to implement this strategy is to use a “carbon credit trading system” in the advanced countries, with each advanced country receiving a certain amount of carbon credits to determine its permissible emission levels.
If a country exceeds its level of emissions, it must buy additional credits from other countries that achieve emissions lower than their permitted levels. But an advanced country could also undertake mitigation efforts in the developing world and thus earn additional credits equal to the full value of its mitigation efforts (thus allowing more emissions at home).
Such a system would trigger entrepreneurial searches for low-cost mitigation opportunities in developing countries, because rich countries would want to pay less by lowering emissions abroad.
As a result, mitigation would become more efficient, and the same expenditures by advanced countries would produce higher global emission reductions.
As for developing countries, while they would not have explicit credits or targets until they graduate to advanced-country status, they would know that at some point (say, when their carbon emissions reach the average level of advanced countries) they would be included in the global system of restrictions.
This would provide them with an incentive even before that point to make decisions concerning energy pricing and efficiency that would reduce the growth of their emissions without impeding economic growth, and thus extend the period during which their emission levels remain unrestricted.
Conflict between advanced and developing countries over responsibility for mitigating carbon emissions should not be allowed to undermine prospects for a global agreement.
A fair solution is as complex as the challenge of climate change itself, but it is certainly possible.
Escaping the Oil Curse
CAMBRIDGE – Libyans have a new lease on life, a feeling that, at long last, they are the masters of their own fate.
Perhaps Iraqis, after a decade of warfare, feel the same way.
Both countries are oil producers, and there is widespread expectation among their citizens that that wealth will be a big advantage in rebuilding their societies.
Meanwhile, in Africa, Ghana has begun pumping oil for the first time, and Uganda is about to do so as well.
Indeed, from West Africa to Mongolia, countries are experiencing windfalls from new discoveries of oil and mineral wealth.
Heightening the euphoria are the historic levels that oil and mineral prices have reached on world markets over the last four years.
Many countries have been in this position before, exhilarated by natural-resource bonanzas, only to see the boom end in disappointment and the opportunity squandered, with little payoff in terms of a better quality of life for their people.
But, whether in Libya or Ghana, political leaders today have an advantage: most are well aware of history, and want to know how to avoid the infamous natural-resource “curse.”
To prescribe a cure, one must first diagnose the illness.
Why do oil riches turn out to be a curse as often as they are a blessing?
Economists have identified six pitfalls that can afflict natural-resource exporters: commodity-price volatility, crowding out of manufacturing, “Dutch disease” (a booming export industry causes rapid currency appreciation, which undermines other exporters’ competitiveness), inhibited institutional development, civil war, and excessively rapid resource depletion (with insufficient saving).
Oil prices are especially volatile, as the large swings over the last five years remind us.
The recent oil boom could easily turn to bust, especially if global economic activity slows.
Volatility itself is costly, leaving economies unable to respond effectively to price signals.
Temporary commodity booms typically pull workers, capital, and land away from fledgling manufacturing sectors and production of other internationally traded goods.
This reallocation can damage long-term economic development if those sectors nurture learning by doing and fuel broader productivity gains.
The problem is not just that workers, capital, and land are sucked into the booming commodity sector.
They also are frequently lured away from manufacturing by booms in construction and other non-tradable goods and services.
The pattern also includes an exuberant expansion of government spending, which can result in bloated public payrolls and large infrastructure projects, both of which are found to be unsustainable when oil prices fall.
If the manufacturing sector has been “hollowed out” in the meantime, so much the worse.
Even if an increase in oil prices turns out to be permanent, pitfalls abound.
Governments that can finance themselves simply by retaining physical control over oil or mineral deposits often fail in the long run to develop institutions that are conducive to economic development.
Such countries evolve a hierarchical authoritarian society in which the only incentive is to compete for privileged access to commodity rents.
In the extreme case, this competition can take the form of civil war.
In a country without resource wealth, by contrast, elites have little alternative but to nurture a decentralized economy in which individuals have incentives to work and save.
These are the economies that industrialize.
The final pitfall is excessively rapid depletion of oil or mineral deposits, in violation of optimal rates of saving, let alone environmental preservation.
What can countries do to ensure that natural resources are a blessing rather than a curse?
Some policies and institutions have been tried and failed.
These include, in particular, attempts to suppress artificially the fluctuations of the global marketplace by imposing price controls, export controls, marketing boards, and cartels.
But some countries have succeeded, and their strategies could be useful models for Libya, Iraq, Ghana, Mongolia, and others to emulate.
These include: hedging export earnings – for example, via the oil options market, as Mexico does; ensuring counter-cyclical fiscal policy – for example, via a variant of Chile’s structural budget rule; and delegating sovereign wealth funds to professional managers, as Botswana’s Pula Fund does.
Finally, some promising ideas have virtually never been tried at all: denominating bonds in oil prices instead of dollars, to protect against the risk of a price decline; choosing commodity-price targeting as an alternative to inflation targeting or exchange-rate targeting for anchoring monetary policy; and distributing oil revenues on a nationwide per capita basis, to ensure that they do not wind up in elites’ Swiss bank accounts.
Leaders have free will.
Oil exporters need not be prisoners of a curse that has befallen others.
Countries can choose to use their resource bonanzas for the long-term economic advancement of their people, not just that of their leaders.
Eternal Debts
"Everything . . . everything changes."
So goes the refrain in a famous Argentine song.
But actually, in Argentina everything stays the same or becomes worse.
Heraclitus's warning against bathing in the same sea twice is lost on our economic ministers, who insist on bathing regularly in contaminated waters.
Whenever they go bathing, they follow the same path, first raising concerns over what will happen if Argentina pays back its foreign debt, and then inevitably paying back the debt under strong pressure from the International Monetary Fund and the US.
Sometimes, Argentine negotiators respond to international bond owners, who harass the government in an effort to force payment on what cannot be paid.
By playing this endless game, our ministers leave for tomorrow what they lack the courage to face today, knowing full well that this ruse will end tragically for Argentines.
The sagacious historian and politician Arturo Jauretche liked to say, "It's not about changing our collar; it's about ceasing to be a dog."
His companions, however, remain unconvinced and seem resigned to failing to find an alternative to the neo-liberal taxation model for paying the foreign debt.
They believe we will be condemned to the abyss unless we accept rules created by the world's powerful.
This is wrongheaded; it's time we cease being dogs.
Our foreign debt, or more appropriately our eternal debt, cannot and should not be paid.
It is an immoral debt and a profound human rights issue.
The debt is used to dominate people, and the impact is cruel and abusive.
The world's indebted nations, unfortunately known as the Third World, transfer capital to the rich nations by paying interest on their foreign liabilities.
This generates a vicious, untenable cycle of deep poverty and social exclusion for the south.
The northern countries, unfortunately known as the First World, use the hunger and poverty of southern nations to ensure a better life for themselves.
Argentina's foreign debt was generated during the military dictatorships, when the rich nations of the north provided credit to despots and sold them weapons to repress their people.
These private debts were passed along to the populace, which received nothing from the loans but is now expected to pay them back.
Indeed, Argentina's case is pathetic.
It was a rich country, a great producer of food, where endemic diseases such as leprosy, parasites, and tuberculosis had been defeated and literacy thrived.
True, Argentina endured fifty years of military dictatorships and weak civil governments. But, up until the 1970's it was never heavily encumbered by debt.
Today, 23 million Argentines are poor, and more than 10 million live below the poverty line.
Everyday, nearly 100 children die from hunger and preventable diseases.
Our indigenous communities continue to lose their land to foreign corporations.
Endemic diseases and illiteracy are increasing.
Hundreds of factories have closed, driving up the unemployment rate to nearly 30%.
Nonetheless, we continue to transfer capital to rich countries to pay interest on our foreign debt.
The more we pay, the more we seem to owe and the less we have.
Still, Latin Americans know how to resist and how to create social movements to fight the "axis of evil" - militarization, foreign debt, and the Association of Free Trade for the Americas - that seeks to subject their continent to re-colonization by the US.
The free trade agreement, for example, would provide North American companies with the same production and investment conditions that are available to our companies and grant them agricultural subsidies against which no Latin American country can compete.
Because foreign debt has such a direct impact on people's lives, diverse proposals have been made to government officials, in the belief that the foreign debt burden is fundamentally a political problem - one that must be faced now, not later.
Essential to any real change is the creation of continental unity and regional affiliations such as Mercosur, and the Andino and Caribbean Pacts.
We must differentiate legitimate debt from illegitimate debt, which means taking the problem before the World Court in The Hague.
The World Social Forum, which met this year in Bombay, India, is another useful body that is generating alternative proposals to overcome the dire situation of the heavily indebted countries.
People across Latin America must unite to preserve their sovereignty, their environment, and respect for human rights, all of which are systematically being violated.
We need to re-consider how we define our democracies, which appear to be mere formalities with little real substance.
The fact that we can vote is an important victory, but it does not guarantee us the hope and dignity that we deserve.
Eternal Hong Kong
I have been a part of Hong Kong’s civil service for more than three decades.
Throughout my entire career I have worked with many people whose driving impulse has been to serve Hong Kong.
That remains as true today as it did almost 40 years ago, when I first entered government.
The past couple of weeks have been among the most momentous periods since our reunification with China in 1997, and it has left me in the hot seat as Hong Kong’s Acting Chief Executive.
It is not easy to describe the enormous level of responsibility I feel.
What sets Hong Kong apart is our ability to sustain social stability and economic growth.
One key element of our success is the institutions that buttress our development.
These include our legal system, which is underpinned by an independent judiciary, our legislature, and our civil service.
Each operates independently but is an integral part of the whole.
In short, ours is a system of government like many others.
However, Hong Kong has some distinguishing features, including a very internationally minded and outward-looking government, owing to our close integration into world markets long before globalization became a catchphrase.
Within the ranks of our civil service and judiciary are nationals from Britain, Australia, the United States, Canada, and India.
Moreover, our Court of Final Appeal calls on some of the most esteemed minds of the common-law world.
We have a large foreign population and one of the world’s largest consular corps.
International chambers of commerce play a very active and vital role in government consultations.
Our Basic Law even allows for foreign nationals to be elected to one-fifth of the seats in our legislature.
Hong Kong’s cosmopolitanism long ago planted the seeds of tolerance and respect in our approach to government.
As a result, we are committed to dialogue and compromise as the only way to balance the many competing demands and opinions that pervade public affairs.
Good government is not a competition.
It’s not about winning or losing, or whose view or will prevails. It is about making the best decisions for the community as a whole.
Inevitably, this will often involve compromise.
Indeed, as Hong Kong’s society has grown more sophisticated, it has also become more complex, multi-faceted, and pluralistic.
This means that government can no longer afford to view issues in isolation; its operations need to be de-compartmentalized and flattened, as well as streamlined.
This is a difficult task, given that some of our systems have been in place for many years, often entrenched in law.
Of course, pragmatism has its limits, because good government is also about upholding core values.
I have often referred to what I call the four pillars of Hong Kong’s success: the rule of law, a level playing field for business, a clean and efficient civil service, and the free flow of information.
These are values that we simply will not compromise. To do so would mark the beginning of the end for Hong Kong.
Since reunification with our motherland, we have the added safeguard of the Basic Law, which gives effect to the principles of “one country, two systems” and “Hong Kong’s people running Hong Kong with a high degree of autonomy.”
Good government also requires sharing a vision of the future – the purposes and thinking behind public policies – with the community.
Our vision is to develop Hong Kong as Asia’s world city.
This is an all-encompassing brief, covering everything we do as a community and an economy in areas ranging from international trade to art, culture, and tourism.
The Basic Law embodies this vision, laying the foundations for our development over a 50-year period and providing the freedom and the power for us to position ourselves as Asia’s world city – and to do it on our own.
At the same time, it also embodies the depth of the central government’s support for Hong Kong.
It is thus crucial to the good governance of the Hong Kong Special Administration Region.
In many areas – financial services, infrastructure, communications technology, and tourism – I would say we have reached our goals for Hong Kong.
Hardly a day goes by when we don’t read something in the local press that refers to our status as Asia’s world city.
Even when people feel we have not lived up to the standards expected of a world city, we are glad to be held to a high benchmark, because it keeps us on our toes.
That may sound disingenuous to some, but Hong Kong’s officials share a common mission to maintain the stability and prosperity of our city.
Our duty is to make Hong Kong a better place for us all, without hidden agendas or quid pro quos.
It is an onerous and solemn undertaking, uplifting one day and extremely frustrating the next.
But, above all, it is an honor and a privilege to play such a role in our society, and I know that the vast majority of officials, legislators, judges, and civil servants with whom I’ve worked would agree.
Ethiopia’s New Climate of Fear
Vienna – The European Union, the United States, and other major donors will pump about $2.5 billion into Ethiopia this year, a sum that does not even begin to include the cost of medicines, famine relief, and countless other services provided by non-profit groups in one of the world’s most impoverished countries.
That help is needed, because Ethiopians are prone to malnutrition, disease, and natural calamity.
Its burgeoning population far outstrips the country’s ability to feed itself.
So desperate is Ethiopia that celebrity causes – from Bob Geldoff’s Live Aid famine-relief concerts to Angelina Jolie and Brad Pitt’s adoption of orphaned babies – supplement what donors cannot possibly provide.
But for all this generosity, an authoritarian government rules Ethiopia with virtual impunity.
Prime Minister Meles Zenawi, in power for 18 years, has crushed the opposition.
His ruling party dominates public institutions.
Worse still, in a vast and predominantly rural country, the prime minister’s underlings control broadcasting and maintain a choke-hold on other media.
Four years ago this month, Zenawi’s Ethiopian People’s Revolutionary Democratic Party (EPRDF) suffered its worst loss at the polls since the former guerrilla overthrew a ruthless, Soviet-backed regime in 1991.
Rather than accept its losses, the EPRDF-run government responded with a brutal crackdown, claiming outright victory and accusing the opposition of trying to stage an insurrection.
Security forces attacked peaceful protesters, jailed opposition leaders, sent thousands of their supporters to gruesome detention camps, and accused independent journalists of treason – a crime punishable by death.
Some journalists and politicians sought asylum in other countries.
During several months of unrest, roughly 200 people were killed.
It was a disgraceful snub for donor nations that had invested time and capital in supporting Ethiopia’s democratic transition.
Many of the journalists and opposition figures were eventually released or granted clemency, but there has been no letup to the torment.
In late April 2009, security forces arrested 40 opposition figures, accusing them of trying to topple the government.
Meanwhile, the authorities continue their assault on independent media through capricious licensing rules, interrogations, and, on occasion, revoking the permits of reporters for international broadcasters like the Voice of America.
Leading journalists have been assaulted, the culprits never found. “There is only fear, not freedom, of expression in Ethiopia,” says one leading journalist.
Ethiopia’s journalists are not entirely innocent.
Some newspapers have stoked the country’s ethnic and regional animosities, and can be wildly inaccurate in their reporting.
Yet badgering or jailing journalists is no way to resolve what could be handled through a voluntary media council or independent ombudsman.
Furthermore, the government effort to portray independent journalists as vicious enemies unfairly condemns the many Ethiopian reporters and editors who take their responsibilities seriously.
Zenawi has largely escaped sanction from his Western allies, in part because the erudite ex-Marxist had a friendly relationship with former British Prime Minister Tony Blair and cooperated closely with the Bush administration in counter-terrorism efforts in the Horn of Africa.
There has not been total silence.
Donald Payne, a leading member of the US House Foreign Affairs Committee, and Ana Gomes, a member of the European Parliament from Portugal and head of the EU’s observation team in the 2005 elections, have sought to tie non-humanitarian aid more closely to Ethiopia’s conduct on press freedom and other human rights.
Britain and some other European governments responded to the post-election crackdown by temporarily withholding aid.
But Ethiopia poses a dilemma for anyone who cares about human rights and democracy.
Cutting off aid could have calamitous humanitarian consequences for the nation’s 80 million people.
It could also destabilize a fragile region, sparking fresh wars with neighboring Somalia and Eritrea.
Nevertheless, there are ways to pressure Zenawi:
· Donors should deny Ethiopian ministers a seat at diplomatic tables, such as the coveted spot Zenawi got at the G-20 summit in London as head of the New Partnership for Africa’s Development;
· While the Development Assistance Group, created by the EU and other principal donors to coordinate aid projects in Ethiopia, has improved the efficiency of donor contributions, a vigorous monitoring component is needed to ensure that international resources do not support policies that are anathema to human rights values;
· As a leading donor, the EU wields considerable power in Ethiopia and should be more willing to use it.
The EU should aggressively enforce the Cotonou Agreement, which requires Ethiopia and other nations that receive European assistance to respect “human rights, democratic principles, and the rule of law.”
Cotonou is due for revision in 2010, so now is the time to develop enforcement mechanisms that establish clear penalties for failing to uphold human rights and freedom of the press.
· The EU and the US should wield more of their clout at the World Bank and other international organizations to link development grants to progress on press freedom and human rights.
The aid that Ethiopia receives from its friends may be a small price to pay to keep Africa’s second largest country from descending into chaos.
But Ethiopia’s people deserve more from their government.
Press freedom is a start, not just because it is a fundamental human right, but also because vigorous media are essential to keeping societies alert to the kinds of crises that are all too common in Ethiopia.
Ethiopia’s Struggle for Democracy
When we in Ethiopia’s political opposition agreed to participate in the election that the government called in June, we were under no illusion that the process would be faultless.
After all, Ethiopia has never known democracy.
The dictatorship of Mengistu Haile Mariam was Africa’s most blood-curdling Marxist regime, and was replaced by today’s ruling EPRDF, whose “Revolutionary Democracy” is but a more subtle variation on the same theme.
So we knew that there would be problems with the election, that voting would not be clean in the way Western countries take for granted.
Yet we nonetheless believed that the opposition, led by the Coalition for Unity and Democracy (CUD), would have room to maneuver and campaign, owing to the government’s desire for international legitimacy.
So we decided to test the waters and push for a real political opening and a genuinely competitive vote.
Many Ethiopians appear to have agreed with this strategy.
The government did make some media available and engaged in more than 10 live televised debates.
So, at least at first, there seemed to have been some intention on the government’s part to open up the process – if not completely, then somewhat.
Now, however, it appears that the authorities wanted only a small, managed opening, on the assumption that they could control the outcome.
About a month before the election, the government began to shut down the political space it had opened.
Its election campaign took on a vilifying tone, charging that the opposition was bent on destroying ethnic groups through genocide.
Indeed, it called the opposition “interahamwe,” invoking the memory of the Hutu militia that slaughtered 800,000 Rwandan Tutsis in 1994.
The government also began to harass opposition parties, especially in rural areas.
This was unpleasant, but tolerable.
So we continued campaigning.
But things became nastier a week before the vote.
Attendance at an official pro-government rally in the capital, Addis Ababa, was dwarfed by our rally the following day, when millions of demonstrators peacefully demanded change and showed their support for us.
At that point, the government realized that its democratic opening was slipping out of its control.
Two days before the vote, our poll watchers and supporters were searched, arrested, and given one-day trials, with most sentenced to one or two months in jail.
We feared that the voting would take place without the presence of our poll watchers.
So we gave a press conference – all the opposition parties together – the day before the vote, demanding that the government release our party workers and allow people to vote freely.
Although the government met neither of these demands, the early results clearly showed that the opposition was gaining a large number of seats.
It became obvious that we were winning in many constituencies and that we had won in Addis Ababa, as well as in most of the major cities and the rural areas.
What was surprising was the magnitude of the victory.
In Addis Ababa, top government officials, including the ministers of education and capacity building, lost, as did the speaker of the House of People’s Representatives.
In rural constituencies, opposition candidates defeated such EPRDF heavyweights as the ministers of defense, information, and infrastructure, along with the presidents of the two largest regions, Oromia and Amhara.
The government wasted little time in responding: the next day, it declared itself the winner, with not even half of the constituencies reporting their results.
No surprise, then, that the public erupted in anger.
When university students protested, the police moved in, killing one.
In demonstrations the following day, 36 more people were killed.
Soon after, our office workers were detained, and Hailu Shawel, Chairman of the CUD, and senior CUD official Lidetu Ayalew were put under house arrest.
One hundred staff members were taken from our head office in Addis Ababa alone, and many more from regional offices.
Up to 6,000 people were jailed – CUD members and even ordinary citizens.
My fear is that the will of Ethiopia’s people will be stifled by government hard-liners.
Doubts about the authenticity of the final results will create a danger of instability.
Everyone – the government, the opposition, and the public – must commit themselves to a peaceful resolution.
To restore calm before a recount can be held, confidence-building measures are needed.
The military must be taken off the streets.
The ban on public demonstrations must be lifted.
Those in jail must be released or given a fair trial.
Those held simply because they do not support the government must be freed and allowed to participate in the democratic process.
The government-controlled media must be open to diverse opinions; in particular, opposition access must be guaranteed.
Equally important, the international community must send observers – and thus a clear signal to the government that any attempt to maintain power by force or intimidation is unacceptable.
The world must keep watching, just as it watched in Georgia, Ukraine, Lebanon, and Palestine.
For the first time in our ancient history, we Ethiopians have voted our conscience.
Our people have played their part with courage and discipline.
They deserve the opportunity to build a genuine democratic political system.
That is their only guarantee to live in peace and to achieve prosperity.
Ethnic Cleansing in the Caribbean
SANTO DOMINGO – I am a native-born citizen of the Dominican Republic.
I grew up, went to school, started a family, and raised my children on Dominican soil.
This is the only place I have ever called home.
Yet, after more than 45 years in this country, my nationality –along with that of thousands of other Dominicans – is being called into question.
Like many Dominicans, I am of Haitian ancestry.
My family came to the Dominican Republic from neighboring Haiti to find work.
Their journey was not uncommon, nor was it discouraged.
Hundreds of thousands of Haitians came to work in this country with the express permission of the Dominican government.
But Dominicans like me have always paid a price for our ancestry.
For more than a century, the government has promoted a policy of state-sponsored racial discrimination.
We have been used as scapegoats to shift the focus away from the country’s economic and political problems.
Even so, one lesson I learned growing up was that any person born in the Dominican Republic is a Dominican citizen.
This no one questioned.
This no one doubted.
The Dominican Republic’s constitution says explicitly that anyone born on the country’s territory, except infants born to parents who happen to be diplomats or foreigners “in transit” – understood for decades to mean in the country for fewer than 10 days – is a Dominican citizen.
Because of this, I never worried that my status as a citizen would ever be in doubt.
I was wrong.
Two years ago, my country’s government attempted to strip me of my nationality, and it is now trying to do the same to thousands of other Dominicans of Haitian descent.
The government launched this effort with a bizarre reinterpretation of the constitution. It now deems individuals of Haitian descent born in the Dominican Republic to have no right to Dominican nationality, because their parents or grandparents, many of them residents for years, if not decades, were supposedly “in transit.”
The government has ordered civil registry officers to refrain from issuing any identity documents for persons who were born to “foreign parents” and received Dominican birth certificates under what the government now calls “irregular circumstances.”
Moreover, identity documents that the Dominican state already issued are being declared invalid retroactively.
Only Dominicans of Haitian descent are being singled out.
The discrimination by my country’s government against my racial and ethnic group is so blatant that some civil registry offices have distributed lists of “Haitian sounding names” so that staff members can recognize them.
Some people are even singled out based solely on their appearance.
The crudeness of the government’s campaign would almost be comical if it was not condemning so many Dominicans of Haitian descent to the uncertainty of statelessness.
Indeed, the implications of losing one’s citizenship are enormous.
Without identity documents, people are barred from schools, denied health care, prevented from marrying, and refused official documents like birth certificates and driver’s licenses.
Worse still, the government is considering a constitutional amendment that would permanently strip nationality rights from thousands of Dominican of Haitian descent.
The situation now is even more dangerous than before.
For 30 years, I have worked to secure equal human and civil rights for Dominicans of Haitian descent.
I have encountered many personal and professional difficulties.
State officials have slandered me. Informants have tried to infiltrate my organization and undermine its work.
I have received death threats on more than one occasion, and my children and I have had to flee our homeland.
But, despite everything I have endured, I remain hopeful that change is possible.
Perhaps the campaign against Dominicans of Haitian descent will stop when the Dominican judiciary acknowledges that the retroactive denial of citizenship violates fundamental human rights law.
Perhaps it will stop when the international community starts speaking out against the Dominican Republic’s discriminatory policies.
But one thing is certain: it won’t stop until all Dominicans who value democracy and the rule of law stand alongside their fellow citizens and declare that the time for unequal treatment is over.
Rethinking Fortress Europe
LONDON – There is something rotten about the European Union’s debate on migration.
The continent’s political leaders, paralyzed by the rise of anti-immigrant populism, are turning their backs on desperately vulnerable people fleeing war, human-rights abuses, and economic collapse.
Nowhere is the human cost of European policies more visible than in the Mediterranean Sea.
The waters between Europe and Africa are the world’s deadliest migration route.
Roughly 300,000 people are estimated to have made the crossing in 2014 – more than twice as many as in 2013.
Some 3,000 died from drowning, hunger, exposure, or asphyxiation.
Most migrants set out from Libya, which has emerged as the center of a multi-million-dollar human-trafficking industry.
Until recently, most migrants setting out for Italy made the crossing on small vessels.
But, in a new twist, Italian authorities at the beginning of this year rescued hundreds of migrants, including pregnant women and dozens of children, aboard an aging steel-hulled freighter.
The crew had jumped ship.
Given its close proximity to a deadly conflict in Syria and countries marked by extreme poverty, human-rights abuses, and weak or collapsed states and economies, the EU is inevitably a magnet for migrants and asylum-seekers.
That is why it needs a migration policy that reflects the values on which it was founded.
Unfortunately, respect for human life has taken a back seat to baser political calculations.
Consider Europe’s approach to search and rescue operations.
Last November, Italy suspended its Mare Nostrum rescue operation (which it launched in 2013, after more than 300 migrants drowned off the coast of the Italian island of Lampedusa), because other EU member states refused to share the costs – some €9 million ($10.6 million) a month.
In its place, the EU border agency, Frontex, has begun conducting a limited coastal mission called Operation Triton.
Why the reluctance to share the cost of humanitarian rescue operations?
Senior ministers in the United Kingdom and other northern European countries, relying on little more than armchair behavioral economics, argued that Mare Nostrum encouraged more migrants to attempt the dangerous sea crossing.
In other words, allowing children to drown is a legitimate deterrent.
Back in the real world, the desperation and aspiration driving people to flee outweigh the risks posed by the crossing – meaning that the closure of Mare Nostrum will do nothing to reduce the number of people attempting the journey to Europe.
But Europe’s debate on migration is so toxic that the forces actually causing people to move are seldom discussed.
According to Frontex, roughly a quarter of the migrants who crossed the Mediterranean in 2014 were Syrian families escaping the civil war there.
Young Eritreans – fleeing a country that imposes indefinite military conscription on dissidents – made up another quarter.
Many others came from poor, violence-prone countries: Palestine, Somalia, Sudan, Mali, and Nigeria.
Faced with a humanitarian crisis in the Mediterranean, the EU has responded by trying to build a fortress.
It has invested heavily in a fenced border between Turkey and Greece.
Amnesty International has documented the widespread practice of pushing back migrants and refugees attempting to cross into Greece and Bulgaria – a practice that contravenes international law.
But the fortress has merely rechanneled, rather than stemmed, the flow of people, forcing migrants and refugees to attempt dangerous sea crossings – even as search and rescue operations are being scaled back.
The only beneficiaries are the human traffickers that charge Syrian refugees some €6,000 for space in a dangerous boat or freighter.
The EU’s efforts to develop a coherent approach to the crisis have bordered on farce.
What drives people to Europe is a complex set of forces, ranging from conflict and political persecution to poverty and economic pressures.
Europe’s institutional response is to view all migration as a border-management issue.
The EU Commission’s various departments – notably, those that focus on development – are barely consulted.
Meanwhile, the patchwork of national asylum and migration policies makes a cohesive framework impossible to devise.
This challenge was reflected in the EU foreign ministers’ recent declaration on migration, which was so vague that it defied practical interpretation.
Correcting these policy failures is made more difficult by the rise of populist political forces.
The National Front in France, the United Kingdom Independence Party, and far-right anti-immigration parties in Sweden, Denmark, and Italy are picking up votes and shutting down informed public debate on a tough policy question that has no easy answers.
Europe desperately needs to have a mature, fact-based conversation about migration.
Strict border controls can never be more than one part of the solution to the EU’s migration challenge.
The crises in Syria, Iraq, and parts of Sub-Saharan Africa are likely to lead to yet more dislocation.
Higher fences, more vigilant surveillance, and increased policing will not be enough to address the increase in migration that is almost certain to result.
Instead, acting on the EU’s founding values, member states should co-finance a search and rescue operation along the lines of Mare Nostrum; strengthen their efforts to protect the rights of refugees; and share the burden of granting asylum.
Germany, France, the United Kingdom, and Sweden took in 70% of those granted refugee status in the EU last year.
Others – notably Spain – need to do more.
Wider responses are also needed.
For example, more coherent and generous approaches to the provision of temporary work visas would benefit both migrants and Europeans.
And EU member states could use their aid budgets to provide greater support for the Syrian refugees living in dire circumstances in neighboring countries.
The lesson of the migration crisis in the Mediterranean is clear: Fortress Europe is not working.
The EU must map out a new approach.
Britain’s Last EU Straw?
LONDON – Is £1.7 billion ($2.7 billion) a lot of money for the British government to fork out?
It is when it is a European Union budget demand that comes out of the blue.
But the impact of the EU’s unexpected budget invoice is not just financial, for it has arrived at a time when the anti-EU, United Kingdom Independence Party (UKIP) is riding high in opinion polls. The episode reveals the arbitrary nature of EU budget setting, which puts the EU itself in a bad light – and could be the last straw for Britain’s EU membership.
The bill originates from a statistical recalculation by Eurostat, the EU statistical office, of the UK’s economic performance over the past 20 years.
The longer-terms costs, however, could be much greater than the relatively small amount (0.1% of GDP) involved.
The political crisis – which originated with the calculation of national budget surcharges and rebates from the EU budget – stems from an institutional arbitrariness that seems unjust and fosters immense resentment.
Like friendships or marriages that break down over seemingly trivial issues that in fact signify fundamental problems, this budget crisis has highlighted a serious flaw in the UK-EU relationship.
The new financial demand surprised UK Prime Minister David Cameron, who called it “completely unacceptable.”
For many Euroskeptics, this was yet another sign of a conspiracy by the European Commission against Britain.
Referring to a children’s murder-detective board game, Cameron declared: “You don’t need a Cluedo set to know that someone has been clubbed with the lead piping in the library.”
The timing of the spat could not be better for Britain’s EU opponents.
UKIP could conceivably hold the balance of power following next May’s general election, and force the government to hold its promised “in-out” referendum on EU membership.
Under electoral pressure, Britain’s two main parties – Conservatives and Labour – are already advocating limits on immigration that are incompatible with EU law and the core principles of European integration.
The emotional escalation may lead many people, on both sides of the English Channel, to conclude that the UK and the EU would each be better off without the other.
Pre-existing tensions have inevitably played a large part in the current flare-up.
But is the EU’s budget calculation method also at fault?
It is rational for a country’s EU budget contribution to reflect its real level of economic activity.
In any case, the total EU budget, at around 1% of EU output, is relatively small, and has not changed for more than 30 years.
The recalculation simply attempts to achieve a more accurate picture of the EU economy, correcting for activity not officially measured in national accounts, such as charity, drugs, and prostitution.
Moreover, Britain was not the only EU member to fall foul of the recalculation.
Italy’s economic performance also looked better than previously assumed, necessitating an additional payment.
Italian Prime Minister Matteo Renzi duly joined the chorus of outrage, calling the recalculation a “lethal weapon.”
To be sure, it is fundamentally sensible for governments to monitor and tax as much domestic economic activity as possible.
An external assessment that attempts to account for the whole of the economy – and calculates the budget contribution on this basis – should increase tax efficiency.
Poor taxation capacity has, after all, been an endemic problem in southern Europe, including in Italy (and especially in Greece), while France and Germany, which both received large rebates, are better tax collectors.
Italy, like Greece, has been trying to broaden its tax base.
Aerial surveys now detect garden swimming pools; tax assessors investigate yachts moored in harbors; and no transactions above €1,000 ($1,268) may be made in cash.
Yet why should the EU’s budget calculations place such importance on national accounts, which constitute a set of arbitrary conventions?
If, for example, wages were paid for housework, GDP would increase without any more activity taking place.
In a rational world, EU budget contributions would not be arbitrarily set, but would be automatically determined, say, as a fixed proportion of value-added tax (VAT) receipts.
Only a relatively small share would be needed, requiring no periodic recalculations.
Assessing, and then reassessing, members’ dues in the current way damages the EU. Taken to its logical extreme, member countries would demand recalculations to reflect the different ways they measure income and wealth, thereby pitting potential beneficiary countries against contributors.
Such a fiscal set-up has already threatened to break up member states – consider Scotland or Catalonia.
If the EU is seen as being little more than a treasure chest that allots fiscal resources to its members, it is bound to fail.
As geopolitical challenges mount, and Europe faces its first systemic security threat since the end of the Cold War, the stakes could not be higher.
Europe cannot get bogged down in what should be a simple bureaucratic process.
Rather, the EU must be able to explain what it truly represents, and these ideals must be reflected in actions that are clear, predictable, and non-arbitrary.
Europe’s Pointless Deficit Targets?
BRUSSELS – The fiscal rules of the European Union have undergone some much-needed improvements in recent years, but much more needs to be done.
In addition to suffering from a lack of clarity on key issues, EU fiscal policy remains overly focused on short-term goals, reflected in its needless emphasis on nominal deficit targets within annual budget cycles.
To be sure, all EU countries have a real interest in the fiscal sustainability of their fellow members.
But annual deficits are poor approximations of the likelihood that one member may have to repay another’s debt.
The fact that the existence of exceptional circumstances can now be invoked to distribute the burden of any needed adjustments over more than one year is helpful.
But it does not eliminate the short-term bias embedded in the EU’s fiscal rules.
In a fully integrated market, the annual financing of government deficits should not be an issue, provided the stock of debt is sustainable.
That is why the EU should strive to create a fiscal framework that has the sole objective of ensuring that its members’ debts are sustainable.
By definition, this target would be country-specific.
It would not require a headline deficit of below 3% of GDP in each and every year, in each and every country.
But it would require a more sophisticated analytical framework than the current one, which merely distinguishes between countries on the basis of whether they meet the EU’s 60%-of-GDP ceiling on public debt.
The eurozone is much better positioned to manage fiscal pressures than it once was.
The European Central Bank’s “outright monetary transactions” scheme provides an important backstop for debt sustainability.
And a banking union, once completed, should contain the risk of financial crisis and contagion.
Meanwhile, quantitative easing by the ECB has reduced fears that governments will run out of cash, at least for the time being.
Efforts to make the rules more flexible are a welcome development, but shortcomings remain, particularly given that implementation risks make the macroeconomic effects of rule changes difficult to quantify.
For example, it is not obvious how to deal with the fact that decisions by large countries have larger externalities, both positive and negative, than those made by their smaller peers, setting the ground for different treatment in a monetary union of supposed equals.
Nor is it clear what room for discretion has been provided to the European Commission to address such outcomes.
Above all, long-term fiscal outlooks must be fully embedded in the EU and its member states.
Institutions will have to be redesigned to accommodate this approach and resolve some of the ambiguities in the current framework, while avoiding discrimination or politicization.
One possible vehicle for accomplishing this is the independent councils that the EU’s so-called fiscal compact has now made mandatory for every country in the eurozone.
These councils are tasked with assessing the accuracy of macroeconomic forecasts, overseeing compliance with targets, and ensuring long-term fiscal sustainability.
But it remains unclear exactly how they fit into the overall fiscal framework; indeed, the complexity of EU rules may limit the councils’ capacity to fulfill their function.
Fiscal councils should not be put in the position of trying to interpret the letter of the fiscal compact.
It would be far better to provide them with the sole task of assessing debt sustainability and advising governments in this regard.
Their recommendations should be binding, but they should also be focused on the medium term, rather than on annual fiscal outcomes.
In a few cases, fiscal councils might impose conditions that are even more stringent than current EU rules stipulate, but they would be limited to enforcing the structural balance that each signatory of the fiscal compact has enshrined in its constitution or in equally binding legislation.
In other cases, the councils’ recommendations are likely to be more relaxed on an annual basis than current EU rules.
Either way, the recommendations would have the advantage of being better adapted to local needs – especially if the councils are accountable to national parliaments.
The best way to preserve the councils’ independence over time would be through top-down monitoring and control at the eurozone level, for example through the establishment of a European Fiscal Council, which would be responsible for ensuring that every national council fulfills its mandate.
The EFC would be authorized to request an amended assessment of a country’s fiscal trajectory and requirements.
With such limited authority, there would be no need for the EFC to be accountable or democratically legitimated at the European level.
In addition to favoring a long-term perspective, this governance structure would also answer some of the questions that arise with increased flexibility.
Independent national authorities would be better placed not only to assess implementation risks, but also to advocate for structural reforms.
Moreover, such a system would imply little risk of top-down discrimination against smaller countries.
As national governments took responsibility for the European objective of fiscal sustainability, annual budget targets imposed by the EU would become obsolete, at which point that should be abandoned altogether.
Migration Beyond Crisis Mode
MADRID – Over the past seven years, Europe has been in crisis mode almost without interruption.
From Ukraine to Greece, events have led the continent from the frying pan to the fire and back again, with all of the attendant summitry, declarations, and brinkmanship.
Now, it is a migration crisis – one that is unlikely to be resolved in the foreseeable future – that is commanding the European Union’s attention.
But, if Europe is to respond effectively, it must move beyond crisis mode to understand both what it is facing and what it wants to achieve.
It is indisputable that migration deserves the EU’s focus.
Not only are migrant flows into Europe shattering records from one month to the next; migrants’ primary entry points are changing as well.
Meanwhile, the already-hazy lines between asylum-seekers, refugees, displaced persons, and purely economic migrants are becoming increasingly difficult to distinguish at all.
The dangerous conditions of the migrants’ journey constitute a serious humanitarian crisis.
Since the beginning of this year, roughly 2,500 people have died attempting to cross the Mediterranean, to say nothing of gruesome scenes like the recent discovery of 71 decomposing bodies in an abandoned truck in Austria. Thousands more languish in makeshift camps with little or no support.
To make matters worse, there has been a steady stream of migration-related violence across Europe, from an arson attack on a planned refugee shelter in Germany to police brutality against migrants in Macedonia and Hungary.
The port of Calais has become a chokepoint of the crisis, with migrants desperately trying to force their way onto trucks and trains bound for the United Kingdom.
The situation screams “emergency” – and has triggered a response by the EU.
Most notably, the EU has tripled the budget of Operation Triton, designed to strengthen border security; launched an EU-wide naval operation against human smugglers and traffickers in the Mediterranean (EUNAVFOR Med); and allocated additional funds to overwhelmed frontline member countries.
Some individual member countries have also acted.
Most notably, Germany, despite facing the arrival of a predicted 800,000 asylum-seekers this year, has suspended implementation of the EU’s Dublin Regulation, which would have led to the deportation of thousands of Syrian refugees.
But these measures, though helpful, are far from adequate.
In fact, they are examples of crisis-mode policymaking, which tends to favor impressive-seeming stopgap measures (not to mention lofty declarations that can verge on hollowness or hyperbole), instead of real solutions.
By allowing EU leaders to avoid acknowledging the long-term nature of the migrant challenge, this approach weakens their motivation to take collective action.
And, indeed, a reluctance to cooperate was on display at last month’s meeting of the EU’s Justice and Home Affairs Council, where representatives failed to produce an arrangement on how to distribute the paltry 40,000 refugees that the European Council agreed to accept in June.
The fact is that the pressure of migration is here to stay.
After all, the factors driving hundreds of thousands of people to risk everything to get to Europe are nowhere near being resolved. Iraq and Syria remain mired in violence and chaos;
Eritrea is in the grip of a repressive regime; and Libya has become a collapsed state.
Add to that weak or non-existent governance in much of Africa (and the concomitant security threats and bleak economic prospects), and it is difficult to imagine how the tide of migrants will be slowed.
The chance of a better life – or any life at all – is all but irresistible to the people trapped in these areas.
No matter how strong the EU’s external borders are – though, of course, better monitoring and patrolling measures are needed – the flow of migrants will continue to overwhelm their capacity, endangering the openness that is so fundamental to European unification, beginning with the Schengen acquis, which guarantees freedom of movement, without border controls, among 26 European countries.
If Europe is to adapt to the migrant challenge, and design realistic and productive solutions that heed European Commission President Jean-Claude Juncker’s call for “collective courage,” it must target the root causes and enablers of the current migration wave.
Specifically, the EU must support governance reform, economic development, and the establishment of basic human security in the countries that migrants are fleeing.
At the same time, efforts are needed to strengthen deterrence near and en route to Europe’s borders, through partnerships with major source and transit countries.
Legal channels of migration should be opened for those who either deserve protection under international law or possess skills that could benefit European societies.
For migrants who reach EU territory, are not entitled to international legal protection, and lack such vital skills, repatriation regimes must be established.
All of this will require an update of the legal categorizations of migrants, as well as burden-sharing within the EU, which is glaringly absent at the moment.
The EU cannot simply wait out the current migration crisis by implementing piecemeal and panicked measures in the hope that the problem will eventually resolve itself. What is needed is careful consideration of how best to balance humanitarian imperatives with security concerns, domestic social welfare with international legal obligations, and member countries’ duties to one another with their responsibilities to their own citizens.
A Lifeline for European Solidarity
MADRID – A human tragedy is unfolding in the Mediterranean, with hundreds of thousands of refugees risking – and, in many cases, losing – their lives for the chance to find refuge in Europe.
How the European Union responds to this crisis matters not just for humanitarian reasons; it will also be a bellwether of the future of the Union itself.
The EU must get it right.
Europe faces no shortage of challenges.
Over the last five years, it has confronted a seemingly endless series of tests, including a eurozone-wide financial crisis, Russia’s invasion of Ukraine, renewed fears of a Greek default, and the prospect of a British exit.
But none has raised such fundamental questions about the meaning of the EU as the current debate about migration.
Unfortunately, efforts so far have been inconsistent.
The EU acted quickly in the aftermath of the drowning of more than 1,000 migrants in a particularly horrific episode in April, tripling the budget of its much-maligned naval surveillance operations and expanding their operational area to match Italy’s discontinued Mare Nostrum operation.
This move has already borne fruit, with record numbers of rescues late last month.
Another initiative – the European Commission’s proposed “Agenda on Migration” – is less straightforward.
The agenda presents a hodgepodge of measures in varying degrees of detail.
An important and controversial offshoot of the agenda is the action plan against migrant smuggling, which may include the use of military force to stop the smugglers’ boats.
Critics have questioned the plan’s legality, the risk of collateral damage, and, most important, the effectiveness of armed intervention in stemming human-trafficking operations.
There is also the troubling prospect that such a showy initiative would, by creating the impression that the EU is taking action, enable the EU and its members to avoid the long-term commitment and politically unpopular measures that an effective crisis response would demand.
And, indeed, the EU has so far been focusing on a largely symbolic measure: the proposed EU-wide relocation and resettlement system for asylum seekers.
At first glance, the relocation system – which would move 40,000 asylum-seekers from Italy and Greece to other EU members countries, with the allocation determined according to factors such as GDP, population, and the unemployment rate – may seem like a substantial step.
But, with Italy alone having received more than 63,000 asylum applications and 170,000 irregular migrants last year, the program’s impact would be minimal.
The European Commission’s proposal is intended to underscore European solidarity and burden-sharing – both core EU principles.
But the plan’s limited scope undermines this impression.
Worse, the response to the plan – with some member states opting out of the program; others objecting to how the quotas are to be measured; and still others bristling at the idea that the EU should propose a quota at all – seems to suggest that it is every country for itself.
Throughout these discussions, the line between asylum seekers and economic migrants, who are not protected by binding international humanitarian conventions, has been blurred.
These squabbles in the face of undeniable, large-scale human suffering controvert the EU’s core values, including its commitment to adhere to a rules-based international order.
They also reflect a disturbing trend affecting EU institutions: individual countries’ interests are increasingly trumping unity and cooperation.
The problem is that many Europeans regard the EU as either a dispenser of benefits, a bogeyman, or an albatross – not something to which they are obliged in any way.
As the financial crisis has dragged on, and recriminations among member countries have weakened the sense of community that forms the EU’s foundations, the refugee challenge has exacerbated a dangerous divisiveness.
Instead of reinforcing its foundations with solidarity and compassion, the Union has fractured.
In fact, Europe’s interest in mounting an effective response to the crisis extends beyond values.
As rapid population aging generates significant fiscal pressures, EU members have a strong economic incentive to accept more immigrants.
The short-term challenges that doing so would pose, however, seem to be obscuring this fact.
But the refugee challenge is not a short-term issue.
On the contrary, with countries throughout the Middle East and Africa facing continued violence, poverty, and governmental breakdown, the crisis will only deepen.
In Libya alone, an estimated 500,000 to one million additional migrants are awaiting passage to Europe.
It is time to place principle back at the forefront of policy.
EU leaders must make a clear commitment to do what it takes to address the refugee crisis – even if that means pushing through measures, such as expanded options for legal migration, that are neither expedient nor popular.
To facilitate implementation, the EU and its member states could initiate a campaign to educate the public about the benefits of a more supple and responsive immigration system.
No response, it must be stressed, would be complete without a sustained commitment to addressing the drivers of mass immigration – and that means a complete overhaul of the EU’s Neighborhood Policy.
The new policy should focus on contributing to the creation of economic opportunities in countries with large unemployed youth populations, so that young people no longer feel that risking their lives to reach Europe is their only chance at a future.
All of this will require a sustained commitment, underpinned by a strong sense of common purpose.
If Europeans do not stand together in addressing migration, countless more people will drown in the Mediterranean and the EU will continue to unravel.
Staying the Course in Europe’s East
STOCKHOLM – As the European Union’s leaders gather in Riga for a summit with the six members of the EU’s “Eastern Partnership,” many recall the dramatic meeting in Vilnius of November 2013.
It was there that Ukraine’s then-president, Viktor Yanukovych, under heavy Russian pressure, refused to sign the EU-Ukraine Association Agreement that had been negotiated from 2007 to 2012.
Of course, when Yanukovych returned home, he had to face thousands of protesters in Kyiv’s Maidan (Independence Square).
Determined to hold him to his promise to sign the EU agreement and not take Ukraine into a customs union with Russia, the protesters mobilized the country.
Yanukovych, failing to crush them with his security forces, simply fled.
Russia’s behavior in Ukraine since then has made the Eastern Partnership more important than ever.
The Eastern Partnership was launched in 2009 on the initiative of Poland and Sweden, where I was the foreign minister at the time.
The aim was to respond to the desire of Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine for some of the instruments of integration that had helped transform the Central European and Baltic countries into the democracies – and now EU members – that they are today.
The Eastern Partnership was also seen as a way to balance the EU’s “Russia first” approach.
Enormous resources had been invested in the relationship with Russia, but very little had gone into helping the countries in the neighborhood that the EU and Russia share – including the most important of these neighbors, Ukraine.
Until 2013, the EU’s Eastern Partnership seemed to raise no concerns in the Kremlin.
It was never brought up at any of the numerous high-level bilateral meetings, nor at any meeting in which I participated.
The Kremlin probably regarded it as irrelevant.
That changed after Vladimir Putin returned to Russia’s presidency in 2012.
His main geopolitical project was now the creation of the Eurasian Union, which he knew could not succeed without forcing Ukraine off of its EU path and into his embrace.
While the EU’s vision of “wider Europe” relies on soft power, economic integration, and long-term institution building, Putin’s “wider Russia” policy depends on intimidation and violence.
The EU pursues long-term geo-economics, whereas the Kremlin plays short-term hardball geopolitics.
That is why, soon after Yanukovych decided to flee to Russia, Putin’s “little green men” began to appear openly in Crimea, while Russian Buk anti-aircraft missiles and Russian battalion battle groups appeared in Ukraine’s eastern Donbas region not long after.
In annexing Crimea and stoking separatist violence in Donbas, the Kremlin’s aim has clearly been to destabilize Ukraine in order to bring it under Russia’s thumb.
Indeed, the very notion of an independent Ukrainian state is openly questioned by Russia’s leaders, Putin included.
In Riga, the EU’s leaders will reaffirm the so-called deep and comprehensive free-trade agreements concluded with Ukraine, Moldova, and Georgia.
The most important signal will be the EU’s pledge that these agreements will take effect.
Despite massive propaganda, intense economic pressure, and overt military aggression, the EU can and will stay the course in its Eastern Partnership and its offers to its neighbors.
Clearly, no one in Europe should underestimate the challenges ahead.
When I left the Vilnius meeting in 2013, I could certainly see storm clouds gathering, but I did not know that Putin was prepared to unleash so much aggression and turmoil.
Now we in Europe have every reason to prepare for the long-term effort needed to help our neighbors along their chosen paths.
But this will require a greater European commitment, both politically and economically, than we have seen thus far.
Ukraine has been misgoverned for decades, and it will have to pass through a valley of reform-induced tears before it starts to reap the benefits of association and integration with the EU.
Unfortunately, it is far easier for Russia to fuel short-term volatility than it is for Europe to help build long-term stability.
But to allow the Kremlin and its proxies to succeed would not only undermine the Eastern Partnership countries; it might jeopardize peace in Europe itself.
After all, the appetite grows with eating, which might well apply to the Kremlin’s “wider Russia” strategy.
At some point, the risk of an open confrontation between NATO and Russia could grow.
Even China, as it poses as Russia’s friend and patron, should consider the consequences for itself of such a risk.
Such a clash must be prevented.
By confirming the Eastern Partnership agreements, the EU’s leaders will demonstrate that they are not prepared to acquiesce in a new Yalta-style division of the continent that would deprive these countries of their right to choose their own destiny.
The Riga meeting is unlikely to produce any headline-grabbing new initiatives.
But none is needed.
With everything from massive disinformation to tanks and soldiers thrown against the Eastern Partnership since 2013, just staying the course is a powerful sign of success.
And, in the interest of long-term stability across Europe, that should be welcomed – even in Putin’s nationalistically aroused Russia.
Eurobonds or Bust
LONDON – The eurozone’s institutional weaknesses have been laid bare.
The attempt to run a common monetary policy without a common treasury has failed.
Investors do not know what they are buying when they purchase an Italian bond – is it backstopped by Germany or not?
We now know that the best credit must stand behind the rest, or else bear runs, such as those that have derailed Greece, Ireland, and Portugal – and that now threaten to do the same to Italy and Spain – are inevitable.
Debt mutualization alone will not save the euro, but, without it, the eurozone is unlikely to survive intact.
The eurozone’s July 21 summit was a small step forward.
Leaders agreed to lower interest rates on loans made by the European Financial Stability Fund (EFSF) and they recognized that Greece’s debt burden is unsustainable.
But this falls far short of what is needed to arrest the currency union’s deepening crisis.
Borrowing costs remain unsustainably high for many eurozone economies – and not just those in the periphery.
The economic growth potential of Spain and Italy, for example, now hovers around 1%, but their borrowing costs exceed 6%.
By contrast, German sovereign yields have fallen sharply, lowering public and private-sector borrowing costs.
This is a recipe for further economic divergence and insolvency in the eurozone.
To prevent this, the eurozone needs a “risk-free” interest rate.
The struggling economies need lower borrowing costs, or they will suffocate economically (and political support for eurozone membership will evaporate).
Only mutualization of debt issuance can generate the low (risk-free) interest rate needed to enable these countries to put their public finances on a sound footing and lay the basis for a return to economic growth.
All eurozone countries should, therefore, finance debt by issuing bonds that would be jointly guaranteed by all member states.
The obvious problem with eurobonds is moral hazard: how to prevent fiscally irresponsible countries from free-riding on the credit-worthiness of other member states.
This is the understandable fear of countries such as Germany and the Netherlands.
One possible solution would be to permit member states to issue debt as eurobonds up to, say, 60% of GDP, and to require them to be individually responsible for any debt exceeding that level.
This would give countries with high levels of public debt an incentive to consolidate their public finances.
Had the eurozone introduced such a system from the outset, it might well have worked.
But it is too late for that now.
For several eurozone economies, the additional borrowing would simply be too expensive.
A better solution would be to create a new, independent fiscal body to establish borrowing targets for individual member states, together with a European debt agency to issue eurobonds (up to a certain level) on their behalf.
How would the new fiscal rules be designed?
A dogmatic target of budgetary balance four years hence, irrespective of a country’s position in the economic cycle, would achieve little: targets are meaningless if they are impossible to implement.
So the rules would have to be set with reference to each member state’s cyclically adjusted fiscal position (for which the OECD already produces estimates).
Careful thought would need to be given to the composition of the new fiscal body.
A board of 17 people, one from each eurozone economy, would be unwieldy, and unlikely to win the support of the eurozone’s principal creditor countries.
At the same time, a board dominated by the creditor economies would be unlikely to win the backing of the debtor countries.
A board of nine economists, from the big eurozone members, the European Commission, the European Central Bank, and the OECD might form a good basis.
The eurozone, of course, has a poor record of enforcing fiscal rules, implying the need for strong penalties for non-compliance.
If a country deviated from its fiscal targets, it would be barred from borrowing additional funds at the risk-free interest rate.
It would have to borrow under its own rating, which would be prohibitively expensive for fiscally weaker countries.
To provide additional incentives to abide by the rules, the ECB could refuse to accept debt issued under national ratings as collateral.
Alternatively, a new EU financial regulator could handicap own-country bonds by requiring banks holding them to set aside more capital.
Fiscal rules of the type envisaged (and a new body to enforce them) would not necessarily require a treaty change.
And, while various creditor countries rightly fear that eurobonds would push up their borrowing costs and constitute a transfer union, opponents might eventually come around to seeing eurobonds as the least bad option.
The risk is that, by then, it could be too late to save the euro from a partial break-up: what might work if adopted promptly could be ineffective if adopted in six months.
For core countries, eurobonds would certainly be a cheaper option than underwriting loans to struggling member-states, which essentially means throwing good money after bad.
They will book large losses on EFSF loans, and those losses will be even larger if, as seems possible, some of the borrowers end up leaving the eurozone and defaulting on their debt.
Eurobonds without Fear
SANTIAGO – The day of the Eurobond may be near.
What was once a quack’s idea for resolving Europe’s financial crisis is now the only reliable way to save the euro.
Having their bonds purchased by the European Central Bank did not keep Greece, Ireland, and Portugal from needing a bailout.
It will not save Spain and Italy, either.
But Spain and Italy are too large to be bailed out.
The new European Financial Stability Facility (EFSF) is not up to the task.
And enlarging the EFSF to an appropriate size would require massive additional French borrowing, which could well place France itself at the receiving end of a speculative attack.
This is where Eurobonds come in.
The five countries in trouble will need to place tens of billions of euros in new debt and roll over even larger amounts of old debt.
Markets long ago stopped buying bonds issued by Greece, Ireland, and Portugal, and might soon stop buying paper issued by Italy and Spain – or do so only at prohibitive interest rates.
But markets would happily gorge on bonds backed by the full faith and credit of the eurozone.
Eurobonds would cut borrowing costs for the European Union’s two large troubled members.
And it would spare German and other taxpayers from the EU’s solvent northern countries from having to fund yet another bailout of a southern member state.
The debate about whether and how to introduce Eurobonds has focused on the appropriate limits on issuance.
With no limit, profligate countries could go on a spending spree at the expense of thriftier ones.
After the advent of the euro, the eurozone’s Mediterranean members enjoyed a lending boom while piggybacking on Germany’s low interest rates.
There is understandable reluctance to allow that to happen again.
But arguments about whether the limit should be 60% of GDP or more miss a larger point.
Nineteen years of experience with the Maastricht Treaty, which created both the EU and the euro, has shown convincingly that such limits are unenforceable.
Countries with the clout to flaunt the limits will do so whenever it is politically convenient.
And, if a debt crisis is near, exceptions will be found, waivers will be issued, and buyers for the additional debt will be lined up.
So the question is not what to do when debt gets near its limit, however high or low.
It is how to prevent debt from getting near that limit in the first place, except in very extreme and unusual circumstances.
And for that, you need fiscal rules.
A fiscal rule is any pre-specified mechanism that constrains spending or the deficit.
According to a study by the International Monetary Fund, 80 countries around the world use some kind of fiscal rule.
But not all fiscal rules are created equal.
If too loose, a rule is merely ornamental.
If too tight – a constitutional amendment requiring a balanced budget, for example – the rule could create rather than solve problems: think of the economic and political chaos that would ensue if Spain, with unemployment at 21%, were forced to eliminate its huge fiscal deficit overnight.
Sweden and Chile are almost poles apart geographically, but both have used sophisticated fiscal rules successfully.
Chile sets a target for its cyclically-adjusted fiscal balance – that is, the balance that emerges after accounting for the deviations in commodity prices and domestic output from their trends.
When commodity prices boomed in the middle of the last decade, the rule called for huge budget surpluses – which Chile achieved, repaying almost all of its public debt and accumulating a sizable rainy-day fund.
When the financial crisis came, Chile was able to mount an aggressive fiscal stimulus without so much as a hiccup from financial markets.
Of course, no fiscal rule can account for all contingencies.
That is why you need an independent fiscal council to administer it, just as you need an independent central bank to pursue an inflation-targeting monetary rule.
Agreeing on the composition of such a council for Europe would be hard, but no harder than it was to agree on the makeup of the ECB’s board.
Eurobonds plus fiscal rules: this formula is the euro’s best hope for salvation.
Unfortunately, another crisis or two might be necessary before European leaders consider it seriously.
How Far Will the Euro Fall?
LONDON – The US dollar is hitting new 12-year highs almost daily, while the euro seems to be plunging inexorably to below dollar parity.
Currency movements are often described as the most unpredictable of all financial variables; but recent events in foreign-exchange markets seem, for once, to have a fairly obvious explanation – one that almost all economists and policymakers accept and endorse.
French President François Hollande, for one, has ecstatically welcomed the plunging euro: “It makes things nice and clear: one euro equals a dollar," he told an audience of industrialists.
But it is when things seem “nice and clear" that investors should question conventional wisdom.
A strong dollar and a weak euro is certainly the most popular bet of 2015.
So is there a chance that the exchange-rate trend may already be overshooting?
In one sense, the conventional explanation of the recent euro-dollar movement is surely right.
The main driving force clearly has been monetary divergence, with the Federal Reserve tightening policy and the European Central Bank maintaining rock-bottom interest rates and launching quantitative easing.
But how much of this divergence is already priced in?
The answer depends on how many people either are unaware of the interest-rate spread or do not believe that it will widen very far.
Last year, many investors questioned the ECB's ability to launch a bond-buying program in the face of German opposition, and many others doubted the Fed's willingness to tighten monetary policy, because doing so could choke off the US economic recovery.
That is why the euro was still worth almost $1.40 a year ago – and why I and others expected the euro to fall a long way against the dollar.
But the scope for dollar-bullish or euro-bearish surprises is much narrower today.
Does anyone still believe that the US economy is on the brink of recession?
Or that the Bundesbank has the power to overrule ECB President Mario Draghi's policy decisions?
With so much of the monetary divergence now discounted, perhaps we should focus more attention on the other factors that could influence currency movements in the months ahead.
On the side of a stronger dollar and weaker euro, there seem to be three possibilities.
One is that the Fed could raise interest rates substantially faster than expected.
Another is that investors and corporate treasurers could become increasingly confident and aggressive in borrowing euros to convert into dollars and take advantage of higher US rates.
Finally, Asian and Middle Eastern central banks or sovereign wealth funds could take advantage of the ECB's bond-purchase program to sell increasing proportions of their German, French, or Italian debt and reinvest the proceeds in higher-yielding US Treasury securities.
These are all plausible scenarios.
But at least four factors could push the dollar-euro exchange rate the other way.
First, there is the effect of the strong dollar itself on the US economy and its monetary policy.
If the dollar continues to rise, US economic activity and inflation will weaken.
In that case, the Fed, instead of raising interest rates faster than expected, will probably become more dovish.
Second, there must be serious doubts about whether Asian and Middle Eastern governments will in fact want to shift more reserves into dollars, especially if this means converting the euros they have acquired since 2003 at a loss and far below their purchasing power parity.
Many countries have spent decades diversifying their wealth away from dollars, for both financial and geopolitical reasons.
With the US increasingly prone to using its currency as an instrument of diplomacy, even of warfare – a process known in Washington as “weaponizing the dollar" – China, Russia, and Saudi Arabia, for example, may well be reluctant to shift even more of their wealth into US Treasury bonds.
A third factor suggesting that the euro's downward trend against the dollar may not last much longer is the trade imbalance between the US and Europe.
The gap is already wide – the International Monetary Fund forecasts a $484 billion deficit this year for the US, versus a $262 billion surplus for the eurozone – and is almost certain to widen much further, owing to the euro's 20% depreciation since the IMF released its estimate last autumn.
The implication is that hundreds of billions of dollars of capital will have to flow annually to the US from Europe just to maintain the present euro-dollar exchange rate.
And as the transatlantic trade imbalance widens further, ever larger capital flows will be needed to keep pushing the euro down.
Such huge capital flows are entirely possible, but what will drive them?
That question leads to the final and most important reason for expecting the euro's decline to reverse or at least stabilize.
While higher US interest rates will attract some investors, others will move away from the dollar if the combination of a more competitive euro, the ECB's enormous monetary stimulus, and an easing of fiscal pressures in France, Italy, and Spain generates a genuine economic recovery in Europe.
The resulting flows of global capital into European shares, property, and direct investment – all of which are now substantially cheaper than corresponding US assets – could easily outweigh the cash and bond investments attracted by rising US interest rates.
What, then, can strike a balance between the opposing forces operating on the euro-dollar exchange rate?
No one can say for sure, but one thing is certain: Whereas the profits from playing transatlantic interest-rate differentials may run to 1% or 2% per year, investors can easily lose that amount in a single day – or even an hour – by buying the wrong currency when the trend turns.
As we know from decades of Japanese and Swiss experience, selling a low-interest-rate currency simply to chase higher US yields is often a costly mistake.
Europe Agonistes
In transatlantic relations, nothing is potentially more divisive than the issue of Israel’s security.
From that standpoint, in spite of a rapprochement between France and the United States, culminating in a joint UN resolution, the latest Middle East war is in reality widening and deepening the emotional gap that has existed between Europe and the US since the war in Iraq began.
What is unfolding in front of us can be seen as a real-life version of Luigi Pirandello’s play To Each His Own Truth.
And, in all fairness, each side has its grains of truth.
For a majority of Americans, now more than ever, Israel is the first line of defense for the West against Iranian-led radical Islam, even if they disagree with the tactical choices made by Ehud Olmert’s government.
This war, unlike the previous 1982 war in Lebanon, is for Americans not a war of choice but of necessity.
For a majority of Europeans, though they have absolutely no sympathy for radical Muslims, be they Sunni or Shia, Israel’s offensive against Hezbollah and its result, the destruction of Lebanon, are seen as self-defeating for Israel and as potentially detonating a clash of civilizations between Islam and the West.
For, ultimately, a resolution of the conflict between Israel and its neighbors can be only political.
The “falling out of love” between Europe and Israel, so visible in most European reporting about the war, is part of a process rather than the result of a single event.
Until the Six-Day War in 1967, Israel’s image benefited from living memories of the Shoah and the silent guilt of an entire generation of Europeans.
The transformation of Israel’s image in Europe since then is above all a product of time and size, magnified by the power of images in our global age.
With the passing of time and the transformation of Israel from a small pioneer state to a regional superpower, Israel’s image became blurred and progressively negative, while sympathy for the Palestinian cause spread, despite Palestinian terrorism.
Israel’s settlement policies, opposition to the ever closer alliance between Israel and the US, and integration of the sensitivities of a growing Muslim population all contribute to explaining the evolution of Europe’s disenchantment with Israel.
Paradoxically, given the initial Christian origins of anti-Semitism in Europe, the process of “dechristianization” on the Continent has played against Israel.
At a time of reconciliation between Christianity and Judaism, a less Christian Europe has been more reluctant to consider the spiritual specificity of Israel.
This stands in total contrast with the growing strength of America’s Christian revival, with the evangelical right combining support for the Greater Israel of the Bible with a rather classical form of Anti-Semitism.
After all, Jews are destined to be converted to Christianity before the end time.
Europeans, with some nuances, are now emotionally united in their “coolness” toward Israel.
Germany is no longer an exception when it comes to public opinion, and European governments are united in their reluctance to send troops on the ground to separate Israel and Hezbollah.
Nonetheless, political divisions within Europe are reminiscent of those that prevailed at the time of the Iraq war.
Of course, Germany under Angela Merkel has adopted a somewhat different stance, owing to the Christian Democratic Party’s special relationship with Israel.
By contrast, Spain and Italy are more critical and have moved closer to France.
Indeed, in the context of the latest Middle East war, there is “more” France and “less” Europe, at least on the visible diplomatic front.
Paradoxically, it is France, which initiated – or at least reinforced – the European Union’s deep identity crisis by its resounding “No” to the EU constitution in 2005, that could emerge with more clout from today’s Middle East morass.
This is easy to explain.
As a former mandate power, France had always had a keen interest and presence in Lebanon, and its influence has been deepened by the close personal rapport between President Jacques Chirac and Lebanon former Prime Minister, the late Rafiq Hariri.
But will France ultimately deliver i.e. send a significant amount of troops for the UN force set to police the peace in southern Lebanon?
By not doing so France would damage her credibility as a &quot;serious country,” and her reputation for being a rare breed in Europe, a country that is not shy to intervene militarily with her troops.
Where is the France whose motto once was &quot;I intervene therefore I exist&quot;
Europe’s other natural interventionist, Great Britain, has its hands more than full in Iraq and Afghanistan, and Germany remains reluctant to intervene in general, and in a conflict that so directly involves Israel in particular, leaving only France to act.
The lesson for the EU is clear: if it wants to matter diplomatically, the Union must be able at least to give the impression that it matters militarily.
The EU’s current formula, “United we fall, divided I stand,” does not augur well for the future of Europe’s foreign and security policy.
The Middle East was a natural ground for the emergence of a new European presence in the world.
Given that Europe’s legacies of anti-Semitism and colonialism stand at the origins of the Middle East’s core problems, the EU could have been at least part of the solution.
Unfortunately, the Middle East, beyond suffering its own tragic fate, has also revealed the extent of Europe’s weakness.
Europe Under Siege?
BRUSSELS – Many Europeans feel like their countries are under assault, as huge numbers of migrants flow across their borders.
Whether they are being exposed to refugees firsthand, or just seeing images of them splashed across newspaper pages, Europeans are well aware of the vast numbers of desperate people trying to enter European Union territory by any means possible.
But this awareness has yet to translate into a unified response.
Tensions among member states seem to be rising, perhaps because the problem differs so greatly across countries.
On a per capita basis, Sweden receives 15 times more asylum applications than the United Kingdom, where official policy toward refugees remains the most hostile.
Germany has now become the main destination overall, receiving nearly 40% of the EU total; even on a per capita basis, this is several times more than the EU average.
Of course, there are clear rules about how responsibility for refugees is delineated: according to the so-called Dublin Regulation, the first EU member state into which a refugee crosses is responsible for that person’s asylum application.
But this is clearly problematic, as it puts the entire burden of refugees on the EU’s frontier countries.
Though this may not have been a huge problem in the 1990s, when EU countries received, in all, only 300,000 asylum applications annually, it cannot work in a year when the total is expected to be triple that number.
Smaller border countries like Hungary and Greece simply do not have the capacity to register and house hundreds of thousands of asylum-seekers.
And larger countries like Italy have an incentive to overlook the large numbers of refugees landing on their shores, knowing that, if nothing is done, those refugees will likely head elsewhere (mainly to northern Europe).
Germany, recognizing that the Dublin system is untenable, has now decided to process all asylum applications from Syrians, regardless of where they crossed into the EU.
The decision was likely driven, at least partly, by how difficult it is, given the EU’s porous internal borders, to determine where a refugee first entered.
A 2013 ruling by the European Court of Justice that Germany could not return an Iranian refugee to Greece (where the applicant was found “to face a real risk of being subjected to inhuman or degrading treatment”) probably heightened Germany’s sense of responsibility on this issue.
Germany is the largest EU member country in terms of population and GDP; so, to some extent, it does make sense for it to take the lead.
But Germany still accounts for less than one-fifth of the EU’s population, and less than one-quarter of its economy.
In other words, not even Germany can handle all of Europe’s refugees today.
A few months ago, the European Commission tried its hand at resolving this problem with a courageous proposal to distribute refugees across member states according to a simple equation that accounts for population and GDP.
But the plan was rejected, with member states – particularly those with the fewest refugees – claiming that it represented an undue interference in domestic affairs.
This has put the EU in its usual quandary: everybody recognizes that there is a problem, but a solution requires unanimity, which cannot be achieved, because each country defends only its own interests.
The only way forward is to leave out the countries that are most averse to accepting immigrants, at least temporarily, and create a solution involving just those that are willing to share the burden.
This may not seem “fair,” but, with more refugees landing on Europe’s borders every day, EU leaders cannot afford to delay action.
But there is another dimension to the crisis that makes addressing it all the more complicated.
The migrants are not all from conflict areas like Syria, and thus do not, according to international law, have a “right to asylum.”
There are also plenty of economic migrants from, say, the poorer parts of the Balkans, hoping to escape poverty at home – and willing to misuse the asylum system in the process.
Lodging an application, even one without any chance of being accepted, is appealing, because until it is rejected, the applicant receives basic housing, social services (including health care), and pocket money in an amount that may well exceed wages in his or her home country.
Spending a few months in northern Europe while an asylum application is processed is far more attractive than going home to a job that pays a barely livable wage, or to no job at all.
As the number of asylum-seekers increases, so does the time it takes to process their applications, making the system all the more tempting for economic migrants.
And, indeed, close to half of all asylum-seekers in Germany now come from safe countries, like Serbia, Albania, or Macedonia.
As Europe’s populists use such cases of “welfare tourism” to sow fear and anger among the European public, reaching an agreement to accommodate actual refugees becomes increasingly difficult.
Against this background, the EU needs to take action on two fronts. First, member countries must urgently boost their capacity to deal with asylum applications, so that they can quickly identify those who deserve protection.
Second, the EU needs to improve burden sharing – ideally among all countries, but perhaps among a smaller group at first – in providing shelter for those who gain asylum.
The Eurozone’s Minsky Conundrum
BRUSSELS – Stubbornly low inflation has the European Central Bank worried.
But its response – essentially just more quantitative easing – could backfire, exacerbating imbalances and generating serious financial instability.
As it stands, the headline consumer price index in the eurozone hovers around zero, and even core inflation remains below 1% – too far for comfort from the ECB’s target of around 2%.
While a new round of weakness in global commodity prices earlier this year contributed to these figures, it does not explain the weakness in longer-term inflation expectations, which have improved little since March, when the ECB started its massive €60 billion ($66.3 billion) per month bond-buying program.
But instead of rethinking its strategy, the ECB is considering doubling down: buying even more bonds and lowering its benchmark interest rate even further into negative territory.
This would be a serious mistake.
Easier credit conditions and lower interest rates are supposed to boost growth by stimulating investment and consumption demand.
But in the core of the eurozone – countries like Germany and the Netherlands – credit has been plentiful, and interest rates have been close to zero for some time, so there was never much chance that bond purchases would have a significant impact there.
And, indeed, the European Commission’s most recent economic forecast shows that spending in the core countries has not increased as a result of the ECB’s policies;
Germany’s external surplus is actually increasing.
Of course, in the highly indebted peripheral countries, there was room for interest rates to fall and for credit supply to grow – and they have, leading governments and households to increase their spending.
While the asymmetrical impact of the ECB’s policy is appropriate in principle (because unemployment is much higher in the periphery), the reality is that a recovery supported by the least solvent economies is not sustainable.
Back in 1986, Hyman Minsky warned about the longer-term dangers to financial stability if “Ponzi” borrowers – those who can service their debt only with new debt – become the main pillar of the economy.
A zero-interest-rate environment is of course ideal for such borrowers, because there is nothing to provide an indication of solvency; borrowers can just roll over their debt.
But it is bad for those with a strong asset position; by reducing their spending power, it spurs them to save even more.
The standard response to Minsky’s concern – that the spenders can’t afford it and the savers aren’t spending – is that monetary policy should focus on ensuring price stability, while macroprudential policy aims to safeguard financial stability by limiting borrowing by highly indebted agents.
But this approach does not work.
If macroprudential policy limited additional credit to marginal borrowers effectively, monetary policy would have no impact on demand (as long as the most solvent agents refuse to spend more).
This problem arose in the United States after the 2001 recession.
Although the Federal Reserve kept interest rates low for a protracted period, the corporate sector did not increase its investment.
The recovery was ultimately fueled by so-called “subprime” mortgages: home-purchase loans extended to borrowers with lower credit ratings.
The result, as we know, was a mega-bubble that triggered the 2008 financial crisis.
In the eurozone’s case, the risk is compounded by the ineffectiveness of its key macroprudential instrument, the Stability and Growth Pact, in limiting countries’ spending, as lower interest rates give debtor countries leeway to spend more.
Public debt as a share of GDP is on the rise in Italy and Spain, even though both countries, with their eurozone partners, have committed to reducing the debt ratio.
In fact, even without lower interest rates, the deficit limits that the Pact imposes have proved to be non-binding, exemplified by France’s flouting of them since 2009.
In short, monetary policy is perpetuating the disequilibrium between creditor and debtor economies in the eurozone, and macroprudential policy is doing nothing to stop it. When interest rates normalize, this could generate serious financial instability.
But – and this is the conundrum – the ECB has few options for stimulating demand among the eurozone’s more solvent agents, and thus supporting a sustainable recovery.
In deciding its next move – whether to initiate more bond purchases, lower interest rates even further, or do both – the ECB must recognize that any positive impact on demand probably will be limited to the eurozone’s weaker economies – that is, the economies that can least afford it.
This is a high-risk move, one that is probably not justified by the effort to bring price increases a few dozen basis points closer to the ECB’s target.
A recovery has already begun in the eurozone.
It should be left to run its course.
An even more expansionary monetary-policy stance might strengthen the recovery marginally, but at the cost of increasing the eurozone’s already-dangerous imbalances.
Europe’s Chimerical Capital-Markets Union
LONDON – The eurozone's survival is in doubt again, as Greece demands debt forgiveness and an end to austerity – or else.
But, though Europe's currency union is at risk, and its banking union remains at an early stage of development, the endlessly creative European Commission is embarking on another adventure: a so-called “capital-markets union."
That “so-called" is appropriate, because the project, despite being only vaguely defined at this point, is most certainly not intended to create a single European capital market.
Indeed, European Union leaders know better than to announce such an ambition, which would require a new treaty – no one is prepared to open up that can of worms.
After all, European voters are in no mood to transfer more powers to Brussels.
The capital-markets union actually began as a slogan, coined by one of EU Commission President Jean-Claude Juncker's acolytes.
Now, the new financial markets commissioner, the United Kingdom's Lord Jonathan Hill, has been assigned the unenviable task of putting flesh on bare bones.
The Commission's “Green Paper" consultation round on the subject produced more questions than answers.
Think tanks, lobby groups, and national regulators have wasted no time in trying to influence Hill's efforts, and to head off any initiatives that might damage their interests.
The Bank of England has argued that there should be no replication of the banking union grant of new powers to the European Central Bank at the expense of national central banks.
The capital-markets union, the BOE argues, “does not require institutional change," so no super-regulator should be created.
The Commission has accepted that conclusion for now, though one of Hill's aides has suggested that, “at some point…supervisory issues will pop up."
In fact, establishing a European version of the US Securities and Exchange Commission is a longstanding aim of the Brussels Eurocracy – one that may be achieved one day, but not just yet.
But before delving into institutional issues – a favorite topic of EU veterans – one should consider what problem the capital-markets union is supposed to solve.
And here, there is considerable agreement.
Most regulators and market participants agree that Europe's financial markets are dysfunctional.
With banking assets amounting to roughly 300% of EU-wide GDP, compared to some 70% in the United States, large pools of savings are being left unused.
Moreover, European companies receive an excessive 80% of their finance from banks and less than 20% from capital markets (the proportions are roughly reversed in the US).
The need to redress that imbalance has become increasingly evident since the recent financial crisis, as banks' efforts to rebuild their capital bases (and meet stricter regulatory requirements) has led to credit rationing.
Loosening that constraint on output growth would improve the European economy's resilience, encourage risk-taking, and promote dynamism.
The overall aim of the capital-markets union is thus relatively straightforward.
But achieving it is not – in no small part because Europe's heavy reliance on bank finance stems from structural and cultural factors.
And the remedies that the Commission has suggested so far – for example, encouraging crowdfunding and standardizing the terms of securitization – appear unlikely to promote rapid growth in non-bank finance.
Promoting a pan-European private placement market might help, as would aligning standards for covered bonds.
But both strategies would face serious legal obstacles.
Indeed, though Hill's modest initial agenda certainly would do no harm (and should be pursued as quickly as possible), any substantial measures beyond it would confront major roadblocks.
For example, harmonizing insolvency regimes across the continent and reducing tax incentives that favor debt over equity, while entirely logical, strike at the heart of member states' remaining sovereignty, and thus will be extremely difficult to push forward.
Some of the other ideas that Hill has floated, such as relaxing the capital standards for long-term investments, run counter to the EU solvency standards for insurers and pension funds that will be implemented next year.
Some old nags have also been dragged out of the stables for another run around the course. “Streamlined" prospectuses and exemptions from some accounting standards for small companies have been tried before in individual countries – and have failed.
Looser standards for issuers weaken protection for investors, and there is evidence that lax regulation of new issues may reduce investor demand for them, raising the cost of finance.
Unless the political mood changes radically in Europe – an unlikely development – it would be unrealistic to expect the capital-markets union to be anywhere near as transformational as the banking union has been.
It will be, at best, a small disturbance, in which few national sacred cows are slaughtered.
What began as a slogan may turn out to be helpful.
But a capital-markets union is highly unlikely to end Europe's love affair with its banks.
The biggest impact on market structure will continue to come from ever-rising capital requirements, which will make bank credit more expensive and encourage borrowers to look elsewhere.
Which Internet for Europe?
BRUSSELS – When the European Commission announces its new digital strategy on May 6, it will face a decisive choice between two very different approaches to the Internet.
Will it choose a forward-looking, market-driven path?
Or will it opt for a defensive, backward-looking, insular retreat?
First the good news: the high profile of the planned announcement shows that the continent’s leaders recognize that the Internet can no longer be shunted to the sidelines of European policymaking.
It is central to economic performance and to modernizing Europe’s industrial base.
Over the past five years, while Europe has grappled with its macroeconomic woes, the United States and Asia have raced ahead, reaping digital benefits.
According to a recent study by Plum Consulting, information and communications technology (ICT) contributed nearly 1.6% to annual productivity growth in the US during this period – double its contribution in Europe.
Perhaps that should come as no surprise, given that nearly 5% of US investment is spent on ICT, compared to 2% in Europe.
“The difference is not because the Internet comprises a larger share of the economy in the US, but because the US has been better at using the Internet throughout the economy,” write Plum consultants Brian Williamson and Sam Wood.
“Europe invests more than the US overall relative to GDP, but not in relation to the Internet and ICT.”
The question facing European policymakers is how to close this gap.
The best way forward would be to embrace the Internet, even where it is disruptive.
In practice, this means cutting red tape so that all businesses can sell their goods and services across a common market of 500 million people.
European companies today must navigate 28 sets of rules.
It is little wonder that only 15% of consumers shop online across European borders.
Europe’s focus should be on removing barriers and updating regulation to encourage more, not less, use of the Internet.
This will require having the courage to face down those who would retreat behind national borders and protect existing business models.
To benefit fully from the Internet, the EU should avoid favoring local businesses over global competitors, and all investment should be welcome, whether it comes from Stockholm, Seoul, or San Francisco.
A regulatory regime that gave unfair advantages to local businesses would hurt consumers, hamper innovation, and damage competitiveness.
European policymakers should also guarantee non-discriminatory wholesale access to communications networks, and that consumers and businesses have a range of choices for telecommunications and online services.
Similarly, the EU should engage internationally to ensure that the Internet remains a key part of the global trading system.
For example, it should complete negotiations with the US on an improved “Safe Harbor” framework for data transfers, thereby encouraging companies on both sides of the Atlantic to rely on transfers of commercial data.
Unfortunately, ominous signs are pointing in the wrong direction.
Europe’s two heavyweights, France and Germany, have been vocal in their determination to roll back digital progress.
Recently, European Commissioner for Digital Economy and Society Günther Oettinger referred to the concept of net neutrality – in which all Internet traffic is treated equally, regardless of its nature or origins – as “Taliban-like” and called for a new levy on online services.
German and French pressure has led to calls for beefed-up regulatory powers to rein in powerful, usually American platforms, such as Google and Facebook.
The continent also seems poised to gut the important “one-stop shop” principle, which would have allowed companies to deal with the data protection authority in the country where they have their main European base.
Meanwhile, protesters across Europe have called for a clampdown on Uber’s ride-sharing service and restrictions on Airbnb’s apartment-sharing service, and the French Senate is considering “search neutrality” obligations.
All of these moves add up to an alarming and wrongheaded approach to the Internet.
If Europe continues on this path, it risks missing out on the potential of the online economy.
After all, it is European small businesses, not just American, that benefit from e-commerce platforms like eBay and Amazon and the advertising services of Google and Facebook.
And European app developers, too, build businesses on mobile phone software.
The Internet is not a game of winners or losers; everyone can win.
Nor does it pit Europe against other regions.
After all, Europe has almost as many billion-euro Internet firms as the US.
The wisest choice for Europe would be to ensure that many more successful Internet firms emerge, by creating the best possible conditions for digital innovators.
Europe’s Dog in the Nighttime
BRUSSELS – The new European Commission headed by Jean-Claude Juncker is off to a rocky start.
But one would not know it from reading the news headlines.
As Sherlock Holmes understood, a dog that does not bark in the nighttime usually goes unnoticed.
In Europe’s case, the European Union’s fiscal rules are at issue, and the Commission – in principle the EU’s watchdog – should bark loudly when they are flouted.
Last month, howls seemed inevitable after two large EU countries, Italy and France, submitted budget plans for 2015 that clearly violated their governments’ vows of continued austerity.
At first, the Commission dutifully rejected the two budgets as incompatible with the rules of the EU’s Stability and Growth Pact (SGP).
But then something happened that was as “curious” as in Arthur Conan Doyle’s story.
Within days, both countries offered mini-adjustments to their budgets, worth about 0.2% of GDP, and their finance ministers wrote to the Commission that their budgets should now be approved.
The Commission did not react, leaving French and Italian leaders to claim that they, not Brussels bureaucrats, had the last word.
In fact, the latest forecast reflects an even worse outcome for France and Italy this year than originally promised, with France’s deficit set to increase slightly for 2015 and Italy’s cyclically adjusted deficit expected to deteriorate.
The Stability and Growth Pact prescribes an annual improvement of at least 0.5 % of GDP.
The new Commission thus risks losing its authority from the very start of its mandate.
Whether it does is a crucial question, because maintaining a high degree of credibility is essential to economic policymaking in the eurozone.
To see why, it is worth recalling that the SGP’s original rules were judged “stupid” by one former Commission president (Romano Prodi), because the single-minded pursuit of a deficit below 3 % of GDP could be inappropriate during recessions.
That argument was accepted, and the SGP was supposedly rendered more “intelligent” by, for example, permitting budget deficits to be adjusted for the economic cycle, adding medium-term objectives for expenditure, and introducing escape clauses.
But the new rules obviously require a strong institution to interpret them, and whose judgment is accepted by everybody.
Though checking whether a budget is below the SGP’s ceiling of 3% of GDP may be a straightforward matter, there can be reasonable disagreement about whether the business-cycle adjustment should be estimated at 0.5% or 0.8% of GDP, or whether a country is adhering to its medium-term expenditure objective.
The Commission is supposed to have the last word, thereby ensuring the rules’ credibility and consistency – and it seems to have lost this fight in the first round.
One could, of course, argue that the SGP should be scrapped, because austerity makes no sense when the eurozone faces the risk of deflation.
But the Commission, not fiscally louche member countries, should be the one to decide that.
The other problem for Europe is a dog that does bark, but for no reason. This is the case of the United Kingdom, which has been asked to pay an additional contribution to the EU budget of about €2 billion ($2.5 billion, which amounts to a rounding error of the UK’s own budget).
The reason for this additional levy is that a few weeks ago the UK’s Office for National Statistics announced, proudly, that it had discovered that the country’s gross national income (GNI) had been much higher than previously assumed, not only in 2013, but also in all previous years.
Including the revisions for the 2002-2012 period, the difference comes to about £350 billion ($560 billion).
Because every EU member state is obliged to contribute about 1% of its GNI to the Union’s budget, the UK’s data revision had to lead to a back payment of billions of euros.
But British Prime Minister David Cameron’s government has declared that it does not intend to pay money that “the European Commission was not expecting and does not need.”
These two cases – the dog that should have barked but did not, and the dog that barked for no reason – threaten the EU’s fundamental workings, which are based on a clear rulebook enforced vigorously by a strong Commission.
Juncker’s Commission risks losing its authority from the start if the rules can be bent or broken to accommodate the larger member states’ domestic political priorities.
The Commission must regain political and intellectual leadership and make its choice: either explain why the SGP rules must be followed even now, in the face of deflation, or agree with those who argue that the current environment calls for a fiscal stimulus.
It cannot avoid taking sides by insisting publicly on austerity rules but then acquiescing when member states break them.
Leaders in member states have to play their part as well.
Pandering to populists may be attractive in terms of short-term electoral gains, but the long-term cost in terms of credibility, both their own and that of the EU, will be very high.
The Coming Atlantic Century
PRINCETON – The United States is rising; Europe is stabilizing; and both are moving closer together.
That was the principal message earlier this month at the annual Munich Security Conference (MSC), a high-powered gathering of defense ministers, foreign ministers, senior military officials, parliamentarians, journalists, and national-security experts of every variety.
The participants come primarily from Europe and the US; indeed, when the conference began in 1963, it was focused entirely on NATO members.
This year, however, senior government officials from Brazil, China, India, Nigeria, Singapore, Qatar, and Saudi Arabia also joined, an important sign of the times.
John McCain, the US senator and 2008 presidential candidate, always leads a large congressional delegation to Munich.
The US administration also typically sends the Secretary of Defense or the Secretary of State to deliver a ritual speech reassuring the Europeans of the strength of the transatlantic alliance.
This year, Vice President Joe Biden did the honors, bumping the US representation up a notch.
The conference also featured a panel on an unusual subject – “The American Oil and Gas Bonanza: The Changing Geopolitics of Energy.”
Pascual projected that the US will be able to import all of its energy needs from within the Americas by 2030.
A recent confidential study by the German Intelligence Agency raises the possibility that the US could actually become an oil and gas exporter by 2020, in contrast to its present position as the world’s largest energy importer.
That honor would likely fall to China, which would become increasingly dependent on the Middle East.
As an extra bonus, the higher US proportion of gas use has reduced US carbon emissions to 1992 levels.
The sense of US good fortune, a phrase that is not often heard around the world these days, increased with the panelists’ description of how lower energy prices for US manufacturing has a broad positive impact on the American economy’s competitiveness.
As a result, the country’s energy reserves have also become an investment magnet.
German Minister of Economics and Technology Philipp Rösler said that many German firms are already relocating to the US because of lower energy prices.
Equally important, the panelists reported on the rising importance of liquid natural gas relative to pipeline gas, which has enormous geopolitical implications.
In a nutshell, if gas is exported in liquid form, it is fungible.
In other words, if Russia restricts the flow of gas to Ukraine for political reasons, but the rest of Europe has gas from other sources, they can simply resell their gas to Ukraine and export it via the Baltic Sea.
Jorma Ollila, Chairman of Royal Dutch Shell, described the global map of major shale oil and gas deposits.
Ukraine itself has the third-largest reserves in Europe; other countries with large deposits include Poland, France, China, Indonesia, Australia, South Africa, Argentina, and Mexico.
And the US has already taken over from Russia as the world’s largest gas producer.
All of this data got Brazilian Foreign Minister Antonio de Aguiar Patriota’s attention.
On a panel entitled “The Rising Powers and Global Governance,” Patriota referred to the energy discussion and noted that the rising powers should remember that “the established powers are not sinking powers.”
In short, the pervasive narrative of Western decline suddenly reversed itself.
The horizon seemed brighter on the European side as well.
In the opening panel on “The Euro Crisis and the Future of the EU,” cautious optimism prevailed.
No one thought that the European Union’s troubles were resolved, but no one thought that the eurozone was coming apart, either.
On the contrary, German Finance Minister Wolfgang Schäuble made clear that German resolve to see the eurozone through its troubles was firm.
And a prominent economist in the audience who has often predicted the eurozone’s demise was backtracking rapidly.
Aside from reports of a rising US (fiscal woes notwithstanding) and a stabilizing Europe (despite the common currency’s troubles), the conference featured a speech by Biden that went far beyond the reassuring rhetoric that US policymakers typically offer in European capitals.
Biden told the audience that he and US President Barack Obama believe that “Europe is the cornerstone of our engagement with the rest of the world” and “the catalyst for our global cooperation.”
Biden pointed out that “Europe is America’s largest economic partner,” recalling figures that the Asia-focused Obama administration has often seemed to forget: “over $600 billion in annual trade that creates and sustains millions of jobs on the continent and at home, and a $5 trillion overall commercial relationship.”
“Europe remains America’s indispensable partner of first resort,” he declared. “And, if you forgive some presumptuousness, I believe we remain your indispensable partner.”
Those strong words reflect a new sensibility in Washington. As former Secretary of State Hillary Clinton declared in one of her last foreign-policy speeches, the US is not planning to pivot away from Europe to Asia, but rather with Europe to Asia.
Western fortunes are rising, slowly but surely.
Together, Europe and the US account for more than 50% of global GDP, have the largest military force in the world by many multiples, and control a growing proportion of global energy reserves.
They also have a formidable diplomatic and development-assistance capacity, representing a peaceful community of democracies that share a common commitment to the rights, dignity, and potential of all human beings.
Imagine that community spreading down the east coast of Latin America and the west coast of Africa.
Europe and Asia’s Arms Race
When European unification was launched, it was thought that “ever closer union” would establish a community that would protect Europeans from political blackmail.
Now we see – though the lifting of the Union’s arms embargo may now be delayed thanks to US pressure and Chinese aggressiveness – that the European Union has become merely a tool for corruption when France and China draw up joint action plans.
The strategy is simple and ruthless.
The world’s largest dictatorship is preparing to crush and occupy the first Chinese democracy in history – Taiwan.
In order to do so, the People’s Republic needs much more sophisticated arms than those it possesses today.
The United States naturally does not export such arms to China.
Instead, the US is trying to deter China’s rulers from launching a military attack on the democrats in Taiwan.
But if the EU ever begins to offer China extensive exports of powerful and offensive weapons systems, the military power of the People’s Liberation Army would be able to defeat Taiwan’s defense forces.
Over 600 missiles, already deployed on the mainland, are aimed at cities and military bases on the island.
The threat is more apparent than real – for now.
Russia currently sells certain arms to China, but avoids exporting its most sophisticated systems, since the Kremlin views China as a potential future threat.
However, if EU countries start competing for a share of the Chinese market, the Russians could soon be tempted to sell their best arms to the communist regime in Beijing.
China’s new armaments, together with the North Korean crisis, will probably force half a dozen countries in the region to renew their armed forces.
Thus, by whenever the Union should decide to lift its ban on weapons exports to China, the EU could help fuel an arms race in East Asia.
How did China and France manage to fool the EU into thinking that it should ever take part in this?
When Jacques Chirac’s government decided to expound its economic co-operation with China, arms became an important component in the strategy.
Just as a ruthless Prime Minister Chirac sold a nuclear reactor to Saddam Hussein in the 1970’s, so the President Chirac of today is being lured into doing big business with another aggressive dictatorship.
The rest is a question of economic blackmail.
French diplomats have of course informed China about the reluctance of other European countries about lifting the arms embargo, which was imposed after the massacre in Tiananmen Square in 1989.
China then simply threatened to abandon or never to conclude trade deals with these EU members.
To the Germans, the Chinese probably murmur something about Siemens and Volkswagen.
To the Dutch their whispers are most likely about Philips.
China follows the power game within the EU through its French friends, and therefore knows which governments need to be whipped into line.
In Sweden, it has probably been enough to whisper “Ericsson” and “Volvo” to make Primer Minister Göran Persson understand what is at stake for his country commercially.
What European nation, indeed, dares to put at risk a Chinese order for several billion euros?
Typically enough, no EU-country has mentioned Taiwan as a reason not to resume arms exports.
Instead, the EU talks of a “code of conduct” (which probably does not mean very much, but sounds nice) and “free trade” (another charming euphemism for arms exports to dictatorships.
This silence gives a hideous signal.
For what the EU in practice says to China is this: “Taiwan’s cause in not our own.”
If and when the Union lifts the embargo, Europe will be refusing to take responsibility for the catastrophe that may be approaching.
As usual, it is up to America to protect a free nation that may otherwise be destroyed.
Compare this situation to the drama 60 years ago.
Then it was American troops and arms that liberated Western Europe from Nazism.
Now it may be European arms in the hands of the Chinese that will be aimed at American troops protecting a democracy with 23 million inhabitants (in other words, as many people as in all the Nordic countries combined).
As Tom Lantos, a Democratic US Congressman from California, put it, the move to lift the ban on arms exports to China clearly shows that the EU has “lost its moral compass.”
Lantos knows about moral compasses: as a boy, he was rescued by Raoul Wallenberg from being deported to Auschwitz by the Nazis in Budapest.
Wallenberg was a Swede.
But now Sweden is revealing that it, too, lacks political morality.
Several friends of mine in the Conservative party’s parliamentary group have long been engaged in supporting a free Taiwan.
Over the past ten years, we have held Scandinavian conferences on Taiwan in the parliaments in Copenhagen, Oslo, and Stockholm.
But a call from Prime Minister Persson was enough to render the Conservative party leader Fredrik Reinfeldt docile.
Persson had discovered that he lacked a majority in the Swedish parliament to lift the arms embargo on China.
By whispering “Ericsson” into Reinfeldt’s ear, it seems, Persson achieved the desired result.
Reinfeldt became the first Conservative party leader in Swedish history to encourage arms exports to a Communist dictatorship.
But Reinfeldt, like Jacques Chirac, has forgotten something.
Liberal-minded people may very well prefer not just to exchange one cynical prime minister for another at the next election.
They may prefer a clear choice.
European Defense and European Solidarity
PRAGUE - Perhaps it is the experience of a man who endured forty years of Communist rule, and the Nazi Occupation before that.
Maybe it is the experience of inhabiting a country in the center of Europe, a place which has for centuries been a crossroads of Europe’s spiritual currents, geopolitical interests, and confrontations.
Perhaps all these factors, combined, led me to the conviction that Europe is one political entity whose security is indivisible.
The idea that there could forever be two Europes - one democratic, stable, prosperous and integrated; one less democratic, less stable, less prosperous and isolated - is mistaken.
It is as if one part of a room could be heated and the other kept cold.
There is only one Europe, despite its diversity.
Any weighty occurrence provokes repercussions across the continent.
If Europe is to become one, if the European Union is to take in the new postcommunist democracies - which is in the interest of all Europe - a number of vital tasks must be undertaken, within the new democracies, as well as, in the European and Atlantic communities.
To begin, Europe must foster community in the postcommunist countries by restoring civil society.
For a living society cannot be restructured from above.
Thus Europe must help its new democracies to become an organic part of a shared Continental commitment to a deepening and advancement of civil society.
The more diverse and interconnected European civic structures become, the better equipped the new democracies will be for membership in the EU and the more stable they will be as States.
To achieve this, Europe must encourage the new democracies to transfer various tasks of solidarity to self-governing bodies and non-profit or public service organizations.
The lower the level of redistribution, the more transparent and more economical it will be; and, the better it will satisfy those social needs which central authorities cannot discern.
Social solidarity will become more authentic if closely linked with concrete people or their associations.
Authentic solidarity amongst people, social groups, settlements and regions is also the surest background for those forms of solidarity that only States can implement.
A bitter chapter in modern European history was the policy of appeasement with its renunciation of European solidarity, leading to the capitulation of Munich.
This experience still carries a strong appeal for vigilance.
Evil must be confronted as soon as it emerges, but it is not enough if governments act.
For government policies grow from the sentiments of civil society, from the people.
Concern for security, indeed, is a manifestation of societal solidarity.
The EU is working intensively on a new concept of its security policy.
It should be marked by a capacity to decide quickly and speedily translate joint decisions into action - reforms recent events in Yugoslavia exposed as necessary.
NATO’s intervention last year showed that respect for human life and human liberty, and considerations of pan-European security, can necessitate intervention outside the EU’s borders.
The stronger the mandate for such action, the better.
Unfortunately, there may be situations in which a UN mandate may not come, although intervention is in the interest of many people; of all Europe; indeed, of human civilization.
Until recently, Europe was ill-prepared for this alternative.
It is more prepared now, at least psychologically.
This psychological preparedness should be utilized to advance Europe’s material and technical preparedness.
But more needs doing in the field of preventive security, and to make that security reflect the values of Europe’s wider civil society.
Tens of thousands of human lives and immense material could have been saved in Kosovo, Bosnia/Herzegovina, as well as other parts of former Yugoslavia, had the international community acted at the beginning of conflict.
Despite warnings about impending horrors, action was timid.
Those failures arose from a consideration of various particular domestic interests, as well as a lack of readiness to take risks for a good cause.
Indeed, without American energy, the international community would still be watching the horrors of Kosovo.
Europe cannot remain forever dependent on the US, especially over European problems.
It must be capable of agreeing on solutions of its own.
It is unthinkable that the EU can stand as a respected part of the global order if it proves unable to agree on ways of protecting human rights, not only in its territory, but in areas that may one day be joined to it.
Such EU enlargement is fathomable only if it progresses hand-in-hand with bold reform of EU institutions.
I trust that the Intergovernmental Conference on institutional reform will produce viable proposals to move the Union forward.
But I see this as the beginning of a process which may take decades, and which should be guided by a lasting endeavor to speed up EU decision-making, making it more transparent.
One issue connected with institutional reform is the question of how to give smaller States a certainty that they will not be simply outvoted by larger ones, yet pay due regard to the size of these individual States.
A possibility here is to establish a second chamber of the European Parliament with members not elected by direct ballot, but by the parliaments of member States from among their ranks.
Thus, the EU’s first chamber - ie, its present Parliament - would mirror the size of individual member States; its second chamber, with the same number of representatives from every State, would enhance equality.
Sooner or later these changes will require that the EU possess a clear, understandable Constitution - a text all European children could learn.
Such a Constitution needs two parts.
Part One would lay down the rights and duties of European citizens as well as of States; the underlying values of a united Europe; and the meaning and objectives of integration.
Part Two would describe the EU’s key institutions; their principal powers and the relations between them.
Such a basic law would not automatically mean transformation of today’s union into the federal supra-state feared by Eurosceptics.
It would, however, make it easier for citizens in an integrating Europe to recognize what the EU stands for; to understand it better and see its connections to their lives; and, consequently, to identify with it.
European Discrimination on Trial
What good are Europe’s treaties aimed at ensuring the legal equality of all citizens when entire groups face systematic discrimination?
That is the question that the European Court of Human Rights (ECHR) faces this week as its Grand Chamber, consisting of 17 judges, begins considering an appeal of an initial ruling that rejected claims of discrimination against the Roma by the Czech Republic’s education authorities.
All European states are members of the Council of Europe, all have signed the European Convention on Human Rights, 39 of the 46 member states have adopted the Framework Convention for the Protection of National Minorities, and 14 have ratified Protocol 12 on the prohibition against discrimination.
Nevertheless, the living conditions of many Roma remain appalling.
Although recent reports published in 2006 by the European Union’s Monitoring Center on Racism and Xenophobia and the Council of Europe’s Human Rights Commissioner note some improvements, they indicate Roma living conditions have stagnated, if not deteriorated.
Roma are still victims of discrimination in access to housing, employment, healthcare, and education, despite significant local efforts at the Council of Europe’s instigation and with its support.
Discrimination in educational access is particularly important, given its profound effect on its victims’ life prospects.
In the most extreme cases, the education system itself is segregated: isolated schools in remote camps; special classes for Roma children in mainstream schools; and an over-representation of Roma children in classes for children with learning difficulties.
The EHCR was confronted with the third issue in the case D.H. and others vs. Czech Republic .
The Court was referred to 18 cases of girls and boys who, between 1996 and 1999, were placed in special schools for children with learning difficulties, either directly or after a period of time in primary schools.
The question was whether the children were victims of discrimination owing to their national minority status.
The Czech government admitted that some of the special schools’ student bodies comprised 80% to 90% Roma children.
However, if there was discrimination, it was not direct, because under Czech law, such a move could be decided only by a school headmaster based on the results of an intelligence test at an educational psychology counseling centre, and subject to the approval of the child’s parents or legal guardian.
A difference in treatment is not discriminatory in itself.
According to the case law of national supreme courts and the ECHR, discrimination exists only when people in a similar situation are treated differently.
Yet national and international case law recognizes that a non-discriminatory measure in theory can be discriminatory in practice.
So, in the current case, the alleged discrimination does not stem from the law itself, but from its effects, with the plaintiffs relying mainly on statistics showing the over-representation of Roma in special schools.
Many other reports on the situation of Roma in the Czech Republic, including by the Council of Europe, are available.
But, as the Court rightly noted, it should rule only on the cases to which it is referred, and should not make known its opinion on the Czech education system’s legitimacy, as choices concerning educational opportunities fall under the jurisdiction of states and therefore can vary accordingly.
Working on this assumption and given the case it had to solve, an EHCR panel of seven judges ruled against the plaintiffs in February 2006, concluding that the law on special schools is not aimed specifically at Roma and does not apply only to them.
According to the Court, the law’s legitimate purpose is to adapt teaching to the difficulties of a specific category of pupils, and psychological tests seem to be objective enough not to be suspected of racial bias.
Moreover, the requirement of parents’ approval for placing children in special schools remains valid, while Roma children who were initially placed in those schools could have returned to mainstream schools later, and thus reintegrated into normal schooling.
As well-founded as the Court’s reasoning may be, a feeling of unease persists.
The statistics showing the enormous proportion of Roma children in those schools are hard to ignore, and the suspicion of discrimination is difficult to avoid.
While laws have changed, mentalities do not always follow at the same pace, and we intuitively know that it is easy to get psychology to mean a lot of things.
Indeed, before announcing its decision, the Court felt it necessary to state that while it did not conclude that the Convention had been violated, statistics still revealed “worrying figures, and the situation in general in the Czech Republic regarding Roma children’s education needs to be improved.”
The Court’s president, Jean-Paul Costa, expressed a similar view, without questioning the legitimacy of the decision, although Judge Cabral Barreto wrote a dissenting opinion.
Moreover, it is significant that the Court agreed, at the request of the parties, to refer the case on appeal to its Grand Chamber.
According to Costa, rejecting the ruling in February 2006 would contradict previous case law.
Will the Court, then, decide on the workings of the Czech education system itself?
Or will it follow Judge Barreto, who calls for recognition of an obligation to adopt affirmative action policies aimed at benefiting Romanies?
Whatever formula is adopted, it is certain that Roma children should be afforded the same opportunities as other children.
It is this imperative that underlies the importance of the coming decision, for it provides an occasion for the Court to reassert the fundamental principle of non-discrimination that defines our democratic societies.
Europe and Its Discontents
LONDON: Waves of street protests by French farmers, fishermen and truck drivers against surging fuel prices dominate television and newspapers.
If Europe is moving into an autumn and winter of discontent, however, it is not so much because French truckers are blockading oil refineries in France, as because some key political issues on the European agenda seem to be getting out of hand and out of control, especially in Germany and Britain.
In one sense, indeed, the French protests are reassuringly familiar.
Street demonstrations (or, as the French say: Amanif”) are a traditional part of the political vocabulary in France, and these seem to be evolving along customary lines.
On this occasion, the socialist government of Lionel Jospin belatedly tried to summon a bit more firmness than usual, but otherwise it’s a familiar story: alarming to foreigners, but not very surprising or disturbing to the French.
Recent events in Germany, by contrast, are less traditional and more worrying.
First, there is the spate of neo-Nazi attacks on foreigners, which hit the headlines again recently when three young skinheads were convicted and sentenced for killing a black Mozambican man.
In one sense, this is not a new phenomenon.
Over the past decade 90 people died in anti-immigrant attacks in Germany; and these attacks appear to be directly related, first to the collapse of the East German economy after re-unification, and second to a huge wave of refugees, especially from the Balkans.
Yet the government is obviously worried by the upsurge of xenophobia and neo-Nazi violence.
Chancellor Gerhard Schröder has been actively campaigning for tougher measures by police and the courts, and has called on the German people to have the courage to stand up against anti-foreigner racism.
The second worrying development in Germany - intimately linked to the first - is the latest twist in the debate on the planned enlargement of the European Union to bring in ten or more countries from Central and Eastern Europe.
It has long been clear that there is a substantial difference of opinion on this issue between the German people and their leaders: the political élite sees enlargement as a moral and strategic imperative; voters fear a flood of immigrants and job-seekers from the East.
The spat between Austria, Germany and the Czech Republic over the opening of a Soviet-designed nuclear plant near the Austrian border complicates Germany’s response even more.
With the passage of time, enlargement has become more unpopular, not less: at last count, only 20% of Germans are keen on the idea, and 68% are unenthusiastic.
Unfortunately, there is an analogous picture elsewhere in the EU. In France only 21% are keen, and 71% are unenthusiastic; the EU average is only 27% pro, 60% anti.
Support for enlargement, however, is lowest in Germany, especially in East Germany, where voting has been decisive in determining the outcomes of all recent German elections.
What really stirred things up are recent suggestions by Günther Verheugen, the German member of the European Commission who (as it happens) holds the portfolio for eastward expansion, that eastward enlargement should be put to the German people in a referendum.
As things stand, this is impossible, because Germany’s constitution does not provide for holding referenda; so the first step would have to be a revision of the Constitution.
Still, some German politicians, especially in the ruling SPD, are in principle in favour of giving the people their say in referenda.
Mr Verheugen argued that a referendum would force Germany’s political élite to take more account of the concerns of the people, which they failed to do when taking Germany into the single European currency.
Indeed, German public opinion remains deeply ambivalent about the euro, and increasingly disillusioned its continual decline against the dollar (and the pound).
Chancellor Schröder shrugged off the euro’s recent weakness by saying it was good for exports - which immediately triggered a further decline, and prompted the newspaper Bild to headline “The Curse of the Euro”.
Chancellor Schröder’s response to Verheugen’s suggestion was merely to reiterate that his government remains firmly committed to early enlargement of the EU.
But it is only too easy to imagine what would be the consequence of holding a referendum: enlargement would almost certainly be rejected in practice and in principle by a large majority.
In Britain, by contrast, we are now seeing a steep intensification of political controversy, not about enlargement (even though it is unpopular), but about the question of membership of the single currency.
The ever-active anti-Euro lobby has now spawned a new grouping called “NO”, led by Lord David Owen, the former foreign secretary, to oppose not just membership of the euro, but even the holding of a referendum on the issue.
They claim that the government intends to “bounce” Britain into the euro in the next year or so, against the wishes of the people.
The irony is that it was the Euro-sceptics who originally secured the commitment to a referendum on the euro.
It is that commitment by which the government is now bound.
“Bouncing” Britain in is simply impossible.
British public opinion is now so hostile, to the EU in general and to the euro in particular, that a referendum could not be won without a massive government campaign of persuasion.
Denmark’s government has done just this and seems to be bringing the Danish public around to the idea of joining the euro.
Prime Minister Tony Blair is apparently convinced of the strategic desirability of joining the euro, but because a Yes vote in a referendum now looks so implausible he is unlikely to try.
This means that Britain will stay on the outside, not just for a long time, but for good.
So much for the virtues of referenda.
Europe and President Bush
ROME: What does the future hold for transatlantic relations?
That question arises with every new American administration.
Because worries about a “widening Atlantic” gap have existed since the early 1970s, it is tempting to proceed as if transatlantic relations will remain on roughly the same wavelength as before.
The truth is, however, that the US and the EU are rapidly evolving along their own paths: both sides of the Atlantic thus face the challenge of managing an ever more complex relationship.
Two other temptations must also be resisted.
On the European side is the temptation to speed the emergence of the Union as an international actor by constantly claiming autonomy or independence from the US.
Lingering anti-American undertones, of course, will invariably surface for, as in any long unbalanced relationship, the junior partner will tend to make declaratory statements that generate misperceptions.
Europeans should not succumb to this temptation, for the move from dependency to equal partnership is not measured by rhetoric.
Instead, Europeans must assume a fairer share of the transatlantic burden, putting in place a truly common European foreign policy, and think and act as a regional power with a global outreach.
If the Euro succeeds as a global currency, which I believe it will, and if Europe’s rapid reaction force becomes a reality soon, as I also think it will, the EU will have secured the preconditions for a more equal partnership – literally by putting its money (and soldiers) where its mouth is.
On the American side, the temptation is to overplay its “sole superpower” role by acting unilaterally.
But this is loneliness disguised as leadership and is not in America’s interest.
National interests can no longer be effectively pursued unilaterally;
US global interests are served best by multilateral action and bodies.
Even if, in military terms, America remains the sole superpower, military might is of limited use in the daily conduct of foreign policy.
America would benefit not less than Europe from an effective system of global governance in the achievement of its goals – be it freer trade, a viable non-proliferation regime, containment and prevention of regional conflicts, or better regulated financial markets.
To this end, the US has a vital stake in the EU’s coming of age as an international actor.
It should therefore do away with the traditional ambivalence of demanding a more mature and active Europe on one hand, all the time feeling uncomfortable with it on the other.
True, America officially welcomed the launching of a common European security and defense policy. But recurring signs of US nervousness about the nature of this process exist.
Americans often ask whether it is all about better European capabilities – which would be fine for NATO – or about European integration (i.e. instrumental to a political project).
My response is that it is about both, and that Washington should support both.
A sober assessment of this process leads me to assert that a more capable and united Europe will usher in a more effective Atlantic Alliance and not, as some believe, in American disengagement from European commitments.
What the EU aims at is not a duplication of NATO structures or an alternative to the Atlantic Alliance.
The EU is preparing to deal – jointly with US forces or with purely European forces when NATO as a whole decides not to engage – with crises in and around Europe.
More than defense – which will remain NATO-centered – Europe is building up its security role as a regional stabilizer: a role that EU enlargement to include candidate countries in Central and Eastern Europe will strengthen.
For, contrary to what is often said in America’s Congress, Europe already bears the lion’s share of the peacekeeping burden (let alone reconstruction aid) in the Balkans.
It goes without saying that there should be “no taxation without representation.”
If Europe’s foreign and defense policies succeed, NATO should become more European.
Washington, however, should not worry about this: if Europeans see the Alliance as a more European organization they are more likely to commit themselves (in budgetary terms, too) to its success.
A similar logic of partnership applies to enlargement.
The concept of Europe is not immutable, and rightly so.
On the basis of a broad notion of security and stability, EU enlargement is every bit as important as deepening the EU.
Here a common transatlantic approach to both EU and NATO enlargement would enhance stabilization and integration in post-Cold War Europe – to everyone’s benefit.
A new and functional division of labor between Europeans and Americans is thus conceivable, provided it retains the framework of common political commitments and shared responsibilities.
What should not be pursued is a rigid, vertical and artificial division of labor, whereby the US plays the lone global leader (with Europe simply following) while the EU concentrates exclusively on enlarging its “house” (with the US disengaging from Continental security).
This would be unhealthy and make the transatlantic compound unsustainable.
The antidote is a genuine sharing of choices and decisions.
If divisive decisions must be taken, healthy partnership requires that they be discussed openly and honestly.
A case in point is the issue of National Missile Defense.
No matter what policy the Bush administration adopts, European reservations and doubts should be taken into account.
If Europeans want to have some influence here, they must play a unitary role by, say, encouraging America to update the ABM Treaty in agreement with Moscow.
That would help strategic stability, prevent antagonizing Russia (which remains a fundamental factor in European security) and avoid deteriorating the security climate in Asia.
The same is true of dealing with so-called “rogue States”: here again, a better combination of US and European strategies could produce a more effective approach, based on a blend of engagement and resolve.
A new division of labor, and a new sharing of responsibilities, depends as much on economics as on security.
A stable Euro makes stronger cooperation possible and desirable: not only to prevent global financial instability but to avoid the risk of conflicting currency blocs arising.
Provided that the Bush Administration pragmatically pushes for more trade liberalization, we will be able to deepen transatlantic market integration, which will act as a boost for our economies.
Scope will also then exist for revitalizing the WTO, for which a strong European-American commitment is a necessary precondition, though not the entire solution.
Here a serious reassessment of our negotiating tactics and old habits is needed.
The WTO, but also the IMF and World Bank, must understand the evolving needs of those societies most vulnerable to the impact of globalization.
We need to reach out to the rest of the world in a more open and persuasive way.
The G-8 process, which Italy chairs this year, will test such resolve - on which rests the legitimacy of the entire process.
A renewed Euro-American partnership based on our own respective styles and instruments in foreign policy will benefit both sides.
The EU is rightly searching for its identity as a collective actor.
As Europe changes, so too does America – in terms of its demographic and social composition, economic and political structures, geopolitical orientation and national psychology.
Granted, transatlantic diversity might cause occasional squabbles.
However, mutual interaction and equal partnership remain the only response – especially if they are reflected into long overdue reforms of multilateral institutions and increased global governance.
Operating within multilateral frameworks, however tiresome, has more often than not served US national interests as well as those of Europe.
This will not change.
A stronger EU is America’s natural partner, occasional competitor, but certainly not a rival.
It is the duty of governments on both sides of the Atlantic to persuade their publics of this.
Europe and the Euro
PARIS – For anyone living in the 16 eurozone member states, the euro’s enduring success is both a technical and an emotional issue; both hearts and minds are involved.
I consider it axiomatic that the euro is vital to Europe and, indeed, to the world economy.
First of all, it should be recalled that the European idea began as a project for ensuring peace and democracy among Europe’s peoples.
When the new currency was introduced in 1999 – and even more so when European citizens had their first opportunity to use it in January 2002 – it was experienced as the most tangible, decisive proof that European integration was a reality.
As the slogan goes: euro in your wallet, Europe in your pocket.
Twenty years after the European Parliament was elected by universal suffrage in 1979, the introduction of the euro marked a logical extension of the European dream.
It should also be recalled, however, that when Slovenia entered the eurozone in 2007, many people suggested that the country was somehow joining “Old Europe.”
But Cyprus, Malta, and Slovakia have since followed suit in making the euro their currency.
From Dublin on the shore of the Irish Sea to Bratislava in the foothills of the Carpathians, the same coins and banknotes are legal tender, and they are constantly pushing back the European Union’s boundaries.
Tomorrow will bring additional members, such as Estonia, which is slated to join the eurozone on January 1, 2011.
Europe’s “Founding Fathers” were right that “Europe will not be made all at once,” and neither will the euro.
Our common currency should rather be viewed as an inspiring symbol – the symbol of a Europe that is vibrant, attractive, and, above all, cohesive.
Just how cohesive Europe can be is something that we know from the experience of the past few months.
The history of the euro, not surprisingly, has turned out to represent a further stage in the ongoing saga of a European economy that has been in a state of perpetual construction since the Treaty of Rome.
The financial support provided to Greece; the new European Financial Stability Facility, which we created to extend guarantees to eurozone member states in need; and our efforts to achieve more effective financial regulation are among the latest illustrations of European cohesion in practice.
Admittedly, the various crises affecting the eurozone have highlighted – sometimes starkly so – the need to reform our institutions and the way they operate.
It has been argued that Europe’s institutions move forward only in times of crisis.
Perhaps the same is true of the single currency, which will derive strength and validation from the challenges that it overcomes.
In the last few months, as it just barely emerged from the deepest economic and financial crisis in close to a century, the eurozone experienced the worst jolts in its history, although in terms of public finance, the eurozone as a whole has fared better than the United States or Japan.
Once the extent of Greece’s financial crisis and the difficulties encountered by other member states became known, the eurozone economies found themselves on the brink of disaster.
But the EU reacted swiftly and forcefully, with a support program for Greece and a financial guarantee plan for the entire eurozone.
In this state of emergency, a genuine European economic government, most compellingly advocated by German Chancellor Angela Merkel and French President Nicolas Sarkozy, began to take shape.
Following the European Council meeting in June, France and Germany jointly outlined a number of possible reforms.
Three key points emerged, concerning the need to:
· strengthen the Stability and Growth Pact, notably through enhanced European coordination during a “European Semester”;
· maintain our efforts to expand the scope of economic surveillance to include government deficits and public as well as private-sector debt, if necessary by imposing “political penalties”;
· establish a credible crisis-resolution framework without encroaching on the budgetary prerogatives of member states.
Other possible approaches are under consideration as well.
But what they all share is the recognition that the time has clearly come to stabilize and institutionalize a European economic government.
That process is already well under way.
The European Commission has made proposals, and the working group chaired by European President Herman Van Rompuy, in which I represent France, will be submitting its own in the fall.
We all expect that the euro, which proved to be such an asset during the crisis, will be just as effective in getting our economies back on the path to vigorous, sustainable growth.
Indeed, according to Eurostat (the EU’s statistical office), by the second quarter of 2010, the eurozone was growing faster than the US, while the euro remains the second most widely used trading currency.
The euro, like the EU itself, is an exciting adventure that must continue – and we intend to make sure that it does.
Europe and the Rising Powers
KYIV – The world’s center of gravity is heading eastward so fast that we Europeans can almost feel the ground moving beneath our feet.
Because almost all major actors on the international stage are redefining their roles in response to this tectonic shift, Europe must do the same.
So it is right that the EU Council of Ministers is meeting to grapple with this challenge.
For decades, however, Europeans have been more concerned with unification and constitutional arrangements than with traditional diplomacy.
Europe’s historic rivalries have, of course, been civilized into a political model that European diplomats often see as applicable across the international arena.
To be sure, consensus, compromise, and a pooling of sovereignty are the only ways to resolve many of the great issues – climate change, nuclear proliferation – that bedevil our world.
But on the great issues of war, peace, and the balance of power, Europe seems trapped between an insufficiently cohesive foreign policy and uncertainty among individual countries about how to define and secure their national interests.
By contrast, the world’s rising powers – Brazil, China, India, and Russia – insist not only on the primacy of their national interests, but, as the failed climate negotiations in Copenhagen last December demonstrated, on sovereign freedom of action as well.
To them, geopolitics is not anathema; it is the basis of all their external actions.
Defending the national interest still rallies their publics; the exercise of power remains at the heart of their diplomatic calculations.
In the face of this new/old reality, Europe must not merely make itself heard on the great global issues of trade and fiscal imbalances, important as they are.
Instead, Europe must recognize which of its strategic assets matter to the world’s rising powers and leverage those assets to gain influence.
Unfortunately, one of Europe’s key strategic assets – the European countries, in particular Ukraine, that straddle the great energy corridors that will deliver more and more of the fossil-fuel resources of the Middle East and Central Asia to the world – is probably its most neglected.
Indeed, ever since the Russia-Georgia war of 2008, Europe has mostly averted its eyes from developments in the region.
This neglect is both unwarranted and dangerous.
The countries that lie between the European Union and Russia are not only a source of geopolitical competition between Europe and Russia, but now intersect with the national interests of the world’s rising powers, particularly China.
The Russia-Georgia war showed just how much this region matters to the wider world.
In its wake, China began a systematic effort to buttress the former Soviet countries’ independence by offering them huge aid packages.
Countries from Belarus to Kazakhstan have benefited from Chinese financial support.
China cares about this region not only because it is concerned with maintaining the post-Cold War settlement across Eurasia, but also because it recognizes that it will provide the transit routes for much of the energy wealth of Iraq, Iran, and Central Asia.
Indeed, China has been pouring billions of dollars into developing the oil and gas fields of Iraq and Iran.
Given that security issues will likely prevent most of this energy from being transported eastward to meet China’s domestic needs, Chinese energy concerns will need to become players in international energy markets – which means shipping Chinese-developed oil and gas in Iraq and Iran westward for sale.
But two countries essential to this trade – Turkey and Ukraine – are increasingly estranged from the EU.
For Turkey, tensions reflect the lack of progress on the country’s application for EU membership.
Ukraine is another matter.
Until Viktor Yanukovych bludgeoned his way into Ukraine’s presidency earlier this year, Ukraine was becoming emphatically European in its orientation.
Now, Yanukovych seems determined – for the most shortsighted of motives – to weaken Ukraine fatally as an energy-transit country.
Indeed, his latest gambit is an effort to sell Ukraine’s transit pipelines to Russia’s Gazprom in exchange for cut-rate gas.
That idea is foolish economically and strategically.
Ukraine’s industries need to modernize, not become more addicted to cheap gas, and gas transit will become almost as monopolistic as gas supply – a dismal prospect, given past cut-offs of gas supplies between Russia and Europe.
Moreover, Ukraine’s politics is fracturing.
A witch hunt is under way against opposition politicians.
Crusading journalists disappear without a trace.
The country’s biggest media baron, who happens to be the head of state security, expands his media empire by abusing the courts.
Yanukovych’s systematic dismantling of Ukraine’s democratic institutions is damaging the country’s potential as a European strategic asset.
Of course, it is up to Ukrainians to defend their democracy, but Europe is at fault as well, because the EU lacks a grand strategy toward the East.
The moral and strategic vision of the 1990’s, which culminated in the EU’s “big bang” of eastward expansion, has exhausted itself.
Nowadays, Europe is full of whispers that “neo-Finlandization” might be a reasonable compromise for countries like Ukraine and Georgia.
Rebuilding the EU’s relations with Ukraine and the other countries to the Union’s east would, however, also help shape relations with Russia, which today is facing a series of strategic challenges: relations with the USSR’s former republics; the proximity of a dynamic China; the exposed emptiness of Siberia; the future of Central Asia’s energy resources, around which the nineteenth-century “great game” between Russia, China, India, and America is restarting.
The EU can play a constructive role through permanent dialogue that is sensitive to Russia's concerns without acquiescing in all of Russia's answers to them.
Today, the art of diplomacy is to translate power into consensus.
This requires better relations with all of the world’s rising powers.
But it also implies, above all, a unifying vision, not only concerning the challenges that affect all countries – weapons proliferation, terrorism, epidemics, and climate change, for example – but also concerning one’s strategic assets.
If the EU is to craft a successful policy toward the world’s rising powers, it must speak in a strategic language that they understand.
The Power of a European Energy Union
DUBLIN – One of the top priorities established by European Commission President Jean-Claude Juncker ahead of his election last summer was the creation of a European energy union.
He was right to do so.
Done properly, a more cohesive energy policy could achieve three strategic objectives simultaneously.
By coordinating research and investment, encouraging conservation, and integrating energy markets, an energy union would help fight climate change, provide Europe with a much needed economic stimulus, and protect the continent from supply shocks, such as those caused by the crises in North Africa and Ukraine.
Of course, the European Union's ability to act is dependent on the willingness of its member states; and, though some of the continent's leaders have championed the initiative, others have proved less enthusiastic.
A crucial test of their collective resolve will be whether they are willing to support key infrastructure projects that deliver on all three objectives.
One good example of such a project is the North Sea Countries' Offshore Grid Initiative, a proposal that would link offshore wind farms to a new regional grid, and allow countries to balance variable power supplies across borders.
The idea – first advanced in a 2009 memorandum of understanding signed by nine EU member states and Norway – has enormous potential; by 2030, North Sea winds could provide Europe with 10% of its electricity – carbon-free.
But if the project is to go forward, it urgently needs a political mandate.
The integrated grid can be imagined as a large ring, connecting Norway with the United Kingdom, and then linking across the channel to France, Belgium, and Holland, before moving on to Germany and returning to Scandinavia.
Its implementation would allow Europe to introduce a free-trade zone for renewable energy, reducing the need for storage and excess capacity to back up variable power supplies.
Not only would the grid pay for itself; once in place, it would reduce the cost of new wind farms by some 30%, by providing them with an existing connection to energy markets.
An interconnected energy system would make particular sense for the UK and Germany, which could use the one-hour time difference between them to smooth out the peaks and troughs in demand.
Renewable energy production is by nature intermittent, and the sheer number of fluctuating power sources in Germany is already pushing its existing grid to the limit.
Interconnection would also reduce the number of new onshore transmission lines the country needs.
The German government has produced a policy paper outlining how a more integrated regional market might work.
Last year, the UK matched Germany's investments in clean energy, spending some $15.2 billion on solar panels and wind farms.
But Britain will need to do a lot more if it is to meet its climate targets.
According to a parliamentary report, “the cost of developing such a supergrid could be very high...but it may bring a host of economic benefits – including tens of thousands of new jobs in the offshore renewable industry." A regional initiative would also allow Prime Minister David Cameron to accommodate opposition within his party to onshore renewable energy plants.
Each of the individual countries involved in the project would benefit from its construction.
Holland and Belgium need a cost-effective way to develop their own offshore resources.
Denmark already benefits from an interconnected electricity market; and the lesson it has learned is that it makes sense to integrate even further.
Norway would be able to sell its hydropower and secure a backup supply should climate change leave it running dry.
Advances in cable technology would allow Ireland to link to France, providing an alternative route to European markets if the UK elects to remain outside the network.
Juncker's €315 billion ($360 billion) investment plan, proposed in December, includes some €87 billion in interconnection projects.
It would make sense to combine these into a single initiative, with common standards for technology, planning, and regulations.
Doing so would lower the cost of capital on loans from the European Investment Bank and give a boost to European technology companies.
The Baltic states are also planning their own offshore grid.
But it is not just Northern Europe that could gain from such an approach.
Europe's southeastern and Mediterranean countries could also benefit from sharing power.
Most of the necessary legal and regulatory framework is already in place.
There is no need for treaty changes or complex new legislation.
All that is needed is political direction, so that the European Commission can establish the necessary governance structures.
The strength of Europe's commitment to a true energy union will be revealed when the European Council meets on March 19.
Among the decisions it will make will be whether to build these regional grids.
If the EU and its member states reach an agreement, they could simultaneously boost their economies and improve their energy security.
If not, they could end up buying the technology from China or the United States, which will be investing in their own grids in the coming years.
Europe’s Energy Essentials
MADRID – At last month’s European Council meeting in Brussels, energy issues dominated the agenda – for the third time this year.
Energy’s emergence as a focal point for European leaders makes sense, given that it lies at the confluence of the three existential threats facing the European Union: a revisionist Russia, the declining competitiveness of European businesses, and climate change.
As these developments challenge Europe’s values, its social model’s viability, and the world’s long-term security,&nbsp;EU leaders must focus on building a new energy system that ensures a reliable supply, sensible pricing, and ecological sustainability.
The good news is that a framework is already emerging that could facilitate this initiative.
Indeed, beyond widely discussed targets for energy production for 2030 – covering greenhouse-gas emissions, energy efficiency, and renewable resources – the European Council’s conclusions embrace key elements of a practical and effective approach to energy.
But, in order to move from aspiration to implementation, Europeans must muster the unity of purpose that so far has been conspicuously absent in EU energy policy.
The most tangible element of the EU’s emerging energy-policy framework is the internal energy market, which, once completed, will allow for the unimpeded flow of energy and related investments throughout the EU.
Such an integrated energy market would lead to significant savings – estimates go as high as €40 billion ($51 billion) annually by 2030 – thereby providing a much-needed competitiveness boost.
The internal energy market would enhance Europe’s energy security as well.
Though the EU as a whole maintains a balanced energy mix, with supply divided relatively evenly among gas, coal, oil, renewables, and nuclear generation, individual countries are often excessively dependent on a single source and, more dangerously, a single supplier: Russia.
Unrestricted energy flows within the EU would mitigate the risks of supply disruptions or shocks.
Of course, establishing an internal energy market is not just a matter of policy.
The EU needs the right infrastructure to facilitate the movement of energy among states and regions.
On this front, there is much to be done.
Spain, for example, can currently transmit only 1.5% of its electricity-generating capacity to the rest of Europe, owing to a lack of transmission infrastructure in the Pyrenees and France’s reluctance to open its energy market to competition from the Iberian Peninsula.
The European Council, recognizing the urgency of this issue, has called for greater electricity interconnection, targeting 10% of generating capacity by 2020 and 15% by 2030, with countries exporting 15 megawatts of power for every 100 megawatts they produce.
Achieving these benchmarks will require both significant capital investment and a shift in EU member states’ mentalities, so that fears like France’s do not continue to impede progress.
Countries need to know that their companies will not suffer either from outflows of electricity to other EU countries during shortages, or from price increases, owing to the rising emphasis on renewables.
The emerging European “energy union,” which the Council has endorsed, could be the ideal vehicle to facilitate this shift.
The problem is that EU leaders have yet to define a compelling and effective strategy for building it.
Indeed, though European Commission President Jean-Claude Juncker has established a vice-presidential post responsible for energy union – now held by Maroš Šefčovič – no one seems to know what exactly the position will entail.
So far, Šefčovič has merely presented five vague pillars for the energy union, leading many to consider the current policy approach to an energy union hollow.
The EU needs a well-defined energy strategy that helps to overcome the trust deficit that is hampering effective solutions.
This means, first and foremost, establishing clear and predictable community rules and cost-sensitive policies for the energy union.
Doing so would help the EU to achieve another critical goal: presenting a more united front to the rest of the world.
The Council’s recent conclusions recognize this imperative, and the new Commission structure is conducive to policy coherence.
Member states must now fall into line.
A major test will be next year’s United Nations climate change conference (COP21) in Paris.
The 2009 conference in Copenhagen was an unmitigated disaster, as Europe’s “lead by example” approach failed to attract followers.
The EU cannot afford to isolate itself, or misunderstand the geopolitical forces at play, yet again.
Fortunately, the Council seems to have internalized this lesson, leaving open the possibility of reconsidering its commitments after COP21.
But it has a lot to&nbsp;do before then, not only to establish a unified approach, but also to translate that approach into strong tactics and a clear message at COP21.
Success would provide a strong foundation for the broader EU energy agenda.
If the EU is to address the key challenges of energy security, competitive pricing, and sustainability, it will need a unified, comprehensive, and compelling policy approach.
The foundations of such an approach – an internal energy market, the framework of an energy union, and a cohesive external voice – are emerging.
Europe, An Engine of Peace
Critics of European monetary integration often point out that, in the absence of political union, monetary union is doomed to fail.
I agree with the critics’ conclusion, but not with their premise, for the success of the single currency so far has been due precisely to the political commitments of the Union’s member countries.
In other words, it is not true that the European Union does not constitute a political union.
European economic integration – in all its aspects – reflects the desire to integrate Europe politically, which, at least in my view, implies that European economic and monetary integration is irreversible.
This has been true from the outset of the European integration process in 1952, when six countries established the European Coal and Steel Community (ECSC).
The aim of the ECSC was explicitly political: to remove control of the two most important raw materials for the production of heavy weaponry from states that had just fought the bloodiest war in history.
This drive for peace remained, quietly, the key motivation behind further steps toward Europe’s economic integration, which was regarded as the vehicle for achieving political integration.&nbsp;
In 1951, French Prime Minister Rene Pléven proposed establishing a European Defense Community (EDC) alongside the ECSC.
He failed, but the idea did not vanish.
Later that year, Robert Schumann – the French foreign minister at the time and a founding father of European integration – explicitly identified the ECSC with the drive for peace.
He described it as a means for creating a “fusion of interests…that will be the leavening from which may grow a wider and deeper community between countries long opposed to one another by bloody conflicts.”
These words were echoed on the eve of the introduction of the single currency.
In particular, Germany under Chancellor Helmut Kohl often linked monetary integration with the objective of political union.
Kohl once referred to the single currency’s success as a matter of “war and peace.”
For this reason, I do not agree with those who argue that Germany’s support for European monetary integration was the price it paid for Europe’s acceptance of German reunification.
On the contrary, the historical record shows that Germany made the case for a parallel drive to monetary and political integration well before the fall of the Iron Curtain.
Of course, there are other motives behind support for economic integration.
The EU’s leaders are convinced that achieving the so-called four freedoms – i.e., freedom of movement of goods, services, capital, and people – will optimize the well-being of Europe’s population.
They also aspire to increase the Continent’s strategic power.
But peace was the principal driving force in the minds of people like Schumann and Jean Monnet at the beginning of the European integration process, as it was for Helmut Schmidt and Valéry Giscard d’Estaing when they laid the foundations of the single currency and today’s European Central Bank.
For half a century, the process of European integration proceeded – sometimes with setbacks, sometimes with giant steps forward – joining formerly separate markets by creating very close trade relations.
Over time, this stimulated ever-greater economic convergence.
Of course, Europe’s economies have not become “look-alikes,” nor has GDP per capita been fully equalized.
But the differences between Europe’s economies were never so dramatic as to form an insurmountable barrier to embarking upon the most ambitious project of all: adopting a common currency.
Understanding this history is vital, because Europe’s Union once again stands at a threshold: should it keep its promise to start membership talks with Turkey?
In the wake of the defeat of the EU’s Constitutional Treaty in France and the Netherlands this spring, many say that Europe’s decade-old promise cannot and should not be kept.
What strikes me as dangerous is that the issue of peace – the motor that has driven European integration from the start – rarely comes up in the debate about what to do in the wake of these events.
On the contrary, responsible statesmen and party leaders have come out openly against Turkish membership.
I would have hoped that these people had learned from Schumann and Monnet what really matters for Europe and its future; sadly, this does not seem to be the case.
Of course, I do not fear some sort of military clash between Turkey and the EU.
After all, Turkey has been and remains a loyal member of NATO.
But an increasingly virulent and violent clash of cultures is emerging in Europe – particularly in France, Germany, Spain, and the Netherlands – between Islam and the humanitarian, Christian, and Jewish traditions.
For me, Europe’s integration of Muslim Turkey into its political union is the same sort of question of peace that Schumann and Monnet successfully confronted.
Today, Europe needs peace between cultures as much as it once needed peace between nations, and it is for this reason that we must welcome Turkey into our midst.
European Exceptionalism
PARIS – The creation of Europe’s economic and monetary union is unique in the history of sovereign states.
The eurozone constitutes a “society of states” of a completely new type, one that transcends the traditional Westphalian concept of sovereignty.
Like individuals in a society, eurozone countries are both independent and interdependent.
They can affect each other both positively and negatively.
Good governance requires that individual member states and the European Union’s institutions fulfill their responsibilities. Above all, economic and monetary union means just that: two unions, monetary and economic.
Europe’s monetary union has worked remarkably well.
Since the euro’s launch in 1999, price stability has been maintained for 17 countries and 332 million people, with average yearly inflation of just 2.03% – better than Germany’s record from 1955 to 1999.
Moreover, the eurozone has created 14.5 million new jobs since 1999, compared to 8.5-9 million in the United States.
This is not to say that Europe does not have a serious unemployment problem; but there is no obvious inferiority in Europe: all advanced economies must boost job creation.
Likewise, on a consolidated basis, the eurozone’s current account is balanced, its debt/GDP ratio is well below that of Japan, and its annual public-finance deficit is well below that of the US, Japan, and the United Kingdom.
The euro per se thus does not explain why the eurozone has become the sick man of the global economy.
To understand that, one has to consider the weakness of Europe’s economic union.
For starters, the Stability and Growth Pact, intended to ensure sound fiscal policies in the eurozone, was never correctly implemented.
On the contrary, in 2003 and 2004, France, Italy, and Germany, sought to weaken it.
The European Commission, the European Central Bank, and the small and medium-sized eurozone countries prevented the SGP from being dismantled, but its spirit was gravely compromised.
Moreover, eurozone governance did not include monitoring and surveillance of competitiveness indicators – trends in nominal prices and costs in member states, and countries’ external imbalances within the eurozone. (In 2005, long before the crisis, I called, on behalf of the ECB’s governing council, for appropriate surveillance of a number of national indicators, including unit labor costs.)
A third source of weakness is that no crisis-management tools were envisaged at the euro’s launch.
For much of the world at the time, “benign neglect” was the order of the day, particularly in the advanced economies.
Finally, the high correlation between the creditworthiness of a particular country’s commercial banks and that of its government creates an additional source of vulnerability, which is particularly damaging in the eurozone.
Fortunately, much progress has been made, including significant improvements to the SGP and the introduction of surveillance of competitiveness indicators and national imbalances.
New crisis-management tools have been put in place.
And there is a consensus that the EU’s stability and prosperity requires completion of the single market and obligatory structural reforms for all 27 members.
A proposed banking union would help to separate the commercial banks’ creditworthiness from that of their government.
But none of this is enough.
Instead of imposing fines on countries that transgress rules and ignore recommendations, as the SGP was supposed to do, the European Commission, the European Council, and – this is essential – the European Parliament should decide directly on measures to be immediately implemented in the country concerned. Fiscal and certain other economic policies should be subject to activation of a eurozone “federation by exception.”
The idea that sharing a single currency also means accepting limitations on fiscal sovereignty is not new.
A “federation by exception” merely draws the logical consequences from the ineffectiveness of the fines envisaged by the SGP, and is fully consistent with the concept of subsidiarity that has been applied since the SGP’s introduction: as long as national economic policy complies with the framework, there are no sanctions.
Perhaps the most important element of the “federation by exception” would be its strong democratic anchor.
Its activation would be subject to a fully democratic decision-making process, with clear political accountability. More precisely, decisions to implement measures proposed by the Commission and already approved by the Council would require a majority vote by the European Parliament – that is, those representatives elected from the EU’s eurozone members.
In such exceptional circumstances, the parliament of the country concerned should have the opportunity to explain to the European Parliament why it could not implement the recommendations proposed, while the European Parliament could explain why the eurozone’s stability and prosperity are at stake. But the final word would belong to the European Parliament.
In the past, I have suggested establishing a eurozone finance ministry, which would be responsible for activating economic and fiscal federation when and where necessary, and for managing new crisis-management tools like the European Stability Mechanism.
It would also be responsible for overseeing the banking union, and it would represent the eurozone in all international financial institutions and informal groupings.
But, most important, “federation by exception” would ultimately cease to be an exception.
The finance minister would be a member of the EU’s future executive branch, together with the other ministers responsible for other federal departments.
From this perspective, the Commission presages a future European democratic government, as German Finance Minister Wolfgang Schäuble, who has proposed instituting an elected president, has suggested.
The Council, meanwhile, appears to anticipate the European Parliament’s future upper house, with the lower house already elected by all EU citizens.
I am fully aware of the boldness of what I propose.
But Europeans must learn the lessons of the recent past.
We must clarify the nature of what must be done to secure governance that is both democratic and as effective as circumstances require.
Photograph of Jean-Claude Trichet: (c) European Central Bank/Andreas Böttcher
European Expansion or Putin Expansion?
WARSAW – One merit of the Berlin Wall was that it made obvious where Europe ended.
But now the question of Europe’s borders has become a staple of debate in the European Union.
Russian President Vladimir Putin’s recent threat to aim missiles at Ukraine highlights what is at stake in that debate’s outcome.
The Wall’s collapse in 1989 forced European Commission officials to dust off atlases to find places about which they knew little and cared less.
Leon Brittan, then a commissioner and supporter of enlargement, recalls that some officials and countries even hoped that the pre-1989 line could be held.
They felt that enlargement even to the Scandinavian and Alpine countries was going too far.
Only in 1993 did the EU officially recognize that membership for all the former Soviet bloc countries could be a long-term goal.
Today, the debate about Europe’s frontiers is not confined to officials or think tanks.
In mid-2005, voters in France and the Netherlands rejected the EU’s draft constitutional treaty, partly motivated by fear that enlargement was going too fast and too far. “We don’t want the Romanians deciding on how we should order our lives,” a Dutch professor complained.
Many former Soviet Republics with EU aspirations have become victims of this loss of nerve, as have the Western Balkan countries.
Lithuania, Latvia, and Estonia, which were annexed by the Soviet Union in 1940, slipped in under the wire in 2004.
But they were small and contiguous to the EU.
Ukraine is big, and Georgia is far away in the Caucasus.
Then there is Belarus, whose ruler, Alexander Lukashenko, clings to authoritarian rule.
Ukraine, a country of 47 million people, has seen itself as a prospective EU candidate since 2004, when the Orange Revolution forced the country’s rulers to respect election rules.
Since then, another two free and fair national elections have been held.
In contrast to Russia, Ukrainian politicians like President Viktor Yushchenko and Prime Minister Yuliya Tymoshenko have shown that they are keen to break with the communist past.
Moreover, Ukraine’s business leaders, aware of the fate of Russia’s oligarchs under Putin, see EU membership as a way of legitimizing their wealth and fending off Russian rivals.
Ukraine’s business barons want not only to develop their empires within the safety of a legitimate free-market framework, but also to invest in the EU.
But, while Ukraine’s political elites have mastered the art of getting democratically elected, effective governance eludes them.
Russian influence remains strong, especially in eastern Ukraine, and the state apparatus is weak.
Ukraine needs the discipline of the accession process – and thus the promise of EU membership – if reforms are to be implemented effectively.
Belarus is different.
Most of its 10 million people are still so scared of the free market that they are ready to ignore democratic opposition to Lukashenko.
That will hold true as long as cheap energy from Russia acts as a de facto economic subsidy.
But that time is ending, with energy prices rising and the Belarusian economy facing shocks that could provoke unrest and pose a threat to Lukashenko.
Lukashenko, sensing the danger, has been making overtures to the EU to counter what he sees as a growing rift with the Kremlin.
And Belarus’s government has been exploring the possibility of securing oil supplies through Ukraine should Russia cut off supplies.
But Lukashenko has given no sign that he is willing to democratize his regime, let alone release political prisoners.
If the EU decides to leave in abeyance the possibility that Ukraine and Belarus might one day join, both will enter a political limbo that could threaten security on the EU’s eastern flank.
The EU’s failure to encourage Ukraine’s European aspirations risks creating disillusion with the West.
That would strengthen Russia’s position in Ukraine, where the Kremlin constantly encourages a return to Slavic roots and warns against flirting with a West that doesn’t want it.
Should Lukashenko’s regime falter, the democratic opposition could be strengthened by the promise of EU support.
Otherwise, it is just as likely that Russia would step in and use its proxies to install Putin-style authoritarianism.
Since the USSR’s collapse, a new generation has come of age throughout the region.
Young people in the EU’s new members feel themselves to be citizens of a prosperous and secure continent.
In Poland last autumn, younger voters helped to replace a government whose incipient authoritarianism and xenophobic attitudes threatened to isolate their country.
Further east, their contemporaries have also grown up in a post-Soviet world. In Ukraine’s Orange Revolution, it was mostly young people who rejected a return to the past.
But as hopes of integration with the West wane, so a feeling of exclusion is growing.
The danger is that this will fuel support among the young in Belarus and Ukraine for the authoritarian attitudes now ascendant in Putin’s Russia.
At stake in the debate about EU enlargement into the post-Soviet east is whether Western values will take root in those countries or whether they will drift into a gray zone from which they will sooner or later challenge the values and democratic ways of “Europe.”
The Dutch professor who fears that Romanians may start to order his life might reflect that Romania itself is changing as a result of EU membership.
Refusing to countenance a fresh eastward enlargement means that, at some point, those countries that are outside the EU will start to threaten the values that he holds dear.
The Price of European Indifference
BAGHDAD – Europe’s migration debate has taken a disturbing turn.
It began with the creation of the catch-all concept (a legal freak) of a “migrant,” which obscures the difference, central to the law, between economic and political migration, between people escaping poverty and those driven from their homes by war.
Unlike economic migrants, those fleeing oppression, terror, and massacre have an inalienable right to asylum, which entails an unconditional obligation by the international community to provide shelter.
Even when the distinction is acknowledged, it is often as part of another sleight of hand, an attempt to convince credulous minds that the men, women, and children who paid thousands of dollars to travel on one of the rickety boats washing up on the islands of Lampedusa or Kos are economic migrants.
The reality, however, is that 80% of these people are refugees, attempting to escape despotism, terror, and religious extremism in countries like Syria, Eritrea, and Afghanistan.
That is why international law requires that the cases of asylum-seekers are examined not in bulk, but one by one.
And even when that is accepted, when the sheer number of people clamoring to get to Europe’s shores makes it all but impossible to deny the barbarity driving them to flee, a third smokescreen goes up.
Some, including Russian Foreign Minister Sergei Lavrov, claim that the conflicts generating these refugees rage only in Arab countries that are being bombed by the West.
Here again, the figures do not lie.
The top source of refugees is Syria, where the international community has refused to conduct the kinds of military operations required by the “responsibility to protect” – even though international law demands intervention when a mad despot, having killed 240,000 of his people, undertakes to empty his country.
The West also is not bombing Eritrea, another major source of refugees.
Yet another damaging myth, perpetuated by shocking images of refugees swarming through border fences or attempting to climb onto trains in Calais, is that “Fortress Europe” is under assault by waves of barbarians.
This is wrong on two levels.
First, Europe is far from being the migrants’ primary destination.
Nearly two million refugees from Syria alone have headed to Turkey, and one million have fled to Lebanon, whose population amounts to just 3.5 million.
Jordan, with a population of 6.5 million, has taken in nearly 700,000.
Meanwhile, Europe, in a display of united selfishness, has scuttled a plan to relocate a mere 40,000 asylum-seekers from their cities of refuge in Italy and Greece.
Second, the minority who do choose Germany, France, Scandinavia, the United Kingdom, or Hungary are not enemies who have come to destroy us or even to sponge off of European taxpayers.
They are applicants for freedom, lovers of our promised land, our social model, and our values.
They are people who cry out “Europe!
Europe!” the way millions of Europeans, arriving a century ago on Ellis Island, learned to sing “America the Beautiful.”
Then there is the ugly rumor that this imaginary assault has been clandestinely orchestrated by the strategists of a “great replacement,” with foreigners supplanting native Europeans, or, worse, by agents of an international jihad, in which today’s migrants are tomorrow’s terrorists on bullet trains.
It should go without saying that this is nonsense.
Taken together, these distortions and delusions have had serious consequences.
For starters, the Mediterranean Sea has been all but abandoned to human smugglers.
The Mare Nostrum is gradually becoming the kind of vast and watery mass grave described by a faraway poet.
Some 2,350 people have drowned already this year.
But, for most Europeans, these people are little more than statistics, just as the women and men who have survived the journey remain unidentified and indistinguishable, a threatening anonymous mass.
Our society of the spectacle, normally so quick to manufacture an instant celebrity to serve as the “face” of the crisis du jour (anything from swine flu to a truckers’ strike), has not taken an interest in the fate of a single one of the “migrants.”
These individuals – whose course to Europe resembles that of the Phoenician Princess Europa, who arrived from Tyre on Zeus’s back several millennia ago – are being wholly rejected; indeed, walls are being constructed to keep them out.
The result is another group of people being denied basic rights.
Such people, as Hannah Arendt once observed, will ultimately come to see in the commission of a crime their only path into the world of law and of those who enjoy the rights the law confers.
Europe, harassed by its xenophobes and consumed by self-doubt, has turned its back on its values.
Indeed, it has forgotten what it is.
The bell tolls not only for the migrants, but also for a Europe whose humanistic patrimony is crumbling before our very eyes.
European Politics With an Islamic Face?
LONDON – Donald Trump’s call to bar Muslims from the United States provoked the following exchange with two young friends of mine: “If the choice was between Muslim immigration and preserving liberal moral values,” I asked, “which would you choose?”
The immigrants themselves, they suggested, might have reactionary moral codes, but their children, growing up in today’s Britain, America, or Continental Europe, would be quite different.
But is that true?
My question focused not on Islamist terrorism – the ostensible ground of Trump’s outburst – but on the threat posed by large-scale Muslim immigration to the code of morals that my young friends, like most educated Europeans, now accept without question.
Terrorism aside, wouldn’t they worry if Islam came to have a growing influence on British law and politics?
This is not just a hypothetical possibility.
The Muslim population in Europe was 44.1 million in 2010, or 6% of the total.
There were 2.7 million Muslims in the United Kingdom in 2011 (4.8% of the population), up from 1.6 million in 2001.
Given recent immigration trends and, more important, Muslims’ above-average fertility rate (three children per family versus the British average of 1.8), the Muslim share of the UK population is bound to grow for decades to come.
Much of Europe is on the same demographic trajectory.
Of course, demographics is not an exact science: Much depends on assumptions about age profiles, standards of living, inequality, and so on, and sooner or later the Muslim fertility rate will converge with the national average.
But by then the Muslim population will have expanded rapidly – to 10-20% of the total in the UK.
The interesting question concerns the consequences of this.
Liberals have not worried about ethnic demographics, because they assume that individuals eventually identify with the host society’s norms.
The standard argument is that immigrants enrich the host, while leaving any incompatible characteristics at home.
In particular, their political behavior will fall into line with that of the general population.
If this is right, the sociopolitical impact of a change in the ethnic composition of a population is neutral, or even beneficial.
Immigrants from Algeria, Bangladesh, Pakistan, or Turkey will, in the course of a generation or two, become European in outlook and politics.
Their religion will become for them a private matter, as it now is for most Europeans, and they will become integrated in all important respects.
But that historical pattern, in my view, depended crucially on the small size of the immigrant population and its cultural closeness to the home population.
(Even so, the process of assimilation was far from frictionless.)
Historical experience offers little guide to the social and political consequences of the much greater numbers and more pronounced cultural differences at stake in the postwar migrations to Europe, especially from the Muslim world.
The incompatibilities are much greater.
The nub of the problem is that contemporary European civilization is secular, whereas Muslim civilization is religious.
In Europe, religion has lost its authority over law, legislation, education, morals, and business life.
The Islamic world has undergone no comparable process.
There is no systematic separation of faith and state; the family, not the individual, remains the basic social unit.
The essential elements of modern European political life – individual rights and duties, and the accountability of government to the governed – are lacking, particularly in the Arab Middle East.
Despite efforts at secularization, the gap between Muslim and Western outlooks has, if anything, grown in recent years, as religion has regained ascendancy in most Muslim countries.
Sharia religious law – extreme versions of which hold that conduct decriminalized in the West, such as adultery and homosexuality, is punishable by death – influences their legal codes.
Moreover, in many countries, large majorities of Muslims say Sharia should be the official law.
In Europe, Islam is the fastest-growing religion, and Sharia has penetrated European legal systems.
In the UK, a hundred Sharia courts adjudicate on divorce and other family cases, prompting Home Secretary Theresa May to promise a review of Sharia courts “to determine whether they are consistent with British values.”
Secularization is not inevitable.
As the political philosopher Larry Siedentop has argued, “secularization is Christianity’s gift to the world.”
According to Siedentop, features specific to Christianity led to liberal individualism, and they are absent from the other great world religions.
The great gift of secularism, in turn, has been tolerance.
Despite horrific twentieth-century backsliding in Europe, secularism has served to blunt the edge of bigotry, because secular reasoning, unlike divine revelation, is never conclusive.
Economists regard migration as a movement of individuals in search of a better life and call for more immigration to offset population aging, or to provide workers to do the “dirty jobs.”
But such evocations of “economic man” miss a key dimension of migration: People carry their culture with them across political frontiers.
We should not assume that economic success automatically leads to cultural convergence.
This brings us back to Trump.
Whatever happens in the US, Muslim immigration into Europe will continue and even expand in the next few years.
The Syrian catastrophe alone ensures this.
Everything that dialogue and education can do to close the gap between immigrant and host communities should be done.
But it may not be possible to prevent a return to religious politics – and the conflict which religious bigotry brings.
If we are to avoid sleepwalking into a highly troublesome future, we must recognize that failed integration, not terrorism, is the main danger we face.
European Social Democracy’s Powerless Power
At first glance, European social democracy appears to be in crisis.
Gordon Brown’s slump in the United Kingdom; the brutal shock of Spain’s economic downturn; the difficulties of renewing Socialist leadership in France; the collapse of the center-left coalition in Italy; and severe infighting within Germany’s SPD: all point to social democracy’s seeming inability to seize the opportunity – which the current financial crisis should present – to exert greater influence.
But the simultaneous occurrence and high visibility of these problems is less significant than they appear.
Mistakes or clumsiness in governance are not exclusive to the left: Belgium is paralyzed by the threat of break-up, Austria is still looking to cement an unlikely conservative coalition, Poland is struggling to find a steady balance for its numerous reactionary impulses, and the French president is hitting record lows in terms of popularity.
Two factors help to explain current European uncertainties.
First, there is the economic and financial crisis that we are only slowly overcoming.
Second, there is the way in which the media are covering it.
The combination of the two is, I believe, behind the feeling of powerlessness that is now affecting the whole of Europe, and that may appear to characterize social democracy in particular.
In reporting on the crisis, the media have placed too much emphasis on finance alone, and have paid insufficient attention to the marked slowing of economic growth.
But it is the economic slowdown that renders all developed countries less resistant to the financial shocks resulting from the sub-prime problem and from the mixed loan packages that are then used to dilute the risks attached to sub-prime debt.
Indeed, the combination of banking uncertainties, slower growth, and the heightened risk of underemployment and casual labor creates the political weakness now visible in the UK, Spain, Italy, and elsewhere.
Herein lies a real ideological problem.
The second half of the twentieth century witnessed the victory of the market economy over the administered economy.
The left, which had previously looked to Marx, lost its bearings.
Even social democracy, which, particularly in Scandinavia, was an excellent regulator of capitalism, found itself muted in the controversy between Keynesians and monetarists, and, throughout the developed world, the monetarists won.
Today’s accepted wisdom is that markets are optimally balanced whatever their state, meaning that no government intervention or regulation would be efficient or desirable.
The current crisis is severe punishment for that immense intellectual error.
Not only is the decline of previously accepted social and financial regulations reflected in the relative, but important, drop in wage income as a percentage of GDP – and therefore consumer spending – in all developed countries in the last thirty years, but also the deliberate abolition of controls allows the banking sector to do as it pleases.
Still, to judge from most media coverage, the parallel sub-prime and packaged loan crises, which are paralyzing global finance, are entirely attributable to banks’ “immorality,” and are in no way due to systemic failure.
Simply put, deregulation, privatization, reduced public services, and refocusing corporate management on earnings – all this suits too many people.
As a result, the political battle to reintroduce a sense of general interest – of rules and balance – will be long and hard.
What is also clear, even if it is not as well recognized, is that this battle will be primarily intellectual in nature: legitimacy must be given back to the notion of having certain ground rules and public regulatory bodies.
This should be the task for social democrats – but that is where the shoe pinches.
We social democrats can no longer fight such battles, because the problem is not only ideological, but also cultural.
The media are no longer a commentator, but a participant that has hijacked politics with imagery.
Either by accident or design, the media choose only those battles that offer the finest spectacles: clashes of personalities, violence and repression, struggles over national identity, and disputes about moral and sexual attitudes.
For the contemporary media, technical controversies about policy hold no interest, because the audience for them is limited.
For example, in preparation for its next congress, the French Socialist Party has succumbed to this reality.
We already know that there will be media fireworks, but there will be little talk of economic regulation.
The case of Spain – where a competent and respected government is bearing the full brunt of a financial crisis that began elsewhere – is identical.
Instead of focusing on the crisis alone, it is fidgeting in the face of the media.
Anything that threatens government stability sells newspapers and advertising space, while complicating any resolution of the underlying problems.
Quite simply, a system in which the media behave this way places not only the economy, but also democracy, at risk.
Europe’s Lapse of Reason
NEW YORK – At long last, the United States is showing signs of recovery from the crisis that erupted at the end of President George W. Bush’s administration, when the near-implosion of its financial system sent shock waves around the world.
But it is not a strong recovery; at best, the gap between where the economy would have been and where it is today is not widening.
If it is closing, it is doing so very slowly; the damage wrought by the crisis appears to be long term.
Then again, it could be worse.
Across the Atlantic, there are few signs of even a modest US-style recovery: The gap between where Europe is and where it would have been in the absence of the crisis continues to grow.
In most European Union countries, per capita GDP is less than it was before the crisis.
A lost half-decade is quickly turning into a whole one.
Behind the cold statistics, lives are being ruined, dreams are being dashed, and families are falling apart (or not being formed) as stagnation – depression in some places – runs on year after year.
The EU has highly talented, highly educated people.
Its member countries have strong legal frameworks and well-functioning societies.
Before the crisis, most even had well-functioning economies.
In some places, productivity per hour – or the rate of its growth – was among the highest in the world.
But Europe is not a victim.
Yes, America mismanaged its economy; but, no, the US did not somehow manage to impose the brunt of the global fallout on Europe.
The EU’s malaise is self-inflicted, owing to an unprecedented succession of bad economic decisions, beginning with the creation of the euro.
Though intended to unite Europe, in the end the euro has divided it; and, in the absence of the political will to create the institutions that would enable a single currency to work, the damage is not being undone.
The current mess stems partly from adherence to a long-discredited belief in well-functioning markets without imperfections of information and competition.
Hubris has also played a role.
How else to explain the fact that, year after year, European officials’ forecasts of their policies’ consequences have been consistently wrong?
These forecasts have been wrong not because EU countries failed to implement the prescribed policies, but because the models upon which those policies relied were so badly flawed.
In Greece, for example, measures intended to lower the debt burden have in fact left the country more burdened than it was in 2010: the debt-to-GDP ratio has increased, owing to the bruising impact of fiscal austerity on output.
At least the International Monetary Fund has owned up to these intellectual and policy failures.
Europe’s leaders remain convinced that structural reform must be their top priority.
But the problems they point to were apparent in the years before the crisis, and they were not stopping growth then.
What Europe needs more than structural reform within member countries is reform of the structure of the eurozone itself, and a reversal of austerity policies, which have failed time and again to reignite economic growth.
Those who thought that the euro could not survive have been repeatedly proven wrong.
But the critics have been right about one thing: unless the structure of the eurozone is reformed, and austerity reversed, Europe will not recover.
The drama in Europe is far from over.
One of the EU’s strengths is the vitality of its democracies.
But the euro took away from citizens – especially in the crisis countries – any say over their economic destiny.
Repeatedly, voters have thrown out incumbents, dissatisfied with the direction of the economy – only to have the new government continue on the same course dictated from Brussels, Frankfurt, and Berlin.
But for how long can this continue?
And how will voters react?
Throughout Europe, we have seen the alarming growth of extreme nationalist parties, running counter to the Enlightenment values that have made Europe so successful.
In some places, large separatist movements are rising.
Now Greece is posing yet another test for Europe.
The decline in the Greek economy since the start of the crisis is in many ways worse than that which confronted America during the Great Depression of the 1930s.
Youth unemployment is over 50%.
Prime Minister Antonis Samaras’s government has failed, and now, owing to the parliament’s inability to choose a new Greek president, an early general election will be held on January 25.
The left opposition Syriza party, which is committed to renegotiating the terms of Greece’s EU bailout, is ahead in opinion polls.
If Syriza wins but does not take power, a principal reason will be fear of how the EU will respond.
Fear is not the noblest of emotions, and it will not give rise to the kind of national consensus that Greece needs in order to move forward.
The issue is not Greece.
It is Europe.
If Europe does not change its ways – if it does not reform the eurozone and repeal austerity – a popular backlash will become inevitable.
Greece may stay the course this time.
But this economic madness cannot continue forever.
Democracy will not permit it.
Europe’s Barbarians Inside the Gate
BERLIN – I am on a two-week European tour at a time that could make one either very pessimistic or constructively optimistic about Europe’s prospects.
First the bad news: Paris is somber, if not depressed, after the appalling terrorist attacks earlier this month.
France’s economic growth remains anemic, the unemployed and many Muslims are disaffected, and Marine Le Pen’s far-right National Front is likely to do well in the upcoming regional elections.
In Brussels, which was semi-deserted and in lockdown, owing to the risk of terrorist attacks, the European Union institutions have yet to devise a unified strategy to manage the influx of migrants and refugees, much less address the instability and violence in the EU’s immediate neighborhood.
Outside the eurozone, in London, there is concern about negative financial and economic spillover effects from the monetary union.
And the migration crisis and recent terrorist attacks mean that a referendum on continued EU membership – likely to be held next year – could lead the United Kingdom to withdraw.
This would probably be followed by the breakup of the UK itself, as “Brexit” would lead the Scots to declare independence.
In Berlin, meanwhile, German Chancellor Angela Merkel’s leadership is coming under growing pressure.
Her decision to keep Greece in the eurozone, her courageous but unpopular choice to allow in a million refugees, the Volkswagen scandal, and flagging economic growth (owing to the slowdown of China and emerging markets) have exposed her to criticism even from her own party.
Frankfurt is a divided city, policy-wise: the Bundesbank opposes quantitative easing and negative policy rates, while the European Central Bank is ready to do more.
But Germany’s thrifty savers – households, banks, and insurance companies – are furious about ECB policies that tax them (and others in the eurozone core) to subsidize the eurozone periphery’s alleged reckless spenders and debtors.
In this environment, the full economic, banking, fiscal, and political union that a stable monetary union eventually requires is not viable: The eurozone core opposes more risk sharing, solidarity, and faster integration.
And populist parties of the right and left – anti-EU, anti-euro, anti-migrant, anti-trade, and anti-market – are becoming stronger throughout Europe.
But of all the problems Europe faces, it is the migration crisis that could become existential.
In the Middle East, North Africa, and the region stretching from the Sahel to the Horn of Africa, there are about 20 million displaced people; civil wars, widespread violence, and failed states are becoming the norm.
If Europe has trouble absorbing a million refugees, how will it eventually handle 20 million?
Unless Europe can defend its external borders, the Schengen agreement will collapse and internal borders will return, ending freedom of movement – a key principle of European integration – within most of the EU.
But the solution proposed by some – close the gates to refugees – would merely worsen the problem, by destabilizing countries like Turkey, Lebanon, and Jordan, which have already absorbed millions.
And paying off Turkey and others to keep the refugees would be both costly and unsustainable.
And the problems of the greater Middle East (including Afghanistan and Pakistan) and Africa cannot be resolved by military and diplomatic means alone.
The economic factors driving these (and other) conflicts will worsen: global climate change is accelerating desertification and depleting water resources, with disastrous effects on agriculture and other economic activity that then trigger violence across ethnic, religious, social, and other cleavages.
Nothing short of a massive, Marshall Plan-style outlay of financial resources, especially to rebuild the Middle East, will ensure long-term stability.
Will Europe be able and willing to pay its share of it?
If economic solutions aren’t found, eventually these regions’ conflicts will destabilize Europe, as millions more desperate, hopeless people eventually become radicalized and blame the West for their misery.
Even with an unlikely wall around Europe, many would find a way in – and some would terrorize Europe for decades to come.
That’s why some commentators, inflaming the tensions, speak of barbarians at the gates and compare Europe’s situation to the beginning of the end of the Roman Empire.
But Europe is not doomed to collapse.
The crises that it now confronts could lead to greater solidarity, more risk sharing, and further institutional integration.
Germany could absorb more refugees (though not at the rate of a million per year).
France and Germany could provide and pay for military intervention against the Islamic State.
All of Europe and the rest of the world – the US, the rich Gulf States – could provide massive amounts of money for refugee support and eventually funds to rebuild failed states and provide economic opportunity to hundreds of millions of Muslims and Africans.
This would be expensive fiscally for Europe and the world – and current fiscal targets would have to be bent appropriately in the eurozone and globally.
But the alternative is global chaos, if not, as Pope Francis has warned, the beginning of World War III.
And there is light at the end of the tunnel for the eurozone.
A cyclical recovery is underway, supported by monetary easing for years to come and increasingly flexible fiscal rules.
More risk sharing will start in the banking sector (with EU-wide deposit insurance up next), and eventually more ambitious proposals for a fiscal union will be adopted.
Structural reforms – however slowly – will continue and gradually increase potential and actual growth.
The pattern in Europe has been that crises lead – however slowly – to more integration and risk sharing.
Today, with risks to the survival of both the eurozone (starting with Greece) and the EU itself (starting with Brexit), it will take enlightened European leaders to sustain the trend toward deeper unification.
In a world of existing and rising great powers (the US, China, and India) and weaker revisionist powers (such as Russia and Iran), a divided Europe is a geopolitical dwarf.
Fortunately, enlightened leaders in Berlin – and there are more than a few of them, despite perceptions to the contrary – know that Germany’s future depends on a strong and more integrated Europe.
They, together with wiser European leaders elsewhere, understand that this will require the appropriate forms of solidarity, including a unified foreign policy that can address the problems in Europe’s neighborhood.
But solidarity begins at home.
And that means beating back the populists and nationalist barbarians within by supporting aggregate demand and pro-growth reforms that ensure a more resilient recovery of jobs and incomes.
Europe’s Last Straw?
PRINCETON – The European Union is facing a truly terrifying array of crises.
After prolonged euro and sovereign-debt crises polarized and radicalized the continent, creating a deep north-south rift, the arrival of hundreds of thousands of refugees has pitted east (plus the United Kingdom) against west.
Add to that numerous other divides and contradictions, and the EU’s collapse seems to many more likely than ever.
Consider the wide variations among EU countries’ energy policies, beginning with incompatible energy-pricing structures that run counter to the idea of a single internal market.
Countries have also adopted incompatible solutions, making it extremely difficult to integrate national energy networks.
For example, whereas France derives the majority of its electricity from nuclear energy, Germany rushed to close all of its nuclear power plants after the 2011 meltdown at Japan’s Fukushima plant.
Now Germany, along with Spain, is focusing on renewables like wind and solar – but remains highly dependent on fossil fuels when there is no wind or sun.
Meanwhile, the security challenge posed by Russia has grown steadily since 2008, and has become especially serious since last year’s illegal annexation of Crimea and invasion of parts of eastern Ukraine.
Continued fighting and unresolved territorial claims have injected a new sense of urgency into discussions about Europe’s energy policy and, specifically, its dependence on imported energy.
Russia is also involved in another serious challenge to European security and stability: the crisis in Syria that is producing the hundreds of thousands of refugees now flocking to Europe.
The refugee crisis is rooted partly in the failure of European foreign policy to prevent North Africa and the Middle East from descending into chaos.
But Russian attacks on groups fighting Syrian President Bashar al-Assad’s regime are exacerbating instability in large swaths of the country, driving even more desperate people to seek shelter in Europe.
As if these challenges were not enough, the EU is plagued by fundamental questions about its democratic legitimacy.
Extremist ideologies are gaining ground, and separatist movements have been reenergized.
During the first half of this year, Greeks seemed to be pitted against Europe.
A similar drama is now playing out in Portugal, where a left-wing coalition includes politicians deeply hostile toward Europe, while the president insists that the old center-right government can win support by emphasizing the country’s commitment to Europe.
Spain may soon face a similar dilemma.
Simply put, Europe is overloaded by crises – so overloaded, in fact, that many claim it is too weary to respond effectively to new challenges as they arise.
Years of trauma, according to this view, have sapped the psychic energy its leaders need to design effective solutions, and the political capital needed to win support for these solutions.
That is why the response to the refugee crisis has been so sorely lacking.
But the EU was built on the expectation of crisis.
Jean Monnet, one of the EU’s founding fathers, repeatedly returned to the notion that the urgency of emergency would propel integration.
As he put it, “Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.”
And yet the problems driving such crises, one could argue, must be small enough to be manageable.
Too large a crisis – or too many crises at once – threatens to overwhelm the EU’s capacity to respond, ultimately leading to breakdown.
In Hamlet, Claudius, contemplating Ophelia’s deteriorating mental state, observes that, “When sorrows come, they come not single spies/but in battalions.” Ultimately, of course, Ophelia goes mad and drowns herself.
But Claudius, a tyrannical murderer, is not exactly a font of political wisdom.
In fact, addressing multiple crises simultaneously can make them all easier to resolve, by increasing the scope for tradeoffs.
In the EU, where competing interests often impede effective responses to crises, this approach could be the key to progress.
Far from imposing on countries’ sovereignty, the EU would thus become an arena for the negotiation of mutually beneficial compromises.
For example, Germany’s reluctance to provide debt relief to southern European countries has helped to prolong their woes; now, however, it may have sufficient incentive to do more, as it would reap immediate benefits from an EU-wide solution to the refugee crisis.
Similarly, military integration could boost strategic effectiveness and reduce costs, especially for countries with larger defense budgets.
A form of this “issue-linking” approach is already used in international trade negotiations.
Though major breakthroughs are difficult to achieve, they result in overall gains for all participants.
Europe needs to recover the mentality of 1989, when the movement of large numbers of people across borders – initially, the Hungarian-Austrian frontier – prompted reform and openness, rather than a silo mentality.
During that wave of revolutions, protesters seeking freedom thought in terms of Europe and their own countries’ aspirations simultaneously.
The strengthening of the former was integral to the legitimacy of the latter.
In 2015, no less than in 1989, European nation-states need more insurance against external pressures and strategic shocks than the nation-state can provide.
Europe as a Task
For me as Prime Minister of the Czech Republic, Europe has a meaning that goes far beyond geography.
It is a synonym for a new beginning, new hope, the rule of the "better me" that exists in all of us. It's an expression of prosperity, progress, and justice.
Perhaps these words sound exaggerated to cynical ears.
But they clearly express the changes that Europe has witnessed over the past half-century, changes for the good that all Czechs now want to secure for themselves, having been denied the fruits of European peace and prosperity for so long.
Throughout its history, Europe saw countless bloody conflicts; peoples and states clashed, with the Czech lands often the bloody crossroads of these battles.
The disasters of two world wars, and the half-century of Cold War, pushed Europe to embrace cooperation and integration in order to avoid another suicidal battle.
Those far-sighted Europeans who set Europe on its road to peace through unification deserve our heartfelt appreciation.
Simply put, the idea of European integration transformed our continent.
The open economic space and the principle of solidarity helped ensure that economically less developed countries that joined the European Economic Community and, later, the European Union, progressed at an astonishing pace, enhancing the living standards of their peoples.
Nowadays, indeed, instead of deepening disparities in standards of living in Europe, which was the historic norm, differences are actually blurring as the quality of life everywhere in Europe rises.
Yet this prosperous and peaceful Europe is not idyllic; sometimes Europe is not at all an easy place for its citizens to live, as the tumultuous Balkan Wars and painful postcommunist transitions of the past decade demonstrated.
But even in hard times, every European knows deep down that European integration has delivered peace with clear prospects for broadening Europe's zone of peace and stability.
On the other hand, to secure that promise of peace and stability, Europeans must recognize that the Union is not and cannot be perceived as a work set in stone.
The half-century of peace that integration has delivered involved constant changes.
Today, we must also continue forming and correcting the EU to maximize its ability to reflect the needs of its inhabitants in an ever-changing world.
These changes, however, must always be undertaken in the light of core European virtues.
Foremost among these, perhaps, is the Union's open character.
The European Union is neither closed nor static; it is a living organism.
The European Union, as I grasp it, is primarily a process, leading from worse to better; a process with only one end - the continuous development of European prosperity and peace.
Indeed, it is vital to understand that Europe's integration process is not mechanical but organic.
It is not a machine that goes on of its own accord, but is instead something that must be lived and worked for by Europeans.
For no one should be mistaken: there are alternatives to European integration - all of them bad, unwanted, and dangerous.
Unless all Europeans remain devoted to integration and the creation of an open Europe, the Continent's dark past may once again become its future.
There are a number of qualities that must be understood if integration is to continue to build an ever more open Europe.
Voluntary self-restraint, a voluntary sharing of our own rights and privileges with a wider collective, is paramount here.
While states once enforced their rights at the expense of others, they now transfer their rights in favor of others.
The heart of this miracle is that it benefits all - Europe's citizens, its states, the whole continent, and the world.
For states to voluntarily limit themselves is unique in human history.
Europe's states have been able to achieve this discipline primarily because they are democracies.
Europe's peoples have sanctioned limiting their own governments powers so as to achieve peace across Europe.
There would be no Union and no integration, were it not built on the principles of democracy.
This is why, having regained their democratic regimes, Central and Eastern European countries unequivocally voted to join the continent's integration process.
This is why these countries associate the future of their democracies with ever-closer and more integrated cooperation with other European states.
Of course, democracy does not automatically mean integration.
But without democracy, no genuine, fair, and universally beneficial integration would be possible.
The people of the Czech Republic, like most Europeans, wish to jointly build an irreversible system of mutual relationships among states, regions, municipalities, and their inhabitants.
Their desire is to eliminate violence and, at the same time, generate stable conditions for economic and social progress for everyone in Europe.
The end of history may not be at hand in Europe, but the end of Europe's dark history is clearly in sight - so long as Europeans continue on the path of integration.
Europe by Degrees
ROME &#45;&#45; A year ago, few people would have bet that the European Union, still reeling from the trauma of the Constitutional Treaty’s rejection in 2005, would be poised to ratify the new Reform Treaty, adopted in Lisbon last December.
For some, the fact that the United Kingdom might ratify it even earlier than traditionally “pro-European” countries like Italy merely underscores the Treaty’s lack of new and bold initiatives to accelerate European unification.
But they are wrong.
To be sure, impatient dissatisfaction has been a driving force behind European integration since its initial years.
But, as Robert Schuman wrote in his Declaration in 1950, Europe could not be built all at once.
Likewise, Altiero Spinelli, another of the EU’s founding fathers, wrote late in life that without visionary Europeans there would be no Europe, but without pragmatic statesmen, the visionaries would have gotten nowhere.
The Reform Treaty’s shortcomings are obvious.
Abandoning the name “Constitution” was probably necessary to bring all member states on board.
But not equally necessary is the enduring uncertainty about the common political platform upon which Europe’s voice in foreign policy will have to rely.
Moreover, the Area of Freedom, Security, and Justice still requires unanimity for essential decisions in the fight against crime and terrorism and therefore, implying excruciating slowness.
Nor does the Treaty do enough to strengthen coordination of Europe’s economic and budgetary policies.
But it is equally obvious that, as the European Parliament’s Resolution of February 20 puts it, “the Treaty of Lisbon is a substantial improvement on the existing Treaties, which will bring more democratic accountability to the Union and enhance its decision making.”
The adoption of EU legislation will be subject to a level of parliamentary scrutiny (both at the European and national levels) that exists in no other supranational or international structure.
Moreover, agencies such as Europol and Eurojust will be similarly subject to greater parliamentary scrutiny, and the budgetary procedure will be simpler and more democratic.
The EU Charter of Fundamental Rights will become legally binding and the judicial protection of citizens will be enhanced by facilitating their access to the European Court of Justice and by extending the Court’s jurisdiction.
The Union’s capacity as a global actor will be enhanced by merging the High Representative with the Commissioner for External Relations and establishing a single diplomatic service.
The list could continue, but we already have reason enough to conclude that getting the best out of the new Treaty will be the best that the EU and its member states can do.
The first ingredients of a common collective identity have been injected into the EU’s enlarged membership, which is still marked by diverse positions, sensitivities, and expectations.
Asking everyone to do more than what everyone is unanimously ratifying would undermine Europe’s fragile harmony.
Nothing, however, prevents smaller groups of member states from aiming at bolder goals through separate agreements, if their mutual trust and similarities encourage them to do it.
After all, this was how the Schengen Treaty – which later became part of the acquis communitaire (the body of EU law) – came into being.
More recently, the Prun agreement has elevated police cooperation to police integration among the participating states.
There is reason to hope that some of the EU’s member states will embark on this venture in fighting crime and terrorism, defense matters, or in financial and budgetary harmonization.
In whatever area, a group of more deeply integrated member states would give the Union a noyau dur (a hard core) , which might be very helpful in strengthening the EU as a whole.
But let them do it separately, and in the meantime let the Union be energized by the improvements that it has already adopted.
Fifty years later, this is the lesson for us of the Schuman’s declaration.
Europe’s Two Futures
PARIS – Once again, Europe seems to have reached a fork in the road.
In one direction lies the future as described by pessimists, who argue that rising populist movements and the plunge of the euro are evidence of the continent’s coming slide into geopolitical and economic oblivion.
In the other direction lies a steep upward path to Europe’s integration and reemergence as a global power – the course, optimists say, that the continent will take as it wakes up and recognizes that it must have the capacity to weather the harshest storms.
There is no telling which future will be realized.
Is Europe “a grandmother, no longer fertile and vibrant,” as Pope Francis put it when he addressed the European Parliament last November? Or is it a phoenix, about to rise (yet again) from its ashes?
The outcome depends, of course, on how Europeans respond to their current travails.
And as they contemplate their choices, they would be wise to consider how the continent is perceived from the outside.
For starters, it is important to acknowledge that the outlook looks bleak.
Seventy years after the liberation of Auschwitz, Jews are still being attacked and murdered in European cities. More than 50 years after the end of the Algerian War, European Muslims face more discrimination than ever.
With Russian-backed separatists – and maybe even Russian troops – battling government forces in Ukraine, the specter of war is once again stalking the continent.
And the election of a leftist government in Greece has raised the question of whether introducing the euro was a good idea.
On the other hand, Europe has faced worse – much worse – and emerged stronger than ever.
After the first half of the twentieth century – the bloodiest period of human history – the continent’s leaders returned from the battlefield to lay the foundations of lasting European peace.
Europe may never regain its standing as the center of the world, but it can continue to be both an important actor and an attractive model for others.
Indeed, with the benefit of distance, a broader picture emerges.
Seen from China, Europe is first and foremost an attractive investment opportunity; and the euro’s spectacular fall now makes it a particularly tempting one. The continent may not be the island of stability it once was – Russian President Vladimir Putin and a few thousand European jihadists have seen to that.
But the risks it faces are mild when compared with the chronic instability and acute threats facing much of the rest of the world.
Europe’s bloodstained history also provides a useful warning for China and the rest of Asia, and can serve as an example for overcoming the region’s long-standing animosities.
Though tensions between China and its neighbors over territorial claims in the East and South China Seas have receded somewhat in recent months, the prospect of worsening Sino-Japanese relations, in particular, remains worrisome.
Reconciliation along the Franco-German model may not yet be in the cards, but the two Asian powers would be well advised to learn from Europe’s experience.
The view from the United States is completely different.
From the American perspective, Europe is less a model than a historical relic.
The continent’s national characteristics have returned to the fore: Germany with its economic power, France with its terrorists, Greece with its leftists, and so forth.
From the perspective of the poorest parts of the world, Europe represents the weakest link in the coalition fighting radical Islam, a battle that is taking its highest toll – despite the impression created by Western media coverage – primarily in the Middle East, South Asia, and Africa.
For many of those fleeing the conflicts in these regions, Europe is also the Promised Land – the object of the hopes and dreams of those risking their lives to reach the prosperous side of the Mediterranean Sea.
In the end, how Europeans view themselves will determine their collective fate.
If they do not seize this decisive moment to define themselves – by beginning to institute the difficult reforms their countries so desperately need, for example – they risk ending up on a path they never intended to take.
Europe Crosses the Rubicon
The so-called “European Neighborhood Policy” has, so far, been a curious thing.
There is much talk about it in the European Union, but little practical effect.
It was meant as an alternative to the ever-increasing number of accession rounds, say, involving the countries in the southern Caucasus.
But the war in Lebanon and its consequences have caused a sudden and fundamental change in the leisurely pursuit of this policy.
The Lebanon War has served as a harsh reminder to the European Union that it has “strategic interests” – security interests first and foremost – and that, should it choose to ignore them, the price will be high.
Moreover, the division of labor between the US and Europe isn’t functioning in the time-tested manner of old: the ongoing war in Iraq is gnawing at America’s military capabilities and resulted in a crisis of moral and political legitimacy of the US across the Arabic/Islamic world.
With the decision of its member states to send several thousand soldiers to Lebanon to implement the UN cease-fire resolution 1701, the European Union has taken the most significant decision yet within its Neighborhood Policy.
Can the EU in fact be able to emerge as a stabilizing political force in the most dangerous area of conflict within Europe’s immediate geopolitical neighborhood?
After the Balkan Wars of the 1990’s, the Near and Middle East is at once the most dangerous and also – given security considerations – the most important neighboring region for the EU today.
Why?
Because the main threats to European security at the beginning of the 21st century stem from that region.
The threats concentrated in the Middle East are diverse: regional conflicts, totalitarian religious ideologies, terrorism, nuclear armament programs, blockades to modernization, unstable regimes and hegemonic ambitions.
If one asks what interests the EU and its member states have in this crisis-riddled region, the answer is, that certainly European energy and economic interests are at stake, as well as the vital interests of Europe’s partners and allies (Israel in particular).
But first and foremost on the list are Europe’s.
How the Middle East develops will determine the extent of the risks for, or even probable challenges to, Europe’s security.
Success in containing, or indeed resolving, the conflict there will have overwhelmingly positive consequences for Europe’s security.
The Middle East today is defined by three central conflicts: the Israeli-Arab conflict, Iraq, and Iran.
The fusion of Iran’s nuclear program (and Iran’s hegemonic ambitions) with the situation in Iraq and with Hezbollah in Lebanon will lead to a “New Middle East” which, in all likelihood, will provoke a major confrontation.
This will involve far more than just the usual regional actors and conflicts.
The war in Lebanon has made it abundantly clear how far this dangerous process has already progressed.
The mission in Lebanon is a high-risk one for the UN force, and for Europe in particular.
The war did not bring forth a real decision.
Neither Hezbollah nor Syria, let alone Iran, have any interest in the UN mission’s success.
The Security Council resolution presupposes – in addition to separating the combatants – the enforcement of the internal and external sovereignty of Lebanon’s elected government of Lebanon, without saying how this is to be accomplished with a politically strengthened Hezbollah, militarily superior to the Lebanese forces.
Any attempt at disarming Hezbollah by the UN force would mean a war with Hezbollah (and with Syria and Iran in the background) &#45;&#45; a task the UN force cannot accomplish.
But were it to resign itself to mere observer status in Lebanon, the UN and Europe would lose all credibility.
Moreover, it is likely that, within a few months, UN soldiers would once again find themselves between the firing lines of the conflicting parties.
The mission therefore will have to walk the thin and risky line in pursuit of its robust mandate to stabilize the country. Failure will be a constant danger and the military risk will be high.
Yet, in light of the situation there is no better alternative.
In view of the risk to its troops, Europe will be compelled to influence and even proactively bring about strategic changes to the political environment in the entire Middle East.
With its decision in favor of the mission in Lebanon, the EU crossed a military Rubicon.
It must now back up its growing weight in the Middle East with political initiative.
This must include three key elements: a negotiated solution for Syria; a resumption of negotiations between Israel and the Palestinians; and a common strategic understanding with the US of the political strategy of the West for the region (which addresses the region’s most dangerous conflict, Iran).
This common understanding will be the pivotal challenge for the future of the transatlantic relationship.
For Europe and its troops, the stakes in Lebanon are very high.
But this is about vital European interests. War and chaos in the Middle East or just a moral or political vacuum will directly affect and upset the security of the EU and all its member states.
Europe therefore had to act, though that decision was obviously difficult.
The key question in the near future will be whether Europe actually has the military and political capabilities, the political staying power, and the common will to act in accordance with its core interests in the Middle East.
We will see.
In any case, one thing can already be said: Welcome to the real world.
Why Deflation is Good News for Europe
BRUSSELS – In today's global economy, there is no price as important as that of crude oil.
More than 80 million barrels are produced (and consumed) daily, and a large part of that output is traded internationally.
Thus, the sharp fall in the crude-oil price – from about $110 last year to around $60 today – is yielding hundreds of billions of dollars in savings for oil importers.
For the European Union and the United States, the gain from that decline is worth about 2-3% of GDP.
For Europe, the benefits of cheap oil might grow over time, because long-term gas-supply contracts are to a significant degree indexed to the oil price.
This represents another advantage for Europe, where prices for natural gas were, until recently, several times higher than in the US, which had been benefiting from lower-cost shale energy.
But many observers have argued that cheap oil also has a downside, because it exacerbates deflationary tendencies in the advanced countries, which already seem to be mired in a low-growth trap.
The sharp fall in oil prices, according to this view, will make it even harder for these countries' central banks to achieve the 2% annual inflation rate that most have targeted in fulfilling their price-stability mandate.
The eurozone, in particular, seems to be in danger, as prices are now falling for the first time since 2009.
This deflation is bad, it is argued, because it makes it harder for debtors, especially in the troubled economies of the eurozone's periphery (Greece, Ireland, Italy, Portugal, and Spain), to pay what they owe.
But this fear is unfounded, because it is based on a misunderstanding.
What matters for debt-service capacity is the debtors' income, not the general price level.
As oil prices fall, households' real (inflation-adjusted) income should rise, because they do not have to spend as much on fuel and heating.
Lower oil prices make life easier, not harder, for highly indebted households in the US or the eurozone periphery.
Falling consumer prices should thus be viewed as a good sign.
Most manufacturing enterprises will also benefit from lower energy costs, improving their ability to service their debts.
This, too, is particularly relevant in the eurozone periphery, where the non-financial sector accumulated too much debt during the credit boom that preceded the 2008 global financial crisis.
Moreover, though most of the savings implied by lower energy costs might initially show up in higher profits, over time, competition will force companies to pass on some of these windfall gains in the form of lower prices or higher wages.
This is another important consequence of cheap oil: lower prices make it more difficult to judge the point at which wage pressure becomes inflationary.
Because wages can increase to a greater extent without fueling inflation, the US Federal Reserve Board might be inclined to delay hiking interest rates, which it is now widely expected to do this summer.
Public finances should also benefit from the deflation engendered by lower oil prices.
Government revenues depend on the value of domestic output, not only consumption.
Though lower oil prices depress consumer prices, they should boost production and overall GDP.
Absent large price changes for raw materials, the consumer price index evolves along with the GDP deflator (the price deflator for the entire economy).
But that will not be true this year, because consumer prices are falling, whereas the GDP deflator (and nominal GDP) is still increasing.
This should lead to solid government revenues, which is good news for highly indebted governments throughout the industrialized world, but particularly for the eurozone periphery.
The fall in (consumer) prices that the eurozone currently is experiencing should thus be seen as a positive development for all energy importers.
The eurozone periphery, in particular, can look forward to an ideal combination of low interest rates, a favorable euro exchange rate, and a boost in real incomes as a result of cheap oil.
In a deflationary environment, lower oil prices appear to make it more difficult for the European Central Bank to achieve its target of an inflation rate close to 2%.
In reality, lower oil prices represent a boon for Europe – especially for its most beleaguered nations.
Overcoming Europe’s Twin Growth Challenges
MUNICH – As economic recovery finally begins to take hold in Europe, the imperative for policymakers is to ensure that growth can be sustained far into the future.
Fiscal and monetary stimulus may have been appropriate at the peak of the crisis, but they will do little to address the biggest threat to the continent’s long-term prospects: a toxic twosome of weak demographics and low investment.
Even assuming a steady inflow of immigrants, the combined workforces of the 28 European Union countries are projected to shrink by 12-16 million people over the next 15 years, according to the OECD and the European Commission.
A sharper rise in the number of newcomers could help ameliorate the situation; but higher immigration is not, on its own, an adequate solution to the EU economy’s long-term problems.
Europe’s only hope for sustained growth is to boost productivity, so that it can derive more value from its shrinking workforce.
The trouble is that it has been many years since the continent last saw significant productivity gains.
In Western Europe, growth in labor productivity (output per hour worked) has been decelerating for decades.
In the 1960s, labor productivity grew at a robust 4% annual rate, before slowing to 2% in the 1980s and dropping below 1% around the turn of the century.
Today it crawls forward at about 0.5% a year.
Meanwhile, total factor productivity, which takes into account technological innovation, has been stagnant.
The EU desperately needs economic growth to enable its member states to sustain their social security and welfare systems as their societies get older – a challenge that other regions and countries are facing as well.
But few confront Europe’s twin obstacles of anemic productivity growth and demographic decline.
China, for example, is facing a similar demographic challenge, as its labor force shrinks and the number of retirees rises rapidly.
But China’s labor productivity has been growing by 9% a year, on average, over the last decade.
The decline in productivity growth in the EU is surprising, given the rapid onset of digitalization – often described as the industrial revolution of the twenty-first century.
In fact, part of the perceived slowdown can be attributed to measurement issues: In Europe, as well as the United States, the technological changes being wrought by smartphones and the Internet simply are not showing up in the productivity data.
Statisticians struggle, for example, to account for how consumers are benefiting from the increased quality and speed of delivery that often results from digitalization.
Furthermore, in the digital age, many services are being provided free of charge, which means they are not being counted as consumption at all.
Another factor that may be contributing to flat productivity is that many corporations run traditional physical business models parallel to new digital ones.
Adding high-tech systems to traditional processes can temporarily increase costs and thus depress productivity, especially if the new and old businesses are not well connected.
These issues should diminish with time; as that happens, part of the productivity lull should disappear.
But not all of the slowdown in productivity growth can be attributed to the cumbersome transition to a new technological era.
Even as the economy has started to recover, investment in Europe remains well below its level in 2008.
Long-term economic health will depend, in large part, on whether investment recovers and by how much.
And there are reasons for pessimism.
Weak investment activity partly reflects a gloomy view of the European market.
If workforces are stagnating or shrinking and growth is subdued, why spend on boosting output?
Simply put, Europe’s problems have become intertwined.
The continent needs productivity-enhancing investment in order to compensate for its shrinking workforce; but its demographic weakness is causing companies to hold back.
Fortunately, there is much that can be done.
A renewed push to integrate European markets for services, digital goods, capital markets, and energy would remove barriers to business and bring new incentives to invest.
The Transatlantic Trade and Investment Partnership that the EU is currently negotiating with the US would also create a larger market, with less burdensome regulation and more competition.
On a national level, reform drives like those carried out in Ireland, Portugal, and Spain could improve business conditions and competitiveness across the continent.
Finally, all European countries could redouble their efforts to educate and train their residents for the digital era.
Policymakers must not rest on the optimistic assumption that Europe’s economy will recover on its own.
Rather, they should pursue policies that support investment, encourage innovation, and promote the development of skills.
As workers and companies struggle to compete in a rapidly changing – and increasingly winner-take-all – global economy, the need for policies that will ensure long-term growth could not be more urgent.
Europe’s Three Fault Lines
PARIS – Ten or 20 years ago, the existential question facing the European Union was whether it still had a purpose in a globalized world.
The question today is whether the EU can respond effectively to major external shocks.
Europe’s neighborhood is poor and dangerous.
South of Gibraltar, income per capita drops more than fivefold.
War has recently raged in Ukraine.
The Israel-Palestine conflict has continued for more than 50 years.
And the war in Iraq barely ended before the mayhem in Syria commenced.
For several decades after World War II, Europe could afford to overlook what went on beyond its borders: security was the business of the United States.
But things have changed.
The US retreat from Iraq signaled the limits of its engagement, and the problems in the EU’s immediate neighborhood – not just in Syria, but also to the east and the south – are now knocking on its door.
So it would seem that the EU’s top priority should be to protect itself and help stabilize its environment.
Yet three internal fault lines are making it difficult for the EU to achieve these ends.
Britain is wondering whether it should exit.
Western and Eastern Europe are at odds over the refugee crisis.
And France and Germany differ on priorities.
Britain’s torment over EU membership is rooted in history: In 1946, Winston Churchill famously advocated a United States of Europe – but without Britain.
Yet there is little substance to British Europhobia: nothing fundamental separates the United Kingdom from the rest of the continent.
Tellingly, the British Foreign Office’s rigorous review of how the EU operates did not deliver an agenda for the repatriation of competences.
The only significant demand expressed by Prime Minister David Cameron in his recent letter to the EU concerns internal migration.
Britain, the erstwhile champion of labor mobility, has now become wary of foreign workers and wants to limit their access to social benefits.
This is a potential sticking point in the UK-EU relationship; but it is hardly a reason to end a four-decade-old partnership.
Polls suggest that Britain’s referendum on continued EU membership, which Cameron has promised to hold by the end of 2017, will be a close call.
But it would be both a blunder and a tragedy were Britons to vote for “Brexit” as a form of protection against tumult on the continent.
The second fault line appeared alongside the refugee crisis.
By 2014, the EU’s “big bang” enlargement in 2004 could be hailed as a success story, having contributed significantly to swift and peaceful economic and political transition in Central and Eastern Europe.
True European unification seemed to be in the making.
Yet the refugee crisis has revealed that the EU’s western and eastern members do not share the same concept of a nation.
Most Western European countries have converged, at least de facto, on a non-ethnic, non-religious definition.
Most are home to significant ethnic and religious minorities.
This has not been an easy transformation, and there are differences in countries’ perceived ability to absorb more immigrants; but the change is irreversible.
Most Central and Eastern European countries, however, object.
Hungarian Prime Minister Viktor Orbán has developed a fierce anti-Muslim rhetoric.
His Slovak counterpart, Robert Fico, announced in July that his country would accept only Christian refugees.
Earlier this month, Czech President Miloš Zeman addressed a group called the Bloc Against Islam, telling its supporters that they were “not extremists.”
And Poland’s new European affairs minister, Konrad Szymanski, did not wait 24 hours after the Paris attacks before using them to denounce Europe’s flaws.
This is not a disagreement over policies. It is a divide over principles – the very principles of the EU’s treaties and Charter of Fundamental Rights.
In Germany, especially, any person persecuted on political grounds has a constitutional right to asylum.
Contrary to common misperceptions, German Chancellor Angela Merkel acted on the basis of moral values, not demographic self-interest, in letting in about one million refugees this year.
Germany rarely expects solidarity from its European partners.
At the height of the migrant crisis, it hoped, for once, to receive some.
The public, categorical rejection of Germany’s silent plea by countries that continue to benefit massively from European solidarity will not be easily forgotten.
The third fault line lies between France and Germany.
Since the November 13 attacks in Paris, security has become the overriding French objective.
Meanwhile, Germany is focused on organizing the reception and settlement of a massive influx of refugees.
This divide is more circumstantial than essential.
Terrorism may spread to Germany, and refugees may move across borders.
Yet, at least for the time being, public concerns and government priorities differ.
Both Merkel and French President François Hollande have expressed a commitment to mutual support.
France will welcome some refugees, and Germany will dispatch some troops to Mali.
But symbolic gestures are not enough.
The risk remains that each country feels that it has been left alone at a critical juncture.
More ambitious initiatives have been proposed.
Sigmar Gabriel and Emmanuel Macron, the German and French economy ministers, recently called for a common fund to address Europe’s refugee and security challenges and to finance joint policies.
The fund would serve as a concrete risk-sharing mechanism and would be a modest, yet meaningful step toward overcoming the deadlock over EU initiatives, if not toward mutualizing defense and security, as some scholars recommend.
Whatever form it takes, greater boldness is clearly needed.
Otherwise, the failure to address common risks and challenges may well result in citizens placing exclusive faith in the nation-state, rejecting solidarity, and calling for the permanent restoration of national borders.
It is no accident that the EU’s three fault lines have appeared at the very moment when it is confronted with unprecedented challenges.
External pressures reveal internal weaknesses.
Europe can either overcome them or succumb to them.
The EU’s twin refugee and security crises constitute its moment of truth.
Europe’s Politics of Dystopia
TOKYO – The recent victory of the conservative Law and Justice (PiS) party in Poland confirms a recent trend in Europe: the rise of illiberal state capitalism, led by populist right-wing authoritarians.
Call it Putinomics in Russia, Órbanomics in Hungary, Erdoğanomics in Turkey, or a decade of Berlusconomics from which Italy is still recovering.
Soon we will no doubt be seeing Kaczyńskinomics in Poland.
All are variations on the same discordant theme: a nationalist leader comes to power when economic malaise gives way to chronic and secular stagnation.
This elected authoritarian then starts to reduce political freedoms through tight-fisted control of the media, especially television.
Then, he (so far, it has always been a man, though France’s Marine Le Pen would fit the pattern should she ever come to power) pursues an agenda opposing the European Union (when the country is a member) or other institutions of supra-national governance.
He will also oppose free trade, globalization, immigration, and foreign direct investment, while favoring domestic workers and firms, particularly state-owned enterprises and private business and financial groups with ties to those in power.
In some cases, outright nativist, racist parties support such government or provide an even deeper authoritarian and anti-democratic streak.
To be sure, such forces are not yet in power in most of Europe.
But they are becoming more popular nearly everywhere: Le Pen’s National Front in France, Matteo Salvini’s Lega Nord in Italy, and Nigel Farage’s United Kingdom Independence Party (UKIP) all view Russia’s illiberal state capitalism as a model and its president, Vladimir Putin, as a leader deserving of admiration and emulation.
In Germany, the Netherlands, Finland, Denmark, Austria, and Sweden, too, the popularity of populist, anti-EU, anti-migrant right-wing parties is on the rise.
Most of these parties tend to be socially conservative.
But their economic policies – anti-market and fearful that liberal capitalism and globalization will erode national identity and sovereignty – have many elements in common with populist parties of the left, such as Syriza in Greece (before its capitulation to its creditors), Podemos in Spain, and Italy’s Five Star Movement.
Indeed, just as many supporters of radical leftist parties in the 1930s made a U-turn and ended up supporting authoritarian parties of the right, the economic ideologies of today’s populist parties seem to converge in many ways.
In the 1930s, economic stagnation and depression led to the rise of Hitler in Germany, Mussolini in Italy, and Franco in Spain (among other authoritarians).
Today’s brand of illiberal leaders may not yet be as politically virulent as their 1930s predecessors. But their economic corporatism and autocratic style are similar.
The reemergence of nationalist, nativist populism is not surprising: economic stagnation, high unemployment, rising inequality and poverty, lack of opportunity, and fears about migrants and minorities “stealing” jobs and incomes have given such forces a big boost.
The backlash against globalization – and the freer movement of goods, services, capital, labor, and technology that comes with it – that has now emerged in many countries is also a boon to illiberal demagogues.
If economic malaise becomes chronic, and employment and wages do not rise soon, populist parties may come closer to power in more European countries.
Worse, the eurozone may again be at risk, with a Greek exit eventually causing a domino effect that eventually leads to the eurozone’s breakup.
Or a British exit from the EU may trigger European dis-integration, with the additional risks posed by the fact that some countries (the UK, Spain, and Belgium) are at risk of breaking up themselves.
In the 1930’s, the Great Depression brought to power authoritarian regimes in Europe and even Asia, eventually leading to World War II.
Today’s resurgence of illiberal state capitalist regimes and leaders is nowhere close to inciting a war, because center-right and center-left governments still committed to liberal democracy, enlightened economic policies, and solid welfare systems still rule most of Europe.
But the toxic brew of populism now gaining strength may yet open a Pandora’s box, unleashing unpredictable consequences.
This rising tide of illiberalism makes avoiding a break-up of the eurozone or the EU ever more vital.
But, to ensure this, macro and structural economic policies that boost aggregate demand, job creation and growth, reduce income and wealth inequality, provide economic opportunity to the young, and integrate rather than reject refugees and economic migrants will be needed.
Only bold policies can halt Europe’s slide toward secular stagnation and nationalist populism.
Timidity of the type witnessed in the past five years will only increase the risks.
Failure to act decisively now will lead to the eventual failure of the peaceful, integrated, globalized, supra-national state that is the EU, and the rise of dystopian nationalist regimes.
The contours of such places have been reflected in literary work such as George Orwell’s 1984, Aldous Huxley’s Brave New World, and Michel Houellebecq’s latest novel Submission.
Muzzled in the Name of Freedom
NEW YORK – Acts of terror can inflict terrible damage.
But they cannot destroy an open society.
Only those who govern our democracies can do that, by shrinking our freedoms in freedom's name.
Shinzo Abe, Japan's right-wing nationalist prime minister, does not need much encouragement to tighten up secrecy laws, give more powers to the police, or make it easier to use military force.
The grisly executions of two Japanese citizens caught by Islamic State terrorists in Syria have provided precisely the encouragement that Abe needs to pursue such measures.
But Japan has never been seen as a bastion of free speech, nor did it ever make great claims to be.
France does.
That is what the demonstration of solidarity in the face of last month's terrorist attacks in Paris was surely all about.
France, of all countries, would avoid the trap that snared the other great Western republic claiming to be a beacon of freedom in the world.
Fear of terrorist violence after the 9/11 attacks did more damage to freedom in the United States than the suicidal murder of thousands of its citizens.
Because of that fear, Americans allow themselves to be spied on indiscriminately by their own government, and permit terrorism suspects to be tortured and locked up indefinitely without trial.
France, like most other countries in the European Union, already has laws that ban hate speech.
You cannot legally insult people on the grounds of their race, beliefs, or sexual orientation.
And in France, as well as in some other countries, one can be prosecuted for denying the Holocaust and other historical genocides.
President François Hollande, who is not a right-wing nationalist like Abe, now wants to strengthen those bans.
He has proposed new laws that would make online entities like Google and Facebook responsible for any "hate speech" posted online by their users.
Former EU heads of state have also backed a proposal from European Jewish leaders to criminalize in every EU country not just anti-Semitism and genocide-denial, but also "xenophobia" in general.
Few people would wish to defend expressions of xenophobia or anti-Semitism.
But is it really wise to use the law to ban opinions?
First of all, such laws, if enacted, are unlikely to reduce the risk of terrorist acts.
Banning the expression of opinions will not make them go away.
They will continue to be expressed, more secretively perhaps, and as a result become even more toxic.
And the social and political basis for terrorism, in the Middle East and elsewhere, will not vanish just because of a public ban on xenophobic speech.
But there is a larger danger in using the law to police what people think.
It can stifle public debate.
That danger underlies the view, still operative in the US, that opinions, however obnoxious, should be freely expressible, so that they can be opposed by counter-arguments.
It would be naive, of course, to believe that religious or political extremists are interested in an exchange of views.
But inciting violence is banned in the US as well.
The First Amendment of the Constitution does not protect freedom of expression when it can be shown to create a risk of imminent violence.
Xenophobic views, or the denial of genocide, are repellent, but do not necessarily result in such a threat.
In most societies, including the US, the public expression of such opinions is limited by a rough consensus on what is socially respectable.
This consensus changes with time.
It is up to editors, writers, politicians, and others who speak in public to shape it.
Cartoonists, artists, bloggers, activists, and comedians sometimes like to challenge the consensus of respectability.
Some of these challenges might cause outrage (that, after all, often is the point).
But as long as they do not promote or threaten violence, it would do more harm than good to ban them by law.
Allowing the government to decide which opinions are permissible is dangerous not just because it smothers debate, but also because governments can be arbitrary or self-serving.
It would be useful in the current climate of fear to recall a famous hate-speech case in the US.
In 1977, the American Nazi Party planned to stage a demonstration in Skokie, a suburb of Chicago with a large Jewish population.
A local court, prompted by shocked and fearful public opinion, decided that the display of swastikas, distribution of leaflets, and the wearing of Nazi uniforms should be banned.
Such a demonstration, it was quite plausibly argued, would be an insult to a community that included Holocaust survivors.
But the ban was contested by the American Civil Liberties Union as an infringement of the First Amendment.
The argument of the ACLU lawyers, most of whom were liberal Jews, was not based on any sympathy for Nazi symbols or views.
Their argument was that if you allow the government to ban opinions you hate or despise, you weaken your right to contest a similar ban on views with which you might agree.
Freedom of speech, in other words, should mean freedom of hateful speech, too, as long as it does not threaten or promote violence.
Most European governments already take a stricter view of public insults than the US Constitution does.
It would be a great mistake to add even more restrictions.
Terrorist attacks are doing enough damage, in lives and property.
There is no reason for governments to make things worse by tampering with their citizens' liberties.
Europe, Heal Thyself
BRUSSELS – European policymakers like to extol the strength of the eurozone: relative to the United States, it has a much lower fiscal deficit (4% of GDP, compared to almost 10% for the US).
Moreover, unlike the US, the eurozone does not have an external deficit, which means that the monetary union holds enough savings to finance all of its members’ budget deficits and resolve their debt problems.
But, despite this relative strength, the European Union’s leaders seem incapable of resolving the eurozone’s sovereign-debt crisis.
Despite meeting after meeting, heads of state and finance ministers have failed to reassure markets.
Now, Europe’s policymakers are appealing for help from the International Monetary Fund and Asian investors.
This appeal for outside help is misguided, given the reasons why the euro crisis has gone from bad to worse, despite the EU’s abundant resources.
The key problem is the distribution of savings within the eurozone.
The countries north of the Alps have excess savings, but Northern European savers do not want to finance indebted Southern European countries like Italy, Spain, and Greece.
That is why the risk premium on Italian and other Southern European debt had risen at one time to 5%, and why, at the same time, the German government can issue short-term debt at negative real interest rates.
Northern Europeans’ reluctance to invest in their southern neighbors is the problem behind the problem.
The German government could change this if it were willing to guarantee all Italian, Spanish, and other eurozone debt.
But it is understandably loath to do so, owing to the high risk involved.
The European Central Bank could also help solve the problem by agreeing to buy debt that has been shunned by financial markets.
But, like Germany, the ECB understandably lacks enthusiasm about this solution.
So the standoff continues, and the crisis worsens.
The world’s major central banks recently agreed to make more dollar liquidity available, mostly to European banks.
This has eased the immediate liquidity crisis, but the fundamental debt problem remains, because the Italian government cannot fund itself at reasonable interest rates.
Because the eurozone finance ministers could not agree on an internal solution, their latest idea is to call on the IMF to finance an extra-large support package for Italy.
But this might be wishful thinking.
Why should the IMF’s non-European members agree to finance a massive support program for a member of the G-7 and the eurozone that has no external balance-of-payments problem and stronger public finances than most other developed countries?
A month ago, the eurozone’s heads of state arrived at another way to appeal for foreign funds: the European Financial Stability Facility (EFSF) could package euro debt and sell it to foreign investors such as the Chinese and other Asian central banks.
Here the same question arises: Why should China buy Italian debt when Germany shuns it?
Even if China agreed to buy the debt, it would likely consider buying some of the special paper that the EFSF plans to issue only if it obtained some political concessions and an implicit guarantee from Germany.
But it makes no sense for Germany to pay a political price for doing something – guaranteeing other countries’ debt – that it has consistently refused to do.
The political concessions that China would probably demand – for example, EU recognition of the country as a market economy, or a greater voice within the IMF – may be overdue.
Nevertheless, these issues should not be linked to the eurozone’s inability to solve its own problems.
Moreover, a large inflow of funds from the IMF, China, or elsewhere could do more harm than good to the extent that it puts upward pressure on the euro’s exchange rate –&#160;and thus makes recovery in the crisis countries even more difficult.
German growth could survive a stronger euro, because its exports are much less price-sensitive, but countries such as Italy and Greece, which must compete on price, would be weakened further.
Europe’s policymakers cannot offshore the eurozone’s problems.
Europeans can and must deal with this crisis themselves.
One option discussed these days is a special fund, financed by the ECB’s major national central banks and placed at the IMF’s disposal to help Italy and Spain.
This would harness the ECB’s resources without formally violating the EU’s Lisbon Treaty, which forbids central-bank financing for governments.
This plan would have the advantage of forcing the eurozone to rely on its own resources.
But it would also fully expose Europe’s political weakness and lack of coherence.
Indeed, if it turns out that a detour through the IMF is needed to allow the ECB to provide liquidity to countries like Italy and Spain, the rest of the world will ask why Europe cannot be more candid about the ECB’s central role in this crisis.
Good question.
Inequality, Immigration, and Hypocrisy
CAMBRIDGE – Europe’s migration crisis exposes a fundamental flaw, if not towering hypocrisy, in the ongoing debate about economic inequality.
Wouldn’t a true progressive support equal opportunity for all people on the planet, rather than just for those of us lucky enough to have been born and raised in rich countries?
Many thought leaders in advanced economies advocate an entitlement mentality. But the entitlement stops at the border: though they regard greater redistribution within individual countries as an absolute imperative, people who live in emerging markets or developing countries are left out.
If current concerns about inequality were cast entirely in political terms, this inward-looking focus would be understandable; after all, citizens of poor countries cannot vote in rich ones.
But the rhetoric of the inequality debate in rich countries betrays a moral certitude that conveniently ignores the billions of people elsewhere who are far worse off.
One must not forget that even after a period of stagnation, the middle class in rich countries remains an upper class from a global perspective.
Only about 15% of the world’s population lives in developed economies. Yet advanced countries still account for more than 40% of global consumption and resource depletion.
Yes, higher taxes on the wealthy make sense as a way to alleviate inequality within a country.
But that will not solve the problem of deep poverty in the developing world.
Nor will it do to appeal to moral superiority to justify why someone born in the West enjoys so many advantages.
Yes, sound political and social institutions are the bedrock of sustained economic growth; indeed, they are the sine qua non of all cases of successful development.
But Europe’s long history of exploitative colonialism makes it hard to guess how Asian and African institutions would have evolved in a parallel universe where Europeans came only to trade, not to conquer.
Many broad policy issues are distorted when viewed through a lens that focuses only on domestic inequality and ignores global inequality.
Thomas Piketty’s Marxian claim that capitalism is failing because domestic inequality is rising has it exactly backwards.
When one weights all of the world’s citizens equally, things look very different.
In particular, the same forces of globalization that have contributed to stagnant middle-class wages in rich countries have lifted hundreds of millions of people out of poverty elsewhere.
By many measures, global inequality has been reduced significantly over the past three decades, implying that capitalism has succeeded spectacularly.
Capitalism has perhaps eroded rents that workers in advanced countries enjoy by virtue of where they were born. But it has done even more to help the world’s true middle-income workers in Asia and emerging markets.
Allowing freer flows of people across borders would equalize opportunities even faster than trade, but resistance is fierce.
Anti-immigration political parties have made large inroads in countries like France and the United Kingdom, and are a major force in many other countries as well.
Of course, millions of desperate people who live in war zones and failed states have little choice but to seek asylum in rich countries, whatever the risk.
Wars in Syria, Eritrea, Libya, and Mali have been a huge factor in driving the current surge of refugees seeking to reach Europe.
Even if these countries were to stabilize, instability in other regions would most likely take their place.
Economic pressures are another potent force for migration.
Workers from poor countries welcome the opportunity to work in advanced countries, even at what seem like rock-bottom wages.
Unfortunately, most of the debate in rich countries today, on both the left and the right, centers on how to keep other people out.
That may be practical, but it certainly is not morally defensible.
And migration pressure will increase markedly if global warming unfolds according to climatologists’ baseline predictions.
As equatorial regions become too hot and arid to sustain agriculture, rising temperatures in the north will make agriculture more productive.
Shifting weather patterns could then fuel migration to richer countries at levels that make today’s immigration crisis seem trivial, particularly given that poor countries and emerging markets typically are closer to the equator and in more vulnerable climates.
With most rich countries’ capacity and tolerance for immigration already limited, it is hard to see how a new equilibrium for global population distribution will be reached peacefully.
Resentment against the advanced economies, which account for a vastly disproportionate share of global pollution and commodity consumption, could boil over.
As the world becomes richer, inequality inevitably will loom as a much larger issue relative to poverty, a point I first argued more than a decade ago.
Regrettably, however, the inequality debate has focused so intensely on domestic inequality that the far larger issue of global inequality has been overshadowed.
That is a pity, because there are many ways rich countries can make a difference.
They can provide free online medical and education support, more development aid, debt write-downs, market access, and greater contributions to global security.
The arrival of desperate boat people on Europe’s shores is a symptom of their failure to do so.
Europe Has Lost its Way
WASHINGTON, DC – Europe’s response to the strategic challenges it is facing – Russian aggression in Ukraine, refugees fleeing violence in the Middle East, disorder in North Africa – leaves the impression that its leaders have no idea what to do.
And indeed, they may not – a reality that needs to be acknowledged, not papered over.
Simply put, the European Union’s stagnant economy is conditioning its response to the external pressures it confronts; internal crisis has left EU leaders little room for maneuver.
Fortunately, Europe has the means to address this crisis, if it can summon the wisdom and the political will.
The origins of the EU’s problems lie in its response to the 2008 global financial crisis: two years of large-scale fiscal stimulus.
While this did little for growth, it resulted in crippling public debt.
Seven years later, EU output per person is no higher than it was at the start of the crisis.
Meanwhile, average public debt has soared to 87% of GDP, leaving little space for policy flexibility or innovation.
In hindsight, it is all too obvious what should have been done.
Greece, which carried out the biggest fiscal stimulus, is the country whose economy has suffered the most damage.
Its depression continues, whereas countries like Latvia, Lithuania, and Estonia, which carried out early, radical fiscal adjustments and liberalized their economies, are enjoying strong growth.
Furthermore, the slow pace of European decision-making has compounded Greece’s troubles.
When it comes to economic policy, a fast, faulty decision is often better than inaction.
Instead of resolving the Greek financial crisis quickly, EU leaders allowed it to crowd out discussion of other issues for five long years.
Meanwhile, Greece limped along, never taking the decisive measures that might have restored confidence.
With its attention focused on macroeconomics, the EU neglected to take the measures that would have put economic growth back on track: freeing up markets, cutting spending (rather than raising taxes), and, above all, further developing its greatest asset, the single European market.
Little has changed since Italian economists Alberto Alesina and Francesco Giavazzi noted, nearly a decade ago, that, “Without serious, deep, and comprehensive reforms, Europe will inexorably decline, both economically and politically.” They warned that, “Absent profound change, in 20 or 30 years the share of Europe [in world output] will be significantly lower than it is today, and, perhaps more important, its political influence will be much trimmed.”
Indeed, a World Bank report on European growth in 2012 summed up the situation as follows: “Aging Europeans are being squeezed between innovative Americans and efficient Asians.”
The chief culprits for Europe’s underperformance are well known: high taxes, too many and bad regulations, the absence of key markets, and high public expenditures.
And there is only one reason why European governments spend so much: excessive social protection.
As the World Bank observed, “Western European governments spend about 10% of GDP more than the United States, Canada, and Japan.
The difference in social protection spending is 9% of GDP.”
In order to fund this spending, revenues must be raised.
And, because it is difficult to tax capital efficiently, Europe has imposed exorbitant levies on labor.
Across the continent, but especially in southern Europe, taxes and strict labor-market regulations keep unemployment high, at 11% of the labor force, and dissuade Europeans from investing in their education.
The natural consequences are too little employment, too little investment in sophisticated education, too little innovation, and minimal increases in productivity.
Most striking is European backwardness in high-tech development and innovation.
By almost any measure, most of Europe looks pitiable.
Of the 50 best universities in the world, according to the Shanghai list and the Times Higher Education Supplement list, some 30 are American, six or seven are British, and only a handful are to be found in continental Europe.
A half-dozen northern European countries can compete with the US when it comes to research and development spending and patents granted, but the south and east of Europe lag far behind.
Meanwhile, the EU has yet to open its markets for business services and digital trade, on which the American economy thrives, even though services account for about 70% of GDP in most EU countries.
In 2006, the European Commission issued a directive on the liberalization of trade in services, but major countries – particularly Germany – have refused to implement it.
The absence of services and digital markets harms the development of a modern economy in Europe.
It is not by chance that American giants like Apple, Amazon, and Google rule the world of high-tech.
There is nothing inevitable about Europe’s malaise, just as there is nothing quintessentially European about having excessive social transfers.
Serious European governments – from Ireland to Poland – have successfully addressed the problem.
The rest of the EU should not only follow suit; they should also cut income and payroll taxes and liberalize their labor markets.
Fundamental economic reforms are usually implemented only after a severe crisis, as was the case in Britain in the late 1970s, in Sweden and Finland in the early 1990s, and in Eastern Europe after the collapse of communism in 1989.
The EU has wasted the opportunities afforded by the 2008 global financial crisis and the subsequent euro crisis.
Rather than making the difficult changes that would enable strong recovery, Europe’s policymakers have weighed down the economy with more spending and debt.
The EU will continue to flounder until it recognizes its mistakes and begins to carry out the reforms its economy needs.
Only by putting the continent firmly back on the path of growth will Europe’s leaders be able to address the external challenges they now confront.
Europe in the IMF
BRUSSELS – Europe’s leaders never tire of reminding their constituencies, almost like a mantra, that the major emerging-market countries are overturning the existing global economic order.
But when it comes to recognizing that reality in the world’s international financial institutions, they adopt a different tune.
This is particularly true of the eurozone.
The eurozone as such has no representation in the international financial institutions.
Instead, 12 eurozone countries are represented on the board of the International Monetary Fund via six different “constituencies,” or country groups.
The two largest, Germany and France, have a constituency all their own.
Ten other eurozone members are part of four other constituencies headed by Belgium, the Netherlands, Spain, and Italy.
However, these four constituencies also contain more than 20 other countries, most of which are not even EU members.
Together with the Scandinavian and British constituencies, there are thus eight EU representatives on the IMF’s executive board.
Given that the IMF’s Articles of Agreement stipulate that there can be only 20 board members, this means that 40% of all the IMF’s executive directors from the EU, with one-third coming from the eurozone.
The IMF is a prime example of the over-representation of Europeans in international fora.
Counter-intuitively, however, the excessive number of Europeans actually diminishes Europe’s influence, because they usually defend national interests, which are often divergent.
The net effect is that common European interests are not represented at all.
Contrast this current condition of extended misery with the only sensible long-term solution: a pooling of IMF quotas by all eurozone countries.
The eurozone would then have one constituency, or seat, on the Fund’s executive board, filled by a candidate nominated by the eurozone group of finance ministers.
The European Central Bank could also, perhaps, be involved, nominating the deputy of the eurozone executive director at the Fund.
In this way, Europe’s fiscal and monetary authorities would be forced to cooperate in shaping their input into IMF decisions.
Many countries (including Germany) already follow this “double-headed” approach.
The eurozone representative would be very influential, because he would represent an even larger quota than that of the US.
Indeed, the US Treasury’s de facto dominance within the IMF would become a thing of the past.
But, given the scant interest of European Union members in transferring further competences (and juicy international positions) to the EU level, the chances that this solution will prevail seem remote.
Germany, in particular, feels that it has no reason to share its IMF representation with other, fiscally weaker eurozone members.
And the French seem scared of contagion: once France agrees to a common eurozone seat at the IMF, others could cite it as a precedent to be applied to the United Nations Security Council, where France would then risk losing its permanent seat to a common EU representative.
Until now, the rest of world could only grumble at Europe’s obstinate refusal to recognize its relative decline.
Since no European country would agree to give up its seat on the IMF’s executive board, the only way out was to add more and more temporary seats for the dynamic and underrepresented emerging economies.
Such a process, however, cannot go on forever, because with each increase in size, the IMF’s board becomes less effective.
This is why the US has now decided to throw a cat among the European pigeons.
The US (which has veto power) has now taken the stance that it will no longer approve the higher number of executive directors (24 at present).
This has confronted the Europeans with a quandary: if they do not agree to give up some seats on the IMF board, some emerging countries, such as Argentina, Brazil, and perhaps even India, would lose theirs.
The EU does not want to be held responsible for this. The pigeons are thus fighting among themselves over who should be sacrificed.
Until now, it could be argued that the eurozone did not have a common fiscal agency that could represent common eurozone interests.
But this has changed with the creation of a European rescue fund in the form of the European Financial Stability Facility (EFSF).
Funding the next intra-eurozone rescue will be rather cumbersome and costly, because financial markets distrust complicated structures like the one set up to finance the EFSF.
This suggests a golden opportunity for Europe to make a virtue of necessity by pooling its access to much-cheaper IMF funding.
If, for example, Ireland (or Spain) needed emergency support, the other eurozone countries could simply agree to lend it their IMF quotas.
The troubled country could then rapidly obtain a large IMF loan, given that the eurozone countries’ quotas total about €60 billion – and that IMF loans can easily reach multiples of the quota.
Creditor countries like Germany would also gain, because they would not need to extend vast sums in guarantees to the EFSF while still safeguarding their interests within the EFSF’s existing structure.
All eurozone members, then, have an interest in concentrating in a smaller number of constituencies, with the EFSF representing their collective interests within the IMF.
Europe Is Blocking Russia
Russia's political and strategic accommodation with the West continues apace.
Day by day, relations with NATO grow stronger.
The new orientation is irrevocable.
But despite the price that President Putin is paying at home for his pro-Western policies--which are not nearly as popular in Russia as they are in the West--scant economic rewards, particularly from the European Union, have appeared.
Europe, indeed, seems to be in no hurry to give Russia improved access to its markets.
European Commission President Romano Prodi confirmed Russia's status as a "market economy" at last May's EU-Russia summit, a move that should have improved Russia's access to European markets.
But it now seems unlikely that individual EU member states will approve this designation by September 18 th , which they must if it is to enter into force.
Instead of opening the door, the EU seems determined to find covert ways to close its markets to Russian goods.
Since May, the EU commission on trade policy has been preparing strict new rules to manage Russia's exports to the Union.
These new regulations may turn the promise heralded by Russia being accorded "market economy status" into a mere formality that will not increase Russia's access to the EU market by a single iota.
Among the tactics the EU is using to retard Russian trade are numerous antidumping investigations aimed at Russian companies.
These probes, which have the effect of blocking exports from targeted firms, cost Russian businesses $1.3 billion a year in lost exports--a huge loss in an economy that is hurting as much as Russia is.
The EU's trade regulators argue that they have the right--and the obligation--to initiate antidumping investigations if they suspect that a state, say, regulates prices for energy carriers in a way that subsidizes domestic firms.
If they find Russia "guilty" of subsidizing its industry through low-cost energy, they can deem Russian goods as "dumped" and impose trade restrictions.
This is a blatantly hypocritical stance, given the regulation of energy that goes on within the EU--say, in France.
For Russia to prove that it does not use regulated energy prices as hidden industrial subsidies, it will have to make its case using international accounting standards.
Or so the EU demands.
But Russia's accounting standards--no surprise--have not yet reached international standards.
Implementing such standards in Russia is beyond the capacity of most businesses, something that should be self-evident, given how new modern businesses practices are to the country.
True, these EU requirements were not designed simply to frustrate Russia.
They are applicable to all market economies that trade with it. But the EU is using its rules and investigative procedures in ways specifically aimed at Russian businesses.
Besides, given the stories of rampant corruption in accounting practices in the West nowadays, the EU should be more understanding.
The Enron and Worldcom scandals, after all, occurred in countries with long histories as market economies.
Although it is beginning to wean companies off the practice, Russia does indeed sell energy cheaply to people and industries that became addicted to subsidized energy under socialism.
Russia has also failed to establish international accounting standards across its economy.
But Russia has repeatedly discussed the reasons for these problems with EU officials, and has pointed out the reforms now underway.
Change cannot occur overnight.
But even when all the reforms are enacted, Russian energy prices will remain cheaper than in Europe.
This reflects Russia's natural advantage as an energy producer.
The EU seems to want to penalize Russia for its natural wealth.
We have rich reserves of gas and coal.
We have the great resources of Siberia.
We have hydroelectric power plants.
We produce cheap electric energy.
To force Russia to increase energy prices to EU levels is as ridiculous as making China sell rice to its people at world prices.
The EU's emerging anti-Russian trade policy is not an antidumping policy; it is outright protectionism.
Moreover, European companies are not weak. What, exactly, are they so afraid of?
Russia is not strong enough to sink any part of the European market.
Europe's national political leaders, who so often proclaim their joy at growing closeness to Russia, must halt the efforts of those in the EU Commission who seek to sabotage EU/Russia trade relations.
Meanwhile, Russia must mobilize its own diplomats to make the case, publicly and privately in all the EU capitals, for greater access to EU markets.
Europeans who want to develop relations with Russia and the majority of businessmen--European and Russian--with interests in greater trade must also be induced to lobby in favor of greater openness.
All of this needs to be done fast, by September 18 th .
Otherwise, Russians will come to view being accorded "market economy" status as just another broken promise on the part of the West.
Europe is Not the United States
CAMBRIDGE – Europe is now struggling with the inevitable adverse consequences of imposing a single currency on a very heterogeneous collection of countries.
But the budget crisis in Greece and the risk of insolvency in Italy and Spain are just part of the problem caused by the single currency.
The fragility of the major European banks, high unemployment rates, and the large intra-European trade imbalance (Germany’s $200 billion current-account surplus versus the combined $300 billion current-account deficit in the rest of the eurozone) also reflect the use of the euro.
European politicians who insisted on introducing the euro in 1999 ignored the warnings of economists who predicted that a single currency for all of Europe would create serious problems.
The euro’s advocates were focused on the goal of European political integration, and saw the single currency as part of the process of creating a sense of political community in Europe.
They rallied popular support with the slogan “One Market, One Money,” arguing that the free-trade area created by the European Union would succeed only with a single currency.
Neither history nor economic logic supported that view.
Indeed, EU trade functions well, despite the fact that only 17 of the Union’s 27 members use the euro.
But the key argument made by European officials and other defenders of the euro has been that, because a single currency works well in the United States, it should also work well in Europe.
After all, both are large, continental, and diverse economies.
But that argument overlooks three important differences between the US and Europe.
First, the US is effectively a single labor market, with workers moving from areas of high and rising unemployment to places where jobs are more plentiful.
In Europe, national labor markets are effectively separated by barriers of language, culture, religion, union membership, and social-insurance systems.
To be sure, some workers in Europe do migrate.
In the absence of the high degree of mobility seen in the US, however, overall unemployment can be lowered only if high-unemployment countries can ease monetary policy, an option precluded by the single currency.
A second important difference is that the US has a centralized fiscal system.
Individuals and businesses pay the majority of their taxes to the federal government in Washington, rather than to their state (or local) authorities.
When a US state’s economic activity slows relative to the rest of the country, the taxes that its individuals and businesses pay to the federal government decline, and the funds that it receives from the federal government (for unemployment benefits and other transfer programs) increase.
Roughly speaking, each dollar of GDP decline in a state like Massachusetts or Ohio triggers changes in taxes and transfers that offset about 40 cents of that drop, providing a substantial fiscal stimulus.
There is no comparable offset in Europe, where taxes are almost exclusively paid to, and transfers received from, national governments.
The EU’s Maastricht Treaty specifically reserves this tax-and-transfer authority to the member states, a reflection of Europeans’ unwillingness to transfer funds to other countries’ people in the way that Americans are willing to do among people in different states.
The third important difference is that all US states are required by their constitutions to balance their annual operating budgets.
While “rainy day” funds that accumulate in boom years are used to deal with temporary revenue shortfalls, the states’ “general obligation” borrowing is limited to capital projects like roads and schools.
Even a state like California, seen by many as a poster child for fiscal profligacy, now has an annual budget deficit of just 1% of its GDP and a general obligation debt of just 4% of GDP.
These limits on state-level budget deficits are a logical implication of the fact that US states cannot create money to fill fiscal gaps.
These constitutional rules prevent the kind of deficit and debt problems that have beset the eurozone, where capital markets ignored individual countries’ lack of monetary independence.
None of these features of the US economy would develop in Europe even if the eurozone evolved into a more explicitly political union.
Although the form of political union advocated by Germany and others remains vague, it would not involve centralized revenue collection, as in the US, because that would place a greater burden on German taxpayers to finance government programs in other countries.
Nor would political union enhance labor mobility within the eurozone, overcome the problems caused by imposing a common monetary policy on countries with different cyclical conditions, or improve the trade performance of countries that cannot devalue their exchange rates to regain competitiveness.
The most likely effect of strengthening political union in the eurozone would be to give Germany the power to control the other members’ budgets and prescribe changes in their taxes and spending.
This formal transfer of sovereignty would only increase the tensions and conflicts that already exist between Germany and other EU countries.
Europe is Winning on Productivity
Revision is in the air about America's economic miracle.
Not only did America's bubble crash, but also it now appears that much of the US economic miracle of the 1990s never happened.
When it comes to performance, Europe is king, not the US.
A study of the sources of economic growth by the OECD has brought together a formidable set of data and with it new views about who is doing well and who poorly.
One new conclusion is that America's economic performance is not as glittering as previously thought.
The accompanying table captures the central fact: true, the US had high growth in the 1990s, more than Europe's largest economies by a long shot.
But the productivity part - the US as a productivity miracle - is wrong.
This is apparent at the conventional level of output per person employed.
But it gets even worse when we recognize that in Europe many fewer hours are worked per person than in America.
By the time we look at output per hour worked, Europe shows a full reversal.
Suddenly a place thought dull if not worse - Germany - is the big winner.
Germans don't work much, but when they do, it is with unmatched productivity, and the story gets better over time.
It might seem from these numbers that Europe has figured out a neat trick: work little, work well.
In fact, not only was productivity growth better in Europe, but so also were productivity levels.
West Germany or France produced absolutely more dollars worth of output per hour worked than the US.
So, too, did Italy.
By contrast, Japan, with its inefficient service sector, was way below the US or Europe, as was the UK.
How should we interpret these facts?
One possibility is this: Europe's labor market is a great problem.
It is over-regulated and inflexible and, on top of these twin evils, is expensive even at the current low level of the Euro.
Why be surprised, then, that European firms shy away from labor and operate in a capital-intensive fashion.
With high concentrations of capital per worker, other things being equal, labor is highly productive - that is the European model.
Moreover, labor-intensive (i.e. low productivity) companies more readily outsource some tasks or go offshore altogether.
This is partially because restructuring in Europe is hard, which can result in a whole business leaving Europe altogether.
Consequently, by a process of elimination, what firms remain are the ones showing gains in productivity.
That is a smart model, but is there a downside?
The downside is this: Europe has high unemployment because firms shy away from hiring new workers.
In the US by contrast, growth normally involves relatively less capital accumulation per worker and a small productivity gain per worker or per hour, but in exchange significantly more employment creation.
In fact, much of America's growth in the 1990s involved absorption of the unemployed and of welfare recipients into jobs.
US growth thus involves lots of job creation;
Europe's growth, if high, keeps unemployment barely constant.
Two different models, each with a downside.
It would obviously be attractive for Europe to get the extra benefit of massive job creation and for the US to enjoy stronger productivity in addition to its mammoth jobs machine.
Is there a chance of either happening?
Europe does not stand much of a chance to emerge from its unemployment trap either in the coming year of recession or any time soon.
To change things, Europe would need to stoke up the economy with a lot of investment, cheap money, tax cuts for everyone, and perhaps public works spending, too.
No prospect of that in these days of strict accounting.
The story will remain one of good productivity - surprisingly good considering that Europe was not thought to be part of the ``new economy'' area.
In the US there is recession and hence rising unemployment.
The likely modest recovery will not be strong enough to outpace productivity.
Next year, accordingly, Europe and the US will look alike.
On the productivity side, the news may become somewhat better.
This is the first time the US shows productivity growth in a recession (during which productivity normally turns negative).
If this holds up and strengthens with recovery, as Chairman Greenspan seems to think it will, the US may soon face the European dilemma.
It will be doing well on productivity, possibly better than Europe, but will not be able to get the unemployment rate down.
Sadly, it is not at all clear which state of things is better.
Europe is Working Longer
France’s decision effectively abolishing its 35-hour workweek by allowing employers to increase working hours – and pay – marks a reversal of a decades-old trend.
In the 1980’s and 1990’s, most European countries reduced working hours: Germany went from more than 40 to 38 per week, the UK from 40 to 37, Denmark from 39 to 37, and France from 40 to 35.
Today, however, as Europeans struggle with high unemployment and stagnating living standards, they may have to work longer to cope with globalization.
The French actions follow changes in Germany, where some recent wage settlements resulted in longer working times.
The difference between the two countries is that, in Germany, working times were increased without compensating pay increases.
Siemens was the forerunner, going from 35 to 40 hours per week.
Bavaria’s government increased the workweek from 38.5 to 40 hours for older employees and to 42 hours for younger employees.
When Daimler-Chrysler increased work hours from 35 to 40 hours in its research and development center, the dam broke and other bargaining agreements fell into line.
Germany primarily reacted to low-wage competition from ex-communist countries.
Currently, the average wage of the ten countries that joined the EU in May 2004 is about one-seventh of the West German wage level, and the Chinese wage is one twenty-fifth.
Those differences are so huge that some people consider efforts to compete futile.
But, as productivity is much higher in Germany, an effective reduction of hourly labor costs by uncompensated increases in working hours seems worth trying.
This could be an example for other European countries. The next step for France could be unpaid increases in working times.
Trade union opposition to extending working hours is based on the “lump-of-labor” theory.
According to this view, there are no economic advantages of such a policy, because the total amount of labor in the economy is fixed.
As a result, a 10% increase in working time will merely reduce employment by 10% percent.
Despite its seeming plausibility, this view is wrong.
Working longer for the same pay is a useful way of making Europe more competitive, and, when compared to reducing wages, it imposes a much lighter burden on workers and employees.
Working longer will boost economic growth, for if people work longer, then so does capital.
Except for where all 24 hours of the day are filled with shift work, increasing the daily working time of people extends daily capital utilization.
Thus, a 10% increase in working time is the same as if the economy’s stock of productive capital were increased by 10%.
There is a jump in wealth and an immediate production boom.
The lump-of-labor theory assumes that working longer and employing more people is the same thing.
But they are very different.
Longer working time can be achieved nearly instantaneously, whereas employing more people is time consuming and expensive, as it typically requires new physical investment.
Working longer is thus the ideal way to achieve growth and competitiveness.
In fact, extending daily working times will, in the medium term, also result in higher employment, because it will increase productivity while labor costs remain constant.
Some workers whose productivity was too low to cover their cost will now be hired, as firms will find it worthwhile to expand output above the level resulting from the increased working time itself by investing more capital and hiring more workers.
Some fear that extending the workday will not produce more jobs because the resulting expansion of hours worked will reduce the capital-labor ratio.
This would lower the marginal productivity of hours worked sufficiently to offset the positive effects of increasing the number of hours per worker.
But, again, capital would also work longer.
Because of the “capital utilization effect,” the capital-labor ratio would not, in fact, decline, and hence there would be no significant effect on the marginal productivity of hours worked.
The theoretical effect on employment is unambiguously positive, because marginal workers will be more productive as they work longer.
Would there be enough demand to absorb the additional output resulting from increasing the workday?
Advocates of the lump-of-labor view say no.
But as more goods are produced while the wage per worker is fixed, profits increase by exactly the same amount as the value of output does.
The entrepreneur might buy his wife a new fur coat or his workers a new production plant. If all firms work longer, most will experience more demand, and the average firm will face as much extra demand as it provides extra supply.
True, some extra demand will go abroad, but so will some of the extra supply.
A slight devaluation would solve any remaining problem with export demand.
This could be an explicit devaluation or an implicit one due to a price reduction, made possible by the reduction in unit production costs resulting from the extra working time at constant pay.
The argument that working longer destroys jobs and that we need technological progress in order to become more competitive and maintain employment is inherently inconsistent, because working longer is nearly the same as technological progress that makes capital and labor more productive.
Either one or the other view is correct, but both cannot be true simultaneously.
In any case, only the second interpretation is correct.
The fear that extending the workday will damage employment is unfounded.
It is a tried and true path towards growth, competitiveness and employment.
Europe’s Roadblocks to Long-Term Investment
AMSTERDAM – One of the major challenges facing the European economy is the lack of liquidity in its capital markets.
Since the 2008 global financial crisis, an enormous number of new rules have been put in place.
In order to facilitate the long-term investment that Europe desperately needs, it would be wise to reassess the broader regulatory environment that has emerged over the past six years.
With banks reluctant to make new loans, institutions such as pension funds are well placed to meet the desperate demand for capital.
Indeed, the savings of workers who may not be retiring for several decades are particularly well suited for long-term investments.
The trouble is that in many cases, rules and regulations intended to ensure financial markets’ stability impede the ability of pension funds and others to allocate savings smoothly and efficiently.
The importance of proper regulations cannot be understated.
When properly drafted and applied, they ensure financial stability, maintain (and, if necessary, restore) confidence in the markets, and facilitate long-term investment, helping citizens meet their future financial needs.
But if regulations are not well tailored to the various types of market participants and to how markets actually work, they can choke off opportunities that would otherwise benefit investors and the economy.
The new margin requirements for derivatives, introduced in order to reduce systemic risk, are one example of such a chokepoint.
It might make sense to apply them to banks or hedge funds, but pension funds are highly creditworthy institutions that pose little or no systemic risk to financial markets.
Forcing them to set aside assets for collateral purposes only drains capital that could be used for long-term-investment.
Such investment involves a variety of products, market players, and jurisdictions, and, as a result, the effect of regulations can be difficult to see, much less quantify.
For starters, the impact of rules and regulations can be direct or indirect.
Rules that apply specifically to long-term-investment products or strategies can be classified as having a direct impact.
Rules that apply to investors or their counterparts, competitive products, or complementary parts of the market can be described as having an indirect effect.
A well-crafted regulatory framework minimizes the adverse consequences for long-term investment, while maximizing the positive effects.
New regulations are constantly being introduced.
It is important to analyze carefully whether the new regulations are actually needed and, if yes, to foresee and fill regulatory gaps with rules that ensure the smooth flow of savings to new and existing projects.
For example, standardizing regulations relating to covered bonds, green bonds, and cross-border investment through real-estate trusts could encourage more long-term investment.
In a more indirect way, a general regulatory push that increased the availability of projects suitable for long-term-investment and harmonized local insolvency regimes could also have a positive effect.
Prominent examples of regulations with a direct negative impact include existing rules on securitization and proposed rules on asset-based capital charges.
The indirect negative effects of such regulations on long-term investment are, by nature, more difficult to discern, but they can be just as harmful as the direct effects – especially if they leave investors with fewer funds available for long-term investment.
Margin requirements for derivatives transactions have this effect, as do regulations that increase banking costs.
These types of indirect negative effects have not been central to policy discussions concerning how to boost long-term investment.
But they deserve careful consideration.
It is crucial that we identify the full scope and scale of their impact on the allocation of capital.
Otherwise, they risk offsetting the positive impact of investment-enhancing reforms.
As legislators and regulators continue to shape the investment environment, it is important not only to monitor and evaluate the impact of each piece of additional regulation; the way rules interact with one another – and with new rules as they are introduced – must also be understood.
Unnecessarily broad regulations should be avoided in favor of rules that are specifically tailored to the various participants in the market.
Allowing long-term investors such as pension funds to provide the European economy with much-needed capital has the potential to provide huge benefits to future retirees, as well as to the broader economy.
But that will not be possible unless, and until, the right regulatory environment is created.
Europe Means Fair Play
As Ukraine’s agonizing struggle for democracy continues, Europeans wonder if the politics of principle can ever eclipse the politics of power.
Is it naive to believe that the world amounts to more than zero-sum thinking?
Can Europe promote fair play in international affairs, or must it accept a new game of great power rivalry as inevitable and throw itself into the fray?
Many Europeans see themselves as champions of global fair play.
But Europe’s opinion of its integrity is not always shared.
One example is Russia, which is skeptical about the EU’s intentions, most recently over Ukraine.
That should not surprise us.
The EU has expanded from six members to 25, with Bulgaria, Romania, Croatia, and Turkey waiting in the wings.
Russia wants to know where the Union will stop.
Does it plan to swallow Ukraine, Belarus, and the Caucasus?
Most EU members view these as open questions, unlikely to be resolved soon.
The Kremlin, however, seems to see in such vagueness a smokescreen hiding the Union’s true intentions, though the recent EU-Russia summit provided an opportunity to clear the air.
In a sense, critics of the EU are right: the Union may be on a quest to reshape the world in its image.
Nowadays, when the EU concludes agreements with non-EU countries, it includes all sorts of stiff requirements in areas like human rights, non-proliferation, readmission of migrants, and terrorism.
To countries on the receiving end, these conditions can seem like a subtle form of power politics, with Europe trying to impose its values on the world.
Indeed, for the EU some issues are non-negotiable, because they are pillars of the European model that we seek to share with the world.
These issues include democracy and the rule of law, respect for human rights and the environment, non-proliferation of weapons of mass destruction, and the campaign against terrorism.
Countries cannot expect economic and other benefits from the Union unless they meet its political standards.
But are those standards really an imposition?
It looks as if the principles of fair play are increasingly embraced outside of Europe.
Consider Africa, where the African Union is taking a leading role in resolving conflicts on the continent and is increasingly determined to intervene to halt aggression and assure fair play for African minorities.
Even if the results on the ground in Africa don’t yet look spectacular to outsiders, the change in attitude is real.
Instead of playing the “Great Power Game” in Africa, the EU can support Africans’ own efforts and allow them to benefit from the Union’s experience.
Europe’s belief in fair play for all reflects its self-interest, at least in some ways, because the world’s balance of power is changing.
Consider the rise of China and India. The investment bank Goldman Sachs predicts that the dollar size of the Chinese economy will overtake that of Britain and Germany by 2007.
India will pull ahead of France by 2020 and surpass Germany by 2023.
As Asia’s economies race forward, so do its political ambitions.
Asians want to assume greater responsibility in the world, and it is in Europe’s interest that they do, as long as they, too, respect the rules of fair play.
A sense of fair play also matters within the Union.
The larger the EU gets, the greater its need for coordinated and coherent policies, and the harder it becomes to rally all members around a common position.
Call this the “paradox of enlargement.”
The three largest member states – Britain, France, and Germany – have tended to respond to this paradox by pursuing closer trilateral cooperation.
Of course, there’s nothing wrong with vanguard groups of members forging ahead – the recent diplomatic initiative concerning Iran’s nuclear program is a case in point.
Indeed, every member state can be expected to cling to its right to pursue an independent foreign policy for the foreseeable future.
However, to ensure that the European whole is greater than the sum of its parts, and to guarantee fairness to all Union members, all EU states must work within the parameters of EU policy, as they have in the case of Ukraine.
When they do, their efforts strengthen the legitimacy and authority of both the member states and the Union.
In a world of fair play, the flip side of rule making is compliance, and compliance may require enforcement, through economic sanctions and other non-military measures.
As a last resort, the EU must even be prepared to rise to the military defense of the values and principles it believes are worth protecting.
If Europe is not prepared to take up arms when it must, then its appeals for fair play will sound to the rest of the world like mere posturing.
But if fair play is to be made global, European initiatives should be part of broader international efforts, involving both like-minded partners such as the United States and multilateral institutions.
A divisive transatlantic rivalry offers no ethical or political basis for an enlightened European approach.
On the contrary, fair play requires American power to back it up.
Europe’s Movement Against Moving
PRINCETON – The largest unresolved issue in the European Union is mobility.
The integration process was intended to make it easier and more attractive for Europeans to move from one country to another.
According to this vision, the EU’s inhabitants had the nation to lose and a continent to gain.
But some recent election results indicate that they are more worried about losing the nation.
Ever since the 1986 Single European Act removed restrictions on working in other member countries, the continent has been a single labor market – at least in theory.
It was a policy that fit well with other parts of the integration agenda.
The euro’s ability to function as a common currency would require a flexible labor market, in which workers could adjust to regional shocks by moving.
But it was only after the global financial crisis that European migration really took off.
And the result has been a backlash against it, first in destination countries, and now, as Poland’s just-concluded presidential election suggests, in countries of origin.
As the debate over migration has heated up, both those who moved and those who stayed behind have ended up feeling more nationalistic, not more European.
At first glance, the results of recent elections in France and England might give the impression that European migration is on the wane as a hot-button issue.
The French National Front did badly in regional elections compared to the mainstream and pro-European right.
It then descended into scandal and acrimonious infighting between the party’s president, Marine Le Pen, and its founder, her father, Jean-Marie Le Pen (who was ultimately expelled).
Meanwhile, Britain’s anti-European United Kingdom Independence Party (UKIP) performed poorly in the general election earlier this month, and then promptly fractured.
Germany’s right-wing populist Alternative for Germany is also splintering and disintegrating.
Italy’s Five Star Movement is in abeyance as well.
This sequence of failures has led some to predict the end of protest politics.
That view is not quite right.
The far-right political parties that seemed to be the main beneficiaries of the euro crisis may have stumbled.
But the issue of labor mobility is not going away.
Until now, the discussion about European migration has taken place mostly within rich destination countries, like France and the UK.
Little attention has been given to its effects in the countries of origin.
But in Poland’s presidential election, the issue was front and center, where it generated the greatest resonance with voters and contributed to the victory of Andrzej Duda, the head of the right-wing Law and Justice Party.
It also provided the theme for the campaign of Paweł Kukiz, a rock musician who finished third in the election’s first round.
Both Duda and Kukiz complained that too many young Poles were leaving the country, and that their country was becoming an empty land of the elderly – a fact that is obvious to anyone who walks down a Polish street.
Europe might still be home to dynamic young Polish communities, but they are in London, Dublin, Paris, Oslo, and Stockholm – not in Warsaw, Krakow, or Lodz.
And they are certainly not in the poor, rural communities in the east and south of the country, which have been disproportionately emptied by emigration.
Debate about the damage done by emigration has also erupted in countries much more obviously affected by the economic crisis – eurozone countries like Greece, Spain, and Portugal, as well as countries outside the currency union, like Bulgaria and Romania.
And, though the issue raises obvious questions of justice and efficiency – poor countries, having invested large sums in education, now produce graduates who take jobs and pay taxes abroad – Europe has provided little in the way of an effective response.
True, some migrants might eventually return, bringing skills and capital with them.
But, in the meantime, they are leaving behind a population that is older, poorer, and more vulnerable.
European solutions to the problem could involve transfers of funds when local education benefits a continent-wide labor market, or assistance in addressing the problems that affect areas at risk of losing their working-age populations.
The irony is obvious.
European integration has sparked increased mobility – especially in the aftermath of the euro crisis.
But what it has not yet done is generate the institutional framework needed to make mobility acceptable to the EU’s residents.
आप्रवास: यूरोप के लिए सुअवसर
लंदन – पिछले वर्ष 4,000 से अधिक पुरुषों, महिलाओं एवं बच्चों को भू-मध्यसागर पार कर अफ्रीका से यूरोप जाने के प्रयास में अपनी जान गँवानी पड़ी। उनकी दर्दनाक मौतों के के बाद भी उमड़ती भीड़ में कोई कमी नहीं हुई है बल्कि यह हर सप्ताह बढ़ती जा रही है, और तट पर तस्करों की निर्लज्जता और क्रूरता भी निरंतर बढ़ रही है। केवल इसी वर्ष के आरंभ से लेकर अब तक बर्फीले पानी से हजारों प्रवासियों की जान बचाई जा चुकी है।
इस पृष्ठभूमि में - और पेरिस एवं कोपेनहेगन में आतंकी हमलों से उत्प‍न्न भय को देखते हुए - यूरोपीय संघ, आप्रवास के मुद्दे पर एक नई और अत्यंत महत्वपूर्ण योजना तैयार करने के लिए कमर कस चुका है। इस मुद्दे पर आगे की कार्रवाई हेतु विचार-विमर्श करने के लिए जब यूरोपीय संघ के आयुक्तों की बैठक होगी, तो उन्हें तात्कालिक एवं भावनात्मक समाधानों के प्रलोभन से बचना होगा, और इसके बजाय अपने देश और विदेश दोनों के लिए सचमुच रचनात्मक और व्यापक योजना तैयार करनी होगी।
पिछली बार 2011 में यूरोप में आप्रवास को लेकर कुछ ऐसी ही निर्णायक स्थिति तब आई थी जब अरब स्प्रिंग के फलस्वरूप उत्तरी अफ़्रीका में हिंसा और अव्यवस्था के कारण लोगों का सैलाब वहाँ से कूच करके नए आगंतुकों के रूप में आने लग गया था। वह समय शरणार्थियों के भरण-पोषण हेतु निवेश के लिए भू-मध्यसागर मार्शल योजना तैयार करने का साहसिक कदम उठाने का था जिसमें निवेश को आप्रवास से जोड़ा जा सकता था परंतु यह अवसर यूँ ही हाथ से निकल जाने दिया गया। इसके बजाय, यूरोपीय संघ ने अपनी शरणार्थी व्यवस्था में दिखावटी सुधार किए और प्रवासी “कल्याण में धोखाधड़ी” जैसे व्यर्थ के मुद्दों पर बहस करके संतोष कर लिया।
वर्ष 2014 में आप्रवास और शरण-स्थल के लिए यूरोपीय संघ की कुल आकस्मिक निधि मात्र €25 मिलियन ($28 मिलियन) थी – जिसमें सदस्य देशों से प्राप्त राशि भी शामिल है और सामूहिक रूप से जुटाए जाने की दृष्टि से यह राशि शर्मनाक रूप से कम थी। पिछले वसंत में, सैकड़ों लोगों की जान बचाने में इटली के मेयर नॉस्ट्रम सी-रेस्क्यू ऑपरेशन के साहसिक प्रयासों की तुलना में यूरोपीय संघ की पहल अत्यंत कमज़ोर है जो अपने लक्ष्य को प्राप्त करने के लिए जूझ रही है।
यूरोपीय संघ के भीतर प्रतिबद्धता और दयालुता के असंतुलन ने इस समस्या को और भी जटिल बना दिया है। स्वीडन और जर्मनी ने अपने यहाँ सीरिया और अन्य स्थानों से आए अधिकांश शरणार्थियों को जगह दी है, जबकि यूरोपीय संघ के अधिकतर अन्य सदस्य देशों ने बहुत थोड़े शरणार्थियों को ही स्वीकार किया है या किसी को भी स्वीकार नहीं किया है। उदाहरण के लिए यूके ने पिछले वर्ष सीरियाई शरणार्थियों के लिए महज 90 पुनर्वास केंद्रों की पेशकश की थी। (इसके विपरीत तुर्की, लेबनान, और जॉर्डन लगभग चार मिलियन शरणार्थियों के पुनर्वास पर कई बिलियन डॉलर खर्च कर रहे हैं)।
ग्रीस, इटली, और माल्टा को नए आनेवाले शरणार्थियों को बसाने के लिए जो खामियाजा भुगतना पड़ा है, उसमें उससे जुड़ी वित्तीय, सामाजिक, और राजनीतिक लागतों को वहन करने का प्रभाव शामिल है। परिणामस्वरूप, भू-मध्यसागर में लगातार चल रही इस त्रासदी का यूरोपीय संघ की अखंडता पर गंभीर खतरा मंडराने लगा है।
लगातार अकर्मण्यता से न तो इस समस्या का समाधान होगा और न ही इससे यूरोपीय संघ के नेताओं को उनके देश के आगामी चुनावों में कोई लाभ होगा। उत्तरी अफ्रीका के कई देशों की सरकारों की अस्थिरता को देखते हुए यूरोपीय संघ के अनेक देशों के लिए "तस्करों पर नकेल कसना" ही इस समस्या का सही समाधान हो सकता है जिसका प्रभाव दिखाई देने में कई वर्ष लगेंगे। इस बीच, मध्य-पूर्व में और अधिक अस्थिरता की संभावना सचमुच बहुत अधिक है जिससे अंतर्राष्ट्रीय कानून के अंतर्गत सुरक्षा समाधान के कारण उन करोड़ों लोगों की सुरक्षा खतरे में पड़ जाएगी जिनके पास शरण पाने का दावा करने का कानूनी अधिकार होगा।
इसके लिए अधिक बेहतर और सक्रिय नज़रिए की जरूरत है।,इसका तात्कालिक आवश्यक उपाय तो संसाधनों में वृद्धि करना है लेकिन कार्रवाई की दृष्टि से व्यावहारिक यही होगा कि लोगों की जान बचाने के स्पष्ट दिशा-निर्देशों सहित यूरोपीय संघ की ओर से संयुक्त रूप से गहन समुद्री निगरानी प्रक्रिया शुरू की जाए।
जब शरणार्थी यूरोप के समुद्र तटों पर पहुँचें, तो यूरोपीय संघ को उनकी व्यवस्था करने और शरण देने की वित्तीय और प्रशासनिक दोनों तरह की सामूहिक जिम्मेदारी लेनी चाहिए, चाहे वे कहीं पर भी उतरें। और जब बात सीरियाई नागरिकों की हो, तो सभी सदस्य देशों को एकजुट होकर एक कदम आगे बढ़कर उनके पुनर्वास हेतु मिल-बाँट कर ज़िम्मेदारी लेनी चाहिए।
इस बीच, 30,000 से भी अधिक सीरियाई शरणार्थियों के पुनर्वास हेतु यूरोपीय संघ ने अब तक जो प्रतिबद्धता दिखाई है, उसे उससे कहीं अधिक संख्या में शरणार्थी स्वीकार करने चाहिए, ताकि तस्करों की नावों का बोझ हल्का किया जा सके। यह देखते हुए कि लेबनान, तुर्की, और जॉर्डन द्वारा लाखों लोगों को शरण दी जा रही है, उनके लिए यह संख्या कम-से-कम 2,50,000 के आस-पास रखना उचित होगा।
इस बीच, यूरोपीय संघ के विदेश मंत्रियों को भू-मध्यसागर पार करने का जोखिम उठाने वालों के लिए नई, कानूनी, और सुरक्षित राह तैयार करने के लिए अफ्रीकी देशों के साथ वार्ता में तेज़ी लानी चाहिए। इसमें मानवीय आधार पर वीज़ा, श्रम वीज़ा और पारिवारिक पुनर्मिलन वीज़ा देना शामिल किया सकता है और इनके आवेदनों के संबंध में कार्रवाई विदेशों में की जा सकती है। यूरोपीय संघ के देशों को उत्तरी अफ्रीका की अर्थव्यवस्थाओं को विकसित होने देने के लिए साझा भूमध्य सागरीय बाज़ार तैयार करने देने जैसे अधिक दीर्घकालिक लक्ष्यों पर विचार करना चाहिए ताकि उन क्षेत्रों को अंततः पारगमन क्षेत्र के बजाय प्रवासियों हेतु गंतव्य के रूप में परिवर्तित किया जा सके।
सबसे महत्वपूर्ण बात यह है कि यूरोप को स्वयं को भीतर से बाहर तक सशक्त बनाने की ज़रूरत है। यूरोपीय महाद्वीप को विविधता के प्रति बिल्कुल अलग दृष्टिकोण की बेहद ज़रूरत है। यूरोपीय संघ के देशों के पास दो विकल्प हैं: वे या तो अपने देश की घिसी-पिटी एकल-‍नृजातीय संस्कृति के स्वरूप की ओर लौटने का निष्फल प्रयास करें, अथवा अपनी राष्ट्रीय संस्कृति के प्रति जागरूक बने रहने के साथ-साथ विविधता का ताना-बाना स्वीकार कर लें जिससे उनकी संस्कृति का न सिर्फ अस्तित्व बचा रहेगा, बल्कि उसे और भी फलने-फूलने का अवसर मिलेगा।
ऐसा करने से‍यूरोप के मूलभूत मूल्यों से किसी भी तरह समझौता नहीं करना पड़ेगा। बल्कि इसके लिए उनकी जाति या उनके धर्म पर विचार किए बिना उन मूल्यों को अपनाने वाले सभी लोगों के प्रति सम्मान की भावना रखने की प्रति‍बद्धता होगी। कुछ लोग भूमध्य को यूरोप का कमज़ोर और ख़तरनाक क्षेत्र मानते हैं। परंतु इस महाद्वीप को स्थिर, विविधतापूर्ण समाज के रूप में विकसित न कर पाना ही यूरोपीय संघ की वास्तव में सबसे कमजोर कड़ी है।
Europe’s Nationalist Night Watch
PARIS – Populism is on the rise throughout Europe, as both economically depressed and prosperous countries become increasingly frustrated with their established political elites.
But populists are unlikely to take control of any European government in the foreseeable future, even where the risk currently seems highest, in countries such as Hungary, Greece, and France.
The majority of voters, driven by fear or common sense, remain unwilling to accept the prospect of becoming isolated from the rest of Europe.
But that does not mean that the European Union is safe from divisive forces.
On the contrary, the return of nationalism, even (and especially) in the countries that constituted the EU’s founding core more than 60 years ago, represents a less spectacular but potentially more corrosive threat to European unity.
This trend was starkly apparent last week during a visit to the Netherlands, one of the six original signatories of the Treaty of Rome.
On my trip, I visited the Rijksmuseum, which was reopened in 2013, after a decade-long renovation.
The previous building, aging and slightly outdated, was a tribute to the universal appeal of the country’s great painters like Rembrandt and Vermeer; it was a perfect celebration of light and family.
The new Rijksmuseum, despite being a striking and successful reincarnation, conveyed a very different message, serving more as a celebration of Dutch art and history.
One room is devoted to the naval power of the Low Countries in the second half of the seventeenth century, when under the command of Admiral Michiel de Ruyter, the newly independent Netherlands was able to defeat at sea the French, the Spanish, and even the British.
Another room, called “Waterloo,” highlights the defeat of Napoleon on what was then Dutch soil.
It is centered on a huge painting, restored using donations from Dutch citizens, that pays tribute to the Duke of Wellington, as well as to the role of William of Orange, the future king of the Netherlands, in the battle.
Of course, I do not take issue with the Waterloo room out of some sense of French chauvinism.
Napoleon was a despot, who waged useless and exceedingly bloody wars from Spain to Russia.
His defeat was no tragedy, to say the least.
But in the old Rijksmuseum, no room was required to celebrate that defeat.
The Dutch people’s collective psyche did not need a reminder of their country’s contribution to Napoleon’s downfall, which led to the restoration of their independence and, for a brief period, their control over present-day Belgium.
Yet in recent years – during the decade since their spectacular rejection of a treaty establishing an EU constitution – the Dutch have increasingly felt the need to celebrate their past glory in the most traditional manner.
They, like other Europeans, are calling upon the past to compensate for the disillusion and frustration of the present and the uncertainty of the future.
Sixty years ago, a return to the past was precisely what European countries sought to avoid.
They did not glorify historical battles, because they could see the ruins of those battles all around them – images that inspired them to build a different kind of future.
By transcending national sovereignty, they hoped to protect themselves from a return to conflict and destruction.
To be sure, pride in one’s national identity is not, in itself, a bad thing.
On the contrary, in a Europe composed of diverse nations, confidence in one’s own identity is a prerequisite for completing economic and political integration.
To be a proud European, one must be a proud German, Spaniard, or Pole.
But what if that national pride takes hold at a time of deep, even existential, doubt about the value of Europe?
While most Europeans understand that their countries cannot address the challenges facing them alone, they are losing faith that Europe is the answer.
After all, beyond its enduring economic challenges, the EU has so far proved incapable of finding a common solution to the escalating refugee crisis that is coherent, firm, and in line with European values.
The EU is not inherently incapable of addressing these challenges.
The problem is that what the EU needs – more integration – is precisely what Europeans have become unwilling to support.
It seems likely that only a major immediate threat, such as war with Russia, will drive them to take that step to give more powers to EU institutions in which they have lost faith.
The 70 years since the end of World War II represent only a small fraction of Europe’s history – far from long enough to transform the way people view themselves or their countries.
The danger is that 70 years was just long enough for Europeans to begin to forget why they pursued integration in the first place.
If that is the case, the kind of glorification of the past on display in the renovated Rijksmuseum is a very bad sign indeed.
Europe Needs a Plan B
NEW YORK – The European Union was brought into existence by what Karl Popper called piecemeal social engineering. A group of farsighted statesmen, inspired by the vision of a United States of Europe, recognized that this ideal could be approached only gradually, by setting limited objectives, mobilizing the political will needed to achieve them, and concluding treaties that required states to surrender only as much sovereignty as they could bear politically.
That is how the post-war Coal and Steel Community was transformed into the EU – one step at a time, understanding that each step was incomplete and would require further steps in due course.
The EU’s architects generated the necessary political will by drawing on the memory of World War II, the threat posed by the Soviet Union, and the economic benefits of greater integration.
The process fed on its own success, and, as the Soviet Union crumbled, it received a powerful boost from the prospect of German reunification.
Germany recognized that it could be reunified only in the context of greater European unification, and it was willing to pay the price.
With the Germans helping to reconcile conflicting national interests by putting a little extra on the table, the process of European integration reached its apogee with the Maastricht Treaty and the introduction of the euro.
But the euro was an incomplete currency: it had a central bank but no central treasury.
Its architects were fully aware of this deficiency, but believed that when the need arose, the political will could be summoned to take the next step forward.
That is not what happened, because the euro had other deficiencies of which its architects were unaware.
They labored under the misconception that financial markets can correct their own excesses, so the rules were designed to rein in only public-sector excesses.
And, even there, they relied too heavily on self-policing by sovereign states.
But the excesses were mainly in the private sector, as interest-rate convergence generated economic divergence: lower interest rates in the weaker countries fueled housing bubbles, while the strongest country, Germany, had to tighten its belt in order to cope with the burden of reunification.
Meanwhile, the financial sector was thoroughly compromised by the spread of unsound financial instruments and poor lending practices.
With Germany’s reunification, the main impetus behind the integration process was removed, the financial crisis unleashed a process of disintegration.
The decisive moment came after Lehman Brothers collapsed, and authorities had to guarantee that no other systemically important financial institution would be allowed to fail.
German Chancellor Angela Merkel insisted that there should be no joint EU guarantee; each country would have to take care of its own institutions.
That was the root cause of today’s euro crisis.
The financial crisis forced sovereign states to substitute their own credit for the credit that had collapsed, and in Europe each state had to do so on its own, calling into question the creditworthiness of European government bonds.
Risk premiums widened, and the eurozone was divided into creditor and debtor countries.
Germany had changed course 180 degrees from the main driver of integration was to the main opponent of a “transfer union.”
This created a two-speed Europe, with debtor countries sinking under the weight of their liabilities, and surplus countries forging ahead.
As the largest creditor, Germany could dictate the terms of assistance, which were punitive and pushed debtor countries towards insolvency.
Meanwhile, Germany benefited from the euro crisis, which depressed the exchange rate and boosted its competitiveness further.
As integration has turned into disintegration, the role of the European political establishment has also reversed, from spearheading further unification to defending the status quo.
As a result, anyone who considers the status quo undesirable, unacceptable, or unsustainable has had to take an anti-European stance.
And, as heavily indebted countries are pushed towards insolvency, nationalist political parties – for example, Finland’s True Finns – have grown stronger, alongside more established counterparts elsewhere in Europe.
Yet Europe’s political establishment continues to argue that there is no alternative to the status quo.
Financial authorities resort to increasingly desperate measures in order to buy time.
But time is working against them: two-speed Europe is driving member countries further apart.
Greece is heading towards disorderly default and/or devaluation with incalculable consequences.
If this seemingly inexorable process is to be arrested and reversed, both Greece and the eurozone must urgently adopt a Plan B. A Greek default may be inevitable, but it need not be disorderly.
And, while some contagion will be unavoidable – whatever happens to Greece is likely to spread to Portugal, and Ireland’s financial position, too, could become unsustainable – the rest of the eurozone needs to be ring-fenced.
That means strengthening the eurozone, which would probably require wider use of Eurobonds and a eurozone-wide deposit-insurance scheme of some kind.
Generating the political will would require a Plan B for the EU itself.
The European elite needs to revert to the principles that guided the Union’s creation, recognizing that our understanding of reality is inherently imperfect, and that perceptions are bound to be biased and institutions flawed. An open society does not treat prevailing arrangements as sacrosanct; it allows for alternatives when those arrangements fail.
It should be possible to mobilize a pro-European silent majority behind the idea that when the status quo becomes untenable, we should look for a European solution rather than national ones.
“True Europeans” ought to outnumber true Finns and other anti-Europeans in Germany and elsewhere.
Necessary Migrants
BERLIN – How heartwarming it is to land in Germany, where football fans hold up banners welcoming refugees from the war-ravaged Middle East.
Germany is the new Promised Land for the desperate and downtrodden, the survivors of war and pillage.
Even the popular German tabloids, not normally of a do-gooding disposition, are promoting a willingness to help.
While politicians in the United Kingdom and other countries wring their hands and explain why even a relatively minor influx of Syrians, Libyans, Iraqis, or Eritreans constitutes a lethal danger to the social fabric of their societies, “Mama Merkel” promised that Germany would not reject any genuine refugee.
Some 800,000 refugees are expected to enter Germany this year, whereas British Prime Minister David Cameron is making a fuss about fewer than 30,000 asylum applications and warning darkly about “swarms of people” crossing the North Sea.
And, unlike Merkel, Cameron was partly responsible for stoking one of the wars (Libya) that made life intolerable for millions.
No wonder Merkel wants other European countries to take in more refugees under a mandatory quota system.
In fact, despite its politicians’ anxious rhetoric, the United Kingdom is a more ethnically mixed, and in some ways more open, society than Germany.
London is incomparably more cosmopolitan than Berlin or Frankfurt.
And, on the whole, Britain has greatly benefited from immigration.
Indeed, the National Health Service has warned that accepting fewer immigrants would be catastrophic, leaving British hospitals seriously understaffed.
The mood in contemporary Germany may be exceptional.
Taking in refugees, or any immigrants, has never been an easy political sell.
In the late 1930s, when Jews in Germany and Austria were in mortal danger, few countries, including the wealthy United States, were prepared to take in more than a handful of refugees.
Britain allowed about 10,000 Jewish children to come in 1939, at the very last minute, but only if they had local sponsors and left their parents behind.
To say that the generous mood in Germany today has much to do with the murderous behavior of Germans in the past is not to make light of it.
The Japanese, too, carry a burden of historical crimes, but their attitude to foreigners in distress is far less welcoming.
Even though few Germans have any personal memories of the Third Reich, many still feel the need to prove that they have learned from their country’s history.
But the almost exclusive focus by politicians and the media on the current refugee crisis conceals wider immigration issues.
Images of miserable refugee families drifting in the sea, at the mercy of rapacious smugglers and gangsters, can easily inspire feelings of pity and compassion (and not just in Germany).
Even Cameron has had to soften his tone, promising to accept a few thousand refugees, because he was moved “as a father” by the picture of a drowned Syrian boy.
But most people crossing European borders to find work and build new lives are not refugees. When British officials said that it was “clearly disappointing” that about 300,000 more people came to Britain than left in 2014, they were not mainly talking about asylum-seekers.
The majority of these newcomers are from other European Union countries, such as Poland, Romania, and Bulgaria.
Some enter as students, and some come to find jobs.
They do not come to save their lives, but to improve them.
By lumping asylum-seekers together with economic migrants, the latter are discredited, as though they were trying to squeeze in under false pretenses.
It is widely assumed that economic migrants, from inside or outside the EU, are mainly poor people out to live off the tax money of the relatively rich.
In fact, most of them are not spongers.
They want to work.
The benefits to the host countries are easy to see: Economic migrants often work harder for less money than locals.
This is not in everyone’s interest, to be sure: Pointing out the benefits of cheap labor will not persuade people whose wages might be undercut.
It is, in any case, easier to appeal to compassion for refugees than to the acceptance of economic migrants.
Even in Germany.
In 2000, German Chancellor Gerhard Schröder wanted to issue work visas to about 20,000 foreign high-tech experts, many of them from India.
Germany needed them badly, but Schröder met swift opposition.
One politician coined the slogan “Kinder statt Inder” (children instead of Indians).
But Germans, like many other rich countries’ citizens, are not producing enough children.
These countries need immigrants with youthful energy and skills to fill jobs that locals, for whatever reason, are unable or unwilling to take.
This does not mean that all borders must be opened to everyone.
Merkel’s idea of quotas on refugees should be applied to economic migrants, too.
So far, however, the EU has not come up with a coherent policy on migration.
Citizens of the EU can move freely within the Union (Britain wants to stop this, too, though it is unlikely to succeed).
But economic migration from non-EU countries, under carefully managed conditions, is both legitimate and imperative.
This is not because the migrants deserve Europeans’ sympathy, but because Europe needs them.
It will not be easy.
Most people appear to be more easily swayed by emotions – which can lead them to mass murder or warm compassion, depending on the circumstances – than by the cool calculus of rational self-interest.
Europe Needs Solidarity Over Cuba
PRAGUE &#45;&#45;
Five years ago, the European Union was on the verge of fulfilling one of the aspirations of the Velvet Revolutions that swept across Central and Eastern Europe by expanding from 15 to 25 members through the accession of several post-communist states. Yet, while the Berlin Wall and the Iron Curtain may have fallen into the dustbin of history, others vestiges of the Soviet era remain firmly in place.  Certain areas of the world have been transformed for the better, even as others have been suspended in time to fend for themselves.  One place that has not changed is Cuba, despite Fidel Castro’s decision to retire and hand the reigns of power over to his brother Raul.
On March 18th five years ago, Castro’s government cracked down on the Varela Project and other civil society initiatives rather than risk allowing a spark of democratic reform to spread across Cuba as it had in the former Soviet bloc. The seventy five prisoners of conscience locked up were dissidents, independent journalists, leaders from civil society, and librarians, who had dared to speak the truth openly about what life is like in Cuba.  Even though four prisoners have recently been released, fifty five of the seventy five remain incarcerated in deplorable conditions.  In general, the only reason that any of these prisoners were freed was because of how seriously their health had deteriorated.
Given how central the values of human rights, democracy and the rule of law are in Europe, we feel it is our obligation to speak out against such injustices continuing unchecked. Less than twenty years ago there were political prisoners on the EU’s borders who were denied the basic rights of freedom of speech and expression, lived in constant fear of being denounced and dreamed about enjoying what Europeans in the ‘West’ took for granted.
Cuba’s regime has remained in power, the same ways that communist governments did in the former Yugoslavia, Poland, the former Czechoslovakia, Hungary, Bulgaria, and Romania, Estonia, Latvia, and Lithuania – the last three as part of the Soviet Union - by using propaganda, censorship and violence to create a climate of fear. Likewise, the solidarity that was expressed by those outside of these countries helped bring about the changes.
Cuba is the only country in the Western Hemisphere that has not embraced democracy and continues to repress all forms of political dissent. Today, Cuba is closer to making genuine democratic changes due to sacrifices made by dissidents and activists inspired by how other parts of the world have been transformed since the end of the Cold War.
We believe that the former communist Central and Eastern European countries are in a unique position to support the democracy movements in Cuba based on the similarities of their histories and experiences. Our intentions in pushing for democratization are based on friendship and cooperation, good will and an understanding of the needs, expectations and hopes of Cuban people.
We, the undersigned, believe that the EU, as one of the driving forces in international politics, needs to speak out in unison against governments oppressing their own citizens. The EU should denounce human rights violations in Cuba and call for the immediate release of all prisoners of conscience.   The Ministers of Foreign Affairs from all EU member states should send a demarche on March 18th to their Cuban counterpart demanding their release as well.
The actions taken or not taken by the Cuban government should be used as a benchmark when the European Council reviews the EU’s Common Position on Cuba in June. Lastly, the EU should continue actively supporting peaceful democratic movements and civil society organizations in Cuba by taking advantage of the intrinsic knowledge some of its member states have about making a transition to democracy.
Five years ago the dream of several former Soviet satellites being members of the EU was becoming a reality. Dissidents and those committed to the spread of democracy had made this possible.
The time has come for us to repay that debt by helping those in Cuba, whose dreams have already been deferred for too long.
Europe needs to make up its mind
The celebrations to mark the 50th anniversary of the Treaty of Rome this month come at an opportune moment.
For now is the time for the European Union to call an end to its self-imposed “reflection period” following the rejection of the European Constitution by the French and the Dutch, and make up its mind about the future.
The reflection period has been mostly devoid of actual reflection, and Europe’s leaders have failed to offer Europe’s citizens any new, fundamental vision.
So how should a “refounding” (Neubegründung) of Europe – as called for by German Chancellor Angela Merkel in her first parliamentary statement on European policy – be accomplished?
In theory, there are three competing, fundamentally different visions of the EU’s future. Some still take the form of a “state of nation states.”
These thinkers – often imprecisely called “Federalists” – refer to the Constitution as a necessary step towards a European federation.
Such a federal state can be justified by claiming that the moral substance of traditional nation states has been deeply compromised by past belligerence, or as a practical preventive measure to keep the potential of new nationalist passions in check.
Moreover, the British political scientist Glyn Morgan has argued that a robust concept of pan-European security also requires a pan-European state, and that it is irresponsible on the part of Europe’s elites to maintain a permanent position of strategic dependency on the United States.
Related to this is the idea that only a strong EU can save the “European social model.”
But the last few years have made clear the absence of majority support for a European federation by the states that make up Europe, a point underscored by the debate surrounding the failed Constitutional Treaty.
In fact, many of the “federalist” arguments look dubious: in particular, there is no single European social model.
The differences for instance between the Scandinavian countries, the Mediterranean countries, and the “liberal Atlantic countries” like Ireland and the UK are sometimes more pronounced than those between Europe as a whole and the US.
In recent years, an alternative view of the EU that can be described as “supra-national multiculturalism” has taken root.
This view entails a Union whose main function is to allow – and to maintain – diversity and difference.
Instead of traditional homogeneous states, this Europe seeks to be a “Community of Difference,” a kind of “People of Others,” to borrow a phrase from the jurist Joseph Weiler.
Tolerance becomes the cardinal European virtue in this vision, and the EU’s character as an entity with federal law but without federal statehood is viewed as a strength, not a weakness.
The prophets of supra-national multiculturalism thus reject a federal democracy.
What is feasible is, they believe, at best a so-called “demoi-cracy” &#45;&#45; that is, the rule not of one people or “demos,” but of many peoples or “demoi” who deliberately assure and seek to maintain their diversity.
Elements of this vision sound attractive.
It is questionable, though, how credible European heads of government are who promote such pan-European multiculturalism and at the same time emphatically denounce alleged “multiculturalist” illusions at home – as has by now become standard political rhetoric in almost all countries.
The third vision is essentially no vision at all, but a justification of the Brussels bureaucracy as it currently exists.
From this technocratic perspective, Brussels today maintains functions that even within nation states are often delegated to institutions that are not democratically elected.
Central banks are the classic example.
Those policy areas that citizens consider the most significant – in particular welfare and education – remain under the direction of member states.
Consequently Brussels is no government to be, but a regulatory authority – and this often to the benefit of European consumers.
This authority, the technocrats claim, in turn is part of a system of national and supra-national checks and balances which, while not resembling a national democracy, would reliably prevent despotism from taking root in Brussels.
None of these three visions entirely misses the EU’s current reality or its future possibilities.
The federation has become a distant prospect, but still receives homage in politicians’ speeches, as if a different end result was inconceivable.
The demoi-crats win support because their vision tends to reinforce the status quo and leaves nearly all options open.
The technocrats in turn see their position confirmed with every passing day that the alleged crisis of legitimacy fails to appear.
But is there any kind of pan-European consensus on where Europe should go next, whether federal state, demoi-cracy or status quo?
If the answer is no, adhering to a pragmatic approach to the Union as a kind of continuously expanding “Commonwealth” is the most honest alternative to any high-minded visions.
The classic argument that the EU, like a bicycle, must always keep moving forward to avoid falling over, is simply not true: the reflection period may be frustrating for federalists, but it also proves that, even at a standstill, the EU continues.
The Brussels elites are not likely to admit this fact without further ado: their rhetoric still oscillates between doom-and-gloom pessimism and a kind of pro-European PR that is concerned only with how best to “sell” the Union to Europe’s citizens.
But PR won’t work unless there is a vision that ultimately sells itself.
Europe’s Refugee Amnesia
BARCELONA – After World War I, when millions of European civilians were made refugees, forced out of their homelands by enemy occupation or deportation, an international regime was developed to coordinate effective responses and ease the suffering of those who had been uprooted.
A century later, another refugee crisis is underway, and this time, it is Europe that has the power to provide safe haven to desperate people.
Yet it has not risen to the occasion, with many of its responses failing to match the urgency of the situation.
In just the first few months of 2015, more than 38,000 people have attempted to reach Europe by crossing the Mediterranean from North Africa.
Some 1,800 people have died as a result – more than twice the number of such deaths in all of 2013.
Disappointingly, many Europeans have responded to this humanitarian crisis, which closely resembles the one that Europe endured a century ago, by opposing their countries’ acceptance of any more refugees.
How quickly we forget our past.
Worse, some Europeans want us to forget.
Today’s sentiment has been fueled by populist parties positioning themselves as guardians of national identity.
Europe, they argue, faces a mass influx that threatens to place even greater strain on its economies, labor markets, and cultures.
One does not have to look back a century to see how dangerous the consequences of such rhetoric can be.
But the populists’ narrative is not just inflammatory; it is false.
Although it is sometimes difficult to distinguish the drivers of displacement, data from the United Nations refugee agency show that at least half of those trying to reach Europe from North Africa are fleeing from war and persecution.
The International Organization for Migration, together with Italy’s navy, has determined that this year’s migrants hail mainly from Eritrea, Gambia, Nigeria, Somalia, and Syria ‒ countries where conditions entitle their citizens to request asylum.
In short, this is a crisis not of immigrants, but of refugees – and it is showing no sign of slowing.
Indeed, with instability and violence plaguing much of North Africa and the Middle East, the decline in armed conflict since World War II seems to have slowed – and could even reverse.
The international community is legally bound to protect those who are being forced to flee their homes by conflict and persecution.
Given Europe’s history and values – not to mention its proximity to some of the beleaguered populations – it has a special obligation to contribute to this effort.
But Europe is not the only region that has been burdened by today’s migration flows – or even the most affected.
Nine out of ten refugees do not leave their region, fleeing to countries very close to or bordering their own.
The Jordanian refugee camp Zaatari alone shelters more than 82,000 people; if it were an official city, it would be among the country’s most populous.
Lebanon, a country of just 4.5 million people, has taken in an estimated 1,116,000 refugees – roughly equivalent to the population of Brussels.
Given this, it is difficult to justify Europe’s failure to agree on a system of relocation and resettlement for a total of, say, 20,000 refugees this year, distributed among 28 countries according to individual quotas.
Indeed, many European countries have accepted very few refugees so far, making their inaction even more difficult to comprehend.
Spain and Greece, for example, have each accepted only about 4,000 – a meager amount, when compared to Jordan or Lebanon.
A quota-based agreement could help to disperse the burden across European countries.
As it stands, major differences among countries’ asylum policies have meant major disparities in refugee numbers.
Indeed, just four countries – France, Germany, Italy, and Sweden – accounted for two-thirds of all refugees accepted in Europe last year.
When a network of human traffickers turns the Mediterranean into a mass grave, Europe cannot simply turn away.
Instead of succumbing to destructive populism and dishonorable isolationism, Europe’s leaders must commit to fulfilling their legal and moral responsibility to help the refugees – and, of course, to explain to their citizens why this is so important.
Such an effort would require every European country – not just those situated on the Mediterranean – to contribute resources to support large-scale search-and-rescue operations.
Border control cannot be the only – or even the primary – objective.
Beyond helping to manage the crisis today, Europe must commit to helping fragile and conflict-affected countries overcome the challenges they face, improve their citizens’ wellbeing, and build thriving economies.
To retain its moral and political authority, the European Union – perhaps the most compelling example of how cooperation can support peace and prosperity – must implicate itself beyond its frontiers in a sincere and determined way, reaching mutually beneficial agreements with its southern neighbors.
Behind almost every request for asylum that an EU country receives is a human tragedy – a micro-history of violence, fear, and loss.
The goal of the asylum-seekers is not to reach Europe; it is simply to escape conflict and persecution.
And they should be able to.
Last century – in both world wars – Europeans were the ones fleeing from persecution.
With the number of displaced people now at levels unseen since World War II, Europe has a responsibility to recall its history.
And it should take the opportunity to respond to today’s refugee crisis as it would have liked the world to respond to its suffering – and to prove that the EU’s value extends far beyond its borders.
Why Europe Backs Obama on Iran
PARMA – Israeli Prime Minister Binyamin Netanyahu seems close to ordering a general mobilization of his country’s military, and Republicans in the United States are preparing for a ferocious battle with President Barack Obama’s administration, in the wake of the framework nuclear agreement with Iran.
And yet the framework deal has been almost universally welcomed in Europe.
What accounts for this disconnect within the West over a key regional and global threat?
Several factors are at work.
One, certainly, is that Europe – or, more precisely, the United Kingdom, Germany, and France – has been engaged in the talks with Iran for more than a decade.
Even as former President George W. Bush branded Iran a part of an “axis of evil,” the key European Union members insisted that diplomacy was better than war.
And, step by step, the European approach has been vindicated.
Critical to that outcome, of course, was the US intelligence community’s reports that all the evidence pointed to Iran having long ago – in 2003 – abandoned concrete plans to develop a nuclear weapon.
It is easy to see why the Iranians would have done so.
So long as Saddam Hussein, who had launched a brutal eight-year war against Iran in the 1980s, and whom influential Westerners openly accused of seeking to acquire nuclear weapons, remained in power, the Iranian government’s plan to develop nuclear weapons followed a certain realist logic.
Once the US military ousted Saddam’s regime in 2003, Iran’s most acute security threat vanished.
Moreover, there has long been a tactical difference between US and European policies toward Iran’s nuclear program.
At times, the US seemingly sought to eradicate any knowledge of nuclear technology from a country of which it is deeply suspicious, whereas the European approach was to seek reliable assurances that Iran would never develop a nuclear weapon.
At the end of the day, the US recognized that any realistic policy needed European support, while Europeans saw preventing a rush to war by the US or Israel as a central policy objective.
It should also be said that Europeans have never been overly impressed with America’s hardline approach toward that other charter member of the axis of evil, North Korea, and its nuclear ambitions.
Refusing to negotiate with the North Korean regime, and imposing the most stringent sanctions on it, has not stopped it from either acquiring nuclear weapons or accelerating its development of both nuclear and missile technologies.
Among the significant issues that need to be sorted out before the end-of-June deadline for reaching a final deal with Iran is to agree on the details of the gradual suspension, and eventual repeal, of economic and diplomatic sanctions against the country.
While this will be the subject of a fierce political battle in the US, it is likely that the European Union will be far more willing to move ahead.
Indeed, Europe has sound reasons to lift the restrictions on Iranian oil exports.
Additional supplies of oil to global markets will keep prices down or depress them further.
Apart from the economic gain for Europe’s economies, low oil prices yield important strategic benefits – particularly with respect to constraining Russian President Vladimir Putin’s revisionist ambitions in Ukraine and elsewhere.
Needless to say, the US and Europe should stick to a common approach on the sanctions issue.
But were a more militant policy approach by the Republican-controlled US Congress to prevail, America might well find that it loses the ally that makes the key difference for the sanctions’ success.
Indeed, on this issue, the US might rapidly find itself isolated from all other global actors.
Europe is certainly not naive about the nature of the Iranian regime.
France, with its historically strong convictions on issues concerning nuclear proliferation, has taken a particularly firm stance during the talks.
But Europe is also acutely aware of the consequences of the rapid increase in violent conflict and suffering in its immediate neighborhood; indeed, Europeans see those consequences daily in the flood of refugees trying to reach its shores.
Another war in the Middle East is clearly not in its interest.
Finally, Israel is a key factor underlying the differences between the US and Europe when it comes to Iran.
Though Netanyahu’s shrill words still have an attentive audience in the US, most of Europe regards his position as being only a little short of ridiculous.
Thus, it is nearly certain that, assuming a final agreement with Iran is reached in June, Europe’s backing for it will be unanimous – or close to it – and that it will be eager to support Obama in his battle with opponents of the deal at home.
The framework agreement has vindicated Europe’s approach to resolving the nuclear dispute.
Europe on Holiday
Currently, the average number of hours worked per person aged 15 to 25 each year in France and Germany is about 50% lower than in the United States.
Other European countries (for example, Italy and Spain) fall somewhere between these poles.
Although some Americans always like to boast about their superior work ethic, this disparity in working hours between the US and Europe has not always existed.
Indeed, until the mid-1970's, the number of hours worked on either side of the Atlantic was roughly the same.
From the mid-1970's on, however, Americans continued working more or less the same number of hours, while Western Europeans began working less and less each year.
If Western Europe needs an explanation as to why its rate of economic growth is lagging behind the US, it need look no further.
The average number of working hours per person depends on a variety of factors:
• the level of participation in the labor force;
• the number of vacation days workers have;
• the number of hours worked in a "normal" week, i.e., with no vacation.
Virtually all the difference between the US on one side and France and Germany on the other are due to the first two factors, each with roughly equal weight.
So, lower participation in the labor force explains half of the difference, and longer vacations for those who do work accounts for the other half.
The importance of vacation time should come as no surprise to anyone who has experienced Europe's deserted cities in August, the three-week vacation "bridges" in April and May in France and Italy, the "rush hours" that take place every Friday at 2 PM in German cities, and crowded ski slopes in February due to winter school vacations.
But knowing "how" Europeans work less is one thing; knowing "why" Europeans work less than Americans is another.
One view is that Americans are perceived (and like to see themselves) as Calvinist workaholics, whereas Europeans like to think that they know how to enjoy life's pleasures.
As a European working in the US, I admit that I do take many more vacations than my American colleagues.
So there may be something in this "cultural" explanation.
But why did this start around 1973?
A second argument attributes the difference to income taxes, which, in fact, have increased significantly in Europe since the 1970's, while in the US income taxes fell from the early 1980's onward.
Income taxes certainly must affect willingness to work.
They may not change by much the number of hours worked by the main breadwinner in a family (typically a man), but they do influence the participation of women in the labor force.
After all, why work, when your after-tax salary barely pays for childcare and household help?
But even this is not a sufficient explanation, because studies of how the supply of labor responds to tax changes suggest that something else must explain the enormous gap between US and Europe, especially France and Germany.
For the age group over 50, the structure of pension systems is clearly a major factor.
It was and remains much more profitable to retire earlier in Europe than in the US.
Why should a Frenchman or Italian in his early sixties work today, when in the 1990's he could have retired in his mid-fifties with 80% or more of his last working-age salary?
For women, the retirement age in the mid-1990's was even lower. Public sector employees had even more advantages.
Nor is that all.
In the 1980's and 1990's, many European labor unions, in response to rising unemployment, adopted the policy of "work less, work all."
In other words, they obtained shorter hours (i.e., more vacations) in order to keep employment up.
The problem is that total compensation did not go down in proportion to the shorter hours, thus leading to an increase in pay per hour.
Lower productivity and higher unit labor costs eroded firms' willingness to hire, leaving Europe with chronically higher unemployment than in the US.
Today's debates about growth in Europe are full of buzz words like "knowledge-based society," "technological progress," and "investment in education."
Europeans certainly need something to compensate for a short working life with many vacations.
But much of this discussion is merely a form of "political correctness."
It is more reassuring - and "feels better" - to tell Europeans that growth is sluggish because society is not sufficiently knowledge-based, rather than pointing to the trade-off between vacations and growth.
Europeans tend to prefer vacations over growth.
Personally, I love taking more and more vacations.
But I cannot (and do not) then complain if my income does not grow faster and faster.
A Five-Step Plan for European Prosperity
WASHINGTON, DC – Though the Greek crisis has been placed on pause, the economic situation in Europe remains bleak.
Eurozone growth is up slightly from its near-recession levels of a few months ago, but projections by the International Monetary Fund for 2015 and 2016 barely exceed 1%.
Unemployment remains above 11% – and twice that among the young (and doubled again in countries like Greece and Spain).
Greece's exit from the eurozone would likely be less disruptive now than it would have been a few years ago.
The countries most at risk of contagion – Portugal, Spain, and Italy – are less vulnerable now in the eyes of the markets; the European Union has established a bailout fund; and the European Central Bank has launched a large bond-buying program.
The real challenge in Europe is continued stagnation and rising public-sector fiscal pressures in bloated welfare states with rapidly aging populations.
Restoring growth, opportunity, prosperity, and financial stability will require bold solutions to five inter-related problems.
The first problem is fiscal. The math is simple.
The tax rate necessary to fund social spending must equal the ratio of the number of people receiving benefits to the number of taxpayers (the dependency ratio), multiplied by the average benefit relative to the income being taxed (the replacement rate).
It was this math that led Mario Draghi, the president of the European Central Bank, to declare that, “The European social model has already gone." Too many Europeans are collecting too many benefits, but so far governments have mostly ducked the issue, taking on massive debt in order to postpone the reckoning.
Reform that targets social spending at true need is long overdue.
The second problem is economic: growth in Europe has fallen far short of that in the United States, decade after decade.
Though economic theory predicts convergence in standards of living, Europe lags behind the US by 30% or more.
High taxes and burdensome regulations stifle the labor market and potential new businesses.
Overgenerous social-welfare payments create disincentives to work, hire, invest, and grow.
Chronic sluggish growth is insufficient to create opportunities for the continent's masses of unemployed and underemployed young people.
The third problem is the banking crisis.
In Europe, banks supply roughly 70% of the credit to European economies, compared to 30% in the US.
But many European banks are over-leveraged zombies, kept alive by emergency public infusions of liquidity.
Fourth, there is the currency crisis.
The euro's many benefits – cross-border pricing transparency, lower transaction costs, and inflation credibility – required surrendering independent monetary policies and flexible exchange rates.
But, given limited interregional transfers and labor mobility, this means that the continent has far less ability to absorb disparate shocks through the operation of so-called automatic stabilizers.
In the US, by contrast, people in high-unemployment Michigan move to, say, Texas, where jobs are plentiful, even as the federal tax and transfer system automatically shifts money in the opposite direction, cushioning the local downturn.
Finally, Europe faces a severe governance deficit.
Citizens are becoming increasingly disenchanted with European elites and supra-national institutions such as the European Commission, which impose rules and regulations that conflict with their countries' economic interests and sovereignty.
Voters are restless, as the Greek election result demonstrated.
Nationalist sentiment is rising, and demagogic parties of the far right and left are gaining in every poll.
Addressing these problems will be difficult, but not impossible.
The core challenge is fiscal;
Europe cannot escape the need to scale back its sclerotic welfare states.
By recognizing that, and implementing the following series of mutually reinforcing policies, the continent can move beyond its current torpor.
Gradual fiscal consolidation – reducing the projected future size of government spending, and hence future tax rates – will have to be at the center of the effort.
This should be combined with the mutualization of some portion of the liabilities of highly indebted countries – defined as a debt-to-GDP ratio above, say, 60% or 70% – and modest write-downs in exchange for long-term zero-coupon bonds.
The “Brady bonds" that the US used to help resolve the Latin American debt crisis in the 1990s could serve as a model.
Meanwhile, Europe's zombie banks will have to be rapidly resolved by acquisition or temporary takeover, cleanup, and asset sale, as was done by the Resolution Trust Corporation during the US savings and loan crisis in the 1980s.
Structural reforms that increase labor-market flexibility and reduce red tape and related obstacles to new business formation must also be implemented.
Finally, the eurozone should adopt a two-track euro with a fluctuating exchange rate – an idea championed by the American economist Allan Meltzer.
Systematic rules would have to be developed to determine when members of the eurozone are demoted to “euro B" or promoted to “euro A."
Such a halfway house – call it “depreciation without departure" – would avoid some (but not all) of the problems of a country's complete withdrawal from the eurozone.
It would create its own set of incentives, which, on balance, would pressure individual countries to avoid demotion, just as top-tier football (soccer) teams seek to avoid relegation to the minor leagues.
Together, these policies would reduce sovereign debt, lower interest rates, ameliorate tax pressures, enable countries to increase competitiveness with fewer sacrifices to living standards, and provide Europe with a road map to prosperity.
Until now, the EU's leaders have followed the easiest, but least productive path, patching temporary, partial fixes on problems as they erupt.
The possibility of a brighter economic future should be a prize large enough to evoke the same type of leadership through which Europe rose from the ashes of World War II.
Europe Re-Divided?
NEW YORK – The so-called euro crisis is generally seen exclusively as a currency crisis, but it is also a sovereign-debt crisis – and even more a banking crisis.
The situation’s complexity has bred confusion, and that confusion has political consequences.
Indeed, Europe faces not only an economic and financial crisis, but also, as a result, a political crisis.
The various member states have forged widely different policies, which reflect their views rather than their true national interests – a clash of perceptions that carries the seeds of serious political conflict.
The solution that Europe is about to put in place will be effectively dictated by Germany, whose sovereign credit is necessary for any solution.
But this ignores Germany’s major share of responsibility for the currency and banking crises, if not for the sovereign-debt crisis. France’s efforts to influence the outcome are ultimately limited by its dependence on its close alliance with Germany for its AAA sovereign ratings.
Germany blames the crisis on the countries that have lost competitiveness and run up their debts.
Consequently, Germany places all the burden of adjustment on debtor countries.
But this ignores Germany’s major share of responsibility for the currency and banking crises, if not for the sovereign-debt crisis.
When the euro was introduced, it was expected to bring about convergence among eurozone economies.
Instead, it brought about divergence. The European Central Bank treated all member countries’ sovereign debt as essentially riskless, and accepted their government bonds at its discount window on equal terms.
This induced banks that were obliged to hold riskless assets in order to meet their liquidity requirements to earn a few extra basis points by loading up on the weaker countries’ sovereign debt.
This lowered interest rates in the so-called PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain) and inflated housing bubbles just as reunification costs were forcing Germany to tighten its belt.
This caused both the divergence in competitiveness and the banking crisis in Europe, which affected German banks more than others.
In fact, Germany has been bailing out the heavily indebted countries as a way of protecting its own banking system.
For example, Ireland’s massive sovereign debt arose because eurozone authorities, intent on saving the banking system, forced the Irish to nationalize their banks as a condition for keeping them afloat.
Thus, because the arrangements imposed by Germany protect the banking system by treating outstanding sovereign debt as sacrosanct, debtor countries must bear the entire burden of adjustment.
This is reminiscent of the international banking crisis of 1982, when the World Bank and the International Monetary Fund lent debtor countries enough money to service their debts until banks could build up sufficient reserves to exchange their bad debts for Brady Bonds in 1989.
That meant a “lost decade” for Latin America’s economies.
Indeed, the current arrangements penalize debtor countries even more than in the 1980’s, because they will have to pay hefty risk premiums after 2013.
There is something inconsistent in bailing out the banking system once again and then “bailing in” holders of sovereign debt after 2013 by introducing collective-action clauses.
Moreover, the competitiveness requirements demanded by Germany will be imposed on an uneven playing field, putting deficit countries in an untenable position, one that might even drag down Spain, which entered the euro crisis with a lower debt ratio than Germany.
As a result, the European Union will suffer something worse than a lost decade; it will endure a chronic divergence in which the surplus countries forge ahead and the deficit countries are dragged down by their accumulated debt burden.
Germany is imposing these arrangements under severe domestic pressure, but the German public has not been told the truth, and is therefore confused.
Because the rules to be put in place at the end of March will set in stone a two-speed Europe, they are bound to generate resentments that will endanger the EU’s political cohesion.
Two fundamental modifications are required.
First, the European Financial Stability Facility must serve to rescue the banking system as well as member states.
This would allow sovereign debt to be restructured without precipitating a banking crisis.
Despite this added task, the size of the rescue package could remain the same, because any amount used for recapitalizing or liquidating banks would reduce the amount needed by governments.
Bringing the banking system under European supervision, rather than leaving it in the hands of national authorities, would be a fundamental improvement that would help restore confidence.
And it would have the additional merit of enlightening the German public about the true purpose of the rescue operation.
Second, to create an even playing field, the risk premium on the borrowing costs of countries that abide by the rules will have to be removed.
This could be accomplished by converting the bulk of their sovereign debt into Eurobonds.
Individual countries would then have to issue their own bonds with collective-action clauses, paying the risk premium only on amounts that exceed the public-debt limit (60% of GDP) set by the Maastricht criteria.
The first step could and should be taken immediately; the second will have to wait.
The German public is a long way from accepting it; yet it is clearly needed in order to reestablish a level playing field in Europe.
The EU has been built step-by-step, with its architects knowing in advance that each step was inadequate and that additional steps would be needed.
They could be confident, however, that when the time came to correct a deficiency, the necessary political will could be summoned.
This time, by contrast, the prospect of a two-speed Europe is bound to undermine Europe’s political cohesion – and thus its ability, when necessary, to act in unison.
That is why the need for the next step in European integration must be clearly acknowledged alongside implementation of the EU’s crisis-resolution mechanism.
Otherwise, deficit countries will have no reason to hope that they can escape their predicament no matter how hard they work.
A Safer Path to Asylum
LONDON – In 2014, more than 190,000 people risked their lives crossing the Mediterranean Sea from North Africa to Europe.
Some 3,500 lost the gamble, dying as they tried to traverse what has become the world's deadliest frontier.
There can be no doubting that some who undertook the perilous journey did so simply to search for better-paying jobs.
But the origins of those attempting the trip indicate that many are political refugees, not economic migrants.
The majority of those who crossed the Mediterranean last year come from Eritrea and Syria.
Many have been formally recognized as refugees by the United Nations Refugee Agency (UNHCR) in the countries to which they initially fled.
Some 90% of those who apply for asylum in Europe are granted some sort of protection – a further testament to their status as bona fide refugees.
It is time for the European Union to separate the discussion of the crisis in the Mediterranean from its broader immigration debate.
The policies, language, and response to the events unfolding on the EU's southern border must be different from those concerning the voluntary movement of job seekers from one safe country to another.
Indeed, the proper context of the discussion is European countries' obligations under international refugee law.
The policies put in place by the EU and its member states are directly responsible for the plight of those who die attempting to cross the Mediterranean.
Efforts to discourage refugees from arriving have not diminished the number of people who are granted asylum in Europe; they have merely made the process of being granted refugee status more random and dangerous.
Every country in Europe is party to international treaties that recognize the rights of refugees to seek asylum and not be forcibly returned to countries where they will be unsafe.
And yet, despite calls by frontline Mediterranean states to establish systems to improve the handling of the crisis and share the burden, little is being done to make things safer for refugees or more manageable for the countries in which they arrive.
The countries neighboring Syria and Iraq are facing the largest inflows of refugees fleeing the violence there, and the UNHCR has appealed for assistance in resettling a limited number of the neediest.
So far, however, the response from the countries that can most easily afford to take in refugees has been pathetic.
Even worse, many people who, as recently as a few years ago, would have easily obtained permission to study, work, or visit relatives in Europe are being denied visas simply because of their refugee status.
There is no reason to require people seeking an asylum hearing to run a gamut of desert crossings, abuse by smugglers, beatings, extortion, rape, and exploitation – or to have them experience the trauma of watching their friends and family die along the way.
Doing so is cruel and inhumane, and it violates the spirit of all refugee, human rights, and immigration laws.
In the past, resettlement programs in Africa, Asia, and the Middle East screened people to establish their status as refugees; assessed their education, skills, and family relations to determine where they might be integrated most easily; and worked with European, North American, and Australian governments to find them new homes.
In the 1980s, such programs helped thousands of Ethiopians, Vietnamese, and Argentines, and a look at the communities in which the beneficiaries were resettled reveals that the vast majority have become self-reliant taxpayers.
There is no reason that something similar cannot be done for those fleeing violence and persecution today.
If asylum seekers were provided with opportunities to present their claims in the countries where they currently find themselves, they would not be forced to risk their lives at sea to reach Italy or Greece.
Eritreans could file applications in Khartoum for asylum in Sweden, Germany, or the United Kingdom. Syrians in Cairo or Beirut could do the same.
The claims could be prioritized and processed in a regular manner, and the refugees could arrive in Europe healthy and ready to work or study.
The crisis in the Mediterranean cannot be managed in a piecemeal manner.
The financial costs of patrolling its waters and rescuing those adrift are exorbitant.
The loss of lives is inexcusable.
But we do not have to wait until the root causes of displacement – state failure and civil war – are addressed.
We need only to find the courage to create a system in which desperate people do not have to risk their lives to apply for asylum and resettlement.
Europe’s Bad Example
LONDON – The death toll resulting from Europe’s paralysis in responding to the influx of refugees from the Middle East and Africa continues to rise.
Hundreds of thousands of others have suffered unnecessarily.
The European Union’s reputation has been battered, despite bold leadership from Germany, Sweden, and the European Commission.
Bitter divisions among member states have jeopardized the Schengen Area of borderless travel within the EU.
Populists are having a field day.
But the EU’s failure to devise a cohesive response has had another dire, if less commented-upon, consequence: As Europe’s leaders stumble from one inconclusive summit to another, they have handed the rest of the world an excuse for similar inaction.
If the EU cannot get its act together to confront a crisis directly affecting its member countries, why should others leap into action?
Let there be no misunderstanding: Europe alone is not responsible for the wellbeing of all the people fleeing persecution in Afghanistan, Eritrea, Syria, and elsewhere.
These desperate souls are the collective responsibility of the entire world community, as the 1951 Convention Relating to the Status of Refugees makes abundantly clear.
But the immoral and xenophobic posturing of a handful of EU states has allowed other countries to be bystanders, in turn damaging the global refugee system – of which Europeans have been the main beneficiaries over the past 64 years.
So, regardless of what European leaders decide at their latest summit, it is past time for the international community to act in support of the world’s refugees and others who have been forcibly displaced.
A few countries already have stepped up.
Brazil has issued thousands of humanitarian visas to Syrians.
Venezuela has offered to take in 20,000.
But most have been noticeably silent.
Today, just 100,000 out of 20 million refugees benefit each year from the UN refugee agency’s resettlement program, which provides permanent new homes in stable countries (a mere 26 participate).
Most of the rest languish in conditions that offer generally dismal prospects.
Expanding resettlement capacity, therefore, should be one goal of global action.
The potential is enormous.
In Iceland, 11,000 families have offered to host refugees, as have many thousands of others throughout Europe.
Resettlement via “private sponsorship” – whereby individuals, communities, and NGOs take responsibility for families – is stymied only by governments’ failure to set up systems to vet and match refugees with sponsors.
Equally important, adequate support must finally be given to frontline states, like Jordan, Lebanon, and Turkey.
This is the best way to stem refugees’ dangerous efforts to cross the Mediterranean.
Incomprehensibly, the world has failed to provide funds for even basic needs like food and housing, let alone for the schools, health care, and training that would persuade refugees to stay closer to home.
The UN refugee agency’s funding for Syria, which supports humanitarian agencies and development aid for neighboring countries, has received about one-third of the $4.5 billion needed this year.
The World Food Program, a backbone of the refugee system, has met only two-thirds of its 2015 funding needs, compelling it to slash support to hundreds of thousands of Syrians.
But global action must go well beyond offers of temporary or permanent refuge for the displaced, or funding for frontline countries.
Countries could contribute in many other ways as well.
Perhaps the single most effective contribution would be to establish less cumbersome means for asylum-seekers to reach safety.
Providing humanitarian visas – which can be issued with minimal delay – constitutes one clear commitment countries could make immediately.
Over time, countries could also establish procedures enabling asylum-seekers to apply more easily for labor, student, or family reunification visas.
Meanwhile, special economic zones could be established in frontline countries to attract investment and create jobs for refugees, with the G-20 offering preferential trade status.
Tax breaks and other support could be given to companies offering opportunities to refugees.
A global response also must harness the extraordinary potential of civil society and the private sector.
Indeed, the real leadership in this crisis has come from millions of European citizens, whose everyday acts of compassion have put their craven leaders to shame.
Then there are the bold actions of moral entrepreneurs like Chris and Regina Catrambone, who created the Migrant Offshore Aid Station to rescue people at sea; the founders of Refugees Welcome, the Airbnb-type platform to match asylum seekers with families willing to host them; and Refugee Air, a pioneering Swedish effort to enable qualified asylum-seekers to fly to Europe.
These and similar civil-society initiatives need to be supported, coordinated, and amplified.
The potential on the corporate side is immense as well.
Google is matching public contributions to a variety of organizations responding to the crisis.
The Ikea Foundation is a major partner of the UN refugee agency in providing shelter to refugees.
And Turkish-American Hamdi Ulukaya, founder of Chobani yogurt, has pledged $700 million to support refugees.
There is no reason that thousands of companies cannot make similar commitments.
The Syrian exodus is the largest refugee crisis for a generation, and the EU should be doing much more than it is.
But not all solutions will come from Europe – and there is no legal or moral reason why they should.
Europe’s Refugee Problem, Then and Now
NEW YORK – Earlier this spring, I drove to a beautiful spot on the southern bank of Lake Geneva.
My destination was the Hotel Royale in Évian-les-Bains.
It was there, in July 1938, that 32 nations met for a shameful discussion that has been virtually airbrushed from our memory.
Convened by US President Franklin D. Roosevelt in response to the massive refugee crisis triggered by Hitler’s virulent anti-Semitism, the Évian conference was a catastrophe.
And its disastrous outcome needs to be recalled in the light of Europe’s current migration crisis.
The Évian conference was supposed to address the plight of hundreds of thousands of German and Austrian Jews who were desperate for refuge.
Roosevelt believed that only a collective solution could meet the challenge.
Hitler, too, hoped that other countries would accept them.
In a speech in Königsberg that March, he jeered, “I can only hope and expect that the other world which has felt such deep sympathy for these criminals will be generous enough to transform this pity into practical aid.
As far as I am concerned we are ready to place our luxury ships at the disposal of these countries for the transportation of these criminals.”
He had already begun to expel Jews, including by placing them forcibly on ships and sending them to various destinations in the Mediterranean and across the Atlantic.
But, throughout Europe, the refugees faced rejection.
On June 6, 1938, as preparations for the conference were underway, the US State Department received a letter concerning 51 Austrian Jewish refugees stranded on a small boat in the international waters of the Danube.
The writer recalled seeing: “the heartrending fate of 51 human beings driven from one frontier to the other.
We have gained personal knowledge of the unspeakable misery that has innocently befallen 100,000 inhabitants of Austria.”
And yet in Évian the following month, although many European delegations voiced eloquent dismay over the torment experienced by the Jews of Germany and Austria, they were unprepared to take concrete action.
The outcome of the meeting was clear: Europe, North America, and Australia would not accept significant numbers of these refugees.
In the verbatim record, two words were uttered repeatedly: “density” and “saturation.”
The European countries were already beset with population “density” and had reached a point of “saturation” – in other words, there was simply no more room at the European inn.
It was an absurd thing to say, of course, in 1938, given the size of Europe’s populations today.
And it would be an equally ridiculous thing to say now, too.
To be sure, the participants in Évian could not have foreseen the Holocaust, or that Europe was being drawn into another devastating war; nonetheless, their lack of moral conscience was breathtaking.
Many of the countries that refused to take in suffering refugees were themselves, in due course, occupied and brutalized by the Nazis – and desperate for the compassion that they denied the Jews in July 1938.
The Nazis must have reveled in the knowledge that their virulent anti-Semitism found an echo – sometimes not so faint – in the rest of Europe.
They also came to realize that if expulsion was not possible, extermination eventually would be.
Today, anti-Semitism, Islamophobia, racism, xenophobia, and anti-migrant sentiment are again rising across Europe, and we must stop now and reassess precisely where we are.
A major British tabloid newspaper recently felt it acceptable to allow one of its columnists to call immigrants “cockroaches.”
Rwanda’s Radio Télévision Libre des Mille Collines used the same word to describe Tutsis in the run-up to the 1994 genocide, as did Julius Streicher’s Nazi newspaper Der Stürmer to describe Jews.
Political leaders across Europe regularly – and shamefully – blame migrants for their national woes.
Attacking migrants or minorities – whether crudely, through language, or more subtly, through policy – is unacceptable everywhere, full stop.
When words are formulated with the clear intention of causing harm and violence on national, racial or religious grounds, freedom of expression becomes incitement to hatred, which is prohibited by law.
Countries that have ratified the International Covenant on Civil and Political Rights, which includes all European Union members, are bound to uphold it.
And yet Europe’s current proposals on migration leave much to be desired. The continent needs to recall its past more sensitively, and be more generous to the desperate people crossing the Mediterranean.
François Crépeau, the United Nations special rapporteur on the human rights of migrants, observed in a recent interview that Europe, Australia, and Canada could easily resettle one million Syrian refugees over the next five years, and they could add Eritreans to that list and extend this policy to seven years.
So why is Europe proposing to accept a paltry 20,000-40,000 people annually for resettlement?
To the European politician strongly opposed to migration, I suggest that the next time you need hospital treatment, take a look around you: many of the people caring for you have a migrant’s tale.
And should you quench your thirst with the famous water drawn from Évian-les-Bains, you may wish to reflect on the craven failure of a conference that could have saved so many lives – and on what it can still teach us today.
We Should Not Be Afraid
PARIS – Europe is facing an historic moment.
By the end of this year, the number of people applying for asylum in the European Union will exceed one million. The human cost of this refugee crisis is appalling.
Yet, in all but a handful of cases, the response of Europe’s governments has been tentative, at best: acknowledging the need to do more, while fearing the implications.
Some politicians fear the burden that migrants will impose on local communities and taxpayers.
Others fear extremists masquerading as genuine refugees.
Above all, many are scared of public opinion, which – for all the heart-warming scenes of welcome and support for asylum-seekers – remains hesitant and even hostile to the prospect of still more migrants from war-torn, troubled countries, especially if they practice a different religion.
European leaders cannot afford to be afraid.
The refugee crisis is not one from which they can opt out.
No magic wand will empower leaders to transport more than a million people back across the Aegean and the Bosphorus to Mosul and Aleppo, or across the Mediterranean to Eritrea, Somalia, and Sudan.
The reintroduction of border controls and the construction of fences may buy time for over-stretched countries, but no one can seriously expect to keep out people who are so desperate to move.
Given the dire conditions in the countries from which they are fleeing, perhaps half of the asylum-seekers will qualify for residency under even the strictest rules.
So, whatever the sensitivity or ambivalence of public opinion, European leaders will have to find a bold, coordinated, and unified response.
There are three challenges.
The first is to agree on a fair allocation of refugees within Europe; despite their vast numbers, these desperate people must be provided with shelter, food, and support.
This will be difficult enough.
The second challenge is to start the process of integrating refugees into Europe’s societies and economies.
Some refugees will find it relatively easy to find jobs.
A university-educated Syrian civil engineer arriving in Munich will need to learn some German; but, once this is done, he or she is unlikely to have to wait too long before employers come knocking.
Other asylum-seekers have lower levels of education, and many may well be traumatized by their experience of war and exodus.
It will take time and effort to integrate them – and many voters will be skeptical of the process, especially given that successful integration or assimilation will not come cheap.
However, paying the price to accept and integrate today’s asylum-seekers could reap significant benefits for the Europe of tomorrow.
Our work at the OECD shows that migration, if well managed, can spur growth and innovation. Unfortunately, in the past, migration has not always been well managed: migrants have been concentrated in ghetto-like conditions, with few public services or employment prospects.
Even so, the evidence from the OECD’s 34 member countries is that immigrants generally pay more in taxes and social security contributions than they receive in individual benefits.
Today, we’ve released a policy brief on the current refugee crisis.
Put simply, Europe needs migrants and the new skills they can bring.
Otherwise, as its population falls, it will struggle to pay pensions and health-care costs in the future (already in the decade to 2010, immigration accounted for 65% of the increase in the EU workforce).
Many will argue that refugees who lack the skills that the economy demands will be harder to integrate than other newcomers.
Perhaps so.
But, because we now know a great deal about what has worked in resettling migrants, we can hope to avoid the mistakes of the past – not least by documenting and sharing the experiences of the countries that have managed migration well.
This brings us to the third, and greatest, challenge that European leaders have to overcome: the fear of migrants.
Integration is a precondition for the public acceptance of future legal flows.
The presumption is that “we” are integrated, whereas “they” are not.
And yet almost everyone has a migrant somewhere in their family tree, often not many generations back.
The distinction between “us” and “them” is not as sharp as we might assume.
None of today’s leaders expected to face a human tragedy on the scale of what we now see in the Mediterranean and across Europe.
But how they respond will determine how they are judged by their citizens and by history.
This is not a numbers game.
Leaders should shift their attention from questions concerning “how many” and “where” to the “what” of the crisis – namely, what they should be doing to integrate these newcomers into their societies and economies.
They must exercise their leadership to convince the public that migrants – above all, those most in need of protection – give more than they take.
In this moment of crisis, we should all heed the words of the Mexican novelist Carlos Fuentes: “Recognize yourself in he and she who are not like you and me.”
Europe\u0027s Refugee Opportunity
ROME – Europe’s so-called refugee crisis should never have become an emergency.
Accommodating one million asylum-seekers should not be a huge challenge for the European Union – an area with 500 million citizens that welcomes more than three million immigrants every year.
Unfortunately, the lack of a coordinated response is transforming a manageable problem into an acute political crisis – one that, as German Chancellor Angela Merkel has rightly warned, could destroy the EU.
Most EU member states are selfishly focusing on their own interests.
This pits them against one another and has precipitated panic, putting refugees in even greater peril.
A smart, comprehensive plan would calm the fears.
Instead, Europe has preferred to search for scapegoats – and Greece is the latest to be targeted for blame.
Greece has been accused of not doing enough to process and house refugees.
And yet, even if the country were not crippled by economic crisis, it would be unreasonable to expect a single small country to bear the burden alone – especially in a year when more than 800,000 refugees are expected to pass through its territory.
This is a European and global problem, not solely a Greek problem.
There is plenty of blame to go around.
In Greece, George Soros’s Open Society Foundations, acting in partnership with European Economic Area and Norway Grants, anticipated the problems that the lack of a serious European asylum policy would create.
In 2013, the partnership established an organization, Solidarity Now, run by the cream of Greek civil society.
Solidarity Now needs just €62 million ($67 million) to care for 15,000 of the 50,000 refugees who need to be housed in Greece next year.
And yet, though the EU has promised to spend €500 million to help Greece manage the crisis, some member states have failed to pay their share.
In addition to supporting Greece, the EU needs a comprehensive plan for managing the arrival of asylum-seekers in a safe, orderly way.
That means operating beyond Europe’s borders, as, from the donors’ perspective, it is much less disruptive and expensive to maintain asylum-seekers close to their present locations.
For starters, the EU should commit to absorbing at least 500,000 asylum-seekers a year, while working to convince the rest of the world to accept an equal number.
A public commitment of this magnitude should help calm the disorderly scramble for Europe.
Asylum-seekers provided with a clear status and promises of safety could be induced to wait in Turkey and other frontline countries, rather than risk a dangerous Mediterranean crossing.
Second, formal gateways should be established, first in Turkey, and then in Lebanon, Jordan, Tunisia, and Morocco.
Gateway countries would establish, in close cooperation with the United Nations Refugee Agency and the EU, processing centers to register asylum-seekers and assess their applications.
Accepted asylum-seekers would then be placed in a queue and required to remain in the gateway country until an EU country accepts them.
A safe, deliberate process of vetting refugees would quell security concerns in the aftermath of the Paris attacks.
Gateway countries would have to improve reception, asylum, and integration standards.
In exchange, these countries should be helped financially and provided with other incentives – for example, easier access to the EU for their citizens.
Indeed, the EU should establish or expand programs that allow entry to non-asylum-seekers.
Third, political, financial, and technical support must be provided to frontline countries.
Turkey, Lebanon, and Jordan, which have borne most of the burden of the crisis, host more than four million Syrian refugees.
Turkey says it has spent $7.8 billion to care for more than two million refugees; thus far, it has received only $415 million from others (though the EU has promised another €3 billion).
Full support for refugees in frontline countries is estimated to cost at least €20 billion per year.
The EU should commit at least half of this, with the balance coming from the rest of the international community.
Special economic zones that benefit from preferred trade status with the EU and the United States should be created, in order to generate investment, economic opportunities, and jobs for refugees and locals alike.
These zones should be established in both frontline and transit countries.
Fourth, the EU needs a truly common asylum and border-guard system.
The patchwork of 28 separate asylum systems is expensive and inefficient, and it produces wildly uneven results in terms of the reception, status determination, and integration of new arrivals.
The EU should establish a single European Border Guard and a single Asylum and Migration Agency.
Fifth, a global response to the crisis, coordinated by the UN, must accompany the EU’s plan.
This would distribute the responsibility for addressing the refugee crisis over a larger number of states, while helping establish global standards for dealing with the challenge of forced migration.
Finally, to finance the plan, the EU could use its AAA borrowing capacity to issue long-term bonds.
The burden of servicing the bonds would be assigned to member states in inverse proportion to the number of asylum-seekers they accept.
Those countries that can successfully integrate refugees would reap an economic advantage; already, the German economy is growing significantly faster as a result of its willingness to accept Syrian refugees.
The ongoing exodus from Syria and other war-torn countries was long in the making, easy to foresee, and eminently manageable.
Fear-mongering nativists are taking advantage of the lack of a coordinated response to peddle a vision that runs counter to the values upon which the EU was built.
Their vision, if realized, would violate European law; already, it threatens to divide and destroy the EU.
For this reason, it is all the more urgent that the EU backs a comprehensive strategy to end the panic and stop the unnecessary human suffering.
Migration and Memory in Europe
ROME – Stories of migrant-laden ships sinking in the Mediterranean while trying to reach the shores of Europe, and of refugees dying at Calais while trying to enter Britain through the Eurotunnel, have lately become ubiquitous in Europe.
This ongoing crisis should remind us of a painful, and shameful, episode of recent history: the rejection faced by European Jews seeking refuge from the anti-Semitic fury that raged across Europe in the 1930s.
Today’s refugees should remind us, too, of those Jews who, having survived the Holocaust, sailed across the Mediterranean toward Palestine in 1946-1947 only to be imprisoned by the British in Cyprus or elsewhere.
The fact is that in the 1930s, as Jews faced growing persecution in Germany and anti-Semitic laws proliferated in Central and Eastern Europe, the outside world was mostly indifferent to the victims’ fate.
That indifference was no doubt shaped by the deeply ingrained prejudices of the time, as well as by widespread suspicion of all strangers. “The boat is full” was a refrain that resonated with governments and public opinion alike.
Indeed, in 1935, the United States admitted only about 6,000 Jewish émigrés from Europe;
Argentina let in 3,000; and 2,000 legally entered Brazil.
Western Europe was more generous: France took in 35,000, while Belgium and the Netherlands admitted about 20,000 each.
In 1938, under pressure from US President Franklin D. Roosevelt, a conference was held in Évian, France, to discuss the status of Jewish refugees.
Although more than 30 countries took part, they accepted only a minuscule number of Jewish refugees.
Citing unemployment, socioeconomic difficulties, and problems of public order, the participants concluded that nothing could be done for Europe’s Jews.
For their part, the British refused even to discuss the issue of Jewish emigration to Palestine.
Despite the surge in anti-Jewish violence in Europe, the number of Jews admitted by Britain into Palestine had first fallen and then stagnated: 60,000 in 1935, 30,000 in 1936, 10,000 in 1937, 13,000 in 1938, and just a few more in 1939.
Yielding to Arab opposition and afraid of strengthening the Zionist movement, the United Kingdom limited Jewish immigration to Palestine to 10,000 per year for five years (with a potential supplementary quota of 25,000).
In April 1939, the colonial secretary, Malcolm MacDonald, responding to a question in the House of Commons, said that Britain had prevented “1,220 illegal immigrants from landing in Palestine.”
Passengers were ordered to be returned to their ports of embarkation.
“You mean the concentration camps?” the MP then asked. MacDonald’s retort echoes through today’s crisis in the Mediterranean: The responsibility, he said, fell on those who had organized the illegal immigration.
Even after the outbreak of war in Europe that September, only 20,000 Jews found asylum in the US.
(They owed their salvation mainly to resolute action in occupied France by the Emergency Rescue Committee, whose valiant volunteers included Varian Fry and Hannah Arendt).
Many factors account for America’s reticence: anti-Semitism; anti-immigration ideology; silence by Christian churches; and US Jewish organizations’ reluctance to press the Roosevelt administration, lest they increase anti-Jewish sentiment.
Moreover, for Zionists, the need to create a Jewish state took precedence over Jewish migration to America.
In the chronicles of those horrible years, two ships take starring, albeit ill-fated, roles: the Struma and the St. Louis.
The Struma left Romania’s Black Sea port of Constanța in December 1941, carrying 800 Jews fleeing the slaughter organized by the Romanian state and fascist militias.
Upon reaching Istanbul, the British refused to grant its passengers entry visas to Palestine.
After 70 days in harbor, the Struma was forced to return to the Black Sea – where it was sunk by a torpedo whose origin remains a mystery.
Only one passenger survived.
The St. Louis, with 900 German Jews on board, left Germany in May 1939 on course for Cuba.
Upon reaching Havana, after long negotiations between the Cuban government and the American Joint Distribution Committee, the ship was obliged to return to Europe.
Some of the refugees were given safe haven by the Netherlands, Belgium, France, and Great Britain.
Others, however, were forced to return to Hitler’s Germany, where they were soon to perish.
Europe’s response to today’s destitute migrants, many of them seeking asylum from countries that have been torn apart by extremism and civil war, shows that it can happen again.
European leaders, fearful of a popular backlash, are once again devising novel ways to reject, rather than help, some of the most vulnerable people on the planet.
Migration is a complex issue, and there are no simple solutions between the extremes of utopian goodwill and heinous xenophobia.
But recalling the plight of Europe’s Jews in the 1930s should compel us to reject indifference to the fate of those with nowhere else to turn.
Europe’s Ambitious Muddling Through
BRUSSELS – Following the escalation of the euro crisis and decisions taken at the European Union’s last summit, especially EU leaders’ commitment to embark on the road “Towards a Genuine Economic and Monetary Union,” it is high time to ask what comes next.
Whatever the final outcome, the current crisis will fundamentally shape the future of European integration.
In a worst-case scenario, Europe’s sovereign-debt crisis could cause the eurozone to implode, with immediate negative effects for the EU itself.
Fortunately, this scenario still seems rather unlikely –&nbsp;as EU countries inside and outside the eurozone seem keen to avoid the enormous economic, financial, political, and social fallout that such a scenario implies.
But the danger of a fundamental disintegration has increased over time, and today such an outcome cannot be excluded.
At the same time, it seems unlikely that member states will be ready and able to make one giant leap towards a “United States of Europe” – that is, a genuine federal entity in which EU countries agree to surrender national sovereignty on an unprecedented scale.
The record since 2010 suggests that “muddling through” will remain the EU’s dominant approach for the foreseeable future.
But, contrary to the past, the increasing existential pressures on the common currency and the constant scrutiny by markets and citizens will require bold policy responses that go well beyond the lowest common denominator.
At the end of the day, “ambitious muddling through” will most likely lead to a higher degree of sui generis economic and fiscal integration (especially among euro-zone countries), including binding synchronization of national budgets, greater economic coordination, and eventually also some limited form of debt mutualization.
In other words, resolving the crisis will require “more Europe,” though the final outcome is impossible to predict, as it will result from a complex process aimed at reconciling divergent and opposing positions both within the EU and among eurozone countries.
The EU’s leaders have asked Herman Van Rompuy, the president of the European Council, to develop, in close collaboration with the presidents of the European Commission, the Eurogroup, and the European Central Bank, a road map to achieve a “Genuine Economic and Monetary Union.”
The final report, due to be delivered in December 2012, should identify which additional steps can be taken on the basis of the existing EU treaties, and which measures require treaty amendments.
Given the urgency of the crisis, some of the more immediate steps towards a higher level of economic and fiscal integration, which are not enforceable under the current EU treaties, might require additional intergovernmental arrangements outside of the EU’s treaty framework.
Such an approach should not be a goal in itself, but it might be a necessary evil to avert the danger of a euro implosion.
But, in order to regain institutional coherence, legal certainty, and democratic accountability, core elements of the “fiscal compact” and any other future agreements between EU governments should be incorporated into the Union’s primary body of law as soon as possible.
Moving towards a genuine Economic and Monetary Union will also require more fundamental institutional reforms.
This process cannot be limited to governments, but will also have to involve the European Parliament and national parliaments in the framework of yet another European Convention.
A higher level of economic, fiscal, and political integration will also compel the amendment of national constitutions.
Ratification of a new EU treaty and the adaptation of national constitutions would inevitably require referenda in a number of countries.
Given Dutch and French voters’ rejection of the EU’s constitutional treaty in 2005, and European citizens’ increasing frustration with the Union and its crisis management, the outcome would be highly uncertain.
But it is a risk that must be taken.
Indeed, the danger of a euro implosion or a potential exit from the common currency may prove to be sufficiently strong arguments to “persuade” a majority of Europeans to vote yes.
The “ambitious muddling through” scenario will be long, bumpy, and sometimes risky, and will probably end at a destination that looks very different from today’s expectations.
But, before the EU embarks on that inevitable and uncertain journey, its institutions and member states (actively supported by the ECB!) must fashion a safety net that can protect the euro and the Union itself from hitting the ground face first when the going gets rough in the coming years.
After all, the debt crisis is likely to continue to generate immediate economic, fiscal, and market pressures.
But the EU and its members will also increasingly have to cope with the collateral damage caused by the crisis – its unintended and unexpected consequences at the European and national levels.
That damage includes increasing nationalism and anti-euro/EU populism, mounting social challenges in many member countries, a growing “democratic deficit” there and in the EU, a poisoned atmosphere among EU countries, and the lack of proactive, stable leadership coalitions pushing in the same direction.
All of this could lead to a standstill, which, in the current environment, would be tantamount to going backward, threatening not only European integration’s future prospects, but also its past accomplishments.
Under these circumstances, “ambitious muddling through” is both the most likely and the most promising scenario.
It will not be easy, and it will not allow time for complacency, given that the EU is most likely to remain in crisis mode for some time to come.
But it is probably the only way to keep Europe moving forward.
Europe\u0027s Anchor of Stability
FRANKFURT – At less than ten years old, the euro is by all measures a young currency.
Yet it has become a reality of daily life for almost 320 million people in 15 European countries.
In the wake of the euro’s performance during this year’s global financial crisis, even its strongest critics cannot deny that the euro is an astounding success.
This past summer, millions of travelers avoided paying cumbersome and expensive charges to change their currency.
But the advantage for trade and investment implied by the absence of foreign-exchange risks within the euro area is of greater economic importance.
The common currency completes the single market for the euro area’s member states.
Since 1999, members of the European Monetary Union (EMU) have experienced a number of severe exogenous shocks: the rise in the price of a barrel of oil from around $10 to $150; the collapse of equity markets after the dot-com bubble imploded; the spreading risk of terrorism after the September 11, 2001, and two wars.
Starting last summer, the breakdown of the market for US sub-prime mortgages triggered turbulence in financial markets, with no end in sight.
From past experience with national currencies, Europeans could have expected that any of these shocks would trigger a severe crisis in foreign-exchange markets.
It is not difficult to imagine what would have happened during the recent financial-market crisis if the euro-area countries still had all their national currencies: immense speculation against some currencies, heavy interventions by central banks, and finally a collapse of the parity system.
The years 1992-1993 witnessed a dramatic crisis in the European Exchange Rate System.
Since that period the amount of capital ready to exploit any opportunity in foreign exchange markets has multiplied, which would make any comparable situation today much more dangerous.
Indeed, the crisis of the early 1990’s put the status quo within the EU common market at risk.
It is hard to believe that, with today’s vast capital flows, the single market would have survived a series of sharp and abrupt exchange-rate changes.
Changes in exchange rates of the type seen in 1991-1992 have a strong impact on relative prices for goods traded between different countries.
In countries that experienced strong currency appreciation, companies (and unions, for that matter) are exposed to a sudden and severe loss in competitiveness.
Such firms undoubtedly start to clamor for protection against supposedly “unfair” conditions.
True, the euro did not prevent risky investment decisions by European financial institutions or the consequences for financial markets of these decisions.
But it was never intended to do that.
Instead, the euro achieved what it was meant to achieve: the crisis was contained, because it could not inflict damage on foreign-exchange markets within the euro area.
After the outbreak of turbulence in financial markets last year, the European Central Bank immediately provided ample liquidity to calm the situation, and has continued to do so ever since.
At the same time, the ECB never lost sight of its main goal – maintaining price stability.
Indeed, the ECB has successfully anchored inflation expectations right from the start at a level consistent with its definition of price stability.
This achievement contrasts starkly with all the critical voices that warned against the experiment of European Monetary Union and even predicted its early failure.
It was in the first weeks after the establishment of the ECB in June 1998 that I received a letter by the late Nobel Prize laureate Milton Friedman, who congratulated me on my appointment as member of the Executive Board – which he called “an impossible job.”
He was convinced that monetary union in Europe was doomed to fail.
Today, however, it is hard to find anybody who does not consider the euro a great success, and the ECB has been so sure-footed that people now take that success for granted.
But this was not a matter of good luck.
The fundamentals of the euro’s success are hard work, dedicated commitment to the common currency’s unique historical mission, and, not least, a well chosen monetary policy strategy.
But this success is no reason for complacency.
Major challenges lie ahead.
In the context of weakening growth, the Stability and Growth Pact will face a severe new test.
And, just as important, reforms aimed at ensuring greater flexibility of markets still lag behind what is needed to exploit fully the advantages of the single monetary policy.
Europe’s Anti-Ideological Election
PARIS – In each of the 27 states of the European Union, the campaign for the just concluded elections for the European Parliament occurred in an atmosphere of indifference, with voters, candidates, and the media focusing mostly on domestic issues.
Perhaps for precisely this reason, the abstention rate (an average of 57%), was the highest since the first vote in 1979, while the composition of the Parliament, with its right-wing majority, underwent no significant changes.
Following the 2004 elections, the European People’s Party (EPP), which regroups right and center right parties, held 288 MPs of the Parliament’s 785 seats.
In 2009, it is still the first force in the new parliament, with 267 deputies out of a total of 736: the decrease in its membership is also due to the stated commitment of the British Conservatives and the Czech right party to defect from the EPP to create their own party, with a stronger right-wing line.
That opens the way to the possible return for a second term of José Manuel Barroso as president of the Commission.
This situation is paradoxical, as Europe is experiencing one of the worst economic crises in its history, with falling employment and living standards and rising worries about the future.
One should have expected the right-wing to be punished in countries where they govern.
But that threat did not materialize. The latest returns, indeed, show quite the opposite – in France, Italy, Poland, Denmark, and even Germany, where the CDU had won a large number of representatives in the 2004 elections.
Where the right is in opposition, such as in Spain and Portugal, it has improved its position.
On the other hand, the Socialist Party lost support almost everywhere, especially in countries – Spain, Portugal, Hungary, and the Netherlands – where it is in power.
The European socialist party (ESP), which held 215 deputies in the old parliament, secured only 160 seats. In France and Denmark, where the Socialist Party is in opposition, it did no better.
The only exception is Greece.
In France, the Socialist Party is almost outnumbered by Europe Ecologie, a green coalition gathered by the charismatic Daniel Cohn-Bendit.
The liberals remain the third force of the European parliament, with around 80 deputies, less than its previous 100 members.
The Greens appear to be the main beneficiaries of the elections and become the forth force: they will get around 55 seats, a gain of more than 10 seats.
Extreme parties also benefited from the elections, as well as some “eurosceptic” parties.
In France, Jean-Marie Le Pen’s party has been substantially weakened, but in the Netherlands, the anti–Islam party led by Geert Wilders won 17% of the votes, and in Austria, Denmark, Hungary, Slovakia, and even in the UK the far right did better than expected.
Indeed, the far-right British National Party won its first ever seat.
But those worried about the rise of extremism in Europe should take some heart from the fact that there are many differences of views between these parties.
The predominance of the right in the future European Parliament calls for some explanation.
The main reason might be the poor fortunes of social-democratic parties, which now head only eight governments in the EU, despite their efforts since 2000 to minimize their waning influence within their traditional electorate – blue-collar workers and white-collar public-sector employees, middle managers, and civil servants.
This is true for Northern Europe’s large social-democratic parties (Denmark and Sweden) but also for parties that attempted to “modernize” themselves by combining socialism and liberalism (the UK and Spain), and even for Europe’s more traditional socialist parties (Belgium and France), which, despite local successes, have found it difficult to re-gain national power.
Meanwhile, those parties that intend to move left, such as die Linke in Germany, risk being overwhelmed by the radical anti-capitalist left.
It all seems as if, in the face of a crisis that calls into question decades of finance– driven capitalism and the dominance of free-market ideology, and despite widespread expectations of a revival of the welfare state, the social-democratic ideal has failed to convince a majority of Europeans that it can provide effective solutions.
When it comes to managing a deep and complex crisis, indeed, European voters tend to prefer the experience of conservative politicians.
This is all the more remarkable at a time when right-wing governments embrace regulation and even state intervention – the cornerstones of leftist ideologies.
At the same time, a request for transparency and a care for ecology are growing in the youngest generations across Europe, which explains the progress of the Green vote in many countries.
In short, the global economic crisis has destabilized the ideological divides that have long defined the European political scene and has created new dividing lines.
These new chasms might be the most important long term outcome of the European Parliament elections.
Europe\u0027s Bad Lungs
Respiratory disease is the world's leading killer, and it is on the rise.
According to the World Health Organization, of all 50.5 million deaths recorded in 1990, 9.4 million were due to respiratory diseases.
By 2020, of 68 million deaths, 11.9 million will be caused by Chronic Obstructive Pulmonary Disease (COPD), pneumonia, lung cancer, or tuberculosis.
Europe performs little better than the rest of the world.
Respiratory diseases rank second (after cardiovascular diseases) in terms of mortality, incidence, prevalence, and costs.
In some countries, such as the United Kingdom, they are already the leading killer.
The European White Book on Lung Disease, published in 2003 by the European Respiratory Society and the European Lung Foundation, produced epidemiological data for the full spectrum of lung diseases collected from all European countries for the first time. It provides a detailed overview of the evolution of lung diseases in Europe, including data on morbidity, mortality, and costs.
We have learned a great deal from the White Book .
For example, lung cancer mortality rates for males fell slightly between 1960 and 1989 in some Western European countries, such as Norway and Switzerland, but are still rising for females in almost all European countries.
The prevalence of COPD, which is diagnosed mainly in smokers and former smokers, ranges from 2,000 per 100,000 inhabitants to more than 10,000, with mortality rates varying between 25 and 75 per 100,000.
Lung diseases are not just related to smoking.
Genetic influences, along with nutritional, environmental, and poverty-related factors, play key roles.
But COPD is predicted to increase as a cause of death, along with lung cancer and TB.
Epidemiological data for TB are the most complete, due to a surveillance system developed for all European countries.
Whereas TB's incidence and mortality rates in Western and Central Europe are stable or declining, they have increased in Eastern Europe during the last decade, due to deteriorating health systems.
Pneumonia will remain an important cause of death in Europe, with incidence currently ranging from 250 to more than 1,000 per 100,000 and mortality from 15 to 45 per 100,000.
Asthma has become increasingly prevalent in recent decades, affecting 2-20 % of children in Europe, and between 5 % and 10 % of adults in Western Europe.
Reported mortality rates vary widely, the highest being more than eight per 100,000 in Portugal.
Data for other respiratory diseases are scarce.
Interstitial lung diseases vary considerably in incidence and prevalence.
The prevalence of sleep-related diseases, for which data are available only from some of the Western European countries, is less than 1,000 per 100,000 inhabitants in France, but more than 5,000 per 100,000 in Sweden.
Available data on the incidence of cystic fibrosis, the most important hereditary lung disease, indicate a range of between five and ten per 100,000.
Where does respiratory disease kill most often?
According to the data collected in the White Book , the age-standardized mortality rate per 100,000 inhabitants is highest in Kyrgyzstan, at 165, and lowest in Austria (30).
The European average stands at 65, while the European Union average is 57.
Ireland and the UK suffer some of the highest rates - 120 and 105, respectively - whereas other Western European and most Central European countries remain below the average.
As the incidence of lung disease rises, so will its costs.
The total annual financial burden of respiratory diseases in Europe is currently approximately €100 billion, with COPD accounting for almost half of the total, followed by asthma, pneumonia, lung cancer, and TB.
Inpatient care is just the tip of the iceberg, amounting to €17.8 billion annually.
Surprisingly, the annual number of hospital days is higher in Western Europe than in Central and Eastern Europe (11.1 versus 7.2 per 100,000 population), while average daily hospital costs in Western Europe are almost ten times higher (€310 versus €32).
Other costs include ambulatory care (€9.2 billion), drug supplies (€6.7 billion), and mortality and rehabilitation (€20 billion).
The largest single cost by far, estimated at €48.3 billion, is indirect: lost productivity.
The total number of workdays lost due to respiratory diseases was 66.2 per 100,000 inhabitants in Western Europe - more than four times higher than the rate of 15.4 in Central and Eastern Europe.
As with hospital stays, so with workdays: higher productivity in Western Europe compounds the cost.
Because lung diseases are so important, preventive measures, early detection and treatment must be reinforced.
This will necessitate not only improvements in direct patient care, but also in basic and clinical research as well as in teaching and training.
Across Europe, there are huge differences in the number of specialists in respiratory medicine, as well as in the number of researchers at the university level.
The number of chest physicians per 100,000 inhabitants is only 0.8 in the UK, but 10.4 in Greece, with a European average of 3.2. The same is true of respiratory medicine at the university level, where the European average is 0.06 per 100,000 inhabitants, but varies from 0.04 per 100,000 in Poland, Russia, Romania, Austria, Germany, and the UK to more than 0.08 per 100,000 in Norway, Finland, and Ireland.
Given the scale of their human and economic costs, managing lung diseases should become a high priority for all European countries in the twenty-first century.
Europe’s Blame Game
The European Union’s leaders have just met to draw the lessons from the failed referenda on the Constitutional Treaty.
But they need not search too far for culprits; indeed, they need only look in the mirror and confront the consequences of the dishonest game that the leaders of EU member states have played for too long.
Over the years, those leaders hoped to reap the benefits of reform while avoiding the blame, so they routinely let EU officials based in Brussels take the political heat for unpopular but necessary measures.
They then bitterly complained to their people about “Brussels bureaucrats” and their undemocratic ways.
But these leaders forgot that their people might actually believe them.
So, when the leaders of France and the Netherlands – pro-constitution to a fault – asked their people what they thought about the Union, they received a clear echo of their own message: the people did not like the reforms, and they did not like the “Brussels bureaucrats,” constitution or no constitution.
Nowhere has this game of passing the blame been more visible than in the way EU governments have handled the deregulation of the product market.
The rewards to be gained by deregulating product markets are very large.
Breaking up monopolies often yields dramatically lower prices and thus higher living standards for consumers, because the same wage buys a lot more.
Consider deregulation of telecommunications and airlines, which has ushered in competition from low-cost carriers of data and people.
Deregulation also leads to economies of scale, lowering prices even further, as we all know when shopping at the hypermarket rather than the corner grocery store.
But deregulation inevitably brings disruptions.
Consumers gain, but some workers lose.
Existing firms often have a hard time adapting. New, leaner firms take over.
In the process, old firms go bankrupt, workers are laid off.
Rents disappear, and think of the effects of airline deregulation on pilots’ salaries.
Even if as many or more jobs are created as are destroyed, this does not eliminate the pain of those who find themselves unemployed.
By any estimate, with a decent safety net for workers who lose their jobs, the benefits of deregulation far exceed the costs and the pain they cause.
But this does not make governments’ political task much easier, because the benefits are diffuse: consumers paying less for airline tickets may not attribute it to deregulation.
By contrast, the costs are localized: airline workers who risk losing their jobs are intensely aware of the connection between deregulation and layoffs.
Of course, governments could try to explain why they pursue deregulation.
But it is much easier for them to adopt a low profile, get the “Brussels bureaucrats” to do it, and then blame those Brussels officials, indeed the EU, for any and all of the pain.
Or could it really be true that “Brussels” has overstepped its powers, forcing more deregulation than national governments wanted?
This exonerating hypothesis does not hold water.
The case of airline deregulation is again revealing.
Twice in the last ten years, national governments have explicitly given the EU the authority to tighten constraints on their subsidies to failing airline companies.
Governments did not have to cede these powers.
But they did, and this did not prevent them for blaming “Brussels” strongly and loudly for these very constraints when their own national airlines got in trouble.
Having triggered and then witnessed the “anti-Brussels” vote, what should European governments do?
One piece of good news is that deregulation of product markets has been largely achieved, so there is less need to play the Brussels blame game.
The main item on the agenda now is to design better social insurance, in order to minimize the pain from reallocation, be it from deregulation, technological progress, or globalization.
Of course, some product-market deregulation remains necessary, especially in the service sector.
The Bolkestein directive on services played badly, but there is no question that European consumers pay too much for many services.
To take just one example, eliminating the monopoly that notaries public hold in countries like France and Italy would substantially decrease the costs of buying and selling homes, decrease the cost of housing, and make it less costly for workers to move to where the jobs are.
European governments face three choices.
They can try to stop product market reforms altogether and, by the same token, try to stop trade liberalization and globalization.
So far, no government appears to have fallen to that temptation.
They also can continue to play the blame game, letting the Union pursue reforms, while complaining about Brussels bureaucrats.
But the anxiety now being felt across the EU shows the dangers of that strategy.
Moreover, labor-market policies do not fall under the EU mandate, so national governments will be on their own, without the Brussels bureaucrats to blame.
Finally, they can help “Brussels” define and design product-market reforms, and then sell those reforms, and the EU’s role in enacting them, to their voters.
If Europe’s leaders are wise enough to choose this course, the fiasco of the French and Dutch referendums will prove to have been useful after all.
Europe’s Central Bank at Sea
NEWPORT BEACH – Central bank purists are confused.
How can the European Central Bank, a Germanic institution, now be in the business of buying government bonds issued by five of its 17 members?
Why is this monetary authority acting like a fiscal agency?
Isn’t the ECB supposed to be a politically independent and operationally autonomous institution committed to fighting inflation and safeguarding the currency?
Well, yes and no.
And that answer speaks to the disturbing realities of modern-day central banking (or, to be more exact, central banking in the post-bubble world of debt overhangs and sovereign-debt concerns).
It also sheds light on the endgame now taking shape in a confused and unsettled eurozone.
A sea-faring analogy simplifies some of the complexity.
Imagine that a highly agile coast-guard vessel is called out to rescue a floundering boat.
As the rescue is taking place, the vessel finds that it must also rescue two other, larger boats.
It does so, but not before the captain receives assurances that a larger ship is coming to assist.
As the crew of the now-burdened rescue vessel waits for relief, they are forced to deal with restless passengers.
With the ocean getting rougher, the once-agile rescue vessel is now so overburdened that some officers are second-guessing the captain, who again calls for the larger ship to help.
Unfortunately, this ship seems hostage to a confused sense of mission and a distinct lack of urgency.
The overwhelming hope is that the larger ship will come and save the day.
The fear is that it may not.
And the question then becomes whether the crew of the struggling rescue vessel will decide that they can stabilize the situation only through a once-unthinkable action – throwing someone overboard to lighten the vessel and save the rest.
In a nutshell, this is the ECB’s situation today.
The outcome is both uncertain and highly consequential – for Europe, of course, but also for a global economy that is in the midst of a synchronized slowdown and operating with a weakened anchor, owing to America’s recent debt-ceiling debacle and the humiliating loss of its AAA sovereign credit rating.
The ECB has already purchased almost a €100 billion of peripheral government bonds, and it is committed to buying a lot more.
Less visibly, it has acquired many times the current volume in so-called “repo operations,” through which the ECB provides euros to struggling banks in a “temporary and reversible” exchange for the government bonds on their balance sheets.
Clearly, back in 2009, the ECB did not make the controversial call that Greece was insolvent, not illiquid.
My own sense is that it was able but unwilling, owing to its fear of collateral damage for the rest of the eurozone.
It opted for delay in the hope that the eurozone’s most vulnerable members would reinforce their defenses against Greek contagion.
In that sense, the ECB may have been too trusting.
It believed that the peripheral economies would deliver serious fiscal austerity, notwithstanding their dreadful growth outlook and general lack of competitiveness.
It also believed that the core countries would relieve the ECB burden of mounting bailout costs.
But, even if the ECB has limitless patience, the rest of the world does not.
Markets understand that the ECB cannot forever substitute for other government agencies, so they repeatedly call into question its bridging strategy.
Without these other agencies’ help, the ECB’s unprecedented actions will end up being a bridge to nowhere.
Whichever way you look at it, the ECB – and with it Europe – is being forced into an endgame with three once-improbable outcomes.
That endgame will play out in weeks and months, not quarters and years.
The first alternative is a disorderly breakup of the eurozone.
Only chaos-lovers wish for such an outcome, but it is possible if core governments continue to hesitate in engaging their balance sheets; if peripheral governments abandon their fiscal-reform efforts; and/or if societies can no longer tolerate economic stagnation, high and rising unemployment, and budget austerity.
The second is the one preferred by political scientists and European visionaries: greater fiscal union among the 17 eurozone members, or, in blunt terms, German willingness to do for the eurozone what it did for eastern Germany – namely, write large checks for years to come.
In return, Germany would insist on economic-governance reforms that force other eurozone members to surrender some of their national fiscal prerogatives.
The third alternative is the one embraced by several economists.
It involves creating a smaller and more economically coherent eurozone, which would consist of core and near-core countries within a tighter fiscal union and more credible defenses against contagion.
In the process, 2-3 peripheral economies would take a sabbatical from the euro, underwriting immediate economic uncertainty with access to a much wider range of instruments to deal with their debt overhangs and lack of competitiveness.
Although the endgame is close, it is impossible to predict which alternative will prevail.
That will depend on decisions taken by politicians with low approval ratings, noisy oppositions, and inadequate coordination.
Moreover, implementation will likely prove far from automatic, thereby testing the resolve of governments and institutions.
My sense is that politicians will opt for a weak variant of greater fiscal union, but that, ultimately they will fail to execute it for the eurozone as we know it today.
After some considerable volatility, a smaller and more robust currency union will emerge; and, importantly, Europe will avoid the euro’s demise and a total breakdown of the eurozone.
No matter how you view it, the coming endgame will be neither simple, nor orderly.
Had the ECB known this at the start of Europe’s debt crisis, it might have resisted taking so many risks with its balance sheet and reputation.
Then again, it probably could not have done otherwise – just as our once-agile rescue vessel never really had the choice of remaining safely in port.
Europe’s Competitiveness Obsession
BRUSSELS – The President of the European Central Bank is said to show at each meeting of the European Council a graph depicting the evolution of relative wage costs across the eurozone’s 16 member countries.
This chart shows increasing divergences over the last ten years, with the countries now facing difficulties (Greece, Portugal, and Spain) having lost competitiveness by around 20% relative to Germany.
In other words, since 1999, wage costs have increased by about 20% less in Germany than in southern Europe.
The conclusion seems straightforward.
The eurozone’s southern European members must reduce their wage costs to claw back the competitiveness that they have lost since adopting the common currency.
Concern about such divergences has also reached the task force headed by European Union President Herman Van Rompuy, which is supposed to devise fundamental reforms to the rules for economic policy coordination within the EU.
A key proposal from the task force’s first meeting was to develop competitiveness indicators, and then force member countries to take “remedial action” should the EU find large divergences.
But this approach risks leading in the wrong direction.
Competitiveness, which is usually measured in terms of unit labor costs, is a relative concept.
One country’s gain is another’s loss. Restoring competitiveness in some member countries (Spain, Greece) would require others (Germany in the first instance) to accept deterioration in theirs.
The adjustment might come about through wage increases in countries with lower labor costs, rather than cuts in countries where costs are too high.
The official response to this is that no country should be forced to increase wages, and that everybody gains if structural reforms increase productivity.
The latter is certainly true, but it does not solve the fundamental problem – that a country’s relative unit labor costs can decline only if another country’s rise.
Even assuming that agreement can be found within the eurozone on how to allocate the desired gains and losses in competitiveness across countries, member countries are not centrally planned economies.
There is little that government can do in a market economy to force down wages in the private sector.
Governments can, of course, enforce public-sector wage cuts.
This is being done on a large scale in Greece and Spain, for example.
But there is little empirical evidence that public-sector wages have a significant impact on private-sector wage growth.
So is higher productivity the way out?
Even assuming that governments could identify and implement structural reforms that yielded quick productivity gains, it is not clear that higher productivity leads to increased competitiveness.
In fact, across the EU, the opposite often is true.
Some of the countries that achieved the highest growth in labor productivity also lost the most competitiveness (e.g. Ireland).
How is this possible?
After all, higher productivity should bring lower unit labor costs.
But improvements in productivity are easily overwhelmed by changes in wages.
While productivity growth usually is measured in fractions of a percentage point, wage increases have been much larger.
So the real question is, What drives wages?
Country-level data suggest that the largest wage increases over the last decade are generally associated with the strongest growth in domestic demand (e.g. Spain, Greece).
Are wages driving demand, or vice versa?
Most of the loss of competitiveness in southern Europe occurred once unemployment there had fallen significantly.
The measured loss of competitiveness in southern Europe thus should not be ascribed to a lack of structural reforms or unreasonable trade unions, but rather booms in domestic demand, fueled mainly by the easy availability of cheap credit for consumption (Greece) and construction (Spain, Ireland).
This excessive consumption and construction demand led to excess demand for labor, especially in protected sectors like services, thus driving up wage costs.
If excessive domestic demand was the problem, the solution should now be on its way.
International capital markets already have curtailed credit to these countries.
The sharp fiscal retrenchment that has now started throughout southern Europe should contribute further to a sharp deceleration, if not outright fall, in domestic demand there.
If labor markets are flexible, this should result in lower wages.
Indeed, that is the key condition: labor-market flexibility on the way down as much as on the way up.
Adjustment would be much easier, of course, if wages did not fall in Germany as well.
But, given that unemployment is actually declining in Germany, which in the past has tended to increase wages (moderately), this is unlikely.
The proposition that governments “must do something about competitiveness” risks leading to an excessively activist approach to economic policy coordination, with governments and EU institutions constantly trying to influence wage-setting in the private sector.
This might work – at least partly – in the current crisis, but it will not be able to prevent future divergences in competitiveness if domestic demand diverges again.
Structural reforms are always useful, but increasing productivity takes a long time and does not always translate into higher competitiveness.
What is needed in southern Europe is acceptance that domestic demand must fall to a level that allows countries to live without further capital inflows.
After that, it should be sufficient to allow labor markets to work until the system finds its new equilibrium.
Europe’s Competitiveness Shell Game
BRUSSELS – For seasoned observers of Europe’s economy, the most recent European Union summit delivered a bizarre sense of déjà vu.
Little more than a decade ago, European leaders announced to great fanfare the “Lisbon Agenda,” a policy blueprint to make Europe “the most competitive, knowledge-based economy in the world.”
The new “Competitiveness Pact,” proposed at the EU summit by France and Germany, did not make the same pretensions to global grandeur, but was instead sold as a step required to ensure the survival of the euro.
With the exception of what appears to be a covert effort to force EU countries to raise corporate taxes to French and German levels, there is ostensibly nothing unreasonable in the Competitiveness Pact.
Raising the retirement age to 67, abolishing wage indexation, and compelling countries to enshrine a debt brake in their national constitutions are reasonable measures to enhance competitiveness and restore confidence in the euro.
Unfortunately, however, government leaders have apparently learned nothing from the lessons of the failed Lisbon Agenda.
Indeed, the current plans seem doomed to fail for two reasons.
First, a credible policy agenda needs firm targets with clear deadlines.
But, notwithstanding their leadership pose vis-à-vis the Competitiveness Pact, the French have already distanced themselves from the commitment to raise the retirement age to 67.
According to Bloomberg, a French official told reporters at the summit that there was no question of that after the retirement age was lifted to 62 from 60 last year.
Given the huge public protests sparked by that move, the official’s statement seems eminently believable.
The likely outcome – in typical European, consensus-driven fashion – will be to forgo deadlines and concrete targets in favor of an ambiguous, open-ended pledge to undertake further pension reform.
Similar exceptions will probably be made for other countries that cannot reconcile aspects of the new pact with their national circumstances.
Belgium, for example, insists on its system of automatic wage indexing. After every country has received its “opt-out,” and the Competitiveness Pact’s targets have been sufficiently diluted to ensure its passage, there will most likely be very little of substance left.
Second, targets need to be not only specific, but also binding.
Sanctions for non-compliance must be enforced – without political meddling.
One of the most important lessons of the Lisbon Agenda is that the so-called Open Method of Coordination – a harmless peer-review procedure without repercussions for non-performance – is clearly the wrong approach to kick-starting national-level reforms.
But even where the European Commission had the legislative tools and political mandate to impose sanctions – for example, to punish non-compliance with the Stability and Growth Pact – member states managed to avoid punishment by “reforming” the requirements.
Indeed, Germany and France spearheaded the effort to make the Stability and Growth Pact more “flexible” when they could no longer comply with its 3%-of-GDP fiscal-deficit ceiling.
It is this history that makes the current moves to sideline the European Commission in enforcing the Competitiveness Pact suspicious.
Organized purely as an intergovernmental policy program, the pact cannot work, because EU member states cannot be trusted to monitor their own performance and enforce sanctions on their peers – or on themselves.
Such a system would be the political equivalent of letting the inmates guard the prison.
In fact, the Competitiveness Pact’s failure even to mention the Europe 2020 strategy, which EU leaders enacted less than a year ago as a blueprint for economic development, reinforces the impression of uncoordinated, ad hoc, and downright erratic policymaking that is heavy on theatrics and light on implementation.
The lack of consensus on basic features of an economic framework – be it a retirement age commensurate with Europe’s demographic outlook or a legislative commitment to budgetary discipline – makes one wonder how eurozone countries could enter a monetary union in the first place.
That question is in the past, of course, but publicly demonstrating the eurozone’s arrested convergence is bound to undermine confidence in the common currency further – and at a most unfortunate moment.
Just as financial markets seem to have calmed, European leaders have once again raised expectations of a major policy move – only to see yet another summit devolve into squabbling.
It is hard to imagine how Europe’s policy differences can be overcome by the leaders’ self-imposed March deadline, when the next summit will take place.
One thing is certain: it will require a lot more than a warmed-over Lisbon Agenda, with easy targets and toothless enforcement, to restore confidence in the euro and safeguard the monetary union.
Europe’s Competitiveness Trap
LONDON – A flawed understanding of what drives economic growth has emerged as the gravest threat to recovery in Europe.
European policymakers are obsessed with national “competitiveness,” and genuinely appear to think that prosperity is synonymous with trade surpluses.
This largely explains why Germany is routinely cited as an example of a strong, “competitive” economy.
But economic growth, even in traditionally export-led economies, is driven by productivity growth, not by the ability to capture a growing share of global markets.
While imports must, of course, be financed by exports, the focus on trade competitiveness is drawing attention away from Europe’s underlying problem – very weak productivity growth.
And this is as serious a problem in the economies running trade surpluses as it is in those running deficits.
The idea that economic growth is determined by a battle for global market share in manufactured goods is easy for politicians to grasp and to communicate to their electorates.
Economies running external surpluses are regarded as “competitive,” regardless of their productivity or growth performance.
The trade balance is seen as a country’s “bottom line,” as if countries were firms.
In fact, they have little in common – the trade balance is simply the difference between domestic savings and investment or more broadly, between aggregate spending and output – but referring to Deutschland AG, or UK plc, is conceptually attractive and seductively easy.
Governments obsessed with national competitiveness are likely to pursue damaging economic policies.
If economic growth is seen as being dependent on the cost competitiveness of exports, governments will focus on things that might make sense for exporters, but not for their economies as a whole, such as labor-market policies aimed at artificially holding down wage growth, which redistributes income from labor to capital and exacerbates inequality.
Indeed, the secular decline in the proportion of national income accounted for by wages and salaries over the last 10 years in nearly every EU economy is a major obstacle to a recovery in private consumption.
And the flipside of the decline in wage and salaries – a steep rise in the proportion of national income accounted for by corporate profits – has not resulted in booming investment.
This should come as no surprise.
An individual firm can cut wages without undermining demand for whatever good or service it produces.
But if all firms cut wages simultaneously, the resulting weakness of overall demand undermines companies’ incentives to invest, in turn depressing productivity growth.
In short, cutting the proportion of national income accounted for by wages, accepting a secular rise in inequality, and boosting the proportion of national income accounted for by corporate profits is no way to deliver sustainable economic growth.
But that is precisely what happens when governments believe that economic salvation lies in winning a growing share of export markets.
It doesn’t.
There is a very strong correlation between rising labor productivity and economic growth, which holds for countries with trade surpluses as well as those with deficits.
So the European Union’s rate of productivity growth, not the size of its trade surplus, will largely determine its economic prospects.
Unfortunately, productivity growth is declining across Europe, from around 3.5% annually in the 1970’s to barely 1% in the 2000’s.
And productivity growth has been almost as weak in the eurozone’s core as in its troubled periphery.
Governments throughout the EU should focus on raising productivity – not just in the most internationally exposed sectors, like manufacturing, but also in less tradable sectors, such as services, which now account for around two-thirds of economic activity.
Without stronger productivity gains there, economic growth will prove elusive.
But improvement presupposes diagnosing why Europe’s productivity performance, with a few notable exceptions, has been so bad.
There are two core problems.
The first is inadequate skills levels, aggravated by complacency.
Some countries – Scandinavia and the Netherlands, for example – do well.
But the picture elsewhere is patchy at best.
Germany has good vocational training, Britain more than its fair share of top universities, and France good technical education.
Other countries, especially in the south, perform poorly in most areas.
The second problem is inadequate competition.
In too many sectors, incumbents are protected.
This is justified in terms of upholding “social justice” or defending “national champions.”
But it merely fuels rent-seeking – the ability of particular groups in society to extract disproportionate rewards for their work.
Where this tendency is strongest, productivity levels are weakest.
While Europe’s economic growth prospects may be poor, this has little to do with what is happening elsewhere.
Europe’s leaders will find that improving education and training – and throwing open hitherto protected markets – is a long and arduous task.
But, unlike the obsession with “competitiveness,” such reforms would lead Europe onto the path of sustainable growth.
Europe’s Conscience Police
The story of the rejection last autumn of my appointment to be a member of the European Commission is notorious.
Nominated to the Commission by the Italian Government, I was compelled to withdraw because of some allegedly homophobic remarks I was said to have made before the European Parliament’s Committee on Civil Liberties, Justice, and Home Affairs. Now that the dust from that dispute has settled, and with a new Commission in place, it is time to ask what lessons can be drawn from this affair.
The first lesson concerns the indispensability in politics of accurate information and reporting.
Democracy works only if there is a fair reporting of the issues being debated.
Of course, everyone is free to comment on and evaluate events as he or she pleases.
But a high standard of fidelity to the truth is needed in the media; otherwise, debates become too distorted for citizens to evaluate correctly their meaning.
Reporters are not entitled to so twist the facts as to reinvent them.
In my case, the main charge against me was invented: I made no homophobic statement.
Nor did I did introduce the issue of homosexuality into the debate over my appointment.
My opponents did.
I did not introduce the emotionally charged word “sin” and tie it to homosexuality in the debate.
Once again, my foes did this.
What I said, instead, was this: I might, as a practicing Roman Catholic who adheres to his Church’s teachings, think that homosexuality is a sin.
This belief could not be construed to have any influence on my decisions, unless I also said and believed that homosexuality is also a crime.
But I said nothing of the sort.
A liberal society is a society in which people holding different moral opinions are bound together through a common rule of law.
In the fields of both law and politics, I have consistently and clearly supported the principle of non-discrimination.
The distinction that I was drawing in my testimony, between law and morals, was not accepted.
Worse, it was turned into a caricature, and then declared false.
Indeed, the committee entered in the sphere of moral conscience by stating that anyone who does not adhere to a positive moral evaluation of homosexuality is unfit to serve as a European commissioner.
This means that anyone holding to the moral doctrines of most Christian churches should nowadays be considered a second-class citizen in the European Union.
According to this principle, Konrad Adenauer, Robert Schuman, and Alcide de Gasperi – three of the EU’s founding fathers – would not measure up.
What is wrong with the fact that a parliamentary committee passes a political judgment against a Commissioner for purely political reasons?
The rejection of my nomination was, according to many, just another political battle: you win some, you lose some, but you cannot say that you have been unfairly discriminated against simply because you lost.
But the European Commission is not accountable to the European Parliament in the same way that a national government is accountable to its parliament.
The EU’s member governments name the members of the European Commission, and the Parliament lacks an explicit right to veto them.
A hearing over a nomination to be a Commissioner before an EU parliamentary committee should simply examine whether the person is competent in the area he or she is to oversee on the Commission, and whether there are elements of moral indignity – i.e., such obvious moral failings as to be disqualifying.
Now it seems that, according to the committee that rejected my nomination, adhering to the principles of most Christian churches is a cause for such a “moral” disqualification.
The implication of this position is profound and shocking.
If it were generally accepted, it would imply that the EU now holds official moral doctrines, and that allegiance to these doctrines is required in order to exercise the full right of citizens to serve in a public capacity.
That implication is intolerable, and it will progressively weaken and divide the EU through a type of semi-official hostility to religious faith.
Moreover, the demand for such an allegiance is a renunciation of one of the most important steps in Europe’s development.
It has been roughly 300 years since religious people came to understand that being of a different faith, or being agnostic, did not disqualify one from public office.
If the moral test that I endured stands, it means that Europe has come full circle: agnostics are no longer willing to accept that being religious – and having different moral views – should not bar someone from holding an official post.
I hope that the European Parliament’s Committee on Civil Liberties, Justice, and Home Affairs will reconsider its behavior, and that the “Buttiglione affair” will remain only an ordinary political injustice against a single individual rather than the harbinger of second-class citizenship for religious believers.
If, on the other hand, the European Parliament’s members follow through on the logic of my case – if my shunning becomes the basis for a consistent policy – the EU will be on its way to creating a kind of morality police and launching a modern-day inquisition, one that crassly violates both freedom of religion and freedom of conscience.
Europe\u0027s Constitutional Future
Last week, the President of the European Convention, Valery Giscard d'Estaing, submitted a so-called "skeleton" for a future Constitution of Europe.
All the ingredients of a constitution - values, principles, the rights of citizens, the competencies of the Union and its constituent institutions, etc - were included.
This document arose despite the fact that the Convention's mandate did not empower the delegates to produce a constitution.
According to the Nice Declaration, which I drafted as one of the participating prime ministers, we were only to simplify and restructure the EU's basic treaties.
As the C onvention worked, our mandate was transformed due to various pressures.
These came from member countries, from civil society organizations, and from letters, documents, and email messages from across Europe.
Democratic pressure changed our mandate.
When even the Foreign Minister of Britain, a country happy with its centuries-old "unwritten constitution," claims himself eager to have a written European Constitution, something truly has changed!
Yet, scholars such as Ralph Dahrendorf and Joseph Weiler suggest that a European constitution does not make sense because a democratic constitution presupposes a paramount common identity that is absent in an EU where individual national loyalties still prevail.
Others, such as Robert Dahl, argue that democracy requires smaller communities based on shared interests and personal relations.
For them, Europe may be too big to forge truly democratic institutions.
Such theoretical objections must be set against the fact Europe already exists - indeed, decisions are made everyday on the European level which determine our lives.
We may dislike it, but the EU is part of our system of government, like municipalities, regions, and nation-states.
So the question is not whether Europe exists, but whether we are satisfied with the way it functions.
If not, can we fix it, and is a constitution the way to do it?
The first problem in need of a "constitutional" solution that is tackled is Europe's clear and unified identity.
Not many people realize it, but because of the patchwork of treaties from which today's European institutions arose, "Europe" is not a unitary entity; indeed, the "European Union" and the "European Community" denote two different things.
The Community is the set of institutions created in the 1950's to establish a common market.
When we decided later to have a common foreign policy, and to cooperate in judicial and police matters, we invented the Union. The Union deals with foreign policy; the Community with economic integration.
One consequence of this is that agreements with third countries that involve both foreign and economic matters require two distinct treaties: one for the Union, one for the Community.
This confuses even trained foreign diplomats who negotiate with Europe.
If it confuses them, how befuddling must it be for ordinary citizens?
How can a European citizen really identify with Europe if no single "Europe" exists?
Europe's indistinct legal identity has another deleterious impact.
If the Community does something that affects someone's rights, he or she can go to court.
But if the Union encroaches on your rights, access to a court may be closed because the Union happens to have no legal personality!
The next problem to be tackled - again with constitutional implications - is the anonymous, bureaucratic nature of European legal acts.
Criticizing institutions is as essential a part of democracy as protecting enumerated legal rights.
But Europe's institutions are hard to criticize because they produce acts that ordinary people cannot name or understand.
In national life, acts of parliaments are called "statutes" or "laws," and these usually have names that you can rally for and against.
In the EU we have " regulations," "directives," "decisions," "general guidelines," "common strategies," "common actions," "common positions" - a myriad that only experts can comprehend.
When a "directive" is issued, you don't know who is responsible; instead, they are known as, say, "Directive 17.62" (meaning that it is directive no. 17 issued in 1962).
In Italy there is now a controversial statute that will change the rules of criminal procedure in ways that might prove helpful to eminent public figures.
Well, the name of Senator Cirami is attached to that bill.
By god, we can fight about "the law Cirami"!
Would things be the same if the bill were called "Regulation 75"?
Because Europe has so many bodies that legislate - the Council of Ministers, the Council for Agriculture, the Council for Industry, the Council for the Environment, etc. - we cannot know who is doing what and why.
We need a single legislative council, a bicameral European Parliament, with one house representing member states, and the other the European electorate.
In this simplified system, legislation will be called legislation, and executive regulations, as in most legal systems, will fill in the gaps in primary legislation.
This is a system European citizens will understand.
The draft constitutional document presented last week introduces small but significant changes that may empower Europe's citizens to both identify with and criticize Europe.
It calls for a single, unified legal entity.
Whether it is called European Union, United States of Europe, United Europe, or something else, it will also provide for a unitary, simplified system of normative acts that will introduce more transparency and accountability.
The institutional structure envisaged by the proposed European Constitution should also reflect and help develop Europe's broader aspirations.
Europe must be more than a vehicle of economic integration, which is almost accomplished anyway.
At the simplest, we expect Europe to be fair. We expect our social model to be realized.
We expect economic and social matters to be connected.
We expect Europe to play a role for good in the world.
Of course, roadblocks await.
One of them is that more Europe cannot mean a centralized system.
Democratic governments are too complicated for that.
Getting the proper balance among European, national, regional, and local institutions will be a crucial challenge.
But if the people are to ordain a Constitution for Europe, all of their ties and values will need to be respected by that Constitution.
Europe’s Contested Neighborhood
BRUSSELS – What is the most important source of disagreement today between Russia and the West?
It is not the issues most often in the news – Iran or Afghanistan.
It is Europe’s contested neighborhood – the future of those countries between the eastern border of NATO and the European Union and the western border of Russia.
While the West and Russia still talk the talk of cooperative security in Europe, geopolitical competition for influence has been renewed in these regions.
Russia today openly lays claim to a sphere of interest in its borderlands – in direct contradiction to commitments made under the Helsinki process.
It has embraced policies and a military doctrine that labels NATO a threat and justifies the right to intervene in these countries.
While packaged in smooth diplo-speak, Russian President Dmitri Medvedev’s new proposal for European security has the less-than-hidden goal of stopping and rolling back Western influence.
Rather than moving into the twenty-first century, Russia seems determined to revert to nineteenth-century strategic thinking.
With the Obama administration focused on Afghanistan and Iran, the Kremlin hopes that a West in need of its cooperation will acquiesce in its demands.
And it is not only words.
Eighteen months ago, a war took place in Europe between Russia and Georgia.
It was a little war, but one that raised big questions.
It was not fought over the future status of Georgia’s Russian-backed breakaway regions of Abkhazia and South Ossetia (though that source of conflict was a real one).
Instead, the war’s root cause was Georgia’s desire to align itself with the West and Russia’s determination to stop it.
Many diplomats would prefer to forget the Russo-Georgian war or sweep it under the rug.
But none of the underlying tensions are resolved.
There is no stable solution in sight for Abkhazia and South Ossetia.
Russia has not abandoned the goal of breaking Georgia’s desire to go West.
Instability and separatism are growing in the northern Caucasus, making the broader region more volatile.
In late January, the Obama administration issued its first unequivocal reaffirmation of the strategy of democratic enlargement that has guided Western thinking since the collapse of the Iron Curtain two decades ago.
Speaking in Paris, Secretary of State Hillary Clinton reminded us that NATO and EU enlargement created an unprecedented degree of stability and security in the eastern half of the continent, that Russia too had benefited from this stability, and that it was critical that Europe’s doors remain open to further enlargement.
Clinton went on to reject as unnecessary Medvedev’s call to re-make current European security arrangements.
NATO has also finally started engaging in defense planning and other forms of strategic reassurance for its allies in Central and Eastern Europe, which are unsettled by Russia’s new assertiveness.
But what about those countries in between – countries like Ukraine and Georgia and the southern Caucasus?
Ukraine has just elected as its president Viktor Yanukovych, who is unlikely to pursue a NATO integration agenda, and if follows through on his commitment to join a customs union with Russia, Belarus, and Kazakhstan, membership in the EU would be precluded.
But that does not mean that tensions with Russia will automatically disappear.
Yanukovych’s victory notwithstanding, Ukraine is a country that is becoming more European and gradually moving out of Russia’s orbit in its own chaotic way.
Regardless of whether Georgians like or dislike Georgian President Mikhail Saakashvilli, they want to go West, too.
So Russia’s attempts to bring these countries to heel are likely to continue and remain a bone of contention and conflict.
And what is Western policy?
In reality, the West today no longer has a grand strategy toward the East.
The moral and strategic vision of the 1990’s has exhausted itself and come to a grinding halt after the shock of the Russo-Georgian war and the recent Ukrainian election.
As welcome as Clinton’s recent clear words were on the need to defend the right of countries to decide their own fate, you don’t have to go very far in Europe to hear whispers that some kind of new “Finlandization” might be a reasonable compromise for countries like Ukraine and Georgia.
It is time for the West to openly debate what its strategy is – and what it is not.
Two decades ago, the West rejected “spheres of influence,” because Europe’s bloody history taught us that compelling nations to align themselves with others against their will was wrong and a recipe for future conflict.
If we still believe that today, we need an updated moral and strategic vision for such countries, and to back it up with a real strategy.
We need to be clear that Moscow has a right to security, but that it does not have the right to interfere in the affairs of its neighbors, to topple their governments, or to deny them their own foreign-policy aspirations.
Barack Obama is right to try to reset relations with the Kremlin and engage a revisionist Russia.
But we need to do so knowing what our strategy is on this key issue.
As the United States and Russia close in on a new arms-control treaty, it is time to face the question of how we deal with Europe’s contested neighborhood.
The European Oasis
PARIS – Are non-Europeans much less pessimistic about Europe than Europeans themselves?
Could distance be a prerequisite for a more balanced view of the continent’s predicament?
In an interview a few months ago, Wang Hongzhang, the chairman of China Construction Bank, indirectly expressed his subdued enthusiasm for Europe.
Quoting the Chinese proverb, “A starved camel is still bigger than a horse,” he went on to say that Europe’s economies are much stronger than many people believe.
And, without saying so explicitly, he suggested that the time was right to go on a European buying spree at the right price.
Of course, not everyone would share this optimistic vision.
Across the English Channel, British Euroskeptics rejoice that they have kept their distance from a “sinking ship.”
But, while The Economist recently described France as being “in denial,” the same could be said of the United Kingdom.
True, the French had neither the Olympic Games nor a royal celebration this year; but, when it comes to the state of their economies, the two countries are largely in the same boat.
If one travels to America or Asia, as I did this autumn, Europe’s image becomes selectively brighter: while it continues to be perceived as a positive model, it is no longer considered a global actor.
Seen from the United States, Europe may no longer be a problem, but it is not considered a part of any solution to the world’s problems, either – with the possible exception of those that concern Europe directly (and, even then, doubts linger).
Yet, for many international investors, Europe continues to be, or is once again, a risk worth taking, if not – as in the case of Wang – a golden opportunity.
In a time of growing complexity – and thus uncertainty – investors want to hedge their bets.
At least some of the BRICS countries (Brazil, Russia, India, China, and South Africa) appear to be running out of steam economically; and, while new emerging powers, such as Mexico, are tempting, they may prove to be more fragile than they look.
In this context, Europe may be a tired, aging, and depressed continent, but, as its luxury and aeronautics industries attest, it would be premature to bury it.
Relative decline is obvious: Europe accounted for 20% of the world’s population at the beginning of the eighteenth century, but only around 7% today, while its share is expected to be even lower in 2050.
But demography is not destiny: a small population has not prevented Singapore from sustaining a hyper-competitive economy.
Europe may not be a source of economic inspiration, but it still makes people dream.
It is perceived as a model of “civility.”
Whatever their other disagreements, Chinese and Japanese concur on one point: if Asia today, with its rising nationalist tensions, evokes Europe in the first half of the twentieth century, it is precisely because Asia has not embarked on a reconciliation process such as that which enabled France and Germany to transcend their centuries-old rivalry.
Likewise, Russia’s president, Vladimir Putin, may emphasize the specificity of “Russian civilization” in a manner evocative of nineteenth-century anti-Western thinkers; but many in the Russian elite still consider the European Union, despite its many weaknesses, the most civilized model of governance that exists.
When Chinese seek a benchmark model for social protection, they go on study trips to Scandinavia.
But can Europe remain a model if it is no longer a serious geopolitical actor?
When US officials say to the Europeans, “We need you,” what they mean is quite minimal: “Please do not collapse and bring down the global economy with you.”
For example, if the Israeli-Palestinian conflict can still be resolved, a solution can come only with strong US involvement.
Barack Obama, who wants to be a transformative president like his role model, Abraham Lincoln, could do worse to deserve the Nobel Peace Prize that he received prematurely than to facilitate a comprehensive Middle East peace settlement.
Few expect such a colossal achievement, of course, but far fewer expect anything remotely similar from Catherine Ashton, the EU’s foreign policy czarina, or, for that matter, any European leader.
Europe remains a significant economic and commercial actor – one that can rebound at any time, now that it has at least partly transcended its systemic crisis.
It also remains a model of reconciliation in which people can continue to dream, despite unacceptably high levels of unemployment, particularly among the young.
But Europe is no longer perceived as a global actor – and rightly so.
It is an oasis of peace, if not dynamism.
The question for Europeans today is whether they can – and, more important, should – be content with their status.
Europe’s Crisis of Tongues
ROME – When history repeats itself, it is rarely gentle.
Today, as in the era of colonialism, tens of thousands of ambitious young people from Europe’s periphery are escaping the old continent in search of better opportunities in America, Africa, and Asia.
But, unlike in the colonial era, the human outflows are not compensated by inflows of natural resources or precious metals.
European emigrants used to contribute to the glory of their homelands; now, their exodus is contributing to Europe’s decline.
In an extreme attempt to address his country’s job shortage, Portuguese Prime Minister Pedro Passos Coelho recently urged his country’s young unemployed to emigrate to Portugal’s former colonies, such as Brazil or Angola.
Last year, for the first time since 1990, Spain was a net exporter of people, with 31% of emigrants going to South America.
Even in countries with no imperial past, but with an enduring migratory tradition, like Ireland, the brain drain to Australia and North America is accelerating.
The severity of Europe’s economic downturn, deficiencies in the euro’s design, and ill-conceived fiscal-austerity measures are all fueling the exodus.
But the main driver is culture, not economics.
Europe’s high degree of linguistic fragmentation does not allow the eurozone to absorb a self-inflicted crisis, so people move out of the currency area rather than within it.
Labor mobility within a currency area represents a key adjustment mechanism to preserve the effectiveness of monetary policy against asymmetries in regional shocks: in theory, workers from the eurozone’s shrinking periphery should flow to the expanding core.
In practice, the language barrier impairs this safety valve.
Thus, southern Europe is losing its best talent, northern Europe is struggling to fill its job vacancies, and all of Europe is becoming poorer.
Europe’s linguistic variety is immense.
Thirteen official tongues from six distinct branches of the Indo-European group of languages – Germanic, Slavic, Uralic, Romance, Celtic, and Greek – are spoken in the eurozone.
Add to this a plethora of regional dialects, which in Italy alone amount to around 20 (with several variants each).
In many secessionist regions, like Catalonia in Spain, they are de facto the official idiom.
The implications of this linguistic variety are profound.
A language is not just a systematic means of communicating.
It is a sign of identity, culture, and national pride.
According to most experts, linguistic processes shape the way people perceive the world, how they live their lives, and, ultimately, their mindset.
The same concept expressed with different words in different languages generates different emotions.
Indeed, Germany’s indifference toward the pain inflicted on Greece is inscribed in its language.
In English, as in several other European languages, the term austerity derives from the Greek austeros, which means harsh and severe, whereas for Germans it is merely a technocratic savings scheme, a Sparprogramme.
So far, political myopia and national interests have prevented European leaders from formulating a common language policy.
According to EUROSTAT, the European Union’s statistical agency, just 18% of people aged 18-34 perceive themselves to be proficient in another language (usually English), and the percentage decreases dramatically with age.
In such a Tower of Babel, German Chancellor Angela Merkel’s call for a political union to save the euro is wishful thinking, even for the staunchest European official.
Linguistic barriers will obstruct continental political debate and impede the creation of a truly European identity.
Citizens’ passion, rather than technocrats’ creativity, should inspire political unification.
But Europe is still far from that point: after more than 60 years of economic integration, a truly European people, with its own identity and language, has yet to emerge.
The logical implication of a currency that brings together 17 countries is a common, official language.
The EU’s founders believed that a lingua franca would emerge through economic and social interaction.
But they were wrong.
To strengthen the euro and establish the foundations for a political union, European leaders should undertake a rapid and explicit process of linguistic integration.
At the same time, national governments could minimize the political and transition costs of adopting a common language – whichever is chosen – by using their own languages for domestic affairs.
Unlike a currency, languages can easily coexist in an economic area.
Indeed, countries should promote their national languages and regional dialects – an invaluable cultural patrimony and source of identity in an increasingly globalized world.
Changing the course of European history requires bold action, particularly the adoption of a common language.
Otherwise, European history will remain a vicious circle of fragmentation and aborted efforts at integration.
Europe\u0027s Culture of Euthanasia
Modern technology has created the possibility of dramatically extending human life, but also a host of new practical and moral problems in the process.
Extending life is costly both because the technology itself can be expensive, but also because it often is extremely labor intensive in countries where labor is not cheap.
In capitalist societies, the high price tag associated with these new ways to extend life means that the poor and even the middle class can be excluded from important new benefits.
Humanitarian and moral concerns demand that this problem be addressed adequately.
Free market critics, sensitive to the problem of excluding people from living a longer life simply because of their income, look to the welfare states of Northern Europe for guidance, because they do not use the price system to allocate healthcare.
But the welfare states' experience with extending life creates its own ethical problems that may be even more serious than those in more market-oriented societies.
Faced with bloated fiscal deficits, today's newly cost-conscious welfare states are economizing in the use of expensive life-extending technologies.
Moreover, as a result of policies allowing medically-assisted termination of human life, a “culture of euthanasia” has been gaining ground in some Northern European countries.
Life-extending technologies are increasingly out of fashion, and terminating ill old people's lives is often extolled as caring, even “humanitarian.”
The confluence of economic considerations and the culture of euthanasia is nowhere as visible as in Holland.
People may differ about the ethics of euthanasia itself. But a negative by-product of a policy which allows doctors to practice euthanasia is that the taboo against terminating human life diminishes.
As a result, there is less resistance to ending patients' lives “for their own good,” with only the family's consent substituting for that of the patient, or even without the family's consent, and the practice gradually becomes socially acceptable.
According to the respected Dutch newspaper NRC Handelsblad, “humanitarian” terminations by doctors occur at the rate of 10,000 per year in Holland, though how many “terminations” are done without patient or family consent is unclear.
Apparently, Dutch doctors are letting their patients die the old-fashioned way, rather than use the expensive new techniques to prolong their lives.
Reinforcing this “culture of euthanasia” are economic considerations.
By foregoing prices in allocating healthcare, the Dutch have taken the economic incentives for extending life away from the country's physicians.
Unlike doctors in a profit-driven healthcare system, Dutch doctors cannot “make money” extending life; nor can they “make money” from informing the patient and his or her family of the various life-saving options made possible by advances in medical science.
Indeed, because extending the lives of ill old people can be very costly, the economic incentives run in the opposite direction in the welfare state.
In these budget balancing times, doctors at public nursing homes and hospitals are under severe pressures to keep costs down.
Economic considerations thus cannot help but play an important role in life or death medical decisions, though welfare state doctors are loathe to admit it.
Where welfare state medicine differs most from that in more market-oriented countries is that patients and their families often have little or no say in critical medical decisions that can profoundly affect their lives.
In Holland, patients are virtually helpless against the new “culture of euthanasia.” “Free” healthcare effectively disempowers them.
Doctors are not gods, but they increasingly play god by refusing to use life-extending techniques for patients and families who want them and are even willing to pay for them.
In Holland, there is no private medicine. The only recourse for dissatisfied patients is to leave the country or go to the courts.
Europe's welfare states thus face a serious dilemma.
There is no doubt that Holland spends a substantial amount of money on caring for old people.
If it were to exploit more fully the existing life-extending technologies for its people, it would put substantial additional pressure on the healthcare budget, perhaps to the point of causing a deficit crisis.
On the other hand, underutilization of life-extending techniques creates a moral crisis because ill patients are being prematurely terminated by doctors who have too much power over life and death decisions.
One solution to this dilemma is simple.
The Dutch, as the British have done in recent years, should allow private medicine to co-exist with public medicine.
In a so-called “mixed system,” patients would have more – and physicians less – power over life-and-death decisions.
The sick could go “private” to secure life-extending treatments that the state is denying them.
This would be a good thing. Introducing private medicine might even take some pressure off public health budgets.
Critics of market-driven health care say that such changes would lead societies back to the bad old days of unequal access to health care of all sorts, not just to these new life extending technologies.
Such critics, however, forget that welfare state health systems practice an insidious form of unequal access, but one shrouded from view.
In the welfare state system, personal connections are just about the only way to get favored treatment.
Insiders get the goods, outsiders get the waiting list.
Given the life-and-death choices involved, the proper choice seems clear.
Europe’s Dangerous Banalities
JERUSALEM – Europe’s vocation for peacemaking and for international norms of behavior is bound to become the base upon which Barack Obama will seek to reconstruct the transatlantic alliance that his predecessor so badly damaged.
How fast America’s new president addresses the Arab-Israeli conflict will be of paramount concern to Europeans in this effort. For to them, Jerusalem has always mattered more than Baghdad, but George W. Bush refused to listen.
Europe’s inability to help resolve the Arab-Israeli conflict does not stem from its positions on the core issues, which are only microscopically different from those held by the United States.
Its impotence stems, instead, from its attitude toward the Jewish state.
In essence, dialectic of attraction and rejection is embedded in our collective conscience as Jews and Europeans.
Europe, as Denis de Rougemont put it in 1946, is “la patrie de la memoire,” a tormenting and tormented memory, one must admit.
The old continent suffers from two guilt complexes that have much to do with Israel: the colonial and the Jewish complex.
The Palestinian tragedy is directly affected by this European affliction.
Israel was born as a state out of the gravest crisis of the European conscience.
For Europeans, Israel’s creation was to compensate for the sins committed against the Jewish people.
But the price that was supposedly paid by the Palestinians touched another neuralgic lobe in the European mind.
Because Europe remains entangled in this seemingly insoluble conundrum, Israelis see it as trying to compensate for its lack of political effectiveness in Middle East diplomacy with unbearably self-righteous and moralistic talk.
To the Israelis, Europe became the essayist Mario Andrea Rigoni’s “old lady, who after she had allowed herself all sorts of liberties…and a great number of horrors, would like, once she has reached the age of society, fatigue, and weakness, to see the world adapt itself to her needs for moderation, equity, and peace.”
It took Europe gruesome religious wars, two world wars, and more than one genocide to resolve its endemic disputes over borders and nationalism. Its record in colonialism wrote monstrous pages in human history.
Now Europe is making Israelis feel not only that it is indifferent to their existential predicament, but that, rather than fighting for life against tremendous odds, Israel is committing European-style crimes.
Are some Europeans, many Israelis ask, attempting to use Israel as a means to rid themselves of guilt over the Jewish question, and with it the Jews’ unbearable claim to moral superiority, by lightheartedly equating them with the perpetrators of the Shoah?
Israel, as the territorial answer to the old Jewish fears , tends to take decisions only on the basis of worst-case scenarios.
Its new doctrine of “brutal response” when attacked from lands from which it has withdrawn – as happened in Lebanon and Gaza – might be reprehensible, and it may even doom the country to international opprobrium.
But “genocide” it is not.
Indeed, Israel’s critics in Europe are indulging in a frivolous banalization when they compare the recent Gaza conflict or the battle of Jenin in 2002 – with its 58 casualties among Palestinian combatants (Israel lost 25 soldiers) – to Auschwitz, a death factory where 30,000 Jews were slaughtered daily.
Israel should not, however, rejoice at being so far away from Europe, because Europe’s way is not far-fetched; the world cannot be allowed to operate for long outside a reasonable international system of rules and laws.
Moreover, Israel is painfully aware of the many legitimate interests that Europe has in the region.
Instability is a threat to those interests, and with Europe becoming a cosmopolitan continent with a huge Muslim population, the Arab-Israeli conflict has, for Europeans, an undeniable domestic dimension as well.
Europe might not intimidate, but it certainly inspires, and Israel should have an interest in encouraging a judicious role for Europe in building a framework for peace, stability, and cooperation in the region.
It can also teach many lessons.
The EU is not proof of the decay of the nation-state.
It teaches us, instead, that nationalism (if respected) can become a responsible force for broader international cooperation.
Nationalism degenerates into violent narcissism only when denied its fundamental rights.
The EU has shown the difference between voluntarily limited sovereignty and involuntarily stolen sovereignty.
For Europe to play the role to which it is entitled in producing a Middle East peace, it needs to restore its credibility with Israel.
The vigorous and equitable reaction of European leaders to the Gaza war, and the visit of five of them to Jerusalem to help seal the ceasefire can, now that President Obama has launched his “aggressive” quest for peace in the region, launch a promising era of American-European partnership in Middle East peacemaking.
Europe’s Flawed Banking Union
PARIS – The European Union is now the proud owner of a Nobel Peace Prize.
When the choice alighted on Barack Obama three years ago, the Norwegian Nobel Committee was criticized for honoring someone whose achievements were still to come.
The Committee took that criticism to heart, and this time decorated an institution with a proud past, but a clouded future.
The eurozone is distinct from the EU of course, but it is the Union’s most ambitious undertaking to date, and it is still struggling to equip itself with the structures needed to bolster a currency union.
A common fiscal policy remains a distant dream, as does a genuine political union.
But Europe’s policymakers claim to be making progress toward a so-called “banking union,” which means collective banking supervision, rather than a merger of banks themselves.
In September, the European Commission announced a plan to make the European Central Bank the supervisor of all 6,000 of Europe’s banks.
The reaction among national politicians, central banks, and banks themselves was not universally favorable.
The Germans want the ECB to focus only on large systemic banks, and leave smaller savings banks (like those that invested heavily in subprime mortgages) to national authorities.
The United Kingdom and Sweden argue that they cannot be made subservient to a central bank of which they are, at best, semi-detached members.
The case for a pan-European supervisor is widely accepted, especially as the European Banking Authority (the EU’s banking regulator) proved feeble in carrying out financial stress tests: the first tests were so weak that even Spain’s now-bankrupt savings banks could pass with flying colors.
Europe must break the vicious circle linking distressed sovereign borrowers with banks that are obliged, or at least encouraged, to buy their bonds, which in turn provide the funding for bank rescues.
But the method chosen by the Commission to implement a banking union is fatally flawed.&#160;
Moreover, according to a leaked opinion from the EU Council’s chief legal adviser, the proposed reform is illegal, because, according to the Financial Times (which received the leak), it goes “beyond the powers permitted under law to change governance rules at the European Central Bank.”
Throughout the crisis, European leaders have tried to respond to the gaps in the monetary union without proposing a new treaty, because they fear that any new treaty proposing more centralization of authority in Brussels would be rejected, either by national parliaments or by voters in a referendum.
So they have tried to proceed by intergovernmental agreement, or by using existing treaty provisions.
In the case of the banking union, they plan to use Article 127(6) of the Lisbon Treaty which allows the European Council to grant authority to the ECB to perform specific tasks concerning “policies relating to the prudential supervision” of certain financial institutions in the Union.
That is a thin legal basis for establishing a pan-European supervisor with direct responsibility for individual institutions, and it was clearly not intended for that purpose.
Indeed, Germany agreed to the wording only on the understanding that the ECB could not be a direct supervisor.
The consequences of choosing this inadequate, if expedient, route are serious.
For starters, the existing treaty cannot be used to create a single European resolution authority, leaving an awkward interface between the ECB and national authorities.
Nor can it be used to establish a European deposit protection scheme, which is arguably the most urgent requirement, to stem the outflow of deposits from southern European banks.
There will also be potentially dangerous consequences for the ECB itself.
The use of the Lisbon Treaty clause means that the ECB must be given these additional responsibilities.
But it is impossible to create a separate bank-supervision entity within the ECB, as has been done in France, for example, with the Prudential Control Authority, or in the UK with the new Prudential Regulatory Authority, which has its own board and accountability arrangements within the Bank of England.
The importance of these structures is that they insulate the central bank’s monetary-policy independence from corruption by the tighter accountability requirements that inevitably come with banking supervision.
Because supervisors’ decisions affect individuals’ property rights – and their actions or omissions can put taxpayers on the hook to bail out banks – governments, parliaments, and the courts are bound to hold the watchdogs on a tight leash.
That is why Germany’s Bundesbank, which always guarded its monetary-policy independence so assiduously, has once again found itself in the rejectionist camp, expressing severe doubts about the route that the Commission plans to take.
This time, they are right.
There are other serious issues, too.
According to the Commission’s model, the European Banking Authority will remain in place, and is charged with producing a single rulebook for all 27 EU member states. But, while its work is carried out under the normal qualified majority voting system, the 17 eurozone countries will have a single supervisor, so will have a block vote.
The Commission is trying to find ways to protect the rights of the non-eurozone countries.
But the very complexity of what is proposed shows just how inadequate the scheme is.
Non-Europeans, in particular, may find the entire topic impenetrably abstruse.
But it illustrates a simple point: Europe is trying to achieve a stronger federal model that responds to the weaknesses revealed by the eurozone crisis.
But it is doing so without addressing the crucial need to bring its citizens along.
Indeed, the devices that the EU is adopting are designed specifically to avoid having to consult them.
The proposed construction of a banking union reveals this fundamental flaw at the heart of the European project today.
It is difficult to be optimistic about the success of an initiative built on such flimsy legal foundations, and lacking democratic legitimacy.
Europe’s Determination to Decline
SÃO PAULO – In a heroic case of finding a silver lining in the bleakest of all situations, the European Union climate commissioner has concluded that the global economic crisis and recession actually provided a lucky break for everyone.
Commissioner Connie Hedegaard says that the slowdown in economic activity will make it easier for the EU to achieve its 2020 goal of ensuring that greenhouse-gas emissions are 20% below their 1990 level.
In fact, Hedegaard believes that cutting emissions has become so easy that European leaders should be more ambitious and unilaterally aim for a 30% reduction below the 1990 level – an idea that has won support from David Cameron’s new British government.
This may seem like good news, but it is not, because there is a strong correlation between economic growth and carbon emissions.
For almost all countries, higher emissions come from higher growth rates.
And if you restrict carbon emissions without providing affordable alternative energy sources, GDP will falter.
In other words, by advocating even deeper cuts in emissions, Hedegaard is, in effect, calling for an even deeper recession.
It’s worth noting that even before its current economic difficulties, Europe was unable to keep up with the growth rates of the United States, not to mention the emerging economies of India and China.
To stay in the game, the EU acknowledged a decade ago that it needed to become uniquely inventive.
Hence, the European Council’s Lisbon Strategy of 2000, which centered around a pledge to increase general research-and-development spending by 50% over the following decade.
Unfortunately, Europe has done no such thing; if anything, R&amp;D spending has actually declined slightly since then.
This is especially regrettable because R&amp;D in green energy technologies is really the only viable long-term strategy for reducing fossil-fuel consumption without crippling the world economy.
European politicians instead seem to have become increasingly committed to the notion that global warming is the world’s most urgent problem.
Some conspiracy-minded commentators even suggest that this is related to Europe’s lack of competitiveness: instead of trying to keep up, they say, Europe has decided to find a way to slow everyone else down.
One needn’t accept this Machiavellian view to recognize that trying to cut back on the use of fossil fuels in the absence of practical alternatives is a recipe for economic stagnation.
This seems to be a driving factor behind China and India’s refusal to go along with Europe’s plans at last December’s global climate summit in Copenhagen.
The German magazine Der Spiegel recently got hold of a tape of the final negotiating session.
It is instructive to hear the baffled reactions of European leaders like Germany’s Angela Merkel, France’s Nicolas Sarkozy, and Britain’s Gordon Brown as their developing-country counterparts served notice of their refusal to consign their populations to continued poverty in order to solve a problem that the rich countries created.
Attempts in 2010 to rekindle commitment to a global carbon-emission deal have failed.
Both the outgoing head of the UN climate-change secretariat and Commissioner Hedegaard have admitted the obvious: a deal is extremely unlikely to be reached at the next major summit in Mexico at the end of the year.
Nonetheless, Europe has continued to pursue its quixotic course, even without a global treaty on reducing carbon emissions.
And make no mistake about it: the EU’s unilateral emission restrictions are not only economically destructive – likely to cost Europe an estimated $250 billion a year by 2020 – but are also astonishingly ineffective.
Climate models uniformly show that that for all the economic havoc that such carbon cuts would likely wreak, they would have a negligible impact on global temperatures.
The widely used RICE climate-economic model shows a miniscule drop of 0.05 degrees Centigrade over the next 90 years. Despite the huge outlay, the difference in climate by the end of the century would be practically indiscernible.
Unfortunately, it seems as if Europe has decided that if it can’t lead the world in prosperity, it should try to lead the world in decline.
By stubbornly pursuing an approach that has failed spectacularly in the past, Europe seems likely to consign itself to an ever-dwindling economic position in the world, with fewer jobs and less prosperity.
Even the most optimistic-minded would struggle to find a silver lining in that outlook.
Europe’s Distant Mirror?
It is tempting for Europeans to project their own history onto Asia and to view current developments there as a mere repetition, if not an imitation, of what occurred in Europe.
In fact, Asians themselves encourage this temptation, with the Association of Southeast Asian Nations (ASEAN) openly aiming to become increasingly like the European Union.
In trying to decipher Asia’s diplomatic future, Europeans are confronted, so to speak, with an “embarrassment of riches.”
Is Asia today replaying the balance of power games of late nineteenth-century Europe, with China in the role of Germany?
Or is South Asia, through the growth of ASEAN, poised to one day become the Far Eastern equivalent of the EU?
These comparisons are not neutral, and one may detect in the analogy between China today and nineteenth-century Germany an element of that guilty pleasure in others’ troubles that the Germans call “Schadenfreude.”
Asia may be doing well economically now, according to this view, but just wait: rising nationalism, China’s appetite for power, and the rest of Asia’s desire to curb its ambitions will necessarily impede economic growth and restore the West’s global primacy.
But this scenario does not correspond to reality.
China at the beginning of the twenty-first century is not Bismarck’s newly unified Germany in the second half of the nineteenth century.
The Chinese do not view themselves as a rising new power, but instead as Asia’s traditional power, now experiencing a renaissance.
China, they believe, is regaining the status and prestige that it enjoyed until the end of the eighteenth century.
As a result, unlike Wilhelmine Germany, the Chinese are not in a hurry to prove how strong and powerful they have become.
In strategic terms, China is not a revisionist power, but instead a “satisfied,” status-quo power.
The only exception to this, of course, would be a declaration of independence from Taiwan, which the Chinese would consider a casus belli.
To be sure, the Chinese are indeed rearming – and even entering the military space race – but they are doing so at a pace and to a proportion that reflects their new economic prosperity.
China’s fundamental priorities remain economic, reflecting its leaders’ belief that their regime’s long-term survival presupposes the continuation of rapid growth.
For that, they need access to energy, but they are not about to engage in military or even diplomatic adventures.
Nor are they set to become a benevolent, altruistic power, ready to use their new strength and reputation to improve the stability of the international system.
Chinese cynicism and spontaneous selfishness, however, is now tempered by what they perceive as growing recognition of their unique status.
The combination of respect and interest they see in the way the world now views China can only reinforce their sense of confidence.
So why should they take unnecessary risks?
The resounding success of the Africa-China summit, which was attended by more African leaders than purely African gatherings; the diplomatic rapprochement between India and Japan; and the democratic alliance in the making between India, Japan, and Australia can only be interpreted as signs of China’s newly regained position.
Why would they jeopardize such real and symbolic gains with rash and untested moves?
There is no Bismarck at the helm of Chinese diplomacy, but there is no impetuous Kaiser either: just relatively prudent and competent technocrats.
In reality, what may threaten the stability of the region, and above all that of China, is not an excess of Chinese ambitions or a failure to democratize, but the Chinese regime’s inability to establish the rule of law.
In 1978, China’s newly installed leader, Deng Xiaoping, viewed Singapore as living proof of the superiority of capitalism over communism.
He remembered the impoverished backwater that Singapore was in the 1920’s, and now he saw the gleaming city that free enterprise – together with Lee Kwan Yew’s quasi-authoritarian leadership – had wrought.
It was after visiting Singapore that Deng introduced “special economic zones” in southern China.
But the rule of law, even Singapore-style, is far harder to implement than capitalism, and its absence represents the major obstacle to the establishment of an Asian community based on the EU model.
Twenty years ago, one of the main obstacles to creating an Asian Union was Japan – Asia’s most advanced and successful country, but one that did not feel Asian.
Moreover, the rest of Asia resented the Japanese for reveling in this difference.
That resentment remains, sustained in part by historical grievances, but the Japanese have now come to perceive themselves as Asians, helped by their realization that the economic miracle that they initiated in the region has gone well beyond them.
In Europe, transcending nationalism required not only two devastating world wars in the first half of the twentieth century, but also the prevalence of democratic regimes.
The rule of law is the equivalent for Asia today of what democracy was for Europe yesterday.
Without its gradual imposition, an Asian Union could at best remain only a pale and hollow copy of its European model.
Europe’s Divisions, Old and New
LJUBLJANA: From Joschka Fisher to Jacques Chirac visions of a federal EU are multiplying.
To Slovenes, these ideas are unsettling reminders of Yugoslavia’s federal design.
Yugoslavia’s federation failed because, in uniting so many differences, it could be held together only by undemocratic, even authoritarian, means.
Should Slovenes, who avoided the worst of Yugoslavia’s bloody dissolution, now jump into a new federal adventure, even if it is a European one?
That choice, of course, is not Slovenia’s alone and is, anyway, now hostage to other concerns.
Ten years ago, after the Berlin wall fell and Germany was reunited, Europe’s democracies said that they wanted to repair the historic injustice of Europe’s division, when the countries of East/Central Europe became a type of war booty for the Soviet Union.
Today, as almost anyone east of the old Iron Curtain will tell you, however, enlargement is moving ahead at a snail’s pace.
Candidate countries must harmonize their political and economic systems with the so-called acquis communautaire; current EU members want to ensure their ability to absorb enlargement by revising the EU’s structures.
It is often heard that the current number of members already makes the EU’s work difficult.
So it is virtually impossible to imagine enlargement to 27 members not endangering today’s system.
The EU’s first response to these fears was to make minimal changes – ie, to the number of commissioners, the weight of votes within the Council of Ministers, and qualified majority voting.
Soon after the Amsterdam summit of 1997, however, "minimalism" became insufficient.
Big member states began to use the prospect of enlargement as a tool to reduce the influence of smaller states; smaller states now struggle convulsively to avoid being marginalized.
Fears of equal intensity confront candidate countries.
Despite occasional invitations to consult, they are de-facto excluded from participating in decisions about the EU’s future structure, federalist or not.
Moreover, they worry that the problems associated with changing EU decision-making will delay enlargement, with current EU members conveniently able to blame the candidates for this inaction.
These fears multiplied when the Helsinki Summit of 1999 raised the number of candidate countries from 6 to 12.
Of course, offering membership to more countries is praiseworthy, but doing so may postpone membership for the first candidates.
That worry was confirmed earlier this year when the European Commission curtailed negotiations with the first group of candidates, ostensibly to allow the others to catch-up.
Exacerbating all this is the specter of federalism which haunts governments from London to Copenhagen.
In a bid to reconcile euro-skeptics and euro-enthusiasts, the idea of a two speed Europe – which began with the Schengen border arrangements and continued with the euro – gained momentum.
Today, it seems, the right to opt out or opt into an EU policy may be becoming a general rule.
But there are dangers in this.
The differences created among members may devastate the spirit of commonality.
In the eyes of candidate countries, moreover, the two-tier EU that may emerge poses the added threat of first and second class membership, with today’s members trying to escape the consequences of expansion by leaping ahead into some higher, more exclusive, form of membership.
Tolerance of such fundamental differences seems certain to effect Europe’s emerging foreign and defense policies.
The search for a common European stance in international affairs reflects Europe’s experience in Yugoslavia’s wars.
A decade’s bloodshed exposed the EU as incapable of solving a crisis in its backyard without American help.
It will take years, of course, before Europe is independent of the US in the military sense, an independence some members, and most candidates, do not seek.
Any misstep here could jeopardize what Europe has built over the decades.
Having now assumed the EU’s presidency, France will seek a consensus for changes in EU decision-making.
Some expect a precise time-table for enlargement with the first candidates to also be set, but I doubt this will happen.
Next December’s summit in Nice will be a success if it merely sets relatively short deadlines for accepting new members.
If the mood about enlargement does not improve, however, expect the Nice summit to offer only vague formulations.
That vagueness will be deliberate, because anyone speaking too bluntly on matters like this nowadays can expect to be quarantined like Jörg Haider.
Development of the EU over the next few years may well depend on how France leads the EU.
By reinvigorating its axis with Germany, France seems intent on pushing forward proposals to strengthen the powers of big EU states.
The resulting inequality will probably be hard to reconcile with a viable federalism and will likely breed resentment among small EU members and candidate countries, putting expansion at greater risk.
A decade after Europe’s old division ended, the scars remain raw.
So creating new divisions between big and small, have and have nots, and then trying to subsume them in a one-size-fits-all federalism may only revive all that Europe sought to avoid through its democratic integration.
Failure to adequately address the historical injustice of Europe’s postwar division, indeed, may lead only to renewed instability and crisis.
Yugoslavia’s wars of the past decade provide ample warnings as to what may happen when a federal system is torn apart by resentment.
Europe\u0027s Dollar Envy
Currencies can become the focus not just for commercial transactions, but for diplomatic and political wrangles.
When this happens, commercial transactions become more difficult and subject to greater uncertainty.
The politicization of money during the interwar depression was economically devastating.
But there have been more recent occurrences of nasty currency wars.
In the 1960's the international monetary order became the focus of a political tug-of-war.
Each side had quite different theories and explanations of what was going on.
The Europeans--in particular the French--complained about what General Charles de Gaulle termed the "exorbitant privilege" of the US dollar.
The General and his monetary guru, Jacques Rueff, argued that the US used the dollar's status as the major reserve currency of the Bretton Woods fixed exchange-rate regime in order to run deficits and pay for its overseas military adventurism (at that time in Vietnam).
France responded with calls for monetary reform that would end the peculiar role of the dollar and tried to revive the largely discredited gold standard.
Europeans began a long discussion of the advantages of monetary union, achievement of which would allow them to look the dollar in the face.
But from the American point of view, the international role of the dollar was a trap.
Other countries could change their exchange rates, and in this way could maintain greater export competitiveness.
The US government was powerless in the face of an undervalued yen, fueling the belief that the rest of the world was using the dollar to attack America's manufacturing base.
The Nixon administration came to the conclusion that the only way to save the American economy was to engage in monetary unilateralism--a monetary expansion so dramatic that other countries would be forced into adjusting their exchange rates.
These long-forgotten battles seem suddenly very immediate once again.
The world no longer has a fixed exchange-rate regime, but the dollar remains the major reserve currency--a sort of floating Bretton Woods.
For Americans the reserve role of the dollar is a potential threat, while for non-Americans it is yet another instance of an American neo-imperial quest for hegemony.
In this decade, China has taken the place of 1960's Japan, holding its exchange rate down in order to push export growth.
Consequently it is the target of US complaints about unfair competition, and of efforts to force an exchange-rate adjustment that would deter Americans from buying Chinese toys, appliances, and clothing.
Manufacturers in the US have decided that Chinese-made bras constitute a threat to the American way of life.
Meanwhile, Europeans (especially the French) complain about the big US deficits, and de Gaulle's argument that the rest of the world is paying for America's wars is in fashion again.
Some Europeans suggest that Asian central banks should hold a greater part of their reserves in euros, an echo of the General's unsuccessful attempt to force America to its knees by selling dollars for gold.
The 1960's ended in the breakdown of the "system," and in major financial turbulence, accompanied by an inflationary surge of commodity prices.
Everyone was hurt, and America's role in world affairs was shaken.
A similar collapse now is likely to have a rather different effect.
The floating-rate system of today is stronger and the costs of adjustment differently distributed.
Most Americans do not suffer greatly from the dollar's sharp fall, as foreign sellers have to make price adjustments for the US market.
Asian economies are growing vigorously, and their central banks are building up claims on the US.
They are likely to continue this policy, as the alternative would be a sudden setback to the competitiveness of their export sectors in the all-important US market.
This gives the US a longer time to address a current account deficit that is in the long run unsustainable.
The economically dynamic regions of the world--North America and Asia--are thus linked together in a pact that will ensure the continued centrality of the American dollar.
Americans will continue to pile up debt because Asians want them to do that.
To abrogate the pact would be against the interest of both parties.
This is not American unilateralism, because it means working with Asia.
But to Europeans, who are excluded from the pact, it looks like monetary and economic unilateralism.
In the meantime, the rise of the euro against the dollar creates substantial European pain for manufacturing exporters.
Europe, however, is unable to do much to gain relief.
Indeed, Europe will be the major sufferer in the new currency clashes.
Answers that were touted in the 1960's--revival of the gold standard, or the invention of a common European currency--do not appear to be very helpful any more.
Having a single currency has turned out not to afford substantial protection.
The old version of the European response--what psychologists might call "dollar envy"--will only become more acute.
There will be appeals to the European Central Bank to expand the monetary base, as if imitating the dollar were the answer to all the industrial, structural, and demographic problems plaguing Europe.
But a moment's reflection should remind us that Europe's problems are not amenable to currency manipulation.
Protesting the new version of America's exorbitant monetary privilege should be seen for what it is: a way of compensating for a real European powerlessness.
So dollar envy is here to stay, and it will become even greater as the greenback's international value melts away without any obviously bad effects on the people who print and use it.
Europe’s Doubting Generation
PARIS – The contrast between the Schuman Declaration of May 9, 1950, which launched the European unification project through the Coal and Steel Community, and the fearful bid to save Greece and rescue the euro of May 9, 2010, could not be more stark.
Of course, in 1950 the Cold War was raging and recovery from World War II concentrated European minds.
It was urgent to be imaginative – and the right people were in the right positions. Jean Monnet, who inspired the project, was pragmatic and daring.
Robert Schuman, who presented the idea of unification to Europe’s leaders, was animated by a deep Christian faith that helped create miracles.
Different times, different people, different spirit.
The seat of the College of Europe in Natolin, near Warsaw, is a near perfect barometer to test the morale of Europe.
If the young European elites being trained there to occupy positions within the European Union’s institutions no longer believe in the EU’s future, something is really wrong.
For if they don’t believe in Europe, who will?
On the Natolin campus, post-graduate students, representing more than thirty nationalities, live in what they themselves often describe as a “golden cage.”
They interact (or should) to become what many may already have been prior to their arrival: “Europeans.”
At least, this is the way things were and should be.
But, even in this uniquely protected environment, Europe is no longer the cause that it once was.
Students tend to group themselves by nationalities more than they did in the past, as if they want familiar reassurances against the uncertainties of the present and the future.
When I started teaching International Relations in Natolin in 2002, all the college’s students were infused with the hopes stemming from the EU’s enlargement to Eastern Europe.
They prepared for inclusion of eight former Communist countries (as well Cyprus and Malta) with almost quasi-religious fervor.
Students from “Old Europe” were energized by the idealism and confidence emanating from their Polish, Czech, Estonian, and other compatriots.
They all seemed full of optimism about their political and economic future.
The will to transcend the murderous trauma in the Balkans was also present. Watching students from Serbia, Croatia, and Bosnia confront their memories of the Balkan wars, “European students” had first-hand experience of what true “reconciliation” meant and what the rules of the game were in the greatest success the EU had known – transcending the Cold War and nationalist animosities.
On May 1, 2004, I celebrated EU enlargement with my students.
We embraced each other under the blue flag with its 12 yellow stars.
Of course, not everyone beyond the College of Europe’s campus shared this enthusiasm, especially not everyone in Old Europe, which often seemed to be accomplishing its “historical duty” with considerable reluctance.
Today, in fact, as the financial and economic crisis unfolds before our eyes, it is ironic to compare the relative strength of Central Europe, behind a strong Poland, to the extreme vulnerability of Southern Europe, behind Greece.
Nowadays at the College of Europe, the “culture of doubt” among students from Old Europe seems to prevail over what was once the pragmatic confidence of students from New Europe. It is no longer the “good wind” from the East, but the “bad wind” from the EU’s South and parts of its West that carries the day.
Many students, if not the majority, are no longer on campus because they “believe” in Europe, but because they are full of doubts as to their capacity to find a job in their respective countries.
They wish to acquire an additional diploma, even though they are already overqualified.
They hope for an upturn in the economic climate, or to get a comparative advantage in the ferocious competition for first jobs.
They are, above all, gaining time.
Asked not about their motivations, but about their identities, the students from the College – with the exception of the Germans – do not naturally and spontaneously perceive themselves as Europeans first.
They listen with sympathy, and sometimes even emotion, to the testimonies of the generation for whom Europe was synonymous with the ideal of reconciliation and reconstruction. But they desperately need a new narrative.
The Union’s founding story is not their story, but the story of their parents or grandparents.
They do not ask themselves what they can do for Europe, but what Europe can do for them in terms of jobs and salaries.
And they are more dubious than confident.
Europe’s Empty Fiscal Compact
CAMBRIDGE – The driving force of Europe’s economic policy is the “European project” of political integration.
That goal is reflected in the European Union’s current focus on creating a “fiscal compact,” which would constitutionalize member states’ commitment to supposedly inviolable deficit ceilings.
Unfortunately, the compact is likely to be another example of Europe’s subordination of economic reality to politicians’ desire for bragging rights about progress toward “ever closer union.”
The plans for a fiscal compact have evolved rapidly in recent months, shifting from a politically unpopular “transfer union” to a dangerous plan for fiscal austerity and, finally, to a modified version of the defunct Stability and Growth Pact of 1997.
In the end, the agreement that will emerge later this year will do little, if anything, to change economic conditions in Europe.
German Chancellor Angela Merkel initially proposed the “transfer union,” in which Germany and other strong eurozone economies would transfer funds year after year to Greece and other needy countries, in exchange for the authority to regulate and supervise the recipient countries’ budgets and tax collections.
The German public rejected the idea of permanent transfers from German taxpayers to Greece, while Greek officials and the Greek public rejected the idea of German control over their country’s fiscal policy.
The next step was the fiscal plan that was agreed in Brussels at the end of last year, which completely abandoned the idea of a transfer union in favor of an agreement that each eurozone country would balance its budget.
Under this scheme, a financial penalty would “automatically” be imposed on any country that violated that obligation.
With balanced budgets everywhere, there would be no need for fiscal transfers.
But how, exactly, should the balanced budget requirement be defined?
In a letter to the officials negotiating the formal agreement, Jorg Asmussen, the German member of the European Central Bank’s Executive Council, stressed that a balanced budget meant just that.
Even if a country ran budget deficit because a cyclical downturn caused a fall in tax revenue and an increase in social transfers, it should be required to raise taxes or cut spending to restore a balanced budget.
If this proposal were actually implemented, it would have the effect of turning small recessions into major economic downturns.
Fortunately, this recipe for creating future European depressions was rapidly dropped.
The most likely form of the fiscal compact now seems to be a very mild agreement requiring each country to “balance its budgets over the business cycle.”
Although failure to comply would in principle lead to automatic financial penalties, it is difficult to imagine how such failure could be determined in a country like Spain.
At what future point would Spain, with a persistent unemployment rate of more than 15%, be required to raise taxes and cut social transfers?
Ordering Spain to do so might rest with the European Commission, making it a political decision, rather than the “automatic” technical requirement that its proponents promise.
If this is the essence of the fiscal compact that is eventually agreed, it will have no predictable effect on eurozone countries’ behavior.
Its only effect will be to allow the eurozone’s political leaders to claim that they have created a fiscal union, and thus that they have moved Europe closer to the political union that is their ultimate goal.
But a fiscal union conceived in this way is completely different from how most people understand the term.
In the United States, for example, the central government collects about 20% of the country’s GDP and pays out a similar amount.
That centralization of taxes and spending creates an automatic stabilizer for any region that experiences an economic downturn: the affected region’s residents send less money to Washington and receive more in transfers.
There is no similar process in the eurozone, where taxes and spending occur at the national level.
The centralized fiscal role in the US also allows all of the individual states to operate with true balanced budgets, modified only by relatively small “rainy day” funds.
But, although the current European political process will not create strong fiscal discipline, financial markets are likely to force eurozone governments to reduce their sovereign debts and limit their fiscal deficits.
During the single currency’s first decade, private investors’ belief in the equality of all eurozone sovereign bonds kept interest rates low in the peripheral countries, even as their governments ran up large deficits and accumulated massive debt.
Investors will not repeat that mistake: once bitten, twice shy.
For eurozone governments, that means that financial markets will now enforce what the political process cannot achieve.
The EU’s fiscal compact, whatever its final form, will be little more than a sideshow.
Europe’s English-Speaking Peoples
The European Union has a single currency, but what about a single language?
Since its inception, the EU has made each member state’s language one of its official tongues.
Recently, even Irish, spoken at home by only a tiny minority, was granted full official status.
Treating all EU languages on the same footing is a direct consequence of the formal equality of member states under the founding treaties.
It is also a matter of democratic principle that laws are written in the language of every land where they apply.
But the EU’s posture as a protector of linguistic diversity cannot hide the stampede toward English that is underway.
The more languages, it seems, the more English.
Yet, the European Commission still encourages young Europeans to learn as many different languages as possible.
It would be politically lethal to acknowledge the real state of affairs, even if the official policy merely increases the chances that Europeans, after all their efforts, still may not understand each other.
Such an outcome is unlikely, but only because Europe’s language problem is well on its way to solving itself.
Throughout the EU, as in much of the world, from the Indian subcontinent to large parts of Africa, English increasingly functions as the language of international communication.
To be sure, in EU institutions’ public and ceremonial meetings, interpretation and translation must be equally available, at least in principle, from every language into every other.
Each day, hundreds of interpreters literally pay lip service to this lofty precept, and millions of pages are translated annually so that citizens may consult EU law in their own language.
The EU initially invested heavily in the development of machine translation, but has essentially abandoned the project.
As a result, translation and interpretation increasingly proceed in two steps, from a lesser-used language to half a dozen “relay” languages, and from those into other, smaller languages.
This saves resources, but it also implies a considerable loss of meaning.
Moreover, fewer languages are used in the EU’s smokeless backrooms when meetings are less formal and the participants not all that prestigious.
When EU officials meet together or draft internal documents, they use only the “working languages”: French and, more often, English.
German, the EU’s most widely spoken native language, hardly makes a dent.
Representatives may demand interpretation into their home language, but a proposal to limit each country’s translation budget is likely to be accepted soon.
The predominance of English is even more pronounced in communications among the EU’s citizens, where it is the first foreign language in all countries of the “old” Europe.
Among the EU’s new members, English is rapidly replacing Russian as the most widely used foreign language.
Indeed, nine out of ten schoolchildren in the EU now learn English.
Roughly half as many learn French, a quarter German and an eighth Spanish, and these numbers are falling, despite the Commission’s efforts, because people tend to choose the foreign language that they believe is spoken and studied the most by others.
The process resembles the selection of a standard in, say, consumer electronics.
People tend to opt for the standard (VHS, Windows, DVD) that they believe will come out on top, and thus contribute to that victory.
English now seems to have reached the point of no return in its accelerating global expansion, competing with national languages in such diverse fields as popular music, transport, the Internet, banking, cinema and television, science, and sports.
But, while the presence and pressure of English has a striking impact on the vocabulary of the home language, it leaves the syntax, grammar, and pronunciation almost entirely unaffected.
Unlike the indigenous languages that were pushed aside by the languages of the European colonizers, the official languages of the EU are “robust”: they are equipped with grammars, dictionaries, archives, libraries, and linguistics faculties.
They have a centuries-old printed literature, and, above all, they are closely guarded by strong states.
As a result, English will not so easily marginalize European languages, even after a large majority of the population has learned it.
But English and national languages can co-exist only if the state protects the indigenous language and citizens do not allow English to take over all prestigious domains.
The diversity of Europe is indeed innate, but its unity is yet to be achieved.
The commitment to European integration requires a common vernacular, and that is English.
The challenge for Europe is to use English as such an instrument, while avoiding submersion in American and British culture.
Europe’s Ethical Eggs
PRINCETON – Forty years ago, I stood with a few other students in a busy Oxford street handing out leaflets protesting the use of battery cages to hold hens.
Most of those who took the leaflets did not know that their eggs came from hens kept in cages so small that even one bird – the cages normally housed four – would be unable to fully stretch and flap her wings.
The hens could never walk around freely, or lay eggs in a nest.
Many people applauded our youthful idealism, but told us that we had no hope of ever changing a major industry.
They were wrong.
On the first day of 2012, keeping hens in such cages became illegal, not only in the United Kingdom, but in all 27 countries of the European Union.
Hens can still be kept in cages, but they must have more space, and the cages must have nest boxes and a scratching post.
Last month, members of the British Hen Welfare Trust provided a new home for a hen they named “Liberty.”
She was, they said, among the last hens in Britain still living in the type of cages we had opposed.
In the early 1970’s, when the modern animal-liberation movement began, no major organization was campaigning against the battery cage.
The Royal Society for the Prevention of Cruelty to Animals, the mother of all animal-protection organizations, had lost its early radicalism long before.
It focused on isolated cases of abuse, and failed to challenge well-established ways of mistreating animals on farms or in laboratories.
It took a concerted effort by the new animal radicals of the 1970’s to stir the RSPCA from its complacency towards the battery cage and other forms of intensive animal rearing.
Eventually, the new animal-rights movement managed to reach the broader public.
Consumers responded by buying eggs from free-ranging hens.
Some supermarket chains even ceased to carry eggs from battery hens.
In Britain and some European countries, animal welfare became politically salient, and pressure on parliamentary representatives mounted.
The European Union established a scientific committee to investigate animal-welfare issues on farms, and the committee recommended banning the battery cage, along with some other forms of close confinement of pigs and calves.
A ban on battery cages in the EU was eventually adopted in 1999, but, to ensure that producers would have plenty of time to phase out the equipment in which they had invested, its implementation was delayed until January 1, 2012.
To its credit, the British egg industry accepted the situation, and developed new and less cruel methods of keeping hens.
Not all countries are equally ready, however, and it has been estimated that up to 80 million hens may still be in illegal battery cages.
But at least 300 million hens who would have lived miserable lives in standard battery cages are now in significantly better conditions, and there is great pressure on the EU bureaucracy to enforce the ban everywhere – not least from egg producers who are already complying with it.
With the ban on battery cages, Europe confirms its place as the world leader in animal welfare, a position also reflected in its restrictions on the use of animals to test cosmetics.
But why is Europe so far ahead of other countries in its concern for animals?
In the United States, there are no federal laws about how egg producers house their hens.
But, when the issue was put to California voters in 2008, they overwhelmingly supported a proposition requiring that all farm animals have room to stretch their limbs fully and turn around without touching other animals or the sides of their cage.
That suggests that the problem may not be with US citizens’ attitudes, but rather that, at the federal level, the US political system allows industries with large campaign chests too much power to thwart the wishes of popular majorities.
In China, which, along with the US, confines the largest number of hens in cages, an animal welfare movement is only just beginning to emerge.
For the sake of the welfare of billions of farmed animals, we should wish it rapid growth and success.
The start of this year is a moment to celebrate a major advance in animal welfare, and, therefore, for Europe, a step towards becoming a more civilized and humane society – one that shows its concern for all beings capable of suffering.
It is also an occasion for celebrating the effectiveness of democracy, and the power of an ethical idea.
The anthropologist Margaret Mead is reported to have said: “Never doubt that a small group of thoughtful, committed citizens can change the world.
Indeed, it is the only thing that ever has.” The last part may not be true, but the first part surely is.
The end of the battery cage in Europe is a less dramatic development than the Arab Spring, but, like that popular uprising, it began with a small group of thoughtful and committed people.
Europe’s Fearful Natives
PARIS – A referendum in Switzerland forbids the construction of new minarets.
Racial violence explodes in the southern Italian region of Calabria.
An intense and controversial debate takes place in France on the issue of national identity.
These events have little in common, yet they all point to a growing European trend.
More than ever before in recent decades, fear is becoming the dominant force in European politics.
And it is not an abstract, undefined fear: it is above all the fear of the non-European “other,” perceived by a growing numbers of “white” Europeans as a threat to our European identities and ways of life, if not our physical security and jobs.
At the very center of these debates lie the issue of Islam and immigration.
The success of Christopher Caldwell’s recent essay “Reflections on the Revolution in Europe” is indicative of this growing fear of “Islamization” – a fear heightened by the destabilizing impact of economic hard times.
The case of France is interesting, because the country has fared slightly better than most in confronting the downturn, thanks to its well functioning welfare state.
But the right is nervous that regional elections scheduled for two months from now could turn into a referendum on its rule.
So the launch of a debate on national identity by President Nicolas Sarkozy is anything but accidental.
But his tactic could easily backfire.
By playing to the instincts of the extreme right, Sarkozy runs the risk of reinforcing a decaying party, whose electorate he attracted during the last presidential election in 2007, but which may regain its voters in 2010.
Why not vote for the “real thing” if you can?
But, beyond short-term and potentially counterproductive electoral politics, the debate about national identity is indicative of a state of mind that goes well beyond France.
Globalization, and the frustration accompanying it, is leading many to a jittery search for self-worth.
And the less convinced people are about their future, the more they tend to focus on their identity in a negative, defensive manner.
If you lack confidence in your ability to surmount the challenges of modernization, you might as well retreat into yourself and focus on who you are, rather than on what you want to achieve with others.
In defense of the debate he launched, Sarkozy presents his initiative as a barrier against the threat of “multiculturalism and tribalism.”
According to him, nothing would be more dangerous than to impose an artificial silence on a question that is boiling under the mask of political correctness.
Many French were troubled by the explosion of joy that followed the victory of the Algerian soccer team over Egypt in its qualification for the 2010 World Cup in South Africa.
The streets of many French cities vibrated with “Southern Mediterranean” emotions, which stood in stark contrast to the apathy that surrounded the French national team’s game that night.
The contrast between the vibrant pro-Algerian emotion and the more discreet pro-French sentiment was all the more troubling because it recalled another soccer night, when France was playing Algeria in Paris and the French team was booed by a sizable portion of the spectators, whose parents or even grandparents were born in Algeria.
Beyond football patriotism, the issue of the burqa, the full veil that covers the face and body of only a very few Muslim women in France, has also re-emerged as a focus of agitated attention.
Should it be banned, as Sarkozy has suggested, or should such private matters that concern so few be beyond the long arm of the law?
By launching a national debate on the issue of identity, Sarkozy risks creating unnecessary boundaries between French citizens – at the wrong time and for the wrong reasons.
Is the French State doing its utmost to make all of its citizens feel included in the practice of its three cherished universal values, “liberty, equality, fraternity?”
One cannot preach what one does not fully practice.
If a sizable number of young French people feel Algerian or Muslim first and foremost, isn’t it proof that something has gone wrong in French integration policies?
Before asking “them” to clarify the nature of their attachment to France, perhaps we French ought to make certain that we treat them in a fraternal, equal, and free manner.
The only answer to the complexity of identity is the absolute clarity of values.
Every French citizen has to accept the values of the Republic, democracy, the rule of law, respect for the other.
Identity is not a matter of mere ethnicity or religion.
For those who want to join the French and European project, it is a matter of values.
Confronted with the challenge of a rising Asia, fear is not the best response for Europeans to indulge. Indeed, they should remember the words of Franklin Roosevelt in his inaugural address at the height of the Great Depression of 1933: “That the only thing we have to fear is fear itself.”
Europe’s Federalism Debate Revived
BRUSSELS – It is an old debate, but tensions within the euro area have revived it: can a monetary union survive without some form of fiscal federalism?
This issue is of persistent concern for investors worldwide.
Holders of European government bonds believed that they knew what they had bought.
Sure, there was no such thing as a eurozone sovereign security.
But German, French, Spanish, and even Greek bonds all carried roughly the same interest rate, so they were deemed equivalent.
Investors now recognize that they did not really understand what these bonds represented – that is, the institutional construct behind the European currency.
And if the global financial crisis has taught us anything, it is this: when you do not understand a financial product, you should not buy it.
But if investors actually take that lesson to heart, the European crisis will be far from over.
So, should Europe embrace fiscal federalism in order to strengthen the eurozone and restore investor confidence?
The problem is that fiscal federalism means different things to different people.
Americans think they know what it is: a central government with a large budget (about 20% of GDP), whose macroeconomic role is to carry out counter-cyclical spending and taxation, as most US states are constitutionally committed to some sort of balanced budget.
This was clearly true in the case of the stimulus program launched in 2009, which included federal transfers to the states to sustain state-level fiscal spending.
Similarly, when a state such as Michigan is hit by recession in its key economic sector (the auto industry), Washington collects less federal tax but maintains – if not increases – local spending, which partially offsets the shock to state income.
Economically, therefore, the federal budget cushions regional shocks automatically through discretionary action and stabilizing transfers to the states.
Politically, it embodies solidarity and thus helps cement the union.
If this is what is meant by federalism, it is better for the European Union to forget about it.
The EU budget amounts to about 1% of GDP, just one-fortieth of total public expenditure.
No one, not even die-hard European integrationists, imagines that it can reach 5% of GDP (it is more likely to decrease).
But even a 5%-of-GDP budget would be insufficient to play a meaningful macroeconomic role.
A second solution is what can be called “distributive federalism.”
The goal is not to absorb shocks but to reduce income gaps across regions.
In Germany, tax revenues are redistributed between the Länder.
This is another form of solidarity, which also exists in the EU, where regional development funds are allocated to poorer regions to foster catch-up growth.
These transfers are significant for poor countries: about €300 per person for Greece and Portugal every year from 2000 to 2006.
Europe, in this respect, is not qualitatively different from the US.
These transfers have accelerated convergence when put to good use (for example, in several Spanish provinces), but have been ineffective when wasted (as in Greece).
This feeds doubts about solidarity’s usefulness.
Germans, who since reunification in 1990 know what they are talking about when it comes to such transfers, do not want to hear about a Europe where rich regions would permanently finance pockets of under-development.
They are not alone in this.
What, then?
Conceptually, the eurozone must include solidarity with countries facing hardship, because this is what unites and gives strength to the whole – but without the heavy machinery of a federal budget or a permanent increase in transfers.
It needs some sort of mutual insurance, or what could be termed “insurance-based federalism.”
This is what inspired the decision taken in May to create the European Financial Stability Facility (EFSF), by which assistance can be provided, jointly with the International Monetary Fund, to partner countries in times of crisis.
It is also what inspired the European Central Bank to launch an asset-purchase program, which has been used to buy Greek and Portuguese government bonds.
But the uproar caused by these decisions reinforces, rather than dispels, doubts.
In Germany, many consider the EFSF a breach of the fundamental principle that EU governments cannot be bailed-out by their partners.
And the transformation of the central bank into a quasi-fiscal agent (because if Greek debt is restructured, the ECB will record losses) is regarded with horror, as it violates the separation between money and public finances.
Instead, it is claimed, eurozone members should have been allowed to default.
No matter that the public debt of the average US state is less than 0.5% of total US GDP, compared to 5% in the eurozone, which implies that the financial impact of a eurozone sovereign default would be much stronger.
And no matter that there is no prohibition on the purchase of government bonds on the secondary market: the Rubicon has been crossed, and the Germans are nervous.
So there is no agreement yet to make the EFSF permanent, and it has been designed to be as un-federal as possible.
When it comes to ECB purchases of government bonds, no one understands exactly for how long and for what purpose the new weapon is to be used – which reduces its effectiveness.
Meanwhile, proposals for pre-adoption assessment of national budgets by the EU have attracted criticism in France and elsewhere, which serves as a reminder of the distance there is between calls for coordination and actual acceptance of its implications.
The Europeans have begun to assemble the bricks for a new building, but without having agreed on its size and design.
For the time being, they rather give the impression to have thrown sandbags in disorder in an attempt to stop a wave.
This may make skeptics the very people European policymakers wanted to convince.
It is time to accept that those who finance EU governments through purchasing their bonds are entitled to ask inconvenient questions, and to expect clear answers.
Europe’s Fight Against Terrorism
Three years ago this month, international terrorism struck Europe.
In simultaneous bomb attacks on trains in Madrid, Islamist terrorists killed 191 people and wounded over 2,000.
Last month the suspects went on trial in a Spanish court.
Violent extremists claiming to act in the name of Islam have hit many countries around the world, before and after the attacks on America of September 11, 2001.
But the attacks in Madrid – and in London in July 2005 – showed that Europe is one of their prime targets, prompting European governments to respond by bolstering their defenses, including at the level of the European Union.
In the past three years, security standards at European ports and airports have been strengthened, biometric passports have been introduced, and terrorist financing targeted.
More than 2,000 terrorism suspects and those suspected of other major forms of crime have been arrested and extradited on the basis of a European Arrest Warrant.
Similarly, European security and intelligence services have pooled resources in a common center for threat analysis in Brussels.
Through Europol and Eurojust, European police forces and judicial authorities have intensified cooperation, and ministers are preparing to grant law enforcement agencies of other EU countries access to national databases of DNA and fingerprints.
For the first time, security-related research figures prominently in the EU budget, with €1.4 billion earmarked for this purpose.
European police and security agencies have prevented many terrorist attacks.
But, while Europe’s defenses have been considerably strengthened, the threat of terrorism has not diminished.
The risk of new attacks in Europe and worldwide is serious and will remain so for the foreseeable future.
To face this global threat, international cooperation must be improved.
In particular, Muslims and non-Muslims need to combine their efforts to defend the sanctity of human life.
First, the world must work from common standards.
Many countries still need to improve their defenses and implement the 16 counter-terrorism instruments established by the United Nations, including the convention against terrorist financing.
Reducing the risk of terrorists obtaining weapons of mass destruction equally requires stronger international cooperation.
To this end, the EU is working closely with its partners, from Morocco and Indonesia to Saudi-Arabia and other Gulf states.
The EU will extend support to the African Union’s Center for Counter-Terrorism in Algiers.
Cooperation with India, Pakistan, and Russia has also been strengthened, and the Union will continue to work closely with the US, Japan, and Australia.
Second, more must be done to address the international conflicts that terrorists seek to exploit.
Afghanistan remains a critical front-line state in the fight against terrorism.
The Taliban must not be allowed to bomb Afghanistan back in time.
The EU will increase its aid, notably in support of the Afghan police.
Likewise, efforts to bring peace to the Middle East remain essential.
While progress on the road to peace between Israel and the Palestinians would not by itself stop terrorism, it would deal a powerful blow to terrorist incitement and propaganda.
Javier Solana, the EU High Representative for the Common Foreign and Security Policy, will continue to press for results.
Third, we must counter the ideology of the terrorists.
Very few Muslims want to live under a seventh century-style caliphate.
They prefer to live in freedom and in parliamentary democracies.
What unites Muslims and non-Muslims is a commitment to basic human rights.
To respect and promote human rights is critical to winning the battle for hearts and minds, including in Europe.
This means that governments need to practice what they preach.
Detention without trial is counterproductive in the fight against terrorism.
So is torture.
To defeat the terrorists we must offer a vision of a more just and equitable world and act accordingly, at home and abroad.
Ultimately, the values of liberty and justice are our best defense.
Europe’s Financial Alchemy
CHICAGO – It is universally recognized that a key factor underlying the 2007-2008 financial crisis was the diffusion of collateralized debt obligations (CDOs), the infamous special-purpose vehicles that transformed lower-rated debt into highly rated debt.
As these structures lost popularity on Wall Street, however, they gained popularity on the other side of the Atlantic.
After all, the European Financial Stability Facility (EFSF), created by the eurozone countries last May, is the largest CDO ever created.
As with CDOs, the EFSF was marketed as a way to reduce risk.
Unfortunately, the outcome could be similar: the entire banking system sent into a tailspin.
CDOs are a form of financial alchemy: special-purpose vehicles that buy the financial equivalent of lead (low-rated mortgaged-backed securities) and finance themselves mostly with the financial equivalent of gold (highly sought-after AAA bonds).
This transformation is based on one sound principle and two shaky ones.
The sound principle is excess collateral.
If there is $120 of collateral guaranteeing a $100 bond, the bond is safer, no doubt.
How much safer, however, depends upon the returns on the pool of bonds that compose the CDO.
The first shaky principle is that if the return on these bonds is highly correlated, so that they all default at the same time, overcollateralization is not much help.
By contrast, if the returns are uncorrelated, it is extremely unlikely that they will all default at the same time, making overcollateralization sufficient to guarantee a safer return.
Unfortunately, no precise mathematical model can determine correlation across securities, which is always an educated guess based mostly (sometimes entirely) on past behavior.
Thus, the explosion of CDOs in the United States during the housing boom was predicated upon the shaky assumption that house prices never fall nationwide.
The second shaky principle is that, in order to validate these instruments, issuers of CDOs relied on credit-rating agencies.
Historically, these agencies had been reliable in predicting the risk of corporate defaults.
Much of their credibility, however, depended on a fragile balance of power.
Since each issuer represented a small fraction of their revenues, rating agencies were unwilling to compromise their reputation for the sake of any single issuer.
The CDO market, however, was concentrated: six or seven issuers controlled most of the market, and this market ended up representing 50% of the entire revenues to be gained through ratings.
All of a sudden, issuers had much more influence on the rating agencies, which, like any good seller, were ready to bend a little not to alienate important customers.
As a result, the CDO market did not so much spread risk as it shifted and hid it.
When the US housing market started to turn south, the biggest underwriters (such as Countrywide) did not go bankrupt right away, because they had sold the vast majority of their loans to the CDO market.
Eventually, however, the uncertainty created by these CDOs nearly brought down the entire US banking system.
Europe is following a similar path.
The EFSF, created to assist countries facing “illiquidity,” is designed exactly like a CDO.
The EFSF buys the bonds of the countries which find it difficult to finance themselves in the marketplace (for example, Ireland) and issues bonds that are AAA rated.
How is this alchemy possible?
Once again, it relies on overcollateralization, an assumption on the joint distribution of possible outcomes, and the inevitable seal of approval of the three major credit rating agencies.
With the EFSF, the overcollateralization takes the form of guarantees by other eurozone countries.
Among the major countries, however, only France and Germany have an AAA rating.
How can a bond guaranteed in large part by countries such as Italy and Spain (likely candidates for a fiscal crisis) provide AAA status to Irish bonds?
According to Standard and Poor’s, for example, “The rating on EFSF reflects our view that guarantees by ‘AAA’ rated sovereigns and freely available liquidity reserves invested in ‘AAA’ securities will, between them, cover all of EFSF’s liabilities.”
But the value of the guarantees depends on the situation.
As long as the only country to be rescued is Ireland, there is no problem.
But if the EFSF has to guarantee Spain, would Germany really be willing to step in and use its taxpayers’ money to cover Spanish banks’ losses?
And how compromised might French and German banks become – and thus how much more fiscal strain is in store for France and Germany?
Here, too, no mathematical formula can help, because what we need to test is the reasonableness of our assumptions.
This is why rating agencies’ opinions are so valuable.
Unfortunately, one must wonder to what extent these ratings are distorted by the eurozone countries’ political power.
Since the crisis, rating agencies have been under attack, and major regulation, which could severely affect their business, has been discussed on both sides of the Atlantic.
Given this, how free are credit rating agencies to express their opinion on the very institutions that will regulate them?
We will have to await the pricing of the credit-default swaps on EFSF debt, which will be issued in January, to see whether markets believe the ratings.
Independent of this test, however, Germany seems to have squared the circle: it helped the countries in trouble, without coughing up (for the moment) any euros.
As with CDOs, however, this might be a Pyrrhic victory.
The EFSF has bought short-term gain in exchange for much larger losses if the situation deteriorates: a fiscal crisis in Spain could bring down the entire edifice.
After the sub-prime mortgage crisis, politicians alleged that the market was short-sighted and irrational, and rushed to propose new regulations.
While some of the criticism might have merit, what gives politicians the moral authority to criticize?
After all, as the EFSF shows, their orientation can be more short term and irrational than the market’s, repeating the same mistakes because they seem not to have learned from them.
The market’s verdict is likely to be uncompromising.
As Oscar Wilde said: “Fool me once, shame on you; fool me twice, shame on me.”
Europe\u0027s Financial Vulnerability
VIENNA – The most notable innovations of the past two decades have been financial.
Like technological innovation, financial innovation is concerned with the perpetual search for greater efficiency – in this case, reducing the cost of transferring funds from savers to investors.
Cost reductions that represent a net benefit to society should be regarded favorably.
But as the current financial crisis demonstrates, where financial innovation is designed to circumvent regulation or taxation, we need to be more circumspect.
Sadly, the financial revolution has been mostly rent-seeking rather than welfare-enhancing in character.
It has been based on eliminating, or at least reducing, two key elements of banking costs closely associated with prudential arrangements.
One is the need for banks and other financial institutions to hold liquid reserves.
The less liquid a bank’s assets, the greater the need for such reserves.
But the yield on such reserves is small, so economizing on them is profitable.
Last year’s Northern Rock debacle in the United Kingdom will long remain an example of how not to manage such risk.
Moreover, increasing a bank’s leverage can be very profitable when returns on investments exceed the cost of funding.
Reckless balance-sheet expansion in pursuit of profit is kept in check if financial companies adhere to statutory capital requirements, which mandate a capital-asset ratio of about 8%.
But many have sought to ignore this restriction, to their cost: the Carlyle Capital Corporation, a subsidiary of the United States-based Carlyle Group, was leveraged up to 32 times – it held one dollar of capital for every 32 dollars of assets – before adverse market developments wiped out the company.
Avoidance of prudential requirements is at the core of today’s financial crisis, exacerbated by the collapse of confidence in a system based on trust.
This has exposed the fragility of the banking system, including quasi-banking institutions, as revealed by Bears Sterns, Lehman Brothers, and other US investment banks, and in Europe by Northern Rock, UBS, WestLB, and many more.
Perhaps the most tragic aspect of this story is the exploitation of low-income families involved in the so-called sub-prime mortgage crisis, whereby variable-rate mortgages were offered to customers with a low credit rating.
In fact, “variable rate” is a misnomer, since these mortgages’ artificially low initial interest rates were pre-programmed to include a big rate hike after a couple of years.
Thereafter, rates would rise with market rates, but never fall when market rates declined.
This structure could only have been devised to suck in as many customers as possible with scant regard for long-term consequences.
With the property market booming, prospective capital gains promised untold wealth.
And most mortgage holders probably expected to refinance their mortgages before their rising interest-rate trebled or quadrupled monthly repayments.
Another hoped-for benefit was that capital gains could be converted into home equity loans, boosting homeowners’ living standards.
The rude awakening came when property values began to decline.
For those without an equity cushion, refinancing was not a possibility, and rising interest rates have led to default, foreclosure, and homelessness.
Now we hear that sub-prime mortgage holders have only themselves to blame.
No one talks of the bank manager, under pressure to sell “financial products” and eager to sign up customers, even if the products were not in a customer’s best interest.
The banker did not question a bonus system that favors one year of super profits, followed by bankruptcy, over two years of moderate, but stable, results.
It is astonishing that sub-prime mortgages and their like were repackaged and resold in securitized form.
That these collateralized mortgage obligations (CMOs, or bonds backed by a pool of mortgages) found a ready market, both in the US and abroad, reflects failure on several fronts.
The nature of these CMOs should have been apparent to risk managers.
Any financially literate fund manager knows that risk and return are positively correlated.
Any fund manager who claims to have been deluded by the apparently favorable risk-yield characteristics of CMOs or related credit instruments can be accused of having fallen for Milton Friedman’s “free lunch.”
Risk models do not justify abandoning one’s natural sense of incredulity.
In a world where capital is free to flow across international boundaries, the crisis in the US has spread to Europe.
This is a new form of contagion, which transcends national boundaries and is amplified by an international crisis of confidence.
This is why the global problem today is many times greater than the Savings &amp; Loan crisis of the 1980’s and 1990’s, which cost American taxpayers an estimated $150 billion to clean up.
Today, the global integration of financial markets means that problems can pop up anywhere, at any time.
Central banks are currently attempting to plug one leak as the next appears.
But if the financial system’s dykes collapse, we may be headed for a decade of severe deflation, rendering expansionary stimulus useless.
When the US Federal Reserve was created in 1913, its most important function was to serve as a lender of last resort to troubled banks, providing emergency liquidity via the discount facility.
The current crisis suggests that this is no longer enough.
Central banks worldwide are being forced to act as market makers of last resort in securities markets.
The signs are already visible.
The European Central Bank has also failed to tackle local bubbles in Europe.
The justification was that the ECB is concerned with inflation, not relative price adjustments.
This means that monetary policy is geared towards the needs of large countries, like Germany, not to those of, say, Belgium.
But, given the scale of the threat to Europe’s economy from a full-blown financial crisis, this apologia for inactivity has outlived its usefulness.
Europe’s Financial Wasteland
PARIS – “April is the cruelest month,” wrote T.S. Eliot at the beginning of his great poem, “The Waste Land.”
But, if Eliot had been a professional investor who had observed European financial markets over the last few years, I am quite certain that his choice would have been August.
In August 2007, the decision by BNP Paribas to close two of its hedge funds exposed to the subprime sector precipitated a liquidity crisis for all European banks during that summer.
This year, BNP’s great rival, Société Générale, has been in the spotlight.
Its stock fell by more than 14% in one day in mid-August, plumbing depths not seen for two and a half years.
Rumors have swirled about a possible downgrade of France’s sovereign debt, accompanied by speculation about the consequences for French banks.
Since the French, of all continental Europeans, most respect the convention that no useful work should be done in the month of August, this is harsh treatment for their bankers.
They have not been slow to claim that they are being singled out unfairly.
They have a point.
France is not the epicenter of the eurozone crisis.
There is much – too much – competition for that position.
Greece was an early favorite in the race to claim it, but faced a stiff challenge for a time from Ireland.
Portugal made a sprint towards the front, but is now falling back a little, with Spain and Italy moving up.
France likes to think that it is at the back of the field, strolling leisurely in lockstep with Germany.
The evolution of the crisis has, however, thrown European banks’ balance sheets into sharp focus.
Eurozone governments have proven unwilling, or unable, to produce a solution that persuades markets that they are on top of the problem.
It seems inevitable now that either the eurozone will have to contract, with parts of the uncompetitive periphery dropping out, at least for a time, or that member countries’ debts will have to be collectively guaranteed, which implies some form of fiscal union.
Nothing less will persuade investors to go near debt issues from the eurozone’s fiscally challenged members.
The political problem is that the second solution cannot yet be sold to German voters, let alone to nationalist fringe parties like France’s National Front and Finland’s True Finns.
Perhaps it will be possible to persuade the Germans if the alternative is eurozone collapse, which would put the Deutschemark, or a Northern Euro, in the uncomfortable position that the Swiss franc occupies today – too strong for its own good.
But things might have to get worse before the political mood swings.
In the meantime, the European Council continues, as the Americans would put it, to “kick the can down the road.”
Of course, the can is not in the road; it is in the banking parlors.
EU banks are holding sovereign debt that clearly is not worth 100 cents on the euro.
But even the financial “stress tests” conducted by regulators did not require the banks to acknowledge that inconvenient truth.
Many eurozone banks have made far less progress in strengthening their capital adequacy and liquidity than have American and British banks since the financial crisis erupted.
The disparities were exposed in the IMF’s last Global Financial Stability Report, published in April, which contains a striking analysis that shows the changes in tangible common equity over the last two years, and the degree to which banks are reliant on wholesale funding.
One EU central banker described this to me as the “killer chart.”
What it shows is that banks in the United States have increased their equity from about 5.5% to about 7.5%, and have reduced their reliance on wholesale funding from 30% to 25%.
British banks have made less progress with tangible common equity, rising from just under 3% to a little over 4%, but they have significantly reduced their reliance on wholesale funding, from almost 45% in 2008 to less than 35% now.
By contrast, eurozone banks have almost stood still on both indicators.
Their capital has risen a little, but remains below that of banks in the United Kingdom (and well below that of US banks), and they continue to depend on the wholesale markets for almost 45% of their total funding.
That is why continuing uncertainty about the integrity of the eurozone, and the value of its members’ sovereign debt, is proving so damaging to its banks.
Will it be possible for them to rollover their market funding in these circumstances?
Already, the Greeks and the other countries subject to special measures have been shut out of the wholesale markets, and are reliant almost entirely on the European Central Bank.
Might that happen to banks elsewhere?
In 2007-2008, the sins of the bankers were visited on the politicians; now the reverse is true.
Perhaps there is a difference: the bankers’ sins were sins of commission, while the politicians’ sins – repeated failed efforts to produce a solution to match the scale of the problem – are sins of omission.
But the consequences are equally grave.
I have always assumed that the Germans would eventually recognize that their interests lie in preserving the eurozone intact.
As Churchill said of the Americans, “you can always rely on them to do the right thing... once they have exhausted all possible alternatives.” The Germans have now almost run out of alternatives.
If they do not do the right thing soon, there will be some banking casualties, and European governments will once again be obliged to put in public money.
That will be just as unpopular as bailing out the Greeks, and probably much more expensive.
Europe’s Free Riders
In the United States, individual states that follow unsound fiscal policies face a penalty.
Their bonds sell at a discount relative to those of better-managed individual states.
The higher debt service they must pay serves – to some degree – as a form of discipline against the temptation to spend now and pay later.
Of course, the discipline of the market is not perfect: the bond market does not “see” implicit future liabilities (like promised pension payments) to any great degree.
Nevertheless, this enforced fiscal discipline, combined with individual states’ own internal budgetary procedures, has prevented a large scale state-level fiscal crisis from occurring in the US since the Great Depression.
Let us now turn to Europe.
Before the advent of the euro, there were many fiscal crises in individual nation-states in southern Europe, which produced waves of high inflation.
But, with the single currency in place, the road to solving a fiscal crisis through inflation has been closed, as the European Central Bank (ECB) now stands watch over monetary policy.
Nevertheless, even with nation-states no longer able to rely on inflation to solve their unbalanced finances, the single currency allows them to use the debt capacity properly belonging to other members of the European Union to extend their spending sprees and postpone political accountability for periods of laissez les bons temps roulés.
To head off this possibility, the EU created the Stability and Growth Pact: government deficits had to be less than 3% of GDP.
Last week, the government of Germany – once the most fiscally prudent and disciplined EU country – broke the pact’s rules for fiscal discipline for the fifth consecutive year, and did so without (much) apology.
Finance Minister Peer Steinbrueck signaled that he expected the European Commission to apply some sanctions to Germany: the credibility of the pact would, he said, be at stake if no action were taken.
Thus, Germany would not block sanctions this time, as it did two and a half years ago.
But Steinbrueck also made it clear that he expects any sanctions in response to Germany’s predicted 3.4%-of-GDP fiscal deficit to be largely symbolic, not penalties that would cost its government or economy anything of significance.
The Stability and Growth Pact is not – or is not yet – working anywhere near the way it was intended to work.
What about market discipline?
Is the German government’s willingness to issue more debt and run bigger deficits limited because the market recognizes and penalizes nation states that allow their fiscal positions to weaken?
In a word, no.
The interest rates on the euro-denominated sovereign debt of the twelve euro-zone governments are all very similar.
So the market does not seem to care that countries have different potentials to generate exports to fund the financial flows needed for debt repayments, or different current and projected debt-to-GDP ratios.
Willem Buiter of the University of Amsterdam and Anne Sibert of the University of London believe that it is the ECB’s willingness to, in effect, accept all euro-zone debt as collateral that has undermined the market’s willingness to be an enforcer of fiscal prudence.
As long as the marginal piece of German debt is used as collateral for a short-term loan or as the centerpiece of a repurchase agreement to gain liquidity, its value is much more likely to be determined by the terms on which the ECB accepts it as collateral than by its fundamentals.
The ECB’s treatment of all such debt as equally powerful sources of back-up liquidity now trumps any analysis of differences in long-term sovereign risk.
In the long run, this is dangerous.
Both market discipline and sound fiscal management are needed to create a reasonable chance of long-run price stability.
Omit either a market penalty now for behavior that may become reckless or the institutional levers that give a voice to future generations, and you run grave risks – perhaps not today or tomorrow, but someday, and for the rest of your life.
As time passes, the coming of the single currency and the way that the euro has been implemented is generating more and more unease.
Policy as a whole over the entire euro zone is too deflationary.
The necessary transfers are not being made to make the common currency bearable to regions that lose out and are already in recession when the ECB tightens policy.
The institutional foundations of stable long-run fiscal policy are being eroded.
And now, Buiter and Sibert argue convincingly, the ECB is giving the market less scope to reward the thrifty and penalize the profligate than it should.
There is no movement of the soil yet, and there will not be for some time.
But the ground under the euro may well begin to shift if things don’t change.
Europe\u0027s Gathering Political Storm
Jean-Marie Le Pen's breakthrough in the French presidential elections is a slap in the face for mainstream French political parties, as well as a stark warning of the drawbacks of the constitution of the Fifth French Republic.
But the lessons of Le Pen's rise go beyond the specifics of French politics, because far-right parties have been on the march in many European countries of late, from Austria to Portugal, from Italy to Denmark.
The questions we must ask are, first, whether this upsurge of far-right, anti-immigrant, law-and-order parties is part of an evolving crisis in Europe's traditional model of parliamentary democracy; and second, whether it represents the precursor of a major crisis about the future of the European Union.
I believe the answer to both questions to be yes.
On the surface, the crisis in France may seem short-lived.
All mainstream parties are rallying round Jacques Chirac to keep out Monsieur Le Pen.
In the second round of voting, Chirac will undoubtedly defeat Le Pen, possibly with a record majority.
But the figures from the first round tell a different story.
Chirac got less than 20% of the vote;
Chirac, Le Pen, and the socialist prime minister Lionel Jospin, got little more than 50% between them, and an unusually large number of voters stayed home.
In short, France does not want any of these people to be President, and Chirac's large eventual victory will not correspond to any large degree of legitimacy.
Moreover, the presidential election will not be the last word, since it will be followed by parliamentary elections.
If the socialists can pull themselves together behind a new leader, President Chirac, despite re-election, could once again face a left-wing majority in parliament.
What seems clear from Sunday's vote is that France's mainstream parties are enduring a crisis of legitimacy.
Part of the problem is that most leading French politicians are tiresomely familiar and uninspiring.
It is not just that Chirac is corrupt, or that Jospin is dull, but that they have been around for decades.
But the deeper problem is that, in contrast with the populist simplicities of extremists like Le Pen, France's mainstream parties lack clear policies.
When a politician goes to his electorate, he needs to be able to say what he wants to do and why; and a party needs to have a program on which its members all more or less agree.
Communism's collapse undermined the credibility of traditional left-wing ideologies, and the policy problems of national political parties have been made more difficult by the tidal wave of globalization.
In the French presidential campaign, everyone knew what Le Pen stood for; but neither Chirac nor Jospin had a clear program to offer, just vague, abstract generalities.
Chirac did better, mainly because he was better at glad-handing voters.
The French socialist party can still, probably, rely on the loyalty of a substantial minority for atavistic or tribal reasons; but it does not propose to introduce socialism.
On the contrary, everyone knows that Lionel Jospin's government pursued a slow, covert process of privatization and liberalization, because such a process is unavoidable in today's global economy.
The dilemma is similar in all European parliamentary democracies which evolved to express some version of the left-right choice and which are now gasping for lack of oxygen.
In Britain, Tony Blair's government claims to be "New Labour".
But for its first five years in power, its "Third Way" rhetoric failed to conceal that it was pursuing ultra-liberal center-right policies.
It is only recently, with a promise to spend more on the National Health Service, that it has started to return to its social-democratic roots.
No doubt a key factor behind Le Pen's breakthrough is popular anxiety - especially among the old, the unemployed and the unskilled - about globalization and its pressures for change.
These fears incite anger and xenophobia, even though everyone knows that globalization cannot be conquered by kicking out foreigners.
What is most dismaying about the French presidential campaign is how little either mainstream leader had to say about Europe.
After all, the EU has embarked on a year-long exercise which will likely culminate, at next year's end, in a new constitutional treaty for Europe.
Not long after that, the EU will take in ten or more new members from Eastern Europe.
The new constitution will take Europe in a more federal direction, which is essential if the Union is to function with 25 or 30 members and which implies serious adjustments in notions of national sovereignty.
Enlargement, bringing in a large number of much poorer countries, will have a seismic effect on Union policies, implying losses of benefits in richer members.
The next French president cannot control or prevent the forces of globalization; but he can have a major influence on the EU's development.
So what did Chirac and Jospin say on the subject?
Not a word.
Why?
Because they fear the crises that lie ahead.
Europe’s Global Mission
Europe is in search of its identity.
I believe it is easy to find: the European Union embodies the principle of open society, which could serve as a force for a global open society.
Let me explain what I mean.
The concept of an open society was first used by the French philosopher Henri Bergson in his book The Two Sources of Morality and Religion .
One source, according to Bergson, is tribal and leads to a closed society whose members feel affinity for each other but fear or hostility towards others.
The other source is universal, leading to an open society guided by universal human rights that protects and promotes the freedom of the individual.
Karl Popper modified this scheme in his seminal book The Open Society and Its Enemies , published in 1944.
Popper pointed out that an open society can be endangered by abstract, universal ideologies like communism and fascism.
Because these ideologies’ claim to be in possession of the ultimate truth is bound to be false, they can be imposed on society only through repression and compulsion.
By contrast, an open society accepts uncertainty, and it establishes laws and institutions that allow people with divergent views and interests to live together in peace.
The EU embodies the principles of an open society to a remarkable extent.
Although its guiding principles have not been enshrined in a constitution, even this may be appropriate to an open society because, as Popper argued, our imperfect understanding does not permit permanent and eternally valid definitions of social arrangements.
The EU was brought into existence by a process of piecemeal social engineering – the method Popper considered appropriate to an open society – directed by a far-sighted, purposeful elite who recognized that perfection is unattainable.
It proceeded step by step, setting limited objectives with limited timetables, knowing full well that each step would prove inadequate and require a further step.
That step-by-step approach ground to a halt with the defeat of the European Constitution.
The EU is left in an untenable position, with an enlarged membership of 27 states and a governing structure designed for six.
The political will to keep the process moving forward has eroded.
The memory of past wars has faded, and the threat posed by the Soviet Union has disappeared.
Nationalist, xenophobic, and anti-Muslim sentiments are on the rise, aggravated by the failure to integrate immigrant communities.
Unfortunately the disarray within the EU is part of a broader global turmoil. The United States used to be the dominant power and set the agenda for the world.
But President George W. Bush’s war on terror undermined the basic principles of American democracy by expanding executive powers.
It undermined the critical process that is at the heart of an open society by treating any criticism of the administration’s policies as unpatriotic, thereby allowing Bush to order the invasion of Iraq.
Worse still, the war on terror was counterproductive.
It increased the terrorist threat by creating innocent victims, while leading to a precipitous decline in American power and influence.
As a result, the US is no longer in a position to set the world’s agenda.
The EU cannot possibly take the place of the US as the world’s leader.
But it can set an example, both within its own borders and beyond.
The prospect of membership has been the most powerful tool in turning candidate countries into open societies.
Although most of its citizens do not realize it, the EU serves as an inspiring example.
All that is needed now is for Europe’s people to be inspired by the idea of the EU as the prototype of a global open society.
What this means in principle can be stated concisely: the EU needs a common foreign policy.
That is the one part of the European constitution that urgently needs to be rescued.
In the meantime, the absence of institutional reform should not be allowed to serve as a pretext for inaction.
The EU already possesses ample resources to make an impact on the world stage:
half of the world’s overseas development assistance; the biggest single market in the world; 45,000 diplomats; almost 100,000 peace-keepers serving on every continent; and the prospect of using trade, aid, and membership as catalysts to encourage neighboring states to become open societies.
Where Europe has adopted a common policy – such as on Iran – it has succeeded in persuading others, including the US, to change long-held positions.
But all too often the EU fails to live up to its potential.
For example, Europe has made little progress in formulating a common energy policy, leaving it increasingly dependent on Russia, which has not hesitated to exploit its bargaining position.
Likewise, the EU has failed to give adequate support to Georgia, or to impose appropriate sanctions on Uzbekistan for last year’s massacre at Andijon.
Nor has the European Neighborhood Policy gathered any momentum, while the EU’s treatment of Turkey is pushing an important ally in the wrong direction.
There is also trouble brewing in some of the newly admitted member countries, such as Hungary and Poland, where the EU could play a more proactive role in promoting democratic stability.
Needless to say, a common EU foreign policy should not be anti-American.
Such a posture would be self-defeating, because it would reinforce the division of the international community that the Bush administration has initiated.
But the EU can set an example of international cooperation that the US, under a different leadership – which is bound to come – would eventually emulate.
Europe’s Harmony Overdose
PRAGUE – One pillar of the European Union’s single market is harmonization.
At first sight, that makes a lot of sense.
Harmonized systems of rules make it easier for capital and labor to move around in search of their best use.
Alas, some Europhiles’ unifying zeal has all too often spilled beyond the bounds of economic reason, even common sense.
More unification and harmonization does not necessarily lead to effective – or even reasonable – solutions to the EU’s troubles.
The main point of the new European regulatory measures under consideration (apart from the so-called new Basel III rules) is to bring more stability to the financial system.
The indirect effect will be to reduce the financial sector’s size – in absolute terms and relative to the economy – and to hinder its growth in the future.
But these effects will also occur in EU countries whose financial sectors have maintained a high degree of stability in the current crisis.
Delivery of financial services will be made more difficult and expensive everywhere, even though some countries’ banks are financed by stable long-term deposits rather than short-term interbank loans, with few toxic assets and local loans that are more than comfortably covered by local deposits.
This is why one can hear many voices opposing the idea of a harmonized EU-wide bank levy or tax.
This levy, strongly backed by those countries whose financial sectors are in tatters after the crisis, is hard to swallow for EU states that did not intervene to bail out their banks.
The levy is an easy way to spread the political and financial costs of the crisis from some to all EU members.
If applied, bank capital will be scarcer, the flow of credit slower, and bank fees higher in countries with pretty stable financial sectors, simply because others have spent a fortune to support their financial systems – and because the European Commission never misses an opportunity to unify rules across the EU.
The same is true, for instance, for the derivatives trading system.
The post-crisis harmonization fervor in this area means that it will now be more costly everywhere in the EU to insure against currency volatility or unexpected changes in interest.
But such harmonization is neither necessary nor justified in every EU country.
We are also soon likely to have a unified, harmonized, and enforced-from-above system for euro payments, be they intrastate or interstate.
The Commission reckons that it is rather suspicious that every country currently has its own system, and that these national systems are used by more customers and for more transactions than the harmonized Single Euro Payment Area (SEPA) system of payments.
The irony here is that, at its beginning, participation by private banks in SEPA was strictly voluntary.
But many of the national systems have been evolving for many years.
Millions of customers have willingly relied on them for their debit and credit payments, and simply have not found reason to switch to the SEPA system, with its different codes, abbreviations, and symbols.
This is the system that the Commission wants to prescribe for the whole Union, while banning all SEPA-incompatible products.
Customers will have to change their payment orders and habits just because harmonization has become an end in itself for many in the EU.
One simple rule should be applied as rigorously in this sensitive area as anywhere else: if it ain’t broke, don’t fix it.
Dubious harmonization and unification is in the pipeline in another area as well: macroeconomic performance.
Over the last decade, we have watched as the Stability and Growth Pact (in which EU countries pledge to keep their public debts and deficits low) has dissipated in a mist of permissiveness.
Recently, it almost looked as if the EU had finally come to understand that, given a lack of will, no pact – however commendable its purpose – can ensure sound fiscal policies.
But European institutions are now not only trying to repair the Pact, but are looking for ways to broaden its scope, making it possible to punish EU countries for “macroeconomic imbalances.”
Just look at some of the proposals of EU President Herman Van Rompuy’s task force on economic governance.
For example, if a poorer member country undergoes a period of real convergence and has a temporary current-account deficit – as is usual in such cases – it may be punished for not being sufficiently “harmonized.”
The same is true of a country that undergoes a period of strong productivity growth because it has reformed its labor market or kept real wages low and has a current-account surplus.
Being too innovative, too competitive, too flexible, growing too much, and exporting too much might become “a problem” in this perverted logic of harmonization.
So, Germans and others, are you listening carefully to these voices?
Aren’t you afraid?
There are many areas of economic life in the EU where harmonization does help.
But not every aspect of financial regulation and macroeconomic performance necessarily belongs in this category.
We praise competition, not monopolies, in economic life.
Competition in the rules that govern it might serve us better as well.
Europe’s High Court Confronts Racism
The European Court of Human Rights is hearing oral arguments in two of the most important cases in its history.
As in Brown v. Board of Education , the case that ultimately broke the back of racial segregation in America half a century ago, the European Court is being asked to give meaning to the fundamental principle of equality.
The resulting decisions could establish clear ground rules to guide future policy toward Europe’s increasingly numerous ethnic and religious minorities.
The plaintiffs are members of Europe’s poorest and largest minority group – the Roma, or Gypsies, whose ancestors are believed to have migrated from India centuries ago.
One case concerns 18 Roma children from the northeastern city of Ostrava in the Czech Republic who were placed in “special” schools for those deemed mentally deficient, where they receive a markedly inferior education.
The children argue that such schools are a barrier to social and economic progress.
Many Roma are sent to special schools even though they show no sign of mental disability.
Few go on to finish high school or attend university.
As a result, Roma unemployment rates in the Czech Republic, as in much of Europe, far exceed those for the rest of the population.
Evidence before the Court indicates that, in some Czech communities, Roma children are 27 times more likely to be sent to special schools than non-Roma children.
The plaintiffs suggest that this amounts to racial segregation.
The government vigorously denies this.
The Court’s hearing is set for March 1.
The second case comes from Bulgaria.
In 1996, military police shot and killed two Roma conscripts.
The victims, who had recently absconded from a military construction crew, were known to be unarmed and not dangerous.
The shooting, by automatic weapon fire, took place in broad daylight in a largely Roma neighborhood, where the grandmother of one of the victims lived.
Immediately after the killing, a military police officer allegedly yelled at one of the town residents, “You damned Gypsies!” while pointing a gun at him.
Last year, one panel of the Court found that both the shootings and a subsequent investigation that upheld their lawfulness were tainted by racial animus.
At the request of the Bulgarian government, the Court’s Grand Chamber agreed to review the matter before the end of February.
Though the facts of both cases are heart wrenching, their importance extends beyond the courtroom.
At a time of rising concern about immigration, religious extremism, and ethnic violence, what must government do to secure the promise of equal opportunity for all?
Over the past decade, the European Union has grown more ethnically diverse.
Immigration to Spain, Italy, and Greece has surged, adding to longstanding immigrant populations in northern Europe and to the number of so-called “guest workers” in Austria, Germany, and Luxembourg.
The most recent stage of EU enlargement last May added millions of Roma from the new member states of Central and Eastern Europe.
Just as Europe’s ethnic makeup has been changing, so have its laws.
In 2000, the EU’s executive arm – responding in part to the growing popularity of anti-immigrant and neo-Nazi political parties – enacted the most far-reaching anti-discrimination legislation in the world.
To date, however, this legislation has lain dormant.
In many countries, lawyers and judges lack familiarity with legal concepts of discrimination.
Perhaps not surprisingly, acts of exclusion, segregation, and violence often go unpunished.
The two cases soon to be heard in Strasbourg provide an opportunity to change this.
A finding of discrimination would establish a landmark legal precedent, putting core values of non-discrimination and equal justice beyond dispute at a time when Europe’s politicians consider how best to absorb millions of new immigrants and minority members.
Just as importantly, such a ruling would send a powerful signal that racism and xenophobia have no place in the new Europe.
But perhaps the greatest significance of these cases lies in their very presence on the docket of Europe’s highest rights tribunal.
A decade ago, few minority victims would have been inclined or able to seek legal remedies for discrimination.
The success of some in having their claims heard is testimony to the growing power of law as a force for positive change in Europe.
Europe’s High-Risk Gamble
CAMBRIDGE – The Greek government needs to escape from an otherwise impossible situation.
It has an unmanageable level of government debt (150% of GDP, rising this year by ten percentage points), a collapsing economy (with GDP down by more than 7% this year, pushing the unemployment rate up to 16%), a chronic balance-of-payments deficit (now at 8% of GDP), and insolvent banks that are rapidly losing deposits.
The only way out is for Greece to default on its sovereign debt.
When it does, it must write down the principal value of that debt by at least 50%.
The current plan to reduce the present value of privately held bonds by 20% is just a first small step toward this outcome.
If Greece leaves the euro after it defaults, it can devalue its new currency, thereby stimulating demand and shifting eventually to a trade surplus.
Such a strategy of “default and devalue” has been standard fare for countries in other parts of the world when they were faced with unmanageably large government debt and a chronic current-account deficit.
It hasn’t happened in Greece only because Greece is trapped in the single currency.
The markets are fully aware that Greece, being insolvent, will eventually default.
That’s why the interest rate on Greek three-year government debt recently soared past 100% and the yield on ten-year bonds is 22%, implying that a €100 principal payable in ten years is worth less than €14 today.
Why, then, are political leaders in France and Germany trying so hard to prevent – or, more accurately, to postpone – the inevitable?
There are two reasons.
First, the banks and other financial institutions in Germany and France have large exposures to Greek government debt, both directly and through the credit that they have extended to Greek and other eurozone banks.
Postponing a default gives the French and German financial institutions time to build up their capital, reduce their exposure to Greek banks by not renewing credit when loans come due, and sell Greek bonds to the European Central Bank.
The second, and more important, reason for the Franco-German struggle to postpone a Greek default is the risk that a Greek default would induce sovereign defaults in other countries and runs on other banking systems, particularly in Spain and Italy.
This risk was highlighted by the recent downgrade of Italy’s credit rating by Standard &amp;
Poor’s.
A default by either of those large countries would have disastrous implications for the banks and other financial institutions in France and Germany.
The European Financial Stability Fund is large enough to cover Greece’s financing needs but not large enough to finance Italy and Spain if they lose access to private markets.
So European politicians hope that by showing that even Greece can avoid default, private markets will gain enough confidence in the viability of Italy and Spain to continue lending to their governments at reasonable rates and financing their banks.
If Greece is allowed to default in the coming weeks, financial markets will indeed regard defaults by Spain and Italy as much more likely.
That could cause their interest rates to spike upward and their national debts to rise rapidly, thus making them effectively insolvent.
By postponing a Greek default for two years, Europe’s politicians hope to give Spain and Italy time to prove that they are financially viable.
Two years could allow markets to see whether Spain’s banks can handle the decline of local real-estate prices, or whether mortgage defaults will lead to widespread bank failures, requiring the Spanish government to finance large deposit guarantees.
The next two years would also disclose the financial conditions of Spain’s regional governments, which have incurred debts that are ultimately guaranteed by the central government.
Likewise, two years could provide time for Italy to demonstrate whether it can achieve a balanced budget.
The Berlusconi government recently passed a budget bill designed to raise tax revenue and to bring the economy to a balanced budget by 2013.
That will be hard to achieve, because fiscal tightening will reduce Italian GDP, which is now barely growing, in turn shrinking tax revenue.
So, in two years, we can expect a debate about whether budget balance has then been achieved on a cyclically adjusted basis.
Those two years would also indicate whether Italian banks are in better shape than many now fear.
If Spain and Italy do look sound enough at the end of two years, European political leaders can allow Greece to default without fear of dangerous contagion.
Portugal might follow Greece in a sovereign default and in leaving the eurozone.
But the larger countries would be able to fund themselves at reasonable interest rates, and the current eurozone system could continue.
If, however, Spain or Italy does not persuade markets over the next two years that they are financially sound, interest rates for their governments and banks will rise sharply, and it will be clear that they are insolvent.
At that point, they will default.
They would also be at least temporarily unable to borrow and would be strongly tempted to leave the single currency.
But there is a greater and more immediate danger: Even if Spain and Italy are fundamentally sound, there may not be two years to find out.
The level of Greek interest rates shows that markets believe that Greece will default very soon.
And even before that default occurs, interest rates on Spanish or Italian debt could rise sharply, putting these countries on a financially impossible path.
The eurozone’s politicians may learn the hard way that trying to fool markets is a dangerous strategy.
Europe Should Dump Anti-Dumping
Stockholm – Defending Europe’s economy against unfair international trade practices has long been a key element of the European Union’s external policies.
It is almost an instinct among some politicians and business leaders that if competition is deemed unfair, the European Commission should marshal new trade defenses.
But what are Europeans defending against, and what are “unfair” trade practices anyway?
In the absence of international competition regulations to prevent predatory pricing and other anti-competitive activities, trade defenses are a second-best option.
By far the most widely used instrument are anti-dumping duties aimed at imposing some restraint on companies that behave in an anti-competitive way.
But, by increasing tariffs, prices also rise, which often means a welfare loss for society as a whole.
This fact has long been ignored by firms seeking trade defence.
What is new, however, is that the firms themselves might not gain from trade defense.
The very word “defense” creates an image of a nation state that is commercially connected to the rest of the world only via traditional trade.
For such a state, all imports would truly be foreign goods, and its trade defenses would consequently be directed only against foreign interests.
But this is not true in today’s globalized world.
Although we still have traditional trade, we also have foreign direct investment, offshoring, and outsourcing.
We have global supply lines in which goods are developed in one country, manufactured in another, and assembled in a third.
Capital and know-how flows across borders, so traditional bilateral trade flows have been replaced by a complex web of international commercial relations.
This has major implications for trade defense.
If your mobile phone was assembled in India, but developed and designed in Finland, is it an Indian or a Finnish product?
When European corporations outsource labor-intensive manufacturing to low-cost countries but keep the rest of the production process in Europe, they greatly complicate matters for anyone trying to evaluate the economics of trade defense.
To aim an anti-dumping measure against an Asian manufacturer may inflict most of the damage on a European producer.
That happened in the October 2006 anti-dumping action against leather shoes, when the EU decided to impose anti-dumping tariffs against China and Vietnam.
Sweden’s National Board of Trade conducted a case study of five European shoe producers in different countries and market segments to establish where the value added in their production processes was created.
Although manufactured in China and Vietnam, shoes were designed, developed, and marketed in Europe.
These largely intangible production processes before and after the physical manufacturing sometimes constituted 80% of the value added.
In other words, shoes from China were 80% European!
For less expensive shoes, with lower sums invested in the intangible parts of the production process, this figure was not as high, but still more than 50%.
The anti-dumping measures imposed by the EU therefore hit European companies in an unintentional way.
Sectors with a higher human capital content – electronic consumer goods, for example – have much higher R&amp;D costs than the shoe sector, so manufacturing these goods on an assembly line in a low-cost country is probably not very costly in comparison to R&amp;D and other intangible costs.
For more advanced goods, the EU value added (if the intangible part of the production process is in Europe) is quite high.
Imposing trade defense against such goods, even if legally warranted, is likely to create problems for globalized European companies.
Many say that these problems are the price to be paid for ensuring that companies do not engage in anti-competitive behavior, or receive trade-distorting subsidies.
But, even if the measures worked as supposed, the majority of trade defense measures are probably not directed against anti-competitive business practices.
More often it is the politics of protectionism that are the crucial factor behind trade defenses.
Anti-dumping measures are frequently used against products that are simply so cheap that they pose a threat to European producers, even though that is no more than fair competition.
This raises a fundamental criticism Europe’s trade defense mechanisms.
International trade is by definition a competition between companies on an uneven playing field.
Some companies have easier access to capital, whereas their competitors cannot get access to finance at reasonable interest rates.
Some have excellent infrastructure at their disposal, while their international competitors may have to contend with constant power cuts.
Some must pay excessive taxes, while others operate out of tax havens.
Some find it easy to recruit top-notch engineers, whereas for others enjoy an abundance of cheap labor.
To create a completely level playing field in trade is impossible.
Yet many politicians and business leaders are keen to focus on the differences they don’t like and would like to see “leveled.”
In reality, what they don’t like is competition itself, and they fight it by deploying an instrument that can inflict even greater damage on themselves.
Europe’s Instability Mechanism
MUNICH – By 2010, Europe was to be “the most competitive and dynamic knowledge-based society in the world.”
This was the official proclamation in 2000 of the European Commission in the so-called Lisbon Agenda.
Now a decade has passed since that bold pledge, and it is official: Europe is the world’s growth laggard rather than its champion.
While current EU members grew by 14% over the last ten years, North America grew by 18%, Latin America by 39%, Africa by 63%, the Middle East by 60%, Russia by 59%, Singapore, South Korea, Indonesia, and Taiwan by 52%, India by 104%, and China by 171%.
The Europeans wanted to achieve their goal through, among other means, further environmental protection and more social cohesion – desirable aims, but certainly not growth strategies.
The Lisbon Agenda turned out to be a joke.
The European Stability and Growth Pact of 1995 has fared no better.
EU countries agreed to limit their fiscal deficits to 3% of GDP to ensure debt discipline under the euro, so that no country could use the new currency to take its neighbors hostage and force them into bailout operations.
In fact, the EU countries exceeded the 3% limit 97 times.
In 29 of these cases, the breaches were permissible under the Pact’s original formulation, because the countries were in recession.
In the remaining 68 cases, however, deficits above 3% of GDP were clear violations of the Pact, and the European Council of Finance Ministers (Ecofin) should have imposed sanctions.
Yet not a single country was ever penalized.
The political debt constraints that the eurozone’s members had self-imposed were never taken seriously after that, because the sinners and the judges were one and the same.
A subject worthy of Kafka and Molière.
Indeed, this year, two countries, Greece and Ireland, were bailed out by the rest of the EU, even though Article 125 of the consolidated EU treaty stipulates that no member state is to stand in for the debt of another, a guarantee that Germany required as a pre-condition for giving up its beloved Deutschmark.
That doctrine of hard discipline was abolished in a coup in May 2010, when it was claimed that the world would collapse unless Germany opened its purse.
It is emblematic of the laxity with which the Stability and Growth Pact was pursued that Greece was able to join the euro through plain fraud, claiming that its deficit ratio was below the 3%-of-GDP threshold when it was, in fact, far above it.
In view of Greece’s deceptive behavior, Eurostat, the EU’s statistical agency, declared that its Greek counterpart and the supreme Greek supervisory authority had “deliberately falsified” the data.
But no matter, Greece was already in – and willing and able to take its fellow EU members hostage.
Germany has now opened its purse, acting as Greece’s prime rescuer.
Moreover, at their pre-Christmas summit, European heads of state agreed to amend the EU treaty by legitimizing the European Financial Stability Mechanism, now called the European Stability Mechanism (ESM), and making it a permanent institution.
Once back home, German Chancellor Angela Merkel, who had insisted for months that the facility had to be terminated, celebrated this as a victory over the rest of Europe.
In fact, it was largely a necessary concession to Germany’s Constitutional Court, which had argued that the bailout measures lacked a proper legal basis.
The participation of creditor banks, which had long been the conditio sine qua non for Merkel, was downgraded to optional status.
The European Central Bank also lost its credibility.
A year ago, it vowed to stop accepting BBB- rated government securities as collateral for its monetary operations.
But that, too, went out the window in May, when it started buying even Greek junk bonds.
Meanwhile, the ECB has announced that it will have to double its equity capital.
The EU’s maneuvers may stabilize Europe in the short run and help it to withstand better the current speculative attacks on some of the euro countries’ government bonds, but they risk long-term destabilization.
While financial contagion today is limited to bank interaction, the EU’s measures have broadened the channels for contagion to include government budgets.
Indeed, the first step toward a potential chain of government insolvencies in Europe has been taken.
The risk may be limited today, but it will become larger should the new ESM become full-coverage insurance against insolvency with no burden-sharing by creditors. In view of the foreseeable demographic risks from pension entitlements, a time bomb may now have been set ticking.
When politicians try to fight the iron laws of economics, they lose.
This time is no different.
But politicians are averse to academic advice.
All too often, they prefer bad jokes – until the last laugh is on them.
Europe’s Interest in Closing Guantánamo
BRUSSELS – For years, the European Union has called loudly for the closure of the Guantánamo Bay detention center.
Now that US President Barack Obama has taken the decision to do so, the EU stands ready to provide political and practical support to the United States to help achieve that goal.
We share President Obama’s assessment that “Guantánamo became a symbol that helped Al Qaeda recruit terrorists to its cause.
Indeed, the existence of Guantánamo likely created more terrorists around the world than it ever detained.” We in the EU believe that it is our common interest with the US to prevent radicalization and recruitment to terrorism throughout the world.
The primary responsibility for closing Guantánamo and re-settling detainees lies with the US.
But Europeans want to help the US turn the page.
That is why EU member states have already received their own nationals and former residents from Guantánamo.
That is why France recently received an Algerian ex-detainee.
And that is why several other EU countries are now considering receiving ex-detainees cleared for release, but who, for compelling reasons, cannot return to their countries of origin.
We in the EU expect the US to do likewise; if it is safe to release these people in Europe, it is safe to do so in the US.
More generally, we agree with Obama that “in the long run we...cannot keep...safe unless we enlist the power of our most fundamental values,” and that “we uphold our most cherished values not only because doing so is right, but because it strengthens [us] and keeps us safe.”
The experience of European democracies confronted with a long-term terrorist threat shows that human rights and the rule of law are our strongest assets.
That is why terrorists want to destroy them.
The closure of Guantánamo must be accompanied by a fundamental review of the underlying policies that gave rise to its existence.
Obama’s decisions to ban “enhanced interrogation” and end secret detention are important steps in the right direction.
But more steps are needed.
In particular, indefinite detention without trial needs to be addressed to avoid the recurrence of problems.
Therefore, the review of detention, trial, transfer, and interrogation policies is of utmost importance.
There must be no gaps in protection, whatever law is applicable.
The EU will take up the Obama administration’s invitation to share its views with his Detention Policy Task Force on international law principles relevant to the fight against terrorism.
We hope the US will change its “war on terror” paradigm and re-think its conception of a global armed conflict against Al Qaeda.
No EU member has taken such an approach.
There is an obvious difference between persons engaged in an armed conflict, as in Afghanistan and Iraq, and terrorist suspects arrested outside of armed conflict.
A case-by-case approach is therefore necessary.
We welcome the fact that the first former Guantánamo detainee is facing criminal charges in New York.
The perpetrators of the Madrid and London bombings were prosecuted in ordinary criminal trials.
One plotter in the attack of September 11, 2001, appeared before ordinary courts in Germany.
In many EU member states, criminal law has been strengthened and is being used to prevent attacks.
Membership of a terrorist organization, including those operating on foreign soil, training and recruiting people for terrorism, and promotion of terrorism have been made criminal offenses.
The fight against international terrorism raises important legal questions.
We are looking forward to continuing our productive dialogue with the US State Department Legal Adviser.
The threat from Al Qaeda is global.
The EU and US must work together to make Europe and America safe.
By closing Guantánamo and addressing the underlying policy issues, the US is creating a much stronger foundation for close EU-US cooperation in counter-terrorism and the fight against international crime, one based on the rule of law and human rights. Together, the EU and the US will be in a better position jointly to promote justice, human rights and freedom around the world.
This has been and remains the most sustainable way of preventing radicalization and recruitment to terrorism.
Closing Guantánamo is not a gesture to win applause from Europeans.
It is a necessary revision of policy that will make the US, Europe, and the world safer.
Europe’s Iranian Dreamworld
Weeks into the crisis triggered by Iran’s illegal capture of 15 British naval personnel, the European Union’s irresolute and contradictory approach is making matters worse.
Faced with a country whose leader is bent on acquiring nuclear weapons, the EU’s leaders are simply dithering, fearing that the fire next door in Iraq could somehow spread.
The latest crisis proves again that Iranian President Mahmoud Ahmadinejad cannot be trusted.
Following the ambush of the UK forces, the Iranian authorities dissembled as to their exact location at the time of their abduction, which was subsequently proven by the UK government to have been in Iraqi territorial waters operating under the authority of UN resolutions and with the express consent of the Iraqi government.
What Ahmedinejad appears to want are bargaining chips to secure the release of 6 Iranians who were aiding the Iraqi insurgency before being captured by the US.
The EU’s reluctance to match America’s robust language on Iran is emboldening him.
Ahmedinejad can sense an international community divided, and like his fellow pariah leader, North Korea’s Kim Jong-il, he is exploiting that division at every opportunity.
The uniquely dangerous combination of a nuclear Iran, which seeks to inspire the Shia in the Gulf states to rise up against their Sunni masters, coupled with Ahmedinejad’s millenarian mysticism, poses an existential threat to Israel, which Ahmadinejad has threatened to “wipe off the map.”
It also threatens to touch off a nuclear arms race in the Middle East.
And, if Iran succeeds in acquiring long-range ballistic missiles, the security threat will become global.
Indeed, the established concept of nuclear deterrence through “mutual assured destruction” (MAD), which kept the peace between the Soviet Union and NATO, may not apply with a ruler like Ahmadinejad, who believes in the sacred merits of martyrdom.
MAD simply won’t work for a mad man who is guided by quasi-messianic certitude.
Those who believe that Ahmedinejad is a bluffer and a buffoon who would pull back from the brink may be fundamentally misreading his psychology.
It is past time for Europe’s leaders to grasp the reality of the situation.
The possibility of degrading Iran’s nuclear weapons program through military action cannot be totally discounted, although it should of course be the last option and would be immensely risky even if militarily possible.
Yet there is much more that EU leaders can do to undermine the regime economically.
The EU’s trade significance for Iran is huge, accounting for 40% of Iran’s imports and a quarter of its exports.
Economic links are historically strong and growing.
Some two-thirds of Iranian industry, most of it state controlled, relies on German engineering exports, 65% of which in 2005 came with export credit insurance guarantees from the German government.
Likewise, the European Investment Bank is providing $1billion to finance the construction of the Nabucco oil pipeline from Iran to Austria.
If completed, the Nabucco pipeline will make Iran an indispensable EU energy partner.
As an organ of the EU, the EIB should be pursuing an ethical investment policy.
This is difficult to reconcile with lending to a country like Iran, which publicly executes individuals for sexual “deviance,” imprisons women who protest peacefully, and silences journalists who are critical of the regime.
The EU needs to tell Iran that unless it releases the British hostages and moderates its nuclear ambitions, it will receive no export guarantees.
Such a policy would stop trade between Iran and the EU in its tracks, and Ahmadinejad knows it.
There are already signs of disquiet among more moderate Iranian policymakers, as Ahmadinejad’s economic mismanagement has begun to fuel higher inflation.
A cut in export guarantees would put the Iranian economy – and Ahmedinejad – in real jeopardy.
Individual companies, mindful of US sanctions on those who do business with the regime, can also help.
For example, British Petroleum (BP), to its credit, has disinvested from Iran on ethical grounds, an example that other European firms should follow.
The Iranian government’s contempt for the international community reflects its contempt for human rights and civilized norms.
Yet Iranians’ hunger for change is clear.
Despite repression, Iran’s civil society is well developed and sophisticated.
The Ahmadinejad government’s popularity has plummeted, as evidenced by recent local election results.
Europe’s political leaders need to recognize that now is the time to facilitate change in Iran by suspending export credit guarantees, stopping EIB financing, and speaking with a united voice.
Wishing the problem away will only make it worse.
Europe’s Islam Question
OXFORD – The growing Muslim presence in Europe has become a central issue for all European countries, east and west.
The numerous debates that have been breaking out across the continent about “multiculturalism,” “secularity,” or even “identity” are almost always connected to this “Islamic” factor.
This link is not necessarily bigoted, because there is a fundamental relationship between “values” and “laws” on the one hand, and “culture” and “diversity” on the other.
Indeed, more than a debate over “Islam” and the “Muslims,” Europe needs a serious dialogue with itself over this relationship, for it is facing a crisis.
The right question to ask is this: can Europe remain consistent with its own values (democracy, equality, justice, respect, etc.) and at the same time tolerate and accommodate new citizens from different backgrounds and religions?
Or, to put it differently, are Europeans intellectually, linguistically, and culturally equipped to face the challenge of marrying equality with an ever more diverse European citizenry?
The starting point here is actually clear: governments should not confuse socioeconomic problems (unemployment, violence, marginalization, etc.) with questions about culture and religion.
In other words, one should not “culturize,” “religionize,” or “islamize” social problems.
The fact that a majority of Europeans who face unemployment or social marginalization are black, Asian, North African, or Muslim does not mean that their religion, ethnicity, or culture explains their situation.
Any kind of cultural, religious, or racial determinism is dangerous: unemployment and marginalization reflect socioeconomic processes, and we need clear social and economic policies to resolve them.
Resorting to vague cultural/religious/racial explanations is a recipe for inaction, if not for misguided action.
Cultural, racial, and religious dimensions may, of course, be subordinate factors that need to be considered, but they are not the main causes of unemployment and marginalization.
European governments, instead of following the suggestions of far-right rhetoric, should reconcile themselves to pursuing strong and creative policies to address the underlying problems of education (segregated or second-class schools, curricula, etc.), unequal employment opportunities, and urban decay.
Indeed, contrary to what has become conventional wisdom (sadly, normalizing what far-right parties have been saying), young European Muslims do not have a problem with religious or cultural “integration.”
Instead, they are frustrated by the absence (or the failure) of social policies to address their needs.
This failure does not mean that a new kind of racism – “Islamophobia” – is on the march.
But no one can deny that some individuals do face discrimination because of their “religion” (according to a recent Pew survey, 45% of Europeans have a negative image of Islam).
The key sign that discrimination has been injected into the current discourse is the obsession with the idea of “integration,” despite the fact that the vast majority of European Muslims abide by the law, know the language of the country in which they reside, and are loyal to their country (though sometimes critical, like their fellow citizens).
Ceaseless reference to citizens “with an immigrant background,” or to the “host society,” only serves to nurture the idea that Muslims are not “truly” Europeans or “at home.”
Such talk implies that European Muslims must constantly prove their loyalty.
This perception of “Muslims” as being the “other” or the “foreigner” is the central factor that incites discrimination in the job or housing markets.
Beyond insecurity and fear, it is crucial to rely on facts and figures to show that, both at the local and the national levels, the situation is much better than the passionate and polarized debates fostered in the media and some political circles.
Far from the ongoing controversies, European Muslims are doing very well today, and the future is promising.
If European countries want to remain faithful to their embrace of universal and equal human rights and avoid any temptation or slide towards racism and xenophobia, all Europeans must act.
European Muslims should avoid nurturing a “victim mentality” and acknowledge their responsibilities within their respective societies.
European governments and citizens, Muslim and non-Muslim alike, must shun any kind of racism.
Education is central here.
School curricula must become more inclusive (to build a common history of memories) and broaden students’ knowledge of religions and cultures.
In the media, journalists should be trained to spot “success stories,” not just problems.
In all cases, rhetoric that draws an implicit link between the words “illegal,” “criminal,” and “immigrant” or “Muslim” should be seen as nurturing fear and xenophobic reactions.
Muslims are facing a new racism, and they have to strive for their rights, but they should do so alongside their fellow citizens and in many fields: domestic and foreign politics, education, media, and social activism.
Europeans must stop being complacent in the belief that they are somehow protected from any resurgence of racism or betrayal of fundamental human rights.
And European Muslims must stop acting (and reacting) to their problems in isolation.
Europe’s Last Best Chance
STANFORD – The resignations of Greek Prime Minister George Papandreou and Italian Prime Minister Silvio Berlusconi have highlighted how Greece, Italy, and many other countries obscured for too long their bloated public sectors’ long-standing problems with unsustainable social-welfare benefits.
Indeed, for many of these countries, meaningful reform has now become unavoidable.
The social-insurance systems in Europe, as in the United States, Japan, and elsewhere, were designed under vastly different economic and demographic circumstances – more rapid economic growth, rising populations, and lower life expectancy – from those prevailing today.
Governments (the focus is on Greece and Italy at the moment, but they are not alone) have promised too much, to too many, for too long.
My 1986 book Too Many Promises pointed to the same problem with America’s social-welfare system.
This fundamental problem has now manifested itself in these countries’ unsustainable debt dynamics.
Euro membership, which temporarily enabled massive borrowing at low interest rates, merely aggravated it.
Reforming social-welfare benefits is the only permanent solution to Europe’s crisis.
One hopes that, with the help of national governments, the European Central Bank, the International Monetary Fund, and the European Financial Stability Facility, the holes in the sovereign-debt-funding dike will be temporarily plugged, and that European banks will be recapitalized.
But this will work only if structural reforms make these economies far more competitive.
They must both lower the tax burden and reduce bloated transfer payments.
Too many people are collecting benefits relative to those working and paying taxes.
Meanwhile, the bond market’s concern over fiscal deficits and debt dynamics is driving these countries’ borrowing costs higher.
Short-term and long-term policies are therefore closely related; unless temporary stopgaps are combined with fundamental long-term structural reform, another disaster like the current one – or worse – will become inevitable.
There are three fundamental factors that determine the evolution of a country’s sovereign debt: its rate of economic growth; its borrowing costs; and its primary budget position (the budget balance net of interest payments).
A country with a balanced primary budget collects enough revenue to pay its current expenses but not the interest on its outstanding debt.
Higher interest rates, slower growth, and a weaker primary budget position all raise the debt-ratio trajectory.
Italy is now paying 7% interest annually on its sovereign debt, while its economy is growing at only 1%. Thus, Italy needs sustained, large primary surpluses, much faster growth, and/or far lower interest rates to avoid a debt restructuring.
A credible path to sufficient primary surpluses would lower interest rates.
In the long run, if primary surpluses are achieved by controlling spending, the increase in national saving will promote investment and growth, whereas higher tax rates would work in the opposite direction.
Successful post-World War II fiscal consolidation in OECD countries averaged $5-$6 in spending cuts per $1 of tax hikes.
Some experts, such as former ECB President Jean-Claude Trichet, argue that fiscal consolidation would be expansionary.
Specifically, it would boost confidence, which would lower interest rates and offset any direct effect on demand, as occurred in Ireland and Denmark in the 1980’s.
But that is less likely now, as many countries are undertaking fiscal consolidation simultaneously, non-sovereign interest rates are already low, and monetary union prevents the most troubled countries in the eurozone – Portugal, Italy, Ireland, Greece, and Spain – from devaluing their way to competitiveness.
Substantial primary surpluses will be needed for many years in order to stabilize the debt ratio and gradually reduce it to the economic safety zone of less than 60% of GDP (Italy and Greece are over 100%).
A credible long-term program of reforms must be implemented now, while temporary emergency measures – bond purchases by the EFSF, IMF, and the ECB – provide breathing room.
If the primary surpluses are insufficient, temporary measures will only postpone the inevitable debt debacle.
Even more fundamental arithmetic lies at the core of the debt quandary.
The tax rate required to fund social-welfare benefits depends on three factors: the dependency ratio (the ratio of recipients to taxpayers); the replacement rate (the ratio of benefits to average wages); and the economic-growth rate (roughly, productivity plus population growth).
In other words, the more generous and widespread the government benefits, the higher the required tax rate.
This core problem will increasingly affect even the Northern European countries, notwithstanding their current appearance of economic strength and fiscal soundness.
In Europe’s highly taxed economies, better tax compliance or selective revenue measures can produce only a small amount of additional tax revenue without undermining growth.
Spending cuts are the only way to improve the budget position significantly.
But that course will be difficult.
In many European countries, the government pays benefits to a majority of the population.
A key question is whether incoming Greek Prime Minister Lucas Papademos and his new Italian counterpart, Mario Monti, both highly regarded economists, have the leadership skills to navigate these treacherous waters.
Their examples will test whether other European democracies with heavily benefit-dependent populations can rein in the welfare state’s excesses.
It is not an impossible challenge.
Canada has staged a substantial retreat from the welfare state’s worst excesses, as center-left and center-right governments alike reduced the share of government spending as a proportion of GDP by eight percentage points in recent years.
Several European countries are considering raising their remarkably low retirement ages, or have already done so.
Given demographic trends, this may well be Europe’s last chance to build a firmer foundation for future prosperity.
Winston Churchill once famously said of America that you can count on it to do the right thing once it has exhausted all other alternatives.
Let us hope that his dictum proves correct for Europe as well.
Europe’s Latest Revolution
STOCKHOLM – History often moves with small steps, but such steps sometimes turn out to have big implications.
This New Year’s Eve, Sweden made history in a small way by ending the last rotating foreign and security policy presidency of the European Union.
After years of rotation every six months, we handed the job over to the EU’s new permanent structures, established in Brussels in accordance with the Lisbon Treaty.
What might look like a small step for mankind is certainly a giant leap for Europe.
Those with a sense of history will also see the significance of Europe’s nation states, which not long ago fought each other continuously, now pooling their foreign policies in order to assert them more vigorously on the global stage.
The years since the European revolutions of 1989 have been a period of extraordinary success for the rapidly evolving EU.
The Union has expanded from only twelve members then to 27 today, and has brought stability and new prosperity to approximately 100 million people in the eastern and central parts of the Continent.
The introduction of the euro by a number of them – Estonia is likely to follow shortly – has also been a remarkable success story.
It is, to a large degree, the magnetism of the EU model that, during these two decades, transformed Europe from perhaps the world’s leading security problem to one of the most important global partners on virtually any issue.
But what the future will bring is by no means predetermined.
In essence, it boils down to whether Europe in the decades ahead will be seen as a model for the future or as a museum of the past.
Decisions taken during the next few years will be crucial to determining the outcome.
To be a model for the future, Europe’s governments and peoples must remain committed to an open Europe in an open world.
In more practical terms, that means continuing to honor Article 49 of the Treaty of Rome, which keeps the door to membership open to any European country willing and able to share the EU’s values, interests, and policies.
Approximately 150 million people in South-eastern Europe – the Western Balkans, Ukraine, and Turkey – aim at becoming EU citizens.
Membership will obviously take time, but the accession process will drive modernization and democratic reform in a way that will strengthen all of Europe.
A Europe that closes its door to those willing and able to enter will be a Europe that diminishes its own future.
Equally important is a renewed commitment to economic reform in the EU itself.
Economic success or failure in the decade up to 2020 will be another critical element in whether we are seen as a model or as a museum.
This will require a more committed approach than that pursued under the so-called Lisbon Agenda during the past decade.
It remains a shame that only two of the EU’s 27 countries have met the target of spending 2% of GDP on research and development.
It is imperative that the EU build societies that are seen as global leaders in social, political, and technological innovation – all will be urgently needed in the transition to the low-carbon economy that is coming.
An open Europe must also be fully committed to an open global economy.
A sustainable globalization process is not only a paramount interest for Europe itself, but also the only way that we can continue to lift billions of people out of poverty and create better foundations for the rule of the law and global governance in countries still lacking in these respects.
This will require a Europe able to build deep strategic relationships with all the key players in our increasingly multi-polar world.
The year that has just passed has demonstrated – in the handling of the financial crisis and in trying to tackle climate change – both the need for and the difficulties of creating a new paradigm of global governance.
Small elite bodies like the G-8 no longer work, but neither do mammoth meetings of the sort we saw in Copenhagen.
The EU has cooperation and integration embedded in its very DNA.
That is why it truly has the potential to be a model not only for its own region, but also globally.
Few things will be needed more in the years to come.
But, if we are to succeed, we must make the most of our new Lisbon institutions, maintain our commitment to an open Europe, accelerate reform of our economies, and take the lead in forging a new framework for global governance that supports a truly sustainable process of continued globalization.
Nothing less will do.
Europe’s Leisure Trap
Black Friday in the United States traditionally is the day after Thanksgiving that signals the start of the holiday season sale.
At daybreak, people line up before department stores to get the special “early bird” bargains.
In Europe, black Saturday falls in the last weekend of July, when the French and other Europeans set off in droves for their Mediterranean holiday destinations, and highways get jammed with traffic.
This contrast could serve as a metaphor for the difference in lifestyles on either side of the Atlantic.
Americans work more hours per week and have less vacation time, but they have more money to spend.
Not only does a higher percentage of American adults work, but they also work more hours per week and more weeks per year.
In 2004, the French worked 28% fewer hours per person than Americans, and the Germans and Dutch each put in 25% fewer hours, and the money they earned was correspondingly lower—almost 30% less income per person than Americans received.
According to the MIT economist Olivier Blanchard, Europeans simply enjoy leisure more than Americans do, even if it means that they have less money.
In his view, this difference in attitude explains the income gap between Europe and the US.
But not everybody agrees with Blanchard.
Some economists point out that high tax rates in Europe make work less rewarding – and thus leisure more attractive.
Other economists see Europe’s powerful labor unions as an important determinant in European attitudes towards work.
After all, employees do not negotiate individually the length of the workweek.
During past economic downturns, labor unions in Europe negotiated a reduced workweek or more vacation time with no reduction in wages.
Moreover, Blanchard fails to note that the preference for leisure is not gender-neutral.
The transatlantic difference in hours worked can be explained in part by comparing the labor input of European women to the input of American women.
While American women work 36 hours per week on average, Dutch women put in only 24 hours per week, while German women work 30 hours.
French women with a job work on average 34 hours per week, but the percentage of women who work outside the home in France is almost 20% lower than in the US.
Are European females that much lazier than American females?
The answer depends on whether one considers the time women in Europe spend on domestic work.
The economists Ronald Schettkat and Richard Freeman have calculated that American women spend ten hours per week less on cooking, cleaning, and childcare than European women do.
Instead of performing these household jobs themselves, Americans pay other people to do them.
Americans eat more often in restaurants, make ample use of laundry, dry-cleaning, and shopping services, and hire nannies to take care of young infants.
Indeed, in the US, one finds all kinds of personal services that do not exist on a similar scale in Europe.
A manicure, carwash, or a massage is often only a stone’s throw from one’s home.
Doorman buildings provide round-the-clock service to residents and dog-walkers look after pets during the workday.
In New York City, one can get help during the weekends to prepare meals for the coming week, with a culinary expert to advise you on the recipes, buy the groceries, and do part of the cooking.
In other words, American women work more hours and use the money they make to hire people to do the tasks that they can’t do because they’re working.
By contrast, European women work less and have less money to spend on services.
In their “free time,” European women are busy cleaning the house and looking after the children.
On balance, therefore, European and American women work about the same amount of hours.
Meanwhile, more wealth is created in the US than in Europe.
After all, women professionals do not have to choose between a career and children, but can enjoy both.
By spending part of their extra income on household jobs and personal services, American women limit their workload while creating demand for service jobs that wouldn’t exist otherwise.
To put it inelegantly, two birds are killed with one stone.
In Europe, no birds get killed at all.
Highly educated European women who have children either stay at home or work part-time and get stuck in low-end jobs.
They take care of the household and children themselves.
Meanwhile, there are not enough service jobs in Europe to put everybody to work.
The social benefits paid to the out-of-work increase the tax burden on labor income, which in turn discourages women from full-time work.
The leisure trap thus keeps both the best educated and the least educated out of the workplace.
Europe’s Lost Decade
MILAN – “Never confess a failure.
Whenever you are about to miss a target, just move the deadline.
Sooner or later, you will make it.” This simple rule, largely followed in Eastern Europe in the socialist days, is also popular among European Union bureaucrats in Brussels today.
On March 24, 2010, what all observers of European affairs have long known will be written in stone: the EU failed to attain the targets for economic growth, efficiency, and modernization set ten years ago in Lisbon.
Rather than becoming “the most dynamic economy in the world,” the EU is losing ground.
The gap in per-capita income of the EU15 (the membership prior to the accession of mainly post-communist states in 2004) relative to the United States – taken as a reference in many targets – is unchanged at 30-40%, depending on the adjustment to purchasing power parity.
The EU as a whole has attained none of the 17 quantitative targets set in the Lisbon Strategy.
And all the qualitative targets, added later in the process, have been used mainly to feed national bureaucracies preparing plans within the so-called “open coordination method.”
Rather than digging into the reasons for this general failure, the EU is now issuing a document that calls for new ambitious targets for 2020.
For another ten years, it seems, we can talk big and dream.
What failed in the Lisbon Strategy?
Basically, everything – and the method, above all.
Rules without any monitoring and enforcement mechanism are merely empty rhetoric.
The “peer pressure” that should have been exerted in the open coordination method has been a powerful tool to exert “peer protection” in justifying delays in attaining the targets.
Second, the targets themselves were wrong, and there were far too many.
Those who bravely tried to list them came out with three-digit totals.
The only justification for such a long list is that every government could claim to have attained at least one target – a trophy to exhibit at home.
Moreover, the targets mostly involved policies that do not require any supra-national coordination, such as labor policies, childcare, and pensions. Hence, the soft method, and the absence of sanctions for countries delaying the process.
In addition, the targets were generally set in terms of outcomes rather than policy instruments.
The government of a country hit by a positive shock could attain a target even without having done anything to achieve it.
For all of these reasons, postponing Lisbon to 2020 is a no-brainer.
Rather than wasting time and public money to set up or maintain the Lisbon bureaucracy, the EU should closely monitor the attainment of those national and EU-wide targets that involve significant spillovers across jurisdictions.
A clear case is environmental protection.
The 2012 Kyoto targets are attainable.
Any delay by one country in moving in that direction would jeopardize efforts made in other countries.
Another example is energy distribution.
The EU is still very far from having a single energy market, which makes it more costly for business and households and reduces efficiency.
Here, there is a strong case for having EU-wide targets rather than simply national objectives and sanctions for countries that do not liberalize their markets.
Other targets could instead be set at the EU level, rewarding those countries that contribute the most to attaining them.
One such target is skilled migration.
Europe is losing out in the worldwide race for talent, and the global recession is providing an opportunity to redesign the geography of human capital endowments.
Selective migration policies and talent-friendly environments supported at the European level could significantly improve the net skill migration balance, which is currently negative or zero in all EU countries.
There is a pool of about 300 million graduates to build on, and, according to solid evidence, they react to changes in economic incentives with respect to their location choices.
In this context, there are clear spillovers across jurisdictions, not least because talents go where there is a critical mass of job opportunities for them.
People often move as “power couples” looking for good jobs for both adult members of the household.
With popular destinations like the United States and Canada cutting back on research and public education and facing the need to raise top tax rates, Europe has a unique opportunity to attract skilled migrants and reduce the exodus of European researchers.
The so-called “blue-card” process has so far been largely unsuccessful, because there was no incentive for individual states to coordinate their policies.
How about conditioning EU support to national researchers on the adoption of selective migration policies?
That would be the first serious step towards creating a single market for labor in Europe.
If Europe were to take such steps, it would look not only like the land of redistribution, but also like a place where the environment is taken care of, energy distribution is efficient, and talent is highly rewarded.
Europe’s Economic War of Attrition
NEWPORT BEACH – I was nine years old when Egypt entered what became known as its “war of attrition” with Israel.
During this period of “no war and no peace,” underlying tensions festered, and a fragile tranquility was periodically interrupted by armed skirmishes.
The war of attrition followed the June 1967 war, in which Egypt – to the immense surprise of most of its citizens and the outside world – was soundly defeated.
Its air force was crippled and its army was virtually overrun, with Israel capturing the entire Sinai Peninsula.
Positioned on the eastern bank of the Suez Canal, Israel’s army was just over 100 kilometers from Cairo.
And, with Israeli jet fighters still controlling the airspace, Egypt’s capital and its major population centers were greatly exposed.
The official narrative reflected little of this.
Whether on state television or in government-controlled newspapers – at the time, there was no free press, Internet, or cable news – citizens were reassured that Egypt had regained control of its destiny.
But they knew better.
To this day, I remember vividly the sense of general anxiety that prevailed among citizens, accentuated by deep concern about what the future might hold.
People were afraid to invest, and many wondered whether they should emigrate in search of a better future.
With the underlying issues left unaddressed, the war of attrition was followed by another full-scale war in 1973 – one that again surprised most people inside and outside Egypt.
This time, the Egyptian armed forces won a number of early battles and secured a cease-fire that regained part of the Sinai, setting the stage for the 1979 peace agreement with Israel.
I recount this history not to draw a parallel with today’s Israeli-Palestinian conflict, which, just a couple of weeks ago, resulted in many civilian deaths, overwhelmingly in Gaza.
Rather, it is because I see too many&#160;parallels with what is happening in the European debt crisis.
European citizens – particularly in peripheral economies such as Greece, Portugal, and Spain – are anxious.
Unemployment is unacceptably high, and is still rising.
Their economies continue to implode, leading to cumulative contractions that are setting tragic new records.
Poverty is on the rise.
Not surprisingly, increased emigration to the stronger eurozone countries (such as Germany) has been accompanied by higher outflows of financial capital.
Admittedly, and fortunately, the parallels are far from perfect.
Europe does not have armed conflicts.
Feelings of intense insecurity are not related to bombs and sirens.
The threat is economic rather than military.
Yet there is a real sense of “no peace and no war.”
Europe’s economic peace remains elusive for a simple reason: governments have still not found a way to generate the trifecta of growth, employment, and financial stability.
The longer this prevails, the more oxygen is sucked out of sectors that remain relatively healthy – and for three distinct reasons.
First, the eurozone economy is extremely interconnected.
As such, it is only a matter of time until weakness in one part migrates to other parts.
Witness what is happening in Germany, a well-managed country once thought itself immune from the troubles around it.
After a period of record low unemployment, economic growth has slowed markedly, reaching just 0.2% in quarterly terms in July-September.
On current trends, the fourth quarter’s growth rate will turn negative.
Second, the eurozone’s bailout bill continues to rise.
Cyprus is expected to join the other three “program countries” (Greece, Ireland, and Portugal) in requiring considerable official financing; and, of the other three, only Ireland is getting close to regaining normal access to capital markets.
With Spain also requiring billions more to recapitalize its banks, the contingent claims on taxpayers in the core countries continue to mount.
Indeed, this is one of the factors that contributed to Moody’s decision – following Standard &amp;
Poor’s – to strip France of its AAA credit rating.
Finally, adverse contagion is extending beyond the 17 countries in the eurozone.
The region’s debt crisis is undermining cooperation within the larger 27-member European Union, resulting in the spectacular failure of the recent summit on the EU budget.
It has also contributed to the economic slowdown in China, raising concerns (which I believe are exaggerated) that the country’s new leadership may have problems engineering a soft landing for an economy accustomed to double-digit (or high single-digit) growth.
This lack of peace would have resulted in outright economic and financial war if not for the critical – and growing – role played by the European Central Bank.
Under the bold leadership of Mario Draghi, the ECB has committed to provide as much time as possible for most governments to get their acts together.
And it has done so by relying on innovative measures that substitute its elastic balance sheet for those of over-extended governments, gun-shy private investors, and fleeing bank depositors.
Yet it would be a grave mistake to assume that the ECB can deliver lasting economic peace.
It cannot.
If governments continue to dither and bicker, the most that it can do is delay the war for a while.
Like Egypt’s war of attrition, the eurozone’s underlying economic, financial, and social ferment continues.
If governments continue to stumble from one patchwork remedy to another – a probability that remains uncomfortably high – the delay in implementing a comprehensive solution will eventually overwhelm the defenses that the ECB has so courageously put in place.
Some say that, just as Egypt’s war of attrition eventually gave way to a full-scale war and then a peace treaty, Europe needs a major crisis to move forward.
But this is a dangerous notion, one that entails not just massive risks, but also unacceptably high interim human costs.
European governments are well advised to use the financial cease-fire that the ECB is willing to buy for them.
Allowing it to expire without progress toward permanent stability would expose Europe to disruptions that would diminish significantly its prospects for long-term economic stability, growth and job creation.
Europe’s Military Injustice
LONDON – The cost of sending troops and military hardware around the world to provide security when and where it is needed is causing major financial headaches across Europe.
Indeed, Europe’s finance ministries face a dilemma over how much of their stretched national budgets to allocate to the military; and European defense officials must somehow ensure that precious funding is spent in the most efficient manner.
The problem is acute in Britain, not only because of our current troop deployments in Afghanistan and Iraq, but also because of the unfair systems by which NATO-led missions and military operations under the European Security and Defense Policy (ESDP) are financed.
Under both systems, those who accept responsibility to take military action also take on the lion’s share of the financial burden.
It is time our collective security alliances overhauled these inequitable funding methods and made sure that all member states pay a proportionate price for global security.
It is no secret that Britain’s Ministry for Defense is facing a funding crisis.
Despite British forces having been engaged in two major military operations since 2003, defense spending represents only 2.3% of GDP – the lowest since the 1930’s.
As a share of total government spending, defense expenditure has fallen from 7.8% in 1998 to 6.1% in 2006.
Owing to the ongoing operations in Iraq and Afghanistan, any future British government will inherit a military that is overstretched, undermanned, and working with worn-out equipment.
The unfunded liability associated with this will total billions of pounds.
Better military and financial burden-sharing within both NATO and the ESDP would not only benefit the United Kingdom, but would also help to alleviate some of the pressure on other national defense budgets in Europe.
We must take full advantage of our organized security structures to ensure that the global security burden is shared in a fair and proportionate manner.
To date, this has not happened.
For NATO to work properly, its members must be prepared not only to supply troops and equipment for NATO-led military operations, but also to fund and sustain these operations until missions are completed.
Instead, certain members now do a disproportionate amount of the fighting, funding, and dying.
This is not sustainable.
All NATO countries must understand that membership brings implicit and explicit responsibilities to ensure that their military forces have the capability to fight and win on the modern-day battlefield.
They must recognize the need to create a sounder financial system for alliance operations.
There is currently common funding for certain shared costs, such as headquarters, with contributions linked to the member states’ GDPs.
But the amounts covered by common funding are only a small part of an operation’s total cost.
All other expenses “lie where they fall”: the more troops and equipment a country contributes to a mission, the more it ends up paying.
The cost to the UK for its contribution to the NATO operation in Afghanistan, for example, totals £3.1 billion – a heavy burden on British taxpayers.
Because of the expeditionary nature of today’s military operations, that system is an anachronism.
Yet fixing the problem is easier said than done.
NATO has been trying for years – without success – to get its member states to spend the required 2% of GDP on defense.
Compliance would mean an estimated $67 billion increase in Alliance-wide defense spending, or roughly the equivalent of adding another British or French defense budget – no panacea, but very helpful nonetheless.
Last April, the leader of the UK’s opposition Conservative Party, David Cameron, explained why we should establish a real operational fund for NATO expeditionary missions, with every member state required to contribute.
Doing so would provide some reimbursement to countries that currently carry an unduly large part of the burden.
It would also offer potential funding to countries that might deploy forces but face short-term financial difficulties in meeting the cost.
The new NATO operational fund would clearly be more equitable than today’s system, which penalizes proactive member states and rewards members that prefer to do nothing.
Why should the few carry the many?
Common security implies common commitment.
Moreover, solving NATO’s burden-sharing problem is not enough.
The European Union’s crisis management missions face similar issues when military forces are involved.
EU civilian crisis management is funded directly from the Common Foreign and Security Policy budget.
But, apart from the common costs of an operation (usually less than 8% of the total), the ESDP uses the same funding method as NATO, which means that the bulk of the money for both ESDP and NATO-led military operations comes out of the same defense pot in each member state.
So there is no point in fixing one funding mechanism without simultaneously fixing the other.
Interestingly, there was some discussion under the French presidency about reforming the so-called Athena Mechanism, which is the means used to determine the amount that each EU member state contributes to the common costs of a mission.
Like the NATO common fund, EU contributions are largely based on GDP.
The French also called for the “costs lie where they fall” concept to be abandoned in the name of financial solidarity.
Any change made to the Athena Mechanism must include reforms to its rules and procedures.
Currently, non-EU members of NATO that contribute troops to an operation cannot vote – or even be present at votes – when the Athena Special Committee sets the mission budget, even though their troops will fight and possibly die.
This is discriminatory, undemocratic, and no way to treat important allies like Norway and Turkey.
Collective security alliances are just that – collective.
It is time that everyone contributed their fair share to the common good.
Europe’s Misguided “Growth Pessimists”
Such is the deep pessimism in Europe about the economy that the better the economy does today, the worse people think it will do tomorrow.
This year has been an excellent one for Europe’s economic growth.
Yet instead of thinking that the momentum building in 2006 will carry forward and make 2007 an even better year, Europe’s gloomy experts are predicting a significant slowdown.
For them, it seems out of the question that Europe can have two good years in a row.
Of course, every year has its growth challenges, and 2007 will be no exception.
What motivates – or frightens – the growth pessimists, in particular, are (1) higher European interest rates, (2) the slowing US economy, and (3) the increase in the German value-added tax (VAT) from 16% to 19% set for the beginning of the year.
But they are wrong to be frightened by these factors.
Fear over the growth effects of the European Central Bank’s 2006 rate increases is based on confusion between real and nominal interest rates.
By the end of the year, European interest rates will have been raised 150 basis points (to 3.5%, from 2% in January).
But European inflation is growing at approximately the same rate.
This means that real interest rates – interest rates measured in terms of goods and services – have stayed the same.
And it is the real interest rate – not the money rate – that counts for economic growth.
Europe must ask itself: how can interest rates induce a slowdown in 2007 when real interest rates have hardly budged despite an economically healthy 2006?
Moreover, because profits are high in Europe, likely future increases in real interest rates needed to ensure price stability easily can be financed out of profits without economic disruption.
The truth of the matter is that interest rates – both nominal and real – are too low in Europe, not too high.
As for the United States, plummeting gas prices – an extraordinary 25% decline in roughly one month – have increased consumer confidence and spending at a time when consumers were supposed to be in full retreat because of the housing market decline.
Moreover, former Federal Reserve Chairman Alan Greenspan says the housing market correction is already almost over.
Pessimistic Europeans are behind the curve.
They are bracing for a 2007 US growth slowdown that already has taken place with little consequence for both the US and European economies.
Of course, falling gas prices are occurring in Europe as well, and this will help take the sting out of the controversial VAT increase engineered by German Chancellor Angela Merkel.
The German Chancellor has been lucky.
The falling gas price and Germany’s high profits will “finance” the tax increase, which should prove little more than a speed bump for the German economy, at least if lower gas prices hold into the coming year.
Indeed, the German government is slowly coming to realize that its pessimism about the economy has been misplaced, which is reflected in continuous “upward revisions” of growth forecasts throughout 2006.
Recently, the government raised its growth forecasts for this year and next, from 1.6% to 2.3% for 2006, and from 1% to 1.4% for 2007.
Expect further upward revisions as the government continues to be surprised by the economy’s ongoing strength.
An important by-product of Europe’s good growth is that it is making the need for structural reform an urgent matter.
The lack of structural reform of Europe’s labor markets, competitive practices, and so on means that European potential economic growth – its growth ceiling – is lower than it should be.
With a low growth ceiling, strong economic performance generates inflationary pressures at a relatively early stage in the growth process.
This makes it hard for Europe to enjoy an extended period of high growth without inflation.
Premature inflationary pressures are a prime reason that both ECB presidents, the late Wim Duisenberg and now Jean-Claude Trichet, have consistently pressed for structural reform in their press conferences and speeches.
It is the ECB, after all, that must fight the inflation caused by Europe’s lack of structural reform.
Growth pessimists have a point if they are wary about Europe’s prospects for structural reform to raise the growth ceiling.
Europe’s politicians simply refuse to take the lead on this all-important issue.
They are wrong, however, about Europe’s prospects for achieving its restricted growth potential.
Europe’s actual economic growth has been quite good and – thanks to low gas prices, low real interest rates, solid profits, and strong growth momentum – promises to get better before the ceiling is hit and inflationary pressures set in.
Call me a “growth optimist”, but Europe looks poised for another good growth year in 2007.
Europe’s Misguided Search for Growth
BRUSSELS – A few months ago, 25 of the 27 members of the European Union solemnly signed a treaty that committed them to enshrining tough deficit limits in their national constitutions.
This so-called “fiscal compact” was the key condition to get Germany to agree to increase substantially the funding for the eurozone’s rescue funds, and for the European Central Bank to conduct its €1 trillion “long-term refinancing operation” (LTRO), which was essential to stabilizing financial markets.
Today, however, the eurozone’s attention has shifted to growth.
This is a recurring pattern in European politics: austerity is proclaimed and defended as the pre-condition for growth, but then, when a recession bites, growth becomes the pre-condition for continued austerity.
About 15 years ago, Europe endured a similar cycle.
In the early 1990’s, when the plans for the European Monetary Union (EMU) were drawn up, Germany insisted on a “Stability Pact” as a price for giving up the Deutschmark.
When Europe fell into a deep recession after 1995, attention shifted to growth, and the “Stability Pact” became the “Stability and Growth Pact” (SGP) when the European Council adopted a resolution on “growth and employment” in 1997.
The need for growth is as strong today as it was 15 years ago.
In Spain, the unemployment rate then was as high as it is now, and in Italy, it was higher in 1996 than it is today.
Politically, too, the background is the same: the “G” was inserted into the SGP under pressure primarily from a new French administration (at the time headed by Jacques Chirac).
Today, France has again given the political impetus for a shift to growth.
Making growth a political priority is uncontroversial (after all, who could be against it?).
But the real question is: what can Europe do to create growth?
The honest answer is: rather little.
The key elements of a growth strategy discussed among Europe’s leaders these days are actually the same as in 1996-1997: labor-market reforms, strengthening of the internal market, more funding for the European Investment Bank (EIB) for lending to small and medium-size enterprises (SMEs), and more resources for infrastructure investment in poorer member states.
The last two, in particular, attract a lot of attention because they involve more spending.
But circumstances are also quite different today.
The EIB’s business model would have to be radically changed to make it useful to promote growth, because it lends only against government guarantees, whereas southern Europe’s fiscally stressed sovereigns cannot afford further burdens.
Moreover, contrary to a popular misconception, the EIB cannot lend directly to SMEs.
The EIB can only provide large banks with funding to lend to local SMEs.
But the ECB is essentially already doing this with its three-year LTRO loans.
There is also talk about a “Marshall Plan” for southern Europe.
Fifteen years ago, there was a clear need for better infrastructure there.
But, since then, the southern countries have had a decade of rather high infrastructure investment – more than 3% of GDP in Spain, Greece, and Portugal.
As a result, most countries in the EU’s south probably have a sufficient stock of infrastructure today.
In fact, more infrastructure investment would actually make most sense in Germany, where infrastructure spending has been anemic (only 1.6 % of GDP, or half the rate of Spain) for almost a decade.
That is why Germany’s famous Autobahnen are notoriously congested nowadays.
But one does not need European funding to finance infrastructure in Germany, where the government can raise funds at negative real cost.
At the rates that it is paying today, the German government should be able to find many investment projects that yield a positive social rate of return.
Given that Germany is close to full employment, more infrastructure spending there would probably suck in imports (and attract unemployed construction workers from Spain), contributing to much-needed rebalancing within the eurozone.
Unfortunately, this is unlikely to happen, because infrastructure spending runs up against popular opposition.
Indeed, such spending is decided at the local and regional level, where grass-roots opposition to any large project is strongest (it took more than 20 years, for example, to push through the modernization of Stuttgart’s railway station).
The urge to be seen to be “doing something” is leading Europe’s policymakers to rely on the few instruments with which the EU can claim to foster growth.
But they should recognize that today’s growth crisis is different.
The real bargain should not be austerity plus a Marshall Plan for the south, but rather continued austerity plus labor-market reforms in the south, combined with more infrastructure investment in Germany and other AAA-rated countries like the Netherlands.
Deep service-sector reforms in Germany would also help to unlock the country’s productivity potential and open its market to services exports from southern Europe.
That way, the South would have a chance to find jobs for its rather well-educated young people, whose only choice now is between unemployment and emigration.
Europe\u0027s Modest Mission
On May 1, ten new nations joined the European Union, pushing its membership up to 25.
Two more countries, Romania and Bulgaria, are in the process of negotiating entry, and another, Turkey, is knocking at the door.
But, beyond the celebrations of the most recent enlargement round and preparations for the next one, it is time to ask what effect the enlarged EU will have on world affairs?
How should - and will - the other member states of the United Nations view this event?
In order to understand the importance of what is happening, we must begin by ridding ourselves of the curse of our times. We are permanent - if consenting - victims of current events, of what is happening at any particular moment.
Television shortens our horizons. No one thinks anymore about the long term.
But it is only in the long term that the European project is really important.
It is important for two reasons, one concerning its implications for peace and human rights, the other concerning its impact on commerce and development.
The history of humanity is only around six thousand years old, and yet it includes some ten thousand wars.
The European continent played a large part in this historical carnage - much greater, proportionally, than the rest of the world, given the time during which the European continent was in fact populated.
But now we have in the EU an organic system that makes war virtually impossible on the European Continent and reconciles the peoples who live here.
In 1945, the Germans and the French liked each other about as much as Serbs and Bosnians do today.
But the Germans and French are now married within the Union.
Europe is now poised for similar reconciliations elsewhere.
For seven centuries, Hungary and Romania have been engaged in wars over territory and peoples.
Hungary is now an EU member, and Romania is poised to join (though its membership is a bit delayed because of a lagging domestic reform process).
Poland has known a thousand years of wars with its neighbors.
Today, it is secure.
The European venture is immense.
The assurance given to the world that wars will no longer originate in Europe represents a formidable reversal of history.
All these European states are not merely at peace with one another; they also all respect human rights.
The other element of historic significance is the unified internal market of the extended European Union.
It is a market with merciless rules in terms of competition, but also with principles and mechanisms of internal solidarity that commit the economically more developed members to help the less advanced countries to overcome their structural handicaps, and a common commercial and customs policy vis-à-vis the external world.
The results of this "competitive solidarity" are huge.
Ireland, Portugal, and Greece have experienced spectacular development; the poverty that bound them for generations has practically vanished.
The ten new countries will now take the baton and begin to banish poverty.
The EU is an exceptionally important precedent in another way. No great economic power in history has been born without force - until now.
European law will be enough to impede any global giant - be it Japanese, European, or American - that might otherwise establish domination of the world in any sector of the world economy.
Microsoft will no longer dominate control over the diffusion of knowledge in the world.
But there is a price to be paid for this progress.
The historical and strategic sensibilities of all the countries assembled in the new Europe are so different that they cannot have a common foreign policy.
People kill each other in Somalia, Rwanda, ex-Yugoslavia, and the Middle East without Europe being able to do anything about it.
Experience has spoken: we have to abandon today the dream of federal Europe as a counterpoint to the United States; the majority of Europeans don't want this.
Far from being a single nation in the process of formation, Europe is only a space of proximity governed by democratic norms and a shared rule of law.
But that is already a lot.
While the mission of this space may not be enough to shift the balance in world affairs, it can help spread peace, respect for human rights, and efficient and respected rules governing global commerce.
If one remains aware of this, and if one does not attempt to impose on the Union the disagreements that America's current leaders and policies incite, an obvious conclusion comes to mind.
The area of peace that is Europe is bound to grow further in the future, first to Ex-Yugoslavia, then to Turkey, then one day to the Middle East and the Islamic world.
In assuring peace and development, Europe will have served humanity well.
Europe\u0027s Moment in Iraq Has Arrived
The formal end of America's occupation of Iraq, with sovereignty transferred to an Iraqi government, provides Europe with a chance to play a serious role in determining the future of that vital nation.
The European Union must get off the sidelines and act, both to assure that the transitional government holds elections and creates a viable Iraqi state, and to preserve Europe's own interests and values in the region.
The total failure of the Bush administration's Iraq policy has opened the door for Europe to offer a serious alternative vision for Iraq's future.
But what should European opponents of the war, having seen their worst fears confirmed, propose?
Of course, it is tempting for Europe not to propose or do anything, and simply wait for the Iraqi crisis to sweep John Kerry into the White House and George Bush back to Texas.
But America's misfortune - and Iraq's - is inimical to European interests.
A policy of "the worse the better" is simply not acceptable: it mirrors the cynicism that the US administration is rightly criticized of adopting.
The EU should present its own policy proposal in the context of the debate now taking place within the UN, and it should outline the conditions that the US would have to accept if it truly wants to find a way out of the crisis and ensure active European involvement.
This requires that Europe's proposal be universally understood and embraced.
Only a common European position - Britain included - has any chance of influencing the Bush administration.
Those who believe that "preventive" war is the worst possible medicine should show that there has always been an alternative based on the principles and regional options that led them to oppose the military intervention in Iraq.
That intervention exemplifies the failure of the "wounded beast" theory of diplomacy, according to which the US could do anything after the terrorist attacks of 2001, with the ends justifying the means.
The senseless intervention in Iraq and the torture of prisoners in Guantánamo, Iraq, and Afghanistan follow the logic of this theory.
But a policy based on arrogance cannot create conditions that support building democracy in Iraq or effectively combating terrorism.
In the case of both policies, efficacy is synonymous with legitimacy, which is thus an essential condition for success.
This was as true yesterday as it is today.
To resolve the Iraqi crisis and to consolidate a democratic system effectively means that the neo-conservative vision of imposing democracy will have been defeated.
Europe cannot once again remain passive in the face of an issue that is of such crucial importance for the international order, especially one that is in its own neighborhood.
At the same time, however, Europe cannot become politically engaged without the right political conditions in place.
If the EU accepts a merely cosmetic change in US policy, not only will it fail to contribute to resolving the crisis, but its actions and image will also be contaminated by the anti-Americanism that dominates the region.
The first condition for European engagement, and the only guarantee of domestic legitimacy, is that the new transitional Iraqi government be politically independent of the US-led Coalition.
Only this will ensure the support of the main Iraqi political forces.
But this is also the hardest requirement to meet, because it means accepting the leadership of moderate Islamist parties and creating a consensus between the latter, the Kurdish parties and secular nationalists.
Once domestic legitimacy has been achieved, international legitimacy can be generated by the UN's assumption of a truly leading role in managing all aspects of international support in Iraq (political, economic, and security related).
The UN can begin to adopt this role by organizing an International Conference for Iraq that involves the Arab nations.
There can be no meaningful reconstruction or appropriate conditions to hold elections without security (Europe already contributes €200 million annually to reconstruction).
The US must remain militarily involved - although it is the problem there today, it must also be a vital part of the solution.
But security cannot remain essentially in the hands of the Coalition.
The US must ultimately accept an East Timor-style solution for Iraq.
What does that mean?
Initially, Australia guaranteed security in East Timor after its independence from Indonesia, and later accepted that it should continue to play a major role, but within a UN framework and under UN command.
It is possible that Europe could build up a strong presence in Iraq, including a military presence, if a future democratically elected Iraqi government should request it.
Finally, as stated repeatedly since the start of the war, there can be no success in Iraq without a strong Israeli-Palestinian peace initiative.
A European plan for Iraq must call for international intervention to enforce the Geneva accords through a process along the lines of the Dayton Agreements that ended the Bosnian war.
It remains to be seen whether the Bush administration, in the midst of an election, can be called to reason and persuaded that only a policy along the lines I have outlined stands a chance of stabilizing Iraq.
If the Bush administration will not change course, that is all the more reason for Americans to change their president.
Europe’s Moment of Decision
BRUSSELS &#45;&#45; Is amnesia an integral part of politics?
When it comes to the treaty to reform the Union’s institutions, which will be finalized in November, recent events suggest that amnesia does play a central role.
Let’s examine the “illness” that leads certain EU leaders with questionable scruples to forget even the recent past.
Busy with domestic political affairs, they do not hesitate to use Europe as a scapegoat to avoid breaking bad news to their fellow citizens.
Some display separatist tendencies that worry, and frustrate, their electorates.
No surprise, then, that many EU citizens refuse, or at least hesitate, to embrace the European cause.
This form of political racketeering may win elections, but it sabotages any opportunity to experience, or to perceive, politics as a process that can contribute to global development.
Consider Gordon Brown, Britain’s new prime minister, according to whom globalization strips the European project of any meaning, a form of political autism that in fact will prevent the EU from adapting to change and from being able to find solutions to globalization’s challenges.
Fortunately, openly anti-European political programs are not the norm, at least not yet.
In fact, if, on the eve of the 2009 European Parliament elections, the new Reform Treaty enters into force, each member country will be forced to clarify and justify its position.
The Treaty will be essential not only to the proper functioning of Europe’s institutions, but also to their further “deepening” – something that many call for without necessarily really wanting to achieve.
Thanks to “reinforced cooperation,” recalcitrant states will no longer hinder those seeking to make progress, and could even resort to an “opt-out” process and “liberate” themselves from the EU, perhaps by means of a referendum.
Then there are those who believe that EU enlargement has prevented greater “deepening,” and who, with scant regard for the past or the future, argue that pursuing the latter requires abandoning the former.
But who can reasonably claim to know what shape the EU will need to take to meet the challenges of the next 50 or 100 years?
Already, issues like climate change and energy supply demonstrate the futility of isolated national action and the critical importance of both deepening and enlarging the EU.
Having suffered from disruptions in oil and gas supplies following disputes between Russia and Ukraine and then Belarus, the EU’s members have finally understood that their survival depends on their capacity to diversify their energy sources.
Further EU enlargement is undoubtedly in Turkey’s interest, and in Europe’s, too.
In addition to the constructive role that Turkey could play, especially in the Middle East, its membership is vitally important in terms of energy.
Moreover, admitting Turkey would demonstrate the EU’s political consistency, while representing a qualitative step forward in the European project.
For politicians like French President Nicolas Sarkozy, such considerations may be meaningless.
But what if Turkey were to abandon its European ambitions and align itself strategically with Russia or even Iran?
The consequences for European security would be severe.
Then there is Britain’s political leadership, for whom enlargement is a way to avoid deepening, and, indeed, to dissolve political Europe.
While such ideas are not for everyone, certain Continental countries secretly prefer Britain’s disjointed scenarios, with some heads of governments even considering their countries’ commitments reversible.
What, for example, should we make of Poland’s governing Kaczynski brothers?
The quick-tempered twins took issue with the reform treaty’s proposed voting system for the Council of Ministers, and then stole the limelight from papacy with their own homophobic declarations, proclamations that seem to exclude any possibility of integrating the EU’s Charter of Rights into Poland’s domestic law.
Russian President Vladimir Putin may be the only one who welcomes this desertion from Europe’s community of values.
In this climate, Dutch Prime Minister Peter Balkenende, still bogged down in his country’s “no” vote on the EU’s draft constitutional treaty in 2005, has been seeking to win British, Czech, and Polish support for measures to make it possible to diminish the EU’s areas of responsibility.
Indeed, he may not even object to ruining the EU’s entire legislative engine by granting national parliaments a veto.
What we Europeans now need most of all is to embark on precisely the opposite course.
Only by enlarging the scope of EU decision-making, backed by the commitment of equally responsible partners, can Europe meet the shared challenges of a common future.
Europe’s Myopic Defense Cuts
COPENHAGEN – All over Europe, budgets are being pared as a new age of austerity takes hold.
Defense expenditures are proving to be the easiest of targets.
Even Britain under the Tory David Cameron has joined the rush to slash defense spending.
These cuts are coming at a time when European efforts to shoulder a fair share of the Western defense burden have been cast in doubt – not least in Afghanistan, where most European countries have limited their participation by insisting on a myriad of “caveats” that usually serve to keep their troops far from the most dangerous zones.
Defense cuts are also happening at a time when Europe, for the first time in modern history, has been overtaken by Asia in terms of total defense spending.
Western Europe’s long-held position as the world’s most important concentration of military power after the United States and Russia appears to be over.
The US faces no serious challenge (not yet, at least) as the world’s dominant military power.
After all, the US spends almost as much on its armed forced as the rest of the world combined.
But the picture is changing with the rapid growth of China’s military expenditures.
The official growth rate of China’s military expenditure – 15% per year over the last decade – has increased substantially, and there is much hidden military spending as well.
Growing anxiety among China’s neighbors, particularly India, has led to remarkable increases in defense spending by other Asian powers as well.
Cuts in European defense spending, moreover, are starting to cause serious tensions within the Atlantic Alliance.
NATO is often described as a construction with two pillars and an architrave symbolizing the common values that form the basis of the alliance.
But even during the Cold War, Americans often pointed out that the European pillar was lacking.
Greater “burden-sharing” was a rote American demand.
This debate may soon heat up again, now that the US, no less than Europe, is faced with grave budgetary problems.
Indeed, in a time of austerity, US politicians might find it difficult to understand Europe’s willingness to cut defense budgets that already total far less than NATO’s official 2%-of-GDP target.
Europe’s problem is not only a lack of military spending, but also poor effectiveness when it comes to the purpose of that spending: the use of force when and where necessary.
Europe’s capability of deploying combat forces is simply too small relative to the number of men and women in uniform.
It is often half-jokingly pointed out that the number of generals and admirals in some European countries (none mentioned, none forgotten) is glaringly disproportionate to the number of fighting troops.
European military effectiveness is also curbed by different procurement policies, as those countries that produce military hardware prefer to keep orders at home.
This is true of weaponry as well as logistical capabilities, where, despite immense efforts over the years to get more out of the shrinking funds, there is still great potential for integration and standardization.
The defense treaties concluded recently by France and the United Kingdom appear to be a good example of what can be obtained through greater cooperation and integration – even though it is a strictly bilateral affair with no direct links to either NATO or the European Union.
But the value of the new “Paris-London Entente” will be limited if both countries cut their defense expenditures so much that their combined strength remains at best unchanged. That Britain plans to fund construction of a new aircraft carrier, but not the planes to fly off of it, suggests that resources for the new entente will be sorely lacking.
Still, French-British cooperation if it does take on real substance could be an inspiration to others, though the challenges to making the agreement viable are formidable.
British “Tommies” have to learn to speak French, and French legionnaires will have to learn English – and the limits on the spirit of cooperation will no doubt be found at the entrance to every army, navy, and air force canteen.
After all, can anyone imagine French sailors eating “spotted dick” or any other culinary peculiarity of the Royal Navy?
Somewhat more promising is the possible invitation to India to participate in developing, alongside France, Germany, and Britain, the new joint Euro-fighter.
India’s commitment to defense spending, and its desire to acquire advanced military production processes, may provide the kind of energy that Europe has been lacking.
But with Germany’s Luftwaffe planning heavy cuts to its procurement of Euro-fighters, India may have second thoughts about taking part in the project.
The kind of energy and commitment to defense spending that India represents needs to be injected into Europe, because European rhetoric about playing a strategic global role remains in high gear.
But it seems ages since a Belgian foreign minister (as chairman of the EU Council of Ministers) declared at an ASEAN meeting in Singapore in 1993: There are now only two superpowers left, the US and Europe!
If Europeans want their ambitions to be taken seriously, they must find ways to deal with the decline in Europe’s military power.
Political leaders will have to tell their constituents that there are limits to how much military budgets can be cut, as the “peace dividend” from the Cold War’s end was digested long ago.
Europeans may have to embrace new modes of cooperation among their national armed forces in order to put them to effective use.
Otherwise, not only will Europe’s global political ambitions become untenable, but its allies on the other side of the Atlantic will lose patience with Europeans’ refusal to shoulder their share of the security burden.
Europe’s Naked Banks
WASHINGTON, DC – European leaders are convinced that bank capital is “expensive,” in the sense that raising capital requirements would slow economic growth.
But the latest developments in the Greek crisis show that the exact opposite is true – it’s European banks’ lack of capital that threatens to derail European and global growth.
Banks’ “capital” simply refers to their equity funding – how much of their liabilities are owned by shareholders rather than being owed to creditors as some form of debt.
The advantage of equity capital is that it is “loss-absorbing,” meaning that only after losses wipe out all of the equity do they need to be apportioned between creditors.
Banks’ capital, therefore, is what stands between bad loans and insolvency.
In the Basel III negotiations that concluded last year, the French and Germans strongly favored relatively low capital requirements.
This was folly: for their big banks today, more capital would reduce the probability of needing further government bailouts.
These banks’ potentially troubled assets include, of course, bonds issued by Greece, Ireland, Portugal, and other eurozone countries whose fiscal prospects are now being marked down by financial markets – but that until recently were regarded as “zero risk” by the relevant authorities.
If European banks had enough capital, a reduction in the value of Greek and other debt would reduce shareholder equity and disappoint investors, but it would not cause a banking crisis.
Unfortunately, European banks do not have enough capital, irrespective of eurozone bailout efforts, because the damage will not be limited to Greece.
Big European banks will not actually default on their debts – the governments of Germany, France, and Italy have made it clear that their banks are too big to fail.
And Germany and France – though perhaps not Italy – have enough fiscal firepower to support their banks as needed.
But no European politician would really want to put serious money on the line for the likes of Deutsche Bank or BNP Paribas; governments will not force recapitalization using public funds.
Nor do politicians care to order banks to raise more capital from private sources – this would be too embarrassing for all involved, because it would expose the full extent of the folly so far.
Finally, the bankers are paid according to return on equity, unadjusted for risk, so it is very much in their interest to continue running their business with very little equity.
If they get lucky, the rewards are immense.
If they hit a difficult patch – as now seems likely – society bears the brunt of the impact as credit dries up and asset prices fall.
To be sure, the European Central Bank could cut interest rates further (widening the gap between banks’ borrowing costs and what they charge for loans is a classic way to help them earn profits and recapitalize themselves).
But the ECB has signaled that big interest-rate cuts are unlikely as long as the German economy remains strong, with relatively low unemployment.
The most likely course of action will be more regulatory forbearance, allowing banks to hide losses, combined with another round of overly optimistic financial “stress tests,” in which regulators pretend that there are no problems.
When the Europeans stress-tested their banks in 2010, for example, they blithely assumed that Ireland did not face imminent fiscal disaster.
Stress tests have turned out to be an exercise between futility and fiasco.
The reaction of European bank executives in this scenario will be to hunker down, calling in loans to reduce the size of their balance sheets and thereby pushing up equity relative to their total assets.
There is an obvious externality here, with each bank wanting to dump assets without regard for the consequences for the rest of the economy.
Regardless of whether Greece will or should default on its debts – or restructure payments under some euphemism – the banking system’s lack of capital means that credit throughout the eurozone will be under pressure.
No one knows how Greece’s problems will affect market perceptions of government debt in other eurozone countries.
And the interlinkages between major global banks are a major, if diffuse, worry for all involved.
Equity capital will increase relative to assets – but, under current policies, it will increase because banks reduce their assets, not because they raise capital.
This is exactly the wrong way to handle a financial crisis.
If the International Monetary Fund were calling the shots in Europe, they would be arguing forcefully for tough stress tests and bank recapitalization throughout the eurozone.
But the European Union collectively has roughly 30% of the votes at the IMF, and can effectively veto a more forceful approach to the European banking system.
Meanwhile, the lack of bank capital will continue, weighing heavily the European economy’s short-run performance and undermining its longer-term growth potential.
Europe’s Naturalized Killers
Europe now seems to be the prime target of Islamist terrorists.
The arrest of 21 British Muslims for conspiring to blow up airlines crossing the Atlantic underscored, once again, the growing sense of dread and inevitability that is rooted in the homegrown nature of the threat.
But what do we really know about these killers among us?
We know, of course, the broad outline of their of their all-encompassing fundamentalism, and we have some vague ideas about Al Qaeda as a decentralized network of cells in many countries that seeks to acquire chemical, biological, and perhaps even nuclear weapons.
We also know their leaders’ long-term goals: seize power in Muslim countries and attack the Western states that support secular regimes in the Islamic world.
Finally, we also know that the leaders of this fanatical tide are few, but now have the sympathy of millions of ordinary Muslims.
There have always been fanatical individuals ready to die and kill in the name of their beliefs.
But they seem far more dangerous nowadays as a result of technological advances that have “democratized” bomb making.
After all, as the London and Madrid bombings demonstrated, a cell phone is all that is needed to time an explosion – or a series of explosions – with deadly efficiency.
Our freedoms and social fluidity also contribute to the threat.
People move about the globe cheaply and with relative ease.
Immigrants can establish themselves in new societies, and in democratic states they can live completely free of supervision.
Our freedoms are their tools.
So how do we fight such an amorphous enemy?
President George W. Bush has demonstrated one way
Indeed, here is how one of the Madrid bombers described the psychological preparation to which he had been submitted: his leader “made us watch DVDs showing pictures of war in Iraq, mostly pictures of women and children killed by American and British soldiers.”
Simply put, bombs dropped from several thousands meters do not kill less indiscriminately than explosive charges placed in train cars.
Acknowledging this is not to excuse terrorism, but it is a first step toward understanding terrorism’s underlying causes, and thus toward their elimination.
Above all, it is to acknowledge that democratic societies must use both political and police tactics in confronting fanatical terrorists.
Politics is necessary for the simple reason that occupying armies and police cannot force hundreds of millions of Muslims to shed their hostility.
Political action implies actually leaving Iraq quickly and finding a fair solution to the Palestinian conflict, which in turn requires ending the occupation of all Palestinian territories.
Of course, extinguishing these hot spots will not erode the fanaticism of diehard and suicidal activists; nor will it rid us of the avidity and hatred that is so evident among the leaders of Islamic rage.
But it will deprive them of the masses of sympathetic Muslims who view the fanatics as the only people seeking to defend “Islamic” values and oppressed Muslim peoples.
Policing is the second part of any effective strategy.
Greater efforts at infiltrating terror networks are needed, as is a deeper knowledge of the social structures created by the terrorists, in order to block their financial support.
This may mean eliminating shadowy “tax havens,” tapping phone lines, and identifying individuals considered highly dangerous.
Police actions must be merciless, even if this means more controls and surveillance.
It is precisely to prevent the development of a collective security fear that we need to alter the equilibrium between security and freedom.
While the European Union lags behind the United States in terms of conventional weapons, its capacity to fight terrorism is probably higher.
For historical reasons, Europe benefits from a political maturity that has allowed it to avoid Bush’s Manichean worldview, which has merely reinforced, rather than undermined, the enemy’s fanaticism.
Moreover, for geographical reasons, Europe also benefits from a better knowledge of Arab and Muslim countries and extensive familiarity with their populations.
The EU can and must prevail in this fight and in the defense of the values that it cherishes.
It might even find, along the way, a new and urgently needed motivation to reinforce its fraying unity.
Europe’s Neo-Liberal Challenge
For over 20 years I have argued that Western Europe’s high unemployment rates are unsustainable.
At the end of the 1970’s, monetarists bet that only a transitory and modest increase in unemployment could rein in the creeping – and trotting – inflation of the industrial west, and that in retrospect the cost of returning to effective price stability would be judged worthwhile.
In Britain and the United States, this monetarist bet turned out well.
In Western Europe, it did not.
Over the past 25 years in Europe, unemployment rose as monetary policy was tightened and interest rates were raised to fight inflation.
But after inflation succumbed, unemployment did not fall – or not by much.
If unemployment was not stuck quite at Great Depression levels, it remained high enough to make long-term joblessness or the fear of long-term joblessness a defining experience.
Societies in which the official unemployment rate stands at 10% or more for generations are societies in which government economic management has failed.
So, for 20 years it has seemed to me that Western Europe’s underlying political equilibrium – corporatist bargaining and ample social insurance, on the one hand, and tight monetary policies, on the other – must crack.
Twin fears appear to be paralyzing European policymakers.
Europe’s central bankers fear that their political masters will order them to loosen monetary policy, that the structural reforms needed to free up aggregate supply will not be forthcoming, and that the result will be a return to the inflation of the 1970’s.
In short, they fear that all of the sacrifices made for price stability will have been in vain.
West European politicians, for their part, fear the opposite outcome.
They worry that even after undertaking structural reforms to reduce the attractiveness of unemployment benefits and increase the ability of workers to move to jobs and of firms to move to workers, central bankers will continue to insist on tight money.
In short, they fear that, with no expansion of output or employment, the net effect will simply be an increase in poverty.
Of course, these fears are accompanied by the hope that structural reforms and monetary expansion work in harmony, boosting employment and output without raising inflation by much.
But the reality is that steps toward looser monetary policies are non-existent – especially with the fledgling European Central Bank anxious to establish its inflation-fighting credibility – and that steps toward structural reforms are half-hearted, hesitant, and small.
For 20 years, I have been wrong: West European polities have remained stable despite the exclusion of a large proportion of citizens from meaningful participation in much of economic life.
West European economies have continued to grow – albeit not as rapidly as they might have – despite bearing the heavy burden of the unemployed 10% or more of the labor force.
Now, though, it looks like I may finally be right – or at least right to worry, if not to panic.
The French rejected the European Union constitution, primarily – or so it appears – because further European integration, it is feared, must bring in its wake the huge costs and disruptions of neo-liberalism.
It is one thing to back the “European project” when the idea is to bind Germany so tightly to France that never again will anybody think it worthwhile to wage a war over what language is spoken in Alsace-Lorraine.
It is another when the European project means that French workers face competition from Polish plumbers, Romanian farmers, and Turkish shop clerks.
In Germany, the electorate seems poised to eject Chancellor Gerhard Schroeder out of discontent with his tepid allegiance to the neo-liberal project.
The problem is that the electorate will then get four years of rule by a chancellor, Angela Merkel, whose commitment to the neo-liberal project is almost as strong as mine.
I think that Germany would be better off in a decade under more neo-liberal policies.
But this does not seem to be what the German electorate wants, and this makes the complexion of German politics four years from now incalculable.
Coupled with all this is northern European discontent with the central bankers, specifically with the ECB and the euro.
It is not that the end of European Monetary Union is on the agenda; it is merely that people have begun thinking about possible low-probability futures in which the end of EMU might be placed on the agenda.
That is enough to shake asset prices worldwide.
Western Europe’s accomplishments since World War II are among the most heartening and impressive success stories in world history.
Everyone should want today’s undivided Europe to build on these accomplishments, rather than for generations of high unemployment to jeopardize them.
But this will require a shift in the ECB’s attitude.
Europe needs a monetary policy that views aiding employment growth in northern Europe as more important than continental price stability.
There will, after all be inflation in southern and eastern Europe – there must be, for as regions develop and industrialize their terms of trade must improve, and under a monetary union regional inflation is how this can happen.
The ECB should not try to balance inflation in the south and east with deflation in the north in order to hit artificial continent-wide targets.
Europe\u0027s Never-Ending Constitution
On October 29, leaders of the European Union will gather in Rome to sign the Union's new Constitutional Treaty.
Praise for the document's uniqueness will undoubtedly be heard, and in this they won't be boasting, because the EU Constitution is unlike any other constitution ever written.
Most constitutions - including the American one - aspire to "freeze history," or to set up a lasting institutional order that will resist the winds of change.
Indeed, a constitution is by its nature an attempt to "tame" history, to make it follow the laws of man rather than its own logic, including unwelcome contingencies and the whims of fate.
By contrast, the EU Constitution is written with the unspoken understanding that the institutions it is setting up are transitory, that they are far from optimal, and that it would be desirable to change them right now if political realities allowed it.
But the realities of politics in today's Europe do not allow for the sort of document the signatories really wanted to draft, so the constitution that they did write is designed to establish a process of evolutionary change that will motivate further improvements along the way - improvement that will, it is hoped, one day obliterate the very arrangements today's EU Constitution is setting up.
Indeed, from the start, the architects of the Union's Constitutional Treaty never seriously expected that their draft would endure in the form in which they wrote it.
Instead, they saw themselves as following Europe's long established pattern of step-by-step integration.
This pattern began at the start of the 'European project' over half a century ago.
Spillover effects from the original Coal and Steel Community of the 1950's led to the creation of the European Economic Community, then to the European Community, and finally to the creation of the Union.
Each step led to progressively greater integration.
Even milestone documents such as the Single European Act and the Treaties of Maastricht, Amsterdam, and Nice, were never envisaged as achieving the kind of permanence (or even semi-permanence) that we normally associate with a constitution.
The same is true of developments like the Union's common foreign and security policy or Monetary Union, with its Euro and European Central Bank.
No sooner did one intergovernmental conference produce a "settlement" than the wheels started turning to prepare for a successor conference and a successor settlement.
This mechanism for the deliberately progressive construction of a unified polity out of nominally sovereign states is unprecedented in human history.
When nations embark on a program of ever closer integration, the end result is always likely to look unfinished if they put aside - on an ongoing basis - any resolution of the ultimate destination.
Indeed, the only thing that seemed clear from the start of the European integration process was that the states involved - along with whatever new partner states they might pick up along the way - would continue wheeling and dealing to construct their ever more integrated polity.
As a result, every set of treaty amendments was the product of the type of untidy political haggling typical of intergovernmental decision-making.
Indeed, even under the Constitutional Treaty, all states know that their partners have the express right to withdraw if they should ever become sufficiently disenchanted or come to look upon the EU as a bad bargain.
But will the Union's new Constitutional Treaty put an end to this pattern of evolutionary constitution building?
It may do so to some degree, but not nearly as much as if the treaty's architects had done more to separate constitutional matters, such as the Charter of Fundamental Rights and the competences of Union bodies and member states, from the stuff of everyday politics, like agricultural and fisheries policies or the technicalities of judicial cooperation in civil and criminal matters.
A great opportunity to segregate what is permanent and durable (i.e., "constitutional") about the Union from what is impermanent and changeable (i.e., "political") was missed.
With nothing set in concrete, Europe's constitutional process continue to rely not on any transcendent document, but on balancing political relations and calculations so that the whole thing does not fall apart.
This process will probably carry the cost of prolonging the emergence of a single European political loyalty (if one ever does emerge).
This will be considered tragic only for those who see a stable European federation as Europe's manifest destiny.
For the rest of us, notwithstanding the Union's unprecedented eastward enlargement, the schisms that erupted over the Iraq war, and the other frictions that are bound to result from Europe's flexible, evolutionary approach to constitution-making, there is also a lot of hope in this extended struggle for self-definition.
The recent collective sense across Europe of the urgency of being able to speak with one voice in external affairs may provide the next breeze, and enough glue, to keep the enterprise afloat.
Europe\u0027s New Dawn
Today in Rome, the heads of state and government of the EU's 25 member states will sign the Treaty establishing a Constitution for Europe.
We have come a long way since the six founding members formed the European Economic Community back in March 1957 - also in Rome.
After the Treaty is signed, it will go before the national parliaments for approval.
So it is crucially important to understand why the Treaty deserves to be ratified.
Simply put, it places the interests of Europe's citizens more than ever at the heart of the European Union's activities. It does so in four ways.
First, the Constitutional Treaty guarantees that the Union's institutions will respect the fundamental rights of everyone within the EU.
The "catalogue of fundamental rights" included in the Constitution is extensive, centering on respect for human dignity, freedom, and equality, and also on the principles of democracy and the rule of law.
By enshrining them in the Constitution, these fundamental rights and principles become legally binding, and citizens will have greater scope for bringing appeals to the Court of Justice.
In this respect, the EU leads the world in the protection of fundamental rights.
Second, the Treaty makes the EU more democratic and brings government closer to Europe's citizens.
The Union has no business interfering in matters that can be dealt with successfully at the local, regional, or national level.
The EU's objectives are precisely those that countries are unable to achieve on their own, for example, a stronger economy and greater security.
The Constitutional Treaty includes guarantees to ensure that the EU adheres to this principle strictly.
National parliaments will be able to call a time-out if Brussels makes proposals that seem to interfere unnecessarily.
Should one-third of national parliaments so wish, the European Commission will be required to reconsider a proposal.
In addition, the Constitutional Treaty gives citizens the right to ask the European Commission to take action on a specific point.
A citizens' initiative of this kind will require one million signatures, obtained in different countries.
At the same time, the European Parliament will have far greater powers.
It will have joint decision-making authority in many more areas, including the budget.
As a result, European citizens' elected representatives will be better able to scrutinize the work of the Commission.
Third, the Treaty makes the EU more open and more transparent.
Citizens want powers to be clearly defined and decisions to be taken openly in a way that they can understand.
Many people despair of finding their way through the maze of current EU treaties and their numerous amendments.
Outside Brussels, few people can explain the "pillar" structure and the distinction between the Union and the Community.
The Constitution consigns these complexities to history.
It also gives people far greater access to official information, extending their right of access to documents from all institutions, organs, and bodies.
Finally, the Treaty will make Europe more effective.
This is essential if the issues that affect people's lives are to be tackled successfully.
Two themes that people consider crucial are a stronger European economy (more jobs and more growth) and greater security (reducing cross-border crime).
European countries are heavily reliant on each other in addressing these issues.
People are counting on Europe to take action.
But, because EU decisions often have to be taken unanimously, this can be difficult.
Moreover, the means to work together effectively are often lacking.
The Treaty introduces major improvements here, enabling us to work together more effectively to achieve our aims.
In sum, the Constitutional Treaty firmly enshrines fundamental rights in law, and also makes the EU more democratic, more transparent, and more effective.
This makes it a good deal for everyone - for people who expect more cooperation and more concrete results from the Union, but also for those concerned about excessive interference by Europe in questions that can be better dealt with by the member states themselves.
Next year, we will celebrate 60 years of peace across a large part of Europe.
Never before in our history have we enjoyed such a long period of concord, a period that has seen an enormous growth in prosperity.
Democracy has taken root in almost every corner of Europe, and Europeans now have far greater freedom to live, work, and study where and how they wish.
These achievements are largely due to European cooperation.
The Constitutional Treaty is a reflection of our wish to continue in the same vein, to carry on working together.
We want to reaffirm our commitment to a life without war and injustice, and to the freedom that we hold so dear.
The Constitutional Treaty provides solid foundations for our shared future.
Peace, security, and prosperity are as vulnerable as they are valuable.
This Treaty makes them stronger.
And that makes us stronger.
The signing ceremony is therefore a message of hope.
It is a new beginning.
Europe’s New Mission in Africa
The EU’s military mission to ensure free and fair elections in the Democratic Republic of Congo (DRC) has shown what the European Security and Defense Policy (ESDP) can achieve in Africa.
A contingent of roughly 2,500 troops from 22 countries went to the DRC in mid-2003 to support United Nations troops, and provided a rapid reaction force that snuffed out disorder in Kinshasa before it could erupt into full-blown mayhem.
Three years later, Operation Artemis, a comparable EU mission in the eastern province of Ituri, again demonstrated Europe’s resolve to use its military capability to underpin a long-term peace process.
For some people, raw military might is the only true measure of power.
But the 16 EU military missions that have now been carried out in support of the ESDP have much more to commend them.
Large parts of Africa need support, and Europe can and must lend a hand.
Nor is the EU’s new style of political-military engagement in Africa a throwback to colonialism.
True, many African countries currently suffer from instability, state failure, regional strife, violent internal political competition, and other assorted ills, including, massacres and large-scale brutality, civil war, massive movements of refugees, economic disruption, and environmental damage.
Yet the big picture in Africa is not uniformly bleak.
Some African countries are comparatively stable and prosperous, and the Continent possesses a youthful population that will soon top one billion people, abundant mineral reserves, and an inherent dynamism.
At the same time, we in Europe cannot afford to dismiss Africa’s troubles as if they had no impact on our own societies.
The European project has been built on values that we deem to be universal, and we must make a very real effort to uphold them, not only as a moral imperative, but also because it is in our strategic interest.
The EU is by far the largest export market for African goods, and it also offers a home to large communities from almost every African country.
Likewise, a large number of European citizens and dependents are scattered throughout Africa.
In the early stages of a crisis, European intervention – through political and financial assistance, diplomatic intervention, and even military action – can prevent it from erupting into violence.
Moreover, when a crisis is winding down and there are openings for moderating influences, outside intervention can prove instrumental in enforcing peace and bringing warring factions to the negotiating table.
In countries that have experienced the horrors of civil war, the arrival of an effective military force from outside is generally welcomed, as was the case in both the 2003 and 2006 Congo operations.
Just by virtue of being there, the force shows the goodwill and commitment of the nations that sent it, and, by projecting a sense of law and order, it provides valuable leverage for honest brokers trying to mediate a peace deal.
Europe’s policy toward Africa may suffer shortcomings, but at least there is a policy, which is based on supporting African states and regional organizations like the African Union whenever practicable, necessary and, above all, requested.
The ESDP takes into account the larger European policy, and aims to provide assistance in planning, training, and logistical support to missions and forces created by African states or groups of states.
For example, the recent concept of “European reinforcement of African capabilities in prevention, crisis response and conflict resolution” (which is known as ‘Recamp’) openly calls for African ownership of this process.
Europe has never claimed to have the means of redressing all the strategic imbalances that exist in Africa – nor does it have any intention of doing so.
Yet, taken together, the EU countries possess a considerable array of assets, including the military capability needed to conduct decisive operations.
Yet their most valuable asset is cultural: soldiers who are willing and able to interact with the local population, who are cautious in their use of lethal force, and who are ready to accept the many shades of gray that exist between conflicting parties.
Nevertheless, European military capabilities are limited, requiring that European planners look for “minimal” options, with the drawback that smaller commitments generally require a long-term perspective.
The ESDP has not functioned long enough to establish a clear track record.
Yet our modest ongoing endeavors in Congo − a police advisory mission known as EUPOL and a defense reform mission called EUSEC − and in Sudan, where 60 Europeans are providing staff support to the African Union’s AMIS II mission in Darfur, offer grounds for hope.
The EU’s members must above all recognize that Africa’s ills have to be dealt with by Africans.
This is as much a matter of principle as of cold, strategic calculation, and it is here where the ESDP has much to offer: a long-term view, supported by a powerful economy with the assets needed to carry out humanitarian operations, conflict prevention, crisis management, and security support.
Foremost among the ESDP’s advantages is Europe’s cultural knowledge and understanding of Africa.
Today, former colonial powers have evolved significantly, just as have their former colonies.
On both shores of the Mediterranean, generations have passed and new connections have been formed.
It is the knowledge, understanding, and mutual respect that remain, and that are the cornerstones on which Europe’s policy for Africa must be built.
Europe\u0027s New Model Economy
CAMBRIDGE: The world's economists are scurrying about, trying to discover and explain the reasons for America's record boom.
Despite eight years of growth, no signs of accelerating inflation are to be found in the US.
Moreover, no one in America seems to care about traditional economics; its all the ‘new economy', internet or die.
Traditional US investors are at a loss to explain why a company earnings are suddenly a poor way to predict what stocks will be hot and which likely to fail.
Any company without a ".com" in its name or future seems doomed.
Establish a new economy link and you are bound to soar, stick to the "old economy" ways and your stock is trash.
Gurus of the old school claim that all this profitless prosperity cannot last; soon, if not very soon, the stock market will get back its senses.
When that happens, the glamour of America's long boom will vanish, the notion of the "new economy" will be as forgotten as last year's fashions.
There is now an entirely new angle to all this that is worth contemplating; namely that America is not so unique, that Europe is joining the new economy game.
Perhaps only Europe's stock markets are the only ones participating yet, but that is a start.
Why does Europe seem hesitant?
The Euro is weak; it has none of the glamour hoped for at its launch last year.
Besides, European governments remain defensive: no important labor market reforms nor initiatives aimed at deregulation are underway.
True, Germany is putting on the books an important tax deal that will allow large financial institutions to sell-off their vast share holdings in the corporate sector without punitive capital gains taxes.
But, at best, Europe's governments have only consented to allow rationalization in their banking industries and some cross border mergers.
Despite these small steps from government, new economy stocks are becoming the big game on Europe's stock markets.
This not only reflects the large number of mergers – within countries and cross border – of late, but increasingly reflects the new economy content of established businesses.
Siemens is carving out a choice filet in the form of its semiconductor business to be offered as one of the largest European IPOs on record.
Already it is oversubscribed and trading in the gray market at a triple the likely issue price.
Not to be left out, other companies are looking at their business holdings to ask what can be carved out and sold off.
Similarly, large financial institutions like Deutsche Bank, as they free up the huge pots of money now tied up in industrial holdings, are thinking of little else but participating in a US-style scene of venture capital, start-up financing and IPOs.
So far all of this has been a sideshow focused on Germany's ‘Neumarkt', but it is becoming a general focus of attention.
And not just in Germany, a country otherwise slow in freeing its economy.
The new economy enjoys at least equal hype in Switzerland, Italy, Spain and France.
Technology and the new economy are immensely popular across Europe because they provide a much better route to prosperity than waiting for government, unions, and bureaucrats to agree on restructuring the old economy.
Indeed, it won't take long before European governments embrace the new economy's quintessential wealth creation and even claim credit.
As European new economy stocks soar into the stratosphere, the rest of the world will eagerly join the game.
Equity capital will come from the US and from the Far East to claim a piece of the action, which may be a replay for anyone that missed the show in the US or just wants to see it once more.
Such robust stock market growth will drive up the Euro, increasing the returns of foreign investors over and above what they can get just from capital gains.
That is exactly what happened in Japan last year; corporate restructuring was just the first pass in the revival of stocks.
Then high technology and new economy became the buzz words in getting valuations higher than in the US.
Of course, the value of the Yen soared too.
This prospective stock market boom is heaven-sent for a European economy stuck in a rut.
Europe has formidable wealth, but that wealth is sleeping; it has formidable human capital, but it is shackled from lack of initiative, counterproductive regulation, bureaucracy, and by insufficient profit motivation – call it a lack of greed.
European leaders should embrace the liberation which will make their lives so much easier and Europe so much freer.
Europe's new economy is coming on.
The wealth it creates may shock governments enough to set the rest of Europe's economy free.
Europe’s New Watershed
COPENHAGEN: The people of Belgrade have presented Europe with another watershed moment.
Clear heads, clear sights, and – most important of all – clear public consent will be needed if Europe is to move forward.
In this regard, it is important to draw the right conclusions from Denmark’s “No” vote in its recent referendum on whether or not to join the euro.
The Danes are no more anti-European than anyone else.
Xenophobia is no more widespread in Denmark than in other European countries.
It was not just an unholy alliance between extreme left and extreme right, as some concluded, that defeated the euro.
Denmark’s “No” must be regarded as a warning to Europe’s leaders – they should be far more careful when starting an open dialogue with their electorates on basic European issues, such as Europe’s role in assuring Balkan peace.
Otherwise they might run into the same saddening surprise as their Danish colleagues, where 4 out of 5 members of Parliament voted “Yes” on a policy only supported by 47% of their constituents.
My assertion that Danes are not anti-Europeans finds support in a recent Eurobarometer-poll: Voters in all EU-countries were asked if they regard enlargement of the Union with the applicant countries in Eastern and Central Europe as “a priority”.
This was supported by close to 60% of Danes.
Indeed, Denmark topped the list. In France and Germany support was a meagre 20%.
Were other governments to follow Denmark’s example and call a referendum on the Euro, most would probably lose.
Let me recall the situation in 1992, when a small majority of Danish voters (less than 1%) rejected the Treaty of Maastricht.
President Mitterrand reacted by calling for a similar referendum in France in order to support the Treaty.
Surprising almost everybody in France, the referendum came as close to a “No”, as Denmark had been close to a “Yes.”
This time Danish voters once again rejected the advice of their political establishment.
What went wrong in Denmark might happen in other countries as well.
Danish political leaders failed to convince their constituencies that the Euro should be regarded as a positive element in the creation of a Europe whole and free.
Economic arguments failed to win them over – the decline of the Euro vis-a-vis the Dollar obviously playing an important psychological role in this.
But too little emphasis was put on the political arguments.
The Economic Monetary Union was created before the Berlin Wall came down in 1989.
As a new Europe began showing its face, the single currency was the bright creation of visionaries who saw the chance of making an even tighter relationship between European countries.
Germany’s political leaders – the Kohl-Genscher-generation who had experienced the war – understood that a united Germany would represent such a concentration of economic strength in Europe that it would inevitably disturb political balances within the EU.
So German leaders concluded that they had to share their country’s dominating position in monetary policies with others. As Hans Dietrich Genscher used to say in those days: “If you want to avoid a German Europe, you must create a European Germany.”
It was a sacrifice, and was met with much resentment in German financial circles. They doubted the willingness and/or ability of other European countries to fight inflation.
But the Germans did it. We all owe them for that.
The Euro has experienced a hard but promising start.
It should not come as a surprise that the Euro started to slide against the Dollar, considering the differences in economic performance between America and Europe.
And it should not come as a surprise that the markets have tested the willingness of European political leaders to keep quiet where monetary affairs are concerned.
Recent intervention and support from America and Japan showed that the Euro is here to stay and that the markets believe in its success.
The common currency is but one step in bringing together a peaceful Europe.
This is the key message, but it was not delivered successfully to the Danes.
This is why the result of the Danish referendum should be taken as a warning that great efforts must be made to convince Europe’s citizens of the Euro’s political importance – and of the importance of enlarging the Union.
Enlargement of the European Union eastward is the great challenge of the coming years.
Of course, living standards are not as high in Eastern Europe as in the west, but the hope – for both applicant countries and those in the Balkans – must be that ongoing democratization and economic reform will mean eventual membership in the EU.
Undoubtedly, expansion will provide the “older” democracies with new growth markets.
The benefits of this will more than compensate for the economic costs of enlargement.
But even stronger than this economic common-sense-argument is the political imperative: if we maintain a divided Europe, we will never reach the Europe of liberty and peace that was the original vision of the founding fathers that wrote The Treaty of Rome.
The new democracies of Eastern and Central Europe and the Baltic countries are eager to participate in the EU.
The brave crowds in Belgrade demonstrated the desire of Serbs to rejoin the family of Europe.
All want to take part in the growth and solidarity of a Europe where democracy and respect are the ruling civic concepts, not brute military power.
The Danes failed to link this with the role of the Euro.
The events in Belgrade have provided another moment for that too-long-postponed debate on the larger goals of European integration to take place.
Europe’s Next Move
Ever since France and the Netherlands rejected the European Union’s proposed Constitutional Treaty, EU leaders have been busy pointing fingers at each other, or blaming French and Dutch citizens for misunderstanding the question they had been asked.
But no amount of finger pointing can obscure the fact that, 50 years after the European Community’s creation, Europe badly needs a new political framework, if not a new project, to shore up its unity.
To be sure, French and Dutch citizens did not respond to the question that they were supposed to answer.
Their vote was a protest against globalization, a rejection of the contemporary world, with its distant and incomprehensible governing mechanisms.
Like the anti-globalization movement, the new anti-Europeanism can be regarded as a demand for a “different world” – in this case, an “alter-Europeanism.”
The two world wars and the Cold War shaped European integration as a project of peace, defense of the West’s fundamental values, and common economic prosperity.
But the collapse of communism in 1989, and the chance to overcome the Continent’s historical divisions, now required a redefinition of the European project.
The Treaties of Maastricht (1992) and Amsterdam (1997) created a new organizational structure for the EU and laid the foundations for political institutions equal to Europe’s economic power.
The Treaty of Nice (2000) was result of a rather poor compromise.
Declarations by German Chancellor Angela Merkel, whose country assumed the European Union’s rotating six-month presidency at the beginning of the year 2007, are unambiguous: the period of reflection, approved by the European Commission in 2005, has ended.
The German presidency will seek to implement the Constitutional Treaty resolutions, and the Berlin Declaration of March 25, 2007 – timed to mark the fiftieth anniversary of the Treaty of Rome – will offer a vision of the EU’s future.
The aim is to leave to Germany’s successors in the EU presidency – Slovenia, Portugal, and France – a roadmap for future reform.
In the past, when politicians debated the EU’s future, they spoke of a definitive formula for European integration, as defined in a famous lecture in 2000 by German Foreign Minister Joschka Fischer.
The accompanying intellectual debate, inaugurated by the philosophers Jürgen Habermas and Jacques Derrida, defined the nature of European identity, above all, against the foil of the United States, but also in terms of the challenges posed by globalization.
A similar debate addressing key questions concerning the EU’s future should be launched now.
First, how should relations between national and common European interests be defined?
At issue is not only the allocation of competencies, but also the more fundamental matter of when to rely on national governments’ agreement and when to turn to common EU institutions, namely the European Commission and the European Parliament.
The second question concerns the EU’s scope.
Europe is a peculiar combination of geography and history, but the EU’s boundaries – and thus the prospects for its further enlargement – are determined as much by its capacity to integrate candidate countries as by these countries’ own adaptive abilities.
After the accession of Bulgaria and Romania, the EU has 27 members, with Turkey and Croatia, but also the other Balkan states, as well as Ukraine and Georgia, waiting in line.
Is enlargement the only effective policy for stabilization and peace, or can the EU’s “neighborhood policy,” falling short of full admission for some of the countries knocking at the door, become an instrument for supporting development and stabilization, much as the Marshall Plan once was for Western Europe?
Third, instead of a futile theoretical debate over “liberal” versus “social” models of economic development, we need to compare the experiences of such countries as Great Britain, Sweden, Germany and France.
Are their experiences mutually exclusive, or is convergence possible?
Which policies in fact reduce unemployment?
Which measures can ensure the EU’s global competitiveness?
How can we narrow the existing differences in development and material welfare within Europe?
Fourth, the EU’s aspiration for a common foreign and security policy must be addressed.
The threats facing the world today are supranational, so counteracting them must be supranational, too.
But this is impossible without a clear European identity – and thus a common interest to be asserted and defended.
Only then will a common approach to pressing issues, such as energy supplies, be possible.
Such questions could be the topic of a consultative referendum held simultaneously in all member states.
Its results would allow the treaty to be presented in a simplified version for ratification by the nine member states that have still not done so.
The EU would then gain both a political dimension and clear rules of procedure.
The alternative is paralysis.
If the EU continues to be governed under the Treaty of Nice, there will be no room for further political integration or enlargement.
Nor do the current rules ensure the effective functioning of the Union’s institutions, as they exist now, while drafting a new constitutional treaty would probably require even more time than was needed for the current proposal.
In these circumstances, pragmatism should prevail.
Democracy may carry certain short-term costs, but they are always lower than the long-term damage that comes from a lack of popular participation.
Only a new European debate that includes both Europe’s citizens and its institutions can combat “alter-Europeanism” effectively.
The time may not be ripe for a true European constitution, but confronting, rather than evading, the fundamental issues that the EU faces could create a context for reviving the constitutional treaty and preparing the Union for the challenges of our time.
Europe’s Next Nightmare
CAMBRIDGE – As if the economic ramifications of a full-blown Greek default were not terrifying enough, the political consequences could be far worse.
A chaotic eurozone breakup would cause irreparable damage to the European integration project, the central pillar of Europe’s political stability since World War II.
It would destabilize not only the highly-indebted European periphery, but also core countries like France and Germany, which have been the architects of that project.
The nightmare scenario would also be a 1930’s-style victory for political extremism.
Fascism, Nazism, and communism were children of a backlash against globalization that had been building since the end of the nineteenth century, feeding on the anxieties of groups that felt disenfranchised and threatened by expanding market forces and cosmopolitan elites.
Free trade and the gold standard had required downplaying domestic priorities such as social reform, nation-building, and cultural reassertion.
Economic crisis and the failure of international cooperation undermined not only globalization, but also the elites that upheld the existing order.
As my Harvard colleague Jeff Frieden has written, this paved the path for two distinct forms of extremism.
Faced with the choice between equity and economic integration, communists chose radical social reform and economic self-sufficiency.
Faced with the choice between national assertion and globalism, fascists, Nazis, and nationalists chose nation-building.
Fortunately, fascism, communism, and other forms of dictatorships are passé today.
But similar tensions between economic integration and local politics have long been simmering.
Europe’s single market has taken shape much faster than Europe’s political community has; economic integration has leaped ahead of political integration.
The result is that mounting concerns about the erosion of economic security, social stability, and cultural identity could not be handled through mainstream political channels.
National political structures became too constrained to offer effective remedies, while European institutions still remain too weak to command allegiance.
It is the extreme right that has benefited most from the centrists’ failure.
In Finland, the heretofore unknown True Finn party capitalized on the resentment around eurozone bailouts to finish a close third in April’s general election.
In the Netherlands, Geert Wilders’ Party for Freedom wields enough power to play kingmaker; without its support, the minority liberal government would collapse.
In France, the National Front, which finished second in the 2002 presidential election, has been revitalized under Marine Le Pen.
Nor is the backlash confined to eurozone members.
Elsewhere in Scandinavia, the Sweden Democrats, a party with neo-Nazi roots, entered parliament last year with nearly 6% of the popular vote.
In Britain, one recent poll indicated that as many as two-thirds of Conservatives want Britain to leave the European Union.
Political movements of the extreme right have traditionally fed on anti-immigration sentiment.
But the Greek, Irish, Portuguese, and other bailouts, together with the euro’s troubles, have given them fresh ammunition.
Their Euro-skepticism certainly appears to be vindicated by events.
When Marine Le Pen was recently asked if she would unilaterally withdraw from the euro, she replied confidently: “When I am president, in a few months’ time, the eurozone probably won't exist.”
As in the 1930’s, the failure of international cooperation has compounded centrist politicians’ inability to respond adequately to their domestic constituents’ economic, social, and cultural demands.
The European project and the eurozone have set the terms of debate to such an extent that, with the eurozone in tatters, these elites’ legitimacy will receive an even more serious blow.
Europe’s centrist politicians have committed themselves to a strategy of “more Europe” that is too rapid to ease local anxieties, yet not rapid enough to create a real Europe-wide political community.
They have stuck for far too long to an intermediate path that is unstable and beset by tensions.
By holding on to a vision of Europe that has proven unviable, Europe’s centrist elites are endangering the idea of a unified Europe itself.
Economically, the least bad option is to ensure that the inevitable defaults and departures from the eurozone are carried out in as orderly and coordinated a fashion as possible.
Politically, too, a similar reality check is needed.
What the current crisis demands is an explicit reorientation away from external financial obligations and austerity to domestic preoccupations and aspirations.
Just as healthy domestic economies are the best guarantor of an open world economy, healthy domestic polities are the best guarantor of a stable international order.
The challenge is to develop a new political narrative emphasizing national interests and values without overtones of nativism and xenophobia.
If centrist elites do not prove themselves up to the task, those of the far right will gladly fill the vacuum, minus the moderation.
That is why outgoing Greek Prime Minister George Papandreou had the right idea with his aborted call for a referendum.
That move was a belated attempt to recognize the primacy of domestic politics, even if investors viewed it, in the words of a Financial Times editor, as “playing with fire.”
Scrapping the referendum simply postpones the day of reckoning and raises the ultimate costs to be paid by Greece’s new leadership.
Today, the question is no longer whether politics will become more populist and less internationalist; it is whether the consequences of that shift can be managed without turning ugly.
In Europe’s politics, as in its economics, it seems there are no good options – only less bad ones.
Europe’s Next Single Market
The current European Commission has made clear its commitment to reducing bureaucratic red tape by adopting an approach to regulation that keeps the number of laws we propose to an absolute minimum.
We are serious about this.
But our commitment to reducing the amount of legislation must be matched by an equal commitment to making what we have really count.
This is a shared responsibility, and member states have to play their part.
Until laws adopted in Brussels are enacted in national law and properly enforced, they remain paper tigers, entirely without teeth.
Most laws adopted in Brussels allow a grace period – generally about two years – for member states to act.
Member states set this deadline themselves, so it should be more than enough time.
After that, there should be no excuses.
Ten years ago, the gap between the number of single-market laws adopted in Brussels and those in force in the member states – known as the “transposition deficit” – stood at 6%.
Faced with this poor record, in 2001 the European Council committed itself to achieving a target of no more than 1.5% at any given time.
In the period since, we have had our ups and downs, but most member states have made a considerable effort to get their house in order.
For the very first time, the average deficit has fallen below 1.5%, standing at 1.2%.
What is more, all member states have made progress, with Denmark and Latvia – both five directives away from a perfect record – sharing first place.
This is an important achievement, but it should not be taken as a signal to relax.
On the contrary, we should ask whether the time has not come to set even more stringent targets.
And it is also time to take a more detailed look at where we continue to fall short.
When member states sign up to laws in Brussels, they accept an absolute obligation to be bound by them.
When they fail to live up to their commitments, they fail in their duty to the consumers and businesses that stand to benefit.
Nor should good overall results be permitted to mask problems in particular areas – public procurement, for example, which accounts for between 15% and 20% of Europe’s GDP.
Opening up markets and applying European rules properly produces savings for governments and delivers better value for taxpayers’ money.
I am, therefore, deeply disappointed that a package of measures adopted in this area in 2004 – aimed at simplifying and modernizing procedures – has not been transposed within the agreed deadline by several member states.
I warn those that have not yet acted that I will take whatever steps are necessary to make them act.
We cannot continue to commit ourselves to delivering a more competitive Europe while denying ourselves the means to achieve it.
But reducing the transposition deficit, while important, is not the end of the game.
Getting laws onto national statute books is one thing, ensuring they are properly applied and enforced is another.
And while the story is good on transposition, it is less rosy when it comes to how things are working on the ground.
Eight member states have managed to reduce the number of infringement cases taken against them by the Commission, but 17 have as many or more than they did this time last year.
I appreciate that close cooperation and partnership with member states are required, and I am ready to work with them in whatever way I can to help them to transpose and apply EU law correctly.
I prefer to avoid infringement cases, which are costly and time consuming.
But member states should know by now that I am not a soft touch.
My job is to ensure that the law is enforced without fear or favor, and that is what I will continue to do.
The single market is one of the European Union’s greatest achievements.
Removing barriers to the free movement of people, goods, services, and capital has brought greater prosperity to people across the Continent, hones our skills internally, and gives us weight internationally.
When we made the big push for the single market 20 years ago, there were just 12 member states. Now there are 27.
Europe is a very different place.
We have also undergone a communications and technological revolution that has touched every aspect of our lives.
While immense new opportunities have opened up for Europe's citizens and businesses, global competition for trade and investment has never been tougher.
Later this year, the Commission will bring forward a review of the single market to ensure that Europe is ready for what lies ahead.
This is an important opportunity for reform and renewal.
A modern single market should reflect modern needs, and we should concentrate our efforts where they can have most effect.
We need a set of priorities that responds to what people want and expect – jobs, growth, and security.
To cope with rapid change, we need to be flexible when it comes to regulation.
We need to accept that not everything can be run from the center, which means more trust and more partnership, but also more willingness to shoulder responsibility further down the line.
Indeed, if we are to succeed in creating a single market that is open to the world, builds on its internal strengths, and is at the cutting edge when it comes to shaping the international environment, our efforts at the EU level have to be matched by efforts at the national level.
I commend the member states for the efforts they have made, but we can all do better.
Europe’s Next Steps
Terrorism in London and the French and Dutch rejections of the European Union’s Constitutional Treaty have brought Euro-pessimism back into fashion.
The failure of the June EU summit and the bitter clashes between Tony Blair and Jacques Chirac have even inspired some to proclaim the beginning of the end for Europe.
They are wrong.
Europe is neither dead nor dying.
But recent events do spell the end of one version of European integration – the vision of an “ever closer union” producing a federal country that would become a new superpower.
That vision, however, was not in the cards even before the recent setbacks.
Once the original six core countries began to expand to include northern, southern, and, most recently, eastern European countries, the old federal vision was doomed.
The constitution was designed to make a Europe of 25 members more efficient, not produce a strong federal state.
Chirac’s rhetoric often includes references to a “multi-polar world” in which the United States is no longer the only superpower.
A recent Pew poll found that many Europeans have lost their attraction to the US and would like Europe to play a larger role in world politics.
But even if America has lost some of its attractive “soft power,” Europe’s post-industrial publics are not willing to pay the price – a doubling or tripling of defense spending as a share of GDP – to invest in the military power that would be required to balance its hard power.
Even so, the picture for Europe is not as bleak as pessimists assume.
Power in world politics today is distributed like a three-dimensional chess game that is played vertically as well as horizontally.
On the top board of military relations among states, the US is the world’s only superpower with global reach.
Europe or China are unlikely to overtake the Americans in the next two decades.
Here the world is uni-polar.
On the middle board of economic relations, the world is already multi-polar.
This is the board where Europe acts as a union, and other countries like Japan and China play significant roles.
The US cannot reach a trade agreement or settle anti-trust cases without the approval of the EU Commission.
Just recently, after the World Trade Organization ruled in favor of a European complaint, the US Congress had to rewrite billions of dollars of tax legislation.
This hardly fits the description of a uni-polar world.
The bottom board includes transnational relations that cross borders outside the control of governments – everything from drugs to infectious diseases to climate change to transnational terrorism.
On this board, power is distributed chaotically among non-state actors.
No government can control outcomes without the cooperation of others.
Here the US needs the help of Europeans, and it makes no sense to call this world uni-polar, either.
On this bottom board, the degree of close civilian cooperation is also important, which is affected by a country’s attractiveness or soft power.
Here European countries are well endowed, having overcome centuries of animosity and developing a large successful market.
One danger of the recent setbacks is a halt to EU enlargement.
At the Cold War’s end, East European countries did not try to form local alliances, as they did in the 1920’s, but looked toward Brussels as the magnet for their futures.
Similarly, countries like Turkey and Ukraine have adjusted their policies because they are attracted to Europe.
The loss of soft power implied by rejection of further enlargement would be a setback for Europe, the Balkans, and international stability.
What will the EU do next?
Some counsel retreating to the original six countries as an inner core that creates a federation within the larger union.
This approach appeals to those who think that the French and Dutch referendums were a rejection of the British liberal economic model.
But that diagnosis is suspect, because polls show that many who voted “non” were objecting to Chirac and/or to high rates of unemployment.
Turning backward and inward to the original six EU members is unlikely to meet such concerns, and augurs poorly for the liberalization of labor markets that Europe’s economies need to get moving.
A better path for the EU is to show that Europe still works. This means a compromise on a new budget that curtails some of the expenditure on the common agricultural policy and devotes funds to integrating the new members who joined last year.
It also means carrying on with the important role that Europe plays in foreign policy such as attracting Serbia to reach agreement on the future status of Kosovo, or continuing efforts to persuade Iran to give up its plans for the enrichment of uranium.
Equally important will be to press ahead with the Doha round of WTO trade talks, and to follow through with past commitments regarding aid to Africa.
Eventually, after the dust has settled, it may be possible to reach inter-governmental agreements to tidy up some of the institutional arrangements that would have been settled if the new constitution had been approved.
Such a practical, effective EU may not reach the lofty rhetorical aspirations beloved by politicians, but it will not be moribund.
On the contrary, such a Europe has a lot to gain for itself as well as to contribute to the rest of the world.
Europe’s Northern Lights
PARIS – “The Northern Lights” was the title of a major painting exhibition in Paris a few years ago, dedicated to Scandinavian masterpieces.
But “northern lights” may also correspond to what Europe, if not the entire West, needs nowadays: a political, economic, social, and ethical model.
Indeed, in becoming the first center-right leader in Sweden to win re-election in modern times, Prime Minister Fredrik Reinfeldt not only ended the centre-left’s electoral hegemony in his country, but revealed that the modern Scandinavian model of governance is relevant across Europe.
At a time when budget cuts are the order of the day, political power in Scandinavia is modest and generally honest.
Women play a major role in society and politics, and have for a long time.
Scandinavian capitalism has been traditionally more humane, and social injustice, though it exists, is much less destructive than in southern Europe, for example.
Moreover, immigrants are generally treated with a greater sense of respect for their dignity.
To be sure, many other Europeans recognize these “virtues.”
But their natural reaction is to say, “It’s not for us.” In order to practice Scandinavian virtues, many believe, you must come from a cold-weather country with a small, homogeneous population that accepts high taxes without grumbling.
One can behave in such a manner, many Europeans outside of Scandinavia say, only if one has been raised according to the Protestant ethic.
For Greeks, Italians, and many French, evading taxes is a kind of national pastime, which some even perceive as a moral duty.
Politics is a game, and power a drug that allows you to rise above ordinary citizens.
And the temptation to consider oneself the incarnation of the state, rather than its servant, is often irresistible among southern European politicians.
Of course, it is dangerous to idealize the Scandinavian model.
Scandinavian countries have their share of problems, such as Denmark’s significant xenophobic extreme right and Norway’s occasional bouts of provincial puritanism.
But the difference between these countries and their southern counterparts in terms of economic performance, social climate, and political culture are plainly visible.
The weak and sick men of Europe – from Greece to Spain – are to be found in the south, not the north.
The Asian challenge, particularly from China, should encourage us to reconsider the validity of the “Scandinavian model.”
For the Chinese example represents for Europeans a dual opportunity to moralize our capitalism and reinvent our democratic practices.
We cannot continue to preach to others values that we no longer practice with rigor.
To play the moral high ground, we must deserve it.
Moreover, we cannot simply wait for the Chinese “other” to collapse under the weight of its own contradictions.
Of course, these contradictions are real, but our main source of strength cannot be their weakness.
The Chinese model – inspired nowadays not by Lenin but by Singapore’s decades of disciplined economic success – has called into question the traditional linkage (made since Adam Smith) between capitalism and democracy.
In China, capitalism prospers without democracy.
In fact, a contemporary Chinese joke is very indicative of how the country perceives its role in today’s world. “In 1949, communism saved China; in 1979 capitalism saved China; and in 2009, China saved capitalism.”
In the aftermath of a major financial and economic crisis – which may yet be far from over – Chinese and Asians in general ask Europeans rather bluntly how we dare try to teach them lessons in financial capitalism.
After all, during the Asian financial crisis in 1998, “we” did not come to their aid; ten years later, “they” saved us.
China today is increasingly becoming for Europe what the United States was yesterday – a mirror reflecting our weaknesses and our strengths.
We are too few to become anything other than a “niche of excellence” in the character of our capitalism and our democratic practices, both of which are endangered above all by ourselves.
Nothing incites failure more than success.
Since the end of the Cold War, we Europeans have lost the incentive to demonstrate the superiority of our systems.
We have become complacent and lazy.
In this context, looking north is essential if we want to regain our universal attractiveness and defend our “democratic” comparative advantages.
There is more rigor and openness under the Northern Lights, and this is precisely the combination we need, with its mixture of modesty towards others and ambition towards ourselves.
Europe\u0027s Obama Challenge
PARIS – Will the year 2009 and the beginning of Barack Obama’s presidency mark the beginning of a new era in transatlantic relations, or will the old divisions linger, nurtured by the depth and gravity of the economic crisis?
Will the crisis lead to nationalistic and selfish attitudes on both sides of the Atlantic, stymieing the long-awaited rapprochement, if not a full reconciliation?
It is, of course, too early to tell.
Even if the left wing of the European left – like the most liberal of America’s Democrats – voices concerns that Obama has selected a far too centrist cabinet, a classical form of anti-Americanism is bound to recede in Europe. It is very unlikely that Europeans will take to the streets to denounce the “essence” of the United States – what America is as much as what America does – as they did during the Bush era and even during the Clinton years.
America’s image in Europe has changed profoundly since November 4, and the style of Obama’s diplomacy once he becomes president will probably confirm that change.
Yet in the realm of transatlantic relations, as is true globally, it is unwise to expect too much from a single man, whatever his exceptional qualities.
Fundamental problems remain, and new ones are likely to emerge.
First, whatever the brutal style of the new Russia under Vladimir Putin and Dmitri Medvedev, the Soviet Union no longer exists and no longer constitutes the common threat that was the “glue” of the Alliance until 1989.
Unless something very wrong happens, a new cold war is not about to start.
Second, there is a continuing structural imbalance between the way Europe looks at America, i.e., with passion and concern, and the way America looks at Europe, i.e., with mild interest giving way to growing indifference.
During the Cold War, Europe was America’s first line of defense.
In the current global age, Asia, the Middle East, and even maybe Africa will constitute greater priorities for the US.
Third, even if America under Obama praises and even practices multilateralism, Americans are far from ready to accept the reality of a multi-polar world.
They may write about it conceptually, but its meaning – a world in which their country is only “primus inter pares” – has not really penetrated the national psyche.
America’s internationalism remains grounded in the idea of American “exceptionalism” – a unique role and sense of mission.
It is an approach to the world with which Europeans have great difficulty coming to terms.
Even with Obama as president, they may be quick to denounce the combination of arrogance and hypocrisy that they see as linked to America’s view of her “special and unique mission.”
Fourth, if US diplomacy changes in style and content, will Europe be ready to face the challenge when America calls for help?
One early test is likely to be Afghanistan, when a smiling but firm Obama turns to Europe and says directly: “You have backed me in immense numbers.
I thank you for it.
But now I do not need your symbolic votes; I need your concrete support.
I need the further engagement of your troops in Afghanistan!”
I suspect that European leaders will not respond eagerly.
Most are convinced that there is no military solution in Afghanistan and they know that public opinion, especially in time of great economic hardship, has no appetite for such operations.
Europeans have a traditional tendency to denounce American military adventurism while relying on the US as their protector.
Fifth, to these “old” problems one must add a new one: the likely impact on transatlantic relations of the worst financial crisis in decades.
Protectionism in the classical sense of the term is unlikely.
We have learned the lessons of 1929.
But public subsidies to “national champions” may prove to be as destabilizing for the climate of international cooperation as tariff barriers were in the past.
The temptation to “appease” suffering populations with populist, selfish measures may grow as the crisis deepens.
Paradoxically, too, the “greening” of America – an America that discovers late but with passion its responsibility for the planet’s survival – may lead to a competitive transatlantic race for first prize in ecological good behavior.
And one could multiply the subjects of possible tensions, from nuclear disarmament – too much for the French, too little for many others – to the best ways to deal with Iran, Russia, and China.
The essential issue lies elsewhere.
For Europe, the election of Barack Obama is a crucial test.
Will Europe rise to the occasion and seize the opportunity created by America’s daring and exhilarating choice to prove to itself and to the world that the old continent can exist as a power and a united actor?
Europe’s Opportunity in Hollande
BRUSSELS – Rarely has an election resonated so widely across the European Union as the French presidential ballot has done.
Rarely has a leadership change in one EU member state created expectations of a real policy shift.
Remarkably, a new European demos and public sphere are emerging from the economic crisis.
Europeans are recognizing how interdependent they are.
One country’s failures can threaten the entire European economy, and can call into question the fruits of 60 years of integration.
Peace, solidarity, and prosperity are not irreversible achievements; only 27 countries working together can guarantee them.
François Hollande’s victory is a fresh chance for Europe.
It should spell the end of a policy oriented exclusively towards austerity, which has paralyzed our economies and divided the EU.&nbsp;The new French president’s commitment to a European growth policy has brought hope to citizens, and should not alarm anyone – certainly not the financial markets.
Hollande’s plans for a growth initiative fall on fertile ground, especially in the European Parliament, which has repeatedly called for such measures.
I am delighted that this message is increasingly echoed by the political mainstream, including most recently by European Central Bank President Mario Draghi.
Likewise, the European Commission is working on a “growth pact” to be discussed by EU leaders in June.
Indeed, Europe needs a master plan to avoid a tailspin of recession, growing unemployment, and weakening banking systems.
A new master plan for growth would not be about printing money.
Fiscal discipline remains essential, as are deep structural reforms.
The growth pact can be properly financed by new sources of revenue, such as a financial-transaction tax and joint project bonds for infrastructure investment, or by curbing tax evasion and tax fraud and eliminating tax havens, as well as by more efficient and intelligent use of structural funds.
What is to be done?
First, targeted investment should be given priority.
The European Investment Bank would be a good vehicle – in addition to new project bonds – to boost spending on major infrastructure projects (for example, in the energy sector).
The EIB could be given significantly more resources to boost its loan programs.
In the longer-term, we should revisit the idea of joint Eurobonds.
Channeling EU structural funds towards innovation is essential, given that spending on research and development is alarmingly low compared to our global partners.
Fundamental reform of the Common Agricultural Policy should not remain a taboo.
Indeed, the CAP is ensuring neither sustainable agriculture nor decent incomes for all farmers.
Undoubtedly, tough negotiations lie ahead on this front, including with Hollande.
Second, young people must be a top priority.
Our responsibility here is twofold: to put growth back on track, but also to respond immediately to the human tragedy that has hit our youth.
The eurozone’s unemployment rate, at 10.9%, is at its highest level since the euro was introduced, and young people everywhere, as the first to suffer the consequences of the crisis, are paying a disproportionally high price.
Youth unemployment in Spain, for example, is above 50%.
We cannot afford to sacrifice a generation, or, rather, risk creating a lost generation that could destroy Europe’s social fabric and stability.
We need an immediate contingency plan: invest to finance job training, improve educational opportunities, and, crucially, create incentives for employers to hire young people.
The ECB has been offering long-term loans to banks at a favorable rate.
This money should be loaned out to small and medium-size enterprises, which are the lifeblood of Europe’s economy.
The EU also needs common initiatives to replace piece-meal bilateral agreements on tax evasion and tax havens, which undermine the goal of a fair society.
Third, member states should not cut the EU budget indiscriminately during negotiations on the Union's long-term spending plan for 2014-2020.
If we are serious about a master plan for growth, we need to provide the necessary means.
The EU budget is an investment vehicle that boosts economic growth and creates jobs.
It finances crucial pan-EU transport and energy links.
It helps to foster innovation and boost research and development.
The EU budget leverages investment, allows for economies of scale, and cannot run a deficit.
The EU’s lack of solidarity, imagination, courage, unity, and vision in recent years has made Europe a symbol of division for some, if not many.
We cannot let this continue.
Hollande’s election offers us a valuable opportunity to meet the challenges that the EU faces.
Alternatively, we can allow growing poverty, fear, and anger to give rise to xenophobia and racism, and thus place at risk the EU’s greatest accomplishments.
But let us be optimistic.
It is not too late.
Europe can still emerge stronger from its current economic woes.&nbsp;The EU is changing direction at last, and Europe’s leaders will find an energetic partner in the European Parliament.
Europe\u0027s Overdue Reformation
War and its huge cost; the falling dollar; mounting trade and budget deficits; the chicanery that hollowed out companies like Enron and WorldCom; the bursting of the high-tech bubble: capitalism American-style is both under strain and under a cloud.
From left to right, many European intellectuals think that the capitalist game as played by the US is passé. An active search is on for new models.
Strong on rhetoric and fueled by a wave of anti-Americanism, that search is nonetheless thin on facts.
Stories of corporate malfeasance do, of course, abound in the US.
But it is facile to jump from individual corporate scandals to broad conclusions about the supposed rottenness of the American economy.
A close look at productivity growth (output per hour worked) in the US and Europe shows that US capitalism remains as vital than ever.
Having grown at an average annual rate of just 1.6% since the early 1970's, annual US productivity growth in the non-farm business sector has accelerated to an average of 2.6% in the seven years since 1995, with no sign of a slowdown.
In 2002, productivity grew by 4.8% - an extraordinary result, because productivity normally falls during economic slowdowns.
Now look at Europe.
Annual productivity growth actually slackened in the second half of the1990's, from 2.5% to just 1.3% today.
This productivity gap is often attributed to the "New Economy" that emerged in the late 1990's.
True, many new technologies were developed and first applied in the US.
But technology spreads rapidly: the same Windows or SAP programs are available in all countries, including Europe.
So there must be other differences.
Two candidates stand out: attitudes toward work and corporate governance.
Six OECD countries do better than America in terms of output per hour worked: Norway, Belgium, France, Ireland, the Netherlands, and Germany.
But the rankings change if you make output per capita (a better measure of a country's economic well-being) the standard: here the US comes first, and France and Germany drop, respectively, to 16th and 11th place.
The reason for examining output per person rather than output per hour worked is simple: what determines a nation's wealth is how much each person works, and how many people work.
This is where the US overtakes Europe: fewer people work in Europe than in the US, and those in Europe who do work don't work as much.
Annual hours worked in the US are about 1800, about 1500 in France, and 1400 in Germany.
One reason why Europeans work less is because they pay more taxes, and high taxes are necessary to support those who do not work - an obvious vicious circle.
But something deeper is at work.
Perhaps the Europeans are perfectly happy to work less and enjoy more free time, both in terms of having more vacations during their working age, and spending less time in the active labor force.
This is a legitimate choice, but once made, Europeans should stop looking for scapegoats for slow growth.
For the source of the problem is neither the European Central Bank, nor the Stability Pact.
Europe grows less because it works less - and it should not be surprised if a number of so-called "developing countries" soon catch up with Europe in terms of income per capita.
The availability of new technologies is a necessary, but by no means sufficient, condition to raise a country's standard of living, because there must also be companies that are able to make use of them.
In the early 20th century, it took over twenty years for the electrical engine to transform the textile industry.
New machines were available, but firms were not prepared to use them.
To do so required a change in work practices and in the way firms were run.
Unions opposed such change, but it also took time for bosses to understand that the way they ran their plants needed to change.
The new economy arrived after a decade of deep transformation within US companies.
During the 1980's, a wave of leveraged buyouts transformed US corporate culture, evidently making bosses more receptive to technological innovation.
Not so in Europe, where the interests of a company's employees and their unions often come before those of its shareholders.
Indeed, at one European newspaper, articles that arrived via e-mail were re-typed by typographers: the technology for transferring them electronically was available, but not the work rules to allow the paper to apply it.
Unions are not the only culprits.
Many European firms have complex ownership structures, with large shareholders whose interests often conflict with those of the company - hardly the best way to take sound business decisions.
This is particularly true in finance and banking.
Whatever the corporate horror stories in US banks, almost no European investment bank remains, and Germany is seriously considering a state-owned "bad bank" to bail out its all-powerful banking giants.
If Europe wants to work less, it must be extraordinarily productive when it does work if it is to keep up with the hard-working Americans.
That is why Europeans should hope that the wave of corporate restructuring and reformation, which many thought would follow inevitably in the wake of the creation of the single market, begins to crest across the Continent and change the way businesses are run.
Europe\u0027s Pain, America\u0027s Gain
Is economic recovery around the corner, as promised by the leaders of the G8, the group of the world's richest countries that held their annual meeting in Evian, France last week?
Many economic stars are indeed aligned for recovery, both in the US and in Europe.
Oil prices are coming down from their highs during the Iraq war and, under plausible scenarios, may be heading for a greater fall.
Investors all over the world are emerging from their Brazil-Enron-Iraq jitters.
The risk premium is falling, pushing stock prices higher and lowering yields on long-term bonds.
Moreover, the overhang of excess capital that accumulated during the crazy high-tech boom of the 1990's has now been mostly worked out.
Investment rates have been low for three years in a row.
Now only a few sectors suffer from excess capital accumulation.
Firms are ready to invest again.
All good news.
But there, alas, the similarities between Europe and America end.
Monetary and fiscal policy are working at full throttle in the US, but are muzzled in Europe.
In the US, Federal Reserve Chairman Alan Greenspan did his job in 2001 and 2002, aggressively cutting interest rates.
When monetary policy could not do much more, the Bush administration took up the charge--and with relish.
The US budget has gone from a surplus of 1.4% of GDP in 2000 to a forecast deficit of 4.6% in 2003, a 6% swing--of which about 5% is due to changes in policy rather than the weak economy.
This may be fiscally irresponsible (together with the tax cuts put in place for the future, it surely is irresponsible), but in the short run, it provides an enormous boost to demand.
In Europe, however, the European Central Bank (ECB) has been far more careful.
True, as a new institution it has had to establish its credibility, but the result is a smaller, slower decrease in interest rates.
Fiscal policy in Europe is constrained by the Stability and Growth Pact.
The budget for the Euro area has gone from a surplus of 0.1% in 2000 to a forecast deficit of 2.4% for 2003, nearly all of it due to the weak economy, not to changes in fiscal policy.
Governments tinker at the margin, cheating a bit, and get reprimanded by the European Commission in Brussels.
In the best of scenarios, what will happen is likely to fall short of the major short-run fiscal expansion Europe needs.
This would require Europe's governments to increase their deficits in the short run, while improving the long run outlook through serious pension reform.
Some governments--most notably France and Germany--are trying to do the second.
They should feel freer to do the first.
America and Europe are not only following divergent economic policies, but their currencies are also diverging because the world is going through a major exchange-rate realignment.
The dollar is depreciating, while the Euro is appreciating mightily.
There is a deep and sad irony to the current depreciation of the dollar.
The depreciation is the price America must pay for past sins--i.e., a huge current account deficit that foreign investors are no longer willing to finance, at least not at the size of 4% or more of US GDP.
The irony is that this dollar adjustment is unambiguously good news for America, and unambiguously bad news for Europe:
For the US, the dollar's fall means a boost to exports, and a further increase in demand, a further push for recovery.
It also means a bit more inflation, but in today's world, a bit more inflation is good, not bad.
For Europe, the rising Euro means lower competitiveness and further economic contraction.
The effects are far from negligible: The best estimates are that a 10% appreciation of the Euro will bring a decrease in demand and output of 0.6% of GDP in the Euro area.
So far, the Euro's appreciation is close to 30% from the lows of two years ago, and there is every reason to believe that even more strengthening is to come.
The Euro is the only currency against which the dollar can depreciate.
(The last thing Japan needs is an appreciation of the yen.)
It will take more than what we have seen so far to return the US current account deficit to reasonable proportions.
With contraction and Euro appreciation comes the specter of falling prices, with which Europe is already flirting.
The Euro's appreciation may well be the tipping factor that triggers deflation.
As the now ten-year-old Japanese slump tells us, once deflation and contraction have established themselves, standard policies stop working.
Europe does not want to find itself in this position.
So, the G8 leaders are half right.
Between falling oil prices, aggressive fiscal and monetary policies, and the dollar's depreciation, it is hard to see what stands in the way of a strong recovery in the US.
But this does not translate into recovery in Europe.
In Europe, monetary caution, self-imposed fiscal constraints, and the Euro's appreciation all lead to clear dangers: deflation and a prolonged slump.
This is not preordained; many fundamentals in Europe are right, and a simple change in mood may spur recovery.
But this is the time for strong contingency plans.
Sadly, I do not see them being prepared.
Europe’s Paradoxical Parliament
What do members of the European Parliament (MEPs) actually do?
Most of the 375 million or so people eligible to vote in the European elections on June 4-7 probably have only a hazy idea, or none at all, which explains why voter turnout throughout the European Union is likely to be disastrously low.
Thirty years ago, when the first elections to the parliament were held, almost two-thirds of the electorate voted, but over the years, participation has dropped steadily.
This year it may be 30%.
Europe’s politicians are by and large proud of the EU and the way it has both grown and deepened.
But it is also the EU’s growing complexity that is at the root of voters’ waning enthusiasm, so their indifference is a matter for serious concern.
The European elections are themselves curious and unsatisfactory; there are no obvious EU-wide issues that people can vote for or against, and, with the average MEP’s constituency numbering well over half a million people, the vote is not a test of personal popularity, either.
In most parts of Europe, the elections will be an opportunity for protest votes on national issues.
Paradoxically, though, great deal hangs on the elections’ outcome.
The number of seats won by the socialists and centre-right parties is likely to influence the make-up of the next European Commission – and thus the EU’s political agenda until 2014.
But you wouldn’t know this from the low level of media interest.
Most journalists, like national electorates, have little understanding of the significant shift in Europe’s political decision-making over the last 20 years.
They hang on to the outdated notion that their national parliaments make all key decisions, when in reality some four-fifths of the policies that determine Europe’s future are taken in Brussels and then rubber-stamped by national parliamentarians.
A glance at any EU member state’s parliamentary calendar shows that lawmaking there is largely confined to domestic issues. The specialist MEPs, on the other hand, use their expertise and their steadily increasing powers to exert a good deal of influence on EU legislation.
But this does not mean that the European Parliament is a “real” parliament.
It can’t raise taxes, declare war, or sack a government (even though in theory it can dismiss all the members of the European Commission en masse, the so-called “nuclear option” that is unlikely ever to be used).
More to the point, perhaps, the European Parliament doesn’t really work on the same basis of left-right politics as national parliaments do; it deals in practicalities more than ideologies.
For all that, the European Parliament’s importance goes far beyond its members’ technical expertise on complex issues, or its usefulness as a democratic fig leaf for an EU decision-making process that is dominated by inter-governmental horse-trading.
The parliament has been able to claw greater power for itself because it is the only mechanism Europe has for questioning and challenging EU policy proposals, and ironing out the sometimes clumsy and high-handed diktats of Brussels’ officialdom.
Unfortunately, however, the European Parliament is fairly inept at selling itself to public opinion.
A recent Gallup poll showed that 36% of people questioned in all 27 EU countries no longer trust the parliament, with the only consolation being that even more, 37%, now mistrust the European Commission.
Of those who said they wouldn’t be voting in this year’s European elections, 64% cited “lack of information” as the reason, with 62% complaining that their vote “wouldn’t change anything.”
This feeling of ignorance coupled with powerlessness is not entirely the European Parliament’s fault.
The combination of high politics and grinding technical detail makes EU policymaking a much less interesting spectacle than national politics, and of course there’s the added problem that so many of the players are unknown foreigners.
But, even when the parliament does make an effort to connect with voters, the ponderous bureaucratic culture of its permanent officials tends to spoil things.
Last year, the parliament launched a lamentably amateurish Web-TV broadcasting service whose large budget was spent not on good programming but on doing everything in all the EU’s official languages.
So what is to be done?
Many of the 736 EU parliamentarians are unsung heroes who risk being seen more and more as a problem rather than a solution to the EU’s ills.
Rather than tinkering, perhaps the EU should boldly create an American-style bicameral system by turning the parliament into a House of Representatives and electing a Senate to replace the Council of Ministers, with two senators per member state.
But that is probably far too revolutionary for an EU that took 50 years to fashion today’s unsatisfactorily hybrid decision-making structures.
Europe’s Power to Lead
CAMBRIDGE &#45;&#45; At this year’s World Economic Forum in Davos, the buzz was about Asia’s growing power.
One Asian analyst argued that by 2050, there will be three world powers: the United States, China, and India.
He did not mention Europe, but underestimating Europe’s power is a mistake.
Yes, Europe currently punches below its weight.
It is fragmented, peaceful, and normative in a world of hard power, but part of the world is not about military power.
The use of force among advanced industrial democracies is virtually unthinkable.
In their relations with each other , such countries are all from Venus, to paraphrase Robert Kagan, and here Europe’s focus on law and institutions is an asset.
As for other parts of the world, a recent Pew poll found that many Europeans would like Europe to play a larger role, but to balance American military power would require a doubling or tripling of defense spending, and few Europeans are interested in such an increase.
Nevertheless, a smart strategy for Europe will require greater investments in hard power.
The picture for Europe, however, is not as bleak as pessimists assume.
Power is the ability to get the outcomes one wants, and the resources that produce such behavior depend upon the context.
In functional terms, power is distributed like a three-dimensional chess game.
On the top board are military relations among states, with the US the world’s only superpower with global reach.
Here the world is uni-polar.
On the middle board are economic relations, where the world is already multi-polar.
Here, Europe acts as a union, and other countries like Japan and China play big roles.
The US cannot reach a trade agreement or settle anti-trust cases without the approval of the EU.
Or, to take another example, Europe was able to lead the drive to remove Paul Wolfowitz from the World Bank.
The bottom chessboard includes transnational relations outside the control of governments – everything from drugs to infectious diseases to climate change to terrorism.
On this board, power is chaotically distributed among non-state actors, and it makes no sense to call this world either uni-polar or multipolar.
Here, close civilian cooperation is important, for which Europe is well endowed.
European countries’ success in overcoming centuries of animosity, and the development of a large internal market, has given them a great deal of soft power.
At the Cold War’s end, East European countries did not try to form local alliances, as they did in the 1920’s, but looked toward Brussels to secure their future.
Similarly, countries like Turkey and Ukraine have adjusted their policies in response to their attraction to Europe.
Recently, the US National Intelligence Council published four widely different scenarios for the world in 2020: Davos World, in which economic globalization continues, but with a more Asian face;
New Caliphate, where Islamic religious identity challenges the dominance of western norms; and Cycle of Fear, in which non-state forces create shocks to security that produce Orwellian societies. Like any exercises in futurology, such scenarios have their limits, but they help us ask which three or four major political factors will help shape the outcome.
The first is the rise of Asia. The big question will be China and its internal evolution.
China has lifted 400 million people out of poverty since 1990, but another 400 million still live on less than $2 per day.
Unlike India, China has not solved the problem of political participation.
If China replaces its eroded communism with nationalism or ensure social cohesion, the result could be a more aggressive foreign policy and unwillingness to deal with issues like climate change.
Or it may deal with its problems and become a “responsible stakeholder” in world politics.
Europe can contribute significantly to China’s integration into global norms and institutions.
In general, Europe and the US have more to fear from a weak China than they do from a wealthy China.
Political Islam and how it develops will be the second factor.
The struggle against extreme Islamist terrorism is not a “clash of civilizations,” but a civil war within Islam.
A radical minority is using violence to impose a simplified and ideological version on a mainstream with more diverse views.
While the largest number of Muslims live in Asia, they are influenced by the heart of this struggle in the Middle East, an area that has lagged behind the rest of the world in globalization, openness, institutions, and democratization.
Here Europe’s economic might and soft power have a lot to contribute.
More open trade, economic growth, education, development of civil society institutions, and gradual increases in political participation might help strengthen the mainstream over time, as could the way Muslims are treated in Europe and the US.
Equally important will be whether Western policies toward the Middle East satisfy mainstream Muslims or reinforce the radicals’ narrative of a war against Islam.
The third major determinant of which scenario prevails will be American power and how it is used.
The US will remain the most powerful country in 2020, but, paradoxically, the strongest state since the days of Rome will be unable to protect its citizens acting alone.
American military might is not adequate to deal with threats such as global pandemics, climate change, terrorism, and international crime.
These issues require cooperation in the provision of global public goods and the soft power of attracting support.
No part of the world shares more values or has a greater capacity to influence American attitudes and power than does Europe.
That suggests that the fourth political determinant of the future will be the evolution of European policies and power.
Europe\u0027s Public and the Anti-Terrorism War
BERLIN: Chancellor Schröder's government coalition barely scraped through Germany's Bundestag to secure the support it needed to dispatch German soldiers to help in the campaign against international terrorism.
No doubt special circumstances accompanied that vote, but the effort which the country's most respected and powerful politician expended in order to gain the backing of Germany's parliament (as well as his coalition partners, the Greens) should be a warning to other Western governments not to leave their publics behind as they engage in the tough, multi-year campaign against the planners and executors of international terrorism.
In the first weeks after the attacks on the World Trade Center and the Pentagon governments all over Europe were certain of public support.
That changed when the US bombing against the Taliban began; doubts over the wisdom of the US campaign combined with resentment at seeing a super-modern superpower pound away at a medieval country devastated by decades of war.
These doubts were moderated somewhat as America's strategy began to produce results.
But they are certain to resurface and grow as memories of September 11 th attacks fade and the effort to stamp out terrorism encounters new difficulties, setbacks and dilemmas and possibly requires risky military operations elsewhere.
Maintaining public support within the US is no problem for America's leadership.
Americans are both shocked and angered by the attack on their cherished invulnerability and are determined to pursue the perpetrators with every means at their disposal.
President Bush has made this his top priority; for as long as he is in the White House, he will not waver in this pursuit and neither will his people.
But to retain popular backing will be a problem in Western Europe, America's closest allies.
Should they cease to support the US, the unique transatlantic partnership could disintegrate.
A wounded America appreciated the spontaneous demonstrations of sympathy and solidarity that poured across the Atlantic after September 11 th .
But this will turn into furious rejection if Europe were to sow doubt over what Americans now regard as the most dangerous - if not the only challenge - to the common security of the Atlantic community.
European governments know this.
After all, not only moral outrage but calculated self-interest led them on September 12 th to invoke, for the first time, Article V of the NATO Treaty.
If they reiterate their expressions of ``unconditional solidarity'' and make their own armed forces available they do so not only to gain some degree of influence on American strategy beyond Afghanistan, but also to signal their determination to stand by the US in the most unequivocal manner possible.
Yet this policy demands a commitment for the long haul.
Unless it is explained and seen as an expression of national interest, it will strain domestic political support, even to the degree of endangering government coalitions like that of Mr. Schröder.
Of all Europe's governments, only that of Prime Minister Tony Blair in Britain has developed a strategy that successfully combines solidarity for the US with retaining public support at home.
Admittedly, going to war is much less an anathema for Britons than for continental Europeans. Yet Blair did not rely on this alone.
From the start, he declared that the attacks on New York were directly aimed at his country.
When he called on British forces it was thus for the common defense, not just to serve the US.
He insisted on being consulted by the Bush administration on US plans, and when some in Washington thought aloud about taking on Iraq after Afghanistan, the Prime Minister registered a clear veto.
All this signaled to allies abroad and citizens at home that Britain's cooperation should not be taken for granted, that it requires domestic approval.
By contrast, continental leaders have done little to dispel the impression that they are acting in response to a US request and for a US cause.
But their people rightly demand that government should not just serve the interests of others.
If they wish to stay the course in the struggle against international terrorism, European leaders must take a leaf or two from Blair's book.
For one, they have to emphasize that this is their own struggle, not just America's.
For another, they will have to make their own, distinct contribution.
They cannot simply wait for America to move, nor can they always seek to placate Washington's preferences.
In short, they will have to make their own efforts to sustain the common effort.
What this distinct contribution could be is not difficult to define.
After all, only the ingrained habit of playing second fiddle to the US prevents EU members from clearly and loudly distancing themselves from Israel's repressive interferences on the West Bank and Gaza, even though such a stance would help strengthen the commitment of Arab states to the coalition against terrorism as well as provide a useful shove to American diplomacy.
The same applies to a European effort to rebuild relations with Iran, or a joint initiative to invest in helping Russia to destroy its huge arsenal of antiquated nuclear and chemical munitions so as to avoid having these fall into the wrong hands.
There is little except national inertia, complacency and opportunism that stands in the way of beginning to formulate and implement a distinct EU policy to bolster the coalition against terrorism.
The present crisis exposes this pattern of European behavior as what it has always been - the luxury of looking backwards.
Calls for pooling European efforts have been many, based on the conviction that only in this way can European governments play a more effective international role.
All too often, however, these have been ignored or dismissed as impractical by those in power.
They deserve a better hearing now that retaining the solidarity of their citizens has become an essential condition for European governments to maintain solidarity with America for the long struggle against international terrorism that lies ahead.
Europe’s Racist Schools
I am what many people call a “Gypsy.” I prefer the term “Roma.”
There are more than 10 million of us across Europe.
The vast majority of us live in Third World conditions – denied access to adequate housing, health care, and education.
I was born in a provincial town in Bulgaria in the late 1960’s, when, like the rest of Eastern Europe, the country was under Communist rule.
The Party recognized no ethnic minorities – we were all, formally, equal.
Indeed, we were so equal that the government gave many of us new, Bulgarian names.
One day, when I was a teenager named Husni, my name became Ivan.
But we were not equal.
Roma lived in segregated ghettos.
We were second-class citizens.
One of my clearest early childhood memories is of my father telling my younger sister and me, “Education is the key to success.”
He said, “If you want to be accepted as equals by Gadje [non-Roma], you must be better educated than they are.
This is not easy.
But if you succeed, this will change not only your life but also the lives of many of your people.”
Education is the only way out of the ghetto for many Roma.
But in societies like Bulgaria, where racism is rampant, Roma have to fight for equal schooling.
Most of the children I grew up with received an inferior education that did not train them for university or skilled jobs.
They are either unemployed or working as unskilled laborers in Bulgaria or in the black market abroad.
By contrast, in large part because of my father, I managed to complete high school, then medical school, and become a general practitioner.
By the early 1990’s, Bulgaria had changed.
The transition to democracy promised freedom and prosperity to all who had suffered in communism’s stranglehold.
Yet the Roma found themselves losers of the democratic transformation.
Their situation, always tenuous, dramatically worsened.
Their poor schooling left them ill equipped for the new economy.
The communist dogma was shattered, but so was the pretense that we were all equals in a homogenous society.
The government allowed employment discrimination to go unchecked, leaving the majority of Roma without jobs, and communities were plunged deeper into poverty.
I obtained a law degree to help advocate for members of my community.
Today, I live and work in Brussels, where I lead an organization that advises the European Union and national governments on Roma-related policies.
I support my family and have achieved fulfillment in my career.
But I am an exception.
It is because of the importance of education in making me an exception that I am so deeply troubled by a recent decision of the European Court of Human Rights.
The case was brought by 18 Roma children from the city of Ostrava in the Czech Republic who had been assigned to special remedial schools for the “mentally deficient.”
In Central and Eastern Europe, Roma are often unfairly placed in these special schools, which provide sub-par education that all but guarantees a life of poverty and manual labor.
I served as one of the lawyers for the children.
The evidence showed that more than half of the Roma children in Ostrava were placed in special schools, and that more than half of the population of special schools was Roma.
All told, Roma children in Ostrava are more than 27 times more likely than non-Roma to be placed in such schools.
This is not a unique situation. Far from it.
The same disproportionate patterns of school assignment exist throughout much of Central and Eastern Europe.
As a United Nations expert body has declared, this is racial segregation, plain and simple.
But the Court was unmoved.
Its judgment recognized that the claimants raised “a number of serious arguments,” and that the education system in Ostrava perpetuated racial segregation.
But the Court ruled that, absent a showing of actual racial bias in the minds of testers and administrators – virtually impossible to prove – the pervasive reality of racial disadvantage was not unlawful.
In what could have been a landmark victory that would open the doors of opportunity for Europe’s Roma, the Strasbourg Court instead chose to keep Roma locked out of a decent education.
Its decision reverberates across the Continent – not just for the Roma, but for all who have a stake in promoting the values of tolerance and equality in a democratic Europe.
Anyone who believes in the rights of all children to quality education should be troubled by a decision so myopic.
For decades, racial segregation in European schools has stigmatized generations of Roma children as stupid and disabled.
The Court’s decision allows this brutal and systematic violation of fundamental rights to continue.
The Roma, and Europe, have suffered a great defeat.
Europe’s Russia Problem
NEW YORK – How should Europe react to the rise of a hostile Russia on its eastern flank?
Different countries have reacted differently, influenced by their historical experience and their economic interests.
Yet it is essential for the European Union to develop a unified policy, reconciling these divergent national interests and attitudes.
Europe cannot afford not to resist Russia’s geopolitical aggression, and it needs to be unified to have any chance of success.
Yet, the unified European policy must not be purely geopolitical, because if it were, the common interest would not be strong enough to override national interests.
Russia could divide and conquer as it is doing already.
In purely geopolitical terms, Russia holds the stronger hand.
Europe’s superiority lies in its values and principles as an open, democratic, peaceful, prosperous, and law-abiding society.
These values hold great attraction for the people in the former Soviet Union—and that includes the leaders as well as the masses, in spite of the fact that the West did not back up its values and principles with deeds in the past.
As a result, admiration of and aspiration to European values is mixed with disillusionment and resentment, and the Putin regime has been able to gather enthusiastic support by baiting the West and scoring well in the geopolitical game.
Nevertheless, Russia remains susceptible to Europe’s allure.
Historically, Russia always aspired to be part of Europe, and the Putin regime recognizes that it would pay a big price if it sought to return to the Soviet Union’s isolation.
But Russia’s strengthened geopolitical position vis-à-vis Europe obscures grave weaknesses in other areas.
Its authoritarian political system stifles private enterprise and innovation.
The rule of law is absent, and much more effort is spent on extortion and rent collection than production.
Consequently, economic progress has not kept pace with the accumulation of oil revenues.
These deficiencies became accentuated by the decline in the price of oil.
Another great weakness is demography.
Russia has immense territory but only 140 million people.
A growing portion of the population consists of Muslim minorities with higher birthrates than ethnic Russians.
Overall population is expected to drop by 10 million in a decade.
Resource rich but sparsely populated Siberia is bordered by resource-deficient but teeming and rising China.
If the Central Asian republics are cut off from the West, they are liable to turn to China in order to avoid becoming totally dependent on Russia.
In the long run, Putin’s baiting of the West may turn out to be as self-defeating as Saakashvili’s baiting of Russia.
But in the short run there is a real danger that Russia will pursue its age-old aspiration of becoming part of Europe by seeking to become the dominant entity.
In these circumstances, Europe needs to pursue a two-pronged strategy.
On the one hand, it must protect itself against the geopolitical threat posed by a newly assertive and adventurous Russia.
On the other, it must seek to replace the rule of force with the rule of law, and geopolitics with the pursuit of democracy, open society, and international cooperation.
The European Union could not possibly forge a common policy without such a two-pronged approach.
There would be too many freeloaders and defectors in a purely geopolitical game, but in a two-pronged approach each member state could find its proper place.
The key to neutralizing the geopolitical advantage that Russia enjoys is to establish a unified energy policy with a Europe-wide regulatory authority which has precedence over national regulators and a Europe-wide distribution network.
This would deprive Russia of its ability to play one country against another, because a concession granted to one national distributor would immediately become available to customers in all the other countries.
Energy companies are beginning to realize this and becoming less resistant to a common European energy policy.
That would also serve another shared objective, namely helping to bring climate change under control.
The other prong, promoting the rule of law, international cooperation, and the principles of open society has to be pursued indirectly, by reforming the international financial system and by paying special attention to Russia’s near-abroad.
Ukraine, in particular, is in a perilous state, but financing public works that would create jobs in eastern Ukraine, where the steel industry is in distress, could make a major difference both politically and economically.
Georgia must also be helped to recover from the damage inflicted by the Russian invasion, but help should be contingent on the Saakashvili regime observing the principles of open society.
Russia cannot be helped directly because of its excessive reliance on arbitrary state power, but when Russia sees progress in international cooperation, particularly with China, it will not want to be left out in the cold.
Strengthening and supporting the former Soviet republics would serve both prongs of a unified EU policy towards Russia.
It would be against open society values if Russia were allowed to turn these countries into satellites just because it has superior military force.
And Europe has a geopolitical interest in keeping them open as sources of energy supply.
Europe’s Russia Question
BRUSSELS – Friend or foe, or something uneasily in-between?
That’s the question Europe is asking about Russia, and Russia about a newly aggressive Europe.
President Vladimir Putin’s choice of Dmitri Medvedev, Chairman of Gazprom, the gas company with an emerging stranglehold on European energy supplies, only throws this question into an even starker light.
Relations between Europe and Russia have been deteriorating for several years, but once manageable economic issues, including energy, are now being aggravated by much more volatile political differences.
The risk is a climate of undisguised hostility, with potentially greater costs than during the nadir of the Cold War.
The most obvious and imminent flashpoint is Kosovo.
The likelihood is that early next year most of the European Union’s member nations will recognize the Albanian-majority enclave on Serbia’s southern edge as an independent state.
This is certain to enflame not just Serbia, but also the Kremlin.
Then there are rising tensions over plans by the United States to based a missile defense system in Poland and the Czech Republic, as well as the growing likelihood that further NATO enlargement will include Georgia, the increasingly prosperous neighbor with which Russia has fractious relations.
Russia continues to fan secessionist flames there by encouraging the independence of Abkhazia and South Ossetia.
Tempers are rising in both Russia and Europe, yet, paradoxically, when it comes to the major challenges they face, their interests are largely identical.
Both are threatened by Islamic extremism and growing unrest.
Both have much to lose if the Middle East erupts into fresh violence.
And both face serious demographic problems, given shrinking and aging populations, as well as the challenge of Asia’s rising superpowers.
The breakdown in relations has been gradual and undramatic – more a morose and resentful refusal to see each other’s point of view than a succession of rows.
This owes much to the humiliations that Russia suffered when the end of communism forced its economy to its knees, and to Western short-sightedness about Russia’s fundamental strengths and resilience.
The EU is as much to blame as the Kremlin.
In the years since the collapse of the Soviet Union, neither EU nor European national policymakers have devised a coherent strategy setting out the relationship that Europe wants with the Russian Federation.
Today, it is more important than ever that the EU, which now includes not only former Soviet satellites but countries that were part of the USSR, should create a strategic policy framework.
This reflects not only worries about energy and shared security concerns, but also the need to head off any looming crisis in the Middle East that could plunge large parts of the world into turmoil, if not armed conflict.
There, and in the volatile Caucasus, a significant improvement in Europe’s relations with Russia is crucial to defusing tensions.
For its part, Europe needs to mount a charm offensive to persuade Putin and Medvedev that Russia’s real interest is in improving bilateral relations.
Russia needs to collaborate on energy in ways that bring genuine security.
In the Middle East, it needs to persuade Iran to hold in check the military elements of the nuclear program that Russia has made possible.
None of this will be easy, not only because Europe’s relationship with Russia has grown so chilly, but also because Putin is understood to despise the EU as politically impotent.
Russian leaders may have misinterpreted as a sign of weakness Europe’s representation at last month’s EU-Russia summit by two Portuguese politicians – European Commission president Jose Manuel Barroso and Prime Minister Jose Socrates, whose government currently holds the revolving EU presidency.
Most telling in Russian eyes has been EU countries’ competition for oil and gas contracts, which has done much to convince the Kremlin that Europe is not a political force to be reckoned with.
On the European side, engineering a new spirit of détente will be tough.
There is widespread disapproval of Putin’s autocratic style and of his government’s human rights record.
Extending an olive branch to Russia will have little or no voter appeal in most EU countries, and Putin’s efforts to retain power de facto if not de jure after Medvedev wins his likely victory next March are certain to make matters worse.
The question, therefore, is whether Europe and Russia can establish a new framework for talking to one another.
There are plenty of well-worn diplomatic paths, so it’s not structures that are lacking.
What’s needed is a more positive frame of mind, and specific ideas about what to do.
Europe’s Scientific Meltdown
After World War II, most Europeans agreed that scientific research would not only boost their economies, but also deliver greater technological autonomy from the United States and act as a catalyst for social change.
The British Royal Society advocated creating the German Max Planck Society on the ground that solidarity between international scientific communities could contribute to reconciling former enemies.
As a result, big projects such as the European Centre for Nuclear Research (CERN), the European Space Agency (ESA), and the European Molecular Biology Organization (EMBO), were founded to help unite European research efforts in basic science.
Today, however, European science is declining in almost all countries (Sweden, Finland, and Iceland are exceptions), wasting existing talent and losing attractiveness for young people.
On average, a young European scientist working in the US receives 2.5 times more research support than in Europe.
No surprise, then, that a brain drain has developed.
Indeed, Europe has only five scientific researchers per 1000 inhabitants, compared to eight in the US and nine in Japan.
Despite its strong scientific tradition, figures for Central Europe are even worse, and the cost of EU integration is likely to further shift priorities away from science and education.
Shrinking budgets are also damaging established scientists.
In the life sciences, for example, foundations find it hard to identify high-level Europeans for awards.
This is not due to lower scientific quality, but to the higher levels of sustained support available to American group leaders to transform new ideas into discoveries.
Massive military and health investments by the US government have generated a critical mass of research, which in turn attracts private funding – including from European companies, particularly in the pharmaceutical industry.
Something similar can and does work in Europe. In Finland, for example, ten years of sustained public funding is now catalyzing private investments and fueling regular increases in R&amp;D budgets.
Edith Cresson, a former European Commissioner for Research, once said that, “funding directly nanotechnologies would have been more rewarding than creating CERN.” She was wrong: the complexity of modern science does not allow anyone, least of all bureaucrats, to predict where innovation will emerge.
Public funding of basic research and industrial investments are both needed to achieve long-term technological development.
Although most national funding agencies lack imagination when it comes to European cooperation, several institutions are aware of Europe’s deteriorating research and the handicaps European scientists face in competition with those in the US and Japan (and also, increasingly, India and China).
At a meeting organized for November 2005 by the Collège de France, Nobel laureates, science historians, and managers of European universities and research facilities will stress the need for a new science policy, including in the social sciences and humanities, in the presence of ministers and European commissioners.
Euroscience and the European Science Foundation have also made suggestions aimed at shoring up political will:
· Establish a European Research Council. This initiative, originally presented by the Deutsche Forschungsgemeinschaft and the magazine Nature , proposes to create a pan-European funding agency to organize international competition in “hard” and “soft” basic science.
Most national research organizations and the European Commission support the idea, but questions persist: who will provide the budget (at least €2 billion is needed, which is roughly half of the increase promised by EU governments to raise R&amp;D to 3% of the GNP in 2010)?
What mechanisms will ensure the Council’s autonomy, a key condition for basing research awards strictly on scientific quality?
· Implement general European training schemes. Large facilities have trained a few generations of genuinely European scientists.
But they cover only a small range of scientific disciplines; in most others, education is still overwhelmingly national.
The Bologne protocol, which aims at harmonizing university training throughout Europe, could prove useful here.
In parallel, European post-doctoral schemes need reappraisal.
In the US, such schemes contribute to widespread dissemination of expertise, whereas European laboratories still use them as waiting lines without putting enough emphasis on multinational and multidisciplinary trajectories.
· Give appropriate recognition, salaries, and autonomy to young scientists. Unfortunately, young scientists are largely viewed as a source of cheap manpower, deterring the best students from embracing scientific careers.
The new Charter of Scientists now under discussion in the European Commission should improve the situation, by making flexible career tracks compatible with transferable social benefits.
Europe needs proactive policies to meet the challenges of new research needs ­– and to take advantage of subsequent job opportunities – in areas like sustainable development, climate change, natural hazards, and public health.
Creating an international pool of expertise could become an important asset for European universities, while enabling European industries to create new jobs.
Europe’s science policies should also frame a new deal for developing countries.
Today, scientific relations between developed and developing countries are unequal; important genetic discoveries based on Third World diseases provide neither appropriate credit to local scientists nor fair returns to the populations that made them possible.
Moreover, the North-South gap in public health is a major threat to the future of mankind.
Europe should seek to make science more user-friendly, both to its own researchers and would-be scientists and those in developing countries.
Let us hope that Europe’s politicians have the foresight to meet these challenges before European science becomes irreversibly marginalized.
Europe’s Second Chance in the Balkans
Confronting the disintegration of Yugoslavia in 1991, former EU Council President Jacques Poos made his famous but now derided statement: “This is the hour of Europe… not the hour of the Americans.”
What the EU learned from the subsequent four years of Balkan disasters under its management is now being tested by another major turning point and potential crisis – when and how Kosovo is to become independent.
Once again, Europe’s role may well prove decisive.
The decision on Kosovo may not imply the prospect of renewed large-scale conflict, but it does raise serious questions for Europe’s relations with Russia and the United States, as well as for stability throughout the Balkans.
While the US has a major stake in the outcome, EU countries obviously have the most significant interests in the region, and perhaps this time they will assume a corresponding leadership role.
For at least the next two months, the United Nations Security Council will debate a blueprint for Kosovo’s future, arduously worked out during a year of “negotiations” between the governments in Belgrade and Pristina by UN envoy and former Finnish president Martti Ahtisaari.
The bluebrint provides for Kosovo’s “supervised independence,” maximum protection for Serb and other minorities, and a supervisory role for the EU.
Ahtisaari’s proposal is an acknowledgement that no agreement between the parties is possible, and that there is no constructive alternative to Kosovo’s independence.
Together with the US, the EU collectively has rallied around the Ahtisaari proposal.
But individually, a number of European countries – Spain, Greece, Italy, Cyprus, Romania, Slovakia, and Austria – are skeptical or negative toward Kosovo independence, which raises profound questions about the EU’s resolve.
Meanwhile, Serbian Prime Minister Vojislav Kostunica is waging a tireless and remarkably effective diplomatic campaign denouncing both Ahtisaari and his proposal.
He has strengthened the position of many in Europe and elsewhere who are skeptical of challenging a country’s territorial integrity or who still claim to believe in a negotiated settlement.
More worrisome is the current uncertainty about whether a shaky Europe will stand up to Russia, upon which Serbia depends to maintain sovereignty over Kosovo.
So far, the Kremlin has resolutely stated that it will accept only a settlement agreed to by both parties, in effect endorsing Serbia’s position.
While conveying the possibility of a veto, Russia’s current strategy is to delay a Security Council vote as long as possible by prompting a new fact-finding mission to Kosovo, which will most likely be followed by renewed insistence on another effort to negotiate a settlement.
Serbia welcomes delay in the hope that this will stimulate violence by frustrated Kosovars, thereby increasing Europe’s opposition to independence and bolstering Serbia’s dedication to maintaining the status quo, or, as a last resort, to partitioning Kosovo.
Some European countries apparently believe that they can maintain an EU consensus in support of Ahtisaari’s plan but allow Russian foot-dragging on the grounds that delay is not unreasonable and something better may turn up with additional negotiations.
But, by adopting such a stance, they thwart their own envoy and may well stimulate the violence they profess to abhor.
History offers little consolation.
The EU’s handling of relations with Serbia in the past only encouraged intransigence.
Instead of repeatedly making clear that Kosovo independence is an indispensable requirement for EU membership – so important to Serbia’s modernization and Balkan stability – EU leaders like Javier Solana laud Kostunica as a great democratic leader.
They relentlessly but unsuccessfully pressured Montenegro’s leaders to remain in a dysfunctional union with Serbia, condoned Kostunica’s dubious 2006 referendum on a new constitution enshrining Kosovo as a part of Serbia, and weakened demands for Serbia’s cooperation with the International Criminal Tribunal in The Hague.
Realizing Ahtisaari’s proposal will depend on EU solidarity and persistence, coupled with strong American support, to manage the vicissitudes of UN debate, lobby skeptical non-permanent Security Council members, such as Indonesia and South Africa, and persuade Russia to abstain rather than exercise its veto.
Many believe that Russia will not risk its relations with Europe and the US, ultimately abstaining if Western countries hold firm.
But Russia appears to be in a Gaullist mood, and has other outstanding issues causing friction with the US and Europe.
Putin’s Russia is not Yeltsin’s Russia, when the West could simply shunt aside Russian concerns.
Europe is vulnerable on many fronts, particularly in view of its dependence on Russian energy, while America’s weakened presidency has diminished US influence in Russia.
If Russia does veto the Ahtisaari plan, the EU’s united facade will likely fracture, with many European countries refusing either to join the US in recognizing an independent Kosovo without the UN’s blessing or to send a supervisory mission there.
That would open a new and tumultuous era in the Balkans, with more than Kosovo at stake.
Indeed, with the UN and the Western alliance in disarray, the region could fall victim to further Russian policy mischief.
Europe\u0027s Secular Mission
Economics and politics have been uneasy allies in the process of European unification.
From the moment Europe's coal and steel industries were merged in an effort to prevent future wars on the Continent, the "European project" has often relied on economic interests to propel itself forward.
Now, however, new members mostly join for political and geo-strategic reasons.
This change in motivation requires changes in how the Union thinks about itself, changes that go beyond the ideas now circulating at the convention drawing up an EU constitution.
Of course, the economic prosperity that European unification has delivered undoubtedly lures new members, but the EU's attraction extends far beyond pocketbook issues.
For the Union is also a huge area ruled by law, some concerning production and commercial exchange, but also others that establish and protect individual rights.
Because of this, the EU's neighbors have felt magnetically attracted to this area of peace and prosperity.
The first enlargement, in 1973, brought in Great Britain, Ireland, and Denmark, and was based mostly on economic considerations.
But all successive waves of enlargement were motivated mostly, if not exclusively, by political reasons.
Greece provides a good example.
After the dictatorship of the colonels, Greece sought international rehabilitation through membership in the European Community, whose imprimatur in turn helped to consolidate the fragile new democratic regime.
The modernizing transformation now taking place in Greece owes much to the country's EU membership.
Much the same is true for Spain and Portugal.
Rejected while they were still fascist dictatorships, their candidacies were accepted when their regimes changed.
As with Greece, democratic consolidation was at stake.
Indeed, from the economic point of view, entry into Europe, and having to compete with the powerful economies of Germany or France, was risky, but it was a necessary condition for securing their democracies.
The inclusion of the next three next countries--Sweden, Finland, and Austria--posed fewer economic problems.
They sought membership mostly for geostrategic reasons: to consolidate their security.
Neutrality prevented them from becoming candidates so long as the Soviet Union existed.
Once the Soviet Union's demise made it possible, they joined.
The motivation of the candidates who will join in 2004 is analogous.
Only Malta is a case in which the major interest in membership--access to the great common market--is economic.
For Cyprus, membership is, above all, a means to unblock the stalemate between the island's Turkish and Greek communities.
As for the eight countries recently freed from Soviet domination, their priority is democratic consolidation.
The three Baltic states and Slovenia also want to entrench their recently revived national identities.
To be sure, the EU's potential to induce economic dynamism, best seen in Ireland and Greece, attracts new members.
But the Iraq crisis provided East European countries with an opportunity to confirm the absolute priority they place on strategic stability, which is why they put relations with the US ahead of worries about European political solidarity.
So the following question arises.
Although it is logical that all Europeans want to give a strong institutional basis to Europe's definitive and everlasting peace, and that we pragmatically unite our markets, these imperatives are insufficient to energize a Union with 25 members.
A deeper shared purpose is needed.
Right now, Europe has set its sight on political bonds that will be, for some time, impossible to establish.
Our 25 nations have profoundly different historical experiences, geographical situations, and strategic sensibilities.
So today's most hyped goal--conceiving and putting into practice a common foreign policy--seems too ambitious to succeed.
One can bemoan this fact, but it is better to accommodate oneself to it and accept the notion that it will take decades for Europe to think in the same way on most issues, not least about relations with the US.
But this does not take anything away from the extraordinary community constituted by the intellectual and cultural patrimony that unites Europeans around recognized and accepted values.
It is here that Europe has a purpose it can rally around--a message that can resonate powerfully in a world riven by religious intolerance and fanaticism.
Many of Europe's values--respect for human life, the desire to protect the weak and the oppressed, equal treatment of women, the commitment to the rule of law--arose in the course of a long history in which the influence of Christianity was very significant.
But Europe also found a productive balance between church and state.
In Europe, sovereignty belongs to the people and does not flow from a transcendent power.
Liberty of thought is absolute, as is religious freedom.
Women do not suffer some divinely mandated inferior status vis-à-vis men.
Political representation must be pluralistic.
Public powers should not depend or refer to any religious authority.
All these values are accepted pillars of political and institutional stability in today's Europe, and command nearly unanimous agreement.
They were extracted from the churches, not granted by them.
This part of our patrimony comes from the Enlightenment, and grows out of the old struggle for the triumph of Reason.
To deepen this set of our values, to test to what extent they are shared is the necessary condition for generating new values and for giving our Union the identity and cohesion that will one day permit us to propose Europe's secular values to the rest of the world.
Europe’s Short Vacation
NEW YORK – Since last November, the European Central Bank, under its new president, Mario Draghi, has reduced its policy rates and undertaken two injections of more than €1 trillion of liquidity into the eurozone banking system.
This led to a temporary reduction in the financial strains confronting the debt endangered countries on the eurozone’s periphery (Greece, Spain, Portugal, Italy, and Ireland), sharply lowered the risk of a liquidity run in the eurozone banking system, and cut financing costs for Italy and Spain from their unsustainable levels of last fall.
At the same time, a technical default by Greece was avoided, and the country implemented a successful – if coercive – restructuring of its public debt.
A new fiscal compact – and new governments in Greece, Italy, and Spain – spurred hope of credible commitment to austerity and structural reform.
And the decision to combine the eurozone’s new bailout fund (the European Stability Mechanism) with the old one (the European Financial Stability Facility) significantly increased the size of the eurozone’s firewall.
But the ensuing honeymoon with the markets turned out to be brief.
Interest-rate spreads for Italy and Spain are widening again, while borrowing costs for Portugal and Greece remained high all along.
And, inevitably, the recession on the eurozone’s periphery is deepening and moving to the core, namely France and Germany.
Indeed, the recession will worsen throughout this year, for many reasons.
First, front-loaded fiscal austerity – however necessary – is accelerating the contraction, as higher taxes and lower government spending and transfer payments reduce disposable income and aggregate demand.
Moreover, as the recession deepens, resulting in even wider fiscal deficits, another round of austerity will be needed.
And now, thanks to the fiscal compact, even the eurozone’s core will be forced into front-loaded recessionary austerity.
Moreover, while über-competitive Germany can withstand a euro at – or even stronger than – $1.30, for the eurozone’s periphery, where unit labor costs rose 30-40% during the last decade, the value of the exchange rate would have to fall to parity with the US dollar to restore competitiveness and external balance.
After all, with painful deleveraging – spending less and saving more to reduce debts – depressing domestic private and public demand, the only hope of restoring growth is an improvement in the trade balance, which requires a much weaker euro.
Meanwhile, the credit crunch in the eurozone periphery is intensifying: thanks to the ECB long-term cheap loans, banks there don’t have a liquidity problem now, but they do have a massive capital shortage.
Faced with the difficulty of meeting their 9% capital-ratio requirement, they will achieve the target by selling assets and contracting credit – not exactly an ideal scenario for economic recovery.
To make matters worse, the eurozone depends on oil imports even more than the United States does, and oil prices are rising, even as the political and policy environment is deteriorating.
France may elect a president who opposes the fiscal compact and whose policies may scare the bond markets.
Elections in Greece – where the recession is turning into a depression – may give 40-50% of the popular vote to parties that favor immediate default and exit from the eurozone.
Irish voters may reject the fiscal compact in a referendum.
And there are signs of austerity and reform fatigue both in Spain and Italy, where demonstrations, strikes, and popular resentment against painful austerity are mounting.
Even structural reforms that will eventually increase productivity growth can be recessionary in the short run.
Increasing labor-market flexibility by reducing the costs of shedding workers will lead – in the short run – to more layoffs in the public and private sector, exacerbating the fall in incomes and demand.
Finally, after a good start, the ECB has now placed on hold the additional monetary stimulus that the eurozone needs.
Indeed, ECB officials are starting to worry aloud about the rise in inflation due to the oil shock.
The trouble is that the eurozone has an austerity strategy but no growth strategy.
And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels.
Moreover, the social and political backlash eventually will become overwhelming.
That is why interest-rate spreads in the eurozone periphery are widening again now.
The peripheral countries suffer from severe stock and flow imbalances.
The stock imbalances include large and rising public and private debt as a share of GDP.
The flow imbalances include a deepening recession, massive loss of external competitiveness, and the large external deficits that markets are now unwilling to finance.
Without a much easier monetary policy and a less front-loaded mode of fiscal austerity, the euro will not weaken, external competitiveness will not be restored, and the recession will deepen.
And, without resumption of growth – not years down the line, but in 2012 – the stock and flow imbalances will become even more unsustainable.
More eurozone countries will be forced to restructure their debts, and eventually some will decide to exit the monetary union.
Europe’s Silent Pro-Treaty Majority
At the European Union’s coming EU summit, debate will center on whether to go forward with a “mini” EU Constitutional Treaty.
That debate is the result of the rejection of the draft treaty by French and Dutch voters in 2005.
But those “no” votes have obscured the fact that 18 of the EU’s 27 member states have ratified the treaty.
Luxembourg’s voters, for example, approved it by a 56.5% majority immediately after the Dutch and French no votes.
Indeed, with two-thirds of member states and a majority of European citizens supporting the Treaty, it cannot simply be abandoned.
At the same time, French and Dutch citizens’ voices cannot be ignored – all the more so because it is unimaginable that an identical text could be submitted to a second referendum in either country.
Because all 27 states must ratify the Treaty, it therefore seems obvious that it cannot enter into force in its current form, and that the “yes” countries cannot push ahead with it unchanged.
But it is equally impossible to start from scratch.
So we must try to reconcile the “yes” and “no” countries if we are to overcome the crisis into which Europe has been plunged.
And we need to do so quickly if the EU is to deliver on its citizens’ expectations.
This is because Europe faces many complex challenges in a globalized world.
In areas as diverse as employment and social inclusion, environmental protection and climate change, health, external and internal security, and the fight against illegal migration and poverty in the Third World, European citizens are demanding effective policies.
It is also obvious that member states cannot solve these problems alone, but only through coordinated EU action and common policies.
But to achieve these results, and thereby convince our citizens of the EU’s value, Europe’s decision-making capacity must be strengthened and democratized.
This does not mean that enlarging the EU’s competencies should be the aim at any cost.
In fact, the Constitutional Treaty defines more clearly which competencies should be shared between the EU and its member states, and how.
It also reinforces the principle of subsidiarity by giving a stronger say to national parliaments.
So the objective is not automatically “more Europe,” but rather a “better Europe” capable of acting effectively and more transparently in areas where collective action is clearly necessary.
For all these reasons, the institutional reforms that are contained in the constitutional treaty are still urgently needed.
If Europe is to fulfill its role as a major global actor, its scope cannot be limited to that of a large common market.
It must be an integrated economic, political, and social force.
In order to realize the full potential of the common market, the EU must adapt its economic governance to the challenges of globalization – research, technological development, and knowledge must be at the heart of the European economy, particularly given Europe’s efforts to be at the forefront of combating climate change.
It also needs to speak with one voice on matters of foreign policy in order to play a more important international role in solving major conflicts and shaping a more peaceful and balanced world order.
Finally, the EU needs to promote social cohesion while adapting Europe’s social model to globalization’s challenges.
It is no exaggeration to say that a large majority of member states and their citizens has already expressed its wish for this vision of the EU by voting for the Constitutional Treaty.
At a meeting convened by Spain and Luxembourg in Madrid in January to which all the “yes” countries were invited, this view was also supported by four other member states that are committed to the constitutional treaty.
It may well be impossible to press ahead with the Treaty without any changes to the text.
However, the Madrid meeting made clear that there is a consensus among these member states in favor of a Europe that can play a key role in our globalized world, and whose actions are based on the principles – effectiveness, transparency, and democracy – that inspire the European integration process.
The solution to the impasse over Europe’s Constitutional Treaty certainly does not lie in the direction of diminishing its scope, and thus perhaps making it just an “ordinary” treaty.
Minimalist solutions respond to neither the expectations of the citizens nor the requirements of a rapidly changing world.
The answer is more likely to be found in the Treaty’s simplification, taking out those elements that are not absolutely necessary, and also enriching it in such areas as climate change.
The EU’s German Presidency, which I know shares the “ambitious” view of the Treaty, is working hard on finding a way out of the deadlock at this month’s European Council.
Those countries that have stepped forward as “friends of the Constitution” have also been making clear that the initiative they launched in Madrid will support the German Presidency’s efforts.
If not all the EU’s members are ready to take this path, flexible solutions of the sort that have been a feature of European compromise in the past may be needed.
By all means, let us try to preserve the solidarity of all 27 EU states.
But those member states that are willing to move forward should not be prevented from doing so.
Differentiation should not mean division, but rather progress at variable speeds.
Europe’s Solidarity Imperative
LONDON – When Mario Draghi, the president of the European Central Bank, publicly proclaimed that the ECB would do “whatever it takes” to ensure the future stability of the euro, the effect of his remarks was immediate and remarkable.
Borrowing costs fell dramatically for the governments of Italy and Spain; stock markets rallied; and the recent decline in the external value of the euro was suddenly checked.
It remains unclear how long-lasting the effects of Draghi’s intervention – or of the public support offered to him by German Chancellor Angela Merkel, French President François Hollande, and Italian premier Mario Monti – will prove to be.
What we can say with certainty is that Draghi’s remarks and the reaction they evoked demonstrate that the fundamental problems of the eurozone are not primarily financial or economic; they are political, psychological, and institutional.
International observers took such notice of Draghi’s commitment to do “whatever it takes” to save the euro because so many of them have come to doubt other leading European players’ commitment to do likewise.
(Some of these doubts are, of course, politically or financially self-serving; a certain model of financial capitalism perceives the euro as a threat, and its adherents will do everything they can to bring about its demise.)
But eurozone leaders’ inability to assuage doubt about their commitment to the euro after two and a half years of crisis suggests that the problem is deeply rooted.
In their own defense, eurozone ministers point to the raft of reforms that they have introduced over the past 30 months, which will promote economic modernization, the restoration of sound government finances, and closer economic coordination.
Unfortunately, these reforms have all too often served as displacement activity – worthwhile in themselves, but failing to answer unambiguously the question posed with increasing urgency by international markets: Are the eurozone’s largest and currently most prosperous members absolutely committed to its continuation?
No one doubts that Germany and most other eurozone members would prefer the single currency to continue.
Today’s uncertainty concerns whether this preference may be overridden by pressing considerations of national politics, or resentment at the slow pace of reform in certain eurozone countries.
Indeed, a German proverb to the effect that “trust is good, but control is better” has been the basis of eurozone leaders’ policy since the developed world’s debt crisis engulfed the single currency’s system of governance.
The implication is clear: trust between the members of the eurozone cannot be taken for granted, but must be earned and maintained.
The limitations of this approach have now been revealed.
While the eurozone’s richer countries have indeed done much to help their troubled neighbors, they have done so in an obtrusively conditional, transitional, and incremental fashion.
At one level, it is entirely understandable that Germany and other eurozone countries should demand assurances that their resources will not be wasted.
But this constant need for reassurance, for the limiting of risk and involvement to the minimum necessary, provokes a fear that at some point Germany and others will judge their partners’ assurances insufficient and the risks run in helping them intolerable.
If that happens, the euro’s demise cannot be far behind.
The Treaty of Rome, signed in 1957, represented a noble and ambitious departure in European history.
Solidarity and predictability in international relations, based on common institutions and common interests, would ensure Europe’s prosperity and stability much more effectively than had the traditional balancing act of high-wire diplomacy, whose practitioners had too often crashed to the ground.
The euro was founded in this spirit of solidarity, and its contribution to limiting economic and financial instability in Europe over the past five years should not be underestimated.
The example of the 1930’s is a reminder of how much worse things might have been.
Eurozone leaders’ temptation to revert to earlier, discredited models of European relationships was bearable for a time, but it has now reached the limit of its tolerability.
My impression is that German public and political opinion is beginning to recognize the economic devastation for Europe and Germany implied by a euro breakup.
German politicians bear the important democratic responsibility of reinforcing this realization and advocating the steps needed to avert a catastrophe.
It can be no part of a well-functioning democracy for leaders to hide unwelcome truths from their electorates.
It would be a delusion to imagine that the eurozone need only follow its current path to ensure the single currency’s future.
If nothing else, that current path unacceptably accentuates the differences between member states in a way that is politically and economically unsustainable in the longer term.
The philosophy of control and reciprocity that until now has characterized the eurozone’s approach to its crisis of governance needs to be replaced by one of solidarity and all that follows from it.
This means a more balanced economic policy within the eurozone, an enhanced role for the ECB, a real banking and financial union, and a road map to partial and conditional mutualization of legacy debt.
Eurozone leaders have spoken about all of these, but the time has come for unequivocal commitments and a realistic timetable for action.
We are now perilously close to the moment when “muddling through” could give way to renewed crisis.
So the Bundesbank’s self-righteous zeal in asserting that its responsibilities are somehow graver – and more binding – than those of other central banks is dangerously wrong-headed.
“Nein” merely brings calamity closer.
None of Europe’s financial problems would look remotely as challenging today if doubts about the eurozone’s future had been dispelled two years ago, and the reputational and financial costs would have been dramatically less than they have been in the past 30 months.
In the long run, solidarity is cheaper for all involved, while its absence could become ruinously expensive in the foreseeable future.
Europe’s Squandered Minority
BUDAPEST – Today, millions of Europeans are afraid and frustrated as they face unemployment, loss of savings and pensions, radically reduced social benefits, and other economic hardships.
Their fears are warranted, because the current financial crisis is undermining the very union that was established to heal Europe’s wounds at the end of World War II.
But, in the midst of the general suffering, one group – the Roma – has been ignored.
Europe’s largest and most disadvantaged ethnic minority, with a population equal to that of Greece, millions of Roma are trapped in extreme poverty and ignorance, compounded by widespread discrimination.
Indeed, the 2009 European Union Minorities and Discrimination Survey found that Roma experience more severe discrimination than any other ethnic-minority group in Europe.
Hard times provoke aggressive, vindictive, and intolerant attitudes, and Roma have become scapegoats in this economic crisis.
In fact, Roma-bashing is helping far-right political parties to mobilize and nationalist leaders to win votes.
Even some mainstream political parties have resorted to using anti-Roma rhetoric that would have been inconceivable a decade ago.
But the Roma have refrained from reciprocating the sometimes lethal violence inflicted on them.
Six years ago, the Open Society Foundation, the World Bank, and nine national governments addressed the issue by elaborating a step-by-step plan to integrate the Roma into European society.
Known as the “Decade of Roma Inclusion 2005-15,” the program prioritized four areas: health, housing, education, and employment.
This year, the European Commission has requested that all EU member states develop and implement strategies to promote Roma social inclusion in these areas.
The Decade of Roma Inclusion provides a blueprint for how to achieve integration and equality, and to eliminate unlawful discrimination.
But these goals can be achieved only if the EU resolves its financial crisis, embarks on a sustainable recovery, and, above all, becomes an inclusive economy.Otherwise, Roma will inevitably serve as the EU’s convenient scapegoats.
Social exclusion is not only morally and legally repugnant; it also defies economic sense.
Roma are Europe’s youngest and fastest-growing population with an average age of 25, in contrast to the European average of 40.
According to recent World Bank research, Roma comprise approximately 23% of new entrants into Bulgaria’s labor market.
In Romania, the figure is 21%.
The vast majority of working-age Roma, however, lack the requisite education to compete successfully in the labor market.
By continuing to shunt Roma children into “special” schools, where expectations are low and results still lower, EU member states are squandering hundreds of millions of euros annually in productivity and tax revenues.
The message is simple: improving opportunities for Roma is morally right and economically smart.
Integration is possible.
I grew up in a small, impoverished town in central Serbia, where my parents lifted themselves out of extreme poverty and deprivation.
My father obtained a high school diploma and became a taxi driver, while my mother attended university and worked in a state office.
We were proud of the two-room house my parents managed to build before we moved into a larger home in an ethnically mixed area.
Having grown up in a family that struggled to rise from poverty to the middle class, I went on to study law and completed an NGO-management training program at Harvard University.
Thousands of Roma have made similar journeys.
And hundreds of thousands more are capable of doing the same.
Europe cannot continue to marginalize one of its own minorities; anti-Roma prejudice and unlawful discrimination must not go unchallenged.
The status quo is damaging the lives of millions of Roma, but it is also hurting Europe economically and morally.
The historical truism applies here – Europe’s greatness will be judged by how it treats its most vulnerable members.
Europe’s Stifled Celebration
LONDON – This could have been a year of joy for Europe.
The 20th anniversary of the fall of the Berlin Wall will be commemorated in November, and it has been five years since the European Union’s “Big Bang” enlargement.
The Cold War division of Europe is well and truly over.
But, instead of setting off fireworks, the EU finds itself under fire, as the global economic crisis confronts it with the greatest challenge it has seen since 1989.
After years of strong growth and remarkable resilience, the Union’s new member states in the east are being hit hard by the economic turmoil that started in the west.
Integration into the global economy, a crucial source of capital, stability, and innovation, has become a threat to many of these countries.
This is true both of the region’s financial sectors and its real economies.
But the tough question that has to be asked is whether the crisis could lead to the unraveling of European integration.
There are four key issues that need to be tackled if we are to ensure that Europe emerges from this crisis strengthened.
The first issue concerns the continuation of enlargement.
The EU is an indisputable success, constituting the largest integrated economic area in the world and accounting for more than 30% of world GDP and around 17% of world trade.
Even with this year’s marked contraction of some central and eastern European countries’ economies, their accession to the EU boosted its overall economic growth, with the European Commission estimating that GDP in the new member states increased by extra 1.75 percentage points in the period 2004-2009.
For the pre-Big Bang EU-15, enlargement significantly contributed to their growth through investment opportunities and increased foreign demand: 7.5% of the older member states’ exports went to the newcomers in 2007, up from 4.7% in 1999.
Indeed, by 2007, central and eastern Europe had become the second most important export destination for euro-zone countries.
But EU membership has always been about more than economic integration and trade flows.
The prospect of a “return to Europe,” as Václav Havel once put it, provided the backing for essential, if sometimes painful, economic, social, and political reforms.
Today, EU membership is a more powerful incentive than ever for what the EU calls three “candidate countries” (Croatia, FYR Macedonia, and Turkey) and five “potential candidate countries” (Albania, Bosnia and Herzegovina, Kosovo under UN Security Council Resolution 1244, Montenegro, and Serbia).
These countries are increasing their efforts to prepare for EU admission, and the EU must not shut its doors on them.
On the contrary, it should finalize further enlargement: the economic crisis has clearly demonstrated that the EU cannot afford black holes on the map of Europe.
The second key issue concerns the EU’s internal structure.
The Lisbon Treaty offers a fundamental redesign of how the Union works, but, despite the pressing need to enhance EU institutions’ mobility and flexibility, it is still awaiting ratification.
The economic crisis makes it more important than ever to introduce these reforms.
Third, there is the euro.
The 12 new member states that joined the EU in 2004 and 2007 committed themselves to its adoption, but with no set date.
Expansion of the euro zone has therefore been slow, especially in central and eastern Europe, where to date only Slovenia (2007) and Slovakia (2009) have become members of the single currency.
But the financial and economic crisis has demonstrated the benefits of euro membership.
Ten years after the common currency’s introduction, the 16-member euro zone has the world’s second most important currency, accounting for more than a quarter of all central banks’ foreign-exchange reserves and having overtaken the dollar as the currency of choice for international bond issues.
The euro’s increasingly important role brings stability, something that is never more important than in times of upheaval.
The European Bank for Reconstruction and Development therefore encourages all new EU member states that have not yet started doing so to draft credible and convincing plans for euro-zone admission.
But there must be no softening of the criteria for joining the euro.
The final issue concerns European solidarity.
EU enlargement brought greater prosperity, with living standards improving throughout the Union, particularly in the new member states.
But many of the older member states also benefitted, and not only in economically measureable ways.
The growing together of people, regions, and countries underpins the foundations on which Europe rests.
The EU’s newcomers have adopted growth models that rely to varying degrees on foreign capital to finance domestic investment, and on banking systems that are largely owned by west European banks.
It is a model that has served new and old member states well.
Investors from the EU-15 committed €37.2 billion in central and eastern Europe in 2006, roughly double the €19.1 billion spent there in 2004.
Over the past five years, foreign direct investment in the new member states topped the €100 billion mark.
This process enabled western European companies and banks to expand into new markets with higher growth rates and, thereby satisfying pent-up demand and tapping unrealized potential.
This has created jobs in central and eastern Europe, while boosting prosperity in the older member states.
To turn our backs on these countries would have serious economic ramifications.
The EU drew the right conclusions when it stressed that national bank rescue packages must not be designed in ways that starve subsidiaries, and also by doubling – to €50 billion – the crisis funds available to EU countries outside the euro zone.
The EU must not stand aside when solidarity is needed.
Today’s crisis offers an opportunity to show that the EU can provide stability, support, and solidarity.
By taking the right steps now, the Union is laying the foundations that will enable it to emerge from today’s difficulties strengthened and more united.
The 60-Year Itch?
JERUSALEM – “Europe is boring: thank God, for you and for us,” my interlocutor told me.
Europe is nowhere – it has become the lost continent.”
There is, of course, a little provocation and a lot of irony in these remarks.
A few years ago, their speaker occupied important positions within US diplomacy; he is now a key figure of the New York establishment.
And his provocation highlights a sad reality that Europeans must accept and confront: Europe no longer interests America.
Yes, the European Union’s enlargement since 2004 was preceded by NATO’s eastward expansion.
But that has not made a real difference; at the end of the day, America is also losing interest in NATO, which turned in a not-fully-convincing performance in Libya and a downright poor one in Afghanistan.
Earlier this month, I gave a talk in Washington, DC, entitled “Hollande’s France: A Year After.”
The audience members’ average age was significantly higher than mine (and I am 66).
The complexities of French politics do not interest young Americans – and why should they?
Would I have had a younger and larger audience if my talk had been called “Merkel’s Germany on the Eve of the Upcoming Election”?
Whereas young Europeans look for jobs and entrepreneurial opportunities in America, young Americans go to Europe as tourists.
For them, Europe is a continent undergoing museumification – a place to "do," not a place to be.
This disinterest in Europe is not recent, but it has deepened over recent years.
Since the end of the Cold War, Europe has no longer been the first line of defense of the United States.
And, since the end of the Balkan wars, the continent’s security problems have disappeared (except at the margins, as in Georgia, or potential threats stemming from its near-abroad, particularly the Arab world).
Many American scholars who were once interested in Europe’s social model have moved on to other research interests or retired, with no new generation to replace them.
Learning European languages is no longer popular in American schools, with the possible exception of Spanish.
To some extent, Mandarin has become the new French, but with a major difference: The language of Molière was a cultural tool, not (or not entirely) an instrument of economic success.
Of course, it would be wrong to overemphasize disenchantment and push self-flagellation too far.
Europe still exists in the US, though probably more among the Washington administrative and political elite than within the world of New York finance and business, despite the fundamental importance of transatlantic trade for both economies.
But is the US interested in Europe or only in parts of it?
In Washington – as in Beijing, for that matter – the temptation to approach Europe in a bilateral manner is strong and growing.
President Barack Obama’s America, rendered prudent by the costs of the country’s military adventures in Iraq and Afghanistan, is only too happy to count on the interventionist traditions of Great Britain and France.
From Libya to Mali, France and Britain are largely seen as the extended arm of an America that is increasingly reticent to commit its own troops – or even weapons.
Similarly, for the US government, as for China’s leaders, Germany has become Europe’s key economic actor.
Of course, faced with the Chinese economic challenge, America would be happy to forge a united front – especially in matters of trade – with the continent that is still the world’s leading commercial power.
But Europe’s interest in successfully concluding a proposed EU-US free-trade agreement may be even stronger.
Without America by its side, Europe would be more vulnerable in the face of a rising China than America would be without the EU.
So America needs Europe, but now at the margins.
Europe, given its current divisions and the growing gap between its northern and southern economies, still needs America.
In security terms, Europe would be quite lonely without the US, whatever the nature of the threat.
Of course, the former NSA contractor Edward Snowden’s revelations of the global reach and the extent of America’s Internet and telephone surveillance are, to say the least, unpleasant.
But America’s questionable means of satisfying its legitimate security concerns are certainly less damaging for Europe in the long run than is Chinese industrial espionage.
America is taking risks with the rule of law, but China has a long way to go before it becomes a country ruled by law.
In the immediate aftermath of Snowden’s revelations, the French satirical newspaper Le Canard Enchaîné ran a headline that said: “For once, Obama is interested in what we are saying.”
Europeans should be pleased – and relieved – that they are no longer America’s first line of defense.
Europe’s Test in North Africa
LONDON – Europe’s reaction to the historic revolutions in North Africa has vacillated between exhilaration and fear.
The natural instinct to celebrate and support democratization across the Mediterranean has been tempered by concerns that the crisis will spill onto European shores.
A few leaders have invoked the post-World War II Marshall Plan as a model for large-scale European development assistance for the region, the aim being to ensure the sustainability of a democratic transformation and generate long-term political and economic benefits for Europe.
But the mainstream reaction has been much more fearful: media and politicians throughout the European Union are obsessing about the threat of waves of migrants reaching their borders.
Such a threat should not be taken lightly.
Already, the controversy over Tunisian migrants in Italy has started to fray the political underpinnings that allow free movement in the Schengen area.
The war in Libya, meanwhile, could lead to many more thousands of civilians fleeing the violence and needing international protection.
So far, nearly 400,000 people have filled refugee camps in Tunisia and Egypt, and an estimated 20,000 have reached Italy’s shores.
Dealing with any surge of asylum seekers will require the EU to strengthen its capacity to offer temporary protection – and possibly to reconsider how its overall asylum system works.
That the Union has been moving towards a common approach to border security, most visibly with the expansion of the Frontex border agency, will be of help here.
But if Europe allows itself to be consumed by the short-term crisis, it risks squandering an extraordinary long-term opportunity.
By using this moment strategically and wisely, the EU would have a chance to reframe its relationship with the southern Mediterranean (as it is being redubbed) to promote generational development and growth in ways that can address Europe’s interests, too.
The best way to allay European fears and prevent uncontrolled migration is to establish positive incentives, and the practical means,for potential migrants to stay home – most significantly by creating jobs in the southern Mediterranean.
After all, the vast majority of migrants leave home reluctantly.
Yet, at the same time, as its baby boomers retire en masse in the coming decade, Europe will need workers at all skill levels.
The southern Mediterranean can be the source of this labor, given its huge youth bulge.
The trick will be to ensure that migrants are given the chance to acquire the skills that European employers need, and that they have the chance to move in a safe, legal, and orderly fashion.
Policies that help train the next generation of North Africans, and allow them to circulate more freely between Europe and their home countries, are a much smarter solution than the current approach, which sustains illegal migration without meeting Europe's labor needs. This is an argument not for more migration, but for better migration – well thought out and planned.
Of course, if Europe helps North Africa build sustainable, prosperous democracies, this would be the greatest long-term deterrent to illegal migration of all.
It is worth recalling that 50 years ago, the largest immigrant populations in northern Europe hailed from Italy, Greece, Portugal, and Spain.
As those countries prospered, the émigrés returned home: their countries eventually became engines of European growth, and major export markets for Germany, France, and other EU member states.
The same arc of development can and should be limned for the southern Mediterranean.
Fortunately, research on migration and development in recent years has helped foster a range of policy tools that Europe should be considering. Experts and policymakers have been devising many innovative programs, including low-cost remittances from migrants to their home countries, efforts to strengthen ties between diasporas and their homelands, and initiatives that help skilled migrants find proper employment, so that qualified surgeons are not driving taxis.
In thinking about how to reframe the EU’s relationship with the southern Mediterranean, we should draw on these ideas as expansively as possible.
In order to connect our societies in positive ways, we should seriously consider liberalizing trade regimes, opening new avenues for legal migration, and vastly expanding the number of students from the region who come to Europe for education and professional training.
After all, it was the youth of North Africa, both at home and abroad, whose notions of freedom helped bring down dictators in Egypt and Tunisia.
Their talents and energy should now be cultivated and harnessed to help rebuild their societies.
Responding to the challenges and opportunities of this moment demands the creation of strong partnerships among states, international institutions, and non-governmental actors.
Since its inception in 2006, the Global Forum on Migration and Development (GFMD) has provided a much-needed platform for dialogue among states and other stakeholders on issues related to migration and development.
Its annual plenary sessions facilitate the exchange of experiences and good practices in a way that transcends traditional “North-South” conflicts.
Among other changes that it has spurred, the GFMD has compelled governments to understand migration more holistically, and to develop a “whole of government” approach to addressing the opportunities and challenges that it poses.
It also has highlighted the importance to development of protecting migrant rights and of fighting illegal migration.
The Global Forum has done its job by generating and fostering ideas that can make migration benefit the development of countries of origin and destination.
It is high time that these ideas are implemented.
There could be no greater opportunity for doing so than this strategically crucial window in the history of Europe and the southern Mediterranean.
If we do not seize this moment for action, history could well pass us by.
Europe’s Three Eastern Questions
WASHINGTON, DC – Today, the European project is shaking. Of course, I am confident that the eurozone’s ongoing sovereign-debt crisis will be overcome, and that a more integrated and effective Europe will emerge.
But, to get to that improved Europe, not only must the sovereign debt crisis be resolved; relations with three major countries to Europe’s east – Turkey, Russia, and Ukraine – will need to be put on more secure footing.
I was of the generation in my country that lived through the transition from dictatorship to democracy four decades ago.
For us, the European Union was a dream.
Indeed, we used to quote Ortega y Gasset: “If Spain is the problem, Europe is the solution.”
I continue to believe, very deeply, that Europe is the solution, particularly for societies that need to deepen – if not establish – a democratic tradition.
Closer relations between Europe and Turkey, Russia, and Ukraine can deliver for them many of the same benefits that we in Spain always associated with Europe.
Turkey is, of course, already a candidate for EU membership, but accession negotiations are moving very slowly, which is strategically unwise, because Turkey’s great authority in the wider Middle East is vitally important to Europe (and probably greater than its own).
From Syria to all of the Arab Spring countries, Turkey’s influence is highly significant, and further cooperation with the EU can only prove beneficial.
The EU has created a channel of communication with Turkey on political matters.
But it has not resolved the relationship’s endgame.
My passionate hope is that Turkey becomes an EU member, because a country that is Muslim, democratic, and overwhelmingly young could strengthen the Union in vital ways.
The debate around Turkish membership is set to become hotter in the second half of this year, when Cyprus assumes the EU’s rotating presidency.
Turkey, to be blunt, will not recognize today’s divided Cyprus as the sole representative of that island.
Further complicating matters is the discovery of oil close to the Cypriot coast.
Anyone planning to drill there will become embroiled in a major maritime dispute, with Cyprus claiming that the reserves lie within its territorial waters, and Turkey countering that Cyprus has no territorial waters, because Cyprus, at least for the Turks, does not exist.
Russia has become a different type of complicating factor for Europe.
Vladimir Putin, who has now returned to the presidency, may be the same person as before, but Russia has changed.
The recent wave of protests in Moscow and throughout the country has exposed the limits of his power.
I believe that Putin understands this, which is an important fact for future diplomacy.
In the next few days, the formation of Russia’s new government will reveal much about power relations between conservatives and liberals.
Notably, billions of dollars of public property are at stake, owing to a privatization plan designed by former President Dimitri Medvedev.
Here, the EU has a framework – the Partnership for Modernization, negotiated with Medvedev – that could potentially be very positive.
Russia’s accession to the World Trade Organization in 2011 should also help to ensure that it plays by international rules, as occurred with China when it joined the WTO.
Russia’s adherence to the WTO’s legal framework should begin to make economic relations with it much more stable and predictable.
Previously, Russia’s admission to the WTO had been blocked by Georgia, which lifted its veto last year after a feat of elegant diplomacy that established a border-control mechanism without recognizing the breakaway regions of South Ossetia and Abkhazia either as part of Georgia or as independent countries.
That solution, while complicated, is a good outcome for the region.
Given the scale of Ukraine’s current problems and dysfunction, an elegant solution may neither be available nor sufficient.
Ukraine, with which I have been engaged since its independence, has been a great frustration to me.
I was involved in the negotiations that helped to bring about a peaceful resolution of the Orange Revolution of 2004-2005.
But subsequent infighting between the revolution’s leaders, Yulia Tymoshenko and Viktor Yushchenko, was so destructive that Viktor Yanukovych, whose efforts to manipulate the 2004 presidential election incited the revolution, is now President and Tymoshenko is in jail.
For the EU, Ukraine continues to be a serious problem.
A comprehensive free-trade and association agreement with the Union remains unsigned, owing to the incarceration of Tymoshenko and others.
Fortunately, given the Union’s attraction for most ordinary Ukrainians, there is still hope that simple realism will persuade Yanukovych and Ukraine’s ruling elite to return to a path that would allow for the association agreement to be signed.
Europe’s soft power has changed many things in many countries over the past two decades, spurring leaders and citizens to reform their economies and embrace or strengthen democratic values and institutions.
It can continue to do so in Turkey, Russia, and Ukraine, or, through inattention and inaction, Europe could lose credibility, influence, and economic opportunities.
Europe’s Time to Learn
PRINCETON – Crises are a chance to learn.
For the past 200 years, with the exception of the Great Depression, major financial crises originated in poor and unstable countries, which then needed major policy adjustments.
Today’s crisis started in rich industrial countries – not only with sub-prime mortgages in the United States, but also with mismanagement of banks and public debt in Europe.
So what will Europe learn, and what relevance will those lessons have for the rest of the world?
Europe’s contemporary problems offer striking parallels with previous problems on the periphery of the world economy.
In successive waves of painful crisis – in Latin America in the 1980’s, and in East Asia after 1997 – countries learned a better approach to economic policy and developed a more sustainable framework for managing public-sector debt.
Today it is Europe’s turn.
The European crisis is coming full circle.
Initially a financial crisis, it morphed into a classic public-debt crisis after governments stepped in to guarantee banks obligations.
That, in turn, has created a new set of worries for banks that are over-exposed to supposedly secure government debt.
Sovereign debt no longer looks stable.
One of the most important precedents is the debacle of Latin American debt almost 30 years ago.
In August 1982, Mexico shocked the world by declaring that it was unable to service its debt.
For most of that summer, Mexico, with a projected fiscal deficit of around 11% of GDP, was still borrowing on international financial markets, though at an increasing premium.
Banks had reassured themselves with the belief that countries could not become insolvent.
But then a wide range of inherently different countries seemed to line up like a row of dominos.
While Mexico had a petroleum-based boom in the wake of the second oil-price shock of the 1970’s, Argentina suffered from economic mismanagement under a military dictatorship that then staged its disastrous invasion of the Falkland Islands/Malvinas.
Brazil had experienced an earlier version of its current economic miracle, with stunning growth rates financed by capital imports.
But in the end, these very different circumstances produced a common and inherently simple problem: over-indebtedness.
A Latin American default would have brought down the banking systems of all the major industrial countries, causing something like a replay of the Great Depression.
Exposure to Mexican debt alone represented some 90% of the capitalization of major US banks.
The solution that was eventually adopted was considered brilliant at the time, because it avoided formal default by any of the big Latin American borrowers (though Brazil briefly defaulted five years later, in 1987).
It involved a combination of three elements: immediate international assistance, through the International Monetary Fund; severe domestic retrenchment, enforced by the highly unpopular conditionality of IMF programs; and additional financing provided by the banks.
There was no institutionalized write-down of Latin American debt until five years after the crisis, when a haircut no longer threatened banks’ stability.
It was only at this moment that real lending for new projects could really begin.
In the meantime, Latin America remained mired in what became widely known as “the lost decade.”
The contemporary European solution seems to be repeating the same time-buying tactics of the lost decade of the 1980’s in the developing world.
There is the same combination of international support, highly unpopular domestic austerity measures (which are bound to set off major protests), and the apparent absolution of banks from financial responsibility for problems that they produced.
Major European banks – in the United Kingdom, Germany, and France – have, like their 1980’s predecessors, built up a gigantic exposure to what they erroneously thought was safe debt.
A substantial immediate haircut on the sovereign debt of the vulnerable eurozone countries would be so destructive that it would set off a new round of bank panics.
Recognizing this problem, banks can hold their host governments to ransom.
That is why the crisis has become a challenge for the UK, Germany, and France.
The Franco-German initiative unveiled at Deauville in early November, which would require some possible measure of restructuring for debt issued after 2013, tried to avoid the immediate shock of a haircut.
But the pre-announcement of possible write-downs still led to a major wave of uncertainty about banks.
A long-term alternative requires some capacity to write down debt where it has reached excessive levels.
But it is also necessary to establish an iron-clad guarantee of some part of the outstanding debt, in order to remove fear of a complete write-down.
A mechanism for dealing in an orderly way with sovereign bankruptcy would be a major contribution to global governance, and to solving a longstanding problem of sovereign-debt markets.
Such proposals were widely discussed in the 1990’s and early 2000’s, and IMF Deputy Managing Director Anne Krueger pushed a Sovereign Debt Restructuring Mechanism that would have offered a legal path to imposing general haircuts on creditors, thereby ending the collective-action problems that impede the efficient resolution of sovereign bankruptcy.
If Europe could show – in the worst possible scenario of sovereign default – how such a process might operate, uncertainty would be reduced and markets would be reassured.
And, in the longer term, we would have a viable international model of how to tackle severe sovereign-debt problems.
Europe’s Triple Threat
PALO ALTO – Europe is suffering from simultaneous sovereign-debt, banking, and currency crises.
Severe economic distress and political pressure are buffeting relationships among citizens, sovereign states, and supranational institutions such as the European Central Bank.
Calls are rampant for surrendering fiscal sovereignty; for dramatic recapitalization of the financially vulnerable banking system; and/or for Greece and possibly other distressed eurozone members to quit the euro (or for establishing an interim two-tier monetary union).
In this combustible environment, policymakers are desperately using various vehicles – including the ECB, the International Monetary Fund, and the European Financial Stability Facility – in an attempt to stem the financial panic, contagion, and risk of recession.
But are officials going about it in the right way?
The sovereign debt, banking, and euro crises are closely connected.
Given their large, battered holdings of peripheral eurozone countries’ sovereign debt, many of Europe’s thinly capitalized banks would be insolvent if their assets were marked to market.
Their deleveraging inhibits economic recovery.
And the large fiscal adjustment necessary for Greece, Ireland, and Portugal, if not Italy and Spain, will be economically and socially disruptive.
Default likely would be accompanied by severe economic contraction – Argentina’s GDP fell 15% after it defaulted in 2002.
Despite stress tests, bailout funds, and continual meetings, a permanent workable fix has so far eluded European policymakers.
Failure will erect a huge obstacle to European economic growth for years to come, and could threaten the survival of the euro itself.
Disagreement among and between heads of state and the ECB over the Bank’s purchases of distressed sovereign debt have only added to the uncertainty.
A decent pan-European economic recovery, and successful gradual fiscal consolidation, would allow the distressed sovereign bonds to rise in value over time.
Until then, the jockeying will continue over who will bear the losses, when, and how.
Will it be Greek citizens?
German, French, and Dutch taxpayers?
Bondholders?
Financial institutions’ shareholders?
And the fundamental problem is that how the battle is resolved will affect the amount of the losses.
Prices of bank shares and the Euribor-OIS spread (a measure of financial stress) signal a profound lack of confidence in the sovereign debt of distressed countries, with yields on ten-year Greek bonds recently hitting 25%.
The crisis affects non-Europeans too; for example, concern over the exposure of American banks and money-market funds to troubled European banks is harming US financial markets.
There are three basic approaches to resolving the banking crisis (which means resolving the fiscal adjustment, sovereign debt, and euro issues simultaneously).
The first approach relies on time, profitability, and eventual workout.
One estimate suggests that a 50% reduction in the value of peripheral countries’ sovereign debt (reasonable for Greece, but high for the others) would cause about $3 trillion in losses, overwhelming the capital of European banks.
But the banks are profitable ongoing enterprises in the current low-interest-rate environment, because they typically engage in short-term borrowing and longer-term lending at higher rates, with leverage.
Playing for time thus might enable them gradually to recapitalize themselves by retaining profits or attracting outside capital.
A strong, durable economic recovery would make such an approach workable.
Most European officials hope that, when combined with substantial public money to support troubled sovereign debt, it will.
The Obama administration adopted this option, following the unpopular Troubled Asset Relief Program, which injected hundreds of billions of public dollars into the banking system (most of which has been repaid).
But some US banks, including Bank of America and Citi, are still vulnerable, with considerable toxic assets (mainly related to home mortgages) on their balance sheets.
The second approach is rapid resolution.
But letting questionable banks gradually recapitalize themselves and resolving the bad debt later – perhaps with European Brady Bonds (zero-coupon bonds which in the 1990’s enabled US banks and Latin American countries to agree to partial write-downs) – won’t work if the losses are too large or the recovery is too fragile.
More rapid resolution may be necessary to prevent zombie banks from infecting the financial system.
The US Resolution Trust Corporation rapidly shut down 1,000 insolvent banks and Savings and Loans from 1989 to 1995 so that they would not damage healthy institutions.
Scaled to today’s economy, assets worth $1.25 trillion were sold off, with 80% of the value recovered.
The financial system rapidly returned to health.
This approach requires judgment and resolve in separating insolvent institutions from solvent ones.
Finally, there is the path of public capital.
If market-driven recapitalization is too slow, and closing failing institutions is impossible, a more extreme alternative is to inject public capital directly into the banks (rather than indirectly, as now, by propping up the value of the sovereign debt that they hold).
This approach prevents bank runs, because banks with more capital are safer.
But how much public capital should be used, and on what terms?
Private capital, of course, is preferable, but, given the risk that it will be wiped out by future public intervention, investors will be wary.
In the meantime, regulators are increasing banks’ capital ratios.
Europeans, both debtors and creditors, must address the banking problem forthrightly, and simultaneously with the euro, sovereign-debt, and fiscal-adjustment issues.
Pretending that banks that passed modest stress tests can be kept open indefinitely with little collateral damage is wishful – and dangerous – thinking.
Europe’s Trojan Horse
BERKELEY – Europe is now moving ineluctably toward a bailout for Greece. There will be emergency financing.
There will be conditions. There will be the obligatory promises by the government in Athens.
This will make it possible for the Greek government to service its debt.
The markets will settle down.
The longer-term consequences will not be savory, but they will be problems for another day.
Some will say that the fatal mistake was allowing Greece to adopt the euro in the first place.
That the country was unprepared should have been clear.
Its fiscal policies were already out of control when it joined the monetary union in 2001, and its trade unions were agitating to push wages up to European levels, despite lagging productivity.
But this answer is too simple, given that such signs of dysfunction are not limited to Greece.
Spain, with its 20% unemployment rate and exploding budget deficit, sees in Greece an image of its own future.
Or, if it doesn’t, the markets do.
Portugal and Italy are little better.
Like Greece, these countries now face sharp budget cuts. Like Greece, they can’t devalue to encourage exports.
Like Greece, they face deep recessions. Like Greece, they will be tempted to ask for help.
All of this raises the obvious question: Was the real mistake creating the euro in the first place?
Since I was one of the few Americans to advocate a single European currency, you would be justified in asking: Am I having second thoughts?
My answer is no, creating the euro was not a mistake, but it could still be a mistake in the making.
The Greek crisis shows that Europe is still only halfway toward creating a viable monetary union.
If it stays put, the next crisis will make this one look like a walk in the park.
Completing its monetary union requires Europe to create a proper emergency financing mechanism.
Currently, other member states can provide assistance to Greece only by bending the rules, which prevent them from lending except in response to natural disasters or circumstances beyond a country’s control.
This heightens uncertainty.
When Europe’s leaders do help, it makes the public and markets think that they are being dishonest.
If it is the Lisbon Treaty that creates these problems, then the Lisbon Treaty should be changed.
Moreover, assistance should come not just with conditions, but with temporary control of the national budget by a committee of “special masters” appointed by the European Union.
Mere promises by the recipient, history tells us, are not enough.
No doubt, countries to which these measures are applied will express outrage.
Well, no one is forcing them to take the money.
Worried about moral hazard?
Here’s your solution.
Note also that this would also be a much more effective disciplining mechanism than the defunct Stability and Growth Pact.
You might well ask: how would Californians feel if their state was forced to turn over its budget temporarily to a special master appointed by President Barack Obama’s administration?
Actually, they would probably feel okay.
The special master would not be a fellow Californian, but he would be a fellow American.
People would understand that he was acting in the interest of the state as well as the country.
They would also be reassured by the fact that California sends representatives to Washington, D.C., where the special master’s marching orders would be issued.
Europeans don’t do these things because they see themselves as Greeks and Germans first.
They don’t interfere in the “sovereign prerogatives” of other member states.
Germany is especially reluctant, given memories of its World War II conduct, not least in Greece.
Well, if Europe is serious about its monetary union, it will have to get over its past.
It needs not just closer economic ties, but also closer political ties.
Those running a strong emergency financing mechanism will have to be strongly accountable. They will have to answer to a strong European Parliament.
German Chancellor Angela Merkel’s constituents hate bailouts, because they know that it is they who will be doing the bailing.
They oppose anything that smacks of European political integration.
But Germany is not innocent of responsibility for this crisis.
It demanded an extraordinarily independent and unaccountable central bank that is now running an excessively tight monetary policy, aggravating the plight of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain).
Germany’s enormous current-account surplus aggravates their problems further.
Germany has also done too little in terms of fiscal stimulus to support the European economy.
Germany has benefited enormously from the creation of the euro.
It should repay the favor.
It should push for the creation of an emergency lending facility, and for political integration to make that feasible.
It should provide more fiscal support.
And who better to press for a more accountable European Central Bank?
The Greek crisis could be the Trojan horse that leads Europe toward deeper political integration.
One can only hope.
Europe’s Troublesome Neighbors
PARIS – Geography has dealt Europe a mixed hand.
Europeans can congratulate themselves on being a relatively safe distance away from whatever tensions may accompany the rise of powers like India, Brazil, and, especially, China.
But Europe is bordered to its south and east by two great regions that give cause for significant concern.
Neither Russia nor the Islamic world is, thus far, adapting well to globalization.
The economies of both remain over-dependent on oil and gas exports.
In the Middle East, this exacerbates the problem of creating jobs for ballooning populations of young adults.
Russia, too, faces real demographic difficulties, though in the other direction as Russia’s population is projected to shrink by as much as 10% over the next 15 or 20 years.
Despite the understandable concerns of Finns, Poles, and others in Central and Eastern Europe, the relationship with Russia should be the easier of the two to manage.
The West’s relations with Russia since the end of the Cold War have resembled the meeting of two tectonic plates, with one progressively forced beneath the other.
The Georgia conflict of 2008 was the tremor that signaled substantial resistance to the western plate’s eastward movement.
But the shifts that have taken place left Russia much diminished in terms of its sphere of influence and military might.
To be sure, Vladimir Putin’s Russia is nationalistic, awkward, and disposed to dangerous trouble-making.
But it also faces acute social and public-health problems and has 1.3 billion Chinese on its eastern border, and it has important common interests with Europe, including trade in gas and oil and a shared preoccupation with Islamic extremism.
Handled with forbearance and firmness, relations with Russia should remain difficult but manageable.
With NATO backing off, the European Union stepping in with its Eastern Partnership initiative to shift continuing competition in the post-Soviet space onto a less antagonistic footing, and President Barack Obama demonstrating his willingness to assuage Russia’s damaged pride, major confrontation should be avoidable.
Europe ’s relations with the Islamic world are a lot trickier.
First, although Russia’s resentments may be fresher, those of the Muslim world run deeper, and are born of more profound interactions, past and present.
Second, whether one thinks of Al Qaeda’s terrorism or the presence of Western armies in Iraq and Afghanistan, Europe and the Islamic world have demonstrated a continuing willingness to deal violently with each other.
Third, even if Europeans are a disparate group, the Islamic world is infinitely more so.
Islam is its identifying glue – but how much else do Indonesia and Yemen, for example, have in common?
The Islamic world is riven by disputes between Arab and non-Arab, Sunni and Shia, and Salafi extremists and theological moderates.
Al Qaeda’s agenda is as much about the creation of a new Islamic caliphate as it is about waging jihad against the West.
Fourth, Europeans find it hard to stomach traditional Islamic attitudes towards, say, women or homosexuals.
Muslims find it hard to understand how we can believe our society is civilized when pornography and drunkenness are openly displayed.
To the extent that Europeans are Christian at all, we see religion as a matter of an individual’s relationship with his or her God;
Muslims see it as an organizing social principle.
Ours is a guilt culture; theirs a shame culture.
Israel is, of course, the single issue on which the Islamic sense of resentment focuses.
It exemplifies Western hypocrisy – whether over nuclear non-proliferation, the refusal to deal with the elected Hamas, or readiness to criticize Russia for “disproportionate” use of force in Georgia while remaining quiet over 1,300 deaths in Gaza.
Unlike his two predecessors, Obama has had the courage to target the Israel-Palestine problem, the intractable seat of the infection, from the beginning of his presidency.
And he went to Cairo to address the Arab world with humility and respect, without shirking issues of human rights and individual freedom.
The risk in this American activism is that it will provide the excuse for Europeans to sit back and cheer while someone else does the heavy lifting. But passivity would be a historic mistake.
America’s Middle East interests are not identical with those of Europe.
Protected behind its oceans, and applying its vast technological capacity to the goal of energy self-sufficiency, the United States is ultimately able to distance itself from the travails of the Middle East.
Once out of Iraq and Afghanistan, the US may find itself increasingly tempted to do just that.
For Europe, such distancing is impossible. European security is inextricably bound up with the need to find and maintain a modus vivendi with the Muslim world.
Europe is not without leverage.
It has currently put on hold a deepened economic relationship with Israel: if Israel’s government continues to refuse to stop its colonization of the West Bank, Europeans should make clear that, as Israel’s most important export market, they have tougher options at hand.
European military forces will also be required to play a crucial role in policing and guaranteeing a two-state settlement.
This makes it all the more important for Europe to wake up to where its real security interests lie, and to take responsibility for asserting them.
Europe’s Uneven Growth Challenge
A year ago, the euro zone’s most important challenge was anemic economic growth.
But 2006 turned out to be a good year for growth in Europe, as surprising strength in exports sparked unexpected increases in domestic demand.
Germany, the euro zone’s biggest economy, had a particularly dramatic turnaround, with annual GDP up by 2.7% in 2006, the highest rate since 2000.
Not only has German resurgence raised overall growth in Europe, but it has also made growth less evenly balanced throughout the euro zone.
This is because Germany is growing faster than the other large economies, France and Italy.
Germany accomplished this feat by dramatically re-structuring its corporate sector.
From 2001 to 2005, there was a “silent revolution” in Germany.
While observers and commentators focused on the economy’s slow overall growth, behind the scenes, largely unnoticed, important changes were taking place.
Without fanfare, German workers accepted longer hours without increases in pay.
This allowed Germany to improve its competitive position in world markets vis-à-vis the other large euro-zone economies, where there were no productivity revolutions, silent or otherwise.
It took some time for the silent revolution to show concrete results.
But by 2006, both German exports and GDP were growing faster than in France and Italy.
Before the introduction of the euro, the reform gap between Germany and its larger neighbors would have been no problem for Europe.
The currencies of the reform laggards would have depreciated against that of Germany, and there might have been a supportive cut in interest rates as well.
This is no longer possible.
Superior German economic performance has bid up the euro and European interest rates to levels that, while comfortable for the Germans, put pressure on the euro zone’s laggards.
The appropriate level of the euro for the Germans is too high for the French and Italians.
The right interest rate for the French and Italians is too low for the Germans.
For reform laggards like France, Italy, and Portugal, currency union with an increasingly competitive Germany is forcing an unwelcome choice between revving up their own reforms and permanent stagnation.
This is no easy choice.
Even with political will, revving up the reform process is a difficult task and takes time.
Indeed, it took a motivated Germany four to five years to do it.
But the prospect of permanent stagnation for countries like France, Italy, and Portugal is unacceptable.
Chronic stagnation is too high a price to pay for adopting the euro.
Naturally, politicians are reluctant to face up to choices between the unacceptable (permanent stagnation), the unthinkable (leaving the euro), and the hard-to-do (reform).
So they are taking refuge in fantasy.
In France, for example, all current presidential candidates hold out the unrealistic prospect of staying in the currency union but watering down the independence of the European Central Bank and its price stability mandate, increasing “consultation” between governments and the ECB, and manipulating the euro to France’s advantage.
This is pure escapism.
Approval of fundamental changes in the currency union must be agreed by all members, and so will not be forthcoming.
Nor will ECB President Jean-Claude Trichet be intimidated by French pressure to pursue a softer monetary policy.
Trichet is a tough guy with a long history of standing up to the French politicians.
They couldn’t make him bend when, as Governor, he successfully defended the independence of the Bank of France, and they won’t make him bend now.
At the January meeting of the ECB’s Governing Council, for example, Trichet virtually pre-announced that European interest rates would be increased in March just before the April French elections.
The ECB President made it clear he will do his duty whatever the political pressure.
The defining factor in Trichet’s sense of duty is the Maastricht Treaty, which clearly states the prime objective of Europe’s central bank to be the promotion of price stability.
Some in France – and not just the left – want to change this.
One idea making the rounds is for the European Parliament to define the ECB’s objectives, on the basis that it is democratically elected – as if the Maastricht Treaty did not result from a democratic process.
This high-handed attempt to highjack the ECB and make it a servant of the European Parliament would mean chronically low European interest rates and a depreciated euro.
France would be off the reform hook, of course, but at the expense of Germany, which would face unwanted inflationary pressures.
This proposal illustrates how the reform gap, and the unbalanced growth that results from it, can debilitate the European fabric by setting one partner against the other.
To protect European cohesion as well as improve their own economic situation, France and Italy must reform at a faster pace than Germany rather than just waiting for Germany to slow down.
The hard-to-do is preferable to the unacceptable and the unthinkable.
Still, there is little indication so far that the two reform laggards are up to the challenge.
Europe\u0027s Unity in European Values
Alongside the debate about the European Union constitution, a debate about European values has also developed.
This debate is important not only for implanting meaning in the constitution, but will also determine the vitality and energy of the EU itself.
The EU, being the product of several great religious and philosophical traditions, is a community of values.
The ideas of the Greeks and Romans, Christianity, Judaism, humanism, and the Enlightenment have made us who we are.
Dialogue with Islamic and Arabic cultures also helped form our identity.
The pattern of our values has been woven over hundreds of years.
Europe is the continent of Michelangelo and Montesquieu, but also of the guillotine and the gas chamber.
Indeed, the bitter experience WWII taught Europeans how fundamental is the importance of shared values.
In an impoverished, war-ravaged Europe, people yearned for peace, freedom, stability, and a new chance to prosper.
The architects of European integration - Monnet, Schuman, Adenauer, De Gasperi, and others - understood that these ideals could be achieved only by combining and interweaving the practical interests of Europe's countries.
They built their fragile house of peace on a foundation of coal and steel.
The founders passed the torch on to the generation of Jacques Delors, Helmut Kohl, François Mitterrand, Václav Havel, Valéry Giscard d'Estaing, and others.
They broadened and deepened European cooperation.
Their leadership made it possible for Europe to make great strides towards its post-war ideals - peace, stability, and prosperity.
We now stand at the threshold of a new phase of European cooperation.
In late October, the EU's Constitutional Treaty will be signed.
A new generation of politicians is ready to carry the torch onwards.
But is the torch still burning bright?
In the early 1950s, Jean Monnet wrote: "We are not forming a coalition of states.
We are uniting people."
Apparently not.
As the Union races ahead, it seems that it has lost Europe's citizens along the way.
Many are turning their backs on the whole project.
They have trouble seeing what is common to Europe.
They do not feel part of the great whole.
Even in the new member states, enthusiasm for the European family of democracies is cooling.
We have achieved a united Europe without uniting Europeans.
Today's post-war generations, lacking direct memory of WWII, view Europe's great achievements - liberty, peace, and prosperity - as a given.
The idea of Europe as a heritage and a mission does not mean much.
But, without ideals, Europe's foundations will erode.
The emphasis on pure self-interest increases this threat.
My generation grew up with the image of Europe as an economic form of cooperation.
Political motives behind European integration were overshadowed by the economic project.
The result is an impression of Europe as a marketplace.
A Europe of markets and money, not of man and morals, dominated the project.
But without a moral foundation, there can be no free-market economy.
Today, we are paying the price for not attending to Europe's shared values and common mission.
Until Europeans know precisely what Europe stands for, what inspires and motivates us, the Union will not be able to take joint action in the world.
The EU Constitution will make Europe more democratic and more transparent.
It provides further guarantees that decisions will be taken by those closest to citizens, and it acknowledges the significance the values on which the Union rests: respect for human rights and dignity, liberty, democracy, equality, and the rule of law.
These shared values are the glue that binds governments together in the recognition that clinging to pure self-interest is no longer reasonable when common concerns call for a common strategy.
For what is the point of doing away with Europe's physical borders if borders between its citizens remain?
How can Europeans be happy that the Iron Curtain is gone if individuals and groups across the Union barricade themselves behind private iron curtains?
Indeed, fear, insecurity, and nationalism are again raising their heads.
It is important for Europeans to reflect on that as they prepare for further rounds of enlargement and consider starting accession negotiations with Turkey.
The preamble of the Constitution states that Europe is "united in its diversity."
This may be the most concise statement of what makes Europe Europe.
But the words "united in diversity" raise the question of where this unity lies.
The answer lies in the values on which the Union is based.
They are contained in three concepts: freedom, solidarity, and mutual respect.
These three together make it possible for Europe to open its doors to a great diversity of peoples and at the same time to speak as a community of peoples prepared to take responsibility for one another.
Making such a community a reality will not come about by believing that Europe's culture is better than others.
We will make it a reality through dialogue and deep reflection about Europe's common values.
Values must be the road that leads to what cannot be reached by markets and institutions alone - the accession of Europe's citizens to the European Union.
Only by embracing their shared values can Europeans prevent their Union from becoming a spiritless machine.
Together, Europeans must find what connects them, and derive new enthusiasm, new spirit from what they find - a spirit sorely needed to tackle the great issues of today.
No country can address these issues along.
After more than fifty years, Europe as a community of values remains as necessary as ever.
Europe\u0027s University Challenge
The university systems in the US and Continental Europe couldn't be more different.
Which works better?
The answer is clear: America's by a long shot.
European universities are generally based on three misguided principles: taxpayers rather than students pay for university education; faculty appointments are governed by public sector contracts and university procedures are often centralized and almost always inflexible; salaries amongst teachers tend to be equalized as well as teaching quality amongst universities.
This system is supposedly more egalitarian than America's system of higher education, which many Europeans look down on as elitist.
In reality, Europe's system typically produces less research, worse students (especially at the doctoral level), and is probably less egalitarian than the US system.
Having taxpayers cover the costs of university education is indeed redistributive, but in the wrong direction--the beneficiaries are most often the children of comfortable European families.
Even taking a generous view, the best that can be said is that the system is neutral insofar as redistribution is concerned, because the wealthiest pay more taxes and use more university services.
In addition to favoring Europe's "haves," this system makes it virtually impossible for self-financed private universities to survive.
In fact, this is probably the true motivation of Europe's free public university system: to maintain the state's monopoly on higher education.
But consider, instead, the US system: students pay for their education and, with part of the tuition these students pay, universities finance scholarships for deserving but poor students.
Such a system is at least as "fair" as Europe's model, and probably more so than one in which taxpayers pay for everybody, including the rich.
Indeed, recent research comparing education in the US and Italy finds that family income is more important in determining a student's success (measured in terms of his salary) in "egalitarian" Italy than it is in "elitist" America.
But competition is as important as financing in determining a university's quality, because competition increases the merit of the product.
This is true in the US system, where public and private universities coexist happily.
The University of California at Berkeley is public. Stanford University, an hour away down the coast, is private.
Both are among America's finest universities.
Competition between them works because it involves fighting for the best students and offering scholarships to deserving poor ones.
By contrast, Europe's centralization and bureaucratization control over universities produces only mediocrity.
Appointments in European universities are often governed by complex bureaucratic processes that involve countless "judges" chosen from all over a country.
This process is supposedly designed to "guarantee" that the best are appointed.
In reality, however, these judges make it easier for insiders to appoint their friends, rather than for the quality of research and teaching to determine who is hired.
Some countries, take France, are changing their systems by appointing a few academics from other countries onto hiring and promotion committees.
While this is obviously a move in the right direction, it will produce few results.
The best American universities operate their hiring processes internally, relying on outsiders only for expert opinions on the quality of a candidate professor's research.
What produces good appointments is the threat that mediocre professors will make it difficult to attract good students and large research grants.
Europe's tendency to equalize salary and treatment of professors and researchers also reduces the incentive to engage in good research and good teaching.
If the only factor that increases a professor's salary is the passage of time, why make the extra effort to excel?
Of course, love of research and teaching is why many people join university faculties in the first place, but why not give these noble sentiments a helping hand with appropriate financial incentives?
Low salaries are often part of an implicit bargain: in exchange for the bad pay, university administrators close their eyes to lazy teaching and research.
Moreover, if salaries are low, how can university deans stop their faculty members from scouring the country to do lucrative consulting?
The result is bad teaching, lousy research, and absentee professors.
US universities often use aggressive financial incentives and differential treatment of professors to reward good teaching and research.
Also, the private nature of contracts between an American university and its professors creates healthy competition for talent and a flexible and efficient market for scientists.
The result is that it is not uncommon for a bright, productive young professor in America to earn as much, if not more, than older and less productive colleagues.
In Europe, promising young researchers struggle and have to supplement teaching and research with outside jobs, while established professors earn good salaries.
Given these conditions, it should surprise no one that American universities nowadays are increasingly staffed by many of Europe's best scholars.
What is surprising in the face of this brain drain is the power of the lobby of university professors in Europe to block reform.
Europe’s Vision Deficit
PARIS – In the Western part of Europe – the part that former US Secretary of Defense Donald Rumsfeld maliciously labeled “Old Europe” – almost every government is in deep political trouble.
The United Kingdom’s new coalition government may be the exception – for now.
In the European Union’s big member states, the popularity ratings of leaders – Nicolas Sarkozy in France, Silvio Berlusconi in Italy, Angela Merkel in Germany, and José Luís Rodriguez Zapatero in Spain – hover around 25% or worse.
Whether it is conservatives like Sarkozy, Christian Democrats like Merkel, right-wing populists like Berlusconi, or socialists like Zapatero, political affiliation appears to make no difference.
If you hold office in Europe nowadays, you are in trouble.
What has gone so wrong?
The economic crisis seems to be the most obvious explanation, but perhaps too obvious.
Two years ago, when shockwaves from the collapse of the US housing bubble crashed onto European shores, these political leaders reacted with apparent vigor, making themselves rather popular for a while.
Paradoxically, the early stages of the financial crisis appeared to favor conservative and pro-market leaders – who seemed to be in a better position to save the economy – more than socialists.
Today, this is no longer the case.
Socialism is on the rise again across Europe, at least in opinion polls.
And right-wing populism has become an electoral force to be reckoned with in France, Belgium, and the Netherlands.
Economic stagnation has come to appear endless.
Jobs are scarce, and the future looks bleak everywhere.
The Greek crisis has cast a pall over the entire eurozone. The common currency is now looked at with suspicion.
On the fringes of public opinion, some people are even muttering suggestions that their countries should revert to their ancient national currencies – which of course would only bring disaster in the form of an even more confusing state of affairs, as EU countries are indebted in euros. To quit the eurozone would only increase their level of indebtedness.
What makes this desolate economic landscape even gloomier is the striking inability of European leaders to explain what has happened and is happening to their citizens.
Indeed, I believe that it is here that the seminal reason for their plunging poll ratings lies.
Europe’s leaders seem to lead nowhere, because they have no vision on which to draw.
Consider the euro: no head of state or government has so far been able to present a coherent defense of the eurozone to counter the pervasive unease that now exists towards the common currency.
Or public spending: all European leaders adamantly want to reduce government spending.
But these same leaders, including that supposedly stern mistress of the budget Angela Merkel, were arguing less than two years ago that public spending would provide a “Keynesian” way out of the crisis.
Why such a turnaround?
The European public has discovered that the 2008-2009 fiscal stimulus programs, which were aimed at forestalling an even greater crisis, generated more debts than jobs.
Politicians, however, hate to confess past errors.
Thus, they appear unable to explain their new rationale for the spending cuts that they are now announcing.
Europe’s leaders make things worse when they prove unable to connect isolated “reforms” – say, a lower public deficit – with any comprehensive vision of the economy.
A good example is Sarkozy’s effort to raise France’s retirement age from 60 to 62. Trade unions are up in arms, which, after all, is their duty.
The population at large just does not understand what links raising the retirement age with the crisis.
The truth that politicians (David Cameron’s UK government excluded, at least for now) are reluctant to admit is that Western Europe’s current morass is distinct from the global US-made downturn.
Old Europe has entered into a severe and intractable crisis of the welfare state as ordinary Europeans have come to know it.
The generous retirement pensions, unemployment compensation, health coverage, and all kinds of social programs that make Western Europe a comfortable place to live were established when Europe’s economy and population were growing fast.
Now, after one generation of economic and demographic stagnation, the welfare state can be financed only by issuing more public debt.
Financial markets, awakened by the global crisis, will no longer support today’s Potemkin-like situation, in which welfare benefits have become a façade propped up by deficits.
Political leadership at such a moment demands a Churchillian accent.
It needs to be explained why the euro remains the best protection there is against inflation, the most dangerous social ill of all; why government stimulus will not work and never actually has delivered sustained growth; and why a new equilibrium between welfare and economic dynamism – based on less public debt and more private investment – must be established.
Such a discourse, if clearly articulated, would be understood and could be endorsed by many, if not by all.
At the very least, it would bring a sense of coherence to the actions of politicians, and those opposed to this search for a new European equilibrium – mostly Marxists and populists – would need to compete with a new vision of their own.
Would such an articulate vision make Europe’s leaders more popular?
Maybe, and maybe not, but they would almost certainly appear more legitimate, even in the eye of their adversaries.
Europe’s Vital French Connection
PARIS – In the debates raging over the future of the European Union and the eurozone, Germany always takes center stage.
It has the largest economy, accounting for 28% of eurozone GDP and 25% of the eurozone’s population.
It is running a current-account surplus that is now larger than China’s – indeed, the largest in the world in absolute value.
And, while weighted majorities can overrule it on some issues, everyone acknowledges that little can be done in the eurozone unless Germany agrees.
But the emphasis on Germany, though justified, should not lead to an underestimation of France’s critical role.
France not only accounts for roughly 22% of eurozone GDP and 20% of its population – behind only Germany – but also has the healthiest demography in the eurozone, whereas the German population is projected to decline over the next decade.
At the same time, France’s critical role reflects more than its size.
Indeed, in terms of influencing outcomes in Europe, France is as important as Germany, for three reasons.
First, France is an indispensable link between southern and northern Europe at a time of growing economic and financial division between creditors and debtors (a fissure that has begun to assume a cultural dimension).
An active France can play a bridging role, leveraging its strong relationship with Germany (a friendship that is a pillar of the EU) and its proximity and cultural affinities to the Mediterranean.
France is “southern” in its current-account deficit, but “northern” in its borrowing costs (slightly above Germany’s), owing partly to inflows of capital fleeing the south, as well as to modest but positive economic growth.
Moreover, there is no perceived “re-denomination” risk affecting French assets, given markets’ confidence that France will retain the euro.
So, while France faces huge economic challenges, its northern and southern features permit it to play a proactive role in the European project’s survival.
French President François Hollande has already given a rather successful preview of this role, meeting German Chancellor Angela Merkel in Berlin on his first day in office, and, a month later, participating in a high-profile meeting with the Italian and Spanish prime ministers in Rome.
Indeed, he took the lead in adding a “growth pact” to the “stability pact” that had been negotiated under Merkel’s leadership.
Second, France, under its new center-left government, must demonstrate that the “European model” of a market economy coupled with strong social solidarity can be reformed and strengthened, rather than abandoned – not just in Europe’s more pragmatic north, but also in its more ideological south.
French Socialists will not renounce their traditional commitments; nor should they.
But they now have the opportunity to contribute to the European model’s renewal.
Under Hollande, France’s Socialists favor achieving that renewal through a process of social dialogue that convinces rather than imposes, that focuses both on revenue measures and on boosting government efficiency, and that may adopt some of northern Europe’s more successful “flexicurity” policies, which combine greater labor-market flexibility with strong social protection.
The reforms should also introduce much greater individual choice, permitting solutions to retirement, education, health, and lifestyle issues that can be more easily tailored to citizens’ specific circumstances and needs.
The government of Hollande and Prime Minister Jean-Marc Ayrault has strong majorities at all executive and legislative levels, giving it a rare opportunity to act.
If it can renew the European model at home, it will be able to project that success much more widely, particularly in southern Europe, in turn reinforcing confidence and belief in the EU, particularly among the young generation.
The French center-left must lead in conceiving a vision for Europe in which solidarity and equity reinforce long-term economic strength.
Finally, along with the United Kingdom among European countries, France retains more of a global role than Germany has yet acquired.
While the United Nations Security Council is outdated in its structure, it still plays a crucial legitimizing role; and France, not Germany, is a member.
In many other international organizations as well, France punches above its weight.
Similarly, while France exports much less than Germany outside the EU, many large French enterprises rival Germany’s in global reach and technical know-how.
And French is still a global language.
In other words, France not only is a link between Europe’s north and south, but also contributes substantially to linking Europe to the rest of the world.
Europe needs a renewed vision and effective policies to realize that vision.
France’s Socialist-Green government can play a critical unifying role as Europeans confront their biggest challenge in decades.
Its success will be highly consequential – not least for the political debate that will inform the outcome of Germany’s elections in 2013.
Europe\u0027s War of Big and Small
The debate on proposals for a new Constitution for the European Union, now entering its final stage in the so-called "European Convention," is turning into a power struggle between member states over rival visions of the future of the Union.
In the past, the main axis of debate was usually been between federalists, who want a stronger EU, and inter-governmentalists, who want to preserve the member states' national autonomy. This remains true today.
But the debate is now being distorted by a secondary struggle between the EU's large and small countries, with results that are sometimes paradoxical.
The immediate issue is management of the EU Council of Ministers.
At present, the Council meets under the Presidency of an individual member state for a period of six months, at the end of which the Presidency rotates to another member state.
France and Germany argue that this rotational system is dysfunctional, partly because of discontinuity, and have proposed that the Council should appoint a full-time permanent President for a period of five years.
Their proposal was categorically rejected in a joint submission by 16 existing or future member states, all of them small countries, who insisted that the principle of rotation must be retained, as a symbol of the equality of all member states.
The stakes on this issue have now been raised two notches higher. Valéry Giscard d'Estaing, the President of the Convention, has formally endorsed the Franco-German proposal.
The same day, the European Commission hit back with a strong criticism of the proposal, saying that it would create rival bureaucracies and a sense of confusion.
The deep reason for this particular argument is the EU's looming enlargement, which will take the membership from 15 to 25 countries in May 2004.
When the European enterprise started, there were three small and three large countries; but almost all the new members are small countries.
So after enlargement there will be six large and 19 small member states.
This re-balancing between the large and small member states is shifting some old assumptions in a number of paradoxical ways.
In the past, small member states used to gravitate towards federalist positions, because they calculated that they needed strong central institutions to contain the power of the large member states (especially France).
Today, by insisting on Presidential rotation and the equality of member states, whatever their size, the small countries are effectively adopting an inter-governmentalist position, because they fear that the real purpose of the Franco-German proposal is to ensure that the Council will remain under the leadership of a big member.
There is, in fact, little doubt that is what France and Germany (and Britain) intend.
So here is the second paradox: both large and small EU countries imagine that they can optimize their relative leverage by adopting inter-governmentalist positions.
They cannot both be right.
It is far too soon to draw hard and fast conclusions.
The "Convention," though influential, is just a debating group; the real negotiations between governments will come later this year.
We can have no idea in advance how a 25-member EU will really operate; practical realities will exert their influence on political chemistry.
It is conceivable that the swarm of small new member states may revert to the traditional and logical predisposition towards federalism.
But my personal hunch is that the Franco-German proposal is based on a fundamental error of judgment.
To understand why, consider that their proposal for a permanent Council President was paired with a proposal that the Commission President--currently nominated by the Council of Ministers--should in future be elected by the European Parliament, and subsequently be endorsed by a majority vote of the Council of Ministers.
If adopted, this innovation would confer much greater political legitimacy on the Commission President, as well as greater independence from the Council of Ministers (i.e., the member states).
It is possible that the French thought that a permanent Council President would be an appropriately inter-governmental counter-weight to a super-legitimate integrationist Commission President.
There are just two problems: first, an appointed President of the Council would have no particular legitimacy, he would be just another appointed official.
Second, his ostensible task--representing the EU abroad--must depend on a degree of agreement between the member states on foreign policy that is now completely absent.
On the contrary, even if a number of large member states talk up about a common foreign policy, they prove by their actions that they are determined to maintain their own national foreign policies.
In the run-up to the Iraq war, many member states refused even to consult their colleagues.
So even if the French and Germans get their way, the Council will have a President representing nobody but himself.
Of course, the future is unpredictable.
Even the British may learn to understand Europe, though no one should count on it.
But we should not overlook the fact that the Convention has slipped in quite a number of proposals which are inherently federalist.
These include the generalization of majority voting, enlargement of the European Parliament's role, the notion of public proceedings for the Council of Ministers (making it almost like a senate), the introduction of the possibility of withdrawal from the Union, and even the possibility of treaty ratification by majority.
These ideas may go nowhere, at least not right away.
But they reflect the fundamental reality that at every turning point, the EU has moved forward through more integration.
On his return from the signature of the Amsterdam Treaty in 1997, Robin Cook, the British Foreign Secretary at the time, announced that "The federalists have been defeated."
Don't bet on it.
Europe’s New Year’s Irresolution
BERLIN – Will the eurozone crisis end in 2013, or will it drag on throughout the year, and perhaps even deteriorate anew?
This is likely to be not only the crucial question for the European Union’s further development, but also a key issue affecting the performance of the global economy.
While the EU clearly needs internal reforms, two external political factors are central to its prospects this year. The first is America’s self-imposed fiscal cliff, which, if not avoided, could throw the United States into recession, with massive repercussions for the world economy, and thus for Europe.
Second, a hot war in the Persian Gulf, in which Israel and/or the US confronts Iran over its nuclear program, would result in a sharp rise in global energy prices.
Either scenario would greatly aggravate Europe’s crisis: soaring oil costs or another US recession would harm even the strong northern European economies, to say nothing of the already-depressed countries in Europe’s south.
But, even then, the humanitarian consequences – especially in the case of another Middle East war – would most likely overshadow these scenarios’ impact on the European crisis.
Indeed, Europe’s crisis only seems to be economic or financial in nature; in reality, it is political to the core, for it has revealed that Europe lacks two things: a political framework – that is, more statehood – for its monetary union, and the vision and leadership to create it.
Since the eruption of the European crisis in 2009, the EU and the eurozone have experienced massive, unprecedented changes.
Today, the eurozone is on its way toward implementing a banking union, probably followed by a fiscal union, which in turn will lead to a genuine political union that centralizes sovereignty over essential economic policymaking.
But these developments have not come about as part of a strategy.
Had there been no crisis, German Chancellor Angela Merkel and other national leaders in the EU would never have been prepared to take these steps.
And this is not likely to change in 2013.
Even today, with the eurozone’s essential players apparently convinced that they are out of the woods, national narrow-mindedness is experiencing a revival in the EU, and the desire for change seems to be slackening. In particular, Merkel wants to be re-elected in 2013, and appears content to leave Europe for later.
As a result, developments in southern European will remain a key factor determining Europe’s course in 2013.
The depression will continue, dimming prospects for economic growth throughout the EU and the eurozone.
The gap between the rich north and the crisis-ridden south will widen, highlighting their contradictory interests and thus exacerbating Europe’s tendency toward separation, primarily between the north and the south, but also between the eurozone and the rest of the EU.
The European Central Bank will serve as the eurozone’s center of power even more than it does today, because it is the monetary union’s only institution that can actually act.
Though the ECB has absolutely nothing in common with the old Deutsche Bundesbank, the German public has not recognized this.
But the fact that the ECB’s power is only a technocratic substitute for the eurozone’s missing democratic political institutions will remain a growing problem in 2013.
This is also true, more generally, of German dominance of the EU.
Should it continue without new institutional regulations that mutualize its role within the eurozone, 2013 will be a year of further disintegration.
It will also be a year of destiny for France, whose government is keenly aware that, without painful reforms, the country might be doomed; the only question that remains is whether it can implement them.
The answer will determine not only President François Hollande’s political future, but also the future of the EU, because, without a strong German-French tandem, Europe’s crisis cannot be overcome.
Meanwhile, Europe’s negative political trends are reinforced by uncertainty in Britain about whether to remain in the EU, Italy’s upcoming general election, and aggressive nationalism in many member states.
Given this, Europe’s condition is quite obviously far from being stabilized, despite some leading Europeans’ recent statements suggesting otherwise.
Europe in 2013 will continue to need the pressure from the crisis in order to find a way to overcome it once and for all.
Regardless of electoral outcomes in important EU member states, Europeans will remain unable to expect much from their political leaders, because opposition forces generally have little more to offer than the incumbents do.
We should wish Europe a successful year, but it would be foolish to bet on it.
Europe’s Year of Indecision
NEW YORK – The dire economic situation in which most of the rich world found itself in 2011 was not merely the result of impersonal economic forces, but was largely created by the policies pursued, or not pursued, by world leaders.
Indeed, the remarkable unanimity that prevailed in the first phase of the financial crisis that began in 2008, and which culminated in the $1 trillion rescue package put together for the London G-20 meeting in April 2009, dissipated long ago.
Now, bureaucratic infighting and misconceptions are rampant.
Worse still, policy disagreements are playing out more or less along national lines.
The center of fiscal conservatism is Germany, while Anglo-Saxon countries are still drawn to John Maynard Keynes.
This division is complicating matters enormously, because close international cooperation is needed to correct the global imbalances that remain at the root of the crisis.
Doubts about sovereign debt in Europe have revolved around the euro to such an extent that some now question whether the single currency can survive.
But the euro was an incomplete currency from the outset.
The Maastricht Treaty established a monetary union without a political union – a common central bank, but no common treasury.
Its architects were aware of this deficiency, but other flaws in their design became apparent only after the crash of 2008.
The euro was built on the assumption that markets correct their own excesses, and that imbalances arise only in the public sector.
As it happened, some of the largest imbalances that fueled the current crisis arose in the private sector – and the euro’s introduction was indirectly responsible.
In particular, sovereign debt in the eurozone was deemed riskless: banks had only to hold minimal reserves against member countries’ bonds, which the European Central Bank accepted on equal terms at its discount window.
Member countries could borrow at practically the same interest rate as Germany, and banks were happy to earn a few extra pennies by loading up their balance sheets with the government debt of the eurozone’s weaker economies.
For example, European banks hold more than a €1 trillion ($1.3 trillion) of Spanish debt, with German and French banks holding more than half of that sum.
Instead of the convergence prescribed by the Maastricht Treaty, the radical narrowing of interest-rate differentials generated divergences in economic performance.
Countries like Spain, Greece, and Ireland developed real-estate bubbles, grew faster, and developed trade deficits with the rest of the eurozone, while Germany – weighed down by the costs of reunification – reined in its labor costs, became more competitive and developed a chronic trade surplus.
The convergence of interest rates was broken when a newly elected government in Greece revealed that the deficit incurred by the previous government was much larger than had been reported.
European authorities were slow to react, because member countries held radically different views.
Germany, traumatized by runaway inflation in the 1920’s, and its dreadful political consequences, adamantly opposed any bailout.
Moreover, it was heading into an election cycle, which increased the rigidity of its position.
With German leaders insisting on charging penalty rates for providing assistance, the crisis festered – and the rescue costs continued to grow.
Indeed, as eurozone members’ inability to print their own money effectively relegated them to the status of less-developed countries that must borrow in a foreign currency, risk premiums widened accordingly.
The authorities, seeing no solution, kicked the can down the road – an approach that usually works, because problems become easier to solve when markets calm down.
But, in this case, the crisis kept growing bigger, and the authorities ran out of road when Germany’s Constitutional Court&nbsp;ruled out additional guarantees beyond the European Financial Stability Facility (EFSF) without the consent of the Bundestag.
At the European Union’s December 9 summit in Brussels, the eurozone countries agreed to establish a closer fiscal union.
But, by the time this decision was taken, it was no longer sufficient to bring the financial crisis under control.
The measures introduced by the ECB went a long way toward relieving banks’ liquidity problems, but nothing was done to reduce the large risk premiums on government bonds.
Because the premiums are intimately interconnected with the banks’ capital deficiencies, half a solution is not good enough.
Unless the sovereign debt of the rest of the eurozone is successively ring-fenced, a Greek default could cause a meltdown of the global financial system.
Even barring such a nightmare scenario in 2012, the summit sowed the seeds of future conflicts – over the emergence of a “two-speed” Europe and the false economic doctrine guiding the eurozone’s proposed fiscal pact.
That doctrine, by imposing austerity in a period of rising unemployment, threatens to push the eurozone into a vicious deflationary debt spiral from which it will be difficult to escape.
Europe Through American Eyes
Europeans are constantly reminded of all that is wrong with America.
But perhaps Europeans should reverse the process: what do Americans think is wrong with Europe?
Above all, Americans see Europe as a continent of self-inflicted stagnation - and with good reason.
Economic growth in the EU was near zero in 2003.
Several countries, most notably Germany and France, seem hobbled by inflexible labor markets and regulations that inhibit dynamism.
The European Union's highly touted "Lisbon Declaration" of a few years ago, which proclaimed that Europe would become the world's most competitive region by 2010, appears laughable to Americans, whose productivity gains seem to scale new heights constantly.
America also sees Europe as excessively inward looking, sometimes dangerously so.
Worse, informed Americans see anti-Semitism running rampant in Europe and xenophobic political parties on the march in country after country.
Not even pacific Scandinavia is exempt from this.
Americans see a total inability by Europe to handle immigration in ways that encourage dynamism and diversity instead of antagonism and higher state spending.
This seems all the more puzzling because Americans realize how badly Europe needs new immigrants, given its extremely low fertility rates.
Europe's perceived attitude towards rogue states and global terrorism only enhances this perception of self-satisfied inwardness.
Americans may differ about what policy should have been pursued in Iraq, but they know that their country cannot run from its role as a world leader responsible for developments in North Korea, the Middle East, Pakistan/India, Taiwan, and elsewhere.
It is a jungle out there, as Americans say; not every problem and conflict can be handled through the sort of peaceful, drawn-out negotiations that the EU prefers.
Germany and France were against meeting Saddam Hussein with military force, but had no alternative for getting rid of the butcher of Baghdad. "What was the European answer to the problem of Saddam Hussein?" asked Senator Joe Biden in a panel discussion at the recent Davos forum.
Biden is a Democrat and strong critic of President Bush. "I asked French and German leaders, but never received any credible answer."
"We are not even ready to forcefully meet conflicts on our own continent," Polish President Aleksander Kwasniewski sighed.
Bosnia's Muslims thank America, not the EU, for their deliverance from slaughter.
Europe devotes half as much in financial resources to the military as the US, resulting in one-tenth of America's military strength, observed Pat Cox, Speaker of the European Parliament.
Americans now see Europe as compounding its military weakness by losing its leading position in science.
Two thirds of Nobel Laureates in the sciences during the last quarter century were Americans; many of the others do or did research at American universities.
According to Time magazine, 400,000 European researchers now work in the US.
Lack of funding, bureaucracies so complicated that even purchasing a used computer is problematic, hierarchies that hamper the joy of curiosity and creativity: all of these barriers confront European scientists and are responsible for inciting today's "brain drain" to America.
Add economics to this recipe as well.
Price regulations and other ill-considered features of European policy contribute to the fact that 60% of the world's new drugs are developed in the US, compared to 40% only ten years ago.
This sterility and inertia make Europe less and less interesting for Americans.
So American eyes are turning elsewhere: to China with its 1.3 billion people and an economy growing at 8-10%, year in and year out, and to India, with its 1.1 billion people and 6% annual growth.
Indeed, India now has some of the world's best engineers, IT technicians and medical professionals.
India probably encompasses the world's largest middle class.
With new patent laws coming into place, India will have the same attraction for the pharmaceutical industry as it has for IT, providing clinical trials for new drugs at a quarter of the cost of Europe or the US.
While America increases its population somewhat, due to normal reproductive rates and large immigration flows, Europe's share of the world's population is approaching a mere 4% and seems doomed to growing older as it shrinks even more.
Demographic change in the US is also working to change America's global orientation.
With American immigration dominated by Latin Americans and Asians, the US feels its European heritage less.
Similarly, domestic US politics is gravitating to the country's south and west, regions that look towards Latin America and Asia, not Europe.
The fall of the Soviet empire, naturally, reduced Americans' security interest in Europe.
Is this American-eye view of Europe unfair?
Perhaps.
It is, however, no more unfair than how America is regularly portrayed in Europe's media these days.
But if Americans are critical of Europe, they are also self-critical, far more so than most Europeans.
As a European editor wrote apropos the flow of scientists from Europe to America: "What's most sad is that Europeans still believe that their society represents the epitome of civilization, while the US is on its way to downfall.
What if the reality is the reverse?"
Every European should contemplate that possibility, at least for a moment, before resuming their current aversion to all things American.
Europe’s Essential Unity
BRUSSELS – Over the past ten years, the European Union has endured a series of unprecedented crises, the likes of which we are unlikely to see again.
But other, no less daunting challenges lie ahead, and we would do well to remember the lessons learned along the way.
One lesson is that unity is not an option; it is a condition sine qua non of the EU’s economic prosperity and political relevance.
It is remarkable that since 2004, when I became President of the European Commission, the EU’s membership has nearly doubled, from 15 countries then to 28 now.
There have been no defections.
From 2004 to 2014, we enlarged both the EU and the eurozone.
Most important, we have kept Europe united.
I fought hard for that unity, particularly when defending, often against the odds, Greece’s continued membership in the eurozone, as well as when arguing against splitting the eurozone, as some people proposed.
The Commission remained attentive not only to the dramatic impact of a “Grexit” on Greece, but also to its possible financial, economic, and political cascade effects.
Unlike others, we never lost sight of the systemic effects of decisions across the eurozone or the EU.
The EU is already an economic and political reality.
This requires solidarity and responsibility – in particular, solidarity from the Union’s more prosperous countries and responsibility on the part of those countries in need of reform.
The Commission has been equally firm in demanding both.
The same logic applies to another core concern that I faced throughout my decade at the Commission: the need to deepen the eurozone while maintaining the integrity of the EU as a whole.
This will remain a critical issue in the near future, if only because of the uncertainty surrounding the United Kingdom’s status in our Union.
Allowing for flexibility while avoiding fragmentation is now a well-established approach within the EU.
But it was not always so.
Some have long advocated establishing a completely separate institutional framework for the eurozone.
I remain convinced that multi-speed European cooperation has become a necessity, but that a multi-tier Europe must be avoided at all costs.
While integration must deepen further, especially in the eurozone, this can and should be done in a way that preserves the integrity of Europe’s single market.
Fortunately, this logic has been widely accepted, as demonstrated by the decision that the European Council’s next president, despite being from a country (Poland) that is not yet in the eurozone, will nonetheless preside over eurozone summits.
A second lesson we learned is that openness to the world is an asset, not a liability.
That thinking – which needs to be reaffirmed and politically supported – underpinned our active trade agenda.
Indeed, it put the EU at the forefront of efforts to liberalize and regulate international trade, enabling us to reap the full benefits of globalization.
This is not just about Europe’s economic wealth, but also about its political relevance on the global stage.
One presupposes the other, requiring vigorous defense of the EU’s interests and views in bilateral relationships with strategic partners and in multilateral fora, such as the United Nations, the World Trade Organization, the G-20 and the G-8/G-7.
If the EU as a whole engages internationally, it can help to shape the international order.
Our current engagement in Ukraine is a case in point, as were our efforts to lead a global response to the 2008-2009 financial crisis, namely by collectively resisting the allure of protectionism.
It was on the EU’s initiative that the world acted in a concerted and convincing way by establishing the G-20 Leaders’ Summit, comprising heads of state or government.
Since then, the G-20 has become the premier forum for economic policy coordination among its members, giving concrete form to many of the ideas – for example, on a framework for balanced and sustainable growth, on financial regulation and supervision, and on action against tax evasion and fraud – that the EU proposed.
The emergence of the G-20 has transformed the global system, and certainly helped to prevent the realization of worst-case scenarios in the aftermath of the crisis.
The third lesson is that making Europe stronger – institutionally, politically, and economically – demands continued reform.
Credibly delivering on important EU-level reforms enabled Europe to put the most existential phase of the crisis behind it.
The system of economic governance that we put in place guarantees that EU members put their public finances in order, increase their competitiveness, and tackle their macroeconomic imbalances.
We created the instruments needed to assist distressed countries, and the ensuing adjustment programs are delivering results.
In short, we seized the momentum of the crisis to provide a structural response to the challenges we faced, in particular by establishing a European banking union.
Step by step, despite strong resistance, we have changed the rules that govern financial institutions, the institutions that oversee banking operations, and the mechanisms to coordinate resolution of failed banks.
Taken together, the reforms adopted since the start of the crisis have changed the way that Europe’s economies and financial sector are legislated, supervised, and regulated.
The framework has been created.
Now we need to implement it fully.
But we also need to go further in advancing structural reforms at the national level.
We can see that the countries that have done the most in this respect now have better economic prospects.
We must not relax these efforts.
After all, the economic crisis has not yet been fully overcome.
We must not take for granted the progress that has been made.
Political decisions matter – and mistakes have consequences.
At the end of a ten-year rollercoaster ride as Commission President, I can confidently declare that Europe has shown great resilience.
We have shown that the forces of integration are stronger than the forces of fragmentation.
Despite all of the challenges we had to face – indeed, partly because of them – Europe remains united and open, and is now stronger and better able to face globalization.
Terrorists and the Refugee Battleground
BUDAPEST – Europe and the United States should open their doors to Syrian and Iraqi refugees.
They are the victims of the Islamic State and Syrian President Bashar al-Assad’s brutal regime.
Terrorism has destroyed their homelands.
Not only is offering them refuge the right thing to do; it is also good for our security.
The Islamic State’s attacks in Paris in November were designed to produce fear by bringing the group’s crimes against humanity into the heart of Europe; and politicians, by equating refugees with terrorists, are pandering to it.
Razor-wire fences and political barriers are being erected in the path of asylum-seekers.
In the battle for hearts and minds, branding refugees as security threats – as politicians on both sides of the Atlantic are doing – only fuels intolerance and gives terrorists a potent recruitment tool to convince young Muslims that the West has no place for them.
This is a battle of values that we should be winning.
Modern Europe was built on the ashes of World War II and the Holocaust.
Europe’s values – and those of its principal postwar sponsor, the US – are tolerance, diversity, and human rights.
Europe has vast experience with refugees.
Millions of Europeans fled from violence and persecution during and after World War II.
In the 1990s, a genocidal conflict in the Balkans forced hundreds of thousands of the region’s residents to seek refuge in countries to the north.
The massive exodus from the Middle East as hundreds of thousands flee war and terror is just the latest chapter in Europe’s long history as a destination for refugees.
Meanwhile, for more than a century, the US, in the words of the poet Emma Lazarus, has provided refuge to “huddled masses yearning to breathe free.”
Security concerns have been addressed as each new wave has arrived.
More than a million Vietnamese were resettled in the US during and after the Vietnam War, and nearly 400,000 refugees from Muslim-majority countries have been accepted by the US since the September 11, 2001, attacks.
It is this proud history that European and American politicians are ignoring.
Hungary and other Central European countries have sealed their borders, and right-wing political parties across Europe have stoked anti-Muslim mania.
In the US, Republican politicians – congressmen, governors and presidential candidates – are trying to derail the resettlement of a miniscule number of Syrian refugees (just 10,000) in the US.
In short, Western anti-refugee politics are playing directly into the hands of the Islamic State’s propagandists.
Western leaders cannot simply wish the refugee crisis away by turning their backs on those fleeing terror.
Asylum-seekers will continue to pour into Europe in large numbers, with the United Nations Refugee Agency predicting a 44% increase next year.
Global management is urgently needed to prevent a humanitarian catastrophe.
The European Union and the US must develop a coordinated strategy to address the crisis.
First, the international humanitarian relief effort must be scaled up sharply.
The UN agencies charged with providing basic necessities to refugees are grossly underfunded and unable to meet more than 40% of the demand.
Huge refugee camps in Turkey, Jordan, and Lebanon lack sufficient food, water, sanitation, medical care, and education.
It is, in part, these desperate conditions that are pushing refugees to Europe and beyond.
Second, the US should lead an international effort to coordinate the resettlement of qualified, security-screened Syrian and Iraqi refugees.
German Chancellor Angela Merkel has taken a courageous stance by receiving more than 700,000 asylum-seekers this year – 70 times the number the US has proposed accepting.
Prodded by Merkel, the EU has developed a quota system for apportioning refugees.
The US should help shoulder the burden by accepting 100,000 refugees next year and using its influence to persuade other countries to join an international resettlement initiative.
Finally, the US and Europe should step up diplomatic efforts to achieve a ceasefire and negotiated end to the war in Syria.
This will involve working with Russia and Iran on the divisive question of who will govern Syria when the war is over, as well as broadening the international coalition to defeat the Islamic State.
Terrorists like those who attacked Paris want to destroy our values because they know these are our most effective weapons against them.
That is why the US and Europe should open their doors to the victims of terror in the Middle East.
Europe without Turkey
AMSTERDAM – Most European citizens (for example, more than 60% in France and Germany) believe that Turkey should not become part of the European Union.
There are various reasons for this opposition – some valid, some based on prejudice: Turkey is too big;
But the main reason is surely that Turkey, a mostly Muslim country, governed by a Muslim party, is viewed as too foreign.
In the words of former French President Valéry Giscard d’Estaing, one of the authors of the EU Constitution, “Turkey is not a European country.”
This is hard to take for members of the secular, Westernized Turkish elite, who have spent decades, if not longer, trying to prove their European bona fides.
As one highly educated Turk, working for an international organization, put it to me recently: “We play football with them, sing songs with them on TV, do business with them, improved our human rights, and democratized our politics.
We do everything they ask us to do, and still they don’t want us.”
That’s right, said another Turk within earshot, a fluent English speaker who spent much time in London, worked for NGOs promoting human rights, and was jailed in the 1980’s for opposing the military regime: “I hate Europe.
I’m not European, and who needs Europe, anyway?”
Good question.
While the Greek crisis is tearing at the seams of the eurozone, the Turkish economy is booming.
To be sure, “Europe” was for many years a symbol, not just of wealth, but also of liberal politics, open societies, and human rights.
And Turkish society has benefited greatly from its attempt – not yet perfect, not yet complete – to come up to European standards.
But more and more Europeans are disillusioned with the Union.
Far from being a model of democracy, the EU is associated with an arrogant, out-of-touch mandarinate that issues rules and edicts with paternalistic and highhanded disregard for ordinary citizens.
And some of its new members – Romania, Bulgaria, and Hungary, for example – are not exactly paragons of open liberal democracy.
So, if Europeans don’t even believe in their own union, why should Turkey wish to join it?
In fact, the woman who protested that she hated Europe would still like very much to see Turkey in the EU.
Her venom was that of a spurned lover.
Members of Turkey’s secular, pro-European elite, governing almost continuously since Kemal Atatürk founded the republic in 1923, are now being squeezed from two directions.
Obstructed by the EU, they are also being pushed from their positions of privilege by a new elite that is more provincial, more religious, and less liberal, but not necessarily less democratic – a cohort personified by the highly popular prime minister, Recep Tayyip Erdoğan.
For these Westernized Turks, acceptance by the EU represents a lifeline against the currents of Islamic populism that Erdoğan represents.
And they need encouragement, for Erdoğan’s Islamists may be democratic, but the secularists, on the whole, are more liberal.
But the old privileged elite is not the only group in Turkey that stands to gain from being part of Europe.
Minorities do well in empires, especially benevolent empires.
Like the Catalans or the Scots, the Kurds in Turkey are in favor of EU membership, because it offers a refuge from their own country’s majority.
The sheer size of Turkey, and its population, worries Europeans, with some reason.
But this fear is probably exaggerated.
Now that the Turkish economy is thriving, there will be less reason for poor Turks to seek work in other countries, let alone “swamp” them.
And if the EU’s hugely expanded membership were to stand in the way of a future federal state, this might not be such a bad thing.
In any case, the addition of Turkey would hardly make the crucial difference.
From the perspective of the Western-minded Turks, the pride of European membership is perhaps less important than the pain of rejection.
But the same goes for the Europeans.
If the most Westernized, most modern, most democratic republic in the Islamic world were to be soured by anti-European resentment, this could not be a good outcome for the West – or, indeed, for the rest of the world.
Turkey is in a good position to guide other Muslim countries in a more liberal-democratic direction.
Moreover, with a real prospect of joining Europe, Turkey would be better placed to defuse actual and potential tensions between Europe and the Middle East.
Without Turkey, EU involvement in the Middle East still looks like Western imperialism.
The prospect of EU membership for Turkey would also dispel the outdated notion that Europe stands for Christendom.
Christian religions certainly helped to shape European civilization.
But not all European citizens are practicing Christians.
Many are not Christians at all.
If a large democracy, with a majority Muslim population, can join the EU, it will be easier to accept French, British, Dutch, or German Muslims as fellow Europeans, too.
Those who believe that common interests and liberal institutions should define the EU would gain by this acceptance.
Those who seek a European identity based on culture and faith will resist it.
Alas, at this time of economic crisis, growing nationalism, and inward-looking populism, the chances of a Muslim country becoming a member of the EU are slim, to say the least.
Such a process cannot be forced on people.
To insist on it, against the wishes of most European citizens, would smack of precisely the kind of undemocratic paternalism that has turned many Europeans against the EU already.
But the majority is not always right.
And times might change.
Then again, we might live to regret that times did not change fast enough.
Eurozone Chutzpah and the IMF
LONDON – Eurozone policymakers and politicians are in no doubt: they have done their part to support the currency union’s struggling members by increasing the size of its rescue fund, the European Stability Mechanism (ESM).
Now it is time for the rest of the world – that is, the International Monetary Fund – to step up and put additional funds on the table, and European finance ministers are making that case at the IMF/World Bank meetings in Washington
European officials, in other words, take for granted that the IMF should support the eurozone, as if the rest of the world had some kind of duty to do so.
In reality, even if eurozone governments could agree on a much larger increase in the ESM’s size, there are compelling reasons why the IMF should refrain from offering any further support. &amp; &amp; &amp;
Europe’s leaders cannot decide if the eurozone is a federation akin to the United States or a group of independent states.
They frequently compare the eurozone favorably to other developed economies.
Eurozone members as a whole, they argue, have a lower budget deficit than the US and the United Kingdom, and a similar level of public debt.
Unlike the US and the UK, the eurozone in aggregate is running a current-account surplus (it is, as policymakers like to say, living “within its means”).
And they express considerable pride in the euro’s growing role as an international reserve currency, as well as resolve to do whatever it takes to defend the currency union’s integrity.
And yet the same policymakers believe that the rest of the world should bail out the eurozone.
When it suits them, the euro is no longer the currency of a highly successful and integrated economy, but a currency shared by a collection of sovereign creditor and debtor countries, and the IMF thus has a responsibility to support the debtor members.
That is an odd position to take, to say the least.
Imagine that the US federal government decided that it no longer wanted to support Mississippi and demanded support for that poor southern state from the IMF.
The rest of the world – led by the eurozone governments – would rightly turn their backs.
Similarly, the IMF is not expected to help India – whose per capita GDP is less than a tenth of eurozone levels – to finance the poverty-stricken states of Bihar and Uttar Pradesh.
The eurozone wants it both ways.
Its debtors and creditors are all members of the same, wealthy currency union, whose current-account surplus with the rest of the world means that it is a net exporter of capital (that is, domestic savings exceed domestic investment).
Moreover, the eurozone’s strategy for dealing with the crisis implicitly relies on a rising surplus: member states with current-account deficits are under pressure to close them, but creditor countries face no pressure to reduce their surpluses.
So, a region that is essentially pursuing a mercantilist strategy now wants the rest of the world to finance it.
Many European leaders believe that the rest of the world owes the eurozone a bailout because the currency union is just an innocent bystander.
Despite being well run and fundamentally more stable than other economies, the markets (or “speculators”) are making it impossible for the eurozone’s struggling members to achieve the necessary adjustments.
So the eurozone deserves protection from international forces intent on destroying it.
This rationale highlights the core of the problem: the eurozone is institutionally incomplete, and eurozone policymakers continue to blame investors for pointing this out.
In every currency union, there are creditor and debtor regions.
Just as it is the responsibility of creditor regions in the world’s other currency unions to support the debtor regions (which they do through a variety of means), it is up to the eurozone’s creditor regions to underpin its debtor regions’ solvency.
This requires debt mutualization, fiscal transfers between member states, and, of course, federal institutions to give all of this legitimacy.
A second reason given by eurozone policymakers to justify their demand for more IMF support is basically a form of blackmail: the global consequences of a further eurozone crisis would be so grave that the IMF has no choice but to do whatever it can to prevent it.
Much poorer countries, and those routinely criticized by eurozone policymakers for their indebtedness (such as the US and the UK), should provide support to a wealthy creditor in order to prevent it from inflicting incalculable damage on the global economy.
This is akin to making the rest of the world an offer that it can’t refuse.
The rest of the world has no moral responsibility to support the eurozone, and it should resist European leaders’ efforts to extort that support, which would be tantamount to covert support for its creditor countries.
That would be an unjustified use of IMF resources, and would further confirm the suspicion among the world's emerging economies that the IMF is in thrall to Western interests.
The IMF should stick to supporting countries with temporary external-financing problems; a wealthy creditor region that refuses to address its institutional contradictions is not a deserving case.
If eurozone governments are unwilling to build the federal institutions needed to stabilize the eurozone, they should either assemble a big enough rescue fund themselves, or accept that the single currency is unworkable in its current form.
The Government the Eurozone Deserves
ATHENS – Will Greece’s troubles destroy Europe’s currency union, or reveal how it should be saved?
The recent controversial bailout deal – likened by some to the 1919 Versailles Treaty, with Greece in the role of Germany – offers the latest twist in the eurozone’s existential saga.
The deal has caused a split in Syriza, Greece’s leftist governing party; opened a rift between Germany’s Chancellor Angela Merkel and her uncompromisingly tough finance minister, Wolfgang Schäuble; and spurred an effort by France to reassert itself within the Franco-German axis that has always been the “motor” of European integration.
Meanwhile, many of North America’s Keynesian economists, such as Nobel laureates Paul Krugman and Joseph Stiglitz, sympathize with Greece’s anti-austerity stance.
Other economists, mainly in Europe, argue that Germany must assume a political role befitting its economic preeminence and must accept sovereignty-sharing (and burden-sharing) arrangements to ensure the monetary union’s cohesion and sustainability.
Humiliating a small country and rendering it a virtual protectorate does not serve Europe’s long-term interest.
Yet this is what is at stake.
Greece signed the deal after facing an explicit invitation from Schäuble to leave the eurozone – supposedly temporarily – and adopt a new currency.
Germany’s stance marked the first open challenge by a leading European power to the notion that the monetary union is irrevocable.
As the French, instinctively sympathetic to the anti-austerity argument and conscious of their increasingly junior role in the Franco-German partnership, were quick to notice, the German stance also signaled a potential shift from a “European Germany” to a “German Europe.”
It hardly helped that the negotiations between Greece and its creditors produced a growing mistrust in the competence and intentions of Syriza.
Devious and erratic negotiating tactics, coupled with secret schemes to prepare – as part of a “Plan B” – for an exit from the euro, undermined the government’s trustworthiness, leading even Paul Krugman to admit: “I may have overestimated the competence of the Greek government.”
Yet, however complicated the blame game, some lessons can be drawn to guide future policy.
When fiscal misbehavior by Greece, a country representing no more than 2% of the eurozone’s GDP, poses serious dangers for the survival of the currency union, something is clearly amiss.
But does the remedy lie in tougher measures – such as heavier penalties or even eviction – to enforce the eurozone’s rules, or do the rules need to be adjusted to accommodate members’ varying circumstances?
So far, enforcement has failed, owing to flaws in the eurozone’s foundations.
First, fiscal and external-account balances are to be kept in check in order to ensure financial stability and sustain the common currency.
Second, removing imbalances is the responsibility of national governments within the context of a rescue regime arranged by supranational authorities – the European Commission and the European Central Bank – in cooperation with the European Council, which in turn represents national governments.
The Greek saga shows that this system cannot control destabilizing imbalances quickly enough to ward off major crises.
Imbalances are not solely the result of irresponsible policies.
They may reflect deeper weaknesses in economic structures, such as a lack of competitiveness or institutional shortcomings.
If Germany insists on national responsibility, it may find that enforcing the rules will have to be ever harsher, eventually leading to such social and political upheaval that the entire euro-edifice collapses.
The alternative is to embrace a “transfer union” that ensures a better balance between solidarity and responsibility.
The United States embodies such a solution, ensuring an integrated pattern of development throughout the country.
The eurozone must strengthen its fiscal structures enough to respond to overall economic conditions while taking into account the differing circumstances of each member country.
These stronger structures should permit limited resource transfers among eurozone countries, either to carry out countercyclical policy or to supplement investment spending, particularly in economic and social infrastructure.
But this must inevitably involve the creation of a separate eurozone budget, transferring competences from national to supranational authorities.
Common taxation and Eurobonds should form part of the new fiscal structure, and the European Stability Mechanism should include a debt redemption fund large enough to resolve sovereign-debt crises.
At the same time, the banking union, established by the EU in the wake of the 2007-2008 global financial crisis, should be strengthened by enlarging the capital base of the Single Resolution Fund and establishing a common deposit guarantee scheme.
All of this presupposes that the powers of the EU’s supranational institutions, the European Parliament and the European Commission, will be significantly augmented.
The Commission should become a proper government, with a popularly elected president.
A European finance ministry should be created, and its head should preside over the Eurogroup (which convenes the finance ministers of eurozone member states).
A special Assembly of the European Parliament, comprising the eurozone members, should have powers – on the model of a national parliament – to legislate and control the executive.
These proposals will provoke plenty of criticism – and not just from Euroskeptics.
But a move toward fiscal and political integration is the price that Europe – beginning with the eurozone – must pay to maintain its unity and global relevance.
The alternative is inconsistent (if not arbitrary) enforcement of the current rules, inducing divisiveness among member states and eventual fragmentation.
Demokratisasi di Eurozone
ATHENA – Layaknya Macbeth, pembuat kebijakan cenderung melakukan dosa-dosa baru untuk menutupi perilaku buruk mereka yang terdahulu.
Dan sistem-sistem politik membuktikan betapa berharganya mereka melalui seberapa cepat mereka mampu mengakhiri kesalahan kebijakan yang dibuat para pejabatnya secara terus-menerus.
Jika dikaji berdasarkan standar ini, maka Eurozone, terdiri dari 19 negara demokrasi yang mapan, justry tertinggal dibandingkan negara dengan perekonomian non-demokrasi terbesar di dunia.
Selepas permulaan terjadinya resesi yang didahului dengan krisis keuangan global pada tahun 2008, pembuat kebijakan di Tiongkok menghabiskan waktu tujuh tahun untuk menggantikan lemahnya kebutuhan atas ekspor bersih di negara tersebut dengan investment bubble lokal, yang diperbesar karena penjualan lahan secara agresif oleh pemerintah daerah.
Ketika hari perhitungan datang di musim panas ini, para pemimpin di Tiongkok mengeluarkan $200 miliar yang merupakan cadangan devisa yang diperoleh dengan susah payah seolah-olah berperan sebagai Knut yang Agung berupaya mencegah pasang-surutnya kekalahan di pasar modal.
Akan tetapi, dibandingkan dengan Uni Eropa, upaya pemerintah Tiongkok untuk memperbaiki kesalahannya – pada akhirnya membiarkan suku bunga dan nilai saham merosot – nampak seperti teladan yang baik atas kecepatan dan efisiensi.
Memang benar bahwa gagalnya “program konsolidasi dan reformasi fiskal” Yunani dan sikap pemimpin Eropa yang masih berpegang teguh meskipun sudah ada bukti selama lima tahun bahwa program ini tidak mungkin berhasil, menjadi gejala atas kegagalan tata kelola pemerintahan Eropa yang lebih luas, suatu hal yang memiliki akar historis yang mendalam.
Pada awal tahun 1990an, trauma atas ambruknya Mekanisme Nilai Tukar Mata Uang Eropa hanya menguatkan tekad pemimpin di Eropa untuk meningkatkannya.
Semakin sering skema ini dipandang tidak berkelanjutan, semakin sering kuat tekad para pejabat untuk bertahan pada skema tersebut – dan semakin optimis pula narasi yang mereka sampaikan.
“Program” Yunani hanya sekedar jelmaan dari inersia kebijakan Eropa yang dianggap sempurna.
Pembuatan kebijakan ekonomi selama lima tahun terakhir di eurozone menjadi ironi yang luar biasa.
Daftar kesalahan kebijakan tidak ada habisnya: kenaikan suku bunga oleh Bank Sentral Eropa (European Central Bank) di bulan Juli 2008 dan kedua kalinya di bulan April 2011; penetapan austerity yang terberat pada perekonomian negara-negara yang menghadapi kemerosotan terburuk; traktat-traktat otoritatif yang mengakibatkan devaluasi internal kompetitif yang bersifat beggar-thy-neighbor; dan penyatuan perbankan yang tidak dilengkapi dengan skema asuransi deposito yang sesuai.
Bagaimana pembuat kebijakan Eropa ini berhasil meloloskan diri? Biar bagaimanapun juga, impunitas politik mereka berkebalikan dengan tidak hanya di Amerika Serikat dimana para pejabat akan setidaknya bertanggung jawab di hadapan Kongres, tapi juga di Tiongkok, dimana wajar kalau kita mengganggap pejabat setempat kurang bertanggung jawab dibandingkan mitra mereka di Eropa.
Jawabannya terdapat di sifat dasar penyatuan moneter Eropa yang terpecah-pecah dan dengan sengaja dibuat informal.
Pejabat di Tiongkok mungkin tidak wajib bertanggung jawab pada parlemen atau kongres yang terpilih secara demokratis – namun pejabat pemerintah memiliki satu badan – tujuh anggota komite Politbiro – dimana mereka harus mempertanggungjawabkan kesalahannya.
Di satu sisi Eurozone diatur oleh Eurogroup yang sifatnya tidak resmi yang terdiri atas menteri keuangan dari negara-negara anggota ditambah perwakilan Bank Sentral Eropa dan ketika merundingkan “program-program ekonomi yang melibatkan lembaganya,” juga akan diikuti oleh Dana Moneter Internasional (International Monetary Fund).
Akhir-akhir ini, sebagai akibat dari perundingan sengit yang dilakukan pemerintah Yunani dengan para kreditor, baru lah masyarakat Eropa menyadari bahwa perekonomian terbesar di dunia, yakni Eurozone, dijalankan oleh badan yang tidak memiliki aturan prosedur yang tertulis, mendebatkan persoalan-persoalan penting “secara rahasia” (dan tanpa menyusun notulensi), dan tidak wajib bertanggung jawab pada lembaga apapun yang dipilih rakyat, bahkan tidak juga kepada Parlemen Eropa.
Salah jika anda mengganggap kebuntuan antara pemerintah Yunani dan Eurogroup sebagai bentrokan antara aliran kiri Yunani dan arus utama konservatif Eropa.
“Athens Spring” mewakili suatu hal yang lebih bermakna: hak suatu negara kecil di Eropa untuk menentang kebijakan gagal yang merusak prospek satu generasi (atau dua), tidak hanya di Yunani melainkan juga di negara lain di Eropa.
Athens Spring ini dihancurkan karena alasan-alasan yang tidak berhubungan dengan politik sayap kiri pemerintah Yunani.
Berulang kali Uni Eropa menolak dan merendahkan kebijakan-kebijakan yang masuk akal.
Kejadian ini menjadi contoh posisi dua sisi mengenai kebijakan pajak.
Sebagai menteri keuangan Yunani saya mengusulkan penurunan pajak penjualan, pajak pendapatan, dan pajak korporasi untuk memperluas dasar pengenaan pajak, meningkatkan pemasukan, dan menguatkan perekonomian Yunani yang hancur.
Pengikut Ronald Reagan pasti tidak akan membantah rencana saya ini.
Uni Eropa di sisi lain meminta – dan memberlakukan – kenaikan pada ketiga tarif pajak.
Jadi apabila perkelahian antara Yunani dengan para kreditor Eropa bukan lah bentrokan sayap kiri-kanan, lalu apakah itu?
Ahli ekonomi dari Amerika Serikat, Clarence Ayres, pernah menulis, seolah-seolah tengah menggambarkan para pejabat Eropa: “Mereka memuji kenyataan karena mengaitkannya dengan status seremonial, namun mereka melakukan itu agar bisa membenarkan status, bukan untuk mewujudkan efisiensi teknologi”.
Wajib bagi mereka yang ingin memperbaiki efisiensi Eropa dan menurunkan ketidakadilan yang berat ini untuk bekerja menuju re-politicizing eurozone sebagai langkah pertama menuju demokratisasi.
Bagaimanapun juga, bukankah Eropa layak mendapatkan pemerintah yang setidaknya lebih akuntabel dibandingkan pemerintah komunis di Tiongkok?
Put Up or Shut Up
NEW YORK – In public policy, peace talks, election campaigns, or corporate strategy, laying out intentions, promises, and commitments is never enough.
It is merely a first step toward a desired end – and entirely meaningless unless the second, third, and all subsequent necessary steps are taken.
Moreover, taking the first step starts the clock on others' trust and confidence that the next steps will in fact be taken, or else risks creating the false impression that the failure to achieve a particular goal reflects mistaken (or irrelevant) intentions, not inadequate execution.
We can see examples of this virtually everywhere we look.
Consider the European Central Bank's announcement in January that it would implement quantitative easing.
At the time, many leaders seemed to think that the ECB's move would be enough: Announcement made, money printed, economies back on track.
Unfortunately, that is not how monetary policy works: QE will not be enough, and no one should be naive about that.
In order to get economies back on track, QE is a useful step, but only as part of a larger package of measures.
In the absence of other economic reforms, QE on its own cannot effect the changes needed to kick-start growth.
And if the reforms are not implemented and growth fails to materialize, politicians are likely to blame QE, not their own failure to take all the other steps that must follow it on the path of economic recovery.
Now consider free speech.
Following the massacre at the satirical magazine Charlie Hebdo in Paris last month, world leaders dashed to the scene, locked arms, and marched in support of freedom of expression as a bedrock principle of civilized societies.
The natural next step for many of them should have been to return home and immediately implement that principle.
Instead, they returned home.
True, Egypt's military regime – whose foreign minister, Sameh Shoukry, raised eyebrows when he appeared near the head of the march in Paris – released the Al Jazeera journalist Peter Greste from prison, and has since freed two other journalists, Mohamed Fahmy and Baher Mohamed, on bail.
But where is the regime's renunciation of the authority to have imprisoned them in the first place?
In another arena, peace negotiations, the recent ceasefire agreement in Ukraine is but the latest attempt to end the war between the country's government and Russian-backed separatists that has been raging for much of the past year in the eastern Donbas region.
Throughout the fighting, attempts to stop the killing have come and gone, and the war's innocent victims – not to mention much of the international community – have grown weary and cynical.
The most effective peace agreements are part and parcel of a peace process.
The first step – signing the agreement – represents the parties' commitment to take the necessary subsequent steps.
Everyone walks away knowing exactly what they are supposed to do, what to expect others to do, and what the consequences will be if they do not.
When agreements fail, it is usually not because of what they contain, but because of what is missing, or because of what the signatories do despite what they have agreed.
A roadmap to peace is useful only if everyone follows it.
Otherwise, the goal is lost.
Election campaigns are the example par excellence of the phenomenon, and the world is now entering another “Season of the First Step."
At least seven general elections will be held in European Union member countries this year (and France will hold regional elections in March).
Greece has already voted (electing a government that so far seems unable to move beyond intentions and commitments), and the coming months will bring elections in Estonia, Finland, the United Kingdom, Denmark, Portugal, Poland, and Spain.
Add to this the US presidential election next year – preceded by a campaign that has already started – and we can expect a lot of promises floating around.
As voters in these countries are inundated with good intentions, ringing assurances, and solemn commitments, they will expect parties and candidates to follow through if they are elected.
Certainly, parties and candidates attempt to persuade voters on the basis of their track records (and by impugning their opponents' track records).
If they do not follow through on their intentions, promises, and commitments, access to information and instant communication is such that empty promises simply will no longer persuade most people.
Companies campaign, too.
They send their leaders before law-making bodies to express contrition for grave malfeasance and promise future good behavior.
And yet the headlines are as filled as ever with stories of unethical, if not outright criminal, corporate behavior.
Unfortunately, too many corporate leaders persist in viewing the world as “us" versus “them," rather than attempting to understand why, in the absence of vigorous action, no one trusts them.
Beginnings are vital; but they are just that.
There is no easy solution for the eurozone economy, for Greece, for Ukraine, or for any of the other major challenges we face today.
But unless protagonists are sure that announcements, campaign promises, and peace agreements will give rise to clear, purposeful action, they should think twice before opening their mouths.
Sustaining the Unsustainable Eurozone
ATHENS – When the eurozone was established, its creators envisioned gradual progress toward an “optimal currency area,” characterized by fiscal integration, the free movement of labor, and political union.
But this process has not occurred, and, as the interminable Greek crisis has shown, the eurozone remains rife with structural weaknesses and extremely vulnerable to internal shocks.
This is clearly not sustainable.
Despite efforts to promote fiscal-policy coordination, eurozone members’ budgets still fall under the purview of separate national authorities, and northern Europeans continue to oppose transfers from more to less prosperous countries beyond the very limited allowance of the European Union’s regional funds.
Moreover, labor mobility is severely constrained by linguistic and cultural barriers, as well as administrative bottlenecks.
And “ever-closer” political union has ceased to attract public support – if it ever did – and is thus not feasible today.
A growing number of commentators – and no longer only in the Anglo-Saxon world – question the monetary union’s viability.
Some encourage Greece to exit the eurozone, believing that a more restricted and homogeneous currency union would be stronger and easier to unite.
Others consider a Greek exit to be just the start of the inevitable unraveling of a scheme that does not serve the purpose for which it was created.
The eurozone has so far managed to prove the doomsayers wrong.
By sheer force of political will, compromise after compromise has been reached, thereby sustaining a historic project that is not, in its current state, sustainable.
The need to maintain this commitment to European unity, and overcome the economic difficulties that arise, is reinforced by new geopolitical challenges.
Most notably, Russia’s perceived ambition of recapturing its Soviet-era influence is challenging the rules-based order that was established after World War II, and a surge in religious and political extremism is threatening democratic and liberal values.
But the economic difficulties are bound to continue, fostering doubts about the currency union’s future – doubts that could become self-fulfilling by undermining the euro’s ability to function properly.
Already, economic pressures have fueled anti-European sentiment in Spain, Italy, and even France; if allowed to continue, such sentiment could culminate in secession, with devastating consequences for the eurozone and Europe as a whole.
The first step in such a process would probably be the eurozone’s division into sub-areas, comprising countries of relatively equal resilience.
As it becomes increasingly difficult to pursue coherent fiscal and monetary policies, the risk of the eurozone’s complete dissolution would grow.
Greece’s exit could shorten this timeline considerably.
Though such a scenario was inconceivable five years ago, when the Greek crisis first erupted, the term “Grexit” entered the European lexicon soon after, when the crisis reached a new peak.
But European leaders seemed to recognize the implications of allowing a country – even small, crisis-stricken Greece – to exit the eurozone.
That is why, this year, a series of Eurogroup meetings were held with the avowed purpose of averting such an outcome.
The problem is that Europeans have become so accustomed to muddling through that long-term solutions seem all but impossible.
Indeed, in recent years, eurozone authorities have introduced several policies for fighting financial crises – including government-backed rescue funds, a partial banking union, tougher fiscal controls, and a role for the European Central Bank as lender of last resort.
But most of these policies – with the possible exception of the banking union – are aimed at managing default risk, not eliminating this risk’s root causes.
It is time to recover the capacity, displayed by the EU’s founders, to look ahead and pursue a dream of a better future.
Specifically, eurozone leaders must introduce a mechanism for fiscal transfers from stronger to weaker economies.
In a currency union, individual economies cannot alter their exchange rates to account for changes in relative competitiveness.
The resulting price stickiness tends to delay macroeconomic stabilization and structural adjustment, leading to rising debt and unemployment in weaker economies.
Without free labor mobility, fiscal transfers are the eurozone’s only option to ease debt repayment and, by stimulating economic activity, boost employment.
Establishing such a mechanism will not be easy, as it requires a resource that is in short supply in Europe today: trust.
Indeed, the north and south have struggled to overcome cultural differences and unequal economic conditions, preventing them from viewing the situation from each other’s perspective.
Binding the union closer together could prove critical to building such trust.
One strategy that combines rationality with the gradualism needed to overcome political resistance would be to increase the EU budget steadily, so that it can ultimately play a macroeconomic role, promoting stability and reinforcing cohesion within the eurozone.
It is a tough sell, but also a vital one.
Moving on From the Euro
SAINT-PIERRE-D’ENTREMONT, FRANCE – European Monetary Union was never a good idea.
I remember my surprise when, as a young assistant professor, I realized that I was opposed to the Maastricht Treaty.
I believed then – and still do – that European integration is a very good thing.
But the textbook economics I was teaching showed how damaging EMU could be in the absence of European fiscal and political union.
Nothing that has happened since has convinced me that the textbook was excessively pessimistic.
On the contrary: it was far too optimistic.
Life is strewn with banana skins, and when you step on one you need to be able to adjust.
But the monetary union itself turned out to be a gigantic banana skin, inducing capital flows that pushed up costs around the European periphery.
And adjustment – that is, currency devaluation – was not an option.
Furthermore, most textbooks of the time ignored the financial sector; thus, they ignored the fact that capital flows to the periphery would be channeled via banks, and that when the capital stopped flowing, bank crises would strain peripheral members’ public finances.
This, in turn, would further erode banks’ balance sheets and constrain credit creation – the sovereign-bank doom loop that we have heard so much about in recent years.
And no textbooks predicted that European cooperation would impose pro-cyclical austerity on crisis-struck countries, creating depressions that in some cases have rivaled those of the 1930s.
It has been obvious for some years that the “actually existing EMU” has been a costly failure, both economically and politically.
Trust in European institutions has collapsed, and political parties skeptical not just of the euro, but of the entire European project, are on the rise.
And yet most economists, even those who were never keen on EMU in the first place, have been reluctant to make the argument that the time has come to abandon a failed experiment.
A famous article by Barry Eichengreen pointed out that an anticipated EMU breakup would lead to the “mother of all financial crises.”
It is hard to disagree with him.
That is why economists of all stripes, whether or not they supported the introduction of the common currency, have spent the last five years developing and promoting a package of institutional reforms and policy changes that would make the eurozone less dysfunctional.
In the short run, the eurozone needs much looser monetary and fiscal policy.
It also needs a higher inflation target (to reduce the need for nominal wage and price reductions); debt relief, where appropriate; a proper banking union with an adequate, centralized fiscal backstop; and a “safe” eurozone asset that national banks could hold, thereby breaking the sovereign-bank doom loop.
Unfortunately, economists have not argued strongly for a proper fiscal union.
Even those who consider it economically necessary censor themselves, because they believe it to be politically impossible.
The problem is that silence has narrowed the frontier of political possibility even further, so that more modest proposals have fallen by the wayside as well.
Five years on, the eurozone still lacks a proper banking union, or even, as Greece demonstrated, a proper lender of last resort.
Moreover, a higher inflation target remains unthinkable, and the German government argues that defaults on sovereign debt are illegal within the eurozone.
Pro-cyclical fiscal adjustment is still the order of the day.
The European Central Bank’s belated embrace of quantitative easing was a welcome step forward, but policymakers’ enormously destructive decision to shut down a member state’s banking system – for what appears to be political reasons – is a far larger step backward.
And no one is talking about real fiscal and political union, even though no one can imagine European Monetary Union surviving under the status quo.
Meanwhile, the political damage is ongoing: not all protest parties are as pro-European as Greece’s ruling Syriza.
And domestic politics is being distorted by the inability of centrist politicians to address voters’ concerns about the eurozone’s economic policies and its democratic deficit.
To do so, it is feared, would give implicit support to the skeptics, which is taboo.
Thus, in France, Socialist President François Hollande channels Jean-Baptiste Say, arguing that supply creates its own demand, while the far-right National Front’s Marine Le Pen gets to quote Paul Krugman and Joseph Stiglitz approvingly.
No wonder that working-class voters are turning to her party.
A victory for the National Front in 2017 or 2022, which is no longer unthinkable, would destroy the European project.
Citizens of smaller eurozone member states will have noted the brutal way the ECB was politicized to achieve Germany’s goals in Greece, and the conclusion that the eurozone is a dangerous “union” for small countries will seem inescapable.
If centrist parties remain on the sidelines, rather than protesting what has happened, the political extremists will gain further valuable territory.
As for economists like me, who have balked at advocating an end to the failed euro experiment and favored reform, perhaps it is time to admit defeat and move on.
If only anti-Europeans oppose EMU, the EU baby could end up being thrown out with the euro bathwater.
An end to the euro would indeed provoke an immense crisis.
But ask yourself this: Do you really think the euro will be around in its present form a century from now?
If not it will end, and the timing of that end will never be “right.”
Better, then, to get on with it before more damage is done.
The Eurozone’s False Recovery
LONDON – At first glance, the eurozone economy seems like it might finally be on the mend.
Stock markets are rallying.
Consumer confidence has picked up.
Lower oil prices, a cheaper euro, and quantitative easing by the European Central Bank are all expected to boost growth.
ECB President Mario Draghi claims that “a sustained recovery is taking hold,” while policymakers in Berlin and Brussels latch onto signs of life in Spain and Ireland as proof that their bitter prescription of fiscal consolidation and structural reforms worked as advertised.
On closer inspection, however, it becomes clear that the improvement is modest, probably temporary, and not the result of the policies promoted by Germany.
True, according to some estimates, the eurozone economy may now be growing at an annual rate of 1.6%, up from 0.9% in the year to the fourth quarter of 2014.
But that is far slower than in the United States and Britain.
With the eurozone economy 2% smaller than it was seven years ago, “recovery” does not feel like the right word – especially as the relief is unlikely to last.
For starters, the one-off boost from lower oil prices is already being unwound.
After dropping by more than half between mid-June and mid-January, oil prices in euros have since bounced back by a third, partly owing to the euro’s sharp depreciation, which is making imports generally more expensive.
The effect of that on households’ budgets and companies’ costs is hardly cause for celebration.
Policymakers are counting on a more competitive currency to stimulate growth.
But they are likely to be disappointed.
With eurozone exports increasingly reliant on global supply chains, a cheaper currency provides less of a boost than before.
Exporters may also choose to pocket any gains, rather than seek to expand market share.
In 2014, exports from the eurozone amounted to nearly €2 trillion ($2.6 trillion at the time) – more than those from China.
Given patchy global demand, rapid export growth will be difficult to achieve.
In any case, with exports accounting for only one-fifth of the eurozone’s €10 trillion economy, they are unlikely to spur a strong recovery while domestic demand remains weak.
According to the ECB’s model, the euro’s 10% depreciation over the past year (in real, trade-weighted terms) may lift growth this year by a mere 0.2%.
The benefits of quantitative easing are also likely to prove ephemeral.
The decline in governments’ borrowing costs is unlikely to boost growth much, as European Union rules preclude fiscal expansion.
Overall, the eurozone’s fiscal stance is set to be broadly neutral this year, according to the European Commission, albeit with further squeezes in Ireland, France, and Italy.
Quantitative easing does improve funding conditions for the few eurozone companies large enough to tap capital markets.
But, even in the US and Britain, where capital markets play a much larger role in corporate finance, asset-price inflation did little to encourage consumers to spend or companies to invest.
On the contrary, investment in a weak real economy has been far less attractive than the prospect of earning easy money from financial engineering.
Most businesses in the eurozone rely on bank finance, and while credit conditions have improved somewhat, lending is flat (and continues to fall in southern Europe).
As long as zombie banks are weighed down with bad loans, that is unlikely to change much.
Nor can the small uptick in the eurozone’s growth, much less the relatively rapid expansion in Spain and Ireland, be attributed to the German recipe of fiscal consolidation and measures to increase export competitiveness.
Indeed, nothing could be further from the truth.
Spain is hardly an example of a successful fiscal adjustment.
On the contrary, its recovery coincided with the easing of the extreme austerity imposed in 2011-13, which has encouraged households to spend more, despite stagnant wages.
Even so, its economy remains 5.7% smaller than it was seven years ago.
A whopping 23.7% of Spaniards – and one in two young people – are unemployed, while many more have dropped out of the labor force altogether.
Meanwhile, Spain’s budget deficit was 5.7% of GDP last year, the highest in the EU.
Its rapidly rising public debt is set to top 100% of GDP this year.
As the country heads toward an election later this year, the European Commission has sanctioned the widening of its structural deficit.
Rather than flourishing as a result of austerity, Spain is in many ways getting a free pass.
Nor does Ireland – the fastest-growing EU economy last year – confirm the appropriateness of Germany’s policy prescriptions.
Ireland, after all, is a tiny, highly open economy whose booming export sector is benefiting from existing strengths – including low business taxes, a skilled workforce, and a flexible economy – and favorable external conditions, especially the strong recovery in its main markets, the US and Britain.
Even so, the economy is smaller than it was before the crisis, the unemployment rate is in double digits, domestic demand remains depressed, and the €64 billion bank-bailout bill unjustly imposed on 2.2 million Irish taxpayers still looms large.
The eurozone economy is set to do a bit better in 2015, but not because of the policies demanded by Germany.
And it is likely to be a temporary bounce, not the start of a sustained recovery.
To overcome its balance-sheet recession, the eurozone needs to clean up its banks, reduce the crushing overhang of mostly private debt, redress the huge shortfall in investment, eliminate barriers to enterprise, and tackle the deflationary drag of German mercantilism.
Signs of Life in the Eurozone
NEW YORK – The latest economic data from the eurozone suggest that recovery may be at hand.
What is driving the upturn?
What obstacles does it face?
And what can be done to sustain it?
The immediate causes of recovery are not difficult to discern.
Last year, the eurozone was on the verge of a double-dip recession.
When it recently fell into technical deflation, the European Central Bank finally pulled the trigger on aggressive easing and launched a combination of quantitative easing (including sovereign-bond purchases) and negative policy rates.
The financial impact was immediate: in anticipation of monetary easing, and after it began, the euro fell sharply, bond yields in the eurozone’s core and periphery fell to very low levels, and stock markets started to rally robustly.
This, together with the sharp fall in oil prices, boosted economic growth.
Other factors are helping, too.
The ECB’s easing of credit is effectively subsidizing bank lending.
The fiscal drag from austerity will be smaller this year, as the European Commission becomes more lenient.
And the start of a banking union also helps; following the latest stress tests and asset quality review, banks have greater liquidity and more capital to lend to the private sector.
As a result of these factors, eurozone growth has resumed, and eurozone equities have recently outperformed US equities.
The weakening of the euro and the ECB’s aggressive measures may even stop the deflationary pressure later this year.
But a more robust and sustained recovery still faces many challenges.
For starters, political risks could derail progress.
Greece, one hopes, will remain in the eurozone.
But the difficult negotiations between the Syriza-led government and the “troika” (the ECB, the European Commission, and the International Monetary Fund) could cause an unintended accident – call it a “Grexident” – if an agreement on funding the country is not reached in the next few weeks.
Moreover, Podemos, a leftist party in the Syriza mold, could come to power in Spain.
Populist anti-euro parties of the right and the left are challenging Italian Prime Minister Matteo Renzi.
And Marine Le Pen of the far-right National Front is polling well ahead of the 2017 French presidential election.
Slow job creation and income growth may continue to fuel the populist backlash against austerity and reform.
Even the ECB estimates that the eurozone unemployment rate will still be 9.9% in 2017 – well above the 7.2% average prior to the global financial crisis seven years ago.
And austerity and reform fatigue in the eurozone periphery has been matched by bailout fatigue in the core, boosting support for a range of anti-euro parties in Germany, the Netherlands, and Finland.
A second obstacle to sustained recovery is the eurozone’s bad neighborhood.
Russia is becoming more assertive and aggressive in Ukraine, the Baltics, and even the Balkans (while sanctions against Russia have hurt many European economies).
And the Middle East is burning just next door: the recent terrorist attacks in Paris and Copenhagen, and against foreign tourists in Tunisia, remind Europe that hundreds of homegrown jihadists could return from fighting in Syria, Iraq, or elsewhere and launch further attacks.
Third, while ECB policies keep borrowing costs lower, private and public debt in the periphery countries, as a share of GDP, is high and still rising, because the denominator of the debt ratio – nominal GDP – is barely increasing.
Thus, debt sustainability will remain an issue for these economies over the medium term.
Fourth, fiscal policy remains contractionary, because Germany continues to reject a growing chorus of advice that it should undertake a short-term stimulus.
Thus, higher German spending will not offset the impact of additional austerity in the periphery or the significant shortfall expected for the three-year, €300 billion ($325 billion) investment plan unveiled by European Commission President Jean-Claude Juncker.
Fifth, structural reforms are still occurring at a snail’s pace, holding back potential growth.
And, while structural reforms are necessary, some measures – for example, labor-market liberalization and pension overhauls – may boost the eurozone’s savings rate and thus weaken aggregate demand further (as occurred in Germany following its structural reforms a decade ago).
Finally, Europe’s monetary union remains incomplete.
Its long-term viability requires the development over time of a full banking union, fiscal union, economic union, and eventually political union.
But the process of further European integration has stalled.
If the eurozone unemployment rate is still too high by the end of 2016, annual inflation remains well below the ECB’s 2% target, and fiscal policies and structural reforms exert a short-term drag on economic growth, the only game in town may be continued quantitative easing.
But the ongoing weakness of the euro – fed by such policies – is fueling growth in the eurozone’s current-account surplus.
Indeed, as the euro weakens, the periphery countries’ external accounts have swung from deficit to balance and, increasingly, to surplus.
Germany and the eurozone core were already running large surpluses; in the absence of policies to boost domestic demand, those surpluses have simply risen further.
Thus, the ECB’s monetary policy will take on an increasingly beggar-thy-neighbor cast, leading to trade and currency tensions with the United States and other trade partners.
To avoid this outcome, Germany needs to adopt policies – fiscal stimulus, higher spending on infrastructure and public investment, and more rapid wage growth – that would boost domestic spending and reduce the country’s external surplus.
Unless, and until, Germany moves in this direction, no one should bet the farm on a more robust and sustained eurozone recovery.
Small Steps to European Growth
PARIS – The topics chosen by the European Central Bank for its annual forum in Sintra, Portugal, at the end of May were not deflation, quantitative easing, or financial stability. They were unemployment, productivity, and pro-growth reforms.
Draghi is undoubtedly right.
The European Commission now expects growth in the eurozone to reach 1.5% in 2015 and 1.9% in 2016.
That certainly looks good in comparison to the near-stagnation of recent years.
But, given the combination of massive monetary support, a now-neutral fiscal stance, a steep fall in oil prices, and a depreciated euro, it is the least we could expect, and it will bring per capita GDP back only to its 2008 level.
The fact that leaders and pundits are hailing this brighter outlook indicates just how diminished our expectations have become.
Until recently, fiscal austerity and the euro crisis could be blamed for poor economic performance.
Not anymore.
Although growth may exceed the Commission’s forecast, there are reasons to be concerned about the eurozone’s growth potential.
In order to strengthen that potential, central bankers can only advocate economic reforms; it is governments that are responsible for adopting them.
And critics point out that repeated exhortations could prove counterproductive.
After all, central banks are quick to rebut monetary-policy suggestions from governments in the name of independence.
Why should governments behave differently?
Draghi has good reason to insist that, in the absence of significant national action, the eurozone might well stumble from crisis to crisis until its very viability is jeopardized.
Participation in a monetary union is a demanding endeavor that requires policy agility among its participating countries, as well as a sense of common purpose.
But governments have good reason to argue that, as far as reforms are concerned, policymaking requires precision and political realism, which outside advice often lacks.
The ECB simply cannot whip the European Union into shape.
A natural solution could be for the ECB to rely on the other European institutions.
Since 2010, the EU has been piling up coordination procedures in the hope of pushing governments into enacting politically difficult reforms.
Each year, every member country is handed a to-do list of public spending, labor-market, and competition reforms, as well as other recommendations.
The European Commission is also trying to lure reluctant governments into bolder action by offering them more fiscal room.
And, two years ago, German Chancellor Angela Merkel floated the idea of individually tailored “reform contracts” that, again, would create incentives for governments to enact pro-growth reforms.
But the effectiveness of these initiatives has proved to be limited, to say the least.
Schemes aimed at strengthening policy coordination have merely added complexity to an already Byzantine architecture of procedures.
Recommendations issued to individual countries lack both traction in national capitals and coherence at the eurozone level.
The EU has a strong hand when a country is in need of financial assistance, but otherwise it can do little more than offer counsel.
The eurozone must overcome this shortcoming, but no simple solution is at hand.
Proposals are expected in the coming months.
There is broad agreement that streamlining is required; but that will not suffice.
Some advocate further centralization of decisions; but that will not help, either, because reforms are intrinsically national, if not sub-national. Instead, progress can be made in three directions.
First, the ECB’s analysis of the economic challenges facing the eurozone should be very transparent.
Governments should know precisely how Draghi and his colleagues assess the potential for growth and employment and how this will affect monetary policy.
They should have a clear idea of what they can expect from the ECB and what outcome (rather than precise measures) the ECB expects from them.
Second, the EU should support the creation of national institutions to monitor domestic developments and their compatibility with overall eurozone goals.
These could be modeled on the fiscal councils that were created a few years ago in each member country to assess national governments’ public-finance plans.
Because they are part of the national conversation, these councils have proved to be a useful addition.
In the same way, competitiveness councils could monitor the evolution of wages and prices, employment and growth, and the current account, and provide recommendations to national governments and social partners.
Such institutions would be much better placed than the EU to formulate timely and granular reform recommendations.
They could operate as a network, rely on similar methodologies, and thus help ensure more consistency among individual policies.
Third, the EU could foster aggregate action in high-priority areas by implementing schemes to support individual citizens, companies or public entities, access to which would be conditional on national policies fulfilling minimal requirements.
For example, the EU could create a training support scheme for unemployed young people, but make it contingent on the elimination of national policies that hinder youth employment.
Or it could create a scheme to support higher education, but reserve it for universities in countries where educational institutions have been granted a minimum degree of autonomy.
The justification would be that EU money can help only in the context of supportive national policies in the same field.
Conditionality of this sort would be positive, local, and non-punitive; it would serve as a carrot, not a stick.
These are modest proposals, because, when it comes to pro-growth reform in Europe, there is no magic bullet.
There can be no centralization, and coordination always risks becoming murky.
But the measures recommended here would serve to build a more decentralized, incentive-based policy regime.
Europe’s Misguided Investment Mania
BRUSSELS – The mantra in Brussels and throughout Europe nowadays is that investment holds the key to economic recovery.
The lynchpin of the new European Commission’s economic strategy is its recently unveiled plan to increase investment by €315 billion ($390 billion) over the next three years.
But the Commission’s proposal is misguided, both in terms of its emphasis on investment and its proposed financing structure.
The Commission’s plan, the signature initiative of President Jean-Claude Juncker at the start of his term, comes as no surprise.
With the eurozone stuck in a seemingly never-ending recession, the idea that growth-enhancing investment is crucial for a sustainable recovery has become deeply entrenched in public discourse.
The underlying assumption is that more investment is always better, because it increases the capital stock and thus output.
This is not necessarily the case in Europe at the moment.
European Union authorities (and many others) argue that Europe – particularly the eurozone – suffers from an “investment gap.”
The smoking gun is supposedly the €400 billion annual shortfall relative to 2007.
But the comparison is misleading, because 2007 was the peak of a credit bubble that led to a lot of wasteful investment.
The Commission recognizes this in its supporting documentation for the Juncker package, in which it argues that the pre-credit-boom years should be used as the benchmark for desirable investment levels today.
According to that measure, the investment gap is only half as large.
Unfortunately, even the pre-boom years are not a good guide for today’s European economy, because something fundamental has changed more quickly than is typically recognized: Europe’s demographic trends.
The eurozone’s working-age population had been growing until 2005, but it will fall from 2015 onward.
Given that productivity has not been picking up, fewer workers mean significantly lower potential growth rates.
And a lower growth rate implies that less investment is needed to maintain the capital/output ratio.
If the eurozone maintained its investment rate at the level of the pre-boom years, there would soon be much more capital relative to the size of the economy.
One might be tempted to say: So what?
More capital is always good.
An ever-increasing capital stock relative to output, however, means ever-lower returns to capital and thus ever more non-performing loans in the banking sector over time.
Given the weak state of Europe’s banking system, accumulating too much capital is not a luxury that the EU can afford.
Even setting aside the question of whether more is always better, what can the Juncker plan do to have a positive short-run impact on aggregate investment?
Academic research on the determinants of investment has generally concluded that the key variable is growth (or expectations of growth), and that interest rates play at most a secondary role.
One immediate implication of this, of course, is that monetary policy is unlikely to have a strong impact on investment.
Indeed, the market signal is clear: At present, there is no shortage of funding available in most of the EU.
The countries on the eurozone periphery, where credit might still be scarce, account for less than one-quarter of Europe’s economy.
So a lack of funding is not the reason that investment remains weak.
The Juncker plan is supposed to unlock, with €21 billion in EU funding, projects worth 15 times as much (€315 billion).
That sounds far-fetched.
Europe’s banking system already has more than €1 trillion in capital.
The addition of €21 billion, in the form of guarantees from the EU budget, is unlikely to have a significant impact on banks’ willingness to finance investment.
The Juncker plan targets, in particular, infrastructure projects, which are often riskier than other investments.
But these risks usually are not financial; they reflect potential political and regulatory barriers at the national level.
These problems cannot be solved by a guarantee from the EU budget (which in any case could not be larger than 1/15th of the value of the project).
The reason why there still is no good interconnection between the Spanish and French power grids is not a lack of financing, but the unwillingness of monopolies on both sides of the border to open their markets.
Many rail and road projects are also proceeding slowly, owing to local opposition, not a lack of financing.
These are the real barriers to infrastructure investment in Europe.
Large European companies can easily obtain financing at near-zero interest rates.
Calling for more investment is superficially always attractive.
But there are fundamental reasons to believe that the eurozone’s investment rate will remain permanently depressed.
The often-invoked investment gap is mostly a result of wishful thinking, and the remaining barriers to investment have little to do with a lack of financing.
Economic performance in the United States and the United Kingdom holds an important lesson for the eurozone.
Both economies’ recoveries have been driven largely by a pickup in consumption on the back of stronger household balance sheets, especially in the US.
The revival of investment has followed the resumption of consumption growth.
If European policymakers are serious about economic recovery, they should focus on consumption, not investment.
The Eurozone Needs More than QE
CAMBRIDGE – Although the European Central Bank has launched a larger-than-expected program of quantitative easing (QE), even its advocates fear that it may not be enough to boost real incomes, reduce unemployment, and lower governments’ debt-to-GDP ratios.
They are right to be afraid.
But first the good news: anticipation of QE has already accelerated the decline of the euro’s international value.
The weaker euro will stimulate eurozone countries’ exports – roughly half of which go to external markets – and thus will raise eurozone GDP.
The euro’s depreciation will also raise import prices and therefore the overall rate of inflation, moving the eurozone further away from deflation.
Unfortunately, that may not be enough.
The success of QE in the United States reflected initial conditions that were very different from what&nbsp;we now see in Europe.
Indeed,&nbsp;eurozone countries should not relax their reform efforts on the assumption that ECB bond purchases will solve their problems.
But even if these countries cannot overcome the political barriers to implementing structural changes to labor and product markets that could improve productivity and competitiveness, they can enact policies that can increase aggregate demand.
To be sure, the major eurozone countries’ large national debts preclude using traditional Keynesian policies – increased spending or reduced taxes – to raise demand through increased budget deficits.
But eurozone governments can change the structure of taxes in ways that stimulate private spending without reducing net revenue or increasing fiscal deficits.
First, though, consider why QE’s ability to stimulate growth and employment in the US does not imply that it will succeed in the eurozone.
QE’s effect on demand in the US reflected the financial-market conditions that prevailed when the Federal Reserve began its large-scale asset purchases in 2008.
At that time, the interest rate on ten-year Treasury bonds was close to 4%.
The Fed’s aggressive program of bond-buying and its commitment to keep short-term interest rates low for a prolonged period drove the long-term rate down to about 1.5%.
The sharp fall in long-term rates induced investors to buy equities, driving up share prices.
Low mortgage interest rates also spurred a recovery in house prices.
In 2013, the broad Standard and Poor’s index of equity prices rose by 30%.
The combination of higher equity and house prices raised households’ net worth in 2013 by $10 trillion, equivalent to about 60% of that year’s GDP.
That, in turn, led to a rise in consumer spending, prompting businesses to increase production and hiring, which meant more incomes and therefore even more consumer spending.
As a result, real (inflation-adjusted) GDP growth accelerated to 4% in the second half of 2013.
After a weather-related pause in the first quarter of 2014, GDP continued to grow at an annual rate of more than 4%.
Thus, QE’s success in the US reflected the Fed’s ability to drive down long-term interest rates.
In contrast, long-term interest rates in the eurozone are already extremely low, with ten-year bond rates at about 50 basis points in Germany and France and only 150 basis points in Italy and Spain.
So the key mechanism that worked in the US will not work in the eurozone.
Driving down the euro’s dollar exchange rate from its $1.15 level (where it was before the adoption of QE) to parity or even lower will help, but it probably will not be enough.
But, fortunately, QE is not the only tool at policymakers’ disposal.
Any eurozone country can modify its tax rules to stimulate business investment, home building, and consumer spending without increasing its fiscal deficit, and without requiring permission from the European Commission.
Consider the goal of stimulating business investment.
Tax credits or accelerated depreciation lower firms’ cost of investing and therefore raise the after-tax return on investment.
The resulting revenue loss could be offset by raising the corporate tax rate.
Similarly, demand for new homes could be increased by allowing homeowners to deduct mortgage interest payments (as they do in the US), or by giving a tax credit for mortgage interest payments.
A temporary tax credit for home purchases would accelerate home building, encouraging more in the near term and less in the future.
Here, the revenue loss could be offset by an increase in the personal tax rate.
A commitment to raise the rate of value-added tax by two percentage points annually for the next five years would encourage earlier buying to get ahead of future price increases.
The reduction in real incomes caused by the VAT increase could be offset by a combination of reduced personal income taxes, reduced payroll taxes, and increased transfers.
Though eurozone members cannot adjust their interest rates or their exchange rates, they can alter their tax rules to stimulate spending and demand, with the appropriate policy possibly differing from country to country.
It is now up to national political leaders to recognize that QE is not enough – and to start thinking about what else should be done to stimulate spending and demand.
Can the Euro Be Repaired?
PARIS – When Wolfgang Schäuble, Germany’s finance minister, recently tabled the option of a Greek exit from the euro, he wanted to signal that no member could abstain from the monetary union’s strict disciplines.
In fact, his initiative triggered a much broader discussion of the principles underpinning the euro, its governance, and the very rationale for its existence.
Only a fortnight before Schäuble’s proposal, Europe’s leaders had barely paid attention to a report on the euro’s future prepared by European Commission President Jean-Claude Juncker and his colleagues from the other European Union institutions.
But the new dispute over Greece has convinced many policymakers of the necessity to return to the drawing board.
Meanwhile, citizens wonder why they share this currency, whether it makes sense, and if agreement can be reached on its future.
For currencies, as for countries, founding myths matter.
The conventional wisdom is that the euro was the political price Germany paid for French acquiescence to its reunification.
In fact, German reunification only provided the final impetus for a project conceived in the 1980s to resolve a longstanding dilemma.
European governments were both strongly averse to floating exchange rates, which they assumed would be incompatible with a single market, and unwilling to perpetuate a Bundesbank-dominated monetary regime.
A truly European currency built on German principles appeared to be the best way forward.
In retrospect, German reunification was more a curse than a blessing.
When exchange rates were locked in 1999, Germany’s was overvalued, and its economy was struggling;
France’s was undervalued, and its economy was booming.
During the ensuing decade, imbalances slowly grew between a resurgent Germany and countries where low interest rates had triggered credit booms.
And when the global financial crisis erupted in 2008, conditions were ripe for a perfect storm.
No one can say how Europe would have evolved without the euro.
Would the fixed-exchange-rate system have endured or collapsed?
Would the Deutschemark have been overvalued?
Would states have reintroduced trade barriers, ending the single market?
Would a real-estate bubble have developed in Spain?
Would governments have reformed more or less?
Establishing a counterfactual baseline against which the euro’s impact could be assessed is impossible.
But that is no excuse for complacency.
Over the last 15 years, the eurozone’s economic performance has been disappointing, and its policy system must answer for this.
What really matters is whether a common European currency still makes sense for the future.
This question is often evaded, because the cost of exiting is deemed too high to consider it (and could be higher still if the break-up takes place in a crisis and sharpens reciprocal acrimony among participating countries).
Moreover, pulling the plug on the euro could unleash the dark forces of nationalism and protectionism.
But, as Oxford’s Kevin O’Rourke recently argued, this is hardly a sufficient argument.
It is the logical equivalent of advising a couple to remain married because divorce is too expensive.
So does the euro still make sense?
It was expected to deliver three economic benefits.
Monetary union, it was assumed, would foster economic integration, bolstering Europe’s long-term growth.
Instead, intra-eurozone trade and investment have increased only modestly, and growth potential has actually weakened.
This is partly because national governments, rather than building on currency unification to turn the eurozone into an economic powerhouse, tried to hang onto their remaining power.
This was perhaps logical politically, but it made no economic sense: Europe’s huge domestic market is one of its main assets, and opportunities to strengthen it should not be squandered.
Second, it was hoped that the euro would become a major international currency (particularly given how few countries are equipped with the necessary legal, market, and policy institutions).
And, according to recent ECB statistics, this hope has been largely fulfilled.
With international use of the euro behind only the US dollar, this achievement can help Europe to continue shaping the global economic order, rather than sliding into irrelevance.
Third, it was (somewhat naively) believed that the institutions underpinning the euro would improve the overall quality of economic policy, as though Europe-wide policies would automatically be better than national ones.
The acid test came in the aftermath of the 2008 global financial crisis: because it overestimated the fiscal dimension of the crisis and underestimated its financial dimension, the eurozone performed worse than the United States and the United Kingdom.
If the euro is to create prosperity, further reforms of the policy system are therefore needed.
But an agenda can be designed and implemented only if there is a broad consensus on the nature of the problem.
And, as the ongoing dispute over Greece illustrates, agreement remains elusive: Participating countries have developed contradictory analyses of the causes of the debt crisis, from which they derive contradictory prescriptions.
Richard Cooper of Harvard University once observed that in the early days of international public health cooperation, the fight against global diseases was hampered by countries’ adherence to different models of contagion.
They all favored joint action, but they could not agree on a plan, because they disagreed on how epidemics crossed borders.
That is the problem the eurozone faces today.
Fortunately, it is not unsolvable, as significant reforms like the creation of the European Stability Mechanism and the launch of banking union show.
Disagreements also did not prevent the ECB from acting boldly, which illustrates that the governance of institutions does matter.
But the fact that reforms and actions were undertaken only lately, and under the pressure of acute crisis, is a sobering reminder of the difficulty of reaching consensus.
Europe cannot afford to procrastinate and pretend.
Either the eurozone’s members find agreement on an agenda of governance and political reforms that will turn the currency union into an engine of prosperity, or they will stumble repeatedly from dispute to crisis, until citizens lose patience or markets lose trust.
Clarity is a prerequisite of serious discussion and ambitious reform.
Each of the major participants now has an obligation to define what it regards as indispensable, what it considers unacceptable, and what it is ready to give in exchange for what it wants.
A New Approach to Eurozone Sovereign Debt
ATHENS – Greece’s public debt has been put back on Europe’s agenda.
Indeed, this was perhaps the Greek government’s main achievement during its agonizing five-month standoff with its creditors. After years of “extend and pretend,” today almost everyone agrees that debt restructuring is essential.
Most important, this is true not just for Greece.
In February, I presented to the Eurogroup (which convenes the finance ministers of eurozone member states) a menu of options, including GDP-indexed bonds, which Charles Goodhart recently endorsed in the Financial Times, perpetual bonds to settle the legacy debt on the European Central Bank’s books, and so forth.
One hopes that the ground is now better prepared for such proposals to take root, before Greece sinks further into the quicksand of insolvency.
But the more interesting question is what all of this means for the eurozone as a whole.
The prescient calls from Joseph Stiglitz, Jeffrey Sachs, and many others for a different approach to sovereign debt in general need to be modified to fit the particular characteristics of the eurozone’s crisis.
The eurozone is unique among currency areas: Its central bank lacks a state to support its decisions, while its member states lack a central bank to support them in difficult times.
Europe’s leaders have tried to fill this institutional lacuna with complex, non-credible rules that often fail to bind, and that, despite this failure, end up suffocating member states in need.
One such rule is the Maastricht Treaty’s cap on member states’ public debt at 60% of GDP.
Another is the treaty’s “no bailout” clause.
Most member states, including Germany, have violated the first rule, surreptitiously or not, while for several the second rule has been overwhelmed by expensive financing packages.
The problem with debt restructuring in the eurozone is that it is essential and, at the same time, inconsistent with the implicit constitution underpinning the monetary union.
When economics clashes with an institution’s rules, policymakers must either find creative ways to amend the rules or watch their creation collapse.
Here, then, is an idea (part of A Modest Proposal for Resolving the Euro Crisis, co-authored by Stuart Holland, and James K. Galbraith) aimed at re-calibrating the rules, enhancing their spirit, and addressing the underlying economic problem.
In brief, the ECB could announce tomorrow morning that, henceforth, it will undertake a debt-conversion program for any member state that wishes to participate.
The ECB will service (as opposed to purchase) a portion of every maturing government bond corresponding to the percentage of the member state’s public debt that is allowed by the Maastricht rules.
Thus, in the case of member states with debt-to-GDP ratios of, say, 120% and 90%, the ECB would service, respectively, 50% and 66.7% of every maturing government bond.
To fund these redemptions on behalf of some member states, the ECB would issue bonds in its own name, guaranteed solely by the ECB, but repaid, in full, by the member state.
Upon the issue of such an ECB bond, the ECB would simultaneously open a debit account for the member state on whose behalf it issued the bond.
The member state would then be legally obliged to make deposits into that account to cover the ECB bonds’ coupons and principal.
Moreover, the member state’s liability to the ECB would enjoy super-seniority status and be insured by the European Stability Mechanism against the risk of a hard default.
Such a debt-conversion program would offer five benefits. For starters, unlike the ECB’s current quantitative easing, it would involve no debt monetization.
Thus, it would run no risk of inflating asset price bubbles.
Second, the program would cause a large drop in the eurozone’s aggregate interest payments.
The Maastricht-compliant part of its members’ sovereign debt would be restructured with longer maturities (equal to the maturity of the ECB bonds) and at the ultra-low interest rates that only the ECB can fetch in international capital markets.
Third, Germany’s long-term interest rates would be unaffected, because Germany would neither be guaranteeing the debt-conversion scheme nor backing the ECB’s bond issues.
Fourth, the spirit of the Maastricht rule on public debt would be reinforced, and moral hazard would be reduced.
After all, the program would boost significantly the interest-rate spread between Maastricht-compliant debt and the debt that remains in the member states’ hands (which they previously were not permitted to accumulate).
Finally, GDP-indexed bonds and other tools for dealing sensibly with unsustainable debt could be applied exclusively to member states’ debt not covered by the program and in line with international best practices for sovereign-debt management.
The obvious solution to the euro crisis would be a federal solution.
But federation has been made less, not more, likely by a crisis that tragically set one proud nation against another.
Indeed, any political union that the Eurogroup would endorse today would be disciplinarian and ineffective.
Meanwhile, the debt restructuring for which the eurozone – not just Greece – is crying out is unlikely to be politically acceptable in the current climate.
But there are ways in which debt could be sensibly restructured without any cost to taxpayers and in a manner that brings Europeans closer together.
One such step is the debt-conversion program proposed here.
Taking it would help to heal Europe’s wounds and clear the ground for the debate that the European Union needs about the kind of political union that Europeans deserve.
Money for Nothing
BRUSSELS – The developed world seems to be moving toward a long-term zero-interest-rate environment.
Though the United States, the United Kingdom, Japan, and the eurozone have kept central-bank policy rates at zero for several years already, the perception that this was a temporary aberration meant that medium- to long-term rates remained substantial.
But this may be changing, especially in the eurozone.
Strictly speaking, zero rates are observed only for nominal, medium-term debt that is perceived to be riskless.
But, throughout the eurozone, rates are close to zero – and negative for a substantial share of government debt – and are expected to remain low for quite some time.
In Germany, for example, interest rates on public debt up to five years will be negative, and only slightly positive beyond that, producing a weighted average of zero.
Clearly, Japan’s near-zero interest-rate environment is no longer unique.
To be sure, the European Central Bank’s large-scale bond-buying program could be suppressing interest rates temporarily, and, once the purchases are halted next year, they will rise again.
But investors do not seem to think so.
Indeed, Germany’s 30-year bund yield is less than 0.7%, indicating that they expect ultra-low rates for a very long time.
And many issuers are extending the maturity structure of their obligations to lock in current rates, which cannot go much lower (but could potentially increase a lot).
In any case, the eurozone seems stuck with near-zero rates at increasingly long maturities.
What does this actually mean for its investors and debtors?
Here, one must consider not only the nominal interest rate, but also the real (inflation-adjusted) interest rate.
A very low – or even negative – nominal interest rate could produce a positive real return for a saver, if prices fall sufficiently.
In fact, Japanese savers have been benefiting from this phenomenon for more than a decade, reaping higher real returns than their counterparts in the US, even though Japan’s near-zero nominal interest rates are much lower than America’s.
Nonetheless, nominal rates do matter.
When they are negligible, they flatter profit statements, while balance-sheet problems slowly accumulate.
Given that balance-sheet accounting is conducted according to a curious mix of nominal and market values, it can be opaque and easy to manipulate.
If prices – and thus average debt-service capacity – fall, the real burden of the debt increases.
But this becomes apparent only when the debt has to be refinanced or interest rates increase.
In an environment of zero or near-zero interest rates, creditors have an incentive to “extend and pretend” – that is, roll over their maturing debt, so that they can keep their problems hidden for longer.
Because the debt can be refinanced at such low rates, rollover risk is very low, allowing debtors who would be considered insolvent under normal circumstances to carry on much longer than they otherwise could.
After all, if debt can be rolled over forever at zero rates, it does not really matter – and nobody can be considered insolvent.
The debt becomes de facto perpetual.
Japan’s experience illustrates this phenomenon perfectly.
At more than 200% of GDP, the government’s mountain of debt seems unconquerable.
But that debt costs only 1-2% of GDP to service, allowing Japan to remain solvent.
Likewise, Greece can now manage its public-debt burden, which stands at about 175% of GDP, thanks to the ultra-low interest rates and long maturities (longer than those on Japan’s debt) granted by its European partners.
In short, with low enough interest rates, any debt-to-GDP ratio is manageable.
That is why, in the current interest-rate environment, the Maastricht Treaty’s requirement limiting public debt to 60% of GDP is meaningless – and why the so-called “fiscal compact” requiring countries to make continued progress toward that level should be reconsidered.
In fact, near-zero interest rates undermine the very notion of a “debt overhang” in countries like Greece, Ireland, Portugal, and Spain.
While these countries did accumulate a huge volume of debt during the credit boom that went bust in 2008, the cost of debt service is now too low to have the impact – reducing incomes, preventing a return to growth, and generating uncertainty among investors – that one would normally expect.
Today, these countries can simply refinance their obligations at longer maturities.
Countries’ debts undoubtedly play a vital role in the global financial system.
But, in a zero interest-rate environment, that role must be reevaluated.
A Strategic Rallying Cry for Europe
MADRID – At the end of June, Greece was hurtling toward implosion and the European Union was consumed by an increasingly vicious internal debate over migration.
That might not sound like the most auspicious time for the European Council to give final approval for the preparation of a long-awaited new “global foreign and security strategy” for the EU.
But that is what happened, with the endorsement – complete with deliver-by date – buried in the conclusions of the Council’s June 25-26 meeting.
The initiative has the potential to revolutionize how Europe addresses the many challenges it now faces and, perhaps more important, to give the EU the sense of purpose that it so badly needs.
That the EU needs a new security strategy is clear.
The current one, created in 2003, is deeply outmoded, as epitomized by its opening line: “Europe has never been so prosperous, so secure, nor so free.”
This is clearly no longer the case today.
The constant state of turmoil in which Europe has found itself is a result of the increasing complexity and intertwining of its internal and external realities – shaped, most notably, by four overlapping existential threats.
First, Russia has revived a traditional security challenge that Europe had, it was thought, solved long ago.
Second, transnational terrorism poses a multifaceted and fundamental danger.
Third, a burgeoning migration crisis is raising questions about European values and identity.
And finally, a general lack of vision for the future of the European project has led to disaffection throughout the continent, undermining cohesion and, in turn, the EU’s capacity to address the trials it faces.
These menaces exacerbate and intensify one another.
The activities of terrorist groups contribute to violence and instability in neighboring regions, driving an increasing number of migrants to the EU.
The difficulty of integrating immigrant communities into European societies has sometimes led to radicalization, providing ammunition to nationalist politicians and further fracturing Europe.
Russia’s leaders, too, have worked insidiously to break down solidarity, without which the EU is powerless to respond to the threats it faces.
All of this raises serious questions about the EU’s global role, while diminishing the viability of the European project itself.
Given this interconnectedness, it is unsurprising that the EU’s compartmentalized responses – such as the European Agenda on Migration, the Eastern Partnership, and the Energy Security Strategy – while important, have proved inadequate.
What is needed is an overarching framework that not only underpins a self-reinforcing and coordinated response to core security threats, but also takes advantage of linkages and opportunities to buttress Europe’s capacity to act.
Such a reconceptualization – not just revision – of Europe’s security strategy must account for the fact that the internal and external are becoming increasingly difficult to separate.
Indeed, internally focused initiatives– the digital single market is one clear example – have significant international impacts, while external events shape life in the EU.
Given this, the new security strategy should account for the wider implications of domestic policies, leveraging the full array of tools that Europe has at its disposal.
Of course, lofty rhetoric and ambitious intentions will mean little unless Europe’s leaders commit to the sustained implementation of concrete initiatives.
This is why the drafting process itself is so important; it presents an opportunity for a serious discussion involving EU institutions and the wider European policy community, which has already spent considerable time reflecting on these issues.
Federica Mogherini, the EU’s High Representative for Foreign Affairs and Security Policy and Vice-President of the European Commission, is correct when she urges the close involvement of member states in the discussions, in order to give them a sense of ownership over whatever strategy emerges.
The aim should be to produce viable ideas, build consensus, and find linkages – first and foremost within the EU, but without forgetting allies and partners.
In fact, that external dimension is essential.
The ongoing euro crisis has stripped away the rationale that undergirded the integration process for decades.
No longer able to point toward shared prosperity as its raison d'être, the EU is floundering in its search for a new narrative – one that convinces citizens and member states that European integration still has real value.
A strategy that focuses not only on how the world impacts the EU, but also on how European values and interests can and should be projected abroad would provide a rallying cry, a broader mission, and a clear purpose.
The European integration process has, at its core, always been values-driven and rules-based – two qualities that are on retreat in today’s world.
By carrying the banner of liberalism, good governance, and the rule of law internationally, the EU can reverse the centrifugal forces at home that have intensified during the crisis, thereby strengthening its capacity to respond to today’s challenges and securing its position in tomorrow’s world.
Evading Tax Evasion
ALESSANDRIA, ITALY – Tax evasion is a global scourge.
The “black” economy has, by some estimates, reached 10% of GDP in advanced countries and can top 70% in developing countries.
And it is getting worse.
Tax evasion is usually confronted in two ways: audits and harsh sanctions.
But, as the rising tide of tax evasion suggests, these mechanisms amount only to a cat game of and mouse problem – and the mice, it seems, are winning.
As tax evasion becomes more pervasive, whole networks to help hide incomes have appeared, making it far less likely that those who break the law are punished. Moreover, because more people are evading taxes, tax administrations are under increasing pressure to become more lenient or to accept bribes.
One strategy for weakening ties among potential evaders is to introduce various conflicts of interests.
For example, value-added tax is designed to encourage firms to procure invoices for their inputs in order to reduce their own tax outlays.
But the results often fall short of the potential benefits, because VAT has helped inspire tax evaders to create even stronger networks that can hide an entire chain of transactions.
The Chinese have devised a novel solution.
To encourage customers to request official receipts as proof of payment, some local tax authorities issue a type of receipt that doubles as a lottery ticket.
The receipts can be used as scratch cards to win small amounts of cash, but they also serve as lottery tickets for winning larger amounts.
To prevent forgery, businesses must purchase special, patented machines for printing these receipts.
Records of the printed receipts are automatically transmitted to the tax authorities and are used to calculate taxes.
Similar systems are in use in Taiwan and Latin America.
Another way to reward consumers for combating tax evasion is to offer subsidies.
Some developing countries have introduced a far-reaching VAT refund system for consumers who collect official receipts.
Northern Cyprus, like Turkey, offers a 2.5 percentage point refund on VAT, compared to the standard VAT rate of 13%.
But such systems are burdened by large administration and compliance costs.
The process of collecting and verifying claims is time-consuming, and the net benefit for taxpayers is low.
Moreover, the method is vulnerable to illicit practices, such as collecting receipts issued to foreigners and students, who cannot claim their own refunds.
Monetary subsidies to consumption are also often granted in developed countries for a variety of purposes, not least of which is fighting tax evasion.
One such subsidy is permitting deduction of a fixed percentage of certain expenses from income tax.
In Italy, expenditures for home improvements have been partly deductible for the past ten years, mainly to improve tax compliance by firms in the housing sector.
New regulations have recently been introduced with the specific aim of cracking down on moonlighting.
Under the 2007 financial law, those who claim the home improvement deduction must supply an invoice from the building contractor, which must specify the cost for labor.
In terms of reducing tax evasion, the results have been mixed.
The bulk of claims for the subsidy come from northern Italy, which is usually considered less prone to tax evasion to begin with.
While some cases of illegitimate claims are under investigation, there is no black market for receipts; fraud seems to arise mainly through falsified invoices.
While econometric studies are not available, raw data show an increase in reported income and in the number of firms and official workers.
However, taxable income in the sector is still growing at a slower rate than gross income as measured by national accounts.
When tax evasion is extremely common, taxpayers are likely to experience high transaction and psychological costs in resorting to tax auditors to enforce the issuing of receipts.
But if consumers bear the brunt of costs for reporting violations to the authorities, subsidies may induce them to seek out vendors willing to offer legal transactions.
Yet these efforts are also costly.
Whenever a firm chooses to evade, it becomes increasingly difficult to find a vendor willing to engage in legal transactions.
When alternatives become difficult to find, the compensation requested for accepting an illegal transaction falls.
As typically happens in these cases, once a critical mass of tax evasion is reached, it can jump to much larger values.
This process might also explain why, although many reward systems have proven successful at the beginning, their benefits quickly fade.
Of course, there is a risk that subsidies and lotteries may diminish the moral motivation of citizens to obey tax laws, because compliance becomes conditional on some form of compensation.
But if lotteries, subsidies, and other devices fail to control tax evasion, the Chinese have another method: the death penalty.
Even the Sheriff Upholds the Law
For some time now America has appeared to be intent on discarding the basic ordering instrument of relations between states - international treaties and the institutions that watch over them.
The Anti-Ballistic Missile (ABM) treaty with the former Soviet Union banning missile defense has been cancelled.
A protocol seeking to supervise the prohibition of biological weapons production has been rejected.
The Kyoto Protocol on climate change has been declared unacceptable to the US.
The Nuclear Test Ban Treaty - negotiated with major US involvement - has been dismissed.
The project of an international court of justice is ridiculed and resented.
Indeed, when Russia demanded that agreed limitations on nuclear strategic warheads be defined in a document binding both Moscow and Washington, the US balked, preferring a vague declaration of principle instead.
International covenants, the Bush Administration conveyed, are maybe all right for lesser powers - but they are an unacceptable restriction on the freedom of action of the world's only superpower.
It is not only America's enduring willingness to use her unique power in ways generally benign to international stability that should put fears over this trend to rest; nor the other familiar phenomenon that American administrations tend to start off with ideology before they arrive at pragmatism.
We are not witnessing a Copernican revision of the orbits of global diplomacy.
For, although a world without treaties and institutions would hurt most other countries more, it would hurt the mighty US as well.
The Guantanamo experience on how to treat Taliban and Al-Qaida fighters is a clear case in point.
In the past, the Geneva Convention prescribed how regular prisoners of war and members of irregular military forces should be treated when apprehended: they are not to be dealt with as criminals.
At first, US Secretary of Defense Donald Rumsfeld declared this international agreement inapplicable.
Soon, however, the Pentagon's language lost its sharp edge: the problem did not really exist as the captives would be released soon anyway, and were treated well anyway.
Finally, President Bush announced that Taliban fighters but not Al Qaida terrorists would enjoy the Geneva Convention's protections.
The reason for this reversal is obvious: if the US puts the Geneva Convention in doubt, American soldiers, if taken prisoner, could lose their protections.
Once the US claims the right of redefining or dismissing international treaties as it pleases, it can scarcely blame others if they do so as well.
Because it is so fragile, international law depends on the support of the most powerful participants in international affairs; if their commitment is in doubt, it will not be upheld.
But the ability of powerful nations to exercise their international influence also depends on international law being upheld.
For its military power, America depends on no one; for its influence in the world, however, the US continues to depend on the acceptance of other, lesser countries.
Were the US to opt out of international law, the strongest symbol for a more equitable international system, it would progressively lose influence.
That is the lesson of Guantanamo.
It is also the reason why the rest of the world need not worry.
The US is going through one of its phases of redefining the world, which usually ends with helping the world work.
American uneasiness about the prevailing body of international law dealing with conflicts is not entirely frivolous.
Given the new challenges of gobalized insecurity caused, at least in part, by the privatization of force, there is now an urgent task to develop international norms that are relevant to today's conditions.
Merely to insist, as some legal purists want, on the sanctity of existing agreements, is not enough; if they were adequate for past international requirements, this does not mean they are viable in a time when non-state actors are muscling into an arena hitherto monopolized by states.
So there may be a case for re-examining the Geneva Convention just as there is for looking afresh at the project to establish a permanent international criminal court.
Since America persists in rejecting the present court proposal (which has not yet entered into force), European governments, instead of sticking to it with equal obduracy, would do better to suggest an ad hoc international court to deal with Al Qaida-type culprits, perhaps attached to the Hague Tribunal now sitting in judgment over the war criminals of the Balkan Wars.
Creating such a court would demonstrate that acts of international terrorism are an affront to the international community as a whole, not merely to the US.
It could also help the Bush Administration to come up with a more convincing procedure than the one presently envisaged for honoring the President's vow to bring the perpetrators of September 11 th to justice.
International agreements and international law are so essential for coexistence on this crowded globe that not even the most powerful nation can do without them.
Even in politics it is foolish to oppose logic, and the simple logic of international agreements is that if one party does not honor them, neither will others.
In the debate over the Guantanamo Bay prisoners and the Geneva Convention America's realists have, once again, won out over America's ideologues.
As if to confirm that the lesson has sunk in, Secretary of State Colin Powell has just informed Russia that the US is ready, after all, to enter a binding treaty on the reduction of nuclear weapons.
Evil Personified
COLLEGE STATION, TEXAS – Equating war with individual evil has become ubiquitous – if not universal – in contemporary international politics.
Wars are fights against evil tyrants and the illegitimate governments they control.
Such rhetoric makes wars easier to justify, easier to wage, and easier to support, especially for elected leaders who must respond directly to swings in public opinion. Such language works equally well for any society in today’s media-obsessed age.
Little wonder, then, that political leaders consistently personalize international conflicts.
Alas, such commonplace language also makes wars harder to avoid, harder to end, and arguably more deadly.
The rhetoric of personified evil is easily seen through American examples, but is hardly a uniquely American phenomenon.
Chinese leaders blame Taiwanese leaders for cross-straits tensions, and blame the Dalai Lama for all that ails Tibet.
So, too, have protestors around the world made George W. Bush resemble Hitler, and mullahs throughout the Islamic world ritualistically harangue US presidents as earthly Satans, simultaneously noting their basic affection for the American people.
Recent American leaders, for their part, find it nearly impossible to deploy military force without first employing such rhetoric as both mantra and crutch.
The most famous example came in 1917.
Woodrow Wilson, asking for a declaration of war against Germany, said, “We have no quarrel with the German people.
We have no feeling toward them but one of sympathy and friendship.
It was not upon their impulse that their Government acted in entering this war.”
Only the Kaiser and his evil henchmen were to blame.
In 1990, George H.W. Bush made the same plea: “We have no quarrel with the Iraqi people.”
George W. Bush had earlier noted that Americans “had no quarrel with the people of Afghanistan,” only with Al Queda and their Taliban supporters.
He even employed this phrase in his final State of the Union address in 2008, saying that “Our message to the people of Iran is clear: We have no quarrel with you….Our message to the leaders of Iran is also clear: Verifiably suspend your nuclear enrichment, so negotiations can begin.”
Every American president since Wilson has, at least once while in office, uttered the phrase “have no quarrel with” a foreign enemy.
Such statements are typically made only days, sometimes hours, before the first American bombs fall.
Bill Clinton promised on the eve of the bombing of Serbia that “I cannot emphasize too strongly that the United States has no quarrel with the Serbian people.” Barack Obama promised from the campaign trail that “We have no quarrel with the Iranian people.
They know that President Ahmadinejad is reckless, irresponsible, and inattentive to their day-to-day needs.”
Presidents employ such language for good reason.
They know their public, a self-styled melting pot of peoples, would rather fight dictators than brothers and cousins abroad.
Indeed, Wilson’s initial formulation grew from a demographic and political quandary.
More than one-third of Americans in 1917 could trace their heritage back to Germany and its allies.
Wilson could not implore his people to “kill the Krauts,” as British or French leaders frequently did, because so many of Wilson’s soldiers were, by ethnicity at least, Krauts themselves.
He instead rhetorically transformed American soldiers from fratricidal killers into liberators of their ancient fatherland.
Only when foreign enemies looked different from what Americans conceived themselves to be could presidents wage war against a people as a whole.
Thus, Franklin Roosevelt could simultaneously urge Americans to keep the world from being “dominated by Hitler and Mussolini ,” even as he told them that “we are now in the midst of a war against Japan .” The war in Europe was a war to liberate oppressed peoples from tyrants.
The war in the Pacific was a race war.
Such politically expedient language has a strategic downside.
First, once you pin blame for a conflict on a single individual, a Saddam Hussein or Kim Jong Il, it is difficult to see a solution to international conflict that does not result from the tyrant’s downfall. Imagine Bush parlaying with Saddam Hussein in 2005 or 2006, if war had never come again to Iraq, after having called him this generation’s Hitler.
More troubling is the identification of conflict with a single human source, which obscures the more systemic and insidious nature of international conflict.
Again, imagine if recent history had gone differently, and Saddam had in fact taken the Bush administration’s eleventh-hour offer of exile rather than war.
Or if the initial attempt made on Saddam’s life in the war’s first hours had been successful.
If Iraq indeed had weapons of mass destruction, as Bush believed, Hussein’s departure would have left such weapons in the hands of…whom exactly?
Equating war with a solitary tyrant thus imposes strategic limitations for policymakers.
It also leads, paradoxically, to a greater number of civilian deaths.
Bombs aimed at foreign dictators or their security apparatus almost invariably kill individuals far from the corridors of power.
Their deaths are easier to stomach, and to justify, so long as airmen and soldiers, and the public watching at home, believe the violence was at least directed against evil incarnate.
Such rhetoric clearly works.
It is global in nature.
But it also helps make the world a more dangerous place by obscuring the real reasons for war, and by allowing peoples around the world to justify violence and conflict not as a means to an end, but rather as a holy mission of liberation, freedom, and the eradication of tyranny.
Until political leaders reject the rhetoric of evil as a justification for war, war itself is unlikely to disappear.
Evolutionary Theory’s Welcome Crisis
EXETER – Those who believe that a supernatural being created the universe have never posed an intellectual challenge to evolutionary theory.
But creationists, whether biblical fundamentalists or believers in “intelligent design,” do pose a threat to scientific thinking.
Indeed, creationism’s insidious genius lies in its ability to reinvent evolution in its own image as a dogmatic belief system – and thus the antithesis of science.
The creationists are right about one thing: contrary to the impression given by much popular writing on the subject, the theory of evolution is in crisis.
But this is a positive development, because it reflects the non-linear progress of scientific knowledge, characterized by what Thomas Kuhn described in his influential book The Structure of Scientific Revolutions as “paradigm shifts.”
For the last 70 years, the dominant paradigm in evolutionary science has been the so-called “new synthesis.”
Widely publicized in recent years by Oxford evolutionary biologist Richard Dawkins, the new synthesis unites Darwin’s theory of natural selection with Mendelian genetics, which explains heredity.
The current crisis in evolutionary science does not imply complete rejection of this paradigm.
Rather, it entails a major, progressive reorganization of existing knowledge, without undermining the fundamental tenets of evolutionary theory: organisms alive today developed from significantly different organisms in the distant past; dissimilar organisms may share common ancestors; and natural selection has played a crucial role in this process.
Other assumptions, however, are under threat.
For example, in the traditional “tree of life” representation of evolution, the branches always move apart, never merging, implying that species’ ancestry follows a linear path, and that all evolutionary changes along this path occur within the lineage being traced.
But examination of genomes – particularly microbes – has shown that genes moving between distantly related organisms are an important catalyst of evolutionary change.
Moreover, the new synthesis assumes that the main drivers of evolution are small mutations generated by chance within a species.
But recent evidence suggests that large changes, caused by the absorption of a chunk of alien genetic material, may be just as significant.
Indeed, the absorption of entire organisms – such as the two bacteria that formed the first eukaryotic cell (the more complex cell type found in multicellular animals) – can generate large and crucial evolutionary change.
Further destabilizing evolutionary theory is the growing realization that many factors, not just the genome, determine an individual organism’s development.
Ironically, as the discovery of DNA’s structure – initially lauded as the final act in the triumph of the new synthesis – led to a better understanding of genomes’ functioning, it ended up weakening belief in their unique role in directing biological development.
Those who long deplored the omission of development from evolutionary models – a decades-old critique made under the scientific banner of evolutionary developmental biology (“evo-devo”) – together with the insistence that organisms’ development draws on a wide variety of resources, have been vindicated.
Recent developments in molecular biology have put the final nail in the coffin of traditional genetic determinism.
For example, epigenetics – the study of heritable modifications of the genome that do not involve alterations to the genetic code – is on the rise.
And the many kinds of small RNA molecules are increasingly recognized as forming a regulatory layer above the genome.
Beyond undermining the gene-centered theories of evolution that have dominated public consciousness for several decades, these developments call for new philosophical frameworks.
Traditional reductionist views of science, with their focus on “bottom-up” mechanisms, do not suffice in the quest to understand top-down and circular causality and a world of nested processes.
This brings us back to where we started.
Radically rethinking evolutionary theory invariably attracts the attention of creationists, who gleefully announce that if professional advocates of Darwinism cannot agree, the concept must be in retreat.
And, evolutionists, confronted with this response, tend to circle the wagons and insist that everyone is in agreement.
But nothing more clearly demonstrates that science and creationism are polar opposites than the latter’s assumption that disagreement signals failure.
In fact, disagreement – and the deeper insights that result from it – enables new approaches to scientific understanding.
For science, unlike for dogmatic belief systems, disagreement is to be encouraged.
Evolutionary theory’s current contretemps – and our inability to predict where the field will be in 50 years – are a cause for celebration.
We should leave the creationists to their hollow convictions and happily embrace the uncertainties inherent in a truly empirical approach to understanding the world.
A Hard Look at a Soft Global Economy
MILAN – The global economy is settling into a slow-growth rut, steered there by policymakers’ inability or unwillingness to address major impediments at a global level.
Indeed, even the current anemic pace of growth is probably unsustainable.
The question is whether an honest assessment of the impediments to economic performance worldwide will spur policymakers into action.
Since 2008, real (inflation-adjusted) cumulative growth in the developed economies has amounted to a mere 5-6%.
While China’s GDP has risen by about 70%, making it the largest contributor to global growth, this was aided substantially by debt-fueled investment.
And, indeed, as that stimulus wanes, the impact of inadequate advanced-country demand on Chinese growth is becoming increasingly apparent.
Growth is being undermined from all sides.
Leverage is increasing, with some $57 trillion having piled up worldwide since the global financial crisis began.
And that leverage – much of it the result of monetary expansion in most of the world’s advanced economies – is not even serving the goal of boosting long-term aggregate demand.
After all, accommodative monetary policies can, at best, merely buy time for more durable sources of demand to emerge.
Moreover, a protracted period of low interest rates has pushed up asset prices, causing them to diverge from underlying economic performance.
But while interest rates are likely to remain low, their impact on asset prices probably will not persist.
As a result, returns on assets are likely to decline compared to the recent past; with prices already widely believed to be in bubble territory, a downward correction seems likely.
Whatever positive impact wealth effects have had on consumption and deleveraging cannot be expected to continue.
The world also faces a serious investment problem, which the low cost of capital has done virtually nothing to overcome.
Public-sector investment is now below the level needed to sustain robust growth, owing to its insufficient contribution to aggregate demand and productivity gains.
The most likely explanation for this public investment shortfall is fiscal constraints.
And, indeed, debt and unfunded non-debt liabilities increasingly weigh down public-sector balance sheets and pension funds, eroding the foundations of resilient, sustainable growth.
But if the best way to reduce sovereign over-indebtedness is to achieve higher nominal GDP growth (the combination of real growth and inflation), cutting investment – a key ingredient in a pro-growth-strategy – is not a sound approach.
Instead, budget rules should segregate public investment, thereby facilitating a differential response in fiscal consolidation.
Increased public-sector investment could help to spur private-sector investment, which is also severely depressed.
In the United States, investment barely exceeds pre-crisis levels, even though GDP has risen by 10%.
And the US is not alone.
Clearly, deficient aggregate demand has played a role by reducing the incentive to expand capacity.
In some economies, structural rigidities adversely affect investment incentives and returns.
Similarly, regulatory opacity – and, more broadly, uncertainty about the direction of economic policy – has discouraged investment.
And certain types of shareholder activism have bred short-termism on the part of firms.
There is also an intermediation problem.
Large pools of savings in sovereign wealth funds, pension funds, and insurance companies could be used, for example, to meet emerging economies’ huge financing needs for infrastructure and urbanization.
But the channels for such investment – which could go a long way toward boosting global growth – are clogged.
Meanwhile, technological and market forces have contributed to job polarization, with the middle-income bracket gradually deteriorating.
Automation, for example, seems to have spurred an unexpectedly rapid decline in routine white- and blue-collar jobs.
This has resulted in stagnating median incomes and rising income inequality, both of which constrain the private-consumption component of aggregate demand.
Even the one factor that has effectively increased disposable incomes and augmented demand – sharply declining commodity prices, particularly for fossil fuels – is ultimately problematic.
Indeed, for commodity-exporting countries, the fall in prices is generating fiscal and economic headwinds of varying intensity.
Inflation – or the lack of it – presents further challenges.
Price growth is well below targets and declining in many countries.
If this turns to full-blown deflation, accompanied by uncontrolled rising real interest rates, the risk to growth would be serious.
Even very low inflation hampers countries’ ability to address over-indebtedness.
And there is little sign of inflationary pressure, even in the US, which is near “full” employment.
Given such large demand shortfalls and output gaps, it should surprise no one that even exceptionally generous monetary conditions have proved insufficient to bolster inflation.
With few options for fighting deflation, countries have resorted to competitive devaluations.
But this is not an effective strategy for capturing a larger share of tradable global demand if everyone is doing it.
And targeting exchange-rate competitiveness doesn’t address the aggregate demand problem.
If the global economy remains on its current trajectory, a period of intense volatility could destabilize a number of emerging economies, while undermining development efforts worldwide.
That’s why policymakers must act now.
For starters, governments must recognize that central banks, however well they have served their economies, cannot go it alone.
Complementary reforms are needed to maintain and improve the transmission channels of monetary policy and avoid adverse side effects.
In several countries – such as France, Italy, and Spain – reforms designed to increase structural flexibility are also crucial.
Furthermore, impediments to higher and more efficient public- and private-sector investment must be removed.
And governments must implement measures to redistribute income, improve the provision of basic services, and equip the labor force to take advantage of ongoing shifts in the economic structure.
Generating the political will to get even some of this done will be no easy feat.
But an honest look at the sorry state – and unpromising trajectory – of the global economy will, one hopes, help policymakers do what’s needed.
Exchange Rate Disorder
NEW YORK – Two troubling features of the ongoing economic recovery are the depressed nature of world trade and the early revival of international global payment imbalances.
Estimates by the International Monetary Fund and the United Nations indicate that the volume of international trade in 2010 will still be 7% to 8% below its 2008 peak, while many or most countries, including industrial nations, are seeking to boost their current accounts.
Indeed, if we believe the IMF’s projections, the world economy’s accumulated current-account surpluses would increase by almost $1 trillion between 2009 and 2012!
This is, of course, impossible, as surpluses and deficits must be in balance for the world economy as a whole.
It simply reflects the recessionary (or deflationary) force of weak global demand hanging over the world economy.
Under these conditions, export-led growth by major economies is a threat to the world economy.
This is true for China, Germany (as French Finance Minister Christine Lagarde has consistently reminded her neighbor), Japan, and the United States.
Countries running surpluses must adopt expansionary policies and appreciate their currencies.
More broadly, to the extent that major emerging-market countries will continue to lead the global recovery, they should reduce their current-account surpluses or even generate deficits to help, through increased imports, spread the benefits of their growth worldwide.
But, while that implies that emerging-market currencies must strengthen, disorderly appreciations would do more harm than good.
To use an American saying, it might mean throwing out the baby (economic growth) with the bathwater (exchange rate appreciation).
Consider China, which accounts for the largest share by far of world trade among emerging economies.
Real appreciation of the renminbi is necessary for a balanced world economic recovery.
But disorderly appreciation may seriously affect China’s economic growth by disrupting its export industries, which would generate major adverse effects on all of East Asia.
China needs a major internal restructuring from exports and investments, its two engines of growth in past decades, to personal and government consumption (education, health, and social protection in the latter case).
But this restructuring will tend to reduce, not increase, import demand, as exports and investment are much more import-intensive than consumption.
Moreover, a sharp appreciation of the renminbi could risk domestic deflation and a financial crisis.
Chinese authorities certainly seem to have that interpretation of the roots of Japan’s malaise in mind as they seek to avoid rapid revaluation.
The only desirable scenario, therefore, is a Chinese economy that transmits its stimulus to the rest of the world mainly through rising imports generated by rapid economic growth (i.e., the income effect on import demand), rather than by exchange-rate appreciation (the substitution effect).
This requires maintaining rapid growth while undertaking a major but necessarily gradual domestic restructuring, for which a smooth appreciation is much better suited.
Now consider other major emerging markets.
Here currency appreciation is already taking place, pushed by massive capital inflows since the second quarter of 2009, and in some cases it can already be said to be excessive (for example, in Brazil).
These countries can, of course, resist upward pressure on their currencies by accumulating foreign-exchange reserves, like they did before the global financial crisis.
The result is, of course, paradoxical: private funds that flow into these countries are recycled into US Treasury securities via investment of accumulated reserves.
Why should emerging-market countries’ central banks undertake this peculiar financial intermediation, which represents a major cost, as the yield of private funds is higher than that of reserves?
The implication here is that relying on free movement of capital to achieve exchange-rate appreciation and current-account deficits may generate a myriad of problems, including slower economic growth and the threat of asset bubbles and financial crises of their own.
So, a more orderly way to induce current-account deficits without risking disruption of emerging economies’ growth should be considered.
One solution (already advocated by some, including me, and adopted to some extent by a few countries) is broader use of capital-account regulations.
Surprisingly, however, this issue has been entirely absent from current global debates on financial reform.
Fortunately, the IMF opened the door to discussion of this issue in a recent staff position paper.
Equally important, a desirable global scenario is possibly one in which most developing countries run current-account deficits.
But this requires major reforms in the global financial system to reduce the vulnerabilities that such deficits generated in the past, and that were reflected in major financial crises in the developing world.
These past crises gave rise to a form of “self-insurance” among developing countries through reserve accumulation.
This helped many of them weather the recent storm, but it also contributed to global payments imbalances.
Recent IMF reforms are just a step in the direction of trying to create better financial instruments to help these countries.
It is essential, in particular, to create reliable large-scale financing for developing countries during crises, through a mix of counter-cyclical issuance of SDRs and emergency financing without onerous conditions.
Regulate the Carry Trade
PRINCETON – During the early years of the global financial crisis, exchange rates were the least interesting part of the macroeconomic debate.
A French proposal in 2011 for a sweeping reform of the international monetary regime went nowhere.
Today, the subject has become the focus of intense anxiety – and with good reason.
Currency wars are a reminder of the fragility of the process of globalization.
As one part of that process begins to appear unacceptably painful, demand for political intervention rises, and the entire system risks beginning to unravel.
The expectation that interest rates in the United States will rise is driving up the value of the dollar, even as monetary easing in Japan and Europe is pushing down the yen and the euro.
Over the last year, the euro has lost more than a fifth of its value relative to the dollar, and there is no sign that the trend will reverse anytime soon.
The euro’s depreciation has been greeted with delight by Europe’s business leaders.
But in the US, where the dollar’s gains are threatening to choke off economic recovery, officials at the Federal Reserve are expressing signs of concern.
The swing in exchange rates could have an impact that extends far beyond the short-term rebalancing of the global marketplace.
US President Barack Obama is negotiating with Asian countries over the Trans-Pacific Partnership and with Europe over the Transatlantic Trade and Investment Partnership.
The dollar’s rapid rise will play into the hands of his protectionist critics in a hostile and increasingly obstructionist Congress.
Indeed, surges in the dollar’s value have long coincided with increased political pressure for trade protectionism.
After all, the most obvious way to compensate for the apparent overvaluation of a country’s currency is by imposing import restrictions.
In the mid-1980s, the dollar’s appreciating exchange rate undermined US competitiveness, inaugurating a period of rapid and painful deindustrialization.
At that time, the major competitive threat was from Japan, and American politicians faced intense pressure to respond.
In 1985, the US Senate unanimously approved a resolution condemning Japan’s unfair trade practices and called on President Ronald Reagan to act to curb imports.
This was followed by a bill proposing a special levy on countries running large bilateral trade surpluses with the US.
If anything, today’s exchange-rate swings are likely to be more extreme, and to last longer, than the surge in the dollar’s value in the 1980s or the volatility of the 1930s, when, in the aftermath of the financial crash that triggered the Great Depression, countries competed to devalue their currencies.
The problem is what is known as the carry trade, a common financial strategy in which an investor borrows money in a currency subject to a low interest rate in order to buy assets in a currency subject to a higher rate.
The interest-rate differential, often combined with high amounts of leverage, provides a profit when the loans are paid off.
When exchange rates are stable and predictable, the carry trade is relatively safe.
But this is rarely the case.
For starters, the practice has the tendency to push exchange rates further apart, as investors sell the currency in which they borrowed to make their purchases.
This creates an incentive to take on more debt, because the real value of the loan is likely to be lower when the time comes to repay it.
The large corporate borrowers engaged in the carry trade consider themselves sophisticated investors, capable of predicting when exchange rates are about to reverse.
Unfortunately, this only increases the risk, boosting the possibility of a sudden reversal as money pours back into the borrowed currency in an attempt to repay loans before the exchange rate soars to loss-generating levels.
And hedging against such a reversal merely builds up risk elsewhere in the international financial system.
The dangers are very real.
In the 1980s, governments responded to large exchange-rate swings through active intervention, intentionally driving the dollar’s value down in 1985, only to try to stabilize it 18 months later.
These initiatives served a political purpose – holding off the protectionists.
But they also caused serious financial instability, contributing to a major stock-market crash in October 1987.
There is one historical precedent that could serve as a model, should we be able to muster the political will to consider it.
In the 1930s, John Maynard Keynes championed limits on the movement of capital in order to blunt the more damaging consequences of globalization.
The equivalent today would be to introduce regulations on the carry trade.
Exhausted Italy
Italy is facing perhaps its most important elections since 1948, when voters confirmed the emergence of Italy’s new republic from the wreckage of Mussolini’s fascist regime.
On April 9-10, Italians must choose between Prime Minister Silvio Berlusconi’s center-right government and the center-left bloc headed by Romano Prodi.
But neither man seems the sort of decisive figure that overcoming Italy’s bleak economic predicament demands.
Italy’s economic malaise is obvious.
Cumulative economic growth over the past five years was the slowest in the euro zone – 3.2%, compared to an average of 7.8% – with two years of stagnation.
Per capita GDP, too, has fallen below the euro-zone average.
Employment has increased, but labor productivity has remained flat and total factor productivity has declined.
Combined with strong real exchange-rate appreciation, this has led to a dramatic loss of competitiveness and weakening exports.
Indeed, the only growth sector seems to be books about Italy’s decline.
Berlusconi claims that statistics are unreliable, for they conceal a much rosier reality for today’s well-off Italians.
Other members of the government admit more soberly that Italy faces serious problems, but they lay the blame on factors beyond their control: a series of global economic shocks, a slow-down in continental Europe, the admission of China to the World Trade Organization, and the role of the euro.
But such explanations are unconvincing.
The global shocks affected all European countries alike, as did the entry of China (and other Asian countries) into the WTO, but French exports, for example, suffered much less, while German exports actually increased.
True, European growth was dragged down by meager growth in Germany, but Italy grew marginally less than Germany.
Finally, while the euro has put a stop to competitive devaluations, it also provided Italy with a sizeable benefit: a reduction by 6% of GDP in interest payments on the huge public debt accumulated in the 1990’s.
It would be unfair, however, to blame the Berlusconi government alone for this dismal performance.
Italy’s growth has been slower than Europe’s, with weakening exports, for the past decade, because the country was ill prepared to adjust to the global revolution in information technology and the changing pattern of world trade.
Its infrastructure, both material and intellectual, was poorer, and its economic structure was unfit for the new challenges, owing both to firm size and their specialization in traditional sectors, as well as low levels of education and R&amp;D.
Yet the Berlusconi government did next to nothing to address these deficiencies, despite being the first government in Italy’s history to survive a full five-year electoral term.
With an unassailable parliamentary majority, it could have undertaken coherent supply-side reforms, even at the risk of some initial unpopularity.
A couple of reforms were belatedly enacted: timid intervention on pensions and a further increase in labor-market flexibility.
But nothing was done to deregulate product markets or to give proper incentives to restructuring, while privatization came to a halt.
Instead, the government chose old-style Keynesian policy: moderate tax cuts to increase disposable income and an increase in current expenditure.
Between 2001 and 2005, current non-interest expenditure rose by 2% of GDP, revenues fell by 0.5% of GDP, and the general government deficit rose by 1% of GDP.
Worse, the surplus fell from 3.2% to 0.5% of GDP, and fell even allowing for the business cycle.
As a result, the debt-to-GDP ratio declined only modestly until 2004 and rose again – to more than 106% – in 2005.
The weak fiscal position will severely constrain whatever government comes to power.
The center-left’s ponderous electoral program proposes a cut of five percentage points in payroll taxes, but it is not clear where the required €10 billion will come from to pay for this.
The idea of increasing the low (12.5%) withholding tax on capital gains met with accusations that Prodi intends to expropriate wealth.
But the right’s slim manifesto includes its own unaffordable promises, such as cuts in property taxes and increases in low-level pensions.
Italian voters are perplexed.
In 2001, Berlusconi signed a “contract with the Italians” containing promises that have gone unfulfilled.
He has always fancied himself as a savior, convinced that he alone can fix the country.
So he finds it unconceivable that anybody can feel otherwise or even that rules should stand in his way.
Hence his government’s efforts to pass laws changing judicial procedures, or to consolidate the duopoly of public (government-controlled) television stations and his own, or to concoct a bizarre new electoral law favorable to his coalition.
But voters’ frustration with Berlusconi is not necessarily good news for Prodi and the left.
Opinion polls reveal that trust in all politicians and political parties has reached the lowest level ever.
Italy has endured a sad and degrading electoral campaign, one that has generated a lot of heat, but little light.
One hopes that whoever wins buckles down to the serious work that Italy so desperately needs.
Exiting from Democracy?
Both President George W. Bush and Prime Minister Tony Blair urgently need a plausible exit strategy from Iraq.
That they want to get out, now that their reasons for the war have so dramatically collapsed and domestic support is fading, is beyond doubt.
But neither wants to leave in ignominy, with their last man dramatically lifted of an embassy rooftop by helicopter.
Both Bush and Blair want to leave Iraq, if not with a victory, then at least with some sense of "mission accomplished."
Judging from their recent statements, the scenario that they are concocting is simple.
In January, there will be elections in Iraq.
The resulting government will then ask the occupation troops to leave, say, within a year.
Withdrawal will begin next spring.
While that scenario is simple, reality is not.
The first nagging question is this: will there actually be elections next January?
Prime Minister Iyad Allawi assures the world that there will be, and President Bush echoes his words.
More neutral observers - and indeed, the daily news bulletins about bombings and hostage taking and "insurgents" - cast doubt on that prospect.
The probability of Iraqi elections being held this coming January must be lower than 50%, and we can be certain that these will not be free and fair elections throughout the entire country.
Indeed, Iraq no longer deserves to be described as a united country.
It has now joined the growing list of the world's failed states and can at best be described as a potential federation of three states plus the unruly city of Baghdad.
Without elections, the Coalition is in trouble.
What other exit strategy can it devise?
Above all, however, Iraq is in trouble.
What other way forward is there for that unhappy former country?
The answer need not be all despair.
It may be that rethinking strategy in the light of new facts will open a way forward.
After all, it might be the case that national elections in a place groping for a democratic future are not the best first step on the road to a liberal order.
This is notably the case where entrenched groups - Kurds, Shiites, Sunnis - compete for central power.
Elections, in such a case, may not even be wise at all - indeed, they may prove to be counterproductive.
History suggests that elections do not create democracies.
They confirm that the conditions for a democratic order are present.
Thus, they are not the first step in the process of democratisation, but the last step in a preparatory phase in which at least two conditions have been created.
The first condition is a settled territorial arrangement.
In "tribal" societies, this is not easy to bring about.
Bosnia's experience reveals why this is so.
However much one may favor multiethnic nation-states, once such a construction has failed, it is imperative to listen to popular sentiment.
Viable units will emerge that are less than ideal but at least capable of creating legitimate government - meaning a government that is both effective and acceptable.
It would be disastrous to destroy the emergent Iraqi-Kurdish entity in the name of an abstract and no-longer existent greater Iraq.
Anyone who experienced occupied Germany after World War II, as I did, remembers that the first postwar elections held there were local and regional.
In fact, they established what are now the Länder of the Federal Republic of Germany.
The second condition that must be satisfied before elections can be credible is security.
Initially, this may be an issue for the military.
But peace and quiet based on tanks and the threat of air strikes cannot be enough.
Security requires not just troops, but laws and their enforcement.
What one might call "the liberal order" requires at least two institutional ingredients.
One is democracy, including elections and governments held to account by parliaments and ultimately the people. The other is the rule of law.
Lord Ashdown, the High Representative of a coalition of countries in Bosnia-Herzegovina, has set a good example of how the rule of law can be established.
It requires persons of great courage to become judges, and strong authorities to enforce their judgments. But it can be done.
In a Muslim country, such a strategy would, moreover, provide protection against hijacking of the law by religious fanatics.
It would establish what might be called the "Turkish solution."
Turkey's Prime Minister Recep Tayyip Erdogan has taken up this very challenge, first set by his great predecessor Kemal Atatürk nearly a century ago.
Perhaps what Iraq needs most is not a ballot box, but an Atatürk.
Such a strategy would be less simple than merely holding highly imperfect elections.
It would make the exit of occupation forces more complex and perhaps more drawn-out.
It would, however, have a more lasting impact on democratic development than a dubious process by which a limited number of people go to the polls to elect an ineffectual central government.
Such a strategy might even lead to an outcome about which those who want Iraq to join a free world can genuinely say: mission accomplished.
Exiting International Justice
I recently took part in a conference in Belgrade entitled “Dealing with the Past in ex-Yugoslavia.”
Although the rest of postcommunist Europe confronted such questions a decade ago, the Balkan wars of the 1990’s left both perpetrators and victims stuck in a time warp of justice delayed.
As the conference’s participants made their way into Belgrade’s Hyatt Hotel, an angry band of mostly older protesters bearing posters that read, “Free Milosevic” greeted them.
In a flurry of media and security, they confronted Carla Del Ponte, chief prosecutor at the International Criminal Tribunal for former Yugoslavia (ICTY) in The Hague.
Del Ponte is pressing Serbia’s government to cooperate in the still unresolved cases of Radovan Karadzic and Ratko Mladic, who ordered, implemented, and oversaw the massacre of 7,000 Muslim men and boys at Srebrenica in 1995.
The protesters are not unrepresentative of Serb opinion.
Almost a decade after the start of the ICTY’s work, debate still rages over responsibility for war crimes, with little agreement on even the most basic facts of the conflicts in Bosnia, Croatia, and Kosovo.
Serbian Prime Minister (then President) Vojislav Kostunica’s attempt in 2001 to set up a truth commission was doomed from the outset by allegations of bias, and was disbanded within a year.
The ICTY is also in trouble.
To be sure, Milosevic is on trial in The Hague for war crimes, crimes against humanity, and genocide. But comparisons to the post-WWII Nuremberg tribunal have worn thin: as the proceedings drag on, observers wonder why it has taken so long to establish criminal liability.
After all, at Nuremberg, the top rung of the Third Reich was tried and convicted within months.
By contrast, Milosevic has taken advantage of the ICTY’s procedures to delay his trial, while challenging its jurisdiction and legitimacy.
This plays well back home, where indicted war criminals are still touted as war heroes.
Indeed, Serbia’s last presidential election became something of a referendum on Milosevic – and hence on Serbia’s relations with the West and the wider world.
The pro-Milosevic candidate, Tomislav Nikolic, lost, but he received 46% of the vote.
Despite his campaign promises, Serbia’s President Boris Tadic has so far failed to cooperate with the ICTY by assisting in turning over Mladic (Karadzic is probably not in Serbia), who would surely testify against Milosevic.
One understands his trepidation: the first post-Milosevic prime minister, Zoran Djindjic, cooperated with the tribunal, and paid for it with his life.
Such foot-dragging exposes the ICTY’s fundamental weakness: unlike the Nuremberg tribunal, the international community convened it
This continues to impede the case against Milosevic, raising questions about whether there is sufficient proof directly linking him to the policy of genocidal ethnic cleansing, although this is likely to be less problematic since the charges against him turn not on “command responsibility,” but instead on the ICTY’s charter principles of individual responsibility.
These implicitly authorize prosecution of those responsible for a “joint criminal enterprise,” thus linking liability for criminal behavior such as deportations and removals to other foreseeable atrocities.
But time is running out.
The ICTY must wrap up new indictments this year, and disband by 2008.
It enters this end game facing diminished resources and waning political will within the international community.
What will be the Tribunal’s legacy?
From the start, the ICTY’s aims were ambitious, having been launched under the UN Security Council’s peacemaking powers.
If this meant that the Tribunal was intended to deter further violence, then it failed, at least in the short run.
After all, atrocities – including the Srebrenica massacre – continued after the ICTY began operating.
What about ethnic reconciliation?
The ICTY’s first chief prosecutor, Richard Goldstone, called for condemnation of ethnic persecution in order to enable all sides to transcend identity politics and move towards a more liberal political order.
Individual accountability would somehow break the chain of ethnic identity and communal vengeance.
But fostering ethnic reconciliation is a tall order for any court, and the ICTY hasn’t yet delivered.
A liberal political order implies a rule of law that recognizes precedents and analogical thinking.
But many Serbs hold on to their sense of historical exceptionalism and unique suffering.
Indeed, the coincidence of the NATO bombing in 1999 with the indictment of Milosevic helped convert both events into “attacks on the Serbian people.”
Historical denial is no less evident in Croatia, where the polarities of blame and suffering have simply been reversed.
There, too, the ICTY will not be missed.
So the talk nowadays is of the right “exit strategy” from international justice.
When the ICTY closes its doors, where should its unfinished cases go?
Del Ponte has called for “new partnerships for justice.”
That sounds fine, but what, realistically, are the choices?
Can the ICTY’s investigations and indictments really be turned over to national courts?
So far, the picture is not promising: the few domestic trials in the region continue to reflect the fractious politics and pervasive ethnic bias that surround them.
As in many parts of the world, it may be several generations before the region’s crimes can be worked through.
The ICTY’s responsibility should be to forge and disseminate a record that limits the possibility of historical denial.
Exit the Political Wife
NEW YORK – France’s new president, François Hollande, is not married to his partner, the glamorous political journalist Valerie Trierweiler, and no one seems to care.
Germany’s president, Joachim Gauck, is not married to his partner, the journalist Daniela Schadt, and no one seems to care.
Andrew Cuomo, the governor of New York, is not married to his partner, the domesticity guru Sandra Lee, and no one seems to care.
The list could easily be continued.
Is the adoring political spouse – so much a part of the political landscape that she has her own iconography, from knit suits to the dreamy upward gaze at her man – receding into the past?
It is true that in America, at least, hay can still be made from the role of political wife.
President Barack Obama may have experienced his first major dip in the polls – and his first real slide with women voters – when a partisan supporter, Hilary Rosen, said that Republican presidential candidate Mitt Romney’s wife, Ann Romney, had never worked a day in her life.
But the response to Rosen’s remark underscored the relative absence of the usual heightened scrutiny of the political wife’s hair and clothes, profession and cookie recipe.
It was only 20 years ago that, during Bill Clinton’s first presidential campaign, his wife Hillary’s career – that is, the fact that she had one of her own – sparked wild and vituperative debate.
There was even her absurd “bake-off” against First Lady Barbara Bush, in which she had to produce her own cookie recipe in order to appease a lingering cultural demand for domesticity in the role.
Those days now seem like another age.
In America in this election cycle, as in Europe, headlines are absent that in the past would have raised questions about an unmarried female partner, a working woman, a woman with a life of her own.
So, what accounts for the sudden disappearance of the adoring political wife?
The role achieved its apotheosis with someone who, perhaps not coincidentally, was trained as an actress.
Nancy Reagan codified the misty-eyed gaze at the rugged man, the demure demurrals, and the aggregation of power behind the throne, while claiming, in interviews, interest in nothing more serious than the White House’s latest china patterns.
“I don’t talk about political matters,” she famously said.
“That’s not my department.”
It is not surprising that this role has recently vanished.
For starters, recent events have made it highly unappealing to any woman who has any alternative to assuming it.
In recent years, the role of the traditional spouse has been, most visibly, to stand by (or not) while some excruciatingly embarrassing foible or betrayal by one’s husband is publicly aired in mortifying detail.
What woman would want to risk that role – one that has become increasingly likely in an age when surveillance by political opponents has become increasingly sophisticated and extensive?
Smart women may be unwilling to marry high-profile political men these days, owing to the tremendous potential downside.
Other domestic arrangements might be easier than taking the matrimonial plunge, with its prospect of thankless exposure in the event of a scandal.
Another reason for the not-necessarily-married and not-necessarily-full-time political spouse has to do with simple generational change: the role of adoring wife that Nancy Reagan perfected is a time-consuming profession.
Most men who are ready to seize the reins of national power will be with women of their own generation, who are likely to have plenty to do on their own trajectory.
We do have Clinton (as fraught and self-involved as her journey around these issues was) and Cherie Blair to thank for clearing away the cultural detritus.
In a way, voters may find this evolution reassuring: when every male politician had to be equipped with a smart but underemployed full-time adoring wife, there was reason to be uneasy about the unseen influence of an unelected adviser hovering around cabinet meetings.
But when a political leader’s partner is a full-time journalist – or a full-time lifestyle guru – one’s fears of a power behind the throne diminish: the woman, presumably, is too busy to meddle excessively in affairs of state.
Finally, what smart contemporary woman wants to take on a one-step-down role?
It is taxing to spend all of one’s time making one’s husband look good, and it is demeaning to have to feign a lack of interest in issues that doubtless were part of the attraction to one another in the first place.
If the traditional political wife is vanishing, it is voters’ own fault: we set it up to be a thankless and infantilizing position.
Why should we expect our leaders’ partners to perform, on a massive public stage, social roles that we no longer accept in our own lives?
The adoring political wife was always more caricature than character.
Exorcising Musharraf\u0027s Ghost
CAMBRIDGE – Following its recent free elections, Pakistan is rebounding politically.
But the euphoria that came with the end of the Musharraf era is wearing off, as the new government faces stark choices.
Unlike Iraq and Afghanistan, democracy is not new to this 60-year-old state, but ethnic cleavages, weak institutions, and religious extremism in the North are perennially destabilizing.
And, while the new government settles in and establishes its priorities, the West, especially the United States, must reassess the impact of its past dealings with Pakistan.
Pakistan’s new prime minister, Yousaf Gilani, is a seasoned politician and, more importantly, has Sufi family roots, which is a good omen because of the Sufi tradition of tolerance.
Gilani unequivocally declared in his inaugural address that fighting terrorism is a top priority, and his first decision was to release from house arrest judges deposed by Musharraf.
The respite from the horrendous spate of suicide bombings since the new government assumed power is similarly heartening.
But the honeymoon period is coming to an end.
Already, in Gilani’s hometown of Multan, rioters attacked government offices and banks to protest electricity disruptions.
A couple of well-known opposition politicians, a chief minister and a federal cabinet minister of the previous pro-Musharraf government, were publicly thrashed, raising doubts about government control over law and order in the country.
So far, Musharraf has accepted his diminishing stature quietly – though he has few other options.
The new political leadership, both inside and outside the parliament, has been carefully avoiding a head-on collision with the president.
Interestingly, in the midst of the political transition, Musharraf embarked on a week-long visit to China to lobby for construction of an oil and gas pipeline between China and the Persian Gulf that would be routed through Pakistan.
The deeper question raised by this proposal is whether Musharraf meant to convey a message to the US that Pakistan’s priorities were shifting.
The revival of democratic politics in Pakistan will undoubtedly effect Pakistan-US relations.
Pakistan’s military links with America appear to remain on a sound footing, so the strategic alliance with the US is likely to continue, perhaps with some nuanced differences over how to fight the “war on terror.”
But Pakistani politicians are bound to be influenced by domestic public opinion, which is generally critical of US policies.
Nevertheless, long-term US interests in the region will be better served if Pakistan’s democratic forces successfully establish themselves.
A proposal in the US Senate to increase development and education aid to Pakistan could help in winning the hearts and minds.
Meanwhile, President George W. Bush has said that “if another September 11-style attack is being planned, it probably is being plotted in Pakistan and not Afghanistan.”
Whether this American intelligence assessment is based on credible information is unknown.
American election-year politics may also be behind this assertion.
But it is significant that Bush decided to voice this view during Pakistan’s political transition.
Pakistan must take this view seriously, regardless of Bush’s motivations.
The new government should quickly devise a policy to deal with terrorism.
Recent months have seen dozens of suicide bombings and other terrorist activities – the price of Pakistan’s own past blunders, as well as those of the West.
Afghanistan is a prime example, as is the failure to settle the Kashmir imbroglio with India.
Both failures have strengthened domestic terrorist groups.
Pakistan’s government appears to be preparing to talk to some of the extremists in the tribal areas, introduce political reforms, and redouble development efforts.
But reference to “talks” makes the West uncomfortable.
American officials have likened this strategy to negotiating with terrorists, and point to a previous round of negotiations that did nothing to stop violence in the tribal areas.
But the new leadership wants to distinguish between al-Qaeda terrorists and religious conservatives and disillusioned Pashtun youth within Pakistan.
After all, the victory of the secular Awami National Party (ANP) in Pakistan’s North-West Frontier Province is a strong indication that people there have rejected religious political forces and violence.
This window of opportunity can be expanded through dialogue and reconciliation with those who are ready to disavow extremism and militancy.
The new Pakistani government needs to explain this to the West in order to keep its support.
The US, meanwhile, should end direct military strikes in the area, even if these are conducted with the knowledge and cooperation of Pakistan’s military.
Force has never worked with the Pashtun tribes, and there is no evidence that this has changed.
There are real signs that the new government is considered a credible partner in the tribal areas.
It needs to be given time to find a way out of the endless cycle of violence.
Exorcising the Last Balkan Ghosts
The next few weeks will see the resolution, one way or another, of the last territorial issues remaining in the Balkans, where the wars of the 1990’s ended with NATO interventions in Bosnia (1995) and Kosovo (1999).
Even with peace, major problems were left unresolved.
Bosnia was divided between a Muslim-Croat federation and a Serb republic, with little authority vested in the central government and a large international military – and eventually civilian – presence needed to hold it together.
Kosovo was left as a United Nations protectorate whose “final status” was uncertain.
These unresolved issues are now returning: prompted by Serbia’s government, Bosnia’s Serb leadership is contemplating secession, even as its Muslim leadership tries to increase central control.
And Kosovo’s Albanian population is clamoring for independence, while Serbia tries to postpone a decision by blocking action in the Security Council.
There is a real risk of renewed violence, though perhaps not on the scale of the 1990’s.
If the current negotiations on Kosovo’s status fail, Albanian extremists will seek to expel the more than 100,000 Serbs who live there.
Similarly, any move by Bosnia’s Serb Republic to secede could incite instability there.
Serbia, which traded violent nationalism for nonviolent nationalism when Slobodan Milosevic was overthrown eight years ago, has done all it can to impede resolution of these issues, with strong support from Vladimir Putin’s Russia.
Serbia wants as much independence as possible for the Serb Republic, while asserting its own sovereignty over Kosovo.
Serbs governed only by Serbs on their own territory is still Serbia’s goal.
The United States and the European Union are committed to a different vision: democratic transition and integration of all of the Balkans into NATO and eventually the EU.
But they have been reluctant to impose conditions on Serbia, for fear of bringing even more radical nationalists to power.
The US allowed Serbia into NATO’s Partnership for Peace, despite Serbia’s refusal to extradite General Ratko Mladic, the Bosnian Serbs’ military leader in the 1990’s, to The Hague to face war crimes charges.
The EU has negotiated and initialed (but not yet signed) a Stabilization and Association Agreement with Serbia, despite its recalcitrance in the Kosovo negotiations and meddling in Bosnia.
But appeasement has failed.
The US and the EU must use the strong hand that they still hold to ensure that their vision prevails, bringing lasting peace to a region that has repeatedly dragged great powers into conflict.
This requires, above all, a stiff warning to Serbia that it can no longer prevent Bosnia and Kosovo from moving towards Europe.
If for now a democratic Serbia prefers radical nationalism and alignment with Russia to membership in the EU and NATO, so be it.
No vital US interests are at stake, and Serbia will soon recognize its mistake.
The EU should be relieved not to admit such a Serbia.
At the same time, the US and the EU, acting together, must get serious in Bosnia and Kosovo.
In Bosnia, any further moves to undermine the essential compromise reached in the 1995 Dayton agreement should be met with the full powers of Bosnia’s “high representative,” who has recently negotiated an agreement that will strengthen the country’s fragile governing structure.
Bosnia’s leading Serb and Muslim politicians are playing with fire because they know the fire department is standing by.
It is time to take away their matches.
In Kosovo, now that a last-ditch round of negotiations has concluded with a report to the UN Secretary General, the US and the EU should agree to recognize Kosovo’s independence, provided the Kosovars agree to implement the plan submitted by Finnish mediator Marti Ahtisaari.
The Ahtisaari plan provides ample protection for Serbs and an international presence in Kosovo – which the US and the EU will need to deploy even without a new Security Council resolution – to ensure implementation.
Ironically, Serbia’s resistance to the Ahtisaari plan undermines protection for Kosovo’s Serbs and increases the risk that they will be mistreated.
American officials are fond of pointing out that the US has repeatedly intervened to protect Muslims from war and dictatorship.
But this claim will be devalued if the so far successful international interventions in Bosnia or Kosovo end in tragedy.
A satisfactory outcome in both places is within reach.
To achieve it, the US and the EU must ensure that Serbia is blocked from making trouble, Kosovo becomes independent, and Bosnia stays united.
Expanding Crime and Punishment in Tibet
NEW YORK – China has been widely criticized for its harsh treatment of almost any form of political dissent in Tibet.
In 2008, for example, a Tibetan named Wangdu, an AIDS educator in Lhasa, received a life sentence for sending news about Tibetan protests to Tibetans abroad.
The logic was clear: preserve what China’s leaders call “stability” and “harmony” in order to maintain state power.
But two recent events in Tibet, involving the trials of two leading Tibetans who had not attacked or criticized the state at all, do not follow this logic.
In the first trial, on June 24, Karma Samdrup, 42, one of the wealthiest Tibetan businessmen in China, received a 15-year sentence from a court in Xinjiang for stealing antiques.
Human rights groups suggested the charge was invented, because the police had dropped the case for lack of evidence when it was first investigated 12 years ago, and neither witnesses nor new evidence were produced in court.
Despite a detailed critique of the prosecution’s case by two Chinese defense lawyers, the sentence, which had been known privately among officials for several days, was confirmed.
On July 3, Karma’s elder brother, Rinchen Samdrup, 46, was tried on charges of “endangering state security.”
His crime was failing to register a small environmental group run by him and his younger brother in their remote home village of Gonjo, in eastern Tibet.
Having been found guilty -- the conviction rate in China is around 98%, and is even higher in Tibet, so the verdict was never in doubt – he was sentenced to five years in prison.
The younger brother, Chime Namgyal, 38, who is disabled, has been hospitalized since June 11 for serious injuries received whilst in custody.
He did not even receive a trial, but was given a 21-month sentence by local officials for the same offense as Rinchen – endangering state security by unofficially organizing litter-collection, tree-planting, and nature patrols to stop the hunting of endangered species.
Even in China, such activities are not usually considered threats to the state.
These three cases are doubly inexplicable, because none of the three brothers has been accused of actually criticizing China, opposing the Communist Party, or even talking about politics.
On the contrary, they have been hailed as ideal Tibetan citizens.
Karma had founded and financed a leading Tibetan environmental organization in 2001, and was named China’s philanthropist of the year in 2006 by China Central Television (for “creating harmony between men and nature”).
And, last year, the One Foundation, a humanitarian fund run by the film star Jet Li, awarded him one million renminbi by for his “model project.”
Rinchen was well regarded, too.
His group was awarded a major environmental prize from Ford Motor Company in 2006, and in 2008 the Chinese government described him and his organization as “an extremely beneficial supplement to the government’s environmental protection work.”
This February, China’s most important paper, the People’s Daily, published a large photograph of him receiving the award, together with praise of his work.
(The paper was apparently unaware that by then he had been in custody for five months.)
Indeed, a book praising the brothers for their work, Tianzhu (“Heavenly Beads”), was published in China late last year, to wide acclaim.
In June, for no apparent reason, the book was banned throughout the country, despite its lack of political content.
So, why is China targeting Tibetans who have no connection with politics and are regarded as model citizens?
Part of the answer may lie with corrupt local officials.
Rinchen and Chime had criticized a local police chief for hunting endangered animals.
One of his superiors at the nearby prefectural headquarters in Chamdo is suspected of having decided to punish them, as well as two of their cousins, Sonam Choephel and Rinchen Dorje, who are also in custody in Tibet for vague or unspecified offenses.
But local officials could not have arranged for Karma to be tried in far-away Xinjiang, let alone persuade the central government to ban the brothers’ innocuous book about their love of nature.
Higher-level leaders may have taken up the case against Karma – persuading their counterparts in Xinjiang to resurrect the old antiques case – because he had used his connections in Beijing to complain about the treatment of his brothers by officials in Tibet.
This theory has gained credence because the Communist Party’s current leader in the Tibet Autonomous Region formerly held a powerful position in Xinjiang Province.
If it is true, the case against Karma suggests that officials stationed in Tibetan areas may be gaining more power, able to reach out beyond their jurisdictions to pursue what appear to be little more than personal grievances.
Nor are these the only cases.
Dorje Tashi, the wealthy owner of the Yak, a leading tourist hotel in Lhasa, is also said to be languishing in prison on vague political charges.
In Tibet, where for the last 30 years major Tibetan businessmen had been seen as natural allies of the state, such developments are unprecedented.
China’s central government has the power to rein in its local chieftains, so its failure to do so in Tibet is puzzling.
If it continues to allow such cases to go forward, it risks losing even more credibility among those Tibetans who, like the three environmentalists, have tried to stay within the law and avoid politics.
Other Tibetans may conclude that China’s government has relegated governance of their region to local satraps who have their own interests to pursue.
In an area full of suspicion and antagonism towards the state, expanding the targets of its political prosecutions from Tibetan protestors to environmentalists and from dissident monks to businessmen risks further undermining China’s own objectives in its most troubled region.
Expansion and Democracy in Europe
Europe is poised on the rim of two nearly revolutionary undertakings: eastward expansion and the possibility of a draft constitution for the European Union.
Both should be treated as inextricably linked.
I support EU-enlargement.
It is an historical necessity.
However, expansion must go hand-in-hand with institutional reforms that improve both the EU's capacity to act and its democratic legitimacy.
Since communism's fall, the nations of Central and Eastern Europe have undergone exhilarating yet wrenching transitions.
The biggest danger posed by that rather abrupt and harsh process of transformation is that, in trying to become open, a society risks disintegrating in the effort.
This may happen when old structures are swept away, and are not replaced with new ones in a prudent way.
Open societies demand reliable institutions, and these cannot be created overnight.
Making that difficult passage from closed to open society was a necessary step for the states of Central and Eastern Europe to become candidate members and - perhaps soon - full members of the EU.
Enormous effort was expended by them - something not fully understood by current EU members - to accomplish their domestic transformations and so adapt themselves to the incredibly extensive acquis of the Union.
But the EU still must prove to the countries seeking to join it that the Union is a truly open, democratic society of the type they have struggled to make of themselves.
That question has practical implications, for if the EU is to manifest itself as a free and open society it must assure its ability to function both effectively and efficiently when expansion takes place.
Here is where the constitutional assembly underway in Brussels can and must link enlargement with reform of the Union, for enlargement must also be used to strengthen the transparency and democratic legitimacy of the EU.
The Council of Nice in 2000 sought to restructure the Union for the time when enlargement will double its membership to 27.
But the Nice meeting failed miserably.
An important step not taken was to end the principle of unanimity that rules decisionmaking in the EU Council of Ministers, and replacing it with a system of qualified-majority voting.
So long as unanimity remains, the more countries that take part in decisionmaking, the bigger the danger of a single veto blocking action.
Reform of the structures and working procedures of the EU Commission is also an urgent need.
Because of the system of collegiality, the sheer number of commissioners even now strains the Commission's decisionmaking capacity.
If, in future, every country continues to send at least one commissioner to Brussels, the process will grind to a crawl, if not a halt.
Better to radically reduce the size of the Commission, and to either tie countries into regional packages for Commission representation or rotate membership every few years among countries.
But the most important question of EU democracy is this: a nation can vote its government out of office when it is not satisfied, but this is not possible in the EU.
The Commission cannot be voted out of office because it was never actually voted into office.
The European parliament is also not yet a real parliament, with control of the purse and oversight of the executive.
Both must change.
The European parliament must exercise effective democratic control on the European level.
It must receive full sovereignty over EU budget-making and the right to sign-off on all decisions taken by a qualified majority in the Council.
As to the EU's executive, the Commission, or at least its president, must be elected - in the long-term it may be elected directly by European citizens, and in the interim, at least by members of the European parliament.
The Nice conference failed because the EU's national leaders could not, or would not, reach beyond their immediate national interests to take a pan-European perspective.
But the Union's capacity to act as a union is now a pre-condition to securing each European country's national interests.
If the events of September 11 th have taught us anything, they have shown that purely national answers to vital questions are either unavailable or unviable.
As the Union reforms itself internally to strengthen its democratic character and become a truly open society, it must not close itself off from those outside it.
At the very moment when today's candidate countries strive for EU membership, EU enlargement is feared by those states that are unlikely to join the Union for the foreseeable future.
After the current round of enlargement is completed, the EU's eastern border will likely run to the east of the Baltic states, Poland, Slovakia, Hungary and Romania, with Russia, Belarus, Ukraine and Moldova on the other side.
The Union must see to it that this border is not a new wall dividing Europe, and that the zone of stability and prosperity it has created for its members spreads to the EU's eastern neighbors as well.
Membership in the EU should not be the determining factor in European statecraft.
Our shared European values should matter most.
The EU's ability to create peace and stability - not to mention economic prosperity - is unique in modern history.
Indeed, the current state of the world shows how necessary a common European foreign and security policy is.
Today there is not too much America - as some maintain - but too little Europe.
The challenge facing the delegates at the Brussels convention is nothing less than creating an open, democratic, and yes, greater, Europe.
Expansion is Solidarity
Nowadays it is often alleged that the European Union’s sense of solidarity was put in jeopardy, if not shattered outright, by its enlargement to take in the countries of central and eastern Europe.
As Bulgaria and Romania come closer to membership, and with accession talks with Turkey and Croatia set to begin, it has become increasingly important to challenge that view.
The values and interests of the EU’s newest member states coincide in most ways with those of the 15 earlier members.
It is, of course, true that enlargement has fundamentally changed the Union and given rise to new problems and policy concerns.
But the new member states in central and eastern Europe are deeply embedded in the economic, social, and cultural development of our Continent.
The ties that bind us together were frayed by forty years of Soviet domination, but this did not fundamentally change these states’ European character.
My country, Poland, has always had deep cultural ties to other European countries, especially France.
We participated in all the major developments in European music, literature, and film (think of Andrzej Wajda’s films from the Solidarity era, such as “Danton,” which were French co-productions).
Even in sport, East Europeans have long been integrated with the rest of Europe.
Indeed, before World War I the German national football team consisted entirely of players with Polish names.
But, above all, there is a deep sense among Poles, Hungarians, Czechs, and others, that they are Europeans.
This is the very meaning of the word “solidarity,” as defined in the Oxford English Dictionary: “unity resulting from feelings and sympathies.”
Solidarity, in the sense of unity resulting from common interests, also clearly exists within both the original EU-15 and the enlarged Union.
The exceptions prove the rule.
The EU’s disunity over the war in Iraq should not overshadow its member states’ agreement on almost all other great questions of international affairs.
In economic matters, disagreements on, say, a single EU regulation should not be allowed to mask the fact that no member state, new or old, has ever contested the internal market.
Finally, the enlargement process itself is also manifestly a symbol of European social, civic, and cultural unity.
The fact that it provoked debate and dispute does not detract from the conviction shared by old and new member states that they had an obligation to rebuild the Continent after 40 years of division.
But there are concerns that, if not fundamentally divisive, are worrying.
Should we fear the fact that Europe is no longer a purely Jewish/Christian and white continent?
Will EU citizens whose origins are in other continents and whose religion is Hindu or Islam, Sikh or Buddhist, be able to identify with “European” values and culture?
Will they be able to feel European, like the Poles or the Czechs have always felt?
These questions apply most pointedly – indeed, they cannot be avoided – in the case of Turkey’s possible accession to the EU.
Is European integration animated by respect for another’s values?
Is it about sharing them or about contributing to them?
These are obviously knotty questions.
They are particularly difficult if we see culture as the cement of Europe’s future.
All European countries probably believed at the outset that non-European newcomers could be assimilated in the same way that Polish immigrants were assimilated into Germany’s Ruhr region in the nineteenth century.
That this has not happened, at least on a large scale, is not to say that it cannot happen at all.
Look at the growing number of prominent citizens of Turkish origin in Germany.
Consider the many second generation Indian and Pakistani Britons who are now seen in business suits carrying laptop computers and flying around the world.
But Europeans must admit that these individuals represent a small minority.
Many immigrant groups in Europe find themselves flung back on their own communities by the impossibility of social and economic integration.
The constant threat of terrorism has made this isolation even more dramatic for the Europe’s Islamic populations.
The EU cannot simply proclaim “solidarity” as a core value and then do nothing to foster it among those who feel marginalized.
They, too, must be allowed to feel those ties of “unity resulting from feelings and sympathy.”
European solidarity cannot and will not survive their neglect.
The Trouble with North Korea
NEW YORK – Nobody would care much about North Korea – a small and isolated country of 24 million people, ruled by a grotesque dynasty that calls itself communist – if it were not for its nuclear weapons. Its current ruler, Kim Jong-un, the 30-year-old grandson of North Korea’s founder and “Great Leader,” is now threatening to turn Seoul, the rich and bustling capital of South Korea, into “a sea of fire.”
American military bases in Asia and the Pacific are also on his list of targets.
Kim knows very well that a war against the United States would probably mean the destruction of his own country, which is one of the world’s poorest.
His government cannot even feed its own people, who are regularly devastated by famine.
In the showcase capital, Pyongyang, there is not even enough electricity to keep the lights on in the largest hotels.
So threatening to attack the world’s most powerful country would seem like an act of madness.
But it is neither useful nor very plausible to assume that Kim Jong-un and his military advisers are mad.
To be sure, there is something deranged about North Korea’s political system.
The Kim family’s tyranny is based on a mixture of ideological fanaticism, vicious realpolitik, and paranoia.
But this lethal brew has a history, which needs to be explained.
The short history of North Korea is fairly simple.
After the collapse in 1945 of the Japanese empire, which had ruled quite brutally over the whole of Korea since 1910, the Soviet Red Army occupied the north, and the US occupied the south.
The Soviets plucked a relatively obscure Korean communist, Kim Il-sung, from an army camp in Vladivostok, and installed him in Pyongyang as the leader of North Korea.
Myths about his wartime heroism and divine status soon followed, and a cult of personality was established.
Worshipping Kim, and his son and grandson, as Korean gods became part of a state religion.
North Korea is essentially a theocracy.
Some elements are borrowed from Stalinism and Maoism, but much of the Kim cult owes more to indigenous forms of shamanism: human gods who promise salvation (it is no accident that the Reverend Sun Myung Moon and his Unification Church came from Korea, too).
But the power of the Kim cult, as well as the paranoia that pervades the North Korean regime, has a political history that goes back much further than 1945.
Wedged awkwardly between China, Russia, and Japan, the Korean Peninsula has long been a bloody battleground for greater powers.
Korean rulers only managed to survive by playing one foreign power off against the other, and by offering subservience, mainly to Chinese emperors, in exchange for protection.
This legacy has nurtured a passionate fear and loathing of dependency on stronger countries.
The Kim dynasty’s main claim to legitimacy is Juche, the regime’s official ideology, which stresses national self-reliance to the point of autarky.
In fact, Kim Il-sung and his son, Kim Jong-il, were typical Korean rulers.
They played China against the Soviet Union, while securing the protection of both.
Of course, this did not stop North Korean propagandists from accusing the South Koreans of being cowardly lackeys of US imperialism.
Indeed, paranoia about US imperialism is part of the cult of independence.
For the Kim dynasty to survive, the threat of external enemies is essential.
The fall of the Soviet Union was a disaster for North Korea, as it was for Cuba; not only did Soviet economic support evaporate, but the Kims could no longer play off one power against another.
Only China was left, and North Korea’s dependence on its northern neighbor is now almost total.
China could crush North Korea in a day just by cutting off food and fuel supplies.
There is only one way to divert attention from this humiliating predicament: propaganda about self-reliance and the imminent threat from US imperialists and their South Korean lackeys must be turned up to a hysterical pitch.
And no tyranny can survive for long by relying on brute force alone.
Some people argue that the US could enhance security in northeast Asia by compromising with the North Koreans – specifically, by promising not to attack or attempt to topple the Kim regime.
The Americans are unlikely to agree to this, and South Korea would not want them to.
Apart from anything else, there is an important domestic political reason for US reticence: a Democratic US president cannot afford to look “soft.”
More important, even if the US were to provide such guarantees to North Korea, the regime’s paranoid propaganda would probably continue, given the centrality to Juche of fear of the outside world.
The tragedy of Korea is that no one really wishes to change the status quo: China wants to keep North Korea as a buffer state, and fears millions of refugees in the event of a North Korean collapse; the South Koreans could never afford to absorb North Korea in the way that West Germany absorbed the broken German Democratic Republic; and neither Japan nor the US would relish paying to clean up after a North Korean implosion, either.
And so an explosive situation will remain explosive, North Korea’s population will continue to suffer famines and tyranny, and words of war will continue to fly back and forth across the 38th parallel.
So far, they are just words.
But small things – a shot in Sarajevo, as it were – can trigger a catastrophe.
A Tale of Two Theories
PARIS – Global growth disappoints again.
A year ago, the International Monetary Fund expected world output to rise 4% in 2015.
Now the Fund is forecasting 3.3% for the year – about the same as in 2013 and 2014, and more than a full percentage point below the 2000-2007 average.
In the eurozone, growth in the latest quarter was underwhelming.
Japan has returned to negative territory.
Brazil and Russia are in recession.
World trade has stalled.
And China’s economic slowdown and market turmoil this summer have created further uncertainty.
True, there are bright spots: India, Spain, and the United Kingdom are beating expectations.
The United States’ recovery is solid.
Africa is doing well.
But, overall, it is hard to deny that the global economy lacks momentum.
This is partly because trees cannot grow forever: China’s economy could not continue to get 10% bigger every year.
And in part, it is because growth is not unconditionally desirable: Citizens may be better off with a little less of it, and more clean air.
But many countries are still poor enough to be endowed with strong growth potential, and many others, though rich, have not yet recovered from the global financial crisis.
So there must be something else holding growth back.
There are essentially two competing explanations. The first, the Secular Stagnation Hypothesis, has been proposed by Larry Summers.
Its key premise is that the equilibrium interest rate at which demand would balance supply is currently below the actual interest rate.
This seems paradoxical, because interest rates are close to zero in most advanced economies.
But what matters is the real rate of interest, that is, the difference between the market rate and inflation.
Aggregate economic balance may require a negative real interest rate; but with inflation at an all-time low – the IMF expects it to be negative this year and next in the advanced economies, and zero in the emerging economies – this is not feasible.
There are several reasons why the equilibrium interest rate could have reached negative territory.
Some are structural: saving is high globally, especially in Asia but also in Europe, where aging countries like Germany put money aside for retirement.
At the same time, the new digital economy is less capital-intensive than the old brick-and-mortar economy. This may be accentuated in the future by the advent of the so-called sharing economy.
Other factors are temporary.
In several countries, debt-financed housing booms have left households and companies over-leveraged; and governments have reduced deficits to contain their own debt.
As a result, there are likely to be too few investors and too many savers.
The Secular Stagnation Hypothesis is worrying, because it gives few reasons to believe that things will improve by themselves.
True, debt deleveraging is not without limits.
But it is impeded by slow growth and, thanks to high unemployment and weak global demand, persistently low inflation.
Worse, over the longer term, low investment undermines productivity, while protracted unemployment destroys skills.
Both reduce future potential growth.
A vicious circle, it seems, is at work.
The way to break it, according to Summers, is to sustain monetary stimulus and boost demand aggressively through fiscal policy.
The alternative explanation for the persistence of weak global growth has been best formulated by the Bank for International Settlements, an organization of central banks.
The BIS maintains that excessively low interest rates are a big reason why growth is disappointing.
This explanation may seem even more paradoxical than the first, but the logic is straightforward: Governments often try to escape the hard task of improving economic efficiency through supply-side reforms and rely on demand-side fixes instead.
So, when confronted with a growth slowdown caused by structural factors, many countries responded by lowering interest rates and stimulating credit.
But cheap credit promotes bad investment and excessive debt, which borrowers often are unable to repay.
More fundamentally, investment is a bet that cannot pay off if growth is structurally depressed.
Artificial growth promotion only ends in tears.
Furthermore, the BIS claims that credit may well aggravate structural deficiencies.
Housing bubbles and investments in dubious projects result in a waste of resources and a misallocation of capital that ultimately dampens potential growth.
The best example is perhaps Spain in the 2000s, where students left university before graduating to take part in the real-estate frenzy.
Amassing useless concrete and losing human capital, the country lost twice.
So here, too, the logic points to a vicious circle: Slower growth leads to artificial remedies and further erosion of long-term growth potential.
The BIS argues in favor of fiscal restraint, debt restructuring if needed, and swift normalization of monetary policies – quite explicitly criticizing the US Federal Reserve’s caution and the European Central Bank’s aggressive stance.
Both theories are internally consistent.
Both also fit only some of the facts.
The Secular Stagnation Hypothesis accounts well for the mistakes made in the eurozone in the aftermath of the global recession, when sovereigns attempted to deleverage while companies and households were unwilling to spend, and the ECB was keeping monetary policy relatively tight.
The BIS’s explanation reads like a summary of the woes of China, where growth has slowed from 10% to 7% or less, but the authorities still push investment amounting to almost half of GDP and promote all sorts of low-return projects.
So which theory fits the facts better globally?
So far, it is odd to claim that advanced countries have stimulated demand excessively.
Persistently low employment and near-zero aggregate inflation do not suggest that they have erred on the side of profligacy.
True, financial recklessness remains a risk, but this is why regulatory instruments have been added to the policy toolbox.
So the BIS’s call for across-the-board monetary normalization is premature (though this does not mean that reforms should wait).
In the emerging world, however, the mismatch between growth expectations and actual potential has often become a serious issue that demand-side stimulus and endless debt accumulation cannot cure.
Rather, governments should stop basing their legitimacy on inflated growth prospects.
A New Chance for European Politics
MADRID – Most political leaders in Europe want the European Union to emerge from its current crisis stronger and more united.
But the economic policies that have been implemented in most EU countries since the crisis began have given rise to an unprecedented threat to deeper integration – and, indeed, to what already has been achieved.
After five years of financial and economic crisis, anti-European politics has come resoundingly to the fore in many EU countries – France, the United Kingdom, Italy, Austria, Holland, Finland, Greece, Portugal, and even Germany.
Growing institutional disaffection has become a corrosive reality almost everywhere in Europe.
The only way to overcome Europe’s existential crisis, and to respond to citizens’ demands for change, is to confront Europe’s domestic opponents head-on: politics without palliatives.
Europe needs, first and foremost, to break the vicious circle of recession, unemployment, and austerity that now has it in its grip.
That means, first of all, refocusing economic policy on growth, employment, and institutional innovation.
It is impossible to advance toward political union while seeming to abandon Europe’s citizens along the way, which is the impression that unremitting austerity has created.
Sacrifice, too many Europeans believe, is not laying the groundwork for a better, more prosperous Europe, but is dragging them into a fatal tailspin.
European leaders cannot remain passive in the face of the dangerous populist tsunami now crossing the continent, and they know it.
There is still time to react – by demonstrating strong leadership and prioritizing growth over short-sighted policies – but that time is limited and the clock is ticking.
Next year will be crucial, for it will mark the end of the current political cycle and the beginning of a new one.
There will be a new German government, European Parliament elections, and, at the end of the year, a new European Commission. It is here that political leaders should devote their efforts.
No one wants the EU to fail because of its citizens’ disaffection.
To take advantage of the political opportunity offered in 2014 requires launching an open, pedagogical effort now.
European citizens have already shown a sense of responsibility and capacity for sacrifice, but they should know why hope – in the form of higher employment and living standards – is not futile.
If that does not happen, next year’s European elections may give rise to an unfortunate paradox.
Just when, as a result of the Lisbon Treaty, the European Parliament gains more power than it has ever had, the risk of it being condemned to irrelevance is greatest.
If, reflecting the mood in the member states, the elections result in a fragmented Parliament – possibly rendered less representative by low voter turnout – paralysis, disaffection, and ineffectiveness are guaranteed.
That is why Europe’s leaders should take advantage of the coming political cycle to correct Europe’s institutional design and strengthen its democratic legitimacy, thereby enabling them to respond to Euro-skepticism and ad hoc bilateral deals with more integration.
If Europeans are to overcome their fear of giving up sovereignty in order to achieve political union, a civic sense of attachment to Europe and its institutions must be regained and nurtured.
Achieving this requires, among other things, the recovery of the Franco-German axis as Europe’s driving force.
It also presupposes a European budget that is sufficient to meet expectations and equal to the challenges that await.
Resolving these issues is as important as resolving individual countries’ economic problems.
Indeed, they are in large part the same problem.
Institutions are legitimized in part by their effectiveness, and the EU must recover its authority to defend common interests and harmonize them with national concerns.
The European Parliament can exercise its power only if citizens feel represented there.
As Kemal Derviş, a vice president of the Brookings Institution, recently put it: “If independent technocrats are allowed to determine long-term policy and set objectives that cannot be influenced by democratic majorities, democracy itself is in serious jeopardy.”
Next year will also mark the centenary of the outbreak of World War I. From that moment until the present, Europe has both endured the worst and enjoyed the best of its history.
We should bear in mind the enormous symbolism of this date in order to understand how much Europe has changed – and, at the same time, to recognize the need to defend those changes.
The EU is one of the great political milestones of mankind.
For this reason, and in order to emerge stronger from the difficult situation in which Europeans now find themselves, Europe’s leaders must work with the conviction that the future is inexorably linked to a more integrated and more capable Union.
Exuberant Brazil
Brazil’s stock market, as measured by the inflation-corrected Bovespa index, has more than quadrupled in value since President Luis Inácio Lula da Silva’s first election victory in October 2002, and is now at almost twice the peak achieved in 2000.
In comparison, the inflation-corrected Shanghai Composite only doubled during this period, while the American stock market, as measured by the inflation-corrected Standard and Poor’s 500, increased only 50%.
Indeed, the United States has never experienced a fourfold increase in stock prices in less than five years, even during the late 1990’s bubble.
Given that Lula is an avowed leftist who counts Hugo Chávez and Fidel Castro among his friends, Brazil’s performance is all the more surprising.
How could he manage to preside over such a spectacular stock-market boom?
Are Brazilians too exuberant?
Might it be time for foreign investors to pull their money out?
Stock-market movements are certainly hard to explain, but there are reasons to believe that Brazilians might be rationally exuberant.
Corporate earnings in Brazil have gone up roughly as fast as stock prices.
With the price/earnings ratio remaining stable and moderate, the stock-market boom does not appear to reflect merely investor psychology.
On the contrary, the real question is why the increase in stock prices has not outpaced growth in corporate earnings.
After all, in the 1990’s, the US stock-market surge (as in many countries) was fueled by record-high price/earnings ratios.
In 1998, the price-earnings ratio in the US was 24, compared to a historical average of around 15.
By contrast, the run-up in stock prices in Brazil started from a very different point, with the price-earnings ration as low as six in 1998.
When a stock-market boom reaches historic proportions, a story always develops to rationalize it.
The news media typically present reasons to justify the view that the economy has entered a “new era.”
Sometimes the stories are mere fabrications to validate market optimism, as with the 1990’s boom.
But, at other times, the stories seem more solid.
Lula has called this a “magic moment” for the Brazilian economy.
While such words merit caution, economy fundamentals bear them out.
The currency, the real, has been strengthening steadily, to nearly twice its value against the US dollar in October 2002, when Lula was first elected.
Inflation and interest rates are falling, the country is running a trade surplus, foreign investment is flowing in at a high rate, and the government has more than paid off its debts to foreigners, becoming a net creditor to the rest of the world.
So stock investors seem to be recognizing Brazil’s economic vitality, carefully watching corporate earnings rise, and running with them.
After being lone believers through 2002, Brazilian stock market participants are now finding that investors from all over the world want to join the party.
Nevertheless, given corruption scandals involving prominent government figures that have come to light over the past few years, it is natural to wonder why the stock market has remained so strong.
Why haven’t the stories of corruption caused a crisis, as similar scandals did in Korea and Malaysia during the Asian financial crisis in 1997-98?
Indeed, while the scandals have shaken the government, Lula was overwhelmingly reelected last year, and investors continue to pour money into the stock market.
One reason is that the corruption scandals have provided an opportunity for investors to see Brazilian freedom of speech and democracy in action.
Newspapers and television commentators have been relentless in reporting the scandals, helping to prove to Brazilians and foreign investors alike that the political system is sufficiently stable to withstand open criticism.
Lula remains popular with Brazilians because his populist rhetoric shows real sympathy with the less affluent, and with foreign investors because he has always tempered his radicalism to accommodate economic reality.
He recently criticized Bolivian President Evo Morales’s threats to seize foreign assets for his failure in this regard: “Radicalism is incompatible with the common sense needed from someone who governs.”
Granted, the future is unknown; we have no crystal ball to predict the Bovespa’s likely path.
But, for me, the story is far more convincing than the one told during the 1990’s stock-market boom.
Strategi Bisnis ExxonMobil yang Berbahaya
NEW YORK – Strategi bisnis ExxonMobil yang terbaru merupakan bahaya bagi pemegang sahamnya dan seluruh dunia.
Lagi-lagi kita diingatkan atas hal ini melalui rumusan laporan Komite Artik dalam Dewan Minyak Bumi Nasional (National Petroleum Council’s Arctic Committee), yang dipimpin oleh CEO ExxonMobil, Rex Tillerson.
Laporan ini meminta pemerintah Amerika Serikat untuk melanjutkan pengeboran minyak dan gas di Artik – tanpa menyebutkan dampaknya terhadap perubahan iklim.
Ketika perusahaan minyak lainnya mulai bicara jujur tentang perubahan iklim, model bisnis ExxonMobil masih menyangkal kenyataan yang ada.
Pendekatan ini tidak hanya salah secara moral; tapi juga ditakdirkan untuk gagal secara finansial.
Tahun 2014 merupakan tahun terpanas dalam pencatatan perangkat hukum, suatu pengingat yang suram akan nasib planet kita pada perundingan iklim global tahun ini, yang akan berpuncak di Paris bulan Desember yang akan datang.
Pemerintah negara-negara dunia sepakat akan menjaga tingkat pemanasan yang diakibatkan manusia di bawah 2º Celsius (3.6º Fahrenheit).
Tetapi lintasan terkini menunjukkan pemanasan jauh melebihi batas ini, kemungkinan sekitar 4-6º Celsius di akhir abad ini.
Solusinya tentu saja adalah pengalihan bahan bakar fosil menjadi energi rendah karbon seperti tenaga surya atau angin, dan penggunaan kendaraan elektrik yang bertenaga listrik rendah karbon.
Sejumlah perusahaan minyak terbesar dunia mulai mengakui kenyataan ini.
Perusahaan-perusahaan seperti Total, ENI, Statoil, dan Shell mendukung metode carbon price (seperti sistem pajak atau perizinan) untuk mempercepat transisi menuju energi rendah karbon dan mulai melakukan persiapan internal.
Shell telah meningkatkan investasi dalam teknologi carbon capture and sequestration (CCS) untuk menguji apakah penggunaan bahan bakar fosil dapat dibuat menjadi aman melalui penangkapan CO2 agar tidak lepas ke atmosfir.
Hal ini tidak berarti seluruh pendekatan yang diambil perusahaan-perusahaan ini sudah difinalisasi; mereka menjanjikan akan menetapkan kebijakan iklim sebelum pelaksanaan climate summit tahun ini.
Setidaknya mereka membahas perubahan iklim dan mulai menghadapi kondisi pasar jangka panjang yang baru.
Sayangnya, ExxonMobil berbeda.
Pihak manajemen perusahaan ini, yang dibutakan oleh kekuasaan politiknya sendiri yang besar, secara sengaja mengabaikan perubahan realitas global.
Kekuasaan ini berada dalam zona nyaman di tengah-tengah pelobi dan penasihat politik Washington DC yang berhasil menyakinkan pimpinan perusahaan bahwa karena Senat Amerika Serikat kini dikuasai Partai Republik, entah bagaimana risiko-risiko bisnis perubahan iklim terhapuskan dan dunia tidak akan berubah meskipun ada atau tidak ada mereka.
Di saat yang sama, ExxonMobil bukanlah pemain kecil dalam sandiwara perplanetan ini.
ExxonMobil adalah salah satu tokoh utama.
Menurut studi yang dilakukan tahun 2013, ExxonMobil berada di posisi kedua di antara perusahaan-perusahaan dunia, tepat di bawah Chevron, yang menghasilkan total emisi terbesar.
Bahkan studi ini mendapati bahwa satu perusahaan ini menyumbangkan lebih dari 3% dari keseluruhan emisi dunia sejak bahan bakar fosil mulai digunakan!
Lalu apa pendapat ExxonMobil mengenai kenyataan iklim yang baru?
Bagaimana perusahaan ini akan menyesuaikan kebijakan korporasi dengan kebutuhan planet?
Sayangnya ExxonMobil membenamkan persoalan ini.
Ketika analis independen seperti Carbon Tracker menanyakan rencana perusahaan untuk menyesuaikan pengeboran minyaknya yang tanpa henti dengan batasan-batasan planet tentang perlunya menjaga penggunaan bahan bakar fosil agar mempertahankan ambang batas perubahan iklim di bawah 2º C, mereka mengabaikan batasan tersebut.
ExxonMobil dengan santainya merasa yakin sekali bahwa pemerintah negara-negara dunia tidak akan menjalankan komitmennya (atau akan melobi demi menghindari pemenuhan tanggung jawabnya).
Tiba lah kita pada pembahasan laporan Artik yang terbaru.
Kementerian Energi Amerika Serikat meminta Dewan Minyak Bumi Nasional, suatu kelompok industri, untuk memberikan saran tentang pengeboran di Artik.
Hasil yang diterima dari komite pimpinan Rex Tillerson justru berupa arahan yang salah.
Pengeboran sumber daya minyak dan gas di Artik akan menyebabkan tingkat pemanasan jauh melebihi batas 2º C. Pemanasan di Artik sendiri sudah jauh lebih cepat dibandingkan rata-rata pemanasan di bumi, sehingga berpotensi menyebabkan gangguan iklim secara berbesar-besaran, kekacauan berskala global – yang dapat meliputi pola cuaca ekstrim yang saat ini terjadi di lintang tengah Amerika Serikat.
Berdasarkan alasan-alasan tersebut di atas, sains terbaik dan terkini, termasuk studi penting yang diterbitkan dalam jurnal Nature tahun ini, memberikan pesan jelas dan tegas: Pertahankan minyak bumi di Samudera Artik berada di laut dalam; tindakan eksplorasi tidak memiliki tempat yang aman dalam sistem iklim.
Dunia ini sudah memiliki lebih dari cukup cadangan minyak dan gas; kini saatnya beralih ke energi rendah karbon, menjauh dari cadangan yang terbukti melimpah, jangan kita justru menambahnya dan terus mengancam planet.
Sebagaimana dirumuskan dalam studi Nature: “Eksplorasi sumber daya di Artik dan penambahan apapun dalam produksi unconventional oil tidak selaras dengan upaya menekan rata-rata pemanasan global di angka 2º C.”
Pembahasan ini ialah topik yang tepat untuk studi tentang Artik di tengah-tengah Dewan Minyak Bumi Nasional.
Namun laporan ini tidak pernah membahas persoalan apakah sumber daya minyak dan gas di Artik sesuai dengan keselamatan iklim.
Posisi ExxonMobil yang tidak memiliki rasa malu seharusnya sangat mengkhawatirkan pemegang sahamnya.
Pihak manajemen perusahaan berencana mengeluarkan uang dalam jumlah besar – mungkin puluhan miliar dolar – untuk eksplorasi cadangan minyak dan gas di Artik yang tidak bisa digunakan secara aman.
Seiring dengan pergeseran global menuju energi terbarukan yang sudah berkontribusi pada merosotnya harga minyak bumi, kebijakan iklim yang diterapkan di tahun-tahun mendatang akan menjadikan pengeboran di Artik sebagai pemborosan sumber daya.
Dana pensiun, universitas, gabungan perusahaan asuransi, dan pusat investasi pemerintah di seluruh dunia bergulat dengan bertambahnya risiko, baik dari segi moral maupun finansial, dari kepemilikan saham di perusahaan-perusahaan minyak, gas, dan batubara.
Sebagaimana Lisa Sachs dan saya pernah utarakan sebelumnya, investor yang bertanggung jawab harus segera menanyakan kepada perusahaan tersebut mengenai rencana bisnis untuk mematuhi batas pemanasan 2º C.
Rencana bisnis yang mencakup investasi di Artik, laut ultra-dalam, dan oil sands di Kanada tidak pantas berada dalam dunia beriklim aman.
Investor ExxonMobil harus mendesak jawaban dari pihak manajemen perusahaan tentang strategi bisnis yang bertentangan dengan kebutuhan global dan kesepakatan kebijakan.
Jika ExxonMobil tetap mempertahankan strategi bisnisnya yang berbahaya, investor harus segera menetapkan bahwa sudah tiba saatnya untuk meninggalkan semuanya dan mencari yang baru.
Eyeball to Eyeball at the Top of the World
NEW DELHI ­– When a foreign minister goes out of his way to assure reporters that there is no tension on his country’s borders with a powerful neighbor, the logical tendency is to wonder whether “the lady doth protest too much.”
After all, you don’t hear Canada’s foreign minister denying tension on his country’s American frontier, because the truth of that proposition is self-evident.
The claim by Indian Foreign Minister Pranab Mukherjee on a June visit to Beijing that the Sino-Indian border is tension-free has prompted cynical observers to assume the opposite.
They are right to do so.
The last six months have witnessed a proliferation of incidents along the 2,520-mile (4,057-kilometer) Sino-Indian frontier.
Nearly a hundred have been recorded, including no fewer than 65 incursions by China’s People’s Liberation Army in just one sector – the evocatively-named Finger Area, a 2.1-square-kilometer salient in the Indian state of Sikkim, which shares a 206-kilometer border with Tibet.
While India seeks to downplay such reports, one incident that did make it into the Indian press occurred inside the “Line of Actual Control” (LAC) on the western sector of the border at Demchok, in India’s Ladakh district.
A mixed civilian-military team investigating reports of Chinese incursions were, on May 16, threatened and forced to retreat by a PLA formation in three armored vehicles.
The Chinese soldiers allegedly assumed firing positions, leading the Indians to withdraw in order not to provoke a shooting match.
The previous month, there were reports of an armed Chinese probe 12 kilometers into the north-eastern Indian state of Arunachal Pradesh.
Intensified Chinese patrolling has been observed at Demchok and Pangong Tso in Ladakh, and in the West Kameng district of Arunachal Pradesh, a state to which the Chinese Ambassador in New Delhi went so far as to lay claim in a media interview.
With China having established four new airbases in Tibet and three in its southern provinces bordering India, the Indian Air Force is reportedly augmenting its own presence near the Chinese border by deploying two squadrons of Sukhoi-30MKI fighters.
What is going on?
Are China and India bracing for war?
Fears of imminent major hostilities are clearly overblown.
China, with the Olympics looming, is unlikely to initiate a clash, and India has no desire to provoke its neighbor, which humiliated it in a brutal border war in 1962 that left China in possession of 23,200 square kilometers of Indian territory.
At the same time, China has taken pains to remind India that it still claims a further 92,000 square kilometers, mainly in Arunachal Pradesh.
It doesn’t help that the two countries share the longest disputed frontier in the world, since the LAC has never been formally delineated in a manner accepted by both sides.
India’s borders were defined by British imperial administrators in 1913 – the MacMahon Line, which China rejects (though it accepts that line as its frontier with Burma, which was then part of British India).
With the LAC coming into being in the wake of China’s victory in 1962, the situation is even more unclear.
Whenever troops from either side build roads, construct or repair bunkers and other fortifications, or conduct patrols close to the LAC, tensions can flare.
When the two sides are anxious to avoid provoking each other, such activities are kept to a minimum, but it would seem that China has taken a conscious decision in recent months to keep the Indians on their toes.
The reasons are not hard to identify.
China’s recent troubles over Tibet have brought with them unwelcome reminders of India’s hospitality to the Dalai Lama and his government-in-exile.
The fact that Tawang, the birthplace of the sixth Dalai Lama and a major monastery of Tibetan Buddhism, lies in Arunachal, deprives China of a vital asset in its attempts to assert total control over Tibet.
Reminding India of China’s claims is therefore all the more urgent for China.
Foreign Minister Mukherjee was treated rudely on his recent visit, with Premier Wen Jiabao cancelling a previously-scheduled appointment and the Governor of Sichuan Province failing to show up to receive a donation of Indian humanitarian aid for China’s earthquake victims.
At his meeting with his Chinese counterpart, Yang Jiechi, Mukherjee was told what his hosts thought of the Dalai Lama’s activities and statements in India, and was reminded that the border incidents reflected different perceptions of where the border lies.
The Chinese demanded a resumption of talks on the unsettled border, though there seems little prospect of either side making new concessions.
Behind the unpleasantness may lie a broader strategic calculation.
With the end of the Cold War, China had two options concerning India: to regard it as a natural ally, together with Russia, in building up an alternative to American dominance in the region, or to identify it as a potential adversary.
The recent emergence of a United States-India partnership appears to have convinced China’s rulers that India has become an instrument for the “containment” of China.
Such a perception may have been reinforced by India’s frequent military exercises with the US, Japan, and Australia and its cultivation of former Soviet Central Asia (including the establishment of a military base in Tajikistan).
Moreover, India has attempted to establish strategic ties with countries that China sees as falling within its own sphere of influence (from Mongolia to Vietnam, including direct competition over Myanmar).
So the Sino-Indian frontier is unlikely to remain quiet.
Needling an eager-to-please India on its troubled northern borders helps China to keep India guessing about its intentions, exposes the giant democracy’s vulnerabilities in an election year, and cuts a potential strategic rival down to size.
Look for China to provoke more incidents once the Olympics are over.
Eyes Wide Shut on Global Warming
The Kyoto Treaty on controlling climate change was, as Harvard professor Rob Stavins puts it, “too little, too fast.”
On one hand, because it covered only those countries projected to emit roughly half of the world’s greenhouse-gas emissions by mid-century, it was not an effective long-run safeguard against the dangers of global warming.
On the other hand, because it required significant and expensive short-run cuts in emissions by industrial countries, it threatened to impose large immediate costs on the American, European, and Japanese economies.
In short, the Kyoto agreement meant lots of short-term pain for little long-run gain.
The European Union and American economists in the Clinton administration argued for passage of the Kyoto Treaty only by creating models for something that wasn’t the Kyoto Treaty.
They projected that developing countries would enter the Kyoto framework at some point, and would trade their rights to emit CO2 and other greenhouse gases to the United States and Europe in return for development aid.
But, all these years later, I have yet to meet anyone who knows what they are talking about who is prepared to defend Kyoto as a substantive global public policy. ”It was a way of getting the ball rolling,” on climate change, say some. ”It was a way of waking up the world to the seriousness of the problem,” say others.
Under neither of these interpretations can those who negotiated and signed the Kyoto Treaty be said to have served the world well.
Of course, the world has been served a lot worse since.
President George W. Bush sided with his vice president, Dick Cheney, in denying that a global-warming problem even exists (his treasury secretary, Paul O’Neill, and his administrator of the Environmental Protection Agency, Christine Whitman, disagreed).
This has probably cost the world a decade of wasted time in developing a policy to deal with the problem, particularly given that intentional inaction is likely to continue until Bush’s term is finished.
But the political cards will be reshuffled, and there will be a new deal on global warming, when America next elects a president in November 2008.
By 2009, the US may have a State Department willing to speak up again.
Unless we are extraordinarily fortunate and learn that climatologists have overlooked some enormously important channels of carbon sequestration, the models predicting global warming will still be grimly accurate in 2009.
When the time comes to revisit international policies on global warming, two things should happen.
First, the world’s industrial core must create incentives for the developing world to industrialize along an environmentally-friendly, C02- and CH4-light, path.
Slow growth of greenhouse-gas emissions in rapidly-growing economies must be accompanied by credible promises to deliver massive amounts of assistance in the mighty tasks of industrialization, education, and urbanization that China, India, Mexico, Brazil, and many other developing countries face.
Second, the world’s industrial core must create incentives for its energy industries to undertake the investments in new technologies that will move us by mid-century to an economic structure that is light on carbon emissions and heavy on carbon sequestration.
Providing the proper incentives for effective research and development will not be easy.
Public programs work less well when the best route to the goal – in this case, the most promising post-carbon energy technologies – is uncertain.
Private R&D is difficult to encourage when investors suspect that success would lead the fruits of their work to be taken by some form of eminent domain and used throughout the world with little compensation.
The world could continue to close its eyes to global warming and hope for the best: a slightly warmer climate that produces as many winners (on the Siberian, Northern European, and Canadian prairies) as losers (in already-hot regions that become hotter and dryer), and that the Gulf Stream continues warming Europe, the monsoons are not disrupted, and that the Ganges delta is not drowned by stronger typhoons.
Or perhaps we are hoping that the “we” whose interests are taken into account when important decisions are made will not be the “we” who are among the big losers.
Perhaps we will continue to close our eyes.
But our chances of ensuring a more sustainable world would be higher if we had not allowed ourselves to be blinded for the past decade by the combination of the public-relations stunt known as the Kyoto Treaty and the idiocy-as-usual known as the Bush administration.
Facing Nature’s Fury
The Pakistan earthquake continues a streak of shocking natural disasters during the past year: the Indian Ocean tsunami, killer droughts in Niger and other countries in Africa, Hurricanes Katrina and Rita, Central American mudslides, and Portugal’s wildfires.
These events are unrelated, and humankind’s vulnerability to natural hazards is as old as our species.
Yet there are also commonalities – and warnings to us all: we are not prepared for these massive shocks, more of which are certain to come.
Massive population growth has exposed vast numbers of people to new kinds of extreme vulnerability.
There are now 6.5 billion people on the planet, almost four billion people more than fifty years ago.
Current trends, according to the United Nations, will push the world’s population up to around 9.1 billion by 2050.
As population rises, billions of people crowd into Earth’s vulnerable areas – near coastlines battered by storms and rising sea levels, on mountainsides susceptible to landslides and earthquakes, or in water-stressed regions plagued by drought, famine, and disease.
Typically, the poorest of the poor are pushed into the riskiest places to live and work – and also to die when natural catastrophes strike.
Many of the key hazards are increasing in frequency and intensity.
Climate change is partly responsible.
Both the number and strength of hurricanes are most likely increasing as a result of rising sea-surface temperatures caused by man-made global warming.
Earth is set to warm further in the decades ahead, bringing more and bigger fires, mudslides, heat waves, droughts, and powerful hurricanes.
Similarly, we are also seeing the emergence and spread of new infectious diseases, such as AIDS, SARS, and avian flu.
As human populations crowd new parts of the planet and come into contact with new animal habitats, new infectious diseases spread from animals to humans.
Such is the case with AIDS and avian flu.
Other infectious diseases are likely to emerge, or to become more severe (as with dengue fever in Asia this year), as a result of changes in climate and interaction between human and animal habitats.
Another common element in all of these disasters is our shocking lack of preparedness, especially to help the poorest members of society.
After Hurricane Katrina hit the United States, we discovered that President Bush had appointed a crony rather than a professional as head of America’s emergency relief agency.
Equipment and personnel needed to address the crisis were halfway around the world in Iraq.
Likewise, Pakistan was substantially ill equipped to deal with the recent earthquake, in part because, like the US, Pakistan over-spends on its military and under-spends on public health and emergency preparedness.
International relief agencies are also starved for cash and resources.
Governments should be taking some basic steps.
First, they should be making careful assessments of the specific kinds of risks their countries face, including risks from epidemics, climate change, extreme weather events, and earthquakes.
Such assessments require establishing and maintaining a system of high-level and high-quality scientific advising.
Bush, for example, would vastly improve US and global security if he started listening to top scientists and paid less attention to political lobbyists regarding the growing risks from man-made climate change.
There is a growing body of expertise to help get the job done.
The Earth Institute at Columbia University, which I direct, recently completed a global assessment of several kinds of natural hazards, such as droughts, earthquakes, and floods, in partnership with the World Bank.
Using advanced statistical and mapping methods, they identified how these various threats are arrayed around the world.
Other colleagues at the Earth Institute, and in similar research institutes, are making careful estimates of how these risks are evolving in view of changes in our planet’s climate, population, and patterns of international travel and human settlement.
But political leaders are not using this kind of scientific information adequately, owing mainly to deep divides that persist between the scientific community, politicians, and the general public.
The public is largely unaware of the scientific knowledge we have concerning the threats and risks that we face, and that we can reduce these risks by thinking ahead.
Politicians, in general, are experts at winning votes or building alliances, rather than at understanding the underlying global processes of climate, energy, disease, and food production that affect all of our planet’s inhabitants.
Even different groups of scientists – in public health, climate, seismology, and other specialities – do not communicate adequately with one another, despite the fact that today’s threats often cut across different scientific disciplines.
These gaps between politicians and scientists, and among scientists themselves, must be closed if we are to overcome the risks that we face.
Nature has reminded us all year of what is at stake.
The bad news is that the threats will almost surely intensify in the coming years, as our planet becomes even more crowded and subject to man-made change.
The good news is that we have the science and the technology to address these risks better than we ever have.
We can build a safer future, but only if we are prepared to use our scientific knowledge and expertise for the common good.
Facing the Deflationary Threat
Many central bankers are like the proverbial general who plans to fight the last war.
But unlike backward-looking military strategy, flawed monetary policies produce inevitable damage, not merely worrisome risks.
Despite having conquered inflation, central bankers continue to fight it and as a result may fail to confront the latest economic menace - global deflation .
Falling prices have paralyzed Japan's economy for a decade.
China and Hong Kong have seen prices plummet recently too.
As the world's richest nations gather in Canada for the annual G-7 jamboree, their leaders should ask if the US and Europe face a similar fate.
Deflation should not be hard to check, with sound policy.
Some argue that rapid productivity gains from new technology, increased competition due to globalization, and the rise of internet-based electronic commerce created a world in which firms must steadily lower prices.
But this thinking is based on a fallacy.
Clearly, economic forces other than a country's monetary policy determine the relative prices that different goods and services should have - and which they eventually do have, regardless of monetary policy.
These forces do not determine the absolute price (in dollars, say) of any good.
The absolute price of any good is determined by monetary policy, in a way largely independent of the structure of relative prices.
The only exception is when monetary policy is conducted in a manner that focuses on the prices of particular goods rather than on stabilization of a broad price index.
For example, the US experienced chronic deflation at the 19 th century's end.
This was due to developments - such as the growing number of nations on the gold standard - that required the market price of gold to increase relative to prices of goods and services generally.
Demand for gold increased, while supply was relatively constant.
Relative price changes could have occurred in two ways: either the dollar price of gold could have increased or the dollar prices of all other goods and services could decrease.
America's commitment to a rapid return to the gold standard prevented an increase in the dollar price of gold, so deflation ensued.
Much the same thing happens today.
Hong Kong's declining attractiveness as a business center helped push down prices of locally produced goods and services relative to the prices of goods sold overseas.
Again, relative prices could change either through an increase in the HK dollar price of internationally traded goods or through decreases in the HK dollar prices of local goods.
Since Hong Kong's currency board prevents inflation in HK dollar prices, the HK dollar prices of local goods must fall.
This would be unnecessary if Hong Kong adopted a monetary policy aimed at stabilizing a broad price index like the kind of policy pursued in the US, the euro zone, and most of the world.
But can central banks stabilize a falling price index as effectively as a rising one?
Some economists argue that once deflation sets in, central banks are powerless because nominal interest rates cannot be pushed below zero.
In a deflationary environment, this means that real interest rates - that are all that matter for economic stimulus - can not be pushed as low as might be necessary to boost demand and stem downward pressure on prices.
The Bank of Japan's overnight interest rate has been essentially zero since 1999, but prices still fall.
Yet even in Japan, monetary policy could stimulate spending.
Effective central banking is mostly a matter of managing expectations; for it is expectations regarding future policy, rather than the current level of overnight rates, that mainly determines long-term rates, other asset prices, and the exchange rate - and hence spending and pricing decisions.
When current overnight rates can no longer be lowered, it is vital that a central bank credibly signal its intention to maintain looser policy in the future, when it will have more room to maneuver.
For years the Bank of Japan (BOJ) failed to provide signals of this kind.
It was more concerned with posing as an inflation-fighter.
This misbegotten strategy culminated in the Bank's decision in August 2000 to abandon the zero interest-rate policy at the first signs of economic recovery, effectively declaring that it would not use monetary policy to bring about negative real rates after expectations of inflation returned.
The BOJ changed course a year ago when it committed to maintaining low interest rates until deflation ends.
This was a timid but helpful initial step in the right direction.
But an explicit price-level target would help more.
Such a commitment would create definite inflation expectations (albeit not of continuing inflation).
More importantly, to the extent that deflation continues, it would also automatically create greater expectations of inflation - and thus greater stimulus.
In the US, the Federal Reserve has paid much more attention to managing expectations, resulting in an effective monetary policy.
Indeed, financial markets end up doing much of the Fed's work for it.
With clear and predictable communication of this sort, the risk that the Fed would be unable to free the US economy from a deflationary slump is much lower - and so is the risk that it would ever have to fight that battle.
Other G-7 leaders might profit by seeking to apply this lesson more broadly.
Facing up to the Islamist Challenge
Our traditional understanding of Muslim communities assumes that when Islam arrives in an area, it becomes deeply rooted in the population and culture, producing powerful local variations.
A Muslim community in the United Arab Emirates is very different from one in Nigeria, and both are very different from Islam in Indonesia.
Recent developments in Russia, however, constitute a stark challenge to this understanding - which explains President Vladimir Putin's bold decision to support the US-led war on terrorism following the September 11 th attacks.
The scenario is the same within Muslim communities throughout Russia.
Young activists arrive in a particular area, typically from Arab countries.
They know how to work with local law enforcement agencies, and initially their activities are limited to gathering information aimed at discrediting the current local religious leaders - whose average age is over 70 - and working skillfully with local media to ensure that this defamatory information is publicized.
The religious community then convenes, removes its old leaders, with the young challengers taking over.
The new leaders proceed on the assumption that they need not - and indeed should not - adapt to national or cultural distinctions among Muslims, for their goal is Islamic unification, not differentiation.
They send their most promising local supporters abroad - not necessarily to Arab countries, but also to France, England, and the US - to be trained to carry out the same work, whether it is in the Volga region (home to 40% of Russia's Muslims) or elsewhere.
Participation in these networks convinces new recruits that they are part of a globally integrated organization.
Operating these networks costs money.
Indeed, notwithstanding the conventional wisdom that the main post-Cold War division pits the poor South against the rich North, the ferment within Islam suggests a struggle between rich and rich.
Elites in Saudi Arabia and other Persian Gulf states have the financial clout of the most advanced countries, yet not a single Arab state has a seat in the Security Council or is a member of the G-7.
To the extent that such international councils of power exclude representatives of the Islamic world, a portion of this would-be Muslim counter-elite will seek to challenge the system, finding no shortage of ideologically committed proxies.
So efforts at Islamic unification are at most only indirectly the result of relative economic backwardness.
Rather, greater mobility, enlarged markets, and increased access to information have made traditional borders increasingly porous, and a more globalized world has led to the emergence of political actors seeking to gain a greater say in international councils.
The steady growth of network communities, linked together by a religious identity that transcends the hierarchical organization of nations and states, reflects this emerging new reality.
The theological and political implications of this integral thrust within Islam are very different from those associated with the emergence of Protestantism in Christianity.
Yet there are some obvious similarities as well.
For example, both share a religious concern with bringing the individual into direct contact with God, and both entail a radical challenge to foreign domination in the temporal world.
However, whereas the Protestant Reformation underpinned a sea change in ethics that spurred the growth of capitalism and liberal democracy, the focus for Islamic unifiers is the establishment of a greater collective presence.
While the Reformation was supported by national elites seeking to throw off Roman hegemony, integralist Islam seeks to unify the community of believers by liberating it from the Western-imposed model of separate Muslim nation states.
As with Protestantism, new developments within Islam cannot be simply banned.
Fortunately, it is not too late to avoid recourse to repression.
So far, Muslims in Russia have not been actively involved in political life, with the glaring exception of certain localities, such as Chechnya.
For the most part, they are still mainly concerned with the transition of religious authority within their communities.
This process implies that political mobilization is inevitable, facilitated by the fragmenting of Russian society and the weakness of Russia's national identity.
Our task is therefore not only to bolster the authority of federal legislation throughout Russia - a key goal from the outset of President Putin's administration - but to find and publicize strategies by which Muslims can preserve their identity without taking to arms.
This is an effort that requires international cooperation, for it cannot be achieved in one country alone.
We must examine the political culture and behavior of Muslims in Europe, China, India, the US, and other countries.
Two distinct parts of this problem exist.
On the one hand, we confront a radical terrorist element which cannot be engaged constructively.
On the other, the ideological struggle with integralist Islam can be won only by displaying a more solid and stronger identity.
The organizers of the September 11 th attacks clearly anticipated retaliation, evidently hoping that an indiscriminate response would strengthen integralist tendencies worldwide.
President Bush's rhetorical slip about a ``crusade'' against terrorism was one such response.
Excessive civilian deaths in Afghanistan - or, for that matter, in Chechnya - are even more damaging.
This brings us to the issue of common values.
President Putin's decision to support the US military's use of bases in Central Asia was a risky step domestically.
Russian politicians urged him to haggle, arguing that President Bush would give him anything: money, debt forgiveness, and technology.
Yet President Putin refused on the grounds that cooperation is both in keeping with Russia's interests and morally correct.
We must now take this collaboration a step further.
If we are to win Muslim hearts and minds and undercut Islam's integralist threat, we must recognize that defending national security cannot come at the price of ignoring human rights and freedoms.
The Second Nuclear Age
NEW HAVEN – North Korea’s launch of a long-range missile in mid-December was followed by a flurry of global condemnation that was almost comical in its predictability and impotence.
But the launch underscored a larger reality that can no longer be ignored: the world has entered a second nuclear age.
The atomic bomb has returned for a second act, a post-Cold War encore.
This larger pattern needs to be understood if it is to be managed.
The contours of the second nuclear age are still taking shape.
But the next few years will be especially perilous, because newness itself creates dangers as rules and red lines are redefined.
This took at least ten years in the first nuclear age, and this time may be no different.
In the Middle East, South Asia, and East Asia, old rivalries now unfold in a nuclear context.
This has already changed military postures across the Middle East.
Part of the Israeli nuclear arsenal is being shifted to sea, with atomic warheads on diesel submarines, to prevent their being targeted in a surprise attack.
Israel also is launching a new generation of satellites to provide early warning of other countries’ preparations for missile strikes.
If Iran’s mobile missiles disperse, Israel wants to know about it immediately.
Thus, the old problem of Arab-Israeli peace is now seen in the new context of an Iranian nuclear threat.
The two problems are linked. How would Israel respond to rocket attacks from Gaza, Lebanon, or Egypt if it simultaneously faced the threat of nuclear attack by Iran?
What would the United States and Israel do if Iran carried its threat to the point of evacuating its cities, or placing missiles in its own cities to ensure that any attack on them would cause massive collateral damage?
Pakistan has doubled the size of its nuclear arsenal in the last five years.
Its armed forces are set to field new tactical nuclear weapons – short-range battlefield weapons.
India has deployed a nuclear triad – bombers, missiles, and submarines – and in 2012 tested an intercontinental ballistic missile, giving it the ability to hit Beijing and Shanghai.
India almost certainly has a multiple warhead (known as a MIRV), in development, and has also launched satellites to aid its targeting of Pakistan’s forces.
In East Asia, North Korea has gone nuclear and is set to add a whole new class of uranium bombs to its arsenal.
It has rehearsed quick missile salvos, showing that it could launch attacks on South Korea and Japan before any counter-strike could be landed.
China, too, is shifting its nuclear forces to mobile missiles and submarines.
These weapons can be put on alert in a way that would be highly visible to US satellites and the global media.
Thus, the Chinese can easily “nuclearize” a crisis with the US or anyone else.
They do not have to detonate a nuclear weapon, but only alert adversaries to the dramatic increase in the political stakes and dangers of a showdown.
Russia, not wanting to be left out of the act, has recently staged the largest nuclear exercises in decades to remind everyone that it remains a serious nuclear player, too.
These individual developments are troubling.
But they cannot be understood in isolation from the larger multipolar system of major powers that is forming.
To a great extent, this is a nuclear multipolar system: possessing nuclear weapons contributes to a country’s global status as a major power.
To see this, consider the following question: When was the last time that the US or anyone else seriously proposed that India sign the Nuclear Non-Proliferation Treaty (NPT) – that is, that India give up the Bomb.
Given America’s economic problems and looming defense cuts, as well as growing Chinese power, there is no longer even a remote possibility that this demand will be made.
India has become an accepted, legitimate member of the nuclear club, the fiction of the NPT notwithstanding.
It is even less likely that China or Russia would disarm for the sake of a nuclear-free world.
But the most urgent problem stems from the breakdown of major countries’ one-time nuclear monopoly and the empowerment of smaller countries like North Korea, Pakistan, Israel, and, quite possibly, Iran.
A new set of rules for diplomacy, military strategy, and arms control is needed to stabilize this emerging nuclear order.
Failing states in Central America
When the US Defence Department produced a report in December in which it named Mexico as one as one of two countries (along with Pakistan) at risk of rapidly becoming a failed state there was a predictable rejection of its findings in many quarters.
In fact, the authors may have got their analysis right, just for the wrong country.
Head further south to Central America – Guatemala in particular – and the failed state paradigm may be far more applicable.
Considering the apparent progress made by democracy in the region since the 1990’s, this assessment may seem a little harsh.
But dig a little closer to look at the quality of democracy, above all in the condition of state institutions such as the judiciary and the police, and the picture becomes less rosy.
Ironically, it is Mexico’s hardline strategy against the drug cartels on its own territory which is making the situation worse; gangs are seeking the relative sanctuary of Central America as a base for their operations.
The evidence from Guatemala is particularly worrying.
Some 80% of Latin American cocaine reaching the US passes through the country at some point.
President Álvaro Colom in February claimed that 40% of the 6,200 murders recorded in 2008 were linked to drug-related violence.
Investigators from the US and Guatemala believe that the two biggest Mexican cartels, the Sinaloa and Gulf gangs, are spreading their tentacles across various departments; the Gulf cartel’s notorious armed wing, Los Zetas, is held responsible for a spate of massacres in the country in the past year.
Many economists believe that a major reason for the quetzal’s strength against the dollar in recent years has been the amount of drug money laundered through the Guatemalan financial system.
Compared with the strong-arm tactics employed by his Mexican counterpart Felipe Calderón, Colom seems resigned to defeat.
Comments in January that the country was helpless against an ‘avalanche’ of drug-trafficking from the north were aimed at securing international support, but do little to inspire confidence in his leadership.
The sad truth is that he may well be right: the national police (PNC) are notoriously corrupt, understaffed and inefficient, as much a part of the problem as the drug gangs themselves.
Moreover, the armed forces have become a shadow of their former self, and still have human rights legacies hanging over them from the country’s bitter civil war.
Even if the PNC were to convert itself overnight into the world’s most effective crime-fighting machine, it would still be unlikely to have a significant immediate impact.
Without an overhaul of the entire judicial system, any government measures or societal pressure are not going to make much of a difference.
This is true as much as for the rest of Central America – with the general exception of Costa Rica and Panama – as it is for Guatemala alone.
Evidence from El Salvador would appear to bear this point out: the Salvadoran police are widely regarded as stronger and more efficient, but crime rates remain roughly on a par with Guatemala.
In both countries, impunity is the key: in Guatemala only 4% (at most) of all crimes, and less than 2% of murders, result in a criminal conviction.
The condition of the Central American judiciary is at the heart of the prospect of state failure.
Already weak and inefficient, prone to corruption, politicisation, lack of co-ordination between departments, and outright intimidation of its officials, judicial systems across the isthmus have been an easy target for organised crime.
Guatemala has been the most obvious victim so far, but Honduras also suffers all the similar conditions to be the next in line.
Bringing the judicial system and other key state institutions to their knees is the main aim of the drug cartels.
Being in virtual control of large swathes of Central American territory and being able to act with relative impunity are ultimately very good for business.
The US may view its war on drugs in Mexico and Colombia as partially successful; the danger is that Central America does not have those countries’ institutional resilience, leaving the way open for new fronts to be opened.
Quite aside from the terrible human and institutional impact, this situation also undermines the long-term economic strategies of Central American governments.
For better or for worse, democracy in the region has been accompanied by policies of economic liberalisation and efforts to attract foreign investment, culminating in the signing of the Central American Free Trade Agreement with the US in 2005.
While foreign companies have not been deliberately targeted, regular headlines of new killings hardly present a positive international image.
On-the-surface political stability and favourable investment laws may be in place, but in the absence of an effective judiciary or reliable security forces, committing capital to promising projects becomes that much more difficult.
Significant improvements to this situation will be hard won.
Central American politicians’ habitual tough talk on violent crime has paid few dividends in practice; it makes little impact on drug cartels, whose resources often far outweigh those of the local police or army.
Attention will inevitably be focused on the US to provide more material and technical support to the security forces; drips of funding for Central America under the term of the Mérida Initiative agreed with Mexico are welcome, but likely to be insufficient in the grand scheme of things.
Meanwhile, the economic downturn is doing its bit to help the gangs’ cause: jobs will dry up, poverty will increase and the government’s ability to provide basic welfare and social services will be tested, making a life of crime all the more attractive and rewarding.
The possible implications of this Catch-22 are troubling to say the least.
Failing the Syria Test
MADRID – On October 2nd in Istanbul, Syria’s disparate opposition movements gave the go-ahead for the formation of a “Syrian National Council.”
This is the most important step yet taken by the fragmented forces that have been trying since May to lead a peaceful uprising against President Bashar al-Assad’s regime. The Council’s formation boosted the morale of those who have been demanding stronger and more unified representation.
But a mere two days after its creation, the embryonic Council suffered its first big setback.
France, the United Kingdom, Germany, and Portugal, in collaboration with the United States, presented a draft resolution before the United Nations Security Council seeking to condemn repression in Syria and put an end to the use of force against civilians.
The draft was a sugarcoated version of a previous text, proposed last June.
This one contained nebulous terms such as “specific measures” or “other options.”
It stressed the sovereignty, independence, and territorial integrity of Syria, and emphasized the need to resolve the current crisis peacefully, by means of an inclusive political process – and called for a national dialogue led from within the country.
The draft called for a 30-day period to study the options, up from 15 days in the earlier draft.
The object was plain: to gain a Russian, and consequently, a Chinese abstention.
But Russia and China vetoed the proposal anyway, and only nine members of the Security Council voted in favor, with Brazil, India, South Africa, and Lebanon abstaining.
There are three key implications of the Security Council’s vote.
First, violence will increase.
Since the protests erupted last March, there have been an estimated 2,700 deaths, more than 10,000 people displaced to Turkey, and thousands more arrested.
The Assad government does not hesitate to fire on civilians, lay siege to cities, or shut off their electricity and water.
And a few days ago, it was reported that some 10,000 Syrian soldiers had defected, with several hundred joining rival movements such as the Free Syrian Army and the Free Officers Movement.
Unless some international protection arrives, a movement that began peacefully risks entering a new and dangerous phase.
Second, there will be grave consequences for regional security.
Syria is a strategic hinge in the Middle East.
It has been one of the countries most hostile toward Israel, mainly through its support of Hamas, Iran, and Hezbollah.
Chaos in Syria would threaten Lebanon’s stability and alter Iran’s geopolitical influence in the region.
Iraq, governed by Shia political forces, also keeps close tabs on Syria’s evolution, as does Turkey, which, until fairly recently, considered Syria a keystone of its regional policy.
Finally, the Security Council vote exposed a clear division within the international community.
Among the BRICS – Brazil, Russia, India, China, and South Africa, all of which happen to be on the Security Council currently – two vetoed and the rest abstained (along with Lebanon, for obvious reasons).
In the case of the resolution on military intervention in Libya, the BRICS decided "to let" Col. Muammar el-Qaddafi be overthrown.
Not so with Syria, where none aligned itself with the positions supported by the European Union and the US.
The Security Council’s composition wouldn’t be substantially different if an “ideal” distribution of seats were to be achieved.
So the fact that no agreement has been reached on Syria forces us to reflect on the future difficulties that we will face in managing global security.
Of course, there is no “one size fits all” model for intervention, but that does not justify evading our “responsibility to protect” – a fine concept promoted by former UN Secretary-General Kofi Annan and adopted by all UN member states in 2005.
Support for the resolution would have weakened Assad’s position, as it would have revealed him as isolated from his traditional allies, Russia and China.
It would also have shown the international community to be unanimous in its rejection of repression and committed to protecting the Syrian people (though the draft made no mention of military intervention).
The sanctions adopted by the EU and the US against Assad’s regime are not enough.
But, unless further measures are channeled through – and thus legitimized by – the Security Council, other alternatives are limited.
In recent years, with countries such as China, India, and Brazil taking their rightful place on the international scene, the G-7 has given way to the G-20.
Likewise, an ambitious reform of the International Monetary Fund was adopted in 2010 to reflect changes in the global distribution of power.
But this change in global governance must not be limited to economic policymaking.
After all, globalization has brought many overall benefits, but also less friendly aspects, such as the ones dealing with global security.
Despite our growing interconnectedness, the UN Security Council has not yet been unable to achieve sufficient consensus to resolve pressing matters such as Syria.
Nobody ever said that the road to stronger global governance would be straight or simple to navigate.
But there are no detours: without effective structures of power and a genuine commitment from all players, the future does not look promising for global stability and prosperity.
Fair Contracts for Poor Countries
A number of countries in Latin America, Africa, Eastern Europe, and elsewhere are abrogating or renegotiating contracts with multinational enterprises (MNEs), and others are likely to follow suit.
The costs can be high.
Governments may get better terms, but they may also become embroiled in international investment disputes and discourage other investors.
For companies, renegotiations mean uncertainty and possible interruptions of production and revenue.
Significant shifts in power (typically as a result of changes in commodity prices) and ideology, or changes in the economics of projects, can lead to renegotiations, especially when it comes to large investments in natural resources and infrastructure.
But often the reason is that the host country considers a contract to be unfair.
While “fairness” may well be in the eyes of the beholder, in some cases, the host country may not have had the expertise required to negotiate the best possible deal – a frequent situation when MNEs negotiate with the least developed countries (the world’s 50 poorest countries, most of them in sub-Saharan Africa).
Mittal’s 2005 deal with Liberia (renegotiated last year) and various contracts with Congo probably fall at least partly into this category, as do some deals in ex-Soviet countries.
Suppose a $500 million petroleum or copper contract needs to be negotiated.
This will most likely involve a leading MNE, which can field a negotiating team that includes world-class lawyers, geologists, and financial analysts who understand, for example, the trade-offs between taxes and royalties and can put them in appropriate language.
The host country, on the other hand, simply cannot match such a team.
Perhaps it does not even know what to ask for.
The resulting contract is all the more problematic because it is likely to involve one of the host country’s few important resources, which can generate more predictable (and probably higher) revenues than official development assistance – and over a long period of time.
So, even without corruption, it is not surprising when a future government demands that the contract be renegotiated.
Clearly, the playing field with MNEs should be leveled.
In theory, the host country could hire its own international experts to assist it in negotiations.
But poor countries typically lack the funds needed to pay such a team’s fees.
Nor do the World Bank and regional development banks have the in-house expertise – or, as a rule, the funds – to provide technical assistance.
But what if MNEs provided the funds?
Obviously, MNEs want the best possible deal for themselves; but they also want durable contracts that won’t be repudiated by the next government.
So they have an interest in negotiating a fair deal, and one that is
But, even if a company embraces this approach, problems abound.
How can it be implemented without looking like bribery (in case the company gives the funds directly to the government)?
And how can companies prevent some of the funds from being misused (say, if the government hires a third-rate team)?
Here is a proposal: an Investment Contract Aid Facility (ICAF) under the umbrella of a well-respected organization.
The ICAF would function like an escrow account into which the firm pays the funds required for the host country to hire a negotiating team.
The escrow account manager then invites the country to select a team, suggesting what skills are required and perhaps even providing a roster of experts.
The country would be free to choose its own team, but the escrow account manager, aided by an international advisory board of expert volunteers, would need to agree that it is, in fact, world-class.
One could even include a capacity-building element by adding to the team one or two local negotiators.
The result should be a contract that is as fair as possible under the given circumstances – and perceived as such.
It would be enough for a handful of CEOs and prime ministers to say that they are prepared to consider using such a Facility on a case-by case basis.
While this would not end the abrogation or renegotiation of contracts, it would eliminate one important reason them, benefiting countries and companies alike.
Busur Keadilan Iklim
ISLAMABAD – Sebuah ironi yang menyakitkan tentang perubahan iklim bahwa mereka yang paling sedikit kontribusinya terhadap masalah justru yang paling menderita kerusakan.
Jika ada negara yang berhak mengklaim dirinya sebagai korban ketidakadilan iklim, itu adalah Pakistan.
Ketika para pemimpin dunia mempersiapkan diri untuk menghadiri Konferensi PBB tentang Perubahan Iklim di Paris, Pakistan berusaha pulih dari akibat buruk bencana banjir yang merusak bangunan, menghancurkan tanaman, menyapu bersih jembatan, dan menewaskan 238 orang.
Tragedi yang berhubungan dengan cuaca seperti ini bukan hal baru bagi Pakistan; yang berbeda hanyalah frekuensi dan keganasannya.
Banjir yang mematikan telah menjadi kejadian tahunan; pada tahun 2010, hujan deras yang memecahkan rekor menewaskan hampir 2.000 orang dan membuat jutaan orang kehilangan tempat tinggal.
Bahkan ketika Pakistan berjuang dalam pertempuran sengit melawan terorisme, meningkatnya cuaca berbahaya memicu kenaikan harga pangan dan air bersih, mengancam pasokan energi, melemahkan perekonomian, dan mengakibatkan ancaman keamanan yang serius dan menelan biaya besar.
Kemungkinan besar penderitaan iklim di Pakistan disebabkan oleh emisi gas rumah kaca yang dihasilkan negara-negara maju sejak awal Revolusi Industri.
Bahkan saat ini, Pakistan menghasilkan kurang dari 1% total emisi global.
Meskipun demikian, Pakistan selalu menjadi salah satu negara yang paling rentan terkena dampak berbahaya dari perubahan iklim, karena kondisi demografi, geografi, dan iklim alamiah.
Sejak tahun 1994 hingga 2013, perubahan iklim menimbulkan kerugian bagi Pakistan rata-rata $4 miliar per tahunnya.
Sebagai perbandingan, pada tahun 2012, terorisme di Pakistan merugikan negara sekitar $1 miliar.
Jika tidak sedang mengalami bencana banjir, Pakistan menderita kekurangan air, sehingga menjadi salah satu negara di dunia yang mengalami krisis air (water stress) terburuk, menurut Asian Development Bank.
Perubahan iklim menggabungkan kedua masalah tersebut, membuat gletser dan salju yang berfungsi sebagai regulator alami aliran air menjadi terkikis dan mencair, bahkan ketika erosi yang memburuk akibat banjir yang berkontribusi terhadap pendangkalan waduk-waduk besar.
Sementara itu, kenaikan suhu meningkatkan kemungkinan terjadinya hama dan penyakit pada tumbuhan, membahayakan produktivitas pertanian dan menjadikan penduduk semakin sering menderita gelombang panas.
Kenaikan permukaan air laut menyebabkan tingginya salinitas di daerah pesisir pantai, kerusakan pada bakau, dan mengancam tempat pembiakan ikan.
Selain itu, suhu laut yang lebih tinggi berpotensi menyebabkan siklon yang lebih sering dan berbahaya, sehingga mengancam kawasan pantai Pakistan.
Prospek ke depannya pun tidak kalah mengkhawatirkan: krisis air dan banjir bandang yang memburuk serta persediaan air di waduk-waduk yang menyusut.
Pada tahun 2040, perkiraan menunjukkan bahwa rata-rata kenaikan suhu sebesar 0.5º Celsius dapat merusak 8-10% hasil panen di Pakistan.
Beban ini tidak bisa dibiarkan untuk dipikul sendiri oleh Pakistan.
Sejauh ini, kemajuan dalam beberapa perundingan internasional tentang perubahan iklim masih relatif kecil.
Kelompok pelobi bahan bakar fosil, pemerintah negara-negara industri yang enggan, dan disengaged electorates telah menunda dan menghambat penetapan perjanjian yang kuat untuk mengurangi emisi gas rumah kaca secara global.
Meskipun harapan atas munculnya terobosan dalam perjuangan melawan perubahan iklim di Paris nanti merupakan keinginan, dorongan untuk pemerataan distribusi biaya pemanasan global harus dilakukan.
Meskipun terdapat penambahan dana untuk adaptasi dan mitigasi perubahan iklim di negara-negara berkembang, kontribusi Pakistan tetap rendah dibandingkan dengan sejumlah bencana yang dialami selama lima tahun terakhir.
Pada tahun 2050, rata-rata biaya tahunan adaptasi perubahan iklim akan mencapai $6-12 miliar, menurut Konvensi Kerangka Kerja PBB tentang Perubahan Iklim.
Mitigasi sendiri akan memerlukan tambahan biaya $17 miliar per tahunnya.
Ketika perubahan iklim terus memakan korban, Pakistan tidak boleh membiarkan kerusakan yang senilai dengan kerugian miliaran dolar yang diakibatkan negara-negara pencemar terbesar di dunia tidak dibayarkan ganti ruginya.
Apapun persetujuan akhir yang dicapai di Paris, para negosiator iklim harus memastikan total kerugian akibat emisi global akan ditanggung secara adil dan tidak menjadi bebab tunggal negara-negara yang menderita dampak terburuk.
Sebagai salah satu negara dengan tingkat pencemaran terendah, Pakistan berhak mencari sumber daya dan dana untuk mengatasi dampak permasalahan yang tidak disebabkan olehnya, sama hal dengan banyak negara lain.
Usulan kami yang menyerukan penetapan mekanisme internasional yang mengikat untuk membagi beban perubahan iklim – suatu mekanisme yang menjamin keadilan iklim – tidak boleh diabaikan di Paris nanti.
Faith in a Globalized Age
LONDON – For years, it was assumed, certainly in the West, that, as society developed, religion would wither away.
But it hasn’t, and, at the start of a new decade, it is time for policymakers to take religion seriously.
The number of people proclaiming their faith worldwide is growing.
This is clearly so in the Islamic world.
Whereas Europe’s birthrate is stagnant, the Arab population is set to double in the coming decades, and the population will rise in many Asian Muslim-majority countries.
Christianity is also growing – in odd ways and in surprising places.
Religion’s largest growth is in China.
Indeed, the religiosity of China is worth reflecting on.
There are more Muslims in China than in Europe, more practicing Protestants than in England, and more practicing Catholics than in Italy.
In addition, according to the latest surveys, around 100 million Chinese identify themselves as Buddhist.
And, of course, Confucianism – a philosophy rather than a religion – is deeply revered.
There is a huge Evangelical movement in Brazil and Mexico.
Faith remains for many in the United States a vital part of their lives.
Even in Europe, the numbers confessing to a belief in God remain high.
And, of course there are hundreds of millions of Hindus and still solid numbers of Sikhs and Jews.
Those of faith do great work because of it.
Around 40% of health care in Africa is delivered by faith-based organizations.
Muslim, Hindu, and Jewish relief groups are active the world over in combating poverty and disease.
In any developed nation, you will find selfless care being provided to the disabled, the dying, the destitute, and the disadvantaged, by people acting under the impulse of their faith.
Common to all great religions is love of neighbors and human equality before God.
Unfortunately, compassion is not the only context in which religion motivates people.
It can also promote extremism, even terrorism.
This is where faith becomes a badge of identity in opposition to those who do not share it, a kind of spiritual nationalism that regards those who do not agree – even those within a faith who live a different view of it – as unbelievers, infidels, and thus enemies.
To a degree, this has always been so.
What has changed is the pressure of globalization, which is pushing the world’s peoples ever closer together as technology advances and shrinks the world.
Growing up 50 years ago, children might rarely meet someone of a different cultural or faith background.
Today, when I stand in my ten-year-old son’s playground or look at his friends at his birthday party, I find myriad different languages, faiths, and colors.
Personally, I rejoice in this.
But such a world requires that mutual respect replace mutual suspicion.
Such a world upends traditions and challenges old thinking, forcing us to choose consciously to embrace it. Or not.
And there is the rub: for some, this force is a threat.
And, for those for whom religion matters, globalization can sometimes be accompanied by an aggressive secularism or hedonism that makes many uneasy.
So we must make sense of how the world of faith interacts with the compulsive process of globalization.
Yet it is extraordinary how little political time or energy we devote to doing so.
Most of the conflicts in today’s world have a religious dimension.
Extremism based on a perversion of Islam shows no sign of abating; indeed, it will not abate until it is taken on religiously, as well as by security measures.
This extremism is, slowly but surely, producing its own reaction, as we see from Islamaphobic parties’ electoral gains in Europe, and statements by European leaders that multiculturalism has failed.
Of course, throughout time, religion has often been part of a political conflict.
But that doesn’t mean that religion should be discounted.
On the contrary, it requires a special focus.
I see this very plainly spending so much time in Jerusalem, where – East and West – there is an emphatic increase in religiosity.
I started my Faith Foundation precisely to create greater understanding between the faiths.
My reasoning is simple.
Those advocating extremism in the name of religion are active, well resourced, and – whatever the reactionary nature of their thinking – brilliant at using modern communication and technology.
We estimate that literally billions of dollars every year are devoted to promoting this view of religion.
So my Foundation has a university program – now underway in nine countries – that is designed to take religion out of the sole preserve of divinity schools and start analyzing its role in the world today.
We have another program – in 15 countries, with others set to join – that links high school students across the world through interactive technology to discuss their faith and what it means to them.
And we have an action program through which young people work with those of another faith to raise awareness of the Millennium Development Goals, the United Nations-led program to combat world poverty.
We are just one organization.
There are others starting.
But governments should start to take this far more seriously.
The Alliance of Civilizations, begun by Spain and Turkey, is one example.
The King of Saudi Arabia has also shown great leadership in this sphere.
Yet this is not just about bringing high-level people together.
It has to be taken down into the grassroots of nations, especially into the media of their young people.
Finally, religious leaders must accept a new responsibility: to stand up firmly and resolutely for respecting those of faiths different from their own.
Aggressive secularists and extremists feed off each other.
Together, they do constitute a real challenge to people of faith.
We must demonstrate the loving nature of true faith; otherwise, religion will be defined by a battle in which extremists seize control of faith communities and secularists claim that such attitudes are intrinsic to religion.
This would be a tragedy.
For, above all, it is in this era of globalization that faith can represent reason and progress.
Religion isn’t dying; nor should it.
The world needs faith.
Famine and Hope in the Horn of Africa
NAIROBI – Yet again, famine stalks the Horn of Africa.
More than ten million people are fighting for survival, mainly pastoralist communities in the hyper-arid regions of Somalia, Ethiopia, and northern Kenya.
Every day brings news of more deaths and massive inflows of starving people into refugee camps in Kenya, across the border from Somalia.
The immediate cause of this disaster is clear: the rains have failed for two years running in the dry regions of East Africa.
These are places where water is so scarce year after year that crop production is marginal at best.
Millions of households, with tens of millions of nomadic or semi-nomadic people, tend camels, sheep, goats, and other livestock, which they move large distances to reach rain-fed pasturelands.
When the rains fail, the grasses shrivel, the livestock die, and communities face starvation.
Pastoralism has long been a harrowing existence in the Horn of Africa.
The location of life-supporting pasturelands is determined by the unstable and largely unpredictable rains, rather than by political boundaries.
Yet we live in an era when political boundaries, not the lives of nomadic pastoralists, are sacrosanct.
These boundaries, together with growing populations of sedentary farmers, have hemmed in pastoralist communities.
The political boundaries exist as a legacy of the colonial era, not as the result of cultural realities and economic needs.
Somalia, for example, contains only a part of the Somali-speaking pastoralist population, with large numbers living across the border in Kenya and Ethiopia.
As a result, the Ethiopian-Somalia border has been war-torn for decades.
A massive drought this year was not exactly predictable, but the risk of famine was easily foreseeable.
Indeed, two years ago, in a meeting with US President Barack Obama, I described the vulnerability of the African drylands.
When the rains fail there, wars begin.
I showed Obama a map from my book Common Wealth, which depicts the overlap of dryland climates and conflict zones.
I noted to him that the region urgently requires a development strategy, not a military approach.
Obama responded that the US Congress would not support a major development effort for the drylands.
“Find me another 100 votes in Congress,” he said.
I don’t know whether Obama’s leadership might have found those votes, but I do know that the US has not mustered the national effort to respond effectively to the Horn of Africa’s needs.
The US is far too focused on expensive and failed military approaches in the drylands – whether in Afghanistan, Pakistan, Yemen, or Somalia – to pay heed to long-term economic development strategies aimed at addressing the root causes of these countries’ ongoing crises.
This year’s drought came at a time of political and economic turmoil in both the US and Europe.
America’s distorted political system gives the rich everything they want in the form of tax cuts, while slashing programs for the poor.
There is no interest in Washington, DC, in addressing the needs of America’s poor, much less the needs of the world’s poor.
In Europe, the global financial crisis of 2008 left a legacy of deep political and economic crisis in the weaker economies of Southern Europe.
This crisis absorbed almost all of the European Union’s political attention this summer, even as famine in Africa has worsened.
The unfolding disaster in the Horn of Africa will not solve itself, and four factors make the situation potentially explosive. First, long-term human-induced climate change seems to be bringing more droughts and climate instability.
The US and Europe are not only failing to respond to the African drought; they have probably contributed to it through their greenhouse-gas emissions.
Second, fertility rates and population growth in the Horn of Africa continue to be extremely high, even as children perish in the famine.
Unless and until widespread family planning and modern contraceptive services are established, expanding populations in the Horn of Africa will crash against a harsher future climate.
Third, the region is already living in extreme poverty, so adverse shocks push it toward calamity.
And, finally, regional politics is highly unstable, leaving the Horn extremely vulnerable to conflict.
But there is still realistic hope.
The Millennium Villages Project, which I have the honor of helping to lead, has demonstrated that pastoralist communities can be empowered through targeted investments in livestock management, veterinary care, business development, mobile health clinics, boarding schools, and local infrastructure such as safe water points, off-grid electricity, and mobile telephony.
Cutting-edge technologies, together with strong community leadership, can unlock long-term sustainable development.
The countries of the Horn of Africa are now stepping forward to help themselves through this approach.
Six countries in the region with large dryland zones – Ethiopia, Somalia, Kenya, Uganda, Djibouti, and South Sudan – have joined together in a Drylands Initiative to use best practices and cutting-edge technologies to support their pastoralist communities’ effort to escape the scourges of extreme poverty and famine.
Many companies, such as Ericsson, Airtel, Novartis, and Sumitomo Chemical, are participating in this effort by making their technologies available to impoverished pastoralist communities.
A new regional partnership is starting to take hold, beginning with the affected communities and their national governments.
Several countries in the Arabian Peninsula, just across the Red Sea from the Horn, are also showing an encouraging readiness to deploy their oil earnings for emergency relief and long-term development.
The Islamic Development Bank, representing the 57 members of the Organization of Islamic Cooperation, is also showing leadership.
Through this new partnership of communities, governments, businesses, and academia, the current crisis could yet mark the start of regional recovery and development.
Farewell to Development’s Old Divides
NEW YORK &#45;&#45; The notion of a divide between the rich north and the poor and developing south has long been a central concept among economists and policymakers.
From 1950 to 1980, the north accounted for almost 80% of global GDP but only 22% of its population, and the south accounted for the remainder of global population and 20% global income.
But the north-south divide is now obsolete.
The dynamic process of globalization has resulted in unprecedented levels of growth and interdependence.
However, while this has blurred the old division, new ones have emerged, splintering today’s world into four inter-connected tiers.
The first tier comprises the affluent countries, notably the United States, European nations, Australia, and Japan – with a combined population of around one billion and per capita incomes ranging from $79,000 (Luxembourg) to $16,000 (Republic of Korea).
For the past 50 years, these affluent countries have dominated the global economy, producing four-fifths of its economic output.
However, in recent years, a new set of economies has emerged that is contesting the affluent countries’ economic dominance.
These emerging economies – call them the Globalizers – constitute a second tier of about 30 poor and middle-income countries (including China and India), with per capita GDP growth rates of 3.5% or more, and a total population of 3.2 billion, or roughly 50% of the world’s population.
These countries have experienced unprecedented levels of sustained economic growth that may well enable them to replace the “Affluents” as engines of the world economy.
The Globalizers are a large and diverse group of countries – in size, geography, culture, and history – that have learned how to integrate optimally with, and leverage, the global economy to catalyze their development.
A third tier is made up of roughly 50 middle-income countries with a combined population of 1.1 billion.
They are also home to many of the world’s critical natural resources, possessing around 60% of proven oil reserves.
But these “Rentiers” have not been able to translate the rents of their natural resource wealth into sustained economic growth.
The fourth tier comprises countries that are lagging behind – the world’s poorest economies, with more than a billion people.
They continue to stagnate or decline economically.
Mostly located in sub-Saharan Africa, these “Laggards” are largely isolated from the global economy, and they face crucial development challenges.
This emerging four-tier world presents three key challenges.
First, we need to increase our efforts to ensure that the Laggards are no longer left behind.
This requires policy changes as well as more generous and more effective aid.
If one considers the issue of aid flows, one finds that though development aid rose in 2005 to $107 billion, most of the increase was geared towards “special circumstances,” such as debt forgiveness and for Iraq and Afghanistan.
The sad truth is that development aid to Africa has decreased from $49 per person in 1980 to $38 per person in 2005.
The true development needs of Laggard countries and other parts of the world are not being met, despite the rhetoric of scaling up aid.
Second, the old powers need to accommodate the rise of Globalizer economies – particularly China and India – by reforming our international order.
The Affluents will continue to be major global players, but as the Globalizers’ relative economic power rises, they will demand a greater role in international affairs.
Most Affluents seem unprepared for this change, but such demands will need to be accommodated.
Finally, while the Globalizers have lifted millions of people out of poverty and reduced global inequality, this has not resulted in a more equal world, because star economies like India and China are experiencing a rise in domestic inequity.
Whether it is coastal versus inland or rural versus urban, these countries must tackle the widening disparities, because high inequality may well threaten their very ability to continue growing as they have.
If we are to create a more equitable world, then traditional levers of development such as trade, investment, aid, and migration need to be scaled up comprehensively and coherently, and global institutions must be reformed.
This would improve our ability to address global challenges and better our prospects for building a more equitable world.
Otherwise, we might bid farewell to old development divides only to welcome new ones.
Farewell to the Neo-Classical Revolution
LONDON – The looming bankruptcy of Lehman Brothers, and the forced sale of Merrill Lynch, two of the greatest names in finance, mark the end of an era.
But what will come next?
Cycles of economic fashion are as old as business cycles, and are usually caused by deep business disturbances. “Liberal” cycles are followed by “conservative” cycles, which give way to new “liberal” cycles, and so on.&#160;
Liberal cycles are characterized by government intervention and conservative cycles by government retreat.
A long liberal cycle stretched from the 1930’s to the 1970’s, followed by a conservative cycle of economic deregulation, which now seems to have run its course.
With the nationalization of America’s two giant mortgage banks, Fannie Mae and Freddie Mac, following the nationalization earlier this year of Britain’s Northern Rock, governments have started stepping in again to prevent market meltdowns.
The heady days of conservative economics are over – for now.
Each cycle of regulation and de-regulation is triggered by economic crisis.
The last liberal cycle, associated with President Franklin Roosevelt’s New Deal and the economist John Maynard Keynes, was triggered by the Great Depression, though it took World War II’s massive government spending to get it properly going.
During the three-decade-long Keynesian era, governments in the capitalist world managed and regulated their economies to maintain full employment and moderate business fluctuations.&#160;
The new conservative cycle was triggered by the inflation of the 1970’s, which seemed to be a product of Keynesian policies.
The economic guru of that era, Milton Friedman, claimed that the deliberate pursuit of full employment was bound to fuel inflation.
Governments should concentrate on keeping money “sound” and leave the economy to look after itself.
The “new classical economics,” as it became known, taught that, in the absence of egregious government interference, economies would gravitate naturally to full employment, greater innovation, and higher growth rates.
The current crisis of the conservative cycle reflects the massive build-up of bad debt that became apparent with the sub-prime crisis, which started in June 2007 and has now spread to the whole credit market, sinking Lehman Brothers.
“Think of an inverted pyramid,” writes investment banker Charles Morris. “The more claims are piled on top of real output, the more wobbly the pyramid becomes.”
When the pyramid starts crumbling, government – that is, taxpayers – must step in to refinance the banking system, revive mortgage markets, and prevent economic collapse.
But once government intervenes on this scale, it usually stays for a long time.
At issue here is the oldest unresolved dilemma in economics: are market economies “naturally” stable or do they need to be stabilized by policy?
Keynes emphasized the flimsiness of the expectations on which economic activity in decentralized markets is based.
The future is inherently uncertain, and therefore investor psychology is fickle.
“The practice of calmness, of immobility, of certainty and security, suddenly breaks down,” Keynes wrote. “New fears and hopes will, without warning, take charge of human conduct.”
This is a classic description of the “herd behavior” that George Soros has identified as financial markets’ dominant feature. It is the government’s job to stabilize expectations.
The neo-classical revolution believed that markets were much more cyclically stable than Keynes believed, that the risks in all market transactions can be known in advance, and that prices will therefore always reflect objective probabilities.
Such market optimism led to de-regulation of financial markets in the 1980’s and 1990’s, and the subsequent explosion of financial innovation which made it “safe” to borrow larger and larger sums of money on the back of predictably rising assets.
The just-collapsed credit bubble, fueled by so-called special investment vehicles, derivatives, collateralized debt obligations, and phony triple-A ratings, was built on the illusions of mathematical modeling.
Liberal cycles, the historian Arthur Schlesinger thought, succumb to the corruption of power, conservative cycles to the corruption of money.
Both have their characteristic benefits and costs.
But if we look at the historical record, the liberal regime of the 1950’s and 1960’s was more successful than the conservative regime that followed.
Outside China and India, whose economic potential was unleashed by market economics, economic growth was faster and much more stable in the Keynesian golden age than in the age of Friedman; its fruits were more equitably distributed; social cohesion and moral habits better maintained.
These are serious benefits to weigh against some business sluggishness.
History, of course, never repeats itself exactly.
Circuit-breakers are in place nowadays to prevent a 1929-style slide into disaster.
But when the financial system, left to its own devices, seizes up, as it now has, we are clearly in for a new round of regulation.
Industry will be left free, but finance will be brought under control.
The cycles in economic fashion show how far economics is from being a science.
One cannot think of any natural science in which orthodoxy swings between two poles.
What gives economics the appearance of a science is that its propositions can be expressed mathematically by abstracting from many decisive characteristics of the real world.
The classical economics of the 1920’s abstracted from the problem of unemployment by assuming that it did not exist.
Keynesian economics, in turn, abstracted from the problem of official incompetence and corruption by assuming that governments were run by omniscient, benevolent experts.
Today’s “new classical economics” abstracted from the problem of uncertainty by assuming that it could be reduced to measurable (or hedgeable) risk.
A few geniuses aside, economists frame their assumptions to suit existing states of affairs, and then invest them with an aura of permanent truth.
They are intellectual butlers, serving the interests of those in power, not vigilant observers of shifting reality.
Their systems trap them in orthodoxy.
When events, for whatever reason, coincide with their theorems, the orthodoxy that they espouse enjoys its moment of glory.
When events shift, it becomes obsolete.
As Charles Morris wrote: “Intellectuals are reliable lagging indicators, near-infallible guides to what used to be true.”
Farewell to the Revolution?
“The FARC are finished, no matter how many men and weapons they may still have.”
Former Salvadoran guerrilla leader Joaquín Villalobos’ lapidary conclusion about the Colombian narco-guerrilla movement is worthy of consideration, given his unmatched insight into Latin America’s armed, revolutionary left.
So is the almost tearful acknowledgement by Venezuelan President Hugo Chávez’s ideological guru, Heinz Dieterich, that “Chávez’s speech on the FARC (calling on it to abandon armed struggle and free its hostages) is the equivalent of unconditional surrender to Washington’s hemispheric ambition.”
However hasty these judgments may end up being, it certainly seems that the region’s oldest and last political-military organization is, at long last, on the brink of defeat.
Colombian President Alvaro Uribe’s strategy of “democratic security” appears to have paid off, supported by the United States-financed Plan Colombia, as well as by much plain good luck, such as finding thousands of incriminating computer files three months ago in an attack on a FARC camp in Ecuador.
If events in the next few months confirm the FARC’s demise, Latin America would finally be rid of one of its main scourges over the past half-century.
At least since December 1956, when Fidel and Raúl Castro, together with a young Argentine doctor, later known as Che Guevara, sailed from Mexico’s port of Tuxpan to Cuba and into history, the region has seen innumerable attempts by small left-wing revolutionary groups to take power through armed uprisings.
They have all invoked heroic precedents from the nineteenth and early twentieth centuries, as well as the impossibility of proceeding otherwise under brutal right-wing dictatorships, such as Batista’s in Cuba, Somoza’s in Nicaragua, and military-oligarchic complexes in Guatemala, El Salvador, Bolivia, Argentina, Peru, Uruguay, and elsewhere – including Colombia.
In many of these cases, they were right: without recourse to guns and bullets, nothing in their countries would ever have changed.
They achieved only three successes: Cuba, in 1959;
Nicaragua, in 1979; and El Salvador, where, by 1992, they fought the US and the local army to a stalemate, bringing peace and growing prosperity to their country.
Everywhere else, for whatever reason – misguided strategies, tactical mistakes, erroneous theories, US intervention, etc. – they faced only defeat, repression, and futility.
By the early 1990’s, it became increasingly evident that the armed struggle for power in Latin American was winding down.
Only a few groups remained: the Shining Path in Peru, the Manuel Rodríguez Patriotic Front in Chile, for a brief time the Zapatistas in Chiapas, Mexico, and the FARC in Colombia.
Democratic transitions throughout the hemisphere had made guerrilla warfare unjustifiable: as Che foretold in his La Guerra de Guerrillas in 1962, wherever the trappings (or, one might add, the realities) of democratic rule prevailed, taking up arms was pointless.
In country after country, the guerrillas were defeated, pacified, brought into the democratic process, or rendered irrelevant.
By the end of the twentieth century, only the FARC endured, together with a smattering of splinter groups in Mexico.
So if Villalobos and Dieterich are right about the FARC’s imminent collapse, it would be a veritable milestone for the region, and a vindication of a strategy – Uribe’s – of which many of us were wary.
That strategy has rightly been criticized for human rights violations, but it seems to have proved successful.
This is no minor matter for the hemisphere, for Colombia, and for Uribe.
Nonetheless, three major problems remain.
First, despite high desertion rates, the death of three of their seven leaders, and Chávez’s apparent decision to forsake them (at least for now), the FARC have proved remarkably resilient over the past 40 years.
Yes, they are divided, unpopular, and devoid of international representation, but the ups and downs of guerrilla warfare are well known; the only truly dead guerrilla fighter is one who is buried.
Second, it would seem highly risky to conclude that one speech by Chávez is tantamount to a fundamental affirmation of principle.
To be sure, Chávez is absolutely crucial to FARC’s survival, given its current, undoubtedly weakened condition.
But, having met Chávez personally a dozen times, it appears naïve, at least to me, to attribute great significance or conviction to anything he says – moderate, hard left, or in between.
He may well have opted for a minor tactical “correction,” only to wait to fight another day.
Finally, supposing Uribe is on the verge of victory, what should he do with it?
Many have advocated negotiating pacification with the late FARC leader Manuel Marulanda’s successors.
But, without any notion of power-sharing, this is easier said than done.
After all, the 1992 Chapultepec Peace Agreements, which ended the Salvadoran civil war, were signed more than two years after it became obvious that neither side could win.
And this occurred thanks to skillful United Nations involvement, led by Alvaro de Soto; the talent of sophisticated FMLN leaders like Villalobos and chief negotiator Salvador Samayoa; strong pressure from the US and its point-man, Bernard Aronson; and Salvadoran President Alfredo Christiani’s undeniable courage and vision.
Few of these ingredients exist in today’s Colombia.
So perhaps Villalobos should be a bit more cautious, and Dieterich a bit less forlorn.
Farewell to the Shadow Shoguns
TOKYO – It’s déjà vu all over again in Japan.
Despite a landslide electoral victory for his Democratic Party of Japan (DPJ) last September, Japanese Prime Minister Yukio Hatoyama resigned only 262 days after taking office.
Sadly, abrupt changes of prime minister are practically an annual event in Japan nowadays, as Hatoyama’s resignation marks the fourth sudden transfer of power to a new leader in the past four years.
While in opposition, the DPJ bashed the Liberal Democratic Party (LDP) for flipping through leader after leader.
With the DPJ now doing the same thing, the Japanese public is flabbergasted, and people are beginning to ask if there is something rotten in their political system.
Hatoyama’s inept handling of key national security issues played a key role in his undoing.
He alienated his Social Democratic Party (SDP) allies by opting – after months of dithering – to honor an agreement with the United States ensuring the future of the Futenma Airbase on Okinawa.
Having promised to shut the base in the campaign, and having also pushed for its removal while in office, Hatoyama’s reversal forced the Socialists to exit the coalition.
The SDP had promised that the base would leave Japan.
Not only did Hatoyama lose a key coalition partner, but the man who put him in the premiership has also been forced out.
DPJ Secretary General Ichiro Ozawa – the party’s shadowy power broker – resigned from his post simultaneously with Hatoyama.
Ozawa’s aspiration to make the next election the grand finale of his political career by cementing the DPJ as a party of government now seems in jeopardy.
The Hatoyama government’s floundering was not confined to the issue of the US base on Okinawa.
Indeed, it also grossly neglected to deal with an outbreak of foot-and-mouth disease in Miyazaki Prefecture, allowing the disease to spread out of control.
Instead of overseeing the government’s management of the outbreak, Hirotaka Akamatsu, the minister of agriculture, forestry, and fishing, took a long trip to Cuba to meet Raúl Castro – a very strange decision given strained US-Japan relations.
That trip further cemented the notion that the Hatoyama government was at root anti-American in the mindless way that former South Korean President Roh Moo-hyun was.
Having lost all support within his own party, Hatoyama had no choice but to resign.
Forcing Ozawa to step down with him can perhaps be said to be Hatoyama’s only meaningful decision as prime minister, for Ozawa’s departure from the political scene – if it sticks – is the far more important event.
In the past, Ozawa was the LDP’s youngest Secretary General.
A protégé of former Prime Minister Kakuei Tanaka, an infamous LDP kingpin, Ozawa’s political methods epitomized the worst aspects of the LDP’s old factional plutocracy.
But in 1993, having failed to gain control of the party, he bolted, along with 45 other Diet members to create the Shinsei Party, supposedly to press for electoral reform.
With Japanese voters becoming supportive of new parties after decades of LDP rule, Shinsei gained tremendous traction and drove forward the creation of the first non-LDP coalition government since the mid-1950’s.
But, as the LDP retained the most seats in the upper house, it soon forged a coalition with its long-time rivals, the Social Democrats, forcing Ozawa back into opposition.
In 1999, Ozawa seized control of the DPJ, which Hatoyama and Naoto Kan, the new prime minister, had founded.
It took ten years to make a DPJ government possible, and only by forging a coalition with the Social Democrats.
By shattering that coalition, Hatoyama destroyed the governing majority Ozawa had worked so cunningly to construct.
With Ozawa gone, not only does the DPJ now have an opportunity to renew itself, but so does the LDP.
The danger in Japan’s game of prime-ministerial musical chairs is that this political wrangling diverts attention from the serious problems facing today’s Asia.
Tensions on the Korean Peninsula are now as high as at any time in decades, and China is engaged in a massive military build-up.
Japan should be seeking to make a difference in securing stability in Asia, not playing sterile political games.
The rest of Asia might be content to sit back and watch the spectacle of Japan’s myopic politics if Japan’s inability to work to help stabilize the region did not matter so much.
That Japan had nothing to offer Thailand in its moment of turmoil is testimony to how irrelevant Hatoyama’s leadership had made the country.
As a former finance minister, deputy prime minister, and the product of a grass-roots civil-society movement, Prime Minister Kan has his work cut out for him, particularly as it is rumored that Ozawa intends to topple him in the autumn.
The likely ongoing instability within the DPJ makes it all the more important that the LDP seriously reform itself.
Although Ozawa retains considerable influence and so may be able to exercise his will on the DPJ, this must not be allowed to happen.
For the politics of Tanaka and Ozawa produced an enfeeblement of Japan’s elected leaders in favor of behind-the-scenes party bosses.
Of course, serious leaders like former prime ministers Yasahiro Nakasone and Junichiro Koizumi were able to overcome this “shadow shogun” system over the years, but no democracy can depend on great leaders being elected every time there is a vote.
Ozawa’s fall can – but may not – return Japanese politics to where it belongs: in the hands of its elected leaders.
Siapa yang paling dirugikan akibat Perubahan Iklim?
SEATTLE – Beberapa tahun yang lalu, saya dan Melinda mengunjungi sebuah kelompok petani padi di Bihar, India, salah satu daerah yang paling sering terkena banjir di negara tersebut.
Mereka sangat miskin dan bergantung pada padi yang mereka tumbuhkan untuk memberi makan dan menghidupi keluarga mereka.
Saat musim hujan terjadi setiap tahunnya, sungai akan meluap, mengancam ladang pertanian mereka dan merusak tanaman di lahan tersebut.
Namun, mereka tetap percaya dan rela bertaruh bahwa lahan mereka tidak akan terkena banjir.
Seringkali mereka kalah dalam “taruhan” ini.
Tanaman mereka rusak, mereka lalu akan pindah ke kota untuk mencari pekerjaan serabutan untuk memberi makan keluarga mereka.
Pada tahun mendatang, namun demikian, mereka akan kembali – seringkali lebih miskin daripada saat mereka pertama pergi ke kota – siap untuk menanam lagi.
Kunjungan kami merupakan pengingat yang berharga bahwa untuk para petani yang paling miskin di dunia, hidup adalah seperti berjalan di titian kabel yang tinggi – tanpa jaring pengaman.
Mereka tidak memiliki akses terhadap bibit, pupuk, sistem pengairan, dan teknologi berguna lainnya yang memiliki kualitas lebih baik seperti yang dipakai oleh para petani di negara kaya – dan tidak ada asuransi tanaman pertanian untuk melindungi mereka dari kerugian.
Satu kemalangan saja – kekeringan, banjir, atau jatuh sakit – cukup untuk menjerumuskan mereka lebih dalam ke lubang kemiskinan dan kelaparan.
Saat ini, perubahan iklim juga menambahkan resiko baru dalam kehidupan mereka.
Suhu yang meningkat di dalam satu dekade mendatang akan memberikan gangguan yang besar terhadap pertanian, khususnya di wilayah tropis.
Tanaman tidak akan tumbuh karena hujan yang terlalu sedikit atau terlalu banyak.
Hama berkembang biak dengan pesat di iklim yang lebih hangat dan menghancurkan tanaman.
Para petani di negara yang lebih kaya akan mengalami perubahan juga.
Tetapi mereka memiliki peralatan dan bantuan untuk menghadapi resiko-resiko ini.
Para petani termiskin di dunia sebagian besar pergi bekerja setiap hari dengan tangan kosong.
Maka dari itu, dari semua orang yang akan dirugikan akibat perubahan iklim, mereka adalah orang-orang yang akan paling menderita.
Para petani miskin akan merasakan akibat dari perubahan ini dan pada saat yang sama dunia membutuhkan bantuan mereka untuk memberi makan bagi populasi yang kian berkembang.
Pada tahun 2050, kebutuhan pangan global diharapkan meningkat sebesar 60%.
Penurunan jumlah panen akan menghambat sistem pangan global, memperburuk kelaparan dan mengurangi kemajuan yang sudah dicapai dunia dalam mengentaskan kemiskinan selama setengah abad belakangan ini.
Saya optimis bahwa kita dapat menghindari dampak perubahan iklim dan memberi makan dunia – jika kita bertindak sekarang.
Ada kebutuhan mendesak bagi pemerintah untuk berinvestasi pada inovasi-inovasi energi bersih yang akan secara drastis mengurangi emisi gas rumah kaca dan menghambat kenaikan suhu.
Pada saat yang sama, kita perlu memperhatikan bahwa kini sudah terlambat untuk menghentikan semua dampak suhu yang lebih panas.
Bahkan jika dunia menemukan sumber energi yang murah dan bersih minggu depan, akan butuh waktu untuk menghilangkan kebiasaan menggunakan bahan bakar fosil dan berganti ke masa depan yang bebas karbon.
Maka dari itu, penting bagi dunia untuk berinvestasi pada upaya-upaya untuk membantu masyarakat yang paling miskin untuk beradaptasi.
Banyak dari peralatan yang mereka butuhkan adalah alat yang mendasar – benda-benda yang mereka butuhkan untuk menumbuhkan lebih banyak makanan dan mendapatkan penghasilan yang lebih besar: akses terhadap pembiayaan, bibit yang lebih baik, pupuk, pelatihan, dan pasar di mana mereka dapat menjual apa yang mereka hasilkan.
Peralatan lainnya adalah peralatan baru dan disesuaikan dengan permintaan berdasarkan perubahan iklim.
The Gates Foundation dan para mitra telah bekerja sama untuk membuat varietas bibit baru yang dapat tumbuh bahkan pada masa kering maupun banjir.
Para petani padi yang saya temui di Bihar, contohnya, sekarang menumbuhkan varietas baru padi tahan banjir – disebut padi “scuba” – yang dapat bertahan dua minggu di bawah air.
Mereka sudah mempersiapkan jika pergantian pola cuaca akan mendatangkan banjir yang lebih besar ke daerah itu.
Varietas padi lainnya yang tahan kekeringan, panas, dingin, dan permasalahan tanah seperti kontaminasi garam yang tinggi sedang dibuat.
Semua upaya ini memiliki kekuatan untuk mengubah kehidupan.
Ini cukup biasa untuk melihat bahwa para petani mampu panen dua kali dan tiga kali lipat saat mereka punya akses terhadap peralatan-peralatan canggih yang dianggap sepele oleh para petani di negara yang kaya.
Perkembangan baru ini membuat mereka mampu meningkatkan pola makan mereka, berinvestasi di pertanian mereka, dan mengirimkan anak-anak mereka ke sekolah.
Ini juga menyelamatkan hidup mereka dari ujung tanduk, memberikan mereka pengaman meskipun mereka mengalami panen yang buruk.
Ada juga ancaman-ancaman perubahan iklim yang tidak dapat kita prediksi sebelumnya.
Untuk bersiap-siap, dunia perlu untuk mempercepat riset atas bibit dan dukungan-dukungan lain bagi para petani kecil.
Salah satu inovasi yang membantu para petani adalah teknologi satelit.
Di Afrika, para peneliti menggunakan gambar satelit untuk membuat peta tanah yang terperinci, yang dapat memberitahukan petani mengenai varietas yang dapat tumbuh subur di lahannya.
Tetap saja, bibit yang lebih baik atau teknologi baru tidak dapat mengubah hidup keluarga petani sampai teknologi ini dapat mereka miliki dan gunakan.
Beberapa organisasi, termasuk sebuah kelompok non-profit bernama One Acre Fund, mencari cara untuk memastikan para petani mendapatkan keuntungan dari solusi ini.
One Acre Fund bekerja dengan lebih dari 200,000 petani Afrika, menyediakan akses kepada pendanaan, peralatan, dan pelatihan.
Pada tahun 2020, mereka bertujuan untuk mencapai satu juta petani.
Pada Surat Tahunan tahun ini, saya dan Melinda bertaruh bahwa Afrika akan dapat memberi makan dirinya sendiri selama 15 tahun mendatang.
Bahkan dengan resiko perubahan iklim, menurut saya, saya akan memenangkan taruhan ini.
Ya, keadaannya sulit bagi para petani miskin.
Hidup mereka disulitkan dengan berbagai macam persoalan yang harus dibenarkan – dari menanam bibit yang tepat dan menggunakan pupuk yang benar sampai mendapatkan pelatihan dan memiliki tempat untuk menjual hasil panen mereka.
Jika satu hal saja bermasalah, makan hidup mereka akan terpuruk.
Saya tahu bahwa dunia ini sudah mengetahui apa yang harus dilakukan agar hal-hal ini berjalan dengan baik untuk menghadapi tantangan-tantangan yang mereka hadapi hari ini atau yang akan mereka hadapi di masa mendatang.
Lebih penting lagi, saya tahu bahwa para petani sudah menyadari hal ini juga.
Fatah’s Status Quo Congress
HERZLIYA – The Sixth Fatah Congress, held recently in Bethlehem, was an important event for the future of the Arab-Israeli conflict and for the Palestinian movement.
But a careful look at the results of the Congress’s elections to Fatah’s Central Committee yields a picture that is quite different from what many will conclude about the meeting.
The Congress seemed to demonstrate three main points: Fatah has moved toward peace with Israel; it has adopted democratic procedures; and a new generation, or even a specific group called the Young Guard, has assumed leadership.
But this interpretation is in large part wrong.
In terms of its approach to peace, the new Central Committee is roughly the same as the old one.
Of the 18 elected members (Palestinian Authority leader Mahmoud Abbas will appoint four more later), no more than two (Nabil Shaath and Muhammad Shtayyeh) are really moderate.
At least four (Muhammad al-Ghuneim, Salim al-Zanoun, Abbas Zaki, and Nasser Kidra) are hardliners, and most of the rest follow pretty much the traditional Fatah line.
As for democracy, while the Congress was certainly a step forward from the past (when Fatah leader Yasir Arafat could handpick Fatah’s leadership), real limits remain.
Depending on one’s definition, Abbas chose between one-third and one-half of the delegates. The majority of the Central Committee, not surprisingly, are Abbas’s close associates and supporters.
The fact that only one out of 18 members will be from the Hamas-ruled Gaza Strip, which contains about half of all the Palestinians that Fatah governs, also skews the results.
But there is one aspect of this election so dangerous that it might outweigh everything else.
The candidate who came in first, with two-thirds of the vote, was Abd al-Mahir Ghuneim, who is increasingly being spoken of as Abbas’s successor. Ghuneim is an unrepentant hardliner and an open opponent of the Oslo agreement, much less of a negotiated peace agreement with Israel.
If he becomes Fatah’s leader (and hence leader of the PA and the PLO as well), any compromise with Israel would become unimaginable.
What about the transfer of power to a new generation?
This is accurate in purely chronological terms – old leaders inevitably get older, after all.
Yet, while almost all the old members of the committee were not reelected, at least 15 of the 22 members will be old-style leaders (presuming Abbas will appoint such people to the four seats that he controls).
Many of the newly elected members, moreover, are veteran Fatah bureaucrats.
The most interesting additions to the Central Committee are three younger men, though they have played leading roles in the organization for 20 years or more.
Marwan Barghouti, the leader of Fatah’s grassroots group on the West Bank, is now in an Israeli prison for organizing the bloody uprising that began in 2000, and for direct involvement in planning the killings of many Israeli civilians.
While some will point to Barghouti’s election as a victory for the younger generation, not one of his followers will join him.
The other two younger men, Muhammad Dahlan and Jibril Rajoub, built political bases of their own as commanders of security forces in the Gaza Strip and on the West Bank, respectively.
But Rajoub has many enemies, and Dahlan was responsible for Fatah’s humiliating defeat by Hamas in the fight that led to the expulsion of Fatah from Gaza.
In addition, all three of the younger men are rivals, not allies.
In other words, there is no unified Young Guard.
Indeed, far from being an electoral revolution, only two of those elected – Barghouti and Muhammad Shtayyeh, who has headed PECDAR, the Palestinian agency that promotes transparency and economic development – can be considered at all critical of the Fatah establishment.
But, while the election did not usher in a leadership eager for peace with Israel and a Palestinian state achieved by compromise, nor was it a prelude to a renewal of violence.
There are several individuals in the new leadership who have many Israeli contacts, and who can pick up a phone and call or be called by their Israeli counterparts.
It is also extremely important that most of Fatah’s new leaders have a strong distaste for Hamas, which makes rapprochement between the two groups unlikely.
Still, if Ghuneim takes over as the PA’s and Fatah’s leader, which could happen next year, a breakdown of negotiations with Israel and a new round of fighting would not be surprising.
The other interesting new face, though he has no chance of becoming a major leader, is Shtayyeh.
A successful businessman, he could become an ombudsman and whistle-blower, which would be a real innovation.
But, while it will be interesting to see whether he speaks out or is shut up, one shouldn’t read too much into his election: he finished last among those elected, beating by a single vote Tayib Abu Rahman, one of Arafat’s most trusted lieutenants and an old-school hardliner.
There is a wide range of views in the new Palestinian leadership.
This is neither a group that will make peace with Israel nor one that will ally itself with Hamas.
In other words, it is a group with which Israel can work on status quo issues, though not on a comprehensive agreement.
But if Muhammad al-Ghuneim does indeed become the new leader, the prospects for any peace at all look grim.
Fat Chance
ATLANTA – We are, supposedly, in the midst of an obesity epidemic.
Everyone is getting fatter. Children are fatter than their parents.
Epidemics caused by fat are now manifest: Type 2 diabetes, increased rates of heart and cardiovascular disease, and notably more cancers, such as breast cancer.
This “globesity” epidemic is seen in poor countries as well as in wealthy ones.
But are people really so unhealthily fat?
Certainly there are morbidly obese people, whose weight puts their lives at risk.
Consider the British jailer Daniel Lambert (1770-1809), who stood 5’1” (155 centimeters) tall and weighed 739 lbs (335 kilos), yet neither drank nor ate “more than one dish at a meal.”
At his death, Lambert was remembered as a man of great “temperance.”
In other words, he was deemed to be healthy and happy.
The problem today seems to be that we have demonized “fat,” even among people who are labeled “overweight” rather that “obese.”
Indeed, we have lowered the boundary for “overweight” to include people considered “normal” a generation ago.
And we have deemed fat the major public health risk in our world and fat people the cause of a range of social problems, from placing stress on health-care systems to posing a risk to their own families.
Several causes of – some of them contradictory – obesity have been identified.
Some point to a shift in the “quality of life”: we live longer, have less physically stressful occupations, and have easier access to more food.
Moreover, we have abundant access to “bad” or “fast” cheap food and an absence of opportunities for physical activity in areas of extreme poverty: this is the “obesity of poverty” argument – that is, poverty is a contributory factor in morbid weight gain.
Others argue that our individual psychological makeup is at fault: we depend on food as a means of manipulating our environment.
On this assumption, obesity is simply on a continuum of eating disorders with anorexia nervosa, which has been defined as a mental illness.
But eating too much food is also an addiction, which nowadays is likewise usually understood in medical terms – as a genetic pathological predisposition in an individual or group.
Then again, obesity is sometimes viewed as a genetically predetermined “normal” predisposition, understood in terms of an evolutionary biological drive to accumulate body fat in order to prevent starvation in times of famine.
This is the “ob-gen” argument, first put forth in a 1994 paper by Yiying Zhang and her colleagues on the genetics of obesity in mice, which concluded by extrapolating their findings to human beings.
Being obese can also be caused by disruption of normal growth caused by pathological changes – ranging from tumors to aging (which is also understood as pathological) – in the endocrine system.
The older we become, the fatter we get, no matter what we eat – though this seems to conflict with the ob-gen argument that we need to get fat to avoid starvation.
On this view, an aging population means a fatter population in the United States, China, Japan, and much of Europe.
Finally, obesity can be the result of infection by an agent that makes us get fat.
Today, this agent is the adenovirus 36 (Ad–36), which stimulates the growth and reproduction of fat cells, as well as causing immature fat cells to mature more quickly, at least in chickens.
Of course, in a “real” human being any number of these causes – social, psychological, or genetic – may be at work.
But all define the obese as an object for intervention.
The model in public health is smoking, though the list of overlapping and contradictory causes implies greater deference to factors beyond our control.
As St. Augustine put it: “In the midst of these temptations I struggle daily against greed for food and drink.
So, are we getting too fat?
What does “too fat” mean in terms of individual happiness and health?
Why are we (if, indeed, we are) getting fatter?
If there is a public health question here, it may well be a series of problems rooted in a faulty assumption: the growth of girth and its absolute relationship to ill health.
This is not to say that there are no health problems associated with fat, but we have created a moral panic about the impact of increased weight on society, on the family, and on our happiness.
To see a world-wide epidemic of fat caused by a conspiracy of fast-food producers and our genes strikes one as weird: but the dieting culture relies on the sense that we must control this epidemic.
Each age, culture, and tradition defines what is an unacceptable body weight – unhealthy, ugly, or corrupt.
We must understand this as a process of creating ideal or normal bodies – those bodies that we desire to inhabit, but almost certainly will not.
The $4.3 Billion Shrug
LONDON – In November, the United Kingdom’s Financial Conduct Authority (FCA) announced a settlement in which six banks would be fined a total of $4.3 billion for manipulating the foreign-exchange market.
And yet share prices barely reacted.
Why?
The nefarious practices and management failings uncovered during the yearlong investigation that led to the fines were shocking.
Semi-literate email and chat-room exchanges among venal traders revealed brazen conspiracies to rig the afternoon exchange-rate “fix” for profit and personal gain.
Senior managers were so disengaged that they allowed their employees to act like vulgar, overpaid children.
Using nicknames like “the three musketeers” and “the A-team,” they did whatever they liked, at an enormous cost to their institutions.
But, despite the huge FCA fine, no top executive was forced to fall on his or her sword, and investors did little more than shrug.
One reason, of course, is that the settlement was known to be coming; only the details of the offenses and the scale of the fines were news.
The more important reason, though, is that even $4.3 billion is small change when compared to the total fines and litigation costs incurred by the major banks over the last five years.
Morgan Stanley analysts estimate that the top 22 banks in the United States and Europe have been forced to pay $230 billion since 2009 – more than 50 times the cost of the FCA settlement.
This is over and above the heavy losses that banks incurred from bad lending and overambitious financial engineering.
American banks have incurred more than half of these massive penalties.
The European bill amounts to just over $100 billion – roughly half of which was paid by the top seven British banks.
But the numbers tell only part of the story.
In the US, the penalties have been dominated by fines for sales of misleadingly marketed mortgage-backed securities, often to the two government supported entities Fannie Mae and Freddie Mac.
The banks, it would be fair to say, do not wholly accept regulators’ arguments about that, but they have bitten their tongues and paid up.
(US regulators have also imposed high penalties on foreign banks for breaches of American sanctions policies in relation to Iran.)
In the UK, by contrast, the biggest penalties have come in the form of compensation payments made to individual mortgage borrowers who were sold Payment Protection Insurance.
The regulators maintain that much of this insurance was worthless to borrowers and was mis-sold.
The banks believe that some of the claimants whom they are being forced to pay are unworthy, but they have nonetheless coughed up the money.
That unhappy episode has cost British banks $37 billion so far, with more to come – most likely another $5 billion or so.
The Morgan Stanley analysis suggests that we can expect another $70 billion in fines and litigation costs over the next two years from already identified errors and omissions.
And new episodes could emerge; two years ago, no one anticipated the fallout from the manipulation of the foreign-exchange markets.
The irony here – not lost on the major banks’ finance directors – is that as fast as banks add capital from rights issues and retained earnings to meet the demands of prudential regulators, the funds are drained away by conduct regulators.
The scale of the penalties is now large enough to have a substantial impact on banks’ balance sheets, delay the restoration of their health, and constrain their lending capacity.
Some of the money, especially in the UK, has gone back to individual customers.
But more has gone to the regulators themselves and onward to national governments.
In the UK, fines once helped defray the regulator’s costs: bad actors reduced the fees charged to the good ones, creating a positive feedback loop.
Today, the payments have become so large that the government has seized them and channeled revenues exceeding the regulator’s enforcement costs to veterans’ charities.
In the US, the end recipients are less clear; indeed, they are undisclosed.
Charles Calomiris of Columbia University has challenged what he calls “a real subversion of the fiscal process” as funds are raised and spent in non-transparent ways.
The most important question, however, is whether fines on this scale serve as useful deterrents.
Clearly, the post-crisis period has revealed unacceptable behavior in many institutions.
It will be some time before we know whether large fines on corporations, paid principally by their shareholders, contribute to keeping the system honest.
But that seems unlikely when banks and investors seem punch-drunk, barely reacting to regulators’ blows.
The reputational impact of each new settlement is modest, despite the escalation in the level of fines imposed.
The FCA has just announced a review of its pricing policies. “This is not a penalties race,” according to Georgina Philippou, the authority’s enforcement strategy director.
Whether the current approach serves as an effective deterrent is a question that should be widely debated.
Senior bank managers and regulators have a common interest in developing a more effective system – one that punishes the guilty and creates the right incentives for the future.
Fear and Freedom on the Internet
Earlier this month it was reported that, at the request of China’s rulers, Microsoft shut down the Web site of a Chinese blogger that was maintained on a Microsoft service called MSN Spaces.
The blogger, Zhao Jing, had been reporting on a strike by journalists at The Beijing News that followed the dismissal of the newspaper’s independent-minded editor.
Microsoft’s action raises a key question: can the Internet really be a force for freedom that repressive governments cannot control as easily as newspapers, radio, and television?
Ironically, Microsoft’s founder and chairman, Bill Gates, has been an enthusiastic advocate of this view.
Just last October, he said: “There’s really no way to, in a broad sense, repress information today, and I think that’s a wonderful advance we can all feel good about….[T]his is a medium of total openness and total freedom, and that’s what makes it so special.”
Despite these sentiments, Microsoft is helping the Chinese authorities to repress information as best they can.
A Microsoft spokeswoman was reported as saying that the corporation has blocked “many sites” in China, and it has been known for several months that Microsoft’s blog tool in China filters words like “democracy” and “human rights” from blog titles.
Microsoft’s defense is that it must “comply with local and global laws.”
But the MSN Spaces sites are maintained on servers in the United States.
The relevant local laws would therefore seem to be those of the US, and Zhao Jing’s discussion of the Beijing journalists’ strike does not violate any of them.
Nor are there any global laws that prevent Chinese people from discussing events that their government would prefer them not to discuss.
TheNew York Times, for example, is free to publish its report on the strike, even though it operates a Web site that anyone with unfettered Internet access can read.
If the Chinese government does not want its citizens to read a foreign newspaper,then it is up to them to figure out how to block access to it.
The newspaper is under no obligation to do it for them.
So Microsoft’s defense misfires.
We can only guess at the company’s real reason for taking down the Web site, but fear of repercussions against its commercial interests in China seems likely to have been an important factor.
To be sure, a corporation can and should place limits on the use of its services.
The absolutist line – let complete freedom of expression prevail – crumbles in the face of uncomfortable examples.
According to Gates, Microsoft might prevent the use of its services to spread instructions about making nuclear bombs, to send pro-Nazi statements into Germany, where such material is illegal, and to propagate child pornography.
But how relevant are such examples?
In his classic defense of freedom of expression, On Liberty, John Stuart Mill argued that the most important reason for freedom of expression is to promote competition between the widest possible range of ideas, and that unfettered debate is the best way to test them.
For the government to protect ideas from criticism is to turn them into a lifeless and rigid dogma, regardless of whether they are true.
If we agree with Mill, then only one of Gates’s examples falls into the category of expression that should be protected.
Recipes for making nuclear bombs are techniques, not ideas.
Nor is child pornography the expression of ideas.
We may therefore restrict both of them without running afoul of Mill’s argument.
(On the other hand, an essay arguing that there is nothing wrong with adults taking a sexual interest in children, and that such conduct should be permitted, expresses ideas, and thus should not be censored, no matter how poisonous we may consider them.)
The most difficult of Gates’s three examples is that of pro-Nazi statements on a Web site aimed at Germany.
It is easy to understand why Germany would wish to prohibit such statements.
Several countries’ laws proscribe incitement of racial hatred, which can be justified, consistently with Mill’s defense of liberty, if such laws really focus narrowly on incitement of hatred rather than on suppressing arguments, bad as they may be, that appeal to people’s intellectual capacities.
A defender of suppression of Nazi ideas might argue that have already been tried, and have failed – in the most horrendous manner imaginable – to produce a better society.
Nevertheless, the best possible sign that Germany has overcome its Nazi past would be to focus its laws specifically on incitement to racial hatred, rather than on Nazism as such.
In any case, China’s crackdown on straightforward reporting and discussion of events taking place in that country is not the suppression of a discredited political ideology, but of open and informed political debate.
If Bill Gates really believes that the Internet should be a liberating force, he should ensure that Microsoft does not do the dirty work of China’s government.
Fear and Loathing in Europe
Two far-right parties, the Austrian Freedom Party and the Movement for Austria’s Future, won 29% of the vote in the latest Austrian general election, double their total in the 2006 election.
Both parties share the same attitudes toward immigrants, especially Muslims, and the European Union: a mixture of fear and loathing.
Since the two parties’ leaders, Heinz-Christian Strache and Jörg Haider, despise each other, there is little chance of a far-right coalition taking power.
Nonetheless, this is Adolf Hitler’s native land, where Jews were once forced to scrub Vienna’s streets with toothbrushes before being deported and killed, so the result is disturbing.
But how disturbing?
That 29% is about 15% more than populist right-wing parties get in very good years (for them) in other European countries.
Strache, the leader of the Freedom Party, wants the government to create a new ministry to manage the deportation of immigrants.
Muslims are openly disparaged.
Haider once praised the employment practices of Hitler’s Third Reich.
Inevitably, the new rightists bring back memories of storm troopers and race laws.
Yet, to see the rise of the Austrian right as a revival of Nazism is a mistake.
Neither party advocates violence, even if some of their rhetoric might inspire it.
Voters for the far right may be motivated less by ideology than by anxieties and resentments that are felt in many European countries, including ones with no Nazi tradition, such as The Netherlands and Denmark.
In Denmark, the hard-right Danish People’s Party, with 25 parliamentary seats, is the country’s third largest party.
Dutch populists, such as Rita Verdonk or Geert Wilders, who is driven by a paranoid fear of “Islamization,” are putting the traditional political elites – a combination of liberals, social democrats, and Christian democrats – under severe pressure.
This is precisely the point.
The biggest resentment among right-wing voters in European countries is reserved for political elites, who, in the opinion of many, have been governing for too long in cozy coalitions, which appear to exist chiefly to protect vested interests.
In Austria, even liberals admit that an endless succession of social democratic and Christian democratic governments has clogged the political system’s arteries, making it difficult for smaller parties to penetrate what is seen as a bastion of political privilege.
The same is true in The Netherlands, which has been governed for decades by the same middle-of-the-road parties, led by benevolent but rather paternalistic figures, whose views about “multiculturalism,” “tolerance,” and “Europe,” were, until recently, rarely challenged.
Expressions of nationalism in postwar European democracies were always tolerated in soccer stadiums, not in public life.
Skepticism about European unity was routinely denounced as bigotry, or even a form of racism.
Attachment to national feeling was further undermined by governments’ habit of blaming unpopular policies on European Union bureaucrats, who are increasingly seen as yet another bunch of self-satisfied, privileged, and unaccountable elitists.
This is linked to resentment of immigrants.
When the offspring of manual workers imported from countries such as Turkey and Morocco in the 1960’s began to form large Muslim minorities in European cities, tensions rose in working-class neighborhoods.
Complaints about crime and unfamiliar customs were often dismissed by liberal elites as “racism.”
People simply had to learn to be tolerant.
None of this was necessarily wrong.
Tolerance, European unity, distrust of nationalism, and vigilance against racism are laudable goals.
But promoting these aims without discussion, let alone criticism, resulted in a backlash.
When the Dutch, the French, and the Irish voted against the European constitution, they were expressing distrust of their political elites.
And populists who promise to restore national sovereignty by rejecting “Europe,” fighting “Islamization,” and kicking out immigrants are exploiting this distrust.
The rhetoric of xenophobia and chauvinism is unpleasant, and, in a country with Austria’s past, even alarming.
But the new populism is not yet undemocratic, or even anti-democratic.
The phrase most often heard in Austria among voters of the right-wing parties is “fresh air.”
People say they voted for Haider and Strache to break the stranglehold of the ruling parties.
This is not an illegitimate motivation.
If people are anxious about their national identities, the sovereignty of their governments, the demographic and social complexion of their societies, such fears are best voiced in the political arena.
As long as people express their concerns, however distasteful to liberal ears, by votes, not violence, democracy will not be seriously harmed.
Running against the political elite is, of course, the essence of populism everywhere.
American presidential candidates pretend to run against “Washington” even when they are the sons of former presidents.
Real damage is done when people lose confidence, not only in the elites, but in the system itself.
This has not yet happened in Europe, not even in Austria.
There is no need for liberal, traditional parties, in a fit of panic, to battle the right by pandering to the same resentments.
But those resentments should be taken seriously in political debates.
That way, the dangers of popular antipathies will be contained.
Instead of damaging democracy, the rise of the right, by challenging the corruption of vested interests, might actually turn out to strengthen it.
Fear and Loathing in Russia and Georgia
Mikhail Saakashvili's victory in Georgia's presidential election was the predictable culmination of November's "Revolution of the Roses," which forced Eduard Shevardnadze to step down after more than a decade in power.
A more complicated question is what Georgia's northern neighbor, Russia, should expect from the new power triumvirate of Saakashvili, Nino Burdzhanadze, and Zurab Zhvania.
Despite Russia's post-Soviet malaise, it has influenced Georgia's internal development at virtually every turn--including Shevardnadze's resignation, which was mediated by Russian Foreign Minister Igor Ivanov--so how it perceives Georgia's new leaders is of crucial geopolitical significance.
The three Georgian leaders declare bilateral relations a high priority, and in Russia, too, there is widespread hope that their victory will help repair ties between the two countries.
But there is also concern about the previous occasional anti-Russian statements of this new generation of leaders, and fear that President Saakashvili might launch a military campaign to bring the breakaway republics of Abkhazia and South Ossetia back under Tbilisi's rule.
As Russia's arch-nationalist Vladimir Zhirinovsky put it, "At least Shevardnadze was still our man," while the new leaders "will flood Abkhazia and South Ossetia with blood."
Although most Russians do not share this view, Russia is obviously concerned with the security threat that it faces from the South Caucasus--a threat that escalated sharply during Shevardnadze's rule.
Most alarmingly, Chechen rebels enjoyed considerable freedom of operation in Georgia, creating supply bases on its territory and receiving medical help in Georgian hospitals before slipping back into Russia.
This support was clearly sanctioned at the highest levels of Georgia's government.
The Chechen separatists' leader, Aslan Maskhadov, maintained a mission directly next door to the Ministry of Internal Affairs in Tbilisi, and various government bodies had direct contacts with Chechen field commanders operating in Georgia.
In the fall of 2001, for example, Georgian security officials provided transportation for the Chechen field commander Ruslan Gelaev from the Pankisi Gorge to Abkhazia.
Georgia's new leaders have opposed such cooperation with the Chechen rebels.
So it is to be hoped that they will take Russia's security concerns seriously, possibly providing partnership in controlling Georgian roads leading into Chechnya.
For too long, these roads have served as arteries for international terrorism, conveying fighters and financing into Russia from the Arab world and other countries.
But Saakashvili and his allies are all young.
Do they have enough experience to guide the country towards political stability and economic prosperity?
Their desire to preserve and reestablish Georgian territorial integrity by asserting renewed control over Abkhazia and South Ossetia is understandable, but can they accomplish this goal as peacefully as they won their revolution?
Despite frequent accusations to the contrary, Georgia's viability as an independent state is very much in Russia's interests.
Talk of re-establishing the Soviet Union or at least absorbing Abkhazia and South Ossetia has always been politically marginal.
But the fact remains that both Abkhaz and South Ossetian leaders have occasionally approached Russia with annexation requests.
Georgia's current economic collapse provides little incentive for either of these self-proclaimed independent republics to support reunification.
Similarly, Georgia's inability to manage relations with its only autonomous republic, Adzharia, doesn't inspire much confidence.
The Adzhar people consider themselves Georgians, but still have frequent squabbles with the central government, so how could ethnically distinct Abkhazia and South Ossetia feel assured that their relations with Georgia would work out any better?
President Saakashvili seems to understand the necessity of reviving Georgia's moribund economy, which requires, first and foremost, political stability.
But he is unlikely to refrain from accusing Russia of stoking tensions with Abkhazia and South Ossetia.
Russia was once blamed for arranging earthquakes in Georgia, so it would be difficult to resist accusing it of support for anti-Georgian separatists.
This allegation is as baseless as the temptation to make it is strong.
Simply put, it would be suicidal for Russia, having itself just stepped back from the brink of territorial disintegration, to build its strength on the collapse of its neighbor.
On the contrary, Russia's profound interest in Georgia's reconstruction has led to a substantial increase in bilateral aid--more than any package ever offered by the West--in the form of enlarged electricity supplies and monetary assistance, which Russian President Vladimir Putin recently put at $2 billion annually.
Indeed, the Saakashvili administration might complain about Russian meddling, but it is unlikely to try to remove Georgia from Russia's economic orbit.
The Baku-Tbilisi-Ceyhan oil pipeline--which will bypass Russia when it is completed--cannot re-define the country's economic strategy to the extent that Shevardnadze had sought.
Instead, Georgia's long-term economic success will depend on exports to the Russian market: neither Georgian wine nor Georgian fruit is needed in the United States or Italy.
Shevardnadze's emphasis on the BTC pipeline also clearly reflects Georgia's pro-Western strategic orientation.
That, too, is unlikely to change under Saakashvili.
On the other hand, this should become less of a burden on bilateral relations as Russia itself moves closer to NATO, the US, and the European Union.
Let there be no mistake: Georgia's new leaders face daunting economic, political, and constitutional challenges in the years ahead.
But Russia wishes them success.
For if they can overcome these challenges quickly, thoroughly, and peacefully, the election of Mikhail Saakashvili will be good news not only for Georgia, but for Russia as well.
Fear and Loathing in the First World
Within the last few years, people throughout the world's most advanced economies have become acutely worried about the economic prowess of China, India, and other emerging countries with large low-wage populations.
They fear for their own jobs and for their children's future in a world where they must compete alongside the world's poorest.
Those fears are testing political leaders in the world's richest countries.
Newspaper stories are an indicator of this rising concern.
I searched the Lexis-Nexis database of English-language newspaper stories around the world that contained all three of the words "outsourcing," "jobs," and "India."
In 1999, Lexis-Nexis produced only 39 stories; by 2003, there were 749 stories. In the first six months of 2004, there were already 1208 stories.
The results were much the same when I searched "outsourcing," "jobs", and "China."
I found similar growth in the use of these three terms together when I searched in French, German, Italian, and Spanish: 90% of the stories were in 2003 and 2004.
Why this explosion of concern?
After all, advanced countries have been losing manufacturing jobs to less developed countries for more than fifty years.
One reason is that the expanding development and use of new information technology, notably cell phones and the Internet, shrinks the world and makes competition from abroad more plausible.
In fact, new technologies are probably the most important reason why globalization is advancing at a rapid pace.
Cell phones and the Internet link the minds of many people in different countries effortlessly and efficiently, encouraging trade in intellectual creations.
At the same time, the new information technology makes us more aware that the kinds of jobs that are migrating to India and China are high-quality jobs, the jobs for educated and skilled people.
Over the last fifty years, people in advanced countries have increasingly sought university education and specialized training to protect them from an unforgiving labor market.
Now First-Worlders are uncertain whether even this will protect their economic status.
Increased fear of competition from emerging countries is also a natural consequence of the collapse of the speculative bubble in equities in 2000; stock markets in some countries fell to less than half their peak value.
Once we saw our exaggerated hopes for our investments failing, we began to consider our other sources of income and wealth, only to confront the worldwide economic slowdown that began in 2001.
Increased economic anxiety has, unsurprisingly, fueled increasing unease about foreign competition.
Earlier this year, I surveyed people who recently bought homes in four American cities.
My questionnaire asked: "Do you worry that your (or your household's) ability to earn as much income in future years as you expect might be in danger because of changes in the economy (someone in China competing for your job, a computer replacing your job, etc.)?"
Of 442 respondents, 11% answered, "Yes, I worry a lot," 36% replied, "Yes, I worry a little," and 52% said, "No, I don't worry at all."
Thus, while most respondents said they were not worried, nearly half expressed some worry.
I asked this question of recent homebuyers on the theory that fear of job loss might help explain the remarkable boom in home prices in the US (as well as many other advanced countries).
After all, people who fear losing their jobs may seek greater economic security by investing in real property in their own wealthy country, bidding up prices in the process.
My survey's results lend some support to this theory.
Although 81% of the respondents said fear of job loss had no effect on their decision to buy a house, of those who said it did, the number who said it encouraged home purchase outnumbered those who said it discouraged home purchase by a margin of two to one.
Growing fear of foreign competition ought to explain a lot of things in the future.
People used to feel insulated from economic problems that occurred beyond their country's borders.
No more.
Fear of competition from abroad is now fundamental, and will change the political process in advanced and relatively advanced emerging countries throughout the world.
It helps explain the rise of protectionism, and the failure of the WTO trade talks in Cancun last September to improve emerging countries' access to advanced-country markets.
As a professor, I find that my students often ask me for career advice with a different tone than in the past.
What I hear is a fundamental lack of confidence that they will do well in any chosen career.
They want to figure out how they can compete with Chinese or Indian workers who have the same, or better, education.
Despite bravado about American superiority, the students themselves do not seem to feel superior, and wonder if they will be living emerging-country lives of their own in coming years.
This sudden fear of emerging countries presents a major dilemma.
The fear is real and visceral, and politicians ignore it at their peril.
Its further increase could lead to counterproductive protectionist measures.
We must not let this happen.
The emerging countries are doing nothing more blameworthy than working towards their place as equals alongside advanced countries.
It is morally and practically vital that they succeed.
Fearless Financial Markets
A number of thoughtful observers – like Citigroup’s Robert Rubin, Harvard’s Larry Summers, and The Financial Times’s Martin Wolf – have expressed puzzlement in recent months about financial markets’ perceptions of risk.
While markets have judged today’s world – especially the dollar and securities linked to it – to have low risk when viewed in historical perspective, geopolitical risks in fact appear to be large.
Wolf, for example, argues that financial markets have adopted a head-in-the-sand focus on the “long run of small gains,” ignoring the “occasional calamity” in advance, while losses will be attributed after the fact to “unforeseeable bad luck.”
But if an investor today did wish to insure against geopolitical catastrophe, how would he or she do so?
In the generation before World War I, the safe assets were thought to be the debt of governments tied to the gold standard, which supposedly offered protection against the inflationary populist viruses that afflicted countries like Mexico, France, or the United States.
But investors in British government debt faced huge losses when Britain’s commitment to World War I produced inflation, and investors in Czarist bonds papered their bathrooms with them after the October Revolution.
After the inflations of World War I, a prudent investor might have thought gold – easily assessable, portable, and real – an attractive asset.
But gold is stagnant, while capital is productive.
In any case, American gold holders found their wealth involuntarily transformed into paper dollars by the Roosevelt administration at the nadir of the Great Depression.
Following World War II, investments in the US seemed safer than any alternative.
But, in the 1970’s, investors in American stocks and long-term bonds lost half their principal, and even investors in short-term American debt were down by 20% in real terms by the end of the decade.
Investors fearing geopolitical catastrophe might cope to some degree by raising their consumption spending.
But there is a limit to this option.
Those who fear geopolitical catastrophe will sell assets, putting downward pressure on their value, only if there are other, safer assets that they see that they can buy.
As Harvard’s Robert Barro has recently pointed out, fear of a general or unpredictable catastrophe – even one that spares a subset of assets that cannot be specified in advance – will not affect relative asset prices, because investors have no motive to sell or buy any particular asset.
According to Barro, the consequences of enhanced fear of a general or unpredictable catastrophe depend on how it affects the global pool of savings.
Fear as much as institutional blockages may be the source of what is either a global savings glut or a global investment shortfall, depending on how you view it.
If people are risk-averse enough that increased fear of the future causes them to save more, rising global uncertainty will raise bond and stock prices, and lower interest rates and dividend and earnings yields.
Creating new assets for investors to hold costs resources, and the greater the demand for such assets the higher the marginal cost of creating them.
This may be the situation that the world financial system is in now.
The principal fear, at least in the circles in which I move, is of a sudden unwinding of “global imbalances”: a rapid and destabilizing end to America’s very large trade deficit and to Asia’s very large trade surplus.
In such a global financial crisis, if the Federal Reserve accommodates inflation and accelerates devaluation in order to prevent collapsing employment in formerly foreign capital-financed sectors from spiraling into a depression, American debt will be among the worst affected assets?
But if the Fed refuses to accommodate inflation produced by a dollar collapse and accepts a depression in the belief that the long-run benefits of maintaining its credibility as a guarantor of price stability will come before we are all dead, American equities will suffer.
Chinese property values and manufacturing assets would also be vulnerable, as the US abandons its role as importer of last resort and China’s coastal-export development strategy turns out to be a dead end.
Don’t get me wrong: somewhat more than half my brain agrees with Rubin, Summers, Wolf, and company.
The principal risk I see today is that being borne by investors in dollar-denominated debt – and I don’t believe they are charging a fair price for what they are doing.
But a quarter of my brain wonders how investors should attempt to insure against the lowest tail of the economic-political distribution, and that quarter of my brain cannot see which way somebody hoping to insure against that risk should jump.
Fear of Finance
Fear of finance is on the march.
Distrust of highly paid people who work behind computer screens doing something that doesn’t look like productive work is everywhere.
Paper shufflers are doing better than producers; speculators are doing better than managers; traders are doing better than entrepreneurs; arbitrageurs are doing better than accumulators; the clever are doing better than the solid; and behind all of it, the financial market is more powerful than the state.
Common opinion suggests that this state of affairs is unjust.
As Franklin D. Roosevelt put it, we must cast down the “money changers” from their “high seats in the temple of our civilization.”
We must “restore the ancient truths” that growing, making, managing, and inventing things should have higher status, more honor, and greater rewards than whatever it is that financiers do.
Of course, there is a lot to fear in modern global finance.
Its scale is staggering: more than $4 trillion of mergers and acquisitions this year, with tradable and (theoretically) liquid financial assets reaching perhaps $160 trillion by the end of this year, all in a world where annual global GDP is perhaps $50 trillion.
The McKinsey Global Institute recently estimated that world financial assets today are more than three times world GDP – triple the ratio in 1980 (and up from only two-thirds of world GDP after World War II).
And then there are the numbers that sound very large and are hard to interpret: $300 trillion in “derivative” securities; $3 trillion managed by 12,000 global “hedge funds”; $1.2 trillion a year in “private equity.”
But important things are created in our modern global financial system, both positive and negative.
Consider the $4 trillion of mergers and acquisitions this year, as companies acquire and spin off branches and divisions in the hope of gaining synergies or market power or better management.
Owners who sell these assets will gain roughly $800 billion relative to the pre-merger value of their assets.
The shareholders of the companies that buy will lose roughly $300 billion in market value, as markets interpret the acquisition as a signal that managers are exuberant and uncontrolled empire-builders rather than flinty-eyed trustees maximizing payouts to investors.
This $300 billion is a tax that shareholders of growing companies think is worth paying (or perhaps cannot find a way to avoid paying) for energetic corporate executives.
Where does the net gain of roughly $500 billion in global market value come from?
We don’t know.
Some of it is a destructive transfer from consumers to shareholders as corporations gain more monopoly power, some of it is an improvement in efficiency from better management and more appropriately scaled operations, and some of it is overpayment by those who become irrationally exuberant when companies get their names in the news.
If each of these factors accounts for one-third of the net gain, several conclusions follow. First, once we look outside transfers within the financial sector, the total global effects of this chunk of finance is a gain of perhaps $340 billion in increased real shareholder value from higher expected future profits.
A loss of $170 billion can be attributed to future real wages, for households will find themselves paying higher margins to companies with more market power.
The net gain is thus $170 billion of added social value in 2007, which is 0.3% of world GDP, equal to the average product of seven million workers.
In one sense, we should be grateful for our hard-working M&amp;A technicians, well-paid as they are: it is important that businesses with lousy managements or that operate inefficiently be under pressure from those who may do better, and can raise the money to attempt to do so.
We cannot rely on shareholder democracy as our only system of corporate control.
The second conclusion is that the gross gains – fees, trading profits, and capital gains to the winners (perhaps $800 billion from this year’s M&amp;A’s) – greatly exceed the perhaps $170 billion in net gains.
Governments have a very important educational, admonitory, and regulatory role to play: people should know the risks and probabilities, for they may wind up among losers of the other $630 billion.
So far there is little sign that they do.
Finally, finance has long had an interest in stable monopolies and oligopolies with high profit margins, while the public has an interest in competitive markets with low margins.
The more skeptical you are of the ability of government-run antitrust policy to offset the monopoly power-increasing effects of M&amp;A’s, the more you should seek other sources of countervailing power – which means progressive income taxation – to offset any upward leap in income inequality.
Eighteenth-century physiocrats believed that only the farmer was productive, and that everyone else was somehow cheating the farmers out of their fair share.
Twentieth-century Marxists thought the same thing about factory workers.
Both were wrong.
Let us regulate our financial markets so that outsiders who invest are not sheared.
But let us not make the mistake of fearing finance too much.
Eurozone Budgets Under the Spotlight
DUBLIN – Bond markets are notoriously fickle, often driven by sentiment rather than rigorous macroeconomic analysis, and, as the 2008 global financial crisis demonstrated, they are far from infallible.
They can also be particularly unreliable when assessing an economy’s long-term prospects.
Though interest rates across the European Union are at historic lows, government debt in the eurozone could come under severe pressure should bond markets re-evaluate the riskiness of sovereign borrowers.
That is a consideration that should weigh heavily on indebted governments as they submit their budgets for scrutiny to the European Commission.
It is not just bond traders who can be swayed by irrational exuberance (or its opposite).
The verdicts of rating agencies on asset quality can also be flawed.
Too often, the raters seem content to follow rather than lead sentiment.
Like the proverbial bus driver fixated on what is happening in his rear view mirror rather than watching what is in front of him, too many bond analysts focus on historical economic data as the key determinant of future performance.
It is against this background that the budget plans submitted by eurozone governments on October 15 will have to be assessed.
This requirement of the eurozone’s Stability and Growth Pact, specified by Article 126 of the Treaty on the Functioning of the European Union, applies to member states that fail to meet their commitments to bring their budget deficits below 3% of GDP.
The main source of concern is that the low interest rates at which most European governments can currently borrow are not likely to last.
There are two reasons for this.
First, sovereign bonds held by banks are treated as risk-free assets under EU rules for calculating banks’ solvency and capital-adequacy levels.
This is a risky assumption, because it implies that no European government will ever fail to repay the bond in full, with all interest due, and on time.
But the debt levels of some European countries relative to their income raise serious questions about whether their bonds really are risk-free. And, assuming that there is no surge in inflation or economic growth, the danger of default cannot be so easily dismissed.
Second, with low interest rates causing vast sums of money to chase so few opportunities for decent yields, it is understandable that investors have turned to government bonds, thereby driving down yields still further.
But this situation cannot last forever; if the flow of funds slows, or alternative, higher-yielding assets become available, demand for government bonds could drop markedly.
At that point, interest rates on sovereign debt would have to rise to sustain governments’ borrowing levels.
This is not a far-fetched scenario, and its realization would play havoc with the budgets of many indebted eurozone member states.
Therefore, in assessing member states’ draft budgets, governments and the Commission would be foolish to assume that low interest rates on government bonds will be around for the foreseeable future.
If investors do decide that government bond yields are no longer worth the investment, sovereign borrowers’ options may be limited.
They might be able to defy the European Commission, but they would be hard-pressed to resist the views of the bond markets.
After all, the world’s financial centers are not only susceptible to bouts of irrationality; they are also less likely to be swayed by the sort of political rhetoric that might find some sympathy within the Commission or among ministerial colleagues in the EU Council.
Moreover, the market’s change of heart can occur very quickly and without warning, giving governments little if any time to make the necessary fiscal adjustments.
But that is less likely to happen if the EU system for coordinating the 18 eurozone members’ budget policies (the so-called Two Pack and Six Pack) is seen to be respected – especially by the larger countries, such as France and Italy.
On the other hand, if the system is defied, or reinterpreted in a way that alters its intended meaning, bond markets could once again become nervous. Ireland knows better than most countries the difficulties that can arise from having to borrow to fund services or repay maturing debts.
The Great Policy Divergence
WASHINGTON, DC – Over the next few weeks, the US Federal Reserve and the European Central Bank are likely to put in place notably different policies.
The Fed is set to raise interest rates for the first time in almost ten years.
Meanwhile, the ECB is expected to introduce additional unconventional measures to drive rates in the opposite direction, even if that means putting further downward pressure on some government bonds that are already trading at negative nominal yields.
In implementing these policies, both central banks are pursuing domestic objectives mandated by their governing legislation.
The problem is that there may be few, if any, orderly mechanisms to manage the international repercussions of this growing divergence.
The Fed is responding to continued indications of robust job creation in the United States and other signs that the country’s economy is recovering, albeit moderately so.
Also conscious of the risk to financial stability if interest rates remain at artificially low levels, the Fed is expected to increase them when its policy-setting Federal Open Market Committee meets on December 15-16.
The move marks a turning point in the Fed’s approach to the economy.
In deciding to raise interest rates, it will be doing more than simply lifting its foot from the financial-stimulus accelerator; it will also be taking a notable step toward the multiyear normalization of its overall policy stance.
In the meantime, the ECB is facing a very different set of economic conditions, including generally sluggish growth, the risk of deflation, and worries about the impact of the terrorist attacks in Paris on business and consumer confidence.
As a result, the bank’s decision-makers are giving serious consideration to pushing the discount rate further into negative territory and extending its large-scale asset-purchase program (otherwise known as quantitative easing).
In other words, the ECB is likely to expand and extend experimental measures that will press even harder on the financial-stimulus accelerator.
In a perfect world, policymakers would have assessed the potential for international spillovers from these divergent policies (including possible spillbacks on both sides of the Atlantic) and put in place a range of instruments to ensure a better alignment of domestic and global objectives.
Unfortunately, political polarization and general policy dysfunction in both the US and the European Union continue to inhibit such an effort.
As a result, lacking a more comprehensive policy response, the harmonization of their central banks’ divergent policies will be left to the markets – in particular, those for fixed-income assets and currencies.
Already, the interest-rate differential between “risk-free” bonds on both sides of the Atlantic – say, US Treasuries and German Bunds – has widened notably.
And, at the same time, the dollar has strengthened not only against the euro, but also against most other currencies.
Left unchecked, these trends are likely to persist.
If history is any guide, there are three major issues that warrant careful monitoring in the coming months.
First, the US is unlikely to stand by for long if its currency appreciates significantly and its international competitiveness deteriorates substantially.
Companies are already reporting earning pressures due to the rising dollar, and some are even asking their governments to play a more forceful role in countering a stealth “currency war.”
Second, because the dollar is used as a reserve currency, a rapid rise in its value could put pressure on those who have used it imprudently.
At particular risk are emerging-country companies that, having borrowed overwhelmingly in dollars but generating only limited dollar earnings, might have large currency mismatches in their assets and liabilities or their incomes and expenditures.
And, finally, sharp movements in interest rates and exchange rates can cause volatility in other markets, most notably for equities.
Because regulatory controls and market constraints have made brokers less able to play a countercyclical role by accumulating inventory on their balance sheets, the resulting price instability is likely to be large.
There is a risk that some portfolios will be forced into disordered unwinding.
Furthermore, the central banks’ policy of curtailing so-called “volatile volatility” is likely to be challenged.
Of course, none of these outcomes is preordained.
Politicians on both sides of the Atlantic have the ability to lower the risk of instability by implementing structural reforms, ensuring more balanced aggregate demand, removing pockets of excessive indebtedness, and smoothing out the mechanisms of multilateral and regional governance.
The three possible outcomes of all this include a relatively stable multi-speed world, notable disruptions that undermine the US’s economic recovery, and a European revival that benefits from US growth.
The good news is that the impact of the divergence will depend on how policymakers manage its pressures.
The bad news is that they have yet to find the political will to act decisively to minimize the risks.
As the Fed normalizes its monetary policy and the ECB doubles down on extraordinary measures, we certainly should hope for the best.
But we should also be planning for a substantial rise in financial and economic uncertainty.
Why the Fed Buried Monetarism
LONDON – The US Federal Reserve’s decision to delay an increase in interest rates should have come as no surprise to anyone who has been paying attention to Fed Chair Janet Yellen’s comments.
The Fed’s decision merely confirmed that it is not indifferent to international financial stress, and that its risk-management approach remains strongly biased in favor of “lower for longer.”
So why did the markets and media behave as if the Fed’s action (or, more precisely, inaction) was unexpected?
What really shocked the markets was not the Fed’s decision to maintain zero interest rates for a few more months, but the statement that accompanied it.
The Fed revealed that it was entirely unconcerned about the risks of higher inflation and was eager to push unemployment below what most economists regard as its “natural” rate of around 5%.
It is this relationship – between inflation and unemployment – that lies at the heart of all controversies about monetary policy and central banking.
And almost all modern economic models, including those used by the Fed, are based on the monetarist theory of interest rates pioneered by Milton Friedman in his 1967 presidential address to the American Economic Association.
Friedman’s theory asserted that inflation would automatically accelerate without limit once unemployment fell below a minimum safe level, which he described as the “natural” unemployment rate.
In Friedman’s original work, the natural unemployment rate was a purely theoretical conjecture, founded on an assumption described as “rational expectations,” even though it ran counter to any normal definition of rational behavior.
The theory’s publication at a time of worldwide alarm about double-digit inflation offered central bankers exactly the pretext they needed for desperately unpopular actions.
By dramatically increasing interest rates to fight inflation, policymakers broke the power of organized labor, while avoiding blame for the mass unemployment that monetary austerity was bound to produce.
A few years later, Friedman’s “natural” rate was replaced with the less value-laden and more erudite-sounding “non-accelerating inflation rate of unemployment” (NAIRU).
But the basic idea was always the same. If monetary policy is used to try to push unemployment below some pre-determined level, inflation will accelerate without limit and destroy jobs.
A monetary policy aiming for sub-NAIRU unemployment must therefore be avoided at all costs.
A more extreme version of the theory asserts that there is no lasting tradeoff between inflation and unemployment.
All efforts to stimulate job creation or economic growth with easy money will merely boost price growth, offsetting any effect on unemployment.
Monetary policy must therefore focus solely on hitting inflation targets, and central bankers should be exonerated of any blame for unemployment.
The monetarist theory that justified narrowing central banks’ responsibilities to inflation targeting had very little empirical backing when Friedman proposed it.
Since then, it has been refuted both by political experience and statistical testing.
Monetary policy, far from being dissipated in rising prices, as the theory predicted, turned out to have a much greater impact on unemployment than on inflation, especially in the past 20 years.
But, despite empirical refutation, the ideological attractiveness of monetarism, supported by the supposed authority of “rational” expectations, proved overwhelming.
As a result, the purely inflation-oriented approach to monetary policy gained total dominance in both central banking and academic economics.
That brings us back to recent financial events.
The inflation-targeting models used by the Fed (and other central banks and official institutions like the International Monetary Fund) all assume the existence of some pre-determined limit to non-inflationary unemployment.
The Fed’s latest model estimates this NAIRU to be 4.9-5.2%.
And that is why so many economists and market participants were shocked by Yellen’s apparent complacency.
With US unemployment now at 5.1%, standard monetary theory dictates that interest rates must be raised urgently.
Otherwise, either a disastrous inflationary blowout will inevitably follow, or the body of economic theory that has dominated a generation of policy and academic thinking since Friedman’s paper on “rational” expectations and “natural” unemployment will turn out to be completely wrong.
What, then, should we conclude from the Fed’s decision not to raise interest rates?
One possible conclusion is banal.
Because the NAIRU is a purely theoretical construct, the Fed’s economists can simply change their estimates of this magic number.
In fact, the Fed has already cut its NAIRU estimate three times in the past two years.
But there may be a deeper reason for the Fed’s forbearance.
To judge by Yellen’s recent speeches, the Fed may no longer believe in any version of the “natural” unemployment rate.
Friedman’s assumptions of ever-accelerating inflation and irrationally “rational” expectations that lead to single-minded targeting of price stability remain embedded in official economic models like some Biblical creation myth.
But the Fed, along with almost all other central banks, appears to have lost faith in that story.
Instead, central bankers now seem to be implicitly (and perhaps even unconsciously) returning to pre-monetarist views: tradeoffs between inflation and unemployment are real and can last for many years.
Monetary policy should gradually recalibrate the balance between these two economic indicators as the business cycle proceeds.
When inflation is low, the top priority should be to reduce unemployment to the lowest possible level; and there is no compelling reason for monetary policy to restrain job creation or GDP growth until excessive inflation becomes an imminent danger.
This does not imply permanent near-zero US interest rates.
The Fed will almost certainly start raising rates in December, but monetary tightening will be much slower than in previous economic cycles, and it will be motivated by concerns about financial stability, not inflation.
As a result, fears – bordering on panic in some emerging markets – about the impact of Fed tightening on global economic conditions will probably prove unjustified.
The bad news is that the vast majority of market analysts, still clinging to the old monetarist framework, will accuse the Fed of “falling behind the curve” by letting US unemployment decline too far and failing to anticipate the threat of rising inflation.
The Fed should simply ignore such atavistic protests, as it rightly did last week.
The Fed’s Communication Breakdown
CAMBRIDGE – Nothing describes the United States Federal Reserve’s current communication policy better than the old saying that a camel is a horse designed by committee.
Various members of the Fed’s policy-setting Federal Open Markets Committee (FOMC) have called the decision to keep the base rate unchanged “data-dependent.”
That sounds helpful until you realize that each of them seems to have a different interpretation of “data-dependent,” to the point that its meaning seems to be “gut personal instinct.”
In other words, the Fed’s communication strategy is a mess, and cleaning it up is far more important than the exact timing of the FOMC’s decision to exit near-zero interest rates.
After all, even after the Fed does finally make the “gigantic” leap from an effective federal funds rate of 0.13% (where it is now) to 0.25% (where is likely headed soon), the market will still want to know what the strategy is after that.
And I fear that we will continue to have no idea.
To be fair, deciding what to do is a very tough call, and economists are deeply divided on the matter.
The International Monetary Fund has weighed in forcefully, calling on the Fed to wait longer before raising rates.
And yet central bankers in the very emerging markets that the IMF is supposedly protecting have been sending an equally forceful message: Get on with it; the uncertainty is killing us.
Personally, I would probably err on the side of waiting longer and accept the very high risk that, when inflation does rise, it will do so briskly, requiring a steeper path of interest-rate hikes later.
But if the Fed goes that route, it needs to say clearly that it is deliberately risking an inflation overshoot.
The case for waiting is that we really have no idea of what the equilibrium real (inflation-adjusted) policy interest rate is right now, and as such, need a clear signal on price growth before moving.
But only a foaming polemicist would deny that there is also a case for hiking rates sooner, as long as the Fed doesn’t throw random noise into the market by continuing to send spectacularly mixed signals about its beliefs and objectives.
After all, the US economy is at or near full employment, and domestic demand is growing solidly.
While the Fed tries to look past transitory fluctuations in commodity prices, it will be hard to ignore rising consumer inflation as the huge drop of the past year – particularly in energy prices – stabilizes or even reverses.
Indeed, any standard decision rule used by central banks by now dictates that a hike is long overdue.
But let’s not make the basic mistake of equating “higher interest rate” with “high interest.”
To say that 0.25%, or even 1%, is high in this environment is pure hyperbole.
And while one shouldn’t overstate the risks of sustained ultra-low rates to financial stability, it is also wrong to dismiss them entirely.
With the decision about raising rates such a close call, one would think that the Fed would be inclined to do it this year, given that the chair and vice chair have pretty much told the market for months that this will happen.
The real reason for not hiking by the end of the year is public relations.
Let’s suppose the Fed raises interest rates to 0.25 basis points at its December meeting, trying its best to send a soothing message to markets.
The most likely outcome is that all will be fine, and the Fed doesn’t really care if a modest equity-price correction ensues.
No, the real risk is that, if the Fed starts hiking, it will be blamed for absolutely every bad thing that happens in the economy for the next six months to a year, which will happen to coincide with the heart of a US presidential election campaign.
One small hike and the Fed owns every bad outcome, no matter what the real cause.
The Fed of course understands that pretty much everyone dislikes interest-rate hikes and almost always likes rate cuts.
Any central banker will tell you that he or she gets 99 requests for interest-rate cuts for every request for a hike, almost regardless of the situation.
The best defense against these pressures is to operate according to utterly unambiguous criteria.
Instead, however good its intentions, the net effect of too much Fed speak has been vagueness and uncertainty.
So what should the Fed do?
My choice would be to have it explain the case for waiting more forthrightly: “Getting off the zero bound is hard, we want to see inflation over 3% to be absolutely sure, and then we will move with reasonable speed to normalize.”
But I also could live with, “We are worried that if we wait too long, we will have to tighten too hard and too fast.”
Throwing out the rulebook made sense in the aftermath of the 2008 financial crisis.
It doesn’t anymore.
And today’s lack of clarity has become a major contributor to market volatility – the last place the Fed should want to be.
It’s wrong to vilify the Fed for hiking, and it’s wrong to vilify it for not hiking; if it is such a close call, it probably doesn’t matter so much.
But, at this critical point, it is fair to ask the Fed for a much clearer message about what its strategy is, and what this implies for the future.
If Fed Chair Janet Yellen has to assert her will over the FOMC for a while, so be it.
Somebody on the committee has to lead the camel to water.
The Federal Reserve’s Escape from New York
WASHINGTON, DC – The US Federal Reserve System is the world’s most important central bank.
Its decisions about interest rates and financial regulation reverberate through global markets and affect millions of lives.
Yet its governance structure is of another age – antiquated, increasingly problematic, and urgently in need of sensible reform.
The Fed made major mistakes in the run-up to the global economic crisis of 2007-08, most notably by adopting a lax approach to the supervision of key financial institutions, and by allowing some very large banks to become extremely fragile.
In one of the great ironies of modern American politics, the post-crisis Dodd-Frank financial reforms of 2010 actually gave more power to the Fed, mostly because other US regulatory agencies were regarded as having done a worse job.
In view of the Fed’s decidedly mixed track record since the Dodd-Frank reforms, some officials evidently regarded that default by Congress as a mandate to conduct business as usual.
Recent press reports have highlighted lapses in supervision, particularly in and around the Federal Reserve Bank of New York – one of 12 regional banks in the Fed System, which also has a Board of Governors in Washington, DC.
This regional structure is the result of legislative compromise in 1913, when the Fed was created, and again in the mid-1930s, when its governance was last overhauled.
Whereas members of the Fed’s Washington-based Board of Governors are nominated by the US president, subject to Senate confirmation, the presidents of the regional Federal Reserve banks are appointed by local boards.
In reality, the New York Fed has always had disproportionate sway; not all regional Fed presidents are created equal.
The president of the New York Fed is a permanent voting member and vice chairman of the Federal Open Market Committee, which sets interest rates, whereas other regional Fed presidents are voting members only on a rotating basis.
The New York Fed also has a particularly important role in bank supervision – most of America’s “too big to fail” banks are located in its jurisdiction (and most global banks have a presence there).
And the New York Fed has long been the Fed System’s eyes and ears on Wall Street.
Or perhaps it has become the other way around.
At least over the past decade, senior New York Fed officials have consistently sided with the interests of very large banks.
(To be clear, I also know many Fed officials who are outstanding public servants).
Though Wall Street interests have long been well represented on the board of the New York Fed, under Timothy Geithner, its president from 2003 to 2009, the big players became even more powerful – with some rather unfortunate consequences for the rest of us.
In his recent memoir, Stress Test, Geithner says, “I basically restored the New York Fed board to its historic roots as an elite roster of the local financial establishment.” His choices included Dick Fuld, CEO of Lehman Brothers, which failed spectacularly in September 2008, and Stephen Friedman, a Goldman Sachs board member, who resigned as chair of the New York Fed’s board after being accused of inappropriately trading Goldman stock during the financial crisis.
Geithner also established a tangled web of connections between the New York Fed and JPMorgan Chase, some of which linger to this day.
Some senior Fed officials become angry when pressed about this reality.
But the Fed’s legitimacy – and its ability to make sensible policy – is not boosted by having major banks represented, directly or indirectly, on a board that chooses and oversees a key policymaker.
Now, finally, US politicians on both the left and the right are focusing their attention on a long-overdue reform of the Fed’s governance.
One important proposal comes from Senator Jack Reed, a Democrat from Rhode Island, who proposes, quite reasonably, that the president of the New York Fed should be nominated by the president and confirmed by the Senate, just like members of the Board of Governors – or any other important economic policymaker.
The president of the New York Fed would also be required to testify before Congress on a regular basis.
The Fed’s defenders will respond that it would be dangerous to alter the status quo.
But it is the Fed’s current governance that has become dangerous.
Senators Elizabeth Warren of Massachusetts and Joe Manchin of West Virginia argue, entirely convincingly, that the composition of the Fed’s Board of Governors should be tilted away from people who are connected with big Wall Street firms.
Meanwhile, House Republicans are preparing their own Fed governance reforms, which would be even more radical – and would likely constrain monetary policy unwisely.
In any case, it is time for change at the Fed.
And, as is often the case with finance, the place to start is New York.
The Fed Versus Price Stability
SAN FRANCISCO – There is a big difference between the Federal Reserve’s mandate to maintain “stable prices” – as enunciated in the Federal Reserve Act – and the Fed’s self-selected target of 2% annual inflation.
So how is it that policymakers have managed to substitute the latter for the former?
The term “stable prices” is self-explanatory: a bundle of goods will cost the same ten, 50, or even 100 years from now.
By contrast, if a country experiences 2% inflation over a ten-year period, the same items that $100 can buy today will cost $122 at the end of the decade.
After 100 years, the price tag will be a whopping $724.
In her recent Congressional testimony, Fed Chair Janet Yellen referred several times to the mandate of maintaining “stable prices”; but she mentioned the Fed’s 2% inflation objective twice as often.
“US inflation continues to run below the Committee’s 2% objective,” she said, and the current “high degree of policy accommodation remains appropriate to foster further improvement in labor market conditions and to promote a return of inflation toward 2% over the medium term.”
Does the Fed really want to increase annual inflation to 2%, such that the price level of the country will increase by more than 700% over the next century?
Is that what Congress had in mind when it tasked the Fed with achieving “stable prices”?
Former Fed Chairman Alan Greenspan knew that it did not.
On July 2, 1996, at a meeting of the Federal Open Market Committee (FOMC), which was devoted to extensive discussion of the appropriate inflation target for the Fed, Greenspan posed a simple question: “Are we talking about price stability or are we talking about zero inflation?” he asked.
“As we all know, those are two separate things.”
The discussion quickly turned to the difficulty of measuring inflation accurately and the need to build in a “safety cushion” to avoid deflation.
According to Greenspan, “Price stability is that state in which expected changes in the general price level do not effectively alter business and household decisions.”
Yellen, then a Fed governor, was not satisfied: “Could you please put a number on that?” she asked.
Greenspan did: “I would say that number is zero, if inflation is properly measured,” he replied.
At the time of that FOMC meeting, the consumer price index was increasing at about 3% per year.
Most of the discussion focused on whether the Fed should slow annual price growth to 2% or even lower, thereby consolidating the gains made in the difficult fight against inflation that policymakers had waged for the previous 15 years.
Greenspan summarized the consensus: “...we have now all agreed on 2%...”
Thus, the Fed’s 2% inflation objective was born.
During the ensuing discussion, several FOMC members argued that the inflation rate might be reduced to less than 2%, but nobody argued that inflation should be pushed higher if a lower, but still positive, rate was achieved.
Following the discussion, Greenspan exhorted the FOMC members to keep the discussion of the inflation target secret.
“I will tell you that if the 2% inflation figure gets out of this room,” he warned, “it is going to create more problems for us than I think any of you might anticipate.”
The official minutes of the meeting make no reference to the entire discussion of the inflation target, which took up several hours, and the FOMC never formally announced its 2% target for annual inflation until Chairman Ben Bernanke, Yellen’s predecessor, finally did so in 2012.
The 2% inflation target now is at the forefront of FOMC decision-making.
For example, while annual inflation stood at 0.8% in December 2014, the minutes of the January 2015 FOMC meeting refer several times to the Committee’s need to make “progress toward its objectives of maximum employment and 2% inflation” by maintaining a highly accommodative policy stance.
Increasing the rate of inflation is now the stated objective of Fed policy.
Congress did not give the Fed a mandate to pursue that goal.
The Federal Reserve Act is explicit: the Fed should achieve “price stability” for the US currency, along with moderate interest rates and maximum employment.
As long as inflation is somewhere between zero and 2%, the Fed should declare victory and leave it at that.
The Wrong War for Central Banking
BEIJING – Fixated on inflation targeting in a world without inflation, central banks have lost their way.
With benchmark interest rates stuck at the dreaded zero bound, monetary policy has been transformed from an agent of price stability into an engine of financial instability.
A new approach is desperately needed.
The US Federal Reserve exemplifies this policy dilemma.
After the Federal Open Market Committee decided in September to defer yet again the start of its long-awaited normalization of monetary policy, its inflation doves are openly campaigning for another delay.
For the inflation-targeting purists, the argument seems impeccable.
The headline consumer-price index (CPI) is near zero, and “core” or underlying inflation – the Fed’s favorite indicator – remains significantly below the seemingly sacrosanct 2% target.
With a long-anemic recovery looking shaky again, the doves contend that there is no reason to rush ahead with interest-rate hikes.
Of course, there is more to it than that.
Because monetary policy operates with lags, central banks must avoid fixating on the here and now, and instead use imperfect forecasts to anticipate the future effects of their decisions.
In the Fed’s case, the presumption that the US will soon approach full employment has caused the so-called dual mandate to collapse into one target: getting inflation back to 2%.
Here, the Fed is making a fatal mistake, as it relies heavily on a timeworn inflation-forecasting methodology that filters out the “special factors” driving the often volatile prices of goods like food and energy.
The logic is that the price fluctuations will eventually subside, and headline price indicators will converge on the core rate of inflation.
This approach failed spectacularly when it was adopted in the 1970s, causing the Fed to underestimate virulent inflation.
And it is failing today, leading the Fed consistently to overestimate underlying inflation.
Indeed, with oil prices having plunged by 50% over the past year, the Fed stubbornly maintains that faster price growth – and the precious inflation rate of 2% – is just around the corner.
Missing from this logic is an appreciation of the new and powerful global forces that are bearing down on inflation.
According to the International Monetary Fund’s latest outlook, the price deflator for all advanced economies should increase by just 1.5% annually, on average, from now to 2020 – not much higher than the crisis-depressed 1.1% pace of the last six years.
Moreover, most wholesale prices around the world remain in outright deflation.
But, rather than recognize the likely drivers of these developments – namely, a seemingly chronic shortfall of global aggregate demand amid a supply glut and a deflationary profusion of technological innovations and new supply chains – the Fed continues to minimize the deflationary impact of global forces.
It would rather attribute low inflation to successful inflation targeting, and the Great Moderation that it presumably spawned.
This prideful interpretation amounted to the siren song of an extremely accommodative monetary policy.
Unable to disentangle the global and domestic pressures suppressing inflation, a price-targeting Fed has erred consistently on the side of easy money.
This is apparent in the fact that, over the last 15 years, the real federal funds rate – the Fed’s benchmark policy rate, adjusted for inflation – has been in negative territory more than 60% of the time, averaging -0.6% since May 2001.
From 1990 to 2000, by contrast, the real federal funds rate averaged 2.2%.
In short, over the last decade and a half, the Fed has gone well beyond a powerful disinflation in setting its policy interest rate.
The consequences have been problematic, to say the least.
Over the same 15-year period, financial markets have become unhinged, with a profusion of asset and credit bubbles leading to a series of crises that almost pushed the world economy into the abyss in 2008-2009.
But rather than recognize, let alone respond to, pre-crisis excesses, the Fed has remained agnostic about them, pointing out that bubble-spotting is, at best, an imperfect science.
That is hardly a convincing reason for central banks to remain fixated on inflation targeting.
Not only have they failed repeatedly to get the inflation forecast right; they now risk fueling renewed financial instability and sparking another crisis.
Just as a few of us warned of impending crisis in the 2003-2006 period, some – including the Bank of International Settlements and the IMF– are sounding the alarm today, but to no avail.
To be sure, inflation targeting was once essential to limit runaway price growth.
In today’s inflationless world, however, it is counterproductive.
Yet the inflation targeters who dominate today’s major central banks insist on fighting yesterday’s war.
In this sense, modern central bankers resemble the British army in the Battle of Singapore in 1942.
Convinced that the Japanese would attack from the sea, the British defenses were encased in impenetrable concrete bunkers, with fixed artillery that could fire only to the south.
So when the Japanese emerged from the jungle and mangrove swamps of the Malay Peninsula in the north, the British were powerless to stop them.
Singapore quickly fell, in what is widely considered Prime Minister Winston Churchill’s most ignominious military defeat.
Central bankers, like the British army in Singapore, are aiming their weapons in the wrong direction.
It is time for them to turn their policy arsenal toward today’s enemy: financial instability.
On that basis alone, the case for monetary-policy normalization has never been more compelling.
Emerging Markets After the Fed Hikes Rates
NEW YORK – The prospect that the US Federal Reserve will start exiting zero policy rates later this year has fueled growing fear of renewed volatility in emerging economies’ currency, bond, and stock markets. The concern is understandable: When the Fed signaled in 2013 that the end of its quantitative-easing (QE) policy was forthcoming, the resulting “taper tantrum” sent shock waves through many emerging countries’ financial markets and economies.
Indeed, rising interest rates in the United States and the ensuing likely rise in the value of the dollar could, it is feared, wreak havoc among emerging markets’ governments, financial institutions, corporations, and even households.
Because all have borrowed trillions of dollars in the last few years, they will now face an increase in the real local-currency value of these debts, while rising US rates will push emerging markets’ domestic interest rates higher, thus increasing debt-service costs further.
But, although the prospect of the Fed raising interest rates is likely to create significant turbulence in emerging countries’ financial markets, the risk of outright crises and distress is more limited.
For starters, whereas the 2013 taper tantrum caught markets by surprise, the Fed’s intention to hike rates this year, clearly stated over many months, will not.
Moreover, the Fed is likely to start raising rates later and more slowly than in previous cycles, responding gradually to signs that US economic growth is robust enough to sustain higher borrowing costs.
This stronger growth will benefit emerging markets that export goods and services to the US.
Another reason not to panic is that, compared to 2013, when policy rates were low in many fragile emerging economies, central banks already have tightened their monetary policy significantly.
With policy rates at or close to double-digit levels in many of those economies, the authorities are not behind the curve the way they were in 2013.
Loose fiscal and credit policies have been tightened as well, reducing large current-account and fiscal deficits.
And, compared to 2013, when currencies, equities, commodity, and bond prices were too high, a correction has already occurred in most emerging markets, limiting the need for further major adjustment when the Fed moves.
Above all, most emerging markets are financially more sound today than they were a decade or two ago, when financial fragilities led to currency, banking, and sovereign-debt crises.
Most now have flexible exchange rates, which leave them less vulnerable to a disruptive collapse of currency pegs, as well as ample reserves to shield them against a run on their currencies, government debt, and bank deposits.
Most also have a relatively smaller share of dollar debt relative to local-currency debt than they did a decade ago, which will limit the increase in their debt burden when the currency depreciates.
Their financial systems are typically more sound as well, with more capital and liquidity than when they experienced banking crises.
And, with a few exceptions, most do not suffer from solvency problems; although private and public debts have been rising rapidly in recent years, they have done so from relatively low levels.
In fact, serious financial problems in several emerging economies – particularly oil and commodity producers exposed to the slowdown in China – are unrelated to what the Fed does.
Brazil, which will experience recession and high inflation this year, complained when the Fed launched QE and then when it stopped QE.
Its problems are mostly self-inflicted – the result of loose monetary, fiscal, and credit policies, all of which must now be tightened, during President Dilma Roussef’s first administration.
Russia’s troubles, too, do not reflect the impact of Fed policies.
Its economy is suffering as a result of the fall in oil prices and international sanctions imposed following its invasion of Ukraine – a war that will now force Ukraine to restructure its foreign debt, which the war, severe recession, and currency depreciation have rendered unsustainable.
Likewise, Venezuela was running large fiscal deficits and tolerating high inflation even when oil prices were above $100 a barrel; at current prices, it may have to default on its public debt, unless China decides to bail out the country.
Similarly, some of the economic and financial stresses faced by South Africa, Argentina, and Turkey are the result of poor policies and domestic political uncertainties, not Fed action.
In short, the Fed’s exit from zero policy rates will cause serious problems for those emerging market economies that have large internal and external borrowing needs, large stocks of dollar-denominated debt, and macroeconomic and policy fragilities.
China’s economic slowdown, together with the end of the commodity super-cycle, will create additional headwinds for emerging economies, most of which have not implemented the structural reforms needed to boost their potential growth.
But, again, these problems are self-inflicted, and many emerging economies do have stronger macro and structural fundamentals, which will give them greater resilience when the Fed starts hiking rates.
When it does, some will suffer more than others; but, with a few exceptions lacking systemic importance, widespread distress and crises need not occur.
The Fed’s Dollar Distraction
CAMBRIDGE – In its September policy statement, the US Federal Reserve took into consideration – in a major way – the impact of global economic developments on the United States, and thus on US monetary policy.
Indeed, the Fed decided to delay raising interest rates partly because US policymakers expect dollar appreciation, by lowering import prices, to undermine their ability to meet their 2% inflation target.
In reality, while currency movements can have a significant impact on inflation in other countries, dollar movements have rarely had a meaningful or durable impact on prices in the US.
The difference, of course, lies in the US dollar’s dominant role in the invoicing of international trade: prices are set in dollars.
Just as the dollar is often the unit of account in debt contracts, even when neither the borrower nor the lender is a US entity, the dollar’s share in invoicing for international trade is around 4.5 times America’s share of world imports, and three times its share of world exports.
The prices of some 93% of US imports are set in dollars.
In this environment, the pass-through of dollar movements into non-fuel US import prices is one of the lowest in the world, in both the short term (one quarter out) and the longer term (two years out), for three key reasons.
First, international trade contracts are renegotiated infrequently, which means that dollar prices are “sticky” for an extended period – around ten months – despite fluctuations in the exchange rate.
Second, because most exporters also import intermediate inputs that are priced in dollars, exchange-rate fluctuations have a limited impact on their costs and thus on their incentive to change dollar prices.
And, third, exporters who wish to preserve their share in world markets – where prices are largely denominated in dollars – choose to keep their dollar prices stable, to avoid falling victim to idiosyncratic exchange-rate movements.
What little impact import price shocks have on US inflation is highly transitory, with most of the effect tapering off after just two quarters.
A sharp 10% appreciation of the US dollar, for example, would reduce inflation for non-fuel imports by 4.4% cumulatively over the next 2-3 quarters, but would have only a negligible impact on inflation after that point.
If one accounts for consumer goods expenditure on imports, that 10% appreciation would lower inflation, as measured by the consumer price index (CPI), by just 0.5 percentage points in the first two quarters.
And that is likely to be an upper bound, because it assumes that US retailers will pass through to consumers the full amount of any increase in import prices.
In practice, they are more likely to increase retail markups and lower cost pass-through.
The estimated price pass-through for imported manufactured goods, which would better represent what enters the consumption bundle, is even lower than that for all non-fuel imports.
Although these factors insulate the US from the inflationary pressures stemming from exchange-rate fluctuations, they increase the vulnerability of other countries, especially emerging economies.
Because the dollar prices of most of these countries’ imports are not very responsive to exchange-rate movements, the pass-through of those movements into import prices denominated in their home currencies is close to 100%.
The impact of exchange-rate movements on inflation in most countries is thus 3-4 times larger than in the US.
A 10% depreciation of the Turkish lira, for example, would raise cumulative CPI inflation by 1.65-2.03 percentage points, over two years, all else being equal.
Despite this imbalance, the US dollar’s dominance as an invoicing currency is unlikely to change anytime soon – not least because bringing about a shift would require coordination among a huge number of exporters and importers worldwide.
The euro might seem like a strong contender, given the volume of trade among eurozone countries; but, outside Europe, the currency is not used nearly as widely as the dollar.
In deciding when to normalize interest rates, the Fed has placed considerable weight on the weakness of inflation, and its global underpinnings.
But while it is true that some global developments – especially falling commodity prices, and perhaps also slowing emerging-economy growth and rising financial volatility – may push down inflation, dollar appreciation will not, at least not in any meaningful way.
A stronger dollar thus is not a legitimate reason to delay the normalization of US interest rates.
The Fed Sets Another Trap
NEW HAVEN – America’s Federal Reserve is headed down a familiar – and highly dangerous – path.
Steeped in denial of its past mistakes, the Fed is pursuing the same incremental approach that helped set the stage for the financial crisis of 2008-2009.
The consequences could be similarly catastrophic.
Consider the December meeting of the Federal Open Market Committee (FOMC), where discussions of raising the benchmark federal funds rate were couched in adjectives, rather than explicit actions.
In line with prior forward guidance that the policy rate would be kept near zero for a “considerable” amount of time after the Fed stopped purchasing long-term assets in October, the FOMC declared that it can now afford to be “patient” in waiting for the right conditions to raise the rate.
Add to that Fed Chair Janet Yellen’s declaration that at least a couple more FOMC meetings would need to take place before any such “lift-off” occurs, and the Fed seems to be telegraphing a protracted journey on the road to policy normalization.
This bears an eerie resemblance to the script of 2004-2006, when the Fed’s incremental approach led to the near-fatal mistake of condoning mounting excesses in financial markets and the real economy.
After pushing the federal funds rate to a 45-year low of 1% following the collapse of the equity bubble of the early 2000s, the Fed delayed policy normalization for an inordinately long period.
And when it finally began to raise the benchmark rate, it did so excruciatingly slowly.
In the 24 months from June 2004, the FOMC raised the federal funds rate from 1% to 5.25% in 17 increments of 25 basis points each.
Meanwhile, housing and credit bubbles were rapidly expanding, fueling excessive household consumption, a sharp drop in personal savings, and a record current-account deficit – imbalances that set the stage for the meltdown that was soon to follow.
The Fed, of course, has absolved itself of any blame in setting up the US and the global economy for the Great Crisis.
It was not monetary policy’s fault, argued both former Fed Chairmen Alan Greenspan and Ben Bernanke; if anything, they insisted, a lack of regulatory oversight was the culprit.
This argument has proved convincing in policy and political circles, leading officials to focus on a new approach centered on so-called macro-prudential tools, including capital requirements and leverage ratios, to curb excessive risk-taking by banks.
While this approach has some merit, it is incomplete, as it fails to address the egregious mispricing of risk brought about by an overly accommodative monetary policy and the historically low interest rates that it generated.
In this sense, the Fed’s incrementalism of 2004-2006 was a policy blunder of epic proportions.
The Fed seems poised to make a similar – and possibly even more serious – misstep in the current environment.
For starters, given ongoing concerns about post-crisis vulnerabilities and deflation risk, today’s Fed seems likely to find any excuse to prolong its incremental normalization, taking a slower pace than it adopted a decade ago.
More important, the Fed’s $4.5 trillion balance sheet has since grown more than fivefold.
Though the Fed has stopped purchasing new assets, it has shown no inclination to scale back its outsize holdings.
Meanwhile it has passed the quantitative-easing baton to the Bank of Japan and the European Central Bank, both of which will create even more liquidity at a time of record-low interest rates.
In these days of froth, the persistence of extraordinary policy accommodation in a financial system flooded with liquidity poses a great danger.
Indeed, that could well be the lesson of recent equity- and currency-market volatility and, of course, plummeting oil prices.
With so much dry kindling, it will not take much to spark the next conflagration.
Central banking has lost its way.
Trapped in a post-crisis quagmire of zero interest rates and swollen balance sheets, the world’s major central banks do not have an effective strategy for regaining control over financial markets or the real economies that they are supposed to manage.
Policy levers – both benchmark interest rates and central banks’ balance sheets – remain at their emergency settings, even though the emergency ended long ago.
While this approach has succeeded in boosting financial markets, it has failed to cure bruised and battered developed economies, which remain mired in subpar recoveries and plagued with deflationary risks.
Moreover, the longer central banks promote financial-market froth, the more dependent their economies become on these precarious markets and the weaker the incentives for politicians and fiscal authorities to address the need for balance-sheet repair and structural reform.
A new approach is needed.
Central banks should normalize crisis-induced policies as soon as possible.
Financial markets will, of course, object loudly.
But what do independent central banks stand for if they are not prepared to face up to the markets and make the tough and disciplined choices that responsible economic stewardship demands?
The unprecedented financial engineering by central banks over the last six years has been decisive in setting asset prices in major markets worldwide.
But now it is time for the Fed and its counterparts elsewhere to abandon financial engineering and begin marshaling the tools they will need to cope with the inevitable next crisis.
With zero interest rates and outsize balance sheets, that is exactly what they are lacking.
America’s Risky Recovery
CAMBRIDGE – The United States’ economy is approaching full employment and may already be there.
But America’s favorable employment trend is accompanied by a substantial increase in financial-sector risks, owing to the excessively easy monetary policy that was used to achieve the current economic recovery.
The overall unemployment rate is down to just 5.5%, and the unemployment rate among college graduates is just 2.5%.
The increase in inflation that usually occurs when the economy reaches such employment levels has been temporarily postponed by the decline in the price of oil and by the 20% rise in the value of the dollar.
The stronger dollar not only lowers the cost of imports, but also puts downward pressure on the prices of domestic products that compete with imports.
Inflation is likely to begin rising in the year ahead.
The return to full employment reflects the Federal Reserve’s strategy of “unconventional monetary policy” – the combination of massive purchases of long-term assets known as quantitative easing and its promise to keep short-term interest rates close to zero.
The low level of all interest rates that resulted from this policy drove investors to buy equities and to increase the prices of owner-occupied homes.
As a result, the net worth of American households rose by $10 trillion in 2013, leading to increases in consumer spending and business investment.
After a very slow initial recovery, real GDP began growing at annual rates of more than 4% in the second half of 2013.
Consumer spending and business investment continued at that rate in 2014 (except for the first quarter, owing to the weather-related effects of an exceptionally harsh winter).
That strong growth raised employment and brought the economy to full employment.
But the Fed’s unconventional monetary policies have also created dangerous risks to the financial sector and the economy as a whole.
The very low interest rates that now prevail have driven investors to take excessive risks in order to achieve a higher current yield on their portfolios, often to meet return obligations set by pension and insurance contracts.
This reaching for yield has driven up the prices of all long-term bonds to unsustainable levels, narrowed credit spreads on corporate bonds and emerging-market debt, raised the relative prices of commercial real estate, and pushed up the stock market’s price-earnings ratio to more than 25% higher than its historic average.
The low-interest-rate environment has also caused lenders to take extra risks in order to sustain profits.
Banks and other lenders are extending credit to lower-quality borrowers, to borrowers with large quantities of existing debt, and as loans with fewer conditions on borrowers (so-called “covenant-lite loans”).
Moreover, low interest rates have created a new problem: liquidity mismatch.
Favorable borrowing costs have fueled an enormous increase in the issuance of corporate bonds, many of which are held in bond mutual funds or exchange-traded funds (ETFs).
These funds’ investors believe – correctly – that they have complete liquidity. They can demand cash on a day’s notice.
But, in that case, the mutual funds and ETFs have to sell those corporate bonds.
It is not clear who the buyers will be, especially since the 2010 Dodd-Frank financial-reform legislation restricted what banks can do and increased their capital requirements, which has raised the cost of holding bonds.
Although there is talk about offsetting these risks with macroprudential policies, no such policies exist in the US, except for the increased capital requirements that have been imposed on commercial banks.
There are no policies to reduce risks in shadow banks, insurance companies, or mutual funds.
So that is the situation that the Fed now faces as it considers “normalizing” monetary policy.
Some members of the Federal Open Market Committee (FOMC, the Fed’s policymaking body) therefore fear that raising the short-term federal funds rate will trigger a substantial rise in longer-term rates, creating losses for investors and lenders, with adverse effects on the economy.
Others fear that, even without such financial shocks, the economy’s current strong performance will not continue when interest rates are raised.
And still other FOMC members want to hold down interest rates in order to drive the unemployment rate even lower, despite the prospects of accelerating inflation and further financial-sector risks.
But, in the end, the FOMC members must recognize that they cannot postpone the increase in interest rates indefinitely, and that once they begin to raise the rates, they must get the real (inflation-adjusted) federal funds rate to 2% relatively quickly.
My own best guess is that they will start to raise rates in September, and that the federal funds rate will reach 3% by some point in 2017.
How the Fed Just Reduced Inequality
NEW YORK – The US Federal Reserve has finally done it, raising interest rates for the first time in almost a decade.
The ramifications for interest-rate spreads, emerging-market equities, and housing demand, among much else, are the subject of widespread debate.
But, as markets learn to cope with a less accommodative monetary policy, there could be an important silver lining, which most people have ignored.
Income and wealth inequality in the United States has grown steadily since the global financial crisis erupted in 2008, but monetary-policy normalization could mark the beginning of the end of this trend.
Indeed, it should serve to accelerate its reversal.
Consider a few dismal statistics reflecting the current state of affairs. Real (inflation-adjusted) median household income in the US is about the same as in 1979.
A recent study by the Pew Research Center noted that Americans earned 4% less income in 2014 than they did in 2000, and for the first time in more than 40 years, middle-class Americans no longer constitute a majority of the population.
America’s 20 wealthiest people now own more wealth than the bottom half of the entire population The wealth gap between America’s high-income group and everyone else has never been more extreme; rich households account for more than one in five of the entire US population.
Strikingly, one hour north of Wall Street, in Bridgeport, Connecticut, the Gini coefficient – a standard measurement of income distribution and inequality – is worse than in Zimbabwe.
Ironically, this trend was exacerbated by the policy response to the financial crisis.
While the recession of 2007-2008 caused higher-income groups to suffer more than lower-income groups (because the former tend to derive relatively more of their income from more volatile sources of capital income, as opposed to labor income), the opposite has been true since 2009.
Since then, about 95% of all income gains have gone to the top 1%.
The causes of rising income and wealth inequality are multiple and nuanced; but the unintended consequences of the recent unprecedented period of ultra-loose monetary policy deserves a chunk of the blame.
Negative real interest rates and quantitative easing have enforced financial repression on holders of cash, hurting savers, while broadly boosting prices of riskier financial assets, most commonly held by the rich.
When there is no yield in fixed income, even the most conservative pension funds pile into risk assets, driving prices higher and higher.
Corporations have benefited massively from these stimulus measures, but at the expense of the working population.
Profit margins have expanded to record highs as companies have cut costs, delayed infrastructure investments, borrowed at ultra-low rates, and taken advantage of weak labor markets to avoid raising wages.
But are we now on the verge of a trend reversal?
The S&P 500 has rallied 150% since its 2009 lows, and valuations look rich given weakening growth dynamics (the Shiller price/earnings ratio stands at 26, compared to 15 in 2009).
Against this backdrop, the wealthiest Americans are unlikely to enjoy substantial further profits from their financial investments in the near term.
At the same time, we should see meaningful upward pressure on wages for the first time in many years.
The unemployment rate has dropped to 5%, just above the Fed’s current median estimate for the non-accelerating inflation rate of unemployment (NAIRU).
While the true NAIRU level is probably lower, and we are likely witnessing a secular decline in the workforce participation rate, the US labor market should still tighten in 2016.
Indeed, the number of those “not in the labor force, currently want a job” category dropped 416,000, to just above 5.6 million, in November; historically, this kind of change has been closely associated with rising wage pressure.
And the average hourly wages for all employees on private non-farm payrolls posted an annual increase of 2.5% in October, the biggest since 2009.
As the Fed slowly raises interest rates, those middle-class families holding their hard-earned savings at the bank will finally start realizing some return on their deposits.
The long-term effects should not be underestimated, given the helpful impact of compound savings.
During the last tightening cycle between 2004 and 2006, households’ interest income rose 29%.
Although this time, the gains presumably will be smaller and slower to arrive, owing to the likely pace and extent of Fed tightening, interest paid on savings will move household income in the right direction: up.
Of course, a multitude of political reforms, each with potential positive implications for welfare, could reduce the extent of inequality further.
But the barriers to such measures – say, to make the tax system more progressive – are well known, especially against the backdrop of a presidential election campaign.
This means that an increase in real wages for workers will have the most immediate impact, even if the downside is lower profit margins for corporate America.
The Fed’s decision to raise rates is a historic moment for financial markets and is already ushering in a period of increased volatility for asset prices worldwide.
Although this may be challenging for investors, we should take comfort in the implications for the real economy.
The social contract in the US has frayed badly, and this is likely to play an important role in the upcoming presidential election, as voters express anger that the American Dream is increasingly out of reach.
No economic recovery can sustain itself without rising wages and higher consumer spending power.
The Fed may have just signaled that the beginning of this necessary dynamic, perhaps the key inflection point of the inequality trend, is finally here.
The Fed’s Risk to Emerging Economies
MILAN – The US Federal Reserve has finally, after almost a decade of steadfast adherence to very low interest rates, hiked its federal funds rate – the rate from which all other interest rates in the economy take their cue – by 25 basis points.
That brings the new rate up to a still-minimal 0.5%, and Fed Chair Janet Yellen has wisely promised that any future increases will be gradual.
Given the state of the US economy – real growth of 2%, a tightening labor market, and little evidence of inflation rising toward the Fed’s 2% target – I view the rate rise as a reasonable and cautious first step toward normality (defined as a better balance between borrowers and lenders).
However, other central banks, particularly in economies where the output gap is larger than in the United States, will not be keen to follow the Fed’s lead.
That implies a coming period of monetary-policy divergence, with uncertain consequences for the global economy.
On the face of it, a tiny change in the US rate should not trigger dramatic shifts in global capital flows.
But, as US monetary policy follows the path of interest-rate normalization, there could well be knock-on effects, both economic and financial, especially in the form of currency volatility and destabilizing outflows from emerging economies.
The reason we should fear this possibility is that the world’s economic equilibrium is both fragile and unstable – and could wobble dangerously without determined and coordinated policy intervention.
A Fed rate hike might not tip it over, but some other seemingly innocuous event could.
One doesn’t need a long memory to understand how even relatively modest policy shifts can trigger outsize market reactions.
Consider, for example, the “taper tantrum” that roiled financial markets in the spring of 2013, after then-Fed Chair Ben Bernanke said only that policymakers were thinking of gradually ending quantitative easing.
But that announcement came as a surprise (as did the devaluation of China’s renminbi this past summer).
Capital that had flooded into emerging markets seeking yields no longer available in developed economies abruptly reversed course.
No investor wanted to be the last one out.
A jittery global financial system, like the one we have now, does not tolerate unwelcome surprises well.
Unlike the taper tantrum and the devaluation of the renminbi, the Fed’s rate-hike announcement on December 16 certainly was no surprise.
So one might argue that if the Fed’s move does lead to volatility in international capital flows, the process must have already started.
In fact, near-universal anticipation of a US rate rise did not produce a spike in capital flows or asset prices.
Yet widespread concerns persist.
The International Monetary Fund for example, has argued that any rate hike by the Fed would need an “effective monetary policy communication strategy” – a polite way of saying that any monetary tightening in the US and other advanced economies would be premature.
The reasoning is that emerging economies have become dangerously dependent on low interest rates and high commodity prices.
Many emerging-market companies are in the highly vulnerable position of having borrowed heavily in foreign currencies.
If capital flight occurs, the consequences will be dire: tightened credit, balance-of-payments difficulties, inflation, rising interest rates, fiscal stress, and downgrades by the major credit-rating agencies – all of which implies more capital flight.
Europeans, too, have become dependent on low interest rates, with the European Central Bank as the key stabilizing force.
Without the ECB’s commitment, in place since 2012, to prevent sovereign-debt yields from soaring, there would be a persistent risk to the eurozone – and, indeed, to the entire edifice of the European Union – of sovereign-debt defaults.
But at least Europe has benefited from falling commodity prices.
By contrast, many emerging economies, highly dependent on commodity export earnings, have been stressed by the commodity-price reset, sluggish growth in developed economies, and slower growth in China.
Capital flight would materially add to their plight – in some cases disastrously so.
Since the 2008 financial crisis, the world has become accustomed to such linkages and spillovers.
And yet policy responses to crises remain decentralized.
There is no ECB for the emerging economies.
They cannot be confident of appropriate reactions by their policymakers to rapid capital outflows, or of their capacity in terms of policy tools, reserves, and balance sheets.
And they cannot be fully certain of the speed and effectiveness of the international policy responses that might otherwise act as “circuit breakers.”
The reality is that emerging markets that benefited after the 2008 crisis from China’s economic growth, rising commodity prices, and cheap foreign capital must now adjust to reversals in all of these factors.
The necessary transitions for these markets will be complex, risky, and not entirely within their control.
While the Fed’s rate hike, prudently accompanied by an emphasis on small and gradual steps, may not turn out to be a trigger, the concerns about the knock-on effects are legitimate.
It would be unwise to assume that, with the initial hike now behind us, systemic risk has somehow disappeared.
In the long run, of course, emerging markets will benefit from interest-rate normalization, because they will no longer suffer the distortions and imbalances that lead to unsustainable growth patterns.
But the hard part will be getting from here to there without an accident.
Feeling Rich
Who is richer, you or I?
As long as we both have enough to live comfortably, it shouldn’t matter much.
Many of us try not to let it matter.
But sometimes such comparisons gnaw at us.
In an era of globalization, with rapid economic growth in some areas and stagnation in others – and with television and the internet allowing us to see how others live – these comparisons are an increasingly important factor in the world economy.
The late social psychologist Leon Festinger argued that interpersonal comparisons of success, whatever our moral qualms about them, constitute a fundamental – and thus irrepressible – human drive, one that is present in every society and all social groups.
Festinger argued that for any measure of success, whether wealth, ability, or merely personal charm, people tend to be most concerned about comparisons with others whom they see regularly and who are at a similar level of attainment.
We tend not to be bothered by people who are either vastly more successful or vastly less successful.
We consider them so different from us that we just don’t care.
Harvard professor Benjamin Friedman’s important new book The Moral Consequences of Economic Growth details what the feelings generated by these comparisons mean for social harmony and the success of our economies.
Friedman argues that comparisons of wealth are more dangerous to a society if it appears that the rich are members of a different race or ethnic group.
In that case, the comparisons become politicized, contributing to social conflict and thus tending to reduce economic success.
For example, South Korea’s spectacular economic growth in recent decades owes much, according to Friedman, to the country’s ethnic homogeneity, which dampens resentment of others’ relative progress.
By contrast, economic development in Sri Lanka, with a standard of living 40 years ago that was similar to that of Korea, was stymied by its Tamil minority’s perception that their opportunities and advancement were blocked by the Sinhalese majority.
The resulting ethnic violence has left real per capita income at just one-fifth the level of Korea today.
The economist Albert Hirschman once likened a society with recognizably distinct groups to a multilane highway where people are unable to change lanes.
If traffic is stalled for hours and no one else is making progress, we tend to relax and accept the situation resignedly.
If the traffic then starts moving in another lane, everyone will greet the change with elation.
Even if we are still stopped, we sympathize with those getting ahead, imagining that we, too, will soon be moving forward.
But if the other lane keeps moving and we do not, our elation is eventually replaced by annoyance and anger.
The same is true of economies that are starting to grow rapidly.
People must feel that their own social group, however they define it, will eventually benefit.
A key insight in Friedman’s book is the fundamental importance of two kinds of comparisons that people make when judging their own success: comparisons with their own (or their own family’s) past experience and comparisons with others that they see around them.
When economic growth falters and people no longer see improvement over their past experience, the first comparison becomes more important – and comes to be shared by millions of people.
But when the downturn affects distinct groups differently, especially when members of some groups are (rightly or wrongly) perceived as doing better than the others, the second comparison gains significance as well.
Consider the rampant anti-Semitism – some of it ultimately genocidal – that arose during the Great Depression of the 1930’s.
Of course, that is the most extreme example, and Friedman does not show that a decline in economic growth rates necessarily leads to social turmoil.
Indeed, many historical episodes of diminished or even negative growth have gone by without any unusual social problems.
Historical forces are complex; they defy any simple economic theory.
Friedman is right that social comparison drives human anxieties, if not conflict, but this is equally true when economies are growing.
In some parts of the world, rising expectations, if unfulfilled, could make the kinds of effects that Friedman describes especially strong.
For example, many people in China today feel great psychological pressure to live up to the expectations created by all the talk about their country’s “economic miracle” – and the sight of others in their midst with significant wealth – and they express anxiety about their own individual success.
As growth and development in emerging economies like China continues, people will increasingly compare themselves to the richer people in their countries’ urban centers.
These countries’ successful people will increasingly compare themselves to people in other countries who are perceived as even more successful.
If Festinger and Friedman are right, little can be done about this, because such comparisons are a part of human nature.
But, regardless of whether these comparisons occur in an economy that is growing or contracting, the anxiety that they engender clearly represents a potential risk of unrest and instability.
So the question is whether anything can be done to minimize that risk.
Obviously, a measured pace of economic growth in the developing world – neither so high that it sets the stage for later collapse nor so low that it weakens the public’s sense of solid progress towards a better life – would help ensure social and political stability, thereby fostering further growth.
But, perhaps more importantly, people must believe that they live in a society that allows them to change lanes and move ahead faster when the route is clear.
Female Genital Mutilation Mutilates Us All
On December 10th, women from around the world will gather at the European Parliament to fight against Female Genital Mutilation.
According to the World Health Organization, some 130 million women have, over the last few years, suffered from genital mutilation in some form.
In reality, those figures are probably even worse, because illegalities are almost always underestimated.
Female genital mutilation, according to the WHO, consists of the "removal of all or part of the external female genital organs."
It is a painful procedure carried out in unsafe ways by old women who are seeking to initiate girls into womanhood, and, more concretely, into a life that will be an unending chain of physical pain and social marginalization.
Indeed, genital mutilation makes a woman's experience of sex, that taboo of taboos, into a painful, humiliating, punitive procedure.
Over the last 80 years, women in democratic societies have struggled to be recognized and treated as citizens endowed with equal rights.
The right to own property, vote, work, divorce, the right to choose whether or not to have children have been secured only through political struggle.
All these civil victories for women contributed mightily to the advancement of social life and have been instrumental in initiating comprehensive social reforms that have transformed Western societies.
In these epochal battles, women's fiercest enemy has been tradition, and its staunch ally: religion.
With the help of information, education and mass participation, women and men, have defeated ignorance and the violence that goes with it hand-in-hand.
The fight against female genital mutilation is not a replay of the West's 'battle of the sexes' circa the 1960s; rather, it is a struggle against the fear of unknown enemies; against fear of change and the opportunities and contexts that arrive in the wake of change.
Throughout the world, from sub-Saharan Africa to the Arab peninsula, from certain regions of the Far East to expatriate communities in Europe, the United States, Canada, Australia, and New Zealand, women are reacting against their being genitally, socially, civilly, and politically mutilated.
In other words, they react to their being considered and treated like some "unknown other."
Networks of local practitioners, non-governmental organizations and politicians are collaborating to confront the issue of female genital mutilation at a national level and to publicize it.
There are ongoing efforts in Africa and elsewhere to internationalize a campaign that seeks to bring to galvanize public awareness of the dark fact that, in many countries, women remain mere commodities at the disposal of tradition.
Today, most of the African, Arab, and Asian countries blighted by the custom female genital mutilation are nonetheless signatories of the international conventions that condemn this practice, particularly the international Convention on the Elimination of Discrimination Against Women and the international Convention on the Rights of the Child.
Most of these countries also support a series of UN resolutions that call for eliminating female genital mutilation.
But all these commendable efforts have failed to counter the phenomenon.
So the issue is not good words and public promises, it is one of securing the political will necessary to stamp out the practice.
Female genital mutilation is a crime with real victims, but who are the criminals?
Should we incarcerate all women who carry out these mutilations on their fellow women?
Should we imprison mothers because they are willingly sacrifice their daughters' physical integrity on the altar of tradition?
Should we impose sanctions on countries that do not make the practice unlawful?
Should we patrol remote African villages with groups of human rights activists?
Tradition can only be countered by creativity.
We need to find ways to address the lack of a real freedom of expression for women in so many societies and, at the same, time to redress damage done to those victimized by female genital mutilation.
In doing so, we must be aware that the solution to genital mutilation of women cannot be limited to this issue alone.
In fact, it needs to be part of a more comprehensive effort aiming at empowering and giving civil rights to women - 50% of the people that live in societies where the practice is carried out.
Such a concerted action must go beyond the sacrosanct effort of providing the old women who practice female genital mutilation with another job or in finding symbolic or ritualistic substitutes to the act of cutting off a woman's clitoris.
We need to reach into politics, because there will be no freedom for African, Arab, or Asian women without the advent of political democracy in their countries.
Here is the challenge that confronts those who live in countries where female genital mutilation is not routinely practiced but who care about the fate of women around the world.
Failure to recognize the political aspect of the issue will insure defeat and the continuance of a violent practice that abuses millions of women each year.
Over the last few years, I have had the chance to meet hundreds of individuals and groups in places where the practice exists.
Those people made the fight against female genital mutilation a priority in their lives.
Their courage, expertise, dedication and resolve is encouraging, but we must not leave them to fight their fight alone.
In Brussels on December 11th, eminent personalities from Africa and all over the world will launch an appeal open to signatures to internationalize their struggle.
Those who want to join the Stop Female Genital Mutilation campaign carried out by AIDOS (Italian Association of Women for Development), TAMWA (Tanzania Media Women's Association), and No Peace Without Justice can sign the petition by visiting www.stopfgm.org .
In allowing so many lives to be blighted through genital mutilation, we degrade ourselves and our world.
Feminism and the Male Brain
NEW YORK – North Americans of my generation grew up with the 1970’s children’s record “Free to Be...You and Me,” on which Rosey Grier, an immense former football star, sang “It’s Alright to Cry.”
The message: girls could be tough, and boys were allowed not to be.
For almost 40 years, that era’s Western feminist critique of rigid sex-role stereotyping has prevailed.
In many ways, it has eroded or even eliminated the kind of arbitrary constraints that turned peaceable boys into aggressive men and stuck ambitious girls in low-paying jobs.
Feminists understandably have often shied away from scientific evidence that challenges this critique of sex roles.
After all, because biology-based arguments about gender difference have historically been used to justify women’s subjugation, women have been reluctant to concede any innate difference, lest it be used against them.
But, in view of recent scientific discoveries, has feminist resistance to accepting any signs of innate gender difference only created new biases?
The feminist critique, for example, has totally remade elementary-level education, where female decision-makers prevail: the construction of male hierarchies in the schoolyard is often redirected nowadays for fear of “bullying,” with boys and girls alike expected to “share” and “process” their emotions.
But many educators have begun to argue that such intervention in what may be a hardwired aspect of “boy-ness” can lead to boys’ academic underperformance relative to girls, and to more frequent diagnoses of behavioral problems, attention deficit disorder, and so on.
And education is just the beginning.
An entire academic discipline emerged out of the wholesale critique of the male tendency to create hierarchy, engage in territoriality, and be drawn to conflict.
When I was in college, the feminist solution to “patriarchy” was an imagined world without hierarchy, where people verbalized all day long and created emotional bonds.
This critique of “masculinity” also dramatically affected intimate relationships: women were encouraged to express their dissatisfaction with men’s refusal to “share” their inner lives.
Women complained of not being heard, of men disappearing after work to tinker in the garage or zone out in front of the TV.
But, however heartfelt, such complaints assumed that men choose all of their behavior.
Now a spate of scientific analyses, based on brain imaging technology and new anthropological and evolutionary discoveries, suggests that we may have had our heads in the sand, and that we must be willing to grapple with what seem to be at least some genuine, measurable differences between the sexes.
The most famous of these studies, anthropologist Helen Fisher’s The Anatomy of Love , explains the evolutionary impetus for human tendencies in courtship, marriage, adultery, divorce, and childrearing.
Some of her findings are provocative: it seems, for example, that we are hard-wired for serial monogamy and must work very hard to maintain pair-bonds; that highly orgasmic women enjoy an evolutionary advantage; and that flirtation among primates closely resembles the way young men and women in a bar show their sexual interest today.
Moreover, in her description of our evolution, Fisher notes that males who could tolerate long periods of silence (waiting for animals while in hunt mode) survived to pass on their genes, thus genetically selecting to prefer “space.”
By contrast, females survived best by bonding with others and building community, since such groups were needed to gather roots, nuts, and berries, while caring for small children.
Reading Fisher, one is more inclined to leave boys alone to challenge one another and test their environment, and to accept that, as she puts it, nature designed men and women to collaborate for survival. “Collaboration” implies free will and choice; even primate males do not succeed by dominating or controlling females.
In her analysis, it serves everyone for men and women to share their sometimes different but often complementary strengths – a conclusion that seems reassuring, not oppressive.
What Could He Be Thinking? , by Michael Gurian, a consultant in the field of neurobiology, takes this set of insights further.
Gurian argues that men’s brains can actually feel invaded and overwhelmed by too much verbal processing of emotion, so that men’s need to zone out or do something mechanical rather than emote is often not a rejection of their spouses, but a neural need.
Gurian even posits that the male brain actually can’t “see” dust or laundry piling up as the female brain often can, which explains why men and women tend to perform household tasks in different ways.
Men often can’t hear women’s lower tones, and their brains, unlike women’s, have a “rest” state (he actually is sometimes thinking about “nothing”!).
Moreover, Gurian argues that men tend to rear children differently from women for similarly neurological reasons, encouraging more risk-taking and independence and with less awareness of the details of their nurture.
One can see the advantages to children of having both parenting styles.
He urges women to try side-by-side activities, not only face-to-face verbalization, to experience closeness with their mates.
Somehow, all this is liberating rather than infuriating.
So much that enrages women, or leads them to feel rejected or unheard, may not reflect men’s conscious neglect or even sexism, but simply their brains’ wiring!
According to Gurian, if women accept these biological differences and work around them in relationships, men respond with great appreciation and devotion (often expressed nonverbally).
Women who have embraced these findings report that relations with the men in their lives become much smoother and, paradoxically, more intimate.
None of this means that men and women should not try to adjust to each other's wishes, ask for shared responsibility with housework, or expect to be “heard.”
But it may mean we can understand each other a bit better and be more patient as we seek communication.
Nor does recent scientific research imply that men (or women) are superior, much less justify invidious discrimination.
But it does suggest that a more pluralistic society, open to all kinds of difference, can learn, work, and love better.
Fictional Sovereignties
LONDON – A year ago, tiny Georgia tried to regain control over its breakaway enclave of South Ossetia.
The Russians quickly expelled the Georgian army, to almost universal opprobrium from the West.
South Ossetia, together with Abkhazia (combined population 300,000), promptly declared their “independence,” creating two new fictional sovereignties, and acquiring in the process all the official trappings of statehood: national heroes, colorful uniforms, anthems, flags, frontier posts, military forces, presidents, parliaments, and, most important, new opportunities for smuggling and corruption.
So far, only Russia and Nicaragua recognize the independence of Abkhazia and South Ossetia.
Russian recognition was widely seen as retaliation for Western recognition of Kosovo (population two million), the breakaway province of Serbia, earlier last year.
A thousand miles to the west of Georgia is Moldova (population 3.5 million), which lies between Romania and Ukraine.
Annexed by Tsarist Russia in 1812, joined to Romania in 1918, and re-annexed by the Soviet Union in 1940, it seized its independence from Moscow in 1991.
It is a member of the United Nations, the Council of Europe, the World Trade Organization, the Organization for Security and Cooperation in Europe, and various other prestigious international bodies.
Moldova’s main claim to fame is King Stephen the Great, who defeated the Ottomans in a great fifteenth century battle.
It also produces rather good wine.
An enduring memory from my own recent visit to its capital Chisinau is the election poster of a local politician called Lupu, who holds a pair of spectacles to his eyes, whether to suggest visions or wisdom isn’t clear.
To get to Moldova from Odessa (now in Ukraine) one must drive through the self-proclaimed “republic” of Transdniestria (population 700,000), a sliver of land on the north shore of the Dniester river.
A clump of peeling buildings, rusting wire, and a filthy lavatory mark the start of Transdniestrian sovereignty.
Progress through this squalid, but well manned, frontier post involved the stamping of lots of documents and a liberal scattering of bribes, a process repeated on leaving the “republic.”
A shadowy mafia-style company, Sheriff, owns most of the economy.
It is said to have close links to the president and his family.
It has built a giant football stadium in the capital, Tiraspol, which seems to be some kind of symbol of Transdniestrian virility.
Unrecognized by the rest of the world, Transdniestrian “independence” is secured by a Russian garrison.
The world’s population is about six billion.
Suppose it was divided into independent political units of two million people each. That would mean 3,000 micro-states, each refusing to accept any sovereignty superior to its own.
Of course, this would be a recipe for global anarchy.
Yet the trend over the past century has been towards a continuous increase in the number of small states, mainly owing to nationalist revolts against multi-national empires: the latest bout of state creation followed the disintegration of the USSR.
Even long-established states like the United Kingdom now have strong separatist movements.
In its political life, the world has been regressing to a form of tribalism, even as its economic life has become increasingly globalized.
The equation of state with nation is the arch-heresy of our time.
A “nation” is, at root, an ethno-linguistic – occasionally religious – entity, and because it is through language and liturgy that culture is transmitted, each nation will have its own distinctive cultural history, available for use and misuse, invention and discovery.
The state, however, is a political construction, designed to keep the peace in an economically viable territory.
There are simply too many “nations,” actual or potential, to form the basis of a world system of states, not least because so many of them, having been jumbled up for centuries, cannot now be disentangled.
Micro-states can never be made small enough to satisfy their advocates’ exalted standards of cultural integrity.
So the unraveling of multi-national states is a false path.
The way forward lies in democratic forms of federalism, which can preserve sufficient central authority for the purposes of statehood, while respecting local and regional cultures.
Today’s upsurge of micro-nationalism is not just a consequence of the revolt against empires: it is also a revolt against globalization.
There is widespread resistance to the idea that the chief function of modern states is to slot their peoples into a global market dominated by the imperatives of efficiency and cheapness, heedless of the damage to non-economic activities.
This feeling is strengthened when the global economy turns out to be a global casino.
National assertion is a way of combating impersonal forces and remote authorities.
Globalization promises too much in terms of welfare gains, particularly to developing countries, to be abandoned.
But the lesson from the current crisis is that we will have to develop styles of global economic governance to manage, regulate, and mitigate the creative, but often disruptive forces unleashed by the global market.
In the absence of an actual world government, this can be done only through cooperation among states.
The fewer “sovereigns” there are, the easier it will be to secure the necessary cooperation.
The Bretton Woods Agreement of 1944, which laid the institutional foundation for the post-war World War II economy, was made possible because the United States and Britain called the shots.
When objections were raised to Cuba being put on the drafting committee, Harry Dexter White, the American representative, remarked that Cuba’s function was to provide cigars.
Such a cavalier attitude to the demands of lesser powers to be heard is no longer possible.
But all this means is that the facades will have to be more subtle and the fictions more elaborate.
Provided we do not deceive ourselves about where real power lies, let presidents and parliaments be three a penny if that is what makes people feel good about themselves.
Fiddling at the Fire
PARIS – Financial markets have rallied since July on the hope that the global economic and geopolitical outlook will not worsen, or, if it does, that central banks stand ready to backstop economies and markets with additional rounds of liquidity provision and quantitative easing.
So, not only has good – or better-than-expected – economic news boosted the markets, but even bad news has been good news, because it increases the probability that central-banking firefighters like US Federal Reserve Chairman Ben Bernanke and European Central Bank President Mario Draghi will douse the markets with buckets of cash.
But markets that rise on both good and bad news are not stable markets. “Risk-off” episodes, in which investor sentiment sours, are likely to return if economic news worsens and confidence in policymakers’ effectiveness drops.
In the eurozone, euphoria followed the ECB’s decision to provide support with potentially unlimited purchases of distressed countries’ bonds.
But the move is not a game changer; it only buys time for policymakers to implement the tough measures needed to resolve the crisis.
And the policy challenges are daunting: the eurozone’s recession is deepening as front-loaded fiscal consolidation and severe credit rationing continues.
And, as eurozone banks and public-debt markets become increasingly balkanized, establishing a banking union, a fiscal union, and an economic union while pursuing macroeconomic policies that restore growth, external balance, and competitiveness will be extremely difficult.
Even the ECB’s support is not obvious.
Monetary hawks – the Bundesbank and several other core central banks – who were worried about a new open-ended ECB mandate pushed successfully for strict and effective conditionality for countries benefiting from the bond purchases.
As a result, they can pull the plug on the program if its stringent criteria are not met.
Moreover, Greece could exit the eurozone in 2013, before Spain and Italy are successfully ring-fenced;
Spain – like Greece – is spiraling into depression, and may need a full-scale bailout by the “troika” (the ECB, the European Commission, and the International Monetary Fund).
Meanwhile, austerity fatigue in the eurozone periphery is increasingly clashing with bailout fatigue in the core.
Small wonder, then, that Germany, politically unable to vote on more bailout resources, has outsourced that job to the ECB, the only institution that can bypass democratically elected parliaments.
But, again, liquidity provision alone – without policies to restore growth soon – would merely delay, not prevent, the breakup of the monetary union, ultimately taking down the economic/trade union and leading to the destruction of the single market.
In the United States, the latest economic data – including a weak labor market – confirm that growth is anemic, with output in the second half of 2012 unlikely to be significantly stronger than the 1.6% annual gain recorded in January-June.
And, given America’s political polarization and policy gridlock, we can expect more fights on the budget and the debt ceiling, another rating downgrade, and no agreement on a path toward medium-term fiscal consolidation and sustainability – regardless of whether President Barack Obama is reelected in November.
On the contrary, we should expect agreement only on the path of least political resistance: avoidance of tough fiscal choices until the bond vigilantes eventually wake up, spike long rates, and force fiscal adjustment on the political system.
In China, a hard economic landing looks increasingly likely as the investment bubble deflates and net exports shrink.
Meanwhile, the reforms necessary to reduce savings and increase private consumption are being delayed.
As in Europe and the US, the worst will be avoided in 2012 only by kicking the can down the road with more monetary, fiscal, and credit stimulus.
But a hard landing becomes more likely in 2013, as the stimulus fades, non-performing loans rise, the investment bust accelerates, and the problem of rolling over the debts of provincial governments and their special investment vehicles can no longer be papered over.
And, given a new leadership’s caution as it establishes its power, reforms will occur at a snail’s pace, making social and political unrest more likely.
Meanwhile, Brazil, India, Russia, and other emerging economies are playing the same game.
Many have not adjusted as advanced economies’ weakness reduces the room for export-led growth; and many delayed structural reforms needed to boost private-sector development and productivity growth, while embracing a model of state capitalism that will soon reveal its limits.
So the recent slowdown of growth in emerging markets is not just cyclical, owing to weak growth or outright recession in advanced economies; it is also structural.
Similar dithering is apparent at the geopolitical level as well.
The major global powers are still trying negotiations and sanctions to induce Iran to abandon its efforts to develop nuclear weapons.
But Iran is playing for time and hoping to reach a zone of immunity.
By 2013, an Israel that – rightly or wrongly – perceives Iran’s nuclear program to be an existential threat, and/or the US, which has rejected containment of a nuclear Iran, may decide to strike, leading to a war and a massive spike in oil prices.
Ineffective governments with weak leadership are at the root of the problem.
In democracies, repeated elections lead to short-term policy choices.
In autocracies like China and Russia, leaders resist the radical reforms that would reduce the power of entrenched lobbies and interests, thereby fueling social unrest as resentment against corruption and rent-seeking boils over into protest.
But, as everyone kicks the can down the road, the can is getting heavier and, in the major emerging markets and advanced economies alike, is approaching a brick wall.
Policymakers can either crash into that wall, or they can show the leadership and vision needed to dismantle it safely.
The Soccer Mafia
NEW YORK – The only surprise about the arrest of seven FIFA officials in a Swiss hotel in the early morning of May 27 is that it happened at all.
Most people assumed that these pampered men in expensive suits, governing the world’s soccer federation, were beyond the reach of the law.
Whatever rumors flew or reports were made on bribes, kickbacks, vote-rigging, and other dodgy practices, FIFA President Joseph “Sepp” Blatter and his colleagues and associates always seemed to emerge without a scratch.
So far, 14 men, including nine current or former FIFA executives (but not Blatter), have been charged with a range of fraud and corruption offenses in the United States, where prosecutors accuse them, among other things, of pocketing $150 million in bribes and kickbacks.
And Swiss federal prosecutors are looking into shady deals behind the decisions to award the World Cup competitions in 2018 and 2022 to Russia and Qatar, respectively.
There is, of course, a long tradition of racketeering in professional sports.
American mobsters have had a major interest in boxing, for example.
Even the once gentlemanly game of cricket has been tainted by the infiltration of gambling networks and other crooked dealers.
FIFA is just the richest, most powerful, most global milk cow of all.
Some have likened FIFA to the Mafia, and Blatter, born in a small Swiss village, has been called “Don Blatterone.”
This is not entirely fair.
So far as we know, no murder contracts have ever been issued from FIFA’s head office in Zürich.
But the organization’s secrecy, its intimidation of the rivals to those who run it, and its reliance on favors, bribes, and called debts do show disturbing parallels to the world of organized crime.
One could, of course, choose to see FIFA as a dysfunctional organization, rather than a criminal enterprise.
But even in this more charitable scenario, much of the malfeasance is a direct result of the federation’s total lack of transparency.
The entire operation is run by a close-knit group of men (women play no part in this murky business), all of whom are beholden to the boss.
This did not start under Blatter.
It was his predecessor, the sinister Brazilian João Havelange, who turned FIFA into a corrupt and vastly rich empire by incorporating more and more developing countries, whose votes for the bosses were bought with all manner of lucrative marketing and media deals.
Huge amounts of corporate money from Coca-Cola and Adidas went sloshing through the system, all the way to the roomy pockets of Third World potentates and, allegedly, of Havelange himself.
Coke was the main sponsor of the 1978 World Cup in Argentina, ruled in those days by a brutal military junta.
Blatter is not quite as uncouth as Havelange.
Unlike the Brazilian, he does not openly associate with mobsters.
But his power, too, relies on the votes of countries outside Western Europe, and their loyalty, too, is secured by the promise of TV rights and commercial franchises.
In the case of Qatar, this meant the right to stage the World Cup in an utterly unsuitable climate, in stadiums hastily built under terrible conditions by underpaid foreign workers with few rights.
Complaints from slightly more fastidious Europeans are often met with accusations of neo-colonialist attitudes or even racism.
Indeed, this is what makes Blatter a typical man of our times.
He is a ruthless operator who presents himself as the champion of the developing world, protecting the interests of Africans, Asians, Arabs, and South Americans against the arrogant West.
Things have changed since the days when venal men from poor countries were paid off to further Western political or commercial interests.
This still occurs, of course.
But the really big money now, more often than not, is made outside the West, in China, the Persian Gulf, and even Russia.
Western businessmen, architects, artists, university presidents, and museum directors – or anyone who needs large amounts of cash to fund their expensive projects – now have to deal with non-Western autocrats.
So do democratically elected politicians, of course.
And some – think of Tony Blair – turn it into a post-government career.
Pandering to authoritarian regimes and opaque business interests is not a wholesome enterprise.
The contemporary alliance of Western interests – in the arts and higher education no less than in sports – with rich, undemocratic powers involves compromises that might easily damage established reputations.
One way to deflect the attention is to borrow the old anti-imperialist rhetoric of the left.
Dealing with despots and shady tycoons is no longer venal, but noble.
Selling the franchise of a university or a museum to a Gulf state, building yet another enormous stadium in China, or making a fortune out of soccer favors to Russia or Qatar is progressive, anti-racist, and a triumph of global fraternity and universal values.
This is the most irritating aspect of Blatter’s FIFA.
The corruption, the vote-buying, the absurd thirst of soccer bosses for international prestige, the puffed-out chests festooned with medals and decorations – all of that is par for the course.
It is the hypocrisy that rankles.
To lament the shift in global power and influence away from the heartlands of Europe and the US is useless.
And we cannot accurately predict this shift’s political consequences.
But if the sorry story of FIFA is any indication, we can be sure that, whatever forms government might take, money still rules.
Cancer’s Dangerous Mythology
GENEVA – This year, World Cancer Day will focus on dispelling damaging myths about the disease.
The theme – illustrated in the tagline “Cancer – Did you know?” – offers an opportunity to reflect on cancer’s true consequences and enhance global prevention and treatment efforts.
One prevailing myth is that cancer is primarily a developed-country problem.
But, while it is true that cancer is pervasive in wealthy countries, people in the world’s poorest countries lose more years of life to the disease.
As medical advances and technological developments have helped cancer patients in high-income countries to live longer – to the extent that some forms of cancer have effectively become chronic conditions – those in low-income countries continue to die young.
Besides being unjust, this is deeply tragic.
Having eluded killers like malaria and AIDS, one should not then be killed prematurely by cancer – especially a form of cancer that could have been prevented with something as simple and as affordable as a vaccine.
The often-overlooked link between vaccines and cancer highlights a second common misconception: fate alone (and perhaps smoking) determines who gets cancer.
In fact, one in six cancer cases worldwide is caused by a known infectious agent, with the proportion rising to one-third in some countries in Sub-Saharan Africa.
The four main culprits are hepatitis B and C (hepB and hepC), human papillomavirus (HPV), and Helicobacter pylori, which are collectively responsible for 1.9 million cases of liver, cervical, and gastric cancer annually.
Cervical cancer now kills more women than childbirth, claiming a life every two minutes.
Of the 275,000 women who die of cervical cancer annually, 85% live in the world’s poorest countries.
After all, cervical cancer tends to target the most vulnerable in particular, such as women infected with HIV.
If left unchecked, the number of cervical cancer deaths is set to rise to 430,000 annually by 2030.
Then there is hepB, which is over 50 times more infectious than HIV and often passed from mother to child before or shortly after birth, increasing the likelihood of liver cancer later in life.
An estimated two billion people alive today have been infected with hepB, while 350 million people are chronically infected.
Of these, roughly one-quarter will die from hepB-related liver cancer or cirrhosis (a consequence of chronic liver disease).
The good news is that powerful tools are available to avert many of these deaths.
Existing HPV vaccines can prevent up to 70% of cervical cancer cases, and new vaccines are in the pipeline that will improve this record further.
Likewise, hepB vaccines are 95% effective at preventing infection and its chronic consequences.
Vaccines protecting against Helicobacter pylori and hepC are in development (although the latter is proving particularly challenging).
Even an Epstein-Barr virus vaccine, which would protect against some kinds of lymphoma, is achieving promising results.
But paying for and delivering these vaccines to the most vulnerable citizens of low-income countries poses a significant challenge.
Although the World Health Organization (WHO) has recommended including the hepB vaccine in routine immunization since 1992, its high price initially hindered its uptake in some developing countries.
More recently, the same problem threatened to hinder the adoption of HPV vaccines.
But the GAVI Alliance intervened to ensure that this is no longer a concern with hepB, and it is unlikely to occur with HPV.
Since its launch in 2000, the GAVI Alliance has sought to increase access to life-saving vaccines for the world’s poorest children.
In partnership with the World Bank, the WHO, UNICEF, and the Bill & Melinda Gates Foundation, it has used innovative financing tools to raise funds for global immunization programs, while working with industry to lower the prices of vaccines.
By including the hepB vaccine as part of a pentavalent (five in one) vaccine, the Alliance has already facilitated its delivery to children in 70 countries as part of routine immunizations.
The Alliance is now working to make the HPV vaccine available to more than 30 million of the world’s poorest women and girls by 2020; as part of this effort, and coinciding with World Cancer Day, it has launched demonstration programs in eight developing countries.
A growing body of evidence shows that vaccines’ benefits extend beyond preventing illness and death.
They have also been found to aid infants’ cognitive development and children’s educational attainment, thus boosting countries’ economic-growth potential.
In the fight against cancer, medical advances can shave precious percentage points off of mortality rates, which implies that improved access to vaccines can have a massive impact, slashing the number of future cases in developing countries for just a few dollars per dose.
People in rich countries are undoubtedly familiar with the maxim that prevention is better than cure.
But, given the ready availability of vaccines in developed countries, the focus of prevention efforts has shifted to changing cancer-causing lifestyles.
Meanwhile, people in developing countries lack access to simple and effective tools for preventing several of the most common cancers.
Improving access to vaccines is crucial to addressing this global inequity and reducing the widening gap between rich and poor.
This requires, first and foremost, dispelling the myth that one cannot “catch” cancer.
Fighting Inflation Promotes Growth
Fighting Terror Among the Believers
The flames of Islamic fundamentalism are not confined to the Middle East and Central Asia.
Indonesia is increasingly in the news because of its large Muslim population, the rise of fundamentalist rhetoric, and purported connections to international terrorism.
The emergence of violent Muslim vigilante groups employing jihadist rhetoric and mobilizing followers for jihad is one of the most conspicuous new phenomena in Indonesian Islam.
The bomb blasts that rocked Kuta, Bali near midnight last October 12th profoundly effected almost every aspect of Indonesian life.
After years of official denial, that horrifying incident triggered awareness that terrorism does exist in Indonesia and that Indonesia's home grown fanatics are connected to a global terrorist network.
Soon after the Bali bomb conspiracy was uncovered, earlier explosions that rocked various parts of the country were reexamined.
Not all of them were definitively connected, but the renewed investigations revealed ties between a number of disparate terrorist groups.
The perpetrators of these bomb blasts are now understood to belong to linked, hard-line Islamist organizations.
Recently, the International Crisis Group, a Brussels-based NGO, revealed the links between Islamist radicalism in Indonesia, and international terrorism.
The document, "Al-Qaeda In Southeast Asia: The Case Of The "Ngruki Network," is an exhaustive review of reliable public data, and identifies a handful of individuals with possible direct or indirect links with Al-Qaeda.
The good news, however, is that the ICG finds no evidence of an extensive Al-Qaeda network in Indonesia.
The evidence of international penetration of Indonesian radical groups is quite limited.
Nevertheless, Indonesians would be mistaken in thinking that they have nothing to fear.
The ICG report was narrowly conceived and intended to focus on a single issue, namely the evidence for an Al-Qaeda presence in Indonesia.
Some important questions remain.
Is radical Islamism ratcheting up its influence in post-Suharto Indonesia?
Are elements within the military continuing to support radical Islamist militias opportunistically, as they began to do in recent years?
Are elements of the political elite appealing to radical Islamist sentiment, as a way of leveraging their power?
Are moderate Islamic intellectuals facing increasing criticism and challenge?
Unfortunately, the answer to all these questions is yes.
The stakes for Indonesia are high.
When the United States declared war against terrorism, Bush administration officials characterized Indonesia as a strategic partner in the struggle against terrorism.
Paul Wolfowitz, Deputy Secretary of Defense and former US Ambassador to Indonesia, said that the US must bring new seriousness to helping Indonesia in its quest to secure a stable democracy and prosperous economy.
But Indonesia can do so only if it demonstrates an unrelenting commitment to anti-terrorist policies.
Foreign investment is already at its nadir, due to the lingering political crisis following the fall of the Suharto dictatorship, and to doubts about the soundness of the country's institutional and legal capacity.
Backtracking on official resolve to fight terrorism would hardly convince international business to start investing in Indonesia again.
The authorities have natural allies in the large, moderate Muslim organisations, especially the Nahdhatul Ulama and the Muhammadiyah, that lead Indonesian civil society.
These groups are fed up with how radicals have smeared Islam in Indonesia, and they are beginning to work together to challenge the extremists head on.
This is not to say that they agree with the American critique of Indonesian policy.
But these two prominent, national membership organizations may succeed in dampening Islamic militancy where the government, afraid of waging the battle it must fight, has failed dismally.
The real conflict ignited by the terrorist attacks is not between Islam and an American-led, Judeo-Christian "crusade." The greater challenge is the ongoing struggle within the worldwide Islamic community, the Ummah, between moderate, progressive Muslims on the one hand and fundamentalist extremists on the other.
This battle for the hearts and minds of believers will be fought on two fronts: the first is theological and educational, while the second concerns socioeconomic issues and the civil society agenda.
In both cases the experiences of Indonesia will be critical.
In essence, extremism and fundamentalism can be countered only from within the faith.
No amount of American intervention will turn the tide against bigotry and ignorance.
In fact, too much meddling by Westerners could radicalize the community even more.
Moderate believers must look to examples such as Indonesia, where Islam has encountered and interacted with new and alien forces.
In Indonesia (and to a lesser extent Malaysia), science and technology, commerce and modern management as well as the all-important challenges of democracy, human rights, and gender equality are being tackled head-on in authentic terms of Muslim discourse.
Finally, moderate Muslims must explore Indonesia's vibrant and indigenous Islamic traditions.
The country's rich vein of Islamic scholarship has embraced new ideas and sought to interpret the Koran in a manner that reveals its compatibility with democracy, human rights, gender equality and social justice.
Indonesians have the tools to thwart radicals' efforts to usurp Islam.
The fight will not be easy, but it can be won.
Fighting Terrorism Democratically
Bombings in London and Turkey have brought to the fore the old ideas that authoritarian regimes are better equipped than democracies to combat terrorism, and that such attacks are the price we pay for liberty.
For some, that is a price worth paying; for others, the costs seem too high.
But a look at the record shows that democracies possess more effective weapons to fight terror than do authoritarian regimes.
Indeed, it is when democracies abandon their ethics and fail to resist the authoritarian temptation that they become weaker.
Of course, the logic behind calls to restrict our freedoms has a simplistic appeal: extremists use our freedoms to commit their crimes, so preventing the abuse of freedom requires curtailing freedom’s scope.
The mistake, however, is to assume that open societies are more permissive and vulnerable to terrorism than those who live under authoritarian regimes.
One need only look at today’s Russia, or recall Algeria in the 1990’s.
True, democracy and the rule of law provide no foolproof security guarantee. But such a guarantee is a mirage anyway, whereas respect for basic freedoms and due process when repressing terrorism is a powerful instrument to isolate extremists and diminish their legitimacy in the eyes of those that might identify with their cause.
It is because Britain is a democracy that respects the rule of law that it has been able to mobilize vast sectors of its Muslim community.
By contrast, authoritarian regimes’ repression of civilians, and their non-differentiation between civilians and killers, provides extremists with fertile recruiting conditions by discrediting the government in the eyes of a significant part of its population.
An undifferentiated approach towards political Islamism that fails to distinguish between those who reject violence and those who resort to terror only facilitates the extremists’ work, for they emerge as champions of causes that do not reflect their true goals.
Russia provides conclusive evidence of the impotence of authoritarian violence and disregard for the rule of law.
President Vladimir Putin undertook a scorched-earth policy in Chechnya, driving many Chechen nationalists straight into the extremists’ arms.
Terrorist attacks on Russia did not cease or decline.
Indeed, recall the terrorism in Beslan in September 2004, in which a single attack on a school killed over 330 people.
Iraq also is demonstrating the limits of illegitimate violence when combating terrorism.
The Bush administration now seems to realize this.
It would be a mistake to believe that the deaths of thousands of civilians, along with arbitrary imprisonment and torture, do not contribute to the spread of terror in Iraq.
After all, torture victims are the best possible advertisement for terrorist recruitment.
When it comes to fighting terrorism, moreover, democracies are more effective both politically and operationally, particularly in terms of their intelligence services.
Intelligence forces in authoritarian states are either highly centralized or tend to become autonomous power centers.
In either case, they are subject to no public scrutiny and accountability.
As a result, they lose their ability over time to evaluate critically their own actions and errors.
Intelligence services in democratic contexts usually have oversight mechanisms that serve to limit abuses of power, and to guarantee effective action by punishing top officials that fail to do their jobs properly.
In the United States, a powerful bi-partisan Senate committee directly monitors the intelligence services.
Its report on the inability of the intelligence services, notably the CIA and the FBI, to prevent the September 11, 2001, terrorist attacks also contained a series of recommendations for restructuring these services to render them more effective.
Europe’s response to terror requires, first and foremost, strengthening its intelligence services so that they can detect and dismantle terrorist cells while respecting basic rights and due process.
It also requires greater coordination among all the European Union’s member states and their allies and partners.
At the same time, the rule-of-law approach to fighting terrorism must be a pillar of European cooperation with third countries, namely with those of the Mediterranean, or with Pakistan, thereby contributing to a security culture that is conducive to democratization.
Deepening democracy in turn means allowing full civic participation, including non-violent Islamic groups.
The right to public speech and peaceful assembly must be defended for those who feel marginalized and indignant at what they – and most Europeans – view as injustices committed against the Palestinians, the Chechens, and the Iraqis.
Last, but not least, combating identity-based extremism calls for a greater capacity to integrate all those who live within the EU.
The response to terrorism should be to reaffirm the value of the rule of law over arbitrary repression, and of the diversity that is the hallmark of Europe’s cities, particularly London and Paris, but increasingly many others across the Union.
We cannot – indeed, must not – cede to terror by building walls around and within our societies.
The best response to intolerant extremism is to cultivate an open and pluralistic society that treats all those who live within its borders as full citizens.
Europe turned diversity into one of its constitutional traits, and this is why it has had such an impact on the world.
Protecting that essence is the best way to honor the memory of the victims of terror, be they from London, Sharm el-Sheik, Madrid, Casablanca, or New York.
Fighting the Aids Pandemic
CAMBRIDGE: After a wasted decade, the world is rousing itself against the AIDS pandemic sweeping through the world’s poorest countries, especially in Africa and South-Asia.
The pandemic has claimed 19 million lives, and created 13 million orphans.
34 million more people live with the HIV virus that causes AIDS; virtually all are marked for early death.
While first identified in the US in the early 1980s, Aids is now concentrated in poor countries: 25 million people suffer from it in Africa; 6 million more in Asia.
In parts of Southern Africa more than 20% of adults are afflicted.
Poor countries suffer more than rich countries for multiple reasons.
Poverty leads to lower comprehension of the disease, with individuals less likely to protect themselves by using condoms.
Poverty makes medical treatment expensive, so poor people with AIDS often hide their disease because there is no point in having tests if treatment doesn’t follow.
Poverty also induces husbands to work away from home as migrant laborers, creating an environment in which sex with multiple partners is more likely.
Poverty also renders women powerless to reject unwanted sexual advances from men who may infect them.
Even the biology of the disease may be different.
HIV/AIDS may be more readily transmitted in Sub-Saharan Africa because of the prevalence of other diseases, especially other sexually transmitted diseases, that facilitate the transmission of HIV.
The genetic characteristics of HIV in Southern Africa are also different from HIV in America and Europe.
Some scientists believe Africa’s genetic sub-type is more easily transmitted.
HIV/AIDS is the greatest pandemic in modern history.
Because it is concentrated in poor countries, it seems, the world has shrugged.
The World Bank provides only a few millions dollars, not the billions needed to combat the disease in Africa.
It’s almost as if China possessed a cure for the bubonic plague in the 14th century, but decided to stand by and watch as Europe succumbed to the Black Death.
It is time to shift from inaction to urgent combat against the pandemic, backed by billions of dollars in assistance from rich countries.
While no overall action plan exists yet, the outlines of such a plan have taken shape.
A proper plan of action should have three components: prevention, treatment, and new research and development towards medical approaches to controlling the disease.
Prevention is mostly the responsibility of poor countries. Their leaders should speak out publicly and repeatedly against the disease, helping educate their people about how to reduce risky behavior.
Special programs to induce prostitutes to use condoms have helped to reverse the epidemic in Thailand; similar approaches are needed in Africa.
Rich countries must provide urgent funding for medical treatment of those with HIV/AIDS.
This includes: funds to stop the transmission of AIDS from mothers to infants; funds to help fight infections such as tuberculosis that accompany AIDS; and with good program design, even funds for anti-retroviral therapies.
With specially designed, low-cost combinations of drugs, and with the drugs provided to the poorest countries at the lowest possible production costs, it may be possible to extend ARV therapies to even very poor countries at an acceptable price.
The third step must be an expanded program of research and development into new and more effective approaches to controlling the disease.
The most promising answer for the long term is a vaccine to protect against the disease.
Recent breakthroughs in basic science give hope that a vaccine can be developed within a decade, if the billions of dollars of research and development funds are mobilized by both public and private sectors.
A full-fledged fight against AIDS in Africa might require support from rich countries of around $5 billion per year for this three-pronged strategy of prevention, treatment, and research.
Perhaps $4 billion is needed for prevention and care, and $1 billion for research specifically directed at the disease in Sub-Saharan Africa (in addition to more general AIDS research already underway). $5 billion amounts to a mere $5 per person per year, since there are 1 billion people living in rich countries that can donate.
At such a modest cost, and with the stakes so high, it is hard to imagine the world failing to act decisively.
At the G-8 summit in Japan last week, rich-country leaders pledged action.
They agreed to convene in Japan by the end of the year to chart a practical plan of action.
For the sake of humanity, let us insist that rhetoric is turned into real financial support to organize efforts to save millions of lives in the poorest countries.
Fighting the \
As the US presidential heats up, critics argue that President George W. Bush's war in Iraq has made the problem of combating terrorism worse.
It is a serious charge, because the world needs a broader strategy against terrorism.
Terrorism is nothing new, nor is it a single enemy.
It is a longstanding method of conflict frequently defined as deliberate attack on the innocent with the objective of spreading fear.
The attacks on New York and Washington of 2001 were dramatic escalations of an age-old phenomenon. Terrorism today, however, is different from what it was in the past.
Nowadays, instruments of mass destruction are smaller, cheaper, and more readily available.
Cellular phones were used as timers in the attacks in Madrid last March.
Hijacking an airplane is relatively inexpensive.
Finally, the information revolution provides inexpensive means of communication and organization that allow groups once restricted to local and national police jurisdictions to become global.
Al Qaeda is said to have established a network in fifty or more countries.
Changes have also occurred in the motivation and organization of terrorist groups. Terrorists in the mid-20th century tended to have relatively well-defined political objectives, which were often ill-served by mass murder.
Governments supported many covertly.
Toward the century's end, radical groups grew on the fringes of several religions.
Most numerous were the tens of thousands of young Muslims who fought against the Soviet occupation of Afghanistan, where they were trained in a wide range of techniques and many were recruited to organizations with an extreme view of the religious obligation of jihad .
These technological and ideological trends increased both the lethality and the difficulty of managing terrorism.
Because of the unprecedented scale of Al Qaeda's attacks, the focus is properly on Islamic extremists.
But it would be a mistake to limit our concern solely to Islamic terrorists, for that would ignore the way that technology is putting into the hands of deviant groups and individuals' destructive capabilities that were once limited primarily to governments and armies.
Deviant individuals and groups exist in all human societies, and they are now empowered in ways that were once unthinkable.
Think, for example of Timothy McVeigh, who bombed the federal building in Oklahoma City in 1995, or the Aum Shinrykio cult that released poison gas in the Tokyo subway system the same year.
Lethality has been increasing.
In the 1970's, the Palestinian attack on Israeli athletes at the Munich Olympics and attacks by groups like the Red Brigades galvanized world attention at the cost of dozens of lives.
In the l980's, the worst terrorist incident killed 300 people.
The attacks on America of September 2001 cost several thousand lives.
This escalation occurred without using weapons of mass destruction.
If one imagines a deviant group in some society gaining access to biological or nuclear materials, it is possible terrorists could destroy millions of lives.
To kill so many people in the 20th century, a Hitler or Stalin required the apparatus of a totalitarian government.
It is now easy to envisage extremist groups and individuals killing millions without government help
Politics has plagued efforts to agree on a common definition of terrorism at the United Nations.
Some skeptics argue that one man's terrorist is another man's freedom fighter, and that treating suppression of terrorism as a global public good is thus merely the hypocrisy of the powerful trying to disarm the weak.
That need not be the case.
Not all struggles for national liberation turn to deliberate killing of innocents.
Deliberate killing of non-combatants (in war or not) is condemned by most major religions, including Islam.
Such behavior is unacceptable whether it is carried out by the powerful or the weak.
While any definition of terrorism has problems at the margins, the core of terrorism is clear enough to permit efforts to de-legitimize it.
Indeed, many countries are parties to UN conventions that commit them to combating aspects of terrorist behavior, even though the UN has not agreed on a single formal definition.
Today, some states harbor terrorists in order to attack their enemies or because they are too weak to control powerful groups.
If a campaign to suppress terrorism is based on broad coalitions that focus on de-legitimizing attacks on innocent non-combatants, it has some prospect of success.
Indeed, one lesson of the efforts since 2001 is that there is no way to avoid broad cooperation.
In that sense, the metaphor of war - with its emphasis on military force is - misleading.
The metaphor of war was understandable in the aftermath of the 2001 attacks, but creates as many problems as it solves.
How long will the war last and how does it relate to civil liberties and alliances?
Bombing is not an option for fighting terrorist cells in Hamburg, Singapore, or Detroit.
Only close civilian cooperation in intelligence sharing, police work across borders, tracing financial flows, and working to pre-clear cargo manifests and passenger lists can cope with such a threat.
Countries cooperate out of self-interest, but a country's soft or attractive power, not only its military might, affects the degree of cooperation.
That is why critics argue that Bush's policy in Iraq was a mistake.
It squandered American soft power, diverted attention from Afghanistan and Al Qaeda, and created a danger that Iraq may become a haven for terrorists.
But critics of Bush at home and abroad must also realize that, notwithstanding past mistakes, pursuing a common strategy is essential, because terrorism is here to stay.
Fighting Words and False Promises
For almost five years, the â€œwar on terrorâ€ has proved to be a false metaphor that has led to counterproductive and self-defeating policies.
A misleading figure of speech has been applied literally to unleash a real war on several fronts, including Iraq, Gaza, Lebanon, Afghanistan, and Somalia.
Thousands of innocent civilians have been killed, enraging millions around the world.
Yet al-Qaeda has not been subdued, as was shown by the recent plot to blow up United States-bound commercial flights from London.
That plot, which could have claimed more victims than the 9/11 attacks, was foiled by the vigilance of the British intelligence authorities.
Clearly, it wonâ€™t be the last.
Unfortunately, the American public accepted uncritically the war metaphor as the obvious response to 9/11.
Indeed, even now, when it is widely admitted that the invasion of Iraq was a blunder, the â€œwar on terrorâ€ remains the frame into which American policy has to fit.
Most Democratic politicians, too, subscribe to it for fear of being branded as weak on defense.
But continuing support for the war on terror makes it no less self-defeating.
By its very nature, war creates innocent victims, and this even more likely when it is waged against terrorists, because terrorists tend to keep their whereabouts hidden.
The deaths, injuries, and humiliation of civilians generate rage and resentment among their families and communities, in turn fueling support for terrorists.
Moreover, terrorism is an abstraction that lumps together all political movements that use terrorist tactics.
Al-Qaeda, Hamas, Hezbollah, and the Sunni insurrection and the Mahdi army in Iraq are very different forces, but President George W. Bushâ€™s global war on terror prevents us from differentiating between them and dealing with them accordingly.
It inhibits much-needed negotiations with Iran and Syria, because they are states that support terrorist groups.
At the same time, as the British have shown, groups like al-Qaeda are best dealt with by good intelligence.
The war on terrorâ€™s emphasis on military action merely increases the terrorist threat and makes the task of the intelligence agencies more difficult.
Osama bin Laden and Ayman al-Zawahiri are still at large, and we need to focus on finding them if we are to prevent attacks like the one foiled in England.
Finally, the war on terror drives a wedge between â€œusâ€ and â€œthem.â€ We are innocent victims; they are perpetrators.
While we seem not to notice that we also become perpetrators in the process, much of the rest of the world does notice â€“ a gap in perception that has severely weakened Americaâ€™s international credibility and standing.
Taken together, these factors ensure that the war on terror cannot be won.
On the contrary, an endless war waged against an unseen enemy is doing great damage not only to our authority and prestige in the world, but also to our own society.
It has led to a dangerous extension of executive powers, tarnished our adherence to universal human rights, and inhibited the critical process that is at the heart of an open society.
It has also cost a lot of money.
Most importantly, the war on terror has diverted attention from other urgent tasks that require American leadership, such as finishing the job that we correctly began in Afghanistan, addressing the looming global energy crisis, and dealing with nuclear proliferation.
With American influence at low ebb, the world is in danger of sliding into a vicious cycle of escalating violence.
We can escape it only if we Americans repudiate the war on terror as a false metaphor.
If we persevere on our current course, the situation will continue to deteriorate.
It is not our will that is being tested, but our understanding of reality.
It is painful to admit that our predicaments are brought about by our own misconceptions.
But not admitting it is bound to prove even more painful in the long run.
The strength of an open society lies in its ability to recognize and correct its mistakes.
That is the test that now confronts us.
Finance Agonistes
LONDON – For at least a quarter-century, the financial sector has grown far more rapidly than the economy as a whole, both in developed and in most developing countries.
The ratio of total financial assets (stocks, bonds, and bank deposits) to GDP in the United Kingdom was about 100% in 1980, while by 2006 it had risen to around 440%.
In China, financial assets went from being virtually non-existent to well over 300% of GDP during this period.
As the size of the financial industry grew, so, too, did its profitability.
The share of total profits of companies in the United States represented by financial firms rocketed from 10% in 1980 to 40% in 2006.
Against that background, it is not surprising that pay in the financial sector soared.
The City of London, lower Manhattan, and a few other centers became money machines that made investment bankers, hedge-fund managers, and private equity folk immoderately wealthy.
University leaders like me spent much of our time persuading them to recycle a portion of their gains to their old schools.
For the last two years, things have been different.
Many financial firms have shrunk their balance sheets dramatically, and of course some have gone out of business altogether.
Leverage is down sharply.
Investment banks with leverage of more than 30 times their capital in early 2007 are now down to little more than ten times.
Trading volumes are down, as is bank lending, and there have been major layoffs in financial centers around the globe.
Is this a short-term phenomenon, and will we see an early return to rapid financial-sector growth as soon as the world economy recovers?
Already the market is full of rumors that guaranteed bonuses are returning, that hedge funds are making double-digit returns, and that activity is reviving in the private equity market.
Are these harbingers of a robust recovery for the financial sector, or just urban myths?
There is no certain answer to that question, but perhaps economic history can offer some clues.
A recent analysis by Andy Haldane of the Bank of England of long-term returns on UK financial sector equities suggests that the last 25 years have been very unusual.
Suppose you had placed a long-term bet on financial equities in 1900, along with a short bet on general equities – in effect a gamble on whether the UK financial sector would outperform the market.
For the first 85 years, this would have been a very uninteresting gamble, generating an average return of only around 2% a year.
But the period from 1986 to 2006 was radically different.
During those two decades, your annual average return would have been more than 16%.
As Haldane puts it, “banking became the goose laying the golden eggs.” Indeed, there is no period in recent UK financial history that bears any comparison to those jamboree decades.
If you had unwound your bet three years ago, you would now be sitting pretty – as long as you had gone into cash, of course – because the period since 2006 has undone most of these gains.
So if you had held your bank stocks up to the end of last year, over 110 years your investment would have yielded an annual average return of less than 3%, still broadly a break-even strategy.
Why was this 20-year experience so unusual, with returns so much higher than at any time in the last century?
The most straightforward answer seems to be leverage.
Banks geared up dramatically, in a competitive race to generate higher returns.
Haldane describes this as resorting to the roulette wheel.
Perhaps that analogy is rather insulting to those who play roulette.
Indeed, the phrase “casino banking” tends to ignore the fact that casinos have a rather good handle on their returns.
They are typically very astute at risk management, unlike many of the banks that dramatically increased their leverage – and thus their risks – during the last 20 years.
The conclusions that we might draw for the future depend heavily on how central banks and regulators react to the crisis.
At present, financial firms are learning the lessons for themselves, reducing leverage and hoarding capital and cash, whereas the authorities are trying to persuade banks to expand lending – precisely the strategy that led to the current crisis.
Of course, we know that a different approach will be needed in the longer run.
In effect, the authorities are following the approach first outlined by St. Augustine.
They would like banks to be “chaste,” but not yet.
But when growth does return, leverage will be far more tightly constrained than it was before.
Regulators are already talking about imposing leverage ratios, as well as limits on risk-weighted assets.
If they follow through, as I expect, there will be no return to the strategies of the last two decades.
In that case, finance will no longer be an industry that systematically outpaces the rest of the economy.
There will be winners and losers, of course, but systematic sectoral out-performance looks unlikely.
What that will mean for financial-sector pay is a slightly more complex question, to which I will return.
Finance’s Crisis of Legitimacy
WASHINGTON, DC – The recent departure of Robert Diamond from Barclays marks a watershed.
To be sure, CEOs of major banks have been forced out before.
Chuck Prince lost his job at Citigroup over excessive risk-taking in the run-up to the financial crisis of 2008, and, more recently, Oswald Grübel of UBS was pushed out for failing to prevent unauthorized trading to the tune of $2.3 billion.
But Diamond was a banker supposedly at the top of his game.
Barclays, it was claimed, had come through the 2008-2009 crisis without benefiting from government support.
And, while his bank had been found in violation of various rules recently, including on products sold to consumers and on how it reported interest rates, Diamond had managed to distance himself from the damage.
Press reports indicate that regulators were willing to give Diamond a free pass – right up to the moment when a serious political backlash took hold.
Diamond started to fight back, pointing an accusatory finger at the Bank of England.
At that point, he had to go.
There are three broader lessons of Diamond’s demise at Barclays.
First, the political backlash was not from backbenchers or uninformed spectators on the margins of the mainstream.
Top politicians from all parties in the United Kingdom were united in condemning Barclays’ actions, particularly with regard to its systemic cheating on the reporting of interest rates, exposed in the Libor scandal.
(The London Interbank Offered Rate is a key benchmark for borrowing and lending around the world, including for the pricing of derivatives).
Indeed, Chancellor of the Exchequer George Osborne went so far as to say, “Fraud is a crime in ordinary business; why shouldn’t it be so in banking?”
His clear implication is that fraud was committed at Barclays – a serious allegation from Britain’s finance minister.
After five years of global financial-sector scandals on a grand scale, patience is wearing thin.
As Eduardo Porter of The New York Times put it,
“Bigger markets allow bigger frauds.
Bigger companies, with more complex balance sheets, have more places to hide them.
And banks, when they get big enough that no government will let them fail, have the biggest incentive of all.”
Second, Diamond apparently thought that he could take on the British establishment.
His staff leaked the contents of a conversation he claimed to have had with Paul Tucker, a senior Bank of England official, suggesting that the BoE had told Barclays to report inaccurate interest-rate numbers.
Diamond apparently forgot that the continued existence of any bank with a balance sheet that is large relative to its home economy – and its ability to earn a return for shareholders – depends entirely on maintaining a good relationship with regulators.
Barclays has total assets of around $2.5 trillion – roughly the size of the UK’s annual GDP – and is either the fifth- or eighth-largest bank in the world, depending on how one measures balance sheets.
Banks at this scale benefit from huge implicit government guarantees; this is what it means to be “too big to fail.”
Diamond apparently believed his own rhetoric – that he and his bank are critical to economic prosperity in the UK.
The regulators called his bluff and forced him to resign.
Barclays’ stock price rose slightly on the news.
The final lesson is that the big showdowns between democracy and big bankers are still to come – both in the United States and in continental Europe.
On the surface, the banks remain powerful, yet their legitimacy continues to crumble.
Jamie Dimon, CEO of JP Morgan Chase, presided this year over reckless risk-taking to the tune of nearly $6 billion (we might call it a “three Grübel” debacle), yet his job apparently remains secure.
Dimon even remains on the board of the Federal Reserve Bank of New York, despite the fact that the New York Fed is deeply involved in the investigation not only of JP Morgan Chase’s trading losses, but also of its potential involvement in the broadening Libor scandal.
As Dennis Kelleher, the president of the advocacy group Better Markets, documented in recent congressional testimony, two years after the passage of the Dodd-Frank legislation, the US banking system continues to fight hard – and effectively – to undermine meaningful reform.
(Kelleher’s testimony is a must-read assessment, as is his opening statement to the hearing).
But progress is nonetheless being made.
Dimon is the public face of megabanks’ resistance to reform; repeated and public egg on this particular face strengthens those who want to rein in these banks’ excessive and irresponsible risk-taking.
Meanwhile, the European situation looks explosive.
The European Union’s approach to bank regulation encouraged financial institutions to load up on government debt – supposedly a “risk-free” asset.
Now, given the profound sovereign-debt crisis in the eurozone periphery, government defaults threaten to take down the big banks.
The European Central Bank has provided a great deal of emergency “liquidity” funding to banks, which they use to buy even more government debt.
This holds down interest rates on that debt in the short run, but creates even bigger potential losses in the case of potential default.
Banks and politics are deeply intertwined in all advanced economies.
Diamond discovered that, ultimately, politicians trump bankers – at least in the UK.
But what really matters is legitimacy and informed public opinion.
Do you really believe the increasingly dubious notion that megabanks, as currently constituted, are good for the rest of the private sector, and thus for economic growth and job creation?
Or do you begin to consider more seriously the increasingly mainstream proposition that global megabanks and their leaders have simply become too powerful and dangerous?
The Political Consequences of Financial Crises
LONDON – I may not be the only finance professor who, when setting essay topics for his or her students, has resorted to a question along the following lines: “In your view, was the global financial crisis caused primarily by too much government intervention in financial markets, or by too little?”
Roughly a third, mesmerized by the meretricious appeal of the Efficient Market Hypothesis, argued that governments were the original sinners.
Their ill-conceived interventions – notably the US-backed mortgage underwriters Fannie Mae and Freddie Mac, as well as the Community Reinvestment Act – distorted market incentives.
Some even embraced the argument of the US libertarian Ron Paul, blaming the very existence of the Federal Reserve as a lender of last resort.
Another third, at the opposite end of the political spectrum, saw former Fed Chairman Alan Greenspan as the villain.
It was Greenspan’s notorious reluctance to intervene in financial markets, even when leverage was growing dramatically and asset prices seemed to have lost touch with reality, that created the problem.
More broadly, Western governments, with their light-touch approach to regulation, allowed markets to career out of control in the early years of this century.
The remaining third tried to have it both ways, arguing that governments intervened too much in some areas, and too little in others.
Avoiding the question as put is not a sound test-taking strategy; but the students may have been onto something.
Now that the crisis is seven years behind us, how have governments and voters in Europe and North America answered this important question?
Have they shown, by their actions, that they think financial markets need tighter controls or that, on the contrary, the state should repudiate bailouts and leave financial firms to face the full consequences of their own mistakes?
From their rhetoric and regulatory policies, it would appear that most governments have ended up in the third, fence-sitting camp.
Yes, they have implemented a plethora of detailed controls, scrutinizing banks’ books with unprecedented intensity and insisting on approving cash distributions, the appointment of key directors, and even job descriptions for board members.
But they have ruled out any future government or central-bank support for ailing financial institutions.
Banks must now produce “living wills” showing how they can be wound down without the authorities’ support.
The government will wash its hands of them if they run into trouble: the era of “too big to fail” is over.
Perhaps this two-track approach was inevitable, though it would be good to know the desired end-point.
Is it a system in which market discipline again dominates, or will regulators sit on the shoulders of management for the foreseeable future?
But what have voters concluded?
In the first wave of post-crisis elections, the message was clear in one sense, and clouded in another.
Whichever government was in power when the crisis hit, whether left or right, was booted out and replaced by a government of the opposite political persuasion.
That was not universally true – see Germany’s Angela Merkel – but it certainly was true in the United States, the United Kingdom, France, and elsewhere.
France moved from right to left, and the UK went from left to right.
But voters’ verdict on their governments was more or less identical: things went wrong on your watch, so out you go.
But now we can see a more consistent trend developing.
Three German economists, Manuel Funke, Moritz Schularik, and Christoph Trebesch, have just produced a fascinating assessment based on more than 800 elections in Western countries over the last 150 years, the results of which they mapped against 100 financial crises.
Their headline conclusion is stark: “politics takes a hard right turn following financial crises.
On average, far-right votes increase by about a third in the five years following systemic banking distress.”
The Great Depression of the 1930s, which followed the Wall Street crash of 1929, is the most obvious and worrying example that comes to mind, but the trend can be observed even in the Scandinavian countries, following banking crises there in the early 1990s.
So seeking to explain, say, the rise of the National Front in France in terms of President François Hollande’s personal and political unpopularity is not sensible.
There are greater forces at work than his exotic private life and inability to connect with voters.
The second major conclusion that Funke, Schularik, and Trebesch draw is that governing becomes harder after financial crises, for two reasons.
The rise of the far right lies alongside a political landscape that is typically fragmented, with more parties, and a lower share of the vote going to the governing party, whether of the left or the right.
So decisive legislative action becomes more challenging.
At the same time, a surge of extra-parliamentary mobilization occurs: more and longer strikes and more and larger demonstrations.
Control of the streets by government is not as secure.
The average number of anti-government demonstrations triples, the frequency of violent riots doubles, and general strikes increase by at least a third.
Greece has boosted those numbers recently.
The only comforting conclusion that the three economists reach is that these effects gradually peter out.
The data tell us that after five years, the worst is over.
That does not seem to be the way things are moving now in Europe, if we look at France’s recent election scare, not to mention Finland and Poland, where right-wing populists have now come to power.
Maybe the answer is that the clock starts ticking on the five years when the crisis is fully over, which is not yet true in Europe.
So politics seems set to remain a difficult trade for some time.
And the bankers and financiers who are widely blamed for the crisis will remain in the sin bin for a while yet, until voters’ expectations of economic and financial stability are more consistently satisfied.
Financial Crisis and War
PRINCETON – The approach of the hundredth anniversary of the outbreak of World War I in 1914 has jolted politicians and commentators worried by the fragility of current global political and economic arrangements.
Indeed, Luxembourg’s prime minister, Jean-Claude Juncker, recently argued that Europe’s growing north-south polarization has set the continent back by a century.
The lessons of 1914 are about more than simply the dangers of national animosities.
The origins of the Great War include a fascinating precedent concerning how financial globalization can become the equivalent of a national arms race, thereby increasing the vulnerability of the international order.
In 1907, a major financial crisis emanating from the United States affected the rest of the world and demonstrated the fragility of the entire international financial system.
The response to the current financial crisis is replaying a similar dynamic.
Walter Bagehot’s 1873 classic Lombard Street described the City of London as “the greatest combination of economic power and economic delicacy that the world has ever seen.”
In one influential interpretation, popularized by the novelist, Labour Party MP, and future Nobel Peace Prize laureate Norman Angell in 1910, the interdependency of the increasingly complex global economy made war impossible.
But the opposite conclusion was equally plausible: Given the extent of fragility, a clever twist to the control levers might facilitate a military victory by the economic hegemon.
The aftermath of the 1907 crash drove the hegemonic power of the time – Great Britain – to reflect on how it could use its financial clout to enhance its overall strategic capacity.
That is the conclusion of an important recent book, Nicholas Lambert’s study of British economic planning and the First World War, entitled Planning Armageddon.
Lambert demonstrates how, in a grand strategic gamble, Britain began to marry its military – and especially naval – predominance and its global financial leadership.
Between 1905 and 1908, the British Admiralty developed the broad outlines of a plan for financial and economic warfare against Europe’s rising power, Germany. Economic warfare, if implemented in full, would wreck Germany’s financial system and force it out of any military conflict.
When Britain’s naval visionaries confronted a rival in the form of the Kaiser’s Germany, they understood how power could thrive on financial fragility.
Pre-1914 Britain anticipated the private-public partnership that today links technology giants such as Google, Apple, or Verizon to US intelligence agencies.
London banks underwrote most of the world’s trade;
Lloyds provided insurance for the world’s shipping.
These financial networks provided the information that enabled the British government to discover the sensitive strategic vulnerabilities of the opposing alliance.
For Britain’s rivals, the financial panic of 1907 demonstrated the necessity of mobilizing financial power themselves.
The US, for its part, recognized that it needed a central bank analogous to the Bank of England.
American financiers were persuaded that New York needed to develop its own commercial trading system to handle bills of exchange in the same way as the London market and arrange their monetization (or “acceptance”).
The central figure in pushing for the development of an American acceptance market was Paul Warburg, the immigrant younger brother of a great Hamburg banker who was the personal adviser to Germany’s Kaiser Wilhelm II.
The Warburg brothers, Max and Paul, were a transatlantic tandem, energetically pushing for German-American institutions that would offer an alternative to British industrial and financial monopoly.
They were convinced that Germany and the US were growing stronger year by year, while British power would erode.
Some of the dynamics of the pre-1914 financial world are now reemerging.
In the aftermath of the 2008 financial crisis, financial institutions appear both as dangerous weapons of mass economic destruction, but also as potential instruments for the application of national power.
In managing the 2008 crisis, foreign banks’ dependence on US-dollar funding constituted a major weakness, and required the provision of large swap lines by the Federal Reserve.
Addressing that flaw requires renationalization of banking, and breaking up the activities of large financial institutions.
For European bankers, and some governments, current efforts by the US to revise its approach to the operation of foreign bank subsidiaries within its territory highlight that imperative.
They view the US move as a new sort of financial protectionism and are threatening retaliation.
Geopolitics is intruding into banking practice elsewhere as well.
Russian banks are trying to acquire assets in Central and Eastern Europe.
European banks are playing a much-reduced role in Asian trade finance.
Chinese banks are being pushed to expand their role in global commerce.
Many countries have begun to look at financial protectionism as a way to increase their political leverage.
The next step in this logic is to think about how financial power can be directed to national advantage in the case of a diplomatic conflict.
Sanctions are a routine (and not terribly successful) part of the pressure applied to rogue states like Iran and North Korea.
But financial pressure can be much more powerfully applied to countries that are deeply embedded in the global economy.
In 1907, in the wake of an epochal financial crisis that almost brought a complete global collapse, several countries started to think of finance primarily as an instrument of raw power that could and should be turned to national advantage.
That kind of thinking brought war in 1914.
A century later, in 2007-2008, the world experienced an even greater financial shock, and nationalistic passions have flared up in its wake.
A Financial Early-Warning System
NEW YORK – Recent market volatility – in emerging and developed economies alike – is showing once again how badly ratings agencies and investors can err in assessing countries’ economic and financial vulnerabilities.
Ratings agencies wait too long to spot risks and downgrade countries, while investors behave like herds, often ignoring the build-up of risk for too long, before shifting gears abruptly and causing exaggerated market swings.
Given the nature of market turmoil, an early-warning system for financial tsunamis may be difficult to create; but the world needs one today more than ever.
Few people foresaw the subprime crisis of 2008, the risk of default in the eurozone, or the current turbulence in financial markets worldwide.
Fingers have been pointed at politicians, banks, and supranational institutions. But ratings agencies and analysts who misjudged the repayment ability of debtors – including governments – have gotten off too lightly.
In principle, credit ratings are based on statistical models of past defaults; in practice, however, with few national defaults having actually occurred, sovereign ratings are often a subjective affair.
Analysts at ratings agencies follow developments in the country for which they are responsible and, when necessary, travel there to review the situation.
This process means that ratings are often backward-looking, downgrades occur too late, and countries are typically rerated based on when analysts visit, rather than when fundamentals change.
Moreover, ratings agencies lack the tools to track consistently vital factors such as changes in social inclusion, the country’s ability to innovate, and private-sector balance-sheet risk.
And yet sovereign ratings matter tremendously.
For many investors, credit ratings dictate where and how much they can invest.
Ratings affect how much banks are willing to lend, and how much developing countries – and their citizens – must pay to borrow.
They inform corporations’ decisions regarding whom to do business with, and on what terms.
Given the problems with ratings agencies, investors and regulators recognize the need for a different approach.
Investors have tried to identify good alternatives – and have largely failed.
Assessments of risk such as sovereign interest-rate spreads and credit default swaps react (and often over-react) fast; but, because they reflect only the market’s understanding of risk, they are not a systematic mechanism for uncovering hidden risks and avoiding crises.
Indeed, the recent sudden rise in market volatility suggests that they are as bad as rating agencies at detecting the early warning signs of trouble.
Regulators, meanwhile, are now starting to require banks to develop their own internal ratings processes.
The problem is that few institutions have the tools and expertise to do this alone.
A comprehensive assessment of a country’s macro investment risk requires looking systematically at the stocks and flows of the national account to capture all dangers, including risk in the financial system and the real economy, as well as wider risk issues.
As we have seen in recent crises, private risk taking and debt are socialized when a crisis occurs.
So, even when public deficits and debt are low before a crisis, they can rise sharply after one erupts.
Governments that looked fiscally sound suddenly appear insolvent.
Using 200 quantitative variables and factors to score 174 countries on a quarterly basis, we have identified a number of countries where investors are missing risks – and opportunities.
China is a perfect example.
The country’s home developers, local governments, and state-owned enterprises are severely over-indebted.
China has the balance-sheet strength to bail them out, but the authorities would then face a choice: embrace reform or rely once again on leverage to stimulate the economy.
Even if China continues on the latter course, it will fail to achieve its growth targets and will look more fragile over time.
Brazil should have been downgraded below investment grade last year, as the economy struggled with a widening fiscal deficit, a growing economy-wide debt burden, and a weak and worsening business environment.
The corruption scandal at energy giant Petrobras is finally causing ratings agencies to reassess Brazil, but the move comes too late, and their downgrades probably will not be sufficient to reflect the true risk.
Other emerging markets also look fragile and at risk of an eventual downgrade.
In the eurozone, shadow ratings already signaled red flags in the late 2000s in Greece and the other countries of the periphery.
More recently, Ireland and Spain may deserve to be upgraded, following fiscal consolidation and reforms.
Greece, however, remains a basket case.
Even with substantial reform to improve its growth potential, Greece will never be able to repay its sovereign debt and needs substantial relief.
An assessment of sovereign risk that is systematic and data-driven could help to spot the risks that changing global headwinds imply.
To that extent, it provides exactly what the world needs now: an approach that removes the need to rely on the ad hoc and slow-moving approach of ratings agencies and the noisy and volatile signals coming from markets.
Financial Gain, Economic Pain
NEW YORK – In the past three months, global asset prices have rebounded sharply: stock prices have increased by more than 30% in advanced economies, and by much more in most emerging markets.
Prices of commodities – oil, energy, and minerals – have soared; corporate credit spreads (the difference between the yield of corporate and government bonds) have narrowed dramatically, as government-bond yields have increased sharply; volatility (the “fear gauge”) has fallen; and the dollar has weakened, as demand for safe dollar assets has abated.
But is the recovery of asset prices driven by economic fundamentals?
Is it sustainable?
Is the recovery in stock prices another bear-market rally or the beginning of a bullish trend?
While economic data suggests that improvement in fundamentals has occurred - the risk of a near depression has been reduced; the prospects of the global recession bottoming out by year end are increasing; and risk sentiment is improving - it is equally clear that other, less sustainable factors are also playing a role.
Moreover, the sharp rise in some asset prices threatens the recovery of a global economy that has not yet hit bottom.
Indeed, many risks of a downward market correction remain.
First, confidence and risk aversion are fickle, and bouts of renewed volatility may occur if macroeconomic and financial data were to surprise on the downside – as they may if a near-term and robust global recovery (which many people expect) does not materialize.
Second, extremely loose monetary policies (zero interest rates, quantitative easing, new credit facilities, emissions of government bonds, and purchases of illiquid and risky private assets), together with the huge sums spent to stabilize the financial system, may be causing a new liquidity-driven asset bubble in financial and commodity markets.
For example, Chinese state-owned enterprises that gained access to huge amounts of easy money and credit are buying equities and stockpiling commodities well beyond their productive needs.
The risk of a correction in the face of disappointing macroeconomic fundamentals is clear.
Indeed, recent data from the United States and other advanced economies suggest that the recession may last through the end of the year.
Worse, the recovery is likely to be anemic and sub-par – well below potential for a couple of years, if not longer – as the burden of debts and leverage of the private sector combine with rising public sector debts to limit the ability of households, financial firms, and corporations to lend, borrow, spend, consume, and invest.
This more challenging scenario of anemic recovery undermines hopes for a V-shaped recovery, as low growth and deflationary pressures constrain earnings and profit margins, and as unemployment rates above 10% in most advanced economies cause financial shocks to re-emerge, owing to mounting losses for banks’ and financial institutions’ portfolios of loans and toxic assets.
At the same time, financial crises in a number of emerging markets could prove contagious, placing additional stress on global financial markets.
The increase in some asset prices may, moreover, lead to a W-shaped double-dip recession.
In particular, thanks to massive liquidity, energy prices are now rising too high too soon.
The role that high oil prices played in the summer of 2008 in tipping the global economy into recession should not be underestimated.
Oil above $140 a barrel was the last straw – coming on top of the housing busts and financial shocks – for the global economy, as it represented a massive supply shock for the US, Europe, Japan, China and other net importers of oil.
Meanwhile, rising fiscal deficits in most economies are now pushing up the yields of long-term government bonds.
Some of the rise in long rates is a necessary correction, as investors are now pricing a global recovery.
But some of this increase is driven by more worrisome factors: the effects of large budget deficits and debt on sovereign risk, and thus on real interest rates; and concerns that the incentive to monetize these large deficits will lead to high inflation after the global economy recovers in 2010-11 and deflationary forces abate.
The crowding out of private demand, owing to higher government-bond yields – and the ensuing increase in mortgage rates and other private yields – could, in turn, endanger the recovery.
As a result, one cannot rule out that by late 2010 or 2011, a perfect storm of oil above $100 a barrel, rising government-bond yields, and tax increases (as governments seek to avoid debt-refinancing risks) may lead to a renewed growth slowdown, if not an outright double-dip recession.
The recent recovery of asset prices from their March lows is in part justified by fundamentals, as the risks of global financial meltdown and depression have fallen and confidence has improved.
But much of the rise is not justified, as it is driven by excessively optimistic expectations of a rapid recovery of growth towards its potential level, and by a liquidity bubble that is raising oil prices and equities too fast too soon. A negative oil shock, together with rising government-bond yields – could clip the recovery’s wings and lead to a significant further downturn in asset prices and in the real economy.
Financial History’s False Lessons
TOULOUSE – If history punishes those who fail to learn from it, financial history does its punishing with a sadistic twist – it also punishes those who learn from it too enthusiastically.
Time and again, financial crises have reflected the weaknesses of regulatory systems founded on the lessons learned from previous crises.
Today’s crisis is no exception; nor will the next one be.
The post-war system of financial regulation was founded on three supposed lessons from the 1930’s.
First, we thought that the main reason why banks fail is that depositors panic, not that the main reason depositors panic is that banks are in danger of failing.
Like the view that running away from lions provokes them to eat you, there is a grain of truth in the view that banks fail because depositors panic.
But it is a small grain, and one on which the average uninsured depositor, like the average tourist in a game park, would be ill-advised to rely.
In fact, many panics happen for a good reason.
Even in the 1930’s, most banks failed as a result of bad management and illegal activity, as is true today.
Second, we thought that the depositors prone to panic would always be small depositors – households and small firms – rather than corporations or professional investors.
We now know that this is wrong, but there was never any serious reason to believe it.
If large corporations (and other banks) have deposits that they expect to be able to claim on short notice, and if they know that not all such deposits can be withdrawn at the same time, then suspicion that a bank might fail gives them as much reason to rush to the exit as households have.
If bank failures typically reflect real underlying problems, sensitive professional investors can be expected to react quickly when any whiff of panic is in the air.
Lending between banks, as well as deposits placed by large corporations, increased spectacularly in the years leading up to the crisis.
This is particularly true of the repo markets, which provide the equivalent services for professional investors – banks and large corporations – that ordinary bank deposits provide for individuals and small firms.
Until the financial reforms adopted since the crisis, this “shadow” banking system operated outside the regulatory regime that applied to traditional deposit-taking banks.
Indeed, shadow banking would not have grown so fast had that regime not been devised with the apparent lessons of the 1930’s in mind.
But the shadow system’s failure after the collapse of Lehman Brothers was no less a bank run just because professional investors were involved.
In this case, unlike in the 1930’s, banks stopped trusting each other before the rest of us realized that it was time to stop trusting banks.
The third false lesson is that if we could only maintain confidence in the financial system (and by extension the wider economic system), the system itself could be trusted to survive and prosper.
This led to real alarm among policymakers whenever a threat to confidence appeared (as when the dot-com bubble burst at the end of the 1990’s).
The dot-com bubble wasn't a threat to the banking system as such, but rather a threat to aggregate demand.
But few people dared ask tough questions when confidence picked up again, as when a housing bubble was inflated on the rubble of collapsed technology stocks.
The idea that something that was good for confidence might lead to danger for the banking system was too strange to be believable.
The lesson that confidence-building measures averted a crash in 2000 was precisely the lesson that the financial system did not need to learn.
Why were we all taken in by the idea that we could make ourselves collectively richer by selling each other overpriced equities and houses?
We were collectively irrational, but that is no explanation.
We need to know why some forms of collective irrationality gain a stronger grip on us than others.
An intriguing clue comes from research in neuroscience that explains why it is impossible to tickle yourself.
Tickling appears to be caused by unexpected sensations on certain areas of the skin.
Because the brain of a person trying to tickle herself anticipates the sensations that will be caused by her fingers – a process performed within the cerebellum – the sensation no longer tickles.
You can, however, succeed in tickling yourself through an intermediary – a machine, for instance, that translates the movements of your fingers into sensations on the skin by a method indirect enough for the cerebellum to be unable to anticipate them.
Although the conscious part of your brain knows that the tickling sensation comes from you and isn’t “really” unexpected, the cerebellum doesn’t get it, and the tickling works.
Tickling yourself is as futile as trying to make yourself richer by writing yourself a check – or selling yourself your house for twice its current market price.
It isn’t much better if you and a friend write each other checks, or sell each other houses.
For a few years we managed to circumvent that part of our brains that told us we couldn’t tickle ourselves to greater wealth.
Perhaps ordinary citizens always knew that when they sold houses for real gains, ultimately they were profiting at someone else’s expense. It was only economists, who studied the lessons of previous crises, who fell for the idea that no one would lose out.
Today’s policymakers, reasoning from the 1930’s, appear to believe that creating confidence is somehow different from creating good reasons to be confident.
The recent “stress tests” of European banks were blatantly designed as a confidence-building measure rather than a genuine exploration of possible systemic weaknesses – failing, for instance, to include the possibility of default on Greek sovereign debt.
That, of course, is like testing your home’s fire extinguishers against burglars.
Positive results will persuade only those who have learned well the lessons of the 1930’s – and then failed to forget them.
Financial Hypocrisy
This year marks the tenth anniversary of the East Asia crisis, which began in Thailand on July 2, 1997, and spread to Indonesia in October and to Korea in December.
Eventually, it became a global financial crisis, embroiling Russia and Latin American countries, such as Brazil, and unleashing forces that played out over the ensuing years: Argentina in 2001 may be counted as among its victims.
There were many other innocent victims, including countries that had not even engaged in the international capital flows that were at the root of the crisis.
Indeed, Laos was among the worst-affected countries.
Though every crisis eventually ends, no one knew at the time how broad, deep, and long the ensuing recessions and depressions would be.
It was the worst global crisis since the Great Depression.
As the World Bank’s chief economist and senior vice president, I was in the middle of the conflagration and the debates about its causes and the appropriate policy responses.
This summer and fall, I revisited many of the affected countries, including Malaysia, Laos, Thailand, and Indonesia.
It is heartwarming to see their recovery.
These countries are now growing at 5% or 6% or more – not quite as fast as in the days of the East Asia miracle, but far more rapidly than many thought possible in the aftermath of the crisis.
Many countries changed their policies, but in directions markedly different from the reforms that the IMF had urged.
The poor were among those who bore the biggest burden of the crisis, as wages plummeted and unemployment soared.
As countries emerged, many placed a new emphasis on “harmony,” in an effort to redress the growing divide between rich and poor, urban and rural.
They gave greater weight to investments in people, launching innovative initiatives to bring health care and access to finance to more of their citizens, and creating social funds to help develop local communities.
Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription, and prognosis of the IMF and United States Treasury were.
The fundamental problem was premature capital market liberalization.
It is therefore ironic to see the US Treasury Secretary once again pushing for capital market liberalization in India – one of the two major developing countries (along with China) to emerge unscathed from the 1997 crisis.
It is no accident that these countries that had not fully liberalized their capital markets have done so well.
Subsequent research by the IMF has confirmed what every serious study had shown: capital market liberalization brings instability, but not necessarily growth.
(India and China have, by the same token, been the fastest-growing economies.)
Of course, Wall Street (whose interests the US Treasury represents) profits from capital market liberalization: they make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc.
In South Korea, the IMF urged the sale of the country’s banks to American investors, even though Koreans had managed their own economy impressively for four decades, with higher growth, more stability, and without the systemic scandals that have marked US financial markets with such frequency.
In some cases, US firms bought the banks, held on to them until Korea recovered, and then resold them, reaping billions in capital gains.
In its rush to have westerners buy the banks, the IMF forgot one detail: to ensure that South Korea could recapture at least a fraction of those gains through taxation.
Whether US investors had greater expertise in banking in emerging markets may be debatable; that they had greater expertise in tax avoidance is not.
The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current sub-prime debacle is glaring.
East Asian countries were told to raise their interest rates, in some cases to 25%, 40%, or higher, causing a rash of defaults.
In the current crisis, the US Federal Reserve and the European Central Bank cut interest rates.
Similarly, the countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation.
But lack of transparency played a central role in this past summer’s credit crunch; toxic mortgages were sliced and diced, spread around the world, packaged with better products, and hidden away as collateral, so no one could be sure who was holding what.
And there is now a chorus of caution about new regulations, which supposedly might hamper financial markets (including their exploitation of uninformed borrowers, which lay at the root of the problem.)
Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.
Following the 1997 crisis, there was a consensus that fundamental reform of the global financial architecture were needed.
But, while the current system may lead to unnecessary instability, and impose huge costs on developing countries, it serves some interests well.
It is not surprising, then, that ten years later, there has been no fundamental reform.
Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world’s economies.
बैंकर क्रांति
कुआला लुम्पुर - वित्तीय नियामकों को आम तौर पर परिवर्तन के प्रति एक नपा-तुला और सतर्क दृष्टिकोण अपनाने के लिए जाना जाता है। लेकिन विकासशील दुनिया में, इस ख्याति को उल्टा-पुल्टा किया जा रहा है। दुनिया के सबसे गरीब देशों में से कुछ में, केंद्रीय बैंकरों ने यह साबित कर दिया है कि वे साहसिक निर्णय लेने - औपचारिक वित्तीय प्रणाली में सहभागिता को व्यापक बनाने की खोज में नवीन दृष्टिकोण को अपनाने, वित्तीय स्थिरता को बढ़ाने, और अपने देशों को समावेशी, टिकाऊ आर्थिक विकास के मार्ग पर लाने के लिए तत्पर हैं।
वित्तीय समावेशन को बढ़ाने के लिए इस बात पर मौलिक रूप से पुनर्विचार करने की आवश्यकता होती है कि किसी देश की वित्तीय प्रणाली को किस प्रकार संरचित और संचालित किया जाता है। इसके लिए अक्सर केंद्रीय बैंकरों के पारंपरिक साधनों से इतर लिखतों का उपयोग करने की आवश्यकता पड़ती है। उदाहरण के लिए, केन्या में अधिकारियों ने विनियामक ढाँचे को इस बात के प्रति सचेत किया कि वे मोबाइल मुद्रा के विकास के लिए अनुमति दें। मलेशिया में, केंद्रीय बैंक ने जनता की वित्तीय साक्षरता के स्तर को ऊपर उठाने में प्रमुख भूमिका अदा की। और फिलीपीन्स में, बैंको सेन्ट्रल एनजी पिलिपिनास ने उन पहुँच स्थलों की संख्या दुगुनी करने में मदद की जहाँ उपभोक्ता वित्तीय सेवाएँ प्राप्त कर सकते हैं, 517 माइक्रो बैंकिंग कार्यालय खोलने में सहायता की, इनमें से कई कार्यालय ऐसी नगरपालिकाओं में खोले गए जहाँ कोई पारंपरिक बैंक शाखाएँ नहीं थीं।
इसी तरह, 2011 में बैंक ऑफ़ तंजानिया ने वित्तीय समावेशन के लिए सहयोग की माया घोषणा के तहत वित्तीय समावेशन को बढ़ाने के लिए विशिष्ट प्रतिबद्धता की, जो विकासशील देशों में गरीबों की सामाजिक और आर्थिक क्षमता का उपयोग करने हेतु नीति निर्माताओं की प्रतिबद्धता है। इसका परिणाम नाटकीय और अपेक्षाओं से बेहद अधिक था। तंजानिया ने अपने 50% वयस्क नागरिकों को बैंकिंग तक पहुँच प्रदान करने के लिए जो लक्ष्य रखा था उसे इसने निर्धारित समय से एक वर्ष पहले ही प्राप्त कर लिया जिससे यह देश डिजिटल वित्तीय सेवाओं में वैश्विक अग्रणी बन गया। पड़ोसी देश केन्या की तरह, मोबाइल मुद्रा को बड़े पैमाने पर अपनाना खेल परिवर्तक सिद्ध हुआ। बैंक के गवर्नर बेन्नो नदुलु ने कहा कि "यह अपरंपरागत लग सकता है। लेकिन हमें विनियमन की अपेक्षा नवाचार को बढ़ावा देना चाहिए।"
इलेक्ट्रॉनिक मुद्रा के मामले में पूर्वी अफ्रीका जहाँ पथ प्रदर्शक बना हुआ है, वहीं दुनिया के अन्य भाग विभिन्न नवोन्मेषी दृष्टिकोण अपना रहे हैं। कोलंबिया में पिछले वर्ष कांग्रेस ने विशेषीकृत इलेक्ट्रॉनिक जमा और भुगतान संस्था नामक एक नई तरह की वित्तीय संस्था बनाने के लिए कानून पारित किया। यद्यपि ये संस्थाएँ तकनीकी तौर पर बैंक नहीं हैं, ये मोबाइल फोन के माध्यम से या किसी डाक घर जैसे लाइसेंसशुदा स्थानों पर ग्राहकों से इलेक्ट्रॉनिक रूप से जमा और भुगतान स्वीकार करने के लिए सक्षम होती हैं। यह प्रयास 2014 में शुरू की गई एक व्यापक राष्ट्रीय रणनीति का हिस्सा है जिसमें 2016 के अंत तक 76% वयस्कों को वित्तीय पहुँच और 56% वयस्कों को सक्रिय बचत खाते उपलब्ध किए जाएँगे।
और प्रशांत क्षेत्र में, फिजी, पापुआ न्यू गिनी, समोआ, सोलोमन द्वीपसमूह, तिमोर-लेस्ते, टोंगा, और वानुअतु प्रशांत द्वीप क्षेत्रीय पहल (पीआईआरआई) को बनाने के लिए एकजुट हुए हैं जिससे प्रत्येक प्रशांत द्वीप देश, चाहे इनमें से किसी का केंद्रीय बैंक न भी हो, भौगोलिक रूप से चुनौतीपूर्ण वातावरण में वित्तीय सेवाओं की पहुँच, ��ुणवत्ता, और उनके उपयोग को बेहतर बनाने के लिए जानकारी को साझा कर सकेगा।
इनमें से प्रत्येक प्रयास देश के नेतृत्व वाली पहल के रूप में शुरू हुआ था, जो विशेष चुनौतियों से उद्भूत हुआ था और स्थानीय आबादी की विशिष्ट जरूरतों को पूरा करने के लिए बनाया गया था। लेकिन अनुभव का इकट्ठा होना अमूल्य साबित हो रहा है। ज्यों-ज्यों सबक साझा किए जा रहे हैं और सफलताओं से दूसरों को प्रेरणा मिल रही है, इसका प्रभाव भी कई गुना बढ़ता जा रहा है, यहाँ तक कि सबसे छोटे देश भी यह प्रदर्शित करने लग गए हैं कि वे महत्वपूर्ण योगदान कर सकते हैं।
इस बीच, जब केंद्रीय बैंक अपने परिचालन के तरीके बदलने लग गए हैं, प्रतिक्रिया के रूप में खुदरा बैंकों ने व्यापार करने के नए तरीके अपनाना शुरू कर दिया है। केन्या के ईक्विटी बैंक ने प्रत्यक्षतः वित्तीय रूप से अपवर्जित वर्गों को लक्षित करके काफी विशाल आकार धारण कर लिया है; सिर्फ छह वर्षों में, इसके ग्राहकों की संख्या आधे मिलियन से बढ़कर लगभग छह मिलियन हो गई है। दूरसंचार कंपनियाँ भी नई सेवाओं का मार्ग प्रशस्त कर रही हैं। उदाहरण के लिए, टिगो अब सीमा पार के मोबाइल भुगतानों और बिक्री एजेंटों के लिए नकदी रहित सेवाओं जैसे उत्पादों के साथ लैटिन अमेरिका और अफ्रीका में 14 से अधिक देशों में 56 मिलियन ग्राहकों को सेवा प्रदान कर रहा है।
जैसा कि महान परिवर्तन के किसी भी युग में होता है, यह देख पाना आसान नहीं होता है कि आगे क्या होनेवाला है। वीज़ा में वैश्विक वित्तीय समावेशन के प्रमुख स्टीफन केहो ने हाल ही में यह कहा कि "पिछले सात वर्षों से इस बात के बिल्कुल कोई संकेत नहीं मिलते हैं कि अगले सात वर्षों में क्या होगा।" तथापि, यह तो स्पष्ट है कि अभी भी बहुत कुछ किया जाना बाकी है - और यह भी कि अवसर लगभग असीम हैं।
दुनिया के दो बिलियन बैंक रहित लोगों को अंधकार से बाहर निकालने और मुख्य धारा की वित्तीय प्रणाली में लाने के लिए नियामकों, निजी क्षेत्र, गैर-लाभ संस्थाओं, क्षेत्रीय निकायों, और अंतर्राष्ट्रीय संगठनों के बीच नई साझेदारियों की आवश्यकता होगी। यह काम किसी कठिन काम की तरह लग सकता है, लेकिन इसे पूरा कर लेने पर हर किसी के लिए उज्ज्वल भविष्य का निर्माण करने में मदद मिलेगी।
Is Financial Repression Here to Stay?
LONDON – There are several definitions of financial repression – and the repressors and the repressed tend to see things differently.
But what financial repression usually involves is keeping interest rates below their natural market level, to the benefit of borrowers at the expense of savers.
The borrowers are often governments, and in many emerging economies the state has funded its extravagances by paying bank depositors derisory rates of interest.
But in the last seven years, since central banks in developed countries pushed down their base rates almost to zero, we have seen a First-World version of financial repression.
A recent research report from the insurer Swiss Re describes who has won and lost as a result, and questions the sustainability of the policies pursued by institutions such as the United States Federal Reserve, the European Central Bank, and the Bank of England.
The report’s argument is that while the stated motivation for ultra-loose monetary policy might be to guard against deflation and promote economic growth at a time when demand is weak, low interest rates also help governments fund their debt very cheaply.
Moreover, as we enter the eighth year of aggressive easing, unintended consequences are starting to appear – notably asset-price bubbles, increasing economic inequality (as wealthier investors able to hold equities benefit at the expense of small savers), and the risk of higher inflation in the future.
The jury may be out on the last point, but the first two are well established.
Many countries now have over-heated property and equity markets; in the US, the S&amp;P 500 index since 2009 has closely tracked the expansion of the Fed’s balance sheet.
As a result, price-earnings (P/E) ratios, which reflect investors’ enthusiasm for equities, are now high by historical standards (Swiss Re has a Financial Market Excess index, which has returned to its 2007 level).
Moreover, according to the Swiss Re report, “monetary policy and central bank asset purchases have aggravated economic inequality via equity price inflation.” The top 1% of US households have enjoyed a 50% gain in their financial wealth, while the bottom 90% have registered only a 12% profit.
The bottom 20% have probably not benefited at all.
Not surprisingly, central banks do not like this argument.
Fed Chair Janet Yellen insists that years of near-zero interest rates and quantitative easing were not intended to make it easier for the US government to fund its deficit.
She argues that focusing on asset prices ignores the role – helpful for all income groups – of the Fed’s monetary policy in maintaining growth and thus warding off the threat of a wholesale depression.
But central banks accept that their policies have led to distortions in financial markets.
For example, institutional investors, especially insurance companies and pension funds, have suffered badly.
They are major holders of fixed-interest securities, and their investment income has fallen sharply.
The returns they can provide to investors and pensioners have similarly fallen.
Logically, therefore, individuals need to save much more to guarantee their income in retirement.
That in itself may have a depressing effect on the economy, partly offsetting the monetary stimulus.
Indeed, it may be one reason why highly expansionary policies by the Fed and other central banks have taken so long to generate growth.
A further distortion stems from the prudential regulation adopted in reaction to the global financial crisis.
The imposition of higher capital requirements on riskier investments has pushed financial institutions into holding government debt, which in turn means that they have less money available to lend for productive investment.
Most countries have yet to see investment recover to pre-crisis levels.
On this analysis, a return to “normal” interest rates cannot come soon enough.
The alternative is further financial repression and, with it, low investment, rising economic and social tensions, and the emergence of a generation of impoverished pensioners.
Like Monty Python’s city-terrorizing “Hell’s Grannies,” tomorrow’s elderly will surely make their voices heard.
But can we really expect the old normal – positive long-term interest rates on government bonds – to return?
Maybe it is unreasonable for investors to expect positive rates on safe assets in the future.
Perhaps we should expect to pay central banks and governments to keep our money safe, with positive returns offered only in return for some element of risk.
One reason is that investment may never reach its previous levels.
If a service-based economy simply has less need for expensive fixed capital, why should we expect a return to the days when business investment was a strong component of demand?
Apps are cheap.
Furthermore, excess savings could be more than just a cyclical phenomenon.
Individuals may have come to value future consumption, in retirement, over current consumption – the reverse of the traditional relationship.
We are beginning to appreciate that in our productive years we must work harder, because our retirement years will be longer and healthier, and the income support provided by our governments and employers will be far less generous than they used to be.
In other words, it is rational to save more now.
In the long run, such a brave new world might not be an intolerable place.
But the transition from here to there will be very challenging for financial firms, be they banks, asset managers or, particularly, insurers.
The types of products that the latter offer to their customers will need to change, and the mix of assets in which they invest will be different, too.
The question for regulators is whether, in responding to the financial crisis, they have created perverse incentives that are working against a recovery in long-term private-sector investment.
Financial Re-Regulation and Democracy
NEW YORK – It has taken almost two years since the collapse of Lehman Brothers, and more than three years since the beginning of the global recession brought on by the financial sector’s misdeeds for the United States and Europe finally to reform financial regulation.
Perhaps we should celebrate the regulatory victories in both Europe and the United States.
After all, there is almost universal agreement that the crisis the world is facing today – and is likely to continue to face for years –&nbsp;is a result of the excesses of the deregulation movement begun under Margaret Thatcher and Ronald Reagan 30 years ago.
Unfettered markets are neither efficient nor stable.
But the battle – and even the victory – has left a bitter taste.
Most of those responsible for the mistakes – whether at the US Federal Reserve, the US Treasury, Britain’s Bank of England and Financial Services Authority, the European Commission and European Central Bank, or in individual banks, have not owned up to their failures.
Banks that wreaked havoc on the global economy have resisted doing what needs to be done.
Worse still, they have received support from the Fed, which one might have expected to adopt a more cautious stance, given the scale of its past mistakes and the extent to which it is evident that it reflects the interests of the banks that it was supposed to regulate.
This is important not just as a matter of history and accountability: much is being left up to regulators.
And that leaves open the question: can we trust them?
To me, the answer is an unambiguous no, which is why we need to “hard-wire” more of the regulatory framework.
The usual approach – delegating responsibility to regulators to work out the details – will not suffice.
And thatraises another question: whom can we trust?
On complex economic matters, trust had been vested in bankers (after all, if they make so much money, they obviously know something!) and in regulators, who often (but not always) came from the markets.
But the events of recent years have shown that bankers can make megabucks, even as they undermine the economy and impose massive losses on their own firms.
Bankers have also shown themselves to be “ethically challenged.”
A court of law will decide whether Goldman Sachs’ behavior – betting against products that it created – was illegal.
But the court of public opinion has already rendered its verdict on the far more relevant question of the ethics of that behavior.
That Goldman’s CEO saw himself as doing “God’s work” as his firm sold short products that it created, or disseminated scurrilous rumors about a country where it was serving as an “adviser,” suggests a parallel universe, with different mores and values.
As always, the “devil is in the details,” and financial-sector lobbyists have labored hard to make sure that the new regulations’ details work to their employers’ benefit.
As a result, it will likely be a long time before we can assess the success of whatever law the US Congress ultimately enacts.
But the criteria for judgment are clear: the new law must curb the practices that jeopardized the entire global economy, and reorient the financial system towards its proper tasks – managing risk, allocating capital, providing credit (especially to small- and medium-sized enterprises), and operating an efficient payments system.
We should toast the likely successes: some form of financial-product safety commission will be established; more derivative trading will move to exchanges and clearing houses from the shadows of the murky “bespoke” market; and some of the worst mortgage practices will be restricted.
Moreover, it looks likely that the outrageous fees charged for every debit transaction –&nbsp;a kind of tax that goes not for any public purpose but to fill the banks’ coffers – will be curtailed.
But the likely failures are equally noteworthy: the problem of too-big-to-fail banks is now worse than it was before the crisis.
Increased resolution authority will help, but only a little: in the last crisis, US government “blinked,” failed to use the powers that it had, and needlessly bailed out shareholders and bondholders – all because it feared that doing otherwise would lead to economic trauma.
As long as there are banks that are too big to fail, government will most likely “blink” again.
It is no surprise that the big banks succeeded in stopping some essential reforms; what was a surprise was a provision in the US Senate’s bill that banned government-insured entities from underwriting risky derivatives.
Such government-insured underwriting distorts the market, giving big banks a competitive advantage, not necessarily because they are more efficient, but because they are “too big to fail.”
The Fed’s defense of the big banks – that it is important for borrowers to be able to hedge their risks – reveals the extent to which it has been captured.
The legislation was not intended to ban derivatives, but only to bar implicit government guarantees, subsidized by taxpayers (remember the $180 billion AIG bailout?), which are not a natural or inevitable byproduct of lending.
There are many ways of curbing big banks’ excesses.
A strong version of the so-called Volcker Rule (designed to force government-insured banks to return to their core mission of lending) might work.
But the US government would be remiss to leave things as they are.
The Senate bill’s provision on derivatives is a good litmus test: the Obama administration and the Fed, in opposing these restrictions, have clearly lined up on the side of big banks.
If effective restrictions on the derivatives business of government-insured banks (whether actually insured, or effectively insured because they are too big to fail) survive in the final version of the bill, the general interest might indeed prevail over special interests, and democratic forces over moneyed lobbyists.
But if,&nbsp;as most pundits predict, these restrictions are deleted, it will be a sad day for democracy – and a sadder day for prospects for meaningful financial reform.
The Quiet Financial Revolution Begins
LAGUNA BEACH – Steadily and indisputably, the financial services industry – with which we all interact, whether as borrowers, savers, investors, or regulators – has embarked on a multiyear transformation.
This process, slow at first, has been driven by the combined impact of two sets of durable forces.
On one hand, top-down factors – regulatory change, unusual pricing, and what Nouriel Roubini has cleverly termed the “liquidity paradox” – are at work.
Then there are disruptive influences that percolate up from below: changing customer preferences and, even more important, outside visionaries seeking to transform and modernize the industry.
Beginning at the top, the regulatory pendulum is still swinging toward tighter supervision of traditional financial institutions, particularly large banks and insurance companies deemed “systemically important.”
Moreover, re-designed regulatory frameworks, phased implementation, and stepped-up supervision will gradually extend to other segments, including asset management.
This will contribute to further generalized de-risking within the regulated sectors, as part of a broader financial-sector movement toward a “utilities model” that emphasizes larger capital cushions, less leverage, greater disclosure, stricter operational guidelines, and a lot more oversight.
The pricing environment compounds the impact of tighter regulation.
Like utilities, established financial institutions are facing external constraints on their pricing power, though not of the traditional form.
Rather than being subjected to explicit price regulations and guidelines, these institutions operate in a “financial repression” regime in which key benchmark interest rates have been held at levels below what would otherwise prevail.
This erodes net interest margins, puts pressure on certain fee structures, and makes certain providers more cautious about entering into long-term financial relationships.
As a result of these two factors, established institutions – particularly the large banks – will be inclined to do fewer things for fewer people, despite being flush with liquidity provided by central banks (the “liquidity paradox”).
And banks and broker-dealers can be expected to provide only limited liquidity to their clients if a large number of them suddenly seek to realign their financial positioning at the same time.
But this is not just about them.
The fact is that providers of all long-term financial products, particularly life insurance and pensions, have no choice these days but to streamline their offerings, including a reduction of those that still provide longer-term guarantees to clients looking for greater financial security.
The impact on the financial-services industry of these top-down factors will gradually amplify the importance of the bottom-up forces.
Over time, this second set of factors will fuel more direct and efficient provision of services to a broader set of consumers, contributing to a reconfiguration of the industry as a whole.
For starters, customer expectations will evolve as the millennial generation increasingly accounts for a larger portion of earning, spending, borrowing, saving, and investing.
With many of these newer clients favoring “self-directed” lives, providers of financial services will be pressed to switch from a product-push mindset to offering more holistic solutions that allow for greater individual customization.
Market-communication functions will also be forced to modernize as more clients expect more credible and substantive “any place, any time, and any way” interactions.
Then there is the influence of outside disruptors.
Jamie Dimon, the CEO of JPMorgan Chase, expressed it well in his 2015 shareholder letter, observing that “Silicon Valley” is coming.
These new entrants want to apply more advanced technological solutions and insights from behavioral science to an industry that is profitable but has tended to under-serve its clients.
Airbnb and Uber have demonstrated that disruption from another industry is particularly powerful, because it involves enabling efficiency-enhancing structural changes that draw on core competencies and strategies that the incumbent firms lack.
Many other companies (for example, Rent the Runway, which provides short-term rentals of higher-end fashion) are in the process of doing the same thing.
Be it peer-to-peer platforms or crowd-funding, outside disruptors already are having an impact at the margin of finance, particularly in serving those who were previously marginalized by traditional firms or had lost trust in them.
The end result will be an industry that serves people via a larger menu of customizable solutions.
Though traditional firms will seek to adjust to maintain their dominance, many will be challenged to “self-disrupt” their thinking and operational approach.
And, while emerging firms will offer better services, they will not find it easy to overcome immediately and decisively the institutional and regulatory inertia that anchors traditional firms’ market position.
As a result, a proliferation of financial providers is likely, with particularly bright prospects for institutional partnerships that combine the more agile existing platforms with exciting new content and approaches.
Failure at the Financial Stability Board
WASHINGTON, DC – At least since the fall of 2008, leading economies’ officials have agreed – in principle – that something must be done about financial firms that are “too big to fail.”
Great efforts, including countless international meetings, working papers, and communiqués have been devoted to this end.
Earlier this month, the Basel-based Financial Stability Board (FSB) announced, to some fanfare, the completion of a major stage in this project.
But the announcement only served to underscore how little progress has been made.
The world’s largest banks remain too big to fail, and this is likely to have dire consequences in the near future.
The problem of too big to fail is not new – the phrase was first used in the United States in the 1980s.
It refers to any firm – usually in the financial sector – whose failure would have major negative spillover effects for the rest of the financial system and for the real (non-financial) part of the economy.
Prior to September 2008, there was some doubt as to whether large non-bank financial firms would be regarded as too big to fail.
Bear Stearns came close to failing earlier that year, before the Federal Reserve stepped in to facilitate a purchase by JPMorgan Chase.
Bear Stearns’ shareholders did not do well and much of its management immediately left the scene, but creditors were fully protected (in fact, ensuring this protection was a central motivation for the Fed’s intervention).
When Lehman Brothers came under severe pressure in September 2008, uncertainty reigned in financial markets (and at the top of Lehman): perhaps the Fed would help out again in some fashion.
By all accounts, the US Treasury and the Fed did indeed consider providing assistance, but then held back, worried about overstepping their legal authority and sufficiently confident that permitting Lehman to fail would not have dire consequences for the broader economy.
The second view proved to be spectacularly wrong.
Within 24 hours of Lehman’s failure, the US authorities were scrambling to prevent asset fire sales, a run on money market mutual funds, the collapse of other investment banks (such as Merrill Lynch, Morgan Stanley, and Goldman Sachs), and even the demise of large, integrated, global banks (such as Citigroup).
While deploying an unprecedented amount of financial firefighting equipment, officials and lawmakers – on both sides of the Atlantic – were clear that this was a “never again” situation.
As soon as the fires were out, they pledged, they would work diligently to ensure that the “next Lehman” could fail in a government-managed “resolution” process that would not cause panic and a collapse of credit.
This task was taken up at the international level by the FSB, established after the G-20 summit in London in April 2009.
After many years of working closely with leading national authorities (including in the US and Europe), on November 9 the FSB published “Removing Remaining Obstacles to Resolvability,” along with a number of related technical papers.
Unfortunately, there are three flaws in the FSB’s framework that will prevent it from being effectively applied to large global banks.
First, by definition, global banks operate across borders, and there is no agreement among different national authorities regarding how to respond in a crisis.
There is, arguably, better communication than there was before 2008, but when the chips are down, this will be worth little.
The countries involved have different legal rules, different procedures for protecting local assets, and different court systems.
A major international treaty could address all of this, but the immediate prospects for one are nonexistent.
Second, the FSB proposes to require a Total Loss Absorbing Capacity for all large banks.
But TLAC is just jargon for saying that these banks should fund themselves with both equity and “bail-in-able debt” – debt that can be converted to equity (or wiped out) when there is an official resolution event.
All this really means is that some debt can fall dramatically in value when government officials pull the trigger.
This may seem elegant in theory, but it is completely unworkable in practice.
In any real crisis, the authorities’ real fear is that the fall in one asset price (the equity value of big banks) will cause other asset-price declines – leading to a broader contraction of credit.
The idea of “loss-absorbing debt” is an oxymoron.
Third, what really matters for financial systems is the extent of equity financing – including how much equity banks are required to have.
Current levels are so low – debt funds around 95% of total credit exposure in most big US banks (and a slightly higher share in big European banks) – that banks’ equity can be substantially wiped out by even moderate negative shocks.
The good news is that the Fed increasingly seems to be taking this point on board – and inching toward higher capital requirements for the biggest banks.
Unfortunately, the failure of the international FSB approach means that the Fed must largely go it alone.
The Spider of Finance
LONDON – The global system of financial regulation is extraordinarily complex. Partly for that reason, it is little understood.
In order to explain it to my students at Sciences Po in Paris, I have devised a kind of wiring diagram that shows the connections among the different bodies responsible for the various components of oversight.
It makes a circuit board look straightforward.
Many people show some spark of recognition at the mention of the Basel Committee on Banking Supervision, which sets capital standards for banks.
They may also have heard of the Bank for International Settlements, the central banks’ central bank, in which the Basel Committee sits.
And the International Organization of Securities Commissions (IOSCO), which sets standards for exchanges and securities regulators, has name recognition in some quarters.
But when you get to the International Association of Insurance Supervisors, brows furrow.
There are many other groupings.
The International Accounting Standards Board does roughly what you might expect, though the Americans, while members, do not in fact use its standards – which are now confusingly called International Financial Reporting Standards.
But the IASB has spawned other committees to oversee auditing.
There is even – reminiscent of Hermann Hesse’s last novel, The Glass Bead Game – an international body that audits the bodies that audit the auditors.
The Financial Action Task Force sounds dynamic, like a rapid-response team one might send to a troubled country.
In fact, it is the part of the OECD that monitors the implementation of anti-money-laundering standards.
Why it is part of the OECD when its remit is global is a mystery few can explain.
This elaborate architecture (and there is a lot more) was assembled piecemeal in the 1980s and 1990s.
Until the Asian financial crisis, it was a web without a spider at its center.
When Hans Tietmeyer, a former head of the Bundesbank, was asked by G-7 finance ministers to review its effectiveness, he recommended a new spider, known as the Financial Stability Forum (FSF), which would examine the financial system as a whole and try to identify vulnerabilities that might cause future trouble.
I was a member of the FSF for five years.
I confess that I am rather afraid of spiders, but even an arachnophobe like me found little reason to be worried.
The FSF was not a scary creature, and the individual regulators, national and international, were largely left to their own devices, with all of the unhappy consequences with which we have become acquainted.
Before 2007, there was little political interest in tougher global standards, and individual countries resisted the idea that an international body might interfere in their sovereign right to oversee an unsound banking system.
So when the next crisis hit, the FSF was found wanting, and in 2009 the G-20 governments decided that a tougher model was needed – the Financial Stability Board.
The FSB has now been in operation for five years, and is currently working on some new proposals to deal with too-big-to-fail banks, which will be on the menu of the forthcoming G-20 meeting in Brisbane (along with surf and turf, Pavlovas, and other Australian delicacies).
There is not (yet) an international group that audits the FSB’s effectiveness.
But if there were, what would it say about the FSB’s performance so far, under the leadership of Mario Draghi and then of Mark Carney, each of whom did the job in his spare time, while running important central banks?
On the asset side of the balance sheet, the auditors would be bound to note that the Board has done much useful work.
Its regular reports to the G-20 pull together the diverse strands of regulation in a clear and comprehensible way.
There is no better source of information.
They would also record that pressure from the FSB has accelerated the work of sectoral regulators.
The second Basel accord took more than a decade to conclude;
Basel 3 was drawn up in little more than 24 months (though implementation is taking quite long).
The performance of the IOSCO and the IAIS has similarly been sharpened by the need to report progress through the FSB.
The Board has also issued some valuable warnings in its so-called “vulnerabilities” assessments.
It has pointed to emerging tensions in the system, without falling into the trap of forecasting ten of the next three crises.
And its peer review mechanism is prodding individual countries to strengthen their regulatory institutions.
Nonetheless, a frank assessment would acknowledge that this spider has so far caught few flies.
To switch animal metaphors, it is a watchdog without teeth.
It can neither instruct the other regulators what to do (or not do) nor force member countries to comply with new regulations.
Indeed, the entire edifice of global financial regulation is built on a “best endeavors” basis.
The FSB’s charter, revised in 2012, says that signatories are subject to no legal obligations whatsoever.
Unlike the World Trade Organization, for example, no international treaty underpins the FSB, which means that countries cannot be sanctioned for failing to implement the standards to which they are ostensibly committed.
So a fair verdict would be that the FSB has done no more and no less than what its political masters have been prepared to allow it to do.
There is no political will to create a body that could genuinely police international standards and prevent countries from engaging in competitive deregulation – and prevent banks from engaging in regulatory arbitrage.
It seems that we must await the next crisis for that resolve to emerge.
In the meantime, the FSB, with all of its weaknesses, is the best we have.
The Debtor Prisoner’s Dilemma
PRINCETON – Any economic slowdown increases debt burdens, whether for households or for states.
Today, both are looking for ways to reduce the weight of debt – and some would prefer to escape it.
Deeply frustrated and angry people – especially in southern Europe – frequently hold up Argentina’s defiance of the international community in 2001 as a model.
Argentina then used a mixture of coercion and negotiation to get out from under the mountain of debt that it incurred in the 1990’s, effectively expropriating foreign creditors, who were viewed as dangerous and malign.
In the 1990’s, Argentina tied its hands with a dollar-pegged currency in order to enhance its credibility as a borrower.
The strategy worked too well: the large credit inflows that it attracted triggered an inflationary boom that reduced the country’s competitiveness.
By 2001, a combination of devaluation (exit from the currency straitjacket) and partial default was inevitable.
Default was followed by nominally voluntary restructurings in which creditors were invited to take some losses.
Up to now, the Argentine model has seemed successful, yielding substantial economic growth for the country since 2001.
That is what has made the model so appealing to debt-burdened southern Europeans.
But a recent New York court ruling against Argentina in a case brought by a holdout hedge-fund creditor has dramatically raised the stakes of sovereign default and bankruptcy.
When holdouts are rewarded by court decisions, and the rights of recalcitrant creditors are recognized in other jurisdictions, efforts at “voluntary” restructuring become unsustainable.
More and more parties will resist writing down some debt in favor of trying to seize whatever assets they can.
For Argentina, the writing is now on the wall.
One of the creditors favored in the New York case, Elliott Capital, had already successfully requested the seizure in Ghana of the Argentine Navy’s three-mast sailing ship ARA Libertad.
If the fallout of the New York decision is an extensive Argentine default on other obligations, foreign trade will become practically impossible, many goods will become scarce, and domestic inflation will increase further.
In short, the Argentine model of debt reduction in the 2000’s has collapsed as completely as its borrowing model in the 1990’s did.
Two fundamental facts have created an apparently insoluble dilemma for the global economy, and have turned countries like Argentina and Greece into victims of an impossible logic.
First, debt continually grows; second, there is no really satisfactory way of getting rid of it.
The financial sector’s explosive growth over the past two decades has fueled the accumulation of exceptionally large volumes of debt.
In the absence of some positive shock – such as an acceleration of GDP growth – servicing that debt becomes impossible for at least some borrowers.
Real debt defaults are historically rare.
For both borrowers and creditors, the risks and costs are enormous.
The borrower is cut off from international markets, and essential imports can no longer be purchased, while large-scale defaults threaten to plunge creditors into insolvency.
The consequence is a complicated game – currently exemplified by the saga of Greek voluntary restructuring – in which both sides stare into the abyss and then turn away from the out-and-out conflict that would send them plummeting into it.
Latin America experienced this dilemma in the 1980’s, when its debt arithmetic had become unsustainable.
At the outset of that crisis, major US financial institutions’ capital exposure to Latin America was near 200%, making candid recognition of debt unsustainability the surest route to wiping out the global financial system.
Most of the big Latin American debtors took extraordinary pains to avoid an explicit default.
The only sustained exception was Peru, which defaulted in 1985 and became an international pariah.
Of the largest borrowers, only Brazil, in 1987, formally defaulted – and only briefly.
As President José Sarney, backing down, admitted, “The fact is that we cannot destroy the international system.
We can scratch it, but it can destroy us.”
Instead, banks in the 1980’s offered new money in an attempt to extricate themselves from the crisis.
Managing modern debt crises always involves the extraordinary logic of throwing good money after bad in the hope of masking the underlying unsustainability.
The same logic has been applied in the euro crisis, with official money taking the place of private-sector exposure.
The emergence of inextinguishable debt replicates other troubling aspects of contemporary life.
Governments, businesses, and individuals all face the build-up of other sorts of liabilities in the form of accumulations of information that cannot be deleted.
E-mail, Facebook, and Twitter accounts all produce a permanent record that perpetually accompanies users, even when their circumstances change.
The legacy of the past continually resurfaces to constrain action in the present.
Just as countries might want to wipe out their debt and start anew, individuals might like to erase their electronic past in a dramatic act of liberation.
But that would destroy the useful together with the embarrassing or irrelevant.
If a clean start is impossible, the best that can be done is to try to bury the old information with such an inflationary flood of new data that it simply dwindles into insignificance.
The analogue in the world of debt negotiation is that a new start that allows borrowing to begin all over again is also impossible.
A cleanup is impossible.
That leaves only one solution: pile on new claims to such an extent that old debts appear paltry.
Those who cannot forget the past are condemned to inflate it.
The Harm of Regulatory Disharmony
LONDON – In the alphabet soup of institutions involved in the regulation of global financial markets, the FMLC – the Financial Markets Law Committee – is not very prominent.
Given that it is based only in London, having grown out of an initiative by the Bank of England 20 years ago, and that most of its members are lawyers, most banks have not even heard of it (though some of them are represented on its Council).
But the services provided by the FMLC have never been more necessary.
The FMLC’s mission is to identify and propose solutions to issues of legal uncertainty in financial markets that might create risks in the future.
As a recent FMLC paper showed, the wave of new regulations implemented since the global financial crisis – many of which were poorly planned or inconsistent across countries – has left a jumbled landscape of legal uncertainties.
Consider banks’ capital requirements.
The Basel 3 Accord, adherence to which increased the liquidity of all banks and decreased their leverage, is viewed as a firm standard in some parts of the world.
But, in others, it is regarded as a minimum to which additional rules may be added.
Such “super-equivalence” or, more colloquially, “gold-plating” creates inconsistencies across jurisdictions, thereby facilitating regulatory arbitrage.
Likewise, the European Union, in contrast to the United States, regards the leverage ratio as a supervisory optional extra, known as a “Pillar 2 measure” (which permits supervisors to add additional capital buffers to address a particular bank’s idiosyncratic risks).
And, though both the US and the EU prohibit proprietary trading, they each define it differently.
There are also inconsistencies between the US and the EU in derivatives-market reform, which the Financial Stability Board has warned could undermine the objectives, set out by the G-20, of greater standardization of contracts and enhanced transparency.
And, whereas the Basel standards continue to refer extensively to credit ratings as the basis for assessing the creditworthiness of borrowers, the Dodd-Frank Act in the US moves away from reliance on ratings.
Such differences – and the FMLC Council lists many more – reflect a dangerous shift in the world’s approach to regulation.
The early post-crisis enthusiasm for new, globally agreed regulatory standards has given way to a range of national initiatives, driven by domestic political agendas, with little regard for cross-border compatibility.
More problematic, the peer-review procedures that have been introduced so far will do little, if anything, to resolve the problem.
Nor do the memoranda of understanding drawn up by national financial regulators offer hope of salvation.
According to the FMLC paper, “they are usually the subject of interpretative disagreement, are not legally binding, do not benefit from any binding dispute-resolution mechanisms, and do not prevent national authorities from acting unilaterally.”
So what can be done?
The FMLC makes four important recommendations.
First, the Financial Stability Board should help to reduce avoidable inconsistencies across countries by propagating a set of high-level principles to which all member countries would be expected to conform when introducing new regulations.
Indeed, the need for such principles should have been recognized in 2009, when the wave of re-regulation began.
Second, to address existing regulatory conflicts, the FMLC recommends establishing a “conflict of regulation” framework to determine which legal regime – that of a global firm’s home country or that of its local subsidiary’s host country – has jurisdiction in a specific cross-border dispute.
The alternative of relying on a third-party multilateral organization to act as mediator in such disputes, the report explains, has little support from G-20 countries.
Third, the FMLC proposes expanding the Financial Stability Board’s mandate.
That body, which emerged from the old Financial Stability Forum in 2009 with few powers and no formal status, has only recently become a separate legal entity.
Strengthening its powers – to include, for example, the establishment of principles for addressing cross-border legal inconsistencies – could go a long way toward addressing the problems raised by regulatory disparities.
Finally, the FMLC calls for the establishment of a permanent G-20 secretariat to improve continuity and coordination across G-20 presidencies.
As it stands, political priorities are constantly in flux, with individual dossiers losing their centrality, and even vanishing, from year to year.
Regulatory uncertainty may not seem like the most exciting topic, which is probably why the FMLC report has attracted so little attention.
But, as the 2008 global financial crisis starkly demonstrated, it can render markets dysfunctional, with ambiguity about different regulators’ responsibilities making it difficult, even impossible, to address the problems caused by failing firms.
(Former US Treasury Secretary Tim Geithner’s crisis memoir makes that point painfully clear.)
When I chaired the United Kingdom’s regulatory body, the Financial Services Authority, I believed in the idea that lawyers should be on tap, not on top.
But they should always be heard.
The FMLC’s influential lawyers have spoken.
Europe’s Dysfunctional Growth Compact
BRUSSELS – Recently, a €10 billion ($13 billion) shortfall in this year’s European Union budget came to light.
As a result, the EU cannot reimburse member states for recent unexpected expenditures, including emergency outlays, such as aid to Italian earthquake victims, and spending aimed at boosting economic growth and employment, such as the accelerated absorption of unused Structural and Cohesion Funds.
Member states have refused the European Commission’s request for extra contributions to cover the shortfall, causing talks over next year’s budget to collapse.
Meanwhile, negotiations over the 2014-2020 Multiannual Financial Framework (MFF), the central-planning instrument for the use of EU funds, have broken down, owing to disagreement over key issues, including the size of the budget and the composition of expenditure.
The decision has been postponed until early next year.
The situation has highlighted the ambiguity surrounding the EU budget’s role in European integration.
While all EU leaders have advocated using the budget to stimulate economic growth, little action is being taken.
This raises doubts about the so-called “growth compact” launched by the European Council in June, particularly about the political commitment to mobilize €120 billion quickly by reallocating unused Structural and Cohesion Funds and increasing the European Investment Bank’s lending capacity.
Indeed, although European governments have agreed to encourage faster absorption of EU funds in crisis countries, they have refused to pay into the EU budget to enable the funds’ disbursement.
This contradiction signals that national interests continue to prevail in EU budget negotiations, which are often exploited for domestic political gain in member states.
Unless a mechanism is introduced that facilitates the rapid disbursement of EU funds, thus insulating the budget from destructive politicization, these funds cannot be used to stimulate growth in times of crisis.
Not all member states contribute equally to the EU budget; some are net contributors, while others are net beneficiaries.
At the end of EU-financed investment projects – payments for which are agreed and executed in the annual budget framework – the money is transferred to the beneficiary.
Cash to net beneficiaries is paid in by net contributors.
One country’s inflow of EU money is thus another country’s outflow – and these are grants, not loans.
As a result, agreement every seven years on overall expenditures is inadequate to preclude conflict on annual budgets.
Nonetheless, steps can be taken to prevent political deadlock in budget negotiations, while increasing the budget’s flexibility so that it can be used to stimulate growth.
For example, some leveraging of the budget could be allowed, although this would spark controversy, given that EU treaties require that the budget remains balanced at all times.
But the EU budget has already enabled an indirect form of leveraging: the European Commission’s use of implicit budget guarantees to raise capital on financial markets.
These funds are used to provide financial assistance to non-eurozone EU countries through the Medium-Term Financial Assistance Facility, to eurozone countries through the now-expired European Financial Stabilization Mechanism, and to partner third countries.
Between the MTFA, the EFSM, and payments to third countries, the total exposure this year is €70.5 billion.
Some borrowing over the seven-year MFF period may be possible, while upholding the medium-term objective of a balanced budget.
Such leveraging of the EU budget would complement the recently established European Stabilization Mechanism (the successor to the EFSM) and the MTFA.
Countries receiving assistance should be given the option of applying for an anticipated disbursement of EU funds.
Following a request by a member state, the Commission would be entitled to borrow on capital markets under the implicit EU budget guarantee, with the maximum amount determined by the size of the country’s unused (pre-allocated) Structural and Cohesion Funds.
The capital would be repaid in annual installments as the funds become available through the EU budget, while the national co-financing rate would apply to interest payments.
This framework would reduce incentives for using annual EU budget negotiations to advance political agendas.
Net contributors would be locked into a relationship with the markets – a convincing creditor.
At the same time, imposing conditionality on this kind of disbursement would enhance legitimacy, as opposed to the current framework, in which beneficiaries seek entitlements.
Indeed, all EU countries – not just eurozone members – would benefit from such a framework.
Such an initiative could co-exist with European Council President Herman Van Rompuy’s proposal to create a risk-sharing mechanism only for eurozone countries.
The revamped growth compact would more effectively allocate European resources and increase the flexibility of permanent transfers from rich to poor countries – provided that the money is used for productive investment.
Van Rompuy’s budget would also help to stabilize the eurozone in the event that asymmetric shocks require temporary transfers from unaffected to crisis-stricken countries.
In fact, the two instruments may well be complementary in eurozone countries.
Crises are typically associated with a drop not only in actual growth, but also in a country’s growth potential, owing to deferred investment. A risk-sharing facility could limit the decline in actual growth after a crisis, while prompt EU-financed investment would prevent a country from shifting to a lower growth path.
Financing Renewable Energy
NEW YORK – There is plenty of money in the private sector to build up the world’s renewable infrastructure as long as the numbers add up, and profit-seeking private investors will figure out how to do it without any financing help from government.
But the numbers do not add up without some sort of subsidy. Wind energy, for example, is about 1.5 to 2 times as expensive as electricity from coal-fired plants.  Even though wind is free and coal must be paid for, the initial capital costs of a wind turbine and transmission cables are much higher than for conventional power plants.  Investors require above-market rates for renewable power or similar compensation that reflects the social benefits of emissions free energy.
The case of my own firm, Christofferson, Robb &amp;
Company (CRC), illustrates how private capital markets can finance renewable energy when the subsidy is right.
In 2005-2006, my firm acquired 330-megawatt onshore projects in Germany and France. Our fund contributed the equity, and a bank lent the money needed to finance construction.
Once the portfolio was assembled, we sold the projects to a special-purpose vehicle called CRC Breeze Finance, which issued €470,000,000 of asset-backed securities.
The wind farms that we built convert the wind’s kinetic energy into electricity.
The revenues gained from selling the electricity is used to repay CRC Breeze Finance’s long-term debt.
CRC keeps the money that’s left over. Even if the wind does not blow as hard as usual or operating and maintenance expenses turn out to be higher than we assumed, there is enough of a cushion that bondholders will be paid out on schedule.  Three years later, it’s proceeding on course.
The CRC Breeze portfolio generates expected annual returns of about 8%, which were boosted to 15% with the help of leverage.
None of this would have been possible without government subsidies.
In Germany, the Renewable Energy Act guarantees a feed-in tariff for 20 years and mandates the grid operator to purchase all the electricity a wind farm can produce at the guaranteed price. Our feed-in tariff was about €83.6 per megawatt hour (MW/h), compared with free market prices that have mainly ranged from €30 - €70 per MW/h.
In the United States, the subsidy regime prior to July 2009 was based on production tax credits: for every MW/h of wind energy produced, the owner can deduct about $2.5 from its tax bill. This had two big defects.
First, investors who could not use the tax deductions had to go to considerable expense to “monetize” the credits.
Second, tax credits were subject to on-again, off-again authorization from Congress.
This lack of certainty undermined investment in plant and equipment or R&amp;D.
The US Department of Energy now provides an upfront payment to wind developers equal to 30% of costs.
This is a step in the right direction.
But a 30% cost rebate is not enough to stimulate development of offshore wind capacity.
The US has no offshore wind farms, and no prospect of having any for at least five years.
To consider just one obstacle, no vessels suitable for installing offshore foundations comply with the Jones Act, which requires that work on such projects use US-flag ships, constructed in the US, and owned and wholly operated by US citizens.
Such ships would take two years to build, at a cost $50,000,000.
No one, insofar as I know, is rushing to build one.
The reasons for offshore wind’s failure to fulfill its promise in the United Kingdom are equally straightforward and have nothing to do with a lack of money.
The subsidies are too small and too complicated to inspire capital outlays for expensive specialized equipment, including jack-up barges, heavy-lift cranes, pneumatic hammers for pounding the foundations into the sea bed, and high-strength gearboxes that will not corrode in humid, salty air.
This is a pity, because the UK is missing out on the opportunity to build offshore generating capacity along its long, windy coastline.
The UK needs offshore wind to meet its renewable targets, and in a few years it will need electricity from any source it can find just to keep the lights turned on.
Fifteen months ago, in a submission to the Economic Affairs Committee of the House of Lords, I predicted that all existing UK projects except Thanet Offshore Wind would be abandoned or postponed unless Parliament radically altered its Renewable Obligation Certificates (ROC) scheme.
I argued that, otherwise, the UK would be on track to add fewer than 300 MW of new wind capacity per year.
This would lead to approximately three gigawatts of capacity by 2020, which equates to 1 GW of continuous production – less than 2% of 2007 consumption.
So far, this is precisely what has happened.
At the time, I proposed that the UK switch from a ROC regime to a 20-year feed-in tariff. I still believe that this is the right way to proceed.
At a similar social cost to ROCs, a feed-in tariff would give confidence to utilities and suppliers of components to undertake the required heavy investment.
It is vitally important that existing projects, as well as new ones, benefit from any policy shift.
If investors sense that new projects may obtain special treatment, everyone will decide to wait.
The topic of how to finance renewable energy is the same topic as how to subsidize it. Governments should not concoct programs to lend directly, guarantee loans, or invest in renewable projects on the theory that the private sector somehow lacks this capability.
Rather, policymakers should figure out how much renewable energy is worth to society (possibly attributing a different value to solar, wind, geothermal and biomass) and make utilities or governments pay extra for it. The most effective subsidies are simple and stable, as in the German model.
Financing the Fight against Climate Change
COPENHAGEN – It is now generally agreed that the developed countries will have to make a substantial financial contribution to enable the developing world to deal with climate change.
Funds are needed to invest in new low-carbon energy sources, reforestation and protection of rain forests, land-use changes, and adaptation and mitigation.
But there is no similar agreement on where the money will come from.
The developed countries are reluctant to make additional financial commitments.
They have just experienced a significant jump in their national debts, and they still need to stimulate their domestic economies.
This colors their attitudes.
It looks like they will be able to cobble together a “fast-start” fund of $10 billion a year for the next few years, but more does not fit into their national budgets.
This is unlikely to satisfy the developing countries.
I believe that this amount could be at least doubled and assured for a longer time span.
Developed countries’ governments are laboring under the misapprehension that funding must come from their national budgets.
But that is not the case.
They have the money already.
It is lying idle in their reserve accounts at the International Monetary Fund.
Spending it would not add to any country’s fiscal deficit. All they need to do is to tap into it.
In September 2009, the IMF distributed to its members $283 billion worth of Special Drawing Rights, an arcane financial instrument, but one that essentially constitutes additional foreign exchange.
They can be used only by converting them into one of four currencies, at which point they begin to carry interest at those currencies’ combined treasury-bill rate.
At present, the interest rate is less than 0.5%.
Of the $283 billion worth of recently distributed SDRs, more than $150 billion went to the 15 largest developed economies.
These SDRs will sit largely untouched in the reserve accounts of these countries, which don't really need any additional reserves.
I propose that the developed countries – in addition to establishing a fast-start fund of $10 billion a year – band together and lend $100 billion dollars worth of these SDRs for 25 years to a special green fund serving the developing world.
The fund would jump-start forestry, land-use, and agricultural projects – areas that offer the greatest scope for reducing or mitigating carbon emissions, and that could produce substantial returns from carbon markets.
The returns such projects could generate go beyond addressing carbon emissions.
Returns from land-use projects, for example, could also include the potential to create more sustainable rural livelihoods, enable higher and more resilient agricultural yields, and generate rural employment.
This is a simple and practical idea, and there is a precedent for it.
The United Kingdom and France each recently lent $2 billion worth of SDRs to a special fund at the IMF to support concessionary lending to the poorest countries. At that point, the IMF assumed responsibility for the principal and interest on the SDRs.
The same could be done in this case.
I further propose that member countries agree to use the IMF's gold reserves to guarantee the interest payments and repayment of the principal.
The IMF owns a lot of gold – more than 100 million ounces – and it is on the books at historical cost.
Thus, at current market prices, it is worth more than $100 billion over its book value.
It has already been designated to be used for the benefit of the least developed countries.
The proposed green fund would meet this requirement.
This means that the developed countries that lend the SDRs would incur no interest expense and no responsibility for repayment. There are some serious technical problems involved in offsetting the interest income against the interest expense, particularly in the United States, but the net effect would be a wash.
These technical difficulties stood in the way of previous attempts to put the SDRs to practical use, but they do not apply to the proposed green fund.
There are three powerful arguments in favor of this proposal.
First, the green fund could be self-financing or even profitable; very little of the IMF’s gold, if any, would actually be used.
Second, the projects will earn a return only if developed countries cooperate in setting up the right type of carbon markets.
Establishing a green fund would be an implicit pledge to do so by putting the gold reserves of the IMF at risk.
Finally, this money would be available now, jump-starting carbon-saving projects.
For all these reasons, the developing countries ought to embrace my proposal.
The key point is that it is possible to increase substantially the amount available to fight global warming in the developing world by using the existing allocations of SDRs, with interest payments on them guaranteed by the IMF’s gold reserves.
All that is lacking is the political will. The mere fact that tapping SDRs requires Congressional approval in the US ensures that nothing will happen without public pressure – including pressure from the developing countries.
Yet it could make the difference between success and failure in Copenhagen.
Finding the Keys to National Prosperity
NEW YORK – In many of history’s most successful economic reforms, clever countries have learned from the policy successes of others, adapting them to local conditions.
In the long history of economic development, eighteenth-century Britain learned from Holland; early nineteenth-century Prussia learned from Britain and France; mid-nineteenth-century Meiji Japan learned from Germany; post-World War II Europe learned from the United States; and Deng Xiaoping’s China learned from Japan.
Through a process of institutional borrowing and creative adaptation, successful economic institutions and cutting-edge technologies spread around the world, and thereby boost global growth.
Today, too, there are some great opportunities for this kind of “policy arbitrage,” if more countries would only take the time to learn from other countries’ successes.
For example, while many countries are facing a jobs crisis, one part of the capitalist world is doing just fine: northern Europe, including Germany, the Netherlands, and Scandinavia.
Germany’s unemployment rate this past summer was around 5.5%, and its youth unemployment rate was around 8% – remarkably low compared with many other high-income economies.
How do northern Europeans do it?
All of them use active labor market policies, including flex time, school-to-work apprenticeships (especially Germany), and extensive job training and matching.&#160;
Likewise, in an age of chronic budget crises, Germany, Sweden, and Switzerland run near-balanced budgets.
All three rely on budget rules that call for cyclically adjusted budget balance.
And all three take a basic precaution to keep their entitlement spending under control: a retirement age of at least 65.
This keeps costs much lower than in France, and Greece, for example, where the retirement age is 60 or below, and where pension outlays are soaring as a result.
In an age of rising health-care costs, most high-income countries – Canada, the European Union’s Western economies, and Japan – manage to keep their total health-care costs below 12% of GDP, with excellent health outcomes, while the US spends nearly 18% of GDP, yet with decidedly mediocre health outcomes.
And, America’s is the only for-profit health system of the entire bunch.
A new report by the US Institute of Medicine has found that America’s for-profit system squanders around $750 billion, or 5% of GDP, on waste, fraud, duplication, and bureaucracy.&#160;&#160;&#160;&#160;&#160;
In an age of soaring oil costs, a few countries have made a real difference in energy efficiency.
The OECD countries, on average, use 160 kilograms of oil-equivalent energy for every $1,000 of GDP (measured at purchasing power parity).
But, in energy-efficient Switzerland, energy use is just 100 kg per $1,000 of GDP, and in Demark it is just 110 kg, compared with 190 kg in the US.
In an age of climate change, several countries are demonstrating how to move to a low-carbon economy.
On average, the rich countries emit 2.3 kg of CO2 for every kg of oil-equivalent unit of energy.
But France emits just 1.4 kg, owing to its enormous success in deploying safe, low-cost nuclear energy.
Sweden, with its hydropower, is even lower, at 0.9 kg.
And, while Germany is abandoning domestic production of nuclear energy for political reasons, we can bet that it will nonetheless continue to import electricity from France’s nuclear plants.
In an age of intense technological competition, countries that combine public and private research and development (R&amp;D) financing are outpacing the rest.
The US continues to excel, with huge recent breakthroughs in Mars exploration and genomics, though it is now imperiling that excellence through budget cuts.
Meanwhile, Sweden and South Korea are now excelling economically on the basis of R&amp;D spending of around 3.5% of GDP, while Israel’s R&amp;D outlays stand at a remarkable 4.7% of GDP.
In an age of rising inequality, at least some countries have narrowed their wealth and income gaps.
Brazil is the recent pacesetter, markedly expanding public education and systematically attacking remaining pockets of poverty through targeted transfer programs.
As a result, income inequality in Brazil is declining.
And, in an age of pervasive anxiety, Bhutan is asking deep questions about the meaning and nature of happiness itself.
In search of a more balanced society that combines economic prosperity, social cohesion, and environmental sustainability, Bhutan famously pursues Gross National Happiness rather than Gross National Product.
Many other countries – including the United Kingdom – are now following Bhutan’s lead in surveying their citizenry about life satisfaction.
The countries highest on the ladder of life satisfaction are Denmark, Finland, and Norway.
Yet there is hope for those at lower latitudes as well.
Tropical Costa Rica also ranks near the top of the happiness league.
What we can say is that all of the happiest countries emphasize equality, solidarity, democratic accountability, environmental sustainability, and strong public institutions.
So here is one model economy: German labor-market policies, Swedish pensions, French low-carbon energy, Canadian health care, Swiss energy efficiency, American scientific curiosity, Brazilian anti-poverty programs, and Costa Rican tropical happiness.
Of course, back in the real world, most countries will not achieve such bliss anytime soon.
But, by opening our eyes to policy successes abroad, we would surely speed the path to national improvement in countries around the world.
Finding the Policy Exit
NEW YORK – There is a general consensus that the massive monetary easing, fiscal stimulus, and support of the financial system undertaken by governments and central banks around the world prevented the deep recession of 2008-2009 from devolving into Great Depression II.
Policymakers were able to avoid a depression because they had learned from the policy mistakes made during the Great Depression of the 1930’s and Japan’s near depression of the 1990’s.
As a result, policy debates have shifted to arguments about what the recovery will look like: V-shaped (rapid return to potential growth), U-shaped (slow and anemic growth), or even W-shaped (a double-dip).
During the global economic free fall between the fall of 2008 and the spring of 2009, an L-shaped economic and financial Armageddon was still firmly in the mix of plausible scenarios.
The crucial policy issue ahead, however, is how to time and sequence the exit strategy from this massive monetary and fiscal easing.
Clearly, the current fiscal path being pursued in most advanced economies – the reliance of the United States, the euro zone, the United Kingdom, Japan, and others on very large budget deficits and rapid accumulation of public debt – is unsustainable.
These large fiscal deficits have been partly monetized by central banks, which in many countries have pushed their interest rates down to 0% (in the case of Sweden to even below zero), and sharply increased the monetary base through unconventional quantitative and credit easing. In the US, for example, the monetary base more than doubled in a year.
If not reversed, this combination of very loose fiscal and monetary policy will at some point lead to a fiscal crisis and runaway inflation, together with another dangerous asset and credit bubble.
So the key emerging issue for policymakers is to decide when to mop up the excess liquidity and normalize policy rates – and when to raise taxes and cut government spending (and in which combination).
The biggest policy risk is that the exit strategy from monetary and fiscal easing is somehow botched, because policymakers are damned if they do and damned if they don’t.
If they have built up large, monetized fiscal deficits, they should raise taxes, reduce spending, and mop up excess liquidity sooner rather than later.
The problem is that most economies are now barely bottoming out, so reversing the fiscal and monetary stimulus too soon – before private demand has recovered more robustly – could tip these economies back into deflation and recession.
Japan made that mistake in 1998-2000, just as the US did in 1937-1939.
But, if governments maintain large budget deficits and continue to monetize them as they have been doing, at some point – after the current deflationary forces become more subdued – bond markets will revolt.
When that happens, inflationary expectations will mount, long-term government bond yields will rise, mortgage rates and private market rates will increase, and one would end up with stagflation (inflation and recession).
So how should we square the policy circle?
First, different countries have different capacities to sustain public debt, depending on their initial deficit levels, existing debt burden, payment history, and policy credibility.
Smaller economies – like some in Europe – that have large deficits, growing public debt, and banks that are too big to fail and too big to be saved may need fiscal adjustment sooner to avoid failed auctions, rating downgrades, and the risk of a public-finance crisis.
Second, if policymakers credibly commit – soon – to raise taxes and reduce public spending (especially entitlement spending), say, in 2011 and beyond, when the economic recovery is more resilient, the gain in markets’ confidence would allow a looser fiscal policy to support recovery in the short run.
Third, monetary policy authorities should specify the criteria that they will use to decide when to reverse quantitative easing, and when and how fast to normalize policy rates.
Even if monetary easing is phased out later rather than sooner – when the economic recovery is more robust – markets and investors need clarity in advance on the parameters that will determine the timing and speed of the exit.
Avoiding another asset and credit bubble from arising by including the price of assets like housing in the determination of monetary policy is also important.
Getting the exit strategy right is crucial: serious policy mistakes would significantly heighten the threat of a double-dip recession.
Moreover, the risk of such a policy mistake is high, because the political economy of countries like the US may lead officials to postpone tough choices about unsustainable fiscal deficits.
In particular, the temptation for governments to use inflation to reduce the real value of public and private debts may become overwhelming.
In countries where asking a legislature for tax increases and spending cuts is politically difficult, monetization of deficits and eventual inflation may become the path of least resistance.
Firebombing the Messenger in Armenia
Late last month, while putting the finishing touches on the next edition of our newspaper, Haykakan Zhamanak (The Armenian Times), we heard an explosion outside our office.
Staff members rushed to find my car on fire.
That explosion was not unanticipated – nor was the announcement by Armenia’s police that the car had caught fire due to technical problems.
But the real problem is censorship, for the explosion was but the latest offensive in Armenia’s hidden war against the press.
For us the battle for press freedom began in 1999, soon after founding our newspaper, then named Oragir (Diary).
It made an instant impact, but not in the way we hoped.
Throughout 1999 there were more court cases against Oragir than against all other Armenian media combined since independence in 1991.
In one case, the prosecutor’s office brought criminal charges against me as editor-in-chief: I was accused of slandering an Armenian political figure and of insulting a state official.
As a result, the court sentenced me to one year in prison.
By a lucky twist, however, on the day the court ruled, Lord Russell Johnston, Chairman of the Parliamentary Assembly of the Council of Europe, was in Armenia.
Lord Johnston expressed his opinion about my case in his talks with the authorities, which then decided not to send me to prison.
I remained free, only to be monitored by the police.
A second trial against our newspaper had worse consequences: a $25,000 fine (a huge sum here) based on allegations that we had damaged the reputation of the Mika Armenia Company, controlled by the so-called Karabakh clan that helps rule Armenia.
The court’s verdict was based on falsified documents.
Following the verdict, bailiffs confiscated our equipment, prohibited the publishing house from printing our newspaper, and, most importantly, seized our business bank accounts, rendering us unable to pay the fine.
These events were initiated by a court wrangle with Serzh Sargsyan, then the Minister of National Security and Internal Affairs.
We demanded an apology for his impugning our paper’s reputation; he accused of us of libel.
These manipulations worked: Oragir was closed down, which forced us to appear under the name Haykakan Zhamanak .
When my time under police supervision ended, the prosecutor’s office quickly brought a new criminal case of slander against me.
This time, Armenia’s chief of civil aviation had sued me.
Investigations lasted several months, before pressure from international organizations and public opinion forced the prosecutor to drop the charges.
Later, after his dismissal from his post, that same civil aviation chief confessed that Armenian President Robert Kocharyan had advised him to file his lawsuit.
At a press conference just hours after my car exploded, I announced my suspicion that the explosion had been organized by Gagik Tsarukyan, an MP nicknamed “Dodi Gago” (“dod” means stupid in Armenian) and one of the country’s richest men and a close friend of the president’s family.
Many Armenians believe that Tsarukyan has carte blanche to do whatever he wants, when he wants.
Indeed, he even gets to write his own history.
For although Gagik Tsarukyan was convicted of a sexual crime in the Soviet era, two years ago Armenia’s courts exonerated him by vacating the decision of the Soviet court.
Indeed, there is something of a taboo on writing about Tsarukyan, and with good reason: not only is he rich, but also he controls an army of obedient skinheads.
Armenia frequently sees skinheads attacking reporters covering opposition rallies and once severely beating a leading opposition politician.
Five years ago, Tsarukyan himself led his thugs in a break-in at our office, taking my staff hostage for several hours.
Recently, after reading some unflattering articles about him in our paper, Tsarukyan tried to invite me to a meeting.
I refused.
Armenia’s paramount oligarch fumed.
He promised to punish me, and that he would act the next time Haykakan Zhamanak criticized any well-known person.
The car explosion occurred the day after we rebuked Armenia’s Police Chief.
None of us are surprised that the police are unwilling to investigate my car’s explosion.
They began to do so only ten days later, when the fire brigade stated that the fire was likely the result of an explosion incited by “outside interference.”
Such harassment is the everyday stuff of journalism in what Vladimir Putin calls the “post-Soviet space.”
Armenia may have adopted in 1995 a new Constitution with fine phrases about freedom of speech, but both the petty harassments and the mortal threats of the Soviet era remain.
Of course, we never believed that press freedom would come easily.
We understood from the start that we would have to fight for it everyday.
But we never imagined the terrifying lengths to which the state – working hand-in-hand with the new oligarchic rich – would go to defeat our cause.
We will not be defeated.
An incinerated car is a small price to pay in the battle for freedom.
First Things First: Americans, or Ethics?
In explaining why he was abandoning the Kyoto accord on global warming, President Bush said: “We will not do anything that harms our economy, because first things first are the people who live in America.”
Those remarks should not have surprised anyone who followed the American election.
In the second presidential debate, George W. Bush was asked what how he would use America's global power and influence.
He said that he would use it to benefit all Americans.
These remarks would not have surprised anyone who studied the speeches of the President's father.
The first President Bush said much the same thing almost a decade ago, at the 1992 “Earth Summit” in Rio de Janeiro.
When representatives of developing nations asked Bush senior to put the over-consumption of resources by the developed countries, especially the US, on the agenda he said that “the American life-style is not up for negotiation” - no matter what, or so it seemed to his audience, the costs to others might be.
But it is not only the Bush administrations that put the interests of Americans first.
In the Balkans, the Clinton-Gore administration made it clear that it was not prepared to risk the life of a single American in order to reduce the risk of civilian casualties.
Observing this, Timothy Garton Ash wrote: “It is a perverted moral code that will allow a million innocent civilians of another race to be made destitute because you are not prepared to risk the life of a single professional soldier of your own.”
In Kosovo restricting intervention to aerial bombardment made this strategy a total success: NATO forces suffered not a single casualty in combat, but approximately 300 Kosovar, 209 Serb and 3 Chinese civilians were killed.
This approach to the duties of a national leader, stated bluntly and honestly, forces us to consider a fundamental ethical issue.
To what extent should political leaders see their role narrowly, in terms of promoting the interests of their citizens, and to what extent should they be concerned with the welfare of people everywhere?
Mr Romano Prodi, President of the EU Commission, and a former Prime Minister of Italy, responded to President's Bush's most recent statement by saying that “If one wants to be a world leader, one must know how to look after the entire earth and not only American industry.”
But the question is not only one for those who aspire to be world leaders.
The leaders of smaller nations must also consider, in contexts like global warming, trade pacts, foreign aid and the treatment of refugees, to what extent they are prepared to consider the interests of "outsiders”.
As Ash suggests, there is a strong ethical case for saying that it is wrong for leaders to give absolute priority to the interests of their own citizens.
The value of the life of an innocent human being does not vary according to nationality.
Even the Bush Administration put the lives of millions of HIV-infected Africans ahead of the economic interests of American pharmaceutical corporations when it reaffirmed former President Clinton=s executive order saying that the US would not prevent African nations licensing their own manufacturers to produce cheap copies of drugs that could save the lives of their citizens, even though American companies held the patents on those drugs.
If American interests always come first, that decision - which was the right decision - would be difficult to explain.
But, it might be said, the abstract ethical idea that all humans are entitled to equal consideration cannot govern the way we look at the duties of a political leader.
Just as parents are expected to provide for the interests of their own children, rather than for the interests of strangers, in accepting the office of president of the United States, George W. Bush assumed a specific role that makes it his duty to protect and further the interests of Americans.
Other countries have their leaders, who have similar roles in respect to the interests of their fellow-citizens.
There is no world political community.
So long as that situation prevails, we must have nation-states and the leaders of those nation-states must give preference to the interests of their citizens.
There is some truth in this.
Without it, unless electors suddenly to turn into altruists of a kind never before seen on a large scale, democracy could not function.
American voters would not elect a president who gave no more weight to their interests than to the interests of people living in other countries.
Perhaps, given the global nature of the problems we now face, this is an argument for a federalist world, rather than one divided into sovereign nation-states.
But as long as that remains a lofty idea without political substance, our leaders will feel that they must give some degree of priority to the interests of their own citizens.
"Some degree", however, does not mean absolute priority.
Parents may give preference to their children, but if buying new toys for your children comes at the cost of the lives of other children, that cannot be defended.
Abandoning the Kyoto accord, many believe, will threaten the lives of tens or hundreds of millions of people living in countries too poor to protect them from the consequences of climate change and rising sea levels.
That is why Europeans, and people in many other countries are incensed at the casual way in which America’s President assumed that “first things first are the people who live in America.”
It may be defensible for President Bush to give some preference to the economic interests of Americans, but to put them above the life-and-death interests of millions of human beings goes beyond what any ethical approach can justify.
Fiscal Apocalypse Now
As support for President George W. Bush in the United States has crumbled over the past year, perhaps the most surprising element is the revolt of economists and observers of economic policy.
Last week, Peggy Noonan, a speechwriter for both President Reagan and the first President Bush declared in the Wall Street Journal that had she known what George W. Bush’s fiscal policy would be, she would have voted for Al Gore in the 2000 presidential election.
“If I’d thought [that George W. Bush] was a big-spending Rockefeller Republican.... I wouldn’t have voted for him...,” Noonan wrote.
Bush “did present himself as a conservative... conservatism is hostile, for reasons ranging from the abstract and philosophical to the concrete and practical, to high spending and high taxing....”
And then she falls into near-complete despair: “Mr. Bush will never have to run again, and he is in a position to come forward and make the case, even if only rhetorically, to slow and cut spending.
He has not. And there’s no sign he will...”
Noonan is not quite correct.
George W. Bush presented himself not as a normal conservative, but as something he called a “compassionate conservative,” thus preserving a certain amount of ambiguity.
Some focused on the “conservative”: they expected the Bush administration’s fiscal policy to keep a tight rein on spending and to eliminate many programs in order to finance significant tax cuts.
Others focused on the “compassionate”: they expected Bush’s fiscal policy largely to eschew tax cuts and to adopt largely Democratic spending priorities, including expanded federal aid to education and a prescription drug benefit, thereby showing that Republicans could run a more cost-effective version of the social-welfare state.
Still others interpreted “compassionate conservatism,” as the commentator Andrew Sullivan put it, as a “smokescreen...necessary for any vaguely successful retrenchment of government power in an insatiable entitlement state.” They expected tax cuts to be followed by a fangs-bared attack on social-welfare spending once deficits reemerged.
As a result, in 2000 and 2001 nobody was really sure of the Bush administration’s policy direction.
Was it traditional fiscal conservativism?
Was it to do what Democrats do, but do it better?
Was it to “starve the beast” by pumping up government debt to the point that social programs would have to be cut?
The first two priorities, if well designed and well implemented, are certainly honorable goals for a government to pursue.
The third is less honorable, and likely to fail: it relies on the dangerously weak premise that the party in power’s political adversaries will be more public-spirited and less ruthless when they return to government.
Of course, conservatives and Republicans could hope that their own favorite policy priorities would emerge as the administration’s preferred strategy.
Or they could be content with whichever of the three strategies that they expected to see, agreeing that, in any case, fiscal policy was always going to be much better than it would have been under Democratic rule.
But then a strange thing happened: the Bush administration did not order any of the three options that were thought to be on the menu.
Moreover, the Bush administration combined its policies with an extraordinary reluctance to veto anything coming out of Congress, and, after the year or two that it took for this to become obvious, an inability to restrain Congress at all.
What emerged was neither traditional fiscal conservatism nor Democratic policies without Democrats nor starve-the–beast populism, but something that has no name.
An exchange between two characters in a scene from the movie “Apocalypse Now” captures an anti-ethic that characterizes the Bush administration’s policies as well:
Willard: “They told me that you had gone totally insane, and that your methods were unsound.”
Kurtz: “Are my methods unsound?”
Willard: “I don’t see any method at all, sir.”
It is not that Republicans and conservatives think that the Bush administration has adopted the wrong method, but that they don’t see any method at all that has driven them into their (late) fiscal-policy revolt.
And that is why so many of them now wish that they had had a different candidate to vote for back in 2000.
Fiscal Follies in America and Beyond
Those of us who know that long-run fiscal imbalances are likely to end in disaster – high inflation, deep recession, financial crisis, or all three – scratch our heads in bemusement at the priorities of George W. Bush and his administration.
The Social Security “crisis” that he wants to spend his political capital on “resolving” ranks no higher than third among America’s fiscal problems in urgency and seriousness – and at a time when these problems have grown into a profound threat to global economic stability.
America’s gravest fiscal problem is the short- and medium-run deficit between tax revenues and spending.
This deficit is entirely of Bush’s own creation, having enacted – and now seeking to extend – tax cuts that are not cuts at all, because they merely shift the burden of fiscal consolidation onto future generations.
The second most serious problem is the looming long-term explosion in the costs of America’s health care programs.
This is also partly Bush’s doing, or, rather, not doing, as his first-term policy on health spending was to do virtually nothing to encourage efficiency and cost containment.
Instead, he enacted a Medicare drug benefit that promises to spend enormous amounts of money for surprisingly little in the way of better health care.
Surely a more competent administration would be worried about addressing these more severe and urgent fiscal problems.
Let’s pretend that the United States had such a government.
What would it do?
Dealing with the short- and medium-run deficit would be fairly straightforward: decide how large a share of GDP the federal government should take up, set spending at that level, and set taxes so that the budget is balanced (or so that the debt-to-GDP ratio is not growing) over the business cycle.
Determine whether, overall, you would rather have in the medium term a federal government that spends, say, 16%, 20%, or 24% of GDP – and on what.
What is not straightforward is how to address the imminent explosion of health-care costs.
In fact, projections of rapidly rising Medicare and Medicaid spending in the US – and similarly rapidly-rising governmental health care expenditures elsewhere in the developed world – are not so such a problem to be solved as the side effects of an opportunity to be grasped.
The opportunity stems from the fact that our doctors and nurses, our pharmacists and drug researchers, our biologists and biochemists are learning to do wonderful things.
Many of these things are, and will be, expensive.
Many of them will also be desirable: longer, healthier, and higher quality lives as we learn more about the details of human biology.
Federal health-care spending will grow very rapidly over the next two generations because the things that health care money will be spent on will be increasingly wonderful, and increasingly valued.
But it will be difficult to grasp fully this opportunity.
It is highly likely that desired health expenditures will be enormous for some things and trivial for others.
This calls for insurance.
The problem is that private insurance markets do not work well when the buyer knows much more about what is being insured than the seller.
Obviously, one’s health is an area in which private information can be very private indeed.
This is, of course, why state-run health-care systems came into being.
But replacing private insurance with public insurance has its own problems: consider the parlous circumstances in which Britain’s National Health System finds itself, the result of generations of politically driven underinvestment in health care.
Moreover, the overall level of spending is likely to be large.
That means that without (and even with) state-run health-care systems, the rich will be able to afford more and better care than the poor.
To what extent do we accept a world where the non-rich die in situations in which the rich would live?
To what extent do we hold on to our belief that when it comes to saving lives, medical care should be distributed on the basis of patients’ needs, not their wealth?
Where and how would we tax the resources to put real weight behind egalitarian principles?
Sharply rising health-care costs will probably confront governments throughout the developed world with the biggest economic policy issues they will face over the next two generations.
The Bush administration has yet to realize this, but other governments are not thinking hard enough, either.
At best, they are seeking ways to keep health-care spending from rising, as though the genie of medical progress can be forced back into the bottle.
Instead, governments should embrace the promise of wonderful innovations in health care, and ask how fast spending should rise, and how that rise should be financed.
Fiscal Follies
NEW YORK – The fiscal stimulus that most advanced economies and emerging markets implemented during the 2008-2009 global recession – together with monetary easing and the backstopping of the financial system – prevented the Great Recession from turning into another Great Depression in 2010.
At a time when every component of private demand was collapsing, the boost from higher government spending and lower taxes stopped the global economy’s free-fall and created the basis for recovery.
Unfortunately, stimulus spending and the related bailout of the financial system, together with the recession’s effect on revenues, contributed to fiscal deficits on the order of 10% of GDP in most advanced economies.
According to the International Monetary Fund and others, these economies’ ratio of public debt to GDP will surpass 110% by 2015, compared to 70% before the crisis.
Aging populations in most advanced economies imply additional public debt in the long term, owing to non-fully-funded pension schemes and rising health-care costs.
Thus, in most advanced economies, deficits need to be reduced to avoid a fiscal train wreck down the line.
But much research, including a recent study by the IMF, suggests that raising taxes and reducing government spending has a negative short-term effect on aggregate demand, thereby reinforcing deflationary and recessionary trends – and undermining fiscal consolidation.
In an ideal world, where policymakers could credibly commit to medium- to long-term fiscal adjustment, the optimal and desirable path would be to commit today to a schedule of spending reductions and tax increases, phased in gradually over the next decade as the economy recovers.
That way, if the economy needed another targeted fiscal stimulus in the short run, financial markets would not respond by driving up borrowing costs.
Unfortunately, the fiscal policy currently adopted by various advanced economies deviates sharply from this path of credible medium-term consolidation combined with short-term additional stimulus.
In the US, we have the worst of all possible worlds.
On one hand, stimulus had become a dirty word – even within the Obama administration – well before the Republicans’ mid-term election victory ruled out another round altogether.
On the other hand, medium-term consolidation will be all but impossible in America’s current atmosphere of hyper-partisanship, with Republicans blocking any tax increase and Democrats resisting reforms of entitlement spending.
Nor is there any pressure from bond markets to concentrate the minds of policymakers.
In the periphery of the eurozone, the problem is the opposite: bond vigilantes are demanding that Greece, Ireland, Portugal, Spain, and Italy front-load fiscal consolidation or watch their borrowing costs go through the roof, risking them their market access and triggering a public-debt crisis.
Markets don’t care that front-loaded fiscal consolidation is exacerbating recession and thus making the goal of reducing debt and deficits as a share of GDP near-impossible to achieve.
To avoid a persistent and destructive recession, the fiscal and structural reforms imposed by the bond vigilantes should be accompanied by other euro-zone policies that restore growth and prevent vicious debt dynamics.
The European Central Bank should ease monetary policy in order to weaken the value of the euro and bootstrap the periphery’s growth.
And Germany should cut taxes temporarily – rather than raising taxes, as planned – in order to increase disposable income and stimulate German demand for the periphery’s goods and services.
Alas, neither of the two biggest players in the euro zone is pursuing policies consistent with restoring sustained growth in the euro zone’s periphery.
The ECB’s monetary policy is too tight; and Germany is front-loading fiscal austerity.
Thus, the periphery is destined to a destructive deflationary and recessionary adjustment that will exacerbate the risks of recession, insolvency, eventual defaults and, possibly, exit from the euro.
In the United Kingdom, the new government gave several reasons for front-loading fiscal consolidation.
The bond vigilantes might have woken up if early austerity was not implemented; the deficit was very large and the public sector bloated; and it is always politically easier to implement tough measures early in an administration, when popular support is still high and the next election is far off.
Certainly, the UK was playing with fiscal fire and needed some commitment to earlier austerity.
But phasing in austerity more gradually, and thus back-loading the adjustment, would have posed less risk to the economy’s anemic recovery while maintaining a credible commitment to fiscal consolidation.
Instead, the government could well end up with no plan B in case plan A – massively front-loaded austerity – leads to a double-dip recession.
In short, an optimal path of fiscal austerity would, in most countries, imply a back-loaded but credible commitment to medium-term consolidation, together with short-term additional stimulus when necessary and allowed by market conditions, thereby avoiding the prospect of a deflationary and recessionary spiral.
Unfortunately, the main advanced economies are following a divergent path – which, in some cases, will lead them in the opposite direction in 2011.
As a result, the risks of debt deflation and eventual disorderly sovereign and private-sector defaults are rising.
Europe’s Fiscal Wormhole
BRUSSELS – The International Monetary Fund now estimates a 30% risk of deflation in the eurozone, and growth figures within the monetary union continue to disappoint.
But policymakers seem trapped in a cat’s cradle of economic, political, and legal constraints that is preventing effective action.
The fulfillment of policy rules appears to be impossible without growth, but growth appears to be impossible without breaking the rules.
German Finance Minister Wolfgang Schäuble is politically committed to outdoing his country’s tough domestic fiscal framework to secure what he calls a “black zero” budget.
The French government is working to regain credibility on reform promises made in exchange for delays on fiscal adjustment, and Italy, with one of the highest debt burdens in the eurozone, has little room to use fiscal policy.
Meanwhile, the European Central Bank is constrained by doubts about the legality of its “outright monetary transactions” (OMT) scheme – sovereign-bond purchases that could result in a redistributive fiscal policy.
With all of the rules pointing toward recession, how can Europe boost recovery?
A two-year €400 billion ($510 billion) public-investment program, financed with European Investment Bank bonds, would be the best way to overcome Europe’s current impasse.
Borrowing by the EIB has no implications in terms of European fiscal rules.
It is recorded neither as new debt nor as a deficit for any of the member states, which means that new government spending could be funded without affecting national fiscal performance.
Thus, some of the investment spending currently planned at the national level could be financed via European borrowing to relieve national budgets.
Such an indirect way of dealing with strict rules would also be easier than starting long and wearying negotiations on changes to the fiscal framework.
The EIB is worried that such a scheme could come at the cost of its triple-A rating.
Indeed, though it can currently borrow at 1.6% on a long maturity, it has used its recent capital-raising exercise to reduce leverage rather than substantially increase its loan portfolio, as would be warranted at a time of retrenchment in private lending.
In any case, a rating change would hardly affect funding costs in the current low-yield environment, as lower-rated sovereigns have demonstrated.
In addition, the ECB could purchase EIB bonds on secondary markets, which would help to keep funding costs low – or even reduce them.
More important, purchases of EIB bonds would enable the ECB to undertake quantitative easing without triggering the degree of controversy implied by intervening in 18 separate sovereign-bond markets, where concerns that ECB purchases would affect the relative pricing of sovereigns are very real.
Already, €200 billion of EIB bonds are available.
Adding €400 billion would increase the pool substantially.
Together with asset-backed securities, covered bonds, and corporate bonds, €1 trillion of assets – the threshold widely thought to make quantitative easing by the ECB credible – would be available for purchase.
A central question, of course, concerns the type of government spending that should qualify as investment spending, and which European investment projects should be supported.
It will be impossible to define new and sensible European projects worth €200 billion per year.
Common projects such as the European energy union will need more time to be precisely defined.
As a result, the bulk of investment now will have to come from national policymakers.
In part, this means that existing infrastructure projects that are supposed to be financed from national budgets could be funded by the EIB.
By removing some of the burden from national budgets, the current decline in public investment could be reversed.
Some of the new resources could also be used to allow for budget consolidation in France without pro-cyclical cuts.
France could get this helping hand in complying with the fiscal rules in exchange for serious and necessary structural reforms, as could Italy, where EIB-funded bonds would provide a much-needed growth stimulus without new government commitments.
In Germany, the freed-up resources could be used to accelerate existing investment projects while still meeting its black-zero pledge.
Similar arrangements could be found for the other eurozone countries.
To prevent the misuse of money, the European Commission should vet all national investment projects.
More broadly, the program would be an important step toward establishing the eurozone’s missing fiscal union.
That goal will be reached more quickly once the benefits of achieving it are apparent to all.
Five Steps Forward in 2011
MILAN – The worst of the financial/economic crisis seems to be over.
Asset markets performed reasonably well in 2010.
Growth in the United States and parts of Europe returned.
Private-sector deleveraging continued, but was counter-balanced by rising public-sector deficits and debt.
And emerging-market growth returned to pre-crisis levels and appears to be sustainable, helped by unorthodox policies designed to “sterilize” massive capital inflows.
But continued high growth in emerging markets depends on avoiding a second major downturn in the advanced economies, which continue to absorb a large (though declining) share of their exports.
Slow growth is manageable.
Negative growth is not.
Thus, for the emerging economies, advanced countries downside risks and the spillover effects of their recovery policies are the key areas of concern.
In several advanced countries, including the US, growth and employment prospects are starting to diverge widely, endangering social cohesion and economic openness.
This situation is largely the result of predictable post-crisis economic dynamics, as firms and households in advanced countries repair their balance sheets.
But it also reflects non-cooperative policy choices.
Indeed, attempts to coordinate economic policy across the G-20, which accounts for 85% of global GDP, fell short of what was hoped for in 2010.
So what would a coordinated set of global economic policies look like?
First, it would include credible plans in Europe and the US to restore fiscal balance.
In Europe, that means agreeing on burden-sharing for re-capitalizing countries where deficits and debt have cut off market access or led to prohibitively high borrowing costs.
Restructuring damages the euro, and fiscal consolidation in the distressed countries, while necessary, is probably not sufficient.
That leaves Europe’s stronger countries, particularly Germany, with the residual liability.
Greater fiscal centralization and political unification seem inevitable, but it may take time to muddle through to that outcome.
In the US, the main challenge is to restore fiscal balance without damaging the recovery and future growth.
Getting the balance correct is complicated by the fact that the right fears the left will use fiscal stimulus as a path to permanently larger government, a path that the right (and apparently the general public) is unwilling to follow.
The second item on the agenda is a pull-back from quantitative easing in the US, which is subjecting the emerging economies to a flood of capital, rising commodity prices, inflation, and asset bubbles.
Intervention may be needed in fragile sectors of the US economy, like housing, where faltering performance could produce another downturn.
But such intervention can and must be far more precisely targeted than QE2.
America’s reluctance to target areas of weakness or fragility leaves the impression externally that QE2’s real goal is to weaken the dollar.
Beyond that, it is unclear whether or how QE2 will produce much growth.
Its proponents argue that it is the main policy instrument left, and that it will work by increasing credit or lowering the discount rate, which will raise asset prices and hence consumption via balance-sheet effects.
But do we really want to see the US leveraged up to its ears again?
Probably not.
On the balance-sheet side, even if a temporary decline in long-term interest rates pushes up asset values, debt-burdened households with uncertain employment prospects are unlikely to rush to consume.
After all, the wealth effect works only when people believe that the wealth is permanent.
Third, advanced and emerging economies that are running chronic surpluses must get rid of them.
The policies needed to do so vary by country and involve structural shifts.
In the case of China, a key part of its 12th five-year plan is to shift income to the household sector, where the savings rate is high but still lower than the corporate rate.
The economy can then use household savings (with appropriate financial intermediation) to finance corporate and government investment, rather than the US government.
That structural shift, in combination with the renminbi’s strengthening effective real exchange rate relative to the dollar, owing to inflation and rapidly rising wages in export sectors, offers hope that China’s surplus will fall.
The fourth item concerns the fact that the global economy will be out of balance so long as the US runs large current-account deficits.
With the post-crisis resetting of domestic consumption and savings, US aggregate demand will remain depressed.
In the longer run, that gap needs to be filled by higher foreign demand and increased export potential.
The US tradable sector is growing.
Its major sub-sectors – increasingly, high value-added (per person employed) services – are highly competitive and growing.
But they are not big enough to fill the gap.
Imports could fall, as they did during the crisis, but that was due to declining demand, not to a shift in demand in favor of domestic producers.
The tradable sector accounts for just 30% of the US economy (by value added), and employment growth in the tradable sector is negligible.
If employment growth in the non-tradable sector – dominated by government and health care – falters, the tradable sector will have to take up the slack.
The problem is that it can’t, even with a depreciating currency.
If exports are to grow substantially, the scope of the tradable sector must expand.
Fifth, and finally, major holders of reserves must agree to deploy them in a way aimed at maintaining global financial stability and preventing excessively volatile exchange-rate and capital movements.
With periodic bouts of contagion in the eurozone and residual uncertainty about America’s commitment to a strong dollar and fiscal discipline, major reserve holders in Asia and the Gulf need to become a stabilizing counterweight.
None of these steps are easy.
They will take time.
But, taken together, they would help reduce uncertainty and restore a pattern of stability and inclusive growth to the global economy, thereby bolstering its continued openness.
In avoiding second- or third-best outcomes and policy accidents, international economic policy coordination, though difficult, has a vital role to play.
Fixing America’s Broken Housing Market
NEW YORK – A sure sign of a dysfunctional market economy is the persistence of unemployment.
In the United States today, one out of six workers who would like a full-time job can’t find one.
It is an economy with huge unmet needs and yet vast idle resources.
The housing market is another US anomaly: there are hundreds of thousands of homeless people (more than 1.5 million Americans spent at least one night in a shelter in 2009), while hundreds of thousands of houses sit vacant.
Indeed, the foreclosure rate is increasing.
Two million Americans lost their homes in 2008, and 2.8 million more in 2009, but the numbers are expected to be even higher in 2010.
Our financial markets performed dismally – well-performing, “rational” markets do not lend to people who cannot or will not repay – and yet those running these markets were rewarded as if they were financial geniuses.
None of this is news.
What is news is the Obama administration’s reluctant and belated recognition that its efforts to get the housing and mortgage markets working again have largely failed.
Curiously, there is a growing consensus on both the left and the right that the government will have to continue propping up the housing market for the foreseeable future.
This stance is perplexing and possibly dangerous.
It is perplexing because in conventional analyses of which activities should be in the public domain, running the national mortgage market is never mentioned.
Mastering the specific information related to assessing creditworthiness and monitoring the performance of loans is precisely the kind of thing at which the private sector is supposed to excel.
It is, however, an understandable position: both US political parties supported policies that encouraged excessive investment in housing and excessive leverage, while free-market ideology dissuaded regulators from intervening to stop reckless lending.
If the government were to walk away now, real-estate prices would fall even further, banks would come under even greater financial stress, and the economy’s short-run prospects would become bleaker.
But that is precisely why a government-managed mortgage market is dangerous.
Distorted interest rates, official guarantees, and tax subsidies encourage continued investment in real estate, when what the economy needs is investment in, say, technology and clean energy.
Moreover, continuing investment in real estate makes it all the more difficult to wean the economy off its real-estate addiction, and the real-estate market off its addiction to government support.
Supporting further real-estate investment would make the sector’s value even more dependent on government policies, ensuring that future policymakers face greater political pressure from interests groups like real-estate developers and bonds holders.
Current US policy is befuddled, to say the least.
The Federal Reserve Board is no longer the lender of last resort, but the lender of first resort.
Credit risk in the mortgage market is being assumed by the government, and market risk by the Fed.
No one should be surprised at what has now happened: the private market has essentially disappeared.
The government has announced that these measures, which work (if they do work) by lowering interest rates, are temporary.
But that means that when intervention comes to an end, interest rates will rise –&nbsp;and any holder of mortgage-backed bonds would experience a capital loss – potentially a large one.
No private party would buy such an asset.
By contrast, the Fed doesn’t have to recognize the loss; while free-market advocates might talk about the virtues of market pricing and “price discovery,” the Fed can pretend that nothing has happened.
With the government assuming credit risk, mortgages become as safe as government bonds of comparable maturity.
Hence, the Fed’s intervention in the housing market is really an intervention in the government bond market; the purported “switch” from buying mortgages to buying government bonds is of little significance.
The Fed is engaged in the difficult task of trying to set not just the short-term interest rate, but longer-term rates as well.
Resuscitating the housing market is all the more difficult for two reasons.
First, the banks that used to do conventional mortgage lending are in bad financial shape.
Second, the securitization model is badly broken and not likely to be replaced anytime soon.
Unfortunately, neither the Obama administration nor the Fed seems willing to face these realities.
Securitization – putting large numbers of mortgages together to be sold to pension funds and investors around the world – worked only because there were rating agencies that were trusted to ensure that mortgage loans were given to people who would repay them.
Today, no one will or should trust the rating agencies, or the investment banks that purveyed flawed products (sometimes designing them to lose money).
In short, government policies to support the housing market not only have failed to fix the problem, but are prolonging the deleveraging process and creating the conditions for Japanese-style malaise.
Avoiding this dismal “new normal” will be difficult, but there are alternative policies with far better prospects of returning the US and the global economy to prosperity.
Corporations have learned how to take bad news in stride, write down losses, and move on, but our governments have not.
For one out of four US mortgages, the debt exceeds the home’s value.
Evictions merely create more homeless people and more vacant homes.
What is needed is a quick write-down of the value of the mortgages.
Banks will have to recognize the losses and, if necessary, find the additional capital to meet reserve requirements.
This, of course, will be painful for banks, but their pain will be nothing in comparison to the suffering they have inflicted on people throughout the rest of the global economy.
Fixing Europe\u0027s Stability Pact
Europe's Stability Pact - which underpins the euro by setting fixed constraints on the size of budget deficits for euro members - is in trouble.
The European Union's leading country, Germany, failed to meet its commitments to its EU partners concerning its deficit.
Furthermore, it used its political muscle to block the early warning about its deficit that the EU Commission had mandated by the terms of the Stability Pact.
Now France is making waves.
The EU's reluctant number two country has served unofficial notice that it, too, does not plan to abide by its deficit-reduction promises.
This comes one year after tiny Ireland received an official warning about its fiscal policies, even though Ireland's budget was in surplus, and mightily so.
So, four years after it was signed, the Stability Pact seems to be in shambles.
Indeed, Europe is now rife with talk about junking it, as well as with discussions about how to fix it.
Rightly so: the Pact is ill-conceived and its implementation ill-designed.
Not only is the Pact's fixed 3% limit for the ratio of budget deficit to GDP arbitrary, but it also ignores the fact that when an economy slows, deficits increase automatically.
Recognizing this fact, the Pact's architects made things worse by adopting two misguided `solutions'.
They introduced a safety clause allowing a country to suspend the deficit ceiling in case of serious recession, but they went on to define a serious recession in such a way as to make such a suspension implausible in practice.
Mindful that normal slowdowns could lead to a breach of the ceiling, they decreed that a normal deficit is a zero deficit.
Accordingly, each year, every county is required to submit a budget that projects two years ahead which demonstrates how its budget will be balanced in that time.
Germany's commitment for 2002 was made in early 2001 when its economy was growing at a reasonable pace.
The unanticipated slowdown made it impossible for Germany to meet the target.
Finance Minister Hans Eichel decided, reasonably, not to worsen conditions by adopting a contractionary fiscal policy.
The Commission, seeking to project itself as the protector of the Pact, sought to issue a warning.
But that decision had to be taken by real-life politicians, the Council of Finance Ministers.
No one on the Council wanted to upset Germany, for all of them recognized that the same problem could one day confront them.
No warning was issued.
France's case is different.
During elections, politicians invariably make promises, including those of tax cuts.
In a country with crushing rates of taxation, this is not only smart politics, but it is also good economics, provided spending is cut.
But France is also a country where everyone enjoys some publicly-funded privilege, so cuts are a political "no-no."
Thus France cannot meet the Pact's deficit target.
The Commission expresses outrage, but France is skilled at challenging the EU's rules of common behavior.
Political scheming is guaranteed.
Economists and cynics are not surprised.
The Pact's objective - to enforce fiscal discipline in countries that share the same currency - is worthy.
But having lost control of their national monetary policies, euro member countries retain only one macroeconomic instrument, fiscal policy.
The challenge, therefore, is to combine long-run discipline with short-run flexibility.
Like promising to go on a diet just before a big party, this challenge is not easily met.
The Stability Pact is too crude and technocratic: a 3% deficit target enforced by Brussels bureaucrats cannot bind real-life politicians.
A solution must be found elsewhere.
Fortunately, we need not look far.
Monetary policy faces a similar challenge.
It needs to deliver price stability in the long run while being flexible enough in the short run to deal with business cycles.
Over the last decade, monetary policy has been a true success story.
Everywhere the recipe is roughly the same: delegate policy to a group of competent people - the central bank - by making them formally independent from political pressure and providing them with a clear, explicit mandate.
Knowing that any slippage today will need to be dealt with tomorrow, they exercise their best judgment.
This has been a spectacular improvement over the monetary rules of the past.
The same approach should work for fiscal policy.
Some, of course, may fear a loss of democratic accountability.
It is essential to realize that fiscal policy fulfills two very different tasks.
The first task is structural and redistributive: it concerns the size of the budget and its detailed structure on both the spending and revenue sides.
Decisions on such issues cannot be delegated; they must remain in the hands of elected governments and be subject to parliamentary approval and oversight.
The second task is macroeconomic: it is about setting the budget balance to deal with cyclical fluctuations.
That task does not differ from monetary policy and can be delegated to an independent body.
So what Europe must to do is clear.
Each country should regain full control of its fiscal policy but delegate its macroeconomic component, decisions about deficits or surpluses, to an independent Fiscal Policy Committee given the long-run mandate of stabilizing, or in some countries reducing, the size of the public debt.
In order to guarantee the outcome, the statutes of such committees and their mandates ought to be agreed upon by all euro members.
No more Brussels interference, no more arbitrary rules, no more political judgments-- just plain common sense.
Fixing, not Sinking, the WTO
Fixing the Food Chain
COPENHAGEN – The global food system is in disarray.
Four years ago, a 30-year trend of decreasing food prices rapidly reversed course.
Grain prices have more than doubled since 2004, and prices for most other foods have increased significantly.
Add unsustainable management of natural resources, emerging negative effects of climate change, and sharply rising prices for fertilizers and energy, and we are faced with the most severe global food crisis since the early 1970’s.
Dramatic price hikes reflect several factors: adverse weather in key food production areas, rapid increase in demand for meats and dairy products, higher oil prices, draw-downs of food stocks, greater use of food commodities for bio-fuel, and failure to invest in rural infrastructure, research and technology, and other public goods needed to facilitate agricultural growth in developing countries.
The skyrocketing cost of food has resulted in more starvation among the poor, reduced purchasing power among the non-poor, and food riots in more than 30 countries.&#160;
The key lesson to learn is that insufficient investment in science and inappropriate government policies lead to food crises.
To avoid these shortcomings in the future, the world’s farmers and food processors must be helped to produce more food to meet increasing demand fueled by growth in world population and incomes.
Moreover, they must produce more with less land and water, at reasonable prices, and without damaging natural resources or worsening climate change.
But are governments getting the message?
I believe so.
Hunger is not a new phenomenon, but as long as the rural poor endure it in silence, as they have for a long time, governments can comfortably ignore it.
Food riots by urban populations, on the other hand, threaten what governments care about the most: their legitimacy.
Developing countries invest only slightly more that 0.5% of the value of their agricultural production in agricultural research.
That is grossly inadequate.
An increase to 2% is warranted. This would still be less than what high-income countries invest in agricultural research.&#160;
Modern science should focus on sustainable increases in land and water productivity, management of production risks caused by droughts, floods, pests, and on mitigation and adaption to climate change.
Drought-tolerant and pest-resistant crop varieties, disease-resistant livestock, and high-yield agricultural production systems that use less water and capture nitrogen from the air are but a few examples of the kind of technologies needed.
More research is also needed to improve the nutritional quality of staple foods by fortifying them with iron, vitamin A, and zinc to help solve widespread micronutrient deficiencies.
We must also strengthen food safety from production to consumption, including improvements in our understanding of the interaction between the food system and human health, particularly zoonotic diseases and the effects of pesticides.
Research to identify alternative energy sources to stop the conversion of maize, soybeans, oil palm, and other foods to bio-fuel should become another high priority.
Most of the people at risk of hunger and malnutrition live in rural areas.
They need access to roads, markets, appropriate institutions and technology, primary health care, and education if they are to escape poverty and hunger and produce more food for an increasing world population.
Both public and private investments are needed to provide such access.
Government action is needed to make markets work in developing countries and to give farmers and market agents access to appropriate technology and knowledge.&#160;
Unfortunately, rapidly falling food prices during the 30-year period since the food crisis of the early 1970’s gave governments a convenient excuse for doing little or nothing.
Public policy is needed in many other areas, including legislation to incorporate environmental costs into food prices, thereby encouraging sustainable production, as well as incentives and regulations to promote more efficient water use.
National and international bio-safety regimes should be implemented to guide the development, application, and trade of modern technology and genetically modified food.
Government subsidies that increase the use of food commodities such as maize, soybeans, and palm oil for bio-fuel should be discontinued.&#160;
International institutions are needed to regulate globalization and ensure trade competition.
Trade-distorting agricultural policies, including those in the United States, the European Union, and Japan, should be eliminated.
While poverty reduction is the best way to reduce fertility rates, access to reproductive health care is critically important for helping families limit the number of children they have to the number they desire.&#160;&#160;
The world’s natural resources are sufficient to produce the food needed in the foreseeable future without damaging the environment, but only if governments follow enlightened policies and science is put to work for the food system.&#160;
Fixing the Innovation Supply Chain
CAMBRIDGE – As a graduate student at MIT, I had the opportunity to work with Professors Robert Langer and Ram Sasisekharan in an environment rife with innovative thinking.
We asked what could be possible, and were driven to pursue revolutionary technologies that were widely considered impossible.
This experience instilled in me a simple but powerful credo: think big.
Innovation is difficult.
If one is willing to traverse the boundary of the unknown, one should pursue the course that promises the greatest potential impact.
In exploring a wide range of subjects – energy, agriculture, medicine, and more – one approach has, in my experience, emerged as the most effective: begin with the end in mind.
By identifying the problems and envisioning the preferred solution, one can define the set of constraints into which technological innovation fits, and establish a clear, albeit often difficult, path to its realization.
A fundamental requirement of this approach is an open mind, unconstrained by the subject’s idiosyncratic dogma.
Those who are immersed in a field have an established view of what is possible, based on some combination of previous successes, citation bias, current limits of knowledge, and truth – and it is often difficult to distinguish these sources.
But the newcomer asking the most basic questions begins to notice logical inconsistencies, from which the real constraints on solutions and technological limits arise.
Breakthroughs lie at the intersection of technological possibility and market pull.
An understanding of these forces enables innovators to optimize the direction of invention.
With well-defined constraints, a clear path for developing innovative technologies – one that accounts for both the known and the unknown – can be planned.
This unconventional approach has consistently produced groundbreaking technologies that, if successfully implemented, revolutionize a field.
What might be more interesting, however, is the response that such progress often elicits: “This seems so obvious.
Why hasn’t someone done it before?” Early in my career, this reaction troubled me; it made me wonder whether I had, in fact, overlooked something obvious.
But, as my experience with entrepreneurial innovation has grown, I have realized that the response is rooted in the fact that most people are trapped in a specific doctrine, which obscures the innovative solutions that lie beyond its borders.
Companies exhibit similar behavior when it comes to acquiring innovative technologies, adhering to ineffective, restrictive processes, despite an ostensibly obvious alternative: the efficient systems that manufacturers use to secure inputs for production.
In order to establish a clear, low-risk path to producing their goods at a predictable (and profitable) cost, companies employ teams dedicated to securing the relevant supply chains, controlling inventory, managing the production process, and so on – from the point of origin to the point of consumption.
In many cases, this involves maintaining relationships with a dedicated network of suppliers, with which producers share detailed product specifications.
Doing so ensures that producers get exactly what they need, and that suppliers are able to deliver the correct inputs.
The result is a well-defined, highly productive, and mutually beneficial working relationship.
By contrast, the innovation supply chain (the process by which companies obtain and/or develop future products and improve on their current products) tends to be characterized by inefficiency, ambiguity, and competition.
And, in many cases, no supply chain is in place.
Most pharmaceutical companies, for example, lack effective innovation supply chains.
But only about 15% of the drugs that the US Food and Drug Administration has approved recently were developed by the same company that markets and sells them, meaning that many major pharmaceutical companies depend on the innovation ecosystem to advance their products.
Drug companies often lament that the firms from which they are sourcing innovations do not perform clinical trials to their specifications, forcing them to repeat the work.
Nevertheless, they are reticent about providing such specifications in advance – even when innovators request them – perhaps to protect their market position or internal efforts.
Moreover, the same companies compete directly in the supply of innovative technologies.
The result is a broken supply chain.
Just as individual innovators must challenge conventional wisdom, companies must replace the established approach to the innovation supply chain with one that more closely resembles how they create and maintain a manufacturing supply chain.
If market incumbents are willing to share “innovation specifications” (which should not be confused with innovation methods), they can develop an effective network of innovation suppliers, thereby increasing the reliability of the product-development engine.
And, as with effective manufacturing supply chains, the supplier and the purchaser must build a reciprocal relationship, in which they do not compete with each other, practically or economically, in the specific activities that they are performing.
An efficient supply chain can transform innovation on both the individual and industry levels.
Indeed, a common approach – defining key market needs, coupling them with solution constraints, and pushing the boundaries of current thinking – applies to all kinds of innovation.
With an innovation ecosystem organized along these lines, “obvious” advances could occur significantly faster.
Fix the Financial Road Before the Others Crash
Flawed International Justice for Sudan
Those who follow events in Darfur closely know very well that Sudan’s President Omar Hassan al-Bashir leads a group of political and military leaders responsible for the serious and large-scale crimes against Sudanese citizens that the country’s military forces, with the assistance of paramilitary groups and militias, commit every day in the region.
These citizens are guilty only of belonging to the three tribes (Fur, Masalit, and Zaghawa) that spawned the rebels who took up arms against the government a few years ago.
Any step designed to hold Sudan’s leaders accountable for their crimes is therefore most welcome.
Nevertheless, the decision of Luis Moreno-Ocampo, the Prosecutor of the International Criminal Court, to request an arrest warrant against al-Bashir is puzzling, for three reasons.
First, if Moreno-Ocampo intended to pursue the goal of having al-Bashir arrested, he might have issued a sealed request and asked the ICC’s judges to issue a sealed arrest warrant, to be made public only once al-Bashir traveled abroad.
The Court’s jurisdiction over the crimes in Darfur has been established pursuant to a binding decision of the United Nations Security Council, which means that even states that are not parties to the ICC statute must execute the Court’s orders and warrants.
Having instead made the request for a warrant public, al-Bashir – assuming the judges uphold the request – can simply refrain from traveling abroad and thus avoid arrest.
Second, Moreno-Ocampo has inexplicably decided to indict only Sudan’s president and not also the other members of the political and military leadership that together with him have planned, ordered, and organized the massive crimes in Darfur.
If Hitler had been alive in October 1945, the 21 indictees who were in fact tried at Nuremberg would not have been let off the hook.
Finally, one fails to understand why Moreno-Ocampo has aimed so high and accused al-Bashir of the “crime of crimes,” genocide, instead of filing charges that are more appropriate and easier to prosecute, such as war crimes (bombing of civilians) and crimes against humanity (extermination, forcible transfer of people, massive murders, rape, etc.).
True, genocide has become a magic word, and people think that its mere evocation triggers the strong outrage of the world community and perforce sets in motion UN intervention.
But this is not so.
Moreover, strict conditions must be met to prove genocide.
In particular, the victims must form an ethnic, religious, racial, or national group, and the perpetrator must entertain “genocidal intent,” namely the will to destroy the group as such, in whole or in part.
For example, one kills ten Kurds not because they are obnoxious or because the perpetrator has strong feelings against each of them taken individually, but only because they are Kurds; by killing those ten persons he intends to contribute to the destruction of the group as such.
In the case of Darfur, according to Moreno-Ocampo, each of the three tribes does constitute an ethnic group; although they speak the same language as the majority (Arabic) and embrace the same religion (Islam) and their skin is the same color, they constitute distinct ethnic groups because each tribe also speaks a dialect and lives in a particular area.
Under this standard, the inhabitants of many European regions – for example, Sicilians, who, in addition to the official language, also speak a dialect and live in a particular area – should be regarded as distinct “ethnic groups.”
Furthermore, Moreno-Ocampo has inferred al-Bashir’s genocidal intent from a set of facts and conduct that in his view amount to a clear indication of such intent. However, according to the international case law, one can prove by inference a defendant’s state of mind only if the inference is the only reasonable one that can be drawn based on the evidence.
In the case of Darfur, it would seem more reasonable to infer from the evidence the intent to commit crimes against humanity (extermination, etc.), rather than the intent to annihilate ethnic groups in whole or in part.
The arrest warrant, assuming that the ICC issues it, seems unlikely to produce the extra-judicial effects – the political and moral delegitimization of the accused – that sometimes follow.
This happened in the case of former Bosnian Serb leader Radovan Karadzic, who, although never arrested, has been removed both from power and the international arena as a result of his indictment in 1995.
Instead, Moreno-Ocampo’s request may have negative political repercussions by creating much disarray in international relations.
It may harden the Sudanese government’s position, endanger the survival of the peace-keeping forces in Darfur, and even induce al-Bashir to take revenge by stopping or making even more difficult the flow of international humanitarian assistance to the two million displaced persons in Darfur.
On top of that, Moreno-Ocampo’s request might further alienate the Great Powers (China, Russia, and the United States) that are currently hostile to the ICC.
Missing Growth Multipliers
PRINCETON – In April 2010, when the global economy was beginning to recover from the shock of the 2008-2009 financial crisis, the International Monetary Fund’s World Economic Outlook predicted that global GDP growth would exceed 4% in 2010, with a steady annual growth rate of 4.5% maintained through 2015.
But the forecast proved to be far too optimistic.
In fact, global growth has decelerated.
In its most recent WEO, the IMF forecasts global GDP to grow by only 3.3% in 2012, and by 3.6% in 2013.
Moreover, the downgrading of growth prospects is remarkably widespread.
The forecast errors have three potential sources: failure to recognize the time needed for economic recovery after a financial crisis; underestimation of the “fiscal multipliers” (the size of output loss owing to fiscal austerity); and neglect of the “world-trade multiplier” (the tendency for countries to drag each other down as their economies contract).
For the most part, the severity and implications of the financial crisis were judged well.
Lessons from the October 2008 WEO, which analyzed recoveries after systemic financial stress, were incorporated into subsequent forecasts.
As a result, predictions for the United States – where household deleveraging continues to constrain economic growth – have fallen short only modestly.
The April 2010 report forecast a US growth rate of roughly 2.5% annually in 2012-2013; current projections put the rate a little higher than 2%.
By contrast, the fiscal multiplier was seriously underestimated – as the WEO has now recognized.
Consequently, forecasts for the United Kingdom – where financial-sector stresses largely resembled those in the US – have been significantly less accurate.
The April 2010 WEO forecast a UK annual growth rate of nearly 3% in 2012-2013; instead, GDP is likely to contract this year and increase by roughly 1% next year.
Much of this costly divergence from the earlier projections can be attributed to the benign view of fiscal consolidation that UK authorities and the IMF shared.
Likewise, the eurozone’s heavily indebted economies (Greece, Ireland, Italy, Portugal, and Spain) have performed considerably worse than projected, owing to significant spending cuts and tax hikes.
For example, Portugal’s GDP was expected to grow by 1% this year; in fact, it will contract by a stunning 3%.
The European Commission’s claim that this slowdown reflects high sovereign-default risk, rather than fiscal consolidation, is belied by the UK, where the sovereign risk is deemed by markets to be virtually nonexistent.
The world-trade multiplier, though less widely recognized, helps to explain why the growth deceleration has been so widespread and persistent.
When a country’s economic growth slows, it imports less from other countries, thereby reducing those countries’ growth rates, and causing them, too, to reduce imports.
The eurozone has been at the epicenter of this contractionary force on global growth.
Since eurozone countries trade extensively with each other and the rest of the world, their slowdowns have contributed significantly to a decrease in global trade, in turn undermining global growth.
In particular, as European imports from East Asia have fallen, East Asian economies’ growth is down sharply from last year and the 2010 forecast – and, predictably, growth in their imports from the rest of the world has lost momentum.
Global trade has steadily weakened, with almost no increase in the last six months.
The once-popular notion, built into growth forecasts, that exports would provide an escape route from the crisis was never credible.
That notion has now been turned on its head: as economic growth has stalled, falling import demand from trade partners has caused economic woes to spread and deepen.
The impact of slowing global trade is most apparent for Germany, which was not burdened with excessive household or corporate debt, and enjoyed a favorable fiscal position.
To escape the crisis, Germany used rapid export growth – especially to meet voracious Chinese demand.
Although growth was expected to slow subsequently, it was forecast at roughly 2% in 2012-2013.
But, as Chinese growth has decelerated – owing partly to decreased exports to Europe – the German GDP forecast has been halved.
And, given that this year’s growth has largely already occurred, Germany’s economy has now plateaued – and could even be contracting.
In good times, the trade generated by a country’s growth bolsters global growth.
But, in times of crisis, the trade spillovers have the opposite effect.
As the global economy has become increasingly interconnected, these trade multipliers have increased.
Indeed, while less ominous and dramatic than financial contagion, trade spillovers profoundly influence global growth prospects.
Failure to recognize their impact implies that export – and, in turn, growth – projections will continue to miss the mark.
The projected increase in global growth next year will likely not happen.
On the contrary, policy errors and delays in individual countries will seriously damage economies worldwide.
Food for Revolution
PRINCETON – Summits are defined by their location.
It is quaint that the 1933 World Economic Conference took place in the Geological Museum in London’s Kensington, at a time when international cooperation seemed as alien as a fossilized dinosaur.
On these criteria, Deauville, in French Normandy, with the (slightly faded) elegance of a past era of elite luxury, ostentatious consumption, and sumptuous banquets, is also perhaps not an altogether fortunate choice for the G-8 meeting.
This year, the G-8ers are talking about interesting but peripheral issues, such as the economic impact of the Internet.
Worse, they are talking about important issues, like food security, in a peripheral way.
The food issue emerged for the first time as a major theme at the July 2009 summit in L’Aquila, Italy, as a response to a commodity boom that was beginning to falter, but that has since reemerged with the force of a hurricane.
Now the G-8 will discuss funding for palliative measures.
The issue of food is, however, intimately tied to a host of much broader economic issues, which the international community is not properly addressing.
Even though the global economy today looks relatively robust in general, international economic cooperation is more fragile now than at any moment in the post-1945 world.
Weak food security highlights all of the major problems of the modern world non-order.
Economic and financial nationalisms threaten.
There is talk of currency wars, national management and regulation of banking, and growing demand for greater levels of trade protection.
And all of these issues are inter-connected.
The discussion of monetary policy is especially divisive.
Because of low interest rates in the United States, major financial institutions can borrow cheaply in dollars and then chase much higher returns in the major emerging-market countries.
The result creates an impossible dilemma for many of the world’s most dynamic economies.
If they try to clamp down by raising domestic interest rates, they will only attract greater capital inflows.
If they let the exchange rate rise, they might deter some capital inflows, but they would also penalize their exporters and push up domestic unemployment.
Emerging-market policymakers in big countries such as Brazil, China, and Turkey routinely attack the US and its monetary policy as a source of inflation, social tension, and political instability.
The most obvious and dangerous consequence of low interest rates in the major industrial countries is their impact on commodity prices, which is especially pronounced for food and fuel.
As many economists, notably Jeffrey Frankel, have shown, prices on these markets are established by an auction-like process; as a result, commodity markets transmit the effects of monetary expansion particularly quickly.
By contrast, branded products, into which producers have sunk major investments in securing the market, have prices that are much stickier and do not reflect the effects of monetary policy as rapidly.
Higher food prices have had a major impact in expanding the area devoted to cultivation in many countries, and have led to higher output levels worldwide.
Brazil, Russia, and China, but also Algeria, Egypt, and South Africa – indeed, all African countries that have maintained functioning governments – have seen dramatic increases in food production over the past decade.
This should be a happy picture: the world is now better able to feed itself.
But the same economic stimuli that underpin higher food output also lead to supply problems, a decline in living standards, and massive social strains, especially in urban centers.
This is important to bear in mind, because rising food prices have historically been the trigger for political revolutions.
The three revolutions that made the modern world, in France, Russia, and China, all had their immediate origins in food shortages, fear of hunger, and disputes about food pricing.
The panic about bread that swept France in 1789, and the inability of the government to guarantee supplies, destroyed the ancien regime.
Louis XVI was contemptuously called “le boulanger,” the baker.
Wartime inflation destroyed stability in the Russian empire in 1917, as farmers, worried about the declining value of their money, hoarded their output and let the cities starve.
The Bolsheviks came to power on a promise of bread (and peace).
China, too, was paralyzed by inflation after the Second World War, leaving it vulnerable to food panics.
Food prices are usually not limited in their effects to one country alone.
Simultaneous revolutions swept Europe in 1848, in the aftermath of crop failures whose most notorious manifestation was the Irish famine.
Price rises have been a major trigger of the discontent this year in the Middle East and North Africa.
Though the Egyptian and Tunisian economies were expanding quite satisfactorily, people had to pay much more for food.
Moreover, it would be wrong to view this as a purely regional phenomenon limited to the so-called Arab Spring.
The same kind of unrest, in which the countryside is pitted against the town, with both sides demanding more rights, could undermine the political order in China and other big emerging-market economies.
Recent decades have been replete with contagious financial crises that spread disorder from one country to another.
The effects of globalized money are now producing a new whirlwind.
The coming years or even months are likely to see new forms of these domino effects.
As in 1848, the struggle for affordable food is producing discontent that transcends national frontiers, threatens established regimes, and fuels popular demand for a more just political order.
Food for Thought in North Korea
DENVER – Meet any Korean of a certain age, and you will learn about barley season, which begins in February and stretches through the cold months of early spring until the first of the winter barley crop is harvested.
Few South Koreans remember those straitened months anymore, but for North Koreans, hunger in the countryside during this time of year is very real.
In past years, South Korea has been the primary external source of food, through either direct food assistance (for the immediate problem) or deliveries of fertilizer.
But this year, with rising impatience and anger in South Korea toward the North Korean regime, the food and fertilizer is in doubt.
And some analysts in Seoul believe that a dicey political succession in Pyongyang, combined with food shortages in the countryside, could prove too much for the North Korean regime to handle.
The past 12 months have seen some of the most outrageous North Korean behavior in decades.
In March 2010, a North Korean submarine torpedoed a South Korean ship on the high seas, killing 46 sailors – and sinking any prospect of an early resumption of negotiations to implement the North Korea’s 2005 commitment to eliminate all its nuclear programs.
North Korean invective and provocation against the South continued, and in November its military shelled a South Korean-held island along the northern limit line, which has served as the North-South border since the 1953 armistice.
More recently, the regime proudly unveiled a modern, high-tech uranium-enrichment facility.
According to the American scientist who was invited to see it, the facility, in contrast to the regime’s aging plutonium technology, appeared to be state-of-the-art, thus reinforcing the suspicion that North Korea has no genuine interest whatsoever in fulfilling its nuclear-disarmament responsibilities.
When asked why they failed to include this facility in their declaration of nuclear programs, North Korean officials responded cheerfully – and absurdly – that it had been built from scratch only after the collapse of the nuclear negotiations in 2008.
The North Koreans lied in writing not only to the United States, which it has done repeatedly in the past, but also to China, Russia, Japan, and South Korea.
The Chinese have urged the US and others to restart the nuclear talks, but they know that it is North Korean perfidy that has jeopardized the process.
Meanwhile, in the stark North Korean countryside, the regime has invested almost nothing.
Unmanaged rivers regularly overflow their banks and inundate villages during typhoon season, much as they did a thousand years ago.
Irrigation systems remain crude and inadequate to confronting the vicissitudes of rainfall on the often parched and barren Korean peninsula.
This neglect has left North Koreans perpetually on the edge of survival – and often with their palms extended to the international community, especially the South.
For South Koreans, whether to care for hungry North Koreans, who are kith and kin, will be a much tougher decision than for others who see only a distant security problem.
Many North Koreans are already malnourished, their body weight and height substantially lower than that of South Koreans.
According to non-government groups and other humanitarian workers, many North Korean children are showing signs of mental impairment as the lack of essential vitamins takes its toll.
South Koreans increasingly are coming to believe that North Korea will not be in the family of nations for long –&nbsp;that sooner or later (perhaps even in this decade), the North will collapse and its malnourished people will become future citizens of a reunified Republic of Korea.
For this reason, the issues facing South Korean public opinion as it decides whether to help with food assistance are not easy; indeed, they could be quite wrenching.
The division of the Korean Peninsula 65 years ago was one of the greatest – and now most enduring – tragedies of the Second World War.
No one dreamed that a line drawn on the 38th parallel for the tactical purpose of organizing the surrender of Japanese units to Soviet and American forces would become a scar across the Korean peninsula that would create two separate states.
But it did, and, in the wake of the Korean War, that line would become – and remain – one of the most heavily fortified borders on earth.
The Korean people have a historical right to determine their peninsula’s future arrangements, including unification should they so choose.
How this increasingly likely process unfolds will have enormous political and security consequences for the region.
Will China accept a unified peninsula under a US ally?
Will the US take measures to reassure China?
How would a unified Korea affect attitudes in Japan?
But the real decisions – and their consequences – will fall on the government in Seoul.
Would food aid help to ensure the survival of a state whose treatment of its own citizens is among the most abysmal in the world?
If so, and if denying food aid would result in a famine that the North Korean regime could not withstand, what could such a decision mean for eventual relations among Korean peoples living in the northern and southern parts of a unified country?
In the coming weeks, South Korea’s government will confront one of the toughest choices that any government can face: whether the short-term cost in human lives is worth the potential long-term benefits (also in terms of human lives) that a famine-induced collapse of North Korea could bring.
Food for Thought on GM Crops
COPENHAGEN – As the world continues to debate the impact of climate-change while seeking a new global treaty to prevent it, Kenya has endured a prolonged drought followed by heavy flooding.
Maize plants have withered, hitting poor rural families hard.
People are starving, and many of those who survive are grossly malnourished.
There is hope: next year, the Kenyan authorities will begin testing maize varieties that they hope will provide high yields and prove more resistant to drought.
But why did farmers in Kenya and other African countries not have access to drought-resistant crop varieties before catastrophe struck?
One reason is that such crops rely on research tools used in molecular biology, including genetic engineering.
African governments have been told that genetic engineering is dangerous, with many Europeans and their national governments – as well as transnational NGOs such as Greenpeace – determined to stay away from it.
Unfortunately, Kenya’s government listened and did not permit their farmers to grow genetically modified (GM) maize, even though it has been approved, sown, harvested, and eaten by both humans and animals in South Africa, Argentina, Brazil, the United States, and other countries for many years.
Although Kenya has a well-functioning and well-funded agricultural research system, the government has not even permitted field tests of GM crop varieties.
Molecular biology has provided excellent tools to address health, environmental, and food problems such as those seen in Kenya.
The question is whether decision-makers are prepared to use them.
Obviously, most EU countries’ governments are not.
But why are developing-country governments dragging their feet?
Are the risks so high that they justify the suffering that could have been avoided?
GM foods have now been on the market in the US for more than 12 years.
Most of the food consumed by Americans is either genetically modified or exposed to genetic modification somewhere in the production process.
There is no evidence of even a single case of illness or death as a result – in the US or anywhere else where GM foods are consumed.
Similarly, GM feed has not resulted in any illness or death in animals.
And no environmental damage has been detected.
It is unusual that a new technology has no negative side effects.
Just think of all the deaths that the wheel has caused, not to mention the side effects of much of the medicine we take.
What, then, is the danger of GM foods?
Opponents of genetic engineering in food and agriculture have several arguments, none of which appears to be valid.
First, “genetic engineering cannot solve the hunger and food insecurity problem.” This is correct: GM foods cannot singlehandedly solve the problem, but they can be an important part of the solution.
A second argument is that “we do not know enough about the effects and side effects.”
Since some of the groups opposing GM organisms destroy the field trials that could give us more knowledge, a more pertinent argument might be that many opponents do not want us to know more.
Third, “we should not play God.”
But if God gave us brains, it was so that we should use them to ensure a balance between people and nature to help eliminate hunger and protect the environment.
Fourth, pollen from GM crops may “contaminate” organically produced food.
This, of course, would be an issue only with open pollinating plants, and only if the definition of “organically produced” excludes GM, something that is difficult to justify, since genes are as organic as anything.
Lastly, some argue that if farmers are permitted to sow GM varieties, they become dependent on large seed producers such as Monsanto, which have patent protection – and thus a monopoly – on the seed.
But private corporations undertake only about half of all agricultural research, whether or not it involves genetic engineering.
The other half is done by public research systems using public funds.
Results from such research would not be subject to private-sector monopoly power.
The fact that virtually all US maize and soybean farmers, and all papaya farmers, use GM seed indicates that it is good business for them.
Similarly, a large share of farmers – most of them smallholders – in Argentina, Brazil, South Africa, China, India, and other countries, prefer GM seed because they make more money from the resulting crops.
Large reductions in the use of insecticides cut costs for growers of GM varieties, while providing an important health and ecological benefit.
But maybe those who oppose private seed corporations are really against capitalism and the market economy rather than GM seed.
If so, they should choose an issue for their campaign that would be less damaging to the poor and hungry in developing countries.
The global food crisis of 2007-2008 was a warning of what the future may hold in store if we continue with business as usual, including misplaced opposition to the use of modern science in food and agriculture.
European and developing-country governments urgently need to reverse their current adverse position on GM organisms in order to help ensure sustainable food security for all.
Such a reversal would reduce hunger, poverty, and malnutrition; help protect our planet’s natural resources; and slow the emission of greenhouse gases from agriculture.
All that is needed is political will.
Food or Fuel?
When United Nations Secretary General Ban Ki-moon recently visited Antarctica, he was impressed by the melting ice he saw there.
Then he was in Brazil, where he was impressed by the country’s use of bio-fuel to power a quarter of its automotive traffic.
Oil pressed from rapeseed can be used as diesel fuel, and maize or sugar beets can yield ethanol to replace gasoline.
The UN and many countries officially share the view that bio-fuel is one option in fighting climate change.
The United States generously subsidizes production of ethanol from maize, with output there currently growing 12% annually and almost 10% worldwide.
EU countries subsidized bio-fuels production with €3.7 billion in 2006, and intend to cover 8% of their motor fuels from biological sources by 2015 and 20% by 2020.
The Kyoto Protocol allows countries to meet their target reductions of CO2 emissions by substituting bio-fuels for fossil fuels.
But is it really a wise and ethically acceptable strategy to burn food rather than eat it?
If we allow food to be used to produce bio-fuels, food prices will be linked to the oil price, as the head of the German farmers association happily announced.
Indeed, food prices are currently increasing in Europe, because more and more farmland is being used for bio-fuels instead of for food production.
This is not sustainable.
The so-called tortilla crisis, which led to protests in Mexico City in January, foreshadows what we can expect.
The price of maize, half of which is imported from the US, more than doubled in a year, primarily because of production of bio-ethanol.
Mexico tried to solve the problem by imposing a state-administered price ceiling for maize tortillas, combined with duty-free maize imports.
The problem is that advocates of reducing the greenhouse effect by promoting bio-fuels production have not made clear where the land will come from.
In principle, there are only three ways to procure it: by withdrawing it from food or fodder production, from the production of natural materials – particularly wood – or from nature.
The perversity of the first alternative is obvious: there is no surplus food production in the world.
Whoever wishes to grow bio-fuels on land that was previously used for food production must recognize that this would increase food prices, harming the poorest of the poor.
Similarly, to cultivate bio-fuels on land that would otherwise be used to produce sustainable construction materials would drive up the prices of these materials and encourage their substitution by non-sustainable materials like concrete and steel.
This may be unobjectionable on ethical and social-policy grounds, but it certainly would not help the environment.
Wood stores carbon, owing to photosynthesis.
The larger the stocks of wood on earth, in the form of living trees or wooden construction material in buildings, the less CO2 there is in the atmosphere and the cooler the earth remains.
So, taking land for the production of bio-fuels from forests means speeding up global warming, because bio-fuel crops store much less carbon than trees.
To be sure, in addition to the negative storage effect, there might be a positive effect on the world climate insofar as bio-fuels may replace fossil fuels for combustion processes.
But this assumes that the oil sheikhs will extract less oil because there is more bio-fuel.
If they don’t, the positive effect will vanish.
World market prices of fossil fuels will simply be lower than they otherwise would be such that total consumption of fossil and bio-fuels rises by the extra production of bio-fuel.
The remaining alternative is to use land that has not previously been used commercially.
But such land is usually wooded.
The substitution of forests by maize, rape, and other oilseed cultivation reduces the stock of biomass and likewise leads to an increase in the concentration of CO2 in the atmosphere.
Brazil has cleared huge areas of its jungle in order to produce the bio-ethanol that impressed the Secretary General.
By doing so, the country has done a great disservice to the cause of fighting climate change.
Indeed, every year, the world loses forest area the size of Ireland.
The effect on the atmosphere is equivalent to 18% of annual CO2 emissions, more than from the world’s entire transport sector.
Deforestation must be reversed, not accelerated.
It makes no sense to use land in whatever form to produce bio fuels.
Only producing bio-fuels without the use of additional land is justifiable in terms of environmental and social policy.
This would mean using agricultural and other waste, which would otherwise rot and produce nearly equal amounts of CO2 and methane, an even more dangerous greenhouse gas.
That option should be supported.
But official encouragement of production of bio-fuels on land that would have been used for other purposes must stop.
Football and Philosophy
Gooooal!!!
Heavenly bliss, or hellish pain, depending on which team has scored: ours, or theirs.
How can the trajectory of a ball cause so much pain or bliss?
For weeks I have sat at my television watching the World Cup.
My wife threatens me with divorce and other disciplinary measures.
What is the source of this attraction, this magic?
The world of play is our permanent Garden of Eden.
At any moment we may step from our real world into the freedom, innocence, and bliss of play.
Football and the Garden of Eden?
What do they have to do with each other?
Each delineates a sacred sphere of freedom and order, innocence, spirituality and justice from our everyday world of chaos, bondage, injustice and guilt.
The chessboard, the tennis court, the soccer field: within their boundaries we feel free because here it is we who make the rules and are not subjected to the iron laws of the outside world.
We feel innocent too, because the world of play is also a world of innocence: a Garden of Eden before the Fall.
Here we can be childishly selfish, we can gratify our thirst for success, power and domination - all without guilt.
In the world of play freedom is generated, paradoxically, by restrictions.
In soccer, the basic rule is simple: the ball is to be moved, from the central point, into one of the goals.
If the ball would roll from the center point straight into one of the goals, its track would be, or would seem to be, strictly determined and the whole thing would be boring.
To generate freedom, rules put obstacles in the way of the ball and complicate its movement.
First, two teams of eleven players are put on the field with the task of getting the ball into the goal.
Second, they are told to get the ball into opposite goals.
With twenty-two players with their own wills and skills, with various movements of confrontation and cooperation, the number of possible combinations is increased almost ad infinitum.
After this only one additional factor is needed to create a real world of happy surprises, freedom and bliss: the ball.
Balls are among the most important "freedom generators" in our lives.
A ball is freedom embodied.
It may bounce in any direction.
It seems to have its "own will."
It is an object and, nevertheless, it seems to be free.
By introducing the factor of chance and unpredictability into the game, the ball transforms a bitter and down-to-earth human fight into an epiphany of spirituality and freedom.
In its brisk movements chance and human will interact, dance, and somersault with each other.
The ball flashes to and fro in happy irresponsibility - between human will and chance, freedom and limitation, success and failure, hope and the loss of hope - to bounce back into the world of hope in the next moment.
It has its own universe.
It moves in the sphere of the sacred.
But that sacred does not exist without the profane.
The football field is marked off and opposed to the surrounding world.
The experience and the sacred ceremony remain incomplete if tension between the field and the grandstand is missing.
The clean emerald field and freedom of the game must be opposed by the howling mob in the darkness of the stands, burning red torches and jerking between ecstatic joy and hellish misery.
In our everyday lives, reason and passions are mixed.
Soccer (like some other games) separates, and opposes to each other, these two realms.
All passions, emotions and instincts are pushed over to the side of the spectators.
They rage and love, prance and explode, and finally reach a catharsis (if their team wins) or to descend into hell (if their team loses ).
At the same time, they watch, perceive, and experience the freedom of Apollonian or Platonic spirituality of the game going on in the field.
Yes, players move in a world of spirituality.
They act according to clear, sacred rules.
While in play, they are supposed to act as pure rational beings who leave behind their everyday passions and emotions, personal wishes or fears.
They move in the world of pure morality and justice.
The player's world is one of justice and total impartiality; of a perfect equality of opportunity, which is never achieved in our everyday lives.
Even advantages deriving from the direction of the wind are balanced.
The two teams change sides at the half.
When and where do we, the privileged and the underprivileged, change sides in the real world?
Players, too, are not supposed to break the rules.
If they do, they are punished and, if they relapse, excluded from play.
They are expelled from the sphere of spirituality and we see them disappearing into the chilly Hades of the locker room.
The real expulsion from Paradise comes only if the sanctity of play is profaned, if the spell is broken: by players falling out of their angelic roles and starting a fight in the field; by a cheating referee; by people realizing that a match is rigged; by spectators invading the field.
Such events do lasting damage to people and to the community.
It is a bitter shock to realize the fragility of our world of freedom, spirituality, and dignity and awaken again (as we will when the Cup winner is decided) in our less hospitable everyday world.
Football is War
NEW YORK – The flags are already flying, from Holland to Argentina, from Cameroon to Japan.
Soon the drums will be beating, the trumpets blowing.
Colors will be unfurled, and battle cries will sound.
It’s that time again: the World Cup is upon us.
The late Rinus Michels, also known as “the General,” coach of the Dutch team that narrowly lost to Germany in the 1974 final, famously said, “Football is war.” When the Dutch had their revenge in 1988 and beat Germany to go on to become European champions, more people danced in the streets in Holland than on the day that the real war ended in May 1945.
On one occasion, in 1969, a football match between Honduras and El Salvador actually led to military conflict, known as the Soccer War.
Tensions between the two countries were already high.
But then fans of the Honduras team were set upon, and even worse, the Honduran national anthem was insulted, and the country’s white and blue flag defiled.
Of course, soccer wars are rare (indeed, I can’t think of another example), but the notion that international sporting competitions inevitably inspire warm fraternity – an idea advanced by Baron de Coubertin, founder of the modern Olympic games – is a romantic fiction.
The violence of British football hooligans, for example, reflects a peculiar nostalgia for war.
Life in peaceful times can be dull, and British glory seems a long way in the past.
Football is an opportunity to experience the thrill of combat, without risking much more than a few broken bones.
Even when football doesn’t lead to actual bloodshed, it inspires strong emotions – primitive and tribal – evoking the days when warriors donned facial paint and jumped up and down in war dances, hollering like apes.
The nature of the game encourages this: the speed, the collective aggression.
Tennis does not create frenzy on a national scale.
Not even boxing does, except on very rare occasions, such as when Joe Louis, the “Brown Bomber,” beat Max Schmeling, the Nazi favorite, in 1938.
After all, these forms of combat are between two individuals, not two tribes.
Arthur Koestler was right when he said that there is nationalism, and there is football nationalism – and that the latter is the more deeply felt.
Koestler himself, born in Budapest but a proud British citizen, remained a Hungarian football nationalist all his life.
It helps to have traditional enemies, old hurts, and humiliations that need to be redressed, if only symbolically.
It would be hard for Americans, who are neither very good at soccer, nor cursed by great historical hatreds, to share the joy of the Dutch, say, when the Germans were defeated in 1988, or that of the Koreans when they defeat Japan.
Perhaps the best example of this type of sporting nationalism was not a football game, but the world ice hockey final in 1969, when Czechoslovakia beat the Soviet Union just one year after Soviet tanks rolled into Prague.
The Czech players pointed their hockey sticks at the Russians like guns, and their victory provoked anti-Soviet riots back home.
Clearly, then, whatever de Coubertin might have hoped, cosmopolitanism and cross-cultural brotherhood comes less naturally to human beings than the raw emotions of the tribe.
The tribe can be a club, a clan, or a nation.
Before World War II, football clubs often had an ethnic or religious component: Tottenham Hotspur in London was “Jewish,” while Arsenal was “Irish.”
Vestiges of these markings remain: Ajax of Amsterdam is still taunted by provincial opponents as the “Jew club.”
And the Glasgow clubs, Celtic and Rangers, are still divided by religious affiliation, Celtic being Catholic and Rangers Protestant.
But a common race or religion is not essential.
The French football heroes who won the World Cup in 1998 included men of African and Arab origin, and they were proud of it.
Most successful modern football clubs are as mixed as Benetton advertisements, with coaches and players from all over the globe, but this seems to have done nothing to diminish the enthusiasm of local supporters.
In some countries, football is the only thing that knits together disparate people, Shia and Sunnis in Iraq, or Muslims and Christians in Sudan.
Of course, most right-thinking people are a bit like de Coubertin.
Tribal emotions are embarrassing, and dangerous when given free reign.
After World War II, for obvious reasons, the expression of nationalist emotions was virtually taboo in Europe (not least in Germany).
We had all become good Europeans, and nationalism was for racists.
And yet, since Koestler was right, these emotions could not simply be crushed.
They had to find some outlet, and football provided it.
The football stadium became a kind of reservation where taboos on tribal frenzy and even racial antagonism could be relaxed, but only up to a point: when the taunting of Ajax supporters as rotten Jews degenerated into actual violence, sometimes accompanied by a collective hiss, mimicking escaping gas, the city authorities decided to step in.
Some games have had to be played without the presence of rival supporters.
Not all football games are fraught with negative feeling and violence.
This year’s World Cup might well be a festival of brotherhood and peace.
Few people even care anymore when Germany wins.
But the fact that sport can unleash primitive emotions is not a reason to condemn it.
Since such feelings cannot simply be wished away, it is better to allow for their ritual expression, just as fears of death, violence, and decay find expression in religion or bull fighting.
Even though some football games have provoked violence, and in one case even a war, they might have served the positive purpose of containing our more savage impulses by deflecting them onto a mere sport.
So let the games begin, and may the best team win.
Which is Holland, of course, the country of my birth.
Football Nationalism
AMSTERDAM &#45;&#45; The late Arthur Koestler, born in Budapest, resident of many countries, and writer in several languages, once said that there is nationalism, and there is football nationalism.
The feelings inspired by the latter are by far the stronger.
Koestler himself, a proud and loyal British citizen, remained a lifelong Hungarian soccer nationalist.
It is hard for Americans, whose “world series” are essentially domestic affairs, to understand the emotions engendered in European citizens when their nations compete for the European soccer championship every four years.
For several weeks this summer, the stadiums in Austria and Switzerland, not to mention the streets of European capitals, from Madrid to Moscow, were given to an orgy of flag-waving, anthem-singing, drum-beating patriotism.
Spain’s victory was one of the rare occasions that Catalonians, Castillians, Basques, and Andalusians erupted together in an explosion of patriotic delight.
Football, more than most sports, lends itself to tribal feelings: the collective effort, the team colors, the speed, the physical aggression.
As a famous Dutch soccer coach once said, not in jest: “Soccer is war.”
It was not supposed to be like this.
After two world wars, displays of national fervor became more or less taboo in Europe.
Nationalism was blamed for almost destroying the old continent twice in the 20th century.
The kind of exalted patriotism, especially when combined with warrior pride, that is still entirely normal in the United States, was for a long time associated with mass slaughter.
The English, who escaped occupation by a hostile power, and still believe they won World War II alone (well, with a little help from the Yanks), still have a militaristic streak.
They are exceptional.
Hence, perhaps, the notorious belligerence of English soccer fans.
And yet, even as nationalistic emotions were suppressed in polite society all over Europe, the soccer stadiums remained stubbornly in the pre-WWII world.
Just as killing continues to be celebrated in ritualized form in Spanish bull rings, illicit tribal feelings are given full vent in the soccer arenas.
These feelings can be festive, even carnival-like, as they were in Euro 2008.
But they can contain something darker, more aggressive, too, especially when sporting combat is loaded with historical memory.
Games between Holland and Germany, for example, or Germany and Poland, tended, until very recently, to be reenactments of the war; either – and most commonly – as melancholy replays of wartime defeat, or as sweet revenge.
When Holland beat Germany in the semi-finals of the 1988 European Championship, it was as though justice finally had been done.
More Dutch people turned out in the streets of Amsterdam for a night and day of celebration than when the country was actually liberated in May, 1945.
(Sometimes football history gets mixed up with “real” history; the defeat of a superior Dutch team by Germany in the World Cup final of 1974 also needed to be redressed.)
The tribal feelings of Germans were considered, for obvious reasons, to be particularly toxic after Hitler’s Reich, which is why German flag-waving, until recently, was exercised with a slight air of shame-faced restraint that was entirely absent in surrounding countries.
Yet Germans, too, are unable to suppress such feelings.
Older Germans can still remember their famous victory over a superb Hungarian team in 1954.
It was the first time since their ruinous wartime defeat that Germans were able to feel proud of themselves.
Here was a victory they could celebrate.
After years of guilt and deprivation, the Germans were back, as it were.
Like everything else, forms of patriotism change over time.
Reasons for national pride are varied.
When France won the World Cup in 1998, the French liked to point out the ethnic diversity of their team.
Their main star, Zinédine Zidane, was of Algerian stock.
Others had ancestral roots in various parts of Africa.
The multi-ethnic nature of the 1998 champion was widely touted as a mark, not of a long and often bloody colonial past, but of national superiority born from the tolerance of the French Enlightenment and the fraternity of the French Revolution.
In fact, the French were harbingers of a kind.
For something profound is changing in Europe, slowly, painfully, but surely.
If ethnic diversity is more and more common in national sides, it is even more marked in clubs.
Clubs, too, often used to command tribal loyalty along ethnic or religious lines, depending on their location in large industrial cities: Irish clubs versus Jewish clubs in London, for example, or Protestants versus Catholics in Glasgow.
Who would have predicted thirty years ago that British soccer fans would have cheered for a London team full of Africans, Latin Americans, and Spaniards, coached by a Frenchman?
Or that the national English team would be managed by an Italian?
But ethnic and cultural diversity is not all that has changed the face of European football.
I have never seen such harmony between the supporters of different nations as in this year’s championship.
Perhaps it was due to the absence of England, whose fans include the last bands of amateur warriors.
But the peaceful, carnival spirit that prevailed, the flying of Turkish and German flags side by side in German streets, when the two nations met in the semi-finals, the joint Spanish-German celebrations after the final, all this suggests something fresh.
Not that national feeling is dying, even as a new European spirit is being born.
But at the very least national identities in Europe are no longer quite so colored by memories of war.
No one much minds any more when Germany wins, as it so often does.
The Germans are now much too nice for that.
Yet I have to admit that I still could not suppress a tiny, keenly felt pleasure when Germany lost to Spain.
Perhaps because Spain played more beautiful football.
Or perhaps it just shows my age.
Forging a European Worldview
WARSAW – Some complain that the European Union lacks a “worldview.”
In fact, the EU’s problem is that it has too many of them.
Europeans’ common experiences and interests mean that they should have a shared view on global issues.
But the sad reality is that political, social, and economic pressures tend to push EU members and citizens in opposing directions; shared histories, it seems, are an insufficient basis for shared policies.
Nevertheless, the more pragmatic Europe’s policies are, the greater the chances of success, not least when it comes to global issues.
Europeans have a shared appraisal of many of the world’s problems, and often put forward common methods and strategies for coping with them.
For example, on climate change, immigration, and development aid, there is growing consensus, as there is on energy policy and the further development of the European Security Strategy.
Agreement in these areas is not merely a reflection of some lowest common denominators; in each area, Europe has contributed important added value at a global level.
Indeed, Europe’s community of attitudes is becoming synonymous with solutions to world problems.
After all, climate change, energy security, and demographic challenges have been part of the European discourse for many years; now that discourse is starting to be shared by other parts of the world.
The global financial and economic crisis may also be a catalyst for promoting Europe’s vision of a new world order.
The EU vision of a capitalist economy harnessed to social progress and subject to regulation, rather than laissez-faire, is growing in influence.
New economic powers like China, India, and Brazil must find their own ways of addressing social injustice and encouraging equal opportunity for all, and the European model looks increasingly attractive to them.
Yet many differences still separate societies within the EU.
There are divergent views on many vital global problems.
And although these differences may grow smaller with time, they occasionally take on an alarmingly clear-cut form, as in the case of the United States-led invasion of Iraq.
It is nevertheless comforting that Europe’s differences on global issues have not had an excessive impact on the EU’s internal dynamics.
The war in Iraq did not delay the Union’s “big bang” enlargement, and was not the reason for the failure of referenda in France and the Netherlands on the Constitutional and Lisbon treaties.
And Europe does need to develop structures and decision-making processes that limit conflicts of interest by offering compromise solutions.
This is the crux of the Lisbon Treaty, which is designed to usher in new institutions and mechanisms aimed at creating more politically cohesive EU external policies.
Transferring more areas of responsibility, such as foreign aid and development policies, to EU institutions helps the Union to adapt to new international realities by underpinning its growing importance as Europe’s decision-making center.
Shaping a shared vision of the world should start with Europe’s immediate neighborhood.
The enlargement of NATO and the EU has embraced a dozen or so states in Central and Eastern Europe and in the western Balkans.
But, despite these achievements, European integration is far from complete, and it will remain so until all European countries can follow the same development path.
This failing was the key reason for the Balkan tragedy of the 1990’s.
Fortunately, the time for armed conflict in that region appears to have come to a definitive end, now that the Balkan states are on the path to NATO and EU membership.
But Eastern Europe, especially Ukraine and Moldova, also must be treated as a region of special importance.
Ukraine’s population of 46 million means it is far too big and important to be left out of any vision of Europe’s future.
Yet the EU’s strategy towards Ukraine has been ambiguous and obscure.
The Orange Revolution’s reform drive has been slowed or even halted by domestic political and economic crises, but also by the Union’s perceived indifference to Ukraine’s fate.
EU leaders lament Ukraine’s political divisions and slow pace of reform, and the country’s leaders need to address these criticisms.
But lack of progress also reflects the EU’s failure to embrace Ukraine.
Reform of a country’s political and economic institutions and its accession to the EU and NATO usually go hand in hand, because the prospect of membership makes painful decisions electorally acceptable.
In short, it is unrealistic of the EU to expect European outcomes from countries like Ukraine and Moldova without making a full commitment to them.
Fortunately, that approach is changing.
The Gas Memorandum signed earlier this year between the EU and Ukraine on the extension and exploitation of Ukrainian gas pipelines is a perfect example; in return for political support and for funding of the extension of its pipelines, Ukraine has agreed to adopt EU rules governing management and access to the gas transmission line.
Ukraine also agreed to implement the relevant EU energy directives as part of its membership of the European Energy Community.
It is a first step towards Ukraine’s eventual full integration into the EU Single Market.
The EU’s current lack of unanimity on many world issues, as well as continental issues such as Ukraine, is no reason for despair.
The trick for the Union is to develop shared solutions and to take joint foreign-policy actions, even when various EU governments see things differently.
Forging Asia’s Missing Links
MANILA – China’s government has just announced that Premier Wen Jiabao will be the main speaker at the 2009 Boao Forum for Asia, where the roster of leaders expected to participate is a virtual Who’s Who of the continent: President Asif Ali Zardari of Pakistan, President Nursultan Nazarbayev of Kazakhstan, President Faure Gnassingbe of Togo, Prime Minister S. Bayar of Mongolia, Prime Minister Thein Sein of Myanmar, Prime Minister Nguyen Tan Dung of Vietnam, Prime Minister John Key of New Zealand, and Kopsak Saphawasu, Deputy Prime Minister of Thailand.
Such meetings are vital for Asia, because the continent lacks the dense institutional infrastructure that Europe has built up over the past five decades.
This year’s Boao Forum has become even more important because of the cancellation of the East Asia summit due to the action of violent protestors.
Multinational companies increasingly treat Asia as a single economic space, at least as far as production is concerned.
This, of course, does not mean that Asia is, or is becoming, a single market, but rather that is now something of a tight-knit pan-national supply chain.
But, although Asia is becoming more like Europe in terms of economic integration, political and diplomatic integration lags behind.
So, because Asia lacks such institutional arrangements, personal diplomacy of the type that the Boao Forum represents, like the annual global winter gathering at Davos, remains vitally important.
Indeed, it was at last year’s Boao Forum that Chinese President Hu Jintao began to express public optimism about the positive trends in Mainland China-Taiwan relations.
That rapprochement was possible because Taiwan’s then newly elected vice president was given permission by China to attend the forum, where he was able to meet informally with President Hu.
Last February, I headed a 40-member trade delegation to Taipei.
That mission’s highlight was my dialogue with Taiwanese President Ma Ying-jeou, who stressed the importance of connecting Taiwan to the China-ASEAN Free Trade Area (CAFTA) in the light of warmer relations developing between the Mainland and Taiwan.
At this time of economic turmoil around the world, increasing Taiwan’s formal economic links with China and its regional partners can only benefit everyone involved, because an inevitable side-effect will be a lessening of tension.
Unfortunately, some analysts suggest that a Taiwan-ASEAN Free Trade Agreement of the likes of CAFTA may not yet be possible, so, in the interim, President Ma’s administration is striving to achieve separate free-trade agreements with various ASEAN members.
Understandably, the opposition Democratic Progressive Party (DPP) has taken the stand that Taiwan should seek closer ties with ASEAN countries rather than depend too much on Mainland China, but Ma does not see the two efforts as being mutually exclusive.
From a wider perspective, Ma and I exchanged views on the synergy of an emerging “Central East Asia Growth Polygon” (CEAGPOL) consisting of the Philippines, Taiwan, Hong Kong, Macau, and the Mainland Chinese provinces of Guangdong and Fujian – plus, eventually, Hainan, Okinawa, and Guam/Marianas.
With goodwill on all sides, real advantages can materialize from building up this informal grouping, as it is a gateway to the huge markets of Southeast and Northeast Asia.
An economic bonus of such an effort for the entire region would come from the opening of direct flights and sea transport across the Taiwan Strait.
CEAGPOL could even become a building block for a Northeast Asian version of ASEAN – an “Association of Northeast Asian Nations.”
As a result of historical suspicion between China, Japan, and Korea, Northeast Asia’s economic heavyweights are the world’s last remaining regional bloc that still lacks an inter-governmental organization of the likes of ASEAN.
The European Union is even more instructive, because centuries of war, culminating in the two World Wars of the twentieth century, inspired, rather than deterred, European economic, political and security integration.
At this time of worldwide uncertainty, Asia-Pacific leaders must redouble their efforts to exploit their partnerships and strategic combinations in order to foster stability and growth.
The easing of tensions between China and Taiwan can, perhaps, set a tone for all of Northeast Asia.
At the 30th anniversary of the “Message to Compatriots in Taiwan” last January, President Hu offered six proposals to improve relations:
1. Abandon the Taiwan independence movement;
2. Stop confrontation and reach peaceful agreements;
3. Increase military contacts/exchanges;
4. Discuss Taiwan’s participation in international organizations under the “One China” umbrella;
5. Establish a Comprehensive Economic Cooperation Agreement (CECA); and
6. Promote China’s traditional civilization with strengthened spiritual ties.
There is now real hope that talks along these lines can succeed.
But there is a major obstacle to easing tensions: the proposed $6.5 billion sale by the United States to Taiwan of 30 Apache attack helicopters and 330 Patriot missiles.
China-US talks on defense cooperation had earlier stalled because of such arms negotiations.
They have since been restarted, an olive branch sent to the Obama administration by China’s government.
All three parties involved will need to tread with care to make certain that the thaw in China-Taiwan relations is not set back by this proposed arms deal.
For, if Asia is to begin to build the type of dense institutional infrastructure that has brought Europe peace and prosperity, the flashpoint between China and Taiwan will need to be transformed into a foundation stone of regional cooperation.
Forging Syria’s Opposition
TEL AVIV – Syria’s crisis is now a year old, with close to 10,000 people, mostly civilians, dead and no end in sight.
The country is at a stalemate: the opposition is unable to topple President Bashar al-Assad’s regime, and Assad’s forces are unable to quash the resistance.
Both sides are adamant: the opposition is determined to bring down a regime that it views as illegitimate, sectarian, corrupt, tyrannical, and stained with blood, while the regime’s hard-line core believes that by persevering it will ultimately silence the opposition, whereas any concession would jeopardize its very existence.
Its downfall, they believe, would mean dispossession and death for the regime’s leadership and for a large part of the minority Alawite community from which it is drawn.
Assad and his cohorts are encouraged by the world’s failure to respond effectively to their brutal suppression of the revolt in Homs, and have proceeded to inflict vicious punishment on its survivors as a warning to opponents elsewhere.
This may cow some of Syria’s civilian population in the short term, but it will serve only to exacerbate popular rage, and thus to increase the prospect of a bloody reckoning with Assad and his cronies down the line.
Today’s brutal stalemate is likely to continue for some time.
Diplomatic and humanitarian missions led by former United Nations Secretary-General Kofi Annan and current UN Under-Secretary-General for Humanitarian Affairs Valerie Amos seem as ineffective as earlier efforts by the international community and the Arab League to mitigate the conflict or to facilitate a political solution.
To be sure, the authorities have suffered some defections, with the most significant coming soon after the violence in Homs reached its peak, when the deputy energy minister resigned and joined the opposition.
But, while defections have occurred among the officer corps as well, the regime has maintained its basic cohesiveness.
The army, the security apparatus, and the Alawite community are still solidly supportive.
A large part of the Syrian population – the middle class in Damascus and Aleppo, the Christians, and other minorities – are passive or sitting on the fence, worried that the alternative to the status quo is chaos, civil war, and possibly a radical Islamist takeover.
And Russia and China continue to provide diplomatic cover, with Iran sending material support.
Life in Damascus, despite increasing shortages, seems almost normal.
The regime’s foes, on the other hand, seem undeterred by the killings, continuing to stage protests across Syria.
Armed opposition is spreading, albeit slowly.
The Western countries, Turkey, and most of the Arab world are incensed by the brutal killing and destruction, and pressure to intervene and stiffen international sanctions is building.
But regional and international pressure on Assad has been ineffective.
While the Arab League seemed to act decisively last November when it suspended Syria’s membership, the military-observer mission that it sent to Syria was a farce.
Turkey’s initiatives have lost steam, and the United States and its European allies are merely going through the diplomatic motions; in practice, their efforts imply little serious impact on the regime.
America and the West claim that they cannot act significantly without a UN mandate, which Russia and China are denying them by vetoing anti-Syrian resolutions in the Security Council.
But the truth is that governments in Washington, London, Paris, and elsewhere could do much more without a Security Council resolution.
Perhaps most strikingly, while some governments have closed their embassies in Damascus (citing safety considerations), there has been no systematic severing of diplomatic relations with Syria.
Indeed, there has been no stoppage of flights to and from the country, or any other measures that could tilt the population of Damascus and Aleppo against the regime and bring the crisis to an end.
This ambivalence can largely be explained by Western and Arab concern with the weakness and opacity of the Syrian opposition’s political leadership.
There is a dramatic discrepancy between the courage and tenacity of the demonstrators and fighters in Homs, Idlib, and Deraa, and the Syrian National Front, whose people and factions have failed to formulate a coherent political program, build an identity, and obtain name and face recognition.
Western policymakers and those in the Gulf ask themselves what Syria would look like the day after Assad is toppled.
This was starkly illustrated in the second week of March, when US defense officials vented their frustration with the Syrian opposition in several press briefings.
The regime has been effective in exploiting that uncertainty by spreading the fear of an Egyptian scenario, in which the weakness of secular activists leads to a takeover by the Muslim Brothers and jihadis.
In fact, it is difficult to separate cause from effect.
Recognizing the opposition as the legitimate government of Syria, as was done in Libya, would give Assad’s foes a boost, but, so far, they lack the gravitas that such a bold measure would require.
The opposition must build itself as a credible and attractive alternative to the Assad regime, and the regime’s international and regional critics must assist in that process.
Assad’s regime is doomed.
It has no legitimacy, and it is bound to fall.
But that could take a long time – and come at an alarming cost.
The alternative is an effective opposition that enjoys unambiguous support by the key regional and international actors.
For Global Growth and Stability, Mobilize the Reserves
If wars, as Clemenceau famously said, are too important to be left to generals, development is too important to be left to finance ministers, central bankers, the IMF and World Bank.
Next month's gathering on ``Finance for Development'' in Monterrey, Mexico is a perfect opportunity for other concerned players, including presidents and prime ministers, to assert their interests.
The international community has agreed on a set of modest goals for global development - reducing poverty and illiteracy and improving health.
But this requires a substantial increase in assistance at a time when the paltry levels of aid provided by rich countries continue to fall.
The US, the world's richest country, is the stingiest.
As long as the world's (economically) advanced countries maintain this attitude, innovative approaches to financing economic development - and global public goods more generally - need to be tested.
One idea receiving attention is a new form of global money akin to the IMF's Special Drawing Rights (SDRs).
SDRs are a kind of global money, issued by the IMF, which countries agree to accept and exchange for dollars or other hard currencies.
The underlying idea is simple: every year, countries around the world set aside reserves as insurance against contingencies such as an abrupt downturn in foreign lenders' sentiment or a collapse of export prices.
As a result, some global income sits around rather than financing investments that poor countries need.
The amounts held in reserves are huge - roughly $1.6 trillion worldwide.
Countries like to keep their reserves growing in tandem with growth in imports and other foreign liabilities.
If these liabilities grow by 10% annually, countries need to set aside an additional $160 billion.
Countries hold these reserves in a variety of forms, including gold and US Treasury bills.
While America benefits from increased demand for its Treasury bills (which reduces borrowing costs), developing countries receive a return of just 2% - essentially zero in real terms.
Investments at home may offer much higher returns, but forgoing them is the price developing countries pay for a safe hedge against the pitfalls of global capitalism.
Instead of holding their reserves in dollars, a new form of global money - ``global greenbacks'' - could be issued which countries could hold in reserve.
The money would be given to developing countries to finance their development programs as well as global public goods like environmental projects, health initiatives, humanitarian assistance, and so on.
There are a variety of institutional arrangements by which these global greenbacks could be issued.
The IMF (responsible for issuing SDRs) could issue them, or a new institution could be created to decide on quantity and allocations.
A new institutional arrangement might entail the creation of a set of trust funds - say, for education or health, or the environment - with competition among countries for projects helping to promote these objectives.
For countries that receive less than the amount that they need to put into reserves, the new ``global money'' would go into the reserves, freeing dollars that these countries would otherwise set aside.
Countries that receive more than they must put into reserves could exchange the new money for conventional currencies.
Eventually, all the new money will wend its way into reserves, which in effect represent a commitment by countries to help each other in times of trouble.
A country with reserves of the new global money could exchange it for hard currencies to sustain needed food imports or other goods.
There is another major advantage. The arithmetic of global trade implies that the sum of all trade deficits equals the sum of all trade surpluses.
If some countries, say, Japan and China, insist on running huge surpluses year after year, then other countries must run deficits.
The deficits are as much the fault of the surplus countries as they are of the deficit countries.
Now, trade deficits are like hot potatoes.
Nobody wants them, so they get passed around.
If one country gets rid of its deficit, it must show up elsewhere.
Uncertainty about whether these deficits can be financed is one reason why the world economy, under current arrangements, faced a succession of crises in recent years.
Issuing the new global money would reduce this uncertainty.
If a developing country's trade deficit is offset by assistance through a grant of the new global money, its overall financial position will be secure.
Of course, even with this assistance, countries that mismanage their economies will face problems; the proposal is not a panacea to the world's problems.
Nor would this scheme be inflationary.
Global greenbacks would offset the deflationary bias in today's arrangements that results from the fact that part of the income set aside as reserves never gets translated into global aggregate demand.
Relative to global income - some $40 trillion - the magnitude of monetary growth would be minuscule.
Relative to today's levels of spending on official development assistance and global public goods, however, the amounts are enormous.
The scheme also provides regular funding, not currently available, to finance global public goods.
Commitment to participate in the program would, presumably, be long term.
Implementing the scheme will not require the support of every major developed country.
This is important because the US might oppose any plan that undermines demand for Treasury bills (and thus its guaranteed access to low-cost financing).
But if most advanced countries were to recognize this new form of global money, they could put pressure on holdouts by limiting their holdings of non-participant currencies and treasury bills in their reserves.
Innumerable details must be worked out before a global money scheme could be put into practice, and changes will not occur overnight.
But the Monterrey meeting provides an opportunity for such ideas to be discussed and vetted.
This much is clear: addressing the plight of the world's poorest countries and providing the global public goods needed in this age of globalization requires us to explore innovative ways of raising the necessary financing.
What makes the global greenback proposal attractive is that it provides the funds poor countries need while contributing to global economic growth, stability, and equity.
For Turkey, For Europe
Turkey is now, finally, negotiating with the European Commission the terms of its possible membership in the European Union.
But whether “possible” becomes “eventual” remains very much an open question.
Indeed, completing the negotiations is likely to prove as difficult as the decision to start them.
Recall that Turkey made its first application to join in 1959, and that since 1963, the European Economic Community, the forerunner to today’s EU, responded with a delaying tactic: a request for a customs agreement.
At the same time, having never had to take “no” for an answer – and after receiving a series of nods and winks that hinted that membership might one day come – Turkey’s expectation of eventual EU integration became increasingly palpable.
But ordinary Europeans have begun looking at maps, and the geography that they see cannot be denied: 95% of Turkey’s territory and 80% of its population is in Asia.
As a result, the fierce and lively debate – in Turkey and much more emphatically in the EU – about whether Turkey really belongs to Europe has continued, despite the start of negotiations.
Of course, the question of Turkey’s European identity cannot be answered with geography lessons.
At least half of the body of Greek theater and philosophy was produced in Asia Minor.
The first Christian evangelization trips of Saint Peter and Saint Paul were to Turkey.
Later, Ottoman Turkey was for centuries considered a part of the “concert of Europe,” proving indispensable in defining and securing the strategic balance among the European continent’s Great Powers.
Yet this historical evidence is not enough to unite European sentiment in favor of Turkey’s EU membership.
On the contrary, “the Turkish Question” will be resolved on the basis of the current political preoccupations and concerns for the future.
Fortunately, that choice was not settled prematurely and peremptorily: the process that will lead to a final decision was merely allowed to start with the opening of negotiations.
Membership talks can’t help but be long and arduous, if only because adopting the acquis communautaire (the body of EU law) requires that Turkey integrate around 10,000 pages of texts into its legislation.
However, all this now seems to have a serious chance of succeeding.
And yet Turkey scares countless Europeans.
With 67 million people today, and a population that will reach 80 million in 20 years and 100 million in 2050, Turkey is bound to become the most populous of all European nations.
It is also a very poor Muslim country.
To be sure, a few countries in Europe, mainly Germany and Austria, have welcomed strong inflows of Turkish immigration. But the immigrants have been mostly poor peasants from Anatolia, whose integration has proven to be difficult.
By contrast, Turkey’s large, secular intellectual community, whose cultural background is European, and from which the Turkish state recruits most of its executives, has remained in Istanbul and Ankara.
Europe, then, is frightened by the prospect of more immigration by Turks who find it almost impossible to assimilate.
For the moment, such immigration has almost stopped, owing to rapid economic growth – indeed, the fastest in Europe – in recent years, which is absorbing the country’s available labor and has thus stemmed the flow of emigrants.
Yet the fear remains that membership in the Union will unleash a new human tide.
Economic fears are not the only concern for EU citizens.
Turkey was the theater of exceptional violence in the twentieth century: its participation in WWI fueled hatred and gigantic massacres, with the genocide of the Armenians the last vicious spasm of the Ottoman Empire’s brutal demise.
Moreover, while Kemal Ataturk restored Turkish national pride by creating the secular Turkish republic, his legacy is mixed, for it includes both Turkey’s strong attraction to the West and a militarization of public life.
The latter explains much of the repressive attitude towards free speech and independent opinion that has characterized much of Turkish public life – a straitjacket that has left little room for real negotiations with Turkey’s restless Kurds or for resolving the division of Cyprus.
But Turkey’s EU aspirations mean that it is now being forced to demilitarize its democracy and to find negotiated and peaceful agreements with all its neighbors and future partners – Armenians, Kurds, and Cypriots.
Thus, if Europe manages to overcome its fears and hesitations and open itself to a powerful Muslim state, it will consolidate peace in one of the world’s most dangerous regions.
Indeed, by integrating Turkey, Europe would show that it is not a Christian club, that the supposed “clash of civilizations” need not be fatal, and that the European project, born out of a desire for reconciliation and the need to promote development, can spread its benefits far beyond the Western half of Europe.
In opening itself to Turkey, the EU would finally begin to play its proper role in confronting today’s most daunting political challenges.
Forward to Putinism
MOSCOW-NIZHNY NOVGOROD-NOVOSIBIRSK: “Forward to Communism!”
That slogan defined, and cynically mocked, the do-nothing Brezhnev era of stagnation.
Today, Russia is racked by a sense of déjà�vu for those times.
Under Yeltsin, despite the chaos of flawed markets and an even more flawed democracy, there was a sense that things were moving forward.
Now many Russians have no idea where they are moving forward or backward or, indeed, if they are moving at all.
President Putin’s restoration of the old Soviet national anthem was the first recent hint that Russians are marching back to the future.
Although Putin did have the decency to change the words, he retained the Soviet spirit - “great Russia united forever.”
Then the Federal Service Bureau, formerly the KGB, celebrated the anniversary of the founding of its foreign service branch - ie, the spies - a reverie attended by a certain former employee named Putin.
This was followed by a shareholders meeting of the RAO UES (United Energy Systems), Russia’s electricity giant, now headed by the reformer turned oligarch, Anatoly Chubais.
The meeting was meant as a sign of Russia’s new business friendly climate, but the banner hanging over the hall - “Long Live the 80th Anniversary of Vladimir Lenin’s GOELRO Plan” - mocked that intent.
GOELRO’s (State Organization for the Reconstruction and Development of the Soviet People’s Economy) slogan was “Socialism means Soviet rule plus electrification of the country.”
Chubais’s plan is similar to the GOELRO one, but instead of national socialization, it calls for obligatory national marketization.
If a region can’t pay for its electricity, people will be cut off and left without heating.
For most of this enormous country, with its 135 million people and 11 time zones, such signs of the past and the promised business future are regarded as skeptically as proclamations about record harvests under Brezhnev.
All of these are seen as Kremlin games, hypothetical and hypocritical, bearing little relation to reality.
Everyone, to some degree, has nostalgia for the past, some bleary idea of how the past can (rather than cannot) work in the future.
But Russia’s people, after 10 years of Yeltsin’s anarchic freedoms, are too jaundiced to take any slogan seriously - whether from the Soviet past or from the management consultant’s hymn book.
Russians no longer care about slogans and symbols because paying bills and feeding their families doesn’t leave time for indoctrination and ideology.
Perhaps this is something the West should have realized about the Soviet economy all along.
Propaganda and indoctrination are time consuming and inefficient.
You can’t produce if you are chanting slogans or spying on friends.
At the end of a day digging coal, teaching children, or waiting tables, Russians now want reasonable services, a logical tax system, and regular paychecks.
Whatever anthem, old or new or none at all, under which these things appear will be deemed suitable, and maybe even be sung.
Of course, many hope that someone will explain to Chubais that national marketization works best when supported by functioning social institutions and a social safety net.
Few have any real hopes of that.
Recently I traveled in distant regions of Russia, where I grasped the enormous disconnect between the center (Moscow) and Russia’s periphery, between rulers and ruled.
That disconnect is nothing new; there have always been Tsars and serfs, Politburo commissars and proletariat.
That postcommunist Boris Yeltsin, however, although he sometimes declared allegiance to a hazy collective sense of Rossiyane (citizens of Russia), deprived – or freed, it’s a matter of opinion – Russians of all collective life; both the real life of shared hardship and the imaginary half-life of communist solidarity.
Today everyone deals with life and hardship individually (a new word in our everyday vocabulary) regardless of any Kremlin desire to make life uniform.
Indeed, even Russian uniformity is different nowadays.
In Novgorod I saw LukOil (one of Russia’s big private oil companies) petrol stations.
I saw them in Moscow too; then in Novosibirsk.
They are uniform: red and white, brightly lit, clean and businesslike.
What makes a market economy a market economy, I thought, is the fact that you can always find a Texaco or a BP, Elf or Statoil petrol station, or a Seven Eleven store in Alaska, South Carolina or Tokyo.
When LukOil stations look the same in central Moscow and remote Siberia, it means something new and, yes, revolutionary.
For in this uniformity Russia has the hope of becoming a “normal” country, a place where the uniformity of slogans is replaced by uniform commercial services.
Of course, highbrows everywhere object to this “McDonaldization” of life, arguing that commercial sameness is the death of culture and individuality.
In Western Europe, Japan, and the United States, places where individuality lost its novelty long ago and where the managerial spirit and mass commerce flourish, this sameness may be something to debate.
In Russia, however, a couple of thousand shining LukOil stations are not threats but are, instead, harbingers.
They are a new type of individuality here, the individuality of the entrepreneur/survivor against the tyranny of the socialist crowd.
To critics of this, I offer one more sign.
On my way to Novosibirk airport at 5a.m. on a morning when the temperature read minus 48 Celsius (minus 118 Fahrenheit) I saw a brightly-lit wooden hut.
Pizzeria Venezia proclaimed a sign with a carving of a gondola.
Globalization and someone’s vague idea – no, dream – of la dolce vita had reached the depths of Russia.
If Putinism means that, perhaps Russia is moving forward after all.
For Whom America’s Bell Tolls
These days the Chairman of President Bush’s Council of Economic Advisers, Ben Bernanke, likes to talk about a “global savings glut” that has produced astonishingly low real interest rates around the world.
But that is the wrong way to look at it.
America certainly does not have a savings glut.
Its savings rate has been distressingly low for decades.
Then the Bush administration’s reckless fiscal policy pushed it lower.
Falling interest rates in recent years pushed up real estate prices and allowed America’s upper middle class to treat their houses as enormous ATM’s, lowering savings still more.
America has a savings deficiency, not a glut.
And the rest of the world?
A global savings glut would suggest that rebalancing the world economy requires policies to boost America’s savings rate and to increase non-US households’ consumption.
But what the world economy is facing is not a savings glut, but an investment deficiency.
Divide the world into three zones: the United States, China, and all the rest.
Since the mid-1990’s, the net current-account surplus of “all the rest” has risen by an amount that one Federal Reserve Bank economist has put at $450 billion a year, not because savings rates have increased, but because investment rates have fallen.
Declining investment rates in Japan, the newly-industrializing Asian economies, and Latin America, in that order of importance, have fueled the flood of savings into US government bonds, US mortgage-backed securities, and US equity-backed loans – the capital-account equivalent of America’s enormous trade deficit.
The investment deficiency in Asia relative to rates of a decade ago amounts to an annual shortfall of $400 billion a year, with the decline in investment in Japan – a consequence of more than a decade of economic stagnation ­– accounting for more than half of the total.
Moreover, investment rates in the newly industrialized economies of Asia have never recovered to their pre-1997-8 crisis levels, and investment rates in the rest of Asia outside China have fallen off as well.
This would seem to call for a very different set of policies to rebalance the world economy.
Yes, the US needs tax increases to move the federal budget into surplus and policies to boost private savings.
But the world also needs policies to boost investment in Asia, Latin America, the Middle East, and Africa.
And here we face a difficulty.
People like me who have been cheerleaders for international integration in trade and finance, as well as for reductions in tariffs and other barriers, have cited three benefits:
· Maximizing economic – and also social and cultural – contact between rich and poor nations is the best way we can think of to aid the flow of knowledge about technology and organization, which is the last best hope for rapid world development.
· Lower trade barriers will make locating production in the poor low-wage parts of the world irresistible to those who have access to finance.
· Freer capital flows will give poor countries precisely this access, as the greed of investors in rich country leads them to venture into poor regions where capital is scarce.
The first reason still holds true.
Maximizing economic, social, and cultural contact between rich and poor remains both the best way to aid the flow of knowledge and the last best hope for rapid world development.
But the second and third reasons look shaky.
Those with access to finance appear to be capable of resisting the urge to locate production in poor low-wage parts of the world (China aside).
Rather than leading rich-country savers to invest their money in poor countries out of greed, liberalization of capital flows has led poor-country savers to park their money in rich countries out of fear – fear of political instability, macreconomic disturbances, and deficient institutions (especially those that protect the rights of bondholders and minority shareholders).
Something may well happen in the next several years to radically boost America’s savings rate by making US households feel suddenly poor: tax increases, a real estate crash, rapidly-rising import prices caused by a plummeting dollar, a deep recession, or more than one of the above.
It would be nice to believe that when the tide of dollar-denominated securities ebbs, the flows of finance currently directed at America will smoothly shift course and boost investment in Asia.
But don’t count on it, especially considering the share of marginal investment in Asia that is aimed, one way or another, at exporting to the American market.
Those outside America, especially in Asia, should regard the unstable state of the US macro-economy with grave concern.
As the seventeenth-century poet John Donne put it, “Ask not for whom the bell tolls – it tolls for thee.”
For Whom Syria Tolls
PARIS – With every passing week, the Syrian conflict increasingly resembles the Spanish Civil War.
The images of warplanes bombing civilians and destroying cities have turned Aleppo into a latter-day version of Guernica, immortalized in Picasso’s masterpiece.
But the real similarities between the two conflicts are to be found in the behavior of the international community’s main actors, which have again taken opposite sides.
On one side stand Russia and Iran, cynically determined to buttress President Bashar al-Assad’s regime.
On the other side stand the established democracies, hesitant and ambivalent in their support of the rebels.
In 1930’s Spain, of course, Nazi Germany and Fascist Italy fully supported General Francisco Franco’s rebellion, while the democracies reluctantly offered scant help to the Spanish Republic.
There are even deeper similarities.
Many argued at the time that support for republican Spain meant helping the far more dangerous anarchists and Communists at a time when the Soviet threat in Europe was growing.
In that sense, yesterday’s Reds have become today’s “fundamentalist Muslims.”
Indeed, for many nowadays, helping the Syrian rebels is too risky, and might even jeopardize the Middle East’s Christian minorities.
While the Syrian regime is odious, they argue, the choice is between a hypothetical hope of democracy in the Muslim world and the real risk of endangering Christians’ lives.
Unfortunately, therefore, one must choose the status quo.
Of course, Western vacillation reflects deeper strategic and diplomatic factors as well.
Indeed, by shooting down a Turkish warplane that wandered into Syrian airspace, Assad’s regime intended to deliver a clear message to the international community: “Stay out of Syria’s domestic affairs.”
Syria is not Libya, and the political context has changed significantly, with America’s presidential election approaching and a deepening economic crisis in Europe.
Rightly or wrongly, Russia and China believe that the time has come to take their revenge over an arrogant West that deceived them about the true purpose of “humanitarian intervention” in Libya.
This time, they hold the better cards.
At a time when US President Barack Obama is basing his campaign partly on his withdrawal of American troops from Iraq and his plan to do the same in Afghanistan, he cannot take the risk of intervening in Syria.
Meanwhile, the European Union is fighting for its survival, and cannot devote its energies to an uncertain battle.
For the West, the timing of the Syrian rebels’ uprising could not have been worse.
But, despite deep divisions among the rebels, the cost of Western indifference is probably higher than the risk of intervention.
The international community can no longer hide behind the pretense of ignorance.
It lost its innocence decades ago.
When faced with the slaughter of civilians, it can no longer pretend that it does not know.
But, beyond ethics, there are geopolitical considerations.
With the Arab world in the midst of upheaval, what message does the West want to send?
And, with global power in flux, what message is the West sending to the authoritarian regimes that are backing Assad?
These regimes can only read the West’s dithering as a green light for their cynical agendas.
This is particularly problematic in the case of Iran.
The less determination the West demonstrates in Syria, the more the Iranians become convinced that they can play with the international community’s nerves and patience indefinitely.
As Russia and Iran continue to send money and weapons, if not military advisers, to Syria, it is impossible to persist with hypocritical language that can be interpreted only as a formula for inaction.
Threatening the Syrian regime with “terrible consequences” if it were to use chemical weapons means only one thing: “Bomb your civilians at will, but use only conventional munitions.”
The time has come to supply the rebels with what they desperately need: anti-tank and surface-to-air missiles.
Of course, such a choice carries risks.
Do we know the people we would be helping?
After all, such weapons could be turned against the West one day, as they have been in Afghanistan.
And, by involving ourselves militarily in the conflict, even if only by supplying the rebels, we might give a propaganda boost to terrorist groups that are already willing to strike in the West.
Nevertheless, the risks of passivity, indecision, and incoherence are even greater.
The more the West waits, the more radicalized the rebels will become, weakening the standing and influence of moderate forces.
The logic of intervention goes through cycles.
In the aftermath of the Rwandan genocide and the subsequent refugee crisis and war in the Great Lakes region of Central Africa in the 1990’s, a combination of guilt, economic prosperity, and America’s unique international status led to interventions in Kosovo, Afghanistan, and, unfortunately, Iraq.
Today, we are in a completely different cycle, dominated by the ghosts of Iraq, the global economic crisis, and the (relative) decline of the West.
When it comes to intervention nowadays, respect for legality has overcome the concern for legitimacy that prevailed a decade ago.
We have gone from one extreme to the other, whereas a middle road would be wiser.
But, above all, let us not forget the lessons of the Spanish Civil War.
It is always dangerous to give the impression of being the first to blink when facing authoritarian regimes.
Irasionalitas Bahan Bakar Fosil
BERLIN – Jika negara-negara di dunia ingin terhindar dari bencana iklim, mereka harus rela hidup tanpa membakar hampir 90% cadangan batubara terbukti, ditambah sepertiga minyak dan setengah cadangan gas alam.
Alih-alih menerapkan kebijakan yang bertujuan mewujudkan tujuan tersebut, justru pemerintah terus mensubsidi industri bahan bakar fosil, dan bahkan menggunakan sumber daya publik yang terbatas untuk mencari cadangan baru.
Praktik ini harus diubah – dan dilakukan segera.
Dalam upaya untuk membantu percepatan perubahan itu, Heinrich Böll Foundation dan Friends of the Earth International telah mengumpulkan data utama mengenai industri batubara dalam Coal Atlas yang diterbitkan baru-baru ini.
Statistik yang termuat di dalamnya sangat mengejutkan.
Menurut International Monetary Fund (Dana Moneter Internasional), post-tax subsidies atas batubara (termasuk kerusakan lingkungan hidup) mencapai 3,9 % dari PDB global tahun ini.
Pemerintah negara-negara G-20 diperkirakan mengeluarkan $88 miliar per tahun untuk subsidi eksplorasi sumber bahan bakar fosil baru.
Selain itu, menurut laporan terbaru yang diterbitkan oleh Natural Resources Defense Council, Oil Change International, dan World Wide Fund for Nature mengungkapkan bahwa sejak tahun 2007 hingga 2014, banyak negara menyalurkan dana publik sebesar lebih dari $73 miliar – atau lebih dari $9 miliar per tahun – dalam proyek-proyek batubara.
Dana terbesar dikeluarkan oleh Jepang ($20 miliar), Tiongkok (sekitar $15 miliar), Korea Selatan ($7 miliar), dan Jerman ($6,8 miliar).
Investasi publik ini menambah dana komersial yang sudah cukup besar yang dialokasikan ke sektor batubara.
Pada tahun 2013, 92 bank-bank terkemuka memberikan setidaknya €66 miliar ($71 miliar) – empat kali lipat lebih besar dibandingkan jumlah pada tahun 2005.
Semua dana ini dikeluarkan untuk menguatkan industri yang menghasilkan emisi global dalam jumlah besar – dan nampaknya bertekad untuk tetap melakukan hal yang sama.
Sejak tahun 1988, hanya 35 produsen batubara, baik swasta maupun milik negara, telah menyumbangkan sepertiga dari total emisi karbon dioksida.
Kerusakan yang diakibatkan oleh produk mereka bukan lagi rahasia.
Namun tetap saja perusahaan batubara dan produsen bahan bakar fosil lainnya menolak untuk memperbaiki model bisnis mereka.
Sebaliknya, perusahaan-perusahaan ini bekerja aktif untuk menghambat upaya mitigasi perubahan iklim di tingkat nasional dan internasional, termasuk membiayai para penyangkal perubahan iklim (climate-change deniers) dan melobi demi menentang target-target dan perangkat energi terbarukan yang berhasil seperti feed-in tariff.
Sementara itu, industri batubara berpendapat bahwa mereka memiliki peran yang sangat diperlukan dalam menanggulangi “kemiskinan energi” – yaitu kurangnya akses kepada sumber energi modern bebas polusi, khususnya listrik.
Benar bahwa kemiskinan energi adalah masalah besar yang dialami oleh 1,2 miliar penduduk di dunia.
Bagi petani, yang bergantung pada air untuk mengairi tanaman, hal ini berarti semakin rendahnya efisiensi dan produktivitas.
Bagi rumah tangga, yang harus membakar kayu bakar, kotoran sapi, dan minyak tanah, hal ini berarti polusi udara indoor yang bisa menyebabkan penyakit pada sistem pernafasan.
Bagi anak-anak usia sekolah, pencahayaan buruk di malam hari berarti hilangnya kesempatan belajar.
Tetapi batubara bukanlah solusi.
Konsekuensi kesehatan akibat produksi batubara dan pembakaran sungguh mengejutkan.
Pada tahun 2013, penyakit pneumoconiosis (“penyakit paru-paru hitam) di kalangan pekerja batubara mengakibatkan 25.000 kematian secara global.
Di Uni Eropa, pembakaran batubara bertanggung jawab atas 18.200 kematian dini dan 8.5000 kasus baru bronchitis akut per tahun.
Di Tiongkok, diperkirakan 250.000 orang mati sebelum waktunya karena pembakaran batubara.
Korban fisik menimbulkan biaya ekonomi yang besar juga, mulai dari kehilangan jam kerja hingga tekanan pada sistem kesehatan.
Perubahan iklim juga akan menyebabkan kerugian besar, bahkan jika upaya-upaya mitigasi dan adaptasi yang kuat mampu diterapkan.
Bagi 48 negara miskin/kurang berkembang, kerugian akibat akan mencapai sekitar $50 miliar per tahun.
Bukannya menerima subsidi, industri bahan bakar fosil justru harusnya membayar perubahan iklim.
Lagipula, tahun lalu saja kedua perusahaan bahan bakar fosil terbesar – Chevron dan Exxon Mobil – menghasilkan profit lebih dari $50 miliar.
Jika negara-negara di dunia ingin membatasai kenaikan suhu global sekitar 2° Celsius dibandingkan era pra-industri, tanpa paksaan untuk menggunakan teknologi berbahaya dan berisiko seperti Carbon Dioxide Capture and Storage atau geo-engineering, maka sistem energi dunia harus diubah.
Pertama dan terpenting, para pemimpin dunia harus berkomitmen untuk menghapuskan secara bertahap penggunaan bahan bakar fosil, dengan tujuan yang tegas untuk menghentikan pembakaran 90% cadangan batubara terbukti, sepertiga cadangan minyak, dan setengah cadangan gas.
Mereka juga harus menghapuskan subsidi pemerintah untuk batubara sesegera mungkin, dalam beberapa tahun, sembari menjamin agar penduduk miskin dan rentan tidak merugi akibat kenaikan harga energi,
Selain itu, pemerintah negara-negara di dunia harus meminta pertanggungjawaban dari produsen batubara dan bahan bakar fosil lainnya atas kerusakan yang diakibatkan, termasuk memungut iuran atas ekstraksi bahan bakar fosil untuk mendanai Mekanisme Warsawa tentang Kerugian dan Kerusakan berdasarkan Konvensi Kerangka Kerja Perubahan Iklim PBB (UNFCCC).
Hukum internasional yang berlaku – khususnya prinsip pencemar membayar (polluters pay), prinsip tidak merugikan (no harm), dan hak menuntut ganti rugi (right to compensation) – menunjang sistem tersebut.
Pada akhirnya, untuk mengatasi kemiskinan energi, para pemimpin dunia harus meningkatkan dana desentralisasi proyek-proyek energi terbarukan, termasuk melalui feed-in tariff yang didanai secara global untuk membangun mini-grid energi terbarukan di negara-negara berkembang.
Keberhasilan industri bahan bakar fosil dalam mempertahankan kepentingannya sendiri telah mengorbankan kesehatan planet bumi dan penduduknya.
Sekarang tiba waktunya untuk mereformasi sistem energi global kita yang buruk – dimulai dengan kesepakatan untuk menghapuskan batubara dan bahan bakar fosil lainnya.
Financing Climate Safety
NEW YORK – The purpose of the global financial system is to allocate the world’s savings to their most productive uses.
When the system works properly, these savings are channeled into investments that raise living standards; when it malfunctions, as in recent years, savings are channeled into real-estate bubbles and environmentally harmful projects, including those that exacerbate human-induced climate change.
The year 2015 will be a turning point in the effort to create a global financial system that contributes to climate safety rather than climate ruin.
In July, the world’s governments will meet in Addis Ababa to hammer out a new framework for global finance.
The meeting’s goal will be to facilitate a financial system that supports sustainable development, meaning economic growth that is socially inclusive and environmentally sound.
Five months later, in Paris, the world’s governments will sign a new global agreement to control human-induced climate change and channel funds toward climate-safe energy, building on the progress achieved earlier this month in negotiations in Lima, Peru.
There, too, finance will loom large.
The basics are clear.
Climate safety requires that all countries shift their energy systems away from coal, oil, and gas, toward wind, solar, geothermal, and other low-carbon sources.
We should also test the feasibility of large-scale carbon capture and sequestration (CCS), which might enable the safe, long-term use of at least some fossil fuels.
Instead, the global financial system has continued to pump hundreds of billions of dollars per year into exploring and developing new fossil-fuel reserves, while directing very little toward CCS.
Many investments in new fossil-fuel reserves will lose money – lots of it – owing to the recent fall in world oil prices.
And many of the fossil-fuel reserves that companies are currently developing will eventually be “stranded” (left in the ground) as part of new global climate policies.
The simple fact is that the world has far more fossil-fuel resources than can be safely burned, given the realities of human-induced climate change.
Though market signals are not yet very clear, this year’s more successful investors were those who sold their fossil-fuel holdings, thereby avoiding the oil-price crash.
Perhaps they were just lucky this year, but their divestment decision makes long-term sense, because it correctly anticipates the future policy shift away from fossil fuels and toward low-carbon energy.
Several major pension funds and foundations in the United States and Europe have recently made the move.
They have wisely heeded the words of the former CEO of oil giant BP, Lord Browne, who recently noted that climate change poses an “existential threat” to the oil industry.
More governments around the world are now introducing carbon pricing to reflect the high social costs inherent in the continued use of fossil fuels.
Every ton of carbon dioxide that is emitted into the atmosphere by burning coal, oil, or gas adds to long-term global warming, and therefore to the long-term costs that society will incur through droughts, floods, heat waves, extreme storms, and rising sea levels.
While these future costs cannot be predicted with precision, recent estimates put the current social cost of each added ton of atmospheric CO2 at $10-100, with the US government using a middle-range estimate of about $40 per ton to guide energy regulation.
Some countries, like Norway and Sweden, long ago introduced a tax on CO2 emissions to reflect a social cost of $100 per ton, or even higher.
Many private companies, including major oil firms, have also recently introduced an internal accounting cost of carbon emissions to guide their decisions regarding fossil-fuel investments.
Doing so enables companies to anticipate the financial consequences of future government regulations and taxation.
As more countries and companies introduce carbon pricing, the internal accounting cost of carbon emissions will rise, investments in fossil fuels will become less attractive, and investments in low-carbon energy systems will become more appealing.
The market signals of CO2 taxation (or the cost of CO2 emission permits) will help investors and money managers steer clear of new fossil-fuel investments.
Carbon taxes also offer governments a crucial source of revenue for future investment in low-carbon energy.
With international oil prices dropping – by a whopping $40 per barrel since the summer – this is an ideal moment for governments to introduce carbon pricing.
Rather than let the consumer price of oil fall by that amount, governments should put a carbon tax in place.
Consumers would still come out ahead.
Because each barrel of oil emits roughly 0.3 tons of CO2, a carbon tax of, say, $40 per ton of CO2 implies an oil tax of just $12 per barrel.
And, because oil prices have declined by more than triple the tax, consumers would continue to pay much less than they did just a few months ago.
Moreover, new revenues from carbon taxes would be a boon for governments.
High-income countries have promised to help low-income countries invest in climate safety, both in terms of low-carbon energy and resilience against climate shocks.
Specifically, they have promised $100 billion in climate-related financing per year, starting in 2020, up from around $25-30 billion this year.
New revenues from a CO2 tax would provide an ideal way to honor that pledge.
The math is simple. High-income countries emitted around 18 billion tons of CO2 this year – roughly half of all global emissions.
If these countries earmarked just $2 per ton of CO2 for global financing organizations like the new Green Climate Fund and the regional development banks, they would transfer around $36 billion per year.
By using part of that money to mobilize private-sector financing, the full $100 billion of climate financing could be reached.
Both Big Oil and Big Finance have made major mistakes in recent years, channeling funds into socially destructive investments.
In 2015, these two powerful industries, and the world as a whole, can start to put things right.
We have within our reach the makings of a new global financial system that directs savings where they are urgently needed: sustainable development and climate safety, for ourselves and for future generations.
The Foundations of Greece’s Failed Economy
NEW YORK – Too many politicians and economists blame austerity – urged by Greece’s creditors – for the collapse of the Greek economy.
But the data show neither marked austerity by historical standards nor government cutbacks severe enough to explain the huge job losses.
What the data do show are economic ills rooted in the values and beliefs of Greek society.
Greece’s public sector is rife with clientelism (to gain votes) and cronyism (to gain favors) – far more so than in other parts of Europe.
Maximum pensions for public employees relative to wages are nearly twice as high as in Spain; the government favors business elites with tax-free status; and some state employees draw their salaries without actually turning up for work.
There are serious ills in the private sector, too – notably, the pervasive influence of vested interests and the country’s business and political elites.
Profits as a share of business income in Greece are a whopping 46%, according to the latest available data.
Italy came in second at 42%, with France third, at 41%.
(Germany’s share is 39%; the United States’, 35%; and the United Kingdom’s, 32%.)
Insiders receive subsidies and contracts, and outsiders find it hard to break in.
Astoundingly, young Greek entrepreneurs reportedly fear to incorporate their firms in Greece, lest others use false documents to take away their companies.
According to the World Bank, Greece is one of the hardest places in Europe to start a business.
The result is that competition for market share is weak and there are few firms with new ideas.
This stunted system springs from Greece’s corporatist values, which emphasize social protection, solidarity instead of competition, and discomfort with uncontrolled change.
These values may well be beneficial for family life; but, even with the best of intentions, they are a recipe for a static economy and stultified careers.
Indeed, Greece’s labor productivity (GDP per worker) is only 72% of the level in the UK and Italy, and a mere 57.7% of that in Germany.
And surveys indicate that mean life satisfaction in Greece is far below that found in the wealthiest EU countries (the EU15).
Contrary to claims by the Greek government, corporatism impoverishes the less advantaged.
EU data on poverty rates in 2010 put Greece at 21.4% – far higher than the mean EU15 rate of 16.7%.
To be sure, Greece saw productivity gains after World War II – but mostly from increases in education and capital per worker, which can go only so far.
Two important sources of broad prosperity are blocked by Greece’s system. One is an abundance of entrepreneurs engaged in detecting and exploiting new economic opportunities.
Without them, Greece does a poor job of adjusting to changing circumstances (an imperative emphasized by Friedrich Hayek).
Greece’s much-lauded shipowners, for example, were too slow to adapt to containerization, and thus lost their market share.
The other source of broad prosperity is an abundance of business people engaged in conceiving and creating new products and processes – often termed “indigenous innovation.”
Here, Greece lacks the necessary dynamism: venture capital investment flows are smaller, relative to GDP, in Greece than in any other EU country.
So Greece’s economy has scant ability to create sustained productivity growth and high human satisfaction.
Some economists believe that these structural considerations have nothing to do with Greece’s current crisis.
In fact, a structuralist perspective illuminates what went wrong – and why.
For several years, Greece drew on the EU’s aptly named “structural funds” and on loans from German and French banks to finance a wide array of highly labor-intensive projects.
Employment and incomes soared, and savings piled up.
When that capital inflow stopped, asset prices in Greece fell, and so did demand for labor in the capital-goods sector.
Moreover, with household wealth having far outstripped wage rates, the supply of labor diminished.
Thus, Greece went from boom to outright slump.
The structuralist perspective also explains why recovery has been slow.
With competition weak, entrepreneurs did not rush to hire the unemployed.
When recovery began, political unrest last fall nipped confidence in the bud.
The truth is that Greece needs more than just debt restructuring or even debt relief.
If young Greeks are to have a future in their own country, they and their elders need to develop the attitudes and institutions that constitute an inclusive modern economy – which means shedding their corporatist values.
Europe, for its part, must think beyond the necessary reforms of Greece’s pension system, tax regime, and collective-bargaining arrangements.
While Greece has reached the heights of corporatism, Italy and France are not far behind – and not far behind them is Germany.
All of Europe, not just Greece, must rethink its economic philosophy.
Four Essential Steps to the Copenhagen Agreement
NEW YORK – The United Nations Climate Change Conference in Copenhagen this year will be the moment in history when humanity can rise to the challenge and decisively deal with the issue.
It is beyond the shadow of a doubt that greenhouse gas emissions must be radically reduced to prevent climate change from sliding into climate chaos.
In 2007, in Bali, the 192 Parties of the UN Framework Convention on Climate Change committed themselves to launching negotiations on strengthened action against climate change.
This process is to culminate in an ambitious negotiated outcome at the end of 2009, which needs to enter into force before January 2013.
This leaves just nine months to conclude one of the most complicated international negotiating processes in the world today.
Last year, negotiators developed a better understanding of what they want from the different aspects of the action plan they agreed in Bali, and they gathered ideas and proposals.
The political process has now reached a phase at which areas of convergence are emerging. These areas will form the basis of an initial draft agreement, to be presented in Bonn in June.
In order to enter into force around the world before 2013, the Copenhagen agreement must meet the political requirements of all participating countries.
For this to happen, clarity on four key political points is needed this year.
First, clarity is needed on ambitious, legally binding emission-reduction targets for industrialized countries.
Without such targets, the international community will not take the necessary action to address climate change, and developing countries will not have confidence that industrialized countries are willing to take the lead on solving a problem that they caused.
There are some positive signals in this direction.
For example, the European Union has agreed to a climate and energy package with which it will be able to reach its target of a 20% emission reduction over 1990 levels by 2020 (30% if other industrialized countries follow suit. within the United States, President Barack Obama has indicated his intention to achieve an 80% reduction of greenhouse gas emissions by 2050, and to return US emissions to 1990 levels by 2020.
Other countries, such as Russia and Japan, will announce their mid-term targets in the course of this year.
Second, clarity is essential on the extent to which major developing countries can undertake nationally appropriate mitigation actions beyond what they are already doing.
For many industrialized countries, particularly the US, it will be very difficult to conclude an agreement unless their citizens see that major developing countries are also willing to engage further.
A number of developing countries, such as China, India, Brazil, and South Africa, have already developed national climate change or energy strategies that indicate the extent to which they feel that they are able, given their economic constraints, to address the issue.
Many developing countries are coming forward with ideas for further nationally appropriate mitigation measures that they could take.
Third, clarity is essential on financing.
The magnitude of action by developing countries will largely depend on the effective delivery of finance and clean technology through international cooperative action.
We need to know how significant financial resources will be generated to help developing countries both limit the growth of their emissions and adapt to the effects of climate change.
Some interesting ideas have been floated.
For example, industrialized countries have suggested auctioning emission rights and using part of the revenue for international cooperation – something that Germany is already doing.
The concept also features in the Liebermann-Warner bill, an example of draft legislation on climate change for the US. Norway has put forward a proposal to monetize a portion of industrialized countries’ emissions budgets, generating revenue for international cooperation.
Emissions trading and market-based mechanisms will continue to play a role.
However, the Bali action plan addresses the need for developing countries to adopt nationally appropriate mitigation actions.
Because the carbon market cannot be the sole instrument, government-to-government cooperation will be needed as well.
Finally, clarity is essential on the governance structure under the convention.
If significant financial resources are to be generated for mitigation and adaptation, developing countries will want a representative say in how that money is to be allocated and spent.
The governance structures have to function according to democratic principles, founded on equity.
Many other important concerns will feature in this year’s intense negotiations. But clarity in these four areas will be essential for success at Copenhagen.
Four Ways Out
BERKELEY – When an economy falls into a depression, governments can try four things to return employment to its normal level and production to its “potential” level.
Call them fiscal policy, credit policy, monetary policy, and inflation.
Inflation is the most straightforward to explain: the government prints up lots of banknotes, and spends them.
The extra cash in the economy raises prices.
As prices rise, people don’t want to hold cash in their pockets or their bank accounts – its value is melting away every day – so they step up the pace at which they spend, trying to get their wealth out of depreciating cash and into real assets that are worth something.
This spending pulls people out of unemployment and into jobs, and pushes capacity utilization up to normal and production up to “potential” levels.
But sane people would rather avoid inflation.
It is a very dangerous expedient, one that undermines standards of value, renders economic calculation virtually impossible, and redistributes wealth at random.
As John Maynard Keynes put it, “there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.
The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose…” But governments will resort to inflation before they will allow another Great Depression – we just would very much rather not go there, if there is any alternative way to restore employment and production.
The standard way to fight incipient depressions is through monetary policy.
When employment and output threaten to decline, the central bank buys up government bonds for immediate cash, thus shortening the duration of the safe assets that investors hold.
With fewer safe, money-yielding assets in the financial market, the price of safe wealth rises.
This makes it more worthwhile for businesses to invest in expanding their capacity, thus trading away cash they could distribute to their shareholders today for a better market position that will allow them to reward their shareholders in the future.
This boost in future-oriented spending today pulls people out of unemployment and pushes up capacity utilization.
The problem with monetary policy is that, in responding to today’s crisis, the world’s central banks have bought so many safe government bonds for so much cash that the price of safe wealth in the near future is absolutely flat – the nominal interest rate on government securities is zero.
Monetary policy cannot make safe wealth in the future any more valuable.
And this is too bad, for if we could prevent a depression with monetary policy alone, we would do so, as it is the policy tool for macroeconomic stabilization that we know best and that carries the least risk of disruptive side effects.
The third tool is credit policy.
We would like to boost spending immediately by getting businesses to invest not only in projects that trade safe cash now for safe profits in the future, but also in those that are risky or uncertain.
But few businesses are currently able to raise money to do so.
Risky projects are at a steep discount today, because the private-sector financial market’s risk tolerance has collapsed.
No one is willing to buy assets and take on additional uncertainty, because everyone fears that somebody else knows more than they do – namely, that anyone would be a fool to buy.
Although the world’s central banks and finance ministries have been devising many ingenious and innovative policies to stimulate credit, so far they have not had much success.
This brings us to the fourth tool: fiscal policy.
Have the government borrow and spend, thereby pulling people out of unemployment and pushing up capacity utilization to normal levels.
There are drawbacks: the subsequent deadweight loss of financing all the extra government debt that has been incurred, and the fear that too rapid a run-up in debt may discourage private investors from building physical assets, which form the tax base for the future governments that will have to amortize the extra debt.
But when you have only two tools left, neither of which is perfect for the job, the rational thing is to try both – credit policy and fiscal policy – at the same time.
That is what the Obama administration is attempting to do right now.
Fragile and Unbalanced in 2012
NEW YORK – The outlook for the global economy in 2012 is clear, but it isn’t pretty: recession in Europe, anemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies.
Asian economies are exposed to China.
Latin America is exposed to lower commodity prices (as both China and the advanced economies slow).
Central and Eastern Europe are exposed to the eurozone.
And turmoil in the Middle East is causing serious economic risks – both there and elsewhere – as geopolitical risk remains high and thus high oil prices will constrain global growth.
At this point, a eurozone recession is certain.
While its depth and length cannot be predicted, a continued credit crunch, sovereign-debt problems, lack of competitiveness, and fiscal austerity imply a serious downturn.
The US – growing at a snail’s pace since 2010 – faces considerable downside risks from the eurozone crisis.
It must also contend with significant fiscal drag, ongoing deleveraging in the household sector (amid weak job creation, stagnant incomes, and persistent downward pressure on real estate and financial wealth), rising inequality, and political gridlock.
Elsewhere among the major advanced economies, the United Kingdom is double dipping, as front-loaded fiscal consolidation and eurozone exposure undermine growth.
In Japan, the post-earthquake recovery will fizzle out as weak governments fail to implement structural reforms.
Meanwhile, flaws in China’s growth model are becoming obvious.
Falling property prices are starting a chain reaction that will have a negative effect on developers, investment, and government revenue.
The construction boom is starting to stall, just as net exports have become a drag on growth, owing to weakening US and especially eurozone demand.
Having sought to cool the property market by reining in runaway prices, Chinese leaders will be hard put to restart growth.
They are not alone.
On the policy side, the US, Europe, and Japan, too, have been postponing the serious economic, fiscal, and financial reforms that are needed to restore sustainable and balanced growth.
Private- and public-sector deleveraging in the advanced economies has barely begun, with balance sheets of households, banks and financial institutions, and local and central governments still strained.
Only the high-grade corporate sector has improved.
But, with so many persistent tail risks and global uncertainties weighing on final demand, and with excess capacity remaining high, owing to past over-investment in real estate in many countries and China’s surge in manufacturing investment in recent years, these companies’ capital spending and hiring have remained muted.
Rising inequality – owing partly to job-slashing corporate restructuring – is reducing aggregate demand further, because households, poorer individuals, and labor-income earners have a higher marginal propensity to spend than corporations, richer households, and capital-income earners.
Moreover, as inequality fuels popular protest around the world, social and political instability could pose an additional risk to economic performance.
At the same time, key current-account imbalances – between the US and China (and other emerging-market economies), and within the eurozone between the core and the periphery – remain large.
Orderly adjustment requires lower domestic demand in over-spending countries with large current-account deficits and lower trade surpluses in over-saving countries via nominal and real currency appreciation.
To maintain growth, over-spending countries need nominal and real depreciation to improve trade balances, while surplus countries need to boost domestic demand, especially consumption.
But this adjustment of relative prices via currency movements is stalled, because surplus countries are resisting exchange-rate appreciation in favor of imposing recessionary deflation on deficit countries.
The ensuing currency battles are being fought on several fronts: foreign-exchange intervention, quantitative easing, and capital controls on inflows.
And, with global growth weakening further in 2012, those battles could escalate into trade wars.
Finally, policymakers are running out of options.
Currency devaluation is a zero-sum game, because not all countries can depreciate and improve net exports at the same time.
Monetary policy will be eased as inflation becomes a non-issue in advanced economies (and a lesser issue in emerging markets).
But monetary policy is increasingly ineffective in advanced economies, where the problems stem from insolvency – and thus creditworthiness – rather than liquidity.
Meanwhile, fiscal policy is constrained by the rise of deficits and debts, bond vigilantes, and new fiscal rules in Europe.
Backstopping and bailing out financial institutions is politically unpopular, while near-insolvent governments don’t have the money to do so.
And, politically, the promise of the G-20 has given way to the reality of the G-0: weak governments find it increasingly difficult to implement international policy coordination, as the worldviews, goals, and interests of advanced economies and emerging markets come into conflict.
As a result, dealing with stock imbalances – the large debts of households, financial institutions, and governments – by papering over solvency problems with financing and liquidity may eventually give way to painful and possibly disorderly restructurings.
Likewise, addressing weak competitiveness and current-account imbalances requires currency adjustments that may eventually lead some members to exit the eurozone.
Restoring robust growth is difficult enough without the ever-present specter of deleveraging and a severe shortage of policy ammunition.
But that is the challenge that a fragile and unbalanced global economy faces in 2012.
To paraphrase Bette Davis in All About Eve, “Fasten your seatbelts, it’s going to be a bumpy year!”
France, Enemy of Europe?
France under President Jacques Chirac is quickly becoming united Europe's biggest nightmare.
It is bad enough Mr. Chirac is splitting Europe with the promotion of his so-called "multi-polar" foreign policy.
Now France's blatant flaunting of the EU's Stability Pact, which caps deficit spending at 3% of GDP, is speeding Europe to an important crossroads that threatens to undermine both European monetary union and the euro itself.
The EU's smaller countries, in particular, are furious with France over its stubborn refusal to play by the EU's deficit spending rules.
They see French defiance as more than just a narrow issue over fiscal numbers.
"It concerns whether the big countries are willing to sacrifice any measure of national sovereignty for the European good," said one influential ECB official. "The Germans at least are trying to rein in their deficits," the official went on.
The act precipitating the current crisis is France's decision to go ahead with the cut in the personal income tax Chirac promised during his election campaign of last year.
The tax cut will put France's fiscal deficit over the 3% limit three years in a row--at an estimated 4.5% of GDP for 2004--because it will not be financed by offsetting cuts in public expenditure.
Of course, some believe an income tax cut is precisely what the French economy needs.
Perhaps.
But as attractive as an income tax cut may look on narrow nationalistic grounds, there is more than just the French national interest to be considered.
For if France can get away with its flagrant violation of the Stability Pact rules, others will follow the French lead.
An orgy of deficit spending throughout the euro-zone economy is certain to result, as welfare state pressure groups in individual member states attempt to make up for prior restraint.
This will cause many to have second thoughts about European monetary union.
After all, who wants a monetary union that bloats the welfare state and is an engine for inflation?
Moreover, once the constraints on deficit spending are off, a major incentive for badly needed structural reform in Europe will be removed.
Europe's politicians will be tempted to simply jack up the fiscal deficit to boost domestic incomes rather than undergo politically painful but necessary rationalization.
Structural stagflation--high inflation and low economic growth--will result.
The EU Commission must act now or face a possible revolt from the smaller countries.
Sweden's rejection of the euro already has sounded the alarm.
Hitting the French with a hefty fine--the penalty provided by the Stability Pact--is not a good idea.
Under its current rules, three big countries (France, Germany, and Italy) could--and probably would--block the sanction.
Even if the penalty were imposed, the French would not pay.
France's occupation of the Netherlands during the so-called French Period at the turn of the 19th century suggests a better alternative. France then imposed a penalty tax on the province of Zeeland for running a sizeable fiscal deficit.
When the Zeelanders refused to pay, the French responded by centralizing what had been until that point a rather de-centralized Dutch fiscal system.
What worked then may work now.
Centralization of the public finances of member states, though a radical step, may be the only answer to the problem of recalcitrant countries like France that refuse to play by the budget rules.
After all, the Stability Pact exists in the first place because Europe lacks a common fiscal policy.
The issue of how much of a double standard the EU's smaller countries are willing to accept has been brought to a head by President Chirac's blatant flaunting of the Stability Pact rules.
By rejecting the euro, Sweden, itself a small country, made it clear that it didn't want to be part of a Europe that discriminated against small countries.
What will it take, one wonders, before others among the smaller member countries follow suit?
France in Search of Europe
With its ten new members, the European Union comprises 25 countries and 453 million citizens.
In light of the fact that during the past millennium the EU’s members fought countless wars with each other, and that for forty five years a cold war split the continent into two hostile blocs, today’s Europe is a success of monumental historical significance.
Indeed, the EU represents many things simultaneously.
First, it is a guarantee of peace: war is now technically impossible between the Union’s interlinked member countries.
Moreover, the EU is a majestic instrument for international reconciliation.
The Germans and the French, who 60 years ago loved each other about as much as Serbs and Bosnians do today, are now a married couple.
Catholics and Protestants in Ireland were killing each other for a century, but now that they are in the EU, they have recognized the idiocy of their conflict and the inevitability of reconciliation.
Hungarians and Romanians, after nine centuries of hatred and wars, are embarking on the same process.
Greece has just decided to support the opening of negotiations for Turkey’s entry into the EU in the next twelve years.
The Union has also been a bearer of prosperity, because it is an effective mechanism for lagging members to surmount long-standing barriers to development.
Ireland and Greece, once the two poorest countries of Europe have surged economically, with Greece coming close to the European average and Ireland having already taken its place among the richest.
It is for these reasons that countries outside the EU want to join.
In less than two years, this will become a reality for Bulgaria and Romania, while negotiations are beginning with Croatia and Turkey.
There is also talk about membership for Serbia and Ukraine.
For each of these countries, membership will mean a stable peace with its neighbors and reconciliation at home, as well as accelerated economic growth.
All of this entails a certain amount of instability, particularly if expansion is driven by negotiations among governments, rather than by democratic choices.
The project of the new European Constitution was devised to remedy this problem.
And, lo and behold, France, which is scheduled to ratify the Constitution by a referendum on May 29, gives the impression of wanting to vote against it.
If it does, the result will be an earthquake.
Although every member nation has played its part in integrating Europe, France has without doubt been the country that provided most of the ideas and master builders.
So what is going on?
In France, as elsewhere in Europe, there have always existed unbridled nationalists, the “sovereignists” who say no to Europe in the name of defending the nation.
But whether they belong to the extreme right or the communist left, they represent barely 20% of the electorate.
Over and above that, two factors explain the bizarre phenomenon captured by recent opinion polls in France.
The first is that the French have accounts to settle with their president and the government.
Jacques Chirac was re-elected president with 82% of the vote because of the menace from the extreme right.
According to all evidence, half of his votes came from the left.
But Chirac acted as if his mandate had been unequivocal and put in place one of the most conservative governments France has seen for half a century. “Let’s make the poor pay” is his fiscal order of the day.
It smacks of usurpation and is inciting many of the French to vote their anger.
The other factor is that France, like the rest of the world, suffers from an ill-managed form of globalization. As a result, France suffers from growing inequality, high and still-rising unemployment, constant corporate restructurings entailing layoffs, threats to public services and social welfare programs, and a general feeling of insecurity.
The world has undergone massive economic deregulation, prescribed by the monetarist doctrine supported by the conservative forces dominant in the developed countries of North America, Europe, and the Far East.
This economic tsunami has come to us from the United States – there is nothing in it for Europe, but the right-wing forces in all our countries, which have coalesced into the majority that governs Europe, have rallied to its support.
It is the desire to reject this state of affairs that, above all else, explains the “No” many French people want to shout.
But to do so would be a big mistake.
Only Europe as a whole, focused politically on the idea of better regulation, is big enough to block the neo-liberal tsunami.
But it needs great doctrinal clarity, a firm political will, and a constitution.
Indeed, rejection of the EU Constitution is a sure way to kill European dynamism and weaken Europe’s ability to defend itself.
The debate in France is still raging, and nothing is yet lost.
The French people still have time to pull themselves together – and opinion polls suggest that they are beginning to do it.
Europe deserves it.
France Is Back In Europe, But On What Terms?
When Nicolas Sarkozy became President of France, he declared that his country was back in mainstream Europe.
Since then, Sarkozy has thrown himself into the European political fray.
His energy – combined with the negotiating talents of German Chancellor Angela Merkel – overcame antagonism toward the new reform treaty that EU leaders just ratified in Lisbon, putting the European Union back on its feet after two years of crippling indecision.
But this triumph marked only a partial return by France to the European fold.
The French must now resolve their own ambiguous attitudes about Europe, which have affected national policies for decades.
For half a century, France has mixed two radically different approaches to Europe.
Some French see the EU as a community where national interests inexorably converge.
At the other extreme is the Gaullist belief that the EU is nothing more than a “power multiplier” for France to defend its own national interests.
Rather than using Europe to project French ideas across the continent, France needs to develop a culture of genuine power-sharing and compromise.
Such a sea change would have profound implications for French policies across a broad spectrum, from internal EU issues and economics to foreign policy and Europe’s role in the world.
Consider the French executive.
The president and government ministers treat Europe as their political preserve.
Yet the prime minister never attends EU meetings and the foreign minister systematically leaves internal EU decisions to a junior secretary of state or a diplomatic representative.
Meanwhile, other ministers circumvent government instructions to get from Brussels what has been refused in Paris.
Clearly, a better EU policymaking system needs to be found.
For a start, the French parliament must be given a greater role and government ministers must drop their habit of blaming Brussels whenever they want to introduce unpopular economic or social reforms.
Sarkozy is particularly eager for France to be heard on economic policy.
His election victory relied heavily on his plans to reform the labor market and to promote work and innovation.
But if France is to be taken seriously by the rest of Europe, Sarkozy will have to deliver more than just growth and jobs.
He will need to demonstrate that France no longer treats Europe as a scapegoat for its own economic troubles – a ploy that merely marginalizes France in economic debates.
Thus, polemics against the European Central Bank’s independence and the damaging effect of “the high euro” will have to stop.
France’s financial credentials also will have to improve if ministers’ views on EU monetary issues are to be taken seriously.
For years, France has funded some of the highest public spending in Europe through budget deficits, despite its commitment to balance the books as part of the EU’s Stability and Growth Pact.
Many EU members fear that Sarkozy’s government will again break French budget promises, as his demands for growth-boosting tax cuts imply pushing back the deadline for eliminating France’s deficit until 2012.
Similarly, French prudence will be under scrutiny during discussions of a new European financial framework, which will test France’s capacity to view EU budgets as something other than a means of redistributing EU cash, particularly to farmers.
The Common Agricultural Policy still accounts for more than 40% of Community expenditure, even though the farm sector accounts for only 2% of employment.
As for global security, it is clear that EU countries can exert international influence only when they speak with one voice.
France must sort out its relations with NATO and the role it intends to play in transatlantic forums.
This means dropping anti-American rhetoric and talk about “European power,” which is meaningless for the majority of EU states.
French and German disagreements with the United States in 2003 generated deep divisions in the EU.
But recent changes in political leadership in the Britain, France, and Germany, together with the arrival of a new US administration in early 2009, could improve transatlantic cooperation.
Next, France and the EU must find a new model for dealing with Russia.
Here, the Union is confronted with a dilemma.
Does it consider Russia a powerful partner or a hostile neighbor?
If France wants to take the lead on EU relations with Moscow, it must become far more sensitive to eastern and central European fears about Russia.
French politicians underestimate the negative impact they have in these countries when they repeatedly refer to a Paris-Berlin-Moscow axis and criticize “excessive” enthusiasm for the transatlantic alliance.
Sarkozy will need to take all this into account if he wants France to play a full part in shaping the EU’s future.
France’s elites need to own up to the mistakes of the past and find better ways to confront today’s challenges.
Ordinary French people also have much to consider: our attitudes toward the market, our relations with the rest of Europe, and our views about the world beyond the EU’s borders.
If we come to terms with today’s complex realities, France could be back in Europe.
France is Not Working
France’s chronic malaise is marked by periodic explosions of protest.
The two most recent episodes – the rioting and arson in French cities last autumn and the successful student campaign earlier this year against a new law governing young labor-market entrants – seem to have little in common.
But their unifying thread is youth, unemployment, and uncertainty about the future, as well as the suffocating state paternalism that underlies the wider malaise itself.
Take, for example, the desirable goal of job security.
French governments have sought it in the only way they know – by ever more regulation.
Unsurprisingly, rules that make it difficult to fire established workers discourage employers from hiring new ones.
Insiders enjoy lavish protections, while entry barriers to the millions left outside are insurmountable.
As a result, unemployment is averaging 10% this decade and has not been below 8% for 20 years.
And, while the overall level of unemployment has remained stable – albeit at a shockingly high level – the unemployment rate among young men (in the 16-24 age group) jumped from 15.3% in 1990 to 21.4% in 2005.
France’s benevolent paternalism penalizes the young beyond the labor market as well.
On paper, wealth redistribution through high taxes and state transfers, reflecting Republican ideals of equality and social cohesion ( fraternité ), has brought good results.
Unlike most other OECD countries, where inequalities have increased over the last 30 years, in France pre-tax income inequality decreased slightly, or at worst remained stable, from 1970 to 2000.
But this aggregate stability masks shifts in income distribution that have favored older age cohorts.
Those around retirement age (51-65) saw their share in total income rise by three percentage points in the last ten years, while younger groups, particularly those aged 18-25, lost ground, with their income share falling by five percentage points.
By 1995, relative poverty was increasing sharply for young adults, while the opposite trend occurred among the elderly.
In 1970, a quarter of all pensioners lived in poverty; today, the figure is only 4%.
Joblessness is the main cause of poverty, and the best protection against it is earned income, for which even France’s generous welfare payments are an inadequate substitute.
Moreover, the high payroll taxes needed to finance these benefits constitute another deterrent to hiring, as does the high minimum wage, which tends to price unskilled labor above its potential productivity.
The relatively generous dole and the prospect of high taxes once in work merely reduces the incentive to take low-paid jobs.
As a result, 40% of all transfers go to poor but able-bodied people of working age.
The full extent of the French system’s pathology becomes fully clear in the light of successive governments’ attempts at reform, with piecemeal measures the norm – and thus proving counter-productive on balance, or failing altogether.
Minimum-wage increases, for example, counteract income-tax credits and lower payroll taxes aimed at encouraging youth employment.
The unspoken premise is that there must be no losers, not even in the short term.
The logical answer would be to reduce equally the degree of job security enjoyed by the entire labor force.
But no French government in recent decades has been remotely strong enough to face down opposition – often involving illegal action that goes unpunished – to any reduction in entrenched privileges.
Perhaps the only way out of France’s current impasse is the no-less traditional French route of revolution.
According to this view, the system is unreformable, and real change will be possible only after it finally collapses, perhaps owing to fiscal weakness, since the combination of deficit-financed transfers, low growth, and low labor-market participation may prove unsustainable.
After all, whatever the deeper causes of the French Revolution of 1789, the immediate trigger was a public-finance crisis.
The social strains of high unemployment – especially among young people – may force decisive change even before any fiscal meltdown.
But evolutionary progress is always preferable to revolutionary upheaval, and, despite all the difficulties of genuine incremental reform, the prospects are not absolutely hopeless.
This is clear from the remarkable recent experience of “Sciences Po,” one of the elite grandes écoles in the center of Paris.
An ostensibly meritocratic competitive admission system to the grandes écoles is in fact monopolized by the socially privileged, who accounted for 81% of students admitted to Sciences Po in 1998 (compared to the roughly 60% of students at Oxford and Cambridge who come from fee-paying private schools).
The head of Sciences Po, Richard Descoings, implemented a program of positive discrimination that favors disadvantaged candidates, such as those from immigrant suburbs and rural areas, and charges increased fees to wealthier students.
Descoings faced strong – and often cogent ­– opposition.
But the dynamic of all reform is clinched when even weighty arguments succumb to the urgency of change.
For France as a whole, the long-term cost of withholding tough medicine will ultimately be much higher than the short-term pain of reforming the country’s fiscally unsustainable and spiritually impoverishing welfare state.
Young people in France will rediscover trust and hope when they can be shown a world where fairness consists not just in egalitarian and unconditional redistribution, but also in hard work and good behavior.
Change for the better will be founded on the basic conviction that one should get what one deserves and deserve what one gets.
France à la Sarkozy
Eight months into his presidency, is Nicolas Sarkozy delivering the “rupture” from 30 years of French immobility that he promised?
Dubbed the “hyper-president” by bewildered media, he has launched a vast number of reforms, many of which were once considered political suicide.
He has targeted many areas – including universities, the judiciary, foreign policy, immigration, taxation, and the environment – but it is the economy that will prove to be the make-or-break issue.
Sarkozy’s slogan “work more to earn more” has won him considerable support.
The crucial test will be his ability to reform the labor market, whose rigidities are widely seen as the main cause of France’s relatively poor economic performance, with an unemployment rate that has never dipped below 8% over the last 25 years.
While the government has begun many projects, with few exceptions, including tax breaks for the wealthy, most are still in the making.
The most important concern public employment, pensions, labor legislation, and the length of the workweek, all of which generate fierce resistance.
The main reason for the slow pace – noting that previous presidents had no pace at all – is a 2005 law that requires that all measures affecting the labor market first be negotiated in good faith with the trade unions.
Naturally, the unions impede negotiations as much as possible.
As a result, France is likely soon to surpass Sweden as the world’s highest public spender.
All French finance ministers lament that they had very little room for cutting costs, given the scope of entitlements, particularly civil servants’ salaries and pensions.
With half of all current civil servants set to retire over the next ten years, Sarkozy has pledged to replace only one of every two.
In 2007, the attrition rate was one out of three – short of the pledge, but a sharp reversal from previous decades, in which the ranks of civil servants grew significantly faster than private-sector employment.
Sarkozy believes that he has a popular mandate to push his labor-market reforms through parliament, where he controls a large majority.
By contrast, the unions argue that they have “social legitimacy,” a claim that may surprise many outside France, but that holds considerable sway in a country where large-scale demonstrations or drawn-out strikes are interpreted as a valid representation of popular will.
From the outset, both sides expected a defining fight, which occurred last November, after the government decided to align the retirement age in the public sector with that of the private sector.
When President Jacques Chirac’s first government attempted such a reform in 1995, railroad workers, who can retire at age 50 or 55, spearheaded the resistance.
After nearly three weeks of complete stoppage of trains, the government caved in, and soon thereafter lost a general election.
The 1995 strike became an icon of “social legitimacy,” instilling fear in all succeeding governments.
But this time around, the unions caved in after nine days, largely because the reform had been explained and promised to the public during the presidential campaign.
Democratic legitimacy won a major battle over social legitimacy.
This opens the way to more and deeper reforms.
A law restricting transport strikes took effect on January 1, and Sarkozy intends to break the 35-hour workweek, albeit indirectly.
Instead of repealing the law, overtime work is to become easy and relatively cheap.
He is also preparing to raise the retirement age to 61, from 60.
Even more provocative are the next steps: a plan to revamp the standard work contract and to require that all workers be invited to vote after eight days of a strike.
Indeed, probably the most fundamental measure is to transform radically the way trade unions operate.
Their role is currently codified by a post-1945 law that gives them enormous influence, even though their membership has dwindled to a mere 8% of employees.
The plan, yet to be fully articulated, is to make them accountable to all workers, not just to their membership – another way of promoting democratic legitimacy, but this time at the heart of the social system.
One reason why Sarkozy could succeed where previous governments have never dreamt to venture, aside from his popular mandate for reform, is a “win-win” strategy, whereby victory for reform implies substantial compensation.
For example, Sarkozy has promised that half of the savings from the reduction in public employment will go to higher pay – possibly based on merit, another red line for the trade unions.
But Sarkozy is not quite turning France, long a country hostile to supply-side reform, into what many would consider a normal economy.
While he has the right instincts concerning labor markets, he is very French on other issues.
He is a staunch advocate of industrial policies, which will lead him into sharp confrontation with the European Commission and many of his colleagues.
He also harbors a deep distrust of financial markets and often advocates more regulation, and sees the strong euro as a threat to French industry and the result of speculation, which has already provoked serious clashes with the European Central Bank.
On all these issues, much of the decision-making power has been transferred to the European Union, which dramatically reduces Sarkozy’s room for maneuver.
But France will hold the EU’s rotating presidency in the second half of 2008.
Nobody’s perfect, least of all Sarkozy, so we should expect some infuriating initiatives.
The Resistible Rise of Marine Le Pen
PARIS – Watching the results of the second ballot in France’s regional elections on December 13, surrounded by my family, I was overpowered by a sense of relief, and even pride.
The party of hatred – Marine Le Pen’s National Front (FN) – failed to win a single region.
Democracy had prevailed.
The values of the Republic had triumphed.
One month to the day after terrorists killed 130 people in Paris, the French once again demonstrated clear-eyed stoicism.
Just as my countrymen had remained strong in the face of terrorism, they held firm against the siren song of venomous populism.
As the results of the ballot became clear, my eldest son leaned over and whispered into my ear: “It is in moments like these that it feels so good to be French.”
To be sure, as welcome as these results may be, we should not allow them to blind us to the message of the first round of balloting, in which the FN finished first in six of the country’s 13 regions.
French voters are deeply disillusioned with the establishment.
Since the 2012 presidential election, Le Pen has tripled her party’s popular support, attracting nearly seven million voters.
And yet, as alarming as her rapid rise might be, there is much to be learned from her decisive defeat.
To begin with, the FN’s effort to present itself as a normal political party has failed.
Despite Le Pen’s attempts to soften its tone and broaden its appeal, shedding – at least formally – its anti-Semitic elements, the party continues to be perceived as a risk by a majority of French voters.
“We are not fools,” was how my neighbors in Normandy – many of them farmers or artisans – put it shortly after the results of the first vote had come in.
They might use the first ballot to express their anger at the government and discontent with the system, but they know that the FN is made up of incompetent extremists.
They don’t want them in positions of real power.
Even in the face of economic stagnation and high unemployment – especially among the young – the French are not ready “to rock the boat” to the point of abandoning the euro or the European Union.
French governments – including the incumbent one – may have failed to respond adequately to the country’s economic plight.
But that doesn’t mean that voters are ready to take a leap in the dark by placing their faith in a pack of preening demagogues surfing on discontent and fear.
Indeed, fear was the dominant factor in these elections.
In the first round, it favored the FN, whose raison d’être is popular anxiety about migrants, terrorists, globalization, and openness to the world.
But in the second round, fear was Le Pen’s undoing.
Voters not only feared handing over positions of real authority to unqualified counter-elites; they feared endangering their country’s image and damaging its position in Europe and beyond.
After all, France’s international identity is an integral component of its national identity.
The country’s pride and sense of mission, inherited from the Ancien Régime and reinforced by the French Revolution, may not have prevented collaboration with Nazi Germany under the Vichy government; but it took a disastrous defeat to force France to bend its knee to the far right.
The situation today is far less dire.
Le Pen might try to paint herself as a modern Charles de Gaulle, leading the resistance against the establishment.
But the public continues to regard the FN as the ideological heir to Vichy France – a party that has barely shed its collaborationist clothing.
The outcome of France’s regional elections is relevant not only in Europe, but also across the Atlantic.
French voters have shown that the EU is not condemned to be destroyed by attacks on its legitimacy, and that populism need not triumph.
If democratic leaders – in Europe and the United States alike – heed that message and take their responsibilities seriously, politicians like Le Pen can and will be defeated.
France Says “No” To Chirac, Not to Europe
Voting No on the EU Constitution would not constitute a French No to Europe, as some believe; it would merely be a vote of no confidence in Chirac’s presidency.
Anything that diminishes Chirac – who has weakened the EU by pushing a protectionist, corporate state model for Europe, and telling the new smaller members to “shut up” when they disagreed with him – must be considered good news for Europe and European integration.
So those desiring a stronger integrated EU should be rooting for a French No, knowing full well that some voting No would be doing the right thing for the wrong reasons.
Even before the May referendum, there have been indications that France’s ability to mold the European Union to its interests has been waning.
Just recently, Romanian president Traian Barescu signed the Treaty to join the European Union.
In the period preceding the signing, however, French foreign minister Michel Barnier chastised him for lacking a “European reflex”.
The reason?
Barescu plans to align Romania with Anglo Saxon liberal economic policies, and wants a special relationship with Great Britain and the United States to improve security in the Black Sea region.
Rather than buckling to France’s will, the Romanian president warned French leaders to stop lecturing his country.
This is Europe’s future.
Even those with close historical ties to France, like Romania, are standing up to France, because Chirac and his colleagues do not offer them the type of “European reflex” they want and need.
The Netherlands—a traditionally pro-European country—also may vote No on the Constitution in its own referendum (which takes place after the French one) --not only as a protest against the conservative and moralistic policies of the Balkenende government, but as a rejection of a corporatist Europe dominated by French and German interests.
The corporate state simply has not delivered the goods in continental Europe, and polls are showing voters may take it out on the proposed Constitution.
Certainly the Yes camp is concerned, with some arguing a French No will stall EU enlargement and sink the euro.
“What prospects would there be for constructive talks with Turkey, or progress towards entry of the Balkan states if the French electorate turned its back on the EU?” asks Philip Stephens in The Financial Times .
True enough.
But a “No” will not mean the French electorate has turned its back on Europe.
What’s at stake is not enlargement, but whether enlargement takes a more corporatist or market-based form.
Wolfgang Munchau of The Financial Times thinks French rejection of the EU constitution could sink the euro. “Without the prospect of eventual political union on the basis of some constitutional treaty,” writes Munchau, “a single currency was always difficult to justify and it might turn out more difficult to sustain….Without the politics, the euro is not nearly as attractive.”
But French rejection of the Constitution does not imply political fragmentation of the EU.
If the Constitution is not ratified, the Treaty of Nice becomes the Union’s operative document.
There is no reason whatsoever why the EU should fall into chaos – and the euro wilt – now under the Treaty of Nice when it did not do so before.
The truth is that not only will the euro survive a No vote; it will prosper.
Britain’s liberal economic principles are more conducive to European economic growth and prosperity than France’s protectionist, corporate state ones.
The market realizes this.
With the polls forecasting a No vote, the euro remains strong in the currency markets.
Finally, not only will a French No serve to marginalize Chirac in Europe, but it will also help undermine the Franco-German alliance that has served France, Germany and Europe so badly in recent years.
Europe, in fact, might be on the verge of a major political re-alignment if the French vote No and Tony Blair wins big in the forthcoming UK election.
With Chirac down and Blair up, an Anglo Saxon-German alliance might well replace the present Franco-German one.
That would be progress indeed.
France’s Broken Dream
CAMBRIDGE – The crisis in the eurozone is the result of France’s persistent pursuit of the “European project,” the goal of political unification that began after World War II when two leading French politicians, Jean Monnet and Robert Schuman, proposed the creation of a United States of Europe.
Monnet and Schuman argued that a political union similar to America’s would prevent the types of conflict that had caused three major European wars – an appealing idea, but one that overlooked America’s horrific Civil War.
A European political union could also make Europe a power comparable to the United States, and thereby give France, with its sophisticated foreign service, an important role in European and world affairs.
The Monnet-Schuman dream led to the 1956 Treaty of Rome, which established a small free-trade area that was later expanded to form the European Economic Community.
Establishing the EEC had favorable economic effects, but, like the North American Free Trade Area, it did not reduce national identification or create a sense of political unity.
That was the purpose of the 1992 Maastricht Treaty, which established the European Union.
The influential report “One market, one money,” issued in 1990 under the leadership of the former French Finance Minister Jacques Delors, called for the creation of a single currency, relying on the specious argument that the single market could not function well otherwise.
More realistically, advocates of a single currency reasoned that it would cause people to identify as Europeans, and that the shift to a single European Central Bank would herald a shift of power away from national governments.
Germany resisted the euro, arguing that full political union should come first.
Since there was no chance that the other countries would accept political union, Germany’s position seemed like a technical maneuver to prevent the establishment of the single currency.
Germany was reluctant to give up the Deutsche Mark, a symbol of its economic power and commitment to price stability.
Germany eventually agreed to the creation of the euro only when French President François Mitterrand made it a condition of France’s support for German reunification.
Moreover, under pressure from France, the Maastricht Treaty’s requirement that countries could introduce the euro only if their national debt was less than 60% of GDP was relaxed in order to admit countries that were seen to be “evolving” toward that goal.
That modification allowed Greece, Spain, and Italy to be admitted.
The pro-euro politicians ignored economists’ warnings that imposing a single currency on a dozen heterogeneous countries was bound to create serious economic problems.
They regarded the economic risks as unimportant relative to their agenda of political unification.
But the creation of the euro caused a sharp fall in interest rates in the peripheral countries, leading to debt-financed housing bubbles and encouraging their governments to borrow to finance increased government spending.
Amazingly, global financial markets ignored the credit risks of this sovereign debt, requiring only very small differences between interest rates on German bonds and those of Greece and other peripheral countries.
That ended in 2010, after Greece admitted that it had lied about its budget deficits and debt.
Financial markets responded by demanding much higher rates on the bonds of countries with high government debt ratios and banking systems weakened by excessive mortgage debt.
Three small countries (Greece, Ireland, and Portugal) have been forced to accept help from the International Monetary Fund, and to enact painful contractionary fiscal cuts.
The conditions in Greece are now hopeless, and are likely to lead to further defaults and a withdrawal from the eurozone.
Spain, too, is in serious trouble, owing to the budget deficits of its traditionally independent regional governments, the weakness of its banks, and its need to roll over large sovereign-debt balances each year.
It is already clear that the EU’s recently agreed “fiscal compact” will not constrain budget deficits or reduce national debts.
Spain was the first to insist that it could not meet the conditions to which it had just agreed, and other countries will soon follow.
French President François Hollande has proposed balancing deficit limits with growth initiatives, just as France had earlier forced the EU’s Stability Pact to become the Stability and Growth Pact.
The fiscal compact is an empty gesture that may be the last attempt to pretend that EU members are moving toward political unification.
The European project has clearly failed to achieve what French political leaders have wanted from the beginning.
Instead of the amity and sense of purpose of which Monnet and Schuman dreamed, there is conflict and disarray.
Europe’s international role is shrinking, with the old G-5 having evolved into the G-20.
And, with German Chancellor Angela Merkel setting conditions for the eurozone, France’s ambition to dominate European policy has been thwarted.
Even if most eurozone countries retain the single currency, it will be because abandoning the euro would be financially painful.
Now that its weaknesses are clear, the euro will remain a source of trouble rather than a path to political power.
France’s Fourth Moment
KYIV – Since World War II’s end, France has consistently risen to the challenge of restructuring Europe in times of crisis.
In doing so, France became the catalyst not only for building European unity, but also for creating the prosperity that marked Europe’s post-war decades – a prosperity now under threat because of the global financial and economic crisis.
If we are to see a stronger Europe emerge from today’s challenges, visionary French leadership is needed again.
The first moment when decisive French leadership began to unify Europe came when Robert Schuman and Konrad Adenauer created the European Coal and Steel Community.
By rooting the then West Germany in the political, economic, and social fabric of the West, that step heralded the start of Germany’s rebirth and economic miracle.
The second time that France consolidated Europe’s internal architecture came in 1983, during the debates over the stationing of American cruise and Pershing missiles in Germany to counter the deployment of SS20 missiles by the Soviet Union.
France’s resolve to stand with Germany helped prevent Germany from drifting into a dangerous neutrality that would have shaken the European community to its core.
The third moment came after the Berlin Wall fell, and it was feared that an enlarged Germany might destabilize Europe.
After initially trying to delay reunification, France embraced it, in exchange for Germany’s reaffirming its commitment to European unity and Franco-German leadership of the European community.
As a result, Germany bound itself to the idea of “ever closer union” even more definitively by pledging to join the common European currency, the euro.
It is now urgent that the insights that have animated Franco-German relations be applied to all of Central and Eastern Europe.
Only by securing the European identity of this entire region, and by anchoring the growing Russo-German relationship in a European context, can the European Union continue on its path of stability and prosperity.
Only by reinforcing open trading and financial relations across Europe can we hope to subdue today’s crisis.
For it is in no European country’s interest, or in the interest of the EU as a whole, that Central and Eastern Europe feel that they have been cast adrift or that Germany and Russia fixate on each other in this time of crisis.
As with Germany in the 1950’s, the nature of Russia’s links with its immediate neighbors is turning out to be the defining factor in shaping the country’s international image.
Many observers regard these relations as a signal not just to the region, but to the rest of the world, of the sort of power that Russia wishes to be.
The issue is partly one of “internationalism” itself.
In contrast to Europe – with its close-knit network of multilateral organizations through which states formulate and conduct much of their foreign policies – Russia is not accustomed to intensively cooperative international procedures.
But keeping Russia at arm’s length from Europe has only strengthened the sense of isolation that many Russians feel, tempting them to define the country’s interests in ways that are irreconcilable with those of Europe.
It has also heightened Russia’s desire to construct a special, bilateral Russo-German relationship heedless of the context of the EU.
European history during the past 60 years makes clear that the most promising approach to meeting the challenge of national reconciliation and stability is not to focus on specific contingencies, but to establish procedures that encourage orderly change.
A singular vision has always animated this process: animosity between neighbors must not be allowed to fester, and the rule of law must reign not just within countries, but also between them.
To believe that such a vision can work for Russia, Ukraine, and Europe is not wishful thinking, but rests on the successful experience of France and Germany in promoting amity.
Indeed, the existence or absence of a framework of cooperation often determines whether a dispute mutates into a crisis.
Such cooperative frameworks seek to reconcile national independence with regional interdependence, focusing political leaders’ minds on prosperity for their people rather than on gaining unilateral advantages that ultimately impoverish and unsettle everyone.
The first lesson of European unity is that times of crisis must draw the continent closer together, not divide it through protectionism, competitive devaluations, and expulsions of immigrants.
Similarly, the euro must not be allowed to become an Iron Curtain that consigns non-members to a high-risk zone where investors dare not venture.
For Ukraine, Europe can help by embracing the free-trade agreement that we are now negotiating.
Coupled with our successful membership in the World Trade Organization, Ukraine would stand to benefit when world and European trade begins to recover.
Europe can also consider using various stabilization funds to help our economy through the crisis that we are all enduring.
I do not ask for these things out of a narrow concern for my country’s health.
Just as the US Federal Reserve has engaged in credit and currency swaps with Brazil, Mexico, Singapore, and South Korea and other countries to ease their access to the dollars they need, the European Central Bank must offer such swap arrangements to Europe’s non-euro countries in order for trade and production processes to continue.
Yes, these are dark times, and all politicians want to protect their voters.
But Europe’s greatest postwar leaders understood that keeping the wider view of Europe in mind is the best way to achieve this goal.
As at so many times before, now – with all of our economies in peril – is a moment for decisive French leadership.
France’s Ghetto Economy
The youngsters who are ravaging France realize that they don’t have a future.
That is why they are burning cars.
But how many French politicians realize that their beloved “social model” is partly to blame?
Poor second-generation immigrants in France have no economic prospects for two main reasons.
First, the economy is growing far too slowly.
As in most of continental Europe, economic performance has been enormously disappointing over the last two decades.
But France managed to do even worse than its neighbors.
During the period from 1980 to 2000, only two OECD countries, Germany and Greece, recorded slower growth in income per capita than France.
But Germany had to go endure the huge costs and trauma of re-unification with East Germany. Greece was hurt by the wars in the Balkans.
What’s France’s excuse?
Second, whatever growth there is in France does not trickle down to the poor.
Many young second-generation immigrants are virtually excluded from the labor market.
Average unemployment has been stuck at around 10% for several years – one of the highest rates in the OECD.
But the unemployment rate is more than double among the young. And it reaches 40% and over amongst those who drop out of school in the banlieues, which have become no-go zones of hopelessness.
Unemployment is high and concentrated amongst French minorities because of specific labor-market institutions.
France has strict hiring and firing regulations that make it costly to dismiss workers and thus reduce job creation.
Those with a job are protected, those without one are hurt.
Moreover, salaries cannot fall below a legislated minimum wage, which is so high that the least productive and least skilled workers remain shut out of the labor market.
Wages are set in centralized negotiations by monopolistic unions, and apply throughout the economy.
But the unions don’t care if the sons and daughters of immigrants living in ghettos have no opportunity of even starting a working life.
These French social institutions are designed with a purpose: to protect the French labor market’s “insiders.”
Regular workers enjoy secure and well-paid jobs, with much leisure time and little stress, particularly in the public sector.
The poor minorities that remain excluded are provided with some social assistance.
But too little is done to integrate them into society and increase their opportunities.
The economic harm done by this corporatist social model is aggravated by widespread state intervention in all parts of the economy.
Services are sheltered from competition, hindering both productivity growth and job creation in these sectors.
Government intervention distorts the prices, leading to inefficient allocation of resources in areas such as healthcare, education, and agriculture.
French civil servants, convinced that they can spot profit opportunities better than the market, engage in a proactive industrial policy with a variety of tools, including the retention of minority or controlling stakes in a number of large enterprises.
All of this results in an economy that grows too little, where the weakest are condemned to a life of exclusion and are deprived of any opportunity for upward mobility.
Why has France fallen into this trap?
Not only the myopic pursuit of insiders’ economic interests is to blame.
France is also burdened by strongly held ideological convictions.
According to opinion polls collected in many countries by the World Value Surveys in 1999-2000, the French on average fear income inequality much more than citizens of other industrial countries.
Compared to other countries at about the same level of development, France stands out as being highly suspicious of the benefits of competition (only Belgium fares slightly worse in this regard).
French political institutions also bear heavy responsibility.
France is a stable democracy, and large majorities in Parliament often support its governments.
But this stability comes at the expense of change.
Barriers to entry into the French political elite are exceptionally high.
The current president, Jacques Chirac, was elected 10 years ago; he was already in government in 1969.
His predecessor, Francois Mitterand, was elected president for the first time in 1981, and made his first appearance in government in 1956.
France is also a heavily centralized State, were most civil servants are recruited from a close circle of policy advisers to the top politicians, often educated at the same institution.
Little wonder that change occurs so seldom in France.
To be sure, the corporatist welfare state is not the only causes of today’s Gallic intifada.
Violent riots by immigrants and ethnic minorities have taken place in other countries as well, from London to Los Angeles.
But, ultimately, the best way to address them and prevent their resurgence is to make sure that economic opportunities are available to those who are determined to try.
Social assistance with no hope of individual improvement is not enough.
It is time that France starts questioning its economic model.
In a recent statement about the burning suburbs, Chirac declared: “We will have to draw all the lessons from this crisis, when the time comes and order has been restored, and with a lot of courage and lucidity.”
France’s Identity Politics
One big surprise of the current presidential campaign in France is how “national identity” has surged to the forefront of the political debate.
During the 1995 presidential campaign, the main issues were unemployment and social divisions.
In 2002, the priority was security.
But the three main candidates this time around – Nicolas Sarkozy, Ségolène Royal, and François Bayrou – have given an entirely different shape to this campaign.
Sarkozy, for example, proposes to establish a ministry of immigration and national identity.
Likewise, while Royal carefully maintains the distinction between nation and nationalism, she is drifting away from the Socialist Party’s old embrace of The Internationale , instead defending La Marseillaise and suggesting that all citizens should display a French flag on the National Day.
Bayrou criticizes the “nationalist obsession” of his competitors, but he supports abrogating the jus soli (the right to obtain French nationality by birth) for people from the French island of Mayotte, owing to massive inflows of pregnant women to the island.
For his part, the far-right leader, Jean-Marie Le Pen, says that he is very happy with this evolution.
Indeed, the debate over national identity is nothing new.
The problem is that French identity has always been made up of contradictory and sometimes adversarial elements, such as France’s Catholic and secular traditions, its revolutionary ideology and conservative inclinations, and the cultural outlooks of its rural and working-class citizens.
The historian Ernest Renan, who pondered about national identity after France’s 1871 defeat in the Franco-Prussian War, has defined the nation as a “soul” made up of two parts.
One part, the “rich inheritance of memories,” is rooted in the past, while the other, related to the present and opening the way to the future, consists in the common will of citizens to build their public life together.
Renan gave priority to this will for a common life over any ethnic definition and set the French idea of the nation in direct contrast to the almost racial notion of people (Volk) that dominates the German tradition.
In this view, national identity, is a “spiritual concept” based on a common history and set of values.
Some of these values are rooted in a kind of secular Christianity, and others in the Enlightenment’s revolutionary beliefs about human rights, equality, the French language, secular schooling, and the idea that the state is responsible for the common interest and application of republican principles.
It is this view of national identity – one that transcends race, color, origin and religion – that is now disputed.
The identity crisis now roiling France is fueled by the conjunction of many factors: globalization, which produces uncertainty, the European Union, which curtails the freedom of national leaders, American strategic dominance, which has reduced France’s position in the world, and the rising Asian powers.
This represents a serious challenge to thinkers who sometimes ridicule the idea of the nation itself, arguing that we now inhabit a “post-national” world.
For them, national identity should be abandoned in favor of a European identity, even if the feeling of belonging to Europe is not deeply held among the peoples of the EU.
Instead, the link between identity and immigration, an old refrain of the far right, remains strong, and the issue has grown more heated because of France’s inability to develop an effective policy to integrate immigrants from Africa.
Making matters worse, while religion and culture have traditionally been restricted to the personal sphere in France, some religious demands have intruded into public life, as demonstrated by the disputes over Muslim girls’ wearing of veils in schools.
The problem of the link between national identity and cultural pluralism is now surfacing in nearly the same way in the United Kingdom, Holland, and Denmark – countries that, contrary to France, long ago chose a policy of multiculturalism.
In the United States, a country of huge immigration, communities can bring together a strong cultural identity and a deeply engrained patriotism.
It has been the same in France, which has been built by successive waves of immigrants.
But, contrary to the US, integration in France is not based on assimilation, but on a desire to promote homogeneity – the nation unified as “one and indivisible.”
Today, in a world changed by globalization, France must face the difficult challenge posed by its new immigrants: maintaining the principles at the core of French identity while meeting the desire of some of its new citizens to maintain their own identity, which may in fact oppose some of those principles.
Today’s debate over national identity arises from this tension, so it’s not surprising that it has become a central issue of the presidential campaign.
But what is at stake in that debate are values that not only built France, but that also have built and will continue to build Europe.
France’s Judicial Revolution
PARIS – A new and important acronym has entered the French political lexicon: QPC, which stands for the rather austere-sounding “Priority preliminary ruling on the question of constitutionality.”
Under QPC, which was part of the constitutional reforms that France implemented in July 2008, any citizen involved in legal proceedings can now contest the constitutionality of a legislative provision.
This is a far-reaching innovation.
France has long been characterized by Jean-Jacques Rousseau’s philosophy, which placed the law – the expression of the General Will – at the absolute top of the hierarchy of judicial norms.
As a result, a veritable allergy to assessing the constitutionality of any law has long held sway.
Not until Charles de Gaulle’s 1958 Constitution was even a limited assessment of a law by the Conseil Constitutionnel (Constitutional Council) allowed, and then only with extensive precautions.
Indeed, the Constitutional Council made its assessments a priori, one month after adoption of the law, and only four officials could initiate a review: the president, the prime minister, and the presidents of the National Assembly and the Senate.
This list was broadened in 1974 to include any 60 members of the National Assembly or the Senate, thus allowing the opposition to submit the laws adopted through parliamentary majority to some examination of their constitutionality.
But the idea that any citizen could challenge the constitutionality of legislation, as is possible in many European countries and the United States, was inconceivable.
The 2008 constitutional reform finally recognized this possibility.
But a double filter of safeguards was established: the jurisdiction before which the matter is brought, and the competent Supreme Court – either the Council of State [Conseil d’État] or the Final Court of Appeal – which has three months to decide whether to refer a case to the Constitutional Council.
One year after its implementation in March 2010, the reform has shown impressive results.
Of the 400 cases examined by both Supreme Courts, 120 were referred to the Constitutional Council, which has issued 102 rulings, including 22 striking down the challenged legislation.
The reform has allowed the Constitutional Council to reconsider a whole set of laws that had never before been submitted for constitutional review, mainly because they were drafted prior to 1958.
One of the most emblematic decisions concerned the code of criminal procedure, with the Council repealing several articles concerning the legal custody of defendants inside police stations.
Other decisions have dealt with taxation, social legislation, or electoral laws.
But nothing has done as much to cement the QPC’s standing as the recent motion submitted by a lawyer in the ongoing criminal proceedings against former President Jacques Chirac, who is charged with having created fictitious jobs at the Paris City Council when he was mayor.
The Court’s President complied with the lawyer’s motion to adjourn the proceedings until the Constitutional Council ruled on the constitutionality of the laws under which Chirac is charged.
We will find out in the coming weeks whether the Cour de Cassation (Court of Final Appeal) will agree to refer the matter to the Council.
France is thus joining the cohort of countries that, over the past half-century or so, have developed within their legal culture a judicial form of constitutional review of legislation.
Indeed, in June 2009, Germany’s Constitutional Court strengthened its political role by demanding that ratification of the European Union’s Lisbon Treaty be accompanied by a law warranting powers of co-decision to the German Parliament.
More recently, in October 2009, the United Kingdom, despite having no written constitution, replaced its supreme judicial body, which sat in the House of Lords, with a Supreme Court.
The recent legal revolution in France is no less important, even if it is still in a transitional phase.
With the QPC, the entire process of assessing the constitutionality of legislation has gained greater acceptance in French legal practice.
It is no longer the privilege of the political class: testing a law for its constitutionality has become a right of all citizens.
At the same time, after one year of implementation, the Constitutional Council has avoided a drift toward a “government of judges,” instead indicating a genuine desire for dialogue with other institutions, notably policymakers.
For example, when answering a request to deal with marriage and the right of homosexual couples regarding adoption, the Council refused to substitute itself for the legislature, which it considered the only competent body to rule on the matter.
And when the Constitutional Council does censure a law, it leaves Parliament the time it needs to review the decision and bring the law into compliance with the Constitution.
Thus, an equilibrium of sorts between constitutional review and a concern not to cause excessive legal instability has been found.
As the Constitutional Council gets closer to functioning like a Supreme Court, its membership, still heavily influenced by politics, will need to be reassessed.
But a huge step has now been taken towards anchoring all laws in the Constitution, which will strengthen the protection of all citizens’ rights.
France’s Presidential Reality Show
The Socialists’ anointment of Ségolène Royal’s as their presidential candidate is an important step on the road to the Fifth Republic’s eighth presidential election, which is set for April 22, 2007, with a second-round runoff two weeks later.
All candidates should be known by the end of January – the deadline for printing the ballots.
So, by that point, France’s four main political parties, two on the left and two on the right, must prepare their party manifestoes and choose candidates.
That, at least, is how the system is supposed to work in theory.
In practice, while the official campaign is supposed to last only two months (long enough in a democracy, in which candidates have to endure an unrelenting media barrage), the jockeying of potential candidates, together with the media’s appetite for a horse race, helped kick off the real campaign nearly a year and a half ago.
So today’s public debates have a somewhat surreal character, because the programs on which the candidates will stake their campaigns are still not developed.
In their absence, personality and style, not political programs, have proven decisive.
I am not sure this is good for democracy, but that’s the way it is.
Two such stylish personalities have so far commandeered the public opinion polls, and appear destined to meet in the second round.
On the right is Nicolas Sarkozy, the interior minister (and briefly the economy minister), whose political rise took place within the grab-bag framework of the Union for a Popular Movement (UMP).
The UMP is the political heir of Gaullism, but its ideological inconsistency is legendary – and reflected in party name changes every eight to ten years.
Sarkozy is philosophically a conservative, but an ultra-liberal on economic issues, making him totally foreign to the Gaullist tradition.
Preaching privatization and social repression, he has placed himself to the right of the right, hoping to take back the votes that the mainstream right has been losing to Jean-Marie Le Pen’s “fascistoid” National Front for the past 20 years.
Sarkozy imposed himself on the Gaullist movement against the will of President Jacques Chirac; indeed, he snatched the presidency of the UMP despite Chirac’s active opposition.
Much of the public likes his raw language and harsh criticism of the rest of the right, notably of Prime Minister Dominique de Villepin, but above all of Chirac.
He knows nothing about international affairs, but no one seems to hold it against him.
On the left, Royal, the Socialist president of the region of Poitou-Charentes, has scant government experience, serving brief stints as environment minister, family minister, and education minister.
The anger of the Socialist Party’s barons at Royal’s rise was amusing to observe.
She has yet to deal with the major problems of the day – financial instability, Europe’s sluggish growth, the Middle East – and she cannot avoid them during her campaign.
But, full of elegance and charm, and treating social problems with good sense and energy, she has topped public opinion polls for over a year.
So Sarkozy and Royal are universally expected to be the two leading candidates heading into the “High Noon” encounter of the second round.
But, judging from the past, this is not how French politics works.
Ever since de Gaulle, all candidates for the French presidency who started too early have lost.
Poher, Chaban-Delmas, Barre, Balladur, and I were picked out by the media and treated as candidates for more than two years before the election, whether declared or not, and we were all eventually beaten.
My own feeling is that the bombardment by the media is of such violence that the credibility of a candidate cannot endure for more than a few weeks.
Overexposure hurts.
So in this bizarre dance, where the big parties and important candidates know that it is better to start later, the real beneficiaries of today’s media circus are the candidates without any real chance of winning: a fascist, another extreme rightist, a communist, two Trotskyites, and a few other marginal personalities.
They are candidates only in order to benefit from two years of free publicity.
But those minor candidates underscore a deeper problem.
To be elected President of France, one needs more than charisma, a good program, and a strong political party.
One also must avoid the fragmentation that doomed the left in 2002, when none of its six candidates qualified for the second round, leaving Jacques Chirac, who had received 19% of the vote in the first round – a record low for a final winner ­– to defeat Jean-Marie Le Pen in the runoff with 82% of the vote.
The most openly conservative French government of the past decade was essentially elected by the left.
A repeat of this scenario seems possible: on the left, outside of the Socialist Party, there are already four announced candidates, and a fifth is likely.
On the right, Chirac’s antagonism toward Sarkozy makes it that another candidate will appear at some point, either Michele Alliot-Marie, the defense minister, or Chirac himself.
At this point, the main point to remember is that all of France’s last seven presidential elections have sprung a surprise.
The final result was never discernible in the polls more than six weeks in advance.
So, for the moment, the election is too far off to know or predict anything with certainty.
What we hear is idle speculation.
But at least the media are doing brisk business, and we are being entertained.
France’s Royal Visage
Ségolenè Royal has surged to the front of the pack of Socialists who aim to succeed Jacques Chirac as President of France.
Nobody would have bet a single euro on such a prospect a few months ago.
Until recently, Royal – who now is merely the head of one France’s 22 regional governments – was best known as the non-married partner of François Hollande, the Socialist Party leader.
Yet, according to the polls, she is the only left-leaning candidate who looks able to defeat Nicolas Sarkozy, the current Interior Minister and odds-on favorite to be the center-right’s standard bearer in the presidential election next May.
How did Royal rise so far and so fast?
One reason is that she is the only fresh face among those Socialists vying for the party nomination. Laurent Fabius, Martine Aubry, Dominique Strauss-Kahn, Jack Lang, and even Hollande are all former senior ministers who neutralized each other, while Lionel Jospin, the former Prime Minister, decided to put an end to his political career after his defeat in 2002.
Each of them has strengths and weaknesses, but none seems able to challenge Sarkozy.
Indeed, confronted with her lead, both Jospin and Hollande have dropped out of the race.
So there was a vacuum to fill, accompanied by a strong desire among the party faithful for revival.
Royal’s chief virtue is that she has not taken part in the numerous internal battles that infuriate socialist militants and voters, and her lack of direct association with the party’s leadership has enabled her to avoid blame for its mistakes.
That is why, far from being a disadvantage, her peripheral position is one of her main assets.
She has slim and politically minor ministerial experience – Environment Minister in 1992-1993, Deputy Minister for Secondary Education in 1997-2000, and Minister for Family Affairs in 2000-2002 – and has drawn attention mainly for her work on subjects related to daily problems, such as kids’ TV programs and mistreatment in schools.
But, while other politicians do not regard these matters as politically important, they mean a lot to most ordinary citizens.
That is why people tend to view her as a sincere politician, rather than one concerned only about personal ambition.
On security issues and education, Royal differs from the classical left, being something of a hardliner.
This, too, is an advantage in a country where security is the top priority for most people nowadays.
A mother of four children who proclaims to believe in traditional family values, she is attractive to right-wing voters, while her non-matrimonial relationship with Hollande makes her seem a quintessentially modern woman.
Moreover, being a woman is a great asset.
When disturbed by a question, she usually replies, “Would you have asked the same question to a man?” Ever since Laurent Fabius took a hit in the polls when he mocked her candidacy by asking, “Who will mind the children?”, her opponents have feared appearing misogynous when attacking her, and when they do criticize her, she immediately assumes the pose of innocent victim, unfairly bashed by schoolboy bullies.
As a political tactician, she has also been innovative, organizing her campaign on the Internet with a plan to write her program from the responses of users.
Her motto, “My program is yours,” could prove popular with citizens who, as in many other democracies, do not trust their political elite.
Even though, like the majority of France’s political class, she was educated at Ecole Nationale d’Administration (ENA), she spurns the language and habits of this elite factory.
Last but not least, she is attractive.
Photos of her in a swimming suit, taken by paparazzi during the summer, triggered much discussion across France.
But the game is not over.
The Socialist will decide on November 17th who will be their candidate.
Trailing her in opinion polls, the other contenders cite her lack of credibility on economic policy and international relations.
No one knows her opinion on the Middle East, terrorism, nuclear deterrence, and international security.
During the recent Lebanon war, she called for Bill Clinton’s intervention – an insufficient answer for many people.
Royal’s lack of program has been her strength, but it could yet be her undoing.
Eventually, she will be obliged to abandon her studied ambiguity, and she will probably pay a price for doing so.
Few voters will support someone whose political program is based only on education and defense of the family.
Some Socialists fear that, once nominated, she would not be able to confront Sarkozy in direct debates.
Moreover, opinion polls in France are fickle omens.
Since 1981, no poll favorite has won the presidency.
According to the polls, Valéry Giscard d’Estaing, not François Mitterrand, should have been elected in 1981.
In 1988, just months before the election, Raymond Barre (a former Prime Minister) was the arch-favorite, but did not even qualify for the second-round run-off.
A few weeks before the election in 1995, Jacques Chirac looked so weak that a journalist bluntly asked him on live TV whether it would not be better for him to give up.
And Jospin was considered the only possible winner in 2002, before finishing third, behind Chirac and Jean-Marie Le Pen.
But Royal is confident in her fate.
She is far from being a weak contender, and she is a fast learner with a strong campaign team.
If she can strengthen her program on foreign policy, she may yet open a new chapter in French political history.
France’s Third Man
Should we be watching the French presidential campaign with admiration or alarm?
Or perhaps a bit of both? It is undeniably a great “show” with all the ingredients of a Hollywood blockbuster, including a surprising plot twist: the emergence of a “Third Man,” François Bayrou.
Even if his victory remains unlikely, Bayrou must now be taken seriously.
First and foremost, he has found in Ségolène Royal and Nicolas Sarkozy two remarkable spokespersons for his candidacy.
The more Royal returns to the “classics” of the Socialist Party, and the more Sarkozy openly courts the extreme right, the more Bayrou’s popularity rises.
Indeed, persistent doubts among the French about Royal’s competence and Sarkozy’s character are the primary reasons for his dramatic rise in public opinion polls, from 7% support at the start of the campaign to 22% now.
The second reason for Bayrou’s spectacular rise has less to do with personalities and more with France’s national mood.
The very reason that led a majority of the French to say “no” to the referendum on the European Union’s draft Constitutional Treaty in May 2005 may lead them to vote for Bayrou, the most pro-European of all candidates.
Why this paradox?
A vote that meant saying “no” to the Constitutional Treaty in 2005 now means saying “no” to the leaders of the French left and right.
In the 2002 presidential election, frustration with the system fueled strong support for the extremes, with Jean-Marie Le Pen, the leader of the far right, qualifying for the second-round runoff.
In 2007, by contrast – and this constitutes real progress – a large segment of the French population is expressing its frustration with the system by being tempted to vote for the “extreme center,” i.e., Bayrou.
Bayrou has been in politics for a long time, including as a presidential candidate in 2002.
But, while his record as education minister is far from impressive, he has successfully reinvented his image in the last few months, becoming the “new man” of French politics.
He looks more reassuring than Sarkozy and sounds more competent than Royal.
This would not be enough for Bayrou in ordinary times, but today, on both sides of the political divide, opponents of the main candidates seem ready to join forces with him and betray their respective camps.
What makes Bayrou potentially so strong is the fact that widespread reservations about the two leading candidates are influencing the calculus of militants and politicians alike.
On the conservative side, Jacques Chirac now officially supports Sarkozy, but he may also secretly encourage his most loyal supporters to vote for Bayrou, even if there is no love lost between the two men.
On the left, the social democratic wing of the Socialist party, which backed Dominique Strauss-Kahn against Royal, may be tempted to align with Bayrou, too, owing to the prospect of a post-electoral alliance between the center left and the center right.
That said, surveys of the electorate demonstrate that a large proportion is still undecided, particularly among Bayrou’s supporters.
So it is too early to say whether Bayrou can reach the second round.
But if he does, he is likely to prove irresistible.
A Bayrou victory, which is unlikely but not impossible, would constitute a triple revolution.
It would lead first to the end of the Socialist Party created by François Mitterrand.
Following Lionel Jospin’s humiliating defeat in 2002, the Socialists simply would not survive a second consecutive failure to reach the second round.
Moreover, a Bayrou victory could signify the end of the conservative party created by Chirac, as well as of Charles de Gaulle’s Fifth Republic.
But de Gaulle’s legacy would most likely be snuffed out gently, with nostalgia for both Mitterrand and Chirac possibly proving very tempting for a people disaffected with the political system but desiring to be reassured.
France wants the illusion of change, but is continuity what she truly desires?.
Finally, while this election was expected to usher in a new generation of politicians, few were prepared to anticipate the peaceful political tsunami that a Bayrou victory would bring.
Yet that would be the outcome if the attraction towards the center proves to be as irresistible for significant segments of the Socialists and conservative parties as it now seems .
France is a marvelously paradoxical country, so the search for novelty, if not modernity, could lead to the reinvention of the Fourth Republic, a parliamentary regime characterized by its weaknesses and instability.
That will depend in part on whether the perception of Sarkozy as a risky candidate will prove greater than the very real institutional risk represented by Bayrou.
There is maybe less of a French presence in the world today than there was twelve years ago when Jacques Chirac came to power, especially since the rejection of the Constitutional Treaty in 2005.
But the world’s interest in the French presidential campaign is greater than ever, and can be compared only with the attention generated by Mitterrand’s election in 1981.
Much may change in the few weeks left before the first round of the presidential vote.
But the campaign has now become a question of numbers: will the Third Man bury the Fifth Republic?
France\u0027s Threat to European Unity
At the end of the EU summit in Brussels on Monday--a meeting held to bridge the growing schism over the Union's policy on Iraq--French President Jacques Chirac committed a diplomatic blunder that rivaled US Defense Secretary Donald Rumsfeld's snide remarks about "old and new Europe."
Chirac chided EU candidate countries for behaving irresponsibly when they expressed support for America's effort to disarm Iraq with the use of force if need be.
The French president spoke of "infantilism" on the part of the candidate countries and said that they should have consulted first with the EU or else remained silent.
He also suggested that those countries were putting their chances of joining the EU in jeopardy.
But it is the EU itself that has been jeopardized by Chirac's outburst.
Many people in the candidate countries have long been convinced that their countries won't be admitted to the EU as equals.
Their objections range from lower farm subsidies for the candidate countries to the new decision-making mechanism in the EU that was adopted at the Nice summit two years ago.
Many people view that mechanism as being intended to strengthen the power of the EU's big members to the detriment of small countries.
Public opinion in some candidate countries was ambivalent about the EU even before Chirac's remarks.
Now, anti-EU attitudes could well become stronger.
Even stalwart supporters of EU membership may feel that their countries are not being treated as equals if they are bullied for holding a different opinion than bigger members.
At any rate, Chirac has handed Euroskeptics new ammunition with which to target the "no" vote ahead of EU membership referenda in the candidate countries later this year.
France and Germany fail to grasp that the candidate countries' support for the US is not aimed against "old Europe."
It is simply an expression of gratitude to the US for helping to bring down Communism and, more recently, for pressing ahead with NATO enlargement--despite objections from Russia--at a time when the EU was hopelessly dragging its feet with regard to its own enlargement.
Small states in the middle of Europe that have been victims of aggression throughout their history should not be blamed for believing that the US remains the only real guarantor of their security.
The EU, despite much talking, has not come close to developing a common defense policy.
Nor should France and Germany regard support for the US in the candidate countries as tantamount to approval of a war against Iraq or any other country.
Indeed, public opinion in all candidate countries is against a military action in Iraq.
The candidate countries have simply shown loyalty to the US at a time when the US needs them.
Perhaps more to the point, they feel that as long as a European security system is not in place, they may yet need the US to defend their security and independence.
The candidate countries are caught between a rock and a hard place.
If they refuse to express support for the US, on whom they rely for their security, the Americans will regard them as disloyal.
When they implicitly refused to support the anti-American stances of France and Germany in the current crisis, they were seen as disloyal to the EU.
But acknowledging the East Europeans' dilemma is in no way to forgive Chirac's arrogant blow against the unity of the Continent as a whole.
The most offensive--and dangerous--aspect of his statement was its equation of the EU with France and Germany.
He did not attack Great Britain, Spain, or Italy for their pro-American stance as he did for the East Europeans, which made his remarks sound all the more jarring to the ears of people in the candidate countries.
Even so, he seemed to be telling them that France and Germany come first, ahead of all other current members, to say nothing of the candidate countries.
Chirac's remarks highlight the EU's distance from its ideal of equality for all of its members.
Indeed, his broadside may effectively kill some of the reforms, currently being discussed at the EU Convention, which aim to streamline decision-making within the EU by creating institutions that would, in effect, give more power to countries with bigger populations.
Such reforms can work only if the big member states do not succumb to the temptation to use these mechanisms to bypass or ride roughshod over the interests of the small countries.
Chirac's outburst is so damaging to European unity precisely because it undermines this most fundamental kernel of trust.
अच्छी फसल, बुरी फसल
नैरोबी – आनुवांशिक रूप से परिवर्तित (जीएम) फसलों के आयात पर केन्या की पाबंदी एक ऐसे देश में परेशान करने वाली प्रवृत्ति को दर्शाती है जिसे कृषि क्षेत्र में नवाचारी की तरह देखा जाता है. यह कदम एक महाद्वीप के लिए उलटी दिशा में एक बड़ी छलांग है जिसे अपने यहां खाद्य सुरक्षा सुनिश्चित करने के लिए अकसर जूझना पड़ता है. कायदे से पूर्वाग्रह, भय और अटकलबाजी की जगह तर्कसंगत वैज्ञानिक सोच को अपनाना चाहिए. और इसमें केन्या अन्य देशों का नेतृत्व कर सकता है.
जीएम फसलें (जिन्हें आनुवांशिक रूप से इंजिनीयर्ड या बायोटेक्नोलॉजी फसलें भी कहा जाता है) बार-बार सुरक्षित साबित हुई हैं और सारी दुनिया में कृषि उत्पादकता बढ़ाने में उनका सफलतापूर्वक इस्तेमाल किया जाता है. पर नौकरशाही, दुष्प्रचार और गुमराह करने वाली सूचना लाखों अफ्रीकी किसानों को, जिनमें केन्या के किसान भी शामिल हैं, उस तकनीकी तक पहुंच बनाने से रोकती है जो उनके जीवन स्तर को सुधार सकती है और भोजन की कमी को दूर करने में मददगार है.
देश में अनाज की कमी के कारण दस लाख से ज्यादा केन्या वासियों को आज खाद्य सहायता पर निर्भर होना पड़ता है. देश में अकाल की अग्रिम चेतावनी देने वाली प्रणालियों के नेटवर्क ने भविष्यवाणी की है कि इस साल के अंत तक मक्का के पहले से ऊंचे दाम और बढ़ते रह सकते हैं. इससे खाद्य सुरक्षा और आर्थिक निष्पादन पर और जोर पड़ेगा. जहां केन्या अपने लोगों को भोजन उपलब्ध कराने और अपनी अर्थव्यवस्था को स्थिर करने के लिए जूझ रहा है, वहां जीएम तकनीकी का स्वागत किया जाना चाहिए. यह ऐसा साधन है जो कृषि उपज और आमदनी बढ़ा सकता है और किसानों, उपभोक्ताओं तथा पर्यावरण को लाभ पहुंचा सकता है.
मुट्ठी भर देशों ने, जो जीएम फसलें उगाते हैं, महत्त्वपूर्ण लाभ अर्जित किए हैं. उदाहरण के लिए, दक्षिण अफ्रीका में लाई गई मक्का, सोयबीन और कपास की जीएम किस्मों से 1998 से 2012 तक किसानों की आमदनी एक अरब डालर से अधिक बढ़ाने में मदद मिली है. यह वृहत् तौर पर मक्का की जीएम किस्मों का नतीजा है कि सालाना उपज 32% तक बढ़ी है. और आज देश में मक्का के कुल रकबे में 90% जीएम मक्का का हिस्सा है. अवश्य ही ऊंचे उत्पादन के बावजूद दक्षिण अफ्रीका मक्का का पर्याप्त निर्यात नहीं कर पाता है कि दुनिया की मांग को पूरा किया जा सके.
इसी तरह बुरकीना फासो के किसान अब कपास की जीएम किस्म उगाते हैं जो प्राकृतिक रूप से विनाशकारी कीटों का प्रतिरोध करती है और उसे महंगे कीटनाशकों की कम जरूरत पड़ती है. पारंपरिक कपास छोड़ कर जीएम किस्म अपनाने से उपज 18% से अधिक बढ़ी है और किसानों को प्रति हेक्टेयर 61 डॉलर अधिक आमदनी होने लगी है. इससे वर्ष 2013 में ही कृषि आमदनी 1.2 अरब डॉलर बढ़ गई है.
कृषि तकनीकी अपनाने में अगुआ बन कर केन्या के किसान भी समान लाभ ले सकेंगे इसमें कोई संदेह नहीं. केन्या में एक-तिहाई खाद्य उत्पादन छोटे किसानों द्वारा किया जाता है. ये वही किसान हैं जो दुनिया में 90% जीएम फसलें उपजाते हैं. केन्या वासी उम्मीद है कि कीट-प्रतिरोधी मक्का जैसी नई जीएम किस्मों को उगा कर भारी लाभ ले सकते हैं जिनका स्थानीय वैज्ञानिकों द्वारा विकास किया जा रहा है.
इसके अलावा केन्या उन गिने-चुने अफ्रीकी देशों में से एक है जिनके यहां मजबूत नियामक तंत्र सक्रिय है जो फसलों की नई किस्मों की समीक्षा कर सकता है और उन्हें मंजूरी दे सकता है. केन्या के बायोसेफ्टी एक्ट, 2009 के अधीन नैशनल बायोसेफ्टी ऑथोरिटी (एनबीए) की स्थापना की गई, जो इस महाद्वीप में इस प्रकार का पहला निकाय है. परंतु, इस क्षेत्र में पहले पदार्पण करने के बावजूद केन्या में जीएम फसलों के खिलाफ अनावश्यक रूप से राजनीतिक लड़ाई लड़ी जा रही है. सन् 2012 में वहां की कैबिनेट ने एनबीए से परामर्श किये बगैर जीएम फसल के आयात पर पाबंदी लगा दी. यह निर्णय एक ऐसे अध्ययन पर आधारित था जिसकी व्यापक आलोचना हुई और बाद में जिसे बंद कर दिया गया. इस अध्ययन में जीएम फसलों को कैंसर पैदा करने वाला बताया गया था. यह दावा झूठा साबित हुआ.
हाल ही में केन्या सरकार ने जैव प्रौद्योगिकी की जांच करने के लिए कार्यबल की नियुक्ति की थी. इसके निष्कर्ष अभी सार्वजनिक नहीं किये गए हैं. पर कार्यबल के अध्यक्ष द्वारा जीएम फसलों के विरोध में की गई टिप्पणियों से इस मुद्दे पर और भ्रम पैदा हो गया है. इससे किसानों, वैज्ञानिकों और आम जनता के उस वक्त असमंजस में पड़ने का खतरा है जब जीएम फसलों की सबसे ज्यादा जरूरत है.
राजनीति और नौकरशाही के चलते आबादी का पेट भरने का एक अच्छा मौका यूं ही जाया हो रहा है. और दुर्भाग्यवश केन्या अफ्रीका में एकमात्र ऐसा देश नहीं है. उदाहरण के लिए युगांडा और नाइजीरिया में भी बेहद जरूरी जैव सुरक्षा विधेयक अधर में लटक गया है.
दरअसल समस्या जीएम विरोधी कार्यकर्ताओं के उस छोटे से समूह के साथ है जो ‘नैतिक’ आधार पर इस तकनीकी पर एतराज जताते हैं. वे आमतौर पर दावा करते हैं कि जीएम फसलें असुरक्षित हैं. पिछले दो दशकों के दौरान वैज्ञानिक समुदाय द्वारा उनके इस दावे को मयसबूत खारिज भी किया जा चुका है. विश्व स्वास्थ्य संगठन भी यह साबित कर चुका है कि ‘ऐसे (जीएम) खाद्य पदार्थों के सेवन से मानव स्वास्थ्य पर कोई प्रतिकूल प्रभाव नहीं दिखाई देता है.’ अवश्य ही प्रत्येक नई जीएम फसल को स्वास्थ्य, पर्यावरणीय और कारगरता के कठोर मानदंडों पर खरा उतरना चाहिए.
अच्छा प्रयोजन होने के बावजूद ये कार्यकर्ता कुछ नीति-निर्माताओं के साथ मिलकर गलत सूचनाओं के आधार पर पूरे अफ्रीका में कृषि प्रौद्योगिकी और उत्पादकता को पीछे ले जा रहे हैं. निश्चित तौर पर जीएम फसलें रामबाण नहीं हैं. पर वे खाद्य सुरक्षा और आर्थिक सम्पन्नता हासिल करने में महत्त्वपूर्ण उपकरण जरूर हैं.
यही कारण है कि फसल की नई किस्मों के स्वास्थ्य व सुरक्षा के बारे में निर्णय वैज्ञानिक प्रमाणों पर आधारित होने चाहिए ना कि उनके बारे में राजनीतिक पूर्वाग्रहों और निराधार ‘नैतिक’ तर्कों से फैसला लिया जाए. नीति निर्धारण में प्रमाण-आधारित रवैया अपना कर केन्या के अधिकारीगण अपने देश में लाखों जीवन सुधार सकते हैं और समूचे महाद्वीप के लिए एक अमूल्य मिसाल भी कायम कर सकते हैं.
François Hollande Meets the World
PARIS – When François Hollande, fresh from his election as France’s next president, was asked by a journalist which language he would use when he meets US President Barack Obama for the first time, his answer was revealing. “I speak English more fluently than the former president,” the Socialist leader insisted, referring to the outgoing Nicolas Sarkozy.
In proclaiming his mastery of the lingua franca of global affairs, Hollande was asserting himself as a modern statesman, while also suggesting that France will remain as influential as possible on the international scene.
Indeed, he was proclaiming his commitment to internationalism and multilateralism.
In order to remain a country that punches above its weight diplomatically, it is in France’s interest to operate through international organizations rather than to rely on bilateral relationships.
Hollande is also aware that, for historical and cultural reasons, France’s international role must be different from that of other countries.
In his book Changer de destin (Changing Destiny), published in February, he affirms that France’s message will continue to be a universal one – a stance reminiscent of the birth in 1789 of the French Republic, which, like the United States, was originally conceived as the triumph of liberty and democracy.
Unlike in France, however, the word “socialist” is an epithet for most Americans.
But this could be a source of strength for Hollande, who, as a new leader with no foreign-policy experience, will have to prove his ability through action.
And here, Obama, in particular, will soon understand that Hollande has no intention of bringing sweeping change.
On the contrary, his intention will be to appear as a reliable and unsurprising partner.
Hollande is unlikely to be less friendly with America than was Sarkozy, regarded by many as France’s most pro-US president.
Hollande supported the military intervention in Libya in 2011, and has joined the condemnation of Syrian President Bashar al-Assad’s regime.
One of his close political allies recently declared that should the United Nations Security Council approve military intervention in Syria, France “could envision” participating in that effort.
Hollande also supports a tough line on Iran and, regarding the Israeli-Palestinian conflict, his book indicates that he subscribes to the “Clinton parameters” – two states with secure borders and a status for Jerusalem that is acceptable to both sides.
With regard to relations between France and the Arab world, one can be certain that Hollande would agree with the pro-engagement thrust of Obama’s 2009 Cairo speech.
Last but not least, Hollande is not likely to call into question Sarkozy’s decision in 2009 to reintegrate France into NATO’s military command.
That decision remains controversial in France, including among Socialists, but Hollande is well aware of the weaknesses of a European defense policy that simply cannot compete with NATO.
Nevertheless, at the NATO Summit in Chicago at the end of May, Hollande will confirm his pledge to withdraw French troops from Afghanistan by the end of 2012, two years ahead of the NATO timetable (though he recognizes the need to negotiate the practical details).
This will be an important test of Hollande’s ability to deal effectively with allies.
The second test of his ability to negotiate with other leaders will be within Europe.
One of the highest-flying proposals of his electoral platform was a call for renegotiation of the European Union’s new “fiscal pact,” endorsed by all member states with the exception of the United Kingdom and the Czech Republic.
Inspired by German Chancellor Angela Merkel, approval of the pact was a precondition for Germany’s participation in the financial rescue plan for Greece and the other distressed eurozone countries.
Hollande’s proposal was initially regarded as lèse-majesté against Germany.
Now all European leaders – from Mario Monti in Italy to Mariano Rajoy in Spain and Elio Di Rupo in Belgium – agree on the need to revive the European economy.
So do Mario Draghi, the president of the European Central Bank, Jose Manuel Barroso, the president of the European Commission, EU Council President Herman Van Rompuy, and, indeed, Merkel herself.
Merkel and Hollande will discuss the main question – how to spur economic growth without increasing public debt – on May 15 in Berlin.
While Merkel opposes Hollande’s proposal to create Eurobonds with a view to financing industrial projects, they cannot afford to waste time in reassuring jittery markets with a message of cohesion.
Merkel has already welcomed Hollande’s ideas for a growth plan for Europe.
Hollande, too, will have to make concessions.
For the French, as for all Europeans, the EU is not a foreign entity, and its decisions are an integral part of domestic policies.
In this regard, Hollande has a chance to succeed on the international scene as a truly pro-European leader.
Only a stronger Europe will ensure fair trade with emerging countries, especially China.
Only a stronger Europe will at last implement the principle of reciprocity in order to protect European businesses and prevent them from relocating, which has been the main cause of unemployment.
In a recent interview, Hollande declared that, “France is not just any European country, and its president is not just any world leader.”
The French are happy to hear that.
But that affirmation also represents Hollande’s main challenge: ensuring that this remains true in the context of twenty-first-century globalization.
François Hollande’s Wrong Idea of France
LONDON – France’s new president, François Hollande, has achieved a remarkable series of political victories – at home and in Europe – since his election in May.
Unfortunately, his streak of success will inevitably call forth an economic reckoning that will shock France’s apparently unsuspecting citizens and doom the French elite’s approach to the “construction of Europe.”
Since winning the presidency, Hollande has won a parliamentary majority and pushed Germany toward accepting joint liability for eurozone countries’ debts.
But forebodings of crisis have become widespread in French business and economic circles.
But the real danger – which even Hollande’s sternest critics may be underestimating – is not so much his individual policy failings (serious though they may be) as his approach to the twin challenges posed by France’s economic imbalances and the eurozone crisis.
On each front separately, he might manage to muddle through; together, they look likely to cement France’s loss of competitiveness.
Declining competitiveness is best captured in a single indicator: unit labor costs, which measure the average cost of labor per unit of output.
In a monetary union, discrepancies in wage growth relative to productivity gains – that is, unit labor costs – will result in a chronic accumulation of trade surpluses or deficits.
Since the euro’s introduction, unit labor costs have risen dramatically faster in France than they have in Germany.
According to Eurostat data published in April 2011, the hourly labor cost in France was €34.2, compared to €30.1 in Germany – and nearly 20% higher than the eurozone average of €27.6.
France’s current-account deficit has risen to more than 2% of GDP, even as its economic growth has ground to a halt.
The high cost of employing workers in France is due not so much to wages and benefits as it is to payroll taxes levied on employers.
The entire French political class has long delighted in taxing labor to finance the country’s generous welfare provisions, thus avoiding excessively high taxation of individuals’ income and consumption – though that is about to come to an end as Hollande intends to slap a 75% tax on incomes above €1 million.
This is a version of the fallacy that taxing companies (“capital”) spares ordinary people (“workers”).
Of course, such taxes on firms are always passed on to households – usually through straightforward price hikes, and, in France, also through unemployment.
High tax rates on labor – together with rigid regulation of hiring and firing – make employers extremely reluctant to recruit workers.
As a result, France has had chronic long-term unemployment – forecast to reach 10.5% by 2013 – for many years.
Hollande’s predecessor, Nicolas Sarkozy, tried to address this problem.
He exempted voluntary overtime pay from employment tax and shifted some of the burden of labor taxation onto consumption (via a hike in VAT).
But Hollande quickly reversed both of these reforms.
The repeal of the tax break on overtime reflects another economic fallacy to which French Socialist politicians are deeply attached: the “lump of labor” notion that underlay the most disastrous of their economic policies – the 35-hour workweek, introduced in 2000.
The idea behind the policy is that demand for labor is a constant, and that this fixed number of aggregate working hours required by employers to meet final demand can be spread more evenly among workers to reduce unemployment.
Such measures, designed to create jobs by freeing up work hours, are futile at best, and are often detrimental.
French Socialists should recall their school physics lesson about communicating vessels: when a homogeneous liquid is poured into a set of connected containers, it settles at the same level in all of them, regardless of their shape and volume.
Generating more “liquid” (jobs) requires not discouraging the entrepreneurs on whose activities sustainable job creation ultimately depends.
The effect of fiscal and regulatory pressure on employment is to encourage French firms to invest and hire outside France.
Hollande’s apologists praise his gradualist and consensual approach to addressing the economy’s structural distortions.
They argue that his penchant for setting up consultative commissions is the best way to forge the consensus required for structural reform, whereas Sarkozy’s combative style was counterproductive.
Even banishing skepticism and assuming that Hollande could over time persuade his supporters to embrace competitiveness-boosting policies, the eurozone crisis is denying France the time that such gradualism requires.
A simple, effective way to buy time would be to abandon the euro and restore competitiveness through a devalued national currency.
But this expedient is incompatible with mainstream French politicians’ devotion to the “European project,” which amounts to a projection of French soft power; indeed, building Europe lies at the heart of the French establishment’s version of what Charles de Gaulle used to call “a certain idea of France.”
For mainstream French politicians, renouncing the European project to buy the time required to restore competitiveness is as unthinkable as is the logical alternative: an all-out push for full European political union.
This would reestablish monetary sovereignty and create a normal central bank (like the Federal Reserve or the Bank of England) at the European level.
But it would also mean abandoning France’s republic in favor of a federal European government – anathema to that “certain idea of France.”
The combination of gradualism (on the most generous interpretation) in domestic economic reform and the paralyzing effect of the eurozone crisis will lead to a massive shock.
Remaining in a currency union with the much more competitive German economy will require wrenching and rapid reforms, for which Hollande’s tepid approach will fail to prepare the complacent French.
The result will be even more support than was seen in last April’s presidential election for extremist political parties that reject both Europe and competitive market capitalism.
Freedom, Blasphemy, and Violence
PARIS – Violent attacks on US diplomatic outposts across North Africa and the Middle East have once again raised the question of how to respond when Americans and other Westerners engage in provocative expression that others consider blasphemous.
Though the attack on the US diplomatic mission in Benghazi, in which Ambassador J. Christopher Stevens and three members of his staff were murdered, may well have been planned, as the State Department has maintained, the killers clearly exploited the opportunity created by outrage at an anti-Muslim film produced in the US.
There have been several episodes in recent years in which perceptions of blasphemy have led to threats of violence or actual killings, starting with the publication of Salman Rushdie’s novel The Satanic Verses more than two decades ago, and including the Danish newspaper Jyllands-Posten’s cartoons of the Prophet Muhammad.
In the Netherlands, Theo Van Gogh was murdered on an Amsterdam sidewalk in retaliation for his film Submission, which criticized Islam’s treatment of women.
Even some who defended freedom of expression in those cases may be disinclined to do so now.
This time, the film that triggered riots in Cairo, Benghazi, Sana, and elsewhere is so crude and inflammatory as to seem clearly intended to elicit the outrage that it produced.
Yet judgments about literary or artistic merit should not be the basis for decisions about freedom of expression.
The proclivity of some elsewhere to react violently to what they consider blasphemous cannot be the criterion for imposing limits on free expression in the US, the United Kingdom, Denmark, or the Netherlands (or anywhere else).
It is important to differentiate blasphemy from hate speech.
What is objectionable about hate speech, and makes it punishable by law in countries around the world, is that it is intended to incite discrimination or violence against members of a particular national, racial, ethnic, or religious group.
Even in the US, where freedom of expression is zealously protected, such incitement may be prosecuted and punished in circumstances in which violence or other unlawful behavior is imminent.
By contrast, in cases of blasphemy, it is not the speaker (or the filmmaker) who is directly inciting discrimination or violence.
Rather, it is those who are enraged by the expressed views who may threaten or actually engage in violence, either against the speaker, or against those, like US government officials, whom they believe have facilitated (or failed to suppress) the blasphemer’s activities.
It is, of course, impossible to be certain what will arouse such anger.
At times, as seems to be the case with the video that triggered the current protests in cities across North Africa and the Middle East, a long period may elapse between the offensive material’s dissemination and an outpouring of popular rage.
The rage, it seems, is not spontaneous; rather, it is an artifact of local or regional politics.
This does not diminish the irresponsibility of those who gratuitously engage in such offensive behavior, but it does make clear that outrage against their actions should not be a basis for abandoning our commitment to freedom of expression.
What, then, is to be done?
The only appropriate response is the one chosen by the US Embassy in Cairo, which denounced the film and said that the American government condemns those who offend others’ religious beliefs.
And Secretary of State Hillary Clinton reinforced the condemnation when she called the film “disgusting and reprehensible.”
Plainly, that was not enough to deter those who sought an occasion to attack the US Consulate in Benghazi.
If they had not grasped this opportunity, they would have sought another.
Simply condemning a film will not mean much to those who believe that, as may be true in their own countries, a powerful government like that of the US can simply decide whether a film should be made or broadcast.
Though the statement from the US Embassy in Cairo has become the target of political criticism, it warrants praise for exemplifying American values. Contrary to the criticism, condemnation of the film is not censorship.
While rejecting censorship, the US government should not renounce its authority to speak sensibly and condemn an appalling and apparently intentional provocation that produced such tragic consequences.
Freedom, Not Democracy, For Russia
Twenty years ago this month, Mikhail Gorbachev began his policies of perestroika and glasnost , which led to the end of the Cold War.
Now, however, a new chill has entered relations between Russia and the West.
President Vladimir Putin is frequently criticized for taking Russia in the wrong direction.
The very people who in 2000 called Putin a man they could do business with are having second thoughts.
People once fascinated by Putin now publicly rebuke him.
Putin is shooting back, accusing the West of trying to weaken and dismember Russia.
As politicians in the West compare him to Mugabe or Mussolini, Putin’s Kremlin aides invoke the Munich appeasers who tried to push Hitler eastward.
Putin himself once blamed the West for trying to channel Muslim radicalism toward Russia.
Why this sharp change in tone?
Initially, most nations exiting from Communism reached out, almost instinctively, to their immediate pre-Communist period.
The Baltic states revived their constitutions of the 1930’s, the Armenians and the Azeris revived their political parties of the late 1910’s, and Eastern Europe, with the exception of East Germany, which reunited with the Federal Republic, suddenly became once again Mitteleuropa.
This revival of the past was a big worry for West Europeans and Americans, who feared the re-emergence of historical enmities and tensions, which did indeed come to the fore in the former Yugoslavia.
These fears underpinned the dual enlargement of NATO and the European Union.
Russia, for its part, also went backwards, to tsarism.
Initially, this was not obvious to all.
Boris Yeltsin was friendly to the West, tolerated open debate, and appointed a few individuals as oligarchs.
He was given the benefit of the doubt, and his anti-Communism was elevated to a surrogate of democracy.
Russia was doubtless freer than ever before, in virtually all respects, good and bad.
But the picture Russia presented to others and to itself was massively distorted.
Parliament was lively, but essentially powerless.
The electronic media were routinely critical of the authorities, but were owned by a handful of people and depended on their owners’ taste, interests, and fate.
Yeltsin’s handover of power to Putin, like a king with his dauphin, tells us more about his regime than almost anything else.
Putin’s regime is openly tsarist.
His Duma is much like the Duma of Nicholas II, docile and acquiescent.
His governors are also like Nicholas’s; many are governor-generals.
The capitalism now being practiced is dependent on the authorities, and plays no independent role in politics.
Of course, this does not mean that there is no difference between the Russia of Vladimir Putin and Nicholas Romanov.
What it means is that Russia is back on its historical path of development, back at the point where things started to go wrong.
The domestic situation, the global environment, and the historical memory of its people all militate against Russia being bound to relive its own tragic history.
But Russia is like Western Europe, in the sense that it will have to advance in stages.
It is not like Central Europe, which could leapfrog over some of them by jumping on the NATO/EU springboard.
This means that we need to be more careful in using the language of democracy when talking about Russia.
Democracy almost everywhere has been a fairly late child of capitalism, for it requires a self-conscious middle class to take root and flourish.
This can only be produced by successful and sustained capitalist development.
Russia is generating it, but the process will take time.
Meanwhile, politics belongs to the elites.
If Russia is to move forward, its high and mighty must agree about who owns what, who makes the rules, and how to change the rules.
Rather than calling for democracy, this calls for a genuine constitutional rule of law.
In other words, the task is to turn tsarist Russia into a version of the Kaiser’s Germany.
This won’t be easy, but there are good reasons for optimism.
With so much being written about Putin’s Russia, the rest of the country is often overlooked.
Putin’s Russia is essentially about the Kremlin and the bureaucracy.
They are dominant, no doubt, but they are not Russia in its entirety.
The millions of consumers exercising their right to choose in the rapidly growing supermarket chains; the planeloads of business travelers converging on London, Zurich, and Frankfurt daily; the holiday-makers who, having lost the Crimea, have rediscovered the Mediterranean – all are part of a Russia beyond Putin’s Russia, one that will grow and develop even when Putin is history.
So Russia’s current agenda must be more about freedom than democracy.
Even now, Russia, though undemocratic, is largely free.
What it needs is to institutionalize that freedom by building a modern state to replace the antiquated tsarist system.
It also needs a modern civil society to consolidate its multi-ethnic post-imperial population.
This calls for a kind of liberalism that is now lacking in Russia, one that stands for freedom, reform, and the nation-state.
Neither the government nor the current opposition possesses it, which means that Russians must look beyond Putin’s Russia.
As for the West, it is fruitless to try to bring Putin and his team back to democracy, where Russia does not belong, or to punish Russia with sanctions, which won’t work.
The West must recognize where Russia stands on history’s timeline and not seek to wish this away.
The political gap can be narrowed only by indigenous capitalist development.
In the meantime, America and Europe should base their policies toward Russia on mutual interests, not the expectation of mutual values.
Freedom of Religion or Freedom of Speech?
PRINCETON – Last month, the United Nations Human Rights Council adopted a resolution condemning “defamation of religion” as a human rights violation.
According to the text of the resolution, “Defamation of religion is a serious affront to human dignity” that leads to “a restriction on the freedom of [religions’] adherents.”
The resolution was originally proposed by the 56-nation Organization of the Islamic Conference (OIC), and was put to the Human Rights Council by Pakistan.
It supports that it was aimed at such things as the derogatory cartoons of the prophet Mohammad published in a Danish newspaper three years ago.
Germany opposed the resolution.
Speaking on behalf of the European Union, a German spokesperson rejected the concept of “defamation of religion” as not valid in a human rights context, because human rights belonged to individuals, not to institutions or religions.
Many non-government organizations, both secular and religious, also opposed the resolution.
Ronald Lauder, president of the World Jewish Congress, said that that body saw the resolution as weakening “the rights of individuals to express their views.”
This seems like a sound argument.
While attempts to stir up hatred against adherents of a religion, or to incite violence against them, may legitimately be suppressed, criticism of religion as such should not be.
The resolution is non-binding, but if nations were to enact laws putting it into effect, there can be no doubt that it would interfere with freedom of expression.
For a start, what counts as “defamation of religion” is contested.
For example, the OIC said in its statement that “Islam is frequently and wrongly associated with human rights violations and terrorism.” Are those associations wrong?
If the OIC wishes to change many people’s perception that Islam violates human rights, suppressing freedom of speech is hardly the best way to go about it.
The way to change such a perception would be to marshal evidence against it, and to make the case that human rights – including the rights of women – are as well protected in Islamic countries as they are in non-Islamic countries.
To demonstrate that it is wrong to associate Islam with terrorism, the OIC might begin to compile statistics on the religious affiliations of those who engage in terrorism.
By contrast, suppressing the freedom of speech of Islam’s critics merely gives rise to the suspicion that evidence and sound argument cannot show their arguments to be mistaken.
Coincidentally, in the same week that Germany and the World Jewish Congress rejected the idea that defamation of religion is an affront to human dignity, and upheld the right to freedom of expression, Germany’s highest court issued its ruling on a case brought by a Jewish organization, and two Jewish individuals. The court ruled against the right of the United States-based animal rights group People for the Ethical Treatment of Animals to exhibit posters that juxtapose photographs of victims of the Holocaust with photographs of animals in factory farms and at slaughterhouses.
The posters bear the heading: “To Animals, All People are Nazis” – a line from the Polish-born Jewish writer Isaac Bashevis Singer.
According to the court, Germany’s laws on freedom of speech did not protect PETA’s campaign, because to make “the fate of the victims of the Holocaust appear banal and trivial” was an offense against human dignity.
PETA was, of course, not arguing that Holocaust victims’ fate was banal or trivial.
On the contrary, it was using the Holocaust – which we would all agree was utterly horrific – to suggest, as Isaac Bashevis Singer did, that there are parallels between the way the Nazis treated Jews and the way we treat animals.
The conclusion PETA wants us to reach is that both the Holocaust and the mass confinement and slaughter of animals are horrific.
A free society should be open to discussing such a claim.
Irrespective of the merits of PETA’s campaign, however, those who stood up for free speech at the UN Human Rights Council should be able to see that the fact that some forms of speech cause offense is not sufficient reason to censor them.
If PETA is not allowed to state its case against our abuse of animals in the way that they judge best, because doing so might offend some people, then criticism of religion could also be prohibited on the same grounds.
If, on the other hand, a religion’s adherents have no right to protection against criticism of their religion, then, even in Germany, Holocaust victims and their descendants (I am one) should not be protected against advertising campaigns that, though not intended to incite hatred or violence, may cause them offense.
Freedom, Security, and Terrorism
America currently finds itself in the midst of a confused search for a central principle around which to organize its foreign and defense policies.
For almost a half-century, until the collapse of the Soviet system in the early 1990's, containing communism was the core doctrine guiding US national security policies.
The ``war on terrorism'' has come to serve as a handy substitute.
But it fails to provide a solid (or particularly admirable) foundation upon which to base America's role in the world in the 21 st century.
The search for a new grand strategy, or at the very least a new organizing principle, is confounded by the revolutionary times in which we live--an unprecedented era of several simultaneous revolutions, all of which are epic and historic.
Globalization is internationalizing markets, finance, and commerce, while the information revolution is changing the way we work, learn, and communicate.
Both revolutions are benefiting the developed, Western world but further dividing the ``haves'' from the ``have-nots,'' in this case those without finished products, services, or resources to trade or without access to new technologies.
They are also contributing to a third revolution, the erosion of the sovereignty--and thus the authority--of the nation state.
The failure of states, especially those artificially constructed by great powers after wars or cobbled together by older colonial powers, is becoming a serious international issue and promises to remain so.
As the authority of the state erodes, the fourth, and potentially most dangerous, revolution emerges: the transformation of war and the changing nature of conflict.
This is the revolution that arrived at America's doorstep on September 11, 2001.
There were, of course, many warnings.
The first attack on the World Trade Center itself occurred in 1993. Then came the bombings of the US barracks in Saudi Arabia in 1996, the US embassies in Kenya and Tanzania in 1998, and the USS Cole in 2000.
On September 15, 1999, the US Commission on National Security for the 21 st Century issued a report entitled ``New World Coming.''
Its first conclusion was that: ``The United States will be attacked by terrorists using weapons of mass destruction, and Americans will lose their lives on American soil, possibly in large numbers.''
The same Commission, on which I served, urged the new President, George W. Bush, on January 31, 2001, to prepare the nation for these attacks by consolidating dispersed federal government agencies into a new national homeland security agency.
Our warnings and recommendations were not heeded.
Three thousand people died in the first terrorist attack in America in the new century.
Everyone agrees that others will follow.
Many experts believe that, two years later, the US has still not begun to take the urgent steps necessary to defend itself against further attacks.
Even the tradeoff of liberty and security has been little discussed relative to its importance.
This is probably because most of those inconvenienced by preliminary counter-terrorism measures in the US are Arab-Americans, while the broader American community has not been bothered.
But the US is, and prides itself on being, an advanced liberal democracy where individual liberties are guaranteed by a written constitution and bill of rights, and whose freedoms are protected by an independent judiciary established as an equal third branch of government.
America's legal community, and some in the wider society, are beginning to awake to the complex issues confronting the US as it seeks to protect itself from outside attacks for the first time since 1812.
Should the national government be able to monitor the computer and telephonic communications of citizens and residents?
Should suspects be placed under surveillance because they belong to a particular religious or ethnic community?
Should due process--including habeas corpus , the right to counsel, and the right to trial by jury--be suspended for ``enemy combatants'' or others who are simply suspects?
These and other questions go to the very nature of democracy and the values of the American Republic.
They will not become any easier to answer over time.
Indeed, they threaten to become much more frequent and troubling.
One of the great issues for democratic societies in the New World of the early 21 st century is achieving a proper balance between security and liberty.
Err too far on the side of liberty and the society is open to attack.
But creating a high-security state hands terrorists a victory by choking democratic freedom.
Policymakers with the wisdom of Solomon, of whom there are precious few, are required.
In this search for the right balance, democracy knows no boundaries.
The US might learn from the experience of other nations and share its experience with them.
Freedom belongs to no particular nation or system.
It is a universal good that all must seek.
Whether threatened by fascism, communism, terrorism, or any other form of fanaticism, freedom must defend itself in ways that do not become self-destructive.
In this age of profound and multiple revolutions, perhaps the greatest revolution will involve the invention of new ways to make democratic freedoms survive and flourish.
Free-Market Babies?
LONDON – Does India need a new independence struggle?
The fight this time would not be against British colonialism, but rather against the United Kingdom’s approach to regulating reproductive medicine.
At a time when India is considering a sort of matchmaking service for Western couples seeking to hire Indian surrogate mothers, the UK government has announced the abolition of two leading medical regulatory agencies.
Meanwhile, as these countries move farther down the road to free markets in reproductive medicine, France is debating all of its bioethics laws – and continuing to stand up for a different model, focused on social justice and protection of vulnerable women.
There is an alternative simply to letting the market decide, the French Assembly insists.
At some point, many countries are likely to find themselves embroiled in similar debates and controversies over reproductive rights and obligations.
So it is necessary to clarify what is at stake in how we regulate – or de-regulate – in vitro fertilization (IVF), egg sales, and surrogacy.
It may come as a surprise to American observers, in particular, that the UK approach could be considered “free market.”
After all, the UK forbids outright payment for eggs, whereas in the United States, a highly differentiated market has grown up around “consumer demand.”
And the UK has a national regulatory agency for IVF, whereas the US has a patchwork of state regulations (or a lack thereof).
But the UK’s Human Fertilization and Embryology Authority (HFEA) might not be around for much longer.
Prime Minister David Cameron’s government announced last July that it intended to abolish the HFEA by 2014, along with the Human Tissue Authority, which deals with non-reproductive tissues.
Already, the HFEA appears to be attempting to preempt the government by softening its regulatory touch.
Last month, the HFEA finished a consultation on increasing the level of “expenses” payable for eggs used in IVF.
European law forbids outright payment for eggs, but the Authority suggests that increasing “expenses” considerably would not constitute an impermissible inducement.
The HFEA is merely “removing disincentives,” not “creating incentives.”
You could be forgiven for missing the difference.
Proponents of the Assisted Reproductive Technologies Regulation Bill 2010, now before the Indian Parliament, employ a similar rhetorical twist.
They say that the bill actually protects surrogate mothers – for example, by limiting the number of pregnancies they can undergo.
But the law would make surrogacy contracts legally binding, requiring the mother to give up the baby even if she changes her mind.
Opponents say that the agencies making the arrangements will be the biggest winners – that the huge profits they reap will dwarf the fees paid by foreign couples to the women bearing their children.
As N.B. Sarojini and Aastha Sharma wrote in the Indian Journal of Medical Ethics, “The Bill actively promotes medical tourism in India for reproductive purposes.”
France, like most European countries, has a problem with reproductive tourism: a yearly shortage of about 700 egg donors sends some couples over the Pyrenees to Spain, where private IVF clinics pay providers more in “expenses” than the UK allows.
Even so, the draft bill continues to prohibit payment for eggs.
And it’s not just France’s official ethics committee that takes an anti-commodification stance.
The French have recently conducted a series of two-day meetings in several provincial cities.
In Rennes, the panel debating reproductive medical issues supported the policy of not paying for eggs or sperm – not even by the back door of increasing the level of “expenses.”
While the HFEA document calls for ethical concerns to be “balanced” against increasing egg supply, French Assembly members insist that law, morality, and progress are compatible.
They reject the view that ethics is optional, even though some influential professors, like René Frydman, who helped to create the first French IVF baby, have warned that France will fall behind in the science race unless it abandons its principles.
The upper house, the Senate, was much more minded to listen to that view, so the outcome is still uncertain.
France is not a Shangri-La, isolated from global markets or the pressures of international research.
In the words of Emmanuel Hirsch, professor of medical ethics at the University of Paris-XI, “How long can our bioethical standards continue to resist the rise of other logics – particularly financial ones?”
To be sure, French regulation can be heavy-handed – for example, IVF is restricted to heterosexual couples who are married or in long-term relationships.
The official rationale was that eggs and sperm are not commodities, but gifts from a fertile couple to an infertile one.
That is also one reason why the French restricted egg donation to women who had already had at least one baby (though this is being changed).
But the limitation to heterosexual couples was rightly condemned as homophobic by the French public in the consultations.
So the draft bill has been amended to allow lesbian women to receive donated eggs.
(Gay men will still be barred, because they would require a surrogate, and surrogacy remains prohibited.)
That sort of responsiveness to popular sentiment in the legislative process gives the lie to the canard that French regulation is inflexible and hopelessly bureaucratic.
In fact, the free-market “Anglo-Saxon” attitude sounds like nothing so much as the old prejudices about the French that have been around since the novelist Thackeray told English readers: “The Frenchman has after his soup a dish of vegetables, where you have one of meat.
You are a different and superior animal – a French-beating animal.”
Of course, we now know that a diet of bully beef is likely to result in hardening of the arteries, whereas the vegetable-centered Mediterranean diet is much better for human health.
Enough said?
Free Speech on Trial
Not so long ago, there was jubilation that the free world and its values had prevailed in the Cold War.
When the Communist empire collapsed, some even announced that the victory of liberty and democracy implied the “end of history.”
But history never bowed out; at most, it only took a decade-long intermission, with its next act heralded by the terrorist attacks in the United States in September 2001.
And here the plot has thickened.
Instead of rejoicing in the liberal order, those of us who have the pleasure of living under it have had to struggle to keep it intact and strong.
Since 9/11, more and more freedoms are being restricted in the name of defending liberty.
New visa requirements and other obstacles to travel, more intimate data collected by governments, and the presence of video cameras everywhere – at once benign and intrusive – remind one more of George Orwell’s Big Brother than of John Stuart Mill’s On Liberty.
Britain is not the only country where ancient rights of habeas corpus, of the inviolability of the person, are to be restricted by new legislation that, for example, extends the permissible length of detention without charge.
Now, even the fundamental right of a liberal order, free speech, is under pressure.
Some restrictions are understandable legacies of the past, but must nevertheless be re-examined.
In Austria, the historian David Irving was arrested recently because he has denied that the Holocaust happened.
In the prison library, however, Irving found two of the books he had written that had led to his arrest!
In Berlin, there is much concern about the possible desecration of the Holocaust Memorial, although its author, the American architect Peter Eisenmann, takes a relaxed view of what is said and done about his creation.
Other restrictions of free speech have more recent triggers.
In the Netherlands, the shock that arose over the killing of the film maker Theo van Gogh runs deep and has led to demands for legislation against hate speech.
In Britain, proposed legislation concerning incitement to religious hatred and terrorism has led to emotional parliamentary debates – and to doubts about the liberal credentials of Tony Blair’s government.
Can such demands for restricting free speech ever be legitimate?
The first and principled answer must surely be no.
All freedoms can be abused by liberty’s enemies, but in the case of speech, the risk posed by restricting freedom is surely greater.
Moreover, the benefits of tolerating free speech outweigh the harm of abusing it.
Indeed, the Nobel laureate economist Amartya Sen has demonstrated that free speech even helps mitigate seemingly natural catastrophes like famines, because it reveals the ways in which a few haves exploit the many have-nots.
As the watchdog organization Transparency International reminds us, corruption exposed is in many cases corruption prevented.
These practical consequences are above and beyond the liberating effect of allowing the “marketplace of ideas,” rather than state authorities, to judge people’s expressed views.
Are there really no exceptions to this rule?
The classic example comes to mind of the man who shouts “Fire!” in a crowded theatre.
In the resulting panic, people may be hurt or even killed.
Nowadays, we worry about incitement ­– using free speech to provoke violence.
I do not know how many Islamic leaders preach murder and mayhem in mosques and help recruit suicide bombers from among their congregants; but even if it is only a handful, they pose a question that must be answered.
That answer must be given carefully.
For free societies to flourish, the boundaries of free speech should always be widened rather than narrowed.
In my view, Holocaust denial should not be outlawed, in contrast to the demand for all, or any, Jews to be killed.
Similarly, attacks against the West in mosques, however vicious, should not be banned, in contrast to open encouragement to join suicide death squads.
What about the mere praise of “martyrs” who have died while murdering others?
The boundary between implicit and explicit incitement is not easily drawn, but, again, it should be wider rather than narrower.
Free speech is immensely precious, and so is the dignity and integrity of humans.
Both require active and alert citizens who engage what they do not like rather than calling for the state to clamp down on it.
Direct incitement to violence is regarded – as it should be ­– as an unacceptable abuse of free speech; but much that is disagreeable about the David Irving’s and the hate preachers does not fall into this category.
Their rants should be rejected with argument, not with police and prisons.
Free Speech under Siege
LONDON – Recently, at a literary festival in Britain, I found myself on a panel discussing free speech.
For liberals, free speech is a key index of freedom.
Democracies stand for free speech; dictatorships suppress it.
When we in the West look outward, this remains our view.
We condemn governments that silence, imprison, and even kill writers and journalists.
ReportersSans Frontières keeps a list: 24 journalists have been killed, and 148 imprisoned, just this year.
Part of the promise we see in the “Arab Spring” is the liberation of the media from the dictator’s grasp.
Yet freedom of speech in the West is under strain.
Traditionally, British law imposed two main limitations on the “right to free speech.” The first prohibited the use of words or expressions likely to disrupt public order; the second was the law against libel.
There are good grounds for both – to preserve the peace, and to protect individuals’ reputations from lies.
Most free societies accept such limits as reasonable.
But the law has recently become more restrictive.
“Incitement to religious and racial hatred” and “incitement to hatred on the basis of sexual orientation” are now illegal in most European countries, independent of any threat to public order.
The law has shifted from proscribing language likely to cause violence to prohibiting language intended to give offense.
A blatant example of this is the law against Holocaust denial.
To deny or minimize the Holocaust is a crime in 15 European countries and Israel.
It may be argued that the Holocaust was a crime so uniquely abhorrent as to qualify as a special case.
But special cases have a habit of multiplying.
France has made it illegal to deny any “internationally recognized crimes against humanity.”
Whereas in Muslim countries it is illegal to call the Armenian massacres of 1915-1917 “genocide,” in some Western countries it is illegal to say that they were not.
Some East European countries specifically prohibit the denial of communist “genocides.”
The censorship of memory, which we once fondly imagined to be the mark of dictatorship, is now a major growth industry in the “free” West.
Indeed, official censorship is only the tip of an iceberg of cultural censorship.
A public person must be on constant guard against causing offense, whether intentionally or not.
Breaking the cultural code damages a person’s reputation, and perhaps one’s career.
Britain’s Home Secretary Kenneth Clarke recently had to apologize for saying that some rapes were less serious than others, implying the need for legal discrimination.
The parade of gaffes and subsequent groveling apologies has become a regular feature of public life.
In his classic essay On Liberty, John Stuart Mill defended free speech on the ground that free inquiry was necessary to advance knowledge.
Restrictions on certain areas of historical inquiry are based on the opposite premise: the truth is known, and it is impious to question it.
This is absurd; every historian knows that there is no such thing as final historical truth.
It is not the task of history to defend public order or morals, but to establish what happened.
Legally protected history ensures that historians will play safe.
To be sure, living by Mill’s principle often requires protecting the rights of unsavory characters.
David Irving writes mendacious history, but his prosecution and imprisonment in Austria for “Holocaust denial” would have horrified Mill.
By contrast, the pressure for “political correctness” rests on the argument that the truth is unknowable.
Statements about the human condition are essentially matters of opinion. Because a statement of opinion by some individuals is almost certain to offend others, and since such statements make no contribution to the discovery of truth, their degree of offensiveness becomes the sole criterion for judging their admissibility.
Hence the taboo on certain words, phrases, and arguments that imply that certain individuals, groups, or practices are superior or inferior, normal or abnormal; hence the search for ever more neutral ways to label social phenomena, thereby draining language of its vigor and interest.
A classic example is the way that “family” has replaced “marriage” in public discourse, with the implication that all “lifestyles” are equally valuable, despite the fact that most people persist in wanting to get married.
It has become taboo to describe homosexuality as a “perversion,” though this was precisely the word used in the 1960’s by the radical philosopher Herbert Marcuse (who was praising homosexuality as an expression of dissent).
In today’s atmosphere of what Marcuse would call “repressive tolerance,” such language would be considered “stigmatizing.”
The sociological imperative behind the spread of “political correctness” is the fact that we no longer live in patriarchal, hierarchical, mono-cultural societies, which exhibit general, if unreflective, agreement on basic values.
The pathetic efforts to inculcate a common sense of “Britishness” or “Dutchness” in multi-cultural societies, however well-intentioned, attest to the breakdown of a common identity.
Public language has thus become the common currency of cultural exchange, and everyone is on notice to mind one’s manners.
The result is a multiplication of weasel words that chill political and moral debate, and that create a widening gap between public language and what many ordinary people think.
The defense of free speech is made no easier by the abuses of the popular press.
We need free media to expose abuses of power.
But investigative journalism becomes discredited when it is suborned to “expose” the private lives of the famous when no issue of public interest is involved.
Entertaining gossip has mutated into an assault on privacy, with newspapers claiming that any attempt to keep them out of people’s bedrooms is an assault on free speech.
You know that a doctrine is in trouble when not even those claiming to defend it understand what it means.
By that standard, the classic doctrine of free speech is in crisis.
We had better sort it out quickly – legally, morally, and culturally – if we are to retain a proper sense of what it means to live in a free society.
Free Tilly – and all Circus Animals
MELBOURNE – Last month, at the Sea World amusement park in Florida, a whale grabbed a trainer, Dawn Brancheau, pulled her underwater, and thrashed about with her.
By the time rescuers arrived, Brancheau was dead.
The death of the trainer is a tragedy, and one can only have sympathy for her family.
But the incident raises broader questions: was the attack deliberate?
Did the whale, an orca named Tilikum and nicknamed Tilly, act out of stress at being held captive in a sterile concrete tank?
Was he tired of being forced to perform to amuse the crowds?
Is it right to keep such large animals in close confinement?
Tilly had been involved in two previous human deaths.
In one episode, a trainer fell into the pool and Tilly and two other whales drowned him.
In another, a man who appears to have gotten into the enclosure at night, when Sea World was closed, was found dead in the pool with Tilly.
An autopsy showed that he had a bite mark.
One of Tilly’s offspring, sold to an amusement park in Spain, has also killed a trainer, as have orcas in other parks.
Richard Ellis, a marine conservationist at the American Museum of Natural History, believes that orcas are smart and would not do such a thing purely on impulse. “This was premeditated,” he told The Associated Press.
We will never know exactly what was going on in Tilly’s mind, but we do know that he has been in captivity since he was about two years old – he was captured off the coast of Iceland in 1983.
Orcas are social mammals, and he would have been living with his mother and other relatives in a pod.
It is reasonable to suppose that the sudden separation was traumatic for Tilly.
Moreover, the degree of confinement in an aquarium is extreme, for no tank, no matter how large, can come close to meeting the needs of animals who spend their lives in social groups swimming long distances in the ocean.
Joyce Tischler, of the Animal Legal Defense Fund, described keeping a six-ton orca in Sea World’s tanks as akin to keeping a human in a bathtub for his entire life.
David Phillips, director of the International Marine Mammal Project for the Earth Island Institute, which led the efforts to rehabilitate the orca Keiko – made famous by the movie Free Willy – said “Orcas deserve a better fate than living in cramped pools.”
But if we are pointing the finger at Sea World for what it does to its captive animals, we should also look more broadly at the way we confine performing animals.
In most countries, it is possible to visit zoos and see bored animals pacing back and forth in cages, with nothing to do but wait for the next meal.
Circuses are even worse places for animals.
Their living conditions are deplorable, especially in traveling circuses where cages have to be small so that they can go on the road.
Training animals to perform tricks often involves starvation and cruelty.
Undercover investigations have repeatedly shown animals being beaten and given electric shocks.
Several countries – among them Austria, Costa Rica, Denmark, Finland, India, Israel, and Sweden – ban or severely restrict the use of wild animals in circuses.
In Brazil, a movement to ban wild animals from circuses started after hungry lions managed to grab and devour a small boy.
Several major cities and many local governments around the world do not permit circuses with wild animals.
Last year, Bolivia became the first country to ban all animals, wild or domestic, from circuses.
That decision followed an undercover investigation by Animal Defenders International, which exposed shocking abuse of circus animals.
Now the British government is holding a public online consultation on the use of animals in circuses.
Many hope it will be a first step towards a ban.
Attempts to defend amusement parks and circuses on the grounds that they “educate” people about animals should not be taken seriously.
Such enterprises are part of the commercial entertainment industry.
The most important lesson they teach impressionable young minds is that it is acceptable to keep animals in captivity for human amusement.
That is the opposite of the ethical attitude to animals that we should be seeking to impart to children.
Nor should we be swayed by the argument that circuses provide employment.
The human slave trade also provided employment, but that was no argument for perpetuating it.
In any case, in many countries that have restrictions or bans on circuses with animals, human-only circuses have flourished.
There is no excuse for keeping wild animals in amusement parks or circuses.
Until our governments take action, we should avoid supporting places where captive wild animals perform for our amusement.
If the public will not pay to see them, the businesses that profit from keeping animals captive will not be able to continue.
When our children ask us to take them to the circus, we should find out if the circus uses wild animals.
If it does, we should explain to our children why we will not take them there, and offer to take them to a circus that does not.
Free Trade Ad Nauseam
NEW YORK – So much has been written, by so many, against the muddled ideas that have now overwhelmed good sense on trade policy in the United States government that one wonders whether there is anything left to say.
Yet it is worth recalling what Pierre-Joseph Proudhon reportedly told the Russian intellectual Alexander Herzen: “And do you imagine that once a thing has been said, it is enough?....It has to be dinned into people, it has to be repeated over and over again.”
What we need now is a primer on the major misconceptions in the hope that, unlike Gresham’s Law, which says that bad money drives out good money, good economics will drive out bad economics.
Four, in particular need to be corrected.
The first misconception is that exports create jobs, while imports do not – a fallacy that the great trade economist Harry Johnson traced to mercantilism, and which the US has resurrected.
In fact, in a world where parts and components come from everywhere, interference with imports imperils competitiveness.
The success of parcel-delivery companies, for example, depends on imports, which must be brought from the borders inland, as well as on exports.
Second, the credo “Trade, not aid” has given way to the mistaken belief that trade matters less than foreign assistance.
The labor constituency, ever fearful of import competition, has undermined trade policy.
It has also shifted aid policy in directions that assign priority to areas where the returns to US efforts are relatively minuscule.
Thus, the US State Department has ceased being an advocate of multilateral trade liberalization, despite decades of massive gains from the removal of trade barriers.
Instead, its aid arm, the US Agency for International Development, has now retreated into low-yield programs conceived as randomized experiments.
That technique impresses Bill Gates, and the new USAID administrator, Rajiv Shah, has experience with it.
But, even if all such programs succeeded, their benefits would not add up to a fraction of the documented gains that have accrued from trade and other macro-level policies in which the US has lost interest.
Third, many believe that manufactures deserve preferential support.
This is practically the mantra of US President Barack Obama’s administration, and it has cost him the support not only of much of the economics profession, but also of Christina Romer, who chaired his Council of Economic Advisers.
In a recent newspaper commentary, she refuted virtually all of the arguments advanced by manufacturing lobbyists for special treatment.
Add to the critiques that of Nobel laureate Robert Solow, a staunch supporter of Obama’s Democratic Party.
He agrees that there are activities that yield higher social returns than private returns.
The problem, he notes, is that neither he nor anyone else can possibly know which ones they are, whereas the lobbyists claim that they know this precisely.
Proponents of a “manufacturing first” policy argue that “clusters” of businesses are more productive than individual businesses are.
But big clustering effects are hard to find.
The economists Glenn Ellison and Edward Glaeser have found that clustering is only marginally greater than if businesses are allocated randomly.
Besides, it is hard not to accept that, in the economist Frances Cairncross’s famous words, we are increasingly seeing the “death of distance.”
Finally, the financial sector has come to be viewed as the bane of morality.
In a world of financial fraud and insider trading, it is easy enough to believe this, and to accept that the financial sector must be taxed.
But morality cuts across sectors.
There are plenty of honest people in all walks of life, and crooks as well.
The quasi-Marxist view that our morality stems from our economic position overlooks the moralizing role of family, religion, culture, and art.
Given these misconceptions, protectionism has re-emerged as a formidable foe.
In 1999, when the ministerial meeting of the World Trade Organization erupted into bomb threats and mayhem, I asked then-Director-General Mike Moore whether we ought not to be prepared to die for the great cause of free trade.
I should have said: we ought at least to be prepared to live for it.
Between old and new muddle, and the certain prospect that the demolition of each bad idea merely allows others to take root and grow in its place, the task of the free trader is never finished.
Free Trade and Labor
Free-Trade Blinders
CAMBRIDGE – I was recently invited by two Harvard colleagues to make a guest appearance in their course on globalization. “I have to tell you,” one of them warned me beforehand, “this is a pretty pro-globalization crowd.”
In the very first meeting, he had asked the students how many of them preferred free trade to import restrictions; the response was more than 90%. And this was before the students had been instructed in the wonders of comparative advantage!
We know that when the same question is asked in real surveys with representative samples – not just Harvard students – the outcome is quite different.
In the United States, respondents favor trade restrictions by a two-to-one margin.
But the Harvard students’ response was not entirely surprising. Highly skilled and better-educated respondents tend to be considerably more pro-free trade than blue-collar workers are.
Perhaps the Harvard students were simply voting with their own (future) wallets in mind.
Or maybe they did not understand how trade really works.
After all, when I met with them, I posed the same question in a different guise, emphasizing the likely distributional effects of trade.
This time, the free-trade consensus evaporated – even more rapidly than I had anticipated.
I began the class by asking students whether they would approve of my carrying out a particular magic experiment.
I picked two volunteers, Nicholas and John, and told them that I was capable of making $200 disappear from Nicholas’s bank account – poof! – while adding $300 to John’s.amp#160;
This feat of social engineering would leave the class as a whole better off by $100.
Would they allow me to carry out this magic trick?
Those who voted affirmatively were only a tiny minority.
Many were uncertain. Even more opposed the change.
Clearly the students were uncomfortable about condoning a significant redistribution of income, even if the economic pie grew as a result.
How is it possible, I asked, that almost all of them had instinctively favored free trade, which entails a similar – in fact, most likely greater – redistribution from losers to winners?
They appeared taken aback.
Let’s assume, I said next, that Nicholas and John own two small firms that compete with each other.
Suppose that John got richer by $300 because he worked harder, saved and invested more, and created better products, driving Nicholas out of business and causing him a loss of $200.
How many of the students now approved of the change?
This time a vast majority did – in fact, everyone except Nicholas approved!
I posed other hypotheticals, now directly related to international trade.
Suppose John had driven Nicholas out of business by importing higher-quality inputs from Germany?
By outsourcing to China, where labor rights are not well protected?
By hiring child workers in Indonesia?
Support for the proposed change dropped with each one of these alternatives.
But what about technological innovation, which, like trade, often leaves some people worse off.
Here, few students would condone blocking technological progress.
Banning the light bulb because candle makers would lose their jobs strikes almost everyone as a silly idea.
So the students were not necessarily against redistribution.
They were against certain kinds of redistribution.
Like most of us, they care about procedural fairness.
To pass judgment on redistributive outcomes, we need to know about the circumstances that cause them.
We do not begrudge Bill Gates or Warren Buffett their billions, even if some of their rivals have suffered along the way, presumably because they and their competitors operate according to the same ground rules and face pretty much the same opportunities and obstacles.
We would think differently if Gates and Buffett had enriched themselves not through perspiration and inspiration, but by cheating, breaking labor laws, ravaging the environment, or taking advantage of government subsidies abroad.
If we do not condone redistribution that violates widely shared moral codes at home, why should we accept it just because it involves transactions across political borders?
Similarly, when we expect redistributive effects to even out in the long run, so that everyone eventually comes out ahead, we are more likely to overlook reshufflings of income.
That is a key reason why we believe that technological progress should run its course, despite its short-run destructive effects on some.
When, on the other hand, the forces of trade repeatedly hit the same people – less educated, blue-collar workers – we may feel less sanguine about globalization.
Too many economists are tone-deaf to such distinctions.
They are prone to attribute concerns about globalization to crass protectionist motives or ignorance, even when there are genuine ethical issues at stake.
By ignoring the fact that international trade sometimes – certainly not always – involves redistributive outcomes that we would consider problematic at home, they fail to engage the public debate properly.
They also miss the opportunity to mount a more robust defense of trade when ethical concerns are less warranted.
While globalization occasionally raises difficult questions about the legitimacy of its redistributive effects, we should not respond automatically by restricting trade.
There are many difficult trade-offs to consider, including the consequences for others around the world who may be made significantly poorer than those hurt at home.
But democracies owe themselves a proper debate, so that they make such choices consciously and deliberately.
Fetishizing globalization simply because it expands the economic pie is the surest way to delegitimize it in the long run.
Free Trade Breakdown
COPENHAGEN – Last month, the Doha negotiations, promising freer trade, broke down, ostensibly over a small technicality in safeguard rules.
In reality, the talks collapsed because nobody – not Europe, not the United States, China, India, or the other main developing countries – was willing to take the political short-term hit by offending inefficient farmers and coddled domestic industries in order to create greater long-term benefits for virtually everyone.
And they broke down because we really don’t care.
After a few exasperated editorials, the world has pretty much dropped the subject and gone back to its usual concerns.
This is foolish.
Establishing significantly freer trade would help the world combat almost all of its biggest problems.
For an astonishingly low cost, we could improve education and health conditions, make the poorest people richer, and help everybody become better able to tackle the future.
We have known for centuries that free trade almost always benefits both parties.
The economist David Ricardo pointed out in 1817 that both Great Britain and Portugal would benefit if they exploited their comparative advantages.
Portugal could produce wine cheaply, whereas Great Britain could produce cloth much more cheaply than wine.
By selling cloth and buying wine, Great Britain obtains more of both, as does Portugal.
The same holds true today, when countries, doing what they do best, produce more and exchange it for more of all other goods.
Yet today, with international trade talks stalled and protectionist rhetoric rising, we are instead moving toward building bigger trade barriers.
These barriers are supported by deep-pocketed, self-serving corporations and lobby groups, and defended by politicians who are scared that the redistribution of jobs, income, and wealth resulting from freer trade will reduce their chances of remaining in power.
When the Doha trade round was launched shortly after September 11, 2001, there was plenty of international goodwill.
But a recent Financial Times/Harris poll in the US, Germany, France, the United Kingdom, Italy, and Spain found people nearly three times more likely to say that globalization is negative than positive.
Recently, the Copenhagen Consensus project gathered some of the world’s leading economists to decide how to do the most good for the planet in a world of finite resources.
The panel – including five Nobel laureates – found that one of the single best actions the planet could take would be completing the Doha negotiations.
They based their conclusions on new research for the Copenhagen Consensus project by Australian economist Kym Anderson.
Anderson showed that if developing countries cut their tariffs by the same proportion as high-income countries, and services and investment were also liberalized, the annual global gains could climb to $120 billion, with $17 billion going to the world's poorest countries by 2015.
This is a respectable sum, and certainly a benefit that the international community should try to achieve.
But what we often fail to realize is that the story only starts here.
As economies open up, as countries do what they do best, competition and innovation drive up rates of growth.
More competition means that previously sheltered companies must shape up and become more productive, innovating simply to survive.
Having more open economies allows more trade in innovation, so that new companies can almost instantly use smart ideas from around the globe.
Instead of every closed market having to re-invent the wheel, once is enough to get everyone’s economy going.
This means that over time, the advantage of moving toward freer trade grows dramatically bigger: the $120 billion benefit in 2015 grows to many trillions of dollars of annual benefits by the end of the century.
And the benefits would increasingly accrue to the developing world, which would achieve the biggest boosts to growth rates.
We have seen three very visible cases of such growth boosts in three different decades.
South Korea liberalized trade in 1965, Chile in 1974, and India in 1991; all saw annual growth rates increase by several percentage points thereafter.
If we recast these benefits as annual installments, a realistic Doha outcome could increase global income by more than $3 trillion every year throughout this century.
And about $2.5 trillion annually would go to today’s developing countries every year, or $500 a year on average for each individual in the third world, almost half of whom now survive on less than $2 a day.
There would, of course, be costs.
Freer trade would force some industries to downsize or close, although more industries would expand, and for some people and communities, the transition would be difficult.
Yet the overall benefits of a successful Doha Round would likely be hundreds of times greater than these costs.
It is interesting to contrast global skepticism about free trade with support for expensive, inefficient methods to combat global warming.
Many argue that we should act, even if such action will have no benefit for the next decades, because it will help lessen the impact of global warming by the century’s end.
But free trade also promises few benefits now and huge benefits in the future.
Moreover, if we could stop global warming (which we can’t), the benefit for future generations would be one-tenth or less of the benefit of freer trade (which we certainly can achieve).
Still, there are few celebrity campaigners calling on politicians to sort out the Doha Round.
Global fear about free trade leaves the planet at risk of missing out on the extraordinary benefits that it offers.
Free trade is good not only for big corporations, or for job growth.
It is simply good.
Free Trade in an Age of Terror
The war on terror appears to be causing a surge in protectionism.
Some anti-terrorist warriors are so worked up about immigrants that they want to build a wall along the entire United States-Mexican border.
They also are fighting the proposed takeover of US ports by a Dubai company, because they fear terrorists could gain vital intelligence from the investments.
In Europe, the movement to stop inflows of migrants from Muslim countries is extremely popular.
These developments do not constitute more protectionism in the usual meaning of the term, where private interests subvert the public good, as when farmers charge higher prices because competitive imports are restricted.
National security concerns are not foolish.
While a nation has a clear interest in the benefits of free and open trade, it also has a vital interest in its citizens’ safety.
National security versus globalization is not an either-or issue though they sometimes come into conflict with each other, so balancing them is the key to successful policy.
US President George W. Bush, for example, is seeking balance on the immigration issue by proposing to restrict, but not eliminate, guest worker entry.
His proposal – which lies somewhere between the extremes of building a wall on the US-Mexican frontier and open borders on the other – is the right approach when guest workers could be disguised terrorists.
Naturally, the greater the terrorist threat on the border, the more restrictive the policy should be.
Compensating for the expected diminution of guest workers on the global stage is a likely increase in outsourcing, which provides an alternative and potentially more attractive way to import labor services when globalization is tainted by terrorism.
Like guest workers, outsourcing imports labor services, but the foreign workers stay in their own backyards.
Either the desired service is performed from abroad – telemarketing, for example – or the work is sent abroad for processing and later imported to the home country (in Europe, more and more industrial work is being outsourced from West to East).
Outsourcing keeps terrorists – and other foreigners who would get expensive welfare subsidies – at bay without sacrificing the benefits of globalization.
Bush may be right on guest workers, but his controversial proposal to have a Dubai-based company run six US ports is a big mistake.
In a safer world, the deal would go unnoticed – and rightfully so.
But American public opinion, worried about the threat of terrorism, seems set against the takeover.
Free traders are dismayed.
They take popular opposition to the deal as a sign that America’s commitment to an open economy may be waning.
But, after the terrorist attacks of September 2001, is it “frenzy” for Americans to demand greater public safety and national security from their elected officials?
In this age of terrorism, doctrines like free trade must be re-defined to include the public’s interest in “goods” like safety as well as more conventional goods like televisions and autos.
Otherwise, such doctrines lose their relevance.
The transfer of potentially strategic information about ports into foreign and perhaps unfriendly hands clearly carries with it national security risks.
It is futile for the Bush administration to deny it.
Even the US Coast Guard could not rule out that the company’s assets could be used for terrorist operations.
Banning the takeover, on the other hand, would mean less efficient management of the ports, since the Dubai-based company is considered a better manager than the current one.
This would mean a loss for the US, because, sooner or later, some of the efficiency gains achieved by the Dubai firm would be passed on to US ports in the form of higher lease payments.
This case requires balancing national security risks with the efficiency gains from better management.
Experts argue that the probability of a terrorist attack because of the Dubai takeover is small.
Should the damage inflicted by a terrorist attack also be small, there would be no problem.
But the damage inflicted by an attack might be tremendous, because ports are thought to be one of the few ways terrorists might smuggle nuclear weapons into the US.
Because of this, Americans can’t afford to take even the minutest of chances with their ports – the consequences of error being too staggering to contemplate.
The American public understands this, even if their president does not.
Free traders should not be dismayed.
Rather than being protectionism in the usual sense, saying no to the Dubai takeover would reflect the desire to maximize the public interest more broadly and properly defined.
This is the opposite to protectionism.
Free Trade or Freebies for the Powerful?
As the United States Congress begins to debate the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA), a titanic struggle between the forces of free trade and protectionism promises to unfold.
But that debate should not be allowed to mask the truth behind this treaty: the DR-CAFTA is more a pleading of special interests than a free-trade deal.
It manages simultaneously to fleece the people of six poor countries and to put US workers in harm’s way.
To be sure, expanded trade holds great promise for promoting development and democracy.
But the trade rules inscribed in DR-CAFTA promote profits for a few at the expense of the well being of the many.
Ironically, the pact even limits market competition to protect powerful special interests, undercutting the core principles of free trade.
Consider pharmaceuticals.
For American drug companies, this agreement extends the time period during which brand-name pharmaceuticals have exclusive access to markets, postponing the entry of generic drugs and thus limiting competition.
For Central Americans, the cost of drugs will soar, straining budgets and gutting health care.
The result may be a death sentence for many.
In agriculture, small farmers would be placed on a collision course with US agro-business and their heavily subsidized farm exports.
The US exported paddy rice, for example, at a price almost 20% lower than the cost of production in 2003, making it impossible for Central Americans to compete.
As for labor rights, the agreement makes a devil’s bargain: it opens trade while locking in a status quo that is appalling.
Workers face everything from rampant discrimination against older people (those over 35) to physical abuse, lack of bathroom breaks, no overtime pay, and poverty wages.
In principle, workers can seek remedies by joining a union and bargaining collectively.
But this option is all but foreclosed, because union membership or organizing can lead to dismissal, blacklisting, violence, or worse. In Guatemala, the largest economy, less than 3% of workers are unionized and their unions are marginal.
The DR-CAFTA pays lip service to international labor standards as enshrined in the International Labor Organization’s core labor rights, but promptly throws them overboard.
Instead, countries are committed only to enforcing their own labor laws, which often seem designed to prevent workers from joining a union.
Moreover, enforcement of the rights that do exist is trapped somewhere between ineptitude and corruption.
As if this were not bad enough, the agreement jettisons everything we’ve learned over the last 30 years or so about international pressure and labor law reform.
The stronger provisions of previous trade agreements, such as the Generalized System of Preferences (GSP) and the Caribbean Basin Initiative (CBI), have been dumped.
Although trade with Central America represents only about 1.5% of total US trade, the outcome of the debate on DR-CAFTA will shape US trade policy – which sets the tone for other rich countries’ stance in trade talks – for years to come.
A trade agreement such as this puts US and Central American workers in the same labor market.
If the whip is cracked in Tegucigalpa today, workers in Charlotte will feel it tomorrow.
If Salvadorans’ wages are squeezed, they won’t be buying many products made in Los Angeles — unless, of course, they wind up moving there.
The anemic labor standards enshrined in this agreement encourage firms to compete by taking the low road, a route that puts them on a collision course with China’s rock-bottom wages.
They could just as easily take the high road: much evidence indicates that workers who are rewarded rather than victimized can contribute to greater competitiveness for firms in the long run.
It is hypocritical to promote democracy and then sign a trade agreement that denies workers the basic democratic right to organize and join unions.
Without this right, elections may not add up to democracy.
The checks and balances that unions provide are essential in the workplace, but they are even more important in sustaining fledgling democratic regimes.
The issue is not free trade versus protectionism, but “smart trade” versus “polarizing trade.”
Smart trade creates balanced development, while polarizing trade rewards a small circle of winners at the expense of the many.
Smart trade requires two key provisions: core labor rights, backed up by tough enforcement, and a development fund targeting infrastructure and education to boost competitiveness.
DR-CAFTA does neither.
Instead, it condemns Central America to carry its dismal past far into the future.
Rejecting it opens the possibility for freer markets and faster income growth in Central America, as well as healthier democracies.
Free Trade with a Human Face
MEXICO CITY – Although many Americans believe immigration is a domestic issue that should be excluded from talks with other governments, this is not a view held by other nations – or by the United States.
Indeed, the US negotiated its first immigration deal in 1907, maintained for more than two decades a controversial treaty with Mexico covering immigration, and has kept up immigration talks and deals even with Fidel Castro since the early 1960’s.
For many Latin American nations, not just Mexico, immigration is the single most important issue in their relations with the US. The Caribbean islands all have a similarly high proportion of their citizens residing in the US and depend as much as Mexico on remittances.
The same is true for much of Central America. And no part of South America is exempt from this pattern.
So almost all of Latin America is deeply affected by the current immigration climate in the US, and would benefit greatly from the type of comprehensive immigration reform that both John McCain and Barack Obama have supported.
The Bush administration’s regrettable decision to build fences along the US-Mexico border, raid workplaces and housing sites, detain and deport foreigners without papers, is viewed in Latin America as being hypocritical and offensive.
The issue is all the more painful and disappointing since most Latin American foreign ministries know full well that these attitudes are pure politics, nothing more.
Everyone knows what viable immigration reform in the US will entail: tightening security at the border, but also including gates in the walls currently being built; legalizing, with expeditious and sensible fines and conditions, the 15 million or so foreigners present in the US illegally; and establishing a migrant or temporary worker program that allows a sufficient number of foreigners to satisfy the growing needs of the US economy, with paths both to regular visits home and to US permanent residence.
A second component is political will and timing.
Bush had it right at the beginning: his willingness to negotiate an immigration agreement with Mexico at the start of his term was probably the only way to get it done.
Moving quickly is probably the only way the next president can succeed on this front as well.
If immigration is to become a less heated issue, the US must address the needs of Latin America’s economies.
Here, one of the key challenges facing the next US administration lies in the existing and pending free-trade agreements between the US and Latin America.
If John McCain is elected, tinkering with or overhauling NAFTA, CAFTA, and free-trade deals with Chile and Peru, as Barack Obama has proposed, will be unlikely. But, given the likelihood that Democrats will retain their majorities in the US Congress, even McCain would need to modify the agreement with Colombia in order to get it passed.
The pressure to include similar provisions in the other deals would then grow.
If recession drags on and Americans continue to blame trade agreements – erroneously – for growing unemployment, falling wages, and yawning inequality, opposition to these deals will grow.
Instead of waiting for the pressure to mount, the next president would do well to preempt it with an ambitious agenda on free-trade reform that would benefit everyone.
In this respect, the US could learn from the European Union.
American trade agreements have been faulted for limiting themselves to trade.
The response has always been: the US is not Europe, nor is it in the business of nation-building or reconstruction.
But this is exactly what it did, successfully, with the post-1945 Marshall Plan and, unsuccessfully, with Iraq and Afghanistan today.
First, clear and explicit human rights and democracy clauses should be included, along the lines of similar clauses in the Mexican and Chilean Economic Association treaties with the EU.
Second, more specific provisions on labor, the environment, gender equality, and indigenous rights are needed, as well as anti-trust, regulatory, and judicial reform provisions, for reasons both of principle and political expediency.
Although there have been enormous improvements in most of these areas, there remains a huge agenda, particularly with regard to breaking up or regulating monopolies – public, private, commercial, trade union-based – that plague nearly every country in the region.
These revised agreements should include bold, enlightened provisions for infrastructure and “social-cohesion” funds, since these can make the difference between muddling through and true success.
Free-trade advocates should not view Obama’s demand that these deals be revisited as a mistake, but rather as an opportunity to improve and deepen them;
McCain’s supporters should not see the incorporation of all of the aforementioned inclusions as “European nonsense,” but rather as a way to narrow the gap between the agreements’ promise and their actual results.
Improving Mexican and Central American infrastructure, education, and rule of law, or improving Colombian and Peruvian drug-enforcement efforts and respect for labor laws and human rights, are all in America’s interest, and-free trade agreements can help rather than harm such efforts.
If the US and Latin America can face up to the challenges of trade and immigration together, the next US president may leave a weightier mark on the hemispheric relationship than any American leader in three generations.
Freeze the Settlement Freeze
RAMALLAH – Israeli Prime Minister Benjamin Netanyahu’s decision to approve new Jewish settlements on the eve of a possible settlement freeze is the latest round in a cycle that has been repeated so many times over the past 40 years that it would seem mundane if it were not so dangerous.
The cycle goes something like this: American or international pressure mounts on Israel to stop settlement activities in the occupied territories.
Israeli settlers and their supporters then gather even more energy to expand onto more Palestinian land, build more exclusively Jewish settlements, and destroy more Arab homes before the so-called “freeze” comes into effect.
The peace process, not surprisingly, becomes a joke while this happens.
Eventually, world pressure subsides and the freeze fails to materialize.
In the end, more Jewish settlements appear.
Indeed, the great paradox of this cycle is that more settlements are built during times of negotiations than during times of conflict.
This pattern can be traced to 1967.
Israelis understand that the only reality in politics is the reality on the ground.
So long as Israeli soldiers control the occupied territories, the idea of a settlement freeze will not take root.
In fact, the demand for a settlement freeze is nothing more than a call to arms to a wide group of Israelis and their supporters to go and build on stolen Palestinian land.
When Egyptian President Anwar Sadat was preparing for his historic visit to Jerusalem, a group of settlers created the settlement of Elon Moreh near Nablus, the most populated West Bank city.
When former United States Secretary of State James Baker began his shuttle diplomacy for peace, his ultimately unsuccessful efforts actually resulted in more settlements, with a new one started just hours before he was due to arrive for talks.
Baker postponed his visit and later vented his frustrations to the US Senate Committee on Appropriations.
He resented “being greeted” every time he came to the Middle East with yet “another settlement.” Baker’s efforts eventually led to the Madrid peace conference in 1991, but that, too, failed to resolve the conflict.
And, while Palestinians and Israelis did reach a secret agreement a few years later that was publicly declared at a White House ceremony, construction of Jewish settlements didn’t stop.
In fact, since the 1993 Oslo Accords the number of Jewish settlers in the occupied territories has doubled.
The creation of new settlements has often been accompanied by hostile media reporting – even within Israel – as well as international condemnation, yet the settlement train has not stopped.
It continued to race ahead even during the days when Israel’s government rotated between Likud’s Yitzhak Shamir and Labor’s Shimon Peres between 1984 and 1990.
The Shamir government would be defeated at the polls, and the incoming Labor government would declare a freeze on all settlement construction, even on buildings that had already been started.
But, despite the decrees, ways were found to continue building, to absorb new residents, and to increase the settler population.
For the US, the settlements have proven to be an equal-opportunity obstacle, obstructing both Republican and Democratic diplomacy.
The Clinton administration attempted to put brakes on then-Prime Minister Netanyahu’s efforts to construct a new settlement near Bethlehem.
After a short hiatus, construction resumed.
The Bush-Cheney Administration, the most pro-Israeli in memory, fared no better.
Today, Har Homa, built on Jabal Abu Ghnaim with the aim of cutting off Bethlehem from Jerusalem, is home to 19,000 settlers.
This cycle has become so bizarre and confusing that Palestinians are not sure whether they should hope for continued tensions with Israel (which usually means no new settlements) or for continued negotiations (which usually provide cover for building settlements).
On January 5, 2007, the day Prime Minister Ehud Olmert met with US Secretary of State Condoleezza Rice to discuss a new round of talks, the Israeli Construction and Housing Ministry issued a tender for the construction of more units in Ma’ale Adumim, an exclusively Jewish settlement in the occupied West Bank.
Of course, whenever the Israelis defy the world over the settlements, as is now once again happening, US and other officials “denounce” and “regret” the decision. But, at the end of the day, despite these few statements and perhaps even a UN resolution of opposition, the pattern established over the past 40 years is clear: the decision stands.
Jeff Aronson, a senior researcher at the Washington-based Foundation for Middle East Peace, concludes that Israeli leaders will continue to be able to fool their American counterparts on this issue.
Some Israeli right-wing leaders like Menachem Begin, Shamir, and Netanyahu trumpet their settlement achievements.
Others, including Yitzhak Rabin, Ehud Barak, and Ehud Olmert “talked left and built right.”
Palestinians are caught in a Catch-22: if they insist on a settlement freeze, Israel preemptively begins to build new settlements.
Unless and until Israel pays a heavy price for its illegal activities in the occupied territories, it is hard to imagine a successful peace process taking shape.
The French Exception?
PARIS – More than ever, the French economy is at the center of the global debate about how far one can push the limits of state size and control in a capitalist democracy.
To those on the left, France’s generous benefits and strong trade unions provide a formula for a more inclusive welfare state.
To those on the right, France’s oversized and intrusive government offers only a blueprint for secular decline.
For the moment, the right looks right.
Once nearly the economic equal of Germany, France has fallen well behind over the past decade, with per capita GDP now about 10% lower.
France may punch above its weight politically, but it punches far below its weight economically.
Whenever someone proposes turning the eurozone into a transfer union, as France’s economy minister, Emmanuel Macron, recently did, the presumption is that Germany will carry everyone else on its shoulders.
But why should only Germany have that responsibility?
France’s economy is roughly three-quarters the size of Germany’s.
Persuading the Germans that the French are willing and able to pay their fair share could make room for a lot of necessary compromises that until now have seemed impossible.
For now, few people feel confident about France’s economic future.
The good news is that France is not quite as French as it pretends to be.
Yes, there is a 35-hour workweek, but companies can negotiate around the limit by offering to pay more for overtime.
The effective workweek for most workers is perhaps closer to 39 hours.
Yes, France has sought to limit the car service Uber, whose business model has arguably been one of the most transformative and important advances of the decade.
But, while this is a triumph for taxi unions and a tragedy for passengers and Uber drivers, France has also started focusing on nurturing small, high-potential technology companies.
The French government is no longer placing all its bets on big, state-led projects, as it did in the 1970s heyday of massive investment in high-speed trains and Airbus.
President François Hollande has given Macron wide berth to try to implement desperately needed structural reforms of labor and product markets.
Of course, it remains to be seen just how much political support such market-oriented policies can sustain.
Progressive economists love the French government for spending a staggering 57% of GDP, compared to government expenditures of 44% of GDP for Germany.
And it must be acknowledged that the French government provides excellent value in some key areas.
France’s health service justly receives much better reviews than the United Kingdom’s.
French citizens might pay a lot of taxes and suffer a high degree of regulation, but at least they get something in return.
Still, France’s supersize government is hardly a source of unalloyed dynamism.
And indeed, one suspects that France’s GDP and productivity measures are flattered by the fact that, for lack of market prices, statisticians blindly assume that citizens get one dollar of value for each dollar spent on government, which might be an overstatement.
Worryingly, it is not clear how well France’s culture of inclusiveness can ever extend to immigrants.
The same strict firing laws and high levels of minimum wages that are intended to protect native French workers from globalization make it much more difficult for newcomers to land jobs.
Yet virtually every study of global inequality suggests that gains from allowing greater labor mobility dwarf gains from redistributing income among natives.
By contrast, the more liberal labor laws in the United States and the United Kingdom ensure more opportunities for outsiders.
The center of Paris and other French cities may be grand, but many immigrants from North Africa and elsewhere live in squalid ghettos on the outskirts.
Although the precise rate of unemployment for particular ethnic groups is not known (French law precludes collecting data by ethnic classification), anecdotal evidence suggests much higher levels of joblessness for immigrants and their descendants.
True, the government provides generous welfare benefits; but this alone does not produce inclusiveness.
Strong popular support for Marine Le Pen’s anti-immigration National Front party, together with French recalcitrance about accepting migrants escaping the war in Syria, indicates the problems with applying the French model in diverse societies.
Another obstacle to applying the French model elsewhere is that France enjoys certain unique advantages that are arguably critical to its success.
Elite French managers are widely considered among the best in the world, and are frequently selected to head major international corporations.
Corruption is certainly a problem, but significantly less so than in most of the eurozone’s south.
(The Italian state is also large and intrusive, but it does not produce the high-quality public services that the French government does.)
Lastly, France arguably has one of the world’s most favorable natural environments, with fertile soil and an exceptionally temperate climate.
A healthy French economy would do wonders to help lift the eurozone out of its malaise.
It could also provide an example to countries everywhere of how inclusive capitalism can work.
But that assumes that the government will embrace the structural reforms that France’s economy so desperately needs.
Friedman Completed Keynes
The most famous and influential American economist of the past century died in November.
Milton Friedman was not the most famous and influential economist in the world -- that honor belongs to John Maynard Keynes.
But Milton Friedman ran a close second.
From one perspective, Milton Friedman was the star pupil of, successor to, and completer of Keynes’s work.
Keynes, in his General Theory of Employment, Interest and Money , set out the framework that nearly all macroeconomists use today.
That framework is based on spending and demand, the determinants of the components of spending, the liquidity-preference theory of short-run interest rates, and the requirement that government make strategic but powerful interventions in the economy to keep it on an even keel and avoid extremes of depression and manic excess.
As Friedman said, “We are all Keynesians now.”
But Keynes’s theory was incomplete: his was a theory of employment, interest, and money.
It was not a theory of prices.
To Keynes’s framework, Friedman added a theory of prices and inflation, based on the idea of the natural rate of unemployment and the limits of government policy in stabilizing the economy around its long-run growth trend – limits beyond which intervention would trigger uncontrollable and destructive inflation.
Moreover, Friedman corrected Keynes’s framework in one very important respect.
The experience of the Great Depression led Keynes and his more orthodox successors to greatly underestimate the role and influence of monetary policy.
Friedman, in a 30-year campaign starting with his and Anna J. Schwartz’s A Monetary History of the United States , restored the balance.
As Friedman also said, “and none of us are Keynesian.”
From another perspective, Friedman was the arch-opponent and enemy of Keynes and his successors.
Friedman and Keynes both agreed that successful macroeconomic management was necessary - that the private economy on its own might well be subject to unbearable instability ­and that strategic, powerful, but limited economic intervention by the government was necessary to maintain stability.
But, while for Keynes, the key was to keep the sum of government spending and private investment stable, for Friedman the key was to keep the money supply -- the amount of purchasing power in readily spendable form in the hands of businesses and households-- stable.
A relatively minor, technical difference in means, you might say.
A difference of opinion that rested on different judgments about how the world works, which could (and ultimately was) resolved by empirical research, you might say.
And you would be half right.
For this difference in means, tactics, and empirical judgments rested on top of deep gulf in Keynes’s and Friedman’s moral philosophy.
Keynes saw himself as the enemy of laissez-faire and an advocate of public management.
Clever government officials of goodwill, he thought, could design economic institutions that would be superior to the market -- or could at least tweak the market with taxes, subsidies, and regulations to produce superior outcomes.
It was simply not the case, Keynes argued, that the private incentives of those active in the marketplace were aligned with the public good.
Technocracy was Keynes’s faith: skilled experts designing and fine-tuning institutions out of the goodness of their hearts to make possible general prosperity -- as Keynes, indeed, did at Bretton Woods where the World Bank and IMF were created.
Friedman disagreed vociferously.
In his view, it usually was the case that private market interests were aligned with the public good: episodes of important and significant market failure were the exception, rather than the rule, and laissez-faire was a good first approximation.
Moreover, Friedman believed that even when private interests were not aligned with public interests, that government could not be relied on to fix the problem.
Government failures, Friedman argued, were greater and more terrible than market failures.
Governments were corrupt.
Governments were inept.
The kinds of people who staffed governments were the kinds of people who liked ordering others around.
At the same time, Friedman believed that even when the market equilibrium was not the utilitarian social-welfare optimum, and even when government could be used to improve matters from a utilitarian point of view, there was still an additional value in letting human freedom have the widest berth possible.
There was, Friedman believed, something intrinsically bad about government commanding and ordering people about -- even if the government did know what it was doing.
I do not know whether Keynes or Friedman was more right in their deep orientation.
But I do think that the tension between their two views has been a very valuable driving force for human progress over the past hundred years.
From Cairo to California
SINGAPORE – Egypt and California are headed in opposite directions politically.
Egypt has had too little democracy and is moving towards more.
California has had too much democracy and is moving towards less.
The common mean point they should arrive at is democracy that delivers good government – and I mean “government,” not mushy “governance.”
For decades, “government” has been demonized.
Ronald Reagan famously said that “government is not the solution to our problem; government is the problem.”
But Reagan was only the most eloquent spokesman for this Zeitgeist.
He did not manufacture it; decades of laissez-faire theory and proselytizing did.
Following an explosion of government programs in the 1960’s, a belief developed in the minds of key American opinion leaders and policymakers that the best government is the least government.
Reagan captured this assumption well, recalling the sixth-century BC Chinese philosopher Lao Tzu’s famous words: “Governing a great nation is like cooking a small fish: too much handling will spoil it.”
Two dangerous corollaries emerged from this view.
The first was the belief that taxes are inherently bad, and thus that reducing them is the only solution to any public problem.
In California, many taxes were reduced by voter initiatives, demonstrating the damaging consequences of too much democracy.
Indeed, such direct democracy helped make California ungovernable.
For example, direct ballots on hot-button issues made prison sentencing mandatory, while simultaneously reducing taxes and funding for prisons.
In 1978, Proposition 13 capped California property taxes – the main source of public-school funding.
School revenues slumped, and from 1974 to 1979, California fell from ninth place to 44th among the 50 US states in per capita spending on public high schools, with California’s students soon slipping down the rankings as well.
The second dangerous corollary was that markets know best.
Former US Federal Reserve chairman Alan Greenspan, the world’s leading financial regulator of the past quarter century, seemed to have little faith in either regulators or the need for regulation.
In an April 2008 article in The Financial Times, he wrote, “Bank loan officers, in my experience, know far more about the risks and workings of their counterparties than do bank regulators.” Similarly, when asked whether he should regulate the market in derivatives, he replied, “These derivative transactions are transactions among professionals.”
Deep down, Greenspan must have believed that he was allowing Adam Smith’s “invisible hand” to deliver the public good.
But Smith stressed that private interests always pursue selfish interests:
“To widen the market and to narrow the competition, is always the interest of the dealers….The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.
It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”
Egypt’s problems are, of course, vastly different from those of California.
Despite the economic growth resulting from reforms undertaken by Hosni Mubarak’s regime in recent years, unemployment and poverty remained at high levels.
With a heavy and stifling bureaucracy and the prospect of a dynastic political succession, sheer lack of hope drove hundreds of thousands of Egyptians onto the streets.
But, with the dictator driven from power, Egyptians, too, must redefine government.
People in both Cairo and California should look to East Asia.
Despite their ideological differences, governments throughout the region have delivered rapid economic growth and improved their populations’ livelihoods.
Nowhere in East Asia has “government” been demonized.
Despite the fact that most leading East Asian policymakers were trained in American universities, none were seduced by Reagan’s belief that “government is the problem.”
Millennia-old cultural beliefs in East Asia underpin the view that if government is not part of the solution, no public good can be achieved.
Confucius, for example, said: “the man who uses his brain should govern; the man who uses his strength should be governed.”
The quality of American public services has deteriorated steadily over the past few decades, while that of Chinese public services has improved dramatically.
Ironically, the Chinese government has been strengthened without oppressing the growth and dynamism of the Chinese economy.
There must be some principles of good government that China has developed.
Of course, neither Egyptians nor Americans would ever allow a communist party to rule them.
But both must find the right principles of good government to resolve their very different public-policy challenges.
Abandoning the Reaganesque ideology that government is inherently bad is a necessary first step.
The bottom line is that the commodity in greatest demand by people all over the world is good government, which provides the best means of improving living standards, especially for those at the bottom.
Unfortunately, good government is in limited supply, in part because there is no global consensus about what constitutes it – to the detriment of people from Cairo to California and beyond.
From Carbon Insolvency to Climate Dividends
BERLIN – Limiting global warming to 2°C above pre-industrial levels is absolutely crucial, says the G-8 and most of the world’s best climatologists.
If this is to be more than lip service, the consequences will be radical.
For starters, until 2050, only a total of around 700 gigatons of carbon dioxide can be emitted into the atmosphere.
At the current rate of emissions, this “budget” will be exhausted in 20 years; if emissions increase as expected, the world will become carbon “insolvent” even sooner.
So reducing CO2 and other greenhouse gas emissions must begin as quickly as possible.
Wasting any more time will cause costs to skyrocket and render the 2° limit obsolete.
The rich North cannot continue as before, emerging industrial countries must leave the old industrial-based path to prosperity, and the rest of the world may not even embark upon it.
Yet the negotiations on emissions limits with each of the 192 signatory countries in the run-up to the Copenhagen Summit in December 2009 have so far given no indication of so radical a change.
A global climate deal must be simpler, fairer, and more flexible than is today’s Kyoto Protocol.
To achieve this, the Global Change Council of Germany (WGBU) suggests that a budget formula be adopted.
The idea is that, in the future, all states will be allocated a national per-capita emissions budget that links three core elements of a fair global climate deal: the major industrial countries’ historical responsibility, individual countries’ current performance capacity, and global provision for the survival of mankind.
The task is immense.
On a global level, quick and comprehensive de-carbonization of the world economy is necessary.
All countries must reduce their use of fossil fuels and switch to renewable energy sources as soon and as much as possible.
But, since the OECD-countries (led by the United States and Australia) will soon overrun their carbon budgets even after far-reaching emissions reductions, they must cooperate with developing countries that still have budget surpluses.
Breaking the Gordian knot of climate negotiations requires offering technology and financial transfers in exchange for the ability to overrun a national budget.
A responsible global climate policy thus entails a fundamental change of international relations, and making the necessary institutional innovations in global governance requires courage.
Until now, the wealth of nations has been based upon the combustion of coal, gas, and oil.
But, if the 2°C target is taken seriously, the twenty-first century will see countries that are not so far down the path of carbonization (such as large parts of Africa), or that leave it in time (such as India and Pakistan), able to become wealthy by helping societies that must de-carbonize rapidly.
For the moment, all this is still utopian.
In its current state, cap-and-trade schemes to reduce emissions are far from being fair and effective; a major improvement would include establishing a Central Climate Bank to register and supervise the transfer of emissions credits.
This bank would also ensure that emissions trading did not run counter to the goal of remaining within the entire global budget, for example via the complete sale of unused emissions credits by individual developing countries at the beginning of the contract period.
In order to achieve this, the Central Climate Bank must have the power to do its job.
That, in turn, implies that it is accountable and that it has democratic legitimacy – something fundamentally lacking in multilateral agencies such as the World Bank.
Additional changes to global governance will also be needed.
These changes include the consolidation of face-to-face negotiations between old and new world powers (the US, the European Union, and China) and developing and emerging countries, including new regional powers like Mexico, Egypt, Turkey, and Indonesia.
In this framework, the old G-7/8 can no longer function as a hegemonic center, but rather as a kind of broker and preparatory body.
Simultaneously, within a variable architecture of negotiation, there must be links to the numerous conference institutions of the United Nations, as well as to political-economic regional associations such as the EU, Mercosur, or the African Union.
This flexible (and, alas, fragile) architecture of multi-level negotiation can function only as long as it is oriented towards clear moral bases for negotiation, has sufficient democratic legitimacy, and is supported in national and local arenas of action.
Global leaders will find it significantly easier to steer towards big cooperation targets if they are supported by visions of the future within civil society.
A low-carbon society is not a crisis scenario, but rather the realistic vision of liberation from the path of expensive and risky over-development.
In 1963, when the world narrowly escaped nuclear catastrophe, the physicist Max Born wrote: “World peace in a world that has grown smaller is no longer a Utopia, but rather a necessity, a condition for the survival of mankind.”
From Central Bank to Central Planning?
BERKELEY – For more than 170 years, it has been accepted doctrine that markets are not to be trusted when there is a liquidity squeeze.
When the prices of even safe assets fall and interest rates climb to sky-high levels because traders and financiers collectively want more liquid assets than currently exist, it is simply not safe to let the market sort things out.
At such a time, central banks must step in and set the price of liquidity at a reasonable level – make it a centrally-planned and administered price – rather than let it swing free in response to private-sector supply and demand.
This is the doctrine of “lender-of-last-resort.”
For more than half that time – say, 85 years – it has been accepted doctrine that markets are also not to be trusted even in normal times, lest doing so lead to a liquidity squeeze or to an inflationary bubble.
So, central banks must set the price of liquidity in the market day in and day out.
According to the followers of Knut Wicksell, the central bank must keep the market rate of interest near the natural rate of interest.
No, said the followers of John Maynard Keynes, it must offset swings in business animal spirits in order to stabilize aggregate demand.
On the contrary, said the followers of Milton Friedman, it must keep the velocity-adjusted rate of growth of the money stock stable.
In fact, if you do any one of these things, you have done them all, for they are three ways of describing what is at bottom the same task and the same reality.
Thus, as social democracy, government guideposts, and centralized planning waxed and waned elsewhere in the economy, social democracy in short-term finance went from strength to strength.
First, central banks suspended the rules of the free market in liquidity squeezes.
Then they set the price of liquidity as an administered price in normal times.
Then they freed themselves of all but the lightest contact with their political masters: they became independent technocrats, a monetary priesthood that spoke in Delphic terms obscure to mere mortals.
The justification for this system was that it seemed to work well – or at least less badly than central banking that blindly adhered to the gold standard or no central banking at all.
This island of central planning in the midst of the market economy was a strange and puzzling feature – all the more so because so few remarked how strange it was.
There were no calls for a five-percent-growth-of-kilowatt-hours rule as there were calls for a five-percent-growth-of-M2 rule.
There was no Federal Automobile Board to set the price of vehicles the way the Federal Reserve Board set the price of federal funds.
But now it appears that, despite all this, we still have not had enough central planning in finance.
For, even as the central banking authority administered the price of liquidity, the price of risk was left to the tender mercies of the market.
And it is the price of risk that is the source of our current distress.
It is not that the world economy faces a liquidity squeeze.
Far from it: two-year United States Treasury notes with a face value of $1,000 will get you $998 in cash – the lowest liquidity price since the Great Depression and Japan in the 1990’s.
Yet the risk premia on non-Treasury assets have soared to barely believable heights: the annual interest-rate premium for holding a CD issued by a private bank now stands at five percentage points.
And it is this rise in risk premia that threatens to send the global economy into a deep recession, and turn the financial markets from a spectacle of schadenfreude into a malign source of unemployment and idle factories worldwide.
The US Federal Reserve, the US Treasury, the European Central Bank, the Bank of England, and other public financial regulatory entities are being pushed toward a further expansion of their roles.
The Treasury and Federal Reserve are adding preferred stock to the balance sheets of the US mortgage giants Fannie Mae and FHLBC and the insurance giant AIG in the hope of shoring up their capital cushions and lowering their borrowing costs so that they can buy more mortgages.
The Treasury has asked for authority to purchase $700 billion of mortgages to get them off of the private sector's books.
Expanding the demand and reducing the supply of these risky assets is a way of manipulating their price.
The Fed and the Treasury are walking down a road that ends with making the price of risk in financial markets, along with the price of liquidity, an administered price.
This was how central banking got started in the first place: letting the market and the market alone determine the price of liquidity was judged too costly for the businessmen who voted and the workers who could overthrow governments.
Now it looks as though letting the market alone determine the price of risk is similarly being judged too costly for today’s voters and campaign contributors to bear.
From Christian Democracy to Muslim Democracy?
BUDAPEST – This summer, Turkey’s ruling Justice and Development Party (AKP) narrowly escaped being banned by the country’s constitutional court.
State prosecutors alleged that the party was trying to “Islamicize” the country and ultimately introduce theocracy.
Not only did AKP supporters celebrate after the decision, but those in the West who view it as a prototype “Muslim Democratic” party also breathed a sigh of relief.
The clear model for a moderately religious party – one committed to the rules of the democratic game – are the Christian Democratic parties of Western Europe and, to a lesser extent, Latin America.
Yet opponents of the idea of “Muslim democracy” argue that European Catholics only turned to democracy under orders from the Vatican, and that since Muslims do not have anything like a Church hierarchy, Christian Democracy is an irrelevant example.
But history shows that political entrepreneurs and liberalizing Catholic intellectuals were crucial to the creation of Christian Democracy.
This suggests that Muslim reformers, given the right circumstances, might be similarly capable of bringing about Muslim democracy.
Christian Democratic parties first emerged in Belgium and Germany toward the end of the nineteenth century as narrowly focused Catholic interest groups.
The Vatican initially regarded them with suspicion, perceiving parties participating in elections and parliamentary horse-trading as signs of “modernism.”
A breakthrough came with the Italian Popular Party’s founding in 1919.
Its leader, Don Luigi Sturzo, wanted it to appeal to tutti i liberi e forti – all free and strong men.
The Vatican, having prohibited Italian Catholics from participating in the political life of newly united Italy for almost sixty years, lifted its ban.
But Mussolini soon outlawed the Popolari ; in any event, the Vatican had had a strained relationship with the party and appeared more comfortable supporting pro-Catholic authoritarian regimes in countries like Austria and Portugal.
But while Christian Democracy got nowhere politically between the World Wars, momentous changes were initiated in Catholic thought.
In particular, the French Catholic thinker Jacques Maritain developed arguments as to why Christians should embrace democracy and human rights.
During the 1920’s, Maritain was close to the far-right Action Française .
But the Pope condemned the movement in 1926 for essentially being a group of faithless Catholics more interested in authoritarian nationalism than Christianity.
Maritain accepted the Pope’s verdict and began a remarkable ideological journey toward democracy.
He criticized France’s attempts to appear as a modern crusader, incurring the wrath of Catholics in the United States in particular.
More importantly, he began to recast some of Aristotle’s teachings and medieval natural law doctrines to arrive at a conception of human rights.
He also drew on the philosophy of “personalism,” which was highly fashionable in the 1930’s, as it sought a middle way between individualist liberalism and communitarian socialism, and insisted that “persons” always had a spiritual dimension that materialistic liberalism supposedly failed to acknowledge.
After the fall of France, Maritain decided to remain in the US, where he happened to find himself after a lecture tour (the Gestapo searched his house outside Paris in vain).
He authored pamphlets on the reconciliation of Christianity and democracy, which Allied bombers dropped over Europe, and he never tired of stressing that the Christian origins of America’s flourishing democracy had influenced him.
Maritain also insisted that Christians, while they should take into account religious precepts, had to act as citizens first.
Acceptance of pluralism and tolerance were thus central to his vision and forbade any one-to-one translation of religion into political life. He was in fact rather skeptical of exclusively Christian parties.
Maritain participated in the drafting of the United Nations Declaration of Human Rights, and the Second Vatican Council eventually approved many of the ideas that he had been propounding since the 1930’s.
He also influenced the Christian Democratic parties that governed after 1945 in Germany, Italy, the Benelux countries, and, to a lesser extent, France, and which consolidated not only democracy, but also built strong welfare states in line with Catholic social doctrine.
While still emphasizing family values and traditional morality, they lost the whiff of incense that had clung to the Christian Democratic parties at the beginning of the century – by the 1970’s, they even began to stress that one didn’t have to be a believer to join.
Maritain’s example disproves the claim that the analogy between Christian and Muslim democracy fails.
It wasn’t the Vatican that took the lead in creating Christian Democracy – it was innovative philosophers like Maritain (who never served in the Church hierarchy, though he was briefly French ambassador to the Vatican) and political entrepreneurs like Sturzo (a simple Sicilian priest).
Of course, Muslim democracy will not be brought about by intellectuals alone.
After all, Christian Democracy’s success is also explained by its strongly anti-communist stance during the Cold War – and, in Italy, by the benefits of widespread corruption.
Nevertheless, some body of thought that makes democracy attractive for believers – and reassures non-believers that the faithful have accepted pluralism – had to be available. True, some of the philosophies used in the European Catholic transition to democracy – such as personalism – were rather nebulous, although it was probably their vagueness that helped to bring as many believers as possible on board.
But the point remains that ideas matter.
So the creation of a liberalized Islam by self-consciously moderate and democratic Muslim intellectuals is crucial.
From Community to Security in Asia
MANILA – Visitors are often catalysts for change.
Barack Obama’s just concluded visit to Asia may be no different, for his trip left Asia and its leaders wondering just what sort of regional community they are building.
The modern sense of building a pan-Asian community began with the traumatic East Asian financial and economic crisis of 1997, when all the countries of the Asia-Pacific region learned the hard way that national reforms and protections could turn out to be woefully inadequate.
Soon afterwards, a consensus formed among many Asian leaders that broader cooperation and coordination was needed.
Even during that 1997 crisis, this lesson was already being recognized, for the members of the Asia-Pacific Economic Community (APEC) remained committed to trade liberalization, one of the key forces that helped restart growth in Asia’s economies.
Indeed, the APEC Economic Leaders’ Meeting in 1997 designated 15 major sectors – including automobiles, chemicals, energy assets, and environmental measures – for early liberalization.
Looking back at Asia’s economic growth over the past 12 years, it is clear that liberalization of trade and investment paid off.
Realizing that economics cannot be neatly separated from politics, APEC soon began to include security issues in its agenda.
In 2002, APEC’s leaders launched the STAR initiative, establishing a “Secure Trade Area in the APEC Region.”
STAR safeguards the flow of goods and people through measures that secure ships, aviation, and travelers – thereby enhancing cross-border security, customs networking, and protection of corporate supply chains.
This was followed, in 2003–2004, by heightening security cooperation through the Counter-Terrorism Task Force, as well as the Asian Development Bank’s Trade and Financial Security Initiative.
These initiatives have undoubtedly deepened Asia’s sense of community.
But now that community must confront its greatest challenge: the rise of China.
As China grows mightier economically and politically, how can long-term stability in the Asia-Pacific be ensured?
I believe that a shift from Pax Americana to Pax Asia-Pacifica could be the answer.
Just as the nations of Western Europe exploited the Cold War stalemate to build the European Union, Asia must exploit the common interests that the United States, Japan, China, India, South Korea, Russia, Australia, New Zealand, and all the Southeast Asian countries have in securing a peaceful and stable Asia-Pacific.
Under the Cold War “balance of terror,” Western Europe organized an economic, political, and cultural community that has now brought about a modern era of “perpetual peace” on that continent.
APEC members, too, should use the existing umbrella of Pax Americana to accelerate economic, security, and political integration before new rivalries emerge to thwart their efforts.
Many of the instruments for greater integration already exist.
There is, to start, the Association of Southeast Asian Nations (ASEAN).
But larger groupings – “ASEAN plus China” and a future “ASEAN plus Japan, South Korea, and India” – are being negotiated.
Among the political tasks these broader groups are beginning to broach are strategies to defeat terrorism without alienating the region’s large, indigenous Muslim population.
Somehow, too, Asia’s leaders must manage the pace of globalization.
Just as Southeast Asia’s peasant rebellions of the 1930’s were a reaction to the breakdown of an earlier episode of globalization, so Islamism in Asia is a response to our new secularist/consumerist societies.
Across Asia, APEC is playing the central role in creating a Pax Asia-Pacifica.
Unlike Pax Americana, which has been imposed by US military force, this will be a peace among virtual equals.
The new Asia-Pacific security architecture should emanate from cooperation based not on a “balance of power” but on burden-sharing to bring about a “balance of mutual benefit.”
Clearly, Pax Asia-Pacifica must be built on an unswerving commitment to peace among APEC's most powerful countries – the US, China, and Japan.
A productive Chinese contribution would demonstrate its commitment to being a responsible stakeholder in the wider world community.
Japan, too, must play an active role in security and peace-keeping.
A crucial factor in ensuring Pax Asia-Pacifica is the synergistic relationship between China and Japan.
In the interest of regional peace, both major powers must stop letting historical resentments obstruct a more harmonious and prosperous future for the Asia-Pacific region.
Once these political shifts begin, APEC can begin to transform itself into an Asia-Pacific Community for Economic Cooperation and Security.
The strategic test will be for regional organizations – such as APEC – to ensure that the spirit of cooperation always outweighs the member states’ competitive impulses.
European nations recognized this a half-century ago, and Asia’s countries must make that same, self-restricting choice now.
Whatever our shared endeavors, Asians must take care that they are undertaken through shared responsibilities, shared burdens, shared values, and shared benefits.
Only in this way will Asia achieve a higher quality of life and greater security for all its peoples.
America’s Trouble with China
WASHINGTON, DC – Xi Jinping, China’s newly anointed president, made his first visit to the United States in May 1980.
He was a 27-year-old junior officer accompanying Geng Biao, then a vice premier and China’s leading military official.
Geng had been my host the previous January, when I was the first US defense secretary to visit China, acting as an interlocutor for President Jimmy Carter’s administration.
Americans had little reason to notice Xi back then, but his superiors clearly saw his potential.
In the ensuing 32 years, Xi’s stature rose, along with China’s economic and military strength.
His cohort’s ascent to the summit of power marks the retirement of the last generation of leaders designated by Deng Xiaoping (though they retain influence).
Despite China’s greater weight in world affairs, Xi faces internal strains that make China more fragile than is generally understood.
China’s export-led economic model has reached its limits, and the transition to domestic-led growth is intensifying internal frictions.
Managing unrest through repression is more difficult than in the past, as rapid urbanization, economic reform, and social change roils a country of 1.3 billion people.
Ethnic conflicts in outlying regions will also test Xi’s political control.
China’s foreign policy is another cause for concern –&#160;especially for the US.
History teaches us that rising powers inevitably compete with status quo leading powers, and that this conflict often leads to war.
For now, the large bilateral trade imbalance has exacerbated US-China tensions, and can be safely reduced only by changes in behavior on both sides – or, unsafely, though a dangerous crisis-driven correction.
More immediately, China’s territorial claims – particularly in the South China Sea, but also regarding its border with India – and its efforts to expand its influence over neighboring countries will force the US to navigate two overarching risks.
The first is confrontation, which could occur directly or as a result of the US being drawn into conflicts between China and its neighbors.
The other risk is that Japan, South Korea, Vietnam, the Philippines, Thailand, or Myanmar could fall into China’s strategic orbit.
Many of these countries will look to the US as a strategic counterweight should China seek to assert local dominance.
But some may conclude that it is safer to steer closer to China than away from it, because their economies depend so strongly on Chinese trade.
As recent events in the East and South China Seas show, China sometimes attempts to strong-arm its neighbors.
The US will need to defend its allies and interests by pushing back, but with actions modulated to limit Chinese concerns.
One way to do this is to understand China’s motives.
China’s drive for economic and political leadership in East Asia, and its increased military capability there, is inevitable.
But the world can be confident that the US will remain stronger, wealthier, and more influential in global affairs than China even in 2030.
That argues against American overreaction, which could fuel the kind of self-reinforcing downward spiral in bilateral relations that occurred between Great Britain and Germany prior to the conflagrations of the first half of the twentieth century.
Perhaps the best way to avoid confrontation is to cooperate on shared external threats, most notably nuclear proliferation, global climate change, and Islamic extremism.
But getting to 2030 without a major confrontation will be a major achievement.
While the US is likely to maintain the upper hand in terms of military power for at least another 15-20 years, asymmetric warfare could undercut America’s advantage should China engage in cyber-attacks on US electronic and satellite systems, along with attacks on infrastructure.
In response to China’s capability to project power many hundreds of miles from its borders, the US (as I have suggested for the last 25 years) should develop a long-range bomber capable of penetrating sophisticated defenses and delivering great force.
As US security interests shift to the Pacific, Americans now rely on increasingly vulnerable forward land bases and carrier fleets with tactical aircraft that have a combat radius of 300-500 miles (482-805 kilometers).
But a long-range bomber would be more cost-effective than standoff bombers with cruise missiles, and, unlike shorter-range tactical bombers, its bases would be invulnerable to attack.
That said, America’s most serious challenge right now is to get the US economy and its governance in order.
I believe that it can do that.
But, unless and until it does, thereby giving President Barack Obama a firm basis from which to engage Xi on issues requiring international statesmanship, the prospect of trouble between the US and China will continue to grow.
From Constitutional Crisis to European Crisis
Since the shock of the French and Dutch “no” votes against the European Union’s proposed Constitutional Treaty, events have followed their inevitable course, but more rapidly than expected.
The French “no” was a massive blow to the political credibility of French President Jacques Chirac.
So he did what French Presidents usually do in such circumstances: rather than admit that French voters might be right, he sacked Prime Minister Jean-Pierre Raffarin as a scapegoat, replacing him with his protégé Dominique de Villepin, who has never held an elective office.
Opinions differ as to the reasons for France’s rejection of the Constitutional Treaty.
But most analyses suggest that it was directed against high unemployment, magnified by the perceived threat to jobs from the new Central and Eastern European EU members.
Naturally, Chirac immediately reaffirmed his faith in the French economic model.
The most undeniable implication of the French vote has been to raise a large question mark over the future of the EU’s traditional integration project.
Rather than admit any such thing, Chirac hurried to meet German Chancellor Gerhard Schröder, so that they could jointly reaffirm their traditional alliance as the spiritual leaders of this European project, in the hope that the Constitutional Treaty might yet be rescued.
Neither of them have been able to say how this should be done.
The British government tried to wriggle out of taking sides on the implications of the French and Dutch votes by saying that it would suspend its own plans for a referendum, but not cancel it outright.
But if the government thought that this mid-way position would finesse its European predicament by appeasing the large anti-European majority in the UK without gratuitously offending the EU’s other members, it was quickly disabused.
One consequence of last year’s enlargement is that it is forcing a far-reaching re-negotiation of all aspects of the EU budget.
Most of the ten new members are much poorer than the old members, and are thus much less able or willing to pay large financial contributions.
They expect to be net financial beneficiaries, which would help them modernize.
But the old member states that have hitherto benefited most from the budget – poorer countries like Spain, Greece, and Portugal – want the budget to be expanded, so that they can continue to receive money.
Old member states that have traditionally contributed most, like Germany and the Netherlands, want to keep the budget as small as possible.
Given this looming negotiation between old and new – and between rich and poor – and because Chirac has no cunning proposal for resurrecting the EU Constitution, he has sought and found a second scapegoat: Britain has, for over 20 years, benefited from a large rebate in its outsized contribution to the EU budget.
By design the EU Common Agricultural Policy (CAP) gives large financial benefits to countries with large farming sectors, like France, but imposes financial penalties on countries with small farming sectors, like Britain.
This inequity long rankled in Britain.
In 1984, Margaret Thatcher demanded and got a large rebate in the British net contribution, which this year is worth roughly €5bn.
Ever since, this concession has been resented by other member states.
Last week, Chirac decided to raise the stakes in the European crisis by going on the offensive against Britain.
The time has come, he said, for “our English friends” to understand that they have to make a gesture of solidarity, and renounce the rebate negotiated by Thatcher.
The British government’s first reflex was to reject any suggestion that the British rebate is open to discussion: it was justified in 1984, and it is justified today.
But Tony Blair has now gone on the counter-offensive, raising the stakes himself.
Britain, he says, might be prepared to put the British rebate on the table, but only if the French are prepared to remove the reasons for it by means of a radical renegotiation of EU farm policy.
From a narrowly British perspective, this might seem a shrewd and reasonable posture for defending British interests.
But, by picking up Chirac’s challenge, Blair has allowed himself to be drawn away from the general European dilemma (what to do about the Constitutional Treaty) – for which Britain is not to blame – to a specific policy problem (the CAP’s finances) on which Britain is isolated.
Coming from anyone else, Blair’s proposal to re-think the CAP might seem reasonable; indeed, over the years, the EU has tried (slowly) to reform its defects.
Unfortunately, in eight years of power, Tony Blair reinforced the widespread impression in the rest of the EU, that the UK is irremediably skeptical about European integration.
His proposal will thus be seen for what it is, a counter-attack on a founding policy of the European project.
The danger is that this week’s EU summit will not be devoted to finding a solution to the dilemma of the French and Dutch “no” votes, but instead will be turned into a confrontation between Britain and the rest about the budget.
This would be a pity for Europe and for Britain.
It would underscore the depth of the chasm between leaders who are seeking to advance the cause of European political integration but are out of touch with their electorates, and the British, who do not like European political integration at all.
From Copenhagen to Copenhagen
This week the EU's 15 Heads of state and government from the current Member States and the leaders of the 13 candidate countries meet in Copenhagen.
We meet with a clear task--to decide on enlargement of the EU.
We will finish a process that began almost ten years ago at another Summit in Copenhagen.
In 1993, the EU took the first step towards integrating the new democracies of Central and Eastern Europe into the EU.
Now we are ready to conclude negotiations with the first new Member States.
From "Copenhagen to Copenhagen" has thus been the motto of the Danish EU Presidency.
It is the expression of a contribution to a vision of a unique project and process, and of Denmark's ambition to accomplish a task that has been placed in our hands.
EU enlargement is the greatest political task of our generation.
It is a challenge and an opportunity reaching beyond the present day.
It marks the end of the tragedy of the division of Europe that marred the 20th century, and provides a gateway to a common future for our peoples, in freedom, peace and prosperity.
The 20th century was a tragedy for Europe.
Before the First World War, our Continent was characterized by optimism, self-confidence and faith in the future.
These values were lost in the Great War, and we never really recovered the optimism and faith in the future that preceded it.
Two horrible world wars tore our Continent apart.
The mayhem of the Second World War was followed by more than 40 years of Communist dictatorship in Central and Eastern Europe.
For nearly half a century, we lived with an unnatural division of Europe.
Now, at long last, we can close one of the darkest and most bloodstained chapters in Europe's history.
EU enlargement marks the beginning of a new era.
It can give Europe both the dynamism and the drive to create the foundation of a new European consciousness.
It is the key to the future of Europe.
In the Convention on the future of the EU, member states and candidate countries are already discussing how to organize the EU in the years ahead.
It is important that we secure efficient institutions and decision procedures.
This is necessary in order to develop our internal market and economies, create new jobs, promote sustainable growth, and strengthen our competitiveness.
It is a prerequisite for the EU to be able to play a strong and positive role internationally, promoting peace, sustainable development, free trade, and good governance.
Together we shall build this common future, and to move toward this goal, the discussions in Copenhagen will focus on three questions.
First, we will complete negotiations with up to ten countries: Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia.
This is a realistic ambition.
But all involved--both candidate countries and current member states--must show the necessary flexibility in the final round of negotiations.
The second question is how to continue the negotiations with Bulgaria and Romania.
These two countries are not yet ready for membership.
At the Summit in Brussels in October, we decided to support these two countries in their efforts to achieve EU membership in 2007.
In Copenhagen we will make concrete decisions on how we may strengthen their preparations for membership.
The Commission has presented a very reasonable proposal for how this can be done.
I expect that we can find reach agreement on this basis.
The third question relates to Turkey, with which accession negotiations have not yet begun.
The expectations of the new Turkish government--and of the Turkish people--are high.
At the same time, however, it is the assessment of the Commission that Turkey is still not yet ready to initiate accession negotiations.
It must first fulfill the clear political criteria defined by the EU in Copenhagen ten years ago.
In Copenhagen this time around, we will make decisions on the next stage of Turkey's candidacy.
We must find a balanced answer reflecting both the present situation and the potential for development in Turkey.
As a candidate country, Turkey will, of course, be treated like all other candidate countries, and it will be important to send a clear signal to the Turkish people confirming their belief in the perspective of membership and a future based on Western and European values.
Europe's leaders meet in Copenhagen this week to unite our continent in peaceful cooperation.
What generations of Europeans have dreamt of is at long last within reach.
Leaders from both member states and candidate countries face a historic decision.
After ten years of preparation the time has come to make the final crucial decisions on enlargement.
From de Gaulle to Putin
PARIS – Fifty years ago, General Charles de Gaulle seized power in France in what was, in essence, a legal coup d’etat.
True, the General had been called upon and elected by the floundering French Parliament.
But pressure from the French army, and rebellion in Algeria, did not give Parliament much of a choice.
The ailing French republic’s political leaders hoped that de Gaulle could end the Algerian war, yet keep Algeria French.
De Gaulle’s agenda was very different: he wanted to rewrite the Constitution and to found a new “Fifth Republic” for France.
The war in Algeria was, for de Gaulle, but another symptom of a dysfunctional state, an analysis that went back to his own experiences in 1940, when the French government proved unable to resist invasion by Hitler’s Germany.
Only a strong leader, de Gaulle thought, could have avoided defeat.
In his memoirs, de Gaulle stated his preference for restoring the monarchy after the Liberation.
But public opinion was not prepared for that, and the heirs to the French crown were not up to the task.
The alternative was an elected monarch: the Fifth Republic’s Constitution, ratified 50 years ago this week, was crafted around that central principle.
What de Gaulle despised about the Fourth Republic was what he dubbed the “regime of the parties,” which put their own interests above the national interest.
Only a king or an elected monarch could incarnate the national interest.
Remarkable propagandist that he was, de Gaulle convinced the French that the Fourth Republic was a disaster – a canard that has remained common wisdom ever since.
But de Gaulle’s vision of government resonated with the convictions of many French and, above all, with many public intellectuals.
The French have seldom been enamored of democracy.
The philosophers who were the intellectual fathers of the 1789 revolution longed not for democracy, but for enlightened despotism, which is what many French still look for when they elect a president.
Democracy from a French perspective looks too American.
The French are thus more ready to believe in the cultural diversity of nations than in the universality of democracy.
This explains why French governments of both right and left tend to support despotism in countries where it seems “natural.”
Despots in Arab countries, China, and Russia do not shock the French.
Indeed, no French president would ever think of exporting democracy.
As former President Jacques Chirac said: to impose democracy in Arab countries means that you despise their cultural differences.
As de Gaulle wished, the French president has powers without equal in any other Western democracy.
Montesquieu’s idea of a separation of governmental powers plays no role in France.
Parliament is weak, the judiciary is under executive control, the media is kept under surveillance, and there is no constitutional guarantee of free speech.
The president’s powers are limited only by accident, when a majority in parliament happens to be against him: this happened to both the socialist François Mitterrand and the conservative Jacques Chirac.
Each had to “cohabit” for a time with a hostile parliament.
Military and foreign affairs – what the French system deems the president’s “reserve domain” – are always in the president’s personal control.
But when president and parliament are controlled by the same party – Nicolas Sarkozy’s current situation – the “reserved domain” knows, in practice, no limit.
Despite this huge concentration of powers in the presidency, or perhaps because of it, the Fifth Republic has failed to perform better than more democratic Western regimes.
The French state budget is chronically ill-managed, running deficits on par with Italy.
Many grandiose Gaullist economic projects – from the Concorde supersonic airplane to a national computer industry – failed.
Most public-sector industries have been near bankruptcy until saved by competition and privatization.
France’s elected monarchs have few reasons to be proud of their supposedly efficient state.
The exception may be the military and the diplomatic service: following de Gaulle’s lead, all French presidents have financed the military generously.
The Gaullist tradition has also been maintained by an independent diplomatic corps that tends towards “non-alliance with allies” and is often perceived as perfidious and arrogant.
Indeed, through much of the Cold War, de Gaulle appeared to want to avoid having to choose sides between the United States and the Soviet Union.
Valéry Giscard d’Estaing had the best relations with East European communist leaders among all Western leaders.
Chirac vociferously opposed the war in Iraq.
Sarkozy nowadays acts more in harmony with the US, NATO, and the European Union, but does so because he wants to be a world leader.
But the real problem with the Fifth Republic might be its influence beyond France.
Following de Gaulle’s lead, elective monarchy or enlightened despotism is now perceived as a legitimate alternative to parliamentary democracy or US-style separation of powers.
Most of Latin America, except for Brazil and Chile, are elective monarchies, a modernized version of the old caudillo tradition.
Russia, after a brief attempt at democracy under Boris Yeltsin, has reverted to a form of unenlightened despotism under Vladimir Putin.
It holds elections, but more as a nod to modernity than to represent the people’s will.
Like the Mona Lisa in the Louvre, the French Revolution’s clarion call for universal rights can be admired only from behind bullet-proof glass, and it is definitely too precious to be exported.
From Depression to Freedom
Clinical depression affects roughly one in four people at some point in their lives.
It is a severe and prolonged state of mind in which normal sadness grows into a painful state of hopelessness, listlessness, lack of motivation, and fatigue.
But, however well defined, clinical depression is many things to many people, varying from mild to severe.
Mild depression can result in brooding on negative aspects of self or others, feeling resentful, irritable or angry much of the time, feeling sorry for oneself, and needing constant reassurance from someone.
It can also result in various physical complaints that do not seem to be caused by any physical illness.
As depression worsens, feelings of extreme sadness and hopelessness combine with low self-esteem, guilt, memory loss, and concentration difficulties to bring about a severely painful state of mind.
To make things worse, there may be a change in basic bodily functions.
The usual daily rhythms seem to go wrong: can’t sleep, or sleep too much, can’t eat, or eat too much.
Enthusiasm for what are usually enjoyable activities fades.
Sometimes, there is even a feeling that life is not worth living and that one would be better off dead.
The most commonly used treatment for major depression is antidepressant medication.
It is relatively cheap, and it is easy for family practitioners, who treat the majority of depressed people, to prescribe.
However, when the episode has passed, and medication ceases, depression tends to return, and at least 50% of those who experienced an initial episode of depression find that depression comes back, despite appearing to have made a full recovery.
After a second or third episode, the risk of recurrence rises to 80-90%.
Early onset depression (before 20 years of age) is particularly associated with a significantly higher risk of relapse and recurrence.
For those who have been suicidal in the past, any depressed mood is likely to be accompanied by a return of suicidal thinking.
The problem with viewing antidepressants as the main method for preventing recurrence is that many people do not want to stay on medication for indefinite periods, and when the medication stops, the risk of becoming depressed again returns.
Finding new ways of helping people stay well after depression demands an understanding of why depression keeps returning.
During a period of crisis in which someone becomes depressed and suicidal, an association is learned between the various symptoms (low mood, physical pain, suicidal tendencies, and so on).
This means that when the negative mood returns, for any reason, it will tend to trigger all the other symptoms – a process called “cognitive reactivity”).
The discovery that the link between negative moods and negative thoughts remains ready to be reactivated even when people feel well is hugely important: it means that preventing future crises depends on learning how to keep mild upsets from spiraling out of control.
Research has shown that combining the ancient practice of meditation with modern psychotherapies can accomplish this.
Based on Jon Kabat Zinn’s Stress Reduction program at the University of Massachusetts Medical Center, Mindfulness-based Cognitive Therapy (MBCT) combines modern cognitive behavioral therapy with meditation practices to help people become more aware of the present moment, including getting in touch with moment-to-moment changes in the mind and body (see www.mbct.co.uk).
In weekly classes (the atmosphere is that of a class, rather than a therapy group), and by listening to CD’s or tapes at home during the week, participants learn the practice of mindfulness meditation.
The classes also include basic education about our moods, and several exercises from cognitive therapy that show the links between thinking and feeling and how participants can best look after themselves when a crisis threatens to overwhelm them.
The MBCT approach helps participants in the classes to see more clearly the patterns of the mind and to learn how to recognize when their mood is starting to sink.
It helps break the normal link between negative mood and negative thinking.
Participants develop the capacity to allow distressing moods, thoughts, and sensations to come and go, without having to battle with them.
They find that they can stay in touch with the present moment without having to ruminate about the past or worry about the future.
Thus, they come to see with greater clarity and conviction how to approach moment-by-moment experience skillfully, taking more pleasure in the good things that often go unnoticed or unappreciated while dealing more effectively with the difficulties encountered, whether real or imagined.
Two controlled clinical trials have demonstrated that MBCT can reduce the likelihood of relapse by about 40-50% in people who have suffered three or more previous episodes of depression.
As a result of such findings, MBCT has now been included in the British government’s national guidelines for treating recurrent major depression.
But this implies a redefinition of treatment itself.
As our understanding of depression grows and we see that it is a recurring problem, the emphasis is shifting from cure to prevention.
Mindfulness-based approaches have already proven that they will play an enormously important role in this.
From Financial Meltdown to Global Depression?
NEW YORK – The rich world’s financial system is headed towards meltdown.
Stock markets have been falling most days, money markets and credit markets have shut down as their interest-rate spreads skyrocket, and it is still too early to tell whether the raft of measures adopted by the United States and Europe will stem the bleeding on a sustained basis.
A generalized run on the banking system has been a source of fear for the first time in seven decades, while the shadow banking system – broker-dealers, non-bank mortgage lenders, structured investment vehicles and conduits, hedge funds, money market funds, and private equity firms – are at risk of a run on their short-term liabilities.
On the real economic side, all the advanced economies – representing 55% of global GDP – entered a recession even before the massive financial shocks that started in late summer.
So we now have recession, a severe financial crisis, and a severe banking crisis in the advanced economies.
Emerging markets were initially tied to this distress only when foreign investors began pulling out their money.
Then panic spread to credit markets, money markets, and currency markets, highlighting the vulnerabilities of many developing countries’ financial systems and corporate sectors, which had experienced credit booms and had borrowed short and in foreign currencies.
Countries with large current-account deficits and/or large fiscal deficits and with large short-term foreign currency liabilities have been the most fragile.
But even the better-performing ones – like Brazil, Russia, India, and China – are now at risk of a hard landing.
Many emerging markets are now at risk of a severe financial crisis.
The crisis was caused by the largest leveraged asset bubble and credit bubble in history.
Leveraging and bubbles were not limited to America’s housing market, but also characterized housing markets in other countries.
Moreover, beyond the housing market, excessive borrowing by financial institutions and some segments of the corporate and public sectors occurred in many economies.
As a result, a housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, and a hedge funds bubble are all now bursting simultaneously.
The delusion that economic contraction in the US and other advanced economies would be short and shallow – a V-shaped six-month recession – has been replaced by certainty that this will be a long and protracted U-shaped recession, possibly lasting at least two years in the US and close to two years in most of the rest of the world.
And, given the rising risk of a global systemic financial meltdown, the prospect of a decade-long L-shaped recession – like the one experienced by Japan after the collapse of its real estate and equity bubble – cannot be ruled out.
Indeed, the growing disconnect between increasingly aggressive policy actions and strains in the financial market is scary.
When Bear Stearns’ creditors were bailed out to the tune of $30 billion in March, the rally in equity, money, and credit markets lasted eight weeks.
When the US Treasury announced a bailout of mortgage giants Fannie Mae and Freddie Mac in July, the rally lasted just four weeks.
When the $200 billion rescue of these firms was undertaken and their $6 trillion in liabilities taken over by the US government, the rally lasted one day.
Until the recent US and European measures were announced, there were no rallies at all.
When AIG was bailed out to the tune of $85 billion, the market fell 5%.
Then, when the $700 billion US rescue package was approved, markets fell another 7% in two days.
As authorities in the US and abroad took ever more radical policy steps from October 6-9, stock, credit, and money markets fell further, day after day.
Do the recent measures go far enough?
When policy actions don’t provide real relief to market participants, you know that you are one step away from a systemic collapse of the financial and corporate sectors.
A vicious circle of deleveraging, plummeting asset prices, and margin calls is underway.
So we cannot rule out a systemic failure and global depression.
As we have seen in recent days, it will take a big change in economic policy and very radical, coordinated action among all advanced and emerging-market economies to avoid disaster.
This includes:
• another rapid round of interest-rate cuts of at least 150 basis points on average globally;
• a temporary blanket guarantee of all deposits while insolvent financial institutions that must be shut down are distinguished from distressed but solvent institutions that must be partially nationalized and given injections of public capital;
• a rapid reduction of insolvent households’ debt burden, preceded by a temporary freeze on all foreclosures;
• massive and unlimited provision of liquidity to solvent financial institutions;
• public provision of credit to the solvent parts of the corporate sector in order to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
• a massive direct government fiscal stimulus that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower-income households, and provision of grants to cash-strapped local governments;
• an agreement between creditor countries running current-account surpluses and debtor countries running current-account deficits to maintain an orderly financing of deficits and a recycling of creditors’ surpluses to avoid disorderly adjustment of such imbalances.
Anything short of these radical and coordinated actions may lead to a market crash, a global financial meltdown, and worldwide depression.
The measures adopted by the US and Europe are a start.
Now they must finish the job.
From Financial to Democratic Crisis in Asia
JAKARTA: Political crisis has replaced financial crisis in Southeast Asia.
President Estrada of the Philippines, who never mastered his office, was removed in a bloodless coup aided by mob rule.
Now Indonesia’s President Wahid faces possible impeachment; so, too, may Taiwan’s president.
Thailand’s new prime minister assumed office surrounded by scandal, Malaysia’s politics seem more unsettled than at any time in twenty years.
Southeast Asia’s boom years are gone, but this is not to say that they have vanished forever, for the causes of this instability are not hidden.
Today’s political turbulence, indeed, has the same roots as yesterday’s financial storms: inadequate, unsound, and unformed institutions.
Unless these institutional gaps are addressed, Asian societies will not get back on track.
Of course, finance and democracy are not twins.
Yet parallels exist: without the checks and balances of sound domestic institutions, the global winds of political liberalization unsettle former authoritarian regimes, much as economic globalization wrecked havoc on weak financial institutions.
Indeed, important lessons can be drawn from Asia’s economic crisis of 1997-98 for today’s political tumult.
The irony of Asia’s economic crisis was that it struck the “miracle” economies that maintained sound macroeconomic policies and carried out far-reaching financial liberalization.
What went wrong?
Some analysts proclaim that liberalization was “inappropriate” or “disorderly.”
Something similar to this complaint is now made by critics who say that countries like Indonesia and the Philippines are too sprawling and undisciplined to adopt democracy.
The trouble in the 1990s arose out of an unexpected confluence of vulnerable domestic financial systems and volatile international capital movements brought about by the globalization of financial markets.
Rapid globalization, however, came about only in part through technological advances.
Another crucial factor was the notion – proved too simplistic in the event – that free capital movements can just replace capital controls.
For a country to benefit from free international capital movements, however, it must have, inter alia, sound and strong financial institutions to prevent panic movements of capital and withstand systemic shocks if such movements occur.
The simplistic equation of financial liberalization with financial deregulation was at the root of Asia’s crisis.
Thailand, for instance, established the Bangkok International Banking Facilities in the hope of becoming a regional financial center, despite the fact that local financial institutions were ill-prepared to handle massive flows of capital.
Nor are institutions the same as laws on paper.
In comparison with Thailand, Indonesia had an adequate provision of prudential rules and regulations.
But it lacked effective legal and accounting systems, so those rules and regulations could not be properly enforced.
The case of Korea is equally instructive.
By 1997, Korea had “liberalized” its financial markets by eliminating government credit allocation and management of commercial banks.
But financial sector reform made it possible for the chaebols, the large conglomerates that dominate Korea’s economy, to increase their control over non-bank financial institutions.
Reform thus strengthened the chaebols’ internal capital market and weakened the banks’ role as monitors of corporate behavior.
Similarly, in the Philippines, financial liberalization, by and large, benefited large family-owned corporations, increasing their monopoly power by easing access to bank credit.
Southeast Asian policymakers are not the only people responsible for paying insufficient attention to establishing institutions necessary for a free-market financial system and the neglect of the danger of regulatory capture.
The West and international institutions also played a pervasive role by promoting the so-called Washington Consensus that defined economic orthodoxy in the decade preceding Asia’s crisis, which has continued ever since. “The pictorial symbol” of the Washington Consensus, quipped C. Fred Bergsten, “was the colonial posture assumed by the Managing Director of the IMF as the President of Indonesia....signed his diktat.”
Much as the Washington Consensus focused on financial liberalization, deregulation, free capital movements, privatization, and stable macroeconomic policy as the keys to development, today’s political consensus is on free elections and the political empowerment of the hitherto oppressed, without sufficient attention being paid to the institutional underpinnings of democracy, such as a functioning judicial system, an infrastructure of political parties, and other constitutional arrangements.
The effects may be equally sobering.
The economic Washington consensus took for granted the presence of institutions necessary for functioning free-markets or assumed that once government intervention was removed such institutions would emerge.
What actually followed, as countries embarked on financial liberalization, was an institutional vacuum that, when combined with volatile international capital movements, incited crisis.
Today, liberalization of the political system, without strengthening its ability to absorb the shocks of political struggle, seems to incite instability, too.
The lessons of Asia’s financial crisis and its current political crisis seem clear: in economics, removing government intervention without establishing needed institutional preconditions may deliver crisis, not growth; in politics, credible institutions to check and balance each other are as vital to democratic stability as the ballot box.
Here a hopeful sign in today’s political travails is found in the potent role played by Southeast Asia’s once tame press in reporting corruption scandals.
For independent media is a vital institutional check far too often absent across the Pacific.
Other powerful institutions, however, must take root for democracy to function properly.
From Football to Fascism in Russia
MOSCOW – In Russia, 2010 ended with an unprecedented upsurge of ultra-nationalist violence.
Images of rioting, fascist-minded thugs have dominated TV broadcasts.
The violence began following an ordinary conflict between two small groups of young people over a taxi.
One group consisted of young people from the Northern Caucasus, the other of fans of a Moscow football (soccer) club.
One of the leaders of the Moscow fans, Yegor Sviridov, was murdered.
Rumors raced around the city the next day that the police had released all those accused of Sviridov’s murder (as it happens, the rumors were true).
Spontaneous protests erupted in front of police headquarters, but the police did not intervene.
On December 11, another rally was held at site of the murder, and moved into the very center of Moscow, Manezhnaya Square, just outside the Kremlin’s walls.
The crowd began to chant nationalist slogans, and then proceeded to beat up passersby who did not look Slavic.
The police were slow to arrive.
The beatings continued and spread to the subway, where the police were essentially powerless.
The night finished with many wounded and one more killed.
The next day, back on Manezhnaya Square, beside the Tomb of the Unknown Soldier, a huge swastika appeared.
These events are not without precedent.
In 2002, Moscow authorities mounted huge TV-screens on Manezhnaya Square to broadcast a World Cup match between Russia and Japan.
By the start of the game, tens of thousands of young fans were on the square, many of them drunk and agitated.
When the final whistle sounded on a 1-0 victory for Japan, the crowd, infuriated, burst into spontaneous pogroms and beatings.
Those events were preceded by a propaganda campaign in which government-controlled newspapers, television stations, and radio broadcasters took part.
It was decided to exploit the forthcoming world championship for “patriotic” purposes.
In pumping up football-induced hysteria, Russian politicians – headed by then-President Vladimir Putin – took the lead.
The government had erected the TV screens outside the Kremlin in order to ensure patriotic exultation of the victory that they assumed was coming.
No one was prepared for defeat.
Clearly, careless manipulation by the authorities of patriotic sentiments has proven to be a risky business in Russia.
But the Kremlin still seems addicted to this means of buttressing its legitimacy among ordinary Russians.
Indeed, the vast popular protests that took place during the “Orange Revolution” in Ukraine five years ago convinced the Kremlin that they could not allow any spontaneous outburst of public emotions.
Officials evidently decided that it is better to flirt with and control public passion than allow it to erupt on its own.
Back then, the Kremlin was frightened by the possibility of a so-called “color revolution” breaking out in Russia.
As a result, enormous resources – both funds and officials’ time – were invested in youth movements created by Kremlin puppeteers, with two aims: control street political activity and prepare brigades for a future struggle – which might include ballot rigging – against political opponents.
For this purpose, contingents of football fans were also used.
This sort of manipulation is now a Kremlin staple.
Indeed, by coincidence, on the Sunday the young football fan was murdered in Moscow, Vladislav Surkov, the first deputy in President Dmitri Medvedev’s administration, was meeting Michael McFaul of President Barack Obama’s National Security Council.
That meeting was taking place as part of a gathering, led by Surkov, of Russian youth-movement activists.
One quote from Surkov that day is particularly telling: “Make ready for the elections, train your brains and muscles.
You can always rely on our support.” Those muscles were put to use outside the Kremlin walls that very day.
To understand what is at stake, it is sufficient to consider the name of the main youth movement fathered by the Kremlin: Nashi, or “Ours.”
It is difficult to invent a more potentially explosive moniker, for the name proudly proclaims a division between “us” and “them” – the most ancient and most destructive of human instincts.
And it is hard to rationalize so atavistic an effort being initiated by a government and supported with taxpayers’ money.
As a result, special youth brigades fostered by the Kremlin nowadays beat up activists of “not ours.”
If the policedetain Nashi members, a telephone call from the President’s administration follows, and the detainees are released.
That is why the police fail to take tough action against rioting young thugs.
Only when the Kremlin was seized by panic at the level of the disturbances that Nashi had initiated, did it demand that the police take control of events.
It is not clear yet whether the nationalist youth rebellion has been suppressed, and whether Muscovites will be able to use the subway without fear during Russia’s New Year and Orthodox Christmas holidays.
But it is absolutely certain that the Kremlin’s unconstitutional activities – its division of citizens into “ours” and aliens, and its flirtation with hard-core xenophobes – has led to serious social and political destabilization.
In a society with weakened immunity to extremism – and with an utterly dysfunctional government – the authorities are, perhaps literally, playing with fire.
From Global Imbalances to Effective Global Governance
STANFORD, CALIFORNIA – The current credit crisis has led to scaled-back projections for growth around the world.
Governments and central banks are responding to damaged balance sheets and credit lockups in an attempt to limit extreme harm to their economies outside the financial sector.
In the United States, the financial sector is undergoing a high-speed but permanent structural transformation, the effects of which could be severe for developing countries’ economic growth.
Indeed, these countries are already experiencing large relative price increases for food and oil, a food emergency for the poor, and higher rates of inflation induced by commodity price shifts.
While rapid growth in developing countries has been an important factor in the rising commodity prices, much of this is beyond their control.
For the past two years, my colleagues and I on the Growth Commission have sought to learn how 13 developing countries managed to record growth rates averaging 7% or more for 25 years or longer.
In The Growth Report , published in May, we tried to understand why most developing countries fell far short of this achievement, and explored how they might emulate the fast growers.
Sustained high growth is enabled by and requires engagement with the global economy that goes beyond simply being able to produce for a potentially massive export market.
It also involves, crucially, importing an essential intangible asset: knowledge.
Economies can learn faster than they can invent, so less developed countries can achieve much faster growth than was experienced by today’s industrialized countries when they were becoming wealthy.
Because of the importance of the global economy, the destiny of developing countries is not entirely in the hands of their leaders, workforces, and entrepreneurs.
Today, there are potential adverse global trends and challenges, many of which are relatively new developments that the 13 high-growth cases did not face.
The most immediate is financial distress emanating mainly, but not exclusively, from the US and spilling out to hit all sectors of the global economy.
This was and is the result of an asset bubble fueled by excessive leverage and by the massive transparency issues associated with complex securities and derivatives that were supposed to spread risk, but instead mainly increased the systemic risk already present with excess debt.
Much has become clear.
First, extreme financial distress can bring down the real economy, with a shortage of credit being the most potent channel.
Second, the current regulatory structure is not adequate to ensure stability in the US economy.
America’s light, incomplete, and fragmented pattern of regulation will not survive, and it will not be used as a model in other parts of the world.
Third, contributing factors included low interest rates, compressed risk spreads, and global imbalances that accommodated low savings in the US, consumption in excess of output, and a mounting trade deficit.
Absent the willingness of large developing countries to run trade surpluses and high savings rates relative to investment, the asset bubble in the US – leading to a rise in domestic consumption and a fall in the savings rate – would have triggered inflation and higher interest rates.
That would have put a partial brake on growth in asset prices, raised savings, reduced investment, and probably lowered the trade deficit.
But the automatic stabilizers that normally kick in did not.
In general, automatic stabilizers may not kick in across the global economy, which means that policies need to be coordinated.
Fourth, regulatory structures will need to be rebuilt, and this will require a global effort.
Absent international coordination, the opportunities for destructive regulatory competition will defeat regulatory reform.
Finally, both the interdependence and global risk that are evident in this crisis will and probably should cause countries to adopt policies with respect to financial structures that provide for some insulation from external shocks, even if such policies impose a cost.
The interdependencies in the global economy (in areas as diverse as financial markets, product safety, infectious diseases, natural resource dependency, and global warming) have outrun our collective capacity to manage them and coordinate policy responses. Restoring that balance will take time, leadership, a shift in attitudes, and creativity.
In the interim, the mismatch creates risks for everyone, including developing countries.
It creates skepticism about whether the net benefits of openness are positive, and uncertainty about what adaptations are needed in the regulation of free markets to achieve a reasonable balance between their benefits and risks.
Influential developing countries share a joint responsibility with the G-8 for the stability of the global financial and economic systems.
But they currently have limited channels for discharging that responsibility and influencing global policies.
In addition, collectively we must do a better job of anticipating problems rather than being in reactive mode in the face of crises.
The global economy and its increasing openness made it possible for three billion people to enjoy the fruits of growth in the postwar period.
It may also provide an economic springboard for another two billion people to fulfill their aspirations in the coming decades.
But openness brings risks, many unanticipated and most under-managed.
People are skeptical for understandable reasons, and in the case of the credit crisis, angry.
Openness needs protecting and the best way to protect it is to manage the areas of growing interdependence effectively, pragmatically and inclusively.
From Hubris to Nemesis in the EU
Paris – The European Union’s Lisbon treaty was initially greeted with enthusiasm, pride, and even hubris.
It promised a more realistic and reasonable way forward than the ill-fated constitutional treaty that it replaced, and many of its supporters also hoped that a central feature of its predecessor – the notion of “constitutional patriotism” – was still alive.
But the Lisbon treaty has instead brought chaos to the Union.
What went wrong?
Constitutional patriotism, a concept developed by two German philosophers, Dolf Sternberger and Karl Jaspers, was intended to replace the nationalism that had been discredited in Germany by the country’s Nazi past.
Similarly, as the EU evolved into a federal state, its loyal citizens would reject nationalism based on ethnic affinities and instead identify with the democratic principles of the federation’s constitution.
This fantasy was unambiguously rejected by Irish voters, so it seems fitting to remind ourselves that the ancient Greeks, who gave the word “hubris” to the western world, saw it as a portent of tragedy leading to downfall, or “nemesis.”
Did the ambitions of the Lisbon treaty’s designers condemn it to failure?
And, indeed, has it really failed? After all, European integration may meet obstacles, but it is still moving forward.
As France’s Robert Schuman, one of the EU’s founding fathers, said in 1950, “Europe will neither happen in one go, nor as a whole construct: it will happen through concrete achievements, first by creating a de facto solidarity.”
Many thought that this solidarity had been achieved in October 2004, with the signing of the Nice treaty, which outlined an EU constitution.
But only 18 member states then approved it, before France and the Netherlands rejected it in referenda and the seven other member states then halted the ratification process.
Faced with this situation, the European Council had only two choices. First, it could stick with the Nice treaty as the basis of the Union’s operation.
But that admission of failure would have weakened the political dynamic of the European project and severely constrained its scope for the future. The second option was to search for a compromise – the Lisbon treaty.
It bears repeating that the Lisbon treaty constitutes real, if modest, progress for the European project.
Under its terms, the European Council’s presidency would have far greater stability; in place of the current six-month rotating presidency, a European political leader who could command the necessary support would be elected to serve as President for two and a half years.
Council decisions that now require unanimity would be taken by majority vote.
The EU’s “high representative” would straddle the European Commission and the European Council to look after foreign affairs and security, and the European Parliament would have more power.
Over and above these considerable advances, the treaty aims to make the EU more democratic.
A group of citizens would be able to “invite” the European Commission to propose new legislation.
National parliaments would be given a say in EU lawmaking, as the treaty recognizes the roles of parliaments in the “adequate workings of the Union.”
Yet, despite its undeniable importance and its contribution to the EU’s development, the Lisbon treaty is far from being the key to everything.
Instead, it is a simplified treaty replete with protocols, dispensations, and opt-out causes.
Former Belgian Prime Minister Guy Verhofstadt was right when he spoke of the treaty as a set of “footnotes.”
Meanwhile, with the Lisbon treaty blocked and no institutional step forward in sight, the underlying question remains: What type of Europe do we want?
The Lisbon treaty is content with clearing pathways rather than creating new horizons.
It mainly gives member states’ leaders the responsibility of implementing various EU advances, and sketches only tantalizing glimpses of Europe’s full potential.
It doesn’t condemn the EU, but as French President Nicolas Sarkozy likes to say, it doesn’t save it, either.
The member states’ political authority remains the motor of European policymaking, with all that this implies in terms of coordination, compromise, and negotiation.
It is now up to the EU’s political leadership to move quickly and take firm grasp of the achievements that initially gave birth to the Lisbon treaty. A charter of fundamental rights has, for example, been integrated into the treaty; but, unless the member states bring it to life, it will certainly fail to yield concrete results.
Fair rather than free competition in trade is proposed, but what does this mean if member states are not able to reach consensus on how to make it happen?
A final point worth emphasizing is that the Lisbon treaty moves away from many of the ideas that could serve as the foundations of a European federal super-state.
The disappearance from the treaty of such terms as “constitution” and “minister of foreign affairs” clearly show that the constitutional treaty’s ambitions have been scaled back.
To move forward without Ireland by establishing a new Union with only 26 countries is legally impossible.
But starting a new cycle of institutional negotiations also seems improbable.
Europe’s citizens are tired of these recurrent discussions – since 1995, there have been treaties of Amsterdam, Nice, Rome, and Lisbon, none of which has entirely succeeded.
Some believe that we will ultimately find a compromise, some ruse to make the Irish succumb, that gives the EU a treaty.
But it will all take time, and if the new arrangement lacks a qualified majority vote, fails to reform the Commission, and includes an opt-out on the charter of fundamental rights, it will not resolve the EU’s essential problems or its estrangement from European public opinion.
Perhaps hubris has finally delivered nemesis in the form of a Union without people, where treaties have replaced the spirit of Europe.
From Kafka to Gorbachev
NEW YORK – On August 2, 1914, Franz Kafka wrote in his diary: “Germany has declared war against Russia.
Kafka, the reclusive and visionary Central European writer, gave his name to the twentieth century. Seventy-five years had to pass after Kafka’s swim before Central and Eastern Europe would return to the broader European civilization.
A Kafkaesque pause, some might say.
Central and Eastern Europe was never only a place of right and left dictatorships, of ethnocentrism and xenophobia, of perpetual and frozen conflicts, as some now caricature it.
It was also the birthplace of a spiritual heritage, of thinkers and artists, of a specific mode of creativity and search for meaning beyond pragmatic negotiations with daily life.
In 1989 the region’s peoples brought with them in their “return to Europe” their diversity and richness; their vivacity, mysteries, and memories; and their old and new aspirations.
And they brought the lesson that moving from a closed society to an open one is both possible and extremely difficult.
As Thomas Mann once wrote: “Freedom is more complicated than power.”
Freedom changes the frame and substance of choice, and of individual and collective responsibility.
It highlights the contrast between initiative and apathy, enterprise and obedience, competition and total dependence on a state that embodies a kind of unshakable fate.
Just as slavery must be learned, step-by-step, in order to survive its terror and tricks, so freedom must be learned in order to face its risks and opportunities.
At that fluid border between old and new people craved most what they had never had: freedom of thought and expression, information, the tools to debate and define their own happiness.
The fall of the Berlin Wall and German reunification, surprisingly accepted by Mikhail Gorbachev, meant immediate and direct support in reconstructing East Germany’s institutions and economy.
Yet, even in Germany, the situation was far from ideal, with many “Ossies” frustrated by their seeming second-class status, and many “Wessies” resenting the financial burden of annexation.
Elsewhere, change proved far more complicated.
Many of the new post-communist societies – consumed with revenge, resentment, and raw struggles for power and status – became breeding grounds for aggressive nationalism.
Ethnocentricism, xenophobia, and anti-Semitism flourished, together with corruption, nepotism, hypocrisy, and opportunism.
The post-communist turmoil led to the dismemberment of the Soviet Union and the breakup of Czechoslovakia, fueled Yugoslavia’s wars and ethnic atrocities, and brought forth authoritarian rule and imperial revanchism in Russia.
In this chaotic freedom, suddenly revealed secrets destroyed families and friendships and a common sense of togetherness; it shattered social stability, as insecure or falsified as that was.
Sometimes it even replaced the old hypocrisy and opportunism with new ones as many former officials and secret-police employees thrived.
Public debates across Eastern Europe soon started to exhibit a fierce confrontation between two different hidden memories: the memory of the Holocaust and that of the communist terror and crimes.
Unavoidably, old-new clichés emerged.
In Romania, some leading intellectuals publicly condemned the so-called “Jewish monopoly of suffering” – part of an “international conspiracy” that had reached, once again, the territory between the Danube and the Carpathians.
In the notorious Walser Debate of 1998 in Germany about the “unbearable” way Germans had been portrayed after the Holocaust, I proposed that every country should complement its monuments of heroism with monuments of shame to recall the wrong done to other countries, other peoples, and also to its own people.
A decade later, that proposal still seems meaningful.
Would not monuments to shame be as instructive, if not more so, than monuments to heroism?
While admission to the European Union appeared to draw a line under the post-communist period (at least in Central and Eastern Europe), the rupture of 1989 did not mark the beginning of an era of perfect cooperation by the people and for the people.
But that did not stop some from proclaiming that the triumph of liberal capitalism meant the end of ideological struggle – and thus of History.
It requires a large reserve of imagination, optimism, or plain stupidity to believe that one’s fellow human beings will ever live beyond history and ideology.
As the religious terrorists of September 11, 2001, proved, the human story and mankind’s history go on, as before, through ideas and conflicts, through projects of absolute happiness, through cruelty and disasters, revolutions and revivals.
And liberal capitalism itself – with its mediocre political leaders and cartoonish public discourse – has become a poor advertisement for the Absolute Idea.
Indeed, some now wonder if the recent financial crisis has done to liberal capitalism what the fall of the Berlin Wall did to communism.
There is an unnerving similarity between many economists’ naive premise of a perfectly rational market and the “dialectical materialism” of scientific socialism.
By hijacking “rationality” in the belief that human behavior can be predicted (and thus potentially controlled), today’s arrogant General Staff of economists, bankers, and bureaucrats have compromised not only themselves, but the basic notion of freedom.
We have no real alternative to the market, just as we have no real alternative to freedom.
None of the defects or shortcomings of market economies are as bad as the remedies ranged against them.
But, just as every act of individual and collective freedom threatened “real socialism,” so we must acknowledge that human freedom – the emancipation of creativity – means the end of certainty.
This uncertainty does not weaken liberal capitalism – on the contrary, it is the system’s primary source of strength.
But it does extend to what economists’ can know about human behavior and the market.
In this regard, the most important lesson of 1989 and its aftermath is that society’s evolution can never be perfectly prophesied.
Despite great difficulties and tensions, today’s post-communist capitalism is still better than the degenerate and tyrannical “real socialism” of yesterday.
From Karl Popper to Karl Rove – and Back
NEW YORK &#45;&#45; In his novel 1984 , George Orwell chillingly described a totalitarian regime in which all communica­tion is controlled by a Ministry of Truth and dissidents are persecuted by political police.
The United States remains a democracy governed by a constitution and the rule of law, with pluralistic media, yet there are disturbing signs that the propaganda methods Orwell described have taken root here.
Indeed, techniques of deception have undergone enormous improvements since Orwell’s time.
Many of these techniques were developed in connection with the advertising and marketing of commercial products and services, and then adapted to politics.
Their distinguishing fea­ture is that they can be bought for money.
More recently, cogni­tive science has helped to make the techniques of deception even more effective, giving rise to political professionals who concentrate only on “get­ting results.”
These professionals take pride in their ac­complishments, and may even enjoy the respect of an American public that admires success no matter how it is achieved.
That fact casts doubt on Karl Popper’s concept of open society, which is based on the recognition that, while perfect knowledge is unattainable, we can gain a better understanding of reality by engaging in critical thinking.
Popper failed to recognize that in democratic politics, gathering public support takes prece­dence over the pursuit of truth.
In other areas, such as science and industry, the impulse to impose one’s views on the world encounters the resistance of external reality.
But in politics the electorate’s perception of reality can be easily manipulated.
As a result, political discourse, even in democratic societies, does not necessarily lead to a better understanding of reality.
The reason democratic politics leads to manipulation is that politicians do not aspire to tell the truth.
They want to win elections, and the best way to do that is to skew reality to their own benefit.
This insight should lead us not to abandon the concept of open society, but to revise and reaffirm the case for it.
We must abandon Popper’s tacit assumption that political discourse aims at a better understanding of reality and reintroduce it as an explicit requirement.
The separation of powers, free speech, and free elections alone cannot ensure open society; a strong commitment to the pursuit of truth is also required.
We need to introduce new ground rules for political discourse.
These cannot be identi­cal to scientific method, but they should be similar in character, enshrining the pursuit of truth as the criteria on which political views are to be judged.
Politicians will respect, rather than manipulate, reality only if the public cares about the truth and punishes politicians when it catches them in deliber­ate deception.
And the public should care about the truth because deception misleads people in choosing their representatives, distorts policy choices, undermines ac­countability, and destroys trust in democracy.
Recent history provides convincing evidence that policies based on a misrepresenting reality backfire.
The Bush administration’s response to the terrorist attacks of September 11, 2001 – declaring a War on Terror and treating criticism as unpatriotic – succeeded in gathering public support, yet the results were the exact opposite to what the Bush administration intended, both for itself and the United States.
The practical difficulty is in recognizing when political profes­sionals are distorting reality.
There is an important role here for the media, the political elite, and the educational system, which must all act as watchdogs.
In addition, the public needs to be inoculated against the various tech­niques of deception.
The most ef­fective techniques operate at the subconscious level.
When emotions can be aroused by methods that bypass consciousness, the public is left largely defenseless.
But if the public is made aware of the various techniques, it is likely to reject them.
One influential technique – which Republican pollster Frank Luntz says that he learned from 1984 - simply reverses meanings and turns reality on its head.
Thus, Fox News calls itself “fair and balanced,” and Karl Rove and his acolytes turn their opponents’ strongest traits into their Achilles’ heels, using insinuations and lies to portray the opponents’ achievements as phony.
That is how insinuations of cowardice and foul play helped defeat two highly decorated Vietnam War veterans, Senator Max Cleland in 2002, and John Kerry in 2004, while Bush and Vice President Dick Cheney – both of whom avoided military service ­– were portrayed as true patriots.
Another technique is transference: accusing opponents of having motives or using methods that characterize the accuser himself.
For example, David Horowitz, who accuses me of being “the Lenin of the anti-American conspiracy,” is a former Trotskyite for whom opponents are never adversaries to be debated, but rather enemies to be crushed.
The American public has proven remarkably susceptible to the manipulation of truth, which increasingly dominates the country’s political discourse.
Indeed, a whole net­work of publications, some of which manage to parade as mainstream media, is devoted to the task.
Yet I believe that it is possible to inoculate the public against false arguments by arousing resent­ment against Orwellian Newspeak.
What is needed is a concerted effort to iden­tify the techniques of manipulation – and to name and shame those who use them.
Now is an ideal time to begin that effort.
Americans are now awakening, as if from a bad dream.
What we have learned from recent years’ experience – what we should have known all along – is that the supremacy of critical thought in political dis­course cannot be taken for granted.
It can be ensured only by an electorate that respects reality and punishes politicians who lie or engage in other forms of deception.
From Lady Di to Michelle Obama
NEW YORK– In one week, Michelle Obama sat for a formal White House portrait, dressed in somber, tailored clothes; posed for a snazzy People magazine cover, dressed in a slightly down-market, hot-pink lace outfit that showed plenty of skin; let the national media know that the First Family would be getting its new puppy from a rescue shelter; and had her press office mention casually that “secretaries and policy makers” had been invited for popcorn and movies at the White House.
That same week, in the midst of the worst economic crisis since the 1930’s, a national poll found that support for President Barack Obama was remarkably high, with respondents consistently saying that he “cares about people like me.”
These two phenomena are closely related.
Almost from her first appearance in the public eye, Michelle Obama has used clothing, etiquette, and such cues as where she shops and entertains to send out a subtle but radical message to American voters and to the world.
For the first time since the days of Andrew Jackson, the White House is aggressively “democratizing” the highest office in the land, and symbolically inviting in the common man – and now the common woman.
In other words, Mrs. Obama is managing to set herself up, unprecedentedly, as the “people’s First Lady.”
She has carefully studied not only Jackie Kennedy – a comparison obvious from her sheath dresses, boat collars, and page-boy haircut – but also the triumphs and failures of that other glamorous but underestimated stealth radical, Princess Diana.
Princess Di’s legacy in generating iconography that opened the way to tremendous social change is grossly underappreciated.
In her brief lifetime, she was often lauded for qualities (her beauty and style) that were secondary to her life’s work, and derided for other aspects of her character (her emotionality and chaotic personal life) that were equally beside the point.
As a result, few people noticed how genuinely, powerfully transformative her agenda was, how well she had thought it out, and how audaciously she sought to manage it.
Without a formal education, Diana self-consciously set about pushing open the doors of an encrusted monarchy, challenging the sanctities of a long-established class structure, and affirming the value and immediacy of a Britain that was more diverse and socially mobile than ever before.
Sometimes her efforts were heavy-handed, as when she embraced AIDS victims physically as a metaphor for social inclusion; sometimes they backfired, as when her shared intimacies with servants provided fodder for a flood of posthumous tell-all books.
But, again and again, by showing up for Elton John and not just for the ballet, or by taking her sons away from the hunting preserve of Balmoral to careen down a waterslide at a tacky amusement park, she told ordinary Britons that their world was as important as any other.
She told them that she wanted to know them, and that she wanted her sons to know them, too.
It was this radical popularizing/democratizing mission –�not her knowledge of her former husband’s secrets or her later intimate relationship with a Muslim – that made her such a threat to the British establishment.
And she was successful: she taught leaders that they would have to invite the people in – and treat them with basic respect – if they were to maintain their position.
So, what Michelle Obama is doing is not trivial.
It was not an earth-shattering policy revelation when she astutely followed reports of Sarah Palin’s $150,000 wardrobe by remarking casually on a late-night talk show that she was wearing a chain-store brand, and that “you can get lots of cute things online.”
But it was nonetheless a powerful statement, especially to women, that said: I am not Nancy Reagan, dressed in Galliano, living in a gated community;
I am not Mrs. Clinton, disregarding such things because I must argue major cases or run states;
I am you – busy, on a budget, overworked, shrewd, cute, clever, finding a way.
Likewise, her invitations to the White House are being used for populist messaging.
Who came over to watch the White House chef with Mrs. Obama?
Local cooking school students.
Who sang at a White House event?
Local public high school students.
Again, “secretaries and policy makers,” not “policy makers and secretaries,” are coming over for film night.
She is deliberately, coolly signaling that secretaries are just as good and important as policy makers, if not more so.
This is a guest list that says to an anxious electorate: I respect you, wherever you are on the socioeconomic scale.
Many White House speechwriters have used that rhetoric, but almost no First Ladies have walked the talk and passed the popcorn.
When I worked on messaging for Al Gore’s 2000 presidential campaign, I often argued with white, older, affluent, male advisers who cared intensely about what was said in the elite media but ignored the popular venues to which most Americans pay attention.
They had learned nothing from the right, whose candidates knew how powerful the right colors, clothing, imagery, and even lighting can be, and how strongly personal narratives – Ronald Reagan in riding boots, or George W. Bush in a flight suit – resonate with voters.
Meanwhile, the nerdy, wonky left kept issuing data points, policy summaries, and white papers –�and generally, since Clinton, kept losing – until a young couple showed up and understood that Americans don’t just read; they watch.
You can tell the nation more about your values by saying where you will seek a dog for your daughters than you can through reams of unread position papers.
At a time of crisis, the Obamas are sending a powerful message, and Mrs. Obama, as the female archetype who has picked up Princess Di’s dropped baton, is instrumental in crafting it: no matter who you are, how stressed, how broke, there is, figuratively speaking, a seat in the White House with your name on it.
From “Les Bleus” to “the Blues”
PARIS – Is football (soccer) just a mirror that reflects the collective emotions of a country?
Or should it instead be seen as a magnifying glass, if not sometimes a distorting mirror, that reveals on the playing field the frustrations, fears, ambition, or hope of a nation?
It would be tempting to attribute to football a “mapping” of the emotional state of the world.
Asia is doing less well in the World Cup than it is doing in economic terms, yet it is definitely progressing, compensating for the current lack of individual talent by the greater collective discipline shown by its teams.
By contrast, in terms of creativity, Latin American flair shines well beyond Brazil and its confirmed emerging-power status in the world to encompass countries such as Argentina, Uruguay, and even Chile.
Africa, despite some rare individual national successes, continues to underperform, even with the World Cup in its backyard.
As a Frenchman who watched with a mixture of sadness and humiliation the behavior of the French national team, on and off the field (happily, the torture is over), the image in the mirror makes a lot of sense.
But can one go so far as to say that a depressed country can produce only a depressed team?
There are many countries with social and economic conditions that are equal to or worse than France’s, yet their national teams are currently shining on the field.
Consider Portugal or the Netherlands, not to mention Spain.
And just think of Argentina.
One could almost speak of an inverse relationship between a country’s confidence and that of its World Cup football team.
The catastrophic performance of France’s team in South Africa may well reinforce the nation’s depression.
French citizens badly needed a furlough, if only for a month, from the socio-economic reality of their country.
But one should not confuse the consequence with the cause.
The French team’s performance may reflect the mood of the country, but the failure of France’s international stars to jell reflected, above all, a total absence of leadership at the helm.
Too much money, too little respect for the honor of wearing the team shirt – the unraveling of “Les Bleus” has not been an event but a process, the chronicle of a disaster foretold, to quote Roselyne Bachelot, France’s minister of health and sport.
In reality, what applies to France can also be said of many other teams, such as Italy.
But nowhere is the contrast between the recent glorious past and the miserable present as spectacular as it is in France.
In the land of Moliere, failure, like success, must be theatrical.
In 1998, France could celebrate the multicolor, multi-ethnic victory of “Les Bleus.”
In 2010, France has the “blues,” and some people are starting to see, through the failure of the national team, the limits of the French model of integration.
“We” Frenchmen were so proud in 1998 of watching the gigantic, iconic image of Zinedine Zidane (the French captain, who is of Algerian descent) being projected onto the Arc de Triomphe on the Champs-Elysees. “We” French were not only on top of the world, we were overcome by a sense of pride, probably similar to what many Americans felt after Barack Obama’s presidential victory.
Liberty, Equality, Fraternity seemed very real as the values of our Republic.
In 2010, “The rise and fall of Les Bleus” can be interpreted as an accelerated version of Gibbon’s study of the decline of the Roman Empire. A weak emperor (the president of the French Football Federation) chose an incompetent general (the coach Raymond Domenech), who failed to inspire mercenaries (the players) or to instill in them a sense of collective sacrifice and duty.
But there is a study much more useful than Gibbon’s analysis of Rome for understanding what happened to France’s team: Marc Bloch’s masterful examination of France’s collapse in 1940, A Strange Defeat.
Like the French army in the spring of 1940, the French team’s strategy and technique were outmoded.
If one substitutes war for soccer, the comparison that comes to mind is that of the aging French military establishment, behind the Maginot Line in 1940, unable to confront General Heinz Guderian’s masterful command of blitzkrieg tank attacks.
A question remains.
Is France just an extreme version of Europe’s traditional “Big Powers” predicament?
In Europe, at least when it comes to soccer, “small is beautiful,” and, as a fan, it is much better to be Dutch, Portuguese, or Slovak, than Italian, English, or, of course, French.
Even Spain and Germany, despite qualifying for the next round, have started to scare theirs fans with mixed results.
In 2006, the World Cup final was European, with Italy defeating France.
This year’s final may well be a Latin American affair.
From Middle Israel to Middle Palestine
Haifa – Americans speak of “Middle America” and Britons of “Middle England.” Both are near mythic places that supposedly embody the authentic character of the nation.
Israel, too, has its “Middle Israel,” but it is very different from the place that Americans and Britons describe.
Rather than being somewhat provincial, Middle Israel is educated, bilingual or multilingual, and extremely well connected to the wider world.
It has provided Israel with the high-tech success that it has enjoyed over the last decade.
Middle Israel is mostly secular, though it also includes the moderately religious.
It is liberal, and despises any sort of fanaticism, whether orthodox or nationalist.
It is based on a strong, legally entrenched (though never perfect) ethos of gender equality that has typified Zionism from its start.
Middle Israel is also gay-friendly and distinctly non-xenophobic.
It is mostly Jewish, though a young Arab professional class is now coming out of the universities and making its way – with difficulties – into the heartland of civil society.
And, lest we forget, Middle Israel is earning the money and paying the taxes that support a wide assortment of traditionalists, fundamentalists, chauvinists, and other extremists – Jewish and Muslim – from Gaza to Jerusalem to the West Bank.
This quiet majority is under-represented in the Knesset because its members steer clear of political careers.
It is far too large to be considered an elite.
It is not exclusively urban, and it includes people of different cultural origins.
It has a powerful common identity, shared memories, and a rich culture.
It is neither inward-looking nor atavistic.
Some Palestinians hope to become, one day, something like Middle Israel.
They, too, would like life, pragmatism, creativity, and even joy to gain the upper hand.
They, too, want moderation and modernity, if perhaps not full secularization, to prevail.
These Palestinians are Middle Israel’s natural allies.
Fed by a meager diet of media reporting and some coarse think-tank buzz, European and American friends often ask me why our universities are awash with self-hating, anti-Israel “post-Zionists.”
But they are not.
Post-Zionism is a much hyped phantom, a term flourished in the mid-1990’s, when it seemed that Israeli and Palestinian leaders were building a peace process.
In response, Israelis quickly developed their own “End of History” thesis, suggesting that soon Zionism would be a thing of the past, primarily because there would no longer be a need for any ideology to support what would be a normal modern state, at peace with its neighbors and with its past traumas.
Back then, historians and sociologists dug into Zionism supposed “sins” – for example, that Israel’s Arab citizens have never, to this day, enjoyed equal civil rights.
Others looked at crimes against Palestinians in the wake of our self-defensive War of Independence.
Many people denied these facts; many others looked them in the eye.
Those of us who were not post-Zionists, but liberal Zionists, were even proud of the way our society had entered this phase of self-inspection and self-critique.
The gravest problem for Middle Israel is the Palestinian predicament in the occupied West Bank and in deadlocked Gaza.
Our leaders, from Levy Eshkol (and much more so Golda Meir) to Yitzhak Shamir, erred gravely in not seizing the earliest opportunity to arrange a territorial separation and a horizon of sovereignty for the post-1967 Palestinians.
They erred gravely in allowing Jewish settlers to have their way on the Biblical mountaintops, while Middle Israel looked the other way.
They erred gravely – and this is less often recognized – in discouraging the moderate Palestinian middle class, many of whom have quit the occupied territories, leaving behind a generation of young, ignorant, hungry, and angry warriors.
But there is a solution to the Israeli-Palestinian conflict.
It is geographical: a division of territory and a separation of homelands that involves painful but conceivable compromises on both sides.
Jerusalem will be divided, Palestinian refugees will not return to their ancestral homes, and Jewish settlements in the West Bank will, like their Gaza counterparts, be dismantled or (inconceivably) left to fend for themselves.
Of course, extremists will hate it.
By contrast, moderates – all moderates – will accept it, albeit unhappily.
If the moderates win, then a “Middle Palestine” will at last rise to prominence.
Paralleling Middle Israel, though perhaps not initially befriending it or liking it very much, this kind of Palestine will be the best news that the Middle East will have had for a long time.
For now, we in Middle Israel must curb our own extremists and hold out for the Palestinian moderates to prevail.
From Neoliberalism to No Liberalism?
WASHINGTON, DC – The era of free-market capitalism launched in the 1980’s by Margaret Thatcher and Ronald Reagan – often called “neoliberalism” by its opponents – is over.
This ideological wave has crashed with the ongoing financial market crisis, but its decline was a long time coming.
In the last few years, while American leaders continued to ride the neoliberal wave, much of the rest of the world was already standing on the shore.
Disenchantment with “neoliberal,” pro-market ideas began in developing countries that had once been their ardent admirers.
Latin American countries that embraced free-market policies in the 1990’s rejected them in the mid-2000’s, as a new wave of left-leaning leaders came to power.
Russia, which adopted market-oriented reforms in the 1990’s, moved to a managed form of state capitalism in the 2000’s with “oligarchs” forced to submit to state control.
As a result, the United States, the European Commission, and the multilateral development banks have become increasingly isolated in their efforts to advance free-market thought and policies worldwide.
The deepening financial crisis weakens their position further.
After all, how can the US or the Western multilateral institutions advocate bank privatization now?
The decline of free-market orthodoxy in the rest of the world was caused by two factors: its failures as an approach to economic policy and the decline of US prestige and “soft power.”
“Neoliberalism” grew in popularity as a result of its successes in jump-starting economic growth in the US, the United Kingdom, and some developing countries in the 1980’s and 1990’s.
However, its weaknesses also became apparent during the mid- to late-1990’s.
The attempt to implant free-market philosophy in Russia, for instance, proved catastrophic.
Whereas the Russian experience clearly demonstrated the importance of strong state institutions in regulating a market economy, the free-market model’s fierce ideological opposition to a large state role in the economy offered a poor guide to building them.
After some successes, most notably in Chile, “neoliberal” advice in Latin America also failed, most dramatically in the case of Argentina’s currency board, but most damagingly by increasing inequality, which worsened the continent’s central political-economic problem.
In Brazil, President Luiz Inácio Lula da Silva showed that significant departures from free-market prescriptions worked better.
Worldwide, most of the high-growth countries of the 1990’s and 2000’s broke with free-market orthodoxy by maintaining a stronger state hand in the economy.
Belief in “neoliberalism” also was based on the success of the US economy, which for much of the 1990’s seemed to demonstrate the superiority of free markets.
But the rapid decline of US prestige and “soft power” during the 2000’s sowed doubt outside the US.
As the global agenda shifted to concerns about global warming, inequality, and the stability of the international system, the US no longer seemed to be a shining example, but rather an immovable obstacle on many of these issues.
America’s elites turned a blind eye to these developments, rejecting all criticism, together with the crude anti-Americanism with which it was often expressed.
Today, the story is different.
A massive reassessment is finally in progress, with US elites now recognizing that market capitalism is in crisis, and that the world will not blindly follow their lead.
But that leaves some large questions unresolved.
If “neoliberalism” has failed, what comes next?
And what must the US do to regain its stature and influence in the international economy?
As New York and London lose their undisputed claim to being the world’s financial capitals, the rising centers of the global economy will gain an increasing say in international economic policy.
Most, if not all, are located in countries that have a stronger tradition of state involvement in the economy.
Jeffrey Garten, the dean of Yale’s School of Management, got it right when he labeled this the era of “state capitalism.” The state is on its way back as an economic player – not least in the US.
But is that a good thing?
While many critics will be tempted to celebrate the end of “neoliberalism,” it remains to be seen whether or not what succeeds it represents an improvement.
Various forms of statism have been tried before; all have been found lacking.
After all, while “neoliberalism” was criticized as technocratic and elitist, it was nonetheless a form of liberalism, and it was also consistent with the spread of democratic governance worldwide.
The new era may not be so propitious for political liberties.
As rising authoritarian powers, China or Russia, for example, have no reason to use their growing international influence to promote democracy; on the contrary, they increasingly counterbalance the efforts of Western countries to promote political liberty.
As statist models of economic development become more appealing, democratic governance will become less so.
Nor is it clear that “state capitalism” can generate the same degree of innovation and entrepreneurship as the liberal models did in their prime.
In order to redeem the liberal project, American and European leaders will need to reformulate it in such a way that it can provide convincing solutions to problems such as environmental degradation and economic inequality.
This will be no easy task, and one that may be far from policymakers’ minds as they grapple with the current crisis.
But, unless they do, the emphasis on economic and political freedom that lies at the heart of liberalism may not survive.
From Oil to Information
Sheikh Yamani, Saudi Arabia’s former oil minister and a founding architect of OPEC, once said, “The stone age came to an end not for a lack of stones, and the oil age will end, but not for a lack of oil.” Humans stopped using stone because bronze and iron were superior materials.
But will we really stop using oil when other energy technologies similarly provide superior benefits?
The threat of depleting the world’s scarce energy resources has maintained a powerful hold on popular thinking ever since the oil shocks of the 1970’s.
Nor is our fear limited to oil.
For example, the classic 1972 bestseller Limits to Growth predicted that the world would run out of gold in 1981, silver and mercury in 1985, and zinc in 1990.
We have the benefit of hindsight today, but even now most discussions of the issue are predicated on the logic of Limits to Growth .
Moreover, the issue is not merely that we have not run out of natural resources.
The American economist Julian Simon allegedly issued a challenge in 1980 to a group of environmentalists, saying that if scarcity were to be measured in terms of higher prices, they should invest in stocks of any raw metal.
The environmentalists put their money on chromium, copper, nickel, tin, and tungsten, and picked a time frame of 10 years.
By September 1990, each of the metals had dropped in price: chromium by 5%, tin by a whopping 74%.
The doom-mongers lost.
More importantly, they could not have won even if they had invested in petroleum, foodstuffs, sugar, coffee, cotton, wool, minerals, or phosphates: all of these commodities had become cheaper.
Today, oil is the most important and valuable internationally traded commodity, and its significance to our civilization is underscored by the recurrent worry that we are running out of it.
However, statistical estimates of its depletion hide much more than they reveal.
A typical oilfield yields only 20% of the reservoir, with close to 63% remaining buried in the earth even when the most advanced technologies are used.
Moreover, economists contend that energy consumption per capita is declining, owing to more efficient use.
Fuel efficiencies in the automotive sector have increased by more than 60% in the past three decades, while overall wealth produced per unit of energy has doubled during the same period.
But, whereas metal prices have fallen, oil prices are reaching record highs.
The reason is simple: metal usage has been substituted by many alternatives, but most still require petroleum products as inputs, and decades-long efforts to develop sufficient alternative energy sources have yielded little success.
So, if oil substitutes are not easily available, modern societies should focus on the sources of demand, most of which is attributable to the transport sector.
Indeed, more than 80% of modern societies’ consumption of energy generated by oil, either in the form of electricity or fuel, is used to move commuters.
Is all of this oil consumption really necessary?
With the rising contribution of services to global GDP, now is the time to reassess the need for travel to work.
Service-sector workers commute daily, only to be present in an environment that has no economic need for them, for they are facilitating information exchange far more than exchange of physical goods.
Do we really need to bring together so many people for so little gain and at such a high cost?
The cost is not merely in terms of natural resources, which should be sustained and passed on to future generations, not exhausted by our own.
The rise in the amount of time spent commuting is a drag on both national productivity and the quality of life in modern cities.
A survey conducted in the Indian city of Mumbai revealed that railway commuters’ average daily journey was 22 kilometers, while rapid urbanization there and in much of the developing world is only likely to increase the length of commutes.
Likewise, passenger air transport is dominated by business travel.
But, given the high-speed data transmission capacities of current telecommunications and information technology, it is now possible to reduce business travel significantly.
Whereas the outsourcing phenomenon is attenuating the need for labor migration, domestic migration can be limited further by the use of home offices, which can eventually reduce stress on real estate, public transport networks, roads, and airports.
Indeed, human travel in general should become increasingly limited to tourism and pleasure trips.
We now have the technological infrastructure to bring most job-related information to workers while allowing them to collaborate closely.
This requires a lifestyle change – one that governments should begin encouraging employers and workers to embrace.
If they do, the age of oil will not end. But the age of worrying about it just might.
From Olympia to Impasse
PARIS – “Do not mix sports and politics!”
That defiant cry from China’s rulers to the threat of a boycott of this summer’s Beijing Olympic Games does not stand the test of reality.
Sport and politics have always been closely linked.
Obvious examples abound.
The 1936 Berlin Olympics were dominated as much by Nazi propaganda as by the athletic events.
During the Cold War, “ping pong diplomacy” helped revive official relations between China and the United States.
In 1990, Germany fielded a single Olympic team before the country reunified.
To claim that politics and sports can be any more separated in today’s media age than they were in the past is especially naïve.
The Olympics were awarded to Beijing for a mixture of economic and political reasons, and China wanted the Games for the same reasons.
The current tension between China and (mostly) Western public opinion on the eve of the Beijing Olympics is the result of incompetence, hypocrisy, and legitimate but potentially counterproductive indignation.
China’s incompetence in its treatment of the crisis in Tibet should come as no surprise.
The Chinese regime is, quite simply, a victim of its inability to reform itself.
China saw in the Olympics a symbolic opportunity to consolidate and celebrate its new status in the world.
Caught by surprise in Tibet, and by the virulence and popularity of what they described as “anti-Chinese” sentiments, China’s rulers have resorted to the traditional tools of authoritarian regimes, turning their citizens’ deep nationalism and sense of humiliation against Western critics.
The Chinese today sound almost as stunned by the supposed mistreatment of the Olympic torch in London, Paris, and San Francisco as Americans were back in 2001: “Why do they hate us so much?”
Self-isolated from global political realities and incapable of grasping the meaning of “civil society,” the Chinese regime encourages its public in expressions of defiance of all who fail to “respect China,” which only reinforces negative reactions.
But the West’s hypocrisy nearly matches the Chinese regime’s incompetence. The moment the international community “bestowed” the Olympics on China, the West demonstrated how little consideration it actually gives to human rights and democracy.
The idea that the Chinese regime would quickly reform the country into an open, moderate, and benevolent giant was either a fraud, a gigantic misperception, or wishful thinking.
The dilemma posed by China for democratic regimes is understandable. Caught between their desperate need for finance and markets and their need to respond to their citizens’ sentiments, they oscillate between condemnation and reassurance of China, struggling to find a coherent path that defends the West’s principles without damaging its economic interests.
Now the West believes that it has found a “third way” by threatening to boycott the Olympics’ opening ceremony, but not the Games themselves.
Thus, the Chinese people, the world’s athletes, and a planet hungry for “bread and circuses ” will not be deprived, and China’s rulers will not “get away with murder” in their contempt for human rights and international public opinion. The problem is that such a choice requires governments’ absolute determination to stand by their words.
The power of indignation is a necessary component of a transparent and interdependent world that has lost the privilege of ignorance.
But selective responses to the actions of dictatorships can be problematic and counterproductive. China, for both good and bad, is a status-quo power that does not want to rock the boat of the international system – a power largely satisfied with its new status, but one that does not want to see its regime transformed, especially through external pressures.
Let us have no illusions: no “conditions” imposed from outside will bring about the “China we deserve” in the way, after World War II, we got the “Germany we deserved” through a process of integration and reconciliation.
If the Chinese reform their political system and improve their human rights record, it will not be the result of anything we in the West say or do, but because they realize that the absence of the rule of law jeopardizes their long-term ambition to be strong and respected.
From Opportunity to Reality in the Middle East
It has been a long time since the words “opportunity” and “Middle East” appeared in the same sentence.
But now they are. Even better, this optimism may have some basis in reality.
One important reason for this change in attitude is, of course, Yasir Arafat’s disappearance from the scene.
Like the Thane of Cawdor in Shakespeare’s Macbeth, “Nothing in his life became him like the leaving it.”
Arafat never grew beyond the man who appeared at the United Nations decades ago with both an olive branch and a gun.
His unwillingness to jettison terror and choose diplomacy proved his undoing, as he lost legitimacy in the eyes of both Israel and the United States. The result was the failure to create a Palestinian state.
But it is not simply Arafat’s passing that provides cause for optimism.
We now have a Palestinian leadership legitimized by elections, one that appears to be opposed to using terrorism as a tool to achieve political aims.
Mahmoud Abbas (Abu Mazen) has a good record of questioning the wisdom of the intifada that has taken too many lives and caused only misery and destruction on all sides of this enduring conflict.
Changes in Israel are also contributing to the mood swing. There is a growing awareness in Israel that the current situation – one of open-ended Israeli occupation of lands mostly populated by Palestinians – is inconsistent with Israel’s determination to remain a secure, prosperous, Jewish, and democratic state.
The formation of a new Israeli government, one more centrist in its composition and support, is another positive development.
Israel is now led by a prime minister who has the ability to make historic choices and a government inclined to support him.
But opportunity is just that.
Middle East history is replete with examples of missed and lost chances to make peace.
The challenge now is to break this pattern and turn today’s opportunity into reality.
This requires that the promised Israeli disengagement from Gaza and parts of the West Bank succeed.
But “success” entails more than departing Israelis.
It also requires that Palestinians demonstrate that they can govern responsibly and that they can put an end to terrorist violence emanating from Palestinian soil.
What happens in Gaza after Israel leaves will have a profound impact on Israeli politics.
If Gaza turns into a lawless failed state, one that is a base for attacks on Israelis, it will be extremely difficult to persuade Israel to withdraw from other areas that it now occupies.
But if Palestinians in Gaza demonstrate that they can rule themselves and be a good neighbor, a key justification for Israel’s continuing occupation elsewhere will weaken.
Palestinians will need help if things are to turn out right in Gaza.
The US, Europe, and Arab states such as Egypt, along with Russia and the UN, all have a responsibility to assist Abu Mazen.
Palestinians need financial and technical help to build up a unified and capable security establishment, to revive a moribund economy, and to build a modern, transparent political system.
It is also important that the Gaza withdrawal be a beginning, not an end, to the political process.
There must be a link between what takes place in Gaza and a comprehensive settlement to the Palestinian question if Mazen is to persuade a majority of his people that diplomacy and compromise deliver more than violence and confrontation.
Here, too, there is an important role for America to play. In fact, the US has already begun to do what is required.
In a September 2004 letter to Israeli Prime Minister Ariel Sharon, President George W. Bush reassured Israelis that it was “unrealistic to expect that the outcome of final status negotiations will be a full and complete return to the armistice lines of 1949.” The framework for a solution to the Palestinian refugee issue “will need to be found through the establishment of a Palestinian state, and the settling of Palestinian refugees there, rather than in Israel.”
These promises meant a great deal to Sharon as he faced domestic political challenges.
What is needed now is a parallel letter from Bush to Abu Mazen.
Such a letter could spell out the US commitment to a viable, contiguous, sovereign, and independent Palestinian state based on the 1967 lines, with compensation provided by Israel wherever territorial adjustments are agreed.
The US would also commit itself to provide resources to help construct a modern society and economy.
Help would also be extended to settle the Palestinian refugees, whether in Palestine, other Arab countries, or, in special cases where Israel agrees for humanitarian reasons, in Israel itself.
In return, Palestinians would need to pledge to reject the use of violence and terror once and for all.
The US should not, however, make the establishment of a full Palestinian democracy a prerequisite for territorial return and peace.
To delay negotiations until Palestinian democracy matured would only persuade Palestinians that diplomacy was a ruse and give many a reason to turn to violence.
After more than a half-century of Israeli-Palestinian conflict, translating opportunity into reality will be difficult enough without introducing new requirements that, however desirable, are not essential.
From Pain to Gain on the EU Frontier
BRUSSELS – The first act of the eurozone debt drama was about whether any European Union member country could ever become insolvent.
It ended when the highest EU authority, the European Council, officially recognized in late July that Greece does need a reduction in its debt obligations.
But that acknowledgement of reality does not end the drama.
The second act will be about restoring growth prospects for the EU periphery, which will pose an even more difficult challenge.
The key problem is simple: until 2008, these countries enjoyed a long boom based on cheap and plentiful credit, which allowed them to finance large current-account deficits.
But any import boom creates a misleading impression of the local economy’s productive capacity.
Imagine a country that increases its imports of, say, cars and other consumer goods by 10% of its starting GDP.
These goods are sold to local consumers via car dealers and a whole chain of traders and retailers.
All of these intermediaries have costs that have to be paid by the local consumer, which flatters the national GDP statistics, because, technically speaking, all of these costs constitute value added in intermediation services.
An import boom thus also leads to higher measured GDP growth.
How large is the induced growth in GDP from higher imports?
The retail price is often more than twice the wholesale price paid by the importer.
The local value added to imports could thus easily equal their value.
This implies that an increase in imports of consumer goods equivalent to 10% of GDP could generate an increase in measured GDP of about 10% as well.
But the opposite is also true: when an import boom ends, measured GDP must drop considerably, because much less intermediation is needed.
This fall in GDP, though a natural consequence of lower imports of consumption goods, is often mistakenly perceived as something to be avoided, because it seems to imply that output is below its “potential.”
In a completely flexible economy, this drop in measured GDP (and the concomitant increase in unemployment) could be avoided if the resources formerly employed in selling imported consumer goods could quickly be used to generate exports.
But retail shop clerks and car dealers cannot be easily transformed into the specialized and highly skilled workers needed in modern manufacturing.
In the case of Greece and Portugal, for example, the tourism industry might absorb some unemployed retailers.
But shops and showrooms cannot be transformed into tourist attractions, whose capacity will remain limited until enough time has passed to build new hotels, recreational facilities, etc.
Given that Greece had a current-account deficit close to 10% of GDP in 2010, a drop in imported consumption goods of that magnitude seems to be needed before the country’s external debt can be stabilized.
But this would imply a further drop of measured GDP by about the same percentage (and a further substantial increase in unemployment).
Even the most flexible economy in the world would take years to switch one-tenth of all of its factors of production from distributing imports to export-oriented activities.
The import boom in the United States was much smaller than that on the EU periphery, but the recent downward revision of US GDP can be seen through the same lens.
An import boom creates only the illusion of economic strength.
How long will the adjustment take?
Post-unification Germany experienced an import and construction boom that was similar to that of the EU periphery.
For a few years, imports surged, and by 1995 a sizeable current-account deficit had developed.
It took Germany ten years (until about 2005) of slow growth to reduce capacity in the construction sector and gain market share for its export industry.
But Germany had no debt overhang to confront.
Financial markets might not give the eurozone periphery that much time.
The three small Baltic EU members provide an alternative model: they had developed current-account deficits of over 20% of GDP during the credit boom, and over the last three years have experienced double-digit GDP contractions.
But, because they now run current-account surpluses, they have fully adjusted and can resume growth, albeit naturally at a much slower pace than during the boom.
Could anything be done to accelerate adjustment in the eurozone’s periphery?
The official recipe is “structural reform.”
But, during a period of weak domestic demand, structural reforms might actually exacerbate short-term problems.
Labor-market liberalization would allow firms in the domestic sector to fire workers more rapidly, but would do little to encourage export-oriented firms to invest more and create more jobs, especially when the domestic banking system is under stress and cannot provide new credit.
Moreover, the additional unemployment would lead to more social-welfare spending, thus increasing the need to cut elsewhere or increase taxes.
Governments in the eurozone’s periphery, including Spain and Italy, now face a dilemma: they must undertake structural reforms to increase their long-term potential growth, but at the cost of even greater short-term pain.
The debt crisis will end only when they have shown that they have understood this and accepted the inevitable sacrifices.
From People Power to Putin Power
As I attended a small but dignified memorial ceremony in Paris last week in honor of the Russian journalist Anna Politkovskaya – a woman “brave beyond limits,” in the words of her French editor – I was reminded of another posthumous tribute I participated in nearly 17 years ago in Moscow.
Unlike Politkovskaya, the great scientist and human right activist Andrei Sakharov had not been murdered, and the tribute given to him then looked like the celebration of a new era.
A new page was being turned, one that was full of uncertainty but also of hope that Russia was on its way to becoming a “normal country.”
It is this page that has been probably fully closed with the assassination of Politkovskaya.
What the small crowd of intellectuals gathered in Paris was mourning was their hope for a different Russia.
We were burying the collective dream of intellectuals and democrats for a Russia where freedom and the rule of law would, after a long and cold Soviet winter, take root and bloom.
The portraits of Politkovskaya, like a multitude of mirrors, were calling us back to a much darker reality.
The dream was over. It had, most likely, never been realizable.
What we are witnessing today is a totally different story.
Russia is literally buying its way back into the international system as a preeminent actor, one that is regaining power and clout by replacing nuclear weapons with oil and gas and substituting greed for fear.
The balance of terror of the Soviet era has given way to unilateral energy dependency in favor of Russia.
With their enormous cash flow, Russian billionaires are buying sumptuous properties all over the world, and Russia is buying prominent Germans like the former Chancellor, Gerhard Schroeder, if not the support of Germany as such.
Whatever the enormous differences that may separate them, post-communist Russia and fundamentalist Iran have much in common.
Energy wealth gives them a sense of unique opportunity, the conviction that time is playing in their favor, and that they can now redress the humiliations they have suffered from the outside world.
It is as if they were combining the Arab/Islamic world’s culture of humiliation and Asia’s culture of hope.
Both are marked by a defiant nationalism, and both feel irresistible, all the more so because they sense that the United States is in decline as a result of the quagmire in Iraq, if not in Afghanistan as well.
Of course, the differences between Russia and Iran are enormous.
The Iranian regime is highly ideological and animated by an open passion to destroy Israel.
It does not enjoy the massive backing of its society, except when it comes to national pride and the quest for nuclear status.
Russia’s regime, by contrast, is animated by money, not ideology.
In its quest to rebuild Russia’s geopolitical power and influence, Presdient Vladimir Putin has the support of the immense majority of the population.
His motto, “Get rich and keep quiet,” sounds like Guizot’s priorities in mid-nineteenth century France, even if it is “seasoned” with a strong touch of imperial pride.
As long as the oil money keeps flowing, most Russians will express no nostalgia for the democratic opening of the Yeltsin years, with its accompanying combination of chaos, corruption, international weakness, and disrespect for the state.
Are Russians so different from us in the western democratic world, or is democracy a luxury that only old, stable, prosperous, and satisfied societies can afford?
In their quest for post-Soviet stability, Russians seem to have found reassurance in Putin.
He does not match Peter the Great in physical stature, but he has proven to be a gifted politician, capable of grasping, then controlling, the mood of the Russian people.
For a majority of Russian citizens, economic prosperity and televised entertainment have become the modern equivalent of the panem et circenses formula of Roman times.
The war in Chechnya may contribute to the moral corruption of Russia as a whole, to its frightening descent into a culture of violence.
But it is also feeding a patriotic emotion – a popular longing for the restoration of Russia’s imperial status and prestige – that Putin’s regime has shrewdly exploited.
Meanwhile, ordinary Russians have gained little.
The multiplication of assassinations of political opponents and economic rivals, the mafia practice of contract murders, cannot be seen as signs of a regained stability.
Nor can the Putin regime’s manipulation of popular xenophobia against citizens of the former Soviet empire, such as Georgians.
Russia may have recovered its status as a strong power, but is it a respected, or even a happy one?
Russia is rich, but Russians, at least most of them, remain poor, with a life expectancy that is closer to Africa than to Western Europe.
Eventually, they will have to recognize that modern nations cannot live by power alone.
From Prague Spring to Velvet Revolution
WARSAW – What was the Prague Spring, or the events of 1968 more generally?
Their meaning, it seems, has become more, not less, debatable with the passage of time.
My generation was forged by protests and police truncheons, by the hopes generated not only by the Prague Spring, but also by the Polish student movement that March, the Paris events of May, and the first signs of Russian democracy voiced in the early books of Sakharov and Solzhenitsyn.
For those of us imprisoned in Poland, the Prague Spring was a harbinger of hope.
Even Poland’s communist newspapers, read behind bars, somehow conveyed news of the great changes taking place in our neighbor to the south.
So I remember my shock when I learned about the Soviet invasion of Czechoslovakia in August, and the trauma that lingered long after.
On the tenth anniversary of that invasion, Václav Havel, Jacek Kuron, and I, along with other dissidents, met on the Czech-Polish border.
There is a photograph of that occasion: future presidents, ministers, and parliamentarians who were at that time pursued by the police like common criminals.
These encounters were an extension of the climate of the Prague Spring.
We all felt that we were creating something new, something that might, one day, turn out to be an important component of democracy in our countries.
And so it was.
In August 1989, I proposed in the Polish Diet a draft resolution apologizing to the Czechs and Slovaks for Polish involvement in the 1968 invasion.
I felt that a historical circle was being closed: the ideas of the Polish March and the Prague Spring, the ideas of our mountain meetings, were becoming political facts.
Three months later, the Velvet Revolution began in Prague.
The main difference between the Prague Spring and the Velvet Revolution was that the former was mostly the work of Communist Party members and others who wanted to bring about “socialism with a human face.”
As a result, some people nowadays dismiss the Prague Spring as a power struggle between communists.
But there were many roads to – and through – communism, and many of them converged with national traditions.
Indeed, communism was attractive for many reasons, including the idea of universal justice and humanized social relations; a response to the great spiritual crisis after World War I and, later, to the Nazis’ genocide; and the conviction that Western dominance of the world was nearing its end.
Finally, in a world divided by Yalta, communism was, for some, the only realistic choice for central Europe.
In Czechoslovakia in 1968, communist reformers appealed to democratic ideals that were deeply rooted in the country’s pre-World War II past.
Alexander Dubcek, the leader of the Czechoslovak communists and the symbol of the Prague Spring, personified hope for democratic evolution, real pluralism, and a peaceful way to a state governed by law and respectful of human rights.
By contrast, in Poland, which had witnessed its own tentative opening in the March student movement, a nationalist-authoritarian faction exploited all that was intolerant and ignorant in Polish tradition, employing xenophobia and anti-intellectual rhetoric.
Polish Interior Minister Mieczyslaw Moczar, the leader of the nationalist faction, combined communist rhetoric with a language proper to fascist movements in order to mobilize the masses against the “cosmopolitan-liberal intelligentsia.”
The Polish freedom movement of 1968 lost its confrontation with police violence; the Prague Spring was crushed by the armies of five Warsaw Pact members.
But in both countries, 1968 gave birth to a new political consciousness.
The Polish and Czech opposition movements that emerged only a few years later had their roots in the events of 1968.
The Prague Spring was provoked by a crisis in the Communist Party, but the claim that it was merely a result of political squabbles among Party members falsifies history and rejects a significant fragment of the national heritage.
Attitudes towards communism were always a controversial subject for the anticommunist opposition.
Some rejected communism in all its forms.
The majority though, in one way or another, had some contact with communism, through intellectual fascination, participation in state institutions, or the cold conviction that only by accepting the reality of life under communism could one do something useful for one’s country.
These people, “tainted by communism,” constituted the majority of the participants in all revolts against the communist dictatorships.
There was, however, another, category of people: the “careful and untainted,” who absented themselves from the world of politics.
They hated communism, but, convinced that the system could not be reformed, they avoided the democratic opposition.
While others took risks or sat in jails, they functioned in official and legal structures.
One should not blame anyone today for such behavior.
But it is surprising when these people accuse participants in the Prague Spring and the democratic opposition of links with communism.
Communism was obviously an instrument of Soviet domination over conquered societies, but it was also a modus vivendi for large parts of these nations under the conditions in which they were obliged to live.
Imre Nagy, the leader of the Hungarian revolt in 1956, and Dubcek became parts of their national legends, which belies the claim that communism was exclusively a foreign imposition.
The Prague Spring appealed to elementary values: freedom, pluralism, tolerance, sovereignty, and rejection of the dictates of communist orthodoxy.
When I recall these events after 40 years, I see not only revolt, but also the great illusion that it might be possible to outfox the Kremlin and painlessly move society from communism to democracy.
This belief was naïve, but it also underpinned a national awakening in which the potential for freedom found its voice.
From Red to Green?
From Resource Curse to Blessing
KAMPALA – New discoveries of natural resources in several African countries – including Ghana, Uganda, Tanzania, and Mozambique – raise an important question: Will these windfalls be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries?
On average, resource-rich countries have done even more poorly than countries without resources.
They have grown more slowly, and with greater inequality – just the opposite of what one would expect.
After all, taxing natural resources at high rates will not cause them to disappear, which means that countries whose major source of revenue is natural resources can use them to finance education, health care, development, and redistribution.
A large literature in economics and political science has developed to explain this “resource curse,”and civil-society groups (such as Revenue Watch and the Extractive Industries Transparency Initiative) have been established to try to counter it.
Three of the curse’s economic ingredients are well known:
Resource-rich countries tend to have strong currencies, which impede other exports;Because resource extraction often entails little job creation, unemployment rises;Volatile resource prices cause growth to be unstable, aided by international banks that rush in when commodity prices are high and rush out in the downturns (reflecting the time-honored principle that bankers lend only to those who do not need their money).Moreover, resource-rich countries often do not pursue sustainable growth strategies.
They fail to recognize that if they do not reinvest their resource wealth into productive investments above ground, they are actually becoming poorer.
Political dysfunction exacerbates the problem, as conflict over access to resource rents gives rise to corrupt and undemocratic governments.
There are well known antidotes to each of these problems: a low exchange rate, a stabilization fund, careful investment of resource revenues (including in the country’s people), a ban on borrowing, and transparency (so citizens can at least see the money coming in and going out).
But there is a growing consensus that these measures, while necessary, are insufficient.
Newly enriched countries need to take several more steps in order to increase the likelihood of a “resource blessing.”
First, these countries must do more to ensure that their citizens get the full value of the resources.
There is an unavoidable conflict of interest between (usually foreign) natural-resource companies and host countries: the former want to minimize what they pay, while the latter need to maximize it.
Well designed, competitive, transparent auctions can generate much more revenue than sweetheart deals.
Contracts, too, should be transparent, and should ensure that if prices soar –&#160;as they have repeatedly –&#160;the windfall gain does not go only to the company.
Unfortunately, many countries have already signed bad contracts that give a disproportionate share of the resources’ value to private foreign companies.
But there is a simple answer: renegotiate; if that is impossible, impose a windfall-profit tax.
All over the world, countries have been doing this.
Of course, natural-resource companies will push back, emphasize the sanctity of contracts, and threaten to leave.
But the outcome is typically otherwise.
A fair renegotiation can be the basis of a better long-term relationship.
Botswana's renegotiations of such contracts laid the foundations of its remarkable growth for the last four decades.
Moreover, it is not only developing countries, such as Bolivia and Venezuela, that renegotiate; developed countries like Israel and Australia have done so as well.
Even the United States has imposed a windfall-profits tax.
Equally important, the money gained through natural resources must be used to promote development.
The old colonial powers regarded Africa simply as a place from which to extract resources.
Some of the new purchasers have a similar attitude.
Infrastructure (roads, railroads, and ports) has been built with one goal in mind: getting the resources out of the country at as low a price as possible, with no effort to process the resources in the country, let alone to develop local industries based on them.
Real development requires exploring all possible linkages: training local workers, developing small and medium-size enterprises to provide inputs for mining operations and oil and gas companies, domestic processing, and integrating the natural resources into the country’s economic structure.
Of course, today, these countries may not have a comparative advantage in many of these activities, and some will argue that countries should stick to their strengths.
From this perspective, these countries’ comparative advantage is having other countries exploit their resources.
That is wrong.
What matters is dynamic comparative advantage, or comparative advantage in the long run, which can be shaped.
Forty years ago, South Korea had a comparative advantage in growing rice.
Had it stuck to that strength, it would not be the industrial giant that it is today.
It might be the world’s most efficient rice grower, but it would still be poor.
Companies will tell Ghana, Uganda, Tanzania, and Mozambique to act quickly, but there is good reason for them to move more deliberately.
The resources will not disappear, and commodity prices have been rising.
In the meantime, these countries can put in place the institutions, policies, and laws needed to ensure that the resources benefit all of their citizens.
Resources should be a blessing, not a curse.
They can be, but it will not happen on its own.
From Rome to Moscow
One of the late Pope John Paul II’s unfulfilled dreams was to visit Moscow and forge a rapprochement with the Orthodox Church.
But, although he was invited to Moscow by Russia’s three most recent presidents – Vladimir Putin, Boris Yeltsin, and Mikhail Gorbachev – opposition to the visit by Orthodox Patriarch Alexi prevented the Pope from making the journey before he died.
Will Pope Benedict XVI achieve the breakthrough that his friend and predecessor failed to realize?
Despite the recent return to Russia of the icon of Our Lady of Kazan that once hung in John Paul’s bedroom, relations between the Vatican and the Patriarchate remain strained.
So Putin, who usually seems omnipotent, remains wary of issuing an invitation to Pope Benedict.
That wariness is reinforced by a new political factor: a defense of Orthodoxy has become a pillar of the national idea on which Putin seeks to base the legitimacy of his regime.
This is one reason why Putin was one of the few leading heads of state to miss attending Pope John Paul’s funeral.
Although the Orthodox Church did send a delegation, immediately after the funeral Patriarch Alexi warned that the disagreements between the two branches of Christianity go much deeper than the former Pope’s Polish nationality, which was always a particular sore spot for Russian Orthodox Slavs.
Russians saw John Paul’s Polish nationality as linking him to a long history of perceived oppression of Russian Orthodoxy.
No less a figure than Alexander Pushkin wrote in 1836 that “Orthodoxy has always been persecuted by Catholic fanaticism….Their missionaries cursed the Orthodox Church, with hypocrisy and threats tried to recruit into Catholicism not only ordinary people but Orthodox priests as well.” Those Russians who continue to view the Catholic Church as a threat regularly quote these lines.
Pope Benedict, being from Germany, a predominantly Protestant country, does not carry the weight of this bitter history.
Perhaps this is one reason why Alexi responded positively to Benedict’s first speech urging reconciliation, saying that he hopes that this will improve “Orthodox-Catholic relations on the post-Soviet territory.”
This positive spirit can be nurtured by Russia’s government, which usually has cordial relations with the Vatican.
Indeed, Russian Foreign Minister Sergei Lavrov has many projects for which he thinks the Vatican can be of help, particularly in advancing the cause of reconciliation and creating a “partnership between civilizations.”
Recently, another key Vatican figure, Cardinal Walter Casper, the head of the Council for Christian Unity, called for a Catholic-Orthodox high level meeting that would address unifying both branches of Christianity.
Cardinal Casper is well regarded in Russia for being the man who returned Our Lady of Kazan to its homeland.
In his public speeches, Casper more than once suggested that the Vatican considers Christian unification its main goal, and – most important from the Orthodox perspective -- that “unity does not have to mean sameness.”
The fact that Pope Benedict and Cardinal Casper are both Germans is important, because Russian-German relations are perhaps warmer now than they have ever been.
Putin, in particular, is at home in the German language, having spent many years in East Germany during his days as a KGB agent.
Moreover, unlike Pope John Paul II, who, as a Pole, always saw communist Russia as an oppressor, Benedict carries the German sense of guilt stemming from the country’s Nazi past and its brutal invasion of Russia.
In both Rome and Moscow, there is growing hope that a road to Christian unity can be built, but it is increasingly clear that the road can be completed only by passing through Berlin.
From Shock Therapy to Sleep Therapy
If the 1990’s was the era of economic shock therapy, the present decade may be remembered for economic reform paralysis.
Although the reasons for gridlock differ across countries, the bottom line is that few politicians anywhere are having much success in limbering up their economies.
The problem is not just in emerging markets such as Indonesia, Mexico, and Brazil, where an ascendant left has failed to find a viable alternative to the much reviled “Washington Consensus” of economic liberalization.
One sees the same phenomenon across many rich countries as well.
In a remarkable coincidence of timing, Japanese Prime Minister Junichiro Koizumi and German Chancellor Gerhard Schroeder called for early elections in the hope of energizing reform.
In Germany, the most urgent needs are for tax and labor-market reform.
In Japan, the Koizumi government wants to privatize the behemoth postal service, whose giant financial arm is wrapped like a python around the country’s banking system.
Even in the United States, one of the few places where economic liberalization is not a dirty word, President George W. Bush has his own frustrations.
Despite a huge investment of time and energy, he has failed to marshal even his own troops in support of a relatively modest proposal to stave off collapse of the nation’s old-age insurance program.
Indeed, Bush’s popularity has taken a beating over pension reform.
Some people ascribe the global collapse of reform efforts to a peculiarly ineffective collection of leaders.
This view is nonsense, and besides, if the public is so unhappy with its leaders’ performance, why does it keep electing and re-electing them?
No, the problems run deeper.
The fact is that people everywhere are having trouble coming to terms with the rapid changes resulting from technology and globalization.
For, although globalization spins off a lot more winners than losers, many people are worried, and worried people press their leaders to slow things down.
You can tell Americans and Europeans that they should rejoice over the boundless cheap goods and cheap credit that trade with Asia has supplied.
But all their politicians seem to worry about is how some farmer or textile worker may lose their job.
You can tell Latin Americans or Africans that Asia’s unquenchable thirst for natural resources will keep pushing up the prices of their commodity and agricultural exports in perpetuity, turning wheat fields into gold mines.
But all their politicians seem to want to worry about is protecting doomed domestic manufacturers against low-wage Asian competition.
Outgoing US Federal Reserve chairman Alan Greenspan preaches flexibility as a way of dealing with globalization.
At some level, of course, he is right.
Today’s world is one of fast-changing currents, where a region flourishes one day, and the next its factories collapse economically as if hit by hurricane Katrina.
If change is inevitable, we must make our economies more flexible and prepare to live with the consequences.
There is no other way.
So why doesn’t the public accept this need for flexibility, which, in the end, is what market-based economic liberalization is all about?
The problem is that most people are not thrilled to live in a world of blindingly fast change.
Most people are creatures of habit; they crave predictability.
German workers who make high-end machine tools are proud of their craft, and they don’t want to be told that the same work can be done for much less in Poland and Slovakia.
Clothing makers in Italy have long been the envy of the world.
These craftsmen don’t want to be told that they should start retraining as tour guides to service the inevitable horde of middle-income Chinese tourists, as that country takes over high-end light manufacturing like tailoring.
With such resistance to change, it is no wonder that so many political leaders try to lull their subjects to sleep, hoping that when everyone wakes up, it will all have proven a dream.
Asia, of course, is different.
China is developing at a dizzying pace.
Whole cities are rising out of desert sands overnight.
China is building more roads, airports, and bridges every five years than Europe and the US combined build in 20.
With a long history of cataclysmic, often violent change, Chinese society is perhaps more adaptable than most.
In India, which is said to have “a strong consensus for weak reform,” things are moving far more slowly – but always forward.
Whereas India is not yet nearly the factor in global trade that China has become, its 1.2 billion people are pushing inexorably onto the scene.
Will today’s reform paralysis outside Asia continue?
Will the political winds shift to reinvigorate economic liberalization, with politicians reminiscent of Britain’s Margaret Thatcher or the US’s Ronald Reagan coming to the fore, breathing the fire of change?
Will politicians finally tell their citizens that if their economies continue to sleep, they may not wake up?
I believe that in most countries, the era of sleep therapy will come to an early end.
But I fear that change might cause a global economic crisis resulting from, say, an ugly unwinding of extravagant US borrowing trends.
Only then may people start waking up and voting for politicians who insist on re-energizing economic reform.
From Solidarity to Freedom
Although the rise 25 years ago of Solidarity, the first independent civic movement in the former Soviet empire, had huge political consequences, Solidarity was, primarily, neither a political movement nor a labor union.
First and foremost, Solidarity was a cry of dignity.
We simply had reached the end of our endurance with the omnipresent and all-powerful communist apparatchiks who ruled in our workplaces, neighborhoods, even places of rest.
Writers, journalists, and artists could no longer stand the heavy-handed censorship and supervision.
In factories as well, Party bureaucrats wanted to know everything and decide everything.
Every civic initiative, every activity of any kind was subject to ideological evaluation and control.
All who were tempted to disobey were certain to be “taken care of” by the secret police.
Last winter, I saw a similar cry for dignity in Ukraine.
Those hundreds of thousands of people who camped for weeks on the freezing streets of Kiev did so because they were demanding their dignity.
Both the Polish and the Ukrainian experiences have convinced me that the will to live in dignity is the most powerful engine of human action, an engine that is capable of overcoming even the greatest fear.
But the desire for dignity is not enough to secure it.
Something else is needed as well.
Second, Solidarity was a social movement.
This meant that Solidarity – ostensibly a labor union – became a home for people from all social groups and classes in Poland: workers and intellectuals, engineers and artists, doctors and patients.
Some passionately discussed economic reform, others talked about developing culture, while still others planned to reform education and the scientific establishment or assure the defense of the environment.
Solidarity created a public space for all of these discussions, while protecting us all against the party apparatus.
But Solidarity was still something more.
It was a Polish version of the ancient Greek agora, a meeting place of all citizens, a locus of a free conversation about our communal and individual future, about all kinds of problems and their solutions.
We did not yet have a free state, but we already had something more important than that: a free civil society engaged in discussing the common condition of its members.
The society embraced by Solidarity counted 10 million members; indeed, 10 million real citizens.
But even that was not enough to achieve the final victory over the party and police apparatus of the state.
Third, Solidarity was an institution; indeed, a unique one given the conditions under which we lived, and it is to its special institutional form that we owe our ultimate victory.
Between the organizational structure of Solidarity and the official state and party organizations there was what might be called a “gap between civilizations.”
Against the authoritarian and hierarchical structures of the regime, we raised a decentralized institution, a huge organism striving to achieve consensus about its aims and the methods of action.
It was an institution committed to respecting the integrity of all individuals and all other institutions.
This may not be extraordinary in old democratic communities; but in our authoritarian environment, it was strikingly new.
And only such a new institutional structure could respond to that deep cry for dignity.
So what is left of all this today?
To be sure, Solidarity achieved a stunning political success.
Poland is a free country, a member of NATO and of the EU, while the Soviet Union is no more.
But recent history has not been kind to the victors.
The leaders of the democratic revolutions in Eastern Europe quickly faded in the new environment.
Democratic elections brought out new and savvier politicians, often from among those who were part of the old regime.
More strikingly, some of our hopes for a new social order also crashed against the rocks of the new rules of the game.
True, Poland’s democratic institutions, despite their flaws, function rather well. Economic growth has been impressive, and life is definitely getting better.
But the vibrancy of civil society, the sense of common purpose, the universal manifestations of social solidarity that our union stood for in its time – all these things are largely gone.
The union itself is a shell of its own former self, a partisan and mostly right-wing movement of workers buffeted by the new economic reality.
Most notably, the unifying character of Solidarity gave way to social divisions and, among many of Poland’s people, a large dose of alienation from both politics and civic engagements.
Is this what normalcy always means?
Do heady times of struggle always give way to a somewhat deflating taste of victory?
Am I merely a veteran wistfully reminiscing about the old days of struggle?
Perhaps. But I am not a nostalgic type.
I know that we have come a long way, and I do not want to go back.
But was it really inevitable that so much solidarity had to escape our Solidarity?
वैश्विक पूँजी का रुख फ़्रंटियर की ओर
प्रिंसटन - तथाकथित "फ़्रंटियर बाज़ार की अर्थव्यवस्थाएँ" निवेश के हलकों में नवीनतम सनक हो गई हैं। हालाँकि, इन कम आय वाले देशों – एशिया में बांग्लादेश और वियतनाम, लातिन अमेरिका में होंडुरास और बोलीविया, और अफ़्रीका में केन्या और घाना सहित – में छोटे, अविकसित वित्तीय बाज़ार हैं, लेकिन वे तेज़ी से बढ़ रहे हैं और उम्मीद की जाती है कि वे भविष्य में उभरती अर्थव्यवस्थाएँ बन जाएँगे। पिछले चार सालों में, फ़्रंटियर अर्थव्यवस्थाओं में आने वाले निजी पूँजी के प्रवाह उभरते बाज़ारों की अर्थव्यवस्थाओं में आनेवाले प्रवाहों की तुलना में लगभग 50% ज़्यादा (सकल घरेलू उत्पाद के सापेक्ष) रहे हैं। इस पर ख़ुश होना चाहिए या खेद करना चाहिए, यह ऐसा सवाल है जो आर्थिक विश्लेषकों और नीति निर्माताओं के लिए रॉर्सचाक परीक्षण की तरह हो गया है।
अब हम जान चुके हैं कि मुक्त पूँजी की गतिशीलता का वायदा पूरा नहीं किया गया है। कुल मिलाकर, प्राप्तकर्ता देशों में आने वाले पूँजी प्रवाह में बढ़ोतरी ने निवेश के बजाय खपत को बढ़ावा दिया है, जिससे आर्थिक अस्थिरता बढ़ी है और कष्टकारी वित्तीय संकट की बारंबारता और ज़्यादा हुई है। अनुशासन लागू करने के बजाय, वैश्विक वित्तीय बाज़ारों ने कर्ज़ की उपलब्धता बढ़ा दी है, जिसने अपव्ययी सरकारों की बजट बाध्यताओं को क्षीण कर दिया है और बैंकों की बैलेंस शीट अत्यधिक विस्तारित कर दी है।
मुक्त पूँजी गतिशीलता के लिए सबसे अच्छा तर्क अभी तक स्टेनली फ़िशर का बना हुआ है जो उन्होंने लगभग दो दशक पहले दिया था जब वे अंतर्राष्ट्रीय मुद्रा कोष के नंबर दो अधिकारी थे और अब वे यूएस संघीय रिज़र्व के उपाध्यक्ष हैं। हालाँकि फ़िशर ने मुक्त प्रवाह वाली पूँजी के ख़तरों की पहचान की थी, लेकिन उन्होंने तर्क दिया था कि इसका समाधान पूँजीगत नियंत्रण बनाए रखना नहीं है, बल्कि ख़तरों को कम करने के लिए ज़रूरी सुधार शुरू करना है।
फ़िशर ने यह तर्क उस समय दिया था जब अंतर्राष्ट्रीय मुद्रा कोष सक्रिय रूप से अपने चार्टर में पूँजी-खाते के उदारीकरण को बनाए रखना चाह रहा था। लेकिन फिर दुनिया ने एशिया, ब्राज़ील, अर्जेंटीना, रूस, तुर्की, और अंततः यूरोप और अमेरिका में वित्तीय संकट देखे। अंतर्राष्ट्रीय मुद्रा कोष के लिए यह श्रेय की बात है कि उसने पूँजीगत नियंत्रण पर अपना रुख नरम कर लिया है। 2010 में, इसने एक नोट जारी किया जिसमें वित्तीय अस्थिरता से निपटने के लिए इस्तेमाल किए जानेवाले नीति संबंधी उपायों के शस्त्रों के भाग के रूप में पूँजी नियंत्रण को मान्यता दी गई।
इसके बावजूद, अंतर्राष्ट्रीय मुद्रा कोष में और उन्नत देशों में, प्रचलित दृष्टिकोण यही बना हुआ है कि पूँजीगत नियंत्रण अंतिम उपाय हैं - जिनका इस्तेमाल केवल तभी करना चाहिए जब पारंपरिक समष्टि अर्थशास्त्र (मैक्रो इकोनॉमिक्स) और वित्तीय नीतियों का उपयोग कर लिया गया हो । मुक्त पूँजी, गतिशीलता का प��म लक्ष्य बनी हुई है, चाहे कुछ देशों को उस तक पहुँचने में समय लगे।
इस दृष्टिकोण के साथ दो समस्याएँ हैं। पहली, जैसा कि पूँजी गतिशीलता के पैरोकार लगातार उल्लेख करते हैं, वित्तीय भूमंडलीकरण से लाभ प्राप्त कर सकने से पहले, देशों को पूर्व-अपेक्षाओं की लंबी सूची पूरी करनी चाहिए। इनमें संपत्ति के अधिकार, प्रभावी अनुबंध प्रवर्तन, भ्रष्टाचार उन्मूलन, प्रवर्धित पारदर्शिता और वित्तीय जानकारी, ठोस कॉर्पोरेट अभिशासन, मौद्रिक और राजकोषीय स्थिरता, ऋण स्थिरता, बाज़ार-निर्धारित विनिमय दर, उच्च-गुणवत्ता का वित्तीय विनियमन और विवेकपूर्ण पर्यवेक्षण शामिल हैं। दूसरे शब्दों में, विकासशील देशों में विकास को सक्षम करने के लक्ष्य वाली नीति के सफल होने से पूर्व पहली दुनिया की संस्थाओं की ज़रूरत होती है।
इससे भी बदतर स्थिति यह है कि यह सूची न केवल लंबी है; बल्कि यह समाप्त न होने वाली भी है। जैसा कि उन्नत देशों के वैश्विक वित्तीय संकट के अनुभव ने प्रदर्शित किया है, सर्वाधिक परिष्कृत विनियामक और पर्यवेक्षी प्रणालियाँ भी विफलता-से-सुरक्षित नहीं हैं। इसलिए, यह माँग किया जाना कि विकासशील देशों को इस तरह की संस्थाओं का निर्माण करना चाहिए जो पूँजी प्रवाह को सुरक्षित कर सकें, यह न केवल गाड़ी को घोड़े से पहले रखना होगा; बल्कि यह मूर्खतापूर्ण काम भी होगा। सावधानी एक ज़्यादा व्यावहारिक दृष्टिकोण की अपेक्षा करती है, एक ऐसा दृष्टिकोण जिसमें अन्य विनियामक और विवेकपूर्ण उपायों के साथ-साथ पूँजी नियंत्रणों की स्थायी भूमिका को भी स्वीकार किया जाता है।
दूसरी समस्या का संबंध इस संभावना से है कि पूँजी के अंतर्प्रवाह विकास के लिए हानिकारक हो सकते हैं, चाहे हम वित्तीय कमज़ोरी के बारे में चिंताओं पर विचार न भी करें। पूँजी गतिशीलता के पैरोकार मानते हैं कि ग़रीब अर्थव्यवस्थाओं में निवेश के बहुत-से लाभदायक अवसर होते हैं जिनका निवेश-योग्य निधियों के कम होने के कारण दोहन नहीं किया जा रहा है। उनका तर्क है कि पूँजी को आने दें, और निवेश और विकास शुरू हो जाएँगे।
लेकिन अनेक विकासशील देश घरेलू बचत की कमी के कारण नहीं, बल्कि निवेश की माँग की कमी के कारण विवश हैं। सामाजिक निवेश पर लाभ ऊँचे हो सकते हैं, लेकिन निजी लाभ कम होते हैं, जिसका कारण बाहरी कारक, उच्च कर, ख़राब संस्थाएँ, या अन्य अनेक कारकों में से कोई भी हो सकता है।
कम निवेश से ग्रस्त होने वाली अर्थव्यवस्थाओं में पूँजी के अंतर्प्रवाह खपत को बढ़ाते हैं, पूँजी के संचय को नहीं। उनसे विनिमय-दर में तेज़ी आती है, जिससे निवेश की कमी और भी भयंकर हो जाती है। इससे व्यापार-योग्य उद्योगों की लाभप्रदता प्रभावित होती है - वे जिनके उपयुक्तता की समस्याओं से सबसे ज़्यादा ग्रस्त होने की संभावना होती है - उन्हें धक्का लगता है और निवेश की माँग और भी गिर जाती है। इन अर्थव्यवस्थाओं में, पूँजी के अंतर्प्रवाह विकास को प्रेरित करने के बजाय, उसे बहुत ज़्यादा धीमा कर देते हैं।
ऐसी चिंताओं के कारण उभरती हुई अर्थव्यवस्थाओं ने विविध पूँजीगत नियंत्रणों के साथ प्रयोग किए हैं। सिद्धांत रूप में, फ़्रंटियर बाज़ार अर्थव्यवस्थाएँ इस अनुभव से बहुत कुछ सीख सकती हैं। जैसा कि जॉन्स हॉपकिंस विश्वविद्यालय में अर्थशास्त्री ऑलिवियर जीन ने हाल ही में, इस तरह के अनुभव को प्रोत्साहित करने के लिए आयोजित किए गए अंतर्राष्ट्रीय मुद्रा कोष सम्मेलन में उल्लेख किया था कि ऐसे पूँजी प्रवाह उपाय जो अब फ़ैशन बन चुके हैं, बहुत अच्छी तरह काम नहीं करते हैं।
यह इसलिए नहीं है कि वे प्रवाह की मात्रा या संरचना को प्रभावित करने में विफल रहते हैं, बल्कि इसलिए है कि ऐसे प्रभाव बहुत मामूली होते हैं। जैसा कि ब्राज़ील, कोलम्बिया, दक्षिण कोरिया, और दूसरों ने सीखा है, बांड या अल्पकालिक बैंक ऋण जैसे विशिष्ट बाज़ारों को लक्षित करने वाले सीमित नियंत्रणों का प्रमुख परिणामों - विनिमय दर, मौद्रिक स्वतंत्रता या घरेलू वित्तीय स्थिरता - पर महत्वपूर्ण प्रभाव नहीं होता। इसका निहितार्थ यह है कि सही मायने में प्रभावी होने के लिए पूँजी नियंत्रण को सामान्य और व्यापक होने की ज़रूरत होती है, न कि विशिष्ट और लक्षित।
पूँजी नियंत्रण अपने आपमें कोई रामबाण नहीं हैं, और वे अक्सर समस्याओं का समाधान करने के बजाय भ्रष्टाचार या ज़रूरी सुधारों में विलंब जैसी बदतर समस्याएँ पैदा करते हैं। लेकिन यह सरकारी कार्रवाई के किसी अन्य क्षेत्र से बिल्कुल अलग नहीं है। हम दूसरी सबसे अच्छी दुनिया में रहते हैं जहाँ नीतिगत कार्रवाई लगभग हमेशा आंशिक (और आंशिक रूप से कारगर) होती है, और किसी एक क्षेत्र में नेक इरादों से किए जानेवाले सुधारों का विकृतियों के कारण अन्यत्र उलटा प्रभाव हो सकता है।
ऐसी दुनिया में, पूँजीगत नियंत्रणों को, हमेशा और हर जगह, अंतिम उपाय मानने का औचित्य बहुत कम है; वास्तव में, यह वित्तीय भूमंडलीकरण को केवल अधिक आकर्षक बनाता है। यह मानते हुए कि पूँजी नियंत्रण को कभी-कभी प्रमुख स्थान दिए जाने की ज़रूरत होती है, दुनिया को अलग-अलग मामले में, अत्यधिक व्यवहारकुशल होने की ज़रूरत है ।
Fukushima, Europe\u0027s Nuclear Test
MADRID – Seen from Europe, the irrationality of the political and media discourse over nuclear energy has, if anything, increased and intensified in the year since the meltdown at Japan’s Fukushima Daiichi power plant.
Yet a dispassionate assessment of nuclear energy’s place in the world remains as necessary as it is challenging.
Europeans should not pontificate on nuclear-energy policy as if our opinion mattered worldwide, but we do.
On the other hand, Europe does have a qualified responsibility in the area of security, where we still can promote an international regulatory and institutional framework that would discipline states and bring about greater transparency where global risks like nuclear power are concerned.
Europe is equally responsible for advancing research on more secure technologies, particularly a fourth generation of nuclear-reactor technology.
We Europeans cannot afford the luxury of dismantling a high-value-added industrial sector in which we still have a real comparative advantage.
In Europe, Fukushima prompted a media blitz of gloom and doom over nuclear energy.
The German magazine Der Spiegel heralded the “9/11 of the nuclear industry” and “the end of the nuclear era,” while Spain’s leading newspaper El Pais preached that supporting “this energy [was] irrational,” and that “China has put a brake on its nuclear ambitions.” But reality has proven such assessments to be both biased and hopelessly wrong.
True, a few countries – Belgium, Italy, Germany, and Switzerland, with Peru the only non- European country to join the trend – formally declared their intention to phase out or avoid nuclear energy.
These decisions affect a total of 26 reactors, while 61 reactors are under construction around the world, with another 156 projected and 343 under official consideration.
If these plans are realized, the number of functioning reactors, currently 437, will double.
But, more interestingly, the nuclear boom is not global: Brazil is at the forefront in Latin America, while the fastest development is occurring in Asia, mostly in China and India.
If we compare this geographical distribution with a global snapshot of nuclear sites prior to the Three Mile Island nuclear meltdown in the United States in 1979, a striking correlation emerges between countries’ nuclear-energy policy and their geopolitical standing and economic vigor.
Whereas the appetite for reactors in the 1970’s reflected the international heft of the Soviet Union, and principally that of the geopolitical West – Japan, the US, and Europe – today the center of gravity has shifted irrevocably to the East, where nuclear energy has become a “gateway to a prosperous future,” in the telling words of a November 2011 commentary in The Hindu.
Indeed, US President Barack Obama, evidently agreeing with that view, has boldly bet that loan guarantees and research into creating small modular reactors will reconfirm America’s global position at the forefront of civilian nuclear technology and its relevance in the new global order.
Energy is, of course, the bloodline of any society, reflected in the correlation between energy demand and income.
In this respect, nuclear energy’s advantages, particularly its reliability and predictable costs, stand out.
The International Energy Agency’s 2010 World Energy Outlook foresees a rise in global energy demand of 40% by 2030 – an unforgiving reality that is most tangibly felt in developing countries, particularly in Asia.
So expansion of nuclear energy is, and will continue to be, a fact.
To act responsibly, Europeans should be working to enhance international security standards for nuclear power, not opting out of the game.
The real lesson of Fukushima is that state controls are necessary but not sufficient to ensure nuclear safety.
Unfortunately, a proposal last year at the International Atomic Energy Agency aimed at launching an effective international control system on safety and security of nuclear power worldwide blatantly failed with the acquiescence of the European Union.
Worse still, with European backing, the IAEA’s budget, already a paltry €300 million, has been cut by almost 10%.
In this context, an initiative to mandate random IAEA inspections of 10% of the world’s operating reactors within three years was watered down, again with the EU’s active support, on the grounds that responsibility for security and inspections should rest primarily with member states.
Only a slim provision that made joint inspections with the IAEA voluntary made it into the final agreement.
As for the EU itself, the debate and final formulation of the March 2011 “voluntary” stress tests, accurately called “stormy” by Polish Prime Minister Donald Tusk, revealed a bewildering array of deficiencies and weaknesses.
Perhaps the most striking contradiction in Europe’s nuclear discourse is the discrepancy between the seeming effort to boost economic growth and employment, and the flippancy of member states in abandoning the nuclear industry, which depends on the design, engineering, and command-and-control skills that underlie Europe’s comparative advantage in the industry.
One heartening exception is a recent agreement between the United Kingdom and France to forge a manufacturing alliance between Rolls Royce and Areva in nuclear technology.
But they should not be alone.
Is it reasonable that Europe’s countries give up a niche of prosperity on ideological grounds that are irrelevant from a global perspective?
The rise of nuclear power in Europe paralleled its post-war economic prowess.
It coincided with the peak of the West’s belief in its soaring economic strength and perpetual global ascendancy.
Today, with Europe increasingly seen as the sick man of the world’s economy, even the whole continent’s renunciation of nuclear energy would have little to no reverberation on the world stage.
Dictating the direction of the policy discourse is no longer Europe’s role.
Behaving responsibly is.
Funding a Global Health Fund
NEW YORK – World leaders will come together at the United Nations in September in order to accelerate progress towards the Millennium Development Goals (MDGs).
Three of the eight MDGs involve bringing primary health services to the entire world’s population.
A small amount of global funding, if well directed, could save millions of lives each year.
The key step is to expand the Global Fund to Fight AIDS, Tuberculosis, and Malaria into a Global Health Fund.
The Global Fund was created in 2002 to help the world battle those three killer diseases, and its accomplishments have been spectacular, making it arguably the most successful innovation in foreign assistance of the past decade.
As a result of Global Fund programs, an estimated 2.5 million people are on antiretroviral AIDS therapy.
No fewer than eight million people have been cured of TB.
And more than 100 million long-lasting insecticide-treated bed nets have been distributed in the fight against malaria.
In total, studies suggest that Global Fund programs have saved five million lives.
The Global Fund’s remarkable successes result from its operational procedures.
Disease-specific committees, called the Country Coordination Mechanism (CCM), are constituted in each developing country.
Each CCM is chaired by the national government, but incorporates input from non-government organizations to formulate national-scale, disease-specific plans for submission to the Global Fund.
Once the Global Fund receives these plans, they are sent to a Technical Review Panel (TRP) to check that the plans are scientifically sound and feasible.
If the TRP approves, the plan is sent to the Board of the Global Fund, which then votes to approve financing.
Once the program gets underway, the Global Fund follows the implementation of the program, undertaking audits, monitoring, and evaluation.
Since 2002, the Global Fund has approved around $19 billion in total funding.
There are two huge challenges now facing the Global Fund, and especially the donor countries that support it.
The first is lack of financing.
The Global Fund has been so successful that countries are submitting increasingly ambitious programs for consideration.
Unfortunately, the Global Fund is already in a state of fiscal crisis.
It needs around $6 billion per year in the next three years to cover expansion of programs for the three diseases, but it has only around $3 billion per year from donor countries.
Unless this is corrected, millions of people will die unnecessarily.
The second challenge is to broaden the Global Fund’s mandate.
So far, the Global Fund has addressed MDG 6, which is focused on the control of specific killer diseases.
Yet control of these three diseases inevitably involves improvement of basic health services – community health workers, local clinics, referral hospitals, emergency transport, drug logistics – that play a fundamental role in achieving MDG 4 (reduction of child mortality) and MDG 5 (reduction of maternal mortality).
All three health MDGs are interconnected; all are feasible with an appropriate scaling up of primary health services.
The obvious step to address MDGs 4 and 5 is to explicitly expand the Global Fund’s financing mandate.
Many programs, such as those in the Millennium Villages project, already show that a scaling up of primary health systems at the village level can play a decisive role in reducing child and maternal mortality.
Expanding the Global Fund’s mandate to include financing for training and deployment of community health workers, construction and operation of local health facilities, and other components of primary health systems could ensure the development of these local systems.
Many countries – including France, Japan, Norway, the United Kingdom, and the United States – have recently recognized the need to move beyond the financing of control of AIDS, TB, and malaria to financing improvements in primary health systems more generally.
But they seem to view the issue of health-system financing as an either-or choice: scale up control of AIDS, TB, and malaria, or scale up financing of primary health systems.
The truth, of course, is that both are needed, and both are affordable.
The annual cost of specific disease control in the next three years is perhaps $6 billion, and another $6 billion per year for health-system expansion.
The total, $12 billion per year for an expanded Global Fund, might seem unrealistically large compared to the $3 billion per year spent now.
But total annual funding of $12 billion is really very modest, representing around 0.033% (three cents per $100) of the donor countries’ GNP. This is a tiny sum, which could be easily mobilized if donor countries were serious.
US President Barack Obama has been outspoken in support of scaling up primary health services, yet the specific budget proposals from his administration are not yet satisfactory.
The worst of it is that the Obama administration’s budget for the 2011 provides just $1 billion per year to the Global Fund.
This small sum is unworthy of US leadership.
If the US would expand its annual support to the Global Fund to around $4 billion per year, it would likely induce the rest of the world’s donors to put in $8 billion per year, keeping the US share at around one-third of total funding.
To raise these extra amounts, the Obama administration could levy an excess-profit tax on Wall Street to make up the budget gap.
Wall Street bankers, whose poor performance did so much damage to the world economy in recent years, and who still are reaping excessive bonuses, would also begin to make amends by seeing their new tax payments contribute to saving the lives of millions in the coming years.
Private Wealth and European Solidarity
COLOGNE – A little-discussed but crucial factor in the debate over wealth transfers from Europe’s more economically sound north to its troubled south is the relationship between public debt, GDP, and private wealth (households’ financial and non-financial assets, minus their financial liabilities) – in particular, the ratio of private wealth to GDP in the eurozone countries.
While the European Central Bank’s bond-purchasing scheme has calmed financial markets to a considerable extent, some European economies – including Italy, Spain, Greece, and Portugal – are still at risk, because they are not growing fast enough to narrow their deficits and stem the growth of their national debts.
The grim irony here is that the ratio of private wealth to GDP in some of the countries that are in need of support from the ECB and northern eurozone members is equal to or higher than that in more solvent countries.
Consider Italy, which has the highest ratio of private wealth to public debt of any G-7 country, and is some 30% to 40% higher than in Germany.
Likewise, Italy and France share a private wealth/GDP ratio of five to one, while Spain’s – at least before the crisis hit the country in full – was six to one. By contrast, the ratio in Germany, Europe’s largest creditor, is only 3.5 to one.
This discrepancy is at the heart of the question with which European policymakers are now grappling: Should taxpayers in debtor countries expect “solidarity” – or, more bluntly, money – from taxpayers in creditor countries?
Why should taxpayers in creditor countries have to take responsibility for financing the euro crisis, especially given that high private wealth/GDP ratios may result from low tax revenues over time, while lower ratios may reflect higher tax revenues?
Before seeking or accepting help from the rest of Europe, countries should employ all available domestic resources.
Debtor governments should call upon their own taxpayers to fund some of the national debt in order to avoid higher interest rates in credit markets.
They could, for example, offer an incentive in the form of a 3-4% interest rate on bonds, and even make them tax-free eventually.
This would allow Italy, Spain, and even Greece to finance their national debts at a more reasonable, sustainable cost.
Citizens’ voluntary financing of their countries’ national debt would be the most effective means of reducing strain on Europe’s financial resources, while simultaneously serving as a powerful symbol of solidarity.
By contrast, turning creditor-country citizens’ tax payments into forced subsidies of other countries’ debts would undermine European cohesion. Nordic countries, for example, cannot be expected to fund other countries’ debts in the long term – especially if those countries have not made full use of their own resources.
In fact, while concerns over the eurozone’s survival tend to focus on its indebted members, Europe’s monetary union is at risk of losing one of the few members that still enjoys a triple-A credit rating: Finland.
Given Finland’s difficult domestic political situation, its citizens may look to Denmark and Sweden – which boast rapid growth and low national debt, and do not pay into the European Financial Stability Facility or the European Stability Mechanism – and decide that eurozone membership costs too much and is no longer worthwhile.
Italy and Spain have enough resources to rescue themselves, and to secure the time needed to restructure their economies.
Indeed, even after taking on the entire national debt, their private wealth/GDP ratios would still be higher than they are in some northern European countries.
Escaping the euro crisis is less a matter of economics than of political will.
By calling upon citizens to finance their own countries’ national debts, southern Europe’s leaders can fix their own economies and strengthen the European principles of solidarity and subsidiarity.
Furnace Cities
COPENHAGEN &#45;&#45; It’s possible to see, right now, what global warming will eventually do to the planet.
To peek into the future, all we have to do is go to Beijing, Athens, Tokyo, or, in fact, just about any city on Earth.
Most of the world’s urban areas have already experienced far more dramatic temperature hikes over the past few decades than the 2.6°C increase expected from global warming over the next hundred years.
It’s simple enough to understand.
On a hot day in New York, locals sprawl out on the grass fields of Central Park, not on asphalt parking lots or concrete sidewalks.
Bricks, concrete, and asphalt – the building blocks from which cities are made – absorb much more heat from the sun than vegetation does in the countryside.
Across an entire city, there’s much more tarmac than there is grass.
So the air above the city heats up.
This effect, called an “urban heat island,” was discovered in London in the early 1800’s.
Today, the fastest-growing cities are in Asia.
Beijing is roughly 10°C hotter than the nearby countryside in the daytime and 5.5°C warmer at night.
There are even more dramatic increases in Tokyo.
In August, temperatures there climbed 12.5oC above the surrounding countryside, reaching 40oC – a scorching heat that affected not only the downtown area, but also covered some 8,000 square kilometers.
Looking at a fast-growing city like Houston, Texas, we can see the real effect of the urban heat island.
Over the last 12 years, Houston grew by 20%, or 300,000 inhabitants.
During that time, the night time temperature increased about 0.8°C. Over a hundred-year period, that would translate to a whopping 7°C increase.
But, while celebrity activists warn about the impending doom posed by climate change, a more realistic view is offered by these cities’ ability to cope.
Despite dramatic increases over the past 50 or 100 years, these cities have not come tumbling down.
Even as temperatures have risen, heat-related deaths have decreased, owing to improved health care, access to medical facilities, and air-conditioning.
We have far more money and much greater technological ability to adapt than our forebears ever did.
Of course, cities also will be hit by temperature increases from CO2, in addition to further warming from urban heat islands.
But we have an opportunity to act.
Unlike our forebears, who did very little or nothing about urban heat islands, we are in a good position to tackle many of their effects.
While celebrity activists focus entirely on cutting CO2, we could do much more – and at much lower cost – if we addressed urban heat islands.
Simple solutions can make a vast difference to temperatures.
Cities are hotter than the land around them because they are drier.
They lack moist green spaces and have drainage systems that efficiently remove water.
In London, the air around the River Thames is cooler than it is a few blocks away in built-up areas.
If we plant trees and build water features, we won’t just beautify our surroundings, but we’ll also cool things down – by upwards of 8°C, according to climate models.
Moreover, although it may seem almost comically straightforward, one of the best temperature-reducing approaches is very simple: paint things white.
Cities have a lot of black asphalt and dark, heat-absorbing structures.
By increasing reflection and shade, a great deal of heat build-up can be avoided.
Paint most of a city and you could lower the temperature by 10°C.
These options are simple, obvious, and cost-effective.
Consider Los Angeles.
Re-roofing most of the city’s five million homes in lighter colors, painting a quarter of the roads and planting 11 million trees would have a one-time cost of about $1 billion.
Each year after that, this would lower air conditioning costs by about $170 million and provide $360 million in smog-reduction benefits.
And it would lower LA temperatures by about 3°C – or about the temperature increase envisioned for the rest of this century.
Compare that to the $180 billion cost of implementing the Kyoto Protocol, which will have virtually no effect.
At the moment, we don’t hear much about the smartest choices when it comes to addressing global warming.
That needs to change.
We do get to choose which future we want.
Confronting the Coming Liquidity Crisis
SAO PAULO – This month, G-20 leaders will meet in Antalya, Turkey, for their tenth summit since the 2007 global financial crisis.
But, despite all of these meetings – high-profile events involving top decision-makers from the world’s most influential economies – no real progress has been made toward reforming the international financial architecture.
Indeed, the group has not seriously engaged with the subject since the 2010 summit in Seoul.
Put simply, the G-20 is failing in its primary and original purpose of enhancing global financial and monetary stability.
A big part of the problem is that the G-20 agenda has become increasingly congested over the years.
At a time of looming financial upheaval, the G-20 must stop attempting to tackle a broad array of issues simultaneously – a goal that has proved impossible – and go back to basics.
The United States Federal Reserve is now preparing to raise interest rates, which it has kept near zero since the crisis.
While monetary-policy tightening may be necessary, it risks triggering a serious liquidity crisis in developing countries, with a major impact on economic growth and development.
That is why, at this month’s G-20 summit, participants must focus on providing a credible institutional backstop for the difficult times ahead.
Specifically, the G-20 should move to empower the International Monetary Fund, both by pushing it to do more with its existing powers and by championing institutional reform.
Raghuram Rajan, the governor of India’s central bank, emphasized this at the recent annual meetings of the IMF and the World Bank in Lima, Peru, when he called for the Fund to build a sustainable global safety net to help countries in future liquidity crisis.
The necessary institutional arrangement already exists: the IMF’s Special Drawing Rights (SDR) department.
Within this department, official entities can exchange SDRs – the IMF’s own international reserve asset – for other currencies.
Moreover, the IMF can designate a country with a strong balance-of-payments position to provide the liquidity that another member needs.
Through this so-called “designation mechanism” – which has never been used – the IMF can ensure certainty of access to global currencies in times of crisis.
Of course, if the IMF’s SDR department is to become a global liquidity hub capable of mitigating future crises, reform is vital.
Ideally, major powers would support efforts to strengthen the IMF.
But the US has so far been unwilling to do so, with domestic partisan politics spurring Congress to block the relevant reforms.
While the G-20 should not give up on IMF-strengthening reforms, it should hedge its bets.
Specifically, it should work with a “coalition of the willing” – including the major emerging economies, concerned advanced countries, and other developing countries – to create an institutional mechanism with which to respond effectively to the next global liquidity crisis.
One obvious option would be to replicate the institutional design of the SDR department by incorporating it in an agreement among the coalition countries.
The Bank for International Settlements, which was the counterparty in currency swaps under the Bretton Woods par value system in the 1960s, could be the manager of this system.
This approach undoubtedly has major shortcomings.
Indeed, the key advantage of the IMF’s SDR department – that it is a quasi-universal and government-driven system whereby currencies are exchanged with reliable “collateral” (the SDR) – would be lost.
But the perfect should not be made the enemy of the good.
As long as an ideal system is out of reach, an imperfect option will have to do.
With the risk of a liquidity crisis intensifying, and the existing international financial architecture ill-equipped to respond to such a crisis, doing nothing is not an option.
In recent years, the international financial system has become increasingly fragmented, exemplified in the proliferation of bilateral and multilateral currency-swap arrangements.
For example, the Chiang Mai Initiative Multilateralization involves the ASEAN countries, plus China, Japan, and South Korea.
And the Contingent Reserve Arrangement (CRA) was created by the BRICS countries (Brazil, China, India, Russia, and South Africa).
Swap contracts involve pre-committed resources, which are not transferred to an international organization with a specific institutional mission.
Instead, foreign-exchange reserves – that is, liquidity in currencies accepted for international payments – are held in national agencies until a swap’s activation.
This means that there is no guarantee that, in the event of a crisis, a central bank will actually provide the swap line it has pledged, at least not without attaching political strings.
In the CRA, for example, members can opt out of providing support – and can request early repayment if a balance-of-payments need arises.
Clearly, the world’s ever-expanding network of currency-swap arrangements is far from a reliable mechanism for responding to crisis.
This is particularly problematic for the emerging economies, which are especially vulnerable now.
Turkey, which currently holds the G-20 presidency, and China, which will take over next year, should have plenty of motivation to demand action to create safeguards against today’s liquidity risks.
Beyond urging the US to approve IMF governance reforms, both countries should be hard at work building a coalition of the willing and designing an effective crisis-response mechanism.
So far, Turkey seems to be falling short, promoting an overcrowded and ineffective agenda.
One hopes that its leaders come to their senses fast, so that the upcoming summit can produce the results that past summits have failed to provide – and that the world needs more than ever.
The Bonfire of the Subsidies
LONDON – The number of chances that the world will have to address climate change is dwindling.
One of them comes with this week’s G-20 summit in Brisbane, Australia, where leaders of the world’s advanced and major emerging economies can signal serious intent by cutting the fossil-fuel subsidies that fuel global warming.
Five years ago, the G-20 pledged to phase out “inefficient fossil fuel subsidies” as part of a wider strategy for combating climate change.
Yet the subsidies have continued to grow.
Globally, some $600 billion is spent to support carbon-intensive energy, compared to just $90 billion for clean energy.
That makes no sense.
Fossil-fuel subsidies encourage investors to put resources into the fuels that are driving climate change.
They generate the terrible local pollution that blights cities in China and India.
And most of the benefits of the subsidies are captured by the middle class, not the poor.
Subsidies directed toward discovering and exploiting new fossil-fuel reserves are among the most wasteful – and the most damaging.
Along with the rest of the international community, G-20 governments are committed to the target of limiting global warming to less than 2ºC above the planet’s pre-industrial level.
According to the International Energy Agency, no more than one-third of known reserves can be exploited if this goal is to be achieved.
So why throw public finance at discovering more unburnable carbon?
That is a question that G-20 taxpayers might want to ask their political leaders.
The Overseas Development Institute and Oil Change International have provided the first financial audit of subsidies allocated specifically to the discovery of new fossil-fuel reserves by G-20 countries.
Their report, published this week, identifies around $88 billion in public financial support provided through an assortment of tax breaks, spending by state-owned enterprises, and transfers mediated through financial institutions such as the World Bank.
Every G-20 country is participating in the exploration subsidy fest.
The host government for the Brisbane summit spends some $3 billion annually.
The US has doubled funding for fossil-fuel exploration – to more than $5 billion – since 2009.
Britain provides around $1.2 billion, principally in the form of tax breaks for North Sea oil exploration, generating windfall transfers for companies like Total and Chevron.
State-owned energy companies in Brazil, China, and India are at the forefront of high-carbon exploration.
Russia’s Gazprom gets tax breaks to support investment in ecologically fragile Arctic areas.
Subsidies for fossil-fuel exploration are where the politics of the greenhouse meets the economics of the madhouse.
Consider, first, the climate-change effects.
If current fossil-fuel reserves are exploited, we will be faced with potentially catastrophic global warming of 4ºC over the course of the twenty-first century.
Governments are using public money to discover new reserves that, if exploited, will drive the world to climate disaster even faster.
The economic case for exploration subsidies is weak and getting weaker.
Public money is being used to boost private profit and bail out a failing industry.
Taken collectively, G-20 governments are spending twice as much on exploration as the 20 largest private energy companies.
In other words, they are putting taxpayer money where commercial companies fear to tread.
With prices for oil, coal, and gas declining, and the cost of new discoveries rising, much fossil-fuel exploration is commercially unviable.
The wider damage associated with fossil-fuel subsidies is insufficiently recognized.
If we are to keep within the 2ºC threshold, governments should be putting a high and escalating price on carbon, linked to emission-reduction targets.
As the Global Commission on Economy and Climate has shown, plummeting renewable-energy costs have created new opportunities to avoid dangerous climate change without sacrificing economic growth.
Indeed, several major pension funds and institutional investors are now divesting from fossil-fuel companies.
But the absence of credible carbon price signals, along with the perverse incentives created by fossil-fuel subsidies, continues to hold back the investments and technologies needed to drive a low-carbon transition.
Nowhere is this more evident than in the European Union.
Political leaders have set the ambitious target of achieving a 40% cut in CO2 emissions by 2030.
Yet prices set by the EU’s emissions trading scheme, the largest in the world, are languishing at around $7 a ton – and (subsidized) coal is making a comeback.
Surely it is time for EU leaders to align climate targets with carbon prices – and to cut the carbon subsidies.
It is easy to be cynical about the G-20 Brisbane Summit.
The host government has been actively rolling back legislation aimed at addressing climate change.
Indeed, the Australian authorities have tried to keep the issue off the agenda altogether.
Moreover, the G-20 itself is short on credibility; what was once considered a workshop for a new system of global economic governance is now widely regarded as an increasingly irrelevant talk shop.
Yet when it comes to climate change, cynicism is a luxury that we cannot afford.
Decisive action by the G-20 would help to galvanize international cooperation ahead of the key negotiations leading to next year’s United Nations climate summit in Paris.
Redeeming the pledge to phase out fossil-fuel subsidies would also help to restore the reputation of the G-20 itself.
An agreement to eliminate financial support for exploration would be a significant step in the right direction – and it would save taxpayers money, too.
Era Pembangunan Mega Proyek
WASHINGTON, DC – Nampaknya kita tengah memasuki era pembangunan mega proyek, ketika negara, khususnya negara-negara anggota G-20, memobilisasi sektor swasta untuk berinvestasi besar-besaran pada inisiatif infrastruktur bernilai jutaan dolar (bahkan miliaran atau triliunan), seperti jaringan pipa, bendungan, sistem pengairan dan listrik, serta jaringan jalan raya.
Kini, anggaran mega proyek bernilai antara $6-9 triliun per tahun, sekitar 8% dari PDB dunia, menjadikannya sebagai “investment boom terbesar sepanjang sejarah manusia”.
Kemudian geopolitik, tuntutan pertumbuhan ekonomi, pencarian pasar-pasar baru dan sumber daya alam memicu pengeluaran lebih besar untuk mendanai proyek-proyek infrastruktur berskala besar.
Di titik puncak yang berpotensi mengarah pada ledakan yang tidak pernah terjadi sebelumnya, pemimpin dunia dan kreditor terkesan lupa atau tidak menyadari betapa mahalnya pembelajaran dari masa lalu.
Memang benar investasi di bidang infrastruktur dapat memenuhi kebutuhan-kebutuhan nyata, menyokong pemenuhan akan tingginya gelombang permintaan yang diperkirakan atas pangan, air, dan energi.
Tetapi, kecuali jika lonjakan mega proyek ini berhasil dialihkan dan dikelola dengan hati-hati, upaya tersebut cenderung bersifat counterproductive dan tidak berkelanjutan.
Tanpa kendali demokratis, investor akan menjalankan praktik privatizing profits and socializing losses, sembari menetapkan pendekatan intensif karbon serta pendekatan lain yang berbahaya bagi lingkungan hidup dan sosial.
Pertama-tama, terdapat isu mengenai efektivitas biaya.
Daripada menerapkan filosofi “kecil itu indah” atau “lebih besar lebih baik”, negara harusnya membangun infrastruktur dengan “skala yang tepat (appropriate scale)” disesuaikan dengan tujuannya.
Bent Flyvbjerg, seorang profesor di University of Oxford dengan spesialisasi di bidang perencanaan dan pengelolaan program, mempelajari data yang berusia 70 tahun untuk menyimpulkan adanya “hukum besi mega proyek (iron law of megaprojects)”: mega proyek ini hampir selalu “over budget, over time, over and over again.”
Mega proyek ini juga, beliau menambahkan, tunduk pada prinsip “survival of the unfittest”, yakni justru proyek-proyek terburuk yang dibangun, bukan yang terbaik.
Risiko ini diperparah dengan fakta bahwa mega proyek ini dikendalikan utamanya oleh geopolitik – bukan ekonomi kehati-hatian.
Semenjak tahun 2000 hingga 2014, ketika PDB dunia menjadi dua kali lebih besar mencapai $75 triliun, penguasaan negara-negara G-7 di dalam ekonomi dunia merosot dari 65% menjadi 45%.
Saat dunia internasional menyesuaikan diri terhadap bentuk keseimbangan baru ini, Amerika Serikat mulai khawatir bahwa hegemoninya akan dilawan oleh pemain-pemain baru, seperti Asian Infrastructure Investment Bank, yang berada di bawah kepemimpinan Tiongkok.
Sebagai reaksinya, lembaga-lembaga keuangan yang dipimpin negara-negara Barat seperti World Bank and Asian Development Bank, secara agresif memperluas operasi investasi infrastrukturnya, dan secara terbuka menyerukan perubahan paradigma.
G-20 pun juga mempercepat peluncuran mega proyeknya, berharap akan mampu menaikkan laju pertumbuhan global setidaknya 2% pada tahun 2018.
OECD memperkirakan kebutuhan akan tambahan anggaran sebesar $70 triliun diperlukan pada tahun 2030 – rata-rata pengeluaran hampir lebih dari $4,5 triliun per tahun.
Sebagai perbandingan, diperlukan dana sekitar $2-3 triliun per tahun guna mencapai Tujuan Pembangunan Berkelanjutan (Sustainable Development Goals).
Tentunya dengan adanya mega proyek ini potensi terjadinya pemborosan, korupsi, dan menumpuknya utang publik yang tidak berkesinambungan akan tinggi.
Persoalan kedua yang perlu dipertimbangkan adalah batasan bumi (planetary boundaries).
Dalam sebuah surat yang dikirimkan kepada G-20 di bulan Maret 2015, sekelompok ilmuwan, kaum penyelamat lingkungan hidup, dan pemuka pendapat telah memperingatkan bahwa kenaikan investasi mega proyek menimbulkan risiko kerusakan yang bersifat irreversible (tidak dapat dipulihkan) dan bencana besar. “Setiap tahun, kita sudah menghabiskan sumber daya yang senilai dengan satu-setengah kali sumber daya di bumi,” jelas penulisnya.
Sejalan dengan itu, Intergovernmental Panel on Climate Change memperingatkan bahwa “pembangunan infrastruktur dan produk umur panjang yang membawa masyarakat menuju jalur tinggi emisi gas rumah kaca menjadikannya sulit diubah atau terlampau mahal.”
G-20 sebetulnya telah memasukkan beberapa kriteria terkait dengan lingkungan hidup, iklim, atau sosial ke dalam “wish list” mega proyek yang harus diserahkan oleh negara-negara anggota pada pertemuan di Turki bulan November nanti.
Potensi masalah ketiga sehubungan dengan mega proyek ialah ketergantungannya pada kerjasama publik-swasta.
Sebagai bagian dari fokus terbaru mengenai investasi skala besar, maka World Bank, International Monetary Fund, dan beberapa kreditor multilateral lainnya telah mengumumkan upaya untuk merekayasa pembiayaan pembangunan, diantaranya dengan penetapan sejumlah asset class baru bagi infrastruktur sosial dan ekonomi untuk menarik investasi swasta. “Kita perlu memanfaatkan aset triliunan dolar yang dimiliki investor institusional…dan mengalihkan aset-aset tersebut ke dalam proyek-proyek,” menurut Presiden World Bank Group, Jim Yong Kim.
Melalui penggunaan dana publik untuk menekan risiko, mereka berharap bisa menarik investor institusional jangka panjang – termasuk reksadana, perusahaan asuransi, dana pensiun, dan lembaga sovereign-wealth fund – yang secara keseluruhan mengendalikan aset sebesar $93 triliun.
Harapan kreditor multilateral ialah pemanfaatan modal besar ini akan memungkinkan mereka meningkatkan pembangunan infrastruktur dan mengubah pembiayaan pembangunan melalui cara-cara yang sebelumnya tidak terpikirkan.
Persoalannya adalah kerjasama publik-swasta wajib memberikan tingkat laba/ROI yang kompetitif.
Akibatnya, menurut tim peneliti di London School of Economics, bentuk kerjasama ini “tidak dipandang sebagai perangkat yang tepat bagi proyek-proyek [teknologi informasi] atau jika kekhawatiran sosial membatasi retribusi sehingga proyek terlihat menarik bagi sektor swasta.” Investor swasta ingin mempertahankan tingkat laba/ROI mereka melalui sumber pendapatan terjamin dan memastikan bahwa hukum dan peraturan perundang-undangan (termasuk persyaratan lingkungan hidup dan sosial) tidak mengganggu perolehan keuntungan.
Risikonya adalah pencarian keuntungan akan menghabiskan barang publik.
Akhirnya, aturan-aturan mengenai investasi jangka panjang tidak secara efektif mempertimbangkan risiko-risiko jangka panjang terkait sosial dan lingkungan hidup, sebagaimana ditekankan oleh serikat pekerja dan United Nations Environment Program.
Penggabungan investasi infrastruktur dalam portofolio atau pengalihan sektor pembangunan ke dalam asset class dapat mengarah pada praktik privatizing profits and socializing losses dalam skala besar.
Dinamika ini dapat memperbesar tingkat ketidaksetaraan dan melemahkan demokrasi, berkat rendahnya pengaruh pemerintah – apalagi masyarakat – terhadap investor institusional.
Secara umum, aturan-aturan dan perjanjian perdagangan memperburuk masalah-masalah ini dengan menempatkan kepentingan investor di atas masyarakat biasa.
Satu hal yang belum diuji, dorongan menuju risiko mega proyek – menurut istilah yang digunakan perumus surat kepada G-20 – “doubling down on a dangerous vision”.
Sangat penting bagi kita untuk memastikan bahwa perubahan apapun terhadap pembiayaan pembangunan dapat dirancang sedemikian rupa agar menegakkan hak asasi manusia dan melindungi bumi.
A Plutocrats Summit?
BRISBANE – At an official dinner in Washington, DC, ahead of November’s G-20 Summit in Brisbane, Australia-born media mogul Rupert Murdoch lectured ministers on the dangers of socialism and big government.
A fervent opponent of Australia’s carbon price, and a battle-hardened opponent of US President Barack Obama, Murdoch lauded the virtues of austerity and minimal regulation, and railed against the corrosive effects of social safety nets.
The ministers were in Washington to attend the Annual Meetings of the International Monetary Fund and the World Bank, where they attempted to thrash out differences and establish common ground before the upcoming summit.
The tone set by Murdoch, however, suggests that a consensus on sustainable, inclusive growth will be hard to achieve.
Murdoch’s comments are in keeping with views expressed by his friend, Australian Prime Minister Tony Abbott, and Abbott’s current administration.
In January, for example, Abbott informed a startled Davos conference that the global financial crisis was caused not by unregulated global markets, but rather by too much governance.
This was certainly news to the finance ministers who had spent the past few years struggling with the toxic fallout from financial-sector excess.
Viewed in the context of such comments, one can better understand Australia’s refusal to put issues of climate change and inclusive prosperity on the Brisbane agenda.
Of course, stimulating global growth is a big enough challenge in itself, even without considering inclusiveness or environmental sustainability.
The IMF’s gloomy growth forecasts attest to that.
And many policymakers view Australia’s G-20 chairmanship as an opportunity to re-energize and refine the group’s mission to boost global growth, create jobs, and raise living standards.
G-20 finance ministers have already decided on a 2% target for annual growth through 2018, and are sifting through more than 900 proposals for structural reforms in order to achieve this.
What reforms G-20 members propose in Brisbane, and how serious they will be about implementing them, remains to be seen.
The bigger challenge, though, is hitting those growth targets in a sustainable and inclusive way.
If structural reforms are not done right, the Brisbane Summit will come to be regarded as a failure.
Structural reforms, in which certain interests are sacrificed for the greater good, will always be controversial and difficult to execute.
But when such reforms involve sacrifices by ordinary citizens and benefit society’s most privileged groups, political gridlock and instability invariably follow.
Over the past two years, academics, regulators, economists, and financial institutions have all linked the secular stagnation in demand with greater income inequality.
It is ironic that, at a time when many in the developing world are entering, or aspire to enter, the emerging middle class, wealth in much of the developed world is becoming more concentrated at the top.
Indeed, inequality of outcomes both in emerging and advanced economies has increased within and across generations.
Australia’s refusal to discuss inclusive growth in Brisbane may please plutocrats like Murdoch, but talk of unregulated markets, lower taxes, and the removal of social safety nets strongly indicates that the summit will offer no substantive policies aimed at reducing inequality.
With just days to go until the Brisbane meeting, the G-20 is ignoring the main long-term threats to the global economy.
As the Bank of England’s Governor Mark Carney (who I assume also heard Murdoch’s lecture) remarked earlier this year, “[U]nchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.” IMF Managing Director Christine Lagarde recently put it more starkly, noting that the world’s 85 richest people control more wealth than the world’s 3.5 billion poorest people, and that this degree of inequality is casting a dark shadow over the global economy.
Inequality is not a fringe issue.
Combating its rise is essential to achieving sustainable economic growth and political stability.
The G-20’s real&nbsp;power is to highlight such challenges and generate informed debate on the issues as a prelude to action.
The question now is which leader in Brisbane, if any, will grab the global megaphone and speak out.
Inclusive Growth and Global Justice
ANKARA – As France and the world mourn the terrorist slaughter of innocents in Paris, the leaders of the G-20 are meeting in Antalya, Turkey.
Terror will now vault to the top of the long list of pressing issues that will be discussed.
The G-20, whose members account for about 85% of the world economy, has an important responsibility to respond to challenges that affect the lives and prosperity of millions of people around the world.
It cannot risk falling into complacency and inaction, whether regarding terrorism or the fragile state of the world’s economy.
Since Turkey assumed the presidency of the G-20 in December 2014, our approach toward ensuring inclusive and robust growth through collective action has enjoyed the support of the organization’s members.
This effort has been built on three pillars: decisive implementation of past commitments, boosting investments as a powerful driver of the global economy, and promotion of inclusiveness so that the benefits of growth are shared by all.
When it comes to implementation, great strides have been made.
By promoting sound macroeconomic and fiscal policies and implementing solid, structural reforms, we have made significant progress toward our objective of expanding the G-20’s collective GDP by 2.1% by 2018.
The global financial system is now more resilient than it has ever been.
Financial capacities are being rebuilt, and new growth targets are being met.
But there remains much more to be done.
G-20 members should expedite efforts to deliver on their commitments to boost productivity and eliminate structural bottlenecks to investment, competition, trade, and jobs.
We must also cement the fundamental reforms to the global financial system that the G-20 has delivered over the past seven years.
Our focus on investment – a key driver of growth, jobs, and development – is also beginning to pay off.
There is a huge investment gap in the global economy, both in advanced and developing countries.
That is why we need developed-country strategies that bring together concrete policy actions and commitments to improve the investment ecosystem, support small and-medium-size enterprises, and promote the construction of efficient, high-quality infrastructure.
If the G-20 members fully implement their commitments under these strategies, their collective GDP is expected to increase by another 1%.
Economic growth must be strong and sustainable; but, above all, it must be inclusive.
Inequality is rising in many G-20 countries; in some cases, it has reached historic highs.
This is a dangerous development, one that can retard growth, threaten the cohesion of societies, and jeopardize people’s wellbeing.
It is imperative that the G-20 tackle inequality head on and demonstrate its determination to ensure that all of its member countries’ citizens enjoy the fruits of economic growth.
Reducing unemployment is central to the fight against inequality.
There are about 100 million jobless people in the G-20, and another 200 million young people who are neither working nor studying.
Significantly reducing youth unemployment is one of the G-20’s most important commitments.
Inclusiveness cannot stop at the borders of the G-20.
We must work to ensure that the benefits of growth and prosperity are shared by people all over the world.
In Antalya, we will discuss how we can align our efforts with the new 2030 Agenda for Sustainable Development and increase our engagement with low-income, developing countries.
As politics and economics are increasingly intertwined, the G-20 must also work together to confront our era’s geopolitical challenges.
This year is an important one in the fight against climate change.
We must send a strong political message from Antalya in support of a successful outcome at the United Nations Climate Change Conference that takes place in Paris from November 30 to December 11.
Meanwhile, the terror attacks in Paris have brutally reminded us, once again, that global challenges – such as terrorism, the war in Syria, and the refugee crisis – require truly global responses.
The G-20 is an ideal forum in which to address them.
The Syrian civil war – now well into its fourth year – must be brought to an end, and a fair and sustainable political transition must be ensured.
The conflict and the brutal state terrorism of Syrian President Bashar al-Assad’s regime is not only the cause of terrible suffering in Syria and the death of more than 360,000 people; it is also the root of the refugee crisis and the emergence of Daesh – a threat to all countries.
Turkey is a member of the coalition against Daesh, and we are seeking to degrade and destroy this terrorist menace in our country and beyond our borders.
At the same time, we must not allow ourselves to forget the plight of those fleeing the brutality of the Assad regime and Daesh.
The international community that shuddered at the photograph of Alan Kurdi, the three-year-old Syrian toddler who was found dead on a Turkish beach, must be made to remember that many more like him are dying every day in the cold waters of the Mediterranean and the Aegean.
Turkey is currently hosting some 2.2 million Syrian refugees, and we have spent more than $8 billion over the last three years caring for them.
The international community must agree on a mechanism that ensures that the burden is fairly shared.
Finally, it is important to note that Turkey continues to confront the threat of the Kurdistan Workers’ Party (PKK), an organization listed as a terrorist group by both the United States and the European Union.
Turkey has implemented a large number of reforms and made major investments to the benefit of our Kurdish citizens.
And yet the PKK has refused to disarm, instead amassing weapons and attacking civilian and security targets across the country. As we continue to fight the scourge of terrorism in our country, we call on all countries not only to mourn the dead in Paris, but to reject terrorism in all of its forms.
The G-20 Summit in Antalya will address these and other major issues confronting the world.
Whether the subject is economics, finance, climate change, or politics, the guiding principle must be equality and justice for all.
The G-7 Embraces Decarbonization
NEW YORK – This week’s G-7 meeting at Schloss Elmau in the Bavarian Alps marked a major breakthrough in climate-change policy.
The seven largest high-income economies (the United States, Japan, Germany, the United Kingdom, France, Italy, and Canada) made the revolutionary decision to decarbonize their economies during this century.
For the first time in history, the major rich economies have agreed on the need to end their dependence on fossil fuels.
German Chancellor Angela Merkel, US President Barack Obama, and the other G-7 leaders have risen to the occasion and deserve strong global approbation.
The historic breakthrough is recorded in the final G-7 communiqué. First, the G-7 countries underscored the importance of holding global warming to below 2° Celsius (3.6° Fahrenheit).
This means that the Earth’s average temperature should be kept within 2°C of the average temperature that prevailed before the start of the Industrial Revolution (roughly before 1800).
Yet the global warming to date is already around 0.9°C – nearly half way to the upper limit.
Then, the G-7 leaders did something unprecedented.
They acknowledged that in order to hold global warming below the 2°C limit, the world’s economies must end their dependence on fossil fuels (coal, oil, and natural gas).
Currently, around 80% of worldwide primary energy comes from fossil fuels, the combustion of which emits around 34 billion tons of carbon dioxide.
This level of emissions, if continued in future decades, would push temperatures far above the 2°C upper limit.
Indeed, with rising worldwide energy use, continued dependence on fossil fuels could raise global temperatures by 4-6°C, leading to potentially catastrophic consequences for global food production, higher sea levels, mega-droughts, major floods, devastating heat waves, and extreme storms.
The science is clearer than many politicians would like.
For humanity to have a “likely” chance (at least two-thirds) of staying below the 2°C threshold, a small reduction in CO2 emissions will not be enough.
In fact, emissions will have to fall to zero later this century to stop any further rise in the atmospheric concentration of CO2.
Simply put, the world economy must be “decarbonized.”
The breakthrough at the G-7 summit was that the seven governments recognized this, declaring that the 2°C limit requires “decarbonization of the global economy over the course of this century.”
The G-7 finally stated clearly what scientists have been urging for years: humanity must not merely reduce, but must end, CO2 emissions from fossil fuels this century.
Decarbonization is feasible, though by no means easy.
It depends on taking three key steps.
First, we must become more energy efficient, for example, through modern building designs that reduce the needs for heating, cooling, and energy-intensive ventilation.
Second, we must produce electricity with wind, solar, nuclear, hydroelectric, geothermal, and other non-carbon energy sources, or by capturing and storing the CO2 produced by fossil fuels (a process known as CCS).
Third, we must switch from fossil fuels to electricity (or hydrogen produced by zero-carbon electricity) or in some cases (such as aviation) to advanced biofuels.
The hard part is the practical, large-scale implementation of broad concepts in a way that does not disrupt our energy-dependent world economy and does not cost a fortune to achieve.
But as we tally these costs, we need to keep in mind that runaway climate change would impose the greatest costs of all.
To succeed, we will need several decades to convert power stations, infrastructure, and building stock to low-carbon technologies, and we will need to upgrade the low-carbon technologies themselves, whether PV solar cells, or batteries for energy storage, or CCS for safely storing CO2, or nuclear power plants that win the public’s confidence.
The G-7, notably, committed to “developing and deploying innovative technologies striving for a transformation of the energy sectors by 2050” and invited “all countries to join us in this endeavor.”
This global process of decarbonization will be long and complex, and it will require detailed roadmaps with periodic redesigns as technologies evolve.
Here, too, the G-7 made a historic breakthrough by declaring its readiness to “develop long-term national low-carbon strategies” to get to a decarbonized future.
The United Nations Sustainable Development Solutions Network (SDSN), which I direct on behalf of UN Secretary-General Ban Ki-moon, has been working on such low-carbon strategies for the main emitting countries in a project called the Deep Decarbonization Pathways Project.
Of course, the G-7 declaration is only a declaration, and it does not yet include the commitments of many of the world’s largest CO2-emitting countries, including China, India, and Russia.
Yet it is a crucial step that will greatly encourage other countries to participate in deep decarbonization as well, especially in view of the G-7’s commitment to speed the development of improved low-carbon technologies.
The outcome of the G-7’s meeting augurs well for a strong global agreement on climate change when all 193 UN member states meet in Paris in December to hammer out a truly global climate agreement.
The G-7 countries have not yet ensured a successful outcome at the Paris meeting, but they have taken a big step toward that goal.
The G-7’s Sustainability Mission
FRANKFURT – In six months, representatives from countries around the world will gather in Paris in an effort to reach a global accord to fight climate change.
When the G-7’s leaders meet next week in Germany, they should use the occasion to take the first steps toward avoiding the most dangerous consequences of global warming.
With the world’s safety and prosperity at stake, the question is not whether or when to begin the transition to a low-carbon economy, but how to manage the effort.
In 2014, investments in clean energy reached a new high of $310 billion, after two years of decline.
That is good news, but it is still far short of the $1.1 trillion per year that the International Energy Agency (IEA) estimates is needed in the low-carbon energy sector.
In the meantime, some $950 billion was invested in oil, gas, and coal in 2013 – a figure that has doubled in real terms since 2000.
The value of an investment is based largely on the perception of how risky it is.
Investment will not shift decisively toward greener sources of energy unless and until portfolio managers begin to account for the risks of dangerous climate change.
Investors also need to consider “carbon bubbles,” the overvaluation of fossil-fuel companies based on the assumption that they will be able to continue burning the world’s reserves until depletion.
Until recently, traditional forms of energy production have had the advantage of being based on established and mature industries.
But the tides are shifting.
Sovereign wealth funds and institutional and private investors are increasingly recognizing that climate change will undermine their returns, and that governments eventually will begin to address the problem.
Likewise, the Bank of England is undertaking important work on the risk that assets like coal or oil reserves could be “stranded” by policy changes intended to limit dangerous climate change.
And the G-20 finance ministers recently requested that the Financial Stability Board undertake a broad assessment of climate-related risks and opportunities.
The G-7 countries should clearly signal that they are serious about the low-carbon transition, and the most effective way to do that would be to support a global goal of cutting net greenhouse-gas emissions to zero by 2050.
In addition, governments and regulators can take concrete steps to stimulate private-sector investment in cleaner forms of energy.
For starters, governments should take the equivalent of the Hippocratic oath and pledge to do no active harm to the planet.
The New Climate Economy Report, released by the Global Commission on the Economy and Climate, on which I serve, underlines the importance of phasing out fossil-fuel subsidies and questions the wisdom of allowing export credit agencies to finance coal projects.
Governments must set themselves a firm four-year deadline to end fossil-fuel subsidies and redirect funding to areas like green infrastructure projects and development assistance.
Second, governments must lead by example.
High-level meetings in Addis Ababa and Paris later this year offer the opportunity to create synergies between the fight against climate change and financing for development and infrastructure.
Governments should also encourage public pension funds to invest responsibly, especially when it comes to the climate.
More, too, could be done to support the market for green bonds, including by issuing green government bonds.
Third, governments must create policy frameworks that foster low-carbon investments.
Putting a price on carbon is critical.
The slow but steady progress that countries are making toward this goal is encouraging.
In the meantime, governments should use a shadow carbon price and carbon discount rate in their decision-making processes.
In addition, governments and regulators should adopt policies ensuring sustainable financial-sector practices, including annual reporting by companies and investors on environmental, social, and governance issues and due diligence and risk models regarding environmental hazards.
Consideration of the possibility of stranded assets must be systematically expanded.
Finally, policymakers should foster partnerships and new instruments that nudge the economy toward low-carbon alternatives.
Development banks, for example, can help leverage private-sector investment.
And new institutions like the Asian Infrastructure Investment Bank are in a position to make sustainability a core mandate.
Managing the transition from an economy based on fossil fuels to one based on low-carbon alternatives will not be easy.
But that is why it is essential to begin today.
It is time for the G-7 to recognize its responsibility and lead the world toward a sustainable future.
G-8 Movie Night
Many people rightly regard the annual G-8 (Group of Eight) presidential summit as the closest thing we have to a functioning world government.
So it is a shame that these meetings tend to be so scripted and dull, with so little room for the informality needed to make genuine progress on tough issues involving world peace and prosperity.
True, this year is a bit better thanks to having Russia’s Vladimir Putin as host; there is simply too much tension between him and his Western counterparts to keep all emotions under wraps.
But if these meetings are ever to be really effective, we need a change in format to spice things up.
I have a suggestion.
Why not have George W. Bush, Putin, and the other leaders share a G-8 movie night, and then discuss their reactions over drinks afterwards?
That should get a conversation going!
Of course, there is the question of which movie to pick.
This year, the clear first choice has to be the 1963 James Bond spy thriller “From Russia with Love.”
The name itself makes it a winner, and the presidents can enjoy watching the fireworks between suave British spy Bond (Sean Connery) and his fetching Russian KGB counterpart Tatiana (Daniela Bianchi).
In case you are worried that the Bond-Tatiana affair would spark too many off-color remarks from the collective eminences, the presence of German Chancellor Angela Merkel should keep things under control.
Perhaps after a couple drinks, Putin might spill the beans on whether, as a real-world KGB agent, he ever directed any remotely similar operation.
And Bush, while of course having no such experience of his own, could retell some of his father’s stories when he was the head of the CIA in the 1970’s.
Not to be left out, Europeans could use the film’s romantic shots of Istanbul to open up about whether Turkey will ever join their club.
There are countless other possibilities.
It would be a bit awkward, but the esteemed guests could also view “An Inconvenient Truth,” narrated by Al Gore, the man Bush narrowly defeated in the 2000 US presidential election.
Gore’s deeply earnest film plots the relentless, and potentially disastrous, warming of the earth during the industrial era.
He attributes, debatably, the entire problem to higher carbon emissions from cars, power plants, etc.
Gore’s film would give the Europeans, always in danger of being marginalized at these meetings, the chance to boast about how they, unlike the Americans and Russians, are already doing their part by heavily taxing gas consumption.
Bush’s reaction is less predictable.
On the one hand, his new star Treasury Secretary, Hank Paulson, the former chairman of Goldman Sachs, has long been deeply committed to environmental causes.
Paulson’s appointment presumably shows that Bush is far more concerned about environmental issues than is commonly believed.
But, on the other hand, some of Bush’s more intemperate Republican colleagues might have told him that global warming will lift ocean levels to the point where many of the coastal “blue” states, which tend to vote for the opposition Democrats, will be washed away, leaving only “red” Republican states in the center of the country.
Putin’s position on global warming would be less ambivalent.
With his country so totally – indeed, embarrassingly – dependent on oil and gas revenues, he is hardly likely to want to spark a big push towards energy conservation.
One could go on forever with possible films, but clearly G-8 movie night might rekindle life in the organization’s moribund framework, and keep it going for many years to come.
And there are so many other advantages.
Consider the dubious results from the G-8 summit in Gleneagles, Scotland, in 2005.
Desperate to capture some of the star power of the rock star-driven campaign to reduce poor countries’ debt, the leaders agreed to forgive Third World debt that no one ever expected to be repaid.
Rather than making really substantive improvements in the quantity and quality of aid delivery, not to mention finding a path towards better governance in Africa, they chose a desperate plea for photo ops with Bono and Angelina Jolie.
With a movie night, there would be a ready-made excuse for inviting glitterati to attend G-8 events to help spark discussions.
Don’t we all want to know how Bond (oops, I mean Sean Connery) would deal with Iran or North Korea?
To be sure, there could be glitches.
What if Russia were to inadvertently use a copy of the film that was pirated, as one imagines is true of most copies floating around in Russia?
That would hardly look good given all the bashing China takes for not enforcing intellectual property rights more vigorously.
Or what if, after a few years, the whole thing devolves into an empty exercise in political correctness?
Still, I say let’s give G-8 movie night a chance.
It would certainly be more entertaining that the current framework, and, who knows, it might even inspire better policy.
G-8 Summit and Climate Change
Two years ago, the G8 Summit in Gleneagles, Scotland promised to advance a clean development agenda and mobilize financial support for greener growth in the key emerging market economies.
This year’s meeting, in Heiligendamm, Germany, must deliver on that promise.
Since Gleneagles, a critical mass of public support to act decisively on climate change has developed.
Some say a tipping point has occurred.
The science and the economics of climate change has come closer as a result of the overwhelming scientific evidence in the studies of the Intergovernmental Panel on Climate Change (IPCC) and Sir Nicholas Stern’s Report for the UK government on the costs of action and inaction.
Around the world expert officials, the business community, concerned citizens, and responsive governments are coming together to find common solutions to a global problem that may be the single most important issue we face as a global community.
In Heiligendamm, the G-8 leaders, together with representatives of major emerging economies (Brazil, Mexico, China, India, and South Africa, who have a critical stake in energy consumption to continue to generate economic growth), will discuss a comprehensive approach encompassing a set of energy options, from energy efficiency and renewable energy, to clean coal, carbon capture and storage, and carbon sequestration.
They also have a chance to advance the use of market mechanisms to do two things: mitigate climate change, and, at the same time, create incentives for expanded use of clean energy.
An important way to achieve both objectives is by expanding carbon markets.
Carbon finance is an effective vehicle for channeling funds for climate-friendly investments, including to the developing world.
Last year alone the size of the world carbon market tripled to over $30 billion, of which about 20 percent went to projects in the developing world.
By one estimate, with a long term, predictable, and equitable post-2012 global regulatory framework for curbing greenhouse gas emissions (when the Kyoto protocol expires), carbon markets could develop exponentially and deliver financial flows to developing countries of anywhere between $20 and $120 billion dollars/year.
The funds are sorely needed.
The World Bank calculations show that developing countries need an annual investment of about $165 billion through 2030 just to supply electricity to their people.
Of this sum, only about half is readily identifiable.
On top of this $80 billion gap, developing countries will need another $30 billion per year to reduce their greenhouse gas emissions from the power sector alone and get on a low-carbon development path, and $10-40 billion dollars more per year to adapt to the already inevitable impact of climate change .
A G8 commitment to the global carbon market will foster long-term financing beyond 2012.
Such carbon finance can also tackle deforestation, which represents about 20% of the global CO2 emissions causing climate change.
A forest carbon facility can reward forest conservation as a means of protecting the climate while also preserving ecosystems and generating income for poor communities in developing countries.
The World Bank is keen to work with partners to experiment with such a facility for avoided deforestation.
An expanded carbon market can help pay for a transformation to a low carbon economy, but it won’t be enough.
Like other new markets, it will take time to mature and reach out to places with weaker market institutions.
German Chancellor Angela Merkel has said that rich countries need to take the lead because only then will the less developed economies follow, and she is right.
The United Kingdom recently announced a new £800 million Environmental Transformation Fund International Window.
Japan’s Prime Minister Shinzo Abe said his country is ready to look into the possibility of creating a new financial mechanism, with substantial funds for the relatively long- term, to help developing countries halt global warming. These are the types of climate change leadership that the world needs.
Mobilizing large scale financing for clean investments today and over the next 5-10 years is critical because this is when developing countries will essentially “lock-in” carbon emissions for the next 50 years.
If we can help them get on a low carbon path, we will have taken a giant step forward in preserving and protecting our planet while enabling them to reduce poverty and offer their citizens a better future.
The meeting in Heiligendamm can advance the commitments made at Gleneagles two years ago and bring the world closer to a more sustainable future.
Gambler’s Ruin
San Francisco – From Adam Smith (1776) until 1950 or so, capital was considered by economists to be absolutely essential for economic growth.
You also needed a few good basic institutions.
“Security of property and tolerable administration of justice,” as Smith put it.
If these fundamental institutions were right, then landlords, merchants, and manufacturers would invest and improve.
In investing and improving, they would add to the capital stock: “In all countries where there is a tolerable security [of property], every man of common understanding will endeavor to employ whatever [capital] stock he can command, in procuring either present enjoyment or future profit...
A man must be perfectly crazy, who, where there is a tolerable security, does not employ all the stock which he commands, whether it be his own, or borrowed of other people...”
A larger capital stock would mean thicker markets, a finer division of labor, and a more productive economy.
A highly productive society based on a sophisticated division of labor was how you secured “the wealth of nations.”
Reverse the process, however, and you get the poverty of nations, which Smith believed he saw in the Asia of his time.
For Smith and his successors over the first 175 years, any episode of sustained economic growth overwhelmingly required investment capital.
We economists were by and large capital boosters, and our magic formula for economic development was saving, investment, thrift, and wealth accumulation.
The last and fullest expression of this line of thought comes at the end of the 1950’s with W.W. Rostow’s book The Stages of Economic Growth .
Then Robert Solow and Moses Abramovitz challenged this near-consensus.
They calculated that 75% to 80% of economic growth did not come from increasing the capital-output ratio – at least not if the private marginal product of capital was taken as an indicator of the social marginal product.
Instead, the keys to growth and development appeared to lie beyond an increase in capital intensity as measured by capital-output ratios: skills, education, technology broadly understood, and improvements in organizational management.
Yet capital continued to be seen as necessary, if not sufficient.
In the framework developed by the development economist Dani Rodrik, a shortage of capital can be a binding “growth constraint”: the place where “the biggest bang for the [policy] reform buck can be obtained.”
Indeed, high investment serves as a sign that other binding constraints to growth are absent, implying prosperity and that things are going right.
The problem is that for poor economies, raising the capital needed to relax binding growth constraints is difficult.
That’s why the world took the neo-liberal bet in the 1990’s: international capital mobility would come to the rescue by relaxing capital constraints where they were binding, and by reducing the scope for corruption and rent-seeking, which was often a more significant binding growth constraint.
The hope was that, like the pre-1913 era of British overseas investment, which financed a huge amount of industrialization in the resource-rich, temperate periphery of the world economy, net capital outflows from the industrial core would finance much late twentieth and twenty-first century industrialization.
But we all know the outcome: while international capital flows soared, the large net flow of capital from rich to poor countries simply never materialized.
In fact, the principal outcome was an enormous flow of capital from the periphery to the rich core.
For most of the past generation, and looking into the future, the message of the market is that the benefits of international capital mobility do not include a relaxation of the capital constraint, and thus an acceleration of growth in the global periphery.
The reason is not that the periphery offers an attractive labor force from which capital profits, but rather that the core – especially the United States – offers a form of protection for capital against unanticipated political disturbances.
But even though net international capital flows are going the wrong way, there are still substantial gross capital flows outward from the world economy’s core to its periphery.
And we can hope that these capital flows will carry with them the institutions and managerial expertise that have made the core so wealthy.
Nevertheless, a dispassionate observer might point out that for someone with limited resources and opportunities for policy reform to keep betting double-or-nothing on neo-liberalism is a strategy that has a well-deserved name: “Gambler’s Ruin.”
Gambling with the Planet
DUBAI – The consequences of the Japanese earthquake – especially the ongoing crisis at the Fukushima nuclear power plant – resonate grimly for observers of the American financial crash that precipitated the Great Recession.
Both events provide stark lessons about risks, and about how badly markets and societies can manage them.
Of course, in one sense, there is no comparison between the tragedy of the earthquake – which has left more than 25,000 people dead or missing – and the financial crisis, to which no such acute physical suffering can be attributed.
But when it comes to the nuclear meltdown at Fukushima, there is a common theme in the two events.
Experts in both the nuclear and finance industries assured us that new technology had all but eliminated the risk of catastrophe.
Events proved them wrong: not only did the risks exist, but their consequences were so enormous that they easily erased all the supposed benefits of the systems that industry leaders promoted.
Before the Great Recession, America’s economic gurus – from the head of the Federal Reserve to the titans of finance – boasted that we had learned to master risk. “Innovative” financial instruments such as derivatives and credit-default swaps enabled the distribution of risk throughout the economy.
We now know that they deluded not only the rest of society, but even themselves.
These wizards of finance, it turned out, didn’t understand the intricacies of risk, let alone the dangers posed by “fat-tail distributions”– a statistical term for rare events with huge consequences, sometimes called “black swans.”
Events that were supposed to happen once in a century – or even once in the lifetime of the universe – seemed to happen every ten years.
Worse, not only was the frequency of these events vastly underestimated; so was the astronomical damage they would cause – something like the meltdowns that keep dogging the nuclear industry.
Research in economics and psychology helps us understand why we do such a bad job in managing these risks.
We have little empirical basis for judging rare events, so it is difficult to arrive at good estimates.
In such circumstances, more than wishful thinking can come into play: we might have few incentives to think hard at all.
On the contrary, when others bear the costs of mistakes, the incentives favor self-delusion.
A system that socializes losses and privatizes gains is doomed to mismanage risk.
Indeed, the entire financial sector was rife with agency problems and externalities.
Ratings agencies had incentives to give good ratings to the high-risk securities produced by the investment banks that were paying them.
Mortgage originators bore no consequences for their irresponsibility, and even those who engaged in predatory lending or created and marketed securities that were designed to lose did so in ways that insulated them from civil and criminal prosecution.
This brings us to the next question: are there other “black swan” events waiting to happen?
Unfortunately, some of the really big risks that we face today are most likely not even rare events.
The good news is that such risks can be controlled at little or no cost.
The bad news is that doing so faces strong political opposition – for there are people who profit from the status quo.
We have seen two of the big risks in recent years, but have done little to bring them under control.
By some accounts, how the last crisis was managed may have increased the risk of a future financial meltdown.
Too-big-to fail banks, and the markets in which they participate, now know that they can expect to be bailed out if they get into trouble.
As a result of this “moral hazard,” these banks can borrow on favorable terms, giving them a competitive advantage based not on superior performance but on political strength.
While some of the excesses in risk-taking have been curbed, predatory lending and unregulated trading in obscure over-the-counter derivatives continue.
Incentive structures that encourage excess risk-taking remain virtually unchanged.
So, too, while Germany has shut down its older nuclear reactors, in the US and elsewhere, even plants that have the same flawed design as Fukushima continue to operate.
The nuclear industry’s very existence is dependent on hidden public subsidies – costs borne by society in the event of nuclear disaster, as well as the costs of the still-unmanaged disposal of nuclear waste.
So much for unfettered capitalism!
For the planet, there is one more risk, which, like the other two, is almost a certainty: global warming and climate change.
If there were other planets to which we could move at low cost in the event of the almost certain outcome predicted by scientists, one could argue that this is a risk worth taking.
But there aren’t, so it isn’t.
The costs of reducing emissions pale in comparison to the possible risks the world faces.
And that is true even if we rule out the nuclear option (the costs of which were always underestimated).
To be sure, coal and oil companies would suffer, and big polluting countries – like the US – would obviously pay a higher price than those with a less profligate lifestyle.
In the end, those gambling in Las Vegas lose more than they gain.
As a society, we are gambling – with our big banks, with our nuclear power facilities, with our planet.
As in Las Vegas, the lucky few – the bankers that put our economy at risk and the owners of energy companies that put our planet at risk – may walk off with a mint.
But on average and almost certainly, we as a society, like all gamblers, will lose.
That, unfortunately, is a lesson of Japan’s disaster that we continue to ignore at our peril.
Gaming US Fiscal Reform
NEWPORT BEACH – It sounded like a really clever idea: Use a very public and sizeable threat to get bickering politicians to collaborate and compromise.
Well, it has not worked so far, and the already-sizeable stakes just got bigger.
No, I am not talking here about Europe’s debt crisis, decisive resolution of which still requires greater cooperation and shared responsibility, both within individual eurozone member states and between creditor and debtor countries.
I am referring to the complex fiscal situation in the United States – a fluid problem that has just been rendered more consequential by the recent warning from the ratings agency Moody’s that the US could lose its top credit rating next year if Congress fails to make progress on medium-term fiscal reforms.
Hobbled by the self-inflicted wounds of the debt-ceiling debacle in the summer of 2011 – which undermined economic growth and job creation, and further damaged Americans’ confidence in their political system – the US Congress and President Barack Obama’s administration recognized the need for a measured and rational approach to fiscal reform.
To increase the likelihood of this, they agreed on immediate spending cuts and tax increases that would automatically kick in (the “fiscal cliff”) if agreement on a comprehensive set of fiscal reforms eluded them.
On paper, at least, this sizeable threat – involving blunt fiscal contraction amounting to some 4% of GDP – should have properly aligned incentives in Washington, DC.
After all, no politician would wish to go down in history as being responsible for pushing the country back into recession at a time when unemployment is already too high, income and wealth inequalities are increasing, and a record number of Americans live in relative poverty.
Yet, so far, the threat has not worked.
To understand why, we can appeal to game theory, which provides economists and others a powerful framework with which to explain the dynamics of both simple and complex interactions.
The objective of threatening a fiscal cliff was to force a “cooperative outcome” on an increasingly “non-cooperative game.”
But, in the absence of a credible enforcer (and lacking sufficient mutual assurances), participants felt that they had more to gain from continuing their non-cooperative behavior.
Politicians on both sides of America’s political divide have generally felt that compromise would be viewed as a sign of weakness.
Moreover, too many have made prior commitments – for example, promising never to increase taxes – that they find hard to break, especially ahead of elections that both sides deem to be of defining significance for the country’s future, reflected in the candidates’ campaigns, which are getting nastier by the day.
The cost-benefit calculations will likely evolve after the election in November.
At that point, the cost of being singled out as collaborating with members of the other side – and thus the risk of being unseated by more extreme forces in one’s party – may well decline.
Moreover, since early September, the potential benefits of cooperation now include avoiding an embarrassing credit-rating downgrade next year if medium-term fiscal reform does not materialize.
I suspect that some will be quick to dismiss the consequences of a Moody’s downgrade.
And it certainly is tempting to do so.
After all, the global financial crisis badly damaged the credibility of ratings agencies as a whole.
Moreover, one would be hard pressed to identify any meaningful hit to the US from the decision by another major agency, Standard &amp;
Poor’s, to downgrade America’s sovereign rating in August 2011.
On the contrary, rather than spiking higher following S&amp;P’s unprecedented move, US market interest rates continued to fall, reaching record-low levels.
This seemingly contradictory fall in financing costs reflected an abundance of foreign capital seeking to invest in the US, including money fleeing from Europe.
The absence of any adverse impact on government finances may thus lead some to dismiss the impact of a potential Moody’s downgrade in 2013.
Yet, those of us who are exposed on a daily basis to the inner workings of financial markets would caution against too upbeat an attitude toward a second downgrade by a major ratings agency.
Moreover, the potential impact certainly is not linear.
Owing to the way that investment contracts are written and guidelines specified, there is a meaningful difference between a single and multiple rating downgrades.
Were Moody’s to follow S&amp;P in stripping the US of its triple-A rating, the most likely outcome is that the universe of global investors who are both able and willing to increase their holdings of US government securities would shrink over time.
Fortunately for the US, the immediate adverse impact on borrowing costs would be alleviated, if not nullified, by investors’ lack of readily available alternatives to US government bonds, as well as a Federal Reserve that has been buying large volumes of US Treasuries.
But this is not a long-term risk worth taking.
Historically, it has taken countries many years of difficult fiscal-policy efforts to regain a triple-A status.
And, while no one can be certain about where the limits lie, there are both theoretical and operational bounds to how many government bonds can (and should) be placed on the balance sheet of a modern, well-functioning central bank.
All of this suggests that, whether in the lame-duck congressional session following the elections or in the first few months of the new Congress, US politicians will likely dismantle the fiscal cliff.
Based on an assessment of potential commonality among the political parties, such a compromise would limit the contractionary fiscal impact to some 1.5% of GDP.
Such a mini-bargain would go a long way toward reducing the risk of a serious US recession.
But it would fall short of the type of fiscal reforms that would satisfy Moody’s.
Such reforms require a grand bargain between America’s political parties, which in turn presupposes visionary leadership by both of them.
LGBT at Work
DAVOS – When Apple CEO Tim Cook announced last year that he is gay, I was inundated by emails and telephone messages from executives around the world.
As an “out” executive at Ernst &amp; Young (EY), everyone seemed to want to know what I thought this meant for lesbian, gay, bisexual, and transgender (LGBT) inclusion on a global scale.
Apple, after all, resides in fifth place on the Fortune 500 list of the world’s largest companies.
Was this the end of the “lavender ceiling”?
In his Bloomberg Businessweek article, Cook describes how being gay has affected him: “I’m proud to be gay, and I consider being gay among the greatest gifts God has given me.
Being gay has given me a deeper understanding of what it means to be in the minority and provided a window into the challenges that people in other minority groups deal with every day.”
My own experience of being “different” is multifaceted.
Like Cook, being in the minority informed my propensity to be an inclusive leader.
Unlike Cook, in addition to being closeted, I was a woman and an introvert, and my politics tended to differ from those of my peers in my heavily male, extrovert-dominated profession.
Since coming out in 2011, I have been publicly truer to myself and more authentic with others.
That has made me a better leader.
And being out in a leadership position in a global organization has provided me a platform to talk openly on a wide range of issues.
There is no question about it: Cook’s announcement was a huge step forward.
And international organizations have made considerable progress in LGBT inclusion by relying on external and employee networks and non-discrimination policies.
But most of today’s available statistics reflect progress in Europe and the United States.
According to a recent study by the women’s advocacy organization Catalyst, 62% of Fortune 500 companies now offer health insurance to domestic partners, while 87% of Fortune 500 companies – and 94 of the top 100 – have non-discrimination policies that include sexual orientation.
By contrast, Todd Sears, founder of Out Leadership, an advocacy group for LGBT employees, estimates that 90% of LGBT workers in Asia are closeted.
In 78 countries, including Uganda and Nigeria, being gay is still illegal.
Singapore recently upheld its stringent anti-homosexuality law.
In Russia, on the same day Cook made his announcement, a memorial to Apple founder Steve Jobs was dismantled, ostensibly to comply with a law prohibiting “gay propaganda.”
Even in the US, where members of the same sex can marry in 35 states (as I did in New York last April), in 29 states it is still legal to fire someone solely on the basis of their sexual orientation.
In 34 states, it is legal to fire a transgender employee.
That said, multinational companies can take several steps to further their LGBT inclusion strategies on a global scale.
For starters, they can strengthen the “ally effect.”
Research conducted by the Center for Talent Innovation shows that allies – people who support LGBT colleagues or work as advocates – play a decisive role in creating an inclusive community.
In fact, 24% of the LGBT workers surveyed attribute their decision to come out professionally to their network of allies.
Employers can create networks that invite straight colleagues to support their LGBT co-workers and sponsor LGBT individuals and groups.
Likewise, senior executives being visibly out makes a huge difference.
Cook is a great example.
LGBT employees are 85% more likely to be out at companies where senior executives are out (24% versus 13%).
At EY, our LGBT leadership participated in the “It Gets Better” video project in 2011, sharing stories for the benefit of at-risk LGBT youth.
I took advantage of the opportunity, and, with the full support of EY’s leadership, officially came out.
I not only talked openly about my own experiences; I also shared how my organization’s philosophy played an important role in my decision.
That leads to a more general point: The more people hear, see, and know about what is going on in an organization, the more quickly cultural change takes place.
Speaking up is an important part of that, because people not only listen to what is said, but also notice what passes without being challenged.
Too often, when an organization does not correct a misstatement, it is taken as agreement.
Customized solutions also help.
Companies should meet with LGBT groups at other organizations, both locally and globally, and implement policies from the more progressive regions in which they do business (say, Europe and the US).
But one size does not fit all.
Strategies work best when they are tailored to fit the requirements of specific conditions, such as geographic locations, business unit type, or department function.
Finally, companies should continue to facilitate an inclusive workplace for everyone, not just LGBT employees.
That means shifting from a culture of diversity, with its implicit focus on “them,” to an inclusiveness-centered culture of “us.”
Cook and I share many of the same attitudes about our LGBT identity.
And I find that his announcement accords with my own experience: “[Being gay has] made me more empathetic, which has led to a richer life.
It’s been tough and uncomfortable at times, but it has given me the confidence to be myself, to follow my own path, and to rise above adversity and bigotry.”
The lavender ceiling has been cracked, but there is nowhere in the world today where inclusiveness has been fully achieved.
Gaza and the Failure of Deterrence
Every day in the Gaza Strip, strategic deterrence – the inhibition of attack by a fear of punishment backed up by superior military power – is being put to the test.
The escalating spiral of violence by Israel and Gazan militants indicates not only that deterrence is failing, but also that its effectiveness depends on adherence to fundamental standards of morality.
Some security strategists and just war theorists argue that there may be nothing morally objectionable about deterrence in cases where the lives and welfare of a civilian population are not directly affected.
The threat of retaliation that underpins its strategic effectiveness remains implicit and hypothetical.
However, when deterrence becomes indistinguishable from collective punishment – barred under international law by Article 33 of the Fourth Geneva Convention – it is far less likely to achieve its intended result.
Israel, which withdrew unilaterally to the periphery of Gaza in September 2005, has been seeking to prevent Palestinian resistance fighters from lobbing rockets into its territory.
Shortly after redeploying to the borders of Gaza, Israel severely restricted ties between Gaza and the West Bank, as well as the movement of goods in or out of Gaza.
When a pro-Hamas parliament was elected in a free and fair election in January 2006, the United States and Israel led a campaign to prevent all banks, including Arab and Islamic banks, from dealing with the new government.
Israel has consistently rejected Hamas’s repeated offers of a cease-fire agreement in exchange for the lifting of the siege on Gaza.
Public opinion polls carried out by the Dialog company and published in the Israeli daily Haaretz have shown that 64% of Israelis support an official dialogue with Hamas.
But the Israeli government and army refuse, calling Hamas “terrorists” in order to deny them legitimacy, despite previously reaching understandings in southern Lebanon with Hezbollah, which they also consider a “terrorist organization.”
The Israelis seem to believe that their only option is to tighten the screws on Gaza.
In the name of deterrence, movement of people and goods has been almost entirely restricted.
Yet the Palestinian resistance has responded with more rocket attacks.
Israeli assassination campaigns against militants have merely led to further escalation on the Palestinian side. Indeed, every time Israel’s deterrence efforts fail to produce the desired result, it ratchets up the siege in the hope that this will deliver some kind of knockout punch.
The result has been a clear case of collective punishment in one of the most densely populated places on earth, with 3,823 persons per square kilometer.
Upon visiting Gaza, John Dugard, the United Nations’ Special Rapporteur on Human Rights, said that “Gaza is a prison and Israel seems to have thrown away the key.”
In January, for example, Israelis began using its monopoly on fuel supplies to punish Palestinians, a decision condemned the following month by Human Rights Watch.
Joe Stork, Human Rights Watch’s Middle East director, rejected Israel’s justification of the fuel cuts as a way to force Palestinian armed groups to stop their rocket and suicide attacks.
According to Stork, “the cuts are seriously affecting civilians who have nothing to do with these armed groups, and that violates a fundamental principle of the laws of war.”
Likewise, following the Israeli air strikes on Gaza in early March that killed more than 100 Palestinians, UN Secretary General Ban Ki-moon was moved to “condemn the disproportionate and excessive use of force that has killed and injured so many civilians, including children.”
Notwithstanding the UN Secretary General’s statement, Israel claimed self-defense, as the air strikes followed a rocket attack from Gaza that killed an Israeli civilian in the border town of Sderot.
However, in his book Crimes of War , Michael Byers, a Duke University law professor, argues that the use of force in self-defense “must not be unreasonable or excessive,” and with regard to anticipatory action, the necessity must be “instant, overwhelming, leaving no choice of means, and no moment of deliberation.”
In fact, Israel persistently conflates self-defense and deterrence, while employing collective punishment to advance its strategic aims.
This conception of deterrence failed in Lebanon in 2006, with Israel forced to accept a UN-sponsored cease-fire agreement, and it is no more likely to succeed in Gaza.
Indeed, opinion polls conducted in Gaza show a spike in support for Hamas after every Israeli escalation.
The international community must act quickly to force the Israelis to abandon its deterrence strategy and instead work on reaching an understanding that can result in a cessation of attacks by both sides.
Only such an understanding can permit a start to the groundwork needed for a political resolution that can permanently end both the siege of Gaza and the occupation of Palestinian lands.
Gaza’s Crushed Childhoods
AMMAN &#45;&#45;
Ayman is a soft-spoken 14-year-old boy in Jabalia City, Gaza.
His family is poor, and his parents have already sold almost all their furniture to pay for food and schooling for their children.
Recently, after collecting a government food handout, Ayman’s father, who has been unemployed since March 2006, had to sell the milk to pay for the journey back home.
Ayman works very hard in school and dreams of a future career. But, with 47 students in his cramped classroom and double shifts the norm, his learning environment is very stressful. Home is no refuge: the recent incursion into Jabalia was 200 meters from where Ayman lives. The shooting and shelling so terrorized his five-year-old sister that she still wakes up screaming at night.
Ayman’s experience is all too familiar in Gaza’s crowded, crippled neighborhoods, where those who are least to blame for the troubles are suffering the most.
Indeed, among Gaza’s 840,000 children – of which 588,000 are refugees – Ayman’s story is luckier than many. Since the recent escalation of violence that began last month, at least 33 Palestinian boys and girls have been killed and many more injured or maimed – caught in the crossfire, shot in their living rooms, or struck by explosions in their own backyards. On February 28, four children playing soccer were hit by a missile, which dismembered them so completely their own families could not identify their bodies.
Ayman, his siblings, and all Gaza’s children are finding their lives diminished each day – a cruel, slow suffocation of their spirit and their dreams.
Instead of enjoying expanding horizons, they are trapped in a virtual prison, where things that every child should be able to take for granted are instead being taken away: the right to play, to go to school, to have enough to eat, to have light to study by at night, and to feel safe in their own homes.
The weight of one of the world’s longest-running conflicts is resting on their thin shoulders, crushing their childhood and inflicting psychological scars that may never heal.
Palestinians were once reputed to be among the best-educated people in the Middle East; today, after years of violence, isolation, and poverty, their proud tradition of educational excellence has been shattered.
Almost 2,000 children in Gaza have dropped out of school in the last five months.
Those who remain must share tattered textbooks and do without crucial resources.
The January 2008 semester exams at schools in Gaza operated by the United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA) found 50-60% failure rates in mathematics and a 40% failure rate in Arabic – the children’s native language. Despite this, Ayman insists, “I want to be an educated person. I want to be an engineer to build my country.”
Let the world recall that Gaza’s crisis is a manmade disaster. And let the world take note that conditions are worse today than at any time since the occupation began. Seventy-nine percent of Gaza’s households live in poverty; eight out of ten depend on food assistance.
Almost half the labor force is unemployed; local industry has collapsed.
Water and sewage systems are failing; garbage is piling up in the streets.
UNICEF is working around the clock to restore a sense of normalcy for Gaza’s youth – developing remedial worksheets to help children keep up with their studies; creating sports and recreation programs in schools; and working with communities to establish play areas where kids can be kids in safety.
UNICEF works with partners to get water, hygiene, and medical supplies to households and health facilities.
And UNICEF-supported counseling teams are spread across the area, helping Palestinian parents and children cope with the burden of stress.
But, while UNICEF is doing all it can to comfort those in the midst of Gaza’s madness, only political leaders can bring the dreadful nightmare to an end. It is time for new engagement. The siege must be lifted.
The killing of civilians has to stop, on both sides.
Palestinian and Israeli children deserve to grow up in peace. And leaders on both sides, supported by the international community, must join in the kind of honest dialogue that is the only viable path toward achieving it.
Ayman’s father quietly says, “My children are my hope.” The children of Gaza are a light in the darkness. They deserve a chance to shine.
Gaza Shrugs
GAZA CITY – Palestinian President Mahmoud Abbas has now personally presented Palestine’s bid for full United Nations membership to UN Secretary-General Ban Ki-Moon.
What remains to be seen is whether Hamas, which has controlled the Gaza Strip since June 2007, will eventually support this initiative by its bitter rival, Abbas’s West Bank-based Palestinian Authority.
The failure for more than a year to make any progress in negotiations with Israel has convinced Abbas and his colleagues to pursue the UN option.
And Israel’s continuing settlement construction on the West Bank has sharpened their sense that negotiations would not be productive, whereas the raft of UN resolutions supporting a two-state solution could now be put to the test.
Moreover, it is widely believed that the Arab Spring has encouraged the Palestinian leadership to seek to change the rules of the game.
Arabs throughout the region, though preoccupied with domestic affairs, are nonetheless pressing a new generation of leaders to support the Palestinian cause more actively.
The collapse of Hosni Mubarak’s regime in Egypt, the subsequent departure of the Israeli ambassador from Cairo, the political upheaval in Syria, and the expulsion of the Israeli ambassador from Ankara are causing great uncertainty in Israeli leadership circles.
Israel is more isolated regionally and internationally than ever, owing to Israeli Prime Minister Binyamin Netanyahu diplomatic failures.
Abbas, whose bid is supported unanimously by the Arab and most Islamic countries, is convinced that the Arabs will stand with the Palestinians, regardless of the consequences.
More than 120 countries are believed to support the Palestinian bid for statehood.
But the Palestinians must secure the approval of the UN Security Council and the support of two-thirds of the UN General Assembly in order to gain full official recognition.
The US has threatened to veto the resolution in the Security Council, and the US Congress has threatened to suspend American aid to the Palestinian Authority.
Members of the European Union are still divided and continue to hope for a compromise and other options.
Israel has denounced the Palestinian strategy as a unilateral initiative, and has threatened the Palestinians with severe reprisals.
Israeli Foreign Minister Avigdor Lieberman suggested canceling the Oslo Accords, signed with the Palestine Liberation Organization in September 1993, which provided the basis for the creation of the Palestinian Authority in 1994.
Israel is also considering a suspension of transfers of Palestinian tax and customs revenues, and has threatened to annex parts of the West Bank.
At the same time, Hamas suspects that Abbas’s effort to gain UN recognition is intended to impose pressure on Netanyahu to revive peace negotiations on the basis of the 1967 borders, a position that Hamas rejects.
Hamas believes that if Israel were to come under pressure and, for example, freeze settlement construction, Abbas’s position would be strengthened.
Hamas slammed Abbas’s speech at the UN and his bid for statehood, because it relinquishes 78% of historic Palestine and endangers Palestinian refugees’ right of return.
Meanwhile, the significance of the reconciliation agreement signed last May by Hamas and Fatah, the secular nationalist movement that controls the Palestinian Authority, remains uncertain.
While some commentators were hopeful that the agreement meant that Hamas would give its tacit support to Abbas’s negotiating strategy, this is doubtful.
Indeed, Hamas is convinced that any success for Abbas and the Palestinian Authority will further discredit its rule and increase its isolation in besieged Gaza.
Hamas’s support for Palestinian statehood within the 1967 borders would convey at least indirect recognition of Israel.
Yet Hamas continues to reject territorial concessions, insisting that all of historic Palestine must be under Muslim jurisdiction.
The Palestinians in the Gaza Strip, suffering for more than four years from siege and isolation, are apathetic to the UN bid.
They already feel alienated from the state-building efforts on the West Bank by Salam Fayyad’s government.
Poverty and unemployment have left them frustrated and desperate, and the slowdown in implementing the Hamas-Fatah reconciliation agreement gives them little hope of meaningful change.
If Palestine does achieve full UN membership, Palestinians recognize that it will be little more than symbolic.
After all, more than 100 countries already recognized Palestine after Yasser Arafat declared the establishment of a state on November 15, 1988.
Moreover, Palestinians are not convinced that UN recognition will change their daily lives as long as the international community takes no action to end the Israeli occupation on the West Bank and the siege and blockade of Gaza.
However, the Palestinian bid at the UN will internationalize the Palestinian-Israeli conflict and discredit US mediating leverage.
As always, the Palestinian-Israeli conflict stands perched between diplomacy and violence.
It remains for the US, working with Israel and the international community, to break this logjam and press forward toward a settlement.
But the ultimate failure of Abbas’s diplomatic strategy – the absence of tangible benefits even if it succeeds – will damage what is left of his credibility among the Palestinians and strengthen Hamas’s political clout.
Gaza Then and Now
When the Gaza Strip was plunged into darkness last week as a result of the Israeli fuel blockade, many people around the world were surprised.
But the optimism produced by the Annapolis peace process, which included President George W. Bush’s promise of an agreement in 2008 to create a Palestinian state, was clearly unrealistic.
Gaza is usually viewed in terms of Hamas’s overwhelming support there, but the reality is much different.
Opinion polls conducted in Gaza by the Near East Consulting Group in late November 2007 indicated 74% popular support for a peace agreement with Israel.
Only 15% would vote for Hamas MP’s or a Hamas presidential candidate, compared to 55% for Fatah candidates.
The Annapolis-inspired peace process received 81% support.
Like many territories in the region, Gaza has had a long history of foreign occupation, extending to ancient times.
In 1949, the Arab-Israeli war ended with an armistice agreement that divided Palestine into three parts, each under separate political control.
Israel encompassed more than 77% of the territory, Jordan was left to rule East Jerusalem and the West Bank, and Egypt took control of Gaza.
The Palestinian Arab state envisioned by the United Nations’ 1947 partition plan, which was to include Gaza, was never established.
Economic development in the Gaza Strip was limited under Egyptian rule, and the region suffered the burden of absorbing Palestinian refugees fleeing the fighting in the southern part of mandatory Palestine, which would later become Israel.
Palestinians’ access to Egypt was restricted, and much of Gaza’s largely unskilled workforce was dependent on the UN Relief Works Administration, which built and maintained the local refugee camps.
The 1967 war placed all of mandatory Palestine (as well as Sinai and the Golan) under Israeli military occupation.
Nevertheless, although one-third of the West Bank was closed to Palestinians to make room for a few thousand Jewish settlers, only 10% of its largely rural population were refugees, many owned their land, and a variety of jobs was available.
By contrast, 70% of the Gaza population comprised refugees, who lived in difficult conditions in scores of refugee camps and were largely dependent on work in Israel.
At one time, more than 150,000 Gazans crossed the Erez checkpoint daily.
Gaza’s poverty was fertile ground for Islamic radicalism.
Sheikh Ahmad Yasin, a paraplegic refugee from the village of Jora (now on Israel’s southern coast), worked quietly to build a grass-root movement with the tacit assent of the Israeli army, which sought to encourage an alternative to the PLO.
But, with the 1987 uprising (Intifada), Yasin’s supporters announced the creation of the Islamic Resistance Movement.
Better known by its Arabic acronym, HAMAS, Yasin’s group competed with the secular PLO groups by staging amateurish attacks on Jewish settlers and kidnapping Israeli soldiers.
While the 1987 Intifada brought about the Oslo process and the return of the PLO leadership, it failed to produce a real economy in Gaza.
The flow of money to the new Palestinian Authority was evident mostly in high-rise buildings, which the PA built to deal with overcrowding.
Non-PA groups like Hamas acquired their own weapons mostly by buying them from Israeli soldiers or on the Israeli black market.
Later, after the Israelis withdrew from Gaza, weapons, ammunition, and cash were smuggled through tunnels from Sinai.
During the second Palestinian Intifada, which erupted in 2000, Hamas used its weapons and explosives to attack Israelis and create their own small protectorate.
But the more that Hamas and others attacked Israelis, the more the Israelis tightened the siege on Gaza.
The number of Gazan workers in Israel was reduced to a few hundred, and rising unemployment and poverty empowered armed factions, gangs, and warlords – a development that intensified after Hamas’s electoral victory in 2006, which resulted in an international siege that cut off public servants’ salaries overnight.
As a largely refugee population, most Gazans had weak social roots.
Those with a university education left to work in either the West Bank or the Gulf States, while Gaza’s armed groups became a magnet for most young people – the only job they understood and which gave them power.
Armed men joined Fatah, Hamas, or other groups and sub-groups, and clans like the Dugmush family (which kidnapped the BBC journalist Alan Johnston) boasted a few hundred members willing to kill for pay.
Clearly, the false trappings of a state provided as part of the Oslo peace process have resulted in little tangible change for Palestinians.
They got an elected president (who for a while was trapped in his headquarters), a parliament and government (whose MPs and ministers are not guaranteed passage from Gaza to the West Bank), and passports (whose numbers must be entered into Israeli computers).
What they did not get was real sovereignty, without which it is difficult to imagine any improvement.
Gaza’s history, and evaporating support for Hamas there, suggest that integrating Gazans into mainstream Palestinian life would not be difficult.
But it also suggests that maintaining the current siege would merely punish a peace-loving population while strengthening the grip of its worst elements on society and public life.
Gazelles and Turtles
MUNICH – The world’s worst post-war financial crisis is over.
It arrived suddenly in 2008, and, after roughly 18 months, vanished almost as quickly as it had come.
Bank rescue programs on the order of €5 trillion and Keynesian stimulus programs on the order of a further €1 trillion staved off collapse.
After falling 0.6% in 2009, world GDP is expected to grow this year by 4.6%, and by 4.3% in 2011, according to International Monetary Fund forecasts – faster than average growth over the last three decades.
The European debt crisis, however, remains, and markets do not fully trust the current calm.
The risk premia that financially distressed countries must pay remain high and signal continuing risk.
Greek interest rate premiums relative to Germany on ten-year government bonds stood at 8.6% on August 20th, which is even higher than at the end of April when Greece became practically insolvent and European Union-wide rescue measures were prepared.
The spreads for Ireland and Portugal have also been rising, even though by the end of July it seemed that the gigantic €920 billion rescue package put together by the EU, the eurozone countries, the IMF, and the European Central Bank would calm the markets.
The world is currently divided into two groups of countries: those that are off to a strong recovery, and those that lag behind and are signaling new problems.
The BRIC countries – Brazil, Russia, India, and China – are in the first group.
Even Russia, where the upswing was difficult and hesitant, is expected to grow by 4.3% this year.
China remains the champion, with a growth rate around 10%.
The second group consists of countries with debt problems, above all the United States.
While the US is expected to grow by 3.3% this year and by 2.9% next year – roughly the long-term average for the past 30 years, this cannot be called a self-sustained upswing, given that the fiscal deficit is expected to reach a breathtaking 11% of GDP this year, before easing to a still-high 8.2% in 2011.
While the US no longer suffers from rising unemployment, the current 9.5% jobless rate is very high for the US, roughly double its level before the recession.
The problem remains the real-estate market, whose collapse caused the crisis.
The Case-Shiller index for single-family homes seemed to have recovered in spring 2009, after a 34% decline relative to the last boom.
But home prices since then have been flat and show no visible trend.
Construction of new single-family homes in May 2010 was at its lowest point since this indicator’s introduction in 1963.
Commercial real-estate prices fell from May to June this year by an alarming 4%.
All this has negative implications for US consumption, for the building industry, and for the banking system.
Moreover, despite the recent banking reform legislation, the US has not yet resolved the structural deficiencies of its capital markets.
The main problem is that the flow of foreign credit has been impaired because US mortgage-backed securities and the derivatives based on them have become nearly unsellable everywhere.
That market has simply disintegrated, with annual emissions volume plummeting 97% – from $1.9 trillion to just $50 billion – between 1996 and 2009.
Nearly all (95%) of housing finance in 2009 had to go through the state agencies Fannie Mae, Freddie Mac, and Ginnie Mae to prevent a complete collapse of the US economy.
In Europe, the picture is also mixed.
The former boom countries – Greece, Ireland, and Spain – remain in recession, and their GDPs will continue to shrink.
The unemployment rate in Spain, one of Europe’s large economies, has sky-rocked to 20% and still shows no sign of improving.
The Spanish economy contracted by 3.6% in 2009, and is expected to shrink by 0.4% this year.
For Finland, Britain, and Italy, below-average growth rates are expected.
But Europe’s biggest economy, Germany, is experiencing a surprisingly strong economic upswing.
The Ifo business-cycle indicator is now clearly in “boom” territory, with regard both to expectations and to assessments of the current situation.
In fact, in its 50-year history, the indicator never climbed as steeply as it has over the past 12 months.
Germany, the laggard of Europe for many years, is expected to grow by about 3% or more this year, while the average of the EU-15 (and the EU-27) stands at only 1.1%.
The German labor market, too, has shown a miraculous turnaround.
The unemployment rate, now at 7%, is slightly lower than it was even at the peak of the last boom, in autumn 2008, and is expected to decline.
On the other hand, France, Europe’s second biggest economy, is struggling.
Its unemployment rate is currently 10%, and GDP growth this year will be in the vicinity of 1.3%, only slightly above the EU average.
Whereas Germany’s unemployment rate is now a bit lower than in the last boom, the French rate is significantly higher than in the last slump (2004-2005).
The explanation for this divided world is that countries like Greece, Spain, and the US, which experienced a long boom financed by huge capital imports, now face growing difficulties in finding foreign finance.
By contrast, countries that exported capital now enjoy an excess of liquidity because capital is shying away from “saturated” countries.
This excess supply of credit results in additional consumption and investment, triggering a boom.
The western world is currently experiencing a process of portfolio rebalancing, which is reversing the international ranking of growth rates relative to those before the crisis.
Former champions are now limping around the track; former turtles are sprinting like gazelles.
GDP Fetishism
NEW YORK – Striving to revive the world economy while simultaneously responding to the global climate crisis has raised a knotty question: are statistics giving us the right “signals” about what to do?
In our performance-oriented world, measurement issues have taken on increased importance: what we measure affects what we do.
If we have poor measures, what we strive to do (say, increase GDP) may actually contribute to a worsening of living standards.
We may also be confronted with false choices, seeing trade-offs between output and environmental protection that don’t exist.
By contrast, a better measure of economic performance might show that steps taken to improve the environment are good for the economy.
Eighteen months ago, French President Nicolas Sarkozy established an international Commission on the Measurement of Economic Performance and Social Progress, owing to his dissatisfaction – and that of many others – with the current state of statistical information about the economy and society.
On September 14, the Commission will issue its long-awaited report.
The big question concerns whether GDP provides a good measure of living standards.
In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens’ own perceptions.
Moreover, the focus on GDP creates conflicts: political leaders are told to maximize it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.
The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognized.
But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.
For example, while GDP is supposed to measure the value of output of goods and services, in one key sector – government – we typically have no way of doing it, so we often measure the output simply by the inputs.
If government spends more – even if inefficiently – output goes up.
In the last 60 y ears, the share of government output in GDP has increased from 21.4% to 38.6% in the US, from 27.6% to 52.7% in France, from 34.2% to 47.6% in the United Kingdom, and from 30.4% to 44.0% in Germany.
So what was a relatively minor problem has now become a major one.
Likewise, quality improvements – say, better cars rather than just more cars – account for much of the increase in GDP nowadays.
But assessing quality improvements is difficult.
Health care exemplifies this problem: much of medicine is publicly provided, and much of the advances are in quality.
The same problems in making comparisons over time apply to comparisons across countries.
The United States spends more on health care than any other country (both per capita and as a percentage of income), but gets poorer outcomes.
Part of the difference between GDP per capita in the US and some European countries may thus be a result of the way we measure things.
Another marked change in most societies is an increase in inequality.
This means that there is increasing disparity between average (mean) income and the median income (that of the “typical” person, whose income lies in the middle of the distribution of all incomes).
If a few bankers get much richer, average income can go up, even as most individuals’ incomes are declining.
So GDP per capita statistics may not reflect what is happening to most citizens.
We use market prices to value goods and services.
But now, even those with the most faith in markets question reliance on market prices, as they argue against mark-to-market valuations.
The pre-crisis profits of banks – one-third of all corporate profits – appear to have been a mirage.
This realization casts a new light not only on our measures of performance, but also on the inferences we make.
Before the crisis, when US growth (using standard GDP measures) seemed so much stronger than that of Europe, many Europeans argued that Europe should adopt US-style capitalism.
Of course, anyone who wanted to could have seen American households’ growing indebtedness, which would have gone a long way toward correcting the false impression of success given by the GDP statistic.
Recent methodological advances have enabled us to assess better what contributes to citizens’ sense of well-being, and to gather the data needed to make such assessments on a regular basis.
These studies, for instance, verify and quantify what should be obvious: the loss of a job has a greater impact than can be accounted for just by the loss of income.
They also demonstrate the importance of social connectedness.
Any good measure of how well we are doing must also take account of sustainability.
Just as a firm needs to measure the depreciation of its capital, so, too, our national accounts need to reflect the depletion of natural resources and the degradation of our environment.
Statistical frameworks are intended to summarize what is going on in our complex society in a few easily interpretable numbers.
It should have been obvious that one couldn’t reduce everything to a single number, GDP.
The report by the Commission on the Measurement of Economic Performance and Social Progress will, one hopes, lead to a better understanding of the uses, and abuses, of that statistic.
The report should also provide guidance for creating a broader set of indicators that more accurately capture both well-being and sustainability; and it should provide impetus for improving the ability of GDP and related statistics to assess the performance of the economy and society.
Such reforms will help us direct our efforts (and resources) in ways that lead to improvement in both.
Geithner’s Gamble
"LOS ANGELES – In a recent interview, United States Treasury Secretary Tim Geithner laid out his view of the nature of world economic growth and the role of the US financial sector.
It is a deeply disturbing vision, one that amounts to a huge, uninformed gamble with the future of the American economy – and that suggests that Geithner remains the senior public official worldwide who is most in thrall to the self-serving ideology of big banks.
Geithner argues that the world will now experience a major “financial deepening,” owing to growing demand in emerging markets for financial products and services.
He is thinking, of course, of “middle-income” countries like India, China, and Brazil.
And he is right to emphasize that all have made terrific progress and now offer great opportunities for the rising middle class, which wants to accumulate savings, borrow more easily (for productive investment, home purchases, education, etc), and, more generally, smooth out consumption.
But then Geithner takes a leap.
He wants US banks to take the lead in these countries’ financial development.
His words are worth quoting at length:
“I don’t have any enthusiasm for…trying to shrink the relative importance of the financial system in our economy as a test of reform, because we have to think about the fact that we operate in the broader world…It’s the same thing for Microsoft or anything else.
We want US firms to benefit from that…Now, financial firms are different because of the risk, but you can contain that through regulation.”
There are three serious problems with this view.
First, Geithner ignores everything that we know about the pattern of financial development around the world.
It is very rare for financial systems to develop without major crises.
In fact, experience in recent decades confirms what should have been obvious from previous centuries: as countries grow and accumulate savings, they become increasingly prone to financial collapse.
Given Geithner’s extensive international crisis-fighting experience at the US Treasury, the International Monetary Fund, and the New York Federal Reserve, his current naiveté on this point is simply stunning.
Second, Geithner assumes that risks at the largest US firms can be contained through regulation, when all our knowledge points directly to the contrary.
Even the strongest supporters of the Dodd-Frank reform legislation emphasize that it only went part way towards reducing the incentives for major financial institutions to take big risks.
Looking at the combined effect of the new law, plus the weak additional capital requirements agreed under Basel III and the hands-off approach already signaled by the Financial Stability Oversight Council (which Mr. Geithner chairs), it is hard to believe that anything has really improved.
In fact, given that our largest banks are now undoubtedly too big to fail, they have even more incentive to increase their debt levels relative to their equity.
Higher leverage increases their payoffs when times are good – as executives and traders are paid based on their “return on equity.”
And when times are bad, for example in a crisis episode, losses are transferred to creditors.
If those creditor losses are large and spread so as to undermine the broader financial system, pressure for a government bailout will mount.
Bankers get the upside and taxpayers (and people laid off as credit is disrupted) get the downside.
The US financial sector went mad for high-risk loans to emerging markets during 1970s – arguing that this was the new frontier.
This loan portfolio blew up in the debt crisis of 1982.
A version of same thoughtless cross-border lending is again underway, extolled by leading financial sector executives (e.g., Jamie Dimon from JP Morgan Chase) – who have apparently persuaded Mr. Geithner to tag along intellectually.
And third, Geithner completely overlooks what has brought significant parts of Europe to its economic knees.
He should spend more time with the authorities in Iceland or Ireland or Switzerland, countries where “financial globalization” allowed banks to become big relative to the economy.
In Iceland, the three largest banks built global balance sheets that were between 11 and 13 times the size of the economy.
And then they collapsed.
In Ireland, the three largest banks went crazy for commercial real estate – financed by large-scale borrowing from other eurozone countries (including Germany).
The politicians looked the other way – or were paid off, some claim – while these banks built balance sheets valued at two times Irish GDP.
And then they collapsed, causing enormous damage to the government’s own solvency.
In Switzerland, the two largest banks (UBS and Credit Suisse) had a combined balance sheet in fall 2008 of around 8 times Swiss GDP – mostly based on their global activities.
Mortgage traders in London – not many of whom were Swiss – took on enormous risks that almost brought down UBS.
The Swiss government could afford the bailout, just.
And now the Swiss National Bank is moving in the exact opposite direction to Geithner – they are pushing these big banks to become smaller and to finance more of their activities with equity, rather than debt.
Geithner is a very smart and experienced public servant.
His views concerning the future of finance will help shape what happens.
And that is why we are headed for trouble.
The Unfinished Sexual Revolution
WASHINGTON, DC – In the United States, the revolution for equality between men and women is stuck halfway.
Over the past 50 years, women’s roles have changed dramatically, with almost 60% of American women now in the workforce.
Men’s roles, however, have barely budged.
Despite insisting on the equal dignity and value of men and women, we still regard men’s traditional work of breadwinning as more valuable and important than women’s traditional work of caregiving.
The result is a profound social and economic imbalance that is holding back women and men alike.
The solution is to focus less on women and more on elevating the value of care and expanding the roles and choices open to men.
Electing and appointing more women to powerful roles remains essential. But focusing on women’s advancement is biased toward tracking how many are rising to the top: the overall percentage at work, their average salaries, and how many become CEOs, senior managers, tenured professors, bankers, surgeons, law partners, parliamentarians, presidents, and ministers.
A focus on care, by contrast, opens the door to the dual problem of too few women at the top and far too many at the bottom.
American women hold less than 15% of executive-level positions in Fortune 500 companies and 62% of minimum-wage jobs.
As a result, one in three adult women are living in or on the edge of poverty, with the picture especially bleak for single mothers, almost two-thirds of whom are working in dead-end, poorly compensated jobs without flexibility or benefits.
What is common to both sets of women, and all the women in between, is that they are still charged with primary responsibility for caregiving – for children, parents, and other family members – in a system that devalues and provides little support for the care work they do.
Although wealthy women can and do buy the care work of poorer women, many also choose to work part-time or flexibly to provide the stimulation and education their children need.
But many professional women’s career advancement is systematically blocked should they choose this path.
If a young female lawyer or banker on a promising career track decides to leave the office “early” every day to be home with her kids for dinner, work part-time, or take time out to be a full-time caregiver, she is quickly knocked out of the competition for top jobs.
And if she decides to devote herself to full-time caregiving, that time becomes a black mark on her résumé, a hole that she must vainly try to hide or explain away if and when she tries to re-enter the job market.
A woman at the bottom faces an even harsher reality.
She is likely to be a single mother who has no choice but to be the sole breadwinner and caregiver for her family.
Half of single mothers in the US make less than $25,000 a year.
Compared to single parents in other high-income countries, American single parents have the highest poverty rate and the weakest income-support system.
No US state provides affordable daycare, early education, and after-school programs that take up the caregiving slack.
Only a few states provide paid leave that any worker can use when a child is sick.
The result is that a mother with dependent children must patch together an unstable and unreliable network of caregivers in ways that sharply hamper her ability to succeed at her job and climb out of poverty.
Other advanced industrial countries are far ahead of the US in providing an entire infrastructure of care to help families invest in the next generation and care for their own parents.
Indeed, virtually every developing country in the world is ahead of the US in at least requiring paid maternity leave.
But before foreign observers get too smug, consider the other solution to America’s unfinished revolution.
Valuing care means valuing it enough to expect men to take on caregiving responsibilities to the same extent that we now expect women to take on breadwinning.
Of course, any couple will divide up breadwinning and caregiving work according to their individual circumstances and personalities.
In a genuinely equal world, men and women would approach this division of labor the same way a same-sex couple does.
When it is two men or two women figuring out how to provide an income for their family and to turn that income into the food, shelter, clothing, nurture, education, discipline, and moral support needed to raise children, they cannot rely on societally imposed default roles.
They turn to different criteria: Who has the bigger income?
Who is more ambitious?
Who has the more flexible job?
Who has a boss or company that better supports reconciling work and family obligations?
Attitudes about male caregiving are beginning to shift in the US.
Only a third of millennial men believe in traditional gender roles.
America’s biggest tech companies are beginning to compete for talent by offering paternity leave.
Scandinavian countries and Germany have led the way on paternity leave in Europe, yet many European men (and certainly Asian, African, Indian, and Latin American men) have a long way to go with regard to shedding traditional attitudes about the male/female division of labor.
It is one thing to let women into the workforce; it is quite another to embrace full equality and create a cultural, economic, and social climate that encourages both men and women to support one another and their families equally with cash and care.
That is what it will take, however, to complete the unfinished business of the movement for women’s equality.
Gender Equality as a Development Goal
NEW YORK – Despite progress in many societies, women almost everywhere still suffer from significant levels of discrimination.
Even in countries where gender equality has advanced furthest, women are over-represented in lower-paying jobs, under-represented in senior government and business positions, and on the receiving end of most domestic violence.
In parts of the developing world, things are much worse.
In many cases, traditional cultural norms prevent girls from obtaining any real education; lead far too many to marry and bear children while still adolescents; and bar women even from opening a bank account.
At the turn of the century, the international community adopted an ambitious set of targets: the Millennium Development Goals.
Much has been achieved since then, including in the area of gender equality, but we still have a long way to go.
Though girls in the developing world today are much more likely to go to school, they still grow up shouldering a disproportionate burden of poverty, poor health, inadequate education, discrimination, and violence.
Most people around the world agree that men and women should be treated equally, and we also know that empowering women is a highly effective way to help families and societies lift themselves out of poverty.
So how can we achieve the most gender equality at the lowest cost?
Working out the costs and benefits of a program to improve women's rights is not easy, but analyses by my think tank, the Copenhagen Consensus, offer some valuable insights.
For example, investing a dollar in family planning programs can yield benefits worth $120 – an amazingly high return.
This information is particularly pertinent now, as the United Nations' 193 governments ready the next set of international goals to guide the world's approach to development until 2030.
Given that there are many important targets but limited resources, hard choices have to be made.
So which targets to increase gender equality should be included?
A useful way to make direct comparisons between targets is to analyze how much each will cost to achieve and how much good achieving each will do.
The Copenhagen Consensus has asked more than 60 top economists to make this assessment across the full range of relevant issues, including education, food and energy security, and ending violence against women.
It is clear that gender equality has a number of important components, but reproduction is a key issue in determining life opportunities.
In particular, allowing women to decide if, when, and how often they become pregnant leads to fewer deaths in childbirth and fewer infant deaths.
It also gives mothers more time to devote to raising their children and investing in the next generation.
It is not surprising, then, that money spent on family-planning programs turns out to be such a good investment.
But there are other gender targets to consider.
The best way to reduce violence against women, lift them out of poverty, and empower them to be full and equal members of society is to break the cycle of early marriage and childbirth.
Such a large change is not easy to achieve, but if girls can stay in school longer and have decent job opportunities available to them after they graduate, they are likely to marry and bear children later.
For example, in rural India, recruiters for well-paid back-office jobs visited randomly selected villages over a period of three years.
Female employment rose and women aged 15-21 were 5-6% less likely to get married or give birth over this period.
Moreover, better job opportunities created an incentive to become better educated.
As a result, younger girls in these areas stayed in school longer, and women enrolled in training courses.
More broadly, the evidence from different approaches and countries is that spending one dollar on improving women's access to economic opportunities yields about $7 in health, education, and poverty-alleviation benefits.
Other studies show that spending a dollar on improving girls' education is also a sound investment, producing $5 of benefits for each dollar spent.
There are plenty of other possible gender-equality targets that seem unquestionably good, but for which we do not have cost/benefit estimates.
For example, ensuring that women have equal rights to inherit, sign a contract, register a business, or open a bank account would cost little, but could have far-reaching economic benefits.
However, we do not have the data to quantify these benefits well.
Likewise, increasing women's political representation would cost little, whereas the benefits would often be welcome but difficult to quantify.
Essentially, women's priorities would begin to take equal precedence with those favored by men.
There is no simple way to achieve something as complex as gender equality.
But economic analyses can help show us where we can do the most good.
Clearly, the international community needs to consider the case for family planning carefully when formulating its priorities for the next set of development goals.
And we now have stronger information for other gender targets when they compete with targets related to nutrition, health, poverty, and the environment.
Belly-Up Brazil?
SAO PAULO – After years of impressive growth, Brazil’s economic prospects appear increasingly dim.
Since the World Cup ended in July, economic activity has plummeted, inflationary pressures have intensified, and consumer and business confidence have collapsed, leading many economists to slash their growth forecasts for this year.
So just how sick is Brazil’s economy, and how will its malaise affect the outcome of the presidential election in October?
At first glance, Brazil’s weak growth appears ephemeral, and President Dilma Rousseff should be well positioned to win a second term.
Over the last 12 years, her Worker’s Party (PT) has delivered the country’s strongest per capita GDP growth in more than three decades; reduced income inequality with an extensive system of social transfers that reaches one-third of Brazilian households; and reduced formal unemployment to a record-low 4.5%.
But even a cursory look at recent economic data reveals that Brazil’s growth model may well be hitting a stagflationary wall.
In fact, Brazil most likely experienced a technical recession during the first half of this year.
And annual growth during Rousseff’s presidency has probably averaged less than 2% – the slowest for any Brazilian president since the 1980s, when the country began its transition from hyperinflationary basket case and serial defaulter to stable and increasingly prosperous middle-income economy.
Moreover, had the government not cut taxes and delayed much-needed increases in gasoline and electricity prices, average annual inflation would stand at 7.5% – a level not reached in decades.
In services, where the government has taken no measures to suppress inflation, the rate exceeds 9%.
Dig deeper, and one finds that the economy’s foundations are plagued with fragilities and imbalances.
Though overall economic activity is weak, the current-account deficit has reached a 12-year high of 3.5% of GDP.
Industrial production is 7% below its pre-crisis peak in 2008.
This, together with the decline in manufactured goods as a share of total exports, from 54% a decade ago to 37% today, points to a substantial loss of competitiveness.
Even the economy’s apparent strengths – a thriving service sector and low unemployment – rest on unsustainable credit policies.
Of course, rapid credit growth is a natural consequence of declining real interest rates.
But, in Brazil, lending by state-owned banks has outpaced that of private banks significantly since 2008, meaning that lending at deeply subsidized rates has largely driven the increase in bank credit, to 58% of GDP (roughly double the rate eight years ago).
Against this background, Brazil is preparing for its most important presidential election since its transition from dictatorship to democracy in 1985 – and the polls do not bode well for Rousseff.
Despite higher incomes and lower inequality, 70% of Brazilians have expressed a desire for change.
This is not surprising, in view of the street protests that erupted last year over the poor quality of public services and rising prices.
But is Rousseff’s government entirely to blame?
The short answer is no.
While Rousseff’s government is largely responsible for the recent bout of cyclical weakness and social upheaval, Brazil’s problems are rooted in a broader unwillingness to shake off the yoke of policies adopted during more than two decades of military rule.
The 1994 Plano Real, a macroeconomic stabilization program, together with subsequent structural reforms, enabled Brazil finally to quash inflation and ride a wave of cheap global liquidity and surging Chinese demand for commodities.
As the government attempted to direct these gains toward wealth redistribution, public expenditure rose and the social-benefits system – underpinned by so-called “acquired rights” – became increasingly rigid.
Brazil needs a new growth model, based on four key elements: tighter fiscal policy, looser monetary policy, a reduced role for state-owned banks in credit provision, and measures to lower Brazil’s astronomical private lending costs.
The next government, whether of the left or the right, will also face the unenviable task of reforming the acquired-rights system to make social benefits more flexible and affordable.
Its approach will determine whether Brazil goes the way of Venezuela, which is currently mired in stagflation, or Chile, widely regarded as Latin America’s best-run economy.
Given the protections afforded to acquired rights, the process of rooting out economic distortions and restoring Brazil’s finances to a stable equilibrium will require a lengthy process of constitutional reform.
And, though the transition will undoubtedly be painful, it is essential to Brazil’s future economic growth and development.
Whether or not the next government can do what is needed will depend on its ability to unify the electorate and a disparate group of regionally focused political parties.
But, first, it must reject the temptingly easy – but ultimately damaging – route of raising taxes and doubling down on redistributive policies.
That path leads to Venezuela – and to a far less stable and prosperous Latin America.
China’s Bad Dream
LONDON – Since his first address as China’s president last year, Xi Jinping has been espousing the so-called “Chinese Dream” of national rejuvenation and individual self-improvement.
But the imperative of addressing the unprecedented amount of debt that China has accumulated in recent years is testing Xi’s resolve – and his government is blinking.
The Chinese government’s uncertain ability – or willingness – to rein in debt is apparent in its contradictory commitment to implement major structural reforms while maintaining 7.5% annual GDP growth.
Given that China owes much of its recent growth to debt-financed investment – often in projects like infrastructure and housing, meant to support the Chinese Dream – any effort to get credit growth under control is likely to cause a hard landing.
This prospect is already prompting the authorities to delay critical reforms.
To be sure, China’s debt/GDP ratio, reaching 250% this month, remains significantly lower than that of most developed economies.
The problem is that China’s stock of private credit would normally be associated with a per capita GDP of around $25,000 – almost four times the country’s current level.
There are strong parallels between China’s current predicament and the investment boom that Japan experienced in the 1980s.
Like China today, Japan had a high personal savings rate, which enabled investors to rely heavily on traditional, domestically financed bank loans.
Moreover, deep financial linkages among sectors amplified the potential fallout of financial risk.
And Japan’s external position was strong, just as China’s is now.
Another similarity is the accumulation of debt within the corporate sector.
Corporate leverage in China rose from 2.4 times equity in 2007 to 3.5 times last year – well above American and European levels.
Nearly half of this debt matures within one year, even though much of it is being used to finance multi-year infrastructure projects.
Making matters worse, much of the new credit has originated in the shadow-banking sector at high interest rates, causing borrowers’ repayment capacity to become overstretched.
One in five listed corporations carries gross leverage of more than eight times equity and earns less than two times interest coverage, weakening considerably these companies’ resilience to growth shocks.
To be sure, China’s situation is more extreme than Japan’s.
At its peak, Japanese investment stood at 33% of GDP, compared to 47% in China.
This is a substantial difference, especially considering that China’s per capita GDP amounts to only 19% of Japan’s at its highest level, and that its debt has already reached 60% of Japan’s.
Moreover, the accumulation of debt in China – 71 percentage points of GDP over the last five years – has been far sharper than in Japan, where the debt level grew by only 16 percentage points over the five-year period before its bust.
That is all the more reason to believe that Japan’s experience can provide important insight into the risks that China faces.
After Japan’s bubble burst, annual GDP growth, which averaged 5.8% in the four years preceding the bust, plummeted to 0.9% for the next four years.
With bad debt left to fester on banks’ balance sheets, growth vanished and deflation set in.
While private debt as a share of GDP stabilized, public debt increased by 50% in the five years after the bust.
The collapse of China’s credit bubble would likely cause annual GDP growth to drop to 1-2%, on average, for the subsequent four years, assuming a 2% annual decline in capital expenditure and a still-respectable consumption-growth rate of 3-5%.
Consolidated public-sector debt would rise to 100% of GDP.
This is a relatively modest prediction.
Without automatic stabilizers or a strong financial-stability framework underpinned by deposit insurance, coping with the downside risks of the potentially destabilizing financial reforms that the government is pursuing will be difficult enough; a credit shock could prove disastrous.
China’s debt tipping point is to be found in its massive real-estate bubble.
According to the investment bank UBS, new urban housing supply has far exceeded marginal underlying demand from urban population growth.
Indeed, almost half of the formal increase is not an increase at all, but merely recognition of rural workers who have been living and working in cities for some time.
The impact of a sharp decline in real-estate prices would be far-reaching.
After all, property collateral is the bedrock of the Chinese financial system, with estimates of banks’ direct and indirect exposure to real estate ranging from 66% to 89% of GDP.
Complicating matters further is the government’s lack of options for stabilizing property markets.
In fact, a key part of the problem is that China’s response to cyclical weakness always entails more housing construction.
China’s lack of automatic stabilizers places the tension between reform objectives and growth imperatives in sharp relief.
The only way for the government to shore up growth in the short run is to pursue more debt-driven stimulus, as it did earlier this year.
But this will also cause China’s debt burden to continue to grow, with bad debt increasingly crowding out good credit.
If China’s leaders continue to choose debt-fueled growth over reform, they will only delay, and possibly prolong, the inevitable slowdown.
That would turn Xi’s Chinese Dream into a more elusive prospect.
Genetic Property Rights on Trial
LONDON – In early February 2010, a United States federal district court in New York began deciding a landmark case as to whether individuals have a “right to know” about how their own genomes can dictate their future health.
The case, American Civil Liberties Union v. Myriad Genetics , may have a tremendous impact on medicine and science.
The questions on which the case turns are whether genetic patents help or hamper research, and whether patients should have to pay a license fee to a biotechnology corporation to be tested for predisposition to disease.
One of the plaintiffs is Lisbeth Ceriani, a 43-year-old woman with breast cancer whose doctors recommended that she be tested for two genetic mutations involved in some hereditary forms of the disease.
Myriad Genetics, the sole test provider in the US – it holds a patent on the genes themselves , not just on the diagnostic test – did not accept her insurance, and Ceriani could not afford to pay for the test.
So she remained ignorant, as did her physicians – with possible ramifications for her clinical care.
Five other plaintiffs – along with major medical bodies – tell similar stories.
Those who oppose genetic patents claim that they also deny US constitutional rights, making this the first time a genetic patent has been challenged on human rights grounds.
As so often happens in biotechnology, what looks at first like an abstruse technical issue raises many questions that cut to the core of our humanity.
One human gene out of approximately every five is now the subject of a patent, the majority of which are held by private firms.
This case concerns two such genes, BRCA1 and BRCA2.
Women with the “wrong” version of these genes have a heightened risk of developing breast cancer (up to 85%, against the normal 12%, although the genes account for only a minority of breast cancers).
These women also run a greater risk of ovarian cancer.
Myriad Genetics also has tried to pursue patent rights in Europe, but there its claims have been largely rejected.
Although the gene’s function in causing breast and ovarian cancer was uncovered by Cancer Research UK in 1995, Myriad, along with nearly 30 other defendants, argues that the patent is a necessary reward for its research costs.
In fact, without patent protections, the firm and its allies claim, medical research would shudder to a halt.
But, whatever the merits of the claim that genetic patents benefit research and treatment, that is a practical, rather than a legal, argument.
In order to gain legal “standing” to sue Myriad Genetics, critics of genetic patents – including the American Medical Association, the American Society of Human Genetics, and the American Civil Liberties Union – had to find an issue that could be adjudicated on a constitutional basis.
Their innovative strategy is to draw on the First Amendment, which protects freedoms such as speech and religion, to argue that patents restrict patients’ freedom of access to information that might enable us to take action to protect our health.
That is a clever argument, but is it really the source of people’s profound disquiet about genetic patenting?
In talking about similar issues raised in my recent book Body Shopping , I have heard many shocked reactions to the growing commodification of human tissue, but none more generally shared than this one: how can you take out a patent on life?
Is a genetic variant a “product of nature” or a “discovery”?
While the plaintiffs assert that “genes are identified, not invented,” the defendants claim that the basis of patent law is precisely the opposite.
Their argument is that what is patented is not the gene as it occurs in our bodies, but rather a sort of “cloned” version produced in the laboratory.
Rather than a “patent on life,” the companies say, they are patenting something more like a chemical.
If that is true, how can Ceriani rightfully be kept in the dark about what form the gene takes in her body?
This is not just a problem for people who think – wrongly, in legal terms – that they own their bodies, as most people do.
With a few limited and recent exceptions, there is no such thing as property in tissue once it has left your body.
We know that from such cases as that of John Moore, who tried unsuccessfully to claim property rights in a valuable cell line developed from his immune cells.
But what about a gene that has not left my body?
Don’t I somehow still “own” it?
Don’t I have rights of control over my own body?
How can a commercial firm not only deny me the right to know my own genetic profile unless I pay their fee for the diagnostic test, which might be fair enough, but also to prevent any other firm from offering me a similar test unless those firms pay it a license fee?
Proprietary rights for commercial firms over the most basic element of an individual’s genetic identity should not be enforceable.
We do not have to believe in genetic determinism to find that argument compelling.
The Age of Epigenetics
LONDON – Fifty-one years ago, James Watson, Maurice Wilkins, and Francis Crick were awarded the Nobel Prize in Medicine for their discovery of DNA’s structure – a breakthrough that heralded the age of the gene.
Since then, the field of genetics has advanced significantly, particularly as a result of the global Human Genome Project, which in 2003 identified all of the roughly 23,000 genes and three billion chemical base pairs in human DNA in order to screen for many rare diseases.
But, despite evidence that most diseases have a clear genetic component, only a fraction of the genes that explain them have been found.
And scientists in the field remain puzzled by the fact that most identical twins (who share 100% of their genes) do not die from the same diseases.
As a result, many in the scientific community are beginning to predict a decline in the role of the gene in pinpointing the root causes of diseases.
It is too soon to discount genetics, however, because the science of “epigenetics” – the study of mechanisms for turning genes on and off, thus changing the way a cell develops without altering the genetic code – is gaining traction.
Indeed, the 2012 Nobel Prize in Medicine was awarded to John Gurdon and Shinya Yamanaka for revolutionizing scientists’ understanding of how cells develop by reprogramming DNA and cells without altering their genetic structure.
In 1962, Gurdon’s finding that almost any cell in the body contains the complete DNA code enabled him to create a tadpole by cloning an adult frog.
More than four decades later, in 2006, Yamanaka discovered a way to trick complex adult cells in mice into regressing to their immature state, forming stem cells.
Before this, stem cells – which can potentially be reprogrammed to develop into replacements for lost or damaged tissue – could be taken only from early-stage embryos, a practice that fueled ethical controversy.
The true promise of epigenetics has become apparent only in the last few years, as scientists’ ability to assess the epigenetic mechanisms in DNA – which can now be measured at roughly 30 million points across the human genome – has dramatically improved.
Epigenetics can potentially be used to explain the root causes of many diseases that scientists have so far struggled to understand, from asthma to allergies to autism.
Consider lung cancer.
Six decades ago, when most men smoked, British doctors linked smoking to lung cancer, making it the first disease to be causally linked to smoking.
(In fact, lung cancer kills one in ten smokers.)
But the incidence of certain kinds of lung cancer continues to rise – particularly in women – making it one of the most prolific killers worldwide, despite the general decline of smoking over the last 30 years.
Indeed, nowadays, many lung cancer patients have no history of smoking.
These “blameless” patients seem to develop a different kind of lung cancer from those who report a history of smoking – one that is more responsive to new medications and has better, albeit still poor, outcomes.
Epigenetic processes that cause key anti-cancer genes, such as the tumor suppressor P16, to be switched off could explain the increased prevalence of lung cancer.
A recent study showed that a few years of smoking can have this effect, making smokers more susceptible to a variety of cancers.
My team and I recently studied 36 pairs of identical twins, of which only one twin had breast cancer.
These “genetic clones” had a few crucial differences.
In the twin who developed the breast cancer, several hundred genes had been switched off.
In a few genes, this had occurred five years before diagnosis.
Such findings unlock the possibility of a diagnostic test well before the disease manifests itself, and of developing drugs that prevent – or even reverse – the cancer’s development.
Moreover, animal studies have shown that changes in stress or diet can alter the behavior and genes of future generations.
As a result, it is likely that epigenetic changes can be inherited.
For example, smoking could have caused epigenetic changes in a grandparent’s DNA, effectively switching off certain anti-cancer genes.
The genes would then be passed down to descendants in this switched-off state.
Thus, the toxins that people ingest may not be the only relevant factor should cancer strike; the toxins that their parents or grandparents ingested could also be to blame.
Physical experiments revealing such trans-generational effects are impossible to conduct on humans, so historical or observational data must be used.
One study of children in Bristol showed differences in growth depending on whether their grandfathers had smoked before the age of 11.
Their bodies probably reacted defensively, adapting in the short term by changing the genes for the next few generations, or until the “danger” had passed, a so-called “soft inheritance” running in parallel to slower-acting evolutionary forces.
Fortunately, these epigenetic changes are potentially reversible.
Four epigenetic leukemia drugs, which aim to switch the natural protective genes back on, are now on the market in the United States.
More than 40 other epigenetic drugs are being developed, not only for cancer, but also for obesity and even dementia.
In the future, regular epigenetic health check-ups could become standard practice.
More than 50 years on, genes remain crucial to understanding complex diseases – especially given scientists’ ever-improving ability to alter them.
The age of the gene is far from over; it has simply progressed into the age of epigenetics.
Genetics\u0027 Information Revolution
Unlocking the secrets of the human genome would be impossible without the computerized manipulation of massive amounts of data, including the majority of the three billion chemical units that comprise our own species' genetic blueprint.
But what this "bioinformatics" revolution has provided, above all, is stark confirmation of the evolutionary basis of all life on Earth.
Sequence data, whether from proteins or nucleic acids, are well suited to computer processing because they are easily digitized and broken down into their constituent units.
Simple computer programs can compare two or more strings of these units and evaluate degrees of similarity, search huge databases to match new sequences against known ones, and cluster groups of sequences in the form of a family tree.
The implications of research on the first proteins to be studied almost half a century ago were profound.
These sequences were all rather small--insulin has only about 50 amino acids, depending on the species--but the variation between species was clear.
My own interest began with one of these simple molecules 40 years ago, when I was a postdoctoral student in Sweden.
Fibrinopeptides are short sequences that are relatively easy to purify and have the virtue of changing significantly from species to species.
As a result, we were able to show a strong correspondence between the fossil record and most of the changes that were observed in the fibrinopeptide sequences.
So it was obviously possible to interpret the evolutionary past in terms of existing genetic sequences.
But advances in computing were indispensable to further progress.
In 1965, Robert Ledley began the first real sequence database, the Atlas of Protein Sequence and Structure.
In 1967, researchers produced a genetic tree of a score of animals and fungi that had virtually the same branching order as would have been drawn by a classical biologist, even though their computer was utterly ignorant of the comparative anatomy, paleontology, embryology, and other non-molecular attributes of these creatures.
Finally, in 1970 a splendid computer innovation enabled the proper alignment of amino acid sequences (which is vital to all subsequent data management).
The interpretation of sequencing data then developed along two dimensions.
First, there was a natural interest in the relationships between organisms.
The assumption was that random changes occur along all limbs of a genetic tree, but depending on the protein, only some small fraction survives.
If these survival rates were constant, then distances separating existing sequences could be calculated.
A second kind of comparison focused on so-called paralogous proteins, which are descended from a common ancestor within the same creature as a result of gene duplications.
Both types of comparison showed that new proteins come from old ones, just as evolutionary theory would predict.
Duplications of parts of a DNA genome occur constantly in all organisms, mainly as a result of random breakage and reunion events.
Most of these duplicated segments are doomed to oblivion, because any proteins their genes produce are redundant.
Occasionally, however, a slightly modified gene product proves adaptively advantageous, and a new protein is born.
Often its function is very similar to the old one, but occasionally a drastic change occurs.
Then, in 1978, DNA sequencing came into wide use.
Almost immediately, a flood of fresh genetic information overwhelmed the existing protein sequence database.
A second storehouse, GenBank, was established, but initially it concentrated exclusively on DNA sequences.
And yet the interesting information resided in the translated DNA sequences, that is, their protein equivalents.
It was one of those rare moments of opportunity when an amateur could compete with professionals.
So I began my own database, mostly using translated DNA sequences; I called it NEWAT (New Atlas).
Armed with a very primitive computer and some very simple programs written by an undergraduate student, we began matching every new sequence against all previously reported sequences and found many wholly unexpected relationships.
By the time the Human Genome Initiative was launched at the end of the 1980's, the amount of data was no longer the limiting factor in the development of new knowledge; suddenly, managing it was.
Many scientists were skeptical about the human genome project.
The human genome, they pointed out, contained a hundred times more amino acid sequences than the existing databases.
So how would the genes be identified?
How can you match up something that's never been found?
But every gene in a genome is not an entirely new construct, and not all protein sequences are possible--otherwise, the number of different sequences would be vastly greater than the number of atoms in the Universe.
Only a miniscule fraction of possible sequences has ever occurred, through duplication, multiplication, and modification of a small starter set of genes.
As a result, most genes are related to other genes.
I was confident that bioinformatics would enable us to identify all genes merely by sequence inspection.
But after the completion of the first dozen microbial genomes, about half the genes remained unidentified--a level that has persisted through the first hundred genomes to be completed, including the human genome.
Even one of the most studied organisms, E. coli , has an abundance of genes whose function has never been found.
Still, the benefits of deciphering genomes have been tremendous.
The promises of quick medical applications may have been over-stated.
But the inherent value is immeasurable: the ability to grasp who we are, where we came from, and what genes we humans have in common with the rest of the living world.
Geneva on the Rhine
PARIS – Twenty years ago, in the immediate aftermath of Germany’s reunification, French magazines were full of caricatures of Chancellor Helmut Kohl wearing the traditional pointed Prussian helmet.
The new Germany was perceived as a threat to the European balance.
Germany was simply “too much” again.
German geopolitical ambitions, it was believed, would invariably seek greater proportionality with the size of the country’s population and the dynamism of its economy.
It was only a matter of time, people thought, before the “German Question” would return to haunt Europe, as it did between 1871 and 1945.
To a large extent, Helmut Kohl held up the same picture, which he used to persuade his European counterparts that they should rush to bind Germany to a more integrated Europe.
Indeed, this reasoning led to the creation of the euro.
For the sake of its European vocation, Germany proclaimed itself ready to abandon its cherished deutschmark, the currency that had accompanied and symbolized its spectacular economic rebirth and post-war social stability.
Today, it is not an excess of German ambition, but rather a lack of it, that is threatening Europe.
Germany may remain “too big” for other Europeans, but the “new German problem” is that the country wants too little.
Its dream is neither to dominate Europe, nor even to lead it by the exemplary quality of its policies.
Germany’s not-so-secret ambition is to become a Magna Helvetia, a Big Switzerland – prosperous, stable, neutral, and ultimately irrelevant.
Such a dream is obviously flawed.
Switzerland can be Switzerland because it is surrounded by the peaceful environment of the European Union.
It is one thing for smaller European countries to dream of being Swiss; it is quite another when such an aspiration comes from the heart of Europe, from the country that was once seen as the EU’s keenest pupil.
So, what went wrong?
The rise of euro-skepticism in Germany is a new twist in the country’s ongoing “normalization.”
With the rise of political leaders who had not witnessed the terrifying consequences of WWII, it was inevitable that Germany’s emotional bond with its European mission – born of guilt and the quest for redemption – &nbsp;should gradually disappear.
Before dreaming of Magna Helvetia, Germany briefly passed through a phase in which it saw itself as a “second France” – a country dominated by the pursuit of national interest, with Europe the continuation of that pursuit by other means.
But soon Switzerland became a reference point for German leaders, and then an explicit and dangerous model.
Referenda are not for Germany what they are in Switzerland, a normal mode of governance.
But, on all major issues, and not only because of their political weakness, Germany’s leaders now make public opinion the polestar of policy.
This drift towards populism exists everywhere in Europe nowadays, but it is particularly damaging when it affects Europe’s leading country.
German public opinion is not necessarily wrong when it denounces the irresponsible behavior that led Greece into its present crisis.
Nor, after Japan’s Fukushima disaster, are Germans irresponsible to reject nuclear power – which is unlike all other energy sources and represents a risk of a far mightier magnitude – with renewed vigor.
And it is not necessarily unwise to express doubts about the rationality of engaging wholeheartedly in Libya without being fully aware of the strength of either Muammar Qaddafi’s loyalists or the rebels, even if Germany’s resulting policy was formulated in a rather naïve and unprofessional manner.
The problem is that policies that reflect a quasi-automatic response to the momentary Diktat of German public opinion do not represent a coherent whole.
The famous saying in Renaissance France, “What woman desires, God wants,” has become, “What the people desire, politicians will deliver.”
Nowhere is this trend from pedagogical responsibility towards demagogic populism more worrisome than in Germany.
Europe’s most populous country and largest economy cannot base its policies solely on its public opinion without causing further damage to the performance of the EU as a whole.
Germany has never been more powerful in Europe than it is today – and it has never been less ambitious for Europe.
And yet Europe cannot succeed without Germany remaining deeply European.
The problem goes beyond Germany’s current leadership, though its increasing weakness certainly does not help.
Germany’s path largely reflects a structural evolution that marks the way Germans now look at Europe.
Yesterday, Europe was the solution for Germany; today, it is the problem.
Yesterday, Europe guaranteed that Germany would never again go astray; today, it is the impediment that threatens the country’s hard-won financial and economic stability.
Europe’s main challenge today is to keep the European flame alive in Germany.
The more distant and neutral to the European project Germany becomes, the more its partners, especially France, must behave like engaged and responsible Europeans.
It may not be enough, but without this nothing can be achieved.
Or, following the German lead, will a Europe-wide Magna Helvetia become the last European ambition?
यूरोप की यूक्रेनी जीवनरेखा
न्यूयार्क. पिछले सप्ताहांत में सम्पन्न हुए यूरोपीय संसद एवं यूक्रेन के राष्ट्रपति चुनावों में बेहद विरोधाभासी नतीजे मिले हैं. यूरोप के मतदाताओं ने जहां यूरोपीय संघ के कामकाज के तौरतरीकों पर अपना असंतोष जाहिर किया है वहीं यूक्रेन की जनता ने यूरोपीय संघ से जुड़े रहने की अपनी इच्छा पर मोहर लगाई है. यूरोप के नेताओं को और नागरिकों को इस अवसर का उपयोग यह जानने के लिए करना चाहिए कि इसके क्या निहितार्थ है और यह भी कि यूक्रेन की मदद कर कैसे वे खुद यूरोप की मदद कर सकते हैं.
यूरोपीय संघ की स्थापना के पीछे मूलरूप से यह विचार था कि संप्रभु राष्ट्रों के एकजुट होने से वे आपसी हितों को बेहतर ढंग से साध सकेंगे. अंतर्राष्ट्रीय प्रशासन तथा कानून के शासन में यह एक निडर प्रयोग था जिसका उद्देश्य था राष्ट्रीयतावाद का प्रतिस्थापन और बल का समुचित उपयोग.
दुर्भाग्यवश यूरो संकट से यूरोपीय संघ बिलकुल ही अलग निकाय में बदल गया. आपसी सहयोग की भावना की जगह कर्जदाता और कर्जदार का संबंध पनपने लगा जिसमें कर्जदाता देश अपनी शर्तें थोपने लगे और अपना दबदबा कायम करने लगे. यूरोपीय संसद के चुनाव में कम मतदान के मद्देनजर अगर इटली के प्रधानमंत्री मैट्टियो रेन्जी को मिले समर्थन के साथ यूरोपीय संघ के विरोधी दक्षिण व वामपंथी मतों को भी मिला दिया जाए तो कहा जा सकता है कि अधिकांश नागरिक वर्तमान परिस्थितियों के विरोध में हैं.
एक ओर जहां अंतर्राष्ट्रीय सरकार बनाने की दिशा में किया गया यूरोप का उदार प्रयोग लड़खड़ा रहा है वहीं रूस यूरोपीय संघ के खतरनाक प्रतिद्वंदी के तौर पर उभर रहा है. उसकी विश्व स्तर पर भौगोलिक और राजनीतिक महत्वाकांक्षाएं हैं और उन्हें पूरा करने के लिए वह बल प्रयोग करने का भी इच्छुक है. पुतिन अपने शासन को मजबूत बनाने के लिए नस्लीय राष्ट्रीय विचारधारा का इस्तेमाल कर रहे हैं. पिछले महीने रूसी रेडियो कार्यक्रम डायरेक्ट लाइन में बोलते हुए उन्होंने रूसी लोगों के अनुवांशिक गुणों का गुणगान किया था. क्रीमिया को यूक्रेन से हथिया लेने के बाद वे अपने देश में लोकप्रिय हो गए हैं और विश्व में अमेरिका की धमक को कम करने के अपने प्रयास में वे चीन से हाथ मिला रहे हैं. उनके इन कदमों पर बाकी दुनिया में सकारात्मक प्रतिक्रिया हुई है.
लेकिन पुतिन सरकार के निहित स्वार्थ रूस के सामरिक हितों से मेल नहीं खाते हैं. रूस कहीं अधिक लाभ ले सकता है बशर्ते कि वह यूरोपीय संघ और अमेरिका के साथ ज्यादा-से-ज्यादा सहयोग करे. रूस और यूक्रेन में दमनकारी नीतियों को अपनाने से उलटा नुकसान हो सकता है. तेल के ऊंचे भाव के बावजूद रूस की अर्थव्यवस्था कमजोर पड़ती जा रही है क्योंकि वहां से पूंजी और प्रतिभा का पलायन हो रहा है. कीयेव के मैदान में हिंसा के प्रयोग से नये यूक्रेन का जन्म हुआ जो नये रूसी साम्राज्य का अंग बनने को कतई राजी नहीं है.
नये यूक्रेन की सफलता से रूस में पुतिन के शासन को खतरा पैदा होगा. यही कारण है कि पुतिन पूर्वी यूक्रेन में स्वघोषित अलगाववादी गणतंत्रों को हवा देकर यूक्रेन को अस्थिर करने पर तुले हैं.
डोनबास क्षेत्र के सबसे बड़े नियोक्ता द्वारा अलगाववादियों के विरुद्ध विरोध को चलाये जाने से पुतिन की योजना खटाई में पड़ सकती है और अब वह राष्ट्रपति चुनाव के नतीजों को स्वीकार कर सकते हैं. इस तरह वह अतिरिक्त प्रतिबंधों से भी बच सकते हैं. लेकिन रूस नये यूक्रेन को अस्थिर करने के लिए अन्य रास्तों को तलाश सकता है और इन रास्तों को तलाशना कठिन नहीं है. यूक्रेन के पूर्व राष्ट्रपति विक्टर यानुकोविच के भ्रष्ट शासन के प्रति वफादार रहे सुरक्षाबलों को आसानी से बरगलाया जा सकता है क्योंकि वे नये शासन के प्रति वफादार नहीं है.
यह सभी घटनाएं हाल ही में बड़ी तेजी से घटी हैं. यूरोपीय संघ और अमेरिका दोनों ही अपनी आंतरिक समस्याओं में उलझे हैं. इस तरह वे उस भू-राजनीतिक तथा विचारधारा से जुड़े खतरे से अनभिज्ञ हैं जो पुतिन के रूस से उत्पन्न हो रहा है. सवाल है कि उन्हें किस प्रकार इसका सामना करना चाहिए?
सबसे पहले तो उन्हें यूक्रेन को अस्थिर करने वाले रूस के प्रयासों को निरस्त करना होगा. यूरोपीय संघ की वित्तीय सीमाओं और सरकारी सहायता को सीमित करने वाले अन्य नियमों के मद्देनजर नवाचारी सोच जरूरी है. एकमात्र सर्वाधिक प्रभावकारी उपाय यह हो सकता है कि यूक्रेन में निवेश या व्यापार करने वालों को निशुल्क (मुफ्त) राजनीतिक जोखिम बीमा दिया जाए. इससे राजनीतिक उथलपुथल के बावजूद अर्थव्यवस्था को चलाए रखने में मदद मिलेगी और यूक्रेनियों को यह संकेत भी जाएगा कि यूरोपीय संघ तथा अमेरिकी सरकार व निजि निवेशक दोनों उनके प्रति वचनबद्घ हैं. नये खुले और संभावनाओं से भरे बाजार में व्यापार आएगा और बढ़ेगा बशर्तें कि उन राजनीतिक घटनाओं से होने वाले नुकसान का पूरा हर्जाना दिया जाए जिनपर उनका वश नहीं है.
राजनीतिक जोखिम बीमा इतना जटिल है कि इसे तुरंत लागू नहीं किया जा सकता है. लेकिन हकीकत में इस प्रकार का बीमा होता है. जर्मनी के यूलर हरमिस जैसे अनेक निजि बीमा व पुनर्बीमाकर्ता इसे वर्षों से देते आ रहे हैं. विश्व बैंक की मल्टिलेटरल इन्वेस्टमेंट गारंटी एजेंसी और अमेरिकी सरकार की ओवरसीज प्राइवेट इन्वेस्टमेंट कार्पोरेशन जैसी सरकारी संस्थाएं भी इस प्रकार का बीमा प्रदान करती हैं. लेकिन उन्हें पुनर्बीमा की लागत वसूलने के लिए भारी किश्तें वसूलनी पड़ती हैं.
भारी किश्त की शर्त के कारण ज्यादातर व्यापारी तूफान के गुजर जाने का इंतजार करते रहते हैं. यही कारण है कि संबंधित सरकारों को पुनर्बीमा के कार्य को अपने हाथ में ले लेना चाहिए और बीमा पॉलिसियों के प्रशासन के लिए ही अपनी एजेंसियों का उपयोग करना चाहिए.
जिस तरह वे विश्व बैंक को गारंटी देती हैं उसी तरह नुकसान को पूरा करने की गारंटी दे सकती हैं. अर्थात् हरेक सरकार वास्तव में प्रयुक्त पूंजी को आंशिक तौर पर प्रदान कर बाकी रकम को कॉलेबल (जरूरत पड़ने पर मांगी गई) पूंजी के रूप में उपलब्ध करा सकती हैं जो नुकसान के एवज में भुगतान हो जाने के पश्चात् उपलब्ध होगी. यूरोपीय संघ को अपने वित्तीय कोष को भी परिवर्तित करना होगा ताकि जरूरत के वक्त मांगी गई पूंजी को छूट दे सकें और वास्तविक नुकसान को अनेक वर्षों में पूरा कर सकें. इस प्रकार की गारंटियों का एक विशेष गुण होता हैः जितनी ज्यादा भरोसेमंद वे होती हैं, उतनी ही कम उन्हें लागू करने की संभावना होती है. इस तरह पुनर्बीमा काफी हद तक लागतरहित साबित होता है. विश्व बैंक इसका जीवंत उदाहरण है.
त्वरित और विश्वास जगाने लायक ढंग से कार्यवाई करते हुए यूरोपीय संघ यूक्रेन और स्वयं की भी रक्षा कर सकता है. जो प्रस्ताव मैं यूक्रेन के लिए करता हूं उसे घर (यूरोपीय संघ) में भी लागू किया जा सकता है. जब तक इतने सारे उत्पादकीय संसाधन नकारा पड़े हुए हैं, यह समझदारीपूर्ण कदम होगा कि वित्तीय कोष से होने वाले निवेश को छूट दी जाए. अंततः वे खुद अपना भुगतान कर लेंगे. रेन्जी इसी तरह की कार्यवाई की वकालत कर रहे हैं.
पुतिन क्रीमिया में अगले कुछ साल के दौरान 50 अरब यूरो का निवेश कर एक मिसाल पेश करने के मनसूबे बना रहे हैं. यूरोप के समर्थन से यूक्रेन भी एक अनुकूल मिसाल बन सकता है और अगर ऐसी किसी पहल से ऐसी किसी विकास नीति की शुरूआत हो सकती है जिसकी यूरोप को निहायत जरूरत है, तो यूक्रेन को बचाकर यूरोप स्वयं को भी बचा रहा होगा.
George W. Bush and America\u0027s Neglected Hemisphere
When the NATO Allies gather in Istanbul, much of the talk will concern the divisions between America and Europe over Iraq.
But Europe is not alone in its estrangement from the United States under President George W. Bush's leadership.
Among the vast list of unforeseen consequences springing from the US fiasco in Iraq is the vital fact that, across Latin America, anti-Americanism is on the rise and is rapidly generating myriad grim effects on the region's politics.
The parallel with Europe does not end there.
Before the Bush administration, various American presidents worked hard to change the US relationship with Latin America from one of hegemon and dominated states to something like the relations that exist with the European allies.
All of that is now gravely at risk - a dangerous turn of events.
Complete estrangement from the US in Latin America will not only harm hemispheric relations, but may discredit broader ideas that are closely associated with the US.
Many of these pernicious side effects can already be perceived.
The first, and deepest, consequence consists in plummeting prestige of and respect for the US and the Bush administration in Latin American public opinion.
This was not the case at the beginning of Bush's term as president. On the contrary, many capitals south of the Rio Grande had high expectations for the team that moved into the White House in 2001.
After all, during his first nine months in office, Bush declared that he would devote tremendous attention to the hemisphere, and his actions seemed to back up his rhetoric.
He visited Mexico before any other country, renewed Temporary Protection Status for Central American immigrants, maintained President Bill Clinton's waiver of certain trade restrictions on countries and companies doing business with Cuba, and gave new impetus to the negotiations to create a Free Trade Area of the Americas.
Iraq changed all of this.
The invasion, the absence of any weapons of mass destruction or any link between Saddam Hussein and Al Qaeda, the pictures of Iraqi civilian casualties, and the subsequent scenes of humiliating mistreatment or torture of Iraqi prisoners and detainees have all contributed to a wide, deep, and probably lasting collapse of sympathy for the US in the region.
This can be measured in public opinion polls, in newspaper editorials, congressional resolutions, summit declarations, and street demonstrations.
A second effect follows directly from the first.
At least rhetorically speaking, government parties or leaders with a strong anti-US tilt are gaining ground, from Mexico City's Mayor Andrés Manuel López Obrador to the Frente Amplio party in Uruguay, from Schaddick Handal in the old FMLN in El Salvador to Evo Morales in Bolivia, not to mention governments like Hugo Chávez's in Venezuela and Nestor Kirchner's in Argentina.
These anti-US forces are not all necessarily left wing; they are, however, stridently critical of the US.
In all likelihood, they will become more vociferous and vituperative before they mellow, because public opinion seems to be rewarding stances and tones such as theirs.
America's friends in Latin America are feeling the fire of this anti-American wrath.
They are finding themselves forced to shift their own rhetoric and attitude in order to dampen their defense of policies viewed as pro-American or US-inspired, and to stiffen their resistance to Washington's demands and desires.
In many cases, American demands and desires are contrary to Latin interests, and should be resisted.
But in other cases, opposition to America's preferences is wrought by public sentiment and goes against the instincts of leaders who know better.
The Bush's administration has brought all of this upon itself.
It could have either avoided a monumental mistake, as Iraq has now proved to be, or it could have brought the United Nations on board from the outset, ensuring that military action, and the subsequent occupation and reconstruction of the country, would have broad multilateral support.
At worst, the Bush administration could have acted alone, but with sufficient force, skill, and diligence - and with the appropriate and imperative respect for human rights and international law - to get the job done quickly.
Instead, the Bush administration, for reasons that are increasingly perplexing, went at it alone.
Moreover, it did so without an endgame strategy, and with a level of force so "underwhelming" that it made the outrageous behavior at the Abu Ghraib prison almost inevitable.
By so doing, Bush's team left America's friends in Latin America - no less than in Europe and elsewhere - in a hapless situation: rightly unable and unwilling to support the US march of folly, and understandably reluctant to poison hemispheric relations in general with the type of strident criticism that local public opinion demands.
George W. Bush, International Anarchist
Europe’s Middle East Mission
LONDON – America’s gradual withdrawal from the Middle East puts increasing pressure on Europe to help foster peace in the region.
With complex and heated wars threatening to bring about the collapse of states like Syria and Iraq, and the long-simmering conflict between Israel and Palestine seemingly as far from resolution as ever, it is almost easier to ask what Europe should avoid than what it should do.
The starting point must be a simple, fundamental principle: Europe should not take sides.
Allowing preconceptions or emotional reactions to overshadow facts could make the situation much more dangerous.
Consider sectarian struggle between Sunni and Shia Muslims – now the prime mover of events in the Middle East.
Fueled by religious rhetoric and a bloody history, the conflict engenders a degree of passion and irrationality that is difficult to moderate.
As has been said: “Where the fires of faith are burning, the goddess of reason tiptoes silently out of the room.”
Likewise, when it comes to the Israel-Palestine conflict, Europe must recognize that both sides are hypersensitive.
If they are faced with criticism that they deem unfair, they will resort to the kind of truculence and bitterness that has long thwarted efforts to reach an agreement.
At least two-thirds of Israelis, recognizing the benefits that lasting peace would bring to the region, would prefer a two-state solution.
But the same majority fears that the Palestinians – with the split leadership of a relatively moderate Fatah under Palestinian Authority President Mahmoud Abbas and a Gaza administration under the implacable, terror-supporting leadership of Hamas – are not ready for a conventional peace and good neighborly relations.
Making matters worse, concessions on either side appear to leave no impression on the other.
On the contrary, they are usually met with lethal provocations that push any agreement even further away.
Palestine’s response to Israel’s release in December of 26 political prisoners – the third batch from a total of 104 detainees that Israeli Prime Minister Binyamin Netanyahu pledged to release when the peace talks were revived last summer – is a case in point.
Many of the prisoners had committed heinous acts of terror.
For example, Juma Ibrahim Juma Adam and Mahmoud Salam Saliman Abu Karbish firebombed a civilian bus, killing a pregnant woman, three of her preschool-age children, and the Israeli soldier who tried to save them.
Yet Abbas received them upon their release, praising them as heroes of the Palestinian people and examples for Palestinian youth.
In this fragile context, EU threats to halt business with Israeli companies present in the country’s West Bank settlements are problematic, as are academic and scientific boycotts against Israel.
Indeed, such moves would be dangerously close to favoring Palestine – a sure-fire way to turn Israel against cooperation.
Of course, given the role that the continual expansion of Israeli settlements in occupied Palestine has played in hampering progress toward peace, it merits a more thorough and sober examination by all relevant parties – especially Israel.
This requires, first and foremost, an understanding of the issue’s scale.
During previous rounds of negotiations, the Palestinian Authority agreed, in principle, to exchange up to 1.9% of West Bank land for Israeli territory.
This means that Israel would be able to annex some settlements adjacent to its border, while giving up only a small share of its land – an exchange to which it should be open when serious negotiations are underway.
The good news is that Tzipi Livni, Israel’s main negotiator, recently stated that Israel would not claim isolated settlements on Arab land.
Through all of this, Europe must present itself as an unbiased mediator.
If negotiators on both sides view it as a credible broker of a lasting and balanced agreement, they may be more receptive to each other’s concessions.
The same is true of religious conflicts throughout the Middle East.
Instead of getting sucked into historical enmities and impassioned disputes, Europe must be resolved to fight implacably against all forms of jihadism, while consistently supporting progress toward conflict resolution.
This does not apply only to diplomats; the European media also have a critical role to play.
New and traditional outlets alike must ensure that they portray the facts accurately and dispassionately, in order to foster a constructive, fair-minded discussion.
Those directly involved in the Middle East’s myriad conflicts do not need any help generating heat.
Georgia on Europe’s Mind
The era in which Europe could rely on America to wage war, make peace, and establish democracy in its own backyard is over.
With European Union enlargement, and as the recent Russian gas crisis demonstrated, that backyard now includes not just Ukraine, but Georgia as well.
Indeed, as in Ukraine, Georgia is undergoing a test of democracy that Europe cannot afford to ignore.
Georgia was the first post-Soviet country to stage a “color revolution,” and thus to demonstrate, with dignity and maturity, its people’s choice for democracy and European values.
The European Union flags that have flown on all Georgian public buildings since then signal a natural attachment, as old as the history of a country that, for the ancient Greeks, was an integral part of the world as it was then known.
Prometheus, Medea, the Amazons and, in neighboring Armenia, Noah’s Ark – the Europe of our myths starts here.
With its history, culture, and traditions – including its critical, independent, and even rebellious spirit within the former Soviet Union – Georgia would seem to be an ideal candidate for successful democratization.
So it is all the more worrisome that democratization there is foundering.
Everything seemed to have started well enough.
Political reforms, privatization, anti-corruption measures, a search for new leaders untainted by compromise with the former regime, and implementation of a pro-European foreign policy met no resistance.
But the totalitarian mindset has since resurfaced in leaders who, with their claim to represent the will of the majority, appropriate more and more power.
Like the ancient Greeks’ Hydra, Georgia’s political elite never ceases to die and be reborn.
The same people and governing methods that the “Rose Revolution” of November 2003 sought to defeat have reemerged at the center of power by using their personal networks, which extend outside Georgia’s borders, as well as their tremendous wealth and finely honed skills at political scheming and manipulation.
This bears little in common with the essence of democracy, which consists not merely in ballot boxes, but in the separation of powers.
The government meddles in the affairs of the parliament, which in turn seeks to micro-manage the government – including, in my case, the nomination of ambassadors and their daily routines!
Finally, and more seriously, the judiciary is not yet independent, undermining the rule of law and thus deterring badly needed private investment.
Georgia’s democracy exists in its head, but not yet in its body: citizens still spurn politics as a dirty pursuit, abandoning the ground to those who should have been retired long ago.
But the hope of democracy remains strongly rooted in Georgia’s people, civic organizations, and media.
Now is the time for Europe to ensure that this hope is not extinguished.
The US has already done as much as it can to support political stability in Georgia since independence.
To be sure, stability was not always identified with democracy during the rule of Eduard Shevardnadze, the former Soviet Union foreign minister who was ousted as our president by the Rose Revolution.
But Americans invested generously in the survival of democratic ideas and leaders.
Although the foundation backed by the financier George Soros did not fabricate the Rose Revolution, as Russian nationalists claim, it certainly nurtured, encouraged, and supported democracy’s preconditions.
But, to help consolidate its democracy, Georgia now requires support of a different nature, which Europe is better equipped to offer.
The models for the balance of powers, the functioning of the judiciary, and local democracy must be inspired by European forms, which are closer to Georgian reality than Anglo-Saxon models of the American type.
Europe’s rejection of this challenge would betray its fundamental duties in a place – small, Mediterranean, flexible, with old historical traditions – where democracy stands a much greater chance of success than in Ukraine, which is both huge and still very Soviet-minded, not to mention Central Asia.
Indeed, refusal to support Georgia’s struggling democracy would most likely postpone democratic progress in Ukraine, Belarus, even in Russia itself.
This clearly raises the stakes.
Russia, while never renouncing its imperial dreams and instruments of domination, was nonetheless coming to terms with the inevitability of democracy, at least on its margins.
But this hesitant acceptance of a certain normality in its relations with its neighbors has always been vulnerable to a sudden eruption of Russia’s famously irrational “derzhava” – an aggressive ethos that glorifies the state and asserts its strength by pouncing on weakness.
This is the key to understanding the recent Russian gas crisis.
Just as surely, any sign of a retreat from democracy in Georgia and other post-Soviet states will merely fuel Russia’s neo-imperial ambitions.
It is Europe’s responsibility to convince Russia that there is no hope of a return to the past.
Europe must assume this role not only to ensure the future independence of its energy supply, but also to demonstrate that European values of freedom, democracy, and justice between peoples have real force.
To succeed, Europe must equip itself with the necessary instruments: a large semi-public foundation to promote Europe and support political reform, a university to train future executives of nascent democracies, a police force, and an army of judges and magistrates to breathe life into the models that we want to emulate.
Above all, Europe needs conviction.
If Europe today cannot convince itself that it has a vital interest in its neighbors’ future, who will believe in Europe tomorrow?
Georgia Splits the Kremlin
MOSCOW – Dmitry Medvedev inherited the post of President of the Russian Federation from Vladimir Putin, and while Putin moved down the pecking order to become Prime Minister, speculation has abounded from the start of Medvedev’s presidency about an eventual split between Russia’s two highest leaders.
The first days of the conflict in Georgia crushed this hypothesis.
Indeed, Putin and Medvedev have worked in perfect tandem with respect to Georgia, cooperating and skillfully performing their different roles, with Putin cast in the lead role of the menacing god of a Russian reckoning, and Medvedev in the supporting role of a possible humanitarian peacemaker.
But the Georgia crisis revealed a new strategic force in the Kremlin that opposes both Putin and Medvedev.
We still cannot name its players, but we are aware of its interests and impact on events in the same way that astronomers discern a new but invisible planet by recording its impact on known and visible objects in space.
One indication that something new is affecting Russian policy is provided by those loyal Kremlin pundits who are known for their gift of unmistakably guessing their masters’ changing moods.
One after another, they have appeared on television and radio to denounce “provokers,” whom they dare not name, for “planning the incursion of Russian troops all the way to Tbilisi and the establishment there of a pro-Russian government.”
Another indirect indication of an ongoing struggle is the uncertain behavior of the Russian military in Georgia, which apparently is the result of contradictory orders from the Kremlin.
While the Russian army seems not to have engaged in any active measures since reaching its current positions, it pointedly remains within a half-hour of Tbilisi.
The line in the sand that President George W. Bush drew on the night of August 11, warning against Russian air strikes on Tbilisi’s airport and shortly thereafter sending Secretary of State Condoleezza Rice to visit Tbilisi, provoked a split in the Kremlin. The split divides those who are and are not concerned about the fate of Russian elites’ vast personal holdings in the West.
I call these camps, respectively, Russia’s global and national kleptocrats.
Both sides firmly agree that there is nothing that the “weakened and cowardly West” can do to restrain Russia, a nuclear and petroleum superpower, beyond financial retribution against those Russian rulers with vast assets abroad.
But the national kleptocrats seem to believe that they can live without overseas assets, or without educating their children and maintaining residences in the West.
Instead, they are content to own properties in elite residential areas around Moscow and in Russia, such as Rublyovka, Valday, and Krasnaya Polyana.
Both Putin and Medvedev (and their television propagandists) currently reflect the views and goals of the global kleptocrats.
Neither leader wants to capture Tbilisi.
Putin, of course, would have been glad to see Georgian President Mikheil Saakashvili, his sworn enemy, put in a cage.
But other, more down to-earth considerations are more important to him.
That said, Putin is keeping his options open to join the national plutocrats, in case their position dramatically strengthens.
If he crosses over to their side, he could even become their leader and triumphantly return to the throne that he formally abandoned only recently.
While no one yet knows the national plutocrats’ names, I believe that they are new, influential players in or associated with the Kremlin, and that they have now become bold enough to challenge both Putin and Medvedev.
Russia’s military chiefs, for whom it is psychologically difficult to be ordered by politicians to abruptly end a large-scale and successful military operation, are their natural allies.
I cannot predict who will win this growing confrontation.
But even if the global kleptocrats sustain their more “moderate” position on Georgia, theirs could be a Pyrrhic victory.
Every day and every hour, by means of their own propaganda, these globally minded kleptocrats, are setting the path to power for the nationalists.
In order to justify their authoritarian rule and camouflage from the Russian public their massive theft of the country’s resources, the global kleptocrats have already convinced ordinary Russians that they are surrounded by ruthless enemies who are trying to dismember and destroy Russia.
Now it is becoming increasingly difficult for them to explain why their wives and children are buying palaces in the capitals of countries that are supposedly Russia’s sworn enemies.
By contrast, the national kleptocrats’ position is more consistent.
They are not constrained by huge assets in the hated West.
It would not be difficult for them to convince ordinary Russians, who have already been primed by today’s xenophobic propaganda, that Tbilisi, Sevastopol, Astana, and Tallinn belong to Russia and should be taken by force.
Putin once said that “the greatest geopolitical catastrophe of the twentieth century was the fall of the Soviet Union.”
The national kleptocrats may soon start calling for its reversal, and they are in an increasingly strong position to do so.
German Reunification and the New Europe
PARIS – I began writing this column shortly after a remarkable anniversary.
October 3, 1990, was the effective date for the implementation of a stunning decision taken barely a month earlier.
On August 23, East Germany’s House of Representatives, the Volkskammer, voted for unilateral adherence by the East German Länder to West Germany’s Constitution.
Article 23 of the West German Basic Law permitted this, but neither West Germany’s government nor its Parliament had been consulted!
Reunification terms were subsequently defined in a Treaty signed in Berlin on August 31, 1990, and ratified by both the East and West German parliaments on September 20.
The Peace Treaty between the two German states and the four victorious Allies was signed in Moscow on the same day, and reunification was officially proclaimed on October 3.
These events, accomplished by three actors, shook the world – and changed it forever.
The first actor was Mikhail Gorbachev, who approved the act – the opening of the border between Austria and Hungary – that triggered the chain of events leading to reunification.
And it was Gorbachev who proclaimed that Soviet forces would not intervene to support troubled communist regimes against the will of their people – a declaration aimed directly at East Germany.
The second key figure was West German Chancellor Helmut Kohl, who rushed into the opened breach, overriding his Allies’ caution, while the third actor was the East German people, who rushed into the streets, regardless of the risks, to demonstrate and push reunification forward.
These events had a profound impact on relations between Germany and its allies.
The United States, Great Britain, and France all seemed to think that everything was happening too fast, that international security was at risk should the new Germany not confirm its membership in NATO (which Germany finally did).
But for a few months, there were fears that Russia would demand Germany’s withdrawal from the Alliance as a condition of its agreement to reunification.
While the US masked its doubts, Great Britain and France were less at ease.
British Prime Minister Margaret Thatcher limited herself to worried public statements, but French President François Mitterrand felt it necessary to improvise a visit to East Berlin, against the opinion of his Foreign Ministry and despite the French people’s great enthusiasm for German reunification.
Mitterrand hoped to slow the process and to link negotiations to some international guarantees.
His effort was a fiasco, remembered in Berlin to this day.
The motive of Mitterrand’s “mission” was to determine what precautions could or should be taken against the potential vagaries of this powerful but unpredictable people.
The response was eventually enshrined in the Maastricht Treaty, which extended the European Union’s competences to foreign affairs and judicial matters, making them partly supranational.
Great Britain and Denmark, however, insisted that these new competences be exercised on intergovernmental grounds only, not by the European Commission, and thus only through consensus.
France did not vote, so Great Britain and Denmark won by default.
Europe would take common action related to foreign affairs only on unanimous grounds.
Political Europe was stillborn at the moment of greatest potential.
This was a major disappointment for Germany, particularly as it could no longer count on France, its main ally in Europe.
In Germany itself, failure to achieve a politically integrated federal Europe baffled pro-integration political forces and dented the war generation’s moral authority.
The New Germany and its post-war generation felt tempted to recover a reunified, yet lonely, German identity, one with influence in Europe and worldwide.
As a result, reunified Germany naturally fell back on its old sphere of dominance, Eastern Europe.
But Germany’s leaders were uneasy with these changes.
In September 1994, two MPs from the majority Christian Democratic Union published a political statement on Europe, questioning its future, particularly the prospect of federalism.
A dismal silence greeted its publication, which left Germany’s pro-European establishment isolated and dispirited.
Indeed, in May 2000, Joschka Fischer, the ex-leader of the Green Party and German Foreign Minister, gave a long speech about the necessity of European integration.
The question about European federalism was posed to all member states, and none answered.
France, obviously in the limelight, remained silent, again leaving Germany to feel abandoned by its partners.
A process of erosion, catalyzed by British diplomacy, was under way.
It succeeded.
The prospect of genuine European integration on foreign affairs and defense issues was denied time and again, at each step of the successive negotiations for the Treaties of Amsterdam, Nice, the aborted constitutional project, and Lisbon.
Time passed, generations changed.
In today’s Germany, because no one with decisive power in business, finance, or government experienced the war, the European project is no longer viewed as conditioning Europe’s collective future.
These new leaders envision Europe only as a trade regime.
Meanwhile, German diplomacy is actively reconstructing the country’s economic and cultural spheres of influence, and not only in Eastern Europe.
The impact of this lost European perspective became clear in the autumn of 2008 when, in the aftermath of the sub-prime crisis and the failure of Lehman Brothers, Chancellor Angela Merkel’s first impulse was nationalistic and wholly anti-European.
There would be no common European plan to address the crisis, and no call for public funds.
Germany would protect its banks’depositors on its own and through private means.
Only the sheer gravity of the situation brought Germany back within the European realm for the subsequent G-20 meeting.
Twenty years after reunification was completed, Germany has become one of the world’s great democracies.
Many wish that it were also more European in its outlook and behavior.
But Germany does not bear the main responsibility for killing off the vision of political Europe.
Germany is Not Volkswagen
MUNICH – The Volkswagen scandal has raised questions about the German model of production.
If the success of the company’s diesel-powered vehicles was due in part to fraudulent efforts to conceal the amount of harmful pollutants they emitted, will similar revelations at other companies call into questions the country’s transformation from “the sick man of Europe” to an export-driven economic powerhouse?
Fortunately, the answer is almost certainly no.
Germany’s competitive advantage has less to do with chicanery than with how its firms are structured and the culture in which they operate.
Germany’s leading car company is an exception to the manufacturing rules that have driven the country’s success, not an example of them.
Indeed, Germany’s success is frequently cited as a model that other countries should emulate, and rightly so.
Since the beginning of the century, the country has grown to become one of the world’s leading exporters, outstripping all other major European countries.
From 2000 to 2013, Germany’s exports grew by 154%, compared to 127% for Spain, 98% for the United Kingdom, 79% for France, and 72% for Italy.
The leading explanation for Germany’s impressive recent export performance is wage restraint.
But, as a comparison with Spain reveals, faster wage growth elsewhere cannot be the entire story.
To be sure, from 2000 to 2008, German wages increased by 19%, compared to 48% in Spain.
But after the 2009 financial crisis, the roles were reversed.
From 2009 to 2013, German nominal wages increased by more than 14%, compared to 4% in Spain.
And yet, despite the more rapid rise in German wages, the country’s exports rebounded faster than Spain’s – or those of any other European Union country.
The most important factor behind Germany’s success is that the structure of its firms improves the quality of their products.
German exporters are organized in a way that is less hierarchical and more decentralized than other European firms.
This gives them several advantages.
Decentralization enables employees at lower levels of the corporate hierarchy to devise and implement new ideas.
As these employees are often closer to customers than those higher up, their collective knowledge about what the market is demanding is an important source of value.
Tapping this knowledge allows Germany to compete on quality, not price.
Indeed, if wage restraint were the main factor in Germany’s success, it would be hard pressed to outperform French, Italian, British, and Spanish exporters, who compete mainly on price by offshoring production to low-wage countries.
Instead, the German focus on quality allows its firms to charge higher prices and gain new customers.
When exporters are asked to rank their products relative to a market average, 40% of German exporters classify their goods as top quality, while only 10% of French exporters do so.
Decentralized management has helped German exporters triple their share of the global market for top-quality goods compared to those firms that did not reorganize.
Indeed, when I studied the top 1% of German exporters – the country’s export superstars – I found that they more than doubled their share of the world export market when they opted to decentralize their organizations.
This focus on quality could explain why German exports rebounded quickly after 2009, despite the rise in nominal wages.
Quality makes exporters less vulnerable to changes in price – including those driven by rising wages.
By contrast, those countries in which firms compete on price may have felt more pressure to move production abroad as domestic wages rose.
Germany’s relative insensitivity to rising costs could also explain why its government is comfortable with a strong euro, whereas France and Italy have been calling on the European Central Bank to weaken the currency.
Volkswagen, it turns out, took a different approach from that of most other German firms.
Rather than decentralizing power, CEO Martin Winterkorn sat at the head of a centralized, command-and-control organization in which he acted as a patriarch.
His desire to take the company to the very top of the global car industry, surpassing Toyota, put enormous strain on his managers to deliver growth.
The result – a decision to cheat on emissions tests – says less about Germany’s culture of manufacturing than about rot at the car company, beginning at the very top.
According to the World Value Survey, Germany is a high-trust society, in which citizens have confidence in one another’s behavior and act accordingly.
Indeed, the lesson of the Volkswagen scandal is that this culture may be necessary for its export model to work.
French and Italian exporters that introduced decentralized management did not increase their share of the global market for top-quality goods.
The likely reason is that providing division managers with greater autonomy not only frees them up to respond to market demands; it also allows them to put their own career interests above the wellbeing of the firm.
If Germany is to maintain its economic dominance, it will have to do something far harder than keeping wages in check or restructuring hierarchies.
It will have to ensure that the culture of integrity underlying its success remains unchanged by the pressures of global competition.
Germany, Europe, and Russia
European unity is indivisible.
When one nation is intimidated or ostracized, all are not free.
Every aspect of our shared culture, if not the last century of shared suffering, confirms that for us.
So a prime objective of the European Union is to promote stability and security through a dynamic structure of economic and political inter-dependence in which all nations have a vested interest.
But such a structure is lacking today between the EU and Russia, to the detriment of all the countries that lie between them.
Thus it is vitally important that Germany has made this a central issue for its EU presidency, which is just beginning.
With high prices for crude oil and natural gas bloating its coffers, Russia is once again aggressively confronting the small and still relatively weak states that fled the eroding Soviet empire 15 years ago.
Given the residual economic and institutional ties born of the Soviet era, Russia’s external influence in this region remains enormous.
But Russia is also now extending its grasp of energy markets beyond those of its immediate neighbors.
Europe’s relationship with Russia is too important for it to be developed in an ad hoc fashion through bilateral arrangements.
Today is Europe’s moment of maximum flexibility; as dependence on Russian energy supplies grows, the EU’s leverage weakens.
So Europe’s strategy cannot be to take the historically well-trodden path of least resistance.
Unfortunately, in the aftermath of the Cold War, it has often been assumed that Russia’s hostile intentions have disappeared, and foreign policy toward Russia has been conducted as if traditional diplomatic considerations no longer apply.
But, of course, they do apply.
Encouraging economic and political reform are important objectives, but they can never serve as a substitute for a serious effort to contain Russia’s deep-seated expansionism.
To be sure, Russia has legitimate security interests in what has been called its “near abroad.”
But Europe’s stability and commitment to economic growth across the continent require that these interests be satisfied without economic pressure or unilateral intervention.
A viable Russia policy for Europe must recognize Europe’s growing dependence on Russian energy resources.
To proceed otherwise would discount the most important question: the reliability of Russia as an energy supplier.
Despite controlling the world’s largest gas reserves, Russia’s state-owned monopoly Gazprom is not producing enough for an economy growing at 6% a year.
Gazprom’s three largest fields, which account for three-quarters of its output, are in decline.
This domestic shortage means that Gazprom is unable to increase supply to Europe, at least in the short term, unless it can buy gas at below-market rates from its Eastern European and Central Asian neighbors and in turn sell it to its European customers at market prices.
At the same time, Russia wants to cater to other markets, notably along its eastern frontier.
The problem is not a lack of reserves, but Gazprom’s investment strategy.
In recent years, the company has spent vigorously on everything but developing its reserves.
It has built or is building pipelines to Turkey and Germany, taken over an oil company, and sought footholds in European distribution markets.
Instead of investing in discovering oil, Gazprom has become the biggest media group in Russia.
All this is done in the name of creating and supporting a national energy champion which also serves as a foreign policy arm of the Kremlin.
Meanwhile, with investment in Gazprom’s core activity – production – steadily declining, a crisis is looming, one that requires the stewardship and steady hand of the EU.
Gazprom’s ambitions for gaining control of pipeline and energy transport infrastructure must be slowed, which requires allowing independent producers to prosper.
Indeed, independent producers already account for 20% of domestic gas sales in Russia.
To boost their output and allow them direct access to European markets will require market-based incentives.
Europe can help by insisting that Russia participate in the European Energy Charter, which calls for Gazprom to grant its production competitors access to Russian pipelines, and for all disputes to be settled by international arbitration.
European competition policy, which successfully brought giant companies like Microsoft into line to promote competition, could help to turn Gazprom into a normal competitor, too.
Europe’s leaders should engage in frank discussions about where European and Russian interests converge or differ, and these discussions should include regional neighbors that are both producer and transit nations, like my own country, Ukraine.
Moscow will understand a policy based on mutual respect for each other’s interests better than simple appeals to goodwill and friendship.
Russia should be welcome in institutions and agreements that foster cooperation, with reciprocal rights and responsibilities.
Russian reform will be impeded, not nurtured, by turning a blind eye to political and economic aggression.
The hard-fought independence of the former Soviet republics must not be tacitly traded away in acquiescence to Russia’s desire for regional hegemony.
Russia’s leaders are entitled to the world’s understanding as they struggle to overcome generations of Soviet misrule.
But they are not entitled to the sphere of influence that Russian tsars and commissars coveted for 300 years.
If Russia is to be a serious partner for Europe, it must be ready to accept the obligations of stability along with the benefits.
If Europe is to ensure its prosperity and energy security, it must demand nothing less.
Europe’s Franco-German Dream Team
PARIS – When the International Monetary Fund lowered its global growth forecast for 2014 and 2015 from 3.7% and 3.9%, respectively, to 3.3% and 3.8%, it cited the eurozone’s increasingly gloomy prospects, including significantly slower growth in Germany, as a leading cause.
After all, the eurozone still accounts for about 13% of world output at market prices – about the same as China.
Europe’s economic struggles are reflected in its political situation, with many European electorates now mired in a sense of hopelessness and sliding toward ideological extremes.
But a forthcoming report by two highly respected economists – Jean Pisani-Ferry, the French government’s Commissioner-General for Policy Planning, and Henrik Enderlein, a key leader of a reformist group of German economists – will propose a way forward.
The task facing Pisani-Ferry and Enderlein is to create a new reform strategy for Europe’s two largest economies, focusing on structural reforms in France and increased investment in Germany.
The hope is that the report, which will be made public on December 1, will provide a breakthrough that can revive, at long last, the eurozone’s growth engine.
The paper was commissioned a few days after the IMF’s Annual Meetings last month, at a gathering of the French finance and economy ministers, Michel Sapin and Emmanuel Macron, and their German counterparts, Wolfgang Schäuble and Sigmar Gabriel.
Though the meeting produced no concrete policy action – as the French daily Le Monde put it, “nothing was asked for, and nothing was obtained” – it could signal the beginning of more effective Franco-German cooperation, guided by the Pisani-Ferry/Enderlein report.
Such cooperation could not come at a better time.
A couple of weeks after the project was initiated, France and Italy submitted revised annual budgets to the European Commission, in which they demanded more fiscal room for maneuver.
The Commission now has until the end of this month to determine whether France has pursued reform diligently enough to avoid penalties for breaking its pledge to cut its budget deficit to less than 3% of GDP by next year.
An effective reform strategy would have to balance the need for budget restraint and macroeconomic stability with growth-enhancing policies.
When it comes to the latter, European Central Bank President Mario Draghi’s proposals in August – expanded monetary easing, structural reforms (particularly in France and Italy), and some fiscal expansion by countries like Germany – provide a useful framework to be supplemented with concrete measures.
The ECB governing council has already agreed, in principle, to use the first of these policy tools.
But monetary expansion alone will be inadequate to lift the eurozone out of stagnation.
Moreover, many of the structural reforms that are currently being considered or implemented, despite boosting growth in the long term, can have short-term contractionary effects.
This is particularly true of greater labor-market flexibility, a key asset for long-term growth that can lead to a short-term increase in unemployment.
That is why a more expansionary fiscal stance is also vital, with Germany leading the way in deploying increased public investment to “crowd in” private investment and boost competitiveness.
The IMF’s recent World Economic Outlook describes the success of this approach in recessionary environments.
Given that Germany and even France can borrow at record-low interest rates, any reasonably well-designed investment program will strengthen the public sector’s balance sheet.
And, with the eurozone running a current-account surplus of nearly $350 billion – which the euro’s recent decline will bolster further – there is no risk of a eurozone-wide balance-of-payments crisis.
The key is confidence.
Germany must trust that its agreement to loosen the eurozone’s fiscal belt will not lead to a slowdown of structural reforms, and countries like France need to know that excessive austerity will not exacerbate the impact of politically difficult structural reforms in the short run.
In this sense, top-level political support, voiced in a way that elicits the approval of Europe’s citizens, will be crucial.
Gabriel and Macron must lead the charge, backed by Sapin and Schäuble.
Crucially, German Chancellor Angela Merkel and French Prime Minister Manuel Valls – not to mention the new Commission – must also step in to offer genuine support for the project.
Waning confidence is a eurozone-wide problem, but the Franco-German relationship lies at its core.
And, as experience has shown, Germany and France can have a major impact when they work together.
The power of that relationship is what the Pisani-Ferry/Enderlein initiative represents – and what could, with sufficient political support, revitalize Europe.
Germany Is Not China
ROTTERDAM – There is little dispute that global imbalances in trade and capital flows are at least partly to blame for the financial crisis and ensuing recession that have rocked the world economy since 2008.
But not all imbalances are created equal, so it is important to weigh the consequences of individual countries’ external accounts for global economic stability and prosperity.
The conventional story of the crisis is well known: rising home prices fueled private consumption in the United States in the early 2000’s, despite tepid wage growth.
Together with the widening US budget deficit, America’s current-account deficit – already large – ballooned, mirrored by bulging external surpluses in China and, as oil prices spiraled, in oil-producing countries like the United Arab Emirates.
Europe, meanwhile, looked wonderfully well balanced, at least superficially, whether one considered all 27 European Union members or the 16-member eurozone.
While the US ran current-account deficits of up to 6% of GDP, the EU and the eurozone rarely had a deficit – or surplus – exceeding 1% of GDP.
In the past year, however, it has become all too clear that all this was just an illusion.
Beneath the surface, huge imbalances were building up, resulting in debt-fueled real-estate booms in the euro periphery.
Germany and the Netherlands ran surpluses in the range of 7% to 9% of GDP, balancing the current account for the eurozone as a whole.
But, by 2006, Portugal, Spain, and Greece were running current-account deficits of 9% of GDP or more.
The China-US relationship resembles that between a mail-order company and a not-so-solvent client.
The world’s most populous country is the largest foreign creditor of the US government and government-sponsored enterprises such as Fannie Mae and Freddie Mac.
China’s official foreign-exchange reserves of more than $2.5 trillion, stemming from double-digit current-account surpluses and capital inflows, are mostly invested in dollar-denominated bonds.
Some commentators argue that Germany plays the same role within the eurozone that China plays in “Chimerica,” the term coined by Niall Ferguson and Moritz Schularick to describe the symbiotic China-US economic and trade relationship.
If one focuses solely on the current-account side of the balance of payments, it may look that way.
In 2007, as its external surplus reached a record of 7.5% of GDP, Germany’s biggest bilateral surplus was with the US (€29.5 billion), followed by Spain, France, the United Kingdom, and Italy.
It ran its largest bilateral deficit (€21.2 billion) with China, followed by Norway, Ireland, and Japan.
But Germany did not accumulate foreign reserves the way that China did.
On the contrary, German foreign reserves actually declined between 2000 and 2008.
Whereas China is a large net recipient of foreign direct investment (FDI), Germany is a large net exporter of FDI.
China’s net FDI inflow totaled $94 billion in 2008, compared to Germany’s net FDI outflow of $110 billion.
Indeed, net FDI makes up about one-third of Germany’s capital account.
More than half of these investments are within other EU countries, with a further 30% going to the US.
According to the Bundesbank, German FDI accounts for almost six million jobs abroad. That number does not include the additional jobs resulting from increased economic activity in a region.
German’s surplus is thus less damaging than China’s, as it is used for investments that foster productivity gains, economic growth, and job creation – and that often include technology transfers that help to develop human capital.
The Chinese surplus, on the other hand, being heavily skewed towards US government bonds, primarily boosts personal consumption – a process whose apotheosis came in the early 2000’s, as the Bush administration’s tax cuts, together with cash-out home refinancing and home-equity loans, turned US sovereign debt into consumer credit.
Of course, the demand generated by Chinese credit also fosters economic growth, but mostly in China, owing to booming exports to the US.
With the bulk of its baby boomers retiring in the coming decade, Germany has a valid motive to save.
In view of the country’s shrinking workforce and already high capital-to-labor ratio, it is also understandable that German investors do not see many domestic investment opportunities, and instead choose to invest abroad.
It is, of course, unfortunate that German banks and pension funds lent money to debt-laden countries such as Spain, Greece, and Portugal on overly favorable terms, inflating asset bubbles that eventually had to burst.
As with any creditor who makes an unwise investment, the banks and pension funds should pay the price.
Nevertheless, the differences between China and Germany are far more substantial than the similarities – not least in terms of how they put their surpluses to use.
Lumping all surplus countries together – or all deficit countries, for that matter, will not help us find a way to rebalance the world economy.
Germany Must Defend the Euro
NEW YORK – Financial markets abhor uncertainty; that is why they are now in crisis mode.
The governments of the eurozone have taken some significant steps in the right direction to resolve the euro crisis but, obviously, they did not go far enough to reassure the markets.
At their meeting on July 21, the European authorities enacted a set of half-measures.
They established the principle that their new fiscal agency, the European Financial Stability Fund (EFSF), should be responsible for solvency problems, but they failed to increase the EFSF’s size.
This stopped short of establishing a credible fiscal authority for the eurozone.
And the new mechanism will not be operative until September at the earliest.
In the meantime, liquidity provision by the European Central Bank is the only way to prevent a collapse in the price of bonds issued by several European countries.
Likewise, Eurozone leaders extended the EFSF’s competence to deal with banks’ solvency, but stopped short of transferring banking supervision from national agencies to a European body.
And they offered an extended aid package to Greece without building a convincing case that the rescue can succeed: they arranged for the participation of bondholders in the Greek rescue package, but the arrangement benefited the banks more than Greece.
Perhaps most worryingly, Europe finally recognized the principle – long followed by the IMF – that countries in bailout programs should not be penalized on interest rates, but the same principle was not extended to countries that are not yet in bailout programs.
As a result, Spain and Italy have had to pay much more on their own borrowing than they receive from Greece.
This gives them the right to opt out of the Greek rescue, raising the prospect that the package may unravel.
Financial markets, recognizing this possibility, raised the risk premium on Spanish and Italian bonds to unsustainable levels.
ECB intervention helped, but it did not cure the problem.
The situation is becoming intolerable.
The authorities are trying to buy time, but time is running out.
The crisis is rapidly reaching a climax.
Germany and the other eurozone members with AAA ratings will have to decide whether they are willing to risk their own credit to permit Spain and Italy to refinance their bonds at reasonable interest rates.
Alternatively, Spain and Italy will be driven inexorably into bailout programs.
In short, Germany and the other countries with AAA bond ratings must agree to a eurobond regime of one kind or another.
Otherwise, the euro will break down.
It should be recognized that a disorderly default or exit from the eurozone, even by a small country like Greece, would precipitate a banking crisis comparable to the one that caused the Great Depression.
It is no longer a question whether it is worthwhile to have a common currency.
The euro exists, and its collapse would cause incalculable losses to the banking system.
So the choice that Germany faces is more apparent than real – and it is a choice whose cost will rise the longer Germany delays making it.
The euro crisis had its origin in German Chancellor Angela Merkel’s decision, taken in the aftermath of Lehman Brothers’ default in September 2008, that the guarantee against further defaults should come not from the European Union, but from each country separately.
And it was German procrastination that aggravated the Greek crisis and caused the contagion that turned it into an existential crisis for Europe.
Only Germany can reverse the dynamic of disintegration in Europe.
That will not come easily: Merkel, after all, read the German public’s mood correctly when she made her fateful decision, and the domestic political atmosphere has since become even more inhospitable to extending credit to the rest of Europe.
Merkel can overcome political resistance only in a crisis atmosphere, and only in small steps.
The next step will likely be to enlarge the EFSF; but, by the time that step is taken, France’s AAA rating may be endangered.
Indeed, by the time Germany agrees to a eurobond regime, its own AAA standing may be at risk.
The only way that Europe can escape from this trap is by acting in anticipation of financial markets’ reactions, rather than yielding to their pressure after the fact.
This would require intense debate and soul-searching, particularly in Germany, which, as the EU’s largest and best-rated economy, has been thrust into the position of deciding the future of Europe.
That is a role that Germany has been eager to avoid and remains unwilling to accept.
But Germany has no real choice.
A breakdown of the euro would precipitate a banking crisis that would be beyond the global financial authorities’ ability to control.
The longer Germany takes to recognize this, the higher the price it will have to pay.
Europe’s Economic Groupthink
FRANKFURT – During the recent hearing on the constitutionality of the European Central Bank’s measures to prevent the eurozone from falling apart, Andreas Vosskuhle, President of Germany’s Constitutional Court, raised an important question: Do non-German economists condemn the ECB’s outright monetary transactions (OMT) as unequivocally as all but one of the German experts testifying?
Of course, there are German economists (not to mention Chancellor Angela Merkel’s government) who support ECB President Mario Draghi’s policies.
Still, an overwhelming majority of German (and possibly Dutch and Finnish) economists seem to favor keeping the ECB on the sidelines in the eurozone crisis.
It’s a fiscal issue, the typical German economist says, and monetary policy will not help; on the contrary, activating it will only make matters worse.
Of course, everyone would prefer it if the line between monetary and fiscal policy had not become blurred as a result of the crisis.
But blindly sticking to principle would have been a highly risky option for the ECB.
It would have meant accepting in 2012 what has been called “redenomination risk” – economic newspeak for a eurozone breakup.
Nonetheless, by launching its OMT scheme, the ECB has committed German (and other northern European) taxpayers, without their parliaments’ approval, to a potential obligation to bail out – well, whom, exactly?
Indeed, it appears that the typical northern European taxpayer supports the typical stakeholder in northern European banks that are over-exposed to southern European debtors.
Likewise, German legal scholars interpret the ECB’s activities as being incompatible with European treaty provisions that prohibit bailouts and monetary financing of the debt of eurozone members.
And one can easily understand civil servants’ strong reluctance to disregard legal obligations and risk criminal liability for breach of trust.
Germany’s Constitutional Court, of course, does not write the rules.
But its obligation is to render a dispassionate reading of legal agreements, and it is renowned for doing so, which is one reason why it is the country’s most trusted institution.
Nonetheless, the ECB is right that it is faced with very different monetary conditions in different member states; indeed, the eurozone is akin to a badly working fixed-exchange-rate system, with all of the attendant risks.
Ultimately, limiting the ECB to its conventional tool kit amounts to accepting the risk of a eurozone collapse.
Against this backdrop, institutional investors self-insured – quite rationally – against a eurozone breakup by withdrawing behind safer borders.
With fiscal policy incapable of responding, the ECB was stuck with a second intermediation role: mitigating with its Target2 system the effects of European financial markets re-segmenting along national lines.
This is fiscal dominance in its purest form.
It is here that Vosskuhle’s question matters the most.
Debates within eurozone member states typically converge on what legal scholars call herrschende Meinung (“dominant opinion”), which, in turn, appears to reflect their countries’ status as creditors or debtors.
Reinforcing this, the typical career-conscious economist has little incentive to deviate.
The media are no remedy, as competition for ratings forces them to favor oversimplification over differentiation, complexity, and nuance.
In terms of substance – which the German Constitutional Court explicitly and intentionally avoids – the case for OMT has always been about preventing a liquidity crisis from morphing into a solvency problem, especially on the eurozone’s periphery. From an investor’s perspective, the mechanics of this are simple: all are reluctant to hold private or public debt from a country that is vulnerable to redenomination.
This by itself creates a rollover risk, which is why, for example, a small firm in Bozen (Bolzano, in Italy’s South Tyrol) is subject to higher financing costs than its competitor in Innsbruck (in Austria’s northern Tyrol).
The OMT scheme’s success depends on an unlimited capacity to intervene – to do “whatever it takes,” as Draghi famously put it.
Legally constraining this capacity would be self-defeating.
So, if the OMT scheme is not feasible under current treaty provisions, these provisions – which, after all, are of human, not divine, origin – must be amended.
But a treaty change would require engaging the European public – and, in several member states, submitting the proposed revisions to popular referenda.
Given how often such referenda have been defeated in recent years – for example, in France, the Netherlands, and Ireland – that is a scenario that everyone wants to avoid.
What is dispiriting is that we ponder these arguments so infrequently.
In fact, the minimal prerequisites for a working monetary union are not discussed upfront and transparently anywhere.
With politicians focused on the median voter, and a groupthink-generating media, the eurozone muddles through, just barely surviving.
But, if the eurozone is to be a sensible long-term proposition, mere survival is not enough.
The main justification for a monetary union cannot be the possibly disastrous consequences of its falling apart.
Even less convincing is the neo-mercantilist point that the eurozone would allow for indefinite current-account surpluses (it does not).
Originally, Europe’s monetary union was supposed to provide a stable framework for its deeply integrated economies to enhance living standards sustainably.
It still can.
But this requires acknowledging what the crisis has revealed: the eurozone’s institutional flaws.
Remedying them calls for a minimum of federalism and commensurate democratic legitimacy – and thus for greater openness to institutional adaptation.
Germany\u0027s Economic Malaise
A month before his re-election last month, Chancellor Gerhard Schröder seemed a certain loser.
People resented his failure to keep his promise from 1998 to reduce unemployment.
Now, with Schröder back in power, it's Germany's economy that seems the certain loser.
Chancellor Schröder's job, as everyone now recognizes, was saved by floods in eastern Germany and his opportunistic crusade against America's Iraq policy.
Each allowed him to preen successfully as a crisis manager.
But the price of switching the terms of the debate away from economics is that the Chancellor now lacks a mandate to undertake serious labor market and other reforms.
Indeed, Mr. Schröder committed himself strongly to trade union demands during his campaign.
At the beginning of his first term, Schröder appeared to be a modern social democrat who understood business.
When he ousted his first finance minister, Oskar Lafontaine, Germans became optimistic about reform and an economic upswing.
Those hopes have vanished.
Germany's vital small and medium-size businesses--the famous "mittelstand"--has not only lost its dynamism, but investment in this sector is grinding to a halt.
Together with today's weak consumer demand, this is a recipe for economic malaise.
Equally troubling, Schröder embraced the misguided reform proposals put forward by the "Hartz Commission," a panel of representatives from industrial and trade union interest groups.
Its proposals are based on the illusion that a key factor in German unemployment is an ineffective labor market bureaucracy that fails to match those searching for jobs with the many jobs on offer.
In reality, German unemployment is primarily a problem of a lack of jobs for low-skilled workers.
Germany's welfare system effectively creates a minimum wage for the low skilled that is so far above the market price that it effectively prices such workers out of jobs.
Implementing the "Hartz Reforms" has now become a primary government commitment that will distract attention and political will from the reforms that are really needed, namely an overhaul of Germany's social support system.
Making Germany's economic prospects even gloomier is a looming round of tax hikes.
An increase in gasoline taxes is set for January 2003.
Income tax relief due in 2003 has been postponed.
Post-election talk abounds about higher wealth taxes, business taxes, and an increase in value-added tax--precisely the opposite of what Germany's economy needs.
Tax hikes will not solve the government's fiscal problems, because weakening growth ultimately means less tax revenues.
Finance Minister Eichel's policy is bound to become as erratic as the fiscal policies pursued by the last Kohl government.
Efforts to find new revenues will chase spending cuts that in recent years have led to a decline in public-sector investment and education spending and a shift in responsibility for welfare spending from the federal to local governments.
Eichel's commitment to balancing the budget is certainly important, but balancing the budget is no substitute for a medium and long-term strategic perspective for fiscal policy that promotes sustainable growth and recognizes the need to invest in Germany's ailing education system.
In many German schools today the youngest teachers are well beyond their mid-forties, while universities find it increasingly hard to attract young researchers and faculty.
Europe's experience over the past 10 years teaches that fiscal consolidation must be supported by growth-friendly tax and spending policies.
Both spending and taxes must be used to strengthen the incentives to work, invest, and innovate.
Even if Schröder wants to push for reform, his political position will make such efforts difficult.
His thin majority in the lower house of the Bundestag faces an upper house dominated by the opposition Christian Democratic Union/Christian Social Union (CDU/CSU).
So any proposal will be subject to tricky negotiations and the need to cater to the special interests of länder governments, further reducing the prospect of serious reforms being undertaken.
This last point has broader implications.
Germany's political center, where elections are won and lost, remains undefined and unstable concerning policy priorities.
So long as the campaign's focus was on economics, Schröder's government was a clear loser.
When the focus shifted to flood relief and foreign affairs, a majority in the center embraced Schröder's disregard of international commitments and alliances.
This suggests that a majority of Germans still do not yet perceive economic weakness as more important than other, more short-term issues.
It also signals, correctly, that both main opposition parties did not appreciate the implications of Schröder's victory in 1998. For much too long, they saw it as an unhappy accident to be corrected at the first opportunity.
So neither the CDU/CSU nor their liberal allies, the Free Democrats, offered convincing policy prescriptions for dealing with Germany's economic problems.
Indeed, Edmund Stoiber's economic policies as premier of Bavaria were (and are) no less interventionist than those of Schröder.
The opposition's main campaign claim was a suggestion that the right is more competent than the left in managing the economy.
But this was merely rhetoric.
The right's lack of clear alternative policies made it easy for voters to turn back to the Chancellor when he decided not to talk about the economy.
The next four years will challenge both the government and opposition.
Chancellor Schröder will be confronted by the need finally to address Germany's real economic problems.
The CDU/CSU and the FDP will be forced to present convincing alternatives to Schröder's policies.
Until one side or the other acts decisively, Germany will remain economically weak and politically unpredictable.
Germany’s Europe Deficit
BERLIN -- Germany used to be at the heart of European integration.
Its statesmen used to assert that Germany had no independent foreign policy, only a European policy.
After the fall of the Berlin Wall, its leaders realized that German reunification was possible only in the context of a united Europe, and they were willing to make some sacrifices to secure European acceptance.
Germans would contribute a little more and take a little less than others, thereby facilitating agreement.
Those days are over.
The euro is in crisis, and Germany is the main protagonist.
Germans don’t feel so rich anymore, so they don’t want to continue serving as the deep pocket for the rest of Europe.
This change in attitude is understandable, but it has brought the European integration process to a halt.
By design, the euro was an incomplete currency at its launch.
The Maastricht Treaty established a monetary union without a political union – a central bank, but no central treasury.
When it came to sovereign credit, euro zone members were on their own.
This fact was obscured until recently by the European Central Bank’s willingness to accept the sovereign debt of all eurozone members on equal terms at its discount window.
As a result, they all could borrow at practically the same interest rate as Germany.
The banks were happy to earn a few extra pennies on supposedly risk-free assets and loaded up their balance sheets with the weaker countries’ government debt.
The first sign of trouble came after the collapse of Lehman Brothers in September 2008, when the European Union’s finance ministers decided, at an emergency meeting in Paris that October, to provide a virtual guarantee that no other systemically important financial institution would be allowed to default.
But German Chancellor Angela Merkel opposed a joint EU-wide guarantee; each country had to take care of its own banks.
At first, financial markets were so impressed by the guarantee that they hardly noticed the difference.
Capital fled from the countries that were not in a position to offer similar guarantees, but interest-rate differentials within the eurozone remained minimal.
That was when countries in Eastern Europe, notably Hungary and the Baltic States, got into trouble and had to be rescued.
It was only this year, when financial markets started to worry about the accumulation of sovereign debt, that interest-rate differentials began to widen.
Greece became the center of attention when its new government revealed that its predecessors had lied about the size of the 2009 budget deficit.
European authorities were slow to react, because eurozone members held radically different views.
France and other countries were willing to show solidarity, but Germany, traumatized twice in the twentieth century by runaway prices, was allergic to any buildup of inflationary pressures.
(Indeed, when Germany agreed to adopt the euro, it insisted on strong safeguards to maintain the new currency’s value, and its Constitutional Court has reaffirmed the Maastricht Treaty’s prohibition of bailouts.)
Moreover, German politicians, facing a general election in September 2009, procrastinated.
The Greek crisis festered and spread to other deficit countries.
When European leaders finally acted, they had to provide a much larger rescue package than would have been necessary had they moved earlier.
Moreover, in order to reassure the markets, the authorities felt obliged to create the €750 billion European Financial Stabilization Fund, with €500 billion from the member states and €250 billion from the IMF.
But the markets have not been reassured, because Germany dictated the Fund’s terms and made them somewhat punitive.
Moreover, investors correctly recognize that cutting deficits at a time of high unemployment will merely increase unemployment, making fiscal consolidation that much harder.
Even if the budget targets could be met, it is difficult to see how these countries could regain competitiveness and revive growth.
In the absence of exchange-rate depreciation, the adjustment process will depress wages and prices, raising the specter of deflation.
The policies currently being imposed on the eurozone directly contradict the lessons learned from the Great Depression of the 1930’s, and risk pushing Europe into a period of prolonged stagnation or worse.
That, in turn, would generate discontent and social unrest.
In a worst case scenario, the EU could be paralyzed or destroyed by the rise of xenophobic and nationalist extremism.
If that were to happen, Germany would bear a major share of the responsibility.
Germany cannot be blamed for wanting a strong currency and a balanced budget, but as the strongest and most creditworthy country, it is unwittingly imposing its deflationary policies on the rest of the eurozone.
The German public is unlikely to recognize the harm German policies are doing to the rest of Europe because, the way the euro works, deflation will serve to make Germany more competitive on world markets, while pushing the weaker countries further into depression and increasing the burden of their debt.
Germans should consider the following thought experiment: withdrawal from the euro.
The restored Deutsche Mark would soar, the euro would plummet.
The rest of Europe would become competitive and could grow its way out of its difficulties but Germany would find out how painful it can be to have an overvalued currency.
Its trade balance would turn negative, and there would be widespread unemployment.
Banks would suffer severe losses on exchange rates and require large injections of public funds.
But the government would find it politically more acceptable to rescue German banks than Greece or Spain.
And there would be other compensations; German pensioners could retire to Spain and live like kings, helping Spanish real estate to recover.
Of course, this is purely hypothetical because if Germany were to leave the euro the political consequences would be unthinkable.
But the thought experiment may be useful in preventing the unthinkable from actually happening.
Germany’s Fiscal Follies
PRINCETON – All over the world, public-sector deficits are exploding.
Governments face massive costs rescuing banks and businesses hit by the financial and economic crisis. There is a universal consensus that Keynesian stimulus is needed.
At the same time, policymakers are looking more and more nervously for an “exit strategy.”
They know that they cannot run deficits forever, but they do not want to say when the painful exit should begin.
Germany is different, not because it is not spending now, but in how it talks about the future.
The German government has taken a peculiarly aggressive line in attacking deficits and in trying to lay down a firm exit strategy.
Chancellor Angela Merkel has criticized the United States Federal Reserve and the Bank of England for “quantitative easing,” which has in practice allowed the central bank to monetize many types of government and non-government debt.
The German government also successfully passed a constitutional law requiring the government deficit to be capped at 0.35% of GDP in 2016 and eliminated by 2020.
Both the attacks on excessively easy central banks and the effort to limit government debt are enormously popular in Germany.
But they have been widely condemned by economists worldwide (including in Germany) as nonsense.
Merkel is not the first German politician to adopt a hardline stance on monetary policy and debt – nor is she the first to face a torrent of international criticism.
In the late 1970’s, when the world was facing a mixture of stagnant growth and inflation, Chancellor Helmut Schmidt insistently told British, French, and American leaders that their deficits were wrong and dangerous.
He believed that the solution to stagflation “was that those with deficits should get rid of them.”
His fellow leaders began to think Schmidt arrogant.
The most obvious explanation for the German peculiarity is an obsession with the lessons of German history, particularly the two episodes of runaway inflation in the twentieth century, in which holders of monetary assets were expropriated.
The Great Inflation of the early 1920’s, which culminated in a hyper-inflation in which prices changed several times daily, destroyed the middle classes and bred the political instability that eventually opened the way to Hitler’s rise.
Hitler repeatedly promised that he would use any means to fight inflation, but his militarism also led to the expropriation of savings.
Even though only quite old people have personally experienced even the second of these episodes of monetary destruction, their political resonance is still acute. Germany’s mass circulation Bild Zeitung warned in a headline in March 2009 of inflation at a time when all price signals pointed in the opposite direction.
Merkel has acute political antennae, and her response struck a deep chord with popular sentiment.
A second rationale for Germany’s policy is demographic.
Budget limitation appeals not just to the old, but is especially attractive to young people, who worry that they will be made to pay the costs of caring for an increasingly elderly and dependent population.
There is a third explanation for Germany’s particular stance.
With governments around the world (including Germany’s) accumulating unprecedented levels of peacetime debt, markets are worrying about sustainability.
Some crisis-prone countries such as Latvia are already unable to sell any more debt.
But even large and stable countries such as Britain and the US are finding auctions of government paper increasingly problematic.
Big investors, particularly Asian countries’ reserve funds, are increasingly nervous.
A cast-iron mechanism to ensure that the debt build-up does not continue forever is appealing as a way of withstanding increasingly fraught competition for funding.
Germany will look like a better credit risk, thereby allowing it to fund its current budget deficits more easily and cheaply.
There is obviously some element of bluff in legislating balanced budgets.
Extravagant promises to behave better at some future point are not completely credible, although they often have a short-term impact.
In 1985, the US Congress passed the Gramm-Rudman Act, which provided for automatic spending cuts in the case of deficits.
It was ruled unconstitutional, but it began a process of budget consolidation.
The European Union’s Maastricht criteria, which cap deficits at 3% of GDP, belong in the same category: a measure that could be relaxed as the political pressure changed, but which did help initially in reducing deficits and borrowing costs.
The real problem with the German measure is not so much our lack of knowledge about what the world will look like in 2016 or 2020 as it is that Germany is politically and economically bound to European integration, and thus tied to states with very different budgetary perspectives and priorities.
As a result, it makes little sense for Germany to compete to have more solid budgets than its neighbors: all European countries have tied themselves together.
When Germans tie their hands with constitutional budget laws, they are in effect untying their neighbors’.
Europe’s monetary unification of the 1990’s was supposed to be accompanied by fiscal convergence and harmonization.
When budgets move in different directions, pressures shift to regional policy (to redistribute income) and to monetary policy (to boost growth).
The prospects for friction between EU members escalate.
The best hope for Germany is that people – both German voters and Chinese fund managers – will take such promises seriously now, but forget about them in ten years.
Germany’s Five Election Unknowns
On September 18, Germany will hold an election that contains at least five unknowns.
If it were an equation, it would be impossible to solve.
Fortunately, politics is not mathematics – though, unfortunately, this means that there are no clear solutions.
Indeed, even in the opaque terms of contemporary politics, the German case is particularly vexing.
The first unknown is why the election is taking place at all.
Chancellor Gerhard Schröder had another fifteen months to go before the end of the electoral term, and it seemed that he had no difficulty mobilizing his admittedly slender majority in parliament.
To be sure, the big issues that the Federal President listed when he dissolved the Bundestag are real.
The fiscal position is, by German standards, unacceptable, and public debt at current levels is contrary to the European Union’s Stability and Growth Pact and a burden on future generations.
Demographic developments alone require major reforms of social policy.
Moreover, the institutions of the federal system do not permit decisions to be made either expeditiously or clearly.
None of this is new, nor will it be changed by an election.
So it is not obvious to many people why they are voting.
The second unknown concerns what, exactly, separates the major parties in this contest.
The Social Democrats (SPD) and the Christian Democrats (CDU) are both committed to the “social market economy,” to the essentials of corporatist economic management, to maintaining the entitlements of the welfare state, and to the EU and NATO.
True, the campaign has brought out nuances that may turn out to be important.
Schröder’s SPD uses the word “social” a little more emphatically than it did in the last seven years.
The opposition CDU leader, Angela Merkel, has linked its program to the ambitious ideas of an outsider, former Constitutional Court judge Paul Kirchhof, seeking a dramatic simplification of the tax system.
In international affairs, Merkel is more skeptical about European enlargement, notably to include Turkey, than Schröder.
Merkel, an East German by background, is also more cautious in her approach to Russia.
But these are nuances, not fundamental differences.
The third unknown is the performance of the Left Party, a new formation positioned to the left of the SPD and built on East Germany’s ex-communist PDS, with the addition of a significant number of dissident Social Democrats in the West who proclaim themselves to be defenders of the welfare state.
The Left Party is led by two talk show politicians, Gregor Gysi, the former PDS leader, and Oskar Lafontaine, the ex-leader of the SPD, who do not have much more in common than a record of political failure and a talent for populist speeches.
But this clearly appeals to those who feel that they have been neglected and forgotten.
The popular vote for this party – which could be 10% – may well determine what kind of coalition is formed after the election.
The fourth unknown is therefore what the next government will actually do.
It will clearly be a government without the new Left Party.
It will also be a government without the Greens, who continue to have a devoted, if limited, clientele, but are now regarded by many as a luxury that Germany can no longer afford.
This leaves two possibilities: a coalition between the CDU, its Bavarian sister party, the Christian Social Union, and the liberal Free Democrats, or a grand coalition between the SPD and the CDU.
The latter is what most Germans want; the former is what they are most likely to get.
But most people doubt whether it even makes a difference, and they are probably right.
There is a widespread desire for change, including a change of government, but there is an equally widespread belief that nothing momentous will happen.
This underscores the final, and deepest, unknown concerning the upcoming election: who will put a confused and directionless Germany back on a road to initiative and growth?
Who will make Germany an engine of Europe again rather than a gloomy passenger?
What Germany needs is, in fact, fairly clear.
It needs to accept that globalization is above all an opportunity, one that must be grasped by confident, innovative, and entrepreneurial people.
Germans need to understand again – as they did so well after 1945 – that their future lies in their own hands, as citizens, rather than in the power of some remote State.
Above all, Germany must appreciate that the changes it needs are improvements that would guarantee its future security.
Perhaps what it requires most is a touch of Margaret Thatcher’s policies of the 1980’s, combined with Tony Blair’s rhetoric of today.
But it remains to be seen whether, or when, that might be on offer.
Germany’s Five Shocks
Over the last decade, Germany has been the slowest growing economy in the European Union, and Europe has been the slowest growing continent in the world.
From 1995 to 2005, Germany will have grown by only 14.6%, while the old EU on average will have grown by 24%, the US by 39.9%, and the world economy by 45.6%.
Why has Germany performed so badly?
One theory, endorsed by the head of Germany’s ruling Social Democratic Party, Franz Müntefering, is that Germany is already where the others still want to be.
Slow German growth, he maintains, is a sign of natural convergence.
But this theory is not convincing.
Germany has recently been overtaken in terms of per capita income by several EU countries, including Ireland, the UK, the Netherlands, and France, and is still growing more slowly than all of them.
Another, more plausible theory is that over the past fifteen years there have been various external challenges or shocks that have hit the country simultaneously.
Rigid as it was, with an extensive welfare system and an over-regulated labor market, Germany was unable to react to these shocks and ran into trouble.
This theory recalls that of the British historian Arnold Toynbee, according to which empires collapse because they are unable to react to external challenges.
The first shock was intensified globalization, which brought a lot of new low-wage competition.
Although globalization is a gradual process, it gained momentum when China decided to play the game.
China is ten times the size of Japan, and Japan was not easy to deal with, either.
German precision instruments and optical equipment, for example, lost their competitive edge when Japan entered the game.
The second shock was EU integration, including the northern and southern enlargements.
The dismantling of the EU’s internal borders boosted each country’s market size and brought about the predicted economies of scale.
But this helped Europe’s small countries more than the big ones, and it implied more competition for Germany, Europe’s biggest economy.
Think of Nokia, the mobile phone maker.
Due to the economies of scale that the common market made possible, Nokia was able to exploit its inventions fully, while Germany’s Siemens recently decided to give up on the mobile phone market.
The third shock was the euro, which has induced a rapid convergence of long-term interest rates, which in some countries had been five to seven percentage points above the German level.
Freed from exchange-rate risk, international investors no longer demanded a risk premium from these countries and were willing to provide funds to all of them under the same favorable conditions that previously had been reserved for Germany.
This is good for Europe, because it helps improve the allocation of capital and stimulates growth by transporting German savings to the remote and previously disadvantaged regions of the euro zone.
But it is of doubtful benefit to German workers who also would have liked to cooperate with that capital.
The fourth shock was eastern EU enlargement, which has brought extraordinary chances for trade and investment in the east, but has also brought massive low-wage competition.
On average, wage costs in the ten countries that joined the EU in 2004 are only 14% of the West German level.
Low-wage competition has led to substantial outsourcing and off-shoring activities that have kept German firms competitive by reducing their demand for domestic labor.
As neither Germany’s unions nor its welfare state would accept falling wages, the result was higher unemployment and slower growth.
The fifth shock was German unification, which is a failure in economic terms.
GDP per working-age person in East Germany had been 61% of the West German level in 1996, but it is now only 59%.
The slow growth of the eastern part of the country has pulled down the Germany-wide average, while the enormous demand for public funds in the east has increased public debt.
The weak fiscal position has in turn undermined investors’ confidence, with obvious implications for economic growth.
All five shocks constitute historical developments that are good for the world as a whole, but problematic for Germany.
In order for the country to meet the challenges and to continue to grow, it would have to make its labor markets flexible.
Only if wages adjust downward to accommodate the new international environment can German workers become competitive again, so that the country returns to a higher employment level, exploiting its human capital up to the capacity constraint.
The new government that voters will most likely elect in September will be confronted with the difficult task of confronting Germans with reality and pushing through the necessary reforms.
Only then will we know whether Germany can meet the Toynbeean challenge it is facing.
Germany’s Gold Delusion
WASHINGTON, DC – Germany’s gold is on the move.
For the first time since official gold transactions became more transparent, the Bundesbank has given notice that a significant portion of its holdings will be transferred home from France and the United States.
Ostensibly, this is just a matter of monetary housekeeping.
But why now?
One possibility is that German policymakers believe that we are approaching an every-country-for-itself scenario – and only gold guarded by one’s own police is worth anything.
But this is more than far-fetched.
The world in which financial trust breaks down completely between Germany and France or Germany and the US is one in which we have much bigger problems than where a country’s gold is located.
International trade would collapse, and major global companies would struggle to sell their products.
Having more gold at home, rather than in the vaults of the New York Fed, would be neither here nor there in such a situation.
Does Germany think that its gold will be subject to sanctions or some form of confiscation – as sometimes happens to rogue nations?
Again, this is hardly plausible.
Countries like Iran and Venezuela work long and hard to become international pariahs.
Germany, by contrast, is a mainstay of the democratic world.
That is not going to change.
Perhaps German central bankers sense a longer-term shift in international preferences away from the dollar and want to be ready in some fashion.
This is plausible in terms of a future decline in the dollar’s importance as a reserve asset and safe haven.
Reserve holdings of dollar assets (primarily by central banks) were worth around 2% of US GDP in 1948 and about the same in 1968.
Today, such holdings are at least 15% of US GDP – with some estimates as high as 30%.
Much of this rise stems from growing prosperity and current-account surpluses in middle-income countries.
When you sell more to the world than you buy, you accumulate claims on the rest of the world – and you need to decide the form in which you want to hold those claims.
At present, the world holds a lot of US dollar assets, and greater diversification of portfolios in coming years would not be shocking.
There is certainly much discussion of the renminbi’s rising international role – an issue on which Arvind Subramanian, my colleague at the Peterson Institute for International Economics, continues to do the most interesting work.
But moving Germany’s gold is hardly helpful in this regard.
What would help is to turn the euro around – in the sense of convincing investors that the common currency has a bright future, because it is underpinned by a stronger monetary, fiscal, financial, and political union.
When seen in this light, the physical location of gold is purely a distraction.
It is as if German political elites think that they are back in the era of the gold standard.
But, even back then, what mattered was the amount of gold you owned – not where it was actually stored.
The broader and more worrying trend is the politicization of central banking.
Leading German political figures are becoming increasingly suspicious of the European Central Bank, while also worrying aloud about the US Federal Reserve’s monetary policy.
Their motivating fear is the prospect of inflation.
But the real fear is not inflation itself – that is, that prices might rise at a surprisingly fast clip this year or next.
Rather, the fear is that central banks will not see inflation coming until it is too late, and that this will cause a major upward shift in inflation expectations.
Again, moving gold does nothing to keep inflation under control or change the behavior of central banks.
The link between currencies and gold was irrevocably broken in 1971, when US President Richard Nixon decided to suspend the convertibility of dollars into gold for central banks.
We have lived in a purely fiat money system ever since – meaning that our money’s value is not backed by gold or any other physical item.
Such monetary systems can succeed only as long as the central bank can credibly commit to keeping inflation under control.
German politicians would thus seem to be suffering from some serious delusions about the importance of gold and the effects of shifting its location.
But they are right to worry about the ECB’s policies: Providing unconditional credit to eurozone governments is unlikely to make these governments more careful.
There is a real danger that so-called “fiscal dominance” will undermine monetary policy and make it much harder to control inflation.
The German fascination with gold is a red herring.
Germany’s Hegemony Trap
MUNICH – The prolonged Greek debt crisis and the ongoing influx of refugees into Europe have ignited a debate about Germany’s role within the European Union.
Has Germany become the European hegemon?
And if not, should it assume that role, as some commentators have suggested, in order to prevent the European project from failing?
‎The idea of German hegemony – as should be clear to any student of history – is self-defeating.
Instead, Germany should assume the position of Europe’s “Chief Facilitating Officer,” as German Foreign Minister Frank-Walter Steinmeier aptly called it, focused on strengthening the EU by working to create the conditions necessary for a truly common European foreign and security policy, one that proactively prepares the continent to meet the challenges it confronts.
By throwing its full weight into this task, Germany would not only promote Europe’s influence in the world; it would also deflate the discussion of hegemony.
The 2007 Treaty of Lisbon was based on the idea that the EU’s prosperity and security depend on its members looking beyond their parochial interests and act jointly, in their common interest.
In order to achieve this, the treaty created posts, such as the President of the European Council and the High Representative of the Union for Foreign Affairs and Security Policy, whose incumbents could speak and act on behalf of the entire EU.
As former Belgian Prime Minister Paul-Henri Spaak once noted, “There are only two types of states in Europe: small states, and small states that have not yet realized that they are small.”
The new offices established by the Treaty of Lisbon have helped the EU achieve some important successes – most notably during negotiations with Iran and with Serbia and Kosovo.
But there has been no consistent effort to strengthen their powers.
Far too often, when it comes to dealing with foreign-policy crises and strategic challenges, EU institutions are assigned a minor role.
The Ukraine crisis, where France and Germany have taken the lead, is but one example of this.
And yet, even as Euro-skepticism has been rising across the continent, there remains widespread popular support for a common, more powerful European foreign policy.
In a recent article in the Financial Times, former Polish Foreign Minister Radosław Sikorski outlined how this might be achieved.
When a foreign-policy issue arises, member states should assess whether it would be most appropriately addressed by individual states or at the European level.
In the vast majority of cases in which common action would be preferable, member states would provide full support to the EU.
As a result, European Council President Donald Tusk, EU High Representative Federica Mogherini, and EU Commission President Jean-Claude Juncker would play leading roles in European foreign policy.
Unfortunately, this is far from established practice.
The EU’s members tend to pursue dissonant policies, weakening, rather than strengthening, Europe’s global position.
And there are few things the rulers of China and Russia enjoy more than playing the EU’s members off against one another.
Germany has an opportunity to provide a counterweight to long-standing British objections to a unified foreign policy.
By putting its considerable influence in the service of a cohesive, strategically focused foreign and security policy, Germany would simultaneously achieve two key objectives: a stronger and more capable EU and a more European Germany.
A good starting point would be to act on longstanding calls for closer integration of EU members’ armed forces.
Germany should put its full weight behind “pooling and sharing” military resources, even if the United Kingdom is resistant to such an effort.
After all, the time when EU member states went to war alone ended more than three decades ago, with the Falklands War.
“Poor old Germany,” Henry Kissinger once quipped. “Too big for Europe, too small for the world.”
Fortunately, Germany has a way out of this trap. As a proactive and constructive part of the EU, Germany is big enough for the world, and at the same time not too big for its neighbors.
As Steinmeier and German Minister of Economic Affairs Sigmar Gabriel, recently wrote, “Only together, and only at the European level, will we be able at all to find rational solutions.”
The End of German Hegemony
BRUSSELS – Without anyone quite noticing, Europe’s internal balance of power has been shifting.
Germany’s dominant position, which has seemed absolute since the 2008 financial crisis, is gradually weakening – with far-reaching implications for the European Union.
Of course, from a soft-power perspective, the mere fact that people believe Germany is strong bolsters the country’s status and strategic position.
But it will not be long before people begin to notice that the main driver of that perception – that Germany’s economy continued to grow, while most other eurozone economies experienced a prolonged recession – represents an exceptional circumstance, one that will soon disappear.
In 12 of the last 20 years, Germany’s growth rate been lower than the average of the other three large eurozone countries (France, Italy, and Spain).
Although German growth surged ahead during the post-crisis period, as the graph shows, the International Monetary Fund predicts that it will fall back below that three-country average – and far below the eurozone average, which includes the smaller high-growth countries of Central and Eastern Europe – within five years.
To be sure, Germany still has some apparent advantages.
But a closer examination shows that they are not quite as positive as they seem.
For starters, Germany is close to full employment – in sharp contrast to the double-digit unemployment rates that prevail in much of the eurozone.
But the combination of full employment and low growth rates actually points to an underlying problem: very slow productivity growth.
Add to that a shrinking pool of workers capable of meeting the needs of Germany’s labor market – the country’s population is aging, and the arriving refugees lack the needed skills – and the German economy seems set for a protracted period of sluggish performance.
Another apparent advantage is Germany’s large financial reserves, which not only cushioned it from the crisis, but also conferred upon it considerable political sway.
Indeed, because German funds were indispensable in bailing out the eurozone’s deeply stressed periphery, the country became central to all efforts to address the crisis.
Germany’s consent was needed to create Europe’s “banking union,” which entailed the transfer of supervisory powers to the European Central Bank and the creation of a common fund to resolve failing banks.
And German resistance contributed to a delay in the ECB’s intervention in bond markets; when the ECB finally did launch its bond-buying program, it did so with Germany’s tacit approval.
But now that interest rates are at zero, Germany’s large savings are no longer doing it much good.
And with the financial storm having largely abated, Germany lacks new opportunities to demonstrate its political clout, both within and outside the eurozone.
Indeed, whereas Germany, owing to its deep involvement in Central and Eastern European economies, was a key player in the Minsk agreements that were meant to end the conflict in Ukraine, it has little influence in the Middle Eastern countries that are occupying the world’s attention today.
While many have highlighted Germany’s political leadership in the refugee crisis, the reality is that being thrust into the front line of that crisis, without having much influence over the factors that are driving it, is placing considerable strain on the country.
Germany is now, for the first time, in the position of having to ask its EU partners for solidarity, as it cannot absorb all the newcomers alone.
As usual, however, perceptions are lagging behind reality, which means that Germany is still widely viewed as the eurozone’s most powerful force.
But, as the global business cycle accelerates Germany’s return to the “old normal,” the power shift within Europe will become increasingly difficult to ignore.
Germany, which exports a large volume of investment goods, benefited more than other eurozone member countries from the investment boom in China and other emerging economies.
But emerging-economy growth is now slowing considerably, including in China, where demand is shifting from investment toward consumption.
This tends to undermine German growth and benefit southern European countries, which export more consumer goods.
The ongoing shift in Europe’s economic and political power dynamics is likely to have a major impact on the EU’s functioning – and especially that of the eurozone.
For example, without a strong Germany to enforce the eurozone’s fiscal strictures and urge the implementation of difficult but necessary structural reforms, countries may lose their motivation to do what is needed to ensure fairness and stability in the long term.
If inflation remains low, the ECB might feel freer to pursue further rounds of monetary stimulus, undermining fiscal objectives further.
In short, we may be headed toward a less “Germanic” economic policy in the eurozone.
While that might enhance the EU’s popularity in the periphery, it could increase resistance to EU membership in Germany – a country that, despite its waning economic strength, remains an important piece of the integration puzzle.
Germany’s Neighborhood Watch
FRANKFURT – On a recent trip to Germany, I was struck by two distinct narratives.
One narrative features a robust German economy with low unemployment, strong finances, and the right competitive position to exploit the most dynamic segments of global demand.
The other narrative describes an economy that is encumbered by never-ending European debt crises whose perpetrators seek to shift their responsibility – and their financing needs – onto Germany’s pristine balance sheet.
Both narratives are understandable.
But they cannot co-exist forever.
After all, it is difficult to be a good house in a deteriorating neighborhood.
Either the neighborhood improves, or the value of the house declines.
And it matters a great deal which narrative prevails – for Germany, for Europe, and for the global economy.
Germany today is reaping the benefits of many years of responsible domestic economic management.
In addition to maintaining sound public finances, German leaders implemented difficult structural reforms aimed at improving international competitiveness, including painful labor-market reforms.
As a result, Germany is one of the few advanced economies today that has created many jobs and maintained financial stability.
In other words, it is the AAA of AAAs.
Yet Germany is also part of a highly challenged neighborhood, if not its anchor.
Its neighbors include countries – most notably on the eurozone’s periphery – that are struggling.
They have high overall unemployment (and alarmingly high youth joblessness), and are unable to grow on their own power.
In some cases, they also face solvency questions, and are far from achieving the socio-political consensus needed to get their economic houses in order.
To state the obvious, this contrast between Germany and its neighborhood is very awkward.
It fuels endless internal and external tensions, encourages finger pointing, and promotes a loud and disruptive blame game.
And all of this distracts attention from the need to compete in a rapidly changing global economy.
The longer all of this persists, the more it tears at the fabric of European unity.
Accordingly, European officials need to continue to make steadfast progress in three major areas:
·&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Improve individual countries’ domestic policy mix in a manner that targets debt sustainability through both growth promotion and deficit reduction, especially in the most vulnerable peripheral economies;
·&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Enhance the eurozone’s internal financial circuit breakers to reduce the risk of disruptive financial feedback loops and destabilizing multiple equilibria; and
·&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Strengthen the eurozone’s institutional underpinnings, as well as its mechanisms for policy coordination and peer review.
None of these steps is easy; and they are certainly not automatic.
Moreover, to maximize their effectiveness, they must be implemented simultaneously; indeed, this is a situation in which one plus one plus one equals more than three.
And this will not happen unless two other, even more controversial steps are taken.
First, Germany must play an even larger role in conducting and coordinating the eurozone’s policy responses.
I know that many Germans are uncomfortable with this.
But there is no workable alternative for Europe’s well-being – and, therefore, that of Germany.
The European Union’s institutions still lack the authority and credibility needed to take on this role.
The European Central Bank does not possess the proper structural policy tools, and it has already been forced to bear burdens that, arguably, are beyond its strictly defined mandate.
And there is no other economy that comes close to Germany in size, influence, and economic and financial health.
Second, the eurozone, led by a Germany that is working closely with France, needs to clarify decisively what it intends to look like in the medium term.
There are two alternatives, both sensitive and controversial, and the choice is for Europeans alone to make and sustain; but they must make it if they are decisively to put behind them the risk of eurozone fragmentation.
On one hand, they can decide to let politics dominate economics.
This is not easy for politicians to sell, especially in the core countries (particularly Germany, Finland, and the Netherlands), as it would involve large multi-year subsidies to the periphery – or the analytical equivalent of the difficult decision made over 20 years ago to reunify Germany at a currency parity.
Here, however, there is the added difficulty of a potential conflict between regional politics and national democratic processes.
On the other hand, they can decide to allow economics to prevail.
Here, eurozone members would collectively opt for a smaller and less imperfect union that includes countries with more similar initial conditions – economically, financially, politically, and socially.
And, again, there is no easy way to do this, especially given that the eurozone was intentionally designed with no exit in mind.
Until these difficult and controversial decisions are made, periods of relative tranquility in Europe are likely to be interrupted by the recurrent eruption of financial instability and bouts of political bickering and dithering.
And the longer this continues, the greater the risk that Germany’s neighborhood will erode the robustness of what the country has painstakingly built.
Ultimately, there can be no strong Germany without a stable eurozone; no stable eurozone without a strong Germany; and no global economic stability without both.
It is time for Europeans to make the difficult longer-term choices that are critical to sustaining and enhancing their historical regional project.
Germany’s Pathological Export Boom
Germany is the world’s industrial bazaar.
No other country can offer its international clients such a broad variety of industrial products.
Germany has 450 hidden world champions for niche products, and is home to 15 of the 20 biggest trade fairs in the world.
It is also the world’s top exporter of merchandise and the second-largest exporter of goods and services.
But Germany is gradually becoming a bazaar economy in a different sense, because nowadays it specializes in packaging and selling its products, while outsourcing an ever-larger share of its high value-added manufacturing to low-wage countries.
In other words, Germany’s role in the world economy is shifting from that of a producer to that of a merchant.
As a result, its exports contain an ever-increasing share of imported goods and services and the share of domestic value-added in its exports per unit of output is rapidly declining.
This does not mean that the German-made share of exports is falling in absolute terms. It only means that the total volume of German exports has been rising faster than the total German value-added in those exports.
Is this good or bad?
A favorable assessment cannot rest on the fact that the overall German value-added in exports has been growing because this is simply an effect of the German specialization in export-related production.
When a country specializes in a certain area, capital and labor move into that area at a rate faster than they move into other areas – indeed, the growth of export-related sectors may come at the cost of a decline in other areas.
Simply put, there is such a thing as excessive specialization.
To assess whether excessive specialization has occurred in Germany, we must focus on the labor market, for it is here that the effect of specialization is most visible.
Unfortunately, there is no reason to be optimistic.
From 1995 to 2004, Germany lost a total of 1.09 million full-time equivalent jobs in manufacturing and trade.
At the same time, no new jobs were created in the rest of the economy.
On the contrary, employment outside manufacturing and trade declined, so that the economy as a whole suffered a net loss of 1.26 million full-time equivalent jobs.
In fact, since the fall of communism, the percentage decline in German industrial employment has been larger than in any other OECD country.
In part, this was due to the decline in the former East Germany.
But even western Germany holds the second-lowest rank of all developed countries.
The automobile and electrical engineering industries have been at the forefront of the bazaar economy.
To remain price competitive, they have had to rely on imported components.
The manufacture of electrical products, such as chips and passive devices, has quite often been shifted completely to Asia, while even automobiles that are still assembled in Germany rely heavily on components produced in Eastern Europe.
At bottom, the coincidence of unemployment and booming exports can be explained by the high and rigid wages from which Germany still suffers.
As a consequence of its welfare state and aggressive unions, Germany has had the highest hourly labor costs in the world for most of the last twenty years; only recently has Denmark taken the lead due to a revaluation of the krona.
Excessive wages destroy the labor-intensive upstream product stages too fast and also impairs other labor-intensive sectors like textiles, simple services, tourism, and construction.
As a result, these labor-intensive sectors must release a lot of labor and capital, which push into the capital-intensive export sectors that are better able to cope with high wages.
But, while these sectors therefore grow especially fast, their high capital intensity means that they cannot fully employ the released labor, with the result that some of the unemployed workers have nowhere to turn but the welfare state.
At the same time, since returns to capital are kept low by high wages, very little investment occurs.
The excess of savings over investment flows abroad as capital exports.
Economic growth and job creation slow, while exports soar.
Astonishingly, many interpret Germany’s export boom and current-account surplus, which measures these capital exports, as an indicator of the strength of Germany as an investment location.
But, according to the Bundesbank, net investment abroad (including financial investment) has already roughly matched domestic investment in recent years.
As the international division of labor proceeds further, the import content of German products will continue to increase, which means that rising exports will lead to fewer domestic jobs and less income growth.
Unless and until German workers accept the need for greater flexibility in the face of global competition, export profits will continue to be invested abroad, reducing overall production costs – and reinforcing the bazaar economy at home.
Germany’s Sunshine Daydream
COPENHAGEN – One of the world’s biggest green-energy public-policy experiments is coming to a bitter end in Germany, with important lessons for policymakers elsewhere.
Germany once prided itself on being the “photovoltaic world champion”, doling out generous subsidies – totaling more than $130 billion, according to research from Germany’s Ruhr University – to citizens to invest in solar energy.
But now the German government is vowing to cut the subsidies sooner than planned, and to phase out support over the next five years.
What went wrong?
There is a fundamental problem with subsidizing inefficient green technology: it is affordable only if it is done in tiny, tokenistic amounts.
Using the government’s generous subsidies, Germans installed 7.5 gigawatts of photovoltaic (PV) capacity last year, more than double what the government had deemed “acceptable.”
It is estimated that this increase alone will lead to a $260 hike in the average consumer’s annual power bill.
According to Der Spiegel, even members of Chancellor Angela Merkel’s staff are now describing the policy as a massive money pit.
Philipp Rösler, Germany’s minister of economics and technology, has called the spiraling solar subsidies a “threat to the economy.”
Germany’s enthusiasm for solar power is understandable.
We could satisfy all of the world’s energy needs for an entire year if we could capture just one hour of the sun’s energy.
Even with the inefficiency of current PV technology, we could meet the entire globe’s energy demand with solar panels by covering 250,000 square kilometers (155,342 square miles), about 2.6% of the Sahara Desert.
Unfortunately, Germany – like most of the world – is not as sunny as the Sahara.
And, while sunlight is free, panels and installation are not.
Solar power is at least four times more costly than energy produced by fossil fuels.
It also has the distinct disadvantage of not working at night, when much electricity is consumed.
In the words of the German Association of Physicists, “solar energy cannot replace any additional power plants.”
On short, overcast winter days, Germany’s 1.1 million solar-power systems can generate no electricity at all.
The country is then forced to import considerable amounts of electricity from nuclear power plants in France and the Czech Republic.
When the sun failed to shine last winter, one emergency back-up plan powered up an Austrian oil-fired plant to fill the supply gap.
Indeed, despite the massive investment, solar power accounts for only about 0.3% of Germany’s total energy.
This is one of the key reasons why Germans now pay the second-highest price for electricity in the developed world (exceeded only by Denmark, which aims to be the “world wind-energy champion”).
Germans pay three times more than their American counterparts.
Moreover, this sizeable investment does remarkably little to counter global warming.
Even with unrealistically generous assumptions, the unimpressive net effect is that solar power reduces Germany’s CO2 emissions by roughly eight million metric tons – or about 1% – for the next 20 years.
When the effects are calculated in a standard climate model, the result is a reduction in average temperature of 0.00005oC (one twenty-thousandth of a degree Celsius, or one ten-thousandth of a degree Fahrenheit).
To put it another way: by the end of the century, Germany’s $130 billion solar panel subsidies will have postponed temperature increases by 23 hours.
Using solar, Germany is paying about $1,000 per ton of CO2 reduced.
The current CO2 price in Europe is $8.
Germany could have cut 131 times as much CO2 for the same price.
Instead, the Germans are wasting more than 99 cents of every euro that they plow into solar panels.
It gets worse: because Germany is part of the European Union Emissions Trading System, the actual effect of extra solar panels in Germany leads to no CO2 reductions, because total emissions are already capped.
Instead, the Germans simply allow other parts of the EU to emit more CO2.
Germany’s solar panels have only made it cheaper for Portugal or Greece to use coal.
Defenders of Germany’s solar subsidies also claim that they have helped to create “green jobs”.
But each job created by green-energy policies costs an average of $175,000 – considerably more than job creation elsewhere in the economy, such as infrastructure or health care.
And many “green jobs” are being exported to China, meaning that Europeans subsidize Chinese jobs, with no CO2 reductions.
Germany’s experiment with subsidizing inefficient solar technology has failed.
What governments should do instead is to focus first on increasing research and development to make green-energy technology cheaper and more competitive.
Production should be ramped up later.
In the meantime, Germans have paid about $130 billion for a climate-change policy that has no impact on global warming.
They have subsidized Chinese jobs and other European countries’ reliance on dirty energy sources.
And they have needlessly burdened their economy.
As even many German officials would probably attest, governments elsewhere cannot afford to repeat the same mistake.
Germany’s Zero Hour
The 8th of May always brings back memories of 1945, because for me the end of the war in Europe really was a zero hour.
When the first Soviet soldiers came up our little street in the Western suburbs of Berlin, we knew that the great slaughter was coming to an end.
My father who had been in the resistance would come back from Brandenburg prison.
I no longer needed to hide as I had done after my release from a Gestapo camp at the beginning of February.
Somehow a new life would begin.
First, however, was the chaos.
The Nazis were gone, and the occupation powers had not yet set up any kind of administration.
We all went looting the local shops;
I still have the slim volumes of romantic poetry which my 16-year-old self took from a bookshop.
The occupation troops went on a rampage.
Food was hard to find.
My father was taken from prison and transported straight to central Berlin, where he was told to set up the office for Berlin’s energy supply, a task that had to be done literally from nothing.
There was no power, no transport, no organised life of any kind for a period.
Was it defeat or liberation?
For Germans this question was not easily answered, though clearly our family was liberated in every sense.
The question then was this: liberated for what?
Where do we go from here?
“You must help,” my mother said to me.
So I offered my services to the local Soviet authority and helped distribute basic foodstuffs to a small number of outlets in our district of Zehlendorf.
Five weeks later, however, I was back at school.
I carried a special pass as a “victim of fascism,” but others showed their Iron Cross which they had got for late military action.
Some were refugees from the East, many had their homes destroyed in air raids, almost all grieved for lost loved ones.
Yet the zero hour did not last.
It is almost unbelievable, but three years later the liberalising policies that followed a currency reform set in motion what came to be known as Germany’s economic miracle.
To be precise: this is how West Germany’s economic miracle began.
The German example shows just how different occupation powers can be.
In the Soviet zone of occupation, progress was slow and above all coupled with a new enslavement.
Even concentration camps like Buchenwald changed their guards and inmates but remained in use.
The Western powers in Germany, on the other hand, pursued, after a short period of non-fraternisation, a policy of controlled empowerment.
Within a year of the end of the war there were indigenous administrations, within two years elections.
Democracy was not just preached but practised, and it could build on German traditions.
All this, to be sure, was not just benevolence on the part of the occupying powers.
It was also a result of the incipient Cold War, and the desire of both sides to consolidate “their” part of Germany.
Even so, there are lessons to be learned from the process.
Two of these deserve to be mentioned.
One is economic and has to do with the Marshall Plan.
It is perhaps regrettable but nonetheless real that democracy finds roots more easily if economic conditions improve.
Such improvement requires above all self-help, the actions of individuals who will not accept the misery of the zero hour for long.
Such self-help can be encouraged by policies (which is what Ludwig Erhard, the father of the “social market economy” did in Germany), but some starting capital helps.
This is where the Marshall Plan of American support became crucial.
Similarly, the European Union has helped, and continues to help the postcommunist countries on their way.
The other lesson is moral, and it is more difficult.
The Nuremberg trials exposed the guilt of the Nazi leaders beyond doubt, if indeed any such doubt was left in people’s minds.
While these were important, however, Germany did not begin its arduous path away from zero hour with concern for the past.
Indeed, the Adenauer years after 1949 were described by many as years of “restoration” because too many minor Nazi figures had remained in their jobs.
In some ways, the country simply ignored their past and moved forward.
Years later when a market economy and political democracy were established, Germany did turn toward “coping with the past”, and did so very effectively.
Germany’s Nazi past is uniquely horrible, so comparisons with other countries with blighted histories are misleading.
Still, in its own way Poland has followed a similar path after 1989: first the new, then the attempt to come to terms with the past.
On balance this is a better method of dealing with a nation’s zero hour than doing things the other way round.
In Europe then, the 8th of May 2005 is an occasion to look back in sorrow and anger.
It is also an occasion to look forward with pride in the achievements of recent decades and therefore for hope.
Masalah Ekonomi yang akan Timbul dari Rencana Schäuble
ATHENA – Krisis di Eropa siap memasuki fase paling berbahaya.
Setelah memaksa Yunani untuk menerima kesepakatan “extend-and-pretend” lanjutan pada dana talangan (bailout), garis pertempuran baru tengah dibentuk.
Dengan masuknya pengungsi yang membongkar kerusakan yang disebabkan oleh prospek ekonomi yang berbeda dan tingginya jumlah pengangguran pemuda di sekitar Eropa, konsekuensinya akan berbahaya, sebagaimana diungkapkan dengan jelas baru-baru ini oleh tiga politisi Eropa – Perdana Menteri Italia Matteo Renzi, Menteri Ekonomi Perancis Emmanuel Macron, dan Menteri Keuangan Jerman Wolfgang Schäuble.
Renzi sudah hampir menghapuskan, setidaknya secara retoris, aturan-aturan fiskal yang selama ini dipegang teguh oleh Jerman.
Dalam tindakan perlawanan yang luar biasa, ia mengancam jika Komisi Eropa menolak anggaran nasional Italia, ia akan mengirimkan ulang tanpa membuat perubahan.
Ini bukan pertama kalinya Renzi mengasingkan pemimpin Jerman.
Memang sudah bisa diperkirakan bahwa pernyataan beliau ini mengikuti upaya berbulan-bulan yang dilakukan oleh menteri keuangan dalam kabinetnya, Pier Carlo Padoan, untuk menunjukkan komitmen Italia kepada “aturan” Eurozone yang didukung oleh Jerman.
Renzi memahami bahwa kepatuhan terhadap sifat hemat yang terinspirasi oleh Jerman akan mengarahkan perekonomian dan keuangan publik Italia menuju stagnasi lebih dalam, disertai dengan penurunan rasio utang terhadap PDB.
Sebagai politisi yang sempurna, Renzi tahu bahwa ini adalah jalur cepat menuju bencana elektoral.
Macron sangat berbeda dari Renzi, baik dari segi gaya maupun substansi.
Seorang bankir yang beralih menjadi politis, ia adalah satu-satunya menteri di kabinet Presiden François Hollande yang menggabungkan pemahaman serius atas tantangan-tantangan ekonomi makro di Perancis dan Eropa dengan reputasi Jerman sebagai reformis dan teman bicara yang terampil.
Jadi ketika ia bicara tentang perang agama yang akan terjadi di Eropa, antara kaum Calvinis dari bagian timur laut Jerman dan kaum Katolik di sebagian besar wilayah pinggiran Eropa, kini saatnya untuk memperhatikan.
Pernyataan Schäuble baru-baru ini tentang trajektori ekonomi Eropa yang sekarang juga menyoroti kuldesak Eropa.
Selama bertahun-tahun, Schäuble telah memainkan permainan untuk mewujudkan visinya akan arsitektur optimal di Eropa yang dapat dicapai dalam keterbatasan politik dan budaya yang selama ini diterima begitu saja.
“Rencana Schäuble”, itu sebutan yang saya berikan, menyerukan panggilan untuk kesatuan politik terbatas untuk mendukung euro.
Singkatnya, Schäuble memilih pembentukan Eurogroup yang resmi (terdiri dari menteri keuangan negara-negara Eropa), dipimpin oleh seorang presiden yang memegang hak veto – disahkan oleh Kamar Euro (Euro Chamber) yang terdiri dari anggota dewan/parlemen dari negara-negara anggota Eurozone – dengan anggaran nasional.
Sebagai pengganti atas hilangnya kendali terhadap anggaran mereka, Schäuble menawarkan Perancis dan Italia – sasaran utama dari rencana ini – janji atas adanya small Eurozone-wide common budget yang akan membiayai sebagian skema pengangguran dan penjaminan deposito.
Kesatuan politik yang berpegang pada displin dan minimalis ini tidak akan dapat diterima di Perancis, dimana kaum elit selalu menolak pelepasan kedaulatan.
Ketika politisi seperti Macron telah bergeser jauh untuk menerima pentingnya mengalihkan kekuasaan atas anggaran nasional ke “pusat”, mereka takut bahwa rencana Schäuble ini meminta terlalu banyak tapi menawarkan terlalu sedikit; besarnya pembatasan pada kewenangan fiskal Perancis dan anggaran bersama yang secara makro ekonomi tidak signifikan.
Akan tetapi, walaupun Macron bisa membujuk Hollande untuk menerima rencana Schäuble, masih belum jelas apakah Kanselir Jerman Angela Merkel akan menyetujuinya.
Gagasan Schäuble sejauh ini gagal membujuknya, atau bahkan Bundesbank (dimana presidennya, Jens Weidmann, sangat bersikap negatif terhadap setiap tindakan mutualisasi fiskal, bahkan versi terbatasnya yang mana Schäuble siap berkorban untuk kendali atas anggaran Perancis dan Italia).
Terperangkap antara Kanselir Jerman yang enggan dan Perancis yang tidak sehat, Schäuble memperkirakan bahwa turbulensi yang diakibatkan oleh keluarnya Yunani dari Eurozone akan membantu meyakinkan Perancis, serta rekan-rekan satu kabinetnya, akan pentingnya menerapkan rencana tersebut.
Kini, sembari menunggu “program” Yunani yang terkini untuk runtuh karena kontradiksi yang sifatnya pasti, kementerian keuangan Jerman tengah menyiapkan pertempuran yang akan datang.
Pada bulan September, Schäuble membagikan ikhtisar tiga proposal kepada rekan-rekannya di Eurogroup guna mencegah krisis euro yang baru.
Pertama, obligasi pemerintah negara-negara Eurozone harus memuat klausa yang memudahkan “bail-in” bagi pemegang obligasi.
Kedua, aturan-aturan Bank Sentral Eropa (ECB) harus direvisi untuk mencegah bank-bank komersial dari memperhitungkan obligasi tersebut sebagai aset-aset yang ultra-aman dan likuid.
Ketiga, Eropa harus menghilangkan gagasan penjaminan deposito bersam dan menggantikannya dengan komitmen untuk membiarkan bank gagal ketika bank tidak lagi mampu memenuhi aturan-aturan penjaminan utang menurut ECB.
Penerapan proposal-proposal ini katakanlah di tahun 1999 mungkin bisa membatasi aliran modal ke pinggiran segera setelah penetapan mata uang tunggal.
Sayangnya, pada tahun 2015, mengingat utang-utang publik dan kerugian perbankan yang dihadapi negara-negara anggota Eurozone, skema tersebut akan mengakibatkan resesi yang semakin buruk di pinggiran dan hampir pasti menyebabkan pecahnya integrasi moneter.
Jengkel dengan Schäuble yang mangkir dari rencananya sendiri atas kesatuan politik, Macron baru-baru ini menyampaikan rasa frustasinya: “kaum Calvinis ingin membuat orang lain membayar sampai akhir masa hidup mereka”, keluhnya.
Aspek yang paling mengganggu dari pernyataan Renzi dan Macron ini adalah keadaan putus asa yang mereka sampaikan.
Penolakan Renzi atas aturan fiskal yang mendorong Italia ke dalam spiral utang-deflasi yang dapat dihindari ini dapat dimengerti; namun, karena tidak adanya proposal tentang aturan-aturan alternatif, hal ini pun tidak menghasilkan apa-apa.
Kesulitan Macron ialah nampaknya tidak ada serangkaian reformasi yang bisa ia tawarkan kepada Schäuble untuk meyakinkan pemerintah Jerman agar menerima tingkat daur ulang surplus yang diperlukan untuk menstabilkan Perancis dan Eurozone.
Sementara itu, komitmen Jerman terhadap “aturan-aturan” yang tidak sepadan dengan ketahanan Eurozone akan melemahkan politisi-politis Perancis dan Jerman yang sejak dulu hingga sekarang mengharapkan aliansi dengan negara-negara ekonomi terbesar di Eropa.
Beberapa diantaranya, seperti Renzi, merespon dengan penolakan.
Lainnya, seperti Macron, dengan enggan mulai menerima bahwa kerangka kelembagaan dan gabungan kebijakan Eurozone yang sekarang pada akhirnya akan mengarah pada pemutusan atau penyiksaan dalam berbagai bentuk divergensi ekonomi yang berkelanjutan.
Hikmah di balik awan badai ekonomi ini adalah proposal-proposal minimalis mengenai kesatuan politik, seperti rencana Schäuble, akan gagal.
Reformasi kelembagaan secara makro ekonomi yang signifikan kurang-lebih akan menstabilkan Eropa.
Dan hanya aliansi warga negara pan-Eropa yang demokratis yang dapat menciptakan dorongan besar yang dibutuhkan agar reformasi tersebut dapat bekerja.
Germany’s Four Neins
BERLIN – Germany’s stance toward Europe has become one of rejection and disengagement.
Its policymakers deny the eurozone’s crisis-ridden countries a more active fiscal policy; refuse to support a European investment agenda to generate demand and growth; have declared a fiscal surplus, rather than faster potential growth, as their primary domestic goal; and have begun turning against the European Central Bank (ECB) in the struggle against deflation and a credit crunch.
On all four counts, Germany is wrong.
To be sure, Germany is justified in rejecting narrow-minded calls by France and Italy for unconditional fiscal expansion.
After all, fiscal stimulus can work only if it supports private investment and is accompanied by much more ambitious structural reforms – the kind of reforms that France and Italy are currently resisting.
But Germany has all of the leverage it needs to implement the stability-oriented reforms that it wants for Europe.
For starters, Germany, together with the European Commission, can compel France to pursue deeper reforms in exchange for more time to consolidate its deficit.
Germany cannot, however, indulge its obsession with supply-side reforms without also pursuing growth-enhancing policies.
As Germany knows from its own experience in the early 2000s, the benefits of supply-side reforms – namely, improved competitiveness and higher long-term growth rates – take a long time to emerge.
Time is a luxury that Europe does not have.
With every month that the economy loses productive capacity, the likelihood of stagnation and deflation rises.
The key to ending the European crisis is a stimulus plan that addresses deficiencies on both the supply and demand sides.
That is why Germany’s refusal to help find a way to finance the proposed European investment agenda – which, for a limited time, would fund productive private investment – is a mistake.
Equally problematic is Germany’s focus on maintaining a fiscal surplus.
With projections for German GDP growth this year and next revised downward by more than 0.6 percentage points in the last few months, the government could be forced to initiate a pro-cyclical fiscal policy to achieve its goal, inducing even lower growth at home and throughout the eurozone.
Given that the German economy’s output gap remains negative, the government should be implementing expansionary fiscal policy that targets the country’s infrastructure weaknesses.
In this sense, Finance Minister Wolfgang Schäuble’s plan to spend an additional €10 billion ($12.5 billion) on public investment in 2016-2018 is a step in the right direction.
But, at just 0.1% of Germany’s annual GDP, Schäuble’s scheme looks more like an attempt to quiet criticism from the rest of Europe than a genuine policy shift.
Germany’s fourth policy mistake is its apparent withdrawal of support for the ECB.
Over the last seven years, the ECB’s actions have helped Germany’s economy and taxpayers as much as those of its neighbors.
Moreover, the claim that the ECB’s purchases of asset-backed securities amount to “toxic loans” that transfer risk to German taxpayers is unfounded; after all, there have been almost no defaults since 2008.
Germany’s leaders need to recognize this – and to defend the ECB publicly from baseless fear mongering.
Failure to do so may reflect an effort to forestall the rise of the far-right anti-European political forces, particularly the Alternative for Germany.
But this strategy merely plays into the party’s hands.
If Germany refuses to take a more reasoned approach, it risks undermining the ECB’s credibility, thereby reducing the effectiveness of its measures.
If that happens, the ECB may well be compelled to initiate large-scale purchases of eurozone government bonds through its so-called “outright monetary transactions” scheme – a plan that many German policymakers and economists staunchly oppose.
The German government can use its considerable leverage to compel France and Italy to pursue the structural reforms that both countries need, while allowing a growth-friendly demand stimulus to lift the threat of deflation hanging over the eurozone.
And it has the authority to bolster the ECB’s credibility and thus its efforts to ensure future price stability and prevent financial contagion.
Europe needs a grand bargain, involving close coordination on structural reforms and fiscal and monetary policy.
Germany’s relative economic and political stability, far from enabling it to disengage from such efforts, makes it among the most important protagonists in their development and implementation.
The question is whether Germany’s leaders will recognize this before Europe’s economy falls into an even deeper slump.
The Roots of German Openness
PARIS – “Germany, Germany,” shout thousands of refugees, faced with the obvious bad will of Hungary’s political authorities, in front of Budapest’s Keleti railway station.
They are dreaming of Germany – not any European country, but specifically Germany – the way, more than a century ago, Europe’s poor, fleeing misery – and, in some cases, pogroms – dreamed of America.
This represents a dramatic shift from the past.
What a contrast between the photo, taken less than 80 years ago in the Warsaw Ghetto, of a small Jewish child with raised arms and fearful eyes, and one taken a few days ago in Munich of a smiling refugee boy, his head protected by a policeman’s hat.
For the first child, Germany meant certain death; for the second, it offers hope for a better life.
And Germany does not represent just an abstract hope; the country is welcoming more migrants than any of its European counterparts, with Chancellor Angela Merkel having announced that the country will take at least 800,000 asylum-seekers this year.
How can a country move so rapidly from darkness to light?
No one can deny the role of schools, civic and business leaders, and, of course, external forces in bringing about this change.
But nor should one underestimate the importance of political leadership.
Events can create politicians.
Before the Berlin Wall fell, Helmut Kohl was essentially a provincial West German political figure; the likes of French President François Mitterrand looked down on him with a certain condescension.
Then, as Chancellor – a position he held for 16 years – Kohl played a key role in German reunification and, together with Mitterand and others, drafted the Maastricht Treaty that created the European Union.
Events have similarly transformed Merkel from a cautiously calculating and often-slow decision-maker into a moral force.
With firmness and clarity, Merkel has condemned all forms of xenophobia and criticized her European counterparts for refusing to accept refugees.
Rather than worrying about offending people or losing the next election, she is following the diktat of her conscience.
The daughter of a Protestant pastor raised in East Germany during Communist rule, she is standing up for Christian Democratic values.
Indeed, at a time when most European political leaders are lacking in inspiration and direction, if not courage, Merkel has emerged as Europe’s moral compass.
It is time for the rest of the EU’s leaders to get on the right path.
When history knocks at the door so powerfully – this time, in the form of hundreds of thousands of refugees – one cannot waste time appeasing or, worse, courting populist movements.
That is the surest route to losing one’s soul – and the next election.
Of course, one must not be naive.
Politics and morality are not always compatible, and Germany is in a very different situation from the rest of Europe.
With its shrinking and aging population, Germany needs more young, motivated people to keep its economy thriving – a need that refugees can fill.
By contrast, France and many other European countries face more favorable demographic conditions and worse economic conditions, including high unemployment.
After years of destabilizing economic crisis, which has yet to be fully overcome, most European societies feel wholly unprepared – socially, economically, politically, and even psychologically – to receive the flood of refugees.
If Germany behaves in a more dignified manner, it is thanks not just to Merkel’s political leadership, but also to the fact that Germans are more secure than most Europeans.
It is easier to become open to others when you are confident in yourself.
But one must not underestimate the endurance of values like tolerance and solidarity within European societies.
With this in mind, EU leaders should be working to encourage and harness the generosity of some, while containing and resisting the selfishness and xenophobia of others.
To be successful, however, there must be burden sharing.
If those whose instinct is to be generous are left alone to shoulder the burden, that generosity will not last for long.
In the long run, a society can advance only through openness and tolerance.
Rejecting diversity – whether by suppressing differences at home or cutting off outsiders – accelerates decay.
To reverse the formula of former Czech President Václav Klaus, the suicide of Europe will come not from accepting the flow of refugees, but from closing our doors to them and washing our hands of their fate.
Likewise, Hungary is not protecting Europe by building walls to keep the refugees out.
On the contrary, it is not only controverting Europe’s fundamental values; it is also undermining Europe’s interests.
After all, the United States would not have become the leading world power in less than two centuries without the successive waves of migrants that landed on its shores.
Europe needs refugees to prosper, and the refugees need Europe to survive.
Getting Corruption Right
NEW YORK – I just returned from India, where I was lecturing to the Indian Parliament in the same hall where US President Barack Obama had recently spoken.
The country was racked by scandal. A gigantic, ministerial-level scam in the mobile-telephone sector had siphoned off many billions of dollars to a corrupt politician.
But several of the MPs had also been taken aback on discovering that when Obama spoke to them, he read from an “invisible” teleprompter.
This had misled his audience into thinking that he was speaking extemporaneously, a skill that is highly regarded in India.
Both episodes were seen as a form of corruption: one involved money, the other deception.
The two transgressions are obviously not equal in moral turpitude.
But the Obama episode illustrates an important cross-cultural difference in assessing how corrupt a society is.
Transparency International and occasionally the World Bank like to rank countries by their degree of corruption, with the media then ceaselessly citing where each country stands.
But cultural differences between countries undermine the legitimacy of such rankings – which are, after all, based on surveys of the public.
What Obama was doing was a common enough practice in the United States (though one might expect better from an orator of his ability); it was not so in India, where such a technique is, indeed, regarded as reprehensible.
India certainly has corruption, like almost every other country.
But India also has a culture in which people commonly assume that everyone in public life is corrupt unless they prove otherwise.
Even a blind man will tell Transparency International: “I saw him take a bribe with my own eyes.”
So, if you ask Indians whether their governance is marked by widespread corruption, they will answer with gusto: yes!
But their exuberance biases India’s global ranking relative to more empirically minded countries.
A similar bias arises from the occasional tendency to view political patronage elsewhere as being more corrupt than the same practices at home.
For example, when the East Asian financial crisis broke out, there followed a systematic attempt to pin the blame on the affected countries: “crony capitalism” allegedly had somehow crippled their economies!
In other words, the acquaintances and benefactors of the East Asian leaders were “cronies,” whereas those of US leaders were “friends”?
In fact, it was clear that the culprits were the International Monetary Fund and the US Treasury, which had encouraged a shift to capital-account convertibility without understanding that the case for free capital flows was not symmetrical with the case for free trade.
But where substantial corruption can unambiguously be found, as it often can, one must recognize that it is not a cultural given.
On the contrary, often it is the result of policies that have fed it.
India in the 1950’s had a civil service, and a political class, that were the envy of the world.
If that seems shocking today, the loss of virtue must be traced to the all-pervasive “permit raj,” with its licensing requirements to import, produce, and invest, which grew to gargantuan proportions.
High-level bureaucrats quickly discovered that licenses could be bartered for favors, while politicians saw in the system the means to help important financial backers.
Once the system had taken root, corruption percolated downward, from senior bureaucrats and politicians, who could be bribed do what they were not supposed to do, to lower-level bureaucrats, who would not do what there were supposed to do unless bribed.
Clerks would not bring out files, or get you your birth certificate or land title, unless you greased their palms.
But if policies can create corruption, it is equally true that the cost of corruption will vary with the specific policies.
The cost of corruption has been particularly high in India and Indonesia, where policies created monopolies that earned scarcity rents, which were then allocated to officials’ family members.
Such “rent-creating” corruption is quite expensive and corrosive of growth.
By contrast, in China, the corruption has largely been of the “profit-sharing” variety, whereby family members are given a stake in the enterprise so that their earnings increase as profits increase – a type of corruption that promotes growth.
In the long run, of course, both types of corruption are corrosive of the respect and trust that good governance requires, which can undermine economic performance in its own right.
But that does not absolve us of the responsibility to define corruption properly – and to acknowledge obvious and important cultural differences in how it is understood.
Getting Governance Right
CAMBRIDGE – Economists used to tell governments to fix their policies.
Now they tell them to fix their institutions.
Their new reform agenda covers a long list of objectives, including reducing corruption, improving the rule of law, increasing the accountability and effectiveness of public institutions, and enhancing the access and voice of citizens.
Real and sustainable change is supposedly possible only by transforming the “rules of the game” – the manner in which governments operate and relate to the private sector.
Good governance is, of course, essential insofar as it provides households with greater clarity and investors with greater assurance that they can secure a return on their efforts.
Placing emphasis on governance also has the apparent virtue of helping to shift the focus of reform toward inherently desirable objectives. Traditional recommendations like free trade, competitive exchange rates, and sound fiscal policy are worthwhile only to the extent that they achieve other desirable objectives, such as faster economic growth, lower poverty, and improved equity.
By contrast, the intrinsic importance of the rule of law, transparency, voice, accountability, or effective government is obvious.
We might even say that good governance is development itself.
Unfortunately, much of the discussion surrounding governance reforms fails to make a distinction between governance-as-an-end and governance-as-a means.
The result is muddled thinking and inappropriate strategies for reform.
Economists and aid agencies would be more useful if they turned their attention to what one might call “governance writ small.”
This requires moving away from the broad governance agenda and focusing on reforms of specific institutions in order to target binding constraints on growth.
Poor countries suffer from a multitude of growth constraints, and effective reforms address the most binding among them.
Poor governance may, in general, be the binding constraint in Zimbabwe and a few other countries, but it was not in China, Vietnam, or Cambodia – countries that are growing rapidly despite poor governance – and it most surely is not in Ethiopia, South Africa, El Salvador, Mexico, or Brazil.
As a rule, broad governance reform is neither necessary nor sufficient for growth.
It is not necessary, because what really works in practice is removing successive binding constraints, whether they are supply incentives in agriculture, infrastructure bottlenecks, or high credit costs.
It is not sufficient, because sustaining the fruits of governance reform without accompanying growth is difficult.
As desirable as the rule of law and similar reforms may be in the long run and for development in general, they rarely deserve priority as part of a growth strategy.
Governance writ small focuses instead on those institutional arrangements that can best relax the constraints on growth.
Suppose, for example, that we identify macroeconomic instability as the binding constraint in a particular economy.
In a previous era, an economic adviser might have recommended specific fiscal and monetary policies – a reduction in fiscal expenditures or a ceiling on credit – geared at restoring macroeconomic balances.
Today, that adviser would supplement these recommendations with others that are much more institutional in nature and fundamentally about governance.
So he or she might advocate making the central bank independent in order to reduce political meddling, and changing the framework for managing fiscal policy – setting up fiscal rules, for example, or allowing only an up-or-down legislative vote on budget proposals.
Macroeconomic policy is an area in which economists have done a lot of thinking about institutional prerequisites.
The same is true in a few other areas, such as education policy and telecom regulation.
But in other areas, such as trade, employment, or industrial policies, prevailing thinking is either naïve or non-existent.
That is a pity, because economists’ understanding of the substantive issues, professional obsession with incentives, and attention to unanticipated consequences give them a natural advantage in designing institutional arrangements to further the objectives in question while minimizing behavioral distortions.
Designing appropriate institutional arrangements also requires both local knowledge and creativity.
What works in one setting is unlikely to work in another.
While import liberalization works fine for integrating with the world economy when import-competing interests are not powerful and the currency is unlikely to become overvalued, export subsidies or special economic zones will work far better in other circumstances.
Similarly, central bank independence may be a great idea when monetary instability is the binding constraint, but it will backfire where the real challenge is poor competitiveness.
Unfortunately, the type of institutional reform promoted by, among others, the World Bank, IMF, and the World Trade Organization is biased toward a best-practice model, which presumes that a set of universally appropriate institutional arrangements can be determined and views convergence towards them as being inherently desirable.
But best-practice institutions are, by definition, non-contextual and cannot take local complications into account.
Insofar as they narrow rather than expand the menu of available institutional choices, they serve the cause of good governance badly.
Good governance is good in and of itself.
It can also be good for growth when it is targeted at binding constraints.
Too much focus on broad issues, such as rule of law and accountability, runs the risk that policymakers will end up tilting at windmills while overlooking the particular governance challenges most closely linked to economic growth.
Getting Investment in Europe Right
PARIS – The European Commission’s new president, Jean-Claude Juncker, has put public investment back on the agenda with his idea of a three-year €300 billion ($378 billion) capital spending plan.
The European Union’s leaders are expected to discuss his proposal in December.
Everyone seems to agree that more investment would help to strengthen a worryingly feeble European economy.
But, behind the superficial consensus, many questions remain unanswered.
For starters, this is not the first time that Europe has considered such an initiative.
In 1993, the Commission, under Jacques Delors, proposed a capital spending plan in its White Paper on growth, competitiveness and employment.
The plan was broadly endorsed, but no action was taken.
Likewise, in 2000, as part of its Lisbon Strategy, the EU sought to increase national spending on research and development to 3% of GDP.
It failed to reach this target.
More recently, in June 2012, EU leaders adopted a Compact for Growth and Jobs that was supposed to mobilize €120 billion.
The check is still in the mail.
It is indeed easy to pretend to act without taking effective action.
One way is to ask the European Investment Bank (EIB), the EU’s development bank, to lend more.
Such calls face two limitations: the EIB itself is careful not to jeopardize its financial rating by taking on too much risk, and its loans easily substitute for private financing.
More lending therefore can be pointless if it results in the EIB crowding out private financing of the best available projects.
A bridge financed by the EIB may be more affordable than one financed by capital markets, but it remains the same bridge and has the same economic impact.
The size of the EIB’s balance sheet is not a good measure of its effectiveness.
Instead, three investment levers should be used.
The first lever is budgetary: Governments that enjoy fiscal space should spend on economically sound projects.
Public investment is a complement to private investment; if designed and targeted well, it can trigger more private investment, rather than crowding it out.
For example, adequate transport and broadband infrastructure favors the burgeoning of business initiatives.
At a time when markets are willing to lend to solvent governments at historically low rates, there should be little room for hesitation.
Obviously, cheap financing does not justify public investment in projects with dubious social returns, or what development practitioners call “white elephants”: headline-grabbing projects of disputable value but supported by special interests.
Investments should be assessed on the basis of their overall economic impact, with proper procedures put in place to prevent public money from being wasted.
The second lever for investment is regulatory in nature. Many large-scale investments that only pay off over the long term – for example, in energy, digital infrastructure, and transport – are concentrated in state-regulated sectors, giving governments the power to influence business decisions.
Predictability regarding the future course of regulation would unlock projects held back by uncertainty.
A credible outlook for the price of carbon, for example, would prompt new private-sector investment in cleaner technologies.
Similarly, an agreed European framework for projects that connect countries would remove obstacles to cross-border investment.
These conditions are a long way from being met, which means that profitable investments are not being made.
Changing that would not cost a single euro; it requires only political resolve.
The third lever is financial. Investment demand has slackened not because interest rates are too high, but because there is not enough risk appetite within the banking system.
Financing in continental Europe is traditionally bank-based, unlike in the US, where capital markets reign supreme.
But banks are being told by regulators to reduce their leverage and to post higher capital when they embark on risky lending, and their creditors are being told that they should not expect to be bailed out if banks get into trouble.
This is intentional.
Governments and citizens in Europe have paid – and are still paying – an astronomically high price for the reckless lending and investment of the 2000s.
Understandably, they do not want to repeat the experience.
The consequence, however, is that high-risk, high-return projects are more difficult to finance than they should be.
If Europe wants to revive its economy and escape stagnation, it needs entrepreneurs to take more risk to innovate.
But its financial system is undergoing a transition from a bank-based to a market-based system that involves risk aversion.
This is where the public side – both national governments and the EU – should step in and share some of the risk with private players.
They should temporarily behave more like investors who scrutinize projects, contribute funding, and earn returns.
Using the EIB and national development banks to this end would help overcome the current impasse.
Would these three types of initiatives add up to €300 billion?
No one knows at this stage.
But this route would be the surest way to reach the goal.
Getting Latin America Unstuck
One of the world economy's biggest puzzles is Latin America's poor performance.
Since the early 1980's, Latin America has been stuck, with per capita incomes growing slowly (if at all) in most of the region, and with one big crisis following another.
Many policies have been tried, especially trade liberalization, privatization of inefficient state enterprises, and budgetary reforms.
Yet something is holding Latin America back.
The lack of vigorous growth is all the more bewildering in view of Latin America's many advantages and social successes.
Natural resources are plentiful, with vast amounts of fertile land.
Health conditions are reasonably good, and all Latin American countries have made headway against illiteracy, with most reaching 90% adult literacy or higher.
Moreover, fertility rates have fallen sharply, to a point where populations in many countries will probably level off in coming decades.
Women's status has improved, and girls enjoy equal access to education, with even higher enrollment rates than boys in many countries.
Latin America may be known for its "macho" culture, but women increasingly participate in the labor force and attain prominent political and social positions.
Latin America boasts still other long-term advantages.
Most people live near the coasts, with good access to international trade, and most live in cities - another advantage for growth.
Indeed, the region is not poor by international standards, but rather stuck in the middle-income range between the world's poorest places and the high-income countries of North America, Europe, and East Asia.
What, then, accounts for the puzzling lack of real growth over the past 25 years?
I blame two unsolved, but solvable, problems.
The first has been around for centuries: the social divisions that trace their origins back to the European conquest over Native Americans in the sixteenth century.
More than most places, Latin America was born in violent conquest.
Europeans subdued Amerindian populations and also brought in massive numbers of slaves from Africa, especially to the Caribbean basin and Brazil.
Societies became racially and ethnically complex, as the European, Amerindian, and African populations intermarried, but the long-term trend of European dominance, indigenous and Afro-American subservience, and entrenched poverty became a scar on Latin American societies.
Even today, income inequality in Latin America is among the highest in the world, reflecting the old patterns of ethnic and racial division.
Income inequality casts a long shadow.
The rich have long fought against taxation needed to increase investment in the education and health of the poor, perpetuating deep social divisions and leaving many people without the health and skills that global competitiveness requires.
The situation today is improving in some places - such as Brazil - which augurs well for the future.
In other places - for example, Guatemala and parts of the Andean region - social divisions remain fraught with violence and distrust.
Beyond this, a basic failure of economic strategy has been largely overlooked, one that is reflected in a major difference between public policy discussions in Latin America and Asia.
In Asia, public debate is about technology: how can Asia catch up?
Asian governments relentlessly act to raise the scientific and technological capacities of their economies.
In Latin America, the global technological revolution is much less discussed, and national policies to promote science and technology are rarely given prominence.
The result is that Latin America has failed to benefit adequately from the global technological revolutions.
Asian developing countries are now producers of computers, semiconductors, pharmaceuticals, and software.
By contrast, even Latin America's star performer, Chile, remains largely a resource-based export economy, with a heavy concentration in copper and agricultural exports.
These sectors are technologically sophisticated, but form a narrow base for long-term development.
The situation is far from hopeless.
Brazil has demonstrated the ability to be a technological export power.
It has succeeded, notably, in exporting airplanes and many consumer durable goods.
Mexico, too, has begun to mobilize significant technological prowess.
Argentina, Chile, and other countries could become high-tech agricultural producers, in the forefront of agro-biotechnology for example, if they put their minds to it.
Still, Latin American countries have not yet tried to foster a technological revolution, certainly not with the focus, skill, commitment, and financing that Asian countries have shown.
Such a push could play a major role in jump-starting economic growth.
Such a policy would entail committing to a major increase in spending on research and development, as Asian developing countries have done.
Latin American countries should aim to increase spending to around 2% of GNP (from 0.5% currently), partly through public support for laboratories and universities and partly through incentives for private-sector R&D. They should roll out the red carpet for high-tech multinational firms, just as Asia has done.
They should also increase their focus on scientific and technological training and encourage a higher proportion of students to go on to university education.
Government stipends for tuition and for new and enlarged universities can play a big role, as can investment in computers and information technology in schools and communities.
The social agenda and the technology agenda are not independent of each other.
Both call upon Latin American societies to invest more in their people, so that Latin Americans can join the cutting edge of global productivity.
If these investments reach all parts of Latin America, rich and poor, the region's prospects will brighten enormously.
Getting Over the Irish Stew
Getting Past the American Election
The pundits have now weighed in mightily in interpreting the American presidential election.
Did the outcome - together with Republican gains in the Congress - represent an endorsement of Bush's positions?
Has the American electorate swung to the right?
Are Americans now more concerned about "values?"
Like price in economics, a single electoral choice compresses a lot of information.
It is a summary of whether, taking everything into account, a citizen prefers one candidate to another.
A host of surveys is required to figure out what it really means, for the United States - and for the world.
This much is clear, however: there is little confidence in Bush's economic policies.
The typical American family knows that it is worse off today than it was four years ago, and appears unconvinced that the tax cuts targeted at upper-income Americans brought the benefits heralded by the Bush administration.
But while Bush was not held back four years ago by the lack of a popular mandate in pushing his agenda, he may be emboldened by the seeming ringing endorsement to push even harder - such as making the tax cuts permanent and partially privatizing social security.
If adopted, these measures will further compound America's fiscal mess.
To the rest of the world, these are America's problems.
Yes, the soaring deficits may contribute somewhat to international financial instability.
Real interest rates may rise, as America borrows more and more.
If declining confidence in US fiscal policy leads to a weaker dollar, Europe and Asia may find it more difficult to export, and if the deficits prove a drag on the American economy, global growth may stall.
But for much of the rest of the world, the real concern is American unilateralism.
An interconnected world needs cooperation and collective action.
Historically, the US has exercised enormous leadership in a world committed to the proposition that no state should dictate collective decisions.
Unfortunately, over the past four years, America's president has lost the credibility necessary to exercise that leadership.
Even if the 59 million votes cast for Bush represented a ringing endorsement of his Iraq policy, it would not restore America's international credibility.
I believe most Americans reject Bush's unilateralism no less than his administration's economic policies.
Before the invasion of Iraq, they wanted America to go to the UN, and today they recognize that America alone cannot maintain order in the Middle East.
Even if Iraq is to bear more of the cost of its own reconstruction, there will have to be debt forgiveness, and this too requires international cooperation.
Those who voted for Bush may not be as outraged by American involvement in torture, or the misleading information about Iraq's weapons of mass destruction and connections with Al Qaeda, as those abroad.
But they do not want America alone to shoulder the burdens of international peace, and they are gradually coming to the realization that leadership and cooperation do not come automatically, simply because America is the only superpower.
Some worry whether Bush will use his electoral mandate to engage in more ventures.
As he himself put it, "I earned capital in the campaign … and now I intend to spend it."
Had the Iraq venture been more successful, these worries would have been justified.
There is little secret that there were discussions concerning Iran.
But the doctrine of preemptive war has been badly tarnished, and I remain hopeful that Congress and the American people have learned a painful lesson.
Peace will not quickly be restored to Iraq, and it is hard to conceive of opening up a major new front, when America can hardly manage what it has already undertaken.
Others will, of course, have to continue to bear the costs of the mistaken and mismanaged adventure in Iraq.
Instability in the Middle East will continue to limit oil supplies, discouraging the expansion of production.
High oil prices will dampen global growth in the remainder of 2004 and into 2005.
In the short run, the only response is more conservation, and America's allies should put pressure on America to conserve.
(Another reason stems from recent reports concerning the rapid melting of the polar ice cap, which seem to reconfirm worries about global warming.)
Presidents do make a difference, but every president operates within constraints.
The good news is that the constraints that Bush and the American government will face in the next four years will almost surely limit the damage they will cause.
The rhetoric and posturing, the lack of commitment to human rights or democratic processes, may be - and should be - upsetting, but there will be far more bark than bite.
While America may continue on a path of unilateralism, other countries' stance will make a difference.
Some suggest that the US constitution provided fewer constraints on the president in the conduct of foreign policy, because the requisite checks and balances were to be provided by the powers of the time - Britain and France.
Today, with the US as the only superpower, it is even more important for countries to stand up and express their views - and to stick by them even when pressured.
Some worry that this will worsen relations with the US.
But long-term relationships are based on friendship and respect; coherent, well-argued positions will earn that respect.
Today, many Americans, especially the young, feel far more respect for the countries that recognized the lack of evidence of Iraqi weapons of mass destruction than for those whose leaders repeated the American distortions.
It may be unfortunate that Realpolitik is the order of the day, but it is, so others must learn to play the same game.
Standing up for multilateralism and international rule of law may not only be the morally right thing to do; it is also in the interests of America's allies and, ultimately, America itself.
Getting Practical in Controlling Malaria
Many international assistance programs fail because they are badly designed and/or too complicated.
The result is that the poor don’t get the help they need, and taxpayers in rich countries lose confidence in the use of their aid funds.
A case in point has been malaria control.
If rich countries adopt simpler and more practical strategies to help Africa fight malaria, they can save millions of Africans while building enthusiastic support among their citizens.
Malaria is a killer disease transmitted by a specific species of mosquitoes.
It depends on warm temperatures, and thus is largely a tropical malady.
Africa turns out to be especially unlucky, because it has a combination of high temperatures and the mosquitos that are likely to transmit the disease.
As a result, Africa accounts for 90% of all malaria deaths in the world – including roughly two million children per year.
Yet even in Africa, Malaria is largely preventable and completely treatable at low cost.
Up until now, there has been far too little malaria control.
Prevention is best accomplished by modern anti-malaria bed nets, which are treated with insecticide.
These nets cover people while they sleep, and repel or kill the mosquitoes, which tend to bite during the night.
The nets reduce the number of bites, and the amount of illness, but they do not eliminate them.
If people get bitten despite the nets, they require treatment within a few hours of the onset of symptoms.
There are two major obstacles to solving the malaria problem.
First, Africa’s poor cannot afford insecticide-treated bed nets and the correct medicines.
Many end up taking cheap medicines that are not effective because the malaria parasite has developed resistance to them.
Second, African villagers lack access to cars or trucks, so they have to walk several miles to reach a clinic.
An infected child is often dead or comatose by the time a mother reaches a clinic.
If rich-country governments thought practically about malaria and recognized that it is a full-scale emergency, they could support simple and practical solutions: bed nets and timely access to medicine.
Rich countries would buy bed nets from companies that produce them and work with African governments to distribute them free of charge to every African household.
And they would work with African governments to ensure that the correct medicines are available for quick use within each village.
There are one billion people living in rich donor countries, and the total cost of comprehensive malaria control in Africa – giving bed nets at no cost to all Africans, and providing the right medicines within every village – is around $2.5 billion per year, or just $2.50 per citizen of the rich countries.
But the rich countries have instead adopted failed strategies.
Rather than giving away bed nets, rich-country organizations like the United States Agency for International Development try to sell them to the extreme poor, albeit at heavily discounted prices.
This policy reflects a shortsighted ambition to promote markets rather than the direct and over-riding goals of saving lives and removing bottlenecks to long-term economic development.
The tragic result has been extremely low use of nets throughout most of Africa, since impoverished people lack the purchasing power to buy nets.
Second, donor governments have failed to promote simple ways to ensure the availability of medicines in villages across the continent.
Rather than shipping medicines to each country on the basis of estimated needs, donor agencies have set up a complicated purchasing system that has led to years of delay in getting medicines to the villages.
The pharmaceutical industry, led by Novartis, has been way ahead of donor agencies. Novartis has agreed to make these medicines available at the cost of production.
But, despite Novartis’s large production capacity, donor agencies have failed to order, buy, and ship the medicines in the required amounts.
Malaria control now faces a period of increasing urgency, as well as renewed hope.
Malaria is spreading, and new scientific evidence indicates that people infected with HIV are more likely to transmit it to others when they are also infected with malaria.
But there is also a growing realization that malaria is a disaster that must be addressed.
US President George W. Bush has launched an important new initiative to help 15 African countries to control malaria, and hosted an unprecedented White House summit in December to rally private-sector support.
Similarly, the Chinese government, the World Bank, and the Islamic Development Bank have recently announced plans to scale up their contributions to the fight against malaria.
A major new citizens’ initiative called Malaria No More is raising private funds to distribute anti-malaria nets.
People across Africa have shown that they are ready to mobilize their efforts if we offer practical means to help them.
The world’s safety, including the safety of people living in rich countries, depends on the global community’s ability to prove that it will come to the aid of all who are in desperate need.
Aid can work wonders if it is practical and directed to those in need.
Malaria control can demonstrate this world-saving lesson once again.
Getting Serious About Global Poverty
Institutions and governments, like people, make bold resolutions at the beginning of every year.
But, for the millions who face the crushing burden of poverty, mere proclamations that help is on the way are not enough to create jobs or foster development.
This year, the international community must move decisively from pledges to action in the effort to reduce poverty.
What will this require?
In 2005, the international community renewed its commitments to help the poorest countries meet the United Nations’ Millennium Development Goals (MDG’s), which aim to halve poverty by 2015.
These commitments include significant increases in debt relief and aid.
While there has been progress on implementing debt-relief measures, the international community must follow through on the other part of its pledge, by delivering increased aid and promoting its better use.
Multilateral lenders have long understood the importance of debt relief to poverty reduction.
Indeed, the joint IMF-World Bank Heavily Indebted Poor Countries (HIPC) Initiative was launched in 1996 to coordinate efforts by multilateral organizations and governments to reduce poor countries’ debt burdens to sustainable levels.
So far, the results are encouraging.
Before the HIPC Initiative, eligible countries spent, on average, slightly more on debt service than on health and education combined.
Now, debt in the 28 countries for which relief has been approved has declined by an average of two-thirds, while their expenditures on health, education, and other social services have risen to almost four times the amount of debt-service payments.
In 2005, the international community went further, agreeing on the Multilateral Debt Relief Initiative (MDRI), which will write off 100% of many poor countries’ debts to the IMF, the World Bank, and the African Development Bank.
As a result, just this past December, the IMF approved immediate, full relief for 19 countries – including 13 in Africa, four in Latin America, and two in Asia – on all outstanding debt to the Fund disbursed before January 1, 2005.
Other countries are eligible, and the IMF is helping these states make rapid progress to qualify, with total debt relief expected to be more than $5 billion.
As with the HIPC Initiative of which it is a part, the MDRI will do more than reduce debt: it will free up resources that can be devoted to poverty reduction and economic development.
In 2006, for example, Zambia will see its debt fall by almost 10% of GDP, leaving more resources available for development.
Similarly, Guyana will have its debt reduced by more than 8% of GDP.
The level of debt relief will be even greater once the World Bank and the African Development Bank finalize their own programs in the months ahead.
Nevertheless, the debt relief now being implemented will only provide a small part of the assistance, both financial and technical, that low-income countries need to meet the MDG’s.
If they are to be met, donors must also deliver on their commitments for significant increases in aid.
The IMF has long called on donors to meet the internationally accepted target for overseas development assistance of 0.7% of GDP.
Some donors have now promised to do so, though only over time; others are not ready to go that far, but have promised more aid than they currently give.
The international community must show that it will follow through on these promises.
Donors must provide the help that developing countries urgently need.
At the same time, we must ensure that low-income countries use debt relief and aid efficiently.
One priority is to ensure that large, new infusions of aid do not produce unintended economic outcomes, such as rapid currency appreciation or inflation, which would make recipient countries’ exports less competitive.
Another priority is to ensure that low-income countries that are striving to meet the MDG’s, and which have large financing requirements, avoid a new spiral of indebtedness.
The gains from MDRI debt relief will amount to precious little if low-income countries emerge from their debt burdens only to start the cycle anew by amassing fresh debt.
But recipient countries must complement donor efforts, and continue to do their part as well, by maintaining a track record of reform and sound macroeconomic policies, and by making the best possible use of the higher levels of assistance.
Outside efforts can help reduce poverty, but it is, ultimately, the efforts of low-income countries themselves to sustain strong economic performance, improve governance, and develop stable and effective institutions that will have the most important impact on reducing poverty.
Low-income countries can also improve their prospects by strengthening their fiscal management, fostering private-sector development, and liberalizing trade.
If we keep our promises, 2006 can be a year of hope for those who have little else than the dream of a better life.
Getting Serious in Russia\u0027s War on Terror
Russia's decision to spend an extra 157 billion rubles (over $5 billion) to fight terrorism is a more impressive response than all the Kremlin's recent tough talk, including President Vladimir Putin's demand that more power be centralized in his hands.
Indeed, after the hostage crisis in the Dubrovka Theater in Moscow in 2002, the same sort of harsh words flowed, but no extra money was spent.
These new billions do seem to demonstrate renewed government resolve, but is throwing money at the war on terror enough?
The Kremlin refuses to publicly admit that today's terrorism has its roots predominantly in the Chechen war, which is now metastasizing throughout the Northern Caucasus.
Chechen fighters and their supporters demonstrate almost daily that the war continues, and countless bold pronouncements, like newly elected Chechen president Alu Alkhanov's recent assertion that "effective measures" have been found to combat terror, look like mere bloviation.
According to Finance Minister Aleksei Kudrin, huge amounts of money are needed to resolve the Chechen problem.
But financial inflows into Chechnya are often more destabilizing than helpful.
President Akhmat Kadyrov, the murdered Chechen president, was right to suggest that 80% of this money ends up in the pockets of Moscow and regional firms who benefit from the Chechen conflict continuing.
So neither money nor military power alone can end the bloodshed, and diplomacy with the less militant Chechen leader Aslan Maskhadov seems unlikely, for three reasons.
First, contacts between Maskhadov and a few Russian politicians haven't - at least as of yet - influenced the Kremlin's position.
Second, the subject for negotiations is unclear, because Putin has ruled out Chechen independence, and surrender by the separatists is just as unlikely.
Third, even if negotiations with less militant Chechens occur and succeed, terrorism will continue under the leadership of the religious fanatic Shamil Basaev.
The result of all this is spreading hopelessness.
The thirst for vengeance after the Beslan school massacre makes confrontation between Chechens and Ingushis increasingly possible.
Chechnya's neighboring republic, Dagestan, is witnessing increasing confrontations between radical and traditional Islamic groups, something now also seen in Kabardino-Balkaria.
Unless the Russian state develops a viable policy, fast, all of these areas threaten to become safe havens for terrorists.
What Russia needs is a political response to terror that takes into account its international dimension.
In the last four years, radical Islam has established itself in the Northern Caucasus.
This doesn't mean that all local Muslims have become jihadis.
In fact, the latter are a tiny minority.
But they are energetic, mobilized, and experienced fighters.
These people increasingly identify themselves with the global jihad, and have forged firm links with Muslim radicals in the Middle East, Southern Asia and Europe.
Russia must now follow America's lead in how to fight terror.
Since the attacks of September 2001, the United States has managed to avoid further attacks on its land.
True, the news coming from Iraq is horrible, but the US is fighting a full-blown war in Iraq; it is not engaged in a counterterrorist operation.
Russia's power structures, like those of America, must now be readied to conduct a very long struggle, entirely different from the old Soviet KGB way of suppressing dissent.
Russia's security forces need to learn to be pro-active, because the terrorists consistently seek to perfect their deadly methods.
The fight against terror turns on who will strike first; so far, the terrorists have been faster and more professional than the Russian state.
To conduct this struggle effectively, Russia must abandon two hoary stereotypes: that all terrorists are bandits, and that they somehow are acting under some Western intelligence supervision to weaken Russia.
The base of world terrorism consists of daring fanatics who believe in a sacred, fiery destiny.
Osama bin Laden doesn't work for money and wants to destroy the entire West, not weaken Russia in particular.
But the greatest obstacle that must be confronted if Russia is to wage war on terror effectively is the rampant corruption in the security forces.
It is well known, for example, that Basaev's fanatical killers paid off Russian militia to enter Budeonovsk in 1995 and kill hospital patients.
Yet nothing has been done to root out this tool of terror.
It is all too easy to reduce the fight against terrorism to tightening the political screws, to a strengthening of Putin's power, to restricting the movement of people within the country.
But none of these measures will frighten extremists in the Northern Caucasus or their al Qaeda allies.
The Kremlin must know this already.
Even Putin's predictable presidential rhetoric reveals a desire to initiate a real fight against terrorism.
But waging a serious war requires a serious reorganization of Russia's power structures, which will be very painful.
Despite Putin's so far unsuccessful fight against terrorism, his popularity remains high, so he has the political capital to make tough internal reforms.
But he must act now, for public support can be no substitute for resolute and effective action.
Getting to Yes (Again) with Germany
GENEVA – Europe’s slow-motion sovereign-debt crisis may appear unique, but it is not.
Just a few decades ago, Europe had the Exchange Rate Mechanism, which collapsed during a crisis very much akin to the one afflicting Europe today.
Will the outcome this time be different?
The ERM was an arrangement that pegged most European currencies’ exchange-rate movements within limited bands.
But ERM members’ monetary policies remained home-grown, which, no surprise, occasionally led to fiscal imbalances.
When capital markets smelled a problem among ERM members, they invariably shorted the most vulnerable currency and pushed that country’s authorities to devalue.
Authorities resisted, blamed speculators, and then, usually over a frantic few days, gave in.
Markets also tested the resolve of policymakers in otherwise sound ERM countries, particularly when there were big strikes or important elections.
In those cases, even a government with the proper economic fundamentals and its financial house in order could still run into trouble.
European Central Bank President Jean-Claude Trichet is well aware of this: in the early 1990’s, he confronted such a crisis as Governor of the Bank of France.
Some contemporary observers of the ERM thought that there was an easy fix for these troubles.
If the central bank of the country that printed its “strong currency” (Germany) had been willing to provide unlimited support to a “weak currency,” things would have been sorted out.
Germany’s Bundesbank, it was suggested, would stand ready to buy “unlimited quantities” of lire or francs, so no one would dare to short either currency.
The notion of “unlimited quantities” was important: speculators would force officials to exhaust limited quantities, with the purchasing authority (the Bundesbank) eventually bearing the loss.
Monetary support would lead to fiscal transfers, making limited interventions a non-starter.
With unlimited support, by contrast, every single speculator could be quashed, and no loss would be borne (since intervention to support a weak currency would succeed).
The only problem was that both the Bundesbank and the German government always fiercely resisted such an arrangement, on the grounds that it could lead to the printing of unlimited quantities of Deutschmarks, and thus stoke inflation.
Instead, Europe developed the euro, which solved the problem of speculative attacks and monetary credibility by replacing individual currencies with a new one.
It was impossible to short the lira or the franc because there were no more lire or francs.
But Italy and France had to give something in return for this security: the ECB was made independent of all eurozone governments.
Yet the current debt crisis has resurrected the old problem, with debt now filling the role that currencies played under the ERM.
Some eurozone countries borrowed excessively and have been punished by the markets, perhaps deservedly so, while others, in the resulting climate of anxiety, have become targets for speculators.
On July 21, eurozone leaders agreed to make “more extensive” use of the new European Financial Stability Facility (EFSF) by permitting it to purchase endangered eurozone countries’ debt in secondary markets.
But the EFSF’s “more extensive interventions” recalls the “unlimited quantities” of foreign-exchange intervention proposed to rescue the ERM.
If “more extensive” means piecemeal limited commitments that will eventually be exhausted, the scheme runs the risk of creating losses (just as the Bundesbank would have suffered losses had it engaged in limited defense of weak ERM currencies).
To rule this out, “unlimited interventions” would be needed.
But with whose resources, and under whose authority?
This explains the growing excitement about issuing “Eurobonds.”
The conversion of all eurozone national bonds into obligations jointly recognized by all eurozone governments is a replica of the solution to the ERM’s breakdown, which consisted in abandoning national currencies in favor of the euro.
This would cost Germany control over the quality of its credit, just as the replacement of the Bundesbank by the ECB implied Germany’s loss of control over the quality of its currency (though it was given a large role in designing the ECB).
What is missing in today’s proposals is the equivalent of the ECB’s independence, which ensured Germany’s participation in the euro.
It is no coincidence that one of the leading opponents – the ECB’s first chief economist, Otmar Issing – of the “unlimited interventions” policy under the ERM recently rebuked both the “extended-EFSF” and Eurobonds.
The current proposals, Issing argues, are “undemocratic.”
The concessions needed to ensure German participation are likely to be enormous.
With markets’ ability to monitor dubious borrowers, the guarantees will probably have to be institutional, constitutional, and political – probably formal control over European fiscal policy by a body at least as credible as the ECB, which would mean a dramatic reduction in the power of national parliaments.
Such radical changes would require the consent of all eurozone countries.
And the Bundestag (not Standard and Poor’s) would have to be happy.
Anything short of this is bound to fail.
Getting to “Yes” on Missile Defense
WASHINGTON, DC – The recent visit by Dmitry Rogozin, Special Envoy of the Russian President for Missile-Defense Cooperation with NATO, to the US State Department highlights one of the many obstacles to Russian-US cooperation on ballistic missile defense (BMD).
Russia’s foreign and defense ministries have both asserted primacy in the BMD dialogue with the US, but with competing perspectives and priorities.
Russia’s diplomats have generally, but not always, adopted a harder line, while Rogozin has been pushing his own BMD agenda.
Another complexity is uncertainty over who will rule Russia.
Given the differing views of President Dmitri Medvedev and former President and current Prime Minister Vladimir Putin – the main candidates in next year’s presidential election – many Russian bureaucrats prefer to avoid offering bold initiatives regarding BMD or other strategic arms-control issues until they know who the next president will be.
Medvedev seems less fearful of NATO than his semi-paranoid predecessor, but Putin has in the past shown surprising flexibility on some strategic issues.
The joint missile-threat assessments that the Russian government recently concluded with NATO and the US revealed much overlap among the participating technical experts, but some fundamental differences between the policy strategists.
For example, while Western representatives generally view Iran as an emerging threat, many Russians still insist that the Iranian regime remains a proliferation challenge that can be managed through non-BMD means such as diplomacy and limited international sanctions.
More generally, for reasons of pride and history, many Russians refuse to believe that US policymakers have become more concerned about Iran’s minimal strategic potential than they are about Russia’s robust nuclear forces.
They therefore presume that, despite American professions to the contrary, the US seeks BMD capabilities that can negate Russia’s strategic deterrent under the guise of protecting America and its allies from Iran.
In bilateral negations with Moscow, US officials have been offering four concrete BMD collaboration projects:
· Bi-national and multi-national jointly manned centers where Russian personnel can see the non-threatening nature of US and NATO missile-defense activities;
· Joint Russian-US expert studies regarding how BMD might affect Russia’s nuclear deterrent and what steps can be taken to minimize any problems;
· Expanded NATO-Russian theater-level BMD exercises that build on earlier collaboration – disrupted by Russia’s August 2008 war with Georgia – and that rehearse how deployed NATO and Russian forces can jointly defend against missile threats; and
· An underlying legal framework to support these and other cooperative projects.
Russian officials have expressed some interest in these projects (some of which were originally proposed by the Kremlin), but they have insisted on first achieving consensus with the US on underlying strategic principles.
Above all, they want the US to sign a legally binding agreement affirming that US BMD will never threaten Russia’s strategic deterrent.
American officials stress that they will not try to negate Russia’s strategic deterrent – an impossible effort, given the size and sophistication of Russian’s offensive nuclear forces.
But the Obama administration cannot sign an agreement stating that it will deliberately constrain America’s ability to protect itself and its allies from foreign missile attacks.
Beyond these specific BMD discussions, US arms-control efforts with Russia currently focus on strategic stability talks and other dialogues designed to establish a favorable conceptual foundation for the next round of formal arms-control negotiations.
These negotiations might address many of the issues set aside in the rush to conclude the New START Treaty.
Besides missile defense, topics could include non-strategic (tactical) nuclear weapons; reserve nuclear warheads that have been removed from operational arsenals, but have yet to be destroyed; and the placement of conventional munitions on strategic delivery vehicles, such as long-range ballistic missiles, that are normally used to carry nuclear warheads.
These discussions are occurring on a bilateral basis, between Russia and the US, and multilaterally, within the context of the so-called P-5 talks, which involve all five permanent United Nations Security Council members – the only countries that the Nuclear Non-Proliferation Treaty legally permits to retain nuclear weapons pending universal disarmament.
Recent US-Russian dialogues have addressed ways to move from a world characterized by mutually assured destruction to one based on mutually assured stability.
These efforts have encountered difficulties.
Only a small group of Russian specialists, primarily nongovernmental experts, embrace and employ US strategic concepts.
Many Russians still employ negative and outdated Cold War constructs when discussing Russia-US nuclear relations.
Despite these problems, some of Russia’s BMD-related concerns can be addressed through mutually agreed transparency and confidence-building initiatives.
Although constraining future US BMD programs with legally binding agreements is politically untenable, US officials could inform their Russian counterparts of their long-range BMD plans without much difficulty.
The US Defense Department regularly includes such data in its budget and planning documents.
Support also exists for jointly manned centers, Russian expert visits to NATO BMD facilities, and exchange of early-warning information from Russian and NATO radars regarding potential missile launches.
One hopeful sign is that Russian officials have recently acknowledged the impracticality of the sectoral BMD plan that Medvedev proposed at last November’s NATO-Russian Council summit.
The idea was that Russia would protect NATO from attacking missiles traveling over its territory, with the expectation that the alliance would then forego developing defenses capable of engaging missiles over Russia.
NATO officials persuasively argued that their collective-defense commitment could not be delegated to a non-NATO member.
A more practical problem is that Russia lacks the capability to destroy space-traveling ballistic missiles.
Russian officials need to retreat from their politically impossible demand for legally binding limitations on US BMD.
They should instead consider cooperating on concrete BMD projects.
Better still, they should redirect their cooperative efforts to easier but important issues, such as securing stability in Afghanistan after NATO’s military withdrawal.
In that case, productive collaboration on other issues might become easier.
Getting to Yes With Iran
WASHINGTON, DC – With the release of America’s National Intelligence Estimate, according to which Iran has suspended its nuclear weapons program, the prospect of military confrontation with the Bush administration dimmed.
But months later, it is clear that the danger is not past, because Iran has not renounced the production of nuclear weapons, which its enriched uranium could eventually be used to fuel.
All parties need to find a formula to resolve the issue before it again threatens to erupt into conflict.
Western diplomacy in recent years has focused on Iranian President Mahmoud Ahmedinejad as the key to resolving the crisis.
But this approach is a blind alley.
Let us recall the fate of Ahmedinejad’s two immediate predecessors.
Muhammad Khatami (1997-2005) tried to implement dramatic political reform, while Akbar Hashemi Rafsanjani (1989-97) tried to open the Iranian economy to the West.
Both failed, because Iran’s presidents do not run the country.
A solution to the nuclear dilemma – or any other problem in Iran’s foreign relations – is in the hands of the Supreme Leader, Ayatollah Ali Khamenei.
Among his responsibilities, Khamenei serves as commander-in-chief of the military, controls the intelligence services, and appoints directors of the national media.
His appointees effectively control most ministries and Iran’s major cities.
In diplomacy, Khamenei tends to operate in a clever but recognizable fashion.
He sends different diplomats into negotiations with contradictory instructions.
Each claims to be acting with the Supreme Leader’s full authority, but ultimately are unable to make commitments because they have little idea of what Khamenei wants to do.
After a time, they are removed, and a new set of representatives is dispatched.
In order to dominate decision-making, Khamenei prefers weak presidents.
Ahmedinejad is no different.
His political base has faded, owing to Iran’s deepening economic crisis, which has been intensified by the conflict with the West over the nuclear issue.
His support in the parliamentary election next March seems particularly weak, which will no doubt please Western observers.
But the election results will not matter: parliament, too, has little influence over Iran’s foreign policy.
Some Western diplomats recognize the Supreme Leader’s role.
In practice, however, Western diplomacy tends to ignore Khamenei, who sabotages any effort to get around him as the final arbiter of Iranian policy.
This might partly explain why Khamenei has been mistrustful of negotiations with the West.
Westerners don’t seem to understand who is in charge.
Indeed, some analysts argue that former President Bill Clinton’s efforts to achieve a breakthrough with Iran failed because they were addressed to Iran’s presidents.
The West should learn from the example of Russian President Vladimir Putin, who did not travel to Iran until he was allowed a direct meeting with Khamenei, during which Putin is reported to have made a proposal to end the nuclear stand-off.
There has been no answer yet, though there does seem to be some recent movement between Russia and Iran on the provision of nuclear fuel for Iran’s controversial reactors.
To be sure, Khamenei is reluctant to meet with non-Muslim foreign leaders.
But that shouldn’t stop the West from reaching out to him directly, or pressing him to publicly appoint the representatives who negotiate with the West.
One American politician who understands how to work with the Iranian power structure is former Congressman Lee Hamilton, now head of the Woodrow Wilson Center.
When Wilson Center researcher Haleh Esfandiari was arrested in Iran, Hamilton wrote to Khamenei, pleading for her release on humanitarian grounds.
Khamenei responded – reportedly the first time he answered an American – and Esfandiari was released in a matter of days.
Khamenei would be hard-pressed to ignore a direct invitation from the US to negotiate on Iran’s most vital concerns.
His clear priority is the Islamic Republic’s survival, not the fate of particular Iranian politicians.
While Ahmedinejad’s apocalyptic vision makes it difficult for westerners to deal with him, Khamenei does not want to stumble into a military confrontation with the West, which would destabilize Iran and possibly lead to the regime’s downfall.
To resolve outstanding issues with Iran, the West should be dealing with the only person powerful enough to make deals and deliver concessions.
That person is Khamenei, not Ahmedinejad.
Ghettoizing Identity
PARIS – Once, as I picked up the Nobel laureate economist Amartya Sen at his hotel, the receptionist asked me if I was his driver.
After hesitating, I nodded yes.
Among my various identities that day, that of driver was the most obvious to her.
This sense of multiple identities is something that Sen himself highlighted mischievously in his book Identity and Violence : “The same person can be, for example, a British citizen, of Malaysian origin, with Chinese racial characteristics, a stockbroker, a non-vegetarian, an asthmatic, a linguist, a bodybuilder, a poet, an opponent of abortion, a bird-watcher, an astrologer, and one who believes that God invented Darwin to test the gullible.”
Only a minimum of introspection shows that our difficulty in answering the question, Who am I?, arises from the complexity we face in distinguishing between our many identities and understanding their architecture.
Who am I, indeed, and why should I accept people reducing me and the richness of my identity to only one of its dimensions?
Yet such reductionism lies behind one of today’s dominant concepts, multiculturalism, according to which one of our identities must prevail above all others, serving as the sole criterion for organizing society into distinct groups.
Nowadays, we are often told that there are only two ways for people to integrate into a society: the “British” model of cultural pluralism, and the “French” model, based on acceptance of Republican values and, above all, the concept of equality.
According to the conventional wisdom, Britain’s social model is based on coexistence between different communities, with each continuing to observe its conventions and customs while respecting the country’s laws – an informal federation of communities.
But that common wisdom is grossly mistaken, because British law grants immigrants from all the Commonwealth countries something extraordinary: the right to vote in British elections, even national ones.
Citizens know by experience that democracy does not consist in universal suffrage alone, but also requires a public sphere that is equally open to all.
In the United Kingdom, a large group of immigrants thus share with native Britons the right to participate in public debates on all matters of general interest, whether local or national.
Because fundamental equality is granted in this way, the British system manages to cope better than others do with a greater expression of distinctive identities.
Nowadays, however, Britain’s government itself seems to be forgetting the bedrock conditions of this British model by trying to satisfy the desire of particular communities’ for public recognition by officially promoting things like state-subsidized denominational schools.
According to Sen, this is regrettable because it leads to people giving one of their identities – religious, say, or cultural – priority over all others at a time when it is essential that children broaden their intellectual horizons.
By embracing the kind of separatism that such schools represent, the British are now saying, “This is your identity and you can have nothing else.” That approach amounts to communitarianism, not multiculturalism.
In the last few years, the “French model” has also been subjected to misinterpretation, due to confusion about its basis – genuine inclusion in the life of society, which means genuine equality in terms of access to public services, the social welfare system, schools and universities, employment, and so on.
Republicanism grants each individual, regardless of his or her other identities equal rights in order to achieve universal equality.
It does not deny distinctive identities and gives each the right to express itself within the private sphere.
The temptation of communitarianism, which the French have debated for at least a decade, comes from the wish to turn the failure of genuine equality into something positive.
It offers integration by default within the differentiated space of various communities – a sort of imprisonment by civilization, Sen would say.
But you cannot dress up failure in the clothes of success.
As long as urban areas are socially and economically deprived, communitarianism will only serve to mask the violation of the principle of equality.
Social groups are then measured in terms of their “ethnic” or “racial” differences.
Because the social conditions of the “French model” have been so neglected, the model is now a living contradiction of its core principle: equality.
To reverse the trend, French republicanism must, like English multiculturalism, contradict itself in order to fulfil itself.
The French must recognize that equality before the law is a core principle, but a weak one; it needs to be complemented by a stricter vision of how to achieve equality.
This vision should make republican efforts proportional to the importance of people’s handicap in order to free them from the burden of their initial conditions.
Genuine equality in the public sphere – which differs according to the values and history of each country – implies a minimal level of acceptance of a country’s history and values.
Sen says that what is being accepted here should be thought of as national identity.
But this identity must be open.
It is an identity we share by living together and by what we have in common, whatever the differences between our multiples identities.
The great British novelist Joseph Conrad, born Józef Teodor Konrad Korzeniowski to Polish parents in Russian-ruled Ukraine, said that words are the biggest enemy of reality.
The appeal of “national identity” must not be turned into a collective smokescreen behind which inclusion becomes a disembodied dream coexisting with the communitarianism that is now emerging from its failure.
Give Children a Break
The buzzword of preschool and primary school education in many countries over the past 20 years has been “accountability.”
Advocates suggest – rightfully, I think – that scarce tax dollars should be spent only on programs that “work.”
But one of the less noticed effects of the movement for greater accountability has been that children’s opportunities for free time and opportunities to interact with their peers, especially at recess, has been eliminated or diminished in many school systems in the United States, Canada, and Great Britain.
Politicians and school superintendents view “accountability” as a way to prove that they are “tough on education” and are striving to improve academic performance.
Indeed, it seems like common sense that reducing recess time would have a positive effect on achievement – a position endorsed by educational leaders like Benjamin Canada, a former superintendent of schools in Atlanta, Georgia.
But there is no empirical or theoretical evidence to support this claim.
On the contrary, whereas many educators recognize the centrality of teaching skills and maximizing efficient use of classroom time, they also advocate breaks between periods of intense work to allow children to relax and interact with peers.
They also hope that children will return to their classrooms after their breaks and work with renewed interest.
There can be common ground between these two positions, particularly with respect to primary schools.
While accepting the need for accountability, our best theory and empirical evidence must be used to guide practice.
To do otherwise is to squander the trust and resources of children, families, taxpayers, and educators.
Indeed, far too many of the policies being recommended for primary schools have no scientific basis.
I am not aware of any data supporting the idea that eliminating recess maximizes children’s attention to classroom tasks.
In fact, experimental data supports the argument that what goes on during recess periods is “educational” in the traditional sense.
Specifically, children are more attentive to classroom tasks after recess than before recess.
Attention to classroom tasks, such as reading, is related to more general indicators of cognitive performance, such as reading achievement , so it is an important indicator of the effects of break time .
Anecdotal evidence from East Asia also suggests that children’s attention to classroom work is maximized when instructional periods are relatively short and followed by breaks.
In most East Asian primary schools, for example, children are given a 10-minute break every 40 minutes or so.
When children come back from these breaks, they seem more attentive and ready to work than before.
American experimental evidence that my colleagues and I gathered also supports these claims.
To illustrate the role of recess on attention, consider the findings of a series of experiments conducted in a public elementary school, in which we manipulated recess timing, or the time children spent doing seatwork before recess.
On randomly assigned days, the children went out to recess at 10 a.m. or at 10:30 a.m.
Before and after the break, children’s attention to classroom tasks was coded.
In three of the four experiments, we also controlled the tasks on which children worked before and after recess.
In all the experiments, the children were more attentive after the recess than before, and they were less attentive when the break came later.
Furthermore, in many cases, gender moderated the effects of recess. First, in reading assignments, the children were more attentive to same-gender, relative to other-gender, books.
Second, boys’ attention was especially sensitive to recess timing: boys were more likely than girls to be inattentive when recess came later.
In one of our experiments, the recess period was held indoors rather than outdoors.
We chose this venue first, because the effects of indoor recess on children’s attention would provide insight into the role of a relatively sedentary break period on subsequent attention.
If children’s attention were greater after the indoor break than before, the role of physical activity per se would be minimal.
Second, as a policy matter, educators sometimes use indoor recess as an alternative to outdoor breaks.
The results from this experiment replicated the findings from the outdoor recess results: the children were more attentive after recess than before.
In conclusion, these experiments support the idea that providing breaks over the course of instruction facilitates children’s attention to classroom tasks.
The fact that these results were obtained using well-controlled field experiments and replication across a number of studies instills confidence in the findings.
Educational policymakers should therefore use these findings to guide policy.
If they do not, concerned citizens should demand that educators provide a justification for the policy that they do impose on schoolchildren.
School officials and politicians often extol Asian educational practices, but they should also consider Asian recess practices in the context of an extended school day and academic year.
Extending the length of the school day and the academic year – a key priority of “accountability” advocates – might positively affect children’s achievement while simultaneously providing parents with badly needed additional childcare.
But requiring that children spend more time in school will not boost cognitive performance and social competence unless we also increase the time children spend outside the classroom.
Giving the Well-Performing State Its Due
MADRID – The triumph of democracy and market-based economics – the “End of History,” as the American political philosopher Francis Fukuyama famously called it – which was proclaimed to be inevitable with the fall of the Berlin Wall, soon proved to be little more than a mirage.
However, following China’s intellectual pirouette to maintain one-party rule while embracing the capitalist credo, history’s interpreters shifted their focus to the economy: not everybody would be free and elect their government, but capitalist prosperity would hold sway worldwide.
Now, however, the economic tumult shaking Europe, the erosion of the middle class in the West, and the growing social inequalities worldwide are undermining capitalism’s claim to universal triumph.
Hard questions are being asked: Is capitalism as we know it doomed?
Is the market no longer able to generate prosperity?
Is China’s brand of state capitalism an alternative and potentially victorious paradigm?
The pervasive soul-searching prompted by such questions has nurtured a growing recognition that capitalism’s success depends not only on macroeconomic policy or economic indicators.
It rests on a bedrock of good governance and the rule of law – in other words, a well-performing state.
The West overlooked the fundamental importance of this while it was fighting communism.
The standard bearers of the Cold War were not just the United States and the Soviet Union, but, in ideological terms, the individual and the collectivity.
When competing in newly independent or developing countries, this ideological opposition became Manichean, fostering a fierce suspicion, if not outright rejection, of rival principles.
As a result, strengthening state institutions was too often seen in the West as communist subterfuge, while the Soviet bloc viewed the slightest notion of individual freedom and responsibility as a stalking horse for capitalist counter-revolution.
Leading economists have long argued that the West’s greater reliance on markets resulted in faster and more robust economic growth.
But viewing the state and the market in terms of their inherent conflict no longer reflects reality (if it ever did).
Indeed, it is increasingly obvious that the threat to capitalism today emanates not from the state’s presence, but rather from its absence or inadequate performance.
Consider recent events in Argentina, which is facing certain economic losses as anxious investors have second thoughts about the country in the aftermath of the government’s nationalization of energy giant YPF.
That response is only logical, as investors seek the security of a well-functioning legal system to protect them from capricious political decisions.
Mexico provides further proof that the market alone is not enough.
An efficient judiciary and effective policing are necessary for capitalism to thrive.
In Brazil, the government is daring, for the first time, to address the lawlessness of the overcrowded favelas that ring the country’s large cities.
Or consider Ghana’s prosperity and how, like Brazil’s, it is going hand in hand with improved governance.
At the opposite extreme, Venezuelan President Hugo Chávez’s undermining of his country’s institutions, prodding it onto a narco-state trajectory, places Venezuela alongside Haiti as an exception to Latin America’s recent economic success.
More generally, the world’s thriving countries are those with strong and effective institutions, backed by legal frameworks that guarantee the rule of law. Latin America and Africa are not the only examples that prove the point.
The European Union’s internal problems, and its ongoing sovereign-debt crisis, are clearly linked to the weakness of its institutions, and, on Europe’s periphery, it still confronts feckless democracies.
Indeed, on Europe’s doorstep, the show trial and imprisonment of former Ukrainian Prime Minister Yulia Tymoshenko is jeopardizing her country’s international economic standing.
In particular, President Viktor Yanukovych’s contempt for the rule of law has put Ukraine’s relations with the European Union in cold storage, with a comprehensive free-trade and association agreement on hold pending the release of Tymoshenko and other political prisoners.
Meanwhile, political trials in Egypt are attracting international attention and deterring foreign investment.
In Asia, China is exposing the fallacy of looking at state capitalism as a competing alternative to liberal capitalism.
Approaching them as alternatives is, in fact, little more than an intellectual remnant of the Cold War, much like the concept of “state capitalism” itself.
With its remarkable ability to adapt, China is making strides to accommodate the rising power of its markets and people.
In the process, officials are acknowledging the importance of good governance, as demonstrated by recent efforts to justify the purge and investigation of Bo Xilai as an example of the Communist Party “safeguarding the rule of law.”
Adam Smith, that icon of market theory, argued that wealth is created when public institutions enable the “invisible hand” of the market to align interests.
The Cold War distorted that wisdom.
In a world free of that era’s ideological constraints, it is time to say loud and clear that the future of capitalism is linked to effective governance and the rule of law, and thus to the consolidation of well-functioning states.
Giving Till it Heals
In my new book The End of Poverty , I show how extreme poverty can be ended by 2025, but only if the rich world follows through on its promise to help the poorest countries.
In order to thrive, and to foster the private-sector investment needed for long-term growth, an economy requires functioning health and education systems, investments in soil nutrients and water management, and basic infrastructure such as electricity and motorized transport.
Yet the poorest countries, even well governed ones, lack the resources to finance these investments.
Lack of adequate foreign assistance is one of the greatest disgraces on our planet, and the United States has been the biggest laggard of all.
It is urgent that the US wake up to global realities, and that it follow through on its commitments.
The most famous single promise by the rich countries has been to provide aid to the poorest countries equal to at least 0.7% of their GNP.
The commitment began 44 years ago, in 1961, when the United Nations General Assembly adopted the objective that foreign assistance should increase significantly, “so as to reach as soon as possible approximately 1% of the combined national incomes of the economically advanced countries.” At the time, foreign assistance was about 0.5% of rich-country income.
Despite the promises, aid continued to decline.
By the early 1990’s, official development assistance was still around 0.33% of donor GNP, and by the early 2000’s, it had declined to around 0.22% of GNP.
Now it is roughly 0.25% of GNP.
But the long-term decline in the ratio of aid to GNP did not stop the rich world from promising time and again to reach 0.7% of GNP, including at the Rio Earth Summit in 1992 and the Copenhagen Summit on Social Development in 1995.
At the start of the new millennium, the world’s leaders got together to adopt the Millennium Development Goals, the global commitment to halve extreme poverty by 2015.
To implement these commitments, world leaders, including US President George W. Bush, met again in Monterrey, Mexico, to adopt the Monterrey Consensus on how to achieve the breakthrough from poverty.
The personal presence of Bush is notable, because the rich countries once again adopted the target of 0.7% of GNP, with the US being a signatory.
The US government often declares these days that it is not bound by any “arbitrary” numerical target such as 0.7% of GNP.
Top officials even declare that the US never signed on to such a goal.
Yet the US and other countries did sign the Monterrey Consensus urging “developed countries that have not done so to make concrete efforts towards the target of 0.7% of Gross National Product as official development assistance.” It could hardly be more clear.
Alas, the US has shown absolutely no “concrete efforts” towards keeping this commitment.
In fact, US official development assistance amounts to just 0.15% of America’s GNP, which is less than one-fourth the global target.
This contrasts with the 4% of GNP that the US spends on its military, roughly $500 billion this year.
So the US spends around thirty times more on the military than it does on peaceful development aid for the poorest countries.
From a global point of view, there are currently five countries that have reached 0.7% of GNP in aid: Denmark, Luxembourg, the Netherlands, Norway, and Sweden.
Six more countries, all in Europe, have recently set a timetable to reach 0.7% of GNP by the year 2015.
They are Belgium, Finland, France, Ireland, Spain, and the United Kingdom.
UN Secretary-General Kofi Annan, in his report in advance of the UN summit of world leaders in September 2005, has called on all donor countries to reach at least 0.5% of GNP in aid by 2009, and 0.7% by 2015.
He also noted that countries like Germany and Japan that aspire to permanent UN Security Council membership have a particular responsibility of global stewardship in reaching the target.
Sadly, the ideological mouthpieces for the super-rich in the US, especially the editorial page of The Wall Street Journal , remain bitterly opposed to foreign aid, even if it’s just 70 cents per hundred dollars of income!
In criticizing my book, a Wall Street Journal review said that I was calling for “Giving Till it Hurts.”
But there is a limit to greed.
I am quite sure that The Wall Street Journal does not really represent the interests or views of many or even most of American rich people, including the millionaires and billionaires whose contributions to aid could make a huge difference for the lives of millions of people.
Many remarkable philanthropists, such as Bill Gates, are already leading the way.
I believe that few wealthy people would refuse to contribute a small portion of their huge wealth for the chance to save the lives of millions of people each year and help the poorest countries get the first foot on the ladder of economic development.
They will know that they would not only save lives, but also contribute to a much safer and more prosperous world.
Instead of worrying that 70 cents per $100 is giving till it hurts, our slogan in the rich countries should be “Giving Till it Heals.”
Global Action for Global Recovery
WASHINGTON, DC – The global economy has entered a dangerous new phase.
There is a path to sustained recovery, but it is narrowing.
To navigate it, we need strong political will around the world – leadership over brinksmanship, cooperation over competition, and action over reaction.
One of the main problems today is too much debt in the global financial system – among sovereigns, banks, and households, and especially among the advanced economies.
This is denting confidence and holding back spending, investment, and job creation.
These countries face a weak and bumpy recovery, with unacceptably high unemployment.
The eurozone debt crisis has worsened, and financial strains are rising.
Political indecision in some quarters is making matters worse.
Social tensions bubbling beneath the surface could well add fuel to the crisis of confidence.
In these circumstances, we need collective action for global recovery along four main policy lines: repair, reform, rebalancing, and rebuilding.
First, repair.
Before doing anything else, we must relieve some of the balance-sheet pressures – on sovereigns, households, and banks – that risk smothering the recovery.
Advanced countries need credible medium-term plans to stabilize and reduce public debt.
But consolidating too quickly can hurt the recovery and worsen job prospects. There is a solution.
Credible measures that deliver and anchor savings in the medium term will help create space to accommodate growth today – by allowing a slower pace of consolidation.
Of course, the precise path is different for each country, as some are under market pressure and have no choice, while others have more space.
It is also important to relieve pressure on household and banks.
With respect to the United States, I welcome President Barack Obama’s recent proposals to address growth and employment; actions like more aggressive principal-reduction programs or helping homeowners to take advantage of low-interest rates would also help.
And, in Europe, the sovereigns must address firmly their financing problems through credible fiscal consolidation.
In addition, to support growth, banks must have sufficient capital buffers.
The second issue is reform, with the financial sector a high priority.
On the positive side, we have broad agreement on higher-quality capital and liquidity standards with appropriate phase-in arrangements.
But substantial gaps remain and must be addressed through international cooperation in order to avoid regulatory arbitrage.
I would also include the social dimension under the reform banner – particularly the need to identify and nurture sources of growth capable of generating sufficient jobs.
This is especially important for the young.
The third target of collective action, rebalancing, has two meanings.
First, it means shifting demand back to the private sector when it is strong enough to carry the load.
That hasn’t happened yet.
Rebalancing also involves a global demand switch from external-deficit countries to those running large current-account surpluses.
With lower spending and higher savings in the advanced economies, key emerging markets must take up the slack and start providing the demand needed to power the global recovery.
But this rebalancing, too, has not happened sufficiently, and if the advanced economies succumb to recession, nobody will escape.
The fourth policy imperative is rebuilding.
Many countries, including those with low income levels, need to rebuild their economic defenses – for example, by strengthening their budget positions – to protect themselves against future storms.
This will also help to provide the space for growth-enhancing public investment and important social safety nets.
In these circumstances, the International Monetary Fund – with its 187 member countries – is uniquely positioned to foster collective action.
Our policy advice can help shine a light on the pressing issues of the day – growth, core vulnerabilities, and interconnectedness.
Our lending can provide breathing space for countries in difficulty.
And, looking beyond the crisis horizon, the IMF can also help construct a safer and more stable international financial system.
This is no time for half-measures or muddling through.
If we seize the moment, we can navigate our way out of this crisis and restore strong, sustainable, and balanced global growth.
But we need to act quickly – and together.
सार्वजनिक स्वास्थ्य को मानचित्र पर लाना
सिएटल – पच्चीस वर्ष पहले, बड़ी आबादियों के लिए सार्वजनिक स्वास्थ्य की स्थिति एक ऐसे डॉक्टर जैसी थी जो उचित निदान के बिना किसी रोगी का इलाज करने की कोशिश कर रहा हो। जिन रोगों और चोटों के कारण जीवन का असमय अंत हो जाता था और अपार कष्ट सहन करना पड़ता था उन पर पूरी तरह से नज़र नहीं रखी जाती थी।
उस समय, विभिन्न रोगों के लिए सदाशयपूर्वक सरोकार रखनेवाले पैरोकारों ने मृत्यु के जो आँकड़े प्रकाशित किए उनसे उन्हें धन जुटाने और ध्यान आकर्षित करने के मुद्दे को उठाने में मदद मिली। लेकिन जब सभी दावों को जोड़ा गया, तो संबंधित वर्ष में मरनेवाले लोगों की संख्या वास्तव में मरनेवाले लोगों की कुल संख्या की तुलना में कई गुना अधिक थी। और जब नीति निर्माताओं के पास सही आंकड़े होते भी थे, तो उनमें आमतौर पर केवल लोगों की मौत का कारण शामिल होता था, उन बीमारियों का नहीं जिनसे उनका जीवन पीड़ा से भर जाता था।
इस समस्या का समाधान करने के लिए, एलेन लोपेज़ और मैंने 1990 में ग्लोबल बर्डन ऑफ़ डिसीज़ (जीबीडी) परियोजना शुरू की। निर्णयकर्ताओं को दुनिया के सबसे बड़े स्वास्थ्य खतरों के बारे में जानकारी चाहिए होती है, और यह भी कि समय बीतने के साथ उनमें विभिन्न आयु समूहों में, लैंगिकता के अनुसार किस तरह का बदलाव आया है, ताकि वे यह सुनिश्चित कर सकें कि हर किसी को यथासंभव सबसे लंबे समय तक, अधिक स्वस्थ जीवन जीने का अवसर प्राप्त होता है।
यह सुनिश्चित करके कि हर मृत्यु को केवल एक बार गिना जाता है, और खराब स्वास्थ्य के कारणों के विस्तृत आँकड़े उपलब्ध करके, जीबीडी द्वारा कैंसर के प्रभाव की पीठ के निचले हिस्से में दर्द या अवसाद से तुलना की जा सकती है। इससे विभिन्न देशों के बीच स्वास्थ्य देखभाल के निष्पादन की तुलना भी की जा सकती है।
जीबीडी के 1990 के अध्ययन और बाद के संशोधनों के फलस्वरूप आबादी के स्वास्थ्य का मापदंड बढ़ गया जिससे निर्णयकर्ताओं को अधिक विश्वसनीय और उपयोगी जानकारी उपलब्ध हो सकी। इसने मानसिक बीमारियों और सड़क पर लगनेवाली चोटों जैसी ध्यान न दी गई पीड़ाओं के महत्व के प्रति अंतर्राष्ट्रीय विकास समुदाय की आँखें भी खोल दीं। विश्व बैंक और बिल एंड मेलिंडा गेट्स फाउंडेशन जैसे दाता अपने निवेशों के मार्गदर्शन के लिए जीबीडी डेटा का उपयोग करते हैं, और 30 से अधिक देशों ने स्वयं अपने रोग-का-कारण के अध्ययन किए हैं।
ऑस्ट्रेलिया, बोत्सवाना, चीन, मैक्सिको, नॉर्वे, रवांडा, सऊदी अरब और ब्रिटेन जैसे देश जीबीडी के निष्कर्षों का उपयोग स्वास्थ्य नीतियों को सूचित करने के लिए कर रहे हैं। चीन में, 2013 में नीति शिखर सम्मेलन में शुरू की गई जीबीडी परियोजना के परिणामों से, देश की आबादी पर वायु प्रदूषण के घातक प्रभाव के बारे में जागरूकता पैदा हुई। उन निष्कर्षों से स्वास्थ्य पर प्रदूषण के नकारात्मक प्रभावों पर अंकुश लगाने के लिए चीनी सरकार के प्रयासों को मूर्त रूप देने में मदद मिली, और चीनी शोधकर्ता अब वैश्विक सहयोगात्मक प्रयास के प्रमुख सदस्य हैं।
रवांडा में जब जीबीडी अध्ययन से यह पता चला कि ठोस ईंधन से खाना पकाने से घर के अंदर होनेवाला वायु प्रदूषण मौत का एक प्रमुख क��रण है तो सरकार ने सबसे अधिक कमजोर परिवारों को एक लाख प्रदूषण रहित स्टोव वितरित करने का एक कार्यक्रम आरंभ किया। रवांडा के वैज्ञानिक और स्वास्थ्य मंत्रालय के अधिकारी – स्वयं मंत्री सहित – जीबीडी के लिए महत्वपूर्ण योगदानकर्ता हैं।
आज जीबीडी में लगातार सुधार हो रहा है जिसका श्रेय 114 देशों के 1300 से अधिक सहयोगियों के प्रयासों को जाता है। ये सहयोगी उन मॉडलों में सुधार करते हैं जिन पर परियोजना का निर्माण किया जाता है, अध्ययन के परिणामों की जाँच करते हैं, नए डेटा सेटों का योगदान करते हैं, और परिणामों को मीडिया के आउटलेटों, शैक्षिक संस्थानों, और निर्णयकर्ताओं को संप्रेषित करते हैं। नवीनतम जीबीडी अध्ययन से पता चला है कि एक और रोग, जिसकी अंतर्राष्ट्रीय विकास हलकों में शायद ही कभी चर्चा हुई हो वह पीठ के निचले हिस्से और गर्दन में होनेवाला दर्द है, यह विश्व स्तर पर होनेवाली स्वास्थ्य हानि का चौथा सबसे बड़ा कारण है। इसने मध्यम आय वाले देशों में महामारी विज्ञान के संक्रमण की तीव्र गति और उप-सहारा अफ्रीका में संचारी, मातृ, नवजात शिशु, और पोषण संबंधी विकारों को भी उजागर किया है।
लेकिन अगर जीबीडी डेटा के अधिक विस्तृत विवरण उपलब्ध कर पाता तो वह नीति संबंधी वादविवादों को सूचना देने के लिए और अधिक कार्य कर सकता था और स्वास्थ्य में सुधार के लिए अधिक कार्रवाई करने के लिए प्रेरित कर सकता था। नीति निर्माता जवाबदेह हैं, सबसे पहले उन ग्राहकों के प्रति जिनकी अनूठी ज़रूरतों को पूरा करना उनके लिए आवश्यक है। स्थानीय रोग के कारणों के अनुमान इबोला जैसी व्याधियों का मुकाबला करने, मध्यम आय वाले देशों में गैर संचारी रोगों से ज्यादा मौतें होने को रोकने, और उप सहारा अफ्रीका में मातृ एवं शिशु स्वास्थ्य से संबंधित सतत विकास लक्ष्यों को पूरा करने के लिए आवश्यक हैं।
निर्णयकर्ताओं को अपने डेटा का बेहतर उपयोग करने में मदद करने के लिए, इन्स्टीट्यूट फॉर हैल्थ मीट्रिक्स एंड इवैल्यूएशन, जिसका मैं प्रधान हूँ, विश्लेषण के नवोन्मेषी स्तर पर रोग के कारणों के भू-स्थानिक मानचित्र तैयार कर रहा है। इन मानचित्रों को तैयार करना मलेरिया एटलस परियोजना द्वारा विकसित पद्धतियों की बदौलत संभव हो सका है, जिसने किसी भी रोगजनक के बारे में हमारी समझ की तुलना में मलेरिया की एक बेहतर स्थानिक समझ उत्पन्न की है।
भू-स्थानिक मानचित्र उन क्षेत्रों की ठीक-ठीक पहचान कर सकते हैं जिनमें उल्लेखनीय प्रगति हो रही है, इससे हम उन समुदायों की पहचान कर सकते हैं जिन्होंने अपने पड़ोसियों की तुलना में कुछ अलग किया है। इन अध्ययन मामलों से समुदाय एक-दूसरे की सफलताओं को दोहराने में मदद कर सकते हैं। इसका एक उदाहरण कैली, कोलम्बिया है जिसमें 1990 के दशक में हत्या दरों में तब कमी हो गई जब शहर के महापौर, रोड्रिगो ग्युरेरो ने शराब पर लगे प्रतिबंधों को कठोर बना दिया, बहुत अधिक गरीब इलाकों में सामुदायिक विकास कार्यक्रम आरंभ किए, और सार्वजनिक स्थानों में अस्थायी रूप से बंदूकों पर प्रतिबंध लगा दिया।
कोलंबिया की राजधानी बोगोटा के मेयर को जब कैली के इस कार्यक्रम के बारे में पता चला तो उन्होंने अपने यहाँ इसी तरह के उपायों को लागू किया जिससे नगर में धीरे-धीरे हत्याओं को कम करने में मदद मिली। तब से, ग्युरेरो ने अंतर अमेरिकी विकास बैंक के साथ मिलकर ऐसे कार्यक्रम विकसित करना शुरू कर दिया है जिनसे अन्य लैटिन अमेरिकी देशों को अपने समुदायों में हिंसा को कम करने में मदद मिलती है। 2014 में, ग्युरेरो को स्वास्थ्य में सुधार के लिए अपने डेटा का उपयोग करने के लिए रॉक्स पुरस्कार प्राप्त हुआ, जिससे उनके कार्य को और अधिक प्रोत्साहन मिला। भू-स्थानिक मानचित्रण से हमें और कई रोड्रिगो ग्युरेरोज़ों की पहचान करने और उनकी उपलब्धियों का समर्थन करने में मदद मिलेगी।
अंतर्राष्ट्रीय समुदाय जब एमडीजी के उत्तरवर्ती ढांचे, सतत विकास लक्ष्यों, के वित्तपोषण और प्रगति पर नज़र रखने के लिए आवश्यक साधनों पर सहमति के लिए एकत्र होगा, तो प्रगति पर नज़र रखने और यह दर्शाने के लिए भू-स्थानिक मानचित्रण महत्वपूर्ण होगा कि इस दिशा में किन सुधारों की जरूरत हो सकती है। स्वास्थ्य मापदंड की दृष्टि से हम 1990 में जहाँ थे, वहाँ से अब काफी आगे पहुँच चुके हैं। ध्यान केंद्रित प्रयासों और अधिक नवोन्मेष से, अगले 25 वर्षों में हम और भी अधिक प्रगति कर सकते हैं जिससे दुनिया को हमारे सामूहिक स्वास्थ्य निवेशों का अधिकाधिक लाभ प्राप्त करने में मदद मिलेगी।
Global Disaster Recovery
PALO ALTO – With the global economy mired in recession and financial crisis, policymakers everywhere have launched a series of monetary, financial, and fiscal responses.
Nevertheless, economies continue to contract, unemployment to rise, and wealth to decline.
Countries’ policy responses have ranged from modest to immense.
China has undertaken a 6%-of-GDP stimulus package aimed (mostly) at infrastructure; the United States has enacted a two-year $800 billion spending and tax rebate package.
The Federal Reserve and the Bank of England lowered short-term interest-rate targets to near zero and are adopting “quantitative easing” – i.e., continuous infusions of money.
Despite all this, massive excess bank reserves remain unlent.
During Japan’s “lost decade,” the Bank of Japan mostly bought Japanese government bonds, whereas the Fed is trying to reopen secondary markets for securitized private lending (which in the US is as important as bank lending), buying mortgage-backed securities and consumer and business loans, as well as U.S. Treasury bonds.
The Bank of England is buying UK government bonds (“gilts”).
The European Central Bank, reflecting a strong inflation concern, has responded more slowly.
The US government is now insuring, lending or spending over $10 trillion from guaranteeing money market funds to the AIG bailout to the Fed’s swap lines supporting foreign central banks.
Analogous guarantees and bank bailouts have occurred in the other major economies (the ECB does not play this role for Europe; national governments do).
The fiscal response – tax cuts and spending increases – has varied considerably, being somewhat more tepid in debt-averse Europe than in the US and China.
The US is hectoring Europe for more fiscal stimulus, while the Europeans pressure the US for greater and more globally coordinated financial regulation.
Will near-zero interest rates, financial-sector bailouts, and fiscal stimulus work?
What else could be done?
As for fiscal measures, the empirical evidence suggests that three-quarters of consumption is based on longer-term economic prospects, not short-run disposable income.
Thus, temporary tax rebates are mostly saved, not spent.
Targeting liquidity-constrained people, especially the unemployed, is a bit more effective, as well as humane.
Some claim that infrastructure spending creates a big Keynesian “multiplier,” a bigger increase in incomes than the initial spending (estimates range up to about 1.5 times the initial increase in spending).
But infrastructure spending is usually slow – and almost always driven heavily by parochial political considerations.
Japan’s annual 15-20 trillion yen infrastructure-intensive stimulus didn’t prevent its lost decade.
Nor did American government spending end the Great Depression (unemployment was still over 15% in 1939, a decade after the depression’s onset).
A more effective stimulus would speed up spending that needs to be done anyway. Or cut taxes to change the marginal calculus of firms on layoffs and consumers on spending – for example, by suspending the payroll tax on firms and workers for a year or suspending part or all of the sales tax or national value-added tax.
Better yet would be permanent rate reductions and controls on future spending.
But governments should be wary of expensive fiscal stimulus.
It is likely to yield little cushion for employment and income per dollar spent, while servicing the large debt accumulation will impede long-run growth, either by forcing substantial future tax increases or spending cuts, or by forcing central banks to inflate.
Indeed, China frets over the safety of the US Treasury bonds that it holds.
In theory, enough quantitative easing implies future inflation, motivating people to buy big-ticket items, like cars and appliances, now to avoid the run-up in prices later.
(In practice, it is an experiment.)
High and rising inflation creates great costs and is difficult to reverse.
After mitigating the downturn, central bankers must withdraw the immense infusion of liquidity before inflation takes off, a tricky maneuver.
The bottom line, though, is that better policies can at best mitigate the economic consequences of this horrible recession.
We will not get out of this mess completely any time soon.
Sometimes, strong recoveries follow recessions, but recovery following financial crises is always immensely painful, time-consuming, and traumatic.
The economists Ken Rogoff and Carmen Reinhart have argued that the major financial crises of the last century typically lasted a half-decade or longer.
In many of the previous banking crises, it was a country or a region that was hit hard (Argentina, Japan, etc.).
This time, virtually every economy is suffering substantially and the banking crisis is global.
Policymakers will continue to throw whatever ammunition they can find at the problem, but it will take time for the deleveraging from the boom to run its course.
At times of serious economic distress, policymakers thrash about seeking solutions, and some people lose confidence in the economic system itself.
Indeed, in the Great Depression of the 1930’s, it was common for Western intellectuals to turn to communism and central planning as a hoped-for panacea.
Some never returned from that intellectual journey, despite the collapse of communism.
There is, of course, no case for going back to socialism and central planning.
Once off government lifelines, we will need a better-regulated financial system.
Any financial institution that is too big or too interconnected to fail, or could quickly become so, must be closely regulated and monitored for risk and capital adequacy in real time, or be broken up into smaller firms.
In the meantime, let’s hope that Messrs. Bernanke, King, Trichet, and the world’s other central bank governors get monetary policy roughly right, and that our politicians don’t waste vast sums on ineffective fiscal stimulus.
A Global Strategy for Disaster Risk
SENDAI – Current disaster-risk levels are alarming.
The cost of damage to commercial and residential buildings worldwide is averaging $314 billion each year, with the private sector bearing as much as 85% of that price tag.
At the same time, a new United Nations report shows that annual investments in disaster-risk reduction of $6 billion can result in savings of up to $360 billion.
Hundreds of business executives, aware of the dramatic costs – and potential benefits – at stake, are now preparing to attend a UN conference on disaster-risk reduction in Sendai, Japan.
A decade ago, when the last such gathering was held, the private sector was scarcely represented.
This time, companies and entrepreneurs will be there in full force to explore a range of valuable opportunities.
The Tohoku region of Japan, where the meeting will take place, is a vivid reminder of how a disaster's economic impact reverberates far beyond its epicenter.
Devastated four years ago by the Great East Japan Earthquake and tsunami, Japan's automobile production was cut by nearly half.
The financial damage did not stop at the country's borders; as a direct result of the slowdown in Japan, automobile production dropped by some 20% in Thailand, 50% in China, and 70% in India.
The risks inherent in globalized production carry great rewards for those who know how to manage them properly.
That is why major businesses such as PricewaterHouseCoopers, Hindustan Construction Corporation, AbzeSolar, Swiss Re, AECOM, AXA Group, IBM, and others – spanning many sectors and encompassing all regions – are engaging with UN experts to improve global strategies for disaster-risk management and reduction.
This level of business engagement bodes well for pioneering a new planet-friendly and people-sensitive approach to global prosperity.
Indeed, the disaster-risk reduction conference in Sendai is the first in a series of major international gatherings this year.
Beyond Sendai, world leaders will convene in Addis Ababa in July to discuss financing for development, in New York in September to adopt a new development agenda, and in Paris in December to reach a meaningful climate-change agreement.
Taken together, these meetings promise to generate transformative action that can set the world on a safer, more prosperous, and more sustainable path.
Sustainability starts in Sendai for three major reasons.
First, by its very nature, disaster-risk reduction requires forward planning.
Second, investment in this area advances both sustainable development and climate action.
And, third, helping those who are most vulnerable to disasters is the ideal starting point for the effort to aid all people by establishing universal targets for development and climate change.
Over the last 12 months, thousands of lives were saved in India, the Philippines, and elsewhere by improved weather forecasting, early-warning systems, and evacuation plans.
Advances in risk reduction that safeguard development gains and business investments must match this progress in disaster preparedness, and we must make wise choices that create greater opportunities in the future.
For example, experts estimate that 60% of the land that will be urbanized by 2030 has not yet been developed.
Enterprises that factor disaster risk into their construction plans will avert the much higher costs of retrofitting later.
More broadly, over the next 15 years, the world will make major investments in urban infrastructure, energy, and agriculture.
If this spending is directed toward low-carbon goods, technologies, and services, we will be on our way to creating more resilient societies.
More and more industries appreciate this.
At the Climate Summit that I convened last September at the UN in New York, financial institutions, commercial and national banks, insurance companies, and pension funds vowed to mobilize more than $200 billion by the end of this year for action to address climate change.
They envisioned a host of new initiatives, including issuing so-called green bonds and shifting assets to clean-energy portfolios.
In a particularly important move, the insurance industry, representing $30 trillion in assets and investments, committed to creating a Climate Risk Investment Framework for industry-wide adoption by the end of the year.
It is time to stop addressing development and humanitarian emergencies separately.
Disaster-risk reduction lies at the nexus of development assistance, which seeks to advance better living conditions, and humanitarian aid, which begins after a disaster hits.
Starting our international calendar with the Sendai meeting on disaster-risk reduction sends a clear signal that the world is ready to integrate its strategies.
I have seen the human toll of disasters – from earthquakes in China and Haiti to floods in Pakistan and Bangladesh to Superstorm Sandy, which affected the Caribbean and North America, even inundating the lower floors of the UN facilities in New York.
When business, civil society, and government team up to help countries withstand disasters, they save lives, boost stability, and create opportunities that enable markets and people alike to flourish.
Sustainable profits.
Sustainable livelihoods.
Sustainable development.
The Economic Consequences of Drug Resistance
LONDON – When British Prime Minister David Cameron asked me in July to lead an effort to find solutions to the growing global problem of antimicrobial resistance, my first question was: “What is that?”
I soon learned that, as bacteria and parasites develop resistance to existing drugs, like antibiotics and antimalarial medications, the world is at risk of losing its battle against infectious diseases.
So my next question was: “Why me?
Don’t you need a scientist?”
It turns out that the problem of rising antimicrobial resistance is as much about economics as it is about science or medicine.
Left unchecked, it will kill millions of people every year, and have serious adverse economic consequences for the world.
For developing economies, including most of the BRIC (Brazil, Russia, India, and China) and MINT (Mexico, Indonesia, Nigeria, and Turkey) countries, the risk is particularly large.
Recent research, by an independent review on antimicrobial resistance, which I chair, has modeled the phenomenon’s likely impact on the world economy.
It suggests that if we fail to address antimicrobial resistance, the problem will grow worse.
By 2020, if we allow resistance to rise by 40%, global GDP will be 0.5% smaller than it otherwise would have been.
By 2030, it will be 1.4% smaller. By 2050, the economic shortfall will reach 3%.
The accumulated loss of global output over the next 35 years will total $100 trillion – more than one and a half times annual world GDP today.
Already, 60,000 people die every year from causes related to antimicrobial resistance in the United States and Europe – some ten times the worldwide death toll from the ongoing Ebola crisis.
By 2050, if the problem is allowed to continue to grow, antimicrobial resistance will kill more than ten million people per year.
That is more than the number of people who currently die of cancer, and greater than the number of deaths from&nbsp;diabetes, lung cancer, road traffic accidents, diarrhoeal disease, and HIV combined.
The economic costs from the resulting panic, including a collapse of travel and trade, could be devastating.
Rising rates of antimicrobial resistance will have a particularly severe impact on India, Indonesia, and Nigeria (as well as the rest of Sub-Saharan Africa).
Countries like China and Brazil, which have been successful in reducing malaria rates, could see their hard work undermined by an increase in resistance to antimalarial drugs.
The research we commissioned was based on the limited data available.
It does not take into account the damage from drug-resistant illnesses outside of hospitals or the impact of escalating healthcare costs.
Nor does it include the drop in living standards from the loss of life-enhancing treatments – for example, knee or hip replacements, cancer treatment, and caesarean sections – that rely on antibiotics to prevent infections.
The broad-brush research we conducted shows that such treatments – many of which would not be possible without effective antibiotics – add around 4% of benefit in terms of GDP.
One of my goals is to persuade policymakers at the United Nations to agree to a set of rules and policies to stop the growth of antimicrobial resistance.
In addition to highlighting the scale of the problem, the review is seeking to find ways to reduce drug resistance and to stimulate the production of new antibiotics to compensate for the loss of those that are now or will become ineffective.
Some solutions to reduce resistance will require cutting-edge technology.
We must encourage policymakers to support the development of the best diagnostics.
Quicker, more accurate diagnoses will curb the current overreliance on antibiotics – a key requirement for combating resistance.
We also must develop tools to identify and halt outbreaks of resistant diseases at an early stage.
Data provided by diagnostic devices could be a potent weapon in containing these outbreaks.
Other solutions are low tech, requiring little more than common sense.
We need to start washing our hands thoroughly and often.
We need to stop demanding antibiotics from our doctors.
And, when antibiotics are called for, we need to finish the prescribed course.
As we try to prevent resistance to existing drugs, we will also need to examine the impact of antibiotics in agriculture.
Developing new antibiotics is a challenge, because pharmaceutical companies seem to need incentives to conduct the required research.
The review will study whether market incentives can be changed.
If they cannot, more dramatic alternatives to boost early innovation by university labs and small companies could be sought, perhaps through a targeted fund.
As the review research shows, the stakes of inaction on antimicrobial resistance are high.
Now is the time to search for bold, clear, and practical long-term solutions.
Are the Good Times Over?
STANFORD – In the 25 years before the Great Recession of 2008-2009, the United States experienced two brief, mild recessions and two strong, long expansions.
Globally, incomes grew briskly; inflation abated; and stock markets boomed.
Moreover, the recovery from the last major slump, in the early 1980s, brought about a quarter-century of unprecedentedly strong and stable macroeconomic performance. This time, however, the return to growth has been much more difficult.
America’s recovery since the Great Recession, has been inconsistent, with growth repeatedly picking up and then sputtering out.
In fact, the US has not experienced three consecutive quarters of 3% growth in a decade.
Though lower oil prices are helping consumers, this gain is partly offset by less energy investment, and the effects of the stronger dollar will be even larger.
The US is not alone.
Though most European economies are now growing again, aided by lower oil prices and currency depreciation, the pace of expansion remains anemic.
Similarly, Japan’s recovery remains fragile, despite strong efforts by the government.
Even the major emerging economies, which were supposed to serve as global growth engines in the years ahead, are struggling: China and India have downshifted, and Brazil and Russia are contracting.
When a boom or bust lasts for such a long time, it begins to seem like it will continue indefinitely.
Six years after the crisis, some prominent economists are asking whether insufficient investment and/or waning gains from technological innovation have pushed the global economy into a “new normal” of lower growth and slow, if any, gains in living standards.
Some economists call this “secular stagnation” – a fancy way of saying that the good times are gone for good.
Are they right?
Total economic growth amounts to roughly the sum of the growth of work hours (an increase in the number of workers or the amount of hours that they work) and productivity (output per hour of work).
If productivity improves by one percentage point in a year, the improvement of living standards over the subsequent generation would be augmented by one-third.
Over time, a productivity improvement of even a fraction of a percentage point would be immensely consequential.
Productivity can be enhanced by capital investment, technological innovation, and improvements in the knowledge and skills of the labor force, though economists disagree on which has the largest impact.
According to my research with Larry Lau, technology has played the largest role boosting productivity in the G-7 economies since World War II.
Given this, America’s declining productivity growth – which has averaged just 0.7% annually since 2010 – has led some observers to blame the slowdown on inadequate technological advances.
These pessimists, such as the economist Robert Gordon, claim that new innovations are unlikely to improve productivity as fundamentally as electricity, automobiles, and computers did in the last century.
Optimists counter that smart phones, Big Data, and expected advances in nanotechnology, robotics, and biosciences are harbingers of a new era of technology-driven productivity improvements.
It may be impossible to predict the next “killer app,” they argue, but it will always be developed.
Both sides cite Moore’s Law, named for Intel’s co-founder, Gordon Moore, who noticed that the density of transistors on a chip could be doubled every 18 months.
The pessimists claim that this is becoming harder and more expensive; the optimists hold that the law will remain valid, with chips moving to three dimensions.
Clearly, the trajectory of technological progress is difficult to predict.
In fact, the main commercial value of new technology is not always apparent even to the inventor.
When Guglielmo Marconi made the first transatlantic wireless transmission over a century ago, he was competing with the telegraph in point-to-point communication; he never envisioned popular mass-broadcast radio.
Thomas Edison designed the phonograph to help the blind – and filed a lawsuit to prevent it from being used to play music.
Complicating matters further is the fact that the next wave of productivity-enhancing technological developments are likely to occur in sectors such as health care, where their economic impact is difficult to measure.
Economists believe that many improvements in health-care quality – such as more effective treatments for cataracts or cardiac disease – are not accurately reflected in real GDP, and are incorrectly reported as price increases.
Better measures for these changes are essential for an accurate assessment of economic progress.
To be sure, technology-driven growth carries some risks.
While old fears that automation and artificial intelligence would cause widespread structural unemployment have never been borne out, technology and globalization have put downward pressure on wages for all but the most skilled workers in the advanced economies.
Capital’s share of national income has increased, while labor’s share has fallen.
But implementing policies that restrict potentially productivity-enhancing technologies would be a grave mistake.
To encourage more robust growth and the associated improvements in living standards, governments should ensure that the private sector has sufficient incentives for innovation, entrepreneurship, and investment in physical and human capital.
For example, officials could cut red tape, rein in deficits and debt, enact tax policies conducive to capital formation, reform the education system, and invest in research and development.
Of course, no one should expect a return to the pre-crisis boom years, given the demographic pressures that almost all major economies – including China – are facing.
But these incentives stand the best chance of continuing the flow of productivity-enhancing technology, from startups to the research divisions of established companies in industries from technology to energy to health care.
Two Cheers for the New Normal
JAKARTA – The conventional wisdom about the state of the world economy goes something like this: Since the start of the 2007-2008 financial crisis, the developed world has struggled to recover, with only the United States able to adjust.
Emerging countries have fared better, but they, too, have started to flounder lately.
In a bleak economic climate, the argument goes, the only winners have been the wealthy, resulting in skyrocketing inequality.
That scenario sounds entirely right – until, on closer examination, it turns out to be completely wrong.
Start with economic growth. According to the International Monetary Fund, during the first decade of this century, annual global growth averaged 3.7%, compared to 3.3% in the 1980s and 1990s.
In the last four years, growth has averaged 3.4%.
This is far lower than what many had hoped; in 2010, I predicted that in the coming decade, the world could grow at a 4.1% annual rate.
But 3.4% is hardly disastrous by historical standards.
To be sure, all of the large, developed economies are growing more slowly than they did when their economic engines were roaring.
But it is only the eurozone that has badly disappointed in recent years.
I had assumed, when I made my projections in 2010, that the region’s poor demographics and weak productivity would prevent it from growing at more than 1.5% a year.
Instead, it has managed only a meager 0.3%.
For Japan, the US, and the United Kingdom, the prospects are brighter.
It should be relatively straightforward for them to grow at an average rate that outpaces that of the last decade – a period that includes the peak of the financial crisis.
In addition, the dramatic drop in the price of crude oil will serve as the equivalent of a large tax cut for consumers.
Indeed, I am rather baffled by the IMF’s decision to downgrade its growth forecast for much of the world.
If anything, with oil prices falling, an upward revision seems warranted.
Another factor supporting a more positive outlook is the rebalancing that has occurred between the US and China, the world’s two largest economies.
Each entered the financial crisis with huge current-account imbalances.
The US was running a deficit of more than 6.5% of its GDP, and China had a surplus of close to 10% of its GDP.
Today, the US deficit has fallen to about 2%, and the Chinese surplus is less than 3%.
Given that their intertwined imbalances were key drivers of the financial crisis, this is a welcome development.
It has recently become fashionable to disparage the economic performance of the large emerging countries, particularly China and the other BRIC economies (Brazil, Russia, and India).
But it is hardly a surprise that these countries are no longer growing as fast as they once did.
In 2010, I predicted that China’s annual growth would slow to 7.5%.
It has since averaged 8%.
India’s performance has been more discouraging, though growth has picked up since early 2014.
The only real disappointments are Brazil and Russia, both of which have struggled (again, not surprisingly) with much lower commodity prices.
Their lethargic performance, together with the eurozone’s, is the main reason why the world economy has not managed the 4.1% growth that optimists like me thought was feasible.
The conventional wisdom on wealth and inequality is similarly mistaken.
From 2000 to 2014, global GDP more than doubled, from $31.8 trillion to over $75 trillion.
Over the same period, China’s nominal GDP soared from $1.2 trillion to more than $10 trillion – growing at more than four times the global rate.
In 2000, the BRIC economies’ combined size was about a quarter of US GDP.
Today, they have nearly caught up, with a combined GDP of more than $16 trillion, just short of America’s $17.4 trillion.
Indeed, since 2000, the BRICs have been responsible for nearly a third of the rise in nominal global GDP.
And other emerging countries have performed similarly well.
Nigeria’s economy has grown 11-fold since 2000, and Indonesia’s has more than quintupled.
Since 2008, these two developing giants have contributed more to global GDP growth than the EU has.
Statistics like these utterly disprove the idea that global inequality is growing.
Gaps in income and wealth may be shooting up within individual countries, but per capita income in developing countries is rising much faster than in the advanced economies.
Indeed, that is why one of the key targets of the United Nations Millennium Development Goals – to halve the number of people living in absolute poverty – was achieved five years ahead of the deadline.
None of this is meant to deny that we are living in challenging and uncertain times.
But one thing is clear: economically, at least, the world is continuing to become a better place.
Global Energy Realism
MADRID – Energy has become a focal point of global policymaking.
As falling oil prices grab headlines worldwide, US President Barack Obama and Chinese President Xi Jinping have signed a major climate-change deal, and October’s European Council decisions could signal real progress toward a serious European Union energy policy.
This momentum should be maintained in the coming year, culminating in December’s United Nations Climate Change Conference (COP21) in Paris.
But, in order to establish a global energy system that meets growing demand within the constraints of carbon neutrality, we must avoid the pitfalls that have plagued past responses.
In particular, we must strike the proper balance between ideology and realism, the public and private sectors, and long- and short-term considerations.
And, critically, we must follow through on our commitments.
When it comes to ideology and realism, the European Union is perhaps the best example of an imbalanced approach, as Europeans’ tendency to lead with their hearts, rather than their heads, has undermined effective action.
The knee-jerk rejection of nuclear power by some EU member countries has led to sharp increases in coal usage.
Renewables have been pursued with a sort of missionary zeal, regardless of their effectiveness or feasibility.
And the EU’s “20/20/20 targets” – a 20% reduction in greenhouse-gas emissions, a 20% share for renewables, and a 20% increase in energy efficiency, all by 2020 – was more of a mantra than a policy.
Bridging the gap between the public and private sectors is vital to finance the construction of an efficient global energy system.
The International Energy Agency estimates that by 2040, the annual investment required in energy-supply infrastructure alone will total $2 trillion, up 20% from current levels.
Over the next 26 years, some $51 trillion will be needed.
This is just part of the overall infrastructure investment shortfall, which stands at $1 trillion annually – far more than what governments can afford.
That is why governments must build innovative partnerships with private-sector actors, while recognizing that energy, as a public good, must be subject to appropriate regulation and oversight.
There have been some notable moves in this direction, though it remains to be seen whether they will translate into real action.
China has spearheaded the establishment of the Asian Infrastructure Investment Bank.
More important, the World Bank, the G-20, and the EU recently launched initiatives aimed at directing the financing power of business toward infrastructure development.
The World Bank’s Global Infrastructure Facility is an open platform that brings together multilateral development banks, national governments, and private finance to shepherd infrastructure projects to completion and to fill in gaps that have hampered investment.
Pivotal to sparking this investment is the mitigation of associated political risks, especially through an enhanced role for the Bank’s Multilateral Investment Guarantee Agency.
Similarly, at last month’s summit in Brisbane, the G-20 created a new Global Infrastructure Hub to facilitate information-sharing, thereby streamlining infrastructure projects.
And, the EU’s Connecting Europe Facility has allocated €5.85 billion ($7.2 billion) from now until 2020 to help kick-start private investment in infrastructure projects linking member countries’ energy systems.
Of course, the need for private-sector involvement extends beyond investment.
The private sector is also better situated to research and develop new production methods that limit demand for fossil fuels.
To spur such action, the public sector should offer funds or guarantees, which, though risky, could offer huge benefits.
US government funding of research into hydraulic fracturing – the technology now driving the surge in America’s oil and gas production – dates back to the 1970s.
This brings us to the need to balance short-term imperatives with long-term vision.
Energy projects and policies today must account for the projected increase in emerging-market demand, while ensuring sufficient investment in future generating capacity.
For example, over the next 25 years, 60% of the EU’s generating capacity is due to retire – contributing to demand for $2.2 trillion of energy investment.
Furthermore, with US tight-oil production expected to peak in the early 2020s, new sources must be developed, such as in Iraq.
Given the long lead time for bringing new projects onstream, efforts to address the coming shortfall must begin today.
In all of these efforts, there is one common imperative: matching words with deeds.
The world does not need more commitments and pledges; it needs action.
Yet many countries continue to issue weak declarations that fail to produce genuine progress.
Once again, this problem is particularly pervasive in Europe.
The maxims of today – the need for diverse suppliers, enhanced interconnection, greater efficiency, and a sensible energy mix – have been discussed for at least a decade.
In fact, despite the seemingly unending stream of new energy initiatives and projects, Europe has made little progress; its energy situation may even be worse.
Repackaging the same old strategies – here one need look no further than European Commission President Jean Claude Juncker’s much-hyped €300 billion investment package – simply will not work.
With attention focused on COP21 next December, the coming year will be an exceptional opportunity to build a sound global energy system.
Europe, which has prided itself on its energy leadership, should set an example by developing – and then implementing – a realistic long-term strategy that involves the private sector.
Global Finance’s Supply-Chain Revolution
HONG KONG – In March 2011, the catastrophic earthquake, tsunami, and nuclear disaster that hit Japan halted production of key components on which many global supply chains depend.
The sudden disruption of these essential materials from the production process forced a reassessment of how these supply chains function.
But such vulnerabilities are not confined to the manufacturing sector.
The finance industry, too, has suffered its own near “supply chain” meltdown in recent times.
The failure of Lehman Brothers in 2008 not only roiled global financial markets, but also brought global trade practically to a standstill as wholesale banks refused to fund each other for fear of counterparty failure.
The simple banking system of the past, one based on retail savings being concentrated in order to fund the credit needs of borrowers, had evolved into a highly complex – and global – supply chain with knock-on risks of disruption comparable to those seen in Japan last spring.
Financial supply chains and those in the manufacturing sector share three key features – architecture, feedback mechanisms, and processes – and their robustness and efficiency depend upon how these components interact.
In today’s financial architecture, as with other supply chains, interdependent networks tend to concentrate in powerful hubs.
For example, just two financial centers, London and New York, dominate international finance, and only 22 players conduct 90% of all global foreign-exchange trading.
Such concentration is very efficient, but it also contributes to greater systemic risks, because, if the leading hubs fail, the whole system can collapse.
Open feedback mechanisms ensure a supply chain’s ability to respond to a changing environment, but, in the case of financial supply chains, feedback mechanisms can amplify shocks until the whole system blows up.
The Lehman Brothers collapse triggered just such an explosion, with the financial system saved only by government bailouts.
Finally, the processes within supply chains, and the feedback interactions between them, can make the system greater or smaller than the sum of its parts.
Since a complex network comprises linkages between many sub-networks, individual inefficiencies or weaknesses can have an impact on the viability of the whole.
Like manufacturing supply chains in the wake of the Japanese disruption, financial supply chains face formidable pressures to re-engineer and adapt as the global economic balance shifts towards emerging markets.
As that happens, billions of consumers will enter these countries’ middle classes, new social networks will evolve, and climate change will become a growing factor in global commerce.
In addition, major regulatory reforms will impose new and higher costs on the financial sector.
Banks and other institutions are also under pressure to devise new financial products that can help the real sector to manage more complex risks and enable investment in areas such as green technology and infrastructure for developing economies.
Moreover, global financial stability now depends upon greater cooperation at the international level, with tighter enforcement of rules at the national level.
It is also clear that emerging markets are searching for alternative growth models that are green and sustainable.
Their financial sectors will have to operate very differently from the current model, which is driven by consumption.
In a world in which both consumption and finance must grow more slowly to cope with global resource and environmental constraints, what role can finance play in reducing addictive consumption, funded by unsustainable leverage?
And, given that financial institutions will have to monitor and manage risk in a radically different manner, both for themselves and their customers, what is the role of distribution in a world where consumption, savings, and investment will accelerate in volatility?
Financial “production” is currently a top-down process.
Instruments are designed in such a way that their sales generate more profits for financial engineers than for end users.
But the rise of interactive social networking has made financial innovation more bottom-up.
Millions of bank customers using mobile phones can provide immediate feedback on which products and services they like or dislike.
In the future, client-service and transaction-management systems will receive more input from customers more frequently, so that product design is shaped interactively.
The current strategy in the financial sector drives excessive competition by increasing market share at rivals’ expense, often breaking trust with customers for the sake of short-term gains.
Yet the financial sector has, in previous eras, proven that it can operate as a public good by providing trustworthy, efficient services.
The winning financial supply chains of the future will instill confidence that they offer safe, stable, and efficient services to the most clients.
Innovation in the last century focused on processes, products, and services.
Today, the financial sector needs innovation of a higher order, involving business models, strategy, and management approaches that restore trust in finance.
Just as Steve Jobs of Apple transformed the computer industry through lifestyle products and highly reliable, user-friendly, and “cool” services, financial institutions will have to introduce new value chains that create confidence by adapting to the growing needs of new markets.
Given such profound changes, financial leaders should think about how to orchestrate a new financial supply chain – the “killer app” for our still new century.
The Right Health Investments
COPENHAGEN – West Africa’s Ebola epidemic has dominated headlines for much of the last year.
But, as devastating as that outbreak has been, its death toll of less than 20,000 people is dwarfed by that of preventable diseases such as AIDS, tuberculosis, and malaria, which together caused more than three million deaths in 2013, hitting the world’s poorest people the hardest.
This need not be the case; indeed, addressing these diseases would be an extraordinarily good investment.
The truth is that we lack the resources – both human and capital – to solve every problem the world faces, so we must focus on the areas where we can do the most good.
That is what 193 national governments are currently attempting to do as they create a set of development objectives to be achieved by 2030.
To help guide these efforts, my think tank, the Copenhagen Consensus Center, has asked 60 teams of top economists to assess some of the key targets, and to make an economic case for which of them should be on the final list.
Health is a big topic, so it was addressed by six expert groups and eight commentaries – which, taken together, cover a lot of analytical ground.
But one objective stood out as particularly cost-effective: tackling deadly preventable diseases.
Consider tuberculosis, which kills about 1.4 million people each year.
Two billion people worldwide carry the bacterium that causes TB, one in ten of whom will develop the disease.
To be sure, significant progress has been made in the fight against TB, which killed about 100 million people during the twentieth century.
Antibiotics have practically wiped out the disease in rich countries, and have helped to reduce TB’s mortality rate by more than one-third over the last two decades, saving an estimated 37 million lives since 1995.
But TB remains pervasive among the poor, and progress toward eliminating it has been hampered by weak health systems, poverty, and multi-resistant strains of TB.
Despite the toll it takes, TB treatment receives just 4% of total development assistance spent on health, compared with 25% for HIV.
One of the problems is that TB can be difficult to detect, particularly in countries with weak health systems.
That is why the World Health Organization recommends a preventative course of drugs, costing just $21 per person, for high-risk populations.
Treatment is highly effective and, on average, can extend productive life by 20 years.
For about $8 billion annually, nearly everyone infected with TB worldwide could receive treatment – an effort that would bring almost $350 billion worth of benefits.
In other words, every dollar spent on treating TB would generate $43 in returns, making it a phenomenally good investment.
Another killer disease that disproportionately affects the poor and vulnerable is malaria.
As it stands, 90% of malaria deaths occur in Sub-Saharan Africa, and 77% are children under five.
Here, too, there is a cost-effective solution.
While artemisinin is the most effective antimalarial medication, its widespread use risks fueling the emergence of resistance among the parasites that cause the disease.
Administering artemisinin in combination with one or more other antimalarials, however, can delay the development of resistance, while helping to save almost a half-million lives each year.
A half-billion dollar investment in fighting malaria would bring nearly $20 billion in returns (or, more precisely, $36 for each dollar spent).
The third major killer disease, HIV/AIDS, arose much more recently than TB and malaria, which have been around for millennia.
While treatment with anti-retroviral drugs has made an enormous difference to people infected with HIV, it is not cheap.
Saving 200,000 lives in the worst-affected countries would require about $1 billion annually, with every dollar spent producing about $10 in benefits.
But there is a more efficient option.
Male circumcision is a one-off treatment that can reduce the transmission of HIV to men during intercourse by 60%, and, with some delay, also reduce transmission to women.
Though this approach would not be as effective as widespread drug treatment, it would cost a miniscule $30 million annually – and bring almost $1 billion in benefits.
That is a $28 return for each dollar spent.
Given the strong case for tackling a few specific preventable or curable diseases, one might assume that improving general health coverage to help protect populations from all of the diseases they face would bring even greater benefits.
For example, one economist working on the project argued that focusing on a handful of key diseases creates islands of excellence in a sea of dysfunction.
But, in reality, an omnibus approach would be far more expensive – and far less efficient.
Improving general health care for the entire developing world would cost more than $400 billion annually, and bring only $4 in benefits for every dollar spent.
Health-related initiatives have the potential not only to save people’s lives, but also to transform them, and thus should feature in the new global development agenda.
The challenge lies in identifying the specific initiatives that will make the most of limited resources.
It is up to world leaders to examine the evidence and make smart choices.
Global Imbalances and Domestic Inequality
WASHINGTON, DC – Despite years of official talk about addressing global current-account imbalances, they remained one of the world’s main economic concerns in 2011.
Global imbalances were, to be sure, smaller overall than before the crisis, but they did not disappear.
Now some are increasing again, alongside inequality in many countries.
That link is no accident.
One often hears calls for global rebalancing whereby emerging-market countries with payments surpluses – China is the most-often mentioned – would stimulate internal demand, so that advanced countries (the largest being the United States) could reduce their deficits and public debts with less threat to their economies’ recovery.
The net foreign demand created by a reduction in balance-of-payments surpluses abroad would partly offset the weakening of public demand in the US and other high-debt countries as they tightened fiscal policy.
The story should not, however, be just about current-account deficits in advanced countries and surpluses in the emerging countries.
Many emerging-market countries – including India, South Africa, Brazil, and Turkey – actually run current-account deficits.
There are also many advanced countries that run a current-account surplus: Germany’s has been well publicized since the eurozone crisis started, but Japan, the Netherlands, Norway, and Sweden run surpluses as well.
So, while global rebalancing does require a reduction of surpluses, the issue is not simply one of shrinking emerging-market surpluses in order to allow a corresponding decline in the deficits of the advanced countries.
As we enter 2012, a reduction in Germany’s surplus may be more urgent than a reduction in China’s, since reducing Germany’s surplus will yield more immediate benefits for Europe, where the greatest risks to global recovery lie.
Moreover, the Chinese renminbi is experiencing a fairly steep real appreciation, as inflation in China is rising much more rapidly than in the US or the eurozone.
Indeed, the “German” euro is losing value, despite Germany’s large surplus, because it is also the currency of the southern European countries that are in so much trouble.
The Chinese and German current-account surpluses are correctly viewed as an obstacle to recovery, because they subtract from potential world effective demand and contribute to global “planned savings” exceeding “planned investments” – a recipe for recessionary pressure.
But the increasing concentration of income and wealth within many countries, foremost the US, should attract similar “Keynesian” worries.
An increasing concentration of income and wealth can be viewed as an “internal” imbalance similar in some ways to “external” current-account imbalances, because the highest-earning groups tend to save a much larger share of their income.
An ongoing income shift towards the highest earners will tend to lead to higher overall savings, which would have to be compensated by higher investment, higher net exports, or higher public expenditures to avoid recessionary pressure.
While levels of inequality around the world vary widely, the tendency towards greater concentration at the top appears to be a general one, and it is changes in concentration that lead to changes in planned savings.
An ongoing trend towards income concentration should be expected to lead to deflationary pressure wherever it takes place.
Of course, other factors, including government policies, can compensate for that pressure.
In the US, low interest rates and debt-financed consumption by lower-income groups, encouraged by government policy and financial-sector practices, compensated for higher savings at the very top during the pre-crisis years.
Thus, despite record income concentration, the US ran a large current-account deficit.
In China, net exports and strong government-supported investment ensured continuous expansion.
In Germany, too, net exports increased.
Nonetheless, shifts of income to high-saving groups and increasing current-account surpluses have similar first-round effects on aggregate world savings.
Of course, it is only the first-round effects that are similar.
Much then depends on whether an increase in a current-account surplus leads to more reserve accumulation or more direct investment abroad; on how different income groups allocate their spending between imports and domestic goods; and on what kind of macroeconomic policies are being pursued. &nbsp;
The full story of imbalances has to include propensities to spend on imports and domestic goods in various countries, as well as the balance between public and private savings.
Moreover, it is necessary to complement our concerns about “global imbalances” with an analysis of how increasing income concentration may be leading to “internal imbalances” and recessionary pressures that are similar in magnitude.
These imbalances are linked, and both threaten sustainable rapid growth.
Global imbalances and rising domestic inequality need to be analyzed and debated together.
Only then can they be addressed effectively.
Global Imbalances without Tears
CAMBRIDGE – Doctors have long known that it is not just how much you eat, but what you eat, that contributes to or diminishes your health.
Likewise, economists have long noted that for countries gorging on capital inflows, there is a big difference between debt instruments and equity-like investments, including both stocks and foreign direct investment.
So, with policymakers and pundits railing against sustained oversized trade imbalances, we need to recognize that the real problems are rooted in excessive concentrations of debt.
If G-20 governments stood back and asked themselves how to channel a much larger share of the imbalances into equity-like instruments, the global financial system that emerged just might be a lot more robust than the crisis-prone system that we have now.
Unfortunately, we are very far from the idealized world in which financial markets efficiently share risk.
Of the roughly $200 trillion in global financial assets today, almost three-quarters are in some kind of debt instrument, including bank loans, corporate bonds, and government securities.
The derivatives market certainly helps spread risk more widely than this superficial calculation implies, but the basic point stands.
Certainly, there are some good economic reasons why lenders have such an insatiable appetite for debt.
Imperfect information and difficulties in monitoring firms pose significant obstacles to idealized risk-sharing instruments.
But policy-induced distortions also play an enormous role.
Many countries’ tax systems hugely favor debt over equity.
The housing boom in the United States might never have reached the proportions that it did if homeowners had been unable to treat interest payments on home loans as a tax deduction.
Corporations are allowed to deduct interest payments on bonds, but stock dividends are effectively taxed at the both the corporate and the individual level.
Central banks and finance ministries are also complicit, since debt gets bailed out far more aggressively than equity does.
But, contrary to populist rhetoric, it is not just rich, well-connected bondholders who get bailed out.
Many small savers place their savings in so-called money-market funds that pay a premium over ordinary federally insured deposits.
Shouldn’t they expect to face risk?
Yet a critical moment in the crisis came when, shortly after the mid-September 2008 collapse of Lehman Brothers, a money-market fund “broke the buck” and couldn’t pay 100 cents on the dollar.
Of course, it was bailed out along with all the other money-market funds.
I am not advocating a return to the early Middle Ages, when Church usury laws forbade interest on loans.
Back then, financial-market participants had to devise fantastic schemes and contortions to disguise interest payments.
Yet today the pendulum has arguably swung too far in the opposite direction.
Perhaps scholars who argue that Islamic financial systems’ prohibition on interest generates massive inefficiencies ought to be looking at these systems for positive ideas that Western policymakers might adopt.
Unfortunately, overcoming the deeply ingrained debt bias in rich-world financial systems will not be easy.
In the US, for example, no politician is anxious to say that home-mortgage deductions should be eliminated, or that dividend payments should be tax-free.
Likewise, developing countries should accelerate the pace of economic reform, and equity markets in too many emerging economies are like the Wild West, with unclear rules and lax enforcement.
Worse still, even as the G-20 talks about finding a “fix” for global imbalances, some of the policy changes that its members have adopted are arguably exacerbating them.
For example, we now have a super-size International Monetary Fund, whose lending capacity has been tripled, to roughly $750 billion.
Europe has similarly expanded its regional bailout facility.
These funds may prove to be an effective short-term salve, but, over the long run, they will likely fuel moral-hazard problems, and potentially plant the seeds of deeper crises in the future.
A better approach would be to create a mechanism for orchestrating orderly sovereign default, both to minimize damage when crises do occur, and to discourage lenders from assuming that taxpayers’ money will solve all major problems.
The IMF proposed exactly such a mechanism in 2001, and a similar idea has been discussed more recently for the eurozone.
Unfortunately, however, ideas for debt-restructuring mechanisms remain just that: purely theoretical constructs.
In the meantime, the IMF and the G-20 can help by finding better ways to assess the vulnerability of each country’s financial structure – no easy task, given governments’ immense cleverness when it comes to cooking their books.
Policymakers can also help find ways to reduce barriers to the development of stock markets, and to advance ideas for new kinds of state-contingent bonds, such as the GDP-linked bonds that Yale’s Robert Shiller has proposed.
(Shiller bonds, in theory, pay more when a country’s economy is growing and less when it is in recession.)
Of course, even if the composition of international capital flows can be changed, there are still many good reasons to try to reduce global imbalances.
An asset diet rich in equities and direct investment and low in debt cannot substitute for other elements of fiscal and financial health.
But our current unwholesome asset diet is an important component of risk, one that has received far too little attention in the policy debate.
Globalization After the Crisis
WASHINGTON, DC – The world economy has just been through a severe recession marked by financial turmoil, large-scale destruction of wealth, and declines in industrial production and global trade.
According to the International Labor Organization, continued labor-market deterioration in 2009 may lead to an estimated increase in global unemployment of 39-61 million workers relative to 2007.
By the end of this year, the worldwide ranks of the unemployed may range from 219-241 million – the highest number on record.
Meanwhile, global growth in real wages, which slowed dramatically in 2008, is expected to have dropped even further in 2009, despite signs of a possible economic recovery.
In a sample of 53 countries for which data are available, median growth in real average wages had declined from 4.3% in 2007 to 1.4% in 2008.
The World Bank warns that 89 million more people may be trapped in poverty in the wake of the crisis, adding to the 1.4 billion people estimated in 2005 to be living below the international poverty line of $1.25 a day.
In this climate, globalization has come under heavy criticism, including from leaders of developing countries that could strongly benefit from it.
President Yoweri Museveni, who is widely credited for integrating Uganda into world markets, has said that globalization is “the same old order with new means of control, new means of oppression, new means of marginalization” by rich countries seeking to secure access to developing country markets.
Yet the alternative to global integration holds little attraction.
Indeed, while closing an economy may insulate it from shocks, it can also result in stagnation and even severe homegrown crises.
Current examples include Myanmar and North Korea; before their economic liberalization China, Vietnam, and India were in the same boat.
To ensure a durable exit from the crisis, and to build foundations for sustained and broad-based growth in a globalized world, developing countries in 2010 and beyond must draw the right lessons from history.
In the current crisis, China, India, and certain other emerging-market countries are coping fairly well.
These countries all had strong external balance sheets and ample room for fiscal maneuver before the crisis, which allowed them to apply countercyclical policies to combat external shocks.
They have also nurtured industries in line with their comparative advantage, which has helped them weather the storm.
Indeed, comparative advantage – determined by the relative abundance of labor, natural resources, and capital endowments – is the foundation for competitiveness, which in turn underpins dynamic growth and strong fiscal and external positions.
By contrast, if a country attempts to defy its comparative advantage, such as by adopting an import-substitution strategy to pursue the development of capital-intensive or high-tech industries in a capital-scarce economy, the government may resort to distortional subsidies and protections that dampen economic performance.
In turn, this risks weakening both the government’s fiscal position and the economy’s external account.
Without the ability to take timely countercyclical measures, such countries fare poorly when crises hit.
To pursue its comparative advantage and prosper in a globalized world, a country needs a price system that reflects the relative abundance of its factor endowments.
Firms in such a context will have incentives to enter industries that can use their relatively abundant labor to replace relatively scarce capital, or vice versa, thereby reducing costs and enhancing competitiveness.
Examples include the development of garments in Bangladesh, software outsourcing in India, and light manufacturing in China.
But such a relative price system is feasible only in a market economy.
This is why China – which appears to be faring well in the crisis, meeting its 8% growth target in 2009 – became an economic powerhouse only after instituting market-oriented reforms in the 1980s.
Indeed, all 13 economies with an average annual growth rate of 7% or more for 25 years or longer, identified in the
Pursuing its comparative advantage strengthens a country’s resilience to crisis and allows for the rapid accumulation of human and physical capital.
Developing countries with such characteristics are able to turn factor endowments from relatively labor- or resource- abundant to relatively capital-abundant in the span of a generation.
In today’s competitive global marketplace, countries need to upgrade and diversify their industries continuously according to their changing endowments.
A pioneering firm’s success or failure in upgrading and/or diversifying will influence whether other firms follow or not.
Government compensation for such pioneering firms can speed the process.
Industrial progress also requires coordination of related investments among firms.
In Ecuador, a country that is now a successful exporter of cut flowers, farmers would not grow flowers decades ago because there was no modern cooling facility near the airport, and private firms would not invest in such facilities without a supply of flowers for export.
In such chicken-and-egg situations, in which the market alone fails to overcome externalities and essential investments go lacking, the government can play a vital facilitating role.
This may be one of the reasons why the
The world is now so far down the path of integration that turning back is no longer a viable option.
We must internalize lessons from the past and focus on establishing well-functioning markets that enable developing countries fully to tap their economies’ comparative advantage.
As part of this process, a facilitating role for the state is desirable in developing and developed economies alike, although the appropriate role may be different depending on a country’s stage of development.
Ultimately, in today’s complex and interlinked world, even the most competitive economies need a helping hand as they climb the global ladder.
Globalization and Anti-Americanism
Anti-American sentiments are rising around the world.
American Democrats say that President Bush's policies have squandered America's attractiveness.
Republicans reply that America is bound to be resented because of its size and its association with globalization.
Anti-Americanism, they say, will persist because some people see America as a cultural threat.
I believe that such views lack historical perspective.
Contrary to conventional wisdom, globalization is not homogenizing and Americanizing the cultures of the world.
Although the United States is at the forefront of the current information revolution, which is creating many similarities in social and cultural habits (such as television viewing or Internet use) that are attributed to Americanization, correlation is not causation.
To see why, imagine a country that introduced computers and communications at a rapid rate in a world in which America did not exist.
You would still expect major social and cultural changes from such modernization.
Of course, because the US exists and is at the forefront of the information revolution, there is a degree of Americanization, but that is likely to diminish over the course of the twenty-first century as technology spreads and local cultures modernize in their own ways.
Historical proof that globalization does not necessarily mean homogenization can be seen in Japan, a country that deliberately isolated itself from earlier waves of globalization.
In the middle of the nineteenth century, Japan became the first Asian country to embrace globalization, and to borrow successfully from the world without losing its uniqueness.
During the Meiji Restoration, Japan searched broadly for tools and innovations that would allow it to become a major power rather than a victim of Western imperialism.
It sent young people to the West for education.
Its delegations scoured the world for ideas in science, technology, and industry.
In the political realm, Meiji reformers were well aware of Anglo-American ideas and institutions, but deliberately turned to German models because they were deemed more suitable to a country with an emperor.
The lesson that Japan teaches the rest of the world is not simply that an Asian country can compete, but that after a century and a half of globalization, it is possible to adapt while preserving a unique culture.
More fundamentally, the image of a homogenizing America reflects a mistakenly static view of culture.
Efforts to portray local cultures as unchanging often reflect reactionary political strategies rather than descriptions of reality.
As the Peruvian writer Mario Vargas Llosa has put it, those who argue in favor of cultural identity and against globalization, betray a stagnant attitude towards culture that is not borne out by historical fact.
Do we know of any cultures that have remained unchanged through time?
To find any of them one has to travel to the small, primitive, magico-religious communities made up of people… who due to their primitive condition, become progressively more vulnerable to exploitation and extermination.
Vibrant cultures are constantly changing and borrowing from other cultures - and that borrowing is not always from the US.
For example, many more countries turned to Canada than to America as an example for framing constitutions in the aftermath of the Cold War.
Globalization is also a two-edged sword.
In some areas, there is not only a backlash against American cultural imports, but an effort to change American culture itself.
Capital punishment may now be supported by a majority of Americans, but the death penalty is regarded as an egregious violation of human rights across Europe - indeed, across much of the world.
American environmental attitudes toward climate change or genetic modification of food bring similar criticism.
More subtly, America's openness to immigration both enriches and changes American culture.
Finally, globalization and the information revolution may reinforce rather than reduce cultural diversity.
Some French commentators express fear that in a world of Internet global marketing, there will no longer be room for a culture that cherishes hundreds of different types of cheese.
But on the contrary, the Internet allows dispersed customers to come together in a way that encourages niche markets, including hundreds of Web sites dedicated only to cheese.
The Internet also allows people to establish a more diverse set of political communities.
The use of the Welsh language in Britain and Gaelic in Ireland is greater today than fifty years ago.
Britain, Belgium, and Spain, among others in Europe, have devolved more power to local regions.
The global information age may strengthen rather than weaken local cultures.
Economic and social globalization does produce superficial similarities in T-shirt logos and soft drink brands, but an underlying cultural diversity will remain.
American culture is now prominent, and it contributes to America's attractiveness - its "soft power" - in many, but not all, areas.
At the same time, immigrants, ideas, and events outside America's borders are changing American culture within the borders of the US.
As globalization spreads technical capabilities, and information technology allows broader participation in global communications, American economic and cultural preponderance may diminish.
A little less dominance may mean a little less anxiety about Americanization, fewer complaints about American arrogance, and less intensity in the anti-American backlash.
The US may have less control in the future, but it may find itself living in a world somewhat more congenial to its basic values of democracy, free markets, individual liberties, and human rights.
The Cacophony of the World
PARIS – In his masterpiece Diplomacy, Henry Kissinger describes, probably too idyllically, the international balance-of-power system that, following the Congress of Vienna in 1814-1815, produced what came to be called the “Concert of Europe.”
As Kissinger describes it, after the Napoleonic Wars, “There was not only a physical equilibrium, but a moral one. Power and justice were in substantial harmony.”
Of course, the concert ended in cacophony with the outbreak of World War I in the summer of 1914.
Today, after the brutality of the first half of the twentieth century, the temporary bipolarity of the Cold War, and America’s brief post-1989 hyperpower status, the world is once again searching for a new international order.
Can something like the Concert of Europe be globalized?
Unfortunately, global cacophony seems more probable.
One obvious reason is the absence of a recognized and accepted international referee.
The United States, which best embodies ultimate power, is less willing – and less able – to exercise it.
And the United Nations, which best embodies the principles of international order, is as divided and impotent as ever.
But, beyond the absence of a referee, another issue looms: the wave of globalization that followed the end of the Cold War has, paradoxically, accelerated fragmentation, affecting democratic and non-democratic countries alike.
The information revolution has created a more global, interdependent, and transparent world than ever.
But this has led, in turn, to an anxious, balkanizing quest for identity.
This effort to recover uniqueness is largely the cause of the international system’s growing fragmentation.
In the Concert of Europe, the number of actors was limited, and they were mostly states, whether national or imperial.
Essential values were widely shared, and most actors favored protecting the existing order. In today’s world, by contrast, the nature of the actors involved is no longer so clear.
Transnational forces, states, and non-state actors are all involved, and their goals are complex and sometimes contradictory, with no universal commitment to preserving the status quo.
The US may be intent on creating a transatlantic trade-and-investment pact with Europe, which would make a political statement to the world that the West writ large constitutes the universal normative reference point.
But does such a West exist?
In our era of fragmentation, there is a more powerful and dynamic American West, a globally more problematic European West (itself fragmented between a prosperous north and an economically lagging south), and even a British West and, in Japan, an Asian West.
The concept of the BRICs (Brazil, Russia, India, and China) may have been an astute branding tool.
But, aside from its members’ high growth rates, has it had any real significance?
Indeed, China is clearly in a category of its own, as a source of perceived (or real) risk to its regional environment.
If the BRICs’ growth slows (as has begun to happen), the concept’s artificiality will become widely apparent.
What unites emerging powers today is more their denial of international responsibilities than their joint diplomatic efforts.
Fragmentation also affects societies internally.
Deep partisan divisions – whether over the role of government or social/cultural issues – are leading to near-paralysis in democratic societies like the US.
In non-democratic societies, they can lead to revolution and violent power struggles.
This has been the case in much of the Arab world since late 2010.
Even power itself is more fragmented than ever.
Indeed, Moises Naim proclaims its demise in his latest book, The End of Power: From Boardrooms to Battlefields and Churches to States, Why Being in Charge Isn’t What It Used To Be.
While Naim’s conclusion may be premature, he is right about one thing: “Power no longer buys as much as it did in the past.”
It is “easier to get, harder to use – and easier to lose.”
Some analysts maintain, reassuringly, that rapprochement between Asia and the West is possible, given symbiosis between Western democracy and authoritarian Confucianism.
This is Kishore Mahbubani’s argument in his book The Great Convergence.
But the harmony stemming from the encounter between different cultures and systems is nowhere near –&#160;and will not be as long as the rule of law has not taken hold in the emerging world and a culture of modesty has not made headway within the plural West.
The cacophony of the world has replaced the concert of Europe.
And this may very well be the case for the foreseeable future.
Globalization and Its Discontents in 2004
The year 2003 was in many ways a disaster for globalization.
America and its "coalition" of the willing went to war in Iraq without the support of the UN, and the World Trade Organization meeting at Cancun--which was supposed to provide the impetus for a successful conclusion of the Development Round of trade negotiations--ended in failure.
2004 will almost surely be better, for political globalization as well as for the global economy.
But don't look for a banner year.
The events in Iraq demonstrate the failure of democratic processes at the international level--and the need to strengthen them.
The Bush administration's approach to the war in Iraq and its aftermath has been marked by the same unilateralism shown by its rejection of the Kyoto protocol and the International Criminal Court.
In each instance, when the world's collective decision differed from what America wanted, President Bush insisted that America get its way.
Whether the US government deliberately lied to the world about the existence of Iraqi weapons of mass destruction or got carried away by its own rhetoric is less important than the lesson to be learned: it is dangerous to put excessive power in the hands of a few.
But the US is finally realizing that even a superpower cannot ensure security in a country occupied by force.
It might have been able to win over the Iraqi people in the early months of the occupation, but by now its cumulative mistakes may have doomed the campaign for hearts and minds to failure.
America has also come to recognize the need to forgive Iraq's debts, which will require rapprochement and cooperation with traditional US allies that opposed the war.
These developments hold out the hope that the US will adopt a more multilateral approach to foreign policy in 2004.
But the Bush administration's exclusion of creditor countries like France, Germany, and Russia from Iraqi reconstruction contracts undermines this hope.
At the same time, if America's "shock therapy" approach to reconstruction--quick economic liberalization and privatization--is carried out, higher unemployment and greater resentment are likely to follow.
"Shock therapy" is a strategy that has repeatedly failed.
In 2004 the world could well learn again the risks of relying excessively on the ideology or leadership of a single country.
Iraq will suffer the most, but the consequences will almost certainly be felt widely.
The WTO talks in Cancun represented the other major failure of globalization in 2003.
The US and Europe reneged on their promise that this would be a round of trade negotiations designed to improve the plight of developing countries.
Indeed, they failed to redress the imbalances of earlier rounds of trade talks that had made the poorest regions of the world worse off.
The US and Europe not only tried to impose their trade agenda on developing countries; they also continued to insist on their right to subsidize agriculture and raised new demands that would have made lives in developing countries even worse.
For the first time, developing countries united, and the talks broke down.
After blaming each other for the breakdown, America and Europe will continue to insist in 2004 that they want to restart the development round.
But unless meaningful concessions are made in agriculture, non-tariff barriers, and intellectual property rights, what do developing countries have to gain?
Tariffs on industrial goods in the advanced countries are already low enough that developing countries are unlikely to receive many benefits--and they have much to lose from another unfair trade agreement.
Developing countries are, however, learning some of the West's tricks.
In Miami last November, they agreed to a Free Trade Area of the Americas that did not, in fact, provide for free trade, and barely went beyond what had already been agreed within the WTO.
In short, it is beginning to look as though any success in the current round of trade talks will be based on agreements without substance.
The pick-up in economic activity in Japan and the US bodes well for the global economy in 2004, as does China's continued strength.
Every economic downturn comes to an end, and it is high time for America's economy, which began slumping almost four years ago, to recover.
This could have happened sooner if the Bush administration had supported tax cuts for the poor and middle class, rather than for the rich.
The size of the tax cuts that it did promote was so large, however, that it provided some stimulus anyway.
But the cost is enormous: a colossal fiscal deficit that jeopardizes future growth.
The counterpart of America's immense fiscal deficit is its yawning trade gap.
This twin deficit has taken a severe toll on foreigners' confidence in the fundamental health of the US economy--and hence on the external value of the dollar.
As the euro remains strong relative to the dollar in 2004, America's trade deficit will moderate, but at the cost of making a robust European recovery all the more difficult.
Meanwhile, once recovery has set in, the huge borrowing demands of the US and Europe will almost certainly drive up real interest rates globally, posing new problems for the world's emerging markets.
For them it will be just another instance of having to bear the costs of policy mistakes made in the advanced industrial countries, another instance of globalization gone awry.
Global Solutions for Globalization’s Problems
OXFORD – The last few decades of globalization and innovation have resulted in the most rapid progress that the world has ever known.
Poverty has been reduced.
Life expectancy has increased.
Wealth has been created at a scale that our ancestors could not have imagined.
But the news is not all good.
In fact, the achievements brought about by globalization are now under threat.
The world has simultaneously benefited from globalization and failed to manage the inherent complications resulting from the increased integration of our societies, our economies, and the infrastructure of modern life.
As a result, we have become dangerously exposed to systemic risks that transcend borders.
These threats spill across national boundaries and cross the traditional divides between industries and organizations.
An integrated financial system propagates economic crises.
International air travel spreads pandemics.
Interconnected computers provide rich hunting grounds for cybercriminals.
Middle Eastern jihadis use the Internet to recruit young Europeans.
Living standards rise – and greenhouse-gas emissions follow, accelerating climate change.
As a byproduct of globalization, crises that once burned locally and then quickly flamed out now risk sparking international conflagrations.
A pandemic, flood, or cyber attack in the City of London or Wall Street could send the entire world into a financial tailspin.
If the progress that globalization has delivered is to be sustained, countries must accept shared responsibility for managing the risks that it has engendered.
National governments – whether powerful, like the United States and China, or weak, like Iraq and Liberia – are unable to address these cascading and complex challenges on their own.
Only a small fraction of the risks arising from globalization require a truly global response.
But, by definition, these risks transcend the nation-state; thus, coordinated action is required to address them effectively.
The nature of the response needs to be tailored to the threat.
In the case of pandemics, the key is to support countries where outbreaks occur and help those most at risk of infection.
Widespread dangers, such as climate change or a new financial crisis, can require the cooperation of dozens of countries and a broad range of institutions.
In nearly every case, an international effort is needed.
An important characteristic of the risks of a globalized world is that they often become more serious over time.
As a result, the speed at which they are identified, along with the effectiveness of the response, can determine whether an isolated event becomes a global threat.
One need only look at the rise of the Islamic State, the outbreak of Ebola, the fight against climate change, or the financial contagion of 2008 to see what happens when a danger remains unidentified for too long or a coordinated response is missing or mismanaged.
And yet, just as the need for robust regional and international institutions is at its greatest, support for them is waning.
A growing number of citizens in Europe, North America, and the Middle East blame globalization for unemployment, rising inequality, pandemics, and terrorism.
Because of these risks, they regard increased integration, openness, and innovation as more of a threat than an opportunity.
This creates a vicious circle.
The concerns of the electorate are reflected in rapidly growing support for political parties that advocate increased protectionism, reductions in immigration, and greater national control over the marketplace.
As a result, governments across Europe, North America, Asia, and Oceania are becoming more parochial in their concerns, starving international agencies and regional organizations of the funding, credibility, and leadership capabilities needed to mount a proper response to the challenges of globalization.
In the short term, countries may be able to duck their global responsibilities, but the threat posed by events beyond their borders cannot be kept at bay forever.
Unaddressed, the endemic dangers of a globalized world will continue to grow.
In confronting dangers such as the Islamic State, Ebola, financial crisis, climate change, or rising inequality, short-term political expediency must be overcome – or the entire world will come to regret it.
Globalization and the Beautiful Game
Cambridge – How does globalization reshape wealth and opportunity around the world?
Is it mainly a force for good, enabling poor nations to lift themselves up from poverty by taking part in global markets?
Or does it create vast opportunities only for a small minority?
To answer these questions, look no farther than soccer.
Ever since European clubs loosened restrictions on the number of foreign players, the game has become truly global.
African players, in particular, have become ubiquitous, supplementing the usual retinue of Brazilians and Argentines.
Indeed, the foreign presence in soccer surpasses anything that we see in other areas of international commerce.
Arsenal, which currently leads the English Premier League, fields 11 starters who typically do not include a single British player.
Indeed, all the English players for the four English clubs that recently advanced to the final 8 of the UEFA Champions’ League would hardly be enough to field a single team.
There is little doubt that foreign players enhance the quality of play in the European club championships.
Europe’s soccer scene would not be half as exciting without strikers such as Cote d’Ivoire’s Didier Drogba (Chelsea) or Cameroon’s Samuel Eto’o (Barcelona). The benefits to African talent are easy to see, too.
African players are able to earn much more money by marketing their skills in Europe – not just the top clubs in the Premiership or the Spanish Primera Liga, but the countless nouveau-riche clubs in Russia, Ukraine, or Turkey.
To be sure, soccer players’ international mobility has increased the earnings gap between stars such as Drogba and Eto’o and their compatriots back home.
This is part and parcel of globalization: enhanced global economic opportunities lead to wider disparities between those who have the skill or luck to take advantage of them and those who do not.
This kind of inequality is not necessarily a bad thing.
It makes some people better off without making others worse off.
But soccer enthusiasts care about country as well as club, and here the consequences of the global mobility of talent are not as straightforward.
Many fear that the quality of national teams is harmed by the availability of foreign players.
Why invest in developing local talent if you can hire it from abroad?
England once again provides an apt illustration.
Many blame the country’s failure to qualify for this summer’s European championship on the preponderance of foreign players in English club teams.
There is also a broader backlash under way.
Sepp Blatter, the president of FIFA, soccer’s global governing body, has been pushing a plan to limit to five the number of foreign players that club teams would be allowed to have on the field.
The impact of soccer globalization on African countries appears to be just the opposite.
On the one hand, it has increased the quality of many African national teams relative to European national teams, with countries such as Cameroon and Cote d’Ivoire now fielding teams that include some of the top players in European clubs.
On the other hand, globalization probably has reduced the quality of Africa’s domestic leagues relative to European leagues.
If you are a resident of Yaoundé, the decline in the quality of domestic play may not be a big deal if you can afford a cable connection that allows you to tune in to the English Premier League.
But otherwise, you are entitled to feel that globalization has left you out in the cold.
The 2008 Africa Cup of Nations, held in Ghana during January and February, revealed the two-way interdependence that soccer globalization has created.
Many European clubs were left without their star players, who were recalled to national-team duty.
For their part, African players grumbled that their absence from Europe reduced their commercial opportunities during a crucial period of league play.
But the most important lesson revealed by the Africa Cup is that successful nations are those that combine globalization’s opportunities with strong domestic foundations.
For the winner of the cup was not Cameroon or Cote d’Ivoire or any of the other African teams loaded with star players from European leagues, but Egypt, which fielded only four players (out of 23) who play in Europe.
By contrast, Cameroon, which Egypt defeated in the final, featured just a single player from a domestic club, and 20 from European clubs.
Few Egyptian players would have been familiar to Europeans who watched that game, but Egypt played much better and deserved to win.
Nor was it a fluke: Egypt is consistently the most successful national team in the Africa Cup tournament, winning it five times previously.
The lesson is not that embracing globalized soccer is a bad thing.
If that were the key to Egypt’s success, Sudan, which has no players in Europe, would have done well.
Instead, Sudan (along with Benin) was the tournament’s least successful team, losing all three games that it played.
The real lesson is that taking full advantage of globalization requires developing domestic capabilities along with international links.
What makes the difference for Egypt is that it has a strong domestic league, which fosters depth of talent and coherence as a national team.
So it is with globalization’s champions in other arenas.
What sets apart the Chinas and Indias of this world is not that they have laid themselves bare to the forces of globalization, but that they have used those forces to enhance their domestic capacities. The benefits of globalization come to those who do their homework.
Globalization and the Genoa Summit
Globalization and the United Nations
After the disastrous month of September, when terrorist attacks and retaliation contributed to storm clouds over the global economy, November demonstrated the resilience of globalization.
The global economic downturn has led most of the world to rally together, not only in the hunt for the terrorists, but in reinforcing global cooperation.
Several events in November give hope for a stronger international community, with consequent economic benefits.
First, more than 100 countries assembled in Marrakech, Morocco, to complete a unique UN agreement to limit global climate change.
These countries agreed to reduce their emissions of greenhouse gases in order to slow the process of global warming.
Yes, the US is not yet a party to the agreement - even though America is the world's biggest single contributor to greenhouse gas emissions.
Yet the fact that the world could agree despite the absence of the US may prove promising.
No single country, even the largest economy in the world, can stop the cooperation of others.
Sometime soon, the US is likely to rejoin these international discussions.
Second, the world community welcomed China as a member of the World Trade Organization. For hundreds of years, China held itself aloof from the world economy.
Then, in the middle of the 19 th century, China suffered at the hands of European imperial powers, which gained technological and industrial superiority over China, using this to force trading concessions from the Ching Dynasty.
For more than a century after that, China was in turmoil. Only 20 years ago did China decide to rejoin the world trading system.
This month's entry of China into the WTO is a major step in that process.
China has now rejoined the world community as a cooperative, stable, and powerful sovereign nation, which will be one of the leading trading countries in the years ahead.
Third, more than 140 nations agreed in Doha, Qatar to launch a new round of trade negotiations.
After years of global protests about free trade, the world's nations chose trade over protectionism.
Importantly, developing countries achieved several breakthroughs in the new trade agenda.
Poor countries won concessions on access to essential medicines; and they pressed for, and received, promises that rich countries would address protectionist policies in several areas.
Fourth, the war in Afghanistan has not only proceeded rapidly on the ground, but has led to a diplomatic breakthrough as well.
The UN will play a central role in the reconstruction of a working government in that country, and in coordinating humanitarian assistance for the Afghan people.
The growing role of the UN in this process puts the seal of international law and diplomacy over the global struggle against terrorism, and helps to reassure many countries that this is a true international effort, not just the US acting alone.
While these seem to be a grab-bag of achievements, they point to a single message: the world community is finding new ways to cooperate, even against a backdrop of terrorism and global recession.
The growing role of international institutions under the UN umbrella provides greater confidence that disputes can be addressed peacefully and even sensibly, with significant inputs of scientific expertise as in the Climate Change treaty.
No country wants to be outside of this global process.
China's membership in the WTO is sure to be followed by Russia's membership in the coming years.
Academic scholars and political observers debate whether globalization is a real phenomenon or a slogan; whether globalization is beneficial or harmful; and whether globalization is a fragile process that could be reversed or a robust process likely to gather force in the coming years.
My view is that globalization is a powerful and generally positive force.
It offers countries the gains from increased international trade, faster diffusion of technologies to mutual benefit, and hopes for less cross-country violence and conflict.
The agreements in November suggest that most of the world shares such hopes, and is ready to commit political resources into the success of the process.
Of course globalization requires international governance and rules.
It cannot be a game of rich against poor.
It cannot function without international law and international institutions.
Therefore the preeminence of UN institutions in so many events in November is notable.
The UN has shown its value in global environmental management, international trade, state building and reconstruction, and humanitarian assistance.
UN agencies will have a critical role to play in future years in helping Africa's impoverished countries (and those elsewhere) to derive larger benefits from globalization.
This month, in short, has been a fitting prelude to the happy occasion on December 13 th when UN Secretary General Kofi Annan and the United Nations organization itself share this year's Nobel Peace Prize in Oslo, Norway.
The prize is a fitting measure of the role that the UN now plays and must continue to play in promoting a successful and peaceful globalization.
Globalization Marches On
LONDON – In a recent symposium in the Financial Times on globalization’s prospects in 2011, the columnist Gideon Rachman observed that, “When Barack Obama visited India recently, the US President warned his hosts that the debate about globalization has reopened in the West,” and that “a backlash…is forming…and growing in advanced economies.”
But Rachman’s alarmism is misplaced.
The fear of globalization in the West is nothing new.
Articulate intellectuals and groups such as labor unions and environmental organizations in the advanced economies have voiced anti-globalization fears and sentiments for at least a quarter-century.
The fear of globalization, however, began historically in the East, not the West.
After World War II, the West dismantled barriers to trade and investment flows, and worked to eliminate exchange controls and move to currency convertibility.
What was sometimes called the liberal international economic order was the order of the day, and it was embraced by public opinion as well.
By contrast, the East generally embraced the fearful view that, as the Chilean sociologist Oswaldo Sunkel put it, integration into the international economy would lead to disintegration of the national economy.
Many intellectuals shared this dark anti-globalization vision, and policymakers in much of the East were not far behind.
Indeed, the West accepted the view that globalization would result (as with trade) in mutual gain, embracing what I called in 1997 the notion of “benign neglect.”
In the case of foreign investment and aid flows, the West went further, viewing them as being motivated by altruism, or “benign intent,” whereas the East regarded globalization in a world of poor and rich nations as implying “malign impact.”
In some analyses, malign impact turned into a more sinister “malign intent.”
Thus, foreign aid was regarded as a plot to trap poor nations in a neo-colonial embrace.
What happened next was what I have called an “ironic reversal.”
As the benefits of globalization became manifest, and the damage wrought by autarkic policies also became evident, policymakers in the East began to appreciate that their anti-globalization stance had been a mistake.
But then fear of globalization moved to the West.
The East had feared that it could not gain from trade with the West, which had superior infrastructure and human capital; now, the West had come to fear that it would lose from trade with the East, which had abundant, cheap labor.
The longstanding stagnation in wages for unskilled labor was attributed to low-cost, labor-intensive imports, ignoring the corollary that Western workers’ consumption of labor-intensive Asian goods offset the effect on real wages.
To take another example, the East worried about a “brain drain” of professionals to the West, where opportunities seemed to be more plentiful.
Today, the West is witnessing anti-globalization opposition from members of professional groups, who fear the loss of their jobs to foreign counterparts.
Rudyard Kipling famously wrote in “The Ballad of East and West”: “Oh, East is East, and West is West, and never the twain shall meet.”
The current crisis did not create the debate about globalization now heard in the West; it only made it slightly more salient.
Yet the crisis may be tilting Western policy outcomes in favor of globalization.
For example, on trade, there has been a remarkable commitment to efforts – largely successful – to avoid significant backsliding into protectionism.
Moreover, the G-20 leaders have continued to express the need to conclude the Doha Round of multilateral trade-liberalization negotiations.
There are also initiatives such as the appointment by the governments of Britain, Germany, Indonesia, and Turkey of a High-Level Expert Trade Group, with Peter Sutherland, former Director General of GATT and the WTO, and myself as co-chairs.
The four governments will report at this year’s World Economic Forum in Davos on how to conclude Doha this year.
In other words, Kipling could yet be proved wrong.
A reversal in the West is possible, perhaps even likely.
So the current crisis may thus, accidentally, establish a pro-globalization consensus that spans East and West.
Globalization’s Assassin
The world’s first wave of economic globalization, led by the British Empire in the nineteenth century, came to an end literally with a bang on a Sunday afternoon in 1914, when Gavrilo Princip killed (with two uncannily well-aimed bullets) Austria’s Archduke Franz Ferdinand and his wife.
The years that followed witnessed pan-European carnage, instability throughout the 1920’s, and the rise of fascism and communism, culminating in the death of countless millions during World War II.
Is today’s globalizing era also coming to an end?
If so, it may not necessarily end with a repeat of the slaughters of the last century, but with an economic retrenchment that brings economic stagnation and consigns billions of people to grinding poverty.
Various candidates have been proposed for the role of globalization’s assassin.
But one little noticed, yet likely, aspirant has been sneaking up on the world economy: the growing tendency to limit the free circulation of people, to “fence in” the rich world.
We see the menace of this tendency constantly nowadays, but we perceive it in such a seemingly unthreatening way that we may well become accustomed to it rather than arresting it.
Globalization means free movement of capital, goods, technology, ideas, and, yes, people.
Any globalization that is limited to the first three or four freedoms but omits the last one is partial and not sustainable.
As soon as people cannot move, there will be little to stop governments from limiting the free movement of goods or other factors of production.
After all, if over-populated countries with high unemployment cannot export people, why not reach for higher tariff barriers to protect the jobs they have?
But what of the unemployed who become locked into their societies?
The war on terror has shown us the dangers that can arise from the social frustrations that often result.
Nevertheless, the “fencing-in” of the rich world continues apace.
The United States plans to construct a veritable “Mexican Wall” to keep poor people from crossing into Texas or California.
Likewise, hundreds, if not thousands, of Africans die every year trying to reach the shores of Fortress Europe.
Efforts to restrict people’s movement between countries expose the soft underbelly of globalization: the deepening gap between countries’ mean incomes.
Rather than poor countries growing faster than the rich (as we would expect from Economics 101), mainly the reverse is true.
Between 1980 and 2002, average annual per capita income growth in the rich world (defined as the “old” OECD members) was almost 2%, compared to just 0.1% in the 42 least developed countries.
Indeed, average income in Latin America is now barely above its 1980 level.
This huge gap spurs migration.
People nowadays know much more about conditions in different countries than they did in the past, and if moving across a border means that their income can be multiplied several-fold, they will try to do it.
This is why today’s most contentious borders separate economies where the income gaps between people on the two sides are the greatest.
There are four such global hot spots: the borders between the US and Mexico, Spain and Morocco, Greece (and Italy) and the southern Balkans, and Indonesia and Singapore (or Malaysia).
The income gaps range from more than seven to one in the latter case to 4.5 to one in the case of Spain and Morocco, 4.3 to one between the US and Mexico, and four to one between Greece and Albania.
Income differences were not always so huge.
In 1980, average income in the US was a little more than three times that of Mexico, the gap between Singapore and Indonesia was 5.3 to one, and the difference between Spain and Morocco 3.5 to one.
Even the gap between Greece and Albania, at three to one, was narrower than it is now.
So income gaps between all these contiguous countries have increased significantly during the last quarter-century.
So it is little wonder that it is in these places that most illegal immigration and human trafficking occurs – pirates in the Straits of Malacca, fast boats between Albania and Italy, and desperate human cargoes from Africa and Latin America.
If today’s globalization continues to widen income gaps, the waves of migration will grow.
So the rich world will, in a knee-jerk response, erect ever-higher barriers to stem the human tide.
If globalization, which has so enriched the world’s wealthiest countries, is to continue, governments must find ways to increase incomes more evenly.
Otherwise, today’s “fencing in” of the rich world will increase the risk of a backlash against free circulation of goods and capital, as well as of political instability punctuated by terrorism.
Global income redistribution by the rich countries should be viewed as a matter not of charity, but of enlightened self-interest.
Globalization’s Government
NEW YORK – We live in an era in which the most important forces affecting every economy are global, not local.
What happens “abroad” – in China, India, and elsewhere – powerfully affects even an economy as large as the United States.
Economic globalization has, of course, produced some large benefits for the world, including the rapid spread of advanced technologies such as the Internet and mobile telephony.
It has also reduced poverty sharply in many emerging economies – indeed, for this reason alone, the world economy needs to remain open and interconnected.
Yet globalization has also created major problems that need to be addressed.
First, it has increased the scope for tax evasion, owing to a rapid proliferation of tax havens around the world.
Multinational companies have many more opportunities than before to dodge their fair and efficient share of taxation.
Moreover, globalization has created losers as well as winners.
In high-income countries, notably the US, Europe, and Japan, the biggest losers are workers who lack the education to compete effectively with low-paid workers in developing countries.
Hardest hit are workers in rich countries who lack a college education.
Such workers have lost jobs by the millions.
Those who have kept their jobs have seen their wages stagnate or decline.
Globalization has also fueled contagion.
The 2008 financial crisis started on Wall Street, but quickly spread to the entire world, pointing to the need for global cooperation on banking and finance.
Climate change, infectious diseases, terrorism, and other ills that can easily cross borders demand a similar global response.
What globalization requires, therefore, are smart government policies.
Governments should promote high-quality education, to ensure that young people are prepared to face global competition.
They should raise productivity by building modern infrastructure and promoting science and technology.
And governments should cooperate globally to regulate those parts of the economy – notably finance and the environment – in which problems in one country can spill over to other parts of the world.
The need for highly effective government in the era of globalization is the key message of my new book, The Price of Civilization.
Simply put, we need more government nowadays, not less.
Yet the role of government also needs to be modernized, in line with the specific challenges posed by an interconnected world economy.
I wrote The Price of Civilization out of the conviction that the US government has failed to understand and respond to the challenges of globalization ever since it began to impact America’s economy in the 1970’s.
Rather than respond to globalization with more government spending on education, infrastructure, and technology, Ronald Reagan won the presidency in 1980 by pledging to slash government spending and cut taxes.
For 30 years, the US has been going in the wrong direction, cutting the role of government in the domestic economy rather than promoting the investments needed to modernize the economy and workforce.
The rich have benefited in the short run, by getting massive tax breaks.
The poor have suffered from job losses and cuts in government services.
Economic inequality has reached a high not seen since the Great Depression.
These adverse trends have been exacerbated by domestic politics.
The rich have used their wealth to strengthen their grip on power.
They pay for the expensive campaigns of presidents and congressmen, so presidents and congressmen help the rich – often at the expense of the rest of society. The same syndrome – in which the rich have gained control of the political system (or strengthened their control of it) – now afflicts many other countries.
Yet there are some important signs around the world that people are fed up with governments that cater to the rich while ignoring everyone else.
Start with the growing calls for greater social justice.
The upheavals in Tunis and Cairo were first called the Arab Spring, because they seemed to be contained to the Arab world.
But then we saw protests in Tel Aviv, Santiago, London, and now even in the US.
These protests have called first and foremost for more inclusive politics, rather than the corrupt politics of oligarchy.
Moreover, US President Barack Obama is gradually shifting toward the left.
After three years in which his administration coddled corporate lobbyists, he has finally begun to emphasize the need for the rich to pay more taxes.
This has come late in his term, and he might well continue to favor the rich and Wall Street in exchange for campaign contributions in 2012, but there is a glimmer of hope that Obama will defend a fairer budget policy.
Several European governments, including Spain, Denmark, and Greece, also seem to be moving in the same direction.
Spain recently imposed a new wealth tax on high-net-worth taxpayers.
Denmark elected a center-left government committed to higher government spending financed by new taxes on the rich.
And Greece has just voted for a new property tax to help close its yawning fiscal deficit.
The European Commission has also called for a new Financial Transactions Tax (FTT) to raise around $75 billion per year.
The Commission has finally agreed that Europe’s financial sector has been under-taxed.
The new FTT might still face political opposition in Europe, especially in the United Kingdom, with its large and influential banking sector, but at least the principle of greater tax fairness is high on the European agenda.
The world’s most successful economies today are in Scandinavia.
By using high taxes to finance a high level of government services, these countries have balanced high prosperity with social justice and environmental sustainability.
This is the key to well-being in today’s globalized economy.
Perhaps more parts of the world – and especially the world’s young people – are beginning to recognize this new reality.
Globalized Crisis
PRINCETON – If there is a bright side to the turmoil that has roiled the global economy since 2008, it is that not every part of the world has erupted simultaneously.
The first blow was the subprime mortgage crisis in the United States, to which Europeans responded with self-satisfied reflections on the superior resilience of their social model.
Then, in 2010, with the outbreak of the European debt crises, it was America’s turn for schadenfreude, while Asian countries pointed to the over-extended welfare state as the root of the problem.
Today, the world is obsessed with the slowdown in China and the woes of its stock market.
Indeed, to some, what is happening in China may be a modern version of the American stock-market crash in 1929 – a shock that shakes the world.
And it is not only the Chinese economy that has hit turbulence;
Russia and Brazil are in much worse shape.
As globalization connects far-flung people and economies, the consequences are not always what was expected – or welcome.
And, with the economic crisis becoming ever more global in nature, the next challenge for policymakers will be to try to mitigate its effects at home – and to contain their constituents’ impulse to reduce engagement with the rest of the world.
By now, it has become clear that every success story has its dark side, and that no economy is likely to continue to rocket upward indefinitely.
But, to paraphrase Leo Tolstoy, it is important to remember that every unhappy economy is unhappy in its own way, and that a fix for one country’s problems might not work for another’s.
Europe’s problems, for example, cannot be attributed to a simple, single cause – such as the adoption of a common currency.
In the run-up to the euro crisis, Italy had undergone a long period of stagnation, while Spain had experienced an American-style housing bubble and Greece was suffering from too much government-fueled growth.
The uniting factor was that each had adopted unsustainable policies that required corrective action.
Nor was the crisis in the United States evenly experienced;
Florida and Arizona had different problems than Michigan did.
Similarly, the economies of Russia, Brazil, and China are all slowing for different reasons.
Russia is suffering from its decision to become a big energy producer at the expense of diversification.
The roots of China’s problems lie in its attempt to shift from exports and investment in infrastructure to a growth model based on higher domestic consumption.
Brazil is weighed down by costly consumer credit and real-wage gains that have been outpacing productivity growth.
There are ways to deal with each of these problems, but the most effective long-term strategies for raising productivity cannot be reduced to a simple formula.
Unfortunately, part of the standard political response to an economic crisis is the demand that something be done quickly.
And, during the ongoing economic troubles, there is a policy that seems to have worked well so far: currency devaluation.
It is a policy that has had success in Japan, where a weaker yen is the only real accomplishment of Abenomics, and in Europe, where a weaker euro is helping to stave off recession.
Europeans also like to maintain that a weak dollar was behind the US economy’s rapid rebound.
Now it is China’s turn to hope that currency devaluation will help it regain competitiveness.
The trouble, of course, is that all countries’ currencies cannot depreciate simultaneously.
In the aftermath of the Great Depression, efforts to do just that pushed governments to adopt increasingly protectionist trade policies, constricting growth for years.
The protectionist impulse has been absent from the response to the current crisis so far, but that could change.
Another uncomfortable consequence of globalization is its tendency to put people and capital on the move.
As large emerging economies hit the skids, more people could be driven to seek a better future elsewhere.
The type of migration that attracts the most attention is the plight of refugees from conflict zones in the Middle East and North Africa.
But that flow is also accompanied by a surge of more economically motivated migration, from the Balkans and West Africa, for example.
And both are triggering nativist responses in destination countries.
Meanwhile, instability in emerging economies leads their wealthier citizens to try to rescue as much capital as possible, driving a surge in real-estate prices in global safe havens like New York, London, and Geneva.
That makes those cities look very glamorous and dynamic, but it also generates huge difficulties as impossibly high housing prices mean overcrowding, longer and difficult commutes, and a decline in the quality of life for the local population.
So far, the advanced economies have dealt with the recent downturns effectively.
But while the economic response has been much more effective than it was in the 1930s, social tensions and resentments have been left to simmer.
Europe and the US now face a new challenge: They must respond not only to their own economic difficulties, but also to the deep human suffering produced by economic and political failure elsewhere.
Globalizing NATO
PRINCETON –&nbsp;Next week, NATO’s 28 members will meet in Chicago for their annual summit.
Sixty-two years after the North Atlantic Treaty was signed, binding the United States, Canada, and ten European states to consider an attack on one an attack on all, NATO is transforming itself into a twenty-first-century global security organization.
The result will be a safer world.
In 1949, the world was rapidly dividing into two principle political-military blocs, East and West, alongside a large “non-aligned movement.”
NATO faced off against the Warsaw Pact, created by the Soviet Union and its allies in 1955.
Within both blocs, smaller powers clustered around the superpower.
No flexibility existed within either bloc for smaller groups of members to deploy alliance assets.
Today, NATO is becoming, in the words of its secretary-general, Anders Fogh Rasmussen, “a hub of a network of security partnerships and a center for consultation on global security issues.”
It is a “globally connected institution,” with more than 40 individual country partners and growing ties to other international organizations.
Indeed, the country partners include all of Europe’s non-NATO countries, such as Austria, Switzerland, Finland, and Sweden, and aspiring and possible NATO members such as Bosnia, Serbia, Macedonia, Ukraine, Belarus, and even Russia.
Virtually all of the Central Asian countries – from Turkmenistan to Kazakhstan, as well as Armenia, Azerbaijan, Afghanistan, and Pakistan – are partners, as is the entire Maghreb, from Morocco to Egypt, as well as Israel, Jordan, Iraq, Bahrain, Qatar, Kuwait, and the United Arab Emirates.
Finally, Pacific partners include Japan, South Korea, Australia, New Zealand, and Mongolia.
On the organizational side, NATO describes itself as having developed “close working relations” with the United Nations, the European Union, and the Organization for Security and Cooperation in Europe.
It also collaborates regularly with the African Union, the International Committee of the Red Cross, the International Organization for Migration, the World Bank, the International Civil Aviation Organization, and the Organization for the Prohibition of Chemical Weapons.
If one draws links radiating outward from NATO to all of these different countries and organizations, the result is a security network that has multiple hubs and clusters – much like a map of the Internet or of planets and galaxies.
This world is no longer unipolar, bipolar, or even multipolar, because the actors that matter are not single states but groups of states that are more or less densely connected.
It is a multi-hub security network, in which the hubs are regional organizations of different sizes and strengths.
This structural shift has enormous practical significance.
For starters, it means that not only NATO’s military resources, but also its human capital and practical knowledge in combating many different kinds of threats are available globally.
NATO has created a Comprehensive Crisis and Operations Management Center that brings together civilian and military expertise on crisis identification, planning, operations, reconstruction, and stabilization capabilities in ways that are explicitly designed to connect NATO headquarters in Europe to “the networked world.”
Second, NATO’s own identity is becoming that of an alliance that exists to empower – to offer assistance and partnership – as much as to overpower.
NATO is no longer just a hammer; it is an entire toolbox of security options.
These options include developing counter-networks to meet networked security threats such as terrorism and proliferation of nuclear, chemical, or biological materials, as well as highly decentralized threats such as piracy.
As a result, when a crisis like the war in East Timor in 1999 or last year’s political stalemate in Côte d’Ivoire arises, NATO can backstop whichever country or group of countries chooses to take the lead in carrying out a UN mandate.
NATO members themselves also have much more flexibility to draw on NATO’s collective assets.
Even skeptics of NATO expansion and operations like the intervention in Libya now recognize that joint operations by member countries, operating under a UN mandate and in conjunction with regional partners, is likely to be a model for the future.
As General Brent Scowcroft, National Security Adviser for President George H.W. Bush, observed recently, the UN Charter originally envisioned a standing military force to enforce Security Council resolutions – a vision that the NATO partner model might ultimately realize.
Power in a network flows from connectedness, or what network theorists call “centrality.”
The most powerful member of a network is the node that has the most connections to others, which means that a node can increase its power not only by adding connections directly, but also by increasing the connectedness of nearby nodes.
In other words, the US can increase its own power both by connecting to other NATO members (and then ensuring that NATO is connected to as many other countries and organizations as possible) and by increasing the connectedness of those other countries and organizations.
If NATO connects with the African Union, for example, and increases the AU’s connectedness, then both NATO and the AU become more central to the network and hence more powerful in terms of their ability to exercise influence and marshal resources.
The logic of centrality as a source of power creates a virtuous circle, in which members of a network gain advantage by bringing more members into the network and connecting more densely to them.
That is exactly the logic behind NATO’s transformation.
The immediate topic on the agenda in Chicago next week will be getting NATO forces out of Afghanistan.
But the longer-term subject will be getting as many countries as possible into the global NATO security network.
Global Macroeconomic Cooperation
NEW YORK – The world has yet to achieve the macroeconomic policy coordination that will be needed to restore economic growth following the Great Crash of 2008.
In much of the world, consumers are now cutting their spending in response to a fall in their wealth and a fear of unemployment.
The overwhelming force behind the current collapse of jobs, output, and trade flows, is even more important than the financial panic that followed Lehman Brothers’ default in September 2008.
There is, of course, no return to the situation that preceded the Great Crash.
The worldwide financial bubble cannot and should not be recreated.
But if the world cooperates effectively, the decline in consumer demand can be offset by a valuable increase in investment spending to address the most critical needs on the planet: sustainable energy, safe water and sanitation, a reduction of pollution, improved public health, and increased food production for the poor.
The United States, Europe, and Asia have all experienced a collapse of wealth due to the fall of stock markets and housing prices.
There is not yet an authoritative measurement of the wealth decline and of how it is distributed worldwide, but it is probably around $15 trillion lower than the peak in the US, and perhaps $10 trillion lower in both Europe and Asia.
A combined wealth decline of around $25 trillion would be roughly 60% of one year’s global income.
The decline in US wealth as a share of the US economy is even larger, around 100% of annual income, and perhaps 70% of annual income in Europe and Asia.
The usual assumption is that household consumption falls by around $0.05 for each $1 decline in household wealth.
This would mean a direct negative shock to household spending in the US of around 5% of national income, and of around 3.5% in Europe and Asia.
The size of this downturn is so large that unemployment will rise sharply in all major regions of the world economy, perhaps reaching 9-10% in the US.
Households will gradually save enough to restore their wealth, and household consumption will gradually recover as well.
Yet this will occur too slowly to prevent a rapid rise in unemployment and a massive shortfall of production relative to potential output.
The world therefore needs to stimulate other kinds of spending.
One powerful way to boost the world economy and to help meet future needs is to increase spending on key infrastructure projects, mainly directed at transportation (roads, ports, rail, and mass transit), sustainable energy (wind, solar, geothermal, carbon-capture and sequestration, and long-distance power transmission grids), pollution control, and water and sanitation.
There is a strong case for global cooperation to increase these public investments in the developing economies, and especially in the world’s poorest regions.
These regions, including Sub-Saharan Africa and Central Asia, are suffering harshly from the global crisis, owing to falling export earnings, remittances, and capital inflows.
Poor regions are also suffering from climate changes such as more frequent droughts, caused by rich countries’ greenhouse-gas emissions.
At the same time, impoverished countries have huge needs for infrastructure, especially roads, rail, renewable energy, water and sanitation, and for improved current delivery of vital life-saving services, including health care and support for food production.
The G-20, which comprises the world’s largest economies, offers the natural setting for global policy coordination.
The next G-20 meeting in London in early April is a crucial opportunity for timely action.
The leading economies – especially the US, European Union, and Japan – should establish new programs to finance infrastructure investments in low-income countries.
The new lending should be at least $100 billion per year, directed towards developing countries.
The new financing would include direct loans from rich countries’ export-credit agencies to enable poor countries to borrow long term (for example, 40 years) to build roads, power grids, renewable energy generation, ports, fiber optic networks, and water and sanitation systems.
The G-20 should also increase the lending capacity of the World Bank, the African Development Bank, and other international financial institutions.
Japan, with a surplus of saving, a strong currency, massive foreign exchange reserves, and factories without domestic orders, should take the lead in providing this funding for infrastructure.
Moreover, Japan can boost its own economy and those of the poorest countries by directing its own industrial production to the infrastructure needs of the developing world.
Cooperation can turn the sharp and frightening decline in worldwide consumption spending into a global opportunity to invest more in the world’s future well being.
By directing resources away from rich countries’ consumption to developing countries’ investment needs, the world can achieve a “triple” victory.
Higher investment and social spending in poor countries will stimulate the entire world economy, spur economic development, and promote environmental sustainability through investments in renewable energy, efficient water use, and sustainable agriculture.
Global Malaise in 2006?
The almighty American consumer had another banner year in 2005, helping sustain global economic growth, albeit at a slower pace than in 2004.
As in recent years, he consumed at or above his income level, and the United States as a whole spent well beyond its means, borrowing from the rest of the world at a feverish pace in 2005 – more than $2 billion a day.
A year ago, most pundits argued that this was unsustainable.
It evidently was sustainable, at least for one more year.
But it nonetheless remains true that whatever is unsustainable will not be sustained, which creates great risks for the US and global economy in 2006.
Two economic surprises prolonged the good times in 2005.
First, while the US Federal Reserve continued hiking short-term interest rates, long-terms rates did not increase in tandem, which allowed housing prices to continue rising.
This was centrally important to sustaining global growth, for the performance of world’s largest economy has been fueled by real estate in recent years, with individuals refinancing their mortgages and spending some of the proceeds, and with high prices leading to more construction.
But this is unlikely to continue.
Long-term interest rates almost certainly will eventually start to rise – and “eventually” increasingly looks like next year.
If so, Americans will have to spend more money on debt service, leaving them with less to spend on consumption of goods and services.
Moreover, real estate prices will most likely stop rising rapidly – indeed, they may even decline.
As a result, refinancing of mortgages will grind to a halt, leaving no money to draw out of housing to sustain Americans’ consumption binge.
On both accounts, aggregate demand will decline.
Is it possible that the cash-rich corporate sector will more than make up for the slack by increasing investment?
There may well be some increase in gross investment, as obsolete equipment and software are replaced.
But there also is some evidence that innovation is slowing – perhaps the result of reduced investment in research in the past five years.
In any case, even if firms are cash-rich, they do not typically expand investment during periods when consumption is slowing.
Uncertainties about the economy are likely to insert an element of caution into companies’ investment decisions.
In short, it is more likely that moderating investment will exacerbate the consumer slowdown than that an acceleration of investment will offset it.
But this is not the only reason for bleaker prospects for America and the world in 2006.
The second surprise in 2005 was that while oil prices increased far more than expected, the economic dampening effect seemed somewhat muted in most places, at least until the last part of the year.
Because of higher oil prices, for example, America’s spending on oil imports has increased by roughly $50 billion a year – money that otherwise would have been spent mostly on goods made in America.
For most of 2005, Americans behaved as if they didn’t really believe that oil prices would remain high, at least for a while.
This is less startling than it may appear: econometric studies suggest that it takes a year to two before the full effects of oil-price increases are felt.
Now, with futures markets predicting that oil will be $50 to $60 a barrel for the next two years, demand for gas-guzzlers has evaporated, taking with it the prospects for America’s auto companies, whose corporate strategies have bet on low oil prices and America’s love affair with the SUV.
High oil prices are set to dampen economic performance in the rest of the world as well, although growth prospects look better than in the US.
China’s growth continues to astound the world; indeed, new GDP data suggest that its economy is 20% larger than previously thought.
Moreover, China’s surging growth will echo throughout much of Asia, including (in somewhat muted form) in Japan.
Europe continues to be a mixed picture, with the European Central Bank almost perversely raising interest rates even as Europe’s economy needs further stimulation to ensure its recovery.
As if that were not bad enough, Germany’s new government is promising to raise taxes.
Fiscal rectitude in the right place and the right time is to be commended; but this is the wrong place and the wrong time – and Germany’s recovery prospects will be dampened.
The main risk in 2006 is that America’s long-brewing problems come to a head globally: investors, finally taking heed of the large structural fiscal deficit, the yawning trade gap, and the high level of household indebtedness, may pull money out of the US in a panic.
Alternatively, rising interest rates and a downturn in the real estate market could so weaken consumer demand that the economy slips into recession, squeezing exporters in other countries that depend on the US market.
In either case, the US government, hamstrung by already-wide deficits, may feel powerless to respond with countercyclical fiscal policy.
With confidence in Bush’s economic management almost as low as confidence in his management of the Iraq war, there is every reason to worry that should one of these crises emerge, it will not be well managed.
But it is more likely that 2006 will just be another year of malaise: China’s significance within the global economy is still not large enough to offset weaknesses in the rest of the world.
America, too, will manage to muddle through again – leaving even higher levels of debt for the future.
In short, 2006 will be marked by mounting uncertainty about prospects for global economic growth, even as the distribution of the fruits of that growth remain dismally predictable.
In America, at least, 2006 is likely to be another year in which stagnant real wages freeze, or even erode, the living standards of those in the middle.
And, everywhere, it is likely to be another year in which the gap between the haves and the have-nots will widen.
Global Public Goods: The Missing Component
Global Risk and Reward in 2011
NEW YORK – The outlook for the global economy in 2011 is, partly, for a persistence of the trends established in 2010.
These are: an anemic, below-trend, U-shaped recovery in advanced economies, as firms and households continue to repair their balance sheets; a stronger, V-shaped recovery in emerging-market countries, owing to stronger macroeconomic, financial, and policy fundamentals.
That adds up to close to 4% annual growth for the global economy, with advanced economies growing at around 2% and emerging-market countries growing at about 6%.
But there are downside and upside risks to this scenario.
On the downside, one of the most important risks is further financial contagion in Europe if the eurozone’s problems spread – as seems likely – to Portugal, Spain, and Belgium.
Given the current level of official resources at the disposal of the International Monetary Fund and the European Union, Spain now seems too big to fail yet too big to be bailed out.
The United States represents another downside risk for global growth.
In 2011, the US faces a likely double dip in the housing market, high unemployment and weak job creation, a persistent credit crunch, gaping budgetary holes at the state and local level, and steeper borrowing costs as a result of the federal government’s lack of fiscal consolidation.
Moreover, credit growth on both sides of the Atlantic will be restrained, as many financial institutions in the US and Europe maintain a risk-averse stance toward lending.
In China and other emerging-market economies, delays in policy tightening could fuel a rise in inflation that forces a tougher clampdown later, with China, in particular, risking a hard landing.
There is also a risk that capital inflows to emerging markets will be mismanaged, thus fueling credit and asset bubbles.
Moreover, further increases in oil, energy, and commodity prices could lead to negative terms of trade and a reduction in real disposable income in net commodity-importing countries, while adding to inflationary pressures in emerging markets.
Moreover, currency tensions will remain high.
Countries with large current-account deficits need nominal and real depreciation (to sustain growth via net exports while ongoing private- and public-sector deleveraging keeps domestic demand weak), whereas surplus countries (especially emerging markets) are using currency intervention to resist nominal appreciation and sterilized intervention to combat real appreciation.
This is forcing deficit countries into real exchange-rate adjustments via deflation – and thus a rising burden of public and private debt that may lead to disorderly defaults.
Furthermore, several major geopolitical risks loom, including military confrontation between North and South Korea and the lingering possibility that Israel – or even the US – might use military force to counter Iran’s nuclear weapons program.
There are also the political and economic turmoil in Pakistan and the risk of a rise in cyber-attacks – for example, in retaliation for criminal proceedings against WikiLeaks.
In the US, slower private-sector deleveraging – given the fiscal stimulus from the extension of unemployment benefits for 13 months, the payroll-tax cut, and maintenance of current income-tax rates for another two years – could lull policymakers into assuming that relatively large fiscal and current-account imbalances can continue indefinitely.
This could generate financial strains over the medium term – and protectionist pressures in the short term.
Finally, in the face of political opposition to fiscal consolidation, especially in the US, there is a risk that the path of least resistance becomes continued monetization of fiscal deficits.
Eventually (once the slack in goods and labor markets is reduced), this would push inflation expectations – and yield curves – higher.
But there are also several upside risks.
The US corporate sector is strong and very profitable, owing to massive labor shedding, creating scope for increased capital spending and hiring to contribute to more robust and above-trend GDP growth in 2011.
Similarly, the eurozone, driven by Germany, could lurch toward greater economic and political union (especially some form of fiscal union), thus containing the problems of its periphery.
Meanwhile, growth in Germany and the eurozone “core” may further accelerate given the strength of emerging markets, which may show even greater resilience, underpinning more rapid global expansion.
The attenuation of downside risks and pleasant surprises in developed and emerging economies could lead to a further increase in demand for risky assets (equities and credit), which would reinforce economic recovery via wealth effects and lower borrowing costs.
Positive feedback from consumption to production, employment, and income generation – both within countries and across countries via trade channels – could further accelerate the pace of global growth, particularly if monetary policies in most advanced economies remain looser than expected, supporting asset reflation and thus demand and growth.
Indeed, after four years (2007-2010) of either recession or sub-par recovery, the process of balance-sheet repair – while not completed yet – is underway, and may result in less saving and more spending to boost growth in advanced economies.
The damage from the financial crisis is still ongoing, but stronger growth can heal many wounds, especially debt-driven wounds.
So far, the downside and upside risks for the world economy are balanced.
But if sound government policies in advanced and major emerging economies contain the downside risks that are more prevalent in the first half of this year – which derive from political and policy uncertainty – a more resilient global economic recovery could take hold in the second half of 2011 and into 2012.
Technology and the Employment Challenge
MILAN – New technologies of various kinds, together with globalization, are powerfully affecting the range of employment options for individuals in advanced and developing countries alike – and at various levels of education.
Technological innovations are not only reducing the number of routine jobs, but also causing changes in global supply chains and networks that result in the relocation of routine jobs – and, increasingly, non-routine jobs at multiple skill levels – in the tradable sector of many economies.
How, then, should policymakers confront the new and difficult challenges for employment (and, in turn, for the distribution of income and wealth), especially in developed economies?
From recent research, we have learned a number of interesting things about how the evolution of economic structure affects employment.
The tradable side of advanced economies has not generated any real net increases in employment for at least two decades, while the jobs that it has created are concentrated in the upper-income and upper-education ranges, with employment declining in the middle and lower range of income and education.
Growth in high-end services employment is matched by contraction in high-employment components of manufacturing supply chains.
Until the crisis of 2008, middle- and lower-income job growth occurred entirely in the non-tradable sector of the economy, which accounts for roughly two-thirds of advanced countries’ output and employment.
Here, incomes and value added per employee remained largely flat.
Jobs could be eliminated by technology, but not by global competition; and, unsustainable, debt-fueled domestic-demand growth helped to delay the current employment deficits.
As a result, the advanced economies have been shedding routine jobs at a rapid rate, while adding non-routine jobs (for example, those that cannot yet be replaced or reduced by machines and networked computers).
This has fueled a dramatic rise in the return on education and high-level skills, with the share of total income received by owners of capital and high-end employees increasing in advanced countries for more than two decades.
Growth and employment are thus diverging in advanced countries.
The key force driving this trend – technology – is playing multiple roles.
The replacement of routine manual jobs by machines and robots is a powerful, continuing, and perhaps accelerating trend in manufacturing and logistics, while networks of computers are replacing routine white-collar jobs in information processing.
Part of this is pure automation.
Another important part is disintermediation – the elimination of intermediaries in banking, online retail, and a host of government services, to name just a few affected areas.
But technology’s impact does not stop there.
The same class of information technologies that automate, disintermediate, and reduce the costs of remoteness are also enabling the construction of increasingly complex and geographically diverse global supply chains and networks.
Global supply chains – constantly in flux, owing to rising developing-country incomes and shifting comparative advantage – locate productive activities where human and other resources make those activities competitive.
Links in these chains include not only intermediate products and assembly, but also a growing range of services – research and development, design, maintenance and support, customer service, business processes, and more – as transaction, coordination, and communication costs fall.
The result is what is sometimes called the “atomization” of global supply chains: increasingly fine subdivisions are feasible, more efficient, and locatable almost anywhere.
Proximity still matters in terms of transport and logistics costs.
But, with the developing world accounting for the largest new markets and most of the growth in global demand, the logic driving atomization should become even more compelling.
The efficient ongoing decomposition of global supply chains, networks, and services has two related consequences.
First, the tradable part of the global economy – where competition for economic activity and jobs is direct – is becoming a larger share of the whole; the same is true of individual economies.
Second, parts of global supply chains that were not competitive are no longer protected by being adjacent to parts that were.
Adjacency is no longer a requirement.
These dynamics and related challenges are not confined to advanced countries.
Over the next decade, for example, China will replace much of its labor-intensive assembly employment with higher-value-added employment in manufacturing and services, not only in the tradable sector, but also – even more noticeably – in the rapidly growing non-tradable part of its economy.
The expanding scope and diminishing costs of automation and additive manufacturing may affect labor-intensive functions globally, including in earlier-stage developing countries.
A key factor in adapting to these forces is investment.
For individuals, businesses, educational institutions, and governments in advanced countries, broad-based, elevated, and efficient investment in education and skills is critical.
Closing wide information gaps in the market for skills would also increase the efficiency of these investments.
Across-the-board upgrading of human capital will improve income distribution both directly and indirectly (by reducing the supply of lower-skill workers relative to demand).
It will also (partly) mitigate the concentration of wealth that results from a highly skewed income distribution.
On the tradable side, competitiveness depends not only on human capital, but also on a host of other factors: infrastructure, tax systems, regulatory efficiency, policy-induced uncertainty, and energy and health-care costs.
There is no guarantee that taking the right steps in these areas would entirely overcome the employment challenges that individuals and countries face, though doing so would help.
In fact, it is possible that we are entering a period in which major adaptations in employment models, work weeks, contract labor, minimum wages, and the delivery of essential public services will be needed in order to maintain social cohesion and uphold the core values of equity and intergenerational mobility.
The End of Pasta?
PRAGUE – Scare stories have been an integral part of the global warming narrative for a long time.
Back in 1997, Al Gore told us that global warming was making the El Niño winds stronger and more severe.
That has not happened. Greenpeace and many others have told us for years that we will see more violent hurricanes.
In fact, over the last six years, global hurricane energy has dropped to its lowest level since the 1970’s, while the United States has had the longest absence of severe hurricanes ever (Sandy was a “superstorm,” not a hurricane, when it hit the vulnerable East Coast in October).
But the scares do not stop there.
The World Wildlife Fund declared in 2004 that polar bears would go extinct by the end of the century, and that the calamity would start in Hudson Bay, where they would stop reproducing by 2012.
The bears are still reproducing.
And stories abound of global warming bringing malaria to Europe or Vermont.
But here, too, the evidence contradicts such fears; in fact, malaria deaths have dropped more than 25% over the last ten years.
It is understandable that pundits, worried about global warming and frustrated with the near-absence of political interest or solutions, see exaggeration as an easy way to garner attention.
The problem is that when these scare stories are later shown to be wrong, people become less willing to listen even to reasonable arguments about global warming.
Indeed, skepticism about global warming has gone up, not down, as the false alarms have become increasingly high-pitched.
Moreover, by casting every problem as mainly caused by global warming, the solution almost automatically becomes cutting CO2 emissions, though this often is the slowest and costliest way to achieve the least good.
Consider the newest global-warming exaggeration: an article from Newsweek shrilly claiming that rising temperatures are heralding “The End of Pasta.”
So, as warming increases, we will see “shockingly high prices” for pasta and bread.
Its central message is straightforward: “If humans want to keep eating pasta, we will have to take much more aggressive action against global warming.”
The argument is almost entirely wrong.
Yields of all major crops have been rising dramatically in recent decades, owing to higher-yielding crop varieties and farmers’ greater use of fertilizer, pesticides, and irrigation.
Moreover, CO2 acts as a fertilizer, and its increase has probably raised global yields more than 3% over the past 30 years.
But increasing temperatures will harm some crops while benefiting others.
Because most crops are already grown where they do best, it is not surprising that climate models show that temperature increases will reduce yields if farmers change little or nothing.
In fact, farmers will adapt, especially over the course of a century.
They will plant earlier, grow more heat-loving varieties, or change their crop entirely.
And, as growing wheat and grains becomes possible higher north in Canada and Russia, even more opportunities will open up.
The largest study, conducted by the International Institute for Applied Systems Analysis, includes temperature impacts, CO2 fertilization, and adaptation, and projects a 40.7% increase in grain production by 2050.
Without global warming, production might have been half a percentage point higher.
With global warming, prices will most likely be slightly lower.
Our linguine supplies are safe.
Of course, this does not mean that global warming has no impact on crops.
Production will move to new varieties and away from the tropics, implying even higher yields for developed countries, but slower growth in yields for developing countries.
For wheat, it is even likely that parts of Africa simply will be unable to sustain production.
But cutting back on CO2 is a particularly ineffective way to help the world’s poor and hungry.
Even if we managed – at very high cost – a significant reduction, we would achieve only a slightly slower rise in global temperatures.
Meanwhile, by embracing biofuels, for example, we are essentially burning food in our cars, which drives up food prices and exacerbates hunger.
We could do much more good if we focused on allowing poor countries to use the benefits of extra CO2 fertilization while adapting to the problems caused by higher temperatures.
That means greater investment in crop research to produce more robust and higher-yielding varieties, as well as making more irrigation, pesticides, and fertilizer available.
Furthermore, even the poorest parts of the developing world will be much richer by mid-century; most people will live in cities and earn their incomes outside agriculture.
As in today’s developed countries, their consumption of wheat will not depend on whether it is produced in their own country, but on global food prices and local income.
This underscores the importance of striving for free trade, thereby enabling cheaper agricultural production while increasing wages in non-agricultural sectors.
Global-warming scare stories merely shift our focus to the least effective ways to help.
The Post-Crisis Crises
NEW YORK – In the shadow of the euro crisis and America’s fiscal cliff, it is easy to ignore the global economy’s long-term problems.
But, while we focus on immediate concerns, they continue to fester, and we overlook them at our peril.
The most serious is global warming.
While the global economy’s weak performance has led to a corresponding slowdown in the increase in carbon emissions, it amounts to only a short respite.
And we are far behind the curve: Because we have been so slow to respond to climate change, achieving the targeted limit of a two-degree (centigrade) rise in global temperature, will require sharp reductions in emissions in the future.
Some suggest that, given the economic slowdown, we should put global warming on the backburner.
On the contrary, retrofitting the global economy for climate change would help to restore aggregate demand and growth.
At the same time, the pace of technological progress and globalization necessitates rapid structural changes in both developed and developing countries alike.
Such changes can be traumatic, and markets often do not handle them well.
Just as the Great Depression arose in part from the difficulties in moving from a rural, agrarian economy to an urban, manufacturing one, so today’s problems arise partly from the need to move from manufacturing to services.
New firms must be created, and modern financial markets are better at speculation and exploitation than they are at providing funds for new enterprises, especially small and medium-size companies.
Moreover, making the transition requires investments in human capital that individuals often cannot afford.
Among the services that people want are health and education, two sectors in which government naturally plays an important role (owing to inherent market imperfections in these sectors and concerns about equity).
Before the 2008 crisis, there was much talk of global imbalances, and the need for the trade-surplus countries, like Germany and China, to increase their consumption.
That issue has not gone away; indeed, Germany’s failure to address its chronic external surplus is part and parcel of the euro crisis.
China’s surplus, as a percentage of GDP, has fallen, but the long-term implications have yet to play out.
America’s overall trade deficit will not disappear without an increase in domestic savings and a more fundamental change in global monetary arrangements.
The former would exacerbate the country’s slowdown, and neither change is in the cards.
As China increases its consumption, it will not necessarily buy more goods from the United States.
In fact, it is more likely to increase consumption of non-traded goods – like health care and education – resulting in profound disturbances to the global supply chain, especially in countries that had been supplying the inputs to China’s manufacturing exporters.
Finally, there is a worldwide crisis in inequality.
The problem is not only that the top income groups are getting a larger share of the economic pie, but also that those in the middle are not sharing in economic growth, while in many countries poverty is increasing.
In the US, equality of opportunity has been exposed as a myth.
While the Great Recession has exacerbated these trends, they were apparent long before its onset.
Indeed, I (and others) have argued that growing inequality is one of the reasons for the economic slowdown, and is partly a consequence of the global economy’s deep, ongoing structural changes.
An economic and political system that does not deliver for most citizens is one that is not sustainable in the long run.
Eventually, faith in democracy and the market economy will erode, and the legitimacy of existing institutions and arrangements will be called into question.
The good news is that the gap between the emerging and advanced countries has narrowed greatly in the last three decades.
Nonetheless, hundreds of millions of people remain in poverty, and there has been only a little progress in reducing the gap between the least developed countries and the rest.
Here, unfair trade agreements – including the persistence of unjustifiable agricultural subsidies, which depress the prices upon which the income of many of the poorest depend – have played a role.
The developed countries have not lived up to their promise in Doha in November 2001 to create a pro-development trade regime, or to their pledge at the G-8 summit in Gleneagles in 2005 to provide significantly more assistance to the poorest countries.
The market will not, on its own, solve any of these problems.
Global warming is a quintessential “public goods” problem.
To make the structural transitions that the world needs, we need governments to take a more active role – at a time when demands for cutbacks are increasing in Europe and the US.
As we struggle with today’s crises, we should be asking whether we are responding in ways that exacerbate our long-term problems.
The path marked out by the deficit hawks and austerity advocates both weakens the economy today and undermines future prospects.
The irony is that, with insufficient aggregate demand the major source of global weakness today, there is an alternative: invest in our future, in ways that help us to address simultaneously the problems of global warming, global inequality and poverty, and the necessity of structural change.
Global Warming’s Cheap, Effective Solution
COPENHAGEN – Global warming will mean that more people die from the heat.
There will be a rise in sea levels, more malaria, starvation, and poverty.
Concern has been great, but humanity has done very little that will actually prevent these outcomes.
Carbon emissions have kept increasing, despite repeated promises of cuts.
We all have a stake in ensuring that climate change is stopped.
We turned to climate scientists to inform us about the problem of global warming. Now we need to turn to climate economists to enlighten us about the benefits, costs, and possible outcomes from different responses to this challenge.
World leaders are meeting in Copenhagen this December to forge a new pact to tackle global warming.
Should they continue with plans to make carbon-cutting promises that are unlikely to be fulfilled?
Should they instead delay reductions for 20 years?
What could be achieved by planting more trees, cutting methane, or reducing black soot emissions?
Is it sensible to focus on a technological solution to warming?
Or should we just adapt to a warmer world?
Much of the current policy debate remains focused on cutting carbon, but there are many ways to go about repairing the global climate.
Our choices will result in different outcomes and different costs.
The optimal combination of solutions will create the biggest impact for the least money.
A groundbreaking paper by economists Eric Bickel and Lee Lane is one of the first – and certainly the most comprehensive – study of the costs and benefits of climate engineering.
Deliberately manipulating the earth’s climate seems like something from science fiction.
But as President Barack Obama’s science adviser, John Holdren, has said it has “got to be looked at,” and many prominent scientists agree.
Bickel and Lane offer compelling evidence that a tiny investment in climate engineering might be able to reduce as much of global warming’s effects as trillions of dollars spent on carbon emission reductions.
Climate engineering has the advantage of speed.
There is a significant delay between carbon cuts and any temperature drop – even halving global emissions by mid-century would barely be measurable by the end of the century.
Making green energy cheap and prevalent will also take a long time.
Consider that electrification of the global economy is still incomplete after more than a century of effort.
Many methods of atmospheric engineering have been proposed.
Solar radiation management appears to be one of the most hopeful.
Atmospheric greenhouse gases allow sunlight to pass through but absorb heat and radiate some down to the earth’s surface.
All else being equal, higher concentrations will warm the planet.
Solar radiation management would bounce a little sunlight back into space.
Reflecting just 1-2% of the total sunlight that strikes the earth could offset as much warming as that caused by doubling preindustrial levels of greenhouse gases.
When Mount Pinatubo erupted in 1991, about a million tons of sulfur dioxide was pumped into the stratosphere, reacting with water to form a hazy layer that spread around the globe, and – by scattering and absorbing incoming sunlight – cooled the earth’s surface for almost two years.
We could mimic this effect through stratospheric aerosol insertion – essentially launching material like sulfur dioxide or soot into the stratosphere.
Another promising approach is marine cloud whitening, which sprays seawater droplets into marine clouds to make them reflect more sunlight.
This augments the natural process, where sea salt from the oceans provides water vapor with the cloud condensation nuclei.
It is remarkable to consider that we could cancel out this century’s global warming with 1,900 unmanned ships spraying seawater mist into the air to thicken clouds.
The total cost would be about $9 billion, and the benefits of preventing the temperature increase would add up to about $20 trillion.
That is the equivalent of doing about $2000 worth of good with every dollar spent.
Many of the risks of climate engineering have been overstated.
Marine cloud whitening would not lead to permanent atmospheric changes, and could be used only when needed.
Turning seawater into clouds is a natural process.
The biggest challenge is public perception.
Many environmental lobbyists oppose even researching climate engineering.
This is startling, given the manifold benefits.
If we care most about avoiding warmer temperatures, it seems that we should be elated that this simple, cost-effective approach shows so much promise.
Climate engineering could remain a back-up option in case of necessity.
Or we could put it on the agenda today.
In either case, there is a commanding case for its serious consideration.
We are on track to being the generation that wasted decades bickering over carbon-emission cuts and failed to stop the harmful effects of warming.
That would be a shameful legacy – one that could be avoided by re-thinking climate policy.
Global Warming’s Dirty Secret
Last week, the European Union declared that it had practically saved the planet.
With European Commission President Jose Manuel Barroso claiming that Europe will lead the way on climate change, the EU has promised to cut CO2 emissions by 20% below 1990-levels by 2020.
Of course, with the EU already having promised an 8% cut by next year in the Kyoto Protocol, this new target seems slightly less ambitious.
Moreover, in continuing the fundamental problems besetting the crippled Kyoto Protocol, the EU has essentially gone and made a worse deal.
Man-made climate change is, of course, real, and constitutes a serious problem.
Yet the current cut-emissions-now-before-it-is-too-late mindset neglects the fact that the world has no sensible short-term solutions.
This seems to be why we focus on feel-good approaches like the Kyoto Protocol, whose fundamental problem has always been that it is simultaneously impossibly ambitious, environmentally inconsequential, and inordinately expensive.
It required such big reductions that only few countries could live up to it.
Some countries, like the United States and Australia, chose to opt out of its stringent demands; others, like Canada, Japan, and a raft of European states, pay lip service to its requirements but will essentially miss its targets.
Yet, even if everyone had participated and continued to stick to Kyoto’s ever more stringent commitments, it would have had virtually no environmental effect.
The treaty’s effect on temperature would be immeasurable by mid-century and only postpone warming by five years in 2100.
Nonetheless, the cost would have been anything but trivial – an estimated $180 billion per year.
With its high-pitched rhetoric, you would be forgiven for believing that the EU has now single-handedly taken the major step towards solving the problem.
Barroso calls the agreement “historic,” Tony Blair extols its “groundbreaking, bold, ambitious targets,” and German Chancellor Angela Merkel even ventured that the promises “can avoid what could well be a human calamity.”
But nobody sees fit to reveal the agreement’s dirty little secret: it will do next to no good, and again at very high cost.
According to one well-established and peer-reviewed model, the effect of the EU cutting emissions by 20% will postpone warming in 2100 by just two years, yet the cost will be about $90 billion annually.
It will be costly, because Europe is a costly place to cut CO2, and it will be inconsequential, because the EU will account for only about 6% of all emissions in the twenty-first century.
So the new treaty will be an even less efficient use of our resources than the old Kyoto Protocol.
It is important to learn from the past.
We have often been promised dramatic cuts in CO2 emissions far into the future, only to see the promises vanish when we got there.
In Rio de Janeiro in 1992, the West promised to stabilize emissions, but overshot by 12%.
In Kyoto, we were promised a 7% reduction in world emissions, but will probably achieve only 0.4%.
Of course, those promises were made by politicians who in all likelihood will no longer be in office when the time comes to fulfil them.
We will not be able to solve global warming over the next decades, but only the next half or full century.
We need to find a viable, long-term strategy that is smart, equitable, and doesn’t require inordinate sacrifice for trivial benefits.
Fortunately, there is such a strategy: research and development.
Investing in R&amp;D of non-carbon-emitting energy technologies would leave future generations able to make serious and yet economically feasible and advantageous cuts.
A new global warming treaty should mandate spending 0.05% of GDP on R&amp;D in the future.
It would be much cheaper, yet do much more good in the long run.
The EU’s new global warming agreement may help win elections for leaders faced with voters scared by the prospect of climate change.
But it will do virtually no good, at high cost, and – as with many other lofty promises from the EU – it will carry a high probability of failure.
Let us hope that the rest of the world will keep its cool and propose a better, cheaper, and more effective solution for the future.
Global Warming’s Misunderstood Victims
BAMAKO, MALI – Media organizations in wealthy countries regularly send forth reporters to find “victims of global warming.”
In dispatches from the Pacific Islands, Bangladesh, or Ethiopia, journalists warn of impending calamity.
Global warming is the most horrific challenge facing these regions, we are told.
Its resolution is vital.
But seldom do we hear from the local people who are said to be in danger.
These people are not voiceless; we just pay no attention to what they say.
The Copenhagen Consensus Center set out to ask people in global-warming hot spots about their fears and hopes.
In Mojo, central Ethiopia, our researchers met Tadese Denkue, a 68-year-old former soldier with no regular income. “I never know when I will be able to buy myself some food,” he said.
“I only know that I suffer a lot. This is not a decent life.”
Tadese has never heard of global warming.
When it is explained to him, he is dismissive.
He has more immediate concerns: “The first thing I need is food, and then a job.”
Tadese is suffering from his second bout of malaria this year.
He has lost count of how many times he has contracted the disease.
Our researcher accompanies him to a free clinic.
The electricity is not working.
A doctor admits that most patients are sent home without testing or treatment: the clinic has run out of medicine.
The threat of more malaria has been used to argue for drastic carbon cuts.
Warmer, wetter weather will improve conditions for the malaria parasite.
Most estimates suggest that global warming will put 3% more of the earth’s population at risk of catching malaria by 2100.
The most efficient, global carbon cuts – designed to keep temperature increases under two degrees Celsius – would cost $40 trillion a year by 2100, according to research by Richard Tol for the Copenhagen Consensus Center.
In the best-case scenario, this expenditure would reduce the at-risk population by only 3%.
In comparison, spending $3 billion annually on mosquito nets, environmentally safe indoor DDT sprays, and subsidies for effective new combination therapies could halve the total number of those infected within one decade.
For the money it takes to save one life with carbon cuts, smarter policies could save 78,000 lives.
Of course, malaria is far from the only reason we worry about global warming.
Twenty kilometers from Mojo, our researcher met Desi Koricho and her eight-month-old son, Michel.
Every two weeks, Desi walks four hours to take Michel to the health center.
After two months of malnutrition treatment, Michel has grown a lot but remains half the normal size of a baby his age.
Michel is not Desi’s biological child.
She took him in after his father committed suicide and he was abandoned.
Desi likely suffers from undiagnosed malnutrition herself.
It is rife here.
There are no roads, electricity, or other infrastructure.
Conditions are cramped and unhygienic. “We need everything,” Desi says.
Solving the malnutrition challenge would be a good start.
Campaigners across Europe and the US use the threat of starvation to argue for drastic carbon cuts.
For most regions, weather changes will increase agricultural productivity.
Cruelly, this is not the case for parts of Africa that are already suffering from hunger.
But, as with malaria, all of the evidence shows that direct policies are much more effective than carbon cuts.
One effective, under-appreciated intervention is providing micro-nutrients to those who lack them.
Providing Vitamin A and zinc to 80% of the 140 million or so undernourished children in the world would require a commitment of just $60 million annually.
For $286 million, we could get iron and iodine to more than 2.5 billion people.
The choice is stark: for a few hundred million dollars, we could help almost half of humanity now.
Compare this to the investments to tackle climate change – $40 trillion annually by the end of the century – which would save a hundred times fewer starving people (and in 90 years!).
For every person saved from malnutrition through climate policies, the same money could have saved half a million people from micronutrient malnutrition through direct policies.
Some argue that the choice between spending money on carbon cuts and on direct policies is unfair.
But it is a basic fact that no dollar can be spent twice.
Rich countries and donors have limited budgets and attention spans.
If we spend vast amounts of money on carbon cuts in the mistaken belief that we are stopping malaria and reducing malnutrition, we are less likely to put aside money for the direct policies that would help today.
Indeed, for every dollar spent on strong climate policies, we will likely do about $0.02 of good for the future.
If we spent the same dollar on simple policies to help malnutrition or malaria now, we could do $20 or more good – 1000 times better, when all impacts are taken into account.
On Mount Kilimanjaro in Tanzania – where the effects of global warming can already be felt – our researcher encountered 28-year-old Rehema Ibrahim.
Rehema was divorced by her husband and disowned by her family after she failed to produce children.
To find out if she was the cause of the infertility, she started sleeping with other men.
She is now HIV-positive, an outcast in a terribly poor society.
Rehema has noticed changes in the weather.
She says that the snow and ice have been melting.
She knows what our researcher means by “global warming.”
But, she says: “The issues I am experiencing have greater priority.
The HIV and the problems it is causing are greater than the [receding] ice.”
Campaigners for carbon-emission reductions regularly highlight the melting snow and ice of Mount Kilimanjaro.
But we need to pay as much attention to the people living in the mountain’s shadow.
Global Warming’s Technology Deficit
COPENHAGEN – Our current approach to solving global warming will not work.
It is flawed economically, because carbon taxes will cost a fortune and do little, and it is flawed politically, because negotiations to reduce CO2 emissions will become ever more fraught and divisive.
And even if you disagree on both counts, the current approach is also flawed technologically.
Many countries are now setting ambitious carbon-cutting goals ahead of global negotiations in Copenhagen this December to replace the Kyoto Protocol.
Let us imagine that the world ultimately agrees on an ambitious target. Say we decide to reduce CO2 emissions by three-quarters by 2100 while maintaining reasonable growth.
Herein lies the technological problem: to meet this goal, non-carbon-based sources of energy would have to be an astounding 2.5 times greater in 2100 than the level of total global energy consumption was in 2000.
These figures were calculated by economists Chris Green and Isabel Galiana of McGill University.
Their research shows that confronting global warming effectively requires nothing short of a technological revolution.
We are not taking this challenge seriously.
If we continue on our current path, technological development will be nowhere near significant enough to make non-carbon-based energy sources competitive with fossil fuels on price and effectiveness.
In Copenhagen this December, the focus will be on how much carbon to cut, rather than on how to do so.
Little or no consideration will be given to whether the means of cutting emissions are sufficient to achieve the goals.
Politicians will base their decisions on global warming models that simply assume that technological breakthroughs will happen by themselves.
This faith is sadly – and dangerously – misplaced.
Green and Galiana examine the state of non-carbon-based energy today – nuclear, wind, solar, geothermal, etc. – and find that, taken together, alternative energy sources would get us less than halfway toward a path of stable carbon emissions by 2050, and only a tiny fraction of the way toward stabilization by 2100.
We need many, many times more non-carbon-based energy than is currently produced.
Yet the needed technology will not be ready in terms of scalability or stability.
In many cases, there is still a need for the most basic research and development.
We are not even close to getting this revolution started.
Current technology is so inefficient that – to take just one example – if we were serious about wind power, we would have to blanket most countries with wind turbines to generate enough energy for everybody, and we would still have the massive problem of storage: we don’t know what to do when the wind doesn’t blow.
Policymakers should abandon fraught carbon-reduction negotiations, and instead make agreements to invest in research and development to get this technology to the level where it needs to be.
Not only would this have a much greater chance of actually addressing climate change, but it would also have a much greater chance of political success.
The biggest emitters of the twenty-first century, including India and China, are unwilling to sign up to tough, costly emission targets.
They would be much more likely to embrace a cheaper, smarter, and more beneficial path of innovation.
Today’s politicians focus narrowly on how high a carbon tax should be to stop people from using fossil fuels.
That is the wrong question.
The market alone is an ineffective way to stimulate research and development into uncertain technology, and a high carbon tax will simply hurt growth if alternatives are not ready.
In other words, we will all be worse off.
Green and Galiana propose limiting carbon pricing initially to a low tax (say, $5.00 a ton) to finance energy research and development.
Over time, they argue, the tax should be allowed to rise slowly to encourage the deployment of effective, affordable technology alternatives.
Investing about $100 billion annually in non-carbon-based energy research would mean that we could essentially fix climate change on the century scale.
Green and Galiana calculate the benefits – from reduced warming and greater prosperity – and conservatively conclude that for every dollar spent this approach would avoid about $11 of climate damage.
Compare this to other analyses showing that strong and immediate carbon cuts would be expensive, yet achieve as little as $0.02 of avoided climate damage.
If we continue implementing policies to reduce emissions in the short term without any focus on developing the technology to achieve this, there is only one possible outcome: virtually no climate impact, but a significant dent in global economic growth, with more people in poverty, and the planet in a worse place than it could be.
Global Warnings
You know how you are told to give your kids organic food because pesticides will give them cancer?
Well, it’s technically true that there is a link between the chemicals and illness, but the risk is miniscule in any well-regulated country.
There is another threat that you haven’t been told much about.
One of the best ways to avoid cancer is to eat lots of fruit and vegetables.
Organic items are 10% or 20% more expensive than regular produce, so most of us naturally buy less when we “go organic.”
If you reduce your child’s intake of fruits and vegetables by just 0.03 grams a day (that’s the equivalent of half a grain of rice) when you opt for more expensive organic produce, the total risk of cancer goes up, not down.
Omit buying just one apple every 20 years because you have gone organic, and your child is worse off.
My intention isn’t to scare people away from organic food.
But we should hear both sides of any story.
Consider a tale that has made the covers of some of the world’s biggest magazines and newspapers: the plight of the polar bear.
We are told that global warming will wipe out this majestic creature.
We are not told, however, that over the past 40 years – while temperatures have risen – the global polar bear population has increased from 5,000 to 25,000.
Campaigners and the media claim that we should cut our CO2 emissions to save the polar bear.
Well, then, let’s do the math.
Let’s imagine that every country in the world – including the United States and Australia – were to sign the Kyoto Protocol and cut its CO2 emissions for the rest of this century.
Looking at the best-studied polar bear population of 1,000 bears, in the West Hudson Bay, how many polar bears would we save in a year?
Ten?
Twenty?
A hundred?
Actually, we would save less than one-tenth of a polar bear.
If we really do care about saving polar bears, we could do something much simpler and more effective: ban hunting them.
Each year, 49 bears are shot in the West Hudson Bay alone.
So why don’t we stop killing 49 bears a year before we commit trillions of dollars to do hundreds of times less good?
From the promotion of organic food to declarations of the polar bear’s imminent demise, the media pelt us with a constant barrage of one-sided warnings.
The list of urgent concerns is topped by global warming, but also includes terrorism, pesticides, and the loss of biodiversity – and seems to have virtually no end.
All the while, we know of the terrible conditions that still face the majority of the world’s population, with more than a billion poor, two billion without electricity, and three billion without clean drinking water and sanitation.
Much of my work is to make sense of all these global warnings.
I try to put them in perspective and figure out which ones really should concern us, and when we should act on them.
Perhaps surprisingly, not everything of concern should be dealt with immediately.
If we don’t have a good way to fix a problem, it might be better to focus on something else first.
After all, when you don’t know where your next meal is coming from, it’s hard to worry about what global temperatures will be 100 years from now.
Things have improved immensely in both the developing and developed worlds.
In the last 100 years, scientists have won many of the most important battles against infectious diseases, to the extent that poverty is now the main reason for a lack of treatment.
Global average life expectancy in 1900 was 30 years; today, it is 68 years.
Food has become more plentiful and affordable, especially in the developing world, where calorie availability has increased by 40% per person over the past 40 years, while food prices have more than halved.
Consequently, the proportion of hungry in the Third World has dropped from 50% in 1950 to less than 17% today, while worldwide incomes have increased more than three-fold.
Perhaps most importantly, all of these positive trends are expected to continue.
The United Nations estimates that average life expectancy will reach 75 years by the middle of the century, and that the proportion of those going hungry will drop below 4%.
By the close of the century, incomes will have increased six-fold in industrialized countries and 12-fold in developing countries, making the average person in the developing world richer in 2100 than the average American or European is today.
The number of poor will drop from a billion to less than five million.
None of this means we should stop worrying about the future.
But it does mean that we can quit panicking and start thinking calmly to ensure that we focus on the right issues.
Global alarm bells might cause pangs of guilt for wealthy Westerners, but they don’t give us an adequate understanding of what’s going on.
We all need to hear both sides of the story.
The Risks of Mislabeled Risk
STANFORD – Increasing numbers of supposedly health-conscious consumers are choosing products with “free from” labels, from “BPA-free” plastics to “non-GMO” foods.
But such labels do not increase public safety. On the contrary, not only are many of the scary-sounding ingredients perfectly safe, but manufacturers, in their haste to meet consumer demand, sometimes substitute inferior – or even harmful – ingredients or processes.
The blame for this situation lies mainly with activists and the news media for fanning unwarranted public fears.
But a recent academic study demonstrates how manufacturers, by drawing attention to what they are omitting from a product, perpetuate spurious concerns that actually drive consumers to take greater health risks.
The study explores, mainly through the lens of product labeling, how people evaluate the risks of Bisphenol A (BPA) – a chemical that is commonly used to harden plastics and prevent the growth of bacteria in food cans – compared to its alternatives.
It found that “people evaluate a situation in which scientific evidence is tempered by controversy similarly to a situation in which there is no scientific evidence at all.” In other words, because there have been questions about the safety of BPA, people disregard the scientific evidence altogether.
Concerns about BPA should have been put to rest long ago.
Years of research and repeated assessments conducted by government regulators – including one earlier this year by the European Food Safety Authority – have concluded that BPA is safe in normal use.
It is the removal of BPA from the cans’ lining, therefore, that may pose a threat to consumers’ health, by leading to an increase in foodborne illnesses from deadly bacteria like Clostridium botulinum (which causes botulism).
Most people found out that BPA existed only when they saw a BPA-free sticker on bottles at their local store.
But that label has a profound impact: it sends the unmistakable message that BPA is a health hazard.
After all, if it were not, why would manufacturers not only exclude it from their products, but also tout that they had done so?
“What consumers do not know,” the study’s authors point out, “is that BPA is often replaced with other, less-studied chemicals whose health implications are virtually unknown,” and thus may prove to be worse than the original material.
Yet people remain so focused on the BPA-free label that they accept these potentially “regrettable substitutions,” exposing themselves to chemicals that they might otherwise reject.
GMOs (genetically modified organisms) face a similarly problematic stigma – one that compelled the American food-production behemoths General Mills and Post Foods to eliminate GMOs from their popular Cheerios and Grape Nuts cereals, respectively.
In trying to meet a perceived consumer demand, the manufacturers have had to make regrettable substitutions – namely, marketing products that lack some added vitamins.
It is ironic that, in order to please their customers, they have begun offering inferior products at higher prices.
Of course, consumers are not the only ones whose inadequate consideration of the facts is resulting in regrettable substitutions.
Governments, too, are making hasty, wrong-headed decisions that deny consumers a choice.
Consider the European Union’s politically motivated decision to ban, beginning in 2013, the state-of-the-art pesticides called neonicotinoids.
Forced to resort to older, more toxic, and less effective pesticides (primarily pyrethroids, which had been largely phased out), Europe’s farmers are seeing a resurgence of insect predation.
The damage may cause a 15% drop in this year’s harvest of canola, the continent’s primary source of vegetable oil used in food and biodiesel.
There are important lessons to be learned from such outcomes.
First, when manufacturers and retailers allow their decisions to be guided by pressure from activists, not scientific evidence, they risk eventual consumer dissatisfaction and potential product-liability lawsuits.
Likewise, policymakers should emphasize science over politics.
The public, too, has a vital role to play: maintaining a healthy skepticism regarding the claims of self-interested, self-styled “consumer advocates.”
Putting science first now is the best way to ensure that we, as consumers, have no regrets later.
God Crashes the Tea Party
OXFORD – Where does America put God?
Historically, there has always been tension between the separation of church and state that the United States has enshrined in its Constitution and regular upsurges of religious faith, even religious extremism, that seek an outlet in the political process – or even seek to dominate it.
Nowhere is this tension more visible today than in the struggle for the political soul of the Tea Party.
For, as the coalition on the religious right that dominated American conservatism since the 1980’s has begun to fall apart, some of the same Christian fundamentalist elements are seeking to absorb – some would say take over – the originally non-sectarian Tea Party.
The Tea Party emerged from a laudably grassroots base: libertarians, fervent Constitutionalists, and ordinary people alarmed at the suppression of liberties, whether by George W. Bush or Barack Obama.
Libertarians, of course, tend to understand church-state separation: if you don’t want government intruding in your life, you definitely don’t want it telling you how to worship.
This anti-establishmentarian impulse is a time-honored tradition in America, where advocacy of separation of church and state – a radical view in the late eighteenth century – was driven by the experiences of religious minorities such as Quakers, Huguenots, and Puritans, all of whom suffered religious persecution in Britain and France.
Unfortunately, religious bigotry also has a long history in America, and there are powerful factions that cannot accept that God did not intend the US to be a Christian nation.
Ronald Reagan saw the benefit of tapping these constituencies, introducing a faith-first element into what had been a more secularized, “big tent” conservatism.
Since the 1980’s, “culture wars” (usually staged) about homosexuality, abortion, and sex education, or other coded messaging about religious values, have served to mobilize the religious right.
Bush’s early avowal of his conversion experience was given in language poll-tested for acceptance by fundamentalist Christians.
But, in the face of a severe recession and endless real wars, hot-button “culture war” issues don’t have the mobilizing power that they once did.
Moreover, the Christian conservative movement has become rudderless and fragmented, with many of its leaders dead, compromised by sex scandals, or increasingly perceived as plain batty.
This is why the architects of the religious right – many of them professional political consultants with no organic ties to movement – see the Tea Party as the great prize to subvert and then dominate.
You can see these fingerprints everywhere.
At early Tea Party events, secular issues dominated: the Federal Reserve, monetary policy, taxation, the size of the government, and, above all, the Constitution.
Today, the think tanks and pressure groups of the organized right are pumping money into Tea Party “branded” sites and events – and altering the message with an increasingly “culture war” slant.
At Townhall.com and LibertyCentral.org, for example, explanations of the Constitution sit uneasily next to articles urging citizens to take action against the construction of a mosque at the Twin Towers site in New York.
Elsewhere, a seemingly commendable grassroots petition movement to re-establish Constitutional values at the state level turns out to be – if you read the fine print – a drive to enshrine Christian values in state law.
Likewise, the Tea Party, which showed no interest in racist language or iconography at its outset, increasingly injects such demagoguery into its messages.
The movement’s libertarian message is now regularly subverted by anti-Muslim paranoia and contradicted by activism supporting such initiatives as the mass round-up, without due process, of undocumented immigrants in Arizona.
The political consultants behind this shift know that chauvinist appeals work in America – especially in times of economic stress and political turmoil.
But perhaps enough Americans will keep their eyes open this time and learn from history.
Over a century ago, a nation that originated modern democracy was gripped by a political fever that led ordinary people to choose sides based on racist demagoguery.
Cynical political tacticians manipulated popular opinion – through propaganda, through what posed as a free press, and through targeted political hate speech – to unite in carrying out a massive miscarriage of justice, demonizing a religious minority for political gain.
Not insignificantly, this hysteria was whipped up in the name of fighting “treason” and bolstering “national security.”
Also tellingly, the accused member of the hated religious minority was jailed for life and condemned to a method of punishment – solitary confinement on an island 3,000 miles away – that was invented just for him after his conviction.
The nation that had defined itself by its belief in freedom and reason for over a hundred years found itself seduced by the most barbaric of faith-based bigotry.
Even civilized, educated people signed on to it.
It was not the US that was gripped by this wave of racist paranoia, but France, the cradle of “liberté, egalité et fraternité.”
And the hated, “treasonous” religious minority was not Muslim, but Jewish.
Indeed, the most important book that a student of America can read right now to understand today’s malignant political climate is Ruth Harris’ admirable new look at the Dreyfus affair, The Man on Devil’s Island.
Harris re-reads the famous trial to show how even the greatest of democracies can falter when good people abandon their principles, and when fear-mongering propaganda drives leaders to erode democratic checks and balances in the name of “national security.”
American Jews, in particular, need reminding that when one religious minority is targeted, all religious minorities are at risk.
France eventually regained its soul – but long after a dark eclipse of its most cherished democratic values.
Americans – and the Tea Party – should look at France a century ago, when religious bigotry hijacked constitutionalism, and then take a good hard look at themselves.
Godless Morality
Is religion necessary for morality?
Many people consider it outrageous, even blasphemous, to deny the divine origin of morality.
Either some divine being crafted our moral sense, or we picked it up from the teachings of organized religion.
Either way, we need religion to curb nature’s vices.
Paraphrasing Katherine Hepburn in the movie The African Queen, religion allows us to rise above wicked old Mother Nature, handing us a moral compass.
Yet problems abound for the view that morality comes from God.
One problem is that we cannot, without lapsing into tautology, simultaneously say that God is good, and that he gave us our sense of good and bad.
For then we are simply saying that God meets God’s standards.
A second problem is that there are no moral principles that are shared by all religious people, regardless of their specific beliefs, but by no agnostics and atheists.
Indeed, atheists and agnostics do not behave less morally than religious believers, even if their virtuous acts rest on different principles.
Non-believers often have as strong and sound a sense of right and wrong as anyone, and have worked to abolish slavery and contributed to other efforts to alleviate human suffering.
The opposite is also true. Religion has led people to commit a long litany of horrendous crimes, from God’s command to Moses to slaughter the Midianites – men, women, boys, and non-virginal girls – through the Crusades, the Inquisition, innumerable conflicts between Sunni and Shiite Muslims, and suicide bombers convinced that martyrdom will lead them to paradise.
The third difficulty for the view that morality is rooted in religion is that some elements of morality seem to be universal, despite sharp doctrinal differences among the world’s major religions.
In fact, these elements extend even to cultures like China, where religion is less significant than philosophical outlooks like Confucianism.
Perhaps a divine creator handed us these universal elements at the moment of creation.
But an alternative explanation, consistent with the facts of biology and geology, is that over millions of years we have evolved a moral faculty that generates intuitions about right and wrong.
For the first time, research in the cognitive sciences, building on theoretical arguments emerging from moral philosophy, has made it possible to resolve the ancient dispute about the origin and nature of morality.
Consider the following three scenarios.
For each, fill in the blank space with “obligatory,” “permissible,” or “forbidden.”
1. A runaway boxcar is about to run over five people walking on the tracks.
A railroad worker is standing next to a switch that can turn the boxcar onto a side track, killing one person, but allowing the five to survive.
Flipping the switch is ______.
2. You pass by a small child drowning in a shallow pond, and you are the only one around.
If you pick up the child, she will survive and your pants will be ruined.
Picking up the child is _______.
3. Five people have just been rushed into a hospital in critical condition, each requiring an organ to survive.
There is not enough time to request organs from outside the hospital, but there is a healthy person in the hospital’s waiting room.
If the surgeon takes this person’s organs, he will die, but the five in critical care will survive.
Taking the healthy person’s organs is _______.
If you judged case 1 as permissible, case 2 as obligatory, and case 3 as forbidden, then you are like the 1,500 subjects around the world who responded to these dilemmas on our web-based moral sense test (http://moral.wjh.harvard.edu/).
If morality is God’s word, atheists should judge these cases differently from religious people, and their responses should rely on different justifications.
For example, because atheists supposedly lack a moral compass, they should be guided by pure self-interest and walk by the drowning child.
But there were no statistically significant differences between subjects with or without religious backgrounds, with approximately 90% of subjects saying that it is permissible to flip the switch on the boxcar, 97% saying that it is obligatory to rescue the baby, and 97% saying that is forbidden to remove the healthy man’s organs.
When asked to justify why some cases are permissible and others forbidden, subjects are either clueless or offer explanations that cannot account for the relevant differences.
Importantly, those with a religious background are as clueless or incoherent as atheists.
These studies provide empirical support for the idea that, like other psychological faculties of the mind, including language and mathematics, we are endowed with a moral faculty that guides our intuitive judgments of right and wrong.
These intuitions reflect the outcome of millions of years in which our ancestors have lived as social mammals, and are part of our common inheritance.
Our evolved intuitions do not necessarily give us the right or consistent answers to moral dilemmas.
What was good for our ancestors may not be good today.
But insights into the changing moral landscape, in which issues like animal rights, abortion, euthanasia, and international aid have come to the fore, have not come from religion, but from careful reflection on humanity and what we consider a life well lived.
In this respect, it is important for us to be aware of the universal set of moral intuitions so that we can reflect on them and, if we choose, act contrary to them.
We can do this without blasphemy, because it is our own nature, not God, that is the source of our morality.
Going “Soft” on Iran
BRUSSELS – 2010 will be a crucial and uncertain year for the Islamic Republic of Iran – and for its relations with the European Union.
The domestic hostility towards the regime that erupted in the aftermath of the disputed presidential elections last June has not died away, but has become stronger and more determined.
The Ashura riots of last December and the violent suppression of protests during the recent anniversary to mark the 31st anniversary of the Islamic Revolution were some of the fiercest to date.
The regime’s sharp crackdown ahead of the anniversary did not stop thousands from marching in the streets, despite the threat of swift retribution.
The likelihood of more arrests, trials, and bloodshed is a concern for many in the international community.
More ominously, following riots the regime put 16 opposition members on trial for taking part in the demonstrations, with prosecutors indicating that some would be charged with the offense of mohareb , or “making a war against God” – a capital crime.
The heavy-handed approach adopted by the regime is causing friction among even its loyalists.
A former member of Iran’s parliament, Javad Ettaat, argues that the “government is contravening the principles of Islam by using an iron fist against protesters.”
Mohammad Taghi Khalaji, a cleric and devoted follower of Ayatollah Khomeini, was arrested on January 12 after saying at a Tehran mosque that Iran’s leaders should repent for their actions.
Moreover, an Iranian diplomat in Oslo, Mohammed Reza Heydari, resigned in protest against the regime’s behavior after the December riots.
Other Iranian diplomats also are reportedly resigning from their posts and seeking asylum abroad.
The European Parliament has been paying close attention to the deteriorating situation in Iran.
There has been pressure to impose targeted sanctions aimed at impeding the financial operations of Iran’s Revolutionary Guard, which holds a virtual monopoly over strategic industries such as banking, defense and construction.
Many European companies have profited from investing in such firms, which means deciding on the terms of sanctions could prove cumbersome.
On the issue of Iran’s nuclear ambitions, the Iranian government’s equivocal position also is a source of growing concern.
Many European lawmakers are worried by the prospect of a nuclear-armed Iran on Europe’s doorstep, and are not convinced by the regime’s claim that it seeks only nuclear energy.
It is critical, therefore, that the EU demonstrate its commitment to the Iranian people through actions, rather than words – a complaint that many Iranians level against Western powers – by taking a tougher stance against the regime.
Targeted sanctions aimed at the Revolutionary Guard would be an important step, but so is clearly expressing solidarity with the millions of Iranian men and women who are fighting for a democratic and pluralist society.
Europe should stand with Iran's civil society, and the European Parliament has already paid tribute to the courage of all those Iranian men and women who are defending their basic freedoms and democratic principles.
A concrete demonstration of its commitment is the request to make better use of the European Instrument for Democracy and Human Rights.
Eighty MEPs, including the Parliament’s former president, Hans-Gert Pöttering, and former Belgian Prime Minister Guy Verhofstadt, are urging the Parliament to honor its commitment to human rights by remembering the life of Neda Agha Soltan, the young woman who was killed last June in Tehran while standing up for her rights.
We believe that the European Parliament should commemorate her sacrifice by hanging a poster of her image on the external wall of the Parliament’s premises in Brussels, beside the poster of Aung San Suu Kyi, the leader of Burma’s democratic opposition.
Agha Soltan has become the symbol of the desire for freedom of a people that Europe must help.
This simple act could demonstrate the importance of Europe’s soft power, which frightens the Islamic Republic more than the threat of military force by keeping the media spotlight on the regime’s human rights record and emphasizing its growing isolation.
It would also foster stronger ties between Iran’s civil society and the outside world, while setting an example to the international community that the EU is committed to the principles enshrined in its own Charter of Fundamental Rights.
Europe’s policy for Iran is not regime change, but when human rights and democracy are at stake, we cannot simply close our eyes.
Going to the Dogs
GAINESVILLE, FLORIDA – There are about 70 million dogs living in human homes in the United States.
That’s 10 million more dogs than children under the age of 15.
The pattern in other Western nations is similar.
Roughly 40% of house dogs are allowed to sleep on their owners’ beds.
How did dogs achieve such an intimate position in our lives? One theory is that, in the thousands of years that dogs have lived with humans, they have become attuned to human ways of thinking.
Certainly dogs have a remarkable sensitivity to human behavior.
Dogs are able to follow human pointing gestures to find hidden food, and they can indicate successfully to their owners by their own pointing actions where a hidden toy is located.
Under certain circumstances, dogs understand that a human who cannot see them (because, for example, she is blindfolded) is less likely to respond to begging with a tasty treat than a person whose vision is not obscured.
Dogs are also more likely to obey a command to leave something desirable alone if their master stays in the room than if he steps out.
And yet attempts to view canine smarts as cut from the same cloth as human intelligence gloss over a lot of the details about how dogs and humans operate.
Evolution doesn’t ever build the same form of intelligence twice – even though similar problems may lead to similar solutions.
As most owners of puppies know, it takes time and care for a dog to learn the ways of humans.
We don’t literally raise our hackles when angry, or sniff each other’s backsides when making new friends.
And dogs don’t gesture with their forepaws or use an elaborate grammatical language when trying to explain things.
In our own research, we have found that people remain somewhat mysterious to dogs for the first five months of life, and dogs at our local pound lag considerably behind house dogs when it comes to understanding human beings.
Recent research by Alexandra Horowitz at Barnard College in New York accentuates the “talking past each other” that sometimes goes on between humans and dogs.
Horowitz asked owners to forbid their dogs to take a biscuit and then briefly leave the room.
When the owners returned after a few moments away, some were told that their dogs had been naughty and eaten the forbidden food.
Others were told their dog had been good and left the biscuit alone.
If the dog had misbehaved, the owner was given a moment to berate his pet for its misdeed.
The owners were then asked whether their dog looked guilty.
The twist in this tale is that only half of the owners were correctly informed.
Half of the time, Horowitz told the owner of a dog that had actually left the biscuit alone that his dog had taken the treat.
And half the time the owner of a naughty dog was told that his dog had been good.
The point of this deception was that when Horowitz asked each owner whether his dog looked guilty, she could consider whether the owner’s report of “guilty looks” actually had to do with the facts of the matter – whether the dog had taken the forbidden treat – or whether it reflected nothing more than whether the owner had chastised his hound.
The results showed very clearly that a dog’s “guilty looks” came about solely because it was being scolded: the look had nothing to do with whether the dog had really committed an offense.
This does not mean that we should not chastise our dogs (or praise them).
Nor does it mean that we should not love our dogs – or sometimes be frustrated by them.
All it means is that, if we want to live harmoniously with another species in our most intimate places, we must recognize that some of the time our preferred modes of reasoning are not theirs.
We must try to understand dogs on their own terms, and help them to understand us.
Gone with the Wind
COPENHAGEN – Efforts to stem global warming have nurtured a strong urge worldwide to deploy renewable energy.
As a result, the use of wind turbines has increased ten-fold over the past decade, with wind power often touted as the most cost-effective green opportunity.
According to Connie Hedegaard, the European Union’s commissioner for climate action, “People should believe that [wind power] is very, very cheap.”
In fact, this is a highly problematic claim.
While wind energy is cheaper than other, more ineffective renewables, such as solar, tidal, and ethanol, it is nowhere near competitive.
If it were, we wouldn’t have to keep spending significant sums to subsidize it.
In the United Kingdom, for example, wind remains significantly more costly than other energy sources.
Using the UK Electricity Generation Costs 2010 update and measuring in cost per produced kilowatt-hour, wind is still 20-200% more expensive than the cheapest fossil-fuel options.
And even this is a significant underestimate.
As the UK and other developed countries have rushed to build more wind turbines, they have naturally started with the windiest places, leaving poorer sites for later.
At the same time, people increasingly protest against the wind farms in their backyards.
Local opposition has tripled over the past three years, and local approval rates for new wind farms have sunk to an all-time low.
Most people believe that a few wind turbines can be attractive, but it is an entirely different matter when turbines are scattered across the countryside, or when massive, industrial wind farms extend for miles.
Complaints have also increased about enormous new wind turbines’ low-frequency noise.
Given souring public sentiment, most of the future increase in wind turbines is expected to take place offshore, where there is less opposition, but where costs are much higher.
With its “20-20-20” policy, the EU has promised that, by 2020, it will cut its carbon emissions by 20% below 1990 levels, and increase its reliance on renewables by 20%.
For the UK, this requires a dramatic increase in wind power, especially offshore.
This will be surprisingly costly.
The UK Carbon Trust estimates that the cost of expanding wind turbines to 40 gigawatts, in order to provide 31% of electricity by 2020, could run as high as £75 billion ($120 billion).
And the benefits, in terms of tackling global warming, would be measly: a reduction of just 86 megatons of CO2 per year for two decades.
In terms of averted rise in temperature, this would be completely insignificant.
Using a standard climate model, by 2100, the UK’s huge outlay will have postponed global warming by just over ten days.
Moreover, this estimate is undoubtedly too optimistic.
Wind frequently does not blow when we need it.
For example, as the BBC reported, the cold weather on December 21, 2010, was typical of a prolonged cold front, with high-pressure areas and little wind.
Whereas wind power, on average, supplies 5% of the UK’s electricity, its share fell to just 0.04% that day.
With demand understandably peaking, other sources, such as coal and gas, had to fill the gap.
Making up for a 5% shortfall in supply is manageable, but the situation will change dramatically as the UK increases its reliance on wind power to reach the 31% target by 2020.
Wind power becomes much more expensive when we factor in the large supplies of power that must be created for backup whenever the wind dies down.
The cheapest backup power by far is provided by open-cycle gas plants, which imply more CO2 emissions.
Thus, wind power will ultimately be both costlier and reduce emissions less than officially estimated.
(This is also why simple calculations based on costs per kWh are often grossly misleading, helping to make wind and other intermittent renewables appear to be cheaper than they are.)
This has been shown in recent reports by KPMG/Mercados and Civitas, an independent think tank.
A new report by University of Edinburgh professor Gordon Hughes for the Global Warming Policy Foundation estimates that 36 GW of new wind power would cost £120 billion for just 23 megatons of CO2 reduction per year.
In other words, temperature rises would be postponed by a mere 66 hours by the end of the century.
Contrary to what many think, the cost of both onshore and offshore wind power has not been coming down.
On the contrary, it has been going up over the past decade.
The United Nations Intergovernmental Panel on Climate Change acknowledged this in its most recent renewable-energy report.
Likewise, the UK Energy Research Center laments that wind-power costs have “risen significantly since the mid-2000’s.”
Like the EU, the UK has become enamored with the idea of reducing CO2 through wind technology.
But most academic models show that the cheapest way to reduce CO2 by 20% in 2020 would be to switch from coal to cleaner natural gas.
The average of the major energy models indicates that, downscaled for the UK, achieving the 20% target would imply a total cost of roughly £95 billion over the coming decade, and £18 billion every year after that.
Of course, these figures include reductions in areas other than electricity, as well as higher energy prices’ total cost to the economy.
Nonetheless, the lesson is clear: if the goal is not just to cut CO2 emissions, but also to use renewables to do it, the models show that the cost balloons to £188 billion for this decade and £36 billion every year after 2020.
In effect, insisting on wind power means using energy that is far from competitive, does not help to avert climate change, and costs an extra £92 billion for the UK alone.
For any country, this seems like a very poor choice.
Good and Bad Deficits
LONDON – “Deficits are always bad,” thunder fiscal hawks.
Not so, replies strategic investment analyst H. Wood Brock in an interesting new book, The American Gridlock.
A proper assessment, Brock argues, depends on the “composition and quality of total government spending.”
Government deficits incurred on current spending for services or transfers are bad, because they produce no revenue and add to the national debt.
Deficits resulting from capital spending, by contrast, are – or can be – good.
If wisely administered, such spending produces a revenue stream that services and eventually extinguishes the debt; more importantly, it raises productivity, and thus improves a country’s long-run growth potential.
From this distinction follows an important fiscal rule: governments’ current spending should normally be balanced by taxation.
To this extent, efforts nowadays to reduce deficits on current spending are justified, but only if they are fully replaced by capital-spending programs.
Indeed, reducing current spending and increasing capital spending should be carried out in lock step.
Brock’s argument is that, given the state of its economy, the United States cannot return to full employment on the basis of current policy.
The recovery is too feeble, and the country needs to invest an additional $1 trillion annually for ten years on transport facilities and education.
The government should establish a National Infrastructure Bank to provide the finance by borrowing directly, attracting private-sector funds, or a mixture of the two.
(I have proposed a similar institution in the United Kingdom.)
The distinction between capital and current spending (and thus between “good” and “bad” deficits) is old hat to any student of public finance.
But we forget knowledge at such an alarming rate that it is worth re-stating it, particularly with deficit hawks in power in the UK and Europe, though fortunately not (yet) in the US.
According to proposals agreed at an informal European Council meeting on January 30, all EU members are to amend their constitutions to introduce a balanced-budget rule that caps annual structural deficits at 0.5% of GDP.
This ceiling can be raised only in a deep depression or other exceptional circumstances, allowing for counter-cyclical policy so long as it is agreed that the additional deficit is cyclical, rather than structural.
Otherwise, violations would automatically trigger fines of up to 0.1% of GDP.
The UK is one of two EU countries (alongside the Czech Republic) that refused to sign this “fiscal compact,” acceptance of which is required to gain access to European bailout funds.
But Britain’s government has the identical aim of reducing its current deficit of 10% of GDP to near zero in five years.
An argument commonly heard in support of such policies is that the “bond vigilantes” will demand nothing less.
And the finances of some European governments (and Latin American governments in the recent past) have been so parlous that this reaction is understandable.
But that is not true of the US or the UK, which both have large fiscal deficits.
And most countries were adhering to reasonably tight fiscal discipline before the crisis of 2008 undermined their banks, cut their tax revenues, and forced up their sovereign debt.
At the same time, we should not attribute current enthusiasm for fiscal retrenchment to such contingencies.
At its heart lies the belief that all government spending above a necessary minimum is wasteful.
Europe has its own Tea Party crackpots who loathe the welfare state and want it abolished or radically pared, and who are convinced that all state-sponsored capital spending is a “boondoggle” – just so many roads, bridges, and railway lines to nowhere that soak up their money in corruption and inefficiency.
Those who believe this are unfazed by the corruption and waste that characterizes much private-sector spending.
And they prefer the total waste of letting millions of people sit idle (Brock reckons that 16% of the American workforce is unemployed, underemployed, or too discouraged to seek work) to the possibly partial waste of programs that put them to work, nurture their skills, and equip the country with assets.
One can criticize details of Brock’s case: a deeper understanding of Keynes would have given him a more persuasive response to the objection that, if state-financed projects were worth doing, the private sector would be doing them.
Before long, we will have to provide answers to these questions, because the pre-slump fiscal rules that the Europeans are vainly trying to strengthen were not up to the job.
We are far from having worked out a post-recession theory of macroeconomic policy, but certain elements are clear.
In the future, fiscal and monetary policy will have to work together: neither on its own can stabilize inherently unstable market economies.
Monetary policy will have to do much more than it did before 2008 to restrain financial markets’ “irrational exuberance.”
And we need a new, unambiguous system of fiscal accounting that distinguishes between tax-funded government spending and public spending that pays for itself.
Above all, we need to recognize that the state’s role goes beyond maintaining external security and domestic law and order.
As Adam Smith wrote in The Wealth of Nations:
“The third and last duty of the sovereign....is that of erecting and maintaining those public institutions and those public works, which though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual, or small number of individuals; and which it, therefore, cannot be expected that any individual, or small number of individuals, should erect or maintain.”
Chief among these public works, for Smith, are those that “facilitate the commerce of any country, such as good roads, bridges, navigable canals, harbors, etc.”
Another piece of forgotten knowledge that Smith also mentions is the importance of education.
He is right to do so, however much today’s deficit hawks seem, by their behavior, to prove the opposite.
Goodbye and Hello to the Universal Bank
Goodbye to Going It Alone
A key lesson that the next American president will take away from the experiences of the Bush administration is certain to be that multilateralism matters.
Notions of American hegemony and unilateral responses make little sense when most of the serious challenges that countries face today – problems like climate change, pandemics, financial stability, and terrorism – fall outside the control of even the largest countries.
All of them require multilateral cooperation.
The United Nations can play an important role in helping to legitimize and implement agreements among countries, but even its closest friends admit that its large size, rigid regional blocs, formal diplomatic procedures, and cumbersome bureaucracy often impede consensus As one sage put it, the problem for multilateral organizations is “how to get everyone into the act and still get action.”
One answer is to supplement the UN by creating informal consultative organizations at the regional and global level.
For example, during the financial crises that followed the oil shocks of the 1970’s, the French government hosted the leaders of five leading economies to discuss and coordinate policies.
The idea was to keep the meeting small and informal by limiting it to a number that could fit into the library of the chateau at Rambouillet.
But keeping the group small proved impossible.
It was soon grew to a “G-7” of advanced industrial economies.
Later, Russia was added to make it the “G-8.”
More recently, the annual G-8 summit has invited five other countries to attend as observers, creating a de facto G-13.
With this expansion have come problems.
The new invitees resent not being included as full members able to help plan and shape the meetings, and the original countries’ delegations have expanded to include hundreds of officials each.
The once informal summits have become unwieldy.
There have been several proposals for new types of supplemental multilateral organizations.
Todd Stern and William Antholis have suggested the creation of an “E-8”: a compact forum of leaders from developed and developing countries – including the United States, the European Union, Japan, Russia, China, India, Brazil, and South Africa – that would devote their full attention once a year to environmental challenges and global climate change.
These states represent their regions’ core economies, account for three-quarters of global GDP, and include the top six emitters of greenhouse gases.
But some critics worry about restricting a group to only one topic.
Leaders’ time is a scarce resource.
They cannot afford to attend multiple summits for each transnational issue.
Moreover, a variable geometry of attendance at meetings might weaken the development of a personal chemistry and the breadth of bargaining that can arise when the same group of leaders meets regularly to discuss a broader range of subjects.
Former Canadian Prime Minister Paul Martin, drawing on his personal experience with the Group of 20 finance ministers as well as the G-8, has proposed a new informal grouping that he calls an “L-20,” with the “L” signifying that it is restricted to leaders.
The L-20 would build upon the G-8’s original strengths of informality and flexibility to provide a consultative forum on issues such a climate change, global health, and conflict management.
Martin argues that about 20 people in a room is probably a reasonable size for attempting to tackle difficult cross-sectoral problems.
With a larger group, real discussion is lost; with a smaller group, meaningful regional representation is difficult.
He would include the present G-8, other leading economies, and major regional powers regardless of economic ranking.
Marcos de Azambuja, former secretary-general of Brazil’s Foreign Ministry, agrees that international life cannot be managed solely or primarily by vast assemblies of nearly 200 states with enormous disparities in their political and economic weight.
He suggests something like an “L-14” would be an effective group to reflect the world as it is evolving, and could be quickly accomplished by expanding the current G-8 to include China, India, Brazil, South Africa, Mexico, and a Muslim country.
Whatever the geometry of such a consultative group, it would be designed to supplement the UN in reaching decisions, and would help galvanize bureaucracies in member governments to address key transnational issues.
Like the G-8, it would act as a catalyst to set agendas, and focus the attention of national bureaucracies on a set of important issues as they prepare their head of government for the discussions.
The G-8, for example, is often credited with helping to advance international trade rounds, addressing public health issues, and increasing aid to Africa.
In addition to membership, several other issues remain.
Should such a new grouping have a secretariat to present common proposals, or should it rely solely on meetings of national officials?
The former runs the risk of developing a new bureaucracy, but the latter may forego continuity.
Should papers be exchanged in advance, with comments from a secretariat or from other countries?
How can informality be preserved and the size of meetings be restricted?
Perhaps leaders should be limited to one aide in the room and prohibited from reading formally prepared opening statements.
None of the proposals suggested thus far is perfect, and many of the details need to be worked out.
But the pendulum has swung back from unilateralism to multilateralism, and the world’s largest countries are searching for ways to make it more effective.
Prolonged negotiations and gridlock are not acceptable, because today’s most serious problems cannot wait for perfect institutional solutions.
Goodbye to the Dollar?
CAMBRIDGE – As the world’s financial leaders meet in Washington this month at the World Bank-International Monetary Fund annual meeting, perhaps they should be glad there is no clear alternative to the dollar as the global currency standard.
If the euro were fully ready for prime time, we might well be seeing it’s dollar exchange rate jump to over 2.00, and not just to 1.65 or 1.70, as it seems poised to do anyway.
You can’t treat your customers as badly as the United States has done lately if they can go elsewhere.
Over the past six years, the value of the trade-weighted dollar has fallen by more than a quarter, as the US has continued to rack up historically unprecedented trade deficits.
With a soft economy, a badly compromised financial system, and serious concerns about rising inflation, the long-term dollar trend is downward, however the current crisis ends.
And it is not over.
The Federal Reserve’s bailout of the financial system is unlikely to stand up unless banks find fresh capital, and lots of it.
Ultra-rich sovereign wealth funds have the cash to rescue US banks.
But they are unlikely to want to do so at this point, even if the US political system allowed it.
Instead, as the credit crunch and housing price decline continue, an epic mortgage bailout appears increasingly likely, possibly costing US taxpayers a trillion dollars or more.
The problem is that after so many years of miserable returns on dollar assets, will global investors really be willing to absorb another trillion dollars in US debt at anything near current interest rates and exchange rates?
US debt hardly looks like a bargain right now, even without the sinking dollar.
Far-flung military misadventures continue to stretch the country’s fiscal resources, with costs potentially running into many trillions of dollars, according a recent study by Linda Bilmes and Joseph Stiglitz.
Next year will almost certainly see a massive rise in US corporate defaults, even though many firms entered the recession with relatively strong balance sheets.
State and municipal finances are in even worse shape.
With tax revenues collapsing due to falling home prices and incomes, dozens of US municipalities could well go into receivership, as New York City did in the 1970’s.
US municipal bonds are already trading at huge risk premia, and the first big government default hasn’t even hit yet.
Of course, if the dollar were to fall off its perch as the world’s dominant currency any time soon, the euro would be the only serious alternative.
The Yuan may well supplant the dollar in the second half of this century.
But China’s draconian capital controls and massive financial repression currently disqualify it from anchoring the global economic system.
Fortunately for the dollar, the euro, too, seems to have its problems.
European banks remain balkanized, with a patchwork of national regulators seeking to promote their own champions.
European governments’ debt may all be denominated in euro, but German and Italian debt are hardly the same thing, so the government euro-bond market lacks the depth and liquidity of the US Treasury Bill market.
Moreover, international investors can buy and sell real estate far more easily in the US than in most of Europe.
And the absence of a Europe-wide fiscal policy creates significant uncertainty about how the European Central Bank would finance itself if it suddenly faced large losses on junk bank debt after a big bailout.
But the euro does have growing strengths.
At current market exchange rates, the European Union is now larger economically than the US.
New central and eastern European members are bringing enormous dynamism and flexibility.
At the same time, the ECB has gained considerable credibility from its handling of the global credit crisis.
Indeed, if the euro zone can persuade Great Britain to become a full-fledged member, thereby acquiring one of the world’s two premier financial centers (London), the euro might really start to look like a viable alternative to the dollar.
In 1971, as the dollar collapsed towards the end of the post-World War II fixed exchange-rate system, US Treasury Secretary John Connally famously told his foreign counterparts that “the dollar is our currency, but your problem.” And the dollar’s exalted global status has survived ever since, despite many episodes of neglect and abuse.
World currency standards have enormous inertia.
The British pound only forfeited its role to the US dollar after more than 50 years of industrial decline and two world wars.
But it could happen a lot faster this time.
As central bankers and finance ministers ponder how to intervene to prop up the dollar, they should also start thinking about what to do when the time comes to pull the plug.
Good Governance Begins At Home
The whole sorry Wolfowitz affair looks like it is finally drawing to a close.
It is hard to believe that he will stay on much longer at the World Bank, and it is time to start thinking more closely about the future of that institution.
From the first, I was critical of the way he was chosen because I have long opposed the “old boy” agreement between the United States and Europe, by which the US always appoints the head of the World Bank and Europe the head of the IMF.
This unspoken arrangement dates from the founding of the Bretton Woods institution at a time when colonialism was still alive, and makes no sense in the twenty-first century.
There are reports that European leaders have told the US that if they get Wolfowitz to step down quickly and quietly, they will be allowed to choose Wolfowitz’s successor.
It’s easy to see why the US and Europe want to stick to business as usual, but such a deal would amount to a wasted opportunity.
I can think of no better way to restore confidence in these two venerable institutions than to finally open up the way their presidents are selected.
One of the lessons of the Wolfowitz debacle is that it does actually matter how stakeholders and employees feel about the Bank’s leadership.
The world was prejudiced against him from the start because of his involvement in the Iraq War.
But people were willing to give him a chance.
Some said that perhaps he would be another Robert McNamara, the US defense secretary who helped mire America in the Vietnam War, but used his service to the Bank as penance.
At first, there was reason for hope: Wolfowitz was forceful in arguing for debt forgiveness and an end to agricultural subsidies.
But he also hired old friends and political allies – many of whom did not have experience in development – and sealed himself off from his staff, alienating the very people whose support he needed.
As we learned from the case of Larry Summers at Harvard, relationships inside institutions (not just with donors and funders) matter.
In this respect, Wolfowitz, while by all accounts an intelligent and pleasant person, did not do himself any favors.
Worse, Wolfowitz did not seem to have a grand vision for the Bank.
Instead of a development strategy, there was simply an expansion of the anti-corruption agenda initiated by his predecessor, James Wolfensohn.
As the World Bank’s Chief Economist under Wolfensohn, I had argued that failing to deal with corruption risked undermining growth and poverty alleviation.
By the time I left the Bank, these ideas were widely accepted, and I was pleased that Wolfowitz supported continuing the Bank’s efforts.
But the fight against corruption was always to be only one part of a more comprehensive development agenda that was required.
Indeed, aid effectiveness could be undermined just as much by incompetence as by corruption.
Sadly, the anti corruption agenda of the Bank became politicized.
There was a push to give money to Iraq – a country rife with corruption – while other countries were accused of corruption without adequate hard evidence or specific details.
And here, too, an opportunity was lost.
The aims of the campaign were laudable, but it generated hostility and ill will, undermining its effectiveness.
The World Bank, in its efforts to support democracy and good governance, must insist on the highest standards of due process: charges of corruption should be treated seriously, and the evidence turned over to national authorities for use in open, transparent, and independent proceedings.
This is something for Wolfowitz’s successor to bear in mind.
If anti-corruption campaigns are to be seen as effective, they must be fair and transparent.
The same is true of the selection of the World Bank’s president.
There is still a chance to snatch victory from the jaws of defeat.
What has been a sad and sorry saga could have a happy ending if Wolfowitz’s successor is chosen in an open, transparent process.
This, one hopes, is the silver lining in the cloud now hanging over the World Bank.
Good News in Bad Times
NEW YORK – At a time when the headlines are filled with financial crises and violence, it is especially important to recognize the creativity of many governments in fighting poverty, disease, and hunger.
The point is not merely to make ourselves feel a little better, but rather to confront one of the world’s gravest threats: the widespread pessimism that today’s problems are too big to be solved.
Studying the successes gives us the knowledge and confidence to step up our shared efforts to solve today’s great global challenges.
Hats off, first, to Mexico for pioneering the idea of “conditional cash transfers” to poor households.
These transfers enable and encourage those households to invest in their children’s health, nutrition, and schooling.
Mexico’s “Opportunities Program,” led by President Felipe Calderón is now being widely emulated around Latin America.
Recently, at the behest of the singers Shakira and Alejandro Sanz, and a social movement that they lead, all of Latin America’s leaders committed to step up the region’s programs for early childhood development, based on the successes that have been proven to date.
Norway, under the leadership of Prime Minister Jens Stoltenberg, is maintaining its tradition of creative social and environmental leadership.
The government has put together a global alliance to prevent maternal death in childbirth, investing in both safe delivery and survival of newborns.
At the same time, Norway launched an innovative $1 billion program with Brazil to induce poor communities in the Amazon to end rampant deforestation.
Cleverly, Norway pays out the funds to Brazil only upon proven success in avoiding deforestation (compared with an agreed baseline).
Spain, under the leadership of Prime Minister José Luis Rodríguez Zapatero, has given a major stimulus to helping the poorest countries to achieve the Millennium Development Goals (MDGs).
Spain created a new MDG Fund at the United Nations to promote the cooperation needed within the UN to address the various challenges of the MDGs.
The Spanish Government rightly proposed that true solutions to poverty require simultaneous investments in health, education, agriculture, and infrastructure, and then the Spanish put up the funds to help make that integrated vision a practical reality.
Spain will host a meeting in January 2009 to launch a new fight against global hunger.
Once again, Spain is proposing practical and innovative means to move from talk to action, specifically to help impoverished peasant farmers to get the tools, seeds, and fertilizer that they need to increase their farm productivity, incomes, and food security.
Australian Prime Minister Kevin Rudd has similarly surged to the forefront of global problem solving, putting forward a bold action plan on climate change and proposing new and practical means to address the MDGs.
Australia put real money on the table for increased food production, along the lines that Spain is proposing.
It also champions an increased program of action for the poor and environmentally threatened island economies of the Pacific region.
These efforts have been matched by actions in the poorest countries.
The landlocked and impoverished country of Malawi, under the leadership of President Bingu wa Mutharika, has doubled its annual food production since 2005 through a pioneering effort to help its poorest farmers.
The program has been so successful that it is being emulated across Africa.
Mali’s government, under President Amadou Toumani Touré, has recently put forward a bold challenge to the world community.
Mali is eager to scale up investments in agriculture, health, education, and infrastructure in its 166 poorest communities.
The plans are detailed, thoughtful, credible, and based on proven successes that the government has already achieved.
The rich world has promised to help Mali, and now Mali has led the way with its creativity.
There are countless more cases that can be mentioned.
The European Union has launched a €1 billion effort to help peasant farmers.
The Gates Foundation, UNICEF, Rotary International, and many governments have succeeded in bringing down polio deaths to one-thousandth of the rate a generation ago, bringing the disease to the verge of eradication.
Similar efforts are underway on many other fronts – the control of worm infections and leprosy, and now a major global effort to bring malaria deaths nearly to zero by 2015.
All of these successes, and many more, share a similar pattern.
They address a well-defined and serious challenge, for example low food production or a specific disease, and are based on a well-defined set of solutions, such as agricultural equipment and inputs needed by peasant farmers, or immunizations.
Small-scale demonstration projects prove how success can be achieved; the challenge then becomes taking the solutions “to scale” in nationwide or even worldwide programs.
Leadership is needed, within the countries in need as well as among the rich nations that can help to launch and finance the solutions.
Finally, modest amounts of money, directed at practical problem solving, can make an historic difference.
Bad news can crowd out good news, especially in times of serious financial crisis and political unrest.
Yet the good news shows that we will lose the battle against poverty and misery only if we give up, and fail to heed the intelligence and goodwill that can be mobilized today.
And perhaps next year, the United States will rejoin the global effort with a new and remarkable force, led by a young president who has rightly told Americans and the world that “Yes, we can.”
The Tinkerer’s Apprentice
BERLIN – The best inventions are never finished.
When the German engineer Karl Benz invented the first petroleum-powered automobile, he did not just create an engine with wheels; he set in motion an industry that revolutionized the way society was structured.
Similarly, the English computer scientist Tim Berners-Lee did not only build the world’s first Web site.
He laid the groundwork for the World Wide Web.
Neither could have anticipated the impact of what he was doing.
If there is one lesson that economic policymakers should heed in 2015 and beyond, it is this: Just as invention is dynamic, so are the industries it creates.
As we learned in 2014, it is a lesson that has yet to sink in entirely.
When Google was launched, people were amazed that they were able to find out about almost anything by typing just a few words into a computer.
The engineering behind it was technically complicated, but what you got was pretty rough: a page of text, broken up by ten blue links.
It was better than anything else, but not great by today’s standards.
So our co-founders Larry Page and Sergey Brin – like all other successful inventors – kept iterating.
They started with images.
After all, people wanted more than just text.
This first became apparent after the 2000 Grammy Awards, where Jennifer Lopez wore a green dress that, well, caught the world’s attention.
At the time, it was the most popular search query we had ever seen.
But we had no surefire way of getting users exactly what they wanted: J­Lo wearing that dress.
Google Image Search was born.
Maps are another great example.
When people search Google for an address, they do not want a link to Web sites that mention the street.
They usually want to know how to get there.
So we built a map that was clickable, draggable, and easy to explore.
Maps have become such an integral part of Google that most users probably cannot imagine it without them.
It has been the same with many of our changes.
Our searches have gotten better over time.
Google the weather where you live and you will get the forecast for the next few days as the top result, saving you time and effort.
But Google’s efforts to provide direct answers to questions have fueled complaints at the European Commission.
Companies like Expedia, Yelp, and TripAdvisor argue that Google searches are depriving their Web sites of valuable traffic, putting their businesses at a disadvantage.
Instead of us providing you with images, maps, the weather, news, or translated versions of foreign-language sites, they would rather go back to ten blue links.
A few years ago, a lawyer for one of our competitors drew a picture of a coastline with a little island offshore.
He added a dotted line, explaining that this was the only ferry connecting the island to the mainland.
His point was that Google was just like the ferry: the only way to navigate the Internet.
In reality, there are many ways to get around on the Web.
For news, you might go directly to your favorite news service.
If you want to buy something, you might go directly to Zalando or Amazon, where you can research models and prices, get reviews, and pay for your purchase all at once.
The real point is that the economic landscape in which we are operating is not only competitive; it is changing constantly.
This year, our industry reached an important milestone.
For the first time, people are spending more time on mobile devices than on their desktop computers.
Time spent on desktops has now fallen to just 40%.
And people use mobile devices very differently from the way they use desktops.
Seven out of every eight minutes spent on a mobile phone is spent within an app, and the most popular app in the world is Facebook.
Many people look at Facebook, Google, Apple, and Amazon, among others, as companies that no competitor could ever beat.
I am less certain.
History is full of examples that show that size and past success guarantee nothing.
Great companies can be surpassed swiftly.
Just a few years ago, companies like Yahoo, Nokia, Microsoft, and Blackberry seemed unrivaled.
They have all since been disrupted by a new wave of tech companies – Google among them.
Google works very differently from other companies that have been dubbed “gatekeepers” and that are regulated accordingly.
We are not a ferry, a railroad, a telecommunications network, or an electricity grid with only one line serving you and no competitors allowed.
No one is stuck using Google.
People have choices, and they exercise them all the time.
We know that if we cease to be useful, our users will leave.
The barriers to entry are negligible, because competition is just one click away.
Someone in a garage somewhere is gunning for us, and 2015 could be the year that they make their move.
I know, because not long ago we were in that garage.
And I know that the next Google will not do what Google does, just as Google did not do what AOL did.
The upheavals resulting from momentous technological change are rarely expected.
The telegraph disrupted the postal service.
Radio and television shook up the newspaper industry.
Airplanes ended the age of ocean liners.
Inventions are always dynamic; that is why the future will always be as exciting as the past.
सभी को शिक्षित करना
एडिनबर्ग – मिलेनियम डेवलपमेंट गोल्स (एमडीजी) द्वारा निर्धारित इस लक्ष्य को प्राप्त करने में भारी रुकावटें सामने आ रही हैं कि यह सुनिश्चित किया जाए कि दिसंबर 2015 तक स्कूल जाने की आयु वाला हर बच्चा स्कूल में हो। चूंकि हाल के महीनों में गाज़ा, सीरिया, इराक और नाइजीरिया में बच्चे वास्तव में युद्ध की पहली पंक्ति में लगे हुए हैं, इसलिए चुनौती की व्यापकता उतनी अधिक स्पष्ट नहीं दिखाई दे पा रही है। यह सब होते हुए भी, सार्वभौमिक शिक्षा के वायदे को पूरा करने के लिए यह ज़रूरी है कि बाल शरणार्थी और युद्ध क्षेत्रों में रहनेवाले बच्चे जो सबसे अधिक कठिन परिस्थितियों में रहते हैं, सुरक्षित रूप से बुनियादी शिक्षा प्राप्त कर सकें।
शैक्षिक अनुसंधान से यह पता चलता है कि कोई भी देश निरंतर समृद्धि का लाभ नहीं उठा सकता – और कोई भी देश मध्यम आय के जाल से नहीं बच सकता – जब तक कि वह उच्च गुणवत्ता की शिक्षा में भारी मात्रा में निवेश नहीं करता है। यह बात आज की ज्ञान आधारित अर्थव्यवस्था के लिए विशेष रूप से सच है जिसमें कंपनियाँ अपना स्वयं का मूल्यांकन केवल भौतिक संपत्तियों के अनुसार नहीं बल्कि अपनी मानव संपत्तियों के अनुसार करती हैं, और शेयर बाजार भौतिक पूंजी के अतिरिक्त बौद्धिक पूंजी का भी मूल्यांकन करते हैं।
शिक्षा को एक अरसे से आय, धन, हैसियत, और सुरक्षा की गारंटी की दृष्टि से सर्वोपरि माना गया है। इसके बावजूद, लाखों लोग लगातार इससे वंचित रहे हैं या इसमें पिछड़ गए हैं, और दुनिया के लगभग आधे बच्चों को अभी भी बुनियादी शिक्षा तक पहुँच उपलब्ध नहीं है।
यह सुनिश्चित करने के लिए, मिलेनियम डेवलपमेंट गोल्स (एमडीजी) शुरू किए जाने के बाद पहले पाँच वर्षों में भारी प्रगति हुई थी, प्राथमिक और निम्न माध्यमिक विद्यालयों में नामांकनों में 1.5% वार्षिक की बढ़ोतरी हुई। इस राह पर चलते हुए, 2022 तक नामांकन दर दुनिया भर में 97% तक पहुँच जाएगी, और उप सहारा अफ्रीका इस स्तर को 2026 तक प्राप्त कर लेगा।
लेकिन 2005 के बाद, प्रगति ठप हो गई। परिणामस्वरूप, दुनिया के सबसे गरीब देशों में केवल 36% बच्चे ही निम्न-माध्यमिक विद्यालय तक की शिक्षा पूर्ण कर पाते हैं। 2030 तक, यह दर बढ़ तो चुकी होगी, लेकिन केवल 54% तक ही।
इसमें कोई आश्चर्य नहीं है कि ग्रामीण समुदायों में लड़कियों को सबसे अधिक बाधाओं का सामना करना पड़ता है। आज, लगभग तीन-चौथाई लड़कियों को बुनियादी प्राथमिक शिक्षा नहीं मिल पाती है; 2030 में, इनमें से आधी फिर भी वंचित रह जाएँगी। इसी तरह, लगभग 90% लड़कियाँ आज माध्यमिक शिक्षा को पूरा करने में असमर्थ रहती हैं; 2030 तक, इस संख्या में केवल 20% तक की ही कमी होगी। और, उप-सहारा अफ़्रीका में प्राथमिक शिक्षा तक पहुँच प्राप्त करने के लिए लड़कों को जहाँ 2069 तक प्रतीक्षा करनी पड़ेगी, वहीं लड़कियों को 2086 तक प्रतीक्षा करनी पड़ेगी। जहाँ तक निम्न-माध्यमिक शिक्षा का प्रश्न है, इसमें लगभग एक शताब्दी लग जाएगी, यदि मौजूदा प्रवृत्तियाँ बनी रहती हैं, तो उप सहारा अफ्रीका में सभी लड़कियों के लिए शिक्षा तक पहुँच को सुनिश्चित करने में लगभग एक शताब्दी लग जाएगी।
इनमें ऐसा कुछ भी नहीं है जो 'वैश्विक नेताओं' के इस वादे से मेल खाता हो कि वे दुनिया भर के सभी बच्चों की प्रतिभाओं को विकसित करेंगे। हाल ही के एक अध्ययन से पता चलता है कि अफ्रीका शिक्षा के अवसरों के मामले में अब तक इतना अधिक पीछे है कि 2025 में रवांडा, चाड, लाइबेरिया, और मलावी में तीस वर्ष से अधिक आयु वाले केवल 2% युवा वयस्कों को - और तंजानिया और बेनिन में केवल 3% को किसी कॉलेज या विश्वविद्यालय की शिक्षा प्राप्त होगी। तृतीयक शिक्षा के ऐसे निम्न स्तरों के कारण, अगली पीढ़ी के लिए योग्य शिक्षकों को नियुक्त कर पाना न केवल असंभव हो जाएगा, बल्कि चिकित्सा केन्द्रों और क्लीनिकों के लिए पूरी तरह से प्रशिक्षित स्वास्थ्य पेशेवरों को नियुक्त कर पाना भी असंभव हो जाएगा - ये ऐसी असफलताएँ हैं जो प्रत्यक्ष रूप से खराब शिक्षा, खराब स्वास्थ्य, बेरोजगारी और गरीबी के अंतहीन चक्र को निरंतर जारी रखती हैं।
इसमें कोई शक नहीं है कि कुछ अफ्रीकी देश - जैसे अल्जीरिया, नाइजीरिया और मिस्र - इस प्रवृत्ति को रोकने में सफल हो सकते हैं। लेकिन दक्षिण अफ्रीका में भी - जो वर्तमान में अफ्रीका का सबसे अधिक विकसित देश है - 2045 तक अधिक से अधिक 10% युवा वयस्कों के पास ही कॉलेज या विश्वविद्यालय की डिग्री होगी।
इस बीच, पाकिस्तान में, मलाला युसुफ़ज़ई के नेतृत्व में चलाए जा रहे एक साहसपूर्ण अभियान से तृतीयक शिक्षा के साथ युवा वयस्कों के हिस्से को बढ़ाने में मदद मिल रही है, जो 2010 में मात्र 7% था। लेकिन ये लाभ मामूली हैं; 2045 तक भी, इनका अंश 15% से अधिक होने की संभावना नहीं है। नेपाल के मामले में उम्मीद की जाती है कि वह तृतीयक शिक्षा के क्षेत्र में अधिक तेज़ी से वृद्धि कर पाएगा, लेकिन इसके न्यून आधार के फलस्वरूप इसका 2045 का स्तर लगभग 16% होने की संभावना है।
यहाँ तक कि भारत जैसी प्रमुख उभरती अर्थव्यवस्था में 2010-2045 तक केवल 11% की प्रगति होगी जिससे वह केवल 23% तक पहुँच पाएगी - यह स्तर उच्च शिक्षा के उसके संस्थानों की वैश्विक प्रतिष्ठा द्वारा सुझाए गए स्तर से बहुत ही कम है। इस बीच, सिंगापुर, दक्षिण कोरिया और जापान में, कॉलेज या विश्वविद्यालय की डिग्री वाले युवा वयस्कों की हिस्सेदारी 80-90% तक पहुँच जाएगी।
आर्थिक विकास और प्रौद्योगिकी प्रगति से अनिवार्य रूप से सभी के लिए अधिक अवसर उपलब्ध होंगे यह धारणा बहुत हद तक ख़्याली पुलाव ही है। वास्तव में, जब तक कोई ठोस प्रयास नहीं किया जाता है तब तक शिक्षा - और इस तरह आर्थिक - अवसर आने वाले वर्षों में तेजी से असमान होता जाएगा।
लेकिन असली विभाजन शिक्षित और अशिक्षित के बीच नहीं है; यह उन लोगों के बीच है जिनकी शिक्षा तक पहुँच है और जो लोग इसे चाहते हैं। लंबे समय से उपेक्षित ये लोग सरकारों और अंतरराष्ट्रीय संगठनों पर तब तक दबाव बनाना जारी रखेंगे जब तक शिक्षा के लिए हर व्यक्ति के मौलिक अधिकार का सम्मान नहीं किया जाता है। और उनके अभियान में अगला पड़ाव न्यूयॉर्क में संयुक्त राष्ट्र महासभा है जिसमें सभी देशों का प्रतिनिधित्व करने वाले सैकड़ों युवा लोग दुनिया के नेताओं से परिवर्तन की मांग करने के लिए एकत्र होंगे।
दुनिया भर में जब विद्यालयों के द्वार फिर से खुलेंगे, तो अंतरराष्ट्रीय समुदाय को यह सुनिश्चित करने के लिए अपनी प्रतिबद्धता को फिर से दुहराना चाहिए कि हर बच्चे को, हर जगह, इन द्वारों में प्रवेश करने का एक मौका अवश्य मिले।
Education Without Borders
LONDON – As the third anniversary of the start of Syria’s civil war approaches, there is a race against time to deliver a groundbreaking education project to the conflict’s hardest-hit victims – hundreds of thousands of child refugees.
A shocking three million Syrian children have now been displaced.
More than one million of them have fled Syria and are languishing in camps in neighboring countries, particularly Lebanon, Jordan, and Turkey.
These children are now suffering a third winter away from their homes, schools, and friends.
Many are separated from their families, and thousands more join the ranks of displaced persons every day in what is becoming the largest humanitarian catastrophe of our time.
But a pathbreaking initiative in Lebanon, involving teachers, aid agencies, and education charities has opened a small window of hope.
Amid the chaos of camps, makeshift huts, and destitution, the fight for an important new principle of international aid has begun: even in times of conflict, children must have access to education.
A century and a half ago, the Red Cross established the norm that health care could – and should – be provided even in conflict zones.
This principle was carried forward by groups like Médicins sans Frontières, whose doctors have risked their lives for the last four decades to deliver medical care to the world’s most dangerous places.
Now Lebanon is the site of a pilot program to advance the idea that providing education for refugee children is equally feasible – and no less important.
Across 1,500 communities in this troubled, divided country, where Syrian refugee children now make up 20% of the school-age population, the aim is to establish children’s right to education as a humanitarian priority.
The typical refugee child spends more than ten years away from home.
And every month that a child is out of school makes it less likely that they will ever return.
Three years ago, most Syrian children were at school, and the country had near universal primary education.
Today, millions of children are being denied any chance to realize their talents.
The scars will last for decades.
So, in Syria and the surrounding region, there is already a lost generation in the making: children who are now eight and nine and who have never been to school, children condemned to work as child laborers, and hundreds of girls forced into early marriages.
There are gruesome tales of young people who have been forced to sell their kidneys and other organs simply to survive.
Of course, we must provide food, shelter, and vaccinations.
But, in conflicts like these, the one thing that children need, beyond the material basics, is hope.
And it is education that provides children with hope that there is light at the end of the tunnel – hope that they can plan for the future and prepare for jobs and adulthood.
The pilot project in Lebanon, designed by Kevin Watkins of the United Kingdom’s Overseas Development Institute and led by the United Nations Children’s Fund (UNICEF) and the UN High Commission for Refugees (UNHCR), creates the opportunity to establish a right to education irrespective of borders.
Indeed, it is designed to cater to all 435,000 Syrian child refugees now in the country.
Thanks to a historic agreement with the Lebanese government, places for hundreds of thousands of children can be created within weeks by putting 1,500 of Lebanon’s schools on a double-shift system.
The scheme is already being piloted in a small village called Akroum in the north of the country.
Lebanese children are taught during the first shift, and Syrian children in the second.
Using the same school for both sets of pupils means that education can be delivered at a cost of only £400 ($670) per child per year.
To secure places for all refugee children, we are seeking $195 million dollars a year for UNICEF and UNHCR, with the plan to be implemented on the ground by NGOs and the Lebanese authorities.
The aim is to secure all funding during March, as the world marks the third anniversary of this tragic exodus from Syria.
We have already assembled a coalition of ten donor countries to take the lead, but we need ten more donors to fund the project fully.
We are appealing to donors not just to create thousands of school places for desperately needy children, but also to establish a precedent for the 20 million other children driven by violent conflict into displaced-persons camps and shantytowns.
There cannot be universal educational opportunity for the worlds’ children without an agreement that we will cater to children in conflict zones.
One million Afghan children are in camps along the border with Pakistan.
Thousands of children in South Sudan still await their first chance to go to school, and schools have yet to be provided for a million more children in the war-torn Central African Republic.
These children’s chances now depend on showing that we can make progress in Lebanon.
The UN Millennium Development Goals, adopted in 2000, expire in December 2015, which means that time is running to meet the deadline for achieving the target of universal primary education.
That goal will remain unattainable unless and until we establish the long-overdue principle that a child’s right to education knows no boundaries.
One Hundred Days of Servitude
LONDON – Demonstrations around the world were held this week to mark the 100th day of captivity for more than 200 Nigerian schoolgirls by the Islamist extremist group Boko Haram.
Since their abduction in April, global outrage has not waned; on the contrary, it has spurred a worldwide movement to uphold all girls’ basic rights.
Campaigners from groups fighting child marriage, child trafficking, and child labor, and from groups demanding children’s right to attend school, free of intimidation, have united in the past few days to show the strength of global opinion in favor of universal education and a world free of child slavery.
But what is of greater long-term significance is that girls themselves are demanding that their rights be taken seriously.
Girls have mobilized in Bangladesh, where the movement to establish child-marriage-free zones is growing; in India, where the Global March Against Child Labor started; and in Africa, where child protection clubs are being formed in almost every country.
The first demand is that the Nigerian girls be returned safely to their homes and that schools in Nigeria are made safer and more secure from threats by Boko Haram (whose name means “Western education is a sin”).
France, the United Kingdom, the United States, China, and Israel have stepped up military and technical support, including the recent provision of helicopters and night-vision equipment for jungle warfare to fight the group, whose campaign of terror has cost 5,000 deaths in the past five years.
In Nigeria alone, six million girls do not attend school; around the world, ten million girls each year become child brides, and seven million school-age girls are full-time workers.
We can no longer assume steady, if rocky, progress toward vindication of girls’ rights.
Iraqi legislators are considering reducing the age for child marriage to nine.
Pakistan’s Council of Islamic Ideology is calling for all age limits on marriage to be abolished.
And India has passed up another chance to outlaw child labor.
The rising tide of adolescent rage at child marriage and child labor has yet to trend on Twitter and Facebook.
And Bangladesh’s child-marriage-free zone in the Nilphamari region, Indonesia’s child-empowerment groups in the districts of Dompu and Grobogan, Uganda’s child-rights clubs, and India’s Bachpan Bachao Andolan, which combats child slavery, may not be household names.
But the yawning gap between what girls are demanding and the opportunities on offer to them is fueling a liberation struggle led by girls themselves.
Last month, on the “Day of the African Child,” thousands of young people marched on the streets of Addis Ababa, Ethiopia, and took over 20 African and Asian parliaments to demand universal education for girls.
On July 23, girls took to the streets in Pakistan, led by Baela Raza Jamil of Idara-e-Taleem-o-Aagahi, which is campaigning for what the Nigerian schoolgirls have lost: the right to an education.
In India, vigils making common cause with the Chibok girls were led by Bachpan Bachao Andolan, which every day rescues children from trafficking and slave labor.
Girls Not Brides mobilized in 45 countries, reminding its 145 sister organizations around the world that many of the Chibok girls will meet the same fate as the girls they seek to protect.
Increasingly, young people around the world see the connection between the abductions in Nigeria, the rape and murder of young girls in India, so-called “honor killings” of Pakistani girls who marry against their families’ wishes, genital mutilation of girls across Africa, and child-trafficking for full-time work, often in slave-labor conditions.
Seven decades after the adoption by the United Nations of the Universal Declaration of Human Rights, girls’ rights are still not taken seriously; so girls are taking action to make themselves heard.
And, slowly but surely, local embryonic civil-rights movements are linking up with global leaders – Girls Not Brides, Walk Free, and A World at School – as part of an emergency coalition to eliminate child labor, child marriage, and educational discrimination against girls.
The timetable for doing so will be set out at the UN General Assembly in September in the presence of Secretary-General Ban Ki-moon.
Girls should be able to study in a classroom, free of fear and without the need to demonstrate on the streets.
This is a basic right; ensuring that it is respected cannot come soon enough.
Putting Education First
LONDON – For far too long, the cause of universal education has taken a back seat to other great international movements for change.
Now, for two new reasons that lie at the heart of UN Secretary-General Ban Ki-moon’s launch of the “Education First” initiative, education has returned to its rightful place atop the global policy agenda.
First and foremost, young people have themselves become the biggest advocates of universal education for girls and boys.
Refusing to remain silent while denied opportunity, young people – particularly girls – have launched one of the great civil-rights struggles of our time.
Few could remain unmoved by the brave fight of the young Pakistani girl Malala Yousafzai after the Taliban shot her in the head because she insisted on the right of young girls to an education.
Few have failed to notice the massive public outpouring of support in Pakistan and elsewhere for the cause that she is championing.
Likewise, we have also seen in recent months the creation by schoolgirls in Bangladesh of child-marriage-free zones, aimed at defending the right of girls to stay in school instead of being married off as teenage brides against their will.
In India, the Global March Against Child Labor, led by the children’s rights advocate Kailash Satyarthi, has rescued thousands of young boys and girls from a life of slavery in factories, workshops, and domestic service, and has ensured that they return to school.
These demonstrations by girls and boys demanding their right to education have made the fight for basic schooling impossible to ignore.
Consequently, every government now feels under even greater pressure to deliver the second of the global Millennium Development Goals (“achieve universal primary education”) by the end of 2015.
But a second worldwide force also has propelled education to the center of the policy agenda in most countries: the increased recognition of the importance of education by those who examine why countries succeed or fail.
For years, academics have debated whether culture, institutions, ideology, or resources cause some countries to lag behind.
Today, a growing number of writers, researchers, and policymakers see the crucial link between education and national economic success.
The deployment of human capital has become an important factor in explaining why some countries remain stuck in a “middle-income trap” and why others cannot break out of low-income status.
And research assessing a country’s human capital now focuses on the quantity and quality of basic skills, qualified graduate manpower, and expertise in research and development.
Putting education first is urgent in view of the scale of wasted talent and potential worldwide.
Some 57 million children still do not go to school, 500 million girls will never finish the secondary education to which they are entitled, and 750 million adults remain illiterate.
The link between education and economic success makes the delivery of quality schooling and training a hugely important issue for business as well.
By 2020, according to the McKinsey Global Institute, we will face the twin problems of a shortfall of up to 40 million high-skill workers and a surplus of up to 95 million low-skill workers.
By 2030, the global workforce of 3.5 billion will include an estimated one billion workers who lack a secondary education, significantly hindering their countries’ economic prospects.
As a result, without urgent action, businesses are likely to face a huge skills shortage, especially in emerging markets and developing countries, where most economic activity will be concentrated.
Indeed, the adult illiteracy rate in Somalia is 63%, and 39% in Nigeria; in South Sudan, more girls die during childbirth than complete primary school.
Unless we act, by mid-century the global economy will be characterized by massive waste of talent and unequal opportunities.
According to new figures from the Wittgenstein Center’s forthcoming book World Population and Human Capital in the 21st Century, only 3% of young adults in Mali and Mozambique are projected to have a tertiary education in 2050; the expected proportion is just 4% in Niger, Liberia, Rwanda, and Chad, and only 5% in Malawi and Madagascar.
While the projection for North America as a whole is 60%, the forecast for Sub-Saharan Africa is 16%.
Such figures reveal a world divided between those who have and those who lack educational opportunity, with huge potential repercussions not only in terms of skill shortages and economic waste, but also in terms of social stability.
The late US Supreme Court Chief Justice Earl Warren’s words in Brown v. Board of Education,which struck down the legal basis for racial segregation in America’s public schools, remain no less relevant today: “It is doubtful that any child may reasonably be expected to succeed in life if he is denied the opportunity of an education.”
We have little more than two years to turn basic education from a privilege for some into a right for all.
Secretary-General Ban and I are determined that every day until that deadline in December 2015, we will work as hard as possible to ensure every child is in school.
Gordon Gekko Reborn
NEW YORK – In the 1987 film Wall Street, the character Gordon Gekko famously declared, “Greed is good.” His creed became the ethos of a decade of corporate and financial-sector excesses that ended in the late 1980’s collapse of the junk-bond market and the Savings &amp;
Loan crisis. Gekko himself was packed off to prison.
A generation later, the sequel to Wall Street – to be released next month – sees Gekko released from jail and returned to the financial world.
His reappearance comes just as the credit bubble fueled by the sub-prime mortgage boom is about to burst, triggering the worst financial and economic crisis since the Great Depression.
The “Greed is good” mentality is a regular feature of financial crises.
But were the traders and bankers of the sub-prime saga more greedy, arrogant, and immoral than the Gekkos of the 1980’s?
Not really, because greed and amorality in financial markets have been common throughout the ages.
Teaching morality and values in business schools will not tame such behavior, but changing the incentives that reward short-term profits and lead bankers and traders to take excessive risks will.
The bankers and traders of the latest crisis responded rationally to compensation and bonus schemes that allowed them to assume a lot of leverage and ensured large bonuses, but that were almost guaranteed to bankrupt a large number of financial institutions in the end.
To avoid such excesses, it is not enough to rely on better regulation and supervision, for three reasons:
· Smart and greedy bankers and traders will always find ways to circumvent new rules;
· CEOs and boards of directors of financial firms – let alone regulators and supervisors – cannot effectively monitor the risks and behaviors of thousands of separate profit and loss centers in a firm, as each trader and banker is a separate P&amp;L with its own capital at risk;
· CEOs and boards are themselves subject to major conflicts of interest, because they don’t represent the true interest of their firms’ ultimate shareholders.
As a result, any reform of regulation and supervision will fail to control bubbles and excesses unless several other fundamental aspects of the financial system are changed.
First, compensation schemes must be radically altered through regulation, as banks will not do it themselves for fear of losing talented people to competitors.
In particular, bonuses based on medium-term results of risky trades and investments must supplant bonuses based on short-term outcomes.
Second, repeal of the Glass-Steagall Act, which separated commercial and investment banking, was a mistake.
The old model of private partnerships – in which partners had an incentive to monitor each other to avoid reckless investments – gave way to one of public companies aggressively competing with each other and with commercial banks to achieve ever-rising profitability, which was achievable only with reckless levels of leverage.
Similarly, the move from a lending model of “originate and hold” to one of “originate and distribute” based on securitization led to a massive transfer of risk.
No player but the last in the securitization chain was exposed to the ultimate credit risk; the rest simply raked in high fees and commissions.
Third, financial markets and financial firms have become a nexus of conflicts of interest that must be unwound.
These conflicts are inbuilt, because firms that engage in commercial banking, investment banking, proprietary trading, market making and dealing, insurance, asset management, private equity, hedge-fund activities, and other services are on every side of every deal (the recent case of Goldman Sachs was just the tip of the iceberg).
There are also massive agency problems in the financial system, because principals (such as shareholders) cannot properly monitor the actions of agents (CEOs, managers, traders, bankers) that pursue their own interest.
Moreover, the problem is not just that long-term shareholders are shafted by greedy short-term agents; even the shareholders have agency problems.
If financial institutions do not have enough capital, and shareholders don’t have enough of their own skin in the game, they will push CEOs and bankers to take on too much leverage and risks, because their own net worth is not at stake.
At the same time, there is a double agency problem, as the ultimate shareholders – individual shareholders – don’t directly control boards and CEOs.
These shareholders are represented by institutional investors (pension funds, etc.) whose interests, agendas, and cozy relationships often align them more closely with firms’ CEOs and managers.
Thus, repeated financial crises are also the result of a failed system of corporate governance.
Fourth, greed cannot be controlled by any appeal to morality and values.
Greed has to be controlled by fear of loss, which derives from knowledge that the reckless institutions and agents will not be bailed out.
The systematic bailouts of the latest crisis – however necessary to avoid a global meltdown – worsened this moral-hazard problem.
Not only were “too big to fail” financial institutions bailed out, but the distortion has become worse as these institutions have become – via financial-sector consolidation – even bigger.
If an institution is too big to fail, it is too big and should be broken up.
Unless we make these radical reforms, new Gordon Gekkos – and Charles Ponzis – will emerge.
For each chastised and born-again Gekko – as the Gekko in the new Wall Street is – hundreds of meaner and greedier ones will be born.
Partnership or Putsch?
EUGENE – In 2010, I sat across the table from Assistant US Trade Representative Barbara Weisel, who was responsible for negotiating the Trans-Pacific Partnership (TPP), the mega-regional free-trade treaty among Vietnam, Malaysia, and ten other Pacific Rim countries that President Barack Obama’s administration wants to conclude in the coming weeks.
At the time, I was Senior Policy Adviser for the US House of Representatives’ Committee on Education and Labor – a position that made me the top congressional staff member responsible for upholding labor standards in international trade treaties.
The purpose of the meeting was for Congress to understand what steps the Obama administration was taking to protect American workers from being forced into unfair competition with workers from low-wage trading partners.
I asked Weisel what I thought was a simple question: “What is the White House’s position on democracy?”
Other democracies feel the same way.
For example, trade agreements negotiated by members of the Commonwealth of Nations (formerly the British Commonwealth) contain just such a provision.
The logic is obvious: If we in developed democracies had lacked the right to protest, speak out, organize unions, and vote for representatives of our choosing, we would never have ended child labor or established the eight-hour workday.
Having used these rights to raise our own living standards, we should not now put developed countries’ workers in direct competition with workers who lack the basic freedoms needed to improve their own conditions.
But my explanation did not help.
Weisel stated simply that “we have no position” on democracy.
I pressed her on how the White House planned to deal with, for example, Vietnam – a country where children as young as 14 are forced to work 12-hour days, and where there is no right to free speech, no right to protest, no right to strike, and no freedom of association. “Oh, you can have labor rights without democracy,” Weisel insisted.
She demurred when asked to name an example.
In reality, the one thing that non-democratic regimes can never tolerate is independent workers’ organizations.
That is why trade unionists were the first through the gates of Dachau, and why Poland’s Solidarity movement posed an existential threat to Communist power throughout the former Soviet bloc.
Indeed, part of international investors’ attraction to countries like Vietnam and China is not simply that wages are low, but that the absence of democratic rights promises to lock in cheap labor for years to come.
For example, when China revised its labor law in 2008, Apple, Hewlett-Packard, and other members of the US-China Business Council lobbied successfully to limit the expansion of Chinese workers’ rights.
While China is not a party to the current negotiations, the TPP is designed to allow additional countries to sign on in the future – and the Chinese, we can assume, will be courted assiduously.
Former US Trade Representative Ron Kirk, for one, noted that he “would love nothing more” than to see China join the treaty.
But the TPP is not really a “trade” treaty at all.
Rather, it is a vehicle for corporate lobbyists to achieve what they have been unable to persuade legislators to support through normal means.
For example, pharmaceutical companies have insisted that the TPP force all countries to grant 12-year patents on prescription drugs – increasing their profits while delaying competition from cheaper generic versions.
Likewise, tobacco companies are seeking to use the TPP to prohibit developing countries – which represent the largest cigarette markets – from adopting new controls on their products.
The TPP’s most controversial provision, if adopted, would allow private corporations to sue foreign governments for adopting policies that adversely affect their expected profits.
For example, if Vietnam were to mandate six weeks of paid maternity leave for all employees, a foreign factory owner might sue the government, insisting that it either repeal the law or reimburse the company for the cost of providing this benefit.
A private tribunal would hear cases and issue binding rulings, with no possibility of appeal to any court or other democratically accountable authority.
This, then, is the future that the TPP holds out: a kind of Potemkin democracy, in which citizens are free to choose their flags and holidays but cannot afford to enact any laws that might reduce international investors’ profits.
Workers’ wages in the US, Canada, Japan, Australia, New Zealand, and other developed countries would be inexorably competed down toward those of lower-wage trading partners, while developing-country workers would find it increasingly difficult – even in nominal democracies – to improve their standard of living.
The TPP is being crafted in utmost secrecy, with even legislators unable to see the full text that is being negotiated, though corporate lobbyists have been treated as partners in the drafting process.
This is not surprising: In the US, where almost five million manufacturing jobs have disappeared since the adoption of the North American Free Trade Agreement, and where real wages have stagnated, a majority of voters across the political spectrum are opposed to more such treaties.
At least for the Obama administration, the rush to conclude the TPP negotiations is doubtless driven by the desire to close the deal well ahead of America’s midterm election in November.
And that, too, is bad for democracy.
Indeed, though the US Constitution stipulates that the power to “regulate Commerce with foreign Nations” lies solely in the hands of Congress, the Obama administration is pressing legislators to approve so-called fast-track authority, under which they would have no say over either the TPP’s terms or the parties to it – or even the power to amend the treaty text in any way.
As a political scientist, I am sometimes asked how it is possible for democracies to enact laws that run counter to the interests of the vast majority of voters.
They do so, in part, by shunning any commitment to democracy itself.
There is no clearer example of this than the TPP, which almost certainly constitutes the single biggest threat to the preservation – or creation – of any signatory country’s middle class.
Government Accountability or Government Accounting?
Paris amp#45;amp#45; When Nicolas Sarkozy’s government spokesperson announced that each minister’s performance would be assessed according to criteria set by a private auditing firm, he probably did not expect to elicit a fierce response.
But he should have.
The opposition quickly attacked the move as a “dangerous gimmick” and a “smokescreen.”
One pundit asked, “Will the time soon come when ministers are hired by head-hunters?” And a young MP declared that “France cannot be managed like a bolt factory.”
But what is so absurd about establishing standards by which to assess the fulfillment of Sarkozy’s campaign promises?
As soon as they were appointed in June 2007, Sarkozy’s ministers were given a clear set of objectives in the form of a letter of intent.
Isn’t it normal to create some means of holding ministers accountable?
A culture of “results” has become central to economic modernization in France, so shouldn’t the same be true of French governments, with their entrenched inclination toward passivity and aloofness? And the issue of setting measurable standards for government operations is not confined to France.  British Prime Minister Gordon Brown has made such quantifiable goals a hallmark of his leadership ever since he was Chancellor of the Exchequer.
Of course, the institutions charged with supervising France’s public sector, such as the Cour des comptes or the Inspection générale des finances , have the skills and capacities that are needed to fulfill their tasks.
Moreover, French public policies are subject to a general review procedure.
But the culture of a private auditing firm can bring something new by moving beyond a basic review of legality to a general assessment of performance.
For the plan’s opponents, the main causes of indignation are the criteria for assessment.
Should the immigration minister be judged according to the number of illegal immigrants expelled?
Should the education minister be assessed according to how much overtime work teachers are made to perform?
Should the culture minister be assessed according to the number of visitors to free museums and the share of French movies in the domestic market?
Such questions hide more basic ones: can the fulfillment of political goals really be quantified?
Is it possible to evaluate a state in the same way that you evaluate a firm, thereby reducing its performance to a set of specific actions?
To some extent, the answer is yes.
After all, state bureaucracies are, on one level, simply a species of the large and complex organizations that, in the private sector, are subject to standardized performance indicators.
In many Western democracies – New Zealand, Sweden, the United Kingdom, and even Italy – efforts at administrative modernization have focused on forging a stronger link between management and performance.
On another level, however, state bureaucracies are very different from private-sector organizations, for they have their own characteristics and objectives, which will be endangered were they are reduced to quantitative standards of performance and efficiency.
Indeed, one of the main reasons why certain tasks are given to governments, rather than left to the private sector, is that ordinary market mechanisms do not work in the case of so-called “public goods” because the market cannot determine the optimal level of their supply.
Quantitative targets thus hide the crucial policy decision about the right “portfolio” of services that a government should provide.
And if assessment of state action were based only on a set of pre-defined quantitative targets, ministers would also understandably – but mistakenly – neglect quality and other important objectives.
So, should the French be worried?
According to Prime Minister Francois Fillon, “We are not at school.” Beyond technical criteria, ministers will still be assessed according to the influence exercised by their party or political faction, election results, and their popularity among the media and the public.
Thus, there is no contradiction between the aim of turning ministers into efficient managers and parliament’s power to hold members of the government accountable.
Eventually, the voters will have the final say.
So, targeting quantitative objectives can be a useful innovation, but only as long as its purpose is to provide a new tool in managing certain aspects of the state’s performance.
Beyond that point, the goals of state action – the substance of ministers’ responsibilities – will still be assessed according to values whose richness and complexity cannot be reduced to the cold one-dimensionality of a spread sheet.
Reengineering Government
PARIS – Since the financial crisis erupted in 2008, governments in advanced countries have been under significant pressure.
In many countries, tax receipts abruptly collapsed when the economy contracted, income dwindled, and real-estate transactions came to a halt.
The fall in tax revenues was in most cases sudden, deep, and lasting.
Governments had no choice but to raise taxes or to adjust to leaner times.
In some countries, the magnitude of the shock was such that a large tax increase could not fill the gap.
In Spain, despite tax hikes worth more than 4% of GDP since 2010, the tax-to-GDP ratio was only 38% in 2014, compared to 41% in 2007.
In Greece, tax increases amounted to 13% of GDP during the same period, but the tax ratio increased by only six percentage points.
Elsewhere, political limits to tax increases were reached before the gap could be filled.
Willingly or not, priority is being given to spending cuts.
Disillusion about future growth adds to the pressure.
The productivity record has generally been weak over the last few years, and this suggests that growth in the years ahead could be slower than previously expected.
Revenue growth thus looks insufficient to match the surge in age-related public spending on health and pensions.
This is a very different crisis from those experienced in the 1980s and the 1990s.
Back then, the main issue was political: the legitimacy and efficiency of public spending was under attack.
In the words of US President Ronald Reagan, government was the problem, not the solution.
The state, it was loudly proclaimed, had to be rolled back.
By contrast, today’s concerns are economic.
Partisan disagreement about the proper scope of government remains, but there is no overall rejection of state intervention.
Often, it is not interests or ideologies that make public spending cuts unavoidable – just facts.
How can governments rise to the challenge?
The risk they face is clear enough: absent a profound reengineering, inertial spending – owing to entitlements and civil-service wages – is bound to crowd out spending on new priorities and new policies.
Already, the countries that have been forced to cut the most have generally sacrificed public infrastructure investment.
Research is another area at risk.
Social investment in programs that pay off over the long term, such as pre-school child care, is suffering from financial constraints.
National security is not given the priority it deserves, despite growing threats.
Last but not least, makeshift solutions such as protracted wage freezes may eventually erode the quality of public services.
Fortunately, there are a few things governments can do to mitigate the effects of inertial spending.
For starters, they can simply systematize evaluations of the efficiency of public money.
In most countries, such assessments are still rare and haphazard: Parliaments often enact policies without knowing whether they are worth the money, and it may take a very long time before ineffective or inefficient policies are terminated.
That is why enabling legislation for spending programs should contain sunset clauses, with extensions subject to independent evaluation.
Second, spending reviews, too, should be systematized.
Setting priorities – whether to spend more on education and less on pensions, for example, or whether to invest in infrastructure or in research – entails hard choices that should be made explicit.
In an ideal world, these choices would be the focus of electoral debates and parliamentary work.
But behind every budget line is a constituency tempting policymakers to eschew hard decisions.
That is why structured spending reviews are useful: they force officials to bridge the gap between ends and means and encourage informed democratic decision-making.
Third, governments should equip themselves with a reengineering budget.
As private companies know, transformations – deep changes in the way things are done – often cost money before they bring savings.
This may be because the changes require investment in new technology, retraining of employees, or simply buying stakeholders’ consent.
Money earmarked in the budget for such reengineering of government programs would be a good investment.
Fourth, governments should promote public-sector innovation.
Contrary to popular prejudice, local governments and public agencies do innovate; what is missing is a mechanism to select and disseminate innovations in the same way the market selects new products or cost-saving processes.
A better way to deliver a public service may remain unknown for years.
That might well change if governments took simple steps like allocating more funding on a project basis and organizing contests.
For example, schools in disadvantaged neighborhoods should be allowed to tender for funds for educational innovation.
Last but not least, people should be empowered.
Citizens want a more nimble state that tailors its operations to local needs.
In the digital age, they want it to meet new standards of speed, reliability, and personalization.
They increasingly challenge the traditional view that efficiency and equality imply less individual choice.
And they want the government to be open, to guarantee access to data, and to make its efficiency and effectiveness directly observable.
These are powerful forces for change, and embattled governments should harness them to the goal of achieving the reengineering they so urgently need.
The alternative is to accept the deterioration of the quality of public services, which would lead only to a loss of government legitimacy and, with it, a diminishing willingness to pay taxes.
Innovate or Stagnate
DUBAI – Companies, like people, grow old.
They start life small and eager to survive, fueled by youthful energy and fresh ideas.
They compete, expand, mature, and eventually, with few exceptions, fade into obscurity.
The same is true of governments: they, too, can lose the hunger and ambition of youth and allow themselves to become complacent.
Consider this: only 11% of the Fortune 500 companies from 1955 still exist today, while the average time that companies stay in the top 500 has fallen from 75 years to 15 years.
In this age of rapid change, those who lag behind become irrelevant– in a heartbeat.
Countries whose governments grow old face the same fate as outdated companies.
Their choice is simple: innovate or become irrelevant.
The race for national competitiveness is every bit as fierce as the competition among companies in the marketplace.
Countries compete for investment, talent, growth, and opportunity in a globalized world, and those that are pushed out of the running surrender the greatest prize of all: human development, prosperity, and happiness for their people.
To avoid this fate, governments must focus on what really matters: how to be like the 11% of companies that have remained, through the decades, in the top 500.
The lifecycle of companies should teach governments that the secret of eternal youth is constant innovation – seizing opportunities and behaving like the dynamic, entrepreneurial companies that are defining today’s world and shaping its future.
The key to corporations’ rejuvenation, civilizations’ evolution, and human development in general is simple: innovation.
I am always amazed when governments think they are an exception to this rule.
Innovation in government is not an intellectual luxury, a topic confined to seminars and panel discussions, or a matter only of administrative reforms.
It is the recipe for human survival and development, the fuel for constant progress, and the blueprint for a country’s rise.
The first key to business-like innovation in government is a focus on skills.
Top-tier companies continuously invest in their employees to provide them with the right skills for the marketplace.
Governments must do the same, by constantly upgrading skills and nurturing innovation – among their own employees, across key sectors of the economy, and at the foundations of the education system.
Governments that fail to equip new generations with the skills needed to become leaders for their time are condemning them to be led by other, more innovative societies.
A United States Department of Labor study found that 65% of children currently in primary school will grow up to work in jobs that do not exist today.
Another study at Oxford University found that 47% of job categories are at high risk of ceasing to exist because they can be automated through technology.
So, how do we prepare our children and future generations for such times?
How do we equip our countries to compete, not only today, but in the coming decades as well?
The answer lies in honing our children’s creativity, and providing them with the analytical and communication skills needed to channel it toward productive ends.
The second key to transforming governments into engines of innovation is to shift the balance of investment toward intangibles, as in the private sector.
Whereas more than 80% of the value of the Standard &amp;
Poor’s 500 consisted of tangible assets 40 years ago, today that ratio is reversed: more than 80% of the largest companies’ value is intangible – the knowledge and skills of their employees and the intellectual property embedded in their products.
Governments, too, should think strategically about shifting their spending away from tangible infrastructure like roads and buildings, and toward intangibles like education and research and development.
It is no secret that the US and Europe, combined, spend more than $250 billion of public funds annually on R&amp;D to maintain their leading positions.
Likewise, a key driver of rapid development in countries like Singapore, Malaysia, and South Korea has been their strategic decision to shift public expenditure away from hard infrastructure and toward the “soft” infrastructure needed to build and sustain a knowledge economy.
Likewise, the British government spends markedly more of its budget on such intangibles than on tangible assets.
Most of today’s transformative companies are well known for having an innovative corporate culture and working environment that inspires and empowers employees.
Governments that set an example for innovation have the power to implant a nationwide culture of creativity.
When such a culture takes root, people feel inspired to run further with their ideas, to aim higher with their ambitions, and to pursue bigger dreams.
That is how countries that encourage innovation take the lead – and stay there.
To sustain innovation, businesses must attract and retain the most creative and productive minds.
In this age of global mobility, countries, too, go head to head in the battle for talent. Global cities compete to provide an ideal life and work environment for innovators, and to harness their creativity to become stronger and more competitive still.
Innovative governments do the same thing on a national scale.
They attract talent, perform efficiently, and continually upgrade their systems and services.
They empower citizens to cultivate their collective energy and develop their potential, and thus become drivers of their countries’ growth and advancement in the world arena.
Above all, they value human minds and help people become better guardians and builders of our planet.
For governments, innovation is an existential question.
Only those that sustain innovation can drive change in the world, because they are the governments that never grow old.
Fraud, Fools, and Financial Markets
NEW HAVEN – Adam Smith famously wrote of the “invisible hand,” by which individuals’ pursuit of self-interest in free, competitive markets advances the interest of society as a whole.
And Smith was right: Free markets have generated unprecedented prosperity for individuals and societies alike.
But, because we can be manipulated or deceived or even just passively tempted, free markets also persuade us to buy things that are good neither for us nor for society.
This observation represents an important codicil to Smith’s vision. And it is one that George Akerlof and I explore in our new book, Phishing for Phools: The Economics of Manipulation and Deception.
Most of us have suffered “phishing”: unwanted emails and phone calls designed to defraud us.
A “phool” is anyone who does not fully comprehend the ubiquity of phishing.
A phool sees isolated examples of phishing, but does not appreciate the extent of professionalism devoted to it, nor how deeply this professionalism affects lives.
Sadly, a lot of us have been phools – including Akerlof and me, which is why we wrote this book.
Routine phishing can affect any market, but our most important observations concern financial markets – timely enough, given the massive boom in the equity and real-estate markets since 2009, and the turmoil in global asset markets since last month.
As too many optimists have learned to their detriment, asset prices are highly volatile, and a whole ocean of phishes is involved.
Borrowers are lured into unsuitable mortgages; firms are stripped of their assets; accountants mislead investors; financial advisers spin narratives of riches from nowhere; and the media promote extravagant claims.
But the losers in the downturns are not just those who have been duped.
A chain of additional losses occurs when the inflated assets have been purchased with borrowed money.
In that case, bankruptcies and fear of bankruptcy spawn an epidemic of further bankruptcies, reinforcing fear.
Then credit dries up and the economy collapses.
This vicious downward spiral for business confidence typically features phishes – for example, the victims of Bernard Madoff’s Ponzi scheme – discovered only after the period of irrational exuberance has ended.
Epidemics, in economics as much as in medicine, call for an immediate and drastic response.
The response by the authorities to the Great Crash of 1929 was small and slow, and the world economy entered a “Dark Age” that lasted through the Great Depression of the 1930s and the Second World War.
The 2007-2009 financial crisis portended a similar outcome, but this time the world’s governments and central banks intervened promptly, in a coordinated fashion, and with an appropriately high volume of stimulus.
The recovery has been weak; but we are nowhere near a new Dark Age.
For that we should be grateful.
Yet some now argue that the fiscal and monetary authorities should not have responded so quickly or strongly when the 2007-2009 crisis erupted.
They believe that the primary cause of the crisis was what economists call moral hazard: because risk-takers expected that the authorities would intervene to protect them when their bets went awry, they took even greater risks.
By contrast, our view (supported by plenty of data) is that rapidly rising prices usually reflect irrational exuberance, aided and abetted by phishes.
The irrationally exuberant were not thinking of the returns they would garner if the authorities intervened to maintain the economy and the flow of credit (or, in extreme cases, moved to bail out their bank or enterprise).
Such possibilities were a marginal consideration in the euphoria preceding the 2007-2009 crisis: those selling at inflated prices were making profits; and buyers “knew” they were doing the right thing – even when they weren’t.
The reluctance to acknowledge the need for immediate intervention in a financial crisis is based on a school of economics that fails to account for the irrational exuberance that I have explored elsewhere, and that ignores the aggressive marketing and other realities of digital-age markets examined in Phishing for Phools.
But adhering to an approach that overlooks these factors is akin to doing away with fire departments, on the grounds that without them people would be more careful – and so there would then be no fires.
We found out many years ago, to the world’s great regret, what happens when a financial epidemic is allowed to run its course.
Our analysis indicates that not only are there endemic and natural forces that make the financial system highly volatile; but also that swift, effective intervention is needed in the face of financial collapse.
We need to give free rein to fiscal and monetary authorities to take aggressive steps when financial turmoil turns into financial crisis.
Governments Without Opposition
America's mid-term elections provide the latest example of an expanding phenomenon: democratic governments that face no effective challenge by an opposition.
More precisely, this phenomenon entails the growing number of democratically elected political leaders who do not confront alternative leaders able to gather the disaffected into a viable opposition.
The phenomenon is by no means confined to what once was the political right.
Britain is nowadays experiencing what can almost be called the self-destruction of the opposition Conservative Party.
For the third time in seven years the Tories are devouring their own leader, without any viable alternative leader for the party anywhere in sight.
In Germany, Gerhard Schröder's narrow victory is made secure by the intense soul-searching now underway among the defeated Christian Democrat opposition, as well as because of the moral collapse of the CDU's junior partner, the Free Democrats.
Even more starkly unbalanced political landscapes can be found in France and Italy, where neither President Chirac nor Prime Minister Berlusconi need fear their challengers; indeed neither has a challenger to speak of.
Moreover, this situation is not confined to Europe.
The self-destruction of the Congress Party has left India's government unworried by any political threat from outside its own ranks.
In Russia, President Putin bestrides his country's elected Duma like Gulliver over the Lilliputians.
How and why has this happened?
How, in particular, can this situation be explained in view of the fact that today's unchallenged heads of government are (at least for the most part) not towering leaders whose charisma shields them from opposition?
One reason is the ongoing personalisation of politics that is taking place everywhere in the world.
Whether someone is charismatic or not, voters want a figurehead, and preferably one with celebrity value.
This 'celebrity' may be based on personality, as with Blair and Berlusconi, or on circumstance, as with Bush and Schröder and Putin, but it is part and parcel of the new politics of media appeal.
Behind this, however, lies a deeper change to democracy.
The end of ideology has been invoked so often that one hesitates to repeat the phrase.
Still, it is a fact that in all cases of governments without effective opposition it is not easy to formulate an electorally viable alternative policy to challenge the leaders.
Mr Putin is perhaps the most exteme in this regard, but Blair and Berlusconi are not far behind in possessing this "policy immunity."
They could form coalitions with anyone, not least with each other, whatever their traditional political affiliations may be.
It is difficult to trip them up by offering alternative policies in any field.
However, this condition may not last.
In at least two respects, alternative policy options are beginning to emerge, and these may one day dominate public debate.
Domestically, there is an obvious difference between advocates of a "European model" of social and moral capitalism and others who adhere to the neoliberal "Washington consensus" that Europeans associate with America's economic model.
Internationally, the clash between unilateralists and multilateralists is not confined to the United States.
Some see it, in present circumstances, as a clash between peace by negotiation and active, even pre-emptive intervention.
Then there are the great unspoken issues.
Law and order is on the agenda of most governments, but many voters feel that it still does not have proper prominence.
Immigration is regarded as a deep threat by many people, so that demagogues are increasingly able to marshal resentment and grassroots support.
In the EU, European integration is taken for granted by most political parties in the older member states of the Union, but a sizeable portion of these electorates have doubts about it, and in the EU's candidate countries, the doubts run even stronger.
Thus, despite today's political quiet, major cleavage between apparently unchallenged leaders and shifting popular moods may be gaining strength below the surface.
This disquiet is expressed in several ways.
One is through voter apathy.
Most of the leaders mentioned earlier command a strong loyalty from only a small minority of their total electorates, so their legitimacy is dubious.
Another takes the form of "opposition by media."
This has become an issue in a number of countries, and it has led some governments (as President Putin's did recently) to try and curb freedom of expression.
Then there is the tell-tale emergence and disappearance of protest parties like the Dutch groups gathered by the murdered Pim Fortuyn.
The tale they tell is one of the failure of democratic institutions as they now stand.
This tale is further underlined by the growing role of "the street," of demonstrations of public irritation focusing on particular issues but really directed against unchallenged governments.
The result is a worrying combination of creeping authoritarianism among those who rule with a growing unrest of the ruled.
As so often the case, there is no patent medicine against this syndrome.
However, the crying need for an effective institutional, usually parliamentary, opposition is evident.
Governments without opposition pose a threat to democracy itself.
To defend our liberty we need domestic democracy at least as much as a readiness to attack whatever "forces of evil" may exist elsewhere in the world.
Grading Obamanomics
PALO ALTO – It is still too soon to gauge the full economic impact of President Barack Obama’s implemented and proposed policies, but a preliminary read indicates limited short-term benefit at large long-term cost.
The administration is exploiting a crisis atmosphere to enact a vast agenda that would reengineer the American economy, from autos and financial services to health care, energy, and the distribution of income.
Obama outsourced the details of the $787 billion fiscal stimulus to Congress and, no surprise, the old barons of the House stuffed it with pork and social engineering.
Several months later, only 4%-6% of the funds have been spent, and the federal government is brow-beating state governments – for example, demanding that California rescind a small pay cut for some unionized workers or lose $7 billion in stimulus funds.
(Intervening in contractual relations ex post to enforce union demands is an emerging characteristic of the administration).
The foreclosure relief plan is off to an even slower start, and is likely to run into numerous problems concerning how to rework delinquent mortgages without inducing a lot more delinquencies.
So score the stimulus a very expensive, largely wasted opportunity.
Instead, Obama could, for example, have suspended the payroll tax for a year, getting money directly into people’s pockets quickly and decreasing the need for firms to lay off workers.
Obama’s long-run budget calls for much higher spending, higher taxes, and an explosion of debt that will crowd out borrowing in capital markets by private companies, state and local governments, and developing countries.
Obama would add $6.5 trillion to the United States’ national debt, more than all previous presidents, from George Washington to George W. Bush, combined.
That is in addition to explicit tax hikes on income, capital gains, and dividends, the implicit ones on energy via cap-and-trade, etc. It appears that the Obama strategy is to “stuff the beast” (the mirror image of the tax-cutting “starve the beast” philosophy attributed to some of President Ronald Reagan’s advisers), i.e., to initiate massive spending and hide the true cost from citizens.
The large deficits will eventually force much higher taxes, such as a national value-added tax similar to those in Europe, or gigantic increases in everyone’s income taxes.
The Federal Reserve lowered its target federal funds rate to zero before Obama was inaugurated, and initiated many programs to try to revive credit markets, with mixed results (the commercial paper facility has helped, whereas others seem to have gotten off to less sanguine starts).
The Fed’s independence is a key component of its anti-inflation credibility, and a key test for Obama will be to support the Fed’s efforts to withdraw the liquidity before substantial inflation pressures assert themselves several years from now.
The Obama administration also seems to be heading toward regulating derivatives and financial institutions deemed too big to fail.
America does need a clearinghouse for derivatives, and a much higher percentage of derivative trading should take place on exchanges, rather than bilaterally over the counter.
Any institution that is or could quickly become too big to fail needs to have adequate capital (rising with size), and real-time continuous monitoring of risk, but these measures should be implemented without overbearing micromanagement.
Unfortunately, the Obama administration’s decision to put the unions ahead of secured debt-holders in the orchestrated Chrysler bankruptcy risks rupturing the basic fabric of credit markets.
But Treasury Secretary Timothy Geithner’s much-ridiculed bank “stress tests” made sense (although one can argue that sufficiently dire scenarios were not included or that too much was negotiated with the banks, etc.).
Determining the size of likely losses is necessary to decide whether banks’ retained earnings from profitable ongoing operations and their ability to raise private capital will allow them to work down their toxic assets over time.
If not, more draconian solutions will be necessary.
I support Geithner’s plan to cooperate with private investors in dealing with the banks’ toxic assets, because they make better business decisions than government bureaucrats.
But the Fed’s low-interest, non-recourse loans to buy up toxic assets have not yet caused a stampede of participants.
Will banks be willing to part with the assets at a low enough price to attract private investment?
And would doing so force larger write-downs, requiring banks, in turn, to ration credit – and thus harming the economy?
Obama has been better than feared on international trade.
He was famously protectionist during the primaries, declaring he would unilaterally rewrite NAFTA.
But, while he has continued his softer tone since the election, he has not even bothered to ask for fast-track trade-promotion authority, let alone try to pump new life into the Doha Round of global trade talks.
Obama is getting a large part of his agenda.
Unfortunately, the numbers don’t add up and he is laying twin time bombs with the explosion of federal government debt and inefficient government micromanagement of the economy.
His call for immense deficits even once the economy is back to normal, funds are returned from the financial bailouts, and the US is out of Iraq – is simply irresponsible.
The American economy will likely return to growth late this year and next, especially with all the monetary and fiscal stimulus (growth would have initially been slower and then much stronger without it), but it will still be an economy on a government lifeline.
The big questions left unanswered are how far Obama wants to push the US toward a European-style social-welfare state, how he intends to pay for it, and how much long-term economic damage will result?
Grandmasters and Global Growth
CAMBRIDGE – As the global economy limps out of the last decade and enters a new one in 2010, what will be the next big driver of global growth?
Here’s betting that the “teens” is a decade in which artificial intelligence hits escape velocity, and starts to have an economic impact on par with the emergence of India and China.
Admittedly, my perspective is heavily colored by events in the world of chess, a game I once played at a professional level and still follow from a distance.
Though special, computer chess nevertheless offers both a window into silicon evolution and a barometer of how people might adapt to it.
A little bit of history might help.
In 1996 and 1997, World Chess Champion Gary Kasparov played a pair of matches against an IBM computer named “Deep Blue.”
At the time, Kasparov dominated world chess, in the same way that Tiger Woods – at least until recently – has dominated golf.
In the 1996 match, Deep Blue stunned the champion by beating him in the first game.
But Kasparov quickly adjusted to exploit the computer’s weakness in long-term strategic planning, where his judgment and intuition seemed to trump the computer’s mechanical counting.
Unfortunately, the supremely confident Kasparov did not take Deep Blue seriously enough in the 1997 rematch.
Deep Blue shocked the champion, winning the match 3.5 to 2.5.
Many commentators have labeled Deep Blue’s triumph one of the most important events of the twentieth century.
Perhaps Kasparov would have won the rematch had it continued to a full 24 games (then the standard length of world championship matches).
But, over the next few years, even as humans learned from computers, computers improved at a far faster pace.
With ever more powerful processors, silicon chess players developed the ability to calculate so far ahead that the distinction between short-term tactical calculations and long-term strategic planning became blurred.
At the same time, computer programs began to exploit huge databases of games between grandmaster (the highest title in chess), using results from the human games to extrapolate what moves have the highest chances of success.
Soon, it became clear that even the best human chess players would have little chance to do better than an occasional draw.
Today, chess programs have become so good that even grandmasters sometimes struggle to understand the logic behind some of their moves.
In chess magazines, one often sees comments from top players such as “My silicon friend says I should have moved my King instead of my Queen, but I still think I played the best ‘human’ move.”
It gets worse.
Many commercially available computer programs can be set to mimic the styles of top grandmasters to an extent that is almost uncanny.
Indeed, chess programs now come very close to passing the late British mathematician Alan Turing’s ultimate test of artificial intelligence: can a human conversing with the machine tell it is not human?
I sure can’t.
Ironically, as computer-aided cheating increasingly pervades chess tournaments (with accusations reaching the highest levels), the main detection device requires using another computer.
Only a machine can consistently tell what another computer would do in a given position.
Perhaps if Turing were alive today, he would define artificial intelligence as the inability of a computer to tell whether another machine is human!
So has all this put chess players out of work? Encouragingly, the answer is “not yet.”
In fact, in some ways, chess is as popular and successful today as at any point in the last few decades. Chess lends itself very well to Internet play, and fans can follow top-level tournaments in real time, often with commentary.
Technology has helped thoroughly globalize chess, with the Indian Vishy Anand now the first Asian world champion, and the handsome young Norwegian Magnus Carlsen having reached rock-star status.
Man and machine have learned to co-exist, for now.
Of course, this is a microcosm of the larger changes that we can expect.
The horrible computerized telephone-answering systems that we all now suffer with might actually improve.
Imagine, someday you might actually prefer digital to human operators.
In 50 years, computers might be doing everything from driving taxis to performing routine surgery.
Sooner than that, artificial intelligence will transform higher learning, potentially making a world-class university education broadly affordable even in poor developing countries.
And, of course, there are more mundane but crucial uses of artificial intelligence everywhere, from managing the electronics and lighting in our homes to populating “smart grids” for water and electricity, helping monitor these and other systems to reduce waste.
In short, I do not share the view of many that, after the Internet and the personal computer, it will be a long wait until the next paradigm-shifting innovation.
Artificial intelligence will provide the boost that keeps the teens rolling.
So, despite a rough start from the financial crisis (which will still slow global growth this year and next), there is no reason why the new decade has to be an economic flop.
Barring another round of deep financial crises, it won’t be – as long as politicians do not stand in the way of the new paradigm of trade, technology, and artificial intelligence.
The Czar of the French
MOSCOW – Vladimir Putin has finally done it.
Russia has been vying for the West’s esteem for centuries, with approval by the French – a sought-after prize since the time of Peter the Great – coveted the most. But, despite the defeat of Napoleon and the World War I alliance, Russia could never get any respect from France.
Indeed, the Marquis de Custine’s Letters from Russia suggested that Russian civilization amounted to little more than the mimicry of monkeys.
But now the French seal of approval seemingly has been bestowed.
And what a gargantuan seal it is, coming in the corpulent form of the actor Gérard Depardieu, who sought – and has now received – Russian citizenship.
Along with a passport comes an offer of a free apartment in the Mordovia region (still a Gulag site) and even a job as the local culture minister.
Two centuries after French troops were run out of Moscow in 1812, Putin has succeeded in making a French popular idol want to be Russian.
In Russia and elsewhere, the French are often perceived to feel and act superior.
And who could blame them?
French artistic beauty is second to none.
The French are the arbiters of European culture, and have long been among the shrewdest observers of other countries’ manners and mores.
Indeed, in the 1830’s, two Frenchmen, Alexis de Tocqueville and Custine, went to the outskirts of civilization to describe the future superpower rivals, America and Russia.
Until 1861, Russia was a backward country in which serfdom reigned and royals and aristocrats envied the latest French fashions.
From Alexander Pushkin’s poems to Leo Tolstoy’s novels, French influence pervades the commanding heights of Russian culture.
Russia’s most famous museum, the Hermitage, is second only to the Louvre in its collection of French art.
Peter the Great, in his eighteenth-century effort to Westernize Russia, invited Jean-Baptiste Le Blond to become the chief architect of his new capital, St. Petersburg.
But forget Peter the Great: Now “Vova the Little” – or Lilli-Putin, as Georgia’s sharp-tongued president, Mikheil Saakashvili, once dubbed Russia’s president – may have pulled off an even greater coup.
When Depardieu was planning to cross the border into dull little Belgium to avoid French taxes, the Russians made him an offer that he could not refuse: not just a flat 13% income-tax rate, but a chance to poke French President François Hollande in the eye.
The ever-vain Depardieu (and what actor isn’t vain?) will be a god in Russia.
We love the French in general, but we adore him in particular.
After all, he starred in the 2011 film about the life of the mad monk Grigory Rasputin.
He was portly Porthos in Alexander Dumas’s classic The Three Musketeers (in 1998’s The Man in the Iron Mask), and played the lead in the film version of Edmond Rostand’s Cyrano de Bergerac (1990), which is almost as popular with Russians as Pushkin’s Eugene Onegin.
Like all Russian leaders, Putin affects a deep love of culture.
In the absence of fair elections, Kremlin occupants traditionally seek legitimacy by attracting artists to their side: if a beloved actor, writer, sculptor, or musician loves Putin, how could anyone feel otherwise?
I myself once witnessed Putin courting culture.
It was New Year’s Eve 2003, during a concert at the newly opened House of Music in Moscow.
Directly across the aisle from me, there was Putin, sitting between the one-time dissident cellist and conductor Mstislav Rostropovich and his equally famous wife, opera diva Galina Vishnevskaya.
Russia’s leader was like a kid in a candy store – thrilled to be surrounded by these cultural icons, former exiles no less.
And the icons were obviously flattered by Putin’s adoration (and by their proximity to power).
Putin has finally proved that he is capable of exploits that no czar could accomplish.
All that tough anti-Western rhetoric on behalf of the nation – the bare-chested horsemanship, the kissing of tigers, and the flying with cranes – has paid off: the aloof French have at long last recognized Russian superiority and are sending one of their greatest representatives to partake of it.
Indeed, not long after Depardieu’s change of allegiance, a French icon of an even older vintage, Brigitte Bardot, suggested that she, too, might embrace Russia.
In her own words, she “decided to seek Russian nationality in order to flee this country, which is nothing but an animal cemetery,” because it has “the cowardice and impudence” to consider euthanizing two elephants in the Lyon zoo.
Putin does share Bardot’s love of animals – not only his pets (especially his dog Koni, whose consolation he allegedly seeks when grieving), but also the co-stars of his mostly animal-centered publicity stunts.
It is with less obedient people that he has problems – say, Mikhail Khodorkovsky, imprisoned for more than ten years after backing Putin’s political opponents; Anna Politkovskaya, brutally murdered in 2006 for her investigative reporting on his regime’s misdeeds in Chechnya; and Sergei Magnitsky, a whistleblowing lawyer who died in prison in 2009 after being refused medical treatment.
Putin’s most vocal current foe, the lawyer Alexei Navalny, has been investigated three times for supposedly stealing millions of dollars.
But one has to appreciate the historical absurdity.
Putin, after more than a decade in power, has lost the support of his own, usually quiescent citizens, who have had rather limited experience with democracy.
And it is the French, the avatars of Enlightenment and the Rights of Man, who have stepped in to provide a patina of legitimacy to his political twilight.
The Grassroots of Climate Change
PARIS – The climate-change agreement reached here on December 12 was a rich victory for diplomacy.
Both the agreement itself and the atmosphere of cooperation that permeated the proceedings represent a sea change from the failed Copenhagen summit in 2009.
But while we should congratulate world leaders on their success, Paris marks the beginning, not the end, of the road.
It is now our collective duty to hold our leaders to account and ensure that they turn promises into action – especially in the world’s most vulnerable regions, such as Africa.
We should applaud China, India, the United States, and the European Union for their pre-Paris pledges on climate action.
These countries’ commitments created the sense of responsibility, trust, and solidarity that enabled 195 nations not merely to agree on a one-off deal, but to set in motion a series of increasingly ambitious five-year cycles to phase out greenhouse-gas emissions this century.
This is a clear signal that the carbon era has reached a turning point; as a result, there will be more investment in renewable energy.
Countries also promised to work harder to protect the world’s most vulnerable, by aiming to limit average global warming to as little as 1.5º Celsius above pre-industrial levels.
And developed countries pledged at least $100 billion of annual climate finance to help the least developed countries cut their carbon emissions and prepare for climate change.
For the first time, an international agreement offers the least developed countries funds to cover some of the loss and damage caused by climate shocks.
But in order to fulfill the Paris agreement, we must ensure that governments keep their promises.
National emissions targets are voluntary, rather than inscribed in the agreement, so they are not legally binding.
In hard, practical terms, there is not yet anything specific to slow the extraction of fossil fuels or stop high-polluting countries from using coal for electricity.
Developed countries made no individual commitments, and the starting year for funding adaptation assistance remains unclear.
We must keep the pressure on to make sure that the promised climate finance is sufficient to enable the least-developed countries to adapt to present and future climate change.
All of this must happen urgently.
The cumulative effect of previous decades of emissions means that there will be no chance for a last-minute solution.
In Africa, climate change may already be responsible for falling water levels in West African rivers; declining coral reefs in tropical waters; lower fruit production in the Sahel; fewer fish in the Great Lakes region; and the spread of malaria in the Kenyan uplands.
Without significant cuts in greenhouse-gas emissions, we will see far worse.
By threatening basic human needs, such as food and water, climate change will be a catalyst for instability, migration, and conflict.
Africa will pay a heavy price.
Fortunately, we now know that we can prevent catastrophic climate change while still providing the energy needed to sustain economic growth, create jobs, and lift millions of people out of poverty.
The many benefits of pursuing a low-carbon development path include not only cleaner air and better energy security, but also the opportunities that arise from decentralized and renewable power.
These opportunities are particularly crucial for Africa, where more than 620 million people live without electricity.
The falling cost of solar power, batteries, and LED lighting means that renewable sources can now provide affordable, modern energy.
In Kenya, for example, Maasai women in Magadi who have been trained to install solar power have brought electricity to 2,000 households in just two years.
But to realize this economic and social potential, African leaders must combat corruption.
They must make the management of their utilities more transparent, strengthen regulations, and increase public spending on energy infrastructure.
Investment and external financing must follow.
This is not a question of aid, but of fairness, given that Africa contributes so little to global emissions but stands to suffer the most from climate change.
Investing in low-carbon energy also makes sound business sense: It boosts technology companies and promotes social entrepreneurship globally.
I am pleased that two initiatives launched in Paris will take us farther down the renewable-energy path.
Europe and Canada pledged $10 billion toward an ambitious project called the Africa Renewable Energy Initiative, which aims to install ten gigawatts of solar, wind, and geothermal capacity by the end of the decade.
And France and India launched the International Solar Alliance to raise more than $1 trillion by 2030 to deploy solar power in more than 100 developing countries.
The Paris agreement has drawn the first broad strokes of a solution to climate change.
But until its targets are translated into action, the world’s least-developed countries may not be convinced that the developed countries are serious about equity – or “climate justice.”
For Africa, 2015 must be a turning point.
If the world’s citizens hold their leaders to account for the targets they have set, it will be.
Quite simply, the historic responsibility for the planet’s future rests on the shoulders of us all.
Grassroots Democracy in China
Critical assessments of grassroots democracy in rural China are hard to make: have the reforms that have been undertaken created a genuine democracy that represents a significant step toward participatory government?
If so, can they be implemented beyond the village level?
Where does China's Communist government fit in?
What role will elected village leaders play in the future?
In 1987, the Chinese government quietly launched a program of self-governance at the village level.
Originally intended as a means to liberalize agriculture and stimulate economic growth by allowing villagers to freely decide what they would produce, reform-minded officials of the Ministry of Civil Affairs soon introduced local elections that allowed rural farmers to elect local leaders.
Gradually, local elections spread to nearly every village and a simple decentralized system of checks and balances between the village committee chief and the village assembly was established.
Rural farmers found themselves empowered to organize themselves, criticize some authorities and even dismiss their village chief.
However, democratization has been a local phenomenon limited to the village level.
As a country, China remains an authoritarian regime and decision-making is highly centralized.
Nonetheless, the emergence of grassroots democracy transformed village power structures by returning political power to the will of the people.
As local elections and the right to freely nominate candidates becomes increasingly institutionalized, the centralized power structure of the Party will be slowly eroded by the people's growing desire for self-determination.
True to its name, grassroots democracy has planted the seeds for future change.
Certainly, this scenario is at odds with the Chinese Communist Party.
In recent years, the Party made determined efforts to weaken village democracy while preserving the fiscal benefits of rural economic liberalization.
One strategy for neutralizing local politics can be seen in Party attempts to exert greater influence through the installation of Party officials as heads of village committees.
A second method has been to actively interfere and encroach upon village government affairs through higher-level township officials.
Such strategies complicate rural politics by producing a highly contentious dual power structure that pits party secretaries and village committee chiefs against one another.
However, despite government attempts at control, the proliferation of rural elections has already laid a solid groundwork for a nation-wide transformation.
The establishment of local electoral systems and self-governance has raised democratic consciousness, which will serve as a powerful foundation for future demands for ever higher levels of democratization.
Already, township elections are widely welcomed as a mechanism to stamp out rampant political corruption, as well as reduce conflicts between peasants and the government.
Three years ago, under the direction of liberal local cadres, the town of Buyan, in Sichuan Province, held the first-ever direct election of a township chief, the next level of governance above the village.
Numerous towns have attempted to follow with elections of their own of this type.
Demand for township elections is strong, but high-level Party cadres fear a possible further loss of control if townships go the way of villages in terms of elections.
In response, the Chinese government prohibited township level direct elections earlier this year.
Despite this disappointing setback, prospects for higher-level democratization within China will continue.
Grassroots democracy may at present be limited to the village level, but the Chinese people have tasted democracy and self-governance for the first time and like it.
Although the future of local elections and grassroots democracy may appear precarious in the face of government opposition, the experience of democratic empowerment, and the expression of popular will this has allowed, has left a deep and indelible impression on ordinary rural Chinese people.
Political rights and local elections may be at the mercy of the Party, but the historical memory of millions of people will not so easily be erased.
Grassroots democracy may be momentarily suppressed, but once the seeds have been planted, the roots can only grow deeper and deeper before an inevitable bloom.
Until that time, village level democracy will continue to inform and educate individual rural Chinese on the fundamental aspects of participatory government.
Calls for political reform are strong at all levels in China.
Consequently, it is only a matter of time before calls for democratic reform spread to cities and urban communities.
The question is no longer ``if'' but ``when.''
The political future of China, and arguably the survival of the Chinese Communist Party, rests on whether the Chinese government chooses to wisely continue to scatter and cultivate the seeds of democracy or foolishly attempt to thwart their inexorable growth.
The Party must make a choice, for the seeds of democracy have been planted, and the People are growing ever hungrier for more than a mere taste.
Revanchist China
SYDNEY – In a speech at the Center for Strategic and International Studies in Washington, DC, on February 22, Japanese Prime Minister Shinzo Abe informed the audience of officials, experts, and journalists that Japan is “back” and will not stand down in its ongoing sovereignty dispute with China over the Senkaku/Diaoyu Islands.
With Chinese provocations on the rise, US President Barack Obama, Abe’s host, appealed for calm and restraint on both sides.
Japan is likely to accede – grudgingly – to America’s request, as it remains dependent on its alliance with the US for its security.
But it will be much more difficult to persuade China that it should stand down.
China’s assertiveness over its sovereignty claim reflects more than a desire to exploit seabed resources, or to gain a widened strategic gateway into the western Pacific.
It is also about national renewal and rejuvenation – the core of the Chinese Communist Party’s raison d’être.
Turning away from a fight with its former occupier and historical rival would be a step backward in this six-decade-long quest.
The idea of Chinese renewal or rejuvenation was popularized by then-Premier Zhao Ziyang in the late 1980’s, and frequently promoted by Presidents Jiang Zemin and Hu Jintao.
Most recently, incoming President Xi Jinping, visiting the National Museum of China’s “Road Toward Renewal” exhibition, pledged to continue the “great renewal of the Chinese nation.”
What does “renewal” or “rejuvenation” mean to the Chinese?
All nations – great and small – embody a combination of historical fact and myth.
In this case, the CCP’s view of rejuvenation is built on the belief that the zenith of Chinese power under the Ming and Qing dynasties represents the natural, just, and permanent state of affairs for a 5,000-year-old civilization.
When Mao Zedong took power in 1949, his immediate goal was to re-establish the “greater China” of the Qing Dynasty (1644-1912), insisting that the Manchu-led empire was the permanent and enduring China.
But, while the assault on the Qing Dynasty by foreign powers is a historical fact, the notion that there has been one enduring China struggling against avaricious outsiders across several millennia is false and self-serving.
Mao achieved his goal following the so-called peaceful liberation of the East Turkestan Republic (now Xinjiang) in 1949 and the invasion of Tibet in 1950, which promptly increased China’s size by more than one-third.
And every CCP leader since has carried forward his vision of a greater China, adjusting and expanding it as the country’s power grows.
For example, China showed little interest in the Senkaku/Diaoyu Islands prior to 1968 – the year a geographical study pointed to vast oil reserves beneath the seabed.
The same can be said for China’s growing stridency with respect to its claims in the South China Sea.
In 2009, relying heavily on a dubious historical claim, China formally tabled its “nine-dotted line” map to the United Nations Commission on the Limits of the Continental Shelf, and has since referred to almost all of the South China Sea as being under its “indisputable sovereignty.”
Having dominated East and Southeast Asia for all but the last two centuries of the past two millennia, China is chafing at the current US-led regional order of sovereign states, in which even the smallest enjoys the same rights, privileges, and protection as the largest.
Modern China has benefited enormously from this arrangement; nonetheless, there is keen resentment that the Chinese civilization-state’s vast achievements over several thousand years offer China no special status.
To a people imbued with a deep sense of superior moral worth, historical achievement, and victimization by foreign powers, this state of affairs is unjust and unnatural.
It follows that pulling back from any territorial dispute with smaller and inferior states would be seen as a humiliating defeat, rather than a step toward ensuring long-term regional stability.
Moreover, an expanding view of greater China implies that a resolution of the dispute over the Senkaku/Diaoyu Islands in China’s favor would be likely to embolden rather than satisfy its ambitions.
Making good on its claim to the South China Sea could be next.
As Obama and Abe forge a common strategy aimed at helping to manage China’s rise peacefully, they must understand that China’s conception of renewal seeks to resurrect a glorious past, and that this implies revision, not affirmation, of the existing regional order.
This means that they will have to limit China’s strategic and military options, even if they cannot constrain its ambitions.
Europe’s Last Act?
NEW YORK – European Union leaders continue to play a game of brinkmanship with the Greek government.
Greece has met its creditors’ demands far more than halfway.
Yet Germany and Greece’s other creditors continue to demand that the country sign on to a program that has proven to be a failure, and that few economists ever thought could, would, or should be implemented.
The swing in Greece’s fiscal position from a large primary deficit to a surplus was almost unprecedented, but the demand that the country achieve a primary surplus of 4.5% of GDP was unconscionable.
Unfortunately, at the time that the “troika” – the European Commission, the European Central Bank, and the International Monetary Fund – first included this irresponsible demand in the international financial program for Greece, the country’s authorities had no choice but to accede to it.
The folly of continuing to pursue this program is particularly acute now, given the 25% decline in GDP that Greece has endured since the beginning of the crisis.
The troika badly misjudged the macroeconomic effects of the program that they imposed.
According to their published forecasts, they believed that, by cutting wages and accepting other austerity measures, Greek exports would increase and the economy would quickly return to growth.
They also believed that the first debt restructuring would lead to debt sustainability.
The troika’s forecasts have been wrong, and repeatedly so. And not by a little, but by an enormous amount.
Greece’s voters were right to demand a change in course, and their government is right to refuse to sign on to a deeply flawed program.
Having said that, there is room for a deal: Greece has made clear its willingness to engage in continued reforms, and has welcomed Europe’s help in implementing some of them.
A dose of reality on the part of Greece’s creditors – about what is achievable, and about the macroeconomic consequences of different fiscal and structural reforms – could provide the basis of an agreement that would be good not only for Greece, but for all of Europe.
Some in Europe, especially in Germany, seem nonchalant about a Greek exit from the eurozone.
The market has, they claim, already “priced in” such a rupture.
Some even suggest that it would be good for the monetary union.
I believe that such views significantly underestimate both the current and future risks involved.
A similar degree of complacency was evident in the United States before the collapse of Lehman Brothers in September 2008.
The fragility of America’s banks had been known for a long time – at least since the bankruptcy of Bear Stearns the previous March.
Yet, given the lack of transparency (owing in part to weak regulation), both markets and policymakers did not fully appreciate the linkages among financial institutions.
Indeed, the world’s financial system is still feeling the aftershocks of the Lehman collapse.
And banks remain non-transparent, and thus at risk.
We still don’t know the full extent of linkages among financial institutions, including those arising from non-transparent derivatives and credit default swaps.
In Europe, we can already see some of the consequences of inadequate regulation and the flawed design of the eurozone itself.
We know that the structure of the eurozone encourages divergence, not convergence: as capital and talented people leave crisis-hit economies, these countries become less able to repay their debts.
As markets grasp that a vicious downward spiral is structurally embedded in the euro, the consequences for the next crisis become profound. And another crisis in inevitable: it is in the very nature of capitalism.
ECB President Mario Draghi’s confidence trick, in the form of his declaration in 2012 that the monetary authorities would do “whatever it takes” to preserve the euro, has worked so far.
But the knowledge that the euro is not a binding commitment among its members will make it far less likely to work the next time.
Bond yields could spike, and no amount of reassurance by the ECB and Europe’s leaders would suffice to bring them down from stratospheric levels, because the world now knows that they will not do “whatever it takes.”
As the example of Greece has shown, they will do only what short-sighted electoral politics demands.
The most important consequence, I fear, is the weakening of European solidarity.
The euro was supposed to strengthen it.
Instead, it has had the opposite effect.
It is not in the interest of Europe – or the world – to have a country on Europe’s periphery alienated from its neighbors, especially now, when geopolitical instability is already so evident.
The neighboring Middle East is in turmoil; the West is attempting to contain a newly aggressive Russia; and China, already the world’s largest source of savings, the largest trading country, and the largest overall economy (in terms of purchasing power parity), is confronting the West with new economic and strategic realities.
This is no time for European disunion.
Europe’s leaders viewed themselves as visionaries when they created the euro.
They thought they were looking beyond the short-term demands that usually preoccupy political leaders.
Unfortunately, their understanding of economics fell short of their ambition; and the politics of the moment did not permit the creation of the institutional framework that might have enabled the euro to work as intended.
Although the single currency was supposed to bring unprecedented prosperity, it is difficult to detect a significant positive effect for the eurozone as a whole in the period before the crisis.
In the period since, the adverse effects have been enormous.
The future of Europe and the euro now depends on whether the eurozone’s political leaders can combine a modicum of economic understanding with a visionary sense of, and concern for, European solidarity.
We are likely to begin finding out the answer to that existential question in the next few weeks.
Europe’s Greek Failure
BRUSSELS – Narratives matter, especially when they are intertwined with hard interests.
As Greece and its creditors court catastrophe, we are getting a clear picture of how conflicting narratives can lead to a lose-lose result.
The facts are indisputable.
In early 2010, when the Greek government could no longer finance itself, it turned to its European partners and the International Monetary Fund for financial support.
And they delivered: not only did other eurozone countries issue loans to Greece, but the IMF provided its largest-ever loan to the country.
Later, Greece received even more support through the eurozone’s bailout funds.
The result was hundreds of billions of euros worth of assistance.
But, as time progressed, Greece and its creditors came to view these facts very differently.
As Greece’s economic situation deteriorated, its citizens got the sense that the loans were not really intended to help them, but rather to bail out German and French banks.
With this narrative, Greeks could avoid admitting the role of their own government’s policy mistakes in thrusting them into recession.
Greece’s creditors, by contrast, felt that they had generously saved a profligate country from bankruptcy.
This narrative allowed policymakers in Germany to disregard the fact that their country’s banks had financed Greek borrowing for too long.
Both narratives contain a large amount of truth, but conveniently overlook some important facts.
For instance, a substantial share of the loans given to Greece until early 2012 was indeed used to pay off maturing debt.
But it is likely that the holders of the debt were no longer French or German banks – who for the most part would have been unable to bear the uncertainty that preceded the 2012 bailout and haircut on Greek debt.
By the time the eurozone governments intervened decisively, most French and German banks had largely unloaded their holdings at a loss to hedge funds and other investors with a greater appetite for risk.
Whatever debt they had held onto lost more than half its value in the haircut.
Given this, it cannot be said that French and German banks did not suffer losses.
Similarly, the creditor countries were right that they had helped Greece, a country that had undeniably overspent for years.
Their financial assistance allowed Greece to reduce its fiscal deficits more slowly than if it had simply gone bankrupt in 2010, as it enabled the country to remain connected to financial markets.
In the first quarter of last year, Greece actually experienced a slight uptick in growth and a small decline in unemployment.
What the creditors overlooked was that, over time, the pain of austerity began – in the minds of many Greeks – to outweigh the benefits of their assistance.
Until a few months ago, it still looked as if Greece could achieve a primary surplus, albeit a small one, this year.
When the country turned to its creditors for help, it was only because it could not cover some large payments on maturing loans.
Greece had ceased to be a “bottomless pit.”
With a bit of financial engineering, Greece’s creditors could have postponed some of the payments the country owed this year – payments that, it should be noted, everyone knew it would not be able to repay at this stage – and enabled it to continue its gradual recovery.
Instead, these clashing narratives created a deleterious spiral, fanning the flames of animosity and leading to the election of a left-wing government in Greece with a mandate to oppose austerity – with disastrous results for both sides.
Rather than help Greece make its payments, the creditors reacted by imposing tough conditions for a new loan that would be used only to repay debts that they themselves held – a point that Greek Prime Minister Alexis Tsipras emphasized in his last proposal.
And yet, blaming the creditors for their “punitive” conditions, as Greek negotiators have done, would also be a mistake, for this simplistic narrative too obscures a complicated truth.
Right before the talks were abruptly cut off for Greece to hold its referendum, the two sides had agreed on fiscal targets for Greece; all that was left was to determine how the targets should be reached.
The Greek government wanted to raise some taxes.
Its creditors believed that this approach would stifle growth even more, so they advocated increasing the tax base, such as by eliminating the lower value-added tax rates enjoyed by Greek islands, instead.
Though the creditors’ logic was sound and their intentions laudable, the Greek side believed that such a condition would amount to an affront to their country’s sovereignty.
With that, their narrative morphed into one of national pride.
It was a classic “prisoner’s dilemma.”
Both sides have known throughout the tortuous negotiations of recent months that failure to reach an agreement would benefit no one.
Greece’s economy would contract even further, and its creditors would have to accept even larger write-offs.
But the two sides have remained locked in their respective narratives – narratives that the recent cutoff of negotiations and hastily arranged referendum have reinforced.
Now, the Greek electorate is rejecting the creditors’ demands in the name of national pride, democracy, and sovereignty; the creditors are angry not only at their attitude, but also at their government’s unreliability.
Saving Greece was always going to be difficult, given its previous fiscal excesses and weak economy.
But last year, it seemed that success was within reach – until the clash of narratives derailed the progress the two sides had made.
This highlights a larger problem: the European Union lacks a unifying narrative strong enough to prevent the emergence of conflicting – and highly destructive – narratives within its borders.
In this sense, the failure to save Greece amounts to a failure of Europe.
What the Greek and Iranian Deals Are Not
PARIS – This month’s agreements on the Greek crisis and Iran’s nuclear program are undoubtedly important achievements.
But the comparisons that have accompanied both deals have tended toward hyperbole, impeding rational discussion of their implications for Europe, the Middle East, and the prospects for international diplomacy.
The deal between Greece and its creditors, for example, has been compared to the Treaty of Versailles, with the Greeks forced to accept ruinous terms of “surrender.”
But economic depression, however difficult, is not war, and the position of today’s Greece cannot compare to that of the defeated Germans in 1918.
Meanwhile, opponents of the accord to limit Iran’s nuclear activities for the next 15 years have likened it to the Munich Agreement (shameful appeasement of an evil foe), while its supporters have compared it to the rapprochement between the United States and China in the 1970s.
But the Iranians are nothing like the Nazis, and there is no country like the Soviet Union posing the kind of threat that inspired US President Richard Nixon to head to Beijing in 1972.
Equally problematic has been the tendency to compare the two sets of negotiations to each other.
Beyond timing, they have little in common.
What they do share is that their “success” was driven largely by the sense that powerful external threats made the alternative – no deal at all – much worse.
In Greece’s case, negotiations were propelled by the specter of an embittered Greece cozying up to Russian President Vladimir Putin, with his dangerous revisionist ambitions, or acting as a conduit for Europe-bound migrants.
With Iran, the immediate threat of the Islamic State’s advance proved more frightening than the medium-term prospect of a nuclear-armed Iran.
The only other feature the two agreements share is their incompleteness.
Neither resolved the issue at hand; both simply bought time – time to figure out whether Greece really can remain in the eurozone, and time without Iran in the nuclear club.
As a result, both deals seem more like wagers than agreements.
The Greek bet – whether the country will be able to keep its financial head above water, as it attempts to implement the very difficult structural reforms it has promised – will be decided first.
Indeed, the answer will become clear in a matter of months, or even weeks.
The Iran bet – whether the country will resume its aggressive nuclear ambitions – will probably take much longer to be settled, perhaps eight or ten years.
Of course, Iran may keep up its end of the bargain for the full 15-year timeline, but then what?
Any international negotiation – whether between partners or adversaries – follows a certain logic.
There comes a moment when the negotiating process creates its own dynamic, escaping the control, at least in some ways, of its protagonists.
The challenge is to find the proper point of balance – the “fair compromise” – between the parties.
Here is where the Greek and Iranian negotiations diverge.
Indeed, beyond the appearance of success in both cases, the results have been very different, if not diametrically opposed.
Whereas Greece, the weaker party in its negotiations, was unnecessarily humiliated by its European partners, Iran, also the weaker party in its negotiations, was given new legitimacy by its adversaries in the West.
Family members, it seems, are treated more severely than outsiders.
One might argue that the deal with Iran represents a fundamental shift in the country’s stance toward the West.
But the fact is that, while Iran may be a potential partner, it has long been a tough rival.
The Iranian regime does not share Western values, nor will it anytime soon.
And it is well known that in the Middle East, the enemy of your enemy is not necessarily your friend – not even if that enemy is the Islamic State (or general chaos).
If it is true that too much was extracted from Greece, and too little from Iran, it seems more likely that this reflects a fundamental difference between the Greek and Iranian negotiating positions than a discrepancy in the negotiators’ skill.
Iran is becoming increasingly indispensable to any resolution of the Middle East’s problems, which gives it a degree of clout that Greece, which many in Europe still view as entirely dispensable, does not have.
This explains why US President Barack Obama and his chief negotiator, Secretary of State John Kerry, were dead-set on reaching an agreement with Iran.
Greece’s European partners, by contrast, were deeply divided on whether to give the country the relief it needed to keep it in the eurozone.
To be sure, there were also divisions among Iran’s interlocutors, the five permanent members of the UN Security Council, along with Germany.
But, with China and Russia essentially on its side, at least partly, Iran could exploit those divisions to its advantage.
Greece had no such option.
While Germany and France disagreed on the concessions they were willing to offer, Greece could not pit one position against the other.
Regardless of the merits of French President François Hollande and German Chancellor Angela Merkel as negotiators, the fact is that, with the Greek economy totally dependent on official financing by Europe, Prime Minister Alexis Tsipras was in no position to reject a last-chance agreement.
Perhaps the most important difference between the two deals is that Greece’s fate, though relevant to the world economy, mostly concerns Europe, whereas the accord with Iran has far-reaching consequences, from the balance of power in the Middle East to global nuclear non-proliferation.
Both are incomplete and provisional, fueling skepticism among their critics.
But it also seems clear that both agreements were the best that negotiators could achieve.
To the extent that time heals wounds, that is reason enough for hope.
A Way Out for Greece
QUITO – The Greek crisis is a tragedy for the country and a danger for the world economy.
Germany is demanding that Greece continue to service its debts in full, even though Greece is clearly broke and the International Monetary Fund has noted the need for debt relief.
The collision of reality (Greece’s insolvency) with politics (Germany’s demands) was bound to create a disaster.
And, indeed, it has: the shocking collapse this week of the Greek banking system.
Yet there still is a way out of this mess.
Greece’s debt should be cut sharply, and the country should remain within the eurozone.
In negotiations with its creditors this spring, Greece recognized this, insisting that its debt be reduced.
Germany refused.
Though the United States and the IMF privately sided with Greece, Germany prevailed, as creditors usually do.
Yet creditors sometimes prevail to their own detriment; by pushing the debtor to the breaking point, they end up bringing about a complete default.
Germany’s mistake this past week was to push the Greek economy – already in conditions rivaling those of the Great Depression – into a complete financial collapse.
German Finance Minister Wolfgang Schäuble has a clear negotiating strategy, aimed at getting Greece to agree to leave the eurozone.
Unfortunately for him, Greece does not want to exit, and it cannot be forced to do so under the treaties governing the European Union.
What Greece wants is to remain in the eurozone, with a lower debt burden – a position that is both economically astute and protected by treaty.
Indeed, a euro exit would be remarkably costly for Greece, and would almost certainly create political and social chaos – and perhaps even hyperinflation – in the heart of Europe.
The value of Greek residents’ savings would be slashed, as euros were suddenly converted into New Drachmas.
The middle class would be eviscerated.
And the currency conversion would not save the country one cent with regard to its external debt, which would, of course, remain denominated in euros.
Still, Greece’s debt burden is unsustainable.
This week, Greece defaulted on its payments to the IMF, rightly choosing pensions over debt service.
The country’s creditors should now negotiate a consensual debt reduction through some combination of lower (and fixed) interest rates, reduced face value of debt, and very long maturities.
There are plenty of precedents for such a course.
Sovereign debts have been restructured hundreds, perhaps thousands, of times – including for Germany.
In fact, hardline demands by the country’s US government creditors after World War I contributed to deep financial instability in Germany and other parts of Europe, and indirectly to the rise of Adolf Hitler in 1933.
After World War II, however, Germany was the recipient of vastly wiser concessions by the US government, culminating in consensual debt relief in 1953, an action that greatly benefitted Germany and the world.
Yet Germany has failed to learn the lessons of its own history.
I propose a four-step path out of the Greek crisis.
First, I recommend that the Greek people give a resounding “No” to the creditors in the referendum on their demands this weekend.
Second, Greece should continue to withhold service on its external debts to official creditors in advance of a consensual debt restructuring later this year.
Given its great depression, Greece should use its savings to pay pensioners, provide food relief, make crucial infrastructure repairs, and direct liquidity toward the banking system.
Third, Prime Minister Alexis Tsipras must use his persuasive powers to convince the public, in the style of US President Franklin D. Roosevelt, that the only thing they have to fear is fear itself.
Specifically, the government should make clear to all Greeks that their euro deposits are safe; that the country will remain within the eurozone (despite the false claims by some members of the Eurogroup that a no vote means a Greek exit); and that its banks will reopen immediately after the referendum.
Finally, Greece and Germany need to come to a rapprochement soon after the referendum and agree to a package of economic reforms and debt relief.
No country – including Greece – should expect to be offered debt relief on a silver platter; relief must be earned and justified by real reforms that restore growth, to the benefit of both debtor and creditor.
And yet, a corpse cannot carry out reforms. That is why debt relief and reforms must be offered together, not reforms “first” with some vague promises that debt relief will come in some unspecified amount at some unspecified time in the future (as some in Europe have said to Greece).
To be sure, in the Greek debacle, both sides have made countless mistakes, misjudgments, and misdeeds over the last decade, and even before.
A country does not reach Greece’s parlous state without a generation of egregious mismanagement.
But nor does a country go bankrupt without serious mistakes by its creditors – first in lending too much money, and then in demanding excessive repayments to the point of the debtor’s collapse.
With both sides at fault, it is important for them not to lose the future by squabbling endlessly over the past.
Easing Greece’s debt burden while keeping the country within the eurozone is the correct and achievable path out of the crisis, and it can be accomplished easily through a mutual accord between Germany and Greece, to which the rest of Europe will subscribe.
The result would be a win not only for those countries, but also for the world economy.
A New Deal for Greece
ATHENS – Three months of negotiations between the Greek government and our European and international partners have brought about much convergence on the steps needed to overcome years of economic crisis and to bring about sustained recovery in Greece.
But they have not yet produced a deal.
Why?
What steps are needed to produce a viable, mutually agreed reform agenda?
We and our partners already agree on much.
Greece’s tax system needs to be revamped, and the revenue authorities must be freed from political and corporate influence.
The pension system is ailing.
The economy’s credit circuits are broken.
The labor market has been devastated by the crisis and is deeply segmented, with productivity growth stalled.
Public administration is in urgent need of modernization, and public resources must be used more efficiently.
Overwhelming obstacles block the formation of new companies.
Competition in product markets is far too circumscribed.
And inequality has reached outrageous levels, preventing society from uniting behind essential reforms.
This consensus aside, agreement on a new development model for Greece requires overcoming two hurdles.
First, we must concur on how to approach Greece’s fiscal consolidation.
Second, we need a comprehensive, commonly agreed reform agenda that will underpin that consolidation path and inspire the confidence of Greek society.
Beginning with fiscal consolidation, the issue at hand concerns the method.
The “troika” institutions (the European Commission, the European Central Bank, and the International Monetary Fund) have, over the years, relied on a process of backward induction: They set a date (say, the year 2020) and a target for the ratio of nominal debt to national income (say, 120%) that must be achieved before money markets are deemed ready to lend to Greece at reasonable rates.
Then, under arbitrary assumptions regarding growth rates, inflation, privatization receipts, and so forth, they compute what primary surpluses are necessary in every year, working backward to the present.
The result of this method, in our government’s opinion, is an “austerity trap.”
When fiscal consolidation turns on a predetermined debt ratio to be achieved at a predetermined point in the future, the primary surpluses needed to hit those targets are such that the effect on the private sector undermines the assumed growth rates and thus derails the planned fiscal path.
Indeed, this is precisely why previous fiscal-consolidation plans for Greece missed their targets so spectacularly.
Our government’s position is that backward induction should be ditched.
Instead, we should map out a forward-looking plan based on reasonable assumptions about the primary surpluses consistent with the rates of output growth, net investment, and export expansion that can stabilize Greece’s economy and debt ratio.
If this means that the debt-to-GDP ratio will be higher than 120% in 2020, we devise smart ways to rationalize, re-profile, or restructure the debt – keeping in mind the aim of maximizing the effective present value that will be returned to Greece’s creditors.
Besides convincing the troika that our debt sustainability analysis should avoid the austerity trap, we must overcome the second hurdle: the “reform trap.”
The previous reform program, which our partners are so adamant should not be “rolled back” by our government, was founded on internal devaluation, wage and pension cuts, loss of labor protections, and price-maximizing privatization of public assets.
Our partners believe that, given time, this agenda will work.
If wages fall further, employment will rise.
The way to cure an ailing pension system is to cut pensions.
And privatizations should aim at higher sale prices to pay off debt that many (privately) agree is unsustainable.
By contrast, our government believes that this program has failed, leaving the population weary of reform.
The best evidence of this failure is that, despite a huge drop in wages and costs, export growth has been flat (the elimination of the current-account deficit being due exclusively to the collapse of imports).
Additional wage cuts will not help export-oriented companies, which are mired in a credit crunch.
And further cuts in pensions will not address the true causes of the pension system’s troubles (low employment and vast undeclared labor).
Such measures will merely cause further damage to Greece’s already-stressed social fabric, rendering it incapable of providing the support that our reform agenda desperately needs.
The current disagreements with our partners are not unbridgeable.
Our government is eager to rationalize the pension system (for example, by limiting early retirement), proceed with partial privatization of public assets, address the non-performing loans that are clogging the economy’s credit circuits, create a fully independent tax commission, and boost entrepreneurship.
The differences that remain concern how we understand the relationships between the various reforms and the macro environment.
None of this means that common ground cannot be achieved immediately.
The Greek government wants a fiscal-consolidation path that makes sense, and we want reforms that all sides believe are important.
Our task is to convince our partners that our undertakings are strategic, rather than tactical, and that our logic is sound.
A New Deal for Debt Overhangs?
CAMBRIDGE – The International Monetary Fund’s acknowledgement that Greece’s debt is unsustainable could prove to be a watershed moment for the global financial system.
Clearly, heterodox policies to deal with high debt burdens need to be taken more seriously, even in some advanced countries.
Ever since the onset of the Greek crisis, there have been basically three schools of thought. First, there is the view of the so-called troika (the European Commission, the European Central Bank, and the IMF), which holds that the eurozone’s debt-distressed periphery (Greece, Ireland, Portugal, and Spain) requires strong policy discipline to prevent a short-term liquidity crisis from morphing into a long-term insolvency problem.
The orthodox policy prescription was to extend conventional bridge loans to these countries, thereby giving them time to fix their budget problems and undertake structural reforms aimed at enhancing their long-term growth potential.
This approach has “worked” in Spain, Ireland, and Portugal, but at the cost of epic recessions.
Moreover, there is a high risk of relapse in the event of a significant downturn in the global economy.
The troika policy has, however, failed to stabilize, much less revive, Greece’s economy.
A second school of thought also portrays the crisis as a pure liquidity problem, but views long-term insolvency as an outside risk at worst.
The problem is not that the debt of countries on the eurozone’s periphery is too high, but that it has not been allowed to rise nearly high enough.
This anti-austerity camp believes that even when private markets totally lost confidence in Europe’s periphery, northern Europe could easily have solved the problem by co-signing periphery debt, perhaps under the umbrella of Eurobonds backed ultimately by all (especially German) eurozone taxpayers.
The periphery countries should then have been permitted not only to roll over their debt, but also to engage in full-on countercyclical fiscal policy for as long as their national governments deemed necessary.
In other words, for “anti-austerians,” the eurozone suffered a crisis of competence, not a crisis of confidence.
Never mind that the eurozone has no centralized fiscal authority and only an incomplete banking union. Never mind moral-hazard problems or insolvency.
And never mind growth-enhancing structural reforms.
All of the debtors will be good for the money in the future, even if they have not always been reliable in the past.
In any case, faster GDP growth will pay for everything, thanks to high fiscal multipliers.
Europe passed up a free lunch.
This is a fully coherent viewpoint, but naive in its unqualified confidence (for example, in the polemical writings of the Nobel laureate economist Paul Krugman).
As a result, the anti-austerian view masks strong assumptions and risks.
In fact, piling loans atop already-high debt burdens in the eurozone’s periphery entailed a significant gamble, particularly as the crisis erupted.
Political corruption, exemplified by the revolving door between Spain’s government and financial sector, was endemic.
Dual labor markets and product-market monopolies still hobble growth, and oligarchs have disproportionate power to protect their interests.
In reality, Germany could not have underwritten all of the European periphery’s debt without risking its own solvency and creditworthiness, particularly in the absence of a functioning system of eurozone-wide checks and balances.
Expansive and open-ended guarantees might have worked, but if they didn’t, the economic rot from the periphery could have spread to the center.
A third point of view is that, given the massive financial crisis, Europe’s debt problem should have been diagnosed as an insolvency problem from the start, and treated with debt restructuring and forgiveness, aided by moderately elevated inflation and structural reform.
This has been my viewpoint since the crisis began.
In Ireland and Spain, private bondholders, not Irish and Spanish taxpayers, should have taken the hit from bank failures.
In Greece, there should have been faster and larger debt write-downs.
Of course, national governments would have had to use taxpayer funds to recapitalize northern European banks – especially in France and Germany – that lent too much to the periphery.
And transfers would have been needed to recapitalize the periphery banks.
But at least then the public would have understood the reality of the situation, while restructured and recapitalized banks would have been in a position to start lending again.
Unfortunately, too many policymakers in advanced economies allowed themselves to believe that such heterodox policies are only for emerging markets.
In fact, advanced countries have resorted to heterodox policies to reduce debt overhangs on many occasions.
Debt restructuring would have given Europe the reset it needed.
Yes, there would have been risks, as IMF chief economist Olivier Blanchard has pointed out, but running those risks would have been well worth it.
So what is the way forward?
Deeper European integration, stricter equity requirements for banks, and deeper but homegrown structural reforms are certainly key elements of any solution.
Further aid to the European periphery is still badly needed.
But, beyond that, Europe’s experience ought to spur a full rethink of the global system for administering sovereign bankruptcies.
That could mean bringing back older IMF proposals for a sovereign bankruptcy mechanism, or finding ways to institutionalize the Fund’s recent stance on Greek debt.
There is no free lunch in Europe, and there never was; but there are much better ways to deal with unsustainable debt.
The Threat of Greek Debt Relief
BERLIN – With Greece’s economic crisis still raging, prominent voices, ranging from Nobel laureate economists like Paul Krugman to officials like US Secretary of the Treasury Jack Lew, are calling for more lenient bailout terms and debt relief.
Even the International Monetary Fund – which, along with other European lenders, has provided Greece with emergency financing – recently joined that call.
But could such an approach really be the proverbial silver bullet for Greece’s crisis?
The short answer is no.
While Greece’s public debt is undeniably high, and evidence abounds that high debt can hold back economic growth, the country faces even stronger drags on growth, including structural weaknesses and political brinkmanship, that must be addressed first.
In fact, Greece will likely depend on concessional funding from official sources in the years ahead – funding that is conditional on reforms, not debt ratios.
Greece’s nominal debt stock will matter only once the country re-enters the debt markets and becomes subject to market, not concessional, borrowing terms.
In the meantime, Greece must implement the structural reforms needed to restore the country’s long-term growth prospects and thus to strengthen its capacity to repay its creditors without a large nominal debt reduction.
But there is another critical reason why debt relief is not the answer, and it lies in the political architecture of the European Monetary Union. Because the eurozone lacks a strong central governing body, crisis policies emerge from a political process in which each of the 19 member states has veto power.
For such a complex system to work, eurozone policymakers must be able to trust one another to behave in a particular way – and that requires a common framework of rules and standards.
A restructuring of Greece’s official debt, despite offering short-term benefits, would weaken that framework in the long run by setting a precedent for exceptions, with other eurozone countries, sooner or later, requesting the same concession.
In 2013, the extension of Greece’s loan maturities prompted Ireland and Portugal to demand – and receive – comparable extensions, despite their less obvious need.
Instead of offering concessions, which could create long-term instability in the eurozone, Europe’s leaders must remain committed to creating strong incentives for all member states to maintain prudent fiscal policies capable of reducing public-debt ratios and restoring fiscal buffers against asymmetric shocks to the currency union.
Only then will the eurozone have a chance of upholding the Lisbon Treaty’s “no bailout” clause.
Greece may account for less than 2% of eurozone GDP, but the pursuit of shortsighted ad hoc solutions to its problems may set precedents that could bring down the entire monetary union.
To prevent such an outcome, it is critical that any solution to the Greek crisis reinforces, rather than undermines, the eurozone’s cohesion.
It is true that Greece has had to undergo painful adjustments to address its deep structural weaknesses, unsustainable public finances, and lack of price competitiveness – adjustments that led to a drop in Greek output.
But high unemployment and a lack of investment cannot be blamed on the medicine prescribed; they are symptoms of the country’s failure to reform its public administration and to enhance the flexibility of its economy.
The international debate about how much austerity is appropriate to balance the interests of Greece and its creditors has distracted policymakers for too long.
It is time to focus on the real imperative: designing and implementing vital structural reforms, at the national and European levels.
To guide this process, the German Council of Economic Experts, which I chair, has developed a set of reforms – called “Maastricht 2.0” – that would reinforce the rules-based framework that is so essential to the eurozone’s long-term success.
For example, the banking union needs to be strengthened through an enhanced resolution regime and an integrated financial supervisor, and a sovereign insolvency mechanism should be introduced.
Underpinning the proposed reforms is the so-called “principle of unity of liability and control,” which demands that both the power to make decisions and liability for their consequences are kept at the same political level, be it national or supranational.
In other words, if countries want to make their own fiscal decisions independent of their eurozone partners, they cannot expect those partners to step in and save them later.
To be sure, in recent years, the European institutional framework has undergone major reforms that reflect the principles of “Maastricht 2.0,” such as the need to emphasize national responsibility for public finances and international competitiveness.
But the reform process remains far from complete.
There is no denying that short-term measures to address acute problems – such as debt relief for Greece – threaten the eurozone’s long-term stability.
If the European Monetary Union is to survive and ultimately thrive, its leaders must not be tempted by facile solutions.
The Lethal Deferral of Greek Debt Restructuring
ATHENS – The point of restructuring debt is to reduce the volume of new loans needed to salvage an insolvent entity.
Creditors offer debt relief to get more value back and to extend as little new finance to the insolvent entity as possible.
Remarkably, Greece’s creditors seem unable to appreciate this sound financial principle.
Where Greek debt is concerned, a clear pattern has emerged over the past five years. It remains unbroken to this day.
In 2010, Europe and the International Monetary Fund extended loans to the insolvent Greek state equal to 44% of the country’s GDP.
The very mention of debt restructuring was considered inadmissible and a cause for ridiculing those of us who dared suggest its inevitability.
In 2012, as the debt-to-GDP ratio skyrocketed, Greece’s private creditors were given a significant 34% haircut.
At the same time, however, new loans worth 63% of GDP were added to Greece’s national debt.
A few months later, in November, the Eurogroup (comprising eurozone members’ finance ministers) indicated that debt relief would be finalized by December 2014, once the 2012 program was “successfully” completed and the Greek government’s budget had attained a primary surplus (which excludes interest payments).
In 2015, however, with the primary surplus achieved, Greece’s creditors refused even to discuss debt relief.
For five months, negotiations remained at an impasse, culminating in the July 5 referendum in Greece, in which voters overwhelmingly rejected further austerity, and the Greek government’s subsequent surrender, formalized in the July 12 Euro Summit agreement.
That agreement, which is now the blueprint for Greece’s relationship with the eurozone, perpetuates the five-year-long pattern of placing debt restructuring at the end of a sorry sequence of fiscal tightening, economic contraction, and program failure.
Indeed, the sequence of the new “bailout” envisaged in the July 12 agreement predictably begins with the adoption – before the end of the month – of harsh tax measures and medium-term fiscal targets equivalent to another bout of stringent austerity.
Then comes a mid-summer negotiation of another large loan, equivalent to 48% of GDP (the debt-to-GDP ratio is already above 180%).
Finally, in November, at the earliest, and after the first review of the new program is completed, “the Eurogroup stands ready to consider, if necessary, possible additional measures… aiming at ensuring that gross financing needs remain at a sustainable level.”
During the negotiations to which I was a party, from January 25 to July 5, I repeatedly suggested to our creditors a series of smart debt swaps.
The aim was to minimize the amount of new funding required from the European Stability Mechanism and the IMF to refinance Greek debt, and to ensure that Greece would become eligible within 2015 for the European Central Bank’s asset-purchase program (quantitative easing), effectively restoring Greece’s access to capital markets.
We estimated that no more than €30 billion ($33 billion, or 17% of GDP) of new, ESM-sourced financing would be required, none of which would be needed for the Greek state’s primary budget.
Our proposals were not rejected.
Although we had it on good authority that they were technically rigorous and legally sound, they simply were never discussed.
The political will of the Eurogroup was to ignore our proposals, let the negotiations fail, impose an indefinite bank holiday, and force the Greek government to acquiesce on everything – including a massive new loan that is almost triple the size we had proposed.
Once again, Greece’s creditors put the cart before the horse, by insisting that the new loan be agreed before any discussion of debt relief.
As a result, the new loan deemed necessary grew inexorably, as in 2010 and 2012.
Unsustainable debt is, sooner or later, written down.
But the precise timing and nature of that write-down makes an enormous difference for a country’s economic prospects.
And Greece is in the throes of a humanitarian crisis today because the inevitable restructuring of its debt has been used as an excuse for postponing that restructuring ad infinitum.
As a high-ranking European Commission official once asked me: “Your debt will be cut come hell or high water, so why are you expending precious political capital to insist that we deliver the restructuring now?”
The answer ought to have been obvious.
An ex ante debt restructuring that reduces the size of any new loans and renders the debt sustainable before any reforms are implemented stands a good chance of crowding in investment, stabilizing incomes, and setting the stage for recovery.
In sharp contrast, a debt write-down like Greece’s in 2012, which resulted from a program’s failure, only contributes to maintaining the downward spiral.
Why do Greece’s creditors refuse to move on debt restructuring before any new loans are negotiated?
And why do they prefer a much larger new loan package than necessary?
The answers to these questions cannot be found by discussing sound finance, public or private, for they reside firmly in the realm of power politics.
Debt is creditor power; and, as Greece has learned the hard way, unsustainable debt turns the creditor into Leviathan.
Life under it is becoming nasty, brutish and, for many of my compatriots, short.
Playing Chicken with Democracy
PRINCETON – In the increasingly nerve-wracking standoff between Greece and the European Union, the Greek authorities seem to be claiming a democratic mandate that extends beyond their country's borders.
The new government, led by the far-left Syriza party, portrays itself not just as a negotiator trying to get a good deal for Greece, but as the champion of a solution to a supposedly European problem of excessive government debt.
That stance fails to acknowledge that Greece's interlocutors have democratic responsibilities of their own.
Modern democratic politics can be thought of as involving two types of tasks: the formulation of laws based on general principles, and the redistribution of resources via government taxation and expenditure.
Within a single country, these tasks are relatively uncomplicated.
But a country's international relations can impose powerful constraints on its government.
Such constraints are particularly strong when the government must operate within a wider polity, as is true of Greece by virtue of its EU membership.
But any process of integration, whether European or global, requires some adjustment of domestic preferences and laws.
A government's ability to redistribute wealth will also be limited if raising taxes causes capital or high-income earners to flee the country.
In making its case for a reduction of Greece's debt burden, Syriza draws heavily on the history of Germany, its principal creditor and, in the eyes of many Greeks, their country's primary antagonist.
According to Syriza's depiction of events, Germany's interwar experiment in democracy failed because international creditors imposed austerity.
Germany and the EU, the argument goes, should apply that lesson to Greece.
That certainly sounds compelling, and another aspect of Syriza's analogy seems, at first glance, to seal the case: Greece was one of the countries that suffered most after the German Weimar Republic collapsed in 1933.
During the Nazi occupation, the government was forced to provide Germany with a loan that has yet to be repaid.
Thus, Germany bears a historic responsibility to its southern European partners.
But history can never be so neatly potted, and Syriza's interpretation suffers from some fatal lacunae.
For example, though the reparations demanded by the victors of World War I were certainly burdensome, by 1932 it had become clear that they would never be paid.
And yet halting the payments did not stabilize German politics.
On the contrary, it cleared the way for increasingly radical agendas.
If the country's populists (the Nazis) had come to power before 1932, they would have faced an impossible choice.
If they continued the reparation payments or attempted to negotiate with Germany's “creditors," they would have discredited themselves in the eyes of their supporters.
But the alternative – implementation of their program and a default on Germany's debt – would have triggered a deeper financial crisis (and possibly a military invasion).
It was only after payments were suspended that the German response to the Great Depression became so destructive.
When Adolf Hitler came to power, he introduced an entirely new solution to the problem of redistribution.
If Germany's resources were limited, he would redistribute other countries' resources – the resources of countries like Greece.
This view flips Syriza's argument on its head.
Like Hitler's solution, the proposed cancellation of Greek debt is an attempt to redistribute other countries' gains.
Were it to succeed, it would strain every other country in the eurozone, including those, like Italy and Spain, that have had to carry out their own belt-tightening.
Greece's charismatic finance minister, Yanis Varoufakis, recently cited a lesson from his country's ancient history: “Sometimes the larger, powerful democracies undermined themselves by crushing the smaller ones."
When democracy is used to justify shifting a country's burden onto its neighbors, integration becomes impossible – and both democracy and the international order may be jeopardized.
Just as financial contagion can spread market uncertainties through neighboring economies, so, too, can political contagion spread the adoption of a zero-sum mentality.
If Europe is to find a solution to its economic problems, it will have to overcome its political challenges first, and craft a form of deliberation that includes all elected governments of the eurozone (the best current approximation is the Eurogroup of eurozone finance ministers).
As long as negotiations are reduced to national governments playing games of chicken, the only result will be chaos – and not just in the markets.
The Endgame in Greece
PARIS – After months of wrangling, the showdown between Greece and its European creditors has come down to a standoff over pensions and taxes.
Greece is refusing to acquiesce to demands by its creditors that it cut payments to the elderly and raise the value-added tax on their medicine and electricity.
Europe’s demands – ostensibly aimed at ensuring that Greece can service its foreign debt – are petulant, naive, and fundamentally self-destructive.
In rejecting them, the Greeks are not playing games; they are trying to stay alive.
Whatever one might say about Greece’s past economic policies, its uncompetitive economy, its decision to join the eurozone, or the errors that European banks made when they provided its government with excessive credit, the country’s economic plight is stark.
Unemployment stands at 25%.
Youth unemployment is at 50%.
Greece’s GDP, moreover, has shrunk by 25% since the start of the crisis in 2009.
Its government is insolvent.
Many of its citizens are hungry.
Conditions in Greece today are reminiscent of those in Germany in 1933.
Of course, the European Union need not fear the rise of a Greek Hitler, not only because it could easily crush such a regime, but also – and more important – because Greece’s democracy has proved impressively mature throughout the crisis.
But there is something that the EU should fear: destitution within its borders and the pernicious consequences for the continent’s politics and society.
Unfortunately, the continent remains split along tribal lines.
Germans, Finns, Slovaks, and Dutch – among others – have no time for the suffering of Greeks.
Their political leaders tend to their own, not to Europe in any true sense.
Relief for Greece is an especially fraught issue in countries where far-right parties are on the rise or center-right governments face popular left-wing opposition.
To be sure, European politicians are not blind to what is happening in Greece.
Nor have they been completely passive.
At the beginning of the crisis, Greece’s European creditors eschewed debt relief and charged punitive interest rates on bailout funds.
But, as Greeks’ suffering intensified, policymakers pressed private-sector banks and other bondholders to write off most of their claims.
At each stage of the crisis, they have done only what they believed their national politics would bear – no more.
In particular, Europe’s politicians are balking at steps that would implicate taxpayers directly.
The Greek government has asked Europe to swap existing debts with new debts to lock in low interest rates and long maturities.
It has also requested that interest payments be linked to economic growth.
(It has notably not asked for cuts in the face value of its debt).
But debt relief of this sort vis-à-vis European governments or the European Central Bank has been kept off the table.
Such measures would likely require parliamentary votes in countries across the eurozone, where many governments would face intense public opposition – no matter how obvious the need.
Rather than confront the political obstacles, Europe’s leaders are hiding behind a mountain of pious, nonsensical rhetoric.
Some insist that Greece finish its payment program, regardless of the humanitarian and economic consequences – not to mention the failure of all previous Greek governments to meet its terms.
Others pretend to worry about the moral-hazard implications of debt relief, despite the fact that the country’s private-sector debt has already been written off at EU insistence, and that there are dozens, if not hundreds, of precedents for restructuring the debts of insolvent sovereigns.
Almost a century ago, at World War I’s end, John Maynard Keynes offered a warning that holds great relevance today.
Then, as now, creditor countries (mainly the US) were demanding that deeply indebted countries make good on their debts.
Keynes knew that a tragedy was in the making.
“Will the discontented peoples of Europe be willing for a generation to come so to order their lives that an appreciable part of their daily produce may be available to meet a foreign payment?” he asked in The Economic Consequences of the Peace.
“In short, I do not believe that any of these tributes will continue to be paid, at the best, for more than a few years.”
Several European countries now seem content to force Greece into an outright default and provoke its exit from the euro.
They believe that the fallout can be contained without panic or contagion.
That is typical wishful thinking among politicians.
Indeed, it is the type of heedlessness that led US Treasury Secretary Hank Paulson to let Lehman Brothers fail in September 2008, ostensibly to teach the market a “lesson.”
Some lesson; we are still digging out from Paulson’s monumental mistake.
Similarly, Keynes watched in horror as economic policymakers blundered repeatedly in the years following WWI, through the upheavals of the 1920s, and into the Great Depression of the 1930s.
In 1925, Keynes criticized the insouciance of those “who sit in the top tier of the machine.”
He argued “that they are immensely rash in their regardlessness, in their vague optimism and comfortable belief that nothing really serious ever happens.
Nine times out of ten, nothing really serious does happen – merely a little distress to individuals or to groups.
But we run a risk of the tenth time…”
Today, Greece’s European creditors seem ready to abandon their solemn pledges on the irrevocability of the euro in order to insist on collecting some crumbs from the country’s pensioners.
Should they press their demands, forcing Greece to exit, the world will never again trust the euro’s longevity.
At a minimum, the eurozone’s weaker members will undergo increased market pressures.
In the worst case, they will be hit by a new vicious circle of panic and bank runs, also derailing the incipient European recovery.
With Russia testing Europe’s resolve to the east, the timing of Europe’s gamble could not be worse.
The Greek government is right to have drawn the line.
It has a responsibility to its citizens.
The real choice, after all, lies not with Greece, but with Europe.
A Greek Morality Tale
NEW YORK – When the euro crisis began a half-decade ago, Keynesian economists predicted that the austerity that was being imposed on Greece and the other crisis countries would fail.
It would stifle growth and increase unemployment – and even fail to decrease the debt-to-GDP ratio.
Others – in the European Commission, the European Central Bank, and a few universities – talked of expansionary contractions.
But even the International Monetary Fund argued that contractions, such as cutbacks in government spending, were just that – contractionary.
We hardly needed another test.
Austerity had failed repeatedly, from its early use under US President Herbert Hoover, which turned the stock-market crash into the Great Depression, to the IMF “programs” imposed on East Asia and Latin America in recent decades.
And yet when Greece got into trouble, it was tried again.
Greece largely succeeded in following the dictate set by the “troika” (the European Commission the ECB, and the IMF): it converted a primary budget deficit into a primary surplus.
But the contraction in government spending has been predictably devastating: 25% unemployment, a 22% fall in GDP since 2009, and a 35% increase in the debt-to-GDP ratio.
And now, with the anti-austerity Syriza party’s overwhelming election victory, Greek voters have declared that they have had enough.
So, what is to be done?
First, let us be clear: Greece could be blamed for its troubles if it were the only country where the troika’s medicine failed miserably.
But Spain had a surplus and a low debt ratio before the crisis, and it, too, is in depression.
What is needed is not structural reform within Greece and Spain so much as structural reform of the eurozone’s design and a fundamental rethinking of the policy frameworks that have resulted in the monetary union’s spectacularly bad performance.
Greece has also once again reminded us of how badly the world needs a debt-restructuring framework.
Excessive debt caused not only the 2008 crisis, but also the East Asia crisis in the 1990s and the Latin American crisis in the 1980s.
It continues to cause untold suffering in the US, where millions of homeowners have lost their homes, and is now threatening millions more in Poland and elsewhere who took out loans in Swiss francs.
Given the amount of distress brought about by excessive debt, one might well ask why individuals and countries have repeatedly put themselves into this situation.
After all, such debts are contracts – that is, voluntary agreements – so creditors are just as responsible for them as debtors.
In fact, creditors arguably are more responsible: typically, they are sophisticated financial institutions, whereas borrowers frequently are far less attuned to market vicissitudes and the risks associated with different contractual arrangements.
Indeed, we know that US banks actually preyed on their borrowers, taking advantage of their lack of financial sophistication.
Every (advanced) country has realized that making capitalism work requires giving individuals a fresh start.
The debtors’ prisons of the nineteenth century were a failure – inhumane and not exactly helping to ensure repayment.
What did help was to provide better incentives for good lending, by making creditors more responsible for the consequences of their decisions.
At the international level, we have not yet created an orderly process for giving countries a fresh start.
Since even before the 2008 crisis, the United Nations, with the support of almost all of the developing and emerging countries, has been seeking to create such a framework.
But the US has been adamantly opposed; perhaps it wants to reinstitute debtor prisons for over indebted countries’ officials (if so, space may be opening up at Guantánamo Bay).
The idea of bringing back debtors’ prisons may seem far-fetched, but it resonates with current talk of moral hazard and accountability.
There is a fear that if Greece is allowed to restructure its debt, it will simply get itself into trouble again, as will others.
This is sheer nonsense.
Does anyone in their right mind think that any country would willingly put itself through what Greece has gone through, just to get a free ride from its creditors?
If there is a moral hazard, it is on the part of the lenders – especially in the private sector – who have been bailed out repeatedly.
If Europe has allowed these debts to move from the private sector to the public sector – a well-established pattern over the past half-century – it is Europe, not Greece, that should bear the consequences.
Indeed, Greece’s current plight, including the massive run-up in the debt ratio,&nbsp;is largely the fault of the misguided troika programs foisted on it.
So it is not debt restructuring, but its absence, that is “immoral.”
There is nothing particularly special about the dilemmas that Greece faces today; many&nbsp;countries have been in the same position.
What makes Greece’s problems more difficult to address is the structure of the eurozone: monetary union implies that member states cannot devalue their way out of trouble, yet the modicum of European solidarity that must accompany this loss of policy flexibility simply is not there.
Seventy years ago, at the end of World War&nbsp;II, the Allies recognized that Germany must be given a fresh start.
They understood that Hitler’s rise had much to do with the unemployment (not the inflation) that resulted from imposing more debt on Germany at the end of World War I. The Allies did not take into account the foolishness with which the debts had been accumulated or talk about the costs that Germany had imposed on others.
Instead, they not only forgave the debts; they actually provided aid, and the Allied troops stationed in Germany provided a further fiscal stimulus.
When companies go bankrupt, a debt-equity swap is a fair and efficient solution.
The analogous approach for Greece is to convert its current bonds into GDP-linked bonds.
If Greece does well, its creditors will receive more of their money; if it does not, they will get less.
Both sides would then have a powerful incentive to pursue pro-growth policies.
Seldom do democratic elections give as clear a message as that in Greece.
If Europe says no to Greek voters’ demand for a change of course, it is saying that democracy is of no importance, at least when it comes to economics.
Why not just shut down democracy, as Newfoundland effectively did when it entered into receivership before World War II?
One hopes that those who understand the economics of debt and austerity, and who believe in democracy and humane values, will prevail.
Why Greece is Different
BRUSSELS – The seemingly interminable negotiations between the new Greek government and its international creditors – the International Monetary Fund, the European Central Bank, and the European Commission – on a new loan deal have entered a dangerous phase.
At this point, a mistake on either side threatens to trigger the kind of accident that could precipitate a new crisis in Europe.
The IMF seems ready to throw in the towel – not least because of the recent revelation that Greece could post a small primary budget deficit (which excludes interest payments) this year, rather than the planned sizeable surplus.
But, with Greece’s economy tanking again, its government is convinced that the current repayment program is not working – and that, in the absence of significant adjustments, it never will.
Fundamental to Greece’s case for new bailout terms is the narrative – reinforced by its current economic travails – that it has been a victim of excessive austerity.
But this neglects a crucial fact: austerity worked in Europe’s other crisis-hit countries.
Indeed, Portugal, Ireland, Spain, and even Cyprus are showing clear signs of recovery, with unemployment finally falling (albeit slowly and from high levels) and access to capital markets restored.
Why is Greece different?
The short answer is exports.
In all of the other crisis-hit countries (and, indeed, in most of the dozens of countries that have received IMF loans in recent decades), rising exports offset, at least partly, the hit that demand took when their governments slashed spending and raised taxes to balance their books.
Of course, in a large economy where external financing is not a problem, as in the United States or the eurozone, attempting to reduce a budget deficit could conceivably lead to such a large decline in demand (and thus tax revenues) that austerity becomes self-defeating.
But this argument does not apply to Greece.
In fact, Greece was running very large current-account deficits – exceeding 10% of GDP – when external financing dried up suddenly in 2008-2009, forcing an adjustment in domestic spending.
If the Greek government had not made such an adjustment, domestic demand and employment would certainly have remained higher – but so would imports and large external deficits.
So, while austerity did cause a deep recession, it enabled Greece to avoid large external deficits, thereby reducing the size of the bailout the country needed.
Export performance is thus the key to escaping the austerity trap.
The problem for Greece is that what little export growth it has experienced lately is largely illusory, as it has come mostly from petroleum products.
Since Greece does not produce oil, this can mean only that Greek refiners, which now have considerable excess capacity, are simply exporting imported crude oil in a slightly different form.
With refinery margins typically less than 5%, the economy is gaining little added value from these exports.
Other exports that have increased, such as metals, raise a similar problem.
Moreover, Greece’s largest services export, maritime shipping, has few real links with the rest of the economy, given that companies in the sector pay no taxes and employ few Greeks (the crews hail from low-wage countries).
Undermining the sector’s economic contribution further is the fact that global commodity prices, on which shipping rates depend, have lately been declining.
Meanwhile, manufactured goods, which do add domestic value and employment, form only a small share of Greece’s overall exports.
In fact, Greece’s total foreign trade, if properly measured, amounts to only 12% of its GDP, much less than what one would expect from such a small economy.
More jarring is the fact that Greece’s total trade deficit (including both goods and services), was even higher in 2008, amounting to 13% of GDP, implying that, in order to avoid a subsequent decline in imports and thus in domestic demand, exports would have had to more than double.
In Portugal, by contrast, the trade deficit amounted to only about one-third of exports in 2008, meaning that exports had to increase by one-third to close the external deficit, without reducing imports.
Since then, Portugal has increased exports cumulatively by more than one-quarter, so that, despite a slight increase in imports since 2007, it runs a trade surplus.
To be sure, Greece’s trade deficit has declined, but only because imports collapsed.
Meanwhile, exports stagnated, even as wages declined by more than 20%.
That, not austerity, is Greece’s real problem.
If Greece had experienced the same growth in exports as Portugal (a country of similar size and per capita income), it would not have experienced such a deep recession, and tax revenues would have been higher, making it much easier for the government to achieve a primary budget surplus.
This suggests that a combination of fiscal consolidation, lower wages, and export-oriented reforms could have enabled Greece to move toward a sustainable recovery.
This approach has been tried before, and it has failed only once, when Argentina had to default on its foreign debt in 2002 and break a decade-long 1:1 peg to the US dollar.
Unfortunately, Greece resembles Argentina in two key respects.
Both countries have only a small export sector, which makes external adjustment much more difficult; and both have an export structure that is skewed toward commodities, the supply of which is unlikely to change much, even as structural reforms are pursued or wages decline.
Of course, this does not mean that Greece is doomed to follow in Argentina’s footsteps toward default.
But it does highlight the challenge that the country faces today – namely, to rebuild its export sector from the ground up.
It is time for Greece’s government to recognize this imperative and expand the scope of negotiations with its creditors to include not just the budget, but also strategies for stimulating exports.
But, first, Greece must finally recognize that austerity is not the enemy.
Greece is Playing to Lose
LONDON – The future of Europe now depends on something apparently impossible: Greece and Germany must strike a deal.
What makes such a deal seem impossible is not the principled opposition of the two governments – Greece has demanded a debt reduction, while Germany has insisted that not a euro of debt can be written off – but something more fundamental: while Greece is obviously the weaker party in this conflict, it has far more at stake.
Game theory suggests that some of the most unpredictable conflicts are between a weak, but determined, combatant and a strong opponent with much less commitment.
In these scenarios, the most stable outcome tends to be a draw in which both sides are partly satisfied.
In the Greek-German confrontation, it is easy, at least in theory, to design such a positive-sum game.
All we must do is ignore political rhetoric and focus on the economic outcomes that the protagonists really want.
Germany is determined to resist any debt write-offs.
For German voters, this objective matters much more than the details of Greek structural reforms.
Greece, for its part, is determined to gain relief from the punitive and counter-productive austerity imposed on it, at Germany’s insistence, by the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund).
For Greek voters, this objective matters much more than detailed calculations about the net present value of national debt in 30 years.
A deal should be easily negotiable if both sides concentrate on their top priorities, while compromising on their secondary aims.
Unfortunately, human fallibility seems to be working against such a rational solution.
Yanis Varoufakis, Greece’s new finance minister, is a professor of mathematical economics who specializes in game theory.
But his negotiating technique – unpredictable oscillations between aggressiveness and weakness – is the opposite of what game theory would dictate.
Varoufakis’s idea of strategy is to hold a gun to his own head, then demand a ransom for not pulling the trigger.
German and European Union policymakers are calling his bluff.
As a result, the two sides have become stuck in a passive-aggressive standoff that has made serious negotiation impossible.
There was nothing inevitable about this outcome.
Just last month, ECB President Mario Draghi provided a textbook example of how these negotiations could, and should, have progressed, when he outmaneuvered German opposition to the monetary stimulus that Europe clearly needed.
Draghi spent months before the ECB’s January 22 announcement that it would launch quantitative easing (QE) in intense public debate with the Germans over which point of principle they chose as a “red line” – the point beyond which no deal would be possible.
Germany’s red line was debt mutualization: there must be no sharing of losses if any eurozone country should default.
Draghi let Germany win on this issue, which he viewed as economically irrelevant.
But, crucially, he was careful not to back down until the last possible moment.
By focusing the QE debate on risk-sharing, Draghi managed to distract Germany from an infinitely more important issue: the enormous size of the QE program, which completely defied the German taboo against monetary financing of government debts.
By conceding at the right time on an issue of no importance, Draghi achieved an enormous breakthrough that really mattered to the ECB.
Had Varoufakis adopted an equivalent strategy for Greece, he would have stuck doggedly to his demand for debt cancellation until the last moment, then backed down on this “principle” in exchange for major concessions on austerity and structural reforms.
Or he could have adopted a less aggressive strategy: Concede from the start the German principle that debts are sacrosanct and then show that austerity could be eased without any reduction in the face value of Greek debt.
But, instead of consistently pursuing either strategy, Varoufakis veered between defiance and conciliation, losing credibility both ways.
Greece started the negotiation by insisting on debt reduction as its red line.
But, instead of sticking to this position and turning a debate over debt forgiveness into a Draghi-style diversionary tactic, Greece abandoned this demand within days.
Then came the pointless provocation of refusing talks with the troika, despite the fact that the three institutions are all much more sympathetic to Greek demands than the German government.
Finally, Varoufakis rejected any extension of the troika program.
This created an unnecessary new deadline of February 28 for the withdrawal of ECB funding and consequent collapse of the Greek banking system.
Greece’s idealistic new leaders seem to believe that they can overpower bureaucratic opposition without the usual compromises and obfuscations, simply by brandishing their democratic mandate.
But the primacy of bureaucracy over democracy is a core principle that EU institutions will never compromise.
The upshot is that Greece is back where it started in the poker contest with Germany and Europe.
The new government has shown its best cards too early and has no credibility left if it wants to try bluffing.
So what will happen next?
The most likely outcome is that Syriza will soon admit defeat, like every other eurozone government supposedly elected on a reform mandate, and revert to a troika-style program, sweetened only by dropping the name “troika.”
Another possibility, while Greek banks are still open for business, might be for the government to unilaterally implement some of its radical plans on wages and public spending, defying protests from Brussels, Frankfurt, and Berlin.
If Greece tries such unilateral defiance, the ECB will almost certainly vote to stop its emergency funding to the Greek banking system after the troika program expires on February 28.
As this self-inflicted deadline approaches, the Greek government will probably back down, just as Ireland and Cyprus capitulated when faced with similar threats.
Such last-minute capitulation could mean resignation for the new Greek government and its replacement by EU-approved technocrats, as in the constitutional putsch against Italy’s Silvio Berlusconi in 2012.
In a less extreme scenario, Varoufakis might be replaced as finance minister, while the rest of the government survives.
The only other possibility, if and when Greek banks start collapsing, would be an exit from the euro.
Whatever form the surrender takes, Greece will not be the only loser.
Proponents of democracy and economic expansion have missed their best chance to outmaneuver Germany and end the self-destructive austerity that Germany has imposed on Europe.
Austerity Is the Only Deal-Breaker
ATHENS – A common fallacy pervades coverage by the world’s media of the negotiations between the Greek government and its creditors.
The fallacy, exemplified in a recent commentary by Philip Stephens of the Financial Times, is that, “Athens is unable or unwilling – or both – to implement an economic reform program.” Once this fallacy is presented as fact, it is only natural that coverage highlights how our government is, in Stephens’s words, “squandering the trust and goodwill of its eurozone partners.”
But the reality of the talks is very different.
Our government is keen to implement an agenda that includes all of the economic reforms emphasized by European economic think tanks.
Moreover, we are uniquely able to maintain the Greek public’s support for a sound economic program.
Consider what that means: an independent tax agency; reasonable primary fiscal surpluses forever; a sensible and ambitious privatization program, combined with a development agency that harnesses public assets to create investment flows; genuine pension reform that ensures the social-security system’s long-term sustainability; liberalization of markets for goods and services, etc.
So, if our government is willing to embrace the reforms that our partners expect, why have the negotiations not produced an agreement?
Where is the sticking point?
The problem is simple: Greece’s creditors insist on even greater austerity for this year and beyond – an approach that would impede recovery, obstruct growth, worsen the debt-deflationary cycle, and, in the end, erode Greeks’ willingness and ability to see through the reform agenda that the country so desperately needs.
Our government cannot – and will not – accept a cure that has proven itself over five long years to be worse than the disease.
Our creditors’ insistence on greater austerity is subtle yet steadfast.
It can be found in their demand that Greece maintain unsustainably high primary surpluses (more than 2% of GDP in 2016 and exceeding 2.5%, or even 3%, for every year thereafter).
To achieve this, we are supposed to increase the overall burden of value-added tax on the private sector, cut already diminished pensions across the board; and compensate for low privatization proceeds (owing to depressed asset prices) with “equivalent” fiscal consolidation measures.
The view that Greece has not achieved sufficient fiscal consolidation is not just false; it is patently absurd.
The accompanying graph not only illustrates this; it also succinctly addresses the question of why Greece has not done as well as, say, Spain, Portugal, Ireland, or Cyprus in the years since the 2008 financial crisis.
Relative to the rest of the countries on the eurozone periphery, Greece was subjected to at least twice the austerity.
There is nothing more to it than that.
Following Prime Minister David Cameron’s recent election victory in the United Kingdom, my good friend Lord Norman Lamont, a former chancellor of the exchequer, remarked that the UK economy’s recovery supports our government’s position.
Back in 2010, he recalled, Greece and the UK faced fiscal deficits of more or less similar size (relative to GDP).
Greece returned to primary surpluses (which exclude interest payments) in 2014, whereas the UK government consolidated much more gradually and has yet to return to surplus.
At the same time, Greece has faced monetary contraction (which has recently become monetary asphyxiation), in contrast to the UK, where the Bank of England has supported the government every step of the way.
The result is that Greece is continuing to stagnate, whereas the UK has been growing strongly.
Fair-minded observers of the four-month-long negotiations between Greece and its creditors cannot avoid a simple conclusion: The major sticking point, the only deal-breaker, is the creditors’ insistence on even more austerity, even at the expense of the reform agenda that our government is eager to pursue.
Clearly, our creditors’ demand for more austerity has nothing to do with concerns about genuine reform or moving Greece onto a sustainable fiscal path.
Their true motivation is a question best left to future historians – who, I have no doubt, will take much of the contemporary media coverage with a grain of salt.
Greece Must Exit
NEW YORK – The Greek euro tragedy is reaching its final act: it is clear that either this year or next, Greece is highly likely to default on its debt and exit the eurozone.
Postponing the exit after the June election with a new government committed to a variant of the same failed policies (recessionary austerity and structural reforms) will not restore growth and competitiveness.
Greece is stuck in a vicious cycle of insolvency, lost competitiveness, external deficits, and ever-deepening depression.
The only way to stop it is to begin an orderly default and exit, coordinated and financed by the European Central Bank, the European Commission, and the International Monetary Fund (the “Troika”), that minimizes collateral damage to Greece and the rest of the eurozone.
Greece’s recent financing package, overseen by the Troika, gave the country much less debt relief than it needed.
But, even with significantly more public-debt relief, Greece could not return to growth without rapidly restoring competitiveness.
And, without a return to growth, its debt burden will remain unsustainable.
But all of the options that might restore competitiveness require real currency depreciation.
The first option, a sharp weakening of the euro, is unlikely, as Germany is strong and the ECB is not aggressively easing monetary policy.
A rapid reduction in unit labor costs, through structural reforms that increased productivity growth in excess of wages, is just as unlikely.
It took Germany ten years to restore its competitiveness this way;
Greece cannot remain in a depression for a decade.
Likewise, a rapid deflation in prices and wages, known as an “internal devaluation,” would lead to five years of ever-deepening depression.
If none of those three options is feasible, the only path left is to leave the eurozone.
A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth.
Of course, the process would be traumatic – and not just for Greece.
The most significant problem would be capital losses for core eurozone financial institutions.
Overnight, the foreign euro liabilities of Greece’s government, banks, and companies would surge.
Yet these problems can be overcome.
Argentina did so in 2001, when it “pesofied” its dollar debts.
The United States did something similar in 1933, when it depreciated the dollar by 69% and abandoned the gold standard.
A similar “drachmatization” of euro debts would be necessary and unavoidable.
Losses that eurozone banks would suffer would be manageable if the banks were properly and aggressively recapitalized.
Avoiding a post-exit implosion of the Greek banking system, however, might require temporary measures, such as bank holidays and capital controls, to prevent a disorderly run on deposits.
The European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) should carry out the necessary recapitalization of the Greek banks via direct capital injections.
European taxpayers would effectively take over the Greek banking system, but this would be partial compensation for the losses imposed on creditors by drachmatization.
Greece would also have to restructure and reduce its public debt again.
The Troika’s claims on Greece need not be reduced in face value, but their maturity would have to be lengthened by another decade, and the interest on it reduced.
Further haircuts on private claims would also be needed, starting with a moratorium on interest payments.
Some argue that Greece’s real GDP would be much lower in an exit scenario than it would be during the hard slog of deflation.
But that is logically flawed: even with deflation, real purchasing power would fall, and the real value of debts would rise (debt deflation), as the real depreciation occurs.
More importantly, the exit path would restore growth right away, via nominal and real depreciation, avoiding a decade-long depression.
And trade losses imposed on the eurozone by the drachma depreciation would be modest, given that Greece accounts for only 2% of eurozone GDP.
Reintroducing the drachma risks exchange-rate depreciation in excess of what is necessary to restore competitiveness, which would be inflationary and impose greater losses on drachmatized external debts.
To minimize that risk, the Troika reserves currently devoted to the Greek bailout should be used to limit exchange-rate overshooting; capital controls would help, too.
Those who claim that contagion from a Greek exit would drag others into the crisis are also in denial.
Other peripheral countries already have Greek-style problems of debt sustainability and eroded competitiveness.
Portugal, for example, may eventually have to restructure its debt and exit the euro.
Illiquid but potentially solvent economies, such as Italy and Spain, will need support from Europe regardless of whether Greece exits; indeed, without such liquidity support, a self-fulfilling run on Italian and Spanish public debt is likely.
The substantial new official resources of the IMF and ESM – and ECB liquidity – could then be used to ring-fence these countries, and banks elsewhere in the eurozone’s troubled periphery.
Regardless of what Greece does, eurozone banks now need to be rapidly recapitalized, which requires a new EU-wide program of direct capital injections.
The experience of Iceland and many emerging markets over the past 20 years shows that nominal depreciation and orderly restructuring and reduction of foreign debts can restore debt sustainability, competitiveness, and growth.
As in these cases, the collateral damage to Greece of a euro exit will be significant, but it can be contained.
Like a doomed marriage, it is better to have rules for the inevitable divorce that make separation less costly to both sides.
Make no mistake: an orderly euro exit by Greece implies significant economic pain.
But watching the slow, disorderly implosion of the Greek economy and society would be much worse.
Europe’s Vindictive Privatization Plan for Greece
ATHENS – On July 12, the summit of eurozone leaders dictated its terms of surrender to Greek Prime Minister Alexis Tsipras, who, terrified by the alternatives, accepted all of them.
One of those terms concerned the disposition of Greece’s remaining public assets.
Eurozone leaders demanded that Greek public assets be transferred to a Treuhand-like fund – a fire-sale vehicle similar to the one used after the fall of the Berlin Wall to privatize quickly, at great financial loss, and with devastating effects on employment all of the vanishing East German state’s public property.
This Greek Treuhand would be based in – wait for it – Luxembourg, and would be run by an outfit overseen by Germany’s finance minister, Wolfgang Schäuble, the author of the scheme.
It would complete the fire sales within three years.
But, whereas the work of the original Treuhand was accompanied by massive West German investment in infrastructure and large-scale social transfers to the East German population, the people of Greece would receive no corresponding benefit of any sort.
Euclid Tsakalotos, who succeeded me as Greece’s finance minister two weeks ago, did his best to ameliorate the worst aspects of the Greek Treuhand plan.
He managed to have the fund domiciled in Athens, and he extracted from Greece’s creditors (the so-called troika of the European Commission, the European Central Bank, and the International Monetary Fund) the important concession that the sales could extend to 30 years, rather than a mere three.
This was crucial, for it will permit the Greek state to hold undervalued assets until their price recovers from the current recession-induced lows.
Alas, the Greek Treuhand remains an abomination, and it should be a stigma on Europe’s conscience.
Worse, it is a wasted opportunity.
The plan is politically toxic, because the fund, though domiciled in Greece, will effectively be managed by the troika.
It is also financially noxious, because the proceeds will go toward servicing what even the IMF now admits is an unpayable debt.
And it fails economically, because it wastes a wonderful opportunity to create homegrown investments to help counter the recessionary impact of the punitive fiscal consolidation that is also part of the July 12 summit’s “terms.”
It did not have to be this way.
On June 19, I communicated to the German government and to the troika an alternative proposal, as part of a document entitled “Ending the Greek Crisis”:
“The Greek government proposes to bundle public assets (excluding those pertinent to the country’s security, public amenities, and cultural heritage) into a central holding company to be separated from the government administration and to be managed as a private entity, under the aegis of the Greek Parliament, with the goal of maximizing the value of its underlying assets and creating a homegrown investment stream.
The Greek state will be the sole shareholder, but will not guarantee its liabilities or debt.”
The holding company would play an active role readying the assets for sale.
It would “issue a fully collateralized bond on the international capital markets” to raise €30-40 billion ($32-43 billion), which, “taking into account the present value of assets,” would “be invested in modernizing and restructuring the assets under its management.”
The plan envisaged an investment program of 3-4 years, resulting in “additional spending of 5% of GDP per annum,” with current macroeconomic conditions implying “a positive growth multiplier above 1.5,” which “should boost nominal GDP growth to a level above 5% for several years.”
This, in turn, would induce “proportional increases in tax revenues,” thereby “contributing to fiscal sustainability, while enabling the Greek government to exercise spending discipline without further shrinking the social economy.”
In this scenario, the primary surplus (which excludes interest payments) would “achieve ‘escape velocity’ magnitudes in absolute as well as percentage terms over time.”
As a result, the holding company would “be granted a banking license” within a year or two, “thus turning itself into a full-fledged Development Bank capable of crowding in private investment to Greece and of entering into collaborative projects with the European Investment Bank.”
The Development Bank that we proposed would “allow the government to choose which assets are to be privatized and which not, while guaranteeing a greater impact on debt reduction from the selected privatizations.”
After all, “asset values should increase by more than the actual amount spent on modernization and restructuring, aided by a program of public-private partnerships whose value is boosted according to the probability of future privatization.”
Our proposal was greeted with deafening silence.
More precisely, the Eurogroup of eurozone finance ministers and the troika continued to leak to the global media that the Greek authorities had no credible, innovative proposals on offer – their standard refrain.
A few days later, once the powers-that-be realized that the Greek government was about to capitulate fully to the troika’s demands, they saw fit to impose upon Greece their demeaning, unimaginative, and pernicious Treuhand model.
At a turning point in European history, our innovative alternative was thrown into the dustbin.
Europe’s Attack on Greek Democracy
NEW YORK – The rising crescendo of bickering and acrimony within Europe might seem to outsiders to be the inevitable result of the bitter endgame playing out between Greece and its creditors.
In fact, European leaders are finally beginning to reveal the true nature of the ongoing debt dispute, and the answer is not pleasant: it is about power and democracy much more than money and economics.
Of course, the economics behind the program that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP.
I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.
It is startling that the troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been.
But what is even more surprising is that Europe’s leaders have not even learned.
The troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018.
Economists around the world have condemned that target as punitive, because aiming for it will inevitably result in a deeper downturn.
Indeed, even if Greece’s debt is restructured beyond anything imaginable, the country will remain in depression if voters there commit to the troika’s target in the snap referendum to be held this weekend.
In terms of transforming a large primary deficit into a surplus, few countries have accomplished anything like what the Greeks have achieved in the last five years.
And, though the cost in terms of human suffering has been extremely high, the Greek government’s recent proposals went a long way toward meeting its creditors’ demands.
We should be clear: almost none of the huge amount of money loaned to Greece has actually gone there.
It has gone to pay out private-sector creditors – including German and French banks.
Greece has gotten but a pittance, but it has paid a high price to preserve these countries’ banking systems.
The IMF and the other “official” creditors do not need the money that is being demanded.
Under a business-as-usual scenario, the money received would most likely just be lent out again to Greece.
But, again, it’s not about the money.
It’s about using “deadlines” to force Greece to knuckle under, and to accept the unacceptable – not only austerity measures, but other regressive and punitive policies.
But why would Europe do this?
Why are European Union leaders resisting the referendum and refusing even to extend by a few days the June 30 deadline for Greece’s next payment to the IMF?
Isn’t Europe all about democracy?
In January, Greece’s citizens voted for a government committed to ending austerity.
If the government were simply fulfilling its campaign promises, it would already have rejected the proposal.
But it wanted to give Greeks a chance to weigh in on this issue, so critical for their country’s future wellbeing.
That concern for popular legitimacy is incompatible with the politics of the eurozone, which was never a very democratic project.
Most of its members’ governments did not seek their people’s approval to turn over their monetary sovereignty to the ECB.
When Sweden’s did, Swedes said no.
They understood that unemployment would rise if the country’s monetary policy were set by a central bank that focused single-mindedly on inflation (and also that there would be insufficient attention to financial stability).
The economy would suffer, because the economic model underlying the eurozone was predicated on power relationships that disadvantaged workers.
And, sure enough, what we are seeing now, 16 years after the eurozone institutionalized those relationships, is the antithesis of democracy: Many European leaders want to see the end of Prime Minister Alexis Tsipras’s leftist government.
After all, it is extremely inconvenient to have in Greece a government that is so opposed to the types of policies that have done so much to increase inequality in so many advanced countries, and that is so committed to curbing the unbridled power of wealth.
They seem to believe that they can eventually bring down the Greek government by bullying it into accepting an agreement that contravenes its mandate.
It is hard to advise Greeks how to vote on July 5.
Neither alternative – approval or rejection of the troika’s terms – will be easy, and both carry huge risks.
A yes vote would mean depression almost without end.
Perhaps a depleted country – one that has sold off all of its assets, and whose bright young people have emigrated – might finally get debt forgiveness; perhaps, having shriveled into a middle-income economy, Greece might finally be able to get assistance from the World Bank.
All of this might happen in the next decade, or perhaps in the decade after that.
By contrast, a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands.
Greeks might gain the opportunity to shape a future that, though perhaps not as prosperous as the past, is far more hopeful than the unconscionable torture of the present.
I know how I would vote.
Greece’s “No” is No Victory for Democracy
PARIS – Despite what many are saying – especially those who do not have to bear the consequences of their words – Greek voters’ rejection on Sunday of the latest bailout offer from their country’s creditors did not represent a “victory for democracy.”
For democracy, as the Greeks know better than anyone, is a matter of mediation, representation, and orderly delegation of power.
It is not ordinarily a matter of referendum.
Democracy becomes a matter of referendum only in exceptional circumstances: when elected leaders run out of ideas, when they have lost the confidence of their electorate, or when the usual approaches have ceased to work.
Was that the case in Greece?
Was the position of Prime Minister Alexis Tsipras so weak that he had no better choice than to pass the buck to his people by resorting to the extraordinary form of democracy that is democracy by referendum?
What would happen if Greece’s partners, each time they confronted a decision that they lacked the courage to make, broke off discussions and demanded a week to allow the people to decide?
It is often said – and rightly so – that Europe is too bureaucratic, too unwieldy, too slow to make decisions.
The least that can be said is that Tsipras’s approach does not make up for these defects.
(Much more could be said, if it inspires Spanish citizens to take the risky decision of electing a government led by their own anti-austerity party, Podemos.)
Putting this aside, let us suppose that the decision before Tsipras was so crucial and complex that it merited the exceptional step of referendum. In that case, the event should have reflected that complexity.
It should have been a careful and deliberate sounding out of the will of the people.
It should have been organized and carried out with due respect for the stakes involved, with the government ensuring that adequate information was relayed to the Greek people.
Instead, Greece got a hastily arranged referendum.
It got an opaque – indeed, a downright incomprehensible – referendum question.
It got no public-information campaign worthy of the name. It got an appeal for a “No” vote that no one understood; the details of the proposals that Greek voters were supposed to reject were not even disclosed to them.
Ancient Greek had two words for the people: the “demos” of democracy and the “laos” of the mob.
With his puerile call to shift the burden of his own errors and his reluctance to reform onto the shoulders of Greece’s fellow Europeans, Tsipras is leaning toward the latter manifestation – and promoting the worst version of Greek politics.
Tsipras might defend his approach to the referendum by asserting that his goal was not so much to sound out the people as to reinforce his position in the confrontation with Greece’s creditors.
But what is the justification for that confrontation?
That they had the audacity to demand progress toward the rule of law and social justice, as well as efforts to tame Greece’s shipping magnates and its tax-avoiding clergy?
The European Union has achieved peace precisely by learning, gradually, to replace the old logic of confrontation and conflict with that of negotiation and compromise.
Despite its defects, the EU has become a laboratory of democratic innovation, in which, for the first time in centuries, an attempt is being made to settle differences not by political war and blackmail but by listening, dialogue, and a synthesis of different points of view.
In this sense, the Greek referendum delivered an insult to 18 countries, including some that are in situations no less difficult than Greece’s, and yet have made considerable sacrifices to grant the country, in 2012 alone, €105 billion ($116 billion) in debt relief while remaining accountable to their own populations.
What twist of the mind enables one to call that an “act of resistance” or the “defense of democracy?”
Yet many have.
Indeed, since the referendum, many have acted as if Tsipras were the last eurozone democrat, as if he had faced a “totalitarian” clique (as described by the far-right French politician Marine Le Pen) against which he valiantly “stood firm” (in the words of far-left politician Jean-Luc Mélenchon).
I will not dwell on Tsipras’s parliamentary alliance with the conspiracy-minded, right-wing Independent Greeks, whose leaders do not shy away from diatribes against homosexuals, Buddhists, Jews, and Muslims. Nor will I dwell on the fact that Tsipras did not refrain, when assembling parliamentary support for his referendum, from soliciting the support of the neo-Nazi Golden Dawn party, whose help any other European leader would have rejected.
Instead, I will emphasize the fact that Tsipras’s fellow European leaders are no less democratic or legitimate than he.
The countries of Central Europe that endured Nazi and Soviet totalitarianism do not need lessons in legitimacy from anyone – especially not the Greek prime minister.
The brave Baltic countries – the “legality” of whose independence is reportedly being reviewed by Russian President Vladimir Putin, another unsavory pal of Tsipras – have not yielded to panic or succumbed to the temptation to burden others with their misfortune.
They are not using their struggles as a pretext to default on their duty of solidarity with Greece.
None of this means that we should write off Greece’s EU membership.
In other times, the Greeks paid dearly for their “No” to Nazism and their “No” to military dictatorship.
Nothing would be sadder than to see them also have to pay for last Sunday’s “No” – a farcical simulation of those earlier noble acts of defiance.
May eurozone leaders have the forbearance to recognize the flawed “No” that has been delivered, and to be more Greek than the Greeks.
May they act in a way that prevents Greece from ever having to face the true, tragic meaning of Sunday’s vote.
Greece’s Catharsis?
ATHENS – Sunday’s election in Greece will decide whether confrontation or negotiation will be used to change the terms of Greece’s refinancing agreement with the eurozone.
Rather than helping Greece to overcome its crisis, the austerity policies pursued since May 2010 have plunged it into a deep recession that perpetuates fiscal deficits and aggravates financial uncertainty.
It is becoming increasingly clear that if Greece proceeds to unilateral action – whether by repealing unpopular austerity laws or renouncing the loan agreement itself – the eurozone will suspend disbursement of the loan.
The government will find it impossible to fulfill basic obligations, such as paying salaries and pensions, and the country will formally default.
International banks will cease to finance Greek enterprises, including imports, creating shortages of fuel, food, and medicines.
As confidence that Greece will remain in the eurozone plummets, a run on deposits will cause the banking system – and, eventually, the real economy – to collapse.
The next step will be forced exit from the euro and reintroduction of the drachma, implying a dramatic drop in living standards, owing in part to immediate devaluation of the new currency and high inflation.
Meanwhile, the benefits in terms of competitiveness will be very limited, owing to the country’s narrow export base, and will evaporate in a vicious circle of devaluations and rising interest rates.
Long-term stagnation and high unemployment are the likely result of confrontation with the eurozone, which leaves only the path of renegotiation.
The new political balance emerging in Europe after the Socialists’ victory in France’s presidential election creates scope for changes in the terms of the loan agreement that would help to boost economic growth.
Opting for renegotiation assumes the victory of pro-euro political forces in Sunday’s elections.
New Democracy, Pasok, and Democratic Left belong to this group, as opposed to Syriza and some smaller parties on the extreme right and left, which support a confrontational stance vis-à-vis the eurozone, eventually leading to the euro exit.
If a pro-euro majority emerges on June 17, the new government’s main challenge will be to propose a new policy agenda, and then to negotiate a revised deal with the eurozone.
The key to growth is increased competitiveness through higher productivity and lower production costs.
In the 1990’s, in the run-up to joining the eurozone, Greece achieved substantial gains on this front.
With inflation falling sharply, real incomes increased.
Fiscal deficits were reduced.
Important structural reforms were implemented, particularly privatization.
Investment accelerated, and major infrastructure projects were realized.
High growth rates were achieved in conditions of stability.
Unfortunately, that effort ceased over the last decade.
Selfish interests prevailed.
Business groups attempted to capture specific markets.
Public-sector trade unions fought for preserving privileges.
Tax discipline was further weakened.
The welfare state was transformed into a system of endemic waste.
A gap emerged between the economy’s productive base, which remained stagnant, and Greeks’ expectations (and demands), which were rising fast.
The agreement with the eurozone attempted to close the gap in a clumsy and misguided way.
Instead of focusing on structural reforms to liberate the economy’s productive forces, it relied on income cuts and tax increases.
The incompetence of the governments that implemented the agreement exacerbates that defect by sidelining structural reforms and enacting only the terms concerning austerity.
The renegotiation should aim at changing the policy mix in the following directions:
Extending the timetable of fiscal-deficit reduction in order to limit the depth of the recession.Avoiding any new cut in incomes or new taxes, with reduction in indirect taxation to start immediately.Social-protection measures, particularly for the unemployed.A European Marshall Plan, through grants from the European Union’s structural funds and loans from the European Investment Bank, in order to sustain economic activity and create new jobs.Achieving these targets presupposes that Greece’s new government implements all of the structural changes agreed with the eurozone.
Privatization, opening up closed markets and professions, promoting entrepreneurship, and eliminating public-sector waste should proceed at a fast pace over the next few months.
The European Marshall Plan would offer a unique opportunity to reorient growth policies.
Greece should move beyond its traditional focus on sectors such as tourism, shipping, and construction, and search for new areas of comparative advantage in renewable energy, high-value-added services, and selected lines of manufacturing that benefit from the country’s research potential.
If Greece succeeds in fulfilling the requirements of a revised financing agreement with the eurozone, it may win the confidence bet by convincing financial markets that it is determined to achieve the targets.
Confidence will unlock the door to economic recovery.
The fear of a return to the drachma will recede. Consumption levels will begin to recover.
Deposit outflows will cease.
The banking system will be reinforced. Investors will reevaluate opportunities for undertaking new initiatives.
A virtuous circle may be set in motion, leading the country, eventually, to escape the crisis zone.
The outcome of Sunday’s election will determine which way Greece goes – and, also, of course, how the unfolding Greek drama affects the eurozone’s future.
A New Chance for Greece
ATHENS – On September 20, Greek voters will go to the polls – yet again – in a snap election called by Prime Minister Alexis Tsipras.
The early poll was no surprise: almost a third of Tsipras’s colleagues in his leftist Syriza Party refused to endorse the bailout he had negotiated with the country’s creditors.
In a parliamentary vote on the deal last month, Tsipras, in office since January, was forced to rely on support from the opposition.
So was the international community’s sigh of relief after the latest financial rescue – additional money from Greece’s creditors in exchange for structural reforms – premature? Will Greece, the twenty-first century’s “sick man of Europe,” persist in refusing to reform?
The underlying issue is whether Europe’s monetary union needs greater integration to manage crises such as Greece’s, or whether it can maintain the current approach, founded on national responsibility and sanctions for those who break the rules.
Germany’s finance minister, Wolfgang Schäuble, has suggested that those sanctions should include expulsion from the eurozone – something that was never envisaged in the European Union’s 1992 Maastricht Treaty.
Nor, of course, was it ever envisaged that Greece would face its current economic trauma.
Admittedly, the country’s economic performance after the oil shock of the early 1970s was poor, marked by slow growth, high inflation and unemployment, huge fiscal deficits, increasing debt, a declining currency, and inadequate infrastructure.
Indeed, until the mid-1990s, the government’s lack of macroeconomic discipline and its tendency to succumb to populist demands and vested interests accounted for much of the country’s economic weakness.
But entering Europe’s economic and monetary union was meant to induce the political system to pursue longer-term goals such as productivity growth and enhanced competitiveness.
At first, events played out according to plan.
During the period of Greece’s accession to the eurozone, from 1994 to 2001, its economy stabilized.
Both inflation and the fiscal deficit fell rapidly; businesses and consumers became more confident; investment picked up; and the government put in place an ambitious package of liberalizing reforms.
Annual GDP growth jumped from -1.6% in 1993 to over 4% in 1997 – and stayed around this level until 2007.
Hubris was perhaps understandable; but, as every Greek schoolchild knows, hubris leads to nemesis.
Excessive borrowing created a credit bubble, which burst when the global financial crisis erupted in 2007-2008, leading to the current social and economic catastrophe.
A fashionable view is that Greece did not fulfill the eurozone’s entry criteria and so falsified statistics in order to secure membership.
This is nonsense.
Greece’s budget deficit for 1999 – the year when its application was assessed – was indeed shown several years later to have exceeded marginally the Maastricht-imposed ceiling of 3% of GDP.
But this calculation was the result of a politically motivated statistical revision, initiated by the government that won the 2004 elections.
The political ruse was to change retroactively the accounting methods for defense spending.
Greece had been following the standard practice of registering expenditures when military purchases were actually delivered.
But an alternative accounting method could also be used, registering expenditures when payments – in accordance with front-loaded schedules – were actually made.
Choosing this alternative meant the transfer of substantial amounts of spending from the date of expected deliveries to the time when orders were placed.
The obvious arithmetical result was to inflate past deficits – including for the year 1999.
Accounting foibles aside, Greece’s real error was to forget – once it had become the 12th member of the eurozone on January 1, 2001 – the imperative to modernize the state through liberalization and privatization; instead, it fell back into its old bad ways.
Vested interests prevailed: business groups attempted to capture specific markets, and public-sector workers fought to preserve their privileges.
Taxes were evaded on a massive scale, and the welfare state was characterized by endemic waste.
In short, bad governance and weak institutions are to blame for the 2010 debt crash.
Previous bailout programs failed because they entailed excessive austerity.
There was no counter-balancing move to increase demand by publicly funding infrastructure investment; domestic reforms were inadequate; and the creditors offered no substantial debt restructuring or debt forgiveness.
So why should last month’s deal succeed?
Optimists will note that the underlying fiscal situation in Greece is healthier.
Moreover, debt relief is being considered; the euro and the price of oil are both – helpfully – weaker; and, despite China’s economic slowdown, international economic developments remain broadly favorable.
On the other hand, Greek society is exhausted by the huge sacrifices it has been forced to accept.
The civil service is weakened and dispirited after painful pay cuts.
The political system has been strained by the rise of populism and extremist forces on both the left and the right – and now, as the coming election highlights, there is the risk of renewed government instability.
Greece’s problems are not new.
Other countries have gone through difficult periods and recovered (Germany, our leading creditor, is a good example).
Greece’s location, together with existing strengths such as tourism, shipping, renewable energy resources, and a pool of scientists at home and abroad, provides real potential for the country to grow.
But to realize that potential requires both stability and genuine reform.
That means that after the election (which is unlikely to produce a single political force capable of undertaking this task), Greece’s center-left and center-right parties must learn to collaborate in the cause of effective governance.
Just going from one crisis to the next will ruin the economy for decades to come – and will exhaust the patience of even the most sympathetic of Greece’s partners.
Still No Exit for Greece
WASHINGTON, DC – Opinion polls in the run-up to Greece’s early general election on January 25 indicate that the left-wing Syriza party is likely to win the largest share of votes.
As a result, Syriza stands to earn a crucial premium under Greek electoral law, according to which the party that gains the most votes is allocated an extra 50 of the parliament’s 300 seats.
In other words, Syriza could come to power, with enormous implications for Greece and Europe.
Syriza is more a coalition than a unified party, meaning that its leader, Alexis Tsipras, must reconcile moderate socialists, including some of his economic advisers, with radical left-wing members.
The implementation and impact of Syriza’s agenda, especially its decisive economic program, will depend on the new government’s ability to maintain support at home and compromise with Greece’s creditors abroad.
Syriza’s economic program rejects the austerity policies supported – or, some might say, imposed – by the so-called “troika” (the International Monetary Fund, the European Central Bank, and the European Commission). These policies require Greece to maintain a very high primary budget surplus – more than 4% of GDP – for many years to come.
Syriza also plans to demand a substantial reduction in Greece’s foreign debt, the nominal value of which remains very high – close to 170% of GDP.
In fact, the real present value of the debt is much lower, given that most of it is now held by governments or other public entities and carries long maturities and low interest rates.
Nonetheless, repayment “spikes” this year constitute a real short-term challenge.
The problem for Greece is that its creditors may adopt a very tough stance.
This largely reflects the belief that, if a breakdown of negotiations triggers another Greek crisis, the systemic risks to the eurozone and the wider European Union would be far smaller than they were just a few years ago.
The “acute” phase of the euro crisis is over; even if growth remains elusive, financial contagion is no longer viewed as a risk.
After all, private creditors hold only a minimal share of Greek debt nowadays.
In 2010-2012, by contrast, systemically important European banks were exposed, raising the risk of a domino effect that threatened the entire eurozone.
Moreover, a debt reduction in the form of further interest-rate reductions and maturity extensions on foreign government-held debt would not hurt financial markets.
But debt held by the European Central Bank and the IMF could pose a problem. If Greece’s new government does not tread lightly in these discussions, withdrawal of these institutions’ liquidity support for Greek banks could follow.
Despite the lack of significant financial contagion risk, a renewed Greek crisis, stemming from a lasting and serious breakdown of negotiations between the new government and EU institutions, would constitute a major problem for European cooperation.
The absence of financial contagion would not rule out serious political repercussions.
Europe’s political landscape is changing.
Populist parties, both on the far right and the far left, are gaining electoral traction. Some, such as France’s National Front, oppose their country’s eurozone membership; others, such as Podemos in Spain, do not.
Nonetheless, the challenge that these new parties pose to Europe could prove to be extremely disruptive.
A Greek exit from the eurozone, together with financial and political turmoil inside Greece, would be perceived as a major defeat for European integration – especially after the laborious efforts made to hold together the monetary union and, with it, the European dream.
Such an outcome would be even more disheartening in light of the tragic terrorist attacks in Paris, and after unity marches in France and across the continent rekindled a long-fading sense of European solidarity.
A new image of solidarity is precisely what the Greek election should produce.
There is little doubt that the suffering that Greeks have had to endure for the last five years is mainly attributable to the fiscal profligacy and poor public management of a procession of Greek governments.
But as most analysts, including at the IMF, now agree, the troika’s approach was also deeply flawed, as it emphasized wage and income cuts, while neglecting the reform of product markets and the dismantling of harmful public and private oligopolies.
For the sake of Greece and Europe, the new government must work with the European institutions to revise their strategy, while taking responsibility for implementing growth-promoting structural reforms.
Greece’s creditors and partners, for their part, must provide the fiscal space needed for the reforms to work.
Walking away from Greece because it no longer poses a threat of financial contagion is not a politically viable option.
Both sides will have to show more foresight.
The last five years have provided two clear lessons for Europe: procrastination only makes reform more difficult, and the end of financial turmoil does not necessarily mean the end of socioeconomic crisis.
It is time to use these lessons to develop a cooperative strategy that will finally enable Greece to make real progress toward a more stable future.
A Greek exit from the euro is not a more viable solution today than it was three years ago.
Shelter from the Storm in Europe
LAGUNA BEACH – Dark clouds are lowering over Europe’s economic future, as three distinct tempests gather: the Greek crisis, Russia’s incursion in Ukraine, and the rise of populist political parties.
Though each poses a considerable threat, Europe, aided by the recent cyclical pickup, is in a position to address them individually, without risking more than a temporary set of disruptions.
Should they converge into a kind of “perfect storm,” however, a return to sunny days will become extremely difficult to foresee any time soon.
As it stands, the three storms are at different stages of formation.
The Greek crisis, having been building for years, is blowing the hardest.
Beyond the potential for the first eurozone exit, Greece could be at risk of becoming a failed state – an outcome that would pose a multi-dimensional threat to the rest of Europe.
Mitigating the adverse humanitarian consequences (associated with cross-border migration), and geopolitical impact of this storm would be no easy feat.
The second storm, rolling in from the EU’s east, is the costly military conflict in Ukraine’s Donbas region.
The crisis in eastern Ukraine has been contained only partly by the Minsk II ceasefire agreement, and reflects the deepest rupture in the West’s relationship with Russia since the Soviet Union’s collapse.
Further Russian interference in Ukraine – directly and/or through separatist proxies in Donbas – would present the West with a stark choice.
It would either have to tighten sanctions on Russia, potentially tipping Western Europe into recession as Russia responds with counter-sanctions, or accommodate the Kremlin’s expansionist ambitions and jeopardize other countries with Russian-speaking minorities (including the EU’s Baltic members).
The third storm – political tumult brought about by the rise of populist political movements – poses yet another serious threat.
Energized by broad voter dissatisfaction, particularly in struggling economies, these political movements tend to focus on a small handful of issues, opposing, say, immigrants, austerity, or the European Union – essentially whomever they can scapegoat for their countries’ troubles.
Already, Greek voters handed the far-left anti-austerity Syriza party a sweeping victory in January.
France’s far-right National Front is currently second in opinion polls.
The anti-immigration Danish People’s Party finished second in the country’s just-concluded general election, with 22% of the vote. And, in Spain, the leftist anti-austerity Podemos commands double-digit support.
These parties’ extremist tendencies and narrow platforms are limiting governments’ policy flexibility by driving relatively moderate parties and politicians to adopt more radical positions.
It was concern about the United Kingdom Independence Party’s capacity to erode the Conservatives’ political base that pushed Prime Minister David Cameron to commit to a referendum on the country’s continued EU membership.
With three storms looming, Europe’s leaders must act fast to ensure that they can dissipate each before it merges with the others, and cope effectively with whatever disruptions they cause.
The good news is that regional crisis-management tools have lately been strengthened considerably, especially since the summer of 2012, when the euro came very close to collapsing.
Indeed, not only are new institutional circuit breakers, such as the European Financial Stability Facility, in place; existing bodies have also been made more flexible and thus more effective.
Moreover, the European Central Bank is engaged in a large-scale asset-purchasing initiative that could be easily and rapidly expanded.
And countries like Ireland, Portugal, and Spain have, through hard and painful work, reduced their vulnerability to contagion from nearby crises.
But these buffers would be severely strained if the gathering storms converged into a single devastating gale.
Given the EU’s fundamental interconnectedness – in economic, financial, geopolitical, and social terms – the disruptive impact of each shock would amplify the others, overwhelming the region’s circuit breakers, leading to recession, reviving financial instability, and creating pockets of social tension.
This would increase already-high unemployment, expose excessive financial risk-taking, embolden Russia, and strengthen populist movements further, thereby impeding comprehensive policy responses.
Fortunately, the possibility of such a perfect storm is more a risk than a baseline at this point.
Nonetheless, given the extent of its destructive potential, it warrants serious attention by policymakers.
Securing Europe’s economic future in this context will require, first and foremost, a renewed commitment to regional integration efforts – completing the banking union, advancing fiscal union, and moving forward on political union – that have been crowded out by a never-ending series of meetings and summits on Greece.
Likewise, on the national level, pro-growth economic-reform initiatives – which seem to have lost some urgency in the face of overly complacent and excessively accommodating financial markets – need to be revitalized.
This would ease the policy burden on the ECB, which is currently being forced to pursue multiple ambitious objectives that far exceed its capacity to deliver sustainably good outcomes regarding growth, employment, inflation, and financial stability.
The current focus on the downpour in Greece is understandable.
But policymakers should not be so distracted by it that they fail to prepare for the other two possible storms – and, much more worrisome, the possibility that they merge into a single more devastating one.
Europe’s leaders must act now to minimize the risks, lest they find their shelters inadequate to the extreme weather that could lie ahead.
Greece’s Aid Addiction
NEW YORK – The ongoing Greek debt saga is tragic for many reasons, not least among them the fact that the country’s relationship with its creditors is reminiscent of that between the developing world and the aid industry.
Indeed, the succession of bailouts for Greece embodies many of the same pathologies that for decades have pervaded the development agenda – including long-term political consequences that both the financial markets and the Greek people have thus far failed to grasp.
As in the case of other aid programs, the equivalent of hundreds of billions of dollars has been transferred from richer economies to a much poorer one, with negative, if unintended, consequences.
The rescue program designed to keep Greece from crashing out of the eurozone has raised the country’s debt-to-GDP ratio from 130% at the start of the crisis in 2009 to more than 170% today, with the International Monetary Fund predicting that the debt burden could reach 200% of GDP in the next two years.
This out-of-control debt spiral threatens to flatten the country’s growth trajectory and worsen employment prospects.
Like other aid recipients, Greece has become locked in a codependent relationship with its creditors, which are providing assistance in the form of de facto debt relief through subsidized loans and deferred interest payments.
No reasonable person expects Greece ever to be able to pay off its debts, but the country has become trapped in a seemingly endless cycle of payments and bailouts – making it dependent on its donors for its very survival.
The country’s creditors, for their part, have an incentive to protect the euro and limit the geopolitical risk of a Greek exit from the eurozone.
As a result, even when Greece fails to comply with its creditors’ demands – for, say, tax hikes or pension reforms – it continues to receive assistance with few penalties.
Perversely, the worse the country performs economically, the more aid it receives.
The long-term consequences of this cycle of dependence could be serious.
As long as Greece’s finances are propped up by international creditors, the country’s policymakers will be able to abdicate their responsibility to manage the provision of public goods like education, health care, national security, and infrastructure.
They will also face few incentives to put in place a properly functioning system to collect taxes.
Dependence on aid undermines the implicit contract between citizens and their government, according to which politicians must keep taxpayers satisfied in order to stay in office.
With foreign infusions of cash easing the need for tax revenues, politicians are likely to spend more time courting donors than caring for their constituents.
The weakened connection between public services and taxes not only makes it easier for officials to cling to power, but also increases the scope for corruption and inefficiency.
Indeed, based on the experience of aid-recipient economies in the emerging world, the Greek people may find it increasingly difficult to hold their government accountable or penalize officials for misbehavior or corruption.
So far, the Greek crisis has been treated as a recurring emergency, rather than the structural problem that it is.
And yet, as long as the country remains locked in a cycle of codependence with its creditors, the state of perpetual crisis is likely to persist.
Effective aid programs have almost always been temporary in nature, working – as was the case with the Marshall Plan – through short, sharp, finite interventions.
Open-ended commitments, like aid flows to poor developing countries, have had only limited success, at best.
As long as Greeks view assistance as guaranteed, they will have little incentive to put their country on a path toward self-sufficiency.
Whatever the way forward for Greece, if there is to be any hope of progress, the assistance provided by the European Union and the IMF must come to be regarded as temporary.
Cutting the umbilical cord in a relationship of aid dependency is never easy, and there is no reason to expect that it will be any different with Greece.
Phasing out transfers, even in a considered and systematic way, works only when the recipient is determined to put in place the measures necessary to survive without assistance.
There are few signs that Greece is ready to walk on its own, and as long as the aid continues to flow, that is unlikely to change.
In this sense, markets should view the Greek situation as an equilibrium, not a transition.
Deescalating Europe’s Politics of Resentment
ATHENS – A German television presenter recently broadcast an edited video of me, before I was Greece’s finance minister, giving his country the middle-finger salute.
The fallout has shown the potential impact of an alleged gesture, especially in troubled times.
Indeed, the kerfuffle sparked by the broadcast would not have happened before the 2008 financial crisis, which exposed the flaws in Europe’s monetary union and turned proud countries against one another.
When, in early 2010, Greece’s government could no longer service its debts to French, German, and Greek banks, I campaigned against its quest for an enormous new loan from Europe’s taxpayers to pay off those debts.
I gave three reasons.
First, the new loans did not represent a bailout for Greece so much as a cynical transfer of private losses from the banks’ books onto the shoulders of Greece’s most vulnerable citizens.
How many of Europe’s taxpayers, who have footed the bill for these loans, know that more than 90% of the €240 billion ($260 billion) that Greece borrowed went to financial institutions, not to the Greek state or its people?
Second, it was obvious that if Greece already could not repay its existing loans, the austerity conditions on which the “bailouts” were premised would crush Greek nominal incomes, making the national debt even less sustainable.
When Greeks could no longer make payments on their mountainous debts, German and other European taxpayers would have to step in again.
(Wealthy Greeks, of course, had already shifted their deposits to financial centers like Frankfurt and London.)
Finally, misleading peoples and parliaments by presenting a bank bailout as an act of “solidarity,” while failing to help ordinary Greeks – indeed, setting them up to place an even heavier burden on Germans – was destined to undermine cohesion within the eurozone.
Germans turned against Greeks; Greeks turned against Germans; and, as more countries have faced fiscal hardship, Europe has turned against itself.
The fact is that Greece had no right to borrow from German – or any other European – taxpayers at a time when its public debt was unsustainable.
Before Greece took any loans, it should have initiated debt restructuring and undergone a partial default on debt owed to its private-sector creditors.
But this “radical” argument was largely ignored at the time.
Similarly, European citizens should have demanded that their governments refuse even to consider transferring private losses to them.
But they failed to do so, and the transfer was effected soon after.
The result was the largest taxpayer-backed loan in history, provided on the condition that Greece pursue such strict austerity that its citizens have lost one-quarter of their incomes, making it impossible to repay private or public debts.
The ensuing – and ongoing – humanitarian crisis has been tragic.
Five years after the first bailout was issued, Greece remains in crisis.
Animosity among Europeans is at an all-time high, with Greeks and Germans, in particular, having descended to the point of moral grandstanding, mutual finger-pointing, and open antagonism.
This toxic blame game benefits only Europe’s enemies.
It has to stop.
Only then can Greece – with the support of its European partners, who share an interest in its economic recovery – focus on implementing effective reforms and growth-enhancing policies.
This is essential to placing Greece, finally, in a position to repay its debts and fulfill its obligations to its citizens.
In practical terms, the February 20 Eurogroup agreement, which provided a four-month extension for loan repayments, offers an important opportunity for progress.
As Greece’s leaders urged at an informal meeting in Brussels last week, it should be implemented immediately.
In the longer term, European leaders must work together to redesign the monetary union so that it supports shared prosperity, rather than fueling mutual resentment.
This is a daunting task.
But, with a strong sense of purpose, a united approach, and perhaps a positive gesture or two, it can be accomplished.
This is an updated and extended version of a post at yanisvaroufakis.eu.
Down and Out in Athens and Brussels
NEW YORK – The Greek catastrophe commands the world’s attention for two reasons.
First, we are deeply distressed to watch an economy collapse before our eyes, with bread lines and bank queues not seen since the Great Depression.
Second, we are appalled by the failure of countless leaders and institutions – national politicians, the European Commission, the International Monetary Fund, and the European Central Bank – to avert a slow-motion train wreck that has played out over many years.
If this mismanagement continues, not only Greece but also European unity will be fatally undermined.
To save both Greece and Europe, the new bailout package must include two big things not yet agreed.
First, Greece’s banks must be reopened without delay.
The ECB’s decision last week to withhold credit to the country’s banking system, and thereby to shutter the banks, was both inept and catastrophic.
That decision, forced by the ECB’s highly politicized Executive Board, will be studied – and scorned – by historians for years to come.
By closing the Greek banks, the ECB effectively shut down the entire economy (no economy above subsistence level, after all, can survive without a payments system).
The ECB must reverse its decision immediately, because otherwise the banks themselves would very soon become unsalvageable.
Second, deep debt relief must be part of the deal.
The refusal of the rest of Europe, and especially Germany, to acknowledge Greece’s massive debt overhang has been the big lie of this crisis.
Everyone has known the truth – that Greece can never service its current debt obligations in full – but nobody involved in the negotiations would say it.
Greek officials have repeatedly tried to discuss the need to restructure the debt by slashing interest rates, extending maturities, and perhaps cutting the face value of the debt as well.
Yet every attempt by Greece even to raise the issue was brutally rebuffed by its counterparties.
Of course, as soon as the negotiations collapsed two weeks ago, the truth about the Greek debt began to be stated.
The IMF was the first to break the silence, acknowledging that it had been urging debt relief but to no avail.
The United States then let it be known that President Barack Obama and Treasury Secretary Jack Lew had been trying to convince German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble to offer debt relief to Greece, also without success.
Then even Schäuble himself, by far the staunchest opponent of debt relief, admitted that Greece needed it; but he also claimed that such relief would violate European Union treaty provisions barring bailouts of governments.
Following Schauble’s remarkable acknowledgment (made publicly only after utter catastrophe had struck), Merkel herself opined that perhaps certain kinds of relief (such as cuts in interest rates, rather than in the debt’s face value) could do the job in a way that would be consistent with EU rules.
The fact that the Greek debt overhang was acknowledged only after negotiations had collapsed exposes the deep systemic failures that have brought Greece and Europe to this point.
We see a European system of crisis management that is fraught with ineptitude, extreme politicization, gamesmanship, and unprofessionalism.
I certainly do not mean to excuse Greek clientelism, corruption, and mismanagement as ultimate causes of the country’s predicament.
Yet the failure of the European institutions is more alarming.
Unless the EU can now save Greece, it will not be able to save itself.
The EU today operates something like the US under the Articles of Confederation, which defined the US’s ineffectual governing structure after independence from Britain in 1781 but prior to the adoption of the Constitution in 1787.
Like the newly independent US, the EU today lacks an empowered and effective executive branch capable of confronting the current economic crisis.
Instead of robust executive leadership tempered by a strong democratic parliament, committees of national politicians run the show in Europe, in practice sidelining (often brazenly) the European Commission.
It is precisely because national politicians attend to national politics, rather than Europe’s broader interests, that the truth about Greece’s debt went unspoken for so long.
The Eurogroup, which comprises the 19 eurozone finance ministers, embodies this destructive dynamic, meeting every few weeks (or even more frequently) to manage Europe’s crisis on the basis of national political prejudices rather than a rational approach to problem-solving.
Germany tends to call the shots, of course, but the discordant national politics of many member states has contributed to one debacle after the next.
It is the Eurogroup, after all, that “solved” Cyprus’s financial crisis by partial confiscation of bank deposits, thereby undermining confidence in Europe’s banks and setting the stage for Greece’s bank panic two years later.
Amid all this dysfunction, one international institution has remained somewhat above the political fray: the IMF.
Its analysis has been by far the most professional and least politicized.
Yet even the IMF allowed itself to be played by the Europeans, especially by the Germans, to the detriment of resolving the Greek crisis many years ago.
Once upon a time, the US might have pushed through policy changes based on the IMF’s technical analysis.
Now, however, the US, the IMF, and the European Commission have all watched from the sidelines as Germany and other national governments have run Greece into the ground.
Europe’s bizarre decision-making structure has allowed domestic German politics to prevail over all other considerations.
And that has meant less interest in an honest resolution of the crisis than in avoiding the appearance of being lenient toward Greece.
Germany’s leaders might rightly fear that their country will be left holding the bill for European bailouts, but the result has been to sacrifice Greece on the altar of an abstract and unworkable idea: “no bailouts.”
Unless some rational compromise is agreed, insistence on that approach will lead only to massive and even more costly defaults.
We are now truly at the endgame.
Greece’s banks have closed, its debt has been acknowledged as unsustainable, and yet the future of both the banks and the debt remains uncertain.
The decisions taken by Europe in the next several days will determine Greece’s fate; wittingly or not, they will determine the EU’s fate as well.
Europe’s Civil War
WASHINGTON, DC – The negotiations leading up to the latest tentative deal on Greece’s debt brought into relief two competing visions of the European Union: the flexible, humane, and political union espoused by France, and the legalistic and economy-focused union promoted by Germany.
As François Heisbourg recently wrote, “By openly contemplating the forced secession of Greece [from the eurozone], Germany has demonstrated that economics trumps political and strategic considerations.
France views the order of factors differently.” The question now is which vision will prevail?
The Greeks, for their part, have been putting their national identity ahead of their pocketbooks, in ways that economists do not understand and continually fail to predict.
It is economically irrational for Greeks to prefer continued membership in the eurozone, when they could remain in the EU with a restored national currency that they could devalue.
But, for the Greeks, eurozone membership does not mean only that they can use the common currency.
It places their country on a par with Italy, Spain, France, and Germany, as a “full member” of Europe – a position consistent with Greece’s status as the birthplace of Western civilization.
Whereas that stance reflects the vision of an “ever-closer union” that motivated the EU’s founders, Germany’s narrower, economic understanding of European integration cannot inspire ordinary citizens to support the compromises necessary to keep the EU together.
Nor can it withstand the inevitable attacks directed against EU institutions for every action and regulation that citizens dislike and for which national politicians want to avoid responsibility.
The original European Economic Community, created by the Treaty of Rome in 1957, was, as the name indicates, economic in nature.
The Treaty itself was hard-headed, grounded in the converging economic interests of France and Germany, with the Benelux countries and Italy rounding out the basis of a new European economy.
But economic integration was underpinned by a vision of peace and prosperity for Europe’s peoples, after centuries of unprecedented violence had culminated in two world wars that reinforced the seemingly eternal enmity between France and Germany.
And, indeed, the language of a larger political union was embedded in Europe’s treaties, to be interpreted by the European Court of Justice and subsequent generations of European decision-makers in ways that supported the construction of a common European polity and identity, as well as a unified economy.
My mother, a young Belgian in the 1950s, remembers the idealism and the excitement of the European federalist movement, with its promise that her generation could create a different future for Europe and the world.
To be sure, the vision of a United States of Europe, espoused by many of those early federalists, looked backward to the founding of the US, rather than forward to a distinctive European venture.
Nonetheless, the EU that emerged – which pools sovereignty sufficiently to benefit from being a powerful regional entity in a world of almost 200 countries while maintaining its members’ distinct languages and cultures – is something new.
That experiment cannot survive if supported only by economic rigor and rules.
What can continue to justify a political entity after the urgent realities and convictions that drove its establishment have faded to the pages of history and civics books or, at best, are the subject of grandparents’ stories?
For the US, those questions arose in the 1840s and 1850s, when the urgent need for a union to secure independence had faded, causing issues and conflicts that had been papered over to resurface.
In particular, slavery was allowed in some states, but prohibited in others, and the 1787 compromise to count each slave as three-fifths of a person when determining a state’s population for representation and taxation was fraying.
Economic differences between the industrial north and the agricultural south meant that discussions over states’ rights were about livelihoods as well as lives.
A horrific war resulted, in which the US defeated the secessionist southern Confederacy and imposed its vision of the union.
Before the war’s end, President Abraham Lincoln created a new narrative, declaring in the Gettysburg Address that it was fought for democracy as much as equality, with the goal of ensuring that “government of the people, by the people, for the people, shall not perish from the earth.”
This account simplified – and, in many ways, distorted – the historical record.
But no matter; the speech became as important a part of American national identity as the Declaration of Independence and the Constitution.
The EU is now facing its own civil war, though one that, fortunately, is free of physical violence.
Without statesmen and stateswomen able to articulate a vision of a shared future worth working and even sacrificing for, the side of unity may not win.
Europe’s national anthem, a circle of stars, and talk of fiscal rectitude and structural reforms cannot compete with the potent messages of the EU’s opponents.
Those opponents, on both the right and the left, are focusing on the everyday living conditions of European citizens – those who feel threatened by migrants and those who are suffering as a result of austerity.
For the EU to continue its march toward a stronger and closer polity and economy –one that nevertheless falls far short of a federal state – it must offer the credible prospect of a better life for all of its citizens.
Just before the final round of the recent Greek negotiations, French President François Hollande said that he did not want a Europe that “no longer progresses.” Fair enough.
But progress toward what?
Toward liberty, equality, and fraternity for all of Europe?
Toward the dignity and solidarity of all European citizens?
Toward a shared European house that is kept in order?
These are the questions that a new generation of European politicians must answer.
Statesmanship and the Greek Crisis
NEW YORK – Sovereign-debt crises such as the one in Greece can be resolved only through bold steps by both debtor and creditor.
The debtor needs a fresh start through a debt write-off; the creditor must find a way to provide one without rewarding bad behavior.
For a deal to be struck, both sides must have their needs addressed.
Thus, serious reforms and deep debt relief need to go hand in hand.
It is for this reason that Greece and Germany, its largest creditor, need a new modus vivendi in order to resume negotiations.
To begin with, the Greek government must be clear about the need for urgent economic reforms.
The country’s economy has not just collapsed; it is structurally moribund.
The roots of Greece’s problems stretch far deeper than the austerity of recent years.
In 2013, for example, resident inventors in Germany filed some 917 patent applications for every million inhabitants.
Resident inventors in Greece, by contrast, filed just 69 patent applications for every million.
If Greece wants the prosperity associated with a technologically advanced, twenty-first-century economy, it will have to earn it, by producing innovative products that are competitive on world markets, just as Germany does.
Doing so is likely to be a generational challenge.
For its part, Germany must acknowledge the enormity of Greece’s collapse.
The Greek economy has shrunk by around 25% since 2009; unemployment stands at 27%, with youth unemployment at nearly 50%.
When Germany faced comparable conditions in the early 1930s, its creditors shrugged, and the resulting instability allowed for the rise of Adolf Hitler.
After World War II, however, Germany’s debt was slashed, enabling it to rebuild.
Given this experience, it should understand the importance of cutting a country’s debt when the burden of servicing it becomes unsustainable.
The case for offering a country a fresh financial start is both economic and moral.
This makes it difficult for many bankers to understand, as their industry knows no morality – only the bottom line.
Politicians, too, tend to have their moral compasses calibrated to the relentless hunt for votes.
Finding effective and moral solutions requires genuine statesmanship – something that has been all too rare during the euro crisis.
Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel now have the opportunity to rise to the occasion as European statesmen.
Since Tsipras’s election in January, German officials have barely been able to contain their fury that a left-wing upstart government of a tiny, bankrupt country would dare to challenge one of the world’s great economies.
Finance Minister Wolfgang Schäuble, for example, has repeatedly sought to provoke Greece into leaving the eurozone.
Tsipras’s response to these provocations has been clear and consistent: Greece should stay in the eurozone, and it needs a fresh financial start to do so.
On July 5, the Greek people backed their young, charismatic leader with a decisive “No” vote on the unreasonable demands of their country’s creditors.
Their decision will one day be recognized as a victory for Europe over those who preferred to carve up the eurozone, rather than give Greece the chance to start anew within it.
At the likely meeting between Tsipras and Merkel this week in Brussels, the stakes could not be higher.
The economic costs of the impasse have been catastrophic for Greece, and pose a grave threat to Europe.
The breakdown of negotiations last week sparked a bank panic, leaving Greece’s economy paralyzed and its banks on the verge of insolvency.
If the banks are to be revived at all, they must be saved within days.
If Tsipras and Merkel meet as mere politicians, the results will be catastrophic.
Greece’s banks will be pushed to the point of failure, making the costs of saving Greece and the eurozone prohibitively high.
If the two leaders meet as statesmen, however, they will save Greece, the eurozone, and the faltering European spirit.
With the promise of deep debt relief for Greece and a rapprochement between Greece and Germany, economic confidence will return.
Deposits will flow back into Greek banks. The economy will come back to life.
Tsipras needs to assure Merkel that Greece will live within its means, not as a chronic ward of Europe.
To ensure such an outcome, debt relief and tough reforms should be phased in over time, according to an agreed schedule, with each party following through on its commitments, as long as the other does, as well.
Fortunately, Greece is a country of exceptional talents, capable of building new competitive sectors from the ground up, if given the chance.
Merkel must now take a stance that is the opposite of the one her finance minister has pursued to date.
Schäuble is undoubtedly one of Europe’s towering political figures, but his strategy for saving the eurozone by pushing Greece out was misguided.
Merkel now must step in to save Greece as part of the eurozone – and that means easing the country’s debt burden.
To do otherwise at this stage would create an irreparable split between Europe’s rich and poor, and powerful and weak.
Some – in particular, the ever-cynical bankers – argue that it is too late for Europe to save itself.
It is not.
In Europe, many influential leaders and citizens still view the marketplace as constrained by moral considerations, such as the need to alleviate economic suffering.
This is an invaluable asset. It makes it possible for Merkel to offer Greece a fresh start, because it is the right thing to do and because it accords with Germany’s own experience and history.
That idea of an ethical approach to the Greek crisis might sound absurd to readers of the financial press, and many politicians will undoubtedly consider it naive.
Yet most European citizens could embrace it as a sensible solution.
Europe rose from the rubble of World War II because of the vision of statesmen; now it has been brought to the verge of collapse by the everyday vanities, corruption, and cynicism of bankers and politicians.
It is time for statesmanship to return – for the sake of current and future generations in Europe and the world.
A Greek Suicide?
LONDON – The good news is that a Greek default, which has become more likely after Prime Minister Alexis Tsipras’ provocative rejection of what he described as the “absurd” bailout offer by Greece’s creditors, no longer poses a serious threat to the rest of Europe.
The bad news is that Tsipras does not seem to understand this.
To judge by Tsipras’s belligerence, he firmly believes that Europe needs Greece as desperately as Greece needs Europe.
This is the true “absurdity” in the present negotiations, and Tsipras’ misapprehension of his bargaining power now risks catastrophe for his country, humiliation for his Syriza party, or both.
The most likely outcome is that Tsipras will eat his words and submit to the conditions set by the “troika” (the European Commission, European Central Bank, and the International Monetary Fund) before the end of June.
If not, the ECB will stop supporting the Greek banking system, and the government will run out of money to service foreign debts and, more dramatically, to pay Greek citizens their pensions and wages.
Cut off from all external finance, Greece will become an economic pariah – the Argentina of Europe – and public pressure will presumably oust Syriza from power.
This outcome is all the more tragic, given that the economic analysis underlying Syriza’s demand for an easing of austerity was broadly right.
Instead of seeking a face-saving compromise on softening the troika program, Tsipras wasted six months on symbolic battles over economically irrelevant issues such as labor laws, privatizations, even the name of the troika.
This provocative behavior lost Greece all potential allies in France and Italy.
Worse still, the time wasted on political grandstanding destroyed the primary budget surplus, which was Tsipras’s trump card in the early negotiations.
Now Tsipras thinks he holds another trump card: Europe’s fear of a Greek default.
But this is a delusion promoted by his finance minister, Yanis Varoufakis.
A professor of game theory, Varoufakis recently boasted to the New York Times that “little Greece, in order to survive, [could] bring down the financial world,” and that his media image “as an irrational fool… is doing my work for me” by frightening other EU finance ministers.
Apparently, Varoufakis believes that his “sophisticated grasp of game theory” gives Greece a crucial advantage in “the complicated dynamics” of the negotiations.
In fact, the game being played out in Europe is less like chess than like tic-tac-toe, where a draw is the normal outcome, but a wrong move means certain defeat.
The rules of this game are much simpler than Varoufakis expected because of a momentous event that occurred in the same week as the Greek election.
On January 22, the ECB took decisive action to protect the eurozone from a possible Greek default.
By announcing a huge program of bond purchases, much bigger relative to the eurozone bond market than the quantitative easing implemented in the United States, Britain, or Japan, ECB President Mario Draghi erected the impenetrable firewall that had long been needed to protect the monetary Union from a Lehman-style financial meltdown.
The ECB’s newfound ability to print money, essentially without limit, to support both banks and governments has reduced Greek contagion to insignificance.
That represents a profound change in Europe’s financial environment, which Greek politicians, along with many economic analysts, still fail to understand.
Before the ECB’s decision, contagion from Greece was a genuine threat.
If the Greek government defaulted or tried to abandon the euro, Greece’s banks would collapse, and Greeks who failed to get their money out of the country would lose their savings, as occurred in Cyprus in 2013.
When savers in other indebted euro countries such as Portugal and Spain observed this, they would fear similar losses and move their money to banks in Germany or Austria, as well as sell their holdings of Portuguese or Spanish government bonds.
As a result, the debtor countries’ bond prices would collapse, interest rates would soar, and banks would be threatened with collapse.
If the contagion from Greece intensified, the next-weakest country, probably Portugal, would find itself unable to support its banking system or pay its debts.
In extremis, it would abandon the euro, following the Greek example.
Before January, this sequence of events was quite likely, but the ECB’s bond-buying program put a firebreak at each point of the contagion process.
If holders of Portuguese bonds are alarmed by a future Greek default, the ECB will simply increase its bond buying; with no limit to its buying power, it will easily overwhelm any selling pressure.
If savers in Portuguese banks start moving their money to Germany, the ECB will recycle these euros back to Portugal through interbank deposits.
Again, there is no limit to how much money the ECB can recycle, provided Portuguese banks remain solvent – which they will, so long as the ECB continues to buy Portuguese government bonds.
In short, the ECB bond-buying program has transformed the ECB from a passive observer of the euro crisis, paralyzed by the outdated legalistic constraints of the Maastricht Treaty, into a proper lender of last resort.
With powers to monetize government debts similar to those exercised by the US Federal Reserve, the Bank of Japan, and the Bank of England, the ECB can now guarantee the eurozone against financial contagion.
Unfortunately for Greece, this has been lost on the Tsipras government.
Greek politicians who still see the threat of financial contagion as their trump card should note the coincidence of the Greek election and the ECB’s bond-buying program and draw the obvious conclusion.
The ECB’s new policy was designed to protect the euro from the consequences of a Greek exit or default.
The latest Greek negotiating strategy is to demand a ransom to desist threatening suicide.
Such blackmail might work for a suicide bomber.
But Greece is just holding a gun to its own head – and Europe does not need to care very much if it pulls the trigger.
What Is Plan B for Greece?
TOKYO – Financial markets have greeted the election of Greece’s new far-left government in predictable fashion.
But, though the Syriza party’s victory sent Greek equities and bonds plummeting, there is little sign of contagion to other distressed countries on the eurozone periphery.
Spanish ten-year bonds, for example, are still trading at interest rates below US Treasuries.
The question is how long this relative calm will prevail.
Greece’s fire-breathing new government, it is generally assumed, will have little choice but to stick to its predecessor’s program of structural reform, perhaps in return for a modest relaxation of fiscal austerity.
Nonetheless, the political, social, and economic dimensions of Syriza’s victory are too significant to be ignored.
Indeed, it is impossible to rule out completely a hard Greek exit from the euro (“Grexit”), much less capital controls that effectively make a euro inside Greece worth less elsewhere.
Some eurozone policymakers seem to be confident that a Greek exit from the euro, hard or soft, will no longer pose a threat to the other periphery countries.
They might be right; then again, back in 2008, US policymakers thought that the collapse of one investment house, Bear Stearns, had prepared markets for the bankruptcy of another, Lehman Brothers.
We know how that turned out.
True, there have been some important policy and institutional advances since early 2010, when the Greek crisis first began to unfold.
The new banking union, however imperfect, and the European Central Bank’s vow to save the euro by doing “whatever it takes,” are essential to sustaining the monetary union.
Another crucial innovation has been the development of the European Stability Mechanism, which, like the International Monetary Fund, has the capacity to execute vast financial bailouts, subject to conditionality.
And yet, even with these new institutional backstops, the global financial risks of Greece’s instability remain profound.
It is not hard to imagine Greece’s brash new leaders underestimating Germany’s intransigence on debt relief or renegotiation of structural-reform packages.
It is also not hard to imagine Eurocrats miscalculating political dynamics in Greece.
In any scenario, most of the burden of adjustment will fall on Greece.
Any profligate country that is suddenly forced to live within its means has a huge adjustment to make, even if all of its past debts are forgiven.
And Greece’s profligacy was epic.
In the run-up to its debt crisis in 2010, the government’s primary budget deficit (the amount by which government expenditure on goods and services exceeds revenues, excluding interest payments on its debt) was equivalent to an astonishing 10% of national income.
Once the crisis erupted and Greece lost access to new private lending, the “troika” (the IMF, the ECB, and the European Commission) provided massively subsidized long-term financing.
But even if Greece’s debt had been completely wiped out, going from a primary deficit of 10% of GDP to a balanced budget requires massive belt tightening –&nbsp;and, inevitably, recession.
Germans have a point when they argue that complaints about “austerity” ought to be directed at Greece’s previous governments.
These governments’ excesses lifted Greek consumption far above a sustainable level; a fall to earth was unavoidable.
Nonetheless, Europe needs to be much more generous in permanently writing down debt and, even more urgently, in reducing short-term repayment flows.
The first is necessary to reduce long-term uncertainty; the second is essential to facilitate near-term growth.
Let’s face it: Greece’s bind today is hardly all of its own making.
(Greece’s young people – who now often take a couple of extra years to complete college, because their teachers are so often on strike – certainly did not cause it.)
First and foremost, the eurozone countries’ decision to admit Greece to the single currency in 2002 was woefully irresponsible, with French advocacy deserving much of the blame.
Back then, Greece conspicuously failed to meet a plethora of basic convergence criteria, owing to its massive debt and its relative economic and political backwardness.
Second, much of the financing for Greece’s debts came from German and French banks that earned huge profits by intermediating loans from their own countries and from Asia.
They poured this money into a fragile state whose fiscal credibility ultimately rested on being bailed out by other euro members.
Third, Greece’s eurozone partners wield a massive stick that is typically absent in sovereign-debt negotiations.
If Greece does not accept the conditions imposed on it to maintain its membership in the single currency, it risks being thrown out of the European Union altogether.
Even after two bailout packages, it is unrealistic to expect Greek taxpayers to start making large repayments anytime soon – not with unemployment at 25% (and above 50% for young people).
Germany and other hawkish northern Europeans are right to insist that Greece adhere to its commitments on structural reform, so that economic convergence with the rest of the eurozone can occur one day.
But they ought to be making even deeper concessions on debt repayments, where the overhang still creates considerable policy uncertainty for investors.
If concessions to Greece create a precedent that other countries might exploit, so be it.
Sooner rather than later, other periphery countries will also need help.
Greece, one hopes, will not be forced to leave the eurozone, though temporary options such as imposing capital controls may ultimately prove necessary to prevent a financial meltdown.
Greek Lessons for the World Economy
CAMBRIDGE – The $140 billion support package that the Greek government has finally received from its European Union partners and the International Monetary Fund gives it the breathing space needed to undertake the difficult job of putting its finances in order.
The package may or may not prevent Spain and Portugal from becoming undone in a similar fashion, or indeed even head off an eventual Greek default.
Whatever the outcome, it is clear that the Greek debacle has given the EU a black eye.
Deep down, the crisis is yet another manifestation of what I call “the political trilemma of the world economy”: economic globalization, political democracy, and the nation-state are mutually irreconcilable.
We can have at most two at one time.
Democracy is compatible with national sovereignty only if we restrict globalization.
If we push for globalization while retaining the nation-state, we must jettison democracy.
And if we want democracy along with globalization, we must shove the nation-state aside and strive for greater international governance.
The history of the world economy shows the trilemma at work.
The first era of globalization, which lasted until 1914, was a success as long as economic and monetary policies remained insulated from domestic political pressures.
These policies could then be entirely subjugated to the demands of the gold standard and free capital mobility.
But once the political franchise was enlarged, the working class got organized, and mass politics became the norm, domestic economic objectives began to compete with (and overwhelm) external rules and constraints.
The classic case is Britain’s short-lived return to gold in the interwar period.
The attempt to reconstitute the pre-World War I model of globalization collapsed in 1931, when domestic politics forced the British government to choose domestic reflation over the gold standard.
The architects of the Bretton Woods regime kept this lesson in mind when they redesigned the world’s monetary system in 1944.
They understood that democratic countries would need the space to conduct independent monetary and fiscal policies.
So they contemplated only a “thin” globalization, with capital flows restricted largely to long-term lending and borrowing.
John Maynard Keynes, who wrote the rules along with Harry Dexter White, viewed capital controls not as a temporary expedient but as a permanent feature of the global economy.
The Bretton Woods regime collapsed in the 1970’s as a result of the inability or unwillingness – it is not entirely clear which – of leading governments to manage the growing tide of capital flows.
The third path identified by the trilemma is to do away with national sovereignty altogether.
In this case, economic integration can be married with democracy through political union among states.
The loss in national sovereignty is then compensated by the “internationalization” of democratic politics.
Think of this as a global version of federalism.
The United States, for example, created a unified national market once its federal government wrested sufficient political control from individual states.
This was far from a smooth process, as the American Civil War amply demonstrates.
The EU’s difficulties stem from the fact that the global financial crisis caught Europe midway through a similar process.
European leaders always understood that economic union needs to have a political leg to stand on.
Even though some, such as the British, wished to give the Union as little power as possible, the force of the argument was with those who pressed for political integration alongside economic integration.
Still, the European political project fell far short of the economic one.
Greece benefited from a common currency, unified capital markets, and free trade with other EU member states.
But it does not have automatic access to a European lender of last resort.
Its citizens do not receive unemployment checks from Brussels the way that, say, Californians do from Washington, DC, when California experiences a recession.
Nor, given linguistic and cultural barriers, can unemployed Greeks move just as easily across the border to a more prosperous European state.
And Greek banks and firms lose their creditworthiness alongside their government if markets perceive the latter to be insolvent.
The German and French governments, for their part, have had little say over Greece’s budget policies.
They could not stop the Greek government from borrowing (indirectly) from the European Central Bank (ECB) as long as credit rating agencies deemed Greek debt creditworthy.
If Greece chooses default, they cannot enforce their banks’ claims on Greek borrowers or seize Greek assets.
Nor can they prevent Greece from leaving the eurozone.
What all this means is that the financial crisis has turned out to be a lot deeper and its resolution considerably messier than necessary.
The French and German governments have grudgingly come up with a major loan package, but only after considerable delay and with the IMF standing at their side.
The ECB has lowered the threshold of creditworthiness that Greek government securities must meet in order to allow continued Greek borrowing.
The success of the rescue is far from assured, in view of the magnitude of belt-tightening that it calls for and the hostility that it has aroused on the part of Greek workers.
When push comes to shove, domestic politics trumps foreign creditors.
The crisis has revealed how demanding globalization’s political prerequisites are.
It shows how much European institutions must still evolve to underpin a healthy single market.
The choice that the EU faces is the same in other parts of the world: either integrate politically, or ease up on economic unification.
Before the crisis, Europe looked like the most likely candidate to make a successful transition to the first equilibrium – greater political unification.
Now its economic project lies in tatters while the leadership needed to rekindle political integration is nowhere to be seen.
The best that can be said is that Europe will no longer be able to delay making the choice that the Greek affair has laid bare. If you are an optimist, you might even conclude that Europe will therefore ultimately emerge stronger.
A Blueprint for Greece’s Recovery
ATHENS – Months of negotiations between our government and the International Monetary Fund, the European Union, and the European Central Bank have produced little progress.
One reason is that all sides are focusing too much on the strings to be attached to the next liquidity injection and not enough on a vision of how Greece can recover and develop sustainably.
If we are to break the current impasse, we must envisage a healthy Greek economy.
Sustainable recovery requires synergistic reforms that unleash the country’s considerable potential by removing bottlenecks in several areas: productive investment, credit provision, innovation, competition, social security, public administration, the judiciary, the labor market, cultural production, and, last but not least, democratic governance.
Seven years of debt deflation, reinforced by the expectation of everlasting austerity, have decimated private and public investment and forced anxious, fragile banks to stop lending.
With the government lacking fiscal room, and Greek banks burdened by non-performing loans, it is important to mobilize the state’s remaining assets and unclog the flow of bank credit to healthy parts of the private sector.
To restore investment and credit to levels consistent with economic escape velocity, a recovering Greece will require two new public institutions that work side by side with the private sector and with European institutions: A development bank that harnesses public assets and a “bad bank” that enables the banking system to get out from under their non-performing assets and restore the flow of credit to profitable, export-oriented firms.
Imagine a development bank levering up collateral that comprises post-privatization equity retained by the state and other assets (for example, real estate) that could easily be made more valuable (and collateralized) by reforming their property rights.
Imagine that it links the European Investment Bank and the European Commission President Jean-Claude Juncker’s €315 billion ($350 billion) investment plan with Greece’s private sector.
Instead of being viewed as a fire sale to fill fiscal holes, privatization would be part of a grand public-private partnership for development.
Imagine further that the “bad bank” helps the financial sector, which was recapitalized generously by strained Greek taxpayers in the midst of the crisis, to shed their legacy of non-performing loans and unclog their financial plumbing.
In concert with the development bank’s virtuous impact, credit and investment flows would flood the Greek economy’s hitherto arid realms, eventually helping the bad bank turn a profit and become “good.”
Finally, imagine the effect of all of this on Greece’s financial, fiscal, and social-security ecosystem: With bank shares skyrocketing, our state’s losses from their recapitalization would be extinguished as its equity in them appreciates.
Meanwhile, the development bank’s dividends would be channeled into the long-suffering pension funds, which were abruptly de-capitalized in 2012 (owing to the “haircut” on their holdings of Greek government bonds).
In this scenario, the task of bolstering social security would be completed with the unification of pension funds; the surge of contributions following the pickup in employment; and the return to formal employment of workers banished into informality by the brutal deregulation of the labor market during the dark years of the recent past.
One can easily imagine Greece recovering strongly as a result of this strategy.
In a world of ultra-low returns, Greece would be seen as a splendid opportunity, sustaining a steady stream of inward foreign direct investment.
But why would this be different from the pre-2008 capital inflows that fueled debt-financed growth?
Could another macroeconomic Ponzi scheme really be avoided?
During the era of Ponzi-style growth, capital flows were channeled by commercial banks into a frenzy of consumption and by the state into an orgy of suspect procurement and outright profligacy.
To ensure that this time is different, Greece will need to reform its social economy and political system.
Creating new bubbles is not our government’s idea of development.
This time, by contrast, the new development bank would take the lead in channeling scarce homegrown resources into selected productive investment.
These include startups, IT companies that use local talent, organic-agro small and medium-size enterprises, export-oriented pharmaceutical companies, efforts to attract the international film industry to Greek locations, and educational programs that take advantage of Greek intellectual output and unrivaled historic sites.
In the meantime, Greece’s regulatory authorities would be keeping a watchful eye over commercial lending practices, while a debt brake would prevent our government from indulging in old, bad habits, ensuring that our state never again slips into primary deficits.
Cartels, anti-competitive invoicing practices, senselessly closed professions, and a bureaucracy that has traditionally turned the state into a public menace would soon discover that our government is their worst foe.
The barriers to growth in the past were an unholy alliance among oligarchic interests and political parties, scandalous procurement, clientelism, the permanently broken media, overly accommodating banks, weak tax authorities, and a weighed-down, fearful judiciary.
Only the bright light of democratic transparency can remove such impediments; our government is determined to help it shine through.
The Greek Time Bomb
ATHENS – Much is at stake in Greece’s upcoming election.
Indeed, the outcome could determine whether the country remains in the eurozone, with far-reaching implications for the rest of the monetary union.
Syriza, a radical left-wing party whose popularity has skyrocketed amid the country’s economic crisis, is the favorite to win, though it is unlikely to gain enough parliamentary seats to govern alone.
Instead, it will probably lead a coalition government, though with which other parties remains unclear.
Fundamental to Syriza’s platform is its economic program, designed to counteract the impact of the excessively strict austerity that Greeks have endured for the last four and a half years, in exchange for bailouts from the “troika” of the European Central Bank, the International Monetary Fund, and the European Commission.
Pensions have been reduced by 40%, on average, while the middle class is suffering under the weight of crippling new property taxes.
As a result, Greece has fallen into a deep and prolonged recession, with output down 25% from pre-crisis levels.
Worse, unemployment stands at nearly 26% – and more than 50% among young people.
Yet most unemployment benefits are now being eliminated after 12 months, with the long-term unemployed often losing access to the state health-care system.
Add to this a 30% increase in prices for prescription drugs, and it is easy to see why Greek society is unraveling.
Of course, these sacrifices might be worthwhile were they helping Greece reduce its public debt to manageable levels.
But, at the end of 2014, public debt amounted to 175% of GDP, having increased from its 2009 level of 127%.
Servicing that debt would require primary budget surpluses equal to at least 4% of GDP until 2022 – an outcome that would require a surge in growth.
Under the weight of relentless fiscal austerity, however, such growth is out of the question.
That is why Syriza has promised to launch a massive new spending program – including free electricity and food coupons for the poor and an increase in state pensions to pre-crisis levels – that would cost about 6.5% of GDP.
Tax hikes for high-income earners and large property owners would help to finance these expenditures, while increases in the minimum wage would round out income redistribution efforts.
Syriza has also promised to repeal labor-market liberalization and suspend privatization.
Finally, it plans to renegotiate Greece’s debt with lenders, in the hope of writing off the bulk of its liabilities.
Syriza’s economic program neglects the important fact that fiscal consolidation and structural measures not only form part of Greece’s commitments; they also serve the country’s long-term interest.
Given this, they cannot – and should not – be abolished.
Instead, the problems in their design and implementation should be addressed, in order to improve their effectiveness within current economic circumstances.
Such an approach would strengthen Syriza’s position in debt-relief negotiations.
Nonetheless, official statements suggest that the troika would not be inclined to accept Syriza’s negotiating framework, intending instead to complete the talks that it had launched with the outgoing center-right government, the goal being to securing further budget cuts and initiate new labor-market and pension reforms.
In short, the troika will insist that Greece honors its prior commitments.
If negotiations stall, financial and liquidity stress, resulting from Greece’ inability to borrow at current interest rates – ten-year bond yields have reached 9.5 % – will weaken the fiscal position and banking system further.
This could lead to a collapse in confidence, triggering financial upheaval and, in turn, forcing the country to seek a third bailout – one that would require Greece to leave the eurozone and introduce a new, devalued currency.
In that case, Greece’s geopolitical position would be weakened, its economy would sink further into recession, and social tensions would rise.
Moreover, instability would become chronic, because the eurozone would no longer offer a backstop for fiscal and financial laxity.
Eurozone authorities may claim that a Greek exit no longer poses a systemic risk, given the introduction in recent years of various instruments for fighting financial crises, including government-backed rescue funds, a partial banking union, tougher fiscal controls, and the European Central Bank’s new role as lender of last resort.
But a member’s exit would still indicate that the eurozone’s integrity is not guaranteed – a message that the markets are unlikely to miss.
A Greek exit may serve as a warning to countries like Spain, Italy, and France, where strong anti-Europe or anti-establishment parties are on the rise.
But it would do nothing to address the real problem: the increasing economic divergence among eurozone countries.
So long as performance gaps continue to widen, voters will continue to challenge European integration.
Only further unification, underpinned by growth-oriented policies in the struggling countries, can reverse this trend.
Such an outcome is still possible – but only if the relevant actors recognize the risks associated with a Greek exit from the eurozone.
A Syriza-led government must moderate its approach and promise that it will continue to pursue reform and limit spending in exchange for a substantial reduction to its debt burden – a reduction that the troika must be willing to grant.
Green Bootleggers and Baptists
NEW YORK – In May, the United Nations’ International Panel on Climate Change made media waves with a new report on renewable energy.
As in the past, the IPCC first issued a short summary; only later would it reveal all of the data.
So it was left up to the IPCC’s spin-doctors to present the take-home message for journalists.
The first line of the IPCC’s press release declared, “Close to 80% of the world‘s energy supply could be met by renewables by mid-century if backed by the right enabling public policies.” That story was repeated by media organizations worldwide.
Last month, the IPCC released the full report, together with the data behind this startlingly optimistic claim.
Only then did it emerge that it was based solely on the most optimistic of 164 modeling scenarios that researchers investigated.
And this single scenario stemmed from a single study that was traced back to a report by the environmental organization Greenpeace.
The author of that report – a Greenpeace staff member – was one of the IPCC’s lead authors.
The claim rested on the assumption of a large reduction in global energy use.
Given the number of people climbing out of poverty in China and India, that is a deeply implausible scenario.
When the IPCC first made the claim, global-warming activists and renewable-energy companies cheered. “The report clearly demonstrates that renewable technologies could supply the world with more energy than it would ever need,” boasted Steve Sawyer, Secretary-General of the Global Wind Energy Council.
This sort of behavior – with activists and big energy companies uniting to applaud anything that suggests a need for increased subsidies to alternative energy – was famously captured by the so-called “bootleggers and Baptists” theory of politics.
The theory grew out of the experience of the southern United States, where many jurisdictions required stores to close on Sunday, thus preventing the sale of alcohol.
The regulation was supported by religious groups for moral reasons, but also by bootleggers, because they had the market to themselves on Sundays.
Politicians would adopt the Baptists’ pious rhetoric, while quietly taking campaign contributions from the criminals.
Of course, today’s climate-change “bootleggers” are not engaged in any illegal behavior.
But the self-interest of energy companies, biofuel producers, insurance firms, lobbyists, and others in supporting “green” policies is a point that is often missed.
Indeed, the “bootleggers and Baptists” theory helps to account for other developments in global warming policy over the past decade or so.
For example, the Kyoto Protocol would have cost trillions of dollars, but would have achieved a practically indiscernible difference in stemming the rise in global temperature.
Yet activists claimed that there was a moral obligation to cut carbon-dioxide emissions, and were cheered on by businesses that stood to gain.
During the ill-fated Copenhagen climate summit in December 2009, Denmark’s capital city was plastered with slick ads urging the delegates to make a strong deal –paid for by Vestas, the world’s largest windmill producer.
Oil tycoon T. Boone Pickens, a famous convert to environmentalism, drafted a “plan” (which he named after himself) to increase America’s reliance on renewables.
Of course, he would also have been one of the major investors in the wind-power and natural-gas companies that would benefit from government subsidies.
Traditional energy giants like BP and Shell have championed their “green” credentials, while standing to profit from selling oil or gas instead of environmentally “unfriendly” coal.
Even US electricity giant Duke Energy, a major coal consumer, won green kudos for promoting a US cap-and-trade scheme.
But the firm ended up opposing the draft legislation to create such a scheme, because it did not provide sufficient free carbon-emission permits for coal companies.
Dubious claims by faithful activists gave rise to the biofuels industry (with supporting lobbyists).
Biofuel production likely increases atmospheric carbon, owing to the massive deforestation that it requires, while crop diversion increases food prices and contributes to global hunger.
While environmentalists have started to acknowledge this, the industry received a lot of activist support when it began – and neither agribusiness nor green-energy producers have any interest in changing course now.
Obviously, private firms are motivated by self-interest, and that is not necessarily a bad thing.
But, too often, we hear commentators suggest that when Greenpeace and Big Business agree on something, it must be a sensible option.
Business support for expensive policies such as the Kyoto Protocol – which would have done very little for climate change – indicate otherwise.
The climate-change “Baptists” provide the moral cover that politicians can use to sell regulation, along with scary stories that the media can use to attract readers or viewers.
Businesses see opportunities for taxpayer-funded subsidies, and to pass on inevitable cost growth to consumers.
Unfortunately, this convergence of interests can push us to focus on ineffective, expensive responses to climate change.
Whenever opposite political forces attract, as activists and big business have in the case of global warming, there is a high risk that the public interest will be caught in the middle.
Green Domestic Product?
SANTIAGO – One of the recurrent themes at the United Nations’ spectacularly unsuccessful Rio+20 summit in June was the need to change how we measure wealth.
Many argue that we must abandon our “obsession” with Gross Domestic Product and develop a new “green” accounting standard to replace it.
In fact, doing so could be a serious mistake.
GDP is really just an account of the market value of all goods and services.
This sounds like a good indicator of wealth, but, as is frequently pointed out, it includes things that do not make us richer and leaves out things that do.
For example, if people are not compensated for the harm done by pollution, its adverse effects will not be included in GDP.
If we pay to clean up pollution, this increases GDP, but no wealth has been created.
Likewise, there is economic value produced when wastewater is naturally cleaned by wetlands, but no transaction has occurred, so it is not counted in GDP.
It is worthwhile to consider these limitations of GDP as a measure of wealth.
And it could make sense to produce a better GDP, which adds uncounted benefits, subtracts the costs of externalities, and excludes activities that generate no wealth.
Unfortunately, many of the proposed “green” substitutions, however well intentioned, may not address these limitations adequately and could, in fact, produce worse outcomes.
One prominent example reported in the run-up to Rio+20 and used to support “greening” GDP centered on the Nakivubo Swamp in Uganda’s capital, Kampala, where wastewater flows from the city toward Lake Victoria.
Without the swamp’s purification services, a study showed, Kampala would need a sewage plant costing at least $2 million a year.
According to economist Pavan Sukhdev, the former head of the United Nations’ Green Economy Initiative, the point was simple: “It’s going to cost $2 million per year to do what the swamp was doing for free, and they don’t have that money.”
Thus, swayed both by the uncounted benefits from wastewater treatment – estimated at up to $1.75 million a year – and the potential outlay to build a sewage plant, Kampala decided to protect the area.
“Economic logic prevailed,” says Sukhdev.
The Nakivubo Swamp is an excellent example of the need for careful valuation of the environment.
Such information is crucial for making good decisions.
For example, if the wetland were to be destroyed to make way for a new district, we know that its benefits would have to be at least $1.75 million higher than the costs.
But there is also a significant risk of political misuse of such information.
Kampala’s decision-makers decided to protect the area.
In other words, they rejected ever considering alternative possibilities for the area.
Green campaigners often seek such outcomes, but they are entirely unjustified.
The swamp is close to the city center and its industrial center, and there is a land shortage in Kampala.
In all likelihood, the net benefits of job creation and economic growth that could result from creating a new district (in place of the swamp) would be dramatically higher than the $1.75 million.
There is a reason why few large, rich cities, if any, have undeveloped wetlands in their midst.
If green measures are used to shortcut the political process, we can actually end up worse off, because countries will be deprived of jobs, wealth, and welfare, while relatively small environmental benefits will be achieved.
The Nakivubo Swamp is not a case of economic logic prevailing, but exactly the opposite – a failure to consider all options and choose the best.
Imagine if our ancestors had made a similar valuation in the past, deciding to protect swampland at all cost.
Much of lower Manhattan would still be a swamp, rather than being turned into the powerhouse of New York City, at a huge cost to society.
In general, green accounting may end up being more biased than conventional GDP measures.
Green GDP does include uncounted losses, so it avoids the problem of overestimating our wealth, but it fails to account for the potentially much larger benefits of innovation.
For example, the World Bank claims that in order to be green, we need to take into account that consuming fossil fuels will deprive future generations of those resources.
In reality, burning fossil fuels over the past 150 years has enabled us to be free to create and innovate an amazingly richer world of antibiotics, telecommunications, and computers.
These will further enrich the future, but are not counted.
Moreover, as we have burned fossil fuels, we have simultaneously found new resources and discovered new methods, such as horizontal fracturing, which has dramatically increased the availability of natural gas while driving down its cost.
All of this leaves future societies amazingly richer – but would be missed in green GDP measures.
In practice, green accounting might easily have led our forefathers not to cut down forests, because this would entail losing a valuable resource.
But converting forests to agriculture led to cities and civilization.
Innovation and substitution followed, which ultimately produced many more calories and much more wealth.
Most policymakers still focus on GDP, because, while not perfect, it is strongly correlated with highly prized real-world outcomes.
A country with higher GDP generally has lower child mortality rates, higher life expectancy, better education, more democracy, less corruption, greater life satisfaction, and often a cleaner environment.
So, while green accounting certainly can play a role, we must not allow it to become a roadblock to development.
Green Money
NEW YORK – There is little doubt that green will be the metaphorical color of choice for world leaders when they gather at the G-20 Summit in Pittsburgh.
Attention will focus on turning the “green shoots” of recovery into sustainable “green growth,” leading to “green economies” consistent with the goal of protecting the world’s climate.
Governments in rich countries are beginning to spell out just what that will mean in terms of policy and lifestyle changes and the investments required to develop clean energy sources.
But, to be successful, a “green new deal” will have to address some enormous challenges in the developing world, where the impact of global warming will be felt first and hardest, and where rapid growth requires massive expansion of cheap energy.
Globally, more than 30 million tons of oil equivalent are consumed in the form of primary energy every day, equivalent to 55 kilowatt hours per person per day, with rich countries, on average, consuming more than twice that figure.
For many developing countries, the figure is well under 20 kwh;
China is still well below the global average, and even most emerging markets consume less than one-third of the average in many advanced economies.
The economics behind efforts to close these energy gaps are relatively straightforward.
Up to a threshold of around 100 kwh per capita per day, energy consumption and human development indicators go hand in hand.
At current prices, between $10 and $20 per person per day would be needed to reach that threshold.
This puts energy security well beyond the means of not just the poorest, but also of most people in emerging economies.
Spending $10 per day on energy services would, for example, exhaust the per capita incomes of countries such as Angola, Ecuador, and Macedonia.
Hence, big investments in energy services are the order of the day throughout the developing world.
In order to provide more energy to meet development goals without accelerating global warming, there must be a shift to a new energy infrastructure built around renewables (of which the most significant are probably solar power, wind, and biofuels), cleaner coal, and carbon capture and storage.
The problem is that these are currently much more costly options than their carbon-heavy alternatives.
Policy makers in developing countries are concerned that being forced to go down this path could put modern energy services beyond the reach of poor countries, families, and communities.
Market-based solutions to the climate challenge run the very serious risk of undermining development objectives, precisely because they aim to raise the price of energy services in order to make renewable energy sources attractive to private investors.
Indeed, the protectionist elements tacked on to these proposals make them decidedly anti-development.
So what is needed is massive public investment in cleaner energy provision, coupled in the short term with appropriate subsidies to offset high initial prices.
If targeted at the most promising technology options (say, solar and wind), such a strategy would yield early unit cost write-downs through innovation, learning, and economies of scale; give the private sector clear, credible, and attractive signals; and encourage energy efficiency.
The big obstacle is access to predictable and affordable finance.
The onus is on rich-country governments to support this big push into clean energy in the developing world, as it was their carbon-fueled economic prosperity that has brought us to the brink of a climate catastrophe.
So far, rich countries have not risen to the challenge; despite commitments made at Kyoto, Bali, and elsewhere, the resources committed for climate-change mitigation – let alone adaptation – in developing countries have been paltry and poorly targeted.
The scale of the needed support is comparable to the Marshall Plan, which committed 1% of the United States’ GDP per year to help European reconstruction after World War II.
But, as with the original plan, the long-term returns from such a commitment will be enormous.
This time, moreover, the burden will not fall on one country alone, and a broader mix of traditional and innovative sources of financing are already available to help fund the required investment programs in energy efficiency and renewables.
Even so, scaling-up multilateral support will require a massive overhaul of international finance.
Back in April, G-20 leaders accepted that investing in a low-carbon infrastructure, particularly energy services, is key to a truly sustainable economic and environmental future.
In Pittsburgh, with the clock ticking on talks to adopt a successor treaty to the Kyoto Protocol this December in Copenhagen, the G-20 will have a real opportunity to show that the color of serious money to meet both climate and development goals really is green.
Green Shoots or Yellow Weeds?
New York – Recent data suggest that the rate of contraction in the world economy may be slowing.
But hopes that “green shoots” of recovery may be springing up have been dashed by plenty of yellow weeds. Recent data on employment, retail sales, industrial production, and housing in the United States remain very weak;
Europe’s first quarter GDP growth data is dismal;
Japan’s economy is still comatose; and even China – which is recovering – has very weak exports.
Thus, the consensus view that the global economy will soon bottom out has proven – once again – to be overly optimistic.
After the collapse of Lehman Brothers in September 2008, the global financial system nearly melted down and the world economy went into free fall.
Indeed, the rate of economic contraction in the fourth quarter of 2008 and the first quarter of 2009 reached near-depression levels.
At that point, global policymakers got religion and started to use most of the weapons in their arsenal: vast fiscal-policy easing; conventional and unconventional monetary expansion; trillions of dollars in liquidity support, recapitalization, guarantees, and insurance to stem the liquidity and credit crunch; and, finally, massive support to emerging-market economies.
In the last two months alone, one can count more than 150 different policy interventions around the world.
This policy equivalent of former US Secretary of State Colin Powell’s doctrine of “overwhelming force,” together with the sharp contraction of output below final demand for goods and services (which drew down inventories of unsold goods), sets the stage for most economies to bottom out early next year.
Even so, the optimists who spoke last year of a soft landing or a mild “V-shaped” eight-month recession were proven wrong, while those who argued that this would be a longer and more severe “U-shaped” 24-month recession – the US downturn is already in its 18th month – were correct.
And the recent optimism that economies will bottom out by mid-year have been dashed by the most recent economic data.
The crucial issue, however, is not when the global economy will bottom out, but whether the global recovery – whenever it comes – will be robust or weak over the medium term.
One cannot rule out a couple of quarters of sharp GDP growth as the inventory cycle and the massive policy boost lead to a short-term revival.
But those tentative green shoots that we hear so much about these days may well be overrun by yellow weeds even in the medium term, heralding a weak global recovery over the next two years.
First, employment is still falling sharply in the US and other economies.
Indeed, in advanced economies, the unemployment rate will be above 10% by 2010.
This will be bad news for consumption and the size of bank losses.
Second, this is a crisis of solvency, not just liquidity, but true deleveraging has not really started, because private losses and debts of households, financial institutions, and even corporations are not being reduced, but rather socialized and put on government balance sheets.
Lack of deleveraging will limit the ability of banks to lend, households to spend, and firms to invest.
Third, in countries running current-account deficits, consumers need to cut spending and save much more for many years.
Shopped out, savings-less, and debt-burdened consumers have been hit by a wealth shock (falling home prices and stock markets), rising debt-service ratios, and falling incomes and employment.
Fourth, the financial system – despite the policy backstop – is severely damaged.
Most of the shadow banking system has disappeared, and traditional commercial banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalized.
So the credit crunch will not ease quickly.
Fifth, weak profitability, owing to high debts and default risk, low economic – and thus revenue – growth, and persistent deflationary pressure on companies’ margins, will continue to constrain firms’ willingness to produce, hire workers, and invest.
Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk.
Seventh, monetization of fiscal deficits is not inflationary in the short run, whereas slack product and labor markets imply massive deflationary forces.
But if central banks don’t find a clear exit strategy from policies that double or triple the monetary base, eventually either goods-price inflation or another dangerous asset and credit bubble (or both) will ensue.
Some recent rises in the prices of equities, commodities, and other risky assets is clearly liquidity-driven.
Eighth, some emerging-market economies with weaker economic fundamentals may not be able to avoid a severe financial crisis, despite massive IMF support.
Finally, the reduction of global imbalances implies that the current-account deficits of profligate economies (the US and other Anglo-Saxon countries) will narrow the current-account surpluses of over-saving countries (China and other emerging markets, Germany, and Japan).
But if domestic demand does not grow fast enough in surplus countries, the resulting lack of global demand relative to supply – or, equivalently, the excess of global savings relative to investment spending – will lead to a weaker recovery in global growth, with most economies growing far more slowly than their potential.
So, green shoots of stabilization may be replaced by yellow weeds of stagnation if several medium-term factors constrain the global economy’s ability to return to sustained growth.
Unless these structural weaknesses are resolved, the global economy may grow in 2010-2011, but at an anemic rate.
Greenspan Hypnotizes Himself
On the eve of the last G-7 meeting in London, US Federal Reserve Chairman Alan Greenspan did a startling about-face by soft-pedaling America’s trade deficit. “Market pressures …appear poised to stabilize and over the longer run possibly to decrease the US current-account deficit and its attendant financing requirements,” he said.
But just two months earlier, in Frankfurt, Mr. Greenspan had cautioned that the US deficit could not go on forever without the dollar depreciating. What is going on here?
To be sure, the US trade figures have improved somewhat.
The expected December trade deficit is $57 billion—an improvement on the record $60.3 billion gap in November.
And the November figure will be adjusted downward because of a recently discovered statistical error by Canadian authorities.
But politics, not economics, explains why the Fed chairman changed his tune about America’s weak external position. Mr. Greenspan’s statement in Frankfurt in November alarmed senior European Central Bank (ECB) officials, who considered it a “provocation” – one that promptly sent the dollar into an unwanted tailspin.
The last thing the Fed Maestro needed was a repeat performance on the eve of the G-7 – a meeting that is supposed to exemplify international co-operation.
So Mr. Greenspan decided to extend a peace offering to the Europeans.
Politics also explains Mr. Greenspan’s pre-G-7 comment that “the voice of fiscal restraint, barely audible a year ago, has at least partially regained volume.”
The Fed chairman is “hearing voices” because he is a team player who wants to encourage US budget cutting.
How would it look if he had openly expressed misgivings about Bush’s plan to cut the budget deficit in half by 2009 just days before it was made public?
What Mr. Greenspan chose to overlook, however, is that most experts are extremely – and rightly – skeptical of the Bush plan, which leaves out big-ticket items such as the cost of the Iraq War, and uses an unrealistic benchmark from which to measure the alleged 50% cutback.
Timing the budget’s release for just after the G-7 made for a harmonious London meeting in which both Americans and Europeans could claim that the US was taking care of business—that is, its twin fiscal and current-account deficits.
The Europeans gladly went along with this charade because they now fear dollar depreciation more than global imbalance.
So far, Europe’s fragile economic recovery has been based largely on exports.
The euro’s rapid appreciation against the dollar threatens to undermine this foundation.
But internal European Union studies indicate that European exports are more closely linked to changes in external demand than the euro-dollar exchange rate.
So long as external demand holds up – and recent growth numbers from China and the US are positive in this regard – Europe’s exports should continue to perform well.
In any case, protecting exports by resisting euro appreciation – or, more precisely, dollar depreciation – is a poor way to promote economic growth.
A strong currency keeps both inflation and ECB interest hikes at bay.
This helps boost private consumption and investment.
Moreover, because crude oil is priced in US dollars, a rise in the euro means a fall in energy costs.
This, too, helps European growth.
Over the longer term, a strong currency promotes efficiency in export industries, further insulating competitiveness from exchange-rate effects.
Dollar depreciation improves Europe’s terms of trade and real income.
America’s fiscal and external deficits will not disappear just because the chief magician at the Federal Reserve waves his wand and says abracadabra.
On the contrary, the longer Greenspan plays down America’s dangerous macroeconomic imbalances with happy talk, the more damage they will ultimately inflict on the global economy.
What the world needs now is the realist Greenspan of Frankfurt, not the cheerleader Greenspan of London.
Simply put, there must be dollar depreciation to keep global imbalances in check.
Instead of catering to European fears and prejudices about exchange rates, the Fed chairman should put politics aside and stick to sound economics.
The Costs of Grexit
PARIS – Earlier this week, following days of tense discussions, the new government in Athens reached an agreement with its eurozone creditors that includes a package of immediate reforms and a four-month extension of the financial assistance program.
But, despite Europe's collective sigh of relief, the compromise does not preclude the need for further tough negotiations on a new financial-assistance program that should be introduced by the end of June.
In any negotiation, a key variable influencing the protagonists' behavior, hence the outcome, is what failure to reach an agreement would cost each of them.
In this case, the issue is the cost of Greece's exit (“Grexit") from the eurozone – a prospect that was widely discussed in the media throughout the recent negotiation, with considerable speculation about the stance of the various players, especially the Greek and German governments.
From Greece's perspective, leaving the euro would be highly disruptive, which explains why there is very little support for it in the country.
But what about Grexit costs for the rest of the eurozone?
Ever since the question was first raised in 2011-2012, there have been two opposing views.
One view – dubbed the domino theory – claims that if Greece exited, markets would immediately start wondering who is next.
Other countries' fate would be called into question, as occurred during the Asian currency crises of 1997-98 or the European sovereign-debt crisis of 2010-2012.
Disintegration of the eurozone could follow.
The other view – often dubbed the ballast theory – claims that the eurozone would actually be strengthened by Greece's withdrawal.
The monetary union would be rid of a recurring problem, and a eurozone decision to allow or invite Greece to leave would bolster the credibility of its rules.
No country, it is claimed, could dare to blackmail its partners anymore.
Back in 2012, the domino theory looked realistic enough that the creditor countries ditched the Grexit option.
Having reflected and pondered over the summer, German Chancellor Angela Merkel went to Athens and expressed her “hopes and wishes" that Greece remains in.
But the situation today is different.
Market tension has eased considerably;
Ireland and Portugal are not under assistance programs anymore; the eurozone financial system has been strengthened by the decision to move to a banking union; and crisis-management instruments are in place.
A Grexit-induced chain reaction would be significantly less likely.
But it does not follow that the loss would be harmless.
There are three reasons why Grexit could still seriously weaken Europe's monetary union.
First and foremost, a Greek exit would disprove the tacit assumption that participation in the euro is irrevocable.
True, history teaches that no commitment is irrevocable: according to Jens Nordvig of Nomura Securities, there have been 67 currency-union breakups since the beginning of the nineteenth century.
Any exit from the eurozone would increase the perceived probability that other countries may, sooner or later, follow suit.
Second, an exit would vindicate those who do consider the euro merely a beefed-up fixed-exchange-rate arrangement, not a true currency.
Confidence in the US dollar relies on the fact that there is no difference between a dollar held in a bank in Boston and one held in San Francisco.
But since the 2010-2012 crisis, this is not entirely true of the euro anymore.
Financial fragmentation has receded but not disappeared, meaning that a loan to a company in Austria does not carry exactly the same interest rate as a loan to the same company on the other side of the Italian border.
Critics like the German economist Hans-Werner Sinn have made a specialty of tracking exposure to the break-up risk.
None of this is currently lethal, owing to the initiatives taken in recent years; but it would be a mistake to assume that full confidence has been restored.
European citizens would certainly respond to a country's withdrawal (or expulsion) from the eurozone by starting to look at the currency in a different way.
Where a euro is held would become a relevant question.
Domestic and foreign investors would scrutinize more closely whether an asset's value would be affected by a breakup of the monetary union.
Governments would become more suspicious of the risks to which their partners potentially expose them.
Indeed, suspicion would become irreversible, and it would replace the belief in the irreversibility of the eurozone.
Finally, an exit would force European policymakers to formalize their so-far unwritten and even unspecified rules for divorce.
Beyond broad principles of international law – for example, that what matters for deciding an asset's post-divorce currency denomination are the law governing the underlying contract and the corresponding jurisdiction – there are no agreed rules for deciding how conversion into a new currency would be carried out.
A Grexit would force these rules to be defined, therefore making it clear what a euro is worth, depending on where it is held, by whom, and in what form.
Indeed this would not only make the break-up risk more imaginable; it would also make it much more concrete.
None of this means that eurozone members should be ready to pay whatever cost is needed to keep Greece inside the eurozone.
This would obviously amount to a surrender.
Grit is Good
PARIS – The United States is widely recognized as possessing the deepest, most liquid, and most efficient capital markets in the world.
America’s financial system supports efficient capital allocation, economic development, and job creation.
These and similar phrases have been common currency among American legislators, regulators, and financial firms for decades.
Even in the wake of the financial crisis that erupted in 2008, they trip off the word processors of a hundred submissions challenging the so-called Volcker rule (which would bar banks from making proprietary investments).
The casual reader nods and moves along.
But there are signs that these assumptions are now being challenged.
Prior to the crisis, regulatory authorities focused mainly on removing barriers to trading, and generally favored measures that made markets more complete by fostering faster, cheaper trading of a wider variety of financial claims.
That is no longer the case.
On the contrary, nowadays many are questioning the assumption that greater market efficiency is always and everywhere a public good.
Might such ease and efficiency not also fuel market instability, and serve the interests of intermediaries rather than their clients?
Phrases like “sand in the machine” and “grit in the oyster,” which were pejorative in the prelapsarian days of 2006, are now used to support regulatory or fiscal changes that may slow down trading and reduce its volume.
For example, the proposed Financial Transactions Tax in the European Union implies a wide-ranging impost generating more than €50 billion a year to shore up the EU’s own finances and save the euro.
The fact that 60-70% of the receipts would come from London is an added attraction for its continental advocates.
Opponents argue, in pre-crisis language, that the FTT would reduce market efficiency and displace trading to other locations. “So what?” supporters reply: maybe much of the trading is “socially useless,” and we would be better off without it.
The Volcker rule (named for former Federal Reserve Chairman Paul Volcker) provoked similar arguments.
Critics have complained that it would reduce liquidity in important markets, such as those for non-US sovereign debt.
Defending his creation, Volcker harks back to a simpler time for the financial system, and refers to “overly liquid, speculation-prone securities markets.”
His message is clear: he is not concerned about lower trading volumes.
There is more grit on the horizon.
In a penetrating analysis of the “Flash Crash” of May 6, 2010, when the Dow lost $1 trillion of market value in 30 minutes, Andy Haldane of the Bank of England argues that while rising equity-market capitalization might well be associated with financial development and economic growth, there is no such relationship between market turnover and growth.
Turnover in US financial markets rose four-fold in the decade before the crisis.
Did the real economy benefit?
Haldane cites a striking statistic: in 1945, the average investor held the average US share for four years.
By 2000, the average holding period had fallen to eight months; by 2008, it was two months.
There appears to be a link between this precipitous drop in the average duration of stock holdings and the phenomenon of the so-called “ownerless corporation,” whereby shareholders have little incentive to impose discipline on management.
That absence of accountability, in turn, has contributed to the vertiginous rise in senior executives’ compensation and, in financial firms, to a shift away from shareholder returns and towards large payouts to insiders.
But Haldane’s main concern is with the stability of markets, particularly the threats posed by high-frequency trading (HFT).
He points out that HFT already accounts for half of total turnover in some debt and foreign-exchange markets, and that it is dominant in US equity markets, accounting for more than one-third of daily trading, up from less than one-fifth in 2005.
The rapid, dramatic shifts brought about by HFT are likely to continue.
It is only a decade since trading speeds fell below one second; they are now as fast as the blink of an eye.
Technological change promises even faster trading speeds in the near future.
Indeed, HFT firms talk of a “race to zero,” the point at which trading takes place at close to the speed of light.
Should we welcome this trend?
Will light-speed trading deliver us to free-market Nirvana?
The evidence is mixed.
It would seem that bid-offer spreads are falling, which we might regard as positive.
But volatility has risen, as has cross-market contagion.
Instability in one market carries over into others.
As for liquidity, while on the surface it looks deeper, the joint report on the Flash Crash prepared by the US Securities and Exchange Commission and the US Commodity Futures Trading Commission shows that HFT traders scaled back liquidity sharply, thereby exacerbating the problem.
The liquidity that they apparently offer proved unreliable under stress – that is, when it is most needed.
There are lessons here for regulators.
First, their monitoring of markets requires a quantum leap in sophistication and speed.
There is a case, too, for looking again at the operation of circuit-breakers (which helped the Chicago markets in the crash), and for increasing the obligations on market makers.
Such steps must be carefully calibrated, as greater obligations, for example, could push market makers out of the market.
But Haldane’s conclusion is that, overall, markets are less stable as a result of the sharp rise in turnover, and that “grit in the wheels, like grit on the roads, could help forestall the next crash.”
So the traditional defense of US and, indeed, European capital markets is not as axiomatic as it once seemed.
Market participants need to engage more effectively with the new agenda, and not assume that claims of greater “market efficiency” will win the day.
Without more sophisticated arguments, they might well find themselves submerged under a pile of regulatory sandbags.
Grounding Syria’s Killers
NEW YORK – As Syria has descended into all-out civil war, much of the worsening slaughter has been attributable to aerial bombardments of urban neighborhoods that President Bashar al-Assad’s opponents control, with such attacks causing especially high casualties in recent weeks in the ancient city of Aleppo.
Can anything be done to stop the killing?
There are many good reasons not to intervene militarily.
For one thing, it would be impossible to do so under the auspices of the United Nations, owing to Russian and Chinese obstructionism in the Security Council.
There is also America’s understandable reluctance to become involved in yet another war in an Islamic country, as well as the impossibility of knowing what kind of regime might emerge if and when Assad is overthrown.
Yet it also seems impossible to stand by while the daily bloodbath continues.
The situation in Syria feels more and more like what we witnessed in Bosnia 20 years ago.
Then, as now, the international community’s main response for an extended period was to provide humanitarian assistance to the conflict’s growing number of victims.
Thanks to satellite television, the world had a front-row seat to watch the citizens of Sarajevo, who were kept alive by UN food deliveries, being killed by shelling and sniping from the surrounding hills.
Today, the UN is delivering an increasing amount of assistance to Syrian refugees who have managed to escape to neighboring countries, while those who have not are being slaughtered.
As with Syria now, Russian support for the Serbian side two decades ago was one of the factors that prevented military intervention.
But it was by no means the only obstacle.
The US presidential election in 1992 made George H. W. Bush’s administration reluctant to use military force.
Other political factors deterred Britain and France – and Bush’s successor, Bill Clinton – from intervening until another three years of killing had taken place.
While military intervention in Syria may be impossible, imposing a no-fly zone is not.
To be sure, a no-fly zone over Syria would not be a simple undertaking: substantial resources would be required, and, given the regime’s military capabilities, it would not be a risk-free operation.
Yet it was accomplished for more than a decade in neighboring Iraq to keep Saddam Hussein from attacking segments of his own population, so we know that it can be done in Syria as well.
Of course, someone – presumably Gulf States such as Qatar and Saudi Arabia – is supplying the Syrian opposition with weapons.
Yet, as long as Assad’s forces can attack opposition-controlled neighborhoods with helicopters and fixed-wing airplanes, the opposition’s ability to overthrow the regime with the arms that are now available to it seems questionable.
What is more certain is that the presence of armed fighters in a neighborhood provokes aerial attacks that destroy civilian infrastructure and maim and kill those residents who have not fled.
Former UN Secretary-General Kofi Annan made a valiant effort to negotiate a peace settlement when there still seemed to be a remote chance of success.
Since then, the sharp rise in bloodshed has made it increasingly unlikely, or even impossible, that Assad’s opponents would consent to any arrangement that kept him in power.
At the same time, Assad’s loyalists, especially members of the minority Alawite sect, must fear that they would be massacred if his regime fell.
At some point, the international community may have to intervene to prevent or mitigate such a massacre.
Its credibility in doing so, and therefore its likelihood of success, would be far greater if it were to intervene now to establish a no-fly zone to protect civilians in the opposition neighborhoods of Syria’s cities.
Because Russian and Chinese intransigence precludes the UN from establishing a no-fly zone, the Arab League and NATO should jointly take the lead.
And, while the participation of the US, which has by far the greatest logistical capacity, is essential, it should not be in the forefront.
As in the case of Libya, this would be an excellent opportunity to “lead from behind.”
A no-fly zone is by no means a solution to the conflict in Syria.
But it would be a modest step in the direction of reducing the great harm currently being done.
A more comprehensive approach, if one could be found, would be far preferable.
Until then, it seems well worth pursuing efforts that would help to abate the carnage.
Growing Up in the Eurozone
MILAN – A rapid and large increase of government debt has been a general phenomenon in the advanced countries since the 2007-09 crisis: for the first time, the average debt/GDP ratio for OECD countries has surpassed 100%.
Fiscal consolidation will weigh on growth prospects for two generations to come, and the welfare state as we have known it in Europe since World War II will have to be transformed, especially given a rapidly aging population.
But the eurozone debt crisis has distinctive features.
Most importantly, while the average debt/GDP ratio is no higher than it is in other advanced countries, and consolidation efforts started earlier, the eurozone has been mired in a severe crisis of confidence for the past two years.
This points to a systemic dimension of the crisis that cannot be reduced to profligate behavior by fiscal sinners.
Indeed, the Greek crisis exposed three main flaws in the monetary union itself.
First, the system lacked effective arrangements to align fiscal and other economic policies.
As long as enforcement of fiscal discipline is entrusted to an intergovernmental body, the problem is bound to reappear, limiting the credibility of common budgetary rules.
Moreover, financial markets underpriced private and sovereign credit risks, in the implicit belief that no one would fail, and that all debts would somehow be made whole, implying weak market discipline on borrowers.
Finally, once the crisis hit, leading to a re-pricing of risks in financial markets, the need to avoid an economic and financial meltdown compelled governments to support aggregate demand and make private liabilities whole.
But the disconnection between centralized monetary and decentralized fiscal powers de facto impeded the full use of monetary instruments to meet monetary and financial shocks.
That left individual eurozone members exposed to brutal pressure by financial markets at a time when excessive private debt was turned into unsustainable public debt.
Suddenly, the eurozone had become a straightjacket.
And so it has remained: budgets are cut, growth falters, and periphery countries must engineer substantial real exchange-rate devaluations to regain competitiveness and close their external deficits.
Core countries, meanwhile, argue that they can do little to strengthen aggregate demand and relieve pressure on their partners, even as the periphery’s agony is dragging the core into recession, owing to its dependence on peripheral export markets.
And, indeed, recent data point to a rapidly worsening economic environment in Germany, where the trade surplus has shrunk dramatically in recent months.
Over the past two years, fundamental changes in the eurozone’s economic governance have aimed at rectifying the monetary union’s founding flaws.
And, along the way, an intergovernmental process has become communitarian.
Key powers over the implementation of common policy guidelines have been entrusted to the European Commission, and the European Council has limited its own ability to reject Commission recommendations by requiring a qualified majority to change them.
Strong economic-governance rules, however, will not suffice.
A fully functioning monetary union also requires a central bank that is free to act as required to confront liquidity and confidence shocks, some mutualization of government debts, and centralized control over fiscal policy.
Moreover, it must have centralized banking supervisory policies, with strong powers to manage bank crises and to liquidate banks that cannot be rescued.
All of this can be achieved only gradually, as Europe moves to a fully-fledged federal union.
Whether the eurozone will survive in the meantime will be determined by the European Council’s capacity to establish intermediate arrangements that can halt the crisis and restore trust among its members.
At their meeting at the end of June, European leaders acknowledged for the first time the multiple dimensions of the crisis, accepting that austerity – putting everyone’s house in order – will not suffice.
Accordingly, new joint policy initiatives will address economic growth, banking union, and liquidity.
Moreover, European leaders have placed these new policies within a coherent longer-term framework that may also include “the issuance of common debt.”
Likewise, the European Council has agreed on a new “Compact for growth and jobs” that identifies a specific European dimension of growth policies, mainly integration of energy, transport, communications, and services, together with higher infrastructure investment.
What is notably missing is recognition of the need for greater flexibility on fiscal-consolidation efforts.
As the Commission has requested, countries with stronger fiscal positions should consider slowing their consolidation efforts in order to avoid aggravating the recession.
But, in order to preserve investors’ confidence, some eurozone countries must strike a difficult balance between austerity and overkill, which would have been facilitated had the European Council issued a clear statement that letting automatic stabilizers work, while remaining on track with structural budget targets, fully complies with European Union obligations.
Moreover, a greater share of the adjustment burden must fall on Germany.
Recent fairly generous wage agreements in Germany will help, but are not enough; there is also a need to boost domestic demand.
More aggressive liberalization of the bloated banking system, network services (especially in energy and transport), and public procurement may contribute significantly over time to raising domestic investment and incomes.
The sizeable investments required to make up for the loss of nuclear energy may contribute more immediate stimulus.
All of this should not be seen as a concession, but as part of the obligations undertaken by eurozone governments to address excessive imbalances.
Now more than ever, Germany must be persuaded that without its contribution in reviving growth and correcting external imbalances, the eurozone faces prolonged depression and certain collapse.
Growth in a Buddhist Economy
NEW YORK – I have just returned from Bhutan, the Himalayan kingdom of unmatched natural beauty, cultural richness, and inspiring self-reflection.
From the kingdom’s uniqueness now arises a set of economic and social questions that are of pressing interest for the entire world.
Bhutan’s rugged geography fostered the rise of a hardy population of farmers and herdsmen, and helped to foster a strong Buddhist culture, closely connected in history with Tibet.
The population is sparse – roughly 700,000 people on territory the size of France – with agricultural communities nestled in deep valleys and a few herdsmen in the high mountains.
Each valley is guarded by a dzong (fortress), which includes monasteries and temples, all dating back centuries and exhibiting a masterful combination of sophisticated architecture and fine arts.
Bhutan’s economy of agriculture and monastic life remained self-sufficient, poor, and isolated until recent decades, when a series of remarkable monarchs began to guide the country toward technological modernization (roads, power, modern health care, and education), international trade (notably with neighboring India), and political democracy. What is incredible is the thoughtfulness with which Bhutan is approaching this process of change, and how Buddhist thinking guides that thoughtfulness.
Bhutan is asking itself the question that everyone must ask: how can economic modernization be combined with cultural robustness and social well-being?
In Bhutan, the economic challenge is not growth in gross national product, but in gross national happiness (GNH).
I went to Bhutan to understand better how GNH is being applied.
There is no formula, but, befitting the seriousness of the challenge and Bhutan’s deep tradition of Buddhist reflection, there is an active and important process of national deliberation. Therein lies the inspiration for all of us.
Part of Bhutan’s GNH revolves, of course, around meeting basic needs – improved health care, reduced maternal and child mortality, greater educational attainment, and better infrastructure, especially electricity, water, and sanitation.
This focus on material improvement aimed at meeting basic needs makes sense for a country at Bhutan’s relatively low income level.
Yet GNH goes well beyond broad-based, pro-poor growth.
Bhutan is also asking how economic growth can be combined with environmental sustainability – a question that it has answered in part through a massive effort to protect the country’s vast forest cover and its unique biodiversity.
It is asking how it can preserve its traditional equality and foster its unique cultural heritage.
And it is asking how individuals can maintain their psychological stability in an era of rapid change, marked by urbanization and an onslaught of global communication in a society that had no televisions until a decade ago.
I came to Bhutan after hearing an inspiring speech by Prime Minister Jigme Thinley at the 2010 Delhi Summit on Sustainable Development.
Thinley had made two compelling points.
The first concerned the environmental devastation that he could observe – including the retreat of glaciers and the loss of land cover – as he flew from Bhutan to India.
The second was about the individual and the meaning of happiness.
Thinley put it simply: We are each finite and fragile physical beings.
How much “stuff” – fast foods, TV commercials, large cars, new gadgets, and latest fashions – can we stuff into ourselves without deranging our own psychological well-being?
For the world’s poorest countries, such questions are not the most pressing.
Their biggest and most compelling challenge is to meet citizens’ basic needs.
But, for more and more countries, Thinley’s reflection on the ultimate sources of well-being is not only timely, but urgent.
Everybody knows how American-style hyper-consumerism can destabilize social relations and lead to aggressiveness, loneliness, greed, and over-work to the point of exhaustion.
What is perhaps less recognized is how those trends have accelerated in the United States itself in recent decades.
This may be the result of, among other things, the increasing and now relentless onslaught of advertising and public relations.
The question of how to guide an economy to produce sustainable happiness – combining material well-being with human health, environmental conservation, and psychological and cultural resiliency – is one that needs addressing everywhere.
Bhutan has many things going its way.
It will be able to increase exports of clean, run-of-the-river hydropower to India, thereby earning foreign exchange in a manner that is sustainable and that can fill government coffers to fund education, health care, and infrastructure.
The country is also intent on ensuring that the benefits of growth reach all of the population, regardless of region or income level.
There are serious risks.
Global climate change threatens Bhutan’s ecology and economy.
Incautious and expensive advice from McKinsey and other private consulting firms could help turn Bhutan into a degraded tourist zone.
One must hope that the quest for GNH will help steer the country away from such temptations.
The key for Bhutan is to regard GNH as an enduring quest, rather than as a simple checklist.
Bhutan’s Buddhist tradition understands happiness not as attachment to goods and services, but as the result of the serious work of inner reflection and compassion toward others.
Bhutan has embarked on such a serious journey.
The rest of the world’s economies should do the same.
Growth in An Age of Anxiety
Grow Your Own Silicon Valley
SAN FRANCISCO: The dot.com boom may have gone bust for the moment, but that is not stopping governments from wanting to encourage their own high-tech industries.
Many countries, indeed, are envious of Silicon Valley outside of San Francisco, the world's center of the computer, software, and Internet industries.
Microsoft's huge investments in Cambridge, England, and the $200 million Bill Gates gave its ancient university for scholarships for technology students from around the world, helped Cambridge become a powerful center of technological innovation.
Cities and university towns everywhere now want to get into the act.
Indeed, across Europe and in Asia other nations have either started, or are considering offering state subsidies to encourage the growth of their own high tech clusters.
After observing Silicon Valley during my many years at the Hoover Institution of Stanford University, however, I am convinced that dynamic industrial clusters require a flexible economic environment, not government industrial policy.
Silicon Valley started in the 1950's with a modest plan by Frederick Terman, a farsighted dean of Stanford's Engineering School, to create an Industrial Park on unused Stanford land.
A few companies took up Stanford's offer, but the area was still sleepy and unimpressive when I first visited Stanford in the early 1960's.
The region took off in the 1970's with Apple's development of the personal computer, and it has exploded since then following the creation of the Internet and the enormous demand for software.
Silicon Valley now employs over 1 million persons, almost 40% have at least a bachelor's degree, and more than one third are foreign born.
They are attracted by the good jobs with excellent prospects, and by the early access to frontier developments in the high tech field.
Silicon Valley is loaded with startup companies, and with former startups like Intel and Cisco Systems that grew very big, very fast.
Venture capitalists invested over $6 billion in 1999 in new or young Valley companies, and 77 companies had IPOs, mainly related to the Internet.
The most prestigious individuals in this Valley are those who can claim they work in "startups".
Faculty and graduates from the strong science and engineering departments of two nearby major universities, Stanford and the University of California at Berkeley, have been leaders in forming dynamic startups.
Although good universities may be necessary to develop these industrial clusters, they are not sufficient.
Other regions with strong science and engineering universities, such as the University of Illinois at Urbana, do not have many high tech companies.
Whatever got Silicon Valley going, its advantages in attracting quality labor and venture capital multiplied as the region grew.
A large pool of engineers, scientists, and software experts are available to both new and old companies.
Talented individuals flock to the region not only because of generous options and decent pay, but also because they know they can find other good jobs if their employers fail.
So while job changes are common in the Valley, unemployment rates are extremely low.
Innovations and other new developments spread rapidly in Silicon Valley, partly carried by the employees who change jobs.
As Alfred Marshall, a great British economist of the late 19th century recognized, when companies in related industries locate near each other, Athe mysteries of the trade become no mysteries; but are as it were in the air".
This makes it difficult to keep secrets, but at the same time companies have early access to innovations by neighbors.
Silicon Valley's labor market flexibility indicates that nations that want to encourage high tech clusters should make it easy to hire and lay off workers rather than mandate substantial severance pay, or legislate limits on working hours.
Companies have stronger incentives to hire added workers when they are formed or expand if they can reduce employment when demand turns down.
The US has relatively few obstacles to starting new companies, raising private capital, or going public.
It also allows key employees to be hired with potentially valuable stock options that economize on out of pocket expenses.
Although several countries have begun to reduce the red tape that hampers the formation and financing of new companies, most have a long way to go in appreciating and encouraging entrepreneurial activities.
For example, reducing artificial obstacles to starting a company is far different from the generous subsidy programs started recently by Germany and other countries desperate for more dynamic economies.
Subsidies generate "safe" startups that appeal to bureaucrats rather than to market demand.
The tremendous spontaneity found in Silicon Valley could never be reproduced through bureaucratic greenhouse support.
Silicon Valley clearly grew over time with little help from government.
Indeed, the major attempt to help actually hurt the region.
For the U.S.-Japan Semiconductor Agreement of 1986 that imposed "antidumping" restrictions on imports of semiconductors from Japan slowed the shift of Silicon Valley toward software and other higher valued added products and services.
It is unlikely that industrial policies toward the high tech sector by other nations will be any wiser than America's failed policy of that time.
Where dynamic industrial clusters locate is partly due to luck and accident.
But Silicon Valley's history indicates that top universities, flexible labor and capital markets, and limited regulatory obstacles to entrepreneurship all help attract high tech companies.
Grumpy Old Men
LONDON – Having reached pensionable age, I qualify to be a grumpy old man.
I should be boring my children, and the students at Oxford University where I am Chancellor, with grumbles about how everything is going to the dogs.
But that is not quite how I see things.
I went to university myself in 1962.
My first term coincided with the Cuban missile crisis.
The world seemed to be teetering on the brink of nuclear catastrophe.
Those were the days when global peace was sustained by a concept known suitably enough by the acronym MAD – Mutually Assured Destruction.
Was that world a worse and more dangerous one than today, where our main nuclear concerns are how to prevent proliferation and strengthen the treaty that has deterred it for the last generation?
At the end of my years at Oxford, I went as a student to the United States and visited Alabama.
You may recall the story of Richard Nixon attending the independence celebrations in Ghana.
At a gala reception, he went up to one guest, mistaking him for a local, and asked what it felt like to be able to vote and enjoy freedom under the rule of law. “I wouldn’t know,” the man replied, “I’m from Alabama.”
Within my adult lifetime, we have moved from the murder of civil-rights campaigners in the US to the election of a black president.
Nothing to be grumpy about there.
Elsewhere, some of our biggest problems have a sort of Hegelian quality.
They are the result of solving past problems or of past success.
Consider, for example, the biggest challenge facing us, which deserves to be called existential: global warming and climate change.
In the last century, the world got richer; its population quadrupled; the number of people living in cities grew thirteen-fold; and we consumed more of everything.
Water consumption rose nine-fold and energy use thirteen-fold.
Industrial output soared to 40 times its level at the beginning of the twentieth century.
But – and here comes the real hit – carbon-dioxide emissions grew seventeen-fold.
That is the biggest problem we face – the unforeseen result of increased economic activity and prosperity.
Looking at preparations for the Copenhagen summit in December, when we will try to broker a new global agreement to combat climate change, does not make me grumpy.
At last, the big players are taking the issues seriously.
The US is no longer in denial on the question.
President Barack Obama and his advisers do not deny the scientific evidence of what is happening to us all.
In China, political leaders seem genuine in their commitment to reduce the carbon content of their runaway economy.
The big problems, of course, are how we take account of past responsibility for the carbon in the atmosphere, how we balance aggregate national emissions and per capita figures – China leads in the first category; the US, Australia, and Canada are the biggest culprits in the second – and how we manage technology transfer from developed to emerging and poor economies.
There will be plenty to moan about if we don’t solve these problems sooner rather than later.
This is where old men seem past their political expiration dates.
Let me explain.
For all of our lives, my generation has defined success in terms of rising GDP growth: more money in more pockets, more resources for public programs, and more jobs.
None of these will necessarily be a measure of future success.
We need to talk more about the quality of growth.
French President Nicolas Sarkozy has raised this issue, and he is right to do so.
I am not arguing that growth is bad.
Try telling that to the poor.
But what we should want to promote is the right sort of growth – growth that won’t ravage our future prospects.
We have to define the sustainability of growth in ways that create an attractive narrative for our citizens.
At the moment, people applaud sustainable growth, but they don’t vote for what it means in practice.
German voters balk at any suggestion that we should limit the environmental damage caused by big and expensive cars.
British voters line up behind the truck drivers when protests are launched against hikes in the price of petrol, not least through the introduction of higher energy taxes.
Ideas for carbon taxes run into resistance everywhere.
I have five grandchildren below the age of four.
By the time they qualify for pensions and the license to grumble, the century will be into its seventh or eighth decade.
We hope!
How much will they have to get angry about then because of the way that we are behaving today?
Guatemala\u0027s Candidate from Hell
The indictment describes brutal crimes--mass murders, rapes, and the dislocation of hundreds of thousands of people--carried out systematically in the Guatemalan highlands.
In San Martín Jilotepeque, villagers were rounded up by Guatemala's military, forced to cook for soldiers and dig pits in the earth.
Later, their masters shot and then dumped them into the pits.
In Santa María Nebaj, children were shot or beaten to death before being thrown into a ravine that also served as an open-air outhouse.
After the massacre, soldiers burned the bodies and the houses of their victims.
They killed and ate their livestock.
The man that Guatemalan human rights organizations charge with responsibility for these acts is Efraín Ríos Montt, ruler of Guatemala during the "scorched earth" campaign of the early 1980's.
Given the gravity of the accusations, and the abundance of evidence against him, Ríos Montt should be on his way to prison.
Instead, he could be headed to the presidency.
Against great odds--and the wording of Guatemala's Constitution--the former brigadier general and dictator has qualified for the ballot in Guatemala's presidential election, set for November 9.
Ríos Montt's presence on the ballot has shocked Guatemalans committed to combating the impunity the country's powerful have traditionally enjoyed.
Claudia Samayoa, a Guatemalan political analyst, calls it "a blow against the victims, and against all those who have struggled in Guatemala for human rights and democracy".
His election would have enormous implications, symbolizing the triumph of impunity over accountability.
It would indicate that there can be no true peace in Guatemala as long as the powerful are accommodated with grants of amnesty and forgetting is prized over truth and justice.
As for a bit of history- following Guatemala's transition from military rule to electoral democracy, Ríos Montt made several attempts in the 1990's to run for president.
He was barred from the ballot by a provision in the 1985 Guatemalan constitution that prohibited people who had participated in military coups from serving as head of state.
Rebuffed but undaunted, Ríos Montt founded a political party, the Guatemalan Republican Front (FRG).
His deputy, Alfonso Portillo, won the presidency in 1999.
Ríos Montt earned a seat in Guatemala's Congress, and went on to rule both the party and the legislature.
All of this occurred at the very moment a UN supported truth commission was concluding that the violence conducted under Ríos Montt's rule constituted genocide against the Mayan people of Guatemala.
Ríos Montt's latest political battle began when he sought to contest the upcoming presidential election.
His petition was first denied by the Guatemalan electoral authority and then by the Supreme Court.
In July, however, the Constitutional Court--staffed by several justices appointed by Ríos Montt--ruled in favor of permitting him to participate in the election.
Whether Ríos Montt can win is a topic of intense debate.
Polls show him trailing Oscar Berger, a conservative former Guatemala City mayor supported by the business community, as well as the more leftist candidate, Alvaro Colom.
It is difficult to gauge Ríos Montt's actual popularity.
Guatemala's press has taken a hostile position against the former general.
In July, amidst the turmoil surrounding the judicial flip-flopping on his candidacy, busloads of his followers--including paramilitaries armed with machetes and guns--entered the capital and attacked groups of people critical of the general.
One journalist, Hector Ramirez, died of a heart attack while fleeing from the mob; others narrowly escaped lynching.
Meanwhile, all over Guatemala, thousands of communities are seeking to exhume the graves of the massacred.
Evidence produced in these exhumations is being organized into indictments, prepared by the non-governmental Center for Human Rights and Legal Action (CALDH).
The genocide charges against Ríos Montt are being pursued in Guatemala's courts.
If the courts fail to act, the CALDH will take the case to the Inter-American Court of Human Rights in San Jose, Costa Rica, or perhaps to Europe.
Human rights activists have increasingly sought friendly foreign courts, willing to invoke universal jurisdiction over so-called crimes "of international concern."
If Ríos Montt faces trial instead of another reign as ruler, perhaps Guatemalans--and the wider world--will begin to see the power of the truth.
Otherwise, we will once again see only the truth about power.
Sadly, at this moment Guatemala invokes the bitter wisdom of William Faulkner, who once observed that "the past isn't dead--it isn't even over yet."
Guilty Democrats
LONDON – When former Czech President Václav Havel knocked on the door of the Chinese embassy in Prague to demand the release of the writer Liu Xiaobo, I had an eerie sense of déjà vu.
Thirty-three years ago, Havel helped initiate Charter 77, the landmark document that crystallized the ideals of all the dissidents – and many others – trapped behind the Iron Curtain.
Havel , of course, was rewarded with a long jail sentence for his efforts. Now Liu has been sentenced to 11 years imprisonment for much the same crime: initiating Charter 08, perhaps the bravest attempt yet to chart a peaceful way forward to freedom for China.
History is said to repeat itself, first as tragedy, second as farce.
And it is indeed farcical for China’s government to try to suppress the yearning for freedom in the same brutal ways that Soviet-era communists once did.
For jailing Liu on the absurd charge of trying to overthrow the Chinese state is typical of the type of thinking found in the closed societies of twentieth-century communism, where the state asserted its absolute right to judge every thought and every thinker.
In such a state, the only way to survive was for everyone to become his or her own thought police: self-censoring and never daring to question.
But to judge and imprison one’s own mind, or any other mind, is to criminalize civilization.
In today’s Internet age, moreover, no prison or censorship can destroy an idea whose time has come.
In its current fight with Google, for example, China’s government appears to think that its technologists can provide the means to maintain the old thought control.
But, thankfully, for anyone with persistence and a modicum of computer skill, the Internet leaks like a sieve.
The great progress of China’s economy over the past 30 years is something all Chinese celebrate.
But the jailing of Liu also demonstrates in the starkest terms that China’s neglect of human rights is flowing to the rest of world alongside the mass of Chinese goods.
Indeed, it is becoming increasingly clear that China opened its economy only to maintain the country’s over-mighty rulers in power, not to respect and enhance the lives of ordinary Chinese.
Although China’s government does not keep any of its international commitments on economic, social, and cultural rights, the world’s democracies appear to have lost their willingness to stand up for their beliefs, as President Barack Obama’s kowtow to China during his November visit painfully demonstrated.
But it was a refusal to buckle to the values of Nazism and Communism in the twentieth century that assured the success of freedom.
Liberty today needs the same type of stalwart defense.
Yes, civilization seems to be on the defensive.
Though many people seem to be in denial about this, politics has retreated to a renewal of the last century’s long struggle for democracy and freedom.
China’s model of authoritarian capitalism appears triumphant, but there is nothing genuinely new about this model; like all dictatorships, it deprives people of political rights and freedom of speech.
And Chinese intellectuals face the cruelest reality: harsh suppression and a popular audience devoted to mammon and materialism.
But the globalization of commercial interests does retain some power to restrict Chinese authoritarianism – particularly its efforts to suppress the peoples of Tibet and Xinjiang – if only the world’s democracies will seize it.
Weak states, of course, tend to be cynical about China’s growing might.
The problem is that the global economic crisis has led even advanced Western states to question the wisdom of allowing the political civilization of human rights to interfere with the quest to restore economic growth.
Democratic politicians must not surrender their consciences to woo either their own economically jittery citizens or the Chinese regime.
That route will lead only to moral and political decay.
Havel captured this idea perfectly when he criticized Obama’s silence in Beijing on human rights.
Such abasement will only lead people to begin to doubt whether democracy is a living social system.
Fortunately, China’s jailing of Liu Xiaobo will not, as we Chinese say, succeed in its effort to frighten the monkey by killing a chicken.
Liu is too invisible to ordinary Chinese for that to happen.
No, the incarceration of Liu is targeted at those who value democracy, both within China and abroad.
It is an effort to criminalize democratic ideas and force people to choose between them and business with China.
That is a false choice.
China’s economy needs world markets as much as world markets need China, if not more.
Moreover, the West’s inclination to appease China will gradually cause ordinary Chinese to lose confidence that economic modernization will ever set them free.
So continued silence when poets, writers, or lawyers – people like Shi Tao, Yang Tianshui, and Tan Zuoren – are treated like criminals will only assure that China’s markets are eventually lost alongside Chinese freedoms.
A closed society will eventually return to a closed economy.
The real criminal in the Liu Xiaobo affair is, of course, the Chinese state.
But those who think that China’s mutant political authoritarianism and mighty economy can long prevail are guilty as well.
Such a system is as unsuited to the future as Mao’s system was to the past.
Gunboat Democracy?
In one sense, Iraq’s weapons of mass destruction were also weapons of mass distraction.
Without doubt, President George W. Bush and Prime Minister Tony Blair believed that Saddam Hussein either had, or had the wherewithal to produce, such weapons when they decided for pre-emptive war.
In the case of Iraq, there was particular fear of chemical and biological weapons.
But WMD were not the only motive for war.
Both leaders were outraged about a murderous dictator and hoped that toppling him would open the door for democracy in Iraq.
This (they hoped) would automatically bring about a degree of stability that would help resolve other conflicts in the region, and also guarantee the uninterrupted flow of oil.
Mixed motives are not necessarily bad motives.
In fact, most human motives are mixed.
The real question is whether democracy could really have done the trick, and then, whether missiles and tanks are the right method to bring democracy to a country that has suffered dictatorial rule for a long period of time.
Historical precedents played a part in the Iraq decision, not least because President Bush’s national security adviser, Condoleezza Rice, cited them often.
One example is Nazi Germany.
To be sure, the Allies did not enter that war to bring democracy to Germany.
In any case, Germany started the war.
The Allies defended those to whom they were bound by treaty, and then the integrity of their own countries.
Perhaps the entry of the United States into the (European) war had something to do with the post-war order.
But there were actually two views about that order.
One was that Germany should be flattened and reduced to a pre-industrial society from which no effective aggression could ever emerge again.
The other was that Germany should be helped on the way to democracy.
As it happened, the protagonists of the first view were sidelined and the proponents of democratization prevailed.
Indeed, the US was effective in using its “soft power” to build democracy in post-war Germany, though Britain was better.
Democratic manners came more naturally to the British occupation forces.
The second example, the end of the Cold War in 1989, was also a success story.
Of course, communism’s collapse was not the result of a pre-emptive strike by the West (though the arms race helped drive the system to implosion).
After 1989, however, Western assistance, not least by the US and Britain, eased the transition to democracy, the rule of law, and market economies in most post-communist countries.
So why does this not seem to work in Iraq?
Evidently, differences of culture and circumstances abound.
Even so, why has so little come of the intention of the Iraq war’s leaders to give democracy a chance in that country?
One reason is that bringing democracy with missiles and tanks is almost a contradiction in terms.
Democracy is by definition a peaceful method of settling conflicts.
Of course, the bombing of Dresden in 1945 was not exactly peaceful.
One must doubt whether it contributed anything to making democracy more acceptable after WWII.
Still, when the fighting was over, the bombing stopped for good, and out of the tanks came people who were intent on creating democratic conditions and capable of doing so.
There is much talk these days about “hard” and “soft power,” about America having one and Europe the other.
In fact, the two belong together.
Soft power without the backing of hard power changes little: witness Iran.
On the other hand, hard power without soft power means only destruction.
It is the greatest single weakness of the US forces that in 2004 – contrary to 1945 – they do not have the capacity to stop the bombing, get out of their tanks, and encourage indigenous democratic development from the bottom up.
Where such capacity exists, there would also be recognition of the fact that democracy does not mean the same institutions in all cultural contexts.
If there are elections in Iraq in January – and this is a very big “if” – they may not resolve much.
Involving the people and providing for peaceful conflict resolution may require institutions peculiar to the region and its history.
It is a great shame that so many Europeans have steered clear of Iraq with a mixture of self-righteousness and anti-American Schadenfreude .
Greater European input might have balanced the “hard power” of the US military machine with the “soft power” of Europe’s experience of diversity and of dealing with post-war situations.
In fact, Europe’s failure is not just a shame, but a historic calamity.
Missiles and tanks alone cannot bring democracy, but coupled with the civil power of sensitive help for the defeated, democracy can be adapted to Iraq and the rest of the Middle East.
Guns, Drugs, and Financial Markets
CAMBRIDGE – The sub-prime mortgage crisis has demonstrated once again how hard it is to tame finance, an industry that is both the lifeline of modern economies and their gravest threat.
While this is not news to emerging markets, which have experienced many financial crises in the last quarter-century, a half-century of financial stability lulled advanced economies into complacency.
That stability reflected a simple quid pro quo : regulation in exchange for freedom to operate.
Governments brought commercial banks under prudential regulation in exchange for public provision of deposit insurance and lender-of-last-resort functions.
Equity markets were subjected to disclosure and transparency requirements.
But financial deregulation in the 1980’s ushered us into uncharted territory.
Deregulation promised to spawn financial innovations that would enhance access to credit, enable greater portfolio diversification, and allocate risk to those most able to bear it. Supervision and regulation would stand in the way, liberalizers argued, and governments could not possibly keep up with the changes.
What a difference today’s crisis has made.
We now realize even the most sophisticated market players were clueless about the new financial instruments that emerged, and no one now doubts that the financial industry needs an overhaul.
But what, exactly, needs to be done?
Economists who focus on such issues tend to fall into three groups.
First are the libertarians, for whom anything that comes between two consenting adults is akin to a crime.
If you are selling a piece of paper that I want to buy, it is my responsibility to know what I am buying and be aware of any possible adverse consequences.
If my purchase harms me, I have nobody to blame but myself.
I cannot plead for a government bailout.
Non-libertarians recognize the fatal flaw in this argument: financial blow-ups entail what economists call a “systemic risk” – everyone pays a price.
As the rescue of Bear Stearns shows, the government may need to bail out private institutions to prevent a panic that would lead to worse consequences elsewhere.
Thus, many financial institutions, especially the largest, operate with an implicit government guarantee.
This justifies government regulation of lending and investment practices.
For this reason, economists in both the second and third groups – call them finance enthusiasts and finance skeptics – are more interventionist.
But the extent of intervention they condone differs, reflecting their different views concerning how dysfunctional the prevailing approach to supervision and prudential regulation is.
Finance enthusiasts tend to view every crisis as a learning opportunity.
While prudential regulation and supervision can never be perfect, extending such oversight to hedge funds and other unregulated institutions can still moderate the downsides.
If things get too complicated for regulators, the job can always be turned over to the private sector, by relying on rating agencies and financial firms’ own risk models.
The gains from financial innovation are too large for more heavy-handed intervention.
Finance skeptics disagree.
They are less convinced that recent financial innovation has created large gains (except for the finance industry itself), and they doubt that prudential regulation can ever be sufficiently effective.
True prudence requires that regulators avail themselves of a broader set of policy instruments, including quantitative ceilings, transaction taxes, restrictions on securitization, prohibitions, or other direct inhibitions on financial transactions – all of which are anathema to most financial market participants.
To grasp the rationale for a more broad-based approach to financial regulation, consider three other regulated industries: drugs, tobacco, and firearms.
In each, we attempt to balance personal benefits and individuals’ freedom to do as they please against the risks generated for society and themselves.
One strategy is to target the behavior that causes the problems and to rely on self-policing.
In essence, this is the approach advocated by finance enthusiasts: set the behavioral parameters and let financial intermediaries operate freely otherwise.
But our regulations go considerably further in all three areas.
We restrict access to most drugs, impose heavy taxes and marketing constraints on tobacco, and control gun circulation and ownership.
There is a simple prudential principle at work here: because our ability to monitor and regulate behavior is necessarily imperfect, we need to rely on a broader set of interventions.
In effect, finance enthusiasts are like America’s gun advocates who argue that “guns don’t kill people; people kill people.” The implication is clear: punish only people who use guns to commit crimes, but do not penalize others as well by restricting their access to guns.
But, because we cannot be certain that the threat of punishment deters all crime, or that all criminals are caught, our ability to induce gun owners to behave responsibly is limited.
As a result, most advanced societies impose direct controls on gun ownership.
Likewise, finance skeptics believe that our ability to prevent excessive risk-taking in financial markets is equally limited.
Whether one agrees with the enthusiasts or the skeptics depends on one’s views about the net benefits of financial innovation.
Returning to the example of drugs, the question is whether one believes that financial innovation is like aspirin, which generates huge benefits at low risk, or methamphetamine, which stimulates euphoria, followed by a dangerous crash.
Haiti and the Limits of Generosity
MELBOURNE – All over the world, people have responded generously to the devastating earthquake that struck Haiti.
In just three days, more than a million Americans had donated $10 with the aid of text messages from their cellphones.
People with very little themselves, like Maria Pacheco, an unemployed single mother from Chicago, donated food and clothes.
Others did whatever they could – from pedicures to washing cars – to raise money.
On current indications, the amount Americans will give to relief efforts in Haiti could surpass the $1.9 billion they gave to assist victims of the 2004 Asian tsunami, which until now has stood as a record for donations to a disaster outside the United States.
Given that the US is undergoing economic hard times, the size of the response has surprised many.
Haiti ’s proximity, plus the fact that close to a million Haitians live in the US, goes some way towards explaining why Americans have responded so generously.
But the response has been worldwide.
In Melbourne for the Australian Open, Roger Federer, Serena Williams, and other stars held an exhibition match that led to donations of $600,000.
In Rwanda, a group of community health workers making less than $200 a month raised $7,000 for Haiti.
All of this raises many questions about how we respond – and how we should respond – to such tragedies.
The earthquake killed up to 200,000 people.
Terrible as that is, it is fewer than the number of children who, according to the United Nations Children’s Fund, UNICEF, die every 10 days from avoidable, poverty-related causes.
Moreover, as Elie Hassenfeld has argued on GiveWell.net, there are good grounds for thinking that disaster relief is less cost-effective than aid aimed at saving the lives of those who are risk from extreme poverty.
Why do people give generously to earthquake victims, but not to prevent the much larger number of deaths brought about by extreme poverty, insufficient food, unsafe water, lack of sanitation, and the absence of even the most basic health care?
Media saturation obviously makes a critical difference.
Scenes from Hurricane Katrina, the Asian tsunami, and now the Haitian earthquake were shown over and over again on all television news broadcasts.
An earthquake in a remote part of Pakistan that killed 80,000 people received relatively little television coverage, and a much less generous response.
The daily deaths of children in poor countries from diarrhea, measles, and malaria are part of the background of the world we live in, and so are not news at all.
Suppose that a million children all in one place seemed likely to be swept away and drowned by approaching floodwaters.
The media coverage would be enormous.
Now imagine the jubilation if they were saved!
And imagine the acclaim for the heroes who had saved so many children.
Yet when UNICEF announced, in September of last year, that the number of children dying each year from poverty-related causes had dropped by one million, as compared to two years earlier, the story got very little media attention.
The people who contributed to this drop by delivering effective basic health care, building a supply of safe water, or immunizing children against measles remain largely unknown.
Perhaps people respond more generously to the victims of natural disasters than they do to those in extreme poverty because, after a natural disaster, we tend not to blame the victims.
We seem to accept that to be struck by an earthquake, a tidal wave, or a hurricane is just bad luck (unless, as the American evangelist Pat Robertson suggested after the Haitian earthquake, your ancestors made a pact with the devil in order to free themselves from colonial rule).
Still, many people profess to believe that poverty is the result of not working hard enough, or of having too many children.
But the circumstances that produce extreme poverty are not, except in rare cases, under the control of such poor people.
They may be, to some extent, under the control of governments, and undoubtedly bad government is a major contributor to poverty.
But then, bad government can also contribute to the toll exacted by a natural disaster.
Two years ago, a team of geophysicists led by Eric Calais of Purdue University predicted that the fault that produced the recent Haitian earthquake was at high risk of doing exactly what it did.
They urged the Haitian government to take steps to strengthen critical buildings, including hospitals and schools.
Failure to do so contributed to the toll.
What should we do?
Brian Tucker, founder of the non-profit organization Geohazards International, urges that 10% of the money raised by relief efforts should be set aside for mitigating damage from future earthquakes: training builders, improving engineering, and making the public more aware of the risks and how to reduce them.
He claims that every dollar invested in preparing for natural disasters saves ten dollars in future damage.
Tucker’s proposal makes good sense, but it is difficult – and arguably unethical – for charities that raised money to help Haitians now to divert some of those funds to programs to mitigate the damage caused by future earthquakes.
It would be excellent if the general public responded to an appeal for funds for mitigating future damage.
But the prospects of that happening are slim, because such an appeal would lack the emotional pull of the desire to help immediate victims.
Instead, governments that are pledging aid to Haiti now should ensure that part of their assistance goes to reducing the chances that such a disaster will affect Haiti so dramatically again.
Haiti’s Moment
NEW YORK – Fortune has not been kind to Haiti.
The pain and suffering arising from last year’s earthquake was already enormous, and has since been compounded by Hurricane Tomas and an outbreak of cholera. Now there is growing tension surrounding the just completed election.
That epidemic has spread to all ten departments of the country, as well as to the capital, Port au Prince.
The Haitian Ministry of Public Health reports that the number of deaths is approaching 2,000, with the number of infections exceeding 80,000.
Because many people do not have easy access to hospitals and clinics, these figures are rough estimates at best.
United Nations teams fear that the actual number of deaths and current infections may in fact be up to twice as high.
Clearly, the epidemic will continue to spread.
This is a function of a particularly virulent strain of cholera and underlying issues: a weak national health system, poor sanitary conditions, and a lack of clean water and other basic services.
The World Health Organization and the Pan-American Health Organization (PAHO) estimate that the outbreak could affect some 400,000 people.
As the international community mobilizes to respond, we have two priorities: first, bringing down the fatality rate through effective treatment, and, second, informing the population about how to care for themselves, their families, and their communities.
There is some positive news, however grim the overall picture.
While the epidemiological statistics are alarming, the death rate has declined in recent weeks, from 7.6% to 3.6%.
The Haitian government, UN agencies, and the humanitarian community are moving quickly to put treatment and preventive measures in place.
They are providing water-purification materials, carrying out large-scale public-information campaigns, and helping to build treatment centers.
Yet one thing is clear.
Admirable as these collective efforts may be, they are simply not sufficient.
Without a massive and immediate international response, the lives of hundreds of thousands of people will be at risk.
It is up to us to act, with maximum speed and full deployment of resources.
Most immediately, there is an urgent need for more cholera treatment centers.
More trained medical and non-medical personnel are needed to run these facilities.
PAHO and WHO estimate that an additional 350 doctors, 2,000 nurses, and 2,200 support staff will be required over the next three months.
Approximately 30,000 community health workers and volunteers are also needed to help staff an estimated 15,000 oral re-hydration points.
Still others are required to educate and promote better hygiene in camps and communities.
It is vital that the Haitian people in all communities are fully informed about how to deal with this disease, and that they understand that cholera is quickly cured when diagnosed and treated quickly.
Essential medicines and materials are in short supply: water purification tablets, chlorine disinfectant, antibiotics, jerry cans, soap, water cisterns, and construction material for latrines.
Stocks of oral re-hydration salts must be constantly replenished.
Not surprisingly, the incidence of cholera is highest in Haiti’s slums and rural areas, where people are farthest from assistance. In the camps where an estimated 1.3 million took refuge after this year’s earthquake, ironically, incidence is relatively low.
The reason: we are there with what is required – medical aid, sanitation, and clean water.
To help Haiti help itself, we must extend our reach.
That is why the UN and its partners issued the Cholera Inter-Sector Response Strategy for Haiti, a $164 million funding appeal to support the international community’s efforts to contain the outbreak.
So far, it is only 20% funded.
This will not be a short-term crisis, so we cannot think only in the short term in formulating our response.
Millions of people look to the international community for immediate survival.
At the same time, our response must be viewed within the broader context of recovery and long-term development.
Investment in basic infrastructure is critical – clean water, sanitation, healthcare, education, and durable shelter.
Along the way, we must help strengthen Haitian institutions.
Haiti needs a strong and legitimate government to overcome the challenges ahead.
The recent elections were a milestone in the country’s long and very hard road.
But irregularities now seem more serious than initially thought.
Tensions are on the rise.
Political leaders must put the national interest ahead of personal and partisan ambitions.
The UN and its many international partners will help Haiti to get back on its feet.
But, at the end of the day, Haitians can stand only on their own.
As a people, they are singularly resilient and brave.
They need, and deserve, our support.
But they need, and deserve, strong national leadership as well.
This is Haiti’s moment.
Hamas and Fatah at the Crossroads
Palestinian politics is approaching the point of no return.
The power struggle between the Islamist Hamas and Palestinian president Mahmoud Abbas and his secular/nationalist Fatah movement is intensifying, with tensions breaking into outright combat.
Since Hamas was founded in the early 1980’s, it has refused to come under the leadership of the Palestine Liberation Organization (PLO).
Hamas’s victory in the parliamentary election earlier this year – a democratic watershed – demonstrated that it had come of age politically.
For the first time in Palestinian history, a religious party is dominant.
But Fatah has not accepted defeat, while Hamas is convinced that elements within Fatah agree with Israeli and American plans to topple the Hamas government.
Abbas remains the Palestinian president, and the Basic Law makes him commander of all Palestinian security forces.
However, while most official security forces remain loyal to him, over the past year Hamas has created an alternative security structure, built around a 4000-member “Operational Force.”
Moreover, Hamas has announced plans to recruit 1,500 additional security personnel for the West Bank, Fatah’s stronghold.
In recent weeks, the two sides have clashed frequently across the Gaza strip, heightening tensions further.
The confrontations have come at a time when Abbas has been trying to persuade Hamas to moderate its anti-Israel stance and ally with Fatah in a national unity government.
Abbas believes that Hamas’s acceptance of negotiations with Israel is the only way to break the international sanctions that are devastating Palestinian society.
Despite this, both sides are building up their forces.
Intelligence reports suggest that Hamas is smuggling weapons and explosives from the Sinai into the Gaza Strip at an accelerated pace.
The United States, Israel, and some Arab governments plan to arm and train forces loyal to Abbas, especially his presidential guard.
They want to prepare Abbas’s forces in Gaza for a confrontation with Hamas, which they believe is inevitable.
Israel is considering Abbas’s request to transfer arms and ammunitions from Egypt and Jordan in hopes of bolstering his loyalist forces.
There is also an American proposal to allow the Badr Brigade – a wing of the Palestine Liberation Army that is currently stationed in Jordan – to relocate to the Palestinian territories as Abbas’s rapid reaction force in Gaza in anticipation of a feared civil war.
The Badr Brigade is composed of several thousand Palestinians, mostly long-time PLO activists.
As the maneuvering continues, Israel and Egypt find themselves working together to bolster Abbas and Fatah.
With the Gaza Strip in its backyard, Egypt has already mediated several times between Hamas and Fatah, and has been trying, so far unsuccessfully, to arrange a swap of prisoners with Israel following Hamas’s abduction of Israeli soldier Gilad Shalit.
But Egypt’s government is angry with Hamas for opposing the formation of a coalition government.
Indeed, the seizure of Shalit deepened the rift between Hamas and Fatah, which believes that the abduction was staged in order to sabotage discussions about a national unity government.
More generally, Egypt is concerned that Gaza is becoming politically radicalized and may be transformed into “Hamastan.”
This, Egypt fears, would give a boost to its own Islamic radicals, against which the government has long fought.
Egypt also worries about a possible Hamas-Fatah civil war.
Although Hamas has ruled this out, it has shown no hesitation to use heavy force against its opponents.
Likewise, Foreign Minister Mahmoud Al-Zahar of the Hamas-led government says that any dissolution of the government or call for early elections by Abbas would be a recipe for civil war.
Fear of major fighting has already sent many Palestinians into Egypt, leading to the deployment of Egyptian troops on the border to control any mass exodus.
Israel, meanwhile, is worried that Hamas has strengthened its military grip on Gaza, in terms of both fortifications and networks capable of launching Qassam rockets into neighboring Israeli towns.
Israel might not wait for Abbas and his forces, but rather launch a full-scale intervention to weaken Hamas.
Can Hamas and Fatah put aside their differences and form a unity government?
Abbas says that if a coalition government is not agreed upon within the next two weeks, he will dissolve the current government, a move Hamas will not tolerate.
But forming a coalition government is unlikely to ease the tension between Hamas and Fatah.
New confrontations would likely emerge as soon as a new government was formed.
Ironically, the most likely way to avoid large-scale confrontation between Fatah and Hamas is through an Israeli incursion into Gaza.
Facing the Israelis together is the only way that the rival Palestinian groups will postpone their own bloody showdown.
Hamas Comes in from the Cold
GAZA CITY – In the wake of revolutionary change in the Middle East, the forces of political Islam have scored one electoral victory after another.
As the West grapples with the rapid rise of moderate Islamists in Tunisia, Morocco, and Egypt, the issue of Hamas’s role in the Palestinian territories looms large.
The signing of a new unity deal between Hamas and Palestinian President Mahmoud Abbas’s secular Fatah party earlier this month has heightened an unprecedented struggle within Hamas over its future course as an Islamist movement.
How the West responds could very well influence the outcome.
As events in recent weeks have proven, Hamas’s days of near-total isolation in the Middle East are over.
While most Western governments continue to consider it a terrorist organization, in Arab capitals, political embargos have given way to engagement.
In December, Ismail Haniyeh, Prime Minister of the Hamas-led Palestinian Authority in Gaza, embarked on a tour of the Mediterranean that included stops in Tunis, Cairo, and Istanbul.
In mid-February, he was warmly received in Qatar, Bahrain, and Iran.
This political outreach, however, has not emanated solely from Gaza.
In January, Khaled Mashal, the leader of Hamas’s Damascus-based political bureau, embarked on a diplomatic initiative of his own, and was hosted by King Abdullah of Jordan – the first such visit in more than a decade.
In February, Mashal crowned these efforts in Qatar with the signing of the new unity agreement with Fatah, which commits both Palestinian movements to a transitional government under Abbas’s leadership.
Ever since, disagreements within Hamas have been escalating, pitting the movement’s Diaspora leadership against the Hamas-led Gaza administration, which has openly rejected the unity deal.
While personal ambitions certainly play a role in the tensions, what lies at the core is a fundamental conflict over Hamas’s character.
Haniyeh, who represents the conservative wing of Gaza’s Hamas leadership, has sought to cash in on regional changes.
His long-boycotted government was thrown a lifeline by regime change in Egypt and the opening of the border with Gaza.
Notably, Haniyeh’s recent diplomatic tour garnered not only symbolic recognition for Hamas, but also support for his uncompromising stance vis-à-vis Israel.
He missed no opportunity to criticize “futile” peace negotiations, and, in Tehran, he pledged that Hamas’s “resistance” would continue “until all Palestinian land has been liberated.”
What that means needs little clarification.
In a further telling move, Haniyeh also recently suggested merging Hamas with the Islamic Jihad movement, which continues to target Israeli civilians with rockets fired from Gaza.
Mashal, by contrast, has come to represent a force of change.
Last May, he signed an initial reconciliation agreement with Fatah in Cairo, which committed Hamas to a Palestinian unity government, called for a cessation of violence, and accepted the notion of a Palestinian state on the 1967 borders.
Mashal also offered Abbas a one-year mandate for negotiations with Israel, and, unlike Haniyeh, supported recent Israeli-Palestinian “exploratory talks” in Jordan.
One reason for Mashal’s change of heart can be found in the ongoing popular revolt in Syria against President Bashar al-Assad.
The leader of the Sunni Hamas can no longer support his Syrian host, who has cracked down on the Sunni-dominated opposition.
Thus, Mashal has attempted to close ranks with Fatah, and is seeking to move Hamas’s Diaspora headquarters from Damascus – a powerful symbol of his efforts at re-invention.
But Mashal’s refusal to support Assad has not only forced him to re-locate.
It has also unleashed the wrath of Syria’s ally, Iran, which has responded by scaling down its financial support for Hamas – thus denying Mashal a key source of influence within the movement.
Indeed, Mashal’s decision has effectively ended his ties to his two most important allies, thereby not only weakening his position, but also increasing his readiness to embrace political moderation.
Tensions increased dramatically when Mashal signed the unity agreement with Fatah, after stating his intention to resign as head of the political bureau.
While that announcement may have been political blackmail aimed at forcing Gaza into line, it underscored Mashal’s confidence in his popularity, which has since been vindicated by expressions of support from both within and outside of the political bureau for him to remain in charge.
Mashal has more than one option.
He may reemerge as the head of a newly established Palestinian branch of the Muslim Brotherhood, or as a leader of a new Islamist political party under the umbrella of the Palestine Liberation Organization.
Such a merging of Hamas with the established Palestinian political organizations would signify Hamas’s formal acceptance of a two-state solution, and would mark an important step in transforming the movement.
For the West, using the opportunity to influence Hamas’s future course requires modifying the failed policy of all-encompassing rejection.
As in Egypt, Morocco, and Tunisia, Islamist moderates in the Palestinian territories need to be engaged as a legitimate political force.
Leaders such as Mashal, who has expressed a readiness to forsake alliances with Syria and Iran and to accept a two-state solution with Israel, should be bolstered rather than boycotted.
That means supporting the ongoing effort to form an interim Palestinian government of technocrats, as stipulated in the Qatar agreement.
At times, such an approach will be challenging;
Hamas will undoubtedly prove to be a difficult counterpart.
But the United States, European governments, and Israel should take this opportunity to engage Hamas’s moderates and test their flexibility.
In the new Middle East, the West’s current approach will only strengthen the hardliners in Gaza and elsewhere.
Hamas, Fatah, and the Palestinian Dilemma
GAZA CITY – With dueling authorities running Gaza and the West Bank, the Palestinian people find themselves in the middle of an experiment.
In Gaza, where Hamas is in charge, the high price of armed resistance to Israel has discredited any attempts to revive the conflict.
In the West Bank, under Fatah rule, negotiations have gone nowhere.
Neither track of Palestinian politics – resistance or negotiation – offers hope of achieving independence.
As a result, Palestinians face their most difficult challenge since 1948.
Israeli threats of renewing its war on Hamas in the Gaza Strip are taken very seriously.
The scenes of devastation are still vivid in the streets and neighborhoods of Gaza, and Hamas is taking no chances of provoking Israel into a new war.
The fighting cost Hamas two of its top leaders, Saeed Siyam and Nizar Rayan, and significantly weakened its military capabilities.
Only recently have these been rebuilt.
Hamas finds itself in a difficult position, since its policy calls for strong resistance, alongside politics.
Yet this policy has failed.
Hamas has put pressure on all resistance groups in Gaza to refrain from provoking Israel.
In an unprecedented statement, Mahmoud al-Zahar, a top Hamas leader, said any missiles fired at Israel from Gaza would be “betrayal missiles.”
Instead, Hamas has turned its attention to the West Bank, where it has no political authority.
It has called on Palestinians there to launch a new intifada against Israel, even while insisting on calm in the Gaza Strip.
Fatah, which runs the West Bank, wants no part of another Palestinian uprising.
President Mahmoud Abbas has made no secret of his objection to such a strategy.
But, with their government unable to do anything about the expansion of Israeli settlements, including in East Jerusalem, as well as continued conflicts over holy sites in Hebron, Bethlehem, and the Al-Aksa mosque, West Bank Palestinians are extremely frustrated.
Recent street demonstrations could easily turn into an outbreak of ongoing resistance to Israeli rule.
The Palestinian Authority, which runs the West Bank, is afraid that a popular, non-violent intifada might quickly turn violent.
If so, Israel might use it as a pretext to crush the Palestinians and their newly built institutions.
This has happened before, during the last intifada in 2002.
There is another scenario that also terrifies Fatah leaders.
An outbreak of violence could strengthen Hamas and its military wing, Al-Qassam Brigades, in the West Bank.
This, in turn, could produce a repeat of the scenario that brought Hamas to power in Gaza in June 2007, when all Fatah authority in the area collapsed after the Israeli withdrawal.
Yet the peace process has been stalled for more than a year, greatly reducing Fatah’s credibility in the West Bank.
Abbas has repeatedly described peace as a strategic choice for the Palestinians.
But, 17 years since the signing of the Oslo agreement and the launch of bilateral talks between the Palestine Liberation Organization and Israel, there has been very little movement toward a Palestinian state.
In popular opinion, negotiations have reached a dead end.
Arab diplomats also show few signs of optimism.
At its recent summit in Libya, the Arab League rejected the proximity talks proposed by the United States’ Middle East peace envoy, George Mitchell.
The Arab position is that no proximity talks can be held until Israel freezes its settlement activity in the West Bank and East Jerusalem.
Palestinian and Arab opinion is waiting for the US, as Israel’s ally, to intervene and press for concessions.
Though the Palestinian economy in the West Bank has improved greatly under Prime Minister Salam Fayyad, this is no substitute for serious peace negotiations.
In August 2009, Fayyad declared his vision of a Palestinian state in two years.
Under his blueprint, which has received strong financial support from the US and the European Union, the political, economic, and security infrastructure of the Palestinian state would be ready by August 2011.
Fayyad has also gained the backing of Fatah and most other Palestinian groups in the West Bank.
Fayyad’s strategy for international recognition of a Palestinian state is to fight a legal battle against Israel in the United Nations Security Council and other international bodies.
He is convinced that establishing a Palestinian state would serve the interest of all parties, and that the odds favor the Palestinians in international political struggle.
Hamas does not share this view, and Palestinian reconciliation efforts have reached an impasse.
The Arab League has given Egypt the lead role in bringing the two sides together, but Hamas has spurned Egypt’s proposals.
Now, with questions about President Hosni Mubarak’s successor in the air, Egypt has put aside these talks.
Palestinians are looking instead to Iran, Hamas’ ally, for signs of any revival in discussions between Fatah and Hamas.
Palestinians’ choices are limited, and there is no consensus among them on how to proceed.
But there is a growing sense that the waiting game cannot last much longer. Whatever comes next will most likely come soon.
Hamas in Power
The victory of the fundamentalist Hamas in the Palestinian elections will have far-reaching consequences for the region, some totally unexpected.
Two aspects, however, are already visible.
The Hamas victory is, first and foremost, an indication of the total failure of the traditional Palestinian leadership to create a body politic.
Palestine is not yet a state, but it is already a failed one.
Since the Oslo Accords of l993 between Israel and the PLO, the Palestinians enjoyed limited transitional autonomy.
To be sure, the new Palestinian Authority (PA) took power under difficult conditions, but which new liberation movement does not face serious challenges when it finally must govern?
The PA had an opportunity to lay the institutional foundations for a functioning state.
But, but instead of supplying the population with the necessary infrastructure – economic development, education, welfare, medical services, housing, and refugee rehabilitation – Yasser Arafat’s Fatah-led PA spent more than 70% of its meager budget on a dozen competing security and intelligence services, neglecting all other spheres of activity.
It created what is called in Arabic a Mukhabarat (security services) state, very much like what is prevalent in almost all Arab countries – Egypt, Syria, Saudi Arabia, republics and monarchies alike.
The vacuum that the PA left elsewhere, including the social sphere, was filled by Hamas.
Indeed, its popularity is due not only to its fundamentalist Islamic ideology and its commitment to the destruction of Israel.
The high esteem in which Palestinians hold Hamas also grew out of what Hamas actually did for them while the PA squandered its resources.
It was not only the endemic corruption of the official Palestinian leadership that turned so many Palestinians from it.
Hamas set up better schools, kindergartens, crèches for mothers, medical centers, welfare services, and programs for youth and women – all of this in addition giving special grants to the families of suicide bombers.
In the elections, Hamas received its dividend for doing what the Fatah-led Palestinian Authority failed to do.
It is still an open question whether Hamas in government will become more pragmatic and less committed to terrorism: it certainly is a possibility, and one should not prejudge the outcome.
But nor, on the other hand, is it clear that the existing organs of the Palestinian Authority – especially the security services at its disposal – will allow a peaceful transfer of power.
Indeed, no such precedent exists: there has never been a peaceful transfer of power in any of the Arab League’s 22 member states.
Israel’s response to Hamas’s victory will obviously be complicated by its own elections on March 28, and by a government headed by an interim prime minister, Ehud Olmert, owing to Sharon’s incapacitation just weeks after leaving Likud and founding a new, centrist party, Kadima (Forward).
Despite Sharon's absence, Kadima maintains its lead in public opinion polls – the most recent gave it 44 of the Knesset’s 120 seats, compared to 21 for Labor and 14 for the right-wing rump-Likud, under Binyamin Netanyahu.
Kadima’s success is due to Sharon’s main innovation in Israeli politics: the successful unilateral disengagement from Gaza.
That withdrawal was based on the conviction that the gaps between the Israeli and Palestinian positions are too wide to enable meaningful negotiations. Hence, Israel must start deciding the future boundaries of the country unilaterally, hoping for eventual negotiations at a later stage.
This is also the line adopted by Olmert.
But Hamas’s victory suggests that the gaps between the Israeli and Palestinian sides will grow even wider, and that the chances for a negotiated settlement will recede even farther into the future.
This leaves further unilateral Israeli moves – such as a partial set of withdrawals from selected areas in the West Bank – as the only feasible option.
Realistic conflict management will replace utopian hopes for conflict resolution.
In a region full of paradoxes, the Hamas victory may have added another one: usually, when extremists on one side become stronger, it plays into the hands of extremists on the other side, producing a dangerous spiral effect.
In this case, however, the victory of the extremist Hamas may strengthen not the extremists of Likud, but, surprisingly, the more moderate centrists of Kadima.
One cannot be certain of such an outcome, of course, but it is now the best that one can realistically hope for.
Hamas’s Ghost in Annapolis
America’s return to the Israeli-Palestinian diplomatic front is a welcome development. One surely that EU diplomacy has sought to bring about.
Secretary of State Condoleezza Rice’s efforts to push the peace process forward during her last years in office seem genuine.
If they succeed, Rice and the Bush administration will be remembered not just for the endless tragedy of Iraq, but for making a serious contribution to Middle East peace.
But can the Middle East conference set to take place in Annapolis, Maryland succeed?
It could if it ushered in a Palestinian national unity government and an agreement to an extended truce backed by a strong international military presence.
Unfortunately, that is highly unlikely.
A failure to take Palestinian domestic factors sufficiently into account is the root cause for pessimism.
The need to involve all Palestinian forces in any future peace negotiations is one of the key points of consensus that emerged from a recent Euro-American conference organized by the European Union Institute for Security Studies.
Hamas must be a part of any lasting solution to the Palestinian issue, not just because it won democratic elections, but also because it controls the Gaza Strip and has real influence in the West Bank.
Moreover, while Hamas’s long truce with Israel shows that it may be willing to abandon violence given the right amount of persuasion, it can make itself a terrible nuisance if it continues to be excluded.
There is still the remote possibility, however unlikely, that Israeli Prime Minister Ehud Olmert and Palestinian Authority President Mahmoud Abbas will come to Annapolis with a concrete plan (a divided Jerusalem, a return to the 1967 borders with minor alterations, compensation for refugees), and a calendar to dismantle West Bank settlements.
In this case, Abbas would leave Annapolis in a stronger position and thus be better able to negotiate with Hamas to establish a national unity government.
But any strategy that aims to destroy Hamas as a political force, were it feasible, would only aggravate the crisis by transforming Hamas into a cluster of violent armed groups with which dialogue would be almost impossible.
Henry Kissinger recently proposed waiting for so-called “moderate” Arab countries to impose a solution.
But that strategy ignores Palestinian and regional realities.
Arab state involvement is, of course, essential.
But a strategy that aims to isolate Hamas entirely divides the Palestinians, and also poses a serious problem to Arab governments, which face strong domestic opposition from Islamic parties that back Hamas.
Saudi Arabia understood this when it promoted the Mecca agreement that ushered in the first Hamas-PLO national unity government.
Supporting another attempt to form such a government, moreover, could gain the backing of the Israeli public.
It is worth remembering that public opinion polls in Israel immediately after the 2006 war in Lebanon indicated that 76% of the population supported negotiations with a Palestinian national unity government that included Hamas.
The Annapolis conference could indeed achieve a firm commitment to the future involvement of all major Palestinian political forces in any future peace negotiations, coupled with the recommendation that these should start with an equally firm pledge to abandon violence by all parties to the conflict.
This would remove the main obstacle to rebuilding a Palestinian national unity government.
Such an arrangement can establish the strong popular legitimacy that the Palestinians will need at the negotiating table in order to make any real compromise.
Ending violence is also important for improving the lives and engendering trust among ordinary Palestinians and Israelis, and ensuring that Israelis and Palestinians alike support the negotiations.
The Israeli population is genuinely concerned about security, as are the Palestinians, and the support of Israel’s political parties for negotiations depends upon security guarantees.
That is why the question of violence is more pressing than that of immediate recognition of the state of Israel, something that Hamas has already done in practice.
International peacekeepers should enforce such a truce.
Palestinians have always favored an international military presence, and the Israelis have also moved in that direction, accepting European forces in South Lebanon and in Gaza at the Rafah border with Egypt.
Europeans should agree to supply the bulk of such a force.
Indeed, Europeans should continue to play their traditional role, and to talk without ideological blinkers with all those involved in Palestine’s tragedy – including Hamas.
This is, in fact, what many Americans privately ask Europeans to do.
But, if the Annapolis meeting is to re-ignite a successful peace process, EU governments must first develop a common position on this issue.
Hamas’s Real Enemies
JERUSALEM – In Iran, elements from within the regime are reportedly offering a $1 million reward for the assassination of Egyptian President Hosni Mubarak because of his opposition to Hamas in the Gaza Strip.
In Lebanon, the leader of Hezbollah, backed by Iran and Syria, merely calls for the Egyptian government’s overthrow.
In response to this, Tariq Alhomayed, a Saudi who is editor-in-chief of the newspaper Al-Sharq al-Awsat , describes Hamas as Iran’s tool, and argues that “Iran is a real threat to Arab security.”
Egypt’s foreign minister, Ahmed Aboul Gheit, agrees – and he is not alone.
When Arab states met to discuss the Gaza crisis, Saudi Arabia vetoed any action.
Even the Palestinian Authority (PA) blames Hamas for the fighting.
Activists in Fatah, Hamas’s nationalist rival which runs the PA, make no secret of their hope that Hamas loses the war.
Welcome to the new Middle East, characterized no longer by the Arab-Israeli conflict, but by an Arab nationalist-Islamist conflict.
Recognizing this reality, virtually all Arab states – other than Iran’s ally, Syria – and the PA want to see Hamas defeated in the Gaza Strip.
Given their strong self-interest in thwarting Islamist revolutionary groups, especially those aligned with Iran, they are not inclined to listen to the “Arab street” – which is far quieter than it was during previous conflicts, such as the 1991 war in Kuwait, the 2000-2004 Palestinian uprising, or the 2006 Israel-Hezbollah war.
Today’s Middle East is very different from the old one in many significant ways.
First, the internal politics of every Arab country revolves around a battle between Arab nationalist rulers and an Islamist opposition.
In other words, Hamas’s allies are the regimes’ enemies.
An Islamist state in the Gaza Strip would encourage those who seek to create similar entities in Egypt, Jordan, and every other Arab country.
Already, a tremendous price has been paid in lives and treasure for this conflict.
The violence has included civil wars among Palestinians and Algerians; the bloodshed in Iraq; and terrorist campaigns in Egypt and Saudi Arabia.
In the Palestinian case, after winning an election victory and making a deal with Fatah for a coalition government, Hamas turned on its nationalist rivals and drove them out of Gaza by force.
In return, the PA has been repressing Hamas in the West Bank.
In Lebanon, Hezbollah has been trying to bully its more moderate Sunni Muslim, Christian, and Druze rivals into submission.
Second, because Arab states confront an Iran-Syria alliance that includes Hamas and Hezbollah, in addition to internal conflicts, there is a regional battle between these two blocs.
An aspect of this is that the largely Sunni Muslim-led states face a largely Shia Muslim-led competitor for regional hegemony.
These two problems pose far greater dangers to the existing states than does any (largely fabricated) Israeli threat, and the region’s rulers know it.
On the other side of the divide, Iran and its allies have put forward the banners of jihad and “resistance.”
Their platform includes: Islamist revolution in every country;
Iran as the region’s dominant state, backed up by nuclear weapons; no peace with Israel and no Palestinian state until there can be an Islamist one encompassing all of Israel (as well as the West Bank and Gaza Strip); and the expulsion of Western influence from the region.
This is a very ambitious program, probably impossible to achieve.
Nevertheless, it is a prescription for endless terrorism and war: both pro- and anti-Iranian revolutionary Islamists believe that, because God is on their side and their enemies are cowardly, they will win, and they are quite prepared to spend the next half-century trying to prove it.
While this seems to be a very pessimistic assessment of the regional situation, the radical Islamist side has many weaknesses.
Launching losing wars may make Islamists feel good, but being defeated is a costly proposition, for their arrogance and belligerence antagonizes many who might otherwise be won over to their cause.
In addition, the situation provides a good opportunity for Western policymakers.
The emphasis should be on building coalitions among the relatively moderate states that are threatened by radical Islamist forces, and on working hard to prevent Iran from obtaining nuclear weapons – a goal that is in the interests of many in the region.
The worst mistake would be to follow the opposite policy – an inevitably futile effort to appease the extremists or seek to moderate them.
Such a campaign actually disheartens the relative moderates who, feeling sold out, will try to cut their own deal with Tehran.
The current crisis in Gaza is only one aspect of the much wider battle shaking the region.
Helping Hamas would empower radical Islamism and Iranian ambitions, while undercutting the PA and everyone else, not just Israel.
Arab states don’t want to help their worst enemy.
Why should anyone else?
Hamas’s Zero-Sum Game
Imagine your next-door neighbor – with whom you have had a long and bloody feud – pulling out a gun and shooting into your windows, from his own living room, which is densely packed with women and children.
In fact, he’s holding his daughter on his lap as he tries to target your own kids.
He claims he will not stop until your family is dead.
Police are unavailable.
What should you do?
One option is to do nothing, or little.
You try this for a while.
After all, your neighbor is poor and traumatized, there is a sad and complicated history between you, and you bear some of the blame.
But finally, as one shot hits your child’s bedroom, you decide that enough is enough.
You pull out your far superior gun.
You attempt a surgical strike: aim at the shooter’s head and try to spare the innocents.
In an abstract sense, this is what Israel is doing right now.
But there is nothing surgical about the blood and agony that have engulfed Gaza in the last week. Try as Israel might to target militants alone, civilian bodies are being pulled from the rubble, because, like our metaphorical gunman’s home, militants and civilians inhabit the same urban space in the Gaza Strip.
Gaza City and Rafah are crowded and poor – and, more than ever before, they double as army camps.
Fighters train next to schools, and rockets are stored in the basements of apartment buildings.
According to recent reports, Hamas’s senior officials are currently hiding in hospitals.
Over a million Palestinians, unable to flee to either Egypt or Israel, have for years been ruled by a military junta that prioritizes the killing of Israelis, across the international border, at all costs.
Of course, civilians have always been in the line of fire and conquest, from Troy to Berlin.
But no regime has ever used its citizens so deliberately as tools to arouse world sympathy, as hostages to modern sensitivities.
While theories of just war instruct us not to hurt non-combatants, Hamas and its military arm have made a conscious decision, banking on global humanitarian concerns, to ensure that Israel hits as many civilians as possible.
Even if Israel’s current war against Gaza is a just war – which is suggested by its attempts at limited and “measured” retaliation after eight years of Hamas rockets followed its unilateral retreat from Gaza – it is therefore a very dirty war, too.
There is a sad zero-sum game between Palestinian suffering and Israeli sovereignty, security, and normal life.
Most Israelis – even those hoping to see, in their lifetime, an independent and prosperous Palestine – agree that the attack on Hamas was necessary.
Many others would not like to see the Israeli army launch a ground invasion into Gaza.
Prime Minister Ehud Olmert has rightly allowed convoys of food and medicine into Gaza during the fighting, and Israeli hospitals are treating several injured Gazan citizens.
Not unreasonably, Israel wants an internationally guaranteed and monitored ceasefire agreement that would put a total stop to Hamas assaults against its territory.
But, as world opinion awakens from its holiday slumber, it is likely to turn against Israel.
After all, Israel is the strong guy, the former occupying power, the better shooter.
Its bombardment of Gaza is not “proportional.”
Indeed, there is no symmetry of suffering on the two sides of the border.
Gazans are worse off than Israelis in every conceivable way.
But does that mean that Israel should let them keep shooting at it?
Or should Israel respond “proportionally,” by firing 10 to 80 rockets, indiscriminately aimed against Gazan homes and schools, every day for the next few years?
Israelis have become used to blanket accusations.
It is the kind of message that unites the nation, left and right, in grim resolve.
What, Israelis ask, would other countries do?
Does the enemy’s civilian suffering trump Israel’s sovereignty?
Does it trump the real, if less bloody, agony and fear of hundreds of thousands Israelis over long years?
Olmert, Defense Minister Ehud Barak, and Foreign Minister Tzippi Livni have cast aside their political rivalries in order to orchestrate an answer: Israel must fight off the Gazan rockets.
That said, Israel’s unity may be short-lived.
It is a democracy, not a one-voice nation, and, with a general election due in February, debate is continuing both within the government and beyond it.
If the Gaza campaign turns Lebanon-like, with a humanitarian catastrophe, ongoing bombardment of Israeli civilians, or both, domestic criticism will echo loud and clear.
But even opponents of Olmert’s second war must face the blunt fact that Hamas is lethal.
To the detriment of their own people, its leaders, Haled Mash'al and Ismail Hanieh, want neither peace nor compromise.
Like their friend and supporter, President Mahmoud Ahmedinejad of Iran, they want Israel dead.
It is as simple as that.
One ray of hope is that moderate Arab leaders, including Egypt's foreign minister, have openly blamed Hamas for the current Gazan predicament.
Egypt, Saudi Arabia, and Jordan are willing to broker peace, and perhaps save the Palestinians from their own worst leadership.
Israel has gone a long way since the Arab world set out to kill it off.
For the first time, prominent Arab voices acquit Israel of the wholesale blame that some Western critics still lazily throw at it.
For the time being, Israel should strive for the safest truce it can accomplish, provided that Hamas stops shooting out of its own crowded living room.
But, after the election in February, Israel’s next leader must face the moderate Arab challenge.
He or she must talk directly to the Arab League, whose proposed peace plan will require tough Israeli negotiation, but is a reasonable start to preventing future wars, including just wars.
Give it a chance.
Hamas Takes on the Radicals
GAZA CITY – The recent shoot-out in a Gaza mosque between Hamas security officers and militants from the radical jihadi group the Warriors of God brought to the surface the deep tensions that divide Palestinian Islamists.
Twenty-two people died, including the Warriors of God’s leader, Abdel Latif Moussa.
But Palestinian security officials doubt that these will be the last casualties.
With Hamas in control for more than two years, the Gaza Strip has long been considered much more traditional and conservative than the West Bank.
Nevertheless, in Gaza’s political milieu, Hamas is a moderate Islamic group that opposes al-Qaeda-style extremism. But such extremist Islamic groups have been gaining support in Gaza, and Hamas has noticed.
The shoot-out in the mosque shows that Hamas will be ruthless in taking them on.
Various Salafi extremist groups have been operating in Gaza for years.
Salafis, whose name is derived from the Arabic phrase for “righteous ancestors,” known as “Salaf al-Salih,” insist on a return to what they consider the purity of the practices of the first Muslims.
Hamas has, in the past, cooperated with some of the Salafis, assuming they would stand behind Hamas’s leadership.
The Army of Islam joined in the raid that abducted the Israeli soldier Gilad Shalit in June 2006.
The group also took responsibility for the 2007 kidnapping of the BBC’s Gaza correspondent Alan Johnston, who was later released after negotiations led by Hamas.
The Warriors of God is one of a handful of radical, al-Qaeda-inspired groups to have appeared in the Gaza Strip in recent months, first coming to public attention in June after claiming responsibility for a failed horseback attack on Israel from Gaza.
Their Web site shares images, language, and music with al-Qaeda and other jihadi groups.
In a recent declaration, the group made favorable mention of al-Qaeda leaders Osama bin Laden and Ayman al-Zawahiri.
The Warriors of God demands a pure form of Islamic practice throughout the Gaza Strip, including the implementation of Sharia religious law and a rejection of democracy.
Indeed, the confrontation at the mosque followed the declaration of an Islamic Caliphate in Gaza, a flagrant rejection of Hamas’s authority.
Many young men in Gaza have become increasingly radicalized.
Pakistani-style dress has become common, as is the long hair that is thought to resemble the style of the Prophet Mohammad.
At the same time, violence against “law-breakers” is on the rise. Internet cafes have been bombed, institutions with Christian affiliations burned down, foreign schools attacked, and wedding parties assaulted.
There are substantial ideological differences between Gaza’s Salafi al-Qaeda affiliates and Hamas.
As a ruling party, Hamas has insisted that its sole concern is the Palestinian people, not a global Islamic revolution.
Hamas has not imposed Islamic law in the Gaza Strip.
The Salafi groups, however, appear increasingly influenced by the growth of radical al-Qaeda-style extremism in Pakistan, Iraq, and Afghanistan.
While traditional Salafi movements have stayed away from politics, the younger groups see activism and violence as the best means of realizing their goals.
But Hamas’s failure to establish and implement Islamic law is not the only issue that rankles.
One of the reasons for these groups’ increased appeal is the de facto cease-fire between Israel and Hamas, which has led some in Gaza to charge that Hamas has been neutralized as a resistance force.
With the border closed under Israeli blockade for more than two years, levels of poverty, unemployment, and despair have grown, with young men increasingly interested in joining the global jihad as it comes to Gaza.
Indeed, Hamas’ confrontation with Salafi groups comes as Israel is charging that dozens of foreign terrorists have crossed into Gaza from the Sinai Desert to join the violent underground.
Hamas’s crackdown thus highlights its desire to maintain control over its conflict with Israel.
The threat of Salafi extremism in Gaza is far from over.
Salafis have threatened to retaliate against Hamas, particularly the security brigades that led the counter-attack on the mosque.
A new Salafi group called the Brigade of Swords of Righteousness has declared its obedience to the Warriors of God, and has warned Gazans to stay away from government buildings, security headquarters, mosques attended by Hamas leaders, and other official buildings. The group now considers these legitimate targets.
With hundreds of tunnels connecting the Gaza Strip and Sinai, it is very difficult to control the flow of arms, ammunition, and possibly foreign fighters.
Hamas’s battle with these radicals, who detonated suicide bombs and killed six Hamas security men during the mosque fight, is just beginning.
Residents are afraid that Gaza could become another Iraq, with bombings and mass killings a daily occurrence.
Hamas will use all means necessary to protect its power, and to break the jihadi groups now spreading in Gaza.
In the process, Hamas hopes to win the international legitimacy that it has long sought.
Happiness, Money, and Giving It Away
Would you be happier if you were richer?
Many people believe that they would be.
But research conducted over many years suggests that greater wealth implies greater happiness only at quite low levels of income.
People in the United States, for example, are, on average, richer than New Zealanders, but they are not happier.
More dramatically, people in Austria, France, Japan, and Germany appear to be no happier than people in much poorer countries, like Brazil, Colombia, and the Philippines.
Comparisons between countries with different cultures are difficult, but the same effect appears within countries, except at very low income levels, such as below $12,000 annually for the US.
Beyond that point, an increase in income doesn’t make a lot of difference to people’s happiness.
Americans are richer than they were in the 1950’s, but they are not happier.
Americans in the middle-income range today – that is, a family income of $50,000-$90,000 – have a level of happiness that is almost identical to well-off Americans, with a family income of more than $90,000.
Most surveys of happiness simply ask people how satisfied they are with their lives.
We cannot place great confidence in such studies, because this kind of overall “life satisfaction” judgment may not reflect how much people really enjoy the way they spend their time.
My Princeton University colleague Daniel Kahneman and several co-researchers tried to measure people’s subjective well-being by asking them about their mood at frequent intervals during a day.
In an article published in Science on June 30, they report that their data confirm that there is little correlation between income and happiness.
On the contrary, Kahneman and his colleagues found that people with higher incomes spent more time in activities that are associated with negative feelings, such as tension and stress.
Instead of having more time for leisure, they spent more time at and commuting to work.
They were more often in moods that they described as hostile, angry, anxious, and tense.
Of course, there is nothing new in the idea that money does not buy happiness.
Many religions instruct us that attachment to material possessions makes us unhappy.
The Beatles reminded us that money can’t buy us love.
Even Adam Smith, who told us that it is not from the butcher’s benevolence that we get our dinner, but from his regard for his self-interest, described the imagined pleasures of wealth as “a deception” (though one that “rouses and keeps in continual motion the industry of mankind”).
Nevertheless, there is something paradoxical about this.
Why do governments all focus on increasing per capita national income?
Why do so many of us strive to obtain more money, if it won’t make us happier?
Perhaps the answer lies in our nature as purposive beings.
We evolved from beings who had to work hard to feed themselves, find a mate, and raise children.
For nomadic societies, there was no point in owning anything that one could not carry, but once humans settled down and developed a system of money, that limit to acquisition disappeared.
Accumulating money up to a certain amount provides a safeguard against lean times, but today it has become an end in itself, a way of measuring one’s status or success, and a goal to fall back on when we can think of no other reason for doing anything, but would be bored doing nothing.
Making money gives us something to do that feels worthwhile, as long as we do not reflect too much on why we are doing it.
Consider, in this light, the life of the American investor Warren Buffett.
For 50 years, Buffett, now 75, has worked at accumulating a vast fortune.
According to Forbes magazine , he is the second wealthiest person in the world, after Bill Gates, with assets of $42 billion.
Yet his frugal lifestyle shows that he does not particularly enjoy spending large amounts of money.
Even if his tastes were more lavish, he would be hard-pressed to spend more than a tiny fraction of his wealth.
From this perspective, once Buffett earned his first few millions in the 1960’s, his efforts to accumulate more money can easily seem completely pointless.
Is Buffett a victim of the “deception” that Adam Smith described, and that Kahneman and his colleagues have studied in more depth?
Coincidentally, Kahneman’s article appeared the same week that Buffett announced the largest philanthropic donation in US history – $30 billion to the Bill and Melinda Gates Foundation and another $7 billion to other charitable foundations.
Even when the donations made by Andrew Carnegie and John D. Rockefeller are adjusted for inflation, Buffett’s is greater.
At a single stroke, Buffett has given purpose to his life.
Since he is an agnostic, his gift is not motivated by any belief that it will benefit him in an afterlife.
What, then, does Buffett’s life tell us about the nature of happiness?
Perhaps, as Kahneman’s research would lead us to expect, Buffett spent less of his life in a positive mood than he would have if, at some point in the 1960’s, he had quit working, lived on his assets, and played a lot more bridge.
But, in that case, he surely would not have experienced the satisfaction that he can now rightly feel at the thought that his hard work and remarkable investment skills will, through the Gates Foundation, help to cure diseases that cause death and disability to billions of the world’s poorest people.
Buffett reminds us that there is more to happiness than being in a good mood.
Happy Days Are Not Here Again
The National Bureau of Economic Research, the non-profit organization that has long been responsible for marking the beginning and end of America's recessions, has finally declared that the recession that it said began in March 2001 is over.
In fact, the NBER says that it ended almost two years ago, in November 2001.
Non-economists find it hard to understand why it took the NBER so long to decide that the US recession was over.
Economics is not supposed to be an exact science, but isn't this tardiness taking things a bit too far?
More importantly, if the recession is over--and has been for so long--why don't Americans feel any better?
Why is the economic mood so negative?
The answer lies in the definition of a recession.
In fact, the questions posed by the NBER may not be the right questions, or at least the most relevant.
A recession is normally defined as two quarters (six months) of decline in GDP.
By carefully poring over the data, the NBER determined that output most probably started to grow again in December 2001.
Having determined that, it was easy to date the end of the recession.
Indeed, today output is 3.3% above its pre-recession peak of late 2000.
But that does not mean that the economy is performing well.
Not at all.
In economics, one has to run to stand still.
Every year, more than one million additional workers enter America's labor force, and a functioning economy must find jobs for them.
One of the marvels of a market economy is how, every year, year after year, productivity--the amount of output produced by each worker in an hour--increases.
During the 1990's, Americans' productivity soared.
The new economy may have been hyped, but behind all the hype was something real: the rate of productivity growth increased.
In the 1960's, productivity increased by more than 3% per year, but in the early 1970's, productivity growth suddenly declined, by almost two thirds.
Economists puzzle over why.
More entrants to the labor force, higher oil prices, and lower investment played a role, but most mysteriously, the pace of technological progress seemed to slow dramatically.
For all the vaunted supply-side economics, productivity gains remained weak in the 1980's.
The turnaround came during the Clinton administration, although some investments in technology made in earlier years almost surely played a role.
But with productivity now back up to the levels of the 1960's, the economy's annual growth potential increased from around 2.5% to around 3.5%.
The important point is that unless the economy is growing at a fairly strong pace, say around 3%, no jobs will be created.
That is what has happened during the Bush years.
The economy has grown, but not enough to create new jobs, let alone to create enough new jobs for all the new entrants to the labor force.
Today, unemployment is the highest it has been since 1994, at 6.2% (far higher than the 5.3% of Japan's supposedly moribund economy).
But even this number masks the true extent of the problem.
Jobs are so scarce that many Americans have given up looking--the so-called discouraged worker effect.
Had labor force participation remained at the level of the late 1990's, the unemployment rate would be far higher.
More and more workers have joined the ranks of the long-term unemployed--out of a job so long that they are no longer eligible for unemployment benefits.
Ironically, one early argument used by the Bush administration to resist increases in unemployment benefits was that it would discourage workers from looking for a job.
They seemed callously to suggest that the problem of unemployment was with workers too lazy to pound the pavement to find work.
But if there are no jobs, looking does no good.
So the NBER's efforts at dating recessions--defined the way they do--are of only limited relevance.
After all, there is nothing magic about the number zero.
Indeed, the focus on zero can be misleading.
The gap between an economy's potential and its actual performance is what matters most.
Assume that America's annual growth potential is 3.5%.
In a $10 trillion economy, that means America lost something like $320 billion in 2001, $440 billion in 2002, and, if growth turns out to be even 3% in 2003, $500 billion in 2003.
The Bush administration has been setting all kinds of records, such as the largest adverse turnaround in America's fiscal position in the space of just over two years--more than $700 billion per year--from a robust surplus to a yawning deficit.
But this waste, in excess of a trillion dollars over three years, sets another record.
So Americans are right not to let declarations about the end of the US recession make them feel good.
Weak economic performance--whether it is called a recession or not--smells just as bad.
Those responsible for such economic mismanagement should be held accountable.
Hard Financial Questions about Soft Development Money
Achieving the Millennium Development Goals (MDG’s) by 2015 is a tremendous challenge facing the international community, and there is widespread agreement that additional external aid is required to meet it.
So the question now is not whether to increase aid, but how best to finance it.
The search for additional and more stable funding to meet the MDG’s has led to various proposals for innovative financing mechanisms and debt relief, in particular by British Chancellor of the Exchequer Gordon Brown.
But the broad range of proposed schemes to bolster resources for development assistance raises hard questions about the appropriate balance between objective needs and sound and effective financing.
Donors as well as recipients must ensure consistency between financing and absorptive capacity.
They must also ensure that additional official financing and debt relief will not distort incentives or create moral hazard.
New money should go to good performers, not just to those who are experiencing debt distress.
In addition to these issues, financing proposals to achieve the MDG’s should be discussed from a central banker’s perspective.
The best solutions include sufficient increases in rich countries’ foreign aid allocations and more ambitious trade liberalization.
But such policies seem politically untenable in the short term, even though – according to the World Bank’s estimation – an appropriate conclusion of the current trade round under the auspices of the World Trade Organization could contribute $350 billion a year to developing countries by 2015.
Similarly, when it comes to increasing foreign-aid budgets, politicians want solutions that are not “felt” by taxpayers (that is, voters) and that can remain outside of national budgets.
However, opaque solutions designed to avoid critical public scrutiny do not seem particularly democratic. “Innovative” financing solutions might also undermine the clear assignment of responsibilities for raising and using public money.
Indeed, the term “innovative financing mechanism” conjures the idea that there is an easy way to meet the MDG’s.
But, in the end, there are only three ways to secure additional financing for development aid or debt relief: higher taxes, increased indebtedness (that is, higher taxes for future generations), and/or monetary expansion.
One proposal calls for taxing national and international financial transactions.
Others call for allocating Special Drawing Rights (SDR’s) from the IMF, or for using the IMF’s gold resources.
But none of them appears desirable.
To be effective, any tax on financial transactions would have to be implemented on a global scale, which currently does not seem realistic.
Moreover, taxation would increase costs (passed on to borrowers) and reduce the volume of transactions, thereby fueling market volatility amid decreasing liquidity.
Allocating new SDR’s also is inappropriate.
Above all, SDR’s represent liquidity and can be allocated only if and when there is a “global need,” which would currently be difficult to prove given highly liquid and “easy” international capital-market conditions.
Even if a “global need” were recognized, SDR’s, as a component of countries’ official foreign-exchange reserves, should not be available for budgetary spending.
Financing development aid with SDR’s – or even to replace budget-financed aid with such allocations – is comparable to financing budget deficits with central bank money.
In any case, new SDR allocations require the support of 85% of votes within the IMF’s board, which appears unachievable in the foreseeable future, as major shareholders are opposed.
Even the special one-time issuance of SDR’s, agreed upon in 1997 to ensure that all Fund members receive an “equitable” share of cumulative SDR allocations, has still not been activated, owing to insurmountable opposition.
Finally, the proposed “better use” of the IMF’s gold holdings to finance the costs of debt relief seeks to raise up to $8 billion.
At the current market price, this would require selling about a quarter of the Fund’s holdings of 103.4 million fine ounces.
However, these reserves represent an important “hidden” asset that lends strength to the Fund’s balance sheet.
The IMF’s creditors consider it a necessary safeguard against increased risks in the Fund’s credit portolio.
This is because the Fund has experienced exceptionally high access and prolonged use of its resources by a few large economies in the last decade.
Moreover, the IMF’s share in crisis countries’ total external debt has reached unprecedented and systemically problematic levels.
As a result of both tendencies, there is a high concentration of credits on a few large borrowers.
To use IMF gold for further debt relief in the face of increased risk threatens the Fund’s financial integrity and contradicts the recent decision to increase the IMF’s precautionary balances.
Development aid has to be financed in “real terms,” or in a reputable manner, not by spending central bank money or by jeopardizing the IMF’s financial integrity.
Aid should preferably be financed out of donor countries’ national budgets in a transparent, democratically accountable way. “Innovative” must not become a euphemism for non-transparent, ineffective, or unsound.
Hard Truths About Global Growth
NEW YORK – The world’s high-income countries are in economic trouble, mostly related to growth and employment, and now their distress is spilling over to developing economies.
What factors underlie today’s problems, and how appropriate are the likely policy responses?
The first key factor is deleveraging and the resulting shortfall in aggregate demand.
Since the financial crisis began in 2008, several developed countries, having sustained demand with excessive leverage and consumption, have had to repair both private and public balance sheets, which takes time – and has left them impaired in terms of growth and employment.
The non-tradable side of any advanced economy is large (roughly two-thirds of total activity).
For this large sector, there is no substitute for domestic demand.
The tradable side could make up some of the deficit, but it is not large enough to compensate fully.
In principle, governments could bridge the gap, but high (and rising) debt constrains their capacity to do so (though how constrained is a matter of heated debate).
The bottom line is that deleveraging will ensure that growth will be modest at best in the short and medium term.
If Europe deteriorates, or there is gridlock in dealing with America’s “fiscal cliff” at the beginning of 2013 (when tax cuts expire and automatic spending cuts kick in), a major downturn will become far more likely.
The second factor underlying today’s problems relates to investment.
Longer-term growth requires investment by individuals (in education and skills), governments, and the private sector.
Shortfalls in investment eventually diminish growth and employment opportunities.
The hard truth is that the flip side of the consumption-led growth model that prevailed prior to the crisis has been deficient investment, particularly on the public-sector side.
If fiscal rebalancing is accomplished in part by cutting investment, medium- and longer-term growth will suffer, resulting in fewer employment opportunities for younger labor-market entrants.
Sustaining investment, on the other hand, has an immediate cost: it means deferring consumption.
But whose consumption?
If almost everyone agrees that more investment is needed to elevate and sustain growth, but most believe that someone else should pay for it, investment will fall victim to a burden-sharing impasse – reflected in the political process, electoral choices, and the formulation of fiscal-stabilization measures.
The core issue is taxes.
If public-sector investment were to be increased with no rise in taxation, the budget cuts required elsewhere to avoid unsustainable debt growth would bein implausibly large.
The most difficult challenge concerns inclusiveness – how the benefits of growth are to be distributed.
This is a longstanding challenge that, particularly in the United States, goes back at least two decades before the crisis; left unaddressed, it now threatens social cohesion.
Income growth for the middle class in most advanced countries has been stagnant, and employment opportunities have been declining, especially in the tradable part of the economy.
The share of income going to capital has been rising, at the expense of labor.
Particularly in the US, employment generation has been disproportionately in the non-tradable sector.
These trends reflect a combination of technological and global market forces that have been operating over the last two decades.
On the technology side, labor-saving innovations in network-based information processing and transactions automation have helped to drive a wedge between growth and employment generation in both the tradable and non-tradable sectors.
In the tradable part of advanced economies, manufacturing automation – including expanding robotic capabilities and, prospectively, 3D printing – has combined with the integration of millions of new entrants into rapidly evolving global supply chains to limit employment growth.
Multinational companies’ growing ability to decompose these global supply chains by function and geography, and then to reintegrate them at ever lower transaction costs, removes the labor-market protection that used to come from local competition for workers.
This challenge is particularly difficult, because economic policy has not focused primarily on the adverse distributional trends arising from shifting global market outcomes.
And yet the income distributions across advanced economies, presumably subject to similar technological and global market forces, are, in fact, startlingly different, suggesting that a combination of social policies and differing social norms does have a distributional impact.
Although the theory of optimal income taxation directly addresses the tradeoffs between efficiency incentives and distributional consequences, the appropriate equilibrium remains a long way off.
A healthy state balance sheet could help, because part of the income flowing to capital would go to the state.
But, with the exception of China, fiscal positions around the world are currently weak.
As a result, deleveraging remains a clear priority in a range of countries, reducing growth, with fiscal countermeasures limited by high or rising government debt and deficits.
Thus far, there is little evidence of willingness on the part of politicians, policymakers, and perhaps the public to reduce current consumption further via taxation in order to create room for expanded growth-oriented investment.
In fact, under fiscal pressure, the opposite is more likely.
In the US, few practical measures that address the distributional challenge appear to be part of either major party’s electoral agenda, notwithstanding rhetoric to the contrary.
To the extent that this is true of other advanced economies, the global economy faces an extended multi-year period of low growth, with residual downside risk coming from policy gridlock and mistakes in Europe, the US, and elsewhere.
That scenario implies slower growth – possibly 1-1.5 percentage points slower – in developing countries, including China, again with a preponderance of downside risk.
Hard Turkey
JERUSALEM – The recent surge in Turkey’s military actions against the Kurds in northern Iraq is an indication that, somewhat surprisingly – but not entirely unpredictably – Turkish foreign policy has undergone a 180-degree turn in less than two years.
The Turkish offensive is also an indication that these changes go beyond the current tensions between Turkey and Israel, which are just one facet of much deeper trends.
Just a couple of years ago, after the European Union slammed the door in Turkey’s face (despite some significant military and penal reforms by the Justice and Development Party (AKP) government), Turkey re-oriented its policy away from Europe towards its immediate region.
Foreign Minister Ahmet Davutoğlu’s “zero conflicts with neighbors” approach gave this re-orientation its strategic and theoretical foundation.
Opening an impressive new page, Turkey reached out to Armenia; softened its position on Cyprus; tried to draw Iran into a positive dialogue with the West; convinced Syria to settle the two countries’ simmering border dispute; and, as a crowning achievement, launched peace talks between Syria and Israel under Turkish mediation.
Yet these good-neighborhood policies did not work out as intended.
Rapprochement with Armenia stalled; no significant progress was made on Cyprus, especially after a less-accommodating leader was elected in the Turkish Republic of Northern Cyprus (an entity that only Turkey recognizes); the opening to Iran did not soften the mullahs’ position on nuclear development (and strained relations with the United States); the Syria-Israel talks failed; and Turkey’s participation in the 2010 flotilla to Gaza, and Israel’s brutal response to it, signaled an end to decades of close Israeli-Turkish cooperation.
To top it all off, Syria’s President Bashar al-Assad, ostensibly Turkey’s closest new ally, emerged as the most oppressive and bloody regional tyrant.
Assad has now spent the better part of 2011 killing his own people as they demonstrate for liberalization and reform.
Notwithstanding these failures, Turkey’s strategic stature did not suffer, partly because the diminution of US engagement under President Barack Obama enabled Turkey to fill the ensuing regional power vacuum.
The Arab Spring, despite its still-inconclusive outcome, greatly weakened Egypt’s role in regional politics and made it possible for Prime Minister Recep Tayyip Erdoğan to position Turkey – and himself – as the leader of a Muslim bloc and a model of co-existence between Islam and democracy.
Last but not least, the AKP’s victory in recent parliamentary elections has encouraged Erdoğan to embrace Putinesque ambitions.
All of this exposed the built-in ambivalence in Davutoğlu’s “zero conflict” policy.
While initially viewed as pacific and moderate, it was underpinned by an overarching view of Turkey as the hegemonic regional power – as an arbiter of conflicts, but ultimately also as an enforcer of its own views on lesser players.
It may be incorrect to call Turkey’s behavior “neo-Ottoman,” but some neighboring countries, after expecting a mediator and facilitator, may now feel faced by a possible bully.
Erdoğan’s policy re-orientation vis-à-vis Israel can be understood as an attempt not only to overcome traditional Arab suspicion of Turkey, given its imperial past, but also to present a more moderate Islamic alternative to theocratic Iran and its unpredictable president.
But Erdoğan’s threat to consider using the Turkish navy as a military escort for further flotillas to Gaza already borders on saber rattling, as does his declared willingness to use force to prevent the Republic of Cyprus from exploring for gas in its continental shelf.
Indeed, Erdoğan’s has warned of a diplomatic rupture with the EU if Cyprus accedes to the Union’s rotating presidency in 2012.
At the same time, renewed violent incursions into northern Iraq in pursuit of alleged guerillas suggest a reversion to hardline anti-Kurdish policies.
The withdrawal of US forces from Iraq only seems to have encouraged Turkey’s will to create a cordon sanitaire on the Iraqi side of the border – and possibly to establish a counterweight to Iran’s influence on a Shia-led government in Baghdad.
And, while Turkey’s agreement to host NATO anti-missile radar facilities, and its recent seizure of a Syrian-registered arms ship, may please the West, here, too, its policies are focused on “hard” military power.
Similarly, Erdoğan’s recent visit to Egypt, Libya, and Tunisia brings out the ambivalence of Turkey’s new claim to regional hegemony.
While Egypt’s shaky military junta welcomed Erdoğan, many Egyptians were not happy about his hectoring them – and other Arabs – to follow Turkish policies and to regard Turkey as their Muslim leader.
A new sultanate?
Erdoğan as the new Saladin?
Turkey has an enormously important role to play in the region.
It could be a bridge between the West and the East, between Islam and modernity, and between Israel and the Arabs.
But it runs the danger of succumbing to the arrogance of power, which has corrupted and sidelined many strong states in the past.
Soccer Lessons for Europe’s Economy
PRINCETON – Though a solution to the euro crisis continues to elude European leaders, the foundations of one are not difficult to discern.
In fact, Europe’s recent soccer experience – specifically, in the EURO 2012 tournament and this year’s World Cup – provides insight into how to revive Europe’s economy and address its deeper identity problem.
On June 28, 2012, as European political leaders met in Brussels, amid growing uncertainty about the eurozone’s survival, to negotiate the design of the European Stability Mechanism (ESM), Germany was playing Italy in a semifinal match in Warsaw.
Two goals by Mario Balotelli cinched the win for Italy – and propelled Balotelli to superstar status.
At such a politically sensitive moment, a German victory could have sparked a bitter nationalist reaction in southern Europe.
Instead, encouraged by his country’s victory, Italy’s new technocratic prime minister, Mario Monti, in alliance with Spanish Prime Minister Mariano Rajoy, pressed German Chancellor Angela Merkel for easier access to ESM support – and scored another major victory for his country.
For a brief moment, Monti joined Balotelli in becoming a national hero.
The Italian media eagerly linked the two “Super Marios,” with photomontages showing the prime minister with the soccer player’s idiosyncratic mohawk hairstyle. The message from both the soccer field and the negotiating room was that there was a quick and easy route to victory, complex issues could be solved by a brilliant argument, and individual superstars were the key to success.
The World Cup championship in Brazil was another matter altogether.
This time, the Germans won, with a spectacular display of power in a 7-1 semifinal erasure of the host country, Brazil, and a 1-0 triumph over Argentina in the final.
The disappointed supporters of the defeated teams viewed the games in terms of personalities.
Brazil and Argentina had long histories of superstars: Pelé, Garrincha, Ronaldo, Alfredo di Stéfano, and Diego Maradona.
In the semifinal, Brazil appeared to be paralyzed without its hero, Neymar, who wore the same number as Pelé but had been badly injured in the previous match.
In the final, Argentineans believed that the world’s best player, Lionel Messi, would surely carry the national team to victory.
Of course, the German team had plenty of good players.
But, instead of behaving like superstars, they worked together, passing consistently and creating opportunities for one another to score.
Germany’s World Cup performance was a brilliant demonstration of the importance of deep, long-term reforms.
In the early 2000s, German soccer was boring.
Germany’s heroes were from the distant past.
It was easy to draw an analogy between ineffective and mundane performance in the stadium and the general state of the country.
At the time, Germany was regarded as the sick man of Europe, with a proclivity for highly protected labor markets.
Something needed to be shaken up.
In 2004, the German national team’s new trainer, Jürgen Klinsmann, did just that. Beyond more aggressive tactics, his radical new strategy entailed a fundamental revolution in sports education and training, with programs that identified and propelled promising young players through the teams in Germany’s domestic league.
In other words, it was a long-term strategy.
Fortunately, the team’s management understood this and persevered, despite the lack of a short-term payoff.
Klinsmann’s assistant trainer, Joachim Löw, succeeded him, and became the architect of the 2014 championship bid.
Germany’s soccer revolution was mirrored in the economy.
Beginning in 2003, Chancellor Gerhard Schröder, a Social Democrat, launched a series of reforms aimed at increasing labor-market flexibility and, more generally, laying the foundations for long-term prosperity.
But this future-oriented approach had serious short-term political consequences, with Schröder losing the next election and his party’s popularity diminishing considerably.
Neither Schröder nor Klinsmann attained superstar status, but they carried out the reforms that mattered.
There are other lessons that Germans and Europeans can derive from these experiences.
One concerns the integration of foreigners.
All of the major European teams, including Germany’s, depend on players of foreign descent.
In the Brazil game, Miroslav Klose, whose family hails from Poland, became the highest-scoring player in World Cup history.
The half-Ghanaian Jérôme Boateng was a pillar of the German defense.
And Mesut Özil, who is of Turkish descent, executed many beautiful sweeping passes.
Even Balotelli, Italy’s EURO 2012 superstar, is the son of Ghanaian immigrants.
But the most important lesson is that there are no quick fixes or magic bullets.
An exceptional performance by a superstar soccer player can be beautiful – even inspiring – just as rescue mechanisms and stimulus packages can rally markets and raise hopes.
But their impact is fleeting.
Consistent, reliable, long-term success requires forward-thinking measures that focus on building strong fundamentals.
Europe needs such an approach, one that includes microeconomic adjustments and programs that encourage mobility, flexibility, and innovation.
If other Europeans emulated the German model, Europe would begin to look – and play – like a championship team.
The Secret History of the Financial Crisis
PRINCETON – Balzac’s great novel Lost Illusions ends with an exposition of the difference between “official history,” which is “all lies,” and “secret history” – that is, the real story.
It used to be possible to obscure history’s scandalous truths for a long time – even forever.
Not anymore.
Nowhere is this more apparent than in accounts of the global financial crisis.
The official history portrayed the US Federal Reserve, the European Central Bank, and other major central banks as embracing coordinated action to rescue the global financial system from disaster.
But recently published transcripts of 2008 meetings of the Federal Open Market Committee, the Fed’s main decision-making body, reveal that the Fed has effectively emerged from the crisis as the world’s central bank, while continuing to serve primarily American interests.
The most significant meetings took place on September 16 and October 28 – in the aftermath of the collapse of the US investment bank Lehman Brothers – and focused on the creation of bilateral currency-swap agreements aimed at ensuring adequate liquidity.
The Fed would extend dollar credits to a foreign bank in exchange for its currency, which the foreign bank agreed to buy back after a specified period at the same exchange rate, plus interest.
This gave central banks – especially those in Europe, which faced a dollar shortage as US investors fled – the dollars they needed to lend to struggling domestic financial institutions.
Indeed, the ECB was among the first banks to reach an agreement with the Fed, followed by other major advanced-country central banks, including the Swiss National Bank, the Bank of Japan, and the Bank of Canada.
At the October meeting, four “diplomatically and economically” important emerging economies – Mexico, Brazil, Singapore, and South Korea – got in on the action, with the Fed agreeing to establish $30 billion swap lines with each of their central banks.
Though the Fed acted as a kind of global central bank, its decisions were shaped, first and foremost, by US interests.
For starters, the Fed rejected applications from some countries – whose names are redacted in the published transcript – to join the currency-swap scheme.
More important, limits were placed on the swaps.
The essence of a central bank’s lender-of-last-resort function has traditionally been the provision of unlimited funds.
Because there is no limit on the amount of dollars that the Fed can create, no market participant can take a speculative position against it.
By contrast, the International Monetary Fund has finite resources provided by member countries.
The Fed’s growing international role since 2008 reflects a fundamental shift in global monetary governance.
The IMF emerged at a time when countries were routinely victimized by New York bankers’ casual assumptions, such as J.P. Morgan’s assessment in the 1920’s that Germans were “fundamentally a second-rate people.”
The IMF was a critical feature of the post-WWII international order, intended to serve as a universal insurance mechanism – not one that could be harnessed to advance contemporary diplomatic interests.
Today, as the Fed documents clearly demonstrate, the IMF has become marginalized – not least because of its ineffective policy process.
Indeed, at the outset of the crisis, the IMF, assuming that demand for its resources would remain low permanently, had already begun to downsize.
In 2010, the IMF made a play for resurrection, presenting itself as central to solving the euro crisis – beginning with its role in financing the Greek bailout.
But here, too, a secret history has been revealed – one that highlights just how skewed global monetary governance has become.
The fact is that only the US and the massively over-represented countries of the European Union supported the Greek bailout.
Indeed, the major emerging economies all strongly opposed it, with the Brazilian representative calling it “a bailout of Greece’s private debt holders, mainly European financial institutions.”
Even the Swiss representative condemned the measure.
As fears of a sudden collapse of the eurozone have given way to a prolonged debate about how the costs will be met through bail-ins and write-offs, the IMF’s position will become increasingly convoluted.
Though the IMF is supposed to have seniority over other creditors, there will be demands to write down a share of the loans that it has issued.
Poorer emerging-market countries would resist such a move, arguing that their citizens should not have to foot the bill for fiscal profligacy in much wealthier countries.
Even the original advocates of IMF involvement are turning against the Fund.
EU officials are outraged by the IMF’s apparent effort to gain support in Europe’s debtor countries by urging write-offs of all debt that it did not issue.
And the US Congress has refused to endorse the expansion of IMF resources – part of an international agreement brokered at the 2010 G-20 summit.
While the outrage that followed the appointment of another European as IMF Managing Director in 2011 is likely to ensure that the Fund’s next head will not hail from Europe, the IMF’s fast-diminishing role means that it will not matter much.
As 2008’s secret history shows, what matters is who has access to the Fed.
Falling for Germany
PRINCETON – Germany’s general election in September and the prolonged formation of a new government since then have highlighted a peculiar development.
Not only does Germany now seem to be running Europe, but the rest of Europe seems to be falling in love with Germany – not least because, in a time of political confusion and economic instability, Germans are the only Europeans who seem to know what they want.
Germany’s exceptionalism is obvious.
Whereas electorates across the European Union have punished their governments for the Great Recession and the euro crisis, Germans reelected Chancellor Angela Merkel and displayed strong support for her party, the Christian Democratic Union (CDU), in the recent election.
Indeed, as with postwar Germany’s first leader, Konrad Adenauer, there are jokes about Merkel being Chancellor for life (Germany has no term limits).
Elsewhere, populist anti-European parties of the right have been gaining ground with campaigns directed against immigrants and minorities, especially Muslims.
This has fueled concern that the populist bloc will be the largest in the European Parliament after next year’s EU-wide election.
Germany, by contrast, has no anti-European party with any serious support.
Even the newly formed Alternative for Germany – which did unexpectedly well in the recent election, finishing just short of the 5% threshold needed to enter the Bundestag – insists that its anti-euro agenda is not anti-Europe.
They want to end the common currency, because, in their view, it is undermining the European ideal.
Against this background, Germany’s neighbors have been showing their love – or at least admiration.
At the end of 2011, Polish Foreign Minister Radosław Sikorski called upon Germany to take a stronger leadership role in Europe.
This year, confronted with a revival of nationalist sentiment, former Polish President Lech Wałęsa – the leader of the anti-communist Solidarity movement – suggested that his country should enter into political union with Germany.
Likewise, as France slides into a governance crisis and its leaders’ credibility rapidly erodes, the leading French intellectual Alain Minc has published Vive l’Allemagne (“Long Live Germany”), in which he argues that Germany is Europe’s healthiest and most democratic country.
In Italy, the bourgeoisie of Milan and Rome have made a point of spending winter days dressed in characteristically German Loden overcoats.
When Italian philosopher Giorgio Agamben recently appealed for a Latin empire to assert itself against Germany, his call was widely rejected, with several of his contemporaries asserting that, on the contrary, Germany should serve as a model for Italy as it seeks to overcome its current malaise.
Even in the habitually Euro-skeptical United Kingdom, Prime Minister David Cameron has sought to boost his international credibility by highlighting his close ties with Merkel, rather than by emphasizing the UK’s “special relationship” with the United States.
Revealingly, the writer Miranda Seymour’s recently published book Noble Endeavours reminds Britain of the centuries-old love affair between Germany and England.
Maybe the royal family will go back to styling itself the House of Hanover?
While this admiration stems partly from Germany’s current economic success, the sentiment runs deeper – and extends beyond Europe.
China, for example, considers Germany to be much more than a model of export-led growth; for many Chinese, that success highlights the way Germany’s historical trajectory has been shaped by its struggle with the authoritarian spirit of the past.
Germany’s constitution – first adopted in West Germany in 1949 – lays out a striking vision, stating the country’s “resolve to preserve its national and political unity and to serve the peace of the World as an equal partner in a united Europe.” With the division of Germany considered a microcosm of the broader European split during the Cold War, German reunification seemed possible only in the context of an integrated Europe – a point that Chancellor Helmut Kohl emphasized in the debates of 1990, as reunification beckoned.
The Germany that emerged from this process is uniquely suited to act as a model for Europe, owing to its federal character, which is reflected in strong constitutional guarantees of states’ rights.
Germany’s deeply embedded commitment to Europe and insistence on constitutionalism reflect its profound effort to understand what went wrong during the interwar period, the consequences of racism and extreme nationalism, and the legacy of Nazi crimes.
Few countries – if any – have so effectively internalized the lessons of their history.
When Merkel’s new government is in place, Germany will assume an even more important role in the pursuit of greater European integration – a process that will demand additional sacrifices, including the ceding of national sovereignty.
In a sense, this will be a continuation of Germany’s long history of self-abolition.
Roughly every hundred years since the Lutheran Reformation, the number of independent German political units has fallen by a factor of ten.
The 1648 Peace of Westphalia reduced the number of independent units in the Holy Roman Empire from 3,000-4,000 to 300-400.
In the aftermath of the Napoleonic wars, the number of German states fell to 39. By 1866, only 34 members of the German confederation remained.
Another round of wars and peace treaties produced the kleindeutsch German Empire of 1871, and there were only three primarily German-speaking states left in Europe – the German Empire, Austria-Hungary (a dynastic unit, otherwise known as the Habsburg Empire), and the Swiss Confederation – none of which was a conventional nation-state.
While Germany’s 1949 split into the Federal Republic and the Democratic Republic raised the number to four (along with Austria and Switzerland), the overall trajectory has been clear.
If Germany’s new government leads the charge toward a stronger, more federal Europe, a century from now, there may well be no sovereign German political unit at all.
Germany and its lovers die in the end, only to live happily ever after.
History versus Europe
PRINCETON – History matters, but in different ways.
In some places and for some people, history means eternal clashes that are shaped by profound geopolitical forces: four centuries ago is the same as yesterday.
Elsewhere and for other people, history suggests a need to find ways to escape from ancient predicaments and outdated prejudices.
It is this cleavage that defines the intellectual battle now taking place in and around Europe.
With this year’s centennial of the outbreak of World War I, dozens of new analyses of “the war to end all wars” have rolled off the presses.
And it is tempting to see contemporary parallels in imperial Europe’s complacency, particularly its firm belief that the world was so interconnected and prosperous that any reversal was unthinkable.
Today, despite the supposed civilizing effects of global supply chains, tinderboxes like Syria or the South China Sea could blow up the world – just as the Bosnian conflict did in 1914.
Reflecting on the legacy of the Great War has also been an occasion for reviving the era’s mentalities.
In the United Kingdom, Education Secretary Michael Gove recently issued a polemic against historians who emphasized the futility of the war, calling it a “just war” directed against the “ruthless social Darwinism of the German elites.”
This looks like a thinly veiled allusion to the power struggles of contemporary Europe.
But 1914 is not the only possible or attractive point of comparison in interpreting Britain’s past.
Next year is the bicentennial of the Battle of Waterloo and the final defeat of Napoleon.
The right-wing British politician Enoch Powell used to claim that the European Common Market was the revenge that the Germans and the French imposed for the defeats that Britain inflicted on them.
The celebrations and commemorations will be full of symbolism related to contemporary disputes.
Already, British Prime Minister David Cameron has had to shift a summit meeting with French President François Hollande from the proposed site, Blenheim Palace, because French diplomats realized that it had been built to celebrate John Churchill, the Duke of Marlborough, who crushed Louis XIV’s forces in 1704, near the small Bavarian town that gave the palace its name.
The year 1704 is packed with meaning.
The victory over France laid the foundation for the 1707 Act of Union between England and Scotland.
That union is the subject of a vital referendum that will be held this year in Scotland.
Evocative historical dates are being used or abused in a similar way on the other edge of the European continent, to conjure up images of enemies that resonate in contemporary political debates.
A few years ago, a Russian film simply entitled 1612 evoked the Time of Troubles, when weak leadership caused Russia to be invaded and subverted by insidious Polish aristocrats and capitalists.
The film’s director, Vladimir Khotinenko, said that it was important that his audience “didn’t regard it as something that happened in ancient history but as a recent event… that they felt the link between what happened 400 years ago and today.”
As Russia struggles to bring Ukraine back into its orbit, another ancient date looms large: 1709, when Czar Peter the Great crushed the Swedish and Cossack armies at the Battle of Poltava.
That battle was also the subject of a recent Russian film, The Sovereign’s Servant.
Russian television commentators describe the countries most engaged in supporting a European-oriented Ukraine – Sweden, along with Poland and Lithuania, which had been brought into the Swedish orbit – as seeking revenge for Poltava.
Europe’s western and eastern fringes obsess about dates that recall their struggles with the core: 1914, 1815, 1709, 1707, 1704, and 1612, among others.
The European integration project is a sort of liberation from the pressures and constraints of the past.
After World War II, Charles de Gaulle evolved a complicated metaphysics to explain his country’s relationship with its problematic past.
Every European country had been betrayed. “France suffered more than others because it was more betrayed than the others.
That is why it is France that must make the gesture of pardon....It is only I who can reconcile France and Germany, because only I can raise Germany from its decadence.”
“[T]his noble continent…is the fountain of Christian faith and Christian ethics,” he claimed. “If Europe were once united in the sharing of its common inheritance, there would be no limit to the happiness, to the prosperity and glory which its three or four hundred million people would enjoy.”
Is the European center currently too naive, or too idealistic?
Is it really possible to escape from history?
Or, on the contrary, is there something odd in the way that the European fringes obsessively resort to historical milestones?
In Britain and Russia, this obsession appears to be not just a way to assert national interests, but also a mechanism for appealing to a population disenchanted with the contemporary realities of decline from the imperial past.
De Gaulle and Churchill knew plenty about war, and they wanted to transcend the blood-soaked legacy of Poltava, Blenheim, and Waterloo.
They viewed history as offering concrete lessons about the necessity of escaping from the past.
Today, Europe’s fringes, by contrast, appear determined to escape into it.
Harvest of Suicide
NEW DELHI – An epidemic of farmers’ suicides has spread across four Indian states – Maharashtra, Andhra Pradesh, Karnataka, and Punjab – over the last decade.
According to official data, more than 160,000 farmers have committed suicide in India since 1997.
These suicides are most frequent where farmers grow cotton, and appear directly linked to the presence of seed monopolies.
For the supply of cotton seeds in India has increasingly slipped out of the hands of farmers and into the hands of global seed producers like Monsanto.
These giant corporations have begun to control local seed companies through buyouts, joint ventures, and licensing arrangements, leading to seed monopolies.
When this happens, seed is transformed from being a common good into being the “intellectual property” of companies such as Monsanto, for which the corporation can claim limitless profits through royalty payments.
For farmers, this means deeper debt.
Seed is also transformed in this way from being a renewable regenerative resource into a non-renewable resource and commodity.
Seed scarcity is directly caused by seed monopolies, which have as their ultimate weapon a “terminator” seed that is engineered for sterility.
This means that farmers can’t renew their own supply but must return to the monopolist for new seed each planting season.
For farmers, this means higher costs; for seed corporations, higher profits.
The creation of seed monopolies is based on the deregulation of seed corporations, including giving them oversight over bio-safety.
With the coming of globalization, seed companies were allowed to sell seeds for which the companies had certified their safety. In the case of genetically engineered seed, these companies are again seeking self-regulation for bio-safety.
State regulation does continue to exist where seeds are concerned, but nowadays it is aimed at farmers, who are being pushed into dependency on patented, corporate seed.
Such compulsory licensing is a big cause of the global destruction of biodiversity.
The creation of seed monopolies, and with them crushing debts to a new species of moneylender – the agents of the seed and chemical companies – has taken a high human toll as well.
The farm suicides first started in the district of Warangal in Andhra Pradesh.
Peasants in Warangal used to grow millets, pulses, and oilseeds.
Overnight, Warangal was converted to a cotton-growing district based on non-renewable hybrids that require irrigation and are prone to pest attacks.
Small peasants without capital were trapped in a vicious cycle of debt.
Some saw only one way out.
This was a period when Monsanto and its Indian partner, Mahyco, were also carrying out illegal field experiments with genetically engineered Bt cotton.
All imports and field trials of genetically engineered organisms in India are governed by a provision of the Environment Protection Act called the “Rules for the Manufacture Use, Import, Export, and Storage of Hazardous Microorganisms, Genetically Engineered Organisms, or Cells.”
We at the Research Foundation for Science, Technology, and Ecology used the law to stop Monsanto’s commercialization of Bt cotton in 1999, which is why approval was not granted for commercial sales until 2002.
Rising production costs and falling prices for their products is a recipe for indebtedness, and debt is the main cause of farmers’ suicides.
This is why the suicides are most prevalent in the cotton belt on which the seed industries’ claim is rapidly becoming a stranglehold.
At the start, the technology for engineering Bt genes into cotton was aimed primarily at controlling pests.
However, new pests have emerged in Bt cotton, leading to higher use of pesticides.
In the Vidharbha region of Maharashtra, which has the highest number of suicides, the area under Bt cotton has increased from 0.2 million hectares in 2004 to 2.88 million hectares in 2007.
The cost of pesticides for farmers has increased 13-fold in the same period.
A pest control technology that fails to control pests might be good for seed corporations that are also agrichemical corporations.
For farmers, it translates into suicide.
Technologies are tools.
When the tool fails, it needs to be replaced.
Bt cotton technology has failed to control pests or secure farmers lives and livelihoods.
It is time to replace GM technology with ecological farming.
It is time to stop the killing.
Harvests of Hunger
New York – Lack of food is rarely the reason people go hungry.
Even now, there is enough food in the world, with a bumper harvest this year, but more people cannot afford to buy the food they need.
Addressing this growing crisis is the aim of the Global Conference on Food Security in Rome on June 3-5.
Even before the recent food price spikes, an estimated billion people were suffering from chronic hunger, while another two billion were experiencing malnutrition, bringing the total number of food-insecure people to around three billion, or almost half the world’s population.
Roughly 18,000 children died daily as a direct or indirect consequence of malnutrition.
Obviously, the recent increases in food prices are likely to drive the number of people vulnerable to food stress even higher.
There is now an urgent need to finance existing food aid programs to address mounting food demands, avert further social unrest, and ensure that farmers get the costlier farm inputs they need for the next planting season.
But, as we respond to the current humanitarian emergency due to higher food prices, we must not lose sight of the longer-term problems that have undermined food security in recent decades.
Clearly, a “new deal” for food security is urgently needed.
The major increases in food production associated with the Green Revolution in the 1960’s – with considerable government and international not-for-profit support – gave way to new policy priorities in the 1980’s.
As food supply growth slowed, demand continued to grow, and not only due to population increase.
With higher incomes, rising meat consumption requires more grain for animal feed.
Since the 1980’s, governments have been pressed to promote exports to earn foreign exchange and import food.
But food cannot be treated as just another commodity, and governments should develop appropriate policies, infrastructure, and institutions to ensure food security (not to be equated with total self-sufficiency) at the national or regional level.
The problem is that, having neglected food security and the productive sectors of their economies for several decades, many developing countries’ governments now lack the fiscal capacity to increase public spending in order to increase food production and agricultural productivity.
Moreover, growing urbanization and other non-agricultural uses of land have reduced acreage available for food production, while agricultural land is increasingly used to produce commodities other than food, such as bio-fuels.
But we should not rush to abandon bio-fuels, despite some undoubtedly poor policies in recent years.
Some bio-fuels are far more cost-effective and energy-efficient than others, and different bio-fuel stocks have very different opportunity costs for food agriculture (sugar has not experienced any significant price increase).
Another problem is that fewer and fewer transnational agro-businesses now dominate marketing, production, and inputs.
This comes largely at the expense of small farmers and consumers, particularly the poor.
Moreover, with less government support, rural credit has often become prohibitively expensive.
In addition, more securitization, easier online trading, and other financial market developments in recent years have facilitated greater speculative investments, especially in commodity futures and options markets, including those affecting food.
Falling asset prices in other financial market segments, following the sub-prime mortgage meltdown in the United States, may be more important for explaining the recent surge in food prices than supply constraints or other factors underlying longer-term gradual upward price trends.
Meanwhile, rich countries’ agricultural subsidies and tariffs have undoubtedly undermined food production in developing countries.
However, cutting farm subsidies will increase food prices, at least initially, while reducing agricultural tariffs alone will not necessarily lead to an increase in food production in poor countries without complementary support.
Instead, some food security advocates have called for rich countries to compensate for the adverse consequences of their own agricultural subsidies and protectionism by providing additional foreign aid to the developing world, targeting production efforts that enhance food security.
To avoid catastrophe, the world community must also meet the urgent emergency food and planting requirements mentioned above, including more generous budget and balance-of-payments support for low-income food-importing countries.
Finally, as world leaders gather in Rome, the international community must secure a meaningful global commitment to food security that will not be undermined by contradictory policies.
Has America Lost its Mojo?
Cambridge – You know that American self-confidence is shaken when even the President starts expressing fear that the financial crisis may turn out worse than the Great Depression of the 1930’s.
George Bush is not alone in worrying that things might get a lot worse before they get better.
A growing number of savvy business people are also starting to wonder whether the United States will be able to right its economy anytime soon.
Professional forecasters are considerably more sanguine, with the consensus forecast for US growth in 2009 at around -1.5%, after a similar contraction in the second half of 2008.
This would be a painful recession, but far short of the 10-15% output drop normally associated with a full-blown depression.
Of course, economic forecasters have generally been far too optimistic at every turn of late, so the public is understandably leery of their prognostications.
Consensus forecasts do still seem optimistic.
With its financial system on life support, housing prices continuing to plummet, and unemployment rising, the US economy is looking more vulnerable than it has at any time since the 1970’s, and perhaps since World War II.
Still, it must be noted that negative output growth for more than two years is a relatively rare event, even in the aftermath of severe banking crises.
Historical statistical relationships are perhaps cold comfort in a downturn that now seems so insidiously different from previous catastrophes.
But they should not be dismissed.
Japan may have taken what seemed like forever to recover from its 1990’s crisis, but it is an exception – the crisis occurred as the Japanese economy needed to restructure in the face of the huge challenges posed by China’s emergence.
The complete policy paralysis that has prevailed during the interregnum between Presidents Bush and Obama has not helped.
US policy has devolved into a sort of “wheel of fortune” game for financial firms. One day you get bankruptcy, another day loans with few strings attached.
One hopes that President-elect Obama’s all-star economic team will at least adopt a coherent and consistent policy.
Consistency alone would be a big boost for confidence.
The basic elements of a recovery package include, first and foremost, a rational approach to rebooting the financial system.
This means mark-to-market pricing of assets, restructuring and recapitalizing banks, and a new approach to regulation that allows creativity while better protecting the public against some of the madness that has prevailed for more than a decade. Help for housing is required to prevent overshooting in home prices, as is massive macroeconomic stimulus, including a moderately inflationary monetary policy.
A number of leaders, most prominently German Chancellor Angela Merkel, are understandably worried about the longer-term consequences of aggressive macroeconomic stimulus.
These concerns are valid, even more so given government’s growing role in the economy.
But, as in wartime, one hopes these effects are temporary.
Besides, is inaction a real alternative?
Prior to the 1950’s, output drops of 15-20% in a single year were routine (admittedly, national income accounting was more primitive.)
A number of academic economists say we should simply tough it out as we did back then.
Recessions have important cleansing effects, helping to facilitate painful restructuring.
But today’s social, economic, and political systems – at least in developed countries – are unable to withstand a peacetime decline in output of 15-20% within a short period.
Massive stimulus and intervention – the US Federal Reserve’s current stance – is unavoidable.
One can only hope that the state can get out of the economy half as fast as it is getting in.
Nevertheless, the distinct possibility that stimulus and restructuring may work is further cause to hope that the deepening recession will not morph into a full-blown depression.
The US may be ground zero for the global financial crisis, but it is not the only country riven by self-doubt.
Britain, Ireland, and Spain each face financial crises of a similar magnitude.
Some countries that depend on energy exports, particularly governance-challenged ones such as Russia and Venezuela, are experiencing even worse downturns.
Even once-invulnerable China must contemplate a halving of its growth rate.
Europe and Japan do not have quite as complex financial messes as the US. But these regions are nevertheless mired in recession.
The global economy is in a pickle.
But, just as optimists were too sanguine in the boom, ultra-pessimists probably go too far in forecasting a depression around the corner.
2009 will be a tough year. Yet, absent a large-scale conflagration, there is a fair chance that 2010 will see a restoration of weak growth in the US, Europe, and Japan, and probably robust growth in most emerging markets.
The US economy may have lost a fair chunk of its mojo, but it will require a lot more bad luck and policy blunders to get to a second worldwide Great Depression.
Has Economic Power Replaced Military Might?
CAMBRIDGE – At the Cold War’s end, some pundits proclaimed that “geo-economics” had replaced geopolitics.
Economic power would become the key to success in world politics, a change that many people thought would usher in a world dominated by Japan and Germany.
Today, some interpret the rise in China’s share of world output as signifying a fundamental shift in the balance of global power, but without considering military power.
They argue that a dominant economic power soon becomes a dominant military power, forgetting that the United States was the world’s largest economy for 70 years before it became a military superpower.
Political observers have long debated whether economic or military power is more fundamental.&#160;
The Marxist tradition casts economics as the underlying structure of power, and political institutions as a mere superstructure, an assumption shared by nineteenth-century liberals who believed that growing interdependence in trade and finance would make war obsolete.
But, while Britain and Germany were each other’s most significant trading partners in 1914, that did not prevent a conflagration that set back global economic integration for a half-century.
Military power, which some call the ultimate form of power in world politics, requires a thriving economy.
But whether economic or military resources produce more power in today’s world depends on the context.
A carrot is more effective than a stick if you wish to lead a mule to water, but a gun may be more useful if your aim is to deprive an opponent of his mule.
Many crucial issues, such as financial stability or climate change, simply are not amenable to military force.
Today, China and the US are highly interdependent economically, but many analysts misunderstand the implications of this for power politics.
True, China could bring the US to its knees by threatening to sell its dollar holdings.
But doing so would not only reduce the value of its reserves as the dollar weakened; it would also jeopardize US demand for Chinese imports, leading to job losses and instability in China.
In other words, bringing the US to it knees might well mean that China would bring itself to its ankles.
Judging whether economic interdependence produces power requires looking at the balance of asymmetries.
In this case, it resembles a “balance of financial terror,” analogous to the Cold War military interdependence in which the US and the Soviet Union each had the potential to destroy the other in a nuclear exchange.
In February 2010, a group of senior Chinese military officers, angered over US arms sales to Taiwan, called for China’s government to sell off US government bonds in retaliation.
Their suggestion was not heeded.
Economic resources can produce soft-power behavior as well as hard military power.
A successful economic model not only finances the military resources needed for the exercise of hard power, but it can also attract others to emulate its example.
The European Union’s soft power at the end of the Cold War, and that of China today, owes much to the success of the EU and Chinese economic models.
Economic resources are increasingly important in this century, but it would be a mistake to write off the role of military power.
As US President Barack Obama said when accepting the Nobel Peace Prize in 2009, “We must begin by acknowledging the hard truth that we will not eradicate violent conflict in our lifetimes.
There will be times when nations – acting individually or in concert – will find the use of force not only necessary but morally justified.”
Even if the probability of the use of force among states, or of threats of its use, is lower now than in earlier eras, the high impact of war leads rational actors to purchase expensive military insurance.
If China’s hard power frightens its neighbors, they are likely to seek such insurance policies, and the US is likely to be the major provider.
This leads to a larger point about the role of military force.
Some analysts argue that military power is of such restricted utility that it is no longer the ultimate measuring rod.
But the fact that military power is not always sufficient to decide particular situations does not mean that it has lost all utility.
While there are more situations and contexts in which military force is difficult to use, it remains a vital source of power.
Markets and economic power rest upon political frameworks, which in turn depend not only upon norms, institutions, and relationships, but also upon the management of coercive power.
A well-ordered modern state is one that holds a monopoly on the legitimate use of force, and that allows domestic markets to operate.
Internationally, where order is more tenuous, residual concerns about the coercive use of force, even if a low probability, can have important effects – including a stabilizing effect.
Indeed, metaphorically, military power provides a degree of security that is to order as oxygen is to breathing: little noticed until it becomes scarce, at which point its absence dominates all else.
In the twenty-first century, military power will not have the same utility for states that it had in the nineteenth and twentieth centuries, but it will remain a crucial component of power in world politics.
Has Financial Innovation Been Discredited?
MOSCOW – Skeptics of financial liberalization and innovation have been emboldened by the crisis in the world’s credit markets that erupted in mid-2007, when the problems with sub-prime mortgages first appeared in the United States.
Are these skeptics right?
Should we halt financial liberalization and innovation in order to prevent crises like the sub-prime disaster from recurring?
The entire sub-prime market is largely a decade-old innovation – the word “sub-prime” did not exist in any language before 1994 – built on such things as option adjustable-rate mortgages (option-ARM’s), new kinds of collateralized debt obligations, and structured investment vehicles.
Previously, private investors in the US simply did not lend to mortgage seekers whose credit history was below prime.
But, while it does sometimes appear that the current crisis is due, at least in part, to financial innovation, financial-market liberalization has been shown to be a good thing overall.
A study published in 2005 by economists Geert Bekaert, Campbell Harvey, and Christian Lundblad found that when countries liberalize their stock markets, allowing them to operate freely without government intervention, economic growth rises by an average of one percentage point annually.
The higher growth tends to be associated with an investment boom, which in turn seems to be propelled by the lower cost of capital for firms.
Of course, while complicated financial arrangements allow us to move forward economically, they also can create hazards.
Think of the scaffolding and equipment around construction sites.
Sometimes people trip over the equipment, or a piece of scaffolding falls, with disastrous consequences.
Any time you build something, there is always a chance of a setback.
But, with every setback, we learn.
Governments and insurance companies implement better safety requirements in response to construction accidents.
The same is true, over time, with financial disasters.
The US is one of the world’s most financially liberal countries.
Its financial markets’ high quality must be an important reason for America’s relatively strong economic growth.
Indeed, given a very low savings rate and high fiscal deficit over the past few decades, the US might otherwise have faced economic disaster.
The reason is simple.
Individual firms might have splendid investment opportunities – to enlarge plant and equipment, capitalize on new software, or exploit new research and new training of key personnel – but might be deterred by cash shortages or perceived macroeconomic risks.
Effective financial markets enable them to pursue such opportunities despite these constraints by enlisting investors to provide the capital.
These investors can, in turn, be encouraged when financial hedging devices and financial diversification protect them.
There has been a longstanding discussion about whether new derivative markets, which provide such financial hedging, tend to increase preexisting financial markets’ volatility.
The consensus is that they do not.
In 2000, Stewart Mayhew, Assistant Chief Economist at the US Securities and Exchange Commission’s Office of Economic Analysis, surveyed the extensive literature on this topic.
Mayhew concluded that it is rather difficult to tell whether derivative markets worsen financial-market volatility, because their creation tends to come when existing financial markets already are more volatile, or can be predicted to become so.
Moreover, he found that there is no evidence that derivative markets create volatility in underlying cash markets; in fact, they may even reduce it.
The effect on underlying financial markets’ volatility may not even be the right question to consider in deciding whether to permit new derivative products.
The right question is whether these products are conducive to economic success and growth.
Here, Mayhew concludes that new derivative markets clearly increase the liquidity and quality of information in existing financial markets.
And it is this liquidity and quality of information that ultimately propels economic growth.
The sub-prime crisis has exposed serious problems that we must address.
For example, we need stronger consumer protection for retail financial products, stricter disclosure requirements for new securities, and better-designed vehicles for hedging risks.
Some of the innovations associated with the sub-prime crisis – notably option-ARM’s, when extended to borrowers who couldn’t handle them – seem to have little redeeming value.
But others – those involved with the securitization of mortgages – were clearly important long-run innovations, because they can help spread risks better around the world.
So, we should not slow down financial innovation in general.
On the contrary, some of the fixes that result from the sub-prime crisis will probably take the form of still more innovation, further increasing the sophistication of our financial markets.
Has Global Stag-Deflation Arrived?
NEW YORK – The latest macroeconomic news from the United States, other advanced economies, and emerging markets confirms that the global economy will face a severe recession in 2009.
In the US, recession started in December 2007, and will last at least until December 2009 – the longest and deepest US recession since World War II, with the cumulative fall in GDP possibly exceeding 5%.
The recession in other advanced economies (the euro zone, United Kingdom, European Union, Canada, Japan, Australia, and New Zealand) started in the second quarter of 2008, before the financial turmoil in September and October further aggravated the global credit crunch.
This contraction has become even more severe since then.
There is now also the beginning of a hard landing in emerging markets as the recession in advanced economies, falling commodity prices, and capital flight take their toll on growth.
Indeed, the world should expect a near recession in Russia and Brazil in 2009, owing to low commodity prices, and a sharp slowdown in China and India that will be the equivalent of a hard landing (growth well below potential) for these countries.
Other emerging markets in Asia, Africa, Latin America, and Europe will not fare better, and some may experience full-fledged financial crises.
Indeed, more than a dozen emerging-market economies now face severe financial pressures: Belarus, Bulgaria, Estonia, Hungary, Latvia, Lithuania, Romania, Turkey, and Ukraine in Europe;
Indonesia, Korea, and Pakistan in Asia; and Argentina, Ecuador, and Venezuela in Latin America.
Most of these economies can avoid the worst if they implement the appropriate policy adjustments and if the international financial institutions (including the IMF) provide enough lending to cover their external financing needs.
With a global recession a near certainty, deflation – rather than inflation – will become the main concern for policymakers.
The fall in aggregate demand while potential aggregate supply has been rising because of overinvestment by China and other emerging markets will sharply reduce inflation.
Slack labor markets with rising unemployment rates will cap wage and labor costs.
Further falls in commodity prices – already down 30% from their summer peak – will add to these deflationary pressures.
Policymakers will have to worry about a strange beast called “stag-deflation” (a combination of economic stagnation/recession and deflation); about liquidity traps (when official interest rates become so close to zero that traditional monetary policy loses effectiveness); and about debt deflation (the rise in the real value of nominal debts, increasing the risk of bankruptcy for distressed households, firms, financial institutions, and governments).
With traditional monetary policy becoming less effective, non-traditional policy tools aimed at generating greater liquidity and credit (via quantitative easing and direct central bank purchases of private illiquid assets) will become necessary.
And, while traditional fiscal policy (government spending and tax cuts) will be pursued aggressively, non- traditional fiscal policy (expenditures to bail out financial institutions, lenders, and borrowers) will also become increasingly important.
In the process, the role of states and governments in economic activity will be vastly expanded.
Traditionally, central banks have been the lenders of last resort, but now they are becoming the lenders of first and only resort.
As banks curtail lending to each other, to other financial institutions, and to the corporate sector, central banks are becoming the only lenders around.
Likewise, with household consumption and business investment collapsing, governments will soon become the spenders of first and only resort, stimulating demand and rescuing banks, firms, and households.
The long-term consequences of the resulting surge in fiscal deficits are serious.
If the deficits are monetized by central banks, inflation will follow the short-term deflationary pressures; if they are financed by debt, the long-term solvency of some governments may be at stake unless medium-term fiscal discipline is restored.
Nevertheless, in the short run, very aggressive monetary and fiscal policy actions – both traditional and non-traditional – must be undertaken to ensure that the inevitable stag-deflation of 2009 does not persist into 2010 and beyond.
So far, the US response appears to be more aggressive than that of the euro zone, as the European Central Bank falls behind the curve on interest rates and the EU’s fiscal stance remains weak.
Given the severity of this economic and financial crisis, financial markets will not mend for a while.
The downside risks to the prices of a wide variety of risky assets (equities, corporate bonds, commodities, housing, and emerging-market asset classes) will remain until there are true signs – towards the end of 2009 – that the global economy may recover in 2010.
A Special Moment for Special Drawing Rights
NEW YORK – The recent annual meetings of the International Monetary Fund and the World Bank in Lima, Peru, were dominated by talk of the weakness of several emerging and developing economies.
But the discussion focused very little on one key cause: the global monetary system.
Much more will be said next month at the IMF board, though what the Fund will do remains an open question.
The problem that emerging and developing economies are facing stems from the fact that their capital inflows follow a strongly pro-cyclical pattern.
When they were growing rapidly – especially compared to the advanced economies – they attracted massive amounts of capital.
But as risks multiplied, capital started to flow back toward a reserve-issuing country – namely, the United States.
After all, the US is set to raise interest rates, and the dollar has appreciated against virtually all of the world’s currencies.
In the past, this pattern has always ultimately led to a correction, with America’s growing current-account deficit eventually bringing about a dollar depreciation.
But such corrections – in 1979-1980, 1990-1991, and 2007-2008 – have also always been associated with a global slowdown or crisis.
This highlights the problem inherent in using the US dollar, a national currency, as the global economy’s primary international-reserve currency.
The Belgian economist Robert Triffin first identified this problem – dubbed the “Triffin dilemma” – in the 1960s, emphasizing the fundamental conflict between national objectives, such as limiting the size of the external deficit, and international imperatives, such as creating enough liquidity to satisfy demand for reserve assets.
Moreover, this system subjects the world economy to cycles of confidence in the US dollar, while placing the world economy at the mercy of a national authority – one that often makes decisions with scant regard for their international implications.
The only way to stabilize the system would thus be to place a truly global currency at its center.
This was the idea behind John Maynard Keynes’s proposal in the 1940s to create a supranational currency, called the “bancor.”
And it was the motivation behind the 1969 creation of the IMF’s Special Drawing Right (SDR), which was supposed to become “the principle reserve asset in the international monetary system.”
General SDR allocations are to be based on “a long-term global need to supplement existing reserve assets,” with decisions made for successive periods of up to five years.
So far, such allocations have been made only three times, in 1970-72, in 1979-81, and in 2009, with the latter allocation, amounting to $250 billion, being part of the recovery package adopted by the G-20 to manage the global financial crisis.
The SDR has been in the news again lately, owing to debate about whether the IMF should add the Chinese renminbi to the basket of currencies that determine the unit’s value.
Given the renminbi’s growing international role, it seems abundantly obvious that the currency should be part of the SDR basket.
Now, the discussion should focus on how to enable the SDR to reach its potential as an instrument of international cooperation.
The first step toward making SDRs a more active force in global finance would be to remove the division between SDR accounts and normal IMF operations.
As long as that partition remains in place, SDRs will function, at best, like a credit line that can be used unconditionally by the holder – a kind of overdraft facility, not a true reserve asset.
A better approach would be to allow countries to “deposit” unused SDRs in the Fund, so that they can be used to finance IMF lending operations.
In other words, issuing more SDRs would enable the IMF to finance more lending.
If those SDRs were issued during crises, like the one that emerging and developing economies are confronting today, the result would be a truly counter-cyclical global monetary policy.
This could even be taken one step further, with SDRs being allocated according to a new formula that accounts not just for IMF quotas, but also for demand (or need) for foreign-exchange reserves.
The current formula would have the countries most in need of foreign reserves – that is, middle- and low-income countries (excluding China) – receiving just over one-third of the total allocation.
That is not enough.
Even without this change, the SDR can and should gain a more prominent position in global reserves.
With emerging and developing economies in deepening trouble, there is no time to waste.
Some five decades after Triffin first identified the problems with the US dollar’s reserve-currency status, the SDR’s moment has, one hopes, finally arrived.
Has Neo-Liberalism Failed Mexico?
Six years ago, I was ready to conclude that the North American Free Trade Agreement (NAFTA) was a major success.
The key argument in favor of NAFTA had been that it was the most promising road the United States could take to raise the chances for Mexico to become democratic and prosperous, and that the US had both a strong selfish interest and a strong neighborly duty to try to help Mexico develop.
Since NAFTA, Mexican real GDP has grown at 3.6% per year, and exports have boomed, going from 10% of GDP in 1990 and 17% of GDP in 1999 to 28% of GDP today.
Next year, Mexico’s real exports will be five times what they were in 1990.
It is here – in the rapid development of export industries and the dramatic rise in export volumes – that NAFTA made the difference.
NAFTA guarantees Mexican producers tariff and quota-free access to the US market, the largest consumer market in the world.
Without this guarantee, fewer would have invested in the capacity to satisfy the US market.
Increasing trade between the US and Mexico moves both countries toward a greater degree of specialization and a finer division of labor in important industries like autos, where labor-intensive portions are increasingly accomplished in Mexico, and textiles, where high-tech spinning and weaving is increasingly done in the US, while Mexico carries out lower-tech cutting and sewing.
Such efficiency gains from increasing the extent of the market and promoting specialization should have produced rapid growth in Mexican productivity.
Likewise, greater efficiency should have been reinforced by a boom in capital formation, which should have accompanied the guarantee that no future wave of protectionism in the US would shut factories in Mexico.
The key word here is “should.”
Today’s 100 million Mexicans have real incomes – at purchasing power parity – of roughly $10,000 per year, a quarter of the current US level.
They are investing perhaps a fifth of GDP in gross fixed capital formation – a healthy amount – and have greatly expanded their integration into the world (i.e., the North American) economy since NAFTA.
But the 3.6% rate of growth of GDP, coupled with a 2.5% per year rate of population and increase, means that Mexicans’ mean income is barely 15% above that of the pre-NAFTA days, and that the gap between their mean income and that of the US has widened.
Because of rising inequality, the overwhelming majority of Mexicans live no better off than they did 15 years ago.
(Indeed, the only part of Mexican development that has been a great success has been the rise in incomes and living standards that comes from increased migration to the US, and increased remittances sent back to Mexico.)
Intellectually, this is a great puzzle: we believe in market forces, and in the benefits of trade, specialization, and the international division of labor.
We see the enormous increase in Mexican exports to the US over the past decade.
We see great strengths in the Mexican economy – a stable macroeconomic environment, fiscal prudence, low inflation, little country risk, a flexible labor force, a strengthened and solvent banking system, successfully reformed poverty-reduction programs, high earnings from oil, and so on.
Yet successful neo-liberal policies have not delivered the rapid increases in productivity and working-class wages that neo-liberals like me would have confidently predicted had we been told back in 1995 that Mexican exports would multiply five-fold in the next twelve years.
To be sure, economic deficiencies still abound in Mexico.
According to the OECD, these include a very low average number of years of schooling, with young workers having almost no more formal education than their older counterparts; little on-the-job training; heavy bureaucratic burdens on firms; corrupt judges and police; high crime rates; and a large, low-productivity informal sector that narrows the tax base and raises tax rates on the rest of the economy.
But these deficiencies should not be enough to neutralize Mexico’s powerful geographic advantages and the potent benefits of neo-liberal policies, should they?
Apparently they are.
The demographic burden of a rapidly growing labor force appears to be greatly increased when that labor force is not very literate, especially when inadequate infrastructure, crime, and official corruption also take their toll.
We neo-liberals point out that NAFTA did not cause poor infrastructure, high crime, and official corruption.
We thus implicitly suggest that Mexicans would be far wose off today without NAFTA and its effects weighing in on the positive side of the scale.
That neo-liberal story may be true. But it is an excuse.
It may not be true. Having witnessed Mexico’s slow growth over the past 15 years, we can no longer repeat the old mantra that the neo-liberal road of NAFTA and associated reforms is clearly and obviously the right one.
Has Oil Production Peaked?
OXFORD – Throughout the history of the oil industry, fear and concern about the imminent exhaustion of oil reserves has been a recurring theme.
Such sentiments often spread and capture the public imagination at times of rapidly rising oil demand, sharp spikes in energy prices, and geo-political uncertainty.
So today’s talk of oil scarcity, which began at the turn of the last century, should come as no surprise.
Believers in oil scarcity point to the sustained annual average increase of oil prices from 2002 to 2008, declining output in many areas of the world, and the absence (until recently off the coast of Brazil) of large-scale oil discoveries in the last few decades.
All these factors lend credence to the view that oil production has peaked.
In the face of relentless demand-side pressure, driven mainly by high-growth countries like China and India, some predict stratospheric energy prices, supply shortages, economic and social hardship, and even resource wars.
Given that oil is a non-renewable resource, in a sense the world is always running out of it.
Unless global demand collapses, at some point in the future oil production will peak and eventually be exhausted.
But this prediction is close to a tautology.
For it to be useful, believers in scarce oil must be able to predict such things as the timing of the oil peak, the state of demand when oil production reaches it, and the pattern of decline.
But the track record of “peak oil” theorists on such matters has not been impressive: their predictions have steadily moved forward the date that global oil production will peak.
Worse still, they have made no serious attempt to identify why their earlier predictions have had to be revised.
A major problem is that such predictions often confuse resources with reserves.
Resources are the available volumes of hydrocarbon without reference to constraints as to their accessibility and/or cost.
Resources impose an upper bound on what ultimately can be produced; thus, it is the relevant concept for determining the likely dates of peak production and ultimate exhaustion.
If the volume of oil resources were known with certainty, and if we could accurately predict the growth of oil consumption, calculating the imminence of exhaustion would be simple.
But these are big “ifs” – especially given the high level of uncertainty regarding the ultimate volume of oil resources.
While peak oil theorists have strong views about that, they do not allow for all the current and future technological possibilities that might increase resources.
Indeed, given the difficulty in estimating the total size of resources, many consider peak oil theories irrelevant.
Fortunately, the focus of the debate is on reserves and not resources.
Reserves are defined as the quantities of petroleum that are expected to be commercially recoverable from known fields. The concept of reserves is technical and economic, not geological.
It is also a non-static concept, as estimates of reserves will generally be revised upwards or downwards as additional geologic or engineering data become available, as technology improves, and/or as economic conditions (such as oil prices and production costs) change.
In fact, the bulk of recent growth in world reserves is due not to new discoveries, but mainly to reserve growth and improved recovery rates.
Moreover, despite what many believe, crude oil is far from being a homogenous product.
There is a fossil carbon continuum ranging from easy, conventional oil, to deep and ultra-deep offshore oil, to extra-heavy crude oil.
With technological progress and rising oil prices, most of these reserves will become conventional, helping to push back peak oil for years.
The failure to distinguish clearly between resources and reserves – and to recognize the importance of prices, costs, and technology in transforming resources into reserves – results in bad predictions about an imminent peak in oil production and misinformation that has had a negative impact on policymaking.
Rather than focusing on the major short- and long-term challenges facing the oil industry, the debate about peak oil diverts attention to the wrong problems.
In the short term, there are concerns that oil production will peak soon, owing not to the unavailability of reserves, but to obstacles to investment – for example, access to reserves, sanctions, and policy uncertainty.
Some who believe in the imminence of peak oil consider these barriers essentially irrelevant, arguing that their removal would merely delay the peak for a few years.
But, in the long term, the challenge is how to make the transition to a new and sustainable energy path, and to evaluate the political, economic, social and climate costs associated with this transition.
Unfortunately, that debate has not yet started.
The current tone surrounding the peak oil debate is reminiscent of that surrounding the global war on terror, with the phrase “you’re either with us or against us” recycled to polarize observers and analysts.
But as in any other debate, once extreme positions dominate, the real problems are trivialized and marginalized.
Has Palestine Won?
TEL AVIV – The somber spectacle of Israel’s isolation during the United Nations debate on Palestinian statehood marks the political tsunami that Prime Minister Binyamin Netanyahu’s critics warned would arrive if Israel did not propose a bold peace initiative.
But, more importantly, the speeches at the UN General Assembly by the two rivals, Netanyahu and Palestinian President Mahmoud Abbas, showed that any initiative to bring the parties back to the negotiating table might turn out to be futile.
Speeches do not make peace, but they can mar its prospects.
Netanyahu and Abbas both showed once again how the politics surrounding “the peace process” has defeated the cause of peace.
Both leaders exhibited utter indifference to the other’s core concerns, and catered to their constituencies, Hamas and Israeli settlers included, making it clear, urbi et orbi, that the gaps separating their positions are as unbridgeable as ever.
Netanyahu could not bring himself to admit the sins of occupation, or even to utter a minimal expression of empathy with the Palestinian tragedy of dispossession and dispersion.
Israel’s march of folly in expanding its West Bank settlements did not deserve a hint of soul searching on his part.
Indeed, Netanyahu’s call for peace will remain hollow so long as he continues to view the solution to Israel’s legitimate security concerns as requiring continuous occupation of sizable portions of the future Palestinian state.
The Jordan Valley and the hills of Judea and Samaria are, undoubtedly, strategic assets for a country whose width is that of the length of a Manhattan avenue.
But demilitarization, the deployment of international forces, and rigid security arrangements could offer an answer.
Security concerns can no longer be treated as a license for territorial expansion.
Eager to deliver his elementary history lessons, Netanyahu refuses to admit the validity of one key perspective.
Rather than interpreting Israel’s victory in the 1967 Six-Day War as permission for annexation of territory, that triumph should be viewed as a watershed that made possible peace with the entire Arab world should Israel relinquish occupied Arab lands.
This principle was stipulated by the 2002Arab peace initiative, and was previously realized in Israel’s peace with Egypt and Jordan.
So, whoever aspires to help the parties reach a settlement needs to be attentive to the fact that territorial borders are only one aspect of this conflict – and not necessarily the most contentious one.
Unlike Israel’s peace with Egypt (and, one hopes, its peace with Syria), the Israeli-Palestinian conflict is rooted in more than a real-estate dispute.
As the UN debate showed, what is at stake is a clash of irreconcilable national narratives.
Egypt had to grant Israel only political recognition, but the Palestinians are being asked to recognize Israel’s moral legitimacy by accepting Jewish links to the Holy Land and hence admitting the Jews’ millenarian claim for a state in a land that the Palestinians believe is historically theirs.
Not a word, nor an omission, in Abbas’s UN speech was accidental.
What was most striking was how flagrantly dismissive he was of Israel’s most fundamental national narrative.
He spoke of the Holy Land as the source of Christianity and the home of sacred shrines of Islam, but intentionally ignored the Biblical roots of Judaism and Jerusalem as the home of Hebrew kings and prophets.
For Israelis, that omission reveals even the most moderate Palestinians’ unwillingness to embrace the existence of a Jewish state.
Abbas’s refusal to recognize Israel as a Jewish state – on the ground that to do so would betray Israel’s 1.5 million Palestinian citizens – vindicated a key Israeli concern, and fueled skeptics’ fears of a hidden long-term Palestinian agenda to do away with the Jewish state altogether.
This is likely to dishearten Israeli doves – and embolden hawks in their insistence that no progress toward peace is possible without the Palestinians’ unequivocal acceptance of Israel as the Jewish national homeland.
Thus, Abbas’s implicit message that Israel will never offer a fair deal to its Arab minority will reinforce Netanyahu’s leadership as the staunch defender of the national interest against the naïve dreamers of the left.
Netanyahu has only to present Abbas’ arguments as proof that, for the Palestinians, peace with Israel is just the first stage in a grand strategy leading to one Palestine, embracing all of Israel, with an Arab majority.
Even if, as expected, the Security Council rejects the Palestinians’ request for full UN membership and Palestine ends up with observer status in the General Assembly, Abbas can already claim victory.
He managed to redress the balance of power with Israel and the United States by mobilizing the vast support that the Palestinian cause elicits in the international community.
If not for his bold initiative at the UN, the Quartet (the UN, the US, the European Union, and Russia) would not have become so suddenly hyperactive in searching for a formula to bring the parties back to the negotiating table.
But don’t hold your breath.
Nothing will come out of the Quartet’s move unless the parties change their attitudes.
Peacemaking is about courageously addressing the other side’s genuinely vital concerns.
And would-be mediators, for their part, can no longer just be “facilitators”; they need to regard themselves as stakeholders – and be prepared to exert pressure and twist arms.
Left to their own devices, Israelis and Palestinians will never reach a comprehensive peace settlement.
Has Russia Gone Back to Sleep?
MOSCOW – In just six months, from the end of September 2011 to March 2012, Russia was transformed.
The state’s gradual decomposition – its degenerate ethos of rent-seeking and appropriation of public goods – finally pushed Russia’s citizens, especially its young post-communist middle class, into the streets.
Soviet-era deference to paternalistic leaders gave way to self-confidence and distrust of established authority.
Or did it?
Vladimir Putin and his regime, caught off guard by last winter’s massive protests, were on the verge of panic.
But, after last month’s presidential election returned Putin to the office, the protest wave rapidly subsided.
Rallies shrank to one-tenth their previous size.
With expectations of immediate success unmet, the romantic impulse wilted.
It was clear what to do in confronting electoral fraud; what to do later, after the defeat, was not.
The protests’ leaders could formulate no new goals and slogans.
Moreover, between the parliamentary elections of last December and the presidential election in March, the authorities began to seize the initiative.
Putin’s presidential placeholder, Dmitri Medvedev, proposed political reforms and started meeting with representatives of opposition parties, which also had a demobilizing effect.
The authorities no doubt perceived the decline in street activity as a victory, which they immediately sought to consolidate by using the security forces to suppress future protests.
Courts hearing allegations of falsified election results generally ignored clear evidence of legal violations.
To many, the protest movement had been defeated.
But there was no real victory for the country’s power elite; nor was society defeated.
The protests reflected irreversible changes.
Russian society has become a dry peat bog, waiting for a spark to ignite it.
Of course, the reforms announced by the government were the simulated sort that have been a staple of Putin’s rule.
But, even as the authorities try to dilute their own initiatives – for example, resumption of elections for regional governors, removal of barriers to party registration, or the establishment of independent public television – they have provided new opportunities for political participation.
But what is happening in Russian society is more important.
In Moscow, the presidential election coincided with the election of municipal leaders.
Those in power, concerned about alienating voters, increasingly sought to hide their affiliation with Putin’s United Russia party.
And the municipal elections, previously the object of widespread indifference, attracted educated, active young people – the first “unwhipped generation” in Russian history – who not only challenged the incumbents, but won.
This bottom-up process is inestimably important to Russia’s future.
And Moscow is not the only example.
In several Russian cities, the opposition won mayoral elections.
In Astrakhan, where the opposition candidate lost because of widespread voting fraud, the scale of street protests grew ten-fold, and the entire country has been stirred by the scandal.
Nowadays, opposition leaders from Moscow and elsewhere travel to other cities and join the protests or become election observers.
That activity will need to continue.
When asked in a recent interview about the fate of the Putin-Medvedev regime, Medvedev, now the prime minister, said: “It is now time to calm down, because the tandem is here for a long time.”
But, while the “tandem” continues to see its main achievement as “stability,” what they now mean is the regime’s ability to stay in power “for a long time.”
To guarantee their understanding of “stability,” the tandem contrasts the continuous middle-class protests with a wave of regime-orchestrated demonstrations.
As a result, the country is now swollen with all sorts of phobias – against sexual minorities, against the so-called “propaganda of sex” among young people, against critics of the Orthodox Church, and, as always, against the West.
It is difficult to predict the fate of such a blinkered regime.
What we can say for sure is that only a democratic Russia will be able to survive within the country’s current borders.
The alternative is collapse, unpredictable and merciless.
Fortunately, the awakening of Russian society, the geographic broadening of political opposition, and the advent of a new generation unshackled by Soviet habits of mind and behavior has given the country an opportunity for genuine democratic reform that 12 years of Putinism had seemed to bury.
But Russia will choose not only between Putinism and democracy.
Trying to ensure stability, the regime is awakening forces that it will not be able to control.
The nationalism and homophobia that Putin and Medvedev have mobilized against the liberal wave is more dangerous to them – and their plan to swap jobs with each other indefinitely – than the liberals and leftists are.
Russia can go down three paths: democracy, which would preserve the country and provide prosperity for its citizens; the dead end of Putininism; or an orgy of nationalist obscurantism.
Either of the second two scenarios would increase dramatically the likelihood of Russia’s eventual disintegration.
Has the US Recovery Begun?
CAMBRIDGE – Although the American economy is continuing to decline, it is no longer falling as fast as it was at the beginning of the year or in the weeks after the collapse of Lehman Brothers in September 2008.
In that sense, it is reasonable to say that the worst of the downturn is now probably behind us.
But my reading of the evidence does not agree with that of those who claim that the economy is actually improving, and that a sustained cyclical recovery is likely to begin within the next few months.
Although the stimulus package of tax cuts and increased government outlays enacted earlier this year will give a temporary boost to growth, we are unlikely to see the start of a sustained upturn until next year at the earliest.
The optimists back their claims of an earlier recovery by pointing to a variety of statistics.
They note that construction activity is rising, home prices are declining more slowly, disposable personal income increased in the first quarter, consumer spending is up, and the labor market is improving.
But a careful look at these data is less reassuring.
In each case, the details do not support what the headline number appears to indicate.
While total construction spending recently rose by a very small 0.3% (less than the measurement error), private construction spending actually fell and residential construction was down a much more significant 4%.
Likewise, home prices declined at a very rapid rate of 18.7% in the 12 months to March, which is not meaningfully lower than the 19% fall over the 12 months to February.
And the most recent monthly decline corresponded to an annual rate of more than 25%.
Moreover, disposable personal income rose in the first quarter only because of a massive jump in tax rebates and government pension payments.
In contrast, salaries, self-employment income, dividends, and interest all fell.
The anomaly of rising consumption driven only by tax rebates and social-welfare payments ended in March, when consumer spending declined in response to lower employment and falling labor incomes.
This was confirmed by a fall in retail sales in April.
Finally, employment continues to contract rapidly.
Although the pace of decline slowed between March and April, half of that improvement was the result of an increase in government employment, owing to a one-time hiring of more than 60,000 temporary staff to conduct the 2010 census.
But, although the recent news is not as encouraging as some have claimed, I expect that the next few months will see some real improvements that will reduce the rate of overall economic decline, or even produce a temporary rise in the GDP growth rate, owing to the Obama administration’s fiscal stimulus measures.
The stimulus package will add about $60 billion to overall GDP during April, May, and June, or roughly 1.5% of quarterly output.
But when the GDP figures for the second quarter are reported later this summer, the government’s statisticians will annualize the 1.5% increase and add 6% in calculating the annual growth rate.
If economic activity apart from the stimulus package is continuing to decline at nearly the 6% annual rate that was recorded in the last two quarters, the temporary boost from the stimulus package will suffice to make the overall GDP change close to zero or even positive.
But the key thing to bear in mind is that the stimulus effect is a one-time rise in the level of activity, not an ongoing change in the rate of growth.
While the one-time increase will appear in official statistics as a temporary rise in the growth rate, there is nothing to make that higher growth rate continue in the following quarters.
So, by the end of the year, we will see a slightly improved level of GDP, but the rate of GDP growth is likely to return to negative territory.
The positive effect of the stimulus package is simply not large enough to offset the negative impact of dramatically lower household wealth, declines in residential construction, a dysfunctional banking system that does not increase credit creation, and the downward spiral of house prices.
The Obama administration has developed policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery.
Having said that, these policies are still works in progress.
If they are strengthened in the months ahead – to increase demand, fix the banking system, and stop the fall in house prices – we can hope to see a sustained recovery start in 2010.
If not, we will just have to keep waiting and hoping.
Healing Bolivia
BUENOS AIRES – Since the mid-19th century, Latin America has suffered fewer inter-state wars and undergone less state creation than any other region of the world.
The continent has been a relatively quiet periphery because its countries tend neither to fight each other nor to divide from within.
Bolivia, however, may be poised to buck the latter trend.
A referendum on autonomy which was approved in May in Bolivia’s eastern province of Santa Cruz has generated fear about the region’s eventual secession.
This relatively rich, opposition-controlled, ethnically mixed, and more conservative province, blessed with fertile lowlands and hydrocarbons, voted for autonomy by a wide margin.
The most outspoken anti-government forces in Santa Cruz seem to be itching for partition.
And recent referendums in the Amazonian provinces of Beni and Pando appeared to have exacerbated this sense of potential national fracturing.
A key ingredient of this simmering conflict is ethnicity, the salience of which became evident even before the election of President Evo Morales in 2005.
The combination of highly mobilized and vocal indigenous groups (the Amerindians, mainly located in the western highlands of Bolivia, represent some 55% of the population) and the declining influence of traditional elites at a time of socio-economic deterioration, has created a society in which there are more losers than winners.
The referendum marked a critical conjuncture of Bolivia’s social, regional, and political divisions.
Yet, despite Bolivia’s arrival at this gloomy turning point, events can, paradoxically, turn out moderately well.
The country stands before two distinct paths: uncontrolled and protracted civil violence, political crisis, and institutional collapse, or short-term tension, medium-term accommodation, and long-term stability.
But can Bolivia move away from becoming a quasi-failed state?
The inauguration of Morales, an indigenous leader, was a political earthquake, but it was also a sign of deepening democracy.
Restructuring relations between the state and the private sector in the hydrocarbons’ sector has provided the central government with the resources and capacities needed to rebuild an extremely weak state.
Morales’s social and cultural policies have been geared toward not only recognition of the rights of Bolivia’s indigenous majority, but also bringing about a redistribution of power among racial groups.
His initial radicalism was more symbolic and rhetorical than real, moderated by late 2007, and most of his foreign policy initiatives were eclectic rather than extremist.
If Morales had ever conceived a major revolutionary change in Bolivia, by early 2008 that project had dissipated, owing to the absence of a national consensus on the feasibility, intensity, and direction of such a transformation.
The muddled results of a Constituent Assembly that Morales had convened to amend the constitution reflected this reality.
In the meantime, the opposition, although strong and immoderate, is not yet secessionist.
Fortunately, the world economy is not exacerbating Bolivia’s domestic polarization.
High global commodity prices have helped all the country’s major economic sectors: mining business in the west, agro-industrial production and hydrocarbon projects in the east, and further oil and gas development in the south.
Moreover, boom in global consumption of cocaine – owing to higher demand in Europe and Latin America, together with stable demand in the United States – has brought new income to some Bolivians.
But, while the relative power of Bolivia’s diverse regions is increasing, none can survive alone or veto the actions of highly mobilized zones of the country.
Ethnic and social groups, activated by an intense, politicized agenda, may think in zero-sum terms, but they cannot advance their interests without positive-sum compromises.
Moreover, neighboring countries such as Argentina and Brazil have shown a remarkable degree of understanding for Bolivia’s domestic predicament.
They have sought to avoid, wherever possible, economic or political disputes with Morales’s government, and have become more diligent about exerting a positive influence on Bolivian affairs.
The recently established “Group of Friends” (Argentina, Brazil, and Colombia) is trying to promote confidence-building and conflict-prevention measures.
In addition, the US appears to be seeking to avoid open antagonism with Morales.
With a reformist regime in La Paz, it is difficult not to expect tensions with the Bush administration.
But, crucially, the US has refrained from intervention in Bolivian politics, because it understands that undermining the current government could lead to chaos.
Bolivia’s future is not inexorably bleak.
There is a window of opportunity to rebuild its state and institutions in more viable forms.
More democracy and material welfare probably can co-exist with realistic local autonomy, whereas partition, it should be remembered, does not always breed political pluralism, social cohesion, and economic well-being.
Bolivians must recognize that there is a real chance to avoid this risky course.
Healing the Depressed Brain
Scientists and mental health professionals have made major strides in understanding and treating major depression, including the discovery of the role played by imbalances in brain chemicals such as serotonin and noradrenaline.
But there is increasing evidence that there is more to the story: depression also involves structural changes in areas of the brain that are involved in mood, memory, and decision-making.
Depression is often precipitated by stressful experiences.
The brain interprets our experiences and decides if they are threatening, and then controls our behavioral and physiological responses to them.
Data obtained from animal experiments show that harmful physiological changes result from the inability of the brain and body to respond to repeated stress with adaptive modifications in structure and function.
Three brain areas - the hippocampus, the prefrontal cortex, and the amygdala - are particularly susceptible to pathological changes in size and function.
These areas are instrumental in interpreting what is stressful and in determining appropriate responses.
Many chemical mediators are involved, including cortisol and adrenalin from the adrenal glands, other hormones and neurotransmitters (such as serotonin and noradrenalin), and responses from the autonomic and immune systems.
Depression thus leads to changes in the rest of the body, owing to long-term chemical imbalances in the systems that control the heart, the immune system, and metabolism.
The hippocampus, a key structure in the formation of memories of events and contexts, expresses receptors that enable it to respond to stress hormones in the blood.
We now know that it atrophies in a number of psychiatric disorders.
Within the hippocampus - a curved elongated ridge located in each of the brain's two temporal lobes - is a structure called the dentate gyrus, which produces new neurons throughout adult life.
Chronic stress inhibits neurogenesis and also causes many hippocampal neurons to shrink - a process called "remodeling."
Animal studies have shown that the stress hormone cortisol, together with neurotransmitters in the brain, also plays an important role in the remodeling of neurons.
Similarly, there is evidence that the prefrontal cortex - a key structure in emotional regulation as well as in decision-making and working memory - shrinks in major depression.
On the other hand, rather than atrophying, the amygdala, the seat of emotional memories, becomes hyperactive both in post-traumatic stress disorder and depressive illness, and there is evidence from animal studies of a hypertrophy of nerve cells after repeated stress.
A hyperactive amygdala, along with abnormal activity in other regions of the brain, leads to disrupted patterns of sleep and physical activity, as well as irregular patterns of secretion of hormones and other chemical mediators that control many of the body's structures.
For example, levels of the stress hormone cortisol increase in the evening, when they are normally low.
Over time, if uncorrected, major depression can cause such conditions as progressive mineral loss from bones, accumulation of abdominal fat, increased blood platelet reactivity, and increased risk of cardiovascular disease.
Moreover, certain types of antidepressants may contribute to some of these conditions.
Nevertheless, one of the most interesting features of these structural changes is that they can be prevented, and potentially reversed, with medication.
Indeed, in key respects depression is comparable to Cushing's disease, a disorder cause by excessive production of cortisol.
The elevated cortisol in Cushing's patients is higher than that found in major depression, but the psychiatric and somatic features of Cushing's disease are strikingly similar: melancholia, depression, abdominal obesity, bone mineral loss, and increased risk for cardiovascular disease, along with shrinkage of the hippocampus and memory impairment.
The good news from Cushing's disease is that hippocampal shrinkage and memory impairment is at least partially reversible over several years after correction of the excess cortisol.
This encourages the belief that structural changes in the brain that are associated with major depression can be prevented or even reversed with the right medications and other treatments.
For example, neurogenesis in the dentate gyrus that is suppressed by acute and chronic stress is elevated by many antidepressant treatments.
Still, one of the problems with many of the current medications is that, even with treatment, the recurrence of major depression is very high - around 70-80%.
This suggests that physiological processes underlying depression - the ones that may also lead to structural changes in the brain - are not being completely arrested, and thus that a new generation of anti-depressant medications is urgently needed.
If so, new, the new antidepressants would have to target what appear to be progressive neurodegenerative changes in the brain, which we infer are taking place because recurrence of depression is so high under currently available treatments.
Lithium, a mood stabilizer and neuroprotective agent, has the properties we are seeking, although its toxicity makes it less than ideal.
As ever, the challenge facing medical researchers is to develop more effective treatments without reducing their safety.
बुढ़ापे में नया जीवन
ज़्यूरिख – हममें से कई लोगों ने देखा है कि हमारे माता-पिता या दादा-दादी बुढ़ापे में आत्मनिर्भर नहीं रह पाते हैं। 2012 में, 65 साल से अधिक की आयु के 2.4 मिलियन से अधिक अमेरिकियों का गिरने से लगी चोटों के लिए आपातकालीन कक्षों में इलाज किया गया। दुनिया भर में लोगों की उम्र तेजी से बढ़ने के कारण ऐसी चुनौतियाँ बहुत अधिक बढ़ती जा रही हैं, जिनका प्रभाव न केवल स्वास्थ्य देखभाल प्रणालियों, बल्कि अर्थव्यवस्थाओं, सरकार की नीतियों, और यहाँ तक कि परिवारों पर भी पड़ रहा है।
संयुक्त राष्ट्र का अनुमान है कि इस सदी के मध्य तक, 60 से अधिक आयु वाले लोगों की संख्या दुगुनी हो जाएगी, और 65 से अधिक आयु वाले लोगों की संख्या, इतिहास में पहली बार पांच साल से कम उम्र के बच्चों से अधिक हो जाएगी। इस जनसांख्यिकीय रुझान की व्याख्या सीधे-सीधे इस तरह की जा सकती है: वैश्विक प्रजनन दरें घट गई हैं, 1950-1955 में प्रति महिला पांच बच्चों की औसत दर से कम होकर यह 2010-2015 में प्रति महिला 2.5 बच्चों तक पहुँच गई है।
फिर भी, उम्र बढ़ने के कारण नागरिकों को केवल आर्थिक बोझ के रूप में नहीं देखा जाना चाहिए। वास्तव में, वे सक्रिय उपभोक्ताओं के रूप में एक सकारात्मक भूमिका निभा सकते हैं - यह एक ऐसी संभावना है जिसे कई उद्योगों ने पहले से ही पहचान लिया है और उन्होंने इसका दोहन करना शुरू कर दिया है। बैंक ऑफ़ अमेरिका मेरिल लिंच के अनुसार, संयुक्त राज्य अमेरिका में उपभोक्ता वस्तुओं पर किए जानेवाले खर्च में से लगभग 60% खर्च 50 से अधिक आयु वाले लोगों द्वारा किया जाता है।
लेकिन इससे दुःसाध्य लगनेवाली यह अंतर्निहित चुनौती कुछ कम नहीं हो जाती है: सेवानिवृत्त लोगों की बढ़ती संख्या का भरण-पोषण करनेवाले करदाताओं की संख्या में लगातार कमी हो रही है। इस असंतुलन ने कुछ सरकारों को पहले ही सेवानिवृत्ति की उम्र को बढ़ाने और पेंशन नीतियों को बदलने के लिए प्रेरित किया है ताकि लाभ देरी से दिए जाएँ या उनमें कमी की जाए और लोगों को कार्यबल में बनाए रखा जाए।
लोगों को लंबे समय तक काम पर लगाए रखने के लिए यह महत्वपूर्ण है कि उन्हें स्वस्थ रखा जाए। यही कारण है कि स्वास्थ्य देखभाल उद्योग को लोगों की उम्र बढ़ने की चुनौतियों से निपटने के प्रयासों में महत्वपूर्ण भूमिका निभानी चाहिए। बुढ़ापे को केवल जीवन के एक अनिवार्य चरण के रूप में ही नहीं देखा जाना चाहिए, बल्कि इसे लोगों को अच्छा जीवन जीने में मदद करने के लिए स्वास्थ्य देखभाल कंपनियों और प्रणालियों के लिए एक अवसर के रूप में देखा जाना चाहिए।
इस उद्देश्य से, स्वास्थ्य देखभाल कंपनियों को अपने अनुसंधान और विकास के प्रयासों को उन बीमारियों पर केंद्रित करना चाहिए जो बूढ़े रोगियों में अधिक पाई जाती हैं, जिनमें मधुमेह, हृदय रोग, मोतियाबिंद, संधिशोथ, और कैंसर जैसी पुरानी बीमारियाँ शामिल हैं। इस तरह के प्रयास इसलिए भी महत्वपूर्ण हैं कि लोगों की शारीरिक शक्ति, मानसिक क्षमता, और श्रवण और दृष्टि जैसी इंद्रियों को ठीक बनाए रखकर उनकी उत्पादकता और आत्मनिर्भरता में होनेवाली कमी को और अधिक प्रभावी ढंग से रोका जा सके। यह न केवल स्वयं अधिक उम्र के रोगियों के लिए, बल्कि उनके परिवारों और देखभाल करने वालों के लिए भी महत्वपूर्ण है।
विशेष रूप से एक आशाजनक क्षेत्र स्वास्थ्यसुधार संबंधी दवाओं का है जिसके कई सं���ावित उपयोग हैं -इसमें बहरेपन को रोकना या ठीक करना भी शामिल है। आज जो स्थिति है, उसमें 65-70 साल की उम्र के लोगों में से एक-तिहाई (और 75 से अधिक उम्र के लोगों में से आधों) में बहुत अधिक बहरेपन की शिकायत है, ऐसा अक्सर भीतरी कान के बालों की उन कोशिकाओं को क्षति पहुँचने या उनके नष्ट हो जाने के कारण होता है जो मस्तिष्क में अंकित होनेवाली ध्वनि तरंगों को पहचान कर संकेतों के रूप में बदल देती हैं।
इस समस्या के समाधान के लिए, मेरी कंपनी नोवार्टिस CGF166 नामक यौगिक का परीक्षण कर रही है जो बालों की कोशिकाओं के विकास को उत्तेजित करनेवाली एक विशिष्ट जीन को "सक्रिय करने" के लिए भीतरी कान में कुछ स्वस्थ कोशिकाओं पर काम करती है। हम पहले ही अपनी शोध के नैदानिक-परीक्षण चरण में प्रवेश कर चुके हैं, जिसके दौरान हम गंभीर बहरेपन के शिकार रोगियों के उपचार में CGF166 की सहनशीलता और प्रभावकारिता का मूल्यांकन करेंगे।
लेकिन अगर ऐसे उपचार सस्ते या आम लोगों के लिए सुलभ नहीं होंगे तो इनका कोई मतलब नहीं होगा। और स्वास्थ्य देखभाल की बढ़ती लागतों का बोझ अधिकाधिक रोगियों पर डालते रहने की वर्तमान स्थिति उत्साहजनक नहीं है। इस प्रवृत्ति को पलटने के लिए, स्वास्थ्य देखभाल उद्योग को चाहिए कि वह स्वास्थ्य देखभाल प्रणालियों की वित्तीय स्थिरता का समर्थन करने के लिए सभी हितधारकों के साथ मिलकर काम करे ताकि वे देखभाल के लिए बढ़ती मांग के संबंध में बेहतर रूप से कार्रवाई कर सकें।
इसमें सफलता के लिए आर्थिक दृष्टि से धारणीय रूप से रोगी परिणामों में सुधार लाने के लिए नवोन्मेषी रणनीतियाँ अपनाने की जरूरत होगी। उदाहरण के लिए, स्वास्थ्य देखभाल उद्योग स्वास्थ्य को सुधारने वाली सेवाओं की पेशकश करने के लिए सरकारों के साथ काम कर सकता है - जैसे कि दवाओं के अलावा दूरस्थ रोगी निगरानी, स्वास्थ्य एप्स, और रोगी-परिचर्चा टूल्स के रूप में। रोगियों को उनके इलाज या बीमा जैसे संबंधित मुद्दों के बारे में जवाब देने के लिए प्रशिक्षित स्वास्थ्य कर्मियों या सलाहकारों की उपलब्धता सुनिश्चित करना भी इसमें मददगार हो सकता है।
भुगतान करनेवालों - सरकारों और निजी बीमा कंपनियों दोनों को ही चाहिए कि वे अपनी ओर से स्वास्थ्य देखभाल कंपनियों को उनके उत्पादों और सेवाओं के वास्तविक लाभों के आधार पर पुरस्कृत करने के लिए एक तंत्र बनाएं। प्रति रोगी वार्षिक भुगतान के अलावा, स्वास्थ्य देखभाल कंपनी को प्राप्त किए गए परिणामों के आधार पर बोनस या दंड दिया जा सकता है।
बढ़ती उम्र वाले लोगों की जरूरतों के बारे में कार्रवाई करना स्वास्थ्य देखभाल कंपनियों और भुगतान करनेवालों के लिए सबसे बड़ी चुनौती है। इसके सफल मॉडल से स्वास्थ्य देखभाल की लागतों में कमी होगी, आयु-संभाविता में वृद्धि होगी, और बुजुर्ग लोगों के जीवन की गुणवत्ता में सुधार होगा। और, उम्र बढ़ने की प्रक्रिया के बारे में अधिक व्यापक समझ प्रदान करके, युवा लोगों को प्रभावित करनेवाले रोगों सहित - अन्य रोगों के उपचार और इलाज के लिए यह हमारा मार्गदर्शन भी कर सकता है।
यह सुनिश्चित करना सभी के हित में है कि हर व्यक्ति यथासंभव अधिक से अधिक स्वस्थ जीवन जिए, और जहां तक संभव हो अधिक से अधिक लंबे समय तक जिए। इसलिए अब इसी बात में समझदारी है कि हम अपने बीच सबसे वरिष्ठ व्यक्ति पर ध्यान केंद्रित करें।
Health Care’s Frequent Flyers
NEW YORK – For those of you who have seen the (American) movie “Up in the Air,” think of the scene where George Clooney meets Vera Farmiga.
He’s an outsourced human-resources executive who flies around the country firing people on behalf of timid managers; she’s a counterpart female road warrior.
Their courtship ritual revolves around loyalty cards: he pulls out his American Airlines Executive Platinum card; she matches.
Next, his Diamond VIP Hilton HHonors card; she calmly slaps hers on the rickety table where they are sharing drinks.
The unspoken message: points make you sexy.
Airlines and hotels have known this for a long time.
Dean Margolis, who long ago consulted for major airlines and is now applying the same techniques to healthy behavior, recalls wondering how to get executives to fly just a little more. It’s not by offering discounts, which benefit an executive’s company rather than the executive.
Margolis asks: “When the boss says ‘Who wants to come to Philadelphia with me?’, what’s going to get two people instead of one to say yes?
To abandon their families, stand in line, and perhaps take a middle seat...”
Points, of course, will do the trick.
The promise of being recognized at the airline counter, ushered to the front of the line, and, yes, looking like a big shot at the airport bar.
Margolis’s new company, MedRewards, plans to give people points for healthy behavior – everything from taking their medications regularly to signing in at the gym more than five times a week.
As in the airline business, the actual customers won’t be the users, but rather the vendors who want to influence users’ behavior: pharmaceutical companies who want patients to buy their drugs, along with insurers and employers who want to lower long-term costs.
(Employers, bless them, even have an interest in keeping people healthy!)
How do you translate healthy behavior into status?
First, of course, you can have cards identifying your compliance behavior – e.g., not how many drugs you take, but how regularly you take them.
As for the rewards, they could be everything from discounts on energy-saving appliances and posture-enhancing furniture to vouchers from suppliers of “healthy” foods.
With the right partner, such a scheme could also include better treatment from the medical establishment: perhaps a separate phone line to call your care provider, free WiFi while you sit in the waiting room (others have to pay), and even room upgrades if you’re unlucky enough to need surgery.
Just as with flying, which most people (George Clooney’s character excepted) don’t particularly like, users may eagerly sign up in order to collect points.
MedRewards is not alone.
A variety of other companies are taking different approaches, but all of them have the same goal – to motivate people to engage in healthy behavior.
And all of them avoid simply paying them, which is counterproductive over the long run, and may lead to cheating.
While some may think it worth cheating to get money, most people don’t want a gold card that they know in their heart is a fraud.
Yet many people will do all they can to game the system, a challenge that each company must confront.
Contagion Health, in which I am an investor, uses multi-person game mechanics to turn healthy behavior into status and rewards.
Its initial service, at http://imoveyou.com, allows you to challenge someone else by filling in a form, which is then published on the person’s Facebook wall or on Twitter.
For example, Alice could fill in the blanks: “I will walk three extra miles if @JuanTigar spends 30 minutes on the elliptical machine.”
Of course, people use imoveyou for other purposes – everything from challenging a roommate to make his bed to encouraging a colleague to beat a sales record.
So much the better.
Getting people engaged in general is healthy, too – though the corporations and health providers that sponsor subscriptions will probably put some restrictions on subject matter.
Then there’s HealthRally, which uses insights from behavioral economics to motivate people to achieve their own health and wellness goals.
The basic insight is that owing something to your friends is a far more powerful incentive than getting something for yourself.
The user signs up and recruits friends and family to sponsor a reward of their choice for a specified goal.
(We can imagine a wish-list revenue opportunity here, where vendors can offer specific motivational products or services.)
From then on, the sponsors have an implicit right to check on the user’s progress, offering support or criticism far more compelling than any stranger could.
It’s relatively easy to fail on your own, but if your friends have put up real money, it’s much harder.
While the service is currently designed for individuals, companies could also use HealthRally to enhance their corporate wellness programs.
By providing matching financial rewards, for example, a company could leverage its employees’ natural support networks and provide a valuable boost to the pot.
All three of these companies let us use our own quirks and psychology to motivate ourselves.
Over time, MedRewards, Contagion Health, HealthRally, and others will have to prove their worth with data.
If people who use their services actually stay healthy, work harder, and cost less, the evidence will be hard to ignore.
And people who might not have adopted these tools on their own will be encouraged to do so by others with evidence and incentives on their side.
Disclosure: I am an investor in Contagion Health, and am considering investments in MedRewards and HealthRally.
Health Food Truths
“Low-carbohydrate” pasta is in a category of health foods known in the trade as “lesser evils” – foods with fewer unwanted calories, fat, trans fat, sugars, salt, or carbohydrates.
There is now a whole industry of such products, as well as health foods classified as “natural,” “organic,” and “functional.”
But are these foods really better for you?
In the United States, “organic” has a precise meaning established by the US Department of Agriculture. “Natural,” however, means whatever the food producer or manufacturer says it means.
So-called “functional” foods – or “techno-foods” – are those to which manufacturers add omega-3 oils, artificial sweeteners, indigestible starches, cholesterol reducers, soy or milk (whey) proteins, phytochemicals, and other ingredients to enable them to take advantage of “qualified” health claims permitted by the Food and Drug Administration (FDA).
Sales of lesser-evil and functional foods have done well in recent years, bringing in about $85 billion in US sales in 2004.
If you routinely buy such foods, you are among LOHAS (Lifestyles of Health and Sustainability) consumers – the health food industry’s cherished demographic base.
You buy low-carbohydrate products, energy and nutrition bars, vitamin- and mineral-fortified foods and beverages, soy foods, and practically anything with a health claim.
Like many people, I thought that small, innovative companies dominated functional foods.
In fact, PepsiCo holds a 25% share of the market with products like Quaker cereals and fortified Tropicana juices, which qualify for FDA-approved health claims.
Coca-Cola, General Mills, Kellogg, Kraft, Nestlé, and Groupe Danone all have market shares ranging from 4% to 7%.
These companies’ control of this market makes sense if you think about what they are selling.
The most popular functional foods are soft drinks, sports drinks, breakfast cereals, snacks, energy bars, and juice drinks.
About three-quarters of breakfast cereals make health claims for the whole grain or fiber that has been added to make them “functional.”
Moreover, as Nancy Childs, a business school professor, wrote in Nutrition Business Journal in 2004, functional foods for obesity, for example, promise their manufacturers “a double reward”: eligibility for qualified health claims and possible reimbursement under Medicare as a disease treatment.
They also provide “balance to food company product portfolios, thereby limiting corporate liability on both legal and stock valuation fronts” – a reference to potential claims against companies that their products might cause obesity or poor health.
But many of these products are basically sugar water or sugary foods that might as well be cookies, with ingredients added or removed to appeal to LOHAS customers who would otherwise not buy them.
A private testing laboratory, ConsumerLab.com, found that hardly any of the “vitamin waters” it tested contained what their labels said they did, and some had only 20% to 50% of the amounts of nutrients listed.
Likewise, half the fat in most power and energy bars – which bring in $2 billion in annual sales – is saturated and some is trans.
Many bars targeted to low-carbohydrate dieters have misleading “net carb” calculations.
Some do not disclose their content of sugar alcohols, and some have so much of these additives that they are almost certain to produce laxative effects or gas.
Others are so highly fortified with vitamin A or D that ConsumerLab advises against giving them to young children.
Even if I had not seen these results and warnings, I wouldn’t eat power and energy bars, which, according to the magazine Consumer Reports , taste “gritty, chalky, or chemical.”
I agree.
When I ask friends and colleagues why they buy the bars, they say: “Because I know they are healthy and I don’t care how they taste.”
I can’t see the point of eating indigestible vitamin-and-fiber supplemented carbohydrates flavored with artificial sweeteners.
If I think I need more vitamins, I prefer to take a multivitamin supplement.
If I need a hundred or so calories in a hurry, I prefer a banana, a handful of nuts, or, for that matter, a delicious candy bar.
This is not to diminish the value of some of the lesser evils – low-fat milk and yogurt, for example.
But most foods posing as “health food” raise the same question as vitamin-supplemented candy: does adding vitamins really make a food better for you?
Real health foods do not need to be made functional to be good for you.
They are functional just the way they are.
Healthy People, Healthy Cities, Healthy Economies
OXFORD – The forces that drove the growth of European and North American cities in the nineteenth and twentieth centuries are now driving urbanization in Brazil, China, India, Mexico, Russia, and other emerging-market countries.
Because the growth of these cities has been accelerated and magnified by productive technologies, rapid internal migration, and high net reproduction rates, many have reached unprecedented sizes at breathless speed.
Indeed, all but three of the world’s 20 largest cities are in emerging markets.
Many forecasts suggest that by 2030, the four largest emerging-market economies will have overtaken the G-7 in combined size, and that by 2050, today’s emerging-market economies will represent more than half the global economy and an even larger share of the world’s population.
These forecasts all assume that economic growth will be generated in cities.
But will emerging-market cities be healthy enough to drive rapid economic growth?
The issues that preoccupy health policymakers and practitioners in Lima, Cairo, Kolkata, and Jakarta reflect contrasting climates, geographies, histories, and cultures.
Each city is ultimately a special case.
But they share some generic features.
One is that the urban disease burden is shifting from infectious to chronic diseases – the so-called “diseases of affluence.”
But the urban poor, faced with bad housing, limited infrastructure, and meager services, are vulnerable to epidemics, malnutrition-based childhood diseases, HIV/AIDS, malaria, tuberculosis, and mental disorders.
They are also likely to be hardest hit by natural disasters, such as the floods and mudslides that devastated parts of Rio de Janeiro in January.
A second generic feature of emerging-market cities is that dense concentrations of poverty help create fragile environments that spawn civil disorders, resulting in death and injuries.
But a recent symposium at Oxford University concluded that emerging-market cities could improve and maintain urban health by capturing the inherent advantages of concentration, coordinating health policies and programs, adopting successful innovations, reforming health education and training, and developing improved planning processes.
Indeed, many potential solutions stem from opportunities for innovation created by the physical concentration of people and economic activity.
It is invariably more efficient to build and maintain health-related infrastructure, such as water supply and sanitation systems, clinics, and hospitals, and deliver specialized health care, where population densities are highest – and to create affordable-care networks of community health workers using low-cost technology.
It is invariably easier to capture economies of scale and operation in public-health programs where those economies are greatest.
Moreover, while the health of urban populations is directly or indirectly affected by actions taken (or not taken) in almost every branch of government, few emerging markets have acted to improve horizontal coordination within national or city administrations.
Fewer still have addressed the need for vertical coordination betweennational and city governments.
Tailored solutions are required – what works in one city might not work in others – but, because problems arising from weak or absent coordination are widespread, emerging markets should consider governance models that vest accountability for urban health outcomes – together with the authority to shape them – in city governments.
But such innovation does not always begin at home, which is why city governments need to know about potentially applicable ideas and lessons from other cities and countries.
Unfortunately, the diffusion and dissemination of innovative ideas in the fields of public health and health care is generally a random, haphazard, and inefficient process.
So emerging markets should collaborate to develop health-knowledge networks aimed at facilitating mutual learning.
There is also an urgent need to address the fact that public health and medical education in emerging markets is rarely integrated.
Having received different training and developed different mindsets, public-health officers and medical doctors (and their subordinates) often operate in silo-like environments – to the detriment of the people they serve.
Moreover, there are few opportunities for doctors to specialize in urban health.
To overcome this challenge, emerging-market governments should consider radical reforms in education and training in urban public health and health care.
Urban growth in emerging-market countries – and the corresponding concentration of poverty – has challenged and sometimes overwhelmed the capacity of their governments to provide sustainable and affordable housing, water supply and sanitation, solid-waste management services, and education – all of which directly affect urban health – as well as basic health-care services.
To address these issues emerging-market cities should practice anticipatory planning, based on realistic demographic forecasts; develop city and nationwide patient registers and health-information systems; and seek to integrate health and health-care planning with overall city planning.
If cities are to drive emerging-market countries towards a better future, their governments must ensure that urban housing, infrastructure, and services stay abreast of demand.
After all, an investment-friendly business environment requires adults who are fit to work and children who are fit to learn.
Ultimately, the economic health of emerging-market countries will depend on the reinvention of urban public health.
Hearing Voices
You are in a crowd when you hear your name.
You turn, looking for the speaker.
No one meets your gaze.
It dawns on you that the voice you heard must have sprung from your own mind.
This foray into the uncanny is as close as most people come to experiencing auditory hallucinations or "hearing voices," a condition that affects 70% of patients with schizophrenia and 15% of patients with mood disorders such as mania or depression.
For these individuals, instead of hearing just one's name, voices produce a stream of speech, often vulgar or derogatory ("You are a fat whore," "Go to hell") or a running commentary on one's most private thoughts.
The compelling aura of reality about these experiences often produces distress and disrupts thought and behavior.
The sound of the voice is sometimes that of a family member or someone from one's past, or is like that of no known person but has distinct and immediately recognizable features (say, a deep, growling voice).
Often certain actual external sounds, such as fans or running water, become transformed into perceived speech.
One patient described the recurrence of voices as akin to being "in a constant state of mental rape."
In the worst cases, voices command the listener to undertake destructive acts such as suicide or assault.
But hearing voices is not necessarily a sign of mental illness, so understanding the mechanics of auditory hallucinations is crucial to understanding schizophrenia and related disorders.
For example, your occasional illusionary perception of your name spoken in a crowd occurs because this utterance is uniquely important.
Our brains are primed to register such events; so on rare occasions the brain makes a mistake and reconstructs unrelated sounds (such as people talking indistinctly) into a false perception of the spoken name.
Hallucinated voices are also known to occur during states of religious or creative inspiration.
Joan of Arc described hearing the voices of saints telling her to free her country from the English.
Rainer Maria Rilke heard the voice of a "terrible angel" amidst the sound of a crashing sea after living alone in a castle for two months.
This experience prompted his writing the Duino Elegies .
How can we understand differences between an inspired voice, an isolated instance of hearing one's own name, and the voices of the mentally ill?
One answer is that "non-pathological" voices occur rarely or perhaps only once.
Not so for the person with mental illness.
Without treatment, these experiences recur relentlessly.
Brain imaging studies have found that parts of the temporal lobe activate during these hallucinations.
Our research at Yale University, as well as studies conducted at the Institute of Psychiatry in London, also detected activation in an area of the brain known as Broca's region during production of "inner speech" or verbal thought.
One theory is that voices arise because Broca's area "dumps" language outputs into parts of the brain that ordinarily receive speech inputs from the outside.
To test this theory we are using trans-cranial magnetic stimulation (TMS) to reduce the excitability of portions of the temporal lobe and Broca's region.
So far, most patients appear to experience significant improvements from TMS directed to both brain regions, with improvements lasting from two months to over a year.
These results, although preliminary, suggest an alternative treatment if validated in larger-scale studies.
What remains unaddressed is the root cause of abnormal brain activations.
We are pursuing three intertwined ideas.
The first is based on studies suggesting that schizophrenia patients suffer from reduced brain connectivity.
As a result, certain groups of neurons, such as those responsible for producing and perceiving language, may begin to function autonomously, beyond the control or influence of other brain systems.
It is as if the string section of the orchestra suddenly decided to play its own music, disregarding everyone else.
The second idea is that deprivation of social interaction--namely human conversation--makes the brain more likely to produce hallucinated conversations.
Often one of the first signs of schizophrenia--occurring well before manifestations such as hearing voices--is social isolation.
Indeed, sensory deprivation can produce hallucinations in the sense mode that is deprived.
An example is Charles Bonnet Syndrome, where visual impairments in the elderly can produce visions of human figures.
Could the absence of actual spoken human conversation--a cornerstone of day-to-day human intellect and creativity--produce hallucinated conversations?
Recall the extreme isolation that preceded the appearance of Rilke's startling voice.
Third, heightened emotions may play a role in producing voices.
Indeed, heightened emotionality prompts the brain to produce information consonant with that emotional state.
For example, a low mood favors generation of thoughts that are themselves depressing.
It is possible that intense states of emotion could pre-select and perhaps elicit from the brain certain verbal messages having the same emotional charge.
Verbal messages expressed by voices often are highly emotional.
Moreover, when schizophrenia begins, these persons are often in states of extreme fear or elation.
It could be that these powerful emotional states increase the propensity of the brain to produce corresponding verbal "messages."
This would account for the fact that voices also emerge during states of extreme, but incidental, emotionality brought on by inspired thought, mania, depression, or ingestion of certain drugs.
Here the voices disappear when the emotional states return to normal.
The brains of schizophrenia sufferers may be vulnerable to becoming "stuck" in these hallucinatory states.
Our hypothesis is that voices arise from different combinations of these three factors--reduced brain integration, social isolation, and high levels of emotionality.
This view has become the focus of efforts to understand and help patients with mental illness quiet their minds.
The Spanish Revival
MUNICH – After fighting for its life for the last two years, Spain’s economy finally seems to have moved out of intensive care.
The banking sector has been deemed “cured”; demand for Spanish bonds has soared; and the country can once again raise capital at reasonable interest rates on the market.
But much more work must be done to ensure a stable long-term recovery.
First, the good news.
Investor confidence is on the mend, exemplified by the recent placement of €10 billion ($13.8 billion) in ten-year government bonds – which was over-subscribed by four times.
While risk premiums on ten-year bonds remain far above pre-crisis levels, yields have dropped considerably, from 4% at the beginning of 2010 to 3.2% today.
And a growing number of banks and companies are returning to the capital market.
Moreover, the Spanish economy returned to growth in the third quarter of last year, and is on track to grow by roughly 1% this year.
If, as expected, GDP grows by about 2% next year, Spain will outperform the eurozone average and create an environment conducive to significant long-term employment gains.
Perhaps the most notable consequence of Spain’s recent reform efforts is its current-account surplus – the country’s first in more than two decades.
At the peak of the crisis, Spain’s current-account deficit amounted to an unprecedented 10% of GDP.
Much of this progress reflects surging exports, which grew at an annual rate of 5.2% in 2013, outperforming Germany.
Rapid export growth, together with a drop in imports, enabled Spain to halve its trade deficit last year.
In fact, Spanish factories have boosted their productivity to such a degree that they are now taking orders away from their European competitors.
It should be noted, however, that productivity gains are partly attributable to a massive wave of employee layoffs – the dark side of economic remediation.
Likewise, the reduced labor costs and falling inflation caused by recession and austerity helped to boost Spanish firms’ competitiveness within the eurozone.
To be sure, wage and price adjustments, including temporary developments affecting food and energy costs, have turned Spain’s inflation rate negative, at roughly -0.1%. But worries about potential deflation scenarios are unwarranted.
On the contrary, by increasing Spaniards’ real disposable incomes, low inflation is helping to stimulate private consumption, fueling a corresponding improvement in economic sentiment indicators, including consumer trust.
And yet, despite these positive indicators, Spain’s long-term economic recovery remains far from certain.
One critical test of its trajectory will be how investment activity develops over the next few quarters.
Though investment stabilized in the second half of last year, it remains well below pre-crisis levels.
The challenge is not simply to increase investment, but also to ensure that it is sustainable, unlike before the crisis, when excessive allocation of capital to real-estate development caused construction and related sectors to become overheated.
This time around, investment must be spread across all sectors, boosting their competitiveness and, in turn, their contribution to GDP growth.
Fortunately, the outlook appears promising, with increased private-sector confidence, rising capacity utilization, and an encouraging sales outlook for companies.
Ongoing fiscal consolidation – and thus strong pressure to keep a tight rein on the budget – will, however, restrict public-sector investment.
The most potent threat to Spain’s economic recovery stems from the labor market.
With an unemployment rate of 25.3% – and youth unemployment running at 53.9% – the situation appears grim.
Making matters worse, despite considerable gains in the last quarter of 2013, employment growth is far too weak to make a significant dent in joblessness.
In 2012, the government implemented sweeping labor-market reforms to increase companies’ internal flexibility (making it easier to dismiss permanent workers and facilitating wage moderation), and introduced a model for reducing workers’ hours.
But such changes take effect slowly, and often not until the recovery phase.
Given this, the government must do more to boost employment in the short term, especially among young people, whose knowledge, effort, and entrepreneurial spirit is critical to Spain’s long-term economic success.
Additional measures to improve vocational training or extend part-time work, for example, could prove to be invaluable.
The final challenge facing Spain is government debt, which currently amounts to nearly 100% of GDP.
So far, efforts to curb public debt have centered on painful austerity measures, including substantial cuts in the supply of public goods, especially health care and education.
At the same time, pension reform – including adjustments in how benefits are indexed to inflation – will ease some of the pressure on the public budget.
Such measures, together with further liberalization of protected domestic sectors, will strengthen Spain’s economic-growth model considerably.
The risk now is a relapse into reform fatigue.
While a slowdown in the pace of reform might bring temporary relief, it would almost certainly reverse Spain’s hard-won achievements.
Indeed, with the worst now over, complacency is the Spanish economy’s worst enemy.
Quantitative Easing for the People
OXFORD – It is now a near certainty that, by the end of this year, falling energy and commodity prices will push annual inflation in the eurozone below zero – well under the European Central Bank’s target of near 2%.
Rather than continue to allow misguided conventional thinking, centered on German economic ideology, to impede effective action, the ECB must pursue quantitative easing (QE) “for the people” – an adaptation of Milton Friedman’s “helicopter drops” strategy – to reverse deflation and get the eurozone back on track.
As it stands, conventional monetary policy has had – and American-style QE will have – little impact on the eurozone’s core countries.
This can be explained partly by the fact that, when it comes to credit provision, capital markets do far less of the heavy lifting in the eurozone (where banks matter more) than in the United States.
As a result, bringing down yields on government, corporate, and asset-backed bonds has less impact.
At the same time, the euro exchange rate – the one mechanism whereby current policies could still make a difference – cannot be pushed down much further.
For starters, given the eurozone’s huge trade surplus, doing so would incur strong international resistance.
Moreover, the mechanisms by which the US Federal Reserve’s purchases of asset-backed securities stimulate consumer spending – low mortgage rates, widely available home refinancing, high housing prices, and home-equity withdrawal – function differently in the eurozone.
In Germany, France, and Italy, higher house prices spur non-owners to save more for the down payment and inspire caution among tenants, who expect future rent hikes.
And the housing wealth of existing owners does not translate into significantly higher spending, given the lack of access to home-equity loans and cheap mortgage refinancing.
Finally, in countries like Germany, where households’ bank and saving deposits far outweigh their debt, lower interest rates reduce total household spending.
Another factor impeding QE’s impact in the eurozone is low bond yields, which, by increasing measured pension-fund deficits, make some companies reluctant to invest and thus more likely to raise contribution rates and limit pension benefits.
In the US, more generous assumptions regarding discount rates are used to calculate pension-fund liabilities.
Furthermore, US-style QE, in particular, tends to have adverse distributional implications, because it channels more money toward the wealthy, who have a lower propensity to spend, without providing much to the poorer people who would use it to consume more.
In the eurozone, the distribution issue is especially complex, given that institutional differences between countries can give the impression of discrimination among them.
Clearly, the ECB must develop a strategy that works in the eurozone’s unique system, instead of continuing to follow the Fed’s lead.
Such a strategy should be based on Friedman’s assertion that “helicopter drops” – printing large sums of money and distributing it to the public – can always stimulate the economy and combat deflation.
But, in order to maximize the impact of such an operation, the ECB would also have to find a way to ensure fair distribution.
One simple solution would be to distribute the funds to governments, which could then decide how best to spend them in their countries.
But the eurozone’s rule against using the ECB to finance government spending bars this approach.
A more feasible option, therefore, would be to provide all workers and pensioners with social-security numbers (or the local equivalent) with a payment from the ECB, which governments would merely assist in distributing.
Another alternative would be to use the electoral register, a public database that the ECB could use independently of governments.
Of the roughly 275 million adults with social-security numbers in the eurozone, some 90% are on the electoral register.
Extrapolating from America’s experience in 2001, when a $300 per person social-security rebate boosted spending by about 25% of the total amount distributed, a €500 ($640) check from the ECB could increase spending by about €34 billion, or 1.4% of GDP.
The extra tax revenue that such a rebate would produce would reduce government deficits significantly.
Beyond lifting the eurozone economy out of deflation, such an initiative would have massive political benefits, as it would reduce resentment toward European institutions, especially in struggling countries like Greece and Portugal, where an extra €500 would have a particularly strong impact on spending.
In this way, the ECB could prove to disgruntled citizens and investors that it is serious about meeting its inflation target, and even help to stem the rise of nationalist parties.
To be sure, some countries – especially Germany – are likely to resist this approach by marshaling arguments about prudence and responsibility.
But the fact is that “helicopter money” would work – and nothing in eurozone law prohibits it.
After years of austerity, infighting, and unemployment, it is time to implement a QE program that delivers what Europe needs.
Help the Poor Help Themselves
HELSINKI – One early result of today’s global recession is that many donor governments are trimming their foreign aid programs.
Before taking office, President Barack Obama had promised a doubling of American foreign assistance, from $25 billion to $50 billion, but since then Vice-President Joe Biden has warned that this commitment will probably be achieved more slowly because of the downturn.
Here in Finland, our aid decreased by 62% in the early 1990’s, a period that Finns still call “The Depression.”
Japan’s overseas aid declined by 44% when that country hit hard times.
The current worldwide slump could bring a cut in official development assistance (ODA) of 30%.
It is also easy to predict that donor governments will be looking carefully at the ever-growing expenditure on the United Nations’ 14 peacekeeping operations around the world.
The total bill for all UN operations in the 12 months to mid-2008 reached $6.7 billion, about twice the level 15 years ago.
One can only imagine the grave consequences if operations that are already spread thin are cut.
Recall that the Rwandan genocide was preceded by a similar lack of enthusiasm for financing the UN mission there.
Recent events in Congo and elsewhere suggest that there is no room for complacency.
But by far the biggest transfer of assets from rich countries to the developing world takes place through migrant workers’ remittances.
Few decision-makers seem aware of this.
In 2006, around 150 million migrants sent roughly $300 billion to their families in developing countries.
The number of transactions is huge, estimated at 1.5 billion remittances annually.
Most are for sums of only $100-$300, and they normally go towards immediate household consumption.
The value of all ODA in 2006 was $126 billion, less than half the value of private remittances, even though it includes assistance from OECD and non-OECD countries, as well as from China.
If the recession costs migrants their jobs in richer host countries and forces them to return home to their countries of origin, millions of already poor people will be thrown into greater poverty.
The possible impact can be gauged by looking at where the $300 billion in remittances are distributed.
In 2006, poorer European countries received about $50 billion, Africa got $38 billion, Latin America and the Caribbean $68 billion, the Middle East $24 billion.
Asia is the major beneficiary, receiving $113 billion.
In all, an estimated 10% of the world’s population is estimated to benefit from remittances, with 57 countries each receiving $1 billion or more annually.
Indeed, some countries are dependent on this income flow.
Cape Verde received 34% of its GDP from remittances, Eritrea 38% and Burundi 23%.
In Asia, the figures were 30% for Afghanistan and 38% for Tajikistan, while in Europe Moldova received 31% of its GDP from external sources.
Some of these countries are either in conflict or are fragile states, so a diminishing flow of remittances will aggravate their instability, and perhaps increase the flow of migration to other countries.
Governments in Europe and elsewhere should therefore consider carefully what other forces will be at work if and when migrant workers are sent home.
These governments already spend tax money on direct foreign aid.
So they should weigh tax breaks that might entice employers to keep migrant workers on the payrolls, as this would probably be a much more efficient way to support these poor countries.
Moreover, given that transaction costs often take a big slice of remittances, aid mechanisms could be used to create safe and cheap channels for financial flows, especially where private money cannot easily reach remote rural areas, as is often the case in Africa or Asia.
Anti-terrorism laws are a problem here, because the demand for more effective control mechanisms on international financial transfers places an extra burden on remittance operators.
These new rules have certainly pushed transaction costs higher.
But the fight against terror and its financing means that governments and financial institutions have extensive data on the cross-border flow of money, which should be used to help people send money to their relatives more easily.
Sending money to some countries is now allowed only through formal banking channels, and this has created virtual monopolies while also preventing remittance money from reaching rural areas where banks don’t operate.
In West Africa, a simple money transfer operator now handles 70% of official payments and also imposes exclusivity on banks.
Allowing more informal financial institutions to channel foreign payments would ease the money flow to remote regions.
Cooperatives, credit unions, and new forms of micro-financing could form networks that would ensure greater accessibility.
Restrictive legal rules in some countries exclude migrants from using official banking systems unless they have the necessary legal status.
Other countries, however, have taken steps to make remittance transfers possible via mobile phones.
The sheer size of these remittances, and their importance in keeping many millions of people above the poverty line, suggests that rich-country governments should take a careful look at the existing system.
An improved system could help alleviate the burden imposed on innocent victims of the financial and economic downturn.
Such a review of remittances should look into restrictive practices that could be abolished, and ask whether official assistance should be adapted to the needs of this informal yet crucially important aid network.
The Living Legacy of Helsinki
VIENNA – Forty years ago, the Conference on Security and Cooperation in Europe concluded with the signing of the Helsinki Final Act, a historic triumph of cooperation over conflict that set the stage for the end of the Cold War.
The accord represented a revolutionary approach to comprehensive security, as well as to bilateral and multilateral relations.
Its signatories recognized a direct link between political and military issues and human rights concerns – and that this link is a fundamental component of peace and security.
That is why, when Serbia was entrusted to lead the Organization for Security and Cooperation in Europe (OSCE), which grew from the Helsinki conference, this year, we were looking forward to celebrating the accord’s many achievements on its 40th anniversary.
But, with the resurgence of armed conflict in Europe challenging the Helsinki Final Act’s fundamental principles, this anniversary has taken on new meaning.
The crisis in Ukraine has, in fact, underscored the Final Act’s enduring relevance.
Indeed, the only way to reconsolidate European security is to reach a durable settlement based on its principles; indeed, had those principles been respected, the current crisis in Ukraine would not have occurred in the first place.
It is now apparent that the roots of that crisis are far deeper than anyone initially realized.
Well before the turmoil in Ukraine erupted, the East-West divide, which our predecessors worked hard to close in Helsinki, had begun to reemerge.
A growing sense of mistrust and hostility, together with a diminishing commitment to the OSCE’s brand of comprehensive security, was hindering cooperation in various areas.
Constructive engagement on security issues had been difficult for some time, reflected in a lack of progress on arms control and other key areas of the OSCE agenda.
The emergence of the crisis in and around Ukraine has only made these challenges more profound, and the search for a solution more urgent.
The high-level Panel of Eminent Persons on European Security as a Common Project, established at the Basel Ministerial Council by last year’s Swiss OSCE chairmanship, provided invaluable insights when they presented their Interim Report on European security at the Munich Security Conference Core Group Meeting in Vienna this week.
The report focuses on the lessons of the OSCE’s engagement in Ukraine, and part of the solution is reflected in the Panel’s title; European security is, indeed, a common project.
The OSCE could play a pivotal role, serving, like the Helsinki conference 40 years ago, as a platform to overcome the existing divide, restore trust, and rebuild a cooperative approach to common security concerns.
The most visible aspects of the OSCE response to the crisis in and around Ukraine have been carried out by the Trilateral Contact Group and the Special Monitoring Mission.
Yet the entire OSCE toolbox has been mobilized to mitigate the crisis, as well as to support other critical steps, including constitutional reform, the protection of ethnic minority rights, and political dialogue and reconciliation.
As the only regional platform that brings all of the key stakeholders to the table, the OSCE plays a vital role in keeping the lines of communication open and finding opportunities for joint action.
Given our good relations with all the key stakeholders in the crisis, Serbia can contribute to the process.
Our chief objectives are preventing the crisis from escalating into a larger conflict, ensuring a sustainable political process, and preserving the inclusive and cooperative nature of the OSCE’s work.
There is little doubt that de-escalation on the ground and visible progress in the Trilateral Contact Group – and the four working groups operating under its auspices – would set the stage for renewed discussions on broader European security issues and the future role of the OSCE.
Given the obvious imperative for cooperative solutions to address transnational and global security threats, this could not be more important.
Simply put, without a shared approach to security and a dedicated joint response, overcoming our current challenges will be virtually impossible.
And, in fact, the situation could worsen considerably, with so-called “frozen” conflicts heating up and reverting to armed confrontation.
As growing instability exacerbates social tensions, ethnic conflict, radicalization, and violent extremism become increasingly likely.
The East-West divide that leaders in Helsinki confronted in 1975 was much wider than the one that that exists today.
Yet, with courage and commitment, they managed to produce a pragmatic compromise based on a set of key principles – a compromise that opened the way for far-reaching cooperation and, indeed, the emergence of today’s interconnected and interdependent world.
Today’s leaders must show similar wisdom and vision, supporting the OSCE’s efforts to revitalize the principles of the Helsinki accord.
This will require increased investment of both financial resources and political capital – and a shared commitment to put that investment to good use.
Serbia, a post-conflict society built on a series of compromises, is well placed to coordinate Europe’s much-needed security dialogue during its chairmanship of the OSCE – an organization that helped us through our own transition.
What better advocate is there than one who speaks with conviction gained from personal experience?
The Helsinki principles do not need to be reconsidered; on the contrary, they need to be reaffirmed, strengthened, and safeguarded.
The platform is already in place.
जल की हर बूँद से अधिक फसल
स्टैनफोर्ड – संयुक्त राष्ट्र ने सूखे को “दुनिया की सबसे महँगी प्राकृतिक आपदा” कहा है, आर्थिक दृष्टि से इसकी वार्षिक लागत 6-8 बिलियन डॉलर है, और मानवीय दृष्टि से इसने सन् 1900 से लेकर अब तक दो बिलियन लोगों को प्रभावित किया है, जिसके फलस्वरूप 11 मिलियन से अधिक लोगों की मृत्यु हुई है। ऐसा इसलिए है क्योंकि दुनिया का बहुत बड़ा हिस्सा असुरक्षित है; वर्तमान में प्रभावित क्षेत्रों में ऑस्ट्रेलिया, उप सहारा अफ्रीका, दक्षिण एशिया, उत्तरी और दक्षिणी अमेरिका और मध्य पूर्व शामिल हैं।
यह देखते हुए कि दुनिया भर में औसत रूप से पानी की 70% खपत कृषि में होती है, यह तर्कसंगत लगता है कि इस क्षेत्र को संरक्षण के उपायों का केंद्रबिंदु होना चाहिए। और, वास्तव में, एक सिद्ध प्रौद्योगिकी मौजूद है जो सूखे के प्रभाव को कम करने की दिशा में बहुत कारगर हो सकती है: जेनेटिक इंजीनियरिंग (जीई)।
जेनेटिक इंजीनियरिंग (जीई), जिसे कभी-कभी "आनुवंशिक सुधार" कहा जाता है, पौधा प्रजनकों को मौजूदा फसल के पौधों को कुछ नई चीजें करने के लिए सक्षम बनाते हैं – जैसे कि जल का संरक्षण करना। अनुसंधान और विकास कार्य में कार्यकर्ताओं के प्रतिरोध और सरकार के अत्यधिक विनियमन के फलस्वरूप बाधा उत्पन्न होने के बावजूद, दुनिया के कई हिस्सों में सूखा-प्रतिरोधी जीई फसल की किस्में विकास प्रक्रिया में से उभर कर आ रही हैं।
पिछले दो दशकों में ऐसी फसल किस्मों की खेती लगभग 30 देशों में 17 मिलियन से अधिक किसानों द्वारा 1.5 बिलियन हेक्टेयर से अधिक भूमि पर की गई है – और इससे किसी भी पारिस्थितिकी तंत्र में कोई खलल नहीं पड़ा या किसी तरह का कोई पेट दर्द जैसा भी कुछ नहीं हुआ। लैंडेस बायोसाइंस की एक हालिया रिपोर्ट के अनुसार दुनिया भर में, इन नई किस्मों से “खेत स्तर पर बहुत महत्वपूर्ण शुद्ध आर्थिक लाभ प्राप्त हुए हैं, 2012 में इनकी राशि 18.8 बिलियन डॉलर थी और 1996 से लेकर 2012 तक 116.6 बिलियन डॉलर थी।
इन नई फसल किस्मों में से अधिकांश, शस्यनाशकों को रोकने के लिए तैयार की गई हैं ताकि किसान अधिक पर्यावरण अनुकूल, जुताई-रहित खेती प्रथाओं को अपना सकें, और इनमें से बहुत-सी किस्मों को फसलों को तबाह करनेवाले कीटों और बीमारियों को रोकने के लिए डिज़ाइन किया गया है। दूसरी किस्मों में उच्च पोषण मान होता है, जो किसी विकासशील देश की उन आबादियों के लिए आदर्श रूप से अनुकूल होता है जो स्वस्थ, उत्पादक जीवन जीने के लिए आवश्यक पोषक तत्वों को प्राप्त करने के लिए संघर्षरत होती हैं।
लेकिन, लंबी अवधि में, सबसे बड़ा वरदान, खाद्य सुरक्षा और पर्यावरण दोनों के लिए, संभवतः नई फसल किस्मों की सूखे क�� अवधियों और अन्य जल-संबंधी तनावों को सहन करने की क्षमता होगा। सिंचाई के लिए उपयोग किए जानेवाले पानी की मात्रा में थोड़ी-सी कमी से भी, विशेष रूप से सूखे की स्थितियों में, भारी लाभ हो सकते हैं।
ऐसी किस्मों को विकसित करने के लिए, पादप जीवविज्ञानियों ने पानी के उपयोग को नियंत्रित करने वाले जीन की पहचान की और उन्हें महत्वपूर्ण फसल पौधों में स्थानांतरित कर दिया, जिससे वे कम या कम गुणवत्ता वाले पानी के साथ विकसित हो सकें, उदाहरण के लिए ऐसा पानी जिसका पुनर्चक्रण किया गया हो या जिसमें प्राकृतिक खनिज लवण अधिक मात्रा में हों। मिस्र के शोधकर्ताओं ने यह दर्शाया है कि केवल एक जीन को जौ से गेहूं में स्थानांतरित करने पर, पौधे कम पानी मिलने की स्थिति को लंबे समय तक सहन कर सकते हैं। इस नई, सूखा-प्रतिरोधी किस्म के लिए परंपरागत गेहूं की तुलना में केवल उसके आठवें हिस्से जितनी सिंचाई की ही आवश्यकता होती है; कुछ रेगिस्तानों में इसकी खेती अकेले वर्षा के साथ की जा सकती है।
जेनेटिक इंजीनियरिंग (जीई) फसल की अन्य किस्मों, उदाहरण के लिए जो रोग-प्रतिरोधी और कीट-प्रतिरोधी होती हैं, से परोक्ष रूप से पानी के उपयोग की कुशलता में सुधार होता है। क्योंकि रोगों और कीटों के कारण होनेवाला नुकसान ज्यादातर पौधों के पूरी तरह से बड़े हो जाने के बाद – अर्थात उनके विकास के लिए आवश्यक पानी की अधिकतर आपूर्ति कर दिए जाने के बाद होता है – इसलिए उनके प्रतिरोध का अर्थ प्रति इकाई निवेश किए गए पानी की दृष्टि से अधिक कृषि उत्पादन है। संक्षेप में, किसान हर बूंद से अधिक फसल प्राप्त कर सकते हैं।
आण्विक जेनेटिक इंजीनियरिंग प्रौद्योगिकी से अन्य तरीकों से भी जल संरक्षण किया जा सकता है। दुनिया भर में सिंचित भूमि का एक-तिहाई भाग नमक की उपस्थिति के कारण फसलों को उगाने के लिए उपयुक्त नहीं होता है – यह बारंबार उर्वरकों का उपयोग करने का परिणाम है। प्रतिवर्ष खेती के लिए अयोग्य हो जानेवाली 2,00,000 हेक्टेयर से अधिक सिंचित भूमि को फिर से हासिल करने के लिए, वैज्ञानिकों ने टमाटर और कनोला जैसी विविध प्रकार की फसलों में नमक की सहिष्णुता में वृद्धि की है। आनुवांशिक रूप से रूपांतरित पौधे खारी मिट्टी में विकसित हो सकते हैं और उनकी खारे पानी से सिंचाई की जा सकती है, जिससे ताज़े जल का अन्य उपयोगों के लिए संरक्षण किया जा सकता है।
इसके लाभों को देखते हुए, यह उम्मीद की जा सकती है कि ऐसी घटनाओं की सर्वत्र सराहना की जाएगी और उन्हें प्रोत्साहित किया जाएगा। लेकिन इन्हें भारी विनियामक बाधाओं का सामना करना पड़ता है। उदाहरण के लिए, यूरोप काफी हद तक जेनेटिक इंजीनियरिंग (जीई) की फसलों पर प्रतिबंध लगाता है; भारत ने कीट-प्रतिरोधी कपास को तो मंजूरी दी है, लेकिन उसने किसी प्रकार की खाद्य फसलों के लिए मंजूरी नहीं दी है। जहाँ जीई फसलों की खेती की भी जा रही है, वहाँ अवैज्ञानिक और जरूरत से ज्यादा भारी विनियमन के फलस्वरूप फसलों की नई किस्मों के उत्पादन की लागत में भारी वृद्धि हुई है, जिससे कई संभावित महत्वपूर्ण फसलें बाजार से बाहर हैं।
ये उपाय अविवेकपूर्ण हैं क्योंकि वे जोखिम से विपरीत रूप से संबंधित हैं। वे काफी हद तक पौधों और सूक्ष्मजीवों की उन नई किस्मों का अनियमित उपयोग करने की अनुमति देते हैं जो कम सही और कम विश्वसनीय तकनीकों से तैयार की गई होती हैं, जिसमें उनका बहाना यह होता है कि वे किसी रूप में अधिक "प्राकृतिक" हैं जबकि वे अत्यधिक उन्नत ज्ञान और तरीकों पर आधारित किस्मों को कठोरतापूर्वक विनियमित – या वर्जित भी – कर देते हैं।
जैसे-जैसे जल की कमी बढ़ेगी, सूखे से प्रभावित फसलें सूखने लग जाएँगी, और खाद्य पदार्थों की कीमतों में वृद्धि होगी, जिसके फलस्वरूप लोचदार कृषि की आवश्यकता और अधिक स्पष्ट – तथा और अधिक आवश्यक हो जाएगी। अधिक तर्कसंगत सार्वजनिक नीति के साथ, हम उस जरूरत को अब पूरा कर सकते हैं। सवाल यह है कि इससे पहले कि हमारे नीति निर्माता इसका औचित्य देख पाएँ, रोकी जा सकनेवाली विपदा और मृत्यु कितने और समय तक होती रहनी चाहिए?
Governing a World Out of Order
WASHINGTON, DC – Can we develop an international order that will keep the peace and allow countries to play by agreed rules?
That is the question that Henry Kissinger poses in his new book World Order.
Unfortunately, it is the wrong question.
Kissinger defines “world order” as a concept of just international arrangements that is “thought to be applicable to the entire world.” Before the advent of the European Union, for example, Europe conceived of world order as a balance of great powers, in which multiple religions and forms of government could coexist.
As a civilization and a religion, Islam envisions the optimal world order very differently – as a caliphate, in which faith and government are united and peace prevails throughout the Dar al-Islam, or house of Islam.
That is certainly not the belief of all Muslims or of the governments of Muslim-majority states, but the radicalism espoused by groups like the Islamic State seeks to spread not just codes of conduct but an entire worldview.
In Kissinger’s view, contending conceptions of world order are emerging not only in the Middle East, but also in Asia.
China is currently playing by the international rules but is increasingly signaling that it expects to be treated as first among equals in the region (as the US has long insisted with respect to its position in the Americas).
But, as China grows stronger and reclaims what it believes to be its historic position in Asia and the world, how long will it wait to insist on reshaping the international rules?
Russia is openly breaking those rules and no longer bothering to justify itself under international law.
Instead, it boasts of reclaiming territories once ruled by the Kremlin and threatens to use force to “protect” ethnic Russians from purported threats.
When Russia annexed Crimea last March, Kadri Liik of the European Council on Foreign Relations pointed out the marked difference in the way it handled its invasion of Georgia in 2008. The Russian government essentially provoked Georgia into attacking first and then crafted an elaborate justification aimed at rendering its actions compatible with international law.
But this time, Kadri wrote, “Moscow has challenged the whole post-Cold War European order, together with its system of rules.”
Kissinger’s hope is that these countries and rising powers like India and presumably Brazil (he leaves Latin America out of his account of world orders) will be able to forge agreement on a set of rules that all will regard as legitimate, thereby maintaining a stable global balance of power. The Westphalian principle of multiplicity will be critical, he believes, as it will be necessary to allow different countries and civilizations to operate on very different domestic principles.
An effective world order for the twenty-first century, however, must do much more than keep the peace.
Kissinger focuses on inter-state relations – on how, from one country’s perspective, to avoid war with other countries while deterring them from aggression or other actions likely to upset a regional or global balance of power.
Yet a glance at today’s headlines suggests that what is most likely to kill and displace millions, if not hundreds of millions, of people in the coming decades are global threats such as pandemics, climate change, and terrorist and criminal networks – not inter-state war.
Yes, Russia’s invasion of Ukraine has led to more than 3,000 deaths.
But current projections of the spread of the Ebola virus predict a million cases by January.
According to the World Health Organization, the HIV/AIDS epidemic has killed 36 million people, roughly ten million higher than the estimated number of military deaths in World War II, with an additional 35 million people infected.
Many of these global threats are closely intertwined with war, but war that is far more likely to be fought within borders than across them.
Consider that roughly two-thirds of Syria’s population has been displaced by the country’s civil war, with millions living miserably in refugee camps.
The disastrous state of health care in Liberia and Sierra Leone, where Ebola is raging, reflects decades of horrific civil war in both countries.
The ongoing violence in Africa’s Great Lakes region, which has claimed millions of civilian lives, is rooted in the 1994 Rwanda genocide and the resulting flood of Hutu refugees into neighboring states.
The droughts and floods caused by climate change will put millions of people on the move, first into crowded and combustible cities, and then across borders. Russia and Canada may be happy to receive them as vast new tracts of land open up, but many other parts of the world are already crowded, which spells conflict.
Maintaining peace is mostly a matter of restraint or constraint.
Effective global cooperation requires much more.
Governments must be able to come together, alongside vital actors from both business and civil society, to adopt comprehensive plans of action.
Those plans, in turn, require funding, manpower, collective will, and enforcement capability.
Yet today, faced with a virus that kills half of those it infects and the prospect that it could decimate an entire region of Africa, disrupt air travel, and put people around the world in quarantine, the world has delivered only a fraction of the needed financial and material assistance.
We live in a world of global problems and largely national solutions.
The need for institutions that can respond swiftly and effectively, as domestic government does in well-governed states, is greater than ever.
The post-WWII institutions have become insufficient.
It is time to reform them – and to devise new structures and tools designed to address global problems.
Henry Paulson is Wrong
CHICAGO – When a profitable company is hit by a very large liability, the solution is not to have the government buy its assets at inflated prices. The solution, instead, is protection under bankruptcy law, which in the United States means Chapter 11.
Under Chapter 11, companies with a solid underlying business generally swap debt for equity. Old equity holders are wiped out and old debt claims are transformed into equity claims in the new entity which continues operating with a new capital structure.
Alternatively, the debt-holders can agree to reduce the face value of debt, in exchange for some warrants.
So why not use this well-established approach to solve the financial sector’s current problems?
The obvious answer is that we do not have time; Chapter 11 procedures are generally long and complex, and the current crisis has reached a point where time is of the essence.
But we are in extraordinary times, and the government has taken and is prepared to take unprecedented measures.
As if rescuing the big insurer AIG and prohibiting all short selling of financial stocks was not enough, now US Treasury Secretary Henry Paulson proposes buying up (with taxpayers’ money) the distressed assets of the financial sector.
But at what price?
If banks and financial institutions find it difficult to recapitalize (i.e., issue new equity), it is because investors are uncertain about the value of the assets in their portfolios and do not want to overpay.
Will government do better at valuing those assets?
In a negotiation between government officials and a banker with a bonus at risk, who will have more clout in determining the price?
Paulson’s plan would create a charitable institution that provides welfare to the rich – at taxpayers’ expense.
If the government subsidy is large enough, it will succeed in stopping the crisis.
But, again, at what price?
Aside from costing billions of taxpayer dollars, Paulson’s plan violates the fundamental capitalist principle that whoever reaps the gains also bears the losses.
Remember that in America’s Savings and Loan crisis of the late 1980’s, the government had to bail out those institutions, because their deposits were federally insured.
But in this case, the government does not have to bail out the debt-holders of Bear Sterns, AIG, or any of the other financial institutions that will benefit from Paulson’s plan.
Since we do not have time for Chapter 11 proceedings and we do not want to bail out all the creditors, the lesser evil is to do what judges do in contentious and overextended bankruptcy processes: impose a restructuring plan on creditors, with part of the debt forgiven in exchange for equity or warrants.
There is precedent for such a bold move.
During the Great Depression, many debt contracts were indexed to gold.
So when the dollar’s convertibility into gold was suspended, the value of that debt soared, threatening many institutions’ survival.
President Roosevelt’s administration declared the clause invalid, forcing debt forgiveness.
My colleague and current Fed Governor Randall Koszner studied this episode and showed that not only stock prices, but also bond prices, soared after the Supreme Court upheld the decision.
How is that possible?
As corporate finance experts have been saying for 30 years, having too much debt and too little equity is costly, so reducing the face value of debt can sometimes benefit not only equity-holders, but also debt-holders.
But, while debt forgiveness benefits holders of both equity and debt, debt-holders don’t voluntarily agree to it for two reasons.
First, even if each individual debt-holder benefits, he or she will benefit even more if everybody else cuts the face value of their debt and he or she does not.
Hence, everybody waits for others to move first, creating obvious delay.
Second, from a debt-holder’s point of view, a government bailout is better.
Even talk of a government bailout reduces the debt-holders’ incentive to act, making the bailout more necessary.
As during the Great Depression and in many debt restructurings, it makes sense in the current contingency to mandate partial debt forgiveness or a debt-for-equity swap in the financial sector.
It is a well-tested strategy, and it leaves taxpayers out of the picture.
Forcing a debt-for-equity swap or debt forgiveness would be no greater a violation of private property rights than a massive bailout.
But, for the major players in the financial sector, it is much more appealing to be bailed out by the taxpayers.
Indeed, for the financial industry, the appeal of Paulson’s proposal is precisely that it taxes the many and benefits the few.
Since the many (taxpayers) are dispersed, we cannot put up a good fight in the US Congress, whereas the financial industry is well represented politically.
For six of the last 13 years, the Treasury Secretary was a Goldman Sachs alumnus.
The decisions that Congress must make now will affect not only the US economy’s short-term prospects, but will shape the type of capitalism that we will have for the next 50 years.
Do we want to live in a system where profits are private, but losses are socialized, where taxpayer money is used to prop up failed firms?
Or do we want to live in a system where people are held accountable for their decisions, where imprudent behavior is penalized and prudent behavior rewarded?
For anyone who believes in free markets, the most serious risk of the current situation is that the interest of a few financiers will undermine the capitalist system’s fundamental workings.
The time has come to save capitalism from the capitalists.
Herbert Hoover and the Stability Pact
In mid-July the great-and-good finance ministers of the European Monetary Union (EMU) gathered to consider the euro zone's economic condition.
They ruminated over the most recent economic forecast, which projects annual GDP growth in the euro zone this year at a pathetically anemic 0.7%.
Then, to a minister, without exception, they all but decided that their economies should suffer more of the same, if not worse.
They reiterated their commitment to the Stability and Growth Pact, which requires euro-zone countries to raise taxes and cut spending, putting even more downward pressure on their economies.
The Pact is already knocking Germany into recession, and Italy's government is struggling to revise its growth forecasts fast enough to keep up with falling output.
But none of this is apparently enough to force officials to re-examine their priorities.
Some EU finance ministers still view the Stability Pact as the ``cornerstone'' of EMU.
Others talk of the importance of obeying the ``rules of the game.''
Still others say that while it is clearly essential to restore economic growth, the recovery must occur ``within the spirit of the Pact.''
From the American side of the Atlantic, all of these rationales seem utterly bizarre.
The last time an American government tried to ensure a balanced budget in the face of a recession was over seventy years ago, during the presidency of Herbert Hoover at the outset of the Great Depression.
Since then the broad consensus in the US has been that cyclical economic distress requires the use of budget deficits to ameliorate suffering, stimulate aggregate demand, and hasten recovery.
Economists call these cyclical fiscal boosts ``automatic stabilizers.''
When private incomes fall, so do public revenues.
The reduction in tax collection can increase disposable income.
But, more importantly, when private incomes fall, government social-welfare expenditures rise, sparking a recovery in demand, output, investment, and employment.
The fall in taxes and the rise in spending do widen the budget deficit, but in a healthy and useful way.
On the American side of the Atlantic, the usefulness of these automatic fiscal stabilizers is unchallenged.
On the contrary, whenever recession threatens, political debate revolves around whether they need to be reinforced by additional stimulus via discretionary fiscal policy.
No one considers how to put further downward pressure on the economy by raising tax rates and cutting back on spending programs.
Neither Democrats nor Republicans have an interest in choking off economic activity.
This is not a partisan issue.
Nor is it even a fiscal discipline issue.
Whenever proposals have surfaced for some sort of balanced-budget amendment to the US Constitution, proponents have typically included exemptions not just for war, but also for recessions.
We know the origins of the Stability and Growth Pact.
Northern European countries--particularly Germany and the Netherlands--prided themselves on traditionally maintaining moderate debt-to-GDP ratios and relatively low interest rates.
These countries saw that Southern European countries--Italy and Greece were the biggest worries--traditionally had high debt-to-GDP ratios and relatively high nominal interest rates because of their perceived tolerance of inflation.
The Northern European countries feared that deficit spending by the South might ultimately create pressure for partial monetization of their debt through inflation of the euro--or, more precisely, their leaders feared that investors, fearing the same thing, would demand higher interest rates.
The Stability and Growth Pact was intended to keep the public debts of southern Europe low, and thus keep interest rates low by reassuring investors that national debts would never be allowed to rise high enough to generate serious inflationary pressures.
But if you look at the euro zone's economic problems today, the danger of high long-term nominal interest rates does not even rank among investors' top ten concerns.
At the very least, investors clearly do not fear that high debt will lead governments to stoke inflation by printing more money.
The EU's problems are stagnant output, high structural unemployment, weak productivity growth, the wasteful and unfair Common Agricultural Policy (CAP), and the forthcoming structural adjustments from the expansion of the EU itself.
From one perspective, it is good that the euro zone's finance ministers are eager to keep their national debts low in the long term: it is a sign that the victories over inflation won in the 1970's will not be casually thrown away.
But it is dangerous to become obsessed with the past.
There is no more certain route to economic disaster than to put on historical blinders.
As Herbert Hoover could attest, when we see only the economic policy problems of a generation ago, we risk missing the hazards that lie directly in front of our eyes.
Perubahan Zat-zat Aman menjadi Berbahaya
PALO ALTO – Semenjak perkembangan toksikologi di abad ke-16, prinsip yang mempedomani adalah “the dose makes the poison” (hanya dosis/konsentrasi yang dapat menentukan benda/bahan tersebut bersifat racun atau tidak bagi tubuh mahluk hidup).
Pernyataan ini merupakan aturan yang berlaku bagi obat-obatan yang digunakan pasien di seluruh dunia bahkan jutaan kali dalam sehari.
Dosis aspirin yang tepat bisa menjadi pengobatan yang berharga tapi konsumsi yang terlalu banyak dapat mematikan.
Prinsip ini pun berlaku pada makanan: pala atau akar manis (licorice) dalam jumlah besar sangat beracun.
Risiko yang ditimbulkan dari suatu bahan/zat tergantung pada dua faktor: kapasitas inherennya dalam menciptakan bahaya dan tingkat paparan terhadap seseorang.
Idenya sederhana namun beberapa profesional yang spekulatif nampaknya tidak mampu memahaminya – sebagaimana dibuktikan dengan keputusan International Agency for Research on Cancer (IARC) atau Badan Internasional untuk Penelitian Kanker, unit di dalam Badan Kesehatan Dunia (WHO) yang mengelompokkan herbisida 2,4D yang lazimnya dipakai sebagai “memiliki potensi karsinogenik pada manusia”.
Bicara mengenai herbisida, IARC terkesan mengalami kekalahan beruntun.
Baru-baru ini lembaga tersebut mengelompokkan glifosat, jenis herbisida lain yang populer, dalam kategori “memiliki potensi karsinogenik”, suatu kesimpulan yang bertentangan dengan badan regulator lain di dunia.
Sejalan dengan itu, belum ada lembaga pemerintahan yang menilai herbisida 2,4D bersifat karsinogenik.
Di awal tahun ini, Environmental Protection Agency di Amerika Serikat (EPA) menyimpulkan bahwa “berdasarkan pertimbangan bobot bukti atas data yang tersedia, herbisida 2,4D dikelompokkan sebagai ‘Kemungkinan Kecil bersifat Karsinogenik pada Manusia’”.
European Food Safety Authority juga baru-baru ini menyimpulkan bahwa “jenis 2,4D yang sekarang diproduksi berkemungkinan rendah menghasilkan potensi genotoksik atau risiko karsinogenik pada manusia”.
Keputusan yang dibuat IARC untuk mengelompokkan bahan-bahan seperti 2,4D dan glifosat sebagai bahan yang berpotensi membahayakan dapat menimbulkan kekhawatiran bagi petani dan pengguna, yang akan mempertanyakan kelayakan untuk meneruskan penggunaan bahan-bahan tersebut pada pertanian komersial atau perkebunan.
Hal ini akan memalukan sebab jenis herbisida ini sangat efektif dan paling banyak digunakan dan saat IARC membuat keputusan itu tidak dilakukan dengan mempertimbangkan apakah bahan-bahan yang dipertanyakan ini betul-betul mungkin menimbulkan kanker.
Panel di IARC tidak mengkaji apakah kimia tersebut akan menyebabkankanker – tapi hanya apakah mampu menyebabkan kanker.
Sebagai akibatnya, AIRC sebelumnya pernah mengelompokkan lidah buaya, senyawa akrilimida (bahan yang dihasilkan dari mengoreng makanan, seperti kentang goreng dan keripik kentang), telepon genggam, kerja shift malam, sayuran yang diasamkan dari Asia, dan kopi sebagai bahan-bahan yang “mungkin” atau “berpotensi” karsinogenik.
Hal ini dikarenakan lembaga tersebut mengabaikan dosis, gagal mempertimbangkan kemungkinan adanya kontak dengan bahan dalam jumlah yang cukup besar hingga dapat menimbulkan bahaya.
Contohnya kopi, seseorang harus lah mengkonsumsi lebih dari 50 cangkir kopi sehari, dalam periode yang cukup lama, sebelum adanya kemungkinan terjadinya efek-efek yang merusak.
Klasifikasi yang dilakukan terhadap 2,4D sebagai bahan berisiko kanker pada manusia telah mengabaikan penelitian dan analisa mendalam yang dilakukan lembaga-lembaga kesehatan di seluruh dunia, termasuk Pertemuan Gabungan WHO/FAO tentang Residu Pestisida (Joint Meeting on Pesticide Residue atau JMPR).
Badan ini mengevaluasi risiko bahan-bahan seperti 2,4D dan mengamati variabel-variabel nyata seperti jumlah zat di dalam tanah dan sumber air terdekat, paparan kepada hewan yang melewati ladang yang telah diberi zat tersebut, dan potensi adanya kontak langsung pada manusia.
Dalam kajian yang dimulai di tahun 1970, JMPR selalu menyimpulkan apabila 2,4D digunakan dengan tepat, maka tidak akan menimbulkan ancaman kesehatan terhadap orang ataupun benda di tanah atau perairan.
Temuan ini dikuatkan oleh beberapa badan pemerintahan, temasuk European Food Safety Authority, EPA, Departemen Pertanian Amerika Serikat, dan Departemen Kesehatan Kanada.
Ketika IARC – lembaga ini membatasi panelnya untuk mempertimbangkan hanya sebagian kecil dari publikasi-publikasi tertentu saja – membuat keputusan yang salah maka konsekuensinya berbahaya.
Keputusan lembaga ini dapat memberi kepercayaan bagi aktivis-akvitis yang memiliki chemophobia yang mencari publisitas dan menambah kemungkinan adanya bahan-bahan yang dicap berbahaya akan digantikan oleh produk-produk lain yang bisa jadi menciptakan risiko lebih besar atau manfaat lebih rendah.
Jika produk-produk seperti glisofat dan 2,4D tidak tersedia, maka petani akan terpaksa beralih ke metode lain guna mengendalikan gulma – walau diantaranya tidak ada yang seefisien itu.
Memang benar, beberapa alternatif yang ada bisa jadi lebih beracun atau membutuhkan lebih banyak tanah yang dikerjakan, berakibat pada erosi tanah yang merusak, menaikkan tingkat emisi karbon dioksida, berkurangnya jumlah hasil panen, tingginya biaya produksi, dan harga yang lebih tinggi bagi konsumen.
Masalahnya pun tidak terbatas pada petani saja.
Terdapat lebih dari 100 penggunaan 2,4D yang disarankan termasuk pengendalian gulma di halaman rumput yang bersifat mengganggu, pemakaian dalam kehutanan, dan peningkatan keselamatan di jalan raya, menara sutet, dan jalur kereta api.
Proses yang diterapkan IARC dalam mencapai kesimpulan tidak hanya salah secara ilmiah, tapi juga berbahaya.
Keputusan yang dibuat, yang mungkin berdampak luas, dapat menciptakan risiko terbesar bagi kehidupan manusia dan hewan – seberapa pun dosisnya.
Hezbollah in a Corner
BEIRUT – The future of Hezbollah, Lebanon’s powerful Shia political and paramilitary organization, has never looked more uncertain.
Indeed, given rising tension with Israel and possible indictments of its operatives by the international tribunal investigating the assassination of former Prime Minister Rafic al-Hariri, Hezbollah appears to be hemmed in on all sides.
The most immediate question concerns the possibility of another Israel-Hezbollah war, fears of which have mounted throughout this year, fueled by reports of new missile transfers to Hezbollah and intermittent threats from Israel.
Those who foresee war argue that Israel is unwilling to tolerate a heavily armed Iranian proxy on its border while tensions with Iran over the nuclear issue remain unresolved.
Although war is unlikely in the coming months, if sanctions on Iran don’t bear fruit by early 2011, Israel might feel the need to act.
If it launched military strikes on Iran’s nuclear installations, Hezbollah would likely join the fray and Israel would have to engage Hezbollah at the same time.
Alternatively, Israel might launch a pre-emptive war against Hezbollah in order to rob Iran of a nearby retaliatory capacity.
Hezbollah is preparing intensively for such scenarios, building defenses, digging tunnels, and assembling a powerful missile arsenal.
But, although Hezbollah’s preparations are likely to ensure its survival, it would be hard-pressed to justify to the Lebanese public a strategy that led to two ruinous wars in the span of five years.
In the end game of such a war, Syria might be asked by the Arab countries and the international community to take greater responsibility in Lebanon, in order to contain Hezbollah and its military profile.
Moreover, if peace prevents a slide into war, Hezbollah has another problem.
Although a real breakthrough in the Arab-Israeli peace process appears unlikely, United States envoy George Mitchell is still talking of Arab-Israeli peace as a distinct possibility in 2011.
Sources within the US administration hint that President Barack Obama might announce the outlines of an Arab-Israeli settlement sometime later this year.
An accord between Syria and Israel is a key element of all proposed scenarios for Arab-Israeli peace.
In exchange for giving back the occupied Golan Heights, Israel and the US will insist on the disarmament of Hezbollah.
Indeed, within the context of the Arab Peace Plan, announced in Beirut in 2002, the Arab states take it upon themselves to ensure the security of “all states in the region” – code words for dealing with the threats from Hezbollah and Hamas – since the region includes Israel.
Although both Hezbollah and Iran still argue, perhaps correctly, that Israel will not give back the Golan Heights or allow the emergence of a Palestinian state, the possibility of peace cannot be ruled out.
If it does occur, Syria will push Lebanon into a peace treaty with Israel and lean on Hezbollah heavily to adjust to the new realities.
Given its popularity among Lebanese Shia, Hezbollah could continue as an influential political party, but it would have to abandon its role as a major proxy force for Iran’s Revolutionary Guards.
Nevertheless, Hezbollah faces severe political trouble, too.
Although no official announcement has been made, there are reports that Daniel Bellemare, the prosecutor for the Special Tribunal for Lebanon, might conclude his investigation and issue indictments in the fall.
In a speech on July 16, Hezbollah leader Sheikh Hassan Nasrallah acknowledged rumors that the Tribunal might indict members of his party, but charged that the Tribunal was part of an Israeli plot to undermine the Islamic resistance in Lebanon and has no credibility.
He argued that the indictments would probably be based on cell-phone records, and that Israeli agents had penetrated the Lebanese cell-phone network.
Indeed, the Lebanese authorities recently arrested a high-level official at one of the country’s two cell-phone companies, alleging that he was an Israeli agent.
In describing the tribunal as part of an Israeli plot, Nasrallah warned the government and other parties in Lebanon against cooperating with it, or accepting its verdicts.
He reminded his audience of the street fighting in Beirut in May 2008, and made clear that Hezbollah would not shy away from another fight if necessary.
While Hezbollah has tried to convince other Lebanese that its presence helps maintain the country’s security and stability, regional and international developments suggest that it faces mounting challenges.
And, although the future does not look bright for Hezbollah, it is not likely to relinquish its power without a fight.
Beban Utang Tersembunyi pada Negara-negara Emerging Market
LIMA – Ketika gubernur bank sentral dan menteri keuangan dari seluruh dunia berkumpul untuk menghadiri pertemuan tahunan Dana Moneter Internasional (IMF) di Peru, negara-negara ekonomi rendah (emerging world) dipenuhi dengan gejala-gejala meningkatnya kerentanan ekonomi.
Hilang sudah hari-hari ketika pertemuan-pertemuan IMF dimonopoli oleh permasalahan negara-negara maju berjuang untuk pulih dari krisis keuangan tahun 2008.
Sekarang, diskusi telah bergeser kembali ke arah negara-negara berkembang, yang menghadapi risiko krisis keuangan mereka sendiri.
Meskipun tidak ada dua krisis keuangan yang identik, semua krisis cenderung memiliki beberapa pertanda yang sama: pertumbuhan ekonomi dan ekspor yang berkurang secara signifikan, meredamnya booming harga aset, membengkaknya defisit neraca berjalan dan fiskal, kenaikan pembiayaan dengan utang (leverage), dan penurunan atau pembalikan aliran modal.
Meskipun tingkatannya berbeda, negara-negara ekonomi rendah memperlihatkan semua pertanda tersebut.
Titik balik terjadi pada tahun 2013, ketika ekspektasi kenaikan suku bunga di Amerika Serikat dan penurunan harga-harga komoditas global mengakhiri bonanza aliran modal tahunan yang selama ini menyokong pertumbuhan di negara-negara ekonomi rendah.
Kemunduran yang dialami Tiongkok akhir-akhir ini, yang memicu turbulensi di pasar modal global dan semakin melemahkan harga-harga komoditas, telah memperburuk kemunduran (downturn) di negara-negara tersebut.
Tantangan-tantangan ini, meskipun sulit untuk diatasi, setidaknya dapat dilihat.
Tapi negara-negara ekonomi rendah juga dapat mengalami gejala umum lainnya dari krisis yang segera terjadi, satu gejala yang jauh lebih sulit dideteksi dan diukur: utang-utang tersembunyi.
Terkadang karena adanya korupsi, utang-utang tersembunyi ini biasanya tidak tercatat di dalam neraca/laporan posisi keuangan atau basis data standar.
Bentuknya berubah dari satu krisis ke krisis lainnya, sebagaimana pelaku yang terlibat dalam penetapannya.
Akibatnya, utang-utang ini sering tidak terdeteksi sampai akhirnya sudah terlambat.
Bahkan, setelah letusan krisis peso selama tahun 1994-1995 terjadi baru akhirnya dunia mengetahui bahwa bank-bank swasta di Meksiko mengawali risiko nilai tukar yang signifikan akibat pinjaman off-balance-sheet (derivatif).
Demikian juga, sebelum krisis keuangan di Asia tahun 1997, IMF dan pasar-pasar keuangan tidak sadar bahwa cadangan devisa bank sentral Thailand hampir habis (jumlah total $33 miliar yang dilaporkan tidak memperhitungkan kontrak serah (forward contract) yang menyisakan cadangan devisa bersih hanya sebesar $1 miliar).
Dan sampai krisis Yunani terjadi di tahun 2010, defisit fiskal dan beban utang Yunani dianggap jauh lebih kecil, berkat penggunaan instrumen keuangan derivatif dan akuntasi kreatif yang diterapkan pemerintahnya.
Jadi pertanyaan terbesarnya adalah di mana tempat persembunyian utang-utang negara-negara ekonomi rendah.
Sayangnya terdapat kendala yang berat untuk mengungkapnya – dimulai dengan tidak transparannya transaksi keuangan Tiongkok dengan negara berkembang lainnya selama satu dekade terakhir.
Selama booming infrastruktur domestiknya, Tiongkok mendanai proyek-proyek besar – umumnya berhubungan dengan pertambangan, energi, dan infrastruktur – di negara berkembang lainnya.
Mengingat bahwa pinjaman tersebut utamanya dalam mata uang dolar AS, maka tunduk pada risiko nilai tukar yang menambah kerentanan pada neraca keuangan negara-negara ekonomi rendah.
Namun jumlah pinjaman ini umumnya tidak diketahui, sebab sebagian besar pinjaman dikeluarkan oleh bank-bank pembangunan di Tiongkok yang tidak termasuk dalam data yang dikumpulkan Bank for International Settlements (sebagai sumber informasi global yang utama).
Karena pinjaman jarang dikeluarkan dalam bentuk surat berharga di pasar modal internasional, maka juga tidak tercatat di basis data misalnya milik Bank Dunia.
Walaupun data tersedia, angka-angka tersebut harus ditafsirkan dengan hati-hati.
Sebagai contoh, data yang dikumpulkan berdasarkan proyek oleh Global Economic Governance Initiative and the Inter-American Dialog dapat memberikan gambaran atas pinjaman Tiongkok kepada Venezuala yang mencapai 18% dari PDB tahunan, dan Ekuador menerima pinjaman dari Tiongkok yang melebihi 10% PDB-nya.
Pinjaman Tiongkok kepada Brasil hampir sebesar 1% PDB-nya, sementara pinjaman yang diterima Meksiko relatif kecil (lihat grafik).
Tapi pencairan dana sebenarnya mungkin gagal memenuhi rencana awal, yang berarti utang negara-negara ini kepada Tiongkok lebih rendah dari jumlah yang diperkirakan.
Sebaliknya – dan kemungkinan besar – data tidak mencakup beberapa proyek, pemberi pinjaman, atau peminjam, yang berarti jumlah utang mungkin lebih besar.
Selain itu, bentuk peminjaman lainnya – seperti pembiayaan transaksi perdagangan, yang cenderung lebih cepat jatuh temponya – tidak termasuk dalam jumlah tersebut.
Perjanjian currency-swap, yang penting bagi Brasil dan Argentina, juga perlu diperhitungkan.
(Hal ini menyoroti pentingnya pelacakan cadangan devisa netto, bukan bruto).
Singkatnya, meskipun utang negara-negara emerging market umumnya terkesan berjumlah sedang berdasarkan nilai historis, sangat mungkin bahwa jumlah utang sebetulnya kurang diperhitungkan, dengan margin besar.
Jika demikian, besarnya pembalikan aliran modal yang tengah dialami oleh negara-negara emerging market mungkin lebih besar dibandingkan yang diyakini secara umum – berpotensi cukup besar memicu krisis.
Dalam konteks ini, melacak financial linkage yang samar dan berubah bentuk menjadi jauh lebih penting dibandingkan sebelumnya.
High Anxiety
CHICAGO – The United States has reached a point where almost half its population is described as being in some way mentally ill, and nearly a quarter of its citizens – 67.5 million – have taken antidepressants.
These eye-popping statistics have sparked a widespread, sometimes rancorous debate about whether people are taking far more medication than is needed for problems that may not even be mental disorders.
Studies indicate that 40% of all patients fall short of the diagnoses that doctors and psychiatrists give them, yet 200 million prescriptions are still written annually in the US to treat depression and anxiety.
Those who defend such widespread use of prescription drugs insist that a significant part of the population is under-treated and, by inference, under-medicated.
Those opposed to such rampant use of drugs note that diagnostic rates for bipolar disorder, in particular, have skyrocketed by 4,000% and that overmedication is impossible without over-diagnosis.
To help settle this long-standing dispute, I studied why the number of recognized psychiatric disorders has ballooned so dramatically in recent decades. In 1980, the Diagnostic and Statistical Manual of Mental Disorders added 112 new mental disorders to its third edition ( DSM-III ).
Fifty-eight more disorders appeared in the revised third (1987) and fourth (1994) editions.
With over a million copies in print, the manual is known as the bible of American psychiatry; certainly it is an invoked chapter and verse in schools, prisons, courts, and by mental-health professionals around the world.
The addition of even one new diagnostic code has serious practical consequences.
What, then, was the rationale for adding so many in 1980?
After several requests to the American Psychiatric Association, I was granted complete access to the hundreds of unpublished memos, letters, and even votes from the period between 1973 and 1979, when the DSM-III task force debated each new and existing disorder.
Some of the work was meticulous and commendable.
But the overall approval process was more capricious than scientific.
DSM-III grew out of meetings that many participants described as chaotic.
One observer later remarked that the small amount of research drawn upon was “really a hodgepodge –scattered, inconsistent, and ambiguous.”
The interest and expertise of the task force was limited to one branch of psychiatry: neuropsychiatry.
That group met for four years before it occurred to members that such one-sidedness might result in bias.
Incredibly, the lists of symptoms for some disorders were knocked out in minutes.
The field studies used to justify their inclusion sometimes involved a single patient evaluated by the person advocating the new disease.
Experts pressed for the inclusion of illnesses as questionable as “chronic undifferentiated unhappiness disorder” and “chronic complaint disorder,” whose traits included moaning about taxes, the weather, and even sports results.
At first it struck me as a serious condition. By the 1990’s experts were calling it “the disorder of the decade,” insisting that as many as one in five Americans suffers from it.
Yet the complete story turned out to be rather more complicated.
For starters, the specialist who in the 1960’s originally recognized social anxiety (London-based Isaac Marks, a renowned expert on fear and panic) strongly resisted its inclusion in DSM-III as a separate disease category.
The list of common behaviors associated with the disorder gave him pause: fear of eating alone in restaurants, avoidance of public toilets, and concern about trembling hands.
By the time a revised task force added dislike of public speaking in 1987, the disorder seemed sufficiently elastic to include virtually everyone on the planet.
To counter the impression that it was turning common fears into treatable conditions, DSM-IV added a clause stipulating that social anxiety behaviors had to be “impairing” before a diagnosis was possible.
But who was holding the prescribers to such standards?
Doubtless, their understanding of impairment was looser than that of the task force.
After all, despite the impairment clause, the anxiety disorder mushroomed; by 2000, it was the third most common psychiatric disorder in America, behind only depression and alcoholism.
Over-medication would affect fewer Americans if we could rein in such clear examples of over-diagnosis.
We would have to set the thresholds for psychiatric diagnosis a lot higher, resurrecting the distinction between chronic illness and mild suffering.
But there is fierce resistance to this by those who say they are fighting grave mental disorders, for which medication is the only viable treatment.
Failure to reform psychiatry will be disastrous for public health.
Consider that apathy, excessive shopping, and overuse of the Internet are all serious contenders for inclusion in the next edition of the DSM, due to appear in 2012.
If the history of psychiatry is any guide, a new class of medication will soon be touted to treat them.
Sanity must prevail: if everyone is mentally ill, then no one is.
When Interest Rates Rise
CAMBRIDGE – Long-term interest rates are now unsustainably low, implying bubbles in the prices of bonds and other securities.
When interest rates rise, as they surely will, the bubbles will burst, the prices of those securities will fall, and anyone holding them will be hurt.
To the extent that banks and other highly leveraged financial institutions hold them, the bursting bubbles could cause bankruptcies and financial-market breakdown.
The very low interest rate on long-term United States Treasury bonds is a clear example of the current mispricing of financial assets.
A ten-year Treasury has a nominal interest rate of less than 2%.
Because the inflation rate is also about 2%, this implies a negative real interest rate, which is confirmed by the interest rate of -0.6% on ten-year Treasury Inflation Protected Securities (TIPS), which adjust interest and principal payments for inflation.
Historically, the real interest rate on ten-year Treasuries has been above 2%; thus, today’s rate is about two percentage points below its historical average.
But those historical rates prevailed at times when fiscal deficits and federal government debt were much lower than they are today.
With budget deficits that are projected to be 5% of GDP by the end of the coming decade, and a debt/GDP ratio that has roughly doubled in the past five years and is continuing to grow, the real interest rate on Treasuries should be significantly higher than it was in the past.
The reason for today’s unsustainably low long-term rates is not a mystery.
The Federal Reserve’s policy of “long-term asset purchases,” also known as “quantitative easing,” has intentionally kept long-term rates low.
The Fed is buying Treasury bonds and long-term mortgage-backed securities at a rate of $85 billion a month, equivalent to an annual rate of $1,020 billion.
Since that exceeds the size of the government deficit, it implies that private markets do not need to buy any of the newly issued government debt.
The Fed has indicated that it will eventually end its program of long-term asset purchases and allow rates to rise to more normal levels.
Although it has not indicated just when rates will rise or how high they will go, the Congressional Budget Office (CBO) projects that the rate on ten-year Treasuries will rise above 5% by 2019 and remain above that level for the next five years.
The interest rates projected by the CBO assume that future inflation will be only 2.2%.
If inflation turns out to be higher (a very likely outcome of the Fed’s recent policy), the interest rate on long-term bonds could be correspondingly higher.
Investors are buying long-term bonds at the current low interest rates because the interest rate on short-term investments is now close to zero.
In other words, buyers are getting an additional 2% current yield in exchange for assuming the risk of holding long-term bonds.
That is likely to be a money-losing strategy unless an investor is sagacious or lucky enough to sell the bond before interest rates rise.
If not, the loss in the price of the bond would more than wipe out the extra interest that he earned, even if rates remain unchanged for five years.
Here is how the arithmetic works for an investor who rolls over ten-year bonds for the next five years, thus earning 2% more each year than he would by investing in Treasury bills or bank deposits.
Assume that the interest rate on ten-year bonds remains unchanged for the next five years and then rises from 2% to 5%.
During those five years, the investor earns an additional 2% each year, for a cumulative gain of 10%.
But when the interest rate on a ten-year bond rises to 5%, the bond’s price falls from $100 to $69.
The investor loses $31 on the price of the bond, or three times more than he had gained in higher interest payments.
The low interest rate on long-term Treasury bonds has also boosted demand for other long-term assets that promise higher yields, including equities, farm land, high-yield corporate bonds, gold, and real estate.
When interest rates rise, the prices of those assets will fall as well.
The Fed has pursued its strategy of low long-term interest rates in the hope of stimulating economic activity.
At this point, the extent of the stimulus seems very small, and the risk of financial bubbles is increasingly worrying.
The US is not the only country with very low or negative real long-term interest rates.
Germany, Britain, and Japan all have similarly low long rates.
And, in each of these countries, it is likely that interest rates will rise during the next few years, imposing losses on holders of long-term bonds and potentially impairing the stability of financial institutions.
Even if the major advanced economies’ current monetary strategies do not lead to rising inflation, we may look back on these years as a time when official policy led to individual losses and overall financial instability.
High Fences Make Bad Neighbors in Europe
Good fences make good neighbors, so the poet Robert Frost wrote.
Sadly, the European Union seems to be taking Frost's poetic whimsy as a serious policy prescription.
For how is the EU preparing to welcome the citizens of the ten countries that will become members in May?
Simple: by shutting the door in their faces, and then building regulatory walls to keep them away from the door in the first place.
Indeed, the Union is behaving even worse.
Because no agreement exists at the EU level concerning a common set of rules to be applied to the Union's new citizens, each member country is establishing its own rules without any coordination.
Some of these emerging rules are draconian.
Austria and Germany - so far the two largest recipients of migrants from Eastern Europe, receiving four out of every five - announced last year that they will restrict migration from the new member states for the full transition period of seven years.
France and Belgium will restrict immigration by new EU citizens for at least the first two-years of the transition period.
Sweden initially appeared to take a liberal stance, but is now postponing opening its borders and may tighten migrants' access to welfare benefits.
The Danish government almost collapsed in January when the Ministry of Labor proposed to open the job market to all new EU citizens who can prove that they have found employment.
Greece and Italy have been silent so far, which means that they are likely to keep current restrictions vis-à-vis the new members: they will de facto be treated the same as migrants from outside the EU.
Thus, all the countries bordering the new member states will be closed to migration from the "New Europe."
All this barrier-building reflects mounting public concern about citizens from the new member states emigrating to take advantage of generous welfare systems in the Union.
Little wonder, then, that the largest drops in popular support for enlargement registered by the Eurobarometer Survey occurred in EU countries with the most generous welfare states.
But support for enlargement is fading everywhere, right on the brink of accession.
At the same time, closing the doors to the Union's newest citizens will not solve the problem of welfare access and will certainly hurt economic growth.
In EU labor markets characterized by low mobility, such as those that exist across Western and Southern Europe, migrants can play a very important role.
By increasing average productivity, they contribute not only to stronger growth, but also to achieving higher incomes per capita.
In fact, due to distortions in how wages are set-often set irrespective of local labor productivity rates-migrants can even contribute to reducing unemployment in Western and Southern Europe.
Moreover, shutting the door will not solve the problem of welfare access, because illegal migration is worse than legal migration: it draws resources without contributing anything to finance the welfare state even though most migrants are young and do work.
A better way to deal with the fear of migrants abusing social welfare systems would be to adopt a common and rather generous transitional quota at the level of the EU as a whole, to be lifted early if it is not filled.
Migration quotas should be preferred to other types of restrictions on the ground that they allow at least a part of the potential welfare gains from migration to be realized.
Quotas could be established at levels set on the basis of past periods of high migration - say, an annual flow of 400,000 people to the EU.
While these transitional restrictions are put in place, reforms should be undertaken that address the underlying basis for the public's fear of migration.
The root of this fear, of course, is the vast differences in income between citizens of, say, Lithuania, and those of most of the Union.
Of course, economic convergence is a long-term business.
Thus, redistributive policies in the EU should be reformed in ways that discourage "welfare shopping" by citizens of its poorest member states.
Here the problem is the incompatibility of insurance schemes, on the one hand, in which the benefits that people receive are based on what they have contributed, and, on the other hand, social assistance programs that entail cash transfers.
All EU countries, including the new members, should be encouraged to adapt social assistance schemes (which also exist in the new member states) so as to meet some basic income requirements.
EU-wide coordination of these minimum guaranteed income schemes should be gradually pursued, with the long-term intention of building up a pan-European safety net as one of the institutional pillars of the EU.
Reinvigorating Egypt’s Economy
NEWPORT BEACH – Some two years into Egypt’s grass-roots revolution, the country’s economy is in a worrisome downward spiral.
A growing number of people, inside and outside of the country, are starting to blame the revolution itself for derailing an economy that was growing, reducing its external-debt burden, and maintaining a comfortable cushion of international reserves.
Blaming the revolution is the wrong approach to Egypt’s current economic woes. Yet its appeal to some is understandable, given that the country’s economic situation has continued to worsen over the last few months.
Growth is anemic, unemployment is high, and new investment has fallen off dramatically – all of which complicate already-difficult financial, social, and political conditions.
The result is a growing threat of several vicious circles at once.
Domestic supply disruptions are now fueling inflation and compounding the problems of a subsidy-laden national budget.
They have also aggravated the weakness of external finances, contributing to a sharp drop in international reserves that has been contained only by exceptional loans and deposits from abroad.
Inadequate growth and higher inflation impose a particularly severe burden on Egypt’s most vulnerable.
Public safety nets are overstretched, with too many poor people falling through.
Moreover, other support networks – including income opportunities in tourism, the informal sector, and charitable and family support – are crumbling under the pressure of growing poverty.
This broad set of spiraling difficulties has led credit-rating agencies to slash Egypt’s rating.
It is also discouraging foreign direct investment, as is the discrediting of Egypt’s police forces.
As a result, still more sources of working and investment capital are disrupted, amplifying the impact of domestic capital flight.
None of this facilitates the political reconciliation and national unity that Egypt needs to complete the most difficult of all revolutionary pivots: from dismantling an oppressive past to building a better future.
Indeed, having suffered from post-revolutionary institutional and political dysfunctions, economic decline is now itself fueling these destabilizers.
To be fair, governments – first under the Supreme Council of the Armed Forces and now under the Muslim Brotherhood – have recognized the challenges.
Their responses, however, have fallen short, following a familiar sequence that begins with waiting for an endogenous bounce and aspiring to self-reliance.
When no miracle arrives, they opt for capital controls and consider asset sales and leases while courting those once viewed as having perpetuated the old order.
The post-revolutionary government’s initial narrative characterized Egypt’s economic malaise as temporary and self-correcting. Having overthrown Hosni Mubarak’s iron-fisted 30-year-old regime in a remarkably quick and relatively peaceful manner, Egypt’s revolutionary masses were to leave the streets and pursue an all-out drive for economic prosperity and social justice.
Their efforts would be supported by the re-orientation of public institutions (and governance more broadly) away from benefiting the privileged few toward an ethos of service to all of the country’s citizens.
This narrative reflected (understandable) revolutionary exuberance rather than realities on the ground.
It takes years to reform institutions.
Economic and financial transmission lines cannot be rerouted quickly.
Discredited businesses cannot be replaced overnight.
Credible political parties are not easy to organize on the fly.
And many of those who bravely fought for freedom had little political experience, placing an even greater premium on great leadership to channel Egyptians’ enormous energy – and their demands for greater social justice – into a shared vision and common purpose.
The resulting power vacuums were filled by those whose prior positions in society gave them an inside track at the time of the popular uprising.
They assumed power with a set of ideas and operating procedures that had to catch up with the new Egypt.
As the economy struggled, optimism gave way to a more defensive and insular view that values self-reliance.
Accompanied by creeping economic controls, the narrative became more nationalistic.
Loyalty, rather than merit, drove key appointments, making policy management even more difficult.
With this approach offering no better chance at success, the country has been pushed back to pursuing measures that, at least in the mind of much of the public, are associated with the old regime.
Securing a loan from the International Monetary Fund has become the principal objective of economic management, coupled with other anxious attempts to raise financing.
But, absent a fundamental policy revamp, the most that this can deliver is a few months of relative financial calm, albeit at a cost for the subsequent future.
What Egypt needs today cannot be provided only by IMF loans and asset leases.
That is the bad news.
The good news is that, as someone who has followed similar cases for more than 30 years, I can say with confidence that Egypt has all the components needed to restore economic and financial stability: resources, people, dynamism, entrepreneurship, location, and regional and global linkages.
Egypt also has a powerful secret weapon that is yet to be fully deployed – a generation of young people who, after years of alienation and repression, believe that they can (and should) influence the country’s destiny.
Already, some are making a notable difference on the ground, attracting widespread admiration.
Egypt is not a country where economic sectors and segments of the population can succeed despite the government.
The government must provide the context to restart the engines of economic recovery; and policies should serve as growth accelerators by providing development gateways for the energetic young, the restive poor, and the pressured middle class.
This brings us back to the interactions between economics, politics, and finance, which are now fueling a tailspin that is harming Egypt’s citizens and threatening their children’s future.
Appropriate political reforms must come first; when they do, Egypt’s economic and financial revival will surprise many with its buoyancy and speed.
Think of a car that can and should achieve great performance based on its strong internal engine.
Egypt is capable of speedy economic growth and durable financial health.
Without determined efforts at political progress and unity, however, it will remain stuck in neutral – and could slip into reverse.
High Noon at the IMF
This month’s International Monetary Fund (IMF) meetings in Washington will bring together the world’s top finance ministers and central bankers at a critical juncture for the global economy.
For starters, the roof is starting to collapse on the global housing bubble, as housing markets begin to freeze up not only in the United States, but also in many other countries, such as high-flying Spain.
Moreover, money markets, especially in Europe, remain traumatized by the festering global credit crunch.
Record-high food and energy prices, combined with sharply rising wages in China, are pushing up inflation in much of the world.
Last, but not least, the US productivity boom is decelerating.
These combined pressures will make it far more difficult for central banks to sustain the so-called “Goldilocks” economy (“just right” inflation and growth).
At the same time, the outside world will be looking especially carefully at what, if anything, officials plan to do if the dollar continues to sink.
Though exchange rates are notoriously unpredictable, the best guess is that a slow unwinding of the massive US trade deficit will keep the dollar on a path of gradual long-term decline.
But the fact that several Asian and emerging-market countries are resisting this decline by buying dollars is putting inordinate pressures on the more flexible currencies, such as the euro and the Canadian dollar, which are trading at record levels.
(What are the Chinese planning to do with all their ever-growing $1.4 trillion in reserves?
Do they intend to give foreign athletes paper bags stuffed with dollars as a welcoming present at the Olympic village?)
European leaders are arguing, with some justification, that their exporters are paying the price for America’s huge trade imbalance with Asian and oil-exporting countries.
If the US goes into recession, the acrimony will get a lot worse.
The IMF’s leadership tried to broker a deal over currencies at its April meeting, but without tangible results.
Given that China’s ruling Communists are holding their Party Congress at the same time as the current IMF meetings, a deal seems unlikely now, too.
Yet, given clear inflationary pressures in countries like Saudi Arabia, Argentina, and Russia, and notable price spikes in China, the world just might have reached a moment when agreement can be reached.
Let’s hope so.
There could be a real disaster if US growth woes turn today’s mild downward pressures into something much more serious.
The Federal Reserve would be forced to lower interest rates further, making the dollar even less attractive, and the concomitant shift in global demand away from the US, marked by a sharp decline in the US trade balance, would put still more pressure on the dollar.
According to my own calculations in a series of research papers with Maurice Obstfeld, the trade-weighted dollar would likely fall by 20% if a global demand shift (say, due to a US housing recession) were to cut the US trade deficit in half.
In principle, such a depreciation against all of the world’s currencies is manageable.
But if emerging markets force Europe to take all the adjustment, the results would be catastrophic, pushing up the euro to $1.50, $1.60 or beyond, with truly dire consequences for trade.
Indeed, the US Congress has already produced a series of ominous bills aimed at retaliating against China and other countries that engage in one-way currency intervention.
The leading Democratic US presidential candidates have indicated their support.
Fortunately, the IMF recently asserted the right to take action if countries engage in sustained one-way currency intervention.
But will incoming IMF Managing Director Dominique Strauss-Kahn be able to exercise this new power quickly enough to avert a crisis?
The IMF itself, of course, is in a deep crisis, with many questioning its mission and legitimacy.
For better or for worse, however, current circumstances offer an opportunity.
It would be unfortunate if the finance ministers merely sit around and beg Fed Chairman Ben Bernanke and European Central Bank head Jean-Claude Trichet to rescue them with rate cuts.
It would be even worse if European ministers, frustrated with gridlock over exchange rates, started sharing ideas for creatively managing their budgets to stimulate short-term demand, rather than long-term growth.
For the past couple of years, finance ministers and central bank heads have had the luxury of using the IMF meetings to congratulate themselves on rapid global growth, regardless of how much they actually contributed to it.
(Globalization and China were the biggest part of the story.)
This time needs to be different.
High Tensions In the Low Countries
Belgium and the Netherlands, two founding members of the European Union, are increasingly divided about what that project now means.
The EU’s Reform Treaty is now the focus of that dispute, but its roots go deeper.
At one point, according to press reports, the row became so serious that French President Nicolas Sarkozy had to intervene.
Europe cannot afford a dogfight between these two founding member states, so it’s high time to put emotions aside and review their differences on the future course of European integration.
As a former Dutch State Secretary for European Affairs and Benelux Coordinator, I believe that the Netherlands and Belgium can once again play complementary roles.
From the very beginning, these countries have represented the different aspects of Europe’s identity: Belgium, as an industrial country, continentally oriented, bilingual, and an intermediary with southern Europe, and the Netherlands with its strong agricultural and trading tradition and its Anglo-Saxon and Atlantic orientation.
Of the two, Belgium tends to be more uncritically supportive of the EU.
Polls show that more than 80% of Belgians want yet more integration, whereas roughly 50% of the Dutch describing themselves as Euroskeptics.
They value the Union for its economic benefits, but are wary of its politics.
Belgian-Dutch cooperation has in years past been essential in helping Europe to move forward.
The Benelux Economic Union treaty of 1944 was an early testing ground for the Europe of the Six, and it was the joint Benelux Memorandum, fathered by the far-sighted J. W. Beyen and presented in Messina in 1955, that gave the impetus to the creation of the common market.
Indeed, it was the basis on which Belgian Foreign Minister Paul-Henri Spaak and his colleagues worked when setting the scene for the Treaty of Rome and the European Economic Community.
The Spaak committee devised a system that balanced the voting power of states of varying size.
Clearly, a system of one vote per member state would have meant domination by Europe’s smaller states.
Conversely, a system based on population would have gone too far in favoring the big ones.
Balance was achieved partly by a system of weighting of votes in the Council of Ministers, where most decisions are taken.
With each enlargement of the Union, this system of decision-making has been largely maintained.
The equilibrium in voting rights between small and large member states was also secured by vesting exclusive authority to propose regulation in the Commission, which expresses the common interests of the Community.
This authority was reinforced by requiring unanimity among member states to overrule the Commission – a provision that has strengthened the smaller states against the larger ones.
As open economies, Belgium and the Netherlands have both been interested in developing the internal market, while differing in their methods.
Belgium followed the mainly French monetarist school, while the Netherlands shared Germany’s preference for economic convergence before committing to exchange-rate parity.
Once President Valéry Giscard d’Estaing and Federal Chancellor Helmut Schmidt made the joint Franco German proposal for the Economic and Monetary Union (EMU), both Belgium and the Netherlands worked together to achieve that common goal.
Along with Luxembourg, they were an important factor in creating EMU.
In 1991, when the Netherlands held the European presidency, Belgium supported its far-reaching draft for a treaty of European Union.
The Dutch proposed bringing all European decision-making − economic, foreign policy, justice, and home affairs − into a single framework.
The proposal turned out to be a step too far and subsequently went down in Dutch history as “black Monday,” named after the day on which the then foreign minister, Hans Van den Broek, faced near-unanimous opposition in the European Council of Ministers.
Belgium, though, was the one member state that supported the Dutch in this brave venture.
But the Belgians and Dutch have also been less than cooperative at times.
When it came to voting rights in the European Parliament and in the Council, the Dutch fought doggedly to get one extra vote in Amsterdam in 1991 and another in Nice in 2000.
This may have satisfied nationalist feelings in the Netherlands, as the country is 1.5 times the size of Belgium, but it did not go down well in Belgium.
The two countries also found themselves in opposing camps over the war in Iraq, and, of course, in their attitudes about further political integration.
The Netherlands’ current reserved stance on further political integration is not in its broader interest.
But Belgium could have shown greater understanding for the Netherlands’ position after Dutch voters decisively rejected the proposed European constitution in the mid-2005 referendum.
Belgium and the Netherlands need to resuscitate their cooperative efforts within the Benelux framework.
The Benelux economy is the EU’s fourth largest.
Belgium will be serving on the United Nations Security Council for the next two years, and has indicated that it wants to give its mandate a European dimension.
The coming period could thus be used in both countries to review traditional positions and reflect on how European policy can best serve their common needs.
Traditionally, the Netherlands has thought of itself as the smallest of the EU’s large member states.
But others generally see it as the largest of the small.
Accepting this view could have a healthy impact on its behavior in the EU.
After all, the three largest EU states – Germany, Britain, and France – can be expected to seek agreements among themselves about the Union’s future shape, so the Benelux countries’ common goal should be to influence their actions and ensure that their thinking is acceptable to the whole community.
Three Encounters with Hillary
PARIS – It is Boston, July 2004.
The setting is a downtown restaurant to which the editor Tina Brown has invited Hillary Clinton and a handful of notables, including Caroline Kennedy, filmmaker Michael Moore, and former Senator George McGovern.
What is immediately striking is Clinton’s youthful appearance, bright laugh, and blue eyes that appear a little too round when she gazes at us with curiosity.
Sometimes her expression is briefly clouded by a streak of stifled pain, obstinate and not wholly contained.
Five years earlier, she was the most humiliated wife in America, a woman whose private life was thrown open – fully and relentlessly – to public scrutiny.
So she can talk national and international politics until she is blue in the face.
She can sing the praises of John Kerry, whom her party has just nominated in an effort to deny George W. Bush a second term.
And she can expound on her role as the junior senator from New York.
Still, there persists an idea that I cannot push out of my head, and that I enter into the travel journal that I am writing for The Atlantic.
The idea is this: to avenge her husband and to take revenge on him, to wash away the stain on the family and show what an unblemished Clinton administration might look like, this woman will sooner or later be a candidate for the presidency of the United States.
This idea brings to mind Philip Roth’s The Human Stain, published a year after the Senate acquitted her husband of perjury and obstruction-of-justice charges, with its searing portrait of how indelible even an undeserved blot on one’s reputation can be.
She will strive to enter the Oval Office – the theater of her inner, outer, and planetary misery – on her own terms.
And the most likely outcome, my article will conclude, is that she will succeed.
Fast forward to Paris in May 2011.
The senator from New York has become President Barack Obama’s secretary of state.
Her aura dominated the just-concluded G-8 summit hosted by France.
It is ten in the evening, and I am waiting at the elevators in the lobby of the Hotel Westin with Mahmoud Jibril, one of the leaders of the Libyan insurrection.
Jibril has made a special trip to plead on behalf of the civilians whom Colonel Muammar Qaddafi and his sons have promised to drown in rivers of blood.
“I thought you were in Libya!” she exclaims when she sees me. “I’ve just returned,” I respond, gesturing toward Jibril.
“Really, hidden in a vegetable truck with him?” That triggers one of those great bursts of laughter that, as I noticed in Boston, raise her high cheekbones still higher.
Then, suddenly serious, and accompanied by a man whom I notice for the first time and who turns out to be J. Christopher Stevens, the young US ambassador to Libya who will be murdered a little more than a year later, she leads Jibril to her suite for an interview.
When, after nearly an hour, Jibril reemerges, he is convinced that the conversation went badly.
He grumbles that Clinton hardly opened her mouth, which he interprets to mean that his plea was not well received.
In fact, Clinton was deeply moved by Jibril’s testimony, riveted by the horror of the regime’s tanks grinding toward Benghazi at that very moment.
In the hours that follow, she convinces Obama not to bow to his anti-interventionist secretary of defense, Robert Gates.
She displays emotion and composure, I note.
Her humanity and compassion are coupled with an acute sense of the iron discipline required for effective governance.
These are the reflexes of an impeccable stateswoman.
By February 2012, the war in Libya is over, and I am wrapping up my documentary film about the conflict.
I am in Washington, DC, in a wood-paneled conference room on the seventh floor of the Department of State’s headquarters, to gather Clinton’s recollections, as I had already done with French President Nicolas Sarkozy and British Prime Minister David Cameron.
This is the moment for conclusions and perspective, the always-fascinating moment when the actors in the drama, who have sometimes operated in secret, turn up their last cards.
Clinton lends herself graciously to the exercise.
She evokes her interview with Jibril, a conversation at the White House or the Elysée Palace.
She remembers everything and regrets nothing.
She feels that, in acting as she did, she was faithful to her most cherished values and beliefs.
And she has no doubt that the West, in responding to the Arab League’s entreaty to intervene, avoided a replay of Srebrenica in North Africa.
What strikes me the most is that she sees, even then, the beginnings of the tribal conflicts and the coming contest among Islamists to outdo one another in fundamentalist purity.
She worries about the early violations of human rights, particularly women’s rights, which she fears will multiply.
She has no illusions that history turns out the way reason tells you it should.
Time is needed, she says, to build a state and construct a democracy – time and a mixture of pragmatism and faith, of patience and audacity, of respect for others and regard for oneself.
Was this concern about “nation building” a warning?
Was it her ideological contribution to an administration that, though she did not know it at the time, would continue without her?
Was she laying down the broad strokes and ambition of her own presidency?
One thing is certain: Of my three encounters with Hillary Clinton, this third was the one where I found her the strongest and most passionate, thoroughly imbued with the meaning and pitch of the great American pastoral.
If we meet again, I will not be surprised if I am addressing her as Madam President.
Farewell Hillary, For Now
TOKYO – F. Scott Fitzgerald famously said that “there are no second acts in American lives.”
Hillary Clinton’s stunning (and, I trust, unfinished) career – from First Lady to United States Senator to presidential candidate to US Secretary of State in the administration of the man who defeated her – proves that Fitzgerald could not have been more wrong.
Today, as Clinton prepares to leave office, there is widespread speculation that she will seek to succeed President Barack Obama in 2016.
She has had not only a second act, but a third as well – and millions of Americans want her to write a fourth.
Clinton’s four years as America’s top diplomat have given her iconic status around the world – and deservedly so.
On her watch, two of the longest wars in US history have been wound down, America’s alliances have been reinvigorated, and young women everywhere have been encouraged to pursue their dreams – whether in academia, business, or politics.
Hers is a record that ranks her among the great postwar US secretaries of state – Dean Acheson, Henry Kissinger, and James Baker.
The position of secretary of state is truly global in scope.
It demands not only a coherent conception of how the world works and the place of US national interests within the international order, but also extraordinary political skill, stamina, timing, and, above all, courage.
Clinton used all of these virtues to their highest possible effect.
In the midst of two wars and Asia’s rise, Clinton confronted the three great tasks that any US secretary of state must face: pinpointing the challenges at hand; developing a viable strategy that attracts the support of the entire US government and public opinion; and managing the actual practice of US diplomacy.
Here, she was aided by the great confidence that Obama placed in her – a remarkable outcome, given their rivalry in the 2008 presidential campaign.
Obama’s decision attests not only to his judgment, but also to her character.
Clinton’s primary challenge as secretary of state was to recast the very nature of US involvement in global affairs.
The go-it-alone America of the years of the war on terror had alienated its closest allies, and had proven insufficient both to resolving the wars in Iraq and Afghanistan, and to creating a structure of peace for an Asia struggling to cope with China’s new power and assertiveness.
With Clinton at the diplomatic helm, the US once again made its alliances – in Europe, the Middle East, and Asia – both a core principle and the key operational mechanism of its foreign policy.
This renewed trust in allies has been particularly important in Asia and the Middle East, where the US has used cooperation with old partners like Turkey, Japan, and South Korea, and new near-alliances with India and Indonesia, to deter aggression.
Indeed, American foreign policy’s “pivot to the Pacific” could not be undertaken without the US having first reinvigorated its relationships with Asia’s democracies.
But it also could not have been undertaken without Clinton’s resolve to make China part of the solution, rather than merely a target of recrimination or containment.
As a result, China is being given the opportunity to preserve its dignity while receiving incentives to integrate into a stable regional –&#160;and ultimately global – order that welcomes it as an integral player, so long as it abides by multilateral rules.
Of course, Clinton’s efforts to revitalize America’s alliances made restoring confidence in US leadership an overriding priority, which she achieved without seeking to militarize every international problem.
Her approach implicitly assumed that creating conditions of cooperative strength can make the search for lasting peace self-reinforcing.
Moreover, even as she emphasized the importance of alliances, she did not neglect diplomatic engagement with adversaries, though never – particularly with respect to Iran and North Korea – as simply an exercise in splitting the difference.
Clinton, the one-time legislator and practicing politician, understood that a stateswoman’s real legacy is not found in today’s headlines and opinion polls, but in lasting policies and institutions.
This effort, she knew, requires a willingness to achieve one’s goals in stages, however imperfect.
In her own words, “The challenge now is to practice politics as the art of making what appears to be impossible, possible.”
Finally, less noted but of real long-term consequence, Clinton made the cause of gender equality – and not only in the halls of power – a special focus of her diplomacy. Wherever she traveled, she spoke out for equal rights.
“In too many instances,” she noted, “the march to globalization has also meant the marginalization of women and girls. And that must change.”
Clinton has helped to bring about such change, not only for women like her (and me), but, more important, for the world’s poor, disenfranchised, and silenced women.
Hillary in Asia, Round Two
SINGAPORE – US Secretary of State Hillary Clinton is scheduled to travel to Asia again in July to meet foreign ministers at the ASEAN Regional Forum, and to visit India.
On her first Asian trip in February, she provided a welcome contrast to the past with her openness to others’ views, her willingness to cooperate, and her star power.
She made Asians look at America anew.
But this trip will be trickier.
One challenge is that part of the plot for the US and Clinton is being written by others.
North Korea will be on the agenda after its missile tests, as will Myanmar, since its generals persist in prosecuting Aung San Suu Kyi, the world’s most famous political detainee, on trivial charges.
After all that has happened in recent weeks, the definition of “success” must be set low.
Nothing positive will come from the US condemning these two difficult regimes unilaterally.
So a key goal of Clinton’s visit must be to pull together with the Asian leaders present at the ASEAN Regional Forum.
As for Myanmar, its neighbors and fellow ASEAN members – Indonesia, Singapore, Malaysia, and Thailand – are also concerned about Suu Kyi’s continued prosecution.
The US should begin to work with these countries not only on this matter, but also on the elections that Myanmar military junta has promised for 2010.
Together, they should press for assurances of a free and fair process, with the aim of avoiding the kind of mess that followed the Iranian elections.
Indonesia can be one ally.
After decades of autocracy, this vast archipelago of a country just concluded a presidential election that has solidified its transition to democracy.
India, proud of its long-standing democracy and fresh from its own elections, shares a border with Myanmar and can also assist efforts there.
The approach to North Korea is similar.
Kim Jong-il is a naughty boy who wants attention and incentives to behave decently.
Rather than debate with her counterparts, Clinton needs to ensure that other countries in the six-party framework, especially China and South Korea, are on the same page as the US.
On both issues, there is little capacity to exert force or sufficient pressure for solutions any time soon.
So diplomatic efforts must instead aim to join Americans and like-minded Asians in common cause, to push for steps forward in the medium to longer term.
Others must be brought on board, especially the Regional Forum hosts, ASEAN and Thailand.
A moral community should form in Asia, one that displaces its leaders’ usual cynical calculations of power in order to jump on the right bandwagon.
In all this, China is the 800-pound dragon in the room.
China is already closer to ASEAN and a key player with respect to Myanmar, North Korea, and other sticky issues.
A “bamboo” economic zone appears to be emerging, perhaps to replace today’s weakening US-centric trans-Pacific ties.
This is the context for Clinton’s visit to India, as well.
George W. Bush’s administration should be credited for giving overdue recognition to India, but this was done primarily on a bilateral basis.
The US should now leverage that relationship to work on regional and even global issues.
Besides her own work, Clinton is likely to also be inundated during this visit with requests concerning President Barack Obama.
There is still no confirmation concerning when Obama will visit Asia, though many expect that he will attend the Asia Pacific Economic Cooperation Summit, to be held in Singapore in November.
China, Japan, and Indonesia must be among Obama’s priorities, but many others will clamor for him to visit their capitals.
Clinton and the US administration would do well to decide which requests are merely photo ops and confine these to meetings at the sidelines of APEC.
The US should insist on a substantive agenda as a precondition for any Obama visit.
In China, for example, Clinton successfully established an agenda for the two countries to work together on climate change.
Plans and resources now must be prepared.
Clinton has reopened the doors for Obama in Asia with charm and confidence.
Obama will eventually come to Asia with many high expectations and star billing.
While his charisma and openness to dialog will be sought after, substance will also be measured and much needed.
By November, after all, it will be more than a year since the global crisis began in the US, and Obama and his team must show tangible prospects for recovery.
American leadership – globally and in Asia – can no longer be presumed.
It must be earned.
Hillary\u0027s Back
NEW YORK – So, why did he do it?
What led Barack Obama to tap his former adversary, Hillary Clinton, to serve as his Secretary of State, the face and voice of his foreign policy, his emissary to the world?
There are plenty of plausible explanations.
One can imagine that he is applying that old adage, “Keep your friends close and your enemies closer.” In one stroke, Obama gets control of the Clinton political machine: the network, the donors, and the constituency.
And he neutralizes the Clintons’ famous skill at corrosive sniping and flamboyant stage-hogging – the kind that led Al Gore and Bill Clinton to be on barely speaking terms during the 2000 Presidential campaign.&#160;With this appointment, Obama turns the big guns away from himself – and directs them outward.
Shrewd tactics.
One can also imagine that he did it to secure the women’s vote.
Not a single Democrat has won the White House without a substantial gender gap.
But the exit polls and the data all show that Obama already has the support of a disproportionate share of American women.
(The real news in his victory was that he got a chunk of white men, who rarely support a Democrat.)
Indeed, there is plenty of evidence to suggest that Obama – the son of a strong single mother, raised also by an influential grandmother, man enough to marry an accomplished woman with opinions of her own, and a devoted father of two girls – understands in a whole new way how to draw and keep women.
He recognizes that women will adore you when you include them as a matter of course.&#160;
Obama is surrounding himself with accomplished female advisers without calling condescending attention to that fact.
If you are a woman watching, you feel in your gut that these women won't be window dressing.
They may succeed or fail; but they are really in the game.
But I don’t think any of those reasons, however compelling each one is, provide the strongest explanation of why Obama chose Hillary.
I think he chose her because he understands that, even as President of the United States, he is truly a citizen of a global community – one to which he is accountable and with which he is in an interdependent relationship.
One of Hillary Clinton’s much-overlooked strengths is that she understands that, too – and has demonstrated that she knows what it means.
There is plenty in her experience as First Lady that she has hyped.
But one of her undeniable accomplishments, perhaps more important than anything else she did during that time, was the set of global journeys that she undertook on behalf of women’s issues.
She surrounded herself with extremely well-informed advisers who specialized in such important issues as women’s critical role in the developing world in raising educational levels, managing population growth, containing environmental degradation, and building up microcredit economies.
She journeyed to Africa and to the Indian subcontinent, and spoke forcefully at the Beijing conference that brought women leaders together from around the world.
The world’s top development experts now agree that resolving many of today’s cultural, environmental, resource-driven conflicts requires educating and investing in women, as she advocated.
But what distinguishes Hillary Clinton from Madeleine Albright or Condoleezza Rice is where she was willing to go for her education.
She did not stay in the air-conditioned hotels and the parliamentary chambers of the nations she visited; she went to tiny impoverished villages, to places where women walk four miles a day for water, to places where women were basing their families’ prosperity on a $20 loan for a sewing machine.
She sat on mud floors and sandy village commons to hear from these communities about their issues and priorities, and she took on controversial and culturally sensitive subjects, such as female genital mutilation and bride burning.
Yet the respect she showed for the various cultures and people whom she was engaging did a great deal to allow such challenges to move forward without bitterness, and in a spirit of real dialogue.
Hillary is adored by many women in the developing world for those journeys, and I am certain that they taught her crucial lessons about global policy – lessons that built up a worldview that Obama, a child of international experiences, also shares.
In that view of the world, America does not stand alone against all others, issuing fiats and focusing narrowly on corporate profits.
Rather, cooperating with other international leaders, America tries to solve the world’s true problems: environmental degradation, resource shortages, inadequate literacy, and the appalling poverty in which the “bottom billion” live.
Obama understands, as I believe Hillary Clinton understands, that resolving those crises is the true key to matters of war and peace – the true marker of the possibility of international alliances.
I believe that Obama knows that Hillary realizes that conflict emerges from these problems, and that using military intervention without addressing them is merely the equivalent of throwing a blanket into a volcano.
America’s president-elect may even understand that his choice for secretary of state learned to look at statecraft and global policy in that way by sitting with and listening to a formerly dirt-poor woman in a sari in a dusty village commons – a woman who has now become a small-scale microcredit entrepreneur, and is helping to educate and feed her family.
It would be most impressive of all if he understood that that education was at least as important as what she – along with the boys – learned at Yale.
Hillary’s Kissinger Moment
TOKYO – Hillary Clinton’s recent trip to Asia may one day be seen as the most significant visit to the region by a United States diplomat since Henry Kissinger’s secret mission to Beijing in July 1971.
Kissinger’s mission triggered a diplomatic revolution.
Renewal of US-Chinese relations shifted the global balance of power at the Cold War’s height, and prepared the way for China to open its economy – the decision that, more than any other, has defined today’s world.
What Clinton did and said during her Asian tour will mark either the end of the era that Kissinger initiated four decades ago, or the start of a distinct new phase in that epoch.
Clinton’s tour produced the clearest signals yet that America is unwilling to accept China’s push for regional hegemony.
Offstage at the Association of Southeast Asian Nations (ASEAN) summit in Hanoi, Clinton challenged Chinese Foreign Minister Yang Jiechi over Beijing’s claim that its ownership of the Spratly Islands in the South China Sea was now a “core interest.”
By that definition, China considers the islands (whose ownership is disputed by Vietnam and the Philippines) as much a part of the mainland as Tibet and Taiwan, making any outside interference taboo.
Rejecting this, Clinton proposed that the US help establish an international mechanism to mediate the overlapping claims of sovereignty between China, Taiwan, the Philippines, Vietnam, Indonesia, and Malaysia that now exist in the South China Sea.
For China, Clinton’s intervention came as a shock, and, given the warm response she received from her Vietnamese hosts – despite criticizing Vietnam’s human-rights record – the US Secretary of State may well have raised the issue at least partly at their urging, and perhaps with additional prompting from Malaysia and the Philippines.
A general fear has arisen in Asia that China is seeking to use its growing maritime might to dominate not only development of the hydrocarbon-rich waters of the South China Sea, but also its shipping lanes, which are some of the world’s most heavily trafficked.
So it was welcome news when Clinton later deepened America’s commitment to naval security in the seas around China by personally attending joint naval and air exercises with South Korea off the east coast of the Korean peninsula.
Likewise, military ties between the US and the most elite unit of Indonesia’s armed forces – suspended for decades – were restored during Clinton’s Asia tour.
Those war games were, most immediately, a warning to North Korea of the strength of America’s commitment to South Korea, following the North’s sinking of the South Korean warship Cheonan earlier this year.
Perhaps more importantly, they also confirmed that the US military is not too distracted by its Iraqi and Afghan engagements to defend America’s vital national interests in Asia.
A later portion of the war games took place in the Yellow Sea, in international waters very close to China, bluntly demonstrating America’s commitment to freedom of the seas in Asia.
And this was followed by the visit of a US aircraft carrier to Vietnam, the first since the Vietnam War ended 35 years ago.
North Korea, no surprise, wailed and blustered against the war games, even threatening a “physical” response.
And China not only proclaimed Clinton’s intervention over the South China Sea islands an “attack,” but also held unscheduled naval maneuvers in the Yellow Sea in advance of the US-South Korean exercise.
Clinton’s visit was important not only for its reaffirmation of America’s bedrock commitment to security in Asia and the eastern Pacific, but also because it exposed to all of Asia a fundamental contradiction at the heart of Chinese foreign policy.
In 2005, China’s leaders announced a policy of seeking a “harmonious world,” and set as their goal friendly relations with other countries, particularly its near neighbors.
But in August 2008, the Communist Party Central Committee declared that “the work of foreign affairs should uphold economic construction at its core.”
All foreign relations have, it seems, now been made subservient to domestic concerns.
For example, it is fear of spreading turmoil from a collapsing North Korea that has made Chinese policy toward the North so supine.
And Chinese intransigence over the South China Sea is a direct result of the economic bonanza it suspects lies on the seabed.
As a result, China is making the task of developing amicable regional relations almost impossible.
In Asia, the hope today is that Clinton’s visit will enable China’s rulers to understand that it is primarily in Asia that their country’s overall international role is being tested and shaped.
Strident rhetoric and a hegemon’s disdain for the interests of smaller neighbors create only enmity, not harmony.
Indeed, it is the quality of China’s ties with its Asian neighbors, particularly India, Indonesia, Japan, Russia, and South Korea, that will be central to forging its international image, signaling not just to the region, but to the wider world, the type of great power that China intends to be.
A Chinese policy of pressure and great-power threats against Vietnam and/or the Philippines over ownership of the Spratly Islands, or deliberate intimidation of China’s smaller South Asian neighbors, will continue to raise alarms across the Pacific and be seen as proof of the Chinese regime’s hegemonic ambitions.
Unless China demonstrates that it can reach peaceful accommodations in its sovereignty disputes with its neighbors, its claims to a “peaceful rise” will appear unconvincing not only in Washington, but in capitals across Asia.
Forty years ago, the US opening to Mao’s China shocked Japan and all of Asia.
Clinton’s visit has done the reverse: it has shocked China – one hopes in a way that moderates its behavior in the region.
And, if a shock can be said to be reassuring, this one certainly soothed Asian concerns about America’s enduring commitment to regional security.
Historical Memory and Engineering Failures
George Santayana, the Spanish-American poet and philosopher, once warned that "Those who do not remember the past are condemned to repeat it."
This is especially true in the field of bridge building, where over the past 150 years dramatic failures have occurred at surprisingly regular intervals.
In 1847, the first major structural failure on Britain's expanding railway network occurred at Chester, England.
The Dee Bridge, whose cast- and wrought-iron design followed common practice for the period, collapsed under a passing train, killing everyone aboard.
Subsequent investigation revealed that the structure, the longest of its kind, simply pushed the limits of railroad-bridge engineering too far.
In 1879, the longest bridge in the world spanned the River Tay at Dundee, Scotland.
Composed of many modest spans, the structure involved no radically new design concepts and seemed to be a mere application of proven technology.
However, the force of the wind was grossly underestimated and worksmanship was inferior.
As a result, the Tay Bridge, vulnerable in a gale, was blown off its supports.
In 1907, the longest span in the world was being constructed over the St. Lawrence River near Quebec, Canada.
The bridge was of a relatively new type, known as a cantilever, which had become quite fashionable.
Although it was only slightly longer than the highly successful cantilever bridge over the Forth River near Edinburgh, Scotland, the Quebec Bridge was so inadequately designed that it collapsed before it was completed.
In 1940, the third longest suspension bridge in the world was opened in Washington State.
The Tacoma Narrows Bridge was designed as state of the art, which included a strong aesthetic preference for slender structures.
Within four months of its opening, the bridge was destroyed by winds in a manner totally unanticipated by its engineers.
In 1970, steel box-girder bridges in Milford Haven, Wales, and in Melbourne, Australia, failed spontaneously while under construction.
Both were among the longest structures of their kind and were thought to be just natural applications of existing technology.
In 2000, the much-anticipated opening of London's Millennium Bridge over the River Thames was followed only three days later by its closure.
The sleek footbridge swayed unexpectedly and excessively under the feet of pedestrians, and it was deemed too dangerous to use.
What should have been a mere extension of the millennia-old art of building pedestrian bridges, proved to be a modern engineering embarrassment.
The thirty-year interval between historic bridge failures was first highlighted by the work of Paul Sibly, who wrote a thesis on the subject, and his University of London advisor, A. C. Walker.
They noted the cyclical regularity of such occurrences and speculated that it represented a gap in communications between generations of engineers.
Although each of the notable failures involved a different type of bridge, in no case was the structure radically new.
Each used technology that engineers had been confidently employing for bridges, and for which the assumed loads and methods of analysis were well established.
In every case, engineers believed that they were just building incrementally on successful practice.
In fact, designing in a climate of success can be dangerous for an engineer.
Successful experience teaches us only that what has been accomplished in the past has worked.
But things that work on a small scale do not necessarily work when slightly larger.
This was known to Vitruvius, who wrote about Greek and Roman engineering more than 2,000 years ago.
It was also known to Galileo, who noted that Renaissance engineers who followed successful methods of building ships and moving obelisks were often surprised by the spontaneous failures when tried with larger ships and obelisks.
Failures always reveal weaknesses and provide incontrovertible evidence of our incomplete understanding of how things work.
When the failures described above occurred, engineers were sensitized to their own limitations and so approached subsequent designs - no matter of what kind of bridge - with renewed respect for the laws and forces of nature.
Unfortunately, human memory fades with time, and new generations of engineers with no vivid experience of past failures can proceed with hubris to design again beyond wise limits.
The history of engineering is no mere adjunct to technical know-how.
A historical perspective on bridge building or any other engineering specialty provides a caveat about how our humanity affects our thinking.
Building a new bridge following a familiar model can lead to complacency.
Building a novel bridge, especially in the wake of a spectacular failure, forces engineers to think from scratch and also to think more deeply and critically.
Hence, the paradox that success leads to failure, and failure leads to success.
The cable-stayed bridge is a form that is currently being pushed to limits and beyond those originally imagined to apply to it.
Widespread successes with cable-stayed structures have made the type almost commonplace.
As such, its development into ever longer spans is following the historic pattern that in the past has led to failures.
Whether there will be a major cable-stayed bridge failure soon - or around the year 2030 - will most likely depend not so much on computer analyses as on how well engineers know their history and are determined not to repeat it.
Historic Election in Egypt?
Egyptians go to the polls on September 7th to elect a president from among ten contenders, including the incumbent of 24 years, Hosni Mubarak.
While few doubt the outcome will be his re-election, many are intensely following the process.
Some 6000 domestic election monitors have been training for the event, while hundreds of foreign reporters are converging on the country this week.
Although all the formal trappings of a true electoral contest are in place, important aspects of authenticity are glaringly absent.
Despite promises to the contrary, this is far from a level playing field.
Mubarak still commands disproportionate assets: name recognition, a virtual monopoly on state-controlled electronic media and some 85% of the print media.
One week before the poll, some opposition candidates have yet to air even one campaign ad on Egyptian television.
All members of the presidential election commission are Mubarak appointees, and the new election rules eliminated any independent challengers.
Since the year 2000, Egypt’s 8000 judges must supervise and certify election results, by ruling of the High Court.
This was a major step toward fairer elections, as the judges’ professional union has remained fairly independent over the past half-century of executive power grabs.
So the Mubarak regime has had to use various ploys to neutralize the judge’s union.
One was to stretch the definition of ‘the judiciary’ to include thousands of loyal government employees who have law degrees but no experience on the bench. This boxes in the true judges, for if they protest by boycotting their supervisory duties, the task will fall once more to police from the infamous Ministry of the Interior.
Thus, in the past, the judges’ union tended to go along, with predictable results.
In the 2000 parliamentary elections, while Mubarak’s ruling party received roughly 38% of the popular vote in districts supervised by true judges, that percent somehow jumped to 86% where the quasi-judges were in charge.
This year promises to be very different.
In the spring the judges held a nation-wide assembly and resolved that unless the regime granted them full independence, and exclusive oversight of the voting process they would not supervise the upcoming presidential (or parliamentary) races.
On September 2nd they made their final demands: allow civil society groups to observe the voting process, stop interfering in the definition of legitimate judges for purposes of the election, and agree that no ballot box will leave the presence of a legitimate judge until its contents are counted, certified and reported.
Thus far, a standoff looks likely, as the head of the presidential election commission has stated publicly on Egyptian television that he refuses all citizen monitoring of the election process.
Other interesting developments on the eve of the election include a fierce public debate over whether to vote or to boycott the presidential race.
Several opposition parties have called on their members to stay away in protest over restrictive election rules that strongly favor Mubarak.
On the other hand, the Muslim Brotherhood, thought to be the single strongest opposition group in Egypt, are urging their followers to caste ballots and vote their conscience but not to give support to any ‘despotic, corrupt rulers.’
This is a clear if implicit repudiation of Mubarak, the sole ruler for 24 years.
Some 34 civil society organizations are preparing thousands of young Egyptians to monitor the elections despite repeated governmental objections.
These groups argue that if the regime is not planning to rig the vote, then domestic as well as foreign observation of the polling process should not be a problem.
The regime response is to say that any outside monitoring is an infringement on Egyptian sovereignty, and that domestic monitors are an affront to the integrity of the judges.
That argument was quickly undermined when the judges’ union announced their support for civil society monitors.
Whether the Mubarak regime is running scared because of the mounting challenges from within and without to hold a free and fair election, or is simply incapable of ridding the party of cheating as a way of life, the present signs do not bode well for next Wednesday’s polls.
Meanwhile, Egyptians for the first time are experiencing the thrilling taste of defying tyranny, and enjoying some newly-found space for freedom.
History’s Crimes and Punishments
BUENOS AIRES: What price justice?
How countries deal with historical violations of human rights is the material of daily politics across Latin America, Eastern Europe, and Africa.
Look at Rwanda.
Look at Chile, where General Pinochet may at last face trial.
Look at Poland where President Kwasniewski and former President Walesa were almost banned from October's presidential election because of alleged ties to the communist era's secret police.
People everywhere are perplexed by the fact that horrific, systematic violations of human rights are treated differently in different countries.
Although differences undoubtedly exist, the ethical principles by which historical human rights violations should be treated in reconstructing democracy are the same.
Chile and Poland are not unique in confronting the burden of history.
Building democracy out of political cultures and civic habits riddled by state violence is no easy task.
The difficulties are multiplied when attempted in times of economic crisis.
I come from a country where violations of human rights were punished harshly.
Nonetheless, I understand the impulse to limit punishment in order that society heal and rebuild.
For punishment of systematic, historical human rights crimes as a matter of government policy is only morally justified if it is designed to protect society from greater evils in the future.
Human rights crimes, though fostered by states, are committed by individuals acting according to their own wills.
There are real social consequences in seeking punishment for such people.
It is not rational to impose such punishment when the consequences, far from preventing future crimes, may incite or cause greater or new social damage.
Punishment is ultimately an instrument – not the only one, nor the most important – for restoring a collective moral conscience to societies ravaged by dictatorship.
More important than punishment, I believe, is the revelation of truth by credible means, such as through an impartial judicial process.
Through such revelations what I call a "moral sentence" may be imposed on the guilty, and it is the existence of such a "sentence" which will arouse the type of deep public reflection necessary for the restoration of democracy.
No more secure guarantee for the protection of human rights exists than a heightened, collective moral awareness within society to defend every person’s dignity.
National laws and international studies are valuable instruments to protect such rights insofar as they serve to promote such awareness, but they cannot replace it as the ultimate guarantee.
In democratic systems, this moral awareness can only be cultivated if the citizenry trusts the independence of its judges.
In the transition from dictatorship to democracy, members of the judiciary lack legitimacy.
So reestablishing social trust in the judiciary is one of the weightiest tasks democratically elected officials face during a transition.
In the appointment of independent judges, great care must be given to insure that the judiciary helps revitalize social trust in the capacity for transformation to democracy.
Based on my own experience as Argentina’s first democratically elected president after the collapse of its military junta, I know that this is a long, complex, and painful process.
But if a social consensus arises that the judiciary is insufficient to guarantee or safeguard individual rights as well as the division of power between the legislative, executive, and judicial branches of government, that lack of trust could lead to social dismemberment.
Comprehending the process by which a society begins to fail to protect itself, by which it’s moral compass deteriorates, is almost impossible.
Perhaps ethical absolutism and its opponent relativism influenced that deterioration by undermining the sense of collective truth that is forged in social dialogue and wide civic participation.
But a society’s decision to waive punishment for human rights violators is not necessarily a sign that its moral awareness remains stunted.
Retribution is not the only sign of restored moral vigor.
A moral sense is essential to a democracy of true solidarity.
To secure the moral sense that only social solidarity may provide, a clear set of social rights must also exist.
A decent home and health care, education and an adequate income to develop and enrich personal lives, is sometimes considered as a particular goal for a group – class, union, corporation – without effect on other groups.
But the contrary is true.
Developing the economic and social aspects of the rights of man helps root all human rights as undeniable truth.
In short, democracy can only be built by men and women who are democratic in all their aspects.
This obvious truth is forgotten frequently.
Monarchy can exist with people who are anti-monarchists.
Fascism and Soviet communism were constructed on the backs off unwilling people.
Democracies built on unwilling foundations, however, cannot stand.
For democrats, loving freedom is not enough.
The great failure of our democratic conscience is in not recognizing this.
The habit of limiting universal human rights to a series of political and moral rights and consigning the economic aspects of humanity to a second, lower tier of our concern is dangerous.
It undermines the ethics of solidarity through which all human rights exist.
Democracy today must urgently address this insufficiency of solidarity.
If human rights are truly to be protected, the second, economic tier of human rights must be elevated to equality with the first tier in our consciences.
Only then will history’s crimes receive the response they demand, which first and foremost is not punishment, but the certainty that such crimes will not reoccur.
Never again: for history’s victims, that is our truest debt of honor.
History’s Ghosts in Iran
Using historical analogies to interpret the present is both tempting and dangerous, for history never truly repeats itself.
Yet, to understand the difficulty of responding to the problems that Iran’s nuclear ambition and anti-Israel obsession now pose, it might be helpful to analyze the three analogies that are most commonly used.
Some compare the Iranian regime to Nazi Germany.
Others believe that the only useful analogy is to Europe’s old balance-of-power games.
And still others combine the two, pointing to the “balance of terror” during the Cold War.
In other words: is Iran to be treated as Hitler’s Germany in 1938, Prussia in 1756, or Stalin’s Soviet Union?
Each analogy contains an element of truth, but none, of course, corresponds to the realities of the challenges Iran represents.
Above all, each analogy, if taken seriously, should lead to a specific course of action, and this is far from being the case today.
Let us start with the analogy between Iranian President Mahmoud Ahmadinejad and Hitler.
Ahmedinejad pursues a dual objective with his anti-Zionist obsession: to de-legitimize Israel and to re-legitimize Iran’s claim to speak for Muslims over the heads of their more cautious governments.
He very probably means what he says about Jews and Israel, but is he a latter-day Hitler, and is today’s Iran the equivalent of Germany in the 1930’s?
Hitler came close to developing the nuclear bomb, but never had it, whereas Iran very well might.
But Hitler’s power over Germany was much more absolute than Ahmadinejad’s power over Iran.
The results of Iran’s recent municipal elections were humiliating for Ahmadinejad and his supporters.
Those elections would have been unthinkable in Nazi Germany.
Although the Iranian regime’s rhetoric may be totalitarian, political power there is much more diffused.
The analogy with Hitler’s Germany is also problematic because, if it were regarded as true, the only sensible course of action would be a preventive strike on Iran and the removal of Ahmadinejad.
Given the evolution of American strategic thinking after Iraq (and now Afghanistan), and of Israel’s strategic thinking after Lebanon, a preventive strike is highly unlikely.
The second analogy, to the old balance-of-power system in Europe, is especially popular among Israeli and American diplomats.
According to this view, if Iran wants to de-legitimize Israel and ultimately unite Moslems against the West, the only answer is to isolate Iran in the Middle East, and to create alliances against Iran with moderate Sunni Arab regimes.
Before the 1979 Iranian revolution, some in Israel advocated an alliance between Israel, Turkey, and Iran, the Middle East’s three non-Arab powers.
Today, many in the United States and Israel dream of a moderate Arab front, with countries such as Saudi Arabia and Egypt containing and isolating “radical” Iran.
That diplomatic project is far from absurd.
The rise of Hamas in Palestine and Hezbollah in Lebanon as instruments of Iranian ambitions can only worry moderate Arab regimes.
But such an alliance has a price: the resumption of negotiations between Israel and the Palestinians, with serious territorial concessions on Israel’s part to match the Palestinians’ absolute recognition of Israel.
Moderate Arab regimes will not dare to engage in an open and serious process of rapprochement with Israel in the absence of real progress over the Palestinian issue.
But are the two parties ready for it?
Could the US, a wounded power mired in Iraq, implement the part of the Baker report that suggests “Peace in Baghdad goes through Jerusalem”?
While Israel’s non-victory in Lebanon and the Palestinians’ bloody divisions mean that both sides have been humbled, a breakthrough, though possible, remains unlikely.
The third analogy is reflected in Israeli Prime Minister Ehud Olmert’s recent references to Israel’s nuclear deterrent, which may have been a mistake, but probably indicate the evolution of Israeli strategic thinking.
Olmert seemed to be reminding the Iranians of the hard realities of nuclear deterrence: Iran may join the nuclear club someday, but it will return to the Stone Age if it uses those weapons against a country that has a far more advanced nuclear arsenal.
The comparison here is to the Cold War period.
But can today’s Iran be compared to the Soviet Union?
The success of the “balance of terror” presupposed a mixture of confrontation and dialogue between two “rational actors.”
Can Iran under Ahmadinejad be considered a rational actor?
The dilemma concerning Iran is whether a power imbued with an “absolute” ideology can be allowed to be in control of an “absolute” weapon.
Since a military solution is highly improbable, what are the serious alternatives?
Can we have a productive dialogue with Iran while rejecting the mad ideology of its president?
As the shortcomings of the three most popular historical analogies suggest, the answer is far from obvious.
History, Used and Abused
LONDON – In her brilliant book, “The Uses and Abuses of History” the historian Margaret Macmillan tells a story about two Americans discussing the atrocities of September 11, 2001.
One draws an analogy with Pearl Harbor, Japan’s attack on the US in 1941.
His friend has no idea as to what this means. “You know,” the first man replies, “It was when the Vietnamese bombed the American fleet and started the Vietnam War.”
Historical memory is not always quite as bad as this. But international politics and diplomacy are riddled with examples of bad and ill-considered precedents being used to justify foreign policy decisions, invariably leading to catastrophe.
Munich – the 1938 meeting between Adolf Hitler, Édouard Daladier, Neville Chamberlain, and Benito Mussolini – is a frequent witness summoned to court by politicians trying to argue the case for foreign adventures.
Britain’s disastrous 1956 invasion of Egypt was talked about as though Gamal Nasser was a throw-back to the fascist dictators of the 1930’s.
If he were to be appeased as they had been, the results would be catastrophic in the Middle East.
Munich was also produced as a justification for the Vietnam War and President Bush’s war of choice in Iraq.
1930’s appeasement – a word that elides diplomatic engagement and the rejection of military options – was said to remind us of what would happen if South Vietnam was not defended and Iraq not invaded. We know what happened in both countries.
But analogies are not always wrong, and those that were wrong in the past could prove correct today. One of the arguments for the Vietnam War was the so-called domino theory.  If South Vietnam was to fall to the Communists, other countries in South-East Asia would tumble before Communist insurgency.
Things turned out very different.
Vietnam proved to be the end not the beginning of the line.
Pol Pot’s wicked regime murdered millions in Cambodia until Vietnam intervened.
Elsewhere in the region capitalism, promoted by the opening of markets, triggered growth and promoted stability.
Globalisation produced its own domino effect. The dominoes toppled;
GDP rose; millions were lifted out of poverty; literacy rates soared; child mortality figures fell.
Maybe, if not there and if not then, dominoes are more relevant to foreign and security policy today.
In America and Europe at the moment, many people are calling for the withdrawal of NATO forces from Afghanistan.
We are told that NATO and the West cannot build a nation there and that the goals that have been set for establishing democracy and prosperity are unattainable.
NATO soldiers die in vain.
Sooner or later the Taliban will sweep to power again, at liberty as happened before to throw acid in women’s faces.
It is vanity to think that anything can be done to prevent this.
Better to cut and run than stay and die, and who is to say that the result will embolden Taliban terrorists?
They do not necessarily share the same aims as Al Qaeda.
There have certainly been mistakes in Afghanistan.
After the overthrow of the Taliban regime, the West did not commit enough troops to extend the national government in Kabul’s authority over the whole country.
The Bush administration had turned its attention to the preparations for the Iraq war.
Development has been slow.
The build-up of the Afghan army and police has lagged. The poppy crop has grown.
Sometimes the military response to insurgency has been too tough; sometimes too light.
The West has courted trouble in appearing to isolate the Pashtun.
So the West can do better. There is no doubt about that.
But the case for quitting is bad and touches on Pakistan’s future as well as Afghanistan’s.
Leave Afghanistan to the Taliban, hoping against hope that they will become better-behaved global citizens, and what is the effect likely to be on Pakistan?
Here come the dominoes – wrong in Vietnam but not necessarily in the South Asian sub-continent.
Afghanistan is NATO’s great test.
The Alliance has promised to see the job through. So if it abandons the job now, leaving the country to poverty, prejudice, and poppies, what then will happen?
Why should anyone in Pakistan believe that the West is serious in wanting to sustain that country as a Muslim democratic state?
Would such a decision help turn the tide against the Taliban?
Would it encourage the middle-class professional and urban workers in Pakistan, disgusted by the excesses of the extremists, to dig in and see off fundamentalism?
Would it strengthen the more moderate elements in politics and the military? You can count on us, the West would be saying, but don’t look next door to Afghanistan, where you will see that you can’t rely on us.
If Pakistan, nuclear weapons and all, was to fall to the extremists, the consequences in terms of encouraging the export of terrorism would be dire. Think about Kashmir. Think about India.
How would India’s government view the future if Pakistan falls into the hands of fundamentalists?
So the West should see the job through in Afghanistan – do it better but do it. Sometimes the dominoes do topple over, one by one.
That is not a prospect that anyone should welcome in South Asia.
Hobble and Muddle
NEWPORT BEACH – Colleagues from around the world recently gathered at PIMCO’s headquarters in California for our annual Secular Forum, when we leave behind high-frequency issues for a few days and, instead, debate what the next 3-5 years hold for the global economy.
The perspective is global, informed by the insights of outside speakers, and the focus is on what is likely to happen, as opposed to what should happen.
The last two Secular Forums projected that, after the global financial crisis, the world economy would not reset in its traditional, cyclical manner. Instead, it faced multi-year re-alignments of both a national and global nature.
The world economy would heal, but in a slow and uneven fashion, as advanced economies muddled through while the more dynamic emerging world gradually closed today’s income and wealth gaps.
Developments since then have been consistent with this characterization.
The G-7 recovery has been unusually sluggish, notwithstanding large and unprecedented policy stimulus (particularly in the US).
As a result, unemployment has surged, now exceeding that of emerging economies.
Meanwhile, deficit and debt indicators have worsened, both in absolute terms and relative to emerging economies, and the average risk premium on advanced economies’ debt now exceeds that for emerging economies.
These are outcomes that fall well short of policymakers’ expectations, be it in America or in Europe.
Indeed, for most of the post-crisis period, all of them have been understandably fixated on stimulating growth.
Some have even embraced explicit policies to boost asset prices (e.g., the US Federal Reserve’s second round of so-called “quantitative easing”).
Yet, along with “good” asset-price inflation, aimed at making people feel richer and spend more, these approaches have delivered “bad” inflation, owing to surging commodity prices, which impose a tax on both inputs and consumers.
In Europe, every balance sheet available has been tapped to forestall a debt crisis in the periphery, resulting in large bailout packages for Greece, Ireland, and Portugal, and the contamination of the ECB’s balance sheet.
Looking ahead, some signs point to the global economy’s accelerated healing and growing resilience, which bodes well for an orderly retreat from unconventional policies.
There are also signs suggesting that emerging economies’ breakout is well anchored, and that China, in particular, will be able to navigate its complicated middle-income development transition.
Unfortunately, other signs point to an uneven, faltering global recovery.
In advanced economies, projected rates of growth are not sufficient to avoid mounting debt and deficit problems.
For some, such as Greece, this means more difficult choices between restructuring and socialization of losses.
For others, like the US, future sacrifices are already required, most likely through a combination of higher inflation, austerity, and “financial repression,” as governments seek to impose on savers negative real rates of return.
Needless to say, demographic transitions, commodity constraints, and geopolitical uncertainties complicate all of this.
Most importantly, too many government and household balance sheets remain out of equilibrium in an excessively asset-based global economy.
As a result, many long-standing promises will come under pressure over the next 3-5 years.
Specifically, a variety of social contracts – for example, health-care and pension entitlements, as well as unemployment benefits – will come under greater strain.
At the international level, the standing of US-supplied public goods (including the dollar as the global reserve currency) faces gradual erosion.
To the extent that this scenario holds, the next few years will follow the same multi-speed dynamics that we have seen recently.
Specifically:
· Advanced economies will face sluggish (call it 2%) growth and persistently high, increasingly structural (and therefore protracted) unemployment.
Already-large disparities in income and wealth will continue to deepen, amplified by higher inflation and financial repression.
And debt and deficit concerns will remain, with the virtual certainty of at least one sovereign-debt restructuring in Europe.
· Emerging economies will achieve higher growth (in the 6% range), and their income and wealth levels will continue to converge with those of advanced economies.
But this will create its own challenges, including recurrent inflationary pressures and surges in capital inflows, leading to greater policy experimentation.
· Sovereign creditworthiness will continue to diverge, with a further deterioration in advanced countries and continued improvement in emerging markets.
· Inflation convergence – between high headline and low core rates, as well as between high emerging-market and low advanced-country rates – will occur at levels higher than currently anticipated.
· The global economy overall will hobble along, continuing its gradual transition from a uni-polar to a multi-polar world.
This baseline scenario is subject to two-sided risks that could well increase over time.
On the upside, the US could have a “Sputnik moment”: a sense of national unity, common purpose, and shared sacrifice leads to structural reforms that focus on re-aligning balance sheets over the medium term, enhancing job creation, and improving competitiveness.
Europe could re-engineer the eurozone to enable debt sustainability and high economic growth.
And emerging economies could unleash their consumers, boosting global demand.
The chances for such “grand bargains” have increased in recent months, but, at this stage, they can at best only offset the global outlook’s downside risks.
Above all, liabilities have simply been shifted around the global economy, which cannot continue indefinitely.
Meanwhile, excessive income and wealth inequalities are weakening the fabric of societies; persistent joblessness in advanced countries is undermining productivity and skills; policy effectiveness and flexibility are deteriorating; and the world economy is facing increasing challenges in accommodating the development breakout phase in systemically important emerging economies.
Multi-year re-alignments are messy and complex, especially when they occur simultaneously at the national and global levels, and when multi-speed growth, inflation, and credit dynamics are at work, as is the case today.
Parameters become variables; balance sheet repairs proceed in a slow and uneven fashion; and policymakers experience an uncomfortable shift in the balance of benefits, costs, and risks.
As much as we may wish for a more reassuring outlook, the world economy will remain unusually fluid in the coming years.
What appears as a systemically interconnected world will also turn out to be increasingly fragmented cognitively, with weak global governance and policy coordination.
This is a global economy that must be navigated carefully, lest those that seek to benefit from change find themselves falling victim to it.
Holding Back Europe’s Economic Nationalists
PARIS – The German and French governments have been scrambling to save their automobile and truck industries though big fiscal injections, making it clear that, within much of the European Union, industrial policy has returned with a vengeance.
But, throughout last year, French, German, and other EU leaders worked against rather than with each other when putting their policies in place.
As a result, some European industries got undue protection, while others were squeezed out of the market.
The lesson is clear: European governments must work together when implementing industrial policy.
But they also need to do much more to promote innovation and competitiveness.
The French and German governments intervened last year with capital injections to replace deserting shareholders.
They buttressed weakening demand by subsidizing sales, stimulating research into cleaner technologies, and protecting jobs.
These recovery schemes put national interests first, using the argument that taxpayers’ money must be used to defend the nation’s companies and workers.
The French authorities have now taken this approach a step further with the creation of a Fonds stratégique d’investissement (FSI), which aims to protect domestic capital from the predatory designs of foreign investors.
This wholesale return to the industrial policies of yesteryear, and governments’ reluctance to let even uncompetitive companies fail, should be cause for widespread concern.
Judging by governments’ reactions to the crisis, one could be forgiven for thinking that market regulators and competition authorities should take the lead when an economy is stable, and that industrial policies should be implemented in times of emergency.
Unfortunately, European governments did not respond to the crisis with common policies, nor did they seize the opportunity to strengthen the powers of eurozone authorities.
Instead, each EU member state opted to fend for itself.
The member states’ common arsenal of interventionist tools – deposit guarantees, re-capitalization of banks, guarantees for inter-bank loans, and purchases of toxic assets – seemed to give credence to the notion of European unity.
But the reality turned out to be very different; member states’ interventionist measures have in fact created distortions and irregularities up and down the Continent.
On bank re-capitalizations, some countries adopted the more punitive approach of quasi-nationalization, while others lent public bailout funds on very advantageous terms, linking re-capitalization to the development of credit or the restriction of dividends.
The net result was a hodgepodge of fragmented and re-nationalized financial systems.
National competition authorities in countries like Britain were silenced.
France and the Benelux countries had to bail out Fortis and Dexia, owing to the lack of any European mechanism for saving integrated financial companies.
To try and ease the harm that all this assistance was doing to EU competitiveness, the European Commission’s Directorate General for Competition warned that it had little option but to block state aids – but then quickly capitulated to vociferous national protests.
Europe should have used its regulatory power and managed the conflict between systemic and competitive risk that all this emergency public funding was generating, but the competition watchdog’s contradictory request that companies receiving funding should reduce credit to their clients made this well nigh impossible.
The Commission’s handling of the GM Europe issue was an excellent example of industrial intervention.
Initially, the Commission gave the German government free rein, but instead of assisting Opel, Berlin sought to protect German jobs by supporting Magna, the prospective Canadian-Russian buyer, even though this placed Opel’s Belgian and British workforces at risk of job losses.
The Commission’s competition lawyers announced that they would look into all national clauses, but GM’s recovery and the slow implementation of the German scheme ended up undermining the Magna solution.
Then, after last October’s German elections, the incoming government withdrew support from Magna.
Thus, the Commission was able – even before it was officially asked to intervene – to preempt measures that were contrary to single-market logic.
The difficulties that EU governments face in managing the financial crisis are raising serious questions about whether national industrial policy and the Union’s competition rules can co-exist.
They probably can, but only if Europeans give up the political directives of yesteryear and instead promote innovation and more competitive environmental policies.
The global economic crisis, together with the growth of emerging markets, is putting Europe’s longstanding overcapacity problems firmly in the spotlight.
To prevent the EU's single market from going bust, national policymakers must implement industrial restructuring policies in tandem.
This is particularly true of the automobile sector.
The Davignon “manifest crisis” cartels, which once helped manage the European steel industry’s decline, urgently need to be revived.
If the European authorities do not move to address overcapacity in the automotive sector, we will surely see a revival of protectionism.
Holding Charities Accountable
Suppose you are concerned about children in Africa dying from preventable diseases.
You want to donate money to a charity that is working to reduce the toll.
But there are many charities doing that.
How do you choose?
The first thing that many people ask about charities is, “How much of my donation is spent on administration?” In the United States, that figure is readily available from Charity Navigator, a Web site that has five million users.
But the information is taken from forms that the charities themselves complete and send to the tax authorities.
No one checks the forms, and the proportions allocated to administration and program expenses are easily massaged with a little creative accounting.
Worse still, that figure, even if accurate, tells you nothing about the charity’s impact.
The pressure to keep administrative expenses low can make an organization less effective.
If, for example, an agency working to reduce poverty in Africa cuts staff with expert knowledge, it is more likely to end up funding projects that fail.
It may not even know which of its projects fail, because evaluating them, and learning from mistakes, requires staff – and that adds to administrative costs.
In 2006, Holden Karnofsky and Elie Hassenfeld faced the question of which charity would make the best use of their money.
They were in their mid-twenties, earning six-figure incomes at an investment company – more than they needed – and were thinking about donating money to help make the world a better place.
As investment advisers, they would never recommend investing in a company without detailed information about how well it was achieving its goals.
They wanted to make similarly well-informed choices about the charities to which they contributed.
So Karnofsky and Hassenfeld got together with six friends who also worked in finance and divided up the field to find out which charities could be shown to be effective.
They contacted organizations and received lots of attractive marketing material, but nothing that answered basic questions: what do the charities do with their money, and what evidence do they have that their activities help?
They called many charities, but eventually realized something that seemed extraordinary: the information was just not there.
Some foundations said that information on their work’s effectiveness was confidential.
This, Karnofsky and Hassenfeld thought, is not a good way to go about charitable work.
Why should information about how to help people be secret?
The fact that charities were unprepared for such questions indicated to Karnofsky and Hassenfeld that other donors and foundations give more or less blindly, without the information needed to make sound decisions about whom to support.
Karnofsky and Hassenfeld now had a new goal: to obtain and publicize the information.
To that end, they founded an organization called GiveWell so that other donors would not have as hard a time extracting it as they had had.
However, it soon became apparent that the task required more than part-time attention, and the following year, after raising $300,000 from their colleagues, Karnofsky and Hassenfeld left their jobs and began working full-time for GiveWell and its associated grant-making body, The Clear Fund.
They invited charities to apply for grants of $25,000 in five broad humanitarian categories, with the application process demanding the kind of information that they had been seeking.
In this way, a substantial part of the money they had raised would go to the most effective charity in each category, while simultaneously encouraging transparency and rigorous evaluation.
The first report on which organizations are most effective at saving or transforming lives in Africa is now available on GiveWell’s Web site, www.givewell.net .
Population Services International, which promotes and sells items like condoms, to prevent HIV infection, and bed nets, to prevent malaria, came out on top, followed by Partners in Health, an organization that provides health care to poor rural populations.
The third-ranked organization was Interplast, which is more narrowly focused on correcting deformities like cleft palate.
Evaluating charities can be more difficult than making investment decisions.
Investors are interested in financial returns, so there is no problem about measuring distinct values – in the end it all comes down to money.
It is more difficult to compare the reduction of suffering brought about by correcting a facial deformity with saving a life.
There is no single unit of value.
In other ways, too, evaluating charities takes time, and can be expensive.
Perhaps for this reason, many organizations, including some of the best-known anti-poverty organizations working in Africa, did not respond to GiveWell’s request for information.
No doubt they calculated that a chance to get a $25,000 grant wasn’t worth it.
But if donors start to follow GiveWell’s recommendations, then a high ranking from GiveWell could be worth far more than the value of the grant.
This is why the potential of GiveWell is revolutionary.
In the US, individual donors give about $200 billion to charities each year.
No one knows how effective that vast sum is in achieving the goals that donors intend to support.
By giving charities an incentive to become more transparent and more focused on being demonstrably effective, GiveWell could make our charitable donations do much more good than ever before.
Hollywood’s Favorite Villains
Once upon a time, Cold War enemies, white supremacists, and evil geniuses reigned supreme as Hollywood’s favorite bad guys.
No more.
Today, it is multinational corporations that are increasingly being cast as the über-villains of our globalized world.
For all their subliminal paid promotions and subtle product placements, corporations are getting drubbed in the main story lines of our popular culture.
This treatment goes far beyond documentaries like Michael Moore’s polemical Fahrenheit 9/11 or The Corporation , an earnest if somewhat paranoid portrayal of multinational companies’ role in globalization.
It extends to mainstream hits like The Constant Gardener , in which the idealistic protagonists do battle with a malicious global pharmaceutical company that is bent on exploiting Africa’s misery to test experimental drugs.
To be sure, sociopathic corporations have populated books and films for more than a century. But corporate villains, typically multinational companies, have never been so ubiquitous as today.
Is it unfair?
Most corporations, after all, are merely convenient mechanisms for ensuring that scarce global capital is used at maximum efficiency, to the benefit of all.
Are famously liberal Hollywood film directors spending too much time going to anti-globalization rallies?
Perhaps.
But I would submit that Hollywood’s misgivings, however untutored, represent only the tip of a growing iceberg of resentment against the perceived injustices of globalization.
The simple truth is that corporations represent capital, and capital – in the form of factories, equipment, machines, money, and even houses – has been the single biggest winner in the modern era of globalization.
Corporate profits are bursting at the seams of investors’ expectations in virtually every corner of the world.
Even in moribund economies like Germany and Italy, where employment security is vanishing, corporations are swimming in cash.
This phenomenon comes as no surprise to economists.
Add two billion Indian and Chinese workers to the global labor force, and the value of other means of production – particularly capital and commodities (for example, gold and oil) – is bound to go up. And so it has, with capitalists everywhere gaining an ever larger share of the economic pie.
(In theory, capitalists in labor-abundant China and India could end up as losers, but in practice they, too, have benefited thanks to their governments’ success in simultaneously liberalizing and globalizing.)
Many policymakers seem to be under the impression that surging profits are a purely cyclical phenomenon, as economies continue to grow out from the depths of the 2001 recession.
Wait a bit, they predict, and wages will fully catch up later in the cycle.
Not likely.
Capital’s piece of the pie has been getting bigger for more than 20 years, and the trend looks set to continue.
Indeed, corporations’ growing share of income has been a major driver behind the long, if uneven, bull market in stocks that began in the early 1990’s.
At the same time, inflation-adjusted wages for rich-country unskilled workers have barely budged over the last two decades.
Some of these trends also have to do with the nature of modern technological change, which seems to favor capital and skilled workers disproportionately.
But, regardless of their cause, rapidly growing inequalities are a powerful force for instability everywhere, from wealthy America to rapidly growing China to reform-challenged Europe. “A rising tide lifts all boats,” conservatives like to say.
Fine, but what happens to people, like the poor of hurricane-struck New Orleans, who don’t own boats?
Growing inequality would not be such a problem if governments could simply raise taxes on the rich and strengthen subsidies to the poor.
Unfortunately, any country that taxes capital too aggressively will only succeed in chasing it to regions where the tax burden is lighter.
In a globalized world, national governments’ ability to tax potentially mobile factors of production is sharply circumscribed.
The same mechanism that pours profits into the pockets of global corporations also prevents governments from claiming a larger share of the spoils.
Unfortunately, the long-term trend towards ever-lower income shares for unskilled workers is likely to continue over the coming decades, as modern technology permeates the globe, and as emerging markets like China, India, Brazil, and Eastern Europe continue to integrate into global production.
This is not to say that unskilled workers are actually being made worse off by globalization in absolute terms; the vast majority are actually breaking even or better.
But unskilled workers’ incomes are not keeping pace with overall economic growth, and the resulting social strains are a ticking bomb.
If so, then Hollywood’s cartoon-like caricatures of evil multinational corporations may some day seize mainstream consciousness, leading to political upheavals that shatter today’s social contract.
That won’t be good for profits, or for the poor.
Governments – and corporations – must find better ways to provide equal opportunity through improved education, broader financial markets, and other channels.
Otherwise, globalization’s storyline may not proceed according to the script.
Holocaust Denial, Nuclear Denial
What connects Iran’s nuclear ambitions and Holocaust denial?
With equal fervor, Iran’s president, Mahmoud Ahmedinejad, defends his country’s right to develop its nuclear capacity (though denying that his country seeks nuclear weapons) and challenges decades of Holocaust research.
How should Ahmedinejad’s denial that Iran intends to pursue nuclear arms be judged in light of his Holocaust denial?
Journalists ask, but Ahmedinejad won’t answer.
His argument is that Iran does not want nuclear weapons, and would not use them to duplicate a crime that did not happen.
Some westerners, while lamenting Ahmedinejad’s insensitivity, have struggled to minimize the significance of his Holocaust denial as the fulminations of a misguided fanatic (as if misguided fanaticism were an incidental quality in a nation’s president).
This misses the point.
Holocaust denial is not an argument about the past.
It is an argument about the future.
The point of Holocaust denial is to remove the taboo now associated with the original crime.
For deniers, the problem is not that the Holocaust occurred, but that most people still consider it to be a bad thing.
Thus, Auschwitz is dismissed as a “detail of history,” in the telling phrase of the French politician Jean-Marie Le Pen.
What Holocaust deniers seek most is to undo the idea that Nazi crimes should have any impact on current international relations or on global notions of morality.
Ahmedinejad made this point repeatedly in interviews with western media and in long letters to US President George W. Bush and German Chancellor Angela Merkel.
He has even done the math: sixty years have indeed passed since the Holocaust ended, five times the actual period of Nazi rule in Germany.
So, it is time, he wrote Merkel, to “make the shadow of World War II disappear.”
Unsurprisingly, he has Israel in mind.
But Ahmedinejad’s obsession with Israel blinds him to any understanding of what actually happened across Europe during WWII – and to the fact that present-day Europe was constructed over the six decades since then as a response to this historical disaster.
In writing to Merkel, he is addressing the leader of a country decimated by Nazi rule – millions dead, an entire society and economy reduced to rubble.
Had she been politically active during the Nazi times, Merkel would have landed in a concentration camp.
Yet Ahmedinejad, referring to Europe’s response to the Holocaust, asks her to imagine “what standing some European countries could have had and what global role they could have played, if it had not been for this 60-year-old imposition.”
Germany does not seem to have done too badly in these 60 years, but consider the core of this “imposition”: the effort to give enduring political expression to the moral concepts of good and evil that the Nazis tried to invert.
As a policy, the Holocaust was premised on denial – the physical denial of any legitimate religious, racial, or political difference within Nazi Germany.
The means of this denial were the annihilation of offending populations – the Jews foremost among them – in a merciless attempt at social purification.
The intent of the crime was so ambitious, and its scope so great, that a new word – genocide – was coined to describe it.
Modern media played a role, too, broadcasting images of the death camps that immediately came to symbolize the depth of Nazi depravity.
The enduring impact of the Holocaust, explored in hundreds of books and films, was to portray Nazism as the ultimate expression of evil.
In this context, to deny the Holocaust is to reject its modern association with evil, and implies that what happened during the Holocaust could be accommodated under a different moral order.
Ahmedinejad argues that outside pressure, not the actual historical experience of total war, keeps the memory of the Holocaust alive in Europe.
What he doesn’t understand is that the memory of Auschwitz is also the memory of the Battle of Britain, the bombing of Dresden, the occupation of Paris, and the Warsaw uprising.
Auschwitz did not occur in a vacuum.
It was the furthest extreme of a disaster that incorporated all these other events.
If the Holocaust did not happen, or if it has no meaning, then how is the rest of modern European history to be understood?
If there were no crimes, then the Nazis were not criminals.
Ahmedinejad feels the power that comes with re-writing history.
He enjoys taunting the West with the past that he denies.
He understands the temptation of evil, the lure of forgetfulness.
Above all, he is a practical man.
It does Ahmedinejad no good for Europe to maintain a sense of history that must put it at cross purposes with Iran.
Ahmedinejad’s purpose is simple: find the weak spots in the chain that links Europe to its past and, through this past, to Israel and the US.
Europe’s choice is equally clear: to accept absolution for this past from the president of Iran, or to determine whether the standard of truth that he applies to history is the same as he applies to nuclear weapons.
Homeless at Home
Today, the United Nations estimates that 77 million people – more than 1% of the world’s population – are displaced within their own countries, having been forced to flee their homes by armed conflicts, violence, urbanization, development, and natural disasters.
This is more than the population of France, the United Kingdom, or Turkey.
These people are not “refugees,” because they have not crossed an international border, but their experiences are often equally devastating.
Today, the number of people who have been internally displaced by conflicts alone is twice that of refugees.
With the increasing pattern of internal, rather than international, armed conflicts, and the rising regularity of extreme weather events affecting millions of people, internal displacement poses an even greater challenge to future generations.
Uprooted from their homes and livelihoods, and traumatized by the violence or sudden disaster that forced them to flee, the displaced are often thrust into an extremely precarious future with few resources. Think of the 15 million Chinese displaced following the Sichuan earthquake, the more than two million Iraqis uprooted within their country’s borders by sectarian and other violence, the 2.4 million displaced in Darfur, or the hundreds of thousands who have fled Mogadishu in the last year.
In the last decade, those displaced by conflicts alone rose from 19 million to 26 million, with millions more displaced by disasters.
The plight of these victims long went unrecognized, as governments and the international community alike failed to acknowledge their rights to protection and assistance.
In 1998, the UN issued Guiding Principles on Internal Displacement, which sets out these legal rights.
Ten years on, what impact have the Principles had on displaced people’s lives?
The achievements are notable, if insufficient.
We have raised awareness of the plight of the displaced, brought about changes in government policies, and raised billions of dollars to respond to their basic needs.
This has helped save countless lives.
Humanitarian efforts continue to be strengthened, including through a new rapid funding mechanism, the UN Central Emergency Response Fund.
But for every gain we have made, enormous difficulties still remain.
The number of those displaced by natural disasters is rising, as the adverse effects of climate change continue to mount.
Nine of every ten recorded disasters are now climate-related.
As many as 50 million people around the world are estimated to be displaced each year by floods, hurricanes, tsunamis, earthquakes, and landslides.
However sudden the initial displacement, the impact can last for generations, together with a long-term need for clean water, shelter, health care, and other basic services, as victims of Hurricane Mitch in Central America in 1998 know from bitter experience.
Nor are rich countries immune.
Two years after Hurricane Katrina, thousands of people remain in temporary shelters.
Moreover, violent armed groups, be they government-supported militias or rebel movements, increasingly embrace terror as a tactic to force civilians from their homes, as seen in the Democratic Republic of Congo, Somalia, Iraq, and elsewhere.
Millions of people remain impoverished, face discrimination, and suffer long-lasting trauma even after the guns fall silent.
Life in camps is demoralizing and ultimately dehumanizing.
The world rightly focuses on the tragedy in Darfur, but overlooks another four million Sudanese still displaced as a result of the north-south conflict, many of whom continue to live in terrible poverty in Khartoum slums or in makeshift camps across the country, with little opportunity to re-build their lives.
We must prevent displacement from occurring, and end it as quickly as possible.
On the preventive front, countless lives can be saved by simple actions such as flood-proofing coastlines, or strengthening earthquake codes for hospitals and schools.
Countries like Bangladesh and Mozambique have proven that disaster risk reduction and preparedness can be a life-saving investment.
In conflict situations, preventing displacement primarily requires political will.
Those who forcibly displace civilians in violation of international law must be held accountable in order to deter others in the future.
States that are not involved in the conflict are also required to uphold the rights of the displaced, including the right to return to their homes wherever possible, and this must be addressed in peace agreements and enforced in peacekeeping mandates.
So here’s the bottom line: conflicts will continue and natural disasters are growing in frequency and intensity.
Addressing the root causes and reducing the impact of displacement should start by heeding victims’ voices – their needs and wishes must be understood and their rights respected.
The international community can help. But national authorities must lead.
Ten years after the Guiding Principles were signed, the time for excuses and inaction has run out.
Home Sweet Second Home
Whenever I speak at finance and economics conferences around the world, I find that a great conversation starter with the spouses of the middle-aged business people who attend is to inquire about their vacation home.
I then find myself entertained by stories of gorgeous ocean sunsets seen from the porch, views onto expanses of colorful wildflowers on mountainsides, and happy family reunions in beautiful seclusion (as well as problems with the plumbing).
Years ago, I never asked about vacation homes.
They never seemed so much on people’s minds.
Purchases of second homes for pleasure were confined to the rich, and thus did not seem quite so much of a conversation topic for the rank-and-file business people that I meet at such conferences.
But now the world is undergoing a second-home boom: an increasing number of people are buying vacation homes in beautiful and fun places that are within a few hours’ flying time from their first homes and jobs.
Their second homes are a retreat where they will spend only a fraction of the year, and recently pristine mountain ridges and ocean cliffs are being dotted with new homes to meet the demand.
A study by the National Association of Realtors (NAR) indicates that 13% of all homes purchased in the United States in 2004 were vacation homes.
This does not include buyers who purchased homes as investment properties, mostly to rent out.
According to the NAR, investment buyers account for another 23% of home sales, bringing second-home purchases to 36% of the total.
Some of the US counties with a high proportion of vacation homes are seeing price increases that rival, if not outstrip, the booming metropolitan areas.
For example, according to the Case-Shiller Indexes, home prices in the fashionable Cape Cod vacation area in Massachusetts soared 184% from 1997 to 2005, compared to the 131% increase in nearby Boston over the same period.
America is not alone.
Europeans are buying gemütliche Alpine ski chalets, glamorous condominiums with Mediterranean views in the South of Spain, and, increasingly, villas in picturesque sites in Turkey, Hungary, and Croatia.
Australians are buying oceanfront properties at the Sunshine Coast and the Whitsundays.
Japan’s vacation-home boom of the 1980’s has largely fizzled with its collapsing stock market and urban land market.
But even there, the market for vacation homes remains hot in places like Karuizawa, Lake Kawaguchi, and Hakone.
Being able to afford a vacation home in beautiful surroundings may mean a lot to some people.
Indeed, sometimes the talk that I hear about these properties seems to integrate them into the true meaning of life.
After all, where do we imagine that philosophers and poets and gurus live?
In one of these captivatingly charming places, of course, and not as tourists in hotel rooms.
Most people who couldn’t possibly afford such a vacation home probably don’t miss it.
Craving one seems to be a desire, like fine wine, that one discovers only when one has substantial wealth.
So, as global economic growth continues, and as household incomes rise in today’s most populous emerging countries, demand – and thus prices – for vacation homes in beautiful places, either at home or abroad, will most likely soar.
There is reason to worry about this.
Real GDP has been growing at around 3% a year in many advanced countries, and twice that or more in some emerging countries.
Properties in beautiful places are likely to be what economists call “superior goods” – those goods that account for a higher proportion of consumption as incomes rise.
With fixed supply, rents on these properties should increase at a rate equal to or above the rate of GDP growth.
Prices could increase much faster at times.
On the other hand, in some places, a speculative bubble is fueling today’s boom in vacation-home prices.
The vacation-home boom appears psychologically tied to the urban home-price bubble in many of the world’s “glamour cities,” and prices of these vacation homes are similarly vulnerable to a significant drop in coming years.
Moreover, there are plenty of ways for the construction industry to offer untold millions more people the opportunity to call some beautiful place home, simply by building more high-density and high-rise vacation apartment buildings there.
Many of the single-family vacation mansions or low-density apartment buildings that are being built today will likely eventually be sold, torn down, and replaced with higher-density megastructures, boosting supply and thus easing pressure on prices of the remaining low-density vacation homes.
Such higher-density construction must be the best possible outcome, for it will please the most people.
Most vacationers seem to derive a sense of excitement from the presence of many other vacationers around them.
Large numbers of people contribute to a holiday atmosphere and attract entertainment and sports industries.
But, for many of those who imagine relaxing in a place that offers a quaint life of undisturbed beauty, there is a strong risk that prices will rise out of reach in future decades.
No economic strategy can change that, even if it produces spectacular GDP growth.
Home Truths about Immigration
Something strange happened in Europe's election campaigns this year.
In France and Germany, Holland and Sweden the subject uppermost on many people's minds--immigration--was either ignored or exaggerated.
Established parties seem almost to have an unwritten pact to play down the significance of immigration.
"We must keep this sensitive subject out of the campaign" seemed to be the prevailing attitude, as if the period of heightened political awareness that elections provide should not be used to debate serious controversies.
As a result, fringe parties stepped in with slogans about countries being "swamped" by immigrants and the need to preserve the "purity" of nations.
Can one blame voters for being suspicious of the silence of the political majority, and even for being taken in by the fringe's blustering?
It is high time--indeed, past time--for those who believe in liberal and enlightened political discourse to present their case.
Some home truths about the migration of people need to be remembered and the necessary consequences drawn.
Here are five such truths, or at any rate, five issues for debate:
First, emigration is no fun.
As a rule, people do not leave their homes on a whim or out of adventurousness.
Typically, they want to escape conditions of hopelessness, as many Europeans did when they left their homes in the 19 th and 20 th centuries, usually for America.
Whether migrants are responding to political oppression or economic destitution, it is important to understand that the price they are prepared to pay is as high as the push to leave is strong.
Second, immigration is a great compliment to those countries that migrants choose as their final destination.
The answer to the question, "Where do we go if we have to leave?" is not usually China or some African country, nor is it any longer much of Latin America.
Countries that are magnets for migrants tend to be rich and free.
Canada has become a dream for many, but so are the countries of Europe.
They should be proud--and a little humble--about their magnetic quality, as the US was for a long time.
Third, it is misleading to argue for a certain amount of immigration in terms of the need to fill certain high-tech or other positions.
Gaining a few Indian computer specialists is a bad reason for allowing "green card" access, if only because such migrants are likely to remain a tiny minority of newcomers.
Rich countries need immigrants nowadays in order to fill the jobs that Adair Turner, in his book Just Capital , calls "high-touch" jobs.
Getting your hands dirty is what most people in rich countries no longer want to do.
From restaurant kitchens to care for the elderly, from harvesting cotton to laboring on building sites, people in rich countries want to consume services that they are no longer willing to provide themselves.
It may not be dignified to expect immigrant workers to do these "dirty" jobs, but to these workers such jobs offer a step on the ladder of hope as they help to keep advanced economies and societies functioning.
Fourth, no one has yet thought through the full implications of today's demographic and attendant social changes, but the fact is that without immigrants the welfare state in advanced countries will become unaffordable.
This is not pleasant to say.
Using migrants to provide for the needs of natives, but without letting the migrants share all the benefits, is morally unattractive.
There may be ways to mitigate the result, but without immigration social benefits across Europe will have to be reduced massively within a generation.
Fifth, immigration can be treated either as a step towards the full integration of migrants, or as a transitional phase in their lives.
Both possibilities need to be on offer, but there is a lot to be said for the second.
Italians (and later Turks) who worked in Northern Europe and then returned home with sufficient assets to start small businesses made a double contribution; they helped their host countries and then helped their home countries.
The fact that countries can be turned around is a reason for hope.
Portugal, and above all Ireland, are prime examples.
For more than a century, Ireland was an emigration country par excellence .
Now Ireland is so prosperous that it attracts immigrants even from Britain.
This is not the only way forward.
Integration of immigrants makes much sense; but it is desirable to help create sustainable conditions in troubled countries with the help of a generation of emigrants who first transfer resources and then return themselves.
Many consequences follow from such home truths about immigration, not least a more rational debate.
Viewed from the perspective such truths provide, the European Union's eastward enlargement, for example, is highly desirable not despite but because it may lead to migration from the new member states to the old.
In this way, more Portugals and Irelands can be created as the wealth of already prosperous regions is sustained.
Homophobia in Mexico
It never fails.
After I've given a lecture or a course on homosexuality, explaining at length why it can no longer be considered an illness, the questions are always the same: "What are the symptoms?"
"How can one prevent it in one's children?" Even, occasionally, "Is it contagious?"
I encounter these questions everywhere: in Mexico City and the provinces; on radio programs and university campuses; among ordinary people, psychology students, and health professionals.
In Mexico there is still the assumption that homosexuality is a disease, as well as a social problem to be eradicated.
Always there is the presumption that gay people are fundamentally different from "us normal people."
These views translate readily into action.
With an average of 35 reported murders a year (unofficial estimates run three times higher), Mexico ranks second in the world, after Brazil, for anti-gay crimes.
Attempts to legalize a limited form of gay marriage were quashed three times by the local congress of Mexico City, by parties of the left and right alike.
For years I've tried to discover the underpinnings of this homophobia, which remains deeply rooted despite the progressive liberalization of public opinion in most areas of morality: contraception, premarital cohabitation, divorce, single motherhood, women's rights, have all gradually (if grudgingly) been assimilated into the spectrum of "normal" behavior.
Yet homosexuality remains outside the pale.
Why?
To begin, the presumed causes of homosexuality are shrouded in pseudo-scientific theories and psycho-babble: homosexuals supposedly suffer from hormonal imbalances, or were sexually abused as children, or constitute an indeterminate "third sex" that is neither male nor female, or had absent fathers and over-protective mothers.
Although science disproved these explanations decades ago, they still prevail in Mexican popular culture because they all fit into that culture's rigid, polarized definitions of masculinity and femininity.
In this deeply held view, men and women are not only different, but opposite.
A man who has any "feminine" traits is "poco hombre": boys who dislike soccer, men who enjoy the opera or express unmanly feelings such as sadness or tenderness, husbands who help with the housework or tend to their children, are considered effeminate.
A woman who does "man's work," shows too much independence, or stands up to men is overly masculine, "hombruna."
It is easy to take the next step and declare her a man-hater and a lesbian.
"Effeminate" men and "masculine" women coincide perfectly with the popular view of homosexuals as men who are not "real" men and women who are not fully "feminine."
The fact that most gay men are not effeminate, and that most lesbians are not masculine, does not affect this belief, mainly because that kind of gay individual is invisible within the culture.
The mass media, for instance, pick up on the flamboyant queens and dykes who participate in gay pride parades.
The vast majority of homosexuals, who are indistinguishable from straight men and women, simply don't enter into the picture.
But homophobia is not just about homosexuality; it is also about what it means to be a man or a woman.
Anything that violates traditional gender stereotypes is severely sanctioned in Mexican society; therein lies the true foundation of homophobia.
But this has implications that go far beyond the rejection of homosexuality, because heterosexuals are also affected by it.
As a psychotherapist specializing in homosexuality, I have been consulted many times by anxious parents terrified that their little boy is gay (at age five!): he likes to play with dolls, enjoys the company of girls, refuses to play soccer.
He must be homosexual.
When I ask them what they would think if their child was a little girl who liked to play baseball, enjoyed playing with boys and refused to play with dolls, they answer, "Oh, that would be fine.
It's OK for a girl to be active and enjoy sports."
This is logical: in a machista society, masculinity is the central value.
That is why, in Mexico today, little boys (and not little girls) are subjected to hormonal and psychological treatment, are removed from mixed schools, and are forbidden to play with girls, all in an effort to prevent them from turning out homosexual.
Thus, homophobia, far from involving only homosexuals, affects everybody who does not fit into traditional gender roles.
Homosexual couples prove that it is possible to have relationships on an equal footing.
Almost always, in a gay couple both men work, because men do so as a matter of course; and both women in a lesbian relationship work, simply because they don't have men to support them.
The fact that both members of a couple have an income, and the autonomy that comes with work, produces an equality that is rarely seen in heterosexual Mexican marriage.
Similarly, homosexual partners are generally best friends--which is rarely the case between husband and wife in a machista society.
For all of these reasons, homosexuality poses a serious threat to the ideas that underlie Mexican society.
Homophobia serves not only to discriminate against homosexuals, but to keep everybody--men and women, gay and straight alike--firmly in their place.
हांगकांग में अगला कदम
लंदन – यह कहना पूरी तरह से सच नहीं है कि पूरी दुनिया की नज़रें हांगकांग पर लगी हुई हैं। परंतु, यह तब हो सकता है जब मुख्यभूमि चीन के लोगों को यह जानने दिया जाए कि उनके देश के सर्वाधिक सफल शहर में क्या हो रहा है। लेकिन चीन की सरकार ने हांगकांग लोकतंत्र के प्रदर्शनों के बारे में किसी भी खबर को देश के बाकी हिस्सों में पहुँचने से रोकने की कोशिश की है – यह वास्तव में चीन के शासकों की सत्तावादी शासन प्रणाली में चीनी शासकों के आत्मविश्वास का संकेत नहीं है।
हांगकांग के फूहड़ प्राधिकारियों के लिए आगे के किसी रास्ते को सुझाने से पहले, तीन बातें स्पष्ट करना बहुत ज़रूरी है। सबसे पहले, हांगकांग के नागरिकों की निष्ठा और उनके सिद्धांतों पर यह एक मिथ्या आरोप लगाया जा रहा है कि बाहरी बलों द्वारा उनके साथ चालाकी की जा रही है जैसा कि चीनी सरकार का प्रचार तंत्र कर रहा है। हांगकांग के हजारों लाखों प्रदर्शनकारियों को जो चीज़ प्रेरित करती है वह उनका यह प्रबल विश्वास है कि स्वतंत्र और निष्पक्ष चुनाव में वे उन लोगों को चुन सकेंगे जो उन पर शासन करेंगे, उन्हें अपने मामलों को चलाने दिया जाना चाहिए, जैसा कि उनसे वादा किया गया था।
दूसरे, हांगकांग के बाहर के अन्य लोगों की इसमें जायज़ रुचि है कि शहर में क्या होता है। हांगकांग एक महान अंतर्राष्ट्रीय केंद्र है जिसकी स्वतंत्रता और स्वायत्तता को संयुक्त राष्ट्र में पंजीकृत एक संधि में गारंटी दी गई थी। विशेष रूप से, यूनाइटेड किंगडम ने, जो इस चीनी-ब्रिटिश संयुक्त घोषणा की दूसरी पार्टी है, इस बात की गारंटी माँगी थी और यह उसे मिली भी थी कि हांगकांग की स्वायत्तता और स्वतंत्रता की 50 वर्षों के लिए गारंटी होगी।
इसलिए यह सुझाव देना हास्यास्पद है कि ब्रिटिश मंत्रियों और सांसदों को हांगकांग के मामलों में अपनी टाँग नहीं अड़ानी चाहिए। वास्तव में, उन्हें यह जाँच करते रहने का अधिकार और नैतिक दायित्व है कि चीन समझौते के अपने पक्ष पर टिका हुआ है या नहीं - जबकि सच तो यह है कि यह ज्यादातर अब तक ऐसा करता रहा है।
लेकिन, तीसरे, सबसे बड़ी समस्याएँ इस बारे में विवाद के कारण पैदा हुई हैं कि हांगकांग के लिए लोकतंत्र के मार्ग पर ले जाने के लिए किए गए वादे को उसे कहाँ, और कब ले जाना चाहिए । हांगकांग के लोगों को जब सार्वभौमिक मताधिकार का आश्वासन दिया गया था तब उन्हें किसी ने यह नहीं बताया था कि इसका मतलब यह नहीं होगा कि वे यह चयन कर सकेंगे कि उन्हें किसके लिए वोट देना है। किसी ने भी यह नहीं कहा था कि चीन की कम्युनिस्ट ब्यूरोक्रेसी के मन में ईरान लोकतांत्रिक मॉडल था जिसमें चीनी सरकार को उम्मीदवारों पर प्रभावी वीटो लागू करने का अधिकार होगा।
वास्तव में, चीन के मन में यह बात नहीं थी। बहुत पहले 1993 में, हांगकांग पर चीन के मुख्य मध्यस्थ, लू पिंग ने समाचार पत्र पीपल्स डेली को बताया था कि "[सार्वभौमिक मताधिकार की विधि] रिकार्ड के लिए [चीन की संसद को] सूचित की जानी चाहिए, जबकि केन्द्र सरकार की सहमति आवश्यक नहीं है। हांगकांग भविष्य में अपने लोकतंत्र को कैसे विकसित करेगा यह पूरी तरह से हांगकांग की स्वायत्तता के क्षेत्र के भीतर है। केंद्र सरकार इसमें हस्तक्षेप नहीं करेगी।" अगले वर्ष, चीन के विदेश मंत्रालय ने इस बात की पुष्टि की।
जो कहा गया था और जिसका वादा किया गया था उसका संक्षेप ब्रिटिश संसद ने 2000 में हांगकांग पर एक रिपोर्ट में प्रस्तुत किया। "इसलिए चीनी सरकार ने औपचारिक रूप से यह स्वीकार कर लिया है कि यह हांगकांग सरकार को तय करना होगा कि हांगकांग में लोकतंत्र किस सीमा तक और किस स्वरूप का हो।"
तो, आगे क्या होगा?
हांगकांग में अपने छातों और कचरा इकट्ठा करने के बैगों के साथ शांतिपूर्ण प्रदर्शन करनेवाले लोग, खुद को कचरे की तरह सड़कों पर बिखरने नहीं देंगे या आँसू गैस और मिर्च के स्प्रे के दबाव के आगे झुक नहीं जाएँगे। ऐसा करने के किसी भी प्रयास से दुनिया के सामने हांगकांग और चीन की एक भयानक और विकृत तस्वीर पेश होगी, और यह चीन के लिए अपमान की बात होगी जिसे चीन कभी नहीं चाहेगा।
हांगकांग के अधिकारियों ने अपने नागरिकों के विचारों का आकलन अत्यंत गलत तरीके से किया है। कन्फ्यूशियस ने जिन बुरे दरबारियों के बारे में चेतावनी दी थी, वे उन्हीं की तरह बीजिंग में गए और सम्राट को वह बताया जो उनके विचार से वह सुनना चाहता था, न कि उस स्थिति के बारे में बताया जो वास्तव में शहर में थी। उन्हें फिर से सोचना चाहिए।
चूँकि इस प्रक्रिया में यह एक छद्म प्रारंभ सिद्ध हुआ, मौजूदा योजनाओं के तहत, संभवतः इसके बाद की जानेवाली कार्रवाई के रूप में लोकतांत्रिक विकास पर विचार-विमर्श का एक दूसरा चरण भी है। हांगकांग की सरकार को अब अपने लोगों को परामर्श के एक वाजिब दूसरे दौर की पेशकश करनी चाहिए जो खुला और ईमानदारीपूर्ण हो। वार्तालाप ही आगे बढ़ने का एकमात्र विवेकपूर्ण तरीका है। हांगकांग के नागरिक गैर-जिम्मेदार या अविवेकपूर्ण नहीं हैं। निश्चित रूप से एक अच्छा समझौता उपलब्ध है जिसमें ऐसे चुनाव करवाए जा सकते हैं जो लोगों को उचित लगें, न कि पहले से तय किए हुए।
हांगकांग में प्रदर्शनकारी, जवान और बूढ़े, शहर के भविष्य का प्रतिनिधित्व करते हैं। वे ऐसे शांतिपूर्ण और समृद्ध जीवन की उम्मीद करते हैं जिसमें वे उन स्वतंत्रताओं और कानून के शासन का आनंद ले पाएँ जिसका उनसे वादा किया गया था। यह केवल उनके शहर के हित में ही नहीं है; यह चीन के हित में भी है। हांगकांग का भविष्य मुख्य मुद्दा है; लेकिन साथ ही यह चीन के सम्मान और दुनिया में इसकी प्रतिष्ठा का मुद्दा भी है।
Hong Kong Holds its Breath
Hong Kong's residents used to be branded as "apolitical."
But that description hardly seems appropriate nowadays.
Since turning out to rally in record numbers on the anniversary of the handover to China in 2003, hundreds of thousands of Hong Kong citizens have taken peacefully to the streets on various occasions to protest government decisions and demand political reform.
But China's government clings to the belief that Hong Kong's people are not ready for democracy.
In April 2004, China's legislators ruled out universal suffrage in Hong Kong's 2007 election of its chief executive, as well as for its 2008 Legislative Council election.
They acknowledged that under the city's special constitution, the Basic Law, these elections could be the first opportunities for the territory to choose its representatives according to the principle of "one person, one vote."
But they expressed concern that major reform could undermine political stability and economic development.
Currently, all eyes in China are on Hong Kong's upcoming legislative election on September 12, which will indicate to Hong Kong's government and to China's leaders what people think about the pace and direction of reform.
A high turnout in favor of pro-democracy candidates is expected, although this won't guarantee them a majority in the legislature because of Hong Kong's unusual political structure.
For this month's election, Hong Kong's 3.2 million registered voters can elect only 30 of the 60 seats.
The pro-democracy camp is likely to win 22 seats of those 30 seats, which are based on five large geographical constituencies.
The other 30 seats, however, are chosen through functional constituencies, which represent specific interests, such as banks, insurance companies, stockbrokers, chambers of commerce, and transport operators.
Only 199,000 voters, some of them representatives from corporations, elect the legislators who fill these seats.
Some of these constituencies have only a few hundred voters and are easily controlled by a small number of vested interests.
Indeed, at the close of nomination on August 4, eleven functional candidates were chosen without opposition, including those representing banks and the Chinese chamber of commerce.
The British and Chinese governments in the 1980's designed Hong Kong's awkward political system during their negotiations over the eventual transfer of sovereignty.
Its purpose was to ensure that the will of the public could not be fully expressed through the ballot box.
After 1997, Hong Kong's government made doubly sure that legislators' already limited powers to initiate debates, legislation, and amendments to laws were further restricted.
It imposed rules requiring majority support from members of functional constituencies as well as geographic constituencies to take such steps.
So resistance to change is built into the system.
If the government can influence 16 of the 30 functional votes, it can thwart proposals from the directly elected legislators.
This has happened with controversial issues concerning political reform and government accountability over the past few years.
Yet no one should forget that on July 1, 2003, over 500,000 people protested because the government refused to allow more time to discuss proposed national security legislation.
Hong Kong's government felt it could ignore public opinion and push the bill through with a large majority of the functional members, plus a handful of directly elected pro-government legislators.
It only backed down when the pro-government Liberal Party, which held a number of functional seats, broke ranks as a result of intense public pressure.
The Civic Exchange-Hong Kong Transition Project's latest survey results, from early August, recorded a sharp upturn in public protests over the past year.
It noted that people increasingly adopted informal means of expressing unhappiness with Hong Kong's government, because they did not think that formal channels were sufficient.
People began taking matters into their own hands by attending rallies, signing petitions, and donating to political parties and activist groups in unprecedented numbers.
The survey also showed that although China's government ruled out universal suffrage in the 2007 and 2008 elections, over 40% of respondents still wanted democracy by then, with nearly 20% more wanting it by the next round of elections in 2011 and 2012.
Furthermore, the majority did not think democratization would hurt the economy, although there were clear concerns that political instability could arise from China's intervention in Hong Kong affairs.
China's government may well adopt a new Hong Kong policy after the election.
The best case would be if China agreed to universal suffrage no later than the 2011 and 2012 elections, gaining legitimacy in Hong Kong by backing reform of the political system.
While China's rulers may fear losing control, they also need to recognize that the current system is causing intense discontent.
The worst case would be if China disregarded a decisive pro-democracy win in 2007 and 2008 and continued to insist that Hong Kong's people were unready for democracy or to allege foreign manipulation of the pro-democracy camp.
Hong Kong's people may well conclude that they have no alternative but to use every occasion to protest chief executive Tung Chee-hwa's unpopular government, making it even harder for him to govern.
Who Loves China?
NEW YORK – Tens of thousands of people have been “occupying” the tear-gas-filled streets of Hong Kong’s Central district to fight for their democratic rights.
Many more may soon join them.
Though some businessmen and bankers are annoyed by the disruption, the demonstrators are right to protest.
China’s government has promised Hong Kong’s citizens that they can freely elect their Chief Executive in 2017.
But, given that candidates are to be carefully vetted by an unelected committee of pro-Chinese appointees, citizens would have no meaningful choice at all.
Only people who “love China” – that is, love the Chinese Communist Party (CCP) – need apply.
One can almost understand why China’s leaders should be baffled by this show of defiance in Hong Kong.
After all, the British simply appointed governors when Hong Kong was still a crown colony, and nobody protested then.
Indeed, the deal that Hong Kong’s colonial subjects appeared to accept – leaving politics alone in exchange for the opportunity to pursue material prosperity in a safe and orderly environment – is not so different from the deal accepted by China’s educated classes today.
The common opinion among British colonial civil servants, businessmen, and diplomats was that the Chinese were not really interested in politics anyway; all they cared about was money.
Anyone with the slightest knowledge of Chinese history knows that this view was patently false.
But, for a long time, it seemed to be true in Hong Kong.
There was, however, a significant difference between Hong Kong under the British and under China today.
Hong Kong was never a democracy, but it did have a relatively free press, a relatively honest government, and an independent judiciary – all backed by a democratic government in London.
For most Hong Kong citizens, the prospect of being handed over in 1997 from one colonial power to another was never an entirely happy one.
But what really invigorated politics in Hong Kong was the brutal crackdown in Beijing’s Tiananmen Square and in other Chinese cities in 1989.
Huge demonstrations took place in Hong Kong to protest the massacre, and massive commemorations of the event are held every June, keeping alive a memory that is repressed and fading in the rest of China.
It was not simply humanitarian rage that galvanized so many people in Hong Kong to act in 1989.
They recognized then that under future Chinese rule, only genuine democracy might safeguard the institutions that protected Hong Kong’s freedoms.
Without any significant say in how they were to be governed, Hong Kong’s citizens would be at the mercy of China’s leaders.
From the point of view of China’s Communist rulers, this seems perverse.
They regard Hong Kongers’ democratic demands as a misguided effort to mimic Western politics, or even as a form of nostalgia for British imperialism.
Either way, the demonstrators’ agenda is considered “anti-Chinese.”
The way China’s rulers see it, only firm control from the top and the CCP’s unquestioned supremacy can create the conditions needed for a rich and powerful China to emerge.
Democracy, in their view, leads to disorder; freedom of thought causes popular “confusion”; and public criticism of the Party tends toward the breakdown of authority.
In this sense, the CCP is rather traditional.
But, though Chinese government always was authoritarian, it was not always as corrupt as it is now.
Nor were China’s politics always as lawless.
China traditionally had institutions – clan associations, religious communities, business groups, and so on – that were relatively autonomous.
Imperial rule may have been authoritarian, but there were large pockets of independence from central control.
In that sense, Hong Kong is perhaps more traditional than the rest of China, excluding, of course, Taiwan.
Today, the CCP’s political supremacy places it above the law, which encourages corruption among Party officials, whether at the local or national level.
Strict Party control of religious, academic, artistic, and journalistic expression stifles the dissemination of necessary information and creative thought.
The lack of an independent judiciary undermines the rule of law.
None of this benefits future development.
When Hong Kong was formally handed back to China 17 years ago, some optimists thought that the former colony’s greater freedoms would help to reform the rest of China.
The example of a clean bureaucracy and independent judges would strengthen the rule of law throughout the country.
Others, for the same reason, regarded Hong Kong as a dangerous Trojan horse that could seriously undermine the Communist order.
So far, there is no evidence that the protesters in Hong Kong’s Central district have any ambition to undermine, let alone topple, the government in Beijing.
They have their hands full just standing up for their own rights in Hong Kong, and the chance that they will succeed appears to be slim.
Chinese President Xi Jinping is anxious to show how tough he can be.
Compromise would smack of weakness.
His aim seems to be to make Hong Kong more like the rest of China, rather than the other way round.
And yet, there is every reason to believe that China would benefit greatly from the opposite course.
Less official corruption, more trust in the law, and greater freedom of thought would make China a more stable, more creative, and even more prosperous society.
In the short term, this probably will not happen.
But the people who truly “love China” are more likely to be found in the streets of Hong Kong than in the closed government compounds of Beijing.
China’s Hong Kong Follies
HONG KONG – The massive public demonstrations by students and young members of the middle-class that have roiled Hong Kong in recent weeks are ostensibly demands for democracy.
But they actually reflect frustration among a population that has been poorly governed by a succession of leaders picked by China’s central government more for their loyalty than their competence.
In fact, the current near-uprising is the culmination of a long series of demonstrations since Hong Kong’s handover from the United Kingdom to China in 1997, after Chris Patten, the last British governor failed to persuade China to allow Hong Kong to establish a genuine democratic government.
In China’s view, Patten’s position was hypocritical, even offensive, given that the British had ruled Hong Kong autocratically.
China believed that it could easily manage the same kind of “executive-led” government that had served Hong Kong well for 150 years under the British.
In order to placate Hong Kong’s restive population – which included many refugees from China – a “one country, two systems” policy was embedded in the region’s constitution, promising Hong Kong “a high degree of autonomy,” except in foreign and defense affairs for 50 years.
Indeed, Hong Kong enjoys many freedoms that the rest of China lacks, including a judiciary system that is guided by British common law and independent from the executive branch.
China has yet to follow through on its second promise: that Hong Kong would elect its chief executive by “universal suffrage” by 2017.
Instead, a committee – initially comprising 800 members, but since expanded to 1,200 – selects the chief executive in accordance with the Chinese government’s wishes.
Hong Kong’s first chief executive, Tung Chee-hwa, was widely viewed as a wise choice.
The Western-educated heir to a shipping fortune, and unusually well connected with the global elite, Tung was thought to be a conservative, thoughtful, cosmopolitan man imbued with liberal values and free of ties to the powerful families that dominated the real-estate industry in the territory.
This perception could not have been more wrong.
Tung turned out to be shallow, radical in his views, more chauvinist than China’s top leaders, and prone to rash decision-making on important policies with wide-ranging social and economic consequences.
He forced out his competent chief secretary, Anson Chan, a veteran Hong Kong civil servant, for her colonial background, thereby signaling his mistrust of the entire civil service that the British had created.
It did not take long for Hong Kongers to realize that their new leader harbored a deep – and deeply flawed – “patriotic” worldview that regarded Western “values” as unsuitable for Hong Kong, the first globalized Chinese city in modern history.
But it was not until Tung tried to ram through draconian internal-security legislation that many of Hong Kong’s citizens began to feel that they were being overtaken by the repressive governance from which they were supposed to be exempt.
Under Tung’s leadership, mass protests became a frequent sight in Hong Kong.
The Chinese government also belatedly recognized that Tung was a liability.
In 2004, then-Chinese President Hu Jintao unceremoniously dressed down Tung on live television.
Three months later, Tung resigned for “health reasons” and was elected Vice Chairman of the largely symbolic Chinese People’s Political Consultative Conference.
Tung’s successor, Donald Tsang, was chosen reluctantly.
But he was a senior civil servant, and seemed to be the only technocrat who could credibly hold together Hong Kong’s disaffected civil service, which China knew was indispensable to governing the territory, regardless of its British heritage.
But Tsang brought his own weaknesses to Hong Kong’s government – most notably, greed.
Tsang, who enjoyed spending time with the wealthy on their yachts and in their private suites, pursued a restrictive land policy that boosted real-estate values – and thus the wealth of the land-owning tycoons.
Prices rose so high, however, that real estate became accessible only to the very well-off, such as the families of high officials from the mainland.
This kind of corrupt behavior earned Tsang a disgraceful exit from government.
Next came Leung Chun-ying, the current governor.
Leung – who was not China’s first choice for the position – inherited a mess.
But he did not do himself any favors with his cabinet choices, many of whom had mediocre records that indicated corruptibility.
One of them, Paul Chan Mo-po, was tasked with managing Hong Kong’s land-supply policy, despite a history of corruption in his personal property transactions.
Worse, Leung pushed forward an unpopular plan to introduce “patriotic education” to Hong Kong, stoking fear among students of a China-dictated brainwashing.
After the failure of three consecutive Chinese-selected leaders to address Hong Kong’s concerns, it is no wonder that Hong Kong’s citizens are increasingly seeking to loosen China’s grip on their government.
But, for the Chinese authorities, this movement reflects an unacceptable challenge to China’s sovereignty.
In this sense, Hong Kong is locked in a vicious circle – and it is up to China’s government to break it.
The fact is that Hong Kong’s citizens understand that they need China, and they have no interest in subverting the central government – nor do they have the power to do so.
Their demands for democracy are simply calls for good governance.
They believe that free and fair elections represent their best chance of having a competent leader – someone like Patten, China’s former nemesis, who is remembered fondly in Hong Kong.
China’s government is doing itself a disservice by demanding that Hong Kong’s citizens bow before their sovereign, while blaming “outside hostile forces” for spurring some kind of unconstitutional rebellion.
Instead, it should focus on the problems created by the chief executives that it chose for the wrong reasons, and it should resolve the underlying governance problems that the demonstrations reflect.
Hong Kong\u0027s Threat to China
Last month's massive demonstrations in Hong Kong, when over half a million residents poured into the streets in protest against the government of Chief Executive Tung Chee-hwa, continues to echo.
Never in Hong Kong's history has popular opposition--uniting investment bankers, street hawkers, off-duty civil servants, and artists, among others--been so loud.
China's communist rulers are dithering about how to respond.
One objective of the demonstrators was to voice their desire to select Hong Kong's future leaders through universal suffrage.
Today, 800 electors handpicked by the mainland Chinese government -- who mostly represent big business -- choose Hong Kong's Chief Executive.
The unpopularity of Hong Kong's incompetent and sycophantic Chief Executive, chosen by China for a second five-year term that will only end in 2007, creates a grave dilemma for the country's communist rulers.
Before July's protests, they hoped that Hong Kong would provide so attractive an example of the idea of ``One Country, Two Systems'' that Taiwan would be lured into accepting the sovereignty of the government in Beijing.
Now Taiwan's leaders point to Hong Kong as a failed model of a flawed concept.
Indeed, Mr Tung's anticipatory subservience to the real or imagined wishes of China's rulers exposed the congenital flaw in the political architecture of uniting a liberal society with a dictatorship.
That flaw infects the heart of the ``One Country, Two Systems'' notion: the idea that genuine autonomy can exist in a country whose supreme leaders do not believe in rule by consent.
Now China's communist rulers find themselves trapped in a bind.
If they back Tung unconditionally for the rest of his term, they can look forward to the collapse of their long-term strategy to re-absorb Taiwan, for the alternative to peaceful reunification with Taiwan is coercion.
But any resort to coercion increases the likelihood of military confrontation with the US, Taiwan's protector.
In this context, the steady build-up of China's short- to medium-range missile capability is a cause for alarm, such missiles being the principle threat against Taiwan.
As the US Defense Department's ``Annual Report on the Military Power of the People's Republic of China'' recently put it, ``The primary driving force for China's military modernization is Beijing's perceived need to prepare credible military options in any potential conflict in the Taiwan Strait.''
Such a nightmare scenario isn't at all likely in Hong Kong, but a steady rot of Hong Kong's vitality is.
For if the frustrations of ordinary Hong Kong citizens are allowed to fester without a genuine commitment by China to allow for universal suffrage by 2007, a far more serious eruption of social and political unrest beckons.
Such frustrations are growing.
Unemployment now stands at 9%--unimaginable before the handover in 1997, when both Tung and China promised that Hong Kong would do even better under Chinese sovereignty than under British rule.
In fact, many observers believe that Hong Kong's real rate of joblessness is much higher, and fear that the trend is not encouraging.
China's leaders, and their handpicked servants in Hong Kong may still believe that Tung's popularity will revive if and when the economy does.
So they comfort themselves with the thought that demands for democratization reflect Hong Kong's economic woes, nothing more.
But six years of divisive as well as dismissively haughty misrule by Tung's administration, which pits one group against another as its preferred method of governance, suggest that Hong Kong's problems are much deeper.
Hong Kong is now an acrimoniously divided society harking back to the days when Chinese communists routinely classified their own citizens as either ``the people'' or ``enemies of the state.''
Most of Hong Kong's people now recognize that their stagnating economy is not merely a matter of bad policy.
It also results from deeply flawed political structures.
In an oligarchic economy such of that of today's Hong Kong, the costs of stagnation and the fruits of growth are distributed in grossly unfair ways.
This cynical structure must be changed if people are to have enough confidence in the future for the economy to recover.
If China's rulers heed the wishes of Hong Kong's seven million people to have the right to elect their own leaders through direct elections, however, they face the prospect that China's 1.3 billion people will demand the same right.
Perhaps so.
But a political system is only ever truly put at risk when leaders consistently misrule.
Indeed, democracies are so stable because they allow misrule to be ended through regularly scheduled elections.
Because stability is their great goal, China's communist rulers, if they are wise, will allow Hong Kong to show the way to a system in which Chinese govern themselves democratically, peacefully, and prosperously.
Taiwan has already done so.
Hong Kong, linked physically to the mainland, provides a more intimate case study for China's people to watch and one day follow.
But if the goal is merely for the communists to retain their monopoly on power, in both Hong Kong and China, then the rot that has settled into Hong Kong's polity and its economy may begin to infect the mainland.
At that point, China might wish it had never heard of Tung Chee-hwa.
Indeed, it might wish it had never secured Hong Kong's return.
Hopeless Unemployment
BERKELEY – However bad you think the global economy is today in terms of the business cycle, that is only one lens through which to view the world.
In terms of global life expectancy, total world wealth, the overall level of technology, growth prospects in emerging economies, and global income distribution, things look rather good, while on still other dimensions – say, global warming or domestic income inequality and its effects on countries’ social solidarity – they look bad.
Even on the business-cycle dimension, conditions have been far worse in the past than they are today.
Consider the Great Depression and the implications of market economies’ inability back then to recover on their own, owing to the burden of long-term unemployment.
But, while we are not at that point today, the Great Depression is no less relevant for us, because it is increasingly likely that long-term unemployment will become a similar impediment to recovery within the next two years.
At its nadir in the winter of 1933, the Great Depression was a form of collective insanity.
Workers were idle because firms would not hire them; firms would not hire them because they saw no market for their output; and there was no market for output because workers had no incomes to spend.
By that point, a great deal of unemployment had become long-term unemployment, which had two consequences.
First, the burden of economic dislocation was borne unequally.
Because consumer prices fell faster than wages, the welfare of those who remained employed rose in the Great Depression.
Overwhelmingly, those who became and remained unemployed suffered the most.
Second, reintegrating the unemployed even into a smoothly functioning market economy would prove to be very difficult.
After all, how many employers would not prefer a fresh entrant into the labor force to someone who has been out of work for years?
The simple fact that an economy had recently undergone a period of mass unemployment made it difficult to recover levels of growth and employment that are often attained as a matter of course.
Devalued exchange rates, moderate government budget deficits, and the passage of time all appeared to be equally ineffective remedies.
Highly centralized and unionized labor markets, like Australia’s, did as poorly as decentralized and laissez-faire labor markets, like that of the United States, in dealing with long-term unemployment.
Fascist solutions were equally unsuccessful, as in Italy, unless accompanied by rapid rearmament, as in Germany.
In the end, in the US, it was the approach of World War II and the associated demand for military goods that led private-sector employers to hire the long-term unemployed at wages they would accept.
But, even today, economists can provide no clear explanation of why the private sector could not find ways to employ the long-term unemployed in the near-decade from the winter of 1933 to full war mobilization.
The extent of persistent unemployment, despite different labor-market structures and national institutions, suggests that theories that pinpoint one key failure should be taken with a grain of salt.
At first, the long-term unemployed in the Great Depression searched eagerly and diligently for alternative sources of work.
But, after six months or so passed without successful reemployment, they tended to become discouraged and distraught.
After 12 months of continuous unemployment, the typical unemployed worker still searched for a job, but in a desultory fashion, without much hope.
And, after two years of unemployment, the worker, accurately expecting to be at the end of every hiring queue, had lost hope and, for all practical purposes, left the labor market.
This was the pattern of the long-term unemployed in the Great Depression.
It was also the pattern of the long-term unemployed in Western Europe at the end of the 1980s.
And, in a year or two, it will be the pattern again for the long-term unemployed in the North Atlantic region.
I have been arguing for four years that our business-cycle problems call for more aggressively expansionary monetary and fiscal policies, and that our biggest problems would quickly melt away were such policies to be adopted.
That is still true.
But, over the next two years, barring a sudden and unexpected interruption of current trends, it will become less true.
The current balance of probabilities is that two years from now, the North Atlantic’s principal labor-market failures will not be demand-side market failures that could be easily remedied by more aggressive policies to boost economic activity and employment.
Rather, they will be structural market failures of participation that are not amenable to any straightforward and easily implemented cure.
Hope or Hype for Personalized Medicine?
STANFORD – During the past several decades, treatment for a variety of conditions has begun to shift from a “one size fits all” approach to a more personalized strategy.
As a result, patients can more often be matched to the best drug for their genetic makeup or the exact subcategory of their disease.
This enables physicians to avoid prescribing a medication (or a dosage) that might cause serious side effects in certain populations.
In other words, even among patients who apparently have the same disease and symptoms, the treatment for each one would be determined by various predictive or prognostic tests.
Eventually, these tests could extend even to the sequencing of the DNA in an individual patient’s cancer cells, for example.
But, while this high-tech approach could be a boon to patients, it could prove detrimental to drug companies’ bottom lines.
The reasons are subtle.
Personalized drug therapy uses biological indicators, or “biomarkers” – such as DNA sequences or the presence or absence of drug receptors – as an indicator of how patients should be treated, as well as to estimate the likelihood that the intervention will be effective.
This concept is not new: it has been known for decades, for example, that people who have a genetic deficiency of an enzyme called G6PD can experience severe and precipitous anemia if they are exposed to certain drugs.
Similarly, ethnic groups and individuals vary widely in their ability to clear medications from the bloodstream, owing to differences in the activity of the enzymes that metabolize, or degrade, drugs.
That is important because low metabolizers clear certain drugs slowly and have more medication in their systems for longer periods of time than high metabolizers.
Thus, the former might be prone to overdose, and the latter to insufficient levels of the same drug.
Prognostic biomarkers have begun to make a big difference in cancer therapy.
Drugs such as Erbitux and Vectibix work only in tumors containing the normal version of a gene called KRAS.
If mutations of KRAS are present, the drugs are ineffective.
Such mutations explain about 30-40% of cases in which patients fail to respond to these drugs, and mutations in another gene called BRAF could account for another 12%.
Knowing this crucial information about a cancer patient’s genes will reduce sharply the number who are unnecessarily subjected to the side effects (and expense) of drugs that will not work.
Improving the efficacy and reducing the side effects of drug therapy will be a boon to doctors, patients, and insurance companies, to be sure, but why should pharmaceutical companies embrace personalized medicine in the long term?
On the positive side, the presence of biomarkers will enable drug companies to perform smaller, better-targeted clinical studies in order to demonstrate efficacy.
In any kind of experiment, a fundamental principle is that the greater the number of subjects or iterations, the greater the confidence in the study’s results.
Unless the effect of the intervention is profound, small studies generally have large uncertainties in results.
That is where biomarkers make a difference.
They can help drug makers to design clinical studies that will show a high “relative treatment difference” between the drug and whatever it is being compared to (often a placebo, but sometimes another treatment).
Thus, when drugs are ultimately approved based on the use of biomarkers, the description of the medication’s approved uses, which is printed on the label, might be more restrictive – that is, it might reduce the size of the patient population for which the drug is intended.
For example, a drug broadly approved for “arthritis” – inflammation of joints that may be due to dozens of different disease processes – can be more widely marketed than one approved to treat only the arthritis that accompanies psoriasis or gout.
In reality, however, the situation is more complex.
Assessments of safety and efficacy often do not move closely in tandem, so that even if smaller, better-targeted clinical trials offer clear evidence of a drug’s efficacy, regulators might demand far larger studies to provide evidence of the drug’s safety.
Increasingly defensive about accusations that drugs and vaccines are inadequately tested for safety, in recent years safety-obsessed regulators have required massive, hugely expensive, and time-consuming clinical trials designed to detect even very rare side effects.
Consider, for example, that before its US approval, a vaccine against rotavirus (a common, sometimes fatal gastrointestinal infection in children) was tested in more than 72,000 children – and another 40,000-plus in post-marketing studies.
On a similar scale, a vaccine to prevent human papilloma virus infection and cervical cancer was tested in almost 30,000 young women.
Such studies are very costly, and, by any reasonable standard, the number of patients included in them is grossly excessive.
Thus, the impact of personalized medicine in the short term might be positive at the patient’s bedside, but vast clinical trials to demonstrate the safety of new drugs will impose huge development costs that manufacturers might never recover.
(Currently, only about one in five drugs approved by US regulators ever recoup their development costs.)&#160;This situation would not be sustainable in the long term.
If society is to derive the maximum benefit from personalized medicine – which will require companies to pursue it – regulators worldwide will need to adopt reasoned and reasonable policies.
Horse Trading and Climate Change
AMSTERDAM – When the panda smiles, the world applauds. Or so it seemed after Chinese President Hu Jintao’s recent speech at the United Nations.
Judging by the way much of the media reported his words, it seemed as if China had actually made an important announcement on cutting greenhouse-gas emissions.
It hadn’t. All President Hu really said was that China would now “endeavour” to curb its carbon emissions by a “notable” margin.
But how does one measure “endeavour” or “notable”?
As someone with close links to the Chinese administration told me when pressed: “What was said was actually pretty meaningless.”
Indeed, there were no specific targets and, as any China watcher knows, the “greening” of the government is old news.
Official Chinese policy in recent years has been to make GDP growth greener. But not at the expense of growth itself – and China plans to grow pretty fast.
At least the panda smiled.
Poor Barack Obama didn’t even have that to offer.
He offered no pledge to cut emissions in the United States, and, with vote-sapping battles already underway over health-care reform, one wonders how much time and energy Obama will have for environmental imperatives.
If all the world got out of this UN General Assembly meeting of government leaders was insubstantial rhetoric, the worse news is that it got more of the same at the G-20 meeting in Pittsburgh.
As one finance minister told me rather wistfully, when I asked him what had actually been delivered on climate change: “Words,” he said, &quot;just words.”
Given that there are little more than two months until the Copenhagen summit on climate change, which is supposed to frame the successor agreement to the Kyoto Protocol, this is depressing.
Perhaps the only people not suddenly depressed are those immersed in the negotiations.
With more than a thousand points still to be agreed, all the policymakers I’ve spoken to recently say that they cannot see how a meaningful deal can be reached by December in Copenhagen.
In reality, everyone is gearing up behind the scenes for a “Copenhagen 2,” and what those involved in the negotiations are calling “an even greater slog.”
Even if some sort of communiqué is cobbled together in December – and countries with elections coming up, such as the United Kingdom, will push for one – it is hard to believe that it will contain sufficient detail or reflect the proper level of commitment to have the impact so desperately needed.
“Copenhagen 1” was always bound to fail, partly because – and this may sound strange at first – it is all about climate change.
Although cuts in CO2 emissions and agreement on funding and finance are necessary goals, the geopolitical reality is that climate change cannot be decoupled from trade or discussions on exchange rates, the IMF, reform of the UN, and so on.
There is a quid pro quo that no one explicitly talks about but which must be addressed: trade-offs between these negotiations, not just within them.
Meaningful action on climate change will not be seen until it is agreed within this broader framework.
This means taking the issue out of its current compartment and being realistic enough to understand that Brazil’s position on cutting down rainforests, for example, will be affected by whether or not it is given a seat on the UN Security Council.
It means being sophisticated enough to understand that as long as China feels under pressure to stop propping up the renmimbi, it is unlikely to deliver commitments on emissions cuts.
Widening the scope of the next round of negotiations so that much more can be used as bargaining chips would make the job of the negotiators considerably harder.
But it would also give them considerably more to work with.
In fact, there is no other way to prevent the process from remaining a zero-sum game.
Worryingly, “Copenhagen 2” will not only have to navigate this complicated terrain, but it must do so in less than five years.
The climate bomb is ticking, and there is a palpable sense of urgency among policymakers.
For, as the UN’s Intergovernmental Panel on Climate Change has explicitly warned, if emissions do not fall before 2015, and only fall from then onwards (and the overall trend is that they have been rising), we will reach the point of no return.
At that point, the Armageddon scenarios of droughts, rising sea levels, floods, energy and resource wars, and mass migration will become a reality.
Just think of the images of recent storms and floods in the Philippines and Vietnam that displaced and killed thousands, and multiply those horrors manifold.
That is what we are up against.
Climate change negotiations are arguably the most important of our lifetime, because their outcome will determine the fate of our planet.
It is essential that they take place within structures and frameworks that encourage agreement by putting other major multilateral issues up for discussion.
The world’s governments must be able to trade horses if pandas and presidents are to do more than smile.
Hot Memory/Cold Memory: The Political Half-Life of Fascism and Communism
Hot Rocks
CANBERRA – Ask any power system engineer about renewable energy and you are likely to be told that it doesn’t deliver “base-load” power.
In other words, renewable energy can’t be relied upon to provide power 24 hours a day, seven days a week: wind doesn’t always spin the turbines on the hill, the sun cannot shine on solar power stations at night, and even hydroelectricity can run short if the rains don’t come.
The inherently erratic behavior of the major renewable energy technologies presents serious problems for power system planners.
It limits how much of these types of renewable power can usefully be fed into the world’s electricity grids.
After all, consumers expect power always to be available.
The engineering solution is to keep a large amount of reliable base-load power as a major component of the generating mix and supplement this with “peaking plants” that can be brought on-line when needs arise.
This peaking capacity is built around hydroelectric systems in some countries, but usually it is based on burning fossil fuels such as gas, diesel, or fuel oils.
The base-load power, too, is predominantly based on fossil fuels, with around 39% of global electricity generation sourced from burning coal.
In some countries, nuclear power has been seen as an answer, but deposits of high-grade nuclear fuel worldwide appear to be limited, and the long-term costs of waste storage and plant decommissioning are high.
The challenge, then, is to reduce our current reliance on fossil and nuclear fuels for base-load power.
The answer may be under our feet.
Earth is an extraordinarily hot planet.
Six thousand kilometers below the surface, the planet’s core is as hot as the surface of the sun.
Yet, even at shallow depths, useful temperatures for power generation are often available.
This “conventional” geothermal energy has been used to generate reliable base-load electricity for more than 100 years, and is now used in many countries including Italy, Iceland, Japan, New Zealand, and the western United States.
The technology is well established, and the track record of reliable power generation includes more than 9000 megawatts of generating capacity.
But conventional geothermal power requires a natural source of large quantities of steam or hot water, and such sources are usually found only in volcanic regions, which rules out its use in large parts of the world.
More tantalizing for humanity’s need for widely available, clean base-load power is the non-conventional geothermal energy called “hot dry rocks,” or HDR. With HDR, useful heat is present in rocks only a few kilometers below the Earth’s surface.
But, with no natural steam or hot water to bring the energy to the surface, an engineered solution is needed, and, during the past 35 years, more than $600 million has been spent worldwide devising one.
The concept is beguilingly simple: drill at least two boreholes five kilometers deep, inject cold water into one, pass it through the hot rocks, and then bring it back to the surface, where the energy is removed in a power station.
Then re-inject the now cooled water for another pass through the subsurface.
Only the heat is extracted at the surface, and everything else that is brought up to the surface is re-injected again, eliminating waste.
But it is the economics of HDR geothermal that will eventually determine its long-term role, because deep boreholes are expensive to drill, and their costs must be met before power stations can begin to generate electricity.
The shallower the heat resources and the cheaper the capital, the more competitive an HDR project will be.
The rising costs of fossil and fissile fuels will also make HDR more compelling, since the long-term economics of geothermal power is effectively quarantined from fuel price movements.
Deposits of hot dry rocks are common, and large amounts of heat are within reach in many places.
But the science and engineering of HDR has been challenging, and it is only now that the first power stations are emerging.
A small power station is operating in Landau, Germany, and others are under construction in France and Australia.
These first power stations will develop the operational and financial performance histories that will be necessary before HDR geothermal energy can begin making an impact on world energy supplies.
Re-engineering humanity’s power systems is going to be an expensive undertaking, regardless of what mix of technologies are used, and the chosen systems will have to be reliable and widely available.
The road to HDR geothermal energy has been long and expensive, but, like all developing technologies, the basic research and development had to be done before commercial development could follow.
With power stations now being built, the signs are bright for widespread use of geothermal energy to generate clean, emissions-free base-load power.
Houses in the Air
Over the past six months, attention and worry have shifted from America’s enormous trade deficit to its surging property markets and real-estate bubble.
At least two of the reasons for high – and rising – home prices in the United States are well understood.
What remains highly uncertain, however, is whether an obviously overheating market can be cooled without sending America, and its main trading partners around the world, into an economic tailspin.
The US housing boom is due, first, to low interest rates, which mean that large amounts of money can be borrowed for mortgages with moderate monthly payments.
Low interest rates strengthen the ability to pay, and thus boost demand. And, with demand high and housing supply fixed – at least in the short run – prices go up.
Second, the 70-year period that began with the widespread diffusion of the automobile –during which one could get nearly anywhere in a typical metropolitan area in half an hour or less – is over.
Before there was widespread automobile ownership, land prices depended on location, and proximity to the central city or to the local railroad station carried a premium.
Now, with serious congestion slowing traffic in major cities to a crawl, the land gradient in housing prices is steep once again.
Perhaps this steepening of the location gradient could be delayed for a decade if we were willing to shift to denser residential patterns.
We could, for example, tear down San Francisco’s row houses and replace them with buildings more like those of New York’s Upper West Side.
But we aren’t willing to do that.
These two factors – low mortgage rates, and the fact that the country has filled up so much that our cars no longer marginalize location costs – go a long way toward explaining the surge in housing prices over the past decade or so.
But they don’t go all the way.
On top of these two powerful fundamental factors sits a bubble.
The bubble is filled by people with money who are buying extra houses because they think home prices will continue to rise, and by people without money who are buying $400,000 houses in less-fashionable neighborhoods with zero percent down and floating interest rates.
Both groups’ demand is inherently ephemeral.
When the first group discovers that housing prices don’t always go up, they will try to dump their properties.
And when the second group discovers that interest rates don’t always stay low, many of them will be unable to meet their higher mortgage payments and will likewise try to dump their properties.
The end of the American housing bubble might not turn out badly. But if it does, it will probably be due to a sharp rise in interest rates.
This could happen for two reasons.
First, investors, recognizing that the dollar is overvalued and that they are likely to suffer large losses when it returns to its fundamental value, could start selling their Treasury bonds, corporate bonds, and mortgage-backed securities.
As the prices of these assets fall, their yields will rise.
At some point, the yields on bonds and mortgages will be high enough that investors’ appetite for yield will balance their fear of exchange-rate depreciation.
In the corridors around my office, all the economists agree that this factor should have pushed US interest rates up three years ago.
But so far it has not.
Does this mean that a hurricane could hit world financial markets at any moment?
Yes.
Or it could also mean that economists’ baseline model of the international economy – especially the assumption of “uncovered interest parity,” which holds that foreign interest income expressed in the domestic currency should equal the domestic interest rate – is simply wrong.
The second factor that could push US interest rates sharply upward is not fear of a decline in the future value of the dollar, but the fact of a past decline in its value.
The US imports the equivalent of 16% of its GDP.
A 40% fall in the value of the dollar – of which half passes through to increased dollar prices of imports – thus implies a 3.2% rise in the overall price level.
A Federal Reserve committed to effective price stability will likely raise interest rates rather than allow any year’s inflation rate to jump from 3% to 6%.
If there is a sharp spike in interest rates – caused either by capital flight in anticipation of a dollar decline or by tight monetary policy in reaction to a dollar decline comes to pass – we will see how good the Federal Reserve really is.
If interest rates rise too far, then the collapse in housing values will lead to large-scale foreclosures and a collapse in consumption spending as well.
This would mean a depression not just for the US, but for Asia and probably Europe as well, for the US can remain the world’s importer of last resort and guarantor of effective demand only as long as its domestic consumption is strong.
But if interest rates don’t rise far enough, the value of the dollar will spiral downward and US inflation will spiral upward like in the 1970’s, setting the stage for the type of extremely painful measures imposed by then Federal Reserve Chairman Paul Volcker.
In these circumstances, straight is the gait and narrow is the path that the Federal Reserve will have to walk – hardly an enviable position.
And yet journalists – not very experienced reporters, to be sure – ask me who is likely to get the “plum job” of Fed Chair next year.
How Accurate Are Your Pet Pundits?
Every day, experts bombard us with their views on topics as varied as Iraqi insurgents, Bolivian coca growers, European central bankers, and North Korea’s Politburo.
But how much credibility should we attach to the opinions of experts?
The sanguine view is that as long as those selling expertise compete vigorously for the attention of discriminating buyers (the mass media), market mechanisms will assure quality control.
Pundits who make it into newspaper opinion pages or onto television and radio must have good track records; otherwise, they would have been weeded out.
Skeptics, however, warn that the mass media dictate the voices we hear and are less interested in reasoned debate than in catering to popular prejudices.
As a result, fame could be negatively, not positively, correlated with long-run accuracy.
Until recently, no one knew who is right, because no one was keeping score.
But the results of a 20-year research project now suggest that the skeptics are closer to the truth.
I describe the project in detail in my book Expert Political Judgment: How good is it?
How can we know?
The basic idea was to solicit thousands of predictions from hundreds of experts about the fates of dozens of countries, and then score the predictions for accuracy.
We find that the media not only fail to weed out bad ideas, but that they often favor bad ideas, especially when the truth is too messy to be packaged neatly.
The evidence falls into two categories.
First, as the skeptics warned, when hordes of pundits are jostling for the limelight, many are tempted to claim that they know more than they do.
Boom and doom pundits are the most reliable over-claimers.
Between 1985 and 2005, boomsters made 10-year forecasts that exaggerated the chances of big positive changes in both financial markets (e.g., a Dow Jones Industrial Average of 36,000) and world politics (e.g., tranquility in the Middle East and dynamic growth in sub-Saharan Africa).
They assigned probabilities of 65% to rosy scenarios that materialized only 15% of the time.
In the same period, doomsters performed even more poorly, exaggerating the chances of negative changes in all the same places where boomsters accentuated the positive, plus several more (I still await the impending disintegration of Canada, Nigeria, India, Indonesia, South Africa, Belgium, and Sudan).
They assigned probabilities of 70% to bleak scenarios that materialized only 12% of the time.
Second, again as the skeptics warned, over-claimers rarely pay penalties for being wrong.
Indeed, the media shower lavish attention on over-claimers while neglecting their humbler colleagues.
We can see this process in sharp relief when, following the philosopher Sir Isaiah Berlin, we classify experts as “hedgehogs” or “foxes.”
Hedgehogs are big-idea thinkers in love with grand theories: libertarianism, Marxism, environmentalism, etc.
Their self-confidence can be infectious. They know how to stoke momentum in an argument by multiplying reasons why they are right and others are wrong.
That wins them media acclaim.
But they don’t know when to slam the mental brakes by making concessions to other points of view.
They take their theories too seriously.
The result: hedgehogs make more mistakes, but they pile up more hits on Google.
Eclectic foxes are better at curbing their ideological enthusiasms.
They are comfortable with protracted uncertainty about who is right even in bitter debates, conceding gaps in their knowledge and granting legitimacy to opposing views.
They sprinkle their conversations with linguistic qualifiers that limit the reach of their arguments: ‘but,’ ‘however,’ ‘although.’
Because they avoid over-simplification, foxes make fewer mistakes.
Foxes will often agree with hedgehogs up to a point, before complicating things: “Yes, my colleague is right that the Saudi monarchy is vulnerable, but remember that coups are rare and that the government commands many means of squelching opposition.”
Imagine your job as a media executive depends on expanding your viewing audience.
Whom would you pick: an expert who balances conflicting arguments and concludes that the likeliest outcome is more of the same, or an expert who gets viewers on the edge of their seats over radical Islamists seizing control and causing oil prices to soar?
In short, the qualities that make foxes more accurate also make them less popular.
At this point, uncharitable skeptics chortle that we get the media we deserve.
But that is unfair.
No society has yet created a widely trusted method for keeping score on the punditocracy.
Even citizens who prize accuracy have little way of knowing that they are sacrificing it when they switch channels from boring foxes to charismatic hedgehogs.
Here, then, is a modest proposal that applies to all democracies: the marketplace of ideas works better if it is easier for citizens to see the trade-offs between accuracy and entertainment, or between accuracy and party loyalty.
Wouldn’t they be more likely to read pundits with better track records?
If so, pundits might adapt to accountability by showing more humility, and political debate might begin to sound less shrill.
Granted, it is not easy to create methods of keeping score that are credible across the spectrum of reasonable opinion.
But in a world where, as Yeats said, “and the best lack all conviction, while the worst are full of passionate intensity,” it is worth trying.
Brexit, Voice, and Loyalty
PRINCETON – Albert Hirschman, who died at the end of last year, was a great economist with a gift for producing striking insights by focusing on an element of observable behavior as a way to transform our view of a whole range of particular problems.
One of his most far-ranging insights was his framework of “exit, voice, and loyalty.”
Originally formulated after an experience with poor trains in West Africa, Hirschman realized that if a complex social system allowed people to leave (exit), its efficiency might deteriorate; a better solution would be to retain people (loyalty), which would give them incentives to articulate demands (voice) that would improve the system’s performance.
It is easy to see how this theory can be applied to personal relations.
Marriages break down if divorce (exit) is too easy; but also become unbearable if there is no sense of mutuality and discussion (voice).
Voice may also decrease if new possibilities emerge: a new potential partner means that there is no longer any pressure to discuss and improve relations within the existing arrangement.
The schema might also be applied to political relations: Hirschman wrote a memorable article showing how the ability to exit East Germany in 1989 produced a sudden breakdown of loyalty.
Europeans might rethink some of their current dilemmas in the light of Hirschman’s theory.
The marriage analogy has become a rather over-used metaphor for Europe’s efforts to integrate.
But it is clear that both voice and loyalty have become a problem for the European Union.
Many citizens and governments believe that they lack influence, or voice, which tends to reduce loyalty.
Now a more radical possibility has been raised.
British Prime Minister David Cameron has raised the possibility of a “Brexit,” a British exit from the European Union.
The polemics that preceded and followed Cameron’s recent speech on Europe showed that both British Euro-skeptics and Europe’s truest Europhiles – including such iconic figures as former European Commission President Jacques Delors – welcomed the British initiative.
Can the British exit threat shake Europe to its senses and make the United Kingdom’s effort to reform institutions more likely to succeed, or to make Europe a more stable polity?
Hirschman’s framework, which is instructive in helping us to think about how loyalty and affection can be generated, suggests that it cannot.
Countries do not like to feel isolated.
They want to see their institutions and values mirrored and replicated in their neighbors – a dynamic that builds loyalty.
As a result, the EU is constantly expanding, while the US likes to urge the world to democratize.
Democratic states are not alone in seeking to expand their influence.
The Soviet Union also wanted to surround itself with a protective buffer of like-minded states, and Italy’s Benito Mussolini was proud that for a time fascism was a competitive export.
The recognition of an exit possibility reverses that basic process of forging bonds of loyalty.
Some other attraction may appear.
One of the factors driving the UK’s sense of unease in its relations with an increasingly bureaucratized Europe is the belief that its values and institutions are closer to those of the US, or of other English-speaking former colonies.
By the 1990’s, British Euro-skeptics coined the term “Anglosphere” to describe a model that was more successful and more expansionary than that of the EU.
The US has been the “other woman” undermining Britain’s loyalty to the EU as an attractive permanent partner.
As a result, Britain has lost much of its ability to make an effective contribution to European reform.
Indeed, the last time Britain had a strong European voice was more than two decades ago.
In the mid-1980’s, then-Prime Minister Margaret Thatcher successfully pushed the idea of an integrated internal market.
The liberalization of trade and investment implied by the Single European Act was greatly inspired by a British deregulatory vision.
At the time, Delors presented the introduction of a single currency as a way to complement or complete the Single Market.
Since then, however, both the American financial model (with powerful financial institutions thriving in lightly regulated markets) and the American model of engagement (in Iraq and Afghanistan) for some time appeared more dynamic and more in accordance with the demands of a globalizing world.
Both elements of the American dream have now lost something of their appeal.
The Iraq engagement proved to be built on deception.
The financial house of cards collapsed.
But Britain remains attracted to something else, and so unwilling to engage in “voice.”
The US is appalled by the consequences of Britain’s flirtation.
It wants to remain engaged with the entire world, not just some islands off the European coast.
It is easier for the US to deal with Europe as a whole, especially when some European answers to common social dilemmas look as if they might provide solutions for America as well.
The outcome resembles a Shakespeare comedy of confused identity.
Europe and Britain are married, but Britain wants to deepen its relationship with America, while America cares more about Europe.
Loyalty-enhancing mechanisms are not easy to establish.
The best ones are positive, like rapid economic growth and rising prosperity, which underpinned the European dream in the past.
Restoring them is unlikely, at least for now.
There can also be negative incentives to loyalty that induce everyone to keep up appropriate standards of behavior.
The risk is that the comedy of misguided affection is resolved by punishing both the tempter and the tempted.
What is the modern equivalent of branding with a scarlet “A,” which was the penalty for adultery in colonial New England?
Inside America’s Tax Battle
BERKELEY – America’s recent presidential election answered the question of whether an increase in revenues will be part of the country’s long-run deficit-reduction plan.
The answer is yes: there is now bipartisan agreement on the need for a “balanced” approach that includes revenue increases and spending cuts.
But there are still deep political and ideological divisions about how additional revenues should be raised and who should pay higher taxes.
If a preliminary agreement on these questions is not reached by the end of the year, the economy faces a “fiscal cliff” of $600 billion in automatic tax increases and spending cuts that will shave about 4% from GDP and trigger a recession.
The majority of citizens agree with President Barack Obama that tax increases for deficit reduction should fall on the top 2-3% of taxpayers, who have enjoyed the largest gains in income and wealth over the last 30 years.
That is why he is proposing that the 2001 and 2003 rate cuts for these taxpayers be allowed to expire at the end of the year, while the rate cuts for other taxpayers are extended.
So far, Obama’s Republican opponents are adamant that the cuts be extended for all taxpayers, arguing that increases in top rates would discourage job creation.
This claim is not supported by the evidence.
Recent research finds no link between tax cuts for top taxpayers and job creation.
In contrast, tax cuts for the bottom 95% have a positive and significant effect on job growth.
During the past three decades, income inequality in the United States has increased significantly; indeed, the US now has the fourth-highest level of income inequality in the OECD, behind Chile, Mexico, and Turkey.
At the same time, as the largest tax cuts have gone to high-income taxpayers, the US tax system has become considerably less progressive.
The US needs fiscal measures that both curb the deficit and contain rising income inequality – and the inequality of opportunity that it begets.
But how should additional revenues be raised from top taxpayers to achieve these two goals?
Most economists believe that increasing revenues by reforming the tax code and broadening the tax base is “probably” better for the economy’s long-term growth than raising income-tax rates.
The analytical case for this belief is strong, but the empirical evidence is weak.
In theory, higher marginal tax rates have well known negative effects – they reduce private incentives to work, save, and invest.
Yet most empirical studies conclude that, at least within the range of income-tax rates in the US during the last several decades, these effects are negligible.
A recent Congressional Research Service report, withdrawn under pressure from Congressional Republicans, found that changes in the top income-tax rate and the rate on capital gains had no discernible effect on economic growth during the last half-century.
A recent review of the economic literature by three distinguished academics found no convincing evidence that real economic activity responds materially to tax-rate changes on top income earners, although such changes do affect their tax-avoidance behavior.
So Obama has evidence on his side when he says that allowing the tax cuts for high-income taxpayers to expire at the end of the year will not affect economic growth.
Republicans have proposed tax reforms in lieu of rate hikes on high-income taxpayers to raise revenues for deficit reduction.
Obama has signaled that he is willing to consider this approach, provided it increases tax revenues from the top 2-3% by at least the same amount as higher rates while protecting other taxpayers.
The federal tax system is certainly in need of reform.
Tax expenditures – which include all deductions, credits, and loopholes – account for about 8% of GDP.
Indeed, the US tax code is riddled with special preferences and contains large differences in effective tax rates across individuals and economic activities.
These differences distort decisions about investment allocation and financing.
Reforms that made the tax system simpler, fairer, and less distortionary would have a beneficial effect on economic growth, although economists concede that the size of this effect is uncertain and impossible to quantify.
Because tax expenditures are so large, limiting them could raise a significant amount of additional revenue that could be used both for deficit reduction and to finance across-the-board cuts in income-tax rates.
Analysis of the Simpson-Bowles and Domenici-Rivlin deficit-reduction plans by the nonpartisan Tax Policy Center confirms that this approach is arithmetically feasible.
Reducing large regressive tax expenditures like preferential tax rates for capital gains and dividends and deductions for state and local taxes, and replacing deductions with progressive tax credits, could generate enough revenue to finance rate cuts for all taxpayers, increase the tax code’s overall progressivity, and contribute meaningfully to deficit reduction.
But the odds of such an outcome are very low: what is arithmetically feasible is unlikely to be politically possible.
Efforts to cap popular tax expenditures will encounter strong opposition from Republicans and Democrats alike.
Nonetheless, some tax reforms are likely to be a key component of a bipartisan deficit-reduction deal, because they provide Republicans who oppose increases in tax rates for high-income taxpayers with an ideologically preferable way to increase revenue from them.
Unfortunately, it will take time to negotiate tax reforms – more time than remains until the end of the year, when the 2001 and 2003 tax cuts are scheduled to expire for all taxpayers.
But there is still time to negotiate an agreement that extends these cuts for the bottom 98%, and that contains temporary measures to cap deductions and credits for high-income taxpayers in 2013.
Such an agreement could help to break the political impasse over whether and how much these taxpayers’ rates should rise next year, thereby preventing the US from falling over the fiscal cliff and back into recession.
Rank Mysteries
PARIS – Gibraltar received exciting news last month.
The latest Global Financial Centres Index (GFCI), published by the consultancy Z/Yen in London, revealed that the Rock had risen further and faster up the ranks than any other center – 17 places, from 70th to 53rd position, since the previous report in September 2013.
I can imagine the celebrations in Gibraltar Town, where, now that the British naval base has closed and Spain is being difficult at the border, financial services are crucial for employment.
And I can also imagine that many in Hamilton, Bermuda, which plummeted almost as far as Gibraltar climbed – 16 places, to 56th – must be crying into their rum punch.
Of course, it is also possible that Gibraltar and Bermuda have chosen to ignore the results, or dispute their significance.
Either way, there is no doubting the global obsession with league tables nowadays.
One can find a ranking for almost every form of human activity.
Commercial banks are ranked by assets.
Investment banks are ranked on a variety of metrics, as are universities – from academic results to their prowess in environmental management, or their appeal to gay students. In the United Kingdom, you can find a table showing where it is best to live if you wish to win Britain’s National Lottery.
(Your chances are almost twice as good in the northeast as in Northern Ireland.)
When one looks closely, most of these tables are, as Henry Kissinger famously put it, “content-free.”
For one brief shining moment, the Royal Bank of Scotland was global top dog in rankings of commercial banks, and we know how that story ended.
Is this true of the GFCI, or does it contain valuable insights into how the global financial system is evolving?
The press headlines accompanying the release of the latest GFCI focused on the change at the top of the league: New York leapfrogged ahead of London, while Hong Kong and Singapore held on in third and fourth place, respectively.
Is this a significant switch?
Much speculation has centered on the recent damage to London’s reputation stemming from the scandal surrounding banks’ manipulation of the Libor interest rate.
Even if some of the machinations were carried out in other cities, there is no escaping the fact that Libor is the London Interbank Offered Rate.
Moreover, London is the biggest center for foreign-exchange trading, the new focus of regulatory attention.
And, though Bruno Iksil was a Frenchman working for the American bank JPMorgan Chase, he became known universally as the “London Whale.”
But GFCI’s detailed results do not bear out that explanation.
London’s reputational factors “are firmly above average and have not seen much change over the past five editions.” Indeed, it seems that London’s small decline is attributable to negative scores on general factors such as the “business environment” and “infrastructure.”
Overcrowded Underground trains and Heathrow’s congestion are having an impact, though it is hard to understand why New York wins on these measures.
Riding the Subway often brings unpleasant surprises, while JFK Airport is hardly a favorite among travelers (and there remains no fast rail link to it).
And yet these subtle switches at the top of the table are not the real story.
From a ten-year perspective, the big gainers have been Hong Kong and Singapore.
It was once fashionable to argue that when China opened up to the world, Hong Kong and Singapore would suffer.
Once the Chinese got their act together, these cities’ role in intermediating the region’s finances would be marginalized by Shanghai, Shenzhen, and other new centers. That still may happen one day, but it has not happened yet.
Hong Kong and Singapore have played their cards astutely.
The combination of an Asian market with strong Chinese connections and a system of English law and property rights continues to provide a powerful competitive advantage.
That is especially true in fund management.
Chinese companies may increasingly raise capital in Shanghai, but wealthy Chinese with money to invest like to hold it in financial centers that are perceived as safe and non-political.
In Europe, we see a different pattern.
Over 15 consecutive surveys, London’s ranking and ratings have remained broadly constant, while Zurich, Geneva, Frankfurt, and Luxembourg have gradually narrowed the gap with it – though that gap remains wide.
There is little doubt that Frankfurt has won the contest with Paris to be the eurozone’s most important financial center.
The Germans were smart to insist on putting the European Central Bank there.
Given the ECB’s new function as the eurozone’s banking supervisor, Frankfurt can consolidate its victory.
Every European Union bank will need to bend the knee to its supervisor on the Main River, even if she does happen to be a Frenchwoman, Danièle Nouy.
In the United States, Boston, San Francisco, and Washington, DC, continue to consolidate their positions as important centers for asset management and, in the last case, for regulation. The 2010 Dodd-Frank financial-reform legislation has given the Federal Reserve Board a much larger regulatory role than it had before the crisis.
But, unless New York’s populist new mayor, Bill de Blasio, tries to run the banks out of town, Western sheriff-style, these cities do not seem likely to steal Wall Street’s crown anytime soon.
All of the best award shows include a surprise.
This year’s wild card, billed as the financial center most “likely to become more significant” in the near future, is Casablanca.
I have no idea why Casablanca is an up-and-coming center, and the GFCI’s compilers do not explain.
Europe’s Fitful Financial Integration
LONDON – The well-publicized troubles of Portugal’s Banco Espírito Santo this summer have reminded us that the eurozone’s financial problems are by no means resolved.
There are, no doubt, idiosyncratic factors behind the bank’s problems, stemming from its exposure to other parts of the Espírito Santo family’s empire.
But when the bank announced a first-half loss of €3.6 billion ($4.7 billion), the sudden collapse of confidence was alarming, and nervous investors are asking whether there are similar time bombs ticking elsewhere.
All eyes are now on the European Central Bank’s asset quality review, due to be completed in the next couple of months.
The AQR is the key element in a “comprehensive assessment” of Europe’s banks before the ECB formally takes on supervisory responsibility for more than 80% of the eurozone banking system in November.
The ECB, quite sensibly, wants all of the potential horrors to be visible before the takeover – so that it cannot be blamed.
With national supervisors, who are often inclined to present a rosy picture of their countries’ institutions, no longer in charge, we can hope that the assessment will be more robust than the earlier stress tests carried out under the auspices of the European Banking Authority (EBA).
Those tests, unlike their equivalent in the United States, failed to rebuild confidence.
Several banks that passed with flying colors were soon obliged to raise new capital.
But the creation of the European banking union has not been the only important change to Europe’s financial regulation since the crisis.
The events of 2007-2009 made it clear that there were serious gaps and inconsistencies that needed to be addressed.
So, following the recommendations of a report prepared in 2009 by former IMF Managing Director Jacques de Larosière, the European Commission created three new pan-European authorities charged with ensuring “consistent application” of European directives.
The deal was done with a large helping of political fudge: the three biggest European Union economies – the United Kingdom, France, and Germany – were persuaded to cede some control to the center, but only if each could host an authority.
Thus, the EBA was established in London, the European Securities and Markets Authority (ESMA) is located in Paris, and the European Insurance and Occupational Pensions Authority (EIOPA) found a home in Frankfurt.
Collectively, they are known as the ESAs (European supervisory authorities).
The road to pan-European regulation over the last two decades has been winding and rocky.
In the early stages, it was assumed that the single financial market could work on the basis of mutual recognition: each country would accept the others’ regulation as broadly equivalent to its own and allow cross-border business to proceed on that basis.
That proved inadequate, as standards and rules remained very different from country to country, and gave way to an approach based on minimum harmonization, whereby core rules were to be the same across Europe, but local variations and additions remained permissible.
When that, too, proved ineffective at promoting competition, as countries used their national rules to block new entrants, the emphasis switched to maximum harmonization, with directives spelling out exactly how local rules must be applied across the EU.
That caused great concern in the City of London, but has been grudgingly accepted.
Since the global financial crisis, London has become less able to argue that it is special and must be left alone.
Now, with the establishment of central regulatory authorities, the EU has moved to the next stage of financial integration.
But, so far, these agencies’ responsibilities are very limited.
ESMA supervises rating agencies directly; but, outside banking, national authorities retain their day-to-day oversight responsibilities.
Integration-minded officials at the European Commission clearly do not regard this as a satisfactory end-state.
So they commissioned a thoughtful review of the three ESAs from Mazars, an accounting firm, which was published earlier this year.
The verdict, roughly, was “so far, so good.”
Now the Commission has followed up by publishing its own assessment.
The Commission was perhaps unlikely to be hypercritical of its own creations, and it is not.
Its report maintains that the ESAs have “quickly established well-functioning organizations aimed at contributing to restoring confidence in the financial sector,” and that market participants seem broadly satisfied with their work.
But the report’s authors believe that there is a need to expand the current mandates, develop a comprehensive approach to consumer protection, and reduce further the influence of national authorities.
The ESAs should have more power to impose their will in the interests of the EU as a whole.
Their chairs should have wider discretion to act on their own initiative.
The ESAs also need more money, which probably can come from fees levied on financial firms, and consideration should be given to merging them in a single location, presumably Brussels.
The general direction is clear.
Unless the new internal market commissioner takes a different view, the European Commission plans to move further along the road to genuine pan-European regulation.
The report now goes to the European Parliament, which can be expected to push harder for more integration, as it usually does.
A single authority, or perhaps two or three working closely together, is a logical arrangement for the eurozone, and perhaps for the entire EU financial market.
It would usefully complement the ECB’s new supervisory role.
But will London fall into line this time?
The British government, after all, has embarked on a path that runs in precisely the opposite direction – reducing the functions of central bodies and repatriating powers to national capitals.
Given the central role of London in EU financial markets, and its political sensitivity in the UK, there is bound to be trouble ahead.
The JPMorgan Problem Writ Large
PARIS – JPMorgan Chase has had a bad year.
Not only has the bank just reported its first quarterly loss in more than a decade; it has also agreed to a tentative deal to pay a fine of $13 billion to the US government as punishment for mis-selling mortgage-backed securities.
Other big legal and regulatory costs loom.
JPMorgan will bounce back, of course, but its travails have reopened the debate about what to do with banks that are “too big to fail.”
In the United States, policymakers chose to include the Volcker rule (named after former Federal Reserve Chairman Paul Volcker) in the Dodd-Frank Act, thereby restricting proprietary trading by commercial banks rather than reviving some form of the Glass-Steagall Act’s division of investment and retail banks.
But Senators Elizabeth Warren and John McCain, a powerful duo, have returned to the fight.
They argue that recent events have shown that JPMorgan is too big to be managed well, even by CEO Jamie Dimon, whose fiercest critics do not accuse him of incompetence.
Nonetheless, the Warren-McCain bill is unlikely to be enacted soon, if only because President Barack Obama’s administration is preoccupied with keeping the government open and paying its bills, while bipartisan agreement on what day of the week it is, let alone on further financial reform, cannot be guaranteed. But the question of what to do about huge, complex, and seemingly hard-to-control universal banks that benefit from implicit state support remains unresolved.
The “school solution,” agreed at the Financial Stability Board in Basel, is that global regulators should clearly identify systemically significant banks and impose tougher regulations on them, with more intensive supervision and higher capital ratios.
That has been done.
Initially, 29 such banks were designated, together with a few insurers – none of which like the company that they are obliged to keep!
There is a procedure for promotion and relegation, like in national football leagues, so the number fluctuates periodically.
Banks on the list must keep higher reserves, and maintain more liquidity, reflecting their status as systemically important institutions.
They must also prepare what are colloquially known as “living wills,” which explain how they would be wound down in a crisis – ideally without taxpayer support.
But, while all major countries are signed up to this approach, many of them think that more is needed.
The US now has its Volcker rule (though disputes between banks and regulators about just how to define it continue).
Elsewhere, more intrusive rules are being implemented, or are under consideration.
In the United Kingdom, the government created the Vickers Commission to recommend a solution.
Its members proposed that universal banks be obliged to set up ring-fenced retail-banking subsidiaries with a much higher share of equity capital.
Only the retail subsidiaries would be permitted to rely on the central bank for lender-of-last-resort support.
A version of the Vickers Commission’s recommendations, which is somewhat more flexible than its members proposed, is in a banking bill currently before Parliament.
A number of MPs want to impose tighter restrictions, and it is difficult to find anyone who will speak up for the banks, so some form of the bill is likely to pass, and big British banks will have to divide their operations and their capital.
The UK has decided to take action before any Europe-wide solution is agreed.
We British are still members of the European Union (at least for the time being), but sometimes our politicians forget that.
Sometimes they simply lose patience with the difficulty of agreeing on changes in negotiations that involve 28 countries, which seems especially true of financial reform, given that many of these countries are not home to systemically important banks and probably never will be.
But EU institutions have not been entirely inactive.
The European Commission asked an eminent-persons group, chaired by Erkki Liikanen, the head of the Finnish central bank, to examine this issue on a European scale.
The group’s report, published in October 2012, came to a similar conclusion as the Vickers Commission concerning the danger of brigading retail and investment banking activities in the same legal entity, and recommended separating the two.
The proposal mirrors the UK plan – the investment-banking and trading arms, not the retail side, would be ring-fenced – but the end point would be quite similar.
But the European Banking Federation has dug in its heels, describing the recommendations as “completely unnecessary.”
The European Commission asked for comments, and its formal position is that it is considering them along with the reports.
That consideration may take some time; indeed, it may never end.
Germany’s government seems to have little appetite for breaking up Deutsche Bank, and the French have taken a leaf from the British book and implemented their own reform.
The French plan looks more like a Gallic version of the Volcker rule than Vickers “à la française.”
It is far less rigorous than the banks feared, given President François Hollande’s fiery rhetoric in his electoral campaign last year, in which he anathematized the financial sector as the true “enemy.”
So we now have a global plan, of sorts, supplemented by various home-grown solutions in the US, the UK, and France, with the possibility of a European plan that would also differ from the others. In testimony to the UK Parliament, Volcker gently observed that “Internationalizing some of the basic regulations [would make] a level playing field.
It is obviously not ideal that the US has the Volcker rule and [the UK has] Vickers…”
He was surely right, but “too big to fail” is another area in which the initial post-crisis enthusiasm for global solutions has failed.
The unfortunate result is an uneven playing field, with incentives for banks to relocate operations, whether geographically or in terms of legal entities.
That is not the outcome that the G-20 – or anyone else – sought back in 2009.
The Banks that Ate the Economy
LONDON – Bank of England Governor Mark Carney surprised his audience at a conference late last year by speculating that banking assets in London could grow to more than nine times Britain’s GDP by 2050. His forecast represented a simple extrapolation of two trends: continued financial deepening worldwide (that is, faster growth of financial assets than of the real economy), and London’s maintenance of its share of the global financial business.
These may be reasonable assumptions, but the estimate was deeply unsettling to many.
Hosting a huge financial center, with outsize domestic banks, can be costly to taxpayers.
In Iceland and Ireland, banks outgrew their governments’ ability to support them when needed.
The result was disastrous.
Quite apart from the potential bailout costs, some argue that financial hypertrophy harms the real economy by syphoning off talent and resources that could better be deployed elsewhere.
But Carney argues that, on the contrary, the rest of the British economy benefits from having a global financial center in its midst. “Being at the heart of the global financial system,” he said, “broadens the investment opportunities for the institutions that look after British savings, and reinforces the ability of UK manufacturing and creative industries to compete globally.”
That is certainly the assumption on which the London market has been built and the line that successive governments have peddled.
But it is coming under fire.
Andy Haldane, one of the lieutenants Carney inherited at the BoE, has questioned the financial sector’s economic contribution, pointing to “its ability to both invigorate and incapacitate large parts of the non-financial economy.” He argues (in a speech revealingly entitled “The Contribution of the Financial Sector: Miracle or Mirage?”) that the financial sector’s reported contribution to GDP has been significantly overrated.
Two recent papers raise further doubts.
In “The Growth of Modern Finance,” Robin Greenwood and David Scharfstein of Harvard Business School show that the share of finance in US GDP almost doubled between 1980 and 2006, just before the onset of the financial crisis, from 4.9% to 8.3%.
The two main factors driving that increase were the expansion of credit and the rapid rise in resources devoted to asset management (associated, not coincidentally, with the exponential growth in financial-sector incomes).
Greenwood and Scharfstein argue that increased financialization was a mixed blessing.
There may have been more savings opportunities for households and more diverse funding sources for firms, but the added value of asset-management activity was illusory.
Much of it involved costly churning of portfolios, while increased leverage implied fragility for the financial system as a whole and imposed severe social costs as over-exposed households subsequently went bankrupt.
Stephen G. Cecchetti and Enisse Kharroubi of the Bank for International Settlements – the central banks’ central bank – go further. They argue that rapid financial-sector growth reduces productivity growth in other sectors.
Using a sample of 20 developed countries, they find a negative correlation between the financial sector’s share of GDP and the health of the real economy.
The reasons for this relationship are not easy to establish definitively, and the authors’ conclusions are controversial. But it is clear that financial firms compete with others for resources, and especially for skilled labor.
Physicists or engineers with doctorates can choose to develop complex mathematical models of market movements for investment banks or hedge funds, where they are known colloquially as “rocket scientists.” Or they could use their talents to design, say, real rockets.
Cecchetti and Kharroubi find evidence that it is indeed research-intensive firms that suffer most when finance is booming.
These companies find it harder to recruit skilled graduates when financial firms can pay higher salaries.
And we are not just talking about the so-called “quants.”
In the years before the 2008 financial crisis, more than a third of Harvard MBAs, and a similar proportion of graduates of the London School of Economics, went to work for financial firms.
(Some might cynically say that keeping MBAs and economists out of real businesses is a blessing, but I doubt that that is really true.)
The authors find another intriguing effect, too.
Periods of rapid growth in lending are often associated with construction booms, partly because real-estate assets are relatively easy to post as collateral for loans.
But the rate of productivity growth in construction is low, and the value of many credit-fueled projects subsequently turns out to be low or negative.
So, should Britons look forward with enthusiasm to the future sketched by Carney?
Aspiring derivatives traders certainly will be more confident of their career prospects.
And other parts of the economy that provide services to the financial sector – Porsche dealers and strip clubs, for example – will be similarly encouraged.
But if finance continues to take a disproportionate number of the best and the brightest, there could be little British manufacturing left by 2050, and even fewer hi-tech firms than today.
Anyone concerned about economic imbalances, and about excessive reliance on a volatile financial sector, will certainly hope that this aspect of the BoE’s “forward guidance” proves as unreliable as its forecasts of unemployment have been.
How Can Qurei Succeed?
The new Palestinian Prime Minister, Ahmed Qurei, faces daunting challenges.
He must tread between the shrapnel shards of constant Israeli military actions against the Palestinians, the ambivalence of the US about the road map, and a plethora of militant Palestinian groups seeking revenge for every one of their assassinated leaders.
This sickening cycle of violence is all too predictable.
It need not be inevitable.
Breaking the sequence of Israeli assassination followed by Palestinian suicide bombing requires a change of thinking and action.
The idea that either side can crush the other and declare victory has proven to be a seductive and dangerous mirage, leaving behind only a trail of blood and hate.
Israeli leaders must be made to understand that preemptive attacks and assassinations only increase the chance of more anti-Israeli attacks, not less.
So far, the right-wing Sharon government, which seems to give only lip service to peace, is more than happy to engage in military actions that it knows will lead to Palestinian retaliations.
As harsh Israeli actions fail to deter Palestinians, Israel seems to raise the stakes, hoping that even harsher, more inhuman acts might bring the Palestinians to heel.
Instead, brutal Israeli actions produce only more determined Palestinian reaction, and the cycle of killing and violence continues.
The US government must change its attitude, too.
Instead of stating that they understand that Israeli must defend itself, the Bush administration should take an unambiguous stand against Israel's assassinations and collective punishments, which now include uprooting decades-old olive trees and destroying eight story buildings.
Travel restrictions and continued settlement activity must end.
If the Americans can get Israel to agree to these straightforward requests, the situation could be ripe for a ceasefire, which in turn would be the prelude to a genuine peace process.
Until recently, Israeli officials have publicly and privately refused to respond to the Palestinian request for a ceasefire agreement.
Instead, they press for the impossible request that the Palestinian Authority dismantle the militant groups, an act that Israel, with all its powers, has not succeeded in accomplishing.
A deadly civil war would surely ensue if the Palestinian Authority seeks to crush Palestinian militants at a time of relentless Israeli attacks and no tangible progress in the peace talks.
Any ceasefire agreement requires both parties to refrain from attacking the other.
Such agreements normally include a clause creating a mandate for neutral third-party monitors.
But a ceasefire agreement to stand, it must be followed immediately with a concerted effort to produce a political solution to the issues that caused the warring parties to attack each other.
The hudna worked out between militant Palestinian groups and the Palestinian Authority (with the knowledge of the Americans) clearly lacked a major component: Israel's assent to the agreement.
Israel's insistence in continuing its assassination policy led, predictably, to a violent reaction--a pattern of assassinations followed by revenge suicide bombings and then further assassinations, with neither side prepared to blink.
But Israel's belief that one more assassination will cause the Palestinians to crumble, and the Palestinian belief that one more suicide attack will cause the Israelis to raise the white flag have led both sides to a dead end.
India's Mahatma Ghandi once said that an eye for an eye and a tooth for a tooth leaves the world blind and toothless.
There must be a stop to this zero-sum game and a return to a sane policy based on reason, reciprocity, and compromise.
The pattern of the past three years shows that the first order of business must be a ceasefire between the Israeli government (and all its military and intelligence agencies) and the Palestinian Authority (including all the militant factions).
Such an agreement must end all types of military and armed attacks as well as assassinations, and it needs to be monitored by a neutral third party--namely, the quartet (the US, the UN, the EU, and Russia) that drew up the road map, which already contains a provision for foreign monitors.
Finally a ceasefire must be supported by round-the-clock negotiations (preferably in secret with top-level US involvement) aimed at ending the basic reason for the violence--the occupation of the Palestinian areas--and determining the issues of borders, settlements, refugees, and Jerusalem.
In this context, Israel must put aside thoughts of choosing its negotiating partners.
Palestinian President Yasir Arafat is the legitimately elected leader of the Palestinian people.
No serious negotiations can take place and no results can last if one party vetoes the representatives of the other side.
Real peace presupposes agreement between enemies , not friends.
Everyone involved in attempting to resolve the Israel-Palestine conflict knows what a peace agreement between the sides will most likely look like.
In Taba, Palestinian and Israeli negotiators were very close to agreement on all the major issues early in 2001.
President Bush's vision of a state of a free and independent Palestine established in 2005 alongside a safe and secure state of Israel could also be used as a benchmark for fresh talks.
How Can the New Members Catch Up?
Of the ten new EU member states, eight have undergone a transformation whose speed and scope has been unprecedented.
Wherever one looks in the postcommunist accession countries ­­- at money, markets, ownership structures, banking sectors, foreign trade, health care, environmental protection, and education - one sees institutions that have been reconstructed from the ground up.
In many of the transition countries, inflation was brought down from majestic heights - 251% in Poland in 1989 - and all now have fully convertible currencies.
Private enterprise dominates production and employment, whereas it accounted for only 23.1% of GDP in Poland in 1989 and just 4% in the Czech Republic and Slovakia.
Similarly, after the collapse of the Council for Mutual Economic Assistance (COMECON) in 1991, the transition countries quickly redirected their foreign trade to the West.
Educational opportunities have multiplied, air and water pollution have plummeted, and life expectancy has increased almost to West European levels across the region.
Since the early 1990's, the prospect of eventual admission to the EU has helped spur these institutional changes.
But now the task for the new member states - which account for 20% of the enlarged EU's population but only 5% of its GDP - is no less difficult: to achieve the rapid catch-up growth rates needed to close the economic gap with the EU's leaders.
Membership itself will certainly help.
Increased policy credibility will boost inflows of foreign direct investment (FDI), while EU structural funds will support further institution building, infrastructure investment, and environmental protection.
There is little empirical doubt about the positive impact of FDI inflows.
FDI promotes technology transfer and contributes relatively more to economic growth than domestic investment, because it increases total investment in the economy more than one for one, owing to complementarities with domestic firms.
Empirical research also confirms the positive impact of EU structural funds on growth.
EU structural assistance has increased annual GDP growth, on average, by 0.4-0.9% in Greece, Portugal and Ireland, and by 0.3 to 0.5% in Spain, thereby helping poorer countries catch up with richer member states.
EU membership provides the opportunity to catch up, but the actual economic outcomes will depend on the quality of domestic policies - and whether the EU policies most conducive to economic growth are strengthened, not weakened.
This implies several imperatives for the EU and the new member countries alike.
Defend the Stability and Growth Pact. In the long term, large budget deficits lead either to a crisis or to slower economic growth. But even in the short term, there is a negative correlation between large budget deficits, slow economic growth, high inflation, and a distorted foreign-exchange market.
Moreover, fiscal deficits and inflation squeeze out investment and limit productivity gains.
Strengthen single-market policies. The benefits of the single market are evident, not least by creating a much more attractive location for foreign investors.
Surveys indicate that the internal market has helped more than 60% of companies that export to more than five EU countries boost their cross-border sales, and that 80% of consumers believe that the range of goods has increased, while 67% say that their quality has improved.
Cross-border trade in goods has grown by around a third since the creation of the Internal Market in 1992 due to two principles: mutual recognition, which allows companies to apply their own national rules, and EU directives that harmonize national rules.
But mutual recognition does not work well for relatively more complex products, and EU directives affecting items like construction products, machinery, and pressure equipment have been problematic to implement.
Pre-tax prices of new cars can differ up to 70% between member states due in large part to regulations that suppress competition.
Services are even more susceptible than goods to internal market barriers.
For example, a new directive requires non-household customers to be able to choose their electricity supplier by July 2004 and their gas supplier by July 2007.
But the directive ignores household customers, who in 2001 were able to choose their electricity supplier in only five EU States and their gas supplier in only three.
As for labor mobility, practice has yet to catch up with theory.
In 1992-2002, only 4% of the total EU population moved across borders either to work or to retire.
During this period, only 8% of EU students completed part of their studies in another member state.
Integration of EU financial markets - launched in 1999 with the adoption of the Financial Services Action Plan (FSAP) - also needs to accelerate.
According to the European Commission, creating a single European capital market would reduce the cost of equity capital for EU businesses by 0.5% and lower the cost of corporate debt financing by 0.4%.
It would also boost GDP in the EU-15 over ten years by about 1.1% and raise employment by 0.5%.
But, by 2002, only 31 of the FSAP's 42 provisions had been implemented.
Target early EMU entry. Entry into the euro as soon as possible is the best strategy for the accession countries, because it will mobilize them to complete structural reforms in order to meet the Maastricht criteria for inflation, interest rates, fiscal deficits, and public debt.
This would have obvious benefits for long-term economic growth, as would elimination of exchange-rate risks, hedging costs, and transaction costs in foreign trade.
The accession countries are already highly integrated with the EU economy, with pronounced cyclical convergence between the accession countries and the EMU countries.
Continuing EU integration is likely to align the business cycles of these countries in a manner similar to the synchronization of supply and demand shocks in the EU in the 1990's.
Thus, costs associated with giving up an independent monetary policy and a flexible exchange rate would not be significant.
In each of these areas, the Union's new members still face a difficult path to full integration.
In many of them, so does the EU.
How Corrupt are US Capital Markets?
Why has the US stock market done so well in recent months--the Dow increased over 30% since its low on March 11, 2003, and closed above 10,000 on December 11--even with the media reporting one financial scandal after another?
We have seen Enron-style fraud from corporate management, Arthur Anderson-style smoke and mirrors from accountants, and now Putnam Funds-style market-timing irregularities from mutual funds.
After all this dirt, why aren't more investors voting with their feet?
The most important reason is a sharp improvement in corporate earnings, and in economic conditions in general.
The scandals may be pushing the boat of market sentiment downwards, but their effect is being overwhelmed by the rising tide of economic prosperity, at least for now.
To be sure, television, radio, newspapers, magazines, and Internet sites have been hyping financial misconduct, awakening and shaping the type of emotional responses that often have a powerful influence on financial markets.
But attention-getting emotions (such as anger) are not the only factors that drive investment decisions.
Investors may respond emotionally, but they are unlikely to let their anger cause them to miss what appears to be a substantive increase in value.
The excessive optimism of the late 1990's lingers, so investors are more impressed by the recent upsurge in corporate earnings--seen as confirming their optimism--than they are by the financial scandals.
Next to the $100 billion annual rise in after-tax corporate profits in the US in 2003, the scandals look puny.
Indeed, the scandals look even punier when one realizes that the list of crooked US companies, like Enron, is short.
In 2002, Harvey Pitt, the former chairman of the US Securities and Exchange Commission, made a dramatic call for CEOs of US companies with revenues exceeding $1.2 billion to sign their financial statements by August 14, 2002--and then be held criminally liable if the statements turn out to be fraudulent.
The world anticipated a wave of "restatements" of past performance by anxious CEOs.
But, of the more than 600 CEOs who signed by the deadline, not a single one admitted major error.
Is accounting in worse shape?
The major accounting firms have clearly established a culture of permissiveness towards earnings manipulation.
The 1990's saw an unprecedented rise in the number of quarters in which earnings beat analysts' estimates by a penny a share, suggesting that more irregularities could be discovered.
But the fact that earnings beat estimates by a penny a share every quarter is itself only a sign of quarter-to-quarter manipulations of earnings, not of their wholesale fabrication.
Finally, the market-timing practices of mutual funds that have been revealed to date simply don't amount to all that much in the broader scheme of things.
Eric Zitzewitz of Stanford University estimates that market timing has cost US mutual fund investors about $5 billion a year--less than 0.1% of the $7 trillion mutual fund assets.
This amount, akin to a modest management fee, is simply not a dominating consideration for investors.
(Some media accounts have made Zitzewitz's estimates appear much larger by taking them as a percent of the most vulnerable mutual funds' assets, rather than of all mutual funds assets.)
Paradoxically, the scandals themselves have highlighted America's strong regulatory system.
If anything, they are evidence not of widespread corruption, but of the vigilance of US regulatory authorities--which is precisely why the cases now in the news are the exception rather than the rule.
This vigilance is also reflected in the prompt legislative response to recent financial scandals.
The Sarbanes-Oxley Act of 2002 has made it a lot more difficult to repeat the kinds of things that Enron and Arthur Anderson did.
The US House of Representatives has passed a reform bill that would prevent mutual-fund market-timing abuses.
Similarly, regulatory agencies are now better equipped to deal with financial irregularities.
The SEC's fiscal 2004 budget set by the House spending bill is $811 million, roughly twice as much as it was before the scandals surfaced.
This is higher than that of regulators in other major countries.
Investors also see that the US regulatory system is stronger than the SEC alone.
Revelations of malfeasance have also come from the governments of New York (Attorney General Elliott Spitzer) and Massachusetts (Secretary of the Commonwealth William Galvin).
These states have set a standard for action, and there are 48 more states that could do the same.
So investors know that even if a Federal agency like the SEC overlooks or ignores serious regulatory problems, another regulator might step in.
The best evidence for continuing confidence in the integrity of US securities markets comes from foreign investors, who would be among the first to flee if they feared rampant corporate fraud and inadequate regulation.
Being removed from the US, they should be highly sensitive to any whiff of information that their money may not be safe there.
But net foreign purchases of US stocks for the first ten months of 2003 are still positive (although down about 90% from the same period of 2000, the bubble-peak year).
In short, most investors--while not always the most rational species--do know a good thing when they see it.
The market may not value US stocks perfectly, but it is not irrational to believe that the corporate scandals are not a major factor.
How Does the Weak Dollar Affect Oil Prices?
Around the world, there is anguished hand-wringing about the high price of oil.
But if political leaders and policymakers want lower oil prices, they should be promoting policies that strengthen the dollar.
The implications of pricing oil in any single-currency are more far-reaching than most people think.
For example, some oil-producing countries ask their customers to pay in euros, but that does not mean that their oil is priced in euros.
And even if dollar prices were to be replaced by euro prices, the impact of single-currency pricing on the oil market would be the same.
While oil-exporting countries receive revenues in dollars (or their euro equivalent), they use different currencies to import goods and services from various countries.
Any change in the exchange rate of the dollar affects the purchasing power of these countries, and therefore their real income.
Likewise, international oil companies sell most of their oil in dollars, but they operate in various countries and pay some of their costs in local currencies.
Any change in the value of the dollar therefore affects their cost structure and profitability.
In turn, it affects reinvestment in exploration, development, and maintenance.
The relationship between the value of the dollar and oil prices is very complex.
While they can feed on each other to produce a vicious cycle, their short-term relationship is distinct from their long-term relationship.
In the short-term, dollar depreciation does not affect supply and demand, but it does affect speculation and investment in oil futures markets.
As the dollar declines, commodities – including oil – attract investors.
Investing in futures becomes both a hedge against a weakening dollar and an investment vehicle that could yield substantial profit, particularly in a climate of vanishing excess oil production capacity, increasing demand, declining interest rates, a slumping real estate market, and crisis in the banking industry.
OPEC might be correct to blame American policies and speculators for higher prices.
It is also correct that if OPEC had excess capacity, it would have already used it to flush out speculators to bring oil prices down.
OPEC can regain control in one of two ways: use its “claimed” excess capacity to flush out speculators, or use its financial surpluses to overtake them.
Recourse to the latter option means that, even without excess capacity, OPEC can still be in the driver’s seat.
In the long run, however, statistical analysis of various oil industry variables indicates that a weaker dollar affects supply by reducing production, regardless of whether oil is owned and produced by national or international oil companies.
A weak dollar also affects demand by increasing consumption.
The result of a decrease in supply and an increase in demand is higher prices.
The lower dollar also reduces the purchasing power of oil exporters.
If nominal oil prices remain constant while the dollar declines, the real income of the oil-producing countries declines, resulting in less investment in additional capacity and maintenance.
The same is true of oil companies.
Consequently, oil prices increase.
Indeed, because oil prices were rising while the dollar was declining, capacity expansion by oil firms failed to meet forecasts for non-OPEC production in the last three years.
Even oil production in the United States has not matched the increase in oil prices, as rising import costs for tools and equipment – partly a reflection of the dollar’s weakness and other factors – have forced project delays and cancellations.
Of course, the lower dollar means cheaper oil in Europe, Asia, and all countries with appreciating currencies.
Oil prices hit records in the US in 2004 and 2005, but not in Europe, which partly explains why economic growth there has not been affected.
When Americans paid $120 per barrel, Europeans paid only about €76 per barrel.
Several factors have prevented high oil prices from affecting the demand for petroleum products in the US in recent years, such as increased government spending, low interest rates, tax breaks, and an increase in real incomes.
To be sure, the weaker dollar has forced some American families to spend their vacations in the US instead of Europe.
But, since many Americans use gas-guzzling SUV’s for their vacations, demand for gasoline has remained high.
Unless and until US consumption patterns change or a rebounding dollar increases oil production, Americans will bear the brunt of single-currency oil pricing.
How Economic Superpowers Rise
Anti-Japanese riots across China have heightened tensions in Asia.
Indeed China-mania, a mixture of hopes, but mostly fears, is sweeping the world due to China’s rapid economic rise.
Should the world really be more fearful than hopeful?
Americans fear their markets being flooded by Chinese goods.
Mexico, Brazil, Central Europe, Indonesia, and even Sri Lanka are worried about competition from lower wages.
Europeans may be more cheerful, believing that the Chinese market will open not only for European engineering products and machine tools to equip the new workshop of the world, but also for luxury goods and even the tourism demanded by a new and affluent Chinese middle class.
Everyone feels that a seismic shift is under way.
Such rapid industrial rises are rare, but not unprecedented.
The most interesting analogies are Germany’s rise in the 19th century and Japan’s in the 20th.
Even prior to that time, England was the economic Wunderkind of Europe.
What had been an offshore European island with bad weather emerged as the world’s major economy, whose products, from textiles to railroad equipment, came to dominate world markets.
England was a pioneer in industrialization, and was deeply shocked by the presumption of newcomers who soon entered the same stage.
By the end of the 19th century, however, Germany, with much lower wages levels, had overtaken England in steel production, and was clearly dominant in the new technologies of electrical goods, chemicals, and dyes, as well as in many aspects of fine engineering.
But Germany also swamped world’s markets with mass consumption goods: cheaper musical instruments than the traditional makers in France or Italy could produce, and lithographic prints used for Christmas cards and seaside postcards.
Indeed, German products were omnipresent.
When an irate British writer, E.E. Williams, wrote a protest entitled “Made in Germany,” he began by recording his discomfort that the pencil he was using was a German product as well.
The ‘Made in Germany’ scare of the late 19th century foreshadowed the reaction in the United States to Japan’s industrial success in the 1960’s and 1970’s.
In particular, Americans were frightened by Japanese consumer products – televisions, which wiped out domestic production, and automobiles, which seemed so malignly efficient.
In both the German and the Japanese cases, the already-existing industrial powers complained that there was some sort of nefarious and unfair mechanism behind the newcomer’s advantages.
Such explanations included government intervention or a new sort of industrial organization, and unfair patent infringements by the new producers who copied products and then blocked off their own markets from import competition.
But the economics of the rise of industrial Germany and Japan should hold comforting lessons for us today.
The fears were misplaced, because the world benefited from cheaper and more readily available products.
Thanks to German manufacturers, pianos were no longer restricted to aristocratic salons or the professional middle class, but began appearing in respectable working-class homes.
Thanks to Japanese car producers, American manufacturers learned to produce more efficiently and competitively.
The classical liberal free-trade argument about the universal economic benefits of greater commerce and open markets proved to be unambiguously correct.
It did not matter that the catch-up countries’ economic “miracles” were produced in part by illiberal policies guided by government bureaucracies.
The outcome was an endorsement of the lessons of economic liberalism.
But changing economic balances also lead to changing political balances.
At the moment, it looks as if there is nothing to fear from China.
Like Germany in the mid-19th century, or Japan in the 1960’s, China sees many advantages in participating in the international order more or less as it is currently configured.
Can this change?
Germany certainly became assertive, owing mostly to the social pressures and tensions incited by rapid economic growth.
When it feared that it might be overtaken by the next rising economic power, the vast Russian empire, assertiveness turned into aggression.
By the early 20th century, Germans had concluded that Russia’s faster demographic growth and rapid industrialization posed a military threat.
China can already see considerable problems in the medium term.
In forty years, a demographic implosion within China, the consequence of its one-child policy, will make European and Japanese concerns about aging populations look trivial.
Before then, profound inequalities between China’s poor countryside and its dynamic industrial centers will generate tensions, which may be increased by the gender imbalance – young men greatly outnumber young women.
Combine this with a tottering authoritarian regime, and something like the pre-1914 German scenario looks realistic.
A government impressed by past national achievement, but fearful of being overtaken and deeply worried about its own legitimacy, is likely to look for an outlet in foreign policy to mobilize domestic support or ward off opposition.
So there is no need for a strategy to deal with China’s economic rise; but there is a need to lock in China’s prosperity and reduce the chances of political eruption.
Japan in the second half of the 20th century had stable politics, due in large part to a good constitution and democratic institutions.
If China is to avoid the fate of early 20th century Germany, it must bolster successful economic modernization with constitutional and political reform.
The Tyranny of Political Economy
CAMBRIDGE – There was a time when we economists steered clear of politics.
We viewed our job as describing how market economies work, when they fail, and how well-designed policies can enhance efficiency.
We analyzed trade-offs between competing objectives (say, equity versus efficiency), and prescribed policies to meet desired economic outcomes, including redistribution.
It was up to politicians to take our advice (or not), and to bureaucrats to implement it.
Then some of us became more ambitious.
Frustrated by the reality that much of our advice went unheeded (so many free-market solutions still waiting to be taken up!), we turned our analytical toolkit on the behavior of politicians and bureaucrats themselves.
We began to examine political behavior using the same conceptual framework that we use for consumer and producer decisions in a market economy.
Politicians became income-maximizing suppliers of policy favors; citizens became rent-seeking lobbies and special interests; and political systems became marketplaces in which votes and political influence are traded for economic benefits.
Thus was born the field of rational-choice political economy, and a style of theorizing that many political scientists readily emulated.
The apparent payoff was that we could now explain why politicians did so many things that violated economic rationality.
Indeed, there was no economic malfunction that the two words “vested interests” could not account for.
Why are so many industries closed off to real competition?
Because politicians are in the pockets of the incumbents who reap the rents.
Why do governments erect barriers to international trade?
Because the beneficiaries of trade protection are concentrated and politically influential, while consumers are diffuse and disorganized.
Why do political elites block reforms that would spur economic growth and development?&#160;
Because growth and development would undermine their hold on political power.
Why are there financial crises?
Because banks capture the policymaking process so that they can take excessive risks at the expense of the general public.
In order to change the world, we need to understand it.
And this mode of analysis seemed to transport us to a higher level of understanding of economic and political outcomes.
But there was a deep paradox in all of this.
The more we claimed to be explaining, the less room was left for improving matters.
If politicians’ behavior is determined by the vested interests to which they are beholden, economists’ advocacy of policy reforms is bound to fall on deaf ears.
The more complete our social science, the more irrelevant our policy analysis.
This is where the analogy between human sciences and natural sciences breaks down.
Consider the relationship between science and engineering.
As scientists’ understanding of the physical laws of nature grows more sophisticated, engineers can build better bridges and buildings.
Improvements in natural science enhance, rather than impede, our ability to shape our physical environment.
The relationship between political economy and policy analysis is not at all like this.
By endogenizing politicians’ behavior, political economy disempowers policy analysts.
It is as if physicists came up with theories that explained not only natural phenomena, but also determined which bridges and buildings engineers would build.
There would then scarcely be any need for engineering schools.
If it seems to you that something is wrong with this, you are on to something.
In reality, our contemporary frameworks for political economy are replete with unstated assumptions about the system of ideas underlying the operation of political systems.
Make those assumptions explicit, and the decisive role of vested interests evaporates.
Policy design, political leadership, and human agency come back to life.
There are three ways in which ideas shape interests.
First, ideas determine how political elites define themselves and the objectives they pursue – money, honor, status, longevity in power, or simply a place in history.
These questions of identity are central to how they choose to act.
Second, ideas determine political actors’ views about how the world works.
Powerful business interests will lobby for different policies when they believe that fiscal stimulus yields only inflation than when they believe that it generates higher aggregate demand.
Revenue hungry governments will impose a lower tax when they think that it can be evaded than when they think that it cannot.
Most important from the perspective of policy analysis, ideas determine the strategies that political actors believe they can pursue.
For example, one way for elites to remain in power is to suppress all economic activity.
But another is to encourage economic development while diversifying their own economic base, establishing coalitions, fostering state-directed industrialization, or pursuing a variety of other strategies limited only by the elites’ imagination.
Expand the range of feasible strategies (which is what good policy design and leadership do), and you radically change behavior and outcomes.
Indeed, this is what explains some of the most astounding turnarounds in economic performance in recent decades, such as South Korea’s and China’s breakout growth (in the 1960’s and the late 1970’s, respectively).
In both cases, the biggest winners were “vested interests” (Korea’s business establishment and the Chinese Communist Party).
What enabled reform was not a reconfiguration of political power, but the emergence of new strategies.
Economic change often happens not when vested interests are defeated, but when different strategies are used to pursue those interests.
Political economy undoubtedly remains important.
Without a clear understanding of who gains and who loses from the status quo, it is difficult to make sense of our existing policies.
But an excessive focus on vested interests can easily divert us from the critical contribution that policy analysis and political entrepreneurship can make.
The possibilities of economic change are limited not just by the realities of political power, but also by the poverty of our ideas.
How Effective is Disaster Relief?
When disaster strikes, non-governmental organizations (NGOs) are among the first on the scene.
The United Nations estimates that there are now more than 37,000 international NGOs, with major donors relying on them more and more.
Inevitably, there are problems.
Both the Rwandan genocide of 1994 and the 2004 Indian Ocean tsunami saw chaotic competition among NGOs.
Yet there have also been landmark successes. More than 1,400 NGOs operating in 90 countries helped to get 123 countries to ratify the treaty banning landmines.
But the sheer scale of the disaster relief “industry” – plus the longer-term development efforts of NGOs – is raising serious concerns about how to measure their performance.
Flexibility allows NGOs to be innovative in ways that organizations like the UN often cannot.
But there are few international rules on what an NGO actually is, and the lack of control can lead to unpredictable consequences.
In Chad recently, the French NGO L’Arche de Zoé tried to smuggle children out of the country without obtaining permission from either parents or the government.
Among the questions being asked by NGOs, the UN, and national donors is how to prevent the recurrence of past mistakes.
The wake-up call for most NGOs came after the Rwandan genocide, when hundreds of small organizations tried to set up ad hoc operations in refugee camps in the Democratic Republic of Congo and Tanzania.
Some camps turned into staging posts for armed factions.
In the ensuing chaos, more than 50,000 refugees died from cholera.
There was also mayhem following the Indian Ocean tsunami.
At one point, more than 400 NGOs were on the ground in Aceh, Indonesia, competing for resources, personnel, and funding.
Many of the lessons learned in Rwanda were forgotten or ignored as smaller NGOs with little or no experience in dealing with disasters caused much of the confusion.
The situation in Indonesia led the UN to adopt a new “cluster” system to improve coordination.
And, after a review of the Rwanda debacle, 400 NGOs and UN organizations working in 80 countries got together in the Sphere Project to develop a common humanitarian mandate and handbook of standards outlining the minimum performance required of any NGO working in a disaster zone.
As the number of post-intervention reviews increases, a rudimentary framework for evaluating the impact of NGOs has appeared.
Rather than simply looking at project inputs and outputs, the emphasis has turned towards measuring the overall impact of an operation.
The idea is to find out if the lives of the people on the receiving end were changed for the better in any sustained way.
More and more donors are also insisting that NGOs provide measurable proof that they make a difference.
That sounds fine in theory, but in practice there are drawbacks.
By demanding quantifiable results, donors may force program managers to choose easily achieved targets over less measurable actions that accord with sound humanitarian principles.
Or reporting about aid programs may be skewed to keep donor funds flowing. The greatest danger is that humanitarian relief will be tailored to meet donors’ demands, rather than actual needs.
Until recently, the record on evaluating responses to humanitarian emergencies has been patchy at best.
CARE, as both a relief and development agency, can take a long-term approach to disasters, matching emergency relief with a rehabilitation and recovery phase.
But this is not an option for NGOs that focus only on emergency responses.
Once their allotted time is up – or their funds run out – they tend to pack up and leave.
Even for NGOs that stick around, determining their relief efforts’ impact in the middle of a crisis is difficult, if not impossible.
Emergencies are chaotic: staff and resources are stretched, the local population is very unlikely to be able to provide meaningful feedback, and pre-crisis baseline data are largely unavailable, so comparisons are complicated.
Moreover, all too often, events move too quickly to be measured accurately.
And, until recently, donors who were willing to pay for relief were less likely to finance follow-up evaluations.
As a result, emergency relief evaluations often rely on little more than guesswork and assumptions.
A 2004 report by the Humanitarian Policy Group cited a survey carried out in Ethiopia after UN agencies said that humanitarian efforts had averted widespread famine in 2000.
The claim sounded credible until the subsequent survey showed that the area’s crude mortality rate had actually risen to six times the normal base rate.
Most of the deaths were from communicable diseases, which malnourished people may well have contracted after crowding into feeding centers.
The HPG therefore recommended long-term monitoring of future humanitarian responses, and said that success or failure should be judged in a broad context rather than by a narrow focus on a specific project.
Many people who survive an earthquake or a flood, for instance, may soon face another crisis if the disaster also destroys their only means of earning a living.
New and more sophisticated analytical tools are needed to understand these long-term effects, along with sufficient training to ensure that new methods are applied properly in the field.
A recent innovation has been the Coping Strategy Index, devised by the World Food Program and CARE, which analyzes how people cope with short-term food crises while also taking into account their future vulnerability to hunger.
NGOs do the lion’s share of the world’s humanitarian work, and some mistakes are inevitable.
But as we deepen our experience of humanitarian relief and development, we must learn the lessons of the past and understand how much more there is to know.
Avoiding Algeria in Egypt
PORTO – The military coup that has overthrown Egypt’s first democratically elected president and led to the arrests of Muslim Brotherhood leaders across the country poses an enormous danger not only for Egypt’s democratic transition, but for the democratic hopes of the entire Arab world as well.
The fact that the coup was undertaken with massive popular support is a sign of the enormous difficulties faced by the Muslim Brotherhood during its first turn in power.
President Mohamed Morsi’s government struggled to address Egypt’s inherited economic and social crises in the face of the enormous public expectations created by the 2011 revolution, whose protagonists sought not only freedom, but also economic development and social justice.
Of course, the Muslim Brotherhood was also a victim of its own mistakes, particularly the failure of Morsi and his government to reach out to the secular opposition, elements of which had contributed to his election.
The Morsi government seemed incapable of understanding that a slim electoral majority is not enough, especially nowadays.
Indeed, the breadth of the opposition to Morsi reflects a major global tendency toward the empowerment of the educated and connected middle classes, whose members tend to be suspicious of political parties and demand more direct political participation.
In this sense, Egypt’s difficulties differ only in scope, not in kind, from those faced by governments in Turkey, Brazil, and even Europe.
Morsi’s Muslim Brotherhood dominated government from its first days in power.
But it also faced opposition from a variety of other, far less democratically minded, forces, including holdovers from Hosni Mubarak’s regime, who continue to wield influence in official institutions.
The judiciary, for example, dissolved the first elected legislative assembly. Likewise, the interior minister refused to protect the Brotherhood’s headquarters from repeated attack.
Moreover, some secular intellectuals demonized the Brotherhood.
Like their Algerian counterparts – who in 1992 approved of the Algerian army’s suppression of an Islamist electoral victory, leading to years of brutal fighting that left perhaps a half-million dead – many Egyptians didn’t mind repressing Islamists.
Morsi and the Brotherhood also faced competition from Saudi-backed Salafists.
Indeed, on the night of the coup, these ultra-conservative Islamists appeared together with military leaders and the secular political leader Mohamed ElBaradei to announce Morsi’s overthrow.
The prospects for Egypt’s democratic transition have become increasingly difficult to predict, but one thing is clear: the military cannot and must not be trusted.
During the period after the fall of Mubarak, when the army exercised full power, 12,000 civilians were charged in military courts, virginity tests were imposed on women (particularly those protesting against the military), demonstrators were killed, and myriad human-rights violations were committed with impunity.
Of course, it is possible for soldiers to assure a transition to democracy, as they did four decades ago in my homeland, Portugal, following their overthrow of the Salazar/Caetano dictatorship.
But the record of military-led transitions elsewhere has been poor: democracy may be proclaimed to be the coup’s raison d’être, but the transition stops there.
Moreover, in this case, the Egyptian army appears far more interested in protecting its enormous economic interests than it is in securing the benefits of a civilian government responsive to its citizens.
Trust should still be put in young Egyptians and their demands for freedom and democracy – demands that link the movement that overthrew Mubarak to the demonstrations that led to Morsi’s removal.
But the predominant goal should be to support the creation in Egypt of a pluralistic society that defends the rights of all to political participation and free and fair elections.
Today, this requires opposition to any Mubarak-style repression of the Muslim Brotherhood.
Immediately following the coup, the European Union adopted an ambivalent position toward it.
This, too, is reminiscent of Algeria in 1992, when most European governments supported the annulment of the Islamists’ electoral victory.
(Likewise, the EU refused to recognize Hamas’s electoral victory in Gaza in 2006.)
Continuing fear of political Islam in much of the West explains past support for dictatorial regimes.
Today, the EU and the US should demand the liberation of all members of the Muslim Brotherhood, including Morsi, and the integration of the Brotherhood into any political solution.
The international community should also be concerned with the coup’s regional implications.
Syrian President Bashar al-Assad’s cynical declaration of support for the coup is a sign that some want to turn today’s struggle in the Arab world into a bloody contest between Islamists and secularists.
In the long term, any crackdown on the Brotherhood would lead its members and supporters –&#160;already bitterly disappointed in democracy – to reject elections entirely.
That outcome could have a very negative impact on Islamist movements elsewhere.
For many, the extremists who criticized the Brotherhood and other Islamist parties for choosing a democratic route to power will have been vindicated, and a new wave of violence in the region may begin.
Hope remains that Egypt will not become Algeria in 1992 (or Chile in 1973).
But to avoid that grim fate, it is imperative that Muslim Brotherhood members’ fundamental rights now be protected.
US President Barack Obama, who has expressed deep concern about the overthrow of Morsi, is perhaps the only leader able to mediate in such a situation and work for a consensus solution that prevents a civil war.
To achieve this, he would need to use all of the leverage at his disposal, including cutting off the massive military assistance that the US provides to Egypt’s armed forces, as he has threatened to do.
He can also use the reserve of trust that he established by reaching out to the Brotherhood during Morsi’s presidency.
But will Obama take the initiative?
His speech in Cairo in 2009 – which called for “A New Beginning” in the region – inspired many in the Arab world.
How Europe Can Rescue Europe
LONDON – At their meeting in Rome last Thursday, the leaders of the eurozone’s four largest economies agreed on steps towards a banking union and a modest stimulus package to complement the European Union’s new “fiscal compact.”
Those steps are not enough.
German Chancellor Angela Merkel resisted all proposals to provide relief to Spain and Italy from the excessive risk premiums that both countries are now confronting.
As a result, the EU’s upcoming summit could turn into a fiasco, which may well prove lethal, because it would leave the rest of the eurozone without a strong enough financial firewall to protect it from the possibility of a Greek exit.
Even if a fatal calamity can be avoided, the division between creditor and debtor countries will be reinforced, and the “periphery” countries will have no chance to regain competitiveness, because the playing field is tilted against them.
This may serve Germany’s narrow self-interest, but it will create a very different Europe from the open society that fired people’s imagination and propelled European integration for decades.
It will make Germany the center of an empire and permanently subordinate the “periphery.”
That is not what Merkel or the overwhelming majority of Germans stand for.
Merkel argues that it is against the rules to use the European Central Bank to solve eurozone countries’ fiscal problems – and she is right.
ECB President Mario Draghi has said much the same.
Indeed, the upcoming summit is missing an important agenda item: a European Fiscal Authority (EFA) that, in partnership with the ECB, could do what the ECB cannot do on its own.
In particular, the EFA could establish a Debt Reduction Fund – a modified form of the European Debt Redemption Pact that was proposed by Merkel’s Council of Economic Advisers and endorsed by Germany’s Social Democrats and Greens.
In exchange for specified structural reforms in Italy and Spain, the Fund would acquire and hold a significant portion of their outstanding stock of debt.
It would finance the purchases by issuing European Treasury bills – joint and several obligations of the member countries – and pass on the benefit of cheap financing to the countries concerned.
The Treasury bills would be assigned a zero-risk rating by the authorities and treated as the highest-quality collateral for repo operations at the ECB.&nbsp;The banking system has an urgent need for risk-free liquid assets.
Banks are currently holding more than €700 billion of surplus liquidity at the ECB, earning only one quarter of 1% interest.&nbsp;This assures a large and ready market for the bills at 1% or less.
Should a participating country subsequently fail to abide by its commitments, the EFA could impose a fine or other penalty, which would be proportionate to the violation, thereby preventing enforcement from becoming a nuclear option that can never be exercised.
This would provide strong protection against moral hazard.
A successor government in, say, Italy, would find it practically impossible to break any commitments undertaken by Italian Prime Minister Mario Monti’s current administration.
With practically half of Italy’s debt financed by European Treasury Bills – producing an effect similar to a reduction in the average maturity of its debt – a successor government would be all the more responsive to any punishment imposed by the EFA.
After a suitable period, the participating countries would enter into debt-reduction programs tailored in a way that does not jeopardize their growth.
This would be the prelude to the establishment of a full political union and the introduction of Eurobonds.
Of course, the issuance of European Treasury bills would require the approval of the Bundestag, but it would be in conformity with the German Constitutional Court’s requirement that any commitment approved by the Bundestag be limited in time and size.
It is not too late to turn this proposal into a political declaration that outlines not only the long-term goal of a political union, but also a road map toward a fiscal and banking union.
Guided by this declaration, the eurozone’s financial-rescue fund, the European Stability Mechanism (ESM), could immediately take over the ECB’s holdings of Greek bonds; the ECB could start accumulating Spanish and Italian bonds; and Italy and Spain could implement the structural reforms needed to qualify for the Debt Redemption Fund.
This agenda would bring immense relief to the financial markets.
Equally important, it would change Europe’s political dynamics from negative to positive.
The main obstacle is that German politicians remain mired in a “can’t do” mode.
Merkel insists that a political union should precede a full-fledged fiscal and banking union.
That is both unrealistic and unreasonable.
The three have to be developed together, step-by-step.
There can be no treaty or constitutional clause preventing the establishment of the EFA if the German electorate, as represented by the Bundestag, approves it; otherwise, the ESM could not have been created.
If the rest of Europe is united behind this proposal, and the Bundestag rejects it, Germany must take full responsibility for the financial and political consequences.
How France Will Reform
PARIS – The world is changing rapidly – and it will not wait for anyone.
The only way to thrive is to keep pace with this transformation.
That is why France is pursuing reforms.
Of course, reform means change.
But it does not mean giving in to external pressure, or giving up what makes France French.
Rather, it is the key to consolidating our history, our pride, our traditions, our way of life, and our values in a dynamic global environment, for the sake of today’s citizens and tomorrow’s.
It is the key to building a stronger, more prosperous France.
Clearly, much is at stake in the ongoing reform process.
The good news is that many factors work in France’s favor, including diverse geography, a vibrant science and technology sector, a rich culture, and vast human capital.
Indeed, these factors help to explain why France remains the world’s fifth-largest economy.
But, as globalization transforms the world economy, France must adapt in order to enable its businesses to compete abroad as well as at home.
A robust business sector is decisive in an open economy, as it shapes a country’s ability to preserve – and improve – its citizens’ living standards.
That is why everything possible must be done to enable France to create more and better wealth.
By helping French businesses recover lost margins, we can empower them to invest and create employment.
That is precisely what the “responsibility pact,” which came into force on January 1, and the tax credit for encouraging competitiveness and jobs aim to do.
As we help French businesses to expand abroad, we must also work to encourage inward foreign investment.
Both are key to a country’s commercial attractiveness – among the most important dimensions of global competition.
This stronger France will tackle whatever challenges the world throws at it head on.
At the same time, it will demonstrate its capacity to eliminate drags on creativity and wealth creation.
The “law on growth and activity” that will be voted on this year will unleash the business sector’s energy, including by stimulating competition.
Moreover, opening up regulated professions will help to reduce the inequalities with which the French public has become increasingly frustrated.
To create more wealth in an open economy is one of my government’s priorities.
But more wealth alone will not cure France’s ills.
The most successful countries are those where employers and employees feel bound to a common fate.
It is thus urgent to improve social dialogue and bolster trust in France.
This objective underlies our “simplification schemes” for negotiation and consultation in the business sector.
And it is helping to guide vocational education and training reform, which will benefit not only those who wish to enhance their skills at work, but also those whose lack of training is preventing them from finding employment.
These initiatives are just part of a broader shift.
Through a variety of mechanisms, we are working to make citizens’ lives easier, streamline business activities, and relieve the authorities of extraneous work that diverts attention from important strategic tasks.
French citizens will soon begin to feel the impact of these efforts in their daily lives.
Despite the tremendous potential of these initiatives, they will be for naught if they are not perceived as being fair.
France, after all, has long been defined by a strong egalitarian impulse.
Consider education.
In reworking our “priority education” program, we can adjust teaching methods to address school inequalities, while channeling additional resources to disadvantaged areas.
This includes ensuring that all schools have enough computers, so that all students can benefit from today’s technological breakthroughs, with no digital divide among students or regions.
The fact that the impact will not be felt for years should not be allowed to diminish its urgency.
Indeed, the entire process of building a strong and equitable economy should aim not just to improve citizens’ lives today; it must also prepare France for the future.
And, when it comes to boosting a country’s long-term prospects, the most successful initiatives often take time to produce visible results.
In a society that overvalues immediacy, it can be difficult to take a long-term view.
But my government will not be deterred from forward-thinking action that will ensure that tomorrow’s France is the France our citizens want and deserve.
It is up to the state to set an example for reform.
This is all the more true in France, where citizens place high expectations on the state – not to do everything, but certainly to draw strategic lines and enable local actors to succeed.
In short, the government must put its agenda-setting power at the service of the people.
When it comes to preparing for the future, one exceptionally large project lies ahead: the energy transition.
We all know that we are headed toward a new growth model – one that is more sober and sustainable, that depends less on fossil fuels and more on renewable energy sources.
This new approach to growth will entail new habits, new attitudes, and new modes of living.
With the energy transition law, my government aims to get ahead of this trend by creating the legislative framework for future “green” growth.
The goals of the French government’s reform agenda are clear: A stronger France, able to thrive in a rapidly changing global environment; a fairer France, without which no effort, whether individual or collective, could be considered a success; and a more steadfast France that can serve as a stable and prosperous home for our children.
In the interest of France and its people, we are committed to the reforms needed to realize this vision.
How Free is Speech?
NEW YORK – Bishop Richard Williamson has some very peculiar, and frankly odious, views: that no Jews were murdered in gas chambers during World War II; that the Twin Towers were brought down by American explosives, not by airplanes, on September 11, 2001; and that Jews are fighting to dominate the world “to prepare the anti-Christ’s throne in Jerusalem.”
On questions of Roman Catholic doctrine, his views were considered so out of line with the modern Church that the Vatican excommunicated him in 1988, along with other members of the ultra-conservative Society of St. Pius X, founded by the fascist sympathizer Marcel Lefebvre.
Supporters of Williamson include the British historian David Irving, who was recently jailed in Austria for glorifying the Nazis.
The bishop, then, does not strike one as an attractive man.
But does he deserve everything now hanging over his head?
As a consequence of the views he expressed on Swedish television, he was denied re-entry into the Church, as was promised earlier by Pope Benedict, which is probably just as well.
But he was also kicked out of Argentina, where he lived, and is threatened with extradition to Germany, where preparations are made to prosecute him for Holocaust denial.
Meanwhile, consider the case of another unappealing man, the Dutch politician Geert Wilders, who was banned last month from entering the United Kingdom, where he had planned to show his short film, entitled Fitna , which describes Islam as a terrorist faith.
Back in Holland, a case is being made against him in an Amsterdam court for “spreading hatred” against Muslims.
He has compared the Koran to Hitler’s Mein Kampf , and wishes to stop immigration of Muslims to the Netherlands.
The British ban, as well as the impending court case, has actually made Wilders more popular in the Netherlands, where one poll indicated that his populist anti-Muslim party, the PVV, would get 27 seats in parliament if elections were held today.
The reason for Wilders’ surging popularity, apart from widespread distrust of Muslims, is that he has successfully cultivated an image as a fighter for free speech.
The principle of free speech, one of the fundamental rights in liberal democracies, means that we must live with views that we find reprehensible, up to a point.
The question is, up to what point?
Laws on free speech differ somewhat from country to country.
It is a criminal offense in various European democracies, including France, Germany, and Austria, to express the view that the Holocaust never happened.
Many democratic countries also have laws against inciting violence or hatred.
Some countries, including the Netherlands, even have laws against deliberately insulting people on the grounds of their race or religion.
Bishop Williamson’s ideas may be loathsome, but criminal prosecution against a man for his views about history is probably a bad idea.
He should be criticized, even ridiculed, but not jailed.
Similarly, it would have been much better to let Wilders show his wretched film in Britain than to ban him.
Whatever one thinks of laws against spreading hatred or insulting people, the law remains a blunt instrument when it came to matters of speech.
Nevertheless, free speech is not absolute.
Even Wilders, with his absurd call to ban the Koran, clearly believes that there are limits – for his opponents, of course, not for himself.
But it is not so easy to define precisely what those limits should be, for they depend on who says what to whom, and even where.
Williamson’s opinions suddenly mattered, because this obscure, excommunicated priest was about to be reinstated by the Pope.
This would have given institutional legitimacy to his private views.
In the case of Wilders, it makes a difference that he is a politician, not just a private individual, pandering to dangerous prejudices against a vulnerable minority.
In civilized life, people refrain from saying many things, regardless of questions of legality.
Words used by young black men among themselves in American cities would have a very different resonance if young white men used them.
Mocking the ways and beliefs of minorities is not quite the same thing as taking on the cherished habits and views of majorities.
If this smacks of political correctness, then so be it.
But civilized life, especially in countries with great ethnic and religious diversity, would soon break down if everyone felt free to say anything they liked to anyone.
The problem is where to draw the line.
Legally, this should probably be the point where words are designed to result in violence.
Socially, there are too many variables to establish an absolute, universal principle.
The proper limits must be constantly tested, contested, and renegotiated.
People like Bishop Williamson and Geert Wilders are useful to the extent that they allow us to do just that.
Let them speak, so that they can be judged, not in court, but by contrary opinions.
Banning them only allows them to pose as martyrs to free speech.
And that not only makes it harder to attack their views, but also gives free speech a bad name.
How Germany Lost the Iraq War
Wars always have winners and losers.
Saddam Hussein--dead or on the run--is, of course, the Iraq war's biggest loser.
But Germany has also lost much, including the many US troops who will now reportedly be re-deployed to bases in other countries.
Despite the announcement of plans to create a European army along with France, Belgium, and Luxembourg, Germany is less relevant in both European and world politics than it was before the Iraq war.
Repairing the damage will not be easy.
Every part of Germany's international position has been wounded by the Iraq war.
The country can no longer play the role of transatlantic mediator between France and America.
It can forget about US support in its campaign to gain a permanent seat in the UN Security Council.
Instead of forging a "third way" for Europe's left with British Prime Minister Tony Blair, Chancellor Gerhard Schröder needs Blair to plead his case with President George W. Bush, who feels personally betrayed by the Chancellor's conduct in the run-up to the war.
In postcommunist Eastern Europe, Germany is no longer perceived as an absolutely dependable advocate of the region's needs.
Multilateral institutions that served as pillars of German foreign policy for almost half-a-century have been weakened: the European Union's hopes for common foreign, security, and defense policies have been gravely jeopardized.
From an American perspective, flexible ad hoc coalitions of the willing have turned out to be more useful than the established NATO alliance, where Germany led the fight to refuse Turkey's request for support.
Even the UN--the institution that Schröder was supposedly defending--has been diminished by his fecklessness.
But the heart of the matter is the deterioration of German-American relations.
Germany is by no means the only sinner here, for US diplomacy over Iraq was often clumsy and bombastic.
Nevertheless, pointing out others' mistakes is not going to help rehabilitate Germany's position.
German-American relations suffered a devastating blow when Schröder stoked the country's overwhelmingly pacifist attitudes.
By doing so he drowned out the concerns about low growth and high unemployment that were threatening his re-election prospects.
But that political strategy left President Bush believing that Schröder had stabbed him in the back.
As with people, so too with states: trust once lost is extremely difficult to regain.
Germany's opposition parties and much of its foreign policy establishment warned that the country risked diplomatic isolation, so Schröder joined an ad hoc coalition of the unwilling, along with France and Russia.
This compounded the error by adding to it a public relations disaster.
Much of the world press dubbed this "gang of three" an "axis," a word with sinister echoes of the German-Italian-Japanese World War II axis.
Not surprisingly, Poland--like other Central and East European countries--sought reassurance from the US and Britain when their colossal neighbors, Germany and Russia, embarked on their anti-American flirtation.
But wartime victory makes cowards of leaders who backed the wrong side.
So, with Baghdad's fall, Schröder began to send conciliatory signals to Washington and London.
Schröder implicitly began to welcome regime change in Iraq.
During a Franco-German-Russian summit in St. Petersburg, he explicitly refrained from criticizing the US and Britain. "I don't want to speak about the past," he emphasized, "we should think about how the military victory can be turned to help the entire region."
That French President Jacques Chirac is even less popular in the US than Schröder gives German diplomats slight consolation.
But opposition to US policy from France never comes as a shock.
Indeed, Chirac's tone and tactics conform to textbook Gaullist patterns.
By contrast, German assertiveness vis-à-vis the US was stunning--perhaps because, as it is said, you have to be fully behind someone who you stab in the back.
The Chancellor's aides try to justify Schröder's rhetoric as an expression of the country's political maturity.
At long last, they say, German leaders can use the unrestricted sovereignty Germany acquired with reunification in 1990.
But the Chancellor's juvenile experiment in mature diplomacy has diminished, not expanded, Germany's prestige.
Quite simply, German Gaullism doesn't work.
After all, Germany's traditional low-key foreign policy made the country an anchor of NATO and helped secure reunification.
That diplomatic tradition has never simply been about "do-goodism" and checkbook contributions to peacekeeping missions around the world.
It was about creating and transferring stability through the strengthening of international governance and supranational structures.
Germany is too big to abstain from leadership in Europe.
But it is well advised to avoid being suspected of hegemonic goals.
Sharing sovereignty with its fellow Europeans and exerting influence through European and Atlantic institutions remains Germany's most promising political strategy.
Besides abandoning any Gaullist pretensions, the other lesson Germany must learn is that influence is based not only on soft "civilian power," but also on hard military capabilities that are adapted to the exigencies of the post-Cold War world.
If Germany wants to increase its diplomatic weight, it must increase its defense spending.
Only an enhanced German relevance in European and world politics will convince America that it is time to bury the hatchet.
How Globalization Stabilizes Poor Countries
Globalization stands accused of generating economic instability in developing countries and greatly exacerbating poverty, at least in the short run--which is the longest period the world's poor can afford to care about.
Critics point to the string of economic crises in Africa, Asia, and Latin America in recent years, often attributing them to multilateral lenders' demands for full liberalization of foreign trade and capital flows, privatization, and fiscal austerity.
But the raging debate over globalization often overlooks an increasingly important feature that makes life better and more stable for poor people in developing countries right now: the many millions of migrants who send money home.
Data on families in developing countries that receive money from relatives working abroad directly demonstrate that at least one element of globalization--migration--increases economic stability in poor countries.
Migrants from struggling countries in Latin America, Southeast Asia, and other regions are increasingly securing jobs at wages that, while low by rich country standards, are far higher than they could dream of back home.
In 2001, workers from low- and middle-income countries sent home a staggering $43 billion--more than double the level of a decade earlier and $5 billion more than that year's total official foreign aid to these countries.
Migrant workers may send money home for a variety of reasons: to maintain good family relations, to ensure an inheritance, or to re-pay a loan from elders.
But whatever the reason, these so-called "remittances"--the cash workers send home to countries like Colombia, Haiti, Jamaica, Mexico, and Bangladesh--act as a safety net that their governments typically need but cannot afford to provide.
This is particularly true in small, developing economies.
Here incomes are often considerably more volatile than in richer countries, owing to heavy reliance on a few commodities or industries and hence higher vulnerability to external shocks, including weather-related and other natural disasters.
Indeed, poor countries also often lack the private insurance needed to offer the type of emergency assistance that citizens of wealthy nations have come to expect.
In developing countries, remittances from workers abroad amount to the best insurance around.
In addition to providing their families at home with a much-needed source of stable income, expatriate migrant workers send home even more money when catastrophe strikes.
Such remittances enabled thousands of Jamaicans, for example, to recover from the devastation of Hurricane Gilbert in 1988, when storm damage was estimated at more than one-quarter of the country's annual GDP and nearly three households in four reported damage.
Insurance was scarce and the government offered only limited help, providing a mere fraction of the aid that was actually needed.
Jamaican families got far more help from loved ones living and working in places like Miami, New York, and Los Angeles.
The same was true when Argentina's economy collapsed last year, when violence wracked Haiti and a hurricane ravaged Honduras before that, and whenever floods submerge villages in Bangladesh.
In case after case, billions of dollars in remittances from migrants have given families in poor countries what their governments (and foreign donors) could not always provide: food, safety, the resources to recover, and hope.
The economic importance of such remittances to poor countries in normal times is itself revealing.
In Jamaica, remittances from workers abroad make up more than 10% of annual GDP on average--more than double the level of foreign direct investment.
After Hurricane Gilbert, remittances increased by 25 cents for each dollar of hurricane damage that households incurred.
To be sure, this implies that the extra money sent home provided only partial insurance.
Perhaps migrants worry--just like actual insurance companies--that furnishing too much assistance would result in recipients doing less to protect themselves.
Or maybe the damage from the hurricane was simply too large for migrants to cover completely.
After all, migrant workers may be relatively well off by standards at home, but they struggle to earn a decent living in their host countries.
Either way, even if remittances from abroad act as a form of insurance in the event of natural disasters, this does not mean that they will increase when other types of external shocks occur.
Damage due to hurricanes is relatively easy to observe and can't be blamed on human mistakes.
In contrast, it might be more difficult for a migrant in a distant country to assess the extent to which family members back home, knowing that they can always rely on the remittances, are responsible for other forms of income loss.
Nonetheless, the importance of remittances to households in poor countries, especially during periods of external shock, holds two lessons.
First, it should be easy and inexpensive for migrants to send money home.
Today, migrants and their families often pay 10% or more of the remittances in fees to financial institutions that transfer funds and exchange currencies.
Reducing these fees would, in effect, be a tax cut for the world's poorest.
Second, and perhaps more importantly, we should embrace migration as a proven method of bringing immediate relief and stability to poor nations.
Given that family members are the best judge of need, migration and remittances may, in fact, constitute a foreign-aid framework that is better targeted and more effective than any government program can ever be.
America’s Zombie Prison
NEW YORK – Why add to something that is not supposed to exist?
The something in question is the Unites States’ prison in Guantánamo Bay, for which the Pentagon recently requested $49 million in extra funding.
Despite Barack Obama’s promise in 2009 – one of his first as President – to shut down “Gitmo,” the US evidently has no intention of doing so anytime soon.
In fact, the only thing concerning Gitmo that the Obama administration has shut down is the office of the special envoy, Daniel Fried, who had been tasked with its closure.
The US State Department reassigned Fried in late January, and he will not be replaced.
How better to memorialize that decision than with a building boom at the prison?
The new facility for which the money is to be earmarked will house 106 prisoners (the precise number is uncertain) who have been neither tried nor charged.
Eight of the prisoners are now entering the second month of a hunger strike.
According to the spokesman for the US Southern Command, which oversees Gitmo, the hunger strikers are disillusioned, because they believed Obama’s pledge to close Gitmo.
Indeed, they are cleared to leave, and it is only Obama’s failure to keep his promise – and the US Congress’s failure to legislate their transfer – that is keeping them there.
So now they feel that the only way they can get the world’s attention is to “do something drastic.”
One reason why the Pentagon needs to build a costly new facility has to do with the role of private contractors in driving detention policy.
At Gitmo, corporate contractors run the show.
They share signage with military units; enjoy better housing than military personnel; run the food services; and import Southeast Asian workers to build the gigantic infrastructure, which was new when I visited in 2009 (calling into question the “deterioration” cited to justify the latest cash infusion).
Contractors also ran the military tribunal facility, and even set policy – deciding, for example, what could be told to the press.
Based on some disputes that I witnessed, contractors appeared to outrank soldiers.
The vast, often undocumentable profits that flow to these companies go a long way toward explaining why facilities like Gitmo – and privately owned and operated prisons in the US itself – never close.
The transfer of public money to private corporations is far more attractive than old-fashioned market capitalism.
But then there is the brutality of the prison.
I recently toured Alcatraz, the former US federal prison in San Francisco Bay.
Like Gitmo, Alcatraz was created, in the 1930’s, to house what was then “the worst of the worst” – the Muslim terrorists (or accused terrorists) of their day.
Mass murderers and gangsters – including, for example, Al Capone – were incarcerated there.
Alcatraz was closed 50 years ago, in 1963, owing to its perceived inhumanity, and the prisoners were transferred elsewhere.
Yet I was struck by how much more humane the facility and regime at Alcatraz were compared to Gitmo.
For starters, prisoners at Alcatraz who broke rules or were violent were punished by being put in “D Block,” where the cells had no windows; at Gitmo, all the cells that journalists are shown lack windows or natural light.
Solitary confinement in D Block was seen as the harshest punishment, and it was never used for more than 48 hours at a time.
At Guantánamo – and in other US facilities – prisoners are placed in solitary confinement for days or weeks at a time, which can lead to psychosis.
Likewise, in Alcatraz, prisoners had access to a fully stocked library, monthly visits from loved ones, and mail delivery.
At Gitmo, contrary to Red Cross rules, prisoners may not receive visits or mail from family, their reading is dramatically curtailed, and news is censored.
They are not even notified of the deaths of parents and children.
Prisoners at Alcatraz also had basic privacy.
They were stripped naked on entry, but then wore clothing and showered in single-sex groups with male guards.
By contrast, prisoners in Guantánamo must shower in individual shower stalls that are placed in main hallways and fronted by glass, leaving them naked in full view of female guards.
And, of course, the prisoners in Alcatraz had been tried in a court of law, defended by lawyers whose communications with them were privileged, and duly convicted of their crimes.
The men in Guantánamo have never been tried; their lawyers’ communications are monitored; and their lawyers may not even report to journalists or tribunals what was done to their clients to extract confessions, because – in a twist worthy of Franz Kafka – investigators’ methods, which detainees claim include torture, are classified.
The eight hunger strikers are being fed through tubes inserted into their stomachs.
This is a brutal process – the men are strapped onto restraint chairs twice a day and force-fed, in a facility that I witnessed.
During my visit in 2009, a Yemeni hunger striker, Mohammad Saleh, died.
As with all hunger strikers who have died at Gitmo, the US military ruled his death a suicide.
Perhaps, someday, tourists will travel to Guantánamo and look in horror and amazement at what America built.
Until then, Americans need to ask themselves what has coarsened in the national conscience between 1963 and today.
How is it that a prison too brutal for gangsters, too un-American to house the worst of the worst, was more humane than a place that Americans are spending millions to enlarge?
How Independent Is The ECB?
As the European Union prepares to welcome up to twelve new members, debate is heating up among the leading candidate countries about whether or not speedy adoption of the euro will promote or impede rapid catch-up growth.
But expanding the reach of monetary union raises two equally fundamental questions for current euro members: does formal political independence for the European Central Bank deliver truly independent judgements about policy?
If not, will expansion aggravate the problem because the biases of ECB members will become even more divergent than they are today?
Each new entrant into Europe's monetary union adds one member to the ECB's Governing Council, the group that sets the euro area's monetary policy.
With 18 members, the Governing Council is already larger than the governing bodies of the US Federal Reserve Board, the Bank of England, or the Bank of Japan.
To reduce the risks of unwieldiness, the ECB needs to reform its Governing Council now.
While the Nice Treaty does not permit re-structuring the Governing Council, it does allow for change in the voting rule that the Council uses.
A rule that requires a rotation of votes among Council members, or that groups them into voting blocs, could replace the current one-man-one-vote scheme.
How would such a change affect European monetary policy?
Enlargement of monetary union will increase the relative number of national central bank chiefs on the Governing Council.
Each entrant will add one member, while the number of officials from the ECB's headquarters in Frankfurt will remain fixed at six.
Some observers suggest that this shift will make European monetary policy more prone to the regional biases of national central banks.
But it may be a mistake to assume that central bankers in Frankfurt lack regional or national bias.
I examined the question of regional bias in the US Federal Reserve, whose monetary policy body, the Federal Open Market Committee (FOMC), is composed of seven officials from Washington and five from regional offices.
I analyzed records from 1978 through 2000, which included 214 meetings and conference calls, with more than 2,400 votes by FOMC members.
America's Fed policymakers are more likely to dissent in favor of lower interest rates when their region's unemployment rate is higher than the national average.
They are also more likely to dissent in favor of raising rates when their region's unemployment rate is below the national average.
So officials in Washington seem to be more , not less, sensitive to regional unemployment than officials in regional Fed offices!
Is the same thing true of the ECB?
To find out, an identical analysis of its policy deliberations would be needed, but the absence of recorded and published votes makes this impossible.
I devised an experiment that allows us to look at whether national loyalties played a role in ECB policy since the euro's inception.
This experiment assumed that each member of the ECB's Governing Council casts votes on the basis of the difference between his country's inflation rate and the average inflation rate in the euro area during the previous month.
It also assumed that if the difference between the national inflation rate and the euro-area average exceeded a certain threshold in the month prior to a monetary policy meeting, the Governing Council member would vote in a particular fashion.
For example, if national inflation were higher than euro-area inflation by more than a particular amount (the threshold value), then a Council member from that country would vote in favor of monetary tightening or against monetary easing.
If it were lower than the euro-area average by more than the threshold value, then he or she would vote against monetary tightening or in favor of monetary easing.
Finally, I assumed that all policy decisions were made on the basis of a simple majority vote.
I analysed the eleven instances in which the ECB changed interest rates from January 1999 through December 2001.
Taking into account the national identities of each Governing Council member, I calculated the total number of members who would have voted contrary to the actual monetary policy change that was made, given the assumptions about differences between national and euro-zone inflation rates.
I then repeated the experiment using various threshold values.
The results indicate that the ECB's monetary policy decisions are consistent with the regional bias hypothesis.
In nearly every case and for every threshold value tested, a majority of Governing Council members voted for the policy change that actually occurred, and their votes could be predicted by the difference between their national inflation rate and the euro-area average.
One proposal for voting reform on the Governing Council gives greater weight to the six policymakers at the ECB's center, under the assumption that these officials are less likely to be swayed by national interests.
But my experiment indicates that even when voting is limited to these six officials, the policy decisions taken between January 1999 and December 2001 are consistent with outcomes based on differences in regional inflation.
Two serious conclusions follow from all this: first, any change to the voting rules of the ECB's Governing Council should minimize the potential for regional bias, which can only grow with expansion eastward.
Second, reformers should not presume that officials at the ECB's Frankfurt headquarters are less likely to show bias than officials from national central banks.
How India Survived the Financial Crisis
NEW DELHI – As the world economy begins to recover, Indians are looking back with particular satisfaction at how they coped with the recent crisis.
Despite an unprecedented global recession, India remained the second fastest growing economy in the world.
Whereas most countries suffered negative growth in at least one quarter over the last two years, India’s GDP grew by more than 6% throughout this period – and by 7.9% in the last quarter of 2009.
India’s achievement is all the more striking given that the Pakistani terrorist attacks on Mumbai – India’s financial nerve center and commercial capital – in late November 2008 came in the midst of the crisis.
The terrorists dented the worldwide image of India as an emerging economic giant, a success story of the era of globalization, and a magnet for investors and tourists.
Indeed, in late 2008, foreign investors did withdraw $12 billion from India’s stock markets.
But India’s resilience in the face of adversity, and its mature restraint in the face of violent provocation, encouraged investors to return.
Foreign direct investment totaled $27.3 billion in 2008-2009, despite the global financial crisis, and reached $1 billion in just one week in May 2009.
India’s ability to stave off the economic gales was helped by the fact that it is much less dependent than most countries on global flows of trade and capital.
India relies on external trade for about 20% of its GDP (the figure for China is roughly double).
The country’s large and robust internal market accounts for the rest.
Indians continued producing goods and services for other Indians, and that kept the economy humming.
Though India’s merchandise exports did register declines of about 30%, its exports of services continued to do well throughout the crisis.
Indians abroad stayed loyal to India: remittances from overseas Indians remained robust, reaching $46.4 billion in 2008-2009, the bulk of which came from the mainly blue-collar Indian expatriate community in the Gulf countries.
India’s generally conservative financial system played a vital role, too.
Its banks and financial institutions were not tempted to buy the mortgage-supported securities and credit-default swaps that ruined several Western financial institutions.
Among the drivers of growth, domestic capital formation retained much of its momentum from preceding years.
Moreover, India’s government adopted a pro-active fiscal policy, rolling out two rounds of stimulus packages.
The authorities pursued pro-growth policies, including lower interest rates, expanded credit, and a reduction in excise duties.
There are still challenges ahead.
Reform is pursued hesitantly by a coalition government constantly wary of voters’ reactions.
A decision to de-regulate petrol and diesel prices has sparked massive street protests and stoked fears of rampant inflation.
Privatization of India’s bloated public sector (from massive coal and steel enterprises to the loss-making national carrier Air India) has been slow to get off the ground.
And, of course, the persistent complaints of corruption and bureaucratic red tape have not faded with liberalization.
The country’s infrastructure remains woeful, as any visitor flying into an Indian airport notices.
Power shortages are frequent.
Some 40% of the population still lives below a poverty line drawn just this side of the funeral pyre.
Yet all these problems are being dealt with by a confident Prime Minister Manmohan Singh, who has steered the ship of state through some particularly treacherous waters.
India is simultaneously tackling the “hardware” of development (ports, roads, airports) and its “software” (health care, education).
Success will not occur overnight, but progress has been impressive and is continuing.
In the last 15 years, India has pulled more people out of poverty than in the previous 45 – roughly 10 million people per year on average in the last decade.
The country has visibly prospered, and, despite population growth, per capita income has grown faster, and to a greater level, than ever before.
The current financial crisis, far from prompting India to retreat, is an opportunity to safeguard and build on those gains.
India can advance with the confidence that it can cope with the world from a very secure base.
As the 2010 monsoon nourishes India’s plains, that’s an encouraging place to be.
How Inequality Fueled the Crisis
CHICAGO – Before the recent financial crisis, politicians on both sides of the aisle in the United States egged on Fannie Mae and Freddie Mac, the giant government-backed mortgage agencies, to support low-income lending in their constituencies.
There was a deeper concern behind this newly discovered passion for housing for the poor: growing income inequality.
Since the 1970’s, wages for workers at the 90th percentile of the wage distribution in the US –such as office managers – have grown much faster than wages for the median worker (at the 50th percentile), such as factory workers and office assistants.
A number of factors are responsible for the growth in the 90/50 differential.
Perhaps the most important is that technological progress in the US requires the labor force to have ever greater skills.
A high school diploma was sufficient for office workers 40 years ago, whereas an undergraduate degree is barely sufficient today.
But the education system has been unable to provide enough of the labor force with the necessary education.
The reasons range from indifferent nutrition, socialization, and early-childhood learning to dysfunctional primary and secondary schools that leave too many Americans unprepared for college.
The everyday consequence for the middle class is a stagnant paycheck and growing job insecurity.
Politicians feel their constituents’ pain, but it is hard to improve the quality of education, for improvement requires real and effective policy change in an area where too many vested interests favor the status quo.
Moreover, any change will require years to take effect, and therefore will not address the electorate’s current anxiety.
Thus, politicians have looked for other, quicker ways to mollify their constituents.
We have long understood that it is not income that matters, but consumption.
A smart or cynical politician would see that if somehow middle-class households’ consumption kept up, if they could afford a new car every few years and the occasional exotic holiday, perhaps they would pay less attention to their stagnant paychecks.
Therefore, the political response to rising inequality – whether carefully planned or the path of least resistance – was to expand lending to households, especially low-income households.
The benefits – growing consumption and more jobs – were immediate, whereas paying the inevitable bill could be postponed into the future.
Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly.
Politicians, however, prefer to couch the objective in more uplifting and persuasive terms than that of crassly increasing consumption.
In the US, the expansion of home ownership – a key element of the American dream – to low- and middle-income households was the defensible linchpin for the broader aims of expanding credit and consumption.
Why did the US not follow the more direct path of redistribution, of taxing or borrowing and spending on the anxious middle class?
Greece, for example, got into trouble doing precisely this, employing many thousands in the government and overpaying them, even while it ran up public debt to astronomical levels.
In the US, though, there have been strong political forces arrayed against direct redistribution in recent years.
Directed housing credit was a policy with broader support, because each side thought that it would benefit.
The left favored flows to their natural constituency, while the right welcomed new property owners who could, perhaps, be convinced to switch party allegiance.
More low-income housing credit has been one of the few issues on which President Bill Clinton’s administration, with its affordable-housing mandate, and that of President George W. Bush, with its push for an “ownership” society, agreed.
In the end, though, the misguided attempt to push home ownership through credit has left the US with houses that no one can afford and households drowning in debt.
Ironically, since 2004, the homeownership rate has been in decline.
The problem, as often is the case with government policies, was not intent.
It rarely is.
But when lots of easy money pushed by a deep-pocketed government comes into contact with the profit motive of a sophisticated, competitive, and amoral financial sector, matters get taken far beyond the government’s intent.
This is not, of course, the first time in history that credit expansion has been used to assuage the concerns of a group that is being left behind, nor will it be the last.
In fact, one does not even need to look outside the US for examples.
The deregulation and rapid expansion of banking in the US in the early years of the twentieth century was in many ways a response to the Populist movement, backed by small and medium-sized farmers who found themselves falling behind the growing numbers of industrial workers, and demanded easier credit.
Excessive rural credit was one of the important causes of bank failures during the Great Depression.
The broader implication is that we need to look beyond greedy bankers and spineless regulators (and there were plenty of both) for the root causes of this crisis.
And the problems are not solved with a financial regulatory bill entrusting more powers to those regulators.
America needs to tackle inequality at its root, by giving more Americans the ability to compete in the global marketplace.
This is much harder than doling out credit, but more effective in the long run.
How Japan Fuels Global Financial Instability
Over the past several years, much attention has focused on the role of China’s trade surplus in creating today’s global financial imbalances.
But too little attention has been paid to the role of Japan’s policy of near-zero interest rates in contributing to these imbalances.
As global financial uncertainty rises, it is time for Japan to change course.
Japan’s ultra-low interest rate policy was initiated in the 1990’s to put a floor under the economy following the bursting of its asset price bubble.
However, over time these ultra-low interest rates have promoted a highly speculative financial “carry” trade: speculators borrow yen at low interest rates and then buy dollars and other currencies that are invested in higher-yield assets elsewhere.
There are two key features of this carry trade.
First, it contributes to yen depreciation and dollar appreciation as carry traders switch out of yen.
Second, it increases global asset demand, generating asset price inflation.
The yen’s depreciation versus the dollar has contributed to continuing large US trade deficits with Japan.
It has also pressured other East Asian countries to under-value their exchange rates in order to remain competitive with Japan.
Given China’s under-valued currency, East Asia’s two largest economies have thus anchored down exchange rates throughout the region, thereby increasing the region’s trade surplus at the expense of jobs and growth in the rest of the global economy.
Funds switched out of Japan have shifted to other financial markets, with the chase for yield driving up asset prices and lowering interest rates.
In the US, this has complicated the Federal Reserve’s task.
The Fed has been trying to slow demand growth and cool the housing price bubble to avoid inflation, but carry trade speculators have been easing credit.
Most importantly, the carry trade generates global financial fragility by creating fundamental – and dangerous –mismatches.
First, carry traders borrow in yen but invest in dollars and other currencies.
Second, carry traders borrow short-term money in Japan but may invest in longer-term assets outside Japan.
Unexpected yen appreciation could cause large carry trade exchange rate losses, as could unexpected closing of the interest rate gap with Japan.
Such losses, or just the thought of them, have the potential to trigger global contagion as carry traders close positions in US markets to repay loans in Japan.
In addition to the global dangers of the carry trade, the policy of ultra-low interest rates may also be bad for Japan.
This is because ultra-low interest rates may hurt Japan’s households and lower consumption, and this effect may be larger than the benefit that a weak yen confers on Japan’s exports.
Higher interest rates can spur consumption if their impact on income outweighs the increased incentive to save.
This may well be the case for Japan, which has a rapidly aging population.
Current ultra-low interest rates may be scaring people about the adequacy of future income.
Raising rates could alleviate those fears, increasing consumer confidence and spending.
Additionally, raising interest rates would be a form of expansionary fiscal policy.
This is because Japan has a large public debt, and increasing interest payments on that debt would put extra money in the hands of households.
The policy of ultra-low interest rates was justified in the aftermath of the bursting of Japan’s asset price bubble, but Japan stabilized its economy long ago.
At this stage, the policy has become a contributor to global financial fragility, and it may be retarding Japan’s own prosperity by contributing to consumer anxieties.
That means Japan should decisively abandon ultra-low interest rates, albeit gradually so as to allow an orderly unwinding of speculative positions.
How Long for Low Rates?
CAMBRIDGE – How long can today’s record-low, major-currency interest rates persist?
Ten-year interest rates in the United States, the United Kingdom, and Germany have all been hovering around the once unthinkable 1.5% mark.
In Japan, the ten-year rate has drifted to below 0.8%.
Global investors are apparently willing to accept these extraordinarily low rates, even though they do not appear to compensate for expected inflation.
Indeed, the rate on inflation-adjusted US Treasury bills (so-called “TIPS”) is now negative up to 15 years.
Is this extraordinary situation stable?
In the very near term, certainly; indeed, interest rates could still fall further.
Over the longer term, however, this situation is definitely not stable.
Three major factors underlie today’s low yields.
First and foremost, there is the “global savings glut,” an idea popularized by current Federal Reserve Chairman Ben Bernanke in a 2005 speech.
For various reasons, savers have become ascendant across many regions.
In Germany and Japan, aging populations need to save for retirement.
In China, the government holds safe bonds as a hedge against a future banking crisis and, of course, as a byproduct of efforts to stabilize the exchange rate.
Similar motives dictate reserve accumulation in other emerging markets.
Finally, oil exporters such as Saudi Arabia and the United Arab Emirates seek to set aside wealth during the boom years.
Second, in their efforts to combat the financial crisis, the major central banks have all brought down very short-term policy interest rates to close to zero, with no clear exit in sight.
In normal times, any effort by a central bank to take short-term interest rates too low for too long will boomerang.
Short-term market interest rates will fall, but, as investors begin to recognize the ultimate inflationary consequences of very loose monetary policy, longer-term interest rates will rise.
This has not yet happened, as central banks have been careful to repeat their mantra of low long-term inflation.
That has been sufficient to convince markets that any stimulus will be withdrawn before significant inflationary forces gather.
But a third factor has become manifest recently.
Investors are increasingly wary of a global financial meltdown, most likely emanating from Europe, but with the US fiscal cliff, political instability in the Middle East, and a slowdown in China all coming into play.
Meltdown fears, even if remote, directly raise the premium that savers are willing to pay for bonds that they perceive as the most reliable, much as the premium for gold rises.
These same fears are also restraining business investment, which has remained muted, despite extremely low interest rates for many companies.
It is the combination of all three of these factors that has created a “perfect storm” for super low interest rates.
But how long can the storm last?
Although highly unpredictable, it is easy to imagine how the process could be reversed.
For starters, the same forces that led to an upward shift in the global savings curve will soon enough begin operating in the other direction.
Japan, for example, is starting to experience a huge retirement bulge, implying a sharp reduction in savings as the elderly start to draw down lifetime reserves.
Japan’s past predilection toward saving has long implied a large trade and current-account surplus, but now these surpluses are starting to swing the other way.
Germany will soon be in the same situation.
Meanwhile, new energy-extraction technologies, combined with a softer trajectory for global growth, are having a marked impact on commodity prices, cutting deeply into the surpluses of commodity exporters from Argentina to Saudi Arabia.
Second, many (if not necessarily all) central banks will eventually figure out how to generate higher inflation expectations.
They will be driven to tolerate higher inflation as a means of forcing investors into real assets, to accelerate deleveraging, and as a mechanism for facilitating downward adjustment in real wages and home prices.
It is nonsense to argue that central banks are impotent and completely unable to raise inflation expectations, no matter how hard they try.
In the extreme, governments can appoint central bank leaders who have a long-standing record of stating a tolerance for moderate inflation – an exact parallel to the idea of appointing “conservative” central bankers as a means of combating high inflation.
Third, eventually the clouds over Europe will be resolved, though I admit that this does not seem likely to happen anytime soon.
Indeed, things will likely get worse before they get better, and it is not at all difficult to imagine a profound restructuring of the eurozone.
Nevertheless, whichever direction the euro crisis takes, its ultimate resolution will end the extreme existential uncertainty that clouds the outlook today.
Ultra-low interest rates may persist for some time.
Certainly Japan’s rates have remained stable at an extraordinarily low level for a considerable period, at times falling further even as it seemed that they could only rise.
But today’s low interest-rate dynamic is not an entirely stable one.
How Military Should Japan Be?
Is it time for Japan to prime its weapons and sail out into the world in defense of peace?
The very idea still incites howls of protest in Asia - not least in Japan, where popular attachment to the country's postwar "peace" constitution remains powerful.
Yet Japan's modestly named Self-Defense Forces are involved in many regional hot spots (no combat duty, of course) and seek to play a more active part in UN peacekeeping.
If a shooting war ever breaks out in Asia, Japan is nowadays prepared to do a lot more than fill the petrol tanks.
It is past time for these modest changes, because the Asia/Pacific region's many fault lines affect the interests of the world's great and emerging powers in fundamental ways.
Northeast Asia contains the last remnants of the Cold War: the divided Korean Peninsula and hostile glares across the Taiwan Straits.
Southeast Asia forms its own unique geo-political environment, with a wide variety of ethnic groups, cultures, and religions in tension - as the current Islamic unrest in Thailand attests.
Beyond these conventional strategic concerns, the emergence of global terrorism and the Iraq War re-enforce Japan's sense that the strategic environment has changed profoundly.
The roles and obligations of the Self-Defense Forces must gradually shift and diversify, and their zone of action broadened.
Neat binary concepts like "peacetime" and "wartime" are no longer viable.
The world must get used to a twilight security environment of sudden and peripheral emergencies.
Japan's laws are primed for this change, because the obligations of the Self-Defense Forces are relatively clear in these circumstances.
The "Anti-Terrorism Special Measures Law" allows the Self-Defense Forces to participate in the fight against international terrorism, although the form of participation is limited to logistical support.
Nor are the Self-Defense Forces' operations and obligations any longer restricted to Japanese territory and the adjacent seas.
Ever since Japan dispatched minesweepers to the Persian Gulf after the Gulf War in 1991, the Self-Defense Forces have been expanding their activities beyond Japan and its immediate vicinity to include international peacekeeping missions, emergency relief operations, multilateral military exercises, and naval refueling support in the Indian Ocean.
Self-Defense Force units have been dispatched to southern Iraq to provide humanitarian aid and support reconstruction efforts.
Of course, the obligation of the Self-Defense Forces not to engage in offensive combat operations remains unchanged.
With its expanded roles, however, the Self-Defense Forces are well prepared to engage in other military operations, such as shadowing and chasing spy ships, anti-terror activities, and missions to prevent proliferation of weapons of mass destruction and ballistic missiles.
Japan's warships can help with sanctions monitoring and minesweeping.
Its ships and aircraft can rescue stranded nationals.
But these incremental changes in Japan's military capacity and policies, though necessary and effective, can be sustained only with a clear national consensus on the country's defense interests.
The international community's demand that Japan participate directly in resolving global tensions has helped, by changing the terms of domestic debate.
The old deadlock on security issues is relaxing, and the Japanese public, recognizing the changed international environment, mostly embraces the Self-Defense Forces' deployment in pursuit of international and regional responsibilities.
Every Japanese citizen may have his or her own opinion, but a clear majority appear to agree that Japan must become a prominent nation in promoting international and regional security, as well as economic growth.
To achieve these ends, Japan must be endowed with responsibilities equivalent to the country's national power, while securing the safety, comfort, and prosperity of Japan and preserving the people's identity as Japanese with pride and honor.
Achieving these goals requires fulfilling several conditions.
Japan's political leadership needs to be founded on a competitive but stable political structure.
Only a truly popular political mandate can assure that the Japanese people are fully aware of their international responsibilities as an influential nation in the international community.
Prime Minister Junichiro Koizumi seems to grasp much of this, and so is undertaking discussions on security and defense that aim to help revise the "National Defense Program Outline."
Those with bitter memories of Japanese behavior half a century ago should be reassured; this debate is about how to defend peace, not about how to promote or wage war.
Many of Japan's neighbors were understandably reassured by the Cold War arrangement whereby America promised to defend Japan, relieving the country of the need for a powerful military.
The one-sided nature of this alliance rankled little when Japan was just one among many protected by America's global shield.
As Japan prospered under America's protection, it prided itself on being a "civilian" power, using its trade and aid, rather than tanks and guns, to encourage stability.
But America, in its global war on terror, has justifiably lost interest in bearing Asia's many military burdens alone.
Hence, Japan must be seen to be doing more to support its inseparable ally, as well as international peacekeeping efforts in general.
A rich and powerful Japan in a region as dangerous as East Asia cannot go on playing military bit parts forever.
The question is whether Japan's Self-Defense Forces work alongside America and the world in defense of world peace now, or eventually do so alone in defense of Japan.
How Much is Enough?
LONDON – The economic downturn has produced an explosion of popular anger against bankers’ “greed” and their “obscene” bonuses.
This has accompanied a wider critique of “growthmanship” – the pursuit of economic growth or the accumulation of wealth at all costs, regardless of the damage it may do to the earth’s environment or to shared values.
John Maynard Keynes addressed this issue in 1930, in his little essay “Economic Possibilities for our Grandchildren.”
Keynes predicted that in 100 years – that is, by 2030 – growth in the developed world would, in effect, have stopped, because people would “have enough” to lead the “good life.”
Hours of paid work would fall to three a day – a 15-hour week.
Human beings would be more like the “lilies of the field, who toil not, neither do they spin.”
Keynes’s prediction rested on the assumption that, with a 2% annual increase in capital, a 1% increase in productivity, and a stable population, average standards of living would rise eight times on average.
This enables us to work out how much Keynes thought was “enough.”
GDP per head in the United Kingdom in the late 1920’s (before the 1929 crash) was roughly £5,200 ($8,700) in today’s value.
Accordingly, he estimated that a GDP per capita of roughly £40,000 ($66,000) would be “enough” for humans to turn their attention to more agreeable things.
It is not clear why Keynes thought eight times the average British national income per head would be “enough.”
Most likely he took as his standard of sufficiency the bourgeois rentier income of his day, which was about ten times that of the average worker.
Eighty years on, the developed world has approached Keynes’s goal.
In 2007 (i.e., pre-crash), the IMF reported that average GDP per head in the United States stood at $47,000, and at $46,000 in the UK.
In other words, the UK has had a five-fold increase in living standards since 1930 – despite the falsification of two of Keynes’s assumptions: “no major wars” and “no population growth” (in the UK, the population is 33% higher than in 1930).
The reason we have done so well is that annual productivity growth has been higher than Keynes projected: about 1.6% for the UK, and a bit higher for the US.
Countries like Germany and Japan have done even better, despite the hugely disruptive effects of war.
It is likely that Keynes’s “target” of $66,000 will be achieved for most western countries by 2030.
But it is equally unlikely that this achievement will end the insatiable hunt for more money. &#160;&#160;Let’s assume, cautiously, that we are two-thirds of the way towards Keynes’s target.
We might therefore have expected hours of work to have fallen by about two-thirds.
In fact they have fallen by only one-third – and have stopped falling since the 1980’s.
This makes it highly improbable that we will reach the three-hour working day by 2030.
It is also unlikely that growth will stop – unless nature itself calls a halt.
People will continue to trade leisure for higher incomes.
Keynes minimized the obstacles to his goal.
He recognized that there are two kinds of needs, absolute and relative, and that the latter may be insatiable.
But he underestimated the weight of relative needs, especially as societies got richer, and, of course, the power of advertising to create new wants, and thus induce people to work in order to earn the money to satisfy them.
As long as consumption is conspicuous and competitive, there will continue to be fresh reasons to work.
Keynes did not entirely ignore the social character of work. “It will remain reasonable,” he wrote, “to be economically purposive for others after it has ceased to be reasonable for oneself.”
The wealthy had a duty to help the poor. Keynes was probably not thinking of the developing world (most of which had hardly started to develop in 1930).
But the goal of global poverty reduction has imposed a burden of extra work on people in rich countries, both through the commitment to foreign aid and, more importantly, through globalization, which increases job insecurity and, particularly for the less skilled, holds down wages.
Moreover, Keynes did not really confront the problem of what most people would do when they no longer needed to work.
He writes: “It is a fearful problem for the ordinary person, with no special talents, to occupy himself, especially if he no longer has roots in the soil or in custom or in the beloved conventions of a traditional economy.”
But, since most of the rich – “those who have an independent income but no associations or duties or ties” have “failed disastrously” to live the “good life,” why should those who are currently poor do any better?
Here I think Keynes comes closest to answering the question of why his “enough” will not, in fact, be enough.
The accumulation of wealth, which should be a means to the “good life,” becomes an end in itself because it destroys many of the things that make life worth living.
Beyond a certain point – which most of the world is still far from having reached – the accumulation of wealth offers only substitute pleasures for the real losses to human relations that it exacts.
Finding the means to nourish the fading “associations or duties or ties” that are so essential for individuals to flourish is the unsolved problem of the developed world, and it is looming for the billions who have just stepped on to the growth ladder.
George Orwell put it well: “All progress is seen to be a frantic struggle towards an objective which you hope and pray will never be reached.”
How Much Transparency is Too Much?
PRINCETON – Transparency seems to be the word of the day in a wide array of policy domains.
But is greater transparency always good?
Ever since the financial crisis erupted in 2008, there has been a call for “greater transparency” in financial services.
The financial-reform law passed by the United States Congress last month requires improved transparency from banks and other financial-services firms.
Moreover, thanks to the hard work of Oxfam America and the Publish What You Pay coalition, the law also requires oil and mining companies – both US and foreign – that want to raise capital in the US to disclose their payments to the governments of countries in which they operate.
For many poor countries, wealth in natural resources is a curse rather than a benefit.
Corrupt rulers can use the billions they receive from oil and mining corporations for personal extravagance, or to buy arms for troops to crush democratic resistance movements.
Of course, transparency alone cannot prevent this, but it will show everyone how much the rulers are getting, and who is funding them.
This, one hopes, will change the attitude of corporations that enrich themselves by paying dictators for the right to extract valuable resources that belong to the whole country.
Throughout the world, to receive what one knows are stolen goods is a crime – except, it seems, when the goods are stolen by dictators from the people they dominate.
A different form of transparency received much more attention last month.
Wikileaks, which describes itself as “an anonymous global avenue for disseminating documents the public should see,” released 92,000 documents related to the war in Afghanistan, including military reports on incidents, and intelligence reports.
Wikileaks has, over the past three years, published a variety of sensitive documents, ranging from the American military’s manual for operating its prison in Guantánamo Bay to evidence of corruption in Kenya and the dumping of toxic chemicals off the coast of Africa.
It also published a list of Web sites that the Australian government proposed blocking, the extreme-right British National Party’s membership roll, an analysis of a major Icelandic bank’s default risk, and video footage of a US helicopter attack in Baghdad that killed 12 people, including a Reuters journalist and photographer.
But posting the Afghan war reports was its most controversial move yet.
The New York Times, together with The Guardian and Der Spiegel, was given a chance to study the documents before they were released, and decided to publish some of the material.
Its editors argued that while the decision to publicize secret material is always difficult, these documents were of “significant public interest” and “illuminate the extraordinary difficulty of what the United States and its allies have undertaken in a way that other accounts have not.”
US Senator John Kerry, a leading Democrat who supports the war, has said that the documents may “underscore the stakes” in the conflict, and make it more urgent to “make the calibrations needed to get the policy right.”
Wikileaks founder Julian Assange has suggested that the documents could form the basis for prosecuting war crimes committed by US forces against Afghan civilians.
Others, including President Barack Obama, have said that the documents “don't reveal any issues that haven't already informed our public debate on Afghanistan.”
There is a clear parallel between the recent Afghanistan leaks and Daniel Ellsberg’s release in 1971 of the Pentagon Papers, which helped the American public understand how the war in Vietnam was really being conducted.
On its Web site, Wikileaks quotes the US Supreme Court ruling in that case: “only a free and unrestrained press can effectively expose deception in government.”
But even some supporters of open government think Wikileaks goes too far.
Steven Aftergood, head of the project on government secrecy at the Federation of American Scientists, counts Wikileaks among the enemies of an open society because of its failure to respect the rule of law and the rights of individuals.
Although Wikileaks says it has withheld an additional 15,000 documents on the Afghan war in order to remove names and other means of identifying individuals who might be placed at risk, the Times of London revealed that in some cases sufficient identifying details were in the documents already released.
Assange has said that he deeply regrets any harm that the released documents may cause, but has defended the release nevertheless.
And the Wikileaks Web site points out that while openness may lead to some highly visible bad consequences, what we fail to see are the consequences of not publishing, and the way in which a climate of openness makes it more likely that governments and corporations will act more ethically.
But how much openness is too much?
In Latvia, an artificial-intelligence researcher in the University of Latvia's computer science department who earlier this year leaked confidential records on the income of bank managers has been praised as a modern “Robin Hood,” because otherwise the public would not have known how much some people were continuing to be paid while their banks were being bailed out with public funds.
Each year in Norway, the government publishes the income and wealth of almost every taxpayer.
Is that too much transparency?
If so, why?
In a world in which terrorists have committed atrocities and threaten to commit more, to seek complete government transparency is utopian.
Sometimes it is possible to do good only in secret.
Yet on the whole, a more transparent community is likely to be a better one – and the same applies to a more transparent world.
How Musharraf Survives
The devastating Kashmir earthquake is once again testing the skills of one of the world’s great political survivors.
General Pervez Musharraf, president of the Islamic Republic of Pakistan, has few friends and many enemies.
Pakistan’s major political parties oppose him.
For the religious right and the mullahs, he is an agent of America, the great Satan, and has thus betrayed the cause of Islam.
Somewhere out there, gunning for Musharraf, are Islamic militants furious at being dumped after they fought his covert wars in Afghanistan and Kashmir.
Many in Musharraf’s own army despise him for the same reason.
For Pakistan’s small and embattled liberal and left-wing forces, he is yet another military dictator who seized and holds power by force, undermining the development of democracy.
So how does Musharraf survive?
In large part, he can thank 9/11.
Faced by a United States bent upon bloody vengeance, Pakistan’s military establishment scurried to join the US-led coalition and take up arms against its own creation, the Taliban.
Only a few senior officers with an Islamic bent resisted this straightforward betrayal.
They were soon marginalized, drawing praise from Washington.
With US help, an economy that had nearly run aground was suddenly righted by a wave of international aid and loan write-offs.
Even more important was a decision, taken in the hope of choking off funds to extremist groups, to require all expatriate Pakistani earnings to be remitted through official banking channels.
In a curious way, nuclear weapons also are crucial to Musharraf’s survival, for they create conditions that distract Pakistan’s highly ideological army from its objective of war with India.
The dispute over Kashmir had occupied the minds of military planners throughout Pakistan’s history, and war had been the raison d’etre for maintaining the world’s eighth-largest standing army.
But nukes, a belief in deterrence, and the growing realization that Kashmir is a lost cause, have freed the army from the hard life of the trenches.
Ideology is increasingly irrelevant as the officer class scrambles to build vast personal fortunes.
A look at Pakistan’s economic landscape says it all.
The CEO’s of many, if not most corporations, public and private, are retired military officers – many fairly young.
The military owns airlines and freight companies, petrochemical factories, power generation plants, sugar mills, cement and fertilizer plants, construction firms, banks and insurance companies, advertising agencies, and more.
Vast tracts of prime real estate in cities, sold to officers for a pittance, have turned into mega housing developments.
Musharraf defends the military acquisitions, claiming that they are economically efficient, and angrily dismisses criticism as the ranting of unpatriotic Pakistani pseudo-intellectuals.
But they are “efficient” only in the sense that they dampen the threat to Musharraf posed by the military.
No so Pakistan’s Islamists, however, whom Musharraf infuriated yet again last month, when he ordered his foreign minister to initiate the first official contact with Israel.
But the Islamists’ call for nationwide protests flopped.
The military, after decades of rule, has dismantled all forms of political organization – parties, trade unions, and student associations – leaving a Pakistani society immobilized, apathetic, and incapable of articulating its preferences.
As Islamists’ anger at Musharraf’s betrayals increases, so does his global standing and image as a world statesman.
Scenes of wild-eyed mullahs demonstrating in the streets of Pakistani cities are a boon to his position. Surely the Pakistani public needs to be tamed by a strongman.
No harm if it is an army general.
But the truth is more complex.
Musharraf flits effortlessly between personae.
At one moment he is the “responsible” world leader who speaks charmingly to the international media about moderate Islam; at the next, he is the cunning conspirator who rigs elections, destroys political opponents, breaks promises on relinquishing power, enters into mutually beneficial relationships with mullahs, and castigates human-rights activists as “Westernized fringe elements” that “are as bad as the Islamic extremists.”
To forestall the possibility of a coup, the army is being cleansed of hardline Islamists.
Soldiers charged with mutiny have received the death penalty.
This process has deepened pro- and anti- US divisions within the army, both among commissioned and non-commissioned officers, but nothing in Pakistan today suggests that radical change is imminent.
To be sure, more incidents of global terrorism associated with Pakistan, such as July’s London bombings, will bring new pressures.
The US and Europe will make their usual demands to close down the country’s hate-spewing madrassas, and to reform a public-school system that, unhindered by the government, churns out young militants burning to kill and die for Islam.
For Musharraf, this means that continuing to hunt with the hounds and run with the hares might get harder.
But the current constellation of forces suggests that, barring unforeseen developments, his survival instincts will serve him well for years to come.
How New is Egypt’s “New” Foreign Policy?
CAIRO – In the months since Egyptian President Hosni Mubarak’s resignation, his successors have signaled a shift in foreign policy by reaching out to former adversaries. Egypt’s government has welcomed Iranian diplomats and embraced the Palestinian group Hamas. Many interpret such moves as clear evidence of Egypt’s desire for a diplomacy that is not subordinate to American interests.
But Mubarak never entirely fit his detractors’ portrayal of him as an American lackey. In fact, Mubarak’s need to please his Saudi Arabian benefactors, not the United States, was paramount in his thinking. Although he sometimes supported American policies, Mubarak frequently rebuffed the US when its positions did not align with his own.
Since the end of the October 1973 war, Arab-Israeli peace has been a cornerstone of America’s Middle East agenda. The US often looked to Egypt, the most important and influential Arab country, to play a leading role in promoting this goal. And, when it suited him, Mubarak played his part. When the late Palestinian leader Yasser Arafat humiliated Mubarak before the US secretary of state and the international media by refusing to sign an annex to an Israeli-Palestinian accord brokered in Cairo, Mubarak told him, “Sign it, you son of a dog!”
On the other hand, when Arab public opinion opposed Palestinian concessions, Mubarak remained aloof from US peace initiatives. For example, in 1996, he declined President Bill Clinton’s invitation to come to Washington, along with Arafat and the leaders of Israel and Jordan, to settle a bout of Palestinian violence. And when Clinton asked Mubarak to pressure Arafat to facilitate an Israeli-Palestinian peace deal during negotiations at Camp David in 2000, he refused.
Mubarak had a rocky relationship with Israel, and held America’s closest Middle East ally at arm’s length throughout his presidency. For almost ten of his 30 years in office, Egypt had no ambassador in Tel Aviv. Mubarak never made an official state visit to Israel, and he frequently refused Israeli prime ministers’ requests to come to Cairo. When the US sought to extend the Nuclear Non-Proliferation Treaty in 1994, Mubarak mobilized the Arab world against the initiative, because Israel refused to sign the NPT.
Instead, Mubarak’s relationship with the Saudis usually determined his foreign policy. When Iraq invaded Kuwait in 1990 and threatened to attack Saudi Arabia, Mubarak quickly dispatched troops to defend the kingdom. He was keen to support the Saudis and their Persian Gulf allies, who provided him with a steady flow of aid and an outlet for surplus Egyptian labor.
Though Mubarak’s opposition to the Iraqi invasion of Kuwait in 1991 happened to align with US policy, he was unwilling to back other American campaigns against Arab leaders. When President Ronald Reagan’s deputy national security adviser, John Poindexter, asked Mubarak to launch a joint US-Egyptian attack against Libya in 1985, the Egyptian president scolded his visitor, saying, “Look, Admiral, when we decide to attack Libya, it will be our decision and on our timetable.”
Mubarak again refused to acquiesce in US plans to isolate Libya in the 1990’s for its involvement in the downing of Pan Am flight 103 over Lockerbie, Scotland. Instead of ostracizing Libyan leader Col. Muammar el-Qaddafi, Mubarak welcomed him to Cairo. After the United Nations imposed an international flight ban against Libya in 1992, its land crossings with Egypt proved crucial to Libya’s economy (and possibly Qaddafi’s political survival). Libya withstood the sanctions in part by importing food and oil infrastructure supplies via Egypt, and by exporting petroleum and steel with Mubarak’s help.
In fact, Mubarak’s Libya policy was driven largely by economic and security concerns, and rarely took US interests into consideration. More than one million Egyptians worked in Libya, which was also a large export market. And Qaddafi was eager to help Mubarak subdue Islamist threats to the Egyptian regime. Unlike neighboring Sudan, which harbored Egyptian radicals, like al-Qaeda leader Ayman al-Zawahiri, who were bent on destabilizing the country, Libya turned them over to Mubarak.
While Qaddafi delivered terrorists to Mubarak, the Egyptian president declined American requests to do the same. After Palestinians in 1985 hijacked the Italian ship Achille Lauro, killed an American, and berthed in Egypt, the US asked Mubarak to extradite them. But Mubarak refused, saying that Secretary of State George Shultz was “crazy” if he believed that Egypt would betray the Palestinian cause.
Egypt’s new leaders have inherited Mubarak’s dilemma – how to realize the country’s aspiration to lead the Arab world without angering its Saudi benefactors. For this reason, the Egyptian-Iranian rapprochement will yield more photo opportunities than tangible results. On opposite sides of religious and ethnic divides, a close bilateral relationship would seem unlikely under even the best circumstances. And, with Egypt in need of massive financial aid to offset the economic losses caused by its February revolution, its leaders can ill afford to alienate the Saudis, who view Iran, not Israel, as the gravest threat to regional stability.
Egypt is entering a new era. But the radical policy upheavals predicted by analysts will prove to be small tremors. Saudi interests will continue to weigh heavily on Egyptian foreign policy.
And that, above all, means preserving the status quo.
How Nutritious Are Your Investments?
NEW HAVEN – Those labels that you see on packaged foods listing their ingredients and nutritional values had their beginnings in an international scandal and in the efforts by governments to deal constructively with the public outrage that followed.
The scandal erupted with the publication in 1906 of Upton Sinclair’s novel The Jungle, a bestseller that detailed the experiences of a Lithuanian immigrant family working in America’s meatpacking industry.
The public response to the book’s description of unsanitary conditions in the industry was so strong that the United States Congress enacted the Pure Food and Drug Act – the first law to require labeling of contents on food packages – the very same year.
By 1910, according to The Manchester Guardian, “The Jungle Scare” had spread to the United Kingdom, where it had been taken up by “less scrupulous [sic] newspapers of this country,” with “slanderous” and “sensational” claims about the food industry.
That may have been true, but the eventual effect was better food labeling laws in the UK, too.
Indeed, the scandal set in motion a sequence of laws in countries around the world that today require food labeling to go beyond mere lists of ingredients to include information about the vitamins, minerals, and calories that products contain.
These labels are undoubtedly useful to consumers, but it is unlikely that many manufacturers, if given the choice, would have introduced them on their own.
That is how regulatory progress is often made.
The history of legislative reform is substantially a punctuated equilibrium, with long periods of time during which public apathy prevents any progress, interrupted by scandals that suddenly make progress possible.
Entrenched interests (food-processing companies, in the case of nutritional labeling) resist change with all of their lobbying efforts, but public outrage is too strong for them to win.
We have to hope that the same kind of outcome will emerge from the financial scandals that have produced public outrage analogous to that directed at the food industries in Upton Sinclair’s day.
As was the case then, public outrage today is at a level that might well overwhelm the lobbying efforts of entrenched interests.
Indeed, one of the areas in need of such regulatory progress is exactly the same, but has merely moved from food products to financial products.
For today we need laws that will require purveyors of financial products to provide the essential information that consumers need.
That is the argument of a new book written by the Squam Lake Group, led by Kenneth French of Dartmouth and composed of 15 finance and economics professors, including me.
Among its proposals, The Squam Lake Report: Fixing the Financial System recommends that investment products like mutual funds should include a standardized disclosure label analogous to the nutritional labels on foods.
The structure of the label should be developed by a committee of academics, regulators, and industry executives with the objective of promoting informed comparison among consumers of investment products.
Of course, existing regulations require that a significant amount of information be disclosed in prospectuses for financial products.
The label would be designed for those who are less motivated and/or able to read these prospectuses.
The group recommends that the standardized disclosure should give the consumer an understandable measure of long-term risk.
This might include such measures as the annualized volatility of the inflation-adjusted ten-year returns, and the range of real payoffs that an investment might earn in ten years, including 5th, 50th, and 95th percentiles.
Not all investors will be able to interpret even these simple measures of the outlook for an investment.
But neither are all consumers of food able to interpret the quantities of nutrients that are shown on nutritional labels.
These facts should be there to allow those people who will look at them to do so, and to encourage them to spread the information via word of mouth to others with whom they are acquainted.
The standardized disclosure label should not, however, include past returns on investments.
This is because most investors overreact to past returns, shifting their money around in a largely futile effort to channel it to managers who can beat the market.
This requirement is analogous to that of nutrition labeling, which does not allow listing of nutritional quantities that are not significant in the usual serving size.
Moreover, The Squam Lake Report recommends that when an advertisement for an investment product does report a prior average return, it should also include a statement of the uncertainty associated with that return.
Including such statements in the disclosure is analogous to the requirement that food labels contain a full list of nutritional factors per serving, rather than merely a featured list that the producer might try to add in order to promote the product.
Including such information on financial products would give an enormous boost to the efficiency and efficacy of our financial products in serving customers’ needs.
The only reason that such labeling has not yet been required is the same reason that nutritional labels were not required long ago on foods.
Public outcry at a time of scandal forced progressive change then; we should hope that it does so now.
America’s Fiscal Cliff Dwellers
WASHINGTON, DC – In early 2012, Federal Reserve Chairman Ben Bernanke used the term “fiscal cliff” to grab the attention of lawmakers and the broader public.
Bernanke’s point was that Americans should worry about the combination of federal tax increases and spending cuts that are currently scheduled to begin at the end of this year.
But there is not really any kind of “cliff” in the sense that if you stepped over the edge, you would fall fast, land on something hard, and not get up for a long time.
In the modern US economy, the scheduled changes constitute more of a fiscal “slope” – meaning that the full effect of the tax increases would not be felt immediately (income withholding takes time to adjust), while the spending cuts would also be phased in (the government has some discretion regarding implementation).
This slope offers President Barack Obama a real opportunity to restore the federal government’s revenue base to what it was in the mid-1990’s.
The choice of words to describe America’s fiscal situation matters, given the hysteria that has been whipped up in recent months, primarily by people who want to make big cuts in the country’s two main entitlement programs, Social Security and Medicare.
Their logic is that if we are about to rush off a cliff, we need to take extreme measures.
And cutting pensions and health care for the elderly certainly qualifies as extreme – as well as completely inappropriate and unnecessary.
If, instead, the US faces a fiscal slope, then people who refuse to consider raising taxes – namely, Republicans in the US Congress’s House of Representatives – have a very weak hand indeed.
It has become clear that the House Republicans will steadfastly refuse to vote for any increases in tax rates during the current lame-duck congressional session.
House Speaker John Boehner, who offered relatively conciliatory remarks immediately after the election, now says that he would accept higher revenue with lower rates – precisely what the temporary tax cuts enacted by George W. Bush’s administration were supposed to deliver, but manifestly did not.
It is very unlikely that congressional Democrats and Republicans can reach an agreement on extending the Bush-era tax cuts for the middle class, while allowing them to expire for the rich.
They will spar with each other for another six weeks, then go to the brink of the purported “cliff” and see who blinks at the last moment.
The sensible course of action for Obama would be to step off the “cliff” by vetoing any extension of the Bush-era tax cuts, which would then expire at the end of 2012.
Once tax rates were restored to their previous levels, Obama could present his own tax-cut package to Congress – for example, with a proposal in early January that provided greater benefit to lower-income Americans, as he promised during his re-election campaign.
These tax cuts should also be linked to the state of the economy, so that they would wind down as employment recovers (for example, to its level in 2007, relative to total population).
If the economy looks weaker than anticipated in early 2013, the proposed tax cuts could be larger (as long as they were phased out during the economic recovery).
This approach would significantly transform America’s longer-run fiscal prospects.
Then, as America heads steadily down the fiscal slope in early 2013, the House Republicans would have a choice. Do they vote, week after week, against tax cuts that would help 100 million Americans, while the economy deteriorates around them?
Or do they embrace a deal that cuts taxes and tax rates relative to where they would be otherwise?
In effect, the House Republicans can be forced to sign onto a deal that both supports the economy and restores revenue to the level that prevailed before the disastrous experiment of Bushonomics.
Obama has already put spending cuts on the table – probably to a greater extent than would please his electoral base (he does have a tendency to do this).
The big question is whether the US can strengthen revenue in an appropriate manner that is consistent with renewed economic growth.
America should aim to return to the tax rates of the mid-1990’s, when the economy was booming and the federal budget was in much better shape.
But it should do this fully only once the economy has completely recovered.
Ordinarily, partisan political gridlock in Washington would prevent any such sensible change.
Fortunately, the fiscal slope gives Obama the opportunity to bring it about – and even to write some history in the process.
That means vetoing any extension of the Bush-era tax cuts, and then working to enact the Obama tax cuts.
How Obama Leads
CAMBRIDGE – Two years ago, Barack Obama was a first-term senator from a mid-western state who had declared his interest in running for the presidency.
Many people were skeptical that an African-American with a strange name and little national experience could win.
But as his campaign unfolded, he demonstrated that he possessed the powers to lead – both soft and hard.
Soft power is the ability to attract others, and the three key soft-power skills are emotional intelligence, vision, and communications.
In addition, a successful leader needs the hard-power skills of organizational and Machiavellian political capacity.
Equally important is the contextual intelligence that allows a leader to vary the mix of these skills in different situations to produce the successful combinations that I call “smart power.”
During his campaign, Obama demonstrated these skills in his calm response to crises, his forward-looking vision, and his superb organizational ability.
In addition, his contextual intelligence about world politics has been shaped from the bottom up with experience in Indonesia and Kenya, and his understanding of American politics was shaped from the bottom up as a community organizer in Chicago.
Obama continued to demonstrate these leadership skills in his almost flawless transition.
By selecting his primary opponent, Hillary Clinton, as his Secretary of State, and reaching across party lines to retain Robert Gates as Secretary of Defense, he showed openness to strong subordinates.
In his inaugural address, he sounded the themes of smart power – a willingness “to extend an open hand to those who unclench their fists” – but also stressed themes of responsibility as Americans confront sobering economic problems.
Moreover, Obama has started his term in decisive fashion.
In his first weeks in office, he began to fulfill his campaign promises by outlining a massive economic stimulus plan, ordering the closure of the Guantánamo Bay prison, promoting new fuel-efficiency standards to save energy, giving an interview to Al Arabiya, and sending a top emissary to the Middle East.
George W. Bush once said that his role as leader was to be “the decider.”
But even if Bush had been better as a decider, people want something more in a leader.
We want someone who reinforces our identity and tells us who we are.
We judge leaders not only by the effectiveness of their actions, but also by the meanings that they create and teach.
Most leaders feed upon the existing identity and solidarity of their groups.
But some leaders see moral obligations beyond their immediate group and educate their followers.
Nelson Mandela could easily have chosen to define his group as black South Africans and sought revenge for the injustices of Apartheid and his own imprisonment.
Instead, he worked tirelessly to expand the identity of his followers both by words and deeds.
When Obama was faced with a campaign crisis over incendiary racial remarks by his former pastor, he did not simply distance himself from the problem, but made use of the episode to deliver a speech that served to broaden the understanding and identities of both white and black Americans.
The crisis on September 11, 2001, produced an opportunity for Bush to express a bold new vision of foreign policy.
But he failed to produce a sustainable picture of America’s leadership role in the world.
A successful vision is one that combines inspiration with feasibility.
Bush failed to get that combination right.
Obama will need to use both his emotional and contextual intelligence if he is to restore American leadership.
Contextual intelligence is the intuitive diagnostic skill that helps a leader align tactics with objectives to produce smart strategies in different situations.
A decade ago, the conventional wisdom was that the world was a uni-polar American hegemony.
Neo-conservative pundits drew the conclusion that the United States was so powerful that it could do whatever it wanted, and that others had no choice but to follow.
This new unilateralism was based on a profound misunderstanding of the nature of power – that is, the ability to affect others to get the outcomes one wants – in world politics.
The US may be the only superpower, but preponderance is not empire.
America can influence but not control other parts of the world.
Whether certain resources will produce power depends upon the context.
To understand power and its contexts in the world today, I have sometimes suggested the metaphor of a three-dimensional chess game.
On the top board of military power among countries, the US is the only superpower.
On the middle board of economic relations among countries, the world is already multipolar.
America cannot get the outcomes it wants in trade, antitrust, or other areas without the cooperation of the European Union, China, Japan, and others.
On the bottom board of transnational relations outside the control of governments – pandemics, climate change, the drug trade, or transnational terrorism, for example – power is chaotically distributed.
Nobody is in control.
This is the complex world in which Obama takes up the mantle of leadership.
He inherits a global economic crisis, two wars in which US and allied troops are deployed, crises in the Middle East and South Asia, and a struggle against terrorism.
He will have to deal with this legacy and chart a new course at the same time.
He will have to make difficult decisions while creating a larger sense of meaning in which America once again exports hope rather than fear.
That will be the test of his leadership.
The Political Economy of 2013
NEWPORT BEACH – Watching America’s leaders scramble in the closing days of 2012 to avoid a “fiscal cliff” that would plunge the economy into recession was yet another illustration of an inconvenient truth: messy politics remains a major driver of economic developments.
In some cases during 2012, politics was a force for good: consider Prime Minister Mario Monti’s ability to pull Italy back from the brink of financial turmoil.
But, in other cases, like Greece, political dysfunction aggravated economic problems.
Close and defining linkages between politics and economics are likely to persist in 2013.
Having said this, we should also expect much greater segmentation in terms of impact – and that the consequences will affect both individual countries and the global system as a whole.
In some countries – for example, Italy, Japan, and the United States – politics will remain the primary driver of economic-policy approaches.
But elsewhere – China, Egypt, Germany, and Greece come to mind – the reverse will be true, with economics becoming a key determinant of political outcomes.
This duality in causation speaks to a world that will become more heterogeneous in 2013 – and in at least two ways: it will lack unifying political themes, and it will be subject to multi-speed growth and financial dynamics that imply a range of possible scenarios for multilateral policy interactions.
With an election looming in Italy, the country’s technocratic interim administration will return the reins of power to a democratically elected government.
The question, both for Italy and Europe as a whole, is whether the new government will maintain the current economic policy stance or shift to one that is less acceptable to the country’s external partners (particularly Germany and the European Central Bank).
Monti may or may not be involved in the new government.
The further removed from it he is, the greater the temptation will be to alter the policy approach in response to popular pressures.
This would involve less emphasis on fiscal and structural reforms, raising concerns in Berlin, Brussels, and Frankfurt.
Japan’s incoming government has already signaled an economic-policy pivot, relying on what it directly controls (fiscal policy), together with pressure on the Bank of Japan, to relax the monetary-policy stance, in an effort to generate faster growth and higher inflation.
In the process, officials are weakening the yen.
They will also try to lower Japan’s dependence on exports and rethink sending production facilities to lower-wage countries.
The economic impact of politics in the US, while important, will be less dynamic: absent a more cooperative Congress, politics will mute policy responses rather than fuel greater activism.
Continued congressional polarization would maintain policy uncertainty, confound debt and deficit negotiations, and impede economic growth.
From stymieing medium-term fiscal reforms to delaying needed overhauls of the labor and housing markets, congressional dysfunction would keep US economic performance below its capacity; over time, it would also eat away at potential output.
In other countries, the causal direction will run primarily from economics to politics.
In Egypt and Greece, for example, rising poverty, high unemployment, and financial turmoil could place governments under pressure.
Popular frustration may not wait for the ballot box.
Instead, hard times could fuel civil unrest, threatening their governments’ legitimacy, credibility, and effectiveness – and with no obvious alternatives that could ensure rapid economic recovery and rising living standards.
In China, the credibility of the incoming leadership will depend in large part on whether the economy can consolidate its soft landing.
Specifically, any prolonged period of sub-7% growth could encourage opposition and dissent – not only in the countryside, but also in urban centers.
Then there is Germany, which holds the key to the integrity and unity of the eurozone.
So far, Chancellor Angela Merkel has been largely successful in insulating the German economy from the turmoil elsewhere in Europe.
Unemployment has remained remarkably low and confidence relatively high.
And, while growth has moderated recently, Germany remains one of Europe’s best-performing economies – and not just its paymaster.
While some would have favored greater policy activism, Merkel’s Germany has provided a steady anchor for a eurozone struggling to end bouts of financial instability and put an end to questions about its survival as a well-functioning monetary union (one that aspires to becoming much more).
A change in German leadership would, therefore, raise questions about Europe’s policy underpinning.
How politics and economics interact nationally and globally is one of the important questions for 2013 and beyond.
There are three scenarios: good economics and effective politics provide the basis for a growing and more cooperative global economy; bad economics interact with dysfunctional politics to ruin the day; or the world muddles through, increasingly unstable, as a tug of war between economics and politics plays out, with no clear result or direction.
Part of the answer depends on what happens in three countries in particular – China, Germany, and the US.
Their economic and political stability is essential to the well-being of a world economy that has yet to recover fully from the 2008 global financial crisis.
Current indications, albeit incomplete, suggest that the three will continue to anchor the global economy in 2013.
That is the good news.
The bad news is that their anchor may remain both tentative and insufficient to restore the level of growth and financial stability to which billions of people aspire.
Financial Inclusion Now
KUALA LUMPUR – Making the financial system accessible to the world’s poorest people can unlock their economic potential, improve their lives, and benefit the wider economy.&nbsp;So it is no surprise that financial inclusion of the poor has become an important component of public policymaking.
Central banks and regulators worldwide are taking the lead in making financial inclusion a priority, in addition to their traditional mandates of maintaining monetary and financial stability.
Financial inclusion is about providing an opportunity for the world’s 2.5 billion unbanked and financially underserved to participate in the formal financial system, thereby helping to lift them out of poverty and enter the economic mainstream.
Greater financial inclusiveness promises a more cohesive society and more balanced growth and development.
Moreover, financial systems themselves stand to benefit from becoming more comprehensive and progressive.
The additional consumers participating in the formal financial system will strengthen national economies and, in turn, enrich the global economy.
Indeed, as developing countries move toward middle-income status, financial inclusion is a key component of continued progress.
In countries with high levels of financial exclusion, consumers are left to rely on unregulated informal services.
These inferior substitutes often imply exorbitant costs for borrowers – and financing that is usually too short term for productive investment activity.
Moreover, the lack of consumer protection and regulatory and supervisory frameworks exposes informal activities to vulnerabilities that can harm borrowers and jeopardize financial stability.
Increasing the availability of formal financial services to those who have long been denied them requires establishing a balanced regulatory framework.
Oppressive, blanket regulation, which may be necessary in complex and unpredictable financial markets, may not be relevant in a rural community –&nbsp;or, worse, it may stifle efforts to promote financial inclusion.
Indeed, proportionality is an important aspect of regulation, enabling prudential measures that, rather than exceed or underestimate, are commensurate with the risks that need to be addressed.
Little wonder, then, that high levels of exclusion in developing and emerging countries have prompted policymakers to embrace proportionate regulation, thereby gaining the flexibility to encourage innovation in the provision of financial services while preserving financial stability.
Bangladesh, for example, has adapted its financial regulations for microfinance institutions.
This has helped to catalyze the growth of sustainable microfinancing to local women-owned enterprises.
Kenya’s “test and learn” approach to regulation has unleashed the potential of mobile-phone-based financial-service delivery through M-PESA, which offers consumers a safe and convenient alternative to cash.
There are many other examples of successful implementation of proportionate regulation that have resulted in greater financial inclusion without compromising financial stability.
In Malaysia, agent-banking regulation (which safeguards consumers’ interests while supporting financial institutions’ business models) has led to the expansion of branchless banking to reach previously unserved rural areas.
Similarly, Mexico’s “tiered” approach to financial access – according to which requirements for opening bank accounts are proportionate to risk, with low-value accounts subject to higher transaction restrictions – has expanded access to basic accounts, while mitigating the risk of money laundering.
And Pakistan and Indonesia, by basing capital requirements for microfinance institutions on the size of the population that they expect to serve, are enabling these institutions to serve distinct market niches sustainably.
Policymakers in many countries have recently been considering the role of financial standard-setting bodies (SSBs) in advancing financial inclusion.
In particular, they are focusing on the specific challenges that arise when applying supervisory standards in a developing country that is pursuing financial stability and inclusion.
Although global standards supposedly reflect the principles of proportionality, they provide insufficient guidance for the national regulators, banking institutions, and financial-sector assessors who are trying to apply them effectively in diverse environments.
This lack of contextual clarity has led to excessively conservative interpretations of the regulations – and thus to the creation of unintended barriers to financial inclusion.
Addressing this will require input from policymakers with practical experience applying international standards, particularly in emerging economies.
At the same time, in order to ensure continued progress toward financial inclusion, representatives from developing and emerging economies must play a greater role in shaping future standards.
The Alliance for Financial Inclusion, a network of central bankers and financial policymakers from more than 80 developing countries, is already contributing to more effective and proportionate global regulation by facilitating increased engagement with SSBs.
This September, Malaysia’s central bank will advance the process by hosting AFI’s Global Policy Forum.
Such collaborative efforts among developing countries ultimately foster closer cooperation between them and their developed counterparts.
This will lead to better outcomes for the global financial system, the global real economy, and, most important, the people who have been excluded from both for far too long.
Occupy QE
NEW HAVEN – The Federal Reserve continues to cling to a destabilizing and ineffective strategy.
By maintaining its policy of quantitative easing (QE) – which entails monthly purchases of long-term assets worth $85 billion – the Fed is courting an increasingly treacherous endgame at home and abroad.
By now, the global repercussions are clear, falling most acutely on developing economies with large current-account deficits – namely, India, Indonesia, Brazil, Turkey, and South Africa.
These countries benefited the most from QE-induced capital inflows, and they were the first to come under pressure when it looked like the spigot was about to be turned off.
When the Fed flinched at its mid-September policy meeting, they enjoyed a sigh-of-relief rally in their currencies and equity markets.
But there is an even more insidious problem brewing on the home front.
With its benchmark lending rate at the zero-bound, the Fed has embraced a fundamentally different approach in attempting to guide the US economy.
It has shifted its focus from the price of credit to influencing the credit cycle’s quantity dimension through the liquidity injections that quantitative easing requires.
In doing so, the Fed is relying on the “wealth effect” – brought about largely by increasing equity and home prices – as its principal transmission mechanism for stabilization policy.
There are serious problems with this approach.
First, wealth effects are statistically small; most studies show that only about 3-5 cents of every dollar of asset appreciation eventually feeds through to higher personal consumption.
As a result, outsize gains in asset markets – and the related risks of new bubbles – are needed to make a meaningful difference for the real economy.
Second, wealth effects are maximized when debt service is minimized – that is, when interest expenses do not swallow the capital gains of asset appreciation.
That provides the rationale for the Fed’s zero-interest-rate policy – but at the obvious cost of discriminating against savers, who lose any semblance of interest income.
Third, and most important, wealth effects are for the wealthy.
The Fed should know that better than anyone.
After all, it conducts a comprehensive triennial Survey of Consumer Finances (SCF), which provides a detailed assessment of the role that wealth and balance sheets play in shaping the behavior of a broad cross-section of American consumers.
In 2010, the last year for which SCF data are available, the top 10% of the US income distribution had median holdings of some $267,500 in their equity portfolios, nearly 16 times the median holdings of $17,000 for the other 90%.
Fully 90.6% of US families in the highest decile of the income distribution owned stocks – double the 45% ownership share of the other 90%.
Moreover, the 2010 SCF shows that the highest decile’s median holdings of all financial assets totaled $550,800, or 20 times the holdings of the other 90%.
At the same time, the top 10% also owned nonfinancial assets (including primary residences) with a median value of $756,400 – nearly six times the value held by the other 90%.
All of this means that the wealthiest 10% of the US income distribution benefit the most from the Fed’s liquidity injections into risky asset markets.
And yet, despite the significant increases in asset values traceable to QE over the past several years – residential property as well as financial assets – there has been little to show for it in terms of a wealth-generated recovery in the US economy.
The problem continues to be the crisis-battered American consumer.
In the 22 quarters since early 2008, real personal-consumption expenditure, which accounts for about 70% of US GDP, has grown at an average annual rate of just 1.1%, easily the weakest period of consumer demand in the post-World War II era.
That is the main reason why the post-2008 recovery in GDP and employment has been the most anemic on record.
Trapped in the aftermath of a wrenching balance-sheet recession, US families remain fixated on deleveraging – paying down debt and rebuilding their income-based saving balances.
Progress has been slow and limited on both counts.
Notwithstanding sharp reductions in debt service traceable to the Fed’s zero-interest rate subsidy, the stock of debt is still about 116% of disposable personal income, well above the 43% average in the final three decades of the twentieth century.
Similarly, the personal saving rate, at 4.25% in the first half of 2013, is less than half the 9.3% norm over the 1970-1999 period.
This underscores yet another of QE’s inherent contradictions: its transmission effects are narrow, while the problems it is supposed to address are broad.
Wealth effects that benefit a small but extremely affluent slice of the US population have done little to provide meaningful relief for most American families, who remain squeezed by lingering balance-sheet problems, weak labor markets, and anemic income growth.
Nor is there any reason to believe that the benefits at the top will trickle down.
With real consumption stuck on a 1% growth trajectory, the bulk of the US population understandably views economic recovery and job security very differently from those enamored of wealth effects.
The Fed’s goal of pushing the unemployment rate down to 6.5% is a noble one. But relying on wealth effects targeted at the rich to achieve that goal remains one of the great disconnects in the art and practice of economic policy.
The Occupy Wall Street movement began two years ago this month.
While it can be criticized for its failure to develop a specific agenda for action, it galvanized attention to income and wealth inequality in the US and around the world.
Unfortunately, the problem has only worsened.
Lost in the angst over inequality is the critical role that central banks have played in exacerbating the problem.
Yes, asset markets were initially ecstatic over the Fed’s decision this month not to scale back QE.
The thrill, however, was lost on Main Street.
That is precisely the point.
The Fed’s own survey data, which underscore the concentration of wealth at the upper end of the US income distribution, fit the script of the Occupy movement to a tee.
QE benefits the few who need it the least.
That is not exactly a recipe for a broad-based and socially optimal economic recovery.
How Risky is the Global Economy?
NEWPORT BEACH – Three years after the global financial crisis, the global economy remains a confusing place – and for good reasons.
Should we draw comfort from gradual healing in advanced countries and solid growth in emerging economies?
Or should we seek refuge against high oil prices, geopolitical shocks in the Middle East, and continued nuclear uncertainties in Japan, the world’s third largest economy?
Many are opting for the first, more reassuring view of the world.
Having overcome the worst of the global financial crisis, including a high risk of a worldwide depression, they are heartened by a widely shared sense that composure, if not confidence, has been restored.
This global view is based on multispeed growth dynamics, with the healing and healthy segments of the global economy gradually pulling up the laggards.
It is composed of highly profitable multinational companies, now investing and hiring workers; advanced economies’ rescued banks paying off their emergency bailout loans; the growing middle and upper classes in emerging economies buying more goods and services; a healthier private sector paying more taxes, thereby alleviating pressure on government budgets; and Germany, Europe’s economic power, reaping the fruit of years of economic restructuring.
Much, though not all, of the recent data support this global view.
Indeed, the world has embarked on a path of gradual economic recovery, albeit uneven and far less vibrant than history would have suggested.
If this path is maintained, the recovery will build momentum and broaden in both scope and impact.
But “if” is where the second, less rosy view of the world comes in – a view that worries about both lower growth and higher inflation.
While the obstacles are not yet sufficiently serious to derail the ongoing recovery, only a fool would gloss over them.
I can think of four major issues – ranked by immediacy and relevance to the well being of the global economy – that are looming larger in importance and becoming more threatening in character.
First, and foremost, the world as a whole has yet to deal fully with the economic consequences of unrest in the Middle East and the tragedies in Japan.
While ongoing for weeks or months, these events have not yet produced their full disruptive impact on the global economy.
It is not often that the world finds itself facing the stagflationary risk of lower demand and lower supply at the same time.
And it is even more unusual to have two distinct developments leading to such an outcome.
Yet such is the case today.
The Middle Eastern uprisings have pushed oil prices higher, eating up consumer purchasing power while raising input prices for many producers.
At the same time, Japan’s trifecta of calamities – the massive earthquake, devastating tsunami, and paralyzing nuclear disaster – have gutted consumer confidence and disrupted cross-border production chains (especially in technology and car factories).
The second big global risk comes from Europe, where Germany’s strong performance is coinciding with a debt crisis on the European Union’s periphery.
Last week, Portugal joined Greece and Ireland in seeking an official bailout to avoid a default that would undermine Europe’s banking system.
In exchange for emergency loans, all three countries have embarked on massive austerity.
Yet, despite the tremendous social pain, this approach will make no dent in their large and rising debt overhang.
Meanwhile, housing in the United States is weakening again – the third large global risk.
Even though home prices have already fallen sharply, there has been no meaningful rebound.
Indeed, in some areas, prices are again under downward pressure, which could worsen if mortgage finance becomes less readily available and more expensive, as is possible.
With housing being such a critical driver of consumer behavior, any further substantial fall in home prices will sap confidence and lower spending.
It will also make relocating even more difficult for Americans in certain parts of the country, aggravating the long-term-unemployment problem.
Finally, there is the increasingly visible fiscal predicament in the US, the world’s largest economy – and the one that provides the “global public goods” that are so critical to the healthy functioning of the world economy.
Having used fiscal spending aggressively to avoid a depression, the US must now commit to a credible medium-term path of fiscal consolidation.
This will involve difficult choices, delicate execution, and uncertain outcomes for both the federal government and the US Federal Reserve.
The longer the US postpones the day of reckoning, the greater the risk to the dollar’s global standing as the world’s main reserve currency, and to the attractiveness of US government bonds as the true “risk-free” financial benchmark.
The world has changed its supplier of global public goods in the past.
The last time it happened, after World War II, an energized US replaced a devastated Britain.
By contrast, there is no country today that is able and willing to step in should the US fail to get its act together.
These four risks are material and consequential, and each is growing in importance.
Fortunately, none of them is yet transformational for the global economy, and together they do not yet constitute a disruptive critical mass.
But this is not to say that the global economy is in a safe zone.
On the contrary, it is caught in a duel between healing and disruptive influences, in which it can ill afford any further intensification of the latter.
Russia’s European Game in Syria
PARIS – This much is clear in Syria: There is no good solution.
There has not been a good solution since that black Wednesday in August 2013, when Syrian President Bashar al-Assad’s war machine, by using chemical weapons, crossed the “red line” that US President Barack Obama had warned would trigger an American military response.
The moderate opposition still stood, and the Islamic State had not yet emerged from the shadows.
Yet, in a shocking last-minute about-face, Obama declined to intervene.
That lapse cannot be undone.
But in the hell of bad solutions on offer for Syria, some are worse than others.
And the one devised by Russian President Vladimir Putin is probably the most infernal of all.
Russian airstrikes have been concentrated on targets around the cities of Idlib, Homs, and Hama – areas where, according to independent observers, jihad watchers, and other groups that scrutinize the videos placed online by the Russian authorities themselves, the Islamic State is not established.
This means that the primary objective of the Russian attacks is to weaken the entire opposition, including the democratic opposition, fighting the Assad regime.
The goal of Russia’s intervention is therefore not to contribute to the “struggle against terrorism,” as the Kremlin’s propagandists claim, but to restore political control, at any cost, to the regime that spawned the terrorism in the first place.
More precisely, Russia’s aim is to rescue (after a long period of arm’s-length support) a dictatorship that American and French authorities describe as being responsible for causing more than 250,000 deaths since 2011.
The regime’s behavior no doubt fueled the terrifying rise of the Islamic State as well, providing Assad with a trump card in his bid for international support – and Russia with a fig leaf.
One might argue that the past is past and that, in view of the general disaster in Syria, Russia’s intervention will at least have the benefit of halting the country’s free fall.
But the first consequence of Putin’s offensive – one employing methods tested in the two Chechen wars and not burdened, to put it mildly, by the precautions observed by Western armed forces – will be to increase, not reduce, the number of civilian casualties.
The world was rightly horrified by America’s recent blunder in bombing the Médecins Sans Frontières’ hospital in Kunduz, Afghanistan.
But how many Syrian Kunduzes will result from Russian airstrikes if the Kremlin continues to favor unguided bombs over guided missiles?
(This is just one example of Russia’s tactics, but one that reveals much about how Putin intends to prosecute his latest foreign adventure.)
And can anyone believe, even fleetingly, that Russia’s intervention will lessen, rather than aggravate, Syria’s refugee crisis?
Putin’s methods are forcing tens of thousands of civilians to flee indiscriminate airstrikes, clearing the way for the death squads of a regime that in recent months had been showing signs of exhaustion, and dashing any remaining hope of creating effective safe zones in northern Jordan and southern Turkey.
Now even the last holdouts among the regime’s opponents will be appearing on the roads of Europe.
They will not appear on the roads of Russia, mind you: Unlike Germany or France, Putin will not hesitate, while terrorizing tomorrow’s refugees, to slam the door in their faces.
Nor is Putin shy about his intentions in Syria.
One piece of news reported by Russian media but curiously unheeded in the West is that the missile cruiser Moskva, with its dozens of anti-aircraft ordnance, has been deployed to Latakia.
But the Islamic State has not, unbeknownst to everyone but Putin, acquired an air force that needs to be neutralized.
Rather, the Kremlin evidently will view as a legitimate target any aircraft that might pass over territory that it comes to regard as being under its control.
And, because any such plane would necessarily be flying the flag of the United States, the United Kingdom, France, Turkey, or another member of the coalition fighting the Islamic State, it is not hard to envisage how Russia’s involvement could lead to international escalation of Syria’s civil war.
Fortunately, we are not there yet.
But let us not pretend that Russia’s military operations, which, to date, have been aimed solely at providing Russia with mastery over Syrian airspace and protecting its interests on the ground, are bolstering efforts to defeat the Islamic State.
Putin is not just a fireman who sets fires; he is an old-school imperialist.
His operation in Syria is partly designed to divert attention from his dismemberment of Ukraine.
And his thinly veiled threats against the Baltic states, Poland, Finland, and now Turkey – whose airspace and relations with NATO have been probed by Russian aircraft – reveal a strategy of aggression that has as its chief goal the weakening of Europe.
Europeans must wake up to Putin’s design before it is too late.
In France, the siren song of appeasement is becoming a national rallying cry, from the far-right National Front to far-left elements – and among a growing number of mainstream politicians of all stripes.
Indeed, the Kremlin has assiduously cultivated party secretariats across Europe. A web of invisible links has brought into being what could be called “Putin’s Party” in Europe.
If Putin’s Party were enticing only the usual European populist demagogues, from Nigel Farage in the United Kingdom to Viktor Órban in Hungary, it would be bad enough.
But when even leaders who are normally considered to be responsible statesmen, such as Italian Prime Minister Matteo Renzi, begin justifying Putin’s actions, Europe risks frittering away the very security on which its prosperity is built.
How Safe Are Your Dollars?
CAMBRIDGE – Chinese officials and private investors around the world have been worrying aloud about whether their dollar investments are safe.
Since the Chinese government holds a large part of its $2 trillion of foreign exchange in dollars, they have good reason to focus on the future value of the greenback.
And investors with smaller dollar holdings, who can shift to other currencies much more easily than the Chinese, are right to ask themselves whether they should be diversifying into non-dollar assets – or even shunning the dollar completely.
The fear about the dollar’s future is driven by several different but related concerns.
Will the value of the dollar continue its long-term downward trend relative to other currencies?
Will the enormous rise of United States government debt that is projected for the coming decade and beyond lead to inflation or even to default?
Will the explosive growth of commercial banks’ excess reserves cause rapid inflation as the economy recovers?
But, while there is much to worry about, the bottom line is that these fears are exaggerated.
Let’s start with the most likely of the negative developments: a falling exchange rate relative to other currencies.
Even after the dollar’s recent rally relative to the euro, the trade-weighted value of the dollar is now 15% lower against a broad basket of major currencies than it was a decade ago, and 30% lower than it was 25 years ago.
Although occasional bouts of nervousness in global financial markets cause the dollar to rise, I expect that the dollar will continue to fall relative to the euro, the Japanese yen, and even the Chinese yuan.
That decline in the dollar exchange rate is necessary to shrink the very large trade deficit that the US has with the rest of the world.
Consider what a decline of the dollar relative to the yuan would mean for the Chinese.
If the Chinese now hold $1 trillion in their official portfolios, a 10% rise in the yuan-dollar exchange rate would lower the yuan value of those holdings by 10%.
That is a big accounting loss, but it doesn’t change the value of the American goods or property investments in the US that the Chinese could buy with their trillion dollars.
The Chinese (or Saudis or Indians or others outside the euro zone) should, of course, be concerned about the dollar’s decline relative to the euro.
After all, when that decline resumes, their dollar holdings will buy less in European markets.
While it is hard to say how much the decline might be, it would not be surprising to see a fall of 20% over the next several years from the current level of about 1.4 dollars per euro.
But the big risk to any investor is the possibility that inflation will virtually annihilate a currency’s value.
That happened in a number of countries in the 1970’s and 1980’s.
In Mexico, for example, it took 150 pesos in 1990 to buy what one peso could buy in 1980.
That is not going to happen in the US.
Large budget deficits have led to high inflation in countries that are forced to create money to finance those deficits because they cannot sell longer-term government bonds.
That is not a risk for the US.
The rate of inflation actually fell in the US during the early 1980’s, when the US last experienced large fiscal deficits.
Federal Reserve Chairman Ben Bernanke and his colleagues are determined to keep inflation low as the economy recovers.
The Fed has explained that it will sell the large volume of mortgage securities that it now holds on its balance sheet, absorbing liquidity in the process.
It will also use its new authority to pay interest on the reserves held by commercial banks at the Fed in order to prevent excessive lending.
This is, of course, a formidable task that may have to be accomplished at a time when Congress opposes monetary tightening.
Looking forward, investors can protect themselves against inflation in the US by buying Treasury Inflation-Protected Securities (TIPS), which index interest and principal payments to offset the rise in the consumer price level.
The current small difference between the real interest rate on such bonds (2.1% for 30-year bonds) and the nominal interest rate on conventional 30-year Treasury bonds (now 4.6%) implies that the market expects only about 2.5% inflation over the next three decades.
So the good news is that dollar investments are safe.
But safe doesn’t mean the investment with the highest safe return.
If the dollar is likely to fall against the euro over the next several years, investments in euro-denominated bonds issued by the German or French governments may provide higher safe returns.
Even if the dollar is perfectly safe, investors are well advised to diversify their portfolios.
The Social-Business Revolution
DHAKA – The global financial crisis of recent years has exposed serious flaws in the world’s financial system.
Credit markets that were originally created to provide businesses with capital were manipulated by a handful of individuals and companies to serve the selfish goal of earning unrealistically high returns through financial engineering.
People in developed countries have suffered as a result – witness unprecedented levels of unemployment in countries like Spain and Greece – but so have countless millions in developing countries that played no part in causing the crisis.
In fact, the persistence of many of the world’s social problems reflects our collective misinterpretation of the idea of capitalism. As a result, businesses are run for the sole purpose of maximizing profit, and humans are conceived as one-dimensional money-making machines.
But there is a missing component in our conception of the economic marketplace: social business.
A social business is a non-dividend-paying company whose entire purpose is to solve a particular social or environmental problem.
Shareholders can recoup their initial investment over time, but nothing beyond that.
All profits are plowed back into the company to increase its reach or to improve the product or service that it provides.
The company’s board, management, and employees are focused on addressing the problem that the company was established to solve, and it measures its success and impact accordingly.
Profitability serves the company’s need to cover its costs and its desire to grow, not investors’ wish to make money.
The entrepreneur and investor in a social business is motivated by the desire to do good rather than to do well.
This kind of business has no place in our economic framework; only profit-maximizing companies do.
While their proliferation has brought economic growth, jobs, and prosperity, it has also created today’s environmental, energy, food, and financial crises, in addition to widening income inequality and large pockets of poverty.
Social businesses are one way to create a balance between individual greed and collective imperatives.
Companies, for example, could create social businesses in parallel with their for-profit businesses.
Each entrepreneur or firm could create its own range of social businesses.
They could also create social-business funds to pool resources from many investors – small, medium, or large – to capitalize new and existing social enterprises.
While social philanthropy by individuals or corporations is of course important, it has a fundamental limitation.
A charity dollar only has one life: once it is used, it cannot be brought back.
But a social-business dollar is immortal.
It can be recycled without end.
By addressing charitable objectives with social businesses, we can achieve them in a sustainable way.
Currently, government is left to address the problems created by profit-maximizing individuals and businesses.
But government alone cannot solve them all, because it is, by design, slow-moving and not highly innovative – limitations that become increasingly constraining as problems grow and multiply.
Individuals and companies are far more dynamic and creative, and they could easily address these problems more effectively through the creation of social businesses.
While the idea of a non-dividend-paying company may seem utopian to some, I am happy to report that more and more people and businesses are embracing the concept.
We have created a series of social businesses in Bangladesh, and more are now springing up in Albania, Haiti, Colombia, Costa Rica, the United Kingdom, Japan, India, China, and Germany, among others.
What we are seeing is that when we de-link business from the imperative to make money, we get an entirely different type of enterprise – one that specializes in using human creativity to solve human problems.
There is no problem or crisis faced by the world today that cannot be solved with human ingenuity and creativity.
All we have to do is create the right institutional framework to unleash the creativity latent in all of us and focus it accordingly.
Creating space for social business in our economies does just that.
In fact, we cannot resolve problems like unemployment by going back to the old system.
That would just be putting a Band-Aid on a problem that requires major surgery.
We must redesign and reconstruct the system from the ground up – an opportunity that today’s systemic crises provide.
Indeed, I believe that we can create a world in which no one will be unemployed. The word “unemployment” will not make any sense to anybody.
Now is the time to begin creating this world.
Starved for Science
AMSTERDAM – In the Mekong Delta, farmers obtain 6-7 tons of rice per hectare in dry seasons and 4-5 tons per hectare in wet seasons, using fast-maturing rice varieties that allow up to three consecutive yields annually.
By contrast, West African rice farmers harvest only 1.5 tons per hectare of traditional upland rice annually, while other cereals yield no more than one ton – a figure comparable to yields in medieval Europe.
Such disparities are unnecessary.
Indeed, the proliferation of agricultural technology – from more efficient machinery to higher-yielding or more robust crop varieties – has the potential to narrow the productivity gap considerably, even if differences between climates and producers remain.
For example, a new variety of African upland rice, Nerica, triples annual yields.
Likewise, over the last four decades, improved breeding methods, higher-quality feed, and better veterinary care have more than doubled average milk production worldwide.
Nevertheless, regional discrepancies remain massive: cows in the Netherlands can produce roughly 9,000 liters of milk annually, while Zebu cattle in the tropics produce only about 300 liters.
The need to increase agricultural output becomes more urgent every day.
The global population is set to reach nine billion by 2050, while people in the developing world – where nearly all of the population growth will occur – are seeking more varied diets.
By 2030, demand for animal products will double, with overall food demand rising by 40%.
Science has much to contribute to global food security.
While genetic modification is not essential to feed the world, it does provide significant advantages, enabling scientists to introduce or enhance traits – virus resistance in cassava, for example, or improved digestibility of feed – that cannot be realized with conventional breeding.
To be sure, raising yields is not the same as feeding the world.
If a vast swath of the population cannot afford the food that is produced, the size of the yield is irrelevant.
While nearly one billion people have been lifted out of poverty (defined by the World Bank as an income of less than $1.25 per day, in purchasing-power-parity terms) in the last 20 years, such progress will prove more difficult for the next billion.
Given this, policymakers should redouble their efforts to reduce poverty by supporting sustainable and inclusive economic growth.
They should commit to advancing sound agricultural management, maintaining well-functioning markets, and increasing investment in agriculture.
At the same time, these objectives, while pressing, should not obscure the need to focus on yields – increases in which have accounted for three-quarters of food-production growth in recent decades.
Fortunately, the most significant potential limitations – land, water, and nutrients – seem unlikely to constrain global output excessively in the foreseeable future.
But, while none is in short supply globally, local shortages may occur.
Although crop land per capita will continue to decline, more arable land is available worldwide than previously thought.
The example of the use of the Brazilian cerrado, once considered useless, augurs well for the African savannas.
Underused land reserves also exist elsewhere in South America, Central Asia, and Eastern Europe.
A more immediate challenge is ensuring that crops receive sufficient water, which requires building and maintaining efficient irrigation systems to stabilize yields and enable farmers to harvest an additional crop each year.
As it stands, only 4% of arable land in Sub-Saharan Africa is irrigated, compared to 38% in Asia.
While the Middle East will face serious water shortages, Africa, where most population growth is set to occur, contains numerous unexploited water sources.
Fertilizer use has become significantly more efficient in recent years, a trend that will continue.
Reserves of minerals like phosphate will remain plentiful in the next decades, and nitrogen is not limited.
Technology to extract nutrients from waste already exists, reducing dependency on mining.
Moreover, pigs and poultry are ideal food-waste processors, and their effluents can serve again as nutrient and energy sources, turning future food chains into interconnected production cycles.
Perhaps the most pressing constraint on agricultural production is the impending labor shortage, as rural young people, who traditionally comprise the agricultural labor force, flock to cities.
With small farmers unable to provide sufficient surpluses, agricultural production will become increasingly consolidated and mechanized, raising fossil-fuel consumption, which will have to be offset by the introduction of more efficient technologies.
Of course, future food production is subject to significant uncertainty.
Population growth may not slow down as rapidly as expected.
Protectionism threatens open markets and GDP growth.
And price volatility, whether triggered by drought or short-sighted national policies, could deter investments in agriculture and decrease the poor’s purchasing power.
Whether climate change will be a source of yield uncertainty in the coming decades remains unclear as well.
Although precipitation may be affected, higher temperatures would enable agricultural production in colder regions, and CO2 is known to bolster plant growth, even in dry areas.
In addition, while food hygiene, traceability, and labeling are improving, any amount of negligence when it comes to food safety could have far-reaching consequences in the complex and interconnected global food chain.
Rising demand for animal products highlights microbiological risks, with animal-welfare measures sometimes creating new hazards.
For example, open pens for poultry may increase the spread of communicable diseases like avian influenza.
Despite such risks, the outlook for future food security is promising.
Our food is safer and our diets are more diverse than ever before; production methods are becoming increasingly sustainable, clean, and efficient; and we are constantly becoming better at protecting biodiversity.
Yet many in Europe and the United States – which have benefited most from agricultural advances – are mistrustful of this progress, viewing scientific advancement and free trade as a dangerous combination.
To the extent that this perception impedes progress, it is the real threat to global food security.
How Terrorism\u0027s Victims Became Perpetrators
Why is America in trouble?
September 11 was a traumatic event that shook the nation to its core. But it would not have changed the course of history for the worse if President Bush had not responded as he did.
Declaring war on terrorism was understandable, perhaps even appropriate, as a figure of speech.
The problem is that President Bush meant it literally.
I believe there is a direct connection between this and the abuse of detainees by US soldiers in Abu Ghraib prison.
What happened at Abu Ghraib was not a case of a few bad apples, but a pattern tolerated and even encouraged by American authorities.
For example, the Judge Advocate General Corps routinely observes military interrogations from behind a two-way mirror; that practice was discontinued in Afghanistan and Iraq.
The International Red Cross and others started complaining about abuses as early as December 2002.
It is easy to see how terrorism can lead to torture.
Last summer, I took an informal poll at a meeting of Wall Street investors to find out whether they would condone the use of torture to prevent a terrorist attack.
The consensus was that they hoped somebody would do it without their knowing about it.
Americans, sadly, are now victims who have turned into perpetrators.
Indeed, since September 2001, the war on terror has claimed more innocent victims than those terrorist attacks.
This fact is unrecognized at home because the victims of the war on terror are not Americans.
But the rest of the world does not draw the same distinction, and world opinion has turned against America.
The Bush administration knew what it was doing when it declared war on terror and used that pretext for invading Iraq.
Perhaps Bush did not personally recognize this, but Vice President Dick Cheney and a group of extremists concentrated in and around the Pentagon did.
These people are guided by the belief that international relations are relations of power, not law.
Because America is the most powerful nation on earth, it ought to use that power more assertively.
They advocated the overthrow of Saddam Hussein even before Bush was elected and won him to their cause after September 11.
The invasion of Afghanistan could be justified on the grounds that the Taliban provided Bin Laden and Al Qaeda with a secure training ground.
Invading Iraq could not be similarly justified.
Nevertheless, the ideologues in the administration were determined to pursue it because, in the words of Paul Wolfowitz, "it was doable."
President Bush managed to convince the nation that Saddam Hussein had some connection with the suicide bombers of September 11, and that he possessed weapons of mass destruction.
When both claims proved false, he argued that America invaded Iraq to liberate the Iraqi people.
That claim was even more far-fetched.
If America had really cared for the Iraqi people, more troops would have been sent to provide protection not only for the Ministry of Oil, but for museums and hospitals, too.
Instead, Iraq was devastated by looting.
Now that America's position has become unsustainable, the Bush administration is handing over power to local militias in Falluja and elsewhere.
This prepares the ground for religious and ethnic divisions and possible civil war à la Bosnia, rather than democracy.
I would love to pin the blame for all this on Bush and his team. But that would ignore that Bush was playing to a receptive audience.
Indeed, after all that has happened, a majority of the US electorate continues to have confidence in Bush on national security matters.
If this continues and Bush is reelected, Americans must ask the question: "What is wrong with us?"
America needs profound soul-searching.
The terrorists seem to have hit upon a weak point in America's collective psyche.
They have made Americans fearful and found a willing co-conspirator in the Bush administration.
For reasons of its own, the Bush administration has found it advantageous to nurture the fear that September 11 engendered.
By declaring war on terror, Bush united the country behind him.
But fear is a bad counselor.
By succumbing to fear Americans are doing the terrorists' bidding: unleashing a vicious cycle of violence that may result in a permanent state of war.
The war on terror need never end; because the terrorists are invisible, they will never disappear.
The war on terror polarizes the world.
In battles for survival, whether in Yugoslavia or Israel, everyone sticks with his own tribe or nation, whether its policies are right or wrong.
This is the state of mind that Bush sought to foster when he declared that those who are not "with us" are with the terrorists.
That attitude cannot be reconciled with an open society, a concept based on the recognition that nobody possesses ultimate truth.
Might is not necessarily right.
It is not enough to reject the Bush administration's policies; Americans must reaffirm the values and principles of an open society.
The war on terror is an aberration.
America must defend itself against terrorist attacks, but that cannot be allowed to become the overarching objective of its existence.
Today, no single country or combination of countries can stand up to American military might.
The main threat to America's dominant position comes not from outside, but from within.
If Americans fail to recognize that they may be wrong, they risk undermining the country's dominant position.
Being the most powerful nation gives America privileges, but it also imposes obligations.
If Americans want to preserve their privileged position, they must not use it to dictate to the rest of the world, but for the well being of others.
Indeed, many problems-maintaining peace, ensuring law and order, protecting the environment, reducing poverty, and fighting terrorism-require collective action.
Americans cannot do anything they want, but little can be done without US leadership or active participation.
Instead of undermining and demeaning international institutions because they do not necessarily follow America's will, the US should strengthen and improve them.
Instead of engaging in preemptive military actions, the US should pursue preventive actions of a constructive nature, creating a better balance between carrots and sticks in the prevailing world order.
Emerging Markets’ Euro Nemesis
BRUSSELS – Emerging markets’ currencies are crashing, and their central banks are busy tightening policy, trying to stabilize their countries’ financial markets.
Who is to blame for this state of affairs?
A few years ago, when the US Federal Reserve embarked on yet another round of “quantitative easing,” some emerging-market leaders complained loudly.
They viewed the Fed’s open-ended purchases of long-term securities as an attempt to engineer a competitive devaluation of the dollar and worried that ultra-easy monetary conditions in the United States would unleash a flood of “hot money” inflows, driving up their exchange rates.
This, they feared, would not only diminish their export competitiveness and push their external accounts into deficit; it would also expose them to the harsh consequences of a sudden stop in capital inflows when US policymakers reversed course.
At first sight, these fears appear to have been well founded.
As the title of a recent paper published by the International Monetary Fund succinctly puts it, “Capital Flows are Fickle: Anytime, Anywhere.”
But this view misses the real reason why capital flowed into emerging markets over the last few years, and why the external accounts of so many of them have swung into deficit.
The real culprit is the euro.
Quantitative easing in the US cannot have been behind these large swings in global current-account balances, because America’s external deficit has not changed significantly in recent years.
This is also what one would expect from economic theory: in conditions approaching a liquidity trap, the impact of unconventional monetary policies on financial conditions and demand is likely to be modest.
Indeed, the available models tell us that, to the extent that an expansionary monetary policy actually does have an impact on the economy, its effect on the current account should not be large, because any positive effect on exports from a weaker exchange rate should be offset by larger imports due to the increase in domestic demand.
This is what has happened in the US, and its recent economic revival has been accompanied by an expansion of both exports and imports.
The impact of the various rounds of quantitative easing on emerging markets (and on the rest of the world) has thus been approximately neutral.
But austerity in Europe has had a profound impact on the eurozone’s current account, which has swung from a deficit of almost $100 billion in 2008 to a surplus of almost $300 billion this year.
This was a consequence of the sudden stop of capital flows to the eurozone’s southern members, which forced these countries to turn their current accounts from a combined deficit of $300 billion five years ago to a small surplus today.
Because the external-surplus countries of the eurozone’s north, Germany and Netherlands, did not expand their demand, the eurozone overall is now running the world’s largest current-account surplus – exceeding even that of China, which has long been accused of engaging in competitive currency manipulation.
This extraordinary swing of almost $400 billion in the eurozone’s current-account balance did not result from a “competitive devaluation”; the euro has remained strong.
So the real reason for the eurozone’s large external surplus today is that internal demand has been so weak that imports have been practically stagnant over the last five years (the average annual growth rate was a paltry 0.25%).
The cause of this state of affairs, in one word, is austerity.
Weak demand in Europe is the real reason why emerging markets’ current accounts deteriorated (and, with the exception of China, swung into deficit).
Thus, if anything, emerging-market leaders should have complained about European austerity, not about US quantitative easing.
Fed Chairman Ben Bernanke’s talk of “tapering” quantitative easing might have triggered the current bout of instability; but emerging markets’ underlying vulnerability was made in Europe.
The fickleness of capital markets poses once again the paradox of thrift.
As capital withdraws from emerging markets, these countries soon will be forced to adopt their own austerity measures and run current-account surpluses, much like the eurozone periphery today.
But who will then be able – and willing – to run deficits?
Two of the world’s three largest economies come to mind: China, given the strength of its balance sheet, and the eurozone, given the euro’s status as a reserve currency.
But both appear committed to running large surpluses (indeed, the two largest in the world).
This implies that, unless the US resumes its role as consumer of last resort, the latest bout of financial-market jitters will weaken the global economy again.
And any global recovery promises to be unbalanced – that is, if it materializes at all.
How the French Plunder Africa
France's unchallenged political, economic, and military domination of its former sub-Saharan African colonies is rooted in a currency, the CFA franc.
Created in 1948 to help France control the destiny of its colonies, fourteen countries--Benin, Burkina-Faso, Ivory Coast, Mali, Niger, Senegal, Togo, Cameroon, Central African Republic, Congo, Gabon, Equatorial Guinea, Bissau Guinea, and Chad--maintained the franc zone even after they gained independence decades ago.
In exchange for France guaranteeing the CFA franc's convertibility, these countries agreed to deposit 65% of their foreign exchange reserves in a special account within the French Treasury and granted to France a veto over the franc zone's monetary policy whenever this special account was overdrawn.
These decisions have had devastating consequences for forty years.
The bulk of the CFA franc money supply comes from trade between France and its African allies.
As a result, the franc zone's basic features have always been scarce money and high interest rates.
On the other hand, in line with IMF and World Bank structural adjustment programs, strict budget discipline has kept inflation low--as if further belt tightening in the name of price stability was the right policy priority in desperately poor countries hit by decades of depressed demand.
The result has been a lethal combination of currency convertibility, skyrocketing interest rates, low inflation, and free capital movement, which merely fuels speculation and capital flight.
Speculators transfer huge amounts of money from France to high-interest-bearing local deposit accounts, collect their tax-free gains every three months, and take the no-risk plunge again.
Commercial banks are awash with these volatile short-term speculative funds, which they lend to governments on the most stringent conditions.
The banks and speculators reap handsome gains, governments are overburdened with unsustainable commercial debts, the domestic productive sector is starved of medium- and long-term financing, and most people remain mired in appalling poverty.
Capital flight, meanwhile, stems from free transfer of profits, debt payments, and the propensity of the elite to exile their assets.
This massive hemorrhage of foreign currency is channeled exclusively to France, thanks to a capital control it put in place in 1993.
As a result, some of the poorest countries in the world are financing part of the French budget deficit.
The only rational reason for the CFA franc's existence is connivance between France and the governing elites of its former colonies in order to plunder the franc zone states.
Even the common currency's beneficial effects on trade among member countries were nullified by the paradoxical decision taken by the former sub-Saharan French colonies to dismantle the federal governmental structure and the single market of colonial times and to erect trade barriers in their place.
As though all of this were not bad enough, the CFA franc's exchange rate, which had remained unchanged since 1948, was devalued by 50% in 1994.
What better time--from the prospective of foreign investors, that is--to undertake a vast privatization of state assets?
Under the auspices of the IMF and the World Bank, lucrative sectors such as energy, telecommunications, water supply, and banks were sold off at knockdown prices to western companies.
So the end result of the partnership between France and its former African colonies has been spectacularly lopsided.
France has secured a vast market for its products, a steady supply of cheap raw materials, repatriation of the lion's share of local savings, unrivaled political influence, a strategic presence with military bases occupied free of charge, and the certainty that it can rely on its African allies' diplomatic support.
But for the Africans, the partnership has meant weak trade performance, tight money, high interest rates, massive capital flight, and mountains of debt whose repayment prevents higher investment in education, training, health, food production, housing, and industry.
This arrangement's negative effects extend, moreover, to the entire African continent.
At the political level, France and its allies opposed the concept of a continental government advocated in the late 1950's and early 1960's by the likes of Nasser and Nkrumah.
They helped block the project and establish the notoriously inefficient African club of heads of states, the Organization of African Unity (OAU), thus setting back the clock of African integration by decades.
When the OAU mandated the Economic Community of West African States (ECOWAS) to promote regional economic and monetary union, France and its allies moved quickly to impede it by spearheading the creation of the West African Economic and Monetary Union (UEMOA) and the Central African Economic and Monetary Union (CEMAC).
This partly prevented ECOWAS from emulating the economic performance of it sister organizations, the Southern African Development Community (SADC) and the Common Market of East and Southern Africa (COMESA).
But for France's African allies, grafting a program of economic integration onto a pre-existing artificial monetary union is delusory and unworkable.
Indeed, it has been tearing apart the fabric of these societies ever since so-called independence came in 1960.
No wonder that nowadays most of these countries face civil unrest, rebellion, and risk of implosion.
If French Africa is to grow, the franc zone must be dismantled.
The euro's birth provided an opportunity for these former colonies to break free of France's suffocating embrace.
They missed it.
Instead, they shifted the peg for the CFA franc to the euro while keeping the same rules, institutions, and mode of functioning.
For the citizens of Francophone Africa, this will certainly have tragic consequences.
A Time for Action in the Middle East
LONDON – The announcement, following the use of chemical weapons in Syria, of an emergency summit in Jordan this week of military leaders from the United States, the United Kingdom, France, Germany, Italy, Canada, Turkey, Saudi Arabia, and Qatar is a welcome development.
Western policy is at a crossroads: commentary or action; shaping events or reacting to them.
After the long and painful campaigns in Iraq and Afghanistan, I understand every impulse to stay clear of the turmoil, to watch but not to intervene, to ratchet up language but not to engage in the hard, even harsh business of changing reality on the ground.
But we have to understand the consequences of wringing our hands instead of putting them to work.
People wince at the thought of intervention.
But contemplate the future consequences of inaction and shudder: Syria, mired in the carnage between the brutality of Bashar al-Assad and various affiliates of Al Qaeda, a breeding ground of extremism infinitely more dangerous than Afghanistan in the 1990’s;
Egypt in chaos, with the West, however unfairly, looking as if it is giving succor to those who would turn it into a Sunni version of Iran; and Iran itself, despite its new president, still a theocratic dictatorship, with a nuclear bomb.
The West would appear confused, its allies would be dismayed, and its enemies would be emboldened.
This is a nightmare scenario, but it is not far-fetched.
Start with Egypt.
To many in the West, it is clear that the Egyptian military has removed a democratically elected government and is now repressing a legitimate political party, killing its supporters and imprisoning its leaders.
So we are on a steady track toward ostracizing the new government.
In doing so, we think that we are upholding our values.
I completely understand this view.
But to embrace it would be a grave strategic error.
The fallacy of this approach lies in the Muslim Brotherhood’s nature.
We think of it as a normal political party.
It is not.
If you want to join the UK Conservative Party or the German Christian Democrats or America’s Democratic Party, you can do so easily, and they will welcome you with open arms.
In all of these countries, all parties respect basic democratic freedoms.
The Muslim Brotherhood is not such a party.
Becoming a member is a seven-year process of induction and indoctrination.
The Brotherhood is a movement run by a hierarchy that is more akin to the Bolsheviks.
Read their speeches – those put out not for Western ears, but for their own.
What they were doing in Egypt was not “governing badly.”
If you elect a bad government, then tough – you live with it.
The Muslim Brotherhood, by contrast, was systematically changing the constitution and taking control of the commanding heights of the state in order to make it impossible for its rule to be challenged.
And it was doing so in pursuit of values that contradict everything for which democracy stands.
So you can rightly criticize the actions or overreactions of Egypt’s new military government; but it is difficult to criticize the intervention that brought it into being.
Now all of the choices that Egypt faces are ugly.
There are large numbers of soldiers and police among the casualties, as well as civilians; and, partly as a byproduct of the fall of Libya’s Muammar el-Qaddafi, Egypt is awash with weapons.
But simply condemning the military will not bring a return to democracy any nearer.
Egypt is not a creation of nineteenth- or twentieth-century global power games.
It is an ancient civilization stretching back thousands of years, imbued with fierce national pride.
The army has a special place in its society.
The people do want democracy, but they will be disdainful of Western critics whom they will see as utterly naive in the face of the threat to democracy that the Muslim Brotherhood posed.
We should support the new government in stabilizing the country; urge everyone, including the Muslim Brotherhood, to get off the streets; and let a proper and short process to an election with independent observers be put in place.
A new constitution that protects minority rights and the basic ethos of the country should be drafted, and all political parties should operate according to rules that ensure transparency and commitment to the democratic process.
This is the only realistic way to help those – probably a majority – who want genuine democracy, not an election used as a route to domination.
In Syria, we know what is happening – and that it is wrong to let it happen.
But leave aside any moral argument and just think of the world’s interests for a moment.
Doing nothing would mean Syria’s disintegration, divided in blood, with the countries around it destabilized and waves of terrorism rolling over the region.
Assad would remain in power in the richest part of the country, with bitter sectarian fury reigning in the country’s eastern hinterland.
Iran, with Russia’s support, would be ascendant – and the West apparently impotent.
I hear people talk as if nothing can be done: the Syrian defense systems are too powerful, the issues too complex, and in any event, why take sides when one is as bad as the next?
But others are taking sides.
They are not terrified of the prospect of intervention.
They are intervening in support of a regime that is assaulting civilians in ways not seen since the dark days of Saddam Hussein.
It is time we took a side: the side of the people who want what we want; who see our societies, for all their faults, as something to admire; who know that they should not be faced with a choice between tyranny and theocracy.
I detest the implicit notion behind so much of our commentary that the Arabs or, even worse, the people of Islam, are unable to understand what a free society looks like, that they cannot be trusted with something so modern as a polity where religion is in its proper place.
It is not true.
What is true is that there is a life-and-death struggle going on over the future of Islam, with extremists aiming to subvert both its open-minded tradition and the modern world.
In this struggle, we should not be neutral.
Wherever this extremism is destroying the lives of innocent people – from Iran to Syria, Egypt, Libya, and Tunisia, as well as elsewhere in Africa, Central Asia, and the Far East – we should be at their side.
As one of the architects of policy after the terror attacks of September 11, 2001, I know the controversy, anguish, and cost of the decisions taken.
I understand why the pendulum has swung so heavily the other way.
But it is not necessary to revert to that policy to make a difference.
And the forces that made intervention in Afghanistan and Iraq so difficult are of course the very forces at the heart of the storm today.
They have to be defeated.
We should defeat them, however long it takes, because otherwise they will not disappear.
They will grow stronger, until we will reach another crossroads; at that point, there will be no choice.
How to Avoid a Double-Dip Global Recession
NEW YORK -- There is an ongoing debate among global policymakers about when and how fast to exit from the strong monetary and fiscal stimulus that prevented the Great Recession of 2008-2009 from turning into a new Great Depression.
Germany and the European Central Bank are pushing aggressively for early fiscal austerity; the United States is worried about the risks of excessively early fiscal consolidation.
In fact, policymakers are damned if they do and damned if they don’t.
If they take away the monetary and fiscal stimulus too soon – when private demand remains shaky – there is a risk of falling back into recession and deflation.
While fiscal austerity may be necessary in countries with large deficits and debt, raising taxes and cutting government spending may make the recession and deflation worse.
On the other hand, if policymakers maintain the stimulus for too long, runaway fiscal deficits may lead to a sovereign debt crisis (markets are already punishing fiscally undisciplined countries with larger sovereign spreads).
Or, if these deficits are monetized, high inflation may force up long-term interest rates and again choke off economic recovery.
The problem is compounded by the fact that, for the last decade, the US and other deficit countries – including the United Kingdom, Spain, Greece, Portugal, Ireland, Iceland, Dubai, and Australia – have been consumers of first and last resort, spending more than their income and running current-account deficits.
Meanwhile, emerging Asian economies – particularly China – together with Japan, Germany, and a few other countries have been the producers of first and last resort, spending less than their income and running current-account surpluses.
Overspending countries are now retrenching, owing to the need to reduce their private and public spending, to import less, and to reduce their external deficits and deleverage.
But if the deficit countries spend less while the surplus countries don’t compensate by savings less and spending more – especially on private and public consumption – then excess productive capacity will meet a lack of aggregate demand, leading to another slump in global economic growth.
So what should policymakers do?
First, in countries where early fiscal austerity is necessary to prevent a fiscal crisis, monetary policy should be much easier – via lower policy rates and more quantitative easing – to compensate for the recessionary and deflationary effects of fiscal tightening.
In general, near-zero policy rates should be maintained in most advanced economies to support the economic recovery.
Second, countries where bond-market vigilantes have not yet awakened – the US, the UK, and Japan – should maintain their fiscal stimulus while designing credible fiscal consolidation plans to be implemented later over the medium term.
Third, over-saving countries like China and emerging Asia, Germany, and Japan should implement policies that reduce their savings and current-account surpluses.
Specifically, China and emerging Asia should implement reforms that reduce the need for precautionary savings and let their currencies appreciate;
Germany should maintain its fiscal stimulus and extend it into 2011, rather than starting its ill-conceived fiscal austerity now; and Japan should pursue measures to reduce its current-account surplus and stimulate real incomes and consumption.
Fourth, countries with current-account surpluses should let their undervalued currencies appreciate, while the ECB should follow an easier monetary policy that accommodates a gradual further weakening of the euro to restore competiveness and growth in the eurozone.
Fifth, in countries where private-sector deleveraging is very rapid via a fall in private consumption and private investment, the fiscal stimulus should be maintained and extended, as long as financial markets do not perceive those deficits as unsustainable.
Sixth, while regulatory reform that increases the liquidity and capital ratios for financial institutions is necessary, those higher ratios should be phased in gradually to prevent a further worsening of the credit crunch.
Seventh, in countries where private and public debt levels are unsustainable – household debt in countries where the housing boom has gone bust and debts of governments, like Greece’s, that suffer from insolvency rather than just illiquidity – liabilities should be restructured and reduced to prevent a severe debt deflation and contraction of spending.
Finally, the International Monetary Fund, the European Union, and other multilateral institutions should provide generous lender-of-last-resort support in order to prevent a severe deflationary recession in countries that need private and public deleveraging.
In general, deleveraging by households, governments, and financial institutions should be gradual – and supported by currency weakening – if we are to avoid a double-dip recession and a worsening of deflation.
Countries that can still afford fiscal stimulus and need to reduce their savings and increase spending should contribute to the global current-account adjustment – via currency adjustments and expenditure increases – in order to prevent a global shortage of aggregate demand.
Failure to implement such coordinated policy measures – to sustain global aggregate demand at a time when deflationary trends are still severe in advanced economies – could lead to a very dangerous and damaging double-dip recession in advanced economies.
Such an outcome would cause another bout of severe systemic risk in global financial markets, trigger a series of contagious sovereign defaults, and severely damage the growth prospects of emerging-market economies that have so far experienced a more robust recovery than advanced countries.
How to Bail out Good Banks and Let Bad Banks Fail
LOS ANGELES – How should large-scale systemic failures of a country’s financial system be addressed?
Nobody wants to bail out banks that make bad decisions.
But to save a financial system from collapse requires preventing all banks from failing at the same time.
We need a way to bail out good banks but allow bad banks to fail.
But how can we distinguish good banks from bad?
When markets panic, as they did in 1929 and again in 2008, supporting the financial system is essential.
The alternative would be a 1930’s-style depression.
But that does not mean that we should bail out individual banks.
Recent economic history is replete with examples of financial crises: the United States in the late 1980’s;
Sweden, Finland, and Norway in 1992;
Japan in 1998; and much of the world economy in 2008.
The ways these crises were handled offer important lessons.
In 1992, Sweden’s central bank, the Riksbank, allowed private bank equity holders to be wiped out, but it rescued depositors and creditors by buying up risky assets of failing institutions.
Sweden recovered.
Japan recapitalized its banks in 1998, but did not wipe out equity holders.
Because insolvent banks were kept alive through government bailouts and guarantees, Japan provided the wrong incentives to its financial institutions.
As a result, Japan never fully recovered from its recession.
So the lesson is that we must allow equity holders to lose money sometimes in order to maintain a healthy financial system.
An important role of central banks is to provide cash to potentially insolvent banks in times of panic, when all other sources of capital dry up.
The central bank is the “lender of last resort.”
But if bankers know that they will be bailed out in bad times, they have an incentive to make risky loans.
These loans earn the banks a high return when the economy is strong, but are protected from losses by government bailouts when the economy weakens.
In 2007, Lehman Brothers, AIG, and most other players in the financial markets were earning huge returns by trading derivatives backed by very risky mortgages.
When US housing prices fell, some of these players should have gone bankrupt.
But when the Federal Reserve allowed Lehman Brothers to fail in September of 2008, there was widespread panic, leading the Fed to intervene to prevent the collapse of every other major player.
How could things have been managed differently?
As Simon Johnson suggests in his book 13 Bankers, we should break up the mega-banks into smaller parts that can comfortably be allowed to fail.
But it is not enough to have many small banks.
We must also find a way to support the system as a whole.
I propose a new policy solution that would support the whole but not the parts.
Central banks should put a floor under the value of a country’s banking system by committing to buy shares in an index fund of bank stocks at a predetermined price.
This price commitment would take effect in times of financial panic.
By guaranteeing to buy shares of a mutual fund, the central bank would provide an incentive for private investors to channel money to the stronger parts of the banking system while allowing the weaker parts to fail.
The index fund would be similar to the ones held by so many workers today in private pension plans.
Individual banks would rise or fall in importance based on their value relative to the market index of all banks in the fund.
By offering to buy shares in the mutual fund at a minimum preset price, the central bank would provide a way of channeling funds into the financial system in times of crisis.
Although this plan would prop up the value of the financial system as a whole, it would still allow market forces to determine relative share prices of individual banks.
If this structure had been in place in the US in 2008, when house prices collapsed, banks that held large portfolios of underperforming toxic assets would have started to drag down the value of the index fund.
But these banks also would have fallen in importance in the total index.
The Fed’s commitment to buy shares of the mutual fund at a preset price would have caused investors to put new capital into the stronger banks to take advantage of the central bank’s price support.
This scheme for recapitalizing banks has three advantages over others that have been suggested by economists and politicians.
First, it does not require government regulators to decide how much individual assets are worth, because private markets value toxic assets.
Second, it removes the incentive for banks to make bad decisions.
By allowing bad banks to fail, it solves the moral-hazard problem.
Finally, by offering to buy shares in a mutual fund of bank stocks, the central bank gives private investors the incentive and the confidence to recapitalize the banking system.
This plan would allow us to bail out good banks and allow bad banks to fail – without costing the taxpayer a penny.
How to Emerge from the Crisis in 2009
WASHINGTON, DC – In the maelstrom of events and news that characterize the current global crisis, it is often difficult to keep a clear head and a sense of what is really going on.
But when one takes a step back (something easier to do on days when markets are closed), the picture becomes clearer, and so do the required policies.
Let me first set the scene by making three observations on where we are today.
First, in the advanced countries, we have probably seen the worst of the financial crisis.
There are still land mines, from unknowable credit default swap (CDS) positions to hidden losses on balance sheets, but the worst days of frozen money markets and obscene risk spreads are probably over.&nbsp;
Second, and unfortunately, the financial crisis has moved to emerging countries.
In crossing borders, the sharp portfolio reallocations and the rush to safer assets are creating not only financial but also exchange-rate crises.
Add to this the drop in output in advanced countries, and you can see how emerging countries now suffer from both higher credit costs and decreased export demand.
Third, in the advanced economies, the hit to wealth, and even more so the specter of another Great Depression, has led people and firms to curtail spending sharply.
Not only have they revised their spending plans, but, in many cases, they have delayed purchases, waiting for the uncertainty to clear.
The result has been a sharp drop in output and employment, reinforcing fears about the future, and further decreasing spending.&nbsp;
Let me now turn to policy.
If my characterization of events is correct, then the right set of policies is straightforward:
First, the measures put in place earlier to repair the financial system must be refined and consolidated.
One silver lining of the worst days of the crisis in October was to scare governments into action on the financial front.
Central banks generously provided liquidity.&nbsp;&nbsp;
But governments soon realized that the main issue was solvency.
They pledged to implement programs aimed at asset purchases (to clarify the balance sheets of financial institutions), recapitalization (to make sure that, if solvent, they could operate and continue to lend), and guarantees (to reassure depositors and some investors that their funds were safe).
The basic architecture for these measures is now in place, but the implementation has been often haphazard.
Lessons from previous banking crises around the world could have been learned faster.
The twists and turns in some of the programs, most notably in the United States, have left markets confused, and have led private investors to stay on the sidelines, waiting for policy clarification before taking a stake in financial institutions.
I have little doubt that learning by doing will eventually lead to coherent programs.
But time has been lost.&nbsp;
Second, emerging market countries must get help in adjusting to the financial crisis.
It is not just a question of providing them with liquidity so that they can simply maintain their exchange rates in the face of a large capital outflows.
Many investors who want out will not return for some time, and countries must accept this fact and adjust accordingly.&nbsp;&nbsp;
In some cases, they can do this on their own, so all that is needed is liquidity support to avoid a collapse of the exchange rate and allow for the adjustment to occur.
In other cases, the capital outflows only worsen already difficult situations.
These countries need more than liquidity; they need financial help to carry out the necessary adjustments.
Are the proper help measures in place?
Yes and no.
For a few countries, the main central banks have provided access to liquidity through swap lines.
The International Monetary Fund, for its part, has created a new liquidity facility, enabling countries that pre-qualify to apply and get funds with little or no conditionality.
For the time being, these arrangements have been sufficient.
But liquidity provision needs to be provided on a more coherent and comprehensive basis.
As for countries that need more help, this is the IMF’s natural function.
A number of countries have already obtained funds under program lending.
One may reasonably worry that the available funds will be depleted before the crisis is over.
Third, governments must counteract the sharp drop in consumption and investment demand.
In the absence of strong policies, it is too easy to think of scary scenarios in which depressed output and troubles in the financial system feed on each other, leading to further large drops in output.
It is thus essential for governments to make clear that they will do everything to eliminate this downside risk.
Can they credibly do it?
The answer is yes.
With interest rates already low, the room for monetary policy is limited.
But the room for fiscal policy is wider, so governments must do two things urgently. First, in countries in which there is fiscal space, they must announce credible fiscal expansions; we – the IMF – believe that, as a whole, a global fiscal expansion about 2% of world GDP is both feasible and appropriate.
Finally, and just as importantly, governments must indicate that, if conditions deteriorate, further fiscal expansion will be implemented.
Only with such a commitment will people and firms be confident that we are not headed for a repeat of the Great Depression, and start spending again.&nbsp;
My strong belief is that if these policies are followed, by the end of 2009, if not sooner, the world economy will start recovering from the crisis.
How to End the Greek Tragedy
SANTIAGO – European leaders, faced with the reality of an insolvent Greece, are reportedly now considering a “Plan B” that would involve reducing the burden of its future debt payments.
This is a welcome contrast to the options considered so far, all of which involved – under different guises – foisting more debt onto a country that has too much of it already.
Greek public debt today stands at nearly 160% of the country’s official GDP.
Suppose Greece took 25 years to bring it down to the Maastricht ceiling of 60%.
If the real interest rate on Greek debt were 4% (more or less what Greece is paying now for the emergency loans from the European Union) and annual GDP grew by 2% on average, the required primary fiscal surplus each year for the next quarter-century would be 5.7% of GDP.
That is an unimaginably large burden, and it risks condemning Greece to permanent recession and social unrest.
A possible counterargument is that Greece has a large informal economy, so its actual GDP is larger than the official figure.
As a result, the debt ratios commonly applied to Greece could be overstated.
But informal output is of little use for debt service if it cannot be taxed.
In any case, the scope for tax increases is severely limited in an economy that is shrinking quickly.
The conclusion is clear: Greece’s debt-service burden is too large, and it must be reduced.
This can be accomplished in two ways: sharply cutting the interest rate paid by Greece, or reducing the face value of the debt.
Some analysts – most prominently Jeffrey Sachs – have argued that the best way forward is to cut the yield on Greek debt to that of German public debt.
Germany currently pays a little over 3% nominal interest on 10-year debt, half of what Greece is being charged for emergency loans – and far less than Greece would pay if it attempted to raise money in private markets.
This approach has several advantages: by leaving the face value of the debt unaltered, EU officials could argue that restructuring Greece’s debt did not amount to a default, thereby limiting contagion.
European banks holding Greek government debt could keep pretending that it is worth its full value.
And the European Central Bank would have fewer excuses to refuse Greek bonds as collateral.
The question is whether the change in coupons – possibly coupled with an extension of maturities – would be enough to stabilize the Greek economy and restore growth.
Even with German-level interest rates, Greece would have to run a primary surplus of at least 2% of GDP – still quite large, and far from today’s deficit.
And, with the face value of the debt unchanged, the psychological drag on expectations and investment might linger.
The alternative is to cut the face value of Greece’s debt.
European leaders seem to be moving in this direction.
The required cut is large: eliminating half of Greece’s public debt obligation would leave it at nearly 80% of GDP, a ratio higher than Spain’s.
Talk of “haircuts” for private investors immediately triggers concerns about contagion.
But markets are already assigning a high probability to a Greek default.
The rating agencies have long placed Greek debt deep in junk territory, and are now giving Portuguese and Irish debt the same status.
Rising spreads in Spain and Italy show that contagion is already occurring, even in the absence of an official decision to write down Greek debt.
The EU is pinning its hopes on one mechanism to reduce Greek debt: loans from the European Financial Stability Facility that would allow Greece to buy its own debt at a discount in the secondary market.
But, while allowing the EFSF to finance buybacks is a step forward, a slew of theoretical and empirical research, generated by developing countries’ efforts to buy back their debt in the 1980’s and 1990’s, has shown that it is far from a cure-all.
The main reason is simple: as debt is reduced, its price rises in the secondary market, sharply curtailing the benefits to the borrower.
So far, policymakers are talking only about exchanging old Greek bonds for cash (in buybacks) or new Greek bonds.
It would be far preferable to exchange them for Eurobonds, backed by the full faith and credit of all eurozone countries.
Nor are European ministers, still struggling to catch up with reality, yet considering involuntary debt exchanges.
But, if the past 18 months are any guide, they soon will be.
How to Fail in Stimulating Business Without Really Trying
CAMBRIDGE: Debates about supply side reform often come down to slogans: flexible labor markets, deregulation, and more competition.
Even when everyone agrees about what to do, however, nothing much usually happens.
Suppose you are an economics minister serious about improving the supply side of your economy but short on specific ideas about what to do.
One interesting answer comes from a research group at Harvard University organized by Andrei Shleifer, a distinguished economist who focuses on how governments make economic life harder than it need be.
Shleifer’s research looks at 75 countries and asks how many formal steps it takes to establish (legally and without bribes) a new company, how long it takes to do so, and what is the cost.
For if a country makes it hard to create companies, don’t be surprised if new companies are few and far between.
And if companies are not created, where will growth and employment come from?
The table (see at the bottom of the text) gives a flavor of the odyssey involved in setting up a business: an average for 75 countries shows more than 10 separate steps of getting various certificates and a cumulative time of 63 days spent in getting the paperwork done (assuming no bureaucratic delays) and total payments to government as high as one third of a year’s income.
The numbers are stunning, particularly when you ask what does the state really do other than register a name and give out a tax number?
Who has time to spend a 110 days, as in the Slovak Republic, running around government offices?
What struggling entrepreneur has the money to spend a $1,000, as in Poland, on paper work?
Canada wins this contest of bureaucracies: government interventions are minimal, user friendly and come at low cost;
Who is worst?
Bolivia.
In between sits the rest of the 75, including Western Europe.
Italy, to cite just one example, is a bureaucratic embarrassment where it takes 4 months for an entrepreneur to set up a business.
Brazil, your typical Latin American country looks pretty awful in this competition; so do most Eastern European economies.
Go beyond North America, the Nordic countries, Australia and New Zealand – the world supply side leaders – indeed, and conditions become awful real fast.
Harvard’s researchers ask: is this red tape strictly necessary?
Attempts to show the benefits of entry regulation on business fail miserably.
Bureaucracies, Shleifer concludes, impose hurdles mostly to set themselves up for rip-offs, bribes or safe, comfortable jobs.
Not only does an economy suffer by having fewer jobs than it might with more user-friendly entry conditions, it also suffers the burden of paying for and enduring a bureaucracy.
Because excessive entry regulation serves no other purpose, reforming governments should act: eliminate the obstacle course.
An argument is made, of course, that these hurdles mean nothing in practice: if obstacles to operating in the formal economy are too cumbersome, businesses simply go underground.
They work just as well, the argument goes, so where is the damage?
Nonsense.
Not only is it bad economic strategy to criminalize business formation and operation by pushing it underground, the fact is that a lot of businesses simply won’t come into existence, not even in the informal sector.
Suppose, once again, that you a minister in charge.
You despise corruption and bureaucratic excess; you demand change.
What to do?
Brazil once experimented with a minister of de-bureaucratization.
The new minister went around the country, looked at every single form to be filled out in the various interfaces with the government.
He eliminated perhaps a third of them.
This was a real triumph in a country where officials love to stamp papers for just about anything.
What happened next?
Nobody remembers: its job supposedly finished, the ministry went out of existence.
Bureaucracy, however, is harder to kill.
Today, Brazil’s paper maze is stronger than ever.
This confirms a rule that Shleifer and his colleagues intuit: the only way to control bureaucrats is to get rid of as many as you can, permanently.
So long as they squat in their offices, bureaucrats will find something to do and, unfortunately, it usually comes down to “protecting the public from business” or, in other words, impeding business from working.
How to Fail to Recover
NEW YORK – Some people thought that Barack Obama’s election would turn everything around for America.
Because it has not, even after the passage of a huge stimulus bill, the presentation of a new program to deal with the underlying housing problem, and several plans to stabilize the financial system, some are even beginning to blame Obama and his team.
Obama, however, inherited an economy in freefall, and could not possibly have turned things around in the short time since his inauguration.
President Bush seemed like a deer caught in the headlights –�paralyzed, unable to do almost anything – for months before he left office.
It is a relief that the US finally has a president who can act, and what he has been doing will make a big difference.&nbsp;
Unfortunately, what he is doing is not enough.
The stimulus package appears big – more than 2% of GDP per year – but one-third of it goes to tax cuts.
And, with Americans facing a debt overhang, rapidly increasing unemployment (and the worst unemployment compensation system among major industrial countries), and falling asset prices, they are likely to save much of the tax cut.
Almost half of the stimulus simply offsets the contractionary effect of cutbacks at the state level.
America’s 50 states must maintain balanced budgets.
The total shortfalls were estimated at $150 billion a few months ago; now the number must be much larger – indeed, California alone faces a shortfall of $40 billion.
Household savings are finally beginning to rise, which is good for the long-run health of household finances, but disastrous for economic growth.
Meanwhile, investment and exports are plummeting as well.
America’s automatic stabilizers –�the progressivity of our tax systems, the strength of our welfare system – have been greatly weakened, but they will provide some stimulus, as the expected fiscal deficit soars to 10% of GDP.
In short, the stimulus will strengthen America’s economy, but it is probably not enough to restore robust growth.
This is bad news for the rest of the world, too, for a strong global recovery requires a strong American economy.
The real failings in the Obama recovery program, however, lie not in the stimulus package but in its efforts to revive financial markets.
America’s failures provide important lessons to countries around the world, which are or will be facing increasing problems with their banks:
- Delaying bank restructuring is costly, in terms of both the eventual bailout costs and the damage to the overall economy in the interim.
- Governments do not like to admit the full costs of the problem, so they give the banking system just enough to survive, but not enough to return it to health.
- Confidence is important, but it must rest on sound fundamentals.
Policies must not be based on the fiction that good loans were made, and that the business acumen of financial-market leaders and regulators will be validated once confidence is restored.
- Bankers can be expected to act in their self-interest on the basis of incentives.
Perverse incentives fueled excessive risk-taking, and banks that are near collapse but are too big to fail will engage in even more of it.
Knowing that the government will pick up the pieces if necessary, they will postpone resolving mortgages and pay out billions in bonuses and dividends.
- Socializing losses while privatizing gains is more worrisome than the consequences of nationalizing banks.
American taxpayers are getting an increasingly bad deal.
In the first round of cash infusions, they got about $0.67 in assets for every dollar they gave (though the assets were almost surely overvalued, and quickly fell in value).
But in the recent cash infusions, it is estimated that Americans are getting $0.25, or less, for every dollar.
Bad terms mean a large national debt in the future.&nbsp;
One reason we may be getting bad terms is that if we got fair value for our money, we would by now be the dominant shareholder in at least one of the major banks.
- Don’t confuse saving bankers and shareholders with saving banks.
America could have saved its banks, but let the shareholders go, for far less than it has spent.
- Trickle-down economics almost never works.
Throwing money at banks hasn’t helped homeowners: foreclosures continue to increase.
Letting AIG fail might have hurt some systemically important institutions, but dealing with that would have been better than to gamble upwards of $150 billion and hope that some of it might stick where it is important.
- Lack of transparency got the US financial system into this trouble.
Lack of transparency will not get it out.
The Obama administration is promising to pick up losses to persuade hedge funds and other private investors to buy out banks’ bad assets.
But this will not establish “market prices,” as the administration claims.
With the government bearing losses, these are distorted prices.&nbsp; &nbsp;Bank losses have already occurred, and their gains must now come at taxpayers’ expense.
Bringing in hedge funds as third parties will simply increase the cost.
- Better to be forward looking than backward looking, focusing on reducing the risk of new loans and ensuring that funds create new lending capacity.&nbsp;
Bygone are bygones.&nbsp;
As a point of reference, $700 billion provided to a new bank, leveraged 10 to 1, could have financed $7 trillion of new loans.&nbsp;
The era of believing that something can be created out of nothing should be over.
Short-sighted responses by politicians – who hope to get by with a deal that is small enough to please taxpayers and large enough to please the banks – will only prolong the problem.
An impasse is looming.
More money will be needed, but Americans are in no mood to provide it – certainly not on the terms that have been seen so far.
The well of money may be running dry, and so, too, may be America’s legendary optimism and hope.
National Governments, Global Citizens
CAMBRIDGE – Nothing endangers globalization more than the yawning governance gap – the dangerous disparity between the national scope of political accountability and the global nature of markets for goods, capital, and many services – that has opened up in recent decades.
When markets transcend national regulation, as with today’s globalization of finance, market failure, instability, and crisis is the result.
But pushing rule-making onto supranational bureaucracies, such as the World Trade Organization or the European Commission, can result in a democratic deficit and a loss of legitimacy.
How can this governance gap be closed?
One option is to re-establish national democratic control over global markets.
This is difficult and smacks of protectionism, but it is neither impossible nor necessarily inimical to healthy globalization.
As I argue in my book The Globalization Paradox, expanding the scope for national governments to maintain regulatory diversity and rebuild frayed social bargains would enhance the functioning of the global economy.
Instead, policy elites (and most economists) favor strengthening what is euphemistically called “global governance.”
According to this view, reforms such as those that enhance the effectiveness of the G-20, increase the representativeness of the International Monetary Fund’s Executive Board, and tighten the capital standards set by the Basel Committee on Banking Supervision would be sufficient to provide a sound institutional underpinning for the global economy.
But the trouble is not just that these global institutions remain weak.
It is also that they are inter-governmental bodies – a collection of member states rather than agents of global citizens.
Because their accountability to national electorates is indirect and uncertain, they do not generate the political allegiance – and hence legitimacy – that truly representative institutions require.
Indeed, the travails of the European Union have revealed the limits of transnational political community-building, even among a comparatively limited and similar set of countries.
Ultimately, the buck stops with national parliaments and executives.
During the financial crisis, it was national governments that bailed out banks and firms, recapitalized the financial system, guaranteed debts, eased liquidity, primed the fiscal pump, and paid the unemployment and welfare checks – and took the blame for everything that went wrong.
In the memorable words of outgoing Bank of England Governor Mervyn King, global banks are “international in life, but national in death.”
But perhaps there is another path, one that accepts the authority of national governments, but aims to reorient national interests in a more global direction.
Progress along such a path requires “national” citizens to begin viewing themselves increasingly as “global” citizens, with interests that extend beyond their state’s borders.
National governments are accountable to their citizens, at least in principle.
So, the more global these citizens’ sense of their interests becomes, the more globally responsible national policy will be.
This may seem like a pipedream, but something along these lines has already been happening for a while.
The global campaign for debt relief for poor countries was led by non-governmental organizations that successfully mobilized young people in rich countries to put pressure on their governments.
Multinational companies are well aware of the effectiveness of such citizen campaigns, having been compelled to increase transparency and change their ways on labor practices around the world.
Some governments have gone after foreign political leaders who committed human-rights crimes, with considerable domestic popular support.
Nancy Birdsall, the president of the Center for Global Development, cites the example of a Ghanaian citizen providing testimony to the US Congress in the hope of convincing American officials to pressure the World Bank to change its position on user fees in Africa.
Such bottom-up efforts to “globalize” national governments have the greatest potential to affect environmental policies, particularly those aimed at mitigating climate change – the most intractable global problem of all.
Interestingly, some of the most important initiatives to stem greenhouse gases and promote green growth are the products of local pressures.
World Resources Institute President Andrew Steer notes that more than 50 developing countries are now implementing costly policies to reduce climate change.
From the perspective of national interest, that makes no sense at all, given the global-commons nature of the problem.
Some of these policies are driven by the desire to attain a competitive advantage, as is the case with China’s support for green industries.
But when voters are globally aware and environmentally conscious, good climate policy can also be good politics.
Consider California, which at the beginning of this year launched a cap-and-trade system that aims to reduce carbon emissions to 1990 levels by the year 2020.
While global action remained stalled on capping emissions, environmental groups and concerned citizens successfully pushed for the plan over the opposition of business groups, and the state’s Republican governor at the time, Arnold Schwarzenegger, signed it into law in 2006.
If it proves a success and remains popular, it could become a model for the entire country.
Global polls such as the World Values Survey indicate that there is still a lot of ground that needs to be covered: self-expressed global citizenship tends to run 15-20 percentage points behind national citizenship.
But the gap is smaller for young people, the better educated, and the professional classes.
Those who consider themselves to be at the top of the class structure are significantly more globally minded than those who consider themselves to be from the lower classes.
Of course, “global citizenship” will always be a metaphor, because there will never be a world government administering a worldwide political community.
But the more we each think of ourselves as global citizens and express our preferences as such to our governments, the less we will need to pursue the chimera of global governance.
How to Help Burma
RANGOON – Across the Middle East, and now in Burma (Myanmar), one of the great questions of contemporary global politics has resurfaced: How can countries move from a failing authoritarianism to some form of self-sustaining pluralism?
Foreign ministers everywhere, in turn, face crucial policy questions: When a country launches such a political transition, when should other countries help, and what is the best way to do so?
Happy transitions, to paraphrase Tolstoy, are all alike; but every unhappy transition is unhappy in its own way.
The happy transitions across much of Central Europe following the end of the Cold War were made easier by the fact that the old communist order more or less died on its feet and surrendered power peacefully.
This, along with generous support from Western Europe, the United States, and others, helped to create a mood conducive to reconciliation, allowing each country to tackle in a measured, non-vengeful way the many difficult moral issues arising from the recent dark past.
Above all, perhaps, these transitions took place amidst a wider network of legitimate institutions – the European Union, OSCE, NATO, and the Council of Europe – championing the rule of law.
This supportive context provided a roadmap for national policymakers, helping them to build democratic institutions and marginalize extremists.
Elsewhere in the world, things are not so easy.
Discredited regimes may cling all the more ruthlessly and ruinously to power, as in Syria.
Or they may create all sorts of new problems on their way out of power, as in Libya.
Or they may be struggling to introduce democratic accountability while maintaining stability, as in Egypt.
In Burma, we see another model – a bold attempt after decades of military rule to move in a controlled but purposeful way toward a new, inclusive form of government.
Here there are striking similarities to what happened in Poland as communism ended.
A military elite favors step-by-step reform, but wants to protect its position and is determined to avoid a descent into chaos.
The opposition is led by a charismatic leader with huge popular support.
And the ruling elite opens a number of parliamentary seats to a popular vote, only to be shocked by a landslide opposition win.
Moreover, as was true in Poland, Burma’s opposition leaders must strike a delicate balance: satisfy their impatient supporters (many of whom have suffered mightily under the old regime), while offering those still in power the prospect of a worthwhile future.
But there are key differences.
Burma has a very different internal political dynamic, not least because of the complex relationships among its various ethnic and linguistic communities – social cleavages that were not an issue in largely homogeneous Poland’s transition.
Moreover, unlike Poland when communism collapsed, Burma already has powerful business tycoons flourishing under the existing system – and they mean to maintain and develop their privileges.
Above all, there is no immediate international institutional context encouraging steady change and establishing standards and benchmarks: Burma must find its own path.
Earlier this month, I visited Burma, where I met President Thein Sein and the opposition leader Aung San Suu Kyi, as well as former political prisoners and many other activists.
I came away convinced that Burma is a country on the move – and moving firmly in a good direction.
All sides accept that this large and resource-rich country has under-performed for far too long.
They also agree that a step-by-step approach, based on reconciliation, is better than an open struggle for power, which could quickly take on a calamitous ethnic dimension.
That consensus will remain credible as long as political reform continues and economic growth accelerates.
After such a long period of stagnation, people demand to see and feel changes for the better in their own lives.
The rest of us should be constructive and creative, not prescriptive and pernickety.
Above all, we should be patient.
The EU’s suspension of sanctions and general readiness to engage constructively make sense.
Burma’s leadership should respond by releasing all remaining political prisoners and opening up the entire political process.
The EU also should ensure that its development assistance – and the process of delivering it – enhances pluralism and reconciliation by benefiting all of Burma’s communities fairly and transparently.
Poland is making its own direct contribution, above all by helping senior Burmese decision makers, opposition leaders, and business representatives to understand the “technology of transition” –&nbsp;that is, the sequencing of technical reforms, which has helped to make Poland one of Europe’s healthiest economies today.
Our business representatives came with me to present large-scale investment projects.
Perhaps the most encouraging aspect of my visit to Burma was a willingness to open up and learn from other countries that have navigated the painful transition from dictatorship to democracy.
One general asked me, off the record, “How did you manage to implement such dramatic political changes without bloodshed?” A young woman at our democracy workshop told the assembled journalists and lecturers, “We thought that Burma was a one-off example.
Now we see that countries far away have had very similar experiences.
We feel less lonely – it all worked out for you.”
Given that spirit – and appropriate foreign assistance – I am confident that it will all work out for Burma, too.
A Eurasian Solution for Europe’s Crises
MOSCOW – More than 18 months after former President Viktor Yanukovych was driven from power (and into exile), the crisis in Ukraine is at a stalemate.
Crimea has been reabsorbed by Russia (in what many consider an annexation); much of eastern Ukraine is held by pro-Russia rebels; and relations between the West and Russia are more tense than at any time since the early days of the Cold War.
But can anyone claim an advantage?
Those who wanted to see Ukraine anchored in the West, or imagined that sanctions on Russia would incite regime change in the Kremlin, by palace coup or popular uprising, have seen their hopes dashed: President Vladimir Putin’s popularity is as high as ever.
In Russia, those who predicted the immediate collapse of Ukraine and the establishment in its eastern and southern provinces of a pro-Russian “Novorossia” have been similarly disappointed.
The tragedy is that the price of these illusions has been extraordinarily high in human terms – the ceasefire-defying death toll in eastern Ukraine has risen to more than 6,000 since April 2014 – and dangerously high in geostrategic terms as well.
It looks like both sides are ready to fight “to the last Ukrainian.”
As I have long argued, Russia was never likely to yield.
After being pushed to the wall by more than two decades of Western expansion – be it European Union or NATO enlargement – into a part of Europe that it considers vital to its national security, Russians believe that they have the moral high ground in defending their interests.
The danger now, with both sides trading accusations in an atmosphere of mutual distrust, is that the current stalemate will lead to a much deeper crisis between Russia and the West.
Both sides need to find a solution; yet, despite emerging victorious from the Cold War, the West seems not only to have lost the peace, but is on the verge of re-dividing Europe.
And this is occurring at a time when the entire continent, including Russia and many other Eurasian states, is facing the threat of Islamic extremism.
It is also happening at a time when both parts of Europe are in search of a new geopolitical, or even spiritual, identity.
While the EU wrestles with problems of migration and integration, Russia is drifting away from a Eurocentric cultural and economic course toward a Eurasian alternative.
And the United States – at least under President Barack Obama – has retreated into a kind of semi-isolation, leaving behind troubling zones of instability and unresolved crises.
So what will happen next?
With both Western and Eastern Europe beset by political conflict and economic stagnation, the five centuries of European global dominance are drawing to an end.
The reality now, following the end of the bipolar supremacy of the US and the Soviet Union and a brief “unipolar” phase following the Soviet Union’s collapse, is that we are now in a “multipolar” world.
This, too, may prove temporary as two new geopolitical macro-blocs gain strength in the twenty-first century. One centers on the US and its ambition to conclude the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).
The second macro-bloc is “Greater Eurasia,” featuring China, Russia, Kazakhstan, Iran, and possibly India.
Strong foundations for this project were established with the May 2015 agreement between Russia and China to coordinate the Russian-led Eurasian Economic Union (EEU) with President Xi Jinping’s “Silk Road” initiative, which aims to bind Central Asia’s economies and those farther to the west closer to China’s.
The question is whether this Greater Eurasia can help Europe find a way through its current security impasse.
Some in Europe will doubtless prefer to strengthen the Organization for Security and Cooperation in Europe – but the truth is that the OSCE, burdened by its Cold War history and its failure to secure the post-Cold War peace, is too tarnished to play a decisive role.
An alternative might be a dialogue between the EU and the EEU, but that would be tricky as the EEU pursues a closer relationship with China and its Silk Road allies.
A better approach would be to invite – sooner rather than later – China and Eurasian states to create over time a common economic space from Shanghai to Lisbon.
There is obvious potential for the EU to engage constructively with the Shanghai Cooperation Organization (created in 2001 by China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan, with India and Pakistan set to join next year).
The failure of the old framework demands an effort to create a new one, beginning with a dialogue on Eurasian development cooperation and security that involves China and both Eurasian and European countries.
None of this will render the OSCE or NATO redundant, and that should be no one’s goal.
What matters in resolving today’s conflicts, be they active or supposedly “frozen,” is to build a broader framework of cooperation and dialogue between the EU and what I term Greater Eurasia.
The remaining question in such a scenario concerns the role of the US.
Does it really want to remain in semi-isolation, hoping to be called back to center stage at some unlikely “unipolar moment” in the future?
Let us hope for an America ready to act as a responsible player in a fairer world.
Women and the World Economy
WASHINGTON, DC – In many countries, public debate about gender equality focuses mainly on women's access to top positions and high-powered career opportunities.
But the “glass ceiling" is only a small part of the issue.
The broader question is whether women have the same opportunities as men to participate in labor markets in the first place.
In other words, are women empowered to contribute fully to global economic growth and prosperity?
Unfortunately, the International Monetary Fund's latest study by its staff, “Women, Work, and the Economy," shows that, despite some improvements, progress toward leveling the playing field for women has stalled.
This is bad news for everyone, because it translates into lower economic growth – amounting to as much as 27% of per capita GDP in some countries.
Around the world, the number of women in the workforce remains far below that of men; only about half of working-age women are employed.
Women account for most unpaid work, and when they are paid, they are overrepresented in the informal sector and among the poor.
They continue to be paid less than men for the same jobs, even in OECD countries, where the average gender wage gap is about 16%.
And in many countries, distortions and discrimination in the labor market restrict women's chances of equal pay and rising to senior positions.
The potential gains from a larger female workforce are striking.
In Egypt, for example, if the number of female workers were raised to the same level as that of men, the country's GDP could grow by 34%.
In the United Arab Emirates, GDP would expand by 12%, in Japan by 9%, and in the United States by 5%.
According to a recent study based on data from the International Labor Organization, of the 865 million women worldwide who could contribute more fully to their economies, 812 million live in emerging and developing countries.
Raising women's labor-market participation rate boosts economic performance in a number of ways.
For example, higher incomes for women lead to higher household spending on educating girls – a key prerequisite for faster long-term growth.
Employment of women on an equal basis with men provides companies with a larger talent pool, potentially increasing creativity, innovation, and productivity.
And, in advanced countries, a larger female labor force can help to counteract the impact of a shrinking workforce and mitigate the costs of an aging population.
So what underlies the persistence of gaping inequality and stalled progress?
Legal, regulatory, and social discrimination against women in many countries still prevents them from seeking paid work in the formal sector.
As a result, women dominate the informal economy, where jobs are often transient and earnings are low.
In addition, tax systems and social-welfare programs in many countries are designed in ways that discourage women from working.
Against this background, government tax and spending policies, as well as labor-market regulation, should be reformed to help boost female employment.
For example, taxing individual rather than family income – which in many economies imposes a higher marginal tax on the second earner in households – would encourage women to seek employment.
Linking social-welfare benefits to participation in the workforce, training, or active labor-market programs also can help, as can affordable, high-quality childcare and greater opportunities for paternity and maternity leave.
In Brazil, for example, the share of women in the workforce has risen sharply over the past 20 years, from about 45% to almost 60%, owing in part to family-friendly policies.
These are just a few examples; far more can be done.
Women benefit when flexible work arrangements are introduced and the barriers between part-time and full-time work contracts are lowered, as the Netherlands has successfully done.
In developing countries, accessible water and better transportation systems in rural areas can help women manage their time better.
Establishing and upholding equal property and inheritance rights can increase women's access to credit and other productive resources, and creating greater awareness of legal rights in general will help reduce discrimination.
Some of these steps have been taken in recent years, but it is time to jumpstart the process.
We urge policymakers to take action and implement policies aimed at removing the obstacles that block women's participation in the workforce.
We at the IMF will do our part by enhancing our analysis of the economic effects of gender inequality and working with our member countries to enable women to contribute fully to global economic growth and prosperity.
Especially now, with the growth outlook uncertain in much of the world, policies that encourage more women to enter the workforce certainly can help.
Women are ready, willing, and able.
How to Keep a New Year’s Resolution
MELBOURNE – Did you make any New Year’s resolutions?
Perhaps you resolved to get fit, to lose weight, to save more money, or to drink less alcohol. Or your resolution may have been more altruistic: to help those in need, or to reduce your carbon footprint.
But are you keeping your resolution?
We are not yet far into 2010, but studies show that fewer than half of those who make New Year’s resolutions manage to keep them for as long as one month.
What does this tell us about human nature, and our ability to live either prudently or ethically?
Part of the problem, of course, is that we make resolutions to do only things that we are not otherwise likely to do.
Only an anorexic would resolve to eat ice cream at least once a week, and only a workaholic would resolve to spend more time in front of the television.
So we use the occasion of the New Year to try to change behavior that may be the most difficult to change.
That makes failure a distinct possibility.
Nevertheless, presumably we make resolutions because we have decided that it would be best to do whatever it is that we are resolving to do.
But if we have already made that decision, why don’t we just do it?
From Socrates onwards, that question has puzzled philosophers.
In the Protagoras, one of Plato’s dialogues, Socrates says that no one chooses what they know to be bad.
Hence choosing what is bad is a kind of error: people will do it only if they think that it is good.
If we can teach people what is best, Socrates and Plato seem to have thought, they will do it.
But that is a hard doctrine to swallow – much harder than eating the extra slice of cake that you know is not good for you.
Aristotle took a different view, one that fits better with our everyday experience of failing to do what we know to be best.
Our reason may tell us what is best to do, he thought, but in a particular moment our reason may be overwhelmed by emotion or desire.
Thus, the problem is not lack of knowledge, but the failure of our reason to master other, non-rational aspects of our nature.
That view is supported by recent scientific work showing that much of our behavior is based on very rapid, instinctive, emotionally based responses.
Although we are capable of deciding what to do on the basis of rational thought processes, such decisions often prove less powerful than our instinctive feelings in moving us to action.
What does this have to do with keeping resolutions?
Richard Holton, a professor of philosophy at MIT and the author of Willing, Wanting, Waiting, points out that a resolution is an attempt to overcome the problem of maintaining an intention when we expect that, at some future time, we will face inclinations contrary to our intention.
Right now, we want to lose weight and we are rationally convinced that this is more important than the pleasure we will get from that extra slice of cake.
But we anticipate that, faced with cake tomorrow, our desire for that rich chocolate texture will distort our reasoning so that we might convince ourselves that putting on just a little more weight doesn’t really matter all that much.
To prevent that, we seek to shore up our current intention to lose weight.
By making a solemn resolution and telling our family and close friends about it, we tilt the scales against succumbing to temptation.
If we fail to keep our resolution, we will have to admit that we are less in control of our behavior than we had hoped, thus losing face in our own eyes and in the eyes of others about whom we care.
This fits well with what psychologists have discovered about how we can improve the odds that we will keep our resolutions.
Richard Wiseman, a professor of psychology at the University of Hertfordshire, has tracked 5,000 people who made New Year’s resolutions.
Only about one in ten managed to stick to what they had resolved.
In his recently released book 59 Seconds, Wiseman sets out the things that you can do to make success more likely:
· Break your resolution into a series of small steps;
· Tell your family and friends about your resolution, thus both gaining support and increasing the personal cost of failure;
· Regularly remind yourself of the benefits of achieving your goal;
· Give yourself a small reward each time you achieve one of the steps towards your goal;
· Keep track of your progress towards your goal, for example by keeping a journal or putting a chart on the fridge door.
Individually, each of these factors seems trivial.
Collectively, they are ways of exerting our self-control not only now, but in the future as well.
If we succeed, the behavior we judge to be better will become habitual – and thus no longer require a conscious act of will to keep acting in that way.
These tools for keeping a New Year’s resolution can help us to make progress, not only in losing weight or staying out of debt, but also in living more ethically.
We may even find that that is the best resolution to make, for our own benefit and that of others.
New Model Europe
ROME – It is becoming increasingly clear that if Europe is to overcome its crisis, business as usual will not suffice.
We need a Europe that is more concrete, less rhetorical, and better suited to the current global economy.
We need to focus not only on the European Union’s specific policies, but also on how to change its “politics” – a change that must place economic growth at the top of the agenda.
Europe does not need a debate between austerity and growth; it needs to be pragmatic.
A good example of this was the most recent European Council, which addressed two of Europe’s most pressing problems: malfunctioning labor markets, reflected in record-high youth unemployment, and malfunctioning credit markets, in which access to financing is difficult and lending rates vary considerably among different parts of the single market.
The outcome of the Council’s June meeting was encouraging, and we must continue on that path in the coming months to make progress on two equally important issues: how to foster innovation and the digital economy, and how to ensure Europe’s manufacturing competitiveness.
We need to assess what can be achieved at the national level and what EU institutions should do.
Fiscal consolidation and national reforms are essential and should continue.
But we can better achieve our objectives under an EU framework that supports, rather than impedes, national action to boost growth and employment.
The European Commission’s recent decision to grant member states some flexibility for productive public investment linked to EU structural funds is a welcome step in this direction.
The second issue is the need to take further steps toward closer integration within the eurozone.
A banking union is an important start, which should prevent financial markets from fragmenting along national lines and reduce private-sector borrowing costs.
Lending rates are still too high for small and medium-size enterprises and too dependent on where in the EU a company is located.
We have achieved important results on the way to a banking union, notably on supervision.
Now we need to work on the second pillar, resolution of the banking crisis.
The proposal presented by Michel Barnier, European Commissioner for Internal Market and Services, is bold, but Europe does indeed need a strong, efficient resolution mechanism that ensures timely action to address banking crises.
We also need to consider how to enhance coordination of economic policies to promote productivity convergence.
We already have a good mechanism for multilateral surveillance in place, but we should aim to focus it on the areas that really matter for economic union.
This must go hand in hand with a discussion of how the EU can provide incentives to member states that are committed to difficult structural reforms at a time of retrenchment, which could lead to talks about possible forms of fiscal coordination.
Though it is premature to enter into such discussions now, the issue should not be taken off the table.
All of these changes concern the eurozone’s members first, of course, but they are clearly relevant for the wider EU.
At the same time, setting eurozone members apart from the wider EU would be inadvisable.
Ensuring a stable and effective eurozone is essential to the smooth operation of the entire single market.
And, without an efficient EU, the eurozone could not prosper.
We have only one Europe, and we all need to work together to reform it and drive it forward.
Indeed, with its 500 million consumers, the EU single market remains the largest destination for goods and services worldwide and is the best engine to restore growth.
Key economic sectors, such as financial services, benefit greatly from the single market’s common rules.
Without the single market, all member states would be less attractive to foreign investors, who, once established in one member state, can move freely around the EU.
The single market also provides a platform and leverage to export goods and services to international markets.
So we must make the single market more open, internally and externally.
But, to do so, we will need to make EU institutions more efficient, with better regulation and a lower administrative burden.
Common institutions are needed to ensure that all EU countries’ interests are protected, and to act as a bridge between eurozone and non-eurozone member states.
Frankly, the functioning of the EU and its institutions during the crisis has been a part of the problem.
For many people, EU decision-making is opaque, inefficient, and removed from democratic control.
Most worrying, the crisis has challenged the very idea of European integration.
Thus, we will be able to advance a reformist agenda only if we have a convincing narrative that explains why we need Europe and why it serves the interests of current and future generations.
I am a committed pro-European.
I have in mind the extraordinary image of Helmut Kohl and François Mitterrand at Verdun in 1984, two old leaders, standing hand in hand, remembering the victims of World War I.
Next year will mark the 100th anniversary of the outbreak of that war.
The experience of two world wars was foundational for European integration.
But these memories no longer provide a sufficient catalyst for action.
We need to find a forward-looking rationale that, after 50 years of integration, shows how acting together can help Europe achieve its goals in a changed global environment.
There is nothing worse than letting people believe that European integration is something that proceeds by stealth, a journey driven by invisible and uncontrollable forces. The EU cannot last unless it is built on its citizens’ explicit commitment.
Today, we have a chance to remodel Europe.
Next year’s European parliamentary elections will provide an opportunity for a fundamental debate about the EU’s future.
Unless we make a successful case for Europe (and for a different Europe), Euro-skeptic forces will gain ground and Europe’s decision-making processes will be blocked.
The choice is clear, and it will have to be made sooner rather than later.
Escape from Mecca
LOS ANGELES – The recent stampede in Mecca, in which more than a thousand pilgrims making the hajj were trampled to death, is a tragic but powerful reminder of the city’s prominence in the Muslim world.
According to theological tradition, every Muslim is required to make a trip to the city once in their lifetime, if they are able to do so.
In practice, however, it is only in recent times that making a pilgrimage to Mecca has come to play such an important role in Islam.
The city has always had symbolic significance, but its importance to millions of Muslims worldwide is largely a modern phenomenon, one that has grown in recent decades as Saudi officials and fundamentalist Wahhabi clerics promoted religious tourism as a means of spreading their influence.
For most of Islamic history, the overwhelmingly majority of Muslims did not travel to Mecca.
Instead, they made local pilgrimages to the major shrines that still garland the Muslim world.
Some are to Koranic prophets even older than Muhammad; others are to Shia imams or Sufi saints; and still others are to hallowed Muslim women.
The name of one holy place, the necropolis of Makli in Pakistan, hints at its medieval ambition to become an alternative destination for pilgrims: Makli means the “little Mecca.”
The modern hajj has its origins in the rise of religious tourism to Mecca in the nineteenth century, when steamships began transporting large numbers of pilgrims to the Arabian Peninsula.
Then, as now, there was little local effort to limit the number of pilgrims to safe levels or to provide adequate infrastructure and security to handle the masses of visitors.
Annual influxes of hundreds of thousands of pilgrims closely packed into steamships were blamed for spreading cholera through port cities from Bombay to Hamburg, making the hajj a major cause of death around the world.
For the most part, the pilgrimage’s religious nature has muted criticism of the way it was handled.
But contemporary accounts make clear that not all were pleased with Mecca’s management of the event.
In the 1860s, the female Indian Muslim ruler of Bhopal, Sikandar Begum, wrote a warts-and-all account of Mecca as a “wild and melancholy-looking” city whose “dirty and ill-drained” streets were filled with disease and disorder.
A half-century later, the Central Asian pilgrim ‘Abd al-Rashid Ibrahim described the holy city’s filth and squalor, recounting stories of pilgrims walking through streets ankle deep in excrement.
Religious tourism played a central role in the region’s nineteenth-century economy (until the arrival of Texas oilmen in the 1930s, Mecca was almost entirely dependent on visiting pilgrims).
But the numbers of visitors began to rise sharply after the city fell under the control of the Saudi royal family in 1924.
Until then, the only way to reach Mecca was by pack animal.
The Ottoman Empire raised funds from pious Muslims (and brought in German technicians) to lay a railway from Damascus to Medina.
But the last leg of the journey – to Mecca itself – remained a monopoly of the camel-owning Bedouin.
When the Saudi government introduced Fords to the area in around 1930, it needed all of its military resources to prevent the Bedouin from destroying them.
To be sure, the Saudi government faces massive demand from Muslims to be allowed to make the hajj, and it has introduced a quota system to limit their numbers.
Even so, it maintains strenuous efforts to attract pilgrims – particularly wealthy ones – by building attractions, including vast shopping malls and a colossal copy of London’s Big Ben that now looms incongruously over the Ka‘ba.
And the authorities’ admission of more pilgrims than the city’s infrastructure can safely handle is indisputable; the proof is repeated disasters like the one in September.
Indeed, since taking control of Mecca, the Saudi government has used the city and the hajj as centerpieces in its efforts to place the kingdom at the center of the Muslim world and spread Wahhabi Islam.
As soon as the Saudi royal family seized the city, the new rulers destroyed the Shia and Sufi shrines that might have undermined their sought-after monopoly over the ritual aspects of the pilgrimage.
And their approach seems to have worked.
It is not uncommon for pilgrims from, say, India or Indonesia to adopt strict, conservative tenets after their return from Mecca.
As influence is ultimately a matter of numbers, it should come as no surprise that the Saudis seek to maximize the inflows of Muslim pilgrims each year.
Even when faced with calamitous death tolls, the Saudi establishment is unlikely to change its approach.
It is up to the rest of the Muslim world to provide alternatives to the modern idea, championed by Saudi Wahhabis and other arch-conservatives, that Mecca is the inexorable and inevitable center of the Muslim world.
There is nothing stopping Muslim governments from taking a page out of the Saudi handbook and promoting the neglected shrines in their own territories.
Doing so would not only reduce the number of pilgrims traveling to Mecca, making the visits safer; it would also force Saudi Arabia to share the enormous profits of religious tourism.
Even more important, moving beyond the modern hajj to a more plural pattern of pilgrimage could help stem the Wahhabi takeover of the faith.
How to Pay a Banker
CAMBRIDGE – The United States’ Federal Reserve Board recently adopted a policy under which bank supervisors, the guardians of the financial system’s safety and soundness, would review the compensation structures of bank executives.
Authorities elsewhere are considering or adopting similar programs.
But what structures should regulators seek to encourage?
It is now widely accepted that it is important to reward bankers for long-term results.
Rewarding bankers for short-term results, even when those results are subsequently reversed, produces incentives to take excessive risks.
But tying executive payoffs to long-term results does not provide a complete answer to the challenge facing firms and regulators.
The question still remains: long-term results for whom?
Equity-based awards, coupled with the highly leveraged capital structure of banks, tie executives’ compensation to a leveraged bet on the value of banks’ assets.
As Holger Spamann and I show in our research, executive payoffs should be tied to the long-term value delivered not only to shareholders, but also to other contributors to banks’ capital.
As it is, bank executives expect to share in any gains that might flow to common shareholders, but they are insulated from the consequences that losses, produced by their choices, could impose on preferred shareholders, bondholders, depositors, or the government as a guarantor of deposits.
Insulating executives from losses to stakeholders other than shareholders can be expected to encourage them to make investments and take on obligations that increase the likelihood and severity of losses that exceed the shareholders’ capital.
In addition, such insulation discourages the raising of additional capital, inducing executives to run banks with a capital level that provides an inadequate cushion for bondholders and depositors.
The more thinly capitalized banks are, the more severe these distortions – and the larger the expected costs rising from insulating executives from potential losses to non-shareholder stakeholders.
How could pay arrangements be redesigned to address these problems?
To the extent that executive compensation is tied to the value of specified securities, such pay could be tied to a broader basket of securities, not only common shares.
Thus, rather than tying executive pay to a specified percentage of the value of the bank’s common shares, compensation could be tied to a specified percentage of the aggregate value of the bank’s common shares, preferred shares, and all the outstanding bonds issued by the bank.
Because such a compensation structure would expose executives to a broader share of the negative consequences of risks taken, it would reduce their incentives to take excessive risks.
Nevertheless, while such a compensation structure would lead executives to internalize the interests of preferred shareholders and bondholders, thereby improving incentives, it would be insufficient to induce executives to internalize fully the interests of the government as the guarantor of deposits.
To do so, executive payoffs could be made dependent on changes in the value of the banks’ credit-default swaps, which reflect the probability that the bank will not have sufficient capital to meet its full obligations.
In addition, bonus compensation should be redesigned.
In the past, bank executives’ bonuses were often based on accounting measures that are of interest primarily to common shareholders, such as return on equity or earnings per common share.
In the future, banks should consider basing bonus compensation on broader measures, such as earnings before any payments made to bondholders.
Recognizing the value of tying executive payoffs to the effects of executives’ choices on non-shareholders highlights the important role of bank regulators in this area.
The common shareholders in financial firms do not have an incentive to induce executives to take into account the losses that risks can impose on preferred shareholders, bondholders, depositors, and taxpayers.
Consequently, governance improvements that make directors more focused on shareholder interests cannot be relied on to tie executive payoffs to the interests of shareholders and non-shareholders alike.
Regulatory encouragement may be helpful, perhaps even necessary.
Getting executives to internalize perfectly the expected losses that their choices might impose on contributors of capital other than shareholders is complex.
But moving in this direction, even if imperfectly, would mean real progress.
Motivating financial executives to focus on the effects of their choices on all those contributing capital to the bank would significantly improve their risk-taking incentives.
It thus would also contribute to making our financial systems safer.
How to Prevent a Depression
AMSTERDAM – The latest economic data suggests that recession is returning to most advanced economies, with financial markets now reaching levels of stress unseen since the collapse of Lehman Brothers in 2008.
The risks of an economic and financial crisis even worse than the previous one – now involving not just the private sector, but also near-insolvent sovereigns – are significant.
So, what can be done to minimize the fallout of another economic contraction and prevent a deeper depression and financial meltdown?
First, we must accept that austerity measures, necessary to avoid a fiscal train wreck, have recessionary effects on output.
So, if countries in the eurozone’s periphery are forced to undertake fiscal austerity, countries able to provide short-term stimulus should do so and postpone their own austerity efforts.
These countries include the United States, the United Kingdom, Germany, the core of the eurozone, and Japan.
Infrastructure banks that finance needed public infrastructure should be created as well.
Second, while monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful.
The European Central Bank should reverse its mistaken decision to hike interest rates.
More monetary and credit easing is also required for the US Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank.
Inflation will soon be the last problem that central banks will fear, as renewed slack in goods, labor, real estate, and commodity markets feeds disinflationary pressures.
Third, to restore credit growth, eurozone banks and banking systems that are under-capitalized should be strengthened with public financing in a European Union-wide program.
To avoid an additional credit crunch as banks deleverage, banks should be given some short-term forbearance on capital and liquidity requirements.
Also, since the US and EU financial systems remain unlikely to provide credit to small and medium-size enterprises, direct government provision of credit to solvent but illiquid SMEs is essential.
Fourth, large-scale liquidity provision for solvent governments is necessary to avoid a spike in spreads and loss of market access that would turn illiquidity into insolvency.
Even with policy changes, it takes time for governments to restore their credibility.
Until then, markets will keep pressure on sovereign spreads, making a self-fulfilling crisis likely.
Today, Spain and Italy are at risk of losing market access.
Official resources need to be tripled – through a larger European Financial Stability Facility (EFSF), Eurobonds, or massive ECB action – to avoid a disastrous run on these sovereigns.
Fifth, debt burdens that cannot be eased by growth, savings, or inflation must be rendered sustainable through orderly debt restructuring, debt reduction, and conversion of debt into equity.
This needs to be carried out for insolvent governments, households, and financial institutions alike.
Sixth, even if Greece and other peripheral eurozone countries are given significant debt relief, economic growth will not resume until competitiveness is restored.
And, without a rapid return to growth, more defaults – and social turmoil – cannot be avoided.
There are three options for restoring competitiveness within the eurozone, all requiring a real depreciation – and none of which is viable:
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A sharp weakening of the euro towards parity with the US dollar, which is unlikely, as the US is weak, too.
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A rapid reduction in unit labor costs, via acceleration of structural reform and productivity growth relative to wage growth, is also unlikely, as that process took 15 years to restore competitiveness to Germany.
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A five-year cumulative 30% deflation in prices and wages – in Greece, for example – which would mean five years of deepening and socially unacceptable depression; even if feasible, this amount of deflation would exacerbate insolvency, given a 30% increase in the real value of debt.
Because these options cannot work, the sole alternative is an exit from the eurozone by Greece and some other current members.
Only a return to a national currency – and a sharp depreciation of that currency – can restore competitiveness and growth.
Leaving the common currency would, of course, threaten collateral damage for the exiting country and raise the risk of contagion for other weak eurozone members.
The balance-sheet effects on euro debts caused by the depreciation of the new national currency would thus have to be handled through an orderly and negotiated conversion of euro liabilities into the new national currencies.
Appropriate use of official resources, including for recapitalization of eurozone banks, would be needed to limit collateral damage and contagion.
Seventh, the reasons for advanced economies’ high unemployment and anemic growth are structural, including the rise of competitive emerging markets.
The appropriate response to such massive changes is not protectionism.
Instead, the advanced economies need a medium-term plan to restore competitiveness and jobs via massive new investments in high-quality education, job training and human-capital improvements, infrastructure, and alternative/renewable energy.
Only such a program can provide workers in advanced economies with the tools needed to compete globally.
Eighth, emerging-market economies have more policy tools left than advanced economies do, and they should ease monetary and fiscal policy.
The International Monetary Fund and the World Bank can serve as lender of last resort to emerging markets at risk of losing market access, conditional on appropriate policy reforms.
And countries, like China, that rely excessively on net exports for growth should accelerate reforms, including more rapid currency appreciation, in order to boost domestic demand and consumption.
The risks ahead are not just of a mild double-dip recession, but of a severe contraction that could turn into Great Depression II, especially if the eurozone crisis becomes disorderly and leads to a global financial meltdown.
Wrong-headed policies during the first Great Depression led to trade and currency wars, disorderly debt defaults, deflation, rising income and wealth inequality, poverty, desperation, and social and political instability that eventually led to the rise of authoritarian regimes and World War II.
The best way to avoid the risk of repeating such a sequence is bold and aggressive global policy action now.
How to Resolve the Euro Crisis
NEW YORK – A comprehensive solution of the euro crisis must have three major components: reform and recapitalization of the banking system, a eurobond regime, and an exit mechanism.
First, the banking system.
The European Union’s Maastricht Treaty was designed to deal only with imbalances in the public sector; but, as it happened, the excesses in the banking sector were far worse.
The euro’s introduction led to housing booms in countries like Spain and Ireland.
Eurozone banks became among the world’s most over-leveraged – and the worst-affected by the crash of 2008.
They remain badly in need of protection from the threat of insolvency.
The first step was taken recently when the European Financial Stability Facility was authorized to rescue banks as well as governments.
This needs to be followed by other steps.
The equity capital of banks urgently needs to be substantially increased.
And if a European agency is to guarantee banks’ solvency, that agency must also oversee them.
A European banking agency would break up the incestuous relationship between banks and regulators that was at the root of the excesses that fueled the current crisis.
And it would interfere much less with national sovereignty than would the subordination of fiscal policies to an EU or eurozone-wide authority.
Second, Europe needs eurobonds.
The introduction of the euro was supposed to reinforce convergence; in fact, it created divergences, with widely different levels of indebtedness and competitiveness separating the member countries.
If heavily indebted countries have to pay heavy risk premiums, their debt becomes unsustainable.
And that is now happening.
The solution is obvious: deficit countries must be allowed to refinance the bulk of their debt on the same terms as surplus countries.
This is best accomplished by authorizing the issuance of eurobonds, which would be jointly guaranteed by all of the member countries.
While the principle is clear, the details will require a lot of work.
Which supranational agency will be in charge of issuing eurobonds?
What rules will it follow in authorizing issuance?
How will it enforce the rules?
Presumably, the eurobonds would be under the control of the eurozone finance ministers.
The board would constitute the fiscal counterpart of the European Central Bank; it would also be the European counterpart of the International Monetary Fund.
The debate will therefore revolve around voting rights.
The ECB operates on the principle of one vote per country; the IMF assigns voting rights according to countries’ capital contributions.
Which system should prevail?
The former could give carte blanche to debtor countries to run up their deficits; the latter might perpetuate a two-speed Europe.
Some compromise will be necessary.
Because the fate of Europe depends on Germany, and because the issuance of eurobonds will put Germany’s own credit standing at risk, the compromise will clearly have to put Germany in the driver’s seat.
Unfortunately, Germany has some unsound ideas about macroeconomic policy: it wants the rest of Europe to follow its example.
But what works for Germany cannot work for the rest of Europe: no country can run a chronic trade surplus without others running deficits.
Germany must propose rules that other countries can follow.
These rules must allow for a gradual reduction in indebtedness.
They must also allow countries with high unemployment, like Spain, to continue running&nbsp; budget deficits.
Rules involving targets for cyclically adjusted deficits can accomplish both of these goals.
Most importantly, the rules must recognize their own imperfection – and thus must remain open to review and improvement.
Bruegel, the Brussels-based think tank, has proposed that eurobonds should constitute 60% of eurozone members’ outstanding external debt.
Given the high risk premiums currently prevailing in Europe, this percentage is too low to constitute a level playing field.
In my view, new issues should be entirely in eurobonds up to a limit set by the Board.
The higher the volume of eurobonds a country seeks to issue, the more severe the conditions the Board would impose.
The Board should have no problem imposing its will, because denying the right to issue additional eurobonds would be a powerful deterrent.
Surveillance must be improved, however, in order to give countries timely notice when they are in violation.
This leads directly to the third unsolved problem: What happens if a country is unwilling or unable to keep within agreed conditions?
Inability to issue eurobonds could result in a disorderly default or devaluation.
In the absence of an exit mechanism, this would have catastrophic consequences.
A deterrent that is too dangerous to invoke would lack credibility.
Greece constitutes a cautionary example.
This is the most difficult of the three problem areas, and I do not claim to have a ready solution.
Much depends on how the Greek crisis plays out.
It might be possible to devise an orderly exit for a small country like Greece that could not be applied to a large one like Italy.
In that case, the eurobond regime would have to carry sanctions from which there is no escape – something like a European finance ministry that has political as well as financial legitimacy which could emerge from the intense debate and soul-searching that is so badly needed (particularly in Germany).
One thing is certain: these three problem areas – reform and recapitalization of the banking system, a eurobond regime, and an exit mechanism – need to be resolved to make the euro a viable currency.
But financial markets might not offer the respite necessary to put the new arrangements in place.
Under continued market pressure, the European Council might have to find a stopgap arrangement to avoid a calamity.
It could authorize the ECB to lend directly to governments that cannot borrow from the markets on reasonable terms until a eurobond regime is introduced.
How to Save the Euro
BRUSSELS – The European Union is facing a constitutional moment.
The founders of Economic and Monetary Union (EMU) warned even before the euro’s birth that fiscal profligacy would constitute a danger to the common currency’s stability.
Nevertheless, the euro-zone’s member countries insisted on maintaining their full sovereignty in this area.
The solution to this conundrum was supposed to have been the Stability and Growth Pact, working in tandem with the so-called “no bailout” clause in the Maastricht Treaty.
The latter was intended to impose market discipline, and the former, to preserve the stability of public finances by fixing a strict limit on the size of national budget deficits.
Both proved futile.
The Stability and Growth Pact clearly did not prevent “excessive” deficits, and the no-bailout clause failed its first test when European leaders, facing the Greek crisis, solemnly declared on February 11 that euro-zone members would “take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole.”
The failure to impose market discipline via the no-bailout clause was predictable: in a systemic crisis, the immediate concern to preserve the stability of markets almost always trumps the desire to prevent the moral hazard that arises when imprudent debtors are saved. But in September 2008, the United States government thought otherwise, and allowed Lehman Brothers to fail in order to impose market discipline.
The disaster that followed illustrated the damage that an uncontrolled failure can produce.
Yet the lesson should not be that failure has to be avoided at all costs: applied to the case of Greece, this would mean that the pressure on the Greek government to adjust would evaporate.
The alternative, instead, is to think ahead and prepare for failure!
A debtor’s strongest negotiating asset is always that creditors cannot contemplate default, because default would bring down the entire financial system.
But market discipline can be established only if default is a true possibility.
This is why it is crucial to create a mechanism to contain the cost –&nbsp;and thus minimize the unavoidable disruptions – resulting from a default.
This is the key aim of the Euro(pean) Monetary Fund (EMF), which Thomas Mayer and I have proposed, and which has been put on the Union table for discussion by German Finance Minister Wolfgang Schauble, among others.
The EMF (or rather ESF, as some have dubbed it, for European Stability Fund) could manage an orderly default of an EMU member country that fails to comply with the conditions attached to an adjustment program.
We imagine a simple mechanism, modeled on the successful experience with Brady bonds.
These were bonds issued by distressed Latin American countries in the early 1990’s as part of an arrangement to reschedule their international debts. US government securities provided collateral for them.
To safeguard against the systemic effects of a default, the EMF could offer holders of the defaulting country’s debt an exchange of this debt against claims on the EMF.
Of course, debt-holders would be obliged to accept a uniform discount (or “haircut”) on what they are owed.
This would be a key measure to limit the disruption from a default.
A default creates ripple effects throughout the financial system, because all debt instruments of a defaulting country become, at least upon impact, worthless and illiquid.
But, with an exchange à la Brady bonds, the losses to financial institutions would be limited (and could be controlled by the choice of the haircut given to creditors).
In return for offering the exchange against a haircut, the EMF would acquire the claims against the defaulting country, which would then receive any additional funds from the EMF only for specific purposes that the EMF approves.
Other EU transfer payments would also be disbursed by the EMF under strict scrutiny, or they could be used to pay down the defaulting country’s debt to the EMF.
Thus, the EMF would provide a framework for sovereign bankruptcy comparable to the procedures that exist in the US for bankrupt companies that qualify for restructuring.
How would the EMF finance its interventions?
We propose to establish a common insurance fund with contributions proportional to the risk that each member country represents.
Ideally, one should base the contributions on market indicators of default risk.
But the very existence of the EMF would distort credit-default swap spreads and yield differentials among EMF members.
We therefore propose that contributions to the EMF should be based on member countries’ fiscal deficits and public debt levels, because both represent warning signs of impending liquidity or insolvency risk.
The EMF could receive a levy that would be proportional to any fiscal deficit in excess of 3% of GDP and public debt in excess of 60% of GDP – the caps imposed by the Stability and Growth Pact.
This levy would represent a sort of automatic fine, thus making the elaborate structure of the Pact redundant.
These two simple elements – orderly default and a financing mechanism – could resolve the current crisis within the euro zone: by creating a European Monetary Fund along these lines, the euro area would acquire an institution that could support member countries in difficulties, but that would also ensure that market discipline really worked.
How to Sell Anti-Protectionism
STOCKHOLM – The looming global recession has brought government intervention to save failing companies to the forefront of economic policy.
In a speech just prior to the recent G-20 summit, British Prime Minister Gordon Brown warned President-elect Barack Obama against bailing out America’s struggling Big Three automakers, arguing that global competition has made their decline irreversible.
A bailout, then, would simply delay the inevitable at a huge cost to taxpayers.
Such advice is always tough to sell – all the more so in the face of the worst economic outlook in 70 years.
After all, according to conventional wisdom, global competition moves jobs to low-cost countries and puts downward pressure on wages everywhere else.
As globalization intensifies and accelerates economic change, it affects the lives of ordinary citizens like never before, stoking popular fear.
Little wonder, then, that French president Nicolas Sarkozy succumbed to the allure of protectionism during last year’s election campaign, as did both presidential candidates in the United States.
But protectionism need not be the only alternative to fear of global competition.
In the Scandinavian countries, as in the US, foreign competition intensified sharply during the past decade.
China and India gained considerable economic power, and close neighbors in previously isolated communist states were rapidly integrated in the European economy.
However, surveys by Pew Research show that in Sweden, 85% of the population agrees that trade is good for their country, compared to only 59% of Americans.
Among Swedish industrial workers, the figure is 75% in favor.
How can that be?
By designing educational and social protection policies that strengthen the individual, Scandinavian politicians have sought to promote change rather than prevent it.
The positive public opinion in Sweden is not a symptom of brainwashing, but a rational response to people’s experience during the last decade.
As competition intensified and production started moving to the Baltic States and Eastern Europe, Sweden’s policy answer was to upgrade the skills of the work force.
As a result, from 1997 to 2007, Swedish exports nearly doubled and industrial production grew by 36%, with manufacturing companies achieving record-high productivity growth.
Indeed, while annual US output per hour grew by 6.2% during this period, Swedish productivity rose by 8%.
Sweden accumulated a current-account surplus of 53% of GDP, in contrast to America’s 48%-of-GDP deficit.
Employment rose by 11%, and blue-collar workers’ wages increased by 24%, fueling a more than 30% surge in private consumption.
In short, even as globalization progressed, Swedish wage earners enjoyed a substantial improvement in living standards.
While some jobs moved abroad, the net effect was still greatly positive.
The secret behind Sweden’s successful development, and hence people’s attitudes, is how the costs of change are distributed.
Official policy aims to reduce the cost of globalization for individuals, but never for companies.
Entrepreneurs need to face competition in order to develop, whereas individuals who are laid off may have difficulties getting back into productive work.
As trade minister of Sweden for most of this period, I never hindered or postponed import competition.
In the European Union, Sweden voted against almost all anti-dumping and other protectionist proposals.
This never met any criticism from my voters, because educational policy and the social safety net were designed to lower workers’ risk aversion.
Broad educational policies equip an increasing share of Sweden’s population with basic education, thereby enhancing their employability.
Higher education is free of charge and accessible in all parts of the country.
But reaching one cohort per year is too little to meet demands in a fast-changing economy.
Therefore, on top of this, large resources are spent on modernizing the skills of those already in the labor force.
Social protection also has a broad, general nature.
In the Scandinavian countries, as opposed to, say, Germany and the US, the government, not individual companies, are responsible for most social benefits.
That way, economically irrational lock-in effects, whereby workers simply cannot afford to change jobs, are avoided.
Furthermore, benefits are generous enough to ensure that short periods of unemployment don’t force workers to sell their homes or even cars.
The system protects not only the unemployed, who can continue to pay their mortgages and interest, but also indirectly the banks, because their loans to households are repaid even in times of recession.
And, instead of solving all sorts of economically caused private problems, laid-off workers can concentrate on finding new and more future-oriented jobs.
No doubt, these policies are expensive.
But they pay for themselves by producing growth and revenues.
As the past decade shows, they have served the Scandinavian countries well during a period of extreme internationalization.
Instead of giving in to conventional wisdom, we have exploited the possibilities that globalization and technological change offer.
Could the Scandinavian model work for others?
At the very least, the Scandinavian example shows that politicians have more than one option to choose from when considering how to handle globalization.
Intense foreign competition and rapid technological change does not have to be a race to the bottom.
On the contrary, it can be compatible with rapidly rising real income and more and better jobs.
How to Sell Global Re-Balancing
CHICAGO – At its most recent meeting in Toronto this spring, the G-20 agreed to disagree.
Even though the world economy is desperately in need of rebalancing, their declaration was deliberately vague enough to accommodate any set of domestic policies that countries might choose.
Everyone came away thinking that they had won, but the world largely lost.
World trade is highly imbalanced.
Households in the United States, having spent too much, are now weighed down by debt.
Exporters in Europe and Asia have become excessively dependent on selling to the US and other, now-weakened, economies like Spain and the United Kingdom.
Myopic actions on both sides have helped entrench a longer-term pattern of behavior that only makes it harder to move away from today’s unsustainable equilibrium.
As ever, change upsets the cozy status quo and the interests that benefit from it.
For example, the real-estate lobby in the US obviously has no desire to see government support for housing diminish, despite the fact that the US probably has far more housing stock than it can afford.
Similarly, the export lobby in China has no interest in a strong renminbi, even though it is in China’s long-term interest to let its currency appreciate.
We keep hoping that somehow meetings of heads of state will magically produce the policies that will rebalance world trade.
Unfortunately, the macroeconomic changes that countries must make involve actions to which even heads of state are unable to commit.
No US president can unilaterally agree to alter the pattern of government support and spending; that is a decision for Congress.
Similarly, no Chinese president can unilaterally agree to allow the renminbi to appreciate faster; that is a consensus decision reached together with the various apparatchiks in the State Council and Communist Party.
Moreover, the necessary reforms in both America and China go well beyond these two steps.
They require deep, fundamental changes.
So we are caught between a financially unsustainable pattern of global demand and the need for politically difficult changes in many countries’ domestic policies.
All politics is local, and there is no local constituency for the global economy, so what triumphs often erodes global imbalances further.
The G-20 asked the International Monetary Fund to prepare a road map for the policies that countries will have to follow to restore stable global growth.
But neither the G-20 nor the IMF can impose its will on national governments – nor should they.
How, then, can we go beyond ritualistic meetings that do little to advance the global agenda?
Obviously, we need more political support for that agenda.
Perhaps non-governmental organizations (NGOs) like Oxfam or Mothers against Land Mines suggest a way.
These movements use pressure from below to convince political leaders that there is domestic support for international agreement.
The ability of grassroots movements to influence policy is set to increase.
As the power of the Internet spreads through social and political networking sites, and as virtual democracy grows, this bottom-up influence is likely to grow.
Those who want to influence political leaders must get used to convincing their masters, the people, directly.
Unfortunately, it is difficult for existing NGOs to take up the cause of popularizing global economic policy coordination.
Unlike hunger or land mines, the cause of rectifying global trade imbalances will not touch the public enough to attract the donations that are necessary to keep NGOs afloat.
But there is an organization that could do the job: the IMF.
If the IMF reoriented a substantial portion of its activities towards influencing the influential among the world’s public, it could have far more impact on global macroeconomic policy, especially policies followed by countries that do not need its loans, than it does today.
The IMF is currently under-equipped for this task.
If it is to improve its persuasive capabilities, it must learn to become more like grassroots activists, with punchy prose, clear policy recommendations, and TV-ready talking points.
It must go directly to the public – including political parties, nongovernmental organizations, and influential figures – in each country, and explain its position.
The Fund must also do more to enhance its presence on the Web and in school and university classrooms, especially as students are often the most receptive to ideas about global citizenship.
Above all, the Fund must change how it is perceived from outside.
It must be seen as an institution that respects each country’s sovereignty but works for the global good.
A transparent and fair process of arriving at its policy recommendations, based primarily on convincing economic research and data analysis, will be essential.
Countries will have to agree to accept and facilitate the IMF’s direct engagement with their influential citizenry as long as it is carried out in good faith.
The IMF’s expression of its economic views to local publics should then be protected by international agreement, much like embassies and their activities.
If we can make these changes – and one should not minimize the scale of the task – perhaps when G-20 leaders meet in the future, they will not think that their citizens have little interest in the outcome.
Instead, they will have a political mandate to attend meaningfully to the welfare of the global economy.
How to Set Goals
COPENHAGEN – At this century’s start, leaders from every country agreed to pursue the United Nations’ Millennium Development Goals.
The ambition was to improve significantly the lot of the planet’s most disadvantaged citizens before 2015.
The intention was laudable, but 11 years on, progress in achieving the MDGs has been uneven.
As decision-makers start to consider what our aspirations should be after the deadline has expired, it is worth looking back at what worked, what didn’t, and how we could do better.
The targets set by the MDGs basically amounted to a list of “things that would be good to achieve.”
We have made progress on almost all of them, but not nearly enough on most.
We have done reasonably well at ensuring that a child born in 2015 is likely to face fewer material burdens than his or her parents.
But significant challenges and massive inequalities remain.
As always, we should ask ourselves how we could ensure faster progress.
The MDGs comprised eight sweeping statements of ambition: the world decided to eradicate extreme poverty and hunger; achieve universal primary education; promote gender equality and empower women; reduce child mortality rates; improve maternal health; combat HIV/AIDS, malaria, and other diseases; ensure environmental sustainability; and develop a global partnership for development.
These goals were underpinned by concrete targets.
We aimed, for example, to halve the proportion of people living on less than $1 a day; to achieve decent employment for women, men, and young people; to reduce by three-quarters the maternal mortality rate; and to reduce by two-thirds the under-five mortality rate.
Nobody could argue with any of these goals.
But their formulation is inconsistent.
Why aim to reduce poverty by half, maternal mortality by three-quarters, and under-five mortality by two-thirds?
Why set specific reduction targets in these areas, and yet remain vague on our desire to “achieve decent employment”?
And why these particular goals?
Why aspire to improve access to information technology (the Internet, mobile phones) but not to basic energy?
Today, 1.6 billion people do not have electricity; when the sun sets, their lives are literally beset by darkness.
And why no target to reduce the 1.4 million deaths each year from indoor air pollution, largely caused by the use of poor fuels like wood, cardboard, and dung for cooking and heating?
The MDGs have been helpful in focusing attention on some areas of need.
Clean water and sanitation, deforestation, and gender inequality in education are not topics that receive much media attention or focus in developed countries.
The MDGs helped to ensure that these issues did not disappear from the policy agenda, and, partly as a result, there has been progress in at least the first two areas.
But we could have gone a step further and paid closer attention to the areas where we could achieve the most good.
We actually knew back in 2000 that we were unlikely to achieve the goals: the World Bank estimated that in addition to policy and service-delivery reform in many countries, annual overseas development aid would need to increase by $50 billion.
Instead of agreeing to broad aspirations, it would have been more worthwhile to use the goals to highlight specific, more achievable investments.
According to an analysis by Nobel laureates and other prestigious economists for the Copenhagen Consensus Center, these investments include expanded immunization for children, efforts to lower the price of schooling, and initiatives to end the “silent hunger” of micronutrient deficiency.
Despite the MDGs’ breadth, one issue received the most attention by far over the past decade: global warming.
Indeed, among world leaders and policymakers, no other development-related issue came close.
The European Union’s climate policy is costing $250 billion a year, enough to have achieved all of the Millennium Development Goals.
Yet its impact on global temperature in a hundred years will be immeasurable.
When it comes to “doing good” in the world, there is a big difference between focusing on problems and focusing on solutions.
Global warming highlights this contrast.
We understandably focus on the problem, and then take for granted that a global carbon-reduction deal is the only logical solution.
But such a comprehensive deal appears to be politically impossible, and has been shown to be incredibly ineffective.
While global warming is a serious challenge (and will exacerbate other problems), cutting carbon emissions is a poor solution – and a poor use of funds compared to the alternatives.
Finding the smartest solutions to problems requires prioritizing – an effort that the MDGs do not explicitly make, and which many people find distasteful.
But if we do not explicitly choose between policies based on their effectiveness, often the decision is made for us by other factors, including which issue attracts the most media attention or has self-interested corporations and activists pushing for a specific investment.
An overarching theme of the MDGs was to reduce poverty.
We will succeed, by 2015, in halving the proportion of people whose income is less than $1 a day.
But this is thanks almost entirely to the massive economic strides taken by China and India, which show how effectively trade can reduce poverty. Yet developed countries have rendered politically impossible reforms that would reduce trade barriers for developing countries.
While we have spent all of our time writing a successor treaty to the Kyoto Protocol, we have all but forgotten the Doha Round of trade talks.
Overall, the Millennium Development Goals improved the planet.
But when we set new goals in 2015, we will need to be much more honest about focusing on areas where we can achieve the most good.
How to Target Iraq
In the current debate about policy towards Iraq, two extreme alternatives are usually presented: either extend the military campaign against terrorism to Iraq, or maintain the current uneasy status quo with that country.
Pious talk about reworking the UN sanctions is another version of the second alternative - that is, of doing nothing.
Both alternatives are unpalatable.
Yet preparing a ground war against Iraq - finishing off the unfinished business of the 1991 Gulf War - is a high risk strategy.
Arab countries, already questionable allies in the war against fellow Muslims in Afghanistan, will be even less reliable in a war against fellow Arabs.
The Europeans, let alone the Russians, may demure.
The military odds appear daunting.
Still, letting the status quo continue is equally problematic.
It means that the Iraqi people will continue to suffer - both from Saddam's brutalities, as well as from the consequences of the sanctions caused by his continued rule.
Moreover, it would continue to send the wrong message to would-be terrorists: you can get away with murder.
The perceived weakness of the US after the embassy bombings in East Africa and the attack on the destroyer the USS Cole no doubt contributed to the audacity of the attacks of September 11 th .
Other options, however, do exist and a combination of them could help bring down Saddam without necessarily engaging in outright military action.
First, local forces opposed to Saddam should be encouraged.
By this I do not mean the loudmouthed but totally ineffective so-called Iraqi Opposition.
The local forces to be encouraged - by special operations people and the provision of arms and training - are the leaders of the southern Shi'a and the northern Kurds.
In the latter case, the infrastructure for support already exists, though it was partially dismantled during the Clinton administration.
In the Shi'a south, still reeling from the brutal suppression of the ill-fated 1991 rebellion, contacts must be created and networks established.
Iraq's neighbors - Saudi Arabia in the south and Turkey in the north - must be reassured that Shi'a and Kurdish rebellion will not result in the dismantling of Iraq and a change of borders: both countries have legitimate concerns regarding this issue.
With the current much more open regime in Teheran, Riyadh can also be convinced that the dangers from an Iranian-controlled Shi'a entity in southern Iraq are less formidable now than they were in 1991.
On the other hand, the cozy relationship that now exists between Jordan and Saddam must be addressed, with all sensitivity to Jordan's dilemmas.
The Iraqi politico-military elite must be both targeted and approached.
Saddam has been masterful at filling most crucial positions in the army and security services with people who come from his Tikriti clan.
But they are far from being a monolithic group: enmity, jealously, anger over the past brutalities and injustices visited upon many of their kin may make some generals and colonels open to suggestions of a coup.
Those suggestions should be premised on a two level approach: first, the US, with UN support, should create a war crimes tribunal to judge Saddam and his top generals: they should know that come the day of reckoning, they will be hunted down like Milosevic and his minions.
One major indictment should deal with the use of poison gas against Kurdish rebels in Halabja during the time of the Iran/Iraq war.
Parallel to this, and the encouragement of insurrections in Iraq's south and the north, preparations for a military option should be credibly enhanced.
But with the stick should come a carrot: with good intelligence, some Iraqi generals and colonels should be approached with offers of amnesty and support should they decide to try to topple Saddam.
Failure to act, they should be told in no uncertain terms, will leave them exposed (like Saddam) to an indictment by in an international war crimes tribunal once Saddam's rule is brought to an end.
They should also be offered the lifting of sanctions on Iraq provided that they - after getting rid of Saddam - accept the resumption of a UN inspection regime.
Even if this will not immediately bring Saddam's regime down, such active attempts at undermining his rule will certainly make Saddam nervous, and as Ceausescu and Milosevic have shown, nervous dictators make fatal mistakes.
One premise underlies this entire line of thought: to imagine that there is a democratic alternative to Saddam, or that once he disappears there will be a democratic transition in Iraq, is to entertain dangerous illusions.
The only alternative to Saddam's regime is some sort of military rule, but one less oppressive and relatively more open.
It must certainly be committed to a foreign and internal policy not based on terrorism and thuggery and a Saddam-like quest for weapons of mass destruction.
Here, undoubtedly, is a complicated strategy, and one with its own inherent pitfalls.
One key advantage of it is that such an approach has a real chance of gaining support, albeit sometimes tacit, from Arab countries - and from Europe and Russia as well.
Such a calibrated approach, however, combining a differentiated understanding of the nature of Saddam's regime and its weaknesses, has a better chance of success than an outright assault, or the dangers inherent in allowing Saddam to remain in power.
The successes in Afghanistan call for an equally nuanced and sophisticated approach in regard to Iraq.
How to Undermine an Alliance
TOKYO – 2010 marks the 50th anniversary of the signing of the Japan-United States Security Treaty.
But, instead of celebrating an agreement that has helped stabilize East Asia for a half-century, the treaty is now at serious risk, as much from indecision as from kneejerk anti-Americanism.
In August 2009, Japan’s people voted for “change.”
The Liberal Democratic Party, which had ruled Japan for most of the post-war decades, lost parliamentary elections to the Democratic Party of Japan.
The key reason for the DPJ’s victory was that voters were fed up with the LDP.
That feeling had been growing in the country for some time.
In the election of 2005, the LDP retained power only because Prime Minister Junichiro Koizumi positioned the LDP as an agent of change.
But after Koizumi left office, Japan’s prime ministers – Shinzo Abe, Yasuo Fukuda, and Taro Aso – came and went so swiftly that our country’s leadership came to seem like a “soup du jour.”
With so little respect being shown for the LDP’s leaders, it is no surprise that Japanese voters lost what little patience they had left for the party and its antiquated practices.
So the DPJ took power, and formed a coalition government with two smaller parties, the Social Democratic Party (SDP), and the People’s New Party (PNP).
The DPJ’s only reason for being, however, is its anti-LDP stance, while the SDP has long opposed the Japan-US Security Treaty, and the PNP strongly opposes the privatizations of the Koizumi era.
That does not amount to a coherent government program, and Prime Minister Yukio Hatoyama’s administration quickly revealed the DPJ’s fundamental hollowness.
But the biggest problem with Hatoyama’s government is that the DPJ took power without a coherent national security policy.
This should not have surprised anyone.
The DPJ was established in 1998 as a “jambalaya” party, consisting of people who had abandoned the LDP, including Hatoyama himself, and the former Socialist Party.
One of the DPJ’s major campaign pledges was “change,” which, at its core, meant anything but the LDP.
But should opposing the LDP really mean undoing 50 years of work on national security?
Although that now seems to be the case, the DPJ gave only a few lines to national security in its election manifesto, thereby avoiding infighting between the party’s left-wingers, who oppose the Japan-US Security Treaty, and its right-wingers, who support it.
Quite a few members of Hatoyama’s cabinet are as much “anti-Japan” as they are anti-US.
For example, Yoshito Sengoku, Minister of State for Government Revitalization, was once a member of Shaseidou, a left-wing youth group that is reflexively anti-American, as was Hirotaka Akamatsu, Minister of Agriculture, Forestry, and Fisheries.
As a result, Hatoyama’s administration seems to be trying to emulate South Korea’s former Roh Moo-hyun administration, which foolishly sought to distance that country from its main defensive partner, the US.
Indeed, many in the DPJ cabinet are baby boomers influenced by the radical student groups that opposed the Japan-US Security Treaty 50 years ago.
But, as these would-be radicals play politics with Japan’s national security, serious tensions are mounting in our region.
China continues its military build-up, and North Korea remorselessly pursues nuclear weapons while refusing to resolve or even explain its abduction of dozens of Japanese citizens over the years.
Instead of dealing with these concrete threats to Japan, Hatoyama continues to act like an opposition politician by attacking the LDP and undermining one of the proudest achievements of LDP rule, the deep and trusting alliance with the US.
Of course, disagreements do arise in the Japan-US relationship.
A realignment of US military forces in Japan is needed, with priority given to relocating the Futenma US Marine Corps base on Okinawa, which houses half of the 47,000 US troops in Japan.
It makes no sense to have that base located in the middle of a densely populated town, making it one of the most visible and tempting targets in the world.
Hatoyama’s administration, however, is attempting to reverse the current plan, which the LDP administration and the US had agreed upon after long and intense discussions.
The problem is that Hatoyama, in backing away from the agreed plan, has no viable alternative to offer.
One day Hatoyama suggests relocating the base outside of Japan, perhaps to Guam, and then next he suggests only moving it outside Okinawa, giving an impression to the world of a feckless national security strategy.
In November, when US President Barack Obama visited Japan, Hatoyama uttered the words “trust me” in an attempt to settle the issue.
The next day, he said things that completely contradicted what he had just told Obama – stunning the US government and ordinary Japanese alike.
Since then, his administration’s approval rating has dropped from 80% to 50%.
People are discovering that Hatoyama is incapable of making – and sticking with – a decision.
To be sure, finding an alternative location for the US base is extremely difficult, as Japanese are as prone to NIMBY (not in my backyard) reactions as anyone else.
Moving the base to the lightly populated Henoko District in the northern part of Okinawa – a solution agreed by both governments – is the only realistic choice.
Yet Hatoyama dithers, undermining the most important pillar of peace and security in the Pacific, the Japan-US alliance.
This is not a favorable situation for Japan, the US, or, indeed, the entire world.
How to Waste a Crisis
The global financial crisis is reaching a bottom, and yet political frustration is growing, because the low point of the collapse seems to offer a last opportunity to promote dramatic change, and that opportunity may be missed.
Last year, President Obama’s chief of staff Rahm Emanuel remarked that a good crisis should never be wasted.
Disaster is an opportunity for thinking of ways to make the world fundamentally better – and also prevent future crises.
People do a great deal of thinking, but sometimes they think so much that they come up with contradictory responses.
Indeed, what really makes a crisis profound is precisely the broad variety of differing diagnoses and different remedies.
The political passions aroused by the clashes of interpretation often make the crisis seemingly insoluble.
It was those conflicts, rather than some technical flaw in the operation of the economy, which made the Great Depression of the 1930’s such a dismal and destructive event.
Responses to a crisis fall into two categories.
The first type aims at an institutional reordering, so that inefficiencies and perverse incentives are removed, and the economy functions more smoothly and efficiently.
The second, more radical approach, tries to improve not the economy but the way people themselves go about their lives.
No institutional solution is purely neutral in its effects on relative incomes – and it is relative income and wealth around which political debate typically revolves.
Bailout operations invariably bring bitter controversy because they help some but not others.
Rescuing automobile producers looks good to their employees and suppliers.
But the costs must be borne by everyone, including firms that are not rescued – probably because they operate more efficiently – and are put at a competitive disadvantage as a result.
Such rescues, in short, appear to help big companies with bad managers.
Small businesses will always complain that they do not have the organizational clout to extract public funds from governments.
And bank bailouts, involving the direct use of public money to recapitalize failing institutions, are even more costly and politically unpopular.
Advocates of monetary stimulation sometimes argue that it is preferable because it is more neutral in its distributional effects, and that its benefits are spread more widely.
But monetary stimulus is often in reality just as selective as bailouts.
The analogy popularized by the great monetarist economist Milton Friedman was that the central bank could always deal with deflationary problems by dropping money from a helicopter.
But, in the real world, not everyone is underneath the helicopter when it makes the drop.
In fact, it is likely that the helicopter pilot will hover over friends and relatives when dropping the money.
And even if the pilot is completely non-corrupt, the crowd on the ground will always assume that there is some hidden and partisan plan.
That has been precisely the problem with the aggressive provision of liquidity, quantitative easing, and the reduction of central bank interest rates used to address the current crisis.
In today’s credit crunch, as in the Great Depression, central banks lend at practically zero interest rates.
Depositors are paid almost nothing on their deposits.
But when businesses and consumers try to borrow, they find that it is very costly, if not impossible.
Lenders (the bankers) are suspicious, worried about creditworthiness, and demand high risk premia.
As a consequence, in most countries, credit is still contracting.
In practice, it is only banks that have access to cheap borrowing, so they can reconstitute their balance sheets by borrowing cheaply and lending expensively.
This is why banks suddenly look so unexpectedly profitable.
But the contrast between bank profitability and the woes of everyone else turns up the political heat on the central banks, which have to explain why it is only their “friends,” the banks, who are standing under the helicopter when it drops money.
Frustration with the complexities of trying to provide ready fixes leads to attempts to find even more radical solutions.
Some try to deal with basic human proclivities, and to modify behavior to make people better.
It is in times of crisis that Utopian ideas about ways of guaranteeing human happiness flourish, often claiming some scientific basis.
For example, long before the financial collapse, experimental economists joined psychologists in attempting to measure varying propensities to greediness.
Some evidence suggests that there is a link between the level of dopamine, addiction, and greedy behavior.
Since a common diagnosis of the problems generated in the financial services business holds that human greed is to blame, a German think tank recently suggested that people with a genetic proclivity to high dopamine levels should be barred from taking leading positions in financial institutions.
But such apparently attractive strategies aimed at making better people turn out to be exclusionary – and based on rather arbitrary testing.
If implemented, the German proposal would most likely exclude behavior that involves acceptable risk, as well as sidelining those who take wild and inappropriate decisions.
Both the institutional and the behavioral responses to a crisis are fundamentally problematical. The search for technical solutions leads to political polarization, and may produce stalemate.
The search for deep human roots of the crisis, by contrast, leads to attempts to change human nature, which are futile – and also inherently much more dangerous.
How United Is \
Seen from the point of view of the European Union's longtime member states, the eight postcommunist countries that - together with Cyprus and Malta - joined the EU on May 1st seem united in their positions on most important issues.
Indeed, since the US intervention in Iraq, many West Europeans see the EU's new members from Europe's East as something of a bloc.
US Defense Secretary Donald Rumsfeld's division of Europe into "new" and "old" was, above all, a clever ploy that helped the Bush Administration get its way by using the old strategy of "divide and rule."
But, although it reflected real differences between established EU members and the newcomers, it also managed to solidify the false impression that the EU's new members share a similar identity and political agenda.
Rumsfeld's remarks were divisive because Western Europe seems to know even less than the Americans about Europe's eastern half.
In reality, big differences exist among the new EU members.
Even with regard to Iraq, there was little unity.
While some countries ­- say, Poland - strongly supported America's war effort, others tried to balance their support for the US with their "understanding" of the views of Germany and France.
Still others - for example, Slovenia - stood on the side of "old Europe."
Beyond politics, there are vast differences among the economies of the new members, not only in terms of wealth, but also in their structures.
Industrialized and urbanized countries, with relatively small agricultural sectors, such as the Czech Republic, Slovenia, or Slovakia, have different concerns than Poland, where farmers form 20% of the population.
Historical traditions also play a role.
Although all new member states claim to be "western," some are more Western than others.
The Czech Republic, Slovakia, Hungary, Slovenia and parts of Poland share a common legacy of Mitteleuropa , formed during the Hapsburg Empire.
Moreover, communism in those states was different than that practiced in the three Baltic countries, which were part of the Soviet Union.
At the start of the 1990's, following communism's fall, the common experiences and the shared legacy of Czechoslovakia, Hungary, and Poland were behind the idea of creating the so-called "Visegrad Group," with the aim of coordinating the three countries' efforts to join the EU and NATO.
The Visegrad initiative worked to some extent, though it was temporarily paralyzed by the disintegration of Czechoslovakia just over a decade ago.
Although the leaders of Poland, Hungary, the Czech Republic and Slovakia recently declared they wanted to keep the Visegrad grouping alive even after their countries' enter the EU, the future of Visegrad cooperation is uncertain.
In fact, the fate of this group is perhaps the best example of how individual identities of the new member states are beginning to assert themselves now that membership in the EU and NATO are secured.
Poland, as its stance over the EU constitution demonstrated, pursues its own specific interests in a united Europe, which may be difficult to harmonize with the interests of smaller Central European states.
Once in the Union, Poland will have an even freer hand, unconstrained by the need to support the aspirations of other East European countries.
Some advocates of a closer Visegrad cooperation criticize Poland's emerging strategy, while euroskeptics in the Czech Republic, Hungary, and Slovakia applaud the Poles.
For example, the Czech Civic Democratic Party, heavily influenced by Czech President Vaclav Klaus, describes Poland as the Czech Republic's chief ally and an example of how new members should approach the EU.
The situation could become even more complicated, because some leaders in the Czech Republic, Hungary, and Slovakia would like to join the "hard core" of European integration should some European states one day decide to create a two-speed Europe.
If these countries join the hard core of European integration, while others, Poland in particular, opt to stay out, it would create a dividing line between them, burying Visegrad cooperation.
Regardless of what happens, all Europe needs to get past clichés about "old" versus "new" Europe.
Poland may find that it has security and other interests in common with some states of a similar size in the current EU.
The three Baltic states will most likely cooperate much more closely with the Scandinavian countries than with the other new members.
It is also time to start thinking about a new way of organizing Central Europe.
For the Czech Republic, Hungary, and Slovakia, close cooperation with Poland may not be the best way to protect their interests in the EU, as their interests and the interests of a big, self-confident Poland may not be identical.
It may be more natural for the Czech Republic, Hungary, and Slovakia to strive for closer regional cooperation with Austria and Slovenia, the contours of which can already be seen in some existing regional groupings.
Such a regional group would be bound together by a long common history and compatible interests.
This would be much more effective and durable than the Visegrad initiative, which lumps together three small states with a country that has more inhabitants than its three partners put together, plus its own agenda.
How Will Tomorrow’s Scientists Learn?
I was recently invited to speak at science-related meetings on two consecutive days in different places in Europe.
One was the official opening of a network of science centers in Vienna, linking decentralized activities in an interactive exhibition that tour Austria.
The other was the Science Festival of Genoa, Italy, a young and hugely successful event with exhibitions and high-profile speakers throughout the ancient town.
What struck me on both occasions was the sustained, and evidently successful, attempt to reach out to the two target groups upon whom the future of science and technology will depend.
The first group is teenagers, who are deeply interested in all the new technologies and gadgets that surround them.
They have made these technologies an integral part of their lives, but their relationship to science has remained distant.
The other target audience consists of younger children, whose openness and inborn curiosity have not yet been stifled by formal schooling.
The success of Europe’s newly established science centers and festivals in reaching their potential audiences reflects their invention of a new way of teaching and learning.
They have succeeded in setting up a largely informal learning environment, focusing mainly on truly interactive learning.
By soliciting questions from children that have little place in the formal educational system, the audience is led to experience the research process – which often begins precisely by asking the right kind of question.
Although we will need more such informal learning environments in the future, politicians and the public have hardly noticed.
Gone are the utopian dreams of the 1970’s, when there were visions of life-long learning and paid leaves of absence to pursue topics that might be useful for further professional advancement – or might also include the sheer luxury of studying ancient Greek or Assyrian art.
But the need for some kind of continuous learning has become even more obvious today, in a world driven by the forces of globalization.
The relentless competition for talent and skills is being underscored daily by the increases in R&amp;D investment in China and India, whose growing middle classes are only too keen to seek better educational opportunities for their children.
Talent is now recognized as a scarce commodity that needs to be nurtured for a worldwide market of skills and competencies. “The battle for brainpower,” as The Economist recently put it, has begun.
It is fairly safe to predict that learning in a knowledge-intensive society will continue at a heightened pace, both at the workplace and outside of it.
It will be facilitated through Web-based social software, through wikis, blogs, and similar developments as much as through new, “open source” business models.
These are informal structures, even if they have owners and access to them is regulated.
The corporate world – indeed, the formal workplace more generally – can no longer be strictly separated from the informal world in which work and leisure have become blurred.
Just as formal schooling needs to become better integrated with the informal learning environments to which our children are exposed in multiple ways, formal and informal learning must mesh in a life-long process.
Science and technology have an enormous stake in this development, and worldwide competition for the best brains is already acutely felt in European universities.
This year’s Nobel Prizes highlighted once more that the research climate in the United States continues to be more conducive to scientific excellence compared to what Europe has to offer.
Initiatives aimed at fostering scientific excellence in Europe, like one recently launched in Germany that officially defined three universities, all in the southern part of the country, as “excellent”(qualifying them for extra funding), seek to make universities more attractive and thus more competitive.
While such efforts certainly point in the right direction, the research-friendliness and innovativeness of the wider societal environment – particularly practices of informal learning and opportunities to follow one’s curiosity – also matter.
When, beginning in the nineteenth century, book publishing became not only a lucrative business, but also made books increasingly affordable to many more households, the sources of learning in society exploded.
Indeed, the societal wealth created through the Industrial Revolution is partly due to this new diffusion of knowledge and skills.
Seeing the excitement that can be generated in young people through events like science festivals and networks of science centers gives rise to cautious optimism – provided we seize the diversity of opportunities that informal learning offers.
Informal learning implies a messy, unruly, and potentially subversive process. But it also promises to nurture the creative ferment in which great science thrives.
How Women Go Bankrupt
As the world struggles to emerge from the economic near-collapse of last fall, there is one sub-group that has slid below the waterline in record numbers: formerly middle-class women.
A new report shows that a million American middle-class women will find themselves in bankruptcy court this year.
This is more women than will “graduate from college, receive a diagnosis of cancer, or file for divorce,” according to the economist Elizabeth Warren . Their plight, symptomatic in many ways of the plight of women around the world, holds lessons for us all.
These bankrupt women are better educated than their male counterparts: most have some college; and more than half own their own homes.
What tipped them from middle-class lifestyles to incomes just above the poverty line were likely to have been one or all of three factors.
Two are economic, and, for many women, the third may be emotional.
First, these women tend to be awash in debt.
Just about everyone spent above their means in the recent bubble, but middle-class women have a special relationship to debt.
Many of them have jobs that require them to dip into credit lines just to stay afloat.
But others have been successfully targeted by luxury-goods manufacturers and credit-card companies, which benefit from the way that mass culture ties certain kinds of consumerism – the latest designer clothes, this season’s “it” bag, the right highlighting, and even the trendiest sports car – into a narrative of successful femininity.
Nor is this pressure confined to the United States.
New middle classes are emerging globally, and magazines like Cosmopolitan and Vogue are targeting newly middle-class women in India and China – many of them part of a generation with its own disposable income for the first time ever in their family histories – with the very same luxury goods.
The second reason that a million US women have filed for bankruptcy is that legislation enacted in 2005 now pits individual women – who can’t afford costly legal advice – against credit-card companies in terms of who gets paid first when ex-husbands owe delinquent credit-card payments and child-support payments.
These pressures are serious, and both are discussed publicly.
But there is frequently a third factor in middle-class women’s economic stress, one that is seldom publicly addressed, much less measured.
It has to do with many middle-class women’s emotionally complex expectations and projections about money.
In the young women’s leadership program that I help to run at the Woodhull Institute, we regularly see that middle-class women, more often than working-class women, find it embarrassing to talk about money.
When they do bring it up – to employers, for example – they use apologetic, self-defeating language.
They are reluctant to negotiate salaries and rarely know how to do so.
They believe that asking for money in exchange for their labor makes them “unfeminine.”
They frequently assume that working twice as hard as those around them – while never speaking up for their own worth or accomplishments – will generate a raise because an authority figure will notice.
Moreover, these women tend to have unrealistic notions about their economic paths.
Young, middle-class women often fail to save because they assume – still – that marriage will rescue them financially.
As a result, they often see buying trendy shoes or a great haircut – rather than giving some money each month to a broker – as an “investment” in their romantic futures.
And the familiar cliché is all too often true: older middle-class women fail to become financially literate in their own households, leaving brokerage accounts, pension accounts, taxes, life insurance, and so on to their husbands.
This leaves them economically vulnerable when divorce or widowhood strikes.
Paradoxically, we have found that working-class women (and women of color) rarely harbor such economically problematic structures of denial.
They tend to be more ready than middle-class white women, in our experience, to master the basics of financial literacy and to learn salary negotiation, because they don’t have the luxury of assuming that a knight on a white horse will rescue them economically.
Indeed, the financial pragmatism of working-class and poor women is the reason for the successes in the developing world of micro-financing that puts money in their hands.
It would surprise me if middle-class women anywhere in the world – brought up to view certain forms of economic ignorance and naiveté as socially appropriate – could, without climbing a steep learning curve, be as reliable and hard-nosed as the world’s poor and working-class women consistently prove themselves to be.
The new book Financial Intimacy , by Jacquette Timmons, a talented financial coach who focuses on women, offers truths that would have been valuable to any of the middle-class women now in crisis. “Many women today earn significantly more than women in previous generations,” she writes.
When middle-class women anywhere in the world get over this taboo, we will do so by understanding that money is never just about money, and that becoming financially literate means pushing back against a social role that casts middle-class women as polite, economically vague, underpaid, shopping-dazed dependents.
All the other awful pressures that are driving so many women into bankruptcy will still exist, but at least more women will be facing these pressures with their eyes wide open, and, one hopes, with many better options.
The Chávez Way
LONDON – I remember the exact date of my visit to Venezuela.
I was sunbathing by the pool on the roof of the Caracas Hilton.
A waiter came up to me and mumbled something about a bomb attack in New York.
I rushed to my room and saw the news footage, endlessly replayed, of two airplanes crashing into the World Trade Center.
I was in Venezuela on September 11, 2001, to attend a conference on the “Third Way.”
Hugo Chávez was very interested in the Third Way – a modus vivendi between American-style capitalism and state socialism – as had been Tony Blair a few years earlier.
Chávez himself, dressed in fatigues, briefly graced the meeting with his presence, receiving a heavy volume of Marxist texts from an elderly professor.
A day earlier, I had had lunch at the Venezuelan central bank, sitting next to the deputy governor, Gastón Parra Luzardo.
He told me that all Venezuelans believed that they had been born with a “loaf under their arm” – that is, a right to a share in the country’s oil revenues.
As a result, no one worked hard.
An economist, Orlando Ochoa, explained that rent-seeking dominated the Venezuelan economy.
Oligarchs fight to keep control over the oil revenues, populists promise to redistribute them, and both groups steal as much as they can for themselves.
No one is interested in creating wealth.
“No one,” I wrote in my diary, “believes that Chávez will last his full term.
They see him as a damaging buffoon, rather than as a dangerous revolutionary.”
In fact, a coup against him was attempted a year later.
He survived it, and went on to win a second, a third, and then a fourth term.
The debate over Chávez’s political legacy is a posthumous re-enactment of the ideological battles that were fought while he was alive.
The battle for his economic legacy is more straightforward: it comes down to how he managed Venezuela’s oil wealth.
Venezuela has the largest oil reserves in the world, and Chávez’s economic strategy depended on harnessing that wealth in order to address his country’s social problems.
The first few years of his rule were dominated by his struggle to gain control of the country’s state-owned oil company, PDVSA.
Upon reasserting political control in 2003, Chávez fired 40% of PDVSA’s staff.
His hostility to foreign players in the industry (he expropriated several American oil companies’ holdings in 2007) limited investment and held back production.
Chávez turned PDVSA into a personal fiefdom and used it as a cash cow; many of his social programs were funded directly from the company’s budget.
Starved of cash, PDVSA was forced to cut back on maintenance and expansion, which increased the number of accidents and limited production.
Thanks partly to Chávez’s policies, Venezuela is still a small player in the global oil market, with less than a 3% share of world production.
It is therefore vulnerable to price fluctuations, and has to follow the lead of Saudi Arabia and other big OPEC producers.
Though Venezuela’s non-oil sector has been growing, oil still provides the vast majority of its dollar earnings.
For the past decade, booming oil prices have spurred economic expansion, with only a short break following the financial crisis of 2008.
Yet stumbling oil-export performance and a sharp rise in infrastructure-related imports, combined with an explosive growth in public spending, have fueled consistently high levels of inflation, with the annual rate now at more than 20%.
This has put immense pressure on Venezuela’s dollar-pegged currency, the bolívar.
In early 2013, the government was forced to announce a 32% devaluation, and stopped issuing government debt in dollars.
The issuance of dollar bonds was a major source of abuse, with speculators buying dollar debt at the official exchange rate, selling it for greenbacks, and then exchanging them for bolivars at a much higher rate on the black market.
With limited access to global capital markets, Chávez turned to China for loans, backed by sales contracts for oil.
Loans from the China Development Bank carry higher interest rates than the West’s traditional lending mechanisms, but they also come with fewer restrictions on policy, and allowed Venezuela to escape the worst of the bondholders’ wrath – at least so far.
Where has the oil wealth gone?
Chávez’s social programs were the biggest beneficiaries.
He used to go around the villages writing checks to poor farmers.
The most reliable data suggest that he was successful at reducing inequality; during his rule, Venezuela’s Gini coefficient, a 100-point scale measuring income inequality, fell from 50 to 39, the biggest decline in Latin America.
Poverty was cut in half – from 50% to around 25% of the population, while extreme poverty fell by two-thirds.
One can hardly say that every céntimo was well spent.
Cronyism was rife and the murder rate tripled, partly owing to corruption in the police and the justice system.
Chávez’s petro-diplomacy sometimes took bizarre forms, like providing cheap bus travel for Londoners to please London’s left-wing mayor, Ken Livingstone.
Despite his extravagancies and authoritarian style, the masses loved him.
They fervently believed that he was on their side, and voted overwhelmingly for him up to the end, even when they knew that he was dying of cancer.
He is sure to enter the pantheon of Latin American heroes.
And what about the Third Way?
In the aftermath of the collapse of communism, Chávez’s mix of anti-Americanism and state activism seemed merely eccentric.
There could be no alternative to free markets and the neoliberal Washington Consensus – or so it appeared.
But the rise of China, the relative decline of the United States, the long boom in commodity prices, and the Western financial collapse of 2008 have created space for political and economic experiments.
Chávez took advantage of that opening, and Chávezism may well prove to be a significant phenomenon far beyond its Latin American homeland.
Human Change We Can Believe In
Montreal – A recent symposium on evolution in Montreal posed to high-school students and university professors the following question:&nbsp;“Do you think that humans are still evolving?”
Indeed, there is an almost universal belief that, with multifaceted cultures and intricate technology, humans have freed themselves from the pressures of natural selection.
Recent findings, however, show otherwise.
Far from providing immunity against evolutionary pressures, culture often creates new ones.
For example, the genes associated with digestion of lactose are more prevalent in populations that have traditionally bred cattle and consumed milk.
In scientific reviews in Nature Genetics and Proceedings of the National Academy of Sciences of the United States of America, the evolutionary biologist Stephen Stearns and his colleagues set out to demonstrate that natural selection operates on contemporary humans.
Supported by extensive genealogies, including centuries of church and national health registries, their argument is convincing.
Indeed, contrary to the widely held assumption that evolution takes millennia to manifest itself, recent evidence suggests that its effects can become visible as quickly as in a few generations.
Rapid evolutionary change, or “contemporary evolution,” is not drastic; humans are not likely to sprout wings a few generations down the road.
Rather, these evolutionary effects are difficult to detect, as they are reflected in a population’s genetic composition.
Contemporary evolution requires a specific set of conditions.
First, the population must comprise individuals with varying characteristics, or traits. Moreover, members of the population must differ in terms of survival rates, including, most important, lifetime reproductive success (LRS) – the total number of offspring that they produce over a lifetime.
These conditions are fundamentally linked: different values for a particular trait translate into diverse survival rates.
This crucial link facilitates change in a trait’s average value over successive generations.
For example, if larger individuals produce more children than smaller ones, the number of larger individuals would grow, thereby increasing the average size of individuals in the population.
The most significant changes occur when individuals at one end of a trait’s value are heavily favored, pushing the entire population in that direction.
Prevalent human traits are often strongly associated with LRS.
For example, people who first reproduce at a younger age tend to have more children, so selection generally favors those who become parents earlier.
Tall women’s LRS tends to be lower, while tall men’s is higher.
In a recent study, research psychologist Markus Jokela and his colleagues took this link further, connecting LRS to personality.
According to Jokela, selection pressure favors people of both sexes who are extroverted, open to experience, and less anxious.
Moreover, women who are agreeable and less meticulous do better reproductively, while these qualities do not affect men’s LRS at all.
Even certain cultural traits, such as income and wealth, can be connected to LRS: in men, the link is positive; in women, it is negative.
But translating selection pressure into evolutionary change requires another crucial ingredient: the variation observed in the trait should be caused at least in part by genetic differences.
Indeed, evolution is possible only if the resemblance between related individuals has a genetic basis, and is not simply a reflection of a shared environment.
For example, siblings do not have to grow up together for their resemblance to be evolutionarily meaningful, owing to their common genes.
Even when it comes to morphology, personality, and life-history traits – such as age at sexual maturity and fertility – related individuals’ likeness often has a genetic basis.
The conditions required for rapid evolutionary change to occur in human populations exist.
But, given that measurable alterations in a trait over time can occur for many reasons – including those related to shared culture or environment – or randomly (“genetic drift”), studies demonstrating this phenomenon are rare.
Today’s challenge is to isolate the diverse sources of change.
Recently developed statistical tools have finally made this possible.
With more sophisticated methods, my colleagues and I were reliably able to distinguish genetic changes, and thus to demonstrate an evolutionary shift toward a younger age at first birth in a small, insular population in Québec over the last 140 years.
This discovery challenges another fundamental myth: evolutionary change necessarily benefits the species.
In fact, evolution simply increases the average individual’s reproductive success – with potentially damaging demographic consequences.
So, while contemporary evolution is occurring, adaptation may not always lead to a better life.
Human Evolution: No Easy Fix
MADISON –Humans are undeniably complex, and proud of it.
No case, we believe, needs to be made for our biological superiority.
Our biological functions are exquisitely regulated and resilient to external variations, owing to complicated webs of interactions.
Unlike other species, we seem to be endowed with willpower and intellect, hence we are capable of modifying the environment to buffer the effects of our decreasing fitness.
Be that as it may, we may be doomed as a species precisely because of the way in which our complexity arose.
Paraphrasing the science writer Philip Ball, nature seems to have activated a time bomb, and our complexity is only a short-term fix.
To grasp the nature of the problem, we need to examine how humans are made at the molecular level, and contrast our constitution with that of other species that we often call “rudimentary,” such as unicellular organisms.
This analysis leads us to examine proteins – our cellular building blocks and the executors of biologicalfunctions – across vastly different species.
Proteins with common ancestry belonging to different species, termed “orthologs,” offer solid ground for comparison.
It has been generally recognized that the basic “fold,” or shape, of a protein must be conserved across species, because there is a tight correspondence between structure and function.
Proteins that retain the same function across very different species – generally the case with orthologs – are expected to keep the same fold.
But the sequence of amino acids that make up the protein chains in these orthologs can vary significantly.
Sometimes the extent of sequence identity between two orthologs can be as low as 25-30%, and yet their folds remain strikingly similar, attesting to the robustness of function to evolutionary change.
This conservation of the protein fold across species makes the origin of our complexity even more puzzling, as it is well known that the number of human genes is deceptively small, merely one order of magnitude larger than that of, say, rice.
If the structure of the proteins is conserved across species, where is our complexity coming from?
Better still, in what sense are we more complex?
Researchers have recently discovered subtle structural variations occurring in orthologs from species that diverged from each other billions of years ago.
In these structures, something subtler than overall topology changes across orthologs.
The structure in some seems “looser” than in others – less well packed, with surface regions that enable surrounding water to penetrate and disrupt the structure by interacting favorably with the protein backbone.
These structural vulnerabilities are known as dehydrons.
As we examine orthologs, the proteins become more degraded, or richer in dehydrons, in species with a lower effective population – a somewhat elusive indicator inversely related to the size and complexity of the organism and to the complexity of its reproductive pattern.
Thus, humans (or mammals) have significantly smaller (ten or more orders of magnitude) populations than bacteria.
The observation that structural degradation is a reflection of decreasing species population resonates in the field of evolution, because natural selection becomes more inefficient as the population gets smaller.
Structural degradation is thus an indicator of the species’ exposure to random genetic drift: mildly deleterious mutations that would typically degrade the protein structure are more likely to be selected against in bacteria before they can become fixed in the entire population (estimated in trillions of individuals), whereas such a mutation has a far better chance of prevailing in humans.
A protein that is richer in dehydrons than its ortholog is more vulnerable to becoming disrupted by surrounding water.
Precisely for this reason, it becomes more “needy” – that is, more reliant on binding partners to maintain its structural integrity.
Furthermore, dehydrons are known to be sticky, so structurally degraded proteins are more likely to promote protein-protein associations than orthologs with lower dehydron content.
Thus, protein-protein interactions, a hallmark of complexity, are actually promoted by randomdrift, the evolutionary force behind the protein degradation process.
So, it seems, complexity is not really naturally selected, but instead arises as a short-term fix to the effects of selection inefficiency.
At first reading, this assertion seems counterintuitive, but the root of the paradox is simply our dogmatic way of thinking, where complex traits are expected to be an outcome of natural selection.
And where is nature’s gambit taking us?
The proteins with the largest accumulation of structural defects are the prions, soluble proteins so poorly wrapped that they relinquish their functionally competent fold and form aberrant aggregates that may cause degenerative neuropathies.
This extreme case of an “aberrantly needy protein” illustrates the high level of genetic risk to which we are exposed as a result of our small population.
The prion is a “fitness” catastrophe that gives us clues as to where nature’s gambit might lead humanity.
Perhaps the long-term evolutionary cost of our complexity is too high, with our survival as a species ultimately depending on our ability to mitigate its fitness cost through increasingly arduous therapeutic solutions.
Let’s hope we pass the test.
Humanizing the Human Genome Project
COLD SPRING HARBOR – Since the human genome was first sequenced in 2000, genome science has accelerated at a remarkable rate.
Rapid advances in DNA-sequencing technology mean that affordable decoding of the human genome is not far away.
In fact, human genomes could be sequenced for as little as $1,000 in the next few years.
Unfortunately, the current biomedical research establishment is entirely unprepared for such a scenario.
Researchers often believe that their mission is to uncover new biology and genetics, and that someone else will translate them to the clinical arena.
Accordingly, many geneticists have worked on “big-science” genomics, including genome-wide association studies focused on common genetic variation in the human species.
But it is widely known that certain mutations can run in families, increasing dramatically the risks of certain diseases – for example, breast cancer, sickle-cell anemia, and cystic fibrosis.
Unfortunately, many human molecular geneticists have abdicated any responsibility for trying to decrease the overall burden of such diseases.
While this trend has many causes – most of which have been debated extensively – one very important factor is rarely discussed.
Scientific research – and biomedical research in particular – largely resembles a race.
Human geneticists, like big-game hunters, specialize in finding disease genes – the “prize.”
Once they succeed, they usually do not continue to develop their findings; instead, they move on to their next target.
Today, scientists are rewarded for how many papers they publish, and in which journals.
In the United States, several major genome-sequencing centers exist primarily to conduct research – including the Centers for Mendelian Genomics, which seek to find the genetic basis of “simple” Mendelian disorders (diseases caused by a single mutation in the structure of DNA).
Many other countries are undertaking similar programs.
But the discoveries and published papers rarely benefit the people who enable this research by donating their blood and other tissue samples.
As Michael Nielsen discusses in his recent book Reinventing Discovery, the “publish or perish” mentality that dominates the field means that many substandard or incomplete papers are published, while those people who are supposed to benefit from the research are often little more than an afterthought.
Indeed, research volunteers rarely receive their genomic data, which betrays the trust that participants place in researchers to use their findings not only to increase the stock of scientific knowledge, but also to deliver actionable results.
The personal genomics and biotechnology company 23andMe has created a useful interface for returning results, which could easily be built upon to deliver complete genome data to participants – as long as the sample collection and sequencing are performed to a sufficiently high clinical standard.
The company’s model laudably calls for research participants to help in the analysis of their own genomes, thereby relieving researchers of the burden of returning all results at once.
With expanding knowledge, analyzing genomes becomes easier.
The hope is that, as technology develops, more researchers will recognize the importance of returning results – especially those that could have a significant medical impact – to participants.
Because there is no regulation requiring that initial sequencing of human genomes be performed to clinical standards, most sequencing does not meet laboratory-test criteria.
Indeed, results are often not reproducible – badly conceived, poorly conducted, or outright fraudulent.
Criteria must therefore be established to ensure that sequencing is performed in an appropriate clinical environment, with rigorous standards in place, including for sample collection.
Researchers today face the wrong incentives, which results in the failure to translate findings into meaningful action for research participants.
Only by improving clinical standards and returning results to participants can human genome sequencing truly serve its purpose – to help humanity.
Migration Realism
GENEVA – The scenes of death and misery that are occurring with increasing frequency in the waters of the Mediterranean and Southeast Asia have focused renewed attention on one of mankind’s oldest activities: migration.
It is time to accept the reality that, like the waves on the seas that many of the migrants traverse, the ebb and flow of human movement cannot be stopped.
That is why the international community must manage migration with understanding and compassion.
Today, some 250 million migrants live and work around the world, and in the coming months and years many more will certainly join them.
We must put in place policies to manage the flows of people in ways that benefit migrants’ countries of origin, transit, and destination.
And of course, we must ensure the wellbeing of the migrants themselves.
This calls for action on four fronts.
For starters, leaders of destination countries – whether in Europe, Africa, the Americas, Asia, or Oceania – should not turn their back on the desperate and wretched.
For many elected officials, migration poses a complex political dilemma: how to reconcile their citizens’ demands with the interests of migrants.
They must find the courage to make the case for a humane migration policy.
But, all too often, migrants are used as scapegoats.
To be sure, immigrants must agree to adapt to the cultures and customs of the countries in which they settle.
But the public in destination countries, for their part, must acknowledge the critical role that the new arrivals can play in the economy.
Migrants fill critical skill gaps, perform jobs that others cannot or will not do, and replace a country’s workforce as it grows older or shrinks.
According to the Munich-based Institute for Economic Research, Germany alone will need an estimated 32 million immigrants by 2035 to maintain an adequate balance between its working-age and non-working-age population.
Second, we need to ensure that migrants who choose to send money back to their countries of origin can do so as easily and inexpensively as possible.
In 2014, remittances by migrants to developing countries amounted to an estimated $436 billion – a sum that dwarfs the annual total that the international community spends on official development aid.
Unfortunately, however, financial intermediaries take an average of 9% of the precious earnings that migrants send home.
Reducing the intermediaries’ share would boost the income of migrants’ families back home, increase economic opportunity in these countries, help reduce poverty, and, by extension, contribute to global stability.
Third, we must provide immigration systems with the resources needed to process asylum claims quickly, fairly, and openly, so that refugees are protected and safely resettled.
European countries, for example, need to devise mechanisms to share the flow of incoming migrants.
The developed world sometimes wrongly feels that it is being asked to care for a disproportionate number of people seeking a better life.
In reality, 70% of refugees seek protection in developing countries.
Lebanon, for example, has a total population of 4.5 million people.
By the end of this year, it will likely harbor close to two million refugees, driven from their homes by violent conflict in neighboring Syria and elsewhere.
Those migrating today are doing so for the same reasons that once spurred millions of Europeans to leave their countries.
They are fleeing poverty, war, or oppression, or are searching for a better life in a new land.
Moreover, many of today’s migrants, like those flooding into Lebanon (and Jordan) have legal claims to asylum under the 1951 Convention Relating to the Status of Refugees and the subsequent 1967 Protocol Relating to the Status of Refugees.
When potential refugees are blocked by offshore barriers, detained for excessive periods in unsatisfactory conditions, or refused entry because of restrictive legal interpretations, the protection of international law is lost.
Finally, interdiction efforts should focus on traffickers, not on those whom they exploit.
We must be careful not to drive migration further underground or offer additional opportunities to the criminal gangs that prey on the desperation of migrants to make obscene profits.
This is not a call for unrestrained migration.
But it is important that we accept the fact that efforts to block migration are bound to fail, with disastrous consequences for human lives – whether they are lost on sinking boats in the Mediterranean and the Andaman Sea or threatened by xenophobic violence in South Africa, India, or elsewhere.
Building higher fences cannot be the answer.
Migration will continue until we lift the poorest and most vulnerable out of the conditions they are currently fleeing.
In the early 1980s, I worked at the United Nations Refugee Agency, and I recall how Europe’s political leaders, intellectuals, and academics rallied to the cause of the boat people fleeing Vietnam.
The world has a moral duty to come together in the same way today.
Human Rights are Union Rights
Are human rights related to trade union power?
Do both march in tandem around the globe?
For nearly two centuries the answer was almost always a resounding "Yes!"
On every continent, the growth of organized labor seemed to herald the emancipation of common people and the demise of their oppressors.
Today we live in an era of global human rights.
War criminals are put on trial in The Hague.
Women's rights are on the social and political agenda in the Middle East.
From Burma to Nigeria, the world pays close attention to the free speech rights of political dissidents.
Thousands of NGOs (Non-Governmental Organizations) expose human rights violations and promote social, economic, and legal standards aimed at benefiting those who toil in factories in poor countries.
Some 182 labor and human rights codes of conduct have been adopted by corporations and industry associations around the globe.
Prodded by groups like the Workers Rights Consortium and the Ethical Trading Initiative, some corporations promise to pay living wages, open their factories to monitors, and even provide employees a voice in the workplace.
Reebok, the multinational sportswear firm, advertises its corporate code as being "based on the core principles" of the UN's Universal Declaration of Human Rights.
The company markets its soccer balls and other goods with a "Guaranteed: Manufactured without Child Labor" label.
But sensitivity to human rights has done nothing to staunch trade unionism's worldwide decline.
The International Labor Organization reports that unions are in retreat in most nations.
During the 1990s union membership fell to less than 20% of workers in 48 out of 92 countries.
The paradox is clear.
Consider the US, where since the 1960s a multicultural, gender-sensitive tradition of rights has been legitimized and codified in US law, within major corporations, inside governmental bureaucracies, and across the political spectrum.
Most big corporations favor "diversity" and boast of their compliance with civil rights and gender-equality laws.
At the same time, in no other large nation, save for outright dictatorships, have trade unions lost so many members and so much political leverage.
Membership has dropped sharply over the last quarter-century, and today less than one in ten private-sector American workers are union members.
What severed the traditional link between strong trade unions and respect for human rights?
To be sure, trade unions have lost members and political clout owing partly to a decline in their moral authority and hence legitimacy as institutions capable of defending the interests of ordinary working people.
Too often trade unions are seen as defending an unjust status quo, as complicit in maintaining gender and racial hierarchies, or else as being so politically self-interested that they injure the rest of society.
Moreover, government and businesses have clearly become increasingly hostile to trade unions over the last 25 years.
As Human Rights Watch reported, "In a system replete with all the appearance of legality and due process, workers' exercise of rights to organize, to bargain, and to strike...has been frustrated by many employers who realize they have little to fear from labor law enforcement."
But the evisceration of US labor law also reflects the extraordinary power of America's culture of rights.
Rights are universal and are held only by individuals, which means that a company CEO enjoys them just as much as his office clerk.
Under a regime of universal individual rights, it becomes difficult to grant trade unions the legal status and privileges of a collectivity distinct from and superior to its members.
For millions of workers, not to mention their bosses, union solidarity has become an antiquated or even alien concept. This is hardly surprising.
In the contemporary American workplace, employers use their court-protected free-speech rights to spread millions of dollars worth of anti-union propaganda, to intimidate individual workers, and to persuade employees that joining a union would mean losing their jobs.
But are unions relevant anymore?
Some argue that in the US and elsewhere the human rights regime is so powerful and pervasive that trade unionism is no longer necessary or even desirable.
If workers are protected against sexual harassment by a state agency rather than by their union shop steward, the employee's rights will be adequately protected.
If it is legislation rather than a clause in a union contract that regulates health and safety conditions in the workplace, a factory's air will smell just as sweet.
But a century of experience in America and other parts of the world demonstrates that, by itself, no legal-regulatory system can enforce, by administrative order or judicial ruling, the inner life of millions of workplaces.
As anti-sweatshop and human rights advocates in places like Malaysia and South China understand, no regime of rights is possible without hearing from workers, whose voices will remain silent unless some institution protects them from the consequences of speaking up.
The history of social regulation in the industrial West is unambiguous: systematic, organized pressure at the workplace is essential to breathing life into the rights enshrined in statute books.
Without a new burst of trade unionism in poor countries, the worldwide movement to insure human and labor rights will lose momentum and stall, turning hope into helplessness for millions of desperate workers.
Human Rights Made Whole
On June 18, the United Nations’ intergovernmental Human Rights Council took an important step toward eliminating the artificial divide between freedom from fear and freedom from want that has characterized the human rights system since its inception. By giving the green light to the Optional Protocol to the 1966 International Covenant on Economic, Social, and Cultural Rights, the Council has established an important mechanism to expose abuses that are typically linked to poverty, discrimination, and neglect, and that victims frequently endure in silence and helplessness.
It will now be up to the UN General Assembly to provide final approval of the Protocol. If adopted, this instrument can make a real difference in the lives of those who are often left to languish at the margins of society, and are denied their economic, social, and cultural rights, such as access to adequate nutrition, health services, housing, and education.
Sixty years ago, the Universal Declaration of Human Rights recognized that both freedom from want and freedom from fear are indispensable preconditions for a dignified life. The Declaration unequivocally linked destitution and exclusion with discrimination and unequal access to resources and opportunities. Its framers understood that social and cultural stigmatization precludes full participation in public life and the ability to influence policies and obtain justice.
Yet this unified approach was undermined by the post-World War II logic of geopolitical blocs competing over ideas, power, and influence. Human rights were also affected by such Cold War bipolarity. Countries with planned economies argued that the need for survival superseded the aspiration to freedom, so that access to basic necessities included in the basket of economic, social, and cultural rights should take priority in policy and practice.
By contrast, Western governments were wary of this perspective, which they feared would hamper free-market practices, impose overly cumbersome financial obligations, or both. Thus, they chose to prioritize those civil and political rights that they viewed as the hallmarks of democracy.
Against this background, it was impossible to agree on a single, comprehensive human rights instrument giving holistic effect to the Declaration’s principles. And, unsurprisingly, it took almost two decades before UN member states simultaneously adopted two separate treaties – the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social, and Cultural Rights – encompassing the two distinct baskets of rights. However, only the former treaty was endowed with a follow-up mechanism to monitor its implementation.
In practice, this discrepancy created a category of “alpha” rights – civil and political – that took priority in the influential and wealthy countries’ domestic and foreign policy agendas. By contrast, economic, social, and cultural rights were often left to linger at the bottom of the national and international “to do” lists.
Addressing this imbalance between the two baskets of rights, the new Protocol establishes for the Covenant on Economic, Social, and Cultural Rights a vehicle to expose abuse, known as a “complaint mechanism,” similar to those created for other core human rights treaties. This procedure may seem opaque, but by lodging a complaint under the Protocol’s provisions, victims will now be able to bring to the surface abuses that their governments inflict, fail to stop, ignore, or do not redress. In sum, the Protocol provides a way for individuals, who may otherwise be isolated and powerless, to make the international community aware of their plight.
After its adoption by the General Assembly, the Protocol will enter into force when a critical mass of UN member states has ratified it. This should contribute to the development of appropriate human rights-based programs and policies enhancing freedoms and welfare for individuals and their communities.
Not all countries will embrace the Protocol. Some will prefer to avoid any strengthening of economic, social, and cultural rights and will seek to maintain the status quo. The better and fairer position, however, is to embrace the vision of the Universal Declaration of Human Rights and promote unambiguously the idea that human dignity requires respect for the equally vital and mutually dependent freedoms from fear and want.
Humpty Dumpty and Global Financial Imbalances
WASHINGTON, DC: There is an old saying that goes, “If you have only a hammer, everything looks like a nail.”
Unfortunately, this focus on savings distorts understanding and distracts from the real challenge of creating mass consumption markets in developing countries.
Within national income accounts, trade deficits represent the excess of a country’s consumption over production.
From an accountant’s perspective, that makes it logical to label trade deficits as negative savings.
Most economists go a step further, asserting that the US deficit is caused by a savings shortage.
But, since one country’s trade deficit is another’s surplus, US Federal Reserve Chairman Ben Bernanke has argued for turning the conventional logic on its head: rather than resulting from a savings shortage, the US trade deficit is the result of a global savings glut – especially in China.
Both stories are flawed.
How does a savings glut translate into exports, given that households do not export?
Likewise, if the US is consuming too much, why has it been closing manufacturing capacity, and why is there so much labor market softness?
Both the savings shortage and savings glut hypotheses confuse accounting outcomes with causes.
Trade deficits reflect transactions between producers and buyers, and those transactions are the result of incentives and price signals.
US consumers buy imports rather than American-made goods because imports are cheaper.
This price advantage is often due to exchange rates in places like China and Japan, whose currencies are undervalued by between 25% and 40%, which often offsets US efficiency advantages.
Undervalued exchange rates are only one of the policies that countries use to boost exports and restrain imports, so that they run trade surpluses, while their trading partners (including the US) run deficits.
Policies aimed at ensuring export-led growth also include export subsidies and barriers to imports.
In the modern era of globalization, export-led growth is supplemented by policies to attract foreign direct investment (FDI), a combination that has been particularly successful in China.
Such FDI policies include investment subsidies, tax abatements, and exemptions from domestic regulation and laws.
These policies encourage corporations to shift output to developing countries, which gain modern production capacity.
This increases developing countries exports and reduces their import demand (or increases it at a lower rate than export growth).
Meanwhile, corporations reduce home country manufacturing capacity and investment, which reduces home country exports while increasing imports.
Once again, China provides clear evidence of these patterns, with almost 60% of Chinese exports being produced by foreign corporations.
This story is fundamentally different from the savings shortage and savings glut hypotheses, and it leads to dramatically different policies.
Developing countries need to grow, but nowadays it is easier to acquire capacity and grow through FDI than it is to develop domestic mass consumption markets.
Consequently, rather than facing a savings glut, the global economy faces a problem of demand failure in developing countries.
The challenge is to get corporations to invest in developing countries, but for purposes of producing for local consumers.
That requires expanding markets in developing countries, which means tackling income inequality and getting income into the right hands – an enormous organizational challenge that is off the radar because economists focus exclusively on savings and supply-side issues.
Labor standards, minimum wages, and unions are part of the solution, as they were in countries that developed successfully.
Unions have historically been especially important since they engage in decentralized wage bargaining that tie wages to firms’ productivity.
Consequently, wages are market sustainable.
Government spending can also help, but its role is limited.
Countries that substitute government spending for market spending either generate inflationary budget deficits, or end up with excessively high tax rates that destroy incentives.
But no solution is possible until we abandon the savings shortage and savings glut hypotheses and connect today’s global financial imbalances with global production patterns and inadequate demand in developing countries.
Tortuous claims that saving is merely the flip side of consumption and investment spending are the economic equivalent of Humpty Dumpty’s argument in Through the Looking Glass : “When I use a word, it means just what I choose it to mean.”
Humpty-Dumpty Iraq
Iraq’s draft constitution will probably be approved in the referendum to be held on October 15.
But whether it is ratified or not ultimately does not matter, as the constitution – and the whole constitution-making process – is totally out of touch with the realities of a country that no longer exists as a coherent body politic.
The problem is not with the constitution, but with the conventional wisdom – almost an idée fixe – that Iraq is a viable modern nation-state, and that all it needs to make it work properly is the right political institutions.
But this is a fallacy, and responsible leaders should begin to think of alternatives.
The Iraqi state, established in the 1920’s by British imperialist planners (with Winston Churchill in the lead), is a strange pastiche of three disparate provinces of the old Ottoman Empire: Mosul in the north with a Kurdish majority, Baghdad in the center with a Sunni Arab majority, and Basra in the south with a Shia Arab majority.
For their own political reasons, the British put the Sunni Arabs – never more than 25% of the population – in control of the whole country, and even imported a Sunni Arab Hashemite prince to rule over their creation.
Ever since, the country could be held together only by an iron fist: Iraq’s history is replete with Shia, Kurdish, and even Christian Assyrian revolts, all put down in bloody fashion by the ruling Sunni minority.
Throughout its history, modern Iraq has always been the most oppressive of the Arab countries.
Saddam’s rule was only the most brutal in a long line of Sunni regimes.
It was this Sunni hegemony – and not merely that of Saddam’s Ba’athist regime – that was toppled by the United States.
But, given Iraq’s history and demography, the American attempt to refashion the country as a functioning democracy has foundered on three shoals: the Shia majority’s empowerment, the Kurds’s refusal to give up their hard-won de facto mini-state in the north, and the Sunnis’ violent campaign to undermine any system that they do not lead.
In short, the draft constitution is an attempt to square a circle.
The Sunni resistance – a guerilla and terrorist war that was well prepared in the last years of Saddam’s rule – will continue to try to subvert any semblance of order representing the current majority Shia-Kurdish coalition.
The Sunnis will go on with their murderous attacks on Shias, Kurds, and the US-led military coalition.
They will probably boycott the constitutional referendum and all subsequent elections, just as they have boycotted the previous elections.
After all, given the brutal logic of their long hegemony in Iraq, why should the Sunnis contemplate submitting to a process that is premised on their minority status, particularly when whole areas of the country are under the effective control of the Sunni insurgency?
Similarly, why should the Shias, for their part, submit to Sunni hegemony rather than building up their own political structure in the south, modeled on what the Kurds have already achieved in the north?
Let’s be frank: Iraq is going the way of Yugoslavia as it disintegrated in the early 1990’s.
This should be acknowledged and ultimately welcomed, despite conventional diplomatic norms regarding the inviolability of the territorial integrity of existing states.&#160;
Of course, such norms are helpful. But once a state disintegrates, as happened in Yugoslavia, no constitutional formulations can save it.
Constitutions works only if all sides have an interest in operating within the proposed framework – and this obviously is not the case in Iraq.
There is nothing sacrosanct in the continued existence of multi-ethnic and multi-religious states if their constitutive groups do not wish to live together.
On the contrary, there are lessons to be learned from the demise of the Soviet Union, Yugoslavia, and even – perhaps especially – Czechoslovakia, which negotiated its break-up without violence.
By contrast, the current Bosnia-Herzegovina is an example of another failed attempt to keep a decrepit multi-ethnic entity alive: it doesn’t work, and the country is held together only by the almost dictatorial power of the international community’s High Representative and the presence of foreign troops.
It is time to face reality: the Kurdish region in the north is functioning in a reasonable way, and it has even been able to allay Turkey’s fears that its existence will aggravate that country’s own Kurdish problem.
With the Shias building their polity in the south, the Sunni areas too should be allowed to go their own way.
This may be more conducive to peace than trying to impose on them a hated occupation or an equally hated Shia hegemony.
The emergence of three states – or highly autonomous regions – instead of a unified Iraq is happening anyway, constitution or no constitution.
Nobody, it appears, can put Humpty-Dumpty Iraq together again.
But it will require courage to acknowledge what is occurring before our eyes, rather than continue to grasp at the chimera of a consolidated Iraqi state.
In fact, to acknowledge the obvious in Iraq is also to recognize that there are grounds for hope.
As in the former Yugoslavia, the separate entities now emerging may stand a better chance of developing a semblance of representative and eventually democratic governance than if Iraq’s warring communities are forced to live together in the prison house that the country has always been for most of its citizens.
Hunting the Higgs
CAMBRIDGE – Fifty years ago, particle physicists faced an unexpected challenge. Their best mathematical models could account for some of the natural forces that explain the structure and behavior of matter at a fundamental level, such as electromagnetism and the weak nuclear force responsible for radioactive decay.
But the models worked only if the particles inside of atoms had no mass.
How could huge conglomerations of such particles – proteins, people, planets – behave as they do if their constituent parts weighed nothing at all?
Some physicists invented a clever workaround.
They suggested that a type of particle exists that had never been detected; it was eventually named in honor of the British physicist Peter Higgs.
For a half-century, physicists searched for the elusive “Higgs particle.”
Now, following research conducted at CERN, the sprawling particle-physics laboratory near Geneva, the hunt may soon be over.
At first blush, the idea behind the Higgs particle sounds outlandish.
Higgs and his colleagues suggested that every elementary particle really is massless, just as the mathematical models require, and hence all particles would ordinarily zip around at the speed of light.
But suppose that everything around us – every single particle in the universe – is immersed in a huge, unseen vat of Higgs particles.
Whenever most kinds of particles move from point A to point B, they continually bump into Higgs particles, slowing their motion.
When we observe them, they appear to lumber along like holiday shoppers in a crowded store.
From their slow motion, we infer that they have mass.
While a 50-year search for a hypothetical particle reminiscent of a bizarre fairytale might seem quixotic, the Higgs particle stands at the center of the “Standard Model” of particle physics.
Every experimental test of the model so far has matched theoretical expectations.
In some striking examples, the agreement between prediction and measurement has stretched out to twelve decimal places, making the Standard Model the most accurate scientific theory in human history.
The model successfully accounts for three of the four basic forces of nature; only gravity remains beyond its purview.
Higgs particles might have played an even more substantial role at earlier moments in cosmic history.
My own research, along with that of physicists around the world, has focused on what effects Higgs particles might have had just fractions of a second after the big bang – effects that could explain the shape and fate of the universe.
And yet, for all that, we still have no direct evidence that Higgs particles even exist.
According to the Standard Model, Higgs particles scatter off each other, so they, too, should have mass.
The latest research indicates that Higgs particles (if they exist) should be among the most massive critters of the subatomic realm, more than 120 times as massive as the familiar proton.
To produce such a particle in the laboratory requires revving up protons to nearly the speed of light and smashing them together, which the Large Hadron Collider at CERN accomplishes trillions of times per second.
The energetic collisions produce all manner of debris, which physicists carefully track with huge detectors and sift with sophisticated computer algorithms.
Physicists confront two major hurdles in their hunt for the Higgs.
First, they must identify patterns in the debris that could have come from the production and rapid decay of a Higgs particle.
The sought-after signal is well understood in principle, given what we know about the Standard Model.
So is the background noise from all of the other junk that comes flying out when two protons collide with colossal energy.
Physicists searching for a few Higgs-like needles in a mind-bogglingly large haystack must comb their data for anomalies in the debris that cannot be accounted for by known processes.
The second difficulty concerns statistics.
The rules of quantum theory, on which the Standard Model is built, are at root probabilistic.
There will always be statistical flukes in the data, just as any series of coin tosses can produce an unexpected string of seven heads in a row.
To know with confidence that the coin is ordinary, with no hidden features, one must log a sufficiently large number of coin flips and check whether the data include equal numbers of heads and tails over the long run.
After thousands of coin tosses, if the data still show a bias toward heads, one may be justified in thinking that the coin has some unusual properties.
The same holds true for all of the chaff from the protons’ collisions.
Before physicists can claim that their anomalies really come from Higgs particles, they must gather enough data to rule out flukes.
At CERN, two independent teams of physicists recently announced that their data were consistent with detection of a Higgs particle, though there remained a 1-in-2,000 chance that the signal came from mundane, non-Higgs processes.
So the teams will continue smashing protons together, gathering more data, and sifting for signs of a Higgs.
We might not have the Higgs in hand right now. But the latest news is the strongest indication yet that the 50-year hunt for one of the most fundamental bits of matter might well be coming to a successful conclusion.
The next time the CERN teams call a press conference, it could be weighty news indeed.
Hu’s Chance
Chinese President Hu Jintao’s upcoming visit to the United States, postponed following hurricane Katrina, will be different from previous bilateral meetings.
This time, the countries’ presidents will meet at a time of intensive American attention to the US-China trade balance and other economic issues, such as protection of intellectual property rights.
With China’s US trade surplus reaching $200 billion last year, American sentiment is growing to take strong measures.
Some have suggested that the trade imbalance is related to China’s currency peg to the US dollar.
A recent Congressional bill has called for imposing a 27.5% punitive tariff on Chinese imports.
In fact, the trade imbalance is more complicated than the currency issue per se.
Globalization has strengthened the ability of capital to flow to wherever investment promises the highest returns; likewise, competitive manufactured products from low-wage economies will flow in the other direction.
That is why China fascinates American investors, among others, and why US customers buy Chinese products.
To be sure, the exchange rate has an impact on investment and trade.
But, even with China’s efforts to loosen the renminbi-dollar linkage, it is arguable whether revaluation could save American jobs or improve the US trade balance.
After all, China is not alone: India and other competitive developing countries pose a similar challenge to the US.
Nevertheless, for China’s part, now seems to be a good time to reflect on how to increase its exports’ value-added, as well as focusing on environmental protection and sustainability.
Thus, there is scope for a compromise that recognizes both sides’ legitimate concerns.
The Chinese government is hastening its shopping spree in America these days, pushing up the renminbi’s exchange rate slowly but steadily.
A sensible US policy on China may be to accept gradual currency appreciation, rather than a large revaluation, as America’s economic vitality stems from its own innovation rather than from concessions by the Chinese government.
A more difficult issue for Hu could be intellectual property rights.
China’s recent campaign to crackdown on pirating needs to be encouraged, but far more needs to be done.
However, while the US government and American companies question whether the Chinese are willing and able to enforce such rights, one must put this issue into historical perspective.
Intellectual property protection is related to economic development, so the question should be whether China has reached the stage at which effective protection is possible.
There is a positive side to such problems, however, namely that their very emergence reflects the deepening and broadening of bilateral relations.
Indeed, Sino-US interaction has been so strong that the two presidents met five times last year.
While those meetings also highlighted trade disputes, they also yielded heightened cooperation and significant accomplishments.
For example, the two states share a common interest in anti-terrorism efforts, and they have been collaborating to ensure container security and combat human trafficking.
Their coordinated efforts to divert North Korea peacefully from its nuclear course have also vindicated bilateral cooperation when both sides can define a common security stake.
Similarly, the two countries have a common interest in stabilizing mainland China’s relations with Taiwan.
The current formula, maintaining the status quo, offers the highest common denominator.
With this strategic understanding, there is good reason to expect that Hu’s talks with Bush on Taiwan’s recent termination of the National Unification Council will serve to reduce tensions.
China and the US both have much to gain by thwarting Taiwan’s move toward independence.
Nevertheless, to American eyes, other contentious issues are now emerging in relations with China.
The recently released National Security Strategy outlines three, in particular: China’s global trade expansion, its military transparency, and its relations with “misruling” states.
The political cost of a serious compromise on these matters would be too high for China, but it does no harm to analyze them and find ways to enhance dialogue.
Among the three issues, military transparency seems to be the most sensitive and difficult to address.
Nevertheless, given the large size of China’s armed forces, which currently stands at 2.3 million, a rough calculation would indicate that monthly spending per soldier is at most 2,500 yuan on average – too low to recruit and retain competitive staff.
But if China wants to raise the military budget to improve the quality of its army, the conflict with the demands of fiscal stability could make military transparency important for domestic reasons, and China might no longer view it as being off limits in its relations with the US.
Above all, we must bear in mind the maturation of Sino-US relations in recent years.
A mature bilateral relationship is one in which even difficult issues can be discussed routinely and promptly.
There is no question that such a framework has already been established in relations with the US.
We will now see how Hu uses that framework – and thus what imprint he leaves on the bilateral relationship – in meeting the current challenges.
Hypocrisy and War
MELBOURNE – All the world hates a hypocrite.
When states preach virtues they do not practice, or set lower hurdles for allies, trading partners, or co-religionists than they do for others, irritation and non-cooperation are the least they can expect.
International policymaking is a hardheaded, cynical business, but tolerance for double standards has its limits.
Russia discovered that when it invoked the “responsibility to protect” doctrine to try to justify its 2008 invasion of Georgia.
Democracy promotion by the United States and the European Union generates ridicule when it extends only to elections producing winners found palatable, as Gaza’s vote for Hamas in 2006 did not.
Nuclear-weapons states keep learning the hard way that strengthening the non-proliferation regime is a tough sell when they drag their feet on disarmament.
And the invasion of Iraq in 2003 is a gift that keeps on giving to the world’s malcontents: embracing the Security Council only when you get your way, but ignoring or undermining it when you don’t, is no way to promote a cooperative rule-based international order.
But in the real world, how consistent is it possible to be in responding to genocide and other mass atrocities, treaty breaches, border violations, or other serious trespasses against international law?
To demand that every case that seems to look alike be treated alike might set the bar impossibly high, and certainly runs the risk of becoming hostage to critics – like those who attack the intervention in Libya – who assert that if you can’t act everywhere, you shouldn’t act anywhere.
The hardest cases, always generating the strongest emotions, involve the coercive use of military force.
Why strike in Libya but not in Darfur – or in Yemen, Bahrain, or Syria?
If military intervention in Libya and Côte d’Ivoire were correct decisions, why wasn’t the Iraq invasion in 2003, given Saddam’s many crimes?
What credence can the responsibility to protect have when we know that however bad things get in Tibet, Xinjiang, or the Northern Caucasus, military action against China or Russia will always be off limits?
Former US President George W. Bush famously did not “do nuance.”
Nor do most of the world’s foreign-policy pundits.
But nuance is exactly what is required.
And there are tools for applying it in the five tests of legitimacy for the use of force – in any context, not just mass atrocity crimes – recommended by former United Nations Secretary-General Kofi Annan and the High Level Panel he appointed to advise the 2005 World Summit on reforms to the global security system.
These guidelines have not yet been formally adopted by the General Assembly or the Security Council, and remain only background noise in current international debates.
But their practical utility, combined with long philosophical pedigree, justifies much greater visibility.
The first test is seriousness of risk: Is the threatened harm of such a kind and scale as tojustify prima facie the use of force?
The risk of an imminent civilian bloodbath was as real in Benghazi and Abidjan last month as it was in Rwanda in 1994.
By contrast, there was no such imminent risk in Iraq in 2003, though there certainly had been a decade and more earlier for the country’s northern Kurds and southern Shiites.
The current situations in Bahrain, Yemen, and Syria are on the cusp: ugly, but smaller in scale and perhaps retrievable by pressure short of military action (of which the US and its allies could usefully apply much more).
The second test is whether the primary purpose of the proposed military action is to halt or avert the threat in question.
Libya passes, as would most other recent cases: had oil – or regime change – been the primary motivation, the Arab League and the Security Council would never have endorsed military intervention.
Russia, by contrast, found it hard to find any takers for its assertion that civilian protection was the primary rationale for its South Ossetian adventure in 2008.
The third test whether every non-military option has been explored and found wanting.
Libya again followed the textbook: Resolution 1970 applied targeted sanctions, an arms embargo, and the threat of prosecution at the International Criminal Court to concentrate Col. Muammar el-Qaddafi’s mind on civilian protection.
Only when that failed did Resolution 1973 embrace the military option.
In Iraq in 2003, lesser options had far from run their course, which is arguably true now in Bahrain, Yemen, and Syria.
The fourth test is one of proportionality: Are the scale, duration, and intensity of the proposed military action the minimum necessary to meet the threat?
As military stalemate looms in Libya, there will be a growing temptation to stretch the UN’s legal authority – and the moral and political support that goes with it – to the breaking point, and NATO is now close to that line.
It must not cross it if it wants to preserve its own credibility, and the world’s capacity for intervention in similar conscience-shocking cases.
The final, and usually toughest, legitimacy test attempts to balance the consequences: Will those at risk be better or worse off?
This was always the showstopper in Darfur: any attempted invasion of Sudan would have been disastrous for the two million displaced people, and would have re-ignited the country’s even deadlier north-south conflict.
This test explains the effective impunity of China, Russia, or any other major power; however badly it behaves internally, any attempted invasion would trigger a much larger conflagration.
Resolving Libya’s agony will take more than military action.
But, as in Côte d’Ivoire, it is hard to argue that the use of force will cost more lives than it will save.
Steering a course between double-speak and necessary selectivity is hard.
But, when examined against the right criteria, cases that initially look alike are often very different.
Even when they’re not, a higher principle surely comes into play.
When our common humanity is under threat, even if we can’t do everything we should, shouldn’t we at least do what we can?
Hypocrisy on the High Seas?
Thirty years ago, Australian vessels, with the government’s blessing, killed sperm whales off the West Australian coast.
Last month, Australia led international protests against Japan’s plan to kill 50 humpback whales.
Japan, under mounting pressure, announced that it would suspend the plan for a year or two.
The change in public opinion about whaling has been dramatic, and not only in Australia.
Greenpeace began the protests against Australian whaling, and the government appointed Sydney Frost, a retired judge, to head an inquiry into the practice.
As a concerned Australian and a philosophy professor working on the ethics of our treatment of animals, I made a submission.
I did not argue that whaling should stop because whales are endangered. I knew that many expert ecologists and marine biologists would make that claim.
Instead, I argued that whales are social mammals with big brains, capable of enjoying life and of feeling pain – and not only physical pain, but very likely also distress at the loss of one of their group.
Whales cannot be humanely killed – they are too large, and even with an explosive harpoon, it is difficult to hit the whale in the right spot.
Moreover, whalers do not want to use a large amount of explosive, because that would blow the whale to pieces, while the whole point is to recover valuable oil or flesh.
So harpooned whales typically die slowly and painfully.
Causing suffering to innocent beings without an extremely weighty reason for doing so is wrong.
If there were some life-or-death need that humans could meet only by killing whales, perhaps the ethical case against it could be countered.
But there is no essential human need that requires us to kill whales.
Everything we get from whales can be obtained without cruelty elsewhere.
Thus, whaling is unethical.
Frost agreed.
He said that there could be no doubt that the methods used to kill whales were inhumane – he even described them as “most horrible.”
He also mentioned “the real possibility that we are dealing with a creature which has a remarkably developed brain and a high degree of intelligence.”
Prime Minister Malcolm Fraser’s conservative government accepted his recommendation that whaling be stopped, and Australia soon became an anti-whaling nation.
While Japan has suspended its plan to kill humpback whales, its Japanese whaling fleet will still kill about 1,000 other whales, mostly smaller minke whales.
Japan justifies its whaling as “research,” because the International Whaling Commission’s rules allow member nations to kill whales for such purposes.
But the research seems to be aimed at building a scientific case for a resumption of commercial whaling; so, if whaling is unethical, then the research itself is both unnecessary and unethical.
Japan says that it wants the discussion of whaling to be carried out calmly, on the basis of scientific evidence, without “emotion.”
The Japanese think that humpback whale numbers have increased sufficiently for the killing of 50 to pose no danger to the species.
On this narrow point, they might be right.
But no amount of science can tell us whether or not to kill whales.
Indeed, Japan’s desire to continue to kill whales is no less motivated by “emotion” than environmentalists’ opposition to it.
Eating whales is not necessary for the health or better nutrition of the Japanese.
It is a tradition that they wish to continue, presumably because some Japanese are emotionally attached to it.
The Japanese do have one argument that is not so easily dismissed.
They claim that Western countries object to whaling because, for them, whales are a special kind of animal, as cows are for Hindus.
Western nations, the Japanese say, should not try to impose their cultural beliefs on them.
The best response to this argument is that the wrongness of causing needless suffering to sentient beings is not culturally specific.
It is, for example, one of the first precepts of one of Japan’s major ethical traditions, Buddhism.
But Western nations are in a weak position to make this response, because they inflict so much unnecessary suffering on animals.
The Australian government strongly opposes whaling, yet it permits the killing of millions of kangaroos each year – a slaughter that involves a great deal of animal suffering.
The same can be said of various forms of hunting in other countries, not to mention the vast amount of animal suffering caused by factory farms.
Whaling should stop because it brings needless suffering to social, intelligent animals capable of enjoying their own lives.
But against the Japanese charge of cultural bias, Western countries will have little defense until they address the needless animal suffering in their own backyards.
Stopping a Dirty Bomb
VIENNA – Nuclear terrorism is, in the words of US President Barack Obama, “the gravest danger we face.” But while few would dispute this characterization, the world has unfinished business in minimizing the threat.
Ten years after world leaders agreed to amend the landmark 1987 Convention on the Physical Protection of Nuclear Material (CPPNM) to make it harder for terrorists to obtain nuclear material, the new measures have yet to enter into force.
The resulting vulnerability needs to be addressed urgently.
In July 2005, signatories to the CPPNM agreed to amend the Convention to address the risk of terrorism more effectively.
The new measures that were introduced would make it more difficult for terrorists to cause a widespread release of radioactive material by attacking a nuclear power plant or detonating a radioactive dispersal device – commonly known as a dirty bomb.
But before the amendment can enter into force, two-thirds of the 152 signatories to the original convention must ratify it.
While significant progress has been made – in July, the US, Italy, and Turkey did so – at least 14 more countries are needed.
The fact that there has never been a major terrorist attack involving nuclear or other radioactive material should not blind us to the severity of the threat.
There is evidence that terrorist groups have tried to acquire the material needed to construct a crude nuclear explosive device, or a dirty bomb.
In 2011, for example, Moldovan police seized highly enriched uranium from a group of smugglers who were trying to sell it.
The smugglers, exhibiting a worrying level of technical knowledge, had tried to evade detection by building a shielded container.
In this case, the story ended happily.
Thanks to efforts by Moldova, with the assistance of the International Atomic Energy Agency, to boost its nuclear security capabilities, the material was identified and confiscated, and the smugglers were arrested.
There is no way to know whether the smuggling effort uncovered in Moldova is an outlier or the tip of a very large iceberg.
But one thing is certain: the amount of nuclear material in the world is increasing.
Since 1999, the amount of such material being used for peaceful purposes has increased by 70% – a trend that will continue as the use of nuclear power grows.
It is essential that effective measures are in place to ensure that these materials are not misused or misplaced, whether accidentally or intentionally.
Since 1995, the IAEA’s member states have reported nearly 2,800 incidents involving radioactive material escaping regulatory control.
Although only a handful of these incidents involved material that could be used to make a nuclear explosive device, a relatively small amount of radioactive material could be combined with conventional explosives to create a dirty bomb.
Such a weapon could be capable of killing many people, contaminating large urban areas, and sparking mass panic.
Much has been achieved in the secure management of nuclear material since the attacks on the United States in September 2001 prompted a renewed focus on the risks of terrorism.
Many countries have instituted effective measures to prevent the theft, sabotage, or illegal transfer of nuclear or other radioactive material, and security at many nuclear facilities has been improved.
But much more needs to be done.
The original Convention focused only on the international transport of nuclear material, and did not cover the protection of nuclear facilities. The amendment adopted ten years ago would oblige countries to protect nuclear facilities and any nuclear material used, stored, or transported domestically.
It would expand cooperation on locating and recovering stolen or smuggled nuclear material and coordinate the response to any attack on a nuclear facility.
It would also make nuclear trafficking a criminal offense and require signatories to cooperate on improving national systems of physical protection and minimizing the consequences of sabotage.
Protecting nuclear material is not just an issue for countries that use nuclear power.
Terrorists and criminals will try to exploit any vulnerability in the global security system.
Any country, in any part of the world, could find itself used as a transit point – just as any country could become the target of an attack.
Effective international cooperation is critically important.
The consequences of a major security failure could be a catastrophe that transcends borders.
All countries must take the threat of nuclear terrorism seriously.
The single most effective way to do so would be to ensure that the amendment to the CPPNM enters into force as soon as possible.
America’s Late Imperial Dilemma
NEW YORK – US President Barack Obama is under attack – from so-called liberal hawks, more or less to the left of center, as well as from active interventionists on the right – for being a weak president, leading a war-weary (even world-weary) America in retreat.
Obama’s critics, whether on the left or the right, believe that the United States has a unique calling to impose its will on the world.
The only difference is that the former justify their views with talk of democracy and human rights, while the latter do not need any such justification, because, after all, America is the greatest country on earth.
Either way, the premise that the US should lead forcefully rests on the idea that without a benevolent hegemonic power to police the world, chaos will ensue and more malevolent forces will take over.
This opinion was expressed most clearly in a recent article by the conservative foreign-policy thinker Robert Kagan.
Kagan’s argument is that other countries cannot be relied upon to behave responsibly without strong US leadership.
Like other hawks, he warns not only that dictators will behave badly if given the chance, which is certainly plausible, but also that democratic allies need to be kept in their place by a firm hegemonic hand.
In East Asia, for example, China must be “hemmed in” by strong US allies.
But if Japan, America’s main ally in the region, were “much more powerful and much less dependent on the United States for its security,” it, too, should not be trusted.
Kagan may be right in thinking that a precipitous US retreat from East Asia could have dangerous consequences.
But this argument has the familiar whiff of the late stages of empire.
The European imperial powers of the twentieth century would periodically hold out the distant prospect of independence to their colonial subjects – but not yet, not before they were ready, not before their Western masters had educated them to take care of themselves responsibly.
How long this education might take was anybody’s guess.
That is the paradox of imperialism.
As long as the colonized are under the imperial cosh, they can never truly be ready, because the authority to run their own affairs, responsibly or not, was taken away from them.
Empires can impose order and stability for a long time; but imperialists – rather like many Americans today – become tired, and their subjects grow restless.
The imperial order becomes brittle, and, as Kagan rightly notes, when the old order finally breaks down, mayhem often follows.
That happened in India in 1947, when the British left, Pakistan broke away, and roughly a million Hindus and Muslims died in mutual slaughter.
But does this really mean that the British Raj should have lasted longer?
If so, how much longer?
It is just as plausible to argue that prolonged imperial rule could have made ethnic tensions worse.
After all, those tensions were largely the result of colonial divide-and-rule policies.
So it is today, to some degree, with Pax Americana – a kind of imperial world order that was never a formal empire.
Compared to most previous empires, it was relatively benign, though it is too easily forgotten how often the leader of the “Free World” subverted elected leaders and supported dictators, as in Chile, South Korea, El Salvador, Argentina, Indonesia, Guatemala, and so on.
The much-vaunted “liberal order” policed by the US was a product of World War II and the Cold War.
Germany and Japan had to be kept down, the Communist powers had to be contained, and the old countries of Europe had to learn to live with one another under unifying pan-national institutions.
All of this was made possible by American money and military might.
As a result, the Free World, in Western Europe and East Asia, became a US dependency.
This cannot go on forever.
Indeed, the arrangements are already fraying.
But then comes the old imperial paradox.
The longer others remain dependent on the US, the less capable they will be of taking care of their own affairs, including their security.
And, like an authoritarian parent, the US itself, despite its admonitions to its allies to pull their weight, is often loath to let go of its increasingly unruly dependents.
When a new government came to power in Japan in 2009 and tried to break the postwar mold by initiating better relations with China and seeking to reduce its dependence on the US, the Obama administration sought to undermine this effort.
The informal empire would not stand for that kind of insubordination.
In his recent foreign-policy speech at the US Military Academy at West Point, Obama barely mentioned East Asia.
But if any region would benefit from the Obama doctrine, which promises to shift from military to more political approaches to regional problems, it is East Asia.
Still, Obama’s instincts are right.
At least he has recognized the limits of America’s power to impose a global order by force.
His success as a president rests less on the good things he has done (although he has done plenty) than on the stupid things he has avoided, like getting into more unnecessary wars.
This does not resolve the late imperial dilemma of how to reduce dependency on the hegemon without causing more tyranny and violence.
But that painful and risky process will have to be launched eventually, and it will be better served by Obama’s brand of caution than by the tough talk of his critics.
East Asia’s Sins of the Fathers
NEW YORK – One way to look at the growing military tensions over a few tiny islands in the East China Sea is to see in recent events a straightforward case of power politics.
China is rising, Japan is in the economic doldrums, and the Korean peninsula remains divided.
It is only natural that China would try to reassert its historical dominance over the region.
And it is just as natural for Japan to feel nervous about the prospect of becoming a kind of vassal state (the Koreans are more accustomed to this role, vis-à-vis China).
Being subservient to American power, as Japan has been since 1945, was the inevitable consequence of a catastrophic war.
Most Japanese can live with that.
But submission to China would be intolerable.
And yet, because East Asian politics remains highly dynastic, a biographical explanation might be just as useful.
Shinzo Abe, the Japanese prime minister, is the grandson of Nobusuke Kishi, once the top industrial bureaucrat of wartime Japan.
Imprisoned by the Americans as a war criminal in 1945, Kishi was released without trial at the beginning of the Cold War, and was elected Prime Minister as a conservative in 1957.
Kishi was a nationalist with fascist tendencies during the 1930’s and 1940’s.
After the war, an equally deep aversion to Communism made him a staunch ally of the United States; Richard Nixon became a close friend.
His lifelong quest was to revise the pacifist Japanese constitution, written by the Americans just after the war, and turn Japan into a proud military power once more.
Abe’s greatest wish is to complete the project that eluded his grandfather: abandon constitutional pacifism and bury the war crimes of Kishi’s generation, while remaining allied with the US against China.
As a right-wing nationalist, Abe feels compelled to resist the dominance of China, if only rhetorically for the time being.
One of Kishi’s greatest Cold War allies – apart from Nixon – was the South Korean strongman President Park Chung-hee, who came to power in a military coup a year after Kishi resigned as prime minister.
Park, too, had a dubious wartime career.
Under the Japanese name of Takagi Masao, he served as an officer in the Japanese Imperial Army.
He graduated from a military academy in Manchuria, where Kishi had once ruled over an industrial empire that was built on Chinese slave labor.
Like Kishi, Park was a nationalist.
But, apart from his sentimental wartime connections to Japan, his anti-Communism was incentive enough to continue warm relations with the imperial power that had brutally colonized Korea for a half-century.
Park Geun-hye, South Korea’s current president, is his daughter.
Park Geun-hye adored her father at least as much as Abe loved his grandfather, but the result of her dynastic connection is the opposite of Abe’s.
To be seen as a Korean nationalist today, she must distance herself from some of her father’s political ties, especially his links with Japan.
Though still admired by many South Koreans for rebuilding the country from the ruins of war, his legacy, like that of many members of the old conservative elite, is tainted by wartime collaboration.
So his daughter must confront Japan over territorial disputes, to avoid inheriting the stigma of her father’s colonial past.
The case of the current Chinese leader, Xi Jinping, is perhaps the most complicated of the three.
His father, Xi Zhongxun, was one of the top leaders of the Communist revolution.
A guerilla leader in the war against Japan, he helped to defeat Chiang Kai-shek’s Nationalists in China’s civil war, became a member of the Central Committee, and then chief of propaganda, Vice Premier, and Governor of Guangdong.
An impeccable Communist career, one might think, giving his son no need to distance himself or to complete a frustrated ambition.
But Xi’s nationalism, too, has a history.
Chairman Mao’s main aim was to consolidate his revolution at home.
His nationalist credentials were so impressive that he could afford to be relatively easy on former enemies.
Territorial disputes over unimportant islands could be laid to rest.
He did not even bother to reclaim Hong Kong from the British.
It was only when Deng Xiaoping opened the door to trade with capitalist countries that anti-Japanese sentiments were deliberately stirred up.
Neither Marxism nor Maoism could be used to justify China’s joining the capitalist world.
This left an ideological vacuum, which old-fashioned nationalism soon filled.
The more the leadership opened up the Chinese economy, the more it stoked popular anger over past wrongs, especially those committed by Japan.
The man who was most responsible for Deng’s Open Door policies was none other than Xi’s father, Xi Zhongxun.
Always a pragmatic Communist, the elder Xi had been the target of several purges under Mao, when relative moderates were frequently denounced as counterrevolutionaries.
His son appears to follow in this pragmatic tradition, open to business with the world.
That is why he, too, like Deng’s reformers, must burnish his nationalist credentials by standing up to Japan and asserting Chinese dominance in East Asia.
None of these leaders – Xi, Abe, or Park – wants a real war.
Much of their posturing is for domestic consumption.
One reason why they can engage in this dangerous brinkmanship is the continuing presence of the US as the regional policeman.
America’s armed forces are the buffer between the two Koreas, and between China and Japan.
The US presence allows East Asia’s rival powers to act irresponsibly.
The only thing that might change their behavior would be US withdrawal of its military force.
In that case, the three countries would have to come to terms with one another by themselves.
But that is still regarded by the Americans, Japanese, Koreans, and probably even the Chinese as too much of a risk.
As a result, the status quo is likely to persist, which means that nationalist grandstanding over conflicting territorial claims is far from over.
Abe’s Long March
TOKYO – Japanese Prime Minister Abe Shinzo’s coalition government has decided to “reinterpret” the postwar Japanese constitution.
According to Article 9 of the constitution, drafted by American lawyers in 1946, when Japan was under Allied occupation, Japan renounces “war as a sovereign right of the nation and the threat or use of force as means of settling international disputes.”
The new interpretation would allow Japan to use military force in support of an ally if Japanese security is under threat.
Abe chose to reinterpret the constitution because revising it would require the approval of two-thirds of the Japanese Diet.
Given that most Japanese are still allergic to military force, securing the necessary votes would have been impossible.
The reinterpretation will almost certainly result in protests from China and South Korea against resurgent Japanese militarism.
Because Abe is the nationalist grandson of a former prime minister who was once arrested as a war criminal, and because he has paid public tribute to soldiers who died for the emperor in World War II, these protests might seem reasonable.
Abe’s break with Japan’s pacifist consensus is beyond doubt.
But the circumstances under which Japan would use force are so restricted that a revival of militarism is still a very long way off.
More worrying is the effect on Japanese democracy: Elected governments do not simply change the meaning of the constitution without even bothering to get parliamentary support.
There is, however, an odd contradiction in Abe’s nationalism.
Constitutional pacifism was part of the postwar order imposed by the United States during occupation and largely supported by the Japanese people, who were tired of war.
Unlike in Germany, Japan had no Hitler or Nazi party on which to blame their wartime atrocities.
What needed to be purged instead, postwar reformers believed, was a specific form of Japanese militarism, rooted in emperor worship, the samurai tradition, authoritarian “feudalism,” and so on.
Much in the remaking of Japan after 1945 is still to be admired: democracy, women’s suffrage, land reform, freedom of speech.
But taking away Japan’s sovereign right to use military force had one major consequence: Japanese security was put almost entirely into American hands, reducing Japan to the status of a vassal state.
That is why the main goal of nationalist-minded Japanese leaders, starting with Abe’s grandfather, Nobusuke Kishi, has been the return of full Japanese sovereignty by revising Article 9.
That was not possible when Kishi was prime minister in the late 1950s.
The Japanese were not ready for it and Kishi was tainted by his wartime record as Minister of Munitions.
Abe’s dream is to make it happen now – and to go further.
He would like to restore some aspects of an older Japan, discredited by Japanese military behavior, such as patriotic pride, a more central role for the imperial institution, and even a reappraisal of Japan’s wartime record itself.
Hence his tributes to the Yasukuni Shrine, where the souls of imperial soldiers, including notorious war criminals, are worshipped.
Many Asians, including some Japanese, see this as a sign of new militarism.
Abe would like it to be viewed as an attempt to restore Japan’s international reputation as a “normal country.”
But Abe’s idea of normality is not yet shared by the majority of Japanese, let alone other Asians.
The contradiction in Abe’s nationalism is this: even as he talks about sovereignty regained and patriotic pride, he has done nothing to distance Japan from the postwar dominance of the US.
On the contrary, his reinterpretation of the constitution is meant to help the US in its military policing of East Asia.
In fact, what appears to be driving Abe’s endeavors even more than the desire to revise the postwar order in Japan is a widely shared fear of China’s increasing regional dominance.
A cursory glance at the Japanese press, or even the kind of books piled high in Japanese bookstores, shows just how frightened the Japanese are.
All of the talk in Tokyo is about Chinese aggression in the East and South China Seas.
Abe’s reinterpretation, then, is not really a radical departure from the postwar order at all.
China’s growing power has actually reinforced Japanese dependence on the US for its security.
Japan’s main worry is that the US may not wish to risk a war with China over territorial disputes in the East China Sea.
What is feared most, in addition to the rise of China, is the possible decline of the US.
The Japan-US alliance is an irritation to the Chinese, who would like the US to get out of the way, in order to be Asia’s dominant player.
Or so they say in public.
In fact, Chinese attitudes may be more complicated and less unified than they seem.
Indeed, China faces a rather stark choice. Either it must live with the continued Pax Americana in Asia, for as long as it lasts, or face a more independent, nuclear-armed Japan.
Privately, many Chinese might still prefer the former.
This may seem to be the most stable solution.
In fact, it is fraught with danger.
To be sure, the US military presence still imposes a certain order with which most parties can live; but it risks dragging the world’s largest military power into petty regional conflicts, a prospect that should alarm us one century after 1914.
Reading Israel from Left to Right
NEW YORK – Israel’s current government and its supporters in the West are quick to denounce criticism of Israeli policies as anti-Semitism.
This can be inaccurate and self-serving, but it is not always wrong.
Israel’s defenders are right to point out that public opinion in Europe, and to a much lesser extent in the United States, tends to be much more critical of Israeli atrocities in Gaza than about bloodier violence committed by Muslims against Muslims in other parts of the Middle East.
This can be explained by the fact that Israel is supported by Western governments and generously subsidized by American taxpayers.
There is not much that public outrage can do about the behavior of Iranian mullahs or Syrian thugs.
But Israel is “one of us.”
To be sure, excessive zeal in denouncing Israel, and cheap comparisons between Israeli violence and Nazi mass murder, betray a dubious urge to throw off the burdens of guilt.
After decades of feeling obliged to drop the collective European head in shame for what was done to the Jews, people can finally say with an element of glee that Jews can be murderers, too.
But, though unseemly, this is not necessarily anti-Semitic.
Anti-Zionism takes a nasty turn to anti-Semitism when it conflates Jews with Israelis – for example, when the British Liberal Democratic politician David Ward criticized “the Jews” for inflicting horrors on the Palestinians.
And, while one can be skeptical about Zionism as a historical project, to deny Israel’s right to exist is hard to distinguish from anti-Semitism.
The most sinister form of anti-Zionism is to be found among leftists who see Israel and the US as the planet’s twin evils.
Those who see dark American forces behind all that is wrong with the world, from financial crashes to the violence in Ukraine, are prone to detect the malign hand of Israeli or even Jewish lobbies in every US policy.
The link between corrupting Jewish influence and the US was originally a right-wing trope.
Jews were supposedly rootless, clannish, and omnipotent, with no loyalty to any nation.
The immigrant society of the US was seen as rootless by definition.
In the view of early-twentieth-century right-wing European nationalists, Anglo-American capitalism, controlled by Jews, undermined the sacred ties of blood and soil.
This worldview also blamed the Jews for Bolshevism, which might seem like a contradiction, but is not.
Bolshevism, like capitalism, was internationalist, at least in theory.
(Joseph Stalin was actually a Soviet nationalist who also denounced Jews as rootless cosmopolitans.)
The dangers of zealous anti-Semitic attacks on Israel are obvious.
If Israel was&nbsp;not just a fearful nation oppressing the Palestinian people, but the source of all evil, any form of violence, however destructive of self and others, could be justified.
If the Israel Defense Forces were the modern equivalent of the Nazis, it should be smashed with maximum force.
If all Jews were responsible for the oppression of Arabs, attacks on Jews in Europe, or anywhere else, should be condoned, if not actively encouraged.
The number of people in the West who really hold such beliefs is, I believe, small.
Such people exist in universities.
They write blogs.
They march together in demonstrations with some indisputably anti-Semitic Islamist militants.
But they are far from the mainstream.
Remarkably, some of Israel’s most ardent admirers are now to be found on the right – and even the far right.
Quite a few are members of political parties with a profoundly anti-Semitic provenance, such as Austria’s Freedom Party, whose early members included former Nazis.
The Freedom Party leader, along with such luminaries of the populist right as Filip Dewinter, the Flemish nationalist leader, and the Dutch demagogue Geert Wilders, have visited the West Bank and voiced their support for Israeli settlements.
This can be explained partly by antagonism against Islam.
Right-wing populists in Europe regard Islam as the greatest threat to the West.
So, naturally, they applaud the Israeli government for using harsh measures to keep the Arabs down.
As Wilders put it, the Israelis “are fighting our fight.
If Jerusalem falls, Amsterdam and New York will be next.”
But the main reason for this new solidarity between Western right-wing populists and the state of Israel might lie deeper than shared antipathy toward Islam.
No state is static, and Israel has changed a great deal since the heroic decades after its founding in 1948.
In the early years, Israel was admired by Western leftists for being a progressive state, run by Polish and Russian socialists.
Today’s Israeli leaders, however, in their rhetoric and behavior, often sound more like the old European anti-Semites.
Israeli Jews are now firmly rooted in their own national soil.
But the ruling ideology is no longer socialism; it is a form of ethnic nationalism, with a great deal of military swagger.
No wonder, then, that Israel’s current admirers have a distinctly illiberal cast.
They reflect current mainstream opinion more than leftist anti-Zionists do.
The world is increasingly fragmenting, with fearful people embracing smaller, defensive identities: Scottish, Catalan, Flemish, Sunni, Shia, Kurdish, and so on.
The idealistic internationalism of the early postwar years is collapsing fast.
Tribal feelings – national, ethnic, and religious – are filling the vacuum.
And, most ironic of all, Israel, a nation-state built by a people despised for their cosmopolitanism, has become a prime symbol of this disturbing trend.
Sorry for Nothing
NEW YORK – Japanese Prime Minister Shinzo Abe is once again stirring Asia’s cauldron of national rivalries and historical resentments.
This time, he has instructed a committee of historians to reexamine the official apology delivered in 1993 to World War II-era sex slaves held in Japanese military brothels.
It is clear from various recent statements that some of Abe’s closest advisers believe that the apology was not in order, so the committee might well conclude that Japan was never officially involved in prostitution, and that its “sincere remorse” should therefore be withdrawn.
What perverse reason could Abe have for pursuing such an outcome?
Glossing over, or denying, dark chapters of national history is not unique to Japan, of course.
There is no room for Stalin’s mass murders in the kind of “patriotic” education favored by Russian President Vladimir Putin.
And the Tiananmen Square Massacre, to name but one bloody event in China’s recent past, has been officially forgotten.
Still, Japan is a democracy, with freedom of expression.
The official apology made in 1993 was prompted by a Japanese historian’s discovery of documents showing that the Imperial Japanese Army had been directly involved in setting up, though not necessarily in running, what were known as “comfort stations.” One of the official reasons was that widespread rape of Chinese women by Japanese soldiers was provoking too much resistance among the local population.
Various means were used to stock the brothels with young women.
But, because there was no escape, the women, once ensnared in the system, were effectively slaves.
This has been officially admitted, so why reopen the ghastly business now, at a time when rescinding the apology would make Japan’s already-strained relations with China and South Korea many times worse?
If Abe and his allies were cosmopolitan in their outlook, with a deep understanding of, or concern for, other countries, the decision to revisit the 1993 apology would indeed be extraordinary.
But, as is true of many political leaders, especially on the nationalistic right, they are chauvinistic provincials whose concerns are almost entirely domestic. In their efforts to revise the historical record, they are not really thinking of Koreans or Chinese, but of political adversaries at home.
The views of the Japanese on their country’s wartime history are deeply divided, reflecting political battle lines drawn in the immediate aftermath of the war, when Japan was under Allied occupation.
The United States, which ran the occupation, was keen to reform Japanese society in such a way that another war would be unthinkable.
Worship of the emperor was abolished, though Hirohito remained on his throne.
Education was purged of all militaristic and “feudal” elements, including favorable references to the samurai spirit.
A new pacifist constitution, written by the Americans, banned the use of armed force.
And Japan’s wartime leaders were tried in Tokyo by Allied judges for “crimes against peace” and “crimes against humanity.”
Most Japanese, heartily sick of war and military bullying, were happy to go along with all of this.
But there was always a right-wing minority that felt humiliated and resentful of the loss of national pride and, more important, national sovereignty, for Japan’s security would henceforth have to depend entirely on the protection offered by the US.
One of the main leaders of this group of disgruntled nationalists was Nobusuke Kishi, Abe’s grandfather.
Kishi’s aim was to regain Japanese pride and sovereignty by revising the constitution and reviving old-fashioned patriotism, thus undoing some of the American educational reforms. He failed, because most Japanese were still allergic to anything that smacked of militarism.
Until not long ago, there was a strong left-wing current in education and some of the media that used Japan’s horrendous wartime record as an argument against any kind of revisionism.
But, as long as the Japanese left used history to make this political argument, the nationalists pushed back by claiming that stories of wartime atrocities had been greatly exaggerated.
Books about the infamous Nanking Massacre of 1937, or the enslavement of “comfort women” in military brothels, were denounced as “historical masochism” or dismissed as “the Tokyo Trial View of History.”
The left was accused of being complicit in spreading foreign – Chinese, Korean, or American – propaganda.
This, then, is the modern Japanese version of populism: the “liberal elites,” by falsifying the history of Japan’s glorious war to “liberate Asia,” undermined the Japanese people’s moral fiber.
Because the ideological collapse of left-wing politics in Japan has been as precipitous as in much of the Western world, the so-called liberal elites have lost much of their former influence.
As a result, the voice of the nationalist right has grown louder in recent years.
That is why Abe can get away with appointing cronies to the board of NHK, the national broadcasting company, who openly claim that the military brothels were an entirely private enterprise and that the Nanking Massacre was a foreign fabrication.
Historical truth is not the point; political mastery is.
Japan’s prime minister is playing a risky game.
He is upsetting allies in Asia, embarrassing the US, and making bad relations with China even worse. Like Putin, he is driving himself and his country into further isolation for entirely domestic reasons.
In a region increasingly dominated by Chinese power, he will be without Asian friends.
And that is where Abe’s behavior becomes truly perverse.
After all, a Japan that is isolated in Asia will be even more dependent on the US, the wartime victor, which Abe and his nationalist allies hold responsible for the postwar order that they seek to revise.
Diplomats Behaving Badly
NEW YORK – Diplomats, normally discreet figures who rarely court publicity, have been in the news a lot lately, for all the wrong reasons.
Two recent arrests of diplomats by their host countries have put a spotlight on the justification for, and limits of, the immunity from local law that such officials typically enjoy.
In the first case, Dmitri Borodin, the minister counselor at the Russian embassy in The Hague, was arrested late one night in October of last year, after neighbors alerted the Dutch police that Borodin, allegedly in a drunken state, was beating his two small children.
He was handcuffed in his own home and taken to the police station.
According to the Vienna Convention on Diplomatic Relations, diplomats cannot be prosecuted according to a host country’s laws.
So Russian President Vladimir Putin immediately demanded an official apology from the Dutch government for ignoring Borodin’s diplomatic immunity.
The rabble-rousing Russian politician Vladimir Zhirinovsky called on his followers to smash the windows of the Dutch embassy in Moscow.
A week later, a Dutch diplomat in Moscow was beaten up at his home by armed thugs (no connection between the two cases has been proved).
The timing of all of this was awkward.
The Dutch king, Willem Alexander, was about to visit Russia to celebrate the two countries’ friendly relations in the so-called “Netherlands-Russia Year.”
The Dutch foreign minister duly apologized to Russia for the conduct of his country’s police, and Borodin was recalled to Moscow.
Then, in December, the New York City police arrested an Indian consular official, Devyani Khobragade, for paying a domestic worker less than the minimum wage in the United States and for falsifying the worker’s visa application.
Because consular officials do not enjoy the same degree of immunity as higher-ranking diplomats, the police were acting within their authority, even if their methods – strip-searching Khobragade, for example – might be considered excessive.
The reaction in India, however, was much fiercer than in Russia.
Outrage was voiced in the press.
Apologies were demanded.
Demonstrations were held.
US diplomats were stripped of customary privileges.
Threats were made to arrest same-sex partners of US diplomats, because Indian law criminalizes homosexuality.
All of this might seem over the top and childish.
But, because diplomats are their countries’ official representatives abroad, their symbolic function is much more important than their individual personalities.
They are like national flags: insult them, and you insult the “nation.”
And when it comes to preserving national “face,” Russia and India are perhaps touchier than most countries;
Russia has always felt looked down upon by western European powers, and India is still reckoning with a legacy of colonial humiliation.
A writer for the Times of India expressed Indians’ sensitivity succinctly: “The sad truth is that India is now viewed abroad as a third-rate banana republic.”
Many Indians, especially among the Delhi elite, believe it.
The behavior of the New York City police played into their deepest fears.
One of the most interesting aspects of these two diplomatic incidents is what it tells us about the new Russian and Indian elite.
Diplomats have always represented the face of their country, but their own faces have changed.
In the past, diplomats did not actually represent nation-states, but royal courts (in most monarchies this is still officially the case).
As a result, European diplomats, for example, were mostly aristocrats, who all spoke French to one another.
Diplomatic incidents often had to do with the relative status of kings and queens.
One famous incident in the late eighteenth century was Lord Macartney’s British mission to the Imperial Court of China.
Macartney refused to conform to Chinese imperial protocol by declining to kowtow to the emperor, because he was not required to do the same to his own sovereign.
This, too, was very much a case of “keeping face”: the Chinese expected tribute; the British lord insisted on the equal status of his king.
As a result, the mission broke down.
Diplomatic immunity from local prosecution was an idea that sprang directly from another incident, almost a century earlier, involving the arrest of a Russian aristocrat, Andrey Matveyev, who represented Peter the Great in London.
Matveyev was detained and roughed up by bailiffs who demanded money from him.
The Russians complained.
The British apologized.
And the British parliament enacted a new law protecting diplomats from suffering similar treatment in the future.
Borodin and Khobragade are not aristocrats.
Far from it.
They represent a very different age, which one is tempted to call democratic, even if Russia today is more like a soft dictatorship.
Perhaps Borodin was just enjoying a rare night out and is normally an abstemious man, but his thuggish behavior is perhaps not entirely atypical of a new class of Russians that has accumulated a great deal of money and power since the Soviet Union collapsed.
Khobragade’s case is more interesting.
She was born into the Dalit caste, the “untouchables,” who in former times would never have gotten anywhere near the elite, except to sweep their floors.
Since Indian independence, the government has done much to improve the Dalits’ status, and the deputy consul general is one of the beneficiaries of this policy.
She is a member of the new Indian elite, increasingly wealthy and proud to represent a rising power in the world.
If the allegations that Khobragade systematically underpaid her domestic worker are true, this shows how fully she has adopted the customs of the class to which she has risen.
In all the Indian protests about the terrible blow dealt by the Americans to Indian self-esteem, only a few mentioned the habitual exploitation of the poorer classes.
As with their politicians, a country’s people, it seems, often have the diplomats they deserve.
Ideas over Interests
CAMBRIDGE – The most widely held theory of politics is also the simplest: the powerful get what they want.
Financial regulation is driven by the interests of banks, health policy by the interests of insurance companies, and tax policy by the interests of the rich.
Those who can influence government the most – through their control of resources, information, access, or sheer threat of violence – eventually get their way.
It’s the same globally.
Foreign policy is determined, it is said, first and foremost by national interests – not affinities with other nations or concern for the global community.
International agreements are impossible unless they are aligned with the interests of the United States and, increasingly, other rising major powers.
In authoritarian regimes, policies are the direct expression of the interests of the ruler and his cronies.
It is a compelling narrative, one with which we can readily explain how politics so often generates perverse outcomes.
Whether in democracies, dictatorships, or in the international arena, those outcomes reflect the ability of narrow, special interests to achieve results that harm the majority.
Yet this explanation is far from complete, and often misleading.
Interests are not fixed or predetermined.
They are themselves shaped by ideas – beliefs about who we are, what we are trying to achieve, and how the world works.
Our perceptions of self-interest are always filtered through the lens of ideas.
Consider a struggling firm that is trying to improve its competitive position. One strategy is to lay off some workers and outsource production to cheaper locations in Asia.
Alternatively, the firm can invest in skills training and build a more productive workforce with greater loyalty and hence lower turnover costs.
It can compete on price or on quality.
The mere fact that the firm’s owners are self-interested tells us little about which of these strategies will be followed.
What ultimately determines the firm’s choice is a whole series of subjective evaluations of the likelihood of different scenarios, alongside a calculation of their costs and benefits.
Similarly, imagine that you are a despotic ruler in a poor country.
What is the best way to maintain your power and pre-empt domestic and foreign threats? Do you build a strong, export-oriented economy?
Or do you turn inward and reward your military friends and other cronies, at the expense of almost everyone else?
Authoritarian rulers in East Asia embraced the first strategy; their counterparts in the Middle East opted for the second.
They had different conceptions of where their interest lay.
Or consider China’s role in the global economy.
As the People’s Republic becomes a major power, its leaders will have to decide what kind of international system they want.
Perhaps they will choose to build on and strengthen the existing multilateral regime, which has served them well in the past.
But perhaps they will prefer bilateral, ad hoc relations that allow them to extract greater advantage in their transactions with individual countries.
We cannot predict the shape that the world economy will take just from observing that China and its interests will loom larger.
We could multiply such examples endlessly.
Are German Chancellor Angela Merkel’s domestic political fortunes best served by stuffing austerity down Greece’s throat, at the cost of another debt restructuring down the line, or by easing up on its conditions, which might give Greece a chance to grow out of its debt burden?
Are US interests at the World Bank best served by directly nominating an American, or by cooperating with other countries to select the most suitable candidate, American or not?
The fact that we debate such questions passionately suggests that we all have varying conceptions of where self-interest lies.
Our interests are in fact hostage to our ideas.
So, where do those ideas come from?
Policymakers, like all of us, are slaves to fashion.
Their perspectives on what is feasible and desirable are shaped by the zeitgeist, the “ideas in the air.”
This means that economists and other thought leaders can exert much influence – for good or ill.
John Maynard Keynes once famously said that “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist.”
He probably didn’t put it nearly strongly enough.
The ideas that have produced, for example, the unbridled liberalization and financial excess of the last few decades have emanated from economists who are (for the most part) very much alive.
In the aftermath of the financial crisis, it became fashionable for economists to decry the power of big banks.
It is because politicians are in the pockets of financial interests, they said, that the regulatory environment allowed those interests to reap huge rewards at great social expense.
But this argument conveniently overlooks the legitimizing role played by economists themselves.
It was economists and their ideas that made it respectable for policymakers and regulators to believe that what is good for Wall Street is good for Main Street.
Economists love theories that place organized special interests at the root of all political evil.
In the real world, they cannot wriggle so easily out of responsibility for the bad ideas that they have so often spawned.
If Fish Could Scream
PRINCETON – When I was a child, my father used to take me for walks, often along a river or by the sea.
We would pass people fishing, perhaps reeling in their lines with struggling fish hooked at the end of them.
Once I saw a man take a small fish out of a bucket and impale it, still wriggling, on an empty hook to use as bait.
Another time, when our path took us by a tranquil stream, I saw a man sitting and watching his line, seemingly at peace with the world, while next to him, fish he had already caught were flapping helplessly and gasping in the air.
My father told me that he could not understand how anyone could enjoy an afternoon spent taking fish out of the water and letting them die slowly.
These childhood memories flooded back when I read Worse things happen at sea: the welfare of wild-caught fish, a breakthrough report released last month on fishcount.org.uk.
In most of the world, it is accepted that if animals are to be killed for food, they should be killed without suffering.
Regulations for slaughter generally require that animals be rendered instantly unconscious before they are killed, or death should be brought about instantaneously, or, in the case of ritual slaughter, as close to instantaneously as the religious doctrine allows.
Not for fish.
There is no humane slaughter requirement for wild fish caught and killed at sea, nor, in most places, for farmed fish.
Fish caught in nets by trawlers are dumped on board the ship and allowed to suffocate.
Impaling live bait on hooks is a common commercial practice: long-line fishing, for example, uses hundreds or even thousands of hooks on a single line that may be 50-100 kilometers long.
When fish take the bait, they are likely to remain caught for many hours before the line is hauled in.
Likewise, commercial fishing frequently depends on gill nets – walls of fine netting in which fish become snared, often by the gills.
They may suffocate in the net, because, with their gills constricted, they cannot breathe.
If not, they may remain trapped for many hours before the nets are pulled in.
The most startling revelation in the report, however, is the staggering number of fish on which humans inflict these deaths.
By using the reported tonnages of the various species of fish caught, and dividing by the estimated average weight for each species, Alison Mood, the report’s author, has put together what may well be the first-ever systematic estimate of the size of the annual global capture of wild fish.
It is, she calculates, in the order of one trillion, although it could be as high as 2.7 trillion.
To put this in perspective, the United Nations Food and Agriculture Organization estimates that 60 billion animals are killed each year for human consumption – the equivalent of about nine animals for each human being on the planet.
If we take Mood’s lower estimate of one trillion, the comparable figure for fish is 150.
This does not include billions of fish caught illegally nor unwanted fish accidentally caught and discarded, nor does it count fish impaled on hooks as bait.
Many of these fish are consumed indirectly – ground up and fed to factory-farmed chicken or fish.
A typical salmon farm churns through 3-4 kilograms of wild fish for every kilogram of salmon that it produces.
Let’s assume that all this fishing is sustainable, though of course it is not.
It would then be reassuring to believe that killing on such a vast scale does not matter, because fish do not feel pain.
But the nervous systems of fish are sufficiently similar to those of birds and mammals to suggest that they do.
When fish experience something that would cause other animals physical pain, they behave in ways suggestive of pain, and the change in behavior may last several hours.
(It is a myth that fish have short memories.)
Fish learn to avoid unpleasant experiences, like electric shocks.
And painkillers reduce the symptoms of pain that they would otherwise show.
Victoria Braithwaite, a professor of fisheries and biology at Pennsylvania State University, has probably spent more time investigating this issue than any other scientist.
Her recent book Do Fish Feel Pain? shows that fish are not only capable of feeling pain, but also are a lot smarter than most people believe.
Last year, a scientific panel to the European Union concluded that the preponderance of the evidence indicates that fish do feel pain.
Why are fish the forgotten victims on our plate?
Is it because they are cold-blooded and covered in scales?
Is it because they cannot give voice to their pain? Whatever the explanation, the evidence is now accumulating that commercial fishing inflicts an unimaginable amount of pain and suffering.
We need to learn how to capture and kill wild fish humanely – or, if that is not possible, to find less cruel and more sustainable alternatives to eating them.
Ignorance Today
NEW YORK – Ignorance is the root of all evil, according to Plato, who also famously gave us a still-current definition of its opposite: knowledge.
For Plato, knowledge is “justified true belief.”
That definition is worthy of consideration as we reflect on the perils of ignorance in the twenty-first century.
Plato thought that three conditions must be met in order for us to “know” something: the notion in question must actually be true; we must believe it (because if we do not believe something that is true, we can hardly claim that we know it); and, most subtly, it must be justifiable – there must be reasons why we believe the notion to be true.
Consider something that we all think we know: the earth is (approximately) round.
This is as true as astronomical facts get, particularly because we have sent artificial satellites into orbit and seen that our planet is indeed roundish.
Most of us (except for a lunatic fringe of flat-earthers) also believe this to be the case.
What about the justification of that belief?
How would you answer if someone asked you why you believe that the earth is round?
The obvious place to begin would be to point to the aforementioned satellite images, but then our skeptical interlocutor could reasonably ask if you know how those images were obtained.
Unless you are an expert on space engineering and imaging software, you may have some trouble at that point.
Of course, you could fall back on more traditional reasons to believe in a round earth, like the fact that our planet projects a round-looking shadow on the moon during eclipses.
Naturally, you would have to be in a position to explain – if challenged – what an eclipse is and how you know that.
You see where this could easily go: if we push far enough, most of us do not actually know, in the Platonic sense, much of anything.
In other words, we are far more ignorant than we realize.
Socrates, Plato’s teacher, famously goaded the Athenian authorities by maintaining that he was wiser than the Oracle at Delphi, who claimed to be the wisest, because he, unlike most people (including the Athenian authorities), knew that he did not know anything.
Whether Socrates’ humility was sincere or a secret joke at the expense of the powers that be (before said powers put him to death after tiring of his irreverence), the point is that the beginning of wisdom lies in the recognition of how little we really know.
Which brings me to the paradox of ignorance in our era: on the one hand, we are constantly bombarded by expert opinion, by all sorts of people – with or without Ph.D. after their name – who tell us exactly what to think (though rarely why we should think it).
On the other hand, most of us are woefully inadequate to practice the venerable and vital art of baloney detection (or, more politely, critical thinking), which is so necessary in modern society.
You can think of the paradox in another way: we live in an era when knowledge – in the sense of information – is constantly available in real time through computers, smart phones, electronic tablets, and book readers.
And yet we still lack the basic skills of reflecting on such information, of sifting through the dirt to find the worthy nuggets.
We are ignorant masses awash in information.
Of course, it may be that humanity has always been short on critical thinking.
That’s why we keep allowing ourselves to be talked into supporting unjust wars (not to mention actually dying in them), or voting for people whose main job seems to be to amass as much wealth for the rich as they can get away with.
It is also why so many people are duped by exceedingly costly sugar pills sold to them by homeopathic “doctors,” and why we follow the advice of celebrities (rather than real doctors) about whether to vaccinate our kids.
But the need for critical thinking has never been as pressing as in the Internet era.
At least in developed countries – but increasingly in underdeveloped ones as well – the problem is no longer one of access to information, but of the lack of ability to process and make sense of that information.
Unfortunately, colleges, high schools, and even elementary schools are unlikely to mandate introductory courses in critical thinking on their own.
Education has increasingly been transformed into a commodity system, in which the “customers” (formerly students) are kept happy with personalized curricula while being prepared for the job market (rather than being prepared to be responsible human beings and citizens).
This can and must change, but it requires a grassroots movement that uses blogs, online magazines and newspapers, book clubs and meet-up clubs, and anything else that might work to promote educational opportunities to develop critical-thinking skills.
After all, we do know that it is our future.
Ignoring Serbia
Berlin – Just before Christmas, Serbia’s government formally submitted its application for European Union membership.
A few days earlier, visa requirements for the country’s citizens were lifted, together with those for citizens of Montenegro and Macedonia.
The exultation about this step was great in all three of these countries; their expectations of the EU are even greater now.
Reactions in Europe, by contrast, were meager or non-existent.
Public sentiment towards EU enlargement is negative.
In fact, a majority of states and citizens would prefer to stop enlargement – the most important and effective means by which Europe is capable of projecting power – once and for all.
Anonymous senior diplomats in Brussels were quoted as regarding Serbia’s application to be too early; otherwise, an embarrassing silence prevailed.
Exhausted by the frustrating climate negotiations in Copenhagen, European leaders seemed not to be in the mood for questions about EU enlargement. Indeed, given the domestic political mood in the 27 member states, they are deeply convinced that discussing further enlargement would win them no bouquets.
As a result, a subjective twilight is lowering over the European project. That is tragic, because many unique and even historic opportunities are not being seized.
Serbia’s application for accession is precisely such an opportunity.
It was Serbia, Yugoslavia’s largest federal unit, which, led by Slobodan Milosevic, triggered the great Balkans crisis and caused numerous wars and “ethnic cleansings” as the federation collapsed at the start of the 1990’s.
Under Milosevic, a majority of the Serbs turned to radical nationalism based on violence and territorial conquest.
Four wars – in Slovenia, Croatia, Bosnia and Herzegovina, and Kosovo – had to be fought and a fifth one – in Macedonia – had to be prevented at the last minute by NATO and the EU in order to put violent Serb nationalism in its place.
With the defeat in Kosovo, Milosevic was finally thwarted.
Still, throughout this time, integrating Serbia into the region’s post-nationalist order remained central to the West’s strategy.
Certainly by the time of the West’s military intervention in Bosnia, this strategy was based on the assumption that the European continent after the end of the Cold War should not allow itself to have a divided security system – that is, if security and peace were to be permanent.
This meant that the Balkans, too, had to be introduced to Euro-Atlantic structures first and then integrated into NATO and the EU, because only a new European order could overcome the region’s recurring tragedies and guarantee lasting security.
Serbia played and plays a central – perhaps even the leading – role in this.
For Serbia’s path to Europe will immediately enable resolution of the main Balkan crises and conflicts that continue to this day: Bosnia and Herzegovina, Kosovo, and war criminals.
Without addressing the question of its final borders, however, Serbia has no prospect of joining the EU.
The Europeans have gained experience with Cyprus.
They will not let another state into the EU whose border issues are not resolved beyond any doubt.
And, in Serbia’s case, this question remains open regarding Kosovo and – in a more concealed way – Republika Srpska in Bosnia and Herzegovina.
Serbia must also deliver Gen. Ratko Mladic, who led the Bosnian Serb army during the Balkan wars, to the war crimes tribunal in The Hague – or prove that he is dead or hiding elsewhere.
Mladic, whose troops carried out atrocities throughout Bosnia and Herzegovina – including the massacre of thousands of Muslim civilians at Srebrenica in 1995 – is the most significant war-crimes suspect still at large since former Bosnian Serb President Radovan Karadzic’s arrest in Belgrade and extradition to The Hague in 2008.
Nevertheless, the great importance of Serbia’s application for EU accession is that it could bring about successful and permanent reorganization of the Balkans.
To be sure, sure, the path to accession will be tiresome and long, but if both sides set out on this path decisively and sincerely, the whole region will be changed for the better.
Europe stands only to gain from continued accession negotiations over Serbia.
Bringing Serbia into the EU would permanently stabilize the regional order and – at the time when Europe is increasingly wary of indefinite military commitments &#45;&#45; offer the prospect of a concrete exit strategy for NATO troops in Kosovo.
But this assumes that the governments of EU member states finally accept their political responsibility and, instead of pandering to rampant enlargement fatigue, take decisive steps against it.
Europeans may be too tired and divided to play a significant role in world politics, which could have dire consequences for Europe in this time of global realignment.
But even if Europe abdicates its global role, the EU cannot forget about order within its immediate neighborhood, or hope that others will solve their problems for them.
The Balkans are a part of Europe, and Europeans must solve the region’s problems.
Serbia’s application for EU accession provides a historic opportunity to achieve just that.
Ignoring the Storm
The most recent G7 finance ministers’ meeting in October was an utter failure.
The only thing that they agreed on was to admonish China to revalue its currency.
The yuan’s value, while important, is not the central question facing the world economy today.
The real immediate problem concerns what is happening and what will happen to the dollar.
But the real issue for prosperity concerns the foundations of the global financial system.
How low will the dollar go?
How can we undo the imbalances of economies – China, followed far behind by Europe – exporting massively to the United States or to the dollar zone?
Will the US mortgage market, which is expected to become even more difficult in 2008, subside into calm afterwards, or will it contaminate the whole international financial system?
Is there a risk that rising oil prices – already reaching all-time highs – will cause further debt defaults worldwide?
The spate of earning reports from America’s biggest banks suggests that there are real worries here.
The condition of the world economy nowadays is very strange.
There are no great shocks but various declines and crises.
Central bankers try to soothe and reassure, but they are not very convincing.
Governments are silent, acting more or less as if nothing important is happening.
And, according to many economists, commentators, and journalists, today’s worries are temporary, solvable difficulties.
There is no general crisis on the horizon.
I disagree.
I believe that we have entered a period of weakening across the different parts of the global economic system, and that this may lead to a global recession.
This weakening calls for a strong international public response, including tighter regulation, if we are to avoid such a crisis.
Why does the world economy look so flimsy?
First, the way capitalism operates nowadays has changed mightily from just 30 years ago.
In developed countries from 1945 to 1975, capitalism brought rapid growth, an average of 5% per year for long periods.
Of course, it was subject to ups and downs, but it was not subject to financial crises of the type that we see regularly today.
Moreover, capitalism in the post-WWII decades maintained full employment, with unemployment often hovering around 2% in Europe, North America, and Japan.
Job insecurity back then was mostly unknown and mass poverty had disappeared.
The keys to that period of growth and happiness were a strong social welfare system and mainly Keynesian domestic and foreign economic policies in all the world’s big states.
Above all, every developed economy pursued policies designed to provide high wages, which would guarantee high consumption and thus rapid growth.
Shareholders used to put up with relatively meager dividends compared to today.
Thirty years on, shareholders have broken definitively with this system.
Pension, investment, and hedge funds have taken the lead in this revolution.
In all developed economies, profits have leaped spectacularly in the past 25 years, by between 8% and 10% of GDP.
But wages and social security revenues have suffered an equivalent cut.
As a result, growth has weak underpinnings.
Everywhere, labor is becoming insecure and mass poverty has reappeared in developed countries.
As economic deregulation increased, financial crises began erupting: since 1990, there have been three distinct crises in Latin America, one each in Russia and Asia, the Internet bubble, and now the sub-prime crisis.
Second, over the past 6-7 years, strong GDP growth in the US and Great Britain has been offset by staggering debt.
The US now borrows $2 billion a day, 95% of it from Asia and 45% of that amount from China’s central bank.
America’s total debt exceeds 39 trillion dollars, or roughly 3.5 times US GDP.
This situation will remain manageable only if oil prices stop increasing.
And yet, the opposite is more likely, with domestic inflation – a danger aggravated by central banks’ loosening of money supply to help commercial banks – bringing the threat of higher interest rates.
Finally, while assets nowadays are much more liquid, this has not boosted long-term productive investment.
Instead, the profitable carving up of healthy companies has freed up capital to flow to intangible assets, houses and other forms of real estate, fueling a speculative crisis.
In short, the global economy – replete with get-rich-quick schemes, overpaid bosses, and corporate fraud – has lost its moral bearings.
We cannot let those dangerous trends continue unchecked.
We are obviously sailing toward the rocks, and the whole developed world should be concerned.
There is an urgent need for a global conference – a Bretton Woods II – to adopt strict rules to contain today’s wayward financial markets.
Unfortunately, as the most recent G7 meeting showed, the world’s major governments are not yet ready to act.
Dirty Development Money
COPENHAGEN – One of the biggest problems affecting the world’s poor is one that few have ever heard about: illicit financial flows.
Though such flows cost people in Djibouti, Congo, and Chad more than one-fifth of their incomes every year, they almost never make headlines.
With the world preparing to establish the specific targets that will guide global development efforts for the next 15 years, the time to change that is now.
Given that the new global development targets – like the current Millennium Development Goals, which have focused on health, hunger, and education – could guide the allocation of hundreds of billions of aid dollars, choosing the right areas on which to focus is critical.
The international community, swamped with hundreds of proposed goals, undoubtedly faces a major challenge.
To help guide the process, the Copenhagen Consensus Center asked 62 teams of top economists to determine where limited resources could do the most good by 2030.
Some of the targets that they identified – such as increased food security, expanded educational opportunity, and improved health care – were unsurprising.
But one recommendation – curbing illicit financial flows – was unexpected.
After all, at first blush, such flows do not seem to be as powerful or as urgent a threat to people’s wellbeing as, say, not having enough food to survive.
Many people do not realize that illicit flows are a problem at all.
Nonetheless, the economist Alex Cobham insists that that curbing such flows should be a high priority.
And he makes a strong case.
The Global Financial Integrity Institute (GFI) reports that, in 2011, developing countries lost almost a trillion dollars through illicit transfers to the developed world.
In the same way, 20 African countries have lost sums equivalent to more than 10% of their GDP every year&nbsp;since 1980.
(In a sense, this makes Africa a net creditor to the world, though it cannot expect to be repaid.) Some $85 billion flowed illegally out of India in 2011.
Where does the money go?
Kleptocratic regimes often channel some of their countries’ wealth into Swiss bank accounts.
This, like money laundering by criminal organizations, is obviously illegal (as well as morally reprehensible).
But there is also a legal mechanism for such financial flows: tax avoidance.
Though it is not a criminal offense, tax avoidance attracts widespread criticism – not least because it is common among major multinational companies, including Amazon, Starbucks, and Google.
These companies minimize their tax liabilities by registering and declaring their profits in a low-tax country, despite doing most of their business elsewhere.
Yet another method for moving capital between countries is the mis-invoicing of trade, whereby companies alter the value of their imports and exports.
A recent GFI study indicated that, from 2002 to 2011, $60.8 billion moved illegally into or out of Ghana, Kenya, Mozambique, Tanzania, and Uganda in this way.
Taken together, illicit financial flows currently amount to nearly ten times the total sum of international aid.
Imagine how much good that money could do if it were channeled toward welfare-enhancing projects.
That is why Cobham has proposed including in the next development agenda the requirement that all beneficial ownership information be made publicly available.
By making it harder for individuals to hide behind shell companies, such regulation would make illicit financial flows significantly more difficult to accomplish – and much easier to spot.
If this effort produced just a 10% reduction in the average losses from illicit financial flows, compared to 2002-2012, it would save countries $768 billion – money that could be used to finance development projects.
A 50% reduction would save a staggering $7.5 trillion.
Of course, Cobham’s proposed regulation would carry significant administrative costs.
But, even if the highest estimate of $66 billion proved to be correct, poor countries would gain $13 worth of extra income per dollar spent – a very handsome return.
A more likely rate of return would be $49 per dollar spent.
The regulation’s impact could be bolstered by two other proposals: automatic exchange of tax information among jurisdictions and a requirement that multinationals report revenues on a country-by-country basis.
This level of transparency – which, in some cases, would amount to “naming and shaming” – could transform how companies manage their financial affairs.
Though it is extremely difficult to estimate the precise costs and benefits, it is safe to say that such measures are likely to be highly cost-effective.
But (there is always a “but”) if any of these measures are to work, they must be enforced as widely, consistently, and strictly as possible.
Simply reducing the number of available channels for transferring money out of a country would direct more funds through those that remained.
Unfortunately, the existing framework for preventing money laundering does not offer an encouraging precedent.
Though it is universally accepted and enforced in most countries, money laundering remains rampant.
The hope underlying the current transparency proposals is that their relative simplicity would boost their impact.
Of course, nutrition, education, health, and the environment are important features of the next development agenda.
But global leaders have compelling reason to add the reduction of illicit financial flows to the list.
Images of Scarcity
NEW HAVEN – Could the television image we’ve all seen of the Greenland ice cap crumbling into the ocean because of global warming somehow – indirectly and psychologically – be partly responsible for high oil and other commodity prices?
The usual explanation of today’s scarcity and high prices focuses on explosive growth in emerging countries, China and India in particular, whose demand for scarce resources is “insatiable.”
But psychology also matters in speculative markets, and perhaps that image of the Greenland ice disappearing makes it seem all too plausible that everything else– land, water, even fresh air – is running out too.
Let’s take a case study, the last generalized boom-bust cycle in commodity prices, which caused these prices generally to rise (more or less) from some time in the 1960’s until the 1980’s, and then generally to fall until the mid-1990’s.
Maybe images matter just as much as substance in explaining that.
The conventional “fundamental” explanation for that cycle relates it to political events.
The 1973-1974 oil crisis is said to have been due to the cutoff of oil following the Arab-Israeli Yom Kippur War.
The 1979-1981 oil crisis is said to reflect the cutoff in oil due to the Iranian Revolution and the Iran-Iraq war.
The drop in oil prices after the mid-1980’s is said to be due to the collapse of the OPEC oil cartel.
But some economists doubt that these events tell the whole story.
Sure, there were sharp movements in oil prices corresponding to these events, but maybe there were other, even more important factors affecting general trends in oil prices.
After all, these events don’t really explain why prices of other commodities often followed that of oil.
Maybe more important than those wars in the 1970’s was that people throughout the world got worried about running out of things.
This was the time of the “great population scare,” which transformed thinking worldwide, no doubt contributing to higher commodity prices while the fear lasted.
There seemed to be some basis for this scare.
The rate of increase in the world’s population rose from 1.8% in 1951 to 2.1% in 1971.
But those were just dry statistics.
Images likely mattered more.
In 1948, the astronomer Fred Hoyle said, “Once a photograph of the Earth, taken from outside, is available – once the sheer isolation of the earth becomes plain – a new idea as powerful as any in history will be let loose.”
A generation later, he was proven right.
The first photograph of the earth from space came as part of the Apollo project in November 1967.
One of the Apollo astronauts, James B. Irwin, who landed on the moon in 1971, said of his view of the earth, “It was so far away…a little ball in the blackness of space.
That does something to your soul….We all came back humanitarians….We saw how fragile our planet is and yet how beautiful.
We saw how we must learn to work together, to love each other.”
Let’s not discount that statement.
That image of the earth from space had a profound psychological effect, and we all saw it.
Maybe that image was at least part of the reason why people became so worried in the 1970’s about population running ahead of resources.
The Club of Rome’s monumental book The Limits to Growth came out in 1972, with a picture of the earth on its cover.
The book, written by a team of scientists, predicted disastrous shortages and mass starvation due to population pressure.
Despite scientific critics of the Club of Rome’s methods, the public was ready to believe the dire forecast.
The great population scare led to various birth-control efforts around the world, notably to the “one-child policy” instituted in China in 1979.
Partly due to such efforts, as well as to a change in family values, the rate of growth of the world’s population, began a long decline, to 1.1% in 2005.
That gradual decline led to gradual loss of concern about limits to growth.
Commodity prices fell, too.
Today, we remain mostly unconcerned about global population growth.
But, in the last ten years or so, we have become concerned about something else: rapid world economic growth.
While it may seem that no image in the last decade was so dramatic as the first photo of the earth from space, think again.
Try searching YouTube, for example, on Greenland ice.
More generally, the Internet gives a sense of vastness to the world’s economic activity that was never available before.
The ability to communicate via e-mail to everyone in the world creates a sense of the world’s smallness relative to the abundance of people in it.
We have seen photographs of hurricane and typhoon activity due to global warming, affecting people in Louisiana or Myanmar.
We have seen devastation from the 2004 Indian Ocean tsunami, interpreted as a sign of crowding at the coasts.
The North Pole turned into a lake for the first time in 2000.
We see aerial photos of the Aral Sea drying up.
We practically can’t buy caviar from the Caspian Sea any more.
The European Space Agency announced in September 2007 that satellite photos showed that the Northwest Passage appeared clear of ice for shipping for the first time ever, and that the Northeast Passage is almost clear.
With so many vivid images of a shrinking and damaged planet, is it really any wonder that human psychology is ripe for high commodity prices?
Imagining Recession
The world’s housing, oil, and stock markets have been plunged into turmoil in recent months.
Yet consumer confidence, capital expenditure, and hiring have yet to take a sharp hit.
Why?
Ultimately, consumer and business confidence are mostly irrational.
The psychology of the markets is dominated by the public images that we have in mind from day to day, and that form the basis of our imaginations and of the stories we tell each other.
Popular images of past disasters are part of our folklore, often buried in the dim reaches of our memory, but re-emerging to trouble us from time to time.
Like traditional myths, such graphic, shared images embody fears that are deeply entrenched in our psyche.
The images that have accompanied past episodes of market turmoil are largely absent today.
Consider the oil crisis that began in November 1973, resulting in a world stock market crash and a sharp world recession.
Vivid images have stuck in people’s minds from that episode: long lines of cars at gas stations, people riding bicycles to work, gasless Sundays and other rationing schemes.
Today, the real price of oil is nearly twice as high as it was at the peak of that crisis, but we have seen nothing like the images from 1973-5.
Mostly we are not even reminded of them.
So our confidence is not shaken, yet.
Just before the October 19, 1987, stock market crash, the biggest one-day drop in history, the image on people’s minds was the crash of 1929.
Indeed, the Wall Street Journal ran a story about it on the morning of the 1987 crash.
I know that those images contributed to the severity of the 1987 crash by encouraging people to sell, because I ran a survey of individual and institutional investors the following week.
Images of 1929 – of financiers leaping from buildings, unemployed men sleeping on park benches, long lines at soup kitchens, and impoverished boys selling apples on the street – are not on our minds now.
The 1929 crash just does not seem relevant to most people today, probably because we survived the 1987 and 2000 crashes with few ill effects, while 1929 seems not only the distant past, but another world.
But images of the 1987 crash, driven by computers in tall modern steel-and-glass office buildings, do seem to be on people’s minds today.
The stock market suffered one of its biggest one-day drops this year on the 20th anniversary of the 1987 crash, with the S&amp;P 500 falling 2.56%.
No previous anniversary of the 1987 crash showed any such drop.
The image of a bank run, of long lines of angry people lining up outside a failed bank, was briefly on our minds after the Northern Rock failure in Britain.
But the Bank of England’s direct intervention prevented these images from gaining a foothold on our collective psychology.
The images that are uppermost in our minds are of a housing crisis.
We imagine residential streets with one “for sale” sign after another.
Worse, there are images of foreclosures, of families being evicted from their homes, their furniture and belongings on the street.
If home prices continue to decline in the United States and possibly elsewhere, there could be many more vivid images.
You may yet be presented with the image of your child’s playmate moving away because his parents were thrown out in a foreclosure.
You may see a house down the street trashed by an angry owner who was foreclosed.
Such images become part of your sense of reality, and could disturb your sense of confidence and reduce your willingness to spend and support the economy.
Could such changes in psychology be big enough to tip us into a world recession?
While it is far from clear that they will, it is a possibility.
Psychology need only change enough to bring about a drop in consumption or investment growth of a percentage point or so of world GDP, and market repercussions can do the rest.
The IMF’s Euro Crisis
OXFORD – Over the last few decades, the International Monetary Fund has learned six important lessons about how to manage government debt crises.
In its response to the crisis in Greece, however, each of these lessons has been ignored.
The Fund’s participation in the effort to rescue the eurozone may have raised its profile and gained it favor in Europe.
But its failure, and the failure of its European shareholders, to adhere to its own best practices may eventually prove to have been a fatal misstep.
One key lesson ignored in the Greece debacle is that when a bailout becomes necessary, it should be done once and definitively.
The IMF learned this in 1997, when an inadequate bailout of South Korea forced a second round of negotiations.
In Greece, the problem is even worse, as the €86 billion ($94 billion) plan now under discussion follows a €110 billion bailout in 2010 and a €130 billion rescue in 2012.
The IMF is, on its own, highly constrained.
Its loans are limited to a multiple of a country’s contributions to its capital, and by this measure its loans to Greece are higher than any in its history.
Eurozone governments, however, face no such constraints, and were thus free to put in place a program that would have been sustainable.
Another lesson that was ignored is not to bail out the banks.
The IMF learned this the hard way in the 1980s, when it transferred bad bank loans to Latin American governments onto its own books and those of other governments.
In Greece, bad loans issued by French and German banks were moved onto the public books, transferring the exposure not only to European taxpayers, but to the entire membership of the IMF.
The third lesson that the IMF was unable to apply in Greece is that austerity often leads to a vicious cycle, as spending cuts cause the economy to contract far more than it would have otherwise.
Because the IMF lends money on a short-term basis, there was an incentive to ignore the effects of austerity in order to arrive at growth projections that imply an ability to repay.
Meanwhile, the other eurozone members, seeking to justify less financing, also found it convenient to overlook the calamitous impact of austerity.
Fourth, the IMF has learned that reforms are most likely to be implemented when they are few in number and carefully focused.
When a country requires assistance, it is tempting for lenders to insist on a long list of reforms.
But a crisis-wracked government will struggle to manage multiple demands.
In Greece, the IMF, together with its European partners, required the government not just to cut expenditures, but to undertake far-reaching tax, pension, judicial, and labor-market reforms.
And, although the most urgently needed measures will not have an immediate effect on Greece’s finances, the IMF has little choice but to emphasize the short-term spending cuts that boost the chances of being repaid – even when that makes longer-term reforms more difficult to enact.
A fifth lesson is that reforms are unlikely to succeed unless the government is committed to seeing them through.
Conditions perceived to be imposed from abroad will almost certainly fail.
In the case of Greece, domestic political considerations caused European governments to make a show of holding the government’s feet to the fire.
The IMF, too, sought to demonstrate that it was being as tough with Greece as it has been on Brazil, Indonesia, and Zambia – even if doing so was ultimately counterproductive.
The sixth lesson the IMF has swept aside is that bailing out countries that do not fully control their currencies carries additional risks.
As the Fund learned in Argentina and West Africa, such countries lack one of the easiest ways to adjust to a debt crisis: devaluation.
Having failed to forewarn Greece, Portugal, Ireland, and Spain about the perils of joining a currency bloc, the IMF should have considered whether it was proper or necessary for it to intervene at all in the eurozone crisis.
Its rationale for doing so highlights the risks associated with its decision.
The most obvious reason for the IMF’s actions is that Europe was failing to address its own problems, and had the power and influence to drag in the Fund.
The IMF’s managing director has always been a European, and European countries enjoy a disproportionate share of the votes on the IMF’s board.
Equally important, however, is the fact that the IMF made its decision while facing an existential crisis.
Historically, the biggest threat to the IMF has been irrelevance.
It was almost made redundant in the 1970s, when the US floated the dollar, only to be saved in 1982 by the Mexican debt crisis, which propelled it into the role of global financial lifeguard.
A decade later, the IMF’s relevance had started to wane again, but was revived by its role in the transformation of the former Soviet-bloc economies.
At the time of the euro crisis, the Fund was floundering once more in the aftermath of the East Asian crisis, as its fee-paying clients did anything they could to avoid turning to it.
The IMF’s participation in the eurozone crisis has now given powerful emerging economies another reason to be disenchanted.
After the US stymied their demands for a greater say within the Fund, they now find that the organization has been doing Europe’s bidding.
It will be difficult for the IMF to regain the trust of these increasingly prominent members.
Unless the US and the EU relinquish their grip, the Fund’s latest bid for relevance may well turn out to be its last.
The IMF’s “Tough Choices” on Greece
ATHENS – The International Monetary Fund’s chief economist, Olivier Blanchard, recently asked a simple and important question: “How much of an adjustment has to be made by Greece, how much has to be made by its official creditors?”
And have its creditors given anything at all?
In May 2010, the Greek government agreed to a fiscal adjustment equal to 16% of GDP from 2010 to 2013.
As a result, Greece moved from a primary budget deficit (which excludes interest payments on debt) of more than 10% of GDP to a primary balance last year – by far the largest such reversal in post-crisis Europe.
The IMF initially projected that Greece’s real (inflation-adjusted) GDP would contract by around 5% over the 2010-2011 period, stabilize in 2012, and grow thereafter.
In fact, real GDP fell 25%, and did not recover.
And, because nominal GDP fell in 2014 and continues to fall, the debt/GDP ratio, which was supposed to stabilize three years ago, continues to rise.
Blanchard notes that in 2012, Greece agreed “to generate enough of a primary surplus to limit its indebtedness” and to implement “a number of reforms which should lead to higher growth.”
Those so-called reforms included sharply lower public spending, minimum-wage reductions, fire-sale privatizations, an end to collective bargaining, and deep pension cuts.
Greece followed through, but the depression continued.
The IMF and Greece’s other creditors have assumed that massive fiscal contraction has only a temporary effect on economic activity, employment, and taxes, and that slashing wages, pensions, and public jobs has a magical effect on growth.
This has proved false.
Indeed, Greece’s post-2010 adjustment led to economic disaster – and the IMF’s worst predictive failure ever.
Blanchard should know better than to persist with this fiasco.
Once the link between “reform” and growth is broken – as it has been in Greece – his argument collapses.
With no path to growth, the creditors’ demand for an eventual 3.5%-of-GDP primary surplus is actually a call for more contraction, beginning with another deep slump this year.
But, rather than recognizing this reality and adjusting accordingly, Blanchard doubles down on pensions.
He writes:
“Why insist on pensions?
Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.
Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP.
We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners.”
Note first the damning admission: apart from pensions and wages, spending has already been “cut to the bone.”
And remember: the effect of this approach on growth was negative.
So, in defiance of overwhelming evidence, the IMF now wants to target the remaining sector, pensions, where massive cuts – more than 40% in many cases – have already been made.
The new cuts being demanded would hit the poor very hard.
Pension payments now account for 16% of Greek GDP precisely because Greece’s economy is 25% smaller than it was in 2009.
Without five years of disastrous austerity, Greek GDP might be 33% higher than it is now, and pensions would be 12% of GDP rather than 16%.
The math is straightforward.
Blanchard calls on Greece’s government to offer “truly credible measures.”
Shouldn’t the IMF do likewise?
To get pensions down by one percentage point of GDP, nominal economic growth of just 4% per year for two years would suffice – with no further cuts.
Why not have “credible measures” to achieve that goal?
This brings us to Greek debt.
As everyone at the IMF knows, a debt overhang is a vast unfunded tax liability that says to investors: enter at your own risk.
At any time, your investments, profits, and hard work may be taxed away to feed the dead hand of past lenders.
The overhang is a blockade against growth.
That is why every debt crisis, sooner or later, ends in restructuring or default.
Blanchard is a pioneer in the economics of public debt.
He knows that Greece’s debt has not been sustainable at any point during the last five years, and that it is not sustainable now.
On this point, Greece and the IMF agree.
In fact, Greece has a credible debt proposal.
First, let the European Stabilization Mechanism (ESM) lend €27 billion ($30 billion), at long maturities, to retire the Greek bonds that the European Central Bank foolishly bought in 2010.
Second, use the profits on those bonds to pay off the IMF.
Third, include Greece in the ECB’s program of quantitative easing, which would let it return to the markets.
Greece would agree to fair conditions for the ESM loan.
It does not ask for one cent of additional official funding for the Greek state.
It is promising to live within its means forever, and rely on internal savings and external investment for growth – far short of what any large country, controlling its own currency, would do when facing a comparable disaster.
Blanchard insists that now is the time for “tough choices, and tough commitments to be made on both sides.”
Indeed it is.
But the Greeks have already made tough choices.
Now it is the IMF’s turn, beginning with the decision to admit that the policies it has imposed for five long years created a disaster.
For the other creditors, the toughest choice is to admit – as the IMF knows – that their Greek debts must be restructured.
New loans for failed policies – the current joint creditor proposal – is, for them, no adjustment at all.
How the IMF Failed Greece
NEW DELHI – Democracy is about real choices.
But, throughout their country’s crisis, the Greek people have been deprived of them.
For this, the Europe Union and especially the International Monetary Fund bear considerable responsibility.
Greece was offered two stark choices: Leave the eurozone without financing, or remain and receive support at the price of further austerity.
But Greece should have been offered a third option: Leave the euro, but with generous financing.
This option should have been put on the table, recognizing that Greece has broader political reasons for staying within the eurozone.
Although exiting the monetary union would have yielded considerable benefits, “Grexit” would have entailed sizeable costs as well.
The benefits would have included a massive devaluation, which would have restored some dynamism to what was once a fast-growing economy.
But the costs were terrifying.
The government would have had to default, the banks would have been ruined, and both would have struggled for years to regain the trust of financial markets.
As a result, interest rates would have remained high for a long time to come, impeding efforts to restore growth.
Is it any wonder that the Greek government shrank from this horror and chose the “safe” option of austerity?
But this option may not be safe at all.
It is in fact, to quote T.S. Eliot, that “awful daring of a moment’s surrender...”
Greece will now need to grind away at austerity, hoping that in some distant future “internal devaluation” – that is, wage and price deflation – will help to spark a recovery.
Only the IMF could have offered the third option of an orderly exit.
Greece should have been told that it could reap the benefits of devaluation, while the international community would act to minimize the attendant costs.
The precise terms of Grexit – agreed by the troika (the IMF, the European Commission, and the European Central Bank) and Greek authorities – surely would have included a negotiated reduction in Greece’s debts, as well as a strategy for recapitalizing the banking system in order minimize uncertainty, pain, and disruption.
Still, the costs would have been sizeable, so the IMF would have needed to offer generous financing, covering the country’s import requirements for, say, two years while providing the liquidity to manage the transition to a new currency.
Of course, this would have increased the IMF’s already-large exposure to Greece; but this would have been a worthwhile trade-off, because it would have served a strategy that would have had a much better chance of success.
But is there any strategy that could have succeeded in restoring the Greek economy?
After all, under any scenario, Greece will need to run a primary surplus and undertake structural reforms to transform its economy.
And many insist that this will not happen, because Greece simply refuses to change.
And yet such assessments overlook the record of the past few years, during which successive governments have taken some fairly radical measures to strengthen Greece’s fiscal position and scale back the public payroll.
Moreover, the skeptics overlook the fact that incentives to carry out structural reforms are partly endogenous.
After all, without devaluation and the prospect of debt relief, reform merely spells more short-term pain, not less.
The reason why an assisted Grexit was never offered seems clear: Greece’s European creditors were vehemently opposed to the idea.
But it is not clear that the IMF should have placed great weight on these concerns.
Back in 2010, creditor countries were concerned about contagion to the rest of the eurozone.
If Grexit had succeeded, the entire monetary union would have come under threat, because investors would have wondered whether some of the eurozone’s other highly indebted countries would have followed Greece’s lead.
But this risk is actually another argument in favor of providing Greece with the option of leaving.
There is something deeply unappealing about yoking countries together when being unyoked is more advantageous.
More recently, creditor countries have been concerned about the financial costs to member governments that have lent to Greece.
But Latin America in the 1980s showed that creditor countries stand a better chance of being repaid (in expected-value terms) when the debtor countries are actually able to grow.
In short, the IMF should not have made Europe’s concerns, about contagion or debt repayment, decisive in its decision-making.
Instead, it should have publicly pushed for the third option, which would have been a watershed, for it would have signaled that the IMF will not be driven by its powerful members to acquiesce in bad policies.
Indeed, it would have afforded the Fund an opportunity to atone for its complicity in the creditor-driven, austerity-addled misery to which Greeks have been subject for the last five years.
Above all, it would have enabled the IMF to move beyond being the instrument of status quo powers – the United States and Europe.
From an Asian perspective, by defying its European shareholders, the IMF would have gone a long way toward heralding the emergence of a new institution: a truly International Monetary Fund, in place of today’s Euro-Atlantic Monetary Fund.
All is not lost.
If the current strategy fails, the third option – assisted Grexit – remains available.
The IMF should plan for it.
The Greek people deserve some real choices in the near future.
The Inequality Trifecta
LAGUNA BEACH – There were quite a few disconnects at the recently concluded Annual Meetings of the International Monetary Fund and World Bank.
Among the most striking was the disparity between participants’ interest in discussions of inequality and the ongoing lack of a formal action plan for governments to address it.
This represents a profound failure of policy imagination – one that must urgently be addressed.
There is good reason for the spike in interest.
While inequality has decreased across countries, it has increased within them, in the advanced and developing worlds alike.
The process has been driven by a combination of secular and structural issues – including the changing nature of technological advancement, the rise of “winner-take-all” investment characteristics, and political systems favoring the wealthy – and has been turbocharged by cyclical forces.
In the developed world, the problem is rooted in unprecedented political polarization, which has impeded comprehensive responses and placed an excessive policy burden on central banks. Though monetary authorities enjoy more political autonomy than other policymaking bodies, they lack the needed tools to address effectively the challenges that their countries face.
In normal times, fiscal policy would support monetary policy, including by playing a redistributive role.
But these are not normal times. With political gridlock blocking an appropriate fiscal response – after 2008, the United States Congress did not pass an annual budget, a basic component of responsible economic governance, for five years – central banks have been forced to bolster economies artificially.
To do so, they have relied on near-zero interest rates and unconventional measures like quantitative easing to stimulate growth and job creation.
Beyond being incomplete, this approach implicitly favors the wealthy, who hold a disproportionately large share of financial assets.
Meanwhile, companies have become increasingly aggressive in their efforts to reduce their tax bills, including through so-called inversions, by which they move their headquarters to lower-tax jurisdictions.
As a result, most countries face a trio of inequalities – of income, wealth, and opportunity – which, left unchecked, reinforce one another, with far-reaching consequences.
Indeed, beyond this trio’s moral, social, and political implications lies a serious economic concern: instead of creating incentives for hard work and innovation, inequality begins to undermine economic dynamism, investment, employment, and prosperity.
Given that affluent households spend a smaller share of their incomes and wealth, greater inequality translates into lower overall consumption, thereby hindering the recovery of economies already burdened by inadequate aggregate demand.
Today’s high levels of inequality also impede the structural reforms needed to boost productivity, while undermining efforts to address residual pockets of excessive indebtedness.
This is a dangerous combination that erodes social cohesion, political effectiveness, current GDP growth, and future economic potential. That is why it is so disappointing that, despite heightened awareness of inequality, the IMF/World Bank meetings – a gathering of thousands of policymakers, private-sector participants, and journalists, which included seminars on inequality in advanced countries and developing regions alike – failed to make a consequential impact on the policy agenda.
Policymakers seem convinced that the time is not right for a meaningful initiative to address inequality of income, wealth, and opportunity.
But waiting will only make the problem more difficult to resolve.
In fact, a number of steps can and should be taken to stem the rise in inequality.
In the US, for example, sustained political determination would help to close massive loopholes in estate planning and inheritance, as well as in household and corporate taxation, that disproportionately benefit the wealthy.
Likewise, there is scope for removing the antiquated practice of taxing hedge and private-equity funds’ “carried interest” at a preferential rate.
The way home ownership is taxed and subsidized could be reformed more significantly, especially at the top price levels.
And a strong case has been made for raising the minimum wage.
To be sure, such measures will make only a dent in inequality, albeit an important and visible one.
In order to deepen their impact, a more comprehensive macroeconomic policy stance is needed, with the explicit goal of reinvigorating and redesigning structural-reform efforts, boosting aggregate demand, and eliminating debt overhangs. Such an approach would reduce the enormous policy burden currently borne by central banks.
It is time for heightened global attention to inequality to translate into concerted action.
Some initiatives would tackle inequality directly; others would defuse some of the forces that drive it.
Together, they would go a long way toward mitigating a serious impediment to the economic and social wellbeing of current and future generations.
Imperial Hubris
The United States, with its claims of exceptionalism, is usually thought of as free of historical analogies.
But comparisons with the fate of earlier empires are becoming more common.
I have recently been struck by an analogy from German history: the disaster of German leadership during World War I, epitomized by Kaiser Wilhelm II.
Wilhelm assumed the throne in 1888 at age 29, his liberal father having reigned for 88 days before succumbing to throat cancer.
His grandfather, Wilhelm I, had presided over Prussia’s military victories, which enabled Bismarck to create the unified Reich in 1871.
Within two years, Wilhelm II dismissed Bismarck.
Wilhelm II became the leader of a country on the cusp of European mastery.
By the 1890’s, Germany was the strongest power on the continent.
But power generates opposition, and Germany’s alarmed neighbors began to form defensive alliances.
Wilhelm flaunted his absolute power, believing it to be divinely ordained.
He was contemptuous of parliament, whose circumscribed powers were set forth in a constitution that he boasted of never having read.
He was intelligent, impressed by technological progress, perhaps even gifted, but untutored and impulsive; he reveled in the trappings of power and delighted in uniforms.
His ostentation and extravagance were deeply un-Prussian.
He was given to bombastic speeches, once warning newly sworn-in recruits that, if he so ordered, they would have to shoot their parents.
He gave astounding orders to soldiers departing to suppress the Boxer Rebellion in China: they should awaken fear as had the Huns of yore.
He detested liberal critics.
And he spoke disparagingly of foreign nations, especially Great Britain.
Some of this had to do with his ambivalent anglophobia and his distrust of his mother, Queen Victoria’s daughter.
Worse, he supported those groups that sought to increase German military power, including the creation of a high-sea fleet that could challenge the British navy.
He shunned the details of government, for they interfered with his diversions.
From the beginning, members of his entourage worried about his volatility and mental balance.
German foreign policy from 1890 to 1914, for which the Kaiser bore formal and intermittently actual responsibility, comprised a series of failures and setbacks.
But Wilhelm did not in fact rule, as Germany’s conduct during WWI made clear.
In early July 1914, after the murder of Austrian Archduke Franz Ferdinand, Wilhelm egged on the Austrians, but by the end of the month he couldn’t restrain his own subordinates from starting a war, following the dictates of military strategy – the famed Schlieffen Plan.
Once war started, Wilhelm became Supreme War Lord, and his chief function would have been to adjudicate among rival elements within his government.
At the center, a civilian-military conflict emerged, the German army having always had a state-within-a-state mentality and status.
Moreover, military and civilian leaders were divided among themselves.
After the battle of the Marne (September 1914) and the failure of the Schlieffen Plan, some of Wilhelm’s advisers realized that the chances for a military victory were slim, hence the need for a negotiated peace.
But by that time, even the civilian chancellor had resolved on extravagant war aims that made hopes for a negotiated peace illusory.
From then on, the Kaiser’s mental state became a dominant issue in the war’s conduct.
Yet the most portentous decisions had to be taken: changes in the military and civilian leadership, and, in 1917, whether to declare unrestricted submarine warfare and thus insure the United States’ entry into the war.
The fate of his country (and of Europe) depended on how Wilhelm decided.
But, after three years of unimaginable carnage, the Kaiser had been reduced to an instrument of a military dictatorship run by Paul von Hindenburg and his chief of staff, Erich Ludendorff.
They enjoyed the confidence of Germany’s ruling classes, were determined to reject all compromise, and believed that “one more push” would deliver “total victory.”
Meanwhile, the Kaiser was systematically shielded from the truth and became estranged from reality.
For a moment in the spring of 1918 – after the Bolsheviks signed a German-dictated Carthaginian peace – a German victory seemed possible.
But by August, Allied forces broke through German lines, and a stunned Ludendorff, fearing a sudden collapse of his army, demanded that the newly constituted civilian government send an immediate request for an armistice.
But the Allies wouldn’t negotiate with the Kaiser.
War-weary Germans began to demand the Kaiser’s abdication.
The army forced Wilhelm into exile in the Netherlands, where, until his death in 1941, he spread venomous poison where he could: the Jews and socialists were to blame; he alone was right.
Once more reflecting and encouraging a large segment of what had been his people, he saw in Hitler the new man chosen by providence, the savior of a Germany defeated by treachery.
Wilhelm had terrifying flaws and operated at the head of a deeply flawed political system.
But, ultimately, his chief failure had been to hand power to military and civilian hawks – wrongly called conservatives, for their vision was a radical reordering of Europe.
Of course, America is not Imperial Germany.
But there may be a lesson from a country whose wartime rulers, quarrelling among themselves, inflicted unimaginable harm on their people and to the world with their mendacious, secretive, and paranoid style.
The consequences of their leadership became manifest only later, as an aggrieved nation’s people turned against each other in their deep political and moral divisions and hatreds.
It took a worse catastrophe, a world-historical scourge, to teach these people a lesson.
Let us hope that Americans learn their lesson about the dangers and follies of imperial hubris sooner.
Imperialism Reclaimed
LONDON – History has no final verdicts.
Major shifts in events and power bring about new subjects for discussion and new interpretations.
Fifty years ago, as de-colonization accelerated, no one had a good word to say for imperialism.
It was regarded as unambiguously bad, both by ex-imperialists and by their liberated subjects.
Schoolchildren were taught about the horrors of colonialism, how it exploited conquered peoples.
There was little mention, if any, of imperialism’s benefits.
Then, in the 1980’s, a revisionist history came along.
It wasn’t just that distance lends a certain enchantment to any view.
The West – mainly the Anglo-American part of it – had recovered some of its pride and nerve under US President Ronald Reagan and British Prime Minister Margaret Thatcher.
And there was the growing evidence of post-colonial regimes’ failure, violence, and corruption, especially in Africa.
But the decisive event for the revisionists was the collapse of the Soviet empire, which not only left the United States top dog globally, but also seemed, to the more philosophically minded, to vindicate Western civilization and values against all other civilizations and values.
With the European Union extending its frontiers to embrace many ex-communist states, the West became again, if briefly, the embodiment of universal reason, obliged and equipped to spread its values to the still-benighted parts of the world.
Francis Fukuyama’s The End of History and the Last Man testified to this sense of triumph and historical duty.
Such a conjuncture set the stage for a new wave of imperialism (though the reluctance to use the word remained).
In doing so, it was bound to affect interpretations of the old imperialism, which was now extolled for spreading economic progress, the rule of law, and science and technology to countries that would never have benefited from them otherwise.
Foremost among the new generation of revisionist historians was Niall Ferguson of Harvard University, whose television series, based on his new book Civilization: The West and the Rest, has just started showing in Britain.
In its first episode, Ferguson appears amid the splendid monuments of China’s Ming Dynasty, which, in the fifteenth century, was undoubtedly the greatest civilization of the day, with its naval expeditions reaching the coasts of Africa.
After that, it was all downhill for China (and “the Rest”) and all uphill for the West.
Ferguson snazzily summarizes the reasons for this reversal in six “killer apps”: competition, science, property rights, medicine, the consumer society, and the work ethic.
Against such tools – unique products of Western civilization – the rest had no chance.
From such a perspective, imperialism, old and new, has been a beneficent influence, because it has been the means of spreading these “apps” to the rest of the world, thereby enabling them to enjoy the fruits of progress hitherto confined to a few Western countries.
Understandably, this thesis has not met with universal approbation.
The historian Alex von Tunzelmann accused Ferguson of leaving out all of imperialism’s nasty bits: the Black War in Australia, the German genocide in Namibia, the Belgian exterminations in the Congo, the Amritsar Massacre, the Bengal Famine, the Irish potato famine, and much else.
But that is the weakest line of attack.
Edward Gibbon once described history as being little better than a record of the “crimes, follies, and misfortunes of mankind.”
Imperialism certainly added its quota to these.
But the question is whether it also provided, through Hegel’s “cunning of reason,” the means to escape from them.
Even Marx justified British rule in India on these grounds.
Ferguson, too, can make a sound argument for such a proposition.
The most serious weakness in Ferguson’s presentation is his lack of sympathy for the civilizations dismissed as “the rest,” which also points to the most serious limitation of the revisionist case.
The “triumph of the West” that followed the collapse of Communism in Europe was clearly not the “end of history.”
As Ferguson must know, the main topic of discussion in international affairs nowadays concerns the “rise” of China, and more generally Asia, as well as the stirring of Islam.
Of course, the Chinese may prefer to talk about “restoration” rather than “rise,” and point to a “harmonious” pluralism of the future.
But “rise” is how most people think of China’s recent history, and in history the rise of some is usually associated with the decline of others.
In other words, we may be reverting to that cyclical pattern that historians assumed to be axiomatic before the seemingly irreversible rise of the West implanted in them a view of linear progress toward greater reason and freedom.
Europe is plainly in decline, politically and culturally, though most Europeans, blinded by their high living standards and the pretensions of their impotent statesmen, are happy to dress this up as progress.
Chinese savings are underwriting much of the American civilizing mission that Ferguson applauds.
The pattern seems clear: the West is losing dynamism, and the rest are gaining it.
The remainder of this century will show how this shift plays out.
For the moment, most of us have lost the historical plot.
It is possible, for example, to imagine a “Western world” (one that applies Ferguson’s “killer apps”) in which the actual West is no longer the dominant factor: America will simply passes the torch to China, as Britain once did to America.
But it seems to me extremely unlikely that China, India, and “the rest” will simply take over Western values wholesale, for this would amount to renouncing any value in their own civilizations.
Some syntheses and accommodations between the West and the rest will inevitably accompany the shift in power and wealth from the former to the latter.
The only question is whether the process will be peaceful.
Europe’s Plan A
FRANKFURT – Europe’s politicians nowadays are desperately looking for someone to blame for the euro crisis.
Germany blames France, and vice versa.
Even lawyers are getting into the act, trying to identify legal responsibility for the monetary union’s design flaws.
Meanwhile, as the crisis has deepened, a new consensus about Europe’s monetary union has emerged.
The euro, according to this view, was devised in a fit of giddy and irresponsible optimism – or, alternatively, panic at the prospect of German hegemony over Europe – in the wake of the fall of the Berlin Wall.
Nothing could be further from the truth.
The Report on economic and monetary union in the European Community, which laid out the euro blueprint, was presented in April 1989 – a time when no one (with the possible exception of some Kremlin strategists) was thinking about German reunification.
Moreover, the salient issues concerning monetary unions were well understood, and remedies for the most significant obstacles were proposed at the outset.
The committee that drafted the report – now known as the Delors Report, after its chairman, Jacques Delors – was a fundamentally rather conservative group of central bankers, with even the governor of the Bank of England (BoE) signing on.
Its internal debates highlighted two problems of the potential monetary union.
First, the committee explicitly discussed whether the capital market would suffice to impose fiscal discipline on the currency union’s members, and agreed that a system of rules was needed.
But those rules were steadily weakened, and by the early 2000’s were widely derided (including by Romano Prodi, Delors’ successor as President of the European Commission), as governments found that they could run large deficits without paying higher market interest rates.
The second problem was more serious.
In the original plan for the European Central Bank, the proposed institution would have had overall supervisory and regulatory powers. Indeed, the drafters of the ECB statute produced an astonishingly far-sighted approach to banking supervision.
Their 1990 version of the Maastricht Treaty’s Article 25 on Prudential Supervision included the following provisions (placed in square brackets to show that they were not completely consensual): “The ECB may formulate, interpret, and implement policies relating to the prudential supervision of credit and other financial institutions for which it is designated as competent supervisory authority.”
The demand that the ECB should be the central supervisory authority in an integrated capital market met strong resistance, above all from Germany’s Bundesbank, which worried that a role in maintaining financial stability might undermine the Bank’s ability to focus on price stability as the primary goal of monetary policy.
There was also bureaucratic resistance from existing regulators. Most important, supervision suggested some potential responsibility to recapitalize problematic banks, and thus involved a fiscal cost.
The most energetic actor behind the early thinking on banking supervision was a BoE official, Brian Quinn.
But his credibility was sapped in the wake of criticism of the BoE’s handling of the collapse in 1991 of the Bank of Credit and Commerce International – an episode that anticipated later issues in managing the failure of large, cross-border institutions.
A legal vestige of the original plan may offer an easy path to a greater ECB supervisory role today.
According to Article 25 of the Maastricht Treaty, the ECB may “offer advice to and be consulted by” the Commission or the Council on the scope and implementation of legislation relating to prudential supervision.
When that phrase was inserted in the Treaty, it appeared as if the hurdles to effective European banking supervision could hardly be set higher.
The ECB was not given overall supervisory and regulatory powers.
And, until the outbreak of the financial crisis in 2007-2008 highlighted the connections between financial and fiscal health, no one considered that a problem.
They do now.
Nevertheless, fiscal rules and common banking supervision are still regarded in many quarters as an illegitimate encroachment on member states’ sovereignty.
After all, the European Union has avoided becoming a focus of heated contestation precisely because it never got much of a share of what Europeans produced (its budget, at just over 1% of the EU’s GDP, has barely changed in relative terms for the past 40 years).
It was the member states that did politics and budgets.
Delors had a different vision.
At the time of his report, he concluded that the European budget would amount to some 3% of GDP – identical to the peacetime US federal budget’s share of GDP during the country’s first stage of monetary union, in the nineteenth century.
Moreover, as in Europe today, when Alexander Hamilton proposed a central banking system, the Bank of the United States, alongside consolidation of states’ Revolutionary War debt into federal debt, the implementation of his sensible plan was imperfect.
In the American case, the principles of federal finance were not worked out until the Civil War, and the Federal Reserve System was established even later, coming only in 1913.
Europeans can learn from the United States and implement a fundamentally sound plan.
But they must also recognize that political backlashes and setbacks are inevitable – and thus that the road from vision to reality may be longer than expected.
National Security Babies
WASHINGTON, DC – From the emergence of the Islamic State to Russian expansionism and China’s rise, there is no shortage of national-security challenges facing the United States.
But, as a new report – Worthy Work, STILL Unlivable Wages – demonstrates, nothing poses a more potent threat to America’s future than the failure to provide adequate care and education to children under the age of five.
If young children do not receive high-quality care from educated professionals who understand how to stimulate and shape brain development, the next generation of Americans will suffer from an ever-widening achievement gap relative to their counterparts in other advanced countries and emerging competitors.
Yet Americans pay these trained professionals the same wages paid to those who park our cars, walk our dogs, flip our burgers, and mix our drinks.
The implication is clear: American children require no more nuanced attention than animals or inanimate objects.
This is a grave error.
Early childhood care can shape a person’s lifelong capacity for learning, emotional resilience, confidence, and independence.
In fact, providing high-quality care that engages and instructs children in their first five years of life has a greater impact on their development than any other intervention over the course of their lifetime.
This is not new information.
The book Neurons to Neighborhoods: The Science of Early Childhood Development, published more than a decade ago by the National Academy of Sciences,&nbsp;begins by acknowledging that, from conception to the first day of kindergarten, the pace of development exceeds “that of any subsequent stage of life.”
That development “is shaped by a dynamic and continuous interaction between biology and experience.”
This observation is now backed by neuroscience, which has identified how&nbsp;the brain develops over that period and has created a system for measuring learning gaps.
Such research has confirmed that building the brain is just as important as feeding the body to produce healthy, intelligent, productive, and resilient adults.
A recent study tallied the results of the Carolina Abecedarian Project, a North Carolina social experiment that began in the early 1970s.
The study compared two sets of disadvantaged children, with one set receiving excellent nutrition and high-quality, stimulating care for eight hours a day from birth to age five, and the other receiving ordinary formula and care.
Four decades later, the adults who had received better care were not only physically healthier; they were more than four times likelier to have a college degree.
Clearly, there is a lot more to early-childhood care than setting out juice and cookies, supervising naps, and taking kids to the playground.
According to Megan Gunnar, who specializes in the intersection of developmental psychology and neuroscience, a good early childhood caregiver “requires [the] capacity to analyze what’s happening in the moment” and determine what concept – whether a numerical concept, or one related to language or physics – the child could be learning. Responding “in the moment, dynamically, really takes analytic skills, executive function, ordering and sequencing, and knowing a lot of information.”
Unfortunately for America’s children, the high-functioning circuits in the caregiver’s prefrontal cortex that these skills demand are directly affected by stress.
And, in the US, the vast majority of early-childhood workers are under enormous economic stress.
In 2012, almost half of all childcare workers’ families received some kind of federal public support, from food stamps to children’s health insurance.
Such economic stress does not decrease with education.
A male teacher working in the civilian labor force with a bachelor’s degree or higher in 2012 had an average annual salary of $88,000.
Early childhood educators with the same qualifications had an average annual salary of $27,000-28,000.
The exception is the US military, which pays teachers according to the same scale as other defense department employees, based on criteria like training, education, seniority, and experiences.
In other words, the segment of the US government that is directly responsible for upholding national security recognizes the need to attract and retain highly educated workers to provide care and early learning to the children of all employees.
Could this be because the military and civilian leaders of the US defense establishment have seen first-hand the costs of stunted intellectual growth, hyperactivity, and lack of impulse control?
To compete in a digital global economy, the US – indeed, any country – needs a capable, well educated, innovative, and healthy workforce.
The development of such a workforce begins at birth.
Anyone can change a diaper, but not everyone can engage, stimulate, and respond to a baby or a toddler in a way that will build neurons, much less impart skills calibrated to the child’s stage of development.
The US has the world’s most dynamic technological sector – not least because it offers the high salaries needed to attract the best talent.
You get what you pay for, and Americans are paying far too little for their children to thrive.
Impotent America?
JERUSALEM – Israel’s 60th anniversary has come and gone. So, too, has President George W. Bush’s final visit to the Middle East.
Amidst the celebrations and the soul-searching, no meaningful breakthrough in the deadlocked Israeli-Palestinian negotiations is visible.
There are immediate reasons why this is so: Israeli Prime Minister Ehud Olmert’s government is weak and unpopular, mainly due to the botched 2006 war against Hezbollah in Lebanon.
The Palestinian Authority under Mahmoud Abbas is even weaker, having lost control of Gaza to Hamas after a violent putsch last year.
On the Palestinian side, this is part of a deeper phenomenon: a longstanding failure to create the institutional structures necessary for nation building.
For example, in 1936-1939, a Palestinian uprising against British rule deteriorated into a bloody civil war, in which more Palestinians were killed by their brethren than by the British army or the Jewish self-defense forces.
This is repeating itself now in Gaza.
Looking back at 60 years of American involvement in the region, one can discern two scenarios in which the United States can bring the local players to an agreement.
Absent these conditions, the US is ultimately powerless.
The first scenario is when a real war threatens to spill over into a wider conflict, destabilizing the region and Great Power relations.
At such times, resolute American steps can stop the fighting and impose a cease-fire, if not peace.
In 1973, at the end of the Yom Kippur War, Israel was poised to encircle the entire Egyptian Third Army in Sinai.
Its troops were on the road to Cairo, threatening to inflict a major defeat on Egypt.
Soviet intervention became a real threat.
A few tough messages from President Richard Nixon stopped the Israelis in their tracks and enabled the Americans to start a lengthy process of de-escalation that led to a number of interim agreements.
Likewise, in 1982, during the invasion of Lebanon, Israeli troops were about to enter Muslim West Beirut after Syrian agents assassinated the pro-Israeli Lebanese President-elect Bashir Gemayel.
This would probably have brought Syria into the war.
A few tough calls from President Ronald Reagan to Prime Minister Menachem Begin prevented this.
During the first Gulf War in 1991, when Iraq fired 39 Scud missiles at Israeli civilian targets and US forces failed to stop the Iraqi attacks, Israel was set to strike Iraqi targets, which would have split the US-Arab anti-Iraq coalition.
The US warned Israel not to get involved, and Israel was forced to comply.
In all these cases, American involvement was swift and focused on a clear aim, and compliance was verifiable within days, if not hours.
In such dramatic situations, US power is at its greatest.
The other scenario is when the two sides have already engaged in bilateral peace talks, paid the domestic political price, and reached agreement on most issues, though some matters remain unresolved and threaten to derail the process.
In such cases, America can step in and, by using both carrot and stick, make both sides go the extra mile.
After Anwar Sadat’s visit to Jerusalem in 1977, Israel and Egypt negotiated for a year and reached agreement on most issues: peace, diplomatic relations, and full Israeli withdrawal from all occupied Egyptian territory in Sinai.
At this point, President Jimmy Carter – who initially opposed the process – invited both sides to Camp David to hammer out a peace treaty.
In 1993, in secret bilateral negotiations in Norway (unknown to the Americans), Israel and the PLO reached an agreement about mutual recognition and the creation of a provisional Palestinian Autonomous Authority. Yet some issues remained unresolved.
President Bill Clinton stepped in, and prevailed upon the two sides to work out their remaining disagreements.
When either of these two scenarios is lacking, American initiatives are stillborn.
This happened to Clinton at Camp David in 2000, when he failed to bring Israeli Prime Minister Ehud Barak and PLO Chairman Yasser Arafat to an agreement, and to Bush’s Road Map in 2003, when both sides agreed in principle to its general guidelines, but did little to implement them.
Absent local political will, and when confronted with a peace-making project that may take years to complete, the US is virtually powerless.
It is extremely successful as a fire brigade or as a midwife , but not as an initiator . What applies to the US is even truer for the European Union, whose “soft power” is no match for its lack of local credibility.
The same dynamic can be seen elsewhere: for all its power, the US has failed to resolve the conflicts in Cyprus, Bosnia, or Kosovo.
The Annan Plan failed in Cyprus because of one party’s opposition; progress now (the minor but symbolically important opening of the Ledra Street crossing in downtown Nicosia) reflects internal political changes on the Greek Cypriot side.
Similarly, if Belgrade will change its obstreperous position on Kosovo, this will be due not to US or EU pressure, but to internal political changes in Serbia.
Recognizing the limits of US power doesn’t mean that America is irrelevant: it can stabilize a conflict, help bring about confidence-building measures, and negotiate interim agreements.
But at the end of the day, in the case of Israel-Palestine, as in any conflict between two national movements, the key is in the hands of the local players.
No national conflict has ever been solved by outside powers, however well intentioned they may be.
Health Care’s New Frontier
BEIJING – Developing countries face a seemingly insurmountable hurdle in providing health care to their rapidly growing – or, in some cases, rapidly aging – populations, especially as health systems become increasingly over-burdened and infections and other diseases spread.
Because access to medicine in these regions is a multifaceted challenge, it is best tackled by several parties.
Lasting, collaborative relationships among pharmaceutical companies, governments, nonprofit organizations, and community leaders are needed to help disadvantaged populations overcome their health-care challenges.
Together, these parties should take a binary approach, addressing both “hardware” factors (which remain constant, such as physical distance to treatment centers and elongated supply chains) and “software” factors (the intangibles that vary greatly in each region, such as the role of family and cultural beliefs).
These principles are especially true in places like China’s rural Xinjiang province, where life expectancy is stunted at 67 years (compared to 73.5 for China as a whole), and lack of access to health care undermines well-being.
Xinjiang covers nearly 650,000 square miles (1.7 million square kilometers), but it is home to only 21 million people, many of whom are members of nomadic tribes.
From an economic standpoint, Xinjiang’s resilience is crucial to China’s economic growth strategy – it is seen as the country’s gateway to the west.
But the reality is that maintaining the livelihood and well-being of this area’s population and those in other rural parts of China is a serious challenge.
Throughout rural China, the spread of infectious diseases – particularly hepatitis B, which affects millions – reflects a lack of hygiene education.
The health ministry cited a 9.5% increase in deaths caused by infectious diseases from 2011 to 2012.
Moreover, there is a serious shortage of health-care workers – just 1.3 per 1,000 rural inhabitants in China.
Free medicines are only part of the solution.
We need to go beyond donations and reduced-pricing schemes to build sustainable health-care systems with strong distribution channels and education programs for the public and for health-care workers.
Without these components, the model collapses.
Through public-private partnerships, we can leverage unique strengths and be better equipped to expand access to health care.
This can create a symbiotic relationship, offering benefits to government, business, and the local community.
For example, Novartis’s Jiankang Kuaiche (“Health Express”) program in Xinjiang is a partnership between Novartis and the local government that aims to expand access to medicine, build capacity, and educate the public.
Health Express achieves this by training local physicians in prevention and treatment of infectious diseases and educating primary and middle-school students on health and hygiene via a traveling caravan that moves from school to school.
During a recent trip to Xinjiang, I met several physicians from rural hospitals who had received training through Health Express.
They told me that in the past, hepatitis patients had to travel for hours to be diagnosed and treated at a city hospital, while many others who were unable to make the journey suffered without treatment.
Now, with physicians trained in infectious diseases, hepatitis treatment is possible in rural areas of Xinjiang, and patient outcomes have improved significantly.
I also met with school children at Urumqi Dengcaogou Boarding School, which is situated in a rural area outside of the provincial capital.
The students were proud to be able to bring their new health-care knowledge back to their families.
They told me how they had told their parents to quit smoking after learning about the consequences of the habit on health.
These children join more than 500,000 others in Xinjiang who have participated in the educational component of Health Express.
By targeting schools as hubs for health-care education and shaping students into health ambassadors for their families and friends, we can reach an even greater number of people in Xinjiang’s nomadic communities.
Xinjiang means “new frontier,” and right now, we are at the edge of a new frontier in delivering sustainable health-care solutions to communities where limited resources and infrastructure constrain access to health care.
These multidimensional, scalable interventions help to bridge the gaps in developing regions.
But neither corporations nor governments can do it alone.
They need to work together to achieve the best possible outcome.
We also must abandon the idea of a one-size-fits-all model for expanding access to health care and adjust our approaches to ensure the best fit with local health priorities and customs.
With education and prevention, capacity-building, and new kinds of partnerships, we can continue to improve access to health care in Xinjiang and beyond, boosting well-being throughout the developing world.
Improving Breast Cancer Care Step by Step
Breast cancer, the most common life-threatening malignancy in the West, is more curable than ever but remains one of the most common causes of cancer death.
The cost of this disease is high; so, too, are the costs of treatment because no “magic bullet” cure exists.
Yet, the death rate from breast cancer is falling in most Western countries even though the number of cases remains relatively unchanged.
This likely reflects increased attention to the details of care.
Because progress against breast cancer is incremental - ie, no single treatment is instantly recognized as dramatically superior – big disparities exist in how various treatments are applied in different countries.
Even though science may clearly point to the best way to fight breast cancer, uneven application of new treatments may cause many women to suffer, or even die, unnecessarily.
Although the causes of breast cancer remain unknown, early detection, before cancer cells spread, is crucial.
Large randomized trials from several decades ago showed that mammography added to regular physical examination improves early detection, reducing the risk of death.
Recent studies focus on the ideal age to begin screening and the ideal frequency of testing.
Soon debates about the ideal technology – conventional mammography, digital mammography, ultrasound, magnetic resonance imaging, or a combination of technologies – are likely.
Screening with mammography is clearly superior to no screening and our first priority should be to assure that women are screened.
Arguments about effectiveness here frequently focus on cost-effectiveness.
But if this is the barrier to widespread use, efforts to lower costs should be pursued, for this is no excuse to deny women the benefits of screening.
Surgery, although not always curative, is the mainstay of treatment because most tumors left in place will spread.
The classic surgical option was the mastectomy, where the entire breast and surrounding tissue was removed.
Appreciating the fact that breast cancer could spread even before it was treated led to clinical trials testing breast-sparing surgery (“lumpectomy”).
Studies show that the majority of women can be safely treated in this way.
Within the US, variations in the use of breast conservation are linked to surgical bias, as well as to availability of radiation therapy.
Individual patients should not be encouraged to have mastectomies because of their surgeons’ bias, although there are specific circumstances where this is appropriate.
To treat cancer cells that might remain in the breast even after an optimal surgical procedure, radiation to the preserved breast is routinely used.
Even if the breast is removed, radiation is sometimes needed to prevent recurrence of the breast cancer on the skin of the chest.
In the case of breast conservation, radiation therapy is needed from the beginning, except in unusual circumstances.
Efforts to assure access to high quality radiation therapy should be made so that breast cancer does not require the loss of a breast.
Surgeons and pathology laboratories performing breast conservation need to be skilled in determining the adequacy of the procedure to assure patients of the best result.
Because breast cancer is so invasive and spreads so unpredictably, surgery is not always sufficient.
But treatment of cancer cells that may have spread beyond the breast is possible with systemic therapy, meaning drugs.
Unfortunately, we cannot know in advance if surgery will succeed because we cannot detect if cancerous cells have spread.
This is why treatment of breast cancer is ideally multi-disciplinary and multi-faceted, including not only local treatment of the breast but also systemic treatment for the entire body.
The only way to approach cells that might have spread throughout the body is to give medicines because only drugs circulate throughout the body.
Systemic treatment given after surgery is called “adjuvant therapy”.
Here, however, are found the widest variations in treatment, both among and within countries.
This reflects honest intellectual differences as well as monetary concerns and limits.
The basic adjuvant options are hormone treatments and chemotherapy.
Hormone therapy takes advantage of the fact that many (but not all) breast cancers have receptors for the female hormones estrogen and progesterone.
Interaction with these receptors can kill cancer cells.
Chemotherapy comprises a large variety of drugs that directly kill cancer cells.
Investigators at Oxford University conduct an overview every five years of the many adjuvant treatments now available, and this report points to some clear conclusions.
At least 50,000 women have been treated in clinical trials that demonstrate conclusively the impact of tamoxifen, the most widely used anti-estrogen treatment.
Before the Oxford overview, American oncologists typically did not recommend tamoxifen for young patients while Europeans often recommended it for all patients including those whose tumors lacked the requisite receptors.
As an outgrowth of the Oxford findings, there is a more consistent approach now and evidence of improving outcomes.
Several hundred thousand women are now alive because of effective anti-estrogen therapies.
In contrast to hormone treatments, given only to patients likely to respond by virtue of an analysis of their hormone receptors, chemotherapy is given to all or any eligible patients.
Hence, the impact of chemotherapy appears to be smaller than that of hormone treatments in some patient groups.
A predictive test for responsiveness to chemotherapy would be a major step forward in treating breast cancer as it might allow more selective use of these agents.
Chemotherapy, usually comprising several drugs, is effective at killing cancer cells, increasingly safe, and adds to the effectiveness of hormone therapy.
Building on this success, current research is exploring new drugs, particularly those that rely on our growing biological insights.
For example, some aggressive breast cancers were found to have an excess of a protein called HER2.
An antibody targeting HER2 appears to be effective both when given alone or in combination with conventional chemotherapy, but such therapy in the adjuvant setting will raise the cost and complexity of care.
Newer targeted treatments entering clinical trials are likely to be even more contentious because of their cost.
For some new agents, it is fair to ask whether they truly represent an advance over previously available (less expensive) alternatives.
For novel agents, such as the anti-HER2 antibody Herceptin™, where there is no precedent, this cost must be considered against its novel action, activity, and limited toxicity.
These challenges and questions are becoming more frequent and societies must ask how much they can afford.
This requires more than discussion about how health care money is spent because this can force doctors and patients to fight over crumbs when what is needed is bigger loaves (budgets)!
Discussions over expenditures should not pit pediatricians against oncologists but instead, patients and physicians should discuss with governments overall expenditures for health and non-health needs.
Because the outlook for women can be improved if everyone conforms to best practice, the best available care must be provided to breast cancer’s victims even as we search for incremental steps forward.
This requires hard decisions at the societal level as well as dedicated advocates for patients.
We should resist sacrificing lives simply because of expense.
An Optimistic Case for the Euro
CAMBRIDGE – The prospects for the euro and the eurozone remain uncertain.
But recent events at the European Central Bank, in Germany, and in global financial markets, make it worthwhile to consider a favorable scenario for the common currency’s future.
The ECB has promised to buy Italian and Spanish sovereign bonds to keep their interest rates down, provided these countries ask for lines of credit from the European Stability Mechanism and adhere to agreed fiscal reforms.
Germany’s Constitutional Court has approved the country’s participation in the ESM, and Chancellor Angela Merkel has given her blessing to the ECB’s bond-buying plan, despite strong public objections from the Bundesbank.
And the international bond market has expressed its approval by cutting interest rates on Italy’s ten-year bonds to 4.8%, and on Spain’s to 5.5%.
Italian bond rates had already been falling before ECB President Mario Draghi announced the conditional bond-buying plans.
That reflected the substantial progress Italian Prime Minister Mario Monti’s government had already made.
New legislation will slow the growth of pension benefits substantially, and the Monti government’s increase in taxes on owner-occupied real estate will raise significant revenue without the adverse incentive effects that would occur if rates for personal-income, payroll, or value-added taxes were raised.
Reflecting these reforms, the International Monetary Fund recently projected that Italy will have a cyclically adjusted budget surplus of nearly 1% of GDP in 2013.
Unfortunately, because Italy will still be in recession next year, its actual deficit is expected to be 1.8% of GDP, adding to the national debt.
But economic recovery will come to Italy, moving the budget into surplus.
When the markets see that coming, they will drive Italy’s sovereign interest rates even lower.&nbsp;
Given Italy’s very large national debt, interest payments add more than 5% of GDP to the fiscal deficit.
The combination of economic recovery and lower interest rates would produce a virtuous dynamic in which falling interest rates and a rising budget surplus are mutually reinforcing.
The situation in Spain is not as good.
Despite cuts in government spending and increases in taxes, the IMF still projects the cyclically adjusted fiscal deficit to exceed 3.2% of GDP in 2013 and 2.3% of GDP in 2015.
The key to solving Spain’s fiscal problem lies in the semi-autonomous regions that generate spending and shift the financing burden to Madrid.
Perhaps Italy’s success will help to convince Spain to adopt the tough measures that reduce projected future deficits without more current austerity.
If Italy and Spain have budget surpluses and declining debt/GDP ratios, financial markets will reduce the interest rates on their bonds without the proposed ECB purchases.
That would remove the serious risk that the ECB could start buying bonds on the basis of agreed fiscal packages, and then be forced to react if governments fall short on implementing them.
None of this would be enough to save Greece, where the fiscal deficit is 7.5% of GDP, or Portugal, where it is 5% of GDP.
But if Italy and Spain are no longer at risk of default, or of abandoning the euro, Germany and other eurozone leaders will have room to decide whether to continue funding these very small states or politely invite them to leave the euro and return to national currencies.
Moreover, even under this optimistic scenario, the problem of the current-account deficits of Italy, Spain, and the other peripheral countries will remain.
Differences among the eurozone countries in growth rates of productivity and wages will continue to cause disparities in international competitiveness, resulting in trade and current-account imbalances.
Germany now has a current-account surplus of about $215 billion a year, while the rest of the eurozone is running a current-account deficit of about $140 billion.
Italy, Spain, and France all have current-account deficits equal to 2% or more of their GDP.
As they come out of their cyclical recessions, incomes will rise, leading to increased imports and even larger current-account deficits.
Those deficits must be financed by net inflows of funds from other countries.
If Italy, Spain, and France were not part of the eurozone, they could allow their currencies to devalue; weaker exchange rates would increase exports and reduce imports, eliminating their current-account deficits.
Moreover, the increase in exports and the shift from imports to domestically produced goods and services would strengthen their economies, thereby reducing their fiscal deficits as tax revenues rose and transfers declined.
And a stronger economy would help domestic banks by reducing potential bad debt and mortgage defaults.
But, of course, Italy, Spain, and France are part of the eurozone and therefore cannot devalue.
That is why I believe that these countries – and the eurozone more generally – would benefit from euro depreciation.
Although a weaker euro would not increase their competitiveness relative to Germany and other eurozone countries, it would improve their competitiveness relative to all non-eurozone countries.
If the euro falls by 20-25%, bringing it close to parity with the dollar and weakening it to a similar extent against other currencies, the current-account deficits in Italy, Spain, and France would shrink and their economies would strengthen.
German exports would also benefit from a weaker euro, boosting overall economic demand in Germany.
It is ironic that the ECB’s offer to buy Italian and Spanish debt has exacerbated external imbalances by raising the value of the euro.
Perhaps that is just a temporary effect and the euro will decline when global financial markets recognize that a weaker exchange rate is needed to reduce current-account deficits in the eurozone’s three major Latin countries.
If not, the ECB’s next challenge will be to find a way to talk the euro down.
The Economics of Inclusion
CAMBRIDGE – Many people find economic growth to be a morally ambiguous goal – palatable, they would argue, only if it is broadly shared and environmentally sustainable.
But, as my father likes to say, “Why make something difficult if you can make it impossible?” If we do not know how to make economies grow, it follows that we do not know how to make them grow in an inclusive and sustainable way.
Economists have struggled with the tradeoff between growth and equity for centuries.
What is the nature of the tradeoff?
How can it be minimized?
Can growth be sustained if it leads to greater inequality?
Does redistribution hamper growth?
I believe that both inequality and slow growth often result from a particular form of exclusion.
Adam Smith famously argued that, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” So why would growth not include people out of self-interest, rather than requiring deliberate collective action?
It is well known that levels of income are dramatically different around the world.
Thanks to more than two centuries of sustained growth, average per capita income in the OECD countries is just under $40,000 – 3.3, 11.3, and 17.7 times more than in Latin America, South Asia, and Sub-Saharan Africa, respectively.
Sustained growth has obviously not included the majority of humanity.
What is less well known is that huge gaps exist within countries.
For example, GDP per worker in the State of Nuevo León in Mexico is eight times that of Guerrero, while output per worker in the Department of Chocó in Colombia is less than one-fifth that of Bogotá.
Why would capitalists extract so little value from workers if they could get so much more out of them?
The answer is surprisingly simple: fixed costs.
Modern production is based on networks of networks.
A modern firm is a network of people with different expertise: production, logistics, marketing, sales, accounting, human-resource management, and so on.
But the firm itself must be connected to a web of other firms – its suppliers and customers – through multi-modal transportation and telecommunication networks.
To form part of the modern economy, firms and households need access to networks that deliver water and dispose of sewage and solid waste.
They need access to the grids that distribute electricity, urban transportation, goods, education, health care, security, and finance.
Lack of access to any of these networks causes enormous declines in productivity.
Just think of how your life would change if you had to walk two hours each day to obtain drinking water or wood for fuel.
But connecting to these networks involves fixed costs.
Before anyone can consume a kilowatt-hour, a liter of water, or a bus ride, somebody has to get a copper wire, a pipe, and a road to their house.
These fixed costs need to be recouped through long periods of use.
If income is expected to be low (perhaps because of other missing networks), it does not pay to connect a firm or a household to the network, because the fixed costs will not be recouped.
Growth is not inclusive because fixed costs deter markets from extending the networks that underpin it.
Changes in these fixed costs have outsize effects on who is included.
For example, the first telephone company started operations in 1878, while mobile phones are barely 25 years old.
One might expect that the former would have diffused more than the latter, just because of the time advantage.
Yet, in Afghanistan, there are 1,300 mobile phones for every landline.
In India, there are 72 cellphone lines&nbsp;per 100 persons, but only 2.6 landlines.
In fact, many Indians with mobile phones must defecate in the open because the median Indian does not have piped water in his house.
In Kenya, where there are 50 mobile phones per 100 people, only 16% of the population has access to electricity.
This reflects the fact that cellphone towers and handsets are much cheaper than pipes and copper wires, making it possible for the poor to pay the fixed costs.
It is the fixed costs that limit the diffusion of the networks.
So, a strategy for inclusive growth has to focus on ways of either lowering or paying for the fixed costs that connect people to networks.
Technology can help.
Clearly, cellphones have done wonders.
Cheaper photovoltaic cells may enable remote villages to get electricity without the fixed costs of long transmission lines.
Mobile banking may lower the fixed costs faced by traditional banks.
But in other areas, the issue involves public policy.
From its beginning in 1775, the US Postal Service was based on the principle “that every person in the United States – no matter who, no matter where – has the right to equal access to secure, efficient, and affordable mail service.”
A similar logic led to the expansion of the interstate highway system.
Obviously, all of this costs money, and it is here that priorities matter.
Poor countries lack the money to connect every person to every network at once, which explains the huge regional differences in income.
But too many resources are often allocated to palliative redistributive measures that address the consequences of&nbsp;exclusion rather than its causes.
Countries such as Brazil, South Africa, Peru, Uganda, Guatemala, Pakistan, and Venezuela spend substantially more money on subsidies and transfers than on public investment to expand infrastructure networks, education, and health care.
A strategy for inclusive growth must empower people by including them in the networks that make them productive.
Inclusiveness should not be seen as a restriction on growth to make it morally palatable.
Viewed properly, inclusiveness is actually a strategy that enhances growth.
Redistribution or Inclusion?
RIYADH – The issue of rising income inequality loomed large at this year’s World Economic Forum in Davos.
As is well known, the United States’ economy has grown significantly over the past three decades, but the median family’s income has not.
The top 1% (indeed, the top .01%) have captured most of the gains, something that societies are unlikely to tolerate for long.
Many fear that this is a global phenomenon with similar causes everywhere, a key claim in Thomas Piketty’s celebrated book Capital in Twenty-First Century.
But this proposition may be dangerously misleading.
It is crucial to distinguish inequality in productivity among firms from unequal distribution of income within firms.
The traditional battle between labor and capital has been about the latter, with workers and owners fighting over their share of the pie.
But there is surprisingly deep inequality in firms’ productivity, which means that the size of the pie varies radically.
This is especially true in developing countries, where it is common to find differences in productivity of a factor of ten at the provincial or state level and many times higher at the municipal level.
These two very different sources of inequality are often conflated, which prevents clear thinking on either one.
Both are related to a similar feature of modern production: the fact that it requires many complementary inputs.
This includes not only raw materials and machines, which can be shipped around, but also many specialized labor skills, infrastructure, and rules, which cannot be moved easily and hence need to be spatially collocated.
A shortage of any of these inputs can have disastrous effects on productivity.
This complementarity makes many parts of the developing world unsuitable for modern production, because key inputs are missing.
Even within cities, poor areas are so disconnected and inadequately endowed that productivity is dismal.
As a result, there are huge disparities among firms in terms of efficiency – and hence in the income they can distribute.
Given productivity constraints, redistribution is only palliative, not curative.
To address the problem requires investing in inclusion, endowing people with skills, and connecting them to the inputs and networks that can make them productive.
The dilemma is that poor countries lack the means to connect all places to all inputs.
They are faced with the choice of connecting a few places to most inputs and getting high productivity there, or putting some of the inputs in all places and getting very little productivity growth everywhere.
That is why development tends to be unequal.
The other problem of modern production is how to distribute the income generated by all of the complementary inputs.
Today, production is carried out not just by individuals, or even by teams of people within firms, but also by teams of firms, or value chains.
Just look at the credits at the end of any contemporary film.
Complementarity thus creates a problem of attribution.
How should credit for the final product be allocated, and to whom?
Economists have traditionally believed that each team member is paid her opportunity cost, that is, the highest income she could receive if she were kicked off the team.
In this context, if markets are characterized by what economists call perfect competition, once the opportunity cost of all inputs has been paid, there is nothing left to distribute.
But in real life, the team is worth more – often much more – than the opportunity cost of its members.
Who gets to pocket this “team surplus”?
Traditionally, the assumption has been that it accrues to shareholders.
But the rise of extreme CEO compensation in the US, documented by Piketty and others, may reflect CEOs’ ability to disrupt the team if they do not get part of the surplus.
After all, CEOs experience precipitous income declines when they are kicked out, indicating that they were paid far more than their opportunity cost.
In the case of successful start-ups, the money paid when they are acquired or go public accrues to those who put the team together.
For more conventional value chains, the surplus tends to go to the inputs that have greater market power.
Business schools teach their students to capture the maximum surplus in the value chain by focusing on inputs that are difficult for others to provide while ensuring that other inputs are “commoditized” and hence cannot capture more than their opportunity cost.
The gains do not accrue to the most deserving.
The rise of “capital,” which Piketty documents in France and other countries, is caused mostly by the appreciation of real estate, simply because good locations become more valuable in an increasingly networked economy.
As with land, the current intellectual property-rights regime, by over-protecting old ideas, may provide market power that not only exacerbates income inequality but also hurts innovation.
This means that policies aimed at ensuring an equitable outcome should rely on either owning or taxing the inputs that capture the “team surplus.”
One reason why Singapore has a well-funded government, despite low taxes, is that its successful policies caused the land and real estate it owned to explode in value, generating a huge revenue stream.
Similarly, the Colombian city of Medellín funds itself from the profits of its successful utility company, which is now a multinational player.&nbsp;The economist&nbsp;Dani Rodrik recently suggested&nbsp;that governments should fund themselves from the dividends earned by investing in public venture funds, thus socializing the gains from innovation.
Of course, capturing this surplus may allow for income redistribution, as many suggest; but a much bigger and sustainable bang can be achieved if the proceeds go instead to financing inclusion.
In the end, inclusive growth may generate a more prosperous and egalitarian society, whereas redistribution may fail to benefit either inclusion or growth.
Inconvenient Truths for Al Gore
Cinemas everywhere will soon be showing former US Vice President Al Gore’s film on global warming. “An Inconvenient Truth” has received rave reviews in America and Europe, and it will most likely gain a large worldwide audience.
But, while the film is full of emotion and provocative images, it is short on rational arguments.
“An Inconvenient Truth” makes three points: global warming is real; it will be catastrophic; and addressing it should be our top priority.
Inconveniently for the film’s producers, however, only the first statement is correct.
While it’s nice to see Gore bucking the trend in a nation where many influential people deny that global warming even exists, many of his apocalyptic claims are highly misleading.
But his biggest error lies in suggesting that humanity has a moral imperative to act on climate change because we realize there is a problem.
This seems naïve, even disingenuous.
We know of many vast global challenges that we could easily solve.
Preventable diseases like HIV, diarrhea, and malaria take 15 million lives each year.
Malnutrition afflicts more than half the world’s population.
Eight hundred million people lack basic education.
A billion don’t have clean drinking water.
In the face of these challenges, why should stopping climate change be our top priority?
Gore’s attempt at an answer doesn’t stand up to scrutiny.
Gore shows that glaciers have receded for 50 years.
But he doesn’t acknowledge they have been shrinking since the Napoleonic wars in the early 1800’s – long before industrial CO2 emissions.
Likewise, he considers Antarctica the canary in the coalmine, but again doesn’t tell the full story.
He presents pictures from the 2% of Antarctica that is dramatically warming, while ignoring the 98% that has largely cooled over the past 35 years.
The UN climate panel estimates that Antarctica’s snow mass will actually increase during this century.
And, whereas Gore points to shrinking sea ice in the Northern Hemisphere, he fails to mention that ice in the Southern Hemisphere is increasing.
The movie shows scary pictures of the consequences of the sea level rising 20 feet (seven meters), flooding large parts of Florida, San Francisco, New York, Holland, Calcutta, Beijing, and Shanghai.
Were realistic levels not dramatic enough?
The United Nations panel on climate change suggests a rise of only 1-2 feet during this century, compared to almost one foot in the last century.
Similarly, Europe’s deadly heat waves in 2003 lead Gore to conclude that climate change will mean more fatalities.
But global warming would mean fewer deaths caused by cold temperatures, which in most of the developed world vastly outweigh deaths caused by heat.
In the UK alone, it is estimated that the temperature increase would cause 2,000 extra heat deaths by 2050, but result in 20,000 fewer cold deaths.
Financial losses from weather events have increased dramatically over the past 45 years, which Gore attributes to global warming.
But all or almost all of this increase comes from more people with more possessions living closer to harm’s way.
If all hurricanes had hit the US with today’s demographics, the biggest damage would have been caused not by Katrina, but by a hurricane in 1926.
Allowing for changes in the number of people and their wealth, flood losses have actually decreased slightly.
The movie invites viewers to conclude that global warming caused Hurricane Katrina, with Gore claiming that the warm Caribbean waters made the storm stronger.
But when Katrina made landfall, it was not a catastrophic Category 5 hurricane; it was a milder Category 3. In fact, there is no scientific consensus that global warming makes hurricanes more destructive, as he claims.
The author that Gore himself relies on says that it would be “absurd to attribute the Katrina disaster to global warming.”
After presenting the case for the potentially catastrophic effects of climate change, Gore unveils his solution: the world should embrace the Kyoto Protocol, which aims to cut carbon emissions in the developed countries by 30% by 2010.
But even if every nation signed up to Kyoto, it would merely postpone warming by six years in 2100, at an annual cost of $150 billion.
Kyoto would not have saved New Orleans from Hurricane Katrina.
But improved levees and maintenance could have.
While Gore was campaigning for Kyoto in the 1990’s, a better use of resources would have been to bolster hurricane defenses.
Indeed, the real issue is using resources wisely.
Kyoto won’t stop developing countries from being hardest hit by climate change, for the simple reason that they have warmer climates and fewer resources.
But these nations have pressing problems that we could readily solve.
According to UN estimates, for $75 billion a year – half the cost of implementing the Kyoto Protocol – we could provide clean drinking water, sanitation, basic health care, and education to every single human being on Earth.
Shouldn’t that be a higher priority?
Recent hurricanes killed thousands in Haiti, and not in Florida, because Haiti is poor and cannot afford even basic preventive measures.
Combating disease, hunger, and polluted water would bring immediate benefits to millions and allow poorer countries to increase productivity and break the cycle of poverty.
That, in turn, would make their inhabitants less vulnerable to climate fluctuations.
At the climax of his movie, Gore argues that future generations will chastise us for not having committed ourselves to the Kyoto Protocol.
More likely, they will wonder why, in a world overflowing with “inconvenient truths,” Gore focused on the one where we could achieve the least good for the highest cost.
China’s Multilateral Financial Mobilization
LONDON – The board of the European Bank for Reconstruction and Development recently approved China’s application to join – an application a decade in the making – and sent it on to member governments for final approval.
But EBRD membership is only one expression of China’s rapidly growing role in the world’s international financial institutions.
The question now is whether China will spur change within them, or vice versa.
The global financial crisis shook up the international financial architecture, catching many institutions off guard.
The International Monetary Fund, for example, had actually pursued sharp downsizing in the preceding years.
But it also allowed them to prove their mettle. Many of them – not least the IMF, but also the EBRD and the European Investment Bank – eventually showed that they could respond flexibly and, as a result, have gained expanded mandates and more capital.
The crisis also undermined the legitimacy of the G-7 – the countries at the root of the problem – while invigorating the G-20.
Amid these transformations, China gained an opening to boost its global influence – one that it is determined to exploit, despite resistance from some corners.
It plans to use its presidency of the G-20 in 2016, for example, to advance an ambitious agenda.
In fact, Chinese international engagement is now occurring on a scale and at a rate never seen before.
China is a member of many multilateral institutions – including several regional players like the African Development Bank (AfDB) and the Inter-American Development Bank (IDB) – with which it is deepening its relationships, especially through co-investment in projects around the world.
For example, China significantly ratcheted up its commitment to the AfDB last year through the $2 billion Africa Growing Together Fund.
Similarly, China’s sovereign wealth funds have served as important anchor investors in the vehicles designed by the World Bank’s International Finance Corporation and the EBRD to bring long-term institutional capital into their projects.
One of those funds, SAFE, is currently the only investor in the EBRD vehicle – and China has not even formally joined the organization yet.
China is also forging new institutions.
The establishment of the Asian Infrastructure Investment Bank (AIIB) captured global headlines earlier this year, not just because of strong US resistance, but also because countries like Britain and Germany joined anyway.
China also played a leading role in the formation, with its BRICS counterparts (Brazil, Russia, India, and South Africa), of the New Development Bank (NDB), now headquartered in Shanghai.
Then there is China’s $40 billion Silk Road Fund, intended to support the infrastructure projects needed to underpin President Xi Jinping’s “one belt, one road” strategy, which aims to improve trade and communication linkages across Eurasia.
China’s most ambitious effort to date, the Silk Road Fund dwarfs the activities of the more traditional international financial institutions, in terms of both scale and range of activities.
The Fund’s first initiative, the $1.65 billion Karot hydropower dam in Pakistan, will entail both direct lending to the project and equity investment in the company responsible for building the dam and managing it for 30 years.
As it stands, the Silk Road Fund is unilateral, placing it in the same category as the China Development Bank and the state-owned investment conglomerate CITIC.
But the Chinese authorities have said that it is open for others to join, though that seems unlikely, given the scale of the Chinese commitment.
Despite the remarkable size of China’s investment projects, the country’s leaders have so far remained relatively conservative in terms of institutional innovation.
Over the last year, however, Chinese Communist Party officials have mooted a proposal for a more experimental new multilateral financial institution geared toward “restoring the environment” – that is, supporting large projects aimed at land reclamation, water purification, and improvements in air quality.
Getting such an institution off the ground will not be easy, given the need for global coordination to bring potential shareholders together and for large subsidies to make investments viable.
But that kind of bold institutional innovation could fill an important gap in the global financial architecture, and cement China’s leadership in financing environmental remediation.
In the meantime, Chinese institutions are innovating on a smaller scale, as they spearhead a leaner and faster approach to financing.
For example, the AIIB’s inaugural president, Jin Liqun, has announced plans to eliminate some of the most inefficient features of existing institutions, like the resident board and nationality restrictions on hiring.
Nonetheless, China’s growing global financial role is not likely to change profoundly how existing institutions operate.
Of course, as efforts like Jin’s highlight the flaws in existing structures, they may help to inspire reform.
And the EBRD can undoubtedly benefit from China’s experience with experimentation and scaling up.
But the main aim of the AIIB and the NDB seems not to be to transform the multilateral financial landscape, but to add capacity, while showing that China can build state-of-the-art institutions.
And when it comes to the EBRD, China’s stake will be tiny, at least at first; the Chinese say they are there to learn.
Indeed, co-investment with the EBRD can provide Chinese companies with local knowledge – and potentially even protection – as they navigate new markets.
For now, increased engagement in multilateral institutions seems likely to change China more than it changes the institutions, even as China’s voting power increases to reflect better its growing contributions.
A closer look at the experiences of long-standing institutions – including working with civil-society groups and promoting local ownership of policies – will help China hone its strategy for engagement in Africa and elsewhere.
It may even enable China to improve its own development model.
In the longer term, however, the development challenges that China faces at home – particularly rapid environmental deterioration – could drive it to take a more transformative role, pushing for institutional innovation globally.
In Darwin’s Place
BERKELEY – Imagine that, as a young scientist, you spent years collecting information about the foundations of how nature works.
You built your reputation by collecting plants, animals, fossils, and geological samples from around the world, and sending back letters that tracked your development into a first-rate scientist.
By the time you returned from a great five-year voyage, you were surprised to find that you were a rising star.
Throughout your trip, and in the years afterward, the mists that had obscured some incredibly simple yet powerful natural explanations lifted.
You came to realize that you were in virgin intellectual territory.
Your academic mentors and the scientists whose works you had read were continuing to stumble over grand problems that now seemed, if not solved, at least soluble.
People had been talking about evolution for decades, but you have come up with a mechanism – natural selection – that just might explain much of it.
You realize that to reveal what you’ve come to understand will not only revolutionize your science, but will potentially shatter many of your countrymen’s religious and philosophical foundations.&#160;&#160;&#160;&#160;
These were the circumstances in which Charles Darwin found himself in the late 1830’s and early 1840’s, when he developed the principle of natural selection and its revolutionary implication: all the Earth’s life forms could have evolved from a single common ancestor.
His was one of the most brilliant insights in the history of science: a mechanism that enabled the principle of evolution to unify and inform all of biology.
Just for a minute, put yourself in his place.
How would you feel? (“It is like confessing a murder,” he wrote at the time.)
Here’s the translation to today’s world: your discovery might win you the Nobel Prize, but it also might get you a bullet in the brain from a religious fundamentalist.
How do you feel about publishing now?&#160;&#160;&#160;&#160;
But then, at roughly the same time you finish drafting the first summary of your ideas, a book, written by an anonymous author, appears that also purports to explain how life might have changed through time, and considers some of the mechanisms that may underlie this grand history.
Have you been “scooped”?&#160;
No, the author has many of his facts wrong and goes beyond reasonable speculation, which brings him disdain from scientists.
Predictably, he fares as poorly with religious leaders, some of whom accuse him of blasphemy.
And he hasn’t independently reached your new ideas – the ideas that matter.
But you empathize with his position: you will be pilloried in the same way if you don’t nail down your theory with the best arguments possible and marginalize your opponents so that they have neither theological nor scientific reasons to attack you.
So you wait to publish.
Years roll by.
You gather data, do experiments, read, and write.
Your book becomes bigger.&#160;
Impossibly big.
It is a good thing you do not have to work for a living.
Then, a bolt from the blue. A letter from an old colleague in Southeast Asia with whom you’ve corresponded for years, attached to a manuscript that lays out your whole theory of natural selection in a nutshell.
He’s asking you, as a well-connected man of science, whether you would communicate his paper to the Linnean Society of London for reading and possible publication, if you think his arguments meritorious.&#160; &#160;&#160;&#160;&#160;&#160;
You are unsure about what to do.
He’s scooped you on your main idea, although he hasn’t thought through the implications, or worked out all the other ideas that comprise your theory.
You don’t want to lose your investment.
You want credit where it’s due, and you want to control the game, because you have so much more to show and to support your arguments.&#160;
So you consult scientific colleagues who have known for years how you’ve been developing your theory.
They agree that it is fair to broker an arrangement with your correspondent to publish together.
This appears to satisfy everyone, but it puts you in panic mode.
Now you have to publish your entire theory right away, before someone else gets the credit.&#160;
It nearly kills you, but you get the book out – only an abstract of the magnum opus that you had planned – by the end of the next year.
You call it The Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life .
The reaction is immediate: 1,200 copies are published, and they sell out immediately.&#160;
There are welcome reviews from scientists, but also sharp broadsides from religious people.
Serious criticism comes from unexpected places: philosophers you knew and learned from, scientists to whom you had entrusted your priceless collections to describe.
And yet: the genius of the argument is seen.
Natural selection as a theory becomes a proposition in play, needing much more work.
But almost no serious intellectual can continue to doubt the common ancestry of all living things.
You’ve changed the world: people will never again look at all species as fixed entities, but as part of a single tree of life.&#160;
How do you feel?
In Defense of International Justice
MEXICO CITY – Not long after I took office as Mexico’s foreign minister in 2001, a novel problem came across my desk.
An Argentine naval officer who had resettled in Mexico under an assumed name was wanted by Spain on charges of genocide, torture, and terrorism.
The officer, Ricardo Miguel Cavallo, was implicated in abuses committed in 1977 and 1978 at the notorious Naval Mechanics School in Buenos Aires.
According to the Spanish indictment, Cavallo belonged to the operations unit of a group actively involved in kidnapping and torturing people whom the military regime perceived as leftist.
The question before me was whether to extradite Cavallo to Spain, a third country, to face trial for human rights abuses committed in Argentina.
Signing the papers would be groundbreaking, as it would signal for the first time that suspected rights abusers might face trial anywhere in the world if justice was not likely at home.
For me, the decision was straightforward: the crimes demanded justice, and Cavallo was more likely to be held to account in Spain than in Argentina.
Amnesty laws in Argentina at the time shielded him from prosecution.
I signed the extradition papers.
Since then, many inroads have been made to ensure that the world’s most serious crimes no longer go unpunished.
The International Criminal Court is up and running, and 107 states, including Mexico, have ratified the treaty establishing the court and acceded to its jurisdiction.
National courts, such as those in Spain, play an increasingly strong role in combating impunity through the exercise of universal jurisdiction.
The rise of these types of prosecutions has in turn motivated countries, including Argentina and Chile, to repeal their amnesty laws so that suspected war criminals can be prosecuted at home.
The trials of Slobodan Milosevic and Charles Taylor have demonstrated that even heads of state are no longer safe from prosecution.
The comfort level for perpetrators of these crimes is shrinking as the options for prosecution expand.
Whether the progress in this battle against impunity continues or slides backwards is now in the hands of the United Nations Security Council.
On July 14, the ICC prosecutor, Argentine lawyer Luis Moreno Ocampo, announced that he was seeking an arrest warrant for Sudanese President Omar al-Bashir for orchestrating the atrocities in Darfur.
Immediately after the announcement, Sudan’s government and its allies began a diplomatic campaign aimed at securing a Security Council deferral of the investigations for 12 months.
They are attracting wider support than they should – in part because of fear of retaliation against UN peacekeepers and humanitarian workers.
But the Security Council must be extremely cautious in considering any suspension of ICC proceedings.
Such a decision would be a serious setback to the movement to end impunity for the most serious crimes.
It would show that indicted warlords and dictators can avoid justice by holding the Security Council hostage to threats of more violence.
Suspending the ICC’s work in this way would undermine its potential for deterrence, one of the purposes for which it was established. Postponing the case against al-Bashir would seriously undercut the important principle – which has gradually been taking root worldwide – that no one is above the law.
The Security Council’s decision to refer the situation in Darfur to the ICC prosecutor in March 2005 was itself a major milestone in the battle against impunity.
That decision demonstrated, for the first time, that there was an institution that could investigate and prosecute the most serious international crimes regardless of where they occur.
Apart from being a victory for international justice, the referral was also a promise to victims of the horrific crimes in Darfur that the perpetrators of the crimes against them would one day be held accountable.
For the Security Council to step back from that commitment would do more than abandon the victims in Darfur.
It would be a major blow to those around the world who have struggled to put an end to impunity for perpetrators of humanity’s most terrible crimes.
In Defense of Polish Plumbers
Supporters of Europe’s social model claim that what distinguishes it is the importance placed on “social cohesion.”
And, of course, it is as difficult to be against cohesion as it is to be against friendship. But the real question is which policies work best.
Existing policies to achieve social cohesion are based on the belief that, if uncorrected, the free play of market forces will lead to wide disparities in income and thus intensify social conflict.
But studies tend to show that the majority of income transfers by government occur within the middle class, while only a relatively small proportion are from rich to poor.
In fact, some transfers flow the other way.
For example, many pension systems transfer money from the poor to the middle class, simply because richer people usually live longer.
What most European countries get for their social expenditure is a lot of state provision of services, and not much reduction in social inequality.
So lower levels of social expenditure could involve only a relatively small increase in inequality and social conflict.
Moreover, if Europeans target social expenditure better, they might achieve a greater reduction in inequality with a lower level of social transfers.
Indeed, some policies aimed at achieving cohesion may well reduce it.
Restriction on firing employees, for example, may protect people who have jobs, but often at the expense of the unemployed, thus increasing social exclusion.
Even where high levels of social transfers actually do reduce inequality (and therefore presumably increase cohesion), they may undermine inter-communal relations if ethnic minorities are perceived as being strong net beneficiaries.
The European Union resulted from the tragic lessons of the first half of the twentieth century, when giving free rein to national egoism led to continental catastrophe, and increasing globalization means that economic, internal, foreign, and defense policies are unlikely to be successful when pursued exclusively at national level.
Yet we continue to believe that social cohesion can be limited to that of the nation.
European cohesion funds account for only a fraction of a percent of European GDP, whereas about 10% of national income is typically spent on social transfers.
A massive increase in European Commission spending power to achieve greater pan-European social cohesion would be politically unacceptable to the richer members, who would have to pay for it.
But neither can we accept a situation in which vast resources are spent on national cohesion, while European cohesion lags so woefully behind.
Fortunately, inequalities can often be reduced considerably without spending much money.
Nothing that the EU or its individual members can do would have as great an impact on reducing income inequality in Europe than eliminating national protectionist barriers to migration, movement of capital, and provision of services.
Doing so would reduce inequalities not only between EU member states, but also within the poorer ones.
The poorest of the poor would gain the most, while the rich member states would lose little, despite their popular fear of open borders.
For example, during the referendum campaign in France for the European constitution, the “Polish plumber” became a symbol of the threat that European integration was supposed to pose to French workers’ standards of living.
But the impact of free migration (when allowed) on French plumbers’ incomes is in fact minimal, not least because of the smallness of the new member states compared to the whole of Western Europe.
Workers’ incomes in Britain and Ireland have not fallen measurably, despite both countries’ openness to immigration from the enlarged EU.
Free migration in the EU means that Polish plumbers will not only catch up with French plumbers, but also with Polish bankers.
Middle-class people in Poland are being hit by the increased cost of the services of skilled workers, such as plumbers, and also of the less skilled, such as decorators, and the highly skilled but low paid, such as doctors.
Why, then, was the European Commission’s proposed services directive, which would ensure freedom to supply services across the Union to all EU companies, vilified as the “Frankenstein directive”?
Why was it fatally diluted by the European Parliament?
Why have demands by the EU’s new member states for freer access to Western Europe’s labor and services markets, and for the right to compete with “old Europe” for investment, been stigmatized as social dumping?
Why are policies that would do the most to reduce inequality in Europe being presented as anti-social?
What motivates the opponents of free service provision and labor movement in Europe is not a desire to ensure social cohesion, but a wish to maintain the status quo.
To be sure, change creates discomfort, and may even cause tension and conflict.
But the conservative attitudes underlying opposition to change are anything but “social,” for they would deny the poorest of Europe’s poor a chance to improve their lot.
Indeed, such attitudes are potentially disastrous.
If they came to be accepted as the guiding principles of European policy, Europe’s economy would become petrified, with stagnant growth making it impossible to afford even modest levels of social transfers.
In Defense of Sharia
This week, an Islamic court at Funtua, in Katsina State, in northern Nigeria rejected the appeal of a woman convicted of having sex out of wedlock.
Her lawyers will likely appeal her conviction to a higher Sharia court, and if necessary, to Nigeria's Supreme Court, but if the judgment of the Funtua court stands, Amin Lawal will be stoned to death the moment her daughter is weaned.
Muslim-Christian relations are tense all over the world, but nowhere are they more inflamed than in Nigeria, the most populous country where Christians and Muslims exist in roughly equal numbers.
The flash point for Muslim-Christian tensions is Sharia, or Muslim religious law.
The spread of Islamic law in Nigeria--since late 1999 ten of the country's 36 states have adopted Sharia as their public law--has provoked a sharp outcry against the severe punishments it levies, including amputation for thieves and death by stoning for woman convicted of adultery.
As a Muslim lawyer who practices in a Sharia court in Kano, Nigeria's second-largest city, the demonization of Islamic law by Christians and human rights activists in Europe and North America angers me.
Sharia law is systematically distorted and misunderstood.
But as someone trained in American law who has taught at an American law school, I also am aware of the shortcomings in how Sharia is applied, especially in its treatment of women.
No matter how great the outcry against the death sentences imposed on adulterous women, Sharia law cannot be wished away here.
Islamic law has long been an integral part of social life in Nigeria.
It will remain so.
The challenge facing Sharia's critics is to modernize Islamic law, not banish it from public life.
Sharia law is undoubtedly controversial.
Its severe punishments fly in the face of Western legal canons.
I have mixed feelings about these penalties.
In theory, I accept the death penalty and even amputations, though in practice I believe that implementers of Sharia show little understanding for the reality that much crime stems from poverty and desperation.
In my view, amputation for thieves should not be carried out unless and until society's poor are better provided for.
The process leading to the death penalties imposed by Sharia courts have drawn rebukes from around the world, and for good reason.
Sharia law as applied in Nigeria today is insensitive to the welfare of women.
Why are only women sentenced to death for adultery, while men go free?
Sharia courts contend that unless four witnesses catch a man in the act, he cannot be convicted.
This standard of proof is so difficult to meet that men simply are not convicted.
Until Sharia can handle adultery fairly, no penalties should be imposed.
But attention to sensational cases of amputation and death by stoning, while justified, obscures the reality that the bulk of Sharia cases involve family matters and ordinary commercial law.
Sharia, with its emphasis on swift justice, is often preferable to civil law in a country such as Nigeria, where courts are poorly administered and cases move slowly, when they move at all.
It may surprise non-Muslims, but some Nigerian Christians prefer to file their cases in Sharia courts because of their speed, fairness, and relative unconcern with legal technicalities.
Recently, a Christian car buyer drew wide attention in Nigeria when he was duped by a Muslim car seller and took his case to a Sharia court.
Within a few weeks, he won--and paid no legal fees.
Too often, however, Sharia law harms Christians.
In one Nigerian state, Christian bus operators are discouraged and sometimes prohibited from carrying both men and women in a single trip.
Christian businessmen have also suffered because the ban on the commercial sale of alcohol has led to the destruction of their beverage stocks.
Why is Islamic law growing in importance?
The end of Nigeria's military dictatorship and the return to civilian, elected government created countless beneficial freedoms.
But freedom of expression resulted in more militant religious positions.
The clash of religions is exacerbated by the indecisiveness of President Olesegun Obasanjo.
Moreover, Muslim politicians gain popularity by siding with Islamic conservatives while their Christian rivals score political points by complaining about Sharia's extreme aspects.
The tensions spawned by Islamic law might be justified if it targeted Nigeria's biggest problem: government corruption.
Muslim politicians know that corruption is killing our country and yet Sharia law is not applied to the misdeeds of public officials.
Only when the spotlight of Sharia shines on government wrongdoing will we know that Nigeria is on the road to prosperity.
The shortcomings of Sharia, however serious, need not doom Islamic law in a society where Christians and traditional believers roughly equal Muslims in number.
Sharia can be reformed in ways that make the law more tolerant, open, and acceptable to non-Muslims.
It is not absurd to speak of a cosmopolitan Sharia.
In Islamic tradition, reform of Sharia results from an
It is time for another
In Defense of Swiss Banking
GENEVA – Leaders of the G-20 have now declared that “the era of banking secrecy is over,” and have threatened to take action against “non-cooperative jurisdictions, including tax havens.”
No one should include Switzerland among these, for the Swiss government has already offered to improve international cooperation by adopting the OECD’s standard on international administrative assistance on tax issues.
To appreciate the implications of this, it is important to know the background.
Swiss banks are obliged by law to extend a very high degree of bank-client confidentiality to all their clients, both Swiss and foreign. Any banker who reveals details of his clients’ affairs to unauthorized third parties is committing a criminal offense in Switzerland.
But this bank-client confidentiality has never been 100% absolute, and Swiss legislation makes absolutely clear what it protects and what it does not protect.
It poses, for example, no obstacle whatsoever to a criminal investigation.
One characteristic of Swiss law is that it distinguishes between tax evasion and tax fraud.
Submitting an incomplete tax return, for example, would be tax evasion and is handled through administrative measures, including severe fines if necessary.
So, despite some foreign media reports, tax evasion is not legal in Switzerland; it merely is not a criminal offence.
Anyone found to be illegally evading their tax obligations in Switzerland faces severe financial penalties.
Tax fraud, on the other hand, involves forging documents and thus much more criminality.
Tax fraud is a criminal offense in Switzerland.
The international implication is that Switzerland has traditionally offered international assistance in criminal tax cases that have elements of fraud, but not of evasion.
By agreeing to adopt the standard on the exchange of information set out in Article 26 of the OECD’s Model Tax Convention, Switzerland will now extend administrative assistance to cover all tax offenses, including tax evasion.
States that implemented Article 26 agree to exchange information upon request, but not to the automatic disclosure of information.
This means that the country seeking information must produce a substantiated request, naming the taxable person and the specific bank in question or describing them in sufficient detail. So-called “fishing expeditions” – indiscriminate trawling through bank accounts – remain out of bounds.
The privacy of clients not under suspicion will thus continue to be protected by Swiss bank-client confidentiality.
Citizens in a democracy would never allow their government to have an automatic right of forced entry into their homes on the off-chance of finding stolen goods, so why should the state have an automatic right of forced entry into bank accounts on the off-chance of finding a few tax evaders or criminals?
Once Switzerland makes a commitment to do something, it does it thoroughly, efficiently, and on time.
The implementation of the agreement with the European Union on the taxation of savings is a good example of this.
I am confident that the same reliability will be demonstrated in Switzerland’s commitment to take on the OECD standard, which will be incorporated into future bilateral double-taxation agreements.
Following this commitment, improper criticism of Switzerland and its legal system, and also various threats to put Switzerland on a so-called “black list,” should end.
But I have not quite finished with the OECD.
The OECD is a multinational grouping of 30 countries established nearly a half-century ago, with Switzerland a member.
It is not an international organization, and it has no legal authority to speak for the world or to establish rules, norms, or standards for any state except its own members – that China is not a member demonstrates clearly the limits of its reach.
The OECD’s founding convention calls on it to assist sound economic expansion and to contribute to growth in world trade on a multilateral, non-discriminatory basis.
Switzerland’s recent treatment by the OECD, however, has been disgraceful.
The secret drafting of a black list behind a member’s back is unacceptable and, in my view, seriously damages the OECD’s credibility.
Incidentally, I think it would be far more revealing to draw up a list of those states that have destroyed or damaged the relationship of trust with their citizens to such an extent that they can only secure their tax revenues by criminalizing tax evasion and trampling on privacy.
Accusations that Switzerland is a tax haven usually come from countries that have a low level of taxpayer honesty.
The Swiss state, by contrast, has an excellent relationship with its taxpayers, and there is a correspondingly high level of taxpayer honesty.
The Swiss people vote their own taxes, have a high degree of control over how tax revenues are spent, and believe their tax system to be fair, transparent, and comprehensible.
Critics should study the Swiss model with a view to improving things in their own countries.
The OECD itself has drawn attention to Switzerland's Code of Conduct for Tax Authorities, Taxpayers and Tax Advisers as an example of how to promote what it calls an “enhanced relationship between taxpayers and revenue bodies.&quot;
Of the world’s tax evaders, 99.99% do not have a bank account in Switzerland, but Switzerland is an easy target.
There is no political risk involved; the Swiss have no powerful lobby in the United States or the EU that they can mobilize; as the birthplace of private banking, Switzerland has enormous symbolic value; as the world leader in private banking, it triggers jealousies.
In these difficult economic times, Switzerland serves as a handy scapegoat, enabling financially-challenged states to discharge their frustrations and divert their citizens’ attention from shortcomings in their own complicated and inefficient tax systems.
Attacks on Switzerland should be seen and analyzed from this perspective.
India at Play
New Dehli – On June 1, the Indian Premier League came to a thundering climax with a cliffhanger final match, watched by 60,000 cheering fans in a new stadium and an estimated 300 million television viewers around the world.
As cheerleaders danced and waved brightly colored pom-poms, and star sportsmen from across the globe, clad in their teams’ multi-hued regalia, looked forward to a $2.5 million payday, black-market tickets changed hands for as much as $2,500.
Football?
Basketball?
No, the IPL is the newest Indian innovation revolutionizing that most staid of Victorian sports – cricket.
As the globalizing world discovers a twenty-first-century India full of high-tech computer geeks, efficient businessmen, colorful fashions, and glitzy entertainment – a far cry from the old stock images of fakirs on beds of nails, maharajahs on elephants, and mendicants with begging bowls – it is also finding an India obsessed with what most regard as a nineteenth-century sport.
Cricket has seized the Indian national imagination like no other sport.
An international match can fill 100,000-seat stadiums, while attracting TV audiences of 350 million.
Airline pilots provide passengers with the latest scores; office-goers cluster around the nearest available television.
Cricketers occupy a place in India’s pantheon rivaled only by gods and Bollywood stars.
The performances of our heroes are analyzed with far more passion than any political crisis.
In no other country does a sport so often command the front pages of leading newspapers.
Cricket first came to India with decorous English gentlemen.
It took nearly a century for the “natives” to learn the sport, but when they did, they took to it like snakes to their charmers.
Today, the public’s obsession has made India into the sport’s global financial powerhouse, with advertisers and sponsors pouring unheard-of sums into the game.
It is estimated that India alone accounts for nearly 90% of cricket’s worldwide revenues, putting the game’s traditional guardians, England and Australia, in the shade.
India has become the most influential country in the sport’s governing body, the International Cricket Council, which has moved its headquarters from London to Dubai, which has no cricketing tradition but is closer to the sport’s new fulcrum in South Asia.
In April and May, the new Indian Premier League revolutionized the sport.
By bringing the world’s top players to India at unprecedented salaries (one Australian player was auctioned to his new team for $1.4 million, more than most cricketers previously earned in a lifetime), and by spicing up the game through such innovations as American cheerleaders, the IPL is transforming the sport.
When the traditional English cricket season opened in April, as it has for the last couple of centuries, seasoned British journalists ruefully reported that while the players and officials were dutifully present, their minds were far away, following the fortunes of the lucrative league in India.
I have often thought that cricket is really, in the sociologist Ashis Nandy’s phrase, an Indian game accidentally discovered by the British.
Everything about cricket seems ideally suited to the Indian national character: its rich complexity, the endless possibilities and variations that can occur with each delivery, the dozen different ways of getting out – all are reminiscent of a society of infinite forms and varieties.
A country where a majority of the population still consults astrologers can well appreciate a sport in which an ill-timed cloudburst, a badly prepared pitch, a lost toss, or the sun in the eyes of a fielder can transform a game’s outcome.
Even the possibility that five tense, exciting, hotly-contested, and occasionally meandering days of cricketing could still end in a draw seems derived from ancient Indian philosophy, which accepts that in life the journey is as important as the destination.
So, too, is the fact that cricket is a team game that showcases individual excellence.
Indians have long been resigned to defeat for their national side (though this is changing), but they have always managed to produce individual record-breakers – outstanding cricketers like the batsmen Sunil Gavaskar and Sachin Tendulkar, or the all-rounders Vinoo Mankad and Kapil Dev, who were considered to be among the world’s best players, even if the Indian teams to which they belonged lost more often than they won.
What offers better consolation than the thrilling endeavors of a gifted batsman or the magical wiles of a talented bowler, each performing his dharma , the individual doing his duty in a team game, just as in life each Indian fulfils his destiny within the fate of the collectivity?
In the old days, cricket was reproached as a sport played by Anglicized elites in the big cities.
But now cricket is followed by the masses all over the country.
New cricketing heroes have emerged from small towns, none more popular than India’s swashbuckling captain, M.S. Dhoni, the son of a peon in the dusty town of Ranchi, who now commands millions in endorsement fees to tout products that his family could never have aspired to own.
Cricket, once the sport of the British upper classes, is in India a great leveler.
Indeed, the sport both reflects and transcends India’s diversity.
It is entirely fitting that the Indian team has been led by captains from each of its major faiths – Hindus, Muslims, Parsis, Christians, and a colorful Sikh.
A land divided by caste, creed, color, culture, cuisine, custom, and costume is united in consensus around a great conviction: cricket.
India at the UN High Table
NEW DELHI – Indian diplomacy began 2011 with election to the chair of the United Nations Counter-Terrorism Committee, a body of some importance to the country (and one which many thought India might not be asked to lead, given its strong feelings on the issue).
Coming in the wake of India’s record margin of victory in the race for a non-permanent seat on the Security Council, this news confirms India’s standing in the world and the contribution it is capable of making on the Council.
With such endorsements, however, expectations are high, and India’s government will have to think about how they can best be fulfilled.
This is an unusual year at the UN high table.
Several powerful states, whose growing global role has made them aspirants to permanent seats on a reformed Security Council, will serve alongside India.
Germany and South Africa were elected as non-permanent members at the same time, while Brazil and Nigeria are halfway through their two-year-terms.
This also means that four international groupings will be represented on the Council in 2011: the Russia-India-China triumvirate, whose foreign ministers meet twice a year; the BRICs, which adds Brazil to the list; the India-Brazil-South Africa alliance of the three largest southern hemisphere powers; and BASIC, which brought Brazil, South Africa, India, and China together during the climate-change negotiations in Copenhagen last year.
India is the only country that belongs to all four.
That not only highlights the extent to which India has become a fulcrum in global politics, but also points to the exceptional composition of the new Security Council.
Half the members of the G-20, the grouping that is now the world’s premier forum on international economic questions, will be on the Council, dealing with issues of global peace and security.
The five permanent Security Council members – the US, Britain, France, China, and Russia – will not be able to take these members for granted.
They have become accustomed in recent years to making deals among themselves and more or less imposing them on the ten non-permanent members.
But the five big countries now also on the Council will expect to be consulted; their acquiescence on key questions cannot simply be assumed.
At the same time, the performance on the Council of those countries that aspire to permanent membership will be seen as a harbinger of what would come if they were to succeed.
This puts the spotlight on India all the more.
One immediate implication of serving on the Council will be the need to take positions on matters that in recent years some Indian mandarins have preferred to duck – for example, South Sudan, whose referendum on independence threatens to spark serious violence in an area where Indian UN peacekeepers are already serving.
Also during India’s first month as a Council member, the future of the UN peacekeeping operation in neighboring Nepal will be addressed.
Before long, the Council will also have to consider the implications of the likely commencement of a US troop drawdown in Afghanistan, another area of direct importance to India’s national security.
Issues like sanctions on Iran, the stop-and-start Middle East peace process, and the world’s response to a likely change of leadership in North Korea, will almost certainly appear on the Council’s agenda as well.
All are matters that call for creative and courageous thinking that transcends entrenched positions or reflexive solidarity with “non-aligned” countries.
India will also have to reconsider its traditional opposition to the Council’s tendency to broaden its mandate by taking on issues that India believes fall within the General Assembly’s jurisdiction.
The Council has tended to stretch into areas like HIV/AIDS, climate change, and women’s empowerment, which inflate the term “peace and security” beyond recognition.
And yet, as a member of the G-20 and the Security Council, India may well see an interest in bringing up issues of food security or energy security, which touch on both groups’ core concerns.
There are serious staffing implications with respect to Security Council membership as well.
The need to acquire expertise on diverse issues and to participate in the adoption of roughly 60 resolutions a year (not to mention Presidential Statements on the same issues, which have less legal force but whose adoption requires unanimity) will test India’s capacity and negotiating skills.
Various sub-committees and working groups of the Council (including the Counter-Terrorism Committee) will also require full-time attention.
In August 2011, India will preside over the Council by alphabetical rotation, and may find itself playing a key role in the election (most likely the re-election) of the UN Secretary-General, which must take place before the end of the year.
All in all, India’s place on the Security Council offers an extraordinary opportunity, after two decades of absence from the global high table, to demonstrate to the world what it is capable of.
It should emerge from the experience with its reputation and credibility as a major global player enhanced.
In any case, the world will be watching.
India Dissents from Obamamania
NEW DELHI – India is among the few dozen countries, largely clustered in Asia and Africa, where sentiment in favor of the United States actually rose during the administration of George W. Bush.
Nonetheless, more Indians favored the election of Barack Obama than they did John McCain.
What explains this seeming contradiction?
At the heart of the Bush administration’s success with India was a belief that India was a nation whose rise was beneficial to US interests.
This led Bush to seek to adjust the international order to India’s benefit, most notably by negotiating an exemption from the Nuclear Nonproliferation Treaty for India.
The net result was a closer Indo-US relationship and a positive view of Bush that overrode unpopular actions such as invading Iraq.
Obama’s election – the success of a member of a non-white minority in the world’s oldest democratic polity – has seized the imagination of many Indians.
He is exhorted in the media and among the intellectual classes.
Among the most fervent supporters of Obama in the US have been the nearly three million-strong Indian-American community. “You can’t swing a dead cat in the Obama camp without hitting an Indian-American,” said an Obama advisor.
In the run up to the election, many Indians could not believe that an African-American would ever be chosen to reside in the White House.
His election inevitably enhanced the standing of the US as a land of genuine opportunity, a nation whose multicultural credentials were as great if not better than polyglot and poly-ethnic India.
The greatest skepticism about an Obama presidency lies among Indian strategic elite, who are focused on promoting India’s economic and political interests in the wider world.
They found an ally in that cause in Bush.
Whatever Obama’s ethnic credentials, India’s government has detected in his statements reason to believe that he will be less supportive than Bush.
First, India is wary that any Democratic administration will include the same proponents of nuclear nonproliferation who opposed Bush’s exemption for India.
Obama has publicly said he intends to push for a comprehensive test ban treaty, a treaty that India opposes because it feels its own nuclear deterrent remains incomplete.
Second, Obama has attacked the outsourcing of service jobs to places like India and the offshoring of manufacturing jobs to Asia as a whole.
His advisors also indicate that they will seek to incorporate social provisions, like labor standards, into future international trade negotiations.
Though candidates tend to rollback from protectionist stances once they come to power, the Democrats’ control of both houses of Congress may not give Obama that leeway.
Third, a Democratic administration has said it will put climate change at the forefront of its global policy concerns.
If the focus is about mitigating carbon production through technological means, there will be few concerns.
However, if the policy slips into more coercive measures such as carbon tariffs and the like, the result is likely to convert climate change into an energy security struggle.
It will also pit the big carbon emitters of the future, like India and China, against present polluters like the US and Europe.
Finally, conversations with a few Obama advisors and his own speeches indicate that Washington’s number one security concern in the coming years will be Afghanistan and Pakistan. “Iraq is yesterday’s problem,” said one advisor to an Indian audience several weeks ago.
At the heart of that problem, say Obama advisors, is the growing neurosis of the Pakistani regime.
Pakistan suffers from internal strife and is prone to seeing conspiracies against it that include virtually all of its neighbors and often the US.
Easing those fears is big concern in the US these days.
One element in such a policy of reassurance, repeatedly said by Obama and most recently in a television interview, is to “try to resolve the Kashmir crisis so that they [Pakistan] can stay focused not on India, but on the situation with those militants.”
This is a sensible goal, and one India’s leaders will acknowledge as in their country’s interest.
But any Kashmir peace process that is seen to be a consequence of US pressure is politically dead on arrival in India.
Kashmir is a diplomatic minefield.
One misstep by the new Obama administration could result in a deep freeze of the Indo-US relationship for years.
Ultimately, the indicators are that the new Obama administration will seek to restore an international status quo that preceded the Bush presidency.
This includes restoring ties with Europe, tightening the nuclear nonproliferation regime and possibly a restoration of China as the centerpiece of US policy in Asia.
If so, the question for India will be whether this is accomplished by reducing the international space that the country gained under Bush.
If so, there is a strong likelihood that one area in which an Obama administration will fail to gain traction is in advancing the Indo-US relationship in areas outside the strictly economic.
India, Iran, and the Case for Double Standards
All but lost in the controversies surrounding Iraq and Iran is a major initiative involving a third “I” country: India.
Sometime this year, the United States Congress is likely to vote on the “US-India Civil Nuclear Cooperation Initiative,” signed when President Bush visited New Delhi in March.
The agreement paves the way for American exports of nuclear technologies and materials for use in India’s civilian nuclear program.
In return, India has pledged to open 14 of its 22 existing and planned nuclear power reactors, as well as all future civil reactors, to international inspection.
The agreement matters for at least two reasons. First, the accord symbolizes the arrival of a new geopolitical relationship between the world’s two largest democracies that were often on opposite sides during the Cold War.
This development may be of historic importance if it not only leads to a deepening of US-Indian technical and economic ties, but also strengthens their ability to tackle regional and global challenges, ranging from the proliferation of nuclear weapons to climate change.
But the proposed US-India accord is attracting notice for a second, and far more controversial, reason: concern that it could weaken, rather than advance, efforts to resist the further worldwide spread of nuclear weapons.
Critics charge that the agreement undermines the Nuclear Non-Proliferation Treaty (NPT) by letting India have its cake (nuclear weapons) and eat it, too (by giving it access to nuclear fuel and technology).
They allege that the agreement creates a double standard, according to which only some countries may possess nuclear weapons.
To be fair, the critics are right, at least in part.
There is a double standard at work.
But there is nothing new about that.
The NPT, some four decades old, is based on a double standard that gives only five countries – China, France, Russia, the United Kingdom, and the US – the right (for how long is not defined) to possess nuclear weapons.
Moreover, the world seems to have learned to tolerate the reality that three other countries – Israel, India, and Pakistan – also possess nuclear weapons.
Where the critics of the proposed US-India accord are wrong is in charging that such a double standard is wrong when it comes to India because it opens the way for countries such as North Korea and Iran to develop nuclear weapons.
Not all countries are equal.
India is a democracy.
Transparency and the rule of law are the norm, and its government does all it can to fight terrorism.
There is no reason to believe that India will promote the spread of nuclear fuel, technology, or weapons to any other party or country; on the contrary, it is committed to preventing this.
This is not true of either North Korea or Iran.
The former is arguably the most closed, tyrannical, and militarized society in the world, with a long record of irresponsible exports of dangerous technologies.
Iran offers official support to terrorists and its president has threatened publicly to destroy Israel.
The world has good reason to be far less tolerant of what North Korea or Iran do in the realm of nuclear weapons and to reject their calls for equal treatment with India.
Indeed, if there is a danger in the proposed US-India accord, it is the possibility that either North Korea or Iran might conclude that it is only a matter of time before the world comes to accept their nuclear status.
Here the US and others must disabuse them.
The message seems to have gotten through to North Korea; we have seen no nuclear weapons test, despite its probable ability to so.
China, the transit route for most of what goes enters and leaves North Korea, understands that were North Korea to cross this red line, it would risk US military reprisal and possibly lead Japan and/or South Korea to rethink their nuclear weapons policy.
None of these outcomes is in China’s strategic interest.
Unfortunately, there is no country in a position to influence Iran to the extent that China can influence North Korea.
The situation is made more difficult by the fact that oil prices are already at a record high, while US ground forces are busy in Iraq, thus reducing the credibility of American military threats to Iran.
Iran’s leaders, though, would be unwise to proceed with an unconstrained nuclear program and discount the possibility of US military action.
This said, a US preventive strike at Iran’s nuclear-related installations is not in the interest of either country.
The potential for loss of life, for Iranian retaliation, and for global economic disruption is high.
Both countries – indeed, the world – would be better served by a diplomatic outcome in which Iran accepted severe limits on any independent uranium enrichment activity it could undertake and agreed to place all of its nuclear-related facilities under highly intrusive international inspection in exchange for economic benefits and security assurances.
Better yet would be if Iran turned to Russia or the IAEA for uranium-generated electrical power.
Direct US-Iran talks should be convened if they are required to bring about any such agreement.
Iran’s calculations will not be affected by what happens between the US and India.
Rather, Iranian policy will be shaped by its domestic politics, by the ability of the international community to present a united front, and by the willingness of the US to put forth a reasonable diplomatic offer against the backdrop of sanctions and potential military strikes should diplomacy fail.
The stakes could hardly be greater.
It is Iran, not India, that we should all be worried about.
Realizing the Indian Dream
NEW DELHI – It is not often that I get to wear two hats at once.
But that is exactly what happened earlier this month, when I spent a few days in New Delhi.
I was in India primarily as part of my current role as Chairman of a review for the British prime minister on anti-microbial resistance (AMR).
But my visit coincided with the presentation of India's 2015-2016 budget, the first under Prime Minister Narendra Modi.
Given some of my other interests and experiences, I found what was presented to be very interesting.
Following recent revisions to its GDP figures, India's economy has recently grown – in real terms – slightly faster than China's.
A key feature of my research into the BRIC economies (Brazil, Russia, India, and China) more than ten years ago was that at some point during this decade, India would start to grow faster than China and continue to do so for dozens of years.
The reasoning is straightforward.
India's demographics are considerably better than China's, and the size and growth rate of a country's workforce is one of the two key factors that drive long-term economic performance – the other being productivity.
Between now and 2030, the growth rate of India's workforce will add as much to the existing stock of labor as continental Europe's four largest economies put together.
India is less urbanized than China, and it is in the early stages of benefiting from the virtuous forces that normally accompany that process.
But there is a catch.
When it comes to productivity, India has been a laggard.
Unless it finds a way to improve, the country's demographic profile could become a burden rather than a benefit.
In this regard, Modi's first full budget did not include anything dramatic.
But if a number of initiatives are successfully implemented, the economy should receive a real boost.
Indeed, the budget's main feature is its commitment to investments in public-sector infrastructure, even at the expense of raising next year's deficit from 3.6% to 3.9% of GDP.
I have argued for several years that India should emphasize investment spending, so I welcome this shift.
The budget also includes a number of other helpful measures, such as the reduction of the corporate-tax rate and efforts to improve the business environment.
My visits as chairman of the AMR review also allowed me to witness some encouraging signs.
In my book The Growth Map, I describe my unforgettable first visit to Gurgaon, a municipality near Delhi that serves as a regional financial and industrial hub.
Gurgaon is home to a lot of high-flying technology firms, and on this trip I visited one of India's leading diagnostics companies, SRL Diagnostic, which is developing tools that could improve the use of antibiotics.
The last time I made the trip from the Oberoi hotel in New Delhi to Gurgaon, it took well over 2.5 hours to travel the 30 kilometers.
Though a new freeway was under construction, the building site was full of cars and animals.
As a result, traffic was in a state of chaos, and it was impossible for any roadwork to be done.
I had always promised myself that the next time I took the trip, I would somehow repeat the exact journey.
I am pleased to say that the drive now takes less than an hour and the experience was much less dramatic.
Moreover, the hotel car that made the journey provided free Wi-Fi – the first time I have come across this anywhere in the world.
It is probably too early to say with certainty that India will soon take its place as the world's third largest economy, behind China and the United States.
But, given that India's investment climate seems to be improving, that moment might not be too far away.
By 2017, India could surpass Italy and Brazil to become the world's seventh largest economy; by 2020, there is a reasonable chance that it will overtake France and the United Kingdom to become the fifth largest.
Overtaking Germany and Japan, however, will require bolder steps, especially regarding education, health, and economic policy.
India will need to improve its education system dramatically, both at the secondary and tertiary level, and make similarly large advances in basic sanitation (not to mention implementing my review's recommendations for combating AMR).
These developments, along with a more stable framework for monetary and fiscal policy, could lead to the type of double-digit growth that China has enjoyed for the past three decades.
Indianomics
NEW DELHI – Nowadays, economists are assailed by irresolute thoughts: what, for example, is the right term to apply to current global economic conditions?
Is it “depression,” “recession,” or, finally, “recovery”?
What of the euro?
Will it flounder or regain its “health”?
As these debates fill the air in finance ministries and economics departments around the globe, India continues its steady GDP growth, now projected to reach 9.4% this year.
Indeed, the government says that the growth rate will hit double figures soon.
Although many people seem amazed that India has maintained rapid growth for so long – even in the face of the global downturn – surprise is unwarranted.
India’s proportion of global GDP stood at 25% in 1750, but slumped to 1.6% in 1900, at the high noon of imperialism.
India is simply rising again to reassert its traditional global position.
Can India achieve this?
Many challenges confront India on its path to sustained strong growth, principally that of converting the country’s vast promise into reality.
In order to achieve this in a true democracy, India must ensure distributive justice.
It must ensure that enhanced purchasing power leads to a markedly improved quality of life for all of India’s citizens.
Currently, India has a window of opportunity, nearly unique in nature, thanks to a huge demographic dividend: almost 60% of the country’s population is below the age of 30.
But this advantage is limited in duration, lasting two or perhaps three decades.
If it is not used now, it will dissipate.
To seize this opportunity, India first must move decisively away from state capitalism, the remnants of which continue to retard the country’s economic progress.
India’s economic future lies in maximizing its private sector’s dynamism, which demands an acceleration of institutional reform, including privatization at both the national and state level.
But, as the Indian economist and frequent policymaker Vijay Kelkar has put it, “India needs to fashion [its] own sui generis model of growth and development…towards an advanced economy, always promoting inclusive growth, and thus gain the benefits of enhanced efficiency, greater equity, and better governance under a liberal democracy.” Simply copying American, British, or other Western policies and institutions will not work.
Moreover, India is not China; it cannot be – indeed, it must not be.
That is why it should not hanker after any ersatz export-led or state-directed growth.
India’s second great challenge is to resolve its enormous infrastructure shortcomings.
India is no longer primarily an agricultural economy; indeed, agriculture accounts for only around 20% of GDP.
But this does not mean that agriculture should be neglected; on the contrary, it remains a way of life for many millions of Indians, who need capital and new technology.
Raising farm productivity and income requires improved irrigation, wasteland reclamation, warehousing, marketing, transport development, and the free movement of produce within the country.
This is why rapid strengthening of India’s physical and social infrastructure is central to its progress.
This leads us to examining India’s current fixation with GDP growth as a national panacea.
The theory is that the government, as the agent of the people, collects taxes and delivers public goods in return.
In this sense, the Indian state has been rather a poor agent; it collects little and delivers a pittance – and what it does deliver is of grossly inadequate quality.
Yet the Indian state continues to ask for a disproportionately high price from the people.
This must change, by directly targeting the alleviation of poverty – and ultimately its elimination.
I accept that the most powerful anti-poverty program is economic growth, but it works only if and when it is accompanied by distributive justice.
Only such “just” growth can eventually be converted into high GNC: “Gross National Contentment,” a truer index of economic well-being.
Rather than endless debates about higher budgetary allocations, India needs to find practical ways to promote effective, targeted, self-adjusting, and self-liquidating anti-poverty programs.
It is not the amount of money allocated by government that matters.
The true litmus test of budget expenditures is what actually gets delivered.
Only an inclusive approach to reform can meet peoples’ expectations, and in turn spread contentment.
India does not need more laws.
It needs more effective and more accountable governments.
It does not need more regulations, but rather a vastly larger canvas for individual freedom and opportunity.
India’s economy must be freed from the organizing principle of state control, so that individual enterprise and creativity can become its main engine.
India is at the threshold of an era of unprecedented growth.
But to cross it, Indians must craft a new idea of India – as the flagship of a modern global economy that unleashes the dynamism of all citizens.
India or China?
NEW DELHI – When US President Barack Obama visited India in November and complimented its leaders on the growing success and prowess of their economy, a tacit question returned to center stage: Will China grow faster than India indefinitely, or will India shortly overtake it?
In fact, this contest dates back to 1947, when India gained independence and democracy became the country’s defining feature, while China turned to Communism with the success of Mao Zedong after the Long March.
Both countries, the “sleeping giants,” were expected to awaken at some point from their slumber.
But, since the growth model in vogue at the time laid principal emphasis on capital accumulation, China was widely held to have the advantage, because it could raise its investment rate higher than India, where democracy limited the extent to which the population could be taxed to increase domestic savings.
As it happened, however, both giants slept on – until the 1980’s in China and the early 1990’s in India – mainly because both countries embraced a counter-productive policy framework that crippled the productivity of their investment efforts.
Reflecting flawed economic arguments, India embraced autarky in trade and rejected inflows of equity investment. It also witnessed economic interventionism on a massive scale, including the proliferation of public-sector enterprises in areas beyond public utilities.
In China, the results were similar, as the political embrace of Communism meant going autarkic and giving the state a massive role in the economy.
After progressively dismantling their inefficient policy frameworks in favor of “liberal” reforms, the two giants began to stride forth.
The race was finally on.
And, once again, China seemed to be the horse to bet on: it grew faster, because it changed its policy framework much faster than democracy permits.
But there are good reasons to suspect that China’s authoritarian advantage will not endure.
First, while authoritarianism can accelerate reforms, it can also be a serious handicap.
Years ago, when both Mao and Zhou Enlai were alive, Padma Desai, the Columbia University expert on Russia, was asked about China’s future growth prospects.
She answered: it depends on whether Mao dies first or Zhao dies first – her point being that in a top-heavy system, growth paths can become unpredictable, and thus subject to volatility.
Moreover, we know from experience elsewhere – and now in China itself – that as growth accelerates, political aspirations are aroused.
Will the Chinese authorities respond to them with ever greater repression, as they have with dissidents and Falun Gong, creating discord and disruption, or will they accommodate new popular demands by moving to greater democracy?
Again, China’s authoritarian politics means that it cannot profit from the innovations that depend on software, as that is an instrument through which dissent can flourish and become subversive of total control.
As one wit has observed, the PC (personal computer) and the CP (Communist Party) do not go together.
Finally, China’s growth must continue to depend on its exploitation of external markets, which makes it vulnerable in a world that is increasingly making democracy and human rights a central preoccupation.
In such a world, continued hassles and hiccups for Chinese exports can be confidently expected.
Economic factors also militate against Chinese prospects.
China was clearly able for many years to exploit a “reserve army of the unemployed” à la Karl Marx – to grow rapidly without facing a labor-supply constraint, so that capital accumulation would not run into diminishing returns.
But now, given China’s one-child policy and lack of adequate infrastructure (including housing) in rapidly growing areas, labor is getting scarce and wages are rising.
In economic jargon, the supply curve of labor was flat but is now sloping upward, so that rapidly increasing demand for labor resulting from rapid growth is driving up wages.
That means that China is beginning to “rejoin the human race” as capital accumulation meets scarcer labor and growth slows.
By contrast, India has a far more abundant supply of labor, as well as a more favorable demographic profile, so that, as India’s investment rate increases, labor will not be a constraint.
India will thus become the new China of the past two decades.
Besides, in contrast to China, where economic reforms were quicker and more complete, India still has a way to go: privatization, labor-market reforms, and opening up the retail sector to larger, more efficient operators are all pending – and will give a further boost to India’s growth rate once they are implemented.
Clicks over Bricks in India
SINGAPORE – After years of debate, India’s government recently announced that will open the country’s retail sector to foreign investment.
The move was met with howls of protest from those who argue that the entry of large hypermarket chains like Carrefour and Walmart will devastate the small shops that currently dominate India’s retail sector.
A country-wide strike called by opposition parties on September 20 brought many cities and towns to a halt.
So far, Prime Minister Manmohan Singh’s government has not relented, despite the loss of support from a key coalition ally.
The debate around opening the retail sector to foreign investment is currently being framed, on the one hand, by the need to modernize supply chains and, on the other hand, by the desire to protect small shopkeepers’ livelihoods.
Those who support the decision argue that India’s supply chains are simply too wasteful, and that only the finance and knowhow of big, international retail chains can upgrade them.
Opponents point to how big retailers decimated the traditional retail segment in the West.
But this debate misses a crucial point: the hypermarket model is itself under serious threat everywhere from online shopping.
Consumers worldwide are finding that they can access virtually unlimited choice on the Internet – including customized goods and services that big retailers simply cannot deliver.
As a result, large hypermarkets are suddenly finding that their business model is unraveling.
They watched in horror as Amazon, en route to becoming the world’s largest online retailer, pushed the bookstore chain Borders into bankruptcy, and have wondered if they will be next.
The American discount retailer Walmart, reportedly concerned that it is cannibalizing its own sales, has gone so far as to stop selling Amazon’s Kindle tablets.
Indeed, the Indian government’s decision to welcome foreign retailers coincided with French retailer Carrefour’s announcement that it will shut down its substantial operations in Singapore by the end of this year.
Meanwhile, its British counterpart, Tesco, is shifting away from the large hypermarket format and investing heavily in online systems.
Quite clearly, the established framework of retailing is being fundamentally overhauled.
Given these developments, India may simply skip the hypermarket stage and go online, just as it skipped fixed-line telephony and went mobile.
Of course, hypermarkets will do well in a few locations, but they are unlikely ever to dominate India’s retail sector.
For small shopkeepers, this poses both a challenge and an opportunity.
The challenge is that the rise of online shopping will increase competitive pressure, regardless of whether big foreign retailers enter the market.
While Indians have traditionally been wary of buying online, owing to their distrust of digital security, in recent years the urban middle class has become increasingly accustomed to using the Internet to purchase airline tickets, reserve hotel rooms, and order books.
As rising affluence and falling technology prices make online shopping accessible to a growing pool of customers, more products will follow.
Change is inevitable.
But this shift may also open an opportunity for small shops.
We know from international experience that online shopping undermines hypermarkets more than neighborhood stores, which often offer home delivery, credit, and the reassuring familiarity of personal relationships.
A local shop may be able to use the Internet to tailor more precisely its selection of goods to its customers’ tastes.
In other words, small shops may be more than capable of holding their own against big retailers if they adapt to the new environment.
Indeed, small shops’ advantages are so compelling that Tesco is investing heavily in expanding its network of convenience stores, Tesco Express, thereby effectively mimicking the traditional model of local grocery stores.
So India’s political debate over the entry of foreign retailers into the market, while heated, is probably already outdated.
The real question is how India’s creaking supply chains will respond when consumers leapfrog hypermarkets and go online.
No other country has created a logistical network directly for online retailing.
For investors and businesses – perhaps including India’s small shopkeepers – this is where the really interesting opportunities will emerge.
India’s Agony
MUMBAI – In most cities of South Asia, hidden beneath the grime and neglect of extreme poverty, there exists a little Somalia waiting to burst out and infect the body politic.
This netherworld, patrolled and nourished by criminals who operate a vast black-market economy, has bred, in Mumbai, a community that has utter contempt for the state, because it knows that its survival depends on corrupting the police. Like underground magma, that underworld has now burst into the streets of Mumbai.
Because the denizens of this netherworld know neither patriotism nor morality, they are easily lured into partnership with terrorists, particularly when they have reason to feel aggrieved. In Mumbai, a large proportion of them are Muslims who were denied space in the formal economy and have developed strong vested interests over the past 50 years.
Details about the Mumbai outrage, where terrorists killed over 100 people, are still unfolding.
But we do know that at least 30 men armed with AK47 rifles and grenades held India’s business and financial center hostage, targeting both Indians and foreigners, particularly Americans and British.
It is likely that this operation was propelled from Pakistan through the Lashkar e Tauba, a terrorist organization sustained by hatred of secular India and backed by shadowy Pakistani agencies and street support.
In the blood and drama of the events, however, we might miss a significant element of the story.
The attacks were an operation that must have required months of planning: serious weapons were deployed, a small army was mobilized, targets were studied, transport was organized, and weak points identified.
A plan of attack that involved hundreds of people was put in motion, and yet the massive infrastructure of India’s government discovered nothing.
The chief of India’s Anti-Terrorist Squad, Hemant Karkare (who lost his life in the battles that raged through the night) received a death threat from the nearby city of Pune, but his own unit did not bother to investigate it, since it was busy playing games on behalf of its political masters.
Complacency and politics gave the terrorists more protection than silence or camouflage ever could.
Indeed, the attacks represent more than a failure of police work.
They represent a collapse of governance; these are the wages of the sins of administrative incompetence and political malfeasance.
India is a tough nation.
No one should have illusions about that.
It has fought off Muslim terrorists in Kashmir, Sikh terrorists in Punjab, Christian terrorists in Nagaland, and Hindu terrorists in Assam and across the country.
It understands that you cannot blame the whole community for the sins of a few.
But under ineffectual governance, particularly during the last three years, India is in danger of degenerating into a soft state.
Instead of being an international leader in the worldwide war against terrorism, it is sinking into the despair of a perpetual victim.
Indeed, India stands only behind Iraq in the number of people killed each year in terrorist attacks.
Three years ago, Indian Prime Minister Manmohan Singh rather smugly told President George W. Bush in Delhi that Indian Muslims were not involved in any act of terrorism.
The implication was that the integration of Muslims in Indian society constituted a success story. Muslims, Singh implied, also benefit from the virtues of democracy, a conclusion that Bush happily repeated.
But Singh certainly did not fool any of the terrorists, some of whom may have read his self-congratulation as a challenge for them to act.
I am an Indian and a Muslim and proud to be both.
Like any Indian, today I am angry, frustrated, and depressed.
I am angry at the manic dogs of war who have invaded Mumbai.
I am frustrated by the impotence of my government in Mumbai and Delhi, tone-deaf to the anguish of my fellow citizens.
And I am depressed at the damage being done to the idea of India.
India\u0027s Bollywood Power
The world has heard much about India’s extraordinary transformation in recent years, and even of its claims to a share of “world leadership.“ Some of that is hyperbole, but in one respect, India’s strength may be understated.
What makes a country a world leader?
Is it population, military strength, or economic development?
By all of these measures, India has made extraordinary strides.
It is on course to overtake China as the world’s most populous country by 2034, it has the world’s fourth-largest army and nuclear weapons, and it is already the world’s fifth-largest economy in terms of purchasing power parity and continues to climb, though too many of its people remain destitute.
All of these indicators are commonly used to judge a country’s global status. However, something much less tangible, but a good deal more valuable in the twenty-first century, may be more important than any of them: India’s “soft power.”
Take Afghanistan, for instance – a major security concern for India, as it is for the world. But India’s greatest asset there doesn’t come out of a military mission: it doesn't have one.
It comes from one simple fact: don’t try to telephone an Afghan at 8:30 in the evening.
&quot;Saas&quot; is the most popular television show in Afghan history, with a 90% audience penetration.
It’s considered directly responsible for a spike in the sale of generator sets and even for absences from religious functions which clash with its broadcast times.
“ Saas” has so thoroughly captured the public imagination in Afghanistan that, in this deeply conservative Islamic country where family problems are often literally hidden behind the veil, it’s an Indian TV show that has come to dominate (and sometimes to justify) public discussion of family issues.
That’s soft power, and its particular strength is that it has nothing to do with government propaganda.
The movies of Bollywood, which is bringing its glitzy entertainment far beyond the Indian diaspora in the United States and the United Kingdom , offer another example.
A Senegalese friend told me of his illiterate mother who takes a bus to Dakar every month to watch a Bollywood film – she doesn’t understand the Hindi dialogue and can’t read the French subtitles, but she can still catch the spirit of the films and understand the story, and people like her look at India with stars in their eyes as a result.
An Indian diplomat in Damascus a few years ago told me that the only publicly displayed portraits as big as those of then-President Hafez al-Assad were of the Bollywood superstar Amitabh Bachchan.
Indian art, classical music and dance have the same effect.
So does the work of Indian fashion designers, now striding across the world’s runways.
Indian cuisine, spreading around the world, raises Indian culture higher in people's reckoning; the way to foreigners’ hearts is through their palates.
In England today, Indian curry houses employ more people than the iron and steel, coal and shipbuilding industries combined.
When a bhangra beat is infused into a Western pop record or an Indian choreographer invents a fusion of kathak and ballet; when Indian women sweep the Miss World and Miss Universe contests, or when “Monsoon Wedding” wows the critics and “Lagaan” claims an Oscar nomination; when Indian writers win the Booker or Pulitzer Prizes, India’s soft power is enhanced.
Likewise, when Americans speak of the IITs, India’s technology institutes, with the same reverence they accord to MIT, and the “Indianness” of engineers and software developers is taken as synonymous with mathematical and scientific excellence, India gains in respect.
In the information age, as Joseph Nye, the guru of soft power, argues, it is not the side with the bigger army, but the side with the better story, that wins.
India is already the “land of the better story.”
As a pluralist society with a free and thriving mass media, creative energies that express themselves in a variety of appealing ways, and a democratic system that promotes and protects diversity, India has an extraordinary ability to tell stories that are more persuasive and attractive than those of its rivals.
And there's the international spin-off of India just being itself .
India’s remarkable pluralism was on display after national elections in May 2004, when a leader with a Roman Catholic background (Sonia Gandhi) made way for a Sikh (Manmohan Singh) to be sworn in as Prime Minister by a Muslim (President Abdul Kalam) – in a country that is 81% Hindu.
No strutting nationalist chauvinism could ever have accomplished for India’s standing in the world what that one moment did – all the more so since it was not directed at the world.
There’s still much for India to do to ensure that its people are healthy, well fed, and secure.
Progress is being made: the battle against poverty is slowly (too slowly) being won.
But India’s greatest prospects for winning admiration in the twenty-first century may lie not in what it does, but simply in what it is.
India’s Burma Dilemma
The world has been horrified by graphic images of the latest crackdown by Myanmar’s military junta.
But the bullets and clubs unleashed on Buddhist monks have worked.
The monks have retreated, and an eerie normalcy has returned to Yangon (Rangoon), Myanmar’s principal city and former capital.
That crackdown continues under cover of darkness.
When the sun sets in Myanmar, fear rises.
Everyone listens half awake for the dreaded knock on the door.
Any night, the military’s agents can come for you, take you away, and make sure you are never heard from again.
In recent nights, the junta’s henchmen have burst into monasteries, lined up sleepy monks, and smashed their shaved heads against the walls, spattering them with blood.
Scores of others, perhaps hundreds, have been carted off for interrogation, torture, or execution.
The nighttime assault on a United Nations employee and her family made international news, but hundreds of less well connected Burmese have been similarly abused.
For 45 years, Myanmar’s people have been subjected to the junta’s reign of terror.
My father was born in Rangoon long before the 1962 coup that brought the current regime to power.
Afterwards, many of my relatives, prosperous Indian merchants who had been settled in Myanmar for generations, abandoned homes and businesses in order to save their skins as chaos enveloped the city, later renamed Yangon.
A relative who now lives in Bangkok, but who returned part-time to Yangon in response to overtures from Myanmar’s cash-starved rulers, recalled those days: “We lived through hell.
We never knew when we woke up each morning what would happen.
People were being denounced left and right.
They could just come and take you away and take everything away from you.” Those who couldn’t leave Myanmar, or didn’t want to, have lived with this fear ever since.
The United States and Europe have issued strong statements condemning the crackdown and calling upon Myanmar’s neighbors, especially India and China, to exert their influence on the regime.
The response from both has been muted (as it has from Thailand, which also has strong economic ties with Myanmar).
China balks at interfering in the “internal affairs” of a neighbor from whom it gets precious natural gas and potential access to the sea.
India, which “normalized” bilateral relations a few years ago, is reluctant to alienate Myanmar’s military, with which it has worked closely to counter rebels in India’s northeast who had been using the common border to tactical advantage.
To this end, India has provided aid, including tanks and training, to Myanmar’s military.
But the main reason for India’s good relations with Myanmar’s ruling thugs is the country’s vast and still largely unexploited energy reserves, which India desperately needs to fuel its economic boom.
India has invested $150 million in a gas exploration deal off the Arakan coast of Myanmar, and India’s state-owned Oil and Natural Gas Corporation and Gas Authority of India Ltd. have taken a 30% stake in two offshore gas fields in direct competition with PetroChina, which has also been given a stake.
India and China are simply doing what the US and European countries have done for so long: trump rhetoric about democracy and human rights with policies that serve their strategic and energy security interests.
US relations with Pakistan and Saudi Arabia are two examples, and America’s Chevron and France’s Total, two of the world’s oil giants, continue to do a brisk business in Myanmar, thanks to loopholes in the sanctions.
But the rise of India and China means that the time-tested posture of Western democracies toward emerging states to “do as we say, not as we do” will become less tenable.
If the EU and the US want democratic India to act according to its stated moral values and not its vital national interests when these appear to conflict, they had better be prepared to do the same.
Feeling the heat, including threats from some US senators to link America’s nuclear deal with India to its actions in Myanmar, India has announced that it is asking for the release of Burmese democratic opposition leader and Nobel Prize winner Aung San Suu Kyi from house arrest.
But the credibility of all democratic regimes, not just India’s, is at stake in what unfolds in Myanmar.
India\u0027s China Syndrome
CAMBRIDGE: India may the most important unheralded story of the world economy in coming years.
Though India's one billion people constitute nothing less than one-sixth of humanity, and notwithstanding the fact that India is the world's largest democracy, India remains off the radar screen for most observers of the world economy.
This may change soon, for India is on the move.
If it remains on course with economic reforms, India will be one of the fastest growing economies in the world in the next few years, and will become one of the premier locations for foreign investment.
India's global political influence is likely to rise in conjunction with economic success, benefiting both the cause of democracy as well as the global economy.
India's low profile is easy to understand.
Upon independence half a century ago, India's first Prime Minister, Jawaharlal Nehru, set India on a course of protectionism and socialism – two of the most self-defeating economic strategies of modern times.
To a country that had struggled for decades against British imperialism, however, neither capitalism nor openness to foreign investors seemed a prudent course.
While India made important advances – in science, agricultural technology, and democratic institutions – the economy remained below its potential for decades.
Only when India chose a course of market reforms in the mid-1980s did the outlook improve.
With a decisive turn towards open trade and market liberalization in 1991, India finally broke free of the shackles of a failed economic strategy.
During the 1990s, India found its footing as a market economy integrating with the world.
Because of its poverty, its complexity, and its vastness (even national elections have to be held over the course of several weeks, to accommodate hundreds of millions of voters), the uptake of market reforms has been gradual, but also remarkably resilient to shocks.
The old centralized political structure built around Nehru's Congress Party collapsed in the mid-1990s, giving way to a succession of weak multi-party governments.
But the remarkable underlying truth is that each new government endorsed the direction of globalization and market reforms, so much so that the basic reform direction is now a national consensus of virtually every major party.
Today's government won a strong mandate in last autumn's elections, giving it several years to deepen and widen reform.
With this political mandate, India stands the chance of a dramatic breakthrough to rapid growth.
Several things are now working in India's direction:
1. rapid population growth is finally slowing (though not yet by enough).
A growing proportion of the population will now be of working age, and a smaller population will be children.
This should boost India's per capita income;
2. old social barriers to education for girls and lower castes are giving way, under democratic pressures, to strong calls for universal education.
This could provide the most dramatic social boost to rapid economic growth and improved well being;
3. decades of investment in science and technology are now paying off in creating a powerful technological base for a modern Indian economy.
Though much of rural India remains impoverished, new dynamic urban-based centers of information technology are springing up around the country.
Indian cities such as Bangalore, Chennai (formerly Madras), Mumbai (formerly Bombay) and Hyderabad are becoming locations for software and hardware exports, the cutting edge of India's modern economy.
India's exports of computer software and hardware have soared from a few hundred million dollars some years back to around $5 billion today, with a forecasted growth to $30 billion or more by 2005.
As China boomed in the 1980s, India could boom in the first decade of this new century.
If the national consensus around reforms is sustained and enlarged, two great goals could be met.
India could enjoy a decade of "income doubling," in which per capita gross domestic product actually doubles by the year 2010.
This would require an annual growth of per capita income of around 7%, something that is achievable given India's economic conditions.
Second, India could create a system of universal literacy and education for the first time in its history, another dramatic social improvement that is realistically within reach.
These goals require hard work on the part of government and society.
Most importantly, all major political groups have to get behind the concept of universal education, a commitment that has, in practice, been missing for decades.
Next, the Government must lead a massive effort of reform.
For example, despite nationalist rhetoric by state enterprises and associated trade unions, the government should decide that the vast telecommunications network should be privatized, including to foreign investors.
It's only in this way that India can hope to create a network of fiber optics and telephone lines to catapult the country into a modern information economy.
Other economic measures will also be politically tough, like reigning in subsidies for power that undermine the budget and make it difficult to get new investors into rural areas.
(Farmers have been promised cheap electricity for years – so cheap that private-sector power supplies are loath to make new investments.)
Several other areas of reform – in finance, labor markets, foreign investment, tax reform – await action.
Another goal should be to increase the government's spending on research and development, especially in areas of health, agriculture, environment and information technology.
Despite long-standing political obstacles to some of these reforms, this may be the best and most likely moment for a political breakthrough.
India is feeling confident about itself, especially in view of its growing role in the world of high technology and a decade of successful reforms.
The new government has an electoral mandate.
Favorable demographic realities are in the mind of policy makers.
If India cannot make a breakthrough now, when could it?
We should pay rapt attention as the new Government unveils its new budget and new development policies in coming weeks.
It may contain positive news for India, and for the world.
India’s Dalai Dilemma
As the world reacts to China’s crackdown in Tibet, one country is conspicuous by both its centrality to the drama and its reticence over it.
India, the land of asylum for the Dalai Lama and the angry young hotheads of the Tibetan Youth Congress, finds itself on the horns of a dilemma.
On one hand, India is a democracy with a long tradition of allowing peaceful protest, including against foreign countries when their leaders come visiting.
It provided refuge to the Dalai Lama when he fled Chinese occupation of Tibet in 1959, granted asylum (and eventually Indian citizenship) to more than 110,000 Tibetan refugees, and permitted them to create a government-in-exile (albeit one that India does not recognize) in the picturesque Himalayan hill town of Dharamsala.
On the other hand, India has been cultivating better relations with China, which humiliated India in a brief border war in 1962.
Though their bitter border dispute remains unresolved, and China has been a vital ally and military supplier to India’s enemies in Pakistan, bilateral relations have grown warmer in recent years.
Trade has doubled in each of the last three years, to an estimated $40 billion this year; China has now overtaken the US as India’s largest single trading partner.
Tourism, particularly by Indian pilgrims to a major Hindu holy site in Tibet, is thriving.
Indian information technology firms have opened offices in Shanghai, and Infosys’s headquarters in Bangalore recruited nine Chinese this year.
India has no desire to jeopardize any of this.
India’s government has attempted to draw a distinction between its humanitarian obligations as an asylum country and its political responsibilities as a friend of China.
The Dalai Lama and his followers are given a respected place but told not to conduct “political activities” on Indian soil.
When young Tibetan radicals staged a march to Lhasa from Indian soil, the Indian police stopped them well before they got to the Tibetan border, detaining 100.
When Tibetan demonstrators outside the Chinese Embassy in New Delhi attacked the premises, the Indian government stepped up its protection for the Chinese diplomats.
Indian Foreign Minister Pranab Mukherjee – who was noticeably less forthcoming on Tibet than his American counterpart during a press conference with Secretary of State Condoleezza Rice – has publicly warned the Dalai Lama against doing anything that could have a “negative impact on Indo-Sino relations.”
The Dalai Lama’s curious position has complicated India’s diplomatic dance with China.
He is simultaneously the most visible spiritual leader of a worldwide community of believers, a role that India honors, and a political leader, a role that India permits but rejects in its own dealings with him.
As a Buddhist, the Dalai Lama preaches non-attachment, self-realization, inner actualization, and non-violence; as a Tibetan he is admired by a people fiercely attached to their homeland, with most seeking its independence from China and many determined to fight for it.
He is the most recognized worldwide symbol of a country that he has not seen for nearly five decades.
The Dalai Lama’s message of peace, love, and reconciliation has found adherents among Hollywood movie stars, pony-tailed hippies, Irish rock musicians, and Indian politicians.
But he has made no headway at all with the regime that rules his homeland, and he has been unable to prevent Tibet’s inexorable transformation into a Chinese province.
His sermons fill football stadiums and he has won a Nobel Prize, but political leaders around the world shirk from meeting him openly, for fear of offending China.
Indians are acutely conscious that, on this subject, the Chinese are easily offended.
While India facilitated the highly publicized visit by Nancy Pelosi, Speaker of the US House of Representatives, to the Dalai Lama in Dharamsala last month, it almost simultaneously canceled a scheduled meeting between him and Indian Vice-President Mohammed Hamid Ansari.
When China summoned India’s ambassador in Beijing to the foreign ministry at 2 a.m. for a dressing-down over the Tibetan protests in New Delhi, India meekly acquiesced in the insult.
Though Prime Minister Manmohan Singh has publicly declared the Dalai Lama to be the “personification of nonviolence,” India has let it be known that it does not support his political objectives.
Tibet, India’s government says, is an integral part of China, and India lends no support to those who would challenge that status.
That position is not without detractors.
The opposition Bharatiya Janata Party (BJP, which led the previous government) has criticized the current administration for not “expressing concern over the use of force by the Chinese government” and instead “adopting a policy of appeasement towards China with scant regard to the country’s national honor and foreign policy independence.” But few observers believe that the BJP would have conducted itself differently.
The stark truth is that India has no choice in the matter.
It cannot undermine its own democratic principles and abridge the freedom of speech of Tibetans on its soil.
Nor can it afford to alienate its largest trading partner, a neighbor and an emerging global superpower, which is known to be prickly over any presumed slights to its sovereignty over Tibet.
India will continue to balance delicately on its Tibetan tightrope.
India’s Democracy at 60
At midnight on August 15, 1947, a new nation was born on a subcontinent ripped apart by a bloody partition.
Independent India came into being as flames blazed across the land, corpse-laden trains crossed the new frontier with Pakistan, and weary refugees abandoned everything to seek a new life.
A less propitious start for a fledgling nation could scarcely be imagined.
Yet, six decades later, the India that emerged from the wreckage of the British Raj is the world’s largest democracy, poised after years of rapid economic growth to take its place as one of the giants of the twenty-first century.
A country whose very survival seemed in doubt at its founding offers striking lessons in constructing, against all odds, a working democracy.
No other country embraces such an extraordinary profusion of ethnic groups, mutually incomprehensible languages, religions, and cultural practices, as well as variations of topography, climate, and levels of economic development.
In 1947, India’s leaders faced a country with a million dead, 13 million displaced, billions of rupees worth of property damage, and the wounds of sectarian violence still bleeding.
Given this, and the challenges of administering a new country, integrating the “princely states” into the Indian Union, and reorganizing the divided armed forces, they could have been forgiven for demanding dictatorial powers.
But India made a strength out of its major weakness.
To the American motto, “E Pluribus Unum,” India could only counter, “E Pluribus Pluribum.”
Instead of suppressing its diversity in the name of national unity, India acknowledged its pluralism in its institutional arrangements: all groups, faiths, tastes, and ideologies survive and contend for their place in the sun.
This wasn’t always easy.
India suffered caste conflicts, clashes over the rights of different linguistic groups, religious riots (mainly between Hindus and Muslims), and separatist threats.
Despite many stresses and strains, India has a remained a freewheeling multi-party democracy – corrupt and inefficient, perhaps, but nonetheless flourishing.
It helped that India’s founding fathers, from Mahatma Gandhi on, were convinced democrats.
India’s first and longest-serving prime minister, Jawaharlal Nehru, spent his political career instilling in his people the habits of democracy: disdain for dictators, respect for parliamentary procedures, and abiding faith in the constitutional system.
As prime minister, Nehru carefully nurtured the country’s infant democratic institutions by showing them respect, even deference.
For example, on the one occasion that he publicly criticized a judge, he apologized the next day and wrote an abject letter to the India’s Chief Justice.
Though there was no serious challenger to his authority, Nehru never forgot that he derived his power from India’s people, to whom he remained astonishingly accessible.
By his personal example, democratic values became so entrenched that when his own daughter, Indira Gandhi, suspended India’s freedoms in 1975 with a 21-month State of Emergency, she felt compelled to return to the Indian people for vindication.
Having imbibed the most important of her father’s values, she held a free election, which she overwhelmingly lost.
Though Indian politics is hardly immune to the appeal of sectarianism, its people have come to accept the idea of India as one land embracing many differences of caste, creed, color, culture, cuisine, conviction, costume, and custom, yet still rallying around a democratic consensus.
The heart of that consensus is the simple principle that you don’t need to agree all the time – except on the ground rules about how you can disagree.
India has survived all the challenges that have beset it for 60 years because it has maintained a consensus on how to manage without consensus.
For example, India permits all religions to flourish while ensuring that none is privileged by the state.
This includes the granting of group rights, under which Muslims are governed by their own Personal Law, distinct from the common civil code.
If America is a melting-pot, then India is a thali , a selection of sumptuous dishes in different bowls.
Each tastes different, and does not necessarily mix with the next, but all belong on the same plate.
No one speaks seriously any more of the danger of disintegration.
Separatist movements in far-flung places like Tamil Nadu and Mizoram have been quietly defused by a simple formula: yesterday’s secessionists become today’s chief ministers (the equivalent of provincial or state governors) and tomorrow’s opposition leaders.
Moreover, democracy in India is not an elite preoccupation, but matters most to the underprivileged masses.
Whereas in the United States, a majority of the poor do not vote, – turnout in Harlem was 23% in the last presidential election – in India the poor turn out in great numbers.
As a result, the explosive potential of caste division also has been channeled through the ballot box, with the lowest of the low attaining high office.
Mayawati, an “untouchable” woman, has ruled India’s most populous state, Uttar Pradesh, as Chief Minister three times, and now enjoys a secure majority.
More generally, the logic of the electoral marketplace means that no single communal identity can dominate others.
Three years ago, India, a country that is 81% Hindu, saw a Roman Catholic political leader (Sonia Gandhi) make way for a Sikh (Manmohan Singh), who was sworn in by a Muslim (President Abdul Kalam).
By contrast, the world’s oldest democracy, the US, has yet to elect a president who is not white, male, and Christian.
Democracy has sustained an India that safeguards the common space available to each identity.
That idea has knit together a country that many thought would not survive, and whose 60th birthday is therefore well worth celebrating.
India\u0027s Divide and Misrule
An eye for an eye makes the whole world blind. So said Mahatma Gandhi, the apostle of non-violence.
Today communal violence ravages his home state Gujarat.
Were Gandhi alive to witness today's communal violence between Hindus and Muslims in Gujarat, he would sink into despair.
Despair not only for the victims of violence, but for the cynicism of those politicians, such as Gujarat's Chief Minister Narendra Modi, who seek to justify lawlessness, violence and even murder of minority members by the majority Hindus.
The current spate of violence began on February 27 th , when a train carrying many Hindu devotees was set ablaze by some Muslims at Godhra, Gujarat.
Retaliation against Muslims came swift - the next day - and has smouldered since, leaving hundreds dead, orphaned, and homeless.
The tension boils on thanks, in part, to the refusal of Gujarat's government to pursue and prosecute the perpetrators of the crime.
That such bloodshed occurred in today's Gujarat is surprising, for the state is no economic backwater but is, instead, one of India's most dynamic states.
Moreover, it has been noted for tolerance: not only Muslims, but of Parsees (a minority community from Persia who practice Zorastrianism).
So why did such a state suddenly explode?
The politics of division that bedevils Indian national politics is in ugly display in Gujarat.
True raj dharma (good governance) creates the conditions for social trust and tolerance to flourish.
But instead of seeking to encourage these civic (and economic) virtues, the ruling Bharatiya Janata Party (BJP) use threats of communal violence to boost its electoral ends.
But playing with fire brought only momentary advantages.
After the Gujarat violence the national BJP government faced a "censure motion" vote in parliament.
It survived, but was none the less discomforted by it.
Voters, indeed, increasingly see through such cynical toying with ethnic and religious divisions, for it is clear that prompt arrest and prosecution of those who instigated the Godhra incident would have brought independent voters flocking to the BJP.
The party has squandered that opportunity.
Of course, the BJP is not alone in seeking to exploit India's religious and caste divisions.
Even the venerable Congress party - which led India's struggle for independence - manipulates religious, communal and caste rivalries so as to boost its chances of forming government.
Thankfully, many small parties, who are the key to coalition politics, are pressing the big parties to behave more responsibly.
For example, some of the 15 or so centrist parties who support the BJP-led coalition national government are demanding real action in Gujarat, including removal of its Chief Minister.
They still support Prime Minister Atal Behari Vajpayee, but their demands for accountability have laid down boundaries beyond which the BJP and Congress will now stray only at the risk of paying a high political cost.
The BJP can't take such risks because it fears holding early elections.
Although BJP members trumpet the party's fundamentalist Hindu agenda, it won power nationally on its promise to deliver good government after the seeming corruption and chaos of the Congress party's previous term in power.
"Good government" remains the public's biggest concern, and the BJP knows that murderous riots will undermine its claim to be delivering such.
The Congress, however, is keen to push for elections because it scents blood.
Its performance in local and state elections has improved markedly since Congress's popularity collapsed in the early 1990s and it now rules 14 of the 29 states (including government of the national capital region Delhi).
Should an election take place, Congress is likely to increase its strength in parliament.
But until Congress forges an attractive political program, and acquires charisma beyond that inherited from the Nehru family, it seems condemned to opposition.
Of course, the Nehru family name still commands loyalty among India's masses, but that is a shallow political foundation in a democracy.
Moreover, reliance on the Nehru/Gandhi name prevents the party from addressing its malaise because many party leaders still think that they can rely on the old magic to win.
Good governments must emphasise real development, which means removing what the Nobel laureate Amartya Sen calls the unfreedoms of illiteracy, ill-health and social deprivation.
The smouldering fires of Gujarat provide India's politician with a moment to do as Sen suggests.
It calls for speedy and impartial rehabilitation to the victims and bringing to trial in a transparent manner the perpetrators of these crimes.
Only such decisive actions can break India's cycle of divide and misrule.
"Into that heaven of freedom, my Father, let my country awake," wrote the Nobel laureate Rabindra Nath Tagore in Gitanjali in 1912.
His sentiments remain relevant for today's India.
Wake up Gujarat!
Wake up India!
Read more from "Modi's Operandi"
What’s Troubling India?
CAMBRIDGE – India’s recent fall from macroeconomic grace is a lamentable turn of events.
After many years of outperformance, GDP growth has slowed sharply.
Annual output will most likely rise by less than 5% this year, down from 6.8% in 2011 and 10.1% in 2010.
Reform has stalled amid profound political paralysis.
All of the major emerging economies face weakening external demand, but India’s slowdown has been exacerbated by a drop in investment that reflects a deeper loss of official direction and business confidence.
Even the International Monetary Fund’s forecast of a modest improvement in 2013 is predicated on the government’s ability to breathe life into a spate of stalled economic reforms.
India’s recent torpor has underpinned a remarkable shift in global opinion.
Just a couple of years ago, India was developing a reputation as the cool place to invest.
Heads of state tripped over one another to meet business leaders in Mumbai, hoping to pave the way for a significant expansion of trade and investment.
Now their interest has faded, along with the macroeconomic numbers.
And yet changes currently afoot might just turn things around.
India’s octogenarian prime minister, Manmohan Singh, has recently awakened to the desperate need for renewed momentum.
Economists around the world have taken note of the arrival of Raghuram Rajan as chief economist in the finance ministry.
Rajan is a superstar academic researcher, a brilliant writer on political economy, and a former chief economist for the IMF.
But it is far from obvious that Sonia Gandhi, President of the Indian National Congress and the country’s most powerful politician, shares Singh’s reform agenda.
True, the cabinet is being reshuffled to elevate younger ministers.
But the process points to a continuation of the tradition whereby most ministers are appointed on the basis of their loyalty to the Gandhi family rather than their merit and accomplishments.
Unfortunately, for a country as poor as India, only sustained rapid growth can lead to enduring development gains.
India’s poverty rate (an indicator that is admittedly both conceptually and practically difficult to measure) fell by half between 1981 and 2010, to just under 30% – a remarkable achievement.
But faster-growing East Asia has experienced significantly greater progress, with the poverty rate falling from 77% to 14% over the same period.
Why has India’s growth acceleration fizzled?
For many years, India benefited from the long-lasting impact of economic liberalization in the early 1990’s.
Back then, Singh, as finance minister, played a central role.
He could count on the IMF – which had real policy leverage, owing to India’s need for a bailout program in 1991 – to provide external support to counter the huge internal obstacles to reform.
Today, however, there is no external counterweight to the domestic political pressure that is stalling further liberalization.
True, India’s government must now consider growing threats to the country’s investment-grade credit rating.
The major ratings agencies are increasingly complaining about the country’s lack of a growth strategy and its outsize budget deficits.
But the impact has been limited, owing to the authorities’ ability to stuff debt down the throats of captive local banks, insurance companies, and pension funds.
Indeed, this “financial repression” tax on domestic savers remains a huge opaque source of funding for India’s debt-ridden government.
It also prevents funds from being channeled to private-sector investment projects with far higher rates of return than the government can offer.
The good news is that, from an economic perspective, there is still plenty of low-hanging fruit for restoring growth.
Although India is right to avoid taking financial liberalization to the extreme that the United States did in the decades before the recent meltdown, it can do quite a lot without assuming inappropriate risks, as a commission headed by Rajan detailed a few years back.
The retail sector is a huge source of inefficiency that effectively places a massive tax on India’s poor by driving up prices.
Instead of suing foreign retailers like Wal-Mart, India should be finding ways to emulate and benefit from their hyper-efficient methods.
Infrastructure is slowly improving, but roads, ports, water access, and the electricity grid are still horrific across large parts of the country.
Of course, India’s democratic government cannot simply bulldoze through people and the environment to create infrastructure.
But the obstacles also include layers of corrupt bureaucrats and politicians – a vast network of resistance to reform.
Some argue that central-government paralysis is inevitable in a democracy of 1.2 billion people, and that the only way to re-energize India is to establish a looser confederation of its constituent states.
Devolution would unshackle the economically more successful states.
And, by combating the culture of aid dependency in economically weaker states, India’s poorer regions might benefit in the long run as well.
As dysfunctional as a decentralized Europe seems to be these days, India might benefit from moving a few steps in that direction, even as Europe itself struggles to become more centralized.
Devolution might sound unrealistic, but once upon a time so did the European Union.
If Singh’s new reform agenda is again blocked, perhaps it will be time for a more radical assessment.
India’s Fiscal Follies
NEW DEHLI &#45;&#45; India’s new budget for 2008-2009 says less about the country’s current financial health than it does about the irresistible tendency of Indian governments to use the national budget as a pre-election cudgel.
Every year, India struggles to reconcile the irreconcilable: stimulate economic growth and investment, alleviate endemic poverty, and feed a ravenous military appetite.
The government must be seen to care about “aam aadmi,” the common man (who votes), while satisfying the needs of businessmen (who keep the economy humming).
Indeed, the new budget is a pre-election bonanza for key constituencies: tax cuts for the middle class and perks for the country’s big corporations.
There’s a little something for everyone, including a stunning $15 billion in loan waivers for small farmers.
For all the attention that India’s retail revolution, information technology prowess, and booming manufacturing sectors have garnered in recent years, agriculture, on which 70% of the population still directly depends, is in crisis.
Growth in India’s agricultural sector declined from a lackluster 3.8% to an even more anemic 2.6% last year.
Water tables are dropping where farmers are lucky enough to have wells, and rainfall has become increasingly unpredictable.
Subsistence farming of traditional food grains, fruits, and vegetables is giving way to cash crops and monocultures dependent on high-priced inputs that small farmers cannot afford and water that they can’t provide.
Farmers borrow money from usurious private lenders.
Unable to repay their loans, they kill themselves.
Farmer suicides in India have raged unabated over the past decade, a period of much-vaunted rapid growth.
These more than 100,000 deaths are a tragic indictment of India’s economic “miracle,” and an embarrassment for a government eager to promote India’s image as an up-and-coming global economic and military power.
While well intentioned, the new budget’s lavish loan forgiveness scheme will not help those farmers who most need relief: 80% of India’s farmers have no access to formal credit, and it is bank loans that are to be forgiven.
Moreover, since farmers who do have access to formal credit will have less incentive to repay their loans, banks will become more reluctant to lend to any farmers at all.
A policy of expanding legitimate micro-lending schemes and prosecuting illegal loan sharks, not to mention the promotion of sustainable agricultural practices that require fewer expensive (and environmentally dangerous) inputs, would do far more to help India’s poorest farmers than this expensive and misguided measure.
The new budget, recognizing the country’s acute water crisis, also calls for more money to expand irrigation.
Most Indian farmers will benefit from greater access to irrigation, but if this means building more ill-conceived dams and pursuing large-scale projects, the result will be more water for industrial agriculture, more damage to India’s damaged environment, and little improvement for poor farmers.
Aggressive expansion of proven low-cost, high-impact micro-irrigation techniques would do more to help small-scale farmers.
The new budget is also likely to do little to improve India’s poor education and primary health-care systems.
True, spending in these two critical areas is to rise dramatically (by 20% for education and 15% for health care). But, because these items amount to a pittance of India’s total budget, total spending remains low, especially relative to need.
Meanwhile, the lion’s share of the new budget, 63%, will go to the military, police, administration, and debt service.
India’s defense spending will hit a new record of $26.5 billion as the world’s fourth-largest military embarks on an aggressive drive to modernize its capabilities in the face of the deteriorating situation in Pakistan and China’s military expansion.
Having performed poorly in a spate of recent state elections, the ruling Congress Party is betting that the new budget will swing voters its way if the national election, currently scheduled for April 2009, is moved forward to this autumn.
The lesson of the 2004 election, when poorer voters, fed up with the previous BJP-led government’s “India Shining” policies and slogans, threw it out of office, has not been forgotten.
But the strategy of embracing “poor-friendly” policies that deliver little real relief could backfire.
Poor voters may not associate the largesse with the Congress-led government in New Dehli, but rather with the state governments that actually hand out the goods.
Moreover, there is nothing to indicate that the government aid proposed in the budget will reach those who need it with any more efficiency than the dismal record so far.
It is conceivable that Mayawati Kumari, the self-appointed “goddess” of the poor whose low-caste-based party, the BSP, swept to power last year with a clear majority in Uttar Pradesh, could be the biggest winner in an early election.
This would represent a revolution in Indian politics, but it is hardly the outcome the champions of business-driven market reforms would welcome.
Whether a more populist government would be able to break radically with India’s flawed fiscal policies and create an environment favorable to a dramatic improvement in India’s shamefully poor human and physical infrastructure – which would give a solid boost to India’s economy over the long term – remains to be seen.
India’s Hillary Clinton?
As Americans debate their readiness to accept a woman such as Hillary Clinton as president, India has already done so, with the election of Pratibha Patil.
Although India’s presidency is primarily a ceremonial post that carries less weight than that of prime minister (the position once held by Indira Gandhi), it is symbolically significant.
Sonia Gandhi, the leader of the ruling Congress Party, who pushed hard to promote Patil’s candidacy primarily on gender grounds, calls this election “a special moment for women across the country.”
Moreover, India can claim a great deal of pride in the fact that the last two presidents were from minority populations – one from the lowest of castes (Harijan, formerly referred to as “untouchables”), and another one from the Muslim community.
As a daughter of a woman who fought for women’s rights during the independence movement and was instrumental in starting one of the first women’s institutions in India, I should feel a genuine sense of pride in the election of Patil.
But at best I have mixed emotions.
Both of India’s last two presidents had distinguished themselves in professional careers before being elected – one in the Foreign Service and the other in nuclear physics – and their reputations were above reproach.
Patil, on the other hand, is a controversial figure, with questionable qualifications.
Most of India’s major news outlets highlighted in their coverage of the story charges of corruption and ineptitude.
One well-respected publication even called Mrs. Patil’s selection “embarrassing.”
Women hear over and over that we have to be twice as good as men to be perceived as successful, deserving leaders.
Even if we disregard some of the accusations against Patil as baseless, it is hard to imagine a less powerful candidate for the highest ceremonial post in the largest democracy in the world.
All the same, I applaud Sonia Gandhi for her commitment to appointing a woman to this important position.
In a country full of contradictory attitudes toward women – ranging from the worship of the powerful goddess Durga to the killing of innocent young brides – such gestures can be very powerful.
But gestures cannot be a substitute for real action, or for the hard work that is necessary to empower all Indian women.
Indeed, one could argue that such symbolic acts may even create a blind euphoria that obscures the fact that, as a result of less education and lower pay, young females in India continue to have far fewer resources than their male counterparts.
While India’s president may be only a ceremonial head of state, during periods of political instability – especially in the current age of coalition governments – it is the president who makes crucial decisions about governing parties.
Many past presidents have also used the position to throw their intellectual weight behind such important issues as education and India’s cultural diversity.
So President Patil has large shoes to fill.
One can only hope that she will prove her critics wrong.
For those women in India who have proven themselves to be effective leaders in all segments of society, it would be wonderful if she can demonstrate early on that she has the intellectual and professional gravitas that befits the position.
India’s Illiterate Revolution
The United States has long been divided over what it calls “affirmative action,” a system of racial preferences intended to overcome the lingering consequences of slavery and discrimination against black Americans.
India is now becoming divided in much the same way, and for much the same reason – the emerging system of “reserved places” aimed at redressing centuries of caste discrimination.
But India’s good intentions, like America’s affirmative action policies, are misguided.
The underlying question is whether merit as a criterion for advancement is doomed when legacies of racial and caste discrimination exist.
Are those who agitate for affirmative action fighting for something that is more a quack remedy than a real solution?
In fact, India’s “reserved places” scheme operates as a deliberate smokescreen, for it allows the government cleverly to mask the real issue, which is access to primary education for India’s disadvantaged.
Were adequate primary education available to India’s poor – or, for that matter, to America’s poor urban blacks – there would be no need for reserved places in higher education and elsewhere.
Indeed, any Indian able to read this article should consider himself lucky, because India’s politicians have succeeded in keeping a majority of the country’s population thoroughly illiterate (as well as poor and unhealthy).
Instead of providing quality elementary education for all, our policymakers are more concerned with enacting caste-based measures aimed at short-term political gains.
Since India gained independence 58 years ago, billions of rupees have been doled out in numerous educational policies, but general primary education remains abysmal.
According to a report released by the National Institute for Educational Planning Administration (NIEPA) in 2005, 8.1% of primary schools in India have no classrooms, while 17.5% have only one teacher.
In addition, 76.2% of schools do not have clean drinking water, while 14.6% lack electricity.
Less than 4% of all primary schools have computers.
Likewise, the Mumbai-based NGO Pratham’s Annual Status of Education Report 2005 , which was prepared after a survey in 28 states and union territories, reveals that 35% of children in the 7-14 age group are unable to read simple paragraphs, while 41% failed to solve a simple two-digit subtraction problem or a division problem.
Instead of preparing a pool of educated workers for the future, the government’s policies have given rise to an illiterate and innumerate population.
These findings raise damning suspicions about the literacy levels that successive Indian governments have claimed to achieve.
If the state of primary education is this bad, will the disadvantaged classes ever stand a chance?
Moreover, according to Vinod Raina, a member of the Central Advisory Board on Education (CABE), 80 million of India’s 200 million children between 6-14 years of age are not in school at all.
Of the remaining 120 million, only 20 million are expected to reach the tenth year of school, with the rest dropping out along the way.
Indeed, Prime Minister Manmohan Singh recently expressed dismay over the fact that “only 47 out of 100 children enrolled in class I reach class VIII.”
The government has pledged in its National Common Minimum Program to raise public expenditure on education to 6% of GDP.
However, recent years have witnessed a steady decline in educational spending, from 4% of GDP in 2001-02 to 3.8% in 2002-04 and 3.5% in 2004-05.
Quality education is the single greatest asset that a nation can give to its people.
It also happens to be the least expensive and most cost-effective support that government can provide.
But Indian politicians’ interests appear to lie elsewhere.
After all, with the rate of functional literacy at only 37.5%, they can easily manipulate the votes of uneducated people with alcohol, pop slogans, and intimidation.
So the protests by highly educated Indians against “reserved places” is not only wrongheaded, but dangerous as well.
Unless India’s highly educated stand up for better schools for all, protests against caste preferences will only succeed in heightening tensions and selling newspapers, rather than improving the lives of India’s destitute.
The government is probably happy with these protests, for they divert attention from the real issue – the authorities’ utter failure to address the fundamental problem.
As in America, the issue is not racial and class reservations and preferences, but ensuring high-quality primary education for all, rich and poor alike.
As India’s educated revolt against preferences, they should not do so in a way that reinforces illiteracy.
India’s Israel Envy
NEW DELHI – As Israeli planes and tanks exact a heavy toll on Gaza, India’s leaders and strategic thinkers have been watching with an unusual degree of interest – and some empathy.
India’s government has, no surprise, joined the rest of the world in calling for an end to the military action, but its criticism of Israel has been muted.
For, as Israel demonstrates anew its determination to end attacks on its civilians by militants based in Hamas-controlled territory, many in India, still smarting from the horrors of the Mumbai attacks in November, have been asking: why can’t we do the same?
For many Indians, the temptation to identify with Israel was strengthened by the terrorists’ seizure of Mumbai’s Jewish Center (the Lubavitcher Chabad house) and the painful awareness that India and Israel share many of the same enemies.
India, with its 150-million strong Muslim population, has long been a strong supporter of the Palestinian cause and remains staunchly committed to an independent Palestinian state.
But the Mumbai attacks confirmed what has become apparent in recent years: the forces of global Islamist terror have added Indians to their target list of reviled “Jews and crusaders.”
Just as Israel has frequently been attacked by rockets fired from across its border with Gaza, India has suffered repeated assaults by killers trained, equipped, financed, and directed by elements based next door in Pakistan.
When President George W. Bush’s press secretary equated members of Hamas with the Mumbai killers, her comments were widely circulated in India.
Yet there the parallels end.
Israel is a small country living in a permanent state of siege, highly security-conscious and surrounded by forces hostile to it;
India is a giant country whose borders are notoriously permeable, an open society known for its lax and easy-going ways.
Whereas many regard Israel’s toughness as its principal characteristic, India’s own citizens view it as a soft state, its underbelly easily penetrated by determined terrorists.
Whereas Israel notoriously exacts grim retribution for every attack on its soil, India has endured with numbing stoicism an endless series of bomb blasts, including at least six major assaults in different locations in 2008 alone.
Terrorism has taken more lives in India than in any country in the world after Iraq, and yet, unlike Israel, India has seemed unable to do anything about it.
Moreover, whereas Israel’s principal adversary is currently Hamas, India faces a slew of terrorist organizations – Lashkar-e-Toiba, Jaish-e-Mohammad, Jamaat-ud-Dawa, and more.
But, whereas Hamas operates without international recognition from Gaza – its legitimacy questioned even by the Palestinian Authority – India’s tormentors function from Pakistan, a sovereign member of the United Nations.
And that makes all the difference.
Hamas is in no position to repay Israel’s air and ground attacks in kind, whereas an Indian attack on Pakistani territory, even one targeting terrorist bases and training camps, would invite swift retaliation from the Pakistani army.
Israel can dictate the terms of its military incursion and end it at will, whereas an Indian military action would immediately spark a war with a well-armed neighbor that neither side could win.
And, at the end of the day, one chilling fact would prevent India from thinking that it could use Israel’s playbook: the country that condones, if not foments, the terror attacks on India is a nuclear power.
So India has gone to the international community with evidence to prove that the Mumbai attacks were planned in Pakistan and conducted by Pakistani citizens who maintained contact with handlers in Pakistan throughout the operation.
While India’s government had briefly hoped that the proof might enable Pakistan’s weak civilian government to rein in the malign elements in its society, the Pakistani authorities’ reaction has been one of denial.
Yet no one doubts that Pakistan’s all-powerful military intelligence has, over the last two decades, created and supported terror organizations as instruments of Pakistani policy in Afghanistan and India.
When India’s embassy in Kabul was hit by a suicide bomber last July, American intelligence sources revealed that not only was Pakistan’s Inter-Services Intelligence behind the attack, but that it made little effort to cover its tracks.
The ISI knew perfectly well that India would not go to war with Pakistan to avenge the killing of its diplomatic personnel.
The fact is that India knows that war will accomplish nothing.
Indeed, it is just what the terrorists want – a cause that would rally all Pakistanis to the flag and provide Pakistan’s army an excuse to abandon the unpopular fight against the Taliban and Al-Qaeda in the west for the more familiar terrain of the Indian border in the east.
India’s government sees no reason to play into the hands of those who seek that outcome.
Yet, when Indians watch Israel take the fight to the enemy, killing those who launched rockets against it and dismantling many of the sites from which the rockets flew, some cannot resist wishing that they could do something similar in Pakistan.
India understands, though, that the collateral damage would be too high, the price in civilian lives unacceptable, and the risks of the conflict spiraling out of control too acute to contemplate such an option.
So Indians place their trust in international diplomacy and watch, with ill-disguised wistfulness, as Israel does what they could never permit themselves to do.
India’s New Caste Politics
Caste, once again, is casting its shadow over India’s politics. Caste-based “reservations” (reserved places) in education and government employment are supposed to benefit India’s most deprived, but in reality they have hardened, rather than eroded, India’s ancient system of discrimination.
Every now and then, particularly before elections, caste groups demand to be placed on the list of “other backwards classes” (OBC’s), in order to benefit from these reservations.
Indeed, nowadays political parties dangle the carrot of reservations to ever more castes, and even promise to extend the policy to admissions into elite educational institutions and the private sector.
Many consider India’s increasing mobilization along caste lines a welcome assertion of “identity.”
Indeed, intellectuals and politicians of all varieties almost unanimously hail the politics of caste identity as a move towards true equality.
Some go so far as to argue that the recent rise of the lower castes in northern Indian politics and the implementation of reservations by the central government amount to a silent revolution, and that the politics of caste is secular and a bulwark against religious sectarianism.
Public policy, however, should be based on evidence and logic, not glib sociological babble.
Whether caste is a good indicator of socioeconomic deprivation remains an unsettled issue.
Indeed, the protagonists of caste politics and caste-based public policy simply cannot validate their assertions, offering only small-sample surveys that can be grossly misleading in the context of a huge country characterized by monumental diversity.
Moreover, these studies typically pool castes into three large groups, which distorts the real picture.
Since India gained its independence, the government has systematically refused to collect sufficient data on the socioeconomic aspects of caste.
The huge mass of evidence available in the censuses and land revenue settlement reports of the period from 1901 to 1931 lies ignored.
If caste is a good indicator of deprivation now, it should have been even clearer in the past.
But statistical analysis of this evidence – the only accessible macro-level quantitative data for the whole country – does not confirm caste as a clear indicator of deprivation.
For example, less than one-third of workers in this period followed their traditional caste occupations.
Workers belonging to each caste pursued a wide variety of occupations, although agriculture provided the bulk of employment.
Each caste contained a varying mixture of landless laborers, cultivators, and landlords.
While some castes concentrated on one, others were equally involved in a number of occupations.
Access to literacy and to jobs in the government sector and modern professions was limited to a small section of the population usually belonging to the high castes.
Access to land was uneven.
Farmers, the single largest occupational group in most castes, with ritual rank ranging from high to low, were highly differentiated in terms of size and economic status.
The size of holdings was similar for most upper castes and some lower castes.
Thus, the economic status of households varied a great deal within each caste.
In any case, the majority of peasants belonging to any caste, upper or lower, were poor.
In many castes of low ritual rank, landlords, prosperous cultivators and traders were found, some of whom actually paid income tax.
Consider the average economic position of the members of each caste in this sample.
Generally, most high-ranking castes occupied high economic positions, and the majority of the “untouchable” castes were confined to the lowest economic positions.
In some regions, e.g., Mysore (Karnataka), Madras (Tamil Nadu) and Uttar Pradesh, some lower castes occupy higher economic positions than high castes.
The most obvious fact in the data is the great disparity in the economic positions of castes sharing the same ritual rank.
Such differences are particularly acute for middle-ranking castes, which are now called OBC’s, and are observed in all parts of India.
Even among the untouchables, some castes have higher economic status than others.
Among the middle-ranking, agricultural castes, some had high economic status due to improved agriculture, brought about by canal irrigation and commercialization.
Most other cultivating and artisan castes, enjoying similar ritual ranks as the financially more successful group, occupied much lower economic positions, which resulted in an amazing degree of heterogeneity among backward castes.
In some regions – Uttar Pradesh, Bombay (Maharashtra and Gujarat), and the Telugu speaking areas of Madras (Andhra Pradesh) – the lowest economic positions were occupied by some “backward” castes, not by untouchables.
Hence, caste has not been an indicator of material deprivation, even during the early decades of the twentieth century.
But boosters of caste politics claim that it is not economic deprivation but the social backwardness from which these castes have historically suffered that makes caste reservations necessary.
In fact, the whole population of the lower castes did not suffer from an equal degree of ritual handicap.
There was an elaborate gradation and hierarchy among the middle-ranking and even untouchable castes, which governed interaction between them and kept inter-caste socialization to a minimum.
Historically, the rich in each low caste emulated the customs and rituals of the upper castes, such as child marriage, the payment of dowries, and prevention of widows remarrying.
Sometimes, well-off sections of low castes broke away to form new castes and managed to achieve higher ritual status.
Usually a prosperous caste succeeded in raising its rank in the ritual hierarchy.
By using caste as a criterion in public policy, India’s government is effectively treating the rich and the poor equally, thereby conveying benefits to the former.
This helps co-opt the elite among the lower castes to the ruling coalition, and keeps the poor divided along caste lines.
But it is hypocritical to argue that this does anything to eliminate poverty.
India’s New Ruling Caste
CAMBRIDGE – The largest election in history, involving more than 700 million voters, has resulted in the victory of India’s ruling alliance, led by Prime Minister Manmohan Singh of the Indian National Congress.
The verdict disproved gloomy predictions of a hung parliament and the further strengthening of regional parties.
The new government will be far more stable than many of its predecessors, so the election results have elicited profound relief.
But the fact remains that, like previous governments, the new administration will consist mostly of politicians unfit to hold ministerial office.
While several provincial satraps have been cut down to size, new, aspiring ones have garnered significant support.
Despite the manifest success of Indian democracy, its parliamentary system is not succeeding in giving India good governance.
Obviously, India is not a failed state.
Lant Pritchett of the Harvard Kennedy School has coined a new name for India: a “flailing state” – a state where the government’s extremely competent upper echelons are unable to control its inefficient lower levels, resulting in poor performance.
But this analysis gives credit where none is due: India’s problem is its top political leadership’s lack of competence.
The inability of India’s current political system to provide effective government places the country in a different category: a non-performing state.
The idealism of India’s freedom movement quickly evaporated after independence in the face of the opportunities for patronage that came with power.
The way India’s political system evolved has made politics the surest path to wealth.
The money spent to win elections (often including the purchase of a party’s nomination) is recouped many times over once the winner is in office.
Half of India’s legislators who stood for reelection this time around had tripled their assets in the last five years.
Increasing corruption within governments run by the Congress party, which led India to independence and monopolized political power for decades, showed what a lucrative career politics had become.
Given India’s religious, caste, and linguistic divides, politicians saw how easily they could leverage even a small following into votes.
Soon, Indian political parties began to break up, giving rise to a large number of regional and caste-based parties.
Most of these parties are led by political dynasties that prize loyalty over merit.
Because of the splintering of political parties, India has had only one single-party government and eight coalition governments in the last two decades.
Members of the coalition governments have treated the ministries allocated to them as fiefdoms, to be milked for their benefit.
Over time, India’s government has become primarily a tool for advancing the personal interests of politicians rather than the entity responsible for running the country.
The opportunity for personal gains through public office has made electoral politics an automatic career choice for Indian politicians’ progeny.
Record numbers of sons and daughters of political leaders and millionaires (and people with criminal backgrounds) contested this election.
We are seeing the formation of a new Indian caste – a caste of rulers different from India’s traditional Kshatriya caste – before our very eyes.
Like existing castes, the new caste specializes in one occupation: political office.
Just as someone became a carpenter or a trader in an earlier era merely through birth, members of India’s ruling caste now become leaders of parties, members of legislatures, and cabinet ministers solely because of their parentage.
And, as with the older castes, there is no need for any qualification for the vocation; birth alone is sufficient.
Lack of vocational competence never barred Indians from remaining in their caste, and how well one performs in political office is, likewise, not a criterion for politicians to continue in positions of power.
India’s parliamentary system requires ministers to be members of the legislature.
Party leaders select family members and other loyal followers as candidates for elections, with absolutely no consideration of their abilities to fulfill ministerial responsibilities, resulting in cabinets that are simply not capable of managing the problems confronting the country’s national and state governments.
Even with the best political leadership, governing India is no easy task.
Successive governments staffed with unqualified politicians have failed dismally to carry out the core governmental functions of maintaining law and order, providing the basic services expected of modern societies, and promoting economic growth.
India’s high-performing private sector has so far masked the failure of the Indian state.
In its current form, India’s parliamentary system can produce only non-performing, corrupt governments.
It rewards ambition, promotes office-at-any-cost politics, and devalues merit.
Taking away the prize of ministerial office from elected representatives might discourage wealth-maximizing politicians from entering politics.
It is time, therefore, for India to consider introducing a presidential system of government, which would reduce the scope for “horse trading” and allow the country’s leader to select competent people for cabinet positions.
India’s Olympic Also-Rans
NEW DELHI – As the world awaits the Beijing Olympics, many wonder whether China’s grand coming-out party will also mark the occasion when it wrests dominance of the medal tally from the United States.
China’s dedicated athletes are widely assumed to have dozens of gold and silver medals in their grasp.
Whether or not they overtake the US, however, one thing is certain: China’s neighbor and regional geopolitical rival, India, will be lucky to win even a single medal.
International sport is, of course, an exercise in national chauvinism by other means.
At some level, we all pretend to tune into the Olympics to admire human athleticism.
But none of us can deny the attraction of the flags under which those athletes compete, the anthem that is played for the winners, and, ultimately, that impossible-to-ignore, regularly-updated medal tally, listing the gold, silver, and bronze medals awarded to each country, the Games’ real honor roll.
Every Indian who follows the Olympics has cringed scanning the daily list of medal winners, eyes traveling down past dozens of nations big and small before alighting on a solitary Indian bronze in tennis or wrestling.
Worse yet, we have all known the shame of waiting day after day for India to appear on the list at all, as countries a hundredth our size record gold upon gold and Indian athletes are barely mentioned among the also-rans.
Indians like to think we can hold our own against the best in the world in any field: our Kalidasa can stand up to their Shakespeare, our Ramanujan to their Einstein, our Bollywood to their Hollywood and, these days, our Infosys to their Microsoft.
In sport, however, it is a different story.
Our cricketers have come close to being considered the best in the world, but cricket is not an Olympic sport.
Our sole world champion in any sport is the chess grandmaster Vishwanathan Anand – in another non-Olympic sport, and one that calls for brain, not brawn.
In fact, in the Olympics, India’s record has declined over time.
The one gold medal we had become used to winning since the 1920’s, in field hockey, has proved elusive in recent Games, as our players have stumbled on Astroturf.
This year, India’s hockey players failed even to qualify for the Games.
In everything where simple human prowess is at stake – running, jumping, swimming, lifting, throwing - Indians simply don’t have what it takes.
An Indian beauty queen, Madhu Sapre, once became an unwitting victim of Indians’ sense of national shame at our sporting insignificance.
She was unjustly denied a Miss World title in 1992 because of her answer to the final-round question, “What is the first thing you would do if you became the ruler of your country?”
Her response – “I would build a sports stadium” – was considered stupid by the judges, and the almost-certain crown (she was the overwhelming favorite) slipped from her grasp.
Sapre’s answer might not have been the brightest, but if the judges had any idea of how desperate Indians are for sporting success, they would have understood that she was not expressing such an absurd priority.
Why do Indian athletes perform so badly?
The explanations range from the anthropological to the borderline racist: Indians don’t have the genes, the build, the stamina, the climate, whatever.
There are structural and infrastructural explanations: lack of training facilities, gymnasiums, running tracks, equipment, financial resources.
We are a developing country, it is said; after all, it is not just your eye against his, your legs against hers, but what you can do against their trainer, their running shoe, their ergodynamic costume, their titanium archer’s bow.
But those rationales won’t do: other developing countries, from Jamaica to Ethiopia, regularly rake in the medals.
Our talent pool isn’t really a billion, some argue; it’s only the well off and middle class, maybe 300 million strong, who can afford to play sports.
But even that is a larger population base than a hundred countries that do better than India at the Olympics.
On the other hand, the incentives for success are not great; the years of sacrifice and effort it takes to become a world-class athlete are simply not a realistic option to an Indian who needs to make a living, and sponsors are few and far between (and they are all spending their sponsorship money on cricket).
Finally, there’s the usual Indian problem: sports administrative bodies and government departments are ridden with patronage and petty bossism, with officials more interested in protecting their turf (and enjoying paid vacations to sporting events) than in promoting athletes.
With all these factors, failure in the Olympics, it is suggested, is encoded in our national DNA.
Yet success or failure still depends on the individual athlete.
Indian genes in a developing country did not prevent Vijay Singh emerging from Fiji to rival Tiger Woods as the best golfer in the world.
And if Indians can be better than white and black sportsmen on the cricket field, why can’t they beat them in an Olympic stadium?
The newly globalized India can no longer content itself with mediocrity in this global competition.
For a land with world-class computer scientists, mathematicians, biotech researchers, filmmakers, and novelists, sporting excellence is the last unconquered frontier.
But 2008 won’t be the year in which that frontier is breached.
India\u0027s Pseudo-Democracy
Recently, India's Prime Minister Atal Behari Vajpayee said that despite the outward appearance of health, Indian democracy appears to have become hollow, with elections reduced to a farce and the "party system eroded due to unethical practices."
According to Vajpayee, "The outer shell of democracy is, no doubt, intact, but appears to be moth-eaten from inside."
Indeed, in the preface to a recent collection of his speeches, Vajpayee wondered whether democracy had truly taken root in India.
"How can democratic institutions work properly," he asked, "when politics is becoming increasingly criminalized?"
This is a strange turn, for parliamentary democracy has long been a source of pride for most Indians.
The country may not match up to its Asian neighbors in prosperity, but Indians have always been able to boast of the vitality of their parliamentary system.
Nowadays, such boasts are heard far less frequently.
Not only are India's economic failures more obvious, in comparison to Asia's revived economic juggernauts; so, too, are the failures of its political system.
Unprincipled politics, cults of violence, communal rage, and macabre killings of religious minorities have all combined to shake people's faith in the political system's viability.
Small wonder, then, that people are starting to ask whether India needs an alternative system of government.
Part of the problem lies in India's deracinated party politics.
For decades, the Congress Party of Nehru and his daughter, Indira Gandhi, basically ruled the country unchallenged.
But with the assassinations of Indira Gandhi and her son, former Prime Minister Rajiv Gandhi, Congress disintegrated and has not recovered.
Rather than ushering in an era of recognizable multi-party politics, Indian democracy still lacks a party system worthy of the name.
One reason for this is that there are barely any national parties.
Instead, India is saddled with highly volatile leader-based groups.
When the leadership is charismatic and strong, the party is a servile instrument.
Lacking coherent principles or an overriding ideology, these groups fragment when their leadership changes or splits, as Congress did.
Where parties are weak, there can be no party discipline.
India's parliament is riddled with defections by MPs, who move freely from one party grouping to another.
So endemic is the buying and selling of legislators that parliament looks a lot like a cattle market.
The prizes conferred on opportunistic defectors not only undermine the party system, but weaken the foundations of parliament by making organized opposition impossible.
Public apathy bordering on fatalism is the inevitable result.
This is dangerous because apathy does not take the form of withdrawal from public life, but increasingly finds expression in sectarian and religious conflict.
Of course, politicians incite many of these conflicts, using caste, sect, and religion--not political ideas--to build voter loyalty.
But apathy about democracy is what makes so many ordinary Indians prey to poisonous appeals.
This susceptibility is the clearest sign that India's experiment with the Westminster model of parliamentary democracy has failed to justify the hopes that prevailed fifty years ago when the Constitution was proclaimed.
Back then, parliament was seen as a means to bridge the divides of caste, religion, and region.
Parliament's increasing irrelevance in sorting out these problems--indeed, its role in exacerbating them--is fueling a growing preference among Indians for a presidential system of government that removes executive functions from the oversight of an institution that has been addled and rendered impotent by undisciplined factions.
Of course, politicians are not the only people at fault here.
Sadly, Indian society never really embraced the consensual values that India's Constitution proclaims: a participatory, decentralized democracy; an egalitarian society with minimal social and economic disparities; a secularized polity; the supremacy of the rule of law; a federal structure ensuring partial autonomy to provinces; cultural and religious pluralism; harmony between rural and urban areas; and an efficient, honest state administration at both the national and local level.
Instead, race and caste remain as potent as ever.
Wealth is as grossly distributed as ever.
Corruption rules many state governments and national ministries.
Urban and rural areas subvert each other.
But parliaments demand a minimal national consensus if they are to function, for they are creatures of compromise in decision-making.
Executive governments, on the other hand, are creatures of decision: a popularly elected president is ultimately responsible to his voters, not to his party colleagues.
The very election by national suffrage of an executive provides the type of minimal consensus that India's faction-riven parliaments have, sadly, never been able to cultivate.
Of course, a president will undoubtedly need to compromise with his legislature, but the general consent that is gained by popular election implies at least some broader agreement behind the platform that he or she campaigned on.
Of course, no magic bullet will do away with the forces that divide India.
But at least some of the maladies of the current parliamentary system, such as defection, party factionalism, inherent political instability, and crippling coalition politics can be minimized, if not eliminated, by adopting an executive-dominant model of presidential democracy.
In adopting such a system, Indians would have nothing to lose but the corruption and chaos of today's discredited parliament.
India\u0027s Second Great Mutiny?
For all its long history, India is a young country, with perhaps 70% of its population under 30 years of age.
The number of those with memories of the bloody 1947 partition that produced India and Pakistan as independent states is declining, and for the young generation, Pakistan is no longer a part of the great nation that was lost, but a hostile neighbor that supports violent, fundamentalist jihad.
Sadly, distrust of Pakistan increasingly touches India's Muslim community, more than 100 million strong, but still only 12% of the Indian population.
Despite partition, India's mood in the first decades of independence was one of idealism and hope.
Most Muslims saw Jawaharlal Nehru, India's first Prime Minister, as the true inheritor of Mahatma Gandhi's vision of India as a tolerant, multi-national state.
In turn, several of Nehru's Muslim associates were respected nationally across the religious divide.
Muslims trusted Nehru implicitly, and his Indian National Congress Party had a near monopoly on Muslim votes.
This support persisted despite difficult conditions for the Muslim minority, including blatant discrimination in employment and in the distribution of government largesse.
More ominously, Muslims were often considered a Fifth Column within India, plotting to divide the country further.
Such suspicions frequently boiled over into religious riots, in which Muslims bore over 90% of the casualties.
No one has ever been punished for these killings.
By the 1980s, the Congress Party's dominance of Indian politics was ending.
From the Muslim point of view, no major political party took up the cause of Indian pluralism with the conviction that guided Nehru.
Other parties moved in to take their share of Muslim votes while the Hindu right-wing Bharatiya Janata Party, (BJP) the current ruling party, began creating and consolidating a growing bloc of anti-Muslim voters.
The BJP has always evoked instinctive fear among Muslims.
It exploited the multiple failures of the Congress Party in launching its quest for power, building vicious diatribes against Muslims and Christians into their campaign rhetoric.
The BJP and its allies sought retribution for what they portrayed as the historical sins of the Muslims, and turned an insignificant 16 th century mosque at Ayodhya into the symbol of this mission.
The BJP's real target was Indian society tradition of tolerance and pluralism, which it attacked for allegedly representing the appeasement of religious minorities.
Constitutional law was defied and horrendous communal violence against religious minorities became frequent.
Finally, the Ayodhya mosque was demolished in December 1992 during a mass gathering organized by the BJP.
The current Deputy Prime Minister, Lal Kishan Advani, was present when the structure was brought down.
The destruction of the mosque was seen as the most serious rupture between Hindus and Muslims since India became independent in 1947.
The Indian state began to be perceived as openly discriminatory.
Muslims became suspicious of other Indian political parties, none of which seemed able to stand up to the BJP.
The Muslim community closed in on itself.
Muslim professionals, fearing for their safety, began to move into ghettos.
Muslim charitable organizations, often funded by Saudi Arabia and other Arab countries, began to move into areas of social life where the state had failed dismally, particularly education.
As a result, thousands of Muslim boys were enrolled in school for the first time.
Unfortunately, they were educated in religious seminaries espousing a deeply intolerant, fundamentalist brand of Islam.
With discrimination soon cutting across class lines, increasing numbers of Indian Muslims began to look for links with Muslim communities elsewhere in the world.
They willingly bought the "Great Satan" theory of Ayatollah Khomeini, whose face was spread on posters across Muslim India in the 1980s.
In the 1990s, Saddam Hussein replaced this poster boy.
The Taliban's rise in Afghanistan also had a strong impact.
The jihadi movement that gripped Pakistan crossed into the neighboring Indian state of Jammu and Kashmir, where the two countries have repeatedly fought for control, even, recently, threatening an exchange of nuclear weapons.
As the only state in India with a Muslim majority, Jammu and Kashmir has a special status under India's Constitution.
However, the BJP has campaigned to rescind that status, a campaign that gathered supporters in reaction to Pakistan's activities.
Today, Kashmir is seen as a front against terrorism, and Indian Muslims are seen as sympathizers with terrorists--although the overwhelming majority of the jihadis' victims inside Kashmir have been Muslim.
Secular, liberal Indians are alarmed at the rise of both Hindu and Muslim fundamentalism as domestic policies in South Asia become entangled with America's global anti-terrorist objectives.
Their only hope is to ensure that Indian Muslims do not lose faith in the democratic process.
If that happens, India's admirable pluralist traditions, to which Muslims have made significant contributions, would be lost forever.
A deepening religious conflict across all of South Asia would inevitably follow.
India\u0027s Untouchable Apartheid
India’s Wary Rise
PARIS – Some countries are naturally at ease with the concept and the reality of strategic power.
Such was clearly the case of France under Louis XIV, the Sun King in the seventeenth century, and such is the case today of China, whose leadership is comfortable with the balance-of-power games of classical Europe.
India is clearly in a different category.
In economic terms, India’s confidence has been boosted by the way the Western world now looks at it with a mixture of respect and greed: “What kind of deals can I strike with such an emerging market, whose population will soon be the largest of any country in the world?”
Yet, in order to understand India’s political and diplomatic relationship with the outside world, the most enlightening comparison is with America in 1920.
Like the United States after World War I, India is realizing that its status and role in the world have been deeply transformed in the last two decades.
And, like America then, India is not naturally at ease with the notion of exercising global power.
India’s history and culture, from Asoka, its mythical emperor in the third century BC, to Gandhi, push it to emphasize ethics and to consider itself an “exceptional” nation in its relationship with the world.
Contrary to China, India finds it difficult to adapt to its status as an emerging “Great Power.”
It would be a gross exaggeration, of course, to speak of an Indian “inferiority complex.”
And yet India constantly measures itself against China, remains obsessed with Pakistan, and has recently begun to look more critically at its relationship with the US.
It is natural for India to proclaim its “democratic” superiority to China while recognizing that on all strategic fronts it is not in the same league.
But is it even possible to draw a comparison between what one Indian academic has called the “robotized Chinese man” and the vast human diversity of India?
India seems to worry more than ever about China’s evolution.
China’s key role within the G-20, together with the relative if not absolute decline of the Western powers, seems to have reinforced the hard-liners in Beijing and the nationalism of a China that seems less ready than ever to accept any criticism of its human rights record.
Viewed from New Delhi, the vision of a reasonable, prudent, and ultimately satisfied China – a vision “sold” to the world by the Minister Mentor of Singapore Lee Kuan Yew – appears less than obvious.
When it comes to Pakistan, too, India seems to lack confidence.
On all fronts – demographic, economic, military, and political – India is far above Pakistan.
But India does not seem to know how to deal with its northwestern neighbor, and even less whom to deal with in its government.
The largest democracy in the world cannot say openly that it almost preferred the military dictatorship of General Pervez Musharraf to the chaos of the current situation.
In reality, what prevails in India is a deep sense of frustration with Pakistan.
India’s overtures to Pakistan’s government have largely remained unanswered, and when Indian officials express their unease, the US, if not the international community, accuses them of behaving irresponsibly.
If India seems not to believe that America and its allies can really “succeed” in Afghanistan, nor is it willing to resign itself to a return of the Taliban to power, which could in turn lead to Talibanization of Pakistan.
Yet India seems to behave in a very “European” way in Afghanistan; it is ready to send money and experts, but not troops.
India’s worries and frustrations in Afghanistan and Pakistan translate into a mixture of disillusion and irritation with an America that, seen from New Delhi, allows itself to be manipulated by Pakistani officials.
Indians cannot quite decide whether the Americans are simply “naive” or duplicitous; either way, they are not reassured.
Whatever the case, the current warming of relations between India and Russia, symbolized by Prime Minister Vladimir Putin’s recent visit, does not translate into a grand reversal of alliances, as India’s break with Russia in the 1990’s did.
India’s exchanges with Russia are only one-fifth of what they are with China.
What prevails nowadays in New Delhi and Moscow is simple pragmatism.
While there is room for Europe in India’s view of the world, for India (as for China) Europe is above all an economic rather than a political reality.
When it comes to politics, bilateral relations prevail, and from that standpoint France and Germany seem more important than Great Britain.
The Raj era may be visible in the buildings of New Delhi and in the uniforms of the Indian army, but Britain has lost any competitive edge that it once had in India.
The past is truly passed.
India’s unease about strategic power, and its resemblance to a gigantic European Union united only by the English language, reflects its ongoing search for a new international identity.
In this quest, India is impaired by its lack of practice in the exercise of power on a grand scale.
India is not about to become a second China – it lacks both the means and the ambition.
That is a further reason for the West to engage and invest in India.
India with 1.5 Billion People
India's population is now a little over one billion; it will almost certainly surpass 1.5 billion by mid-century, overtaking China's population along the way before it stops growing.
But, as worrying as this might appear, this actually represents a considerable demographic slowdown: India's population more than tripled during the past sixty years.
Moreover, the economy is growing much faster than before.
So will India be able to provide a comfortable home for 1.5 billion people?
I recently co-authored a study (with Tim Dyson, Leela Visaria and others) that concludes, with modest optimism, that while India can manage its population growth, it also faces a number of major difficulties.
True, poverty fell in the 1990's, while literacy rates and school attendance rose.
But they did so unevenly.
Most of India's big poor states - Bihar, Madhya Pradesh, Orissa, Rajasthan, and Uttar Pradesh - suffer from a combination of relatively slow economic growth and rapid demographic growth.
Only Rajasthan's economy has kept pace with the rest of the country; the other four have not benefited much from trade and regulatory liberalization.
Similarly, states where birth rates fell earlier, such as Kerala and Tamil Nadu, are already enjoying shrinking school-age populations, whereas school-age numbers in Bihar will still be rising until around 2025.
But the majority of children in Kerala and Tamil Nadu are already in school, while in Bihar they are not.
These five poor states contain 45% of India's population, and 56% of its poor.
Our projections indicate that in 20 years they will account for more than half the population and 75% of the poor.
Unless recent trends can be reversed, the growing economic and demographic gulf between India's North and East and its South and West will pose a serious political threat.
The environmental impact of 1.5 billion inhabitants forms the other major challenge.
India's past population growth has been accompanied - if much too slowly and unequally - by improving health, education, and economic welfare.
But the environment has been suffering.
Our study concludes that India can have faster economic and industrial growth, higher rates of energy consumption, and a cleaner environment.
But this is not what has happened so far.
Air, soil, and water pollution has been growing, causing hundreds of thousands of deaths every year.
The key to a clean future is clean technologies, whose costs have been falling steadily, and will continue to do so.
Sometimes these technologies pay for themselves and will be adopted.
But Indian producers and transporters will not invest in them if they bear the costs, while the public at large receives the benefits.
In these cases, government will have to provide incentives, or regulate and tax.
Unfortunately, however, when the main beneficiaries are the poor, corporations are powerful, and governments are weak or corrupt, good environmental practices are far from guaranteed.
There are nonetheless some notable success stories.
Delhi's barely breathable air has become tolerable, following a big move to compressed natural gas in public transport, retirement of old vehicles, and higher emissions standards in new ones.
Delhi's cleaner air hasn't cost much, yet other cities have been slow to follow suit.
The biggest problem is water pollution, with discharges into canals and rivers growing faster than treatment capacity.
At the same time, India's growing population will make increasing demands on water supplies - mainly for agriculture, which absorbs more than 80% of all the fresh water India consumes.
If the population grows by 50%, the country will need to grow 50% more food, if it is to continue to feed itself.
But there won't be any more water.
In fact, there could well be less water than there is now, owing to pollution and climate change.
So India will need huge increases in water efficiency.
Here, too, there are examples of improvement.
But there is also far too much populist politicking, with promises of free water for farmers.
Doing what has to be done to ensure sustainable water supplies - controlling pollution, encouraging conservation, regulating and charging where necessary - is politically tough.
Eventually, however, India has no choice: there are already sporadic riots over water shortage, while water tankers move under armed guard in some cities, and virulent conflicts arise between communities over water-sharing.
In questionnaires, the poor say that an adequate water supply is their foremost need.
But one fears that something more dreadful than the daily misery must occur before India's politicians decide to act.
Our study quotes three national water surveys.
Each concludes that India can have a satisfactory water future.
As with the other challenges posed by population growth, the issue is not whether the future can be managed, but whether it will be.
India may or may not be the world's next economic wonder; but it will have to solve its age-old problems, as well as its new ones, if it is going to be a good place to live for the vast majority of its citizens.
Social Benefits in the Age of Uber
PARIS – When it comes to compensation, the company you work for often matters more than how good you are at what you do.
In 2013, the average employee of Goldman Sachs, the investment bank, earned $383,000 – much higher than what the best-performing employee in most firms can hope to take home.
Pay differences across companies are considerable.
Research by Jason Furman, US President Barack Obama’s top economic adviser, and Peter Orszag, Obama’s former budget director, has found that rising pay differentials are the prime cause of widening US wage inequality in recent decades.
They account for a larger part of the rise in overall income inequality than wage differences within companies or capital income.
At the other end of the spectrum, many labor-force participants are on temporary contracts, work for small firms, or are self-employed.
Some combine different jobs at the same time.
If, as expected by many, the so-called sharing economy develops, their number is bound to grow.
These workers do not benefit from job security and generally earn much less.
Emerging countries offer the example of blatant inequality between employees in the formal sector – companies like Petrobras in Brazil and Infosys in India – and those who work in the informal economy.
But even in advanced economies, where social protection is broad in scope, access to benefits is far from equal.
Employees of large, profitable firms tend to enjoy better health-care coverage, more generous pensions, and easier access to training.
Moreover, some benefits – for example, parental leave – are conditional on seniority within a company.
These are disturbing facts.
Talent and effort should be rewarded, but two people of equal capabilities and dedication should not be treated differently just because one happens to be an insider, with a secure job in a big, successful company.
Such differences are questionable not only in terms of fairness; they are also economically inefficient, because they tend to limit labor mobility across firms and sectors.
Employees may think twice before leaving a company if they are set to lose valuable perks as a consequence.
This prevents potentially positive matching of the skills needed by employers and the available supply of them.
It also makes hiring first-class talent excessively difficult for small companies.
Public policy should not prevent successful companies from paying more and offering better working conditions.
But it should ensure that all participants in the labor force, whatever their status, enjoy equal access to essential benefits; and it should aim at minimizing the losses that impede mobility across firms, sectors, and types of employment.
Obama’s health-care reform was an important step in this regard.
But social-welfare reforms should go much further.
For fairness as well as for efficiency reasons, rights and benefits should be attached to individuals, not to companies or employment status, and should be fully portable across sectors and jobs.
To attune its social-welfare system to a changing economy and reduce inequality among individuals, France is currently considering a system of so-called Individual Activity Accounts (IAAs).
My colleague Selma Mahfouz chaired a committee that prepared a blueprint for such a system.
Put simply, every new labor-force entrant would be equipped with a lifelong individual account, thereby accumulating points in the same way airline travelers accumulate miles.
They would earn them by working in both the private and public sector.
Physically strenuous jobs would yield more points than office jobs.
Pro bono community service would also generate points – perhaps more than paid jobs.
Points earned could be spent on lifelong education and professional training, which would thus become independent from employment status.
Every person could decide to draw on her IAA to prepare for, or when making, a job change.
Other financing could also be mobilized toward the same end.
For example, an employee could decide to shorten the duration of his unemployment benefits and invest the corresponding points to benefit from better education opportunities.
But financing education should not be the only purpose.
Points could also be used to help finance volunteerism or care for elderly family members.
Points earned through hard toil could be spent on retiring earlier.
Many more examples of partial fungibility could be imagined.
Such a system would have three additional benefits.
First, it would help improve access to information.
Employees nowadays are often lost in the complexity of the various social benefits to which they are entitled.
The creation of IAAs and the adoption of a single unit of account would go a long way toward making things simpler, especially if all relevant individual information is available to users via a single smartphone app.
Second, IAAs would empower employees, especially the least skilled, who often perceive themselves as being in a state of subjection.
Together with information, the possibility to invest their social benefits, rather than only consuming them, would strengthen their autonomy and freedom of choice.
Finally, the same accounts could serve as vehicles for public policy.
For example, early school-leavers could be endowed with points for later use in professional training.
More broadly, instead of assisting people only when social risks materialize, public policy could support individuals throughout their working life, by adopting a more effective bespoke approach that fits peoples’ needs better than coarsely tailored schemes.
This may sound utopian; in a way, it is.
But at a time when every digital service becomes more and more personalized, why should social policy remain confined to the philosophy and solutions of the twentieth century?
Indonesia\u0027s Democratic Miracle
JAKARTA – Modern miracles do happen.
Ten years ago, as the Asian financial crisis savaged Indonesia’s economy, many experts predicted that the country would become unstable, if not splinter.
Instead, Indonesia, the world’s most populous Islamic country, has emerged as a beacon of freedom and democracy for the Muslim world.
What happened?
And why hasn’t the world taken note?
The story is as complex as Indonesia itself.
One leading expert on Indonesia, Benedict Anderson, roots Indonesia’s nature in its core Javanese culture, particularly the wayang religious tradition.
According to Anderson, “In contrast to the great religions of the Near East…the religion of wayang has no prophet, no message, no Bible, no Redeemer.…The endless variety and sharp individuality of its dramatis personae indicate that wayang reflects the variegation of human life as it is felt by the Javanese...” In short, Javanese culture helps Indonesia handle the many diverse voices that a new democracy throws up.
There is also a strong Indonesian tradition of resolving disagreements through “musyawarah dan mufakat” (consultation and consensus).
Of course, this tradition has not always prevented violence, most notoriously in the killings that followed the 1966 coup against President Sukarno.
And ten years ago, during the financial crisis, violent anti-Chinese riots erupted again, causing many Chinese to flee the country.
Today, however, many of those Chinese have returned. In a remarkable development, Chinese language and culture, which had been suppressed for decades, is allowed free expression.
By contrast, imagine Turkey, a more advanced member state of the Organization of the Islamic Conference, allowing free expression of Kurdish language and culture.
Indonesia’s record looks even more remarkable when compared to the United States.
Americans explain their country’s democratic backsliding by pointing to the 9/11 terrorist attacks.
But Indonesia was attacked, too, with the bombing in Bali coming little more than a year later, on October 12, 2002.
Despite this, Indonesia has consolidated its democracy.
Indeed, in 2005 Freedom House declared that Indonesia had moved from “partly free” to “free.”
President Susilo Bambang Yudhoyono deserves great credit for this remarkable success.
Under his leadership, the long-standing and painful Aceh conflict was peacefully resolved.
Some credit the 2004 tsunami, which killed hundreds of thousands of Acehnese, for this breakthrough.
But Sri Lanka was hit equally hard by the tsunami, and since then the Sinhalese-Tamil conflict has worsened.
Today, the biggest threat to Indonesia’s democracy comes from America, even though most Americans want Indonesia’s democracy to succeed.
With modern technology, Indonesian Muslims can see clearly the plight of the Palestinians in Gaza, the disastrous results of the American invasion of Iraq and Afghanistan, and America’s silence when Lebanon was bombed in July 2006.
Many senior Americans were puzzled that Turkey, a long-standing NATO ally and a secular state, refused to allow American forces to use Turkey as a base to invade Iraq.
If relatively secular Turkish society could be swept by a surge of anti-American sentiment, so, too, can Indonesia society.
Indeed, a major struggle is underway between those who want Indonesia to become more fundamentalist and those who want to preserve the traditionally open and tolerant nature of Javanese culture.
Curiously, while many Americans and Europeans want moderate Muslim voices to succeed in Indonesia (and Southeast Asia), they often undermine moderates with policies that are perceived as anti-Islamic.
America’s stance on military aid to Indonesia is but one example.
For several years, some members of the US Senate have maintained a punitive policy towards Indonesia by cutting off military assistance and curtailing Indonesian military training in the US.
These punitive policies are self-defeating.
In recent years, the Indonesian military has provided a model for other Third World military forces on how to accept a transition to a full democracy.
There are no threats of a coup d’état, and senior generals, such as Bambang, who studied in American military colleges, returned to Indonesia as convinced democrats.
It is a tragedy that ignorance of how much Indonesia has changed is being allowed to endanger its democratic development – and its role as a beacon of freedom and hope in the Islamic world.
It is to be hoped that Barack Obama, should he win America’s presidency, will recall the tolerant Indonesia where he grew up and shape policies toward it accordingly.
Indonesia’s Moderate Muslims
Islam in Indonesia, whose 200 million people constitute the world’s largest community of Muslims, is increasingly viewed as very different from the Islam practiced in the older Muslim communities of the Middle East.
Indeed, one distinguished scholar, Bassam Tibi of Gottingen University, has described Indonesia as “a model for religiously and ethno-culturally different communities to live together in peace and mutual respect.”
Some historians argue that Indonesia’s moderate form of Islam reflects the way in which foreign traders introduced it, as early as the fourteenth century.
Then, the coastal culture already incorporated egalitarianism, dynamism, and inter-dependence, which affected the ideology and practice of Islam.
In addition, Indonesian Islam had strong Sufi influences, which emphasize the spiritual rather than the legal elements of the faith.
Similarly, Giora Eliraz of Hebrew University argues that the Islamic ideas that arrived in Indonesia from the Middle East changed, becoming more inclusive and pluralist in character, owing to the influence of the great nineteenth-century Egyptian reformer Muhammad Abduh.
In Egypt, Abduh’s progressive ideas gained support from only a tiny group of reformers.
In Indonesia, however, Abduh’s vision of Islamic modernity sparked the creation of the country’s largest modernist Muslim organization, Muhammadiyah, which represents mainstream moderate Islam in Indonesia.
This history of moderation continued unabated through the twentieth century, embraced by both traditionalists and modernists.
The traditonalist organization Nahdlatul Ulama
(NU), for example, had issued a fatwa (religious decree) in the 1930’s declaring Dutch colonial rule to be legitimate.
The early leaders of Muhammadiyah focused more on the spiritual improvement of individual Muslims, rather than public enforcement of Islamic law.
Most importantly, this orientation toward moderation has consistently drawn support from Indonesia’s leading intellectuals.
A remarkably creative and dedicated group of young religious and social thinkers and activists chose in the 1960’s and 1970’s – during the early days of Suharto’s secular New Order regime – to reject the idea of an Islamic state.
At the height of the New Order’s political repression of Islam during the late 1970’s and early 1980’s, a new pattern of thinking emerged among younger intellectuals.
Their “reform movement” ( gerakan pembaruan ), is perhaps best summed up in Nurcholish Madjid’s 1972’s dictum: “Islam yes, Islamic party no.”
By the late 1980’s, Suharto’s own stance towards Islam was changing.
Government concessions to religious sentiment included the promulgation of Islamic family law in 1989, the establishment of the Indonesian Muslim Intellectual Association in 1990, lifting the ban on schoolgirls’ wearing the jilbab (head cover) in 1991, the founding of an Islamic bank (Bank Muamalat) in 1992, and abolition of the state lottery.
These measures persuaded Indonesia’s Muslims that they could live in accord with Islamic teaching without Indonesia becoming an Islamic state.
The state established a wide network of educational institutions that support this moderate tendency.
There are now 27 branches of the State Islamic University, which integrate Islamic and general studies for undergraduate and graduate students.
There are also roughly 100 Institutes of Islamic Studies, for undergraduates who want to focus on Islamic studies only.
Indonesian students and scholars actively seek to engage new ways of understanding Islam and exploring its relevance for Indonesia.
For the past two decades, increasing numbers of Indonesian students have been drawn to study in the West.
As a result, they have come to see Islam as a dynamic process of understanding the world, rather than a static faith that cannot change.
Those who studied in the West appear well equipped to present an “Islam” more adaptable and amenable to social change.
Indeed, many Western-educated students now occupy the highest academic and political positions in Indonesia.
They work actively to develop a different image of Islam – an Islam compatible with modern human achievements, including democracy, human rights, and vibrant civil societies.
Not confined by any fixed orthodoxy, Indonesian Muslims have taken the historic step of welcoming dissident Muslim thinkers like the Pakistani Fazlur Rahman, the Palestinian Ismail al-Faruqi, and the Iranian Seyyed Hossein Nasr, even when their ideas were unwelcome in their native lands.
It is neither exaggeration nor overly optimistic to say that Indonesia’s experience could pave the way for the emergence of what might be called a “moderate Islamic network,” one that forges strong links with the West.
Industrialization’s Second Golden Age
WASHINGTON, DC – “The golden age of finance,” the economist Barry Eichengreen has said, “has now ended.”
If that is true – and let us hope that it is – what follows will most likely be a new golden age of industrialization.
Historically, except for a few oil-exporting economies, no country has ever become rich without industrializing.
Thus, all eyes nowadays should be on our economies’ real sectors.
Confronted by the global financial crisis that looms over Europe, political leaders around the world are waking up to a stark new reality: unless the developed countries stop relying excessively on financial deal-making and start to rebuild from the ground up, they will lose their current standard of living.
The global community must look beyond the eurozone and sovereign-debt crises and pay attention to the opportunity of structural transformation in the developing world’s real sectors.
By structural transformation, I mean the process by which countries climb the industrial ladder – their workforces move into higher value-added manufacturing sectors as their sources of production advance.
Throughout 2011, I was struck by the potential for less-developed countries – including in Sub-Saharan Africa – to emulate successful industrializing East Asian countries such as Japan, South Korea, Singapore, Malaysia, China, and Vietnam.
Indeed, by focusing development efforts on the comparative advantages of poorer countries, we can rebuild confidence in the business sector and reinvigorate investment in job creation – not only in developing countries, but also in advanced economies.
The current global financial crisis, which is rooted in the advanced countries’ structural problems, requires investment and innovation policies, in addition to monetary or fiscal measures.
In advanced countries, research and development costs are quite high, because their technologies and industries are already in the vanguard.
By contrast, developing countries, including those in Sub-Saharan Africa, have the potential to expand their industrial sectors rapidly, because they can borrow technology from the advanced countries with little risk and at low cost.
So developing countries’ backwardness in terms of technology and industry means that they can grow for decades at an annual rate several times that of high-income countries before they close the income gap.
This May, in Maputo, Mozambique, I delivered the United Nations University’s annual WIDER lecture on development.
I explained how the winning formula for developing countries is to build up the same tradable industries that have been growing for decades in wealthier countries that have endowment structures similar to their own.
The pattern of flying geese is a useful metaphor to explain this idea.
Beginning in the eighteenth century, the less-developed West European and East Asian countries followed their more successful neighbors: emulating a flying-geese pattern, they benefited from the leaders’ tailwind as they first industrialized and then became advanced countries themselves.
Large, dynamic emerging-market economies (particularly Brazil, Russia, India, China, and South Africa) that have industrialized quickly offer unprecedented opportunities for other developing economies to emulate their success – and thus to jumpstart their own industrialization processes.
China – once a “follower goose” – is on the verge of becoming a leader, with the potential to relocate 85 million low-skilled manufacturing jobs in the coming decade.
The scale of this shift is huge when compared with the 9.7 million jobs that Japan created in the modern sector in the 1960’s, or South Korea’s 2.3 million modern jobs in the 1980’s. And a similar trend will arise in other emerging-market economies.
In fact, it is already happening: China’s outward foreign direct investment reached $68 billion in 2010, exceeding that of Japan and the United Kingdom.
India, Brazil, Russia, and South Korea are not far behind.
Moreover, India’s outward FDI is heavily concentrated in the manufacturing sector, accounting for 42.7% of the total in 1999-2008.
For developing countries to benefit fully from industrial upgrading in China and other large emerging-market economies, their governments must identify tradable industries that are consistent with their latent comparative advantage.
They also must help private firms to resolve information, coordination, and externality issues in the process of industrial upgrading.
Rapid industrialization in developing countries will require large imports of capital equipment from advanced countries.
Given that developing countries have accounted for as much as two-thirds of global growth in GDP and imports over the past five years, focusing on how to foster development in their industrial sectors could benefit advanced countries by helping to boost demand, thereby pulling the world out of its economic malaise.
In short, the imminent golden age of industrialization in developing countries will help to create jobs and spur recovery in advanced countries.
The benefits of this new era will be two-pronged: it will contribute to the achievement of the UN Millennium Development Goals – the plan to cut world poverty in half by 2015 – and also will help to drive a global recovery.
Then, we may see a golden age for all.
Industrial Policy Comes Out of the Cold
WASHINGTON, DC – One of the best-kept economic secrets was strongly reconfirmed in 2010: most countries, intentionally or not, pursue an industrial policy in one form or other.
This is true not only of China, Singapore, France, and Brazil – countries usually associated with such policies – but also for the United Kingdom, Germany, Chile, and the United States, whose industrial policies are often less explicit.
Given that industrial policy broadly refers to any government decision, regulation, or law that encourages ongoing activity or investment in an industry, this should come as no surprise.
After all, economic development and sustained growth are the result of continual industrial and technological change, a process that requires collaboration between the public and private sectors.
Historical evidence shows that in countries that successfully transformed from an agrarian to a modern economy – including those in Western Europe, North America, and, more recently, in East Asia – governments coordinated key investments by private firms that helped to launch new industries, and often provided incentives to pioneering firms.
Even before the recent global financial crisis and subsequent recession, governments around the world provided support to the private sector through direct subsidies, tax credits, or loans from development banks in order to bolster growth and support job creation.
Policy discussions at many high-level summits sought to strengthen other features of industrial policy, including public financing of airports, highways, ports, electricity grids, telecommunications, and other infrastructure, improvements in institutional effectiveness, an emphasis on education and skills, and a clearer legal framework.
The global crisis has led to a rethinking of governments’ economic role.
The challenge for industrial policy is greater, because it should assist the design of efficient, government-sponsored programs in which the public and private sectors coordinate their efforts to develop new technologies and industries.
But history also tells us that while governments in almost all developing countries have attempted to play that facilitating role at some point, most have failed.
The economic history of the former Soviet Union, Latin America, Africa, and Asia has been marked by inefficient public investment and misguided government interventions that have resulted in many “white elephants.”
These pervasive failures appear to be due mostly to governments’ inability to align their efforts with their country’s resource base and level of development.
Indeed, governments’ propensity to target overly ambitious industries that were misaligned with available resources and skills helps to explain why their attempts to “pick winners” often resulted in “picking losers.”
By contrast, governments in many successful developing countries have focused on strengthening industries that have done well in countries with comparable factor endowments.
Thus, the lesson from economic history and development is straightforward: government support aimed at upgrading and diversifying industry must be anchored in the requisite endowments.
That way, once constraints on new industries are removed, private firms in those industries quickly become competitive domestically and internationally.
The question then becomes how to identify competitive industries and how to formulate and implement policies to facilitate their development.
In developed countries, most industries are advanced, which suggests that upgrading requires innovation.
Support for basic research, and patents to protect successful innovation, may help.
For developing countries, Célestin Monga and I have recently developed an approach – called the growth identification and facilitation framework – that can help developing-country governments increase the probability of success in supporting new industries.
This framework suggests that policymakers identify tradable industriesthat have performed well ingrowing countrieswith similar resources and skills, and with a per capita income about double their own.
If domesticprivate firms in these sectors are already present, policymakers should identify and remove constraints on those firms’ technological upgrading or on entry by other firms.
In industries where no domestic firms are present, policymakers should aim to attract foreign direct investment from the countries being emulated or organize programs for incubating new firms.
The government should also pay attention to the development by private enterprises of new and competitive products, and support the scaling up of successful private-sector innovations in new industries.
In countries with a poor business environment, special economic zones or industrial parks can facilitate firm entry, foreign direct investment, and the formation of industrial clusters.
Finally, the government might help pioneering firms in the new industries by offering tax incentives for a limited period, co-financing investments, or providing access to land or foreign exchange.
Our approach provides policymakers in developing countries with a framework to tackle the daunting coordination challenges inherent in the creation of new, competitive industries.
It also has the potential to nurture a business environment conducive to private-sector growth, job creation, and poverty reduction.
As economies around the world struggle to maintain or restore growth in 2011, industrial policy is likely to be under a brighter spotlight than ever before.
Given the right framework, there is no reason for it to remain in the shadows.
Industrial Policy Returns from the Grave
PALO ALTO – One of the worst responses by officials to the financial crisis and deep recession has been to revive “industrial policy.”
Once again, governments are using subsidies, mandates, regulation, and capital investment to pick industrial winners and losers, rather than using a broad, even-handed approach.
The new round of industrial policy is occurring in advanced economies such as the United States and the United Kingdom, which long resisted its worst excesses, France, which long promoted national “champions”, and emerging economies such as Brazil and China.
For example, French President Nicholas Sarkozy plans to borrow 52 billion euros to promote what his government guesses or hopes will be “growth industries.”
Even central banks, especially the US Federal Reserve, have been supporting particular firms and types of assets because of the financial crisis.
Industrial policy is appealing to politicians who can favor key constituencies while claiming to be helping the economy as a whole.
But it usually does far more harm than good.
Perhaps the most contentious area of industrial policy is governments’ role in research and development.
While governments have an obvious interest in military-related R&amp;D, markets function well when the returns are received and the risks borne by private owners.
For basic scientific research, the potential return will be broadly available to any and all, whether or not they paid for it and bore the risk of failure.
Because private investors are unable to appropriate the returns, private markets invest too little in basic science.
That is why economists of all political persuasions agree that governments should fund basic science and technology.
When I chaired the Council of Economic Advisers for President George H.W. Bush, we doubled the budget of the National Science Foundation. Governments, however, risk crowding out private R&amp;D, the returns from which could be fully appropriated by firms, not only through their own use, but by patenting and licensing the technology to other firms.
The appropriate place to draw the line conceptually is at pre-competitive, generic science and technology.
Governments should fund R&amp;D until it reaches the stage where private firms could appropriate (the bulk of) the benefit.
It should also remain generic research, thereby maintaining a level playing field for commercial applications.
For example, the computer-linking technology that created the Internet was funded by an agency of the US Defense Department.
But it would be foolish for the government to subsidize a particular search engine or social-networking platform.
Governments should not be in the game of using subsidies, taxes, regulation, mandates, loans, and investments to pick particular winners.
It simply doesn’t work, and, worse still, it crowds out or stifles potentially valuable competing technologies.
In the 1980’s, advocates of industrial policy praised its extensive use in Japan.
But the attempt by Japan’s powerful trade and industry, and finance ministries to micromanage the economy is one reason the Japanese wound up with a burst asset bubble, a lost decade, three recessions, and by far the highest public debt-to-GDP ratio of any advanced economy.
Back then, America’s advocates of industrial policy – often called “Atari Democrats,” after the long since eclipsed maker of early computer games – didn’t even get their facts straight about Japan. While there was a “fifth generation” computer project and one on HDTV, the vast bulk of Japanese subsidies went not to new technologies, but to old-line, high-employment industries like agriculture, mining, and heavy manufacturing.
Similar economic problems permeate the history of the last few decades, from South Korea to Western Europe to the US.
In 1980, President Jimmy Carter ran for reelection on a platform of “national reconstruction banks,” industrial policy, and a council headed by labor and business leaders that would decide where to invest tens of billions of dollars.
He was trounced by the free-marketeer, Ronald Reagan.
But even in the US, industrial policy is making a comeback.
President George W. Bush spent years and billions of dollars pushing a hydrogen car. It got nowhere, and, while hydrogen may eventually become commercially viable for stationery sources, its use for transportation must still overcome some serious obstacles (including flammability and combustibility that is an order of magnitude greater than that of gasoline).
America’s massive $787 billion fiscal stimulus, ostensibly designed to combat recession and create jobs (but so far ineffective) contained immense sums for subsidies to particular industries and technologies, almost $40 billion for clean-energy programs alone.
While firms and investors take the funds, private financing for commercial alternative-energy projects is widely available; an immense number of venture-capital funds worldwide are devoted to alternative and clean energy.
Government should set general goals for energy and the environment and then let entrepreneurs, investors, and consumers decide how best to achieve them.
It should fund basic scientific and technological research applicable to these issues.
But no policy makes sense if it cannot be sustained without long-term government support.
Whatever the dubious temporary merits of reviving industrial policy in a deep recession, governments need an exit strategy before the programs become permanently entrenched and develop powerful rent-seeking constituencies.
Vast amounts of debt-financed spending will require higher future taxes, which will divert capital and labor from higher-value uses than can be sustained without permanent government lifelines.
Industrial policy failed miserably in the 1970’s and 1980’s.
Allowing governments to pick industrial winners and losers is just as bad an idea today.
Inequality and Discontent
In the last two decades, the world as a whole has gotten richer, but, while some national economies have advanced sharply, others have fallen farther behind.
The increase in aggregate wealth has not led to the abolition, or even reduction, of poverty.
Much the same is true within countries.
Almost everywhere, globalization has produced both a new class of multi-millionaires and an underclass comprising people who are not just poor in the statistical sense of earning less than half the national average, but who are excluded from opportunities that are supposed to be open to all.
Globalization’s dynamism has benefited many, but it has also increased inequality.
Is that necessarily a bad thing?
There are many who think so.
In fact, entire countries have a built-in egalitarian streak.
They dislike the business leaders who take home huge sums even when they fail, and they hate to see poor and excluded people in their midst.
But, while it is comfortable to live in the social-democratic world of Scandinavia, Germany, and other European countries, many of them have purchased their equality on credit from future generations.
Moreover, an egalitarian climate does not promote innovation and a sense of dynamic development.
Creative individuals tend to leave societies in which there is strong pressure not to be different.
Inequality is not merely compatible with freedom, but is often a result of and stimulus for freedom.
Is that the choice we have to make then: freedom or equality?
Things are not quite so simple.
A free society recognizes two limits to economic and general inequality.
Both raise quite difficult practical questions, though they are clear in principle.
Inequality is incompatible with freedom if it limits individuals’ chances of participation in the political community, in the market, and in civil society.
At the lower end of the social scale, this raises the old and vexing question of equality of opportunity.
What is clear is that everyone must have access to elections and political parties, to education and the labor market, and to the associations of civil society.
In short, citizenship in the full sense of the word requires basic rights and the ability to enforce them.
It also requires a basic economic status, including an income guarantee, which can be provided in a variety of ways.
One difficult question is where, exactly, to draw the line that defines the basic status to which all citizens are entitled.
In most countries, it should probably be higher than it is now.
Another difficult question is how the basic status is to be guaranteed.
The debate about individual income supplements versus general public services has become lively everywhere.
It may well be resolved with different answers that accord with different countries’ traditions, although tax credits and similar additions to people’s incomes are more compatible with free societies.
At the upper end of the social and economic scale, a different issue arises.
Many people object to business managers who take away in pay, bonuses, and stock options hundreds of millions of dollars from their companies.
Indeed, there is a legitimate question whether the behavior of today’s capitalists promotes the general acceptance of capitalism.
But individual wealth becomes a problem only if and when it can be used to restrict others’ chances of participation.
When wealth turns into unchecked power, something must be done to restrict it.
What has come to be called money laundering, that is, the attempt to turn illicit gains into legitimate riches, provides one example of the need for action.
There are others, including the question of inheritance taxes, which have long been regarded as a necessary component of a free society.
Nevertheless, while a free society recognizes limits to inequality, it also accepts that inequality exists, for it provides hope for many by showing what one might achieve with ability and luck – or perhaps even luck alone.
Inequality adds color and variety to societies; it is one of the marks of lively, flexible, and innovative countries.
It is thus not bad in itself, even if its excesses must be capped in the name of citizenship for all.
Social exclusion and personalized power through wealth are always unacceptable.
But if we want freedom, then social and economic inequalities are a legitimate, and necessary, price to pay.
Inequality and Its Discontents
Leaders around the world seem to be convinced that inequality and lack of broad participation in economic growth, if allowed to persist, will lead to social discord and even violence.
But is inequality the real problem?
As Indian Prime Minister Manmohan Singh put it at the International Conference of Dalits and Minorities, held in New Delhi in December, “Even as absolute poverty may be reduced by growth, inequalities can get sharpened. This can be politically and socially extremely destabilizing.”
Likewise, at the World Economic Forum in Davos in January, Brazilian President Luiz Inácio Lula da Silva said,“ It will be through economic growth, job generation, and income distribution that we will live in a peaceful world.” He then urged lower barriers to agricultural exports to help the poor in developing countries.
Such arguments have the ring of common sense. If people believe that they will share in overall economic growth, they should be more likely to support social peace.
If they do not, unrest will become more likely.
However, social scientists have found it difficult to prove that point.
In fact, some statistical analyses of the correlation between inequality and social conflict conclude that there may even be an inverse relationship: societies that are more unequal tend to show less conflict, because the rich are better able to control the poor.
There is some evidence that social unrest follows from inequality.
The economists Alberto Alesina and Roberto Perotti have shown that, after controlling for several other factors, high-inequality countries do tend to have more social instability, as measured by, say, the number of politically motivated assassinations or the number of people killed in conjunction with domestic mass violence.
Nevertheless, one wonders why the evidence that inequality causes social unrest is not stronger.
One part of the problem may be that it is not always inequality per se that causes social discord, but also how inequality is perceived to have come.
Unrest may reflect more a sense of betrayal – that others are not living up to their implied promises or are not behaving honorably.
Indeed, a sense of trust in others’ intentions is central to a functioning economy.
Lawyers write a lot of contracts, and courts spend a lot of time enforcing them, but these institutions cannot cover everything.
Most economic relationships depend on good will, a basic inclination to do the right thing even if no one is checking.
Trustworthiness is hardly universal.
But the business world is built on our intuitive knowledge of when we can trust people fairly well and when we can’t trust them much at all.
We design contracts around imperfect trustworthiness and construct elaborate institutions that take account of the hills and valleys of human honor.
When these function well, we have a general sense that, even though people are not always trustworthy, basic fairness prevails.
An article by Ernst Fehr at the University of Zurich and Alexander Klein and Klaus Schmidt at the University of Munich in the January 2007 issue of the journal Econometrica shows how people design economic relationships based on their knowledge of the circumstances in which people are trustworthy.
In their experiments, subjects, acting as employers, were asked to choose among types of employment contracts and then observe the outcomes when other subjects, acting as employees, responded.
The employers initially trusted the employees to work hard without specific incentives, and quickly learned that, without such incentives, many employees would shirk.
But the employers also quickly learned that the best kind of employment contract is one that offers employee not just a fixed contract, but also the possibility of a bonus, a sort of gift for good performance that is outside of any contract provisions.
Employees learned in the experiments that employers largely could be trusted to give such bonuses as a reward for hard work, even though no one could hold them formally accountable if they selfishly refused.
Thus, a sort of free gift exchange between employer and employee emerged from these experiments, not any rigid or formulaic employment contract.
One may infer that such informal arrangements survive in real-world employment relationships because they reinforce our heartfelt feelings of good will toward each other.
By contrast, when inequality is perceived as the result of a breakdown in trusting relationships, it can lead to bitterness, and, ultimately, social unrest.
This frequently occurs in times of rapid economic change.
For example, in a rapidly globalizing world, people may have to leave their long-term employers, with whom they have built a sense of trust, or it may be their supervisors who will have to be replaced.
In such cases, inequality may be perceived more intensely, for people may link it with the loss of good will.
What Singh, Lula, and other world leaders really seem to want is to strengthen trust and cooperation even amidst a rapidly changing economy.
If they succeed in devising policies, laws, and incentives that achieve this, a byproduct would likely be a reduction in inequality, which one hopes would reinforce the improved sense of trustworthiness.
Inequality on the March
How much should we worry about inequality?
Answering that question requires that we first answer another question: “Compared to what?”
What is the alternative against which to judge the degree of inequality that we see?
Florida is a much more materially unequal society than Cuba.
But the right way to look at the situation – if Florida and Cuba are our alternatives – is not to say that Florida has too much inequality, but that Cuba has much too much poverty.
On the global level, it is difficult to argue that inequality is one of the world’s major political-economic problems.
It is hard, at least for me, to envision alternative political arrangements or economic policies over the past fifty years that would have transferred any significant portion of the wealth of today’s rich nations to today’s poor nations.
I can easily envision alternatives, such as Communist victories in post-World War II elections in Italy and France that would have impoverished nations now in the rich North.
I can also envision alternatives that would have enriched poor nations: Deng Xiaoping becoming China’s leader in 1956 rather than 1976 would have done the job there.
But alternatives that would have made the South richer at the price of reducing the wealth of the North would require a wholesale revolution in human psychology.
Nor should we worry a great deal that some people are richer than others.
Some people work harder, apply their intelligence more skillfully, or simply have been lucky enough to be in the right place at the right time.
But I don’t see what alternative political-economic arrangements could make individuals’ relative wealth closely correspond to their relative moral or other merit.
The problems that can be addressed are those of poverty and social insurance—of providing a safety net—not of inequality.
But on the level of individual societies, I believe that inequality does loom as a serious political-economic problem.
In the United States, the average earnings premium received by those with four-year college degrees over those with no college has gone from 30% to 90% over the past three decades, as the economy’s skill requirements have outstripped the educational system’s ability to meet them.
Because the required skills acquired through formal education have become relatively scarcer, the education premium has risen, underpinning a more uneven distribution of income and wealth.
Ceci Rouse and Orley Ashenfelter of Princeton University report that they find no signs that those who receive little education do so because education does not pay off for them: if anything, the returns to an extra year of schooling appear greater for those who get little education than for those who get a lot.
A greater effort to raise the average level of education in America would have made the country richer and produced a more even distribution of income and wealth by making educated workers more abundant and less-skilled workers harder to find – and thus worth more on the market.
Likewise, America’s corporate CEO’s and their near-peers earn ten times more today than they did a generation ago.
This is not because a CEO’s work effort and negotiation and management skills are ten times more valuable nowadays, but because other corporate stakeholders have become less able to constrain top managers and financiers from capturing more of the value-added.
Similar patterns are found elsewhere.
Within each country, the increase in inequality that we have seen in the past generation is predominantly a result of failures of social investment and changes in regulations and expectations, and has not been accompanied by any acceleration in the overall rate of economic growth.
For the most part, it looks like these changes in economy and society have not resulted in more wealth, but only in an upward redistribution of wealth—a successful right-wing class war.
This kind of inequality should be a source of concern.
Bill Gates, Paul Allen, Steve Ballmer, and the other millionaires and billionaires of Microsoft are brilliant, hardworking, entrepreneurial, and justly wealthy.
But only the first 5% of their wealth can be justified as an economic incentive to encourage entrepreneurship and enterprise.
The next 95% would create much more happiness and opportunity if it was divided evenly among US citizens or others than if they were to consume any portion of it.
An unequal society cannot help but be an unjust society.
The most important item that parents in any society try to buy is a head start for their children.
And the wealthier they are, the bigger the head start.
Societies that promise equality of opportunity thus cannot afford to allow inequality of outcomes to become too great.
In Europe We Distrust
MADRID – For decades, critics of the European Union have spoken about a democratic deficit.
I never accepted that reproach of the EU and its institutions, but I do see a new and dangerous deficit within the Union – a trust deficit, both among governments, and among the citizens of various member countries.&#160;Indeed, if today’s euro banknotes included a motto, as dollars do, it could well be, “In Europe We Distrust.”
This lack of trust has brought the eurozone to the cusp of implosion, and is calling into question the very future of European unity.
The arc of EU history seems to be bending to catastrophe – the sort of periodic European disaster that integration was intended to prevent.
Grandiloquent as it might sound, the disintegration of the euro and the disarray that would engulf the European project, not to speak of the global repercussions, would unleash comparable devastation.
But few official pronouncements, let alone policies, are addressing Europe’s deficit of trust and credibility.
The current crisis has exposed the original lacunae and widening cracks in the compact between Europe’s citizens and EU institutions, between Europe’s north and south, and between its peoples and its elites.
Indeed, a dangerous emotional discourse has emerged, reflecting – and feeding – the worst stereotypes of the “lazy South” and the “despotic North.”
It is indicative that the latest Pew Research Survey in late May reveals unanimity about who the least hardworking Europeans are: southerners, especially Greeks.
Likewise, polls and elections signal the ascent of populists across Europe, while financial markets’ vulture-like behavior stems from the cynical calculation that the EU lacks the wherewithal to restore its credibility.
That, after all, is the point of Europe’s straightjacket of austerity, which hampers its growth prospects, and thus makes little sense in economic terms.
The ultimate aim of austerity is precisely the restoration of trust – among northern Europeans that the money transferred to troubled economies will not be squandered, and among the peoples affected by painful spending cuts that their efforts are recognized and supported.
Speaking from the heartland of the troubled South, I can attest to the fact that the need for austerity has been the leitmotif of Spanish Prime Minister Mariano Rajoy’s government, a course that gained explicit popular support in the recent elections.
Reforming Spains’s cajas (savings banks), labor market, welfare provisions, and how its autonomous regions function top the national agenda (though unfortunately only at the insistence of the European Commission and Germany).
But restoring trust and credibility requires more than southern discipline.
Northern Europe must hold up its side of the bargain.
Germany, in particular, must acknowledge that, far from being an innocent victim, its economy is the eurozone’s biggest beneficiary – and has been since the euro’s inception.
That, together with the counterfactual – the economic calamity that would befall Germany following a collapse of the euro – implies a unique obligation to maintain it.
German Chancellor Angela Merkel has been a favorite target of opponents of austerity for some time now, and it is understandable that, after months of being a bystander to the EU’s painful inability to govern, Germany has reluctantly – indeed, insufficiently – taken charge.
Looking ahead, as the threat of disintegration looms larger, the need for German leadership will be even greater.
But, once the crisis has passed, EU institutional reform will be a critical element in restoring trust.
The EU’s supposed democratic deficit is a corollary of the “technocratic imperative” that has emerged as a favorite scapegoat in the ongoing European drama.
According to this view, European integration was flawed from the outset, more than six decades ago, because it was conceived and developed as an elite project.
But, for as long as the European project delivered prosperity, no one bothered to question its rationale.
Today, however, the EU is the last point of reference as far as prosperity is concerned.
According to the Pew survey, EU favorability is down almost everywhere since 2007, having dropped 20 points in the Czech Republic and Spain, 19 points in Italy, and 14 points in Poland.
If EU institutions are to regain trust and relevance, they need to articulate concrete policies and deliver on issues that bear directly on citizens’ interests – youth unemployment, urban planning, health care, bio-tech research, energy conservation, transport, and aging.
All of these issues were an integral part of the EU’s ambitious Lisbon Strategy (which in 2000 promised to make Europe the world’s most competitive economy by 2010), and all were quickly hijacked by national political agendas.
That cannot be allowed to happen again.
In fact, there is nothing inevitable about the euro's failure.
The dismal image that Europe projects to the world nowadays does no justice to reality.
Europe has the world’s healthiest and most educated population, its largest economy, and huge stores of soft power, owing also to its commitment to human rights and democratic values.
And yet Europe is facing a calamity.
Discipline and morality may well be key to reinforcing trust and credibility to Europe’s social fabric – a point that northern Europeans never tire of making.
But, unless all Europeans accept responsibility for saving the euro – and, with it, the EU – everything else is shallow rhetoric.
The Inexorable Logic of the Sharing Economy
MILAN – When Amazon was founded in 1994, and eBay the following year, they harnessed the connectivity of the Internet to create new, more efficient markets.
In the beginning, that meant new ways of buying and selling books and collectibles; but now e-commerce is everywhere, offering customers new goods and used goods – and becoming a global force in logistics and retail.
Likewise, while today’s sharing-economy companies may be just out of their infancy, their services will one day be ubiquitous.
By now, most people have heard of Airbnb, the online apartment-rental service.
The company has just 600 employees but a million properties listed for rent, making it larger than the world’s biggest hotel chains.
Of course, what Airbnb offers is different from what hotels provide; but if Airbnb offered options for, say, maid service or food, they could become closer competitors than one might initially imagine.
The insight (obvious in retrospect) underlying Airbnb’s model – and the burgeoning sharing economy in general – is that the world is replete with under-utilized assets and resources.
How much time do we spend actually using the things – whether cars, bicycles, apartments, vacation homes, tools, or yachts – that we own?
What value do office buildings or classrooms generate at night?
Answers vary by asset, individual, household, or organization, but the utilization numbers tend to be astonishingly low.
One recent answer for cars was 8%, and even that may seem high to someone not burdened by long commutes.
But those numbers are changing, as the Internet enables creative new business models that increase not only a market’s efficiency but also the utilization of our various assets.
Hundreds of experiments are being conducted.
Clearly, not all of them will experience the astonishing growth of Airbnb and Uber.
Some, like Rent the Runway for designer clothes and accessories, may find profitable niches; others will simply fail.
The digital platforms that act as the basis of all this e-commerce need to meet two related challenges.
The first is to produce a network effect, so that buyers and sellers find one another often enough and rapidly enough to make a business sustainable.
Second, the platform must create trust – in the product or the service – on both sides of the transaction.
Trust is crucial to the network effect; hence the need for two-way evaluation systems that encourage buyers and sellers to be repeat users of the relevant platform.
Small players can then act in large markets, because – over time – they become known quantities.
The power of these platforms derives from overcoming informational asymmetries, by dramatically increasing the signal density of the market.
Indeed, in order to encourage infrequent e-commerce users, innovators and investors are exploring ways to combine the evaluation databases of separate, even rival, platforms.
Whatever the legal and technical issues that must be overcome, down the road we can surely imagine the kind of data consolidation already practiced internally by retail giants like Amazon or Alibaba.
There can, of course, be other incentives to support “good” behavior, such as fines and deposits (for bicycles borrowed for too long or not returned, for example).
But punitive measures can easily lead to disputes and inefficiency.
By contrast, refining evaluation systems holds far more promise.
The urge to exploit under-utilized resources should not be confined to material assets.
The McKinsey Global Institute has recently studied internet-based approaches to the labor market and the challenge of matching demand for talent and skills with supply.
Some sharing models – perhaps most – rely on both labor and other assets: for example, a person and his or her car, computer, sewing machine, or kitchen (for home-delivered meals).
This throwback to the cottage industries that preceded modern production is possible today because the Internet is lowering the costs of dispersion that once compelled the concentration of work in factories and offices.
Perhaps inevitably, regulatory issues arise, as Uber is now discovering from California to Europe.
Taxis and limousines are to some extent protected from competition because they need licenses to operate; they are also regulated for customer safety.
But then Uber invades their market with a differentiated product, subject largely to its own regulations for vehicles and drivers.
In the process, it threatens to lower the value of licenses just as surely as any official decision to issue new licenses would.
No wonder the taxi drivers of Paris and other French cities – hitherto protected from competition – have protested so vehemently (and, on occasion, violently).
An intriguing question is how far the financial sector will embrace the sharing economy.
Peer-to-peer lending and crowdfunding already represent new ways of matching borrowers with investors.
Clearly, issues relating to liability and insurance will have to be addressed in all sharing-economy models, especially financial ones; but these are hardly insurmountable obstacles.
The truth is that the Internet-led process of exploiting under-utilized resources – be they physical and financial capital or human capital and talent – is both unstoppable and accelerating.
The long-term benefits consist not just in efficiency and productivity gains (large enough to show up in macro data), but also in much-needed new jobs requiring a broad range of skills.
Indeed, those who fear the job-destroying and job-shifting power of automation should look upon the sharing economy and breathe a bit of a sigh of relief.
In Finance We Distrust
MILAN – Around the world, the debate about financial regulation is coming to a head.
A host of arguments and proposals is in play, often competing with one another – and thus inciting public and political confusion.
One approach to financial re-regulation – supported by arguments of varying persuasiveness – is to limit the size and scope of financial institutions.
Some claim that smaller entities can fail without impairing the system, thus sparing taxpayers the cost of a bailout.
But if systemic risk emerges in ways that are not yet fully understood, smaller banks may all fail or become distressed simultaneously, damaging the real economy.
A second, hotly debated argument is that limiting banks’ size and scope has relatively low costs in terms of performance.
This point is used to bolster a third argument: large institutions have undue political influence and thus “capture” their regulators.
Put bluntly, large and profitable financial institutions will find a way to get the regulatory system they want – one that is compatible with a highly profitable trading super-structure that goes beyond the requirements of hedging and seeks to maximize short-term gains.
A second approach, on which there is substantial agreement in principle, is to limit leverage.
The main argument is that high leverage contributes powerfully to systemic risk – a condition in which asset prices move in a highly correlated way, and distress, when it occurs, spreads quickly. Leverage is also partially caused by misperceptions of risk and mispricing of liquidity.  It is desirable to constrain leverage, but not to the point of increasing the cost of capital and investment.
Moreover, few would disagree that, as the complexity of the system increases, gaps and asymmetries in terms of information, knowledge, and expertise are multiplying.
Such asymmetries impair market performance in a variety of ways, and conflicts of interest are particularly dangerous in such an environment because they create an incentive to exploit precisely these advantages.
Rigorous disclosure requirements that include conflicts of interest are one way to limit the potential damage.
Or the conflicts can be limited by regulating the scope of financial institutions.
For example, asset management, distribution, underwriting and securitization, and proprietary trading would be separated in various ways.
This approach has the added advantage of preventing different risk profiles and their appropriate capital requirements from getting mixed up in the same entity and balance sheet.
There are two other ways to address complexity and asymmetries.
One, widely adopted in developing countries, is simply to impose restrictions on products (for example, derivatives and hedge funds) on the grounds that the upside in terms of risk avoidance far outweigh the costs – less access to capital and reduced risk spreading.
The other way is to try to reduce the informational gaps or their impact by regulating the expertise and incentives surrounding the rating process (the failure of which had serious consequences in the current crisis).
At a somewhat deeper level, there are two conflicting threads running through the public debate surrounding the crisis.
One is the “perfect storm” position: there were very many failures, misperceptions, informational asymmetries, and complexities, as well as much repugnant behavior, but it never occurred to market participants, regulators, or academics that the aggregate effect would be a near-collapse of the system.
Critics of that argument maintain that sophisticated players understood the systemic risks, didn’t care, and cynically played the game that they helped to create – in some cases for enormous profit.
It now seems universally accepted (often implicitly) that government should establish the structure and rules for the financial system, with participants then pursuing their self-interest within that framework.
If the framework is right, the system will perform well.
The rules bear the burden of ensuring the collective social interest in the system’s stability, efficiency, and fairness.
But in a complex system in which expertise, insight, and real-time information are not concentrated in one place, and certainly not in government and regulatory circles, reliance on such a framework seems deficient and unwise.
Moreover, it ignores the importance of trust.
A better starting point, I believe, is the notion of shared responsibility for the stability of the system and its social benefits – shared, that is, by participants and regulators.
It is striking that no senior executive of whom I am aware has laid out in any detail how his or her institution’s expertise could be deployed in pursuit of the collective goal of stability.
The suspicion that underlies much of today’s public anger is that these institutions, having influenced the formulation of the legal and ethical rules, could do more to contribute to stability than just obey them.
The finance industry, regulators, and political leaders need to create a shared sense of collective responsibility for the system as a whole and its impact on the rest of the economy.
This set of values should be deeply embedded in the industry – and thus should transcend haggling over regulation.
It should take precedence over narrow self-interest or the potential profit opportunities associated with exploiting an informational advantage.
And it should be thought of as an addition to the guiding norms, rules, and ethics associated with “normal” times.
Some will object that this idea won’t work because it runs counter to greedy human nature.
Yet such values shape other professions.
In medicine, there is a huge and unbridgeable gap in expertise and information between doctors and patients.
The potential for abuse is enormous.
It is limited by professional values that are inculcated throughout doctors’ training, and which are bolstered by a quiet form of peer review.
By itself, such a shift in values and the implicit model that defines roles certainly will not solve the challenge of systemic risk.
Neither will fiddling with the rules.
Taken seriously, however, it could help provide an ongoing reminder of the importance of the financial sector to the broader well-being of the economy.
It might even help start rebuilding trust.
Inflationary Angst
PRINCETON – Can central banks contain inflation?
We once thought they could.
Over the past 20 years, central banks around the world, including the United States Federal Reserve, pursued price stability with remarkable success.
But now, in the wake of the financial crisis, a tide of distrust is sweeping the world – including a new and widespread fear that central banks are incapable of controlling inflation.
In the US, the Tea Party has made a return to the gold standard a part of its platform, and Utah is debating making gold and silver coins legal tender.
German inflation worries have pushed the government into a much harsher stance on debt relief in Europe.
In China, fear of inflation is unleashing large-scale discontent.
Inflation fear was already present before the new challenges of 2011 raised questions about long-term energy prices.
As pro-democracy protests shake Arab authoritarian regimes, the prospect of sustained conflict threatens a global economy still dependent on oil, while the aftermath of the Japanese earthquake and nuclear accident raises doubts about the security of nuclear energy.
The main anchor of central banks’ monetary policy over the past 20 years was an inflation-targeting framework that developed from academic interpretation of the problems involved in targeting monetary aggregates.
After successful experiments in smaller economies, New Zealand in 1990 and then Canada in 1991, and later in Sweden and the United Kingdom, the conviction developed that the new approach represented a superior way of dealing with the problem of inflationary expectations.
The really large currencies – the dollar, the euro, and the yen – were never managed explicitly or solely on this principle.
But central banks in both Europe and the US thought that a 2% annual inflation rate would be a desirable target (for the Europeans a desirable maximum).
There was always a problem in this approach, namely that the general price level is an abstraction.
It is a useful in a context of overall stability; but, especially during crises or in the aftermath of large shocks, there are sharp movements of relative prices.
At these moments, it is easiest to accommodate the movements by letting all prices rise, but to differing extents.
Some econometric attempts have been made to identify long-term cycles in both inflation and monetary growth.
The economist Luca Benati has identified such surges of underlying inflation in the last decades before World War I, the late 1930’s, the late 1960’s, and the 1970’s.
He also has found evidence of a pick-up in long-term underlying inflation in the UK and the US since the early 2000’s.
The debate in the 1970’s – the period of the last general inflationary surge – has become relevant again.
At that time, it was often argued that price spikes for petroleum or other commodities were somehow “extraneous” to the system, and not a reflection of the real basis of monetary policy in the industrial countries.
Consequently, analyses of inflation left out food and energy prices.
Today, the debate is over “core inflation,” which excludes food and energy prices because they are too volatile.
But the oil-price shocks that came after 1973 were in part also a response to the major industrial countries’ monetary policy in the later 1960’s and early 1970’s.
The real price of oil seemed to be lagging behind, and oil producers’ dramatic actions in 1973 were part of an effort to correct that.
Other commodity prices had risen rapidly in the early 1970’s, in direct response to monetary easing in the US and elsewhere.
Shortages of natural gas increased fertilizer prices, pushing up food prices.
That led to protests in many poorer countries, and to a political determination to extract additional gains from other commodity exports.
As in the 1970’s, there are more links than may at first appear between the apparently new problems of 2010-2011.
Food and energy prices are more likely to be affected by monetary policy.
And they produce an economic basis for discontent – which played at least some part in triggering the protests of the “Arab Spring.”
Given that food and energy prices respond to monetary developments, and thus are not exogenous, the concept of “core inflation” obviously becomes problematic, to say the least.
One consequence is that Fed officials now try to avoid it.
Another way to approach it is to attempt to grasp changing consumer behavior analytically.
As a result, inflation is continually being redefined.
In the UK, the consumer price index is being recalculated to include new products, such as electronic dating services.
It is easy to suspect that this is not just a concession to changing social mores, but that it also reflects a desire to include as many declining prices as possible.
This is less radical than the method adopted by Argentina, where high levels of inflation are both a historical nightmare and a current challenge.
There, the government, whose statistical agency puts annual inflation at 10%, is punishing private-sector economists who release much higher estimates – typically around 25% – with heavy fines.
The finance minister claims that there is no “structural inflation.”
As the statistical manipulation that attends uncertainty increases, confidence is eroded.
A better approach is to think of the longer-term story as being one of changes in relative prices, which are not well handled by a consumer price index.
That issue is especially acute in the wake of a generalized real-estate crisis.
Until 2007, many people financed consumer purchases, whose prices were more or less stable, by borrowing against their houses, which were rapidly rising in value.
Consumer goods therefore seemed to be getting cheaper.
Now, by contrast, food and gasoline prices are rising, owing to emerging markets’ ongoing boom, while house prices continue to plummet.
It is when we worry about relative prices that we get most angry about monetary policy – and when central banks seem to offer no answer.
Inflation Comes to China
SHANGHAI – Macroeconomic conditions in any country are like running water.
How large and fast is the flow?
Where does it originate and where does it go?
The “main stream” of China’s economy is the vast flow of inward investment.
China’s economy is prone to rapid growth, with buoyant investment demand sustaining powerful short-term inflationary pressures.
As a result, credit controls on investment projects and a close watch on the money supply have been used to promote macroeconomic stability since China began its market reforms.
But in 2003, following five years of deflation, China’s economy entered a new phase.
Overcapacity vanished, constraints on consumption were lifted, and a dramatic increase in household demand followed.
Since then, heavy industries – steel, automobiles, machinery, building materials, energy, and raw materials – have experienced an unprecedented investment boom, reflecting demand for urban construction, housing, transport, infrastructure, and equipment renewal.
Not surprisingly, the economy began to overheat.
Productivity and profitability in manufacturing and heavy industries picked up, boosting China’s national savings dramatically.
Indeed, the huge increase in China’s trade surplus in recent years is a consequence not of the renminbi’s exchange rate, as many believe, but of the domestic savings’ increase.
Yet, from 2005 to early 2007, macroeconomic policy was focused on reining in the surplus.
Most importantly, the renminbi was allowed to appreciate, and the export tax rebate was virtually eliminated.
In early 2007, because inflation was not really visible, the government did not regard it as a major problem.
But when price increases accelerated in the second half of the year, the authorities began to worry.
The central bank (PBOC) initially attributed it to excess liquidity, and so began to use monetary policy tools, raising interest rates five times since late 2007.
As a result, the interest rate for 12-month fixed deposits has reached 3.9%.
Moreover, the PBOC has issued Central Bank Notes six times, reinforcing its anti-inflationary effort.
Nevertheless, by the end of October, M2 money supply had increased by 18.4% – growing by 1.3% faster year on year, and exceeding the 16% target.
By the start of 2008, it was clear that controlling inflation and cooling an overheating economy had become the government’s main economic target.
Indeed, the government’s key economic committee, the Central Work Committee, has concluded that after years of “high growth and low inflation,” China is on a route to “high growth with high inflation.”
This invariably means that fiscal and monetary stability will become a priority while controlling the trade surplus has become a lower one.
The problem is that, until now, the major cause of inflation has been rapidly rising manufacturing costs, and there is no sign of a slowdown in energy and raw material prices.
Moreover, a new labor law and income policies will further increase workforce costs.
And, due to rising consumer prices, the nominal interest rate will continue to rise.
As a result, with investment demand remaining robust, inflation could spread.
In the face of growing inflation, output is set to suffer.
In order to curb investment demand, tighter credit rationing and monetary policy are inevitable in 2008, while investment projects and land use will be subject to more rigorous control.
Likewise, increasing pressure from growing labor costs will force enterprises to lower their profit expectations and cut costs, negatively affecting output growth and employment in the short run.
It will be difficult to ease these inflationary pressures this year. International commodity prices will continue to rise, increases in domestic labor costs and prices of non-tradable goods cannot easily be stemmed, the international economic situation will encourage further capital inflows, and asset inflation will persist.
All these factors will push inflation above the 2007 level.
With export performance also set to slow, owing to the economic downturn in the United States, employment and growth could be weakened further, which implies mounting pressure on China’s government – and thus on the fiscal deficit, creating another source of inflationary pressure.
And, once an inflationary trend emerges and economic growth slows, the steady- as-you go pattern to China’s decade-long boom will be over.
Inflation is Now the Lesser Evil
CAMBRIDGE – It is time for the world’s major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today’s epic debt morass.
Yes, inflation is an unfair way of effectively writing down all non-indexed debts in the economy.
Price inflation forces creditors to accept repayment in debased currency.
Yes, in principle, there should be a way to fix the ills of the financial system without resort to inflation.
Unfortunately, the closer one examines the alternatives, including capital injections for banks and direct help for home mortgage holders, the clearer it becomes that inflation would be a help, not a hindrance.
Modern finance has succeeded in creating a default dynamic of such stupefying complexity that it defies standard approaches to debt workouts.
Securitization, structured finance, and other innovations have so interwoven the financial system’s various players that it is essentially impossible to restructure one financial institution at a time.
System-wide solutions are needed.
Moderate inflation in the short run – say, 6% for two years – would not clear the books.
But it would significantly ameliorate the problems, making other steps less costly and more effective.
True, once the inflation genie is let out of the bottle, it could take several years to put it back in.
No one wants to relive the anti-inflation fights of the 1980’s and 1990’s.
But right now, the global economy is teetering on the precipice of disaster.
We already have a full-blown global recession. Unless governments get ahead of the problem, we risk a severe worldwide downturn unlike anything we have seen since the 1930’s.
The necessary policy actions involve aggressive macroeconomic stimulus.
Fiscal policy should ideally focus on tax cuts and infrastructure spending.
Central banks are already cutting interest rates left and right.
Policy interest rates around the world are likely to head toward zero; the United States and Japan are already there.
The United Kingdom and the euro zone will eventually decide to go most of the way.
Steps must also be taken to recapitalize and re-regulate the financial system.
Huge risks will remain as long as the financial system remains on government respirators, as is effectively the case in the US, UK, the euro zone, and many other countries today.&nbsp;
Most of the world’s largest banks are essentially insolvent, and depend on continuing government aid and loans to keep them afloat.
Many banks have already acknowledged their open-ended losses in residential mortgages.
As the recession deepens, however, bank balance sheets will be hammered further by a wave of defaults in commercial real estate, credit cards, private equity, and hedge funds.
As governments try to avoid outright nationalization of banks, they will find themselves being forced to carry out second and third recapitalizations.
Even the extravagant bailout of financial giant Citigroup, in which the US government has poured in $45 billion of capital and backstopped losses on over $300 billion in bad loans, may ultimately prove inadequate.&nbsp;
When one looks across the landscape of remaining problems, including the multi-trillion-dollar credit default swap market, it is clear that the hole in the financial system is too big to be filled entirely by taxpayer dollars.&nbsp;
Certainly, a key part of the solution is to allow more banks to fail, ensuring that depositors are paid off in full, but not necessarily debt holders.
But this route is going to be costly and painful.
That brings us back to the inflation option.
In addition to tempering debt problems, a short burst of moderate inflation would reduce the real (inflation-adjusted) value of residential real estate, making it easier for that market to stabilize.
Absent significant inflation, nominal house prices probably need to fall another 15% in the US, and more in Spain, the UK, and many other countries.
If inflation rises, nominal house prices don’t need to fall as much.
Of course, given the ongoing recession, it may not be so easy for central banks to achieve any inflation at all right now.
Indeed, it seems like avoiding sustained deflation , or falling prices, is all they can manage.
Fortunately, creating inflation is not rocket science.
All central banks need to do is to keep printing money to buy up government debt.
The main risk is that inflation could overshoot, landing at 20 or 30% instead of 5-6%.
Indeed, fear of overshooting paralyzed the Bank of Japan for a decade.
But this problem is easily negotiated.
With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.
It will take every tool in the box to fix today’s once-in-a-century financial crisis.
Fear of inflation, when viewed in the context of a possible global depression, is like worrying about getting the measles when one is in danger of getting the plague.
Inflation or Deflation?
CAMBRIDGE – The investors that I talk to these days are not sure whether to worry more about future inflation in the United States or about future deflation.
The good news is that the answer – for at least the next few years – is that investors should worry about “neither.”
America’s high rate of unemployment and the low rates of capacity utilization imply that there is little upward pressure on wages and prices in the US.
And the recent rise in the value of the dollar relative to the euro and the British pound helps by reducing import costs.
Those who emphasize the risk of inflation often point to America’s enormous budget deficit.
The Congressional Budget Office projects that the country’s fiscal deficit will average 5% of GDP for the rest of the decade, driving government debt to 90% of GDP, from less than 60% of GDP in 2009.
While those large fiscal deficits will be a major problem for the US economy if nothing is done to bring them down, they need not be inflationary.
Sustained budget deficits crowd out private investment, push up long-term real interest rates, and increase the burden on future taxpayers.
But they do not cause inflation unless they lead to excess demand for goods and labor.
The last time the US faced large budget deficits, in the early 1980’s, inflation declined sharply because of a tight monetary policy.
Europe and Japan now have both large fiscal deficits and low inflation.
The inflation pessimists worry that the government will actually choose a policy of faster price growth to reduce the real value of the government debt.
But such a strategy can work only in countries where the duration of the government’s debt is long and the interest rate on that debt is fixed.
That is because an increase in the inflation rate causes interest rates on new debt to rise by an equal amount.
The resulting higher interest payments add to the national debt, offsetting the erosion of the real value of the existing debt caused by the higher inflation.
In the current situation, the US cannot reduce the real value of its government debt significantly by indulging in a bout of inflation, because the average maturity on existing debt is very short – only about four years.
And the projected fiscal deficits imply that the additional debt that will be issued during the next decade will be as large as the total stock of debt today.
So raising inflation is no cure for the government’s current debt or future deficits.
Those who worry about deflation note that the US consumer price index has not increased at all in the past three months.
Why won’t that continue and feed on itself – as it has in Japan – as consumers delay spending in anticipation of even lower prices in the future?
And doesn’t Japan’s persistent deflation since the early 1990’s also show that, once it begins, deflation cannot be reversed by a policy of easy money or fiscal deficits?
But the recent weakness in US prices is very different from the situation that prevails in Japan.
Zero inflation for the past three months has been a one-time event driven by the fall in energy prices.
The other broad components of the consumer price index have increased in recent months, and the consumer price index is up about two percentage points over the past 12 months.
Moreover, surveys of consumer expectations show that US households expect prices to rise at more than 2% in both the coming year and the more distant future.
That expected inflation rate is consistent with the difference in interest rates between ordinary US government bonds and Treasury Inflation Protected Securities.
With such expectations, consumers have no reason to put off purchases.
A second reason for relatively low inflation in recent years has been a temporary fall in the cost of production.
As firms shed workers during the economic downturn, output fell more slowly.
The resulting rise in output per worker, together with slow wage growth, reduced unit labor costs.
That process is now coming to an end as employment rises.
So the good news is that the possibility of significant inflation or deflation during the next few years is low on the list of economic risks faced by the US economy and by financial investors.
But, while inflation is very likely to remain low for the next few years, I am puzzled that bond prices show that investors apparently expect inflation to remain low for ten years and beyond, and that they also do not require higher interest rates as compensation for the risk that the fiscal deficit will cause real interest rates to rise in the future.
The Deflation Bogeyman
CAMBRIDGE – The world's major central banks are currently obsessed with the goal of raising their national inflation rates to their common target of about 2% per year.
This is true for the United States, where the annual inflation rate was -0.1% over the past 12 months; for the United Kingdom, where the most recent data show 0.3% price growth; and for the eurozone, where consumer prices fell 0.6%.
But is this a real problem?
The sharp decline in energy prices is the primary reason for the recent drop in the inflation rate.
In the US, the core inflation rate (which strips out changes in volatile energy and food prices) was 1.6% over the last 12 months.
Moreover, the US Federal Reserve, the Bank of England, and the European Central Bank understand that even if energy prices do not rise in the coming year, a stable price level for oil and other forms of energy will cause the inflation rate to rise.
In the US, the inflation rate has also been depressed by the rise in the value of the dollar relative to the euro and other currencies, which has caused import prices to decline.
This, too, is a “level effect," implying that the inflation rate will rise once the dollar's exchange rate stops appreciating.
But, despite this understanding, the major central banks continue to maintain extremely low interest rates as a way to increase demand and, with it, the rate of inflation.
They are doing this by promising to keep short-term rates low; maintaining large portfolios of private and government bonds; and, in Europe and Japan, continuing to engage in large-scale asset purchases.
The central bankers justify their concern about low inflation by arguing that a negative demand shock could shift their economies into a period of prolonged deflation, in which the overall price level declines year after year.
That would have two adverse effects on aggregate demand and employment.
First, the falling price level would raise the real value of the debts that households and firms owe, making them poorer and reducing their willingness to spend.
Second, negative inflation means that real interest rates rise, because central banks cannot lower the nominal interest rate below zero.
Higher real interest rates, in turn, depress business investment and residential construction.
In theory, by depressing aggregate demand, the combination of increased real debt and higher real interest rates could lead to further price declines, leading to even larger negative inflation rates.
As a result, the real interest rate would rise further, pushing the economy deeper into a downward spiral of falling prices and declining demand.
Fortunately, we have relatively little experience with deflation to test the downward-spiral theory.
The most widely cited example of a deflationary economy is Japan.
But Japan has experienced a low rate of inflation and some sustained short periods of deflation without ever producing a downward price spiral.
Japan's inflation rate fell from nearly 8% in 1980 to zero in 1987.
It then stayed above zero until 1995, after which it remained low but above zero until 1999, and then varied between zero and -1.7% until 2012.
Moreover, low inflation and periods of deflation did not prevent real incomes from rising in Japan.
From 1999 to 2013, real per capita GDP rose at an annual rate of about 1% (which reflected a more modest rise of real GDP and an actual decline in population).
Why, then, are so many central bankers so worried about low inflation rates?
One possible explanation is that they are concerned about the loss of credibility implied by setting an inflation target of 2% and then failing to come close to it year after year. Another possibility is that the world's major central banks are actually more concerned about real growth and employment, and are using low inflation rates as an excuse to maintain exceptionally generous monetary conditions.
And yet a third explanation is that central bankers want to keep interest rates low in order to reduce the budget cost of large government debts.
None of this might matter were it not for the fact that extremely low interest rates have fueled increased risk-taking by borrowers and yield-hungry lenders.
The result has been a massive mispricing of financial assets.
And that has created a growing risk of serious adverse effects on the real economy when monetary policy normalizes and asset prices correct.
The Information Revolution Gets Political
NEW DELHI – The second anniversary of the “Arab Spring” in Egypt was marked by riots in Tahrir Square that made many observers fear that their optimistic projections in 2011 had been dashed.
Part of the problem is that expectations had been distorted by a metaphor that described events in short-run terms.
If, instead of “Arab Spring,” we had spoken of “Arab revolutions,” we might have had more realistic expectations.
Revolutions unfold over decades, not seasons or years.
Consider the French Revolution, which began in 1789.
Who would have predicted that within a decade, an obscure Corsican soldier would lead French armies to the banks of the Nile, or that the Napoleonic Wars would disrupt Europe until 1815?
If we think of the Arab revolutions, there are many surprises yet to come.
So far, most Arab monarchies have had enough legitimacy, money, and force to survive the waves of popular revolt that have brought down secular republican autocrats like Egypt’s Hosni Mubarak and Libya’s Muammar el-Qaddafi, but we are only two years into the revolutionary process.
Beneath the Arab political revolutions lies a deeper and longer process of radical change that is sometimes called the information revolution.
We cannot yet fully grasp its implications, but it is fundamentally transforming the nature of power in the twenty-first century, in which all states exist in an environment that even the most powerful authorities cannot control as they did in the past.
Governments have always worried about the flow and control of information, and our age is hardly the first to be strongly affected by dramatic changes in information technology.
Gutenberg’s printing press was important to the origins of the Protestant Reformation and the ensuing wars in Europe.
Today, however, a much larger part of the population, both within and among countries, has access to the power that comes from information.
The current global revolution is based on rapid technological advances that have dramatically decreased the cost of creating, finding, and transmitting information.
Computing power doubled roughly every 18 months for 30 years, and, by the beginning of the twenty-first century, it cost one-thousandth of what it did in the early 1970’s.
If the price of automobiles had fallen as quickly as the price of semiconductors, a car today would cost $5.
As recently as the 1980’s, phone calls over copper wire could carry only one page of information per second; today, a thin strand of optical fiber can transmit 90,000 volumes in a second.
In 1980, a gigabyte of data storage occupied a room; now, 200 gigabytes of storage fits in your shirt pocket.
Even more crucial has been the enormous drop in the cost of transmitting information, which reduces barriers to entry.
As computing power has become cheaper and computers have shrunk to the size of smart phones and other portable devices, the decentralizing effects have been dramatic.
Power over information is much more widely distributed today than even a few decades ago.
As a result, world politics is no longer the sole province of governments. Individuals and private organizations – including WikiLeaks, multinational corporations, NGOs, terrorists, or spontaneous social movements – have been empowered to play a direct role.
The spread of information means that informal networks are undercutting the monopoly of traditional bureaucracy, with all governments less able to control their agendas.
Political leaders enjoy fewer degrees of freedom before they must respond to events, and must then communicate not only with other governments, but with civil society as well.
But it would be a mistake to “over-learn” the lessons that the Arab revolutions have taught about information, technology, and power.
While the information revolution could, in principle, reduce large states’ power and increase that of small states and non-state actors, politics and power are more complex than such technological determinism implies.
In the middle of the twentieth century, people feared that computers and new means of communications would create the kind of central governmental control dramatized in George Orwell’s 1984.
And, indeed, authoritarian governments in China, Saudi Arabia, and elsewhere have used the new technologies to try to control information.
Ironically for cyber-utopians, the electronic trails created by social networks like Twitter and Facebook sometimes make the job of the secret police easier.
After its initial embarrassment by Twitter in 2009, the Iranian government was able to suppress the country’s “green” movement in 2010.
Similarly, while the “great firewall of China” is far from perfect, the government has managed thus far to cope, even as the Internet has burgeoned in the country.
In other words, some aspects of the information revolution help the small, but some help the already large and powerful.
Size still matters.
While a hacker and a government can both create information and exploit the Internet, it matters for many purposes that large governments can deploy tens of thousands of trained people and have access to vast computing power to crack codes or intrude into other organizations.
Likewise, while it is now cheap to disseminate existing information, the collection and production of new information often requires major investment, and, in many competitive situations, new information matters most.
Intelligence collection is a good example, and the elaborate Stuxnet worm that disabled Iranian nuclear centrifuges seems to have been a government creation.
Governments and large states still have more resources than information-empowered private actors, but the stage on which they play is more crowded.
How will the ensuing drama unfold?
Who will win, and who will lose?
It will take decades, not a single season, to answer such questions.
As events in Egypt and elsewhere have shown, we are only just beginning to comprehend the effects of the information revolution on power in this century.
In Marx’s Shadow Again
A century and a half ago, Karl Marx both gloomily and exuberantly predicted that the modern capitalism he saw evolving would prove incapable of producing an acceptable distribution of income.
Wealth would grow, Marx argued, but would benefit the few, not the many: the forest of upraised arms looking for work would grow thicker and thicker, while the arms themselves would grow thinner and thinner.
This injustice would provoke revolt and revolution, producing a new, better, fairer, more prosperous, and far more egalitarian system.
Ever since, mainstream economists have earned their bread and butter patiently explaining why Marx was wrong.
Yes, the initial disequilibrium shock of the industrial revolution was and is associated with rapidly rising inequality as opportunities are opened to aggressiveness and enterprise, and as the market prices commanded by key scarce skills rise sky-high.
But this was – or was supposed to be – transient.
A technologically stagnant agricultural society is bound to be an extremely unequal one: by force and fraud, the upper class push the peasants’ standards of living down to subsistence and take the surplus as the rent on the land they control.
The high rents paid to noble landlords increase their wealth and power by giving them the resources to keep the peasants down and widen the surplus – for, after all, they cannot make more land.
By contrast, mainstream economists argued, a technologically advancing industrial society was bound to be different.
First, the key resources that command high prices and thus produce wealth are not fixed, like land, but are variable: the skills of craft workers and engineers, the energy and experience of entrepreneurs, and machines and buildings are all things that can be multiplied.
As a result, high prices for scarce resources lead not to zero- or negative-sum political games of transfer but to positive-sum economic games of training more craft workers and engineers, mentoring more entrepreneurs and managers, and investing in more machines and buildings.
Second, democratic politics balances the market.
Government educates and invests, increasing the supply and reducing the premium earned by skilled workers, and lowering the rate of return on physical capital.
It also provides social insurance by taxing the prosperous and redistributing benefits to the less fortunate.
Economist Simon Kuznets proposed the existence of a sharp rise in inequality upon industrialization, followed by a decline to social-democratic levels.
But, over the past generation, confidence in the “Kuznets curve” has faded.
Social-democratic governments have been on the defensive against those who claim that redistributing wealth exacts too high a cost on economic growth, and unable to convince voters to fund yet another massive expansion of higher education.
On the private supply side, higher returns have not called forth more investment in people.
America’s college-to-high-school wage premium may now be 100%, yet this generation of white, native-born American males may well wind up getting no more education than their immediate predecessors.
And increasing rewards for those at the increasingly sharp peak of the income distribution have not called forth enough enterprising market competition to erode that peak.
The consequence has been a loss of morale among those of us who trusted market forces and social-democratic governments to prove Marx wrong about income distribution in the long run – and a search for new and different tools of economic management.
Increasingly, pillars of the establishment are sounding like shrill critics.
Consider Martin Wolf, a columnist at The Financial Times .
Wolf recently excoriated the world’s big banks as an industry with an extraordinary “talent for privatising gains and socialising losses... get[ting]... self-righteously angry when public officials... fail to come at once to their rescue when they get into (well-deserved) trouble.... [T]he conflicts of interest created by large financial institutions are far harder to manage than in any other industry.”
Wolf then announced his “fear that the combination of the fragility of the financial system with the huge rewards it generates for insiders will destroy something even more important – the political legitimacy of the market economy itself...”
For Wolf, the solution is to require that such bankers receive their pay in installments over the decade after which they have done their work.
That way, shareholders and investors could properly judge whether the advice given and the investments made were in fact sound in the long run rather than just reflecting the enthusiasm of the moment.
But Wolf’s solution is not enough, for the problem is not confined to high finance.
The problem is a broader failure of market competition to give rise to alternative providers and underbid the fortunes demanded for their work by our current generation of mercantile princes.
Innocent Bystanders
SANTIAGO – Take a taxi in São Paulo nowadays and you will experience the maddening traffic and untidy streets of an emerging-country metropolis.
But when the time comes to pay for the ride, you may feel like you are in Boston, Luxemburg, or Zurich: the value of the Brazilian real, like the currencies of many emerging-market countries, is high – and could go higher.
Strong currencies make strong countries, a senior United States policymaker used to say.
Many emerging-country exporters, struggling to retain customers in the wobbly US and European markets, feel otherwise.
For decades, developing countries dreamed of a nirvana of sky-high commodity prices and rock-bottom international interest rates.
But perhaps finance ministers in Lima, Bogota, Pretoria, or Jakarta should have been more careful about what they wished for.
The problem?
An invasion of short-term capital flows fleeing the slow-growth, low-interest-rate advanced countries.
Meeting in Calgary last month, the Inter-American Development Bank reported that $266 billion entered Latin America’s seven largest economies in 2010, compared to less than $50 billion a year, on average, between 2000 and 2005.
And while only 37% of inflows in 2006 were “hot money” that can leave at a moment’s notice, last year such inflows accounted for 69% of the total.
So, what is going on?
Emerging countries in Latin America, East Asia, Eastern Europe, and Africa are innocent bystanders in the tussle between the US and China over currencies and trade imbalances.
And the bystanders are absorbing some of the hardest blows.
For a decade now, the world economy has suffered from tremendous global imbalances: massive external surpluses in countries like China, Japan, Germany, Switzerland, and the oil producers, matched by equally large external deficits in the US, the United Kingdom, Spain, and others.
The imbalances were reduced temporarily as the global financial crisis caused private demand to drop in the US, the UK, and elsewhere.
But, starting in 2010, the imbalances returned, and, according to the International Monetary Fund’s recently released World Economic Outlook, they will not shrink between now and 2016.
G-20 communiqués have repeatedly pledged to secure “adjustment” and “rebalancing” in the world economy, but those promises have come to nothing.
Still-troubled financial systems and huge fiscal deficits are keeping the West’s deficit countries (especially the US) from expanding domestic demand.
And an unwillingness to trade away export-led growth is having the same effect on the East’s surplus countries (especially China).
As a result, emerging countries, according to the IMF, have been pressed to carry “a disproportionate burden of demand rebalancing since the crisis.”
Countries running surpluses accumulate massive stocks of foreign assets, and those resources have to be invested somewhere.
Before the crisis, a substantial amount of that money was invested in US, Spanish, or Irish real estate.
Today, that market is dead and the money must go elsewhere.
Europe, gripped by a tremendous banking and debt crisis, is not an attractive destination, and loose monetary policy in the US has produced ultra-low bond yields there.
As a result, many emerging countries, with their higher interest rates and promising growth prospects, have become irresistibly attractive to investors.
After recent events in Tunisia, Egypt, and Libya, Wall Street analysts are waxing somewhat less optimistically about political stability in emerging countries.
And a flat 2011 performance in some Latin American and Asian equity markets – following tremendous runs in 2010 – has taken a bit of sheen off the emerging-market investment fad.
But the money keeps coming.
This dollar invasion is making macroeconomic management in emerging countries even more challenging than usual.
If high commodity prices are expected to persist, then some strengthening of currencies is both desirable and inevitable.
But a thin line separates orderly adjustment to changed conditions from market over-reaction.
And sensible people in many emerging-country capitals are wondering whether we have crossed that line.
Loss of export competitiveness as a result of excessively strong currencies is not the only problem.
Massive capital inflows caused real-estate and stock-market bubbles in the US and parts of Europe.
Today, some policymakers in Latin America, worried that the same thing could happen to their countries, are casting about for policy tools to prevent it.
As a result, the US Federal Reserve’s policy of so-called “quantitative easing” is going south, where it takes the form of foreign-exchange intervention.
If rich-country central banks can buy long term bonds, then emerging-country central banks can buy dollar-denominated bonds.
Even countries that practice inflation targeting and have otherwise vowed to let their exchange rates float – Brazil, Colombia, Peru, and Chile, for example – have done it, and in large quantities.
Expect macroprudential policies to go south, too – and to be redefined in the process.
If buying dollars is not sufficient to stem the appreciation tide, regulators in emerging economies will erect an array of other barriers to keep money out.
None of these policies is without costs.
They are second-best local-policy responses to an ineffective mechanism for international adjustment (or non-adjustment).
A better system to rebalance the world economy is as necessary as it is unlikely.
All we can look forward to is the next G-20 communiqué.
Innovation and Philosophy
MIAMI – Is it possible to learn to innovate?
Is innovation something that can be taught at school?
After reading literature by some of the world’s leading experts on innovation – Clayton Christensen, Henry Chesbrough, John Kao, James Andrew, and Harold Sirkin – I was fascinated, but, alas, also frustrated. Innovation is the production of new knowledge that generates value.
It is about fresh ideas that give rise to novel products, services, and processes, new management methods, and original designs and inventions that generate greater profits for firms, regions and countries.
Most experts agree that there are no ready-made formulas or recipes for how to innovate.
But is it possible to create the appropriate conditions – to filter ideas and execute plans, and thus to facilitate creativity – under which innovation may flourish?
Managers can perhaps be taught how to nurture innovation by creating an environment that stimulates and encourages individual freedom, creativity, and constructive criticism. Innovation is more likely where it is possible to defy restrictions and authority; where individuals and groups are allowed to ignore conventions; where a mixing of ideas, people, and cultures is permitted and stimulated; and where management techniques enable firms and industries to acknowledge, identify, and learn from errors as quickly as possible.
Above all, innovation will blossom wherever it is recognized that innovation must be open to the physical world and to the world of ideas, and that, because no firm, no process, and no invention has a guaranteed future, everyone should be prepared for uncertainty.
Innovation may increase even more when firms and managers realize that even the most successful firms – those that “have done everything right” – may languish and disappear.
In brief, innovation will only truly take off with the understanding that the world is rapidly changing, extremely dynamic and volatile, and that the future is unpredictable.
These are great ideas, but as I went through these texts I found them to be rather familiar sounding – I had the feeling that somehow and somewhere I had already studied them.
I soon realized that these clever ideas had already been developed by the theory of knowledge and the philosophy of science.
Indeed, innovation is simply a subset of scientific knowledge.
According to the school of rational criticism, when existing theories can neither explain nor solve current problems, the formulation of new hypotheses – and thus new scientific knowledge – is, like innovation, more likely to flourish when constructive criticism is openly allowed and encouraged.
Here, too, the formulation of new ideas and hypotheses quite often takes place at a far remove from the authority of experts, because experts, like business managers, often become prisoners of their specializations and backgrounds.
Scientific knowledge is more likely to emerge in environments where it is accepted that there are no prescribed or logical methods for formulating hypotheses; that they may be the result of sudden inspiration; or that they may come from dreams, from other disciplines, or from people that belong to different professions or have different backgrounds.
Once a plausible hypothesis is formulated, it must be tested against all existing theories and against all available experience and information.
It has to be subject to open criticism from all directions, and only if it survives these tests and criticisms may it be adopted as tentative and conjectural new knowledge.
Science and knowledge are made up not of winners, but of survivors of continuous and systematic efforts to refute.
Theories are never certain and must always be prepared for an uncertain future.
Or, as Karl Popper put it, truth is never definitive and error is always probable.
No book on innovation that I have read makes the connection between innovation and the theory of knowledge and philosophy of science.
This is unfortunate, because the theories of innovation may be subject to all the questions, conjectures, and answers that these disciplines have developed with respect to scientific knowledge.
Should business administration students and future business managers immerse themselves in the philosophy of science, they would not only become more knowledgeable and have greater respect for science; they might also become more rigorous and more competent, have greater respect for other disciplines, and be more humble.
At the same time, philosophy professors and students might also profit from the questions that challenge firms and industries.
They might broaden their scope and find that they, too, can contribute to the productivity of firms, industries, and the economy in general.
But it is past time that some basic principles in the theory of knowledge and of philosophy of science be introduced into schools of business administration.
Silicon Valley or Demand Mountain?
BELLEVUE, WASHINGTON – Everyone wants to know how to build the next Silicon Valley: an innovation hub that draws talent and capital, and that creates jobs, companies, and whole new industries.
Developed-country governments scramble to subsidize technology that could be the Next Big Thing.
Emerging-market policymakers hope that incentives like tax breaks and free land will induce innovators to settle and prosper there.
But most of these well-meaning schemes are missing an essential ingredient: demand.
Demand for innovation in specific areas of technology has been the common force behind all high-tech hot spots, as well as the most important inventions.
Technological breakthroughs such as antibiotics and cars responded to a compelling need felt by a huge number of consumers.
Government projects such as the United States’ Apollo program – intended to put a man on the moon – drove demand for more basic technologies (which are simply inventions that no one has asked for yet).
Silicon Valley itself was built on demand.
The US Department of Defense put up tens of billions of dollars in contracts for microelectronics, a commitment that both paid down innovators’ risk and created an infrastructure that would support the growth of start-ups.
All demand is not created equal, though, and it is instructive to examine the differences.
Consumer or market-driven demand – the kind most of us think of when we hear the word – is far less predictable, and therefore much riskier, than state-sponsored demand of the sort that landed a man on the moon.
Companies that depend solely on their products’ commercial appeal are limited in the kinds of innovations that they can safely introduce, because if one of their products fails in the marketplace, they may not survive to build another one.
This is especially true of start-ups and small companies – the very players that everyone hopes will show up in the next-wave of Silicon Valleys.
Fortunately, by sponsoring long-term, targeted initiatives, governments can stimulate more predictable demand.
The Apollo program gave innovators clearly defined goals and a roadmap for getting there: first put animals in orbit, then put people there, then send probes to the moon, then send people there.
Equally important, the government offered rewards for interim progress, not just ultimate success.
Putting a monkey in space may not have been the most exciting achievement, but the government was paying for it, so it happened.
A smart government creates guaranteed demand not only for the solution itself, but for the steps along the way.
Coupling intermediate technical milestones with guaranteed incentives enables companies to focus on problems that might take ten years or more to solve.
It also motivates innovators from a variety of industries to take on complex problems that must be addressed by more than one kind of invention.
The US Defense Department’s microelectronics initiative required not only new materials and circuits, but also new methods of fabrication.
Because of the reward structure, these efforts could be coordinated, rather than pursued in isolation.
Unlike market-driven demand, which too often results in a winner-takes-all dynamic, state-sponsored demand creates an environment in which multiple solutions to technical problems can proliferate and coexist.
The pioneers of microelectronics tried many strategies to supplant vacuum tubes, and they delivered a host of semiconductors and chip designs: germanium, silicon, aluminum, gallium arsenide, PNP, NPN, CMOS, and so on.
Some of these research efforts were never implemented, but many found their way into specialized devices.
The diversity of options allowed widespread adoption, paving the way for the digital revolution.
As with the microelectronics program, government incentives don’t have to line the road all the way to commercial success.
At some point, companies will be ready to sell products, and market demand can take over.
The US Department of Defense was the only customer for integrated circuits in 1962, but by the end of the decade consumers were buying transistor radios and pocket calculators in droves.
Likewise, state-sponsored demand should not take the form of subsidies to specific technologies or companies; the government has no business gambling taxpayer money on particular ventures.
Assuming that risk is the job of venture capitalists and others in finance, not public officials.
But there is little risk in offering a contract for a job well done: there is no payout if the problem remains unsolved.
And those payouts are modest compared to the research and development efforts they stimulate.
A program offering rewards of $1-5 billion in contracts or deployment commitments can generate many times that value in private-sector R&amp;D. Innovators and their investors are willing to bet big on these opportunities, because they know that the eventual reward in revenue from a global customer base will far exceed the initial investment.
That makes state-sponsored demand a very efficient mechanism for generating innovation.
Because of the multiplier effect, small governments and states, and even large cities, can successfully sponsor the kind of demand that fosters a world-class innovation epicenter.
Certain Scandinavian countries, Chinese provinces, and the city-state of Singapore, for example, are ideally positioned to try this approach.
Some years ago, I calculated how many units of product need to be sold to launch a technology.
The number is actually quite modest: If you can move between 100,000 and one million units of a disruptive product, you can establish the technology standards for that category and in time become the global leader of a new industry.
Government sponsorship ensures that a certain number of people will adopt your product.
At the start, it need not be that many.
The economic planners and policymakers who are chasing Silicon Valley’s taillights are learning that they cannot always replicate the entrepreneurial culture and finance mechanisms that flourish there now.
But they have forgotten how it all started: guaranteed demand, which stimulates the most ambitious kind of innovation.
The lesson is a simple one: Don’t try to build another Silicon Valley.
Instead, build a Demand Mountain, and the innovators will come.
In Praise of Euroskepticism
BRUSSELS &#45;&#45;
The EU has no coherent strategy on many issues.
It has only sketchy economic policies toward Russia; ambitions, but no game plan, to become a player in the Middle East; and, despite its original leadership on the Kyoto Protocol, no successor program on climate change.
And the biggest question of all – how to engage with China, India, and other giants of the future – has received virtually no attention from EU-level policymakers.
These issues require attention now, and an integral part of the EU’s search for new global strategies should be to invite, rather than avoid, criticism of its activities.
If the EU is to lift its gaze from its navel to the horizon, it must reconcile the very different views that exist across Europe of its place in the world and its own best interests.
That means engaging with those shades of political opinion that the European Commission and the European Parliament consider “Euroskeptical.”
The counter-pressure, of course, is that EU officialdom feels unloved and unappreciated.
There is an almost embattled culture among many senior officials, who fear that fanning the flames of dissent among Europe’s voters could one day knock European unity off course.
Euroskepticism represents everything the Eurocrats dislike.
They worry that politicians and journalists who oppose their strategies for closer political and economic union could yet tip the balance of public opinion against the EU.
Euroskeptic politicians elected to the European Parliament are often treated with the disdain that true believers reserve for the infidel.
Yet it is ludicrous to think that Euroskeptics represent a silent majority that could rise up and destroy the EU. Popular support for the European project has barely faltered over the last 25 years, and has even begun to strengthen of late.
At the beginning of the 1980’s, when Europe was faltering and the media catchword was “Eurosclerosis,” 50% of people polled for the Eurobarometer surveys viewed membership as positive for their country.
About 19% said its effects were negative, and the rest didn’t know.
Today, overall support for the EU stands at 57%, and the share of people unhappy with it has dropped to 15%.
There are now no EU countries where Euroskeptics are in the majority, and the widespread impression that citizens in Western and Eastern Europe alike are turning their backs on the EU is wrong. The reality is that even though voters may find the EU remote, most appreciate the need for Europe to unite in a world where China, India, and other fast-developing countries are set to challenge it.
Reassured by this groundswell of support, the Eurocrats should be fostering a much more pluralistic approach to EU policymaking and debate.
The Commission should be organizing public debates that give equal prominence to dissenting views.
Eurocrats must learn that Euroskepticism is fundamentally healthy, because it invites closer examination of the policy options open to Europe, and thus increases the involvement of ordinary people in the EU’s policymaking process.
And greater involvement quickly leads to better understanding of the issues at stake, and the reasons why some policies have been adopted that challenge or even override the sovereign powers of individual countries.
For half a century, Europe’s integrationists have sought unquestioning acceptance of their efforts.
That demand must be abandoned.
It will probably take several generations before a workable EU-wide political system emerges, but the first step is for the EU to encourage people to have their say, however uncomfortable that may be.
In Praise of Parasites
In 1933 primatologists discovered a red-and-black colored monkey living in the canopy of West Africa's forests, which they named Miss Waldron's Red Colobus.
Recently it was pronounced extinct - the first documented extinction of a primate since the 1700s.
After searching for six years, a team of scientists have not been able to find any sign of the monkey, leading them to conclude that heavy logging in the region killed off the last member of the species.
But when Miss Waldron's Red Colobus vanished, it did not go alone.
It also took with it into oblivion an unknown number of parasite species that made the monkey their home - parasites that might have included viruses, bacteria, protozoans, fungi, tapeworms, and other gruesome creatures.
We may be in the process of causing mass extinctions the likes of which the planet has not seen since an asteroid crashed into earth 65 million years ago.
Surprisingly, it is parasites that will disappear in the greatest numbers, because parasites represent the vast majority of Earth's biodiversity.
Although researchers are divided over how many species exist - estimates vary from 5 to 30 million - it appears that four out of every five species is a parasite of some sort.
It can be difficult to grasp the fact that we live in an overwhelmingly parasitic world.
After all, we typically think of parasites with fear and loathing.
They are things to be eradicated or at the very least not discussed in polite company.
But parasites are nature's great success story.
They have been around for billions of years, and have evolved into a bizarre panoply of forms - nematodes that can curl up in a single muscle cell, crustaceans that clamp onto the eyes of Greenland sharks, flatworms that live in the bladders of desert toads buried in the sand for 11 months out of every year.
Parasites have evolved into remarkably sophisticated creatures along the way.
They can biochemically castrate their hosts, so that they don't waste energy making eggs or finding mates when they could be feeding the parasites.
Parasites can even control the behavior of their hosts to ensure their own reproductive success.
Many species of parasites, for example, need to live inside two or more species to complete their life cycle.
Often the first host is prey for the second, and so the parasites helps the predators catch their prey.
Toxoplasma, a protozoan that starts out in rats and other mammals, makes cats its final host.
A rat infected with Toxoplasma is perfectly healthy, but it loses its instinctive fear when it smells a cat.
By altering the rat's neurochemistry, Toxoplasma may make its hosts easier targets.
Parasites may not win anyone's love, but they should win our respect.
So when we take strides to preserve biodiversity, we should not forget the parasites that live inside endangered hosts, like the ones that lived in Miss Waldron's Red Colobus.
For there are practical reasons to preserve biodiversity, and they apply to parasites just as much as to their hosts.
Many of the most effective drugs, for example, were originally discovered in plants or animals.
Parasites are masters of biotechnology.
Consider hookworms.
These nasty creatures dig their fangs into the linings of the intestines in order to drink blood and lacerated flesh.
Normally, clots would form in the wound, making it impossible for the hookworm to feed.
But the hookworm has evolved the ability to produce a molecule that elegantly jams up the cascade of chemical reactions that create clots.
Biotech researchers are so impressed by the hookworm that they've synthesized the molecule and are testing it as a blood-thinning medicine that can be used during surgery.
The hookworm is but one species out of millions of parasites; other parasites may produce chemicals that can be used to stop organ rejection or to alter the brain.
If they disappear into extinction, they will take their secrets with them.
The contempt that many people have for parasites hides a profound uneasiness about our own role in nature.
We pride ourselves as the masters of nature, with the beasts of land and sea at our disposal.
Yet parasites can sneak past our defenses and turn our bodies into their own playgrounds.
The fact that we will always be part of the natural world is, in some ways horrifying.
That horror is what makes parasites such a great device for science fiction movies such as Alien.
But parasites make us uneasy in another way. When you look at an aerial photograph of housing developments spreading into prairies or logging operations obliterating rain forests, it's hard to avoid entertaining a frightening possibility: we are parasites.
Our host is the biosphere, which we exploit and consume for our own advantage, and to our host's detriment.
There may be something to this metaphor, but the lesson I take from it is not what others might.
To be called a parasite is not necessarily a bad thing.
Parasites have been incredibly successful over the past four billion years of life's history.
If we are in fact parasites, we are not very good ones.
Parasites make very careful use of their hosts, because killing them off too quickly will leave them without a home.
Unlike other parasites, we have only one host, which means that we must be especially careful.
Judging from the state of the world's rain forests, wetlands, and coral reefs, we're not.
We should learn from the masters.
In Regulation We Trust?
LONDON – From next year, on swearing allegiance to the Queen, all members of Britain’s House of Lords – and I am one of them – will be required to sign a written commitment to honesty and integrity.
Unexceptionable principles, one might say.
But, until recently, it was assumed that persons appointed to advise the sovereign were already of sufficient honesty and integrity to do so.
They were assumed to be recruited from groups with internalized codes of honor.
No more.
All peers must now publicly promise to be honest.
Only one had the guts to stand up and say that he found the new procedure degrading.
The trigger for imposing this code of conduct was a scandal over MPs’ expenses, which rocked Britain’s political class for much of 2009.
It was a scandal with deep historical roots.
Until 1910, British legislators were unpaid.
Payments were then started, but kept below the professional level, on the ground that members of parliament ought to be willing to make some personal sacrifice in the service of their country.
During the inflationary 1970’s, a byzantine system of “allowances” was instituted to supplement lagging parliamentary salaries.
Parliamentarians were allowed to claim expenses for the upkeep of properties connected with their official duties.
Supervision was lax, and, human nature being what it is, all sorts of minor abuses crept in.
In May of this year, London’s Daily Telegraph began publishing details of MPs’ expenses claims.
In an aggressive campaign of “naming and shaming,” the paper showed how MPs had been exploiting loose regulation to their advantage.
Most offenses were trivial, and only a few were illegal.
Upwardly mobile MPs from the ruling Labour Party claimed the trappings of their newly-acquired middle-class status: second homes, mock-tudor beams, and plasma screen televisions.
By contrast, the rich grandees of the Conservative Party claimed reimbursement for such things as repairs to swimming pool boilers, moat cleaning, and hanging chandeliers.
Revelations about such behavior has already forced over 100 legislators out of public life.
Personal honor can no longer be relied upon to keep legislators straight.
The expenses scandal is a symptom of a society in which money has replaced honor.
The new assumption is that individuals will act not honorably, but gainfully: they will never miss an opportunity to turn a profit.
In a money-obsessed society, the only way to restrain this proclivity is by externally imposed sanctions.
The older language of trust has been replaced by a new language of “accountability” and “transparency.”
People must be regulated into good behavior.
The market has been insidiously creeping into many spheres of society traditionally governed by non-market norms.
Duties of government, like fighting wars, educating children, or punishing criminals, are being outsourced to private companies.
The United States employs over 100,000 private “military contractors” in Iraq.
The ethic of public service is being replaced by contracts and financial incentives.
The market logic of individual choice has been busy destroying the social logic of community.
Formerly, leaders of the people were leaders of their communities, often personally known to those whom they served, and jealous of their reputations for probity and fair dealing.
Trust was based on local knowledge fortified by continuous contact.
The erosion of these powerful constraints on bad behavior was bound to produce a growing demand for public “accountability.”
The quest for market efficiency has also led to a frightening rise in complexity.
Today, the systems by which most services are provided have become almost completely opaque to their users.
People who call for greater “transparency” do not understand that complexity is the enemy of transparency, just as simplicity is the hallmark of trust.
Complexity, by leading to moral ambiguities, forces relationships onto a contractual footing.
Parliamentarians are by no means the only, or chief, victims of the cold blast of public mistrust.
Some of the most respected banks have been exposed as perpetrators of moral fraud: hence the demand for a new regulatory framework.
But pervasive mistrust of politicians is more dangerous, because it undermines the basis of a free society.
A low-trust society is the enemy of freedom.
It will produce a juggernaut of escalating regulation and surveillance, which will reduce trust further and encourage cheating.
After all, human nature is not only inherently gainful, but also takes satisfaction in gain cunningly achieved – for example, by finding ways round regulations.
A free society requires a high degree of trust to reduce the burden of monitoring and control, and trust requires internalized standards of honor, truthfulness, and fairness.
Systems in which people are trusted to behave well are more likely to produce good behavior than systems in which they are compelled to do so by regulation or fear of legal sanctions.
Liberal societies must tolerate some degree of crime and corruption.
But there will be less of it than in societies run by bureaucrats, courts, and policeman.
In the former communist countries, private crime was virtually non-existent, but state crime was rampant.
There is nothing inevitable about the disappearance of trust.
We have a choice.
Societies can decide to protect trust-based ways of life by limiting the scope of developments that undermine it.
The law, for example, could be used to favor institutions (like the family) that incubate commitment, and to decentralize decision-making to the maximum practicable extent.
Politicians should stop treating religious belief as a “problem” rather than as a powerful social resource for good behavior.
The role of a free press should be to put pressure on public officials to behave better.
But it is counterproductive to whip up such popular resentment at “abuses” as to produce precipitate changes in law or regulation, as has happened in Britain.
After any such media-stoked scandal, there should be a pause to allow better norms to take root.
Legislation or regulation aimed at restoring faith in the political class should be a last, not a first, resort.
Why Europe?
PRINCETON – What is the point of Europe?
The threat of an explosive disintegration of the eurozone – and with it of the European Union – is receding.
But the confused outcome of Italy’s recent parliamentary election, with an upper house dominated by a party that campaigned on an anti-EU platform and a pro-European majority in the Chamber of Deputies, has revived the fundamental debate about the purpose of European integration.
Europeans find it hard to find a positive way of describing the exercise in which they have been engaged for the past six decades.
One common interpretation is that integration makes people better off.
Unity is supposed to be a foundation of prosperity.
The Common Market was defended at the outset in terms of the gains that would follow from increased trade.
The case for capital-market integration, and then for a single currency, was similar.
All of this recalls some powerful arguments that were made in the nineteenth century about national integration and unification.
In particular, the two countries whose problems drove much of the need for twentieth-century European integration – Germany and Italy – were culturally and politically highly diverse.
In both countries, early-nineteenth-century romantic nationalism gave way to a sober obsession with economic forces after the failed revolutions of 1848.
The influential German journalist Ludwig von Rochau, who coined the term Realpolitik, described the new German mood on the eve of Otto von Bismarck’s last war of unification.
German unity was not a question of the heart’s desire; it was “a mundane business transaction, in which no one should lose, but everyone should grab as much as they could for themselves.”
Italians shared the same belief after the disillusion of 1848.
Patriotism could generate business opportunities.
The great Florentine liberal statesman, Bettino Ricasoli, concluded that Tuscany was simply financially unviable on its own.
This sort of economic nationalism in Germany and Italy briefly produced coalitions of interests that supported the drive to national unification under Bismarck and Cavour.
But the credibility of the national project seemed to crumble when growth faltered, leading to the emergence of movements that championed the aggressive, confrontational, and violent assertion of cultural identity.
Mario Monti is the twenty-first-century descendant of those nineteenth-century patriots who argued for the economic necessity of national unity.
Now it is European unity that is needed for economic reasons.
This vision of Europe is not idealistic; it is simply concerned with how Europeanization can benefit Italians.
And, like its nineteenth-century precursor, it is vulnerable to severe backlashes, especially when it appears to bring only pain and suffering.
Indeed, when today’s Europeans peer into the future, they see only prolonged recession and austerity.
Europe means nothing but sacrifice: northern Europeans paying for southern Europe’s woes through large transfers, or southern Europeans repaying onerous – and maybe impossible – levels of debt.
A variant of the economic argument for European unity is the claim that enhanced integration makes it easier to finance debt, because interest rates are lower.
A reduction in borrowing costs constituted a powerful motive in the 1990’s for southern European governments to join the monetary union.
But the costs of moving into a non-defaulting environment are high.
Here, another historical parallel is helpful.
France in the ancien régime repeatedly imposed semi-default on its creditors by reducing interest rates and extending maturities.
In the 1780’s, a new consensus against such measures emerged.
But the impossibility of raising revenue then triggered the French Revolution, with the revolutionaries demanding confiscatory taxes and impositions on the wealthy elite.
The alternative to thinking about European integration simply as a way of generating wealth and prosperity frequently analogizes it to a marriage.
In the late 1980’s, for example, then-European Commission President Jacques Delors, raising the prospect of a two-speed Europe, suggested that one or two countries might need a “different kind of marriage contract.”
The marriage analogy was used initially to signal that the European relationship was an exclusive one.
Europeans had a unique relationship with which no one –&#160;especially the United States – should interfere.
As Dominique Strauss-Kahn, then France’s finance minister, put it in 1997, “People who are married do not want others in the bedroom.”
But marriage can be a fraught institution (as Strauss-Kahn may know better than most).
The British economic journalist Martin Wolf thinks of Europe as a marriage kept together only by the high cost of divorce.
Others see it as a sham marriage.
Traditional marriage vows entail a commitment that binds the partners through changing circumstances: for richer and for poorer, in sickness and in health.
Even if the marriage does not make the partners better off, they still need to stick with it.
So neighbors who have a quarrelsome or violent past are not always well advised to reconcile by marrying.
The problem was that the Europeans did not understand what marriage really meant and why they should want to get married.
Enthralled by promises of material well-being and security, they had exaggerated expectations of romantic wedded bliss.
The unhappy marriage analogy for Europe’s current malaise, while depressing, is helpful.
At least it tells Europeans that they are not stuck together only for material reasons.
But, until that lesson is really learned, Europe must brace itself for more setbacks and backlashes, which means that it must still answer the fundamental question: Why stick it out together, especially at a time when more and more Europeans are choosing not to get married at all?
Insecure Securities
MUNICH – Once upon a time, stocks were risky and collateralized securities were safe.
That time is over, as the breakdown of the American mortgage securitization market has shown.
For years, hundreds of billions of new mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) generated from them were sold to the world to compensate for the lack of savings in the United States and to finance American housing investment.
Now virtually the entire market for new issues of such securities – all but 3% of the original market volume – has vanished.
To compensate for the disappearance of that market, and for the simultaneous disappearance of non-securitized bank lending to American homeowners, 95% of US mortgages today are channeled through the state institutions Fannie Mae, Freddie Mac, and Ginnie Mae.
Just as there was a time when collateralized securities were safe, there was also a time when economies with so much state intervention were called socialist.
Most of these private securities were sold to oil-exporting countries and Europe, in particular Germany, Britain, the Benelux countries, Switzerland, and Ireland.
China and Japan shied away from buying such paper.
As a result, European banks have suffered from massive write-offs on toxic American securities.
According to the International Monetary Fund, more than 50% of the pre-crisis equity capital of Western Europe’s national banking systems, or $1.6 trillion, will have been destroyed by the end of 2010, with the lion’s share of losses being of US origin.
Thus, the resource transfer from Europe to the US is similar in size to what the US has spent on the Iraq war ($750 billion) and the Afghanistan war ($300 billion) together.
Americans now claim caveat emptor : Europeans should have known how risky these securities were when they bought them.
But even AAA-rated CDOs, which the US ratings agencies had called equivalent in safety to government bonds, are now only worth one-third of their nominal value.
Europeans trusted a system that was untrustworthy.
Two years ago, Ben Bernanke, chairman of the US Federal Reserve, argued that foreigners were buying US securities because they trusted America’s financial supervisory system and wanted to participate in the dynamism of its economy.
Now we know that this was propaganda intended to keep the foreign money flowing, so that US households could continue to finance their lifestyles.
The propaganda was successful.
Even in 2008, the US was able to attract net capital inflows of $808 billion.
Preliminary statistics suggest that this figure has now fallen by half.
For years, the US had a so-called “return privilege.”
It earned a rate of return on its foreign assets that was nearly twice as high as the rate it paid foreigners on US assets.
One hypothesis is that this reflected better choices by US investment bankers.
Another is that US ratings agencies helped fool the world by giving triple-A ratings to their American clients, while aggressively downgrading foreign borrowers. This enabled US banks to profit by offering low rates of return to foreign lenders while forcing foreign borrowers to accept high interest rates.
Indeed, it is clear that ratings were ridiculously distorted.
While a big US rating agency gave European companies, on average, only a triple-B rating in recent years, CDOs based on MBSs easily obtained triple A-ratings.
According to the IMF, 80% of CDOs were in this category.
And according to an NBER working paper by Efraim Benmelech and Jennifer Dlugosz, 70% of the CDOs received a triple-A rating even though the MBSs from which they were constructed had just a B+ rating, on average, which would have made them unmarketable.
The authors therefore called the process of constructing CDOs “alchemy,” the art of turning lead into gold.
The main problem with US mortgage-based securities is that they are non-recourse.
A CDO is a claim against a chain of claims that ends at US homeowners.
None of the financial institutions that structure CDOs is directly liable for the repayments they promise; nor are the banks and brokers that originate the mortgages or create MBSs based on them.
Only the homeowners are liable.
However, the holder of a CDO or MBS would be unable to take these homeowners to court. And even if he succeeded, homeowners could simply return their house keys, as they, too, enjoy the protection of non-recourse.
As home prices declined and one-third of US mortgage loans went under water – that is, the property’s market value sank below the amount of the loan – three million US homeowners lost their homes, unable to meet their payment obligations, making the CDOs and MBSs empty shells.
The problem was exacerbated by fraudulent, or at least dubious, evaluation practices.
For example, homeowners signed cash-back contracts with builders to feign a higher home value and receive bigger loans, and brokers’ fees were added to mortgages and the reported values of homes.
Low-income people who could not be expected ever to repay their loans were given so-called NINJA credits: “No income, no job, no assets.”
Such reckless and irresponsible behavior abounded.
The US will have to reinvent its system of mortgage finance in order to escape the socialist trap into which it has fallen.
A minimal reform would be to force banks to retain on their balance sheets a certain proportion of the securities that they issue.
That way, they would share the pain if the securities are not serviced – and thus gain a powerful incentive to maintain tight mortgage-lending standards.
An even better solution would be to go the European way: get rid of non-recourse loans and develop a system of finance based on covered bonds, such as the German Pfandbriefe .
If a Pfandbrief is not serviced, one can take the issuing bank to court.
If the bank goes bankrupt, the holder of the covered bond has a direct claim against the homeowner, who cannot escape payment by simply returning his house key.
And if the homeowner goes bankrupt, the home can be sold to service the debt.
Since their creation in Prussia in 1769 under Frederick the Great, not a single Pfandbrief has defaulted.
Unlike the financial junk pouring out of the US in recent years, covered bonds are a security that is worthy of the name.
Insecuritization
BRUSSELS – There is no shortage of analyses of what went wrong in the world’s capital markets over the past 18 months.
What is clear is that a complex set of relationships, interactions, events, and omissions on the part of many different actors, rather than any single factor, was to blame.
I am convinced, for example, that over the years there has been too much “regulatory capture” by the supply side of the financial services market, with its well-organized and powerful lobbies.
By contrast, there has been too little engagement on the demand side.
That is an imbalance of which legislators must be much more conscious.
A second problem for regulators, supervisors, and, indeed, credit rating agencies was scarce resources.
When investment banking markets were booming – and the private sector easily recruited up top talent – regulators and supervisors found it difficult to get the budgets to keep up with innovation and police the markets.
In the future, governments will have to commit the necessary resources to ensure more robust oversight of risk management in financial institutions.
Capital markets must be subject to much more detailed and frequent hands-on supervisory inspections.
In Europe, crisis management mechanisms must be put in place to manage their deeply integrated nature, as 80% of Europe’s banking assets held in cross-border banking groups.
A third problem – particular relevant to banks, risk managers, and traders – has been misaligned incentives.
Incentive structures have been overwhelmingly aligned to short-term performance.
In firms where this was most pronounced, there has been almost total destruction of shareholder value.
As a consequence, a wholly unacceptable long-term burden has been imposed on taxpayers.
Privatizing banks’ profits and socializing their losses is not acceptable in democratic societies.
The structure and timing of performance pay in banks must be more closely aligned to long-term shareholder interests and financial stability.
Incentives for brokers and credit rating agencies have been even more perverse.
In the United States, brokers were selling mortgages without checking whether the borrower had the means to repay.
They had no stake beyond the immediate “sale.”
Financed via Special Purpose Entities, mortgages were parceled up in debt packages and securitized entities in which neither originators nor sponsors retained any material long-term stake but paid credit rating agencies to award a nice little ribbon marked AAA.
When the packages were unwrapped, most of their contents turned out to consist of pools of toxic assets for which there was no proper due diligence, no evidence of capacity to repay, and little cushion to cope with a market downturn.
That’s why I have proposed much tougher measures in the revised Capital Requirements Directive amendments now being considered by the European Parliament.
This will require thorough independent due diligence on securitizations, proper cash-flow sensitivity analysis, and less reliance on credit rating agencies paid by issuers.
Originators or managers of these securitizations will be required to retain a meaningful stake in each tranche of the issue.
I was pilloried for this proposal when I initially put it forward.
I am therefore glad to see that a G-30 advisory group has now supported this principle, and that it is gaining increased traction in the US.
But some banking industry lobbyists have sought amendments in the European Parliament that would totally neuter the proposal’s effectiveness.
Even more irresponsible are attempts to undermine a requirement for adequate due diligence on securitization positions prior to investing – with some amendments containing wording that would make it virtually impossible for supervisors to monitor compliance.
Mortgage assets and leveraged loans created in huckster shops, carved up and buried in “CDO squareds” (securitizations wrapped in other securitizations), and characterized by progressively more obscure, more contingent, and more complex orders of priority for allocating cash flows have no place in capital markets.
The opaqueness, wholly unnecessary complexity, and near impossibility of undertaking independent due diligence on these structures’ underlying risk have undermined trust in the securitization market.
Financial institutions – and their trade bodies – are doing themselves no favors by vigorously opposing meaningful reform.
Is it any wonder that the valuation of securitized investments has become so challenging, that mark-to-market valuation on securitized assets has become meaningless, depressed, or both, and that the securitization market itself has seized up?
Rather than restoring the trust and confidence in capital markets needed for recovery, those European Union members and banking federations that submitted “wrecking amendments” to the due diligence and securitization proposals are reinforcing the suspicion that is now embedded within them.
If successful, they will impair the revival of a transparent, responsible, and vibrant securitization market – a market that, if properly managed, can contribute meaningfully to sustainable, long-term economic growth.
Inside Africa’s Consumer Revolution
JOHANNESBURG – Nowadays, Africa’s economic potential – and the business opportunities that go with it – is widely acknowledged.
Poverty and unemployment are still more widespread than in other emerging markets, but accelerating growth since 2000 has made Africa the world’s second-fastest-growing region (after emerging Asia and equal to the Middle East).
With rapid economic growth have come more prosperous consumers – and vice versa: 45% of Africa’s total GDP growth in the 2000’s (before the financial crisis erupted in 2008) came from consumer-related sectors of the economy.
It is expected that, by 2020, more than half of African households – almost 130 million – will have discretionary income to spend (or save), up from 85 million today.
Moreover, Africa has the world’s fastest-growing population – and the youngest, with more than half under 20 years old, compared to 28% in China.
The United Nations estimates that the continent will account for more than 40% of global population growth through 2030, with the working-age population expected to surpass that of China by 2040.
Given these trends, the continent’s consumer industries are expected to grow a further $410 billion by 2020 – more than half the total revenue increase that all businesses are expected to generate in Africa by the end of the decade.
But, for many companies entering Africa or seeking to expand there from a local base, the challenge now is to obtain a better understanding of the market and its consumers.
In one of the first studies of its kind, the McKinsey Africa Consumer Insights Center surveyed 13,000 individuals from 15 cities in ten of the continent’s 54 countries in 2011 and 2012.
The ten countries – Algeria, Angola, Egypt, Ghana, Kenya, Morocco, Nigeria, South Africa, Sudan, and Tunisia – accounted for 81% of Africa’s private consumption in 2011.
But, throughout the continent, market opportunities for consumer-facing companies are concentrated more in cities than in particular countries.
Indeed, with 40% of its population living in cities, Africa is more urbanized than India (30%), and nearly as urbanized as China (45%). By 2016, more than 500 million Africans will live in urban centers, and the number of cities with more than one million people is expected to reach 65, up from 52 in 2011 (on par with Europe and higher than India and North America).
This development is critically important for consumer companies.
Urban household spending in Africa is increasing twice as fast as rural spending, with urban per capita incomes, on average, 80% higher than those of countries as a whole.
Befitting the continent’s strong macro trends, the survey found a high degree of optimism among urban African consumers: 84% of respondents expect their households to be better off in two years.
Sub-Saharan Africans are the most optimistic – 97% of Ghanaians, for example, expect to be much better off in two years.
(For North Africans, however, that figure drops to only 10-15%, which is unsurprising given the uncertainty generated by the region’s recent political turmoil.)
Overall, consumers are increasing their spending across most retail categories.
Up to 30% of the more optimistic consumers in some countries say that they are shopping more frequently and purchasing new and more expensive products.
And half of all respondents claim to make daily sacrifices to save for major expenditures.
This suggests that companies offering cheap, poor-quality, unbranded products are unlikely to succeed in the long term.
For apparel consumers, for example, quality is second only to price when choosing a store, and second only to fashion when choosing a specific item.
And, in both North and Sub-Saharan Africa, brand loyalty is strong, averaging 58%.
But quality and brand must be delivered at the right price.
Even though Africans value brands and product quality, affordability remains crucial.
To succeed, companies should work to reach consumers’ price points through a combination of product reengineering (such as removing low-value-added features), smaller package sizes, and low-cost operating models.
Moreover, timing is crucial when choosing where to play.
Demand for consumer products typically follows an S-curve.
As incomes rise, categories reach a takeoff point where demand accelerates by 3-5 times.
At higher levels of income, markets become saturated and growth slows.
Different products and categories enter the “hot zone” at different moments: those with low price points, such as snacks and beverages, typically take off relatively early; beauty products somewhat later; and luxury goods, such as branded fashion, later still.
Not surprisingly, in most African markets, few categories have entered the slower-growth “chill-out” zone.
This is where understanding opportunities at a city level is vital.
Country-level planning and resource allocation is still the rule for most businesses operating in Africa, resulting in inefficient allocation of human and capital resources.
By creating detailed profiles of the most promising urban opportunities, companies could target their investments more effectively.
Identifying growth hot spots is only the start.
Substantial differences among and within Africa’s countries imply the need for a much deeper and finer-grained understanding of consumer preferences and affordability profiles by product category.
Likewise, many markets are still in early stages of development, and must be built through concerted consumer education and trial.
Here, Africa’s youth merit special attention: the survey found that the 16-34 age group already accounts for 53% of income in urban centers.
Young people’s consumption habits are quite different from their elders’.
They are more than twice as likely to search for information online and to seek products and stores that reflect the “right image.”
They are also more educated, with 40% of 16-24 year olds having completed high school, compared with only 27% of the 45-and-older group.
These characteristics point to a major change in African consumption habits as this cohort ages, its incomes increase, and its behaviors and decision criteria become the societal norm.
Many companies – particularly multinational firms accustomed to old and aging populations in the advanced countries – will have to adapt accordingly.
Inside Iran’s Nuclear Reasoning
MELBOURNE – Is Iran really hell-bent on becoming a nuclear-armed state?
Or will it settle for nuclear capability, able to make weapons but choosing not to?
Does the difference matter?
Few international questions involve higher stakes than these.
An immediate concern, if deep pessimism about Iran’s intentions prevails, is a preventive Israeli strike, leading to another major Middle East war – with catastrophic consequences for the global economy likely.
No one should underestimate the difficulty of assessing Iran’s real intentions.
Mixed signals from competing power centers don’t help; nor does the recurring contrast between Iranian officials’ usually-strident public pronouncements and often-moderate private discourse.
Pessimists and skeptics have plenty to point to in Iran’s long record of obstruction and brinkmanship in addressing legitimate international concerns about its nuclear programs.
That said, too many policymakers and commentators have rushed to judgment, insisting that Iran is irrevocably determined to build nuclear weapons, or that it wants a break-out capability that is just as dangerous.
In fact, there is good reason to believe that the situation is less alarming and more containable than this.
While a negotiated settlement acceptable to both Iran and the rest of the international community would be a hugely difficult undertaking, it is achievable.
One does not need to look hard for Iran’s reasons for testing the limits of international tolerance: to redeem the humiliations of the Mosaddeq era and beyond; to demonstrate superior technological prowess to the region and the wider world; and to make clear to the Western powers – whose perceived double standards abandoned Iran to Saddam Hussein’s chemical warfare in the late 1980’s – that it would not compromise on its “right” to enrich uranium under the Nuclear Non-Proliferation Treaty.
By contrast, it has not been so easy for observers to see why Iran would stop short of building the nuclear weapons that it may soon have the capacity to produce.
But in my many off-the-record discussions with senior officials in Iran and elsewhere over the last few years, I have heard five such reasons stated with clarity and consistency, and they deserve to be taken seriously.
The first reason is concern that Israel will perceive the existence of one or two Iranian bombs as an existential threat, demanding a pre-emptive military attack – with or without US support, but in either case with resources that Iran knows it cannot match.
Iranians think such an attack unlikely if they do not cross the red line of actual weaponization.
Second, it is well understood that there is zero tolerance in Russia and China for an Iranian bomb, and all the rope that that these powers have so far given Iran in the Security Council will run out if Iran weaponizes.
The writing on this wall became even clearer after the most recent round of sanctions negotiations.
Third, following from this, there is a clear perception in Iran that acquiring an actual bomb would lead to impossibly stringent economic sanctions.
Financial sanctions, direct and indirect, already are biting – including on the Revolutionary Guard and its significant economic interests – but have been tolerable in the context of asserting Iran’s “right to enrich” under the NPT.
Once in obvious breach of the NPT, universal participation in a much tougher sanctions regime is seen in Iran as inevitable.
Fourth, Iranians acknowledge that any regional hegemony bought with nuclear weapons is likely to be short-lived.
There is skepticism about the capacity of Egypt, Saudi Arabia, or Turkey to move quickly to build bombs of their own, and a belief that they would be under much international pressure, especially from the US, not to do so.
But there is also a clear view that Arab-Persian, Sunni-Shia, or more straightforward regional power anxieties would make a nuclear-arms race inevitable.
Finally, there is a religious reason: weapons of mass destruction simply violate the precepts of Islam.
Few in the West are likely to find this line very compelling, but it has echoed strongly in every conversation that I have ever had with Iranian officials, senior or minor.
And it is not without plausibility: Iran did not, after all, respond in kind when it was bombarded with chemical weapons by Iraq.
None of this suggests that Iranian intentions can be taken on trust.
There is too much history, and there are too many continuing grounds for suspicion, for that.
Any agreement involving an end to sanctions and diplomatic isolation would need to be accompanied by intrusive monitoring, inspection, and verification arrangements, covering not only all sensitive stages of the nuclear fuel cycle, but also any suspected weapons design or engineering facilities.
The international community requires real confidence that there would be enough lead time – 12 months or so – in which to respond to any evidence of real intent to move to weaponization.
Frustrations will continue, like those over the last year as creative efforts by Security Council members – and more recently by Brazil and Turkey – to find interim confidence-building solutions were rebuffed, largely because the leaders of last year’s democratic movement refused to support a compromise-inclined President Mahmoud Ahmadinejad.
But there is a solid foundation of rationality on which to build in keeping the door open for negotiations.
Iran is an extraordinarily complex country.
But, just as we cannot afford to underestimate the forces of extremism that persist there, we also fail at our peril to comprehend the currents of restraint and good sense that run within the country, including at high policymaking levels.
Inside Thailand’s Hidden War
LEEDS – Thailand’s former prime minister, Chavalit Yongchaiyudh, recently ignited a furor when he proposed that the separatist campaign in his country’s Muslim-majority southern provinces might be solved politically, with a form of self-rule.
Thailand’s ruling Democrat Party immediately called Chavalit’s remarks “traitorous.”
But recent developments surrounding Afghanistan’s elections have highlighted the shortcomings of using military force alone to resolve a civil war.
This precedent offers an important lesson for Thailand and other countries facing intractable insurgencies.
As Arisotle put it, “politics is the master science in the realm of action.”
In June 2006, I sat in a village in southern Thailand’s Yala province with several ordinary-looking young men who had taken part in extraordinary events.
They had joined the militants who had attacked a dozen security checkpoints across three southern provinces on April 28, 2004.
Armed mainly with machetes and kitchen knives, 106 attackers perished that day, 32 of them inside Pattani’s historic Krue-Ze mosque, where they had taken refuge.
Five members of the Thai security forces were also killed.
None of the youths I talked to could give any clear explanation for their actions, except to say that an Islamic schoolteacher known as Ustadz So had recruited them into a shadowy militant movement.
Ustadz So had taught them that Thai rule over this historically Malay region was illegitimate, that Thai officials were cruel and heartless, and that the time had come for the Muslim population to rise up and expel the Buddhist infidels.
According to counter-insurgency expert David Kilcullen, the violence in Thailand’s deep South – which has now claimed more than 3,500 lives – was some of the most intense in the world between 2004 and 2007, “second only to Iraq and Afghanistan during this period.”
Yet, despite such alarming levels of bloodshed, the insurgency has been under-reported and under-researched, barely registering on the international community’s radar screen, largely because the conflict cannot be reduced to a sound bite-friendly narrative of identifiable bad guys and good guys.
First, the militant movement itself has no name, operating in a highly decentralized manner through small local cells that operate relatively independently – what might be described as self-managed violence franchises.
Thai political expert Chaiwat Satha-Anand has called the movement a “network without a core.”
The lack of a defined enemy makes reporting on and understanding the conflict difficult for journalists, diplomats, and government officials.
Second, outcomes are not predictable.
On April 28, 2004, the insurgents’ primary targets were Buddhist members of the security forces, but most of those who died were Malay Muslims.
The would-be perpetrators also became the primary victims.
Some victims have been killed extra-judicially.
The one group not targeted by anyone has been Westerners.
Again, reporting such a messy story is a challenge; most Western news editors have preferred to highlight Iraq and Afghanistan.
A third factor is that the violence has become a marginal issue even within Thailand.
The breaking news teams returned to Bangkok long ago, where a military coup, ongoing mass protests, and other big political stories have kept them busy ever since.
And, because the violence tends to come in dribs and drabs – rarely since 2004 has any one day’s casualties reached double figures – the South has never risen back up the news agenda.
Many Thai military and police officials now privately admit that the insurgency cannot be defeated through security measures.
After a dip in the number of incidents during late 2007 and 2008, violence once again increased in 2009.
The military’s belief that Malay Muslims could be re-educated and re-socialized into accepting a Thai identity has proved untenable.
The same goes for earlier hard-line rhetoric about rooting out the militants and destroying their organization.
The current government under Prime Minister Abhisit Vejjajiva misses the point with rhetoric about creating peace simply through promoting justice, or by funding large-scale socio-economic development projects.
Malay Muslims in Thailand’s southern provinces are demanding their own political space.
Few of them seriously believe that a tiny separate Patani state, wedged between Thailand and Malaysia, would be viable.
What many are seeking is some form of special status within Thailand, enabling them to pursue their own cultural and religious traditions without interference from Bangkok.
Until the Thai government grasps this simple point, young men like those I met in Yala will still be recruited into militant activity.
As Chavalit Yongchaiyudh understands, the southern Thai conflict is a political problem in need of a political solution – just like Afghanistan and other more familiar wars.
Why Turkey is Thriving
NEW YORK – A recent visit to Turkey reminded me of its enormous economic successes during the last decade.
The economy has grown rapidly, inequality is declining, and innovation is on the rise.
Turkey’s achievements are all the more remarkable when one considers its neighborhood.
Its neighbors to the west, Cyprus and Greece, are at the epicenter of the eurozone crisis.
To the southeast is war-torn Syria, which has already disgorged almost 400,000 refugees into Turkey.
To the east lie Iraq and Iran.
And to the northeast lie Armenia and Georgia.
If there is a more complicated neighborhood in the world, it would be difficult to find it.
Yet Turkey has made remarkable strides in the midst of regional upheavals.
After a sharp downturn in 1999-2001, the economy grew by 5% per year on average from 2002 to 2012.
It has remained at peace, despite regional wars.
Its banks avoided the boom-bust cycle of the past decade, having learned from the banking collapse in 2000-2001.
Inequality has been falling.
And the government has won three consecutive general elections, each time with a greater share of the popular vote.
There is nothing flashy about Turkey’s rise, which has been based on fundamentals, rather than bubbles or resource discoveries.
Indeed, Turkey lacks its neighbors’ oil and gas resources, but it compensates for this with the competitiveness of its industry and services.
Tourism alone attracted more than 36 million visitors in 2012, making Turkey one of the world’s top destinations.
Even a short stay in Ankara allows one to see these underlying strengths.
The airport, highways, and other infrastructure are first class, and a high-speed intercity rail network links Ankara with other parts of the country.
Much of the advanced engineering is homegrown.
Turkish construction firms are internationally competitive and increasingly win bids throughout the Middle East and Africa.
Turkey’s universities are rising as well.
Ankara has become a hub of higher education, attracting students from Africa and Asia.
Many top programs are in English, ensuring that Turkey will attract an increasing number of international students.
And the country’s universities are increasingly spinning off high-tech companies in avionics, information technology, and advanced electronics, among other areas.
To its credit, Turkey has begun to invest heavily in sustainable technologies.
The country is rich in wind, geothermal, and other renewable energy, and will most likely become a global exporter of advanced green innovations.
Waste-treatment facilities are not typically tourist attractions, but Ankara’s novel integrated urban waste-management system has rightly attracted global attention.
Until a few years ago, the waste was dumped into a fetid, stinking, noxious landfill.
Now, with cutting-edge technology, the landfill has been turned into a green zone.
The private waste-management company ITC receives thousands of tons of solid municipal waste each day.
The waste is separated into recyclable materials (plastics, metals) and organic waste.
The organic waste is processed in a fermentation plant, producing compost and methane, which is used to produce electricity in a 25-megawatt power plant.
The electricity is returned to the city’s power grid, while the heat exhaust is piped to the facility’s greenhouses, which produce tomatoes, strawberries, and orchids.
Turkey’s diversified, innovative base of industry, construction, and services serves it well in a world in which market opportunities are shifting from the United States and Western Europe to Africa, Eastern Europe, the Middle East, and Asia.
Turkey has been deft in seizing these new opportunities, with exports increasingly headed south and east to the emerging economies, rather than west to high-income markets.
This trend will continue, as Africa and Asia become robust markets for Turkey’s construction firms, information technology, and green innovations.
So, how did Turkey do it?
Most important, Prime Minister Recep Tayyip Erdoğan and his economics team, led by Deputy Prime Minister Ali Babacan, have stuck to basics and looked to the long term.
Erdoğan came to power in 2003, after years of short-term instability and banking crises.
The International Monetary Fund had been called in for an emergency rescue.
Step by step, the Erdoğan-Babacan strategy was to rebuild the banking sector, get the budget under control, and invest heavily and consistently where it counts: infrastructure, education, health, and technology.
Smart diplomacy has also helped.
Turkey has remained a staunchly moderate voice in a region of extremes.
It has kept an open door and balanced diplomacy (to the extent possible) with the major powers in its neighborhood.
This has helped Turkey not only to maintain its own internal balance, but also to win markets and keep friends without the heavy baggage and risks of divisive geopolitics.
No doubt, Turkey’s ability to continue on a rapid growth trajectory remains uncertain.
Any combination of crises – the eurozone, Syria, Iraq, Iran, or world oil prices – could create instability.
Another global financial crisis could disrupt short-term capital inflows.
A dangerous neighborhood means inescapable risks, though Turkey has demonstrated a remarkable capacity during the last decade to surmount them.
Moreover, the challenge of raising educational quality and attainment, especially of girls and women, remains a priority.
Fortunately, the government has clearly acknowledged the education challenge and is pursuing it through school reforms, increased investments, and the introduction of new information technologies in the classroom.
Turkey’s successes have deep roots in governmental capacity and its people’s skills, reflecting decades of investment and centuries of history dating back to Ottoman times.
Other countries cannot simply copy these achievements; but they can still learn the main lesson that is too often forgotten in a world of “stimulus,” bubbles, and short-term thinking.
Long-term growth stems from prudent monetary and fiscal policies, the political will to regulate banks, and a combination of bold public and private investments in infrastructure, skills, and cutting-edge technologies.
Inspecting Iraq
The UN weapons inspectors are now at work in Iraq, trying to determine how many weapons of mass destruction have been developed in the last four years.
If the track record of previous inspections holds true, Iraq will not come clean, and the inspectors will have to work their way through a maze of deception and distortion.
In 1991, a team from the International Atomic Energy Agency (IAEA) visited Tarmiya to check out rumors that the site was part of Iraq's nuclear weapons program.
According to Dr. Abdul-Qadir Ahmed, the Iraqi official in charge that day, the huge magnets attached to giant spools of copper wire were simply part of the maintenance equipment for Iraq's power stations.
How else could Iraq have managed to put its power stations back in production after the Gulf War?
The inspectors looked over the huge winding machine and concluded that there were really no grounds for the rumors.
At the same time, however, a defector was telling a different story to US intelligence.
Having been refused permission to transfer out of the clandestine nuclear weapons program, Dr. Ibrahim Bawi had put his family in his government-supplied car and driven north.
He wound up at the American Air Force base in Incirlik in southern Turkey.
From there, he was whisked to the US to begin his debriefing.
Soon thereafter, the inspectors returned to Tarmiya.
This time, they knew exactly what the huge magnets were for: to produce weapons grade nuclear materials.
This time, Dr. Ahmed, the Iraqi counterpart, realized the game was up.
Some of the inspectors he knew well, having dined with them on collegial terms during visits to Vienna.
That he would lie to them so brazenly was incomprehensible to his friends on the inspection team.
Nothing personal, he told them, he was under orders.
The word had come down: a lie under orders is not a lie, it is just following orders.
In fact, the much-touted accomplishments of both the IAEA and UN inspectors came only after major defections from within the Iraqi weapons program and a lot of follow-up by the inspection teams.
Though the teams were staffed by capable weapons experts on loan from their governments, it still took four years to force Iraq to admit to conducting a biological weapons program.
Only the 1995 defection of Saddam's son-in-law, Hussein Kamel, brought definitive proof of the existence of Iraq's huge nuclear weapons program.
Hans Blix, the director of the new inspections effort, has been fooled twice before by the Iraqis.
In 1990, before Iraq's invasion of Kuwait, he declared that there was no nuclear weapon's program in Iraq.
In 1994, Blix accepted the Iraqi story that there was no real nuclear weapon program, only a small research effort.
The huge Iraqi uranium enrichment program was only meant to produce fuel for future nuclear power stations.
Of course, the story changed after Hussein Kamel's defection.
The problem now is that Kamel was the last major defector to come out of Iraq.
None of the inspections or gadgetry can match the value of an insider who changes sides.
The inspectors have very little information, and Iraq has the upper hand.
All the research and production facilities are under Iraqi, not UN, control.
British and American intelligence can only provide circumstantial evidence of what Iraq is doing in the weapons area.
For inspections to work, the UN will have to get inside information.
Accounting for this information gap, UN Security Council Resolution 1441 empowers the inspectors to talk to Iraqi scientists without government minders, outside of Iraq if necessary, and accompanied by their families.
Most Iraqi scientists I knew would consider this a blessed opportunity to escape the confinement and threats that shadow their lives.
Saddam is aware of their value to the UN and recently ordered the resettlement of their families to high-security camps.
Incredibly, the UN inspection team leaders indicate that they do not plan to bring the scientists out of Iraq.
They will rely for now on physical inspection, not private interviews with the people most directly responsible for building Iraq's weapons.
The new inspections regimen has already been compromised by its passive approach.
To join the inspectors, weapons experts are obliged to resign from their national postings, but few are ready to give up their careers to work in the UN bureaucracy.
Thus, the UN team is much smaller and less experienced than its predecessors, and faces Iraqi counterparts steeped in the art of deception.
I fear that the inspections effort is not intended to uncover the full extent of Iraq's illegal weapons program.
The Europeans are treating Iraq as a prize to be denied the US, not as a strategic danger.
What drives the inspections is fear of an American invasion.
The Americans will be accommodated up to the point that their attack is forestalled.
On December 8, Iraq is obliged to declare formally its full weapons program.
We can expect the inspectors to be flooded with information about everything but the actual weapons.
It is will be vintage Saddam: diversion with no real revelations.
The real test will be for the Americans.
Either they get the information they need, or the game will be over.
Saddam will be the winner, ready to play another day.
Instability from Rigidity
Everyone wants economic stability, and many are reluctant to abandon today what gave them stability yesterday.
But trying to obtain stability from rigidity is illusory.
The stability of the international financial system today depends on the willingness of countries with rigid exchange rates to allow greater flexibility.
In the aftermath of the international financial crisis of 1997-1998, many emerging markets found themselves – through currency depreciation, rapid productivity gains, or both – highly competitive.
Countries that ran significant current-account surpluses, built up large reserves, and fixed (or heavily managed) their exchange rates in order to support the first two objectives appeared to secure external stability.
The irony is that the crisis of 1997-1998 was one in which a particular system of exchange-rate pegs failed when capital flowed out.
Yet, in many ways, accumulating reserves worked better than anyone could have imagined – countries found that they could withstand considerable shocks and growth was impressive both domestically and globally.
So, within a few years, many countries concluded that their pegs could work fine if supported by large enough war chests of official reserves.
A new type of order emerged in the world’s exchange rate system.
There were, of course, some less desirable spillover effects on others.
If a considerable fraction of the world economy wants to run a current-account surplus (by 2006, this included much of emerging Asia, most oil exporters, and Japan), an equal share of the world economy must run a deficit.
In the period after 1998, the United States provided almost the entire required deficit.
As long as US assets were attractive to residents of surplus countries (or there was an acceptable chain of investments from surplus countries that ended in the US), these accumulations of reserves were sustainable.
The IMF worried a great deal about what would happen when this chain broke – and the eventual break was, of course, more a matter of arithmetic than economics.
The US current-account deficit can persist above roughly 3% of GDP only if unrealistic assumptions are made about the share of US assets that the rest of the world is willing to hold.
The policy plans announced by China, the euro area, Japan, Saudi Arabia, and the US in the spring of 2007 – in the context of the IMF’s Multilateral Consultation on global imbalances – represent the international community’s response to the rising risks.
The US is to reduce its deficit, with the surplus countries proposing sensible steps to bring down their surpluses in ways that support global growth.
The sense of urgency in these discussions has increased in recent months, as the global situation has grown more complex.
Specifically, problems in the US housing sector have, since summer, undermined confidence in securitized assets.
The net result has been to shift global portfolio preferences in ways that have affected some exchange rates significantly.
The dollar has depreciated in a way that helps global adjustment and fortunately does not disrupt the US government securities market; long-term rates are in fact down from July, so adjustment has been “orderly.”
Yet the pattern of exchange-rate movements in the rest of the world has been largely unrelated to existing current-account positions.
In fact, currencies of surplus countries with heavily managed exchange rates have actually depreciated in real effective terms since the summer, creating inflationary pressure and frustrating global adjustment.
This has also shifted the burden of adjustment disproportionately onto countries with floating currencies, such as the euro and the Canadian and Australian dollar.
The lack of adjustment of surplus countries with inflexible exchange rate-regimes means that as the US deficit falls, a counterbalancing deficit develops elsewhere in the world – along with real effective exchange rate appreciation.
Knowing what to do in this increasingly complex and volatile situation is the easy part: look at the Multilateral Consultation policy plans and “just do it.”
As the US Treasury’s recent semiannual report to America’s Congress noted, for China these plans are to “rebalance its economy: boosting domestic demand and consumption-led growth; reforming its financial system; and achieving greater flexibility in its exchange-rate regime.
Indeed, rebalancing the pattern of growth is a central economic goal of China’s leadership.”
But expanding demand and allowing real effective exchange rate appreciation in China will not be enough if other countries do not do their part.
Oil exporters must increase fiscal spending further; Japan and the Euro area must trigger higher growth through structural reforms; and the US must implement concrete measures to sustain higher savings.
This would help maintain confidence that the adjustment process will remain orderly and free of new global imbalances or protectionism.
Implementing the policy commitments from the multilateral consultation is also needed to avoid a loss of confidence in the dollar.
The risks to global growth will increase as long as adjustment remains uneven.
The politics is not so simple, but we need cooperation between countries to reduce these risks, and we need it now.
David Cameron’s European Spaghetti Bowl
WASHINGTON, DC – British Prime Minister David Cameron’s “Europe” speech, delivered on January 23, was powerful, polished, contained a bold vision, and offered good arguments.
In particular, he got three things right.
But translating those arguments into institutional reality will be a nearly impossible challenge.
First, Cameron is correct to emphasize the urgent need for a renewal of popular support for the European Union.
The percentage of Europeans who believe that the EU is “a good thing” is dropping steadily.
Democracies require real debate.
Yet too many decisions about the future of Europe and the eurozone are made in highly technocratic settings, with most citizens not really understanding what is going on, let alone feeling that policymakers care.
One can debate whether a referendum is the most appropriate vehicle for asking for their consent, but ask one must.
As Cameron put it: “There is a gap between the EU and its citizens which has grown dramatically in recent years and which represents a lack of democratic accountability and consent that is – yes – felt particularly acutely in Britain.”
Second, Cameron was right to say that “the European Union that emerges from the eurozone crisis … will be transformed beyond recognition by the measures needed to save the eurozone.” He did not disagree that the eurozone needs more integration, but correctly noted that the required degree of political integration is beyond the comfort zone of British citizens and of others in the EU.
Finally, Cameron argues that the EU is not an end in itself.
Rather, it must deliver better economic performance for its citizens by emphasizing the challenge of competitiveness, particularly with respect to the new emerging countries.
His speech stressed the economic weakness of many EU members (though some – such as Germany and the Nordic countries – are actually doing reasonably well in the global marketplace).
As a conservative, Cameron lays the blame for economic weakness on the size of the state and a high degree of market regulation, though some Nordic countries with large government spending and strong financial and environmental regulations are in better shape than the UK, which has had less of both.
But he is right that a debate on economic performance is needed, and that it will be crucial to reform Europe in a way that maximizes its prospects in global competition.
It is normal for conservatives to argue for less government and to place greater trust in free markets, and for social democrats and greens to argue for public policies that deliver less income inequality, more public goods (such as a clean environment and public transport), and more regulation to help markets function with greater stability and distribute benefits more evenly.
The competitiveness debate should indeed be part of the debate about Europe’s renewal.
But Cameron’s vision for Europe’s institutional future is difficult to translate into workable specifics.
He argues for a Europe “à la carte,” at least for those outside the eurozone.
He entertains the possibility that the UK and other EU countries that have opted out of the eurozone could each negotiate a specific and special “deal” with the EU, picking and choosing among its various dimensions those that suit them best and cost them the least.
Thinking about the consequences that such a Europe would have on EU institutions, one must ask how the European Commission, the European Parliament, and the Council of Ministers would function.
Would there be one set of sub-institutions for every country that has made a special deal with the Union – say, a Commission for the eurozone and Sweden, and another for the eurozone and the UK?
And would the European Parliament become fragmented in similar fashion?
Would the European Council have a diverse set of memberships?
How many temporary or permanent opt-outs can there be?
How will Europe’s citizens, who already have enough trouble with the complexities of European governance, be able to comprehend such a “spaghetti bowl” structure?
And yet Cameron is right to believe that not all EU members will want or be able to be part of a more integrated eurozone.
There will have to be some flexibility if the EU is not to shrink, becoming a smaller eurozone.
British membership is important to many in Europe.
One way to overcome the dilemma might be to articulate an institutional future in which there would be essentially just two types of countries within the EU and the single market: those in the eurozone and those with national currencies.
There would have to be two sets of EU institutions, one for the eurozone and another for non-eurozone countries, although they would overlap.
This is already the case in some areas: consider the EU-wide Ecofin and the eurozone-only Eurogroup of Finance Ministers.
Something similar could be created for the European Parliament, and so on.
It would be complex, but it could be made manageable; we should discuss how.
A new European treaty would not allow cherry-picking, but would give each member state a chance to join, or commit to, either the politically more integrated eurozone or the less integrated second group.
There would be clear rules and decision-making mechanisms for both sets of countries, subject to democratic votes by a two-tier European Parliament.
Many details would have to be worked out.
But this may be a vision that gives Europe a chance to remain big and inclusive, while retaining the politically integrated core that the eurozone needs.
Insuring Against Insurance
NEW HAVEN &#45;&#45; Most people who save and invest do so for their entire lives.
But most of the institutions upon which they rely for their investments and savings are geared to the short term.
This mismatch causes fundamental problems.
An excellent example is homeowners’ insurance.
Almost universally in the world today, homeowners’ insurance is short term.
Typically, it is renewed annually, which means that it does not cover the risk that insurance companies will raise rates at any future renewal date.
Yet we have seen major changes recently in homeowners’ insurance rates.
For example, the average homeowner premium in Florida soared from $723 at the start of 2002 to $1,465 in the first quarter of 2007.
Such rapid increases represent a risk that is on the same order of magnitude as many of the damage risks that the policies are supposed to address.
In a study presented in early May at America’s National Bureau of Economic Research, the economists Dwight Jaffee, Howard Kunreuther, and Erwann Michel-Kerjan called for a fundamental change in policy aimed at developing true long-term insurance (LTI) that set insurance premiums for many years.
Unless we do that, homeowners are unsure from year to year whether their insurance policies will be canceled or that their premiums will skyrocket unexpectedly as they have in coastal regions of Florida where there is hurricane and flood risk.
As the authors point out, for insurers to even consider a long term policy they must have the freedom to charge premiums that reflects risk.
Urbanization itself is also a source of risk, as evidenced by the recent earthquake in China, which has cost at least tens of thousands of lives.
Moreover, global warming appears to be increasing the intensity of storms.
Some scientists attribute the intensity of Cyclone Nargis, which struck Myanmar, killing more than 30,000, to global warming.
Of course, we do not know for sure that these risks will mean higher insured losses in the future.
Population growth in coastal areas may not continue to imply more risk exposure, since choice lots may already be getting somewhat more scarce, and further development may favor more central areas.
And urbanization, if done right, leads to better catastrophe planning and stricter construction standards, which might actually reduce risks.
In fact, long term insurance may encourage homeowners to invest in risk reducing measures because the premium discounts they will obtain for taking this action will justify incurring the cost of investment.
The course of global warming, and its impact on future storms, is also the subject of considerable uncertainty.
Meteorology is not an exact science, and we cannot predict the precise extent and impact of environmental initiatives, though progress in weather forecasting might also reduce the damage caused by hurricanes.
Data presented by Roger Pielke in the Natural Hazards Review in February shows that actual insured losses caused by the most important hurricanes since 1900 followed a U-shaped curve.
The most damaging hurricanes (scaled for the size of the economy) to hit the United States occurred both in the early twentieth century and most recently – the worst being the 1926 hurricane that struck Miami, Florida.
Just as no one anticipated this U-shaped pattern of losses, so future losses must remain essentially unknown.
This means that the problem is not a certain increase in homeowners’ insurance losses, but rather a risk of increase.
Paradoxically, that is a good thing, because it means that risk-management technology can be used to mitigate the problem.
To see why, consider health or life insurance.
If genetic information ever enables an exact prediction of each individual’s ultimate date of illness and death, that information, if commonly available, would make such insurance impossible to get (no one would insure someone about whom it is known that he will suffer from the harm to be insured against).
It is just the same with homeowners’ insurance: because the risk of losses is uncertain, it can be sold by those who feel most concerned about it to others who can better bear it.
Insurance regulators are certainly well aware of the risk of future increases in homeowners’ insurance premiums.
But trying to address these risks by limiting such increases doesn’t work well, because if insurance companies are not making any money, they will withdraw from the market.
Nor can this problem be solved by imposing fees on insurance companies that withdraw from the market in response to premium caps, because the companies will eventually learn to consider the possibility of such fees even before entering an insurance market.
Sometimes, governments have become directly involved in providing insurance.
In the US, for example, Florida’s state legislature created the Citizens’ Property Insurance Corporation in 2002.
But replacing private insurance with government insurance plans is far from optimal.
Like other forms of saving and investment, it is better that insurance be allocated by a market, rather than in a political arena.
The beauty of the LTI plan proposed by Jaffee, Kunreuther, and Michel-Kerjan is that it would allow market forces to determine long-term (20 years or more) insurance premiums.
The premiums would be set so that there would be no reason for insurance companies to withdraw from the market in response to greater risk.
Homeowners can rest assured that they can continue to insure their property at known rates.
Moreover, the premiums would provide price signals that would guide new construction.
In areas where scientists think that there is a likelihood that greater risks will prevail in coming years, high insurance premiums would provide a market incentive to curtail development.
Everyone would end up better off.
Emerging Economies’ Misinsurance Problem
LONDON – Over the last decade, America’s expansionary monetary policy and China’s rapid growth have been the two key drivers of global financial flows.
Now, both dynamics are being reversed, generating new risks for the global economy – particularly for emerging countries.
Whether they can cope with these changes will depend on whether they have taken out enough insurance against the right risks.
Following the Asian financial crisis of the late 1990’s, emerging economies began to accumulate massive foreign-exchange reserves to protect themselves against the risks of external over-indebtedness.
In fact, they amassed far more than they needed – $6.5 trillion, at last count – effectively becoming over-insured against external balance-of-payments shocks.
But they remained underinsured against domestic credit risks ­–&#160;the leading threat to emerging economies today.
After the global financial crisis erupted in 2008, interest rates plummeted, fueling private-sector credit booms in many of the largest emerging markets, including Brazil, India, Indonesia, and Turkey.
Although these booms were initially financed by domestic capital, they soon became dependent on foreign capital, which flowed into their economies as advanced-country central banks pumped huge amounts of liquidity into financial markets.
Now, just as the US Federal Reserve contemplates an exit from its unconventional monetary policies, emerging economies’ current-account positions are weakening, making their reliance on capital inflows increasingly apparent – and increasingly dangerous.
Ironically, today’s pain stems from one of the great successes that emerging economies have achieved: the reduction of foreign-currency funding in favor of local-currency debt.
As emerging-market central banks leaned against heavy capital inflows in order to mitigate exchange-rate appreciation, their currencies became less volatile.
The resulting perception that currency risk was declining bolstered capital inflows further.
This virtuous feedback loop has now turned vicious, with capital inflows amounting to only a fraction of outflows.
Given this, the likely upshot of monetary tightening in the advanced economies will be a long depreciation of emerging-market currencies and, in turn, a significant interest-rate hike – a trend that puts emerging economies at risk for the kinds of credit crises that have bedeviled developed economies over the last six years.
The higher interest rates rise to stabilize emerging markets’ currencies, the more severe their crises will be.
Ultimately, even if emerging economies manage to diversify their funding away from foreign currencies, they will remain hostages to US monetary-policy cycles.
Had emerging economies resisted the temptation of excessive private-sector credit growth, raising interest rates in order to stabilize currencies would not pose a severe threat to economic performance.
But, unsurprisingly, they did not; rather, they succumbed to the notion that unprecedentedly high rates of GDP growth were the new normal.
Nowhere was this more apparent than in China, where double-digit annual output gains long obscured the flaws in a state-led, credit-fueled growth model that favors state-owned enterprises (SOEs) and selected industries, like the real-estate sector, to the detriment of private savers.
Since 2008, banking-sector credit growth in China has been among the fastest in the world, far outpacing GDP growth, and China’s total debt has risen from 130% of GDP to 220% of GDP.
As of this year, ¥1 of GDP growth is consistent with more than ¥3.5 of credit growth. China’s financial sector is now increasingly feeling the strain of this rapid credit growth, which has led to overcapacity in favored sectors and mounting debt problems for local governments, SOEs, and banks.
Meanwhile, China’s shadow-banking system has expanded at an unprecedented rate.
But here, too, mounting risks have been largely ignored, owing partly to the collateralization of real property, which is believed to retain its value permanently, and partly to the system of implicit government guarantees that backs loans to local governments and SOEs.
At the very least, the combination of higher interest rates in the shadow-banking sector and weaker nominal GDP growth undermines borrowers’ debt-repayment capacity.
In a worst-case scenario, falling property prices or diminishing faith in implicit government guarantees would compound the risks generated by the shadow-banking system, severely undermining China’s financial stability.
In that sense, although China, with its $3.5 trillion stock of foreign-exchange reserves, may seem to exemplify emerging economies’ tendency to be over-insured against external risks, it actually faces the same credit risks as its counterparts.
The difference is that China has implemented structural – and thus longer-lasting – credit-based policies, while other emerging economies have been drawn into a cyclical lending binge.
Indeed, China’s slowness to implement an alternative to the investment-led, debt-financed growth model that has prevailed for the last two decades means that its domestic credit risks are the most significant threat to the global economy today.
While China may have the financial resources to cover its debt overhang, it risks being left with a low-to-middle-income economy, high debt levels, and nominal growth rates roughly two-thirds lower than the 17% average annual rate achieved in 2004-2011.
This is bad news for other emerging economies, which have depended heavily on China’s growth for their own.
Unless emerging-market governments take advantage of the limited space provided by their foreign-exchange reserves and floating currencies to enact vital structural reforms, the onus of adjustment will fall on interest rates, compounding the effects of slowing growth and the risks associated with bad debt.
Whether this becomes a systemic issue affecting the entire global economy will hinge on China.
Insuring the Worst
In the nearly six months since Hurricane Katrina destroyed half of New Orleans, many storm victims’ expectations of help have been dashed, creating a legacy of bitterness.
That legacy may be all the more painful when we consider that many homeowners suffered unnecessarily devastating losses because of their lack of insurance or their underinsurance, often owing to the belief that they could not afford the right coverage.
Future catastrophes – storms, earthquakes, tsunamis, volcano eruptions, forest fires, agricultural or other environmental crises, disease epidemics, or terrorist attacks – are likely to result in the same kinds of problems.
So it is important to consider the causes of underinsurance and whether our insurance institutions are adequate to the risks that we face.
According to a report from the Insurance Information Institute, nearly 70% of homeowners’ claims in Louisiana were settled by the end of January, for a total of $7.5 billion dollars.
Sounds good, but there were roughly 200,000 homes that were either severely damaged or destroyed, so the total amounts to less than $40,000 per home – far below what was needed.
Indeed, a large share of New Orleans homeowners – 60% in Orleans Parish – were completely uninsured against floods.
Many of those who were insured discovered that clauses in their policies barred them from collecting full benefits.
In some cases, insurance companies argued that houses were damaged by flood, not wind, which their policies cover more generously.
That may seem like capricious hair-splitting to people who have suffered a major loss, but such terms are in the insurance contracts that they signed, whether they understood them or not.
Claims disputes have led to many lawsuits, and many of those who have lost their homes have discovered that the only help available to them now is a low-interest loan.
Not unreasonably, President George W. Bush wants government grants to bail out only the approximately 20,000 homeowners who can’t be faulted for failing to buy flood insurance, because they lived outside the designated flood plains.
Despite the disappointments, private insurance is still the best way to deal with possible future disasters.
Insurance policies that clearly specify the amounts that will be paid and the types of damage that will be covered are far better than the government-administered, after-the-fact bailout that many people seem to have expected.
Adequate private insurance can be boosted in the future through public education, improved insurance institutions, and lower insurance costs.
We need to work on all of these agendas, because each must be part of any new plan to deal with the next catastrophe.
The cost of insurance may be the most serious problem.
According to estimates by Robert Klein of Georgia State University, homeowners’ insurance premiums in Louisiana had already gone up by 70% between 1997 and 2005.
State insurance regulators resist rate increases, but they are ultimately powerless, because insurers can simply take their business elsewhere.
The National Association of Insurance Commissioners (NAIC) proposed in December that each of America’s 50 states should establish a disaster insurance fund to cover a wide range of big calamities.
The funds – modeled after similar funds in France and Spain – would be designed to cover the biggest, once-in-fifty-years catastrophes.
The federal government would then augment the protection up to the once-in-five-hundred-year level.
The NAIC’S proposal is now under discussion.
If it were fully implemented, which is unlikely, it would constitute a revolution in risk management in the US similar to that of the creation of Social Security in 1934.
But preparation for catastrophe does not have to reside exclusively with the government.
Mega-disaster risks can be handled with private financial markets, as long as these markets manage to get the full attention and interest of portfolio investors.
Consider catastrophe bonds (or “cat bonds”), which contain clauses that stipulate that the issuer of the bond (the borrower) does not have to repay the money if a specified catastrophe occurs.
The bonds can be sold to a worldwide market by insurance companies that incur major risks by writing policies.
If the insurance companies can get a good enough price for such bonds, they can eliminate their exposure to the risk of a major disaster, thereby allowing them to issue policies to homeowners at a lower cost.
Cat bonds have been growing in importance in recent years.
According to estimates by Lane Financial, there were $1.8 billion worth of cat bonds issued in the year April 2004-March 2005.
Since Katrina, issuance has accelerated.
In the first three post-Katrina months alone (September to December 2005), $2.1 billion were issued.
The total value of outstanding cat bonds is small by Katrina standards.
But the trend towards increasing sophistication and breadth of our financial markets suggests that we can expect to see much further growth in cat bonds.
Ultimately, even Hurricane Katrina and other disasters of similar magnitude are small by world standards.
The total insured property loss of Katrina, $34.4 billion according to an insurance industry estimate, even if expanded to represent uninsured losses, represents a miniscule fraction of world wealth.
But such disasters represent a much larger share of a single country’s wealth.
This is why financial theory prescribes spreading risks as evenly as possible around the world, rather than around only one country, as plans for a national catastrophe fund envision.
The possibility of managing national risks globally is another example of the advantages of economic globalization and expansion of financial markets.
Integrating Russia’s Post-Imperium
MOSCOW – With Russia’s 2012 presidential elections effectively over since Vladimir Putin’s decision to reclaim his old Kremlin office, it is time to turn from personalities to policies.
Putin plans to stay in the Kremlin for two more presidential terms, another 12 years, as he is enabled to do by the recently-amended constitution.
So who will be Russia’s next president is now a certainty; less obvious is what he hopes to achieve.
One issue, however, has now shot to the top of Russia’s political agenda: Eurasian integration.
In early October, Putin wrote a newspaper article that proclaimed what appears to be his reigning foreign-policy goal: a Eurasian Union of former Soviet states.
Two weeks later, in St. Petersburg, he hosted a meeting of Commonwealth of Independent States (CIS) prime ministers, eight of whom signed an agreement establishing a free-trade area among their countries.
On January 1, 2012, Belarus, Kazakhstan, and Russia, which now form a customs union, will join a single economic space.
And Putin wants even more: a “Eurasian Schengen” (free movement of people among the three countries, built on the example of the European Union) by 2015, followed by a currency union and, ultimately, full economic integration.
Indeed, Putin wants to restructure Russia’s relations with the former Soviet states to create not merely a bigger market, but eventually an economic bloc-cum-security alliance.
The feasibility of this plan is not to be taken for granted.
Ever since the Soviet Union broke up 20 years ago, there has been much talk about reintegrating the successor states.
Little has come of it, owing mainly to Russia’s reluctance to support the other countries financially.
At the same time, the other CIS countries have maintained an overriding focus on their own state-building and independence vis-à-vis Russia.
Both factors, however, may now be changing – at least somewhat.
Russia, which a half-dozen years ago abruptly ended its energy subsidies to Ukraine, Belarus, Moldova, and others, is now expressing interest in supporting some of its struggling neighbors, in exchange for some of their most lucrative assets.
During the 2008-2009 global crisis, Moscow began to strengthen its regional economic standing and promote the establishment of the customs union with Belarus and Kazakhstan, even at the risk of complicating its own bid for membership in the World Trade Organization.
For Russia’s partners, too, the current forms of integration, such as the customs union and the forthcoming single economic space, are pragmatic arrangements that serve their interests.
In Belarus and Kazakhstan combined, Russia has gained 25 million potential new consumers; Belarus and Kazakhstan, for their part, have widened their access to the 140 million-strong Russian market.
The Russian market is also attractive to many others, from tiny Kyrgyzstan to sizable Ukraine.
In the latter’s case, for example, the prospects of closer association with the EU have dimmed recently, owing to the EU’s internal difficulties, as well as to the Ukrainian authorities’ politically-motivated prosecution of former Prime Minister Yuliya Tymoshenko.
In his much-quoted newspaper piece, Putin denied that his new integration plans are aimed at restoring the Soviet Union under another name.
This is a credible claim, for three basic reasons: the complete evaporation of Russia’s imperial élan, its unwillingness to pay other countries’ bills, and the new countries’ unwillingness to cede too much sovereignty to the former hegemon.
Consequently, Russia has been strict about the terms of its financial assistance to Belarus, pressing its government to open up its economy to Russian business.
And, for all their interest in the Russian market, neither Belarus nor Kazakhstan has acceded to Russia’s desire that they recognize the independence of Georgia’s breakaway Abkhazia and South Ossetia regions.
Putin is ambitious, but he is also cautious.
He probably sees that only mutual economic interest can do the trick.
Creating a new Council for Mutual Economic Assistance (COMECON, the Soviet-era trade bloc), or a new Warsaw Pact, is as impossible as a latter-day Soviet Union.
Eurasian economic integration, if it stands a chance, must follow a different path.
If all parties concerned join voluntarily, and proceed in a step-by-step manner, as with the EU or the North American Free Trade Agreement, Eurasian integration will benefit all of those involved.
Rather than behaving like an empire secretly trying to re-invent itself, Russia has an opportunity to become a regional leader.
But Eurasian integration will fail if Russia’s partners see the process as Moscow’s attempt at political domination.
All of this has geopolitical implications.
In Eastern Europe, Russia is clearly drawing Belarus closer, and is competing with the EU over Ukraine’s future economic orientation.
Meanwhile, in Central Asia, Russia, having built strong economic ties with Kazakhstan, is now reaching out to Kyrgyzstan, thus competing more actively with neighboring China.
Rather than choosing between Brussels and Beijing, Moscow now seeks to turn Russia’s post-imperial neighborhood into a community.
And, as a long-term goal, Putin envisions a close economic relationship between his Eurasian Union and the EU in what he calls a Greater Europe.
In the West, Putin’s best-remembered statement about the Soviet Union described its end as the “greatest catastrophe of the twentieth century.”
But Putin’s other comments, less familiar to Western readers, refer to the Soviet system as “unviable.”
In his ruthless judgment, those who want the USSR back “have no brains.”
Twenty years after the loss of its twentieth-century empire, Russia is ready to move toward a new kind of integration with its ex-provinces.
This is not intended as a threat to others; rather, economic integration is a test of how much Russia has learned about the world since 1991, and of how much more modern it has become as a result.
Intellectual-Property Rights and Wrongs
Last October, the General Assembly of the World Intellectual Property Organization (WIPO) decided to consider what a development-oriented intellectual property regime might look like.
The move was little noticed, but, in some ways, it was as important as the World Trade Organization’s decision that the current round of trade negotiations be devoted to development.
Both decisions acknowledge that the current rules of the international economic game reflect the interests of the advanced industrial countries – especially of their big corporations – more than the interests of the developing world.
Without intellectual property protection, incentives to engage in certain types of creative endeavors would be weakened.
But there are high costs associated with intellectual property.
Ideas are the most important input into research, and if intellectual property slows down the ability to use others’ ideas, then scientific and technological progress will suffer.
In fact, many of the most important ideas – for example, the mathematics that underlies the modern computer or the theories behind atomic energy or lasers – are not protected by intellectual property.
Academics spend considerable energy freely disseminating their research findings.
I am pleased when someone uses my ideas on asymmetric information – though I do appreciate them giving me some credit.
The growth of the “open source” movement on the Internet shows that not just the most basic ideas, but even products of enormous immediate commercial value can be produced without intellectual property protection.
By contrast, an intellectual property regime rewards innovators by creating a temporary monopoly power, allowing them to charge far higher prices than they could if there were competition.
In the process, ideas are disseminated and used less than they would be otherwise.
The economic rationale for intellectual property is that faster innovation offsets the enormous costs of such inefficiencies.
But it has become increasingly clear that excessively strong or badly formulated intellectual property rights may actually impede innovation – and not just by increasing the price of research.
Monopolists may have much less incentive to innovate than they would if they had to compete.
Modern research has shown that the great economist Joseph Schumpeter was wrong in thinking that competition in innovation leads to a succession of firms.
In fact, a monopolist, once established, may be hard to dislodge, as Microsoft has so amply demonstrated.
Indeed, once established, a monopoly can use its market power to squelch competitors, as Microsoft so amply demonstrated in the case of the Netscape Web browser.
Such abuses of market power discourage innovation.
Moreover, so-called “patent thickets” – the fear that some advance will tread on pre-existing patents, of which the innovator may not even be aware – may also discourage innovation.
After the pioneering work of the Wright brothers and the Curtis brothers, overlapping patent claims thwarted the development of the airplane, until the United States government finally forced a patent pool as World War I loomed.
Today, many in the computer industry worry that such a patent thicket may impede software development.
The creation of any product requires many ideas, and sorting out their relative contribution to the outcome – let alone which ones are really new – can be nearly impossible.
Consider a drug based on traditional knowledge, say, of an herb well known for its medicinal properties.
How important is the contribution of the American firm that isolates the active ingredient?
Pharmaceutical companies argue that they should be entitled to a full patent, paying nothing to the developing country from which the traditional knowledge was taken, even though the country preserves the biodiversity without which the drug would never have come to market.
Not surprisingly, developing countries see things differently.
Society has always recognized that other values may trump intellectual property. The need to prevent excessive monopoly power has led anti-trust authorities to require compulsory licensing (as the US government did with the telephone company AT&T).
When America faced an anthrax threat in the wake of the September 11, 2001, terrorist attacks, officials issued a compulsory license for Cipro, the best-known antidote.
Unfortunately, the trade negotiators who framed the intellectual-property agreement of the Uruguay trade round of the early 1990’s (TRIP’s) were either unaware of all of this, or more likely, uninterested. I served on the Clinton administration’s Council of Economic Advisors at the time, and it was clear that there was more interest in pleasing the pharmaceutical and entertainment industries than in ensuring an intellectual-property regime that was good for science, let alone for developing countries.
I suspect that most of those who signed the agreement did not fully understand what they were doing.
If they had, would they have willingly condemned thousands of AIDS sufferers to death because they might no longer be able to get affordable generic drugs?
Had the question been posed in this way to parliaments around the world, I believe that TRIP’s would have been soundly rejected.
Intellectual property is important, but the appropriate intellectual-property regime for a developing country is different from that for an advanced industrial country.
The TRIP’s scheme failed to recognize this.
In fact, intellectual property should never have been included in a trade agreement in the first place, at least partly because its regulation is demonstrably beyond the competency of trade negotiators.
Besides, an international organization already exists to protect intellectual property.
Hopefully, in WIPO’s reconsideration of intellectual property regimes, the voices of the developing world will be heard more clearly than it was in the WTO negotiations; hopefully, WIPO will succeed in outlining what a pro-developing intellectual property regime implies; and hopefully, WTO will listen: the aim of trade liberalization is to boost development, not hinder it.
Intelligent Economic Design
BERKELEY – As Stephen Cohen, with whom I wrote The End of Influence: What Happens When Other Countries Have the Money, likes to say, economies do not evolve; they are, rather, intelligently designed.
He also likes to say that, though there is an intelligence behind their design, this does not mean that the design is in any sense wise.
The first claim is, I think, incontrovertible.
Since long before Croesus, King of Lydia, came up with the game-changing idea of standardized “coinage,” what governments have done and not done to structure, nudge, and put their thumbs on the scales has been decisively important for economic development.
Just look around you.
Notice the hundred-fold divergence across political jurisdictions in relative levels of economic productivity and prosperity?
I dare anyone to claim that the overwhelming bulk of that disparity springs from causes other than history and the current state of governance.
The second claim is also, I think, true.
To say that economies are the products of intelligent design means only that some human intelligence or intelligences lies behind the design.
It does not mean that the design is smart or optimal.
For one thing, the process by which the design decisions are made resembles committee work: most people want a horse, but the push and pull and tug of negotiation produces a camel.
Moreover, the government officials, lobbyists, and interest groups doing the designing may not have the public interest in mind – or even know what the public interest happens to be.
Most of the time in America, the process of intelligent design of the economy has gone well: that is why Americans are so relatively and absolutely rich today.
After all, the Founding Fathers were keen on redesigning the infant American economy.
Alexander Hamilton was clear on the primacy of commerce and industry.
In particular, Hamilton was convinced of the importance of a sophisticated banking system to support the growing economy.
And he and his Federalist colleagues, including John Adams, believed strongly in providing infant industries with room to grow – even using money from the Department of War to fund experiments in high-tech industry.
When the Democratic-Republicans, led by Thomas Jefferson and James Madison, replaced the Federalists, they quickly decided that their small-government principles were an out-of-power luxury.
Wars of conquest, territorial acquisition, continental surveying, and canal and then railroad subsidies were good for voters, immigrants, and pretty much everyone else except the outnumbered and outgunned Native Americans who got in the way.
Indeed, any government that builds infrastructure and allocates land titles on the scale of the nineteenth-century US government is “Big Government” incarnate.
Add steep tariffs on imported manufactured goods – rammed through over the angry protests of farmers and southern planters – and you have the policies that intelligently designed much of nineteenth- and early twentieth-century America.
After World War II, it was again government that led the redesign of the US economy.
The decisions to build an interstate highway system (and to spend most of that money on suburban commuter roads) and to jump-start the long-term mortgage market – reflecting the widespread belief that General Motors’ interests were identical with America’s – literally reconfigured the landscape.
Combine that with the large-scale development of the world’s leading research universities, which then educated tens of millions of people, and with the tradition of using defense money to finance high-tech research and development, and, voilà, you have the post-war US economy.
Whenever push has come to economic shove, America’s government has even deliberately devalued the dollar in the interest of economic prosperity.
Franklin Roosevelt did it during the Great Depression, and Richard Nixon and Ronald Reagan did it, too.
This history is worth reviewing because America is poised for another debate over whether its economy evolves or is designed, with President Barack Obama’s opponents claiming that whatever is good in America’s economy has always evolved with no guidance, and that whatever is bad has been designed by government.
This claim is, of course, ludicrous.
American governments will continue to plan and design the development of the economy, as they always have in the past.
The question is how, and whether the design will be in any sense wise.
But there are two dangers in America’s forthcoming debate. The first concerns the term likely to be used to frame the debate: competitiveness.
“Productivity” would be much better. "Competitiveness" carries the implication of a zero-sum game, in which America can win only if its trading partners lose.
That is a misleading, and dangerous, implication.
Instead, all else being equal, richer trading partners benefit America: they make more good stuff for Americans to buy and sell more cheaply, and their stronger demand means that they are willing to pay more for the stuff that America has to sell.
Win-win.
The second danger is that “competitiveness” implies that what is good for companies located in America – good, that is, for their investors, executives, and financiers – is good for America as a whole.
Back when President Dwight D. Eisenhower’s cabinet nominee Charlie Wilson claimed that what was “good for America was good for General Motors – and vice versa,” GM included not just shareholders, executives, and financiers, but also suppliers and members of the United Auto Workers union.
By contrast, General Electric CEO Jeffrey Immelt, recently appointed by Obama to lead the President’s Council on Jobs and Competitiveness, runs a company that has long since narrowed to executives, investors, and financiers.
Let us hope that the looming debate goes well.
A more prosperous and rapidly growing America – a scenario in which the rest of the world has a vital interest – hangs in the balance.
International Economic Strategy after September 11
International Justice Supports National Justice
In recent years, an emerging international system of justice has begun to undermine the old calculus of tyrants and torturers.
Recently they could commit their crimes with impunity, bludgeoning their nation's judicial system into submission.
Now international war crimes tribunals have been created for Rwanda and former Yugoslavia, national courts have indicted despots from other countries, and a permanent International Criminal Court will soon be established.
Yet international justice is attacked as elitist and undemocratic.
Critics complain that home-grown national justice is being replaced by distant, unaccountable international tribunals.
Decrying a new legal imperialism, they ask why foreign prosecutors should make critical decisions about justice concerning countries with which they have no personal connection.
Recent experience, however, suggests that, far from supplanting national law enforcement, international justice is beginning to spur toward national prosecutions, reinforcing rather than replacing local efforts.
The clearest case concerns former Chilean dictator Augusto Pinochet.
He left Chile for England in October 1998 confident that he would continue to enjoy impunity from prosecution until his dying days.
This confidence lay in two legal gifts he had bestowed upon himself - an amnesty for his crimes and immunity as a senator-for-life.
But once Pinochet was arrested in London, on charges filed by a Spanish judge, his carefully constructed edifice of impunity began to crumble.
His arrest, and the House of Lords' later approval of it, legitimized the idea of prosecuting the former dictator.
Indeed, in an effort to secure Pinochet's return, Chilean officials vowed for the first time to prosecute him themselves.
As a result, when Pinochet was returned to Chile sixteen months later, on medical grounds, he faced revived criminal charges filed by victims and survivors of his rule.
The Chilean courts allowed these cases to proceed by stripping Pinochet of his parliamentary immunity and endorsing a legal theory to bypass the amnesty.
Because of failing health, Pinochet may still escape punishment.
But the effect of his case on international justice ensures that, at the very least, he will be remembered for his indictment in Chile rather than for the impunity he had sought to ensure.
Another instance in which international justice has had a positive effect is in Chad.
In February 2000, at the request of victims, Senegal indicted and arrested Chad's former dictator Hissene Habre, who had taken refuge there.
The fate of that prosecution in Senegal remains uncertain, but it revived the once moribund issue of justice in Chad.
Last October, seventeen victims and survivors filed criminal complaints in Chad for murder, "disappearance," and torture against one-time members of Habre's secret service.
Chad's current president, Idriss Deby, recently met with victims for the first time and promised to support their cases.
He also vowed to rid his administration of Habre's security agents and to grant access to the files of a truth commission that investigated Habre's rule.
The international human rights system plays a similar role in promoting national prosecutions.
For example in Guatemala, where the findings of a UN truth commission has at last sparked a serious judicial investigation of former President Rios Montt for crimes against humanity committed during his scorched-earth attacks on perceived rural opponents in 1982-83.
An amendment to Argentina's Constitution giving international treaties constitutional force lay behind an Argentine court's historic decision this month, reversing amnesties adopted under military pressure in the 1980s for atrocities committed during the country's 1976-83 "dirty war."
The International Criminal Court - a tribunal with potential worldwide jurisdiction over genocide, war crimes, and crimes against humanity - is built on a comparable catalytic theory. It has jurisdiction only insofar as national governments fail to investigate and, if appropriate, prosecute a case in good faith.
Of course, national justice does sometimes fail - for lack of will or capacity - and international justice must step in.
In Indonesia, for example, the threat of international justice for the September 1999 rampage in East Timor led to the Indonesian government's publishing of a list of twenty-two suspects.
But a year-and-a-half later, Indonesia's government has not prosecuted anyone. An international tribunal may be the only hope.
Similarly, the war crimes tribunal for former Yugoslavia, based in The Hague, insists on the surrender of former Yugoslav President Slobodan Milosevic and other indicted suspects.
Milosevic's victims and survivors - mostly ethnic Bosnians, Albanians, and Croats - have little confidence that the Serb-dominated Yugoslav government, emerging from a decade of ethnic wars, will ever prosecute their cause in good faith.
Nor has Belgrade given grounds for confidence.
It speaks of prosecuting Milosevic for corruption or the murder of a few Serb political opponents, but not for mass atrocities committed against other ethnic groups.
Its apparent willingness to prosecute Milosevic at all is largely due to the threat of international justice.
But the half-hearted prosecution that it has been willing to contemplate so far highlights the need for an international tribunal.
Donors should withhold all non-humanitarian aid to Belgrade until it surrenders Milosevic for trial in The Hague.
Experience shows that international justice is less a threat to national justice than a backstop; that it is less likely to replace national justice than bolster it.
In any case, that developing partnership between national and international justice means that tyrants and torturers - past and future - can no longer blithely assume lifelong impunity.
International Norms in Cyberspace
CAMBRIDGE – Last month, the Netherlands hosted the Global Conference on Cyberspace 2015, which brought together nearly 2,000 government officials, academics, industry representatives, and others.
I chaired a panel on cyber peace and security that included a Microsoft vice president and two foreign ministers.
This “multi-stakeholder” conference was the latest in a series of efforts to establish rules of the road to avoid cyber conflict.
The capacity to use the Internet to inflict damage is now well established.
Many observers believe the American and Israeli governments were behind an earlier attack that destroyed centrifuges at an Iranian nuclear facility.
Some say an Iranian government attack destroyed thousands of Saudi Aramco computers.
Russia is blamed for denial-of-service attacks on Estonia and Georgia.
And just last December, US President Barack Obama attributed an attack on Sony Pictures to the North Korean government.
Until recently, cyber security was largely the domain of a small community of computer experts.
When the Internet was created in the 1970s, its members formed a virtual village; everyone knew one another, and together they designed an open system, paying little attention to security.
Then, in the early 1990s, the World Wide Web emerged, growing from a few million users then to more than three billion today.
In little more than a generation, the Internet has become the substrate of the global economy and governance worldwide.
Several billion more human users will be added in the next decade, as will tens of billions of devices, ranging from thermostats to industrial control systems (the “Internet of Things”).
All of this burgeoning interdependence implies vulnerabilities that governments and non-governmental actors can exploit.
At the same time, we are only beginning to come to terms with the national-security implications of this.
Strategic studies of the cyber domain resemble nuclear strategy in the 1950s: analysts are still not clear about the meaning of offense, defense, deterrence, escalation, norms, and arms control.
The term “cyber war” is used very loosely for a wide range of behaviors, ranging from simple probes, website defacement, and denial of service to espionage and destruction.
In this, it reflects dictionary definitions of “war,” which include any organized effort to “stop or defeat something that is viewed as dangerous or bad” (for example, “war on drugs”).
A more useful definition of cyber war is any hostile action in cyberspace that amplifies or is equivalent in effect to major physical violence.
Determining whether an action meets that criterion is a decision that only a country’s political leaders can make.
There are four major categories of cyber threats to national security, each with a different time horizon and (in principle) different solutions: cyber war and economic espionage, which are largely associated with states, and cyber crime and cyber terrorism, which are mostly associated with non-state actors.
The highest costs currently stem from espionage and crime, but the other two may become greater threats over the next decade than they are today.
Moreover, as alliances and tactics evolve, the categories may increasingly overlap.
During the Cold War, ideological competition limited US-Soviet cooperation, but both sides’ awareness of nuclear destructiveness led them to develop a crude code of conduct to avoid military confrontation.
These basic rules of prudence included no direct fighting, no first use of nuclear weapons, and crisis communication, such as the Moscow-Washington hotline and the Accidents Measures and Incidents at Sea agreements.
The first formal arms-control agreement was the 1963 Limited Test Ban Treaty, which can be considered mainly an environmental treaty.
The second major agreement was the 1968 Nuclear Non-Proliferation Treaty, which aimed at limiting the spread of nuclear weapons.
The US and the Soviet Union perceived both agreements as positive-sum games, because they involved nature or third parties.
Similarly, the most promising areas for early international cooperation on securing cyberspace are problems posed by third parties such as criminals and terrorists.
Russia and China have sought a treaty for broad United Nations oversight of the Internet.
Though their vision of “information security” could legitimize authoritarian governments’ censorship, and is therefore unacceptable to democratic governments, it may be possible to identify and target behaviors that are illegal everywhere.
Limiting all intrusions would be impossible, but one could start with cyber crime and cyber terrorism.
Major states would have an interest in limiting damage by agreeing to cooperate on forensics and controls.
Of course, historical analogies are imperfect.
Obviously, cyber technology is very different from nuclear technology, particularly because non-governmental actors can exploit it much more easily.
Nonetheless, some institutions, both formal and informal, already govern the basic functioning of the Internet.
The US wisely plans to strengthen the non-governmental Internet Corporation for Assigned Names and Numbers (ICANN) by having it supervise the Internet “address book.”
There is also the Council of Europe’s 2001 Convention on Cybercrime, with Interpol and Europol facilitating cooperation among national police forces.
And a UN Group of Government Experts has been analyzing how international law relates to cyber security.
It is likely to take longer to conclude agreements on contentious issues such as cyber intrusions for purposes like espionage and preparing the battlefield.
Nonetheless, the inability to envisage an overall cyber arms-control agreement need not prevent progress on some issues now.
International norms tend to develop slowly.
It took two decades in the case of nuclear technology.
The most important message of the recent Dutch conference was that massive cyber vulnerability is now nearing that point.
Renovating the World Order
WARSAW – Russia-instigated violence has returned to Ukraine.
The Islamic State continues its bloodstained territorial conquests.
As violent conflicts and crises intensify worldwide, from Africa to Asia, it is becoming abundantly clear that there is no longer a guarantor of order – not international law or even a global hegemon – that countries (and would-be state-builders) view as legitimate and credible.
To develop a strategy for restoring order requires an understanding of the complex drivers of today’s fissures.
And the best place to start is with the fate of four major empires.
That story begins in 1923 with the collapse of the Ottoman Empire, which, at its peak in the sixteenth and seventeenth centuries, controlled much of southeastern Europe, western Asia, and North Africa.
Nearly seven decades later came the dissolution of the Soviet Union, followed by the renaissance of a Chinese empire that aims to translate its economic success into geopolitical influence.
Finally, and most important, there is the declining influence of the United States – what Raymond Aron called “the Imperial Republic.”
After all, it is the US that organized and supported the post-1945 multilateral institutions – the United Nations Security Council, the International Monetary Fund, and the World Bank, among others – to sustain global stability.
The failure of that system to adapt to changing geopolitical and economic realities has raised serious questions about its legitimacy.
With the world now divided less into “empires,” the number of actors (including many dysfunctional ones) on the world stage has multiplied – a trend propelled by the notion that identity and national sovereignty are inextricably linked.
In the aftermath of the decolonization of Africa, the proliferation of states – including those that some considered “artificial” – was widely criticized for fueling tensions and instability on an already-fragile continent.
A similar phenomenon may now be occurring on a global scale.
Still another factor contributing to the rise of disorder is the explosion of inequality.
With globalization, the divide between the richest and the poorest – both within and among countries – has grown larger, diminishing the sense of unity of purpose that is so important to a legitimate international system.
How can one speak of the “common good,” when so few have so much, and so many have so little?
Against this background, it will undoubtedly be extremely difficult to create an international order that strikes the needed balance between legitimacy and power.
To meet this challenge, three potential approaches stand out.
The first approach entails redefining the international order so that it better reflects geopolitical realities.
After World War II, a bipolar world order, dominated by the US and the Soviet Union, emerged.
When the Soviet Union collapsed, the world became unipolar, with the US as the sole superpower.
But, in the last decade, as the US has retreated from its global leadership position, no other country has stepped in to fill the void, leaving the system vulnerable to instability.
Clearly, another power must help the US to support global stability and promote multilateral cooperation.
The European Union, mired in crisis, is not prepared to fill this role.
Russia not only lacks the means to assume such a position; it has also proven itself to be a primary generator of disorder.
And emerging countries like Brazil and India, as well as developed countries like Japan, are great regional powers, but have yet to develop a global mindset.
In fact, the only country with the means and ambition to serve alongside the US as a world leader is China (an obvious conclusion, perhaps).
Together, these countries can reinvigorate the international system so that it is better able to stem the tide of chaos and violence.
Of course, the creation of such a bipolar world order would not be a panacea.
Despite its relative decline, the US still possesses important structural advantages over China relating to innovation and values, not to mention vastly greater energy resources.
As a result, the new order would be lopsided.
Still, the recognition of China as a true global power would force the US to come to terms with its declining hegemony and compel China’s leaders to recognize their international responsibilities.
The second approach to revitalizing the international system is to reinforce the values that underpin it.
At the end of the eighteenth century, Jean-Jacques Rousseau was convinced that the absence of democracy in Europe constituted one of the main causes of war.
Today, it seems that what is missing is the rule of law.
The dynamic is simple.
As ordinary citizens have watched the wealthy get wealthier – often aided, directly or indirectly, by corrupt governments – they have become increasingly frustrated.
In order to quell popular unrest, many governments have turned to nationalism, often in its most revanchist form, blaming some external enemy – say, the Western countries that imposed sanctions on Russia – for their citizens’ struggles.
An international system that enforced the rule of law effectively would go a long way toward mitigating such conflict-generating behaviors.
The third approach is to reevaluate the functioning of multilateral institutions.
Specifically, the best way to transcend the paralysis of the UN Security Council is to shift some important decisions to a more informal institution like the G-20, whose composition, while far from ideal, is more representative of today’s geopolitical dynamics.
These three approaches are not the only options that global leaders have for reforming the international system.
But the one approach that they must not choose is to do nothing – unless they are willing to countenance further erosion of the global order and, with it, a continued descent into chaos and violence.
The Digital Transformation of Europe
SAN JOSE – Europe is on the cusp of an unprecedented technological transformation.
I call it the Internet of Everything: the penetration of the World Wide Web into the everyday aspects of our lives.
Wearable technology will tell us how well we are sleeping and whether we need to exercise.
Sensors in the street will help us avoid traffic jams and find parking. Telemedicine applications will allow physicians to treat patients who are hundreds of miles away.
This massive transition will transform how citizens interact with their governments, revolutionize entire industries, and change the way we engage with one another.
In Europe, the Internet of Everything is emerging as the single most promising way to revive a moribund economy and tackle the continent's stubborn unemployment problem, with companies, cities, and even countries positioning themselves as leaders in innovation, growth, and the creation of jobs.
The most recent example is France.
Last month, Prime Minister Manuel Valls and I announced an ambitious partnership to promote a digital transformation of the entire country.
The collaboration, which includes a $100 million investment from Cisco in French startups, could transform energy management, health care, and education – boosting France's economic competitiveness, job creation, dynamism, and growth in the process.
France's program is a major step toward a digital Europe, following German Chancellor Angela Merkel's Industrie 4.0 initiative and the United Kingdom's planned expansion of innovation centers to foster technological breakthroughs and pioneer solutions in energy, transport, health care, and education.
Cities too are embracing digitization.
Barcelona has installed in-ground parking sensors and launched connected public transportation as part of its Smart City strategy.
Nice has constructed a “connected boulevard," including smart lighting and environmental monitoring.
And the Port of Hamburg has a digital system to reduce water, rail, and ground traffic congestion.
Projects like these are being replicated across the continent, generating billions of dollars in value in terms of reduced costs, productivity gains, and increased revenues.
As a result, Europe's leaders see not only opportunities for growth, but also the need to avoid being left behind.
To create a truly digital Europe will require a foundation of high-speed, high-quality broadband, both wired and wireless.
As part of Europe's Digital Agenda, policymakers have set out to connect 50% of European households to superfast broadband (100 mbps or greater) by 2020.
They also aim to connect all residences to broadband (at least 30 mbps) by this time.
These targets should be fully embraced, and policymakers should continue to encourage major investments in broadband, as well as in the infrastructure needed to support the wireless devices in which we have all come to depend.
Of course, Europe will also have to encourage entrepreneurship, which requires fostering a culture of risk-taking, facilitating access to venture capital, and investing in strong educational institutions.
Many countries are doing just that, implying that the next game-changing technology may not come from Silicon Valley; it could just as easily be developed in a lab in Paris, London, or Berlin.
Over the longer term, Europe will need a workforce trained for careers in the new digitized economy.
It is estimated that Europe will have an e-skills gap that, if filled, could lead to 850,000 potential jobs in 2015, rising to twice that by 2020.
On a continent where youth unemployment exceeds 50% in some countries, there should be no problem finding young and eager people able to do these jobs, provided they receive the proper training.
This gap cannot be closed overnight, but countries that do nothing to overcome it could very well fall behind.
Widening the talent pipeline sufficiently will require a generational commitment to teaching math and science, providing technical training, and mentoring young people of all backgrounds so they understand the full range of possibilities that a career in technology affords.
As Europe continues down the road of digital transformation, the possibilities for growth are immediate and significant.
The continent is already the world's largest economic bloc, with a GDP of more than €14 trillion ($15.2 trillion) in 2014.
But its growth has been waning.
The European Commission estimates – conservatively, in my opinion – that the digital revolution could spur an “additional 2.1% of GDP growth over the baseline."
On the jobs front, the Internet of Everything will be a key driver of employment.
Advances in cloud computing alone are expected to create 2.5 million additional jobs in Europe by 2020.
The digital transformation will bring opportunities and create new types of jobs: systems developers, transportation network engineers, medical device consultants, data analysts, electrical engineers for smart grids, and many more.
As Europe charts its economic course for the next decade, its leaders must ensure that digital transformation forms the foundation of their strategy.
This will allow them to create a Europe that is stronger, faster, more dynamic – and more digital.
Interpreting Facts the Bush Way
Last month's American election saw the two sides throw facts, figures, interpretations, and counter-interpretations at the hapless electorate.
It is an old trick: throw enough mud and some of it will stick.
Confuse the voters enough, and eventually more will be likely to stay with the horse they know.
Most of the media not controlled by the right wing tried to play the role of honest broker, giving equal weight to each interpretation.
If one side said the sky was blue and the other said it was orange, journalists would work hard, for the sake of appearing balanced, to find some academic, even a color blind one, willing to say that the sky was indeed orange.
But is it all just a matter of opinion?
Are all interpretations equally valid?
I can answer that question only in my own area expertise, economics.
With the election over, the debate itself has much to teach us about economics, economic policy, and media spin.
President Bush cited seeming huge job growth in the last 13 months, claiming that America's labor market turned the corner.
Is this true?
The claimed increase in jobs has barely kept up with growth in the labor force.
Although job growth in October was robust at last, in September there were only 96,000 new jobs, 50,000 short of what was needed.
But at this point in the business cycle, the United States normally should be creating jobs at a rapid pace to make up for job losses earlier in the cycle - as it did in 1993-1995.
In fact, this is the worst job recovery after any of America's nine postwar recessions.
No spin can alter this fact.
America has not turned the corner.
On the contrary, most forecasters expect 2005 to be weaker than 2004, with growth insufficient to eliminate the "job deficit" - the gap between the number of jobs needed during the past four years to provide employment for new labor-market entrants and the actual number of jobs created.
But don't blame Bush.
The economy was in a downturn when he took office in 2001, and 9/11 and Iraq made matters worse.
True, the economy was slowing when Bush took office, but he also inherited an enormous fiscal surplus, amounting to 2% of GDP, which he transformed into a yawning deficit, equaling 4.5% of GDP.
Normally, a fiscal turnaround of this magnitude would provide massive stimulus.
The economy should be going gangbusters.
Inflation - not jobs - should be the main worry.
This has not happened because Bush pushed a tax cut that was not designed to stimulate the economy, but to benefit the rich.
A tax cut to low-income individuals or increased unemployment benefits would have provided far more stimulus to consumption, just as a temporary investment tax credit would have boosted capital spending far more than reducing taxes on dividends did.
In fact, fixed business investment as a share of GDP is some 2% lower today than 4 years ago.
True, the terrorist attacks on America and the Iraq war hit the economy hard. But it was evident even before 9/11 that Bush's medicine wasn't working.
In his annual economic report in February 2002, and again in February 2003 and February 2004, Bush confidently - and wrongly - predicted that his tax cut would create millions of jobs.
Finally, Bush cannot be given a pass on the Iraq war and its economic consequences.
Critics warned that the war would cause instability in Iraq and the Middle East, and that this would lead to high oil prices.
Bush ignored these warnings. But the critics were right.
Today, two factors threaten America's recovery.
First, high household debt means that if interest rates rise, as they do in a normal recovery, households will find themselves strapped.
Moreover, real estate prices might fall dramatically, in which case many households may find the value of their mortgage exceeding the value of their house.
US bankruptcy rates are already up 33% over four years ago.
But can Bush really be blamed for Americans' borrowing too much?
He can and should.
Failure to design an effective fiscal stimulus shifted the burden to monetary policy.
Interest rates were brought to new lows, which helped the economy, but without stimulating much investment.
Monetary loosening worked only because households took on more debt, leaving the economy more vulnerable to rising interest rates.
The second threat to economic recovery is high oil prices.
Bush's failed Mid-East policy is only part of the problem.
He could, and should, have pushed for strong energy conservation measures; had he done so four years ago, America's consumption - and oil prices - would be lower today.
Japan and other developed countries prove that a high standard of living requires only a fraction of the energy per dollar of GDP.
Instead, Bush pushed for subsidies to oil companies to encourage more domestic production.
This "drain America first" policy will leave America more vulnerable in the future.
We know from the recent US election campaign that facts do not always speak for themselves.
Yet it doesn't take much to work out where America's economy is today, where it's heading, and who's to blame.
But more important than assessing blame is correcting mistakes.
Unfortunately, President Bush has been as reluctant to admit the mistakes of his economic policy as he has in the case of his Iraqi misadventure.
Without grasping what has gone wrong in either area, it will be difficult to avoid repeating the same mistakes.
Golden Slumbers
CAMBRIDGE – In principle, holding gold is a form of insurance against war, financial Armageddon, and wholesale currency debasement. And, from the onset of the global financial crisis, the price of gold has often been portrayed as a barometer of global economic insecurity.
So, does the collapse in gold prices – from a peak of $1,900 per ounce in August 2011 to under $1,250 at the beginning of July 2013 – represent a vote of confidence in the global economy?
To say that the gold market displays all of the classic features of a bubble gone bust is to oversimplify.
There is no doubt that gold’s heady rise to the peak, from around $350 per ounce in July 2003, had investors drooling.
The price would rise today because everyone had become convinced that it would rise even further tomorrow.
Doctors and dentists started selling stocks and buying gold coins.
Demand for gold jewelry in India and China soared.
Emerging-market central banks diversified out of dollars and into gold.
The case for buying gold had several strong components.
Ten years ago, gold was selling at well below its long-term inflation-adjusted average, and the integration of three billion emerging-market citizens into the global economy could only mean a giant long-term boost to demand.
That element of the story, incidentally, remains valid.
The global financial crisis added to gold’s allure, owing initially to fear of a second Great Depression.
Later, some investors feared that governments would unleash inflation to ease the burden of soaring public debt and address persistent unemployment.
As central banks brought policy interest rates down to zero, no one cared that gold yields no interest.
So it is nonsense to say that the rise in the price of gold was all a bubble.
But it is also true that as the price rose, a growing number of naïve investors sought to buy in.
Lately, of course, the fundamentals have reversed somewhat, and the speculative frenzy has reversed even more.
China’s economy continues to soften; India’s growth rate is down sharply from a few years ago.
By contrast, despite the ill-advised fiscal sequester, the US economy appears to be healing gradually.
Global interest rates have risen 100 basis points since the US Federal Reserve started suggesting – quite prematurely, in my view – that it would wind down its policy of quantitative easing.
With the Fed underscoring its strong anti-inflation bias, it is harder to argue that investors need gold as a hedge against high inflation.
And, as the doctors and dentists who were buying gold coins two years ago now unload them, it is not yet clear where the downward price spiral will stop.
Some are targeting the psychologically compelling $1,000 barrier.
In fact, the case for or against gold has not changed all that much since 2010, when I last wrote about it.
In October of that year, the price of gold – the consummate faith-based speculative asset – was on the way up, having just hit $1,300.
But the real case for holding it, then as now, was never a speculative one.
Rather, gold is a hedge.
If you are a high-net-worth investor, or a sovereign wealth fund, it makes perfect sense to hold a small percentage of your assets in gold as a hedge against extreme events.
Holding gold can also make sense for middle-class and poor households in countries – for example, China and India – that significantly limit access to other financial investments.
For most others, gold is just another gamble that one can make.
And, as with all gambles, it is not necessarily a winning one.
Unless governments firmly set the price of gold, as they did before World War I, the market for it will inevitably be risky and volatile.
In a study published in January, the economists Claude Erb and Campbell Harvey consider several possible models of gold’s fundamental price, and find that gold is at best only loosely tethered to any of them.
Instead, the price of gold often seems to drift far above or far below its fundamental long-term value for extended periods.
(This behavior is, of course, not unlike that of many other financial assets, such as exchange rates or stock prices, though gold’s price swings may be more extreme.)
Gold bugs sometimes cite isolated historical data that suggest that gold’s long-term value has remained stable over the millennia.
For example, Stephen Harmston’s oft-cited 1998 study points to anecdotal evidence that an ounce of gold bought 350 loaves of bread in the time of Nebuchadnezzar, king of Babylon, who died in 562 BC.
Ignoring the fact that bread in Babylon was probably healthier than today’s highly refined product, the price of gold today is not so different, equal to perhaps 600 loaves of bread.
Of course, we do not have annual data for Babylonian gold prices.
We can only assume, given wars and other uncertainties, that true market prices back then, like today, were quite volatile.
So the recent collapse of gold prices has not really changed the case for investing in it one way or the other.
Yes, prices could easily fall below $1,000; but, then again, they might rise.
Meanwhile, policymakers should be cautious in interpreting the plunge in gold prices as a vote of confidence in their performance.
In the D-Mark’s Shadow
In the Footsteps of Gandhi, Mandela, and Havel
LONDON – Liu Xiaobo, the imprisoned Chinese writer and human-rights campaigner, will receive the Nobel Peace Prize on December 10.
For the first time in history, however, neither the laureate nor any member of his immediate family will be present in Oslo to accept the award.
China’s government has blocked Liu’s wife, the acclaimed photographer Liu Xia, from participating by keeping her under virtual house arrest in Beijing.
It has browbeaten other countries into boycotting the award ceremony.
Not surprisingly, Vladimir Putin’s Russia was among the first to kowtow to China’s Diktat.
More ominously, it looked for a while like the Norwegian Nobel committee itself might bow to Beijing, too.
But in the end it decided to go ahead with the award.
That is only fitting: an award for moral courage ought not to be compromised by those offering it.
When Liu learned that he had been awarded this year‘s Nobel Peace Prize, his first reaction was telling: “This prize is given to the victims of the Tiananmen Square massacre.”
That simple phrase neatly encapsulates Liu’s peaceful 20-year-resistance to China’s government, which began with a hunger strike in Tiananmen Square.
Over the next two decades, he was imprisoned several times, and held under house arrest when not in prison.
Despite this ongoing persecution, Liu continued to write and petition the government on behalf of the people of China.
Like the greatest non-violent freedom fighters of modern times – Mahatma Gandhi, Martin Luther King, Nelson Mandela, and Václav Havel – he sacrificed his own freedom to highlight his people’s lack of it.
Today, many individuals and countries are demonstrating their support for the Nobel Peace Prize Committee’s decision to award the prize to Liu.
Indeed, Havel and a previous laureate, Desmond Tutu, were consistent advocates of awarding the prize to him.
But, in addition to supporting Liu’s achievements by making certain that they are represented at the ceremony in Oslo, world leaders need to come to grips with the Chinese government’s reaction.
Although much of the world recognizes that it is in economic competition with China, it often fails to see that it is also in moral competition with China.
The Communist Party of China used to rule a destitute power.
But, having become much richer over the past three decades, China is now proposing to the world its own model of development – and, indeed, of civilization.
This model, which some have dubbed “The Beijing Consensus” is explicit: there are no moral standards, only material ones.
Human rights and freedom can be made to disappear not only from Web sites, but also from reality.
Though now better off than they have ever been in material terms, the Chinese people under the current regime are denied any real opportunity to retain and refine their own dignity beyond the quest for wealth and luxury goods.
Liu’s prize is a rebuke to the regime, because it rejects the dogma that nothing but the pursuit of economic interest matters.
China’s rulers know that in a system in which justice is absent, Liu’s efforts to speak to a higher moral calling requires only moral courage to be followed.
The regime has tried to separate politics and economics, but Liu has shown that this is impossible.
Any Chinese can become another Liu Xiaobo if they choose to see through the lies of the regime’s “Materialism/Leninism.”
But even here there is a paradox for the regime.
For inevitably, the ordinary men and women who have built modern China will demand to live in a freedom commensurate to their material achievements.
So a civilized China is emerging, just as a civilized Eastern Europe once emerged, from the hearts and minds of prisoners of conscience, of people like Liu Xiaobo.
Havel, who has inspired Liu as he has so many others who aspire to freedom, wrote a public letter to Chinese President Hu Jintao after Liu’s latest imprisonment.
In it, he said: “Mr. Liu's trial was the result of a political order for which you carry ultimate political responsibility.”
Just as Czechoslovakia’s communist government once imprisoned Havel for daring to dream of a civil society and a true constitution of liberty for his country, China’s government has imprisoned Liu for attempting something similar, with his Charter 08 appeal, modeled on Czechoslovakia’s Charter 77.
Havel eventually saw his ideas triumph in the Velvet Revolution of 1989.
Liu Xiaobo is demonstrating anew the unstoppable power of the powerless.
Awarding him the Nobel Peace Prize lifts the hopes of all of us who dream of a truly free and civilized China.
And we might also dream that next December, the Nobel committee will at long last recognize Havel for an award whose meaning he truly personifies.
In the Shadow of Miloševic
Two years ago the world cheered as Slobodan Miloševic's opponents united to overthrow his dictatorship.
Opposition to Milosevic, however, appears to have been the sole glue holding them together.
Those protest leaders, now in power, have been at each other's throats ever since.
Vojislav Koštunica, the current president of what remains of Yugoslavia and the `mildish' nationalist who out-polled Miloševic two years ago, holds a high-profile job with numerous ceremonial duties but little real power.
So he decided to compete head-to-head in Serbia's presidential elections of September 29 with the reform candidate Miroljub Labus, a vice-premier in charge of finance.
Because Koštunica did not win 50% plus one of the votes of all registered voters in the first round, he faces a run-off with Labus on October 13th.
Intelligent speeches, spirited debates and clever slogans were conspicuous by their absence in this election.
Violence was also absent, but insults were not.
For example, Zoran Djindjic, the hyper-pragmatic prime minister of Serbia who supports Labus, called Koštunica a lazy drone.
Such language is lamentable, but it is still a big step forward from the Miloševic era, when both regime and opposition commonly dubbed their opponents as traitors, spies, or Western mercenaries.
Look beyond the insults and you see that Koštunica and Labus have similar moderate programs.
Labus favors faster economic reform and is readier to accept Western demands to cooperate with the Hague Tribunal.
Koštunica is also for privatization and decreasing the role of the state, but he is more worried about corruption and favoritism during the sale of state firms.
While he claims to be pro-Western, he prefers that extraditions of indicted Serb war criminals to the Hague conform to Serbian law.
The biggest electoral surprise of the first round was the success of the blood-curdling nationalist Vojislav Sešelj, who received 24% of the vote.
For years he championed extreme Serbian nationalism and led paramilitary formations in the wars of Yugoslavia's disintegration.
He also instigated many violent incidents in Serbian internal politics.
Last but not least, Sešelj was in coalition with Miloševic when the Democratic Opposition of Serbia, a loose coalition of 18 opposition parties led by Koštunica but internally dominated by Djindjic, defeated Miloševic.
Sešelj has worked hard to soften his image.
He remains a nationalist, but the main theme of his electoral campaign was the struggle against organized crime and his promise to purge the police of dishonest high-ranking officers.
Sešelj was much helped by Miloševic who, from his cell in the Hague, urged his Socialist Party to vote for Sešelj, not for one of its own two quarrelling candidates.
Miloševic's shrewd, pugnacious cross-examination of witnesses in the Hague courtroom has somewhat restored his prestige among Serbs who perceive the Tribunal as anti-Serb.
The good news is that Miloševic's support for Sešelj damaged the already weak Socialist Party, which is unlikely to recover soon.
Sešelj was also the only major politician who spoke about the plight of the unemployed and the soon-to-be-unemployed, of the refugees and the homeless, and of the poor.
He did this in a demagogical, nationalistic and populist way. But it is obvious that in the period of transition through which Serbia is going, there is a need for a strong, well-organized European-style social-democratic party to address these issues.
Most of Sešelj's supporters will vote for Koštunica in the second round because they view Labus as a lackey of Americans and Germans, of the IMF and World Bank, and simply of Serbia's enemies the world over.
Since most people who voted for the eight minor candidates in the first round will also cast ballots for Koštunica, he is all but certain to win.
This certainty means that Koštunica need not actively court Sešelj supporters or other nationalists.
Koštunica has made a career more by the absence of negative characteristics than by what he has achieved.
He is neither corrupt nor a war criminal, neither aggressive in his utterance and behavior nor likely to bend the law for the sake of personal power.
Many people voted by for him by default, both now and when he defeated Miloševic in 2000.
Though he does not sacrifice major moral principles for power, Koštunica is not the unassuming lawyer he once was.
He crams his party with mediocrities, selects mostly bad advisers, and does not listen to the rare good ones.
It is possible that his image as a right-of-center democrat conceals a reactionary who would like for Serbia to restore its pre-WWII monarchy and for the Orthodox Church to play a major role in political and social life.
For there is a deep contradiction at the core of Koštunica, as there is at the core of Serbian society - an impossible dream of combining liberal European political institutions with authoritarian Serbian political traditions.
It should not be forgotten that Koštunica supported the struggle of Serbs in Croatia, Bosnia and Kosovo and that he adheres to a rosy picture of Serb history.
But Parliament is the seat of real political power here.
After the parliamentary elections that will probably take place in the spring of 2003, Koštunica's Democratic Party of Serbia (DSS) will be a formidable force in the Serbian assembly. But it will never come close to an absolute majority.
Neither Serbs nor the West want a government in which Sešelj or someone like him plays a leading role.
So Koštunica and Djindjic cannot seek allies in the nationalist camp.
Both Djindjic and Koštunica must ultimately realize that they are stuck with each other and so begin to compromise and cooperate.
If they do Serbia will sail on - slowly, without spectacular successes, in a disorderly way, but peacefully and in the right direction.
In the Shadow of Tamarlane
In the Shadow of the Taj Mahal
Invasion of the Culture Snatchers?
The specter of ``Americanization'' haunts the world.
Its consequences are demonized everywhere, sometimes going as far as to draw on the metaphor of a (need I say American) science-fiction movie entitled Invasion of the Body Snatchers, within which hostile aliens imperceptibly take control of our bodies and our minds.
But hyperbolic rhetoric about invasions misses the complexity of the cultural change taking place all around us.
Neither side in the debate about Americanization offers a convincing explanation for the phenomenon.
Those who argue that Americanization is a virulent form of ``cultural imperialism'' apparently see it as a product of growing market domination by American media concerns.
However, many giant cultural corporations - Japanese-owned Sony, Canadian-owned Seagram, Murdoch's empire or Germany's Bertelsmann - are no longer American, even though they promote American cultural models.
Even if the media were American-owned, it is too facile to say that consumers of culture the world over are mere clay in the hands of skilled marketing experts.
It makes more sense to assume that there are some elements of social, psychic, and aesthetic gratification that explain the resonance of American cultural models, and provide for their commercial usefulness.
The other side in the debate over Americanization emphasizes the liberating, anti-authoritarian power of American popular culture.
At times, this may be fitting: in 1950's Germany, for example, American youth culture had a strong anti-authoritarian component that helped to undermine authoritarianism and contributed to the process of postwar democratization.
Only rarely, however, does American-inspired popular culture possess this dimension explicitly.
More often, its attack on authority takes the form of willful provocations or ever-more uninhibited and graphic depictions of violence.
At other times, the refreshingly anti-authoritarian appeal of such programs as The Simpsons is commercially exploited to strengthen global media empires, such as Rupert Murdoch's.
In other words, anti-authoritarianism is not the whole story either.
We need to look with more nuance at the forward march of American culture instead of demonizing it as a form of crude imperialism or merely celebrating its liberating potential.
In particular, American popular culture must be viewed in light of the drawn-out historical process of cultural modernization.
In the past, culture was tied to privilege and wealth.
Until the 18 th century, books were comparatively expensive; their ownership was limited largely to the propertied classes.
Moreover, a certain educational grounding (such as knowledge of Latin or Greek) was necessary to make sense of most cultural objects.
``Popular culture'' is our word for a form of culture that gradually abolished these restrictions.
Its earliest manifestation, the novel, aided by new print technologies, created a market that allowed for much wider access to literature.
Knowledge of meter or classical poetics was no longer necessary.
The novel became the literature of the middle class, and the dime novel , an ``abbreviated novel'' for a dime and slimmed down to magazine-size, expanded readership to the lower strata of society, especially to adolescent readers.
The development of an ``entertainment culture'' around the turn of the 20 th century, including vaudeville theater, amusement parks, a dance craze triggered by the domestication of black plantation dances, and silent movies, further reduced the prerequisites for cultural understanding.
The invention of radio and television extended the audience for this new ``mass'' culture even more, and the shift to the priority of pictures and music created a ``universal'' language, not limited to a particular community.
For a number of reasons, America was in the forefront of this cultural revolution.
Due to its multi-ethnic and multi-cultural composition, especially in the formative years of modern entertainment culture around 1900, American popular culture was faced with the challenge of a market that anticipated the present global market on a smaller scale.
This led to the development of broadly comprehensible, non-verbal forms of performance, relying preferably on visual and auditory forms of expression.
Before Americanization of other societies could occur, American culture itself had to be ``Americanized.''
What is the meaning and cultural significance of this process of ``Americanization?''
The constant reduction of the prerequisites for making sense of culture may confirm the view that consumers of mass culture are passive.
Popular music, in particular, is highly effective in insinuating itself into the listener almost imperceptibly; no intellectual processing of its content is required because it makes no claim to inform.
Instead, moods are created by subliminal effect.
The characteristic form by which music activates the imagination is by short evocations of out-of-context images, or a diffuse feeling of boundlessness, both of which need not be integrated into any meaningful context.
Listeners to popular music need not ``earn'' their aesthetic experience through participation.
Contrary to prior visual forms of cultural expression, including the movies, there is no longer a need for continuity in the flow of images; contrary to what happens with a novel, no mental translation is required because the sensual effect of music creates associations that are shaped not by narrative but by mood.
The development of popular culture from the novel via the image to the triumph of popular music and the ``center-less'' heterogeneity of television, created forms of cultural expression that are singularly useful for the purposes of imaginary self-extension and self-empowerment.
The result is an increasing separation of expressive elements from moral, social, even narrative contexts.
Here is the triumph of ``mood over morals.''
Americanization, indeed, is carried by the promise of heightened imaginary self-realization for individuals who are freed from the bonds of social norms and cultural traditions.
Americanization, thus, cannot be viewed as a tacitly engineered hidden cultural takeover but as a process in which individualization is the driving force.
This process is most advanced in the US for a number of reasons.
The promise of a particular form of individualization provides the explanation why American popular culture finds so much resonance in other societies where it has taken hold almost without resistance (mostly carried by a young generation trying to escape tradition).
Cultural Americanization is thus part of a modernizing process.
Americanization is not a form of cultural imperialism, but the embodiment of modernity's promise of painless self-realization for each individual, in contrast to the demands made by more traditional concepts of emancipation.
Globalization, which often appears as the triumph of cultural standardization, in reality undermines standardization.
No single national culture is the driving force but, instead, globalization is powered by a restless individualism drawing on a growing store of mass symbols.
So: we are not becoming Americanized.
We ``Americanize'' ourselves.
Invasions of Liberty?
Whatever happens at the end of the day, the debate about a possible war with Iraq has brought to the surface fundamental issues on which no agreement exists, even among friends, but which will not go away and cannot be ignored.
Indeed, if they are not resolved among those who cherish liberty, the price will be high.
Three issues stand out.
First, the terrorist attacks on New York and Washington of 2001 reminded us (in case we had forgotten) that there is a union of values called "the West."
These enlightened values form the basis of the constitution of liberty and link the countries of North America, Europe, and some other parts of the world.
If a gap opens up between these countries insofar as the interpretation of Western values is concerned, this is bad news.
Perhaps this has happened between the US and many Europeans; if so, the challenge now is to close that gap rather than exploit it, either for unilateral American interest or for enhancing European unity.
Second, defending our values requires instruments of power.
Power may have become more diffuse in the contemporary world.
Some even speak of "governance without government" because economic fortunes are in part determined without identifiable rulers.
Yet traditional power has not gone away, and it is something more than the size of populations or their gross domestic products.
Ultimately, power remains the ability to coerce.
In that sense, Europe has but modest capabilities.
So, too, Japan, India, Asia's democracies, and the democracies of Latin America.
Europe must rely on alliances to exercise power, and these are likely to depend on America for some time to come.
Much the same is true among the Asian and Latin American members of the constitution of liberty.
In this area, more than in most, wishful thinking is a deadly mistake.
Third, if the basic values in which the West believes are threatened anywhere, we must either be prepared to defend them or to abandon them without a fight.
Of course, military force is only one way to defend one's convictions, and its use must be measured--but also timely.
Appeasement at Munich in 1938--the "peace in our time" which really meant surrender to a vicious dictator--incited disaster.
The eventual victory of democracy in 1945 came at a terrible price, and would not have come at all without American intervention.
All of this is relevant to today's crisis.
The US is central to the values of the West; if it is attacked, we are all attacked.
Iraq is a rogue state that has proved to be a threat to its own people and to its neighbors.
At least in part, it has been known to seek weapons of mass destruction.
There must therefore be a presumption in favor of the US line of action, a point made forcefully and persuasively by Britain's Prime Minister, Tony Blair.
To be sure, this is not the last word on the subject.
But it is the first word.
More than that, it is the first principle that should guide the actions of those who share the West's values.
This raises two critically important sets of issues.
The first is that democracies cannot go to war without at least the tacit consent of their peoples.
Citizens must be persuaded that the reasons (especially for preemptive action) stand up to scrutiny.
This is why--even at this late moment--more must be done to make the case for war to the public in those countries that are prepared to fight for freedom.
Likewise, other democracies must be convinced; indeed, action has to be sanctioned by international bodies.
This is why UN inspections are vital, and it is also why Blair and French President Jacques Chirac were right to support and strengthen those in the Bush administration who recognized the place of the UN Security Council in the process.
The second set of issues has to do with the conditions envisaged at the end of whatever action is taken.
Talk about "regime change" is not enough.
Talk about occupying Iraq for eighteen months or so is intriguing but insufficient.
The occupation of Germany--and of Japan--after WWII followed intense fighting for many years, coming at a point when the vanquished countries viewed their defeat as irreversible.
Even then, it took much longer than eighteen months to establish viable democratic orders.
There is also the question of whether anything in the texture of Iraqi society can serve as a foundation on which to establish the constitution of liberty in the Tigris/Euphrates valley.
Answers to these questions may be found.
America's partners may provide them.
An unfortunate analogy used in the Iraq affair poses America as the chef and others, notably Europe, as the cleanup staff.
America breaking the eggs and others cooking the omelet would be better.
Asserting Western values in a unified way and then assigning jobs to those who can do them best seems a more effective and dignified approach than the present spectacle of Americans moving forward almost blindly while Europeans try to look away.
Investing in Health for Economic Development
At the UN Millennium Summit in September 2000, 180 world leaders pledged to achieve significant advances in the well-being of the world's poor by 2015.
Several of the key Millennium Development Goals (MDGs) relate to health, in particular controlling epidemic diseases and reducing the death rates of mothers in childbirth and young children.
To further the Summit's goals, Dr. Gro Harlem Brundtland asked me to head a Commission on Macroeconomics and Health with the aim of charting a path for the world to achieve those MDGs in health and poverty reduction.
Our Commission released its findings on December 20th.
Our Commission grappled with the challenge of burgeoning epidemic diseases that are ravaging the poorest countries of the world, especially in Sub-Saharan Africa.
Despite a considerable diversity of views at the outset of the two-year investigation, the Commission reached a strong consensus after examining extensive evidence from around the world.
The core findings are easily summarized. First, the disease burden in the poorest countries constitutes a fundamental barrier to their economic advance.
Second, millions of impoverished people die tragic deaths each year from infectious diseases that are preventable and treatable simply because they lack access to the needed health services.
Third, using existing technologies, it would be possible to save 8 million lives per year by the end of the decade, but only if rich countries help poor countries to obtain these technologies.
Specifically, the Commission calls for rich countries to put aside one tenth of one percent of their gross national product - or just one penny out of every ten dollars of income - on behalf of health services for the world's poor.
Since the combined income of rich countries is around $25 trillion per year, this would mobilize $25 billion per year which, when combined with the poor countries' own increased contributions, would dramatically improve the health conditions of the world's low-income countries.
This modest contribution would save 21,000 lives daily in the poor countries.
Moreover, the contributions to health would translate into huge economic strides.
Improved health conditions would help the poor countries to escape from the poverty trap in which they have been stuck for the past decade: poor health has led to poverty and economic stagnation, which in turn has led to poor health.
If the program is adopted, countries with high fertility rates and rapid population growth will move towards lower fertility rates and slower population growth as households gain confidence that their children will survive to adulthood.
Population pressures will ease, as will the strain on fragile tropical ecosystems.
Foreign investors will be able to invest in an African labor force no longer shattered by disease.
The economic benefits would be more than $360 billion per year from 2015-2020, many times the annual costs of increased health outlays under the program presented in the Report.
The substantial benefits of donor aid for health have already been demonstrated.
Unlike some types of aid, where the assistance can be funneled to offshore bank accounts, assistance for health comes in the form of drugs, diagnostic tools, and salary support for doctors and nurses.
Smallpox was eradicated even in the most remote impoverished countries; polio is well is on its way to eradication.
Immunization campaigns, when properly funded, have reached huge proportions of very poor children.
Recent efforts against African River Blindness, leprosy, and trachoma, backed by industrial leaders such as Merck, Novartis, and Pfizer, have also performed wonders.
The main problem is that the scale of worthy efforts has been a shadow of what is needed.
The Commission notes that R&D investments directed at the diseases of the poor are likely to have enormous social returns, not only because of recent breakthroughs in science (such as the mapping of the malaria parasite genome), but also because so little is currently invested in these areas.
Malaria accounts for roughly three percent of the world's disease burden but attracts just one-sixth of one percent of global R&D outlays in biomedical research, largely because most malaria victims are impoverished and therefore ignored by private industry.
The Commission advocates a series of measures to boost R&D into diseases of the poor, including donor R&D outlays of roughly $3 billion per year, or five percent of the global total.
The new Global Fund to Fight AIDS, Tuberculosis, and Malaria, which was initiated by U.N. Secretary General Kofi Annan earlier this year and will begin operation in 2002, can be a critical mechanism here.
Programs will be conceived at the country level and will be submitted to the new fund for financial backing.
The Commission calls on each potential recipient country to establish national-level commissions to set long-term health priorities and strategies worthy of donor backing.
The paradox of the global economy is that rich countries are now so rich and poor countries so poor that even small contributions from the rich can perform wonders.
A penny on ten dollars would make historic breakthroughs in health; another penny on ten dollars could address the critical needs in education as well.
The idea of controlling epidemic disease and cutting absolute poverty sharply by 2015 is not naïve idealism, but hard-headed thinking amply supported by the best evidence.
The Commission on Macroeconomics and Health launched its Report on December 20 optimistic that the great battle against disease and poverty will now be joined in earnest.
Inviting the Avoidable
Maybe it is excessive skittishness, or perhaps it is the result of global financial volatility in recent years – crises in Mexico in 1994-5, East Asia in 1997-98, Russia in 1998, and then in Brazil, Turkey, and Argentina – but we economists are more concerned about monetary affairs and possible future disasters than we have been in many decades.
This month, the Switzerland-based Bank for International Settlements (BIS) was the latest to worry aloud about the financial risks that the world seems to be building into its future. “[A]ll the countries hit by financial crisis... experience[d] a very sharp slowdown,” the BIS says of the recent past.
It then cites “global current account imbalances,” particularly “the US external deficit,” describing it as “unprecedented for a reserve currency country to have a current account deficit of such magnitude.”
In short, the world has become “increasingly prone to financial turbulence.”
The BIS hints at the possibility of a financial crisis that, with the US at its center, would dwarf by at least an order of magnitude all crises that have occurred since 1933.
Yet, in response to this risk, the BIS issues the standard textbook recommendations.
Countries whose policies and economies are out of balance should change their policies, thereby restoring balance: “deficit countries should reduce the rate of growth of domestic spending below that of domestic production.
Allowing their currencies to depreciate in real terms would make their products more competitive, and also provide an incentive for production to shift out of non-tradables into tradables.”
This is economists’ polite code for the message that the US must gradually cut its budget deficit, while other countries – like China and Japan – must gradually let the value of the dollar fall and that of their own currencies rise.
So the BIS proposes nothing new or particularly attention-grabbing.
But if we turn to America’s government, we see an enormous pretense that the current budget deficit is not a problem.
As Stan Collender, a noted observer of the US federal budget, has commented, “No one with federal budget responsibilities actually seems to be interested in the budget.” This is not “because the budget committees are too busy....[T]he House and Senate...are not doing much of anything...[because] they don't want to.”
Within the Bush administration, Director of the Office of Management and Budget Josh Bolten “has been virtually invisible,” while “the president and vice president...avoid talking publicly about the budget.”
Let us be clear on this point: it is not that politicians who wish to take the lead on fiscal consolidation are failing to gain traction; it is that there are no politicians – at least none with any agenda-setting influence – who are even trying to steer the US towards adopting a more responsible fiscal policy.
This is a grotesque failure of leadership.
Governments that pursue policies – whether US fiscal laxity or China’s exchange-rate peg – that create unsustainable imbalances do so for what they regard as important political reasons.
Appeals to them to change their policies, and thus contribute to the common global good of financial stability, are fruitless unless others are seen to change their policies, act responsibly, and so contribute to the common good as well.
International policy coordination requires a leader, a first mover.
But, while the US, as the world’s largest economy, is best suited for this role, it has so far failed to play its part.
Treasury Secretary John Snow has spent almost no public time on the budget, but a lot of public time on China.
Republican political operatives care far less about national savings than they do about manufacturing-sector job losses.
“So what else is new?” you may ask – and with good reason.
The list of issues on which the Bush administration has failed to lead is a long one, and failure to take steps to diminish the risks of future financial catastrophe cannot rank very high.
The entire Bush administration has been a succession of leadership failures, so why harp on its poor financial management?
Form a purely practical point of view, one reason is that ensuring global financial stability is an issue on which real progress can be made relatively easily.
The Bush administration may not care that deficit reduction is the right policy for America, but it might care far more if the issue were framed as a prerequisite for policy changes abroad that diminish pressure from imports on domestic manufacturing employment.
Invocatio Dei and the European Constitution
In progressive liberal circles, the demand that the Preamble to the Constitution of the European Union include a reference to God and/or the "Christian Roots" of Europe has been met with derision, even contempt.
Such a reference, it is said, would run afoul of the common European constitutional tradition of state neutrality in matters of religion.
It would also offend against Europe's political commitment to a tolerant, multicultural society.
But the opposite is true: a reference to God is both constitutionally permissible and politically imperative.
Constitutionally, European nations display characteristic richness.
As a matter of positive constitutional law, all members of the EU, under the tutelage of the European Convention on Human Rights, are committed to the principle of the "Agnostic or Impartial State," which guarantees both freedom of religion and freedom from religion.
Across Europe, there is a remarkable degree of homogeneity-even if on some borderline issues such as religious headgear in schools or crucifixes, different EU member states balance differently the delicate line between freedom of religion and freedom from religion.
But when it comes to constitutional symbolism and iconography, Europe is remarkably heterogeneous.
At one extreme you find countries like France, whose constitution defines the State as secular ( laique ).
At the other extreme are countries like Denmark and the UK, where there is an established state religion.
In the UK, the sovereign is not only head of state but also head of the church.
In between are states like Germany, whose constitutional preamble makes an explicit reference to God, or Ireland, where the preamble refers to the Holy Trinity.
All in all, about half the population of the EU lives in states whose constitutions make an explicit reference to God and/or Christianity.
What is remarkable about Europe-a value to be cherished-is that even in such states, the principle of freedom of religion and freedom from religion are fully respected.
No one could credibly argue that, say, Denmark is less committed to liberal democracy or is less tolerant than, say, France or Italy, despite the fact that Denmark recognizes an official state church and France and Italy are avowedly secular.
In its substantive provisions, the European Constitution reflects the homogeneity of the European constitutional tradition.
It is fully committed to the notions of freedom of religion and freedom from religion, as it should be.
But when it comes to the preamble, the EU Constitution should reflect European heterogeneity.
It should reflect the European commitment to the noble heritage of the French Revolution, as reflected in, say, the French constitution, but it should reflect in equal measure the symbolism of those constitutions that include an invocatio dei .
The refusal to make a reference to God is based on the false argument that confuses secularism with neutrality or impartiality.
The preamble has a binary choice: yes to God, no to God.
Why is excluding a reference to God any more neutral than including God?
It is favoring one worldview, secularism, over another worldview, religiosity, masquerading as neutrality.
How, then, can one respect both traditions?
The new Polish constitution gives an elegant answer: It acknowledge both traditions: " We, the Polish Nation - all citizens of the Republic, both those who believe in God as the source of truth, justice, good and beauty, as well as those not sharing such faith but respecting those universal values as arising from other sources, equal in rights and obligations towards the common good …"
A similar solution should be found for the European Constitution.
Europe cannot preach cultural pluralism and practice constitutional imperialism.
Indeed, the political imperative is as great as the constitutional one.
Europe, after all, is committed to democracy worldwide.
But in the European way of thinking, democracy must be spread pacifically, by persuasion, not by force of arms.
One of the greatest obstacles to the spread of democracy is the widely held view that religion and democracy are inimical to each other: to adopt democracy means to banish God and religion from the public sphere and make it strictly a private affair.
Indeed, that is the message that the Franco-American model of constitutional democracy sends to the world.
But is the particular relationship between church and state at the time of the French and American Revolutions the model that Europe wishes to propagate in the rest of the world today?
Is the European Constitution to proclaim that God is to be chased out of the public space?
How long must we be prisoners of that historical experience?
The state has changed, and the church has changed even more.
In this area, as in many others, Europe can lead by example and offer an alternative to American (and French) constitutional separationism.
It can be a living illustration that religion is no longer afraid of democracy and that democracy is no longer afraid of religion.
The truest pluralism is embodied by states that can, on the one hand, effectively guarantee both religious freedom and freedom from religion, yet acknowledge without fear-even in their constitutions-the living faith of many of their citizens.
Only this model has any chance of persuading societies that still view democracy with suspicion and hostility.
Invulnerable Brazil?
Two questions have dominated economic debate in Latin America in recent years.
First, when will the current period of great international liquidity end?
Second, what will happen when it does?
We could also add a third, related, question: are Latin America’s governments preparing for that day?
In the case of Brazil, the answer appears ambiguous, at least at first glance.
On one hand, Brazil has remained more or less at a standstill in terms of economic reform after the start of President Luiz Inácio Lula da Silva’s administration in 2003.
Essential changes to the tax code, labor law, and pension system have simply not been made.
On the other hand, whereas, lenders once demanded commitments from Brazil that were often nearly impossible to meet due to the political situation, these same investors now generally seem completely satisfied with Brazil, despite its economic policy paralysis.
There are objective reasons for this change.
For the first time in decades, Brazil has been able to take advantage of good economic times to reduce its external debt, thereby lowering the risk to lenders.
Indeed, Brazil’s foreign debt-to-export ratio in 2006 was the lowest in the past 50 years.
Moreover, while Brazil’s total gross foreign debt fell by $50 billion during the past eight years, its foreign currency reserves rose rapidly, especially in the past two years, cutting the net foreign debt by more than $120 billion since the 1999 crisis (see table).
Brazil’s foreign debt (US$ billions)
Breakdown 1999 2000 2001 2002 2003 2004 2005 2006 2007
Gross foreign debt 225,6 216,9 209,9 210,7 214,9 201,4 169,5 172,5 175,9
International reserves 36,3 33,0 35,9 37,8 49,3 52,9 53,8 85,8 109,5
Net foreign debt 189,3 183,9 174,0 172,9 165,6 148,5 115,7 86,7 66,4
Data for December.
For 2007, March.
Source: Central Bank of Brazil.
Diminishing debt is important for investors because it shows a trend: if the rate observed in 2006 and 2007 is maintained, Brazil will eliminate net foreign debt by the end of Lula’s second term in 2010.
This, together with its strong fiscal position, means that Brazil will be much better “armored” against a foreign crisis than ever before in the modern era.
Indeed, a country affected by a world recession or by falling export prices is much more vulnerable if its external debt is 40% or 50% of the value of its net exports than if it has little or no net foreign debt.
When foreign credit dried up for Brazil years ago, the only way to avoid bankruptcy was to call in the IMF.
Now, if something similar happens, the central bank will have the foreign exchange needed to service its debts while maintaining a stable exchange rate.
As a result, however, Brazil faces an uncomfortable fiscal dilemma.
In order to compensate for the increase in money supply associated with the purchase of dollars, the government issues securities that pay a higher interest rate than the central bank receives for investing its reserves overseas.
While the result in terms of net public debt is neutral, reducing net foreign debt in the public sector – which already is less than Brazil’s international reserves – and increasing domestic debt is not good business in terms of the cost of the official debt.
This is one reason why it is important that domestic interest rates fall, which in the coming months will very likely happen – and relatively robustly.
In the coming years, Brazil’s government also should strive for fiscal balance (last year the deficit was still 3% of GDP), and then to attain a surplus, as Chile has done for years now.
Brazil is preparing partially for the day when the current period of great international liquidity ends.
While structural reforms have lagged, the economy is far less vulnerable than it was in the past.
Iran - a Land of Paradoxes
Iran is marking the 23 rd anniversary of its Islamic Revolution with nostalgic blasts at ``America, the Great Satan,'' thanks, in part, to President George Bush naming Iran as part of the ``Axis of Evil'' involved in terrorism and the production of weapons of mass destruction.
Beneath the surface, however, Iran is no longer Ayatollah Khomeini's sharia state.
Iran does deserve to be classified as a regional and, perhaps, a global promoter of instability; its support for the fundamentalist Islamic terrorism of Hizbollah in Lebanon is, indeed, aimed at further undermining the diminishing chances for an Israeli-Palestinian reconciliation.
But internal developments in Iran are complex, and demonization of the Islamic Republic is not helpful.
Neither is a drawing a simple dichotomy between ``conservatives'' and ``reformers,'' the latter led by President Khattami, helpful.
In many respects, Iran is perhaps the most interesting country in the region, with the greatest potential for development leading to - not to a Western-style democracy - but greater opening and liberalization.
The paradox is that Iran's potential is embedded in its ideology as an Islamic state.
After the first turbulent and murderous years of the Iranian revolution, the last few years have shown some remarkable developments.
Among them:
Elections: these are confined to an Islamic discourse, and all candidates and parties must secure the imprimatur of the highest Islamic authority in the land before they can be listed on a ballot.
But despite these restrictions, there is a fierce contest between various groups and interpretations;
Women can vote and participate actively and publicly in political life.
Moreover, the general image of Iranian women suppressed behind their black chadors is more complicated than it first seems.
For example, in medicine: because male doctors are prevented by strict Islamic law from treating women, the government has encouraged the training of female doctors.
Today, there are many more women doctors in Iran than under the Shah, and the number of women dying at childbirth is among the lowest in the region.
The government has also instituted a very pro-active birth control program, and has found a way of legitimizing it within an Islamic context, saying ``we want educated Islamic families, not just large Islamic families.''
Iran, as a consequence, has one of the lowest birth rates in the region.
Because elections to the Majlis (Parliament) and the Presidency are contested, they are meaningful.
It is, for example, clear that President Khattami was elected with the support of women and younger people, and the ``establishment'' candidate was not elected.
There is nothing like this in any Arab country: In Egypt or Syria (just as in Belarus) there is virtually only one candidate, and he receives between 97-98% of the vote.
Parliamentary debates are real, and real contested voting takes place.
Again, this is nothing like the rubber-stamp sham parliaments of countries like Egypt and Syria.
The shades of gray have real consequences for policy towards Iran: as an Iranian political scientist recently put it at a seminar in Germany, younger people in Iran do feel themselves to be Muslims, and Iran will never become a secular society.
But they view their Islam as part of their Iranian identity, whereas the older clerics viewed Islam as a universal revolutionary identity.
These younger people - the Iranian scholar claimed - are first of all Iranian nationalists, and would like to dissociate themselves from Middle Eastern politics, in particular the Arab-Israeli conflict.
They will continue, of course, to give verbal support for the Palestinian course, but it is not at the top of their agenda.
In sum, Iran presents a complex, sometimes confusing picture.
But anyone who knows European history can identify a parallel: the Calvinist, Puritan revolution.
The Calvinists of Geneva, or Cromwell's Puritans, were - like the mullahs of Teheran - biblio-centric, with a Holy Book as their model for the ideal society.
Their society was meant to be puritanical, frugal, non-permissive, with laws against conspicuous consumption and luxuries.
It was also anti-feminist, anchored in patriarchal family structures.
Because the Calvinists did not accept a Church hierarchy, they - like the Iranian Shi'ites who are not part of the Sunni majoritarian universalism - based their legitimacy on the community of believers and so introduced elections.
But once you hold real elections, different modes of interpretation of the Holy Book become possible and legitimate.
Suddenly, there exists a mechanism for participation, control, dissent (limited as it may be) and the introduction of innovative strategies that seek to legitimize change within a traditional context.
In Europe, after all, Calvin's Geneva - an autocratic theocracy, more similar to Khomeini's Teheran than to any other regime - eventually developed, through English Puritanism, towards modern parliamentary government.
Indeed, in Britain until the l820's only members of the Church of England could vote in Parliament or be elected to it.
Will Shi'ite Iran follow a road similar to that of the European Calvinists?
Nothing is pre-determined; but the parallel is striking.
For all of today's involvement of some Iranian leaders in terrorism, the picture is more complex, more interesting - and perhaps more promising than President Bush's speech suggests.
Iran: Another Problem from Hell
WASHINGTON, DC – Throughout 2010, the pattern for negotiations over Iran’s nuclear program held to form.
With just about every diplomatic effort failing to yield results, international efforts have increasingly given way to discussions about sanctions – and what mix of them would be needed to bring Iran to heel.
In 2011, a renewed focus on comprehensive economic sanctions could turn out to be the bad idea whose time has arrived.
Sanctions, of course, have a dismal historical record in achieving their aims.
Indeed, they have often been more useful in proving the law of unintended consequences.
So it might be useful to step back and take one more look at our disagreeable negotiating partner – Iran – to see what should, and should not, be emphasized diplomatically.
There is nothing easy about negotiating with Iran.
It is one of the oldest states in the broader Middle East, with a deep culture.
Despite its leaders’ grim public image, Iran has a sense of humanism, as any Kurd who fled from Saddam Hussein’s chemical-warfare attacks along the Iranian border can attest.
Bending, much less breaking, will not come naturally to such a prideful country.
Iran also doesn’t “play well with others.”
Most Americans remember it as the country that abducted US diplomats soon after its Islamic revolution in 1979, holding them for no apparent purpose for 444 days.
No American diplomat has been stationed in Tehran since.
American attitudes toward Iran are probably far more conditioned by that episode than people realize.
Iran is also internally divided.
Its mullahs bicker constantly, seeming to reflect the country’s broader cleavages.
Iran’s civilian authorities apparently have limited control over the military and the dreaded security services, which seem to answer to no one but themselves.
Iran’s Islamic Revolution, moreover, has run into a familiar contradiction: it cannot further its aims without accepting Westernization and modernization.
Iran’s youthful population – a product of the massive post-revolution baby boom – is increasingly frustrated and depressed; not surprisingly, young Iranians are having fewer children than ever.
As the June 2009 election protests showed, Iran’s urban youth desperately want to end the country’s isolation, but they have increasingly found that the only way out of isolation is to study or work abroad – and never return.
Iran does not live in a great neighborhood, either.
Turkey can be a good neighbor, but otherwise Iran is bordered by inhospitable states to the east and the north.
And, while its western neighbor Iraq is a fellow Shia-majority state, Iraq’s Arab Shia make no secret of their distaste for the Persians and their claim to Shia prominence.
While most of the world may have missed it, there is an ongoing competition between Iraq’s Najaf and Iran’s Qom over which city is holier.
Iran has virtually no friends among the Sunni Arab states.
As the world recently learned from the WikiLeaks release of US diplomatic cables, Sunni Arab leaders are no more tolerant of an Iranian nuclear bomb than is the US or its allies.
The Sunni reaction to Iran may reflect deep-seated suspicions about the Shia (witness the cold shoulder given by most Sunnis to Shia rule in Iraq).
Iran’s only friends, it seems, are those – like the Chinese – who are more interested in its natural resources than its people.
While sanctions may deepen Iran’s predicament, they are unlikely to break the diplomatic impasse on nuclear weapons.
But, given the Iranian government’s increasingly unhelpful reactions to diplomatic overtures, there is unlikely to be any interest in toning down sanctions.
Indeed, just the opposite response is likely – efforts to tighten sanctions still further.
Yet, just as the US adopted a “bomb and talk” approach with the Serbs during the dénouement of the Bosnian war, America must be willing to “sanction and talk” when it comes to Iran, thereby creating greater space for an eventual diplomatic strategy.
First, the US should consider establishing diplomatic relations with Iran and putting diplomats on the ground.
This would not be an easy process, and could well meet considerable Iranian resistance.
But the Iranians have diplomatic relations with other members of its main interlocutor in talks on its nuclear program, the sanctions-minded P-5+1 Group (China, France, Germany, Russia, the United Kingdom, and the US), and restoring Iran-US diplomatic ties would shorten lines of communications and close the 444-day chapter of 1979-1981.
Second, even if a stronger bilateral mechanism is forged, it should not be allowed to displace the P-5 approach.
The ability of this group to work together is critical to resolving this and future crises.
Third, the US should continue its efforts to encourage action by Iran’s neighbors.
While Turkey’s lurch into the fray in 2010 may have been unwelcome, its interest in calming a situation involving an immediate neighbor is understandable.
More problematically, the Sunni Arab states should also give more serious thought to addressing the situation, and should seek to reconcile their private and public postures.
Iran, after all, is not building an Islamic bomb.
It is building an Iranian bomb, or, worse yet, a Shia bomb that Arab leaders must be more resolute in trying to stop.
Private expressions of deep concern do not compensate for public nonchalance (or changing the topic to Israel), and are hardly a basis for a successful policy toward a country whose nuclear ambitions could have a catastrophic impact on the region.
Finally, the Chinese and the Russians have been brought along principally by the US to a more robust policy, yet they remain reluctant.
They need to convey through their own bilateral approaches to Iran a sense of urgency – and perhaps even express a little anger – at Iran’s unwillingness to negotiate seriously.
Sanctions should be a tool of diplomacy, not the other way around.
Even as we look to tighten sanctions on Iran in 2011, we must strengthen our efforts to establish a strong political and diplomatic track.
Iran Confronts Reality
MADRID – Who has not seen what looks like water on a highway on a hot summer’s day?
Or a three-dimensional image that was actually a picture on a flat surface?
The nature of illusion is that we mistake what we perceive for reality.
That is true whether an illusion is cognitive or political.
Depending on how a particular event develops, it can lead us to formulate erroneous interpretations of what is actually happening.
Such perceptions are often mediated by ideas and previous experiences.
And, as Robert Jervis argued in Perception and Misperception in International Politics, published during the Cold War, the illusions that we create have an enormous influence on decision-making – even becoming a fundamental cause of conflict.
To a certain extent, this is what has happened with analysis of the recent 16th Summit of the Non-Aligned Movement (NAM), held at the end of August in Tehran – the first time Iran has hosted the meeting.
The summit took place against a background of scant progress in negotiations with Iran on its nuclear program and growing pressure from Israel for the international community to establish a “trigger” – a line that the Islamic Republic must not cross.
Moreover, regional tensions heightened the perception of the NAM summit’s importance and that of its host.
In the Middle East, only Iran and Hezbollah support Syrian President Bashar al-Assad’s regime in a civil war that is nearing the point of no return and destabilizing Lebanon and Jordan.
The NAM played an important role during the Cold War.
Its vision was shaped by the recent independence struggles of many of its member countries, and its agenda promoted national sovereignty, non-interference, a rebalancing of North-South relations, and support for national liberation movements.
But the reality that united NAM in the past has changed.
The Cold War’s bipolar governance structures and a subsequent period of American unilateralism – to which the non-aligned states attempted to act as a counterbalance – have given way to a much more complex and interdependent multi-polar world.
While the United States and Europe are still struggling to overcome a serious economic crisis, many NAM members, such as India, Chile, and Singapore, have maintained relative strong growth and form a part of new global governance structures, such as the G-20.
Likewise, many of the problems that we now face – whether climate change, financial crisis, development challenges, terrorism, or nuclear proliferation – reflect growing global interdependence.
Managing them effectively obliges us to rethink the concept of sovereignty.
These changes have transformed not only the traditional structures of power, but also the leitmotif of NAM and the fate of its members.
Globalization has fueled ever-widening disparities among its members – just compare Colombia with Afghanistan, or Chile with Sudan – that make it difficult to transform sheer numbers into coherent influence.
The impact of the Tehran summit, and whom it may have benefited, is not entirely clear.
Iran certainly regarded the meeting as a propaganda opportunity, promising wide media coverage at a time when it was in the eye of a diplomatic hurricane.
But the participants’ inability to reach a common position on their hosts’ nuclear program or the violence in Syria – two of the fundamental questions that confronted the summit – obviously undermined Iran’s effort to demonstrate that, despite facing severe economic and diplomatic sanctions, it remains an effective international player.
Indeed, United Nations Secretary-General Ban Ki-moon criticized Iran for not assuring the world that it is not seeking nuclear arms at a time when the International Atomic Energy Agency has published a new report suggesting that it is.
And, in a speech of great depth, Mohamed Morsi, the first Egyptian president to visit Iran since the Islamic Republic’s birth in 1979, firmly rejected the Syrian regime, as he did in a subsequent appearance before the Arab League as well.
Moreover, Morsi urged Iran to join Egypt, Turkey, and Saudi Arabia – all Sunni-majority countries – in pressing for political transition in Syria (a role that the Syrian opposition rejected before Iran could even say no).
In other words, reality betrayed the perception that Iran sought to create in hosting the NAM summit.
Instead, Morsi’s speech provided the occasion’s most memorable moment.
And Iran’s nuclear quest remains a reality that must not be ignored during the next key three years, when the Islamic Republic will lead NAM while itself remaining one of the most serious problems on the international agenda.
An Iran Deal Ten Years Late
ROME – The only thing to lament about the agreement reached by Iran and the P5+1 (the UN Security Council’s five permanent members – China, Britain, France, Russia, and the United States – plus Germany) in Vienna this month is that it was not signed and sealed a decade ago.
In the years that it has taken for diplomatic sanity to prevail, the Middle East has endured myriad avoidable tensions and lost opportunities for security cooperation.
From 2003 to 2006, Iran made clear to anyone willing to listen that it would agree to all the key elements of the recent deal, including measures to block uranium and plutonium pathways to a bomb and obtrusive monitoring mechanisms to ensure ample advance notice of a likely breakout.
All it needed in return – beyond, of course, the lifting of sanctions as implementation proceeded – was formal recognition of its “right to enrich” uranium.
In discussions with the European Union in 2003-2004, Iran voluntarily froze its then-minimal enrichment program, pending negotiation of a full accord.
Iran also declared its willingness to apply the “additional protocol,” allowing for much more far-reaching and stringent monitoring by the International Atomic Energy Agency than is called for under standard arrangements.
Those commitments ended in 2005, owing to the continued insistence by the EU, backed by the US, that Iran abandon uranium enrichment entirely.
This stance disregarded the “inalienable right,” clearly acknowledged in the Nuclear Non-Proliferation Treaty (as much as one might wish otherwise, in an ideal world), of NPT parties to engage in all stages of the nuclear fuel cycle as part of a peaceful nuclear energy program.
If, at that time, the West had been prepared to settle for effectively containing Iran’s nuclear program, rather than destroying every last sensitive component of it, a deal would have been possible.
And, indeed, in early 2006, the International Crisis Group published a comprehensive “delayed limited enrichment” proposal that included all of the key features of the deal that has now been signed in Vienna.
I am confident, on the basis of many hours of productive dialogue with senior Iranian officials in Tehran, New York, and elsewhere, that this proposal could have broken the deadlock.
It had all the right elements of an effective compromise.
But with the US not talking to Iran at any level, and the EU talking but not listening, the effort went nowhere.
The Iranians were never going to accept what they perceived as second-class status under the NPT.
It was only when US President Barack Obama’s administration acknowledged that, and commenced direct back-channel talks in 2011, that progress became possible.
The key was the recognition that Iran’s sense of honor had to be accommodated.
Critics of the Vienna deal in the US Congress, Israel, and the Arab world tend to assume that Iran has no honor.
They believe that Iran has always been hell-bent on building nuclear weapons, and that its leaders signed the deal, which imposes limits on the country’s nuclear program for 15 years, only to relieve the enormous sanctions pressure now crushing its economy.
Iran is biding its time, the critics charge, and will inevitably attempt to break out again.
While no one should be under any illusion that Iran has been a model international citizen, or is likely to become one any time soon, this perception of the country’s nuclear ambitions involves a fundamental misreading of the dynamics in play.
My judgment, based on more dialogue with senior Iranian officials than most of the critics have conducted, is that Iran – whatever engineering research it may have carried out in the past, and whatever fuel-making and missile-delivery capabilities it may have developed more recently – has never been close to deciding actually to build nuclear weapons.
Iran has always been keenly aware of the multiple risks involved in crossing that red line.
It knows that it would face attack by a much more heavily armed Israel, whether supported by the US or not; that Sunni powers in the region could move quickly to counter a “Shia bomb” with their own nuclear weapons; and that additional crushing international sanctions could be imposed.
And there is another factor that should not be instantly dismissed, as it usually is by cynical critics: Iranian leaders’ repeated strong rejection of weapons of mass destruction on religious grounds.
The question, then, is why has Iran walked the precipice for so long by building a visible breakout capability bound to spook the West, Israel, and its Arab neighbors?
The answer, I believe, is overwhelmingly national pride – its peoples’ desire to demonstrate that Iran is a power to be reckoned with, a country that has impressive technical prowess, and that there are limits to its willingness to suffer international humiliation.
Iranians vividly remember the overthrow, orchestrated by the CIA and British intelligence, of the elected government of Mohammad Mosaddegh in 1953.
They remember the West’s prolonged support for the hated Shah, and for Iraq in its brutal war with Iran in the 1980s, even after Iraqi leader Saddam Hussein employed chemical weapons.
And they remember when US President George W. Bush labeled their country part of an “axis of evil,” despite its cooperation with the US in Afghanistan.
It is understandable that many will not readily be persuaded of Iranian sincerity, not least because the national negotiating style – among moderates and hardliners alike – tends to be anything but frank and direct, with private reason often accompanied by public thunder that makes it hard to assess real intent.
But the Vienna agreement deserves wide support, and not just because the alternatives – continuation of acute regional tension at best, and catastrophic military conflict at worst – are so unappealing.
In fact, there is every reason to believe that the agreement captures and reflects the real interests not just of Iran, but also of the international community.
It keeps intact a global non-proliferation regime that has been showing signs of falling apart, and gives new hope for wider regional security cooperation.
Saying No to the Warmongers
NEW YORK – The accord struck in Vienna to rein in Iran’s nuclear activities has warmongers fulminating.
Citizens worldwide should support US President Barack Obama’s brave effort to outmaneuver them, taking heart from the fact that the signatories include not just the United States, but all five permanent members of the UN Security Council plus Germany.
Many of the warmongers are to be found in Obama’s own government agencies.
Most Americans struggle to recognize or understand their country’s permanent security state, in which elected politicians seem to run the show, but the CIA and the Pentagon often take the lead – a state that inherently gravitates toward military, rather than diplomatic, solutions to foreign-policy challenges.
Since 1947, when the CIA was established, the US has had a continuous semi-covert, semi-overt policy of overthrowing foreign governments.
In fact, the CIA was designed to avoid genuine democratic oversight and provide presidents with “plausible deniability.”
It has gone on to topple dozens of governments, in all regions of the world, with no accountability there or at home.
I recently examined one period of CIA activity in my book To Move the World: JFK’s Quest for Peace.
Soon after Kennedy assumed the presidency in 1961, he was “informed” by the CIA of its plot to overthrow Fidel Castro.
Kennedy felt stuck: Should he sanction the planned CIA invasion of Cuba or veto it?
New to the gruesome game, Kennedy tried to have it both ways, by letting it proceed, but without US air cover.
The CIA-led invasion, executed by a motley group of Cuban exiles at the Bay of Pigs, was a military failure and a foreign-policy disaster, one that led to the Cuban Missile Crisis the following year.
During the missile crisis, most senior security officials advising the president wanted to launch military action against Soviet forces, a course that could well have ended in nuclear annihilation.
Kennedy overruled the warmongers, and prevailed in the crisis through diplomacy.
By 1963, Kennedy no longer trusted the advice of the military and the CIA.
Indeed, he regarded many of his putative advisers as a threat to world peace.
That year, he used diplomacy relentlessly and skillfully to achieve a breakthrough nuclear agreement with the Soviet Union, the Limited Test Ban Treaty.
The American people strongly – and rightly – supported Kennedy over the warmongers.
But three months after the treaty was signed, JFK was assassinated.
Viewed through the lens of history, the main job of US presidents is to be mature and wise enough to stand up to the permanent war machine.
Kennedy tried; his successor, Lyndon Johnson, did not, and the debacle of Vietnam ensued.
Jimmy Carter tried;
Reagan did not (his CIA helped to unleash death and mayhem in Central America throughout the 1980s).
Clinton mostly tried (except in the Balkans);
George W. Bush did not, and generated new wars and turmoil.
On the whole, Obama has tried to restrain the warmongers, yet he has given in to them frequently – not only by relying on weaponized drones, but also by waging covert wars in Syria, Libya, Yemen, Somalia, and elsewhere.
Nor did he truly end the US wars in Iraq and Afghanistan; he replaced troops on the ground with US drones, air strikes, and “private” contractors.
Iran is surely his finest moment, a historic milestone that demands full-throated approval.
The political difficulty of making peace with Iran is similar to that of JFK’s peacemaking with the Soviet Union in 1963.
Americans have been suspicious of Iran since the Islamic Revolution of 1979 and the subsequent hostage crisis, in which Iranian students held 52 Americans at the US embassy for 444 days.
But their suspicion also reflects jingoistic manipulation and a lack of perspective on US-Iran relations.
Few Americans know that the CIA overthrew a democratic Iranian government in 1953.
Iranians had had the temerity to elect a progressive, secular prime minister who believed that the country’s oil belonged to its people, not to the United Kingdom or the US.
And few Americans recall that after the coup, the CIA installed a brutal police state under the Shah.
Likewise, following the 1979 Iranian Revolution, the US armed Saddam Hussein’s Iraq to go to war with Iran, resulting in hundreds of thousands of Iranian deaths in the 1980s.
And US-led international sanctions, imposed from the 1990s onward, have aimed to impoverish, destabilize, and ultimately topple the Islamist regime.
Today, the warmongers are trying to scuttle the Vienna accord.
Saudi Arabia is in a violent struggle with Iran for regional supremacy, with geopolitical competition converging with the Sunni-Shia rivalry.
Israel, the Middle East’s only nuclear power, wants to retain its strategic monopoly.
The US warmongers seem to view any Islamist state as ripe for toppling.
Obama is correct that America’s true interests, and those of the world, are with peace, not continued conflict, with Iran.
The US is not a partisan in the Shia-Sunni struggle; if anything, the US confronts mainly Sunni terrorism, funded from Saudi Arabia, not Shia terrorism backed by Iran.
Obama is also right that, despite Israel’s arguments, the agreement will reduce the possibility of Iran ever becoming a nuclear state.
The best way to ensure that outcome is to normalize relations with it, help its economy recover, and support its integration into the international community.
Iran is a great and ancient culture.
Its opening to the world as a place of business, tourism, the arts, and sports would be a boon to global stability and prosperity.
The new treaty will verifiably prevent Iran from developing a nuclear weapon for at least a decade – and keep it bound to nuclear non-proliferation thereafter.
This is the time to begin a broader US-Iran rapprochement and build a new security regime in the Middle East and the world that leads toward full global nuclear disarmament.
To get there requires, above all, replacing war (including the CIA’s secret wars) with commerce and other forms of peaceful exchange.
After the Iran Deal
BERLIN – After 12 years of tedious negotiations, Iran and the “P5+1” countries (China, France, Russia, the United States, and the United Kingdom, plus Germany) have reached a comprehensive agreement that will limit Iran’s development of its nuclear capabilities to non-military objectives.
In exchange for its cooperation, Iran will eventually be relieved of the punishing sanctions that the United Nations, the European Union, and the US have imposed upon it for years.
This is a huge diplomatic success.
Of course, the negotiations have attracted plenty of critics, including in the US Congress and Iran’s parliament, as well as in Saudi Arabia, Israel, and even France.
But the agreement’s potential benefits cannot be denied.
For starters, the deal proves that world leaders – despite being divided on a multitude of issues, such as the conflict in Ukraine and territorial disputes in the South China Sea – can still come together to resolve a shared problem.
It will also make nuclear proliferation in the Middle East less likely, while strengthening the global nuclear non-proliferation regime.
And it will allow for the normalization of Iran’s relations with the West.
Of course, Iran’s neighbors have legitimate concerns about the impact the deal will have on the regional balance of power.
As sanctions are lifted, Iran will become stronger, challenging the influence of the Gulf States.
Anticipating this, these states have already sought reassurances from the US, while following a more hard-nosed policy in Yemen or Syria, where they consider themselves to be containing Iran’s hegemonic ambitions.
Ultimately, however, the impact of the nuclear agreement will depend on political dynamics in Iran.
Many – indeed, probably a majority – in the Iranian establishment support the resolution of the nuclear confrontation, and agree that Iran does not need to be perpetually at odds with the rest of the world.
But some still view the dispute as a key component of the country’s revolutionary identity.
This post-agreement dynamic thus could play out in two ways.
In the first scenario, events unfold according to the hopes of the P5+1 and the Iranian negotiators, with the agreement amplifying the voices of those in Iran who advocate regional and international accommodation.
In this case, Iran reaches out to Saudi Arabia with a convincing indication that it does not intend to bolster its influence at the expense of the Saudis or their allies.
This allows Saudi Arabia to join Iran in using its influence in Syria to bring about a ceasefire agreement between regime forces and rebels, paving the way for the formation of a credible transition government capable of pushing back the Islamic State.
Likewise, Saudi Arabia and Iran bring an end to the fighting in Yemen by backing a power-sharing agreement there.
Meanwhile, relief from sanctions, together with the gradual return of international companies, kick-starts Iran’s ailing economy.
Increased openness toward Europe and, more cautiously, the US encourages reform-minded members of Iran’s middle class to seek their future inside the country, rather than emigrating.
Finally, under this scenario, President Hassan Rouhani’s strong international standing helps him to overcome conservative resistance to pursue much-needed domestic reforms.
On this basis, Rouhani’s coalition of reformists and pragmatists easily wins a majority when Iran’s next parliament is elected in 2016, with Rouhani himself re-elected in 2017.
The second scenario is far less benign.
In this case, it soon becomes clear that domestic support for the nuclear agreement was broad but thin.
Whereas Rouhani’s reformist camp wants to improve Iran’s foreign relations, the conservative and nationalist forces surrounding Supreme Leader Ayatollah Ali Khamenei view the agreement as a necessary tool to eliminate economic sanctions and strengthen Iran’s conventional military capabilities.
The hardline clerics then undermine whatever confidence Rouhani is building with Iran’s neighbors by declaring repeatedly that the agreement represents an implicit acknowledgement of Iran’s might by the world’s major powers.
This stance vindicates the skeptics, spurring Saudi Arabia to continue its efforts to build a “Sunni coalition” to contain Iranian influence and uphold the fight against what it views as Iranian proxies in countries like Syria and Yemen.
Furthermore, with regional tensions high, the economic impact of the removal of sanctions turns out to be negligible, while conservatives gain ground in resisting reform.
Rouhani and his allies are unable to offer ordinary Iranians economic hope – a failure that causes them to lose both the legislative and presidential elections.
Paradoxically, in the pessimistic scenario, Iran’s new government, controlled by conservatives and hardliners, actually fits into the region better than the current one.
After all, Saudi Arabia, Egypt, and many other Arab states are also ruled by authoritarian hardliners with little interest in de-escalating regional conflicts.
This would make the resurgence of reform-oriented leadership in Iran extremely difficult.
Of course, the most likely scenario is a combination of both dynamics.
But, given that it is in everyone’s interest to ensure that developments hew more closely to the reform-oriented path, it should be clear to all that the diplomatic work with regard to Iran is far from complete.
The Case for Peace With Iran
NEW YORK – The nuclear framework agreement between Iran and the five permanent UN Security Council members (the United States, the United Kingdom, France, China, and Russia) plus Germany is an important achievement in global diplomacy.
The deal announced earlier this month represents the triumph of rational hope over irrational fear, and it deserves to be implemented.
But now the race is on against hardliners in the US, Iran, Israel, and elsewhere, who want to kill the deal before the deadline for a final agreement in June.
The framework agreement benefits all parties.
Iran scales back its nuclear activities, especially the enrichment of uranium fuel, in exchange for an end to economic sanctions.
Its government is kept further away from developing a nuclear bomb – which it denies pursuing – and gains room for economic recovery and normalization of relations with the major powers.
It is a smart, pragmatic, and balanced approach, subject to monitoring and verification.
It does not require that the US and Iranian governments suddenly trust each other; but it does offer an opportunity to build confidence, even as it allows for specific steps that are in each side’s interests.
Crucially, it is part of international law, within the framework of the UN Security Council.
By propounding the idea that the other side can never be trusted, the hardliners are advancing a self-fulfilling theory of politics and human nature that makes war far more likely.
These purveyors of fear deserve to be kept on the sidelines.
It is time to make peace.
The great divide between the West and Iran today, it should be noted, is largely the result of malign Western behavior toward Iran (Persia until 1935) in the past.
From the start of the twentieth century, the British Empire manipulated Persia in order to control its vast oil reserves.
After World War II, that job fell increasingly to the US.
Indeed, from coup to dictatorship to war to sanctions, the US has racked up more than 60 continuous years of trying to impose its will on Iran.
The CIA and Britain’s MI6 jointly toppled Mohammad Mossadegh’s democratically elected government in 1953, in order to block Mossadegh’s attempts to nationalize Iran’s oil reserves.
The US then installed the brutal dictatorship of Shah Mohammad Reza Pahlavi, which ruled the country until the Islamic Revolution of 1979.
Following the revolution, the US helped to arm Iraq in the Iran-Iraq War of the 1980s, in which an estimated one million Iranians died.
Since 1987, the US has imposed economic sanctions against Iran on a variety of premises, including claims of Iranian terrorism and the alleged nuclear threat.
And the US has worked hard to internationalize these sanctions, leading the push for UN measures, which have been in place since 2006.
The US hardliners have their own long list of grievances, starting with the 1979 seizure of America’s embassy in Tehran, in which 66 US diplomats and citizens were held for 444 days.
Then there is Iran’s involvement in Islamist insurgencies, and its support for anti-Israel political movements and groups deemed to be terrorist.
Still, the British and American abuses vis-à-vis Persia and Iran started earlier, lasted longer, and imposed far higher costs than Iran’s actions vis-à-vis the US and UK.
Moreover, much of what the US categorizes as Iranian “terror” is a product of the region’s sectarian struggles between Shia, backed by Iran, and Sunnis, backed by Saudi Arabia. “Terror” is a term that obscures rather than clarifies these long-standing clashes and rivalries.
That is why Iran, called a “terrorist state” by US hardliners, is now America’s de facto ally in the fight against Sunni jihadists in Iraq and Syria.
Iran’s confrontation with the UK and the US is part of the much broader saga of the West’s use of its military and economic dominance to project its power and political will over much of the world during the nineteenth and twentieth centuries.
Today’s low- and middle-income countries are only now entering a period of true sovereignty.
The proposed agreement with Iran will not overcome a century of distrust and manipulation, but it can begin to create a new path toward peace and mutual respect.
Mutual benefit will be achieved by honest appraisals of mutual interests, and step-by-step progress backed by verification, not by hardliners on both sides claiming that the other side is pure evil and insisting on complete triumph.
The success of US President John F. Kennedy and Soviet leader Nikita Khrushchev in reaching the 1963 Limited Nuclear Test Ban Treaty, at the height of the Cold War, provides an instructive lesson.
At the time, hardliners on both sides denounced the LTBT as a weakening of national defense in the face of an implacable enemy.
In fact, both sides fully honored the treaty, and it led to the landmark 1968 Nuclear Non-Proliferation Treaty.
JFK’s words a half-century ago apply to the Iran agreement today.
The LTBT, said Kennedy in 1963, “is not a victory for one side – it is a victory for mankind.” This treaty, he said, “will not resolve all conflicts, or cause the Communists to forgo their ambitions, or eliminate the dangers of war.
It will not reduce our need for arms or allies or programs of assistance to others.
But it is an important first step – a step towards peace – a step towards reason – a step away from war.”
Grand Bargaining with Iran
STOCKHOLM – Slowly but surely, Iran’s talks with the international community about its nuclear program are approaching the make-or-break point.
But, more important, the outcome could mark a turning point for the wider – and increasingly volatile – Middle East.
The rapprochement between Iran and its negotiating partners on the core nuclear issue is obvious.
No one at this point seriously believes that Iran is maintaining an active program to develop nuclear weapons, though not long ago it was almost conventional wisdom that the country was close to having them.
Now the focus is on ensuring that Iran would need a year or so to assemble a nuclear device if it ever decided to do so.
But the concept of “breakout time” is dubious.
If trust were to collapse, and the Iranian regime decided to abrogate all of the relevant international agreements, it is highly likely that it would get its weapon, even if the country itself was bombed repeatedly.
The strategic emphasis on “breakout time” is thus misplaced.
The key to progress is to help turn Iran from a cause into a country, to paraphrase Henry Kissinger.
Iran needs to focus on developing all of its human and material resources to become part of a region moving from confrontation to cooperation.
The deal on the core nuclear issues is central to this approach, but so is a credible process for developing the trade and investment links that will facilitate Iran’s move from isolation to integration.
As the talks enter the final phase, the issue of sanctions is likely to be at the forefront.
This is because the Joint Plan of Action to which the parties agreed in November 2013, while addressing virtually all of the West’s immediate nuclear concerns, does not map out the necessary pathway to Iran’s normalization.
Just as conservative forces in Iran can be expected to try to stop an agreement, forces thriving on confrontation in the United States and elsewhere will do the same.
Iran’s hardliners play up doubts that the West will ever agree to lift the sanctions, while their Western counterparts will do whatever they can to support that presumption.
A spiral of mutually destructive diplomacy might result.
Here, the European Union should clearly signal its readiness to take the lead in easing and lifting restrictions on Iran, though this obviously must be done in close coordination with Europe’s partners.
The EU oil sanctions, for example, could be suspended almost immediately if an agreement were reached.
An agreement should also be followed by sustained political engagement on other mutually important issues.
Developments in Afghanistan and Iraq are obviously urgent.
And, based on close consultation with both Saudi Arabia and other Gulf countries, it may yet be possible to move toward more cooperative arrangements in that strategically vital region.
That will require putting the issue of Syria squarely on the table.
Four years after the outbreak of the country’s civil war, and despite the horrific humanitarian consequences of the fighting, international diplomacy to stop the violence has achieved nothing.
The United Nations Security Council has been split and ineffective, and even Russia seems to be gradually losing the leverage it once had in Damascus.
Iran, the US, and the EU all share an interest in stopping a war that is causing the Syrian state to collapse – with all of the consequences seen in Iraq since 2003 – and strengthening the forces of Sunni jihadism across the region.
Whether this is enough common ground for a constructive dialogue with Iran on ending Syria’s civil war remains to be seen, but it is an option that must be pursued.
The talks now reaching their endgame in Lausanne are confined to the nuclear issue; but beyond the agreement loom larger possibilities and risks.
A breakthrough might compel a phase of intense diplomacy, giving Iran a pathway to diplomatic normalization and opening the door for grand bargains that could begin to restore order and stability to the rest of the region.
A breakdown, by contrast, though unlikely to lead immediately to war, could easily foment developments that lead in that direction, and the region as a whole could be pulled even deeper into the current vortex of chaos and violence.
With the core nuclear issue more or less settled, it is now imperative to resolve sanctions and normalization issues and grasp the opportunity for regional grand bargains that might then become possible.
The nuclear deal must mark the beginning of the international community’s efforts to engage Iran in addressing the Middle East’s toughest challenges.
The Future of the Iran Nuclear Deal
NEW YORK – “There’s many a slip twixt the cup and the lip,” goes the old English proverb.
Something seemingly resolved and certain in fact is neither.
If no such expression exists in Farsi, I predict one soon will.
The reason, of course, is the “Parameters for a Joint Comprehensive Plan of Action Regarding the Islamic Republic of Iran’s Nuclear Program,” the framework just adopted by Iran and the P5+1 (the UN Security Council’s five permanent members – China, Britain, France, Russia, and the United States – plus Germany).
The agreement constitutes an important political and diplomatic milestone, and it contains more detail and is broader in scope than many anticipated.
But, for all that, the text leaves unanswered at least as many questions as it resolves.
In reality – and as the coming weeks, months, and years will demonstrate – major issues have yet to be settled.
It is closer to the truth to say the real debate about the Iran nuclear accord is just beginning.
The framework places significant limits on Iran’s nuclear program, including the number and type of centrifuges, the sort of reactors, and the amount and quality of enriched uranium that the country may possess.
Standards are set for the inspections needed to provide confidence that Iran is fulfilling its obligations.
And provision is made for easing economic sanctions once Iran has verifiably met its commitments.
The bottom line is that the agreement will provide an estimated one-year warning from the moment that Iran might decide to build one or more nuclear weapons to the point at which it could achieve that goal.
This assessment assumes that the monitoring called for in the accord will detect any Iranian non-compliance early enough to enable a coordinated international response, particularly the reintroduction of sanctions, before Iran could acquire nuclear weapons.
There are no less than five reasons not to assume the deal will enter into force or have the desired impact.
The first involves the next 90 days.
What was announced was an interim framework; a formal, comprehensive accord is supposed to be completed by the end of June.
In the meantime, there could easily be changes of heart and mind as those who negotiated the interim deal return home and face criticism from their governments and publics over its terms.
Already, significant differences are emerging in how the US and Iranian sides are representing what was negotiated.
A second concern stems from the specific issues that remain to be resolved.
The most difficult might be the timing of when various economic sanctions are to be removed – the issue of greatest concern to Iran.
But these same sanctions are also the source of the greatest leverage over Iranian behavior, which means that many in the US and Europe will want them to remain in place until Iran has fully met its critical obligations.
A third source of doubt is whether the various parties will approve any long-term pact.
The two main uncertainties involve Iran and the US.
So-called hardliners in Iran will undoubtedly object to an agreement with the “Great Satan” that places limits on their country’s nuclear ambitions.
But there is also a widespread desire among Iranians to get out from under economic sanctions, and Iran will approve a pact if Supreme Leader Ayatollah Ali Khamenei favors it, which he presumably does.
The uncertainties are greater in the US.
President Barack Obama must contend with a far more complex political environment, beginning with the US Congress.
There is widespread and understandable concern about leaving Iran with any nuclear capabilities, about the adequacy of provisions for monitoring and inspection, and about what will happen in ten or 15 or 25 years when various limits on Iran expire.
Persuading Congress to approve the final pact and/or lift sanctions is anything but assured.
This question of gaining political approval is closely tied to a fourth area of concern: how any final agreement is implemented.
The history of arms control suggests there will be occasions when Iran, which has a record of withholding relevant information from UN weapons inspectors, is suspected of not living up to the letter, much less the spirit, of what was negotiated.
Agreement is needed on the process for judging Iranian behavior and for determining appropriate responses.
The fifth concern stems not so much from the accord as from everything else about Iran’s foreign and defense policies.
The agreement is only about Iran’s nuclear activities.
It says nothing about Iran’s missile programs or support for terrorists and proxies, much less about what it is doing in Syria or Iraq or Yemen or anywhere else in the turbulent Middle East, or about human rights at home.
Iran is a would-be imperial power that seeks regional primacy.
Even a nuclear agreement that is signed and implemented will not affect this reality and might even make it worse, as Iran could well emerge with its reputation enhanced and a long-term option to build nuclear weapons intact.
Obama is right: A nuclear agreement of the sort outlined is preferable to Iran possessing nuclear weapons or going to war to prevent that outcome.
But any agreement must also generate widespread confidence in the US and the region that it will place a meaningful ceiling on Iran’s nuclear program, and that any cheating will be discovered early and dealt with firmly.
This will not be easy; indeed, it is no exaggeration to predict that the effort to generate such confidence may well prove as demanding as the negotiations themselves.
Where Obama Went Wrong on Iran
JERUSALEM – The pros and cons of the accord with Iran over its nuclear program will be debated extensively over the next two months, in the run-up to a vote on the deal by the US Congress.
But the so-called Joint Comprehensive Plan of Action will be judged by its implementation, which will take years.
Nonetheless, two things are already clear.
First, the JCPOA’s weakest provisions – both cumbersome and open to competing interpretations – are those covering compliance and verification.
So some skepticism about implementation is in order.
Second, and more immediately, the very achievement of an agreement between Iran and the five permanent members of the UN Security Council plus Germany (the P5+1) has already begun to affect the regional balance of power.
Indeed, it is legitimate to ask whether Western (and especially US) negotiators were aware of the geopolitical implications of the deal.
Even at this early stage, it is apparent that the agreement has empowered Iran regionally.
Syrian President Bashar al-Assad’s minority Alawite regime lavished praise on the agreement, rightly recognizing that enhanced international legitimacy and financial resources will enable Shia Iran to provide greater backing.
Assad’s other major regional ally, Lebanon’s Hezbollah (which the US classifies as a terrorist organization) also supports the deal.
Vladimir Putin’s Russia is also happy to have received US assistance, however indirectly, in strengthening Assad’s hold on power.
Understandably, Iran’s empowerment has made America’s closest allies in the region extremely uncomfortable.
In their different ways, Israel, Saudi Arabia, and some of the smaller, more vulnerable Gulf states have let their unease be known.
Turkey – an uncertain US ally nowadays, yet still a NATO member – may be too preoccupied with domestic political turmoil to respond in detail.
But President Recep Tayyip Erdoğan certainly is skeptical of an agreement that Obama describes in almost messianic terms.
The Egyptian leadership, also fighting internal challenges, is similarly unhappy with the JCPOA.
And, whether Israel benefits or loses, Israeli Prime Minister Binyamin Netanyahu is sure to come out ahead.
A crafty fear monger, he will be able to present the agreement as further proof of Israel’s isolation and abandonment by the world, enabling him to leverage public anxiety into enhanced political support for his government.
Netanyahu may even succeed in bringing Yitzhak Herzog’s Zionist Union into his government, thereby shoring up his shaky coalition.
His comparison of the Iranian threat to the Holocaust may be absurd and obscene, but it is politically effective.
Nothing helps the Israeli right more than heightening the electorate’s sense of being under siege.
Obama’s defense of the JCPOA may be helping Netanyahu in this regard, thanks to some historical claims that may be even more dubious than his arguments regarding Iran’s nuclear policies.
In some of his statements, and in his recent interview with Thomas Friedman of the New York Times, Obama compared the deal with Iran to Richard Nixon’s opening to China in 1972.
This is a savvy and enticing claim. But it is also a misleading one.
Nixon’s secretary of state, Henry Kissinger, was pursuing a brilliant strategy to weaken Communism by exploiting the Sino-Soviet split.
Emulating the French statesman Cardinal Richelieu, Kissinger helped the weaker power against the stronger one.
No such overarching strategy underlies Obama’s policy, even if it may be justified on the more limited grounds of nuclear non-proliferation.
In this interview with Friedman, Obama also maintained that one should try to understand Iranian history and culture.
This sounds unexceptional, even innocuous, until one realizes what Obama means. “The fact is that we had some involvement in overthrowing a democratically elected regime in Iran,” he says, referring to the 1953 coup that toppled Prime Minister Mohammad Mosaddegh’s government.
Moreover, the US “had in the past supported Saddam Hussein when he used chemical weapons against Iran.”
Therefore, according to Obama, the Iranians have “their own security concerns and their own narratives.” This is an extraordinarily ahistorical claim.
Similarly, one could claim that Germany had its own “security concerns and narratives” during the 1938 Munich crisis.
Is Obama suggesting that the US should have supported Mosaddegh in the midst of the Cold War, or tilted toward Iran during the Iran-Iraq War in the 1980s?
All of this may say something essential about Obama’s approach to the nuclear deal with Iran.
Above all, while his negotiators’ unremitting focus on the issues before them – centrifuges, enrichment levels, the fate of spent fuel, and so on – undoubtedly permitted the deal to be done, the “success” of this approach has left the future of the region blurrier than ever.
Living With the Iran Nuclear Deal
NEW YORK – It is probable that after 60 days of intense debate in Washington, DC, and conceivably Tehran, the “Joint Comprehensive Plan of Action,” signed on July 14 by Iran and the UN Security Council’s five permanent members plus Germany (the P5+1), will enter into force.
But no one should confuse this outcome with a solution to the problem of Iran’s nuclear ambitions or its contributions to the ongoing turmoil in the Middle East.
On the contrary, depending on how it is implemented and enforced, the agreement could make matters worse.
This is not to suggest the JCPOA makes no contribution.
It places a ceiling for the next decade on the quantity and quality of centrifuges Iran is allowed to operate and allows the country to possess only a small amount of low-enriched uranium for the next 15 years.
The agreement also establishes, in US President Barack Obama’s words, a “where necessary, when necessary” inspections mechanism that has the potential to verify whether Iran is meeting these and other commitments.
The net result is that the accord should lengthen the period it would take Iran to produce one or more nuclear weapons from several months to as much as a year, making it more likely that such an effort would be discovered in time.
The prospect that the JCPOA could keep Iran without nuclear weapons for 15 years is its main attraction.
Sanctions alone could not have accomplished this, and using military force would have entailed considerable risk with uncertain results.
On the other hand (there always is another hand in diplomacy), the agreement permits Iran to keep far more nuclear-related capacity than it would need if it were interested only in civil research and in demonstrating a symbolic ability to enrich uranium.
The agreement also provides Iran with extensive relief from economic sanctions, which will fuel the regime’s ability to support dangerous proxies throughout the Middle East, back a sectarian government in Baghdad, and prop up Syrian President Bashar al-Assad’s regime.
Moreover, the accord does not rule out all nuclear-related research and does not constrain work on missiles.
Sales of ballistic missiles and missile parts to Iran are banned for no more than eight years. Sales of conventional arms to Iran are prohibited for no more than five years.
There is also the danger that Iran will fail to comply with parts of the agreement and undertake prohibited work.
Given Iran’s record, this has understandably been the focus of much concern and criticism regarding the pact.
What matters is that non-compliance be met with renewed sanctions and, if needed, military force.
A bigger problem has received much less attention: the risk of what will happen if Iran does comply with the agreement.
Even without violating the accord, Iran can position itself to break out of nuclear constraints when the agreement’s critical provisions expire.
At that point, there will be little to hold it back except the Nuclear Nonproliferation Treaty, a voluntary agreement that does not include penalties for non-compliance.
It is important that the United States (ideally, joined by other countries) let Iran know that any action to put itself in a position to field nuclear weapons after 15 years, though not explicitly precluded by the accord, will not be tolerated.
Harsh sanctions should be reintroduced at the first sign that Iran is preparing a post-JCPOA breakout; this, too, is not precluded by the accord.
Iran should likewise be informed that the US and its allies would undertake a preventive military strike if it appeared to be attempting to present the world with a fait accompli.
The world erred in allowing North Korea to pass the nuclear-weapons threshold; it should not make the same mistake again.
In the meantime, a major effort must be launched to assuage the concerns of Iran’s neighbors, several of which will be tempted to hedge their bets against Iran’s potential breakout in 15 years by pursuing nuclear programs of their own.
The Middle East is already nightmarish enough without the added risks posed by a number of would-be nuclear powers.
Obama’s claim that the agreement has “stopped the spread of nuclear weapons in this region” is premature, at best.
It will also be essential to rebuild strategic trust between the US and Israel; indeed, this will need to be a high priority for Obama’s successor.
And the US should push back as warranted against Iran’s foreign policy or treatment of its own people.
None of this rules out selective cooperation with Iran, be it in Afghanistan, Syria, or Iraq, if interests overlap.
But here, too, realism should prevail.
The notion that the nuclear agreement will lead Iran to moderate its radicalism and rein in its strategic ambitions should not be anyone’s baseline scenario.
In fact, the emergence of an ever more capable Iran, not a transformed one, is likely to be one of the main challenges confronting the Middle East, if not the world, in the coming years.
Iran: One Year Later
WASHINGTON, DC – This month marks the one-year anniversary of the contested re-election of hard-line Iranian President Mahmoud Ahmadinejad, which spurred the country’s largest popular uprisings since the 1979 Islamic revolution.
While the regime gradually succeeded in violently quelling the momentum of the opposition Green Movement, the country’s deep internal rifts – both among political elites as well as between government and society – are far from being reconciled.
Among the numerous post-election casualties was the notion of Iran as an “Islamic Republic.”
As the late Grand Ayatollah Ali Montazeri put it, the regime’s brutality towards its own people has rendered it “neither Islamic nor a Republic.”
Another casualty was the legitimacy of Supreme Leader Ayatollah Ali Khamenei. For two decades, Khamenei deceptively cultivated an image of an impartial and magnanimous guide, but his defiant public support for Ahmadinejad exposed him as a petty, partisan autocrat.
Among the unprecedented slogans of last summer’s street protests were thunderous chants of “Khamenei is a murderer, his leadership is void!”
Under Khamenei’s leadership, an unholy trinity of nouveau-riche Revolutionary Guardsmen, hard-line clergymen, and indoctrinated Basij militiamen increasingly wield power.
Despite his religious pretensions as a spiritual guide, Khamenei’s future rests largely in the hands of the Revolutionary Guards.
While opposition to his rule among top clerics in Qom worries Khamenei, opposition within the Revolutionary Guard could be fatal for him.
Despite the government’s crisis of legitimacy and endemic mismanagement, the Green Movement – nominally led by opposition presidential candidates Mir Hossein Mousavi and Mehdi Karroubi – faces major obstacles.
Their brain trust is either in prison, under virtual house arrest, or unable to communicate freely.
They lack organization and strategy.
As protests began last year, the grass-roots nature of the Green Movement was initially thought to be advantageous, given that it could not be easily decapitated. “Thirty years ago people were sheep and Khomeini was their shepherd,” a prominent Iranian democratic activist told me.
Despite their strength in numbers however, Mousavi and Karroubi’s excessive reliance on street protests is misguided.
While their courageous supporters espouse tolerance and practice non-violence, they are overwhelmed by armed government forces who are willing to kill and die to retain power.
If the Green Movement is to mount a serious challenge to the government it must incorporate support from bazaar merchants, workers in major industries, transportation unions, and government workers.
Sustained strikes by these groups would bring the country’s economy to a halt.
This is a tall order, however, given that Iran’s labor groups, while deeply discontented, are just as amorphous as the Green Movement itself.
What’s more, Mousavi and Karroubi, perhaps chastened in part by the unfulfilled promises and excesses of the Islamic Revolution – are seemingly in no hurry to see abrupt change.
Instead, they have pursued a gradualist approach that aims to co-opt and recruit disaffected members of the traditional classes, including clergy and Revolutionary Guardsmen, to the Green Movement.
The Green Movement’s deliberate approach is complicated by the sense of urgency that the United States, Europe, and especially Israel, feel about the Iranian government’s nuclear ambitions.
While the role that outside powers like the US can play in affecting political reform in Iran is limited, the Obama administration faces two fundamental challenges in its Iran policy.
First, how do you reach an accommodation with a regime that seemingly needs you as an adversary? While a large majority of Iranians want to make amends with the US, for Iran’s hardliners, enmity toward the US has become a central part of the Islamic Republic’s identity.
“If pro-American tendencies come to power in Iran, we have to say goodbye to everything,” conceded Ayatollah Ahmad Jannati, head of the powerful Guardian Council. “After all, anti-Americanism is among the main features of our Islamic state.”
The second challenge for the US is to champion human rights and democracy in Iran without compromising the independence of opposition forces.
Given the diversity of the Green Movement, there is no clear consensus as to which US policies are most constructive.
There is a seemingly universal belief that America should absolutely refrain from military action, condemn the Islamic Republic’s human rights abuses, and express moral solidarity with the Iranian people.
There is little agreement, however, when it comes to more contentious questions, such as the potential efficacy of targeted sanctions.
Iran’s first post-revolution prime minister, Mehdi Bazargan, reportedly once said that the real leader of the 1979 revolution was not Ayatollah Khomeini but rather the Shah, who united diverse groups of people against him.
Today, a somewhat similar dynamic exists: the two individuals arguably most responsible for the opposition’s resilience are not Mousavi and Karroubi, but Ahmadinejad and Khamenei.
Governmental brutality and intimidation can withstand the march of history for years, but not indefinitely.
Whatever becomes of the Green Movement in the short term, millions of courageous Iranian protestors made clear to the world last summer that their country’s centennial quest for a democracy is an idea whose time has come.
Iran’s Syrian Power Grab and Saudi Arabia
RIYADH – Inviting Iran to the next round of talks on the Syria crisis in Vienna, Austria – an invitation that was reiterated last week – has far-reaching implications.
In fact, Iran’s current government is attempting to overthrow a balance of power that has endured for some 1,400 years – and Saudi Arabia, as the cradle of the Muslim world, will not allow it.
The divide between Iran and Saudi Arabia, the Middle East’s most prominent Shia and Sunni powers, respectively, has deep roots.
If we are to understand what is really happening in the Middle East today – not just in Syria – one must consider the origins of the Sunni-Shia schism, the Arab-Persian divide, and past struggles over the governance of Islam.
Islam was divided between Sunni and Shia after the prophet Muhammad died and a new successor had to be chosen.
Most of his followers, who became known as Sunni Muslims, felt that the faithful should base their decision on ability, and supported the Muslim elders’ choice of Muhammad’s father-in-law, Abu Bakr.
But a small dissident group, who would eventually become known as Shia Muslims, were adamant that the new caliph should be a blood relative of the prophet, and thus decided that Muhammad’s son-in-law and cousin Ali ibn Abi Talib (the fourth caliph, according to Sunnis) was his rightful successor.
Today, 90% of all Muslims are Sunni, and 10% are Shia.
While this disagreement was playing out, so was the Muslim conquest of Persia, which began just a year after the prophet’s death in 632.
The Persian Sassanid Empire, exhausted financially and militarily from decades of warfare with the Byzantine Empire, endured a decisive defeat in the Battle of Qadisiyyah in 636.
The next year, the Persian emperor, Yazdegerd III, fled to the border province of Khorasan and the Arabization of Persia began, with Persians taking Arab names and converting to Islam.
By 651, almost all major urban centers in Persia were under Arab control, adding momentum to the process.
The mass conversion to Islam among Persians was the first step toward the establishment of the first caliphate, a political-religious state comprising all Muslim lands.
At various times in history, caliphates have extended into Asia, Africa, and parts of Europe.
The effort by various forces seeking to control or restore the caliphate is a recurrent theme throughout Islam’s history.
The so-called Islamic State is only the latest example of this.
Until the year 1500, almost all Persians were Sunni Muslims.
Then, Shah Ismail – the first Shah and the founder of the Safavid Dynasty – began a brutal policy of forcing Persian Muslims to become Shia, in order to distinguish his iteration of Persia’s empire from the more powerful Constantinople-based and fervently Sunni Ottoman caliphate.
This history clearly informs Iran’s actions today.
As Shia Muslims, Iranians are a minority within the Muslim community, a reality that has caused them to feel persecuted.
Rather than accept their minority status, various Iranian governments have attempted to establish their country’s hegemony in the Arab world.
Of course, Iran not only represents only a tiny minority of Muslims;
Iranians are not Arabs.
It is thus unfathomable that they would dictate to Arab countries in any capacity.
But this has not stopped Iran’s government from attempting to commandeer the main levers of Islam, both politically and theologically.
Using Arab countries’ Shia communities, it is trying to wield control over them, with the ultimate objective of taking over Islam’s two holiest sites, Mecca and Medina, over which the Saudi monarch exercises authority as the Custodian of the Two Holy Mosques.
As the Sunni world’s most influential country, Saudi Arabia knows that it must do what it takes to limit Iran.
In 2011, a Saudi-led Gulf Cooperation Council coalition had to neutralize an Iran-sponsored Shia insurgency in Bahrain.
This year in Yemen (a predominantly Sunni country), a Saudi-led coalition is fighting the Zaydi Shia Houthi rebels, whom Iran armed in order to take over the country and gain a foothold on the Arabian Peninsula.
In Syria – a Sunni-majority country where, incidentally, a Sunni Muslim caliphate, the Umayyads, once prospered – Iran is spending billions of dollars to prop up President Bashar al-Assad’s regime, dominated by members of a minority Shia sect, the Alawites (historically known as Nusayris).
Actions by Assad’s supporters have so far caused more than 270,000 deaths, displaced over seven million people internally, forced nearly four million people to flee, and left close to 12 million in need of desperate assistance.
They have enabled – indeed, fueled – the rise of the Islamic State, and with it a growing threat to the global order, as the successive terrorist attacks in Sharm el-Sheikh, Beirut, and Paris tragically have shown.
Given this, Saudi Arabia’s leadership – regardless of what temporary results are achieved through the Vienna talks – will continue to work hard to ensure that Assad is removed from power and that the mayhem is finally brought to an end.
The terrorism, proxy wars, arms shipments, nuclear ambitions, and grandiose delusions emerging from Iran are part of an age-old struggle with which the Saudis have had enough.
That is why King Salman is overseeing the greatest military acquisition and expansion program in Saudi Arabia’s history.
And Saudi Arabia will not stop until Iran – and its Shia proxies – abandons its revolutionary fantasies and begins working to bring peace and stability to the Middle East and the wider Arab world.
Iran Versus Saudi Arabia
BERLIN – The “new” Middle East is now on daily display.
Unlike the old Middle East, whose fate was determined by the dominant Western powers (the United Kingdom and France after World War I, and the United States from the 1940s until recently), the new one has no external hegemon to stabilize it.
And, without a dominant regional power, a dangerous strategic vacuum has emerged.
The US, quite obviously, is no longer willing – or able – to play its old role.
Though America will not withdraw its armed forces from the region completely, direct military intervention, especially with ground troops, is not tenable, given the debacle in Iraq.
America will not be a military player so long as the region’s strategic balance is not called into question in a fundamental way (which explains US airstrikes on the Islamic State in Iraq and in Syria). Apart from this, the US is now operating at the level of diplomacy to resolve, or at least contain, a fundamental strategic threat – the danger posed by the Iranian nuclear program.
Various state and non-state actors have been trying to fill the void created by America’s newfound caution, with most of the latter dependent on the support of regional powers, and two in particular: Iran and Saudi Arabia.
Indeed, the Houthi rebellion in Yemen marks a new phase in the broader regional conflict. Not only is it occurring in the south of the Arabian Peninsula, directly on Saudi Arabia’s borders; the kingdom’s direct military intervention has brought its strategic rivalry with Iran into the open.
As always in the Middle East, religious and ethnic factors play a large role in this rivalry.
The Shia-Sunni divide within Islam is being reflected in the region’s geopolitics. Moreover, whereas Iran is a Shia country, the overwhelming majority of Arabs are Sunni, reinforcing the salience of Iran’s ethnic distinctiveness.
Geopolitical interests, religious sectarianism, and ethnicity thus form a dangerous mélange in the new Middle East. And, because history has shown that outside military intervention can neither solve nor even contain such conflicts, the regional powers will have to sort this out among themselves, which is far easier said than done.
It will entail a long phase of largely unpredictable violence, which implies a high risk of escalation, even toward global conflict; and it will most likely result in humanitarian disasters on the order of what is happening in Syria today.
Even barring escalation beyond the Middle East, significant economic dangers are also likely, given the region’s energy reserves and thus its importance to the global economy.
World oil prices are de facto determined on the Arabian Peninsula and by the countries of the adjacent Gulf region, and this will not change anytime soon.
In terms of international security, a long-term fight for regional dominance will increase the threat of global terrorism, as both sides are using extremist groups that seek to legitimize their actions in religious terms.
An even greater danger is that the key players in this conflict seek to arm themselves with nuclear weapons.
A nuclear arms race in a region characterized by long-term instability would be a global nightmare.
So it is no accident that, concurrently with the regional powers’ direct military confrontation in Yemen, the international community, led by the US, has been trying to negotiate a nuclear agreement with Iran. The framework agreement that has now resulted from these talks, which have been taking place off and on for 12 years (and in which I participated for a time) is intended to bring Iran’s nuclear program under international supervision, thereby containing the risk to regional and global stability.
America’s agenda is now arousing massive criticism from its close allies in the region, Israel and Saudi Arabia.
But such criticism is based on illusionary aims.
Acceding to it would merely ensure further escalation of the conflict with Iran, which will never completely abandon its nuclear technology and nuclear activities.
The only realistic option to prevent a nuclear arms race in the region is international supervision – as far-reaching and as comprehensive as possible.
But this goal, even if achieved, would satisfy neither Israel nor Saudi Arabia, both of which fear that any agreement would support Iran in its effort to establish its regional dominance. So the end result could be a de facto change of regional strategic partners by the US – a development that in fact is already becoming apparent in the fight against the Islamic State in Iraq.
Iran’s strategy in all of this has not been very clever: its military interventions in Syria, Lebanon, Iraq, and Yemen entail major risks.
The new Middle East needs neither a nuclear arms race nor religious hatred, and it also does not need a foreign policy based on military intervention. Rather, it requires the strength to sit down together and negotiate, and to develop systems of collective security that do serve the legitimate interests of all parties involved.
Without diplomacy and the willingness to work toward viable mutual understandings, as has just happened with the framework agreement negotiated with Iran, the new Middle East will remain the powder keg of world politics – one whose fuse has already been lit.
Iran\u0027s Debate Over Iraq
No country in the Middle East is monitoring postwar events in Iraq more closely than Iran.
Geographical proximity, an intense and bloody history of conflict with Saddam Hussein's Iraq, religious and emotional connections to Shi'a Iraq, and concerns about the United States and its policies in the region are all threads that tie Iran to its western neighbor.
Given ongoing tensions with America, Iran is particularly concerned with the likelihood of a continuing US presence next door, as well as with America's dominant role in shaping Iraq's post-Saddam future.
Outsiders may find it difficult to follow internal Iranian debates, but they do exist, and they are intense, even if they are not always visible to the wider international public.
Three general approaches are recognizable in the evolving Iranian debate on post-Saddam Iraq.
Iranian pragmatists argue that Iran must inevitably cooperate with the US in post-Saddam Iraq, if only to ensure the rights of Iraq's Shi'a population.
For this reason, Iran should win assurances that a new leadership in Iraq will not be hostile to it, and will seek friendly bilateral relations.
Other vital considerations for the pragmatists include preserving Iraq's territorial integrity and repatriation of tens of thousands of Iraqi refugees living in Iran.
These moderates think that Iran's government should press America for extradition of Iraq-based members of the Mujahdin-e Khalq Organization (MKO), as well as its total dismantling.
In exchange, Iran's government should give its support to ensuring peace, stability, and security in Iraq.
In sum, the pragmatists would limit Iranian-American dealings, keeping them focused on an agenda that largely reflects Iran's domestic concerns.
By and large, conservative forces in Iran support this approach.
Another approach envisions a more active, cooperative Iranian role in reconstructing Iraq.
Advocates of this view argue that Iran is well positioned to make rebuilding easier, owing to its well-established infrastructure of personal and institutional ties in Iraq.
Eventually, it is argued, the US and the international community will recognize the value of Iranian cooperation.
Iranian cooperation should be repaid with the dismantling of the MKO infrastructure in Iraq, perhaps linked to an Iranian commitment to crack down further on any al-Qaida activities, as well as expel al-Qaida members from Iran.
Most importantly, Iran ought to press for an American assurance that its cooperation will be reciprocated by an American guarantee that Iran will not be a target of American military action in the future.
In short, advocates of cooperation call for an open and explicit bargain: Iran's support for stability during the current transitional phase in Iraq, as well as its commitment to maintain cooperative relations with whatever permanent government emerges in Iraq, in exchange for an improvement in Iran's regional and international position.
This view is widely held among Iran's reformers--both inside and outside government--and the more internationally minded technocratic and business class.
Finally, for Iran's radicals, the possibility of cooperative relations with the US is pure fantasy.
They believe that America is bent on undermining Iran's security and compromising its national interests.
In the radicals' view, the US will at the very least seek to dictate major changes in Iranian foreign policy.
At most, they argue, America will actively push for regime change in Iran.
It will actively work against Iran's acquisition of nuclear knowledge and energy, and may yet attempt to weaken Iran's military capability altogether.
These radicals view the US invasion of Iraq as reflecting America's desire to encircle Iran.
In response, they believe that Iran must be aggressive in defending its interests, forming strategic alliances with Russia and other regional powers, and using Iran's influence in Iraq to prevent a pro-American, anti-Iran government from emerging in Baghdad.
Hardliners of all factions support this approach.
Overthrowing Saddam's regime was the easy part of the Iraqi crisis.
Now comes the hard part: establishing peace and security, winning the war on terrorism, and convincing the Muslim masses that America is not intent on occupying Iraq, siphoning off its oil, and reshaping the Middle East in its image.
In the meantime, opposition to the US, expressed as suicide bombing and other forms of terrorism, will very likely increase.
Iran is destined to remain a major regional player because its political dynamism and Muslim identity resonate widely in the Muslim world.
What happens in Iraq has major implications for Iran, and the US is well advised to find ways of recognizing this fact.
American threats, or talk of another war, fuel the fires of resentment and frustration in Iran, strengthening the most radical forces.
If the US wishes to avoid this outcome, it must consider limiting the influence of its own radicals, recognizing that America's interests in Iraq are best served by greater cooperation with Iran.
God and Woman in Iran
PRINCETON – My grandmother was one of the first women to study mathematics and physics at the University of Vienna.
When she graduated, in 1905, the university nominated her for its highest distinction, an award marked by the presentation of a ring engraved with the initials of the emperor.
But no woman had previously been nominated for such an honor, and Emperor Franz Joseph refused to bestow the award upon one.
More than a century later, one might have thought that by now we would have overcome the belief that women are not suited to the highest levels of education, in any area of study.
So it is disturbing news that more than 30 Iranian universities have banned women from more than 70 courses, ranging from engineering, nuclear physics, and computer science to English literature, archaeology, and business.
According to Shirin Ebadi, the Iranian lawyer, human-rights activist, and winner of the Nobel Peace Prize, the restrictions are part of a government policy to limit women’s opportunities outside the home.
The bans are especially ironic, given that, according to UNESCO, Iran has the highest rate of female to male undergraduates in the world.
Last year, women made up 60% of all students passing university exams, and women have done well in traditionally male-dominated disciplines like engineering.
It may well be female students’ very success – and the role of educated women in opposing Iran’s theocracy – that led the government to seek to reverse the trend.
Now, women like Noushin, a student from Esfahan who told the BBC that she wanted to be a mechanical engineer, are unable to achieve their ambitions, despite getting high scores on their entrance exams.
Some claim that the ideal of sexual equality represents a particular cultural viewpoint, and that we Westerners should not seek to impose our values on other cultures.
It is true that Islamic texts assert in various ways the superiority of men to women.
But the same can be said of Jewish and Christian texts; and the right to education, without discrimination, is guaranteed in several international declarations and covenants, such as the Universal Declaration of Human Rights, to which almost all countries, including Iran, have agreed.
Discrimination against women is part of a broader pattern of official bias in Iran, especially against those who are neither Muslim nor members of one of the three minority religions – Zoroastrianism, Judaism, and Christianity – recognized in the Iranian Constitution.
To enroll in a university, for example, one must declare oneself to be a believer in one of the four recognized religions.
Atheists, agnostics, or members of Iran’s Bahai community are not accepted.
Imagine how we would react if someone tried to excuse racial discrimination by arguing that it is wrong to impose one’s culture on others.
It was, after all, for many years the “culture” of some parts of the United States that people of African descent should sit at the back of the bus and go to separate schools, hospitals, and universities.
It was the “culture” of apartheid South Africa that blacks should live apart from whites and have separate, and inferior, educational opportunities.
Or, to put it more accurately, it was the culture of the whites who held power in these places at that time.
The same is true in Iran.
The country’s rulers are all male and Muslim.
Supreme Leader Ayatollah Ali Khamenei’s call in 2009 for the “Islamization” of universities led to courses being changed and the replacement of some academic staff by more conservative figures.
Two months ago, Khamenei said that Iranians should return to traditional values and have more children – which would have obvious implications for the role of women, quite apart from the environmental impact.
The international sanctions against Iran that are currently in place seek to prevent the regime from building nuclear weapons, not to persuade it to end discrimination against women or on religious grounds.
There are no widespread boycotts of Iran’s universities, or of its other products, as there were against apartheid South Africa.
It seems that we still take sexual and religious discrimination less seriously than we take racial and ethnic discrimination.
Perhaps we are more ready to accept that the biological differences between men and women are relevant to the roles they play in society.
There are such differences, and they are not purely physical.
So we should not leap to the conclusion that if most engineers are men, there must be discrimination against women.
It may be that more men than women want to be engineers.
That, however, is a completely different question from whether women who do want to become engineers and are qualified to study engineering should be denied the opportunity to achieve their ambition.
By explicitly preventing women from enrolling in courses open to men, Iran has taken a step that is as indefensible as racial discrimination, and that should be condemned just as forcefully.
Iran’s Electoral Strategy
WASHINGTON, DC – Negotiations over Iran’s nuclear program have again hit a wall, but the country’s Supreme Leader, Ayatollah Ali Khamenei, appears unconcerned.
Indeed, Khamenei seems convinced that neither the United States nor Israel will attack its nuclear facilities – at least not before the US presidential election in November.&nbsp;
Ironically, while Khamenei is no fan of democracy, he relies on the fact that his principal enemies are bound by democratic constraints.
Khamenei controls Iran’s nuclear program and its foreign policy, but the US and Israel must work to reach consensus not only within their respective political systems, but also with each other.
Iran’s leaders, who closely follow Israeli political debates, believe that Israel would not launch an assault on their nuclear facilities without America’s full cooperation, because unilateral action would jeopardize Israel’s relations with its most important strategic ally.
Given that an Israeli offensive would need to be coordinated with the US, while an American assault would not require Israeli military support, Iran would consider both to be American attacks.
But Iran’s leaders remain skeptical of either scenario, despite America’s official position that “all options are on the table” to prevent Iran from developing nuclear weapons capability.
So far, they simply do not feel enough pressure to consider a compromise.
In fact, Iran’s leaders continue to deride Israel from afar, calling the country an “insult to humanity,” or a “tumor” in the region that must be eradicated.
Meanwhile, Iran’s citizens – including clergy in the holy city of Qom, near the Fordow nuclear facility – are deeply concerned about the consequences of an attack.
Ayatollah Yousef Sanei, a former attorney general and a religious authority (marja’), has asked the government to refrain from provoking Israel.
Indeed, critics of the government believe that its incendiary rhetoric might lead to a devastating war.
But, from the perspective of Iran’s leadership, the taunting has tactical value to the extent that it reinforces the view among the Israeli public that Iran is a dangerous enemy, willing to retaliate fiercely.
In fact, anti-Israel rhetoric reflects Iranian leaders’ confidence that Israel will not attack – a view that is bolstered by the situation in Syria.
They are convinced that, even if Syrian President Bashar al-Assad’s regime falls, Iran will be able to destabilize the country in such a way that would pose a major security threat to Israel.
According to this view, it is Israel that has an interest in refraining from further antagonizing Iran, not vice versa.
Recent editorials in Kayhan – the hardline Iranian newspaper that serves as a mouthpiece for the Supreme Leader – indicate that Khamenei is looking forward to the US presidential election.
Regardless of the outcome, he foresees no threat of military action, at least through next year.
A victory by Obama would reinforce America’s unwillingness to attack Iran and renewed efforts to rein in Israel.
And, if Republican challenger Mitt Romney is elected, he will need months to form his national security team and assemble his cabinet, leaving him unable to attack Iran immediately.
That said, since the Islamic Republic’s emergence in 1979, Iran’s leaders have generally preferred Republican presidents to Democrats: despite their harsh rhetoric, Republicans have been more willing to engage with Iran in practice.
Indeed, given that Iran has so far survived severe international sanctions, its leaders believe that they could get an offer from the US after the election – particularly if Romney wins – that recognizes their right to enrich uranium.
In fact, it is far from certain that Iran will be able to withstand current sanctions-related pressures indefinitely.
But its leaders’ confidence that they can remains a crucial element of their strategy, and the West cannot afford to ignore their perceptions.&nbsp;America, whether led by Obama or Romney, must understand that Iran will not negotiate seriously on its nuclear program until it perceives a clear, convincing, and unified consensus in the US and Israel on an approach that addresses both Iran’s ambitions and Israel’s concerns.
Achieving such a consensus in the context of an American presidential election will be no small feat.
Nor is it easy to create consensus in Israel, especially as its political parties prepare for elections next year.
But only with significantly greater cohesion within the US and Israel will Iran’s leaders even consider accepting a compromise on their nuclear program.
Iran’s Hardline Choice
Iran’s choice for its next president, the hardline Mayor of Teheran Mahmoud Ahmadinejad, is likely to worsen relations with the West and the country’s international isolation.
Yet in domestic terms the Islamist regime is likely to be better off than it would have been with a more moderate result.
Clearly, Ahmadinejad has a real base of support.
But the fact that he ran as a populist, talked about helping the poor, condemned the government’s performance, and acted almost like an opposition candidate are all irrelevant: he was the regime’s choice, and, in the end, he received official help even against rival hardline candidates.
The regime played its hand brilliantly.
It turned the slightly more pragmatic Hashemi Rafsanjani, who disagreed with some current policies, into the “establishment” figure and its own man into the rebel.
The government thus used anti-establishment feeling to revitalize its own rule.
Given the fact that the last president, Muhammad Khatami, was a supporter of the reform movement – albeit a timid one who ultimately accomplished nothing – only underlines how thoroughly the rulers turned around the political situation.
Ahmadinejad is a representative of the younger activists in the anti-Shah revolution of a quarter-century ago.
He was directly involved in the holding of American hostages in Iran, though exactly how much so remains a matter of dispute.
Most worrisome of all, he is close to the two main groups that represent the most extreme elements in Iran: the Islamic Revolutionary Guard Corps and the Basij organization.
The first is a parallel pro-regime army; the second is an organization for intimidating opponents and anyone seeking a more open society.
However, concern that an even more radical leadership has taken over in Iran is mitigated by two factors.
First, Ahmadinejad is more likely to focus on domestic issues, trying – with whatever degree of success is unclear – to improve living standards for the poorest Iranians.
Second, the same group that has been in control ever since the revolution will basically continue to run ideological and foreign policy.
The president has fewer powers than it seems, overshadowed particularly by Supreme Guide Ayatollah Ali Khamenei.
Nevertheless, Ahmadinejad’s election starkly clarifies the challenge that Iran poses for Western policy and Middle East stability.
First and foremost, it sends a signal to the most extreme elements in Iran and that country’s terrorist clients – Lebanon’s Hezbollah, the Palestinian Hamas and Islamic Jihad, and various small groups operating against Saudi Arabia, Iraq, and other Arab countries – that they have a green light for launching attacks.
They are likely to assume that Iran will support them whatever they do.
Outwardly, Iran has often been relatively cautious, but, at the covert level, it has been the world’s leading sponsor of terror.
Sometimes individual Iranian officials may have acted on their own to order and coordinate specific operations; they will now feel freer to do so.
Moreover, Ahmadinejad openly advocates Iran’s crash program to obtain nuclear weapons.
Most Iranian politicians – at least those allowed by the government to function openly – support the program, but favor a quieter and more cautious approach.
Rafsanjani, for example, put building better economic relations with the West ahead of pushing forward on the nuclear front.
If Ahmadinejad is president of a nuclear Iran, he is more likely to use the weapons in an adventurous manner.
This does not mean that he would fire them, but rather that he would use them for purposes of diplomatic blackmail, raising threats to crisis levels.
Since Iranian leaders daily proclaim their desire to wipe Israel off the map and to fight the US (Ahmadinejad stepped on a picture of an American flag on his way to vote), the risk of confrontation has increased.
Finally, Ahmadinejad is likely to be bolder in subverting stability in Iraq, and his victory will encourage radical Iranian officials and extremists within Iraq itself.
Iran is already sending many agents into Iraq and supporting clients seeking to turn that country into a clone.
Iraqis, including Shia Muslims – who follow the same version of Islam as Iranians — generally reject such interference.
A more militant Iranian posture is likely to increase friction with Iraq, as well as inspire more anti-American violence there.
In short, Iran’s electoral outcome is a dangerous one, though precisely how destabilizing it ultimately turns out to be will depend on Ahmadinejad’s actions and the degree of power granted him by Khamenei.
Moreover, dealing with such an openly extreme Iran – radical even by the hardline regime’s standards – will be a challenge not just for the US, but for Europe as well.
Will European countries try to pretend that Ahmadinejad’s militant rhetoric and provocations don’t matter and that some diplomatic solution to Iran’s nuclear ambition can be found?
With Rafsanjani, either a real agreement or the pretense of cooperation would have been easy to maintain.
But, with Ahmadinejad, a high level of appeasement will be necessary for even the most minimal diplomatic process to continue.
Some Iranian reformers and exiles put a bright face on Ahmadinejad’s election, arguing that his administration is more likely to show the regime’s real face and disabuse any Western hopes of compromise.
Yet it may also represent the regime’s success at co-opting dissatisfaction with a quarter-century of radical Islamist rule.
Whatever the outcome, for the West, Ahmadinejad’s victory means that everything related to Iran is set to become even hotter.
Iran’s Last Chance?
MADRID – The latest round of negotiations on Iran’s nuclear program between Iran and the so-called “5+1” group (the United Nations Security Council’s five permanent members – the United States, the United Kingdom, Russia, France, and China – plus Germany) has now begun.
Following more than a year of deadlock, after negotiations in January 2011 led nowhere, this dialogue is for many the last chance to find a peaceful solution to a nearly decade-long conflict (in which I participated closely from 2006 to 2009 as the West’s main negotiator with Iran).
The objective of the talks, chaired by the European Union’s foreign-policy chief, Catherine Ashton, and Iran’s chief negotiator, Saeed Jalili, is still to persuade Iran to halt uranium enrichment and to comply with Security Council resolutions and its obligations under the Nuclear Non-Proliferation Treaty.
But several factors heighten the current negotiations’ strategic importance.
First, domestic economic and political conditions in Iran have changed markedly since the last round of talks.
International pressure has mounted since the International Atomic Energy Agency confirmed last November that the country’s nuclear program was advancing towards the production of nuclear arms, rather than electricity or medical isotopes, with new sanctions imposed on Iranian oil exports and on transactions with the Central Bank of Iran.
Although rising global energy prices have given Iran some respite in recent months, the sanctions have made themselves felt more than ever among Iranian consumers.
The rial has lost 40% of its value since October (making imports less affordable), and financial transactions have become much more expensive and difficult for the government, businesses, and households alike.
Moreover, Iran’s leadership is fragmented and weak.
Relations between President Mahmoud Ahmadinejad and Supreme Leader Ayatollah Ali Khamenei continue to deteriorate, while tensions are growing within the Revolutionary Guard.
It remains to be seen what impact these political developments will have on the negotiations.
Second, Iran’s regional standing has been shaken by the wave of Arab revolts, especially in Syria – a decisive country, given its strategic relations with both Iran and Russia.
Indeed, Syria is Iran’s main ally in the Middle East, as well as being the only country outside of the former Soviet Union in which Russia has a military base.
Russia’s need to reconcile its role in these negotiations with its interests in Syria makes an already-complicated dialogue more difficult.
The strategy with respect to the Gulf’s Sunni monarchies has also changed.
Today, these countries are more at odds with both Iran and Syria than they have been for decades.
Led by Qatar and Saudi Arabia, they have openly admitted the possibility of arming Syrian rebels in order to overthrow President Bashar al-Assad.
Moreover, Saudi Arabia’s oil reserves enable it to give crucial support to oil-export sanctions on Iran by offsetting the loss of global supply.
China, with its growing energy dependency on the Gulf states, will have to weigh that factor carefully at the negotiating table.
Along with Russia, China has backed Syria in the Security Council, and it was recently revealed that Iran helped Syria to defy international sanctions by providing a ship to transport oil from Syria to a state-owned company in China.
Third, Israel, already unhappy with the outcome of the previous round of negotiations, is becoming increasingly uneasy.
With Iran’s nuclear program advancing and political uncertainty looming over the region, Israel supports a military operation against Iran in 2012, before, in the words of Israeli Defense Minister Ehud Barak, it crosses the “immunity zone,” beyond which intervention would be futile.
Israeli Prime Minister Benjamin Netanyahu, speaking last month to the membership of AIPAC, the largest pro-Israel lobby in the US, emphasized the urgency of the situation.
But the negotiations will be long, with many ups and downs, and, to add another layer of complexity, are taking place during an election year in the US, with the opposition Republican Party more closely aligned with Netanyahu’s position.
Finally, US President Barack Obama knows that his reelection depends on avoiding mistakes in this matter.
But how can a lengthy negotiation be carried out without seeming to benefit the party, which wants to gain more time?
Political optics – that is, the management of public perceptions – will be a very important part of this negotiation.
For now, America is keeping a channel open for direct dialogue with Iran (as US Secretary of Defense Leon Panetta warned Barak months ago).
On the first day of the talks in Istanbul, Jalili accepted a US request for a bilateral meeting within the context of the negotiations, and all participants deemed the results so far to be a step in the right direction.
If we want to ensure that Iran never has a nuclear weapon, the only guarantee is to change its desire to possess one.
And the best way to do that is still by negotiating, rather than by using force.
No one has calculated the consequences of a war.
Iran’s Less-is-More Nuclear Policy
NEW YORK – The recent United States National Intelligence Estimate (NIE), which reports that Iran once had a “nuclear weapons program” but suspended it in 2003, means that there will probably be no American attack on Iran during the Bush administration.
How could America’s president explain to the world why he was bombing nuclear weapon facilities that his own intelligence services have said do not exist?
So, in all likelihood, the world has been spared a policy that would be as futile as it would be destructive.
Indeed, the one act most likely to guarantee that Iran obtains nuclear weapons would be to attack it.
(Nine years after Israel’s bombing raid on Iraq’s nuclear reactor at Osirak in 1981, Saddam Hussein was nevertheless within a year of having an atomic bomb.)
Yet the NIE arrived at its result by a strange route.
Every technically competent person knows that the paths to civilian nuclear power and to nuclear weapons are the same, except for a few last, comparatively simple steps.
The hard part is obtaining the fissionable materials – plutonium or highly enriched uranium.
Once that’s done, any nation – or even a sophisticated terrorist group – can do the rest.
Nuclear power requires low-enriched uranium as fuel.
Enrich it further, in the same facilities, and you have bomb-grade highly enriched uranium (HEU).
The remaining step – slamming two pieces of HEU together to create a critical mass and an explosion – is easy: the blueprints can be downloaded from the Internet.
Indeed, the “secret” of the hydrogen bomb was published in 1979 in an article by Howard Morland in The Progressive magazine, sparking a failed legal suit by the US government to suppress it.
The hard work of building facilities for enriching uranium is precisely what the Iranians are now already doing, if not yet in sufficient quantity to make a bomb, which might take them five or ten more years to acquire.
But, once they acquire sufficient capacity, only the easy steps will remain.
Yet it is work on the easy steps, allegedly attempted and then canceled, that the NIE called Iran’s “nuclear weapon program.”
In light of the technical realities, it would have been more accurate to designate the difficult and openly acknowledged enrichment activity as the nuclear weapons program, for this is what can supply the guts of an atomic bomb.
Ironically, Iran’s suspension of the easy steps creates the impression that its weapon program has been stopped, while the most important activity continues in plain sight.
Of course, this does not mean that once Iran has adequate enrichment facilities, it will make a bomb.
But it is capacity, not intention, that counts.
Iran could easily do what Japan does – hold enrichment facilities in readiness to make a bomb without actually doing so.
Or, like India in 1974, it might wait a long time, then dash to the finish line and conduct an atomic test.
How has this confusion arisen?
One answer lies in the provisions of the Nuclear Nonproliferation Treaty (NPT), which forbids nuclear weapons to most of its signatories but guarantees them the right to build technology for nuclear power, including uranium enrichment.
Thus, the treaty unfortunately permits any signatory to acquire the most important facilities needed for making atomic bombs.
So, when the Bush administration wanted to oppose Iran’s program, merely pointing to the bare fact of enrichment wasn’t enough.
It had to point to other acts, including concealment efforts, which violate the NPT, and argue that these infractions were so serious that Iran’s enrichment right must be taken away.
The US was thus led to a series of over-statements.
In December 2005, Vice President Dick Cheney said, “There is every reason to believe that they are seriously pursuing nuclear weapons.” President Bush now argues that all along it has been the above-board enrichment of uranium, not some other, secret program, that carries Iran ever closer to having nuclear weapons.
But he makes that legitimate point in vain: having rested its case on misjudgments, the administration now finds itself discredited by its own intelligence estimate.
We are left in a situation that layers paradox upon paradox.
A disastrous possible policy – military attack on Iran – has been headed off by a misguided, misinterpreted intelligence report.
One question is why Bush and Cheney set themselves up for this embarrassment.
Bush has said that he learned of the NIE’s conclusion only a week before it came out – a statement that either is false or reveals a level of incompetence beyond anything suspected so far.
None of that matters now.
The Bush administration’s habits of falsehood have undone its aggressive proclivities, leaving a gaping vacuum.
The doctrine according to which great powers, many of them nuclear-armed, try to stop lesser powers from acquiring nuclear weapons by force and threats of force – a fiasco in Iraq, nuclear-armed North Korea, and now Iran – has reached a dead end.
But, report or no report, the danger that Iran will acquire nuclear weapons is real, and may even have increased.
What’s missing is a policy to address it.
Iran’s Muddled Presidential Politics
WASHINGTON, DC – The decision of former Iranian president Mohammad Khatami not to seek the presidency again has revealed how muddled Iranian presidential politics now is. In trying to sort out this muddle, the most important thing to keep in mind is not so much who will be elected, but what that choice will reveal�about the intentions of the country’s Supreme Leader, Ayatollah Ali Khamenei.
Unfortunately, the most likely outcome will be continuing transformation of the Islamic Republic from a civil government into a garrison state in which the military plays a major role in determining political and economic matters.
Who will actually win the vote is unpredictable, but not because Iran is democratic.
Ayatollah Khamenei, who is also the commander-in-chief of the armed forces, oversees the agencies that will run the election: the Guardian Council and the Ministry of Interior, which supervise the electoral process, and the Basij militia and Revolutionary Guard (IRGC), which unofficially control the ballot-boxes and the vote-counting process.
Recent surveys show that the increasing unpopularity of the current president, Mahmoud Ahmadinejad, stems primarily from his economic policies.
Although oil prices reached an all-time high in 2008, unemployment and inflation (now 31%) are out of control and the government is facing a $44 billion budget deficit.
The public sector accounts for roughly 80% of the economy, and relies mostly on now-plummeting oil revenue, while Iranian banks face a credit crisis, with Mahmoud Bahmani, the governor of the Iran Central Bank, estimating total delinquent payments to be $38 billion.
But Ahmadinejad’s unpopularity does not necessarily weaken his chances of being re-elected.
A few months before the election, neither of the two main political currents, conservative and reformist, has settled on its candidate.
Among the reformists now in the race, Mehdi Karrobi, the former speaker of the Majlis is a declared reformist candidate.
Mir Hossein Moussavi, a former prime minister, and Abdullah Nouri, a former interior minister, are also expected to enter the race.
On the conservative side, Ahmadinejad so far stands alone.
But many conservatives also oppose his economic policies, as well as his management style.
Conservative voices have repeatedly argued that supporting Ahmadinejad will cost them votes and reinforce the economic crisis.
Conservative disenchantment with Ahmadinejad is apparent in the current Majlis, which is predominantly conservative.
The Majlis has rejected the government’s economic bills, and has repeatedly impeached or challenged Ahmadinejad’s cabinet ministers.
Iran’s main diplomatic challenge will center on its nuclear program and relations with the United States.
Since the president has no authority over these issues, any disagreement between the Supreme Leader and the next president will place the president in a difficult position with no real power.
In terms of domestic policy, the major challenge for the next president will be the economy.
Over-reliance on oil revenues, the effect of longstanding international sanctions, and the reluctance of foreign companies to invest in Iran have exacerbated the economy’s structural problems.
Perhaps one of the most significant elements in Iran’s stagnation is that the Revolutionary Guards control a large portion of the economy, and are beyond the reach of government regulation.
In order to manage the economic crisis successfully, any president must not only shift economic policy, but also amass enough political power to be able to thwart the intervention of the Revolutionary Guards and other organizations in economic policy-making.
Former President Khatami’s initial decision to run for the post again grabbed the international community's attention.
Yet a Khatami victory would not have guaranteed change.
As president, he faced criticism from reformists for his failure to resist a range of powerful groups that sabotaged economic reform and improvement in Iran’s relations with the west.
Khatami’s organizational savvy had not improved much since then.
So far, he lacks even a media platform for his faction.
Reformist critics believe that in order to mobilize people it will not be enough just to campaign against Ahmadinejad.
If a reformer is to win he must prove that he will be able to sway Iran’s political structures toward a reform agenda.
But reformists ask: if the Supreme Leader does not even permit the Khatami faction to have a newspaper, would he really have allowed Khatami to become president?
Even if any reformer does become president, will he be able to overcome his differences with the Supreme Leader?�
Speculation about the outcome of the election is an interesting parlor game.
But it should not distract us from the fundamentals of Iranian politics.
The next president may have room to adjust economic or social policies.
But, on the big issues of foreign policy, relations with the West, and the nuclear program, the identity of the president is not important.
These issues will be decided by a man who is not running for office in June, but whose power is secure: Ayatollah Ali Khamenei, Iran’s Supreme Leader.
Iran’s New Contender
WASHINGTON, DC – Iran’s presidential race just got more interesting, with former Prime Minister Mir Hussein Mousavi throwing his hat in the ring and former President Mohammad Khatami withdrawing his.
This development poses the most significant challenge yet to current President Mahmoud Ahmadinejad – and a potential opportunity to alter the relationship between Iran and the West.
Mousavi, who believes that Iran is in “poor shape,” is perceived by many of the Iranian elite to possess the revolutionary and ideological credentials to run against Islamist fundamentalists such as Ahmadinejad.
At the same time, he is associated with Iranian reformists, who believe that Iran must enact major domestic and foreign policy changes to escape its economic crisis and international isolation.
A Mousavi presidency could lead to foreign policies that incorporate engagement with the United States and European Union on a number of issues, including Iran’s nuclear program.
However, Mousavi will face many obstacles in the months leading up to the June 12 vote, and he will succeed only if allowed to by Supreme Leader Ayatollah Ali Khamenei.
Mousavi was an important part of the revolutionary movement that overthrew the Shah in 1979.
As Prime Minister from 1981 to 1989, he was credited for steering Iran through the crises of the early revolutionary period and the Iran-Iraq war.
Widely viewed as a capable technocrat, Mousavi has often been able to navigate Iran's complicated economic and political maze.
He appeared to have abandoned an active role in politics after his post was abolished in 1989.
But now he has ostensibly resurfaced, like a Persian Cincinnatus, to help Iran in its hour of need.
Iran under Ahmadinejad is facing its worst economic crisis in decades.
Inflation, unemployment, sanctions, and falling oil prices have created a perfect storm, threatening the stability of the regime.
Yet the public and the elite few view the presidential contenders as being capable of improving Iran’s conditions.
Ahmadinejad maintains some support among the poor and rural classes, but he is viewed with disdain by much of the ruling class, even within his own political camp.
His economic failures have highlighted the need for a more moderate and capable president.
Former President Khatami, meanwhile, is reviled by the fundamentalists and the top brass of the Revolutionary Guards, who repeatedly obstructed his reform agenda during his presidency.
A recent op-ed in the right-wing Kayhan newspaper, which is closely associated with Khamenei, had warned Khatami to avoid the same fate as the assassinated Benazir Bhutto in Pakistan.
It is no surprise that he backed out of the race, leaving Mousavi, a technocrat and a revolutionary, as the only viable challenger to Ahmadinejad.
But change does not come easily to Iran.
Supreme Leader Ayatollah Ali Khamenei is wary of Mousavi, who served as Prime Minister during Khamenei’s presidency in the 1980’s.
The two were often at odds over economic, social, and religious policies.
Ahmadinejad, by contrast, has been loyal to Khamenei and has largely followed his policies over the past four years.
In Khamenei’s eyes, it was Ahmadinejad who kept Khamenei’s reformist opponents at bay and resisted President George W. Bush’s attempt to “dominate” Iran and the Middle East.
A perceived change in American “behavior” under the Obama administration may facilitate Khamenei’s support for, or at least acquiescence in, an electoral victory by Mousavi.
Khamenei may be fundamentally opposed to full US-Iranian relations, but a new Iranian president may provide some cover for limited accommodations, including perhaps on the nuclear front.
And an easing of US-Iranian tensions over the next few months, even if unaccompanied by substantive advances in the relationship, could improve the prospect for a fairer, less manipulated election result.
Mousavi is the man to watch.
But, as always, elections in Iran are neither predictable nor transparent.
The dominant actors – Khamenei and the Revolutionary Guards – will continue to exert potentially decisive influence.
Iran’s Nuclear Lies
Mohammad El-Baradei, the director general of the International Atomic Energy Agency (IAEA), is pressing the agency’s board of governors to make one last effort to find a diplomatic solution to Iran’s nuclear ambitions before sending the case to the United Nations Security Council for possible sanctions.
A decision to refer Iran to the Security Council could come as early as November 24, when the IAEA’s board meets to discuss “new information” discovered by inspectors on the ground.
Thanks to the IAEA’s inspectors, we now have a fairly detailed picture of Iran’s nuclear archipelago – at least those facilities that the Iranian government has been forced to open.
We know that Iran has discovered, mined, and milled natural uranium, the basic building block of any enrichment program, without telling the IAEA.
We know that Iran built a uranium conversion facility in Isfahan to convert uranium yellowcake into uranium hexafluoride gas (UF6), the feedstock for uranium enrichment, without the required prior notifications to the IAEA.
We also know that Iran built an underground uranium enrichment plant at Natanz, hardened it against missile attack, and erected dummy buildings on the surface to conceal it from overhead surveillance.
The authorities agreed to open this facility to the IAEA only after its existence was confirmed by commercial satellite imagery, and they appear to have swept the underground halls of whatever equipment was installed before the inspectors arrived.
Once fully operational, these facilities will give Iran mastery of the entire nuclear fuel cycle.
For eighteen years, Iran’s government concealed these activities from the IAEA, in clear violation of its safeguards agreement.
For this reason alone, the IAEA’s board must refer Iran to the Security Council for further actions, as required by the agency’s charter.
Non-nuclear nations that sign the Non-Proliferation Treaty, as Iran has, pledge to abandon all efforts to develop nuclear weapons.
In exchange, they are given access to nuclear technologies.
But that pledges requires complete, transparent cooperation with the IAEA.
Instead, Iran has been playing cheat and retreat, in clear violation of Article II of the NPT.
“With Iran, we realized that mastery of the fuel cycle makes you a virtual nuclear weapons state,” a top aide to El-Baradei told me. “That was a wake-up call for all of us.”
But a wake-up call that allows the IAEA‘s board to go back to sleep is useless.
For two and a half years, the European Union has made every effort to get Iran to cooperate fully with the IAEA and come clean about its nuclear activities, to no avail.
When the IAEA announced it wanted to inspect a suspected enrichment cascade within the Revolutionary Guards complex at Lavizan-Shian, Iran’s government stalled for months until it could raze the site.
When it asked to visit a suspect lab within the Parchin defense production plant, the Iranians stalled. When they finally allowed a small team in, they limited their movements, in violation of Iran’s commitments.
El-Baradei has stated that the IAEA has found “no evidence” of a weapons program in Iran – a statement that Iranian leaders have since cited as proof of their peaceful intentions.
But the IAEA has no authority to determine whether or not a country has a nuclear weapons program. That is up to the UN Security Council.
The IAEA’s job is to determine whether a nation has violated its safeguards agreement, and El-Baradei has made it abundantly clear that Iran has.
Understanding the intentions of Iran’s leaders is not as difficult or as ambiguous as some believe.
Eighteen years of concealment constitutes a powerful track record. So do Iranian leaders’ own statements.
For example, in 1986, then-president Ayatollah Ali Khamenei gave a pep talk at the headquarters of the Atomic Energy Organization of Iran. “Our nation has always been threatened from outside,” he said.
“The least we can do to face this danger is to let our enemies know that we can defend ourselves.”
In 1988, Ali Akbar Hashemi-Rafsanjani – the supposed “moderate” candidate in Iran’s recent presidential election – spelled out what that meant in an address to the Revolutionary Guards Corps. “We should fully equip ourselves both in the offensive and defensive use of chemical, bacteriological, and radiological weapons,” urging the audience to “make use of the opportunity and perform this task.”
Iran’s regime has only grown bolder since then.
Foreign Minister Kamal Kharrazi declared in June 2004 that Iran “won’t accept any new obligations,” and must “be recognized by the international community as a member of the nuclear club.”
Similarly, in March 2005, Rafsanjani reiterated Iran’s refusal to dismantle its nuclear fuel cycle facilities, as the EU and the IAEA had demanded, insisting that “we can’t stop our nuclear program and won’t stop it.”
In these circumstances, the risk entailed by doing nothing far outweighs the costs of referring Iran to the Security Council.
Indeed, Iran may already be enriching uranium secretly.
If it used the centrifuges that it purchased from Pakistan’s nuclear impresario A.Q. Khan, it could have enough fissile material to produce 20 bombs.
With Iran continuing to shelter top al-Qaeda leaders, this raises an even graver threat: that terrorists get hold of nuclear weapons.
The dangers of allowing Iran to go nuclear ought to be obvious.
Even to El-Baradei.
Iran’s Nuclear Zealot
With negotiations over Iran’s nuclear program looming once again, understanding Iran’s new president, Mahmoud Ahmadinejad, is critically important.
Perhaps the best place to start is the moment the world first gained a glimpse of Ahmadinejad’s character and hardline program.
When President Ahmadinejad addressed the United Nations in New York last September, he suddenly felt himself surrounded by light.
It wasn’t the stage lighting, he said.
It was light from heaven.
Ahmadinejad related his otherworldly experience in a videotaped meeting with a prominent Ayatollah in Tehran.
A transcript of his comments and sections of the video-tape wound up on a hard-line, pro-regime website, baztab.com.
According to the transcript, Ahmadinejad said that a member of his entourage at the UN meeting first told him of the light. “When you began with the words ‘In the name of God’… I saw a light coming, surrounding you and protecting you to the end [of the speech].”
Ahmadinejad confirmed sensing a similar presence. “I felt it myself, too, that suddenly the atmosphere changed and for 27-28 minutes the leaders could not blink....They had their eyes and ears open for the message from the Islamic Republic,” he told Ayatollah Javadi-Amoli.
Ahmadinejad’s “vision” at the UN could be dismissed as political posturing if it weren’t for a string of similar statements and actions that suggest he believes that he is destined to bring about the “End Times” – the end of the world – by paving the way for the return of the Shia Muslim messiah.
Given that Iran continues to pursue suspect nuclear programs, which could bring the Islamic Republic dangerously close to weapons capability, a leader with messianic visions is worrying.
After all, this is the same man who recently pledged to use Iran’s newfound powers to “wipe Israel off the map” and to “destroy America.”
In a November 16 speech in Tehran to senior clerics who had come from all over Iran to hear him, the new president said that the main mission of his government was to “pave the path for the glorious reappearance of Imam Mahdi (May God Hasten His Reappearance).”
The mystical 12th Imam of Shia Islam disappeared as a child in 941 CE, and Shia Muslims have awaited his reappearance ever since, believing that when he returns, he will reign on earth for seven years, before bringing about the Last Judgment and the end of the world.
In order to prepare for the Mahdi, Ahmadinejad said, “Iran should turn into a mighty, advanced, and model Islamic society.” Iranians should “refrain from leaning toward any Western school of thought” and abstain from “luxurious lives” and other excesses.
Three months into Ahmadinejad’s presidency, his views of the 12th Imam are being widely discussed in Tehran.
According to one rumor, as mayor of Tehran, Ahmadinejad drew up a new city plan for the Imam's return.
In recent weeks, Ahmadinejad’s aides have denied another rumor that he ordered his cabinet to write a pact of loyalty with the 12th Imam and throw it down a well near the holy city of Qom, where some believe the Imam is hiding.
Those who give credence to the rumor point to an early decision of his cabinet to allocate $17 million to renovate the Jamkaran mosque, where devotees of the 12th Imam have prayed for centuries.
Similarly, reports in government media outlets in Tehran have quoted Ahmadinejad as having told regime officials that the Hidden Imam will reappear in two years.
This proved too much for one Iranian legislator, Akbar Alami, who publicly questioned Ahmadinejad’s judgment, saying that even Islam’s holiest figures have never made such claims.
While many Shia Muslims worship the 12th Imam, a previously secret society of powerful clerics, now openly advising the new president, are transforming these messianic beliefs into government policies.
Led by Ayatollah Mesbah Yazdi, who frequently appears with the Ahmadinejad, the Hojatieh society is considered by many Shia as the lunatic fringe.
During the early years of the Islamic Revolution, even Ayatollah Ruhollah Khomeini found their beliefs too extreme and sent them scurrying underground.
As devotees of the 12th Imam, the Hojatieh believe that only great tribulation will warrant his coming.
Akin in some ways to Lenin’s doctrine that worsening social conditions would hasten revolution, the Hojatieh believe that only increased violence, conflict, and oppression will bring the Mahdi’s return.
Since taking office last August, Ahmadinejad has installed Hojatieh devotees in his cabinet and throughout the bureaucracy.
The Ministry of Information and Security (MOIS), largely sidelined by former President Mohammed Khatami, has re-emerged as a powerful repressive force, using plain-clothes agents, allied with the paramilitary Bassij and non-government vigilantes, to crack down on potential opponents of the regime.
As the world prepares to confront an Iranian regime that continues to defy the International Atomic Energy Agency on its nuclear programs, we must listen to what Iran’s leaders say as we watch what they do.
A religious zealot with nuclear weapons is a dangerous combination the world cannot afford to tolerate.
Iran’s Options
With President Bush in Europe getting EU leaders to agree to toughen UN sanctions against Iran, and with the ongoing debate between John McCain and Barack Obama about whether the US needs to talk with Iran’s rulers, the issue of Iran’s nuclear program is heating up. Iranians, no surprise, are watching this debate with interest.  They need to do more than watch.
Iran’s political elite sees the United States, rather than Europe, as their appropriate international counterpart.
Only the US can give the Islamic Republic the security guarantees it craves.
The US, indeed, should be prepared to eventually give such guarantees if it wants Iran to stop the more suspicious parts of its nuclear program.
But Iran must do its part to make any future dialogue with the US a success.
In talks with members of Iran’s policy community, I am continually astounded that they see resolving the nuclear conflict (or, indeed, other problems in which Iran has a stake) to be primarily the responsibility of the US, Europe, and other major powers, not of Iran.
Such passivity is not in Iran’s interest. As the Middle East’s essential regional player, Iran can trigger and heat up conflicts as well as contribute to their solution.
Yet few in the Iranian establishment understand that being the leading regional power brings responsibility; and that only responsible behavior can create legitimacy and acceptance that Iran craves.
Iranian policymakers must, therefore, try to develop their own ideas for a negotiated resolution of the nuclear and other regional security issues, as well as to think about how Iran can rebuild trust in its actions.
Iran’s leaders should begin by shunning hostile rhetoric.
Incendiary statements about Israel exacerbate the lack of trust among Iran’s would-be partners, and make it hard for those in Europe and the US who are interested in building more favorable relations.
Iran hints that it wants to have a high-level dialogue with the US in the not-too-distant future.
If true, Iran should realize that violent statements on sensitive issues will set back any serious attempt to get a dialogue going.
Iran could also build trust if it became more transparent, particularly about its own strategic ambitions.
A good start would be to publish key documents that are constantly referred to by Iranians but never seen – say, Ayatollah Khamenei’s fatwa that reportedly rules that Islam prohibits the production, stockpiling, and use of nuclear weapons?
It would also be helpful if Iran laid out its strategic vision for the region.
It should accept the concerns of its neighbors, seek to develop its own ideas for regional confidence- and security building, and participate in efforts to create regional security arrangements.
It should also positively respond to offers from the US to establish confidence-building measures between the two countries’ military forces, particularly their navies.
As to the nuclear issue, Iran should try to switch from the language of “inalienable rights” to one of pragmatic solutions.
This would help depoliticize the issue.
The right to independent nuclear research and development under the NPT is not disputed.
But rather than insist as a matter of principle on operating the fuel cycle independently under national sovereignty, Iran could engage the Saudis about their idea of a regional joint venture, or explore different options of multilateral consortia with other countries.
Iran’s parliament, now led by Ali Larijani, Iran’s former nuclear negotiator, could make a strong contribution to confidence building and to the resolution of the nuclear conflict by ratifying the NPT’s Additional Protocol.
Other clarifications are also needed. Is Iran prepared to accept a compromise that responds to European and other international concerns about its nuclear program, and thereby gain wide-ranging economic, energy, technology and science cooperation? Nuclear energy, after all, is only one technology, and a 20th century, rather than a 21st century one at that.
Eventually, partnership with Europe could help Iran keep the best of its young generation at home rather than having them queue for visas at foreign embassies – or, more often, the US consulates in Istanbul or Dubai.
The willingness of major countries to accept Iran with a nuclear status similar to Japan depends on whether Iran not only refers to itself as a status-quo power – which it occasionally does – but whether it acts as such.
If it wants to be seen as a status-quo power, it needs to accept local and international efforts at establishing peace between Israel and its neighbors.
For a grand bargain with the US, Iran needs to end its support for militant organizations like Hamas or Palestinian Islamic Jihad which undermine efforts at reaching a two-state solution for Israel and Palestine.
Even without such a bargain, however, Iran will have to do certain things if it wants to be seen as a constructive regional player.
It will have to accept all the other states in the region as legitimate players with their own legitimate interests as much as it wants to be recognized as such itself.
It will also have to accept the wish of the huge majority of Palestinians for a peaceful settlement with Israel.
Iranian officials sometimes try to make relative President Mahmoud Ahmadinejad’s more violent statements about Israel as nothing more than a call for “regime change.”
That is not a status-quo policy.
Iran is entitled to seek assurances against externally forced regime change.
But it cannot have it both ways, seeking guarantees against regime change at home, and promoting it in its neighborhood.
Iran’s Political Clerics
Iran’s theocratic regime appears more confident than ever.
Its standoff with the West over its nuclear program, together with its ties to Syria and its growing influence in Lebanon and Iraq, suggest the emergence of a strong regional power.
But, while Western analysts and Iran’s neighbors raise the alarm, the regime’s authority is in fact built on insecure foundations.
The 1979 revolution, which ended Iran’s monarchical tradition, created a new political order based on Shiite theological foundations and giving absolute ruling power to a Shiite jurist/cleric.
Throughout Iran’s long history, Shiite seminaries exercised great influence on Iranian society and politics, but they had been considered civil institutions.
It was not until the Iranian revolution that the seminary establishment came to be considered a source of political legitimacy.
The change followed Ayatollah Khomeini’s theory of the “jurist-ruler.”
In Khomeini’s view, the jurist-ruler could modify religious laws, depending on his interpretation of the needs of the regime.
As a result, religious interpretation – previously, a highly decentralized function undertaken by various seminaries – was concentrated in the hands of a political leader.
Accordingly, the seminary establishment was no longer a civil structure managing only religious affairs, but instead developed into a unified, ideological party serving the interests of the regime.
That transformation was far-reaching.
Traditionally, Shiite seminaries were rather unorganized, unstructured places, based on pre-modern styles of management.
The concept of a decentralized religious establishment is difficult for Westerners to understand, given the highly structured administrative framework of Christian churches and ecclesiastical orders.
But this fluid hierarchy, an absence of written rules and organizational order, allowed the various seminaries – and their different interpretive traditions – to survive despotic political regimes and resist intervention by different dynasties and monarchies.
This change in Shiite orientation also reflects a very modern influence on politics.
Since Shiite fundamentalism is itself a recent phenomenon, the early Iranian revolutionaries inevitably rebuilt the religious seminaries along lines suggested by the Iranian opposition’s most powerful pre-revolutionary discourse: communist ideology.
By “modernizing” the seminaries following a single-party model, the revolutionaries gained control over them. The seminaries became little more than an extension of the political system.
The death of Ayatollah Khomeini – and that of other religious authorities ( marjas ) like Ayatollah Abul Qassem Khoi in Najaf, Iraq – marked the end of the ideal of a ruler who had mastered both religion and politics.
Iran’s current supreme ruler, Seyyed Ali Khamenei, whose religious degree was a focus of suspicion in the seminary and among the clerical elite, was not considered a jurist by merit.
Consequently, Khamenei’s evident lack of religious legitimacy has pushed the government to assume full control over the clerical establishment, further depriving the seminaries of their historical independence.
The last decades have provided the regime with near-ideal conditions to seize control over the Shiite clerical establishment in Iraq as well.
Under Saddam Hussein, restrictions were imposed on the Shiite seminary in Najaf – traditionally a counterbalance to Iran’s Shiite establishment – forcing the emigration of a number of clerics to the Iranian seminary in Qom.
Indeed, growing Iranian control of the Shiite clerical establishment extended beyond Iraq.
It was also strengthened by the regime’s activities in the 1980’s, when it created Hezbollah as a guerilla organization in Lebanon, thereby expanding its domination over the most important Shiite areas in the region.
The Iranian regime then consolidated its mastery of the Shiite network in the Middle East, and now uses this control to further its own interests.
There is thus little prospect of an alternative Shiite power center emerging out of the chaos in Iraq.
Khamenei, the supreme leader, has succeeded in politicizing the Shiite clerical establishment, primarily by controlling the financial resources of the religious authorities and Shiite institutions in Iran and the region.
Iraq’s leading Shiite cleric, Ayatollah Ali Sistani, has not been able to act independently and has avoided opposing Iranian policies toward Iraq in order to protect his fragile network of institutions.
As a result, despite Saddam’s fall, the Najaf seminary remains impotent.
Ironically, it seems that theocratic theory in Iran has led to anti-theocracy.
With the seminaries politicized and their independence greatly reduced, the religious establishment is no longer in a position to confer political legitimacy on the regime.
Nor can it exercise its traditional functions in the religious sphere to provide support to civil society in the country.
At a time when the Islamic Republic has failed in its economic and political promises to the Iranian people, the regime’s most glaring weakness may prove to be the absence of a credible religious authority that can justify its shortcomings.
Iran’s Pre-Emptive Strike
Iran’s quarreling and competing leaders have decided, by their acts, to reject the offer by Europe and the United States of a nuclear reactor, aircraft spare parts, economic cooperation, and more in exchange for giving up uranium enrichment.
Many people hoped that Iran’s leaders, despite their extremism, would accept the offer if only to avoid sanctions – which are sure to come even if China and Russia refuse to support them in the United Nations Security Council.
The US and Europe are united this time, and can effectively cut off Iran from world banking, bar Iranian leaders from traveling to the West, and stop exports to Iran of everything but food and medicine.
Instead of waiting passively for sanctions, Iran’s leaders decided to start a Middle East crisis by organizing attacks against Israel.
Their aim is to discourage the US and the Europeans from starting another crisis – financial markets and everyday politics in Europe can tolerate only so much conflict.
They may also hope to shatter the unified EU/US position that now exists.
Moreover, Iran’s claim to leadership in the Muslim world is being undermined by the conflict in Iraq, where Iran supports the Shia militias that are killing Sunnis.
Every bloody day of bombings and executions in Iraq reminds Arabs that the Iranians are neither Arab nor Sunni.
But attacking Israel unites Muslims, and gains Arab gratitude.
Iran’s move was prepared in a series of meetings with both Hamas and Hezbollah in Lebanon.
Khaled Mashal, Hamas’s overall leader, who lives under Syrian protection in Damascus, traveled to Tehran, where he received some $50 million in badly needed cash.
Although an offshoot of the Sunni Muslim Brotherhood, whose Arab financial supporters loathe the Ayatollahs, Hamas decided to cooperate in Iran’s scheme because it was diplomatically isolated and cut off from Western funding due to its refusal to recognize Israel.
Hamas acted by increasing rocket attacks on nearby Israeli territory, and by launching a raid into Israel itself, killing two soldiers and capturing another.
That provoked Israeli retaliation, starting the Gaza end of the crisis that Iran wanted.
As for the impact on lives in Gaza, Hamas – like Yasir Arafat – has again shown itself to be more devoted to the idea of Palestine than to the welfare of Palestinians.
It was far more costly to get Hezbollah to serve Iran’s strategy.
While it retains a heavily armed, salaried, and uniformed guerilla/terrorist force of some 5,000, its leader, Hassan Nasrallah, has been striving for years to build Hezbollah into a legitimate political party and the main representative of Lebanon’s Shia.
This effort was so successful that Hezbollah now has two ministers in the government.
But to be accepted by other Lebanese, and to some extent even to retain the support of fellow Shia, Hezbollah had to agree to join the Lebanese consensus on the priority of reconstruction and economic recovery after years of civil war.
That meant avoiding a war with Israel.
Hezbollah is under order by the UN Security Council to disarm and disband its militia, but it claimed that even after Israel’s full withdrawal from Lebanon in 2000, it needed its weapons to continue to liberate “Lebanese territory.”
That refers to a tiny fragment of land, the so-called Sheba farms, declared by UN inspectors to be in Israel, but which Hezbollah claims as part of Lebanon.
Other Lebanese political parties agreed that Hezbollah could keep its weapons to fight there – but only on condition that it keep the peace on the rest of the border.
That is the condition Nasrallah violated by ordering an attack on an Israeli patrol nowhere near the Sheba farms and launching rockets into Israeli territory.
With that, Hezbollah threw away its political position in Lebanon.
For the Israeli coalition government headed by Prime Minister Ehud Olmert, matters are relatively simple.
It ordered the withdrawal from Gaza in order to stop the cycle of violence there, on the presumption that Israeli territory proper would not be attacked.
But the possibility of attack was of course anticipated, and military planners determined that the only possible response was to counterattack as heavily and for as long as might be needed, until Palestinian attacks would stop, whether from exhaustion or agreement.
Hamas’s control of the Palestinian Authority does not diminish or increase the need for Israeli military action, but it does increase its political benefits, because the fighting and destruction tells Gaza’s population that their rulers are endangering their physical survival.
As for Hezbollah, the Israeli military response is by no means confined to retaliation.
Over the years, Hezbollah has received and stored several thousand rockets and some one hundred longer-range missiles from Iran.
Recently, and very revealingly, two Iranian leaders threatened Israel with bombardment by Hezbollah’s rockets if Israel attacked Iran’s nuclear installations.
Thus, Israel is using the opportunity brought by the current fighting to search out and destroy Hezbollah’s underground and other hidden sites where it keeps its rockets and missiles.
Israel’s political aim is to destroy Hezbollah’s position as a legitimate Lebanese political party by exposing it as the paid agent of Iran, which serves foreign interests at grievous cost to Lebanon.
So Israel is blocking Lebanon’s ports from the sea, has breached the runways of all three jet-capable airfields, including Beirut’s international airport, and remains ready to destroy generating plants and other high-value targets, if necessary, to generate sufficient political pressure on Hezbollah.
If Lebanon’s political forces and Nasrallah’s followers cannot get him to revert to a truce, Israel will bomb more targets, including Nasrallah’s offices in south Beirut.
If more missiles are launched, Israel will cross the border deep into Lebanese territory.
Of course, in both Gaza and southern Lebanon, the outcome is pre-determined by the one-sided military balance.
The only open question in both places is how much damage Israel will need to inflict to obtain new cease-fires.
Iran’s Rattling Saber
WASHINGTON, DC – As the West ratchets up its economic pressure on Iran to halt its drive to develop nuclear weapons, the Islamic Republic’s rulers are not sitting idly by.
Since Iran lacks the soft power and the economic capacity to counter Western pressure, it is likely that its leaders will resort to threats, and even to force, to prevent the West from cracking down further, as the recent attack on the British embassy in Tehran shows.
Iranian authorities claimed that angry “students” spontaneously stormed the embassy.
While inside, they seized documents and set others alight, and took six embassy employees hostage.
It was only much later that the crowd came under police control and the hostages were set free.
The scene was quite familiar. In 1979, the United States embassy was also attacked by angry “students,” fueling enmity between the two countries that continues to this day.
Ayatollah Ruhollah Khomeini was not aware of the students’ plan in 1979.
But he later endorsed their actions, and made anti-Americanism a pillar of Iran’s foreign policy.
Iran today is not the revolutionary Iran of 1979.
Thirty-two years after the Islamic Republic was established, Iran’s tactics are obvious to everyone.
The so-called students are members of the Basij militia, which was ordered to attack the embassy, with the police only pretending to stop them.
In the government’s thinking, it does not have to accept responsibility for the attack, the attackers’ identity will remain a mystery, and no one will even be accused of or tried for breaking the law.
The Fars News Agency, which is affiliated with Iran’s powerful Revolutionary Guard has called the British embassy a “lair of espionage” – the same term used to describe the US embassy in 1979.
This is not the first time that a European or British embassy has been attacked by the Basij.
But the stakes are higher now than ever before.
In response to Iran’s nuclear program and Iranian banks’ money-laundering activities, Britain sanctioned the Central Bank of Iran.
As a result, Iran felt compelled to respond –&#160;and not solely with the assault on the British embassy: a few days prior to the attack, a majority in the Iranian parliament voted to downgrade the country’s diplomatic relations with Britain.
Reacting to mounting fear of Western military action against Iran’s nuclear facilities, Revolutionary Guard commanders recently sharpened their rhetoric against the US and Israel.
Amir Ali Hajizadeh, commander of the Guard’s Aerospace Division, said that, in the event of war, “NATO’s missile-defense installations will be attacked by Iran.”
Moreover, he threatened that Iran’s armed forces would not remain quiet if “economic and cultural pressures” continued.
Likewise, Yahya Rahim Safavi, Supreme Leader Ayatollah Ali Khamenei’s military adviser and a former commander-in-chief of the Revolutionary Guard, appealed to Iranian officials not to confine their threats to words, but rather to respond with military action.
He not only argued that Iran’s strategy should be offensive rather than defensive, but also threatened that Tel Aviv would be attacked by Hamas and Hezbollah if Israel went to war with the Islamic Republic.
Some experts argue that if covert operations against Iran’s nuclear and military programs – such as the assassination of nuclear scientists and explosions at the Revolutionary Guard’s missile arsenals – are already taking place, war has already begun.
Indeed, Khamenei and Revolutionary Guard commanders believe that covert war will inevitably become overt if Israel and the West truly believe that Iran is approaching a dangerous point in its nuclear program.
Khamenei recently stated that “we should threaten [the West and Israel] in response to their threats,” which prompted Armed Forces Deputy Chief of Staff Brigadier General Mohammad Baqeri to conclude that Khamenei’s remark meant “revising [Iran’s] defense strategy.”
Obviously, Revolutionary Guard commanders will not divulge what the new strategy is.
Instead, they hope that their own covert action might stop the West from applying more sanctions and greater pressure.
Thus, the West’s main concerns should stem not from Iran’s official responses, but from “independent elements,” like those that attacked the British embassy.
Recently, the US accused an Iranian-American of being instructed by a member of the Quds Force (a Revolutionary Guard unit tasked with carrying out foreign operations) to assassinate the Saudi ambassador in Washington.&#160;
Back in 2007, Iranian forces captured a group of British sailors in the Persian Gulf, releasing them a few weeks later under strong pressure from the United Kingdom.
With tensions much higher today, however, such acts – even if carried out by unknown or unofficial groups – can trigger war.
Indeed, Iran might become so fearful of an overt war that it starts one itself.
Iran’s Republic of Fear
WASHINGTON, DC – Iran’s clerical regime governs by a simple formula: he who is the most frightening, wins.
Indeed, it is a reliable guide to his political philosophy.
This view was not invented by Khamenei, but rather is drawn from the Koran and the Shiite tradition.
The Iranian Revolutionary Guard have uniforms bearing a Koranic verse that reads, “Make ready for them whatever force and strings of horses you can, to terrify thereby the enemy of God and your enemy, and others besides them that you know not; God knows them.”
Furthermore, in the Shiite tradition, the strategy of the Mahdi, the Shiite Messiah, will be to intimidate all his enemies upon his return to Earth.
But cultivating fear in others also makes one more susceptible to fear, and nothing is more frightening to Khamenei and the leaders of the Islamic Republic than the social dynamism unleashed by the democratic movement brewing inside the country.
The regime seems convinced that there is only a small likelihood of a military attack on its nuclear program.
It does not believe that sanctions can bring about its collapse.
Thus, external forces do not appear to pose much of a threat.
What has shaken the government, and indeed threatens the existence of the ruling Islamic ideology, is the pressure of the Iranian people for human and political rights.
Hossein Saffar Harandi, a former minister of culture and Islamic guidance, expressed this fear when he said that “citizens who want the government to be accountable before the people (are) part of a soft war against the Islamic Republic.”
For 30 years, the Islamic Republic has relied on the heavy hand of the internal-security apparatus to silence dissidents and critics.
Fear is a cornerstone of the republic.
But, since Iran’s post-election crisis in June, the people have become fearless, and in turn are terrifying the government.
The extent to which Khamenei fears this social upsurge is stunning.
He is afraid of the humanities, books, arts, universities, satellites, the Internet, and even mobile phones.
For him, the state must control public access to global culture and technology.
If not, these forces will work to undermine the state.
Unlike the Islamic Republic’s founder, Ayatollah Ruhollah Khomeini, Khamenei lacks charisma and deep learning.
Both his political legitimacy and religious authority are highly questionable, and the street violence and prison brutality of recent months has undermined his authority and shaken his social base.
Increasingly reliant on the Revolutionary Guard as the bulwark of his regime, Khamenei has cut himself off from the possibility of compromise.
Khamenei’s foreign policy is now completely subject to how the domestic situation in Iran develops.
As recent months have shown, he will consider a compromise with the West only when he loses his certainty that all is under control internally.
It is like a seesaw: Khamenei’s domestic weakness changes the balance of Iran’s foreign policy.
Thus, initially intimidated by the post-election crisis, the regime acceded to the October 1 proposal in Geneva that would have allowed the controlled enrichment of Iran’s uranium outside the country.
In November, when the government thought that street brutality had intimidated the protest movement, Iranian officials backed away from the compromise.
In this sense, the Iranian people can be regarded as a strategic ally of the West, not only because they want democracy at home and peace in the region, but because their continued protests offer the West the most effective leverage against the Islamic Republic’s nuclear program.
This regime cannot survive in the long term with a political crisis such as the one it now faces.
Continued crackdowns would result in a military dictatorship, while an accommodation with the protest movement would produce some kind of consensual semi-democratic government.
In either case, however, the democratic movement would not die.
It would reemerge continuously, despite heavy repression over short periods of times, raising the kinds of challenges that pose an existential threat to any non-democratic government.
Support of human rights and democracy in Iran is not only a matter of morality.
It should be a strategic priority for the West.
Empowering the Iranian people means weakening Khamenei and his military allies.
And a weakened Khamenei is more likely to compromise on the nuclear front.
Iran’s Revolutionary Echoes
STONY BROOK, NY – Iran’s continued unrest, now extending through the 30th anniversary of the revolution that toppled the Shah, raises the question of whether the Islamic Republic is about to fall.
As in 1979, millions of Iranians have taken to the streets, this time to protest electoral fraud in the presidential vote last June.
The cheated presidential candidates, both veterans of the revolution, instinctively thought of a replay of history.
Mir Hossein Moussavi saw the green symbols of the demonstrators as representing the color of the House of the Prophet, and urged his supporters to continue their nightly rooftop chants of “God is Great!”
Thus, the first slogan of the opposition invoked the religious credo of the 1979 revolutionaries.
More recently, protesters chanted it during the funeral demonstrations for Grand Ayatollah Hussein Ali Montazeri in the closing days of 2009.
And yet we risk being led astray by memories of 1979.
It is far too soon to predict another revolution.
But t he divide between Iran’s society and its government is much greater today than it was under the Shah 30 years ago.
Change seems just as inevitable.
Technological advances greatly favor the 2009 protesters.
Text messages, Twitter, and the Web are infinitely superior to the smuggled cassettes of Ayatollah Ruhollah Khomeini’s speeches that fueled the opposition in 1979.
What’s missing this time, however, is a charismatic leader comparable to Khomeini.
Indeed, the striking feature of the Iranian opposition movement is the lack of effective leadership, despite the astonishing persistence of protests.
As Moussavi has readily acknowledged, neither he nor the other presidential candidate, Ahmad Karroubi, feels in charge by now.
The greatest difference between 2009 and 1979 was created by the revolution itself.
R evolutions give birth to a new political class, and Iran’s Islamic revolution was no exception.
The Iranian leadership formed after the revolution consisted of a narrow ruling stratum and a much broader supporting group that was given charge of administration and political mobilization.
In the 20 years since Khomeini’s death, the composition of this political class has changed drastically.
The clerical elite has gradually lost power to the military-security groups, from whose ranks President Mahmoud Ahmadinejad emerged.
Bureaucratic and security services dominated by the Revolutionary Guards and its militia, the Basij (Mobilization Corps), are now firmly in command.
The leader of the Islamic Republic, Ayatollah Ali Khamenei, blessed the Revolutionary Guards’ decision to steal the presidential election.
By identifying squarely with the military-security apparatus headed by Ahmadinejad, Khamenei has alienated an important segment of the ruling clerical elite.
He has also reduced his own status as the ultimate arbiter in Iranian society, a role that was central to Khomeini’s dominance of the system.
As a result, he has produced a rupture between the two pillars of the revolutionary regime: the clerical elite and military-security structure.
The growth of Khamenei’s personal, extra-constitutional power introduces a strong element of uncertainty into Iran’s future.
Political regimes that rely on personal power, commonly known as dictatorships, prove to be fragile in crisis.
This was the weakness of the Shah’s regime, which collapsed as he became paralyzed in his decision-making.
There was nothing behind him supporting the system.
Khamenei’s backing of the June 2009 putsch now appears to be a costly mistake.
With this single error, he has undermined what had appeared to be a robust post-revolutionary course for the first and only theocracy in modern history.
The cries of “God is Great!” have now been overtaken by chants of “Death to the Dictator!” in recent demonstrations in Tehran, Tabriz, Shiraz, and other Iranian cities.
The Iranian regime is now critically dependent on decisions made by one man, the Leader.
For that reason, it is demonstrating a degree of fragility that is comparable to the Shah’s regime in the latter part of the 1970’s.
Most spokespersons of the Green protest movement advocate civil disobedience instead of revolution.
Earlier this month, Ezattolah Sahabi, who was a member of the revolutionary provisional government in 1979, issued a statement in Tehran stating categorically that “a revolution in today’s Iran is neither possible nor desirable.” At roughly the same time, five prominent opposition intellectuals living in exile released a reformist, not revolutionary, manifesto directed against the “despotic guardians.”
But there is little chance that these children of the Islamic revolution – now graying reformists – will remain in control of the Green movement, which now reflects the aspirations of a post-revolutionary generation of young women and men and students.
The ayatollah-dictator and the Revolutionary Guards have tried their best to discredit their opponents by concocting, through forced confessions at show trials, a conspiracy of regime change based on a “velvet revolution” produced by “Western social sciences.”
Deep down, they know there is no conspiracy.
Their fear is grounded in what they see in front of them: the forward march of history.
Iran’s Supreme Power Struggle
WASHINGTON, DC – Iran’s Supreme Leader, Ayatollah Ali Khamenei, has never been happy about the status of the Iranian presidency – neither during his own tenure, from 1981-1989, nor during the terms of his three successors.
Tension between the president and the Supreme Leader is built into the Islamic Republic’s core.
The Supreme Leader has absolute authority and can veto decisions made by the executive, legislative, and judicial branches of government.
At the same time, the president emerges from an electoral process with an agenda and ambitions of his own.
During a president’s second term – which Mahmoud Ahmadinejad has now begun – the tensions inevitably emerge into public view.
Khamenei has never been willing to tolerate a president with a large independent power base.
In the past, he clipped the wings of Akbar Hashemi Rafsanjani, who had strong ties to the merchant class, and of Mohammad Khatami, a reformer whose support came from Westernized middle-class professionals.
Though Ahmadinejad received the Supreme Leader’s support in the face of large-scale protests against his re-election last year, Khamenei does not appear hesitant about limiting the president’s power.
In fact, it appears that the massive demonstrations against Ahmadinejad delayed their confrontation, since both the Supreme Leader and the president rallied publicly to defend the legitimacy of the election.
But Ahmadinejad’s radical Islamist views and his support among religious, lower middle-class Iranians have not protected him from Khamenei.
For the most part, the two men have avoided head-on confrontation.
Their struggle is visible, however, in their maneuvering inside other branches of government.
In this arena, Ahmadinejad faces off against Ali Larijani, the speaker of the parliament, and his brother, Sadeq Larijani, who is the head of the Iranian judiciary.
The Larijani brothers have been vehement critics of the president, whom they accuse of ignoring legislation and key judicial rulings.
Within the parliament, the conservative bloc is divided between supporters of Ahmadinejad and advocates of more parliamentary oversight of the president.
Recently, parliament demonstrated its opposition to Ahmadinejad’s economic policies by deciding to remove the president from his traditional post as head of the General Assembly of the Central Bank.
This would reduce Ahmadinejad’s ability to intervene in economic policies and keep him from naming the bank’s governor.
But this decision is contingent on the approval of the Guardian Council, where a group of the president’s supporters have launched a counter-attack.
They want the Supreme Leader to allow the president to issue warnings to both the parliament and the judiciary if he thinks they have overstepped their authority, thereby subordinating the Larijani brothers.
Until now, parliament has been an effective tool for the Supreme Leader legitimately to rein in presidential authority, and it is difficult to imagine that the Larijani brothers would have mounted such a sharp challenge to Ahmadinejad without the Supreme Leader’s approval.
If they carry the day, the president will lose authority over the one area where his power has been greatest: the Iranian economy.
By contrast, the president has no serious say in foreign policy, which is under the Supreme Leader’s direct supervision.
Khamenei is known to seek advice from various parties, but ultimately he makes decisions alone.
For example, he overruled Iranian nuclear negotiators who offered a compromise during the Geneva negotiations in October 2009.
He has also diminished the foreign ministry’s stature by appointing a number of special envoys in key areas.
Khamenei does rely on Ahmadinejad to lead Iran’s public diplomacy.
The president travels widely, speaks frequently, and mobilizes political support with his anti-American and anti-Western rhetoric.
But public diplomacy is not diplomacy itself.
It is clear that no one in Ahmadinejad’s inner circle – certainly not the president himself – has gained the Supreme Leader’s confidence.
The nuclear portfolio, for example, remains exclusively under Khamenei’s control.
Within the realm of religious politics, Khamenei has made careful use of Ahmadinejad’s radicalism.
It is widely believed that the president would like to reduce the clergy’s influence and increase the power of the Revolutionary Guards, his main source of institutional support.
Thus, Khamenei can present himself as a defender of the clergy, which, given widespread doubt about his clerical credentials since he took power 21 years ago, enhances his position.
Clerics know that if Khamenei weakens, Ahmadinejad’s circle can manipulate widespread anti-clerical resentment and exclude them from power.
Moreover, Ahmadinejad knows that, without Khamenei’s restraint, the clerics would use their political networks among conservatives like the Larijani brothers to limit the president further.
The mutual hostility of Ahmadinejad and the clerical class offers the Supreme Leader the best of both worlds.
The history of the Islamic Republic indicates that the power struggle between the Supreme Leader and the president never abates.
It also suggests that the Supreme Leader will prove to be stronger.
More importantly for the international community, this internal struggle keeps Iran’s leaders from realistically appraising their foreign and nuclear policies.
Consumed with their test of wills, they are unable to make well-informed and nuanced decisions in their dealings with outsiders.
Iran’s Troubled Rise
America’s decision to target Iranian agents in Iraq who may be involved in supporting violent militias is but another sign of the massive influence Iran is exercising in that troubled country.
But the United States in fact facilitated Iran’s growing influence by toppling Saddam Hussein’s regime and that of the Taliban in Afghanistan, thus removing two factors that had kept the Iranian regime hemmed in for the last two decades.
Moreover, high oil prices have filled the national treasury, and Iran is benefiting from the opportunity created by America’s being bogged down in Iraq and the growing international weight of Russia and China.
Iran is also reaping the returns of long-term investments.
It has supported Iraqi Shiite groups since the early 1980’s and has an equally long-standing alliance with Syria.
In Lebanon, Iran helped create Hezbollah, which recently survived a head-on war with Israel and is the leading opponent of the anti-Syrian, Western-backed government.
Iran’s investment in Palestine is more recent, but its backing for the Hamas-led government, which has been frustrated elsewhere, is no less significant.
A country of 70 million, Iran also has potential influence with Shiite communities in Kuwait, Saudi Arabia, Bahrain, and the UAE.
Iran’s rise is causing alarm in the Arab Middle East, particularly in Saudi Arabia and Jordan, but also in Egypt.
Though a Shiite country in an overwhelmingly Sunni region, Iran’s radical Islamism resonates with the politicized Islamism that is energizing most Arab opposition movements, and its militant opposition to the US and support for groups that engage Israel in battle is very popular on the Arab street and in the Arab media.
At another level, Iran’s rise, reinforced by its suspected bid for nuclear weapons threatens to awaken historical hostilities, between Sunnis and Shiites and between Persians and Arabs.
Both Iran and the Arab countries are struggling to come to terms with the consequences of Iran’s newfound assertiveness.
To be sure, Iran’s longstanding support for regional Shiite groups is paying off.
But its successes in Iraq, Lebanon, and Palestine are creating great anxiety, and even hostility, in some quarters.
The rapid Shiite rise has already turned into a sectarian civil war in Iraq and recently has threatened to generate the same outcome in Lebanon.
If Iran does not properly manage its growing power, it could unwittingly trigger a drawn out sectarian war throughout the region, a nuclear arms race with Saudi Arabia and Egypt, and war with Israel, the US, or both.
It could also draw in major Sunni powers, such as Egypt and Turkey, which have at times been dominant in the region, but lately have been disengaged.
Too many Iranian successes, and too many Sunni debacles, could also lead to immense pressure in Syria, where a minority Alawi regime dominates a Sunni majority.
The loss of Damascus would cost Iran its influence in Syria, Lebanon, and Palestine in one fell swoop.
Iranian President Mahmoud Ahmedinejad’s administration is maintaining its radical rhetoric, perhaps looking ahead to a post-Bush era, when the US has withdrawn from Iraq and Iran has developed nuclear weapons.
Nevertheless, Iran also feels the need for accommodation with its adversaries.
For example, while Iran may not be happy with the American presence in Iraq, it realizes how close the country is to full-scale civil war.
As a result, it has expressed a willingness to cooperate with the US on finding a soft landing for Iraq.
Likewise, while Iran supports Hezbollah, it has also held Hezbollah back from outright rebellion, which might trigger a further Sunni backlash in the region.
In the Gulf, Iran has tried to reassure its Arab neighbors that Iranian power is not aimed at them and can in fact be a pillar of gulf security.
But the Arab world is divided about how to deal with the sudden rise in Iranian power.
The tension is particularly acute in Saudi Arabia, which has warned the US about the dangers of Iraq’s possible collapse and now finds itself in an unequal face-off with Iran.
Some in the kingdom argue that Saudi Arabia must confront Iran, stand up for Sunni Arab interests, and become a hands-on regional power.
Other Saudis believe that confrontation will only lead to wider wars and are urging dialogue and accommodation.
In this view, the US, not Iran, produced the region’s current problems.
Iran’s regional foreign policy has not yet caught up with its new pre-eminence; it is making as many enemies as it is gaining friends, and it might squander the windfall gains that it made in the past three years.
If Iran and the Arab countries – and alongside them the US and the international community – do not manage today’s tensions wisely, the region could enter a period of protracted warfare.
But there is a way forward, because all players in the region share an interest in security and stability.
Leaders in Tehran, Riyadh, Washington, and other key capitals must realize the costs of further mismanagement, step back from the brink, and work toward cooperative solutions before it is too late.
Iran’s Young Guard
TEHRAN – Iranians will go to the polls on June 12 to elect a new president.
While some argue that President Mahmoud Ahmadinejad’s re-election is a foregone conclusion, the outcome is, in fact, not at all clear.
Iran’s Supreme Leader, Ayatollah Ali Khamenei, has repeatedly said in public settings that he will not declare his preference among the candidates.
Indeed, in Mashad on March 21, Ayatollah Khamenei said, “There were some rumors that I support a special candidate for the presidential elections.
But I have one vote, and I would not determine a certain candidate because the people themselves should choose their candidates based on their own knowledge.”
So how will the Iranian people weigh their votes?
To answer, one needs to understand the composition of the Iranian electorate.
With the voting age set at just 16 years, Iran has roughly 48 million eligible voters.
Turnout averages 60-65% in presidential elections, implying that around 29 million votes are likely to be cast.
Analysts point to several electoral cleavages, particularly the urban-rural split and socioeconomic status.
Moreover, a key determinant of voting behavior in the upcoming elections is likely to be generational.
Some 46% of the electorate is under the age of 30. In previous elections, younger voters have turned out in greater numbers than their elders, leading some to predict that half of the voters will be in the 16-to-29 age bracket.
The number of potential first-time voters (16 to 19 years old) is estimated at six million.
Several factors distinguish members of this group from the rest of the Iranian electorate.
They are more educated, more urbanized, and more internationally oriented than previous generations.
More of them are university educated, and, of this group, a majority is female.
They have branched out into new lines of work and social engagement, as inventors, entrepreneurs, and bloggers.
No candidate can be elected president of Iran without significant support among younger voters.
Age, not social class, will determine the outcome of June’s election.
Like all Iranians, younger voters are focused on economic issues, particularly the difficult combination of high inflation and high unemployment.
The populist policies of the past four years have not brought economic improvement.
Younger Iranians have a particular economic concern as well.
With so many of them graduating from universities, they suffer from a mismatch between their qualifications and the jobs on offer.
Underemployment is deeply frustrating to them.
They also want a more liberal social environment that would loosen restrictions on their dress, broaden access to cultural products like film and music, and enlarge press freedoms.
They want university campuses, in particular, to be more open.
Finally, younger Iranians are tired of Iran’s international isolation.
They want Iran to succeed – and to be recognized for its success – in sports, arts, and education at an international level.
As of this writing, only two presidential candidates have declared themselves: former Prime Minister Mir Hossein Moussavi and former parliament speaker Mehdi Karroubi.
Assuming that Ahmadinejad seeks re-election, this line-up lacks any candidate with clear appeal to the youth vote.
Given their dissatisfaction, it would be natural for young voters to take out their frustrations on Ahmadinejad.
One seemingly unrelated event to watch: in the week before the presidential vote, Iran will play two critical football matches as part of the qualifying round for the 2010 World Cup.
If Iran fails to qualify, this could turn some young voters against the incumbent.
Among the other candidates, who will pick up this slack?
Moussavi, Iran’s prime minister between 1981 and 1989, is barely known to young voters.
However, his campaign has been hinting that, if elected, Moussavi will loosen some social and cultural restrictions.
Karroubi, too, is handicapped among the young.
Many consider him to be an old, out-of-touch cleric with no feel for their concerns.
Former President Mohammad Khatami, who openly considered trying again for the office, would have been a strong candidate for young voters.
His decision not to run disappointed many of them.
Standing in the wings is one possible candidate who might take up where Khatami left off and address the economic and cultural concerns of young Iranians.
Though he has not announced his candidacy, Mohammad Baquer Qalibaf, now Mayor of Tehran and formerly the country’s chief of police, has a relatively moderate track record and an image of someone who can get things done.
But Qalibaf still has not taken the plunge.
If he doesn’t, and if no younger candidate emerges, the youth bloc in Iran’s electorate may have nowhere to turn.
Without a voice for their concerns, Iran’s young people face the prospect of increased frustration, whatever the outcome of the election.
Iran, Turkey, and the Non-Arab Street
PRINCETON – To Western eyes, Middle East politics have again been stood on their head.
Iran’s theocratic mullahs allowed the election of Hassan Rowhani, a man who announced in his first speech as President-elect that his victory is “the victory of wisdom, moderation, and awareness over fanaticism and bad behavior.”
Iranians, apparently surprised that the candidate whom a majority of them had backed (over six harder-line candidates) had won, poured into the streets and hailed a victory “for the people.”
To be sure, it was a carefully controlled election: all candidates who might actually have challenged Supreme Leader Ayatollah Ali Khamenei’s authority were disqualified in advance.
But, within those limits, the government allowed the people’s votes to be counted.
Next door, in Turkey, the West’s favorite Islamic democrat, Prime Minister Recep Tayyip Erdoğan, was using bulldozers, tear gas, water cannon, and rubber bullets to clear central Istanbul’s Taksim Square and Gezi Park of peaceful protesters who would not bend to his will.
Erdoğan’s theory of government seems to be that, because he was elected by a majority of Turks who still support him, anyone who opposes him is a terrorist or a pawn of sinister foreign forces.
He appears to see no room for legitimate opposition, for the idea that today’s majority can be tomorrow’s minority and that the rules of the game must allow both to be heard.
Four years ago, when hundreds of thousands of young Iranians flooded the streets of Tehran to protest outgoing President Mahmoud Ahmadinejad’s reelection, the Iranian government shot at them with live rounds.
The protests were brutally repressed, with participants rounded up, imprisoned, and reportedly raped and tortured, damaging the regime’s standing not only among Iranians, but also among the millions of young Arabs across the Middle East and North Africa who would soon rise up to demand their social and political rights.
Erdoğan was initially a hero to those same crowds.
He toured Egypt, Tunisia, and Libya in September 2011 and received a hero’s welcome.
He presented his Justice and Development Party as the Muslim equivalent of Europe’s Christian Democratic parties, combining economic growth, anti-corruption policies, and free elections.
Today, Erdoğan’s government looks much more like the governments against which young Arabs rose, targeting journalists and accusing a “high-interest-rate lobby” of speculators of seeking to harm the Turkish economy.
He has also taken a page from Syrian President Bashar al-Assad’s book, not only demonizing the demonstrators, but also going after the medical personnel who care for them and the hoteliers who shelter them.
Turkey is certainly not Iran, and vice versa.
But comparing current developments in the two countries yields lessons that resonate across the Middle East and North Africa.
Most important, in a world that at least pays lip service to democracy, the voice of “the people” matters.
It confers a kind of legitimacy that simply cannot be acquired by force and that is ultimately the surest guarantee of investment and growth.
Of course, “the people” are never truly one: fickle in their loyalties and subject to demagoguery, they often unite in opposition but fracture once in command.
Nonetheless, the willingness of large numbers of people to stand up (or sit in) for their right to be heard, despite the imminent possibility of violent repression, announces to their fellow citizens and the world that something has gone very wrong.
Khamenei and his fellow guardians of Iran’s Islamic revolution were able to weather the 2009 storm, but their façade of legitimate power was collapsing.
Somewhat paradoxically, the election of Rowhani will strengthen their political hand.
And, though Erdoğan may well be able to force the protest genie back into the bottle, he will be significantly weakened until the next Turkish election.
A second lesson of recent events in Iran and Turkey is that the spectrum of government in the Middle East and North Africa runs from autocracy and theocracy to varieties of managed democracy.
No country qualifies as a full liberal democracy – that is, as a political system that combines free and fair elections with constitutional protections of individual rights for all its citizens.
Iran has long qualified as what the American foreign-policy analyst Fareed Zakaria has called an “illiberal democracy.”
Turkey, for its part, seemed to be on a path toward true liberal democracy, notwithstanding the criticism of those who pointed to Erdoğan’s jailing of journalists and generals; it is now backsliding for all the world to see.
A final lesson is that the test of a secure government is whether it can bear to hear itself criticized, even excoriated.
Erdoğan seems outraged, above all, by Turkish citizens’ temerity to speak up against him.
After Erdoğan appeared to broker a deal with the protesters regarding the fate of Gezi Park, the planned demolition of which sparked the initial demonstrations, one of my Twitter followers expressed his satisfaction at the outcome and said the demonstrators should now go home, because “three weeks is enough.”
But enough for what?
Recall that the Occupy Wall Street protesters in 2011 took over lower Manhattan for two full months.
New York City officials ultimately did shut down the protest, but largely for health and sanitary reasons and related complaints by neighborhood residents.
At a press conference on the day the protests began, New York City Mayor Michael Bloomberg said: “People have a right to protest, and if they want to protest, we’ll be happy to make sure they have locations to do it.”
Meanwhile, in Syria, “the people” rose up, were fired upon, took up arms, were manipulated, and began a cycle of sectarian killing and revenge that can only fracture them further.
Neither Iran nor Turkey has reached that point.
Nonetheless, peaceful protest, lawsuits, political negotiation, compromise, and ultimately fresh elections would provide both countries – and many others in the region and beyond – a far better way to resolve their internal tensions than the approaches their leaders currently employ.
Iran v. Britain: Who Blinked?
While commentators have charged that Britain capitulated to Iran and handed them a humiliating victory in obtaining the release of the 15 British Marines last week, it would appear that something more like the opposite is actually the case.
But to understand why this is so, we have to look at the larger picture of internal Iranian politics against which the crisis played out.
Our Iranian problem is actually a problem with the Islamic Revolutionary Guard Corps (IRGC, or in Persian Pasdaran) and allied institutions like the Basij militia.
These are the “power” agencies that serve as the political base for the conservatives inside Iran.
In return for its support, political leaders like ex-president Akbar Hashemi Rafsanjani and the Supreme Leader Ayatollah Ali Khamenei have allowed the IRGC to grow into a semi-autonomous state-within-a-state.
Today it is a large and sprawling enterprise, that controls its own intelligence agency, manufacturing base, and import-export companies, much like the Russian FSB or the Chinese military.
Since coming to power, the current Ahmedinejad regime has awarded IRGC-affiliated companies billions in no-bid contracts, increasing the already great perception among the Iranian public of its corruption.
It is widely believed that Supreme Leader Khamenei put the current nutcase president Mahmoud Ahmedinejad into office as a means of counterbalancing former president Rafsanjani, and has been regretting this decision ever since as Ahmedinejad spouted off about the Holocaust and pushed Iran deeper and deeper into isolation.
The current president comes out of the IRGC (specifically, the Ramazan Unit of the Quds Force), and has used that organization and the Basij to help consolidate his power by moving against more liberal political opponents.
No one knows exactly why the naval wing of the IRGC took the 15 British Marines captive at the end of March.
Some have speculated that it was a matter of freelancing by the IRGC’s command, or the navy, reacting to a local target of opportunity.
The IRGC may have wanted some bargaining chips to help spring of its members captured in Iraq.
It does not seem to be an accident, though, that the capture came quickly after the Security Council passed a very specific set of sanctions against Iran that targeted not just IRGC-affiliated companies and financial institutions like the Ammunition and Metallurgy Industries Group and the Bank Sepah, organizations dealing with nuclear or ballistic missile activities, but also a series of senior IRGC commanders, including Morteza Rezaei, the Guards’ deputy commander, Vice Admiral Ali Ahmadian, chief of the Joint Staff, and Brigadier General Mohammad Hejazi, commander of the Basij.
By freezing Iranian assets outside of Iran, the UN was hitting the IRGC where it hurt, in its pocketbook.
Clearly, whoever was responsible for the decision to take the British Marines prisoner was hoping to rekindle some of the fervor of the 1979 revolution, and use that to force the rest of the leadership into a confrontation with Britain and America.
Hence the televised “confessions” that hearkened back to the taking of hostages in the American Embassy (the “nest of spies”), and the rallies against foreign embassies.
But the gambit didn’t work, and there was clearly a behind-the-scenes power struggle between different parts of the regime.
Ahmedinejad was supposed to give a major speech to a huge rally in Teheran, which he cancelled at the last moment, and when he did speak, it was to announce that the captives would soon be released.
The IRGC prisoners in Iraq were released, but Britain did not apologize or admit wrong-doing in return.
So it would appear that it was the Iranians who blinked first, before the incident could spiral into a genuine 1979-style hostage crisis.
All of this does not mean that there are necessarily “radicals” and “moderates” within the clerical regime in Teheran.
Those pulling the IRGC’s chain are themselves committed to a revolutionary agenda, and doubtless want a nuclear weapon as badly as the Pasdaran commanders.
One of the alleged reasons Khamenei didn’t want Rafsanjani as president was because he was not keen enough on the nuclear program.
The Iranian regime is not, however, a totalitarian juggernaut; there are important splits within the leadership and there is an important faction that does not want Iran to be isolated.
The IRGC has evolved into something like a mafia organization, with extensive economic interests that lead both to corruption and potential vulnerability to sanctions imposed by the international community.
It is important to remember: those who were responsible for taking the British Marines captive wanted an escalation of the confrontation, both to improve their domestic standing, and to punch back for sanctions that were beginning to bite.
This suggests that what the Bush administration has been doing – slowly ratcheting up the pressure through the use of diplomacy to create an international coalition that now includes the Russians – is the proper course to be on.
Iraq and a Great Leap for Chinese Intellectuals
Even before images of the first cruise missile strikes on Baghdad reached Chinese TV screens, the country's intellectuals were debating the US-led war against Iraq and the government's response.
Commentaries in leading newspapers and on-line journals demonstrated a diversity of opinion seldom seen in the country's state-controlled media, and precipitated wider discussion in people's living rooms.
Most debates addressed whether the war was justified.
Opinions were voiced in newspapers and in on-line forums such as the home page of the media school of Qinghua University, widely known as "China's MIT."
It posted an anti-war petition with over 1,000 signatories, mostly academics.
Although this grassroots response adhered to the government's anti-war stand, it remains surprising in a country that discourages unscripted political discourse.
So it was even more surprising to see pro-war sentiments expressed publicly, such as the petition that appeared in the Guangzhou-based weekly newspaper 21st Century World Herald .
That petition voiced a taboo viewpoint: that "human rights are of greater value than national sovereignty."
In a rare challenge to the government, Beijing-based writer Yu Jie, one of the petition's authors, wrote that China ought to support the war on Iraq.
Only by embracing universal values and distancing itself from "evil states," Yu argued, can China rise to the level of the world's mainstream democracies.
Others, such as Han Deqiang of Beijing's aerospace university, who wrote an anti-war commentary that accompanied Yu's essay, scoffed at such an idea.
Han called pro-war Chinese intellectuals hopelessly na?ve and overly "immersed in the American dream."
But others supported Yu Jie's critique.
The Beijing-based dissident writer Liu Xiaobo, an activist intellectual in the 1989 Tiananmen Square demonstrations, questioned the government's motives for opposing the war.
Since 1989, Liu wrote, the Chinese government has nurtured a strident nationalism to boost its own legitimacy.
Moreover, Liu argued, the government's marginalization of pro-war sentiment and promotion of anti-war views accords with its broader effort to ascribe almost every domestic and international disaster to American hegemony.
Although the surface of this debate is about America and Iraq, the subtext, as always, concerns China.
Indeed, the debate revealed political fault lines among Chinese intellectuals that could never be openly exposed on domestic policy.
Ultimately, the two main camps of China's intelligentsia--the "neo-leftists" (xin zuo) and "old liberals" (lao you)--ask the question that has divided Chinese intellectuals for a century: what does it mean to be Chinese and also to be modern?
Does it mean following the West (as liberals advocate) or, as the neo-leftists suggest, is there some Third Way between Communism and western-style democratic capitalism?
Most fundamentally, can the scope of economic disaster witnessed following the Soviet Union's collapse be avoided?
Both groups comprise scholars from numerous fields, state intellectuals serving in government think tanks, journalists and even some dissidents.
Liberals are known to favor more thorough economic and political reforms, such as democratization at the grassroots level and a free press.
Conservatives insist on a more cautious approach that avoids the "shock therapy" and drastic overhauls experienced in postcommunist Eastern Europe.
Unlike in Western countries, where intellectuals often engage in head-on public confrontations, most intellectuals in China speak obliquely.
The invasion of Iraq presented them with a relatively safe topic with which to discuss issues that are normally off limits, such as human rights.
Scholars used the Iraq debate to ask whether a state relinquishes its sovereignty when it loses popular support--a highly provocative topic in China.
"A modern sovereign state, first and foremost, bases itself on the recognition of individual rights and democracy," according to Wang Yi, a liberal scholar.
"That is to say, given the nature of the current Iraqi regime, it has no right to ask for treatment as a sovereign state."
In the pro-war petition, Yu Jie and others made an explicit link between Iraq and China, likening Saddam Hussein, to his "colleague and predecessor," Mao Zedong, who "disguised the illegitimacy of his authoritarian regime in the name of the people."
As the war progressed, pro-war voices increasingly fell silent.
Some media critics ascribed this to a combination of official censorship and the effect of the scenes of Iraqi civilian deaths played (and replayed) on China's new 24-hour news channel, created especially to cover the war in Iraq.
At the same time, celebrities like Zhang Ziyi, star of the film Crouching Tiger, Hidden Dragon joined the anti-war chorus.
Zhang, who appeared in this year's Oscar-nominated film Hero , refused to attend the Academy Awards ceremony in Hollywood in protest.
In any case, speaking out carries a price.
The relatively independent Nanfang Daily Group , whose members include 21st Century World Herald and the Guangzhou-based liberal magazine Southern Breeze , was closed by the government for "redesign."
It may be allowed to publish again, but no one knows when.
The Hong Kong newspaper The South China Morning Post reported that it would have been closed, permanently, if not for the personal intervention of Hu Jingtao, China's new president and communist party chairman.
Despite these setbacks, the debate benefited China's intellectual climate.
As ideas advanced by Jean-Jacques Rousseau, George Orwell, and Václav Havel enter China's public discourse, interest grows in such Western thinkers and their political insights.
This alone amounts to a great leap forward for intellectual freedom.
Iraq and Japanese Isolation
Every country that has sent troops to aid America's efforts in Iraq is under pressure, as the decision by the Philippines to withdraw its small contingent shows.
But for Japan, the question of whether to continue to aid in Iraq's reconstruction extends beyond the merits of this particular policy and goes to the heart of Japanese notions of security and what constitutes the national interest.
Throughout the Cold War, Japan's national security policy appeared to waver between "UN-first-ism" and an "Alliance-first" principle.
In essence, however, fostering alliance with the United States dominated Japan's course.
That tendency remains dominant.
But the terrorist attacks on the US in September 2001 pressed Japan to recognize that it must begin to exercise greater autonomy and independent judgment in formulating and implementing its national security policies.
The paradigm of international security that had long dominated Japan's defense thinking had shifted and policymakers realized that they had to shift with it.
For Japan nowadays, security policy must satisfy a trinity of criteria: "national interests," "alliance," and "international cooperation."
This trinity is not something new for Japan, but has deep historical roots.
It may be helpful to look back, in particular, to Japanese actions at the time of the Boxer Rebellion (1900), as well as during World War I. Of course, there are huge differences between the situation then and what Japan faces now.
But those historic contexts shed light on Japan's response to events in Iraq and the wider world today.
At the time of the Boxer Rebellion, Japan responded to requests for help from the international community and won world trust through the sacrifices it made.
As a consequence, and despite the anti-Japanese "yellow peril" propaganda then raging in Europe, Japan entered an alliance with the most sought-after partner of the time, Great Britain.
That alliance enabled Japan to help defeat Russia in the Russo-Japanese War (1904-1905).
During the First World War, however, Japan was reluctant to send troops to Europe despite repeated requests from the Allies.
Although Japan did receive some appreciation for its dispatch of naval squadrons to the Mediterranean, it endured wide criticism for its refusal to send ground troops.
As a consequence, after the war Japan lost Britain's confidence, which eventually resulted in the end of the Anglo-Japanese Alliance.
From that time on, Japan trod a lonely path that ended with its defeat in World War II.
At the time of the Boxer Rebellion, Japan fully understood that to contribute to the world for the "emergency protection of foreign residents" was a "matter of national importance."
During World War I, on the other hand, Japan was blinded by its eagerness to protect small but immediate benefits, and failed to appreciate what a true "matter of national importance" was.
Its passivity cost Japan the trust of the international community.
In the light of this history, how should Japan's stance in Iraq be viewed?
Will Japan's humanitarian and restoration aid in Iraq secure a long-term national interest?
With the exception of international terrorists and remnants of Saddam Hussein's regime, almost everyone, including Iraqis who eye America's occupying forces with suspicion, wish to see the task of rebuilding Iraq, both politically and materially, fulfilled.
For Japan, too, there is justification in responding to such global expectations.
Of course, restoring peace and security is taking much more time than expected.
With almost daily terrorist attacks, ordinary citizens victimized by shell and gunfire or misconceived bombing, the abuses of Iraqi prisoners, and the hostility of Iraq's Shiites - on whom the US had pinned high hopes for the peace process - American policy is in jeopardy of failure.
The question for Japan is this: what will happen, both in Iraq and in the world, if America withdraws in failure?
It is in recognition of the possible consequences - a return of US isolationism, the emboldening of terrorists - that many countries sent and retain troops in Iraq.
Indeed, Russia, France, and Germany, which confronted the US and Britain at the UN over the Iraq war, and the UN itself, which withdrew early in the occupation, are all now searching for a way to assist in Iraq's rehabilitation.
In the end, they agreed on international efforts under UN Security Council Resolution 1546.
France and Germany will now participate directly by helping to train Iraqi security forces.
Considering all this, Iraq represents a decisive moment and a "matter of national importance" for Japan.
Thus, its Self Defense Forces must continue fulfilling their duties of "humanitarian and restoration efforts," while cooperating with Japan's key ally, the US, as a member of an integrated multinational force under UN leadership.
Even if dangerous situations arise, the Self-Defense Forces, and Japan itself, must not flinch.
Only by demonstrating dignified resolve will Japan's true national interests be defended.
True autonomy for Japan, as in the past, depends once more on active and cooperative engagement in containing a world crisis.
Iraqi Libya
GENEVA – As post-revolution Libya looks ahead, Iraq looms as a perilous example.
After 42 years of dictatorship, Libya, like Iraq in 2003 after the fall of Saddam Hussein, needs more than wishful thinking to become a vibrant democracy.
It needs organized state-building in Tripoli – and realistic policymaking in Western capitals.
Successful transitions depend from the start on factors that are still crucially missing in Libya – a relatively cohesive leadership, an active civil society, and national unity.
Without these, Libya will most likely fail to find its footing and, much like post-Saddam Iraq, suffer from persistent political division and volatile civil disorder, in addition to a multifaceted array of geopolitical pressures.
Avoiding that outcome presupposes a strong political center.
But, from the start of the uprising in February 2011, Libya has been politically atomized.
It lacks the sort of civil society that could have led the uprising and planted the seeds for post-authoritarian politics, as was the case in Tunisia and (more problematically) Egypt.
Libya’s transition was arguably further impeded by NATO’s intervention, as the rapid shift from a spontaneous popular uprising to an elite-led and externally supported movement prevented the revolution from following the linear course seen in Tunisia and Egypt.
Thus, despite substantial international support, the Libyan National Transitional Council (NTC) still lacks the level of consensus needed to form a viable government.
The NTC has suffered regular internal disputes, and its membership and functioning are shrouded in secrecy.
Last July, the Council’s military leader, Abdul Fatah Younis al-Obeidi, was assassinated under ambiguous circumstances.
Then, in November, the NTC’s military prosecutor named its own former deputy prime minister, Ali al-Issawi, as the prime suspect.
The conflict and opacity surrounding the case are telling signs of the country’s political fragility since Colonel Muammar el-Qaddafi’s demise.
Libya should take note of how Iraq’s post-Saddam transition has featured ceaseless power struggles and infighting.
In 2010, Iraqi political leaders’ machinations – personal, as well as tribal and sectarian – left the country without a government for 249 days.
Today, Libya appears set to undergo similar struggles, owing mostly to the presence of powerful political actors outside the NTC.
The 20,000-strong Tripoli Military Council, for example, which controls the capital, has been consistently independent of the NTC, and forced out its first foreign minister, Mahmoud Jibril.
The rival Tripoli’s Revolutionists Council, meanwhile, has warned that it would unseat any incoming government should its demands for representation not be met.
The NTC also faces pressure from Libya’s Berbers, who comprise 10% of the population and have already taken to the streets to denounce the new political arrangements and to reject any system that does not accommodate theirculture andlanguage.
This dissension may well be compounded by two additional factors.
The first is major cities’ competing sense of entitlement to the fruits of the revolution: Misurata, where Qaddafi’s body was displayed;
Tripoli, which hosted the liberation ceremony; and Zintan, which is holding Qaddafi’s son, Saif al-Islam el-Qaddafi, prisoner.
And all of them, like most Libyans, share the unrealistic expectation that their newfound freedom will somehow solve their socio-economic woes.
The second complicating factor is that political power now lies in the hands of competing militias.
The internecine rivalries that began in earnest last November between fighters from Zawiya and Warshefana, and among Tripoli’s various factions, will be difficult to defuse, as the thowar (revolutionaries) have refused repeated calls by the NTC to disarm.
Tripoli is in danger of becoming like Baghdad circa 2005, with different groups controlling turf and instituting a clientelist neighborhood political economy.
Inter-urban competition and the militias’ defiant independence are all the more worrisome because Libya is awash in weapons, with unguarded caches, abandoned stockpiles, looted ammunition depots, and thousands of shoulder-fired heat-seeking surface-to-air missiles.
Last November, Mokhtar Belmokhtar, the commander of al-Qaeda in the Islamic Maghreb (AQIM), confirmed that AQIM seized the opportunity to secure some of this arsenal when the revolution started.
Meanwhile, the aims of France, the United Kingdom, the United States, the Arab League, NATO, and Qatar, all of which have played a role in Libya’s transformation, are unlikely to be the same.
In other words, external pressures, too, are likely to pull Libya in several different directions, which will only further delay an autonomous and sustainable state-building process.
Qaddafi left behind a booby-trap.
The collapse of authoritarian rule created a security vacuum with no functioning state apparatus, making Libya highly exposed to international influence, often in the service of corporate interests.
To avoid repetition of the costly mistakes made in Iraq, Libya will require adroit leadership that can elaborate a compelling new national vision with which to unify competing authorities, rein in undisciplined militias, and minimize the country’s strategic vulnerability.
Iraq, Katrina, Iraq
Four years ago, President George W. Bush was on shaky political ground.
He had barely won the controversial 2000 election, and polls showed the American people remained doubtful about him.
After the terrorist attacks of September 11, 2001, Bush found his voice and the American people rallied around his presidency.
Thanks to Osama Bin Laden, Bush’s popularity soared, and while his ratings had diminished by the 2004 election, his “war on terrorism” helped him win a second term.
In September 2005, another crisis, Hurricane Katrina, probably killed at least as many Americans as the terrorist attacks in 2001, but it had the opposite effect on Bush’s poll numbers, which dropped to an all-time low.
Why the startling difference?
For one thing, the September 11 attacks were by a human enemy, and despite inadequate domestic preparations for such an event, Americans’ anger was directed outward.
Katrina, on the other hand, was a terrible act of nature, but one that was predicted by the national weather service with impressive accuracy.
The inadequate preparation and slow response by the Bush administration meant that anger was directed at the president.
To be sure, some of the blame for poor preparation belongs to state and local officials.
But the Bush administration bears a significant share of the responsibility.
In the 2000 election campaign, Bush praised Bill Clinton’s Federal Emergency Management Administration (FEMA) for its effectiveness.
As president, he treated it as a source of patronage, replacing its top officials with political cronies who had little experience in managing emergencies.
To make matters worse, the administration shoehorned FEMA into its massive new bureaucracy, the Department of Homeland Security.
During the 2004 election campaign, Bush claimed that the new department had made Americans safer.
But the halting and weak response to Katrina has called this into question.
If it was difficult to evacuate and supply a small city like New Orleans, how would New York or Los Angeles fare?
Katrina has also raised questions about other items on the president’s agenda.
One of the top priorities had been the Republican plan to complete the repeal of the estate tax on the richest Americans.
But, as the costs of responding to Katrina mount, adding to the federal deficit, it seems difficult to proceed as planned.
Moreover, rising gasoline prices have called attention to the shortcomings of the Bush administration’s energy policy, which includes recently passed legislation that contains inadequate requirements for energy conservation. The press, meanwhile, has reported on speculation about the relationship between warmer ocean waters and the frequency of severe hurricanes, thus highlighting the low priority that the administration has given to environmental problems in general and global climate change in particular.
But Bush will survive Katrina.
The floodwaters will recede in New Orleans and reconstruction will begin.
Already the scenes of looters exploiting the chaos in the early aftermath of the storm have been replaced with stories of charitable contributions from other parts of the country, of children being accepted into schools outside the city, and of families being helped by strangers.
On the anniversary of the September 11 attacks, a unit of the New York City Police Department was helping out in New Orleans, and the city returned a fire engine that New Orleans had earlier donated as a symbol of solidarity.
Katrina is thus likely to be a footnote in the history of the Bush presidency.
The real question for Bush’s role in history remains Iraq.
The short-term effect of Katrina was to drive stories about Iraq off of television screens and newspaper front pages.
But the news from Iraq before the storm was bad and hasn’t gotten better.
The majority Shia and their Kurdish allies rejected Bush’s plea to Iraqi politicians to modify the new draft constitution to attract disgruntled Sunni Arabs.
Given that the insurgency is centered among the Sunnis, this refusal is likely to make it more difficult to establish the security that is necessary for democratic government to work.
Of course, the Sunnis comprise a minority in Iraq, so insurgents have little prospect of “winning” control of the country the way North Vietnam was able to win control of South Vietnam.
But that is little consolation, because they can still disrupt progress toward a stable constitutional government.
At worst, they may be able to foment a civil war.
Despite claims by the extreme left and right around the world, America is not an imperial nation.
Domestic public opinion will support the use of force if people feel threatened or believe that the cause is just, but Americans have little interest in ruling over other nations.
Neo-conservative appeals to the example of the British Empire are far-fetched.
The idea that American troops will stay in Iraq indefinitely – or even “just as long as necessary and not one day more,” in the clichéd language of Donald Rumsfeld – is implausible.
This means that Bush has only a relatively short time to achieve his goals in Iraq.
If he is able to produce a stable constitution, a political compromise among the contesting parties, and successful elections, he may be able to declare victory.
But right now, the prospects look dubious.
Even before the floodwaters of Katrina recede, Bush will need to focus on his Iraq conundrum, because long after Katrina has been forgotten, history will judge his presidency by how he resolves it.
Iraq: More than an American Problem
Many people around the world are indulging in what the Germans call “schadenfreude”: pleasure at the suffering of others.
The pleasure appears to be derived from the suffering the United States is enduring after four years of efforts to stabilize Iraq.
On one level, that reaction is predictable.
Resentment of the wealthy and powerful is hardly new.
But the US in the last few years has compounded this reaction by what it has done and how it has done it.
For some, it was the decision to go to war in Iraq; for others, it was Guantánamo and the perceived double standards of American justice.
For still others, it was the lack of sustained effort to bring about peace between Israelis and Palestinians or US opposition to the International Criminal Court and to the Kyoto Protocol on climate change.
The result is that anti-Americanism has grown in both reach and intensity.
Still, any satisfaction at the problems the US is undergoing in Iraq is shortsighted and sure to be short-lived.
Every government in the world has a stake in the future of Iraq and the stability of the Middle East.
Terrorism bred in Iraq will not stay there.
Those men and women who learn to make and detonate roadside bombs on the streets of Baghdad will ply their trade elsewhere in the region and beyond.
Terrorists who have tasted success in Iraq will increasingly turn on others.
Expressions of anti-Americanism will provide no protection or immunity to governments or individuals who for good reason are not prepared to endorse the terrorists’ radical agendas.
War in Iraq will only exacerbate frictions between the country’s Sunni minority and Shia majority, and such frictions could well be replicated elsewhere where Sunnis and Shia live side by side.
Even if not, the flight of millions of Sunni refugees will weaken the foundations of neighboring states, including Jordan.
Continued fighting in Iraq could also lead to regional war.
Turkey, for example, is poised to attack the Kurdish enclave in Iraq’s north.
It is also possible that resistance to Iranian efforts to dominate Iraq could lead to a wider conflict that draws in Saudi Arabia, Egypt, and others.
Such a conflict would threaten the vital flow of oil from the Middle East to the rest of the world.
Even without such a wider conflict, what happens in Iraq will affect the price of oil.
Iraq is producing oil at levels below what it produced under Saddam Hussein, and has the potential to double or even triple output.
Doing so would require significant investment, which in turn would require international confidence in Iraq’s future stability.
Absent such confidence, Iraq’s oil output will not approach its potential, which will only widen the gap between global supply and demand.
Costly oil is a tax on the poor in developing countries and a source of inflation for the developed countries.
It also provides resources to governments that in many cases are promoting foreign policies that are contrary to the interests of most other countries.
The rest of the world also has a stake in how the US emerges from Iraq.
There is a real danger that a widely-perceived failure in Iraq could lead to a serious weakening of American domestic political support for an active international role, particularly difficult but necessary deployments of military force.
The alternative to a world shaped by a strong, confident, and engaged US is not likely to be a world that is peaceful, prosperous, and free.
In strategic terms, no other country or group of countries has the capacity to replace the US.
The alternative to a US-led global order is disorder, in which terrorism, nuclear proliferation, and economic protectionism are increasingly the norm.
This suggests, first, that governments should avoid public comments describing the American presence as an occupation or as lacking legitimacy, lest they make it more likely that the US departs Iraq entirely and leaves the country and its people to a terrible fate.
Second, countries should support Iraq’s government, despite its shortcomings.
This means extending diplomatic recognition, including opening and maintaining embassies.
It also requires providing financial help, ranging from debt forgiveness to investment, loans, and other forms of aid.
There is also a moral and practical case for doing more to ease the plight of refugees and internally displaced persons.
Third, terrorism needs to be checked.
This means doing everything possible to stop infiltration of terrorists into Iraq and rethinking support for militias.
None of Iraq’s neighbors, including Iran, would benefit from sectarian conflict that grows into a regional war.
Finally, governments should consider contributing troops to help establish order, train the Iraqi police and military, and help Iraq guard its borders.
As the US inevitably reduces its role, others should be prepared to step up, lest Iraq’s government falls and the Iraqi state fails.
The reality is that Iraq’s future is not assured even if these and similar measures are taken.
Still, there is a big difference between an Iraq that struggles and one that implodes; between an Iraq that contributes to global energy security rather than undermining it; between a civil war and a regional war.
It may be too late for the US to succeed in Iraq, but it is not too late for others to increase the odds that the US does not fail.
Iraq’s Bullets and Ballots
When the Iraq war started in 2003, the Bush administration had very ambitious plans: as in post-1945 Germany and Japan, a long and peaceful occupation was envisaged, during which expanding oil production would assure rising prosperity as democratic structures were built piece by piece.
The foundation was to be a liberal, even post-modern constitution, complete with a guarantee of 25% of parliamentary seats for women.
In today’s Iraq, there is no peace and no prosperity.
The constitution that will be voted on October 15th includes that 25% rule, but otherwise is far from liberal.
The key provision (article 2) that no law may contradict “the undisputed rules of Islam” violates the basic principle of parliamentary sovereignty, and will prevent legislation from meeting international standards.
For example, the age of sexual consent for girls cannot be set above nine, because Muhhamad himself had a nine-year-old wife.
It follows that nine-year-old girls are also adults in criminal law, and subject to capital punishment for, say, converting to another religion.
More broadly, the Shias can use this provision to place their ayatollahs over the elected parliament, as in Iran, because they alone are authorized to determine the “rules” of Islam.
Outsiders and the few Iraqi liberals worry mainly about this Islamic provision, but the widespread Sunni opposition to the constitution is aimed at other provisions: the exclusion of the “Saddamist Ba’ath Party” from political life and government, and the federalist provisions that grant autonomy to the 18 Iraqi provinces and allow them to combine into regional governments.
The exclusion rule is a personal issue for elite Sunnis – including thousands of businessmen, professionals, even artists – because, with few exceptions, they were all Ba’ath members.
In theory, the constitutional prohibition could be interpreted as applying only to the future.
But in practice administrative rules are now being applied to exclude so-called “high-ranking” Ba’ath members from any form of government employment, and thousands are affected.
The Sunnis would probably accept the federalist provisions if they applied only to the Kurds.
They know that the alternative is not a return to centralism, but secession by the three Kurdish-majority provinces of Dahuk, Arbil, and As Sulaymaniyah to form an independent Kurdistan, with its own treasury, army (the Pesh Merga), and oil production around Kirkuk – the second-largest reserves in Iraq.
Sunnis reject the same federalism for the Shias because they view them as fellow Arabs who have always accepted Sunni rule in the past, and will do so again – unless they have their own government.
That is what the new constitution would allow, because the Shia-majority provinces in the south – which contain the greater part of Iraq’s oil reserves – could form their own regional government.
In the usual style of the Middle East, disappointed Sunni leaders, unhappy with the constitution, now threaten violence.
But federalism is not the reason why Sunni supremacists and Islamists launch deadly attacks.
Their opposition is more elemental: they do not accept the principle of democratic majority rule.
Instead, they seek to restore Sunni minority rule.
For the Islamists, all Shias deserve death anyway, as apostates.
One Shia leader, Moqtada Sadr, also vehemently opposes federalism.
His followers are the largely illiterate, poorest, and most violent Shias of the slums of Baghdad and beyond, whose “Mahdi militia” fought American troops in 2004, even while the Americans were protecting Shias from Sunni attackers.
As a very junior priest who derives his authority from his dead Ayatollah father – himself a populist – Sadr is opposed by Iraq’s living Ayatollahs, who despise his ignorance and violence.
Sadr cannot possibly compete with them in religious authority, so he takes an Arab-nationalist stance against them, often recalling that the highest Shia cleric, Ayatollah Sistani, is a Persian, not an Arab.
Similarly, he reminds his followers that the El Hakims, who head the Supreme Council for the Islamic Revolution in Iraq (SCIRI), and their “Badr” militia were subsidized exiles in Iran – many fighting for Iran in the long and bitter Iran-Iraq war – until the Americans “brought them back.”
Sadr opposes federalism because a Shia regional government would obey his enemies, Sistani and the SCIRI, and, he says, fall under Iranian influence.
To underline his message, Sadr sent his men to attack the Badr militia, succeeding in Baghdad, where the Mahdis are numerous, but failing in Najaf, where Sadr is hated after the destruction caused last year – until his men were massacred by the Americans.
It was bad enough to deal with Sadr as a bandit; simple political arithmetic now dictates that he will likely be the central figure deciding the outcome of October’s vote on the constitution.
To reject the constitution and force new elections for a constitutional assembly, opponents need a two-thirds majority in at least three provinces.
The Sunnis are only likely to win in two provinces, but if Sadr orders his followers in Baghdad’s slums to vote “no” alongside local Sunnis, that would probably flip the capital to the constitution’s opponents, ensuring its defeat.
As a political thug, Sadr is, of course, willing to be bought.
Last year he was wanted for murder.
Now he wants recognition as a statesman, money, and, at least implicitly, Sistani’s and the SCIRI’s humiliation.
He might receive offers, and perhaps the bargaining has already started.
But some of the Shias whom he attacks with words and bullets have thousands under arms, and think that he should be offered only bullets.
Iraq’s Critical Election
BLOOMINGTON – Iraqis go to the polls on March 7 to elect a new Parliament for the second time under the country’s permanent constitution of 2006.
Many scholars believe that it is the second general election, not the first, which is the most important test of any new democracy.
If so, these elections appear to foreshadow ominous times ahead.
The security situation in Iraq has deteriorated dramatically over the past six months.
Though much of the violence in Iraq over the past six years has been random, aimed at soft targets such as markets and restaurants, its nature changed last summer.
On August 19, 2009, the sixth anniversary of the bombing that killed the United Nations representative in Baghdad, a series of spectacular attacks were carried out.
These bombings, and others since, have targeted the Iraqi state and its infrastructure, including the ministries of finance and foreign affairs and municipal and judicial offices.
Moreover, as United States troops have lowered their profile, daily violence of the more random variety has increased.
Equally ominous, the banning of hundreds of candidates for alleged ties to the Baath Party signals a return to sectarian politics, which could reignite a sectarian civil war.
The individuals banned include the current defense minister and several members of parliament.
The message from Iran’s allies in Iraq, who control the de-Baathification process, is clear.
While some Shia who were prominent allies of the Baathist regime hold positions of great influence in the “new” Iraq, Sunnis will never know when they will be shut out of the process, especially if they become too powerful.
Some of Iraq’s Sunni leaders might thus conclude that permanent armed opposition is their only viable strategy.
True, they might not be able to topple the new regime, but they will be able to de-stabilize Iraq over the long term, in the hope of forcing a negotiated settlement of their grievances.
The new Shia elites who control Iraq have emulated their allies in Iran, creating a system that effectively chooses which of their rivals may constitute a “legitimate” opposition and which may not participate in the political process.
The struggle of Iraq’s Kurds should be instructive.
As the Iraqi political scientist Ghassan Atiyyah, has noted, the Kurds, even without regional allies, have been able to de-stabilize Iraq for 80 years.
How much more will the Sunnis be able to de-stabilize the country, he asked, enjoying as they do the support of most of the regional powers, including Saudi Arabia, Syria, and potentially Turkey?
Politics aside, the long-term damage to Iraq’s legal institutions caused by these maneuverings should not be underestimated.
After the de-Baathification order was issued (by a commission that does not actually have any sitting members) a panel of the Iraqi Court of Appeal essentially invalidated it.
The prime minister then met with Iraq’s chief justice, following which the court’s decision was reversed.
There will be several ways to gauge the election’s relative success.
The first of these will be the length of time that it takes the victors to form a new government.
If, as occurred after the last elections, months go by without the formation of a government, this will be confirmation that Iraq’s political elites will continue to subordinate the desperate needs of the country – for security, electricity, water, and basic services – to their political futures as they haggle over positions.
Whether competent technocrats, or as has happened in the past, party hacks are appointed to the ministries will be a telling sign.
Another sign will be the extent to which the newly elected leadership, which is likely to be largely the same as the current leadership, reaches out to real Sunni leaders.
Doing so might well mean a retreat from the pre-election banning of candidates, and would demonstrate a maturity among the Shia political elites that they have not yet shown.
Finally, the reaction of the election’s losers will be key.
That includes not only those who have been banned from running for office, but others as well.
For example, it is likely that the current prime minister will not be able to form a new government.
Even the principal Kurdish parties are facing a challenge from an independent party, Goran, and are likely to incur some losses to it.
If these losers engage in post-election jockeying to cheat opponents of their fair allotment of seats, that will tell much about the future.
Whether Iraq achieves stability or is once again ripped apart by sectarian violence now depends, as it always has, on the new political elites.
If the past is an indication of their future performance, there is reason for deep concern.
Iraq’s Economic Divide
Everyone who looks at Iraq sees a nation divided between Shia, Sunni, and Kurd communities.
But an equally fundamental division – one that has contributed as much to the ongoing insurrection as sectarian strife and opposition to the American-led military occupation – is the widening gap between Iraq’s rich and poor.
When Iraq was liberated, most people, especially the poor, began to hope for a charismatic leader who would save them from the bitter reality of daily life.
Raised in fear, they had no idea how democracy could apply to their society, or how human-rights groups and other civic organizations could help shape the future.
Soon enough, Iraq was faced with a new social divide.
On one side stood people who understood how to operate in a democracy, attain power, and realize their ambitions.
They learned to speak the language of democracy, gaining money and influence in the process and enlisting independent organizations to defend their rights and privileges.
On the other side, however, remains the vast population of powerless Iraqis, including widows and divorced or abandoned women with no one to provide for them and their children.
For these people, democracy and human rights mean nothing.
They are ignorant, poor, and sick.
Victimized by an educational system that collapsed over a decade ago, they have few skills that can help them find employment in Iraq’s blighted economy.
During Saddam’s reign, no effort was made to raise living standards for the poor.
I have visited the huge slums of Iraq and found families living in homes with barely a roof to cover them, with infestations of insects everywhere, and with raw sewage seeping under their doors.
Day or night, they live in darkness.
Needing nothing more than food, decent housing, and the possibility of a job, these families wait for death, dreading the cries of their starving children.
When I met the women who live in those houses, they showered me with questions: will democracy give us food and houses?
Will democracy stop men from beating their wives?
Will it give citizenship to our children?
Will it give us the right to divorce the husbands who abandon us?
My answer to all of these questions was “yes.”
Yes, democracy will give you the right to live in a decent house, the right to learn and work, and it will give citizenship to your children and make you equal with your men.
But you have to work hard and make every possible effort in demanding your rights.
They replied: “Saddam taught us for 35 years how to be jobless, silent, and fearful.
What can we do now?”
In these destitute areas, where most Iraqis live, people are prey to bitter temptations.
Many are beyond the reach of political or government leaders.
They fall easily into violence, theft, and sabotage.
Poverty drives some to take money in exchange for acts of violence, abetted by the lure of a false heroism that they were not able to act upon during Saddam’s long reign.
Poverty has exacerbated the trauma of Iraq’s violent history of wars and atrocities, which has desensitized people to killing.
Though conditions in Iraq today are drawing many young men toward violence, I am convinced that we need only to provide decent jobs and housing to save them.
Jobs, in particular, will help young people to create new lives through serious work.
We must not use no-work jobs to disguise an army of unemployed.
We must give people jobs that allow them to make a contribution to rebuilding the country.
By nature, every individual seeks to prove himself as a useful person in his or her society.
But the culture that Saddam created convinced Iraqis that political connections are the only way to gain authority, money, and knowledge.
Overcoming such sentiments will take time and a vibrant economy, which means that a new Iraqi government must have limited power, allowing the private sector to grow while encouraging widespread understanding of democracy and human rights.
Religious groups are ready to contribute to this process.
We can also rehabilitate the technocrats who served under Saddam, so that they, too, have a chance to serve their country.
Last but not least, we must provide loans to poor families to help them build a respectable life.
Above all, the government must spare no effort in convincing poor Iraqis of the value of democracy and freedom, and how important the constitution is in realizing their aspirations for a better life.
This will not be easy to achieve in a country where many people consider breaking the law an act of heroism.
But we Iraqis have also learned that power should not be concentrated in a few hands, and that establishing justice requires fighting all forms of corruption.
If the constitution is to operate as the guarantee of democracy, freedom, and security, poor Iraqis must learn to make that fight their own.
Defending a Divided Iraq
OXFORD – The United States and its allies are facing another major policy challenge in Iraq.
Airstrikes against the Islamic State might unseat the group’s fighters in critical areas; but, as things stand, troops will be needed to hold and govern liberated territory.
Securing Iraq therefore requires a formidable force to be in place, which is why US President Barack Obama’s strategy includes rebuilding the Iraqi army. But doing so will require overcoming three related obstacles: Iraqi leaders’ military inexperience; corruption and cronyism; and ambiguity regarding the extent of external support.
When states collapse, their constituent parts sometimes inherit armed forces that are competent enough to maintain minimal levels of governance.
This is more often the case when a state breaks up as a result of armed conflict, in which case stability depends on whether the best military leaders are allowed to remain in place.
But states often collapse as an unintended consequence of the presence of a supporting external force.
For example, following Vietnam’s partition in the wake of France’s defeat at Dien Bien Phu in 1954, Ngo Dinh Diem, Vietnam’s last non-Communist president, was able to turn to the US military for support.
However, staggering levels of corruption under Diem and his US-backed successors, and the replacement of the military’s most competent commanders with Diem’s cronies, ultimately led to the rout of the South Vietnamese Army.
A similar situation is evident in Iraq today.
Divided by sectarianism, Iraq’s armed forces have become unable and unwilling to fight.
In the two years following the withdrawal of US troops, then-Prime Minister Nouri al-Maliki, like Diem four decades earlier, set about consolidating political power through patronage. Al-Maliki sought to protect the interests of Iraq’s Shia at the expense of its Sunni citizens, appointing military leaders based on their tribal and sectarian affiliations rather than their merit.
One might expect a leader who faces internal armed opposition to avoid doing anything that might weaken the military.
But al-Maliki seems to have assumed that external forces would simply come to his aid should he run into trouble.
With his lack of a military background, he seems not to have understood that external forces need to work closely with the local army, and that a sophisticated support network must be in place to avoid logistical disruptions resulting from enemy action or corruption.
Viewing the situation from the ground – which is essential if security is to be restored and economic recovery is to be achieved – local militias must be able to defend themselves against rivals or criminal gangs.
This means that the central government’s role should be to provide more advanced security assets such as fixed or rotary air support, intelligence, and logistical and communications support.
Yet the top priority for the leader of a fragmented state is to gain and consolidate a monopoly on the legitimate use of lethal force. And donor countries tend to support the leader, because doing so allows them to standardize and simplify assistance.
Unfortunately, this approach seldom works.
Instead, security experts should consider how best to manage the potential for violence among and within the various factions vying for local control. Strikingly, the reconfiguration of the security forces is usually ignored in post-war political settlements (though this has been changing since Iraq’s implosion).
Indeed, though ethnic divisions can undermine military cohesion, a full appreciation of them can lead to a more robust and stable security environment.
Kurds in Iraq’s autonomous Kurdish region, for example, certainly feel more secure having their own soldiers, the Peshmerga, and have proven to be a better fighting force as a result.
By contrast, the weak national Iraqi defense forces are believed to be doing the bidding of the Shia majority.
Contested state breakups create tough policy problems, and there are no ideal outcomes.
But if foreign powers wish to engage constructively, they must understand a country’s internal politics and demographics, and address all affected groups’ security concerns equally and fairly.
Iraq’s Half Step
The relatively successful election in Iraq is a major victory for democracy, but not necessarily for liberal reform in the Middle East.
This is an important distinction.
The anti-democratic forces who tried to stop people from voting there were Sunni Muslim Arab terror groups, ranging from supporters of Saddam Hussein’s deposed dictatorship to followers of Osama bin Ladin’s extremist Islamism.
Because Sunni Arabs, comprising less than 25% of the population, knew that they could not win a democratic election, many of their leaders urged a boycott.
By contrast, 75% of Iraq’s population is composed of Shi’a Muslim Arabs, who know that they will control the new regime, and Kurds, who want local autonomy.
Thus, a vast majority of the population were sure that a democratically elected government would serve their interests and eagerly participated at the polls.
Indeed, Shi’a Muslim clerics ordered their people – including women – to vote, warning that to stay home on Election Day was a sin.
But if high turnout, albeit based more on communal self-interest than belief in democracy, was the good news from Iraq’s election, the bad news is the leadership they chose, which is not democratically minded.
Liberal reform parties that tried to transcend communal identities and appeal to all Iraqis did not do well.
The victorious coalition follows Ayatollah Ali Sistani, who can be described as a moderate Islamist, but many of its members are extreme.
In the future, especially without Sistani, who is 74 years old, the new regime could turn into a dictatorship.
This ambiguity in Iraq is a good example of the problem faced by Arab democratic reformers elsewhere.
They have compelling arguments, but they lack large numbers of followers.
Already, the reform movement has changed the debate in the Arab world, but it still faces a long road ahead.
For a half-century, reformers explain, Arab nationalist regimes have been a disaster, creating societies and economies that rank low by every statistical measure of development, while leading their countries into countless costly but fruitless wars and crises.
At a time when democracy is spreading, they remain dictatorships.
But the most powerful alternative to the status quo are powerful Islamist opposition movements that have no real answers for these ailments and merely seek to impose another flavor of dictatorship.
The terrorism generated by many of these groups is an increasingly large domestic threat that only further disrupts society.
Besides battling these more powerful Arab nationalists and Islamists, Arab liberals must deal with a wide range of issues, including the modernization or moderation of Islam, relations with the United States, the Arab-Israeli conflict, and women’s rights.
In each case, they must decide whether to confront or endorse the sacred cows of nationalist and Islamist ideology.
There are no easy answers.
Consider Islam. Proposing secularism – the historic approach of Western liberals – is political suicide.
Calling for the modernization of Islam by permitting clerics to reinterpret its laws in light of contemporary conditions is more acceptable.
But this also has a potentially dangerous drawback, too.
After all, this is precisely what the radical Islamists have done by, for example, reversing the traditional Islamic opposition to suicide bombing.
The easiest strategy for liberals is to side with conservative Muslims who reject not only radical Islamism, but also political reform.
In addition, many liberals, notably in Saudi Arabia, offer to work with the current regimes against the radical Islamist revolutionaries – an understandable response, but one that strengthens the authoritarian status quo.
There are few role models for a more moderate, contemporary-minded interpretation of Islam.
Perhaps the most important is Tunisia’s educational system.
There, students in the Islamic university also study the Bible, and the curriculum puts an emphasis on the most tolerant interpretation of Islam.
For example, one final exam is built around having students use Islamic texts to write an essay showing that non-Muslims living under Muslim rule should be treated fairly.
In promoting democracy, liberals reject the argument used by today’s rulers that the first free election would be the last, because Islamists would win and establish theocratic regimes.
Reformers insist that the vast majority of people support moderate solutions, or at least that radical Islamist groups would have to become pragmatic in order to compete for power and govern.
That case is not yet proven.
January’s Palestinian elections were won by a relatively moderate leader because he was put forward by the ruling Fatah movement and Islamists boycotted the election.
But in the Gaza Strip local elections soon afterward, radical Islamists who use terrorism won seven of the ten municipal councils.
What happens in Iraq will show how an elected Islamist-type government wields power.
But the new liberal wave in the Arab world is reflected in media coverage that praised Iraq’s election and suggested that it might make a good model for other Arab countries.
There are many other small signs that change might be possible.
All the Arab entries in an annual essay contest run by a Western agency used to focus on Israel’s alleged responsibility for all the region’s problems.
This year, the writers unanimously made their theme the need to reform their own societies.
The liberal, democratic reformist movement among Arabs is here to stay.
The battle will be long and difficult, and victory is not assured.
But these groups have already become a major contender in the Arab world’s battle of ideas.
Now they hope to become a factor in bringing about real change.
The Iraqi election was an important half-step in that direction.
Iraq’s Jobs-for-Peace Mirage
As the wisdom of President Bush’s proposed “surge” of US troops is debated across the US and around the world, another question about the US President’s new policy to avert all-out civil war there is coming to the fore.
Can using US funding to reopen Iraqi state-owned enterprises get young men to abandon the insurgency and sectarian militias?
The idea sounds logical: a man with a good job that enables him to build a decent life won’t want to fight Americans or his fellow Iraqis, right?
Unfortunately, that jobs strategy is unlikely to reduce the violence.
Iraq’s state-owned enterprises were the cornerstone of Saddam Hussein’s economic policy.
But, propped up by military contracts, those state companies were never well run or efficient; greatly overstaffed, they produced little, similar to the failed state-owned enterprises of the old Soviet Union.
Moreover, outside of the oil and electric power sectors, state-owned enterprises in Iraq have never been major employers.
For example, the roughly 180 enterprises in the Ministry of Industry and Minerals, which controls all state-owned manufacturing companies, never employed much more than 100,000 workers in a nation of roughly 27 million people.
The employees of the state-owned enterprises still receive paychecks, even though about a third of their workplaces have been destroyed.
For example, the Sulaymaniyah Sugar Mill was bombed during the Iran-Iraq war in the 1980’s, but its employees have been paid ever since, though only rats and pigeons now report for work there.
Indeed, many employees of state-owned enterprises show little interest in returning to work.
When the Coalition Provisional Authority asked the employees of the Mishraq Sulfur Company to go back on the job in 2004, some of the workers lit $40 million worth of sulfur on fire and destroyed the facility.
They preferred to be paid without working.
There is little to resuscitate among the state-owned enterprises.
A third are damaged beyond repair, another third are hopelessly unprofitable, and the rest are a mismanaged assortment of plants, a few of which could potentially produce something of value, but only with proper management and incentives.
Trying to give these hopelessly inefficient enterprises a new lease on life would make Iraqis poorer without reducing the violence.
Yet beneath Iraq’s chaos and the rubble, a rough and tumble private sector has been expanding since the US invasion, benefiting from higher oil revenues and more liberal economic policies.
As a result, government expenditures and household incomes are up substantially since Saddam Hussein’s last years in power.
Despite the violence, commercial activity has also risen, because Iraqis are now free to import the equipment and goods they need to build homes, run stores, and operate trucking companies.
If the US wants to increase jobs, it should intensify efforts to work with these private Iraqi companies to bid on contracts.
State-owned enterprises should also be free to bid, but they should receive no favors.
The fundamental problem in Iraq is not jobs.
In contrast to the Mexican, Chinese, or Russian revolutions, economic disenfranchisement is not driving the current conflict.
This is a struggle for power, not for economic justice or a better life.
The root causes are political, sectarian, and personal.
Suicide bombers and death squads are not seeking shorter working hours, higher salaries, or better pension plans.
All credible economic indicators show employment prospects in Iraq improving since the end of the invasion.
Daily wages for laborers in Baghdad have doubled in the last three years – hardly a sign of rising unemployment.
The only decent survey of employment in Iraq, the United Nations Development Program’s Iraq Living Standards Survey of 2004 , measured unemployment at 10.5%.
Iraqi statistics, which define unemployment more expansively, show rates in percent declining from the mid-twenties to the teens in the past two years.
Many young Iraqis join militias because that is where the money is.
They can earn more hanging around with a gun in their hands than by working in construction or trade.
Supporters of the insurgency are happy to plant a roadside bomb in exchange for extra cash.
Instead of focusing on a large jobs program, the US could do more to bring peace to Iraq by reducing the money from Iraqi government coffers and smuggling activities that funds the payrolls of the insurgents and militias.
How then should foreign assistance to Iraq be spent?
The US should increase spending on programs to improve the police.
Currently, many police devote their energies to shaking down citizens for bribes, and some moonlight in death squads.
As long as Iraqis face daily threats of larceny, kidnapping, and murder – particularly from those who are supposed to protect them – they will seek security from neighborhood gangs and militias.
The key to improving police operations is to embed more US and allied police officers in the police force to mentor Iraqi officers.
Mentors provide on-the-job training.
They also identify good officers and those who are corrupt or participating in death squads or sectarian militias.
More funds for equipment, improved facilities, and training would also help.
Funding and support to assist Iraqi courts and prisons to function more effectively and in accordance with international standards is also essential.
Without progress in this area, improvements in the Iraqi police will have little effect.
Throwing more money at Iraq won’t buy peace.
Iraq is already one of the largest recipients of US assistance ever.
But a targeted assistance designed to improve the operations of Iraq’s police and government could help reduce violence.
Iraq\u0027s Next Shock Will be Shock Therapy
With one exception - the actual military "victory," which looks increasingly Pyrrhic - President Bush's Iraqi adventure has been marked by repeated failures.
Scant signs of weapons of mass destruction have been found, and, according to David Kay, America's chief arms inspector, the stockpiles either never existed or were destroyed years ago.
So Bush simply ignored the data, gathered by Hans Blix's UN inspectors, and the evidence on which he based his case for war seems to have been largely fabricated.
Worse still, it is now clear that Bush never had a plan for when the war ended.
Instead of moving towards peace and democracy, the situation in Iraq remains so dangerous that Paul Bremer, the American occupation leader, is using instability as his rationale for avoiding democratic elections this year.
Of course, America tried to keep real order in some places, revealing a lot about what it truly valued in Iraq.
When Baghdad fell, the oil ministry was quickly protected, while museums and hospitals were allowed to be looted.
If there was not outright corruption in the $7 billion in contracts awarded to Halliburton, whose former chairman was Vice President Dick Cheney, there was undoubtedly a strong whiff of crony capitalism.
Halliburton and its subsidiaries have been ensnared in charges of war profiteering ever since, and have had to pay back millions of dollars to the US government.
Now, everyone agrees, the most important task - beyond creating a democratic state and restoring security - is reconstructing the economy.
Blinded by ideology, however, the Bush administration seems determined to continue its record of dismal failures by ignoring past experience.
When the Berlin Wall fell, the countries of Eastern Europe and the former Soviet Union began transitions to a market economy, with heated debates over how this should be accomplished.
One choice was shock therapy - quick privatization of state-owned assets and abrupt liberalization of trade, prices, and capital flows - while the other was gradual market liberalization to allow for the rule of law to be established at the same time.
Today, there is a broad consensus that shock therapy, at least at the level of microeconomic reforms, failed, and that countries (Hungary, Poland, and Slovenia) that took the gradualist approach to privatization and the reconstruction of institutional infrastructure managed their transitions far better than those that tried to leapfrog into a laissez-faire economy.
Shock-therapy countries saw incomes plunge and poverty soar.
Social indicators, such as life expectancy, mirrored the dismal GDP numbers.
More than a decade after the beginning of the transition, many postcommunist countries have not even returned to pre-transition income levels.
Worse, the prognosis for establishing a stable democracy and the rule of law in most shock-therapy countries looks bleak.
This record suggests that one should think twice before trying shock therapy again.
But the Bush administration, backed by a few handpicked Iraqis, is pushing Iraq towards an even more radical form of shock therapy than was pursued in the former Soviet world.
Indeed, shock therapy's advocates argue that its failures were due not to excessive speed - too much shock and not enough therapy - but to insufficient shock.
So Iraqis better prepare for an even more brutal dose.
There are, of course, similarities and differences between the former communist countries and Iraq.
In both cases, economies were pervasively weakened before they collapsed.
But the Gulf War and sanctions weakened Iraq's economy much more than communism weakened the USSR's.
Moreover, while both Russia and Iraq are heavily dependent on natural resources, Russia at least possessed demonstrated abilities in some other areas.
Russia had a highly educated labor force, with advanced technological capabilities; Iraq is a developing country.
To be sure, Russians went decades without opportunities to exercise entrepreneurship, while Ba'athist rule did not suppress Iraq's merchant class and entrepreneurial spirit in any comparable way.
But Iraq's location puts it at a distinct disadvantage compared to Russia and many postcommunist states: none of Iraq's neighbors is doing particularly well economically, while many postcommunist countries sat next door to the European Union during the 1990's boom.
Most importantly, ongoing instability in the Middle East will deter foreign investment (other than in the oil sector).
These factors, together with the ongoing occupation, make quick privatization particularly problematic.
The low prices that the privatized assets are likely to fetch will create the sense of an illegitimate sell-off foisted on the country by the occupiers and their collaborators.
Without legitimacy, any purchaser will worry about the security of his property rights, which will contribute to even lower prices.
Furthermore, those buying privatized assets may then be reluctant to invest in them; instead, as happened elsewhere, their efforts may be directed more at asset stripping than at wealth creation.
If Iraq's prospects are as dismal as my analysis suggests, any international contribution to the US-driven reconstruction effort is likely to be little more than money flushed down the drain.
This does not mean that the world should abandon Iraq.
But the international community should direct its money to humanitarian causes, such as hospitals and schools, rather than backing American designs.
The World Bank and other institutions considering assistance through loans face even greater difficulties.
Piling more debt onto Iraq's already huge obligations will only make matters worse.
If Iraq's economy falters as a result of a misguided economic reconstruction program based on shock therapy, the country will be further indebted with little to show for it.
The dream of Iraq's American invaders was to create a stable, prosperous, and democratic Middle East.
But America's economic program for reconstructing Iraq is laying the foundations for poverty and chaos.
Iraq’s Potemkin Government
With the votes in Iraq’s election in December now counted, attempts to form a new government are set to move into high gear.
Encouragingly, all sides appear to accept the results.
But the key question concerning the future of the country remains: will Shia, Sunnis, and Kurds will unite behind a functioning central authority?
In the short term, there are good reasons to believe that the most powerful among Iraq’s three main groups will do so.
But can any such government administer the country as a whole?
The answer to that question is likely to be no, which is why Iraq probably will be a much less stable place a year from now.
The new Iraqi government, when it is formed, will have at least the appearance of viability for the immediate future.
Shia have an interest in supporting the central government because they believe that their demographic weight (60% of Iraq’s population) means that representative democracy will guarantee them the right to rule and protect them from Sunni demands and attacks.
Sunnis also will support the government, at least initially, because it represents their only opportunity to win what they consider their share of power, resources, and revenues.
Kurds will accept the arrangement because they believe that the new constitution guarantees their right to control most of the oil wealth that lies beneath their territory, and because they don’t want the blame should Baghdad descend into chaos.
There is another reason Shia, Sunnis, and Kurds won’t move immediately to undermine federal authority: the central government in Baghdad won’t have the legal or economic means to challenge their local power.
In essence, while all of Iraq’s factions have a strong interest in promoting a central government that appears fully functional, that government’s powers will in fact be limited.
But, in the longer term, those limits on federal power will push Iraq toward a sectarian scramble for power and revenue.
Article 11 of the new constitution declares that “All that is not written in the exclusive powers of the federal authorities is in the authority of the regions.”
That formulation all but pits the central government and regions against one another in a battle for political supremacy.
Similarly, under current law, soldiers will answer not to Baghdad but to regional powerbrokers, while the Iraqi constitution guarantees local governments the right to pocket the revenue that flows from new oil fields within their jurisdiction.
In fact, although the central government has the authority to collect the revenues generated by existing fields, there is no law to prevent local officials from modernizing old sites and claiming that they are new.
The impact of this state of affairs can hardly be overestimated.
Oil accounts for about 98% of Iraq’s current export revenue.
It is the lifeblood of Iraq's economy and the source of the money that the central government will need to build durable institutions.
Although inflows of international financial assistance remain substantial, reconstruction money from abroad will begin to dry up as Iraq puts its central government in place.
In sum, the national government will lack both the authority and the means to govern Iraq.
Indeed, with Shiite-Sunni violence already intensifying, the Iraqi government may not be able to maintain even the appearance of effectiveness for very long.
Moreover, the Kurds are the proverbial dog that hasn’t yet barked.
They enjoy relative economic prosperity, and their political institutions are growing more effective and efficient.
Thus, for the moment, they have no reason to challenge the status quo.
But this stability will face new challenges in 2006.
Gubernatorial elections this November will force Kurdish political contenders to offer opposing programs, and some candidates will seek electoral advantage via populist calls for independence.
At the same time, cooler heads will struggle to postpone a potentially divisive 2007 referendum on the final status of the oil-rich city of Kirkuk.
In fact, the friction generated by electoral politics is likely to stoke resentments within Shia and Sunni communities as well.
There is a great danger that the new Iraq’s sectarian politics will benefit those who promise their constituents the most – at the expense of the central government and the country’s other factions.
Debates over possible constitutional amendments intended to pacify angry Sunnis and to de-fang the insurgency are likely to incite factional hostility as well.
More worryingly, when Shia, Sunnis, and/or Kurds decide that their elected officials are not delivering the promised perks and protections, they are likely to look beyond politics to advance their individual interests.
Some Shia may turn to militia leaders, Sunnis to insurgents, and Kurds to leaders demanding independence.
At that point, the future of an independent Iraq itself will be called into question.
Any separatist moves by Kurdish leaders would bring Turkey into Iraqi politics.
At the same time, the protection that American forces offer Iraqi officials will diminish as troops are gradually withdrawn, and Iran will race to fill the security vacuum.
In sum, the Iraqi government may appear effective for much of 2006, but it will be committed to trying to serve the competing interests of sharply divided constituencies.
The central government’s weakness, continued insurgent violence, growing Iranian influence in Baghdad and with Shiite powerbrokers in the south, and the natural progression of sectarian politics suggest that the new Iraq will be markedly less stable as the year draws to a close.
Iraq’s Refugee Crisis
Among the many humanitarian disasters produced by the civil war now raging in Iraq is one that is almost invisible.
Only rarely do scenes of massive displacement of the civilian population make it onto our television screens, because, unlike bombs and suicide attacks, displacement does not generate the blood, fire, or screams that constitutes compelling footage.
Yet the numbers are staggering: each month, some 40,000 Iraqis flee their homes because of the war.
Half of them go to other parts of Iraq; the rest go abroad.
Iraq’s population, frankly, is bleeding away.
This devastation is even more dramatic because, since the invasion four years ago, only 3,183 Iraqis have been resettled in third countries.
According to the UN High Commission for Refugees, all countries combined have offered a chance to start a new life to approximately the same number of Iraqi refugees as flee the country in just five days.
This exodus is not new, but since the increased violence that followed the bombing of the Shiite Golden mosque in Samarra in February 2006, the pace of the displacement has accelerated.
Indeed, this is the largest population displacement in the Middle East since 1948.
Two million Iraqi refugees are scattered around the region, the great majority of them in Jordan and Syria, with smaller numbers in Turkey, Lebanon, and Egypt.
Because they are urban refugees – not housed in tents, but rather blending in with the local population in the host countries – they are easily ignored.
For Iraq, this is a brain drain that will be hard to repair.
The country had a total population of 26.8 million, and now nearly 13% of them are displaced; many may never return.
But what happens to them?
Last month, I traveled to four countries in the Middle East to meet refugees and learn about their stories and options.
In Amman, Damascus, Istanbul, and Beirut I met dozens of people who have a well-founded fear of persecution in their home country.
I spoke to a hairdresser who was raped because she is Christian.
I heard the story of a liquor store owner whose one-year old son was kidnapped and beheaded.
I met with a Shiite taxi driver whose father was killed in Najaf just a few days before.
I listened to a Sunni engineer whose association with an American construction company makes him a target for extremists, and to a translator of the Christian Mandaean minority who narrowly escaped death when the United Nations headquarters in Baghdad was bombed in August 2003.
Most of those to whom I spoke were poor and without hope for the future.
None wanted me to use their names.
Refugees who are in the country of first asylum usually face three possible choices: return to their homeland, try to integrate in the host country, or be resettled to a third country.
But do the Iraqis really have these three choices?
Can anyone watching reports of the daily carnage in Iraq envision Iraqis going back?
The answer is no.
If the Parliament in Baghdad, one of the best protected buildings in the country, can be attacked from within, then no Zone in Iraq is Green; they are all Red.
Repatriation of Iraqis is unrealistic and definitely out of question for any foreseeable future.
Most Iraqis cannot opt for local integration, either.
True, Jordan and Syria let most Iraqis in, but they do not offer a possibility of durable local absorption.
Iraqis cannot become permanent residents, and they do not have work permits or access to public health services.
In Jordan, Iraqi children cannot go to public schools.
It is not a matter of ill will on the part of these countries; they simply cannot afford to extend these services.
Helping them to cope with the influx of refugees is necessary, but it is not a durable solution.
This leaves the third possibility – that of resettlement.
But for this to happen, countries with traditionally generous refugee programs should come forward and offer more places to receive Iraqis.
The United States is a bad example: only 692 refugees have been accepted since the invasion – roughly the number of Iraqis who are killed every week.
In February, the Bush administration announced that it will offer resettlement this year to 7,000 Iraqi refugees.
If America makes good on this promise, it would be a big step forward, but the US, which led the intervention in Iraq, should now lead in attending to the victims.
Should the US not take the lead, the only hope is that other countries will be more generous.
The Iraqi refugees are a crisis that cannot be ignored: the international community must alleviate the burden on the countries in the region, while offering resettlement opportunities to many more of the most vulnerable Iraqis.
Iraq\u0027s Secret Environmental Disasters
Horror stories of all types have emerged in Iraq since the fall of Saddam Hussein.
But not only people were horrifically abused.
Iraq's environment was tormented as well.
In the early 1970's a major methyl mercury-poisoning catastrophe occurred in which an estimated 10,000 people died and 100,000 were severely and permanently brain damaged.
Saddam's regime was largely successful in suppressing information about the event.
The problem began in the late 1960's and early 1970's, when Iraq experienced a series of abysmal harvests.
Since the "green revolution" was beginning, Iraq imported "wonder wheat" from Mexico.
The risk was that the seed might grow moldy during the long, humid ocean transport to Iraq if it was not dressed with some fungicide.
Methyl mercury became the most cost-effective fungicide, because it had recently been banned in Scandinavia and several American states due to environmental and toxicological risks.
So the world market was flooded and prices dropped.
The wheat seeds were thus dressed with methyl mercury and sent to Basra in Iraq's south.
Because the shipment arrived late, trucks and trains that had been at hand were reassigned.
So it took another couple of months before the grain reached the farmers.
By then the sowing season was long over.
Farmers were left with a pink grain that they were told not to eat, only to plant.
But recent harvests had been lousy and farmers had little or nothing to feed their animals and themselves.
Like farmers all over the world, Iraqi farmers mistrust their government.
Some began feeding the grain to chickens or sheep and watched to see if there were any bad side effects.
Nothing happened for weeks.
So some then gave the grain to old grandfathers and grandmothers, who also didn't drop dead instantly.
At that point, it seems, most farmers began giving the grain to their livestock and eating it themselves.
Children supposedly liked the pink bread.
But within half a year or so, bad things did start to happen.
Hospitals were flooded with patients showing symptoms of damage to the central nervous system.
At first, doctors initially had no idea as to the cause.
Some suspected an epidemic of "brain fever" of some sort. Others more accurately pointed to methyl mercury.
A small group of international experts on mercury were called in.
I went as a World Health Organization staff member.
We confirmed methyl mercury poisoning through contaminated food.
But what food had been contaminated?
Bread could be and sometimes was.
As grain was fed to chicken, sheep, and cows, meat, milk, cheese, and butter became contaminated.
To avoid problems, I ate only dates and American corned beef canned in 1941 and 1942 for the US Army.
When the imported grain was identified as the cause of the poisoning, Iraq's government acted decisively.
Farmers were ordered to hand over all remaining supplies within a fortnight.
To stress the urgency, a death penalty for possessing pink grain after that date was declared.
But most farmers had no access to radio, television, or daily newspapers.
By the time most learned about the order and the penalty, the two weeks were gone and the army had started to execute those found still to be in possession of the grain.
So the farmers dumped grain wherever they could--along roadsides, in irrigation canals, in rivers.
Fish soon became contaminated, as did migratory birds.
One father of a family with several poisoned members and without any traditional food left stood in his doorway praising Allah for having made these migratory birds easy to catch when they had nothing else to eat.
At hospitals throughout the country, doctors concluded that there was nothing they could do.
There is no real treatment for methyl mercury poisoning.
In rural Iraq the tradition is that a person preferably should die at home with his or her family around.
Thus, when they saw and heard that doctors couldn't help, people brought their sick family member home.
Consequently, the official figures that put the number of deaths from methyl mercury poisoning at 6,500 people only cover those who died in hospital.
The real number is certainly far higher.
The crisis did provide doctors with some greater understanding of how to detect methyl mercury poisoning.
"Quiet baby syndrome," for example, when mothers praise their babies for never crying, is now considered a warning sign for methyl mercury-induced brain damage in children.
Treatment, too, has changed in the wake of the mass poisoning.
The agents traditionally used to speed up excretion of inorganic metals from poisoned patients turned out to make symptoms of methyl mercury poisoning worse rather than milder.
Through tricks and threats Iraq's fallen dictatorship largely succeeded in keeping this tragedy under cover.
Now the story can be told.
But whether anything can and will be done to belatedly help the victims is very much an open question.
Iraq’s Silent Dead
Evidence is mounting that America’s war in Iraq has killed tens of thousands of civilian Iraqis, and perhaps well over one hundred thousand.
Yet this carnage is systematically ignored in the United States, where the media and government portray a war in which there are no civilian deaths, because there are no Iraqi civilians, only insurgents.
American behavior and self-perceptions reveal the ease with which a civilized country can engage in large-scale killing of civilians without public discussion.
In late October, the British medical journal Lancet published a study of civilian deaths in Iraq since the US-led invasion began.
The sample survey documented an extra 100,000 Iraqi civilian deaths compared to the death rate in the preceding year, when Saddam Hussein was still in power – and this estimate did not even count excess deaths in Falluja, which was deemed too dangerous to include.
The study also noted that the majority of deaths resulted from violence, and that a high proportion of the violent deaths were due to US aerial bombing.
The epidemiologists acknowledged the uncertainties of these estimates, but presented enough data to warrant an urgent follow-up investigation and reconsideration by the Bush administration and the US military of aerial bombing of Iraq’s urban areas.
America’s public reaction has been as remarkable as the Lancet study, for the reaction has been no reaction.
The vaunted New York Times ran a single story of 770 words on page 8 of the paper (October 29).
The Times reporter apparently did not interview a single Bush administration or US military official.
No follow-up stories or editorials appeared, and no New York Times reporters assessed the story on the ground.
Coverage in other US papers was similarly frivolous.
The Washington Post (October 29) carried a single 758-word story on page 16.
Recent reporting on the bombing of Falluja has also been an exercise in self-denial.
The New York Times (November 6) wrote that “warplanes pounded rebel positions” in Falluja, without noting that “rebel positions” are actually in civilian neighborhoods.
Another New York Times story (November 12), citing “military officials,” dutifully reported that, “Since the assault began on Monday, about 600 rebels have been killed, along with 18 American and 5 Iraqi soldiers.”
The issue of civilian deaths was not even raised.
Violence is only one reason for the increase in civilian deaths in Iraq.
Children in urban war zones die in vast numbers from diarrhea, respiratory infections, and other causes, owing to unsafe drinking water, lack of refrigerated foods, and acute shortages of blood and basic medicines at clinics and hospitals (that is, if civilians even dare to leave their houses for medical care).
Yet the Red Crescent and other relief agencies have been unable to relieve Falluja’s civilian population.
On November 14, the front page of The New York Times led with the following description: “Army tanks and fighting vehicles blasted their way into the last main rebel stronghold in Falluja at sundown on Saturday after American warplanes and artillery prepared the way with a savage barrage on the district.
Earlier in the afternoon, 10 separate plumes of smoke rose from Southern Falluja, as it etched against the desert sky, and probably exclaimed catastrophe for the insurgents.”
There is, once again, virtually no mention of the catastrophe for civilians etched against that desert sky.
There is a hint, though, in a brief mention in the middle of the story of a father looking over his wounded sons in a hospital and declaring that, “Now Americans are shooting randomly at anything that moves.”
A few days later, a US television film crew was in a bombed-out mosque with US troops.
While the cameras were rolling, a US marine turned to an unarmed and wounded Iraqi lying on the ground and murdered the man with gunshots to the head.
(Reportedly, there were a few other such cases of outright murder.)
But the American media more or less brushed aside this shocking incident, too.
The Wall Street Journal actually wrote an editorial on November 18 that criticized the critics, noting as usual that whatever the US does, its enemies in Iraq do worse, as if this excuses American abuses.
It does not.
The US is killing massive numbers of Iraqi civilians, embittering the population and the Islamic world, and laying the ground for escalating violence and death.
No number of slaughtered Iraqis will bring peace.
The American fantasy of a final battle, in Falluja or elsewhere, or the capture of some terrorist mastermind, perpetuates a cycle of bloodletting that puts the world in peril.
Worse still, America’s public opinion, media, and election results have left the world’s most powerful military without practical restraint.
Ireland Decides, Again
Maynooth, Ireland – On October 2, Irish voters go to the polls for a second time to decide whether to adopt the European Union’s Lisbon Treaty.
The mood in EU capitals is one of nervousness as polling day looms, with the future of the EU in the hands of Ireland’s unpredictable voters.
On two of the last three occasions that the Irish have been asked to vote on an EU Treaty, they have rejected the proposal.
For the EU, the stakes could not be higher.
The Lisbon Treaty was the compromise agreed by EU leaders in the aftermath of the rejection of the Constitutional Treaty in popular referendums in France and the Netherlands in 2005.
Much negotiating blood has been spilled on the Treaty, and its rejection a second time by Irish voters would leave the Union unable to ratify and implement its provisions; this would inevitably lead to policy paralysis and institutional decay.
The referendum campaign in Ireland has seen a resurgence of conflict between a familiar constellation of forces.
On the Yes side are all of the main political parties, trade unions, the business community, and a broad network of civil-society groups.
Their campaign has been more coordinated and intense than last time, with the aim of mobilizing the maximum number of supporters and ensuring a high turnout, which most commentators assume will assist the Yes side.
On the No side: a disparate coalition drawn from both the far right and the far left, including ultra-Catholics and unreconstructed Marxists, has sought to whip up hysteria about supposed threats ranging from military conscription to euthanasia and abortion.
But the No side has struggled to find a coherent point of reference and seems to have none of the dynamism and vigor that it projected last time.
The main reason for this is that Ireland has been traumatized by economic misfortune over the past year.
The hubris of the Celtic Tiger years is a distant memory, owing to the worst recession in Ireland’s history as an independent state.
In 2009, economists expect growth to contract by up to 8%, with a further steep decline likely next year.
The budget deficit is now the largest in the EU, and public debt has ballooned, as the government has struggled to compensate for the steep drop in revenues.
The Irish banking system approached total collapse in September 2008, and was only saved by a €400 billion government guarantee of all bank deposits.
More recently, the state assumed the liabilities of rogue property developers by setting up a “bad bank” which could potentially saddle Irish taxpayers with a mountain of debt for decades to come.
The depth of the economy’s plunge has helped the Irish government in its effort to secure a Yes vote.
The European Central Bank has provided a monetary lifeline that has provided much needed liquidity within the financial system and helped the government to stem the crisis of confidence created by the banking collapse.
Government ministers and EU representatives repeatedly cite the example of Iceland in pointing out what might have happened to Ireland if it had been outside the EU.
Thus, the second referendum campaign has brought back into play the economic dimension of Ireland’s EU membership, which was largely absent from the 2008 debate on the Treaty.
Ireland has benefited disproportionately from EU largesse during its 35 years of membership, and, in 2008, was still receiving a net sum of €500 million from the EU budget.
When voters are reminded of the potentially catastrophic cost of being excluded, not just from the Single Market area, but from the decision-making structures in the Council of Ministers and the European Central Bank, what is at stake in the referendum becomes clear.
In addition, the Irish government secured legal guarantees from its EU partners on the issues that most concerned voters who voted No or abstained in the first referendum.
These compromises state that nothing in the treaties will affect Irish prerogatives on abortion, military neutrality, and taxation.
The government also secured EU-wide agreement that, rather than reducing the size of the European Commission, Ireland will be allowed to retain a permanent place at the Commission table.
This negotiating success has provided the government with considerable breathing space in which to conduct a more effective referendum campaign.
This combination of legal guarantees and changed economic circumstances is helping to mobilize a majority in favor of the Treaty.
Opinion polls conducted in recent weeks indicate that the Yes side commands a strong majority of 62% to 23%, with 15% of the electorate undecided.
But the picture is far from clear-cut.
Surveys indicate that the Irish are strong supporters of EU membership and the integration process.
The problem is that these favorable attitudes vary considerably in intensity and constitute a “soft bloc” of support for the EU; in the 2008 referendum, this soft bloc crumbled in the final week of the campaign.
It seems clear that a second rejection of the Lisbon Treaty by the Irish electorate would plunge the EU into a renewed crisis and threaten to derail the considerable gains in both democratic legitimacy and collective decision-making capacity deriving from the new Treaty. Everything indicates that voters now look set to approve the Treaty.
But nobody should take Irish voters for granted in the final days of the campaign.
Philosopher Kings Versus Philosopher Presidents
LONDON – When I recently met Irish President Michael Higgins – sharing a platform for a speech in which he connected his newly launched “ethics initiative” to a book I co-wrote with my son, How Much is Enough?
Money and the Good Life – I was struck by his devotion to thought.
Indeed, engaging with ideas is a passion for Ireland’s poet-president – one that more heads of states should take up.
Last May, Higgins told economics students at the University of Chicago that they were studying a deformed discipline, torn from its ethical and philosophical roots. “The recent economic and financial upheavals,” he declared, “have thrown a glaring light on the shortcomings of the intellectual tools provided by mainstream economics and its key assumptions regarding the sustainability of self-regulating markets,” especially “largely unregulated global financial markets.”
He then proposed a “critical examination of some of the core assumptions that underpin economics as it is currently taught in university departments across the world.”
What other head of state would be able to pinpoint the deficiencies of economics so accurately, buttressing his arguments with quotations not just from Adam Smith, but also from Max Weber, Thorstein Veblen, and Jürgen Habermas?
Higgins’ experience as an academic and his status as an acclaimed poet undoubtedly give him an advantage over other heads of state, enabling him to hold his own with top thinkers in a way that few others can.
More important, however, is his recognition that a political leader should also be a leader of thought and culture for his or her country – and the world.
Such intellectual leadership should be a major function of all titular (non-executive) heads of state, an important way for them to “earn their keep.”
Of course, the head of state – whether the president or the monarch – has other critical duties as well, including acting as guarantor of the constitution and a symbol of national unity.
Moreover, in proportional voting systems like Italy’s, where no single political party normally wins a majority of seats in parliament, the president often plays a key role in appointing the prime minister.
The Italian president can also compel parliamentary deputies to rethink their decisions (in the United Kingdom, the monarch has outsourced this authority to the House of Lords).
But there is also considerable scope for heads of state to behave in accordance with Ecclesiasticus 44:4: “Leaders of the people by their counsels, and by their knowledge of learning meet for the people, wise and eloquent are their instructions.”
This is particularly important today, when public discourse in democracies is relentlessly demotic and academic work is increasingly specialized.
Though some scholars and thinkers are fit to be “leaders of the people,” a favorable environment is needed to coax them out of their ivory towers.
To this end, an open-minded, culturally literate, and ideas-oriented head of state could play a pivotal role.
Ideally, that head of state would be an elected president, rather than a hereditary monarch.
Indeed, anything worthwhile that a monarch can do, an elected non-executive president can do better – not least because an elected official is much less likely to be undermined by the scandals of pampered offspring or degraded by the inevitable hypocrisy and servility of a royal court.
More important, an elected president has much greater legitimacy than a hereditary monarch, whose claim to authority depends exclusively on tradition and ceremony.
With a king or queen unable to say or do anything that may cause a whiff of controversy, the monarchy has been stripped of its power of action or reflection.
To be sure, monarchs – and especially their spouses, heirs, and relations – often carve out niches for themselves, from wildlife protection to sports and charities.
(Architecture has proved distinctly risky, as Prince Charles learned after launching jeremiads against modernism.)
Monarchs and their courts can, to some extent, still act as leaders of art, music, and fashion, as they did in the eighteenth century.
But this role has atrophied with the rising expectation that they should be “normal,” representing their populations’ habits and tastes as closely as possible.
An elected president has a stronger mandate to be controversial, especially in areas of thought and culture that lie beyond the domain of quotidian politics but shape the quality of the public space in which politics plays out.
It would be inconceivable for a reigning monarch to attack the financial oligarchy, as Higgins did in his speech in Chicago.
Even in 1936, when King Edward VIII of Britain declared that “something must be done” about unemployment, he was criticized for overstepping his brief.
Yet, in May, Higgins declared that his position as head of state compelled him “to represent the experience and hardships of the Irish people” in the years since economic crisis befell them.
But the most important reason why an elected president is better equipped than a monarch to catalyze a public conversation about a society’s values and priorities is that he or she is more likely to be a person of superior ability.
Indeed, that is why, on balance, a meritocratic system will always produce better results than a hereditary one.
Monarchs today are reared to be ordinary, as suits their diminished role in national life.
But democratic countries need symbols of the extraordinary if they are not to sink into permanent mediocrity.
Ireland’s Moment of Fiscal Decision
DUBLIN – “The construction of Europe is an art,” former French President Jacques Chirac once said.
“It is the art of the possible.”
If so, then Europe’s deconstruction – or, worse, its collapse – would be a shockingly fearful and painful business.
That was the situation faced by European leaders last autumn.
The euro was in serious trouble, buffeted by rumors of imminent banking collapses.
Bond yields in southern Europe were rising, and a pervasive sense of apprehension and fear cloaked governments in European capitals.
But political leadership was sorely lacking.
Finally, in December, decisive action was taken.
There would be a “fiscal treaty,” which would reinforce the Stability and Growth Pact and, importantly, entail automatic sanctions to ensure that eurozone members stick to those rules.
At the same time, the European Central Bank unleashed its €1 trillion ($1.3 trillion) long-term refinancing operation, which pulled the European banking system back from the brink.
These two measures were both timely and vital, creating a much-needed period of calm.
In March, having agreed on the fiscal treaty, the European Council turned its attention to reviving economic growth, which will be the key to long-term fiscal sustainability.
In Ireland, our attorney-general advised on the need to hold a referendum on the fiscal treaty, and we are now in the midst of the campaign.
The government parties, Fine Gael and Labour, as well as the largest opposition party, Fianna Fáil, are campaigning tirelessly for a yes vote.
The reasons we are backing the fiscal treaty are simple.
The treaty would promote stability in the Irish economy and contribute to stabilizing the euro, our currency.
It would increase confidence in Ireland and allow us to increase the existing flow of inward foreign direct investment.
Ratification would also give us guaranteed access to funding from the European Stability Mechanism (ESM), should we ever need it.
The ESM is Ireland’s insurance policy as we work our way out of the bailout program with the “troika” (the European Commission, the ECB, and the International Monetary Fund) and return to the markets.
Most importantly, the fiscal treaty promises to ensure responsible budgeting throughout the eurozone.
For us, that means that the economic mismanagement that caused the Irish economy’s collapse would never recur.
It would also mean stable European economies to which we can export.
For Ireland to continue on the path of economic recovery, it needs to be seen as part of the solution, not part of the problem.
We are making progress, and we need to continue doing so.
Ireland’s government has exceeded its targets under the troika program, and the economy returned to growth last year.
International investors are increasingly looking at Ireland as a smart place to do business.
They recognize the dynamic, transparent, and competitive fundamentals of the Irish economy.
We are highly regarded around the world as an excellent export base.
Global companies recognize that, as the only English-speaking member of the eurozone, Ireland is ideally placed as a gateway to Europe.
Indeed, Ireland is ranked as the best place in Europe to do business, the easiest in Europe for paying taxes, and number one in Europe for completion of tertiary education.
We are an open, transparent economy with a highly skilled workforce and a market of 500 million people on our doorstep.
Crucially, we are also a member of the second-largest currency area in the world.
Foreign direct investment accounts by more than 1,000 overseas companies translates into 145,000 jobs in Ireland, 70% of total exports, and €2.8 billion in corporate-tax receipts.
These companies spend €16 billion per year on goods, services, and wages in Ireland.
The latest figures show that 2011 was a very strong year for attracting investment into the Irish economy, with a record 148 new projects – a 30% increase in companies investing in Ireland for the first time – implying an additional 13,000 jobs.
Investors come here because they link Ireland’s eurozone membership to our long-term economic stability and access to outside support if necessary.
By voting for the fiscal treaty, we can guarantee that stability and support – and thus guarantee continued confidence and investment in the Irish economy.
The new treaty reflects clear recognition that the euro’s initial design was flawed.
We spoke about European Monetary Union, but we didn’t have it.
The Stability and Growth Pact, contained in the Maastricht Treaty, laid down strict rules of budgetary discipline, which were immediately violated – and not by small countries, but by both France and Germany.
Irish recovery cannot occur without European recovery.
We must stand together or fall together, because our economies are so interconnected.
This involves putting our public finances in order, which the fiscal treaty allows.
We have begun that process; the next stage will be an unwavering focus on growth and economic renewal throughout the European Union.
Ireland\u0027s Second, and Last, Chance
Once again, Irish voters are poised to vote Yes or No to the Treaty of Nice.
Forgotten what that treaty is all about?
Well, it is one of those all-too-frequent late-night compromises reached by EU heads of state and government that seek to slither around and through some practical problems while postponing others.
The compromise reached at Nice four years ago is important because it contains, among other provisions, all the technicalities of voting balances and power sharing among EU institutions that must be firmly in place before the Union can admit new members.
Enlargement is the most important item on the European agenda, and the Treaty of Nice is its cornerstone.
Without it, the accession candidates can not be invited this December to join the Union, as promised in Copenhagen ten years ago.
The Irish rejected the Nice Treaty in a referendum last year.
The country's entire establishment--its government, major political parties (including the opposition), trade unions and employers--all supported a Yes vote. But the Yes backers could never articulate clearly why people should vote in favor of the Treaty.
Their constituents largely ended up ignoring the issue altogether. The No vote won 54%, but only 35% of eligible voters bothered to turn up at the polls.
It is still difficult to fathom why the No vote attracted so much support, even given widespread apathy.
The opposition to the Nice Treaty was and continues to be a bizarre Irish Stew of pacifism, religion, and socialism, along with some fascinating local eccentricities.
And yet, despite winning the addition of a special protocol to the Nice Treaty that guarantees Ireland's cherished neutrality, Yes supporters face an uphill battle.
Outside interference should always be avoided in situations such as this.
After all, one of the core freedoms of a democracy is that voters have the right to behave in ways that outsiders might deem irresponsible and incoherent.
As long as such choices do not impose unreasonable or unbearable burdens on others, these democratic choices merit full respect.
But the fundamental consequences of the upcoming referendum for Europe need to be clearly impressed upon Irish voters, so that no one can later claim that they did not know what was at stake.
If the Irish vote No a second time, and this leads to the postponement of EU enlargement, they would place an unreasonable and unbearable burden on Europe.
Re-negotiating the Nice Treaty would not be an option.
This would open a Pandora's box of demands from all other countries.
Last year's Irish referendum result prompted Italy to suggest that the EU give guarantees to member states that they would not lose financial support if poorer members are brought into the Union.
This sort of thinking is the surest way to block enlargement.
The Irish people must be brought to understand that if they cannot accept the Nice Treaty, nor can they block it.
A new No vote can lead to only one outcome: Ireland's departure from the institutions of the EU, one way or another.
This is the true choice that the Irish now face.
There is an important parallel to this situation: in 1992, Danes surprisingly voted No to the Maastricht Treaty.
The Danes got their own add-on protocols--such as a neutrality guarantee like the one given to the Irish--making it possible to opt out of certain areas of EU cooperation.
This led to a new referendum, in which the Danes voted Yes.
But--and this is crucial--the Danes were told in no uncertain terms that a second No vote would lead to a situation where Denmark would have to leave the Union.
If the Danes did not want the Maastricht Treaty, their choice would be fully respected.
But they would not be permitted to impose their will upon their partners.
The Irish are in the same position now.
It is up them to say Yes or No to the Treaty of Nice.
Their decision must be respected.
But they cannot be allowed to stop the enlargement process.
It would be an irony of historic proportions if a country that has benefited more than most others from EU integration should block the entry of countries in even more desperate conditions than Ireland was 30 years ago.
Europe must accept the Central and Eastern European candidate countries into the Union, and must do so now.
Too much time has been wasted already.
The window of opportunity to create a Europe that is whole and free after a half century of division and misery may not remain open indefinitely.
Ireland Votes, Europe Waits
MAYNOOTH, IRELAND – On June 12, Irish voters will vote on the European Union’s Lisbon Treaty, the instrument designed to improve the efficiency and legitimacy of the now 27-member bloc.
Ireland is the only country to put the Treaty to a referendum – all the other member states have chosen to ratify the Treaty by parliamentary means – and everything indicates that the result will be close.
For Prime Minister Brian Cowen’s new government, the risk is that a “No” to the Lisbon Treaty would cripple his administration in its infancy.
For the EU, Irish rejection of the Treaty would probably trigger a lengthy period of instability, and perhaps even an end to the European integration process as it is now constituted.
In 2001, Irish voters rejected the Nice Treaty, which threw the EU into a protracted period of crisis and introspection, which ended only with agreement on the so-called Constitutional Treaty in 2005.
Almost immediately, however, French and Dutch voters rejected that Treaty, bringing the negotiations back to square one.
Now, after a lengthy and difficult period of reflection and bargaining, those efforts may be in jeopardy again.
The “No” campaign has been vigorous, comprising a motley crew of aging Marxists, anti-globalization protestors, traditional euroskeptics, and obsessive “sovereigntists.”
They have sought to capitalize on the vacuum of knowledge in Ireland regarding EU affairs and the “Yes” side’s relative lateness to mobilize.
Voters have been subjected to a barrage of outlandish claims: the Treaty would supposedly introduce abortion into Ireland (it is outlawed under Ireland’s constitution), abolish Ireland’s low corporate-tax rate, and introduce a European army that would soon be sending Irish boys home from distant battlefields in body bags.
Even Ireland’s dismal performance at the recent Eurovision Song Contest has been used to bolster the message: “They didn’t vote for us; why should we vote for them?”
Though these claims are easily discredited, the “Yes” side has been unable to provide voters with sufficient reasons to vote for the Treaty.
If that wasn’t enough, the “No” side has also been able to associate the EU with rising fuel and food prices as the campaign draws to a close.
Two factors that are likely to decide the referendum’s outcome can be singled out: turnout and how the farming community votes.
Opinion polls currently show the “Yes” side leading by two to one (35% to 18%).
But there is little comfort in these figures for pro-Europeans: polls prior to the failed referendum on the Nice treaty in 2001 demonstrated an even larger “Yes” majority at the same stage.
Now as then, “No” voters seem more committed.
The percentage of “Don’t knows” remains high, at about 47%, so there is everything to play for in the campaign’s final days.
The crucial issue will be turnout.
In 2001 the ‘Yes’ side lost because it failed to convince enough voters to turn out – almost two thirds of the electorate failed to vote.
In 2002 a second referendum was held which reversed the result and saw the ‘Yes’ side triumph.
A good part of the explanation for this turnaround was the fact that the government managed to convince enough voters to move from abstention to the ‘Yes’ camp (though the turnout still failed to reach 50%). All of this suggests that the higher the turnout the greater the likelihood of a ‘Yes’ win.
For Irish farmers the campaign has delivered a golden opportunity to engage in a tactical assault on Brussels.
They have sought to link the Treaty to the ongoing Doha Round of World Trade Organization talks.
Peter Mandelson, the EU’s trade commissioner, has been routinely presented as public enemy number one with his proposals to reduce some agricultural tariffs by up to 70%.
Farming organizations threaten to withhold support for the Treaty unless the government threatens to veto Mandelson’s proposals.
Although the Irish Farmers Association (IFA) has belatedly urged its 85,000 members to support the Treaty, opinion polls show farmers are opposed to Lisbon by a two to one majority.
Their votes could prove crucial in a tight contest.
From the outside looking in it seems almost perverse that Irish voters might reject the Lisbon Treaty.
After all Ireland has benefited more than other state from the European integration process, garnering almost €60billion in EU subsidies during 35 years of membership.
But in a context where the EU remains too remote from citizens and where apathy and confusion define the referendum campaign, the ‘No’ side has cleverly packaged its message of Europe as an existential threat to Irish jobs, investment and sovereignty.
Ireland, long one of the EU’s bright spots, will be a source of great anxiety in the days to come.
Is Academic Freedom Worth Its Price?
WARWICK, UK – Is academic freedom affordable in a time of economic crisis?
That was the topic for discussion at the annual signing of the Magna Charta Universitatum at the mother of universities, the University of Bologna, earlier this year.
The Magna Charta is the world’s most visible statement of principles for the promotion and protection of university autonomy.
Over the past two decades, nearly 700 institutions of higher education on every continent have signed it.
Nevertheless, there remains a nagging sense that universities are luxuries now that ordinary people are struggling to make ends meet.
There has always been reason for concern.
In the past, universities have been created in times of plenty, typically to encourage people to think beyond their immediate need for survival to more edifying spiritual or national goals.
Nearly 50 years ago, a statistically minded historian of science, Derek de Solla Price, observed that the best indicator of academic research production is a nation’s energy consumption per capita: both grow together.
This is hardly surprising.
From a strictly economic standpoint, academic freedom requires relative immunity to costs, whether stemming from trial-and-error experimentation or from more radical challenges to the status quo.
But should universities now reduce their demands in order to meet the needs of the larger society, not least in terms of their carbon footprint?
If universities are to remain universities in the sense originally laid down by the Bolognese lawyers, the answer is no.
Moreover, this is not an affront to economics.
The efficiency savings of academia occur downstream from the activities of the universities themselves.
Indeed, universities may be the most consistently performing products of long-term capital investment, especially if one is inclined to think about social and economic “investment” in exactly the same terms.
After all, the university’s unique institutional mission is to manufacture knowledge as a public good.
The new knowledge produced by original research is an instance of social capital formation.
It results from academics and funders collaborating on projects that aim to increase the competitive advantage of each in their respective domains.
Left at this stage, knowledge is simply intellectual property, access to which is restricted to paying customers.
But universities also have an institutional mandate to teach.
This forces knowledge to be made more widely available, thereby breaking the effective monopoly that researchers and their funders would otherwise enjoy.
Joseph Schumpeter’s phrase “creative destruction,” his definition of entrepreneurship, aptly describes this process.
Once teaching reduces, if not eliminates, the original competitive advantage associated with a piece of research, academics and their funders are forced to seek new sources of advantage by producing new knowledge.
In the process, the larger public – those not involved in the original production of new knowledge – benefit through classroom instruction.
In this sense, the heart of the university is located in its curriculum committee, as the mechanism by which research is regularly translated into teaching, generating new cycles of creative destruction.
Efficiency-minded knowledge managers nowadays say that the very idea of the university as a place where the same people produce and distribute knowledge is a throwback to the Middle Ages.
Today, teaching is thus said to be more efficiently delivered on-line, and research best delivered through dedicated “science parks.”
But, while the sense of “efficiency” that attracted the mendicant Christian orders, the Dominicans and Franciscans, to staff the original universities was rather different, it is no less relevant today.
The Dominicans and Franciscans literally lived by begging – that is, by depending on diverse sources of income, whose return to any particular investor was always unclear.
The autonomy of these orders rested on a proven long-term ability to do more than expected with what they were given.
The Latin word for this ability was povertas, or “poverty” in English.
While the word does not retain its original virtuous connotations, we still warm to the virtuosity of “doing more with less.”
In the case of the university, this means allowing access to knowledge to students who lack the intellectual, political, or financial resources that might have enabled them to produce it for themselves.
Universities perform their natural economic function when academics speak and write plainly, demystify jargon, present their ideas in alternative media and stress applications to domains that do not concern the academics themselves.
In these ways, academics enable knowledge to do maximum work at minimal cost to its recipients.
In short, universities prove their worth if students find it easier to appropriate academic knowledge than the academics themselves originally did.
Is Ahmadinejad Now Free to Make a Nuclear Deal?
BERLIN – In Istanbul this week, representatives of Iran and the “5+1” group (the five permanent members of the United Nations Security Council plus Germany), led by European Union High Representative for Foreign Affairs Catherine Ashton, will resume talks about Iran’s nuclear program.
No breakthrough is likely, but the outcome could be more favorable than many expect.
In October 2009, an initial understanding was reached, according to which Iranian low-enriched uranium (LEU) would be delivered to Russia for further enrichment and conversion into fuel rods for the Tehran Research Reactor (TRR).
But this accord faltered on Iran’s domestic politics: President Mahmoud Ahmadinejad’s political adversaries effectively blocked it.
Might the same thing happen again?
Ahmadinejad, who was severely weakened after his disputed reelection in 2009, has now consolidated his position.
Representatives of his regime are still concerned about what they see as externally backed attempts to stage a “velvet revolution” in the country, but there is little fear of new challenges from within.
One conservative intellectual put it in almost Nietzschean terms: “Yes, two million people took to the street after the elections.
They criticized the situation.
But no one wants to change the system by force.” In other words, there is no will to power on the part of civil society and the opposition.
Many who protested against the regime in 2009 are disillusioned.
Ordinary people do not hide their contempt for the regime, but they also see that last year’s mass protests have failed.
Many have withdrawn into the private sphere – education and culture for some, business for others.
Visa applications are increasing, indicating preparations for limited or prolonged sojourns abroad.
While Iran’s leadership continues to repress liberal dissenters, it feels secure enough to talk of “reconciliation” with parts of the “loyal” opposition – Ahmadinejad’s conservative and reform-oriented adversaries who want to preserve the Islamic system as such.
Within the president’s camp as well, there are discussions about the post-Ahmadinejad era and possible successors to him – all, however, assuming regular presidential elections in 2013.
Until then, despite frequently harsh criticism of his performance, the president is seen to have a mandate to govern.
The effects of the latest round of international sanctions on Iran are somewhat ambiguous: they have weakened the country, but they do not seem to have weakened Ahmadinejad.
Withdrawal of European companies is delaying necessary investments and forcing Iranian firms to seek less-favored alternatives, mainly in China and Russia.
Prices are increasing, more transactions are being conducted in cash, and more dubious business figures are arriving from around the world.
But, while government officials do not deny that sanctions worry them, they point to Iran’s high foreign-currency reserves and the Iranians’ creativity in coping with the effects.
Moreover, Ahmadinejad uses the sanctions as political cover to pursue his economically sound – but deeply unpopular – policy of slashing subsidies on electricity, petrol, and bread.
Though economic pressure is unlikely to force the regime to abandon uranium enrichment, unity on sanctions among the five permanent Security Council members, and moves by the EU, Japan, and South Korea to sharpen them further has had an impact.
Most importantly, sanctions have strengthened those within the elite who favor negotiations, and weakened those who are deeply critical of Ahmadinejad’s unhidden interest in doing business with the West, particularly the United States.
For Ahmadinejad and his supporters, there are two main reasons for engagement with the US.
First, they know that an understanding with the US would be popular, particularly among educated youth and the business community.
Second, Ahmadinejad and the political leadership believe that the regime is under serious threat from the US – and only from the US.
American officials often underestimate this threat perception and deep suspicion of US intentions, but they are powerful factors in Iranian politics.
While Iran’s ruling elite appears to be divided over the prospect of a full-scale rapprochement with the US, they share this underlying fear of America and do not want their country to be isolated further.
Given this background, it is quite possible that this time Iranian domestic politics will not undermine a new agreement to swap Iranian LEU for fuel rods for the TRR.
The 5+1 group has an interest in reducing Iran’s stockpile of LEU and the risk of its use at some point for military purposes.
Iran, for its part, has an interest in securing both the supply of fuel rods for the TRR and the international community’s implicit acceptance of its uranium-enrichment efforts, as well as in engaging with the US.
Any such deal will be possible only if it responds to both sides’ interests.
It would certainly help if Iran began the talks with a commitment to end its enrichment of uranium to the level of 20%.Even Iranian officials admit that there is no (civilian) purpose for such a program if the 20% enriched fuel rods for the TRR are actually produced in Russia.
Another clear signal of Iran’s intention to settle the dispute would be progress toward ratification by Iran’s parliament of the Additional Protocol to the Nuclear Non-Proliferation Treaty.
The 5+1, for their part, should indicate that an eventual agreement on the basis of “minimum enrichment and maximum controls” is possible.
Agreement on a LEU fuel swap would not resolve the nuclear dispute between Iran and the West, but it would open the door for a diplomatic process that could eventually reach the core of the problem – Iran’s uranium enrichment and the risks of diversion for military purposes.
If the Istanbul talks go well, they could provide a road map for further negotiations, not only on the nuclear issue, but also on Afghanistan, the Middle East, and terrorism.
Even if they only provide an avenue for bilateral engagement between the US and Iran, they will still prove to be worth the effort.
Is America an Empire?
Three decades ago, the radical left used the term "American empire" as an epithet.
Now that same term has come out of the closet: analysts on both the left and right now use it to explain - if not guide - American foreign policy.
In many ways, the metaphor of empire is seductive.
The American military has a global reach, with bases around the world, and its regional commanders sometimes act like proconsuls.
English is a lingua franca like Latin.
The US economy is the largest in the world, and American culture serves as a magnet.
But it is a mistake to confuse primacy with empire.
The US is certainly not an empire in the way we think of the European empires of the 19th and 20th centuries, because the core feature of that imperialism was political power.
Although unequal relationships between the US and weaker powers certainly exist and can be conducive to exploitation, the term "imperial" is not only inaccurate but misleading in the absence of formal political control.
To be sure, the US now has more power resources relative to other countries than Britain had at its imperial peak.
But the US has less power - in the sense of control over other countries' internal behavior - than Britain did when it ruled a quarter of the globe.
For example, British officials controlled Kenya's schools, taxes, laws and elections - not to mention its external relations.
America has no such control today.
In 2003, the US could not even get Mexico and Chile to vote to support a second resolution on Iraq in the UN Security Council.
Devotees of the New Imperialism would say, "Don't to be so literal."
After all, "empire" is merely a metaphor.
But the problem with the metaphor is that it implies a degree of American control that is unrealistic, and reinforces the prevailing strong temptations towards unilateralism in both the US Congress and parts of the Bush administration.
In the global information age, strategic power is simply not so highly concentrated.
Instead, it is distributed among countries in a pattern that resembles a complex three-dimensional chess game.
On the top chessboard, military power is largely unipolar, but on the economic board, the US is not a hegemon or an empire, and it must bargain as an equal when, for example, Europe acts in a unified way.
On the bottom chessboard of transnational relations, power is chaotically dispersed, and it makes no sense to use traditional terms such as unipolarity, hegemony, or American empire.
So those who recommend an imperial US foreign policy based on traditional military descriptions of American power are woefully misguided.
In a three-dimensional game, you will lose if you focus only on one board and fail to notice the other boards and the vertical connections among them.
Witness the connections in the war on terrorism between military actions on the top board, where the US removed a tyrant in Iraq, but simultaneously increased the ability of Al Qaeda to gain new recruits on the bottom transnational board.
These issues represent the dark side of globalization.
They are inherently multilateral and require cooperation for their solution.
So to describe America as an empire fails to capture the true nature of the foreign policy challenges that America faces.
Those who promote the idea of an American empire also misunderstand the underlying nature of American public opinion and institutions.
Will the American public tolerate an imperial role?
Neo-conservatives writers like Max Boot argue that the US should provide troubled countries with the sort of enlightened foreign administration once provided by self-confident Englishmen in pith helmets.
But, as the British historian Niall Ferguson points out, modern America differs from 19th century Britain in its "chronically short time frame."
America was briefly tempted into real imperialism when it emerged as a world power a century ago, but the interlude of formal empire did not last long.
Unlike Britain, imperialism has never been a comfortable experience for Americans, and only a small share of its military occupations led directly to the establishment of democracies.
American empire is not constrained by economics: the US devoted a much higher percentage of its GDP to military spending during the Cold War than it does today.
Its imperial overreach will instead come from having to police more peripheral countries than US public opinion will accept.
Indeed, opinion polls in America show little popular taste for empire and continuing support for multilateralism and using the UN.
Michael Ignatieff, a Canadian advocate of the imperial metaphor, qualifies it by referring to America's role in the world as "Empire Lite."
In fact, the problem of creating an American empire might better be termed imperial
Indeed, the entire State Department budget is only 1% of the federal budget.
The US spends nearly seventeen times as much on its military, and there is little indication that this is about to change.
So the US should avoid the misleading metaphor of empire as a guide to its foreign policy.
Empire will not help America to understand and cope with the challenges it faces in the global information age of the 21st century.
Chess, anyone?
Is America Healing Fast Enough?
NEWPORT BEACH – Six internal factors suggest that the United States’ economy is slowly healing.
For some observers, these factors were deemed sufficient to form the critical mass needed to propel the economy into escape velocity.
While I hoped that they might be proven right, the recent stream of weak economic data, including May’s timid net job creation of only 69,000, confirmed my doubts.
With this and other elements of a disheartening employment report now suddenly raising widespread worries about the underlying health and durability of America’s recovery, it is important to understand the positive factors and why they are not enough as yet.
For starters, large US multinational companies are as healthy as I have ever seen them.
Their cash balances are extremely high, interest payments on debt are low, and principal obligations have been termed out.
Many of them are successfully tapping into buoyant demand in emerging economies, generating significant free cash flow.
Company cash is not the only source of considerable spending power waiting on the sidelines.
Rich households also hold significant resources that could be deployed in support of both consumption and investment.
The third and fourth positive factors relate to housing and the labor market.
These two long-standing areas of persistent weakness have constituted a major drag on the type of cyclical dynamics that traditionally thrust the US out of its periodic economic slowdowns.
But recent data support the view that the housing sector could be in the process of establishing a bottom, albeit an elongated one.
Meanwhile, job growth, while anemic, has nonetheless been consistently positive since September 2010.
Then there is the US Federal Reserve Board.
Despite legitimate questions about the effectiveness of its unconventional and ever-experimental policy stance, the Fed appears willing to be even more activist if the economy weakens.
Indeed, if the Fed makes an inadvertent mistake (the likelihood of this is considerable, given the country’s complex situation and the “unusually uncertain” outlook), it is more likely to err on the side of staying accommodative for too long, rather than tightening monetary policy prematurely.
Finally, with the November elections in sight and subsequently out of the way, some believe that politicians in Washington might finally be in a better position to agree to much-needed grand policy bargains.
In addition to removing the damaging specter of the fiscal cliff – a potentially disruptive economic hindrance equivalent to some 4% of GDP, in the form of excessively blunt spending cuts and across-the-board tax increases – greater political effectiveness would serve to remove other uncertainties that inhibit certain economic activities.
Each of these six factors suggests actual and potential economic healing.
So, not surprisingly, they have provoked excitement in some circles that the US may finally be poised to leave behind the depressing trio of unusually sluggish growth, persistently high unemployment, and high and growing inequality.
The problem is that these factors, both individually and in combination, are unlikely to be a game-changer, for four reasons:
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The economic and financial headwinds from outside the US are strong and gusting, owing largely to the ever-worsening European crisis, which is now entering an even more disruptive and unpredictable phase as depositors in some countries step up their withdrawals from local banks.
But it also reflects the beginning of a growth slowdown in the major emerging countries, including Brazil, China, India, and Russia.
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Too many sectors of the US economy have not completed their balance-sheet rehabilitation process.
This is true for the banking system, which has not de-leveraged to the satisfaction of either regulators or the markets, thus limiting the scope for credit growth.
It is also true for many households.
Indeed, with the average household savings rate having dropped recently to below 4%, too many families are in the process of exhausting their cushions of emergency cash, if they have not done so already.
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The unusual monetary-policy activism of the last few years risks causing collateral damage and producing unintended consequences.
While no individual issue is overwhelming yet, together they could serve to dampen economic activity and the proper functioning of markets.
Recall that the Fed’s policy bet was that these “costs and risks,” to use Chairman Ben Bernanke’s phrase, would be more than offset by the improvement in the overall economic situation.
But this generalized benefit has failed to materialize.
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Perhaps most importantly, repeated delays in removing the persistent impediments to growth and jobs means that some of them are becoming stubbornly embedded in the structure of the US economy – thus draining its dynamism and reducing its responsiveness.
For example, with long-term joblessness at 5.4 million and the average duration of unemployment at 2.5 times the historical norm, workers are less able to regain productive employment quickly at anywhere near their previous wages and salaries.
Similarly, the alarmingly high level of youth joblessness increases the risk of relatively new entrants into the labor force becoming unemployable.
The bottom line is unfortunate, but it must be acknowledged. While the US economy is gradually healing, a lot more needs to happen – indeed, urgently – to restore its traditional vigor and vitality.
Most important, robust recovery requires a degree of seriousness and constructive collaboration in Washington that seems elusive today.
Unless and until this cooperation materializes, the hope of achieving economic escape velocity will remain just that – a hope.
And, rather than surging forward, the US economy, regrettably and exasperatingly, will remain captive to unusual sluggishness, while its vulnerability to the ill winds blowing from the rest of the world will only increase.
Is an Alzheimer’s Cure at Hand?
Is Azerbaijan Next?
As Azerbaijan gears up for parliamentary elections on November 6, the main question is whether the country is about to undergo its own “color” revolution, along the lines of those that have overthrown post-Soviet elites in Georgia, Ukraine, and Kyrgyzstan in the last two years.
Such an outcome cannot be ruled out, but the prospects are uncertain at best.
Azerbaijan’s ruling party, Eni Azerbaijan, faces challenges all around, despite the support of President Ilham Aliyev and privileged access to state resources.
At least three opposition parties – Isa Gambar’s “Mussavat,” Ala Keremela’s “The National Front, and the Social Democratic Party – have maintained support and political influence since Ilham succeeded his late father, Heydar Aliyev, in 2003.
Moreover, like Georgia, Ukraine, and Kyrgyzstan, dynastic politics in Azerbaijan reflects the dominance of clans whose members’ success is determined by proximity to the president.
While such systems may appear stable, they are inherently fragile, for they are synonymous with lawlessness, injustice, and abject poverty for the majority of the population.
The opposition has already started preparing the ground for change.
The leaders of the three-party opposition bloc Azadlyg (Freedom) have declared that they will regard any electoral outcome that gives opposition parties less than 70% of the vote as having been falsified, and that street protests would follow.
This would conform to the pattern seen in Serbia in 2000, Georgia in 2003, and Ukraine in 2004.
But can such a scheme work in Azerbaijan?
A “dress rehearsal” failed in October 2003, when the opposition, incapable of uniting around a single candidate to challenge Ilham in the presidential election, declared the results to have been falsified and called people into the streets.
Only several hundred showed up, and the police quickly dispersed them, arresting dozens.
This time, the opposition is united, having found it far easier to agree on mutual support for 125 parliamentary candidates than to settle on a single presidential candidate.
But the authorities may have the upper hand.
In Tbilisi, Kiev, and Bishkek, the leaders of the “color revolutions” had already held lofty positions in regimes that they now attacked as thoroughly corrupt; yet they succeeded in gaining the population’s trust.
That is far from a foregone conclusion in Azerbaijan, where the last stint in power by some of the opposition leaders in 1992-1993 still evokes bitter memories of a time of war and crisis that few can recall without horror.
Most importantly, however, the previous “color revolutions” underscore the crucial role of world public opinion and the global mass media that shape it.
As in Georgia, Ukraine, and Kyrgyzstan, the fate of the regime and the country may well hang on whether the current government is portrayed on the world’s television screens as a violator of human rights that is thwarting the will of the people and thus rejecting “generally accepted democratic values.”
Such an image may be less valid in Azerbaijan.
After coming to power in 1993, Heydar Aliyev stopped the war with Armenia over the Nagorno-Karabakh enclave, secured Azerbaijan’s existence as a sovereign state, and, as the oil-and-gas sector flourished, oversaw the country’s growing international authority.
The transfer of power from father to son took place peacefully, and Ilham’s administration has presided over completion of the Baku-Tbilisi-Ceyhan oil pipeline – to the annoyance of Russia and Armenia.
At the same time, high oil prices have enabled higher social spending and infrastructure investment.
Today, the capital, Baku, resembles a huge construction site, with high-rise housing, stores, and roads being built at a breakneck pace – and apparently benefiting the broad strata of the population.
But none of this may ultimately matter if the West ­– and the United States, in particular – decides that Ilham’s regime is not ensuring its interests and seeks to manipulate the global media image accordingly.
The West’s main interest is not Azerbaijan’s oil reserves, which accounted for just 0.06% of the world’s total in 2004, but its geopolitical position at the crossroads of global energy and transport corridors and as a frontline state vis-à-vis an increasingly assertive Iran.
So far, it appears as though the West will back Ilham over the opposition.
Former US Secretary of State Madeleine Albright, the president of the European Parliamentary Assembly, Rene Van der Linden, and US Deputy Secretary of State for global affairs Paula Dopryansky have all visited Baku recently.
As US foreign-policy doyen Zbigniew Brzezinski put it in an interview with a German radio station, “The majority of Azeris actually support President Ilham Aliyev.
Therefore, we have a situation that differs from those that took place in Georgia, Ukraine, and Kyrgyzstan.”
Nevertheless, the West appears to be hedging its bets by sustaining contacts with the opposition.
As Brzezinski added, “Of course, it is important for the political regime in Azerbaijan to be as stable and legitimate as possible.” If the West decides that the government has become unreliable, television shots of demonstrators’ weekly clashes with the Baku police, Ilham’s refusal to hold televised debates, and the confiscation of all orange objects from stores will come in handy.
Of course, modern technology alone cannot bring about a revolution.
But almost all post-Soviet states remain weak, and therefore vulnerable to domestic turmoil.
Azerbaijan is no exception, and Russia, having been burned by its naked intervention on behalf of the governments in Georgia and Ukraine, has given every indication that it intends to sit this one out.
The government appears confident that high oil prices, administrative resources, and dominance of the local media will ensure an election victory.
That may not be enough.
Is Bankers’ Pay Really the Root of Financial Evil?
CHICAGO – Compensation practices at financial firms stand accused of being a primary cause of the recent global financial crisis.
Restricting bankers’ pay is said to be the answer.
But will such restrictions work?
Before instituting such invasive regulation, we should examine whether past compensation structures really were the catalysts for our recent problems.
To say that they were implies three things: top bank executives were rewarded for short-term results with large amounts of up-front cash; bank executives did not hold sufficiently large amounts of stock to align their interests with those of shareholders; and executives with more short-term pay and less stock ownership should have had the greatest incentive to take bad and excessive risks, and thus should have performed worse in the crisis.
Two economists, Rudiger Fahlenbrach and Rene Stulz, tested these implications by studying the CEOs of almost 100 large financial institutions from 2006 to 2008.
They start in 2006 because that seems to be the point at which some financial firms took on the risky positions that led to the crisis.
In 2006, the CEOs took home $3.6 million in cash compensation on average, which represented less than half of total compensation.
The larger share of pay was in restricted stock and options.
At the same time, they held an average of $88 million in their firms’ equity and options.
In other words, they left more than 24 times as much in their firm as they took home.
So it seems unlikely that this up-front cash provided much of an incentive for the average CEO to knowingly take bad or excessive risks that would jeopardize their much larger equity stakes.
Moreover, these CEOs lost a lot in the crisis.
From 2006 to 2008, the average CEO lost $31 million in his or her holdings of a firm’s stock, dwarfing any gains from cash compensation.
The CEOs lost on their options as well.
So, if pay and front-loaded incentives were not the reason that banks’ CEOs got their firms (and the world) into a mess, what was?
Some economists point to highly expansionary monetary policy in the years leading up to the crisis.
Others cite the so-called “capital glut” – large inflows of external financing from China and much of the developing world.
Still others highlight the role that the political system played in inflating the banking sector and real-estate prices, particularly the sub-prime sector.
Ruling out compensation practices hardly leaves us at a loss for culprits.
While today’s proposed pay restrictions are unlikely to stop the next financial crisis, they are likely to damage the financial sector.
To see why, it is important to understand why bankers are paid so much.
Over the last two or three decades, technological change and increased scale have led to much greater productivity and much higher incomes for those at the top of society’s income distribution.
Corporate executives manage larger companies.
Investors manage much larger sums of money.
Entertainers and athletes appeal to larger audiences.
Lawyers oversee bigger transactions and cases.
Pay for all of these groups has increased by much more than pay for the average worker.
Given this reality, the best bankers, traders, dealmakers, etc. will work for companies that provide the most attractive compensation.
Greater pay regulation will drive the most talented away from regulated banks and towards hedge funds, private equity funds, boutique investment banks, and other unregulated investment firms.
This talent drain is likely to be exacerbated as pay regulations impose a one-size-fits-all regime.
Why impose restrictions on a dealmaker who earns a large fee for arranging a merger that imposes no risk on the bank after the transaction has closed?
The same is true for a trader who makes money on spreads rather than from taking on risk.
These types of employees will be penalized for no good purpose under the proposed pay regimes.
Perhaps more troubling is that pay restrictions open a Pandora’s box of other restrictions.
Indeed, politicians, eager to look good in the eyes of angry voters, are often more interested in setting limits to total compensation than they are in designing the optimal form of compensation.
Banks serve a special function in the economy that does warrant a special role for the government: not in setting pay, but in imposing effective capital requirements.
Higher and pro-cyclical equity-capital requirements on banks, combined with a requirement to raise contingent long-term debt – debt that converts into equity in a crisis – is a better way forward.
The typical bank is capitalized with equity, long-term debt, short-term debt, and deposits.
Investment banks like Bear Stearns and Lehman Brothers got into trouble because they had too little equity capital – far less than 10%.
Regulators might consider imposing pro-cyclical equity requirements – increasing the equity percentage in boom times in order to offset losses in the inevitable bust times.
In addition, regulators should require banks to issue an additional amount of capital – say, 10% – in the form of long-term debt that is forced to convert into equity if the bank and the overall banking system get into financial difficulty.
In issuing contingent capital, banks would have to pay a higher interest rate than they would on ordinary long-term debt, because debt investors will face the true cost of capital, not the government-subsidized cost.
Over time, however, the interest-rate premium is likely to be small, because higher capital requirements and contingent capital should significantly reduce the likelihood of ever reaching the triggers.
If such a contingent-capital structure had been in place before the crisis, troubled banks would have been recapitalized by the contingent debt holders while avoiding the complications and legal posturing inevitable in formal bankruptcy.
Debt investors, not the government, would have bailed out the banks, making the financial crisis substantially smaller, if it had occurred at all.
Is Bernanke Ready?
Ben Bernanke, the nominee to replace Alan Greenspan this month as Chairman of the US Federal Reserve Board, is a highly capable economist who has devoted his professional life to understanding the historical role of central banks and the problems that they have faced.
His views represent, as much as can be expected, a consensus among those who have studied the issues carefully.
But that does not mean that Bernanke is prepared to ensure that healthy economic growth continues in the US in the coming years and provide the kind of leadership that the world needs.
By the standards of what is generally understood today, he will do a good job.
Unfortunately, that may not be enough.
John Maynard Keynes once said that monetary policy may work like a string. A central bank can pull the string (raise interest rates) to rein in an economy that is galloping ahead unsustainably.
But it cannot push the string up: if economic growth stalls, as when confidence is seriously damaged, lowering interest rates may not be enough to stimulate demand.
In that case, a recession can occur despite the central bank’s best efforts.
Bernanke made his name as an economist by analyzing the worldwide Great Depression of the 1930’s – good expertise to have, since preventing such disasters is a central bank head’s most important job.
The Great Depression, which followed the stock market crash of 1929, saw unemployment rise sharply in many countries, accompanied by severe deflation.
In the US, consumer prices fell 27% between 1929 and 1933, and the unemployment rate topped out in 1933 at 23%.
According to Bernanke’s “debt deflation” theory, the collapse in consumer prices was one of the causes of the Great Depression, since deflation raised the real value of debts, making it difficult to repay loans.
As Bernanke pointed out, 45% of US farms were behind on mortgage payments in 1933, and in 1934, default rates on home mortgages exceeded 38% in half of US cities.
The debt burden destroyed consumer confidence and undermined the banking system, crippling the economy.
Bernanke’s research also stressed that the sooner a country abandoned the gold standard, the better off it was.
Adhering to the gold standard during the Great Depression implied a deflationary monetary-policy bias, since it required keeping interest rates relatively high to encourage investors to hold deposits in banks rather than demanding the gold that backed them.
Once a country eliminated convertibility into gold, it was free to pursue monetary expansion, and deflation tended to end.
But Bernanke’s impressive research on the Great Depression does not mean that he can prevent the next recession or depression, for stopping deflation hardly solves all problems.
After all, the US went off the gold standard in 1933, and the Fed cut the discount rate to 1.5% in 1934, ending deflation (except for minor episodes); but the unemployment rate did not fall consistently below 15% until 1941 and the onset of World War II.
Bernanke will therefore have to be careful about over-generalizing from his past research, just as medical specialists must be careful not to over-diagnose diseases in their own specialty and military strategists must be careful not to over-prepare to fight the last war.
Of course, this does not mean that we should ignore the past altogether.
A 2005 study headed by Guillermo Calvo, Chief Economist for the Inter-American Development Bank, found important similarities between the Great Depression of the 1930’s and economic crises since 1980 in 31 emerging countries.
But the study also found important differences.
The fundamental experience of the Great Depression has repeated itself, on a smaller scale, many times and in many countries in recent decades: a shock in financial markets, followed by a sharp decline in gross domestic product.
But the behavior of consumer prices in the post-1980 crises is fundamentally different from that seen in the 1930’s.
In contrast to the Great Depression, collapsing national output was in recent decades accompanied by accelerating inflation, not deflation.
The Calvo study thus concludes that Bernanke’s debt deflation theory of the Great Depression does not generally apply to the more recent crises.
At the same time, Bernanke is inheriting a pair of economic vulnerabilities that are unusual by historical standards, and that did not precede the Great Depression of the 1930’s.
We are now in the late stages of the biggest real estate boom in US (or world) history, driven by frenzied market psychology.
In contrast, US home prices were uneventful before the Great Depression, and actually fell slightly in real terms between 1925 and 1929.
Moreover, we are now experiencing a fundamental change in expectations about oil prices: not only are today’s prices quite high in real terms by historical standards, but the futures markets indicate that prices are expected to remain high for years to come.
In contrast, real oil prices were flat leading up to 1929, and down nearly 50% in real terms from the 1925-6 “fuel folly” peaks.
In the near future, substantially higher oil prices, lower real estate prices, or both, could, depending on public reaction, put Bernanke into uncharted territory for economic stress.
If confidence declines, his historical understanding of the Great Depression of the 1930’s could leave him ill-equipped to prevent such shocks from sinking the US, and the world, economy.
He might find himself pushing on a string.
Is Blasphemy Hate Speech?
NEW YORK – The assassination of Salman Taseer, the governor of Punjab province in Pakistan and an outspoken critic of religious extremism, has focused attention on his country’s draconian blasphemy law.
Adopted in its present form by General Mohammad Zia ul-Haq’s military dictatorship more than three decades ago, the blasphemy law imposes a mandatory death penalty on anyone convicted of insulting Islam.
The police officer who murdered Taseer apparently acted because the governor recently launched a campaign to repeal the law.
From the standpoint of Pakistani religious extremists who have applauded the murder, that itself was an act of blasphemy.
For a long time, blasphemy laws were considered an unfortunate legacy of efforts in England during the religious struggles of the sixteenth and seventeenth centuries to suppress deviant interpretations of scripture among Christians.
They were spread in South Asian countries and elsewhere through British colonial rule.
General Zia’s harsh version of the law in Pakistan was adopted as part of his effort to use Islam to legitimize his suppression of all dissent.
Blasphemy became a global concern in the late 1980’s when Ayatollah Ruhollah Khomeini of Iran issued a fatwa calling for the assassination of the writer Salman Rushdie for his novel, The Satanic Verses.
Although Rushdie survived with the help of an extraordinary level of protection provided by British security forces, others associated with his book were murdered.
More recently, arguments that it is legitimate to make blasphemy a crime have, disturbingly, gathered increasing support.
Those who insist that blasphemy does not warrant the protection otherwise given to freedom of expression often claim that it is a form of hate speech.
It seems important, therefore, to clarify the differences between hate speech and blasphemy.
Inasmuch as hate speech involves incitement of imminent violence, it may be made criminal, even in the United States, where freedom of expression enjoys particularly strong legal protection.
It is assumed in such circumstances that the violence will be carried out by those who sympathize with the views of the person inciting hatred. An example would be a mob attack on a member of a racial or religious group in direct response to a speech urging an assault on members of that group.
Ordinarily, however, the circumstances in which blasphemy may lead to violence are entirely different.
In those circumstances, the violence is not imminent, and it is carried out by those offended by the speaker’s views rather than by sympathizers.
And, of course, it is typically carried out directly on the speaker.
This makes criminalization of blasphemy a far greater threat to freedom of expression.
After all, while a speaker can reasonably take care not to express views that will lead to imminent violence, if listeners have unlimited discretion in determining what causes offense, the speaker can never know what will so offend some people near or far at some time in the future that they will commit violence.
These differences between hate speech and blasphemy are fundamental.
It is, therefore, inappropriate to extend the legal restrictions on hate speech to blasphemy.
Criminalizing blasphemy should be strongly opposed as an unwarranted restriction on freedom of expression, even by those who believe that there are certain limited circumstances in which it is appropriate to make hate speech a crime.
Of course, such distinctions do not matter much to the religious fanatics who rejoice in the murder of Salman Taseer.
Yet those who admire his courage in struggling for freedom of expression ought to see to it that efforts to make blasphemy a crime, or to perpetuate it as a criminal offense, are afforded no legitimacy whatsoever.
Is Bush Right?
Whatever critics at home and abroad may think, the “surge” that President Bush is planning for Iraq is more than a troop increase; it is a new and high-risk regional strategy.
True, Bush’s plan will prove far too little and comes far too late to stabilize Iraq.
But it does offer the United States some longer-term benefits in the regional battle with Iran for influence.
At the heart of the new strategy is Bush’s decision to take the fight directly to Iraq’s most powerful militia, the Mahdi Army.
Under the nominal control of the militant cleric Moqtada al-Sadr, the group has become Iraq’s largest and best-armed fighting force and is pursuing its own political and security agenda.
The Mahdi Army has exchanged fire with US troops before, most notably during the fierce battles for control of the southern Iraqi cities of Najaf and Karbala in 2004.
Those confrontations ended with a truce of sorts – though skirmishes have continued – because US forces have been reluctant to fight Sunni insurgents and Shi’a militiamen at the same time.
Iraqi Prime Minister Nouri al-Maliki has also been reluctant to take on the Mahdi Army, mainly because the support of Sadr loyalists in Iraq’s parliament is crucial for his political survival.
Now, instead of waiting for Maliki to act, US forces appear poised to do the job themselves.
If they can significantly degrade the militia’s strength, or at least contain its influence within Baghdad’s Shi’a slums, the Iraqi government will have a somewhat better chance of developing a credible security force and Bush can claim some success.
At the very least, the new strategy recognizes that the gravest challenge to stability in the near term comes from militia groups in general and the Mahdi Army in particular.
Then there is the broader and growing conflict with Iran. Recent official US rhetoric and actions on the ground – including the arrest of five Iranians in Irbil in early January and Bush’s authorization of deadly force against Iranians who threaten Iraqi security or US troops – reflect a much more confrontational approach toward Iran’s influence inside Iraq.
But it also indicates recognition that Iran’s effort to extend its regional influence poses the single biggest challenge to the Middle East’s long-term stability.
To be sure, Bush’s new strategy is highly unlikely to help Iraqis avert a slide into sectarian civil war.
A temporary 16% boost in troops simply is not enough to get that job done.
Bush insists that there will soon be enough US troops in central Iraq to “hold” areas seized from militia groups and insurgents.
But for how long?
A month?
Four months?
Three years?
American troops will eventually leave Iraq, and all the relevant parties – the Maliki government, Shi’a militias, Sunni insurgents, Iran, and Iraq’s Sunni Arab neighbors – know it.
Sadr can simply hold back and wait the Americans out.
Moreover, any viable solution in Iraq requires political agreement among Iraqis, which in turn will depend on their willingness to compromise.
Laws guaranteeing a fair division of Iraqi oil profits must be drafted, and all factions must have confidence that what is agreed will be enforced.
Sunnis must be persuaded that neither their minority status nor former membership in Saddam Hussein’s Ba’ath Party will exclude them from political and economic life.
But Sunnis and Shi’a are now killing one another in increasing numbers, and the new aggressiveness of US forces will make compromise all but impossible.
It is unrealistic to expect Iraqi politicians to make substantial political sacrifices while their constituents are fighting Americans and one another.
Finally, Bush’s strategy already faces challenges at home.
Few Americans – and therefore few US lawmakers – have much confidence in Bush’s leadership on Iraq.
If the new strategy fails to produce positive and tangible results within a few months, the steady domestic drumbeat for troop withdrawals will become deafening.
A sharp spike in US casualties would compound the pressure to get out.
Even so, the new strategy has some benefits.
First, it sidelines Maliki, which means that he will be less damaged politically than if he were directly identified with US attacks on Iraqi Shi’a.
US actions will spark Iraqi criticism that Maliki is impotent or an American puppet, but those charges have already been made.
Nothing could be worse for Maliki than explicit authorization for attacks on Shi’a militias, and the near-term survival of his government is crucial if any progress is to be made on the political challenges facing all of Iraq’s factions.
Second, the new strategy will keep the Mahdi Army on its heels.
Sadr’s militia threatens to quickly become Iraq’s answer to Hezbollah: a well-armed, politically connected private army with its own foreign policy.
The more that US forces can degrade the Mahdi Army’s position and force Sadr into face-saving political moves, the weaker the militia will be relative to other forces in Iraq after US troops head home.
Finally, taking the fight directly to Iraq’s most powerful Shi’a militia and Iranians inside Iraq will align the US much more closely with its traditional Sunni Arab allies – Saudi Arabia, Egypt, Jordan, and the Gulf states.
Arab governments have been especially angry over the chaos in Iraq, fearing that the US will abandon the Sunni minority to the not-so-tender mercies of revenge-minded Shi’a and expressing growing anxiety that the war has empowered Iran to extend Shi’a influence throughout the Middle East.
When Iraq falls apart, as now appears all but inevitable, the US will need as many friends in the region as it can get, particularly as the battle with Iran for regional influence and the conflict over its nuclear program intensifies.
If nothing else, having a common enemy will help the US and its Arab allies restore damaged ties.
Is Capitalism Doomed?
NEW YORK – The massive volatility and sharp equity-price correction now hitting global financial markets signal that most advanced economies are on the brink of a double-dip recession.
A financial and economic crisis caused by too much private-sector debt and leverage led to a massive re-leveraging of the public sector in order to prevent Great Depression 2.0.
But the subsequent recovery has been anemic and sub-par in most advanced economies given painful deleveraging.
Now a combination of high oil and commodity prices, turmoil in the Middle East, Japan’s earthquake and tsunami, eurozone debt crises, and America’s fiscal problems (and now its rating downgrade) have led to a massive increase in risk aversion.
Economically, the United States, the eurozone, the United Kingdom, and Japan are all idling.
Even fast-growing emerging markets (China, emerging Asia, and Latin America), and export-oriented economies that rely on these markets (Germany and resource-rich Australia), are experiencing sharp slowdowns.
Until last year, policymakers could always produce a new rabbit from their hat to reflate asset prices and trigger economic recovery.
Fiscal stimulus, near-zero interest rates, two rounds of “quantitative easing,” ring-fencing of bad debt, and trillions of dollars in bailouts and liquidity provision for banks and financial institutions: officials tried them all.
Now they have run out of rabbits.
Fiscal policy currently is a drag on economic growth in both the eurozone and the UK.
Even in the US, state and local governments, and now the federal government, are cutting expenditure and reducing transfer payments.
Soon enough, they will be raising taxes.
Another round of bank bailouts is politically unacceptable and economically unfeasible: most governments, especially in Europe, are so distressed that bailouts are unaffordable; indeed, their sovereign risk is actually fueling concern about the health of Europe’s banks, which hold most of the increasingly shaky government paper.
Nor could monetary policy help very much.
Quantitative easing is constrained by above-target inflation in the eurozone and UK.
The US Federal Reserve will likely start a third round of quantitative easing (QE3), but it will be too little too late.
Last year’s $600 billion QE2 and $1 trillion in tax cuts and transfers delivered growth of barely 3% for one quarter.
Then growth slumped to below 1% in the first half of 2011.
QE3 will be much smaller, and will do much less to reflate asset prices and restore growth.
Currency depreciation is not a feasible option for all advanced economies: they all need a weaker currency and better trade balance to restore growth, but they all cannot have it at the same time.
So relying on exchange rates to influence trade balances is a zero-sum game.
Currency wars are thus on the horizon, with Japan and Switzerland engaging in early battles to weaken their exchange rates.
Others will soon follow.
Meanwhile, in the eurozone, Italy and Spain are now at risk of losing market access, with financial pressures now mounting on France, too.
But Italy and Spain are both too big to fail and too big to be bailed out.
For now, the European Central Bank will purchase some of their bonds as a bridge to the eurozone’s new European Financial Stabilization Facility.
But, if Italy and/or Spain lose market access, the EFSF’s €440 billion ($627 billion) war chest could be depleted by the end of this year or early 2012.
Then, unless the EFSF pot were&nbsp; tripled – a move that Germany would resist &nbsp;– the only option left would become an orderly but coercive restructuring of Italian and Spanish debt, as has happened in Greece.
Coercive restructuring of insolvent banks’ unsecured debt would be next.
So, although the process of deleveraging has barely started, debt reductions will become necessary if countries cannot grow or save or inflate themselves out of their debt problems.
So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong).
Firms are cutting jobs because there is not enough final demand.
But cutting jobs reduces labor income, increases inequality and reduces final demand.
Recent popular demonstrations, from the Middle East to Israel to the UK, and rising popular anger in China – and soon enough in other advanced economies and emerging markets – are all driven by the same issues and tensions: growing inequality, poverty, unemployment, and hopelessness.
Even the world’s middle classes are feeling the squeeze of falling incomes and opportunities.
To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods.
That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states.
Both are broken.
The right balance today requires creating jobs partly through additional fiscal stimulus aimed at productive infrastructure investment.
It also requires more progressive taxation; more short-term fiscal stimulus with medium- and long-term fiscal discipline; lender-of-last-resort support by monetary authorities to prevent ruinous runs on banks; reduction of the debt burden for insolvent households and other distressed economic agents; and stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts.
Over time, advanced economies will need to invest in human capital, skills and social safety nets to increase productivity and enable workers to compete, be flexible and thrive in a globalized economy.
The alternative is – like in the 1930s - unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability.
Is Central Bank Independence All It’s Cracked up to Be?
Alan Greenspan attained an almost iconic status as Governor of the Federal Reserve Board.
So, as his term draws to a close and his mantle of infallibility is passed on to his successor, it is worth examining whether his legacy will measure up and what we can expect from the new Fed chief, Ben Bernanke.
Few central bank governors have the kind of hagiography lavished upon them, especially in their lifetime, that Greenspan has had.
But what makes for a great central bank governor in our modern societies, great institutions or great individuals?
In economics, we seldom have a clearly defined counterfactual: Would the economy have performed even better or a little differently if someone else had been at the helm?
We can’t know, but there is little doubt that those “managing” the economy receive more credit than they deserve, if sometimes less blame.
Many forces behind the boom of the 1990’s, including advances in technology, were set in motion before Bill Clinton took office (just as the legacy of President George W. Bush’s deficits will be felt long after he leaves).
So Greenspan cannot be given credit for the boom.
But, while no central bank governor can ensure economic prosperity, mismanagement can cause enormous harm.
Many of America’s post-World War II recessions were caused by the Fed hiking interest rates too fast and too far.
There is little doubt that Greenspan had great moments, when one could at least imagine a less deft governor doing the “wrong” thing with disastrous consequences.
One such moment was the stock market crash of 1987.
Perhaps another occurred in 1998, when the Fed lowered interest rates in the face of what appeared to be an impending global financial crisis.
These successes, combined with the 1990’s boom and the seeming durability of price stability, reinforced Greenspan’s exalted status.
But they also led many to forget less successful moments.
The Fed failed to avert the economic downturn of 1990, and a reading of Greenspan’s testimony to Congress during that period makes clear that the basic nature of the economy’s problems was not well understood.
But the real problem for Greenspan’s legacy concerns what happened to the American economy in the last five years, for which he bears heavy responsibility.
Greenspan supported the tax cuts of 2001 with the most specious of arguments – that unless something was done about America’s soaring fiscal surpluses, the national debt would be totally paid off within, say, ten to fifteen years.
According to Greenspan, immediate action needed to be taken to avert this looming disaster, which would impede the Fed’s ability to conduct monetary policy!
It says a great deal about the gullibility of financial markets that they took this argument seriously.
More accurately, tax cuts were what Wall Street wanted, and financial professionals were willing to accept any argument that served that purpose.
Of course, if, say, by 2008 the disappearing national debt really did appear to pose an imminent danger, Congress would have happily obliged in cutting taxes or increasing expenditures.
Greenspan’s irresponsible support of that tax cut was critical to its passage.
The fault was not only in the magnitude of the tax cut, but also in its design; by directing the cuts at upper-income Americans, it provided little economic stimulus.
But soaring deficits did not return the economy to full employment, so the Fed did what it had to do – cut interest rates.
Lower interest rates worked, but not so much because they boosted investment, but because they led households to refinance their mortgages, and fueled a bubble in housing prices.
In short, as Greenspan departs, he leaves behind an American economy burdened with high household and government debt and fragile balance sheets – a legacy that is already contributing to global financial instability.
It is still not clear what led Greenspan to support the tax cut.
Was it a massive economic misjudgment, or was he currying favor with the Bush administration?
The most likely explanation is a combination of the two, for he and Bush were pursuing the same “starve the beast” political strategy, which calls for tax cuts to be used to reduce revenues, thereby forcing the public sector to be downsized.
The traditional argument for an independent central bank is that politicians can’t be trusted to conduct monetary and macroeconomic policy.
Neither, evidently, can central bank governors, at least when they opine in areas outside their immediate responsibility.
Greenspan was as enthusiastic for a policy that led to soaring deficits as any politician; but the fig leaf of being “above politics” gave credence to that policy, engendering support from some who otherwise would have questioned its economic wisdom.
This, then, is Greenspan’s second legacy: growing doubt about central bank independence.
Macroeconomic policy can never be devoid of politics: it involves fundamental trade-offs and affects different groups differently.
Unemployment harms workers, while the lower interest rates needed to generate more jobs may lead to higher inflation, which especially harms those with nominal assets whose value is eroded.
Such fundamental issues cannot be relegated to technocrats, particularly when those technocrats place the interests of one segment of society above others.
Indeed, Greenspan’s political stances were so thinly disguised as professional wisdom that his tenure exposed the dubiousness of the very notion of an independent central bank and a non-partisan central banker.
Unfortunately, many countries have committed themselves to precisely this illusion, and it may be a long time before they take heed of Greenspan’s most important lesson.
Stressing the new Fed chief’s “professionalism” may only delay the moment when this lesson is learned again.
Is China Cheating?
Foul play!
How else, says the US, could China undercut American producers in so many areas?
For decades America seemed to dominate manufacturing, so US officials focused on liberalizing trade in manufactured goods.
They put little effort into creating a level playing field for farmers, since they knew America couldn't compete in agriculture.
Now, China is out-competing everyone, racking up huge trade surpluses with the US.
So America's Treasury Secretary accuses China of deliberately keepings its exchange rate low, and calls for China to let market forces determine the value of the reminbi.
The IMF's departing Chief Economist, Ken Rogoff, warns that the surpluses put global stability at risk.
For those who recall East Asia's crisis of five years ago, much of this seems to run counter to what was said then.
China was urged not to float its currency.
Until Argentina's peso imploded, fixed exchange rates were fine.
The US Treasury welcomed government intervention in exchange rate markets, and encouraged the IMF to support such interventions with mega-billion dollar loans to crisis countries.
If China had let its currency float back then, it would have depreciated in value, deepening the crisis.
Countries were warned: avoid trade deficits and build up reserves, because they are the key frontline defense.
East Asia's countries followed that advice, and for a good reason: they had seen the consequences of a lack of reserves.
East Asia's governments knew then that the IMF's policies would deepen their downturns, but they were helpless to resist.
The IMF had the money they needed.
China and Malaysia, lucky enough not to have to turn to the IMF or brave enough to set their own course, did what every textbook said you should do: they pursued expansionary monetary and fiscal policies.
China's economy continued to grow at 7%; Malaysia had the shortest and shallowest downturn.
To understand what is at stake, a few basic economic points need to be spelled out.
First, international trade is based on the principle of comparative advantage; countries export goods in which they have a relative advantage and import goods in which they have a relative disadvantage.
By and large, America now has a relative disadvantage in manufacturing, while China has a relative advantage.
China should be exporting manufactured goods to the US.
Secondly, if a country invests more than it saves, it will need to borrow, and the counterpart to that borrowing is a trade deficit.
America's burgeoning trade deficit is a result of the Bush Administration's unprecedented mismanagement.
Tax cuts that America could ill afford turned a huge fiscal surplus into a massive deficit; rather than saving, America's government is borrowing, much of it from abroad.
That, not China's exchange rate policy, is the culprit.
In fact, China's overall trade surplus today is actually small, around 1% of its GDP.
Of course, the Bush Administration wants to shift the blame, but neither China, nor anyone else, should be fooled.
This is reminiscent of what happened twenty years ago, when President Reagan engineered huge tax cuts that were supposed to pay for themselves, but which incited huge fiscal deficits, which in turn led to huge trade deficits.
Back then, Japan was blamed!
The harsh truth is that neither the IMF nor the Bush administration really believes in free markets.
They interfere with markets when it suits their purposes.
The Bush Administration supported bailouts for airlines, unprecedented subsidies for agriculture, and tariff protections for steel.
The IMF is right: there is a real risk of global instability, but the underlying cause is massive US borrowing from abroad, which began under President Reagan.
This turned the US into a huge debtor.
If, someday, America's creditors decide that they want to hold fewer dollars, it could set off large exchange rate movements, causing global instability.
Why hasn't the IMF sternly criticized these deficits?
Why should the richest country in the world live beyond its means while the IMF scolds poorer countries for smaller transgressions?
This problem is compounded by the global reserve system, which sees most countries demanding US dollars, effectively to bury them in the ground.
The system requires the reserve currency country (the US) to be a massive debtor--to the point where others lose faith.
But to solve deep-seated problems with the global financial system, we need to go beyond the complacency that has long marked the G-7 and the unilateralism that defines the current US administration.
China is right to have ignored America's demands.
Floating the exchange rate would expose the country to instabilities that would lead to a host of further problems, particularly the country's shaky banking system.
A higher exchange rate would undermine job creation and would contribute to deflation, which China is successfully combating.
China is fortunate to have the freedom to follow its own views.
Its huge foreign currency reserves give it the freedom to ignore the IMF and the US Treasury.
In the end, this may be the most compelling reason for why China should continue to run trade surpluses.
Once again, China has shown its mastery of basic economic principles.
Others in the region only wish that they could have acted similarly.
Is China Closing or Opening?
Despite the dominance of the Iraq story, China is back in the headlines, with the country excoriated for its evasiveness about the SARS epidemic, and praised for its suddenly constructive role in helping to bring about negotiations between the US and North Korea, over North Korea's nuclear insubordination.
What do these two seemingly disparate responses tell us about China and its evolving place in the world?
China's response to the SARS epidemic suggests an almost automatic defensiveness when the outside world seems to impinge on it or threaten it in some potentially harmful or embarrassing way.
In this sense, the legacy of China's humiliation at the hands of the West and Japan in the 19th and early 20th centuries still exerts a powerful influence, despite the emergence of a globalized "New China" over the last two decades.
These experiences became burned so deeply into the Chinese psyche that even China's current economic and political rise has not overcome an underlying sense of victimization and grievance.
It would not be too extreme to say that China has fashioned a whole identity out of its historical victimization.
The Maoist ideological mindset grew out of Lenin's theory of imperialism, which, aided by endless barrages of propaganda against capitalism, colonialism, and foreign hegemony, tended to reinforce the sense of national humiliation.
Party spokesmen still often say that some foreign intervention has "wounded the feelings of the Chinese people" when they feel that China has been unfairly victimized.
This deep-seated suspicion of international exploitation fuels a predator/victim perspective that focuses blame on the outside world.
So China's first reaction to SARS was to bury the news of a public health epidemic in the making.
Such secretiveness--rooted in fear of humiliation--has been the Chinese Communist Party's traditional response to bad news.
It was better to hush up the mass famine that killed 30 million people following the Great Leap Forward in the late 1950's and early 1960's than to seem to be in need of foreign help.
Nowadays, the country's communist leaders acted as if they believed that disclosing SARS would risk tarnishing China's "economic miracle" and driving away foreign direct investment--some $50 billion last year, or 80% of all FDI made in Asia.
Why not just keep the fledgling epidemic under wraps and hope that it goes away without the world ever knowing?
When the SARS epidemic broke out in Guangdong in South China, the government's first impulse was, indeed, to be secretive, manipulate statistics, pressure the media into silence, distort the magnitude of the epidemic, and impede the World Health Organization (WHO) from getting involved early.
Even after the epidemic appeared in Hong Kong and then spread to Beijing, officials continued to withhold information.
Only under the most biting international criticism and censure did China grudgingly admit that there were 340 cases in Beijing, with over 400 more suspected cases.
This kind of insular reaction to a fundamentally global problem is self-destructive.
It reflects lingering discomfort with a global world of greater transparency, freedom of expression, and a diminished reliance on absolute sovereignty.
In short, China's initial reaction to SARS--like its disastrous early handling of its AIDS epidemic--is a throwback to its old pre-reform approach to problems.
But if the SARS epidemic exposed the retro side of China's approach to involvement in global affairs, China has shown its newer, more cosmopolitan and internationalist side by hosting the three-way discussion between America, North Korea, and China.
These talks, represent a more open, forward-looking, multilateral view of China's place in the world, hinting at a more pro-active and constructive diplomatic role as matchmaker and reconciler on the global stage.
In the past, China shied away from most multilateral problem solving, fearing that it might set a precedent for other countries to intervene in internal Chinese affairs.
After all, if China helps to resolve the stand-off between Pyongyang and Washington, Seoul, and Tokyo, what is to prevent these same countries from proposing initiatives to resolve the Taiwan Straits problem, the question of Tibetan autonomy, or the challenge of insurgent Muslims in Xinjiang?
Of course, by hosting the talks, China's leaders also tacitly recognize that absolute sovereignty is no longer a viable position, or one that benefits China.
Indeed, if they are successful in bringing about some sort of rapprochement, or even if they only manage to ease the crisis somewhat, their accomplishment will be significant.
Any success will confer a new sense of dignity and status on China.
For this reason, China's reluctant and belated entrance onto the international diplomatic stage is a hopeful trend that bears watching.
If China comports itself well, and if the meetings are productive, this will be important in its own right.
But China's performance could become symbolic of a more significant long-term breakthrough--the moment when the country put its fear of the outside world aside and began to emerge as a more pro-active agent of multilateral cooperation.
Is China Overtaking America?
CAMBRIDGE – The twenty-first century is witnessing Asia’s return to what might be considered its historical proportions of the world’s population and economy.
In 1800, Asia represented more than half of global population and output.
By 1900, it represented only 20% of world output – not because something bad happened in Asia, but rather because the Industrial Revolution had transformed Europe and North America into the world’s workshop.
Asia’s recovery began with Japan, then moved to South Korea and on to Southeast Asia, beginning with Singapore and Malaysia.
Now the recovery is focused on China, and increasingly involves India, lifting hundreds of millions of people out of poverty in the process.
This change, however, is also creating anxieties about shifting power relations among states.
In 2010, China passed Japan to become the world’s second largest economy.
Indeed, the investment bank Goldman Sachs expects the Chinese economy’s total size to surpass that of the United States by 2027.
But, even if overall Chinese GDP reaches parity with that of the US in the 2020’s, the two economies will not be equal in composition.
China would still have a vast underdeveloped countryside.
Assuming 6% Chinese GDP growth and only 2% US growth after 2030, China would not equal the US in terms of per capita income – a better measure of an economy’s sophistication – until sometime near the second half of the century.
Moreover, linear projections of economic growth trends can be misleading.
Emerging countries tend to benefit from imported technologies in the early stages of economic takeoff, but their growth rates generally slow as they reach higher levels of development.
And the Chinese economy faces serious obstacles to sustainable rapid growth, owing to inefficient state-owned enterprises, growing inequality, massive internal migration, an inadequate social safety net, corruption, and inadequate institutions, all of which could foster political instability.
China’s north and east have outpaced its south and west.
Almost alone among developing countries, China is aging extraordinarily fast.
By 2030, China will have more elderly dependents than children.
Some Chinese demographers worry that the country will get old before getting rich.
During the past decade, China moved from being the world’s ninth largest exporter to its leader, displacing Germany at the top.
But China’s export-led development model will need to be adjusted as global trade and financial balances become more contentious.
Indeed, China’s 12th Five-Year Plan is aimed at reducing dependence on exports and boosting domestic demand.
Will it work?
China’s authoritarian political system has thus far shown an impressive capacity to achieve specific targets, for example, staging a successful Olympic Games, building high-speed rail projects, or even stimulating the economy to recover from the global financial crisis.
Whether China can maintain this capability over the longer term is a mystery to outsiders and Chinese leaders themselves.
Unlike India, which was born with a democratic constitution, China has not yet found a way to channel the demands for political participation (if not democracy) that tend to accompany rising per capita income.
Communist ideology is long gone, so the legitimacy of the ruling party depends on economic growth and ethnic Han nationalism.
Whether China can develop a formula to manage an expanding urban middle class, regional inequality, and resentment among ethnic minorities remains to be seen.
The basic point is that no one, including the Chinese, knows how China’s political future will affect its economic growth.
Some analysts argue that China aims to challenge America’s position as the world’s dominant power.
Even if this were an accurate assessment of China’s intentions (and even Chinese cannot know the views of future generations), it is doubtful that China will have the military capability to make this possible.
To be sure, Chinese military expenditures, up more than 12% this year, have been growing even more rapidly than its economy.
But China’s leaders will have to contend with other countries’ reactions, as well as with the constraints implied by the need for external markets and resources in order to meet their economic-growth objectives.
A Chinese military posture that is too aggressive could produce a countervailing coalition among its neighbors, thereby weakening China’s hard and soft power.
In 2010, for example, as China became more assertive in its foreign policy toward its neighbors, its relations with India, Japan, and South Korea suffered.
As a result, China will find it more difficult to exclude the US from Asia’s security arrangements.
China’s size and high rate of economic growth will almost certainly increase its relative strength vis-à-vis the US in the coming decades.
This will certainly bring the Chinese closer to the US in terms of power resources, but China will not necessarily surpass the US as the most powerful country.
Even if China suffers no major domestic political setback, many current projections based on GDP growth alone are too one-dimensional: they ignore US military and soft-power advantages, as well as China’s geopolitical disadvantages in the internal Asian balance of power.
Most importantly, the US and China should avoid developing exaggerated fears of each other’s capacities and intentions.
The expectation of conflict can itself become a cause of conflict.
In reality, China and the US do not have deeply rooted conflicting interests.
Both countries, along with others, have much more to gain from cooperation.
Is China Really Immune to the Crisis?
CAMBRIDGE – Addressing the annual World Economic Forum in Davos, Switzerland, Chinese Premier Wen Jiabao explained his government’s plans to counter the global economic meltdown with public spending and loans.
He all but guaranteed that China’s annual growth would remain above 8% in 2009.
Wen’s words were like warm milk to the recession-numbed audience of global political and business leaders.
But does the Chinese government really have the tools needed to keep its economy so resilient?
Perhaps, but it is far from obvious.
America’s deepening recession is slamming China’s export sector, just as it has everywhere else in Asia.
The immediate problem is a credit crunch not so much in China as in the United States and Europe, where many small and medium-size importers cannot get the trade credits they need to buy inventory from abroad.
As a result, some once-booming Chinese coastal areas now look like ghost towns, as tens of thousands of laid-off workers have packed their bags and returned to the countryside.
Similarly, in Beijing’s Korean section, perhaps half of the 200,000-300,000 inhabitants – mainly workers (and their families) who are paid by Korean companies that produce goods in China for export – reportedly have gone home.
With roughly $2 trillion in foreign-exchange reserves, the Chinese do have deep pockets to fund massive increases in government spending, and to help backstop bank loans.
Many leading Chinese researchers are convinced that that the government will do whatever it takes to keep growth above 8%.
But there is a catch.
Even if successful in the short run, the huge shift toward government spending will almost certainly lead to significantly slower growth rates a few years down the road.
Simply put, it is far from clear that marginal infrastructure projects are worth building, given that China is already investing more than 45% of its income, much of it in infrastructure.
True, some of China’s fiscal stimulus effectively consists of loans to the private sector via the highly controlled banking sector.
But is there any reason to believe that new loans will go to worthy projects rather than to politically connected borrowers?
In fact, China’s success so far has come from maintaining a balance between government and private sector expansion.
Sharply raising the government’s already outsized profile in the economy will upset this delicate balance leading to slower growth in the future.
It would be preferable for China to find a way to substitute Chinese for US private consumption demand, but the system seems unable to move quickly in this direction.
If government investment has to be the main vehicle, then it would be far better to build desperately needed schools and hospitals than “bridges to nowhere,” as Japan famously did when it went down a similar path in the 1990’s.
Unfortunately, China’s local officials need to excel in the country’s “growth tournament” to get promoted.
Schools and hospitals simply do not generate the kind of fast tax revenue and GDP growth needed to outperform political rivals.
Even prior to the onset of the global recession, there were strong reasons to doubt the sustainability of China’s growth paradigm.
The environmental degradation is obvious even to casual observers.
And economists have started to calculate that if China were to continue its prodigious growth rate, it would soon occupy far too large a share of the global economy to maintain its recent export trajectory.
So a shift to greater domestic consumption was inevitable anyway.
The global recession has simply brought that problem forward a few years.
Interestingly, the US faces a number of similar challenges.
For years, the US achieved fast growth by deferring attention to a variety of issues, ranging from the environment to infrastructure to health care.
Even absent the financial crisis, addressing the shortcomings in these areas would likely have slowed down US growth.
This is not to say that the US and China are the same.
One of the great challenges ahead is to find a way to bring these two countries’ savings into line, given the vast trade imbalances that many believe planted the seeds of financial crisis.
I was reminded of the challenge recently when a Chinese researcher explained that men in China today feel compelled to save in order to find a bride.
The same week, a former student of mine who lost his lucrative financial-sector job explained that he had no savings because it was so expensive to date in New York!
These social differences have little to do with the yuan-dollar exchange rate, although that matters, too.
One way or the other, the financial crisis is likely to slow medium-term Chinese growth significantly.
But will its leaders succeed in stabilizing the situation in the near term?
I hope so, but I would be more convinced by a plan tilted more toward domestic private consumption, health, and education than to one based on the same growth strategy of the past 30 years.
Is China’s Economy Overheating?
The Chinese economy has been growing at such a breathtaking annual pace – 9.5% in the year ending in the second quarter of 2005 – that it is the toast of the world, an apparent inspiration for developing countries everywhere.
But is China getting too much of a good thing?
Since he became president in 2003, Hu Jintao has repeatedly warned that China’s economy is overheating, and his government has recently acted accordingly, raising interest rates last October, imposing a new tax on home sales in June, and revaluing the Yuan in July.
But claims that China is overheating don’t seem to be based on observations of inflation.
While China’s consumer price index rose 5.3% in the year ending in July 2004, this was due primarily to a spike in food prices; both before and since, inflation has been negligible.
Nor are these claims based on the Chinese stock market, which has generally followed a downward path over the past few years.
Instead, those who argue that the Chinese economy is overheating cite the high rate of investment in plant and equipment and real estate, which reached 43% of GDP in 2004.
On this view, China has been investing too much, building too many factories, importing too many machines, and constructing too many new homes.
But can an emerging economy invest too much?
Doesn’t investment mean improving people’s lives?
The more factories and machines a country has, and the more it replaces older factories and machines with more up-to-date models, the more productive its labor force is.
The more houses it builds, the better the private lives of its citizens.
A number of studies show that economic growth is linked to investment in machines and factories.
In 1992, Bradford DeLong of the University of California at Berkeley and Lawrence Summers, now President of Harvard University, showed in a famous paper that countries with higher investment, especially in equipment, historically have had higher economic growth.
One of their examples showed that Japan’s GDP per worker more than tripled relative to Argentina’s from 1960 to 1985, because Japan, unlike Argentina, invested heavily in new machinery and equipment.
In short, the more equipment and infrastructure a country is installing, the more its people have to work with.
Moreover, the more a country invests in equipment, the more it learns about the latest technology – and it learns about it in a very effective, “hands-on” way.
It would thus appear that there is nothing wrong with China continuing to buy new equipment, build new factories, and construct new roads and bridges as fast as its can.
The faster, the better, so that the billion or so people there who have not yet reached prosperity by world standards can get there within their lifetimes.
And yet any government has to watch that the investment is being made effectively.
In China, the widespread euphoria about the economy is reason for concern.
Some universal human weaknesses can result in irrational behavior during an economic boom.
Simply put, China’s problem is that its economic growth has been so spectacular that it risks firing people’s imaginations a bit too intensely.
At times like these, people can easily imagine that an apartment in Shanghai will be worth some enormous amount in 10 or 20 years, when China is vastly more prosperous than it is today.
And if it will be worth an enormous amount in 10 or 20 years, then it should be worth a lot today, too, since real interest rates – used to discount future values to today’s values – are still low in China.
People are excited, and they are lining up to buy.
To be sure, their reasoning is basically correct. But when the ultimate determinants of values today become so dependent on a distant future that we cannot see clearly, we may not be able to think clearly, either.
Since the true value of long-term assets is so hard to estimate, it is human nature to focus on the rate of increase in their observed prices, and to allow one’s attention to become fixated on these assets just as their value is increasing very fast.
This can lead people to make serious mistakes, paying more for long-term assets than they should, even assuming that the economy will perform spectacularly well in the future.
They can overextend their finances, fall victim to promotions, invest carelessly in the wrong assets, and direct production into regions and activities on the basis of momentary excitement rather than calculation of economic fundamentals.
So, maybe the word “overheated” is misleading.
It might be more accurate to say that public attention is over-focused on some recent price changes, or over-accepting of some high market values.
Whatever one calls it, it is a problem.
Fortunately, people also tend to trust their national leaders.
For this reason, it is all the more important that the leaders not remain silent when a climate of speculation develops.
Silence can be presumed to be tacit acceptance that rapid increases in long-term asset price are warranted.
National leaders must speak out, and they must match their words with concrete actions, to help signal to the public that the speculative bubble cannot be expected to continue.
That is what the Chinese government has begun to do.
The real-estate boom appears to be cooling.
If the government continues to pursue this policy, the salutary effects in terms of public trust in the country’s businesses and institutions will help ensure stable, sustainable economic growth for years to come.
Is China’s Tibet Policy Bad for Business?
When a Chinese government security official recently accused followers of the Dalai Lama of organizing suicide attacks – merely the most extreme of a barrage of allegations against the “Dalai clique” – it was as though the Cultural Revolution were still raging.
Indeed, particularly where Tibet is concerned, the increasingly sophisticated and pragmatic Chinese leadership seems more like a throwback to the Mao era, with its haranguing propaganda and coercive policies.
Do foreign investors have reason to be worried by all this?
While there is arguably a genuine possibility that the recent protests in Tibet will prompt the authorities to change course, early signs are not promising.
So far, the regime has merely applied the same blunt measures that fueled Tibetans’ grievances in the first place.
International pressure alone will not change this.
Domestic pressure could, but any such opportunity has perished on the battlefield of a public-relations war.
On one hand, some international media painted a black-and-white (and not always entirely objective) portrait of the March violence as a brutal Chinese crackdown on peaceful Tibetan monks.
On the other hand, official Chinese media have stoked domestic anger at perceived Western anti-Chinese bias.
With nationalist sentiment aroused, few Chinese are asking why the violence occurred.
Of course, the Tibet issue has been around for decades, generally without posing serious problems for foreign investors.
But the combination of the first serious unrest in Tibet in almost 20 years and the wider groundswell of criticism being directed at China ahead of the Beijing Olympics has sent businesses and investors scrambling to assess what it means for them, particularly in terms of reputational and ethical concerns.
The Tibet-related protests at several Chinese embassies around the world and during the Olympic torch relay merely provide a glimpse of what is likely to follow.
Investors in China must consider their vulnerability to negative publicity, and be confident that they can explain their position.
Some have already been forced to do so, and many could conceivably be targeted in connection with ongoing campaigns to draw international attention to various human-rights issues ahead of the Olympics.
The most vulnerable firms are generally those with the highest public profile, those making the largest or most visible investments, those that are major sponsors of the Games, and those with some specific connection to Chinese government policies in Tibet.
The latter group includes extractive- and construction-related companies operating in partnership with the government of the Tibet Autonomous Region (TAR) itself.
They face the greatest difficulties, both in terms of distancing themselves from government policies and in countering negative investor perceptions about the viability of operations there in the current climate.
Of course, foreign investment in the TAR is a drop in the ocean relative to that in China as a whole.
Activists cannot possibly take aim at all foreign businesses in China, so most firms are unlikely to be specifically targeted or suffer reputational damage.
It seems highly doubtful that the tide of international opinion will turn against China to the extent that investors in general are seriously expected to shun the market.
Nonetheless, where firms or industries are particularly vulnerable to reputational issues, image and ethics could be a significant factor in more marginal business decisions (particularly with rising costs and tougher labor regulations already causing some firms to look elsewhere).
Meanwhile, the most recent twist in the Tibet fallout serves as a striking reminder of how China’s newfound assertiveness and clout on the international scene is creating an increasingly complex challenge for foreign companies.
While Western firms investing in China must face the prospect of protest and criticism back home from pro-Tibet campaigners, some companies are coming under pressure in China itself.
The big French retailer Carrefour has seen protests at its stores all over China by nationalist activists incensed by the protests that took place in Paris when the Olympic torch passed through the city.
In the current climate, many businesses will find it difficult to avoid becoming stuck between a rock and a hard place.
Is China Strong or Weak?
IRVINE, CALIFORNIA – China’s government has been using unusually strong language of late to assert its sovereignty over disputed stretches of international waters near to its shores.
This has led to a ratcheting up of tensions, in particular between China and the United States, with Secretary of State Hillary Clinton stressing that the Obama administration is now ready to step in and help ensure the fair adjudication of disputes relating to the South China Sea.
Chinese spokesmen denounced this as a throwback to the days when America thought it could, and should, try to “contain” the People’s Republic.
One way to interpret China’s elevated rhetoric – and its tough response to joint US-South Korean military maneuvers – is as another indication that Chinese leaders have grown supremely self-confident and are eager to throw their weight around.
The reality, though, is more complex.
A closer look reveals that President Hu Jintao’s words and deeds are often shaped by a mixture of insecurity and cockiness, and that Chinese officials alternate between playing up and playing down the country’s rise.
Of course, there are moments when China’s leaders do seem like people who know that they are succeeding and want others to acknowledge it.
Even before the current diplomatic controversies, China’s leaders were gleefully drawing attention to how much more effective their stimulus package had been than Obama’s in countering the negative effects of the financial crisis.
And yet, when news broke last month that China had officially replaced Japan as the world’s second-largest economy, instead of crowing about surpassing a longtime rival and having the top spot, held by the US, in its sights, the government issued statements emphasizing that theirs remains a “poor, developing” country.
The self-confident side of the leadership’s split personality is often what worries China’s neighbors and the US alike.
Still, it is important to remember that there’s a positive aspect to the Party’s self-confidence.
As political scientist Kevin O’Brien has argued, China’s increased readiness to compromise with some domestic protesters, rather than treat all forms of collective action as subversive, can be seen as reflecting a growing sense of security.
Conversely, some of China’s most disturbing moves can be chalked up to exaggerated feelings of insecurity.
Consider the harsh treatment of the gadfly critic Liu Xiaobao, sentenced to 11 years in prison on trumped-up charges of “subversion” for launching an Internet petition drive championing civil liberties.
Would a truly self-confident ruling elite have been so skittish about his activism?
The confident side of the Chinese leadership’s split personality is easy to understand.
From the late 1980’s until 2000, many observers presented the Party as being on its last legs, certain to succumb to the “Leninist extinction” that began with communism’s collapse in Europe.
But the Party remains in charge today.
Airport bookstores that once displayed Gordon G. Chang’s The Coming Collapse of China now offer Martin Jacques’ When China Rules the World.
Why, then, do China’s rulers continue to backslide into doubt and fear, and why do they seek to avoid having China labeled a superpower?
For starters, downplaying China’s rise has practical benefits.
It helps to be seen as a “poor, developing” country, not as an economic giant, because “developed” nations are expected to do more to combat major global challenges, like climate change.
At the same time, China really is still a “poor” country in terms of per capita income.
And parts of the country are more similar to sections of troubled “developing” countries than to China’s showplace cities.
The Party is in a vulnerable position – and knows it.
That is no excuse for paranoia and repression, but just because the Party has outlasted predictions of its demise does not mean that it has no Achilles heel.
Most notably, the anger over corruption and nepotism that fueled the Tiananmen protests has never gone away.
China’s leaders thus continue to depend on a form of nationalism structured around tales of victimhood.
They now base their legitimacy on the notion that the Party, which rose to power as the nation fought foreign domination, is uniquely qualified to keep China from being bullied in a hostile international arena, and that only they can provide the stable environment needed for growth.
The Chinese leadership’s split personality explains a curious phenomenon that former US State Department adviser Susan Shirk noted in her book China: Fragile Superpower.
Shirk’s title still captures a significant phenomenon that bedevils diplomatic affairs.
Outsiders are increasingly convinced that China is a superpower, and that it needs to show that it can be a responsible one.
But China’s rulers only sometimes embrace the designation – and the Party still sometimes behaves as if it had only a tenuous hold on power.
Is Chinese Mercantilism Good or Bad for Poor Countries?
CAMBRIDGE – China’s trade balance is on course for another bumper surplus this year.&#160;
Meanwhile, concern about the health of the US recovery continues to mount.
Both developments suggest that China will be under renewed pressure to nudge its currency sharply upward.
The conflict with the US may well come to a head during Congressional hearings on the renminbi to be held in September, where many voices will urge the Obama administration to threaten punitive measures if China does not act.
Discussion of China’s currency focuses around the need to shrink the country’s trade surplus and correct global macroeconomic imbalances.
With a less competitive currency, many analysts hope, China will export less and import more, making a positive contribution to the recovery of the US and other economies.
In all this discussion, the renminbi is viewed largely as a US-China issue, and the interests of poor countries get scarcely a hearing, even in multilateral fora.
Yet a noticeable rise in the renminbi’s value may have significant implications for developing countries.
Whether they stand to gain or lose from a renminbi revaluation, however, is hotly contested.
On one side stands Arvind Subramanian, from the Peterson Institute and the Center for Global Development.
He argues that developing countries have suffered greatly from China’s policy of undervaluing its currency, which has made it more difficult for them to compete with Chinese goods in world markets, retarded their industrialization, and set back their growth.
If the renminbi were to gain in value, poor countries’ exports would become more competitive, and their economies would become better positioned to reap the benefits of globalization.
Hence, Subramanian argues, poor countries must make common cause with the US and other advanced economies in pressuring China to alter its currency policies.
On the other side stand Helmut Reisen and his colleagues at the OECD’s Development Centre, who conclude that developing countries, and especially the poorest among them, would be hurt if the renminbi were to rise sharply.
Their reasoning is that currency appreciation would almost certainly slow China’s growth, and that anything does that must be bad news for other poor countries as well.
They buttress their argument with empirical work that suggests that growth in developing countries has become progressively more dependent on China’s economic performance.
They estimate that a slowdown of one percentage point in China’s annual growth rate would reduce low-income countries growth rates by 0.3 percentage points – almost a third as much.
To make sense of these two contrasting perspectives, we need to step back and consider the fundamental drivers of growth.
Strip away the technicalities, and the debate boils down to one fundamental question: what is the best, most sustainable growth model for low-income countries?
Historically, poor regions of the world have often relied on what is called a “vent-for-surplus” model.
This model entails exporting to other parts of the world primary products and natural resources such as agricultural produce or minerals.
This is how Argentina grew rich in the nineteenth century, and how oil states have become wealthy during the last 40 years.
The rapid growth that many developing countries experienced prior to the crisis was largely the result of the same model.&#160;
Countries in Sub-Saharan Africa, in particular, were propelled forward by the growing demand for their natural resources from other countries – China chief among them.&#160;
But this model suffers from two fatal weaknesses.
First, it depends heavily on rapid growth in foreign demand.
When such demand falters, developing countries find themselves with collapsing export prices, and, too often, a protracted domestic crisis.
Second, it does not stimulate economic diversification.
Economies hooked on this model find themselves excessively specialized in primary products that promise little productivity growth.
Indeed, the central challenge of economic development is not foreign demand, but domestic structural change.
The problem for poor countries is that they are not producing the right kinds of goods.
They need to restructure away from traditional primary products to higher-productivity activities, mainly manufactures and modern services.
The real exchange rate is of paramount importance here, as it determines the competitiveness and profitability of modern tradable activities.
When developing nations are forced into overvalued currencies, entrepreneurship and investment in those activities are depressed.&#160;
From this perspective, China’s currency policies not only undercut the competitiveness of African and other poor regions’ industries; they also undermine those regions’ fundamental growth engines.
What poor nations get out of Chinese mercantilism is, at best, temporary growth of the wrong kind.
Lest we blame China too much, though, we should remember that there is little that prevents developing countries from replicating the essentials of the Chinese model.
They, too, could have used their exchange rates more actively in order to stimulate industrialization and growth.
True, all countries in the world cannot simultaneously undervalue their currencies.
But poor nations could have shifted the “burden” onto rich countries, where, economic logic suggests, it ought to be placed.
Instead, too many developing countries have allowed their currencies to become overvalued, relying on booming commodity demand or financial inflows.
And they have made little systematic use of explicit industrial policies that could act as a substitute for undervaluation.
Given this, perhaps we should not hold China responsible for taking care of its own economic interests, even if it has aggravated in the process the costs of other countries’ misguided currency policies.
Is Cold War II Underway?
TOKYO – President Hu Jintao’s visit to Washington is coming at an increasingly tense moment in Sino/American relations.
Indeed, mesmerized by China’s vast military buildup, a new constellation of strategic partnerships among its neighbors, and America’s revitalized commitment to Asian security, many shrewd observers suggest that 2010 saw the first sparks of a new Cold War in Asia. But is “Cold War II” really inevitable?
Although appeasing China’s drive for hegemony in Asia is unthinkable, every realistic effort must be made to avoid militarization of the region’s diplomacy.
After all, there was nothing very cold about the Cold War in Asia.
First in the Chinese civil war, and then in Korea, Indonesia, Malaysia, and Indochina – particularly Vietnam – the Cold War raged not as an ideological/propaganda battle between rival superpowers, but in dogged, often fratricidal combat that cost millions of lives and retarded economic development and political democratization.
It is this grim history that makes China’s current disregard for Deng Xiaoping’s maxim that China “disguise its ambition and hide its claws” so worrying for Asian leaders from New Delhi to Seoul and from Tokyo to Jakarta.
From its refusal to condemn North Korea’s unprovoked sinking of the South Korean warship Cheonan and shelling of South Korean islands, to its claims of sovereignty over various Japanese, Vietnamese, Malay, and Filipino archipelagos and newly conjured claims on India’s province of Arunachal Pradesh, China has revealed a neo-imperial swagger.
So it should surprise no one that “containment” is coming to dominate Asian diplomatic discourse.
But it is wrong – at least for now – to think that a formal structure of alliances to contain China is needed in the way that one was required to contain the Soviet Union.
Containment, it should be recalled, was organized against a Soviet totalitarian regime that was not only ideologically aggressive and in the process of consolidating its colonization of Eastern Europe (as well as Japan’s Northern Territories), but also deliberately sealed off from the wider world economy.
Today’s China is vastly different.
Overt military imperialism of the Soviet sort has, at least historically, rarely been the Chinese way.
Sun Tzu, the great Chinese theorist of warfare, focused on the weakening of an adversary psychologically, not in battle.
Until recently, much of China’s bid for regional hegemony reflected Sun’s concepts.
More importantly, China abandoned economic autarky three decades ago. Today, its economic links in Asia are deep, and – it is to be hoped – permanent.
China’s export machine sucks in vast quantities of parts and components for final assembly from across Asia – Thailand, Malaysia, the Philippines, and Indonesia, as well as richer Singapore, Taiwan, South Korea, and Japan.
Membership of the World Trade Organization has helped to bind China to highly sophisticated pan-Asian production networks.
Everybody has benefited from these ties.
Throughout China’s three-decade rise from poverty to economic juggernaut, trade within East Asia has grown even faster than the region’s trade with the rest of the world, suggesting deeper specialization and integration.
Indeed, China’s rise has profoundly altered the course of Asia’s trade flows.
Japan no longer focuses on exporting finished goods to Europe and North America, but on exporting parts and components for assembly in China.
In turn, Japan now imports from China finished goods (such as office machines and computers) that once came from America and Europe.
Given that as many as half of China’s 1.3 billion people remain mired in abject poverty, it is in China’s interest to ensure that these economic relationships continue to flourish.
In the past, China has recognized the vital need for good neighborly relations.
During the Asian financial crisis of 1997-1998, Chinese officials did not engage in competitive devaluation of the renminbi.
Unfortunately, such clear-sighted and responsible policymaking is a far cry from what we are seeing today.
China’s dizzying increase in its military capacity is another obvious source of concern in Asia.
But, even according to the highest estimates, China’s military budget is only now about equal to that of Japan and, of course, much less than the combined military budgets of Japan, India, and Russia, all of which border China – not to mention Indonesia, South Korea, and a militarily modernizing Taiwan.
Moreover, Russia and India possess nuclear weapons, and Japan has the technological wherewithal to reconfigure its defense posture to meet any regional nuclear threat.
So the challenge that China poses today remains predominantly political and economic, not military.
The test of China’s intentions is whether its growing economic and, yes, military capacities will be used to seek to establish Asian hegemony by working to exclude America from the region and preventing regional partnerships from flourishing.
The alternative is a China that becomes part of a cooperative effort to bind Asia in a rules-based system similar to that which has underpinned long-term peace in Europe.
In this sense, Asia’s rise is also a test of US competitiveness and commitment in Asia.
America’s historical opposition to hegemony in Asia – included as a joint aim with China in the Shanghai Communiqué of 1972 – remains valid.
It will have to be pursued, however, primarily by political and economic means, albeit backed by US power.
Before 2010, most Asian countries would have preferred not to choose between China and the US.
But China’s assertiveness has provided enormous incentives to embrace an Asian multilateral system backed by America, rather than accept the exclusionary system that China seeks to lead.
In 2011 we may begin to see whether those incentives lead China’s rulers to re-appraise their diplomatic conduct, which has left them with only the corrupt, basket case economies of Burma and North Korea as reliable friends in Asia.
Is Democracy Possible in the Arab World?
With Iraq rapidly descending into bloody chaos, the prospects for holding successful democratic elections in January, as the US and the Iraqi interim government have promised, look bleak.
Some skeptics go further, arguing that the Iraq debacle proves that prospects for democracy throughout the Arab world are dim.
Are they right?
Half the world's countries are democracies, yet none of the 22 Arab countries is among them.
The United Nations' Arab Human Development Report is frank in its criticism of the region's economic and social progress.
Economic growth has been slow, approximately half of women are illiterate, and the region is not well integrated into the world economy.
Indeed, with a population of more than 300 million, Arab countries export less to the world, excluding oil and gas, than Finland.
An enormous "youth bulge" in the Arab world's demographic tables looms, with 45% of the population now under the age of 14, and the population as a whole set to double over the next quarter-century.
Yet the region has inadequate opportunities for young people to find meaningful work.
Unemployment hovers at 20%.
At the same time, the Middle East is awash with modern communications, much of it with an anti-Western slant.
During the Cold War, America's approach to the Middle East was to foster stability in order to prevent the spread of Soviet influence, ensure the supply of oil, and provide security for Israel.
The American strategy was management through autocratic leaders, and a "don't rock the boat" approach.
After the terrorist attacks of September 11, 2001, the Bush administration launched an ambitious new policy to encourage a democratic transformation of the Middle East.
Saddam Hussein's removal was intended as only the first step.
In August 2003, US National Security Advisor Condoleeza Rice argued that "much as a democratic Germany became a linchpin of a new Europe that is today whole, free, and at peace, so a transformed Iraq can become a key element in a very different Middle East in which the ideologies of hate will not flourish."
Germany and Japan were, indeed, postwar success stories.
But both were relatively homogeneous societies with significant middle classes and no organized resistance to American occupation.
Yet both transitions still took nearly a decade.
Moreover, Iraq's possession of oil is a mixed blessing, because few oil-based economies have proven hospitable to liberal democracy.
Moreover, cultural differences between the US and Germany were not as great as those between the US and the Middle East.
Of course, cultural barriers are not insurmountable: democracy has taken root in Japan, South Korea, and in other Muslim countries, such as Turkey, Indonesia, and Bangladesh.
But the time horizons required for a fundamental makeover are measured in decades, not years.
Democracy is, after all, more than mere voting.
Since the Middle East's autocratic regimes destroyed their liberal oppositions, in many countries radical Islamists represent the only dissent, feeding on widespread resentment of corrupt regimes, opposition to American policies, and popular fears of modernization and globalization.
At the same time, the global economy and modernization can also promise better education, more jobs and opportunities, and improved health care, and opinion polls indicate that a majority of the region's population desires these benefits.
Given ambivalence among Arab moderates, there remains a chance to isolate the extremists and gradually build stable polities with broader participation.
To achieve this will require policies that open up economies, reduce bureaucratic controls, speed economic growth, improve educational systems, and encourage the types of gradual political changes now seen in small countries like Bahrain, Oman, Jordan, Kuwait, and Morocco.
Japan and Korea demonstrated that democracy could be combined with indigenous values in Asia.
The Arab world, too, can develop intellectuals, social groups, and eventually countries with liberal economies and societies that are consistent with local cultures.
But this will take time and patience - and it will need to be accompanied by policy changes on Iraq, Palestine-Israel, and the regional economy.
Equally important will be whether Western countries cooperate to create a long-term strategy of cultural and educational exchanges that can help develop a richer and more open civil society in Middle Eastern countries.
The most effective advocates for democratic change are not American or European officials, but citizens of the region who understand Western virtues as well as flaws - and can adapt them to indigenous conditions to press for social change.
Corporations, foundations, universities, and other non-profit organizations can promote much of this work.
Companies and foundations can offer technology to help modernize Arab educational systems and take them beyond rote learning.
Western universities can host more students and faculty.
Other organizations can support specific institutions in Arab countries, or programs that enhance the professionalism of journalists.
But governments also have an important role to play.
By supporting the teaching of foreign languages and financing student exchanges, they can help people in the region accomplish their own goals as spelled out in the Arab Human Development Report .
There are many strands to an effective long-term strategy to promote conditions for stability and broader political participation in the Arab world. This is America's declared goal.
But getting there requires American policies that are consistent with the comprehensive approach that democratic transformation requires.
Is Dialogue with Iran and Syria Worth It?
Despite frequent claims to the contrary, the fundamental problem in the Middle East is not intervention by the West.
On the contrary, the real problem is that, for all their dabbling, the Western powers seem capable of neither war nor dialogue.
This leaves everyone in the region at the mercy of the Middle East’s oppressive regimes and proliferating terrorists.
Advocates of the Iraq war lacked an understanding of the complexities on the ground to wage an effective war of liberation and democratization.
As a result, their policies merely ended up eliminating Iran’s two major regional rivals: the Taliban and Saddam Hussein’s regime.
This presented Iran with a golden opportunity to project itself as a regional hegemon, and Iran’s leaders are unlikely to let this opportunity slip away.
Advocates of dialogue with the Iranians and their Syrian allies, like former United States Secretary of State James Baker, labor under the delusion that they can actually reach an understanding that can enable a graceful US exit from Iraq and help stabilize that wounded country.
The delusion is based on two false assumptions: that the Iranians and the Syrians can succeed in Iraq where the US has failed, and that the international community can afford to pay the price of ensuring their cooperation.
True, Syria and Iran are playing a major role in supporting Iraqi insurgents, and Syria is still encouraging the trafficking of jihadists and weapons across its borders with Iraq.
But the idea that these activities can be halted at will is naïve.
For one thing, the interests of the Shia communities in Iraq and Iran are not the same.
Iraqi Shia have never accepted Iranian dictates, and many took part in Saddam’s war against Iran in the 1980’s.
After all, the Iraqi Shia are Arabs, and if they are now willing to coordinate their activities with their Persian counterparts, their main goal will always be to secure an independent course as soon as possible, even while they carry on with their internecine disputes within Iraq.
Iran is in no better position than the US to convince them to resolve their differences.
President Basher al-Assad of Syria faces a similar dilemma.
Although he has opened Syria’s border to jihadists and has allowed Saddam’s supporters to operate freely there, that choice may not be entirely his.
Syria’s aid to Saddam in maneuvering around the United Nations’ oil-for food program brought Iraqi money to inhabitants of the border region, who have always been closer in customs, dialect, and outlook to their Iraqi neighbors than to their fellow Syrians.
In the absence of government investment, local inhabitants’ loyalty went to Iraqi Baathists who helped improve their lot.
Indeed, even local security apparatuses have been unwilling to comply with dictates from Assad and his clique to seal the borders.
In these cirumstances, neither Syria nor Iran seems capable of delivering anything but mayhem in Iraq.
What, then, would the proposed dialogue between the US and these states achieve other than continue to empower their corrupt yet ambitious regimes?
The story gets more complicated when one considers the UN inquiry into the assassination of former Lebanese Prime Minister Rafiq al-Hariri.
Assad wants nothing more than to see this affair forgotten – and the proponents of dialogue think that they can give him what he wants in the hope of breaking Syria’s alliance with Iran.
But that is merely another erroneous (not to mention amoral) assumption.
The alliance between Syria and Iran dates back more than two decades, and was explicitly reaffirmed by the two ruling regimes as recently as January 2005.
Indeed, the two regimes are now joined at the hip.
Assad’s recent refusal to attend a summit in Tehran with his Iranian and Iraqi counterparts was a mere tactical move designed to appeal to the proponents of dialogue.
In fact, Iran has invested hundreds of millions of dollars in Syria, and annual bilateral trade tops a billion dollars.
Irani’s growing influence over the Syrian security apparatus is well established, and Iran is funding an effort to create Syrian Shia militias to compensate for Assad’s sagging support in the army and in the minority Alawite community.
Assad cannot turn his back on all of this.
No deal would be sweet enough, even if it included the return of the Golan Heights.
For Assad and his supporters, survival is more important than sovereignty.
Still, to read the well-known names of commentators and policymakers who are recommending engaging Syria and/or Iran is a testament to how inconsequential and cut off the Western powers have become from the realities on the ground in the world’s most turbulent region.
That, it seems, is the price of their arrogance.
Is Doping Wrong?
There is now a regular season for discussing drugs in sports, one that arrives every year with the Tour de France.
This year, the overall leader, two other riders, and two teams were expelled or withdrew from the race as a result of failing, or missing, drug tests.
The eventual winner, Alberto Contador, is himself alleged to have had a positive test result last year.
So many leading cyclists have tested positive for drugs, or have admitted, from the safety of retirement, that they used them, that one can plausibly doubt that it is possible to be competitive in this event otherwise.
In the United States, the debate has been fueled by the baseball player Barry Bonds’ march towards the all-time record for home runs in a career.
Bonds is widely believed to have been helped by drugs and synthetic hormones.
He is frequently booed and mocked by fans, and many thought that baseball’s commissioner, Bud Selig, should not attend games at which Bonds might tie or break the record.
At the elite level, the difference between being a champion and an also-ran is so miniscule, and yet matters so much, that athletes are pressured to do whatever they can to gain the slightest edge over their competitors.
It is reasonable to suspect that gold medals now go not to those who are drug-free, but to those who most successfully refine their drug use for maximum enhancement without detection.
As events like the Tour de France turn farcical, bioethics professor Julian Savulescu has offered a radical solution.
Savulescu, who directs the Uehiro Centre for Practical Ethics at Oxford University and holds degrees in both medicine and bioethics, says that we should drop the ban on performance-enhancing drugs, and allow athletes to take whatever they want, as long as it is safe for them to do so.
Savulescu proposes that instead of trying to detect whether an athlete has taken drugs, we should focus on measurable indications of whether an athlete is risking his or her health.
So, if an athlete has a dangerously high level of red blood cells as a result of taking erythropoietin (EPO), he or she should not be allowed to compete.
The issue is the red blood cell count, not the means used to elevate it.
To those who say that this will give drug users an unfair advantage, Savulescu replies that now, without drugs, those with the best genes have an unfair advantage.
They must still train, of course, but if their genes produce more EPO than ours, they are going to beat us in the Tour de France, no matter how hard we train.
Unless, that is, we take EPO to make up for our genetic deficiency.
Setting a maximum level of red blood cells actually levels the playing field by reducing the impact of the genetic lottery.
Effort then becomes more important than having the right genes.
Some argue that taking drugs is “against the spirit of sport.”
But it is difficult to defend the current line between what athletes can and cannot do in order to enhance their performance.
In the Tour de France, cyclists can even use overnight intravenous nutrition and hydration to restore their bodies.
Training at high altitude is permitted, though it gives those athletes who can do it an edge over competitors who must train at sea level.
The World Anti-Doping Code no longer prohibits caffeine.
In any case, performance-enhancement is, Savulescu says, the very spirit of sport.
We should allow athletes to pursue it by any safe means.
Moreover, I would argue that sport has no single “spirit.”
People play sports to socialize, for exercise, to keep fit, to earn money, to become famous, to prevent boredom, to find love, and for the sheer fun of it.
They may strive to improve their performance, but often they do so for its own sake, for the sense of achievement.
Popular participation in sport should be encouraged.
Physical exercise makes people not only healthier, but also happier.
To take drugs will usually be self-defeating.
I swim for exercise, and I time myself over a set distance to give myself a goal and encourage myself to work harder.
I am pleased when I swim fast, but I would get no sense of achievement from improving my time if the improvement came out of a bottle.
But elite sport, watched by millions but participated in by few, is different.
For the sake of fame and glory now, athletes will be tempted to risk their long-term health.
So, while Savulescu’s bold suggestion may reduce drug use, it will not end it.
The problem is not with the athletes, but with us.
We cheer them on.
We acclaim them when they win.
And no matter how blatant the drug use may be, we don’t stop watching the Tour de France.
Maybe we should just turn off the television and get on our own bikes.
Is Eradicating Polio a Good Idea?
PHILADELPHIA – Polio broke out in Central Asia this year, with 560 cases reported in Tajikistan. Cases have also been diagnosed in Russia and Uzbekistan, apparently transmitted by infected but asymptomatic people traveling from Tajikistan.
The Tajikistan outbreak is especially troubling, because the country had been certified by the World Health Organization as polio-free.
Indeed, the drive to eradicate polio, as the Tajikistan tragedy shows, may be putting the entire world at risk.
It makes no sense to talk about eradicating diseases like polio if a small outbreak in a remote part of the globe can rapidly spread and imperil billions.
That scenario is not merely hypothetical.
The Western Hemisphere was certified as polio-free 20 years ago, but there were cases in Haiti and the Dominican Republic as recently as 2000.
Four cases were reported in an Amish community in Minnesota in 2005, and many others have been reported in recent years in Angola, Nigeria, Uganda, Kenya, Benin, India, Nigeria, Somalia, Pakistan, Sudan, and elsewhere.
For many in the field of public health, the greatest triumph achieved by medicine in this century was the eradication of smallpox.
This astounding accomplishment has played a key role in leading various national and international governments and organizations, including the WHO, Rotary International, and the Gates Foundation, to mount efforts to eradicate many other infectious diseases, such as measles, malaria, and polio.
Eradicating diseases that have killed or disabled untold numbers of people is a goal that is easy to understand and support.
As WHO Director Margaret Chan told an audience of Rotarians at the group’s international convention last year, “The international community has so very few opportunities to improve this world in genuine and lasting ways.
Polio eradication is one.” Moreover, talk of disease “eradication” is unparalleled as a means to command funding, engage the attention of politicians, and garner positive media coverage.
But there are reasons to wonder whether continued efforts at polio eradication – as opposed to aggressive and effective disease management and control – is the right course to follow.
If polio eradication is the goal for current public-heath campaigns, it is important to recognize exactly what target is being set.
Talk of eradication means permanent relief from a disease, and thus permission to let down our guard against it.
But the consequences of replacing vigilance with indifference regarding polio are too risky in today’s world.
For starters, the surveillance required to establish eradication is a huge challenge.
Political instability, wars and civil breakdown, and balky governments sometimes make access nearly impossible in some parts of the world.
Moreover, it is not clear that all polio cases can be detected, because some infected people do not show symptoms.
And the challenge of ensuring adequate surveillance appears insurmountable when one considers that polio can suddenly reappear out of the blue in a so-called wild-type form.
Chasing down the last cases of polio is very costly.
Fragile health-care infrastructure and community support are being strained by the eradication effort, as government budgets and resources in poor countries are diverted from more pressing local problems.
In other parts of the world, the emergence of respect for a patient’s right to refuse vaccines creates a difficult challenge for those seeking to eradicate diseases such as polio.
Vaccination rates in many parts of the United States have fallen well below 90% for polio, meaning that the risk of an outbreak is very high should a case be introduced.
And, in an age of mass air travel, a case in Tajikistan can be in Utah in a day.
Finally, there is the ever-present possibility of bioterrorism.
For this reason alone, no trust should be placed in claims of eradication of diseases like polio.
Of course, the eradication of polio is a noble goal.
But it is not the right one.
The best that can be done is to seek to control polio, and to hope that politics, economics, and ethics allow us to get that far. &#160;Those involved in efforts aimed at complete eradication should rethink their goal, lest faith in the unattainable leads to disaster.
Is “Eurabia” Inevitable?
What is it that makes young Muslims in the West susceptible to radicalism?
What is it about the experience of the West’s rising generation of Muslims that leads a small minority to see violence as a solution to their economic and political dilemmas, and suicide as their reward and salvation?
Britain, which will soon mark the anniversary of last year’s bombings in London, provides a test case for seeking answers to these questions.
For young British Muslims, our globalized world challenges key beliefs, destabilizing their identity and thus encouraging a defensive response.
British citizenship, of course, guarantees freedom of expression and minority rights, and young Muslims take full advantage of this.
Yet they are using this freedom to deepen family and cultural ties to the closed world of their inherited Muslim identity, particularly its politics.
In practice, this means that many young Muslims are utterly preoccupied with events in the Arab and Muslim world.
They see what we see: a region where autocratic countries seem corrupt and paralyzed.
But they also see an unprecedented level of hostility from the West, with regime after regime seeming to be either in peril or facing chaos.
Afghanistan, Iraq, Palestine, and now Iran: all seem to be under attack as part of the “global war on terror.”
As a result, the West’s strategic choices appear inherently anti-Islamic to countless of its young Muslims.
This preoccupation with the Middle East is at the heart of young Muslims’ politics in British universities, mosques, and websites.
Although most do not support Pakistan’s Pervez Musharraf, Egypt’s Hosni Mubarak, or the al-Saud family, they see hypocrisy in Western criticism of these leaders that is designed to manipulate and marginalize – after all, the West does not really want to push these regimes too far.
Access to the Internet, satellite television, and travel is drawing these young Muslims into a community that shares their vision and their rage.
So technology is heightening the tensions that exist between the mechanics of a modern free society and the sense of a vast conspiracy against Muslims.
This has led to a schism between the hopes young Muslims have for successful lives in the West and their aspirations for their Muslim brothers and sisters, who have suffered so many terrible disappointments.
As young Muslims in Britain (and across the West) try to maneuver between the various, and often conflicting, aspects of their identity, three clear tendencies have emerged.
A secular and pragmatic response, which makes Islam a private matter; A conservative stance that reconciles cultural, religious, and familial ties with ‘Britishness’;
A radical response to the perceived collision between the foreign policies of their new homelands and the welfare of the Islamic world.
Messianic waves from the Middle East, reaching both schools and mosques, help draw young Muslims into radicalism. One such wave is created by the hardline Saudi/Wahhabi education system, which is based on the concept of al-wala’ wa al bara’ , loyalty to the system and hostility to the infidels.
This curriculum, exported Westward by fat Saudi subsidies, is heavily punctuated with denunciations of the infidels and calls to jihad.
Designed to secure the legitimacy of the Saudi monarchy at home, it is indoctrinating young Western Muslims with values antithetical to open and free societies.
Britain’s government is beginning to recognize the danger, and is trying to clamp down on schools and mosques that spread hate.
Unfortunately, such repression has been merely reactive and shortsighted, with no clear long-term vision about the nature of Islamic education in the West.
Thus, it merely feeds young Muslims’ fears that they are being singled out for persecution.
One difficulty with the British government’s response is that it classifies all Muslims as just that: Muslim.
By defining people on the basis of their religion, nuances – of national identity or of the degree of orthodoxy – are lost.
This plays into the hands of radicals, because it makes Islam the central element of identity.
This process, indeed, is echoed in the 22 Arab countries, where religious orthodoxy rules out any significant liberal political opposition.
In such circumstances, the Mosque becomes the sole public space in which people can voice political views.
Politicization of the mosque has, sadly, also become the norm in Britain.
Islamic radicalization and terror need not continue to flourish in the West.
Regardless of their disappointments with the Western countries’ foreign policy, young Muslims have been exposed to their undeniable democratic spirit.
They may now seek a deeper connection to their Muslim identity, but, having learned to question authority, they are unlikely to accept rigid parental or Islamic traditions.
Like other young people around them, they want to be the agents of their own destiny.
This desire is changing Islam, especially in the West.
The basic texts remain the same, but their interpretation, and the application of religion in people’s lives, has not.
Young Muslims, particularly in the West, are setting an example that is slowly being echoed in the Middle East, despite massive state repression.
The task for Western policymakers is to recognize the interconnection of foreign and domestic policies.
They must become serious about backing legitimate democratic representation in Muslim countries, for only then will Western policy seem less hypocritical.
They must also ensure that career choices are as open to their Muslim citizens as they are to everyone else.
In short, young Muslims in the West need to believe that democratic principles are respected abroad and applied equally at home.
Only when such a belief becomes general will despair stop fueling terrorism, and suicide bombing come to be viewed as an obscene calling.
Is Europe’s Financial Crisis Over?
LONDON – The European Central Bank’s recently announced policy of bond buying, what it calls “outright monetary transactions” (OMTs) marks a convergence of European central banks with their Anglo-Saxon counterparts.
While the ECB’s actions represent the best chance yet to put an end to a crisis that has been playing out since 2010, the Bank has markedly raised the stakes for governments.
The ECB’s policy framework is well suited to fighting systemic blazes, but poorly suited to local fires, which thus can spread uncontrollably.
The OMT program, which allows the ECB to buy sovereign bonds of countries that have agreed to reform their economies, significantly levels the playing field between the Bank and its advanced-economy peers.
Spain has the same fiscal and structural problems that it had prior to the OMT program’s launch, but now it has an external lender of last resort.
That is a game-changer.
Under the pre-OMT regime, a capital outflow from Spain, whether through the sale of government bonds or the liquidation of private claims, resulted in tighter monetary conditions.
The sale of sovereign bonds under the fixed exchange-rate regime put direct upward pressure on their yields, while sales of private securities by foreigners had a similar effect, but through indirect channels.
Monetary tightening was forestalled only to the extent that another source of foreign capital (either private or ECB) could replace the outflow.
The point at which credit risk becomes exchange-rate/redenomination risk is ambiguous.
But the metamorphosis tends to go hand in hand with localized monetary contractions that exacerbate the correlated risk of sovereign default and bank failures.
In Spain, as in Greece before it, the monetary squeeze has become chronic as banks run short of ECB-eligible collateral.
Under the OMT program, the ECB can replace foreign outflows from sovereign-bond markets through direct purchases, putting Spain on par with non-eurozone countries like the United Kingdom.
And, to the extent that there is even an informal price target associated with the ECB’s commitment to purchase bonds, foreign outflows, at least from the sovereign-bond market, are automatically replaced, in full, with ECB cash.
Without the ECB’s willingness to buy a potentially unlimited volume of sovereign bonds to achieve its very imprecise objective of mitigating redenomination risk, the eurozone would have been doomed to recurring episodes of internal funding stress.
The OMT program breaks the volatile liquidity cycle that stems from chronic shortages of bank collateral and a limited fiscal transfer mechanism.
More broadly, the ECB’s marginal lending facility is an indirect means of monetizing sovereign debt.
It is an even less direct way to address the private, related-debt overhang.
But it works.
That said, much can still go wrong.
The ECB has bought time, but it has also raised the stakes.
The credibility of its pledge depends as much on what it will do (buy unlimited quantities of government bonds) as on what it will not do (buy them from countries that do not fulfill conditionality).
Without a credible threat to cut off wayward sovereigns, the ECB’s pledge provides a free lunch to investors and governments alike.
The problem is that following through on that threat would severely test the ECB’s commitment to do whatever it takes.
After all, if markets truly believed that the ECB would refuse to backstop errant governments, investors would run away from participating countries at the first sign that conditionality was not being met.
As with its predecessor, the Securities Markets Program, the OMT program is legally and democratically questionable: it violates the spirit, but not the letter, of the European Union treaty’s no-bailout clause; its promise of equal treatment with private creditors still has no precedent; and it involves back-door fiscal transfers, leaving the ECB heavily exposed to political backlash – witness the visceral reaction of the German press to ECB President Mario Draghi’s announcement.
But OMTs also fit well with a large body of historical evidence that, in times of crisis, policymakers must focus on extinguishing the fire, rather than negotiating over who owns the water and what its cost should be.
The OMT program will cause credit conditions to ease, but without necessarily reversing the financial balkanization of the eurozone that has occurred over the last three years.
Reversal of that process will likely not occur until the three key elements of banking union – common supervision, common deposit insurance, and a common resolution fund – are within tangible reach.
Indeed, if Spanish savers become truly afraid of redenomination risk in the interim, the OMT will not matter: they will just take their cash and deposit it as quickly as possible in, say, a German bank.
The eurozone is still prone to bad equilibria as long as growth on its periphery remains weak.
Even with OMTs, there remain crucial differences between the eurozone and the Anglo-Saxon economies.
Fixed exchange rates within the eurozone impose a constraint that simply does not exist in the UK or the United States, and quantitative easing by the Bank of England and the Federal Reserve is unconditional in nature.
With OMTs, the ECB has converged toward the Fed in its ability to backstop each of its individual parts.
Whether that hastens or hinders political progress toward fiscal and banking federalism is the next big question.
In the interim, OMTs enable financial markets to start breathing again.
The acute crisis is over, at least for now.
But the existential challenge – political agreement on the key elements of banking and fiscal union – is only just beginning.
Unless it is met, the eurozone’s financial disintegration will eventually resume.
Is Europe’s Housing Market Next?
A bubble in the American housing market – fueled in part by so-called “sub-prime” mortgages – was the catalyst for today’s financial market turbulence.
But the bubble was not confined to the United States.
In Europe, house prices have also increased sharply over the last decade – more dramatically than in the US in many cases.
The same is true of other OECD countries and emerging markets, where rapidly increasing incomes have put pressure on asset prices.
Indeed, with a few exceptions (essentially Germany and Japan), housing prices have risen almost everywhere to levels never seen before.
How could such a global pattern emerge when real estate is the most local of all assets?
Recent research suggests that the global housing boom was closely linked to the unprecedented increase in the supply of liquidity by major central banks.
To be sure, financial innovation, like lending to buyers who would not normally have qualified for mortgage loans (sub-prime borrowers) also played a role.
But sub-prime mortgages would probably not have been supplied on the same scale if central banks had not created an environment of ample liquidity and persistently low interest rates.
The sub-prime crisis has so far affected mainly financial markets in the US and Europe.
This is not surprising if one considers that on both sides of the Atlantic prices have reached historical peaks and, until recently, had accelerated.&#160;
This is no mere coincidence.
There has always been a correlation between American and European house prices.
Over the last three decades, prices in the US and Europe have tended to follow three slow-moving, related boom-bust cycles.
All previous peaks were followed by several years of declining prices (in real terms).
There is no reason to assume that this cycle will be any different.
Since last year, prices have declined in the US.
Because data for the euro area will become available only much later, it is not yet possible to determine whether prices have already turned on the Continent as well.
But if the past pattern holds, house prices should start to fall very soon in (continental) Europe as well.
In both the US and Europe it seems that prices went 20-30% above their longer-term average values.
Such a large overshooting is likely to be followed by some undershooting.
This would imply that prices will probably have to fall at least by 20-30 %, but possibly considerably more before they find a bottom.
European policy makers thus have cause for concern.
While there is little evidence in the euro area of large-scale sub-prime lending, there is considerable evidence to suggest that house prices have an important impact on domestic demand, albeit with wide variations among individual countries. &#160;
Almost everywhere, higher house prices have been associated with strong consumption.
Lower house prices throughout Europe are thus likely to be accompanied by weaker consumption demand, as in the US.
In Germany, for example, house prices have remained relatively low and consumption weak.
The impact of house prices on construction activity has been more varied.
In Spain and Ireland, construction investment has increased to a level (18-20% of GDP) far above that of the US and not seen in any other OECD country except Japan before its bubble burst in 1989.
In these two countries, lower housing prices are likely to be associated with a sharp and prolonged drop in domestic demand, which should be stronger even than what can be expected in the US.
By contrast, in France and Italy, where house prices have increased almost as much as in the US, there is no evidence of a housing overhang.
The negative impact of a downturn in housing prices in these two countries should thus be limited to a drop in consumption.
Germany should be affected the least, because both house prices and construction activity have been below trend for some time.
In short, the downturn in house prices will not be limited to the US.
And, on both sides of the Atlantic, that decline is likely to undermine consumer spending.
Is Europe Turning Toward A Strong Euro?
Is this a sign that the tide is turning in Europe in favor of a stronger euro? Or does it simply reflect the fact that the ECB now is reverting to its old policy of not commenting on exchange rates whatever the circumstance?
The answer may come clearer at the June meeting next Thursday when the appreciating euro undoubtedly will be brought up once again at the press conference.
Two factors point to a possible turning of the tide.
One is the fact that crude oil is heading towards $75 a barrel or higher. Second, Europe’s economic recovery is progressing to the point where exports are no longer the sole source of growth.
Indeed, with sky-high prices of crude oil and base metals like copper, aluminum, and zinc, the rising euro has become a shield for Europe’s ongoing economic recovery.
These commodities, after all, are priced in US dollars.
Because the euro has appreciated against the dollar, the euro price of crude oil and base metals has increased at a slower pace than their corresponding dollar prices.
As the escalation of dollar commodity prices continues, so will Europe’s appreciation of its stronger currency.
The recently rising euro also has helped keep down European long-term interest rates — a key determinant of economic activity — as inflationary expectations deteriorated somewhat in the euro-zone area.
During April, the rise in inflationary expectations and the euro’s appreciation occurred more or less concurrently.
The yield on the 10-year German bond, which might have been expected to go higher because of the deterioration in inflationary expectations during this period, barely moved.
This is a big plus for sustaining economic recovery.
Should Bush, Bernanke or the new Treasury Secretary Henry Paulson cause investors to lose faith in US financial assets at some point in time, the rising euro will help shield European interest rates from the consequences.
Still, politicians and maybe even some central bankers continue to be concerned about the currency, because they fear that a stronger euro could stifle exports, thus weakening overall economic performance.
But this fear is likely to diminish as Europe’s recovery broadens past exports into the economy’s domestic sectors.
In fact, there is evidence that this is now happening.
Surveys show that business confidence is up throughout the euro-zone economy, indicating that a domestic investment boom may be around the corner.
Likewise, the new ECB growth forecasts may show the internal economy strengthening.
In short, the fear that a stronger euro could kill the only goose laying the golden eggs is likely to recede in coming months.
Of course, not everyone in Europe can be expected to be equally enthusiastic about a stronger euro.
The euro zone is a vast area comprised of different nations with different cultures, histories, economies, politics, and so forth.
Germany, with its history of a strong deutsche mark and very competitive costs, likes the strong euro more than, say, its partners, France and Italy, which have histories of weak domestic currencies and non-competitive export costs.
The mere existence of a common currency is no guarantee that everyone will agree about what its value should be.
Still, even in the traditionally weak-currency countries, changes afoot suggest that a turnaround in political attitudes and public opinion toward a stronger euro may be on the horizon.
The recent election in Italy of a center-left government led by Romano Prodi is a case in point.
Not only did the Northern League – an important component of Silvio Berlusconi’s ousted right-wing coalition – favor a weak euro, but it also favored pulling Italy out of the euro altogether.
Now it is out of power.
So is Berlusconi himself, who favored a weak euro to compensate for Italy’s economic inefficiency and the complete lack of reform during his years in office.
Prodi, a convinced European, is less likely to favor a weak euro.
Another promising change in Italy has been the appointment of Mario Draghi as Governor of the Bank of Italy.
Draghi, a respected MIT economist, favors economic reform and understands the role that a strong euro plays in spurring it.
Economic reform must be financed somehow, and if the funds are to come, at least in part, from outside the EU, the euro must be a strong currency.
Draghi replaced Antonio Fazio, whose corrupt protectionist practices in Italy’s banking sector had both discouraged capital from coming into Italy and depressed the euro.
In the current global environment, the case for the strong euro is becoming increasingly apparent.
Mr. Trichet’s silence at the May ECB press conference on the rising euro could be a tacit acknowledgement of this new reality.
We should learn more at next week’s June meeting.
Is Evidence-Based Medicine Broken?
LONDON – Evidence-based medicine, as David Sackett and his colleagues wrote in 1996, is “the conscientious, explicit, and judicious use of current best evidence in making decisions about the care of individual patients.”
At first glance, this seems entirely logical; indeed, many would say that this simply could be called “medicine.”
But the approach is generating considerable controversy, with many asserting that it is “broken.”
Last month, when the British Medical Journal asked its readers whether evidence-based medicine is malfunctioning, the responses were almost evenly split: 51% answered positively, and 49% negatively.
The controversy stems from the kind of evidence that is used.
Sackett implies, but does not stipulate, that epidemiological evidence (findings from randomized controlled trials and large-cohort studies carried out over many years) should underpin doctors’ decisions about patients – and, one hopes, in consultation with them.
Epidemiological research studies address questions like, “If 1,000 people with type 2 diabetes were randomly allocated to four groups of 250 people that each received either no treatment (or a placebo), drug A, drug B, or drug C for ten years, how would it impact survival rates, and what, if any, complications and side effects would there be?” If the trial is conducted properly – it is large enough; people are allocated in a truly random way; and “blind” assessments of the outcomes are conducted – the results should be reliable.
Consider the following scenario: Ten-year survival rates for the four groups are 70%, 71%, 80%, and 82%, respectively, and the proportion of people developing troublesome side effects is 1%, 2%, 5%, and 50%.
Most people trade a small reduction in the chance of survival for a large reduction in the chance of adverse effects; in other words, they would opt for drug B.
In short, evidence-based medicine uses the science of epidemiology to create a clear and structured set of decisions about tests and treatments for individual patients, with the evidence often – and increasingly – being summarized in the form of clinical guidelines.
This is problematic for two main reasons.
For starters, the emphasis on randomized controlled trials as the “gold standard” of evidence has meant that any drug that has outperformed a competitor in a trial may now be classified as “evidence-based.”
Look no further than the glossy ads in medical journals to discover drugs you did not know you needed for diseases that you never knew existed, such as “female sexual arousal disorder” and “adult attention deficit disorder.”
And how many drugs are tested against more natural non-drug therapies – yoga for high blood pressure, for example, or brisk walking for diabetes – before being licensed?
In a sense, evidence-based medicine has been a victim of its own success, having fueled an exponential increase in research trials in the 20 years since it began.
One does not need a PhD in cognitive psychology to recognize that overloading doctors working in a high-stress, time-constrained environment with a mass of guidelines and research results will lead to errors.
And the attempted solution – hard-wiring the guidelines into computerized “decision support tools” – has been largely a flop, given computer models’ inability to accommodate messy, real-world clinical practice.
For example, generations of medical students have memorized the textbook features of celiac disease for their examinations.
But your Aunt Nora’s celiac disease has not read the textbook.
Indeed, only Aunt Nora can tell you how her celiac disease behaves.
She also happens to be opposed to taking blue-colored pills. And she insists that, years ago, when she took drug x, it made her feel like a new woman – despite the fact that, in 1,000 patients, drug x has demonstrated, on average, no effect.
The computer model’s treatment recommendations would probably not work for Aunt Nora.
But this does not mean that evidence-based medicine is broken; it simply lacks the needed maturity.
High-quality randomized trials are as important now as they were at the time of the evidence-based movement’s founding.
But the system must be shaped by the doctor’s judgment and the patient’s individual experience.
It is time to stop overloading doctors with evidence and deploying fast-talking industry salespeople to manipulate them with clever marketing pitches.
Instead, researchers must optimize the presentation, summarization, processing, and application of epidemiological evidence, using good visualization techniques that improve doctors’ understanding of complex statistics.
At the same time, research-derived facts about the average patient must not outweigh individual patients’ observations of their own bodies and illnesses.
New processes for capturing and accommodating patients’ personal experiences – which are typically idiosyncratic, subjective, and impossible to standardize – would go a long way toward ensuring that each patient receives the right treatment.
The medical community must develop the science of shared decision-making, in which epidemiological evidence informs conversations about what matters to the patient and how best to achieve those goals.
In doing so, we can take evidence-based medicine beyond its current limits and develop a holistic approach that accounts for patients’ experience of illness and promotes good clinical practice.
Is Export Led Growth Passé?
CAMBRIDGE – For five decades, developing countries that managed to develop competitive export industries have been rewarded with astonishing growth rates: Taiwan and South Korea in the 1960’s, Southeast Asian countries like Malaysia, Thailand, and Singapore in the 1970’s, China in the 1980’s, and eventually India in the 1990’s.
In all these cases, and a few others – also mostly in Asia – domestic reforms would surely have produced growth regardless of international trade.
But it is difficult to see how the resulting growth could have been as high – reaching an unprecedented 10% or more annually in per-capita terms – without a global economy able to absorb these countries’ exports.
Many countries are trying to emulate this growth model, but rarely as successfully because the domestic preconditions often remain unfulfilled.
Turn to world markets without pro-active policies to ensure competence in some modern manufacturing or service industry, and you are likely to remain an impoverished exporter of natural resources and labor-intensive products such as garments.
Nevertheless, developing countries have been falling over each other to establish export zones and subsidize assembly operations of multinational enterprises.
The lesson is clear: export-led growth is the way to go.
But for how long?
While reading the economic tea leaves is always risky, there are signs that we are at the cusp of a transition to a new regime in which the rules of the game will not be nearly as accommodating for export-led strategies.
The most immediate threat is the slowdown in the advanced economies.
Europe and the United States are both entering recession, and fears are mounting that the financial meltdown accompanying the sub-prime mortgage debacle has not worked itself out.
All this is happening at a time when inflationary pressures hamper the usual monetary and fiscal remedies.
The European Central Bank, tightly focused on price stability, has been raising interest rates, and the US Federal Reserve may soon follow suit.
So the advanced economies will suffer for a while, with obvious implications for the demand for exports from emerging markets.
On top of this is the almost certain unwinding of global current-account imbalances.
Emerging markets and developing countries ran a surplus of $631 billion in 2007, split roughly equally between Asian countries and the oil-exporting states.
This amounts to 4.2% of their collective GDP.
The US alone ran a current-account deficit of $739 billion (5.3% of its GDP).
Neither the economics nor the politics of this pattern of current-account balances is sustainable, especially in a recessionary environment.
The politics is clear to see.
Nothing works as potently to inflame protectionist sentiment as large trade deficits.
According to a December 2007 NBC/Wall Street Journal poll, almost 60% of Americans think globalization is bad because it has subjected US firms and workers to unfair competition.
If globalization has acquired a lousy reputation in the US, the external deficit deserves much of the blame.
US trade policy has been remarkably resistant to protectionist pressure in recent years.
But, regardless of who wins America’s presidency, the world should expect closer scrutiny of imports from China and other low-cost countries as well as of outsourcing of services to places like India.
As the US and other advanced economies become less hospitable to developing-country exports, rapidly growing emerging markets, help as they may, are unlikely to take up the slack and thus provide ample fuel for export-led growth.
Import tariffs tend to be higher in developing countries, making it more difficult to gain access to them.
Moreover, developing countries compete in similar products – consumer goods of varying levels of sophistication – so that the politics of expanded South-South trade looks even worse than the politics of North-South trade.
Anti-dumping action against imports from China, Vietnam, and other Asian exporters is already commonplace in developing countries.
So exporting will become an even tougher business.
Countries like China that have large surpluses will have to rely much more on domestic demand to fuel their economies.
This is not all bad, because China can certainly use more public investment in social sectors such as health and education.
But the impact will extend beyond the surplus countries.
If exporters from Brazil, Turkey, South Africa, and Mexico – all deficit economies – were already struggling to compete with China in third markets when those markets were wide open and expanding rapidly, imagine how they will fare under less hospitable conditions.
The impact on growth will almost certainly be negative, even if domestic demand compensates fully for the decline in external demand.
The reason is microeconomic, not macroeconomic: you can sell only so much steel or auto parts at home, and labor productivity in service industries does not match that of export-oriented activities.
So shrinking export markets will slow down growth-promoting structural change at home.
None of this implies a disaster for developing countries.
Long-term success still depends on what happens at home rather than abroad.
What is moderately bad news at the moment will become terrible news only if economic distress in the advanced countries – especially the US – is allowed to morph into xenophobia and all-out protectionism; if large emerging markets such as China, India, and Brazil fail to realize that they have become too important to free ride on global economic governance; and if, as a consequence, others overreact by turning their back on the world economy and pursue autarkic policies.
Absent these missteps, expect a tougher ride on the global economy, but not a calamity.
Is Fiscal Stimulus Pointless?
The Harvard economist Robert Barro, writing in The Wall Street Journal , recently made an intelligent argument against America’s fiscal stimulus.
After wading through the drivel of ethics-free Republican hacks and knowledge-free academic hacks who claim, one way or another, that the basic principles of economics make it impossible for government spending decisions to alter the flow of economic activity, reading Barro comes as a great relief.
But I think that Barro misreads how his own evidence applies to our current situation.
Barro writes that he “estimate[s] a spending multiplier of around 0.4 within the same year and about 0.6 over two years....
[T]he [tax] multiplier is around minus 1.1....
[Thus,] GDP would be higher than otherwise by $120 billion in 2009 and $180 billion in 2010...,” and by $60 billion in 2011.
That means that roughly 1.3 million more people will be employed in America in 2009, 1.9 million more in 2010, and 0.7 million people employed in 2011.
Suppose that what the government spent money on is worth to us two-thirds on average of what private-sector spending is worth.
In that case, we will have spent $600 billion and gotten $810 billion worth of stuff in return, for a net social profit of $210 billion (and those who would otherwise be cyclically unemployed cannot be said to place a high value on their lost leisure).
Only if you think that there are additional large costs lurking down the road – that the stimulus has destabilized price expectations and set in motion a destructive spiral of deflation, or that the stimulus has used up America’s debt capacity, driving up debt-service costs to a prohibitive level – can the social profit turn negative.
Neither of those things has happened.
The long-term nominal and real Treasury rates continue to be absurdly low, so much so that I rub my eyes whenever I see them.
And the market inflation forecast – the spread between Treasury Inflation-Protected Securities and normal Treasuries – remains extremely tame.
So I really cannot understand Barro’s last paragraph: “The fiscal stimulus package of 2009 was a mistake.
It follows that an additional stimulus package in 2010 would be another mistake...”
It is as if he has not done his own arithmetic.
The problem, I think, is that Barro tries to use the years of “total” war in the twentieth century – World War I, World War II, and the Korean War – to “realistically evaluate the stimulus,” because “the defense-spending multiplier can be precisely estimated....”
But this is like looking for one’s lost keys under the lamppost because the light is better there.
Yes, the total war defense-spending multiplier can be relatively precisely estimated.
But we are not interested in what the multiplier is when the unemployment rate is 3% and the government is trying to diminish consumption and boost private savings via rationing and patriotism-based bond drives.
We are interested in what the multiplier is under more normal conditions, and when the unemployment rate is 10%.
I think Bob Hall has a better read on what is going on: &quot;With allowance for other factors holding back GDP growth during those wars, the multiplier linking government purchases to GDP may be in the range of 0.7 to 1.0... but higher values are not ruled out....
Multipliers are higher – perhaps around 1.7 – when the nominal interest rate is at its lower bound of zero, as it was during 2009...” (and is today).
There are other problems with Barro’s analysis.
He characterizes the stimulus bill as a two-year $600 billion increase in government purchases.
But about half of the stimulus money spent to date is on the tax and transfer side, and about a quarter is direct aid to states, which enables them not to raise taxes.
Barro should be using a weighted average of his spending multiplier of 0.6 and his tax multiplier of 1.1 to get a multiplier of 0.9.
In that case, our social profit is not $210 billion but rather $390 billion, and we should certainly do this again.
Indeed, we should do it repeatedly, until there are signs that additional stimulus may start to threaten price or debt-management stability, or until unemployment falls far enough to make Barro’s multipliers overestimates.
Moreover, Barro complains that because Christina Romer, who heads President Barack Obama’s Council of Economic Advisers, has “not [carried out] serious scientific research... on spending multipliers...,” he “cannot understand her rationale for assuming values well above one...” To say that policymakers should rely only on their own personal research to formulate policy seems to me simply bizarre.
Finally, Barro assumes that higher spending in 2009-2010 will have to be offset by higher taxes later, claiming that “the timing of future taxes does not matter.”
But it matters very much.
At the moment, the United States Treasury can borrow at a real interest rate of zero for five years – and shove the entire five-year inflation risk onto the lender.
Time preference means that the $600 billion addition to the debt today, which Barro sees as the cost of stimulus, is not nearly as burdensome as a demand to pay $600 billion now would be.
And when taxes are levied to retire the added debt induced by the stimulus, they will be levied at some time at which nominal interest rates are not stuck at zero.
The Federal Reserve will thus be able to ease monetary policy then to offset the fiscal drag.
So Barro is simply wrong when he claims that although the stimulus boosts employment now, amortizing the stimulus must inevitably reduce employment at some point in the future.
Is France Unreformable?
It all began a year ago with the French “No” in the referendum on the European Constitution.
It continued last fall with the wave of violence in the suburbs.
Now, France has again brought itself to the world’s attention with weeks of street demonstrations against the “contract of first employment” (CFE) proposed by Prime Minister Dominique de Villepin to address high youth unemployment.
These three sets of events, different as they are, together illustrate several deep-seated characteristics of social life in France.
First, France has found it difficult to adjust to the demands of globalization.
Beyond ordinary dissatisfaction with economic problems, the failed referendum in May 2005 expressed the rejection by an important part of the French electorate of the discipline imposed by EU policies ensuring free movement of people, goods, and capital – and thus of the primacy of economic competition.
In a similar vein, last fall’s explosion of violence in the suburbs reflected the frustrations of disoriented young people facing the grim prospects that a modern economy offers to those who lack proper training and education.
The young are also at the center of the most recent protests, but this time, the disaffected include all strata of French youth, including university graduates.
In combating the CFE, they express their refusal to accept a precarious life outside the French model of job security that their parents enjoyed in the context of a profoundly different economy.
There is something very French about all this, because, while the economic rules of the game have changed throughout Europe in the last couple of decades, the need for greater labor-market flexibility seems to have been accepted more easily in most other countries.
In Spain, under a socialist government, roughly one-third of wage earners are working on temporary contracts; the percentage is even higher for the young.
In Italy, greater employment flexibility was introduced by the Prodi government in 1997, and further strengthened under the so-called Biagi Law of 2003.
In Germany too, the coalition agreement between the Social Democrats and the Christian Democrats includes a provision that extends from six months to two years the trial period during which an employee can be dismissed without explanation – the same duration contemplated in the Villepin’s CFE law.
In all these European countries, the new employment laws seem to be accepted as inevitable.
In France, by contrast, the statist tradition – which, as Tocqueville so aptly observed, harks back to the Ancien Régime, and which is equally shared today by both the Gaullist and socialist ideologies – is strongly linked to a marked distaste toward the strictures of economic liberalism.
Since the French Revolution, the imperative of equality has often triumphed over the concern for liberty.
As a result, the French are enamored with the welfare state in all its manifestations.
Not even the obvious failures of the French social model in today’s environment – mass unemployment (reaching 25% among the young), huge public deficits, the blockage of social mobility – have diminished its public prestige.
It would be much more logical to take inspiration instead from the Scandinavian model of “flexisecurity,” which combines employment flexibility and social security (albeit at the cost of a tax burden that France would not easily accept).
Add to all this the French preference for ideological confrontation and the absence of a culture of negotiation and compromise, to say nothing of consensus, and one can understand why so many reform projects in France end up being contested in the streets.
Indeed, quite significantly, most observers have automatically associated the recent disturbances with those of May 1968, which continues to hold a strange fascination for the French.
In truth, however, other than reflecting the French preference for the politics of the street, the two phenomena have nothing in common.
So is France unreformable?
Certainly not.
The country has been transformed profoundly in the recent decades.
Whether it is the breakup of public monopolies, such as electricity, gas, telecommunications, and even the post office, or the replacement of military conscription by a professional military, or pension reform, France has changed much more than is commonly believed.
This is particularly true with respect to French companies, which have remarkably adapted to the demands of international competition.
But much remains to be done: the entire educational system, up through the university level, requires serious reform, and many taboos regarding employment rules, social security, and the functioning of the state must be questioned.
What the experience with the CFE shows is not that reform is impossible, but that it cannot be unilaterally imposed.
Time must be taken for explanation, consultation, and negotiation.
In a society like France, marked by uncertainty about the future and in great need of having its self-confidence restored, the time taken to build consensus and create legitimacy for further reforms will certainly be well spent.
Is Freedom Enough?
Do democracies need values?
The question seems absurd in the light of photographs of American soldiers torturing and humiliating Iraqi prisoners.
But the fact is that the advance of democracy historically entailed the erosion of shared values and the rise of individual autonomy.
It presupposed moral agnosticism and a plurality of meanings, none of which are sacred or compulsory to all.
Democracy does nurture some common values, but they are overwhelmingly liberal values - in other words, individual rights trump collective obligations.
For contemporary democrats, the fullest possible respect for the autonomous individual is, as Thomas Jefferson put it, "self-evident."
But are civil, political, and human rights enough to ensure the strength and survival of democracies?
Are today's democracies virtuous enough to rally the energies - including self-sacrifice - needed to defeat their enemies?
Such questions were never so urgent in the past, partly because fundamental democratic values were less abstract than they seem nowadays.
Such values animated the fight against Nazi and Soviet totalitarianism, fascism, and military dictatorship; in their name, decolonization was achieved, and minorities gained equality and dignity.
Democracy's values may be one-sided on behalf of individual rights, but this has also made them universal, legitimizing the struggle against oppression, wherever it is played out.
But in the world's most advanced countries, the promise of material prosperity that freedom made possible has long since replaced attention to and defense of fundamental democratic values as the cement of society.
Western citizens do not rush to emulate the freedom fighters who built their world, despite celebrations, memorials, and the persistence of oppression.
The September 11, 2001, terrorist attacks in the United States allegedly changed everything - not only international relations, but the balance between rights and obligations that we long took for granted.
In fact, the attacks, while surprising in their method, symbolic character, and scope, changed nothing.
By themselves, they merely revealed the urgency of a fundamental reappraisal that has long been necessary.
What is the Western model of democratic development really worth?
Some non-democratic systems seem to evoke deeper support, because they are based on religious or national communal solidarity, and because closed societies minimize doubt, drift, and criticism.
Beyond fundamental freedoms and economic prosperity, do we have a specific civilization to defend?
Ours is a civilization that accepts selfishness towards one's own family and group; that tolerates, with few exceptions, autonomy in moral matters; and that considers blasphemy, criticism of authority, and even civil disobedience fundamental freedoms.
Our civilization, despite its drugs, prostitution, alcoholism, incivility, and vandalism, will always be better than rule by Mullahs or soldiers, because its social problems can be allayed, if never entirely eliminated, without changing the foundations of the regime.
This is not true of totalitarian or fundamentalist regimes, because, to foster free societies, they must be deposed.
But if our civilization is worth defending, why is it that fundamentalists, of whatever stripe, have the most committed fighters on their side?
Can we oppose them with anything but individual rights?
Two opposite temptations must be resisted.
The first temptation, characteristic of frightened societies, is a rush to embrace so-called "traditional" values, with their implications of withdrawal, closure, intolerance, and even hatred.
The second temptation is a purely military policy that fixates on physical strength without considering how to project greater credibility and fairness.
Of course, when enemies are already attacking, one cannot afford to ask too many questions.
But when enemies are merely threatening, it is better first to assert legitimacy, and thus acquire some credibility at home and abroad.
To do so, there cannot be too wide a gap between our stated principles and our actual behavior.
Nor can we claim, as we used to, that our values spring from God, nature, reason, or historical laws.
Our values reflect the democratic debate itself, nothing more, and our defense of them must address three related fields.
First, we must update our social contract.
France's ongoing public debate about secularism and legislation is an important effort in this direction, even if the debate could be better organized to demonstrate the link between principles, social and anthropological facts, and public policy.
Such a debate should also involve education - its rules, objectives, and contents.
In many countries, however, political parties find it difficult even to contemplate such debates.
The second axis of values concerns social justice and the environment.
Issues linked to inequality, the distribution of wealth, and our exploitation of the natural world will become increasingly salient.
This debate has not happened in the US, despite vague attempts at the beginning of the first Clinton administration; it has barely begun with Tony Blair's "Third Way" in the UK, or with Gerhard Schröder's variant in Germany.
In France, the debate has stalled altogether due to bitter distributive conflicts, deep division within the Left, and the Right's absence of an economic and social vision.
What remains are the values linked to the global order, defense of which requires leading by example, not by narrow, legalistic initiatives aimed at crisis management or conflict resolution.
This approach too often sacrifices long-term essential objectives to short-term concerns.
The fight for democracy cannot be selective.
A desirable vision for the future of humanity must appeal to universally shared conceptions of justice and equity.
We must all become freedom fighters.
Is Free Trade With the US Right for Central America?
Ronald Reagan's death forced many people to confront once again the legacy of Central America's brutal wars in Guatemala, El Salvador, and Nicaragua of two decades ago.
That the region's bloody history is truly behind it seems to have been confirmed by the recent signing of the Central American Free Trade Agreement (CAFTA) with the United States.
The symbolism of that treaty promises much, not least the idea that civil wars and US interventions may be things of the past.
But the details of the treaty offer little comfort to a region that is still recovering from the economic devastation wrought by those wars.
Paramount to CAFTA is a concern about the extent to which Central American countries will liberalize their economies.
But more critical is whether the agreement will make for healthier economies.
Although CAFTA represents an important opportunity in the region's quest to expand its access to the US market, it is unclear whether the new rules will strengthen or weaken Central American producers.
Under CAFTA, 80% of US exports will be duty-free as soon as the treaty is ratified, and all tariffs will expire in 15 years.
Until recently, the region maintained a trade surplus with the US, but with liberalization, the region will increase imports of more affordable goods, thereby turning the surplus into a deficit.
Consider Mexico's trade balance with the US since the North American Free Trade Agreement (NAFTA) came into effect. In the years between 1995 and 2002, Mexico's annual trade deficit with the US increased to $1 billion.
Moreover, trade in agricultural products will benefit US exporters more than Central American farmers.
The US, for example, agreed to sugar imports that equal 1% of the total US market.
That figure can grow only to 1.4% over the next 15 years.
At the same time, the agreement eliminates most import tariffs for commodities like rice, yellow corn, or dairy products.
This will force small and medium producers to become more competitive, but they must do so on an uneven playing field.
Unlike their counterparts in the US, Central American producers lack access to the capital and technology needed for them to expand and innovate.
So, instead of improving their competitiveness, the agreement is likely to increase the number of displaced workers and producers.
For a glimpse at the future, look at what has happened to Mexican corn farmers since NAFTA.
Central American textiles were also caught in a CAFTA snag.
The US textile lobby insisted that knit fabrics exported north come from Central America.
The trouble is that Central America relies on third countries for knit fabrics.
Finally, CAFTA fails to address labor issues in any significant way.
The agreement only stresses that labor rights are to be respected, highlighting that a party to the agreement "shall not fail to effectively enforce its labor laws, through a sustained or recurring course of action or inaction, in a manner affecting trade between the Parties."
In a region with weak enforcement and few mechanisms for redress, protection restricted to prevailing labor standards amounts to no protection at all.
So why did Central America's leaders sign the agreement?
The region's economies have not experienced significant growth in the past five years (nor have they grown more than 5% annually in the past 20 years).
Desperate for improvement, its leaders had few choices and limited time to explore other options.
Instead of being creative, they have been inspired by a wave of neo-liberal nostrums that blinds them to other opportunities.
But there are alternatives.
Remittances by emigrants offer one of the richest.
Nearly $7 billion dollars has entered the region in remittances, yet there is no single economic policy that attempts to leverage the development potential of this gift.
Remittances normally grow more than 15% a year, and will continue to do so.
Even in a good year, trade with the US is unlikely to grow that much.
Central American leaders could implement limited banking reforms to offer incentives to emigrants to save remittances and invest in their home countries.
Instead, their attention is captivated solely by CAFTA's uncertain promises.
What lies ahead is uncertain; the Economic Commission for Latin America and the Caribbean stressed that CAFTA's implementation will add 0.5 percentage points to the rate of annual GDP growth in the region.
This is welcome news. But the question is whether such growth will continue ten years from now or end up being a quick, but temporary, fix.
Regardless of its prospects, CAFTA is far from a done deal, and it at least opens the way for more discussion and debate.
Maybe the best news about CAFTA is that the US Congress is reluctant to take it on during an election year.
Is “Gene Doping” Wrong?
In recent years, the International Olympic Committee and other sports organizations have worried about the possible misuse of gene-transfer technology.
But the sports world seems intent on exploiting this technology in pursuit of gold medals and championships, and genetic testing may be the wave of the future.
Two Australian Football League teams have hinted that they are looking into tests that would indicate an athlete’s likely height, stamina, speed, and strength.
Indeed, for some, “gene doping” now represents the Holy Grail of performance enhancement, while for others it means the end of sports as we know it.
The prospect of a future of genetically modified athletes incites alarm throughout the sports world, accompanied by portrayals of such athletes as inhuman or some form of mutant.
This is a misrepresentation of how gene transfer would alter humans, both therapeutically and non-therapeutically, should it ever be legalized.
But the fear that rogue scientists will take advantage of athletes – or that athletes will seek to enroll in gene-transfer experiments in an attempt to receive some undetectable performance benefit – is very real.
The World Anti-Doping Agency (WADA) prohibited gene doping in 2003, but some scientists predict that its misuse in sport is likely to appear at the Beijing 2008 Olympics.
It is in this context that the debate about gene doping erupted during the 2004 Olympics in Athens.
Unfortunately, because the discussion has so far been dominated by moral panic over the state of sports, many ethical considerations and important questions have been excluded.
Policies concerning gene doping should not rely solely on the interests and infrastructures of sports organizations.
In particular, the monitoring committees on genetic technology that nations develop must be taken on board by the world of sport.
A simple model based on prohibition and testing for gene modification will not be enough, assuming that detection is possible at all.
Moreover, ethics committees must be made aware of the special circumstances of sports, which limit the effectiveness of broader social policies on genetic modification.
Again, regulation ought not to rely on one single global authority.
As has been made clear from the ethical debates on stem-cell research, a global policy cannot easily be adopted or enforced, nor should it be.
Above all, it is not acceptable for the world of sport to impose a moral view about the role of enhancement technology on nations that wish to participate in the Olympics, without implementing an extensive and ongoing consultative process to accompany its policy decision.
This cannot involve the creation of working groups that merely pay lip service to ethical debate, but must enable non-sports organizations to develop their own policy framework for the regulation of ’gene doping’ and, more broadly, the use of genetic information.
Policies governing gene transfer in sports must, therefore, be recognized as subservient to broader bio-ethical and bio-legal interests that recognize the changing role of genetics in society.
The rhetoric surrounding “gene doping” relies heavily on its moral status as a form of cheating.
Yet, this status relies on existing anti-doping rules.
If we don’t ban gene transfer in the first place, then on one level, it is not cheating.
In any case, to describe genetically modified athletes as mutants or inhuman is morally suspect, for it invokes the same kind of prejudice that we deplore in relation to other biological characteristics, particularly race, gender, and disability.
After all, many, if not most, top athletes are “naturally” genetically gifted.
To refer to these people as mutants would surely invite widespread criticism.
Those who fear that gene doping heralds the “end of sports” should instead recognize this moment as an opportunity to ask critical and difficult questions about the effectiveness and validity of anti-doping tests.
Does society really care about performance enhancement in sport?
That may sound like a radical question.
But advancement in ethical inquiry relies on the conflict of beliefs and values.
For many years, commentators have expressed concerns about the culture of doping in elite sport.
Yet, the culture of anti-doping is equally alarming, because it embodies a dogmatic commitment that limits the capacity for critical debate over what really matters in sport.
If anti-doping authorities truly care about sports, then they have a responsibility to re-examine the basic values that underpin their work.
They should begin by imagining what would happen if the child of a genetically modified human wanted to become an elite athlete.
At the very least, they might then be less prone to imposing the narrow moral position of the sports world on the parent.
Is Global Financial Reform Possible?
HONG KONG – Nowadays there is ample evidence that financial systems, whether in Asia in the 1990’s or a decade later in the United States and Europe, are vulnerable to breakdowns.
The cost in interrupted growth and unemployment has been intolerably large.
But, in the absence of international consensus on some key points, reform will be greatly weakened, if not aborted.
The freedom of money, financial markets, and people to move – and thus to escape regulation and taxation – might be an acceptable, even constructive, brake on excessive official intervention, but not if a deregulatory race to the bottom prevents adoption of needed ethical and prudential standards.
Perhaps most important is a coherent, consistent approach to dealing with the imminent failure of “systemically important” institutions.
Taxpayers and governments alike are tired of bailing out creditors for fear of the destructive contagious effects of failure –&nbsp;even as bailouts encourage excessive risk taking.
By law in the US, new approaches superseding established bankruptcy procedures dictate the demise rather than the rescue of failing firms, whether by sale, merger, or liquidation.
But such efforts’ success will depend on complementary approaches elsewhere, most importantly in the United Kingdom and other key financial centers.
Strict uniformity of regulatory practices may not be necessary.
For example, the UK and the US may be adopting approaches that differ with respect to protecting commercial banks from more speculative, proprietary trading, but the policy concerns are broadly similar – and may not be so pressing elsewhere, where banking traditions are different and trading is more restrained.
But other jurisdictions should not act to undercut the restrictions imposed by home authorities.
Closely related to these reforms is reform of the international monetary system.
Indeed, one might legitimately question whether we have a “system” at all, at least compared to the Bretton Woods arrangements and, before that, the seeming simplicity of the gold standard.
No one today has been able to exert authority systematically and consistently, and there is no officially sanctified and controlled international currency.
Arguably, the ideal of a well-defined and effective international monetary regime has become more difficult to realize as markets and capital flows have become vastly larger and more capricious.
Indeed, the global economy, it is said, has grown – and emerging countries have flourished – without a more organized system.
But what is too often overlooked is that international monetary disorder lay at the root of the successive financial crises of the 1990’s, and played an even more striking role in the crisis that erupted in 2008.
The sustained and, in a sense, complementary imbalances in the US and Asia stand out.
From 2000 to 2007, the US ran a cumulative current-account deficit of roughly $5.5 trillion, with nearly symmetrical offsetting increases in reserves in China and Japan.
China found it useful to run a large trade surplus, using a very high rate of internal savings and inward foreign investment to support its industrialization and rapid growth.
By contrast, the US, in the face of slow growth, was content to sustain exceptionally high levels of consumption at the expense of personal savings, inflating a massive housing bubble that burst with a very large and deeply disturbing bang.
The practical and inescapable lesson is that when any country is left to its own policy devices, its preferences may lead to prolonged and ultimately unsustainable imbalances.
Sooner or later, adjustment will be necessary – if not by considered domestic policy or a well-functioning international monetary system, then by financial crisis.
Not so long ago, we were comforted by theorizing that floating exchange rates would mediate international adjustments in a timely and orderly way.
But, in the real world, many countries, particularly but not limited to small, open economies, simply find it impractical or undesirable to permit their currency to float.
We are left with the certainty, however awkward, that active participation in an open world economy requires some surrender of economic sovereignty.
Or, to put the point more positively, it requires a willingness to coordinate policies more effectively.
The possibilities include:
·&nbsp;&nbsp;&nbsp;
Stronger surveillance by the International Monetary Fund and a firmer commitment by countries to abide by “best practices” and agreed norms.
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Direct and public recommendations by the IMF, the G-20, or others, following mandatory consultation.
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Qualification or disqualification with respect to the use of IMF or other credit facilities (for example, central banks’ swap lines).
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Interest or other financial penalties or incentives along the lines under consideration in Europe.
But, if approaches that build on past failure do not seem sufficiently effective, perhaps a new approach toward currency fluctuations would be more promising.
That would require some agreement about appropriate “equilibrium” exchange rates, with a fairly wide band that would allow for uncertainty and permit the market to exert its own discipline.
But individual countries would orient intervention and economic policies toward defending the equilibrium rate, or, more radically, an international authority might authorize aggressive intervention by trading partners to promote consistency.
An appropriate reserve currency and adequate international liquidity represent another central concern.
For years, the pragmatic answer has been the dollar, and to some extent other national currencies, giving rise to complaints of an “inordinate privilege” for the US.
But it is not in America’s interest to accentuate and extend its payment deficits at the expense of an internationally competitive economy with strong industry and restrained consumption.
And the rest of the world wants the flexibility afforded by the currency of the largest, strongest, and most stable economy.
A useful reserve currency must be limited in supply, but have sufficient elasticity to satisfy the large, unpredictable needs that may arise in a turbulent financial world.
Above all, confidence in its stability and availability must be maintained, which highlights the practicality of a national currency, or perhaps a variety of national currencies.
Is Globalization the Only Way to Develop?
A US Treasury official recently "urged Mexico's government to work harder to reduce violent crime, saying the country's high crime rate could frighten away foreign investors." An off-the-cuff remark, perhaps, but it shows how foreign trade and investment are seen as the yardsticks for evaluating developing countries.
Development strategy, indeed, is becoming hostage to the idea of integration into the world economy.
This equation is too facile.
Openness to trade is presented as the most potent force for economic growth, yet integration into the world economy has demanding institutional prerequisites, which are not met cheaply.
It would cost a typical developing country $150 million - a sum equal to a year's development budget in many poor countries - to implement the reforms required under WTO agreements.
Although countries benefit from strengthening their institutions in relevant areas, the reality, according to Michael Finger, who calculated these figures, is that "WTO obligations reflect little awareness of development problems." Integration has other, more subtle, institutional requirements as well.
Openness implies heightened exposure to external risk, and thus greater demand for social insurance.
So, in the real world opening up is not simply a matter of letting barriers down.
You must ensure that you abide by international rules of propriety, covering newly exposed domestic sources of weaknesses, and protecting yourself from the elements.
None of the institutional reforms needed for insertion in the world economy are bad; in fact, many are independently desirable.
But recognize the argument favoring openness for what it is: trickle-down institutional reform.
Reforms may or may not trickle down; even when they do, they will rarely constitute the most effective way of targeting the desired ends (whether those ends are legal reform, observance of human rights, or reduced corruption).
Investing in the prerequisites of trade and financial openness as the first order of business in development not only forecloses alternatives, it crowds out possibly urgent priorities by diverting human resources, administrative capabilities, and political capital.
Consider some tradeoffs:
Education.
What should a government's priorities be in its education budget?
Should it train more bank auditors and accountants, even if it means fewer secondary-school teachers?
Corruption.
How should a government focus its anti-corruption strategy?
Should it target the "grand" corruption that foreign investors complain about, or the petty corruption that affects the average person the most?
Legal reform.
Should a government focus its energies on "importing" legal codes and standards, or on improving existing domestic legal institutions?
Public health.
Should a government pursue tough policies on compulsory licensing and/or parallel importation of basic medicines, even if that means running breaking WTO rules?
Industrial strategy.
Should a government simply open up and let the chips drop wherever they might, or emulate East Asia's experience before the 1990s, with industrial policies such as export subsidies, directed credit, and selective protection?
Social protection and safety nets.
How much can a government afford to spend on such programs in view of the fiscal constraints imposed by market "discipline?"
In each area, a strategy tilted toward global integration precludes other paths that could be more development-friendly.
Of course, none of this would be bad if openness were the key to growth.
Alas, evidence for a link between a country's trade barriers and its growth rate is weak.
The appropriate conclusion is not that trade protection is preferable to trade liberalization, because there is no evidence that trade protection systematically promotes higher growth.
But don't oversell the benefits of trade openness.
When useful policy objectives compete for scarce administrative resources and political capital, trade liberalization often does not deserve the priority it typically receives in development strategies.
This lesson is of real importance to countries (such as in Africa) in the early stages of reform.
My conclusion is that openness is not an adequate substitute for a development strategy.
Policymakers must evaluate globalization in terms of developmental needs, not vice versa.
Any economist who appears to question the benefits of trade openness risks banishment, so let me be clear: I do not question the standard version of the gains-from-trade theory, but the extravagant, unsubstantiated claims made about the consequences of openness.
For the latter endangers broad public acceptance of the real article because it unleashes expectations unlikely to be fulfilled.
In the real world, opening up is not a simple matter of revising tariff codes and removing barriers to foreign investment.
It requires a heavy dose of institutional reform, which consumes financial, bureaucratic, and political resources.
While many institutional reforms are development-friendly, they may not be targeted at key developmental goals - growth, improved governance, industrial and technological capability, poverty alleviation - and occasionally divert attention from them.
Institutional reforms aimed at maximizing trade and capital flows may produce broad benefits, but they are not necessarily the most effective way of fostering development.
Strategic use of international trade and capital flows is part of a development strategy; it should not be a substitute for it.
Is Gold a Good Hedge?
CAMBRIDGE – As I walked through the airport in Dubai recently, I was struck by the large number of travelers who were buying gold coins.
They were not reacting to Dubai’s financial trouble, but rather were joining the eager rush to own gold before its price rises even further.
Such behavior has pushed the price of gold from $400 an ounce in 2005 to more than $1100 an ounce in December 2009.
Individual buying of gold goes far beyond the airport shops and other places where gold coins are sold.
In addition to buying coins minted by several governments, individuals are buying kilogram gold bars, exchange-traded funds that represent claims on physical gold, gold futures, and shares in gold-mining companies that provide a leveraged position on the future price of gold.
And gold buyers include not just individuals, but also sophisticated institutions and sovereign wealth funds.
Recently, the government of India purchased 200 tons of gold from the International Monetary Fund.
Many gold buyers want a hedge against the risk of inflation or possible declines in the value of the dollar or other currencies.
Both are serious potential risks that are worthy of precautionary hedges.
Although inflation is now low in the United States, Europe, and Japan, households and institutional investors have reason to worry that the low interest rates and the extensive creation of bank reserves could lead to inflation when economic recovery takes hold.
And the declining value of the dollar – down more than 10% against the euro in the past 12 months – is a legitimate cause of concern for non-US investors who now hold dollars.
But is gold a good hedge against these two risks?
Will gold maintain its purchasing power value if inflation erodes the purchasing power of the dollar or the euro?
And will gold hold its value in euros or yen if the dollar continues to decline?
The short answer is no on all counts.
The dollar price of gold does not increase with the US price level.
And the value of gold does not increase in dollars to offset the fall in the value of the dollar relative to the euro or the yen.
Consider first the potential of gold as an inflation hedge.
The price of an ounce of gold in 1980 was $400.
Ten years later, the US consumer price index (CPI) was up more than 60%, but the price of gold was still $400, having risen to $700 and then fallen back during the intervening years.
And by the year 2000, when the US consumer price index was more than twice its level in 1980, the price of gold had fallen to about $300 an ounce.
Even when gold jumped to $800 an ounce in 2008, it had failed to keep up with the rise in consumer prices since 1980.
So gold is a poor inflation hedge.
Moreover, the US government provides a very good inflation hedge in the form of Treasury Inflation Protected Securities (TIPS).
A 10-year inflation-protected bond will not only provide interest and principal that keep up with the CPI, but also now pays a real interest rate that is now slightly more than 1%.
And, if the price level should fall, a newly issued TIPS bond will return the original nominal purchase price, thus providing a hedge against deflation.
Of course, investors who don’t want to tie up their funds in low-yielding government bonds can buy explicit inflation hedges as an overlay to their other investments.
Gold is also a poor hedge against currency fluctuations.
A dollar was worth 200 yen in 1980.
Twenty-five years later, the exchange rate had strengthened to 110 yen per dollar.
Since gold was $400 an ounce in both years, holding gold did nothing to offset the fall in the value of the dollar.
A Japanese investor who held dollar equities or real estate could instead have offset the exchange rate loss by buying yen futures.
The same is true for the euro-based investor who would not have gained by holding gold but could have offset the dollar decline by buying euro futures.
In short, there are better ways than gold to hedge inflation risk and exchange-rate risk.
TIPS, or their equivalent from other governments, provide safe inflation hedges, and explicit currency futures can offset exchange-rate risks.
Nevertheless, although gold is not an appropriate hedge against inflation risk or exchange-rate risk, it may be a very good investment.
After all, the dollar value of gold has nearly tripled since 2005.
And gold is a liquid asset that provides diversification in a portfolio of stocks, bonds, and real estate.
But gold is also a high-risk and highly volatile investment.
Unlike common stock, bonds, and real estate, the value of gold does not reflect underlying earnings.
Gold is a purely speculative investment.
Over the next few years, it may fall to $500 an ounce or rise to $2,000 an ounce.
There is no way to know which it will be.
Caveat emptor .
Is Goodness Natural?
It is hard to imagine that anyone thinks of goodness as a problem, but Charles Darwin did.
The little worker bees that sacrificed themselves to protect their hives – the ultimate example of animal goodness – kept Darwin up at night.
Given Darwin’s ideas about evolution natural selection were correct (and, of course, they were and are), then this sort of altruism should be extraordinarily rare in nature.
If increased reproduction is the ultimate end all and be all of evolution by natural selection, then altruists should disappear – and fast.
But they don’t disappear, and Darwin was so puzzled by this that he spoke of altruism as a problem that could prove fatal to his whole theory of evolution.
Then a solution to this nasty conundrum hit Darwin like a ton of bricks.
Worker bees weren’t helping just any old bunch of bees; they were protecting their hive.
And their hive contained special individuals: blood relatives.
Blood relatives are, by definition, very similar to one another.
So even though the little worker bees may have been giving up their lives, by doing so they were potentially saving hundreds of blood relatives.
In modern parlance, we’d say that the worker bees were helping blood kin, because blood kin are genetically related.
By helping your blood relatives, you are indirectly promoting the reproduction of copies of your own genes - copies that just happen to reside inside your kin.
Darwin wasn’t the only scientist who was fascinated with the question of the evolution of goodness.
In fact, his good friend and colleague, Thomas Henry Huxley, was as well.
Huxley, in fact, got himself into quite a heated argument over whether blood kinship could or could not explain altruism.
Huxley’s opponent was Prince Peter Kropotkin, ex-page to the Czar of Russia, naturalist, and arguably the most famous anarchist of the nineteenth century.
Huxley argued that all goodness could be traced to blood kinship, while Kropotkin argued that goodness and blood kinship were completely divorced from one another - one had nothing to do with the each other.
Of course, neither was right, but it would take almost a hundred years before a shy, reserved, and brilliant British biologist named William D. Hamilton would settle all the arguments about blood kinship and altruism by coming up with a simple, but elegant mathematical equation.
Instead of asking if blood kinship explains everything or nothing about altruism, Hamilton approached the question differently.
He began by defining three terms: the genetic relatedness between individuals (labeled r), the cost of an act of goodness (c), and the benefit that a recipient obtained when someone was nice to him or her (b).
Using some beautiful mathematics, in the early 1960’s Hamilton discovered that altruism and blood kinship are not linked by an all- or- nothing relationship.
Instead, what is now known as “Hamilton’s Rule” states that altruism evolves whenever r times b is greater than c.
In other words, if enough relatives receive benefits from altruism to outweigh the cost of altruism, then altruism spreads; otherwise, it does not.
Phrased in the cold language of natural selection, blood relatives are worth helping in direct proportion to their genetic (blood) relatedness, weighted by how great a benefit they received.
Literally thousands of experiments with both nonhumans and humans show the power of Hamilton’s Rule.
This little equation is evolutionary biology’s version of e = mc2.
Over and over, we see that an analysis of the costs and benefits of altruism, along with the genetic relatedness of interactants, allows us to predict the presence or absence of altruism.
Hamilton’s Rule, of course, does not explain all altruism.
Another large chunk of goodness falls under the category of “reciprocity.”
Individuals are sometimes willing to be altruistic to someone now in the expectation that they will, in turn, be helped when we they need it.
Evolutionary biologists have been almost as interested in this type of altruism, as they have been in kinship-based altruism.
Amazingly enough, it was Bill Hamilton, along with the political scientist Robert Axelrod and the evolutionary biologist Robert Trivers, who formalized the models behind the evolution of reciprocity.
Following up on work done by Trivers in the early 1970’s, in 1981, Axelrod and Hamilton used the mathematics of game theory to predict when so-called “reciprocal altruism” should evolve.
Again, scores of empirical studies have followed up the model.
Reciprocity can be complex, but an evolutionary perspective has cleared the path to understanding, just the same way it did in the case of blood kinship and altruism.
If goodness is a problem, then the answer – or at the least part of the answer – can be found in evolutionary biology.
Is Gordon Brown Electable?
Gordon Brown obviously wants to succeed Tony Blair as British prime minister.
But it is less obvious that he is willing to do what is necessary to lead the Labour Party to victory in the next general election.
In some critical sense, he must repudiate Blair’s legacy, which, at a minimum, means promising to take Britain out of the Iraq War.
Brown has longed to be prime minister ever since May 12, 1994, the fateful day when John Smith, the Labour Party’s leader in opposition, dropped dead of a heart attack.
Two weeks later, on May 31, Blair and Brown met in a small restaurant in North London, and debated who should take over the party leadership.
By the end of their discussion, they had made a double deal: Brown would stand aside and support Blair as the next party leader; in return, Blair would later give up the leadership to him.
Crucially, but inevitably, they did not agree when, or under what circumstances, Blair would fulfil his side of the bargain.
Inevitably, they could not foresee that Blair would go on to win an unprecedented three successive election victories for Labour, in 1997, 2001, and 2005, and thus keep Labour in power for a record-breaking period of possibly as long as 13 years.
The key challenge for New Labour (as Blair re-styled it with his characteristic gift for spin), was the management of the British economy.
Since World War II, most British governments tried to manipulate the economy for short-term party advantage, usually with disastrous long-term results.
This lamentable tradition was common to both Conservatives and Labour; and yet, unfairly, it was the Labour Party that was most contaminated by the smear that it could not be trusted to manage the economy.
Brown decisively changed that reputation.
He has been probably the most outstanding Chancellor of the Exchequer in British history, not because of any inspiration or genius, but simply because he has built on a new tradition of prioritizing low inflation, low interest rates, and stable government finances.
Brown understood that these priorities were essential, not just for the British economy, but also for the long-term prospects of Labour in power; and he entrenched this agenda by giving the Bank of England independent responsibility for keeping inflation low.
As a result, Britain has had an unprecedented decade of low inflation and relatively high economic growth, outperforming many of its European counterparts.
Yet, despite economic success, it became steadily clearer that Blair’s time was running out.
The electorate grew increasingly disillusioned with the unavoidable shortcomings of an over-familiar government, and the party grew increasingly discontented with a leader who had outstayed his welcome.
At first, Blair thought that he could claim the right to remain in power for a third full five-year term.
But the pressure on him to go has steadily risen, to the point where he has now almost promised to give up in the summer of 2007.
But no one knows exactly when, or how, Blair will step down.
If there is a formal leadership contest, it seems likely that several rival candidates will aim to stand.
But almost all authoritative observers seem to agree that Brown is by far the most likely man to be the next Labour prime minister.
That is the easy part.
From that point on, no one seems certain whether Brown knows what to do, or has what it takes, to fight and win another general election for Labour.
His reputation for command and control of the economy is magisterial and unchallenged, but he has given almost no clue as to what he thinks of other government policies.
He has remained dour and almost silent, visibly chafing with impatience to come into his inheritance, but offering no hint of what difference he would make when he does.
The one thing he cannot do is promises to continue Blair’s policies.
If Brown offers more of the same, he will lose.
After ten years of Blair, he must offer one or more policies that mark a clear break.
The most obvious candidate for such a policy switch is Iraq: if Brown wants to win an election as Labour leader, he must renounce Blair’s policy and announce the withdrawal, in short order, of British troops.
In tactical terms, this should be easy and obvious: whatever the deceitful and illegal reasons originally given for invading Iraq, everyone now knows that this war has proved a political, strategic, and moral catastrophe.
Everyone knows that it cannot be “won,” whatever that means, and Brown knows that both the war and Britain’s servile subordination to the Bush administration are deeply unpopular in Britain.
This is the issue that is crying out to be addressed: but so far none of the main political parties has dared touch it.
In the past three weeks, Labour, the Liberal Democrats, and the Conservatives have all held their annual conferences.
All of them concentrated on domestic policies; none dared discuss Iraq, because they all know that to do so would raise the question of withdrawal, which in turn would unleash a major and possibly explosive debate about Britain’s relationship with the US.
Does Brown have the stomach to take on the risks involved in confronting the Iraq question?
Possibly not.
He may decide that it is too difficult, in which case he will be a lame duck prime minister, condemned to serve out the three years remaining in Labour’s current term with no hope of winning the next election.
That is not what he planned when he struck his bargain with Blair back in 1994.
Is Greece Japan’s Future?
TOKYO – The Greek fiscal crisis has sent shockwaves through markets around the world.
In just two years, Greece’s budget deficit jumped from 4% of GDP to 13%.
Now other European Union countries seem under threat, and the EU and the International Monetary Fund are grappling to stem the crisis before another nation trembles.
But the problem of excessive government debt is not confined to the EU.
Indeed, Japan’s debt-to-GDP ratio is around 170% – much higher than in Greece, where the figure stands at around 110%.
But, despite the grim parallel, Japan’s government does not seem to think that it needs to take the problem seriously.
Last year’s general election brought regime change to Japan.
Yukio Hatoyama’s Democratic Party of Japan (DPJ) thrashed the Liberal Democratic Party, which had governed almost continuously for a half-century.
But Hatoyama’s government has ignored macroeconomic management by abolishing the policy board charged with discussing economic and fiscal policy.
Instead, the government has focused on increasing spending to meet its grand electoral promises, including a huge amount for new grants to households and farmers.
As a result, the ratio of tax revenue to total spending this fiscal year has fallen below 50% for the first time in Japan’s postwar history.
If the government continues on this path, many expect next year’s budget deficit to widen further.
Despite the weakness of Japan’s fiscal position, the market for Japanese Government Bonds (JGBs) remains stable, at least for now.
Japan had a similar experience in the 1990’s, the country’s so-called “lost decade.”
At that time, Japan’s budget deficit soared after the country’s property bubble burst, causing economic stagnation.
But JGBs are mostly purchased by domestic organizations and households.
In other words, the private sector’s huge savings financed the government’s deficit, so that capital flight never occurred in the way it has in Greece, despite the desperate budget situation.
But this situation has deteriorated recently, for two reasons.
First, the total volume of JGBs has become extremely high relative to households’ net monetary assets, which stand at roughly ¥1,100 trillion.
But in a mere three years, total JGBs will exceed this total.
This suggests that taxpayer assets will no longer back government debt, at which point confidence in the JGB market is likely to shatter.
Second, Japanese society is aging – fast.
As a result, the country’s household savings rate will decrease dramatically, making it increasingly difficult for the private sector to finance budget deficits.
Moreover, an aging population implies further pressure on fiscal expenditure, owing to higher pension and health-care costs, with all of Japan’s baby boomers set to reach age 65 in about five years.
The increase in social-welfare costs is expected to start around 2013, three years from now.
Given these factors, the JGB market, which has been stable so far, will face serious trouble in the years ahead.
After averting its eyes since coming to power, Japan’s new government has finally started discussing tax hikes.
One possibility is an increase in the consumption tax, which currently stands at 5% – low in comparison with other industrialized countries.
But tax hikes alone with not close Japan’s fiscal black hole.
What is most needed is consistent and stable macroeconomic management.
Such management is possible.
Between 2001and 2006, Prime Minister Junichiro Koizumi aggressively tackled Japan’s fiscal problems.
Koizumi sought smaller government and set clear numerical targets for fiscal consolidation, including a primary budget balance in 10 years.
Surprisingly, Koizumi was almost successful.
Japan’s primary deficit of ¥28 trillion in 2002 was reduced to only ¥6 trillion by 2007.
If this effort had been continued for two more years, a primary budget surplus could have been realized.
But over the past three years, the prime minister changed each year, and a populist trend in fiscal expenditure took hold.
What is needed most now is for the DPJ government to restore comprehensive economic management.
A tax hike is only part of that.
Without a strategy for growth, an effort to reduce government spending, and a policy to stop deflation, a tax hike will not solve the problem.
Indeed, some economists fear that a fiscal crisis could erupt even aftera tax hike is passed.
Once that happens, the impact on neighboring countries – and on the world economy – will be huge compared to the current European problem.
After all, Japan remains the world’s second largest economy, accounting for about one-third of Asia’s GDP, and 8% of global output, whereas the GDP share of Greece in the EU is about 3%.
In some countries, lower military expenditures and interest rates has helped to improve a weak fiscal position.
But in the case of Japan, military spending is already low, as are interest rates.
This suggests that fiscal rescue will be extremely difficult if and when trouble starts – and underscores the urgent need for real political leadership now.
Is Honest Politics Possible?
" Those who desire to treat politics and morals separately will never understand anything of either." So wrote Jean-Jacques Rousseau, and I agree.
The practice of politics not only can but must be reconciled with the imperatives of honesty.
But what is honesty or dishonesty in a politician?
Is it possible for a politician to be honest at all?
The question goes to the heart of democracy.
When voters write off politicians as dishonest, anti-democratic movements thrive.
Yet all politicians know that ambiguity and compromise tend to prevail over universal truths.
Sometimes one must choose the lesser evil.
Our ordinary standards of decency and righteousness cannot always be applied - but not because cynicism and hypocrisy are all that matter in politics.
Consider, for example, that prince of ambiguity, the Duc de Talleyrand.
Not only corrupt, but a notorious traitor to consecutive masters, Talleyrand was said to have failed to sell his own mother only because there were no takers.
Yet, although serially disloyal to French rulers, Talleyrand probably never betrayed France.
Political dishonesty, it turns out, takes different forms.
Let us identify the various types.
One type is someone who is a dishonest man or woman to begin with.
Such a person will be a dishonest leader, ideologue, or diplomat in any circumstance.
Another type is the well-meaning dilettante.
Clumsy and amateurish, the dilettante's actions harm the interests he aims to advance.
Political "gamblers," on the other hand, put competence to bad use.
They are skilled but ruthless, lack humility and eschew reflection.
The gambler's close kin is the political "troublemaker," who pursues his soaring ambitions by any means necessary, whatever the risks and regardless of the cost to others.
The political "fanatic" is also dishonest, for he is blinded by the conviction that he is absolutely right in all cases.
The fanatic is inflexible and inertial, a steamroller ready to flatten everything in his way.
By contrast, the political "wheeler-dealer" is no less dishonest, for he lacks what the first President Bush called the "vision thing."
He is spineless, devoid of principle, and retreats in the face of responsibility.
Beyond these distinct types of dishonest politicians are more general political postures.
Cynical forms of pragmatism take the lead, embodied in the principle that the end justifies the means whenever moral imperatives conflict with political interests.
At the other extreme is a naive, utopian, and moralistic stance that is equally dishonest.
Its acolytes deplore the grit and relativism of politics and issue futile appeals for moral revivals.
But things are not that simple.
History is not an idyll and politicians' biographies do not read like the lives of the saints.
Paradoxically, if all people were honest, politics would become redundant.
This does not mean that we cannot identify honest politicians when we see them.
Immanuel Kant described two types of politicians.
The political moralist wants to "hammer out morality" in keeping with the requirements of politics construed as a cynical game.
It is a label that easily applies to all the types of dishonest politicians described above.
Kant's second type is the moral politician , who rejects cynical pragmatism but does not succumb to naive moralising.
An honest politician is someone who regards politics as a tool for achieving the common good.
He is not naive, and knows that patience, compromise, and a policy of small steps are often needed.
Yet in pursuing partial goals he will not lose sight of higher objectives.
An honest politician, in short, pursues a pragmatism built on principles, on the courage to say unpleasant things, but always with a constructive attitude.
Indeed, irresponsible criticism - the eagerness to expose and publicize a problem, unmatched by the willingness to propose feasible solutions - is perhaps the most common form of dishonesty in politics.
This is why actual governance is so often the best test of political honesty.
In democratic countries, if politicians who are critical of others while in opposition prove to be ineffective when in government, voters can - and often do - punish their dishonesty at the ballot box.
The toughest test of an honest politician comes when he or she must defend ideas that are unpopular but right.
Not everyone passes such a test, particularly when elections are approaching.
However, only the dishonest politician equates politics exclusively with popularity.
At the same time, a moral politician never succeeds single-handedly in ensuring the common good.
Only when politicians support one another's decency can they be confident that in critical moments for the state, they can rise above their political divisions.
But political honesty is not the sole responsibility of politicians.
Public opinion must play its part as well.
After all, political honesty - and honest politicians - is more likely to take root in a society marked by a culture of tolerance, solidarity, and the equal enjoyment of individual rights.
Political mischief-makers do poorly in such soil.
I am a political practitioner, first and foremost.
So I know that no theory, no amount of analysis, can free a politician from bouts of soul-searching, from troubling his or her conscience with questions about what is and what is not honest when confronting political choices.
Above all else, the honest politician willingly shoulders this burden.
Is Ignorance Bliss?
The age of the Renaissance man is long gone.
No one thinks it is possible anymore for an individual to grasp, fully, all areas of science and technology.
Popular software contains millions of lines of code.
Mechanisms of the immune response for just one kind of lymphocyte take up thousands of pages of scholarly journals.
An iPod's elegantly simple appearance masks underlying technology that is understood by only a tiny percentage of its users.
But, despite the vast incompleteness of our knowledge, recent research suggests that most people think that they know far more than they actually do.
We freely admit to not knowing everything about how a helicopter flies or a printing press prints, but we are not nearly modest enough about our ignorance.
The easiest way to show this is to have people to rate the completeness of their knowledge on a seven-point scale.
For any question, a “7” denotes the equivalent of a perfectly detailed mental blueprint, and a “1” implies almost no sense of a particular mechanism at all, just a vague image.
People happily, and reliably, assign numbers to their understandings of everything from complex machines to biological systems to natural phenomena such as the tides; but these ratings are usually far higher than their actual knowledge.
We can measure the discrepancy between what we think we know and what we actually know by simply asking people, after they have given their initial ratings, to tell us how some things work in as much detail as they can and then to rate their knowledge again in light of their attempt to explain.
Similarly, we can ask them to answer critical diagnostic questions (for example, “How does a helicopter go from hovering in place to flying forward?”)
Or we can simply provide them with a concise but meaty expert explanation.
In all of these cases, people somewhat sheepishly confess that their level of understanding was far worse than they originally thought.
People are often surprised and dismayed at their ignorance, but we are not generally bad at estimating how much we know.
Instead, we have a special deficit with regard to our explanatory understandings.
We are good at estimating how well we know simple facts (such as the capitals of countries), procedures (such as how to make an international phone call), and narratives (such as the plots of well-known movies).
But we seem to have a specific “illusion of explanatory depth” – the belief that we possess a more profound causal understanding than we really do.
We can be appropriately modest about our knowledge of other things, but not so about our ability to explain the workings of the world.
Several factors converge to create this illusion of knowledge.
When Leon Rozenblit and I uncovered the illusion and its specificity, we ran an extensive series of studies exploring why explanatory understanding is so vulnerable to a false sense of knowing.
All of the factors that we identified are less influential for facts, procedures, and narratives.
One important factor underlying the illusion of explanatory depth arises from the richly hierarchical nature of most complex systems, which means that they can be understood at several levels of analysis.
One can understand how a computer “works” in terms of the high-level functions of the mouse, the hard drive, and the display while not having any understanding of the mechanisms that enable a cursor to move when a mouse is moved, or allow information to be stored and erased, or control pixels on a screen.
This hierarchical structure of complex causal systems seduces us into a sense of understanding at a high level, which is then mistaken for having an understanding at a lower level.
A second factor is the false comfort we derive from seeing the parts of a system.
The more parts you can see, the more you think you know how those parts actually work.
Thus, the illusion is stronger for objects with easy-to-inspect parts than it is for objects with more invisible, inaccessible, or microscopic parts.
For example, we may think that we understand the mind much better than we do when we see images of glowing brain regions.
Finally, we often figure out things on the fly when they are in front of us, but then falsely assume that we came to the object with a full understanding in our heads rather than using and manipulating the object to decipher its mechanism.
There may be a silver lining to our inflated sense of understanding.
The world is, of course, far too complex for any lone person to fully grasp.
If a gnawing sense of ignorance kept us diving deeper in our quest to understand everything we encountered, we might suffocate in the details in one area and miss other areas completely.
The illusion of explanatory depth may stop us at just about the right level of understanding, one that enables us to know how to get more information from others when we really need it without being overwhelmed.
It would perhaps be better if we recognized the limits our own explanatory ability, but there may be some adaptive value of those limits as well.
Is India Ready for Full Currency Convertibility?
India's political boldness in seeking peace with Pakistan in their half-century twilight struggle for Kashmir may soon be matched by economic moves equally as daring.
Indeed, India is edging toward a truly bold reform: full international convertibility of the rupee.
How it goes about this will not only effect India's economic development, but provide object lessons for China as it ponders convertibility in the years ahead.
Since 1991 India has been travelling on a path from rupee devaluation to full convertibility, with the Reserve Bank of India (RBI) relaxing a range of foreign-exchange controls.
Resident Indians can now maintain a foreign-currency account and invest in shares of foreign companies, while non-resident Indians can repatriate legacy/inheritance assets.
Indian companies listed abroad can buy property in foreign countries, and resident firms will be allowed to pre-pay external commercial debt up to US$100 million.
Limits on exporters' foreign-currency accounts will be removed, and banks may invest in overseas money and debt markets.
Is India ready for full convertibility?
The government is still lagging on its domestic economic reforms.
Structural reform and privatization have slowed, eroding investors' confidence.
But failure to address structural problems could expose the economy to external shocks in the long term.
Hence it would be premature for India to open up its capital account immediately.
Exchange rate stability is the key anchor when a country's reform process is underway.
There is, however, little evidence that capital account convertibility has a meaningful impact on a country's growth rate.
With capital-account convertibility, the rupee's exchange rate will be determined more by capital flows than by inflation differentials, as India's inflation rate remains broadly in line with the OECD average of around 3%.
Because India is still running a trade deficit, there could be some pressure on the rupee following any negative shock.
Although monetary growth is more than twice the rate of real GDP growth, the inflationary risk is probably low because substantial excess capacity exists.
Indeed, throughout the 1990s, despite rising output, deflation occurred, which means that India's potential output is expanding.
The moves towards full capital-account convertibility have proceeded in step with impressive growth in India's foreign-currency reserves.
Indeed, India's external liquidity position has strengthened dramatically in the past decade.
As a result of a current-account surplus and an interest-rate differential of 3-4%, foreign reserves reached $70.3 billion by the end of 2002--enough to cover almost 15 months of imports--up from only US$4 billion in 1990.
Following the 1991 balance of payments crisis, the rupee's exchange rate was devalued around 20%.
Exporters could exchange 30% of their earnings at the market rate.
This was subsequently replaced with a two-tier exchange-rate system making the rupee partially convertible--60% of export earnings could be converted at the market exchange rate, and the rest at the RBI's fixed rate (used by the government to finance essential imports like petroleum, cooking oil, fertilizers, and life-saving drugs).
The two-tier exchange-rate system acted as an export tax, but it did not survive for long, giving way to a unified exchange rate on the trade account.
Full convertibility on the current account followed in August 1994.
The policy debate then turned to capital-account convertibility, with the IMF and the World Bank strongly in favor.
In May 1997, the Tarapore Committee on Capital Account Convertibility charted a three-stage liberalization process to be completed by 1999-2000, with an accompanying emphasis on fiscal consolidation, a mandated inflation target, and a strong financial system.
Then the East Asian currency crisis put further action on hold and raised serious questions about when--and whether--to proceed.
The sudden meltdown of apparently healthy economies served as a stark reminder that strong external liquidity should not be the driving force towards full convertibility.
The downside risk of capital-account liberalization, after all, is higher exchange-rate volatility, and even countries with sound liquidity positions could not prevent a run on their reserves.
The lesson for India is that, in the event of a domestic or external shock, full convertibility could prove to be a costly, short-lived experiment.
The fundamental question is whether full convertibility will encourage higher net inflows or outflows of capital.
The downside risk of higher volatility for the rupee is aggravated by some serious problems, including a deficit running at 6% of GDP and the strategic stand-off with Pakistan.
Short-term capital outflows--which might occur should either risk worsen--could create greater output volatility.
So it is vital for India to increase the inward flow of long-term capital, regardless of whether the capital account is closed or open.
In this context, it is noteworthy that China, with a closed capital account, has foreign-exchange reserves of US$286 billion, four times the size of India's, though China's economy is only double India's size.
Nor is full convertibility the key to attracting higher inflows of foreign direct investment (FDI).
China attracted FDI inflows of US$52.7 billion in 2002--the largest in the world.
India needs to attract higher FDI inflows to help soak up the economy's excess capacity.
This underscores the importance for India's financial stability of successful management of the capital account (monitoring inflows and outflows) following any move toward full convertibility.
But, in the near term, full capital account convertibility is not in India's interest.
Is Inequality Inhibiting Growth?
CHICAGO – To understand how to achieve a sustained recovery from the Great Recession, we need to understand its causes.
And identifying causes means starting with the evidence.
Two facts stand out.
First, overall demand for goods and services is much weaker, both in Europe and the United States, than it was in the go-go years before the recession.
Second, most of the economic gains in the US in recent years have gone to the rich, while the middle class has fallen behind in relative terms.
In Europe, concerns about domestic income inequality, though more muted, are compounded by angst about inequality between countries, as Germany roars ahead while the southern periphery stalls.
Persuasive explanations of the crisis point to linkages between today’s tepid demand and rising income inequality.
Progressive economists argue that the weakening of unions in the US, together with tax policies favoring the rich, slowed middle-class income growth, while traditional transfer programs were cut back.
With incomes stagnant, households were encouraged to borrow, especially against home equity, to maintain consumption.
Rising house prices gave people the illusion that increasing wealth backed their borrowing.
But, now that house prices have collapsed and credit is unavailable to underwater households, demand has plummeted.
The key to recovery, then, is to tax the rich, increase transfers, and restore worker incomes by enhancing union bargaining power and raising minimum wages.
This emphasis on anti-worker, pro-rich policies as the recession’s primary cause fits less well with events in Europe.
Countries like Germany that reformed labor laws to create more flexibility for employers, and did not raise wages rapidly, seem to be in better economic shape than countries like France and Spain, where labor was better protected.
So consider an alternative explanation: Starting in the early 1970’s, advanced economies found it increasingly difficult to grow.
Countries like the US and the United Kingdom eventually responded by deregulating their economies.
Greater competition and the adoption of new technologies increased the demand for, and incomes of, highly skilled, talented, and educated workers doing non-routine jobs like consulting.
More routine, once well-paying, jobs done by the unskilled or the moderately educated were automated or outsourced.
So income inequality emerged, not primarily because of policies favoring the rich, but because the liberalized economy favored those equipped to take advantage of it.
The short-sighted political response to the anxieties of those falling behind was to ease their access to credit.
Faced with little regulatory restraint, banks overdosed on risky loans.
Thus, while differing on the root causes of inequality (at least in the US), the progressive and alternative narratives agree about its consequences.
The alternative narrative has more to say.
Continental Europe did not deregulate as much, and preferred to seek growth in greater economic integration.
But the price for protecting workers and firms was slower growth and higher unemployment.
And, while inequality did not increase as much as in the US, job prospects were terrible for the young and unemployed, who were left out of the protected system.
The advent of the euro was a seeming boon, because it reduced borrowing costs and allowed countries to create jobs through debt-financed spending.
The crisis ended that spending, whether by national governments (Greece), local governments (Spain), the construction sector (Ireland and Spain), or the financial sector (Ireland).
Unfortunately, past spending pushed up wages, without a commensurate increase in productivity, leaving the heavy spenders indebted and uncompetitive.
The important exception to this pattern is Germany, which was accustomed to low borrowing costs even before it entered the eurozone.
Germany had to contend with historically high unemployment, stemming from reunification with a sick East Germany.
In the euro’s initial years, Germany had no option but to reduce worker protections, limit wage increases, and reduce pensions as it tried to increase employment.
Germany’s labor costs fell relative to the rest of the eurozone, and its exports and GDP growth exploded.
The alternative view suggests different remedies.
The US should focus on helping to tailor the education and skills of the people being left behind to the available jobs.
This will not be easy or quick, but it beats having corrosively high levels of inequality of opportunity, as well as a large segment of the population dependent on transfers.
Rather than paying for any necessary spending by raising tax rates on the rich sky high, which would hurt entrepreneurship, more thoughtful across-the-board tax reform is needed.
For the uncompetitive parts of the eurozone, structural reforms can no longer be postponed.
But, given the large adjustment needs, it is not politically feasible to do everything, including painful fiscal tightening, immediately.
Less austerity, while not a sustainable growth strategy, may ease the pain of adjustment.
That, in a nutshell, is the fundamental eurozone dilemma: the periphery needs financing as it adjusts, while Germany, pointing to the post-euro experience, says that it cannot trust countries to reform once they get the money.
The Germans have been insisting on institutional change – more centralized eurozone control over periphery banks and government budgets in exchange for expanded access to financing for the periphery.
Yet institutional change, despite the euphoria that greeted the latest EU summit, will take time, for it requires careful structuring and broader public support.
Europe may be better off with stop-gap measures.
If confidence in Italy or Spain deteriorates again, the eurozone may have to resort to the traditional bridge between weak credibility and low-cost financing: a temporary International Monetary Fund-style monitored reform program.
Such programs cannot dispense with the need for government resolve, as Greece’s travails demonstrate.
And governments hate the implied loss of sovereignty and face.
But determined governments, like those of Brazil and India, have negotiated programs in the past that set them on the path to sustained growth.
As a reformed Europe starts growing, parts of it may experience US-style inequality.
But growth can provide the resources to address that.
Far worse for Europe would be to avoid serious reform and lapse into egalitarian and genteel decline.
Is Inflation Returning?
CAMBRIDGE – Inflation is now low in every industrial country, and the combination of high unemployment and slow GDP growth removes the usual sources of upward pressure on prices.
Nevertheless, financial investors are increasingly worried that inflation will eventually begin to rise, owing to the large expansion of commercial bank reserves engineered by the United States Federal Reserve and the European Central Bank (ECB).
Some investors, at least, remember that rising inflation typically follows monetary expansion, and they fear that this time will be no different.
Investors have responded to these fears by buying gold, agricultural land, and other traditional inflation hedges.
The price of gold recently reached a four-month high and is approaching $1,700 an ounce. Prices per acre of farmland in Iowa and Illinois rose more than 10% over the past year.
And the recent release of the US Federal Reserve Board’s minutes, which indicate support for another round of quantitative easing, caused sharp jumps in the prices of gold, silver, platinum, and other metals.
But, unlike private investors, Fed officials insist that this time really will be different.
They note that the enormous expansion of commercial banks’ reserves has not led to a comparable increase in the supply of money and credit. While reserves increased at an annual rate of 22% over the past three years, the broad monetary aggregate (M2) that most closely tracks nominal GDP and inflation over long periods of time increased at less than 6% over the same three years.
In past decades, large expansions of bank reserves caused lending surges that increased the money supply and fueled inflationary spending growth. But now commercial banks are willing to hold their excess reserves at the Fed, because the Fed now pays interest on those deposits.
The ECB also pays interest on deposits, so it, too, can in principle prevent higher reserves from leading to an unwanted lending explosion.
The Fed’s ability to pay interest is the key to what it calls its “exit strategy” from previous quantitative easing.
When the economic recovery begins to accelerate, commercial banks will want to use the large volume of reserves that the Fed has created to make loans to businesses and consumers.
If credit expands too rapidly, the Fed can raise the interest rate that it pays on deposits.
Sufficiently high rates will induce commercial banks to prefer the Fed’s combination of liquidity, safety, and yield to expanding the quantity of private lending.
That, at any rate, is the theory; no one knows how it would work in practice.
How high would the Fed – or the ECB, for that matter – have to raise the interest rate on deposits to prevent excessive growth in bank lending? What if that interest rate had to be 4% or 6% or even 8%?
Would the Fed or the ECB push its deposit rate that high, or would it allow a rapid, potentially inflationary lending growth?
The unusual nature of current unemployment increases the risk of future inflation still further.
Nearly half of the unemployed in the US, for example, have now been out of work for six months or longer, up from the traditional median unemployment duration of just 10 weeks.
The long-term unemployed will be much slower to be hired as the economy recovers than those who have been out of work for a much shorter period of time.
The risk, therefore, is that product markets will tighten while there is still high measured unemployment.
Inflation will begin in product markets, rather than in the labor market.
Businesses will want to borrow, and banks will want to expand their lending.
Under these conditions, the Fed will want to raise the interest rate to prevent an acceleration of inflation.
But, if the unemployment rate is then still relatively high – say, above 7% – some members of the Fed’s Open Market Committee may argue that the Fed’s dual mandate – low unemployment as well as low inflation – implies that it is too soon to raise interest rates.
There could also be strong pressure from the US Congress not to raise interest rates.
Although the Fed’s legal “independence” means that the White House cannot tell the Fed what to do, the Fed is fully accountable to Congress.
The recent Dodd-Frank financial-reform legislation took away some of the Fed’s powers, and the legislative debate surrounding the bill indicated that there could be wide support for further restrictions if Congress becomes unhappy with Fed policy.
Politicians’ desire to keep interest rates low in order to reduce unemployment is often in tension with the Fed’s concern to act in a timely manner to maintain price stability.
The large number of long-term unemployed may make the problem more difficult this time by causing the unemployment rate to remain high even when product markets are beginning to experience rising inflation.
If that happens, Fed officials will face a difficult choice: tighten monetary policy to stem accelerating price growth, thereby antagonizing Congress and possibly facing restrictions that make it difficult to fight inflation in the future; or do nothing.
Either choice could mean a higher future rate of inflation, just as financial markets fear.
Although the ECB does not have to deal with direct legislative oversight, it is now clear that there are members of its governing board who would oppose higher interest rates, and that there is political pressure from government leaders and finance ministers to keep rates low.
Rising inflation is certainly not inevitable, but, in both the US and Europe, it has become a risk to be reckoned with.
Is Inflation the Answer?
CHICAGO – Recently, a number of commentators have proposed a sharp, contained bout of inflation as a way to reduce debt and reenergize growth in the United States and the rest of the industrial world.
Are they right?
To understand this prescription, we have to comprehend the diagnosis.
As Carmen Reinhart and Kenneth Rogoff argue, recoveries from crises that result from over-leveraged balance sheets are slow and typically resistant to traditional macroeconomic stimulus.
Over-levered households cannot spend, over-levered banks cannot lend, and over-levered governments cannot stimulate.
So, the prescription goes, why not generate higher inflation for a while?
This will surprise fixed-income investors who agreed in the past to lend long term at low rates, bring down the real value of debt, and eliminate debt “overhang,” thereby re-starting growth.
It is an attractive solution at first glance, but a closer look suggests cause for serious concern.
Start with the question of whether central banks that have spent decades establishing and maintaining anti-inflation credibility can generate faster price growth in an environment of low interest rates.
Japan tried – and failed: banks were too willing to hold the reserves that the central bank released as it bought back bonds.
Perhaps if a central bank announced a higher inflation target, and implemented a financial-asset purchase program (financed with unremunerated reserves) until the target were achieved, it could have some effect.
But it is more likely that the concept of a target would lose credibility once it became changeable.
Market participants might conjecture that the program would be abandoned once it reached an alarming size – and well before the target was achieved.
Moreover, the central bank needs rapid, sizeable inflation to bring down real debt values quickly – a slow increase in inflation (especially if well signaled by the central bank) would have limited effect, because maturing debt would demand not only higher nominal rates, but also an inflation-risk premium to roll over claims.
Significant inflation might be hard to contain, however, especially if the central bank loses credibility: Would the public really believe that the central bank is willing to push interest rates sky high and kill growth in order to contain inflation, after it abandoned its earlier inflation target in order to foster growth?
Consider, next, whether the inflationary cure would work as advertised.
Inflation would do little for entities with floating-rate liabilities (including the many households that borrowed towards the peak of the boom and are most underwater) or relatively short-term liabilities (banks).
Even the US government, with debt duration of about four years, would be unlikely to benefit much from an inflation surprise, unless it were huge.
Meanwhile, the bulk of its obligations are social security and health care, which cannot be inflated away.
Even for distressed households that have borrowed long term, the effects of higher inflation are uncertain.
What would help is if their nominal disposable income rose relative to their (fixed) debt service.
Yet, with high levels of unemployment likely to keep nominal wage growth relatively subdued, typical troubled households could be worse off – with higher food and fuel prices cutting into disposable income.
Of course, any windfall to borrowers has to come from someone else’s wealth.
Inflation would clearly make creditors worse off.
Who are they?
Some are rich people, but they also include pensioners who moved into bonds as the stock market scared them away; banks that would have to be recapitalized; state pension funds that are already in the red; and insurance companies that would have to default on their claims.
In the best of all worlds, it would be foreigners with ample reserves who suffer the losses, but those investors might be needed to finance future deficits.
So central banks would have to regain anti-inflation credibility very soon after subjecting investors to a punishing inflation.
In such a world, investors would have to be far more trusting than they are in this one.
This does not mean that nothing can be done about the debt problem.
The US experienced debt crises periodically during the nineteenth century, and again during the Great Depression. Its response was to offer targeted and expedited debt relief – often by bringing in new temporary bankruptcy legislation that forced limited debt write-downs.
In this vein, a recent proposal by Eric Posner and Luigi Zingales to facilitate mortgage-debt renegotiation would give a deeply underwater homeowner the right to file a pre-packaged Chapter 13 bankruptcy petition.
This would allow her to write down the value of her mortgage by the average house-price depreciation in her postal zone since the borrowing date, in exchange for giving the lender a share of the future house-price appreciation.
A bankruptcy judge would approve the petition, provided the court was satisfied that the homeowner could make the reduced payments.
Such automatic borrower-initiated filings, if made legal by Congress, could reduce the household-debt overhang without the need for government subsidies.
To the extent that the alternative is costly foreclosure proceedings that make borrowers and lenders worse off, this proposal should attract the support of both sides.
No solution is without weaknesses, though.
One reason that banks oppose debt write-downs is that many underwater homeowners continue to repay debt rather than default, even while cutting back on other spending.
If these diligent payers are eventually expected to default, writing down their debt today makes sense.
If they are expected to muddle through, a blanket debt write-down would weaken banks and might slow economic growth.
Policymakers espousing debt write-downs to spur growth should ask whether they have the political support to recapitalize banks if needed.
Prescriptions like these – as with those for a jolt of inflation – have gained ground because the obvious solutions to economic stagnation have been tried and failed.
But, as the proposals become more innovative and exotic, we must examine them carefully to ensure that they wouldn’t end up making matters worse.
Is Inflation the Right Battle?
BERKELEY – The Federal Reserve and other central banks are coming under pressure from two directions these days: from the left, they are pressured to do something to expand demand and hold down global unemployment; from the right, they are pressured to contract demand to rein in inflation.
This is a situation ripe for trouble, because one of these two diagnoses must be wrong.
If the world’s central banks raise interest rates while the major problem is insufficient global demand, they might cause a depression.
If they do not raise interest rates while the major problem is inflation, they might cause spikes in prices, rising inflationary expectations, and a stubborn wage-price spiral like that of the 1970’s that can be unwound only with a later, deeper depression.
I see the left as being correct – this time – in the global economy’s post-industrial North Atlantic core.
Headline inflation numbers are the only indication that rising inflation is a problem, or even a reality.
The American Employment Cost index and other indicators of developed-country nominal wage growth show no acceleration of change.
And “core inflation” measures show no sign of accelerating inflation either.
The United States is experiencing a mortgage loss-driven financial meltdown that would, with an ordinary monetary policy, send it into a severe recession or a depression.
In normal times, the Fed’s response – extremely monetary stimulus – would be highly inflationary.
But these are not normal times.
Indeed, the Fed’s monetary policy has not been sufficient to stave off a US recession, albeit one that remains so mild that many doubt whether it qualifies as the real animal.
The European Central Bank’s response has been analogous to the Fed’s, but less forceful, with monetary policy easier than the headline inflation rate would suggest is appropriate.
And in Western Europe, too, GDP is now declining.
In brief, the major central banks on both sides of the Atlantic have responded to the financial crisis, but they have not overreacted.
Even with their liquidity injections, the fallout from the financial crisis has eliminated the risk of a wage-price spiral that might otherwise have arisen.
Yet headline inflation is soaring, and, not surprisingly, gets the headlines.
This reflects three developments.
First, the world has, for the moment at least, reached its resource limits, and we are seeing a big shift in relative prices as the global economy responds appropriately by making labor and capital cheap and oil and other resources expensive.
The result of this relative price shift is headline inflation.
Second, inside the US, the return of the dollar toward its equilibrium value is carrying with it import price inflation.
Costs to US consumers are rising and making them feel poorer, not because they have become poorer, but because the previous pattern of global imbalances exaggerated their wealth.
Global rebalancing is painful for American consumers, and shows itself as higher headline inflation.
But to respond by fighting inflation inside the US would be grossly inappropriate – both much more painful for US consumers and pointless.
Finally, as the economists Adam Posen and Arvind Subramanian have argued, “China’s single-minded pursuit of mercantilist objectives produces inflation and overheating at home.” But “US efforts to get China to shed these objectives sound hypocritical when the United States seems to be opting for excess stimulus itself....[I]f the People’s Bank and the Fed tightened in coordination with most central banks, domestic [Chinese] concerns about competitive depreciation would be muted...”
China’s policy of export subsidies through currency manipulation was always bound to become unsustainable in the long run because it was bound to generate substantial domestic inflation.
Now it is also generating substantial pain for other developing countries as China’s booming economy outbids them for resources.
But it is politically impossible for the Chinese government to alter its exchange-rate policy under pressure without some “concession” from the US, and a tightening of US monetary policy could be sold as such a “concession.”
But this overlooks what ought to be at the center of the discussion: higher US unemployment right now is not an appropriate goal for stabilizing US output and offers few benefits, if any, for stabilizing US prices.
Nor is a US that cuts back on import purchases more rapidly in the interest of any export-oriented developing economy – including China.
Is Iraq Safe Yet?
WASHINGTON, DC – The Obama administration’s decision to withdraw the bulk of United Sates troops from Iraq over the next 19 months has sparked fears that Iraq will once again plunge into the wide-scale and debilitating violence that it endured from 2004 to 2007.
Those fears are, for the most part, overblown.
There are good reasons to believe that the level of stability achieved in Iraq can be maintained even without a large-scale US presence.
To understand why, it is important to know what else was going on inside Iraq in 2007, when President George W. Bush ordered the “surge” of 20,000 additional troops and General David H. Petraeus shifted US forces to a more aggressive strategy.
For, although the surge was important, two other factors played a critical role in bringing Iraq back from the brink.
First, Baghdad had been transformed into a Shiite-dominated city.
Although exact statistics are hard to come by, in 2003 approximately 35% of Baghdad’s population was Sunni.
Today, based upon the results of the recently held regional election, Baghdad is only 10% to 15% Sunni.
This means that between one million and 1.5 million Sunnis have fled the capital.
Most now are refugees in Jordan and Syria, and they are unlikely to be welcomed home anytime soon by the new Shiite elite running the country.
The ethnic cleansing of many Baghdad neighborhoods in 2006 and 2007 was deplorable.
But it made it difficult for Sunni insurgents to hide or blend in with the population, and deprived them of logistical and financial support.�It also provided a degree of safety and security for the Shiite-led government, which was largely the purpose of the well-organized campaign in the first place.
The second critical factor in stabilizing Iraq was its regional neighbors’ recognition of, and in some cases support for, Prime Minister Nouri al-Maliki’s government.
This was a major change from the 2003-2005 period, when Iraq’s Sunni neighbors, fearing the country’s new Shiite elite, actively opposed the US occupation.
The multiple insurgencies that developed in Iraq in 2003 and 2004 were supported at least in part by money, materiel, and fighters from abroad.�Suicide bombers from all over the Arab world crossed into the country through the porous Syrian and Jordanian borders.
Regional governments may not have openly supported the insurgents, but they clearly avoided cracking down on the jihadist groups operating within their borders.
Foreign governments began to change these polities after al-Qaeda in Iraq bombed three hotels in Amman, Jordan, in November 2005, killing 60 people.
Frightened governments in the region realized that the type of violence occurring almost daily in Iraq was starting to spill across the country’s borders.
Soon after this incident, the highly effective Jordanian intelligence service began assisting the Iraqi government in going after the al-Qaeda network in Iraq.
By June 2006, this effort was paying off. Jordanian agents were instrumental in providing the intelligence that enabled US forces to kill Abu Zarqawi, the mastermind of the Amman bombing.
Slowly but surely, throughout 2006 and 2007, Jordanian intelligence, working with Iraqi Sunni tribes, chipped away at al-Qaeda.
Moreover, quiet efforts were made in the Arab world to curtail the recruitment and funding of suicide bombers headed to Iraq.
Iran’s role in Iraq also changed.
The Iranian government had been a major backer of Shiite militia groups, including the Mahdi Army, led by radical cleric Muqtada al-Sadr.�But the Iranians also had close ties from the beginning with elements of the Shiite-led coalition government.
In 2008, following Maliki’s military operation to clean out militia groups in Basra, Iran’s leaders seem to have decided that this two-faced strategy had run its course.
Iran then helped broker a ceasefire that was highly favorable to Maliki, and cemented his commanding position inside the Iraqi coalition government.
No doubt Maliki’s hard-line stance on the need for a firm timetable for the withdrawal of US troops was critical to Iran’s decision to throw its weight behind him.
Both the transformation of Baghdad into a Shiite city and the recognition and support of Iraq’s neighbors for the country’s new political order have been instrumental in stabilizing the country.�These changes are likely to be permanent, and offer hope that the wide-scale violence that afflicted the country between 2003 and 2007 will not return after US forces depart.
Is Iraq the Next Afghanistan?
At the onset of the US-led war in Iraq, two competing views shaped predictions about the outcome.
The first contended that overthrowing Saddam Hussein's regime would usher in a democratic era in Iraq that would serve as a model and catalyst for democratic change regionally.
Derided by detractors as a new "domino theory," this view presented intervention in Iraq as similar to America's role in post-WWII Japan.
Against the optimism of that "Japan scenario," pessimists argued that a "Somalia scenario" was more likely.
They staked their claim on the tribal, sectarian, and multiethnic nature of Iraq, which, in the absence of dictatorship, would supposedly incite Iraq's collapse into a "failed state," with rampant warlordism, ethnic and religious feuds, and harboring of terrorist organizations.
But the main question now is whether Iraq will drift along lines somewhere between these two scenarios, increasingly resembling Afghanistan.
This "Afghan scenario" implies a weak state with nominal power over effectively autonomous fiefdoms that are headed by strongmen who are represented in the central government.
Bad as it sounds, this prospect appears to be a "realistic" compromise between the supposedly utopian vision of a flourishing, unified democracy and the wretchedness of a failed state.
Many of the actions and policies of the Coalition Provisional Authority (CPA), as well as higher-level Bush administration decisions, seem to point to a resigned acceptance that early hopes that Iraq would embrace Western-style democracy were misplaced.
Indeed, such hopes were misplaced.
Iraq's political culture - and that of most of the Middle East - is incompatible with the basic components of a recognizable Western-style democracy: notions of individual rights and responsibilities are lacking, the concept of a patriarchal state is deeply rooted, and individual cultural identity is rarely tied to the national community.
On the other hand, much circular logic figures in analyses that consider the "traditional" nature of Iraqi society an obstacle to liberal democracy.
For these analyses are hardly neutral, but unwittingly enter an ongoing confrontation.
In Iraq, as elsewhere in the Arab and Muslim worlds, a cultural war is being waged between two paradigms: grand narratives that accept and promote a collectivistic understanding (nationalism, socialism, Islamism), versus an implicit paradigm of individualistic modernity that is locally rooted yet informed by the global experience.
The frontlines of this war are notions of the individual, cultural identity, civil society, and the nation-state.
The religious Islamic component in Iraqi social life should not be underestimated.
But it also should not be equated with the political Islamism that strives to capitalize on it.
Nationalist and leftist political discourses did leave an imprint on the Iraqi value system, but they are not its sole components.
Indeed, the nominal acceptance of grand narratives of "democracy" and "human rights" as common bases for political discourse represents a crucial shift in demarcating the cultural battle.
This cultural debate is not limited to the Arab scene.
There are also vigorous discussions in the West about the applicability of democratic institutions to the Arab context.
Advocates of the notion of "Arab exceptionalism," which questions the ability of Arab societies to adapt democratic systems are in fact objectively allied with "grand narrative" ideologues - and also with the beneficiaries of the Arab world's patronage-based political order.
The models used in the West, both in political circles and in academia, for the analysis and interpretation of Arab societies are seriously deficient.
In particular, many analyses nowadays promote an ethnic model, reducing Iraq to an artificial construct that rests atop a fragmented "reality" of separate communities.
Some have even suggested hastening the outcome predicted by this faulty view by dividing Iraq into its "genuine" original components: Sunni, Shi`i, and Kurd.
In fact, Iraqi society is more complex than this.
The reception and adoption of democracy is not a function of sectarian belonging, but a reflection of the multi-dimensional historical, cultural, religious, and political identities of Iraqi individuals.
Given the right circumstances, it is eminently possible to mobilize Iraqi society towards a democratic formulation of its state-to-be.
The fall of Saddam ushers in the right circumstances.
Indeed, the seeming failure of a recognizable democratic core to emerge in Iraq within the first few months of the collapse of Saddam's dictatorship is due more to idiosyncrasies of the process than to any presumed essential nature of Iraqi society.
Upon Saddam's fall, a large "middle ground" existed in Iraq that was positively disposed towards democratic discourse and practice.
Policy mistakes and reversals eroded this middle ground, opening a path for ideological Islamism and a reconstituted neo-Ba`athism.
The key mistake was the failure of occupation forces to equip and empower the small group of Iraqi liberal democratic figures to tap into this middle ground. As a result, the space for a liberal democratic outcome receded.
But to treat this setback as a failure would be a self-fulfilling prophecy.
Iraqi democrats must re-assess and develop a clear public strategy.
The CPA, and the world community, must not prejudice the outcome of their efforts by accepting a facile and bogus view of Iraqi society.
Even if such efforts succeed, the road to a full-fledged democratic system in Iraq will still be arduous and expensive.
But instead of succumbing to a "Somalia scenario," dreaming of a "Japan scenario," or settling for an "Afghanistan scenario," Iraq may yet become a "scenario" for successful intervention in the 21 st century.
Is Israel a Normal Country?
NEW YORK -- Israel’s decision in May to drop commandoes onto a flotilla of pro-Palestinian activists was brutal.
The killing of nine civilians by those commandoes was a terrible consequence.
Israel’s blockade of Gaza and occupation of Palestinian territories on the West Bank, not to mention the road blocks, destruction of homes, and other daily torments of the Palestinians, are also a form of institutionalized inhumanity.
Nevertheless, Turkish Prime Minister Recep Tayyip Erdogan’s description of the Israeli raid on the activists’ boat as “an attack on the conscience of humanity,” which “deserves every kind of curse,” and as a “turning point in history” after which “nothing will be the same,” seems hysterical. Whatever one thinks of various Israeli governments (and I don’t think much of the current one), reactions to Israeli government-sponsored violence tend to be much fiercer – not just in Turkey – than to crimes committed by the leaders of other countries, with the exception perhaps of the United States.
But then, in the minds of many critics, the two countries are often conflated.
Israel has never done anything comparable to the late Syrian leader Haffez al-Assad’s 1982 massacre of more than 20,000 members of the Muslim Brotherhood in the city of Hama.
Far more Muslims are still being murdered by fellow Muslims than by Israelis, or indeed by Americans.
And if one thinks of the death toll of the civil war in the Democratic Republic of Congo (more than four million), talk of turning points in history, after the killing of nine people, sounds a little absurd.
But none of that seems to count as much as what Israel does.
So is it true, as many defenders of Israel claim, that the Jewish state is judged by different standards from other countries?
I believe that it is.
But, while anti-Semitism certainly plays a part, it may not be the main reason.
Especially after the 1973 “Yom Kippur” War, many Europeans, I suspect, sighed with relief that Jews could be aggressors, too.
Jewish brutality relieved the burden of wartime guilt.
Eagerness to overcome this guilt might even have prompted some people to exaggerate Israeli aggression.
The old anti-Semitic slogan, promoted by the Nazi newspaper Der Stürmer, that “the Jews are our misfortune,” has been given new currency by the Israeli conflict with the Palestinians.
There are other reasons, however, for the double standard directed at Israel.
One is what the liberal Israeli philosopher and peace activist Avishai Margalit has termed “moral racism.”
The bloodlust of an African or Asian people is not taken as seriously that of a European – or other white – people.
After all, some might say (and many more might think), what can one expect from savages?
They don’t know any better.
This is, of course, a deeply colonial sentiment, and the legacy of colonialism works against Israel in another way, too.
As was true of Apartheid-era South Africa, Israel reminds people of the sins of Western imperialism.
Israel is regarded in the Middle East, as well as by many people in the West, as a colony led by white people (even though many prominent Israelis have their roots in Teheran, Fez, or Baghdad).
The Palestinians are seen as colonial subjects, and the longer Israel continues to occupy Arab territories, the more this perception will be confirmed.
Finally, Israel is still a democracy, so it should not be judged by the same standards as dictatorships.
We must expect more of Binyamin Netanyahu’s government than of, say, Mahmoud Ahmadinejad’s regime in Iran, not because Jews are morally superior to Persians, but because Netanyahu was freely elected and is subject to the rule of law, whereas Ahmadinejad has helped to wreck whatever was democratic about Iran.
In a sense, to hold Israel to the highest standards is to pay it the compliment of being treated like a normal democracy.
If some critics of Israel refuse to treat Israel as a normal country, however, the same is true of some of Israel’s staunchest defenders.
Special pleading for Israel as a nation of victims – the natural heirs of the targets of Nazi mass murder – is another way to apply a double standard. The French philosopher Alain Finkielkraut was right to criticize the Erdogan for over-reacting to the raid on the “Gaza freedom flotilla.”
But, by adding that Hitler’s Mein Kampf is a bestseller in Turkey, he implied that Erdogan’s Turks are modern-day Nazis.
Israel as a nation of victims is, in fact, contrary to its founders’ creed.
They wanted to create a new nation, a normal nation, a nation of good Jewish soldiers and farmers, different from the powerless Jews who fell victim to European persecution.
It was only later, starting perhaps with the Eichmann trial in 1961, that the Holocaust became a staple of state propaganda.
Later still, under such leaders as Menachem Begin, military enterprises were justified by references to the Nazi genocide.
That all Jews, including Israeli Jews, should remain haunted by a horrible past is understandable.
But it must never be used to justify aggression against others.
Israel is an immensely powerful country – freer, richer, and better armed than all its neighbors.
Holding its leaders to account for their actions is essential, not only to protect Palestinians from brutality, but to preserve the freedom of Israelis.
Allowing the past to cloud our critical faculties undermines Israeli democracy, and will have further dangerous consequences in the future.
Is Japanese Militarism Back?
Japan's barbaric conduct during WWII--and the Allies' nuclear retaliation at Hiroshima and Nagasaki--laid the foundation for the US-imposed pacifism that has reigned since the war's end.
The Self-Defense Forces (SDF) that emerged during the 1950's were designed (in theory) only to defend Japan from attack.
Offensive missions were forbidden by the Constitution.
But Japan now has in Prime Minister Junichiro Koizumi a leader who wants the country to be militarily proactive.
Koizumi holds a majority in both houses of the Diet, Japan's parliament, and despite the continuing popularity of pacifism, he intends the SDF to become capable of ``preventive self defense''--a form of offensive action in all but name.
That proposal is uniting Japan's opposition parties against him.
Indeed, the dispatch of Japanese peacekeepers under UN command to Cambodia in 1992 (the first time the 240,000-strong SDF had ventured on a mission abroad) was bitterly contested.
While Japanese warships' logistical support during the recent Afghan conflict was a no-risk operation, that may not be true of the SDF's latest venture--participation in reconstruction in ``pacified zones'' in Iraq.
Japan's growing willingness to flex its muscles overseas is reflected in the changing face of the SDF.
The Koizumi government plans to add two new 13,500-ton warships, both capable of carrying helicopters and of being converted to take jump jets to strike enemy territory.
Similarly, a 6,000-man commando unit will be recruited not only to confront outbreaks of domestic terrorism, but also to provide the air-landed component for the new ship-based helicopter squadrons.
Today, Japanese spy satellites closely observe North Korea's nuclear sites.
If evidence emerges that Korea has the means to deliver nuclear weapons, then it seems probable that Japan will follow suit and develop its own nuclear capacity, riling South Korea and China.
All of this suggests a tectonic shift in Japan's military thinking.
But Koizumi is behaving in accordance with a deep-rooted tradition in Japan, one that long precedes the attack on the US naval base at Pearl Harbor in December 1941.
Indeed, next year is the centenary of the Russo-Japanese War.
To understand what is happening militarily in Japan today, there is no better approach than to examine the soul of the Japanese state one hundred years ago.
By 1904, Japan had already fought a one-sided, eight-month campaign against China.
Under the 1895 peace settlement of Shimonoseki, the full independence of Korea was guaranteed and Japan gained Formosa, the Pescadores, and Manchuria's strategically important Liaoting Peninsula, with Port Arthur (Lushun) lying just to the south.
Russia, France, and Germany objected to this.
Russia coveted Port Arthur, and the powers jointly brought pressure on Japan to withdraw from the Treaty of Shimonoseki.
As a sweetener, Japan was offered £5 million.
Outraged at being forced to back down, the Japanese invested in shipyards to build a modern fleet.
Japan was determined to assert its mastery in the region because Korea and Manchuria were essential for producing food for a population of over 46 million engaged principally in manufacturing.
Russia also coveted Korea and Manchuria.
The Japanese at first tried to appease the Russians, declaring Manchuria beyond its sphere of interest in exchange for a similar guarantee from Russia about Korea.
But Russian noblemen with timber interests in Korea persuaded the Tsar to resist.
What, they asked, could Russia possibly fear from ``yellow monkeys''?
Besides, a short, victorious war might help stem the revolutionary tide threatening the Romanov dynasty.
With a diplomatic resolution ruled out, Japan launched a preemptive strike that annihilated the Russian Fleet in Port Arthur and Chemulpo, Korea.
For the Russians, the situation military went from bad to worse.
But the peace treaty agreed at Portsmouth, New Hampshire in 1905 (brokered by President Theodore Roosevelt) hardly reflected this.
On the contrary, the New York Times called the outcome ``astonishing...
A nation hopelessly beaten in every battle of the war, one army captured and the other overwhelmingly routed, with a navy swept from the seas that dictated her own terms to the victor.''
Predictably, this fueled more outrage in Japan.
Indeed, from this point began the fatal rivalry between Japan and the US that culminated in Pearl Harbor.
The Japanese aircraft carrier Akagi , which led the attack on Pearl Harbor, flew the battle flag flown by the Mikasa , Admiral Togo's ship when he attacked the Russian fleet at Port Arthur.
Japan became militaristic previously because civilian politicians lost control of Japan's generals, who were ignored by their own colonels and majors.
The most dangerous course for Japan now would be to continue its dribbled, strategically aimless increase in defense spending, while treating the armed forces as pariahs, leaving them without a coherent command and with no leadership from the government.
The doctrine of preventive defense has deep roots in Japan, and it is a dangerous doctrine if there is a political vacuum for the country's militarists to fill.
Such a vacuum can be created only by government leaders who are too cowardly to devise and enforce their own defense policy.
The Koizumi government ought to take note.
Is Keynesian Economics Dead?
Since capitalism's beginnings, the market economy has been subject to fluctuations, to booms and busts.
Capitalist economies are not self-adjusting: market forces might eventually restore an economy of full employment, as Keynes said, but in the long run we are all dead.
Keynes proposed clear prescriptions for hard economic times: expansionary monetary and fiscal policy.
In advanced economies, Keynesian economics is the bread and butter of economic forecasting and policy making.
Expansions are longer and downturns shallower and shorter, because Keynesian prescriptions work.
Of course, theory and practice have been refined.
The theory of asymmetric information provides much of the micro-foundations for modern macroeconomics.
But some of the simplest and most important precepts, formulated well before these micro-foundations were well established--such as the fact that temporary income tax cuts are unlikely to be effective, while temporary investment tax credits can be extremely powerful--are as valid today as ever.
We learn from economic policy failures as well as from successes.
When the IMF forced large expenditure cuts in East Asia, output in those countries fell--just as Keynesian theory predicted.
In early 1998, when I was chief economist of the World Bank, I debated the US Treasury and the IMF concerning Russia.
They said that any stimulation of the Russian economy would incite inflation.
This was a remarkable admission: through their transition policies, they had managed, in just a few years, to decrease the productive capacity of the world's number two superpower by more than 40%, a devastating outcome greater than that of any war!
The loss went well beyond the cutback in military expenditures, overwhelming the civilian industrial and agricultural sectors.
In August 1998, with the ruble's devaluation, we tested the alternative, Keynsian hypotheses: production soared, and relatively quickly, showing that policies emphasizing excessive austerity had caused unnecessary idleness of human and physical resources, and unnecessary suffering.
Remarkably, the IMF was slow to learn the lesson.
While it belatedly recognized its fiscal policy mistake in East Asia, it repeated it in Argentina, forcing expenditure cuts that deepened recession and boosted unemployment--to the point where things finally fell apart.
Even now, the IMF has not acknowledged the lesson: it still insists on further cutbacks as a condition for assistance.
The IMF continues to insist on an alternative economic "theory" (though using that term may suggest a higher level of analysis than is merited)--one which Keynes fought against over sixty years ago.
In a nutshell, Keynes struggled against the notion that if only countries would cut their deficits, "confidence" would be restored, investment would return, and the economy would again attain full employment.
Under "IMF" theory, investors, seeing government resolve to eliminate deficits, flock to the country, economic performance recovers, and the policy is vindicated.
The government's budget targets are more than met.
The temporary "pain" paid handsome rewards.
I know of no country where this scenario has played out successfully, for there are two key problems with this "theory."
Confidence is important, but it is only one factor.
For example, even if investors in telecoms become utterly confident in the US economy, they are not going to invest in more fiber optics, given today's huge excess capacity.
Similarly, Argentina's export industries were unlikely to attract investors, regardless of the fiscal deficit, given the overvalued exchange rate, low export prices, and the many foreign markets that remain closed to Argentine goods.
Even if "confidence" were the single most important factor, deficits are not the only, or even the most important factor determining investor confidence.
A country in recession or depression does not inspire confidence.
Contractionary policies only exacerbate recession.
Investors in such a situation take a wait-and-see approach.
As they wait, they will not like what they see.
After all, the first effect of the expenditure cutbacks is a further decline in income, and with it profitability of investment.
With the decline in income, tax revenues decline, and, if the country has any kind of social safety net, expenditures increase.
The hoped-for improvement in the fiscal position does not materialize.
At this point, the IMF castigates the country for failing to fulfill its commitments.
But it is the IMF that should be castigated--for pushing an economic theory that was rejected long ago.
Between 1999 and 2001, Argentina's central government had done an impressive job of cutting back its expenditures, net of interest, by 10%.
What would have happened if Argentina's provincial governors had also miraculously been converted to the IMF's niggardly "logic," as demanded?
I believe the downturn would have come earlier and more precipitously.
Today's unemployment rates of 20% or more (with another 10-15% of hidden joblessness) would have been seen even before last December. Riots and political protests would have broken out earlier, too.
Economics is a difficult subject, because we cannot conduct controlled experiments.
There are not two or three Argentina's, one following the experiment that I described above, and another adopting the policies that I prefer.
But we do have a wealth of experience from which to draw inferences.
This wealth of experience all points in one direction: Keynes's teachings are still very much alive, and Argentina today would be in far better shape if his lessons had been taken to heart.
Islam as a Tool of Modernization
A big worry in Iraq and the wider Middle East is that Islam and modernization are enemies.
But Malaysian history over the past three decades shows that this belief is mistaken.
In fact, Islamization has proved to be an effective political means of reconciling the majority of Malays to the country’s rapid economic development.
In the early 1970’s, when it was still an overwhelmingly agrarian country and Islamization was just gaining momentum, Malaysia embarked on its so-called “New Economic Policy” (NEP), designed to help the majority Malays gain a bigger share of the country’s wealth.
After three decades of spectacular economic growth, many Malays have become prosperous and content not only through secular capitalism, but through the country’s renewed sense of Islamic identity, one which – for the most part – embraced modernization.
(Of course, paradoxes appear every now and then, such as when globalization is advocated alongside demands for stronger censorship.)
Islamic-minded politicians such as Anwar Ibrahim gained prominence when Islamization took off in the 1970’s.
But the Islam they promoted was not backward looking; instead, it sought to shape a modernizing economic policy that took note of Muslim sensibilities.
Faced with the grassroots popularity of this movement, by 1982 the government of then Prime Minister Mahathir Mohamed decided to co-opt Anwar Ibrahim into his United Malays National Organisation (UMNO), the dominant party within the country’s ruling coalition.
The strategy worked well, and helped defuse Islamic opposition to the wrenching changes that accompanied the country’s rapid economic modernization.
During the 1990’s, however, Anwar increased his influence within the party, unsettling many of the old guard.
Matters came to a head after the 1997 financial crisis, when Anwar, the deputy prime minister, adopted an even more economically liberal approach than Mahathir.
Partly in response to this challenge, Anwar was sacked.
Anwar’s bizarre trial and sentencing on charges of sodomy and abuse of power invigorated the reformasi movement, as growing anti-UMNO and anti-Mahathir sentiments took hold among Islamic-minded Malays.
This culminated in poor electoral results for the ruling coalition in November 1999.
The Islamist party, Parti Islam SeMalaysia (PAS), took power in the states of Kelantan and Trengganu and strongly threatened UMNO in other northern states.
The personal conflict between Mahathir and Anwar thus led to an apparent rupture between Malaysia’s Islamist political forces and the modernizers of UMNO.
So, once again, Mahathir felt pressure to adopt a strategy aimed at preventing Islam from becoming a tool of opposition.
This impulse strongly affected his choice of a successor when he decided to step down as prime minister.
His choice of Abdullah Badawi, the current prime minister, helped UMNO regain the Islamist moral high ground that the PAS had been claiming.
It was the beginning of America’s global “war on terror” in 2001, however, that brought the political march of the Islamist parties to a screeching halt, as it provided an excuse for the government to crack down on the Malay right and the PAS.
But this only renewed UMNO’s desire to portray itself as sufficiently Islamist.
So, before stepping down, Mahathir went so far as to declare Malaysia a de facto Muslim state.
Eyebrows were raised and questions were asked about the lengths to which Mahathir would go to counteract the Islamist appeal.
This trend continues.
One of Badawi’s first acts after taking over as prime minister in October 2003 was to introduce the concept of Islam Hadhari.
This vague term was finally fleshed out with a list of ten principles in September 2004, all but one of which, however, was without religious connotations.
Nevertheless, this move appeared to be all that was needed for Islam-minded voters to return to the fold of the ruling front.
In the general election in March 2004 – the first since Mahathir stepped down after 22 years in power – moderate Muslims helped Abdullah Badawi to a landslide victory.
The release of Anwar Ibrahim soon afterwards raised the new premier’s prestige further as a leader who could heal intra-Malay, and intra-Muslim, conflicts.
Since then, Abdullah Badawi has been popularizing the concept of “Hadhari,” shaping it as a means to shift Islam’s focus from its sanctioning function to its civilizing potential and rendering it less ideological.
In Malaysia today, Islam is being presented as a generator of civilization and culture, and not merely as a source of religious inspiration.
This has helped to counter extremist tendencies domestically and provides a conceptual platform for moderate Islam.
Islam Hadhari tries to project the idea that UMNO’s materialism and nationalism do not contradict Islam.
With various feints and strategies, Malaysia has effectively managed the tensions between a secular, modernizing agenda and the Islamic faith that the Malays profess.
By making Islamists and Islamist sentiments a part of the process of modernization, Malaysia demonstrates that Islamic faith and economic growth can be reconciled if politicians are clever enough not to treat them as contradictions.
Islamic Evangelism
Many believe that religious revival and political radicalism among Muslims who reside in the West reflects the traditions and conflicts of the Middle East or the wider Muslim world.
But Islamic Salafism (fundamentalist religious radicalism) is above all a consequence of the globalization and Westernization of Islam, and of the decoupling of culture and religion more generally.
All forms of religious fundamentalism rely on the notion of a "pure" religion independent of cultural variations and influences.
Today's Islamic revival shares the dogmatism, communitarianism, and scripturalism of American evangelist movements: both reject culture, philosophy, and even theology to favor a literalist reading of sacred texts and an immediate understanding of truth through individual faith.
Recent books published in the West reflect this, with titles like What is Islam? , What Does It Mean To Be A Muslim? , and How To Experience Islam?
It is easy to fast during Ramadan in Afghanistan, Pakistan, and Egypt, even if one does not want to.
But a Muslim living in Europe is confronted with the necessity of objectifying the religion.
Ulemas (religious scholars) are useless for believers who must search for purely religious criteria that are no longer linked to a given culture.
The real issue is not a theoretical question about Islam, but concerns the religious practices of Muslims.
The forms of religiosity in Islam today are more or less the same as those found in Catholicism, Protestantism, and even Judaism.
Contemporary adherents insist more on personal faith and individual spiritual experience.
Such "born again" believers rebuild their identities through their rediscovery of religion.
With Islamic fundamentalism, too, we are not witnessing a traditional religion asserting itself against the Christian West.
When the Taliban came to power in Afghanistan in 1996, they initially had excellent relations with the Americans, and Westerners could travel freely in Afghanistan between 1996 and 1998.
The Taliban were not fighting Western culture, but traditional Afghan culture.
Why forbid owning songbirds?
Why ban kites?
The rationale is common to all forms of fundamentalism: this world exists to prepare believers for salvation.
The state's role is not to ensure social justice and the rule of law, but to create opportunities - even through coercion - for believers to find salvation.
The Taliban's argument was simple: if your bird starts singing while you are praying, you will be distracted and your prayer will be nullified.
If you are a good Muslim, you will start again from the beginning.
But, because we are unsure that you are a good Muslim, it is easier to forbid owning songbirds, so that they cannot jeopardize your salvation.
Similarly, kites get tangled in trees, and if you climb the tree to free it, you might look over your neighbor's wall and see a woman without her veil, which would put you in sin.
Why risk burning in hell for a kite?
Better to ban them.
Fundamentalism is thus not a protest by original cultures under threat; it reflects these cultures' disappearance.
So it is a grave mistake to link modern forms of fundamentalism with the idea of a clash of civilizations.
Young people do not become fundamentalists because their parents' culture is ignored by Western civilization.
Fundamentalist religiosity is individual and generational, a rebellion against the religion of one's parents.
Of course, religious fundamentalists of whatever stripe often emphasize similar codes, norms, and values.
When Pim Fortuyn in Holland decided to wage a campaign against Muslim influence, he was defending sexual freedom, not traditional Christian values.
But on this subject and others - say, family and abortion - religious Muslims in Europe side with conservative Christians.
Nevertheless, such commonalities do not explain political and radical Islam.
Osama Bin Laden is much more the expression of deracination than of a tradition of political violence in Islam.
Muhammad Atta, Zacharias Moussaoui, and Kamel Daoudi were "born again" in Marseilles, London, and Montreal, not in Egypt or Morocco (and they all broke ties with their families).
Moreover, young radicals go to fight in Bosnia, Chechnya, Afghanistan, or Kashmir rather than in their countries of origin, because they do not regard the Middle East as the heart of a Muslim civilization under siege by crusaders.
They live in a global world; they do not perceive themselves as Middle Easterners.
The irrelevance of traditional culture explains the growing number of converts in all the recently discovered radical networks.
The members of the Beghal network in France were roughly one-third converts.
The French police arrested a German citizen with a Polish name in connection with the terrorist attack on the synagogue in Djerba, Tunisia.
Richard Reid, who tried to blow up a British airplane, José Padilla, accused of plotting a "dirty bomb" attack in the United States, and John Walker Lindh, the American Taliban, are all converts.
In Europe, conversion is typically confined to underprivileged neighborhoods, populated by young people with no job prospects who generally live in an underground economy of delinquency.
The radical and violent left in Europe today has abandoned these zones of social exclusion.
Radicals used to learn to handle a Kalashnikov and hijack planes with the Palestinians.
Now they learn to handle a Kalashnikov and hijack planes with Al Qaeda.
Their quest for mythic, messianic, transnational movements of liberation remains the same, as does the enemy: America's imperial colossus.
They are the product not of Western or Middle Eastern history, but the fusion of all histories, of globalization.
They are at home in a homeless world.
Islamicizing Malaysia
Malaysian society is now gripped by a fundamental question: is the country, which is more than half Muslim, an Islamic state?
In practice, various religious and ethnic groups give Malaysia a distinctly multi-cultural character.
But the Malaysian constitution provides room for arguments on both sides of the question, and the relatively secular status quo is facing a serious challenge.
Drafted by a group of experts in 1957, under the auspices of the country’s former British rulers, the constitution includes two seemingly contradictory clauses.
On the one hand, Article 3 states that Islam is the religion of the federation, and that only Islam can be preached to Muslims.
On the other hand, Article 11 guarantees freedom of religion for all.
As a result, Malaysia has developed both a general civil code, which is applied universally, and Islamic law, which is applied only to Muslims in personal and family matters.
Recently, however, some Muslim groups have pressed the government to proclaim Malaysia an Islamic state, on the basis of Article 3 and the Muslims’ population majority.
Ultimately, they would like Malaysia to be governed by Islamic law.
For years, there was little need to resolve this constitutional issue.
For example, if a Muslim decided to renounce his faith, the matter would be handled outside the legal system, or conversion records would be sealed.
Today, however, every Malaysian must declare a religious affiliation, which is registered with the government – a requirement that has made it difficult for a Muslim to leave Islam without formalizing the change of status through the legal process.
The country is now riveted on the fate of ordinary citizens like sales assistant Lina Joy and former religious teacher Kamariah Ali, who are trying to change their religious affiliation through the legal system.
Muslim professional organizations and the Islamic opposition political party hold the view that renunciation of Islam is punishable by death.
Likewise, the defense by Malaysian civil reform movements of individuals’ freedom of conscience has been denounced by some religious leaders as an attack on Islam.
Currently, Malaysia has no law that would impose the death penalty on apostates.
Yet public movements have been formed to highlight this Islamic tenet.
If it is not applied, the argument goes, there will be a massive exodus of Muslims to other faiths.
The immediate goal is to keep the courts from allowing Lina Joy or Kamariah Ali to convert.
Attempts by other democratic civil society groups to debate this issue in peaceful public forums have been thwarted by threats of violence from a coalition of Muslim non-governmental organizations calling themselves BADAI (the Malay acronym for Coalition against the Inter-Faith Commission).
Concerned about sparking an ethnic clash, Prime Minister Abdullah Ahmad Badawi has proclaimed a ban on open discussion of these issues, threatening to arrest Internet news providers and activists if they continue to fan such debates.
Badawi is right to be worried.
Since independence, national politics in Malaysia has reinforced group identity, especially among ethnic Malays, an exclusively Muslim community.
Identity politics allowed ethnic Malays to assert their claims to control over land, language, and religion.
All attempts to reduce Malay influence serve to mobilize this community – in both ethnic and religious terms.
Malay politicians have learned how to play this card very effectively.
Ethnic Malays’ special status has long been codified in affirmative action policies giving them special economic benefits.
However, as Malaysia engages with the global economy, these privileges may eventually be removed in order to heighten the country’s competitiveness.
As a result, many Malay-Muslims increasingly worry about the loss of familiar economic and political safeguards.
In particular, tensions have grown between the Malay majority and the country’s large Chinese minority, which has been quicker to benefit from Malaysia’s economic opening to the world.
Moreover, efforts to Islamicize the state comes at a time when conflict in the Middle East has further politicized Muslim movements in Malaysia.
They view themselves as counter-forces to cultural domination by the West, asserting their religious identity in the face of what they regard as imperializing ideas like secularism and human rights.
Small disputes are magnified by this underlying conflict.
Disagreements are increasingly depicted as being rooted in an East-West divide, as a struggle between believers and apostates.
Many Muslims are wary of this brand of identity politics.
They recognize that the intolerance of Islamist groups can easily be turned against moderate Muslims.
But all Malaysians must learn how to manage pressures that seem to be pushing their country’s constituent communities away from one another.
Defending a multi-cultural national identity in the face of religious intolerance is thus the great challenge facing Malaysia’s state and society.
Ending Blowback Terrorism
NEW YORK – Terrorist attacks on civilians, whether the downing over Sinai of a Russian aircraft killing 224 civilian passengers, the horrific Paris massacre claiming 129 innocent lives, or the tragic bombing in Ankara that killed 102 peace activists, are crimes against humanity.
Their perpetrators – in this case, the Islamic State (ISIS) – must be stopped.
Success will require a clear understanding of the roots of this ruthless network of jihadists.
Painful as it is to admit, the West, especially the United States, bears significant responsibility for creating the conditions in which ISIS has flourished.
Only a change in US and European foreign policy vis-à-vis the Middle East can reduce the risk of further terrorism.
The recent attacks should be understood as “blowback terrorism”: a dreadful unintended result of repeated US and European covert and overt military actions throughout the Middle East, North Africa, the Horn of Africa, and Central Asia that aimed to overthrow governments and install regimes compliant with Western interests.
These operations have not only destabilized the targeted regions, causing great suffering; they have also put populations in the US, the European Union, Russia, and the Middle East at significant risk of terror.
The public has never really been told the true history of Osama bin Laden, Al Qaeda, or the rise of ISIS in Iraq and Syria.
Starting in 1979, the CIA mobilized, recruited, trained, and armed Sunni young men to fight the Soviet Union in Afghanistan.
The CIA recruited widely from Muslim populations (including in Europe) to form the Mujahideen, a multinational Sunni fighting force mobilized to oust the Soviet infidel from Afghanistan.
Bin Laden, from a wealthy Saudi family, was brought in to help lead and co-finance the operation.
This was typical of CIA operations: relying on improvised funding through a wealthy Saudi family and proceeds from local smuggling and the narcotics trade.
By promoting the core vision of a jihad to defend the lands of Islam (Dar al-Islam) from outsiders, the CIA produced a hardened fighting force of thousands of young men displaced from their homes and stoked for battle.
It is this initial fighting force – and the ideology that motivated it – that today still forms the basis of the Sunni jihadist insurgencies, including ISIS.
While the jihadists’ original target was the Soviet Union, today the “infidel” includes the US, Europe (notably France and the United Kingdom), and Russia.
At the end of the 1980s, with the Soviet retreat from Afghanistan, some elements of the Mujahideen morphed into Al Qaeda, Arabic for “the base,” which referred to the military facilities and training grounds in Afghanistan built for the Mujahideen by bin Laden and the CIA.
After the Soviet withdrawal, the term Al Qaeda shifted meaning from the specific military base to the organizational base of jihadist activities.
Blowback against the US began in 1990 with the first Gulf War, when the US created and expanded its military bases in the Dar al-Islam, most notably in Saudi Arabia, the home of Islam’s founding and holiest sites.
This expanded US military presence was anathema to the core jihadist ideology that the CIA had done so much to foster.
America’s unprovoked war on Iraq in 2003 unleashed the demons.
Not only was the war itself launched on the basis of CIA lies; it also aimed to create a Shia-led regime subservient to the US and anathema to the Sunni jihadists and the many more Sunni Iraqis who were ready to take up arms.
More recently, the US, France, and the UK toppled Muammar el-Qaddafi in Libya, and the US worked with the Egyptian generals who ousted the elected Muslim Brotherhood government.
In Syria, following President Bashar al-Assad’s violent suppression of peaceful public protests in 2011, the US, Saudi Arabia, Turkey, and other regional allies helped to foment a military insurgency that has pushed the country into a downward spiral of chaos and violence.
Such operations have failed – repeatedly and frequently disastrously – to produce legitimate governments or even rudimentary stability.
On the contrary, by upending established, albeit authoritarian, governments in Iraq, Libya, and Syria, and destabilizing Sudan and other parts of Africa deemed hostile to the West, they have done much to fuel chaos, bloodshed, and civil war.
It is this turmoil that has enabled ISIS to capture and defend territory in Syria, Iraq, and parts of North Africa.
Three steps are needed to defeat ISIS and other violent jihadists.
First, US President Barack Obama should pull the plug on CIA covert operations.
The use of the CIA as a secret army of destabilization has a long, tragic history of failure, all hidden from public view under the agency’s cloak of secrecy.
Ending CIA-caused mayhem would go far to staunch the instability, violence, and anti-Western hatred that fuels today’s terrorism.
Second, the US, Russia, and the other permanent members of the United Nations Security Council should immediately stop their infighting and establish a framework for Syrian peace.
They have a shared and urgent stake in confronting ISIS; all are victims of the terror.
Moreover, military action against ISIS can succeed only with the legitimacy and backing of the UN Security Council.
The UN framework should include an immediate end to the insurgency against Assad that the US, Saudi Arabia, and Turkey have pursued; a Syrian cease-fire; a UN-mandated military force to confront ISIS; and a political transition in Syria dictated not by the US, but by a UN consensus to support a non-violent political reconstruction.
Finally, the long-term solution to regional instability lies in sustainable development.
The entire Middle East is beset not only by wars but also by deepening development failures: intensifying fresh water stress, desertification, high youth unemployment, poor educational systems, and other serious blockages.
More wars – especially CIA-backed, Western-led wars – will solve nothing.
By contrast, a surge of investment in education, health, renewable energy, agriculture, and infrastructure, financed both from within the region and globally, is the real key to building a more stable future for the Middle East and the world.
Blinded By ISIS
MADRID – The general consensus emerging since last month’s carnage in Paris seems to be that the Islamic State (ISIS) can be defeated only by a ground invasion of its “state.”
This is a delusion.
Even if the West and its local allies (the Kurds, the Syrian opposition, Jordan, and other Sunni Arab countries) could agree about who would provide the bulk of ground troops, ISIS has already reshaped its strategy.
It is now a global organization with local franchised groups capable of wreaking havoc in Western capitals.
In fact, ISIS has always been a symptom of a deeper malady.
Disintegration in the Arab Middle East reflects the region’s failure to find a path between the bankrupt, secular nationalism that has dominated its state system since independence and a radical brand of Islam at war with modernity.
The fundamental problem consists in an existential struggle between utterly dysfunctional states and an obscenely savage brand of theocratic fanaticism.
With that struggle, in which most of the region’s regimes have exhausted their already-limited stores of legitimacy, a century-old regional order is collapsing.
Indeed, Israel, Iran, and Turkey – all non-Arab-majority countries – are probably the region’s only genuinely cohesive nation-states.
For years, key states in the region – some of them, like Saudi Arabia and Qatar, darlings of the West – have essentially paid protection money to jihadists.
Yes, America’s wars in the region – as destructive as they were stupid – bear a substantial part of the blame for the mayhem now engulfing the Fertile Crescent.
But that does not exculpate the Arab fundamentalist monarchies for their role in reviving the seventh-century vision that ISIS (and others) seek to realize.
ISIS’s army of psychopaths and adventurers was launched as a “startup” by Sunni magnates in the Gulf who envied Iran’s success with its Lebanese Shia proxy, Hezbollah.
It was the combination of an idea and the money to propagate it that created this monster and nurtured its ambition to forge a totalitarian caliphate.
For years, the Wahhabis of Arabia have been the fountainhead of Islamist radicalism and the primary backer and facilitator of extremist groups throughout the region.
As former US Senator Bob Graham, the lead author of the classified Senate report on the terror attacks of September 11, 2001, put it earlier this year, “ISIS is a product of Saudi ideals” and “Saudi money.” Indeed, Wikileaks quotes former US Secretary of State Hillary Clinton accusing Qatar and Saudi Arabia of collusion “with Al Qaeda, the Taliban, and other terrorist groups.”
That raises an obvious question: When regimes in the region collaborate with terrorist groups, how can intelligence cooperation with them, let alone a coalition to fight Islamic extremism, be credible?
The so-called pro-Western regimes in the Arab Middle East simply do not see eye to eye with the West about the meaning and implications of the war on terror, or even about what violent radicalism is.
That is just one reason why an invasion of the caliphate, with local armies supported by Western airstrikes, could have devastating unintended consequences – think of George W. Bush’s invasion of Iraq.
Indeed, even if such a division of labor could be agreed, a ground invasion that denies ISIS its territorial base in Iraq and Syria would merely push it to redeploy in a region that is collapsing into various no man’s lands.
At that point, “Caliph” Abu Bakr al-Baghdadi, or some future would-be caliph, would invariably fuse the region’s mounting governance chaos with a global jihadi campaign – a process that, as we have seen in Paris and elsewhere, has already started.
The ideological and strategic rift between ISIS and Al Qaeda notwithstanding, an alliance against the common enemy – the incumbent Arab regimes and the West – cannot be entirely discounted.
Osama Bin Laden himself never ruled out the idea of establishing a caliphate.
Indeed, his terrorism was perceived as a prelude to it.
At the same time, Syria and Iran might exploit the inevitable chaos to expand their presence in Iraq, and all parties, including Turkey, would oppose a central role for the Kurds.
The latter have proven themselves to be tremendously reliable and capable fighters, as the battles to liberate the cities of Kobani and Sinjar from ISIS control have shown.
But no one should think that they can be the West’s tool for subduing the Sunni heartland of Iraq and Syria.
Nor is it clear that the West is capable of compensating the Kurds with full-fledged statehood.
The geostrategic constraints that have prevented Kurdish independence for centuries are even more acute today.
Some of the consequences of a Western-backed Arab invasion of the caliphate are no less predictable for being “unintended.”
It would eventually stir up mass sympathy for the caliphate throughout the region, thus providing ISIS with a propaganda victory and further inspiration for alienated young Muslims in Europe and elsewhere to fight the "Crusaders" and the Muslim "traitors" aligned with them.
The only realistic alternative is more – much more – of the same.
That means a constant and resolute effort to stop the caliphate’s expansion, cut off its sources of finance, deepen and expand intelligence cooperation among credible allies, end the oil-rich monarchies’ collusion with terrorist groups, and encourage reform (without engaging in grand state-building projects).
The Arab Middle East is not susceptible to quick fixes.
It requires profound indigenous change that might take the better part of this century to produce.
For now, turning the caliphate into yet another failed state in the region seems to be the best possible outcome.
Islam\u0027s Clash with Modernization
Ten years ago, Samuel Huntington argued that the fault lines of world politics in the post-Cold War era are mainly cultural - a ``clash of civilizations'' defined by five or six major cultural zones that can sometimes co-exist but will never converge, because they lack shared values.
One implication of this argument is that the September 11 th terrorist attacks, and the US-led response, should be viewed as part of a larger civilizational struggle between Islam and the West.
Another is that what we in the West regard as universal human rights are simply an outgrowth of European culture, inapplicable to those who do not share this particular tradition.
I believe that Huntington is wrong on both counts.
Sir V. S. Naipaul, recently awarded the Nobel Prize for literature, once wrote an article entitled ``Our Universal Civilization.''
How appropriate.
Naipaul is, after all, an author of Indian descent who grew up in Trinidad.
He argued not only that Western values are applicable across cultures, but that he owes his literary achievements to precisely that universality afforded by crossing Huntington's putative civilizational boundaries.
Universality is possible in broader terms as well, because the primary force in human history and world politics is not cultural plurality, but the general progress of modernization, whose institutional expressions are liberal democracy and market-oriented economics.
The current conflict is not part of a clash of civilizations in the sense that we are dealing with cultural zones of equal standing; rather, it is symptomatic of a rearguard action by those who are threatened by modernization, and thus by its moral component, respect for human rights.
Virtually any right that is or has been asserted historically relies on one of three authorities: God, man, or nature.
The original source of rights, God or religion, has been rejected in the West since the beginning of the Enlightenment.
John Locke's ``Second Discourse on Government'' begins with a long polemic against Robert Filmer's argument for the divine right of kings.
In other words, the secularism of the Western conception of rights lies at the root of the liberal tradition.
Today, this seems to be the major dividing line between Islam and the West, because many Muslims reject the secular state.
But before we endorse the idea of an irreducible clash of civilizations, we should consider why modern secular liberalism arose in the West in the first place.
It is no accident that liberal ideas emerged in the 16th and 17th centuries, when bloody sectarian struggles between Christian sects throughout Europe exposed the impossibility of a religious consensus on which to base political rule.
Hobbes, Locke, and Montesquieu reacted to such horrors as the Thirty-Year War by arguing that religion and politics must be separated in the interest, first and foremost, of ensuring civil peace.
Islam now confronts a similar dilemma.
Efforts to unite politics and religion are dividing Muslims just as they divided Christians in Europe.
Our politicians are right (and not merely expedient) to insist that the current conflict is not with Islam - an extremely heterogeneous faith that recognizes no authoritative source of doctrinal interpretation.
Intolerance and fundamentalism form one choice for Muslims, but Islam has always had to contend with the question of secularism and the need for religious tolerance, as is evident from the ongoing reformist ferment in theocratic Iran.
The second source of rights - the essentially positivist view that whatever a society declares by some constitutional means to be a right becomes one - likewise provides no guarantee for liberalizing tendencies, for it leads to cultural relativism.
If, as Huntington implies, the rights that we claim in the West emerged uniquely from the political crisis of European Christianity after the Protestant Reformation, what is to stop other societies from appealing to their own local traditions to deny these rights?
The Chinese government is very adept at wielding this question.
The final source of rights is nature.
In fact, the language of natural rights - advanced most emphatically in 18 th century America - continues to shape our moral discourse.
When we say, for example, that race, ethnicity, wealth, and gender are all non-essential characteristics, this obviously implies that we believe that there is a substrate of ``humanness'' which entitles us to equal protection against certain types of behavior by other groups or states.
This belief is the ultimate reason to reject cultural arguments that would subordinate some - women, for example - within a society.
Moreover, the spread of democratic institutions in non-European contexts during the last decades of the 20 th century suggests that we in the West are not alone in this belief.
But if human rights are indeed universal, should we demand their implementation everywhere and at all times?
Aristotle argues in his Nicomachean Ethics that natural rules of justice exist, but that their application demands flexibility and prudence.
That insight remains valid today.
We must distinguish between a theoretical belief in the universality of human rights and the actual practice of supporting human rights around the world, for our shared ``humanness'' is shaped in varying social environments, such that our perception of rights differs.
In many traditional societies, where life choices and opportunities are limited, the Western, individualistic view of rights is very jarring.
This is because the Western conception cannot be abstracted from the larger process of modernization.
To argue otherwise is to put the cart before the horse.
For our commitment to the universality of human rights forms but one part of the complex context of a universal civilization, from which an understanding of the other elements of modern societies - economic justice and political democracy - cannot be excluded.
Islam’s Democratic Imperative
Mahmoud Abbas’s election in Palestine and the forthcoming vote in Iraq on January 30 have pushed the question of Islam’s compatibility with democracy to the center of the world’s agenda.
Sheik Dia al-Shakarchi, a leading Shi’ite theologian, argues that democracy is not only compatible with Islam, but is essential to it.
During the last 25 years, Islam has played an increasingly influential role in politics, and not only in the Islamic world, with political Islam frequently expressing itself in radicalism and terror.
Both Muslims and non-Muslims have not always agreed on the extent to which this is compatible with genuine Islam.
How Islam is understood varies widely among devout, moderately religious, and non-observant Muslims, as well as among Islamic scholars, political parties, and organizations.
Even western experts and critics of Islam hold different views.
Overall, there are two conflicting images of Islam: a peaceful Islam, which is ready for dialogue and coexistence, and a fundamentalist Islam, which is militant and even terrorist.
There is a widespread misperception that Islam’s holy texts are written in a way that can justify both interpretations.
But, in my opinion, the reason for different – and frequently contradictory – interpretations is an incompetent and incomplete approach that detaches individual texts from their context and construes them without a thorough understanding of the true spirit of the Koran.
This approach to Islamic texts – coming from both secular and religiously oriented Muslims, as well as from non-Muslims with an interest in the subject – calls into question the compatibility of Islam and democracy, and also whether Islam is capable with peace and moderation.
But, based on more than a decade of study and debate, I am convinced of the compatibility between Islam and democracy.
Indeed, in my view, democracy is not only permitted by Islam, but can be regarded as a religious rule.
My understanding is drawn from a principle contained by the basic Islamic theory of legal reasoning, which asserts that when strong religious interests can be realized only through a particular path of action, that path itself is no longer a matter of choice.
It also becomes a religious rule.
Thus, if we can establish that democracy is the means to realize the strong interests of the Muslim community – and I believe we can do this – then democracy may be declared a religious duty in Islam.
Even if democracy might be viewed primarily as an evil from an Islamic point of view, there is another principle of interpretation of religious laws in Islam, according to which minor evils – even if religiously impermissible or not recommended at first – become permissible, recommended, and even mandatory if they alone can prevent major evils.
The Muslim interest in democracy is best understood through a clear perception of the reality of how Muslims live.
A country like Iraq, for example, is home to a diverse and varied population: Arab and Kurd, Sunni and Shi’ite, not to mention minorities of other religions and ethnic groups.
Moreover, not all Muslims practice Islam, nor do those who practice do so in the same way.
So religion cannot be imposed; individuals must practice it according to their own decisions.
Any enforcement of religious practice only creates hostility toward religion.
Thus, I believe that a political system that best serves free choice – including the choice of people to be practicing Muslims – is the best system for Islam.
Of course, the problem of Islam’s compatibility with democracy may be analyzed from different points of view.
One possible approach is purely practical, comparing democracy with all other conceivable alternatives.
In my opinion, there are only five conceivable alternatives in a Muslim country.
The first is secular dictatorship.
This is unacceptable for two reasons.
First, dictatorship itself is ugly and unacceptable; second, secular dictatorship excludes Islamic parties from participating normally in the political system.
We have considerable experience of this in the Middle East.
Of course, an Islamic dictatorship is also possible.
But this, too, is unacceptable.
As with a secular dictatorship, Islamic dictatorship is ugly and destructive.
Such a dictatorship would damage Islam by associating Islam with unjust rule and creating enemies for Islam.
A third alternative is democracy, but with secular restrictions on religious parties.
In fact, this would be a pseudo-democracy, and would infringe on the rights of religious people to full participation.
Likewise, an Islamic democracy with restrictions on non-religious parties would be a mockery of democracy and harmful to Islam.
This would also be unrealistic, because in the current age of globalization, any claims to democracy would be exposed as obviously false.
So, in my view, true democracy is the only alternative, because it is realistic and promotes peace.
Call this ideology-free democracy: a political system that tolerates restrictions imposed only from within, never from outside, the democratic process itself.
We must recognize that democracy has proved its worth around the world.
It is the best way of organizing a society based on reality and not ideals.
Why shouldn’t Iraqis benefit from the proven experience of other peoples?
Islam\u0027s Electoral Divide
How to reform the Islamic world will be among the topics NATO's leaders will discuss in Turkey next week.
Both President Bush and the European Union have proposed bold democratization initiatives in the region.
Can such initiatives succeed?
Islam and democracy are frequently presumed to be bitter antagonists.
A careful study of the world's 47 Muslim-majority states, however, shows that Islam and democracy can and do co-exist.
The real gap is narrower: it is the Arab world, not Islam, which seems at loggerheads with democracy.
This conclusion is based on comparing Muslim countries' "electoral competitiveness."
If a government sprang from reasonably fair elections and the elected government is able to fill the most important political offices, the country is deemed "electorally competitive."
Electorally competitive countries are not necessarily democratic: some do not fully control the state's territory; others violate both their constitutions and human rights.
But electoral competitiveness is always a necessary condition for democracy - and therefore a central consideration when evaluating a country's prospects for democratization.
Two initiatives - the Polity Project, founded by political scientist Ted Gurr, and Freedom House's annual Freedom in the World surveys - gauge political rights in almost every country.
The differences between Arab and non-Arab Muslim countries are striking.
Of 29 non-Arab Muslim countries evaluated by Polity IV , 11 enjoyed significant political rights for at least three consecutive years in the period from 1972 to 2000, while eight experienced at least five consecutive years of political rights.
The Freedom House scores are remarkably similar: 12 of 31 non-Arab Muslim countries had relatively high scores for at least three consecutive years, and eight for five consecutive years.
Both research teams rate Albania, Bangladesh, the Gambia, Malaysia, Mali, Niger, Nigeria, Pakistan, and Turkey as meeting the three-year criterion, with all but Albania and Niger meeting the five-year criterion.
But on the Arab side, only Lebanon had three consecutive years of relatively strong political rights - before the 15-year civil war that began in 1975 - and no country experienced five consecutive years of strong rights.
A non-Arab Muslim country in the period from 1972 to 2000 was almost 20 times more likely to be electorally competitive than an Arab Muslim-majority country.
In the non-Arab Muslim-majority subset, both Polity IV and Freedom House rate nine countries as having experienced at least three consecutive years of substantial political rights.
Strikingly, seven of them are clear "overachievers," because they also have low per capita GDP levels.
Indeed, five of the nine qualify as "great overachievers" - significant political rights despite annual per capita income of less than $1,500.
By contrast, none of the 16 Arab Muslim-majority countries is an overachiever.
Seven had annual per capita income levels exceeding $5,500 in the period from 1972 to 2000 but no significant political rights for three consecutive years.
These states are electoral "underachievers" - weak political rights despite relative affluence.
Elections do occur in the Arab world, and they vary in frequency and significance.
In the complete autocracies - Saudi Arabia, Libya, Syria, Tunisia, Iraq under Saddam, and the United Arab Emirates - there have been no meaningful elections to fill the most important offices.
The UAE, a somewhat decentralized and consensual federation, is not as dictatorial as the others, but only seven voters - the traditional rulers of the federation's seven emirates - elect the president.
Elections have begun to play a greater role in Qatar, Kuwait, Bahrain, and Oman, but none uses free and fair elections to fill the most important and powerful political offices.
Traditional monarchs still have broad powers of appointment and decree.
Finally, some Arab countries are not electorally competitive now but once did use free and fair elections to fill the state's most politically powerful offices (Lebanon).
Others seemed close to doing so (Yemen, Morocco, and Jordan) or had a possible political opening but are now substantially farther away from being electorally competitive (Egypt and, arguably, Algeria).
It makes intuitive sense that Islam cannot by itself explain such differences.
All of the world's religions contain some doctrines and practices that are potentially harmful to the emergence of democracy, and others that are potentially beneficial.
A beneficial Islamic doctrine is the Koranic injunction that "there shall be no compulsion in matters of religion."
Others include shura (consultation), ijtihad (independent reasoning), and ijma (consensus).
Perhaps religious and political leaders in electorally overachieving states such as Senegal, Mali, Bangladesh, and Indonesia draw upon some of these concepts.
Most political cultures can and do change over time, because to some extent they are socially constructed by new opportunities, threats, and contexts generally.
Witness Catholicism's pro-democratic transformation.
Unless Arab political culture is shown to be uniquely and permanently inimical to electoral competitiveness, it makes more sense to understand the democratic divide in the Muslim world in terms of the political - as opposed to the ethnic or religious - particularities of the Middle East and North Africa.
One such particularity is that many contemporary Arab states were established with relatively new and arbitrary boundaries, and were then occupied and often reconfigured as European colonies.
The linguistic dominance of Arabic throughout the Middle East and North Africa, together with pan-Arabism, reinforced weak national identities.
Anyone even remotely familiar with the region knows how common is the phrase "the Arab nation" ( watan ).
Furthermore, unlike Latin America, Africa, and elsewhere, Middle East democrats have not benefited from the Cold War's end.
The US continues to subsidize authoritarian Arab regimes, such as Egypt (which receives at least $2 billion a year), because it buys peace with Israel and maintains US geopolitical influence in the Arab-Israeli conflict.
Resolving that conflict - itself a key aspect of Arab political identity - might enable Arab political culture to change.
But NATO's leaders should bear in mind that, viewed in comparative and historical perspective, such change will be less an imposition from outside and more the result of internal pressures and initiatives.
Islam’s Forsaken Renaissance
Children often play a game where they sit in a circle.
One whispers something to his neighbor, who then whispers that information to the next child, and so on, around the circle.
By the time the last child whispers the information to the first, it is totally different from what was originally said.
Something like that seems to have happened within Islam.
The Prophet of Islam, Muhammad, brought one – and only one – religion.
Yet today we have perhaps a thousand religions that all claim to be Islam.
Divided by their different interpretations, Muslims do not play the role they once did in the world; instead, they are weakened and victimized.
The Shia/Sunni schism is so deep that each side condemns followers of the other as apostates, kafir.
The belief that the other’s religion is not Islam, and its followers not Muslim, has underpinned internecine wars in which millions have died – and continue to die.
Even among the Sunnis and Shias there are further divisions.
The Sunnis have four imams and the Shias have twelve; their teachings all differ.
Then there are other divisions, including the Druze, the Alawites, and the Wahabis.
We are also taught by our ulamas (religious instructors) that their teachings must not be questioned.
Islam is a faith. It must be believed.
Logic and reason play no part in it.
But what is it that we must believe when each branch of Islam thinks the other one is wrong?
The Koran, after all, is one book, not two or three, or a thousand.
According to the Koran, a Muslim is anyone who bears witness that “there is no God (Allah) but Allah, and that Muhammad is his Rasul (Messenger).” If no other qualification is added, then all those who subscribe to these precepts must be regarded as Muslims.
But because we Muslims like to add qualifications that often derive from sources other than the Koran, our religion’s unity has been broken.
But perhaps the greatest problem is the progressive isolation of Islamic scholarship – and much of Islamic life – from the rest of the modern world.
We live in an age of science in which people can see around corners, hear and see things happening in outer space, and clone animals.
And all of these things seem to contradict our belief in the Koran.
This is so because those who interpret the Koran are learned only in religion, in its laws and practices, and thus are usually unable to understand today’s scientific miracles.
The fatwas (legal opinions concerning Islamic law) that they issue appear unreasonable and cannot be accepted by those with scientific knowledge.
One learned religious teacher, for example, refused to believe that a man had landed on the moon.
Others assert that the world was created 2,000 years ago.
The age of the universe and its size measured in light years – these are things that the purely religiously trained ulamas cannot comprehend.
This failure is largely responsible for the sad plight of so many Muslims.
Today’s oppression, the killings and the humiliations of Muslims, occurs because we are weak, unlike the Muslims of the past.
We can feel victimized and criticize the oppressors, but to stop them we need to look at ourselves.
We must change for our own good.
We cannot ask our detractors to change, so that Muslims benefit.
So what do we need to do?
In the past, Muslims were strong because they were learned.
Muhammad’s injunction was to read, but the Koran does not say what to read.
Indeed, there was no “Muslim scholarship” at the time, so to read meant to read whatever was available.
The early Muslims read the works of the great Greek scientists, mathematicians, and philosophers. They also studied the works of the Persians, the Indians, and the Chinese.
The result was a flowering of science and mathematics.
Muslim scholars added to the body of knowledge and developed new disciplines, such as astronomy, geography, and new branches of mathematics.
They introduced numerals, enabling simple and limitless calculations.
But around the fifteenth century, the learned in Islam began to curb scientific study.
They began to study religion alone, insisting that only those who study religion – particularly Islamic jurisprudence – gain merit in the afterlife.
The result was intellectual regression at the very moment that Europe began embracing scientific and mathematical knowledge.
And so, as Muslims were intellectually regressing, Europeans began their renaissance, developing improved ways of meeting their needs, including the manufacture of weapons that eventually allowed them to dominate the world.
By contrast, Muslims fatally weakened their ability to defend themselves by neglecting, even rejecting, the study of allegedly secular science and mathematics, and this myopia remains a fundamental source of the oppression suffered by Muslims today.
Many Muslims still condemn the founder of modern Turkey, Mustafa Kamal, because he tried to modernize his country.
But would Turkey be Muslim today without Ataturk?
Mustafa Kamal’s clear-sightedness saved Islam in Turkey and saved Turkey for Islam.
Failure to understand and interpret the true and fundamental message of the Koran has brought only misfortune to Muslims.
By limiting our reading to religious works and neglecting modern science, we destroyed Islamic civilization and lost our way in the world.
The Koran says that “Allah will not change our unfortunate situation unless we make the effort to change it.” Many Muslims continue to ignore this and, instead, merely pray to Allah to save us, to bring back our lost glory.
But the Koran is not a talisman to be hung around the neck for protection against evil.
Allah helps those who improve their minds.
Islam\u0027s Reformist Tradition
The "clash of civilizations" supposedly underway between the West and the Muslim world, which many see as manifested in Iraq, as well as in Saudi Arabia's growing violence, in fact masks other conflicts - disputes that will probably prove to be far more significant in the long term.
One of these struggles is taking place among Muslims themselves over the shape of reform within their own societies.
The Muslim reformist tradition - the search for an authentic path that links Islam's traditions to the modern world - has deep roots, stretching back to the middle of the 19th century.
Back then, Muslim thinkers contrasted the decline of their own societies with Europe's dynamism, a particularly painful distinction in light of European successes in colonizing large parts of the Muslim world.
Then, too, Muslim intellectuals focused on the "decadence" of Muslim societies, their debilitating political and social corruption.
Many early Muslim reformists were clerics or senior bureaucrats, who had seen first hand how diminished their societies had become.
More importantly, they were members of a tiny minority that had been educated in the written heritage of Islam.
Far beyond Koranic recitation, these men aspired to participate in the centuries-long discussions among Muslim scholars about the proper ordering of Muslim life.
This training enabled them to compare the debased state of affairs of their time with the norms and aspirations of earlier generations of clerics and thinkers.
Their judgment was clear: Muslims had sunk far below what their religion required them to be, and lagged far behind the accomplishments of their ancestors.
For the reformers, normality meant the progressive development of Muslim societies, and they tied this to the interaction of Islamic teaching with relevant, worldly ideas of the time.
So these first reformers sought to engage with the ideas that they saw emerging from Europe: rationality, tolerance and ethically determined behavior.
These early reformers, among them Muhammad Abduh and Jamaleddin al-Afghani, did not ignite the mass mobilization they hoped for, and were not able to redress social ills through better implementation of religious prescriptions.
But their influence was powerful and lasting, and extended in directions that they could not have anticipated.
The paradox here is that the open-minded reformism they espoused helped stir conservative trends among Islamic thinkers, who seized on the reformists' revival of Islamic norms to urge a return to the "purity" of the first Islamic societies.
This conservative trend did not follow-up on the reformists' engagement with the modern ideas of the European Enlightenment, arguing instead that these represented a further estrangement from authentic Islamic values.
Thus, the most lasting effect of the first reformist wave was the establishment of a " salafi " (traditionalist) trend and eventually the emergence of an even more radical fundamentalism.
Both conservative traditionalists and radical fundamentalists were drawn to political activism and came to regard the modern state as a means to liberate Muslims from foreign domination and to re-Islamicize society through a revival of Islam's original norms.
Today, we can see the force of this ideology, but it would be a mistake to assume that the spirit of the original Muslim reformists has vanished.
Out of the spotlight, countless Muslim scholars and academics have continued to probe the connections between Islamic thought and modern values.
Drawing on critical scholarship in history and theology, they have detailed the ways in which Muslims have changed - and continue to change - their traditions, in different times and places.
Thus, a sharp, focused challenge to the assertions of religious orthodoxy has emerged in the work of such important thinkers as Abdolkarim Soroush (Iran), Abdelmajid Charfi (Tunisia), Fazlur Rahman (Pakistan), and Mahmud Muhammad Taha (Sudan).
While their work encounters great resistance from traditionalist and fundamentalist circles (whose views are widely covered in mainstream Muslim and Western media), these contemporary reformers - and the questions they have raised - have had a big impact on a rising generation of Muslim intellectuals around the world.
Of course, listeners must strain to hear the voices of reformists amidst the din of those calling for resistance to the enemy and a return to the pure sources of Islam.
However, the seeds of a new wave of "reform" have taken root, and await an early thaw to sprout.
The reformists of the first wave attempted to "reopen the doors of Ijtihad (religious interpretation)" in order to adapt the inherited systems of Islamic thinking to new conditions.
Today's reformists are subjecting these traditional frameworks to scrutiny and attempting to separate the core ethical principles of Islam from the various historical adaptations that conservatives have enshrined as sacred.
Adapting Islam to modern conditions was the purpose of the first generation of reformers.
By engaging fully with the main currents of modern thinking, their contemporary successors seek to better understand how universal principles can be expressed through Muslim tradition.
Islam versus Asia\u0027s Chinese Diaspora
When Malaysia's prime minister, Dr Mahathir Mohamed, recently announced that he intended to resign, Malaysians of Chinese descent joined Mahathir's Malay party loyalists in demanding that he reconsider.
When Mahathir agreed to stay on, if only for another 16 months, the sighs of relief from these Chinese Malaysians were the loudest of all.
That ethnic Chinese Malaysians rallied to Dr. Mahathir's side marks a quiet revolution in Malaysian politics, one that demonstrates how much Mahathir's nationalist image has softened during his 22 years in power.
It also shows how much Malaysia's ethnic Chinese have changed in their views about the nationalist movement that once seemed so antagonistic to them.
When Southeast Asia's colonial rulers were overthrown four decades ago, ethnic Chinese often shunned the nationalist movements that fought for independence.
Some movements saw the local Chinese as outsiders or as intrinsically disloyal for seeming to have benefited disproportionately during the years of imperial rule.
Across the region, anti-Chinese communal violence was widespread.
In the decades since, many Chinese remained suspicious of political parties with ties to the former national liberation movements.
In Malaysia, that fear is dissipating.
Malaysia's Chinese citizens now view Premier Mahathir as a bastion against a new form of violent extremism: the threat posed by Muslim fundamentalism.
Such a bulwark is something members of the vast Chinese diaspora across Southeast Asia need, not only in Malaysia, where Islamic extremism remains a small threat, but in Indonesia, where thousands of Chinese have been killed and injured in rioting in recent years, and where thousands more have seen their property damaged or lost.
Among most of Southeast Asia's ethnic Chinese, the presence of even a hint of allegiance to a secular distinction between faith and state in a Muslim leader is admired like a precious gem.
When found among Islamic believers like Mahathir, evidence of secular tolerance represents a rare sign of modernity and commitment to progress.
Dr. Mahathir has always been a hard-headed modernist.
Lately, he has begun to admit that the "Malay first" policies he has promoted since 1969 have failed to produce the skilled Malay elite essential to a modern knowledge economy.
Mahathir calls for young Malays to work harder, despite knowing that this is an unpopular thing to say.
Much of this new tone in Malaysia's ethnic politics has gone unnoticed due to the furor surrounding Mahathir's efforts to discredit his former deputy, Anwar Ibrahim.
This campaign to denigrate Mr. Anwar cost Mahathir's party, the United Malay National Organization (UMNO), much support among ethnic Malays.
Indeed, during the 1999 national elections, Mahathir retained power only with the help of Chinese voters.
Now non-Malays hope that he will reconsider the idea of special treatment for ethnic Malays.
Such reform, however, remains anathema among Malays.
Malaysia's ethnic Chinese are also impressed by Dr. Mahathir's skillful response to American demands to combat terrorism.
The Premier used this opportunity to soften his anti-Western image by re-affirming his modernist and secular position against those who sympathized with Islamic extremism.
By doing so he revitalized the multi-cultural base of the National Alliance that has ruled Malaysia since independence in 1957.
All of this helped rally Malaysia's Chinese community to his side.
Contrast this with the Chinese in Indonesia, a country where everything secular and modern is associated with political and cultural conformity to the nation-state.
For thirty years, former President Suharto systematically discriminated against ethnic Chinese, while at the same time favoring a few select Chinese cronies, who helped his family and military colleagues make huge, ill-gotten profits.
For the indigenous majority who remained poor, such cronyism spawned an image of the Chinese as corrupt and unscrupulously greedy.
Despite memories of the slaughter of Chinese during the anti-communist purges of the 1960s, Indonesia's Chinese were unprepared for the intense hatred shown in the riots of May 1998, when arson and looting, as well as gang rapes of numerous Chinese women, battered the Chinese community.
Such violence still casts a shadow over ethnic relations in Indonesia.
Successive Indonesian governments headed by Presidents Habibie, Abdulrahman Wahid and Megawati Sukarnoputri all welcomed the Chinese to play their customary leading role in business.
Yet Indonesian officials waver from assuring the Chinese that they retain equal rights as citizens, and they have allowed various forms of discrimination to run rampant.
Today's tensions between Indonesia's secularists, religious believers, and various Muslim extremist groups has taken the spotlight off the Chinese, allowing many to resume their economic role under conditions of growing uncertainty.
But the personal security they crave, and which Malaysia's ethnic Chinese are achieving, is as far away as ever.
Indeed, Indonesia is unlikely any time soon to produce a leader they can depend upon in ways that Malaysia's Chinese now rely upon Premier Mahathir.
Islam versus Modernity?
Islands of Isolation
PARIS – The Japanese and the British may seem very different, but a closer look reveals something akin to a parallel destiny for these two island peoples.
With their old imperial ambitions and widespread distaste for the great continents from which the narrowest of seas divide them, both the British and the Japanese are vulnerable to the siren song of isolationism.
Unfortunately, both now appear to be succumbing to that dangerous temptation.
Perhaps geography is destiny.
As islanders, Britons and Japanese have had wary relations with – and often a superiority complex toward – their great continental neighbors, Europe and China, respectively.
Both historically compensated for their isolation with strong central governments, powerful navies, dynamic entrepreneurship, vibrant culture, and imperial ambition.
Today, Japan and the United Kingdom pretend to be open societies, and to be stakeholders in the globalization process.
In reality, both remain mostly inward looking and preoccupied with the disintegration of their original culture.
Both try desperately to keep immigrants at bay, whether through cultural segregation in the UK or, in Japan’s case, by mere rejection.
The more civilizations become intertwined in the new world order, the more the Japanese and British are tempted to remain aloof and apart.
In Japan, the isolationist temptation is expressed in the current nostalgia for the Edo period, from 1600 to 1868, before Emperor Meiji opened Japan to the world.
“Back to Edo” has become a dominant mood and theme in public debates, promoted by writers, pundits, and historians like Inose Naoki (who is also Vice Governor of Tokyo), who argue that the Japanese were much happier within their closed world, blissfully insulated from the quest for material success and international status.
This “Back to Edo” discourse translates into the refusal of young Japanese to learn a foreign language or travel abroad.
Indeed, in Europe, North America, and elsewhere, the omnipresent Japanese tourists of the 1970’s have been replaced by Chinese and Koreans.
The number of Japanese studying abroad is at a new low at the very moment when South Koreans and Chinese are swarming into European and North American universities.
Even the world’s great universities, from Harvard to Oxford, are seeing fewer Japanese students.
Here the British are very much mimicking the Japanese: fewer and fewer are learning foreign languages, studying abroad, and following the old path of working in Hong Kong, Singapore, or Australia.
So prevalent is this “little England” mood that Prime Minister David Cameron’s government is now tempted to hold a referendum to ask the British whether they want to remain within the European Union, a vote that even that arch euro-skeptic, Margaret Thatcher, never risked.
The prospect of a referendum reflects the overwhelming mood among the Tories, who sometimes mention Norway – a non-EU member whose main role in global affairs is to award the Nobel Peace Prize – as a model for Britain’s role in the world.
Of course, Norway has the world’s highest per capita income.
But that is not the relevant standard against which the UK or other Western countries should measure themselves, because Norway has a tiny, homogeneous, population and sits on vast – and well-managed – natural resources.
If asked in a referendum, the British might well leave the EU, which they never liked.
This would have the unintended consequence of strengthening the federalists on the continent, thereby accelerating the integration dynamic that the British now want to stop.
Indeed, the British would leave just when Iceland, Serbia, Turkey, and Ukraine, despite Europe’s current crisis, are trying to get in.
And, while the eurozone may be in crisis, Poland, among others, still want to join in the near future.
The British may turn their nose up at the euro – to which even the supposedly independent Swiss franc is pegged – but it will almost certainly remain the currency of nearly 300 million Europeans.
Isolationism, whether in Japan or the UK, is not only a short-sighted choice; especially for Japan, it may also be a perilous one, given the rise of China next door.
Both Japan and the UK, much as they may not wish to admit it, depend on the global market.
Isolationism would leave their citizens ill prepared to confront competition and their governments excluded from decisions that impact the global economy and trade.
Nor can isolationism guarantee national security at a time of rising threats from terrorist groups and rising ambitions on the part of China and Russia.
The Edo nostalgia in Japan and the Norway model’s appeal in the UK are not rational choices.
They merely channel national wariness at a time of global competition between cultures, economies, and emerging strategic ambitions.
Sometimes nations, like individuals, grow tired and long for their idealized youth – a recurrent phenomenon that historians call “declinism.”
Whether one calls it that or a desire for a holiday from history, Japan and the UK today seem to be choosing a path that will only accelerate decline.
Islands of Nationalism
BEIJING – If the recent tension between China and Japan over disputed islands in the East China Sea is any indication, relations between the world’s second and third largest economies will not be smooth for some time to come, despite ever-increasing bilateral trade and investment.
That is because both countries’ latest rush to affirm their sovereignty over the islands – called Senkaku in Japanese and Diaoyu in Chinese – reflects a sense of insecurity and a perception that the other side is taking an aggressive stand, which means that the issue is unlikely to be resolved in the foreseeable future.
On the Japanese side, there is growing anxiety over China’s increasing economic and military prowess, such that some nationalists would like to “settle” the matter in Japan’s favor as soon as possible.
Tokyo Governor Shintaro Ishihara’s recent call for Japan’s government to “purchase” the islands from “private” Japanese owners can be explained in this context.
On the Chinese side, the maritime quarrels with Japan – and with Brunei, Malaysia, Vietnam, and the Philippines in the South China Sea – have reignited a national debate about whether China’s foreign policy is too weak in terms of asserting the country’s interests.
America’s “pivot” to Asia, viewed by many Chinese as an effort by the United States to reassert itself in Asia by supporting other Asian states in “containing” China’s rise, has fueled a siege mentality among Chinese nationalists.
Their response is to call for tough military action in the South China Sea, and to stage symbolic landings on the Diaoyu/Senkaku islands, such as those staged by Hong Kong activists on August 15.
Japan arrested the activists, but deported them soon after, thus avoiding a prolonged confrontation with China.
The Japanese authorities clearly learned a lesson from their detention of a Chinese fishing boat captain two years ago, when they eventually acceded to Chinese pressure – which included a range of harsh, and escalating, political and economic measures– to release him.
Soon after the Hong Kong activists' protest landing on the disputed islands, Japanese citizens, including local assembly members, staged their own landing there.
Moreover, the Japanese government, while rejecting a further appeal from Ishihara to provide land on the isles to the Tokyo municipality, is, however, raising money to purchase some of the islands from their supposedly bankrupt Japanese owner.
Such mixed signals have further inflamed nationalist sentiments in China, and anti-Japanese demonstrations have broken out in many Chinese cities, including an attack on the Japanese ambassador’s official vehicle.
Both sides urgently need to cool off, especially in order to contain their extremist elements and prevent them from taking over the issue and setting the policy agenda.
In the short term, China’s government should discourage further anti-Japanese demonstrations.
Well-educated Chinese should understand that destroying Japanese cars (which are made in China) and similar behavior are not rational ways to express an opinion about a territorial dispute with Japan.
And China’s government should work with the Hong Kong authorities to prevent another attempt by Chinese activists to land on Senkaku/Diaoyu again in October.
For its part, Japan should suspend its plan to buy the islands, an effort that is certain to make matters worse if it goes ahead.
The status quo is that the Chinese government has not challenged Japan’s de facto control of the islands, so further action to force China’s hand would be extremely unwise.
In the medium term, the two governments should work out a formula for coping with scenarios that now play out regularly.
A crisis-management team, composed of representatives of both countries’ foreign ministries, coast guards, and militaries, should not only meet regularly, but should also consult each other in emergency situations, thereby minimizing the risk that matters get out of control.
Moreover, such a formula should bar provocative actions by either side, including military exercises, such as those staged recently by China and, jointly, by the US and Japan.
It should also contain a standard procedure for managing the aftermath when behavior by citizens of either country forces the two governments into unexpected situations.
In the long run, the best outcome is a peaceful resolution to the sovereignty issue, or, barring that, a compromise that satisfies both sides’ core interests.
Joint development of the area’s resources, which both countries need, should be returned to the bilateral agenda.
China’s former leader Deng Xiaoping famously proposed that, for the sake of better Sino-Japanese relations, the two countries should shelve the Diaoyu/Senkaku dispute for future generations to resolve.
That wisdom remains the best advice to date, especially given that the consequences of a worsening bilateral relationship would extend far beyond China and Japan.
Is Liquidity Enough?
Every week more liquidity is injected into the global banking system by the United States Federal Reserve and the European Central Bank.
The average interest rate paid for overnight reserves in the US has been well below the 5.25% per year that the Fed still publicly says is its target.
But the market for overnight reserves now appears to be divided into three segments.
Banks known to be healthy can borrow at much less than 5.25%.
But banks facing possible liquidity problems – which the Fed wants to be able to borrow at 5.25% – are borrowing from the Fed itself at 5.75%, as are a few big banks that want more liquidity but don’t believe they could get it without disrupting the market.
Such a difference in the prices charged to “regulated banks” in financial markets is a sign of a potential breakdown.
To date, the premiums charged are small: for an overnight loan of $100 million, even a one-percentage-point spread in the interest rate is only $3000.
That reflects the small probability that the market is assigning to the occurrence of a full-blown financial crisis with bankruptcies and bank failures.
In normal times, however, there is no such premium at all.
The fact that there is even a small liquidity crunch for banks implies larger liquidity crunches for less intensively regulated financial institutions, and even greater liquidity crunches for manufacturing and real-estate companies.
It is hard to imagine that manufacturers are not now postponing orders of capitals goods, and that new home sales in America are not dropping right now.
How does the Fed deal with such a situation?
Gingerly.
A decade ago, Alan Greenspan likened his problems of monetary management to driving a new car, having it suddenly stop, opening the hood, and not understanding a thing about what he saw.
The changes in finance had been that great.
The Fed’s actions have involved what former Fed governor Larry Meyer calls “liquidity tools,” as opposed to interest rate-based monetary policy.
The Fed hopes that it can handle the current situation without being forced to rescue market liquidity by cutting interest rates and thus giving what it fears would be an unhealthy boost to spending.
The Fed still hopes that liquidity and confidence can be restored quickly, and that the summer of 2007 will serve future economists as an example of how de-linked financial markets can be from the flows of spending and production in the real economy.
I think that the Fed is wrong: the fallout from the current liquidity panic means that a year from now we are likely to wish that the Fed had given a boost to spending this month.
The reason is that healthy spending and production no longer depend only on the soundness of the banking system and public confidence in its stability.
Nowadays, the banking system is much larger than the set of institutions formally called “banks” that are intensively regulated by central banks and treasuries.
A bank, at bottom, is something that (a) takes deposits, (b) provides loans, (c) pretends to its depositors that their money (its liabilities) are more liquid than its assets, (d) collects net interest as a result, and (e) gets away with it almost all the time.
The deposits can be individuals’ paychecks and the loans can be to small businesses.
Or the deposits can be consumer paper issued by KKR Atlantic Financing, and the loans can be CDO sub-prime mortgage tranches that KKR Atlantic holds in its portfolio.
Or the deposits can be investments in D.E. Shaw’s funds and the loans can be the complex derivatives that make up D.E. Shaw’s portfolio.
In all these cases, the liability holders – i.e., the depositors – have been promised liquidity, yet that promise cannot be kept if it is ever doubted.
It is being doubted now.
Central banks should not focus only on keeping markets liquid.
In the future, even liquid markets will be willing to intermediate fewer transactions than they were two months ago.
So central banks must also focus on how the fall in the volume of money flowing through financial markets will affect spending, and on how much they should cut interest rates and expand money supply to offset these effects.
Is Low-Wage China Disappearing?
BEIJING – Reports about labor shortages, wage disputes, and wage increases for migrant workers in China have abounded of late.
They naturally raised concerns, or expectations, that China’s labor-cost advantages may be disappearing.
It is my hope that China’s comparative advantage as a low-wage producer does disappear – the sooner the better.
But why should I, a Chinese economist, wish to see China’s competitiveness reduced through rising labor costs?
After all, when a country still lacks real advantages, such as higher education, efficient markets and enterprises, and a capacity for innovation, it needs something like low wages to maintain growth.
While cheap labor has been a key factor in generating high growth over the past three decades, it has also contributed to profound income disparities, especially in recent years.
And persistent, widening inequality might cause social crises that could interrupt growth and damage competitiveness.
China must avoid such a scenario, and if wages could increase in some meaningful way, it would indicate that the economy might finally reach the next stage of development, during which income disparities would be narrowed.
Unfortunately, China has not yet reached that point – and will not any time soon.
Agriculture remains the main source of income for more than 30% of China’s labor force, compared to less than 2% in the United States or 6% in South Korea.
Another 30% of the labor force comprises migrant workers, who have doubled their incomes by moving from agriculture to the industrial and service sectors.
Although migrant workers earn only about $1,500 per year on average, the income gap between them and agricultural laborers provides a powerful incentive for the latter to try to find better-paid non-farm jobs.
Naturally, this competition in the labor market suppresses non-farm wages: whereas labor productivity in non-farm sectors increased by 10-12% annually in the past 15 years, migrant workers’ real wages have increased by only 4-6% per year.
As a result, income disparity between low-end labor, on the one hand, and professionals and investors, on the other, has also increased.
All this means that the process of industrialization in China still has a long way to go.
To reduce farm labor to 10% of the labor force (the point at which, judging by historical experience elsewhere, China may achieve worker-farmer wage equilibrium), the economy needs to create about 150 million new non-farm jobs.
Even if the economy continues to grow at 8% per year, China might need 20-30 years to reallocate agricultural laborers and reach “full employment.”
But this requires generating eight million new jobs every year, including five million for farmers leaving the countryside.
During this long process of industrialization, wages will increase gradually, but it is very unlikely that they will grow at the same rate as labor productivity.
This is bad news for reducing income inequality, as capital gains and high-end wages may grow much faster.
But it should be the good news for competitiveness, because Chinese wages will remain relatively low in terms of “wage efficiency.”
Indeed, the wage increases of recent years have not changed the basic cost structure of Chinese companies.
An analysis by Goldman Sachs shows that, despite real wage gains, the share of labor costs in total manufacturing costs is lower than it was in 2001 – a trend that continued in the first half of 2010.
To prevent serious social tension, China’s government (at various levels) has begun to intervene by enforcing higher minimum wages, in addition to investing in a social safety net for the poor.
In some provinces, minimum wages have increased by more than 30%.
But the minimum wage is normally much lower than the effective wage, and thus has not changed the fundamental relationship between wages and labor productivity.
Nevertheless, artificial wage increases enforced by government policies could slow down the process of labor reallocation and make some “surplus labor” permanent.
Income disparities will not be fundamentally altered until the market equilibrium wage inches upwards sufficiently to create labor demand at decent wage levels.
So will companies, both multinationals and Chinese, leave for Vietnam, Bangladesh, or Mozambique?
Perhaps.
But that will happen only if the other countries’ wages are relatively more efficient (i.e., productivity there is ultimately higher than in China), and not just because Chinese nominal wages go up.
For now, however, this does not seem to be the case in general.
Evidence that China’s wage efficiency remains high relative to other developing countries comes in the form of continued growth in inflows of foreign direct investment over the past 12 months, despite wage increases.
In July, for example, FDI increased by 29.2% year on year, much higher than the global average.
There may be many factors behind China’s strong FDI performance, but it does mean that the nominal wage increase itself may not lower the capital gains that concern investors most.
In any case, the Chinese wage story is much more complicated than it might seem.
Nominal wages may increase, while real wages stagnate, owing to higher inflation.
Even if real wages increase in some coastal cities, “surplus labor” could keep the national average flat.
And even a real wage increase on the national level will not undermine competitiveness if labor productivity grows still faster.
So the conclusion seems to be that wage growth will not threaten China’s competitiveness in the next 10 or even 20 years.
As China will not complete the process of reallocating workers from agriculture to more modern economic sectors any time soon, it should remain a cost-competitive economy for the foreseeable future.
Is Mexico Disintegrating?
MEXICO CITY – Shortly before America’s elections last November, then vice-presidential candidate Joseph Biden was widely criticized for predicting that an Obama administration would almost certainly be tested by what he called a “generated” international crisis, in much the way that the Soviet Union “tested” John F. Kennedy shortly after he assumed office.
Biden did not point to a specific region of the world, but mentioned the Middle East, the Indian sub-continent, and Russia as the likeliest sources of trouble for the new president.
Impolitic or not, Biden’s anxieties seem to have informed several of the administration’s early foreign policy decisions.
These include Biden’s own extension of an olive branch to Russia at the recent Munich Security Conference, and Barack Obama’s appointment of Richard Holbrooke as special envoy for Pakistan and Afghanistan and of George Mitchell to a similar post for Israel-Palestine.
But, as pressing as the Middle East, south Asia, and Russia (as well as Iran and North Korea) are, another crisis far closer to home could create as much peril as a nuclear-armed Iran, an aggressively resurgent Russia, or even an Islamist-dominated Pakistan.
That crisis is located in Mexico, which is in freefall, its state institutions under threat as they have not been since at least the Cristero Uprising of the late 1920’s and possibly since the Mexican Revolution of 1910.
While the Obama administration is obviously aware of what is happening south of the Rio Grande, the threat simply does not command the attention that its gravity requires.
The crisis consists in nothing less than an effort by the major drug cartels to tame and suborn the Mexican state, and not just in the strip along the United States border, though the epicenter of the crisis is there.
Obviously, the cartels’ leaders do not have designs on Mexico’s presidential palace.
But, through a policy of terror extending from Oaxaca in the south, through Acapulco on the Pacific coast, and up to the great border cities of Tijuana and Juarez (Mexico’s sixth and seventh most populous cities, respectively), they have made it abundantly clear that they are trying to achieve impunity.
The only recent parallel in Latin America was a similar effort fifteen years ago by the Colombian drug cartels.
That disguised coup failed – barely – and there is no guarantee that the result will be similar this time around in Mexico.
Journalists with long experience of war zones report being more worried about their safety in Mexico border than when they were in Bosnia, Afghanistan, or Iraq, though much of the violence is internecine.
Of the thousands who have been killed, often after being horribly tortured, many, if not most, have been members of the drug cartels and their families.
But it is the campaign of targeted assassination against any Mexican official who seems to pose a serious threat to the cartels’ operations that makes the crisis so dire.
First, in May 2007, the cartels killed Jose Nemesio Lugo Felix, the general coordinator of information at the National Center for Planning and Analysis to Combat Organized Crime.
Soon after, a hit man murdered Edgar Milan Gomez, Mexico’s highest-ranking Federal police official.
In November, 2008, a plane carrying Juan Camilo Mourino, Mexico’s national security advisor, crashed under mysterious circumstances.
And very recently, retired General Mauro Enrique Tello Quinones, one of the most decorated officers in the Mexican army, was abducted, tortured, and killed less than a week after assuming a new position as anti-drug chief in the resort city of Cancun.
For all the lip service paid to relations with Mexico (and, indeed, with Latin America more generally) from Franklin D. Roosevelt to Obama, the truth is that developments in Mexico have always gotten short shrift from US presidents.
Illegal immigration is a major issue, to be sure, as is the drug trade.
But the US government has always regarded them as domestic American issues rather than as key foreign-policy concerns.
It is emblematic that while Obama has received Mexican President Felipe Calderón, the White House only recently announced that one of his first foreign trips would be to Mexico.
And incoming Secretary of State Hillary Clinton was asked almost nothing about Mexico at her confirmation hearing, and she emphasized relations with Mexico neither in her own statement nor in those she has made since assuming her post.
Indeed, the conventional wisdom in the US is that Mexico policy regarding illegal immigration and drugs will be the province of the new Homeland Security secretary, Janet Napolitano (herself a former border state governor).
Meanwhile, the Treasury and Commerce departments will be handle trade policy concerning the North American Free Trade Agreement.
This is the way Mexico policy has been run for decades.
And, offensive as this has been to Mexican sensibilities – and harmful to finding long-term solutions to America’s immigration dilemma –these complacent arrangements have never presented so clear and present danger as they do today.
Is Middle East War Inevitable?
BERLIN – Fuad Siniora, Lebanon’s former prime minister, is a thoughtful man with deep experience in Middle Eastern politics.
So when he speaks of “trains with no drivers that seem to be on a collision course,” as he recently did at a private meeting in Berlin, interested parties should probably prepare for unwanted developments.
Of course, no one in the region is calling for war. But a pre-war mood is growing.
Four factors, none of them new but each destabilizing on its own, are compounding one another: lack of hope, dangerous governmental policies, a regional power vacuum, and the absence of active external mediation.
It may be reassuring that most Palestinians and Israelis still favor a two-state solution.
It is less reassuring that most Israelis and a large majority of Palestinians have lost hope that such a solution will ever materialize.
Add to this that by September, the partial settlement freeze, which Israel’s government has accepted, will expire, and that the period set by the Arab League for the so-called proximity talks between the Palestinians and Israelis, which have not seriously begun, will also be over.
Serious direct negotiations are unlikely to begin without a freeze on settlement building, which Israel’s Prime Minister Netanyahu is unlikely to announce or implement, given resistance within his coalition government.
Syria, which until the end of 2008 was engaged in its own Turkish-mediated proximity talks with Israel, does not expect a resumption of talks with Israel anytime soon.
This may be one reason why Syrian President Bashar al-Assad mentions war as an option, as he recently did in Madrid.
Moreover, Israelis and people close to Hezbollah in Lebanon are talking about “another round,” while many pundits in the Middle East believe that a limited war could unblock a stagnant political situation.
Their point of reference is the 1973 war, which helped to bring about peace between Egypt and Israel.
But the wars that followed, and the latest wars in the region – the Lebanon war of 2006 and the Gaza war of December 2008/January 2009 – do not support this reckless theory.
Iran, whose influence in the Levant is not so much the cause of unresolved problems in the Middle East as the result of them, continues to defy the imposition of new sanctions by the United Nations Security Council.
Iranian rulers have as little trust in the West as the West has in them, and they continue to increase international suspicion by their words and actions.
Repeated calls by Iranian President Mahmoud Ahmadinejad about Israel’s eventual disappearance play into the hands of those in Israel who argue that Iran’s nuclear program must be ended militarily.
Some of the Middle East’s most important players are increasing the risks of confrontation because they have either lost a proper feeling for their regional and international environment, or seek to increase their own political power through provocation and brinkmanship.
Netanyahu’s short-sighted reluctance to give up settlements and occupied territory threatens Israel’s long-term interest to reach a fair settlement with the Palestinians.
In its deadly assault on the Gaza flotilla in May, Netanyahu’s government demonstrated a kind of political autism in its inability to realize that even Israel’s best friends no longer wish to accept the humanitarian consequences of the Gaza blockade.
In the Arab world, there is currently no dominant power able to project stability beyond its own national borders.
It will take time before Iraq will play a regional role again.
The Saudi reform agenda mainly concerns domestic issues.
Egypt’s political stagnation has reduced its regional influence.
Qatar over-estimates its own strength.
The only regional power in the Middle East today is Iran, but it is not a stabilizing force.
The Arab states are aware of this.
Much as they dislike it, they are also fearful of a war between Israel or the United States and Iran, knowing that they would have little influence over events.
Indeed, intra-regional dynamics in the Middle East today are driven by three states, none of which is Arab: Israel, Iran, and, increasingly, Turkey.
In recent years, Turkey tried to mediate between Israel and Syria, Israel and Hamas, opposing factions in Lebanon, and lately between Iran and the five permanent members of the UN Security Council plus Germany.
Turkey should continue to play this role.
But the Turkish government has increasingly allowed itself to be dragged into Middle East conflicts, rather than functioning as an honest broker.
The Obama administration has had a strong start with respect to the Middle East.
But a year and a half after his inauguration, Obama’s “outstretched hand” to Iran has turned into a fist, and his attempts to encourage Israeli-Palestinian negotiations seem stuck.
Domestic issues are likely to preoccupy Obama and his team at least up until the mid-term elections this November, thus precluding active diplomacy during the critical months ahead.
And the European Union?
There has not been much active crisis-prevention diplomacy from Brussels or from Europe’s national capitals.
None of the leading EU states’ foreign ministers seems even to have made an attempt to mediate between Europe’s two closest Mediterranean partners, Israel and Turkey.
Twenty years ago, in the weeks that preceded Iraq’s invasion of Kuwait, many observers saw signs of a looming crisis.
But Arab and Western players somehow managed to convince themselves that things would not get out of hand.
That crisis, and others before and since, showed that tensions in the Middle East rarely dissolve with the passage of time.
Sometimes they are resolved through active diplomatic intervention by regional or international players.
And sometimes they are released violently.
Is Military Power Becoming Obsolete?
CAMBRIDGE – Will military power become less important in the coming decades?
It is true that the number of large-scale inter-state wars continues to decline, and fighting is unlikely among advanced democracies and on many issues.
But, as Barack Obama said in accepting the Nobel Peace Prize in 2009, “we must begin by acknowledging the hard truth that we will not eradicate violent conflict in our lifetimes.
There will be times when nations – acting individually or in concert – will find the use of force not only necessary but morally justified.”
When people speak of military power, they tend to think in terms of the resources that underlie the hard-power behavior of fighting and threatening to fight – soldiers, tanks, planes, ships, and so forth.
In the end, if push comes to shove, such military resources matter.
Napoleon famously said that “God is on the side of the big battalions,” and Mao Zedong argued that power comes from the barrel of a gun.
In today’s world, however, there is much more to military resources than guns and battalions, and more to hard-power behavior than fighting or threatening to fight.
Military power is also used to provide protection for allies and assistance to friends.
Such non-coercive use of military resources can be an important source of the soft-power behavior of framing agendas, persuading other governments, and attracting support in world politics.
Even when thinking only of fighting and threats, many analysts focus solely on inter-state war, and concentrate on soldiers in uniforms, organized and equipped by the state in formal military units.
But in the twenty-first century, most “wars” occur within, rather than between states, and many combatants do not wear uniforms.
Of 226 significant armed conflicts between 1945 and 2002, less than half in the 1950’s were fought between states and armed groups.
By the 1990’s, such conflicts were the dominant form.
Of course, civil war and irregular combatants are not new, as even the traditional law of war recognizes.
What is new is the increase in irregular combat, and the technological changes that put ever-increasing destructive power in the hands of small groups that would have been priced out of the market for massive destruction in earlier eras.
And now technology has brought a new dimension to warfare: the prospect of cyber attacks, by which an enemy – state or non-state – can create enormous physical destruction (or threaten to do so) without an army that physically crosses another state’s border.
War and force may be down, but they are not out.
Instead, the use of force is taking new forms.
Military theorists today write about “fourth generation warfare” that sometimes has “no definable battlefields or fronts”; indeed, the distinction between civilian and military may disappear.
The first generation of modern warfare reflected the tactics of line and column following the French Revolution.
The second generation relied on massed firepower and culminated in World War I; its slogan was that artillery conquers and infantry occupies.
The third generation arose from tactics developed by the Germans to break the stalemate of trench warfare in 1918, which Germany perfected in the Blitzkrieg tactics that allowed it to defeat larger French and British tank forces in the conquest of France in 1940.
Both ideas and technology drove these changes.
The same is true of today’s fourth generation of modern warfare, which focuses on the enemy’s society and political will to fight.
Armed groups view conflict as a continuum of political and violent irregular operations over a long period that will provide control over local populations.
They benefit from the fact that scores of weak states lack the legitimacy or capacity to control their own territory effectively.
The result is what General Sir Rupert Smith, the former British commander in Northern Ireland and the Balkans, calls “war among the people.”
In such hybrid wars, conventional and irregular forces, combatants and civilians, and physical destruction and information warfare become thoroughly intertwined.
Even if the prospect or threat of the use of force among states has become less probable, it will retain a high impact, and it is just such situations that lead rational actors to purchase expensive insurance.
The United States is likely to be the major issuer of such insurance policies.
This leads to a larger point about the role of military force in world politics.
Military power remains important because it structures world politics.
It is true that in many relationships and issues, military force is increasingly difficult or costly for states to use.
But the fact that military power is not always sufficient in particular situations does not mean that it has lost the ability to structure expectations and shape political calculations.
Markets and economic power rest upon political frameworks: in chaotic conditions of great political uncertainty, markets fail.
Political frameworks, in turn, rest upon norms and institutions, but also upon the management of coercive power.
A well-ordered modern state is defined by a monopoly on the legitimate use of force, which allows domestic markets to operate.
Internationally, where order is more tenuous, residual concerns about the coercive use of force, even if a low probability, can have important effects.
Military force, along with norms and institutions, helps to provide a minimal degree of order.
Metaphorically, military power provides a degree of security that is to political and economic order as oxygen is to breathing: little noticed until it begins to become scarce.
Once that occurs, its absence dominates all else.
In this sense, the role of military power in structuring world politics is likely to persist well into the twenty-first century.
Military power will not have the utility for states that it had in the nineteenth century, but it will remain a crucial component of power in world politics.
Is NATO the War on Terrorism\u0027s Greatest Victim?
As wars end, diplomatic and political autopsies begin.
It is too soon to draw firm conclusions about the ``war on terrorism'' as waged in Afghanistan.
But it is not too early to draw other preliminary conclusions.
One concerns the almost revolutionary changes now being contemplated in NATO's relations with Russia.
Less visible is the deep and self-inflicted wound that, I suspect, has opened within NATO itself.
From the beginning of this crisis, on September 11 th , NATO's European members (as well as other countries, of course) promptly lined up with the US in moral and political solidarity, and with offers of cooperation.
For the first time since NATO's founding, Article 5 of the Washington Treaty was invoked.
The Washington Treaty was signed half a century ago to meet the Soviet threat at the Cold War's outset.
Article 5 is the Treaty's keystone, because it says that an attack against one member of the alliance shall be considered an attack against them all.
This article distinguishes NATO from virtually any other defensive alliance in human history, in the sense that it incorporated an open-ended guarantee of collective defence.
Until September 11 th , it had never been activated.
Here was a momentous event in NATO's 52-year history, and you might think that its activation would lead to a process of collective defence by NATO.
Britain and a number of European NATO allies, including France, Italy and even Germany, quickly offered to provide military forces.
But the Bush Administration did not want collective defence and it did not want NATO to get involved: apart from a small, essentially marginal military contribution by Britain, in essence the US intended to fight this war by itself.
A number of conclusions follow.
First, it has become clear that President George W. Bush's administration, by inclination, remains as unilateralist as it seemed when it came to power 11 months ago.
From the beginning, its first actions were to denounce or opt out of a number of multi-lateral engagements, such as the Kyoto protocol on climate change.
During the following months, it sometimes seemed that this attitude, of systematic disengagement from its friends overseas, might soften under the influence of Secretary of State Colin Powell.
Events since September 11 th , however, confirmed that the unilateralist instinct of this US Administration is in fact unmodified.
The second conclusion, following from the first, is that the attempt by the British, on this occasion once again, to secure influence and advantage by playing on the ``special relationship'' with the US, is being exposed, yet again, for the myth it is.
Prime Minister Tony Blair has made heroic efforts to exert influence on the US, first by total military commitment to support for the US campaign in Afghanistan, second by arguing out loud that the war against terrorism can only be won if it addresses political and economic as well as military issues.
But Mr Blair's problem is that since Britain's military contribution to the US military campaign in Afghanistan is marginal, his influence on US military strategy is also marginal.
The more the British government proclaims its loyalty to the US, the more marginal its influence will be.
This dilemma is being played out inside the British cabinet, where Jack Straw, the foreign secretary, has argued for an international peace-keeping force to help stabilize Afghanistan, but has been opposed by Geoff Hoon, the British defence secretary, who is totally aligned with the Pentagon's hostility to any such proposal.
The third conclusion is that it is now extremely difficult, perhaps impossible, to imagine that Article 5 can be invoked again.
You cannot say to your allies that this is the supreme moment when we call on the Alliance for collective defence, and then in the next breath say, we don't need you for collective defence, we're going to do it our way.
In that sense, the centerpiece of the Atlantic Alliance has been seriously, perhaps fatally damaged.
The fourth conclusion mirrors the third.
European members of NATO have been deeply moved by the shock of the Twin Towers attacks, and have been falling over themselves and each other to offer help to the US.
But the US has been patently reluctant to accept the help offered by France, Germany and Italy.
The fact that European offers of military help have been treated with disdain has not yet back-fired. But the support of public opinion in European NATO will be vulnerable if the military campaign does not produce fairly quick political successes, and even more if the US moves to a wider military war against ``state sponsors of terrorism.''
The fifth conclusion is that this crisis may have seriously damaged efforts to create a common foreign and security policy between members of the European Union.
Blair's first response after September 11 th was to rush to Washington; but everything else that he has done since then, has seemed designed to prevent any collective, integrated EU response.
His systematic promotion of meetings of the ``big'' countries in Europe, independent of EU institutions or mechanisms, culminated in the recent farce over a dinner at Downing Street (the Prime Minister's residence).
Intended as one between Europe's Big Three (Britain, France and Germany), it ended up with all kinds of determined but unwelcome gate-crashers from the EU's other governments.
Suspicions of the EU's smaller members toward the Big Three is now palpable.
Britain, France, and Germany have often resented being forced to tag along behind the US on defence issues, the EU's smaller members now fear being forcibly co-opted into an EU foreign policy when they have had no say in its development.
It will be a bitter irony if the war against terrorism ends by shattering trust among the members of both NATO, the most successful alliance in human history, and the EU.
Is Neo-Conservatism Dead?
Neo-conservatism has served as a badge of unity for those in the Bush administration advocating an aggressive foreign policy, massive military spending, disdain for international law and institutions, an assault on the welfare state, and a return to “traditional values.”
So, with the Bush era winding down in a tailspin of plummeting popularity and high-level resignations, has the neo-conservative movement, too, run its course?
Neo-conservatism began with different premises from traditional forms of conservatism.
Because reforms can become part of “our” heritage, traditional conservatives can adapt to change, even taking credit for negotiating the connection between past and future.
By contrast, neo-conservatism’s adherents are unconcerned with what Edmund Burke called the ties that bind “the dead, the living, and the yet unborn.”
On the contrary, they are revolutionaries or, rather, “counter-revolutionaries” intent upon remaking America and the world.
Indeed, in a certain sense, Irving Kristol, Norman Podhoretz, and other neo-conservative elder statesmen remain defined by the communist dogmatism they sought to oppose when they were youthful Trotskyists.
The virtue of their “party” or clique needs no complex justification: it stands for “American values,” while critics merely provide an “objective apology” for the “enemies of freedom.”
Until the 1960’s, future neo-conservatives shared the Democratic Party’s vehement anti-communism, acceptance of the Civil Rights Movement, and support for President Franklin Roosevelt’s New Deal welfare-state policies.
Tellingly, the influential neo-conservative Richard Perle said in 2003 that he was still a registered Democrat, out of “nostalgia” for Henry “Scoop” Jackson, the powerful former Senator who embodied these commitments.
For future neo-conservatives, however, the 1960’s produced a “trauma” that transcended the humiliation of a lost war and the disgrace of Richard Nixon.
What in the 1950’s had seemingly been a culture of contentment was transformed into what Podhoretz called an “adversary culture.” New social movements, seeking to de-mythologize history, rejecting platitudes justifying the policies of elite interests, and demanding greater institutional accountability, seemingly threatened the entire “establishment.”
Nevertheless, it was not until Ronald Reagan forged an alliance between conservatism’s two traditionally warring factions that the political foundations of neo-conservatism’s triumph were secured.
One faction primarily comprised elites opposed to state intervention in the market.
Its members cared little about the verities associated with “community” or “family values.”
Their best intellectual arguments derived from Milton Friedman, Friedrich von Hayek, and Robert Nozick, who sought to challenge collectivist theories of society in general and “socialism” in particular.
The other faction was rooted in nineteenth-century “know nothing” populism, with its flights of nationalist hysteria, defense of traditional prejudices, and resentment of intellectual and economic elites.
However, its members do not necessarily oppose social legislation that benefits working people – especially when white workers are privileged – and some even retain a positive image of the New Deal.
Neo-conservatism thus cannot be reduced to advocacy of the free market or right-wing populism, since its ideological specificity consists in the fusion of these contradictory outlooks.
The question was how to package elites’ interest in free-market capitalism with the provincial temperament of a parochial constituency.
What sold best was an image of oppressive “big government,” reflected in a tax system that was increasingly burdensome to ordinary people, combined with anti-communist nationalism and barely veiled racism.
After all, everyone understood who the “welfare cheat” was, and who Kristol had in mind when he famously quipped that a neo-conservative is “a liberal who has been mugged by reality.”
But, with the demise of communism, neo-conservatism’s two factions once again seemed fated to clash.
Economic globalization risked provoking a backlash by provincial populists, while the external enemy – the glue that held the neo-conservative movement together – had disappeared.
Then came the terrorist attacks of September 11, 2001.
From the beginning, senior Reagan era officials were wary of pursuing a unilateral response.
It was clear to many that Islamic fundamentalism was not comparable to communism, and, particularly in Iraq, military leaders saw the dangers in stretching American forces too thin.
But their arguments did not carry the day.
For the neo-conservative enterprise, 9/11 helped create a new context for linking the quest for American hegemony abroad with intense nationalism – and an even more intense assault on the welfare state – at home.
Employing a crude form of “realism,” which has traditionally viewed the state as the basic unit of political analysis, neo-conservatives portrayed al-Qaeda in terms of familiar enemies, namely fascism and communism, with backing from “rogue” states that must not be “appeased.”
Thus, the “axis of evil” and the “pre-emptive strike.”
This new “hyper-realism” has little in common with old-style realism.
Churchill and Roosevelt did not lie to the international community about the threat of fascism, construct an artificial “coalition of the willing,” or employ violence without accountability: these were the tactics of their totalitarian enemies.
Today, a meaningful realism calls for recognizing the constraints on building democracy: suspicion of western values generated by imperialism, the power of pre-modern institutions and customs, and the still-fragile character of the state system in most of the world.
But genuine realism, unfortunately, is beside the point.
Given the inherent tension implied by neo-conservatism’s simultaneous embrace of secular free-market capitalism and “traditional” values, its strategy, perfected since the Reagan era, has been to re-draw the lines of division: then, as now, the West is “at risk,” which requires nurturing a strongly emotional distinction between “us” and “them.”
That strategy’s popular appeal will not end with the Bush administration, because neo-conservatism feeds on a set of public fears that are deeply rooted in American history.
Changing that will require not merely confronting a new ideological outlook, but also deciding which policies reflect what is best about the American political tradition.
Is Obama Losing Iraq?
BAGHDAD – The Obama administration’s Iraq policy is in chaos. Seven months after Iraq’s national elections, the United States has publicly denied taking sides in the wrangling over who will be prime minister.
Privately, however, the US is backing the incumbent, Nouri al-Maliki.
The US has applied tremendous diplomatic pressure on Iraq’s Arab neighbors to get them to accept another Maliki term.
Most have refused.
Initially, the US backed Maliki in order to keep the Sadrist bloc from gaining a share of power.
However, that has now backfired, since the Sadrists are the only group other than Maliki’s coalition of Shia parties that supports him.
One unsettling consequence of US diplomacy is that it has reinforced Iran’s role in Iraq, because Maliki is Iran’s preferred candidate for Prime Minister.
Thus, at the very moment that the US is leading a global campaign to isolate Iran over its nuclear program, it is strengthening Iran’s regional position.
The US-Iranian dispute is not limited to the nuclear issue.
American efforts to re-start Israeli-Palestinian peace talks have faced adamant opposition from Iran, which maintains its 30-year-old policy of opposing any effort to promote peace in the region.
Iran exerts significant influence on both state and non-state actors whose support is indispensible to any long-term peace in the Middle East.
First among these is Syria. Post-election Iraq was an obvious opening for the US to place a wedge between Iran and Syria.
While Iran promotes the Shia religious parties in Iraq, Syria’s interests there tilt toward secular nationalism, as represented by former prime minister Ayad Allawi’s coalition, which actually defeated Maliki in the parliamentary elections held earlier this year.
Indeed, Syria has supported Allawi for the past seven years.
Yet, in the wake of intense US and Iranian diplomatic pressure in favor of Maliki, Syria has apparently shifted its support accordingly.
The impact of this American misstep has already been felt, emboldening Iranian President Mahmoud Ahmadinejad on his provocative visit to Lebanon, which included a public appearance on Hezbollah-controlled territory near Israel’s northern border.
The Gulf States, especially Saudi Arabia, have so far resisted US pressure to endorse Maliki.
They cannot forget that Maliki was in charge during the ethnic cleansing of Baghdad’s Sunni Muslims.
They regard Iran – and thus Maliki’s closeness to it – as an existential threat.
Kuwait, Saudi Arabia, and Bahrain, in particular, perceive Iran as inciting unrest among their own substantial Shia populations.
Iraq’s political elites have resisted Maliki’s desire for a second term for two reasons.
First, they are weary of renewed Iranian attempts to destabilize Iraq.
Security forces recently intercepted suicide bombers entering Iraqi Kurdistan from Iran, with, Kurdish leaders believe, the support and training of Iranian intelligence.
Second, Maliki’s tenure has been worrying to those who believe in democracy and the peaceable transfer of power.
He has created security forces – some of which have reportedly acted as death squads – that are answerable directly to him, thus bypassing the constitutional chain of command.
He has also replaced career army and security officers with cronies.
Last March, as rumors circulated that he was losing the vote, Maliki asserted that state security would be threatened if he lost, noting his responsibility to maintain order.
When he did lose, he demanded a recount, not as a candidate, but in his capacity as Commander-in-Chief.
The fact that Maliki, despite his incumbency, has been unable to secure a second term seven months after the elections attests to the widespread opposition to his continued rule among Iraq’s political class.
There is only one way to explain the US administration’s decision to exert such diplomatic pressure in favor of Iran’s favorite in Iraq: Obama’s pledge during his presidential election campaign to disengage from Iraq during his first term.
In this, Obama is following the example of President George W. Bush, who let the US electoral agenda, rather than American – not to mention Iraqi – national interests, dictate Iraq policy.
The Bush administration insisted that Iraq achieve various “milestones” – elections for which the country was not ready and completing a constitution in six weeks, to name two – simply to create the appearance of substantive achievements ahead of the 2004 presidential election or the 2006 mid-term elections.
Similarly, the Obama administration is trying to force what it perceives as the easiest path to a new government in Iraq – even if it is pro-Iranian – not because it is in the US national interest, but to enable it to head for the exits more quickly in advance of the president’s re-election campaign.
The administration’s policy in Iraq is now strengthening Iran regionally at the expense of America’s Arab allies, undermining America’s own efforts to forge a Middle East peace, and weakening Iraq’s nascent democracy.
It is difficult to imagine a worse set of outcomes for US national security interests in this vital region.
Not So Splendid Isolation
PARIS – At the end of the nineteenth century, the British Empire pursued a policy of what it called “splendid isolation,” reflecting its leaders’ determination to stand aloof from international engagements.
With the strength of its economy and the superiority of its navy, the United Kingdom could afford to avoid entanglement in others’ affairs.
Today, as recent events have shown, isolation is – more often than not – a mistake, an unenviable condition resulting from failed policies.
Cuba’s emergence from decades of forced isolation is a victory for the island, while North Korea’s pariah status has led it to the brink of collapse.
Similarly, Israel’s controversial policies and diplomacy risk leaving the Jewish state unprecedentedly alone.
And inward-looking policies in Russia and Turkey, driven largely by their leaders’ egos, are unlikely to produce anything but harm.
By beginning to normalize relations, Cuba and the United States have snatched victory from the jaws of a double defeat: the failure of the embargo and the failure of the Cuban economy.
The deal struck in December allows Cuban President Raúl Castro to claim success in mending ties without making significant political concessions.
For US President Barack Obama, the breakthrough is a chance to cement his legacy as a transformative president, like his models Abraham Lincoln and Franklin D. Roosevelt – even if, in ending nearly six decades of failed policy, he more closely resembles Richard Nixon, who presided over the opening to China.
Though Pope Francis, the first Latin American pontiff, was instrumental in facilitating the resumption of diplomatic ties, so was the plunging price of oil.
Continued isolation would have left the Cuban regime dangerously exposed, given the declining financial fortunes of its primary sponsor, petroleum-rich Venezuela.
North Korea stands in stark contrast to Cuba’s successful policy of engagement.
With its alleged involvement in the recent cyber attack on Sony Pictures, the regime has backed itself further into its tiny corner.
The result can only be deeper – and ultimately more painful – isolation.
Even China, North Korea’s main patron, is losing patience with its client state.
In an interdependent world, isolation is no longer a source of pride; on the contrary, it is a cause for concern.
Nowhere is that more evident than Israel.
Not even the country’s technological wonders or its vibrant civil society can make up for its unappealing politics and policies.
The result has been a dangerously rapid diminution of much-needed Western support.
Equally worrisome is the recent drift of former imperial powers Russia and Turkey.
Both countries’ leaders, Russian President Vladimir Putin and Turkish President Recep Tayyip Erdoğan, place their own power above their citizens’ interests, and both are fanning the flames of misguided nationalism and religious chauvinism, surrounded by frightened courtiers whose main function has been to keep reality at bay.
Turkey is more dynamic and energetic than Russia, and its economy certainly is faring much better, but both regimes are overestimating the strength of their position and underestimating the cost of their autocratic turn.
Just four years ago, Turkey was seen as a model to follow, particularly for the Muslim world.
Today, the country is on the defensive, fearful even of its own journalists.
During the early stages of the Islamic State’s siege of the Kurdish town of Kobani, just across the border in Syria, Turkey seemed to be replicating the Soviet Union’s tactic during the 1944 Warsaw uprising, when Nazi German troops fought Polish resistance fighters: Let the belligerents exhaust each other as much as possible before intervening.
Such policy may be brutally effective in the short term; in the long term, it is certain to be costly for Turkey.
Meanwhile, in Russia, the further the economy plunges, the more defiant Putin becomes.
The great unanswered question is how long Putin will be able to rely on nationalist kitsch to overwhelm Russians’ rational calculation of their interests.
What is certain – as every recent example shows – is that, in an increasingly transparent and interdependent world, isolation is less a splendor than a blunder.
Is Peru Next?
On April 9, when Peruvians elect a new President, they will choose between Ollanta Humala Tasso, a nationalist former army commander who proposes radical economic and social change, and Lourdes Flores Nano, who would maintain the country’s current neo-liberal policies.
Whoever wins, the results will echo across Latin America.
A victory for Humala would seem to confirm the waning appeal of the neo-liberal policies that have dominated the continent since the 1980’s.
It would bolster the informal axis of Venezuela’s populist Hugo Chávez (also a former soldier) and Evo Morales in Bolivia, but also the line supported by Brazil`s Lula da Silva and Argentina’s Kirchner who combine administrative efficiency and left-leaning rhetoric.
On the other hand, a victory for Lourdes Flores would stand out as an exception in the area, together with Alvaro Uribe in Colombia, whose reelection at the end of May seems certain today.
Flores, a Social Christian candidate representing a rightist alliance, wants to maintain present President Alejandro Toledo’s neo-liberal policies, which have boosted economic growth, foreign investment, and exports spectacularly over the past four years.
The problem for Flores is that half the population has not yet benefited from Toledo’s policies and lives under the poverty line, giving Humala his political opening. Humala calls for overhauling Peru’s economic policy in particular by revising foreign companies’ concession contracts, increasing taxes on the rich, and lowering the salaries paid to congressmen and government members –“old fashioned populism that will ruin the country,” claim his opponents.
Flores, who was the favorite for most of the campaign, has now lost support as a result of popular frustration over the distribution of wealth and because of her links with powerful domestic and foreign business interests.
Her running mate, Arturo Woodman, is an old associate of the richest man in Peru, Dionisio Romero, a businessman who had no qualms about asking favors from Vladimiro Montesinos, the loathed adviser to President Alberto Fujimori, who is now in jail on corruption charges.
But Humala is hardly a saint.
He concealed information about his military past when the election campaign started, and is now under investigation for alleged human rights violations.
In 1983, he attended a course at the infamous School of the Americas, the counterinsurgency training institute where many of the region’s most brutal military officers learned their craft.
In 1992, he commanded a military base in an Amazon village where coca leaf was grown – and where Sendero Luminoso guerrillas and drug trafficking bands worked together.
Families of the disappeared, killed, and tortured told the press that Humala ordered the atrocitie
In November 2000, Ollanta Humala led a small-scale military uprising against Fujimori’s dying regime.
But Humala's detractors claim he took up arms to help the escape of Montesinos, who was already wanted by the law, but managed to flee aboard a sailboat towards Galapagos on the day of the coup.
Humala denies everything, and none of the allegations has harmed him.
Even so, not only foreign investors and local big businesses are worried by his rise in opinion polls.
The United States is also concerned.
In its most recent report on the global trade in illegal drugs, the US State Department stressed the increase in coca leaf crops in Peru and Bolivia last year.
It attributed the rise to the “nationalistic preaching” that has taken root in both countries.
Washington believes anti-drug policies will fail, to the benefit of drug dealers, if coca growers continue to identify themselves with nationalists who vindicate the leaf’s production.
Ollanta Humala opposes compulsory and mass coca eradication, claiming that he would industrialize and export the product to keep it from falling into drug dealers’ hands.
In a meeting with Evo Morales, he spoke of a joint agenda to discuss the issue with US officials.
But for the US, an anti-drug policy designed by nationalist leaders whose countries account for more than half of America’s cocaine market hardly inspires confidence.
The same is true for investors, particularly those from Chile, who have assets worth $1.5 billion in Peru.
Humala glorifies two Peruvian military dictators: Cáceres, who fought against Chile, and Velasco Alvarado, who nationalized oil and mining companies, redistributed land, and controlled the press.
In fact, Humala has singled out Chilean contracts and investments as targets for revision.
At the same time, he has spoken of reinforcing the armed forces, which implies buying weapons.
Flores, by contrast, offers legal security for businessmen and investors.
At the same time, acknowledging that in Peru there has made little progress in fighting poverty, she is promising to create 650,000 jobs a year.
Regardless of whether that promise is realistic, many consider her candidacy important for maintaining democratic continuity, whereas Ollanta Humala proposes to overhaul the political system by drafting a new constitution.
When Peruvians vote on April 9, after many years of poverty and inequality, it is likely that popular indignation will prevail. That emotion has led many candidates to victory in Latin America.
The last of them was Evo Morales, an explicit and staunch soporter of Humala[APC1].
Is Pornography Driving Men Crazy?
NEW YORK – It is hard to ignore how many highly visible men in recent years (indeed, months) have behaved in sexually self-destructive ways.
Some powerful men have long been sexually voracious; unlike today, though, they were far more discreet and generally used much better judgment in order to cover their tracks.
Of course, the heightened technological ability nowadays to expose private behavior is part of the reason for this change.
But that is precisely the point: so many of the men caught up in sex-tinged scandals of late have exposed themselves – sometimes literally – through their own willing embrace of text messages, Twitter, and other indiscreet media.
What is driving this weirdly disinhibited decision-making?
Could the widespread availability and consumption of pornography in recent years actually be rewiring the male brain, affecting men’s judgment about sex and causing them to have more difficulty controlling their impulses?
There is an increasing body of scientific evidence to support this idea.
Six years ago, I wrote an essay called “The Porn Myth,” which pointed out that therapists and sexual counselors were anecdotally connecting the rise in pornography consumption among young men with an increase in impotence and premature ejaculation among the same population.
These were healthy young men who had no organic or psychological pathology that would disrupt normal sexual function.
The hypothesis among the experts was that pornography was progressively desensitizing these men sexually.
Indeed, hardcore pornography’s effectiveness in achieving rapid desensitization in subjects has led to its frequent use in training doctors and military teams to deal with very shocking or sensitive situations.
Given the desensitization effect on most male subjects, researchers found that they quickly required higher levels of stimulation to achieve the same level of arousal.
The experts I interviewed at the time were speculating that porn use was desensitizing healthy young men to the erotic appeal of their own partners.
Since then, a great deal of data on the brain’s reward system has accumulated to explain this rewiring more concretely.
We now know that porn delivers rewards to the male brain in the form of a short-term dopamine boost, which, for an hour or two afterwards, lifts men’s mood and makes them feel good in general.
The neural circuitry is identical to that for other addictive triggers, such as gambling or cocaine.
The addictive potential is also identical: just as gamblers and cocaine users can become compulsive, needing to gamble or snort more and more to get the same dopamine boost, so can men consuming pornography become hooked.
As with these other reward triggers, after the dopamine burst wears off, the consumer feels a letdown – irritable, anxious, and longing for the next fix.
(There is some new evidence, uncovered by Jim Pfaus at Concordia University in Canada, that desensitization may be affecting women consumers of pornography as well.)
This dopamine effect explains why pornography tends to become more and more extreme over time: ordinary sexual images eventually lose their power, leading consumers to need images that break other taboos in other kinds of ways, in order to feel as good.
Moreover, some men (and women) have a “dopamine hole” – their brains’ reward systems are less efficient – making them more likely to become addicted to more extreme porn more easily.
As with any addiction, it is very difficult, for neurochemical reasons, for an addict to stop doing things – even very self-destructive things – that enable him to get that next hit of dopamine.
Could this be why men who in the past could take time-delayed steps to conduct affairs behind closed doors now can’t resist the impulse to send a self-incriminating text message?
If so, such men might not be demons or moral ciphers, but rather addicts who are no longer entirely in control of themselves.
This is not to say that they are not responsible for their behavior. But I would argue that it is a different kind of responsibility: the responsibility to understand the powerfully addictive potential of pornography use, and to seek counseling and medication if the addiction starts to affect one’s spouse, family, professional life, or judgment.
By now, there is an effective and detailed model for weaning porn-addicted men and restoring them to a more balanced mental state, one less at the mercy of their compulsions.
Understanding how pornography affects the brain and wreaks havoc on male virility permits people to make better-informed choices – rather than engage in pointless self-loathing or reactive collective judgments – in a world that has become more and more addictively hardcore.
Is Psychiatry Stuck in the Past?
Ever since psychiatry emerged as an independent field of medicine, it has stood in the shadows of other specialties, never progressing scientifically as fast as neurology, oncology, or cardiology.
In many developed countries, the decline of mental hospitals has brought psychiatric services into closer professional contact than ever with these and other medical domains.
Yet psychiatry continues to inhabit medicine's netherworld - within the mainstream clinically, outside it scientifically.
Psychiatry is separated from other medical specialties by its lack of an objective basis for diagnosis.
Other medical fields have refined the diagnostic process to the point where computerized laboratory tests have virtually replaced clinical examination of patients.
Psychiatry remains dependent on interpretation of detailed case histories. These can be obtained only through careful examination and direct questioning of patients.
No universal diagnostic tests exist for the most frequent mental disorders, such as depression, anxiety, and schizophrenia.
Of course, computer programs can now process data derived from patients' symptoms and generate psychiatric diagnoses.
But these apply rules that only replicate the way one or more psychiatrists interpret a patient's symptoms.
There is nothing absolute about the program's output, although it does at least do the same thing every time, which cannot be said for psychiatrists.
After all, interpretations of a case may differ, and the outcome cannot be resolved other than by an appeal to authority - "I am more senior and experienced than you, so my diagnosis takes precedence."
Beyond diagnostic disputes in individual cases, psychiatry's absence of objective diagnostic tests implies something more radical.
The history of the field is littered with definitions of entire disease categories that have been influenced by diagnostic fashions, politics, and the availability of treatments.
Diagnostic fashions reflect prevailing views of what causes mental illness.
From the 1950's to 1980's, for example, psychoanalysis held sway among US psychiatrists.
But the psychoanalytic approach, with its reliance on personal interaction with patients, led to a broad conception of pathology.
During the 1970s, two international studies demonstrated that US psychiatrists diagnosed about twice as many patients as having schizophrenia as psychiatrists in other countries, where psychoanalytic training was relatively uncommon.
The pendulum has since swung in the US, with biological theories of mental disease displacing all other causal contenders.
Parallel to this shift away from psychoanalysis, the diagnosis of schizophrenia has shrunk dramatically, and standard psychiatric practice in the US now incorporates a narrower definition of schizophrenia than is used in Europe.
Psychiatric diagnosis has also been vulnerable to politicization, nowhere more so than in the former Soviet Union, which locked up political dissidents in mental hospitals on what amounted to a charge of schizophrenia.
I once interviewed three former Russian dissidents who had been diagnosed with schizophrenia and forcibly treated.
In no case did I find any evidence that they had ever suffered from the disease as it is defined in the West.
Soviet authorities relied on an idiosyncratic definition of schizophrenia, introduced by a professor of psychiatry (A.V. Snezhnevsky) in Moscow.
Anyone who believed that the political system should be changed was suffering from "reformist delusions."
In deference to psychiatry's diagnostic conventions, he emphasized the history of the "condition."
If a dissident demonstrated against the Soviet system at least twice - say, by distributing illicit writings - the "delusions" signified schizophrenia.
But we should not be complacent about the potential for politicization in the West.
In 1987, political pressure in the US led to the elimination of homosexuality as a diagnosis from the nationally accepted guidelines.
In fact, the inclusion of homosexuality as a pathological condition suggests the extent to which psychiatric diagnosis has been shaped by social and political currents.
By contrast, no one - whatever a society's characteristics - has ever seriously questioned whether cancer is a disease.
Moreover, how psychiatrists treat mental illness profoundly influences how it is defined.
Depression is a recent diagnosis - and now one of the most common.
A study of diagnoses from 1949-1969 at the London psychiatric hospital where I work suggests why: a major shift from diagnoses of anxiety to diagnoses of depression coincided with the introduction of the first antidepressant pill.
Psychiatrists began altering their diagnoses to a condition for which they had an effective treatment.
So is psychiatric diagnosis akin to pseudo-science?
International comparisons carried out by the World Health Organization show that as long as psychiatrists from different countries are trained to interview patients using a standardized format, they can agree on who is suffering from schizophrenia.
The WHO studies revealed that schizophrenia defined narrowly - using a particular group of unusual symptoms - occurs with similar frequency throughout the world.
Still, a broad definition produces wide variation in frequency across countries.
Yet defining schizophrenia broadly may be unavoidable, for it is probably not a single disease with a distinct cause.
Indeed, Eugen Bleuler, the Swiss psychiatrist who introduced the term, referred to the condition as "the group of schizophrenias."
Until biological markers for psychiatric illnesses are identified, diagnosis will remain in a 19 th century time warp, relying on the equivalent of broad and outdated medical terms like "fever" and "dropsy."
But patients and their families and friends need not worry excessively.
Most psychiatric treatments are effective across a wide range of diagnoses, whatever their origin.
Psychiatry's success - like that of all medical specialties - should be judged by its ability to relieve human suffering, regardless of disagreements about causes.
Israel after Goldstone
TOLEDO – Israel’s predicament with the Judge Richard Goldstone’s report accusing it of war crimes in Gaza, and the report’s subsequent endorsement by the United Nations Human Rights Council, brings to mind the reaction of United States Vice-President Spiro Agnew to his indictment on corruption charges in 1973: “The bastards, they changed the rules, but they never told me.”
Indeed, the rules have changed, and Israel cannot say that it was not warned that this is an era in which international law and universal justice are being forcefully promoted as pillars of an improved world order.
That was not the case when the Arab-Israeli conflict started more than 60 years ago. Now, however, the international community is bound to scrutinize how wars are conducted, and crimes of war will not be allowed to go unpunished.
Or so it should be.
Alas, the new rules apply in fact only to those countries that are not world powers.
The UN’s Human Rights Council would not have dared to put Russia in the dock for razing Grozny, Chechnya’s capital, or China for brutally suppressing the people of Tibet and the Muslim Uighur minority.
In her first visit to Beijing, indeed, US Secretary of State Hillary Clinton made it clear that when it comes to China, order and stability take priority over human rights.
After all, she explained to a European colleague, one is not supposed to abuse one’s banker.
And this particular banker finances the Pentagon’s entire budget.
Nor is it conceivable that the US or Britain would have been called to account by the Geneva Commission, itself composed by some of the most brutal abusers in the world, for the massive casualties they inflicted on civilians in Iraq and Afghanistan.
The hundreds of civilian victims of NATO’s massive bombardment of Serbia in 1999 will likewise remain forever anonymous.
It is a major flaw of the system of international law that the application of the lofty principles of universal justice should be conditioned by the global balance of political power, and that the world’s most notorious abusers, such as Libya and Iran, are allowed to pose as guardians of human rights in UN agencies.
Can anyone really expect Israel to be impressed by Iran’s righteous criticism of its “defiance of the law”?
Indeed, as Justice Richard Goldstone himself was dismayed to discover, the Human Rights Council chose to censure Israel exclusively while not even bothering to mention Hamas, which Goldstone explicitly accused of war crimes and crimes against humanity.
It is not entirely far-fetched to assume that an “Obama effect” is having an impact on Israel’s current international predicament.
The onslaught on Israel was indirectly encouraged by the now widespread perception that, with Obama in the White House, America’s unwavering support for the Jewish state can no longer be taken for granted.
The indifference of some European countries towards Israel’s call for help during the debate over the Goldstone report was not unrelated to their frustration at Israeli Prime Minister Binyamin Netanyahu’s refusal to freeze the settlements, as Obama has been insisting.
But, however understandable Israel’s sense of being wrongfully treated might be, it should hold itself to higher standards, and avoid entrenching itself behind the walls of its own convictions.
Israel’s exploits in Gaza were a Pyrrhic victory, and the country is now bound to change its war doctrine of “offensive defense.”
A show of devastating force, with limited Israeli casualties at the price of an unlimited number of Palestinian civilian casualties, is no longer internationally sustainable.
If repeated, this approach will irretrievably undermine Israel’s standing in the family of nations.
Israel will have to adapt its war doctrine to the modern battlefield and to the sensibilities of the international community.
Regular armies are no longer the exclusive threat to countries’ security.
Non-state actors – like Hamas and Hezbollah, or the Taliban in Afghanistan and Pakistan – that shield themselves behind a defenseless civilian population expose the widening gap between the traditional rules of war and the realities of today’s battlefield.
It is doubtful whether Israel has the capacity to forge an international alliance that would adapt the rules of war to the conditions of asymmetric warfare.
The Goldstone report is not necessarily bad news for peace prospects in the Middle East.
Arguably, the war in Gaza created a new kind of mutual deterrence in this war-torn region.
Hamas was definitely deterred by Israel’s merciless offensive, and Israel, whether it admits it or not, is bound to be deterred by the specter of Israeli leaders and army officers becoming the object of arrest warrants in Europe.
The entire legal process might well be cut short by a US veto at the UN Security Council, and Israel might still stick to its traditional claim about its right of self-defense.
But the truth is that Israel’s hands have been tied.
Its leaders will now have to take much more resolute steps on the way to peace if the argument that they used to derail the Goldstone Report – that it should be seen as “hindering the peace process” – is to have any credibility at all.
Israel and America on the Wrong Side of History
MELBOURNE – Shortly before Israeli Prime Minister Yitzhak Rabin’s assassination by a right-wing Jewish extremist in November 1995, I met him in Tel Aviv.
I was visiting Israel as Australia’s foreign minister to argue the case for rapid implementation of the Oslo peace accords – all the way through to negotiated acceptance of Palestinian statehood.
I concluded my pitch by saying, with perhaps a little more cheek than was appropriate, “But of course I’m preaching to the converted.”
Rabin’s response is etched in my memory.
He paused, then said with a little half-smile: “To the committed, not the converted.”
For all his deep emotional attachment to the idea of Israel embracing all of historical Judea and Samaria, Rabin knew that the only way to ensure a democratic Jewish state with viable, secure borders was to accept a Palestinian state alongside it, equally secure and viable.
They would share Jerusalem as a capital, and find a mutually acceptable solution to the enormously sensitive issue of the return of Palestinian refugees.
Rabin’s murder was a catastrophe from which the peace process has never recovered.
No Israeli leader since has shown anything like his far-sighted vision, commitment, and capacity to deliver a negotiated two-state solution.
Ehud Barak and Ehud Olmert came close, but not close enough.
And since then Binyamin Netanyahu has lived down to every expectation of his statesmanship.
His routine capitulation to the demands of the most extreme elements of a manifestly dysfunctional Knesset, and his continuing support of his impossibly divisive and pugnacious foreign minister, Avigdor Lieberman, have earned him little praise at home or abroad.
One need not be naïve or in denial about the Palestinians’ multiple problems and missteps over the years to recognize that most of the recent obstacles to progress have been erected in Israel.
Now, with negotiations at an impasse, settlement building continuing unabated, no end in sight to the never-ending humiliation of occupation, and all other forms of leverage evidently exhausted, the Palestinians are going to the United Nations to seek recognition in some form of their statehood.
They want full UN membership, but – facing inevitable veto of that option by the United States in the Security Council – are willing to accept as a fallback a majority vote by the General Assembly recognizing Palestine as a non-member “observer state,” the status now enjoyed by the Vatican.
Palestinian Authority President Mahmoud Abbas and his colleagues know perfectly well that UN recognition by itself will not deliver an end to occupation and the full realization of a sovereign Palestine.
Only negotiated agreement on all of the critical outstanding issues – boundary definition, Jerusalem, security guarantees for Israel, and refugees – can do that.
But they have persisted on this course in the face of a fierce campaign to dissuade them – including threats of Israeli sanctions and a cut-off of financial support to the Palestinian Authority by the US Congress – owing to their wholly understandable lack of confidence that anything will move without some new spark.
Despite frantic efforts by the US and the European Union to find some compromise that would head off a UN vote by kick-starting real negotiations, it is much more probable that, even after a US veto in the Security Council, an early UN General Assembly vote will deliver a strong majority for observer-state status.
The question for Israel and its friends to address is what the downside risks of that outcome really are, and to calibrate their reaction accordingly.
The argument has been made that recognition as a state, even in limited form, will give Palestine the standing that it probably lacks currently to seek prosecutions in the International Criminal Court for alleged violations of international law.
Even if right, it is difficult to see why Israel and its friends should accept that as a make-or-break argument.
The ICC is not a kangaroo court, and allegations without substance can be expected to be treated accordingly.
Recognition as a state will not change the situation with respect to Hamas.
Of course, its current ideological hostility to Israel’s very existence is a serious issue; but Israel and the West should not compound their grievous mistake of not recognizing the legitimacy of its electoral victory in Gaza by rejecting any Palestinian state in which Hamas plays a governing role.
The door to dialogue with Hamas should remain open.
The more positive argument – as Rabin would certainly have understood – is that it is overwhelmingly in Israel’s own interest to defuse this issue by accepting, once and for all, that Palestinian statehood is an indispensable requirement of its own long-term peace and security.
Indeed, Israel should treat the UN vote as an opportunity for a new start to negotiations, rather than an excuse for renewed confrontation.
Such a constructive outcome has become more urgent than ever, given the Middle East’s new geopolitical realities following the Arab Spring.
Moreover, a perceived change of direction on the Israeli-Palestinian issue would be hugely beneficial for the West in its relations with the Islamic world.
Recent polling to mark the 10th anniversary of the 9/11 attacks has shown alarming persistence of the animosity generated by the interventions in Iraq and Afghanistan.
It is difficult to imagine Israel’s leadership changing course at this stage, and it is probably too late for the Obama administration to escape from the domestic political vice in which it seems pinned on this issue.
But being on the wrong side of history is never a comfortable position.
And that is exactly where the US, Israel, and its closest friends – including my own country, Australia – will be if they resist the tide of international sentiment in favor of moving now to recognize Palestinian statehood.&#160;
Israel and Palestine After Oslo
RAMALLAH – On September 13, 1993, Shimon Peres and Mahmoud Abbas met on the South Lawn of the White House to sign the Israel-PLO Declaration of Principles, or the Oslo Accords.
PLO leader Yasir Arafat and Israeli Prime Minister Yitzhak Rabin then sealed the agreement with a historic handshake.
The Oslo Accords – the result of secret talks that had been encouraged by the Norwegian government and conducted in the country’s capital – called for a five-year transitional period during which Israeli forces would withdraw from the Gaza Strip and unspecified areas of the West Bank, and a Palestinian Authority would be established.
Letters of recognition between the PLO and Israel accompanied the agreement.
The ultimate aim, though never explicitly stated, was to create a Palestinian state roughly within the 1967 borders.
But the goals laid out in the Oslo Accords remain unfulfilled.
In fact, the agreement is unlikely to survive 89-year-old Peres and 77-year-old Abbas, who are now presidents of Israel and the Palestinian Authority, respectively.
Several factors contributed to the deterioration of prospects for lasting peace.
Perhaps the most important factor has been the continuation – and, at times, acceleration – of Israeli settlement activities in occupied Palestinian territories.
Some Palestinians in the West Bank and Gaza objected to the Accords’ failure to call explicitly for the end of illegal Israeli settlement building.
But, given the PLO’s weakness and lack of support in the Arab world after its refusal to oppose Iraq’s occupation of Kuwait, its leaders accepted the flawed agreement, arguing that Palestinian borders would be agreed upon during the transition period.
But, 19 years later, the Washington-based Foundation for Middle East Peace reports that more Jewish settlements have been built in the occupied Palestinian territories since the Oslo Accords than before they were signed.
As a result, the need for Israel to freeze settlement activities has become an international – not just a Palestinian – requirement for effective peace talks.
Another crucial factor is continued violence.
Since Rabin and Arafat shook hands, roughly 7,500 Palestinians and 1,400 Israelis have been killed, and many more have been injured or jailed.
Israel’s unilateral policy of demolishing homes in Palestine has resulted in scores of Palestinians being deported or made homeless in Jerusalem, Hebron, the Jordan Valley, and elsewhere. While killings have declined sharply in recent years, hardly a day passes without some form of violence, often against civilians – including children.
Fueling this violence is growing hopelessness in the absence of a diplomatic agreement.
While international leaders fill the airwaves with talk of peace, they have failed to address the conflict boldly and resolutely.
For example, US President Barack Obama’s election four years ago revived hope that negotiations would resume.
But Obama’s peace envoy, George Mitchell, resigned, and the quartet (the United Nations, the European Union, Russia, and the United States) was sidelined.
Meanwhile, Israeli Prime Minister Binyamin Netanyahu’s conditional promise to support Palestinian statehood has been rendered meaningless by his government’s provocative settlement policies in the areas that were supposed to comprise the Palestinian state.
The Oslo Accords divided the occupied territories into three regions.
Palestinians took charge of the most densely populated urban areas, while Israel maintained total military and administrative control over the largest territory, “Area C,” which makes up 61% of the West Bank.
Many Palestinians believe that this serves a long-term Zionist aim to keep the land without the people.
Indeed, Israeli settlements have amounted to de facto Israeli annexation of territory into which Palestinians seek to expand their state.
As a result, without a clear agreement on borders, Area C will witness the most serious confrontations.
The Oslo Accords have also failed to put Palestinians on a path toward economic independence.
According to the World Bank and other international agencies, slow and complicated bureaucratic and security processes, including hundreds of checkpoints, make Palestinian economic development impossible.
Palestinian dependence on Israeli goods exacerbates the problem, as does Israeli control over the movement of goods and people to, within, and between the West Bank and the blockaded Gaza strip.
The 1994 Paris Protocol, one of the most important annexes to the Oslo Accords, was intended to define economic relations between Israel and the Palestinian Authority.
But it has been hijacked by Israel for the benefit of its businesses.
The Protocol requires the Palestinian Authority to peg prices of certain goods and its rate of value-added tax to Israel’s; forces Palestinians to use Israel’s currency; and regulates customs procedures at border crossings with Jordan and Egypt.
The Palestinian-Israeli conflict, now at least 45 years old, is not a complicated problem; on the contrary, it can be summed up quite succinctly: to paraphrase the American political operative James Carville, “It’s the occupation, stupid.”
Eventually, Abbas will gain the UN General Assembly’s acceptance of Palestinian statehood – his final accomplishment before leaving politics, as he has confided to his top aides.
After his departure, Israel will miss his firm opposition to violence and his support for security cooperation.
The symbolic decision on statehood, followed by Abbas’s exit, will mark the end of the process that began in Oslo, and that has been undermining Palestinian aspirations for nearly two decades.
With the Oslo Process now clearly dead, two options remain: chaos, extremism, and violence, or a new peace process – ideally one that can end the occupation and allow for Palestinian independence and freedom alongside a safe and secure Israel.
Israel at Sixty
Tel Aviv – Ten years ago, on Israel’s 50th anniversary, the peace process begun by the path-breaking Oslo accord, reached by Israel and the Palestinian Authority in 1993, established the legitimacy of two peoples’ national existence in their shared homeland on the basis of territorial compromise.
There was a general feeling that this long conflict was being resolved.
Unfortunately, the past ten years have witnessed a painful setback in many areas.
Individuals and peoples are capable of enduring difficulties if there is a sense that the future will be better and conflicts resolved.
But a sudden backward regression can lead to despair, which we feel today.
Why is it that struggles far more complex than the Israel-Arab conflict – apartheid in South Africa, the partition of Germany, or the collapse of the Soviet Union – all seem to have been resolved, usually without bloodshed, whereas the Middle East conflict, after more than a century, claims more victims every day?
One reason is that this conflict is unparalleled in human history.
There is no other example of a nation that returned after a 2,000-year absence to a territory that it never stopped regarding as its homeland.
So it is no wonder that the Arabs, especially the Palestinians, remain unable to comprehend, existentially or morally, what has befallen them.
The Jews’ return to Israel was not colonialism, as the Arabs thought.
Not only did the Jews lack a mother country, but in Europe they lived as a foreign nation, leading to expulsion and annihilation.
The Jews did not come to exploit Palestine’s resources or subjugate its residents in order to transfer the economic benefits elsewhere.
Nor did they come like the American or Australian settlers in order to build a new identity and assimilate the natives into it.
Zionism aimed at renewing and deepening an old identity.
From the beginning, there was no intention to damage the identity of the native-born Arabs, or to merge it with the traditional Jewish identity.
Because the Arabs had no corresponding historical model from which to learn how to relate to the phenomenon that had overtaken them, they tried to interpret Zionism as colonialism, and thought that other nations’ fight against colonialism provided a model for resistance.
Thus, the legitimacy of Israel’s right to exist remains an open question.
Indeed, never before has the question of legitimacy been so fundamental to a conflict between nations.
Although recognition of Israeli nationality is increasingly widespread, even among most nations of the Middle East, it remains obstructed by two closely related – and dangerous – notions.
The first is the growing shift in the Middle East, and elsewhere, from rejection of Israel’s legitimacy to rejection of Zionism’s legitimacy.
The second is the growing tendency among Palestinians, other Arabs, and many Europeans to prefer a bi-national Israeli-Palestinian state to the original two-state solution.
Hamas spokesmen speak not of “Israelis” but of “Zionists,” as does Iran’s President Mahmoud Ahmedinejad.
Discussion about the “de-Zionization” of Israel can also be heard at universities worldwide and even among Jewish leftists.
In Israel, too, there are people, though not many, who call themselves “post-Zionist” or “non-Zionist.”
But the sole practical expression of Zionism nowadays is the Law of Return, which is not a racist law but a moral law.
When the world’s nations decided in favor of the creation of an independent Jewish state, they did not designate it only for the 600,000 Jews then living there.
Rather, they intended that Israel would help solve the Jewish problem everywhere in the world by enabling every Jew who wished to leave the diaspora to do so.
The idea of a bi-national Israeli-Palestinian state embodies the dangerous illusion that two peoples who are utterly different in their language, religion, culture, and history, who are divided by a deep economic chasm and connected to their own external worlds – the Palestinians to the Arab world and Israelis to the rest of world Jewry – can be combined in the framework of a single state.
Moreover, these are two peoples that have been intensely engaged in a bloody and intractable conflict for the last century.
Both Palestinians and Israelis, as two different nations, deserve their own states.
There must be a clear border between the two.
In Israel, an Israeli Arab-Palestinian minority has full citizenship, even if much remains to be done to afford it full social and economic equality.
It is possible that in the Palestinian state there would be a small Jewish minority, consisting of West Bank settlers whose attachment to the Biblical homeland is so intense that they would be willing to live under Palestinian control – provided that the Palestinians would grant them Palestinian citizenship.
During the early years of Zionism, the great Jewish scholar Gershom Scholem – who was born in Berlin – said that the Jews were embarking on a difficult journey, a return to history.
In other words, the Jews, who based their identity in the diaspora on mythological memory and time, were now returning to its clear-cut elements: a territory defined by borders, and a detailed chronological understanding of their own history.
Sixty years later, the Arab-Israeli conflict reminds us that the Jews’ journey back to history continues.
A Yellow Star for the Jewish State?
PARIS – The world has recently seen a rapid succession of efforts to delegitimize Israel.
Earlier this month, the CEO of French telecommunications company Orange declared at a press conference in Cairo his desire to part ways with an American partner that is too closely tied to Israel.
In May, Palestinians tried to have the Israeli soccer federation expelled from FIFA.
And Britain’s National Union of Students recently approved a resolution supporting boycotts and sanctions against Israel.
Meanwhile, a campaign to ban Israeli products has been gaining strength in the United States and Europe.
And then there are the many performers who – following the lead of Brian Eno, Elvis Costello, Vanessa Paradis, Roger Waters, and others – wonder out loud whether or not to appear in “occupied Palestine.”
None of these developments is, in itself, of great moment.
But, taken together, they create a climate – and perhaps form a watershed.
And this is no accident.
All of the recent episodes can be traced, more or less directly, to the global Boycott, Divestment, and Sanctions (BDS) movement, established in 2005 by 171 Palestinian nongovernmental organizations.
So they provide a good occasion to remind those who support this campaign of its true nature.
BDS is supposedly a worldwide civil-society movement embodying respect for law, democracy, and human rights.
If that is true, why target the only country in the region that was founded on those values, and that has continued, for better or worse – and despite a nearly 70-year state of war with its neighbors – to be broadly faithful to them?
How is it that these scrupulous humanists have had nothing whatsoever to say about the 200,000 victims of Syrian President Bashar Al-Assad, the crimes of the Islamic State, or the massive deportation of Christians from the Plain of Nineveh, to name just a few contemporaneous issues?
BDS is an “anti-apartheid” movement, comes the reply, adopting the methods and spirit of Nelson Mandela in South Africa.
That sounds splendid.
But then, once again, why the focus on Israel?
With its multiethnic polity and society – a mix of Western and Eastern Europeans, Americans and Russians, Ethiopians and Turks, Kurds, Iranians, and Arabs (17 of whom sit in the Knesset) – Israel is precisely the opposite of an apartheid state.
By contrast, in Qatar, whose foundations (together with Saudi think tanks) provide most of the financing for the BDS movement, 95% of the labor force consists of Asian non-citizens working in slave-like conditions under the kafala system, which is a close cousin to apartheid.
Perhaps the goal is to pressure Israel to conclude a peace deal with the Palestinians, which surely is worth a little accommodation with Qatar.
In that case, it is a peculiar peacemaking strategy that puts pressure on only one of the belligerents, and that, instead of strengthening the hand of the many Israelis who favor negotiation, imposes collective punishment in the form of exclusion from the community of nations.
Only one real formula for peace exists, and everyone knows it.
That formula, enshrined in the Oslo Accords, is the two-state solution.
One has only to read the declarations of Omar Barghouti, Ali Abunimah, and other promoters of the BDS movement to see that this solution is precisely what they do not want.
They prefer a “one-state solution” (Abunimah’s term) – under a Palestinian flag, of course.
Is this just a detail that can be safely ignored on the grounds that BDS targets “only” the territories, the Jewish settlements being built there, and the goods that the settlers produce?
This is another sucker trap.
Here, too, it is enough to read the movement’s founding declaration of July 9, 2005, which specifies that one of its “three objectives” is to “protect” the “rights of Palestinian refugees to return to their homes and properties as stipulated in UN resolution 194.”
In fact and in law, that would amount to establishing on those lands a new Arab country that could be counted on, in short order, to undergo an ethnic cleansing that would make it judenfrei.
And, finally, how can I refrain from reminding those whose memory is as full of holes as their thinking that the idea of boycotting Israel is not as new as it appears?
In fact, it is older than the Jewish state, having emerged on December 2, 1945, from a decision by the Arab League, which then wasted no time in relying on that decision to reject the United Nations’ dual resolution to establish two states.
Among the promoters of this brilliant idea were Nazi war criminals who had settled in Syria and Egypt, where they gave their new masters lessons in marking Jewish shops and businesses.
A comparison is not an argument.
And the meaning of a slogan does not reside entirely in its genealogy.
But words do have a history. As do debates.
And it is better to know that history, if we wish to avoid repeating its ugliest scenes.
The truth is that the BDS movement is nothing more than a sinister caricature of the anti-totalitarian and anti-apartheid struggles.
It is a campaign whose instigators have no aim other than to discriminate against, delegitimize, and vilify an Israel that in their mind never stopped wearing its yellow star.
To activists of good faith who may have been taken in by duplicitous representations of the movement, I would say only that there are too many noble causes in need of assistance to allow oneself to be enlisted in a dubious one.
Those worthy causes include fighting the jihadist decapitators, saving the women and girls enslaved by Boko Haram, defending the Middle East’s imperiled Christians and Arab democrats, and, of course, striving for a just peace between Israelis and Palestinians.
Israel’s Terrorist Aid
NEW YORK – The decision by Israeli Prime Minister Binyamin Netanyahu’s government to demolish the family home of Abdelrahman al-Shaludi, a Palestinian who rammed his car into a group of pedestrians, killing two (including a three-month-old baby), was both callous and counterproductive.
By punishing people whose only known offense was being related to a criminal, Israel inadvertently shifted the focus from the attack, the perpetrator of which was killed immediately after his crime, to Israel’s apparent embrace of a policy of collective punishment.
If Israel’s principal concern is deterring terrorist attacks, it should be doing everything in its power to ensure that such acts are universally condemned.
This includes making sure that people who carry out attacks, and those who aid and abet their crimes, are lawfully punished.
Punishing terrorists’ families and neighbors, or those who share their ethnic and religious identity, has the opposite effect, intensifying hostility toward Israel and dissipating the moral outrage that should be mobilized against the actual perpetrators of terrorism.
As observers increasingly equate the two sides, regarding both as victims and victimizers alike, international support and sympathy for Israel wanes.
This is not the first time that Israel has been accused of collective punishment.
Israel’s government regularly destroyed the family homes of alleged terrorists for years before acknowledging that the policy was damaging its image – without deterring terrorist acts. The latest house demolition seems to confirm that Israel’s government is resuming the practice of collective punishment that it abandoned a decade ago.
Why would Netanyahu’s government resume a failed policy?
The most likely explanation is that Netanyahu wants to reassure the Israeli public that no act of terrorism will be tolerated – even if that means a vindictive and cruel response.
In fact, such domestic political considerations were probably also a major driver of the killing and destruction that took place in Gaza over the summer.
Of course, Israel has the right to defend itself against indiscriminate rocket barrages like that launched from Gaza into its territory, and to punish lawfully those responsible.
But Israel did more than defend itself.
It mounted a demonstrably disproportionate response, killing a large number of noncombatants, including hundreds of children, and destroying thousands of homes and commercial enterprises.
While the initiative may have appeased Israeli public outrage over the rockets, it damaged Israel’s standing in many other countries considerably.
More problematic, Israel’s actions in Gaza probably increased its vulnerability to terrorist attacks, not only by fueling animosity toward Israel, but also by suggesting that Netanyahu’s government will most likely discredit itself with its response.
That propensity to act against its own interests to appease an enraged and emotional public was underscored by the recent destruction of al-Shaludi’s family home.
To be sure, Israel is not alone in responding irrationally to terrorist provocations.
Some aspects of the United States’ response to the terrorist attacks of September 11, 2001, reflect the same tendency – but on a significantly larger scale and with more far-reaching consequences.
While the attacks were immensely costly in terms of lives lost and material damage, the US-led war in Iraq that followed was beyond disproportionate; it was truly devastating. And its consequences continue to unfold, as the brutal predations of the Islamic State attest.
It is time for governments in Israel, the US, and elsewhere to recognize that by allowing their citizens’ outrage to drive their responses to terrorist attacks, they are offering themselves as the terrorists’ best weapon.
Only by adopting a pragmatic and legal approach can they galvanize support against their enemies and reduce their citizens’ vulnerability to attack.
That, rather than slaking the public’s thirst for vengeance, should be their primary objective.
Bibi’s Big Surprise
NEW YORK – Binyamin Netanyahu proved the pollsters wrong – not once, but twice.
In the weeks and days leading up to Israel’s election, his defeat was widely predicted.
Then, in the hours after the vote, exit polls suggested parity between his Likud party and the center-left Zionist Union, led by his chief rival, Yitzhak Herzog, with a slight edge for the right-wing bloc.
Several hours after the polls closed, it turned out that Likud was the big winner, gaining 30 of the Knesset’s 120 seats, compared to 24 for the Zionist Union.
As a result, Netanyahu will have no real difficulty in forming a right-wing government coalition.
The kingmakers in the event of parity – the smaller parties and electoral lists in the center of the political spectrum – have lost most of their bargaining power.
It was a crucial election in two respects: The outcome reflected the Israeli electorate’s sharp turn to the right and has reinforced Netanyahu’s political dominance.
As recently as 2006, Ehud Olmert had won an election in Israel on a dovish platform, pledging to extend Ariel Sharon’s unilateral withdrawal from Gaza to the West Bank.
In the 2009 election, the Kadima party, under his successor, Tzipi Livni, received one seat more than Likud, but was unable to form a government coalition.
Netanyahu did, and went on to win the 2013 election.
Now he has won yet again.
The turn to the right derives from both structural and circumstantial factors.
Israel’s right-wing parties draw support from the Orthodox and ultra-Orthodox communities, West Bank settlers, and a large part of the Sephardic and Russian communities.
When the center left won elections in the past two decades, it did so under a powerful security-oriented leader: Yitzhak Rabin, Ehud Barak, Sharon (after his conversion), and Sharon’s successor, Olmert.
Though Herzog and Livni – who formed the Zionist Union by merging Herzog’s Labor party and Livni’s Hatnuah party – possess several attractive qualities, they do not match the prototype preferred by today’s average voter.
These structural elements have been reinforced by developments in the region, which have reinforced the sense among Israeli voters that they are threatened by numerous enemies: Iran and its nuclear ambitions;
Hezbollah and Hamas and their missiles; the rise of ISIS amid state failure in Iraq, Syria, and elsewhere.
Against this backdrop, it is easier to defend the status quo than to advocate accommodation involving territorial concessions.
Netanyahu’s victory was clearly an impressive personal comeback.
In the weeks leading up to the elections, it seemed that the public had grown weary of a prime minister who had been in office long enough to be corrupted by the arrogance of power and tainted by a raft of petty scandals.
He conducted a campaign that relied on his eloquence and charisma, as well as on scare tactics.
Most significantly, he swung sharply to the right, out-flanking his rivals.
Thus, two days prior to the election, he rescinded his formal acceptance, in 2009, of a two-state solution, vowing that his government would never allow Palestinian statehood.
The formation of a right-wing government will have a profound impact on the country’s foreign and domestic policies.
Netanyahu has already destroyed his relationship with US President Barack Obama, and Israel’s relationship with the European Union is not much better.
A government that continues to settle the West Bank and refuses to negotiate with the Palestinians will face erosion of its international legitimacy, boycotts, and sanctions.
Relations with Egypt and Jordan will also be affected, and hopes of collaboration with the moderate Arab camp will be frustrated.
On the home front, attempts by Likud and its right-wing allies to tamper with the legal system, the press, and other institutions identified with the “old elite” are likely to gain momentum.
Netanyahu knows how risky this course will be at home and abroad, which is why he is likely to invite Herzog to join the government as a junior partner.
Herzog would then confront the same dilemma that his predecessors faced in 2009 and 2013.
The arguments for and against joining the government are well known.
Doing so is the responsible thing to do, offering the opportunity to moderate the government’s policies and reduce the danger of a disaster.
And, by holding a major portfolio, a junior partner can avoid marginalization and strengthen its position for the next election.
But, as Livni and Barak know, a junior partner more often ends up having no real impact on the core issues, merely providing window dressing for the status quo.
Nor are Herzog and Livni free to make that choice on their own.
Some party members are eager for cabinet portfolios and the other trappings of power; but many more would rather stay out and fight.
When Netanyahu traveled to Washington, DC, to deliver his controversial speech on Iran to the US Congress, he was described by his American supporters as “Churchillian,” the lonely courageous voice warning a complacent world against an evil force.
One can only hope that now Netanyahu will be Churchillian in a more profound sense, by using his empowered position to make the bold decisions needed to lead his country out of its current predicament and paralysis.
Isolating Israel
RAMALLAH – Israeli Prime Minister Binyamin Netanyahu certainly has reason to celebrate.
He surprised nearly everyone by securing a decisive electoral victory, winning a third consecutive term in office after his right-wing Likud party gained a five-seat advantage in the Knesset over its main rival, the center-left Zionist Union.
But the celebration is likely to be short.
The way Netanyahu finagled this outcome – renouncing his commitment to a two-state solution with Palestine and pledging to continue building settlements on occupied land – will almost certainly have serious political and diplomatic consequences for Israel.
In recent years, Netanyahu’s hardline stance has increasingly undermined Israel’s international credibility, while convincing the Palestinians living in the occupied territories that a genuine agreement with Israel is impossible.
(Indeed, Palestinians showed little interest in the outcome of this election.)
Now that Netanyahu has intensified his right-wing rhetoric – and been rewarded with another term in power – the international movement to isolate Israel will only gain momentum.
After all, support for direct negotiations between Israel and Palestine no longer makes sense, even for Israel’s main ally, the United States, because the assumptions underlying this approach have been demolished.
The first such assumption was that both parties accepted the two-state solution as the general basis for a compromise agreement.
And, indeed, at Bar Ilan University in 2009, Netanyahu declared his willingness to accept the creation of a Palestinian state, on the condition that it be demilitarized and that the Palestinians recognize Israel as the homeland of the Jewish people.
This is no longer the case: two days before the election, Netanyahu explicitly vowed that his government would never allow Palestinian statehood.
The second key assumption underlying peace negotiations was that Israel, as a democratic country, would not want to rule another people through military occupation – thereby denying them their basic human right of self-determination – in perpetuity.
But Netanyahu has now shown that Israel is a democracy only for its Jewish citizens, dismissing Israel’s Arab citizens, who comprise 20% of the country’s population, in blatantly racist terms.
In the last hours of the election, Netanyahu called on Jewish Israelis to turn out, because “the Arabs are voting in droves.”
By eliminating the two assumptions critical to negotiations with the Palestinians, Israel’s current leadership – and, indirectly, the majority of Israelis – has destroyed the thin veneer of legitimacy that the international community had erected around a country that has been occupying another people for nearly five decades.
The justification for not censoring Israel too harshly in international institutions or using boycotts to punish Israel for war crimes is no longer valid.
Obviously, some groups have long recognized the need for sterner measures.
Most notably, in 2005 Palestinians living in the diaspora and others launched the international boycotts, divestment, and sanctions (BDS) movement, with the goal of compelling Israel to stop violating international law, particularly with its settlement policies.
The BDS movement has met significant resistance in many parts of the world, owing to the belief that its tactics are unnecessary and unhelpful.
That will now change.
Similarly, the US opposed the move by Palestine – a United Nations-recognized non-member observer state – to join the International Criminal Court (ICC).
Despite the lack of progress in peace negotiations, American leaders continued to believe in Israel’s democracy and willingness to pursue a two-state solution.
That, too, will change.
Simply put, now that Israel’s leaders have renounced their commitment to a negotiated peace with Palestine, the international community can no longer justify the prevailing approach.
Instead, it must live up to its professed values by isolating Israel politically and economically.
Moreover, world leaders should support Palestine’s efforts to resolve its conflicts with Israel through neutral international agencies like the ICC.
And international forums like the United Nations Security Council must condemn Israel’s refusal to end its 47-year occupation, making it clear that the country will no longer benefit from a diplomatic double standard.
In 1990, when Saddam Hussein sent Iraqi forces to occupy Kuwait, claiming that he was retaking lost territory, the UN Security Council voted, based on chapter seven of the UN charter, to punish Iraq by imposing a strict financial and trade embargo.
Likewise, when apartheid South Africa refused to provide its black majority with their fundamental human rights, the international community supported a major campaign of divestment and sanctions.
Today, Israel is relying on historical claims to occupy another people.
Its government, which has revealed its racist underpinnings, is denying four million Palestinians basic rights, and even using military force against them.
The international community needs to respond accordingly, intensifying boycotts, divestments, and sanctions, until Palestinians are allowed to live freely in a truly independent state alongside Israel.
The Israel Lobby’s Gay-Rights Hypocrisy
LONDON – One of the few liberal victories in a conservative age in the United States has been the formal acceptance of homosexuality.
Same-sex marriage is now recognized by the federal government and is legal in 35 out of 50 states.
The US is not alone.
Nineteen other countries (or regions of countries) – mostly in Europe and North and South America – now allow gay couples to marry legally.
South Africa is the only African country where same-sex marriage is permitted, and it is not legal anywhere in Asia or the Middle East, where to be openly gay can still be extremely dangerous.
Last year, Uganda enacted a law – attributed partly to the influence of well-funded evangelical missionaries from the US – mandating a life sentence for people caught in homosexual acts.
In Iran, sodomy can lead to a death sentence, as is true in Saudi Arabia, Hamas-controlled Gaza, and, of course, under the lash of militant groups like the Islamic State.
So there is nothing untrue about the headline of a paid advertisement that ran in the New York Times on December 23. Placed beneath a picture of a vulnerable-looking young American male, it read: “Hamas, ISIS and Iran kill gays like me.”
There is something not quite right about this ad.
It was paid for by the Orthodox Rabbi Shmuel “Shmuley” Boteach, a popular media performer also known as “America’s Rabbi,” who presides over an advocacy group called This World, which promotes Israel and “Jewish values.”
Another major figure in the group is Sheldon Adelson, a Las Vegas casino magnate who donates millions of dollars to Republican politicians who most actively support Israel.
Favored speakers at This World galas include the right-wing Republican former governor of Texas, Rick Perry, who once compared homosexuality to alcoholism.
Neither traditional “Jewish values,” nor Perry, are naturally friendly to gays.
Homosexuality is considered an abomination in Jewish law, and Texas tried to ban gay marriage.
Still, gay people are not executed in Israel or Texas, and it is good to be reminded of such horrors where they exist.
But hypocrisy is not what is most disturbing about this particular campaign.
It is the insinuation that people who criticize the Israeli government are therefore guilty of condoning violence against homosexuals in other parts of the Middle East.
A snippet from the ad: “To those who scapegoat Israel...yet remain silent about the oppression and violence Hamas, Iran and other countries inflict on the gay community: Shame on you.
You are letting them murder us, literally.”
First of all, not all people who criticize, say, Israel’s treatment of Palestinians are indifferent to violence against gays or anyone else.
Moreover, the two problems are hardly related.
The Israeli government is not driving Arabs off their land on the West Bank to protect gay people in Palestine, let alone in Iran.
And no one is criticizing Israel for its treatment of gays.
By stressing real human-rights abuses in Iran and Arab countries, this lobby group for Israel is suggesting that criticism (“scapegoating”) of Israel is not only wrong but immoral: “Your misguided actions ensure that LGBT people in the Middle East continue to live in hiding under constant threat of death.”
If the lobbyists had simply wished to point out that Western critics often consider Israel more harshly than its Middle Eastern enemies, they would be right.
But their ad wrongly implies that those double standards lead to the oppression of Arab and Iranian gays.
Calling on people to pay more attention to such oppression is no reason to pay less attention to problems in Israel/Palestine.
Abuses in one place, no matter how grotesque, should not be used to stifle criticism in another.
The ad shows the extent to which the language of human rights has become politicized.
As was true of religious zealotry in the past, the ideology of human rights is being invoked to defend or obscure the oppression of others.
Right-wing populist parties in Europe regularly whip up popular sentiment against Muslim minorities by condemning their treatment of women.
There is no doubt that many Muslim men treat women in ways that most modern people in the West would no longer condone.
(The same is true of men in ultra-Orthodox Jewish communities.)
But this is no reason to exclude them as fellow citizens.
More serious in terms of its consequences is the way in which human rights have been used to promote wars.
The idea, now accepted by the United Nations, of “humanitarian intervention” to save people from extreme human-rights abuses, sounds moral and high-minded.
And there may indeed be cases where armed intervention is the only way to stop mass murder.
But most “humanitarian” wars make things worse for the people they are supposed to be saving.
They tear societies apart, destroy the livelihoods of millions, and cause even greater conflicts, as we have seen in Iraq.
This is why, until recently, wars could be justified only if they were fought in self-defense, or in defense of allied nations.
The temptation to embark on wars that cause more harm than good is not the only danger of using the language of human rights to justify military intervention in political conflicts (which usually involve many other interests that have nothing to do with human rights).
Those who invoke human rights to promote wars or, as with This World, to make political propaganda, degrade the very ideals for which they claim to be fighting.
The Fall of Netanyahu?
JERUSALEM – The dissolution of Israel’s parliament, the Knesset, just a day after Prime Minister Binyamin Netanyahu sacked two senior cabinet ministers, marks a surprising turnabout.
Indeed, when Israelis vote again in March, more than two years ahead of schedule, Netanyahu could be voted out of office, with important implications not only for Israel, but also for the wider Middle East.
Until last summer, Netanyahu appeared politically unassailable.
His coalition government, despite some internal bickering, was expected to serve out its term.
Not even 10% of Israelis would have preferred the opposition leader, the Labor Party’s Yitzhak Herzog, as Prime Minister.
Things began to unravel when two cabinet ministers abruptly resigned, citing family commitments or policy disagreements.
Then came the inconclusive war in Gaza, which, given Netanyahu’s unfulfilled pledge to “crush Hamas,” undermined his credibility, especially when ministers like Naftali Bennett, the leader of the nationalist-religious Jewish Home party, openly challenged his policies.
When some European parliaments voted in 2014 to recognize Palestine as an independent state, many Israelis, who had long blamed the Palestinians for the continued failure of peace talks, began to worry.
More significant, Netanyahu’s public clashes with US President Barack Obama fueled concerns among Israelis – including supporters of Netanyahu’s Likud party – that their government’s policies were deepening Israel’s isolation and thus undermining its security.
The domestic situation is not much better.
Netanyahu has failed to fulfill his promises since the massive demonstrations of 2011 to address prohibitively high living costs, especially for young couples.
On the contrary, housing prices have continued to rise.
When Yair Lapid – the ambitious but inept finance minister, who leads the centrist Yesh Atid party – proposed waiving the value-added tax on first apartment purchases by young couples, Netanyahu failed to respond decisively, giving the impression that he lacked control over his own cabinet.
But it was Netanyahu’s support for draft legislation seeking to constitutionalize Israel’s identity as the Jewish people’s nation-state – to the detriment of Israel’s Muslim, Christian, and Druze citizens – that brought the situation to a head.
The bill, which emphasizes Israel’s Jewish identity above its democratic principles, has caused deep divisions not only among the electorate, but also within the government coalition.
Netanyahu, with his weak and vacillating leadership exposed, sacked his opponents, Lapid and Justice Minister Tzipi Livni (who also denounced Netanyahu’s settlement-construction plans), and called for new elections.
But the real game changer was the declaration by Herzog and Livni, who leads the small centrist Hatnuah party, that their parties would run jointly in the elections.
If they win, they will rotate in the prime minister’s post.
This changed Israeli political discourse almost overnight.
Far from invincible, Netanyahu is now viewed as a failed prime minister, confronted by a center-left bloc that may well become the most powerful voice in the Knesset.
Yesh Atid voters, who have been disappointed by Lapid’s failure to deliver the “new politics” of efficiency and transparency that he promised, may supply the Herzog-Livni alliance with the necessary votes.
Some of the moderate orthodox parties, which have been undergoing their own internal splits, have also signaled their willingness to work with a center-left bloc that might enable Israel to make real progress.
Even Minister of Foreign Affairs Avigdor Lieberman, head of the right-wing Yisrael Beiteinu party, is now criticizing Netanyahu for alienating the US and has suggested that he would not rule out joining a centrist government.
All of this bodes well for the Herzog-Livni alliance.
But three months is a long time in politics.
Netanyahu may be a dismal prime minister; but he is also a formidable campaigner.
And if the centrist alliance finishes first in the election, it will still need coalition partners to form a majority in the Knesset.
Gaining fewer than 30 of its 120 seats might drive it to seek potential partners among the orthodox – an approach that could alienate moderate secular voters.
Moreover, once in power, the Herzog-Livni alliance would be met with serious challenges – beginning with reaching an agreement with the Palestinians.
Given that the Palestinians’ political leadership is divided between the Fatah-led Palestinian Authority, which controls the West Bank, and Hamas, which has established an Islamic fundamentalist regime in Gaza, a deal between Israel and Palestinian Authority President Mahmoud Abbas would mean little.
Nonetheless, a Herzog-Livni government would bring significant change, particularly in terms of relations with Europe and the US.
Netanyahu’s provocative policies and statements, which have undermined support for Israel among even its closest allies, would be supplanted by a willingness to negotiate in earnest and make genuine concessions.
Such a shift would reinvigorate hope among Israelis – and not a moment too soon.
There is a growing realization in Israel that it is time to chart a new path.
Netanyahu, always eager to impress upon the Israeli public the impossibility of making peace with the Palestinians, failed to address the question of what kind of country Israel will become if it continues to rule millions of people against their will.
This is what has turned so many people in the West against Israel, leading some to question its very legitimacy.
If Zionism means eternal dominion over the Palestinians, is it really worthy of support?
The Herzog-Livni alliance has tentatively named itself the “Zionist Camp.”
It may not be catchy (and it is likely to be changed), but it expresses an essential truth: Zionism is about the right of the Jewish people to self-determination, not about the permanent domination of another people.
The Inevitable Intifada
PARIS – After the stones of the first Palestinian intifada, or uprising, came the human bombs of the second one.
Now Palestinians have turned to knives.
On the eve of the 20th anniversary of the assassination of Israeli Prime Minister Yitzhak Rabin, the last man to have embodied a real hope for peace, is a third intifada erupting?
To be sure, the recent knife attacks that have taken place across Israel and the West Bank, have apparently been carried out by “lone wolves.”
But they echo a new wave of resistance by Palestinians that goes beyond physical assaults – reflected, for example, in the recent arson attack on a Jewish shrine in Nablus.
With Hamas now calling explicitly for a third intifada, there is no denying the seriousness of the situation.
In fact, a new Palestinian uprising should come as no surprise.
It is not as if anything has happened to break the Israeli-Palestinian cycle of fragile truces and violent explosions.
The situation is not even frozen; it is deteriorating, owing to increasing political and religious radicalization on both sides.
And yet, judging by the attitude of the international community, no one would know it.
A few days ago, I attended a small conference in Paris focused on the new challenges and changing balance of power in the Middle East.
None of the main speakers made even a passing reference to the rising wave of violence in Israel.
They were too busy discussing the crisis in Syria – which now poses a real threat of international escalation – as well as the diplomatic, strategic, and economic consequences of the nuclear agreement with Iran.
The reality is that world leaders have little energy left to dedicate to the seemingly interminable conflict between Israel and Palestine – a conflict that they have tried and failed to resolve innumerable times.
And, indeed, there are serious doubts as to whether there is a viable alternative to today’s frail and sometimes violent status quo.
If Israel refused to leave the occupied territories in the past, how can it be expected to do so now, when the Islamic State is creeping toward the border?
Doing so would raise massive new risks, in stark contrast to the brief spasms of violence that now punctuate Israel’s otherwise stable security situation.
And who on the Palestinian side would be willing, much less able, to engage in serious negotiations with Israel’s increasingly right-wing government?
There are too many rifts and weaknesses on one side, and too powerful an illusion of strength on the other, for talks to yield anything of value.
In any case, even if they did resume talks, Israeli and Palestinian negotiators would not come to an agreement by themselves; and the international community is too divided, fatigued, and indifferent to impose a deal on them.
If a consensus exists today, it is a negative one. With all parties resigned to the current situation, the dream of a “two-state solution” – based on the sound idea of exchanging territory for peace – is effectively dead.
Of course, the status quo is far less desirable for the Palestinians than for the Israelis.
But they may have to do no more than bide their time, as their demographic advantage grows.
Without a viable state of their own, Palestinians will progressively become the majority in the current “Jewish state.”
The political, social, and religious implications of such a transformation would be far-reaching – and unacceptable to the Israelis.
The Israel-Palestine conflict has been so intractable because it is a clash between nationalisms.
If it becomes a clash between religions as well, compromise will become nearly impossible, even without further radicalization.
With the two-state solution off the table, and the establishment of a peaceful binational state unviable, some voices, mostly coming from the Israeli left, are now toying with a third idea: a confederation of Israelis, Palestinians, and Jordanians.
Palestinians share a strong kinship with Jordanians, more than half of whom are of Palestinian origin.
At the same time, Jordan is Israel’s closest partner in the region.
These factors make Jordan seem to many like an ideal bridge between Israel and Palestine.
Of course, there remains serious mistrust among the parties.
Nonetheless, advocates argue that the clear economic advantages of such a confederation – which would include a free-trade zone and joint economic ventures – could prove tempting enough to all sides to put the idea on more solid footing.
But the proposal, though certainly appealing, is not consistent with the realities of the Middle East today.
Unlike European countries, which emerged from World War II so exhausted by conflict that they agreed to pool their sovereignty for the sake of peace, the countries of the Middle East are experiencing an ever-intensifying climate of nationalism, intolerance, and hatred.
By causing a continuous shift to the political right, Israel’s occupation policy has undermined the state’s political and ethical foundations, while turning Prime Minister Binyamin Netanyahu into a hostage of forces even more extreme than he is.
Small minorities of Israeli extremists no longer hesitate to use violence to defend, if not impose, their views on others.
And the radicalization that the occupation has helped to fuel on the Palestinian side is well documented.
But amid the rise of the Islamic State and the end of Iran’s international isolation, not to mention the Palestinian knife attacks, who can convince the Israelis that the biggest long-term threat they face is their own policy?
One cannot say with certainty that if Rabin had lived, peace between Israelis and Palestinians would have become a reality.
But, as the region increasingly becomes trapped in a race to the abyss, the rare combination of courage, modesty, and lucidity that he embodied is badly needed.
Israel’s Centrist Victory
JERUSALEM – Israel’s election is a victory for centrism and national consensus.
Indeed, that is the key to understanding not only the vote count, but also Israeli public opinion, the next government, and its policies.
From experience, most Israelis have developed a worldview that combines traditional left-wing and right-wing thinking.
On one hand, they want to achieve a comprehensive political solution with the Palestinians based on creating a Palestinian state, in exchange for real, lasting peace.
On the other hand, they understand that there is no Palestinian leadership strong or moderate enough to bring it about.
Both the left and the right have been proven wrong.
The left offered big concessions and was ready to take high risks for the sake of peace.
Yet there is no credible way to achieve an agreement with such radical forces as Iran, Syria, Hamas, and Hezbollah, all of whom seek Israel’s destruction.
The Palestinian Authority (PA) is less extreme, but its leadership is weak, doesn’t control Gaza, and is still full of hard-line elements.
This approach also lost credibility as a result of the rise of Hamas and its determination to wage permanent war on Israel; Iran’s expanding influence and nuclear weapons’ program; and the high – even rising – levels of hatred against Israel among Arabs and Muslims.
In addition, the world didn’t reward Israel for making concessions and taking risks.
Indeed, the more Israel gave, the more slander and hostility it faced in many sectors.
At the same time, the right-wing mantra – victory – failed to offer a credible way to replace the Iranian and Syrian governments, or to destroy Hamas and Hezbollah.
There is neither the illusion nor the desire to hold onto captured territories permanently, or to build Jewish settlements, and Israel has virtually no international support for any of these goals.
With alternatives to the status quo constrained, it has become clear that Israel is in a long transitional period in which old ideas don’t work and a new approach is needed.
Foreign Minister Tzipi Livni’s Kadima party, opposition leader Binyamin Netanyahu’s Likud party, and Defense Minister Ehud Barak’s Labor party all fall – with only secondary variations – within a centrist consensus, which also reflects a popular national consensus.
Thus, regardless of who becomes prime minister, the next government will not commit to real concessions to the Palestinians in exchange for a two-state solution unless the result will be an end to the conflict and a long, stable peace.
Few believe that the PA and Hamas’s main rival, Fatah, will be willing or able to make such an agreement for decades.
The same applies to Syria.
As a result, any real changes affecting the status of Jerusalem, the Golan Heights or West Bank settlements are a long way off.
Moreover, no deal can be made with Hamas.
But, since Hamas will not simply disappear – nor will Hezbollah – so the key point is to defend Israel and its citizens as they pursue their normal lives.
This also means that at some point a big decision may have to be made on attacking Iran’s nuclear facilities.
As a result of this national consensus – accepted by Labor, Likud, and Kadima, along with many others – the next government will most likely be a national unity government consisting of this trio. Its policy guidelines are already clear:
· To stress Israel’s willingness to make peace, its readiness to agree to the creation of a Palestinian state, and its refusal to bear responsibility for the continuing conflict and violence;
· To maintain deterrence and defend Israel and its citizens from cross-border attacks;
· To preserve the best possible relations with the United States, Europe, and other countries, as long as this does not involve risks to Israel’s national interests or its citizens;
· Security cooperation with the PA to prevent terrorist attacks on Israel, in exchange for economic aid and assistance to prevent a Hamas takeover;
· To strike back at Hamas – and potentially Hezbollah – based on any attacks against Israel, with the precise response to depend on timing, opportunity, and these groups’ behavior;
· To work for the international isolation of Iran, Hezbollah, and Hamas;
· To negotiate with Syria for peace, though without illusions as to the probability of success.
The main differences between the leading Israeli parties are more atmospheric than real, mainly concerning how much to concede and how much to demand.
Even so, Netanyahu will not embark on a settlement-building campaign, and Livni is not about to give away east Jerusalem.
The most important decision that Israel’s new government is likely to face, when the time comes, is whether the country’s well being and even survival requires acting decisively against Iran’s nuclear facilities.
Which path will be chosen is not clear, but it is far better that a broad coalition be responsible for making such a vital, even existential decision.
Israel’s Dangerous Political System
PARIS – What is wrong with Israel?
In the last few years, the Jewish state seems to have done more than all of its combined enemies to delegitimize itself in the eyes of the world.
Its leaders’ apparent inability to think in strategic terms, and their indifference to the tribunal of global public opinion, is resulting in growing frustration among its citizens and, what may be more dangerous, deepening international isolation.
Where should one look for an explanation for this tragic evolution?
Was it simply inevitable for a people who, deprived of a state for more than 2,000 years, may have lost the ability to act collectively in a “raison d’état” manner?
Or perhaps the weight of Holocaust remembrance has blinded Israel’s leaders and distorted their thinking – in ways that, at the time the State of Israel was created, the Holocaust itself almost miraculously did not.
Certainly, the failure of the peace process in the 1990’s, followed by the coming of the second Intifada, appears to have encouraged the radicalization of Israel’s extremes while discouraging moderates.
And the revival of religious parties – in a country created by avowed secularists – opened the way for a more politically powerful but also more nationalistic and intolerant setting.
One could also ask whether the arrival of one million “Russians,” regardless of their actual ties to Judaism, had a negative effect on Israeli society, by encouraging ideological rigidity and a disdain for democracy that did not prevail before.
Or is the explanation for Israel’s current predicament to be found on the more prosaic terrain of the country’s dysfunctional democracy?
In reality, all these explanations are largely complementary; none is in contradiction with the others.
But the most important cause, the one that should be addressed before all others because it is eroding Israel’s very viability, is the near paralysis of the political system.
Italy can survive being badly governed and with a high level of corruption because it is surrounded by the peaceful environment of the European Union.
This is not true of Israel.
Protected by a “security wall” on one side and the sea on the other, Israeli citizens may enjoy the feeling of living on an artificial island from which they can connect directly to the areas of modernity and prosperity in Asia and the West.
Yet they are surrounded by a sea of angry and frustrated people, and cannot escape the logic of the region they inhabit.
Israel’s political system, through its complex mechanisms of rigged party selection and absolute proportionality, condemns the country to weak coalition governments and escalating corruption.
It must be reformed urgently.
Government leaders in Israel cannot afford to spend 90% of their time thinking about how to survive politically at a time when the state’s right to exist is being challenged.
To make of their country a pariah is a political, strategic, and moral failure for the leaders of Israel.
Those leaders’ strategic decisions over the last few years, if not longer, have been rather consistently poor, or at least imprudent.
This systematic miscalculation can be explained as follows. From the 2006 war in Lebanon to the recent deadly raid on a Gaza-bound flotilla, Israeli leaders have badly appreciated the ratio between military gains and political risks, and the necessary proportionality between the two.
This is all the more dangerous for Israel in view of the apparent decline in its operational military capabilities.
Even the operation in Gaza in 2008-2009, despite its apparent military success, was highly damaging for Israel in political terms.
As Israel’s political center of gravity has shifted to the right, if not the extreme right, one consequence whose long-term effects are not sufficiently appreciated is the growing alienation of Arab citizens, who represent 20% of the population.
Yesterday, they felt discriminated against.
Today, they feel “occupied” by a nation of which they can never be a part, and by a state that they perceive as “democratic” for its Jewish citizens only and “Jewish” for its Arab citizens.
The process of isolation of Israel starts in the heads of its citizens, and is becoming a self-fulfilling prophecy.
History has taught the Jewish people that they can count only on themselves for protection and survival.
Yesterday, intelligence without power led to immense suffering.
But today, power without intelligence creates immense dangers not only for the Israel, but for the Jewish people at large.
Israel is too small to act foolishly.
It desperately needs allies whose populations accept what it is and respect what it does.
There will come a moment when Israel’s actions will incite people – not only the most fanatical of the country’s foes, but also the most generously inclined of its supporters – to question Israel’s essence.
Whether or not this moment has already come, Israel cannot continue to be misgoverned in the way that it is.
Reform of the country’s political system has simply become a matter of life and death.
Israel’s Debacle at Sea
HAIFA – Israel was dead wrong in launching an attack by naval commandos against a flotilla carrying pro-Palestinian activists who were making an attempt to break the Israeli-Egyptian siege of Gaza.
That long-term siege, put in place after Hamas assumed sole control of the government in Gaza – breaking with the Palestine National Authority in the process – is a humanitarian catastrophe and a grave moral error.
There can be no excuses, no “but we didn’t intend.”
The Israeli government of Prime Minister Binyamin Netanyahu must apologize to the victims, investigate what happened on the blood-stained decks of the flotilla’s boats, and move on to honest peace talks with willing Palestinian leaders, like Abu Mazen, the president of the Palestine National Authority.
The fact that Hamas is refusing to make peace has nothing to do with the recent travesty in the sea en route to Gaza.
The fact that Gazan militants have fired missiles on Israeli civilians, and continue to do so, is irrelevant.
The fact that the flotilla did not carry only “peace activists,” but also many people who wish to see Israel destroyed and Israelis perish, is no reason to drop soldiers upon them.
Even the fact that some of the “humanitarian aid workers” turned on the soldiers with a rather un-peaceful array of knives and clubs is no justification for shooting to kill.
The trespassers on the scene, the true-blue pirates, were unfortunately the uniformed Israeli commandos acting in my name.
Prime Minister Netanyahu and Defense Minister Ehud Barak sent top combatants into a seafaring crowd of aggressive protesters and thought that they would win.
What were they thinking? Other cabinet ministers had been promised that no fatalities would occur.
The Israeli public woke up to a justified storm of global outrage.
Once again, an army intended for self-defense on the battlefield was sent on a mission that only diplomacy, humanity, and tact could resolve.
Has Israel lost the remainder of its wisdom?
Are we witnessing a classic case of sheer political stupidity?
If so, then here’s further proof that only peaceful and stable countries can afford the luxury of incompetent decision-makers.
In a hypersensitive reality, stupidity equals malice.
But I am afraid that something more than stupidity (though less than plain evil) is at work here.
Israel’s current leaders, and a segment of Israeli society, are trapped in an idiosyncratic logic of fear and self-centeredness.
This deviant logic has expanded Israel's justifiable acts of self-defense (such as targeting rocket launchers in Gaza and Lebanon) into all-out attacks.
It has eroded the Israeli ethos of respect for the lives of civilians, even when militants hide among them.
It has forced innocent Gazan civilians to pay dearly for their rulers’ crimes.
And it has muddied the Jewish moral legacy demanding the active pursuit of both justice and peace.
In short, Israel’s current leadership has inflated “security” into a surreal new cult, trumping morality.
Not all Israelis share this logic.
Not all of us feel more secure when civilian protesters are shot in our name.
Israel should apologize and make amends.
In this particular case, we must even apologize to those who openly loathe us and our state.
Hatred, after all, is not a punishable crime.
Moderate Israeli citizens, who had nothing to do with the flotilla fiasco, should lower their heads in shame for their government’s act.
And then we should raise our eyes again, proudly meet the gaze of those Palestinians who are willing to talk peace with us, and tell them: “Let’s get on with it.
No time to lose.”
Israel’s Egyptian Dilemma
JERUSALEM – The Arab revolt against inertia, despair, and decline has rightly inspired the admiration of civilized people everywhere – everywhere, that is, except in Israel.
The fall of corrupt Arab dictatorships is being met in Israel with profound skepticism, even hostility.
For years, the Israeli discourse has been that a true peace with the Arab world would be possible only when the region embraced democracy.
But the prospect of Arab democracy has now become a nightmare for Israeli leaders.
They are used to dealing with autocrats in Cairo, Damascus, and Amman, and now fear the consequences of an Arab foreign policy that genuinely responds to the voice of the people.
Egypt, where Hosni Mubarak’s regime was Israel’s closest ally in the war against Hamas in Gaza and in curtailing Iran’s drive for regional hegemony, is of special concern.
Mubarak’s ineffectiveness as broker of an Israel-Palestinian peace was not truly inconvenient for some of Israel’s leaders.
All this is now bound to change.
It is inconceivable, for example, that an Egyptian democracy, in which the Muslim Brotherhood would be a legitimate political force, would persist in Mubarak’s complicity with Israel’s siege of Hamas-controlled Gaza.
Egypt’s policies concerning two of Israel’s other key rivals in the region, Turkey and Iran, also might shift.
The US had two requirements of Mubarak: that he undertake domestic political reform, and that he be a peace broker in the region.
Mubarak conveniently focused on the “peace process,” which explains his jealousy at Turkey's recent attempts to usurp the role of regional broker.
Egypt’s regional power reflects its objective strategic weight, and this is not expected to change.
But Egypt’s attitude to Turkey and Iran would not be as confrontational as Israel would like it to be.
Indeed, one of the first decisions taken by Egypt’s interim government was to allow an Iranian vessel to cross into the Mediterranean through the Suez Canal for the first time in three decades.
Moreover, after 30 years of tension, preparations are under way for the exchange of ambassadors between Egypt and Iran. “Egypt does not view Iran as an enemy,” proclaimed Egyptian Foreign Minister Nabil el-Arabi.
The voice of a democratic Egypt in defense of the cause of Palestine or in putting pressure on Israel to join the Non-Proliferation Treaty (NPT) would be far more credible than that of Mubarak’s regime, which sometimes looked as if it were simply going through the motions on policy issues like these.
Nor is Egypt’s political discourse likely to be especially palatable to Israelis.
Already, the new Egyptian finance minister, Samir Radwan, has made it clear that he does not favor investments from “the enemy” – that is, Israel – which might lead to a takeover of the Egyptian economy.
All of this does not mean that Egypt’s commitment to the two countries’ peace treaty is in imminent danger.
Egypt, whose new paradigm in foreign affairs increasingly looks like an imitation of Turkey’s strategy of “zero problems with its neighbors,” needs the treaty at least as much as Israel does.
Any Egyptian democracy that was truly accountable to its popular base would have to address the country’s colossal domestic problems, and a state of war with Israel would hardly advance that goal.
The real threat to Egypt’s security today is on its southern and eastern borders, not in Israel.
The secession of South Sudan is a real concern in Egypt, for it might eventually lead to the disintegration of the entire Sudanese state into fiefdoms of instability and Islamic radicalism.
Egypt is now also rightly concerned about neighboring Libya possibly splitting into its tribal components.
Conservatism in revolutionary times is an inadequate option.
Israel’s tragedy lies in its obsession with taking (or avoiding) decisions only on the basis of worst-case scenarios.
This is blatantly obvious in its failure to respond creatively to the Arab world’s democratic upsurge.
The Netanyahu government’s political paralysis – its wait-and-see philosophy in the face of massive change all around it – will end up leaving the initiative in others’ hands, to the detriment of Israel’s national interest.
No convincing peace initiatives or major policy responses are expected from Israel at a time when the United Nations General Assembly is poised to recognize overwhelmingly the creation of a Palestinian state – a move that would further isolate the country.
Moreover, an emerging democratic Egypt that is reconciling with Israel’s sworn enemies, and that is bound to be more proactive in its defense of the Palestinian cause, is not viewed in Israel as a legitimate intermediary.
Inertia was not always Israel’s way.
Netanyahu does not have to look very far for examples of bold and visionary Israeli leaders to follow. Some reached peace agreements with the country’s neighbors; others came very close – and at least succeeded in conveying to the Arab world Israel’s commitment to reaching out to the region’s peoples.
The focus of Israel’s regional policy should be building bridges to those peoples, the true masters of the current “Arab awakening.”
A generous solution to the plight of the Palestinians is more vital to that task than ever before.
Israel’s Lonely Prosperity
PARIS – It is difficult not to be struck by the contrast between the “Asian”-like energy of Israel’s economy and civil society and the purely defensive nature of its approach to political change, both within and outside the country.
A recent law bars Israeli citizens from supporting Western boycotts aimed at reversing the country’s settlement policies and at backing an independent Palestinian state.
While Israel has never been so affluent, dynamic, and confident, it also has never been so isolated internationally.
Israel could have embraced the Arab Spring as an opportunity, rather than as a profound risk.
If Arab citizens could transform their culture of humiliation into a culture of hope, perhaps they would be able to reconcile themselves with Israel’s existence.
But Israeli leaders reacted purely negatively to the Arab upheavals.
In their estimation, a complex regional environment has now become even more dangerous, making prudence even more urgent.
For Israel, yesterday’s despots, like Egypt’s former president, Hosni Mubarak, were much more predictable than the “Arab masses.”
While some of the demonstrators might be inspired by democratic ideals, let’s have no illusions, the Israelis seem to be saying: Islamist forces will emerge as the only winners, and they are much more hostile to Israel and the West than their predecessors were.
Of course, with the Syrian regime’s massacres of its own citizens, some in Israel say that the suffering of Gaza’s inhabitants pales in comparison, and thus fails to attract the same sympathy as it did last year.
But this should not obscure the overall diplomatic picture for Israel, which remains essentially negative.
One of the more ironic results of the region’s changing political configuration is that Israel now perceives a strategic convergence with Saudi Arabia.
Despite their political systems’ deep differences, they both favor the regional status quo, and they share an obsessive suspicion of Iran.
But why not dream of a new strategic triangle comprising Israel, Saudi Arabia, and Turkey, just as Israelis once dreamed of a non-Arab triangle between Israel, Turkey, and the Shah’s Iran?
The Turks’ appalled reaction to the Syrian regime’s brutal behavior creates an opportunity that Israel should use to try to restore the privileged relationship with Recep Tayyip Erdoğan’s government that existed before the Gaza blockade.
But that would presuppose a small gesture towards the Palestinians, whom Israelis regard as being so deeply divided among themselves that no progress toward a peace settlement seems possible.
Israel’s leaders seem intent on gaining time both tactically, by resisting the soft pressure of US President Barack Obama’s administration, and strategically, by preparing the country for a new world in which emerging powers such as China play an increasingly important role.
That world, however, will be one in which Israel can no longer count on feelings of Holocaust guilt to influence major powers.
It is a world in which monotheistic rivalries will be diluted in an ocean of polytheist faiths, and in which Israel will be able to depend only on its comparative merits in the eyes of cynical, realistic actors who will judge it solely on the basis of their own national interests.
Israel may be “of Europe,” and its main ally may well remain the United States for many years to come, but Israeli leaders must start thinking of how their country can thrive in a post-Western world.
The most recent “President’s Conference,” held in June in Jerusalem under the patronage of Israeli President Shimon Peres, was highly symbolic of this evolution.
In the opening session, Obama’s special envoy, Denis Ross, was greeted with resounding silence when he conveyed to the participants his boss’s warm wishes.
By contrast, China’s culture minister was welcomed very warmly when he spoke, in typical fashion, of the growing need for global “harmony.”
In the minds of a few Israeli strategic thinkers, Israel must resist firmly for two or three more generations in order to become an irreversible reality in the region and a legitimate “accomplished fact” of the international system.
At that point, who would want to boycott a country whose technological prowess is needed all over the world?
In this context, the idea of a peace settlement with the Palestinians seems more abstract than ever.
Indeed, it makes the current status quo seem comfortable.
The gap between Israel’s rich and poor nowadays may recall Brazil, but who remembers the original Zionists’ social-democratic ideals?
The country’s prosperity is simply overwhelming.
From Tel Aviv to Jerusalem, luxurious penthouses are multiplying.
Are we in Singapore, Hong Kong, or São Paulo?
Why challenge the certainties of the present with the uncertainties of the future?
Moreover, Israel has not only become much more prosperous; it has also moved decisively to the right.
The second Intifada may very well have proven fatal to the Israeli left.
Triumphant capitalism, idolatry of the land, and the comforts of the status quo produce a heady cocktail.
But, high on the benefits of globalization, and waiting with a mixture of excitement and apprehension for the coming of a new post-Western world order, Israelis are dancing on the rim of a volcano.
Israel’s Mission
JERUSALEM – Israel is one of the biggest success stories of modern times.
A nation was reborn out of Holocaust survivors and uprooted Jewish communities who, mostly through the quality of their human capital, built a booming economy, created one of the world’s most innovative agricultures, and revived a dead language.
They also sustained, against all odds, a democracy that, however imperfect and dysfunctional, is nonetheless amazingly vibrant.
And yet, at its 60th anniversary, Israel stands at a crossroads.
Indeed, Israeli Prime Minister Ehud Olmert has warned of “the end of the Jewish state” if the country remains bogged down in the occupied territories and a Palestinian state is not established.
Israel’s internal challenges are no less demanding.
The relatively homogeneous society envisaged by its founders has fragmented into a tense multi-ethnic tapestry comprising secular Jews, an alienated Arab minority, a prolific ultra-orthodox community living on state allowances, religious nationalists bent on a Messianic brand of Zionism, immigrants from the former Soviet Union, marginalized Ethiopians, and Oriental Jews still struggling to join the middle class.
Moreover, Israel has failed to redress a dangerous imbalance: however creative its economy may be, the burden of military expenditure is undermining its investment in education and scientific research.
Metaphorically, Israel’s national psyche oscillates between “Tel Aviv” and “Jerusalem.” “Tel Aviv” embraces secularism, hedonism, and economic growth, and views the State of Israel as a legal entity, in contrast to the dangerous, faith-driven “Jerusalemite” concept of “Eretz Israel.”
It has replaced Israel’s early pioneering ethos with the temptations of modernity, liberalism, and “normalcy.” It aspires to be part of the “global village,” not an isolated, parochial Jewish outpost.
By contrast, “Jerusalem” regards “Tel Aviv’s” drive for “normalcy” as a shallow affair, one that is almost criminally indifferent to Jewish memory and the lessons of Jewish history.
The Israel of “Jerusalem” is one of yearning for Jewish roots, a deep-seated fear of “the Arabs,” and an unyielding distrust of “Gentiles” and their “international community.”
Israel was born in war and has lived by the sword ever since.
Rarely in history has a national movement marched to its Promised Land with such a brilliant display of diplomatic savoir-faire and military skill as the Zionists did on their way to statehood.
But Israel’s breathtaking victory against three Arab armies in 1967 brought it not only grandeur, but also moral and political decay.
Forty-one years later, Israel is still incapable of extricating itself from the corrupting occupation of Palestinian lands, and from the folly of settlements.
This is the paradox of Israel’s existence: a sense of power combined with an ever-present apocalyptic fear of annihilation, reflected in its hostile reaction to any initiative that touches its physical security.
Of course, Jews’ historical experience is not conducive to easy conciliation.
The crisis of the Jewish conscience in the traumatic transition from Holocaust to statehood has not yet been fully overcome.
Israel always, it seems, opts for a fatalistic interpretation of regional challenges, and its agonizing task today is to adopt a radical change of strategy by overcoming its leaders’ traditional tendency to make decisions only on the basis of worst-case scenarios.
It has been a sadly recurrent condition of the Arab-Israeli conflict that no war lost by a humiliated Arab side has ever ushered in a peace settlement, just as no war overwhelmingly won by Israel has ever led its leaders to be magnanimous in victory.
Peace efforts began almost invariably thanks to Arab, not Israeli, moves.
Such was the case of the 1973 war, which was started by President Anwar Sadat with the aim of forcing the United States to broker an Egyptian-Israeli peace.
Likewise, the Palestinian Intifada of 1987 forced Israel to abandon the politics of inertia and engage in a process that culminated in the Oslo accords.
Zionism’s unique combination of democracy and utopianism enabled the Jews to recover their birthright and gave them a key to the future.
The same tools must be used to end the conflict with the Arab world, in particular with the Palestinians.
The Jews did not survive extermination only to entrench themselves behind walls of their own making.
They survived in order to resolve what for too long has looked like an insoluble conundrum: legitimizing Jewish statehood in the eyes of those who consider themselves its victims.
Obama in Israel’s New World
PARIS – Now that Binyamin Netanyahu has formed a new Israeli government out of a dizzying kaleidoscope of possible post-election permutations, has the country’s politics moved to the center?
US President Barack Obama would be wrong to think so as he prepares for his first official visit.
The unexpected second-place finish of Yair Lapid’s new Yesh Atid (“There is a Future”) party in the recent election has certainly changed the complexion of the government: the two leading Orthodox parties, Shas and United Torah Judaism, are out, while two smaller centrist parties, Kadima and Hatnua, are in.
But those who breathed a sigh of relief at the weakening of Netanyahu’s Likud and the country’s extreme right-wing parties should be as anxious as ever.
The political horse-trading is over for the time being, and the outcome seems assured.
Netanyahu will return as Prime Minister, and every party – in power or not – is ready to block, dilute, or paper over whatever policies the new government manages to adopt.
In Israel, the question nowadays is not whether the center will hold, but whether it matters.
In both domestic and in international terms, Israel has not so much moved to the center as it has embraced a new type of national consensus that began to emerge in 2011.
In May-June of that year, while the international community was still mooting potential land swaps for an increasingly distant peace settlement with the Palestinians, Israelis were focusing on a domestic battle over the regulation of cottage cheese.
The new consensus was best symbolized by the massive popular protests that erupted two months later, bringing together young, economically frustrated, mainly middle-class Israelis who might once have been politically divided by their allegiance to either the center-left Labor party or Netanyahu’s Likud.
No mention was made, then or now, of the need for peace initiatives; of the state of mind of the now-invisible (to Israeli eyes) Palestinians, now relegated to their side of the security wall; or of the growing inequalities that separate Israel’s Arab citizens from their Jewish counterparts.
By representing the aspirations of middle class Israelis seeking a better economic deal, Yair Lapid and Naftali Bennett of the nationalist Jewish Home party became the two sides of a newly minted political coin, one backed by an inward-looking ethnic and national identity in a country that sees itself as alone in the world.
This identity may be secular or religious; it may seek middle-class normality or proclaim an Israeli version of manifest destiny –&#160;the two are not incompatible.
Either way, the country no longer resonates with the expectations, hopes, and fears of a world still focused (ever more dimly) on resolving the Israeli-Palestinian conflict.
Nor does Israel listen to the anguish of its own Ciceronian Zionists, perhaps best represented by the novelist Amos Oz.
Israel has simply stopped seeking to reconcile its Jewish identity with its commitment to democracy, for it has stopped addressing the contradiction that the Israeli-Palestinian question represents.
Simply put, that contradiction is no longer relevant to the new Israel.
Despite the deep economic frustrations of many of its middle-class citizens (the truly indigent did not protest), Israel has become a global economic and military powerhouse.
The country increasingly lives in its own virtual reality, simultaneously proximate to and far removed from the revolutionary pre-modernity of most of its neighbors.
Indeed, Israel is now on an equal footing with all of the rising new powers of an increasingly globalized world.
Few of them are democracies, and not one of them holds Israel to task for its settlement policies in the West Bank or cares, like the United States, about Middle East peace.
Why should Israel continue to focus on a weakened West that is constantly reprimanding it when the rest of the world beckons?
Nor does the old secular/religious divide have much salience anymore.
Israel has become post-modern, producing new – and sometimes startling – synergies among its avant-garde high-tech sensibility, its secular and ever more orthodox religious identities, and its overall ethno-nationalist outlook.
Its ancient biblical past can now coexist seamlessly with its ultra-modern present.
Israel’s new millionaires can easily live in far-flung settlements in “Judea and Samaria” and commute daily to their coastal startups.
And the army has already become the purview of nationalistic and religious cadres, even without conscription of the ultra-orthodox – one of the centrist camp’s demands in pressing for fairer national burden-sharing.
As a result, the Israeli state seems to be moving closer to its Asian counterparts, with their emphasis on economic innovation and their indifference to universal values or, for that matter, peace.
Israel is now proud to be in a world of its own, in which it feels free to act unilaterally and scoff at toothless criticism from Europe (and now partly from the US).
There is no reason to believe that Netanyahu’s new government will seek to revive the increasingly feeble and moribund peace process, beyond offering verbal promises and inconsequential half-measures.
Nor should anyone expect a moratorium on settlement expansion.
On the contrary, the settlements offer cheaper housing than is available in Israel, and thus resolve one of the main economic problems of the country’s middle class.
“Red lines” in Israel have a way of mutating into lines drawn in the sand, which are then rendered invisible at the slightest wind.
The new government’s fragile equilibrium only reinforces this sober interpretation.
In Israel, Obama will encounter a country that has indeed moved, but not toward a missing center.
Israel’s New Realism
Kadima’s victory in Israel’s elections is the country’s most important political turning point in 30 years, if not longer.
The new party—barely six months old—has realigned Israeli politics by transforming the entire framework of ideological assumptions underpinning the country’s security strategy.
Everyone knew that Kadima would win and form a coalition with the moderate left Labor party, which managed a respectable second-place finish.
As a result, some Kadima voters stayed home, while other potential supporters voted for Labor to strengthen its hand in pushing social and economic issues in Kadima-led coalition.
On the right, the Likud party, which Sharon abandoned to establish Kadima, did very poorly, partly because many conservative voters also deserted it for religious, immigrant, and other parties.
In fact, a wide variety of small political groups, including three Jewish religious parties, Arab parties, and a pensioners’ party won seats.
Since Kadima and Labor will not have a majority even as coalition partners, they will have to bring in some of these groups.
But the importance of the distribution of seats pales in comparison to that of the longer-term changes in Israeli politics implied by Kadima’s victory.
Indeed, having attracted leading figures from both Labor and Likud, Kadima is now established as the most successful centrist party in Israel’s history.
With few political stars left in either Labour or Likud, Kadima may become the country’s dominant party for many years to come.
Ehud Olmert, the party’s leader and now elected prime minister, has been a maverick of the center since his student days – a fitting symbol for the rapprochement of left and right.
But the rapprochement itself is, of course, mainly the work of Ariel Sharon, whose influence is by no means diminished because he is in a coma.
Kadima is built on Sharon’s charisma and program, which reversed the most basic Israeli strategic thinking of the last half-century.
For 30 years after the 1967 war, Israelis agreed on the need to keep control of the West Bank and Gaza Strip unless or until there was a comprehensive peace agreement with the Palestinians and the Arab states.
From a security standpoint, the occupied territories constituted critical terrain for defending Israel against an attack on its borders by Arab states’ armies.
Moreover, from a diplomatic standpoint, the territories were regarded as bargaining chips (“land for peace”) to be used in achieving a negotiated solution.
The Oslo agreement in 1993 and the ensuing peace process embodied that expectation.
The strategy ran aground in 2000, when Prime Minister Ehud Barak offered to give up almost all the occupied territories and accept a Palestinian state in exchange for real peace.
The Palestinian leader Yasir Arafat turned him down flat and instead returned to a massive campaign of terrorism against Israel.
The entire Israeli political spectrum was thrown into confusion.
The left had maintained that Arafat would make a deal and honor it; the right claimed that Arafat would make a deal and violate it.
Everyone was wrong: there would be no deal to honor or violate.
With the collapse of the strategy’s most basic premises, what should Israel do?
Sharon formulated the answer in 2004, concluding that Israel did not need the territories.
They were no good as bargaining chips, because there was no one with whom to bargain.
Nor could they be annexed to Israel, owing to the demographic problem implied by continued control over so many Palestinians.
Finally, with the USSR gone and the United States the world’s sole superpower, the geostrategic situation had changed entirely.
Arab states, preoccupied with other issues in the post-Cold War era, were less interested in the conflict, while the security situation in the territories themselves had become a problem.
Sharon’s solution was unilateral withdrawal and the idea that Israel would decide on its own interim boundaries with a view to what it would claim if there was ever a negotiated agreement.
Moreover, Sharon now agreed that a security fence, which historically was favored by the Israeli left, would enhance Israel’s defenses.
The country would then focus on domestic issues such as economic development, improving its public institutions, and raising living standards.
This approach appealed to the vast majority of Israelis, regardless of their political loyalties, and the victory in January’s Palestinian election by Hamas, which extols terrorism and demands Israel’s extinction, only reinforced the new strategic consensus.
In fact, the new consensus is shared by most of Labour and the main opposition within Likud.
The dream of peace, the nationalist fervor, and the purported religious redemption that animated Israel’s political combatants for a half-century are gone, replaced by a resigned pragmatism.
That may inspire little enthusiasm, but the Israel that Olmert has now won a firm mandate to lead is by no means demoralized.
On the contrary, public opinion polls show that citizens remain highly patriotic and optimistic about their personal lives.
They have merely concluded that politics will not bring miracles, and that the most they can expect is to keep external threats to a minimum.
That is Sharon’s legacy.
And, in Israel, fulfilling it will be no small achievement.
Israel’s Nightmares
Paris – “It is reasonable to believe in miracles,” David Ben-Gurion, the first Prime Minister of Israel, once said.
Today’s Israelis do not seem to believe in miracles.
Instead, more than ever before they are obsessed by nightmares, foremost among them, the prospect of a nuclear Iran.
To prevent a regime imbued with an absolute ideology from gaining possession of the “absolute weapon” is Israel’s paramount priority.
Everything must be done, even a unilateral military strike, to prevent or at least delay Iran’s acquisition of such a weapon.
This Israeli conviction on what it considers an existential issue stands in stark contrast with the fatalism that otherwise dominates Israelis’ thinking about themselves and their relations with the Palestinians.
How is this fatalism manifesting itself, where does it come from, and what can be done to transcend it?
These questions are important, because “fatalism” has become a major obstacle that must be overcome by anyone seriously interested in bringing peace to the region.
For this fatalism is a strong card in the hands of someone such as Israeli Prime Minister Benjamin Netanyahu, who is intent on preserving the status quo .
A majority of Israelis would probably back a preventive attack on Iran and satisfy themselves with the preservation of the status quo in relations with the Palestinians.
In the aftermath of the Israeli election in February, which brought to power a government coalition that includes the extreme rightist Avigdor Lieberman, now Israel’s foreign minister, an Israeli friend whose sympathies had always been with the left said to me in a resigned, cryptic way, “It’s sad, but it does not change anything; we have no one to talk to anyway.” He gave me approximately the same answer when I referred to the need to change Israel’s electoral system based on proportional representation, which produces weak majorities at best and near-paralysis at worst.
The same fatalism directly applies to the prospect of peace with Palestinians and the Arab/Muslim world in general.
It is as if, paradoxically, Israelis had internalized the concept of “temporary truce” advocated by their Hamas adversary, and had given up the goal of peace through a two-state solution that they once pursued with the Palestinian Authority.
For a majority of Israelis today, the present and the foreseeable future are not about peacemaking, but about conflict management, through the preservation of credible deterrence – a hard-core realistic assessment darkened by the perception that, while time is not necessarily on Israel’s side, that there is no alternative.
Israelis don’t want to delude themselves the way they did in the 1990’s during the so-called Oslo peace process.
The same fatalism also applies to relations with the outside world.
A majority of Israelis are even more convinced today than they were yesterday that they can count only on themselves and, at the margin, on the Jewish Diaspora.
This vision not only tends to encourage a process of self-isolation, but it raises serious issues in the long run.
At the end of the day, there are only 13.2 million Jews in the world and nearly 1.3 billion Muslims.
Israel needs allies, because its ultimate security depends on its legitimacy nearly as much as on its deterrence capability.
If each relative military success is accompanied by an absolute political defeat, as was the case with the recent military operations in Gaza, what is the ratio between costs and benefits?
These deep Israeli emotions are the product of the encounter between the weight of the past and the “facility” of the present.
It could be said without any exaggeration that the weight of the Holocaust is even more present today than it was decades ago.
By calling for the destruction of the “Zionist entity,” Iran’s president rubs that raw nerve.
A little more than 60 years after the Shoah, one does not play lightly with such an evocation of destruction.
In a world where, for many Israelis and non-Israeli Jews, Israel is becoming to the community of nations what Jews once were in the community of peoples – a pariah state, if not an eternal scapegoat – the memory of the Shoah resounds with a vengeance.
On the other hand, there is great comfort in the status quo .
After all, if you walk along Tel Aviv’s beaches, the dramas of Hamas-controlled Gaza and Hezbollah-controlled southern Lebanon seem so far away.
If the United States wants to be seriously involved in a renewed peace initiative, it can neither ignore nor passively accept the hierarchy of Israeli emotions.
But creating a new balance that contains a little less obsession with Iran and a little more concern for the Palestinians is a formidable challenge.
Israel’s Nuclear Option in Iran
LOS ANGELES – Revelations in former President George W. Bush’s recently published memoirs show that he declined an Israeli request to destroy Syria’s secret nuclear reactor in the spring of 2007.
While the revelation may appear merely to be a historical footnote, more profoundly it raises new uncertainty about whether Israel now thinks that it can rely on the United States to apply military force to stop Iran’s nuclear program should diplomacy fail.
The Syrian episode suggests that it cannot, which means that Israel may decide to go it alone once again, this time to eliminate Iran’s nuclear facilities.
If Israel did so, however, it would confront a conundrum.
Unlike the attack on Syria’s nuclear plant, Israel’s conventional forces do not have the capacity to destroy Iran’s suspect installations.
Portions of Iran’s nuclear program may be too heavily bunkered, dispersed, or concealed.
This raises the question of whether Israel’s repeated refrain that “all options are on the table” implies that even a nuclear strike is possible.
Israel’s nuclear history provides no clear answer, but the future may force the issue.
Israel has never acknowledged having nuclear weapons, let alone the size and scope of its arsenal.
Israeli policymakers refuse to talk about the subject.
Israel’s parliament, the Knesset, never discusses the program or appropriates money for it.
Military censors quash public discourse about it.
Yet American and other intelligence services and strategic-research institutes around the world all agree that Israel possesses nuclear weapons.
They disagree about how many, with estimates ranging broadly, from 40 to more than 400 warheads.
Israel’s reluctance to rattle its nuclear saber, even in dire circumstances, adds to the mystery.
In the Yom Kippur War, as Syrian forces threatened to break the country’s defensive lines, Israeli decision-makers recoiled even from threatening to use nuclear weapons.
While Israel keeps its bomb in the basement, it has a long history of stopping its adversaries.
As Iraq moved to complete the Osirak reactor by the early 1980’s, Israel applied diplomatic pressure and actions against foreign nuclear vendors, sabotaged atomic exports, and assassinated Iraqi scientists, before finally settling on the June 1981 air strike on the plant.
In the Syrian case, with one caveat, Israel decided to dispense with the preliminaries and simply destroy the reactor.
The caveat consists in a plea that Israel made to the US.
According to Bush’s memoir, in the spring of 2007, Prime Minister Ehud Olmert made a blunt request of the US president regarding Syria’s reactor: “George, I am asking you to bomb the facility.”
After consultation with his staff, Bush responded that, absent a plutonium extraction facility, US intelligence could not confirm that the plant comprised a nuclear weapons program. “I told him [Olmert] I had decided on a diplomatic option backed by force” to stop Syria, Bush writes.
An apprehensive Olmert responded, “I must be honest with you. Your strategy was very disturbing to me.”
Within months, Israel struck.
One year later, it followed up by assassinating Mohammed Suleiman, the Syrian general in charge of resurrecting the nuclear enterprise.
Given its efforts to fend off an attack, Iran represents a far more difficult target for Israel than Iraq and Syria did.
As a result, Israel ceded to the US and others responsibility to move the Iranian regime from its current path.
Since 2002, the US has applied a multi-pronged approach.
It pressed the International Atomic Energy Agency for greater scrutiny. It got the United Nations Security Council to agree to impose increasingly onerous economic sanctions – and roped allies into even stronger sanctions.
It adulterated nuclear-related exports from European vendors to perform poorly during operation.
It may have inserted computer worms into Iran’s atomic infrastructure.
The result of all these efforts has been to slow, but not halt, Iran’s nuclear progress.
And, even as the US and its allies attempt to restrain Iran, its regime continues to goad Israel, calling for its extinction and exporting military wares to its Lebanese and Gazan adversaries.
In May 2010, Israel responded with a new wrinkle.
It leaked to the London Sunday Times that it had placed nuclear-armed submarines off Iran’s coast.
In the months before and after, it continued to hold war games and practice air strikes on Iran.
And it repeatedly uttered threats that “all” options are on the table.
Iran remains unmoved.
Concerned that President Barack Obama will be less likely than Bush to use force to stop Iran, Israel must now contemplate its next steps should diplomacy continue to stall.
One option would be to pursue a policy of “opacity plus”: a further lifting of the veil over its nuclear arsenal in order to caution Iran’s rulers about the potential consequences of their actions.
Another option would be to bring the country’s nuclear arsenal out of the basement altogether.
Israel could then mimic other nuclear-armed states by flexing its capacity through announcement and transparent nuclear deployment on land and sea, thereby promoting deterrence.
But, for a country that has had little faith in deterrence when it comes to existential nuclear threats, relying on it now would mark a new, uncomfortable bet.
That leaves nuclear use as the final option.
But nuclear attack carries its own heavy burden.
Given Iran’s placement of strategic sites in or near population centers, the deaths of many thousands of people would forever tar Israel.
The only worse stain on Israel would be if survivors of an Iranian nuclear strike were to lament that, had their country acted proactively, “the third destruction of the Temple” – the end of the Jewish state – could have been avoided.
These sobering prospects should prompt all involved to seek a peaceful resolution.
Time is growing short.
Israel’s Political Earthquake
Israeli politics is undergoing its most dramatic changes in 30 years.
The realignment of parties and leaders is all the more remarkable because the latest developments – Ariel Sharon’s decision to leave the ruling Likud party, the defeat of Shimon Peres as the Labor party’s chairman, and Labor’s withdrawal from Sharon’s grand coalition government – were utterly unexpected.
So it is all the more important to comprehend the significance of these changes for the future of Israel, the region, and the Arab-Israeli conflict.
Israel’s political system is, to put it simply, coming to the end of its second era.
From independence in 1948 until 1977, the Labor party was dominant, before giving way to an opposition coalition of conservative, nationalist, and centrist parties allied in the Likud bloc.
Since then, the two parties have taken turns in power, sometimes in grand coalitions and often in partnership with smaller parties.
On the surface, party competition has been between “left” and “right,” or “hawks” and “doves.”
The truth, of course, is more complex.
Social class and economic issues, overshadowed by the persistence of more existential concerns – physical security and the continued existence of the state – have played a much less important role in Israel than in other societies.
Here, the political divide could be defined as “optimists” versus “pessimists.”
The former, as in Labor, believed that some day a force would emerge among Arabs and Palestinians ready to make peace on a reasonable basis; the latter, as in Likud, were more doubtful.
For years, the argument remained an abstraction, a debate over what might happen in the future, until the Oslo agreement with the PLO in 1993 put the competing perspectives to the test.
Since 2000, when PLO leader Yasir Arafat rejected a political settlement and instead launched a five-year war of terrorism, there have been few optimists left.
The subsequent intellectual realignment in Israel has given rise to a new national consensus.
It is now generally accepted that, as the left has always insisted, Israel should be ready to withdraw from the West Bank and Gaza Strip and accept a Palestinian state in exchange for real peace.
But it is also accepted that, as the right has always maintained, there is no partner ready to make real peace.
In this context, Sharon gained two landslide election victories as a hardliner, but implemented a moderate policy, including a full withdrawal from the Gaza Strip.
This is where Israel stands today, facing a political upheaval fueled by two developments.
First, Sharon moved the Likud to the center, making it the hegemonic party, while destroying every stereotype about his personality, methods, and worldview.
For the same reason, though, many within Likud view Sharon – who helped found the party – as a traitor.
Sharon now needs to institutionalize his reforms, even if he now needs to establish another party to do so.
Second, the Labor party has proven politically bankrupt, with its only conceivable leader being the 82-year-old Shimon Peres and its anachronistic dovish optimism the source of much ridicule.
As a result – and helped by low voter turnout – the party’s leadership primary was won by Amir Peretz, an outsider and populist who wants to revitalize Labor by putting social and economic issues at the forefront, which means withdrawing from the national unity coalition with Likud.
Despite having to form a new party, Sharon will probably win the next election, which he has called for February.
Peretz’s strategy may draw voters from other parties on the left, but Labor will most likely lose centrist voters (and those for whom national security is paramount) to Sharon.
Paradoxically, all of this will mean both a great deal in principle and perhaps little in practice.
With Sharon enjoying a strong public mandate for a moderate policy, Israel will be more ready than ever to make a deal with the Palestinians, Syria, and the Arab world in general for a comprehensive diplomatic solution to the conflict.
Yet, given the chaos and paralysis that increasingly characterize Palestinian politics, that opportunity will go untaken.
The rising power of Hamas, which openly proclaims its strategy of increasing terrorism and its goal of destroying Israel, reinforces that trend.
The same can be said of Syria, whose hardline government is turning toward a dangerously adventurous militancy.
Sharon might decide on partial withdrawals and dismantling of settlements on the West Bank.
But it is now widely recognized that such changes are a response to dim prospects of real progress toward peace.
Holding onto territory as a bargaining chip makes less sense if there is no one with whom to bargain.
Instead, Israel will continue to prioritize its own security, strengthening its defenses against terrorism and consolidating control over the relatively small portions of the West Bank that it intends to claim as part of an eventual diplomatic settlement.
A byproduct of this strategy, combined with ongoing Palestinian attacks, has been growing international sympathy with Israel.
That, too, could continue if the current political realignment proves permanent, enabling Sharon to win over the center and even moderate left for his program.
Nothing is assured, of course.
The still popular Benjamin Netanyahu could emerge as a powerful rival on his right, and Peretz might yet shape Labor into a serious contender on his left.
Nevertheless, the national consensus has shifted, shaking all assumptions about Israeli politics.
The February elections will put those assumptions to their severest test in decades.
The Observer State of Palestine
NEW YORK – Palestine is no longer an “entity,” but a state – or, to be precise, a non-member observer state of the United Nations, just like the Holy See.
The Palestinian bid received the support of 138 member countries (Germany, Britain, and 39 other countries abstained), while only seven, including the Marshall Islands, Palau, and Panama, joined the US and Israel in opposing it, leaving both more isolated than ever.
Prime Minister Binyamin Netanyahu was furious; he called Palestinian Authority (PA) President Mahmoud Abbas a liar, and gave permission for 3,000 new Jewish homes to be constructed on occupied Palestinian territory.
His foreign minister, Avigdor Lieberman, had already threatened to crush the PA government on the West Bank if the UN vote went ahead.
But Israel has only itself to blame for what happened.
Abbas and his prime minister, Salam Fayyad, have been more moderate, and more open to serious negotiations with Israel, than any Palestinian leaders before.
The Palestinian police have cooperated with the Israelis to contain violence on the West Bank.
Improving the economy, rather than violent confrontation, has been the PA’s main concern.
But, by continuing to build settlements on Palestinian land, the Israeli government has undermined the authority of Abbas and his Fatah government almost to the point of impotence.
More and more Palestinians, fed up with the futility of what is still called the “peace process,” believe that Fatah’s fierce rival, Hamas, the Islamist movement that rules Gaza, has more effective ways to break the current impasse.
The failure of Abbas’s peaceful methods has made the alternative of violence look increasingly attractive.
Hamas also emerged as the moral victor after the latest – but surely not the last – military clash.
Far from intimidating the Palestinians by bombing Gaza and mobilizing troops, the Israelis made Hamas look heroic in its resistance.
Once again, Abbas looked feeble in comparison.
This is why he desperately needed his victory at the UN.
The diplomatic promotion of Palestine offered him a lifeline.
Did the Israelis really want a resurgence of Islamist violence in Gaza, the potential collapse of peaceful politics on the West Bank, and now the right of a recognized Palestinian state to take Israel to the International Criminal Court for war crimes?
If not, why are they so ham-fisted?
It appears that Israel is making the same mistake that others have made in the past.
It has been proven repeatedly that military intimidation of civilians does not break their morale and turn them against their own leaders, however terrible the regime.
On the contrary, shared hardship usually strengthens the ties between citizens and their rulers.
So it was in bombed German cities during World War II; so it was in Vietnam; and so it is turning out to be in Gaza.
But there is another way of looking at the situation.
To call the Israeli government clumsy is to miss the point.
Israel has few illusions about Palestinians toppling their own leaders.
In fact, a strengthened Hamas may play into the hands of the Israeli hardliners currently in power.
They can point to the violent, anti-Zionist, and, yes, anti-Semitic rhetoric of radical Islamists, and argue that no deal with the Palestinians is possible.
The threat of a large stick is the only language that the natives understand.
Keeping the Palestinians divided between Islamist revolutionaries and the more business-minded Fatah suits Israeli purposes admirably.
As long as Fatah keeps things more or less under control on the West Bank, and all Hamas can do is periodically lob missiles across the Israeli border or occasionally blow up a bus, Israel can easily live with the status quo.
Those Israelis who believe that a two-state solution cannot be achieved feel vindicated; those who simply do not want two states to coexist are equally well served.
From the current Israeli government’s perspective, then, the correct strategy is to keep the Palestinian government on the West Bank weak and off balance, without quite bringing it down, and to contain Hamas with periodic displays of military power (while destroying long-range missiles that can do serious damage to Israel).
Israeli policies are not genocidal, as some commentators, not always free from anti-Semitic animus, like to claim.
Many Palestinians have been killed under Israeli rule, but their number is not even close to the number of Muslim civilians who are still being tortured, murdered, and maimed by Muslim governments every day.
Israel is, however, a semi-imperial power, using traditional colonial methods: ruling by proxy, dividing potential rebels, rewarding obeisance, and punishing opposition.
Colonial history shows that this type of rule is fragile.
Humiliation is not a firm basis for long-term stability.
There comes a point when promises of independence no longer convince anyone.
Fomenting violent resistance by demoralizing those who might still listen to reason is an invitation to disaster.
The chances of a peaceful settlement vanish.
Violence is all that is left.
It is one thing for colonies to blow up on the other side of the world.
It is quite another if the colony is just next door, and the colonial power is surrounded by countries with limited sympathy for a mess that is largely of its own making.
The Arab Spring’s Unlikely Winner
PARIS – The war in Iraq – which led in 2003 to the fall of Saddam Hussein’s regime – had one clear winner: Iran.
The United States-led military intervention resulted in the weakening of the Middle East’s Sunni regimes, America’s traditional allies, and the strengthening of America’s principal foe in the region, the Islamic Republic.
Ten years later, we may be witnessing yet another ironic outcome in the region: At least for the time being, Israel seems to be the only clear winner of the “Arab Spring” revolutions.
Most Israelis would strongly object to this interpretation.
Their regional environment has become much more unstable and unpredictable.
Only a few days ago, Israel’s Iron Dome missile-defense system intercepted a rocket fired from Sinai that was aimed at the port of Eilat.
In contrast to the past, no Israeli border is now secure, especially the long frontier with Egypt.
No implicit alliance can be taken for granted.
All scenarios are open.
Can Israel remain an oasis of stability, security, modernity, and economic growth in such a volatile environment?
The answer, of course, is no.
Israel may be tempted to regard itself as some kind of latter-day Noah’s ark, but it is not.
Tel Aviv has become a cross between San Francisco, Singapore, and São Paulo, but it is still less than 300 kilometers from Damascus.
For the pessimists (or realists, depending on your perspective), Israel must remain on maximum alert to minimize the risks that it faces.
Above all, many Israelis (if not most) believe that this is no time to be imaginative and daring.
The resumption of the peace process with the Palestinian Authority can be only a fig leaf.
Israel simply cannot ignore the Americans in the way that the Egyptian army has as it massacres its Islamist opponents.
But a very different reading of the current situation is possible.
What started as a revolution in the eighteenth-century meaning of the term is becoming a reproduction of the religious wars that ravaged Europe from 1524 to 1648, pitting Catholics and Protestants against each other in the same way that Sunnis and Shia are pitted against each other today.
(In Egypt, however, we are seeing simply the return of a military police state.)
One may disagree with this Euro-centric interpretation, but what is clear is that the Muslim Middle East will be too preoccupied with internecine struggle to worry about the Palestinians or the existence of Israel.
War with Jews or Christians has necessarily taken a back seat (except where, as in Egypt and Syria, Christian minorities are perceived to be allied with the regime).
In some cases, there is explicit cooperation with Israel.
Because it is fighting for its own survival in a highly challenging environment, the Jordanian regime needs Israel’s security collaboration.
Indeed, Israeli and Jordanian forces are now working together to secure their respective borders against infiltration by jihadists from Iraq or Syria, while Egypt and Israel now share the same objective in Sinai.
So the paradox of the Arab revolutions is that they have contributed to Israel’s integration as a strategic partner (for some countries) in the region.
At this point, more Arab lives have been lost in Syria’s civil war alone than in all of the Arab-Israeli wars combined.
Of course, one should not draw the wrong conclusions from this.
Israel may have become, more than ever, a key strategic partner for some Arab regimes, or a de facto ally against Iran (as it is for Saudi Arabia).
But this does not imply that Israel’s neighbors have resigned themselves, in emotional terms, to its continued existence in their midst.
Nor does it mean that Israel can do whatever it wants, whenever and wherever it wants.
On the contrary, the Israeli government should not use the region’s turmoil as justification for doing nothing to resolve the conflict with the Palestinians.
Current conditions, though admittedly confusing, can be seen as opening a window of opportunity – a moment to consider making serious sacrifices for the sake of long-term survival.
Israel should be addressing the Arab world in the following terms: “You may not like me, and you may never like me, but I am not – and never should have been – your first concern.
Now it is clear that you have other priorities to worry about.”
The Arab quagmire may not be creating conditions for peace and reconciliation between Israelis and Palestinians.
But it has turned the “strategic truce” favored by many Arab leaders into the only conceivable alternative.
Arabs cannot be at war with themselves and with Israel at the same time.
The chaotic events unfolding in the Middle East will – and should – change the approach and perceptions of the protagonists.
Short-term considerations will not suffice.
Israeli leaders must adjust their long-term strategic thinking to the new Middle East that ultimately emerges from the current disarray.
That means not exploiting today’s opportunity to build more settlements on Palestinian land, or to expand existing ones, as Binyamin Netanyahu’s government appears determined to do.
Israel may well be the current winner in the Arab Spring; but, if it is wise, it will leave the spoils of victory on the ground.
Israel’s Wrong Friends
JERUSALEM – Israel has been welcoming some rather peculiar visitors of late.
The Dutch populist, Geert Wilders, is a frequent caller, telling sympathetic audiences that Israel is on the front line of the Western war against Islam.
And, in December, a delegation of European far-right politicians toured Jewish settlements on the occupied West Bank, pleasing their hosts by reassuring them that this was “Jewish land.”
Some of these “friends of Israel” represent political parties whose supporters, to put it mildly, have not traditionally been noted for their fraternal feelings towards Jews.
Heinz-Christian Strache, for example, leads the Freedom Party of Austria, which began, under its late leader, Jörg Haider, by actively courting former Nazis. “More strength for our Viennese blood,” one of his election slogans, gives an idea of Strache’s typical tone.
His Belgian colleague, Filip Dewinter, represents a Flemish nationalist party tainted by wartime collaboration with the Nazis.
To be sure, nowadays even right-wing politicians in Europe are careful not to sound openly anti-Semitic.
Wilders, for one, is ostentatiously philosemitic, and all the New Rightists like to stress the importance of what they call “Judeo-Christian values,” which must be defended against “Islamofascism.”
Leftist and liberal critics of Israeli politics like to point out that anti-Zionism is not the same thing as anti-Semitism.
But it is just as true that being a friend of Israel is not necessarily the same thing as being a friend of the Jews.
Richard Nixon, for example, said of Jews that “you can’t trust the bastards,” but was a great admirer of Israel.
And, of course, the last 2,000 years have shown that anti-Semitism is perfectly compatible with the worship of a Jew called Jesus of Nazareth.
In the United States, some of the fiercest defenders of hardline Zionism are evangelical Christians who firmly believe that Jews who refuse to convert to Christianity will one day face terrible retribution.
Sometimes, the wrong friends can be useful.
When Theodor Herzl was making the rounds of Europe at the end of the nineteenth century, trying to gain support for the establishment of a state for the Jews, he was often rebuffed by rich and powerful Jewish grandees, who saw him as a troublemaker.
Instead, he found eager supporters among pious Protestants, for whom Jews belonged in their own holy land rather than in Europe.
Once the Jewish state was established, the earliest European friends of Israel were often people on the left, who admired the communal life on the kibbutzim, and saw Israel as a great socialist experiment, led by wise old left-wing idealists, such as David Ben-Gurion.
Residual guilt about the Holocaust bolstered this attitude.
Things began to change after the 1967 Six Day War, and even more after the 1973 “Yom Kippur” war, when it became clear that Israel was not going to let go of the Palestinian territories that it had conquered.
Later, when Israel began to build settlements all over the occupied territories, admiration even turned into active hostility from Europe’s left.
To many people on the right, however, the very things deplored by the European (and Israeli) left became reasons to admire Israel.
These new friends liked the ruthless use of force, the ethnic nationalism, the continued humiliation of the Palestinians.
Keen to revive a more militant form of nationalism in their own countries, politicians like Strache, Wilders, and Dewinter see Israel as a kind of model – a model discredited for a long time in Europe, owing to bad memories of fascism and Nazism.
Indeed, anti-Zionist leftists frequently attempt to discredit Israel by comparing its actions in Gaza and the West Bank to Nazi atrocities.
This is a cheap trick, aimed to give maximum offense.
Contrary to what the Nobel Prize-winning author José Saramago once said, the Israeli army’s attacks in Gaza are not comparable in any way to Auschwitz.
But the view, espoused by Israel’s new right-wing friends, that Israel is on the front line against Islamic fascism, is equally mendacious.
By comparing Islam in general – not only Islamist terrorism – to fascism, as the right-wing populists do, and to suggest that Europe faces a threat comparable to the Nazis, is not just wrong, but dangerous.
For, if it were true, any and all measures taken against Muslims, however brutal, would be justified, and Israel would indeed be a frontline state, resisting “Islamofacism” to prevent another Auschwitz.
This is certainly how many Israeli right-wing politicians explain things.
And they find eager parrots among some of Europe’s most retrograde political forces.
It is a view that carries the grave implication that a peaceful solution of the Israeli-Palestinian conflict is almost impossible.
The longer Israel, cheered on by the wrong European friends, continues to humiliate the Palestinians and occupy their lands, the more likely it will be that hatred and violence will stand in the way of compromise, without which there can be no peace.
There is another potential consequence, however.
False analogies with the past trivialize history.
If the Israelis, or the Palestinians, are like Nazis, then the horror of what the real Nazis did has been greatly diminished.
But exploiting history to justify current violence will not work forever.
Once people stop believing that Israel is defending the West against fascism, Israel will be blamed for all the violence in the Middle East. And Jews everywhere else will be blamed by association.
In short, the wrong friends of Israel are even worse friends of the Jewish people.
Israel Votes for Violence
War and violence always have a direct effect on elections.
Wars account for dramatic shifts in voter preferences, and radical leaders and parties often poll much higher after a round of sharp violence than in normal times.
Minority ethnic groups are therefore often able to sway the balance of power between major competing forces.
This appears to have been precisely what has happened in Israel’s recent election.
Benjamin Netanyahu’s right-wing Likud Party and the even harder right Avigdor Lieberman and his Yisrael Beiteinu (Israel is Our Home) party achieved a dominant result that saw Labor, the dominant party throughout Israel’s history, consigned to a lowly fourth place.
Throughout the campaign, Israeli leaders competed over who would deal more firmly (read: violently) with the Palestinians.
In the aftermath of Israel’s assault on Gaza, Palestinians hoped that Israel would choose a leader who would focus on the need to end the suffering, lift the siege, and begin rebuilding.
It appears that just the opposite has happened.
The last time that Israeli elections were so obviously affected by violence was in 1996, when polling results shifted wildly in the run-up to the vote, finally allowing Netanyahu a razor-thin win over acting Prime Minister Shimon Peres.
Competing against an older Peres (who had taken over after the assassination of Yitzhak Rabin) Netanyahu dyed his hair white to appear more mature, and then took advantage of a badly handled mini-war and the anger of Israel’s Arab voters.
Now Peres is Israel’s president, while Netanyahu heads Likud.
But not much has changed: badly handled wars, incomplete peace talks, and a boycott by Israel’s Arab voters made this 2009 election seem almost like a carbon copy of 1996, when Rabin’s assassination ended the Palestinian-Israeli talks at a crucial time and Peres’ ill-advised war on South Lebanon reduced his large lead almost to a tie with Netanyahu.
The anger of northern Israel’s Arab citizens at the killing of their brethren across the border led to a boycott that cost Peres the few thousand votes he needed to win.
Israel’s 2009 election is similar in many ways.
It follows two controversial wars (although the current nominees were not directly involved in the 2006 war with Hezbollah). It also follows serious negotiations between Israeli Prime Minister Ehud Olmert and Palestinian President Mahmoud Abbas, which are said to have moved both sides much closer to each other.
But wars and violence move electorates to the hawkish right, and Israel’s operation in Gaza was no exception.
Many Palestinian citizens of Israel, disgusted by the large-scale casualties inflicted on their brethren – and believing that to vote would mean to endorse the political system responsible for the carnage – stayed home once again.
The most important element now is the new administration in the United States.
The decisive victory of a candidate who opposed the Iraq war and favors direct talks with Iran will no doubt have a major influence on US-Israel relations and the peace process.
The appointment of George Mitchell, who opposes Israel’s West Bank settlements, and Mitchell’s decision to open an office in Jerusalem, speaks volumes about what the new Israeli government should expect from the Obama administration.
The Arab world is also in a state of flux after an emotional 22 days of Israel’s televised bombardment of Gaza.
Millions of Arabs throughout the Middle East took to the streets, so angered by the inability of anyone to stop the bloodshed that a huge schism has been created.
Egypt, Jordan, Saudi Arabia, and the Palestinian Authority beat a hasty retreat from their moderate and accommodating positions.
The major stumbling block for the world in trying to relieve the suffering in Gaza is how to finesse the biggest bloc in the Palestinian Legislative Council, Ismael Hanieh’s Islamist list of Reform and Change.
This challenge has become more interesting with European countries’ willingness to deal with a united Palestinian government that includes Hamas’ Hanieh.
President Barack Obama’s pragmatism and refusal to embrace the Bush administration’s “war on terror” will also be a key determinant of the outcome.
But, beyond band-aid solutions for the deep injuries inflicted on Gaza, Palestinians’ biggest concern is to ensure that Israel’s attempt to split Gaza from the West Bank does not become permanent.
Egypt and the Palestinian Authority have been made to look bad in the eyes of the Arab world, owing to their refusal to make Egypt responsible for Gaza and possibly Jordan for the West Bank.
But that proposal was a trap that would have destroyed the possibility of an independent, contiguous Palestinian state.
Despite the election results, Palestinians still hope to re-establish momentum in resolving the remaining points of disagreement with Israel.
While an international consensus now supports a two-state solution, settling the status of Jerusalem and of Palestinian refugees will be the main obstacles facing the two sides.
The only hope now for resuming negotiations is the old “only Nixon could open up China” argument, meaning that only a truly hard-right Israeli leader would have the credibility to make peace with the Palestinians.
But it is now clear to historians that Richard Nixon was determined to make his overture to China from the moment he began his presidency.
Sadly, the signs that any of Israel’s potential prime ministers are truly prepared to take so bold a step are few.
Is Regulation Really for Sale?
LONDON – Relationships between London banks and their regulators are not especially warm just now.
The latest bonus rules issued by the Committee of European Banking Supervisors (soon to morph into the European Banking Authority), have left those sensitive souls on the trading floors feeling rather bruised and unloved.
In the future, 70% of their bonuses will have to be deferred.
Imagine living on only $3 million a year, with the other $7 million paid only if the profits you earned turn out to be real?
It is a shocking turn of events.
Yet, in narratives of the financial crisis, regulatory capture is often an important part of the story.
Will Hutton, a prominent British commentator, has described the Financial Services Authority, which I chaired from 1997-2003 (the date things began to go wrong!) as a trade association for the financial sector.
Even more aggressive criticism has been advanced about American regulators – and, indeed, about Congress – alleging that they were in the pockets of investment banks, hedge funds, and anyone else with lots of money to spend on Capitol Hill.
How plausible is this argument?
Can benign regulation really be bought?
When I was a regulator, I would certainly have denied it.
I had never worked in the financial industry, and knew few people who did.
(Full disclosure: I am now an independent Director of Morgan Stanley.)
My successors have all come from the financial sector, however, which, until recently, was regarded as a sign that they were street-wise.
Now we are not so sure.
The consultation processes on rules and regulations were highly structured, and much effort was devoted to ensuring balanced representations from providers and users of financial services.
We funded research for a Consumer Panel in an effort to ensure “equality of arms.”
Of course, regulatory staff had more informal links with the industry than with consumers.
But that is inevitable in any country.
The industry’s voice was more often heard in Parliament as well.
The most effective lobbyists were Independent Financial Advisers, who seemed to be especially active in the local Conservative Party associations.
Goldman Sachs could learn a lot from their tactics!
I have no first-hand knowledge of the legislative process in the United States.
But, as an outsider, I am amazed at the apparent intensity of lobbying, and at the amounts of money that firms and their associations spend.
Is it effective?
The media seem to think so, though with relations between government and industry still only a notch below open warfare, it is difficult to be sure.
An intriguing sidelight on the relationship between Congress and business is provided in a study by Ahmed Tahoun of the London School of Economics on “The role of stock ownership by US members of Congress on the market for political favors.”
Tahoun analyzed the relationship between stock owned by congressmen and contributions their political campaigns by the relevant firms, and found a powerful positive association.
In particular, Tahoun’s research shows that US congressmen systematically invest more in firms that favor their own party, and that when they sell stock, firms stop contributing to their campaigns.
Moreover, firms with more stock ownership by politicians tend to win more and bigger government contracts.
The data are not from financial firms alone, and Tahoun has not disaggregated them by sector.
But the results are of interest nonetheless.
They suggest a less-than-healthy relationship between lawmakers’ political and pecuniary interests.
Regulators are typically not subject to those temptations.
They are not normally allowed to own stock in financial firms (at least in the jurisdictions that I know).
But can they nonetheless be captured?
I see two potential grounds for concern.
The first is the revolving door between the industry and regulatory bodies.
This is more prevalent in the US, where regulators’ salaries are very low, especially in the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Turnover among senior – and not so senior – people in these agencies is very high.
The Fed folk are paid a little better, and stay rather longer.
The United Kingdom pays its regulators more, but there is still a lot of “in and out” activity, and more than there used to be.
Singapore and Hong Kong have a different model.
Their regulators are given market-related compensation packages, and continuity of senior staff is more effectively maintained.
My view is that the Asian financial centers have it right.
The second concern is what one might call intellectual capture.
While I would strongly argue that the FSA in my day did not favor firms unduly, it is perhaps true that we – and in this we were exactly like US regulators – were inclined to believe that markets were generally efficient.
If willing buyers and willing sellers were trading claims happily, then, as long as they were “professional” investors, there was no legitimate reason to interfere in their markets.
These people were “consenting adults in private,” and the state should avert its gaze.
We now know that some of these market emperors had no clothes, and that their activities, far from benign, could result in severe financial instability and generate serious losses for taxpayers, not to mention precipitating a global recession.
That has been a grave lesson for regulators and central banks.
So intellectual capture is a charge hard to refute.
But were regulators surrogate lobbyists for the financial industry?
I do not think so, and to argue as much devalues the efforts of many overworked and underpaid public servants around the world.
Japan’s Nationalist Turn
TOKYO – Japan has been in the news lately, owing to its dispute with China over six square kilometers of barren islets in the East China Sea that Japan calls the Senkakus and China calls the Diaoyu Islands.
The rival claims date back to the late nineteenth century, but the recent flare-up, which led to widespread anti-Japanese demonstrations in China, started in September when Japan’s government purchased three of the tiny islets from their private Japanese owner.
Prime Minister Yoshihiko Noda has said that he decided to purchase the islands for the Japanese central government to prevent Tokyo Governor Shintaro Ishihara from purchasing them with municipal funds.
Ishihara, who has since resigned from office to launch a new political party, is well known for nationalist provocation, and Noda feared that he would try to occupy the islands or find other ways to use them to provoke China and whip up popular support in Japan.
Top Chinese officials, however, did not accept Noda’s explanation, and interpreted the purchase as proof that Japan is trying to disrupt the status quo.
In May 1972, when the United States returned the Okinawa Prefecture to Japan, the transfer included the Senkaku Islands, which the US had administered from Okinawa.
A few months later, when China and Japan normalized their post-World War II relations, Japanese Prime Minister Kakuei Tanaka asked Chinese Premier Zhou Enlai about the Senkakus, and was told that rather than let the dispute delay normalization, the issue should be left for future generations.
So both countries maintained their claims to sovereignty.
Though Japan had administrative control, Chinese ships would occasionally enter Japanese waters to assert their legal position.
For China, this was the status quo that Japan upended in September.
In Beijing recently, Chinese analysts told me that they believe that Japan is entering a period of right-wing militaristic nationalism, and that purchasing the islands was a deliberate effort to begin eroding the post-WWII settlement.
While Chinese rhetoric is overheated, there is certainly a rightward shift in mood in Japan, though it would be difficult to describe it as militaristic.
A large group of students at Waseda University recently were polled on their attitudes toward the military.
While a significant number expressed a desire for Japan to improve its ability to defend itself, an overwhelming majority rejected the idea of developing nuclear arms and supported continued reliance on the US-Japan Security Treaty.
As one young professional told me, “we are interested in conservative nationalism, not militaristic nationalism.
No one wants to return to the 1930’s.”
And, of course, Japan’s Self Defense Forces are professional and under full civilian control.
Japan faces parliamentary elections in the near future, by August 2013 at the latest, but perhaps as early as the start of the year.
According to public-opinion polls, the governing Democratic Party of Japan, which came to power in 2009, is likely to be replaced by the Liberal Democratic Party, whose president, Shinzo Abe, would become prime minister – a position he has already held.
Abe has a reputation as a nationalist, and recently visited the Yasukuni Shrine, a Tokyo war memorial that is controversial in China and Korea.
In addition, Toru Hashimoto, the young mayor of Osaka, Japan’s second-largest city, has built a new party and also developed a reputation as a nationalist.
Japanese politics, it seems, is showing signs of two decades of low economic growth, which has led to fiscal problems and a more inward-looking attitude among younger people.
Undergraduate enrollment of Japanese students in US universities has fallen by more than 50% since 2000.
Thirty years ago, Harvard professor Ezra Vogel published Japan as Number 1: Lessons for America, a book that celebrated Japan’s manufacturing-fueled rise to become the world’s second-largest economy.
Recently, Vogel has described Japan’s political system as “an absolute mess,” with prime ministers replaced almost every year and the youngest generation’s expectations sapped by years of deflation.
Yoichi Funabashi, former Editor-in-Chief of the newspaper Asahi Shimbun, also is worried: “There’s a sense in Japan that we are unprepared to be a tough, competitive player in this global world.”
Despite these problems, Japan still has remarkable strengths.
Although China surpassed Japan as the world’s second-largest economy two years ago, Japan is a comfortable society with a much higher per capita income.
It has impressive universities and a high education level, well- managed global companies, and a strong work ethic.
It is a society that has reinvented itself twice in less than 200 years – in the nineteenth-century Meiji Restoration and after defeat in 1945.
Some analysts hoped that last year’s earthquake, tsunami, and nuclear catastrophe would spark a third effort at national reinvention, but that has not yet occurred.
Many younger Japanese have told me that they are “fed up” with stagnation and drift.
When asked about the rightward trend in politics, some young Diet (parliament) members said they hoped that it might produce a realignment among political parties that would lead to a more stable and effective national government.
If a moderate nationalism is harnessed to the yoke of political reform, the results could be good for Japan – and for the rest of the world.
But if Japan’s deepening nationalist mood leads to symbolic and populist positions that win votes at home but antagonize its neighbors, both Japan and the world will be worse off.
What happens in Japanese politics over the coming months will ripple far beyond the country’s shores.
Is Russia Dying Out?
Is Russia’s Economic Crisis Over?
MOSCOW – Has Russia’s economic crisis ended?
That depends on who you ask.
Ask Prime Minister Vladimir Putin, or any official of his United Russia party, and you will be told, “Of course it is over.” They will even produce proof in the form of an unemployment rate that does not rise, unprecedented increases in pensions, and strong growth in construction and metal-working.
Of course, all these comparisons are made with how things stood last month rather than with the country’s pre-crisis economic performance.
Then there is another “miracle” that the government is starting to trumpet, one discovered in August 2009: an increase in Russia’s population.
Unfortunately, in no month before or since have births outpaced deaths.
Ask a member of the opposition whether the crisis has ended, and you will be told that it is only just beginning.
Gazprom’s production is falling at a dizzying pace; the country’s single-industry “mono-towns” are dying.
There is truth in both views about the state of Russia’s economy, but because the government controls all the major television channels, it is succeeding in enforcing its view of the situation.
Indeed, the opposition has access only to a few newspapers and radio stations, leaving the Internet the sole remaining space of freedom in Russia.
But there you can read very pessimistic estimates of the country’s economic future.
So the Kremlin blinds its citizens with rosy scenarios, while the Internet over-dramatizes reality.
The truth, it is clear, is somewhere in the middle.
What is beyond dispute is that Russia’s economic health depends on external factors.
But, outside Russia, no responsible economists can even begin to say whether the crisis is truly over.
They know that relatively calm markets do not mean that strong economic growth is around the corner.
Russia ’s economy is now hostage to potential global growth.
It is clear why: the state budget depends almost totally on energy prices.
Now that oil price has reached $80 per barrel, Russia’s central bank can start buying foreign currency again.
Gold and foreign currency reserves are increasing, implying appreciation of the ruble.
But Russia’s budget for 2010 is still headed for a serious deficit, owing to high spending.
The rapid income growth of the early Putin years is a thing of the past.
While it persisted, expenditures swelled but were manageable – until, suddenly, energy prices collapsed.
The Kremlin, devoted to its key fetish –Putin’s approval ratings – proved completely unprepared to curtail public spending in the wake of falling state revenues.
The budget deficit, unsurprisingly, ballooned.
The late Yegor Gaidar, Russia’s first pro-reform prime minister, warned the government about the consequences of inflated oil prices, repeatedly arguing that excessive spending growth would undermine the political will for retrenchment when it became necessary.
Gaidar died last year, his unheeded warnings having come true, proving once again that no man is ever a successful prophet in his own country.
In recent months, Russia’s government finally brought inflation down to 8%.
Sometimes this is presented as another milestone demonstrating that the crisis is near its end.
But that is wrong.
Inflation fell as a result of the crisis, which reversed the direction of capital flows.
Whereas inward investment reached $20 billion in 2008, capital outflows totaled $20 billion in 2009.
The central bank buys less foreign currency, and thus issues fewer rubles, reducing inflation.
A far more inertial indicator is unemployment, which experts predict will grow in 2010.
The problem is that Russian labor is less mobile than in the Europe and the United States.
Russians prefer lower wages – or simply waiting with no wages at all – to moving in search of a new job.
The situation at carmaker AUTOVaz is a striking example.
Last year, output fell to 300,000 cars, from 800,000 in 2008.
Such a dramatic fall in sales would normally require massive layoffs or lower wages.
Yet, of the company’s 102,000 employees, only 27 favored layoffs.
As a result, wages were cut by half.
The state, which is seeking to rescue the domestic automobile industry, allocated to the firm more credits through state-owned banks.
But how long can such a situation last?
One day, it will no longer be possible to disguise unemployment through shorter working weeks, forced leaves of absence, and decreases in wages.
When that happens – and there is a strong probability that it will happen next year – the crisis will only just be beginning for Russia.
All over the world – in the US, Europe, and China – stimulus programs have paid off, as expected.
But it is not yet certain whether the engine of the global economy will be able to run without additional liquidity, possibly undermining fiscal stability worldwide.
Elsewhere, that will become clear in the first half of 2010; in Russia, signs of recovery, if they appear at all, will lag well behind the rest of the world.
Is Russia Weak?
MOSCOW – Western leaders and observers persistently repeat, like a mantra, that Russia is “weak.”
This judgment is based on a flawed comparison between Russia and the Soviet Union –though one that is also popular in Russia itself.
Measured by Soviet standards, Russia has weakened.
But, as former United States National Security Advisor Brent Scowcroft noted, Russia still “has enormous capacities to influence the US security strategy in any country.”
A country with such influence over a military superpower cannot be considered weak.
In fact, the issue is not Russia’s strength per se , but whether Russia intelligently concentrates and applies it.
The new Russia has transcended its Soviet identity and managed to put down uprisings in the post-Soviet space as far away as Tajikistan.
It has dealt with a new generation of security threats on its own territory – most prominently Chechen warlord Shamil Basayev – and prevented them from turning into a global force like al-Qaeda.
Moreover, Russia has helped other new nations in Eastern Europe create their own identities.
Does this not demonstrate Russia’s global know-how?
Is it not a contribution to international security?
The US has recognized the Russian factor in post-Soviet state-building processes.
Russia has not been the only beneficiary of its activities in the Caucasus, especially since 2000.
By bringing recalcitrant minorities into a new security consensus, Russia helped transform local ethnic conflict into a constructive process of nation-building.
So Russia’s claim to being a central element in Eurasian security, on par with the US and the European Union, is not the blustering of a spent Leviathan.
Rather, it is a demand for a fair international legal order.
The debate about whether the US should allow Russia to have “special interests” in Eastern Europe – renewed by Russia’s opposition to America’s proposed missile-defense installations in the Czech Republic and Poland – is pointless.
Russia’s interests are by necessity becoming global.
The agenda of US-Russian relations includes issues such as treaties on the reduction of strategic weapons and on nuclear non-proliferation, NATO, Afghanistan, Iran, Central Asia, North Korea, and the post-Soviet space.
These are all global, not local, issues.
Russia can be effective in dealing with these issues only if it becomes a competent global actor. Yet many assume that world politics should be designed to bypass Russia.
Everywhere Russians are expected to support something without participating in creating it.
We are supposed to help stabilize the region around Afghanistan, for example, but only in order to create a “greater Central Asia” that will not include Russia.
It is clear that modern Russia lacks global “status” in the Soviet sense.
But the US has also been unable to achieve the global status of a “Yalta superstate.” America’s global military power is undisputed, although it is used with decreasing frequency.
Sprawled over 11 time zones between the EU and the US, of which five border China, it is impossible to expect Russia to remain merely a regional power.
A state that is involved in three global regions (Europe, Central Asia, and the Far East, not to mention the Arctic) and borders several others cannot be considered “regional.”
Moreover, because the regions in which Russia has interests face a number of problems, it must seek influence over the strategies for these regions pursued of other powers of various sizes, from China and the US, to the EU and Iran.
Russia is expected to act in ways that are beneficial to US and Western interests.
But it is in America’s interest to enhance Russia’s capacity to act – in other words, to strengthen a globally competent Russia.
This would be a Russia that acts in pursuit of its own interests – the same way that the US and the EU act.
Americans sometimes suggest that the Russians have a hidden strategic agenda.
But the consensus that Vladimir Putin has created in Russia since 2000 is more than a question of interests; it is a value-based reality.
It is based on the possibility of a free life in a secure environment – something that Americans take for granted.
For many years, we had to deal with the problem of Russia’s very existence rather than that of the quality of its governance.
Putin’s consensus made it possible to resolve both problems without foreign assistance and interference.
Now, in order to solve other problems, we need to go beyond Russia.
जलवायु परिवर्तन का समाधान
उआगादूगु - बुर्किना फासो सहेल के केंद्र में स्थित है, जिसका मतलब है कि जलवायु परिवर्तन की दृष्टि से यह दुनिया के सबसे कमजोर देशों में से एक है। इसके किसान शायद ग्लोबल वार्मिंग के भौतिक कारणों के बारे में बहुत कम जानते हैं, लेकिन उन्हें इसके प्रभावों के बारे में पता है - कम-से-कम बारिश के पैटर्न में भारी परिवर्तनशीलता, सूखा पड़ने से लेकर बाढ़ आने तक की स्थिति जिसके फलस्वरूप फसलें नष्ट हो जाती हैं, चराई के मैदानों का भूक्षरण, और खाद्यान्न संकट के बारे में पता है।
परिणामस्वरूप, अंतर्राष्ट्रीय स्तर पर और बुर्किना फासो में, धारणीय कृषि की अवधारणा कई वर्षों से मज़बूत होती जा रही है। इस शब्द का राजनीतिक भाषणों में उल्लेख होता है और यह वैश्विक कृषि विकास के लिए एक महत्वपूर्ण दृष्टिकोण बन गया है। वास्तव में, धारणीयता अब कृषि में एक प्रेरक बल है - और यह उतना ही महत्वपूर्ण है जितना कि पिछले दशकों में उत्पादकता थी।
धारणीय कृषि की अवधारणा अभिन्न रूप से धारणीय विकास से जुड़ी हुई है, 1987 में पहली बार इसकी परिभाषा आर्थिक विकास के उस मॉडल के रूप में की गई थी “जो भावी पीढ़ियों की अपनी आवश्यकताओं को पूरा करने की योग्यता से समझौता किए बिना वर्तमान की आवश्यकताओं को पूरा करता है।”
धारणीय कृषि की परिभाषा उस प्रकार की खेती के रूप में की गई है जिसमें यह सुनिश्चित होता है कि आंतरिक और बाह्य संसाधनों का इस्तेमाल और उनका संरक्षण यथासंभव अधिक से अधिक कुशलता से किया जाता है; यह पारिस्थितिकी रूप से सुदृढ़ हो (यह प्राकृतिक वातावरण को बेहतर बनाता हो, न कि उसे नुकसान पहुँचाता हो); और आर्थिक रूप से व्यवहार्य हो, और कृषि निवेशों पर उचित प्रतिलाभ देनेवाला हो।
इन दोनों परिभाषाओं की बारीकी से जाँच करने पर हम इस निष्कर्ष पर पहुँचते हैं कि धारणीय कृषि के बिना धारणीय विकास नहीं हो सकता। दरअसल, बुर्किना फासो में धारणीय कृषि का देश की विकास नीतियों और रणनीतियों में प्रमुख स्थान है - और यह होना भी चाहिए।
2012 में, बुर्किना फासो ने धारणीय विकास की राष्ट्रीय नीति को अपनाया जो त्वरित विकास और धारणीय विकास की रणनीति में निर्धारित कल्पना को साकार करने का मुख्य साधन बन गई है। इस कल्पना में उस "उत्पादक अर्थव्यवस्था का वर्णन किया गया है, जो विवेकपूर्ण और कुशल प्रशासन के ज़रिए विकास को तीव्र करती है, जीवन स्तरों को बढ़ाती है, जीवन के वातावरण और जीवन की स्थितियों को बेहतर बनाती है और बरकरार रखती है।"
बुर्किना फासो में खेती के सभी हितधारक मोटे तौर पर धारणीय कृषि के प्रति प्रतिबद्धता को साझा करते हैं। नवंबर 2011 में आयोजित कृषि और खाद्य सुरक्षा के लिए महासभा के राष्ट्रीय सम्मेलन ��ें निम्नलिखित उद्देश्य को सम्मिलित किया गया: "2025 तक, बुर्किना फासो में खेती आधुनिक, प्रतिस्पर्धात्मक, टिकाऊ, और विकासपरक होगी। यह परिवार के स्वामित्व वाले खेतों और कुशल कृषि व्यवसायों पर आधारित होगी, और इसमें इस बात की गारंटी होगी कि सभी नागरिकों की पहुँच उस भोजन तक होगी जिसकी उन्हें स्वस्थ, सक्रिय जीवन व्यतीत करने के लिए जरूरत है।" इसी तरह बुर्किना फासो के ग्रामीण क्षेत्रों के लिए राष्ट्रीय कार्यक्रम का उद्देश्य "खाद्य और पोषण सुरक्षा, मजबूत आर्थिक विकास, और गरीबी कम करने के लिए धारणीय रूप से योगदान करना है।"
बुर्किना फासो में कृषि संबंधी एक और परीक्षित और स्वीकृत प्रथा उत्पादन का एकीकृत प्रबंधन करना है। इसका लक्ष्य छोटे भूधारकों की उत्पादकता को धारणीय रूप से बेहतर बनाना है, उन्हें उस ज्ञान और समझबूझ से लैस करना है जिसकी मानव स्वास्थ्य और पर्यावरण का सम्मान करते हुए कुशलतापूर्वक संचालित करने के लिए जरूरत होती है। इस नीति ने प्राकृतिक संसाधनों के प्रबंधन और कीटनाशकों जैसी कृषि निविष्टियों के उपयोग के संबंध में व्यावहारिक बदलावों के लिए प्रेरित किया है।
धारणीय कृषि ने बुर्किना फासो में खेती में बेहतरी के लिए बदलाव किया है। यहाँ और अन्यत्र भी, यह हमारी उस योग्यता का मूलमंत्र है जिससे हम जलवायु परिवर्तन का सामना कर सकते हैं और खाद्य और पोषण संबंधी असुरक्षा के प्रति प्रतिरोधन क्षमता तैयार कर सकते हैं क्योंकि यह भूमि का सम्मान करती है और यह औद्योगिक खेती की तुलना में कहीं अधिक प्रभावशाली है। इसके अलावा, धारणीय प्रथाएँ उन छोटी, परिवार संचालित भूधारिताओं के महत्व को सिद्ध करती हैं जिनसे बुर्किना फासो जैसे देशों में, लगभग पूरी घरेलू खाद्य आपूर्ति का उत्पादन होता है।
लेकिन बुर्किना फासो जैसे देश अकेले ही जलवायु परिवर्तन का समाधान नहीं कर सकते। उन्हें करना भी नहीं चाहिए: यहाँ और अन्य स्थानों पर सूखे और बाढ़ की स्थिति अधिकतर ग्रीन हाउस गैसें उत्पन्न करनेवाले औद्योगिक कार्यकलापों के कारण होनेवाले जलवायु असंतुलनों के कारण होती है। हम मुख्य रूप से विकसित देशों द्वारा उत्पन्न की गई स्थिति के शिकार हैं - यह वह स्थिति है जो हमारे स्वयं के विकास में रुकावट पैदा कर रही है। यदि हम धारणीय विकास की परिभाषा को गंभीरता से लेते हैं, तो इस परिणाम के लिए उन लोगों को भी मदद करनी होगी जो इसके लिए जिम्मेदार हैं, विशेष रूप से उन अनुकूलन लागतों के लिए योगदान करके जिसका सामना अब बुर्किना फासो जैसे देशों को करना पड़ रहा है।
Is Stimulus Still Necessary?
LONDON – Have stimulus packages brought the world’s traumatized economies back to life?
Or have they set the scene for inflation and big future debt burdens?
The answer is that they may have done both.
The key question now concerns the order in which these outcomes occur.
The theory behind the massive economic stimulus efforts that many governments have undertaken rests on the notion of the “output gap.” This is the difference between an economy’s actual output and its potential output.
If actual output is below potential output, this means that total spending is insufficient to buy what the economy can produce.
A stimulus is a government-engineered boost to total spending.
Government can either spend more money itself, or try to stimulate private spending by cutting taxes or lowering interest rates.
This will raise actual output to the level of potential output, thereby closing the output gap.
Some economists – admittedly a diminishing number – deny that there can ever be an output gap.
The economy, they argue, is always at full employment.
If there are less people working today than yesterday, it is because more people have decided not to work.
(By this reasoning, a lot of bankers have simply decided to take long holidays since last September’s financial meltdown.)
So today’s output is what people want to produce.
Attempts to stimulate it will produce only higher prices as people spend more money on the same quantity of goods and services.
A more sensible view is that today’s economy is not producing as much as it could and that there are many more people who want to work than there are jobs available.
So a stimulus will boost both output and employment.
But how large must such a stimulus be?
The United States Congressional Budget Office (CBO) estimates that American output will be roughly 7% below its potential in the next two years, making this the worst recession since World War II.
American unemployment is projected to peak at 9.4% towards the end of 2009 or the beginning of 2010, and is expected to remain above 7% at least until the end of 2011.
The US government has pledged $787 billion in economic stimulus, or about 7% of GDP.
Superficially this looks about right to close the output gap – if it is spent this year .
But it is in fact a three year-program.
Some $584 billion is allocated for 2009-2010, leaving perhaps $300 billion of extra money for this year.
Even so, it is not clear how much of that will be spent.
This can be illustrated by a simple example.
Suppose the government distributes the extra cash to its citizens.
Some of it will be saved.
American household saving has shot up from 0% to 5% since the start of the recession, understandably to pay off debt.
Another part of the extra money will be spent on imports, which does nothing to stimulate spending on US output.
Let’s subtract 20% for these two items.
The bad news, then, is that only 80% of the $300 billion, or $240 billion, will be spent initially.
The good news is that this figure is multiplied over successive rounds of spending, as one person’s spending becomes another person’s income, and so on. The value of the multiplier depends on assumptions about the size of the “gap,” “leakages” from the spending stream, and the effect of government programs on confidence.
Estimates vary from a multiplier of about two all the way down to zero.
A multiplier of two would generate $480 billion of extra spending, compared to a multiplier of one, which would generate just the initial $240 billion.
If the multiplier is zero, as conservative-minded economists believe, there will be no effect on output, only on prices.
A further source of stimulus is “quantitative easing,” or, more simply, printing money.
By buying government securities, the central bank injects cash into the banking system.
This is intended to stimulate private spending by bringing down the rate of interest at which banks lend to their customers.
Extra hundreds of billions of dollars have been injected into banks worldwide by this means.
But the stimulus effect of quantitative easing is far less certain than even that of fiscal stimulus.
While the policy caused credit spreads to narrow and bond market liquidity to improve, many banks have been using the extra money to rebuild their balance sheets (the equivalent of increased household savings) rather than lending it to businesses and individuals.
Several conclusions can be drawn from what admittedly are back of the envelope calculations.
The first is that stimulus packages around the world arrested the slide into depression, and may have started a modest recovery.
Second, it is too early to scale down the stimulus, as Japan and the US seem ready to do.
As one British official said ahead of the G-20 summit in Italy in July, “We should start to prepare exit strategies, but we should start implementing them only when [we] are sure [we] have got a recovery that is entrenched and self-sustaining, and I don't think anyone is saying we are at that point yet.”
Third, existing policy, even if maintained, will not produce self-sustaining recovery.
At best, it offers the prospect of several years more of sub-normal activity.
A double round of stimulus packages is needed to counteract the real prospect of a double-dip recession.
The time to start worrying about inflation is when the recovery is entrenched.
To pay back the debt without strain, we need a booming economy. Talk of government spending cuts is premature.
‘A boom not a slump is the right time for austerity at the Treasury’ said Keynes. He was right.
Is Syria Next?
The recent allegation by US Secretary of Defense Donald Rumsfeld that Syria is smuggling war materiel into Iraq raises the ominous prospect that America's attention will turn toward Damascus the moment it is finished with Baghdad.
Rumsfeld's charge--vehemently denied by Syria--now tops a long list of unresolved issues in Syria's relations with the US: Syria's open-ended military intervention in Lebanon and continued support of Hezbollah there; its supposed involvement in the 1982 suicide attack in Beirut that killed 241 US Marines; its continued support of various "outlawed" Palestinian groups; and its allegedly growing stockpiles of chemical and biological weapons.
Indeed, Syria has long been included on the US State Department's list of nations that support terrorism.
For these reasons, Syria could well become a potential target for American military adventurism.
Even before the onset of the current hostilities, the possibility was raised by certain members of the Bush Administration, such as Richard Perle, and conservative media commentators, all of whom would gladly add Syria to the "Axis of Evil."
Recognizing this possibility, the Syrian regime has made clear its opposition to the American war in Iraq, which has been branded by President Bashir Assad and other senior officials as "a war of aggression".
Top-level thinking about the risks that Syria runs were recently made clear in an interview that President Assad gave to a Lebanese newspaper.
Assad compared the situations in Lebanon and Iraq, insisting that Iraq could achieve what Lebanon had already accomplished two decades before, namely the forced withdrawal by American and British troops in the face of steadfast, bloody resistance. "The US and Britain will not be able to control Iraq," Assad claimed.
Declaring that "Arab popular resistance" to the American invasion has spread through the region, Assad referred to the increasing numbers of Arab, including Syrian, "volunteers" who have gone to Iraq to fight alongside Saddam's soldiers.
The Arabs, Assad said, would resist American efforts "to rearrange the region as it sees fit" in order to control its oil wealth and accommodate Israeli interests.
In response, he called for the enactment of the Arab Mutual Defense Pact.
Recently, the 90-year-old Grand Mufti of Syria, Sheik Ahmad Kiftaro, called on Muslims worldwide to carry out "martyr operations" against American interests, a call that could not have been made without advance government approval.
It seems that the Syrian regime is painting itself into a dark and dreary corner, a development that could set the stage for a potential showdown with the US in the not-so-distant future.
This said, however, there is also an unpublicized aspect of Syrian-American relations to consider.
Since the terrorist attacks on New York and Washington on September 11, 2001, security cooperation between the two countries seems to have intensified.
The Syrian intelligence apparatus has provided much valuable information on the activities of Muhammad Atta and others suspected of involvement in those attacks, as well as information about other al-Qaeda activities.
There are even indications of some Syrian intelligence-sharing with the Americans regarding Iraqi military readiness in the weeks preceding the attacks.
This should not be surprising, for Syria's rulers over the last thirty years have proven skillful at hedging their bets.
It is even possible that the regime's loud anti-American stance might be meant to hide some secret arrangement with the Americans, especially regarding the Kurds and Iraqi opposition members living in Syria.
Nonetheless, if the Americans win in Iraq--which they must in order to maintain their global credibility as a superpower--their relations with their new Syrian neighbors will not be easy.
Resolving all outstanding issues will not happen quickly.
Moreover, the Syrian view of the Arab-Israeli dispute cannot be glossed over, because Syrian agreement is necessary for any peaceful settlement.
If the US attempts to isolate Syria, it will not have an easy time of it.
Damascus maintains good political and economic relations with Russia, China, and key EU members, especially France, with its paternalistic attitude towards its former colony and its young president.
On the other hand, with Americans controlling Iraq, Syria will find itself surrounded by three unfriendly (if not outright hostile) and allied neighbors: the Americans in the East, and the Turks and Israelis in the north and south, both of which occupy Syrian territories.
Nonetheless, outstanding issues between Syria and the US would be better resolved using smart diplomacy than smart bombs.
Considering the evidence on display in Iraq, Syrian leaders must be wondering whether the Bush administration is capable of thinking in these terms.
At the same time, will Syria's new rulers prove capable of striking the kind of Machiavellian bargain for which the late Syrian president, Hafiz Al-Assad, was famous?
Because the country's rulers include many members of his team, such a possibility probably exists.
But are the Americans willing to see it?
Is Syria the Next Domino?
LONDON – With the Tunisian and Egyptian regimes gone and street protests roiling cities from Algiers to Tehran, many people are now wondering which domino might fall next.
Syria, whose secular, militarized dictatorship most closely resembles the fallen regimes of Tunisia and Egypt, may not be next in line, but appears nonetheless to be approaching a tipping point.
Of course, the old “domino theory” in international relations was only a crude way of emphasizing that different parts of any region are linked to each other.
For today’s Arab world, a better metaphor might be a chessboard, from which the removal of even a pawn inevitably alters the relationships among all the other pieces.
Today, as protests mount and multiply, the government of every Arab state in the Middle East and North Africa probably believes that, if left to its own devices, it can contain internal dissent.
In Syria, it seems inevitable that protest may soon crack the regime’s brittle political immobility.
Most ordinary Syrians face extremely difficult economic and social conditions, including high unemployment, rising food prices, constraints on personal freedom, and endemic corruption.
These factors are no different from those that brought people on to the streets in North Africa and the Middle East.
What began as protests over living conditions became full-scale demands for freedom and democracy.
The regime in Damascus is fearful of similar unrest, as it should be.
The best way to avoid a confrontation between the people and the security forces is a process of genuine reform leading to elections and a government of national unity.
The ingrained inertia of the current regime, however, seems to preclude any early move toward that.
Instead, Syria’s rulers are offering inducements to ensure that key constituencies remain in line – laptops for teachers, subsidies for public-sector workers, and empty reformist rhetoric.
But the current situation calls for far more serious measures.
Lifting the state of emergency that has been in force since 1963 – giving sweeping powers to the regime and its security services – would be both a symbolic and tangible step in the right direction.
Unless Syria’s rulers, like other leaders in the Arab world, begin to appreciate that freedom is a fundamental human right, even the most quiescent people’s patience may wear dangerously thin.
High food prices may have served as a trigger in North Africa, but the speed with which the protesters turned their attention to political reform caught everyone off guard.
Putting this genie back in its bottle would be virtually impossible without bloodshed of the type we are now witnessing in some parts of the Arab world.
So the Syrian leadership knows that it must respond – hence the half-hearted reform agenda that it recently outlined.
But trying to address deep-rooted popular grievances with flowery language and a bouquet of subsidies is like trying to extinguish a forest fire with a water pistol.
The solutions to Syria’s problems must be as substantive as the problems are serious.
Until now, Syria’s rulers have relied on their anti-Israel, anti-Western rhetoric to protect themselves.
But cries about the Israel-Palestine conflict were rarely heard in the protests in Tunis and Cairo.
Furthermore, in the last few years, when Israeli planes struck targets in Syria, there was no answer from the regime –amp#160;and still none when Israeli planes flew over the presidential palace.
The regime claims that it is part of the 'resistance' with its senior partner Iran.
However the WikiLeaks cables show that the Syrian leadership told the Iranian regime not to count on it in any war with Israel because it is too weak.
So the regime is making a fatal error if it thinks that its old diversionary tactics will continue to provide it with immunity.
On the contrary, with a young, well-educated population unable to find suitable work, the regime has created its own cadre of potential protestors, who are aware that it is using empty slogans to keep the state of emergency and stay in power.
The Syrian people are strong, patient, resilient, and resourceful.
Family and social bonds remain potent in the face of adversity.
When food is scarce, people share.
When the regime cracks down on the Internet, people use proxy servers.
But they should not have to make do.
They should not have to risk their safety when they seek to engage with the world online.
No one wants to see the streets of Damascus consumed in protest, or a violent confrontation erupt between protesters and security forces.
What the Syrian people want is a meaningful dialogue with the regime.
The regime must appreciate that, despite its best efforts, Syrians have been watching events in the region with as much interest as the rest of the world.
Syria’s people may have no predilection for violence, but the birth of freedom, once witnessed, is not easily forgotten – or trumped by state handouts and vacuous statements by a distant, self-isolated leadership.
People said the Berlin Wall would not fall.
They said that Mubarak would not stand down.
And still some say that Syria cannot change.
But Syria will change, and I, like my compatriots, pray that when change comes, it is peaceful and harmonious.
Is the Bank Crisis Over?
MUNICH – As America’s various rescue plans take hold, stock markets are recovering somewhat.
The S&amp;P 500 price/earnings ratio is gradually climbing back to its long-term average of 16. Bank shares in particular are rebounding, and some banks have even succeeded in repaying at least part of their government-provided capital.
But, as I point out in my new book Kasino-Kapitalismus , this may only be a temporary improvement in expectations rather than a sign of permanent recovery, as the size of the banks’ hidden losses on their balance sheets is probably enormous.
According to the International Monetary Fund’s most recent estimates, the total write-offs on financial claims in this crisis will be $4.05 trillion for the United States, Japan, the euro zone and the United Kingdom, of which the US alone will have to absorb $2.7 trillion.
But according to my calculations of Bloomberg data, just $1.12 trillion had actually been written off worldwide by February, 2009.
This suggests that only a quarter of the necessary write-offs have been realized.
For the US and Switzerland, this is particularly bad news, as in both countries the realized write-offs already amount to 53% and 54% of the aggregate balance sheets of their national banking systems, which corresponds to 4.4% or 15.0% of GDP, respectively.
The Netherlands, the UK, and Germany should also be concerned, as they come next in the ranking of countries whose banking systems have been hit hardest by the crisis.
Their write-offs were 2.0%, 4.2% and 2.8% of GDP, respectively, which corresponds to 11%, 16% and 22% of the aggregate equity stock of their banking systems.
These frightening numbers raise doubts about the stability of the West’s financial system, and they dwarf all measures, such as “bad banks” and government guarantees, that attempt to solve a mere liquidity crisis.
The banking system is not primarily suffering from a temporary breakdown of the inter-bank market and a transitory decline in asset values that could be overcome simply by waiting for recovery.
Rather, the banking system is at the brink of insolvency, with a permanent loss in equity capital.
The prices of structured securities such as collateralized debt obligations have come down, because the institutional fraud of a multi-fold chain of securitizations has been detected.
Cash-back loans to NINJA (No Income, No Job, and No Assets) customers that included voluminous fees to brokers and were securitized and structured up to 60 times do not represent any value.
And if the structuring process created 70% triple-A rated paper out of what on average were B-value loans, there must have been fundamental flaws in the rating process, which will not disappear simply because the economy or the stock market recover.
Moreover, defaults on securitized credit card debt and commercial loans to companies that are driven to bankruptcy are still to come.
They will continue to deprive the banking system of its equity capital, with little chance of it being recouped in the near future.
Accounting rules are generous enough to allow banks to keep many losses under the carpet for the time being.
But it is only a matter of time until banks are forced to reveal the truth.
Thus, there is no point in waiting for miracles.
That mistake was made by the Japanese, who tried, unsuccessfully, to muddle through, only to end up with 18 years of stagnation.
In today’s crisis, muddling through would be a recipe for a continuation of the crisis and secular stagnation of the type once described by Alvin Hansen, a contemporary of Keynes.
Hansen predicted that capitalism would suffer from a permanent underinvestment crisis.
Banks would scale down their balance sheets in proportion to their reported equity losses and exacerbate the credit crunch from which the world is already suffering today.
Bad banks that are constructed generously enough to provide banks with hidden equity injections are one way to avoid or mitigate the credit crunch.
But establishing them would be a bad idea, because to do so would imply that government subsidization of banks, thereby creating incentives for imprudent behavior in the long run.
After all, one reason for the banking crisis was that banks expected governments to bail them out in case of trouble.
A better way to help banks and prevent them from simply deleveraging their business would be to establish full transparency and provide fresh money from taxpayers.
But governments should not make gifts.
Instead, they should become partners of private shareholders, endowing the banks temporarily with new equity capital until the crisis is over.
This rescue strategy has a double advantage.
It helps banks immediately, and it creates the right incentives for future behavior, as banks will know that the government will not prevent private equity capital from being destroyed in a crisis.
This type of rescue strategy also makes it possible to increase the required supervisory equity-asset ratios of banks in the midst of the crisis without risking a credit crunch.
If government becomes a partner, it may well endow the banks immediately with the equity required to sustain their business.
Banks would again trust each other, and the inter-bank market would be re-established.
Of course, from a political perspective, reforms such as these can best be carried out when the crisis is acute, not when Wall Street believes it can go back to business as usual.
The time for reform is now.
Is the Boss Overpaid?
Ever since 2001, when France enacted a law requiring listed companies to reveal their executives’ pay packages, newspapers have had a field day denouncing greedy bosses.
Not only are fixed salaries revealed, but so are bonuses, fees for serving on boards of directors, returns on stock options, pension packages, and other perks, such as corporate jets or chauffeur-driven cars.
But executive remuneration has usually faded from view once the journalistic spotlight shifts elsewhere – that is, until now.
This year, executive heads have started to roll.
In June, Antoine Zacharias, chairman and CEO of Vincy, France’s biggest public concessions and construction company, was obliged to resign when a majority of the board of directors judged his remuneration to be outrageous: €4.3 million in salary, a €13 million retirement bonus, a €2.2 million pension, and an estimated €173 million in stock options.
But the focus of debate was a €8 million exceptional bonus that he requested after successfully executing a financial operation at the end of his tenure.
More recently, Noel Forgeard, the French co-CEO of the Franco-German aeronautical and defence company EADS, was forced to resign under a cloud of suspicion: he sold his EADS shares in March, before the company announced a costly delay in production of the Airbus A380.
Whether Forgeard acted illegally is still under investigation, but, with the announcement causing the share price to plummet by 26% overnight – wiping out €5.5 billion of the company’s value – his position became untenable.
Such events have brought old questions back to the fore in almost every rich country: Are bosses being paid too much?
Should laws governing stock options be reformed?
Although the circumstances are different, the fundamental issues are always the same, for they touch on questions of legitimacy and morality.
If remuneration is perceived as unjust, trust in the capitalist system will suffer.
The French debate about executive compensation is particularly striking in this respect, because managers’ salaries are in fact lower than those paid to their German, British, and American counterparts, and their remuneration has grown in step with corporate share prices, increasing six-fold in 25 years.
Moreover, like managers everywhere, their responsibility is great, making their positions less secure, while companies must compete for the relatively few good ones, driving up their price.
But critics argue that the best managers are not necessarily the best paid, that the market for them is not transparent, and that boards of directors are often partial to their presidents when setting compensation.
Likewise, they insist that mergers and acquisitions, which make big companies bigger, should not be motivated by salary considerations, and that “golden parachutes” should not be granted to failed managers.
More fundamentally, they claim that it is simply immoral that bosses should earn as much in a day as their employees do in a year.
No manager is a superstar, a Tiger Woods or Michael Schumacher of the boardroom.
Stock options, too, often stir passionate criticism.
Allowing managers to buy shares at prices fixed in advance was intended to align their interests with those of other shareholders by giving them a personal stake in building the value of the company.
But, for some managers, stock options have created an incentive to inflate profits and hide losses, thereby enriching themselves artificially while jeopardizing their companies and other shareholders.
The question is not specific to France.
In the United States, a recent study by two university professors showed that more than 25% of the companies reviewed had manipulated the dates of stock-option allowances to increase the profits of the beneficiaries.
The US Securities and Exchange Commission (SEC) and the US Department of Justice apparently decided to fight the “backdating” practices, which where especially common in Silicon Valley.
In France, a law adopted in 2005 requires that severance pay for company managers now be subject to a shareholder vote, and the EADS scandal has spurred consideration of further legal changes.
A bill proposed by former Prime Minister Edouard Balladur seeks to eliminate perverse incentives by barring corporate officers from exercising their stock options until they leave the company.
Jacques Chirac, more cautiously, stated that stock options should be legally “encadrés” (framed).
Others suggest broadening the scope of stock options to include more employees.
Some Socialists are more radical, advocating, as Laurent Fabius recently did, the suppression of stock options.
The problem with legal measures, however, is that they can have pernicious side effects and unintended consequences, especially when they are tailored to a particular crisis.
The state’s function should be to enact and enforce laws on corporate governance and taxation of managers’ compensation.
In all other areas, legislation cannot serve as a substitute for the exercise of common sense, discernment, and responsibility by a company’s board of directors.
But if we must have laws to bolster our ethics, their guiding principle should be that remuneration is always linked to the performance and services it is intended to compensate.
Only measures that ensure that companies reward true merit will be considered legitimate by employees, shareholders, and the public.
Is the EU Paralyzing Itself?
European integration has been compared to a bicycle that must be moved forward, because otherwise it falls to the ground.
According to this analogy (which does not imply that Europe is a Tour de France) integration is an ever-moving process that always demands new stimuli, otherwise the forces of stagnation and disintegration will gain the upper hand.
The introduction of Euro coins and notes, as well as the looming enlargement of the EU eastward, should provide the needed stimulus, and add to the economic dynamics of the EU.
But when the EU expands to include 27 members, its decision-making process will risk becoming deadlocked.
The economic heterogeneity of such a large number of members, when paired with the unanimity required for core decisions to be taken on issues such as taxation, the budget, fundamental rules and other areas, means that the common denominator for decisions in the EU will become smaller and smaller.
National interest and the status quo will become even more dominant, deepening the chance of paralysis.
The arrival of these problems was foreseen long ago, but the Treaty of Nice failed to improve the means for intergovernmental decision-making within the European Council.
On the contrary: the threshold for a qualified majority has been raised from 71.26% (68 of 87 votes) to 74.79% ( 258 out of 345 votes).
With increased membership, the enlarged EU will move towards greater unanimity, which makes decision-making even more difficult, and increases the likelihood of blocking coalitions of members.
But correcting this will become harder after new members have joined.
So, as enlargement approaches, the EU faces a cross roads.
To avoid a ``Stagno-Europe,'' the EU must focus on the essentials in the common institutional framework and allow more variety in an enlarged union, or it must develop institutional arrangements that shift additional portions of national sovereignty to the Union level.
Certainly, political union and a common market require a uniform frame of reference to prevent major distortions in competition.
But increased heterogeneity in a Union of 27 requires a more flexible institutional framework.
Only what is essential should be harmonized within this institutional framework.
Here, the rule should be: deem something essential only if the EU's four freedoms - free movement of goods, services, people and capital - will be seriously impaired without such a designation.
Whatever is necessary in order for markets to function efficiently should be considered essential.
Following this approach, the EU's Structural and Regional Funds must be changed before Eastward enlargement takes place because, after it does, the new East European members will be able to forge a blocking minority.
Agricultural policy should be shifted from price subsidies to income transfers, with these transfers turned into a national obligation, not a Union one.
Moreover, a social union - that is, a common European framework of social insurance systems for health, unemployment and retirement as well as social welfare - is not feasible and so should not be treated as essential to the Union.
Labor market deregulation must also be treated as a national obligation.
The alternative to focussing on the essentials is to cede more national sovereignty to the Union level.
Europe's autonomous nation states have already passed important elements of their sovereignty to supranational decision-making through the Treaty of Europe.
If more national sovereignty is to be ceded, the EU's ``democratic deficit'' must be closed, with the European Parliament gaining a bigger say over policy.
For any of that to happen, a constitution-like arrangement will need to be developed in which decisions are assigned to different layers within Europe: the European, the national, and the regional level.
According to the subsidiarity principle, economic competencies should be transferred to the lowest possible government body.
Only when a transfer of competencies to the supranational level leads to efficiency gains that exceed the welfare losses due to centralization should national and regional responsibility be replaced by the supranational.
This implies that public goods of a limited dimension in space should be provided on the local or regional level, those of a larger size should be supplied on the national level and that Europe-wide public goods be dealt with on the European level.
The route to a constitution-like arrangement will be severe and complex.
It requires considerations similar to those written about in the ``Federalist Papers,'' which appeared when the US was creating itself.
In Europe's case, a constitutional framework will require an even more federalist structure than that established in America.
Such a route presupposes that ``the people'' are sovereign.
But a European people does not (or does not yet) exist.
Neither does European ``public opinion.''
Thus, the role of a European parliament must be limited. Consequently, surrenders of national sovereignty must be limited as well.
At the core of this debate, as it was over two hundred years ago in America, is taxation.
Ceding national sovereignty implies shifting the power to tax, the power to spend and the power of the budget to the European level.
This means that a European institution such as the European parliament would be authorized to decide the type of tax, the tax base and the tax rate for the individual tax payer; it would also be able to decide that a tax collected in one country can be spent in another country.
But preparedness to surrender national sovereignty to the Union varies between EU member countries.
It is hard to imagine how the process of ceding national sovereignty will look in the next twenty years.
Yet it is certainly one way to overcome the institutional blockade that now looms.
Is the Euro Overvalued?
CAMBRIDGE – An American traveler in Paris or Berlin is continually struck by how high prices are relative to those in the United States.
A hotel room, a simple lunch, or a man’s shirt all cost more at today’s exchange rate than they would in New York or Chicago.
To bring the cost of those goods and services down to the level in the US would require the euro to fall relative to the dollar by about 15%, to around $1.10.
It is easy to jump from this arithmetic to the conclusion that the euro is overvalued, and that it is likely to continue the decline that began last December.
But that conclusion would be wrong.
Looking ahead, the euro is more likely to climb back to the $1.60 level that it reached in 2008.
There are three reasons why the traveler’s impression that the euro is overvalued is mistaken.
First, the prices that the traveler sees are generally increased by value-added tax (VAT), which is universal in Europe but unknown in the US. Remove the VAT, which is typically 15% or more, and the prices in Europe are similar to those in the US.
Second, the goods and services that the traveler buys are just a small part of the array of goods and services that are traded internationally.
The goods that Europe exports include machinery, chemicals, and a variety of other products that consumers do not buy directly.
To judge whether their prices are “too high” at the existing exchange rate we have to look at the trade balance.
Germany , Europe’s largest exporter, has a very large trade surplus with the rest of the world.
Because German exports are attractive to foreign buyers at the existing exchange rate, Germany in 2009 was the world’s second largest exporter (after China).
Germany’s exports exceeded its imports by nearly $200 billion in the past twelve months, a surplus equivalent to nearly 6% of GDP.
It is clear that Germany’s net exports would remain high even if the euro appreciated substantially from its current level.
The other eurozone countries are not as competitive as Germany at today’s exchange rate.
But the euro area as a whole nonetheless had a trade surplus of more than $30 billion over the past 12 months.
And, with the euro down significantly relative to many other currencies over the past year, Europe’s trade balance can increase further in the months ahead.
To limit that increase, the euro must rise.
This brings me to the third, and most fundamental, factor that is likely to cause the euro to strengthen substantially from its current level: global economic conditions require the eurozone to have a substantial trade and current-account deficit so that it becomes a large net importer of funds from the rest of the world.
There are two reasons for this.
First, the oil-producing countries and China will continue to export substantially more than they import.
Their net foreign earnings must be invested in foreign countries’ stocks and bonds.
While much of that investment will flow to the US, the surplus countries want to diversify their investment of these new net export earnings.
The eurozone provides the only large capital market other than the US for such investments.
But the eurozone can increase its inflow of foreign capital only if it has a current-account deficit, i.e., if it increases its imports relative to its exports.
And that will require a less competitive euro – higher relative to the dollar and other currencies.
The flow of net export earnings from the oil producers and others into euros will push up the value of the euro and enable the transfer of funds to occur.
Second, countries with large accumulations of dollar reserves will be shifting substantial fractions of those reserves into euros.
Central banks in Asia and the Middle East have traditionally held their reserves in dollars.
That made sense when they needed those reserves to be very liquid so that they could bridge temporary trade deficits.
But those foreign-exchange balances have grown far beyond the level needed as emergency reserves.
South Korea and Taiwan, for example, have foreign-exchange holdings of more than $250 billion each, and China’s holdings total more than $2 trillion.
These and other countries with very large foreign-exchange balances are beginning to diversify their holdings from dollars to euros, a process that will continue and that will inevitably cause the euro to rise relative to the dollar.
So, while I will continue to complain about the prices that I face when I travel in Europe, I understand that the prices that matter for trade are more competitive than those that I see when I pay for my lunch.
And I also know that the complementary pressures on Europe to import funds, and on surplus countries to diversify their currency holdings, will make European travel increasingly expensive in dollar terms.
Europe’s Nobel Wake-Up Call
MADRID – In a decision criticized and praised in equal measure, the Norwegian Nobel Committee awarded this year’s Peace Prize to the European Union in recognition of its contributions “to the advancement of peace and reconciliation, democracy and human rights in Europe” over the past six decades.
But, to what extent is Europe preoccupied with “perpetual peace” at the expense of its current, vastly different ailments? Is this award a swan song –confirmation of the moribund state of the European project, as the 2001 Nobel Prize was for the United Nations?
In announcing the prize, the committee explained how “the work of the EU represents fraternity between nations.”
While it acknowledged that “the EU is currently undergoing grave economic difficulties and considerable social unrest,” it highlighted the EU’s role as a beacon of hope – a democratic anchor, particularly meaningful for peoples who have lived through the horrors of dictatorships.
But it is precisely the mismatch between the EU’s past achievements and its current distress that has fueled anger and led to its rejection by many Europeans.
That is why the prize has invited comparisons to an Oscar lifetime achievement award that comes only when the recipient is nearing death.
The decision to establish the EU was an ingenious response to the biggest challenge of the day – war and conflict.
And, of course, the resurgence of nationalism and extremism of all kinds around the world is a potent reminder, as if any were needed, that peace is not to be taken for granted.
But the prospect of war in Europe now seems like a remote threat, and the varnish of the EU’s past success seems to have faded, even to those who have not forgotten the bloodstains beneath.
Instead, it is Europe’s lack of a vision and narrative for the future – with which it could address issues like chronic unemployment, capital flight, and the ever-tightening grip of austerity – that keeps people awake at night, and that fosters populism, dismay, and internal disarray.
The EU’s ability to capitalize on – or even justify – the award hinges on its prospects for overcoming the sovereign-debt crisis and reestablishing trust among its member countries.
But, more important, the EU needs to restore its allure, an integral part of which has always been economic prosperity.
Aside from the eurozone’s design flaws, the pressing items on Europe’s agenda concern competitiveness, jobs, innovation, and technology.
Europe’s first order of business should be to accept reality: the emerging economies are catching up in terms of innovation while the EU is losing traction, with China on the cusp of surpassing Europe as the second-largest hub for venture capital globally, behind only the United States.
In fact, a 2012 study by Ernst &amp;
Young reveals that one US hub (Silicon Valley) alone boasts almost $12.6 billion in cumulative venture capital, while the United Kingdom, first among European countries, accounts for roughly $1.75 billion and Germany for $665 million.
A similar study, conducted in 2012 by Javier Santiso, a professor at the ESADE business school in Barcelona and a managing director at Telefónica, found that Europe’s per capita investment in venture capital in 2011 was a meager $7, compared to $142 in Israel and $72 in the US.
An equally telling statistic is that only one company in the eurozone, Spain’s Inditex (ZARA), has made it to the FT Global 500 since 1996.
Research and development offers little consolation.
Although European research has given rise to many new technologies used in industries worldwide, its recent record is wobbly at best, owing mainly to the difficulty in translating basic science into industrial advantage.
Europe is losing its technological edge, whether in telecoms, technology, or the Internet, with its companies being displaced by those from emerging markets, while the US remains dominant.
The NASDAQ index confirms this disturbing trend: only 15 European companies are listed, compared to 498 for the US, 43 for China, and 23 for Israel.
Looking to the future, Europe should take note of the potential consequences revealed by the latest Program for International Student Assessment, a worldwide comparison of student performance. In mathematics and science, PISA’s latest report card puts Asia at the head of the class, with China, Singapore, and South Korea on top.
Meanwhile, with some exceptions – most notably Finland – Europe has slipped into riding in the peloton.
The EU is, at last, beginning to understand that betting its future on services will not be enough to safeguard the European socioeconomic model.
Member states’ governments and the European Commission’s last communication, “A Stronger European Industry for Growth and Economic Recovery,” display an awareness of the need to revive Europe’s industrial policy.
Such efforts should promptly translate into legislative changes in areas ranging from insolvency to patents, from CO2 emission-reduction schemes to “smart” electricity grids.
Europe urgently needs to devote its energy to revitalizing the building blocks of its economy – industry, human capital, and a policy framework that enables healthy growth and future prosperity.
One hopes that this year’s Nobel Peace Prize provides a boost in pride that allows Europeans to look beyond their immediate financial problems, consolidate the Union’s strengths, and establish a coherent vision of the future.
Is the Market Moral?
Clemenceau once said that war is too important to be left to the generals.
By the same token, morality is too important to be left to philosophers, especially where the morality of markets is concerned.
Those who see themselves as the protectors of morality are more likely to be antipathetic to markets, whereas those who favor them typically talk about production, distribution, and material wealth--anything but morality.
The market's positive moral features, however, are many. Consider one identified by Adam Smith, namely the link between individual autonomy and self-support through legally free labor.
"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest," Smith wrote. "Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow citizens."
This passage is a famous statement of the utility of self-interest.
But notice its assertion that dependence on others is morally degrading.
Thomas Carlyle, and later Marx and Engels, would decry this appeal to self-interest and the related rise of the "cash nexus" as either a dangerous assault on tradition or a source of human self-alienation.
At the least, there is the danger that the cash nexus can encourage a mindless commitment to work, and the belief that one's worth comes only from paid labor, leading to fear of dependence on others, or to shunning vital but unpaid activity.
But the flip side of the cash nexus is the freedom and self-determination that comes from overturning customary social relations such as slavery and serfdom, which totally subordinated the individual to the will of a master.
Nor does the cash nexus subordinate the individual to the will of the state.
This independence was at the core of Hegel's insistence that supporting oneself by earning a living is one of the key ways that we gain a sense of ourselves as individuals.
Moreover, market relations stimulate honesty as a virtue.
Merchants who seek to build their business on a strong base of regular customers are unlikely to engage in fraud.
Companies that want to attract and retain investors strive for financial transparency.
Perhaps most importantly, market relations contribute to international peace by creating ever-wider forms of association.
As Smith emphasized, when commerce links us to foreign peoples, we come to regard them not as barbarians but as potential suppliers and customers.
In other words, capitalism creates a rational awareness of their needs and interests.
Similarly, markets are a powerful solvent of religious and communal antagonism, by creating incentives to cooperate with those whose identity and ultimate commitments differ from our own.
Having just passed through the bloodiest century in human history, increasing the zone of indifference to the ultimate goals of others--as long as they are not directed against us--should be mankind's top priority.
But self-interested indifference does not mean a lack of mutual concern.
Self-interest is linked to mutual concern every time a sales clerk asks, "Can I help you?"
That phrase is often derided as phony and manipulative--except by those who have lived in societies where sales clerks ignore customers.
The sales clerk's commercially motivated solicitude does lack true charity and altruism.
But, seen historically, the market's ability to create a self-interested regard for others is surely preferable to the alternatives.
Of course, self-interested solicitude can lead to inauthenticity , to a sense of always selling oneself--or rather, a sense of having to become someone who can be sold.
This is a consistent theme of modern social criticism, from Rousseau through "Death of a Salesman" and beyond.
The constant creation of new needs--when not bounded by a sense of how novelty fits into our lives--may put us on a treadmill of joyless consumption.
But capitalism also creates newer and more complex forms of individuality than before.
In previous societies, one's status as a peasant, artisan, or merchant often defined one totally.
Being a member of a guild, for example, encompassed a complete set of social roles--economic, legal, political, and even religious.
Modern market society, by contrast, is based upon looser, more temporary associations, founded to pursue specific economic, cultural, or political interests.
Such associations demand only a small part of the individual's resources, sometimes only a token monetary contribution.
As a result, the modern individual can belong to a greater range of groups, but groups that are less all encompassing.
Modern associations allow for participation without absorption.
I am a husband and father, a Buddhist, a jazz aficionado, a molecular biologist, a marksman, and a reader of modernist fiction.
What is historically new--emerging just in the last few hundred years--is the possibility of being all of these things at once.
This choice of possibilities is due in no small part to the market, and the peril we face is that so much choice can create a protean self, lacking binding commitments to anyone or anything, a self for whom the bottom line of every social contract is the escape clause.
But awareness of this danger should not lead us to lose sight of a fundamental fact: many of the moral advantages and conceptions of selfhood that those in capitalist societies take for granted are due in no small part to capitalism itself.
Is There a Bubble in Home Prices?
Around the world, newspapers trumpet a "housing bubble" about to burst.
The Economist has run numerous cautionary articles with titles like "Castles in Hot Air."
"Housing Prices Soar, Fueling Bubble Fears," chirped The Wall Street Journal .
"The Property Bubble Menaces Growth," warned Le Monde . "Homes Bubble May go Toxic," The Sydney Morning Herald admonished.
Are such fears justified?
How do we know if the housing market is in a bubble?
The term "bubble" is widely used but rarely defined.
A bubble occurs when public expectations for future price increases become exaggerated, pushing prices up to unsustainable levels.
When this happens, many people buy homes to rent out as investment properties, and many more who are buying homes to live in also behave like investors, fearing that if they wait, they will be priced out of the market.
During a bubble, buyers are relatively undeterred by high prices because they think that even bigger price increases will compensate them for spending too much.
If expectations of rapid and steady future price increases are important motivating factors, then the price level is inherently unstable, because prices cannot rise forever.
The bubble will eventually burst and prices will fall.
At least one aspect of a housing bubble is visible: rapid price increases.
A surge in home prices has infected almost all advanced countries since 2000, with the exception of Germany and Japan.
But the key question is whether expectations of large future price increases are sustaining the market.
If the relationship between average incomes and house prices is stable, then economic fundamentals clearly have the potential to explain prices.
The increase in housing prices during the 1980's is now viewed as the veritable model of a boom cycle turned bust.
A pattern of sharp price increases, which peaked around 1990, was followed by declines in cities from Boston and Los Angeles to London, Sydney, and Tokyo, contributing to severe regional recessions.
Will the current run-up in prices be followed by similar, or worse, collapses?
Evidence about a housing bubble in the 1980's was compelling.
Buyers were influenced by strong expectations about future price increases, and they perceived little risk.
Responses to a survey that my colleague Karl Case and I conducted in 1988 during the US boom revealed that casual word-of-mouth transmission of emotional excitement played a big role in purchasing decisions.
Moreover, there was no agreement among buyers about the causes of recent price movements and no cogent analysis of fundamentals.
Earlier this year, we conducted another survey of US homebuyers who bought between March and August of 2002.
For the vast majority, investment was either "a major consideration" or at least "in part" a motive for buying.
But far fewer homebuyers in 2003 said that they were buying "strictly for investment purposes" than in 1988.
Thus, conditions would appear to be consistent with a bubble, though less so than in the 1980's.
The US is hardly alone.
In Europe, the average ratio of home prices to incomes is slightly below its long-term average, mainly because housing prices in Germany are at historically low levels by this measure.
In France, Italy, and Belgium, the ratio is close to its long-term average, and in Spain, the Netherlands, and Ireland, it is 40-50% above it.
Australia, too, is close to the level that preceded previous crashes.
These are averages across whole countries, but some regions are more overvalued than others.
This is likely to be the case for "glamour cities" in which international celebrities, entertainment industries, world-class universities, or high technology industries are located.
Home prices in these cities are high as well as volatile.
The surveys in 1988 and 2003 showed that the central issue is the role of price expectations.
In both booms, roughly 90% of respondents in the US expected an increase in home prices over the next several years, with large expected increases over the next 12 months, surpassing 15% in San Francisco in 2003.
Longer-term expectations were almost as high.
Indeed, word-of-mouth transmission of excitement about real estate prices is nearly as prevalent now as in 1988.
In "glamour cities," newspaper articles feature stories of homes that sold well above asking price, and 45% of respondents in the 2003 survey reported selling at above asking prices in San Francisco.
More than 20% of sellers in all markets surveyed felt that that their property would have sold as quickly if they had charged 5% or 10% more.
Even so, the 2003 survey indicates that US homebuyers are not as confident of real estate prices now as before the 1980's bubble burst.
This may mean that buyers will not allow prices to rise like last time, but it could also mean that owners will be more ready to exit from the market.
This may amplify any price declines, especially in "glamour cities" and those with weakening economies.
The consequences could be severe, and not only in the US, where 21% of mortgages last year were for more than 90% of a home's purchase price, up from 7% at the peak of the boom in the late 1980s.
Australian household debt over the past decade has soared from 55% to 130% of personal disposable income.
It has almost doubled, to 180%, in the Netherlands, where the average mortgage is 110% of home values, because lenders are happy to finance all the purchasing costs.
Judging from the historical record, housing price declines fortunately tend to be relatively local, and nationwide drops are unlikely.
This should blunt the macroeconomic impact of bursting bubbles.
The bad news, though, is that the run-up of personal debt means that many households will be left with liabilities exceeding the value of their homes, implying a rising number of bankruptcies.
Is There a European Identity, Is there a Europe?
PRAGUE - Do Europe's peoples truly regard themselves as ‘Europeans', or is this a fiction which attempts to transform geography into a ‘state of mind'.
This question is often posed in connection with debates concerning the amount of sovereignty that nation-states can, or should, transfer to the European Union.
Many say that if national affiliation is pushed into the background too fast in favor of an unfamiliar, perhaps chimerical, concept of European affiliation, it might not end well.
When I ask myself: ‘To what extent do I feel European, and what links me with Europe?", my first thought is a mild astonishment at the fact that it is only now that I ponder this question.
Why didn't I think of it long ago, in those times when I began to discover the world?
Was it because I regarded my belonging to Europe as a surface matter of little significance?
Or did I take my European linkage for granted?
My entire background was so self-evidently European that it never occurred to me to probe my thoughts.
Not only that – I have a feeling that I would have looked ridiculous if I had written or declared that I was European and felt European; or, in fact, if I professed explicitly a European orientation.
Such manifestations would have appeared pathetic and pompous; I would have regarded them as a haughtier version of the kind of patriotism that I dislike from national patriots.
Such hesitation apparently holds true for most Europeans: they are so intrinsically European that they are unaware of it.
They do not call themselves Europeans.
When asked in opinion polls, they show mild surprise that, all of a sudden, they should declare their European affiliation.
Conscious Europeanism has little tradition, so I welcome the fact that European awareness is rising from the indistinct mass of the self-evident.
By inquiring about it; thinking about it; by trying to grasp its essence, we contribute to our own self-awareness.
This is immensely important – especially because we find ourselves in a multi-cultural, multipolar world in which recognizing one's identity is a prerequisite for co-existence with other identities.
If Europe, until recently, paid so little attention to its own identity it was because it incorrectly saw itself as the entire world; or, at least, considered itself to be so much superior to the rest of the globe that it felt no need to define itself in relation to others.
Inevitably, this had deleterious consequences on its practical behavior.
Reflecting on Europeanism means inquiring into the set of values, ideals and principles that characterize Europe.
It entails, by definition, a critical examination of that set of thoughts, followed by the realization that many European traditions, principles, or values may be double-edged.
Some of them – if carried too far or abused in certain ways – can lead us to hell.
In this effort of reflection, emphasis must be placed on the spiritual dimension and the underlying values of European integration.
Until now, European unification, and its meaning in the wider context of civilization, has been hidden behind technical, economic, financial and administrative issues.
When unification began after WWII, democratic Western Europe was faced with the memory of the horrors of two world wars, and with the threat of Communist totalitarian rule.
Back then, it was unnecessary to speak about the values to be defended, because these were self-evident.
It was necessary to unite the West in order to prevent the spread of dictatorship, as well as the danger of a relapse into old national conflicts.
So, in its infancy, the European Union held much the same attitude that I held toward my European background.
Europe's moral justification was self-evident; it did not need to be professed.
Because Western Europe was defending something equally self-evident, there was no need to describe or analyze it.
It was not until the physical threat to Europe disappeared a decade ago that Europe was prompted to engage in profound reflections upon the moral and spiritual foundations of its unification, and what should be the objectives of a united Europe.
The basic set of European values formed by the spiritual and political history of the continent is, to my mind, clear.
It consists of respect for the unique human being and humanity's freedoms, rights and dignity; the principle of solidarity; the rule of law and equality before the law; protection of minorities; democratic institutions; separation of legislative, executive and judicial powers; political pluralism; respect for private ownership and private enterprise, and a market economy; and the furtherance of civil society.
These values mirror countless modern European experiences, including the fact that our continent is now a multi-cultural crossroads.
In defining what it means to be ‘European', a crucial task is to reflect upon the double-edged nature of what we have gavin the world, to realize that Europe not only taught the world about human rights, but also introduced the Holocaust; that we generated spiritual impulses not only for the industrial and information revolutions, but also to plunder and contaminate nature; that we incited the advance of science and technology, but also ruthlessly ousted essential human experiences forged over several millenniums.
The worst events of the 20th century – World Wars, Fascism, and Communist totalitarianism – were mostly Europe's doing.
During the last century, however, Europe also experienced three auspicious events, though all were not exclusively European accomplishments: the end of colonial rule; the fall of the Iron Curtain; the beginning of European integration.
A fourth great task lies ahead.
Through the manner of its being, a unifying Europe must demonstrate that the dangers generated by its contradictory civilization can be combated.
I would be happy if the people of my country, who are Europeans, could participate in this process of reflection, of defining a European identity, as Europeans fully recognized by Europe.
Is the Reagan-Thatcher Revolution Over?
CAMBRIDGE – Thirty years ago Ronald Reagan and Margaret Thatcher brought about a revolution in thinking and policy in both economics and foreign affairs.
The economies of the United States and Britain are today fundamentally different because of what they did.
The collapse of communism in Eastern Europe and the former Soviet Union is also the result of their policies.
Of course, Reagan and Thatcher have always had their critics, some of whom now believe that the world economy will revert to pre-Reagan and pre-Thatcher policies.
But anyone who recalls what the American and British economies were like before Reagan and Thatcher, and who knows the changes that they introduced, must also recognize that the world cannot go back.
I had the good fortune to work with President Reagan as his chief economic adviser.
Because of his close relationship with Prime Minister Thatcher, I also had several opportunities to meet with her.
They were revolutionaries in their thinking and in their ability to inspire others to accept fundamental change.
Reagan had four key economic goals when he assumed office in 1981: reduce inflation, reduce high personal tax rates, reduce the size of government, and reduce regulation of the private sector.
Inflation came down rapidly, from more than 10% in 1981 to less than 4% in 1983, because Reagan backed the tough monetary policies of US Federal Reserve Chairman Paul Volcker.
Today an inflation rate of close to zero is the accepted goal of US policy.
Reagan’s tax policies reduced the top income-tax rate from 70% in 1980 to 28% in 1986.
Although the top rate has climbed back to near 40%, no one proposes a return to pre-Reagan levels.
Although Reagan could not bring down spending on entitlement programs for retirees, America’s non-defense discretionary spending was reduced by one-third, from 4.7% of GDP in the 1980 to 3.1% in 1988.
It stood at 3.4% in 2008.
Finally, regulations were reduced in a wide range of industries, including air transport and the financial sector.
While some restrictions on banks will be imposed in the wake of the financial crisis, we will not see a return to severe regulatory constraints on banks’ activities.
Reagan characterized the Soviet Union as an “evil empire” and increased defense spending to challenge Soviet aggression and capabilities.
The collapse of the Soviet Union and of communism were, in part, dramatic responses to US policies and to the inability of the Soviet economy to keep up with the West.
There will be no going back here as well.
When Margaret Thatcher became prime minister of Britain in 1979, she faced an economy with much more fundamental problems than those in the US.
Britain was a much more socialized economy, with widespread government ownership and dominant trade unions.
She privatized the major government-owned industries and sold government-owned housing to tenants.
No one is proposing to renationalize industries or to take back that housing.
Trade union power was permanently broken after long and painful national strikes.
The top tax rate on wage income was cut in half during her tenure as prime minister, falling from over 80% when she took office to 40%.
Additional taxes on investment income meant the top tax rate before Thatcher came to power was initially above 95%.
Although the top rate of income tax in Britain was recently raised to 50%, there is no thought of going back to pre-Thatcher taxes.
Faced with high inflation, Thatcher backed a monetarist approach that supported high interest rates and succeeded in sharply reducing inflation.
Today Britain has an independent central bank with an inflation target of 2%.
Thatcher supported Britain’s entry into the European Union in order to benefit from free trade, but she forcefully opposed joining the single currency.
The Labour government that followed her continued the policy of remaining outside the euro zone, as will the Conservatives, who are likely to return to power under David Cameron in the spring of 2010.
Financial deregulation made London a global financial center.
Some of those regulatory changes may be reversed, but Britain is unlikely to jeopardize an important component of its economy by returning to pre-Thatcher financial rules.
Indeed, there are no prospects of counter-revolution in Britain.
Both Tony Blair and Gordon Brown, who headed Labour governments after almost two decades of Conservative rule, have been the face of market-friendly “New Labour,” and it is now the only face that the Labour Party has.
Policies do evolve as conditions change and as we learn from experience.
But the dramatic policy changes in the US and Britain under Ronald Reagan and Margaret Thatcher brought about such profound improvements that there is no going back.
Is There a New Washington Consensus?
CAMBRIDGE – Two and a half years ago, senior staff members of the World Bank approached the Nobel laureate Michael Spence to ask him to lead a high-powered commission on economic growth.
The question at hand could not have been more important.
The “Washington consensus” – the infamous list of do’s and don’ts for policymakers in developing countries – had largely dissipated.
But what would replace it?
Spence was not sure he was the man for the job.
After all, his research had focused on theoretical issues in advanced economies; he had been dean of a business school; and he did not have much experience in economic development. But he was intrigued by the task.
And he was encouraged by the enthusiastic and positive response he received from the commission’s prospective members.
Thus was born the Spence Commission on Growth and Development, a star-studded group of policymakers – including another Nobelist – whose final report was issued at the end of May.
The Spence report represents a watershed for development policy – as much for what it says as for what it leaves out.
Gone are confident assertions about the virtues of liberalization, deregulation, privatization, and free markets.
Also gone are the cookie cutter policy recommendations unaffected by contextual differences.
Instead, the Spence report adopts an approach that recognizes the limits of what we know, emphasizes pragmatism and gradualism, and encourages governments to be experimental.
Yes, successful economies have many things in common: they all engage in the global economy, maintain macroeconomic stability, stimulate saving and investment, provide market-oriented incentives, and are reasonably well governed.
It is useful to keep an eye on these commonalities, because they frame the conduct of appropriate economic policies.
Saying that context matters does not mean that anything goes.
But there is no universal rulebook; different countries achieve these ends differently.
The Spence report reflects a broader intellectual shift within the development profession, a shift that encompasses not just growth strategies but also health, education, and other social policies. The traditional policy framework, which the new thinking is gradually replacing, is presumptive rather than diagnostic .
It starts with strong preconceptions about the nature of the problem: too much (or too little) government regulation, too poor governance, too little public spending on health and education, and so on.
Moreover, its recommendations take the form of the proverbial “laundry list” of reforms, and emphasize their complementary nature – the imperative to undertake them all simultaneously – rather than their sequencing and prioritization.
And it is biased toward universal recipes – “model” institutional arrangements, “best practices,” rules of thumb, and so forth.
By contrast, the new policy mindset starts with relative agnosticism about what works.
Its hypothesis is that there is a great deal of “slack” in poor countries, so simple changes can make a big difference.
As a result, it is explicitly diagnostic and focuses on the most significant economic bottlenecks and constraints.
Rather than comprehensive reform, it emphasizes policy experimentation and relatively narrowly targeted initiatives in order to discover local solutions, and it calls for monitoring and evaluation in order to learn which experiments work.
The new approach is suspicious of universal remedies.
Instead, it searches for policy innovations that provide a shortcut around local economic or political complications.
This approach is greatly influenced by China’s experimental gradualism since 1978 – the most spectacular episode of economic growth and poverty reduction the world has ever seen.
The Spence report is a consensus document, and therefore an easy target for cheap shots.
It has no “big ideas” of its own, and at times it tries too hard to please everyone and cover all possible angles.
But, as Spence puts it with regard to economic reform itself, you need to take small steps in order to make a big difference in the long run.
It is quite a feat to have achieved the degree of consensus he has around a set of ideas that departs in places so markedly from the traditional approach.
It is to Spence’s credit that the report manages to avoid both market fundamentalism and institutional fundamentalism.
Rather than offering facile answers such as “just let markets work” or “just get governance right,” it rightly emphasizes that each country must devise its own mix of remedies.
Foreign economists and aid agencies can supply some of the ingredients, but only the country itself can provide the recipe.
If there is a new Washington consensus, it is that the rulebook must be written at home, not in Washington.
And that is real progress.
Is There Moral Progress?
MELBOURNE – After a century that saw two world wars, the Nazi Holocaust, Stalin’s Gulag, the killing fields of Cambodia, and more recent atrocities in Rwanda and now Darfur, the belief that we are progressing morally has become difficult to defend.
Yet there is more to the question than extreme cases of moral breakdown.
This year marks the 60th anniversary of the United Nations General Assembly’s adoption of the Universal Declaration of Human Rights.
In response to the crimes committed during World War II, the Declaration sought to establish the principle that everyone is entitled to the same basic rights, irrespective of race, color, sex, language, religion, or other status.
So, perhaps we can judge moral progress by asking how well we have done in combating racism and sexism.
Assessing the extent to which racism and sexism have actually been reduced is a daunting task.
Nevertheless, recent polls by WorldPublicOpinion.org shed some indirect light on this question.
The polls, involving nearly 15,000 respondents, were conducted in 16 countries, representing 58% of the world’s population: Azerbaijan, China, Egypt, France, Great Britain, India, Indonesia, Iran, Mexico, Nigeria, the Palestinian Territories, Russia, South Korea, Turkey, Ukraine, and the United States.
In 11 of these countries, most people believe that, over their lifetimes, people of different races and ethnicities have come to be treated more equally.
On average, 59% say this, with only 19% thinking that people are treated less equally, and 20% saying that there has been no change.
People in the US, Indonesia, China, Iran, and Great Britain are particularly likely to perceive greater equality.
Palestinians are the only people of whom a majority sees less equality for people of different racial or ethnic groups, although opinion is relatively evenly divided in Nigeria, Ukraine, Azerbaijan and Russia.
An even stronger overall majority, 71%, regards women as having made progress towards equality, although once again, the Palestinian territories are an exception, this time joined by Nigeria.
Russia, Ukraine, and Azerbaijan again have significant minorities saying that women are now treated less equally than they once were.
In India, although only 53% say that women have gained greater equality, an additional 14% say that women now have more rights than men!
(Presumably, they were thinking only of those females who are not aborted because prenatal testing has shown them not to be male.)
Overall, it seems likely that these opinions reflect real changes, and thus are signs of moral progress toward a world in which people are not denied rights on the basis of race, ethnicity, or sex.
That view is backed up by the polls’ most striking results: very widespread rejection of inequality based on race, ethnicity, or sex.
On average, 90% of those asked said that equal treatment for people of different races or ethnic origins is important, and in no country were more than 13% of respondents prepared to say that equal treatment is not important.
When asked about equal rights for women, support was almost as strong, with an average of 86% rating it important.
Significantly, these majorities existed in Muslim countries as well.
In Egypt, for example, 97% said that racial and ethnic equality is important, and 90% said that equality for women is important.
In Iran, the figures were 82% and 78%, respectively.
Compared to just a decade before the Universal Declaration of Human Rights, this represents a significant change in people’s views.
Equal rights for women – not simply suffrage, but also working outside the home or living independently – was still a radical idea in many countries.
Openly racist ideas prevailed in Germany and the American South, and much of the world’s population lived in colonies ruled by European powers.
Today, despite what happened in Rwanda and the former Yugoslavia – and appeared to be on the verge of happening after the recent disputed election in Kenya – no country openly accepts racist doctrines.
Unfortunately, the same cannot be said about equal rights for women.
In Saudi Arabia, women are not even permitted to drive a car, let alone vote.
In many other countries, too, whatever people may say about gender equality, the reality is that women are far from having equal rights.
This may mean that the surveys I have quoted indicate not widespread equality, but widespread hypocrisy.
Nevertheless, hypocrisy is the tribute that vice pays to virtue, and the fact that racists and sexists must pay this tribute is an indication of some moral progress.
Words do have consequences, and what one generation says but does not really believe, the next generation may believe, and even act upon.
Public acceptance of ideas is itself progress of a kind, but what really matters is that it provides leverage that can be used to bring about more concrete progress.
For that reason, we should greet the poll results positively, and resolve to close the gaps that still exist between rhetoric and reality.
Is the World Bank Beginning to Understand Growth?
At first sight, the World Bank's newest report on globalization contains few surprises.
It repeats the mantra that the countries that went farther down the path of globalization became the ones with the greatest success in economic growth and poverty reduction.
Buried within the pages of the report, however, is a startling admission: countries that integrated into the world economy most rapidly were not necessarily those that adopted the most pro-trade policies.
Think about what this means.
For the first time, the World Bank acknowledges that trade liberalization may not be an effective instrument, not only for stimulating growth, but even for integration in world markets.
It is admitting, in an underhanded manner, that its repeated assertions about the benefits of globalization do not carry direct implications for how trade policy should be conducted in developing countries.
In other words, the World Bank is beginning to face up to a reality that is obvious to anyone who looks at the empirical record with an open mind.
Rapid integration into global markets is a consequence, not of trade liberalization or adherence to World Trade Organization (WTO) strictures per se, but of successful growth strategies with often highly idiosyncratic characteristics.
Consider China and India, the two growth miracles of the last twenty years as well as the leading exemplars of what the World Bank calls ``globalizers.''
In both countries, the main trade reforms took place about a decade after the onset of higher growth.
Moreover, trade restrictions in China and India remain among the highest in the world.
In China's case, high growth started in the late 1970s with the introduction of the household responsibility system in agriculture and of two-tier pricing.
China's authorities did not embark on import liberalization in earnest until much later, during the second half of the 1980s and the 1990s.
As for India, its trend growth rate increased substantially in the early 1980s by about 3%.
Meanwhile, serious trade reform did not start until 1991-93.
Governments in both countries focused their scarce political capital and administrative resources on areas other than trade liberalization.
Because both India and China did increase trade substantially, they are both considered as globalizers by the World Bank's criterion.
But as their experience reveals--along with the experiences of many others, such as South Korea, Taiwan, and Vietnam--deep trade liberalization is hardly ever a factor in fostering higher growth and expanded trade early on.
It is good to see the World Bank catching on to this simple reality.
Unfortunately, there is still a lot of subterfuge in the World Bank's report.
You will not notice how much ground the Bank has given up unless you dig deep in the report and look at the way the evidence is presented.
Even there, you will find a residue of the intellectual sloppiness that the World Bank has displayed on this issue in the past.
For example, a chart in the report shows that the World Bank's sample of ``more globalized'' countries had deeper tariff cuts than the ``less globalized'' countries.
The unstated implication - but the one the reader is expected to draw - is that tariff cuts were an important determinant of global integration and hence growth.
Of course, if there was direct evidence that these tariff cuts were correlated with growth (there isn't), you can be certain that the World Bank would have presented those results instead.
In fact, only a few lines further down, the report denies that the question is even relevant. ``Whether there is a casual connection from opening up trade to faster growth is not the issue'' declares the report.
One wonders why not.
Why did the World Bank invest so much intellectual capital on establishing the linkage between trade openness and growth if that is not an important issue?
These oddities are perhaps to be expected for an institution that is being forced to backtrack from a position that has become analytically and empirically untenable.
We should just be happy that some degree of realism is returning to the World Bank's discussion of globalization.
The bottom line is this. Countries that managed to grow rapidly and reduce poverty also tended to become increasingly integrated into the world economy.
What's at issue is the policy conclusion to be drawn from this empirical observation.
Previously, the World Bank wanted you to think that a significant liberalization of the trade regime is a key element in unleashing all those good things.
Now it is no longer so sure.
Neither should we be.
Is This Really War?
Is Ukraine Next?
LONDON – The war in Georgia has clearly exposed the security vacuum in the surrounding region, as well as a lot of raw nerves.
Russia’s hasty decision to recognize the “independence” of South Ossetia and Abkhazia was a shot across the bow for every former Soviet country, and has intensified speculation about who might be “next” – and how to prevent Russia from multiplying the supposed Kosovo “precedent” in other ex-Soviet countries.
Having established itself as the main broker in the conflict, the European Union has many urgent priorities in Georgia itself.
But it should also be thinking ahead about how it can demonstrate a stronger commitment to security, democracy, and prosperity in the European “neighborhood.”
The most effective way of dealing with a newly assertive Russia will be for Europe to issue a collective refusal to accept a bipolar Europe of distinct Russian and EU spheres of influence.
The place to start is Ukraine.
Fortunately, the EU-Ukraine summit on September 9 in Evian, France, provides the perfect opportunity.
Many Ukrainians now hear domestic echoes of the lead-up to war in Georgia.
Ukraine has its own potentially separatist region in Crimea, and the country’s Russian minority numbers some 8.3 million (the largest minority in Europe).
Half of Ukraine’s population is Russian-speaking in various degrees.
Although the Ukrainian constitution bans dual citizenship, the government has had to launch an inquiry into alleged covert Russian passport-holding in the Crimean city of Sevastopol.
Ukrainians note that Russia justified its invasion of Georgia, as the Nazis justified their dismemberment of Czechoslovakia, as being necessary to “protect” a minority to whom they had just given citizenship.
Russia has begun a war of words over Ukraine’s supply of arms to Georgia.
And the conflict itself has shown that the Russian Black Sea Fleet, based in Sevastopol, can operate with impunity, whether Ukraine likes it or not.
Based on its analysis of Ukraine’s “Orange Revolution” as a foreign-backed “NGO revolution,” Russia has also been quietly building its own network of Russia-friendly NGOs in Ukraine since 2004.
Ukrainians also talk of an otkat ekonomiya (“kickback economy”), in which Russian money percolates throughout the Ukrainian elite.
The European Neighborhood Policy is worthy enough, but it does not address the pressing concerns about maintaining and securing Ukraine’s independence.
Many member states will worry about leaping straight to the contentious issue of ultimate membership for Ukraine, but the EU already recognizes Ukraine’s theoretical right to join once it has met the Copenhagen criteria; and it cannot be beyond EU leaders’ verbal dexterity to play up the prospect.
What Ukraine would value most is a real sense that it is being treated distinctly in its own right.
The key words are “association” and “partnership,” in whatever order or combination.
The EU has more scope for short-term measures, and should develop a multi-dimensional solidarity strategy as a signal to both Ukraine and Russia.
For example, the EU’s foreign ministers should invite their Ukrainian counterpart to give a briefing on Ukraine-Russia relations at their next meeting.
Ukraine should be offered a road map for visa-free travel.
The new EU-Ukraine agreement should include a beefed-up solidarity clause, building on the 1994 Budapest Memorandum, whereby the EU would consult and assist Ukraine in case of challenges to its territorial integrity and sovereignty.
And the EU should back Ukraine if it insists that the Russian Black Sea Fleet leaves on schedule in 2017.
The EU should also launch a comprehensive study of all aspects of Europe’s reliance on Russian energy supplies, including transit, energy security and conservation, supply diversification, and the impact of “bypass” pipelines like Nord Stream and South Stream.
It should consider linking the opening of the Nord Stream pipeline, which would allow Russia to cut off gas to Poland and Ukraine while maintaining deliveries to Germany, to the opening of the proposed “White Stream” pipeline to bring gas from Azerbaijan directly to Ukraine via Georgia, bypassing Russia.
The EU could even play a part in keeping the 2012 European Championship football finals on track.
The decision to appoint Ukraine and Poland as co-hosts was a powerful symbol of European unity across the current EU border (Poland is a member, Ukraine is not).
UEFA is unhappy with Ukraine’s progress in building the necessary infrastructure, but Ukraine should be given time to get its act together.
Where appropriate, the EU should extend these measures to Moldova, which is now calling Ukraine a “strategic shelter.”
Ukraine faces a crucial presidential election in 2009 or 2010 (and Moldova will hold elections in March 2009).
After getting its fingers badly burned at the last election in 2004, Russia is clearly tempted to intervene again.
The “Russian factor” will strongly influence the campaign.
Greater Western engagement is needed to ensure that the “Europe factor” is equally prominent.
Europe, Italian-Style
MILAN – Last summer, after two years of growing uncertainty, systemic risk in the eurozone finally began to wane, as conditional commitments came together.
Italy and Spain offered credible fiscal and growth-oriented reforms, and the European Central Bank, with Germany’s backing, promised intervention as needed to stabilize the banking sector and sovereign-debt markets.
Unfortunately, that trend may be reversing.
Growth in the eurozone has turned negative overall, significantly so in the south.
Unemployment stands at about 12% in Italy, and 38% for the young.
Likewise, Spain’s unemployment rate is above 25% (and 55% for young people).
And French economic indicators are slipping quickly.
Meanwhile, the outcome of Italy’s election will most likely leave the country – the eurozone’s third-largest economy and the world’s third-largest sovereign-debt market – without a stable government.
As a result, it will be difficult to sustain a reform program that is vigorous enough to satisfy the ECB and the eurozone core.
Surprisingly (to me, at least), markets have reacted stoically.
Interest-rate spreads on Italian sovereign debt have widened, but not sharply.
External investors may not be rushing for the exits, but they are not piling in, either.
It feels like wait and see at this point.
Italy is the only debt-distressed eurozone country in which the negative competitiveness trends (productivity relative to income) have not reversed direction in the post-crisis period.
With a debt/GDP ratio of more than 120%, Italy lacks the flexibility to implement fiscal stimulus to bridge the transition to higher growth.
Outgoing Prime Minister Mario Monti’s government accomplished a major pension reform, cut public spending, and raised taxes.
But Italian voters overwhelmingly rejected his approach, in part because austerity did not appear to extend to elected officials or to major parts of the large ecosystem of departments, enterprises, and unions that surround government.
Systemic reform of Italy’s government may be a prerequisite to achieving consensus on a path to fiscal health and growth.
But this is not the ideal moment for a timeout to do that.
The real issues, in any case, are distributional and reflect a shortage of policy instruments.
For example, tax evasion is pervasive, so increases disproportionately hit those who already pay, fueling a widespread perception of unfairness.
Monti attempted to address this, but moving from the current equilibrium to a better one, in which tax evasion is the exception rather than the norm, is a long-term project.
As a result, the burden of the crisis is being borne mainly by the unemployed and the young.
Given Italy’s adverse competitiveness position, devaluation of the currency, were it possible, would not be a long-term substitute for productivity-boosting reforms, but it certainly would help in at least three ways.
First, devaluation would distribute the costs of rebalancing more evenly, making it easier to clear the burden-sharing hurdle to deeper reforms.
Second, floating exchange rates imply that devaluation is an automatic adjustment mechanism, so it occurs without the appearance of an explicit burden-sharing choice and the accompanying potential for political gridlock.
Finally, as is true in many of the advanced countries, weak demand constrains Italy’s short- and medium-term growth.
This means that, unless government spending provides the demand bridge, the large non-tradable part of the economy cannot drive growth and job creation.
But Italy’s government, like that of the United States and other fiscally constrained countries, is subtracting effective demand.
Some parts of the global economy are growing.
So a negative domestic demand shock need not completely constrain the roughly one-third of the Italian economy that is tradable – and thus could grow and generate employment if the competiveness parameters were reset quickly.
Obviously, in the context of the eurozone, this is not an option.
The alternative is muted wage and income growth shared across the income spectrum, combined with productivity-enhancing measures.
This was a component of Germany’s successful reform program of a decade ago, which included labor-market and social-security reforms, the combined effect of which was to restore competitiveness and growth potential in the tradable sector, while improving productivity on the non-tradable side.
This process does work in the long run.
But Germany’s reforms took place in a much healthier global economy, and, when the initial divergences are large, it may take too long to restore growth.
Some observers have argued for a higher stable inflation target in the eurozone to facilitate the “relative deflation” process in countries that need it, and to put the “zero bound” on interest rates further away, thereby enhancing the potential impact of monetary policy.
But inflation has its own adverse distributional and efficiency implications, and would be fiercely resisted.
It is hard to see how this ends well.
The alternatives seem to be a lengthy and difficult return to growth and employment, or declining enthusiasm for the common currency.
Beyond that, the main lessons concern design flaws.
In the eurozone, for the most part, national governments separately choose investment levels in infrastructure, education, research, and technology.
Their labor-market, social-welfare, and competition policies vary.
All affect the trajectories of growth, income, and employment.
So, even if the eurozone’s structure is modified to achieve the desired level of fiscal discipline and balance, in its current highly decentralized structure, countries will continue to diverge in other important respects.
Divergence in policies and convergence in outcomes is not a realistic expectation.
Adjustment mechanisms are needed, but external devaluation and inflation are not available, while labor mobility is partial at best.
Perhaps one could interpret the common currency as “forcing” eventual convergence in policies.
But, realistically, loss of support for the euro might come first, precisely because the adjustment mechanisms are so limited.
No one doubts the depth of Europe’s official long-run commitment to integration.
The huge design challenge is to find the right level of mandatory policy convergence – one that works economically and is acceptable politically.
Italy’s Return to Political Paralysis
For more than a decade, Italy has been ruled through a bipolar political system.
Voters could choose between a left-wing coalition and a right-wing coalition.
Those disappointed by the incumbent government could vote for the opposition.
And the existence of a viable alternative has had a disciplining effect on politicians: not by chance, Silvio Berlusconi’s government served its entire electoral term.
This is in stark contrast to the Italian political tradition.
Throughout the post-war era, until the early 1990’s, Italian governments survived less than a year on average.
Voters were unable to choose between the incumbent and the opposition, because the same centrist parties were in office all the time.
Government crises were merely an opportunity to reshuffle key cabinet positions or change the party faction of the prime minister.
However, there is now a high risk that Italian politicians will return to their old habits.
This may seem strange, given the antagonism between Romano Prodi and Silvio Berlusconi during the electoral campaign.
But that antagonism reflected the personalization of politics achieved by Berlusconi, as well as an institutional feature that he abolished.
One of the last acts of his government was to replace the majoritarian electoral system, introduced in 1993, with proportional rule.
The new electoral system changes the politicians’ incentives, and could induce a return to shifting coalitions and unstable governments.
This outcome would be accelerated if, as is likely, Berlusconi himself were to distance himself from politics in the coming electoral term.
Under the new electoral rules, seats are allotted to parties in proportion to votes, but a special provision induces parties to forge pre-electoral agreements: the pre-electoral coalition that wins the most votes receives a seat premium that ensures a comfortable majority in the Chamber of Deputies (the lower house).
Unfortunately, the new law – hastily enacted at the last minute of the previous legislature – has a silly formulation that does not guarantee an equally safe majority in the Senate.
As a result, Prodi has won a large margin in the lower house, but he has only a handful of extra votes in the Senate.
Given Italy’s almost perfect bicameralism, this means that the new government will find it very difficult to function even under ideal circumstances.
But Italy’s circumstances are far from ideal.
The new government will face formidable challenges.
The budget deficit is again out of control, and well over the 3%-of-GDP Maastricht ceiling.
The aging population is straining the public pension and healthcare systems beyond sustainability.
The manufacturing sector, squeezed by stagnating productivity and competition from China and other low-cost producers, is no longer competitive.
Many services remain inefficient, because they are either in the domain of an archaic public administration or enjoy monopoly rents created by regulatory barriers.
Inaction is simply not an option for the new government.
And yet agreement on virtually everything of significance will be very difficult to reach.
Prodi’s left-wing l’Unione coalition comprises a hodge-podge of parties spread all over the political spectrum, ranging from staunch communists to former liberals (with communists stronger than in the previous election).
Under the new electoral system, all of these parties will be competing with each other for the same votes, and each one will seek to protect its own constituency or claim credit for whatever is accomplished.
Given l’Unione’s razor-thin majority in the upper house, the most likely outcome is paralysis.
As if this was not enough, Prodi will face another problem.
Just before stepping down, Berlusconi’s government also approved a constitutional reform that, among other things, provides a logical complement to the new electoral system.
In particular, the new constitution strengthens the powers of the prime minister and enables him to call early elections in the event of a government crisis.
This provision would be an important weapon in Prodi’s hands.
But the left-wing parties that support him have already announced that they will block the constitutional reform, which they opposed for other reasons.
Hence, Prodi will almost certainly be deprived of his best tool for imposing discipline on his unruly coalition.
What is likely to happen when a large and heterogeneous coalition with barely a parliamentary majority must govern in an increasingly dire economic situation?
The answer is almost obvious: either the government will collapse, or it will seek to poach supporters from opposition parties.
Which of these two outcomes will materialize also depends on what happens inside Berlusconi’s camp, and that is less easy to predict.
But, either way, the bipolar political system to which Italians were getting accustomed is unlikely to survive unscathed.
The left-right divide will become easier for opportunistic politicians to cross, and perhaps a new centrist party will emerge.
As a result, Italy will soon return to its older tradition of short-lived governments and unstable coalitions.
Of course, Prodi could preserve a bipolar political system – and thus increase the longevity of his government – by either restoring a majoritarian electoral system or pressing ahead with other constitutional amendments designed to preserve government and coalition stability.
But forcing such changes on his coalition partners could be as difficult for Prodi as tackling Italy’s daunting economic problems.
It’s Not Just Russia’s Fault
MOSCOW: Today, many people see Russia as undeserving of Western help, due to the chaos, corruption and defaults of the Yeltsin years, but also because of concerns about authoritarianism and human rights abuses under President Putin.
Russia is also thought to no longer need help because its economy and public finances are much improved, thanks to rising oil prices and a GDP growing at 6.5% per annum.
Indeed, Russia is running fiscal and current account surpluses of 2% and 17% of GDP respectively.
Despite being up to its neck in debt - its obligations equal 75% of GDP - Russia appears able to pay its creditors.
But Russia is seeking further relief from the so-called "Paris Club" (made up of western governments) on nearly $40 billion of inherited Soviet debt to those governments.
Prime Minister Mikhail Kasyanov, indeed, journeys to Berlin next week in search of support for an interim deal now under negotiation.
Russia's case for relief is strong.
Even stronger is the case for Western governments - above all, Germany, which holds nearly half Russia's Paris Club debt – to ask taxpayers to forgo part of these claims.
Loans from western governments to the Soviet Union are at issue.
Soviet central planning could not secure a proper return on those loans - and indeed on all investment, which was a primary reason for the USSR’s collapse.
Paris Club loans were made by government export credit agencies, which underwrite foreign purchases of their countries’ capital goods and other products.
As the OECD never tires of pointing out, this is a form of government subsidy to domestic industry more than to the recipient country.
Debt relief is being raised simultaneously with a growing debate about “Who lost Russia?”in western capitals.
Whom do I think responsible?
Western governments acting as the Paris Club in the autumn of 1991 must share the blame.
As the Soviet Union crumbled and Yeltsin’s new, independent Russian government attempted radical reform, the G7 countries’ sent a bunch of deputy finance ministers to Moscow to insist that Soviet era debts be honored.
To show that the new Russia stood for civilized values, Yeltsin refused to repudiate the country’s external obligations as the Bolsheviks had in 1917.
While unilateral debt repudiation by Russia in 1991-92 would have been wrong, revolutionary conditions in Russia called for far-sighted debt forgiveness by the West.
Indeed, Poland received just that in 1991.
No such favor was shown Russia, which was reduced to economic/political meltdown by year’s end.
It was argued - then as now - that debt relief depended on Russia implementing (IMF-approved) economic reform programs aimed at restoring creditworthiness.
Russia’s government under Yegor Gaidar launched such a program in January 1992.
By the time the IMF approved anything, however, Gaidar had been ousted by a fierce political reaction.
Only in 1996, was the scale of Russia’s inherited Soviet debt burden acknowledged in the form of 25-year rescheduling agreements concluded with the Paris and London clubs of government and commercial creditors.
The collapse of Russia’s GDP in dollar terms (from about $430 billion to less than $130 billion) as a result of 1998's ruble devaluation, however, left Russia unable to make even these reduced payments.
In 1999, debt service payments reached about 80% of planned tax revenue.
Just as the oil price fall sparked by 1997's ‘Asian’ crisis contributed to Russia’s default and devaluation of 1998, so soaring prices for oil and other commodities restored Russia’s debt service capacity this year.
But a downturn in prices is only a matter of time (indeed, for many non-oil commodities, it has already happened).
Instead of shortsightedly focusing on Russia’s seeming current ability to pay, the West should commit itself to fostering a supportive environment for Putin’s reform drive.
Will Russia’s official creditors be less blinkered than in 1991-92?
There is no doubt that Putin means business on structural reform.
His political resources are far greater than Yeltsin ever had.
Indeed, Putin has taken advantage of his legitimacy, popularity, and working majority in the State Duma (federal parliament) to force through radical tax reform and a continued tight fiscal policy in the 2001 budget.
New stability and confidence are underpinning buoyant investment and (amounting to the same thing) reducing capital flight.
Mountains remain to be climbed.
Discipline and restructuring must be imposed on the so called natural monopolies: railways, power utilities and, above all, Gazprom - the country’s largest company, and in which there is overwhelming evidence of theft by managers.
Effective corporate governance must be required by law, and those laws enforced.
Corruption must be combated by cutting red tape and overhauling the judiciary.
A land market must be created virtually from scratch.
The same goes for the banking system, which today consists of little besides an inefficient, state-owned virtual monopolist.
Russia’s Paris Club creditors are right in seeking a new IMF arrangement to keep Putin on track and create the discipline of monitored performance.
It is also right that Paris Club creditors receive meaningful repayment.
But they cannot expect repayment in full and on time as Russia is doing for its ‘own’ - ie, post-Soviet - debt.
The London Club (banks and investors holding $32 billion of commercial Soviet-era debt) wrote off 36.5% of this debt earlier this year, and rescheduled the remainder over thirty years.
Germany has set its face against forgiving any debt, but real relief can still be given by a comprehensive long-term rescheduling.
A fair deal is one that won’t strangle Russia’s prospects for sustaining economic recovery.
For without continuing growth there is little hope for implementing the long-term reforms necessary to complete Russia’s escape from the Soviet system and so allow its people the chance to live normal, decent lives.
Ivy League Investors
Yale University, where I teach, has entrusted its endowment portfolio to one man, David Swensen, for over 20 years.
During this period, the portfolio has grown from just over $1 billion to $18 billion – an average return of more than 16% a year, which appears to be the highest of any major university.
And it shows no signs of diminishing: in the latest fiscal year ending in June, the return was 22.9%.
Presidents of Yale have come and gone, but Swensen stays on.
He has done more for the university than any president, or anyone else.
In a university, ideas count more than money, but $18 billion dollars can create an environment for many new ideas.
With 11,500 students, that is more than $1.5 million per student (not including the university’s buildings and art collection, each worth many billions of dollars more).
How did this happen?
How did Swensen make so much money?
Everyone is wondering – not least those of us at Yale.
After all, many people here have been teaching the “efficient markets hypothesis” that financial markets around the world have become so competitive that it is impossible to make more than a normal return from investing.
Anyone who beats the market must simply be lucky.
Studies seem to confirm this.
For example, a 2004 study by Brad Barber and Terrance Odean of the University of California and Yi-Tsung Lee and Yiu-Jane Liu at National Chengchi University acquired trade-by-trade data on individual day traders on the Taiwan Stock Exchange.
The study found that only the top 1% of day traders made a profit – after deducting trading costs – in two consecutive six-month periods, and the median profit was hardly worth the effort: only about US$4000.
It is easy to conclude that there is just no point in even trying to beat the market.
But then one remembers people like Swensen.
Can his consistent performance really be attributed to luck?
Robert Kiyosaki, author of the Rich Dad, Poor Dad series of popular investment books, bases his books’ titles and themes on a comparison of his own highly-educated father with his friend’s father, an eighth-grade dropout.
According to Kiyosaki, his poor but scholarly dad tended to be pessimistic about one’s ability to achieve anything in the real world, so he discouraged his son from even trying.
By contrast, the friend’s dad relished trying to achieve something big.
Is it just a coincidence that he was rich?
Kiyosaki may try too hard to be inspirational, but I often think of him when I hear finance professors opine on the efficiency of markets and the futility of making money by trading in them.
Maybe many academics find it difficult to take the initiative to achieve in the real world – I have yet to meet another professor who has mentioned having read Kiyosaki.
But Swensen is an academic, with a Ph.D. in economics.
He is surrounded by academics.
Somehow, all this talk about efficient markets has not discouraged him from trying, and succeeding.
There seems to be a pattern.
Two similar universities, Harvard and Princeton, have had nearly the same success.
The Harvard endowment, under Jack Meyer, earned a 15.2% average annual return over the last ten years, compared to Swensen’s 17.2% average, while the Princeton endowment, under Andrew Golden, earned an average of 15.6% per year.
In fact, Golden worked under Swensen at Yale from 1988 until 1993.
Swensen has written two books about investing, one for professionals and one for the general public.
I did not come away from reading them with a feeling that I know how to do what he did.
But a couple of things stand out.
One is his long-term focus.
Yale lets Swensen invest for the very long term, and does not bother him about quarterly performance.
Maybe this allows him to focus more on long-term fundamentals – and thus to make investments that may not perform well in the short run.
But, in fact, he has done consistently well in both the short term and the long term.
Part of the reason for Swensen’s success is “absolute return,” a term – now widely quoted in the investment community – that he coined for unusual investment strategies involving such things as merger arbitrage and distressed securities.
He also has invested in non-traditional asset classes, including real estate, oil, timber, private equity, and venture capital and buyout firms.
These assets are generally not followed by multiple analysts, and are not easily understood, giving him a greater advantage in applying his intellectual skills and the skills of others around him.
In these senses, Swensen is completely different from day traders, who are both investing for the short term and trying to beat the most crowded market – the market for exchange-listed securities.
But I also think that the phenomenal success of Swensen and others like him reflects the environment that Kiyosaki criticizes.
The problem is a defeatist attitude, not scholarship.
When an analytical mind, a mind that is trained to search rigorously for the truth and as part of a community of such people is set free from self-doubt, it can do amazing things.
Knowing David Swensen, I can attest that he is not a lonely day trader trying to beat the market.
He is a good listener, is supportive of people he trusts, and is surrounded by a lot of good people with a wide array of skills.
And he is certainly not a defeatist.
I Want My Al Jazeera
NEW YORK – Al Jazeera correspondent Ayman Mohyeldin is on a victory lap in the United States – or rather, Al Jazeera is sending him on its own victory lap.
After all, Mohyeldin is a modest guy, despite being one of Al Jazeera’s best-known reporters – and clearly a rising international media star.
Al Jazeera has good reason to gloat: it has new cachet in the US after millions of Americans, hungry for on-the-ground reporting from Egypt, turned to its online live stream and Mohyeldin’s coverage from Cairo’s Tahrir Square.
So now Mohyeldin is in the US for three weeks of media events – there will even be a GQ photo shoot – having become well known in a country where viewers are essentially prevented from seeing his station.
The network has been targeted by the US government since 2003, when former Vice President Dick Cheney and former Defense Secretary Donald Rumsfeld described it as tantamount to an arm of Al Qaeda.
Two of its reporters were later killed in Baghdad when a US tank fired on the Hotel Palestine, where, according to US officials, it was believed that a spotter directing fire at US troops was located.
But, because Al Jazeera was known to have based its team in the hotel, the channel and others voiced suspicions that the channel’s reporters had been deliberately targeted.
And, to this day, Al Jazeera, which, together with BBC News, has become one of the premier global outlets for serious television news, is virtually impossible to find on televisions in the US.
The country’s major cable and satellite companies refuse to carry it – leaving it with US viewers only in Washington, DC and parts of Ohio and Vermont – despite huge public demand.
So Al Jazeera is sending its news team around the US in an effort to “mainstream” the faces of this once-demonized network.
And Mohyeldin can sound like Robert F. Kennedy: when the cry rose up from Tahrir Square hailing Mubarak’s abdication, he commented, “One man stepped down and eighty million people stepped up.”
The station’s US push could hardly be more necessary – to Americans.
By being denied the right to watch Al Jazeera, Americans are being kept in a bubble, sealed off from the images and narratives that inform the rest of the world.
Consider the recent scandal surrounding atrocity photos taken by US soldiers in Afghanistan, which are now available on news outlets, including Al Jazeera, around the globe.
In America, there have been brief summaries of the fact that Der Spiegel has run the story.
But the images themselves – even redacted to shield the identities of the victims – have not penetrated the US media stream.
And the images are so extraordinarily shocking that failing to show them – along with graphic images of the bombardment of children in Gaza, say, or exit interviews with survivors of Guantánamo – keeps Americans from understanding events that may be as traumatic to others as the trauma of the terrorist attacks of September 11, 2001.
For example, the leading US media outlets, including The New York Times, have not seen fit to mention that one of the photos shows a US soldier holding the head of a dead Afghan civilian as though it were a hunting trophy.
So, for America’s sake, I hope that Al Jazeera penetrates the US media market.
Unless Americans see the images and narratives that shape how others see us, the US will not be able to overcome its reputation as the world’s half-blind bully.
Indeed, Egyptians are in some ways now better informed than Americans (and, as Thomas Jefferson often repeated, liberty is not possible without an informed citizenry).
Egypt has 30 newspapers and more than 200 television channels.
America’s newspapers are dying, foreign news coverage has been cut to three or four minutes, at most, at the end of one or two evening newscasts, and most of its TV channels are taken up with reality shows.
I met Mohyeldin before a recent public appearance in Manhattan.
His analysis of the Egyptian revolution, and others in the region, is that the kind of globalized media to which Americans do not have full access created the conditions in which people could rise up to claim democracy. He points out that, “People are aware of their rights from the Internet, from satellite TV – people are watching movies and reading bloggers.
This was a revolution of awareness, based on access to fast-traveling information.
The farmers, the peasants in Tahrir Square, were aware of their rights.”
Americans have a hunger for international news; it is a myth that we can’t be bothered with the outside world.
Maybe Americans will rise up and threaten to boycott their cable and satellite providers unless we get our Al Jazeera – and other carriers of international news.
We would then come one step closer to being part of the larger world – a world that, otherwise, will eventually simply leave us behind.
Europe’s Red-Tape Economy
WARSAW – Over the past 60 years, the project of European integration has confronted many challenges: post-war economic hardships, the heavy yoke of communism, and the uncertain footing of the post-Cold War world.
But, while it has overcome them all, with the European Union now comprising 28 states, many of which now share a common currency, the EU faces another, equally important challenge – that of reducing the burden of regulation weighing down its major industries.
European business is bound up in rules and regulations, many of which originate from unelected officials in Brussels, whose laudable intention to harmonize business conditions across the EU is instead sapping the continent’s commercial creativity and dynamism.
As a result, economic performance has become sluggish as competitiveness declines and unemployment, especially among young people, remains stubbornly high.
EU institutions issue thousands of regulations, directives, and decisions every year.
In 2012, 1,799 laws were enacted; in 2011, there were 2,062.
Some laws, enacted long ago for a European Community of six founding members, are still on the books.
It is this thicket of red tape that hampers business and deters entrepreneurs.
One small but important example of this is the average cost of setting up a business, which is €158 ($212) in Canada, €664 in the US, and €2,285 in the EU (and as much as €4,141 in Italy).
The sheer cost of getting started is as big a deterrent as one can imagine for a young entrepreneur trying to escape the bounds of unemployment.
European industry is afflicted by similar problems.
The refining and petrochemical sector supplies the EU with a large proportion of its fuel, and is also a major source of tax revenue. The downstream sector, together with fuels distribution, contributes a total of around €240 billion annually to treasury coffers.
By any reckoning, this is an important industry that should not suffer from overregulation.
But, while the industry faces the threat of inflated gas prices from around the world, its concerns closer to home are the abundance of EU and national energy regulations.
Excessive law-making has pushed up prices and pushed out investors, not only from refining and petrochemicals, but from all energy-intensive sectors, including aluminum, steel, and cement. In some EU states, electricity prices for industrial customers are twice what their North American counterparts pay.
Overly complex climate regulations, political resistance to shale-gas development, and energy policies that favor expensive, ineffective technologies are largely to blame.
Some policymakers in Brussels are gradually beginning to recognize that lower energy prices might be good for the economy.
But most still believe that protecting society and the environment from the wider effects of the energy business should take priority over the industry’s development and broader economic growth.
They assume that robust recovery and job creation will emerge simply of their own accord; as a result, rather than enjoying sustainable growth, Europe is heading toward a model for which a new term – “sustainable stagnation” – might be appropriate.
This approach is a colossal waste of money.
As Bjørn Lomborg of the Copenhagen Consensus Center notes, “The European Union will pay $250 billion for its current climate policies each and every year for 87 years.
For almost $20 trillion, temperatures by the end of the century will have been reduced by a negligible 0.05ºC.”
By contrast, the EU is allocating a paltry €8 billion over seven years to alleviate youth unemployment, which currently runs close to 60% in some member states.
But Europe’s economy will not grow, and a sufficient number of jobs will not be created, if such vital industries as aluminum, steel, fuels, plastics, and cement are not allowed to thrive.
This outcome would be bad not only for the economy, but also for the environment, because these industries will simply continue relocating to markets with far worse environmental records.
The problem is not a lack of investment capital.
In 2011, Europe’s publicly traded firms had an estimated €750 billion in cash sitting on their balance sheets, equivalent to twice the decline in private-sector investment in the EU from 2007 to 2011.
But, despite the dire state of public finances, the desperate need for growth and jobs, and historically low interest rates, the authorities are doing nothing to encourage investment.
Europe’s governments urgently need to undertake a root-and-branch review of the regulatory environment, especially in those industries that have the greatest impact on the wider economy.
And, after six decades of meddling, EU policymakers should step back and consider which restrictions have become harmful or irrelevant, and how better to support the entrepreneurs and industries of the future.
Much of the groundwork has already been laid by the OECD, in several guiding principles: economic goals, especially growth and competitiveness, should be as important as social and environmental goals; a regulation’s benefits must justify its costs; regulations should be reviewed frequently, and a cost-benefit analysis of all the alternatives – including simply maintaining the status quo – should always be carried out.
With 7% of the global population, 25% of global GDP, and 50% of global welfare expenditure, the EU has created a model that inspires millions of people to dream of emigrating to Europe.
However, the EU’s historic emphasis on achieving its social goals, to the exclusion of industry’s long-term needs, is undermining the entire European project.
The EU cannot be the inclusive, thriving, and democratic home that millions dream of if red tape is allowed to strangle the industries that are crucial to European prosperity.
Inflation, the Fed, and the Big Picture
CAMBRIDGE – Inflation – its causes and its connection to monetary policy and financial crises – was the theme of this year’s international conference of central bankers and academics in Jackson Hole, Wyoming.
But, while policymakers’ desire to be prepared for potential future risks to price stability is understandable, they did not place these concerns in the context of recent inflation developments at the global level – or within historical perspective.
For the 189 countries for which data are available, median inflation for 2015 is running just below 2%, slightly lower than in 2014 and, in most cases, below the International Monetary Fund’s projections in its April World Economic Outlook.
As the figure below shows, inflation in nearly half of all countries (advanced and emerging, large and small) is now at or below 2% (which is how most central bankers define price stability).
Most of the other half are not doing badly, either.
In the period following the oil shocks of the 1970s until the early 1980s, almost two-thirds of the countries recorded inflation rates above 10%.
According to the latest data, which runs through July or August for most countries, there are “only” 14 cases of high inflation (the red line in the figure).
Venezuela (which has not published official inflation statistics this year) and Argentina (which has not released reliable inflation data for several years) figure prominently in this group.
Iran, Russia, Syria, Ukraine, and a handful of African countries comprise the rest.
The share of countries recording outright deflation in consumer prices (the green line) is higher in 2015 than that of countries experiencing double-digit inflation (7% of the total).
Whatever nasty surprises may lurk in the future, the global inflation environment is the tamest since the early 1960s.
Indeed, the risk for the world economy is actually tilted toward deflation for the 23 advanced economies in the sample, even eight years after the onset of the global financial crisis.
For this group, the median inflation rate is 0.2% – the lowest since 1933.
The only advanced economy with an inflation rate above 2% is Iceland (where the latest 12-month reading is 2.2%).
While we do not know what might have happened were policies different, one can easily imagine that, absent quantitative easing in the United States, Europe, and Japan, those economies would have been mired in a deflationary post-crisis landscape akin to that of the 1930s.
Early in that terrible decade, deflation became a reality for nearly all countries and for all of the advanced economies.
In the last two years, at least six of the advanced economies – and as many as eight – have been coping with deflation.
Falling prices mean a rise in the real value of existing debts and an increase in the debt-service burden, owing to higher real interest rates.
As a result, defaults, bankruptcies, and economic decline become more likely, putting further downward pressures on prices.
Irving Fisher’s prescient warning in 1933 about such a debt-deflation spiral resonates strongly today, given that public and private debt levels are at or near historic highs in many countries.
Especially instructive is the 2.2% price decline in Greece for the 12 months ending in July – the most severe example of ongoing deflation in the advanced countries and counterproductive to an orderly solution to the country’s problems.
Median inflation rates for emerging-market and developing economies, which were in double digits through the mid-1990s, are now around 2.5% and falling.
The sharp declines in oil and commodity prices during the latest supercycle have helped mitigate inflationary pressures, while the generalized slowdown in economic activity in the emerging world may have contributed as well.
But it is too early to conclude that inflation is a problem of the past, because other external factors are working in the opposite direction.
As Rodrigo Vergara, Governor of the Central Bank of Chile, observed in his prepared remarks at Jackson Hole, large currency depreciations in many emerging markets (most notably some oil and commodity producers) since the spring of 2013 have been associated with a rise in inflationary pressures in the face of wider output gaps.
The analysis presented by Gita Gopinath, which establishes a connection between the price pass-through to prices from exchange-rate changes and the currency in which trade is invoiced, speaks plainly to this issue.
Given that most emerging-market countries’ trade is conducted in dollars, currency depreciation should push up import prices almost one for one.
At the end of the day, the US Federal Reserve will base its interest-rate decisions primarily on domestic considerations.
While there is more than the usual degree of uncertainty regarding the magnitude of America’s output gap since the financial crisis, there is comparatively less ambiguity now that domestic inflation is subdued.
The rest of the world shares that benign inflation environment.
As the Fed prepares for its September meeting, its policymakers would do well not to ignore what was overlooked in Jackson Hole: the need to place domestic trends in global and historical context.
The Nigerian Schoolgirls Near You
CAMBRIDGE – The abduction of hundreds of young Nigerian girls by the Islamic militia Boko Haram has been front-page news for weeks.
The global public is outraged by the group’s violation of fundamental principles and sensibilities: the prohibition of slavery, the protection of personal integrity, the obligation to protect children, and the right of adolescent girls to obtain an education and choose when and whom to marry.
Yet the presence of young Nigerian prostitutes on the streets of Western cities barely elicits a reaction.
Indeed, most people simply avert their eyes.
And the media barely mention the issue.
Each year, thousands of Nigerian girls are trapped by fanatical and mercenary thugs and forced into prostitution, often in the same wealthy countries that are now magnanimously offering help to Nigeria’s government.
Six of every ten people trafficked to the West are Nigerian, and at least 60% of trafficked sex workers in Italy and Belgium are Nigerian girls.
Across Europe, North America, Russia, and the Middle East, these young women are visible to all who bother to look – and have been for decades.
Why is no one outraged?
The inconsistency is rooted in the girls’ circumstances: the schoolgirls are innocent victims crying out for protection, while the child sex workers are illegal immigrants, slated for deportation as soon as they are caught.
But they are the same girls.
They all come from impoverished, conservative communities, where girls’ prospects are bleak, owing to the prevalence of child marriage, endemic domestic violence, a lack of educational opportunities, and pervasive unemployment.
In fact, according to one Nigerian survey, Nigeria has some of the world’s highest rates of early marriage, with 48% of girls married by 15, and 78% by 18, in the Northwest region of the country. Moreover, 81% of married women admitted to being subjected to verbal or physical abuse by their husbands.
Given high rates of adolescent marriage, it should come as no surprise that the net secondary-school enrollment rate for Nigerian girls in 2008-2009 was only 22%, compared to 29% for boys.
While the specter of unemployment haunts all Nigerians, with only 10% of the nearly six million young people who enter the labor market each year managing to secure a formal-sector job, the problem is much worse for women, who account for only one-third of those who find a formal job.
Most of the 54 million Nigerian girls and women who live and work in rural areas are forced into insecure employment in the informal economy.
Nigeria’s radical gender inequality reflects a widespread tolerance of discrimination against girls, which facilitates the brutal actions of extremist groups like Boko Haram and creates fertile ground for traffickers.
In such dire circumstances, it is easy to lure girls with false prospects of attractive jobs abroad, often in bars, restaurants, and clubs.
It is a short step from recruitment to a life of extreme exploitation.
As a result, despite the valiant efforts of human-rights activists, at least 200 Nigerian girls are trafficked to Russia monthly to work as prostitutes, according to Nigeria’s ambassador to Russia, Asam Asam.
The United Nations Interregional Crime and Justice Research Institute reports that , there are at least 10,000 – and perhaps as many as 20,000 – Nigerian sex workers in Italy, most of them trafficked and many of them young teenagers.
As if that were not enough, to ensure that the girls do not run away or report their abusers, they may be subjected to so-called juju rituals, during which they are sworn to secrecy under pain of severe sanctions.
Though law-enforcement, anti-trafficking, and child-protection agencies have long known about these abusive practices, solutions – such as employment schemes, legal immigration status, and improved health-care access – remain absent.
National and global leaders are not working to break the cycle of violence.
The problem is not invisible; people simply do not want to see it.
Political leaders and law-enforcement authorities in the West and elsewhere know how Nigerian teenage prostitutes ended up in their cities, but choose to do nothing to help them – or, worse, punish them.
Ideally, Boko Haram’s abduction of the schoolgirls would galvanize worldwide support for efforts to protect the rights of African adolescent girls, just as the Pakistani Taliban’s shooting of Malala Yousafzai helped to combat complacency regarding education for girls in South Asia.
The question is whether the global public will demand action to protect young Nigerian girls’ basic rights and freedoms, or merely continue to condemn distant brutality while acquiescing in it on a nearby street corner.
Jailing the Messengers
WASHINGTON, DC – As China’s clout in global affairs grows, the world is watching more closely than ever to see what kind of great power it will become.
Next month, when jailed Chinese dissident Liu Xiaobo receives the Nobel Peace Prize, attention will be drawn away from the more encouraging aspects of what China’s leaders like to call their country’s “rise,” and toward their persistent mistreatment of its most outspoken citizens.
Already, Chinese officials’ ham-handed response to the award has undercut their cherished – and lavishly financed – mission to project China’s “soft power” around the globe.
Liu won the prize because his lifelong commitment to political activism makes him exceptional.
But we ought to pay equally close attention to another jailed Chinese activist, one whose plight at the hands of China’s justice system is just as troubling as Liu’s – and far more revealing of the boundaries of permissible dissent.
A Beijing court recently convicted Zhao Lianhai, a 38-year-old former advertising salesman, of “using a popular social issue to incite a mob…to seriously disrupt social order,” and sentenced him to two and a half years in prison.
Unlike Liu, Zhao had not called for change in China’s political system.
Rather, he had spent two years rallying around the almost boringly uncontroversial notion that his family and many others deserve justice from the Sanlu Dairy Group, a company that gave their children kidney stones by illegally doctoring its milk powder with the industrial chemical melamine.
Zhao did not set out to become an activist.
His three-year-old son was lucky to recover quickly after he and 300,000 other children fell ill after drinking the adulterated milk in 2008.
But some of the children urinated blood, others have suffered long-term health problems, and at least six died. Zhao, who once worked for the government’s own product-safety watchdog and lived in the capital, saw an opportunity to help less well-positioned families.
He set up Web sites to help them exchange medical information, attract media attention, and file lawsuits demanding compensation.
Initially, the campaign seemed to succeed.
A massive recall of Chinese milk ensued, and the Sanlu Dairy Group collapsed.
Two of Sanlu’s suppliers were executed, and its chairwoman was sentenced to life in prison.
China’s National People’s Congress enacted a new food-safety law.
But, after Zhao and other parents protested that the government’s compensation plan was inadequate to cover the cost of their children’s ongoing medical care, they began to receive threats from local police.
Zhao’s Web sites were repeatedly shut down, and the group’s lawyers received phone calls from authorities urging them to drop the case.
In late 2009, Zhao was officially arrested; he has been in police custody ever since.
Zhao’s campaign had been based on the widespread belief in China that while local officials or individual businesspeople may engage in venal or criminal activities, the central government, once informed of the truth, will see to it that justice is done.
After all, the same Chinese leaders who reject Liu’s calls for political reform argue that what Chinese citizens really want are not “Western-style” rights, but basic necessities – clean water, economic opportunities, safe food – that allow their families to prosper, and which China’s own homegrown political system can adequately protect.
But Zhao’s conviction, like the mistreatment of other Chinese whistleblowers, sends the message that when faced with a perceived threat to social stability, China’s legal institutions are not up to the task of providing basic protections to its citizens.
A discussion thread on the case on Tianya, a popular Chinese Internet portal, was soon flooded with comments expressing bafflement and outrage at the verdict.
“I don’t have children of my own,” wrote one, “but reading this makes my heart hurt.”
Another wrote: “If things go on this way, our country doesn’t have a future.”
In Hong Kong, Zhao’s sentence has sparked popular protests outside of government offices and formal objections from local officials.
Reactions like these ought to be far more worrying to China’s leaders than any rebuke from a group of Norwegians.
Zhao’s allies are not out to “humiliate China.” Rather, like those around the world who believe China deserves credit for its impressive achievements – indeed, like Liu Xiaobo himself – they want their country to develop governing institutions befitting its growing economic stature.
So do China’s neighbors and global partners – and for reasons that have as much to do with self-interest as political values.
If China is to honor its commitments on a wide range of international issues – trade, product safety, and environmental protection, to name just a few – and command genuine trust and respect at home and abroad, it will need to embrace people like Zhao, not silence them.
Kill and Let Die
NEW YORK – By a strange but fitting coincidence, US President Barack Obama and his Republican challenger, Mitt Romney, held their final debate – which focused on foreign policy –&nbsp;just as the new James Bond film, Skyfall, had its world premiere in London.
Although 007, who turned 50 this year, is a British-born global brand, his influence on the American political psyche – and that psyche’s influence on Bond – is obvious.
Indeed, the latest production is a British-American partnership, and the violent special-operations action hero that Bond has come to embody reflects US assumptions about foreign policy and the rule of law.
The presidential debate merely reinforced the dominant real-time plotline: Assassinating people (including US citizens) solely on the president’s orders, once considered a war crime, has become an applause line.
That is as true for Romney as it has been for Obama.
Romney asserted that his foreign policy was “pretty straightforward.”
It was, he said, “to go after the bad guys, to make sure we do our very best to interrupt them, to kill them, to take them out of the picture.”
In other words, he would “kill them” where they were found, not only on the battlefield, but also in other sovereign countries, such as Pakistan, without charge or trial.
Obama, for his part, scored points by shaming Romney for having opposed the illegal raid that killed Osama Bin Laden.
Later, he championed the drone-strike strategy that he has used to “kill bad guys” without charge or trial.
Romney cheered.
Neither candidate mentioned that, by some estimates, the drone strikes have killed far more civilians than “suspected terrorists.”
The most authoritative study puts civilian deaths from drone strikes between June 2004 and mid-September 2012 at 474-881, including 176 children.
Prior to the debate, CNN Chief White House correspondent Jessica Yellin asked Obama about his drone strategy.
His vaguely worded answer – the attacks “must be authorized by our laws” – made no mention of trials for those accused of terror crimes, of international war-crimes treaties, or any other bow to legality.
Indeed, US law cannot “authorize” drone strikes if they are carried out in countries with which the US is not at war.
Not even Americans are exempt.
Obama averred that American citizens “are subject to the protections of the constitution and due process.”
But Anwar al-Awlaki was a US citizen whom Obama directed to have killed in just this way.
So was al-Awlaki’s 16-year-old son, who was deliberately killed by a drone strike two weeks later.
I happened to watch the debate while surrounded by other American teenagers.
They had grown up in a post-9/11 environment saturated with the claim that US presidents may call anyone anywhere a “bad guy” and order his or her summary assassination.
“That’s illegal,” I kept saying when the candidates spoke of “killing bad guys” rather than arresting or extraditing them to face criminal charges.
None of these well-educated teenagers believed me.
Having grown up with presidents and presidential candidates tossing around the Bond meme virtually without challenge, they thought I was making things up.
“Of course it’s legal,” they said.
Both candidates had just told the entire world that they planned to continue to engage in what are, according to both US and international law, criminal acts.
The debate’s moderator, Bob Schieffer, who should have known better, said nothing.
In the background of this legal and moral failure is major cheerleading about the Bin Laden raid, in which a US Navy SEAL team swarmed a compound in a residential Pakistani neighborhood and assassinated a lot of people.
The book No Easy Day, written by a team member, is a bestseller.
Likewise, this month the magazine Vanity Fair published a hagiographic behind-the-scenes look at the steps that Obama and his team took in the run-up to the raid.
What is striking about No Easy Day and the Vanity Fair article is that the rationale for legal due process is reflected in every other paragraph.
The sources cited by Vanity Fair confirm that the intelligence on which the team made the decision to “go in” was impressionistic and incomplete (that is, the target, judging from the length of his shadow, was “tall and thin” like Bin Laden, but his identity was not 100% certain).
It was also clear from the piece that arresting the man would have been no more difficult – and perhaps easier – than killing him and jeopardizing his family.
Like the Navy SEALs and other special-ops teams now roaming the planet in secrecy, Bond is an extrajudicial killer, whether for personal revenge, as in Quantum of Solace; geopolitical reasons, as in Die Another Day; or simply because someone is in his way.
His bosses, too, identify targets from afar and order their annihilation, without revealing any awareness of ambiguity concerning who is a “bad guy” or acknowledging the possibility of poor intelligence or mistaken identity.
His innocent victims, meanwhile, are invisible.
Fabulous military technology is part of the spectacle and becomes its own justification – a character in the hero’s story line.
For 50 years, James Bond and his “license to kill” have stood for imperial justice beyond the limits of law.
But he is imaginary, as are his victims.
America’s violation of domestic and international law – and the bodies of innocents mown down by drones or operatives – are all too real.
Taming Leviathan
STANFORD – A successful society needs effective, affordable government to perform its necessary functions well, and that includes sufficient revenue to fund those functions.
But a government that grows too large, centralized, bureaucratic, and expensive substantially impairs the private economy by eroding individual initiative and responsibility; crowding out private investment, consumption, and charity; and damaging incentives with high tax rates.
It also risks crowding out necessary government functions such as defense.
That is today’s Europe in a nutshell, with America not far behind.
The recent death of James M. Buchanan, the father of public-choice economics, is reason to reflect on his sage warnings.
Buchanan was awarded the Nobel Prize in 1986 for bringing to the study of government and the behavior of government officials the same rigorous analysis that economists had long applied to private economic decision-making.
Buchanan concluded that politicians’ pursuit of self-interest inevitably leads to poor outcomes.
Buchanan’s analysis stood in marked contrast not only to Adam Smith’s dictum that the pursuit of self-interest leads, as if “by an invisible hand,” to desirable social outcomes, but also to the prevailing approach to policy analysis, which views government as a benevolent planner, implementing textbook “solutions” to market failures.
According to this view, if markets do not fully internalize all of the costs of private action – environmental pollution is a classic example – some “optimal” tax or subsidy supposedly can correct the problem.
So, if a monopoly is restricting output and raising prices, regulate firms and industries.
When weak demand leads to recession, increase government spending and/or cut taxes by just the right amount, determined by a Keynesian multiplier, and – presto! – the economy rebounds quickly.
Buchanan considered such analysis romantic.
He showed that public officials, like everyone else, are driven by self-interest and governed by the rules and constraints operating in their economic environment.
Households have a budget constraint.
Firms have technological, competitive, and bottom-line constraints.
For politicians, the ability to exercise power – for their own interests or those of vested interests – is constrained by the need to get elected.
Buchanan predicted that, by hiding the full costs, the ability to finance public spending through deficits would lead to higher spending and lower taxes at the expense of future generations, whose members were not directly represented in current voting.
He predicted ever-larger deficits and debt – and ever-larger government as a result.
On this issue, Buchanan was, unfortunately, prescient –&#160;and well before financial crisis and deep recession led to yet another jump in the size and scope of government, accompanied by large deficits and exploding debt in the United States, Europe, and Japan.
Buchanan argued tirelessly for lower government spending, balanced budgets (even a balanced-budget amendment to the US Constitution), and streamlined regulation.
Buchanan, along with Milton Friedman and many others, correctly pointed out that government failures are as numerous as market failures.
So, even in areas like infrastructure or education, it is necessary to compare the benefits and costs of the imperfect fiscal and regulatory policies likely to be implemented by fallible, self-interested officials with potentially imperfect market outcomes.
These government failures include rent-seeking, pork-barrel spending, social engineering, regulatory capture, and induced dependency.
Market failures or claims of unmet need are not sufficient to prescribe government intervention in the private economy, because the cure may be worse than the disease.
There are, of course, important, successful government programs.
In America, the post-World War II G.I. Bill financed higher education for demobilized soldiers, and was a highly beneficial public investment in human capital.
Social Security has helped reduce poverty among the elderly.
The military has kept the US safe and free.
But the gap between textbook solutions drawn up in universities and think tanks and the reality on the ground can be vast.
More spending or regulation does not always lead to better outcomes.
Government spending is no less subject to diminishing returns than anything else.
Programs become entrenched, develop powerful constituencies, and are hard to shrink.
Few programs are targeted carefully enough to real needs – or to the really needy – as politicians buy votes by spreading coverage far beyond what is needed to achieve programs’ stated goals.
Hence Buchanan’s disdain for romanticizing government action.
In country after country, one casualty of the ongoing debate over spending, taxes, deficits, and debt has been efforts to make government more effective and efficient.
In most areas of government, from defense to entitlements, better outcomes can be achieved at much lower cost, which should please both the left and the right.
For example, America’s federal government has 47 separate job-training programs in nine different agencies, costing almost $20 billion a year, most of which the Government Accountability Office reckons are ineffective or poorly run.
President Barack Obama added the 47th – for green-energy job training – in 2009.
The success rate was so poor (a tiny percentage of participants got targeted jobs) that the Labor Department’s Inspector General recommended shutting it down – and this at a time of massive unemployment, with firms listing millions of job openings but unable to find workers with the required skills.
We have seen what ultimately results when unsustainable spending leads to exploding debt: economic chaos and human tragedy.
Somewhere between “romanticized” government solutions to problems and Buchanan’s self-interested government officials, we must find leaders willing to eliminate poorly performing programs; modernize, streamline, and consolidate others; improve services; and limit pressure for ever-higher growth-destroying taxes.
Europe’s Digital Reactionaries
BRUSSELS – Many European politicians praise the Internet.
Unfortunately, their lofty rhetoric often rings hollow.
While calling for a strong digital agenda in one breath, the same politicians, supported by protectionist interests at home, often argue for putting a brake on the Internet’s “disruption” by imposing strict new regulation.
Such double-talk is misguided.
If Europe is to prosper in the twenty-first century, its newly elected leaders need to embrace a positive, concrete pro-Internet agenda.
That means signing digital free-trade agreements and creating a true European digital single market out of today’s fragmented 28 national jurisdictions.
Long-outdated copyright and licensing laws must be overhauled.
New privacy rules must protect citizens and allow innovation; calls for mandatory data localization and local versions of the “Internet” must be resisted.
If carried out, this substantive digital agenda could provide what Europe needs most after the financial crisis: economic growth.
According to the OECD, the Internet now accounts for up to 13% of economic output in the US.
Every type of business now depends on the digital economy.
With a few keystrokes, small companies selling Polish antiques, traditional Bavarian costumes, and Spanish shoes have burst out of their home markets and reached consumers around the globe.
By unleashing the Internet, financially strapped Europe can create new jobs without taking on new debt.
European Commission figures suggest that Europe’s so-called “app-economy” workforce will rise to 4.8 million by 2018, from 1.8 million in 2013, with revenues more than tripling, to €63 billion ($86 billion).
We also know that some 90% of jobs by 2020 will require workers to have skills in information and communication technologies.
Such success requires breaking down resistance by Europe’s market incumbents and embracing rather than blocking new entrants.
Under the European Union’s current fragmented regulatory regimes, companies must obtain separate permission to sell in each of the 28 national markets.
It takes even large companies like Apple and Google years of work to open local stores and launch new offerings.
The growth of small European innovators, such as Spotify, has been stunted.
Many new services that allow us to swap, rent, and share everything from taxi rides to second-hand designer dresses are struggling to get off the ground.
Internet skeptics could also scuttle potentially transformative transatlantic free-trade talks, launched with great fanfare last year.
A growing volume of trade is conducted in bits and bytes that flow over the Internet.
A new study by McKinsey finds that digital-driven, knowledge-intensive goods today comprise a full 50% of total global cross-border trade – and are growing at least 1.3 times as fast as other types of trade.
If current trends persist, the volume of such goods could triple by 2025.
Yet many Europeans talk of imposing draconian privacy or data-localization rules as a precondition for signing any new free-trade deal.
Such requirements would be diametrically opposed to the Internet’s founding principles of frictionless, borderless access to information.
Like Russia and China, Europe would be blocked from the rest of the global Internet, because new services that are unable to build European data centers would be locked out.
In this context, the European Court of Justice’s recent ruling, which recognizes a “right to be forgotten” – and thus requires Google to remove search information, even when legal, on demand – represents a significant danger.
By requiring every search service, including those of university libraries, to make it difficult to find legal information, we risk opening the door to large-scale private censorship.
Such unintended consequences pervade EU competition policy as well.
European policymakers are considering a regulation that would require Internet platforms like app stores, social networks, search engines, and ecommerce sites to meet certain publicly specified criteria to achieve economic, social, or political ends.
Such regulation, it is argued, would facilitate the emergence of European Internet platforms and guarantee “open access” to users.
In fact, these moves might create new barriers to entry, entrenching market leaders and undermining innovation.
Internet markets are typified by dramatic change.
Witness how Facebook overtook MySpace in social networks, or how Apple upended the market for smartphones – or how new services and markets are constantly being invented.
Twitter has displaced no one; rather, it supplements and competes with all other modes of communication.
By contrast, EU competition investigations drag on and on.
It took ten years to reach a settlement with Microsoft; it may end up taking that long with Google.
By that point, the fast-paced Internet environment may well have evolved beyond recognition.
European authorities should avoid shackling digital progress.
Europe’s consumers should be able to buy online songs, watch online video, and shop online for whatever products they choose, and Europe’s businesses should be able to benefit fully from the EU’s giant market.
Indeed, letting the Internet blossom not only makes good business sense; it might also help to restore voters’ waning faith in the European project.
Boards on Their Backs
WASHINGTON, DC – The recent governance controversy at JPMorgan Chase has masked a much larger issue.
Regardless of Jamie Dimon’s victory in retaining his dual role as CEO and chairman of the board, the more important failure on display was that of the board of directors itself – a problem that affects almost all of the world’s megabanks.
This is completely obvious at JPMorgan Chase.
The report of the recent bipartisan investigation, led by US Senators Carl Levin and John McCain, into the infamous “London Whale” trades provides just one example.
There is also the litany of complaints and legal cases now surrounding the firm.
It is difficult to see JPMorgan Chase escaping its past anytime soon.
But the problem is much broader: Not a single global megabank has a well-functioning board.
Their members kowtow to CEOs, do not examine management decisions closely, and, with very few exceptions, rubber-stamp compensation requests.
Big banks’ boards are supine for three main reasons. First, and most important, there is no market for control over the biggest banks.
One cannot build up a significant shareholding and use it to put pressure on boards – let alone pursue a hostile takeover.
The London Whale is a case in point.
The pressure brought to bear on JPMorgan Chase was completely inconsequential – nothing significant will change.
This is primarily because regulators – despite what they may claim – effectively protect megabanks from market discipline. “Systemic importance” has become an excuse for maintaining impenetrable entry barriers (yet another reason why executives want their firms to be regarded as too big to fail).
Second, most board members lack sufficient relevant expertise.
Who on the current board of JPMorgan or Citigroup has real experience running a giant complex trading operation (which is what will make or break these companies over the next decade)?
Who among them understands macroeconomic risks not in terms of the platitudes of the prevailing consensus, but as the tail risks – the low-probability, high-impact events – that always wag the dog of financial crisis?
Unqualified board members do not ask hard questions.
And, five years after the largest financial crisis in almost 80 years, one can count the number of properly qualified board members – across all megabanks – on the fingers of one hand.
As a result, megabanks’ senior managers are not pressed to remove layers of opaqueness that shield their risk-taking from effective scrutiny.
This helps to keep board members in the dark – and gives them a convenient excuse for not really understanding how the business works.
Effective governance is possible under various formal arrangements.
In principle, a strong outside lead director can be just as effective as an independent chairman – a fair point that has been made in recent weeks.
But which huge banking conglomerate has such a lead director today?
Which board members are willing and able to stand up to CEOs?
That has certainly not been the recent experience at JPMorgan Chase.
Finally, regulators, too, have been rendered docile in the face of the megabanks’ CEOs.
Regulators have the power to require that boards become more powerful – or at least minimally effective.
For example, they could tighten the qualifications needed to become a bank director (in the United States, for example, the requirements are not serious).
Instead, regulators stand idly by while bank boards remain self-perpetuating clubs, with membership regarded as little more than so much social plumage.
The regulators acquiesce because, simply put, they are afraid.
Mostly, they are afraid that being tough on bank governance will somehow disrupt the flow of credit.
It is a silly and baseless fear, but that is how modern regulators think and act – in a state of constant, irrational anxiety.
The banks in question are so large and so central to the functioning of economies that each of them is too big to regulate.
Whenever small groups of individuals acquire that much power relative to the state and the rest of us, there is big trouble ahead.
Power corrupts, and financial power corrupts the financial system.
The biggest banks were badly run in the years leading up to the crisis of 2008 – exhibiting a toxic mixture of hubris, incompetence, and excessive leverage – and their governance problems today are worse than they were in 2005 or 2007.
The 2008 crisis was followed by a long, hard recession; we should not expect a different scenario now.
Back to the Future in Ukraine and Asia
NEW YORK – With Russian troops occupying Ukrainian territory and the Chinese Navy inhabiting Philippine territorial waters in the South China Sea, the world is now entering a dangerous time warp.
In geopolitical terms, Russia and China are reenacting the norms of the nineteenth-century, when states competed by amassing hard power in a system of unbridled nationalism and rigid state sovereignty.
Indeed, Russian President Vladimir Putin seems to be trying to reassemble the nineteenth-century map of Czarist Russia by holding on to Crimea, Abkhazia, South Ossetia, and other parts of the old empire at all costs.
Similarly, China is staking its claim to the South China Sea in full violation of the United Nations Convention on the Law of the Sea on the basis of vague histories of bygone empires.
Both countries are now behaving as if power is a zero-sum game dictated by the old rules of realpolitik.
But, despite US Secretary of State John Kerry’s admonition that Russia’s occupation of Crimea “is not twenty-first-century, G-8, major-nation behavior,” the United States and its allies are struggling to hold on to the postwar twentieth-century world.
For the US, the destruction wrought by Europe’s rapacious nationalisms, reflected in colonialism and two world wars, had to end in 1945. America’s postwar planners concluded that if excessive nationalism was the problem, transnationalism was the answer.
The US took the lead in building a system of international law, creating the UN, and fostering free trade and open markets around the world, while maintaining the security umbrella that allowed transnational institutions like the European Union and the Association of Southeast Asian Nations to develop.
The US was far from consistent or perfect in this process, sometime to murderous effect in places like Vietnam. But its steadfast defense of an international system that was more mutually beneficial than any that had preceded it ushered in seven decades of the greatest innovation, growth, and improvement our species has ever known.
Now, however, with China rising, global power rebalancing, and the US worn down by two decade-long wars that have eroded its credibility, the postwar international order is under intense strain.
Contemporary Japan, a stalwart supporter of the US-led postwar system, was also transformed by it.
When US Commodore Matthew Perry blasted his way into Tokyo harbor in 1854, he found a weak, isolated, and technologically backward country.
Fourteen years later, Japan began a massive modernization drive under Emperor Meiji; thirty-seven years after that, its victory in the Russo-Japanese war shocked the world.
Rapidly appropriating the lessons of nineteenth-century Europe, Japan in 1894 launched a brutal five-decade effort to dominate Asia and secure its resources, stopping only when America’s atomic bombs flattened Hiroshima and Nagasaki.
After the war, under America’s protection and initial guidance, Japan emerged as a champion of a rule-based international system. It financed the UN to a greater degree in relative terms than any other country, engaged meaningfully in other international institutions, and supported the development of its Asian neighbors, including China.
But, with China’s leaders now aggressively demonizing Japan and pressing disputed territorial and maritime claims more assertively than ever before, the country is being thrust in a direction that Prime Minister Shinzo Abe, with his penchant for historical revisionism and highlighting Japan’s nationalist past, may in some ways have already favored: back to the nineteenth century.
Europe, too, embraced the postwar international system.
With security outsourced to America, European governments shifted their focus and expenditures to social welfare and set about building a twenty-first-century post-sovereign utopia that has blurred national divisions and replaced aggression and hostility with negotiation and compromise.
The EU’s twenty-first-century dream now confronts the nineteenth-century Czarist bear, flashing its atavistic claws on the Russia-Ukraine border.
And, just as ASEAN has been unable and unwilling to stand up to China over its encroachment in the South China Sea, the EU is already discovering the limits of its soft-power, consensus-driven approach to Russia.
If a twenty-first-century post-sovereign system remains an unreachable dream in our Hobbesian world, and reverting to nineteenth-century norms by acquiescing to aggressive behavior by Russia and China is unpalatable, defending the postwar international system may be the best option we have.
Ironically, a nineteenth-century response, featuring balance-of-power politics and the rearmament of Europe and Japan, may be part of what is required to do it.
Japan and Its Neighbors After Yasukuni
Japan’s Constitutional Albatross
TOKYO – The approach of the 70th anniversary of Japan’s defeat in World War II has sparked much discussion – and lamentation – of East Asia’s resurgent historical feuds.
But recent tensions in the region may partly reflect a lack of progress in another, overlooked area: Japanese constitutional reform.
Indeed, despite the powerlessness so vividly highlighted by the Islamic State’s beheading of two Japanese hostages, Japan has not adopted even one amendment to the “peace constitution” that the occupying American forces imposed on it in 1947.
At first glance, this may not be altogether surprising.
After all, the constitution served an important purpose: by guaranteeing that Japan would not pose a military threat in the future, it enabled the country finally to escape foreign occupation and pursue rebuilding and democratization.
But consider this: Germany adopted an Allied-approved constitution under similar circumstances in 1949, to which it has since made dozens of amendments.
Moreover, whereas Germany’s constitution, or Basic Law, authorized the use of military force in self-defense or as part of a collective security agreement, Japan’s constitution stipulated full and permanent relinquishment of “the threat or use of force as a means of settling international disputes.”
Japan is the only country in the world bound by such restrictions – imposed not just to prevent a militarist revival, but also to punish Japan for its wartime government’s policies – and continued adherence to them is unrealistic.
That is why Japanese Prime Minister Shinzo Abe has made constitutional reform a high priority.
Having cemented his authority in December’s snap general election, in which his Liberal Democratic Party won a decisive victory, Abe is determined to pursue his goal of building a stronger, more competitive Japan – one that can hold its own against an increasingly muscular China.
Abe’s effort to “normalize” Japan’s strategic posture began with a reinterpretation of Article 9 of the constitution, according to which the country would henceforth be allowed to engage in “collective self-defense.”
Japan’s government approved the change last summer, and the United States backed the move as well.
With the Islamic State’s attempts to leverage the lives of two Japanese hostages, legislation to implement the reinterpretation is set to be submitted to the Diet.
Yet the reinterpretation has faced some resistance at home and abroad.
Chinese critics, in particular, have expressed concern that Japanese militarism could reemerge, though they neglect to mention that it is China’s military buildup that prompted Japan’s government to reassess its national defense policy.
In fact, the reinterpretation amounts to little more than a tweak: Japanese forces can now shield an American warship defending Japan, but they remain prohibited from initiating offensive attacks or participating in multilateral military operations.
Given that the United Nations charter recognizes individual and collective self-defense as an “inherent right” of sovereign countries, the change should be uncontroversial.
But significant obstacles continue to block wider constitutional reform.
Amendments require a two-thirds majority in both chambers of the Diet, and a majority in a popular referendum, making Japan’s constitution one of the world’s most difficult to revise.
To facilitate his ambitions, Abe hopes to scale down the requirement to simple majorities in both chambers or eliminate the need for a public referendum.
Given popular resistance to change, Abe’s task will not be easy.
Whereas citizens of most democracies regard their constitutions as works in progress – India, for example, has amended its constitution 99 times since 1950 – the Japanese largely treat their constitution as sacrosanct. As a result, rather than ensuring that their constitution reflects social, technological, economic, and even ideological developments, they zealously uphold its precise provisions, like religious fundamentalists defending the literal truth of scripture.
Moreover, pacifism is deeply ingrained in the Japanese psyche, even among young people, largely owing to the painful legacy of Japan’s prewar militarism.
Indeed, a poll conducted by the World Values Survey last year revealed that only 15.3% of Japanese – compared with 74.2% of Chinese and 57.7% of Americans – would be prepared to defend their country, the lowest rate in the world.
Just 9.5% of Japanese under the age of 30 said that they would be willing to fight.
Given such opposition, an actual revision of Article 9, rather than just a reinterpretation, does not seem feasible, especially while the avowedly pacifist Komeito party remains part of the ruling coalition. Even if Abe manages to relax the amendment requirements – no easy feat, given the likelihood that a popular referendum would reveal weak public support – he will probably have to leave the change to his successor.
But one factor could bolster Abe’s cause considerably.
Explicit US support for Japanese constitutional reform might not only blunt Chinese criticism, but could also reassure many Japanese that updating Article 9 would not amount to rejecting the postwar order that the Americans helped to establish in Japan.
Such a move would also serve US security interests.
A more confident and secure Japan would be better able to block China from gaining ascendancy in the western Pacific, thereby advancing the central US policy objective of ensuring a stable balance of power in Asia.
No other country in the region could act as a credible counterweight to China.
Today’s Japan – a liberal democracy that has not fired a single shot against an outside party in nearly seven decades, and that has made major contributions to global development during this period – is very different from the Japan of 1947.
Japan’s Vote for Bold Reform
TOKYO – With the powerful mandate of the Japanese people, demonstrated by their overwhelming vote of support in our country’s December 14 election, my government’s ability to act decisively has been strengthened immeasurably.
Indeed, we now not only have the authority to act, but a clear and definitive message from the electorate that we must do so.
In particular, we now have a mandate to launch what has become known around the world as the “third arrow” of so-called Abenomics: structural reform.
And it is structural reform that will unleash the competitiveness, and long-pent-up dynamism, of Japan’s firms and people.
By calling in November for a snap general election, my aim was to consolidate the government’s political capital – not in order to hoard it, but to spend it on the reforms that were first promised two years ago.
Now, with our renewed mandate, that is what we will do.
First, we intend to subject Japan’s tax regime to a fundamental review.
This entails not only an increase in the consumption-tax rate, the second round of which we have postponed, but also making the necessary adjustments so that our tax system no longer impairs investment incentives.
Some of the agro-business organizations – the epitome of vested interests – must change, and we will push them to do so.
Second, we must adapt Japan’s labor regulations to the norms of modern life almost everywhere, which means allowing every individual to strike a beneficial balance between life and work.
We Japanese will always work hard – I have no doubt about that.
But we also need to enable and encourage more Japanese women to participate in the workforce, whether at the beginning of their careers, or after choosing to have and raise children.
Moreover, it is not just bold domestic reforms that must be embraced.
Japan also needs to change how its economy interacts with the world.
Consider the Trans-Pacific Partnership (TPP) and the Japan-European Union Economic Partnership Agreement.
Completion of both trade and investment deals are among the most urgent tasks we face, because Japan’s economy needs powerful external catalysts to spur change in how we compete at home and for export markets.
Japan has no alternative other than to do everything necessary and feasible to enhance its labor productivity.
We now have the Japanese public’s support to make all of these changes happen.
That support is based on explicit statements of the government’s intentions.
For example, it is now well understood – and approved – by voters that, come April 2017, my government will raise the consumption tax.
Until then, we will no longer be bogged down in debating the merits of this decision.
But we also know that the political space that we have secured is too precious to be squandered. We must use it single-mindedly to implement reforms that enhance Japan’s long-term growth potential.
Our country’s global standing depends on it.
Over the last two years, I have traveled 354,200 miles, visited a total of 62 countries, and conducted 246 one-on-one meetings with heads of state and other national leaders.
These experiences have convinced me that there is an enormous amount of trust in the world about the path that postwar Japan has taken.
In particular, there is no doubt about the norms and principles that our people and our government have long upheld, such as popular sovereignty, respect for human rights, and peace – all pillars of the Japanese constitution.
Japan has also gained international credibility for the fact that, for seven decades, its diplomacy has not once sought to coerce or intimidate any other country with threats of military force.
Most significant, global trust in Japan reflects the modesty and decorum that countless Japanese have exemplified as they worked to make our economy one of the world’s three largest.
The faith that the world has placed in Japan and its people has been Japanese diplomacy’s most valuable asset.
Our mandate from the Japanese people is to ensure that this tradition continues, undiminished, into the future.
That is the oath I will be making as I assume leadership of Japan for the coming electoral term. For me and my government, the main task ahead – working even harder to restore Japan’s economy – is inseparable from safeguarding our country’s position in the global vanguard of peace, progress, and prosperity.
Japan’s Beheaded Illusions
TOKYO – Japanese Prime Minister Shinzo Abe was on a six-day tour of Egypt, Jordan, Lebanon, Israel, and Palestine, when the Islamic State of Iraq and the Levant (ISIL) posted a video online threatening to murder two Japanese hostages, Haruna Yukawa and Kenji Goto, if his government did not pay $200 million within 72 hours.
Abe had no good options.
Indeed, when it comes to protecting its citizens overseas, Japan never does.
When Abe failed to bow to its demands, ISIL released a second video claiming that Yukawa, who was seized last August in Syria while reportedly preparing to establish a Japan-based private security company, had been beheaded.
Goto, a journalist who traveled to Syria last October to try to secure Yukawa’s release, will supposedly be spared if Japan secures Jordan’s release of a convicted terrorist.
In fact, Goto’s wife had received an email demanding a ransom of ¥2 billion ($17 million) in December.
But it seems that Abe’s Middle East tour presented a greater opportunity for ISIL to make the most of its Japanese hostages.
ISIL’s ransom demand was not just a bid for cash; it sent a powerful message.
Just three days before the demand was made, Abe pledged to provide $200 million in non-military humanitarian aid to frontline countries in the fight against ISIL, including Jordan, Syria, Iraq, and Lebanon, all of which have taken in large numbers of refugees.
ISIL explicitly directed the video to both Japan’s government and its citizens, evidently hoping that the largely pacifist Japanese would press their leaders to back down.
And, to some extent, their expectation was met; some opposition members of Japan’s Diet tweeted that Abe should cancel the promised aid.
Needless to say, Abe’s government ignored their advice.
When the ransom demand did not work, ISIL shifted its approach, but not its goal.
The prisoner whose release it has demanded in exchange for Goto is Sajida al-Rishawi, who faces the death penalty in Jordan for her role in hotel bombings in Amman in 2005.
The group seems to believe that forcing Japan and Jordan to negotiate such a trade could undermine the countries’ longstanding relationship.
ISIL probably knows that Japan has historically placed the safety of its own citizens above all other considerations – even if it meant bowing to terrorists’ demands.
When the Japanese Red Army hijacked a Japan Airlines flight to Dhaka Airport in Bangladesh in 1977, Prime Minister Takeo Fukuda not only paid the $6 million ransom; he also resorted to the “extralegal measure” of handing over imprisoned members of the faction. “The weight of a human life,” he declared, “is heavier than the earth itself.”
This response stands in stark contrast to Israel’s behavior a year earlier, when the Popular Front for the Liberation of Palestine (PFLP) hijacked an Air France flight with 256 passengers.
Instead of giving the group what they wanted – the release of 53 militants imprisoned in Israel and four other countries – the Israeli Army launched Operation Thunderbolt, rescuing the hostages at Uganda’s Entebbe Airport.
Only three hostages and one Israeli commando – Yonatan Netanyahu, the elder brother of current Prime Minister Binyamin Netanyahu – were killed in the operation.
But Fukuda’s response was not entirely a matter of choice.
Under Japan’s constitution, neither the country’s self-defense forces nor the police would have had legal grounds to travel overseas to rescue endangered Japanese citizens.
In any case, neither force would have had the training necessary to pull off something like Operation Thunderbolt.
The Dhaka episode was hardly the first time that threats against Japanese citizens had exposed this shortcoming.
Seven years earlier, a forerunner to the Japanese Red Army hijacked another Japan Airlines flight – the “Yodogo” – and demanded to be taken to North Korea.
The Japanese authorities got lucky: When the pilot landed first in South Korea, the hijackers released their 129 hostages in exchange for permission to continue to Pyongyang, where they gained asylum.
Two years later, three&nbsp;members of the Japanese Red Army, recruited by the PFLP, attacked Tel Aviv’s Lod Airport, killing 26 people and injuring 80 others.
And, in the late 1970s and early 1980s, the wives of the Yodogo hijackers went to Europe, where they are suspected of abducting young Japanese students and taking them to North Korea.
As ISIL’s actions demonstrate, Japanese are still at risk – and their government still lacks adequate tools to protect them.
Fortunately, Abe – whose efforts to rescue Japanese citizens abducted by North Korea fueled his political rise – seems to recognize the need for change.
Since World War II, military considerations have barely factored into Japanese policy, and official development assistance, which began as war reparations, has placed international imperatives above domestic concerns.
But, after playing benefactor to the world for 60 years, Japan’s diplomatic and crisis-management capabilities have been severely weakened.
It is unacceptable for a government to be unable to protect its own citizens.
That is why Abe is determined to amend, or at least reinterpret, Japan’s constitution to allow for the kinds of defense maneuvers that other countries, from Israel to India, employ when their people are threatened.
As US Supreme Court Justice Robert Jackson once put it, a constitution is not a suicide pact.
Japanese Lessons for China’s Currency
SHANGHAI – The question of how much China’s currency should appreciate to rebalance its trade has become a global hot-button issue.
But the answers have been all over the map, with some finding that the yuan is not undervalued at all, while others argue that it should appreciate against the dollar by more than 30%.
Clearly, there must be major differences in the macroeconomic models used to produce such a wide range of estimates.
But the one thing about which everyone seems to agree is the theoretically and empirically unjustified assumption that an equilibrium exchange rate actually exists.
The theoretical problem is simple: a country’s trade balance depends on a lot more than the value of its currency in the foreign exchange markets.
Interest rates, employment, aggregate demand, and technological and institutional innovation all play a role.
As the economist Joan Robinson pointed out in 1947, just about any exchange rate will be the equilibrium value for some combination of these other variables.
The equilibrium exchange rate, she famously argued, is a chimera.
Not surprisingly, the empirical evidence that trade imbalances can be resolved through exchange rate changes alone is unconvincing.
In the case of China, the most useful precedent is probably that of Japan in the period from the end of the Bretton Woods fixed exchange-rate regime in August, 1971, to the collapse of its “bubble economy” in 1990.
During that period, the yen’s value more than doubled against the dollar, rising from its original fixed rate of 360 to 144 at the end of 1989.
Yet, even as Japan’s exports became much more expensive in dollar terms and its imports much cheaper in yen, its trade surplus rose from $6 billion in 1971 to $80 billion in 1989.
For two decades, expectations that an appreciating yen would restore external balance were repeatedly disappointed.
At the time of the December 1971 Smithsonian Agreement, 308 yen to the dollar was supposed to do the trick.
Fourteen years later, during the Plaza Accord negotiations, the Japanese argued for an eventual level of 200-210, while some US Treasury officials thought the final target should be as high as 165-170.
At the end of the 1980’s, some analysts thought rates as high as 120 might finally produce the long-sought equilibrium.
Yet, as Japan entered the “lost decade” of the 1990’s, its exports continued to grow faster than its imports.
Japan’s trade surplus peaked only in 1994, at $144 billion, just a few months before the yen’s April 1995 all-time high of 79.75.
In retrospect, it is easy to see why none of these supposed equilibrium exchange rates delivered external balance.
As the yen appreciated, Japan responded not by exporting less but by improving productivity and quality control through plant and equipment investment and innovations in factory management, making possible rapid growth in exports of high-value-added products.
Exchange-rate equilibrium calculations from the 1970’s and 1980’s, which could only have been based on the export sector’s contemporary structure, naturally would have little relevance subsequently.
The same is true of calculations at the beginning of the 1990’s, which would have forecast Japanese import growth based on extrapolations from the high GDP growth rates of the previous 40 years rather than on the decade of stagnation that ensued.
In China, changes in the export sector’s structure similar to those observed in Japan are now taking place.
These changes are likely to make today’s attempts to find an equilibrium yuan-dollar exchange rate seem just as chimerical in hindsight as previous calculations of the yen-dollar equilibrium rate.
For the 30 years since the beginning of China’s economic reforms, Chinese industry has achieved impressive efficiency gains by adopting new technologies and realizing economies of scale, leading to a huge expansion in locally made products suitable for export.
While an appreciating currency might eventually drive labor-intensive manufacturers out of business, if Japan’s economic history is any guide, they are likely to be replaced by producers of things like ships, machine tools, semiconductors, and doubtless new products yet to be invented.
The equilibrium yuan-dollar rate is a chimera not because China’s trade could never be balanced, but because the exchange rate alone does not determine equilibrium.
The structure of the entire economy matters, too.
As this is constantly evolving in unpredictable ways, there is no reason to expect that the assumptions underlying any particular macroeconomic model will ever remain valid long enough for its steady-state solution to be achieved in practice.
Abenomics for Asia
TOKYO – Once again, Japan is Asia’s odd country out.
For two decades, as one Asian economy after another boomed, Japan’s economy remained virtually stagnant.
Now, with GDP growth in Asia’s two giants, China and India, slowing precipitously – a decline that appears to be contributing to diminishing economic performance in much of the rest of Asia – Japan is recording its strongest growth since its 1980’s boom.
But, just as Japan’s post-war economic model became the template for the Asian economic miracles of recent decades, the reforms currently being implemented by Prime Minister Shinzo Abe (“Abenomics”) may offer Asian economies a path back to strong growth.
If the fallout from China’s slowdown is not to hit the entire region and jeopardize the economic integration that has already taken place, Asia’s governments – beginning with China – will need to embrace similar reforms.
How did Asia’s boom fade so quickly?
Economics is supposedly a cold-blooded subject.
Yet successful economies are prone to one of the most dangerous emotions of all: self-satisfaction, that excessive pride that Confucius condemned, which makes governments wary of reforming what has been a winning model, even when stresses begin to appear.
Japan has paid a high price for this attitude.
Even after its property bubble burst 24 years ago, the authorities continued to believe that the country’s growth model needed no adjustment.
The result was two lost decades of deflation and introspection before Japan finally embraced the reforms needed to kick-start a new, more open – and hence more vibrant – economic model.
China and India, it seems, have also succumbed to economic hubris.
Three decades of success in China, and a decade in which India supposedly overcame the old, slow, “Hindu rate of growth,” are ending with both economies slowing precipitously. And both are slowing for the same reason: stalled reform, which is a direct result of governments being so satisfied with today’s conditions that they fail to address tomorrow’s rising dangers.
China’s government continues to turn a blind eye toward banks that lend to the politically well connected, or that tolerate companies – mostly state-owned – with poor financial discipline. Indeed, total public- and private-sector debt in China is now around 200% of GDP, up by more than one-third in five years.
Reckless lending is undermining efficient allocation of capital and preventing China from drawing a line under the investment- and export-led growth model of the past three decades and basing future growth more on domestic consumption.
Likewise, India’s government, having embraced economic liberalization, has essentially pulled back from it in recent years.
Plans to allow foreign investment in retailing and other key economic sectors have been put on hold.
In critical industries – mobile communications and mining are perhaps the two most important examples – privatization has been corrupted by cronyism.
Moreover, India remains an inward-looking economy that attracts relatively little foreign investment and plays a much smaller role in world trade than it should.
Notwithstanding its renowned software industry, India plays little part in the production chains that underpin Asia’s regional trade patterns. The result – as visible as it was predictable – has been a sharp slowdown in economic growth.
To be fair, there is a growing recognition in some countries of the need for change. The need to restore economic dynamism was the focus of South Korea’s presidential election in 2012, which brought the country’s first-ever female president, Park Geun-hye, to power.
Today, the country is gripped by an important debate about how to reform the chaebol, the mammoth industrial conglomerates that did so much to lift the country out of poverty and into the front ranks of the world’s economies.
Park’s status as the daughter of former President Park Chung-hee, who put the chaebol at the center of South Korea’s economy, could give her the credibility needed to recast their economic role.
Elsewhere in Asia, including in China, the debate is only beginning.
But progress on reform, particularly in finance, must come quickly, because in most countries – India is the main exception – the demographic window of a growing working-age population is closing, if not already shut.
It is not necessarily bad for Asia’s traditionally high savings rates to fall; after all, consumption typically rises with an aging population.
But savings will need to be allocated far more efficiently than in the past.
Japan’s lost decades provide a grim lesson of the economic cost of neglecting such reform.
Moreover, borrowing in US dollars to finance current investment spending – as many emerging economies have done in recent years, as the US Federal Reserve’s policy of quantitative easing flooded emerging markets with cheap funds – is no substitute.
Indonesia, Thailand, and others are now finding it difficult to service these loans as their exchange rates fall against the dollar in the wake of the Fed’s plans to “taper” its policy.
Indeed, the debt build-up is so large that markets now fear a repeat of Asia’s financial crisis.
The Japanese precedent matters all the more, given that, 16 years after the Asian financial crisis nearly wiped out decades of hard-earned growth, Asia’s banks and capital markets remain inefficient.
Asia’s economies need deep, well-regulated capital markets, so that savings can be allocated to where they yield the highest returns.
Instead, today’s poorly regulated financial sectors – China is the biggest culprit – misprice capital. Moreover, banks are too dominant: Asia (including Japan) accounts for more than half of the world’s population but barely a quarter of global capital-market capitalization.
Sixteen years ago, the Asian financial crisis erupted, following the Thai government’s decision to float the baht in the face of speculative attacks.
The response of governments to that crisis has shaped much of the region’s economic policymaking ever since.
If Asia is to avoid another crisis on a similar scale, or lost decades of growth, its governments will need to embrace the type of all-encompassing reforms that Japan is undertaking.
Economic Policy Turned Inside Out
NEW HAVEN – The world economy is in the grips of a dangerous delusion.
As the great boom that began in the 1990s gave way to an even greater bust, policymakers resorted to the timeworn tricks of financial engineering in an effort to recapture the magic.
In doing so, they turned an unbalanced global economy into the Petri dish of the greatest experiment in the modern history of economic policy.
They were convinced that it was a controlled experiment.
Nothing could be further from the truth.
The rise and fall of post-World War II Japan heralded what was to come.
The growth miracle of an ascendant Japanese economy was premised on an unsustainable suppression of the yen.
When Europe and the United States challenged this mercantilist approach with the 1985 Plaza Accord, the Bank of Japan countered with aggressive monetary easing that fueled massive asset and credit bubbles.
The rest is history.
The bubbles burst, quickly bringing down Japan’s unbalanced economy.
With productivity having deteriorated considerably – a symptom that had been obscured by the bubbles – Japan was unable to engineer a meaningful recovery.
In fact, it still struggles with imbalances today, owing to its inability or unwillingness to embrace badly needed structural reforms – the so-called “third arrow” of Prime Minister Shinzo Abe’s economic recovery strategy, known as “Abenomics.”
Despite the abject failure of Japan’s approach, the rest of the world remains committed to using monetary policy to cure structural ailments.
The die was cast in the form of a seminal 2002 paper by US Federal Reserve staff economists, which became the blueprint for America’s macroeconomic stabilization policy under Fed Chairs Alan Greenspan and Ben Bernanke.
The paper’s central premise was that Japan’s monetary and fiscal authorities had erred mainly by acting too timidly.
Bubbles and structural imbalances were not seen as the problem. Instead, the paper’s authors argued that Japan’s “lost decades” of anemic growth and deflation could have been avoided had policymakers shifted to stimulus more quickly and with far greater force.
If only it were that simple.
In fact, the focus on speed and force – the essence of what US economic policymakers now call the “big bazooka” – has prompted an insidious mutation of the Japanese disease.
The liquidity injections of quantitative easing (QE) have shifted monetary-policy transmission channels away from interest rates to asset and currency markets.
That is considered necessary, of course, because central banks have already pushed benchmark policy rates to the once-dreaded “zero bound.”
But fear not, claim advocates of unconventional monetary policy.
What central banks cannot achieve with traditional tools can now be accomplished through the circuitous channels of wealth effects in asset markets or with the competitive edge gained from currency depreciation.
This is where delusion arises.
Not only have wealth and currency effects failed to spur meaningful recovery in post-crisis economies; they have also spawned new destabilizing imbalances that threaten to keep the global economy trapped in a continuous series of crises.
Consider the US – the poster child of the new prescription for recovery.
Although the Fed expanded its balance sheet from less than $1 trillion in late 2008 to $4.5 trillion by the fall of 2014, nominal GDP increased by only $2.7 trillion.
The remaining $900 billion spilled over into financial markets, helping to spur a trebling of the US equity market.
Meanwhile, the real economy eked out a decidedly subpar recovery, with real GDP growth holding to a 2.3% trajectory – fully two percentage points below the 4.3% norm of past cycles.
Indeed, notwithstanding the Fed’s massive liquidity injection, the American consumer – who suffered the most during the wrenching balance-sheet recession of 2008-2009 – has not recovered.
Real personal consumption expenditures have grown at just 1.4% annually over the last seven years.
Unsurprisingly, the wealth effects of monetary easing worked largely for the wealthy, among whom the bulk of equity holdings are concentrated.
For the beleaguered middle class, the benefits were negligible.
“It might have been worse,” is the common retort of the counter-factualists.
But is that really true?
After all, as Joseph Schumpeter famously observed, market-based systems have long had an uncanny knack for self-healing.
But this was all but disallowed in the post-crisis era by US government bailouts and the Fed’s manipulation of asset prices.
America’s subpar performance has not stopped others from emulating its policies.
On the contrary, Europe has now rushed to initiate QE.
Even Japan, the genesis of this tale, has embraced a new and intensive form of QE, reflecting its apparent desire to learn the “lessons” of its own mistakes, as interpreted by the US.
But, beyond the impact that this approach is having on individual economies are broader systemic risks that arise from surging equities and weaker currencies.
As the baton of excessive liquidity injections is passed from one central bank to another, the dangers of global asset bubbles and competitive currency devaluations intensify.
In the meantime, politicians are lulled into a false sense of complacency that undermines their incentive to confront the structural challenges they face.
What will it take to break this daisy chain?
As Chinese Premier Li Keqiang stressed in a recent interview, the answer is a commitment to structural reform – a strategic focus of China’s that, he noted, is not shared by others.
For all the handwringing over China’s so-called slowdown, it seems as if its leaders may have a more realistic and constructive assessment of the macroeconomic policy challenge than their counterparts in the more advanced economies.
Policy debates in the US and elsewhere have been turned inside out since the crisis – with potentially devastating consequences.
Relying on financial engineering, while avoiding the heavy lifting of structural change, is not a recipe for healthy recovery.
On the contrary, it promises more asset bubbles, financial crises, and Japanese-style secular stagnation.
Japan Must End its Silence
A recent opinion poll in Japan shows that 68% of Japanese believe that the US and Britain should not attack Iraq.
Yet, in debates in the Diet, our parliament, neither Prime Minister Koizumi nor the Foreign Minister utter anything more than such tepid responses as: "Japan cannot respond to a hypothetical situation;" or "Japan cannot take a definitive stance without assessing the results of the inspections;" and "It is in Japan's national interest not to declare whether or not it supports the use of force."
But Japan can no longer afford to be silent or vague about growing global insecurity, as the crisis next door on the Korean peninsula demonstrates.
Why is Japan so seemingly detached in international affairs?
Japan has relied entirely on the US for its security needs for over fifty years and the Japanese government essentially believes that it has no option but to agree with the US or to keep silent.
Indeed, since the end of WWII, Japan has avoided a full-fledged debate on the country's national security framework, in which Japan would have the courage to disagree with the US.
Of course, most Japanese politicians, media commentators, and academics understand the need for this stance, and the Japanese trait of putting a lid on troublesome issues reinforces this silence, compounding all problems in foreign policy.
But at times like these, when issues such as North Korea's bid to acquire nuclear weapons and a possible US-led war against Iraq provoke heated debate in the international community, the Japanese public is also engaged in frequent, daily exchanges about what Japan should do.
It is only the government that steadfastly refuses to intervene in the debate or propose any action.
Criticizing Japan's silence need not undermine the Japanese-US strategic alliance.
Only last year the two countries commemorated the 50 th anniversary of the signing of the US-Japan Security Treaty.
During those fifty years, however, the map of world conflict has been rewritten and the means of warfare transformed, while Japan remains locked in viewpoints forged in the trauma of wartime defeat and US occupation.
There is another factor at work, too.
Japan's "Peace Constitution" supposedly bans possession of military forces.
As a party to Japan's debate on national security, I know from experience that attempting to clarify the vague constitutional status of our Self Defense Forces would lead China and South Korea--victims of past Japanese invasions--to use dissenting voices within Japan to smother all discussion, killing mature debate.
But Japan urgently needs such a debate if it is to respond to a world exposed to the threat of terrorism and gripped by fear.
The terrorist attacks of September 11, 2001, and recent statements by CIA Director George Tenet that North Korea possesses missiles capable of reaching the US West Coast undoubtedly shocked Americans out of their complacency over North Korea's nuclear status.
But what can shake Japan's political class out of its silence?
Japan's dependence on imported Middle Eastern oil also demands that we understand what a war against Iraq might mean.
If Iraq's oil fields are destroyed or the war is prolonged, surging oil prices will hit Japan and the world economy hard.
The best way to avoid this risk is for Iraq to raise its level of cooperation towards the inspections unconditionally and show all the proof needed to dispel the allegations leveled against it. Japan ought to speak up and say this.
Japan also can directly assist in resolving the North Korea crisis by acting as a facilitator, encouraging Russian President Vladimir Putin--in concert with Japan, South Korea, and China--to initiate negotiations with North Korea's Kim Jong Il.
President Putin enjoys a relationship of trust with Kim and thus may be able to persuade him that only by abiding by international law will he ensure his country's future and that this, indeed, is the only option left open to him.
But Putin needs to be convinced to take the lead.
His hope for better relations with Japan gives Japan's leaders leeway to nudge him in this direction.
Undoubtedly, most Japanese strongly support the US-Japan alliance.
While unequivocally commending America's tough stance in pressuring Iraq, Japan should not hesitate to deliver a clear message to the US: exercise patience to avoid war.
But Japan's government also must stop prevaricating with the Japanese people: it should welcome and encourage debate about Japan's defense posture, without fearing that the US-Japan friendship is so fragile that it will be destroyed.
The benefits and burdens of international affairs must become subjects of open debate in the Japanese Diet.
A clear statement from the government, now rather than later, on what contribution Japan would make to any post-war reconstruction effort in Iraq is needed.
Japan must avoid repeating the unseemly scenario following Saddam Hussein's defeat in the Gulf War of 1991, when it wrote large checks to cover the war's costs, yet had no say in the war's conduct or war aims.
Transparency of this kind is needed if Japan is to make a stronger contribution to world affairs and help prevent the 21 st century from becoming yet another century of war.
Japan\u0027s Emerging China Strategy
Football hooliganism and nationalism create a witch's brew that, until lately, has rarely been sipped in Asia.
That changed at the recent Asian Football Cup.
Wherever Japan's players went, they were met by hostile crowds, which culminated in the championship match with China before a huge - and hugely hostile - crowd in Beijing.
This is especially worrisome because, unlike elsewhere in the world, official manipulation helps fan the flames of nationalism in China.
Young Chinese have been thoroughly indoctrinated with anti-Japanese sentiments.
China's former President Jiang Zemin systematically and relentlessly pursued a "Resistance and Victory-over-Japan Campaign" throughout the 1990's - a sinister device used to divert popular grievances and to legitimize continuing Communist rule by making the Party appear to be the defender of Chinese honor.
At the same time, the ancient sense of cultural superiority that runs in Chinese veins makes feelings of inferiority hard to bear.
With China's growing sense of itself as a superpower, resentment about the country being poorer and less admired than some other nations has become intolerable.
Now the young people who make up the vanguard of China's economic modernization are also nationalist-minded football hooligans.
Instead of providing an early showcase of decent spectator manners for the Beijing Olympics of 2008, the Asian Cup provided a glimpse at the rage that seethes beneath China's economic boom - and exposed the government's inability to control its increasingly restless people.
Of course, the bitterness of Sino-Japanese relations since the end of WWII helps set the stage for such nationalist outbursts, but the roots of China's rage go deeper.
Even as China grows richer and more powerful, memories of its past suffering and humiliation at the hands of the West and Japan remain alive - particularly because the Communist Party finds such memories so useful.
China's modern view of foreigners and their intentions is necessarily refracted through the prism of such history.
Perhaps inevitably, the recent anti-Japanese rage during the Asian Cup left most Japanese with a strong sense of China as an irreconcilable and unfriendly nation.
As usual, Japan's government reacted meekly, offering superficial complaints about China to assuage domestic displeasure.
But these complaints fail a vital diplomatic test - preservation of national dignity, prestige, and the honor of one's citizens.
So how should Japan respond?
Should Japan fight fire with fire?
Part of the problem lies in Japan's educational system.
Owing to a curriculum controlled by the powerful Japan Teachers Union, since the end of WWII many Japanese youth have viewed the Japan-China relationship with a consciousness of the need for atonement for the Sino-Japanese War.
Today, however, calls are growing to promote a more accurate and balanced historical education that focuses on modern history after the Meiji Restoration and WWII, and that reflects the reality of the Sino-Japanese relationship free from an obsession with "atonement."
Obviously, calls for greater balance in historical education raise the specter of reactionary overkill: either complete affirmation of past Japanese conduct or other forms of anti-Chinese bias.
But the majority of reform advocates seek something else: fairness and objectivity in history education, including studying the differences between Japan and China in their historical interpretations of the Sino-Japanese War.
Equally important, unlike the subject of WWII, Japanese history education barely addresses the two countries' post-war relations.
Japanese textbooks, indeed, hardly touch upon the enormous economic aid that Japan has given to China - which, not surprisingly, is ignored completely in China's history curriculum.
But the issue goes beyond education.
Coerced into feeling the need to atone to China, Japan passively tolerated recent episodes of worrying Chinese behavior.
This attitude contributed to inattention by Japan's political, administrative, academic, and media elite toward China's unlawful advance toward Japanese territories and neighboring waters, including Japan's Exclusive Economic Zone (EEZ).
China's recent and recurrent actions - such as ocean surveys for economic and military purposes, conducted without notification by navy or survey ships in Japanese territorial or EEZ waters - have, however, finally awakened Japan's elite from its inertia.
In response, the ruling Liberal Democratic Party established a Working Team on the Protection of Maritime Interests. Based on the team's recommendations, the government established an inter-ministerial commission on the survey of continental shelves and maritime resources.
The Japanese media's attention to the issue has also grown.
More is at stake than maritime interests.
With a revision of Japan's National Defense Program expected by year's end, the prime minister's Council on Security and Defense Capabilities has indicated a need to respond to China's military expansion, particularly its buildup of armed forces. "China is now in the stage of surging nationalism, and the trend is expected to continue in the future," the Council warned in its interim report, concluding that, "Japan must take appropriate actions in response to each incident" in which China attempts to "gradually advance its defense line [ocean-ward]."
Japan seems to be departing from its conventional low-profile diplomacy toward China, and readying itself to construct a comprehensive long-term national and regional security strategy.
The military core of such a strategy must include appropriate maritime tactics to respond to China's assertiveness.
But, ultimately, the effectiveness - and hence the success - of such a strategy will depend on how Japan positions itself in the region, especially in the relationship with China.
The Asian Football Cup highlighted not only China's growing nationalism, but also the parlous state of relations with Japan.
A glimpse of the silent rage of China's populace has awakened Japan to the need for a comprehensive regional strategy.
Japan’s Financial Truant
TOKYO – When asked if he had ever read the classic economics textbook by Paul Samuelson, something almost all first-year students in the subject read, Japanese Minister of Finance and Deputy Prime Minister Naoto Kan replied: “I read about 10 pages.”
But many Japanese were dumbfounded to learn that their finance minister began to grapple with the basic principles of economics only after assuming office.
Kan assumed his current office in Prime Minister Yukio Hatoyama’s administration this past January.
A civil-rights activist for much of his career, Kan is one of the few members of the Hatoyama government with previous cabinet experience, having served for 10 months in 1996 as Minister of Health and Welfare.
An aggressive debater, Kan is often mentioned as a candidate to succeed Hatoyama should he leave his post – a live possibility, given the prime minister’s plummeting approval ratings and strained relationship with Ichiro Ozawa, the kingpin of Hatoyama’s Democratic Party of Japan (DPJ).
Kan became finance minister after his predecessor Hirohisa Fujii suddenly resigned, citing ill health.
But Kan stumbled out of the gate by calling, during his first press conference, for a weaker yen – a statement that drew an instant rebuke from Hatoyama.
Kan ’s international debut was equally inauspicious.
At the G-7 meeting in Canada in February, the focus was on the Greek financial crisis and its international implications.
Kan jokingly told journalists that he was glad the meeting was not addressing Japan’s public debt, which has now reached almost ¥900 trillion.
The meeting, it turns out, was “all Greek” to him.
As a member of the European Union, Greece at least can hope for assistance from other EU members.
Japan, however, stands alone with its massive debt.
Likewise, whereas Greece’s nominal gross national product is at least growing, Japan remains mired in deflation.
And while stock markets are recovering in much of the developed world, Japanese stocks continue to stagnate.
When Kan led the DPJ in opposition, he avoided discussing any raise in the rate of consumption tax.
But now that his party is in power and must face the reality of running the second largest economy in the world, and coping with its huge debt burden, he is tossing aside his long-held views, broaching the subject of tax increases to help close the government’s gaping budget deficit.
With Hatoyama continuing to oppose an increase in consumption tax in the next four years, the issue will be a test of the government’s fundamental seriousness.
In last year’s general election, the DPJ offered countless rosy promises.
New childcare allowances of ¥26,000 per month were to be introduced, at a cost of ¥5.2trillion.
The gasoline tax, which brings in ¥2.6 trillion, was to be abolished.
And Japan’s greenhouse-gas emissions were to be cut by 25% relative to 1990’s levels.
In attempting to fulfill these inconsistent pledges, government spending this year will reach an all-time high of ¥92.3 trillion.
But tax revenue will cover only a fraction of that, as it is estimated at only ¥37trillion for 2010.
So, to meet the budget shortfall, a staggering ¥44.3 trillion in government bonds will be issued.
Coming at a time when governments with even less debt than Japan need to show that they are putting their financial houses in order, Japan’s budget sends precisely the wrong signal to markets.
Japan ’s consumption tax (essentially the same as VAT in Europe) was introduced in 1989 at a rate of 3%, and increased to 5% in 1997, after heated political battles.
Japan is no different from other countries in witnessing such disputes over taxes.
What is different is that, given the extent of the country’s fiscal problems, the government still continues to think of taxes only in partisan terms.
Voters chose the DPJ in order to change Japan, but they have mostly seen the same old political scandals. Hatoyama has been accused of receiving shady donations – “childcare allowances” – from his heiress mother.
Ozawa, the all-powerful Secretary General of DPJ, has been accused of using party funds to buy real estate, and of receiving bribes from construction companies.
Such scandals have tainted Japanese politics for decades.
But, just as Kan is planning only to “discuss” raising taxes, the supposedly clean DPJ is planning only to discuss the problem of money in politics by establishing a new non-partisan commission to investigate the problem.
Japan, however, cannot afford to waste time building a new apparatus to prevent party-financing scandals.
The country has laws on the books to handle the matter.
They simply need to be enforced.
What is needed, and badly, is a nonpartisan body to find a sustainable way to pay for the country’s social security programs.
Social security expenditures will face a shortfall of ¥6 trillion this year.
Given Japan’s aging population, there is a natural increase in the social security budget of ¥1 trillion per year.
The country simply cannot keep on piling debt upon debt.
To stop the country’s fiscal rot, Japan must achieve a consensus on the type of social services that national and local governments should offer, for how long, and at what cost.
The problem is too grave to be left to partisan bickering.
Securing Japan’s fiscal health, as well as the physical health of its people, is the most urgent issue the country has faced in half-a-century.
Japan’s Fiscal Crisis Comes of Age
TOKYO – Has Japan’s political paralysis finally lifted?
The recent agreement, after a long debate, between the government and leading opposition parties to double the consumption tax – from 5% to 8% in 2014, and then to 10% in 2015 – suggests that it has.
But there is a real risk that the government will mistake this measure for the end of the reform process.
In fact, it is – or should be – only the beginning.
By virtually any measure, official Japanese debt is the highest in the world.
The total outstanding volume of Japanese Government Bonds (JGBs) is an almost unfathomable $9 trillion, only just below the $10.5 trillion in outstanding debt for the full 17-country eurozone, which has more than triple the population.
So grim has Japan’s fiscal position become that bond issuance has exceeded tax revenue since 2009.
Taxes cover less than half of government spending.
And last year’s earthquake, tsunami, and nuclear disaster only made a grim fiscal picture worse by requiring huge new spending on reconstruction.
Japan issued a record ¥55.8 trillion ($693.5 billion), or 12% of nominal GDP, in government bonds during the last fiscal year.
Of course, Japan’s fiscal problems have been mounting for decades.
Annual tax revenue has fallen 30% since the country’s property bubble burst in 1989, owing to slow growth and deflation, with tax cuts implemented as stimulus measures during the 1990’s recession playing a subsidiary role.
The only reason that Japan has been able to sustain its fiscal position is that 93% of its debt is domestically held (with the Bank of Japan now buying close to one-third of the JGBs issued each year).
Indeed, in contrast to the foreign capital flight that has so damaged Europe, willing foreign buyers of JGBs are currently plentiful, pushing interest rates to their lowest levels ever.
Moreover, Japan’s private sector – its households and companies – sits atop a mountain of savings, which is mostly used to purchase JGBs.
Because the government can still borrow mainly from the Japanese people, its balance sheet remains stable.
But, given Japan’s aging population, how long can that continue?
Most leading Japanese economists believe that the situation cannot be sustained, given that the large number of households formed by pensioners is increasingly drawing down savings.
The share of those aged 65 or over has nearly doubled over the past two decades, to 23%, compared to 13% for the United States and 16% for Europe.
If this trend continues, as seems likely, the captured market that JGBs have had for decades will begin to shrink dangerously.
At that point, foreign purchasers are unlikely to pick up the slack.
In reaching the agreement to raise the consumption tax, the opposition Liberal Democratic Party insisted that the main squeeze on the budget deficit – the amount spent on social-security benefits for Japan’s retirees – begin to be addressed.
But the agreement actually does nothing to fix that problem.
The large number of elderly and retired people means that spending on health care and social security now consumes 29.2% of the budget, a one-third increase since 2000.
To meet these demands, Japan’s government has been slashing spending on education and research, the two areas in which the country’s post-war economic rise was forged.
And the old jibe that Japan cannot resist building bridges to nowhere if the government is paying rings less true nowadays.
Public works and pork-barrel spending fell to 5.1% of the budget this year, from 13% in 2000.
Of course, the tax system will also need to be addressed.
Just as Japan’s deficit is monumental by any measure, Japanese income earners are clearly under-taxed.
Even after the proposed doubling of the consumption tax, the rate will remain half the 20% (or more) that almost all European countries levy.
Overall tax revenue is roughly 27% of GDP, putting Japan in 28th place among the 35 OECD countries.
The government must not overestimate how much revenue can be gained by the consumption-tax increase, and thus how much of the budget hole can be closed.
Moreover, it has so far shrugged off any concern that the tax increase might have a chilling effect on consumption, and thus on economic growth.
Hiromichi Shirakawa, the chief economist at Credit Suisse AG in Tokyo, suggests that the revenue increase from the consumption-tax hike will soon begin to evaporate – and disappear completely in 5-7 years.
If he is right, the increase will turn out to be little more than a finger in the dyke of Japan’s budget problems.
Despite its two decades of economic malaise, Japan remains the world’s third-largest economy, and will grow by about 2% this year and 1.5% in 2013.
Given the economic doldrums in which the world finds itself, that may not seem so bad.
But, if Japan is ever to address its fiscal dilemma effectively, it will need to sustain faster growth than that.
Such growth presupposes a credible strategy to pare the deficit, which means a plan that recognizes the reality of the growing cohort of pensioners.
Japanese authorities will also need to launch bold liberalizing reforms to unshackle the many areas of the economy that are shielded from competition.
These reforms must aim to boost greater workforce participation by women; induce corporations to invest more at home; and increase competition in cosseted sectors of the economy.
If any country has the political tools to undertake a program of comprehensive reform, it is Japan.
The unity with which the Japanese population met last year’s disaster demonstrated once again that, when called upon, the national spirit can work miracles.
And Japan’s “greatest generation” – the men and women who rebuilt a war-shattered country into an economic powerhouse – should not be deemed unwilling to sacrifice for the greater good.
After all, they saved their country once; they are more than capable of doing it again.
Japan’s Kamikaze Isolation
It almost seems as if Japan is bent on self-isolation in Asia.
After a few months during which Prime Minister Junichiro Koizumi ostensibly sought to improve his country’s relations with China, his fifth visit to the controversial Yasukuni Shrine has again raised tempers.
China and South Korea both cancelled meetings of their foreign ministers with their Japanese counterpart.
Once again, Japan has missed a chance to rebuild trust in a part of the world where, in the absence of cooperative international institutions, trust is all there is.
Why does Japan still not understand that the way it treats its history echoes across every part of Asia that Japan’s military occupied in the first part of the 20th century?
Japanese reactions reveal an extraordinary degree of stubborn self-righteousness.
As Japan’s government never ceases to point out, the Yasukuni shrine, built in 1869, venerates the 2.5 million Japanese who have died for their country, not just the 14 judged as war criminals after WWII.
But, while many Japanese feel (with some justification) that South Korea and, in particular, China, exploit the Yasukuni issue to reduce Japan’s influence in the region and to pander to their publics’ strong nationalism, they are missing the point.
Indeed, domestic politicking seems to be at least as important to Japan’s leaders as to South Koreas’s or China’s.
Koizumi’s visit to the shrine, officially presented as that of a private citizen, was intended to impress the Japanese public, regardless of its effects abroad.
But the country now is isolated, which affects the whole fabric of stability in the region.
Japan’s diplomatic isolation strengthens those in the Chinese leadership who have long sought to marginalize what is economically and militarily still Asia’s most powerful nation, while sucking other states in the region deeper into China’s shadow.
Japan’s isolation also increases its dependency on its only ally, the United States, and undermines the fragile chance of developing a framework in Asia to address future regional crises in a spirit of cooperation rather than confrontation and rivalry.
Because Japan’s isolation is a matter not only for the Japanese, it must be a matter for Western policy.
The record, however, is not impressive.
The US administration, fashionably worried over China’s growing regional influence, seems quite happy with a closely-tied Japan that could help balance China.
But this is obviously a shortsighted approach, for a Japan that is tied exclusively to America will lose, not gain, against China in the region, thus making the balancing act even harder.
The Europeans have no Japan policy at all, not even a shortsighted one.
Fixated on the promise of an ever growing Chinese market, they give little thought to the stability of the region.
They seem to think of the powers in the region as unconnected islands, and of their own behavior towards one as devoid of political consequence for the others.
When the European Union last year considered lifting its symbolic arms embargo against China, none of the governments driving the proposal bothered to consider that this, too, would be symbolic, sending a message all over Asia that Europe was putting its political weight behind Chinese regional policies.
Japanese demands to reconsider fell on deaf ears, and the initiative was put on ice only when US congressmen threatened economic repercussions and China increased pressure on Taiwan.
Instead of exploiting Japan as a regional aircraft carrier, as the US tries to do, or neglecting her politically, as Europeans do, both need to work out a new, strategic approach – if possible, jointly.
The aim must be to prevent a clash of nationalisms and encourage a cooperative framework in which the region’s major countries interact and develop respect for each other’s interests.
Such a framework can emerge in Asia only with Japan’s active involvement, not on the basis of her isolation.
Of course, Japan must lead the way.
Japan’s leaders must recognize that the mindlessness with which they still treat the sensitivities of societies that suffered from Japanese imperialism in the twentieth century is as morally deaf as it is strategically damaging.
But this process of realization is more likely to succeed if Japan does not feel it stands with its back against a wall.
Friends from abroad, therefore, can assist this process by ensuring that Japan does not to feel alone.
Far from endorsing Japanese lack of sensitivity, active Western political engagement – for its own credibility in Asia – must convey that Japan’s future depends on gaining the trust of the region.
That is not too much to ask.
After all, Japan was a political ally throughout the half-century of the Cold War.
In a part of the world where democracy is gradually advancing, Japan can point to firm democratic traditions and institutions.
Its economic clout remains formidable, and its commercial and cultural ties to the West are broad and varied.
Japan may have shied away for decades from sharing the task of maintaining international order, but a new awareness of international responsibility is steadily emerging.
For those who want a stable Asia, the interest in establishing close links with Japan should be obvious.
This should not come at the expense of similar links with others, such as China and India, but these ties must not be acquired at the price of isolating Japan.
Can Japan Reboot?
CAMBRIDGE – Japanese Prime Minister Shinzo Abe’s recent policy decisions – to increase monetary stimulus dramatically, to postpone a consumption-tax increase, and to call a snap election in mid-December – have returned his country to the forefront of an intense policy debate.
The problem is simple: How can aging advanced economies revive growth after a financial crisis?
The solution is not.
It is now clear that the first round of Abe’s reforms – known as “Abenomics” – has failed to generate sustained inflation.
Hopes for continued recovery have now given way to two consecutive quarters of negative growth.
The question is whether Abenomics 2.0 will put Japan’s economy back on the path to renewed prosperity.
My own view is that the “three arrows” of Abenomics 1.0 basically had it right: “whatever it takes” monetary policy to restore inflation, supportive fiscal policy, and structural reforms to boost long-run growth.
But, though the central bank, under Governor Haruhiko Kuroda, has been delivering on its side of the bargain, the other two “arrows” of Abenomics have fallen far short.
There has been no significant progress on supply-side reforms, especially on the core issue of how to expand the labor force.
With an aging and shrinking population, Japan’s government must find ways to encourage more women to work, entice older Japanese to remain in the labor force, and develop more family-friendly labor policies.
Above all, Japan needs to create a more welcoming environment for immigrant workers.
There has been some movement on immigration.
Panicked by deadlines for the 2020 Summer Olympics in Tokyo, the government managed to clear the import of foreign construction workers (though the decision had to make its way through a half-dozen ministries).
But overall progress has been slow.
Japan desperately needs more nurses and hospice workers to care for its aging population, but bureaucratic and political resistance to immigration is deeply entrenched.
When I first started asking my Japanese academic friends about Abe’s supply-side reforms, they said, “Don’t worry, they’re coming.” Then, after a while, they would say, “Don’t worry, they’re coming – but slowly.”
One can only hope so. Without structural reforms, especially of the labor market, Abenomics cannot succeed in the long run.
The timing of the April 2014 consumption-tax hike (from 5% to 8%) was also unfortunate.
It would not have been easy for Abe to postpone the move, given that it had been locked in place by broad-based political agreement before he took office.
But the government could have engaged in more aggressive fiscal stimulus to counteract the hike’s short-term effects.
Instead, two successive quarters of negative growth have had a dispiriting psychological impact.
True, the slump is partly an illusion: the earlier boom was fueled by Japanese households’ effort to beat the tax by front-loading purchases of consumer durables – a nuance that seems to have been lost in the public debate.
But the big picture remains: Abenomics so far has failed to turn around a deflationary mindset.
Mind you, Japan’s outsize government debt and undersize pension assets are a huge problem, and only the most reckless and crude Keynesian would advise the authorities to ignore it.
For the moment, the risks are notional, with interest rates on ten-year government debt below 0.5%.
But saying that Japan’s debt is irrelevant is like saying that a highly leveraged hedge fund is completely safe; the risks may be remote, but they are not trivial.
Think about what would happen if the Bank of Japan actually managed to convince the public that inflation will average 2% on a sustained basis.
Would ten-year interest rates still be 0.5%?
What if other factors – say, a sharp decline in emerging-market growth – led to a sharp rise in global real interest rates, or a rise in risk premia on Japanese debt?
In principle, Japan could weather such shocks without high inflation or other extreme measures, but it is folly to deny the country’s vulnerability.
A hedge fund can simply go out of business; that is not an option for a great nation.
Fiscal sustainability requires an eventual rise in the consumption tax, and of course Japan should not wait until international investors start doubting its willpower.
The problem is in the timing and tactics.
Postponing the second consumption-tax increase seems like a good compromise between pushing Abenomics to escape velocity and maintaining long-run credibility.
But this brings us back to Japan’s deeper problems.
Demand policies alone will not alone prevent two more lost decades, much less guarantee two golden ones.
Demographic decline was a key factor in setting off Japan’s 1992 financial crisis and the long malaise that followed.
Japan is still a rich country, but its ranking in terms of real per capita income has now slipped below that of many other advanced economies – including the United Kingdom, by some measures – and far below that of the United States.
Japan’s experience holds important lessons for Europe, the main one being that stimulus policies, though necessary in the short run to support demand, cannot address long-term structural deficiencies.
If Abenomics 2.0 fails to embrace deep structural reform, it will fare no better than the original.
Japan\u0027s Malaise Was Made In America
The long bureaucratic struggle over whom to name as the next Governor of the Bank of Japan is over.
Prime Minister Koizumi has chosen a career BOJ insider, Toshihiko Fukui, a man who is unlikely to rock the boat.
The BOJ's hidebound policies are usually blamed for Japan's deflation.
That guilt is real, argues Deepak Lal, but there is another culprit: American economic policy toward Japan.
It is now widely recognized that an unintended consequence of the "Asian" economic model was an increasingly inefficient allocation of capital.
Japan's chronic slump is a case in point.
Artificially low domestic interest rates in the late 1980s promoted capital-intensive investment, driving down the rate of return on capital from an average of around 12% in 1952-1973 to less than 2% in 1996.
But what still needs to be explained is the timing of Japan's boom and bust over the last 15 years, as well as the reasons for the duration of the country's ongoing slump.
In their excellent book Dollar and Yen , Ronald McKinnon and Kenici Ohno provide an answer: the recurrence of endaka fukyo , a "strong yen recession," which the authors attribute to a "strong yen syndrome" rooted in persistent trade frictions between the US and Japan.
Ever since Richard Nixon took the dollar off the gold standard and exchange rates were floated worldwide, the US has sought to tackle its chronic bilateral trade deficit with Japan by pushing for a strong yen.
Real and threatened action against Japanese exports forced Japan to comply rather than risk a trade war, with the Bank of Japan (BOJ) delivering the requisite appreciation through tight monetary policy.
Thus, while liberalization of Japan's capital market in the early 1980s tied Japanese and US interest-rate movements, Japanese interest rates were discounted by the expected rate of currency appreciation.
As long as US interest rates were high, Japanese interest rates remained fairly positive, allowing the BOJ to moderate the effects of the yen's appreciation by easing domestic monetary policy.
But this ended after 1985, as the so-called "Plaza Accord" - agreed by the central banks of France, Germany, the UK, the US, and Japan - weakened the dollar by 30%.
Massive yen appreciation led to a Japanese recession in 1985-86, and the BOJ lowered interest rates to near zero.
Even with the tradable sector suffering due to the strong yen, capital-market liberalization meant that the capitalized value of future income streams, particularly from land, soared, as the interest rate at which they were discounted fell.
This was the start of the great Japanese asset-price bubble.
As the yen's strength undermined foreign demand for Japanese output, rising asset values turned domestic demand into the engine of the economy, and Japan rapidly grew out of the recession.
The BOJ hailed this outcome, since it gave the tradable sector time to adjust to the stronger yen.
The Japanese government also was happy; having just restored fiscal balance after the oil-price shocks of the 1970's, it was spared the need to run Keynesian-type deficits to deal with the post-1985 endaka fukyo .
But all bubbles burst.
By the end of the decade, the BOJ was worried by a massive appreciation in land and stock prices.
Before long, monetary tightening accompanied renewed trade friction with the US, prompting more yen appreciation and another recession.
It was only in 1995-96 that the US eased its position and allowed the yen to depreciate against the dollar.
But the respite was short-lived.
As US pressure for a strong yen resumed, Japan's economy plunged into its second endaka fukyo of the 1990s, from which it has yet to emerge.
Successive stimulus packages failed, leaving behind a massive build-up of public debt.
Fiscal stability, meanwhile, is already threatened by the growing pension and health-care costs implied by a rapidly aging population.
Another asset price bubble is out of the question; the last one left most of the domestic financial system virtually insolvent.
So Japan's future prospects ultimately depend on the US abandoning its strong-yen policy.
The US's policy is, in fact, economically indefensible.
In a world of integrated capital markets and floating exchange rates, the trade balance between any two countries reflects the difference between their domestic investment and savings.
The US has saved less than it invests for two decades, while Japan has done the reverse.
Japan's bilateral trade surplus is nearly the same size as its savings in the US.
As long as America borrows Japanese savings to fuel its domestic investment, a trade deficit is inevitable.
A strong yen can not prevent this.
When Japan's asset-price bubble burst in 1990-91, Japanese investors pulled out of the US-leading to a credit crunch and the mild recession that torpedoed President Bush's re-election hopes in 1992.
But pitifully low domestic returns on capital soon spurred Japanese investors to resume foreign lending, fueling the massive investment boom of the Clinton-era "new economy."
Japan has hardly benefited.
Although Japan is now the world's largest creditor nation and the US its largest debtor, its foreign-trade and capital flows are still largely denominated in dollars.
Unlike past creditor nations - Great Britain in the 19th century and the US for most of the 20th - Japanese investors have borne the exchange-rate risk involved in foreign lending.
With the dollar depreciating against the yen, the returns on their foreign investments in the 1980-90s were virtually wiped out.
So pity the millions of aging Japanese who bailed out the world economy - America, in particular - and now have nothing to show for it.
Four More Years for Abe
TOKYO – In the December snap election initiated by Japanese Prime Minister Shinzo Abe, the Liberal Democratic Party (LDP) and its junior coalition partner, the Komeito Party, won 326 of the Diet’s 475 seats, retaining their constitutional majority in the lower house of parliament.
It was an extraordinary achievement – one that Japan has not witnessed in decades.
Japan’s opposition parties offered no convincing alternative to the Abe government’s policies.
The Democratic Party of Japan (DPJ), which led the government less than three years ago, was unable even to field enough candidates to contest every seat.
Its road back to political relevance appears long and bleak.
Of course, under the single-seat constituency system, minor parties in Japan are at a distinct disadvantage.
Indeed, a landslide victory on the scale of Abe’s may very well lead to some of them completely disappearing from political life.
The only opposition party that made significant gains in the recent vote was the Japanese Communist Party, which nearly tripled its seat total, from eight to 21.
The JCP has recently sought to position itself as a “reliable opposition” to the LDP – though it has never proved particularly “reliable,” at least not in promoting realistic policies.
Given this, the JCP’s gains were probably fueled more by disgruntled voters’ desire to signal their frustration to Abe.
In fact, in those districts where the election pitted JCP and LDP candidates against each other, many citizens did not take the trouble to vote.
This contributed to record-low voter turnout of 52% – the one real blemish on the LDP’s victory.
The main actor in the election was undoubtedly Abe himself, whose bold macroeconomic strategy, so-called “Abenomics,” has attracted considerable attention since its initiation two years ago.
But three other actors also played important roles in securing Abe’s victory.
The first was Saudi Arabia.
At an OPEC meeting in the run-up to the election, the group’s dominant producer, Saudi Arabia, shelved plans to restrict oil production to counteract the rapid decline in world prices, allowing them to continue to fall.
This has brought considerable benefits to the oil-importing advanced economies – including Japan.
Had the Saudis decided to reduce output, Japan would have suffered the double blow of increased oil prices and a sudden sharp depreciation of the yen.
That would have exposed Abe’s government to widespread criticism, particularly in automotive industry hubs.
The second important actor in Abe’s campaign was China.
The appearance of more than 200 ships harvesting precious red coral around Japan’s Ogasawara islands in November opened the eyes of many Japanese to the risks of China’s growing power.
Such skepticism about China’s peaceful intentions has intensified criticism of the DPJ for what many consider an excessively soft approach to managing relations with the People’s Republic.
The third important actor was Japan’s labor unions.
The current problem facing Abenomics, as it aims to save Japan’s economy from deflation, is that wage hikes have not kept pace with the April 2014 consumption-tax increase (from 5% to 8%) or the rise in import prices associated with a weaker yen.
Organized labor’s representatives in wage negotiations, which are conducted every spring, usually come from unions that support the DPJ.
But Abe himself has supplanted the unions in demanding big pay rises from companies, helping him to attract significantly more votes from union members in this election than in 2011.
These three players’ interventions have helped Abe secure four more years in power.
After decades of rotating leadership, with eight prime ministers in just ten years, Japan finally has a stable government.
Though Japan’s parliamentary system distinguishes it from its neighbors, this aligns more closely with norms in the region, where presidential executives serve for six years in Russia and five years in South Korea and China.
(North Korea’s leader, of course, has no fixed term in office.)
Abe now has more political capital – and thus more freedom to maneuver – than perhaps any Japanese leader since the end of the Pacific War.
He must use it to follow through on the promise of Abenomics, finally enacting the structural reforms that Japan needs to reinvigorate its economy.
Japan’s New Model Political Leadership
AMSTERDAM – Amid the horrifying news from Japan, the establishment of new standards of political leadership there is easy to miss – in part because the Japanese media follow old habits of automatically criticizing how officials are dealing with the calamity, and many foreign reporters who lack perspective simply copy that critical tone.
But, compared to the aftermath of the catastrophic Kobe earthquake of 1995, when the authorities appeared to wash their hands of the victims’ miseries, the difference could hardly be greater.
This time, Prime Minister Naoto Kan’s DPJ (Democratic Party of Japan) government is making an all-out effort, with unprecedented intensive involvement of his cabinet and newly formed specialized task forces.
The prime minister himself is regularly televised with relevant officials wearing the work fatigues common among Japanese engineers.
In 1995, Kobe citizens extricated from the rubble were looked after if they belonged to corporations or religious groups.
Those who did not were expected to fend mostly for themselves.
This reflected a ‘feudal’ like corporatist approach, in which the direct relationship between the citizen and the state played no role.
This widely condemned governmental neglect of the Kobe earthquake victims was among the major sources of public indignation that helped popularize the reform movement from which Kan emerged.
Unfortunately, today’s Japanese media are overlooking that historical context.
For example, the newspaper Nihon Keizai Shimbun recently lamented the shortcomings of the Kan government’s response, emphasizing the poor lines of command running from the cabinet to officials carrying out rescue and supply operations.
But it failed to point out that the feebleness of such coordination, linked to an absence of cabinet-centered policymaking, was precisely the main weakness of Japan’s political system that the founders of the DPJ set out to overcome.
When the DPJ came to power in September 2009 it ended half-a-century of de facto one-party rule by the Liberal Democratic Party (LDP).
But even more significantly, its intentions addressed a cardinal question for Japan: who should rule, bureaucratic mandarins or elected officials?
The LDP, formed in 1955, had not done much actual ruling after helping to coordinate postwar reconstruction, which extended without debate into an unofficial but very real national policy of, in principle, unlimited expansion of industrial capacity.
Other possible priorities hardly ever entered political discussions.
The need for a political steering wheel in the hands of elected politicians was highlighted in 1993, when two major political figures bolted from the LDP with their followers.
By doing so, they catalyzed the reformist political movement that resulted in the DPJ, the first credible opposition party that – unlike the Socialists who engaged in mere ritualistic opposition – was prepared to win elections and actually govern rather than merely maintain the façade of government that had become the norm under the LDP.
Lowering the prestige of the government right now is the fact that Kan has not shown any talent for turning himself into a TV personality who can project a grand image of leadership.
But his government is dealing without question as best it can in the face of four simultaneous crises, its efforts encumbered by huge logistical problems that no post-World-War-II Japanese government has ever faced before.
The efforts of Kan’s government are obviously hampered by a rigid and much fragmented bureaucratic infrastructure.
The DPJ has had scant time to make up for what the LDP has long neglected.
Its seventeen months in power before the current catastrophe have been a saga of struggle with career officials in many parts of the bureaucracy, including the judiciary, fighting for the survival of the world they have always known.
Other countries could learn much from the DPJ’s attempt to alter a status quo of political arrangements that has had half a century to form and consolidate.
But it was the United States that first undermined the DPJ administration, by testing the new government’s loyalty with an unfeasible plan – originally the brainchild of the George W. Bush-era US defense secretary, Donald Rumsfeld – to build a new base for the US Marines stationed on Okinawa.
The first DPJ prime minister, Yukio Hatoyama, miscalculated in believing that a face-to-face meeting with the new American president to discuss long-term matters affecting East Asia could settle the issue.
He was steadily rebuffed by the American government.
As Hatoyama could not keep his promise to safeguard the interests of the Okinawan people, he followed up with a customary resignation.
Japan’s main newspapers have mostly backed the status quo as well.
Indeed, they now appear to have forgotten their role in hampering the DPJ’s effort to create an effective political coordinating body for the country.
A half-century of reporting on internal LDP rivalries unrelated to actual policy has turned Japan’s reporters into the world’s greatest connoisseurs of political factionalism. It has also left them almost incapable of recognizing actual policy initiatives when they see them.
The rest of the world, however, has marveled at the admirable, dignified manner in which ordinary Japanese are dealing with terrible adversity.
I am repeatedly asked why there is no looting or signs of explosive anger.
The term “stoicism” appears over and over in media coverage of Japan’s calamity.
But, in my half-century of close acquaintance with Japanese life, I have never thought of the Japanese as stoic.
Rather, the Japanese behave as they do because they are decent people.
Being considerate, they do not burden each other by building themselves up as heroes in their own personal tragedies.
They certainly deserve the better government that the DPJ is trying to give them.
Japan’s New Monetary Policy
CAMBRIDGE: The economic world breathed easier when the Bank of Japan announced that it would expand Japan’s money supply in order to boost demand.
Japan’s stock market soared nearly 10%, though it has fallen a bit since.
Worries about Japan – the world’s second-largest economy, gripped by stagnation for years – are high.
Unless its monetary policy really changes, both America and Japan could fall into recession simultaneously, with risks for all the world.
In the 1980s, Japan’s economy could do no wrong.
Its economy grew 4% annually, much faster than America’s annual 3% growth.
In the 1990s, however, Japanese growth averaged less than half of the annual 3.4% growth of the US.
Two usual explanations exist for Japan’s poor economic performance.
One is that Japan still suffers from the collapse of a financial bubble in the late 1980s.
Steep decline in Japan’s stock and real estate markets at the end of the 1980s and early 1990s left many financial bankruptcies and a weak banking system filled with bad loans.
Japan’s Government has been rather ineffective in cleaning up the mess, for example by delaying for nearly a decade the re-capitalization of Japanese banks.
A second explanation is that Japan’s economic structure became rigid because vested interests, especially in construction and services, prevented structural changes.
Political paralysis also contributed to the lack of structural change.
These explanations are undoubtedly correct, at least in part.
But there are stranger aspects to Japan’s sluggish economy.
After the oil price hikes of 1974 and 1980, Japan’s economy recovered through export-led growth.
Each time, the Yen weakened, making Japan’s exports – particularly electronics and automobiles – more competitive internationally.
This export-led recovery did not occur in the 1990s.
Why?
A partial, little-recognized explanation of Japan’s sluggishness in the 1990s is that export-led recovery was prevented by America and Europe.
When Japan’s financial bubble burst in 1990, the exchange rate stood around 140 Yen/1dollar.
As the economy weakened, the Yen strengthened, reaching 83 Yen/1 dollar in 1994.
While the Yen later weakened, it remained in the range of 100-120 Yen/1dollar until recently, when it weakened to around 123 Yen/1dollar.
This is strange.
In a floating exchange rate system, a currency should weaken in the face of chronic weakness in the economy.
This didn’t happen.
The direct explanation is that the Bank of Japan kept monetary policy tight, so that the currency did not weaken alongside the economy.
But a policy like that demands a deeper explanation.
Was it monetary policy error or something else?
If we review debates about Japan since 1988 we recognize the international pressures felt by Japan’s politicians and policymakers.
In the 1980s, Japan was not seen as a laggard but as a juggernaut who would soon dominate world markets in automobiles, semiconductors, electronics, even finance.
So American and European leaders insisted that Japan “voluntarily” restrain exports or face steep tariff and non-tariff barriers.
Japan’s export growth was crippled by these non-market interventions, not by a loss of competitiveness.
Moreover, the Bush and Clinton Administrations warned that Japan should not export its way out of trouble, as if a trade surplus resulting from export growth was somehow “unfair.”
Japan is a country with a structural trade surplus – ie, exports are likely to remain above imports on a sustained basis because Japan’s trade surplus results from an excess of national saving over investment.
With Japan’s high saving rate (a function of Japan’s aging population) and with investments held down by rates of return that diminished as Japan invested heavily during the postwar period, Japan’s excess savings naturally sought outlets abroad.
This translated into exports persistently higher than imports.
Notwithstanding this economic logic, America told Japan that it must grow through domestic demand, not exports.
US advice was: cut the savings rate.
Incredibly, Japan was told to run huge budget deficits (reducing government saving) to boost domestic demand.
It was the kind of advice you give to others, but never follow yourself.
Predictably, the results were awful.
First, Japan’s government ran up enormous debts.
Second, as government stopped saving, Japanese households saved even more.
They feared that the government would never be able to pay their pensions when due.
Thus, higher household savings negated the stimulus of government deficits.
While government ran large deficits, the Bank of Japan kept the money supply tight.
That decision came, in part, out of fear of reprisals if the Yen weakened more than American and European politicians deemed “fair.”
The strong Yen led to weak demand for Japanese products, and an inability to surmount the pile of bad debts through export-led growth.
Relatively slow growth in the money supply also led to deflation, worsening the problems of bad debts.
While Japan’s problems are partly due to its own mistakes, both America and Europe bear responsibility for its ongoing debacle.
It’s time for an expansionary monetary policy in Japan (and in other parts of Asia), even if the Yen weakens, as is likely (especially against the Euro, but also against the dollar).
Other Asian countries should let their currencies weaken, too.
If international trade and financial markets are allowed to operate freely, Japan’s recovery will come faster than in the past decade, benefiting the entire world.
Japan’s Nuclear Morality Tale
NEW DELHI – The troubles of the Fukushima nuclear-power plant – and other reactors – in northeast Japan have dealt a severe blow to the global nuclear industry, a powerful cartel of less than a dozen major state-owned or state-guided firms that have been trumpeting a nuclear-power renaissance.
But the risks that seaside reactors like Fukushima face from natural disasters are well known.
Indeed, they became evident six years ago, when the Indian Ocean tsunami in December 2004 inundated India’s second-largest nuclear complex, shutting down the Madras power station.
Many nuclear-power plants are located along coastlines, because they are highly water-intensive.
Yet natural disasters like storms, hurricanes, and tsunamis are becoming more common, owing to climate change, which will also cause a rise in ocean levels, making seaside reactors even more vulnerable.
For example, many nuclear-power plants located along the British coast are just a few meters above sea level.
In 1992, Hurricane Andrew caused significant damage at the Turkey Point nuclear-power plant on Biscayne Bay, Florida, but, fortunately, not to any critical systems.
All energy generators, including coal- and gas-fired plants, make major demands on water resources.
But nuclear power requires even more.
Light-water reactors (LWRs) like those at Fukushima, which use water as a primary coolant, produce most of the world’s nuclear power.
The huge quantities of local water that LWRs consume for their operations become hot-water outflows, which are pumped back into rivers, lakes, and oceans.
Because reactors located inland put serious strain on local freshwater resources – including greater damage to plant life and fish – water-stressed countries that are not landlocked try to find suitable seashore sites.
But, whether located inland or on a coast, nuclear power is vulnerable to the likely effects of climate change.
As global warming brings about a rise in average temperatures and ocean levels, inland reactors will increasingly contribute to, and be affected by, water shortages.
During the record-breaking 2003 heat wave in France, operations at 17 commercial nuclear reactors had to be scaled back or stopped because of rapidly rising temperatures in rivers and lake.
Spain’s reactor at Santa María de Garoña was shut for a week in July 2006 after high temperatures were recorded in the Ebro River.
Paradoxically, then, the very conditions that made it impossible for the nuclear industry to deliver full power in Europe in 2003 and 2006 created peak demand for electricity, owing to the increased use of air conditioning.
Indeed, during the 2003 heat wave, Électricité de France, which operates 58 reactors – the majority on ecologically sensitive rivers like the Loire – was compelled to buy power from neighboring countries on the European spot market.
The state-owned EDF, which normally exports power, ended up paying 10 times the price of domestic power, incurring a financial cost of €300 million.
Similarly, although the 2006 European heat wave was less intense, water and heat problems forced Germany, Spain, and France to take some nuclear power plants offline and reduce operations at others.
Highlighting the vulnerability of nuclear power to environmental change or extreme-weather patterns, in 2006 plant operators in Western Europe also secured exemptions from regulations that would have prevented them from discharging overheated water into natural ecosystems, affecting fisheries.
France likes to showcase its nuclear power industry, which supplies 78% of the country’s electricity.
But such is the nuclear industry’s water intensity that EDF withdraws up to 19 billion cubic meters of water per year from rivers and lakes, or roughly half of France’s total freshwater consumption.
Freshwater scarcity is a growing international challenge, and the vast majority of countries are in no position to approve of such highly water-intensive inland-based energy systems.
Nuclear plants located by the sea do not face similar problems in hot conditions, because ocean waters do not heat up anywhere near as rapidly as rivers or lakes.
And, because they rely on seawater, they cause no freshwater scarcity.
But, as Japan’s reactors have shown, coastal nuclear-power plants confront more serious dangers.
When the Indian Ocean tsunami struck, the Madras reactor’s core could be kept in safe shutdown condition because the electrical systems had been ingeniously installed on higher ground than the plant itself.
And, unlike Fukushima, which bore a direct impact, Madras was far away from the epicenter of the earthquake that unleashed the tsunami.
The central dilemma of nuclear power in an increasingly water-stressed world is that it is a water guzzler, yet vulnerable to water.
And, decades after Lewis L. Strauss, the Chairman of the United States Atomic Energy Agency, claimed that nuclear power would become “too cheap to meter,” the nuclear industry everywhere still subsists on munificent government subsidies.
While the appeal of nuclear power has declined considerably in the West, it has grown among the so-called “nuclear newcomers,” which brings with it new challenges, including concerns about proliferation of nuclear weapons.
Moreover, with nearly two-fifths of the world’s population living within 100 kilometers of a coastline, finding suitable seaside sites for initiation or expansion of a nuclear-power program is no longer easy.
Fukushima is likely to stunt the appeal of nuclear power in a way similar to the accident at the Three Mile Island plant in Pennsylvania in 1979, not to mention the far more severe meltdown of the Chernobyl reactor in 1986.
If the fallout from those incidents is a reliable guide, however, nuclear power’s advocates will eventually be back.
Japan’s Options
TOKYO – The current tensions between China and Japan have revived talk about how far Japan has fallen since its glory years of the 1980’s.
To the extent that this sense of decline is grounded in reality, can Japan recover?
Japan’s economy has suffered two decades of slow growth because of the poor policy decisions that followed the collapse of the country’s massive asset-price bubble in the early 1990’s.
In 2010, China’s economy surpassed Japan’s in total size, though it is only one-sixth the size in per capita terms.
In 1988, eight of the top ten companies in the world by market capitalization were Japanese; today, none is.
But, despite its recent poor performance, Japan retains impressive power resources.
It possesses the world’s third largest national economy, sophisticated industries, and the best-equipped conventional military forces among Asian countries.
Only two decades ago, many Americans feared being overtaken after Japanese per capita income surpassed that of the United States.
Books predicted a Japanese-led Pacific bloc that would exclude the US, and even an eventual war between the two countries.
Futurologist Herman Kahn forecast that Japan would become a nuclear superpower, and that the transition in Japan’s role would be like “the change brought about in European and world affairs in the 1870’s by the rise of Prussia.”
These views extrapolated an impressive Japanese record.
Today, however, they serve as a useful reminder about the danger of linear projections based on rapidly rising power resources.
On the eve of World War II, Japan accounted for 5% of the world’s industrial production.
Devastated by the war, it did not regain that level until 1964.
From 1950 to 1974, Japan averaged a remarkable 10% annual growth rate, and by the 1980’s was the world’s second largest national economy, accounting for 15% of global output.
Japan also became the world’s largest creditor and largest donor of foreign aid.
Its technology was roughly equal to that of the US – and even slightly ahead in some manufacturing branches.
Japan armed itself only lightly (restricting military expenditures to about 1% of GNP), and focused on economic growth.
This was not the first time that Japan had impressively reinvented itself.
A century and a half ago, Japan became the first non-Western country to adapt successfully to modern globalization.
After centuries of isolation, Japan’s Meiji restoration chose selectively from the rest of the world, and within 50 years the country had become strong enough to defeat a European great power, in the Russo-Japanese War.
Can Japan reinvent itself again?
In 2000, a prime minister’s commission on Japan’s goals in the twenty-first century called for just that.
Little has happened.
Given economic stagnation, the political system’s weaknesses, the aging of the population, and resistance to immigration, fundamental change will not be easy.
But Japan retains a high standard of living, a highly skilled labor force, a stable society, and areas of technological and manufacturing leadership.
Moreover, its culture (both traditional and popular), overseas development assistance, and support of international institutions provide resources for soft, or attractive, power.
But it seems unlikely that a revived Japan, a decade or two hence, could become a global challenger economically or militarily, as was predicted two decades ago.
Roughly the size of California, Japan will never have the geographical or demographic scale of China or the US.
And its soft power is undercut by ethnocentric attitudes and policies.
Some Japanese politicians talk about revising Article 9 of the constitution, which restricts Japan’s forces to self defense, and a few have spoken of nuclear armament.
Both seem unwise and unlikely now.
Alternatively, if Japan were to ally with China, the two countries’ combined resources would make for a potent coalition.
In 2006, China became Japan’s largest trade partner, and the new government formed by the Democratic Party of Japan in 2009 sought improved bilateral relations.
But an alliance also seems unlikely.
Not only have the wounds of the 1930’s failed to heal, but China and Japan have conflicting visions of Japan’s proper place in Asia and the world.
For example, China has blocked Japan’s efforts to become a permanent member of the United Nations Security Council.
More recently, after Japanese maritime officials arrested a Chinese fishing-boat captain near the disputed Senkaku islands, China responded harshly with arrests of Japanese businessmen, cancelation of student visits, and suspension of exports of rare-earth minerals upon which key Japanese industries depend.
China’s actions shocked many Japanese and undercut its soft power in Japan.
As one Japanese professor put it, in football terms, China scored an “own goal.”
In the highly unlikely prospect that the US were to withdraw from the East Asian region, Japan might join a Chinese bandwagon, but Japan is more likely to maintain its American alliance to preserve its independence from China.
The main danger for Japan today is a tendency to turn inward, rather than becoming a global civilian power that realizes its great potential to produce global public goods.
For example, Japan’s aid budget has declined, and only half as many Japanese students study overseas as did two decades ago.
An inward-looking Japan would be a loss for the entire world.
Japan Spins Its Wheels
OSAKA – To lose one prime minister may be regarded as a misfortune; to lose two in one year looks like carelessness.
That paraphrase of Oscar Wilde aptly sums up the current state of Japanese politics, given the serial resignations of Prime Ministers Shinzo Abe and Yasuo Fukuda.
Japan is once again saddled with a caretaker government as the ruling Liberal Democrat Party (LDP) scrambles for a new leader with an election to the lower house of the Diet looming.
The question is: who or what has been careless?
The LDP?
The constitution?
The voters?
For the last three years, the ruling LDP-Komei Party coalition has dominated the powerful Lower House with a two-thirds majority.
And, for a year, the opposition Democratic Party of Japan (DPJ) and other mini-parties control Upper House, which can veto legislation.
Political instability and gridlock have been the inevitable result.
The problem is that another election won’t fix this political mess, but will likely only ensure continuing paralysis. Japan’s political system requires the same sort of structural reform that its economy has long needed.
And, as with the economy, its politicians don’t appear ready to deliver anything that daring.
The LDP and the DPJ are now debating how to manage rising inflation at a time of falling living standards and deepening economic polarization within society – the latter a legacy of former Prime Minister Junichiro Koizumi’s market-oriented reforms of 2001-2006.
The debate is centered on whether to increase the consumption tax in order to sustain the country’s severely strained social security system.
Only occasionally does the issue of administrative and governmental reform sneak into the center of the debates.
The LDP has tried to placate public wrath about a series of political scandals and policy mistakes over the last two years, while the DPJ has attempted to capitalize on these.
The LDP is now staging a party leadership election in the hope of gaining a temporary boost in popular support before the Lower House election.
The five contenders, all of whom served in Koizumi’s cabinet, are actively debating major policy issues, but appear to be offering only more of the similar, because they are not equipped with Koizumi’s charisma and boldness.
The frontrunner is Taro Aso, the LDP secretary general, who wants economic pump-priming.
One of his challengers is Yuriko Koike, Japan’s first female defense minister, who is committed to restarting Koizumi’s market-oriented reforms and has his backing.
The other three have some charm and ability, but have offered nothing like a remedy to Japan’s deep structural problems, mostly because they all have not adamantly tackled the problems.
Given Japan’s huge accumulated national debts, the LDP can no longer appease the electorate through pork-barrel spending.
In essence, Koizumi’s reforms effectively dismantled the LDP’s vote-getting machine, which relied on buying off vested interests.
One consequence of this is that most Japanese voters nowadays are swing voters with no party loyalty.
The maverick Koizumi had the personal attractiveness and ideological appeal needed to galvanize a majority behind his plans for a “fair” distribution of the pain of reform.
His charisma dissipated public resistance, as his battle cry – “Demolish the LDP” – seemed to promise that politicians would also pay a price for change.
Koizumi did, of course, revive Japan’s economy after a decade of stagnation.
Yet even he did not touch the economy’s gargantuan quasi-governmental sector – the source of the most horrendous waste and misspending.
The public blames the LDP’s inability to control the bureaucracy, if not its complicity with it.
Yet the LDP’s position is not hopeless, because the public remains highly skeptical that the amateurish DPJ can control the bureaucracy, either.
So Japan’s choice comes down to one between a distrusted LDP and an incompetent DPJ.
Given voters’ vacillation, neither the LDP nor the DPJ is likely to gain an absolute majority.
Should the LDP win a simple majority, the new administration would still face a hung Diet, owing to the DPJ’s control of the Upper House.
So any new LDP-led coalition government will be just as precarious as the last two pathetic administrations.
Conversely, should the DPJ gain a simple majority, its inexperienced government will immediately have to cope with the same intractable policy issues that the LDP failed to confront.
Should the DPJ gain a plurality and forge a coalition with the country’s far-left parties, the outcome would be ceaseless instability.
The core of Japan’s political inertia consists in the current pseudo-two-party system comprising the LDP and the DPJ, because the parties’ divisions are actually devoid of any consistent ideological and policy differences.
Both parties include conservatives and liberals, defense hawks and doves.
The DPJ’s president, Ichiro Ozawa, who once served as an LDP secretary general, is an exemplar of this confused legacy.
Sadly, the chances that the LDP will reform, or that the DPJ will evolve into a responsible party of government in the foreseeable future, are slim.
Japan seems condemned to endure chronic and pointless political trench warfare until some crisis forces a realignment of political parties along ideological and policy lines.
Only when that happens will Japan be ready to play the responsible international leadership role that the world’s second largest economy should play.
Japan\u0027s Political Black Hole
For weeks, Japanese Prime Minister Junichiro Koizumi insisted that he would name a "dedicated inflation fighter" to head the Bank of Japan.
Instead, he has chosen a man steeped in the BOJ's conservative ways.
Mr. Koizumi's timidity is not personal but, says Deepak Lal, reflects the stifling irresponsibility of Japan's political structures.
From a purely economic point of view, pulling Japan out of its long slump would be simple.
Officials would liquidate the low-return investments that form the legacy of the late-1980s asset-price bubble and then clear away the wreckage left behind in the financial system.
As the examples of the recent Korean and Thai financial crises show, what is needed is political will that is equal to the task.
But the write-offs in Korea and Thailand, while large, were nowhere near as massive as what is necessary in Japan.
At a dinner in 1999, Paul Volcker, the former US Federal Reserve Bank Chairman, estimated the size of this financial housecleaning to be over 100% of Japan's annual GDP.
It is a brave politician who can propose that a year's economic output be lost!
No surprise, then, that Japanese leaders skirt the problem as if avoiding a mud puddle.
That path of evasion is reinforced by the nature of the political system created after the 19 th century Meiji restoration and that, notwithstanding the post-war constitution, has survived to our day.
Unlike China, which for centuries had a unified, bureaucratic-authoritarian, imperial state, Japan evolved a unique form of dual and at times triple government.
The Taika reforms of 604 AD created a constitutional monarchy in all but name, with political power wielded by shoguns, prime ministers, or chief advisors backed by military power.
This led to a long, unbroken line of sacred and inviolable--but politically neutered--emperors that still provides the focus for Japanese nationalism.
Japan's 19 th century Meiji rulers were interested in weaponry and hence enthusiastic about acquiring Western science and technology.
A "national identity" was invented, justifying power in new ways and enabling new methods of control.
The Imperial Rescript of Soldiers and Sailors of 1882 set out the ideology of the "family state," which framed hierarchical social relations based on authority, blood ties, and age.
The family state's core values of loyalty, filial piety and duty to one's elders were spread through military conscription and indoctrination in the national educational system.
At the same time, the Meiji oligarchs created a political system with no single focus of power.
They refused to write a constitution permitting power to be concentrated in the hands of a leader legitimized by the emperor.
This would have threatened the position of some of them and led to the oligarchy's disintegration.
Instead, they preferred an opaque power-sharing system in which no identifiable person would bear ultimate responsibility for decisions.
This was in fact a colossal system of irresponsibility , as the run-up to the Second World War demonstrated.
The Meiji oligarchs also propagandized that politicians concerned with narrow party and personal interests were unpatriotic.
So another group had to be found to manage the country: a meritocratic bureaucracy, whose members are largely recruited from the law department of Tokyo University (Todai).
One oligarch, Yamagata Aritomo, made the bureaucracy immune to political meddling by obtaining a personal communication from the emperor that could never be overruled.
It also made the Privy Council the guardian of Aritomo's edicts concerning examinations, appointments, discipline, dismissal, and rankings of bureaucrats.
But the outcome was not a French-style administrative state.
With no political overlord to settle or adjudicate bureaucratic disputes, decisions could be made only by "consensus," which was mostly a euphemism for paralysis.
The Meiji political system and the bureaucrats survived the postwar purges and the imposition of an American-drafted constitution.
As a result, the lack of an effective political center to adjudicate disputes still haunts Japan.
Indeed, the continuing influence of the Meiji tradition clearly implies that Japan's post-war economic "miracle" could not have been due to the enlightened dirigisme of a developmental state, as many Western commentators believe.
In fact, there was no miracle.
As Maurice Scott shows in his book A New View of Growth , Japan's 9.2% annual growth rate during the peak "miracle" years, 1960-73, can be explained by the investment rate, the growth in the quality-adjusted labor force, and the push that comes from "catching up" with the most developed economies.
The much-touted Asian model of development was little more than an unholy alliance between government agencies, large industries, and the financial system.
Industrialists undertook risky projects, over-invested, and eventually stuffed the banks with non-performing loans.
The puncturing of Japan's asset bubble of the late 1980s merely brought these chickens home to roost.
A decade later, the chickens are still roosting. Japan must tackle its financial mess once and for all.
More importantly, it must turn its back on the model that created it.
Given the institutional paralysis built into Japan's political system, it is difficult to see who will undertake this task.
Thus, continuing pain seems likely for ordinary Japanese, whose thrift and productivity ensured that the country rose like a phoenix from its wartime destruction.
Increasingly, Japan's great postwar generation will see their hopes--and their savings--turn to dust.
Japan’s Political Tremors
NEW YORK – Rarely – indeed, perhaps not since World War II – have the Japanese had such good press abroad.
Even South Korean newspapers have been full of praise for the self-discipline of ordinary Japanese in dire circumstances.
And coming from Koreans, not usually Japan’s biggest fans, that is no small thing.
When it comes to Japanese officials, however, matters are a little different.
There has been much complaining from foreign observers, aid teams, reporters, and government spokesmen about the lack of clarity, not to mention reliability, of official Japanese statements about the various disasters following the massive earthquake that struck northeastern Japan on March 11.
Serious problems appeared to be skirted, deliberately hidden, or played down.
Worse still, few people had any understanding of who was responsible for what.
Sometimes it looked very much as if the Japanese government itself was kept in the dark by officials from the Tokyo Electric Power Company (TEPCO), owners of the nuclear power plants that are leaking radiation into land, sea, and sky.
Prime Minister Naoto Kan had to ask TEPCO executives at one point, “What the hell is going on?”
If Kan didn’t know, how could anyone else?
Indeed, Japan’s powerful bureaucrats, normally assumed to know what they are doing, appeared to be as helpless as elected politicians.
Outside Japan, it is widely believed that everything works differently there, owing to the country’s exotic culture.
This perception is not entirely false. An important aspect of culture is the use of language.
Often Japanese officials’ utterances are deliberately vague, to avoid having to take responsibility if things go wrong – a fairly universal trait among the powerful.
But some utterances may get lost in translation.
When a Japanese official says that he will take something “into serious consideration,” he means “no.”
This is not always properly understood.
In the case of Japan’s official response to the earthquake and tsunami-related disasters, however, cultural exoticism is not an adequate explanation.
In fact, the Japanese themselves have been as critical as any foreigner, if not more so, of their politicians’ apparent haplessness, and of TEPCO officials’ evasions and obfuscations.
Some people are even leaving the relative safety of Tokyo, having lost trust in the government and TEPCO, which has a history of covering up dangerous flaws in its nuclear facilities.
An investigation in 2002 revealed that TEPCO had submitted false data to the government, concealed accidents, and literally hid cracks.
The breakdown of public trust in Japanese officialdom would be worrying were it to lead to a democratic breakdown.
But it might also lead to necessary changes.
Even though systems of government may have certain traditional components, Japan’s problems are systemic, not cultural.
Japanese government was always paternalistic, and the chain of command complex and vague.
During the war, the emperor was omnipotent in theory, but relatively powerless in fact.
But there was never a dictator, either.
Decisions emerged from murky negotiations and hidden rivalries between bureaucrats, imperial courtiers, politicians, and military officials, often pushed this way or that by various domestic and foreign pressures, some of them violent.
The post-war political order, though no longer belligerent, was just as murky, with bureaucrats acting as the puppeteers of underfunded and ill-informed politicians, who operated regional pork-barrel operations together with big business, which in turn worked in cahoots with the bureaucrats.
So long as Japan was playing catch-up with the West, and government and industrial resources were concentrated on economic growth, the system worked quite well.
Indeed, it was the envy of many Westerners, who were fed up with self-interested lobbying, pesky labor unions, and meddling politicians.
Such Westerners are now often just as enamored of China’s paternalistic – and equally opaque and impenetrable – political system.
But it was this system that produced the problems now associated with TEPCO.
Tight-knit cliques of bureaucrats and corporate officials made sure that a utility company vital for economic growth would never be hindered by strict regulation or political oversight.
The cozy relationships between government officials and the corporate world – and not just in the case of TEPCO – was reflected in the large number of retired bureaucrats who took jobs on the boards of companies that they had supposedly regulated.
Many Japanese are aware of these problems, which is why they voted for Kan’s Democratic Party of Japan (DPJ) in 2009, breaking the virtual political monopoly exercised for a half-century by the conservative Liberal Democrats.
One of the DPJ government’s stated goals was to increase the political system’s transparency: less hidden authority for bureaucrats, more responsibility for elected politicians.
The aftermath of the earthquake is thus a potential watershed.
If Japan’s relatively inexperienced government is blamed for everything that goes wrong, people might wish to retreat to the old ways of murky paternalism.
If, on the other hand, enough people realize that the old ways are the problem, rather than the solution, democratic reforms will still have a fighting chance.
That would cast at least one ray of light on the gloom that envelops Japan today.
Japan’s Recovery Bonds
TOKYO – The tsunami raced through the town at eight meters per second, the speed of a gold-medal sprinter.
The wave’s height reached 15 meters, towering above even the highest pole-vault bars.
Ships were heaved onto hills, and cars floated like boats.
After the wave passed, a chaotic mountain of debris was all that was left of Kamaishi, Japan’s oldest steel-manufacturing town, in Iwate prefecture.
It looked like the aftermath of the firebombing of Tokyo, or like Hiroshima and Nagasaki after the atomic bombs fell.
Similar scenes can be found throughout the Tōhoku region, along Japan’s northeastern Sanriku Coast.
For example, in the quiet rural city of Rikuzentakata, with a population of 23,000, it is believed that 5,000 of its 8,000 households disappeared in the disaster.
The only buildings that remain standing are the town hall and one supermarket.
Sendai airport, near the coast in Miyagi Prefecture, now looks more like a seaport.
The enormous earthquake that hit the Tōhoku region on March 11, with a magnitude of 9.0 on the Richter scale and its epicenter off the coast of Sanriku, was the largest in Japan’s recorded history.
The number of victims and the extent of the damage remains unknown, but the human loss is expected to exceed 23,000, and economic damage is estimated to be around ¥25 trillion.
Tsunami is originally a Japanese word.
Patrick Lafcadio Hearn (known as Koizumi Yakumo after his naturalization as a Japanese citizen), an Englishman born on the Greek island of Lefkada, first introduced it in his novel A Living God.
Hearn’s depiction of the Meiji-Sanriku earthquake, which in 1896 took 22,000 lives in the same region as the recent quake, was later included in elementary school textbooks under the title of “The Burning of the Rice Field.”
In Hearn’s novel, Gohē, a village headman who lives atop a hill in his village, notices an approaching tsunami wave when he sees seawater being drawn out rapidly from the shore.
In order to warn his fellow villagers, who are busy with festival preparations, Gohē uses a torch to set fire to his recently cut sheaves of rice.
The villagers who gather on the hill to put out the fire soon see below them the tsunami wreaking havoc on their town.
Gohē’s quick leadership and sacrifice saved all of the villagers.
This story has influenced Japan ever since.
Indeed, when Japan provided relief to the countries hit by the Sumatra earthquake in 2004, which claimed 250,000 lives, it was keenest to promote an early warning system for tsunamis.
But Japan’s long history of earthquakes and tsunamis – and now advanced forecasting technology – had made people complacent.
Moreover, no one imagined that such a huge tsunami would ever hit Japan.
The most unforeseen event occurred at the Fukushima Daiichi nuclear power plant.
The facility’s robust design is similar to that of the Kashiwazaki-Kariwa nuclear power plant, the world’s largest, in Niigata, which was unscathed by the Chūetsu offshore earthquake (measuring 6.8 on the Richter scale) in July 2007.
Fukushima Daiichi withstood the earthquake, but no one considered the possibility of ten-meter-high tsunami waves hitting a nuclear plant.
Now we know that the unthinkable is possible.
As a result, the Fukushima Daiichi plant’s problems have brought the worldwide rush toward nuclear-power generation to a screeching halt.
There are currently 443 nuclear power plants worldwide – a number that was set to double in the next 15 years.
China alone had been planning to add 50 new power plants to the 27 plants it already has.
It is Japan’s responsibility, particularly of political leaders like me, to ensure that our experiences are reflected in the creation of safe building codes and standards for such plants worldwide.
As for Japan, once the initial economic panic subsides, bipartisan agreement will be necessary to design and approve a budget aimed at bringing about the quickest possible recovery.
Furthermore, Japan must find a way to compensate for the ten-million-kilowatt shortfall that the loss of the Fukushima plant implies.
Indeed, Japan must now reevaluate its entire national energy strategy, including a review of the different usage levels in eastern and western Japan.
And, because the affected regions were already suffering from depopulation and rapid aging – problems typical of much of today’s Japan – recovery will require a new rural-development program that moves the country away from its Tokyo-centric economic model.
But, in working towards recovery, Japan has a great advantage.
The key word for recovery in Japanese is kizuna (bonds).
Even when faced by the vast confusion created by disaster on the scale of the recent earthquake and tsunami, Japanese relied on kizuna to help and reassure each other.
When implementing forced blackouts in the region, for example, there were few major traffic accidents, even though traffic lights had stopped working.
I hope that one day, after the story of Japan’s recent calamity has been written, kizuna will become even more widely known than “tsunami.”
Japan’s Road to Harmonious Decline
PARIS – Forget what you have heard about the hard-working Japanese salaryman: since the early 1990’s, the Japanese have drastically slackened their work habits.
Indeed, Tokyo University economist Fumio Hayashi has demonstrated that the main reason behind Japan’s 20 years of stagnation has been the decrease in the quantity of work performed by the Japanese.
The government itself has led the way here, starting with its decision to close public administration buildings on Saturdays.
Japan’s banks followed suit.
From 1988 to 1993, the legal work week fell 10%, from 44 hours to 40.
This, as much as anything, helped to bring Japan’s long-running post-WWII economic “miracle” to its knees.
In the service sector, the decline is even worse than in manufacturing, because services are heavily regulated and partially closed to foreign competition.
In the retail sector, which employs a huge number of Japan’s unskilled workers – the so-called “mom and pop” shops – Japanese productivity is now 25% lower than in Western Europe.
Former Prime Minister Junichiro Koizumi (in power between 2000 and 2004) and his chief economic adviser and minister of finance, Heizo Takenaka, understood all too well that Japan was losing ground in terms of productivity.
They sought to counter the trend toward less work through privatization and deregulation.
Japan’s powerful bureaucrats, nostalgic for the 1960’s model of development, whereby government and its business cronies nurtured the Japanese miracle, strongly opposed this bold, free-market solution.
But their model is obsolete, because Japan now competes directly with many other Asian and non-Asian countries, where work habits are of the type that used to prevail among the Japanese.
Moreover, public opinion never supported Koizumi’s policy, which was alleged then, as it is now, to be a source of inequality.
But that is a canard: real-estate speculation, not privatization, has been the real source of undeserved wealth in Japan.
Nonetheless, the newly victorious Democratic Party of Japan (DPJ) has been able to make the accusation stick to free-market policies.
The recent electoral triumph of Yukio Hatoyama’s untested DPJ thus confirmed the popular wish not to follow America’s free-market model. Hatoyama makes no economic sense in declaring that growth is important but that happiness comes first.
Nevertheless, this sentiment does reflect the mood of many Japanese.
Assuming that Hayashi and Takenaka are right about the causes of Japan’s stagnation, one must ask whether today’s Japanese are willing to work more in order to catch up with the United States and to lead Asia development?
Stagnation is a tacit collective choice made by a country’s majority.
Have the Japanese people opted for it?
Nearly half of the Japanese population is either retired or near retirement age, and they worked very hard to achieve a high level of comfort.
Thanks to them, despite the blighted economy of the “lost decade,” Japanese income is still higher than it is in Europe.
Moreover, unemployment is low compared to the Western world, because the unproductive distribution sector absorbs young people who cannot find better jobs.
Stagnating Japan has thus remained a peaceful and rather conservative society.
By contrast, a higher growth rate would require fewer golf breaks for salarymen and significant immigration in a nation that is unaccustomed to foreign intrusion and different cultural habits.
Are the Japanese really ready to accept such a cure?
Most Japanese, mostly among the old generation, are satisfied with the kind of society they have built.
They perceive Americans and Europeans as being obsessed with money and material ambition, and they seem ready to accept some stagnation as the price of remaining truly Japanese.
Hatoyama understands this, which is why he won the recent election.
Hatoyama’s talk about a “new age,” which sounds strange from a Western perspective, is in harmony with the Japanese way: this is a country where thousands of cult leaders offer myriad paths to Happiness, in particular a glib mishmash of New Age and Zen Buddhism.
How long can Japan sustain this period of harmonious stagnation?
Japan’s high-tech industries remain competitive, and the country is still the world’s second largest exporter.
It retains a highly innovative economy, which registers more new patents each year than all European countries combined – second only to the US and eons ahead of China and India.
Japan’s 150 million people still produce far more than 2.5 billion Chinese and Indians.
In ten years or so, however, Japan could lose its status vis-à-vis the rest of Asia.
Stagnation is already having a big impact on Japan’s young, for whom it is becoming hard to find a job, let alone life-long employment in a leading global company.
Teenagers know that they will have fewer opportunities than their parents had.
How they will pay for their parent’s pensions and health care is unknown.
Most troubling is the absence of open debate about these matters.
Japan is a hush-hush society, where everyone is supposed to guess what is going on, and the media are careful not to provoke social division. Hard questions are not to be asked, and straightforward answers are considered too rude and crude to be given.
Foreigners are welcome to make comments, but their advice will usually be ignored.
It may seem to most Japanese that their continuing economic power affords them the luxury of indulging such ingrained habits.
Perhaps they should bear in mind Ernest Hemingway’s description of how a man goes broke: “slowly, then all at once.”
Japan’s Rubble Economy
TOKYO – On March 11, a year will have passed since Japan was struck by the triple tragedy of an earthquake, tsunami, and nuclear accident.
According to figures announced by the country’s National Police Agency, the Great East Japan Earthquake left behind 15,848 dead and 3,305 missing – the largest loss of life due to natural disaster in Japan since World War II.
Searches for the missing – mainly at sea – are still continuing.
The number of buildings affected by the earthquake or the tsunami include 128,582 completely destroyed, 243,914 partly destroyed, 281 completely or partly burned, 33,056 flooded (including 17,806 above the ground floor, and 674,641 with other types of damage.
Approximately 320,000 people lost their homes, of which more than 90% continue to live in temporary housing.
Where to rebuild their homes remains undecided.
The Great Hanshin Earthquake that struck western Japan in 1995 took 6,343 lives, in part because the city’s mazelike streets prevented access by emergency workers.
In the aftermath, the city was reborn in a dramatically different and safer form.
Despite numerous difficulties, recovery from that earthquake was faster than expected: there was no tsunami to complicate matters, and rebuilding efforts could be focused on buildings that had collapsed in the earthquake.
Moreover, the government provided strong leadership and official agencies responded rapidly, ensuring, among other things, a rapid cleanup of the rubble.
Indeed, aside from fiscal issues, disposal of rubble is the greatest obstacle preventing reconstruction after natural disasters everywhere.
The rubble produced in the Great Hanshin Earthquake was equivalent to the amount that Japan normally processes in roughly eight years.
Difficulties like damaged waste-disposal facilities were overcome by local governments’ cooperation and burden-sharing.
And, fortunately, plans to build Kobe Airport on an artificial island near the coast ensured demand for landfill.
In Japan, waste disposal relies mainly on incineration, but use of landfill off the coast made it possible to process the waste more quickly.
Even so, disposal of the waste took approximately three years, at a cost to the central government of ¥324.8 billion.
Compared to the Great Hanshin Earthquake, reconstruction after the Great East Japan Earthquake is moving at a snail’s pace.
Rubble is equivalent to 11 years of waste in Iwate prefecture, and 19 years of waste in Miyagi prefecture – enormous volumes that exceed these regions’ disposal capacity.
The cost of waste disposal, estimated at ¥776.7 billion, will be more than double the disposal cost following the Great Hanshin Earthquake.
Unlike the relatively rapid cleanup after the Great Hanshin Earthquake, only 5% of the total amount of rubble created by last year’s disaster has been processed so far.
Temporary sites for rubble in affected areas are being piled with the remnants of building materials and domestic appliances and furnishings, creating little mountains here and there, as rules on recycling instituted since 1995 require sorting waste by material.
Moreover, there are no plans to build an artificial island to use up the rubble, as was done with Kobe airport.
Owing to the tsunami, some of the refuse will ride the waves of the Pacific, reaching Hawaii and the West coast of the United States in a year or so.
But the damage caused by the tsunami also caused significant delays in reconstruction.
Local governments worry about how far from the coast new residential areas should be built, amplifying concerns about the future for people who are being forced to live with strangers in temporary housing in an unfamiliar area.
But the main reason for reconstruction delays is concern about radiation from the destroyed Fukushima Daiichi nuclear power plant.
Fear of radioactive contamination has stoked strong opposition from residents in areas that would need to accept rubble – even when the rubble is from areas nowhere near Fukushima.
In addition, although incineration greatly decreases the volume of waste, the concentration of radioactive cesium has been increasing over the past year, making it difficult to find suitable final disposal sites.
The heads of local governments in various regions are attempting to convince residents not to fear radiation and to allow for dispersal of rubble.
But the unseen enemy has aroused concerns – particularly among mothers of young children – that are more a matter of psychology than of science.
As the world’s only victim of a nuclear attack, Japan’s allergy to radiation is stronger than anywhere else.
Nevertheless, with the exception of the special circumstances caused by the Fukushima catastrophe, Japan is hardly the only country with a mess to clean up before it can reconstruct.
Thailand, which earlier this year suffered prolonged flooding, is also facing the need to dispose of rubble as it works to rebuild.
Measures to prevent flooding and steps to repair damaged areas of Bangkok cannot even begin until the rubble is cleared.
Haiti and New Zealand have also encountered similar problems.
Reconstruction constitutes a special kind of public-works project.
The disposal of rubble, given its labor-intensive character, has a particularly marked effect on job creation, at least in the short term.
One might call this “rubble economics.”
It is the inevitable formula for recovery – one shovel load at a time.
Japan’s Savings Crisis
CAMBRIDGE – Japan is heading toward a savings crisis.
The potential future clash between larger fiscal deficits and a low household saving rate could have powerful negative effects on both Japan and the global economy.
First, some background.
Japan was long famous for having the highest saving rate among the industrial countries.
In the early 1980’s, Japanese households were saving about 15% of their after-tax incomes.
Those were the days of sharply rising incomes, when Japanese households could increase their consumption rapidly while adding significant amounts to their savings.
Although the saving rate came down gradually in the 1980’s, it was still 10% in 1990.
But the 1990’s was a decade of slow growth, and households devoted a rising share of their incomes to maintaining their level of consumer spending.
Although they had experienced large declines in share prices and house values, they had such large amounts of liquid savings in postal savings accounts and in banks that they did not feel the need to increase saving in order to rebuild assets.
A variety of forces have contributed to a continuing decline in Japan’s household saving rate.
The country’s demographic structure is changing, with an increasing number of retirees relative to the workers who are in their prime saving years.
Surveys tell us that younger Japanese are more interested in current consumption and less concerned about the future than previous generations were.
And the traditional notion of saving for bequests has waned.
The household saving rate therefore continued to fall until it was below 5% at the end of the 1990’s and reached just above 2% in 2009.
At the same time, the fiscal deficit is more than 7% of GDP.
The combination of low household saving and substantial government dissaving would normally force a country to borrow from the rest of the world.
But Japan maintains a current-account surplus and continues to send more than 3% of its GDP abroad, providing more than $175 billion of funds this year for other countries to borrow.
This apparent paradox is explained by a combination of high corporate saving and low levels of residential and non-residential fixed investment.
In short, Japan’s national savings still exceed its domestic investment, allowing Japan to be a net capital exporter.
The excess of national saving over investment not only permits Japan to be a capital exporter, but also contributes – along with the mild deflation that Japan continues to experience – to the low level of Japanese long-term interest rates.
Indeed, despite the large government deficit and the enormous government debt – now close to 200% of GDP – the interest rate on 10-year Japanese government bonds is just 1%, the lowest such rate in the world.
But what of the future?
While the current situation could continue for a number of years, there is a risk that rising interest rates and reductions in net business saving will bring Japan’s current-account surplus to an end.
One reason for a rise in the interest rate would be a shift from low deflation to low inflation.
Prices in Japan have been falling at about 1% a year.
If that swung by two percentage points – as the government and the central bank want – to a positive 1% inflation rate, the interest rate would also increase by about two percentage points.
With a debt-to-GDP ratio of 200%, the higher interest rate would eventually raise the government’s interest bill by about 4% of GDP.
And that would push a 7%-of-GDP fiscal deficit to 11%.
Higher deficits, moreover, would cause the ratio of debt to GDP to rise from its already high level, which implies greater debt-service costs and, therefore, even larger deficits.
This vicious spiral of rising deficits and debt would be likely to push interest rates even higher, causing the spiral to accelerate.
The larger deficits would also eliminate all of the excess saving that now underpins the current-account surplus.
The same negative effect on the current account could occur if the corporate sector increases its rate of investment in plant and equipment or reduces corporate saving by paying higher wages or dividends.
The excess saving could also decline if housing construction picks up.
Japan’s ability to sustain high fiscal deficits, low interest rates, and net capital exports has been possible because of its high private saving rate, which has kept national saving positive.
But, with the current low rate of household saving, the cycle of rising deficits and debt will soon make national saving negative.
A shift from deflation to low inflation would accelerate this process.
The result in Japan would then be rising real interest rates as the low private saving rate runs head-on into large fiscal deficits.
That would weaken the stock market, lower business investment, and impede economic growth.
And if Japan’s domestic net saving surplus vanishes, the current $175 billion of capital outflow would no longer be available to other countries, while Japan might itself become a net drain on global savings.
Japan’s Slow-Motion Crisis
TOKYO – If you listen to American, European, or even Chinese leaders, Japan is the economic future no one wants.
In selling massive stimulus packages and bank bailouts, Western leaders told their people, “We must do this or we will end up like Japan, mired in recession and deflation for a decade or more.”
Chinese leaders love pointing to Japan as the prime reason not to allow any significant appreciation of their conspicuously undervalued currency. “Western leaders forced Japan to let its currency rise in the second half of the 1980’s, and look at the disaster that followed.”
Yes, nobody wants to be Japan, the fallen angel that went from one of the fastest growing economies in the world for more than three decades to one that has slowed to a crawl for the past 18 years.
No one wants to live with the trauma of the deflation (falling prices) that Japan has repeatedly experienced.
No one wants to navigate the precarious government-debt dynamic that Japan faces, with debt levels far above 100% of GDP (even if one factors in the Japanese government’s vast holdings of foreign-exchange reserves.)
No one wants to go from being a world-beater to a poster child for economic stagnation.
And yet, visitors to Tokyo today see prosperity everywhere.
The shops and office buildings are bustling with activity.
Restaurants are packed with people, dressed in better clothing that one typically sees in New York or Paris.
After all, even after nearly two decades of “recession,” per-capita income in Japan is more than $40,000 (at market exchange rates).
Japan is still the third-largest economy in the world after the United States and China.
Its unemployment rate remained low during most of its “lost decade,” and, although it has shot up more recently, it is still only 5%.
So what gives?
First, things look a lot grimmer when one gets two hours outside of Tokyo to places like Hokkaido.
These poorer outlying regions are hugely dependent on public-works projects for employment.
As the government’s fiscal position has steadily weakened, the jobs have become far scarcer.
True, there are beautifully paved roads all around, but they go nowhere.
Old people have retreated to villages, many growing their own food, their children having long abandoned them for the cities.
Even in Tokyo, the air of normalcy is misleading.
Two decades ago, Japanese workers could expect to receive massive year-end bonuses, typically amounting to one-third of their salary or more.
Now these have gradually shrunk to nothing.
True, thanks to falling prices, the purchasing power of workers’ remaining income has held up, but it is still down by more than 10%.
There is far more job insecurity than ever before as firms increasingly offer temporary jobs in place of once-treasured “lifetime employment.”
Although hardly in crisis (yet), Japan’s fiscal situation grows more alarming by the day.
Until now, the government has been able to finance its vast debts locally, despite paying paltry interest rates even on longer-term borrowings.
Remarkably, Japanese savers soak up some 95% of their government’s debt.
Perhaps burned by the way stock prices and real estate collapsed when the 1980’s bubble burst, savers would rather go for what they view as safe bonds, especially as gently falling prices make the returns go farther than would be the case in a more normal inflation environment.
Unfortunately, as well as Japan has held up until now, it still faces profound challenges.
First and foremost, there is its ever-falling labor supply, owing to extraordinarily low birth rates and deep-seated resistance to foreign immigration.
The country also needs to find ways to enhance the productivity of those workers it does have.
Inefficiency in agriculture, retail, and government are legendary.
Even at Japan’s world-beating export firms, reluctance to confront the ingrained interests of the old-boy network has made it difficult to prune less profitable product lines – and the workers who make them.
As the population ages and shrinks, more people will retire and start selling those government bonds that they are now lapping up.
At some point, Japan will face its own Greek tragedy as the market charges sharply higher interest rates.
The government will be forced to consider raising revenues sharply.
The best guess is that Japan will raise its value-added tax, now only 5%, far below European levels.
But is it plausible to raise taxes in the face of such sustained low growth?
Investors who have bet against Japan in the past have been badly burned, grossly underestimating the Japanese people’s remarkable flexibility and resilience.
But the fiscal road ahead looks increasingly perilous, with political consensus fraying badly in recent years.
In the end, are foreign leaders right to scare their people with tales of Japan?
Certainly, the hyperbole is overblown; the Chinese, especially, should be so lucky.
But nor should apologists for deficits point to Japan as reason to be calm about outsized stimulus packages.
Japan’s ability to trudge on in the face of huge adversity is admirable, but the risks of crisis ahead are surely greater than bond markets seem to recognize.
Japan’s Treacherous Bureaucrats
Much has been made of the massive defeat Prime Minister Shinzo Abe’s Liberal Democratic Party suffered in the recent election to Japan’s Upper House.
But, as the smoke dissipates from that vote, it has become clear that the real victor is neither the leading opposition Democratic Party (DPJ) nor the electorate.
Instead, it is Japan’s bureaucrats who are celebrating.
The aim of these entrenched mandarins is to block Abe’s plans for extensive civil-service reforms intended to inhibit them from parachuting into lucrative post-retirement jobs in the public corporations and private firms that they once regulated.
They also want to stop Abe from dismantling and privatizing one of their central fiefdoms, the Social Security Agency.
In this struggle, the mandarins are aligning themselves with the DPJ, at least to the general public’s eye, because it has proposed merging the Social Security Agency with the National Tax Agency, a move that would ensure government jobs for the former’s employees.
The LDP’s declining vote is attributable largely to Abe’s mishandling of pension fund issues, particularly his late admission of knowledge last December about 50 million “lost” pension files.
This followed other minor scandals concerning the misuse of political funds, which had led to two resignations and the suicide of one of Abe’s cabinet ministers.
But a close look reveals the hands of the mandarins behind these debacles.
Abe and his ministers were simply not provided with critical facts by the bureaucrats who are supposed to serve them.
Indeed, a DPJ member of the Diet was able to pose pointed questions to Abe and his ministers because he had obtained detailed information from an unidentified Social Security Agency official.
This constant stream of leaks from the bureaucrats has seriously shaken popular confidence in the Abe administration as well as the ruling LDP.
The mandarins are now counting on an Upper House controlled by the DPJ to wreck Abe’s civil-service reforms.
Former Prime Minister Junichiro Koizumi handpicked Abe as his successor to continue his administration’s central policies: divorcing the LDP from pork-barrel politics and consolidating the huge non-performing loans in the private sector that resulted from the collapse of Japan’s property market bubble in the early 1990’s.
By revitalizing and modernizing Japan’s financial system, and by getting politicians out of the game, Koizumi intended to reinvigorate the Japanese economy.
Koizumi had real successes in these reform efforts, which significantly transformed a malfunctioning Japanese state that was in the grip of pork-barrel LDP politicians, bureaucrats, and big business elites.
Koizumi had relied on the bureaucrats to implement his reforms, but he did so at the price of postponing an overhaul of the civil service, which became a poisoned chalice that he passed on to Abe.
Moreover, Abe’s lack of Koizumi’s star quality and outsider charisma has made him rely more heavily than his predecessor on the LDP’s existing leadership.
These leaders are less concerned with the reform agenda than with promoting patriotism among Japanese youth, upgrading the Defense Agency to a ministry, and enacting a law to permit a referendum to revise the pacifist constitution.
These are all important matters, but they are not among the electorate’s priorities.
Koizumi’s approach was to defy the LDP’s leaders by appealing over their heads directly to the electorate.
He successfully portrayed himself as a rebel resisting the LDP’s old guard, actually purging some of them, in defense of ordinary Japanese.
But Koizumi’s reforms seemed to abandon not only rent-seekers, but also the disadvantaged who had relied on the state’s protectionist measures.
Abe is now confronting the legacy of this strategy: domestic polarization between highly educated and unskilled labor, between competitive and declining sectors, and between urban and rural areas.
And, to protect their jobs, Japan’s bureaucrats are now aligning their interests with those who see themselves as having lost out in the Koizumi years.
The DPJ, now temporarily aligned with low-profile bureaucrats behind the scene, can now either obstruct any bill in the Upper House that is sponsored by Abe’s administration, thereby cornering him into dissolving the Lower House, or they can engage in meticulous deliberations in the Diet in the hope of demonstrating to the electorate their fitness to govern.
The DPJ’s leader, Ichiro Ozawa, seems to be opting for the obstructionist approach favored by the bureaucrats, which will seek to bring not only a populist reversal of Koizumi’s economic and political reforms, but the shelving of Abe’s civil-service reforms as well.
Japan will now likely face a hung Diet for a year or two.
But, in the end, it will have to decide if it wants to be governed by the LDP, which at least offers the possibility of addressing Japan’s problems, or a DPJ in complete thrall to the bureaucracy and the past.
Until Koizumi, the electorate was never faced with such clear-cut choices, and his administration taught the Japanese to like them.
In the meantime, Japan will drift, unable to take any significant foreign policy decision at a time when Asia’s security landscape is changing rapidly.
Japan’s War Guilt Revisited
“It is our obligation as Japan’s most influential newspaper to tell our readers who was responsible for starting the Sino-Japanese War and the Pacific War.” So writes Tsuneo Watanabe, Editor-in-Chief of Japan’s (and the world’s) most widely circulated newspaper, Yomiuri Shimbun , in the introduction to the book From Marco Polo Bridge to Pearl Ha rbor: Who Was Responsible .
Watanabe, who is now in his eighties and served in the Imperial Japanese Army during WWII, was bothered by the way unfinished business concerning the war continued to hinder Japan’s progress.
As a remedy, he set up a War Responsibility Re-Examination Committee at his newspaper to undertake a 14-month investigation into the causes of Japan’s Pacific War.
Watanabe tells us that the Committee concluded that, “not only high-ranking government leaders, general, and admirals should shoulder the blame.” According to the Committee, “field officers were often more influential than even the Emperor, war ministers, and chiefs-of-staffs in making decisions to go to and escalate the wars, and were responsible for many atrocities.”
It has never been easy for a nation to face up honestly to the bitter fact of having committed war crimes, genocide, unjustified foreign aggression, or having mistreated and killed its own people.
Japan is no exception.
Although there have been numerous initiatives to investigate its war guilt, especially its occupation of China, there has not yet been an official effort comparable to what the Germans undertook to take collective responsibility for their war crimes.
While Yomiuri’s unique public effort is not a government initiative, it comes as close as Japan will probably ever get to conducting an acceptable “official” inquiry and offering an adequate apology.
Its style is almost scientific – factual, staccato-like, and unemotional – and it goes a long way toward meeting China’s demand for a convincing investigation and act of contrition that might allow the bitter and still poisonous past to be overcome.
Watanabe laments the fact that after Japanese war criminals were tried by the Tokyo Tribunal of 1951, “No efforts were made in the name of Japan or the Japanese people to look into where responsibility for the war rested.” As a result, “there can be no genuinely honest and friendly dialogue with those countries that suffered considerable damage and casualties in the wars with Japan.”
China’s leaders seem to have taken note of this moment of Japanese remorse.
This implies a ray of hope for a bilateral relationship – the most important in Asia – that over the past two decades has been battered by Japan’s reluctance to face its past, which has become a lightning rod for over-heated nationalist sentiment on both sides.
But does the Yomiuri study go far enough?
While it assigns responsibility to Japan for WWII, and even unflinchingly names the political and military leaders who bear responsibility, one can still detect a whiff of reluctance in its failure to fully describe some of Japan’s war-time actions.
For example, the horrors of the Nanjing Massacre in 1937, when Japanese soldiers killed 45,000-250,000 Chinese – many of whom were civilians – are given little more than a brief mention.
But it would be a pity if China’s leaders did not endorse this acknowledgement of Japanese guilt as a manifestation of Japan’s willingness to repent.
The damaged bilateral relationship has only made China’s desire for a “peaceful rise” more uncertain.
At the same time, it has left Japan’s long sought transcendence of its war guilt and quasi-pariah status incomplete.
Watanabe and Yomiuri Shimbun have provided a rare opportunity that should be seized for the greater good of China and Japan and the world.
Of course, it is always easier to export blame than to shoulder it.
And, true, no Japanese prime minister has yet fallen to his knees in Nanjing the way Chancellor Willy Brandt did on the site of the Warsaw Ghetto, where he apologized for the crimes of Germany by saying, “No people can escape from their history.”
But that was in 1970, when memories of the war’s ravages were fresh. Now, over half-a-century has elapsed.
“If things are left as they are,” writes Watanabe, “a skewed perception of history – without knowledge of the horrors of the war – will be handed down to future generations.” It would be an immensely encouraging sign of China’s growing maturity if its leaders used this moment to look beyond the bitter past toward a new future with Japan.
The Long Road to Agreement with Iran
MADRID – The latest round of negotiations in Geneva between Iran and the P5+1 (the five permanent members of the United Nations Security Council plus Germany) has inspired cautious optimism.
A window of opportunity to reach agreement on Iran’s nuclear program appears to have opened.
Although the details of the meeting are not public, its relative success is clear, as the parties are to reconvene on November 7-8.
Rapprochement between Iran and the West – above all between Iran and the United States – would have positive geostrategic consequences across the Middle East.
Iran has a long way to go, of course, to bring about permanent improvement in its relations with the West; but what Iran needs to do is not the only impediment.
Other strategic actors must also be taken into account.
Without a doubt, Israel will be a major obstacle to reaching an agreement.
At the very moment when negotiations were beginning in Geneva, Prime Minister Binyamin Netanyahu said in the Knesset (Israel’s parliament) that the possibility of a pre-emptive attack on Iran’s nuclear facilities could not yet be ruled out.
Netanyahu has made Iran’s nuclear program his highest foreign-policy priority.
He is suspicious of Iran’s intentions and wants its nuclear power plants to be completely dismantled.
The fear is that so long as Iran maintains residual nuclear capacity – even for civilian use – it could develop atomic arms that would threaten Israel.
As Netanyahu made clear at the United Nations General Assembly on October 1, Israeli officials do not trust Iran’s new government to change course.
But Israel is not alone.
Sunni-ruled Saudi Arabia, the regional power competing most directly with Shia Iran for regional influence, feels left out by the incipient rapprochement with the Islamic Republic, to the point of refusing a seat on the United Nations Security Council to express its leaders’ anger.
Even in the days of the Shah, the Kingdom feared that a strong Iran might become the dominant regional power.
Heir to the historic Persian Empire, Iran has the region’s second-largest GDP and population (behind Saudi Arabia and Egypt, respectively), and Saudi Arabia worries that a possible agreement – resulting in sanctions being lifted – would allow Iran to revive its economy and extend its influence.
This is not the Saudi-US alliance’s finest hour.
The falling out over Iran follows America’s refusal to bomb Syria (another Saudi rival in the region) and its blessing of the removal in 2011 of former Egyptian President Hosni Mubarak (an important Saudi ally).
Saudi Arabia seeks the overthrow of Syrian President Bashar al-Assad, and believes that America’s agreement with Russia to destroy the Assad regime’s chemical weapons amounts to renunciation of that goal.
As a result, the Saudis are now the largest financial backer of the Syrian rebels (and one of the main supporters of the Egyptian Army following its removal in July of Mubarak’s democratically elected successor, Mohamed Morsi).
For the West, however, the most urgent goal should be to put an end to the conflict in Syria.
Too many people have already died in what has become the worst war of this century.
Iran and Russia are the Assad regime’s two main allies and the only external actors able to bring about a change of attitude in Damascus.
The Geneva II talks on Syria are tentatively set to be held on November 23, though Lakhdar Brahimi, Joint Special Representative of the UN and the Arab League for Syria, has already expressed doubts about the suitability of the meeting in the absence of credible representatives of opposition forces.
Saudi Arabia is deeply hostile to Geneva II, because formal diplomatic talks with the Assad regime imply de facto recognition that it retains legitimacy.
For the Saudis, the only acceptable solution starts with the resignation of Assad and his government, while Geneva II envisages a transitional government in which all of the parties are represented.
American policymakers have another major difficulty: the US Congress.
The last-minute agreement to raise the US debt ceiling and reopen the government has left Republican Party extremists in a weakened position, while President Barack Obama has emerged strengthened.
But the episode sets a dangerous precedent. Any conceivable agreement with Iran would involve lifting economic sanctions, which would require legislative approval – thus making a proposed deal vulnerable to congressional near-sightedness.
For the US, a concomitant problem is that Secretary of State John Kerry has made peace between Israel and Palestine a high priority.
It remains to be seen how Kerry manages to balance the negotiations so that Israeli pressure on the US with respect to Iran does not ruin efforts to achieve peace between Israelis and Palestinians.
But if Iran and the West reach an agreement, it will be very difficult for Israel to remain on the sideline.
Europe, for its part, has a good opportunity to vindicate itself by committing to a united, coherent, and effective foreign policy.
The European Union, now through High Representative for Foreign Affairs and Security Policy Catherine Ashton, has always been a key actor in the negotiations between Iran and the P5+1. Ashton has the confidence of all the parties.
It is important for the EU to be agile and maintain close coordination with the US.
When the time comes to lift the sanctions, Europe must coordinate closely with the US in order to maximize the move’s effectiveness.
Negotiation and diplomacy are the only sure way to resolve the standoff with Iran over its nuclear program.
Another conflict in the Middle East is the worst option. But seizing today’s unique opportunity with Iran demands long-term vision from all parties.
National interests must be placed above electoral considerations.
The window for negotiation is open; it will not remain so indefinitely.
Solving Europe’s Credibility Problem
PARIS – As the eurozone debates how to escape the stagnation trap in which it finds itself, one question has become increasingly important: Can governments credibly commit to trim public spending in the future while avoiding immediate cuts?
Fortunately, the answer is a qualified yes: there are ways to ensure that fiscal accommodation now is followed by consolidation later.
Growth and inflation in the eurozone remain much too weak.
The European Central Bank’s latest assessment is bleak, and ECB President Mario Draghi has made no secret of the fact that risks remain on the downside.
Nominal GDP growth – that is, real growth plus inflation – will not exceed 1.5% this year and may well end up perilously close to 1%.
Though monetary policy is supportive, it is close to reaching its limits, and the ECB’s initiative to stimulate credit by lending to commercial banks on super-cheap terms has not proved as effective as hoped.
AAA ten-year government bonds currently yield about 1%, suggesting that markets do not expect a strong rebound.
This is the type of situation in which fiscal policy should come to the rescue.
Draghi made that very point in his speech at the annual gathering of central bankers in Jackson Hole, Wyoming, in late August, and several economists have suggested that it is time for the eurozone to engineer a temporary fiscal expansion.
In a recent article, Francesco Giavazzi and Guido Tabellini of Bocconi University proposed a permanent tax cut, followed by gradual spending cuts.
Combined with pro-growth reforms of product and labor markets, such a program could yield both lasting supply-side benefits (through lower taxation) and a temporary demand boost that would help to revive eurozone growth.
Gradualism on spending cuts may have other merits, quite apart from its macroeconomic benefits.
Efficient public-sector reform takes time.
Governments that trim public expenditures in a hurry rarely make informed choices.
An expenditure review based on systematic policy evaluations is the best approach to sorting out good spending from bad spending and thus maximize value for money.
There are two objections to this approach.
First, it is argued that action of this sort would violate the requirements of the EU’s fiscal compact.
That is not necessarily the case.
Of the eurozone’s 18 members, ten are no longer considered to be running an excessive deficit.
Even for those under enhanced scrutiny, such as France and Spain, escape clauses exist: in case of a “protracted period of very low annual GDP growth,” the EU can grant an exemption from the required annual adjustment.
These countries cannot launch stimulus measures, but the EU could let them fine-tune the pace of consolidation, provided that they are able to commit to comprehensive cuts in the future.
So the eurozone has some – albeit limited – fiscal space.
Debt levels and remaining deficits underscore the need for extreme caution, but, assuming a common will to undertake action, there would be room for maneuver within the European rules.
The second objection is that governments will fail to deliver on their promises.
Responding to Giavazzi and Tabellini, Roberto Perotti (also of Bocconi) has argued that the gradualist strategy simply would not be credible.
Spending cuts are bound to be politically difficult decisions, and governments cannot commit to delivering them with certainty.
So, says Perotti, the “cut taxes now, cut spending later” combination would involve enormous moral hazard.
Perotti has a point.
Carlo Cottarelli, appointed by the Italian government to oversee its expenditure review, noted recently that even before spending cuts were enacted, they were being used to finance new spending.
The political economy of public-spending reform is tricky, and well-designed macroeconomic plans can be taken hostage by pork-barrel politics.
There is, however, a solution to this problem: Governments and parliaments can delay action without postponing decision.
Nothing prevents them from deciding now that pensions will be reduced in three years or that a given industrial subsidy will disappear on January 1, 2017.
If parliaments want to tie their own hands, they can do so simply by passing a law.
Actual decisions whose effects are delayed could serve as a down payment, ensuring that, say, half of the spending cuts programmed for the years to come are already enacted.
To be sure, decisions can always be reversed; parliaments can simply pass another law.
But this is also true of spending cuts that have already been implemented.
Everything is reversible in a democracy.
Moreover, Europe has instruments to ensure that commitments retain their long-term value.
Its surveillance apparatus is mostly used to monitor budget deficits in real time, but it could also help to evaluate the future consequences of policy decisions.
The so-called “costing” of policy measures (determining the exact amount of savings brought about by a reform) requires technical skills and access to extensive data.
The European Commission is uniquely equipped to do this job; together with the independent national fiscal watchdogs, it could be asked to review draft laws in detail, assess their future budgetary effects, and thereby ensure that governments do not embellish their projections when promising that their reforms will yield future savings.
A “cut taxes now, cut expenditures later” strategy is therefore feasible.
Though such a strategy would be challenging to implement and enforce, it could be credible and remain compatible with fiscal responsibility if it were buttressed by strong commitment mechanisms at the national and European levels.
Of course, not everybody agrees that such a strategy, though possible, is desirable.
Can Investment Save Europe?
PARIS – Economic growth in Europe remains disappointing.
Virtually all European Union members are expected to post higher output in 2014; but, according to the International Monetary Fund’s latest projections, the average growth rate in the eurozone will barely exceed 1%.
And, whereas the British economy is displaying strong momentum, its GDP has only now surpassed the pre-crisis mark.
In per capita terms, the EU is still poorer than it was seven years ago.
In this context, a new policy target has emerged: investment.
Italian Prime Minister Matteo Renzi, who currently holds the EU’s rotating presidency, has pushed for it, and Jean-Claude Juncker, the president-elect of the European Commission, has called it his “first priority.”
His goal for the next three years is to mobilize an additional €100 billion ($134 billion) per year (0.75% of GDP) for public and private investment.
Investment is certainly a politically appealing theme.
It can unite Keynesians and supply-side advocates; proponents of public spending and supporters of private business can stand together.
And historically low long-term interest rates undoubtedly provide an exceptionally favorable opportunity to finance new ventures.
But it does not automatically follow that governments should pour money into public infrastructure projects or foster private investment by adding further incentives amid already auspicious market conditions.
At a time when private income has shrunk, public resources are scarce, and debt burdens are heavy, plans to stimulate investment should be carefully scrutinized.
Even seemingly purposeful projects can seriously backfire: only a few years ago, Europe’s well-intentioned efforts to stimulate renewables resulted in a solar energy bubble of macroeconomic proportions.
Whereas cutting greenhouse-gas emissions is necessary, the current generation of relatively inefficient renewables should not be deployed at the expense of the development of more cost-effective technology.
That is why it is essential to determine, prior to any effort to boost investment, whether sluggish growth in Europe reflects abnormally low capital formation.
The data suggest that it does: from 2007 to 2013, investment has fallen by 18% in the EU, compared to just 6% in the United States.
In Southern Europe, investment has literally collapsed; even in Germany, it will reach pre-crisis levels only this year.
But this is hardly a sufficient observation, because excessive pre-crisis real-estate investment made a sharp downward adjustment inevitable.
The reckless construction of condominiums without buyers and airports without passengers had to stop.
More generally, investment tends to follow economic growth: companies add new capacity only if there is demand for their products.
A recession almost always implies a disproportionate fall in investment.
For these reasons, determining whether low investment is a cause or a consequence of slow growth is not as easy as it may seem.
Taking push and pull factors into account, DIW, the German economic institute, reckons that the investment gap is real; for the eurozone, it puts the gap at about 2% of GDP, or €200 billion.
That is a significant number, which suggests that there is a case for policy action.
That raises the next issue: what impedes investment, and what can be done to remove such obstacles?
Part of the answer concerns regulation.
For example, investment in efficient energy production and conservation is being held back by pervasive uncertainty about the future path of climate policies.
A European agreement on how to stabilize the price of carbon would help to catalyze private projects.
At the national level, well designed, stable schemes to improve domestic heating efficiency would also be helpful.
More generally, regulatory clarity and predictability are essential to private investment.
The answer is also partly financial.
In Europe, the pre-crisis boom in real-estate investment was fueled by reckless credit flows from Northern to Southern Europe.
Credit rationing has followed, as banks reduced their overburdened balance sheets and were discouraged from risk-taking.
Moreover, money has flowed back to Northern Europe from the distressed periphery.
As a result, credit for, say, a small Spanish company is neither cheap nor abundant.
This calls for immediate action.
Packaging existing loan portfolios and offloading them to non-bank investors, as many have proposed, should be encouraged.
Beyond short-term fixes, the main priority must be to encourage a resumption of savings flows across Europe, but this time in the form of equity, not bank deposits and loans.
For this, Europe needs an adequate regulatory and tax framework.
Official institutions could also be involved in a suitable way.
Oddly, the European Investment Bank, the EU’s financial arm, is authorized to provide only loans and guarantees, not equity investment.
Substitutes should be found.
There are, finally, a few fields where national governments could act directly.
Infrastructure is a case in point, provided that the current interest in investment projects is not used as an excuse to revive Europe’s love for white elephants.
Will it be enough?
It is hard to know.
The EU faces a delicate balancing act between the need to foster investment and the need to remain cautious, especially with public money.
Juncker, for his part, will need to display both firm resolve and sound judgment.
Will Vladimir Putin Bolster the Eurozone?
PARIS – Jacek Rostowski, Poland’s finance minister until last November, recently suggested that Russian President Vladimir Putin would not have dared to annex Crimea if he had not observed Europe agonizing over a solution to the euro crisis.
Is Rostowski right?
At first sight, such a connection seems far-fetched.
Putin’s show of strength involved military force and the implicit threat of a gas embargo, not monetary power (which he does not have).
Throughout the conflict over Crimea, the focus has been on Ukraine’s relationship with the European Union, not with the eurozone.
Moreover, Ukraine’s recent monetary history has been defined by an exchange-rate peg to the US dollar, not the euro.
So how could the euro be relevant to Russia’s annexation of Crimea?
Rostowski’s point is that European countries demonstrated throughout the euro crisis that they had very little appetite for solidarity, even with their partners in the monetary union.
How much solidarity would they be willing to display vis-à-vis a non-European Union country?
Russia, the reasoning goes, interpreted the EU’s hesitant management of the turmoil as a license to act.
And it could go further for the same reason.
Clearly, the series of events following the financial meltdown in 2008 can be viewed as a crisis of solidarity.
When a common response to Europe’s banking debacle was needed, the answer was that each country should take care of its own financial institutions.
When Greece lost access to financial markets, several months were needed to engineer a response, which took great care not to rely on EU funds and to limit each country’s financial commitment.
Indeed, when a “firewall” was finally created, its size was strictly limited and no form of joint liability was permitted.
And Eurobonds were quickly rejected, because they would have created open-ended mutualized-debt obligations.
Similarly, though it had been envisaged that the European Stability Mechanism could be used to recapitalize banks, it was eventually decided that the ESM would lend only to governments, rather than assuming bank risk directly.
And, most recently, negotiations to establish an EU banking union once again confronted the challenge of forging a common resolution mechanism while limiting each member state’s commitment.
In short, each time the question of European solidarity was raised, the answer was: “Yes, but only if absolutely necessary, and only to the minimum possible extent.”
Russian reactions to the Ukrainian uprising, meanwhile, have shown how vivid the memory of World War II remains in Moscow.
It is fair to assume that the Kremlin may have noticed that Europe had no wish to emulate the United States and engineer a Marshall Plan of its own.
More generally, Putin may have concluded that an EU that is so reluctant to take risks for the good of its own members would certainly not take risks for a mere neighbor.
A key dimension of the current standoff over Ukraine is energy, and it raises the same question about European solidarity.
As a recent study by Bruegel has shown, the EU as a whole could, with some effort, dispense with gas imports from Russia.
But doing so would require EU member states to regard security of supplies as a matter of common concern, not as an issue that each country must address on its own.
For example, in response to an embargo affecting a particular country, other EU members would draw on their reserves, increase their own production, pay more for imports, or cut consumption a bit.
But this sense of solidarity has been consistently lacking in the EU’s energy-policy debate.
The underlying question is whether it is right to assume that the euro should have created more solidarity.
Those who first imagined the single currency expected it to have profound consequences.
In their eyes, it would be a means to forge a community.
Currency borders generally coincide with political borders, so the creation of a monetary union was expected to give rise to some sort of common polity.
Sharing a currency was expected to create a sense of common destiny, and hence solidarity, among the participants.
That did not happen.
Even before the crisis, it was clear that citizens and governments alike regarded (wrongly) the euro as a mere practicality.
Its introduction was viewed as a technocratic affair, to be handled by central bankers and finance ministers, not as the cornerstone of a common European identity.
Its creation did not cause the EU budget to increase by a single euro, nor did it lead to deeper political integration.
The commitment called for by a common currency was consistently underestimated.
In hindsight, it was a mistake to believe in the euro’s spontaneous community-creating power.
Though there clearly is a link between currency areas and political communities (consider the dissolution of the ruble zone at the time of the Soviet Union’s collapse), it is political community that creates the solidarity needed to foster currency linkages, not vice versa.
Rostowski is certainly right: the euro’s weakness has emboldened Putin.
In the end, however, the right question may be whether the Crimea crisis will eventually bolster European solidarity – and thus the euro.
The New Growth Conundrum
PARIS – For most governments, the rate of economic growth that can reasonably be expected in the coming years is a key question.
And, at least for the advanced economies, it has become a particularly puzzling one.
If the past is a good predictor of the future, the outlook is bleak.
Since 2008, economic growth has consistently disappointed expectations.
Of the countries most affected by the financial crisis, only a few – the United States, Germany, and Sweden – have rediscovered the path to sustained growth.
Yet, even for them, GDP in 2013 was far below the level projected prior to the crisis.
The consensus view among economists and policymakers is that the financial crisis and the euro crisis have damaged both demand and supply, but that a gradual healing process has begun.
On the demand side, according to this view, the hangover from pre-crisis private indebtedness and crisis-generated public indebtedness still weighs on domestic demand.
This is likely to persist for several more years, though the burden will diminish steadily.
Gradually, consumers will start spending and investing again (as is becoming the case in the US), and fiscal policy will become neutral again (as is already the case in Germany).
On the supply side, the crisis has lowered potential output growth, because, in Europe at least, firms have invested less, impeding the adoption of new technologies.
Moreover, in some cases – for example, the United Kingdom – wage decreases and flexible layoff rules have encouraged firms to substitute labor for capital, reducing output per employee.
Clogged capital markets and resistance to social hardship have also delayed the replacement of incumbent firms by more efficient new entrants.
The aggregate result has been lower-than-anticipated productivity: in the UK, more person-hours were needed to produce a unit of output in 2013 than in 2007.
But the view that advanced economies are gradually healing is challenged from both sides.
Starting with demand, Larry Summers, the Harvard economist and senior US official under Presidents Bill Clinton and Barack Obama, recently proposed that advanced economies have found themselves in the grip of secular stagnation.
Summers’s view is that pre-crisis indebtedness was not an exogenous anomaly; it was the consequence of insufficient global demand.
The global distribution of income had shifted away from the advanced countries’ middle class toward the rich and the emerging economies, resulting in excess worldwide savings. The only way to avoid stagnation was to push the middle class deeper into debt, helped by low interest rates and lenient lending rules.
In other words, the savings glut (as former US Federal Reserve Chairman Ben Bernanke called it) predated the crisis and could continue to affect global demand, unless the emerging countries’ middle class provides the global economy with a new consumer of last resort.
This is likely to happen eventually; but, despite efforts by the US and the International Monetary Fund in the context of the G-20, this rebalancing process has not yet been completed.
The challenge on the supply side stems from a new dispute among economists and technology experts about the pace of technological progress.
For Robert Gordon of Northwestern University, information and communication technologies have already delivered most of the productivity boost that can be expected from them; there is no major innovation wave in sight that could offset the slowdown in potential growth.
Laggards can look forward to reaping catch-up dividends; but countries at the technology frontier should accept that very slow annual per capita growth – little more than 1% – is the new normal.
By contrast, the MIT scholars Erik Brynjolfsson and Andrew McAfee argue that the Second Machine Age is yet to come.
They claim that ever-increasing computing power, worldwide connectivity, and the almost unlimited potential for generating new innovations through recombining existing processes will trigger major transformations in both production and consumption, in the same way that the steam engine transformed the world in the nineteenth century.
Growth should accelerate as a consequence, at least if properly measured.
Combining the challenges cited by Gordon and Summers to the view that advanced economies are gradually healing leads to some depressing conclusions.
If Gordon is right about slow productivity growth, the debt overhang inherited from the crisis and public-finance woes will persist for much longer than anticipated.
If, in addition, Summers is right that demand is bound to remain deficient, the combination of financial troubles and persistent mass unemployment is likely to push governments toward radical solutions – debt default, inflation, or financial protectionism.
If, on the contrary, Brynjolfsson and McAfee are right, growth will be much more robust, and debt issues will be forgotten sooner than expected.
The challenge, instead, will be to cope with the labor-reducing and income-inequality effects of emerging technologies.
That will be especially true if these transformations take place against the background drawn by Summers of persistent mass unemployment.
The risk is that social problems become intractable, as technological advances come to be regarded as benefiting the rich while creating additional hardship for the masses. In such a scenario, governments will have to look for innovative responses.
Scenarios like these may seem far-fetched.
But, while certainly discomfiting, they are hardly irrelevant.
The Price of Scottish Independence
NEW YORK – Though the world’s eyes now are on Scotland’s referendum on independence from the United Kingdom, Scotland is not alone in seeking to redraw national boundaries.
There are independence movements in many other parts of the world; indeed, 39 new states have joined the United Nations since 1980.
Many more aspirants are waiting in the wings, and would likely be encouraged by a Scottish “Yes” vote.
The Scottish pro-independence campaign is based on four claims.
The first is cultural: to protect and strengthen the identity of the Scottish people.
The second is ideological: to move Scotland toward a Scandinavian-style social democracy.
The third is political: to bring democratic governance closer to the people.
And the fourth is economic: to lay claim to a larger share of North Sea oil and gas.
UK political leaders and many European governments are strongly urging the Scots to vote against independence.
Scottish independence, the “No” campaign argues, would bring few if any of the claimed benefits; on the contrary, it would cause many economic calamities, ranging from financial panics to the flight of jobs and industry from Scotland.
Moreover, an independent Scotland might be excluded from the European Union and NATO.
What should the rest of the world think about this debate?
Should the Scottish independence campaign be hailed as a breakthrough for claims to cultural identity&nbsp;and self-governance?
Or should it be viewed as yet another source of instability and weakness in Europe – one that would increase uncertainty in other countries and parts of the world?
Secession movements can, no doubt, cause great instability.
Consider the regional and even global turmoil over Kosovo, South Sudan, Kurdistan, and Crimea.
Yet national independence can also be handled peacefully and smoothly.
The 1993 division of Czechoslovakia into the Czech Republic and Slovakia – the famed “velvet divorce” – imposed no significant or lasting costs on either successor state.
Both accepted the division, and, knowing that their future lay within the EU, focused their attention on accession.
Here, then, is a plausible and positive scenario for an independent Scotland.
The rest of the UK (called the “RUK” in the current debate), including England, Wales, and Northern Ireland, would quickly and efficiently negotiate the terms of independence with Scotland, agreeing how to share the UK’s public debt and public assets, including offshore oil and gas.
Both sides would be pragmatic and moderate in their demands.
At the same time, the EU would agree immediately to Scotland’s continued membership, given that Scotland already abides by all of the required laws and democratic standards.
Similarly, NATO would agree immediately to keep Scotland in the Alliance (though the Scottish National Party’s pledge to close US and British nuclear-submarine bases would be a complication to be overcome).
Both Scotland and the RUK might agree that Scotland would temporarily keep the British pound but would move to a new Scottish pound or the euro.
If such monetary arrangements are transparent and cooperatively drawn, they could occur smoothly and without financial turmoil.
But if the RUK, the EU, and NATO respond vindictively to a Yes vote – whether to teach Scotland a lesson or to deter others (such as Catalonia) – matters could become very ugly and very costly.
Suppose that a newly independent Scotland is thrown out of the EU and NATO, and told that it will remain outside for years to come.
In this scenario, a financial panic could indeed be provoked, and both Scotland and the RUK would suffer economically.
The key point is that the costs of separation are a matter of choice, not of inevitability.
They would depend mainly on how the RUK, the EU, and NATO decided to respond to a Yes vote, and how moderate a newly independent Scotland would be in its negotiating positions.
If cool heads prevail, Scottish independence could proceed at a relatively low cost.
The dangers of national secession are much greater in places without overarching entities like the EU and NATO to constrain the situation among the successor states.
In such circumstances, unilateral claims of independence opposed by the national government or a sub-national unit often lead to a breakdown of trade and finance – and often to outright war, as we saw in the breakup of the Soviet Union, Yugoslavia, and most recently, Sudan.
In those cases, separation was indeed followed by deep economic and political crises, which in some ways persist.
Indeed, in the case of ex-Yugoslavia and the former Soviet Union, the EU and NATO absorbed some but not all of the successor states, thereby raising major geopolitical tensions.
International politics in the twenty-first century can no longer be about nation-states alone.
Most key issues that are vital for national wellbeing – trade, finance, the rule of law, security, and the physical environment – depend at least as much on the presence of effective regional and global institutions.
Even if Scotland declares independence, it will – and should continue to be – bound by a dense web of European and global rules and responsibilities.
I am personally sympathetic to Scotland’s independence as a way to bolster Scottish democracy and cultural identity.
Yet I support independence only on the assumption that Scotland and the RUK would remain part of a strong and effective EU and NATO.
Certainly, a Yes vote would put an even higher premium on effective EU governance.
But, if the EU and NATO were to “punish” a newly independent Scotland by excluding it, real disaster could ensue, not only for Scotland and the UK, but also for European democracy and security.
Cities and Sustainable Development
NEW YORK – Tacloban in the Philippines has now joined the growing list of cities – including New Orleans, Bangkok, Moscow, New York, Beijing, Rio de Janeiro, and Port-au-Prince, to name just a few – pummeled in recent years by climate catastrophes.
Many of the world’s largest cities, built on seacoasts and rivers, face the threat of rising sea levels and intensifying storms.
So the new global development agenda now taking shape should empower cities to help lead the way to sustainable development in the twenty-first century.
The importance of cities in today’s world economy is unprecedented.
Until the Industrial Revolution, human history was overwhelmingly rural.
Only around 10% of people lived in cities.
Today, the share of urbanites is around 53% and is likely to rise to around 67% by 2050.
Because per capita incomes are higher in cities than in rural areas, the world’s cities today are estimated to account for more than 80% of global income, with the largest 600 accounting for around half.
Most of the new jobs over the next few decades will be created in cities, offering livelihoods to hundreds of millions of young people and, as China and Brazil have demonstrated, helping to slash extreme poverty.
Cities are also the innovation hubs for public policy.
Every day, mayors are called on to get the job done for residents.
They are the ones responsible for providing safe water, garbage collection, safe housing, infrastructure, upgraded slums, protection from disasters, and emergency services when catastrophes hit.
So it is not surprising that while national governments often are paralyzed by partisan politics, city governments foster action and innovation.
In the United States, for example, Martin O’Malley, Baltimore’s former mayor and now Maryland’s popular governor, pioneered the use of advanced information systems for urban management.
New York City’s outgoing mayor, Michael Bloomberg, worked relentlessly to implement a new sustainability plan (called PlaNYC).
And the city’s incoming mayor, Bill de Blasio, is championing a bold program of educational innovations to narrow the vast gaps in income, wealth, and opportunity that divide the city.
Sustainable development offers a new concept for the world economy in the twenty-first century.
Rather than focusing solely on income, sustainable development encourages cities, countries, and the world to focus simultaneously on three goals: economic prosperity, social inclusion, and environmental sustainability.
Economic prosperity speaks for itself.
Social inclusion means that all members of society – rich and poor, men and women, majority and minority groups – should have equal rights and equal opportunities to benefit from rising prosperity.
And environmental sustainability means that we must reorient our economies and technologies to provide basic services like safe water and sanitation, combat human-induced climate change, and protect biodiversity.
Achieving these three goals will require good governance, public finance, and effective institutions.
Cities will be in the front lines of the battle for sustainable development.
Not only do they face direct threats; they also have the best opportunities to identify and deliver solutions.
As high-density, high-productivity settlements, cities can provide greater access to services of all kinds – including energy, water, health, education, finance, media, transport, recycling, and research – than can most rural areas.
The great challenge for cities is to provide this access inclusively and sustainably.
A significant part of the solution will come through advanced technologies, including information systems and materials science.
The information and communications revolution has spawned the idea of the “smart city,” which places the relevant technologies at the heart of systems that collect and respond to information: smart power grids, smart transport networks (potentially including self-driving vehicles), and smart buildings and zoning.
The advances in materials science open the possibility of much more energy-efficient residences and commercial buildings.
Cities also give rise to the opportunity to combine public utilities, as when urban power plants use the steam released in electricity generation to provide hot water and heating to residents.
Yet technology will be only part of the story.
Cities need to upgrade their governance, to allow for a greater role for poorer and more marginalized communities, and to enable much more effective coordination across city lines when a metropolitan area is home to many individual cities.
Metropolitan governance is therefore crucial, as smart cities require networks that operate at the metropolitan scale.
When the metropolitan scale is recognized, the importance of leading urban areas is even more remarkable.
New York City has around 8.4 million people, but the NYC metropolitan area has roughly 25 million people, with an economy estimated at about $1.4 trillion per year.
If this metropolitan area were a country, it would rank about 14th in the world in GDP terms.
A wise political doctrine known as subsidiarity holds that public-policy challenges should be assigned to the lowest level of government able to address them, thereby ensuring maximum democratic participation in problem solving and the greatest opportunity to tailor solutions to genuine local needs.
While some issues – for example, a national highway or rail system – require national-level problem solving, many key challenges of sustainable development are best confronted at the urban level.
The world’s governments are now negotiating the Sustainable Development Goals, which will guide the world’s development agenda from 2015 to 2030.
In an important meeting on September 25, the United Nations General Assembly agreed that the SDGs would be adopted at a global summit in September 2015, with the next two years used to select the priorities.
An urban SDG, promoting inclusive, productive, and resilient cities, would greatly empower tens of thousands of cities worldwide to take up the cause of sustainable development for their own citizens, their countries, and the world.
बिल गेट्स ने इसे ग़लत क्यों समझा
नीना मुंक की त्रुटियों से भरी और पुरानी पड़ चुकी पुस्तक की अपनी समीक्षा में, बिल गेट्स ने अजीब तरह से आकलन और मूल्यांकन करके अपने उस पारखी दृष्टिकोण को त्याग दिया है जो उनकी फ़ाउंडेशन के अमूल्य कार्य को परिभाषित करता है। वे बस मुंक के इस दावे को स्वीकार कर लेते हैं कि 20 से ज़्यादा अफ़्रीकी देशों में चल रही विकास परियोजना - मिलेनियम ग्राम परियोजना - विफल रही है। जबकि यह वास्तव में फल-फूल रही है।
यह भोलापन भ्रम पैदा करने वाला है। मुंक की किताब में दस साल की परियोजना के केवल पहले आधे भाग के एक हिस्से, और 12 में से केवल दो गाँवों को शामिल किया गया है। और वे कभी भी "मिलेनियम गाँवों में लंबी अवधि के लिए नहीं रहीं।" मुंक ने वास्तव में गाँव में विज़िट करने में औसतन प्रति वर्ष लगभग छह दिन - छह साल में लगभग 36 दिन - बिताए हैं, और ये आम तौर से 2-3 दिन के लिए होते थे। इसके अलावा, वे वैनिटी फ़ेयर पत्रिका के लिए पत्रकार के रूप में कहानी तैयार करने के लिए आई थीं, और उनके पास सार्वजनिक स्वास्थ्य, कृषि विज्ञान, अर्थशास्त्र, या अफ़्रीकी विकास के बारे में कोई प्रशिक्षण या अनुभव नहीं था।
इससे भी बदतर बात यह है कि मुंक की टिप्पणियाँ अकसर, कम नहीं बल्कि बहुत ज़्यादा, वर्णनात्मक प्रभाव पैदा करने के लिए बहुत बढ़ा-चढ़ाकर की गई हैं। क्या बिल गेट्स वास्तव में मानते हैं कि मैंने इस बात की चिंता किए बिना विशिष्ट फसलों की वकालत की थी कि उनके लिए बाज़ार है या नहीं, या यह कि मैं सरकार के नेताओं को दी जाने वाली अपनी लगातार सलाहों में राष्ट्रीय कराधान पर विचार करने में विफल रहा? इसके अलावा, MVP में कृषि संबंधी रणनीतियों और विकल्पों का नेतृत्व अफ़्रीकी कृषिशास्त्री कर रहे हैं, जिनमें से कुछ अफ़्रीका में सर्वोत्तम हैं - जो अकसर अफ़्रीका में हरित क्रांति के लिए गठबंधन (AGRA) में बिल के खुद के कृषि कर्मचारियों के साथ मिलकर काम करते हैं।
बिल को यह जानकर ख़ुशी होगी कि MVP का अगले साल – ठीक समय पर इसके समापन के अवसर पर (और 2015 में मिलेनियम विकास लक्ष्यों की अवधि समाप्त होने पर) - उचित और पेशेवर ढंग से मूल्यांकन किया जाएगा। यह आकलन पिछले दशक में इकट्ठा किए गए अत्यंत महत्वपूर्ण डेटा, और 2015 में इकट्ठा किए जाने वाले व्यापक नए सर्वेक्षण डेटा के आधार पर किया जाएगा। इसके अलावा, इस मूल्यांकन में मिलेनियम गाँवों के आ��पास के क्षेत्रों के साथ तुलना शामिल होगी। वास्तव में, मुझे आशा है कि बिल एंड मेलिंडा गेट्स फ़ाउंडेशन इस जटिल परियोजना के पूर्ण मूल्यांकन के लिए ज़रूरी विस्तृत, स्वतंत्र रूप से पर्यवेक्षित सर्वेक्षण कार्य करने में मदद करेगी।
मैं MVP द्वारा हर महीने सामुदायिक स्वास्थ्य की उपलब्धता, रुग्णता (रोग), और मृत्यु दर के संबंध में इकट्ठा किए जानेवाले विस्तृत डेटा के आधार पर कुछ और अच्छी ख़बर देना चाहता हूँ । मिलेनियम गाँवों में मृत्यु दर तेज़ी से गिरी है। वास्तव में, मौजूदा सबूतों, जिनकी अगले साल ज़्यादा विस्तार से जाँच की जाएगी, संकेत करते हैं कि पाँच साल से कम उम्र में मृत्यु दर को प्रति 1,000 जन्म में 30 मृत्यु से कम करने का साहसिक लक्ष्य हासिल कर लिया गया है या यह 2015 तक पहुँच के भीतर होगा, और स्वास्थ्य प्रणाली को इस पर उल्लेखनीय रूप से कम लागत आई है।
हाल ही में, गेट्स फ़ाउंडेशन के एक वरिष्ठ स्टाफ़ सदस्य ने उत्तरी नाइजीरिया में मिलेनियम गाँव का दौरा किया। बाद में, उन्होंने मुझे इस बात की व्यक्तिगत रूप से पुष्टि की कि उन्होंने मिलेनियम गाँव में स्वास्थ्य प्रणाली के संचालन में जो कुछ देखा उससे वे और उनकी टीम बहुत अधिक प्रभावित हुए हैं।
तो मैं इस अवसर का लाभ उठाकर उस चुनौती को दुहराना चाहता हूँ जो मैंने बिल के सामने रखी है। वे ग्रामीण अफ़्रीका में कोई भी ज़िला चुन सकते हैं, और हमारी टीम स्वास्थ्य-क्षेत्र को वार्षिक सिर्फ़ 60 डॉलर प्रति व्यक्ति की लागत पर पाँच साल से कम उम्र में मृत्यु दर को 30/1,000 से कम पर - जो अनेक मध्यम आय वाले देशों विद्यमान विशिष्ट दर है - लाने के लिए मिलेनियम ग्राम स्वास्थ्य दृष्टिकोण का इस्तेमाल करके स्थानीय समुदायों के साथ काम करेगी। और इसे हम पाँच या उससे कम साल के समय में करेंगे। मेरा मानना है कि इस सफलता से बिल और दूसरे लोगों को कम लागत की ग्रामीण स्वास्थ्य प्रणालियों में निवेश करने के उल्लेखनीय मूल्य को पहचानने में मदद मिलेगी जो मिलेनियम ग्राम परियोजना के डिज़ाइन के सिद्धांतों का पालन करती हैं।
अंत में, MVP की स्थिरता और स्केलेबिलिटी के बारे में बिल के द्वारा व्यक्त की गई चिंताओं को देखते हुए, यह कोई छोटी बात नहीं है कि मेज़बान सरकारें इस दृष्टिकोण की घोर समर्थक हैं। इन सरकारों के नेताओं ने लगभग एक दशक तक मिलेनियम गाँवों को रात-दिन देखा है। वे MVP की मार्गदर्शी अवधारणाओं के विस्तृत कार्यान्वयन के लिए अपना ख़ुद का पैसा और नीतियाँ लगा रहे हैं।
उदाहरण के लिए, नाइजीरिया ने देश के स्थानीय सरकार के सभी 774 क्षेत्रों में स्वास्थ्य और शिक्षा सेवाओं को राष्ट्रीय स्तर पर उपलब्ध करने के लिए MVP की अवधारणाओं का इस्तेमाल किया है। समूचे क्षेत्र की सरकारों ने MVP की अवधारणाओं को खुद आगे बढ़ाने के लिए इस्लामी विकास बैंक से 100 मिलियन डॉलर से अधिक की वित्तीय सहायता ली है। अब लगभग एक दर्जन देशों ने या तो अपने खुद के मिलेनियम गाँव शुरू कर दिए हैं या उन्हें शुरू करने में मदद के लिए मिलेनियम ग्राम परियोजना से संपर्क किया है। और अफ़्रीका के खुद के युवा लोगों, पैन अफ़्रीकी युवा नेतृत्व नेटवर्क, ने हाल ही में सेनेगल में मिलेनियम गाँव का दौरा किया, और अपने गृह देशों और क्षेत्रों में मिलेनियम ग्राम परियोजना की तकनीकों और रणनीतियों का विस्तार करने के लिए MVP की सहायता का अनुरोध किया है।
समूचे अफ़्रीका में मिलेनियम ग्राम दृष्टिकोण का प्रसार यह दिखाता है कि अफ़्रीकी राजनीतिक और समुदाय के नेता MVP के तरीकों, रणनीतियों, और प्रणालियों को ग्रामीण अफ़्रीका में ग़रीबी का मुकाबला करने के लिए अत्यधिक उपयोगी मानते हैं। नीना मुंक की पुस्तक पुरानी पड़ चुकी है और वह अपने लक्ष्य को हासिल नहीं कर पाई है। मैं बिल गेट्स को उनकी अफ़्रीका के लिए आगामी यात्रा पर एक या ज़्यादा मिलेनियम ग्राम स्थलों का दौरा करने के लिए आमंत्रित करता हूँ ताकि वे खुद अपनी आँखों से देख सकें कि इस दृष्टिकोण के बारे में समूचे महाद्वीप में इतनी वास्तविक रुचि क्यों ली जा रही है।
Winning the Fight Against Killer Diseases
MAPUTO – One of the greatest successes in development aid in the past decade has been the Global Fund to Fight AIDS, Tuberculosis, and Malaria.
The Global Fund has saved millions of lives and helped countries around the world beat back three epidemic diseases.
Now it is appealing to the world’s governments and the private sector for another three years of funding, with governments set to decide on further financing in early December in Washington, DC.
Back in 2000, the HIV/AIDS epidemic was devastating the world’s poorest countries, especially in Africa.
New antiretroviral medicines had been developed and were being used in rich countries, but were too expensive for the poorest.
Millions of poor people were dying of AIDS, even though the new medicines could have kept them alive.
Two other major killer diseases, malaria and TB, were also resurgent.
Deaths from malaria were soaring, partly because poor countries’ health systems were dramatically underfunded, and partly because the malaria parasite had developed resistance to the usual medicines.
Yet the potential to control malaria was actually improving, thanks to several newly emerging technologies: long-lasting insecticide-treated bed nets to prevent the mosquitos from biting, better diagnostics to identify infections, and a new generation of highly effective medicines.
TB was also running out of control, with a massive disease burden in both Asia and Africa.
As with malaria, the TB bacteria had developed resistance to the traditional therapeutic drugs.
A frightening new epidemic of multi-drug-resistant TB – or MDR-TB, which was much harder to treat than mainstream TB – had erupted.
There were also cases of extreme MDR-TB, soon called XDR-TB, which resisted even the back-up medicines.
Back in 2000, the rich countries were not taking adequate steps to fight AIDS, TB, and malaria.
Aid flows were tiny.
At the time, I had recently been appointed by the Director-General of the World Health Organization (WHO) to help bring finance ministers and health ministers together to see what could be done, both immediately and in the longer term.
Our advisory group, known as the Commission on Macroeconomics and Health, recommended that rich countries scale up their health-care aid to poor countries, including efforts to fight AIDS, TB, and malaria.
This aid would save lives, improve well-being, and help strengthen economic development.
Former Norwegian Prime Minister Gro Harlem Brundtland, the remarkable director-general of the WHO at the time, strongly supported this recommendation.
At the international AIDS conference in Durban, South Africa, in July 2000, I described why a new global fund was needed to fight AIDS.
In early 2001, former United Nations Secretary General Kofi Annan launched a powerful and persuasive appeal to establish the Global Fund.
Leaders around the world responded to Annan’s call; within months, the Global Fund was born.
I remember those days vividly.
In international public-health circles, there was great excitement.
Yet there was also frustration and bewilderment, as vocal opponents of foreign aid began to oppose the increased funding for disease control.
Several economists with little knowledge of public health became outspoken opponents.
They argued on the basis of free-market ideology rather than evidence, claiming that foreign aid always fails.
Fortunately, world leaders listened to public-health specialists and not to the aid skeptics.
US President George W. Bush’s administration provided strong and important support for the Global Fund – and also created new US programs to fight AIDS and malaria.
By the second half of the 2000’s, programs to fight the three main killer communicable diseases were scaling up around the world.
Over the objection of the aid skeptics, the Global Fund provided financial support for massive free distribution of bed nets, diagnostics, and medicines to address malaria.
Lo and behold, for the first time in a generation, deaths from malaria in Africa began to fall (steeply in some places).
Hundreds of thousands of lives, mainly African children, were now being saved every year.
Children were spared not only death but also debilitating infections, enabling them to attend school and lead more productive lives in the future.
The same thing happened with HIV/AIDS and TB.
Back in 2000, before the Global Fund was established, infected people in developing countries died of AIDS without any chance to receive life-saving antiretroviral medicines.
By 2010, more than six million people in developing countries were receiving antiretroviral treatment.
Similarly, testing and treatment for TB rose sharply, including a strong increase in several heavily affected Asian countries.
The aid skeptics were proved wrong.
Aid for health has worked.
The world has benefited enormously from the triumph of generosity, professionalism, common decency, and good sense.
Yet the battle to mobilize adequate financing remains.
The same skeptics repeat their tired opposition without reference to a decade of evidence.
It is shocking how their free-market fundamentalism (or simply ideological opposition to aid of any kind) can blind them to life-and-death needs and the efficacy of practical approaches that are well known to health professionals.
(They are also blind to professional methods in other areas, such as food production.)
The Global Fund is urgently appealing for a minimum of $5 billion per year for the next three years – a tiny sum relative to the world economy (and equal to roughly $5 per person in the high-income countries).
It could wisely use twice that amount.
It seems likely that the US Government will agree to contribute one-third of the $5 billion if the rest of the world delivers the remainder.
The United Kingdom recently made a strong pledge, and the world now awaits the announcements of Germany, Canada, Australia, Japan, and other long-standing and new donor countries in Europe, the Middle East, and Asia.
Millions of people around the world will live, or die, depending on what these governments decide in December.
ईबोला पर कैसे कार्रवाई करें
ईबोला कम से कम चार पश्चिमी अफ्रीकी देशों (गिनी, लाइबेरिया, सिएरा लियोन, और नाइजीरिया) में एक भयानक महामारी बन गया है जिसे फैलने से रोकने के लिए न केवल आपातकालीन कार्रवाई किया जाना जरूरी है; बल्कि वैश्विक जन स्‍वास्‍थ्‍य के बारे में कुछ मूल धारणाओं पर पुनर्विचार किया जाना भी जरूरी है। हम एक ऐसे युग में रह रहे हैं जहाँ ऐसे संक्रामक रोग उभरते हैं और बारंबार उभरते हैं, जो वैश्विक नेटवर्कों के ज़रिए तुरंत फैल सकते हैं। अत: इस वास्तविकता को देखते हुए हमें इसी के अनुरूप वैश्विक रोग-नियंत्रण प्रणाली की आवश्‍यकता है। सौभाग्‍य से एक प्रणाली मौजूद है, बशर्ते हम उसमें उपयुक्त तरीके से निवेश कर सकें।
एड्स, सार्स, एच1एन1 फ़्लू, एच7एन9 फ़्लू और अन्य कई महामारियों में ईबोला सबसे नई महामारी है। इनमें एड्स सबसे अधिक जानलेवा है, जिसने सन 1981 से लेकर अब तक 36 मिलियन जानें ली हैं।
इसमें कोई शक नहीं कि इससे भी बड़ी और आकस्मिक महामारियाँ भी संभव हैं, जैसे प्रथम विश्‍वयुद्ध के दौरान 1918 में होने वाली एन्‍फ़्लुएंजा, जिसने 50-100 मिलियन जानें ली थीं (यह संख्या इस युद्ध में मरने वालों की तुलना में बहुत अधिक है)। हालांकि 2003 में सार्स पर काबू पा लिया गया था, जिसमें कमोबेश 1,000 जानें चली गई थीं, तब इस रोग के कारण चीन सहित अनेक पूर्वी एशियाई अर्थव्‍यवस्‍थाएँ पूरी तरह चरमराने के कगार पर पहुँच गई थीं।
ईबोला और अन्‍य महामारियों को समझने के लिए चार अत्‍यंत महत्‍वपूर्ण तथ्‍य जानना आवश्‍यक है। पहला, ज्‍यादातर उत्‍पन्‍न होने वाले संक्रामक रोग ज़ूनोसेस होते हैं, अर्थात वे पशुओं की आबादी से शुरू होते हैं, और उनमें कभी-कभी आनुवंशिक परिवर्तन की वजह से वे मनुष्‍यों में प्रकट हो जाते हैं। ईबोला संभवत: चमगादड़ों से संचारित हुई है; एच.आई.वी./एड्स चिंपाजियों से उत्‍पन्‍न हुई थी; सार्स संभवत: दक्षिणी चीन के पशु बाजारों में बेचे जाने वाले सीविटों से होकर आई थी; और एच1एन1 और एच7एन9 जैसी इन्फ़्लुएन्ज़ा प्रजातियाँ जंगली और पालतू पशुओं के बीच विषाणुओं के आनुवंशिक पुनर्संयोजनों से उत्‍पन्‍न हुई थीं। मानव समाज ज्यों-ज्यों नए पारिस्थितिकी तंत्रों (जैसे अतीत के दूरस्‍थ वन्‍य क्षेत्रों) में प्रवेश कर रहा है; खाद्य उद्योग आनुवंशिक पुनर्संयोजनों के लिए अधिक अनुकूल माहौल तैयार कर रहे हैं; और जलवायु परिवर्तन ने प्राकृतिक आवासों और प्रजातीय अंत:क्रियाओं को गड्��-मड्ड कर दिया है, अत: नए-नए पशुजनित रोगों का उत्‍पन्‍न होना अवश्‍यंभावी है।
दूसरा, जैसे ही कोई संक्रामक बीमारी प्रकट होती है, वैसे ही वायुयानों, जहाजों, महानगरों और पशु उत्‍पाद व्‍यापारों के जरिए उसके अत्‍यंत तीव्रता से फैलने की गुंजाइश भी मौजूद रहती है। ये महामारी रोग वैश्वीकरण की नई पहचान हैं, जो मौतों की शृंखला के जरिए यह जतलाते हैं कि मनुष्‍यों और वस्‍तुओं की व्‍यापक आवाजाही की वजह से यह दुनिया कितनी असुरक्षित हो गई है।
तीसरा, नुकसान उठाने वालों में गरीब सबसे अव्‍वल और सबसे ज्‍यादा प्रभावित होते हैं। गांवों में रहने वाले गरीब लोग संक्रमित पशुओं के सबसे ज्‍यादा निकट होते हैं और रोग सबसे पहले उन्‍हें ही संक्रमित करता है। वे अकसर शिकार करते हैं और जंगली पशुओं का मांस खाते हैं, जिनसे उनमें संक्रमण होने की संभावना बढ़ जाती है। गरीब लोग जो अकसर अनपढ़ होते हैं, आमतौर पर यह नहीं जानते कि ये रोग - विशेषकर अनजान रोग कितने संक्रामक हैं। इससे स्‍वयं के संक्रमित होने और साथ ही अन्‍य लोगों को भी संक्रमित करने की संभावना बहुत अधिक बढ़ जाती है। इसके अलावा, कुपोषण और मूल स्‍वास्‍थ्‍य सेवाओं का अभाव होने की स्थिति को देखते हुए, उनकी प्रतिरोधक क्षमता, जो पहले से ही कमज़ोर होती है, संक्रमण के आगे बड़ी आसानी से घुटने टेक देती है, जबकि अधिक स्वस्थ और उपचारित व्‍यक्ति इनसे बच निकलते हैं। और "चिकित्‍सा-रहित" स्थितियों में - जहाँ किसी महामारी से निपटने के लिए उचित जन-स्‍वास्‍थ्‍य (जैसे संक्रमित व्‍यक्तियों का पृथक्‍करण करना, छूत के स्रोतों का पता लगाना, निगरानी रखना, आदि) सुनिश्चित करनेवाले पेशेवर स्वास्‍थ्‍य कार्यकर्ता मौजूद न हों या बहुत कम हों, वहाँ आरंभिक प्रकोप ज्‍यादा गंभीर बन जाते हैं।
अंत में, इन उभरते रोगों की तुलना में नैदानिक उपकरणों और असरदार दवाओं, टीकों सहित, सभी जरूरी चिकित्‍सा कार्रवाइयाँ अपरिहार्य रूप से पिछड़ जाती हैं। किसी भी स्थिति में इन उपकरणों को लगातार बनाए रखना आवश्‍यक है। इसके लिए आधुनिकतम जैवप्रौद्योगिकी, प्रतिरक्षा विज्ञान और अंतत: जैवअभियांत्रिकी की आवश्‍यकता होती है ताकि बड़े पैमाने पर औद्योगिक कार्रवाइयाँ की जा सकें (जैसे बड़ी महामारियों की स्थिति में टीकों या दवाओं की लाखों खुराकें बनाई जा सकें)।
उदाहरण के लिए, एड्स संक्रमण के दौरान अरबों डॉलरों का निवेश अनुसंधान और विकास में करने की ज़रूरत पड़ी – और इसी प्रकार औषध उद्योग को भी अपनी प्रतिबद्धताएँ दर्शाने की ज़रूरत पड़ी - ताकि जीवनरक्षक एंटीरेट्रोवायरल दवाइयाँ वैश्विक स्‍तर पर बनाई जा सकें। फिर भी हर प्रकोप के बाद रोगजनक का परिवर्तन होना अपरिहार्य है, जिससे पिछले उपचार कम असरदार रह जाते हैं। इसमें कोई अंतिम जीत नहीं होती, केवल मानव जाति और रोग-उत्‍पन्‍न करने वाले कारकों के बीच कभी न खत्म होने वाली होड़ चलती रहती है।
तो क्‍या विश्‍व इस ईबोला, नए घातक इन्फ़्लुएन्ज़ा, एच.आई.वी. के किसी ऐसे परिवर्तन, जो रोग फैलने की गति बढ़ा सकता है, या मलेरिया की नई बहु-दवा-प्रतिरोधी प्रजातियों या अन्‍य रोगजनकों के लिए तैयार है? उत्तर है नहीं।
हालांकि जन स्‍वास्‍थ्‍य में किया जाने वाला निवेश सन 2000 के बाद उल्‍लेखनीय रूप से बढ़ा है, जिससे एड्स, क्षयरोग, और मलेरिया के खिलाफ लड़ाई में उल्‍लेखनीय सफलता मिली है, फिर भी जरूरत की तुलना में जन स्‍वास्‍थ्‍य पर किए जाने वाले वैश्विक खर्चों में काफी कमी आई है। नई व मौजूदा चुनौतियों का अनुमान लगाने और उपयुक्त कार्रवाई करने में विफल रहे दानदाता देशों ने विश्‍व स्‍वास्‍थ्‍य संगठन के बजट में आंशिक कटौती करवाई है, जबकि एड्स, क्षयरोग और मलेरिया का मुकाबला करने वाले वैश्विक कोष में भी कुल मिलाकर भारी कटौती हुई है, जिससे इन रोगों के खिलाफ जीत हासिल करना मुश्किल हो गया है।
कुछ तुरंत किए जाने वाले कार्यों की सूची इस प्रकार है। पहला, यूनाइटेड स्‍टेट्स, यूरोपीय संघ, खाड़ी देश, और पूर्वी एशियाई देशों को वर्तमान ईबोला महामारी से निपटने के लिए, आगे और घटनाएँ होने तक, डब्‍ल्‍यू.एच.ओ. के नेतृत्‍व में प्रारंभिक स्‍तर पर 50-100 मिलियन डॉलर तक की राशि का एक लचीला कोष बनाना चाहिए। इससे तात्‍कालिक चुनौती के अनुरूप एक त्‍वरित जन-स्‍वास्‍थ्‍य संबंधी कार्रवाई करने में मदद मिलेगी।
दूसरा, दानदाता देशों को अपने वैश्विक कोष के बजट और अधिदेश, दोनों में शीघ्रतापूर्वक विस्‍तार करना चाहिए ताकि कम आय वाले देशों के लिए यह एक वैश्विक स्‍वास्‍थ्‍य कोष बन सके। इसका मुख्‍य लक्ष्‍य सबसे गरीब देशों को प्रत्‍येक स्‍लम और ग्रामीण समुदाय में मूलभूत स्‍वास्‍थ्‍य प्रणालियाँ स्‍थापित करने में मदद करना होगा, इस संकल्पना को यूनिवर्सल हेल्‍थ कवरेज (यू्.एच.सी.) कहा जाता है। इसकी तत्‍काल जरूरत उप-सहारा अफ्रीका और दक्षिणी एशिया को है, जहाँ स्‍वास्‍थ्‍य की स्थितियाँ अत्‍यंत खराब हैं और गरीबी चरम पर है, और ऐसी संक्रामक बीमारियाँ धावा बोलती रहती हैं जिनका उपचार और नियंत्रण करना संभव है।
विशेष रूप से, इन क्षेत्रों को सामुदायिक स्‍वास्‍थ्‍य कार्यकर्ताओं के नए कैडर को नियु‍क्त करना चाहिए, जो रोगों के लक्षण पहचानने, निगरानी रखने, और निदान करने और उचित उपचार प्रदान करने के लिए प्रशिक्षित हो। प्रति वर्ष केवल 5 बिलियन डॉलर की लागत पर, यह सुनिश्चित करना संभव है कि प्रत्‍येक अफ्रीकी समुदाय में भली-भांति प्रशिक्षित स्‍वास्‍थ्य कार्यकर्ता मौजूद हों, जो जीवनरक्षक उपचार कर सकें और ईबोला जैसी स्‍वास्‍थ्‍य आपात स्थितियों से असरदार तरीके से निपट सकें।
अंत में, उच्‍च-आय वाले देशों को वैश्विक रोग निगरानी, डब्‍ल्‍यू.एच.ओ. की दूरगामी क्षमताओं, और जीवन-रक्षक जैवचिकित्‍सा अनुसंधान में पर्याप्‍त मात्रा में निवेश करते रहना चाहिए, जिससे पिछली शताब्‍दी में मानव जाति को काफी लाभ हुए थे। सीमित राष्ट्रीय बजटों के बावजूद, हमें अपनी जान को राजकोषीय मामलों की भेंट चढ़ाना एक बहुत बड़ी भूल होगी।
The Limits of Climate Negotiations
NEW YORK – If the world is to solve the climate-change crisis, we will need a new approach.
Currently, the major powers view climate change as a negotiation over who will reduce their CO2 emissions (mainly from the use of coal, oil, and gas).
Each agrees to small “contributions” of emission reduction, trying to nudge the other countries to do more.
The United States, for example, will “concede” a little bit of CO2 reduction if China will do the same.
For two decades, we have been trapped in this minimalist and incremental mindset, which is wrong in two key ways.
First, it is not working: CO2 emissions are rising, not falling.
The global oil industry is having a field day – fracking, drilling, exploring in the Arctic, gasifying coal, and building new liquefied natural gas (LNG) facilities.
The world is wrecking the climate and food-supply systems at a breakneck pace.
Second, “decarbonizing” the energy system is technologically complicated.
America’s real problem is not competition from China; it’s the complexity of shifting a $17.5 trillion economy from fossil fuels to low-carbon alternatives.
China’s problem is not the US, but how to wean the world’s largest, or second largest economy (depending on which data are used) off its deeply entrenched dependence on coal.
These are mainly engineering problems, not negotiating problems.
To be sure, both economies could decarbonize if they cut output sharply. But neither the US nor China is ready to sacrifice millions of jobs and trillions of dollars to do so.
Indeed, the question is how to decarbonize while remaining economically strong.
Climate negotiators cannot answer that question, but innovators like Elon Musk of Tesla, and scientists like Klaus Lackner of Columbia University, can.
Decarbonizing the world’s energy system requires preventing our production of vast and growing amounts of electricity from boosting atmospheric CO2 emissions.
It also presupposes a switchover to a zero-carbon transport fleet and a lot more production per kilowatt-hour of energy.
Zero-carbon electricity is within reach.
Solar and wind power can deliver that already, but not necessarily when and where needed.
We need storage breakthroughs for these intermittent clean-energy sources.
Nuclear power, another important source of zero-carbon energy, will also need to play a big role in the future, implying the need to bolster public confidence in its safety.
Even fossil fuels can produce zero-carbon electricity, if carbon capture and storage is used.
Lackner is a world leader in new CCS strategies.
Electrification of transport is already with us, and Tesla, with its sophisticated electric vehicles, is capturing the public’s imagination and interest.
Yet further technological advances are needed in order to reduce electric vehicles’ costs, increase their reliability, and extend their range.
Musk, eager to spur rapid development of the vehicles, made history last week by opening Tesla’s patents for use by competitors.
Technology offers new breakthroughs in energy efficiency as well.
New building designs have slashed heating and cooling costs by relying much more on insulation, natural ventilation, and solar power.
Advances in nanotechnology offer the prospect of lighter construction materials that require much less energy to produce, making both buildings and vehicles far more energy efficient.
The world needs a concerted push to adopt to low-carbon electricity, not another “us-versus-them” negotiation.
All countries need new, low-carbon technologies, many of which are still out of commercial reach.
Climate negotiators should therefore be focusing on how to cooperate to ensure that technology breakthroughs are achieved and benefit all countries.
They should take their cue from other cases in which government, scientists, and industry teamed up to produce major changes.
For example, in carrying out the Manhattan Project (to produce the atomic bomb during World War II) and the first moon landing, the US government set a remarkable technological goal, established a bold timetable, and committed the financial resources needed to get the job done.
In both cases, the scientists and engineers delivered on time.
The example of atomic bombs might seem an unpleasant one, yet it raises an important question: If we ask governments and scientists to cooperate on war technology, shouldn’t we do at least the same to save the planet from carbon pollution?
In fact, the process of “directed technological change,” in which bold objectives are set, milestones are identified, and timelines are put into place, is much more common than many realize.
The information-technology revolution that has brought us computers, smart phones, GPS, and much more, was built on a series of industry and government roadmaps.
The human genome was mapped through such a government-led effort – one that ultimately brought in the private sector as well.
More recently, government and industry got together to cut the costs of sequencing an individual genome from around $100 million in 2001 to just $1,000 today.
A dramatic cost-cutting goal was set, scientists went to work, and the targeted breakthrough was achieved on time.
Fighting climate change does depend on all countries having confidence that their competitors will follow suit.
So, yes, let the upcoming climate negotiations spell out shared actions by the US, China, Europe, and others.
But let’s stop pretending that this is a poker game, rather than a scientific and technological puzzle of the highest order.
We need the likes of Musk, Lackner, General Electric, Siemens, Ericsson, Intel, Electricité de France, Huawei, Google, Baidu, Samsung, Apple, and others in laboratories, power plants, and cities around the world to forge the technological breakthroughs that will reduce global CO2 emissions.
There is even a place at the table for ExxonMobil, Chevron, BP, Peabody, Koch Industries, and other oil and coal giants.
If they expect their products to be used in the future, they had better make them safe through the deployment of advanced CCS technologies.
The point is that targeted and deep decarbonization is a job for all stakeholders, including the fossil-fuel industry, and one in which we must all be on the side of human survival and wellbeing.
Deep Decarbonization
NEW YORK – Have a look at what happened around the world this past month. Australia’s heat wave filled headlines when temperatures reaching 45° Celsius disrupted the Australian Open tennis tournament.
California’s extreme drought forced the governor to declare a state of emergency.
Major floods in Indonesia killed dozens and displaced tens of thousands.
Beijing’s coal-induced smog forced people to stay in their homes, closed highways, and diverted flights.
Such events are daily warnings to the world: wake up before it is too late.
We have entered the Age of Sustainable Development.
Either we make peace with the planet, or we destroy our hard-won prosperity.
The choice seems obvious, but our actions speak louder than words.
Humanity continues on a path of ruin, driven by short-term greed and ignorance.
Much (though not all) of the global environmental crisis stems from the world’s fossil-fuel-based energy system.
More than 80% of all primary energy in the world comes from coal, oil, and gas.
When these fossil fuels are burned, they emit carbon dioxide, which in turn changes the Earth’s climate.
The basic physics has been known for more than a century.
Unfortunately, a few oil companies (ExxonMobil and Koch Industries are the most notorious) have devoted enormous resources to sowing confusion even where there is clear scientific consensus.
But, in order to save the planet we know, and to preserve the world’s food supply and the well-being of future generations, there is no alternative to shifting to a new, low-carbon energy system.
There are three parts to this transition.
The first is improved energy efficiency, meaning that we should use much less energy to achieve the same level of well-being.
For example, we can design our buildings to use sunlight and natural-air circulation so that they require far less commercial energy for heating, cooling, and ventilation.
Second, we need to shift to solar, wind, hydro, nuclear, geothermal, and other forms of energy that are not based on fossil fuels.
The technology exists to use these alternatives safely, affordably, and at a scale large enough to replace almost all of the coal, and much of the oil, that we use today.
Only natural gas (the cleanest-burning fossil fuel) would remain a significant source of energy by mid-century.
Finally, to the extent that we continue to rely on fossil fuels, we must capture the resulting CO2 emissions at power plants before they escape into the atmosphere.
The captured CO2 would then be injected underground or under the ocean floor for safe long-term storage.
Carbon capture and sequestration (CCS) is already being used successfully on a very small scale (mainly to enhance oil recovery in depleted wells).
If (and only if) it proves successful for large-scale use, coal-dependent countries like China, India, and the United States could continue to use their reserves.
American politicians have proved to be incapable of designing policies to shift the US to low-carbon energy use.
Such policies would include a rising tax on CO2 emissions, large-scale research-and-development efforts in low-carbon technologies, a shift to electric vehicles, and regulations to phase out all coal-fired power plants except those that install CCS.
Yet politicians are pursuing none of these policies adequately.
Climate-change foes have spent billions of dollars to influence policymakers, support election campaigns by defenders of fossil fuels, and defeat candidates who dare to promote clean energy.
The Republican Party as a whole attracts massive financial support from opponents of decarbonization, and these donors aggressively fight even the smallest step toward renewable energy.
For their part, many Democratic members of the US Congress are also in the pro-fossil-fuel camp.
A few big players in the energy industry, showing no concern for truth (much less for our children, who will bear the consequences of our present folly), have teamed up with Rupert Murdoch.
Indeed, Murdoch, the Koch Brothers, and their allies behave just like Big Tobacco in denying scientific truths; even use the same experts for hire.
The situation is generally the same around the world.
Wherever powerful lobbies defend existing coal or oil interests, politicians typically are afraid to tell the truth about the need for low-carbon energy.
Brave politicians who do tell the truth about climate change are found mainly in countries that do not have a powerful fossil-fuel lobby.
Consider the fate of one courageous exception to this rule.
Kevin Rudd, the former Australian prime minister, tried to implement a clean-energy policy in his coal-producing country.
Rudd was defeated in his re-election bid by a candidate whose backing from an alliance of Murdoch and coal companies enabled him to outspend Rudd by a huge margin.
Murdoch’s tabloids pump out anti-scientific propaganda opposing climate-change policies not only in Australia, but also in the US and elsewhere.
The reason all of this matters is that the path to deep decarbonization is open to us.
Yet time is very short.
The world needs to stop building new coal-fired power plants (except those that implement CCS) and to shift to low-carbon electricity.
It needs to phase out the internal combustion engine for almost all new passenger vehicles by around 2030, shifting to vehicles powered by electricity.
And it needs to adopt energy-saving technologies that consume less commercial energy.
The technologies are available and will get better and cheaper with use, if only fossil-fuel lobbies can be held at bay.
If this happens, people around the world will discover something wonderful.
Not only will they have saved the planet for the next generation; they will also enjoy sunshine and clean, healthy air.
And they will ask what took so long when the Earth itself was at dire risk.
Let the Middle East Govern Itself
NEW YORK – It is time for the United States and other powers to let the Middle East govern itself in line with national sovereignty and the United Nations Charter.
As the US contemplates yet another round of military action in Iraq and intervention in Syria, it should recognize two basic truths.
First, US interventions, which have cost the country trillions of dollars and thousands of lives over the past decade, have consistently destabilized the Middle East, while causing massive suffering in the affected countries.
Second, the region’s governments – in Syria, Saudi Arabia, Turkey, Iran, Iraq, Egypt, and elsewhere – have both the incentive and the means to reach mutual accommodations.
What is stopping them is the belief that the US or some other outside power (such as Russia) will deliver a decisive victory on their behalf.
When the Ottoman Empire collapsed at the end of World War I, the great powers of the day, Britain and France, carved out successor states in order to ensure their control over the Middle East’s oil, geopolitics, and transit routes to Asia.
Their cynicism – reflected, for example, in the Sykes-Picot Agreement –&nbsp;established a lasting pattern of destructive outside meddling.
With America’s subsequent emergence as a global power, it treated the Middle East in the same way, relentlessly installing, toppling, bribing, or manipulating the region’s governments, all the while mouthing democratic rhetoric.
For example, less than two years after Iran’s democratically elected parliament and prime minister, Mohammad Mossadegh, nationalized the Anglo-Iranian Oil Company in 1951, the US and Britain used their secret services to topple Mossadegh and install the incompetent, violent, and authoritarian Shah Reza Pahlavi.
Not surprisingly, the Islamic Revolution that overthrew the Shah in 1979 brought a wave of virulent anti-Americanism in its wake.
Rather than seeking rapprochement, however, the US supported Saddam Hussein during Iraq’s eight-year war with Iran in the 1980s.
Iraq fared no better with the British and Americans.
Britain ruthlessly created a subservient Iraqi state after WWI, backing Sunni elites to control the majority Shia population.
After oil was discovered in the 1920s, Britain assumed control over the new oil fields, using military force as needed.
The US supported the 1968 coup that brought the Ba’ath Party – and Saddam – to power.
With Saddam’s invasion of Kuwait in 1990, however, the US turned on him, and has been entwined in Iraq’s politics ever since, including two wars, sanction regimes, the toppling of Saddam in 2003, and repeated attempts, as recently as this month, to install a government that it considered acceptable.
The result has been an unmitigated catastrophe: the destruction of Iraq as a functioning society in an ongoing civil war, fueled by outside powers, that has caused economic ruin and collapsing living standards.
Hundreds of thousands of Iraqis have died in the violence since 1990.
Syria endured decades of French dominance after WWI, and then alternatingly hot and cold relations with the US and Europe since the 1960s.
During the past decade, the US and its allies have tried to weaken, and then, starting in 2011, to topple President Bashar al-Assad’s regime, mainly in a proxy war to undermine Iranian influence in Syria.
The results have been devastating for the Syrian people.
Assad remains in power, but more than 190,000 Syrians are dead and millions have been displaced as a result of an insurrection supported by the US and its allies (with Assad backed by Russia and Iran).
Some US officials are now reportedly considering an alliance with Assad to fight the militant Islamic State, whose rise was enabled by the US-backed insurrection.
After decades of cynical and often secret interventions by the US, Britain, France, Russia, and other outside powers, the region’s political institutions are based largely on corruption, sectarian politics, and brute force.
Yet whenever a new Middle East crisis erupts, the latest being triggered by the Islamic State’s recent gains, the US intervenes again, perhaps to change a government (as it has just orchestrated in Iraq) or to launch a new bombing assault.
Backroom dealings and violence continue to rule the day.
Pundits claim that Arabs cannot manage democracy.
In fact, the US and its allies simply don’t like the results of Arab democracy, which all too often produces governments that are nationalist, anti-Israel, Islamist, and dangerous to America’s oil interests.
When the ballots go in that direction, the US simply ignores the election results (as it did, for example, in 2006, when Hamas won a large majority of the popular vote in Gaza).
The US cannot stop the spiral of violence in the Middle East.
The damage in Libya, Gaza, Syria, and Iraq demands that a political solution be found within the region, not imposed from the outside.
The UN Security Council should provide an international framework in which the major powers pull back, lift crippling economic sanctions, and abide by political agreements reached by the region’s own governments and factions.&nbsp;
Iran, Turkey, Egypt, Syria, Saudi Arabia, the UAE, and other neighbors know one another well enough – thanks to 2,000-plus years of trade and war – to sort out the pieces themselves, without interference from the US, Russia, and the former colonial powers of Europe.
The countries of the Middle East have a common interest in starving hyper-violent groups like the Islamic State of arms, money, and media attention.
They also share an interest in keeping oil flowing to world markets – and in capturing the bulk of the revenues.
I am not claiming that all will be well if the US and other powers pull back.
There is enough hatred, corruption, and arms in the region to keep it in crisis for years to come.
And nobody should expect stable democracies any time soon.
But lasting solutions will not be found as long as the US and other foreign powers continue to meddle in the region.
One hundred years after the start of WWI, colonial practices must finally come to an end.
The Middle East needs the opportunity to govern itself, protected and supported by the UN Charter, not by any individual great power.
Our Last Chance for a Safe Planet
MELBOURNE – Humanity has just about run out of time to address climate change.
Scientists have pointed out that a rise in temperature of 2º Celsius above pre-industrial levels will put the Earth in dangerous, uncharted territory.
Yet we currently are on a path toward an increase of 4º or more this century.
The last chance for action has arrived.
That chance lies in Paris in December 2015, when the world’s governments meet for the 21st annual United Nations climate-change meeting.
But this time will be different.
Either governments will agree to decisive action, as they have promised, or we will look back at 2015 as the year when climate sanity slipped through our fingers.
In 1992, the world’s governments adopted the UN Framework Convention on Climate Change, promising to avoid “dangerous anthropogenic [human-induced] interference in the climate system” by reducing the rate of emission of greenhouse gases, especially carbon dioxide.
But, though the treaty entered into force in 1994, the rate of emissions of greenhouse gases, including CO2, has actually increased.
In 1992, global combustion of coal, oil, and gas, plus cement production, released 22.6 billion tons of CO2 into the air.
In 2012, the most recent year for which comparable data are available, emissions were 34.5 billion tons.
Humanity has accelerated, rather than controlled, human-induced climate change.
This is now the greatest moral issue of our time.
Global fossil-fuel use gravely threatens the poor, who are the most vulnerable to climate change (though the rich are the main cause), and future generations, who will inherit a planet that has become unlivable in many places, with food supply subject to massive shocks.
We are causing this harm in an age when technological breakthroughs enable the world to shift from dangerous fossil fuels to low-carbon energy sources, such as wind, solar, nuclear, and hydro, and reduce the impact of fossil fuels by using carbon capture and storage (CCS) technology.
Pope Francis recently put it just right: “Safeguard Creation,” he said.
Never forget this!”
Yet, for the many powerful interests, climate change remains a game, with the goal being to delay action for as long as possible.
The giant fossil-fuel companies have continued to lobby behind the scenes against the shift to low-carbon energy, and have used their vast wealth to buy media coverage designed to sow confusion. Rupert Murdoch’s media empire in the United States, the United Kingdom, Australia, and elsewhere stands out as playing a particularly cynical and harmful role in spreading anti-scientific propaganda.
Even so, the politics of climate change may be changing for the better – a change reflected in the Pope’s forceful message.
Here are six reasons why the stalemate might soon end.
First, the world is waking up to the calamity that we are causing.
Though the Murdoch propaganda machine churns out a daily stream of anti-scientific falsehoods, the public also sees prolonged droughts (now in parts of Brazil, California, and Southeast Asia, to name a few places), massive floods (recently in Bosnia and Serbia), and lethal heat waves (in many parts of the world).
Second, the world’s citizens do not want to go down in flames.
Public opinion has so far succeeded in blocking the construction of the Keystone XL Pipeline, which would accelerate the production of Canada’s oil sands – a shocking prospect, given that neither Canada nor the US yet have committed to a climate plan.
Third, more severe climate shocks may lie ahead.
This year could prove to be a major El Niño year, when the waters of the Eastern Pacific warm and create global climate disruptions.
A big El Niño now would be even more dangerous than usual, because it would add to the overall rising trend in global temperatures.
Indeed, many scientists believe that a big El Niño could make 2015 the hottest year in the Earth’s history.
Fourth, both the US and China, the two largest emitters of CO2, are finally beginning to get serious.
President Barack Obama’s administration is trying to stop the construction of new coal-fired power plants, unless they are equipped with CCS technology.
China, for its part, has realized that its heavy dependence on coal is causing such devastating pollution and smog that it is leading to massive loss of life, with life expectancy down as much as five years in regions with heavy coal consumption.
Fifth, the Paris negotiations are finally beginning to attract global attention from both the public and world leaders.
UN Secretary-General Ban Ki-moon has called for political leaders to attend a special summit in September 2014, 14 months ahead of the Paris meeting, to launch intensive negotiations.
The UN expert network that I direct, the Sustainable Development Solutions Network (UN SDSN), will issue a major report in July on how each of the major economies can successfully decarbonize the energy system.
Finally, technological advances in low-carbon energy systems, including photovoltaics, electric vehicles, CCS, and fourth-generation nuclear power with greatly enhanced safety features, all help make the transition to low-cost, low-carbon energy technologically realistic, with huge benefits for human health and planetary safety.
Starting this fall, the UN SDSN will create a platform for all global citizens to participate in the hard work of saving the planet.
The SDSN will offer a free, online introductory course to climate change, and then host a global online “negotiation” of a global climate agreement.
We expect that hundreds of thousands, perhaps millions, of interested citizens worldwide will participate online, showing the way for the politicians.
The control of climate change is a moral imperative and a practical necessity – far too important to be left to politicians, Big Oil, and their media propagandists.
Taking Corbynomics Seriously
LONDON – Fiscal austerity has become such a staple of conventional wisdom in the United Kingdom that anyone in public life who challenges it is written off as a dangerous leftist.
Jeremy Corbyn, the current favorite to become the next leader of Britain’s Labour Party, is the latest victim of this chorus of disparagement.
Some of his positions are untenable.
But his remarks on economic policy are not foolish, and deserve proper scrutiny.
Corbyn has proposed two alternatives to the UK’s current policy of austerity: a National Investment Bank, to be capitalized by canceling private-sector tax relief and subsidies; and what he calls “people’s quantitative easing” – in a nutshell, an infrastructure program that the government finances by borrowing money from the Bank of England.
The first idea is neither extreme nor new.
There is a European Investment Bank, a Nordic Investment Bank, and many others, all capitalized by states or groups of states for the purpose of financing mandated projects by borrowing in the capital markets.
The rationale for this type of institution derives from what that great socialist theorist Adam Smith called the state’s responsibility for the “erection and maintenance” of those “public works and institutions,” which, while of great advantage to society, would not profit private enterprise.
In other words, the state should always have an investment function.
Delegating that function to a dedicated institution may have advantages for the presentation of the public accounts.
Today’s particular economic circumstances provide a second reason for establishing a National Investment Bank.
In slump or even semi-slump conditions, a higher-than-normal proportion of private savings are held in cash or its nearest equivalent (short-term treasury bills).
A National Investment Bank could draw out these “idle savings” by issuing bonds for infrastructure development.
Offering a small premium on government securities, such bonds would likely attract long-term investors like pension funds, which otherwise face zero or even negative real returns.
For example, with a fiscal outlay of €21 billion ($23.3 billion), the European Investment Bank is set to finance investments worth at least €315 billion by 2017.
“People’s quantitative easing” is a more unorthodox – and a more interesting – version of this idea.
Under conventional quantitative easing (QE), the central bank buys government securities from banks or corporations and relies on the extra cash that it “prints” to stimulate private spending.
But studies suggest that much of this money goes into speculative activity, risking asset bubbles, rather than being channeled into productive investment.
An alternative would be to distribute the central bank’s newly issued money directly to housing associations, local councils, or national or regional investment banks – any organization that could carry out infrastructure projects.
This is what Corbyn proposes.
This idea of monetary financing of fiscal deficits (borrowing from the central bank, rather than from the bond markets) has a reputable pedigree.
In a lecture to the Cass Business School in February 2012, Adair Turner, former Chairman of the UK Financial Services Authority, proposed it as an option if further borrowing from the markets were politically or financially impossible.
Corbyn’s proposal, unlike orthodox monetary financing, would not add to the national debt – a major advantage.
Orthodox QE – let’s call it “monetization one” – is intended to be reversed, with taxation used to raise the money to redeem the government bonds held by the central bank.
The expectation of future tax hikes could drive people to save part of the new money, rather than spend it.
Unorthodox QE (“monetization two”) avoids this problem, because the central bank’s borrowing will not be repaid; central-bank assets net out against government liabilities.
That is why it should not be excluded a priori.
There is a strong case for monetization two in the eurozone, which faces zero growth and deflation.
Indeed, while the QE program unveiled by the European Central Bank in January consists mainly of sovereign-debt purchases, the ECB will also buy debt issued by the European Commission and the European Investment Bank – key elements of monetization two.
It will thus help to finance infrastructure investment.
But it is hardly the case that the UK economy, currently growing at close to 3% a year, needs a further QE program of any kind right now.
The government can borrow all it wants from the bond markets at near-zero interest rates.
Outsourcing such borrowing power to a National Investment Bank is merely a way to signal that any additional borrowing will be used for investment, not for current spending.
There are two solid arguments for activating such an institution in the UK today. First, the share of private investment in GDP is still below its pre-crash level of around 11% of GDP.
This suggests that investors lack confidence in the durability of the recovery.
Second, depending on the institution’s mandate, a state-led investment program offers a way to rebalance the British economy away from private speculative activity to long-term investment in sustainable growth, and away from the south-east to the midlands and the north of England.
In short, it offers a way to address the problem of “private affluence and public squalor” that John Kenneth Galbraith identified in the 1950s.
Corbyn should be praised, not castigated, for bringing to public attention these serious issues concerning the role of the state and the best ways to finance its activities.
The fact that he is dismissed for doing so illustrates the dangerous complacency of today’s political elites.
Millions in Europe rightly feel that the current economic order fails to serve their interests.
What will they do if their protests are simply ignored?
Jeremy Lin and the Political Economy of Superstars
CAMBRIDGE – The biggest news around Cambridge in recent weeks has been Jeremy Lin, the Harvard economics graduate who has shocked the National Basketball Association by rising overnight from “nowhere” to become a genuine star, leading a losing New York Knicks team to an unlikely string of victories.
Lin’s success is delicious, partly because it contradicts so many cultural prejudices about Asian-American athletes.
Flabbergasted experts who overlooked Lin have been saying things like “he just didn’t look the part.” Lin’s obvious integrity and graciousness has won him fans outside the sport as well.
The whole world has taken note, with Lin being featured on the cover of Sports Illustrated for two consecutive issues.
The NBA, which has been trying to build brand recognition and interest in China, is thrilled.
I confess to being a huge Lin fan.
Indeed, my teenage son has been idolizing Lin’s skills and work ethic ever since Lin starred on the Harvard team.
But, as an economist observing the public’s seething anger over the “one percenters,” or individuals with exceptionally high incomes, I also see a different, overlooked facet of the story.
What amazes me is the public’s blasé acceptance of the salaries of sports stars, compared to its low regard for superstars in business and finance.
Half of all NBA players’ annual salaries exceed $2 million, more than five times the threshold for the top 1% of household incomes in the United States.
Because long-time superstars like Kobe Bryant earn upwards of $25 million a year, the average annual NBA salary is more than $5 million.
Indeed, Lin’s salary, at $800,000, is the NBA’s “minimum wage” for a second-season player.
Presumably, Lin will soon be earning much more, and fans will applaud.
Yet many of these same fans would almost surely argue that CEOs of Fortune 500 companies, whose median compensation is around $10 million, are ridiculously overpaid.
If a star basketball player reacts a split-second faster than his competitors, no one has a problem with his earning more for every game than five factory workers do in a year.
But if, say, a financial trader or a corporate executive is paid a fortune for being a shade faster than competitors, the public suspects that he or she is undeserving or, worse, a thief.
Economists have long studied the economics of superstars in fields where a company can lever enormously the decisions of a small number of individuals, making them valuable in a way that someone who can, say, chop down trees like the legendary Paul Bunyan, is not.
But the political economy of what levels of income differences countries will tolerate remains uncharted territory.
Of course, there is a certain logic to the public’s disdain for superstar compensation outside of professional sports and entertainment.
This is especially the case in some areas of finance that are essentially zero-sum games, in which one person’s gain is another’s loss.
There are other areas, such as technology, in which someone like Apple’s late founder, Steve Jobs, arguably delivers real innovation and quality, rather than just employing lawyers and lobbyists to maintain a monopoly position.
As a basketball fan, I would not describe the sport as a zero-sum game, even though one team wins and one team loses.
The best players have huge creative flair.
But so do some “street ball” players who excel in slam-dunk theatrics; perhaps because they are not tall enough to compete, they make almost nothing.
Do fans tolerate outsize sports incomes because players are role models?
Many certainly are, but not all high-paid sports celebrities are exemplary citizens.
Michael Vick, a star quarterback in the US National Football League, served time in prison for running a vicious dog-fighting operation, and arrests of players on charges ranging from illegal possession of drugs and weapons to domestic battery have been a regular occurrence.
And, back on the field or court, serious infractions occur all the time.
Think of Zinedine Zidane’s infamous head butt in the 2006 football World Cup.
In the NBA itself, a star player, Ron Artest, was suspended for the remainder of the 2004 season after going into the stands and brawling with heckling fans during a game.
(Artest has now changed his name to Metta World Peace, perhaps in response.)
Moreover, sports teams surely lobby governments as aggressively as any big business.
Professional sport is a legislated monopoly in most countries, with top teams extracting free stadiums and other privileges from host cities.
Indeed, Lin’s story, it should be remembered, grew out of a huge labor dispute between the NBA’s billionaire owners and its millionaire players over division of the league’s nearly $4 billion in annual revenues – more than many countries’ national income.
As the late University of Chicago economist Sherwin Rosen postulated, globalization and changing communication technologies have increasingly made the economics of superstars important in a variety of fields.
That is certainly true in sports and entertainment, but it is also the case in business and finance.
I wish Lin a long and successful career as a superstar, though he will have already had a huge cultural impact even if his success proves meteoric.
One can hope that, as Asian-Americans continue to break barriers in other arenas – they remain under-represented among corporate CEOs, for example – these rising superstars will be greeted with similar acclaim.
If the public is not happy about high superstar incomes, the obvious remedy is to improve the tax system, including for powerful sports-team owners, many of whom benefit from huge tax breaks in their day jobs.
Who knows?
With a more level playing field, superstars outside sports and entertainment might find themselves a bit better appreciated.
Jihad or Murder?
It is remarkable that some of the most critical concepts of Muslim religious terminology have now become part of the international language of current affairs.
Questions drawn from Islamic theology are discussed freely by the world public, engaging specialists and non-specialists, Muslims and non-Muslims.
Theological disputation has moved far from Islam’s religious academies.
For example, the term jihad, commonly translated as “holy war,” has become nearly ubiquitous.
Though conceived in early Muslim history as a means of spreading God’s word, Muslim scholars today distinguish between two kinds of jihad – one being an internal struggle against temptation, and the other a physical conflict against an aggressor who threatens the survival or the fundamental rights of a Muslim community.
In this context, there is widespread rejection of the fundamentalists’ use of the term.
Numerous Muslim scholars have raised their voices to challenge the terrorists’ defense of suicide bombings or attacks on civilians, offering long citations from centuries of religious jurisprudence.
In itself, this approach represents a worthy expression of collective conscience in opposition to the terrorists.
But many among the public and in the media want more.
Muslim intellectuals are being encouraged to press the religious argument against fundamentalist violence in order to deprive the terrorists of their most fearsome and potent arguments.
If Muslim scholars can somehow disprove these arguments, it is thought, then the terrorists’ ability to sustain their violent underground will be reduced.
Is this right?
A quick survey of the history of religious conflict shows that theological controversies have never been resolved by theological arguments.
Looking more closely, one finds that while these controversies were often framed in religious terms, they were not at all about religion.
The range of opposing interpretations of religious texts is virtually unlimited, and disputes are seldom resolved by rational argument.
In earlier times, such controversies were decided by political authorities, which used military force to impose one particular point of view at the expense of all others.
Muslim history is full of such cases.
Recently, when Saddam Hussein invaded Kuwait, he found scholars who raised theological arguments on his behalf.
The coalition confronting him had no difficulty finding religious arguments that led to precisely the opposite conclusion.
Today, it is clear that fundamentalists and their supporters are completely closed off to even the most elaborate theological refutation of their views, even when produced by distinguished religious authorities.
The first reflex of the fundamentalists is to withdraw from the mainstream, to build around themselves a shell that is impervious to any logic other than their own.
The most essential questions that humans face today – those that engender the deepest conflicts – have nothing to do with theology.
They concern disputes over territory, political power, definitions of rights, and distribution of wealth.
The means of discussing these questions is known to all and is expressed in all religions and all languages.
The evils most deeply resented – in all societies – are injustice, despotism, corruption, and poverty.
We all understand what these mean, and how certain people must live with them on a daily basis.
Why, then, do we follow the fundamentalists to the very heart of their madness?
Allowing them to frame these problems in religious terms legitimizes the perspective that they are attempting to impose, particularly in their own societies.It also allows them to camouflage their very worldly thirst for power.
Repeatedly, the Muslim religious establishment has been urged to issue statements denying fundamentalists the right to use religious terms like jihad.
But experience has proven that this approach leads nowhere.
In fact, debates about the use of religious terms lend credibility to fundamentalist efforts to apply these ideas to conditions in the modern world.
Such debates concede that these religious concepts are generally valid, even when, as in the fundamentalists’ case, they simply do not apply.
As a result, the entire discussion could easily backfire.
Invariably, fundamentalists dismiss religious critiques of their views as evidence that religious authorities have been corrupted by hostile influences.
In this way, the terrorists oppose the “purity” and “authenticity” of their arguments to the compromises presumably forced upon religious establishments.
Speaking to Muslims exclusively in their own religious terms also excludes them from broad ethical frameworks that defend essential human values, most notably the protection of innocent civilians.
These values are the foundation upon which all religious and cultural traditions rest.
To be sure, it is important to understand the discourse of those who are making war on societies – their own societies first and foremost.
But adopting the terrorists’ interpretation of events conceals the reality of this conflict.
Instead of fighting on behalf of political and religious liberty, we risk engaging in a conflict with the false images that the terrorists have created.
Worse still, we would bring this conflict into our own societies, where different religious and cultural traditions are now inextricably mingled.
There is simply no need to look to theology to call a crime by its proper name.
The revulsion provoked by the murder of innocents is deeply felt by all, and it is reprehensible by any standard, religious or not.
It may even be that religious language does not adequately express the repulsion we all feel toward the terrorists’ actions.
No feeling of victimhood can justify, under any conditions, such crimes against innocents, and no theology can accept the negation of the human essence that we all share.
Jinnah’s Labyrinth
NEW DELHI – Three recent events vividly illustrate the dilemmas of today’s Pakistan, which are in many ways the same challenges faced by the country’s founder, Mohammed Ali Jinnah, over six decades ago.
The foreign secretaries of India and Pakistan met in New Delhi recently, after a gap of more than 15 months, the terrorist attacks of November 11, 2008 having frozen bilateral relations between the two countries in suspicion and mutual recrimination.
The New Delhi meeting marked a temporary thaw, yet even as Pakistan’s foreign secretary returned home to Islamabad, suspected Taliban bombers had attacked an Indian medical mission in the heart of Kabul, Afghanistan, killing 11 people.
Moreover, in the Pakistani province of Waziristan, three Sikhs, a minority in Pakistan, were abducted.
When the ransom could not be raised, one was beheaded.
India and the world watch such events in horror, unable to decide how to respond.
As people wonder if the United States-NATO surge in Afghanistan which began last month will succeed, all of South Asia is asking even more troubling questions: Who runs Pakistan?
Who is really in charge of its nuclear arsenal?
To understand where Pakistan’s massive problems began, we need to look back to the country’s founding.
At a press meeting on November 14, 1946, nine months before British India was partitioned into two countries, India and Pakistan, Jinnah was asked about the future of the communal situation in what would become Pakistan.
He foresaw “a really stable and secure government in Pakistan,” whose Muslim majority would treat minorities in their midst “in a most generous way.”
Seeking to dispel skepticism, he declared that “Pakistan and Hindustan by virtue of contiguity and mutual interests will be friends in this subcontinent.”
That was Jinnah’s dream, but the reality is that Pakistan has lived in high drama ever since its birth, often troubled by dark and imaginary historical shadows.
It has been a victim of its own grandiose dreams about its role in the world and place among Islamic nations, and often of intense emotionalism and an absence of calm, dispassionate logic.
Almost inevitably, or so it seems, the idea of Pakistan has been usurped, which is why Pakistan’s friends have so often become its masters, and why Pakistan continues to remain fragile, insecure, and tense.
But there are other, non-psychological factors for Pakistan’s troubles.
Founded on the notion of separateness, Pakistan has continuously had to affirm its Islamic identity, as well as its opposition to India.
So it adopted the identity of an Islamic Republic – a seemingly direct and logical evolution from “Muslims as a distinct nation” before partition to Pakistan as an “Islamic State” afterward.
In reality, this transition has impeded Pakistan’s evolution into a modern, functioning state underpinned by a coherent national identity.
Indeed, by becoming an Islamic state, Pakistan ultimately – and perhaps inevitably –became something of a “jihadi” state.
Unsurprisingly, when set on this path, it also became the chosen refuge of Osama bin Laden and of the Taliban leadership that fled Afghanistan after the US-led invasion.
Can Pakistan alter its identity?
Peace in the region, and within Pakistan, depends on the answer to this question, which only Pakistani civil society – not the US, NATO, or any “surge” – can provide.
But Pakistani society is now an orphan, dependant almost totally on both the Pakistani Army and the all-pervasive Inter-Services Intelligence (ISI) , which has grown into a state within a state, answerable only to itself .
Of course, there are ideas of Pakistan other than that of an “Islamic state.”
Indeed, Pakistan aspired at one point to becoming something of a modern extension of India’s long-ruling Mughal dynasty.
But this aspiration grossly misread both the present and the inherited historical reality, for Pakistan also wanted to be a legatee of British India – a confused desire that made Pakistan more vulnerable to becoming a “rented state” than when it was part of either the Mughal or British Empire.
Likewise, dreams of cultural links with Central Asia by themselves do not make Pakistan a boundary between it and the teeming masses of India.
Indeed, the only role Pakistan plays in this respect is as an outpost for Central Asian terrorists.
There is cruel irony in the observation that in the country which Jinnah created in the name of Islam, that noble faith itself now constitutes the principal challenge to the very survival of the state.
It is no less ironic that Pakistan, once seen as the protector of Western interests in South Asia, has become the central challenge to those interests – what one high Western dignitary has undiplomatically called an “international migraine.”
Big Data for Poor Students
WASHINGTON, DC – Countries need skilled and talented people to generate the innovations that underpin long-term economic growth.
This is as true in developed as it is in developing economies.
But it will not happen without investment in education and training.
If we are to end poverty, reduce unemployment, and stem rising economic inequality, we must find new, better, and cheaper ways to teach – and on a vast scale.
This goal may seem to be beyond even wealthier countries’ means; but the intelligent collection, analysis, and use of educational data could make a big difference.
And, fortunately, we live in an age in which information technology gives us the right tools to broaden access to high-quality, affordable education.
Big data – high-volume, complex data sets that businesses use to analyze and predict consumer behavior – can provide teachers and companies with unprecedented amounts of information about student learning patterns, helping schools to personalize instruction in increasingly sophisticated ways.
The World Bank Group and its private-sector lending arm, the International Finance Corporation (IFC), are trying to harness this potential to support national education systems.
A recently launched initiative, called the Systems Approach for Better Education Results (SABER), collects and shares comparative data on educational policies and institutions from countries around the world.
In the private sector, the ability to collect information about teacher-student interaction, and interaction between students and learning systems, can have a profound impact.
In Kenya, for example, Bridge International Academies is using adaptive learning on a large scale.
An IFC client founded by three American entrepreneurs, Bridge runs 259 nursery and primary schools, with monthly tuition averaging $6.
It is a massive learning laboratory for students and educators alike.
Bridge tests different approaches to teaching standard skills and concepts by deploying two versions of a lesson at the same time in a large number of classrooms.
The lessons are delivered by teachers from standardized, scripted plans, via tablets that also track how long the teachers spend on each lesson.
Exam results are recorded on the teacher’s tablet, with more than 250,000 scores logged every 21 days.
From these data, Bridge’s evaluation team determines which lesson is most effective and distributes that lesson throughout the rest of the Academy’s network.
We know that a host of issues can cause a student’s performance to decline – scorching summer heat in classrooms without air conditioning, problems at home, or poor-quality teachers, to name a few.
But when one gathers results on a large scale, variables flatten out, and the important differences emerge.
That is the great value of big data.
Another case is SABIS, a provider of K-12 education in the United States, Europe, Asia, the Middle East, and North Africa.
SABIS mines large data sets to ensure high standards and enhance academic performance for more than 63,000 students.
Continuous tracking of annual student academic performance yields more than 14 million data points that are used to shape instruction, achieve learning objectives, and ensure consistency across the company’s network of schools in 15 countries.
Knewton, an adaptive learning platform that personalizes digital courses using predictive analytics, is another company at the forefront of the data revolution.
With tailored content and instruction, even classrooms without private-school resources can provide individual learning.
As a result, teachers spend their time in the most effective way possible – solving problems with students – instead of delivering undifferentiated lessons.
These benefits do not come without risk.
We are only beginning to grapple with how big data’s tremendous potential for learning can be harnessed while protecting students’ privacy.
In some cases, data-collection technology is outpacing our ability to decide how it should be collected, stored, and shared.
No matter how rigorously data are secured, there is still a need for a clear licensing structure for its use.
In many developing countries, there are no regulations for data privacy at all.
The interface between data and education holds the promise of new educational products for improved learning, with large potential benefits, especially for the poor.
To realize those benefits – and to do so responsibly – we must ensure that data collection is neither excessive nor inappropriate, and that it supports learning.
The private sector, governments, and institutions such as the World Bank Group need to formulate rules for how critical information on student performance is gathered, shared, and used.
Jobless Recoveries and Manic Policies
CHICAGO – Monetary and fiscal policies in the United States, both in this recession and the recession of 2001, have been among the most accommodating in the industrial world. As I write, Congress is working on yet another “jobs” bill.  Indeed, John Taylor of Stanford University attributes the recent financial crisis to excessively stimulatory monetary policy towards the end of Alan Greenspan’s tenure as head of the US Federal Reserve.
Why is US policy so accommodating?
A central reason is that the nature of US economic recoveries has changed.
From 1960 until 1991, US recoveries were typically rapid.
From the trough of recessions, recovery to pre-recession output levels took less than two quarters on average, and employment recovered within eight months.
But the recoveries from the recessions of 1991 and 2001 were different.
For example, in 2001, it took just one quarter for output to recover, but 38 months for jobs to come back.
The current recovery appears to be similarly slow in creating jobs.
Some economists argue that, unlike past recoveries, when workers who were temporarily laid off were rehired, job losses starting in 1991 were more permanent.
Unemployed workers had to find jobs in new industries, which took more time and training.
Others suggest that the Internet has made it easier for firms to hire quickly.
So, rather than hire in panic at the first sign of a recovery for fear that they will be unable to do so later and lose sales, firms would rather make sure that the recovery is well established before adding workers.
Regardless of the true explanation, the US is singularly unprepared for jobless recoveries.
Typically, unemployment benefits last only six months. Moreover, because health-care benefits are often tied to jobs, an unemployed worker also risks losing access to affordable health care.
Short-duration benefits may have been appropriate when recoveries were fast and jobs plentiful, because the fear of losing benefits before finding a job may have given workers an incentive to look harder.
But, with few jobs being created, a positive incentive has turned into a source of great anxiety.
Even those who have jobs fear that they could lose them and be cast adrift.
Politicians ignore popular anxiety at their peril.
President George H.W. Bush is widely believed to have lost his re-election bid, despite winning a popular war in Iraq, because he seemed out of touch with public hardship following the 1991 recession.
That lesson has been fully internalized. Economic recovery is all about jobs, not output, and politicians are willing to push for economic stimulus, both fiscal (tax cuts or government spending) and monetary (lower short-term interest rates), until jobs start reappearing.
In theory, this is what democracy is all about – policy responding to the needs of the people.
In practice, though, public pressure to do something quickly enables politicians to run roughshod over the usual checks and balances on government policy making.
Long-term spending and tax policies are enacted under the shadow of an emergency, with the party that happens to be in power at the time of the downturn getting to push its pet agenda.
Much of what is enacted as stimulus has little immediate effect on job creation, but does have an adverse long-term effect on government finances.
For example, the 2009 stimulus package enacted by the Obama administration had many billions of dollars devoted to cancer research, though such research employs few people directly and is spent over a long time horizon – far beyond that of even a prolonged recovery.
Equally deleterious to economic health is the recent vogue of cutting interest rates to near zero and holding them there for a sustained period.
It is far from clear that near-zero short-term interest rates (as compared to just low interest rates) have much additional effect in encouraging firms to create jobs when powerful economic forces make them reluctant to hire.
But prolonged near-zero rates can foster the wrong kinds of activities.
For example, households and investment managers, reluctant to keep money in safe money-market funds, instead seek to invest in securities with longer maturities and higher credit risk, so long as they offer extra yield.
Likewise, money fleeing low US interest rates (and, more generally, industrial countries) has pushed up emerging-market equity and real-estate prices, setting them up for a fall (as we witnessed recently with the flight to safety following Europe’s financial turmoil).
Moreover, even if corporations in the US are not hiring, corporations elsewhere are.
Brazil’s unemployment rate, for example, is at lows not seen for decades.
If the Fed were to accept the responsibilities of its de facto role as the world’s central banker, it would have to admit that its policy rates are not conducive to stable world growth.
Policy would still be accommodative if the Fed maintained low interest rates rather than the zero level that was appropriate for a panic.
And this would give savers less of an incentive to search for yield, thus avoiding financial instability.
Politicians will not sit quietly, however, if the Fed attempts to raise rates.
Their thinking – and the Fed’s – follows the misguided calculus that if low rates are good for jobs, ultra-low rates must be even better.
Emerging studies on the risk-taking and asset-price inflation engendered by ultra-low policy rates will eventually convince Fed policymakers to change their stance.
But, if politicians are to become less anxious about jobs, perhaps we need to start discussing whether jobless recoveries are here to stay, and whether the US safety net, devised for a different era, needs to be modified.
John McCain and the Decline of America
BERKELEY – Back in 1981, America’s Republican Party gave up all belief that the government’s budget ought to be balanced.
The idea took hold that tax cuts should be undertaken all the time, at every opportunity, because reducing taxes supposedly raised revenue.
Irving Kristol, sometime editor of the magazine The Public Interest and one of the intellectual midwives of this idea, later wrote that he was interested not in whether it was true, but in whether it was useful.
Years later, he spoke of his “own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems.
The task...was to create a new...conservative...
Republican majority – so political effectiveness was the priority, not the accounting deficiencies of government...”
Now it has become clear that John McCain – who once criticized George W. Bush’s tax cuts as imprudent and refused to vote for them – has succumbed to this potion.
He appears to be proposing further tax cuts that promise to cost the United States Treasury some $300 billion a year, to “offset” them with cuts in earmarked spending accounted for at $3 billion a year, and somehow to balance the budget.
We know the consequences: McCain’s fiscal policy is likely to be standard Republican fiscal policy – and since 1981, standard Republican fiscal policy has increased the ratio of gross federal debt to GDP by nearly 2% per year.
By contrast, a typical post-WWII Democratic administration has reduced the debt-to-GDP ratio by more than 1% per year.
This is one of the issues at stake in this year’s presidential election.
Policies that ignore the level of government debt lead to the currency’s collapse, depression (due to the resulting disruption of the sectoral division of labor), and high inflation – perhaps hyperinflation.
Often, the guilty blame the economic catastrophe on the sinister manipulations of foreigners like the “gnomes of Zurich” or the IMF.
The US is far from that point. But even in the shorter run – over the next two presidential terms, say – the costs of a high deficit and rapid debt growth would be substantial.
A growing debt-to-GDP ratio would, in the first instance, crowd out investment, as resources that would otherwise go to fund productive investment instead support private or public consumption.
Since 1981, the US has been lucky in that inflows of capital from abroad financed the growth of government debt.
At some point, this will stop, and increases in deficits will trigger capital flight from the US.
Suppose that over the next eight years larger deficits trigger neither extra capital inflows nor capital outflows, and suppose that a lower-investment America is a poorer America, with a gross social return on investment of 15% per year.
By 2016, America’s productive potential would be smaller by an amount that would reduce real GDP by 3.6% – $500 billion real dollars, or roughly $3,000 per worker.
In a poorer America, fewer businesses would find it worthwhile to entice secondary workers from families into the labor force, and perhaps 500,000 net jobs would disappear.
In getting from here to there over the next eight years, a higher-debt America would see productivity growth slow by perhaps a third of a percentage point per year.
Average unemployment would then have to rise in order to keep workers’ demands for real wage increases at a level warranted by productivity growth.
The gross correlations between productivity growth and average unemployment found in the 1970’s, 1980’s, 1990’s, and 2000’s would increase the economy’s natural rate of unemployment by about one-fifth of a percentage point, costing an additional 500,000 jobs.
And a higher-debt America is one in which savers and lenders would have a justified greater fear that the government would resort to inflation in order to repudiate part of its outstanding debt.
The Federal Reserve would then have to fight inflation – putting upward pressure on unemployment – in order to reassure savers and lenders of its willingness to guard price stability.
There are not even crude gross correlation-based estimates of the size of this effect, but economists believe that it is very real.
Would it cost a negligible number of jobs?
A quarter-million?
A million?
Add it all up, and you can reckon on an America that in 2016 that will be much poorer if McCain rather than Barack Obama or Hillary Rodham Clinton is elected president.
Other countries that are counting on exporting to America would be affected by slower growth and lower employment in the US.
However, under McCain, the wedge between public spending and taxes would be larger, Americans would feel richer, and they would spend more at the expense of “posterity” eight years down the road.
Ronald Reagan might have approved.
After all, as he put it: “Why should I do anything for posterity?
What has posterity ever done for me?” Or was that Groucho Marx?
John Paul the Modernizer
The death of Pope John Paul II was not unexpected, and his immense influence on the modern world will be judged and commented on by everybody who thinks that he has something to say.
Before explaining one of the less known aspects of his teaching, it should be emphasized that one of the comments that is now being heard repeatedly is based either on stupidity or on a lack of understanding of what the Catholic Church is about: the charge that the Pope was and is “conservative” is nonsense.
John Paul II was undoubtedly conservative when he commented on Catholic dogma, but the institution of the Catholic Church is based on the Ten Commandments and dogmas which cannot be changed.
Being truthful and faithful to what is the bedrock of Church teaching cannot be deemed conservative.
In reality, John Paul II was called “conservative” because he was against abortion and some other progressive ideas.
But if you want a Pope who is for abortion, then you want a different Church.
Some things, some values that constitute both the faith and membership in the Catholic Church, are neither conservative nor liberal or progressive; they are fundamental, inevitable and immutable.
John Paul II had a specific task that he implemented during his nearly 27-year papacy: following through on the changes in the teaching and behavior of the Catholic Church that were started by the Second Vatican Council over forty years ago.
Before then, the Catholic Church had lost almost two centuries (XVIII and XIX) because it refused to accept that the world had changed, that social and economic issues are among the most important, that modernity happened.
Only with the Second Vatican Council did things begin to change in the Church, and the impact of John Paul II was immense.
One of the questions that the Church could not answer in a satisfactory way for nearly three centuries concerned its attitude towards the economy and society.
The Church tried everything possible to avoid an unequivocal approval of capitalism.
After Leo XIII stated for the first time – in the famous encyclical
So when, a hundred years after Leo XIII, John Paul II issued his encyclical
“The Church acknowledges the legitimate role of profit as an indication that a business is functioning well. When a firm makes a profit, this means that productive factors have been properly employed and corresponding human needs have been duly satisfied.”
Once again, the Pope added a caveat: “But profitability is not the only indicator of a firm's condition.
It is possible for the financial accounts to be in order, and yet for the people — who make up the firm’s most valuable asset – to be humiliated and their dignity offended.
Besides being morally inadmissible, this will eventually have negative repercussions on the firm's economic efficiency.”
John Paul II was no follower of neo-liberalism.
For him, markets and profits were not a solution to human problems, but a mechanism to be used for moral purposes.
Indeed, we often forget that both Adam Smith and Herbert Spencer’s reasoning are very similar.
Both of them – the two greatest thinkers that promoted the idea of the free market – were also moral philosophers.
For them, as for John Paul II, the free market and profits were ways to improve humanity.
They were sometimes naive, as when Spencer hoped that rich citizens would nearly automatically be good citizens and thus find it natural to help those who were not so successful.
John Paul II might have been naive, too, but only up to a point.
Everything depends on our idea of human nature.
If we believe, as the Catholic Church believes, that human beings bear the burden of original sin, but are perfectible; that human beings can understand what is good and bad and can choose between them because we have free will, then approval of the free market is understandable and not naive.
By this one encyclical, John Paul II moved Church teaching from the Middle Ages to modernity.
The debate the Pope began on the relationship between the free market and moral problems remains unfinished.
Eliminating the abuses that accompany capitalism and harnessing it for the benefit of society and human morals still needs to be tackled.
John Paul II had the courage to raise the fundamental questions that needed asking.
We will continue to ask them without his leadership and prompting?
The Underachieving Education Business
NEW YORK – Capitalism has produced many high-quality products and services, from smartphones to high-speed transport and compelling entertainment.
Yet the profit motive, essential in so many fields, seems to have disappointed in one crucial area: education.
In the United States, for-profit universities have a six-year graduation rate of 22%, far below the 60% achieved by not-for-profit institutions.
The former spend 23% of their revenue on recruiting new students, compared with a mere 1% spent by non-profit institutions.
At the primary and secondary levels, charter schools (publicly funded independent schools) run by for-profit companies are 20% less likely than non-profit institutions to meet proficiency standards, with some of the weakest results coming from the largest for-profit institutions.
Even companies that provide textbooks, educational software, management systems, and student loans fail to achieve the level of excellence reached in other sectors.
For-profit education is not just a US phenomenon; it is part of a global trend.
New for-profit universities are appearing wherever demand for higher education is strong.
In developing Asia and Latin America, scores of new classroom and online English-language preparation programs are trying to meet demand, though it may be too early to judge their quality.
As the founder of several for-profit education companies and an adviser to many others, I have watched managers and investors (including my own) succumb to the temptation to place financial targets above academic goals.
This should not be surprising – educational results take years to measure, but profits and bonuses for executives are calculated annually.
I would like to believe that strong financial performance and educational excellence are not mutually exclusive.
After all, for-profits can hire high-quality staff, respond nimbly to changing conditions, and raise the capital required to scale up quickly.
American Public University System and Renaissance Learning, for example, have demonstrated that one can “do well by doing good.”
One of my own companies brought together the capital, technology, and people needed to enable students worldwide to access America’s leading graduate programs online.
Unfortunately, such projects are exceptions.
The education sector must find a better balance between quality and financial returns.
Fourteen US states have started to do that by authorizing so-called benefit corporations (or B Corps) – businesses that promise to consider more than shareholder value in their strategic decisions.
Though B Corps are expected to act in the public interest, they cannot be forced to do so; if they look beyond the bottom line, they do so voluntarily.
One solution might be to create a variant of the B Corp – call it the E Corp – that could transform the for-profit education sector.
An education company could attain E Corp status only if it became transparent about its values and outcomes.
For example, E-Corp-owned colleges might be required to provide prospective students with the graduation rate, average student-debt levels, and the average starting salaries of students with similar academic records and educational goals.
Furthermore, E-Corp colleges might be required to reveal their per student instructional, marketing, and executive-compensation costs, as well as their pre-tax profits.
Critics might counter that no one should care how much profit a company earns, so long as it provides a worthwhile service.
Perhaps, but why not share the data and see how many students enroll in a school when they fully understand their odds of success and how their money will be used?
E Corps should also analyze and publish their results (including disappointing ones), as this would motivate schools to improve service.
Not all education can be free, but information about education should be.
Many companies might embrace such reforms simply to serve students better.
But we should not underestimate the leverage of public spending.
As confidence in the E-Corp metrics rises, we could make E-Corp status a condition for participating in government programs.
In the US, that would include such coveted funding as Title I grants for primary and secondary education, and Title IV subsidized student loans for higher education.
After all, why should companies benefit from taxpayer support if they are unwilling to put accountability and educational excellence at least on the same level as their targets for return on investment?
Even the most mission-driven companies can be tempted to trade educational quality for outsize commercial returns.
An E-Corp designation would ensure that education leaders can continue to focus on the bottom line, but still rise to the top of the class.
John Stewart Mill vs. the European Central Bank
BERKELEY – One of the dirty secrets of economics is that there is no such thing as “economic theory.”
There is simply no set of bedrock principles on which one can base calculations that illuminate real-world economic outcomes.
We should bear in mind this constraint on economic knowledge as the global drive for fiscal austerity shifts into top gear.
Unlike economists, biologists, for example, know that every cell functions according to instructions for protein synthesis encoded in its DNA.
Chemists begin with what the Heisenberg and Pauli principles, plus the three-dimensionality of space, tell us about stable electron configurations.
Physicists start with the four fundamental forces of nature.
Economists have none of that.
The “economic principles” underpinning their theories are a fraud – not fundamental truths but mere knobs that are twiddled and tuned so that the “right” conclusions come out of the analysis.
The “right” conclusions depend on which of two types of economist you are.
One type chooses, for non-economic and non-scientific reasons, a political stance and a set of political allies, and twiddles and tunes his or her assumptions until they yield conclusions that fit their stance and please their allies.
The other type takes the carcass of history, throws it into the pot, turns up the heat, and boils it down, hoping that the bones will yield lessons and suggest principles to guide our civilization’s voters, bureaucrats, and politicians as they slouch toward utopia.
Not surprisingly, I believe that only the second kind of economist has anything useful to say.
So what lessons does history have to teach us about our current global economic predicament?
In 1829, John Stuart Mill made the key intellectual leap in figuring out how to fight what he called “general gluts.”
Mill saw that excess demand for some particular set of assets in financial markets was mirrored by excess supply of goods and services in product markets, which in turn generated excess supply of workers in labor markets.
The implication of this was clear.
If you relieved the excess demand for financial assets, you also cured the excess supply of goods and services (the shortfall of aggregate demand) and the excess supply of labor (mass unemployment).
Now, there are many ways to relieve excess demand for financial assets.
When the excess demand is for liquid assets used as means of payment – for “money” – the natural response is to have the central bank buy government bonds for cash, thus increasing the money stock and bringing supply back into balance with demand.
We call this "monetary policy."
When the excess demand is for longer-term assets – bonds to serve as vehicles for savings that move purchasing power from the present into the future – the natural response is twofold: induce businesses to borrow more and build more capacity, and encourage the government to borrow and spend, thus bringing the supply of bonds back into balance with demand.
We call the first of these “restoring confidence,” and the second “fiscal policy.”
When excess demand is for high-quality assets – places where you can park your wealth and be assured that it will still be there when you come back – the natural response is to have credit-worthy governments guarantee some private assets and buy up others, swapping them out for their own liabilities and thus diminishing the supply of risky assets and increasing the supply of safe assets.
We call this “banking policy.”
Of course, no real-world policy falls cleanly into any one of these ideal types.
Right now, the European Central Bank worries that continued expansionary fiscal policy will backfire.
Yes, it argues, having governments spend more money and continue to run large deficits will increase the supply of bonds, and thus relieve excess demand for longer-term assets.
But if a government’s debt emissions exceed its debt capacity, all of that government’s debt will become risky.
It will have relieved a shortage of longer-term assets by creating a shortage of high-quality assets, and so be in a worse position than it was before.
The ECB contends that the core economies of the global North – Germany, France, Britain, the United States, and Japan – are now at the point where they need rapid fiscal retrenchment and austerity, because financial markets’ confidence in the quality of their debt is shaken, and may collapse at any moment.
And policymakers are falling into line: in late July, Peter Orszag, Director of the US Office of Management and Budget said that the coming fiscal consolidation in the US over the next three years will be the country’s deepest retrenchment in 60 years.
Yet, as I look at the world economy, I see a very different picture – one in which markets’ trust in the quality of government liabilities of the global North’s core economies most certainly is not on the brink of collapse.
I see production 10% below capacity, and I see unemployment rates approaching 10%.
More importantly for near-term economic policy, I see a world in which investors have enormous confidence in core economies’ government debt – for many, the only safe port in this storm.
In these circumstances, we can be sure of what Mill would have recommended.
What Good Is an Arab Military Alliance?
LONDON – The framework nuclear agreement that Iran and the P-5 (China, Britain, France, Russia, and the United States) plus Germany recently reached represents progress on one major security challenge in the Middle East.
But, as some Arab countries move to establish a joint military force, another security question is emerging: Will such an alliance leave the region better or worse off, particularly given today’s growing Sunni-Shia divide?
A nine-country Saudi-led coalition, which includes Egypt, the United Arab Emirates, Kuwait, and Jordan, is already carrying out airstrikes against the Iran-backed Houthi rebels in Yemen – an effort that Iran’s Supreme Leader Ali Khamenei recently declared will end with the Saudis’ “noses [being] rubbed to the soil.”
Yet Egypt’s president, General Abdel Fattah el-Sisi, has indicated that the coalition’s mandate may be extended beyond Yemen.
But what is that mandate?
A few objectives can be excluded from the start.
For example, post-conflict democratization cannot be the goal, given that Arab regimes lack the credentials or knowhow to craft democracies, and their militaries are neither willing nor able to assist in the process.
Similarly, humanitarian intervention can be ruled out, owing not only to most Arab regimes’ lack of experience and inglorious human-rights records, but also because none of the official statements related to the founding of the joint force have remotely suggested that upholding human rights was ever a concern.
Stabilization might be an objective, but only if the relevant governments can agree on shared threats and how to address them.
They could, for example, take the classic “balance of power/terror” approach, by intervening to undermine the more powerful actor in a conflict, force it to the negotiating table, and dictate the terms of any compromise, thereby ensuring that they benefit from the newly created status quo.
But the rise of Arab military coalitions raises serious concerns, not least because the history of Arab-led military interventions – unlike those carried out by the West in places like Bosnia, Kosovo, and even Libya – does not contain any promising precedent.
Such interventions were usually aimed at empowering a proxy political force over its military and political rivals, instead of averting humanitarian disaster or institutionalizing a non-violent conflict-resolution mechanism following a war.
Egypt’s military intervention in Yemen in the 1960s is a case in point.
By late 1965, Egyptian President Gamel Abdel Nasser had sent 70,000 troops in Yemen to support a republican coup against royalist forces.
Despite using prohibited chemical weapons against Yemeni guerillas from 1963 to 1967 – a first in an intra-Arab conflict – Egypt failed to achieve its objectives.
On top of its military humiliation, Egypt’s international reputation suffered, with the United Nations General Assembly condemning the Egyptian forces’ use of banned chemical weapons against villages that supported the monarchy.
The adventure also took a heavy economic toll; by 1965, Egypt had run up a foreign debt of nearly $3 billion, forcing it to add a “defense tax” to finance the Yemen war.
The Syria-dominated “Arab Deterrent Force” did not fare much better when it intervened in Lebanon’s civil war in the 1980s, failing either to end the brutal fighting or to secure vulnerable Palestinian refugees.
After 1982, when the Lebanese government failed to extend the ADF’s mandate, it turned into a purely Syrian military force – one that ended up committing some of the worst atrocities against Palestinian factions and refugees in the so-called “War of the Camps” in 1985.
Brief and less complex interventions were also unsuccessful in ending violent crises – and in some cases even exacerbated them.
A clear example is the recent Egyptian airstrikes in Libya, which have not only undermined the UN-led peace process in a deeply divided country, but have also empowered the most extreme elements.
Of course, history is not a definitive guide to the future; an Arab-led intervention today could turn out very differently.
But there is little to indicate that it will; indeed, despite hundreds of Saudi airstrikes on Houthi-controlled military bases and seaports, the rebels continue to advance.
If emerging Arab military coalitions are to avoid the mistakes of past interventions, their members must reconsider their approach, including the structural deficiencies that contributed to past failures.
Many factors affect the outcome of a military intervention in a civil war, especially if it involves a ground offensive.
In particular, Arab leaders should focus on revising the processes by which national-security policy is formulated, improving civil-military relations, providing the relevant training in peacekeeping and peace-building, reforming the political culture, and addressing socio-psychological complexes.
If Arab leaders fail to overcome these deficiencies, the latest Arab force could become the Middle East’s newest source of anti-democratic, sectarian-based instability, potentially intensifying the Sunni-Shia conflict.
Joking about Science
ITHACA, NEW YORK – An apocryphal story sometimes heard among physicists concerns a toast, proposed by his Cambridge University colleagues, to J. J. Thomson’s discovery of the electron in 1897: “To the electron: may it never be of use to anyone!”
Why should it be considered witty to celebrate the uselessness of knowledge?
I witnessed a similar attitude from a cosmologist when I participated in a radio show a few years ago: the host remarked to him that his research “has virtually no practical applicability,” to which he quickly replied, “I’m proud of that, yes.”
These jokes all seem to rely on the same assumption: everyone thinks that knowledge, especially scientific knowledge, should be useful.
So it’s funny to boast that one’s own brand of knowledge, whether experimental physics, mathematics, or cosmology, is useless.
But the joke wouldn’t work if there were not at the same time another widely shared assumption that scientific knowledge has a value independent of any practical use.
After all, it would not be funny if a charity dedicated to famine relief celebrated its own ineffectiveness; practical value in that case would be paramount, because it would be the only real reason for the charity to exist.
So, even though potential usefulness is the reason why governments devote so much money to scientific research, people really expect more from science than that.
On this view, science also has a quite different, higher aim: understanding the natural world.&#160;
Einstein may have drawn US President Franklin Roosevelt’s attention to the possibility of making nuclear weapons, but he is chiefly remembered for his profound ideas about the nature of the universe.
More recent scientific gurus, such as Carl Sagan and Stephen Hawking, have presented a similar image to the public.
Science from this perspective is about natural philosophy, an enterprise that seeks to acquire deep understanding of the world regardless of whether that knowledge can be put to use.
Jokes also betray a certain uneasiness about the apparent contradictions that they reveal.&#160;
In this case, the uneasiness derives from a fundamental uncertainty about which of the two faces of science, natural philosophy or instrumentality, represents its true character.&#160;
Is science really about understanding the world, with instrumentality being a matter of fortuitous spin-offs?
Or is it really about putting the natural world to human uses, with natural philosophy being little more than a language to account for why certain techniques work?
The nineteenth century invented the familiar terms “pure” and “applied” science as a way of reconciling these alternative understandings.
Pure science, as the name suggests, is presented as the “real thing,” untainted by practical considerations and rooted in properly conducted empirical and theoretical investigation of nature.
Applied science takes the knowledge provided by pure science and puts it to work.
But that straightforward picture bears little resemblance to the complexities of real scientific activity: if applied science involved nothing more than the application of the results of pure science, there would be no need for “research and development” departments in manufacturing corporations, or research laboratories at chemical or electronics companies.
The instrumental achievements of science would depend solely on the scraps falling from the pure scientist’s table.
“Truth and utility,” wrote Francis Bacon, the early seventeenth-century English philosopher and statesman, “are the very same things.” In other words, the truth of beliefs about the world is guaranteed only by the capacity of those beliefs to be turned into actions that produce the practical outcomes that human beings desire.
What we understand as the instrumentality of science was, for Bacon, nothing but the other side of the scientific coin.
Where the poet John Keats wrote “Beauty is truth, truth beauty,” Bacon might have said, “Utility is truth, truth utility”—as long as we take “utility” in a very broad sense.
But we don’t believe Bacon, either.
Like Bacon, we value utility because it seems to lend credibility to the claims that science makes about the nature of the world – science is true because it works.
But, at the same time, we won’t allow science to be reduced to practical utility, because that would destroy its intellectual status, as well as the intellectual status of scientists themselves, and would prevent science from giving explanations.
So science must retain its claim to being natural philosophy, too.
Sometimes we believe that science is natural philosophy, and sometimes we believe that science is instrumentality.
But in fact it’s both simultaneously, neither “pure” nor “applied.”
If we could acknowledge that, we wouldn’t be joking about it.
Jordan: The Fire Next Door
Jordanians are facing sleepless nights as the siege of Baghdad proceeds.
The images coming to us from next door are horrifying, and Jordanians have taken to the street in protest.
Yet while contemplating the collapse of Saddam's regime, Jordanians are also now recognizing how closely our own society is tied to Iraq's, and how difficult it will be for Jordan to set out on a new course if the Americans end the rule of Saddam Hussein.
At the economic level, Jordan's ties with Iraq are very close.
Nearly all of our oil comes from Iraq at highly subsidized rates.
Replacing this oil at market prices could cost more than $600 million a year.
Former Minister of Trade and Industry Mohammad al-Samadi estimates that Iraqis buy more than $500 million of Jordanian goods annually.
Our trucking industry - 5000 mostly family-owned trucks - is largely dependent on this trade.
How much of it will be lost, particularly if a new regime in Baghdad punishes Jordan for its close ties with the Iraqi government, is a worrying question.
Fahed al-Fanek, a leading Jordanian economist, estimates that the war could cost Jordan as much as 25% of its GDP, about $2 billion.
Such losses could be devastating.
Increased debt and budget deficits are one likely result, putting at risk the accomplishments of more than a decade of effort to reform the economy.
Already, we are expecting the tough conditions of the IMF's reform program to be extended from five years to six.
But economic closeness is merely the tip of the Iraqi-Jordanian relationship.
Through business dealings, the Iraqi regime insinuated itself into the Jordanian elite, coloring our own political culture.
Many prominent Jordanians believe that our reliance on Iraqi markets and oil ought to be the basis of a priority alliance.
Indeed, the complicated networks of commercial relationships help shape the views of political groups, the media, bankers and contractors.
Not only are Jordanians largely silent about the practices of the Iraqi regime, but also they are sceptical about efforts to bring reform or greater openness to Jordan.
Maintaining the status quo is their priority, despite the international cost to Jordan's reputation or the consequences for the Iraqi people.
They cast any criticism of Saddam as a willingness to accept American aggression.
For example, a recent Jordanian decision to freeze all Iraqi government funds held in Jordanian banks produced accusations by the Jordanian opposition that Jordan had stabbed Iraq in the back.
Likewise, there was criticism of the government's recent decision to expel three Iraqi diplomats for activities threatening Jordan's security.
Within Jordan, however, there is another perspective on the future, one that welcomes reduced dependence on Iraq.
Former Foreign Minister Abdullah al-Khatib argues that Jordan should have begun distancing itself from Iraq years ago.
Rejecting the idea of a holy alliance between the two countries, al-Khatib said, ``This relationship was not a strategic alliance between the two countries, but a relationship of mutual interests and benefits.''
While Jordan's access to discounted Iraqi oil was clear for all to see, the benefits to Iraq have not been as visible.
Observers interpret al-Khatib's comments as a reference to the passage of vast amounts of luxury goods through Jordan into Iraq, one of the means by which Saddam has been able to reward his followers.
Others note the presence of numerous Iraqi businesses in Jordan, conducting activities whose purposes have not always been clear.
Although Jordan is at a turning point in its relations with Iraq, there remains little public support for American policy.
More than 80% of Jordanians oppose the war.
Speculation about America's motives, with press commentators highlighting the role of the Christian right-wing in formulating American policy, is increasing.
Links between US Christians and American support for the expansionist Sharon government in Israel are heard frequently.
Within the Arab world, moderate and liberal groups are losing ground to radical Islamic movements.
Confronting the West, particularly the US, has become the common theme of opposition to the war.
Advocates of more democracy in the Arab world now risk being accused of cooperation with the American design for re-making the Middle East.
The only way to begin to turn this tide is for the US to reverse its primarily unilateral approach to the region's problems.
To many Arabs across the region, American reliance on overwhelming military force to achieve its stated goal of spreading democracy is an inherent contradiction.
A critical test awaits in how the US handles post-war Iraq.
If it chooses to take the predominant role in transforming the Iraqi government, instead of relying on the UN, Arab doubts will grow.
A second test lies in American handling of the Israeli-Palestinian conflict.
The US now has an opportunity to address the Palestinians' need to be free from military occupation.
If America misses these opportunities and continues on its current course, it risks exacerbating the issues and conflicts in the region and destabilizing friends like Jordan.
Europe’s Act in Ukraine’s Tragedy
BERLIN – Grand political strategy and everyday experience often have a lot in common.
Try, for example, to swallow a salami whole, and you will probably choke to death.
In the world of high politics, people behave no differently: they slice their salami before consuming it.
If they cannot achieve an objective immediately, they approach it patiently, step by step.
Today, the Kremlin is employing such “salami tactics” vis-à-vis Ukraine. Before our eyes, a tragedy in several acts is unfolding, in which the players and their aims are clear.
What is not known is how many more acts this sad political spectacle will have, and thus when – and how – it will end.
Instead, he chose to have Ukraine enter a customs union with Russia, in exchange for a pile of cash and cheap oil and natural gas. Russian President Vladimir Putin seemed to have achieved his political aim, namely to bring Ukraine, which had been drifting toward Europe throughout the post-Soviet period, firmly back into the Kremlin’s sphere of influence.
The second act was staged by the Ukrainian people, who, in the west of the country and on the Maidan in Kyiv, rebelled against Yanukovych’s effort to align their country more closely with Russia. After three months of protests, the uprising led to Yanukovych’s ouster, temporarily derailing Putin’s plan to vassalize Ukraine peacefully.
It was not NATO, the EU, or the United States that acted to block Ukraine’s shift eastwards. Yanukovych was chased from power by a significant majority of Ukrainians themselves.
The third act was born of Putin’s domestic political situation, and resulted in a stopgap solution that led to Russia’s poorly disguised armed invasion, and then annexation, of Crimea.
Without Crimea’s annexation, Putin faced domestic political disaster and a premature end to his dream of reenacting Ivan the Great’s “gathering of the Russian lands” and restoring Russia’s global power.
But Putin’s aim has never been Russian control only of Crimea; he has always wanted all of Ukraine, because he fears nothing more than a successful, democratic, modern neighbor that undermines by example the authority of his own “managed democracy.”
So now we have reached the tragedy’s fourth act, in which Russia attempts to grab eastern Ukraine, and the West responds.
Annexing eastern Ukraine – and thus splitting the country in two – by force has much less support, even among Russian-speakers, than the operation in Crimea. The aim of Russia’s covert military intervention there is to destabilize Ukraine in the long term by using stage-managed “unrest” to delegitimize the May 25 presidential election in the short term, thereby preventing consolidation of the post-Yanukovych political order.
The task for the West is to stabilize Ukraine by economic and political means and contain Russian expansionism.
The Kremlin, not surprisingly, is seeking to make any Western response as expensive and uncomfortable as possible, by implementing its destabilization strategy before our eyes, step by step, hoping that a frustrated Europe and America will one day throw in the towel.
It is foreseeable that neither Russia nor the West will be strong enough to achieve its aims fully in Ukraine.
It would therefore be sensible for both sides to try, together with the Ukrainians, to reconcile their interests. But that would require Putin to abandon his strategic ambitions, which he will never do so long as he can continue to slice the salami.
Dulling Putin’s knife and ending the Ukraine crisis peacefully depends largely on the EU.
Sanctions will not impress Putin (he and his cronies are isolating Russia economically and financially more effectively than most sanctions could); peaceful yet tangible political steps within Europe will.
Polish Prime Minister Donald Tusk has made the right suggestion here: prompt establishment of a European energy union, starting with the market for natural gas and including joint external representation and a common pricing policy.
This step, combined with further differentiation among supplier countries and progress toward implementing renewable-energy technologies, would invert the balance of power between the EU (Russia’s most important customer for oil and natural gas) and the Kremlin.
If, at the same time, Poland resolved to join the euro at the earliest possible opportunity, Putin’s challenge to Eastern Europe would receive a powerful and completely peaceful answer. And Poland would assume the role of a major player at the center of an increasingly integrated Europe.
It has largely been Germany that has opposed integrating Europe’s energy and natural gas markets. After the tragedy in Ukraine, no one in Berlin will be able to defend this stance, particularly given that Germany’s leaders do not want to confront Russia through sanctions.
There will no longer be any room for excuses about why an energy union should be rejected. Everyone knows now what this communality called Europe is about.
To borrow from Aesop’s “The Braggart”: Hic Rhodus, hic salta!
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Joschka Fischer\u0027s Federal Europe and Its Enemies
BRUSSELS: Joschka Fischer, Germany's foreign minister, set the cat among the pigeons when he laid out his vision of a federalist European Union.
In Britain, where the idea of European federalism has never been popular, it was predictable that the Euro-sceptic newspaper The Times would denounce Mr Fischer's ideas.
But even in France, traditionally committed to its partnership with Germany, he raised a small storm, most sensationally when Jean-Pierre Chevčnement, the French Interior Minister, responded with the bizarre claim that the Germans had not fully recovered from their Nazi past.
These intemperate reactions may seem bizarre.
For one thing, Mr Fischer made it clear at the time that he was only expressing his personal thoughts, not speaking officially for the German government.
For another, it quickly emerged that his federalist vision was not shared by the French government.
Hubert Vedrine, France's foreign minister, described Fischer's ideas as "ambitious", which sounds friendly, but is really diplomatic code for "well-meaning but unrealistic"; and when French and German leaders met a few days later, for a brain-storming session on Europe, they did not endorse the Fischer vision.
Yet it may be a mistake to conclude that this was an episode without significance.
Joschka Fischer set out his federalist vision because he believes that some form of federalism will be necessary if the European Union is to continue to function after enlargement to embrace the countries of Central and Eastern Europe.
He is not alone in this belief.
Last year, Romano Prodi, President of the European Commission and a former prime minister of Italy, made it clear that he believed enlargement would require radical constitutional reform of the Union.
So did a committee of "Three Wise Men", led by Jean-Luc Dehaene, former Belgian prime minister.
This year, the case for radical constitutional reform of the EU was argued by Valery Giscard d'Estaing, the former French President, and Helmut Schmidt, a former German Chancellor; and also by Jacques Delors, a former President of the Commission.
The cause of radical reform has also been taken up by the European Parliament.
EU governments, however, seem determined to steer clear of any attempt at radical solutions.
Last December, they conceded that some constitutional changes would be required before enlargement.
But they also agreed to keep these changes to a minimum: a small increase in the scope for majority voting; some change in the relative voting weights of large and small countries; and some reform of the Commission.
The French government will be leading the negotiations on these modest changes in the second half of this year, and its priority is not to provoke controversy, but to work towards a successful year-end summit at Nice.
The reluctance of governments to consider radical solutions may not be admirable, but is understandable.
One reason is that the idea of European integration is, in many countries, less popular than in the past.
But the bottom line is that constitutional changes can only be carried by unanimous agreement, and several member governments, starting with the UK, would resist any overtly federalist agenda.
In the past, no doubt, France (under President Mitterrand) and Germany (under Chancellor Kohl) would together regularly press the case for closer integration, despite British reluctance.
But today, France and Germany are less united on a common European strategy, and their commitment to European integration seems less strong.
As a result, the French government is reluctant to force a confrontation with the British, if there is any chance of a softer compromise in future.
The problem is that this conspiracy of evasion may not work, and the significance of Fischer's speech is that he is the first government minister in office to say so in public, even if he pretends to say it in a personal capacity.
"Enlargement", he says, "will render imperative a fundamental reform of the European institutions.
Just what would a European Council with thirty heads of state and government be like?
How long will Council meetings actually last?
Days, maybe even weeks?"
His answer is that the incrementalist method of integration, followed for the past 50 years, will no longer work, and that such a large Union must be a federal Union, though still composed of traditional nation states.
It must be reconstructed with a new constitution, built on fundamental human rights.
There must be a clear allocation of distinct competences between the Union and its member states.
And democracy must be reinforced by two chambers of parliament.
There may be great merits in this recipe; but to describe it as "ambitious" is a serious under-statement.
In the first place, it implies a wholesale re-writing of the European Union Treaty, as well as a far-reaching renegotiation of existing EU policies.
This would be a heroic task at the best of times, but more than heroic in the face of the hostility of several member states.
And since Mr Fischer places his federal transformation some ten years from now, after enlargement, the opponents of federalism may by then be even more numerous than today.
But if the obstacles to Mr Fischer's federal vision are too great, then there may be an alternative: an inner group of like-minded states could forge ahead without the others, negotiate a new Treaty, and even form a federal government.
At this point there emerges a clear convergence between French and German thinking.
For shortly before the Fischer speech, Lionel Jospin, the French prime minister, argued that the 11 members of the Euro currency zone should form an economic government for Europe.
In short, the future of European integration may lie with those states that want it, and the others (i.e. the British) may lose the power to block it.
After the Dollar
NEW YORK – It is symbolic that the recent BRICS summit in Fortaleza, Brazil, took place exactly seven decades after the Bretton Woods Conference that created the International Monetary Fund and the World Bank.
The upshot of the BRICS meeting was the announcement of the New Development Bank, which will mobilize resources for infrastructure and sustainable development projects, and a Contingent Reserve Arrangement to provide liquidity through currency swaps.
The Bretton Woods Conference marked one of history’s greatest examples of international economic cooperation.
And, while no one can say yet whether the BRICS’ initiatives will succeed, they represent a major challenge to the Bretton Woods institutions, which should respond.
Rethinking the role of the US dollar in the international monetary system is a case in point.
One key feature of the Bretton Woods system was that countries would tie their exchange rates to the US dollar.
While the system was effectively eliminated in 1971, the US dollar’s central role in the international monetary system has remained intact – a reality that many countries are increasingly unwilling to accept.
Dissatisfaction with the dollar’s role as the dominant global reserve currency is not new.
In the 1960s, French Finance Minister Valéry Giscard d’Estaing famously condemned the “exorbitant privilege” that the dollar’s status bestowed upon the United States.
The issue is not merely one of fairness.
According to the Belgian economist Robert Triffin, an international monetary system based on a national currency is inherently unstable, owing to the resulting tensions among the inevitably divergent interests of the issuing country and the international system as a whole.
Triffin issued his warning more than 50 years ago, but it has recently gained traction, as China’s rise has made the world increasingly disinclined to tolerate the instability caused by a dollar-denominated system.
The solution, however, lies not in replacing the dollar with the renminbi, but in strengthening the role of the world’s only truly global currency: the IMF’s Special Drawing Rights.
Following the creation of SDRs in 1969, IMF members committed to make them “the principle reserve asset in the international monetary system,” as stated in the Articles of Agreement.
But the peculiar way in which SDRs were adopted limited their usefulness.
For starters, the separation of the IMF’s SDR account from its general account made it impossible to use SDRs to finance IMF lending.
Furthermore, though countries accrue interest on their holdings of SDRs, they have to pay interest on the allocations they receive.
In other words, SDRs are both an asset and a liability, functioning like a guaranteed credit line for the holder – a sort of unconditional overdraft facility.
Nonetheless, SDRs have proved to be useful.
After initial allocations in 1970-1972, more were issued to increase global liquidity during major international crises: in 1979-1981, in 1997, and, in particular, in 2009, when the largest issue – the equivalent of $250 billion – was made.
While developed countries, including the US and the United Kingdom, have drawn on their allocations, the major users have been developing and, in particular, low-income countries.
In fact, this is the only way in which developing countries (China aside) share in the creation of international money.
Several estimates indicate that, given the additional demand for reserves, the world could absorb annual allocations of $200-300 billion or even more.
This has prompted many – including People’s Bank of China Governor Zhou Xiaochuan; the United Nations-backed Stiglitz Commission; the Palais-Royal Initiative, led by former IMF Managing Director Michel Camdessus; and the Triffin International Foundation – to call for changes to the international monetary system.
In 1979, the IMF economist Jacques Polak, who had been part of the Dutch delegation at the Bretton Woods conference, outlined a plan for doing just that.
His recommendations include, first and foremost, making all of the IMF’s operations in SDRs, which would require ending the separation of the IMF’s SDR and general accounts.
The simplest way to fulfill this vision would be to allocate SDRs as a full reserve asset, which countries could either use or deposit in their IMF accounts.
The IMF would use those deposits to finance its lending operations, rather than having to rely on quota allocations or “arrangements to borrow” from members.
Other provisions could be added.
To address developing countries’ high currency demands, while enhancing their role in the creation of international money, a formula could be created to give them a larger share in SDR allocations than they now receive.
The private use of SDRs could also be encouraged, though that would likely be met with strong opposition from countries currently issuing international reserve currencies, especially the US.
Keeping SDRs as pure “central-bank money” would eliminate such opposition, enabling them to complement and stabilize the current system, rather than upend it.
Just as the Bretton Woods framework restored order to the global economy after WWII, a new monetary framework, underpinned by a truly international currency, could strengthen much-needed economic and financial stability.
The Innovation Enigma
NEW YORK – Around the world, there is enormous enthusiasm for the type of technological innovation symbolized by Silicon Valley.
In this view, America’s ingenuity represents its true comparative advantage, which others strive to imitate.
But there is a puzzle: it is difficult to detect the benefits of this innovation in GDP statistics.
What is happening today is analogous to developments a few decades ago, early in the era of personal computers.
In 1987, economist Robert Solow – awarded the Nobel Prize for his pioneering work on growth – lamented that “You can see the computer age everywhere but in the productivity statistics.” There are several possible explanations for this.
Perhaps GDP does not really capture the improvements in living standards that computer-age innovation is engendering.
Or perhaps this innovation is less significant than its enthusiasts believe.
As it turns out, there is some truth in both perspectives.
Recall how a few years ago, just before the collapse of Lehman Brothers, the financial sector prided itself on its innovativeness.
Given that financial institutions had been attracting the best and brightest from around the world, one would have expected nothing less.
But, upon closer inspection, it became clear that most of this innovation involved devising better ways of scamming others, manipulating markets without getting caught (at least for a long time), and exploiting market power.
In this period, when resources flowed to this “innovative” sector, GDP growth was markedly lower than it was before.
Even in the best of times, it did not lead to an increase in living standards (except for the bankers), and it eventually led to the crisis from which we are only now recovering.
The net social contribution of all of this “innovation” was negative.
Similarly, the dot-com bubble that preceded this period was marked by innovation – Web sites through which one could order dog food and soft drinks online.
At least this era left a legacy of efficient search engines and a fiber-optic infrastructure.
But it is not an easy matter to assess how the time savings implied by online shopping, or the cost savings that might result from increased competition (owing to greater ease of price comparison online), affects our standard of living.
Two things should be clear.
First, the profitability of an innovation may not be a good measure of its net contribution to our standard of living.
In our winner-takes-all economy, an innovator who develops a better Web site for online dog-food purchases and deliveries may attract everyone around the world who uses the Internet to order dog food, making enormous profits in the process.
But without the delivery service, much of those profits simply would have gone to others.
The Web site’s net contribution to economic growth may in fact be relatively small.
Moreover, if an innovation, such as ATMs in banking, leads to increased unemployment, none of the social cost – neither the suffering of those who are laid off nor the increased fiscal cost of paying them unemployment benefits – is reflected in firms’ profitability.
Likewise, our GDP metric does not reflect the cost of the increased insecurity individuals may feel with the increased risk of a loss of a job.
Equally important, it often does not accurately reflect the improvement in societal wellbeing resulting from innovation.
In a simpler world, where innovation simply meant lowering the cost of production of, say, an automobile, it was easy to assess an innovation’s value.
But when innovation affects an automobile’s quality, the task becomes far more difficult.
And this is even more apparent in other arenas: How do we accurately assess the fact that, owing to medical progress, heart surgery is more likely to be successful now than in the past, leading to a significant increase in life expectancy and quality of life?
Still, one cannot avoid the uneasy feeling that, when all is said and done, the contribution of recent technological innovations to long-term growth in living standards may be substantially less than the enthusiasts claim.
A lot of intellectual effort has been devoted to devising better ways of maximizing advertising and marketing budgets – targeting customers, especially the affluent, who might actually buy the product.
But standards of living might have been raised even more if all of this innovative talent had been allocated to more fundamental research – or even to more applied research that could have led to new products.
Yes, being better connected with each other, through Facebook or Twitter, is valuable.
But how can we compare these innovations with those like the laser, the transistor, the Turing machine, and the mapping of the human genome, each of which has led to a flood of transformative products?
Of course, there are grounds for a sigh of relief.
Although we may not know how much recent technological innovations are contributing to our wellbeing, at least we know that, unlike the wave of financial innovations that marked the pre-crisis global economy, the effect is positive.
Creating a Learning Society
NEW YORK – Citizens in the world’s richest countries have come to think of their economies as being based on innovation.
But innovation has been part of the developed world’s economy for more than two centuries.
Indeed, for thousands of years, until the Industrial Revolution, incomes stagnated.
Then per capita income soared, increasing year after year, interrupted only by the occasional effects of cyclical fluctuations.
The Nobel laureate economist Robert Solow noted some 60 years ago that rising incomes should largely be attributed not to capital accumulation, but to technological progress – to learning how to do things better.
While some of the productivity increase reflects the impact of dramatic discoveries, much of it has been due to small, incremental changes.
And, if that is the case, it makes sense to focus attention on how societies learn, and what can be done to promote learning – including learning how to learn.
A century ago, the economist and political scientist Joseph Schumpeter argued that the central virtue of a market economy was its capacity to innovate.
He contended that economists’ traditional focus on competitive markets was misplaced; what mattered was competition for the market, not competition in the market.
Competition for the market drove innovation.
A succession of monopolists would lead, in this view, to higher standards of living in the long run.
Schumpeter’s conclusions have not gone unchallenged.
Monopolists and dominant firms, like Microsoft, can actually suppress innovation.
Unless checked by anti-trust authorities, they can engage in anti-competitive behavior that reinforces their monopoly power.
Moreover, markets may not be efficient in either the level or direction of investments in research and learning.
Private incentives are not well aligned with social returns: firms can gain from innovations that increase their market power, enable them to circumvent regulations, or channel rents that would otherwise accrue to others.
But one of Schumpeter’s fundamental insights has held up well: Conventional policies focusing on short-run efficiency may not be desirable, once one takes a long-run innovation/learning perspective.
This is especially true for developing countries and emerging markets.
Industrial policies – in which governments intervene in the allocation of resources among sectors or favor some technologies over others – can help “infant economies” learn.
Learning may be more marked in some sectors (such as industrial manufacturing) than in others, and the benefits of that learning, including the institutional development required for success, may spill over to other economic activities.
Such policies, when adopted, have been frequent targets of criticism.
Government, it is often said, should not be engaged in picking winners.
The market is far better in making such judgments.
But the evidence on that is not as compelling as free-market advocates claim.
America’s private sector was notoriously bad in allocating capital and managing risk in the years before the global financial crisis, while studies show that average returns to the economy from government research projects are actually higher than those from private-sector projects – especially because the government invests more heavily in important basic research.
One only needs to think of the social benefits traceable to the research that led to the development of the Internet or the discovery of DNA.
But, putting such successes aside, the point of industrial policy is not to pick winners at all.
Rather, successful industrial policies identify sources of positive externalities – sectors where learning might generate benefits elsewhere in the economy.
Viewing economic policies through the lens of learning provides a different perspective on many issues.
The great economist Kenneth Arrow emphasized the importance of learning by doing.
The only way to learn what is required for industrial growth, for example, is to have industry.
And that may require either ensuring that one’s exchange rate is competitive or that certain industries have privileged access to credit – as a number of East Asian countries did as part of their remarkably successful development strategies.
There is a compelling infant economy argument for industrial protection.
Moreover, financial-market liberalization may undermine countries’ ability to learn another set of skills that are essential for development: how to allocate resources and manage risk.
Likewise, intellectual property, if not designed properly, can be a two-edged sword when viewed from a learning perspective.
While it may enhance incentives to invest in research, it may also enhance incentives for secrecy – impeding the flow of knowledge that is essential to learning while encouraging firms to maximize what they draw from the pool of collective knowledge and to minimize what they contribute.
In this scenario, the pace of innovation is actually reduced.
More broadly, many of the policies (especially those associated with the neoliberal “Washington Consensus”) foisted on developing countries with the noble objective of promoting the efficiency of resource allocation today actually impede learning, and thus lead to lower standards of living in the long run.
Virtually every government policy, intentionally or not, for better or for worse, has direct and indirect effects on learning.
Developing countries where policymakers are cognizant of these effects are more likely to close the knowledge gap that separates them from the more developed countries.
Developed countries, meanwhile, have an opportunity to narrow the gap between average and best practices, and to avoid the danger of secular stagnation.
South Africa Breaks Out
NEW YORK – International investment agreements are once again in the news.
The United States is trying to impose a strong investment pact within the two big so-called “partnership” agreements, one bridging the Atlantic, the other the Pacific, that are now being negotiated.
But there is growing opposition to such moves.
South Africa has decided to stop the automatic renewal of investment agreements that it signed in the early post-apartheid period, and has announced that some will be terminated.
Ecuador and Venezuela have already terminated theirs.
India says that it will sign an investment agreement with the US only if the dispute-resolution mechanism is changed.
For its part, Brazil has never had one at all.
There is good reason for the resistance.
Even in the US, labor unions and environmental, health, development, and other nongovernmental organizations have objected to the agreements that the US is proposing.
The agreements would significantly inhibit the ability of developing countries’ governments to protect their environment from mining and other companies; their citizens from the tobacco companies that knowingly purvey a product that causes death and disease; and their economies from the ruinous financial products that played such a large role in the 2008 global financial crisis.
They restrict governments even from placing temporary controls on the kind of destabilizing short-term capital flows that have so often wrought havoc in financial markets and fueled crises in developing countries.
Indeed, the agreements have been used to challenge government actions ranging from debt restructuring to affirmative action.
Advocates of such agreements claim that they are needed to protect property rights.
But countries like South Africa already have strong constitutional guarantees of property rights.
There is no reason that foreign-owned property should be better protected than property owned by a country’s own citizens.
Moreover, if constitutional guarantees are not enough to convince investors of South Africa’s commitment to protecting property rights, foreigners can always avail themselves of expropriation insurance provided by the Multilateral Investment Guarantee Agency (a division of the World Bank) or numerous national organizations providing such insurance.
(Americans, for example, can buy insurance from the Overseas Private Investment Corporation.)
But those supporting the investment agreements are not really concerned about protecting property rights, anyway.
The real goal is to restrict governments’ ability to regulate and tax corporations – that is, to restrict their ability to impose responsibilities, not just uphold rights. Corporations are attempting to achieve by stealth – through secretly negotiated trade agreements – what they could not attain in an open political process.
Even the notion that this is about protecting foreign firms is a ruse: companies based in country A can set up a subsidiary in country B to sue country A’s government.
American courts, for example, have consistently ruled that corporations need not be compensated for the loss of profits from a change in regulations (a so-called regulatory taking); but, under the typical investment agreement, a foreign firm (or an American firm, operating through a foreign subsidiary) can demand compensation!
Worse, investment agreements enable companies to sue the government over perfectly sensible and just regulatory changes – when, say, a cigarette company’s profits are lowered by a regulation restricting the use of tobacco.
In South Africa, a firm could sue if it believes that its bottom line might by harmed by programs designed to address the legacy of official racism.
There is a long-standing presumption of “sovereign immunity”: states can be sued only under limited circumstances.
Such procedures have proved to be arbitrary and capricious, with no systemic way to reconcile incompatible rulings issued by different panels.
While proponents argue that investment treaties reduce uncertainty, the ambiguities and conflicting interpretations of these agreements’ provisions have increased uncertainty.
Countries that have signed such investment agreements have paid a high price.
Several have been subject to enormous suits – and enormous payouts.
There have even been demands that countries honor contracts signed by previous non-democratic and corrupt governments, even when the International Monetary Fund and other multilateral organizations have recommended that the contract be abrogated.
Even when developing-country governments win the suits (which have proliferated greatly in the last 15 years), the litigation costs are huge.
The (intended) effect is to chill governments’ legitimate efforts to protect and advance citizens’ interests by imposing regulations, taxation, and other responsibilities on corporations.
Moreover, for developing countries that were foolish enough to sign such agreements, the evidence is that the benefits, if any, have been scant.
In South Africa’s review, it found that it had not received significant investments from the countries with which it had signed agreements, but had received significant investments from those with which it had not.
It is no surprise that South Africa, after a careful review of investment treaties, has decided that, at the very least, they should be renegotiated.
Doing so is not anti-investment; it is pro-development.
And it is essential if South Africa’s government is to pursue policies that best serve the country’s economy and citizens.
Indeed, by clarifying through domestic legislation the protections offered to investors, South Africa is once again demonstrating – as it has repeatedly done since the adoption of its new Constitution in 1996 – its commitment to the rule of law.
It is the investment agreements themselves that most seriously threaten democratic decision-making.
South Africa should be congratulated.
American Delusions Down Under
NEW YORK – For better or worse, economic-policy debates in the United States are often echoed elsewhere, regardless of whether they are relevant.
Australian Prime Minister Tony Abbott’s recently elected government provides a case in point.
As in many other countries, conservative governments are arguing for cutbacks in government spending, on the grounds that fiscal deficits imperil their future.
In the case of Australia, however, such assertions ring particularly hollow – though that has not stopped Abbott’s government from trafficking in them.
Even if one accepts the claim of the Harvard economists Carmen Reinhart and Kenneth Rogoff that very high public debt levels mean lower growth – a view that they never really established and that has subsequently been discredited – Australia is nowhere near that threshold.
Its debt/GDP ratio is only a fraction of that of the US, and one of the lowest among the OECD countries.
What matters more for long-term growth are investments in the future – including crucial public investments in education, technology, and infrastructure.
Such investments ensure that all citizens, no matter how poor their parents, can live up to their potential.
There is something deeply ironic about Abbott’s reverence for the American model in defending many of his government’s proposed “reforms.”
After all, America’s economic model has not been working for most Americans.
Median income in the US is lower today than it was a quarter-century ago – not because productivity has been stagnating, but because wages have.
The Australian model has performed far better.
Indeed, Australia is one of the few commodity-based economies that has not suffered from the natural-resource curse.
Prosperity has been relatively widely shared.
Median household income has grown at an average annual rate above 3% in the last decades – almost twice the OECD average.
To be sure, given its abundance of natural resources, Australia should have far greater equality than it does.
After all, a country’s natural resources should belong to all of its people, and the “rents” that they generate provide a source of revenue that could be used to reduce inequality.
And taxing natural-resource rents at high rates does not cause the adverse consequences that follow from taxing savings or work (reserves of iron ore and natural gas cannot move to another country to avoid taxation).
But Australia’s Gini coefficient, a standard measure of inequality, is one-third higher than that of Norway, a resource-rich country that has done a particularly good job of managing its wealth for the benefit of all citizens.
One wonders whether Abbott and his government really understand what has happened in the US?
Does he realize that since the era of deregulation and liberalization began in the late 1970s, GDP growth has slowed markedly, and that what growth has occurred has primarily benefited those at the top?
Does he know that prior to these “reforms,” the US had not had a financial crisis – now a regular occurrence around the world – for a half-century, and that deregulation led to a bloated financial sector that attracted many talented young people who otherwise might have devoted their careers to more productive activities?
Their financial innovations made them extremely rich but brought America and the global economy to the brink of ruin.
Australia’s public services are the envy of the world.
Its health-care system delivers better outcomes than the US, at a fraction of the cost.
It has an income-contingent education-loan program that permits borrowers to spread their repayments over more years if necessary, and in which, if their income turns out to be particularly low (perhaps because they chose important but low-paying jobs, say, in education or religion), the government forgives some of the debt.
The contrast with the US is striking.
In the US, student debt, now in excess of $1.2 trillion (more than all credit-card debt), is becoming a burden for graduates and the economy.
America’s failed financial model for higher education is one of the reasons that, among the advanced countries, America now has the least equality of opportunity, with the life prospects of a young American more dependent on his or her parents’ income and education than in other advanced countries.
Abbott’s notions about higher education also suggest that he clearly does not understand why America’s best universities succeed.
It is not price competition or the drive for profit that has made Harvard, Yale, or Stanford great.
None of America’s great universities are for-profit-institutions.
They are all not-for-profit institutions, either public or supported by large endowments, contributed largely by alumni and foundations.
There is competition, but of a different sort. They strive for inclusiveness and diversity.
They compete for government research grants.
America’s under-regulated for-profit universities excel in two dimensions: the ability to exploit young people from poor backgrounds, charging them high fees without delivering anything of value, and the ability to lobby for government money without regulation and to continue their exploitative practices.
Australia should be proud of its successes, from which the rest of the world can learn a great deal.
It would be a shame if a misunderstanding of what has happened in the US, combined with a strong dose of ideology, caused its leaders to fix what is not broken.
Europe’s Austerity Zombies
NEW YORK – “If the facts don’t fit the theory, change the theory,” goes the old adage. But too often it is easier to keep the theory and change the facts – or so German Chancellor Angela Merkel and other pro-austerity European leaders appear to believe.
Though facts keep staring them in the face, they continue to deny reality.
Austerity has failed.
But its defenders are willing to claim victory on the basis of the weakest possible evidence: the economy is no longer collapsing, so austerity must be working!
But if that is the benchmark, we could say that jumping off a cliff is the best way to get down from a mountain; after all, the descent has been stopped.
But every downturn comes to an end.
Success should not be measured by the fact that recovery eventually occurs, but by how quickly it takes hold and how extensive the damage caused by the slump.
Viewed in these terms, austerity has been an utter and unmitigated disaster, which has become increasingly apparent as European Union economies once again face stagnation, if not a triple-dip recession, with unemployment persisting at record highs and per capita real (inflation-adjusted) GDP in many countries remaining below pre-recession levels.
In even the best-performing economies, such as Germany, growth since the 2008 crisis has been so slow that, in any other circumstance, it would be rated as dismal.
The most afflicted countries are in a depression.
There is no other word to describe an economy like that of Spain or Greece, where nearly one in four people – and more than 50% of young people – cannot find work.
To say that the medicine is working because the unemployment rate has decreased by a couple of percentage points, or because one can see a glimmer of meager growth, is akin to a medieval barber saying that a bloodletting is working, because the patient has not died yet.
Extrapolating Europe’s modest growth from 1980 onwards, my calculations show that output in the eurozone today is more than 15% below where it would have been had the 2008 financial crisis not occurred, implying a loss of some $1.6 trillion this year alone, and a cumulative loss of more than $6.5 trillion.
Even more disturbing, the gap is widening, not closing (as one would expect following a downturn, when growth is typically faster than normal as the economy makes up lost ground).
Simply put, the long recession is lowering Europe’s potential growth.
Young people who should be accumulating skills are not.
There is overwhelming evidence that they face the prospect of significantly lower lifetime income than if they had come of age in a period of full employment.
Meanwhile, Germany is forcing other countries to follow policies that are weakening their economies – and their democracies.
When citizens repeatedly vote for a change of policy – and few policies matter more to citizens than those that affect their standard of living – but are told that these matters are determined elsewhere or that they have no choice, both democracy and faith in the European project suffer.
France voted to change course three years ago.
Instead, voters have been given another dose of pro-business austerity.
One of the longest-standing propositions in economics is the balanced-budget multiplier – increasing taxes and expenditures in tandem stimulates the economy.
And if taxes target the rich, and spending targets the poor, the multiplier can be especially high.
But France’s so-called socialist government is lowering corporate taxes and cutting expenditures – a recipe almost guaranteed to weaken the economy, but one that wins accolades from Germany.
The hope is that lower corporate taxes will stimulate investment.
This is sheer nonsense.
What is holding back investment (both in the United States and Europe) is lack of demand, not high taxes.
Indeed, given that most investment is financed by debt, and that interest payments are tax-deductible, the level of corporate taxation has little effect on investment.
Likewise, Italy is being encouraged to accelerate privatization.
But Prime Minister Matteo Renzi has the good sense to recognize that selling national assets at fire-sale prices makes little sense.
Long-run considerations, not short-run financial exigencies, should determine which activities occur in the private sector.
The decision should be based on where activities are carried out most efficiently, serving the interests of most citizens the best.
Privatization of pensions, for example, has proved costly in those countries that have tried the experiment.
America’s mostly private health-care system is the least efficient in the world.
These are hard questions, but it is easy to show that selling state-owned assets at low prices is not a good way to improve long-run financial strength.
All of the suffering in Europe – inflicted in the service of a man-made artifice, the euro – is even more tragic for being unnecessary.
Though the evidence that austerity is not working continues to mount, Germany and the other hawks have doubled down on it, betting Europe’s future on a long-discredited theory.
The Old World’s New Roles
CAMBRIDGE – China’s rise has raised many questions for the West, with some wondering whether it is set to usurp a struggling Europe’s global leadership role.
As one columnist put it, “there is nothing much European governments can do in East Asia, save serve as marketing managers for their domestic businesses.” With neither the diplomatic weight nor the military heft to make an impression in the region, Europe had better leave the heavy lifting to the United States.
But this does not have to be the case.
For Europe, the implications of China’s rise are far-reaching, beginning with the United States’ strategic “pivot” toward Asia.
After more than 70 years as a top US priority, Europe is beginning to lose its privileged position in the eyes of American policymakers.
Moreover, European sales of high-tech dual-use products that complicate America’s security role in Asia is bound to create friction.
Nonetheless, warnings that the Atlantic partnership is eroding are unduly dire.
Tellingly, US President Barack Obama’s administration has replaced the term “pivot,” which implies a turn away from something, with “rebalancing.”
This change reflects a recognition that China’s increasing economic dominance does not negate the importance of the European Union, which remains the world’s largest economic entity and a leading source of economic innovation, not to mention values like the protection of human rights.
This is not to say that Asia’s rise will not demand adjustments.
When the Industrial Revolution began, Asia’s share of the global economy began to decline from more than 50% to just 20% by 1900.
By the second half of this century, Asia is expected to recover its former economic dominance – that is, account for 50% of global output – while lifting hundreds of millions of people out of poverty.
This power shift – perhaps the most consequential of the twenty-first century – implies serious risks.
Historians often warn that the fear and uncertainty generated by the emergence of new powers like China can trigger serious conflict, like that which Europe experienced a century ago, when Germany overtook the United Kingdom in industrial production.
With Asia riven by territorial disputes and historical tensions, maintaining a stable security balance will not be easy.
But there are levers in place that can help.
In the 1990s, when US President Bill Clinton’s administration was considering how to respond to China’s increasing economic might, some urged a policy of containment.
Clinton rejected that advice: It would have been impossible to forge an anti-China alliance, given the enduring desire of China’s neighbors to maintain good relations with it; more important, such a policy would have guaranteed future enmity with China.
Instead, Clinton chose a policy that could be called “integrate and insure.”
While China was welcomed into the World Trade Organization (WTO), America revived its security treaty with Japan.
If China pursues a “peaceful rise,” its neighbors will focus on building strong economic relationships with it.
If it throws its weight around – which some say is implied by its recent actions on the Indian border and in the East and South China Seas – its neighbors will seek to balance its power, with an American naval presence offering backup.
Where does Europe fit into this picture?
For starters, it should monitor and restrain sensitive exports to avoid making the security situation more dangerous for the US.
Even in trading terms, Europe has an interest in regional stability and secure sea lanes.
Furthermore, Europe can contribute to the development of the norms that shape the security environment.
For example, Europe can play an important role in reinforcing a universal interpretation of the United Nations Convention on the Law of the Sea, rather than China’s idiosyncratic version – especially given that the US has not even ratified the treaty.
Contrary to the claims of some analysts, China is not a revisionist state like Nazi Germany or the Soviet Union, eager to overthrow the established international order.
Indeed, it is not in China’s interest to destroy international institutions – such as the United Nations, the WTO, and the International Monetary Fund – that have helped to facilitate its rise.
Given Europe’s leading roles in such institutions, it can help China gain the multilateral legitimacy that it seeks, in exchange for responsible behavior.
Though China is not attempting to upend the global order, it is now undergoing a profound – and destabilizing – transformation. With the rise of transnational issues like climate change, terrorism, pandemics, and cyber crime – brought about by rapid technological progress and social change – power is being diffused not among states, but among a wide range of non-governmental entities.
Addressing these challenges will require broad international cooperation, with China, the US, and Europe each playing an important role.
Finally, there is the question of values.
Europe, together with the US, has already resisted Chinese (and Russian) demands for greater Internet censorship.
And European countries like Norway and Germany have willingly taken economic hits in the name of human rights.
While it is impossible to predict how Chinese politics will evolve, other countries’ experiences suggest that political change often occurs when per capita income reaches roughly $10,000.
If such change does occur, Europe will have an opening to promote its core values even more effectively.
Whether China’s economic interest in an impartial world order based on the rule of law will lead to greater protection of individual rights remains to be seen.
Only China will decide that.
Duties Without Borders
CAMBRIDGE – More than 130,000 people are said to have died in Syria’s civil war.
United Nations reports of atrocities, Internet images of attacks on civilians, and accounts of suffering refugees rend our hearts.
But what is to be done – and by whom?
Recently, the Canadian scholar-politician Michael Ignatieff urged US President Barack Obama to impose a no-fly zone over Syria, despite the near-certainty that Russia would veto the United Nations Security Council resolution needed to legalize such a move.
In Ignatieff’s view, if Syrian President Bashar al-Assad is allowed to prevail, his forces will obliterate the remaining Sunni insurgents – at least for now; with hatreds inflamed, blood eventually will flow again.
In an adjoining article, the columnist Thomas Friedman drew some lessons from the United States’ recent experience in the Middle East.
First, Americans understand little about the social and political complexities of the countries there.
Second, the US can stop bad things from happening (at considerable cost), but it cannot make good things happen by itself.
And, third, when America tries to make good things happen in these countries, it runs the risk of assuming responsibility for solving their problems.
So what are a leader’s duties beyond borders?
The problem extends far beyond Syria – witness recent killings in South Sudan, the Central African Republic, Somalia, and other places.
In 2005, the UN General Assembly unanimously recognized a “responsibility to protect” citizens when their own government fails to do so, and in 2011 it was invoked in UN Security Council Resolution 1973, authorizing the use of military force in Libya.
Russia, China, and others believe that the principle was misused in Libya, and that the guiding doctrine of international law remains the UN Charter, which prohibits the use of force except in self-defense, or when authorized by the Security Council.
But, back in 1999, when faced with a Russian veto of a potential Security Council resolution in the case of Kosovo, NATO used force anyway, and many defenders argued that, legality aside, the decision was morally justified.
So which arguments should political leaders follow when trying to decide the right policy to pursue?
The answer depends, in part, on the collectivity to which he or she feels morally obliged.
Above the small-group level, human identity is shaped by what Benedict Anderson calls “imagined communities.”
Few people have direct experience of the other members of the community with which they identify.
In recent centuries, the nation has been the imagined community for which most people were willing to make sacrifices, and even to die, and most leaders have seen their primary obligations to be national in scope.
In a world of globalization, however, many people belong to multiple imagined communities.
Some – local, regional, national, cosmopolitan – seem to be arranged as concentric circles, with the strength of identity diminishing with distance from the core; but, in a global information age, this ordering has become confused.
Today, many identities are overlapping circles – affinities sustained by the Internet and cheap travel.
Diasporas are now a mouse click away.
Professional groups adhere to transnational standards.
Activist groups, ranging from environmentalists to terrorists, also connect across borders.
As a result, sovereignty is no longer as absolute and impenetrable as it once seemed.
This is the reality that the UN General Assembly acknowledged when it recognized a responsibility to protect endangered people in sovereign states.
But what moral obligation does this place on a particular leader like Obama?
The leadership theorist Barbara Kellerman has accused former US President Bill Clinton of the moral failure of insularity for his inadequate response to the genocide in Rwanda in 1994. In one sense, she is right.
But other leaders were also insular, and no country responded adequately.
Had Clinton tried to send American troops, he would have encountered stiff resistance in the US Congress.
Coming so soon after the death of US soldiers in the 1993 humanitarian intervention in Somalia, the American public was in no mood for another military mission abroad.
So what should a democratically elected leader do in such circumstances?
Clinton has acknowledged that he could have done more to galvanize the UN and other countries to save lives in Rwanda.
But good leaders today are often caught between their personal cosmopolitan inclinations and their more traditional obligations to the citizens who elected them.
Fortunately, insularity is not an “all or nothing” moral proposition.
In a world in which people are organized in national communities, a purely cosmopolitan ideal is unrealistic.
Global income equalization, for example, is not a credible obligation for a national political leader; but such a leader could rally followers by saying that more should be done to reduce poverty and disease worldwide.
As the philosopher Kwame Anthony Appiah has put it, “Thou shalt not kill is a test you take pass-fail.
Honor thy father and thy mother admits of gradations.”
The same is true of cosmopolitanism versus insularity.
We may admire leaders who make efforts to increase their followers’ sense of moral duties beyond borders; but it does little good to hold leaders to an impossible standard that would undercut their capacity to remain leaders.
As Obama wrestles with determining his responsibilities in Syria and elsewhere, he faces a serious moral dilemma.
As Appiah says, duties beyond borders are a matter of degree; and there are also degrees of intervention that range from aid to refugees and arms to different degrees of the use of force.
But even when making these graduated choices, a leader also owes his followers a duty of prudence – of remembering the Hippocratic oath to first of all, do no harm.
Ignatieff says Obama already owns the consequences of his inaction;
Friedman reminds him of the virtue of prudence.
Safeguarding Cyberspace
CAMBRIDGE – Brazil recently hosted NETmundial, the first global conference on Internet governance, attended by 800 representatives of governments, corporations, civil-society organizations, and technologists.
Based on the notion of “multi-stakeholderism,” the meeting produced a 12-page “outcomes” document.
Nonetheless, at the end of the conference, there was still no consensus on global cyber governance.
Many governments continued to advocate traditional United Nations voting procedures for making global decisions, and defend their right to control domestic cyber activities.
In a sense, this is not surprising.
After all, though the Internet is a complex, fast-evolving, and all-encompassing global resource, it has not been around for very long. While the World Wide Web was conceived in 1989, it was only in the last 15 years that the number of Web sites burgeoned, and Internet technology began to transform global supply chains.
Since 1992, the number of Internet users has exploded from one million to nearly three billion.
Just like that, the Internet became a substrate of economic, social, and political life.
In its early days, the Internet was often characterized as the ultimate egalitarian conduit of free-flowing information – a harbinger of the end of government controls.
But the reality is that governments and geographical jurisdictions have always played a central role in regulating the Internet – or at least have tried.
Ultimately, however, the Internet poses a major governance challenge, exemplified in ongoing efforts to understand the implications of ubiquitous mobility and the collection and storage of “big data.”
The governance challenge stems from the fact that cyberspace is a combination of virtual properties, which defy geographical boundaries, and physical infrastructure, which fall under sovereign jurisdictions.
Control of the physical layer can have both territorial and extraterritorial effects on the virtual layers.
At the same time, attacks can be launched from the low-cost virtual realm against the physical domain, where resources are scarce and expensive.
The Internet began as a small village of known users, where an authentication layer of code was unnecessary and the development of norms was simple.
But then it grew, and everything changed.
Though cyberspace offered the advantages of access to information and easy communication to a growing number of people, it became a breeding ground for crime, hacker attacks, and threats to governments.
Efforts to limit the risks incurred in this volatile environment have focused on creating private networks and “walled gardens” (closed platforms) – cyber equivalents to the seventeenth-century enclosures that were used to solve that era’s “tragedy of the commons.”
But this raises the risk of fragmentation, which, if allowed to go far enough, could curtail the Internet’s economic benefits.
Given that security is a traditional function of the state, some observers believe that growing insecurity will lead to a greater role for governments in cyberspace.
Indeed, accounts of cyber war may be exaggerated, but cyber espionage is rampant, and more than 30 governments are reputed to have developed offensive capabilities and doctrines for the use of cyber weapons.
Ever since the Stuxnet virus was used to disrupt Iran’s nuclear program in 2009-2010, governments have taken the threat posed by cyber weapons very seriously.
Governments also want to protect their societies from what comes through the Internet.
For example, China’s government has not only created a “Great Firewall” of software filters; it also requires that companies take responsibility for censoring their public content.
And, if China is attacked, it has the capacity to reduce its Internet connections.
But China’s government – and others that practice Internet censorship – still want to reap the economic benefits of connectivity.
That tension leads to imperfect compromises.
A similar tension exists in the effort to create international Internet-governance norms. While authoritarian countries like China and Russia seek “information security,” including the kind of overt censorship that would be prohibited in countries like the United States, Western democracies pursue “cyber security.”
This divergence was starkly apparent in 2012, at a conference convened in Dubai by the UN’s International Telecommunications Union (ITU).
Though the meeting was ostensibly about updating telephony regulations, the underlying issue was the ITU’s role in Internet governance.
Authoritarian regimes and many developing countries believe that their approach to sovereignty, security, and development would benefit from the multilateral processes that the ITU employs.
But democratic governments fear that these processes are too cumbersome, and would undercut the flexibility of the “multi-stakeholder” approach, which stresses the involvement of the private and non-profit sectors, as well as governments. The vote in Dubai was 89 to 55 against the “democratic” governments.
This outcome raised concerns about a crisis in Internet governance – concerns that the recent conference in Brazil alleviated, but only slightly. Stayed tuned.
There are many more conferences scheduled on cyber governance – and a lot more work to be done.
Governance in the Information Age
ABU DHABI – As the year comes to an end, it is only natural to ask what might lie ahead.
But, instead of asking what may lie ahead in 2014, let us jump to mid-century.
What will governance look like in 2050?
That is what the World Economic Forum (WEF) asked at a recent meeting in Abu Dhabi that focused on the future of governance under three potential scenarios arising from the ongoing information revolution.
With that revolution already marginalizing some countries and communities – and creating new opportunities for others – the question could hardly be more timely.
The first scenario that participants considered is a world ruled by so-called “megacities,” where governance is administered largely by major urban agglomerations.
The second possibility is a world in which strong central governments use big data to fortify their control.
And, in the third scenario, central governments are fundamentally weak, with markets – and the enterprises that dominate them – providing almost all services.
Each of these scenarios is an extrapolation of a current trend.
While all of them could be beneficial in some respects, they also have features that, if left unchecked, could lead to dystopian outcomes.
Policymakers should already be implementing policies aimed at guiding trends like urbanization, the rise of big data, and the grouping of people into narrow communities, often based on their relationship to the market.
The goal should be to take advantage of these trends’ potential benefits, while ensuring that they do not undermine other critical aspects of governance.
For example, although megacities have the potential to create new opportunities for workers and businesses, they cannot solve universal problems like climate change or manage the production and protection of national and global public goods.
Likewise, while the use of big data has substantial problem-solving potential, important questions remain about who owns, who controls, and who regulates the use of the data.
The notion of a “datocracy” incites fear of an Orwellian “e-1984.”
Indeed, the recent revelations about National Security Agency surveillance programs barely scratch the surface of the issue.
After all, the use of big data is not confined to governments and corporations; anonymous criminal groups can easily abuse the information, too.
Finally, while individual choice within markets is often the most efficient way to allocate resources, markets do not produce a sufficient supply of public goods.
Indeed, there are some goods that the private sector is simply unable to provide.
This system may seem acceptable to those within the “gated communities” that benefit from it, but what about all those left outside?
The WEF’s Global Agenda Council on the Future of Government, of which I am a part, has considered ways in which information technology can improve governance and reduce feelings of alienation among the governed.
The most effective initiatives, the council observed, often arise from partnerships between government and the private sector.
For example, in Kenya, a private company developed a mobile-payments system that allows users to transfer money using cell phones, effectively creating a banking system much more quickly than the government could have done.
Once the system was privately created, the government was able to use it to provide additional services.
As a result, a Kenyan farmer in a remote district can now obtain information about crop prices or transfer funds, without having to travel long distances and wait in lines.
While such initiatives cannot solve the problem of inequality, they can help to relieve some of its most damaging effects.
At a time of rapid social change and relentless technological advancement, efforts to improve governance – at the local, national, or international level – will require careful thought and experimentation, in order to determine how to balance inclusive decision-making with the ever-evolving needs of markets.
As the American diplomat Harlan Cleveland once asked, “How will we get everybody in on the act, and still get some action?”
Consider international institutions.
Today, the world is organized into some 200 countries; in all likelihood, it will be in 2050 as well.
But only 16 governmental entities account for two-thirds of the world’s income and two-thirds of its population.
Many have advocated the use of “double majorities” – which require a majority of votes according to two separate criteria, population and economic output – to elicit action from a manageable number of states while enhancing weaker states’ influence in decision-making.
But, though the G-20 has moved in this direction, the approach to setting a global agenda remains flawed.
Indeed, it seems to be most effective in times of crisis; in more normal times, as we have seen, the G-20 struggles to get things done.
Moreover, even if the double-majority system helps to empower some weaker states, it does not account for the role of the world’s smallest countries in global decision-making processes.
Although these countries represent a small share of the global population, they comprise a significant majority of the total number of countries.
One potential solution would be for states to represent each other, as occurs in the International Monetary Fund.
But the IMF’s experience exposes significant challenges in implementation.
World leaders have not yet figured out how to reconcile the moral conviction that all people are equal with the simple fact that all countries are not.
In a global information age, governance systems capable of addressing fundamental issues like security, welfare, liberty, and identity will require coalitions that are small enough to function efficiently and a decision concerning what to do about those who are underrepresented.
Obviously, all of this calls for a lot more investigation.
Exploring potential future scenarios, as the WEF has done, is an important step in the right direction.
Japan’s Self-Defense Defense
CAMBRIDGE – Since the end of World War II, Japan has been ruled by an American-written “peace constitution,” Article 9 of which prohibits war and limits Japanese forces to self-defense.
Prime Minister Shinzo Abe is now seeking legislation to enable Japan to reinterpret the constitution to include “collective self-defense,” whereby the country would enhance its security cooperation with other countries, particularly its closest ally, the United States.
Critics view this as a radical departure from seven decades of pacifism.
But Abe’s central objectives – improving Japan’s ability to respond to threats that do not amount to armed attack; enabling Japan to participate more effectively in international peacekeeping activities; and redefining measures for self-defense permitted under Article 9 – are actually relatively modest.
Fears that the move would lead to Japanese involvement in distant US wars are similarly overblown.
Indeed, the rules have been carefully crafted to prohibit such adventures, while allowing Japan to work more closely with the US on direct threats to Japanese security.
It is not difficult to see why Abe is pursuing broader rights to self-defense.
Japan lies in a dangerous region, in which deep-rooted tensions threaten to erupt at any moment.
Given that East Asia, unlike Europe after 1945, never experienced full reconciliation among rivals, or established strong regional institutions, it has been forced to depend on the US-Japan Security Treaty to underpin regional stability.
When US President Barack Obama’s administration announced its “rebalancing” toward Asia in 2011, it reaffirmed the 1996 Clinton-Hashimoto Declaration, which cited the US-Japan security alliance as the foundation for stability – a prerequisite for continued economic progress – in Asia.
That declaration served the larger goal of establishing a stable, albeit uneven, triangular relationship among the US, Japan, and China.
Subsequent US administrations have upheld this approach, and opinion polls show that it retains broad acceptance in Japan – not least owing to close cooperation on disaster relief following the Tōhoku earthquake and tsunami of 2011.
But Japan remains extremely vulnerable.
The most immediate regional threat is North Korea, whose unpredictable dictatorship has invested its meager economic resources in nuclear and missile technology.
A longer-term concern is the rise of China – an economic and demographic powerhouse whose expanding military capacity has enabled it to take an increasingly assertive stance in territorial disputes, including with Japan in the East China Sea.
China’s territorial ambitions are also fueling tensions in the South China Sea, where sea-lanes that are vital to Japanese trade are located.
Complicating matters further is the fact that China’s political evolution has failed to keep pace with its economic progress.
If the Chinese Communist Party feels threatened by a public frustrated with insufficient political participation and enduring social repression, it could slip into competitive nationalism, upending the already-delicate regional status quo.
Of course, if China becomes aggressive, Asian countries like India and Australia – which are already disturbed by China’s assertiveness in the South China Sea – will join Japan in the effort to offset China’s power.
But, as things stand, a strategy of containment would be a mistake.
After all, the best way to engender enmity is to treat China as an enemy.
A more effective approach, spearheaded by the US and Japan, would focus on integration, with a hedge against uncertainty.
American and Japanese leaders must shape the regional environment in such a way that China has incentives to act responsibly, including by maintaining strong defense capabilities.
Meanwhile, the US and Japan must rethink the structure of their alliance.
While the expected revisions to Japan’s defense framework are a positive development, many Japanese still resent the lack of symmetry in the alliance obligations.
Others chafe at the burden of US bases, particularly on the island of Okinawa.
A longer-term goal should thus be for the US gradually to transfer its bases to Japanese control, leaving American forces to rotate among them.
In fact, some bases – notably, Misawa Air Base north of Tokyo – already fly Japan’s flag, while hosting American units.
But the process must be handled carefully.
As China invests in advanced ballistic missiles, the fixed bases on Okinawa become increasingly vulnerable.
To avoid the perception that the US decided to turn the bases over to Japan just when their military benefits were diminishing, and to ensure that the move represented America’s recommitment to the alliance, a joint commission would have to be established to manage the transfer.
For Japan, becoming an equal partner in its alliance with the US is essential to securing its regional and global standing.
To this end, Abe’s modest step toward collective self-defense is a step in the right direction.
The Return of Japan
TOKYO – “Japan is back!” Prime Minister Shinzo Abe declared during a visit to Washington, DC, earlier this year.
But, while Japan may be on the right track after two decades of economic stagnation, there is still much to be done to secure the country’s long-term future.
In July, Abe’s Liberal Democratic Party (LDP) won control of both houses of parliament – a resounding electoral victory that amounts to the strongest political mandate any Japanese leader has received in many years.
As a result, Abe seems likely to remain in power longer than his ineffectual predecessors, most of whom did not last more than a year.
Meanwhile, Japan’s economy seems to be recovering from a generation of malaise, with this year’s annualized growth rate exceeding 3%.
Moreover, following the triple shock of the earthquake, tsunami, and nuclear catastrophe in 2011, Japan has managed (at considerable cost) to replace the 25% of its energy supply that the disabled reactors at the Fukushima Daiichi plant provided.
The announcement that Tokyo will host the 2020 Olympic Games has also boosted public confidence.
Skeptics worry that the economic progress may not last, arguing that the high growth rate is simply a reflection of loose monetary policy and fiscal stimulus – a strategy that inflation will render unsustainable.
Abe’s supporters reply that the third “arrow” of “Abenomics” – productivity-enhancing structural reforms – has only now been removed from its quiver.
They point to Abe’s ability to overcome resistance from small rice farmers, part of the LDP’s electoral base, to Japan’s participation in negotiations on the Trans-Pacific Partnership, which would open Japan’s economy to increased global competition.
Nevertheless, Japan faces serious long-term challenges.
First, with its birth rate well below replacement level, Japan’s population is aging and shrinking.
Offsetting this trend will require increased immigration and greater female labor-force participation – neither of which will be easy to bring about.
Japan has not traditionally been a country of immigration, and the World Economic Forum’s Global Gender Gap Report, which ranks 136 countries, has Japan in 105th place.
But, of course, this can change – and Japan does have a history of successfully reinventing itself.
Perhaps the most critical question about Japan’s future concerns its relationship with its neighbors – North Korea, South Korea, and China.
While recent polls suggest that Japan retains substantial soft power globally, this is not the case in its immediate neighborhood.
Unlike Europe, where Germany overcame World War II’s legacy through its integration into the European Union, Northeast Asia remains burdened by history.
According to its neighbors, Japan’s apologies for is past aggression are inadequate.
It does not help that some Korean and Chinese leaders have used anti-Japanese rhetoric to win domestic support.
In Japan, the relentless criticism has triggered a nationalist backlash, spurring politicians to respond in kind during last year’s election campaign.
For example, Abe threatened to rescind the official apologies issued by former leaders or officials for abuses and atrocities committed by Japan’s army during WWII, and stated his intention to visit the controversial Yasukuni Shrine, which honors not only Japan’s war dead, but also many of its war criminals.
While Abe has not acted on these campaign statements, some observers remain convinced that he will visit Yasukuni at some point, further straining Japan’s relations with South Korea and China.
Territorial disputes have exacerbated these tensions significantly.
China challenges Japanese control over more than seven square kilometers of islets – called the Senkaku Islands in Japan, and the Diaoyu Islands in China – in the East China Sea.
While the rival claims date back to the late nineteenth century, the latest flare-up – which has included widespread anti-Japanese demonstrations in China – was triggered in September 2012, when Japan’s government purchased three of the tiny islets from their private Japanese owner.
Then-Prime Minister Yoshihiko Noda said that he decided to purchase the islands for the Japanese central government to prevent Tokyo Governor Shintaro Ishihara from purchasing them with municipal funds.
Noda feared that Ishihara, who was well known for nationalist grandstanding, would try to occupy the islands or find other ways to use them to provoke China.
But Chinese officials viewed the move as proof that Japan was trying to disrupt the status quo.
Some even claimed that Japan was trying to reverse the territorial outcome of WWII.
The May 1972 transfer back to Japan of Okinawa, which the United States had administered, included the Senkaku Islands.
A few months later, when China and Japan were working to normalize relations, Japanese Prime Minister Kakuei Tanaka asked Chinese Premier Zhou Enlai about the islets;
Zhou responded that the dispute should be left to later generations, in order to avoid any delay of normalization.
As a result, both countries maintained their sovereignty claims.
So, though Japan has administrative control, Chinese ships and planes frequently enter Japanese waters to assert China’s claim.
While Japan’s security treaty with the US serves as a deterrent, there is always a danger of miscalculation.
A quick resolution of the Senkaku Islands dispute (or of Japan’s lower-profile conflict with South Korea over the Korean-controlled Liancourt Rocks) is improbable, but Japan could be more proactive.
For example, by stating their willingness to take any territorial disputes to the International Court of Justice, Japanese authorities could help to dispel perceptions of militarism.
Furthermore, Japan should take the sovereign act of designating the Senkaku Islands as an international maritime preserve free of habitation or military use.
China might not agree, but such a move might at least return the issue to the back burner, while reinforcing Japan’s image as a peaceful power.
Japan and Northeast Asia need bold initiatives that focus on the future.
The Myth of Isolationist America
CAMBRIDGE – Is the United States turning inward and becoming isolationist?
That question was posed to me by a number of financial and political leaders at the recent World Economic Forum at Davos, and was heard again a few days later at the annual Munich Security Conference.
In a strong speech at Davos, Secretary of State John Kerry gave an unambiguous answer: “Far from disengaging, America is proud to be more engaged than ever.”
Unlike the mood at Davos a few years ago, when many participants mistook an economic recession for long-term American decline, the prevailing view this year was that the US economy has regained much of its underlying strength.
Economic doomsayers focused instead on previously fashionable emerging markets like Brazil, Russia, India, and Turkey.
The anxiety about US isolationism is driven by recent events.
For starters, there is America’s refusal (thus far) to intervene militarily in Syria.
Then there is the coming withdrawal of US troops from Afghanistan.
And President Barack Obama’s cancellation of his trip to Asia last autumn, owing to domestic political gridlock in the US Congress and the resulting government shutdown, made a poor impression on the region’s leaders.
Indeed, with Kerry’s time and travel focused on the Middle East, many Asian leaders believe that Obama’s signature foreign policy – strategic “rebalancing” toward Asia – has run out of steam, even as tension between China and Japan, evident in their leaders’ statements at Davos, continues to mount.
Particularly egregious from the point of view of “Davos” was the recent refusal by Congress to approve the reform and refunding of the International Monetary Fund, even though a plan that added no significant burden to the American taxpayer had been agreed years earlier by the G-20 under Obama’s leadership.
When I asked a prominent Republican senator why Congress had balked at keeping an American commitment, he attributed it to “sheer orneriness,” reflecting the mood of right-wing Tea Party Republicans and some left-wing Democrats.
Further evidence of American isolationism can be found in a recent opinion poll taken by the Pew Research Center and the Council on Foreign Relations.
According to the survey, fifty-two percent of Americans believe that the US “should mind its own business internationally and let other countries get along the best they can on their own.”
About the same number said that the US is “less important and powerful” than it was a decade ago.
The problem with these perceptions – both at home and abroad – is that the US remains the world’s most powerful country, and is likely to remain so for decades.
China’s size and rapid economic growth will almost certainly increase its relative strength vis-à-vis the US.
But even when China becomes the world’s largest economy in the coming years, it will still be decades behind the US in terms of per capita income.
Moreover, even if China suffers no major domestic political setback, projections based on GDP growth alone are one-dimensional and ignore US military and soft-power advantages.
They also ignore China’s geopolitical disadvantages within Asia.
America’s culture of openness and innovation will ensure its role as a global hub in an age when networks supplement, if not fully replace, hierarchical power.
The US is well positioned to benefit from such networks and alliances, if American leaders follow smart strategies.
In structural terms, it matters greatly that the two entities in the world with economies and per capita income similar to the US – Europe and Japan – are both American allies.
In terms of balance-of-power resources, that boosts America’s net position, but only if US leaders maintain these alliances and ensure international cooperation.
Decline is a misleading metaphor for today’s America, and Obama fortunately has rejected the suggestion that he should pursue a strategy aimed at managing it.
As a leader in research and development, higher education, and entrepreneurial activity, the US, unlike ancient Rome, is not in absolute decline.
We do not live in a “post-American world,” but we also no longer live in the “American era” of the late twentieth century.
In the decades ahead, the US will be “first” but not “sole.”
That is because the power resources of many others – both states and non-state actors – are growing, and because, on an increasing number of issues, obtaining America’s preferred outcomes will require exercising power with others as much as over others.
The capacity of US leaders to maintain alliances and create networks will be an important dimension of America’s hard and soft power.
The problem for US power in the twenty-first century is not just China, but the “rise of the rest.”
The solution is not isolation, but a strategy of selectivity similar to what President Dwight Eisenhower advocated in the 1950’s.
A smart power strategy starts with a clear assessment of limits.
The preeminent power does not have to patrol every boundary and project its strength everywhere.
That is why Eisenhower prudently resisted direct intervention on the French side in Vietnam in 1954.
Eisenhower was right about something else, too: America’s military strength depends on preservation of its economic strength.
Nation-building at home is not the isolation that critics fear; on the contrary, it is central to a smart foreign policy.
A smart strategy would avoid involvement of ground forces in major wars on the Asian continent.
Yet such prudence is not the same as isolationism.
The US needs to combine its soft- and hard-power resources better.
As Obama said in his 2014 State of the Union address, “in a world of complex threats, our security depends on all elements of our power – including strong and principled diplomacy.”
Judging Bush\u0027s Military Tribunals
Britain continues to be America's staunchest ally in the US-led war in Iraq, and Prime Minister Tony Blair remains unwavering in his support.
But his government does have a serious quarrel with the Bush administration.
The American President's designation of two Britons to be among the first six of 680 prisoners held at the US base at Guantanamo Bay in Cuba to face a military trial has been condemned across the political spectrum in the United Kingdom.
The British are not alone.
Worldwide, the detentions at Guantanamo Bay and President Bush's military tribunals have become symbols of America's readiness to abandon concern for rights in the name of the struggle against terrorism.
Indeed, one senses a certain satisfaction in some countries that have been the targets of human rights criticism by the US; now they sense an opportunity to turn the tables.
Whether denunciations of the detentions at Guantanamo and the planned military tribunals are driven by genuine concerns about human rights or by glee at pointing out American hypocrisy, the effect is the same.
Because the US is such an outspoken proponent of human rights internationally, its failure to respect rights assumes added significance, contributing to a rising tide of anti-Americanism in much of the world.
The Bush administration has only itself to blame for this state of affairs.
The creation of Camp X-Ray at Guantanamo, and President Bush's executive order establishing military commissions to try those held there, aimed to deal with prisoners seized during the war in Afghanistan whom the US considered to be ``unlawful combatants.''
That is, the Bush administration believed that they were al Qaeda members or others who did not fight by the rules of war and thus not entitled to prisoner-of-war status.
Potentially, there are three bodies of law that could govern the treatment of these prisoners:
domestic American law in accordance with the rights guaranteed by the US Constitution;
international human rights law to which the US is a party through its membership in the UN and its ratification of the International Covenant on Civil and Political Rights;
international humanitarian law--also known as the laws of war--to which the US is also a party through its ratification of the Geneva Conventions of 1949 and through its acceptance that certain provisions of the First Additional Protocol of 1977 have the status of customary international law that is binding on America as on all other governments.
In practice, the Bush administration rejects application of any of these bodies of law to the Guantanamo prisoners.
Instead, President Bush asserts the power to hold them indefinitely at Guantanamo or, in his unreviewable discretion, to bring them to trial before military commissions that deny them the due process protections to which they would be entitled if any of the three legal systems were followed.
The Bush administration's argument for not applying domestic law is that the prisoners are not American citizens and are not held on American territory.
Guantanamo was selected as the site to imprison them in a deliberate--and successful--effort to prevent American civilian courts asserting their jurisdiction.
As far as international human rights law is concerned, the Bush administration has been silent.
But its fundamental position is that treaties such as the International Covenant on Civil and Political Rights are not self-executing.
Hence, they accord no rights to the prisoners at Guantanamo in the absence of implementing legislation.
It is the Geneva Conventions and the First Additional Protocol that create the greatest difficulties for the Bush administration.
The Conventions require that, where there is any doubt, a hearing must be held before an impartial tribunal to determine whether a prisoner seized during an armed conflict is entitled to prisoner-of-war status.
Since no such hearings have been held, the Bush administration is effectively claiming that there is no doubt in the case of any detainee.
As in other instances where government officials claim unanimity--such as Saddam Hussein's assertion that he obtained 100% of Iraqis' support in the plebiscite that he conducted shortly before the war--America's position is simply not credible.
It amounts to a determination that all the detainees at Guantanamo are guilty of being unlawful combatants without any proceedings or any opportunity for them to defend themselves.
Moreover, even if they are found to be unlawful combatants, the First Additional Protocol of 1977 requires that they be afforded certain due process protections, which will not be available to those brought before the proposed military commissions.
The commissions may even sentence detainees to death, with no appeal to a civilian court whatsoever.
Little wonder, then, that Tony Blair's government is angry that two of its citizens will be tried before President Bush's military commissions.
Up to now, criticism from the rest of the world has had no effect on the Bush administration's plans.
It remains to be seen whether protests by an ally who has stood by America so loyally, and at such great cost to his own political standing, will have a greater impact.
Judgment Day for the Eurozone
MUNICH – Europe and the world are eagerly awaiting the decision of Germany’s Constitutional Court on September 12 regarding the European Stability Mechanism (ESM), the proposed permanent successor to the eurozone’s current emergency lender, the European Financial Stability Mechanism.
The Court must rule on German plaintiffs’ claim that legislation to establish the ESM would violate Germany’s Grundgesetz (Basic Law).
If the Court rules in the plaintiffs’ favor, it will ask Germany’s president not to sign the ESM treaty, which has already been ratified by Germany’s Bundestag (parliament).
There are serious concerns on all sides about the pending decision.
Investors are worried that the Court could oppose the ESM such that they would have to bear the losses from their bad investments.
Taxpayers and pensioners in European countries that still have solid economies are worried that the Court could pave the way for socialization of eurozone debt, saddling them with the burden of these same investors’ losses.
The plaintiffs represent the entire political spectrum, including the Left Party, the Christian Social Union MP Peter Gauweiler, and the justice minister in former Chancellor Gerhard Schröder’s Social Democratic government, Herta Däubler-Gmelin, who has collected tens of thousands of signatures supporting her case.
There is also a group of retired professors of economics and law, and another of “ordinary” citizens, whose individual complaints have been selected as examples by the Court.
The plaintiffs have raised several objections to the ESM.
First, they claim that it breaches the Maastricht Treaty’s “no bail-out” clause (Article 125).
Germany agreed to relinquish the Deutsche Mark on the condition that the new currency area would not lead to direct or indirect socialization of its members’ debt, thus precluding any financial assistance from EU funds for states facing bankruptcy.
Indeed, the new currency was conceived as a unit of account for economic exchange that would not have any wealth implications at all.
The plaintiffs argue that, in the case of Greece, breaching Article 125 required proof that its insolvency would pose a greater danger than anticipated when the Maastricht Treaty was drafted.
However, no such proof was provided.
If Germany had wished to constrain its governor’s authority in this way, it should have informed the other signatory states prior to doing so. On the other hand, Germany’s representative on the Governing Council is sworn to secrecy, which, the plaintiffs argue, precludes any accountability to the Bundestag.
Moreover, the plaintiffs claim that, while the ESM treaty is restrictive in granting resources to individual states, requiring a qualified majority vote, it does not specify the conditions under which losses are acceptable.
Losses can result from excessive wages paid by the ESM Governing Council members to themselves, a dearth of energy in efforts to collect debts from countries that have received credit, or other forms of mismanagement.
And, because Governing Council and Executive Board members enjoy immunity from criminal prosecution, misbehavior cannot be punished.
If losses arise, they must be covered by the initial cash contribution of €80 billion ($100 billion), which then would be topped up automatically by all participating countries according to their capital shares.
If individual countries are no longer able to make the necessary contributions, others must do so on their behalf.
In principle, a single country might have to assume the entire burden of losses. Such joint and several liability, the plaintiffs assert, contradicts the Court’s previous statements that Germany should not accept any financial commitments stemming from other states’ behavior.
Worse, according to the plaintiffs, although the liability of any country vis-à-vis external partners is limited to that country’s share of capital, this limitation does not apply to other signatory states. It is theoretically possible that a single country could be held liable for the ESM’s total exposure of €700 billion.
Finally, the ESM cannot be considered on its own, but must be seen in the context of the total exposure amount, which includes the €1.4 trillion in bailout funds that have already been granted.
In particular, the Target2 credit drawn by the crisis-afflicted countries’ central banks, which already totals almost €1 trillion, should also be taken into consideration.
Nobody knows how the Constitutional Court will rule on these objections.
Most observers believe that the Court is unlikely to oppose the ESM treaty, though many expect the judges to demand certain amendments, or to ask Germany’s president to make his signature subject to certain qualifications.
It is good that the Court’s decisions cannot be forecast, and even better that the Court cannot be lobbied or petitioned.
The European Union can be based only on the rule of law.
If those in power can break its rules on a case-by-case basis, the EU will never develop into the stable construct that is a prerequisite for peace and prosperity.
Mandela’s Children
NAIROBI – Before I knew that Nelson Mandela existed, I thought our then-leader, Kenyan President Daniel Toroitich arap Moi, was the world’s only statesman.
I was five years old, and no world existed for me outside Nairagie Enkare, my birthplace in rural Maasailand.
Moi was a mythical figure to me, because he didn’t live in Nairagie Enkare, yet he was always present through radio, a technology too complicated for a child like me to understand.
Every newscast from the government-controlled radio station began with what “His Excellency, Holy President Daniel Toroitich arap Moi” had said or done.
He visited a school.
He planted a tree.
He helped a women’s group.
He attended church.
He said agriculture was the backbone of our nation.
He said we were fortunate to live in Kenya.
Throughout the day, the airwaves were filled with songs repeating the Father of the Nation’s message, and reminding Kenyans to follow in his footsteps.
Perhaps because what came over the radio was so predictable, people sought alternative news from the BBC Swahili Service.
On most evenings, at six o’clock, men gathered to listen at the homes of the few, like my father, who had radios.
The news lasted only 30 minutes, so everyone had to be absolutely quiet.
But, on February 11, 1990, the men began to say repeatedly, “He is free!
He is free!
Nelson Mandela is free!”
I’m sure that my father and his friends had heard earlier from government radio that Mandela had been released, but they waited for verification from the BBC.
They left before the news was over to go to a bar to celebrate.
When my father came home that night, he was singing praises for Mandela.
I never asked my father who Mandela was.
The following year, I enrolled in school and began to learn that the world extended beyond Nairagie Enkare.
My teachers explained to me why Mandela’s freedom, after 27 years in prison, meant so much to Africans – from big cities to small villages.
Europeans, I learned, had colonized Africa and stripped Africans of the right to self-governance.
As African countries began to gain independence in the 1950’s, the white minority in South Africa was tightening its grip on power through a racial-segregation system known as apartheid.
It was Mandela’s fight against apartheid that led to his imprisonment.
By 1980, black Africans had taken over governance in every country on the continent except South Africa.
Mandela’s release from prison ten years later moved Africa one step closer to absolute independence.
That mission was completed in 1994, when apartheid fell and South Africans chose Mandela as their first democratically elected president.
As I learned more about Mandela, I wondered how he had achieved the unimaginable, overcoming a 27-year ordeal to become the leader of Africa’s largest economy.
And, just when I thought that he had already made his mark on history, he shocked the world by announcing that he would not seek re-election after the end of his first term in 1999.
I was 14 then, old enough to understand how unusual it was for an incumbent African president to retire willingly.
In my own country, for example, people were beginning to wonder whether Moi would leave office in 2002, when his second term expired.
He had ruled Kenya for 13 years before a move in 1991 to reintroduce multi-party democracy paved the way for an election the following year.
Moi was allowed to run again, as long as he honored the constitutional two-term limit.
I feel extremely fortunate and honored that the start of my formal education coincided with Mandela’s re-emergence in African politics.
His patience, civility, and politics of reconciliation provided me a better example of democracy and good governance than any civics class could have done.
Mandela embodied the type of leader that Africans had in mind when they struggled for freedom from the European empires.
Africans wanted leaders who would reconcile and reunite them – leaders who would restore to them the dignity that colonialism had robbed.
Unfortunately for many African countries, freedom and independence ended up in the hands of a few who had tasted and become addicted to the repressive practices that Africans had spent decades fighting.
They amassed untold wealth as hunger and disease ripped their societies apart and pushed more Africans deeper into poverty.
Indeed, more than two decades after Mandela walked through the prison gates, supposedly completing Africa’s struggle for freedom, “Big Men” in countries like Congo and Zimbabwe continue to cling to power against the will of their people.
Nevertheless, I am encouraged by the fact that, since Mandela left office, many African presidents – including Moi and Thabo Mbeki, Mandela’s successor – have adhered to their countries’ constitutions and left office without a fight.
I am also hopeful that Mandela has inspired other young people like me to continue Africa’s liberation peacefully – the Mandela way.
Jumping Viruses
Scientists long anticipated that an influenza virus will spread - as now appears to be happening in Asia - from wild birds to humans, causing a pandemic.
But few predicted last year's SARS epidemic, a pneumonia caused by a coronavirus .
Prior to 2003, coronaviruses ranked very low on the scale of important human diseases, mostly being associated with the common cold.
But we have long known that coronaviruses can cause dreadful diseases in domestic animals.
We simply haven't learned our lesson.
Indeed, events of the last couple of decades - the AIDS viruses transferring from monkeys to man, followed by their global spread, being just one example - should have convinced us that, where diseases are concerned, the unexpected will happen.
After all, the "jumping" of viruses from wild animals to humans is more common than we like to think.
All types of virus strains or variants exist - somewhat akin to dogs existing as different breeds.
Veterinarians and farmers have long known of a coronavirus that can kill 90% or more of young pigs.
Less well known is the fact that cats and dogs are infected by a coronavirus that can also cause disease in pigs.
The cat coronavirus can cause lethal abdominal disease in cats, while some strains of the chicken coronavirus cause kidney disease rather than just bronchitis.
There is simply no room for complacency where viruses - or bacteria, for that matter - are concerned.
Evolution - whether of microbes or humans - involves pushing at the margins, going a little bit further than yesterday or last year, driven by the need to find additional sources of food.
Humans, unlike other creatures, may also
As we come close to other animals, their viruses come closer to us.
The outcome can be the same if we trap, enclose, and trade wild animals, such as civet cats, which seems to be the scenario that led to SARS in humans.
When a virus has been associated with its host for a very long time, it mutates to a form that grows well without killing its host, which would be a pointless outcome from an evolutionary standpoint.
A well-understood example is that of influenza viruses in wild fowl, where the virus causes infections that are hard to detect.
But if an influenza virus jumps from, say, ducks to chickens, there may be lethal consequences.
The virus is not well adjusted to the chicken, and some strains of the virus "go berserk."
It is possible that the SARS coronavirus does not cause serious disease in its natural, wild animal hosts.
Our problem arose when we enabled the virus to move from its normal home into us, by "farming" civet cats and other animals.
Many human viral diseases have not been with us very long, perhaps only ten to twenty thousand years.
Most probably, the viruses came from the wild animals in whose environment we were encroaching.
In other words, the SARS outbreak was not a novel event.
Chinese researchers have detected antibodies to SARS-like viruses in 2% of people from whom blood samples were taken in 2001 - a year before the disease first occurred.
Many animal traders tested in 2003 in a market in the epicenter of the SARS outbreak also had the antibodies - again with no history of disease.
This shows that the SARS virus has jumped species, from animals to man, on other occasions, with benign consequences.
The difference in late 2002 was, perhaps, that people were infected with a variant that "went berserk" and grew too extensively in humans.
It was bad luck.
It is also possible that - again by chance - a benign SARS virus from a civet cat mutated
Both aspects of this scenario - a virus jumping to a strange host and then mutating to a devastating form - are familiar.
Waterfowl commonly spread influenza viruses to chickens, although the outcome usually is not serious.
On occasion, however, the virus mutates to a lethal form that can kill almost 100% of its victims.
It is a highly virulent influenza virus such as this that is devastating chickens in parts of Asia.
That influenza virus has also "jumped" from the chickens to those who look after them, killing some people.
The influenza viruses established in humans for several decades originated from bird viruses.
The chronic fear of health authorities is that, by chance, another avian influenza virus will mutate and spread from person to person to spawn a global pandemic.
Human SARS might never have spread to the extent that it did (killing 800 people and devastating economies) if the problem had been openly acknowledged, with the World Health Organization involved from the outset.
Similar failings have exacerbated the consequences of today's bird-origin influenza epidemic in Vietnam, Thailand, and elsewhere.
Some countries that have the greatest reservoirs of viruses with "jump potential" are ill equipped politically, socially, and institutionally for the world to have confidence in them.
Humans will continue to push against our existing boundaries, whether out of necessity, curiosity, pleasure, or greed, so more virus jumps will undoubtedly occur.
We must trust the WHO and its associates to come to our rescue, as it did so admirably with SARS.
But those involved in human and veterinary medicine must no longer remain aloof from one another.
Recent events have made crystal clear what we already knew - that human and animal viruses are not mutually exclusive.
Jurassic Park for Sale
One bright day last September, Icarosaurus, the famous fossil of a Triassic Age gliding reptile, which had exited the halls of the American Museum of Natural History a decade earlier, was brought back to New York to roost.
Its return was a wake-up call for public education and science everywhere.
Unless action is taken, fossils will continue to be sold to the highest bidder.
Sad to say, the US is not the only country with this problem.
The story begins in 1961 with three teenagers combing the New Jersey Palisades, the cliffs surrounding the Hudson River across from New York City, searching for ancient fossils.
An old quarry was being widened and leveled, and the boys followed the bulldozers as they scraped away a stratum of earth to reveal fragile, fossil-bearing shale underneath.
One day they found an ancient reptile with long ribs that enabled it to glide between trees.
The boys brought the specimen to the Museum of Natural History, where its curator recognized the importance of the find and named it after one of the boys.
Three decades later, one of them, now a man, became sick and needed money.
He asked the Museum for compensation for the fossil.
When his multimillion-dollar demand was refused, he spoke of legal action and claimed the specimen was only on loan to the Museum.
The papers proved him correct.
So the Museum let Icarosaurus go.
The fossil was offered to the highest bidder.
After nearly ten years, when no museum or private buyer met his price, the man put Icarosaurus up for sale at auction – a shock to the world of paleontology.
When should individuals have the right to buy and sell such a fossil?
The boys who found the specimen didn’t own the fossil quarry.
So why do they have any rights to it?
Why does it not belong to everyone?
Why not put it in a public institution where scientists can study it and the public can admire it in perpetuity?
American policy on fossil artifacts is more benighted than those of most third world countries.
Each year, uncounted skeletons of dinosaurs and fossil mammals and fishes are whisked through airport customs and sold to the highest bidder.
International commercial fossil collectors flock to the American West to vacuum up duckbills, carnivores, ceratopsians, and everything that will fetch a price.
They pay landowners for exclusive collecting rights on ranches, displacing paleontologists and ruining publicly funded research and graduate dissertations.
Fossil bones are harvested and made into mounted skeletons, often with little regard for accuracy.
Some are sawn and polished to be made into clock faces, gewgaws, and souvenirs.
If these were trees, we could grow more.
But Jurrasic Park is fiction, dinosaurs will be no more.
Icarosaurus was rescued from the auction block by a philanthropic and conservation-minded businessman repelled by the thought that such valuable treasures could be lost to science and education.
Such individuals should not be pivotal to preserving the natural heritage.
The US is not alone in this problem.
China, Argentina, Brazil, and many other countries are losing their fossil resources to marketplaces, fossil conventions, and internet dealers.
International cooperation is one way to stem this tide; stronger internal laws another.
Practices vary among countries and even within them.
In Bavaria, for example, there are no regulations on the ownership of fossils found on private land, while landowners in Baden-Württember are given finder's fees for important specimens, which must be turned over to the state.
Commercial fossil collectors are trying to get US public lands - national parks and wildernesses – as open for business as private lands are.
Why should such people control the fate of irreplaceable natural resources?
What are the limits of land ownership when nature’s legacy is in the balance?
Public lands should continue to be closed to commercial exploitation.
Valuable scientific specimens, no matter who happens to own the land, should not be at the disposition of those who see only dollar signs in nature.
On the other hand, commercial collectors could work with scientists and the public.
They could excavate specimens on private lands, and on public lands, too, under the supervision of scientists who know how to recover important information about what their surroundings, such as what the rocks say about the fossil when it was alive.
Original and unique specimens would be remanded to museums for permanent care, common or incomplete specimens still be bought and sold.
Businessmen could make casts and mounted skeletons of the specimen and market them to other museums, schools, companies, and shopping centers.
In this way everyone benefits.
The public could get a piece of the history of life and the natural heritage is preserved.
Whether commercial collectors will agree to such a plan without legislative coercion remains to be seen.
So scientists, educators, and the international public must hold the line against commercial exploitation of public lands, and push for laws and treaties that stop the flow of valuable fossils across international borders – both physical borders, and those of common sense.
The ECB’s Leap into the Unknown
FRANKFURT – The European Central Bank is in the middle of a big, risky experiment.
Key interest rates have remained close to zero for six years now.
Financial markets are flooded with liquidity.
Crisis management has resulted in major market distortions, with some segments’ performance no longer explainable by fundamental economic data.
The unintended consequences of this policy are increasingly visible – and will become increasingly tangible with the US Federal Reserve’s exit from post-2008 ultra-loose monetary policy.
And yet Europe’s crisis is far from over, as the decisions by the European Central Bank’s Governing Council in June and September demonstrate.
This reflects two factors: too little ambition in carrying out essential balance-sheet corrections, and slow progress – negligible in France and Italy – in restructuring Europe’s national economies.
The ECB’s decision to double down on monetary stimulus should thus be regarded as an act of desperation.
Its key rate has been cut to 0.05%, the deposit rate is negative, and targeted longer-term refinancing operations are supposed to support bank lending.
Moreover, the asset-backed securities market is to be revived by the purchase of ABSs.
All of this is intended to flood the markets, expand the euro system’s balance sheet by €700 billion ($890 billion), and return to the balance-sheet volume recorded at the start of 2012.
The expansion of the ECB’s balance sheet and the targeted depreciation of the euro should help to bring the eurozone’s short-term inflation rate close to 2% and thus reduce deflationary risks.
For the first time in its history, the ECB appears to be pursuing an exchange-rate target.
As was the case for the Bank of Japan, the external value of the currency will become an important instrument in the framework of a new strategic approach.
Financial markets have applauded the ECB’s recent decisions.
Moreover, having “effectively thrown off all of the Maastricht Treaty restrictions that bound the bank to the model of the Deutsche Bundesbank,” as former Fed Chair Alan Greenspan put it, the ECB is prepared to break further taboos.
But for what purpose?
Particularly by guaranteeing highly indebted countries’ sovereign bonds, the ECB has actually weakened the willingness to reform, particularly in the larger European Union countries, whose decrepit economic structures are an obstacle to potential growth, and where more room must be given to private initiative.
The ECB’s willingness to buy ABSs is especially risky and creates a new element of joint liability in the eurozone, with European taxpayers on the hook in the event of a loss.
The ECB lacks the democratic legitimacy to take such far-reaching decisions, with potentially substantial redistributive effects, which implies an even greater risk to monetary-policy independence.
Indeed, the ECB already has been driven onto the defensive by the International Monetary Fund, the OECD, financial-market analysts, and Anglo-Saxon economists in the wake of feverish discussion of the risk of deflation in the eurozone.
But what is the appropriate eurozone inflation rate, given de facto economic stagnation?
Should higher nominal (that is, inflation-driven) growth replace debt-driven growth?
Europe must aim for sustainable, non-inflationary growth and the creation of competitive jobs.
The current inflation rate of 0.3% is due to the significant decline in commodity prices and the painful but unavoidable adjustment of costs and prices in the peripheral countries.
Only Greece currently has a slightly negative inflation rate.
In other words, price stability reigns in the eurozone.
This strengthens purchasing power and ultimately private consumption.
The ECB has fulfilled its mandate for the present and the foreseeable future.
There is no need for policy action in the short term.
It is, instead, the eurozone governments that must act.
But any clear division of tasks and responsibilities between governments and central banks has, it seems, been jettisoned.
Government action in many problem countries ultimately ends in finger pointing: “Europe,” the ECB, and Germany, with its (relatively) responsible policy, have all been scapegoats.
Against this background, the ECB has yielded to immense political pressure, particularly from France and Italy, to loosen monetary policy further and weaken the exchange rate.
But indulging the old political reflex of manipulating the exchange rate to create a competitive advantage will yield a short-term fix at best.
It will not eliminate the structural weaknesses of the countries in question.
The ECB is moving ever farther into uncharted territory.
In view of the insufficient balance-sheet corrections in the private sector and inadequate structural reforms, macroeconomic demand-management tools will not work.
Despite the ECB’s aggressive approach, monetary policy in the absence of structural economic reform risks being ineffective.
Simply put, more liquidity will not lead to more active bank lending until there is more transparency regarding the extent of non-performing loans and the relevant economies have become more flexible.
The ECB’s asset quality review and bank stress tests are expected to bring some clarity to the first question.
Then, more lending will occur on acceptable terms – assuming that there is corresponding demand.
But the uncertainty regarding the extent and pace of economic reforms remains.
The ECB’s recent decisions, with their focus on short-term effects, indicate that monetary policy is no longer targeted at the eurozone as a whole, but at its problem members.
Ad hoc decisions have replaced a feasible and principled medium-term strategy.
The problems created by this approach will be compounded by the unavoidable conflicts of interest with monetary policy implied by the ECB’s assumption of its new financial-stability and banking-supervision roles.
Justice Comes to Chad
N'DJAMENA, CHAD: "Since when has justice come all the way to Chad?" a former political prisoner asked as a group of torture victims discussed the idea of prosecuting the country's exiled ex-dictator Hissène Habré.
Habré, who brutalized this impoverished country from 1982 to 1990, was then living safely in a seaside villa across the continent in Senegal, enjoying the $14 million he reportedly looted from the treasury on his way into exile.
But justice did come to Chad.
It came in the form of a young Belgian judge, a Brussels prosecutor, four strapping police officers, and a court clerk, who arrived in this dusty capital to investigate charges filed against Habré in a Belgian court pursuant to that country's long-arm anti-atrocity law, which permits prosecution of the worst human rights crimes no matter where they took place.
When news of the group's arrival was announced on Chad's radio, former victims began to line up at the courthouse to tell their stories.
Habré, once backed by the United States and France as a bulwark against Libya's Moammar Quadafi, allegedly killed tens of thousands of real and suspected opponents before he was deposed by his former army chief.
Many of Habré's most brutal henchmen still occupy key security posts in the new administration, however, and coming forward remains a risky business.
The judge's visit - and the Chad government's full cooperation - seemed to give the victims courage, however.
The judge and his team visited the five N'Djamena jails, including one in the presidential compound, where Habré's American-trained political police systematically tortured prisoners.
Ismael Hachim, president of the victims' association, described how he was subjected to the "arbatachar," a common form of torture in which a victim's four limbs were tied tightly behind his back until blood circulation stopped and paralysis resulted.
Souleymane Abdoulaye showed the judge the sweltering underground cell where, as a boy of fourteen, he was crowded in with 72 other prisoners, only eleven of whom survived the near-starvation regimen.
Those left alive rested their heads on the cool stomachs of the newly dead for some relief from the heat.
Sabadet Totodet took the judge to a clearing on the outskirts of town where he was forced to dig graves for more than 500 fellow prisoners who died in custody.
The judge spent a day examining the newly unearthed files of Habré 's dreaded political police, the Documentation and Security Directorate (DDS), including their reports to Habré on massacres of rival ethnic groups and daily lists of prison deaths.
The judge also took the testimony of a number of Habré's DDS directors, and even allowed former victims to confront their torturers face to face.
The Belgian judge, everyone here now hopes, will shortly seek Habré's extradition from Senegal, where Habré's victims began their quest two years ago.
Inspired by the London arrest of Chile's ex-dictator August Pinochet, they filed complaints in Habrè's place of exile.
To everyone's astonishment, a Senegalese judge indicted Habré on charges of crimes against humanity and torture, and placed him under house arrest.
But Senegal's highest court later ruled that Habré could not be tried for crimes allegedly committed in Chad because Senegal did not have a long-arm law like Belgium's.
Responding to a plea by UN Secretary General Kofi Annan, Senegal's president Abdoulaye Wade announced that he would hold Habré pending his extradition to a country where he could get a fair trial.
No one yet thinks that Chad is that country.
Indeed, after a group of victims, emboldened by Habré's arrest in Senegal, filed criminal complaints in Chad last year against a number of alleged Habré -era torturers, the office of the prosecutor handling the file was ransacked and the victims' lawyer, Jacqueline Moudeïna, was badly injured when a police squad commanded by an ex-DDS defendant threw a grenade at her.
Belgium thus looks like the only place where Habré's victims may get their day in court.
Ironically, the judge's visit comes as Belgium's anti-atrocity law is under legal and political attack.
Last year, in a widely acclaimed trial, four Rwandans were convicted by a Belgian jury of involvement in the 1994 genocide in their country.
Since then, however, Belgian politicians have grumbled as cases have piled up against leaders such as Ariel Sharon, Yasser Arafat and Fidel Castro.
In February, after the Democratic Republic of Congo challenged an arrest warrant against its foreign minister, the International Court of Justice said Belgium had gone too far by not respecting the immunity of sitting office holders.
The Habré case poses no such problems, because Habré is no longer in office and because Chad, where the crimes were committed, and Senegal, where Habré resides, are both ready to see him tried in Belgium.
Rather, the case shows that long-arm laws like Belgium's, properly applied, can be an important tool to curtail the impunity of the perpetrators of atrocities as well as provide a forum for their victims.
Justice for Some
NEW YORK – The mortgage debacle in the United States has raised deep questions about “the rule of law,” the universally accepted hallmark of an advanced, civilized society.
The rule of law is supposed to protect the weak against the strong, and ensure that everyone is treated fairly.
In America in the wake of the sub-prime mortgage crisis, it has done neither.
Part of the rule of law is security of property rights – if you owe money on your house, for example, the bank can’t simply take it away without following the prescribed legal process.
But in recent weeks and months, Americans have seen several instances in which individuals have been dispossessed of their houses even when they have no debts.
To some banks, this is just collateral damage: millions of Americans – in addition to the estimated four million in 2008 and 2009 – still have to be thrown out of their homes.
Indeed, the pace of foreclosures would be set to increase – were it not for government intervention.
The procedural shortcuts, incomplete documentation, and rampant fraud that accompanied banks’ rush to generate millions of bad loans during the housing bubble has, however, complicated the process of cleaning up the ensuing mess.
To many bankers, these are just details to be overlooked.
Most people evicted from their homes have not been paying their mortgages, and, in most cases, those who are throwing them out have rightful claims.
But Americans are not supposed to believe in justice on average.
We don’t say that most people imprisoned for life committed a crime worthy of that sentence.
The US justice system demands more, and we have imposed procedural safeguards to meet these demands.
But banks want to short-circuit these procedural safeguards.
They should not be allowed to do so.
To some, all of this is reminiscent of what happened in Russia, where the rule of law – bankruptcy legislation in particular – was used as a legal mechanism to replace one group of owners with another.
Courts were bought, documents forged, and the process went smoothly.
In America, the venality is at a higher level.
It is not particular judges that are bought, but the laws themselves, through campaign contributions and lobbying, in what has come to be called “corruption, American-style.”
It was widely known that banks and mortgage companies were engaged in predatory lending practices, taking advantage of the least educated and most financially uninformed to make loans that maximized fees and imposed enormous risks on the borrowers.
(To be fair, the banks tried to take advantage of the more financially sophisticated as well, as with securities created by Goldman Sachs that were designed to fail.)
But banks used all their political muscle to stop states from enacting laws to curtail predatory lending.
When it became clear that people could not pay back what was owed, the rules of the game changed.
Bankruptcy laws were amended to introduce a system of “partial indentured servitude.”
An individual with, say, debts equal to 100% of his income could be forced to hand over to the bank 25% of his gross, pre-tax income for the rest of his life, because, the bank could add on, say, 30% interest each year to what a person owed.
In the end, a mortgage holder would owe far more than the bank ever received, even though the debtor had worked, in effect, one-quarter time for the bank.
When this new bankruptcy law was passed, no one complained that it interfered with the sanctity of contracts: at the time borrowers incurred their debt, a more humane – and economically rational – bankruptcy law gave them a chance for a fresh start if the burden of debt repayment became too onerous.
That knowledge should have given lenders incentives to make loans only to those who could repay.
But lenders perhaps knew that, with the Republicans in control of government, they could make bad loans and then change the law to ensure that they could squeeze the poor.
With one out of four mortgages in the US under water – more owed than the house is worth – there is a growing consensus that the only way to deal with the mess is to write down the value of the principal (what is owed).
America has a special procedure for corporate bankruptcy, called Chapter 11, which allows a speedy restructuring by writing down debt, and converting some of it to equity.
It is important to keep enterprises alive as going concerns, in order to preserve jobs and growth.
But it is also important to keep families and communities intact.
So America needs a “homeowners’ Chapter 11.”
Lenders complain that such a law would violate their property rights.
But almost all changes in laws and regulations benefit some at the expense of others.
When the 2005 bankruptcy law was passed, lenders were the beneficiaries; they didn’t worry about how the law affected the rights of debtors.
Growing inequality, combined with a flawed system of campaign finance, risks turning America’s legal system into a travesty of justice.
Some may still call it the “rule of law,” but it would not be a rule of law that protects the weak against the powerful.
Rather, it would enable the powerful to exploit the weak.
In today’s America, the proud claim of “justice for all” is being replaced by the more modest claim of “justice for those who can afford it.”
And the number of people who can afford it is rapidly diminishing.
Justice for Srebrenica’s Dead
THE HAGUE – In 1993, atrocities committed against Slavic Muslims near the Bosnian silver-mining town of Srebrenica catalyzed demands to establish a tribunal to try political and military leaders accused of war crimes in the former Yugoslavia.
The new United Nations tribunal that was formed – nearly five decades after the final judgments were rendered at Nuremberg and Tokyo – became the forerunner of ad hoc courts to prosecute perpetrators of Rwanda’s genocide, Charles Taylor and his blood-diamond butchers in Sierra Leone, and the Khmer Rouge killers in Cambodia.
The International Criminal Tribunal for the former Yugoslavia (ICTY) also gave rise to the permanent International Criminal Court to try war criminals worldwide.
Undeterred by the still-untested ICTY’s reach, Serb soldiers finally overran Srebrenica itself – despite its status as a “safe area” under UN protection – 15 years ago, on July 11, 1995, and proceeded to expel the town’s people and execute 7,600 captives.
Out of this massacre, however, the tribunal and foreign-backed war-crimes courts in Bosnia and Serbia have delivered the international justice effort’s most significant achievement to date.
With no media fanfare and limited arrest and investigative powers, and despite the foreign-policy and military “realists” who dismiss international justice as a pipedream, these judicial institutions have brought justice to Srebrenica’s dead and their survivors, and have demonstrated that justice can be delivered to victims in other conflict areas.
It is an imperfect, unsatisfying justice, to be sure, but no more imperfect or unsatisfying than that dispensed by national courts.
The ICTY ruled the Srebrenica massacre to be an act of genocide.
The tribunal and the local courts imprisoned 13 of those who gave the orders, as well as 17 execution-squad members; 11 more men, four of them leaders, are facing their reckoning.
On trial now are Radovan Karadžić, the Bosnian Serb political leader, and Jovica Stanišić, the police minister in Slobodan Milošević’s Serbia.
Of course, the Bosnian Serb commander, Ratko Mladić remains a fugitive.
But Serbia’s authorities, facing economic turmoil, cannot harbor him much longer if the United States and the European Union exert adequate pressure.
Serbia recently surrendered Mladić’s war-time diaries.
The Srebrenica trials also yielded a soul-testing record of a crime whose gravity Serb political leaders, former UN officials, and others once shamefully denied.
Thanks to the ICTY, anyone can read the transcripts of intercepted calls to deliver more “packages” to the killing fields.
A Serb district president, Miroslav Deronjić, testified that Karadžić told him: “Miroslav, those people there must be killed.”
We know when, where, and to whom Mladić issued the kill order.
The tribunal’s Web site has video of an execution.
We know that a Serb truck driver rescued a boy who survived a firing squad and, crying for his father, crawled from a twisted scrum of bodies.
We know that a Serb officer defied Mladić and refused to order his men to partake in mass murder.
The ICTY is flawed, of course.
Judges and attorneys have treated too many witnesses with condescension, as if the tribunal were doing them a favor.
Judges have sentenced too many killers to absurdly lenient prison terms, diminishing any deterrent effect that the tribunal might generate.
And they threw the book at one of Mladić’s men who pled guilty and gave damning insider testimony, eliminating the prosecution’s leverage to obtain similar admissions.
Prosecution officials also negligently incinerated personal effects of Srebrenica victims, as well as items discovered in Albania and other evidence, and then obfuscated to dodge a scandal.
New rules and procedures, as well as better training, can minimize such failings.
But without the ICTY, impunity would have reigned for the murderers of Srebrenica and of less-renowned scenes of war crimes.
Karadžić would still be flogging love potions in Belgrade.
The retired generals would be tanning beside the Adriatic.
Overwhelming proof of Croatia’s complicity with Serbia in the dismemberment of Bosnia – something the media have also ignored – would never have emerged.
And, following this anniversary of the massacre, it is safe to say that, without international justice, all of Srebrenica’s victims – including my brother-in-law’s father, Huso Čelik, and the others who are still missing – would still be moldering anonymously in mass graves.
Their loved ones would be waiting still to gather at the town’s memorial cemetery, where, on this anniversary, they dropped to their knees, drew their hands over their eyes, and recited the funeral prayer to Allah for forgiveness of the living and the dead.
Justifying Humanitarian Intervention
In 1998, I visited Central Asia's former Soviet republics for talks--concerning the democratic development that was--or should have been--taking place in those newly independent countries.
My hosts were former communist leaders who were now more or less democratically elected presidents.
Each spoke easily about institutions, democratic procedures, and respect for the rule of law.
But human rights were another matter entirely.
In each country, I presented lists of political prisoners and asked about their fates.
In one country, the president immediately decided to free a man accused of plotting a coup.
But even this seeming success was morally ambiguous.
The president had not made a political decision; he had bestowed a personal favor.
I was receiving a gift--itself merely another demonstration of the president's arbitrary exercise of power--not proof of respect for moral principles.
In one country, I spoke with a leader of the Islamic fundamentalist opposition, which had waged a long civil war against the government.
This man now styled himself as chairman of a "Committee of National Reconciliation."
Guards armed to the teeth surrounded him, yet he firmly supported the notion of democratization.
Indeed, he saw it as his surest route to power, because the vast majority of the population thought exactly as he did.
Democracy, he hinted more ominously, would enable him to "eliminate"--he did not dwell on the exact meaning of the word--those who did not.
In such democracies without democrats, "human rights" are more problematic to discuss than procedural formalities, because they are not thought of as "rights" in the legal sense, but merely as pangs of conscience, or else as gifts to be exchanged for something else of value.
This distinction matters because it points to the limited effectiveness of formalized legal norms as a means of promoting human rights.
This gap between human rights and the behavior of rulers has brought about the greatest shift in the conduct of international affairs in our time--the advent of "humanitarian intervention."
It arose initially outside established international institutions and the UN system, originating with the French group, Doctors Without Borders, which deemed human rights to be a value superior to national sovereignty.
Doctors Without Borders introduced the concept of "the right of intervention" in humanitarian disasters, bypassing the strictures of traditional international law.
The international system rather quickly adopted (and transformed) this notion, and numerous humanitarian military interventions followed--in Somalia, Haiti, Bosnia, Kosovo, East Timor, and Sierra Leone.
As a rule, such operations were conducted under the Security Council's mandate.
A notable exception was NATO's intervention in Kosovo, which was not explicitly sanctioned by the UN.
The Kosovo intervention was also notable in another way: its legitimation was entirely moral in character, responding to the Milosevic regime's ethnic cleansing campaign, which had created a real threat of yet another immense humanitarian disaster.
NATO's intervention in Kosovo is a precedent that US Secretary of State Colin Powell used to justify the war with Iraq.
But, however compelling the cause of humanitarian military intervention, such actions must be brought under the umbrella of the UN Charter.
Promoting respect for human rights was, after all, the guiding principle behind the UN's establishment.
Its tasks in this area were affirmed in the 1948 Universal Declaration of Human Rights and the 1975 Helsinki Accords, which give human rights legal supremacy over the sovereignty of individual states.
Yet a glaring contradiction exists between the universality and supremacy of human rights and the principles of sovereignty and non-interference in states' internal affairs, which are also enshrined in UN documents.
One way to overcome this chasm is to introduce into the UN Charter a new chapter devoted to human rights and to reformulate Chapter IV, which concerns the use of force in international relations.
Moreover, the principle of sovereignty itself needs redefinition.
What the world needs is a system of legal injunctions--bilateral and multilateral agreements, as well as appropriate monitoring and supervisory institutions--to regulate the use of force for humanitarian reasons.
Legal restraints on humanitarian intervention are necessary because dictators too often use it to justify criminal aggression.
Adolf Hitler minted this strategy when he dismantled Czechoslovakia--supposedly in defense of the Sudeten Germans--and later when he invaded my homeland, Poland.
As Milosevic showed again in the 1990s, when he claimed to be defending innocent Serbs in Croatia and Bosnia, justifying military intervention solely on the basis of moral principles leaves too much room for their distortion and abuse.
This is why debates about reforming the Security Council should focus not on changing its composition, but on its mission.
The Council should be made explicitly responsible for "human security" and be given a responsibility to protect it, in addition to its current role in safeguarding more traditional notions of international security.
The principle of non-intervention in a state's internal affairs was never absolute, and globalization confronts it with a radical challenge.
The term "international relations" assumes the Westphalian order of commitments among sovereign nation states, which replaced the medieval order of communities defined by personal fealty to a king.
But today it is the Westphalian order that is in decline, along with the significance of state borders.
In this wider and uncertain context, the need to regulate humanitarian military intervention looms large.
Biomedicine in Reverse
LA JOLLA, CALIFORNIA – Pundits have long predicted that biology would dominate the twenty-first century, just as physics dominated the twentieth century.
But biomedical research has yet to achieve the kind of productivity increases that accompanied the industrialization of combustion, electricity, and electronics.
Will the “century of biology” turn out to be little more than a fantasy?
The problem largely comes down to a decrease in biomedical research-and-development expenditure.
As it stands, roughly $270 billion is invested in the field each year, producing an impressive half-million research publications, but only 20-30 new medicines.
The discrepancy between spending and output adheres to what has come to be known as “Eroom’s law” – Moore’s law in reverse.
Moore’s law observes the increase in computer processing power over time – specifically, that the number of transistors that can be placed cheaply on an integrated circuit doubles every 18-24 months.
By contrast, Eroom’s law charts the regress in new drug approvals, noting that the costs of developing a new medicine double roughly every nine years.
This phenomenon is rooted in high rates of drug failure and lengthening technology cycles.
The probability that a drug entering clinical trials will gain approval from the US Food and Drug Administration has dropped from 23.9% in 1997 to 10.4% today.
While the first recombinant insulin in the 1980’s took less than a decade from testing to approval, monoclonal antibodies and gene therapy took more than 20 years to reach the same milestone.
So far, pharmaceutical and biomedical research firms have responded to Eroom’s law by cutting R&D or moving it to less expensive sites in Asia, shifting their focus to less prevalent diseases, and sourcing innovation externally.
As a result, growth in biomedical R&D spending has declined from more than 9% annually in the early 2000’s to less than 3% today.
But, while this strategy will moderate the impact of Eroom’s law, it will ultimately prove inadequate to sustain the industry.
The industry’s ability to support R&D budgets has already led to the closure of more than 30 major research sites.
The United States bore the brunt of these closures, with biomedical R&D expenditure declining by more than $12 billion from 2007 to 2012.
And Asia – where biomedical R&D is growing rapidly, but from a small base – is unlikely to pick up the slack.
Asian countries have tended to be reluctant to shoulder the cost of developing new medicines, with reimbursements falling far short of US levels, and their R&D productivity will not match that of the US and Europe for several more years.
Moreover, biomedical research firms are abandoning certain diseases in order to avoid the large-scale trials that they require, focusing instead on “orphan diseases” like cystic fibrosis, which demand smaller clinical trials that have a higher probability of success, leading to drugs that can cost more than $100,000 annually per patient.
But, with insurers and payers worldwide becoming increasingly vigilant about controlling costs, this business model’s long-term prospects are unclear.
Finally, while drugs are increasingly produced by small companies that larger pharmaceutical firms then acquire, funding for these start-ups is drying up.
Likewise, universities – the main source of biomedical innovation – are facing dwindling budgets.
This year, funding for the US National Institutes of Health (NIH) – one of the world’s leading medical research centers – is a billion dollars lower than in 2012.
Restoring funding for basic biomedical research appears to have lost favor with policymakers, because it does not offer immediate self-sustaining economic returns.
And funding for basic research remains a low priority in emerging economies like China, where it accounts for less than 15 cents for every research dollar spent (compared to 35 cents in the US).
With no panacea in sight, several other solutions are gaining traction.
To maximize investment, the public and private sectors are increasingly pooling resources.
For example, under the Accelerating Medicines Partnership, the NIH and ten biopharmaceutical companies will fund a five-year effort to validate promising targets in three disease areas.
Other initiatives include efforts in Alzheimer’s research to test competing drugs against one shared “placebo arm” in clinical trials, and in cancer research to test multiple therapies in a single trial and identify the most responsive patients.
These pooled resources will be directed to a few high-priority diseases, identified through an evaluation of the marginal benefit of additional R&D. Japan’s focused strategy to champion stem-cell R&D should serve as a model for other countries.
At the same time, governments will have to implement policies aimed at guiding investment toward specific diseases.
For example, increased NIH funding, extended market exclusivity, and relaxed regulatory hurdles in the US resulted in a renaissance in antibiotic drug development.
Society will also have to share the cost of drug development.
Regulatory agencies worldwide may follow the United Kingdom’s lead in embracing adaptive licensing.
Under this approach, drugs are conditionally approved and marketed, with the revenue generated following the conditional approval covering the costly trial for proving efficacy.
Such a scheme facilitates lower drug pricing, while overcoming the effect of Eroom’s law on investment in treatments for many diseases.
Whether these efforts will succeed in putting biomedical research on a more sustainable footing remains an open question.
This could still turn out to be biology’s century.
Just Say No to Bush
For three years, America's president has pursued a unilateralist agenda, ignoring all evidence that contradicts his positions, and putting aside basic and longstanding American principles.
Take global warming.
Here Bush is conspicuously absent without leave (AWOL in military jargon).
Time and again, he questions the scientific evidence.
(Of course, Bush's academic credentials were never very impressive.)
Bush's position is more than wrong; it is an embarrassment.
Indeed, when asked by Bush to look into the matter, America's National Academy of Sciences came to a resounding verdict (the only one they could honestly reach) that greenhouse gases are a menace.
But America's automakers love their gas-guzzlers, and Bush's oil industry pals want no interference with their destruction of the planet's atmosphere.
So no change in policy.
In Iraq, Bush again pursued a unilateralist agenda, saying that there was incontrovertible evidence of a link with Al Queda, and that Saddam had weapons of mass destruction.
Even before the invasion, there was overwhelming evidence that Bush was lying.
Detection technology made it clear that Iraq did not have nuclear weapons, as chief UN inspector Hans Blix pointed out.
It's possible that Bush read those reports, but that they were beyond his comprehension.
It is also possible that he did not believe what he read.
Whatever the case, American policy was not based on evidence.
Since the Cold War's end, America is the world's sole superpower.
Yet it has failed to exercise the kind of leadership needed to create a new world order based on principles like fairness.
Europe and the rest of the world are aware of this; but they don't vote in American elections.
Even so, the rest of the world is not powerless.
Instead, the rest of the world should just say no.
America has not won the hearts and minds of those in Iraq; indeed, it has lost them, just as it has lost the hearts and minds of much of the world.
The US wants to retain control of the occupation, but it wants others to receive the bullets now mowing down American soldiers.
UN soldiers should not bear the consequence of America's failure to manage the occupation, so US cries for financial help should fall on deaf ears.
What sympathy does the US agenda deserve, when President Bush has ladled out tax cuts of hundreds of billions of dollars to the richest people in the world.
It was not long ago that a Republican Congress held up $1 billion of UN dues, and threatened that it would only pay what it owed if the UN satisfied a raft of conditions.
America's unwillingness to provide small sums to wage peace contrasts sharply with the huge amounts Congress quickly granted to wage war.
Advocates of a softer approach say that if the UN stays on the sidelines, it will become irrelevant; by participating in Iraq, it will build trust with America, so that the next time a dispute such as this arises, America will turn earlier to the UN.
Nonsense.
Those in the White House today believe in
I normally write about economics, not politics.
But in the new world of globalization, there is greater economic interdependence, which requires more collective action, rules and institutions, and an international rule of law.
Economic globalization has, however, outpaced political globalization; the processes for decision making are far from democratic, or even transparent.
In no small measure, the failures of globalization can be traced to the same mindset that led to the failures in Iraq: multilateral institutions must serve not just one country's interest, but all countries'.
At the recent World Trade Organization (WTO) meeting in Cancun, the developing countries put America--and Europe--on notice that this system can no longer continue.
In that case, Europe was as much the culprit as America.
Europe has no trouble seeing the dangers of unilateralism in America's actions, in everything from abandoning Kyoto to its refusal to join the International Criminal Court.
But Europe should also reflect on its own practices, including trade policy, where the EU works systematically to unbalance the global trade regime against developing countries, despite promising that those imbalances would be corrected in the current round of trade negotiations.
Here, Europe acts like America, which has long talked the rhetoric of free trade, while its actions have long ignored the principles.
Forget about America's rhetoric of upholding fairness and justice; in trade negotiations, the US ignores the pleas of the poorest countries of the world to eliminate the cotton subsidies that have had so devastating an effect on them.
If we are to make the world politically more secure and economically more stable and prosperous, political globalization will have to catch up with economic globalization.
Principles of democracy, social justice, social solidarity, and the rule of law need to be extended beyond national boundaries.
Europe and the rest of the world will have to do their part--abiding by these principles themselves, and giving each other, and America, a shove in the right direction.
Right now, this entails `Just Saying No' to President Bush.
Merkel’s American Minders
BERLIN – Germans used to joke that Chancellor Angela Merkel’s penchant for communicating via fleeting text messages effectively marked the end of traditional historiography.
Well, at least American spy agencies seem to have kept full track of the behind-the-scenes communications – in Berlin and beyond.
Regrettably, US President Barack Obama and his administration have yet to comprehend the scale and severity of the damage caused to America’s credibility among its European allies.
The problem is not that countries spy on each other (they all do).
Rather, it is the extent of US intelligence gathering and America’s attitude toward allies that is most damaging.
Previous transatlantic clashes over diverse issues such as climate change, the detainees at Guantánamo Bay, and the Iraq War exposed a breakdown of mutual understanding, sometimes stemming from sharp differences over how best to achieve certain common objectives.
But the wiretapping crisis and other troubling revelations from the former American intelligence contractor Edward J. Snowden point to a deeper problem: a crisis of mutual distrust that risks becoming a serious transatlantic rift at a time when closer political, economic, and security cooperation between Europe and the United States is needed more than ever.
There is probably nothing more destructive to friendly relations among democratic states than behavior by an ally that causes the other side to lose face at home.
After all, it was Merkel who tried to calm the waters after the NSA scandal first hit Europe this summer.
That is why the alleged US wiretapping of her cellphone is so damaging for her, both personally and politically.
As someone who served in Merkel’s government from 2009 to 2011, I must admit that I was rather careless in the use of mobile communication devices while in office.
In principle, of course, one should always assume that foreign intelligence services attempt to listen in on other governments’ conversations.
But it makes a big difference whether such activities are conducted by Russia or China, or by an ally that repeatedly emphasizes the importance of close transatlantic friendship and cooperation.
Obama’s personality makes matters more complicated.
It is hard to recall any other US president who has been so personally disconnected from other heads of state.
Instead of immediately reaching out to a friendly country, he decided to lie low and send White House Press Secretary Jay Carney to issue a rather awkward statement that the US government “is not” and “will not” monitor Merkel’s communications.
Of course, it does not take much interpretive skill to recognize a clumsy attempt to avoid confessing that US intelligence services targeted Merkel in the past.
The Obama administration appears to have failed to ask itself some basic questions.
How could it justify spying on a leader who is among America’s closest allies in NATO and in the Afghanistan mission – a leader whom he invited to the Rose Garden to bestow the Presidential Medal of Freedom, the highest honor that America can give to a foreigner?
Moreover, Merkel was not the only target.
In the case of France, how could the Obama administration justify targeting an ally that has tried hard to build trust with the US by providing much-needed military and political cover in Libya and Syria?
French President François Hollande, too, must feel like a fool – not just as a result of US surveillance, but also because he probably received no advance warning from his intelligence services about Obama’s sudden decision to ask Congress to pass a resolution prior to using military force in Syria.
Finally, how can Obama explain to the EU (whose delegation in Washington, DC, was also bugged) that it is crucially important to enter into honest, serious, and comprehensive negotiations to conclude a Transatlantic Trade and Investment Partnership?
Prominent voices in Europe – including the president of the European Parliament and the leader of Germany’s Social Democrats (who is about to form a coalition government with Merkel) – are already demanding a suspension of the TTIP talks.
The potential economic cost of a delay or a failure to achieve closer transatlantic economic integration could total hundreds of billions of dollars – in addition to the incalculable damage done to America’s credibility in Europe.
There is much talk today about the risks of a new era of American isolationism and a lack of US leadership in the world.
It is important to remember that isolationism can be triggered not only by a potential retreat from global affairs, but also by the rather imprudent use of America’s hard and soft power on the world stage.
To escape the NSA mess, various options will be discussed.
The new Franco-German push for an intelligence-sharing agreement with the US is probably difficult to put into practice, especially considering that spy services operating around the world are not always fully controllable.
As a first step, Obama must rediscover the great communications skills that propelled him to the White House in the first place.
From a public-diplomacy perspective, his handling of the surveillance scandal has been a complete failure.
To contain the damage and begin to rebuild much-needed trust, Obama must issue a credible apology to Merkel, other Western allies, and their citizens.
In the American political context, issuing an apology, especially to foreign governments, is often viewed as a sign of weakness.
In the case of the NSA scandal, an unequivocal apology by Obama is the only viable solution to leave the past behind and move forward.
Unfortunately, the window of opportunity for such a gesture to be viewed in Europe as a much-awaited olive branch – and a sign of real American strength and conviction – is closing fast.
Karzai\u0027s Crisis of Legitimacy
Reading the press of late, you might conclude that all Harmid Karzai, Afghanistan's chief, needs to pacify his country is an expanded international peacekeeping presence and faster delivery of aid.
The carrot of international assistance and the stick of peacekeeping forces will allegedly prevent Karzai's government from dying in the cradle.
Swayed by this logic, the US has pushed to accelerate delivery of aid--a task it knows well how to achieve, having provided nine-tenths of all emergency relief money to Afghanistan even during the Taliban years.
President Bush's announcement that the US, Japan, and Saudi Arabia have created a $180 million fund to reconstruct Afghanistan's trunk highways is the most recent measure to speed up the flow of development assistance.
The international security force, staffed mainly by Turks, is being upgraded and its mandate extended to the entire country.
When Paul Wolfowitz, the US Deputy Secretary of Defense, announced this, it represented a reversal of America's earlier position, which favored confining the peacekeeping forces to Kabul lest they get in the way of US operations against Al Qaeda and Taliban diehards.
The trouble with this carrot-and-stick strategy is not that it is wrong but that it is insufficient.
It fails to recognize that neither expanded peacekeeping nor efficiently delivered aid will achieve their desired ends until the Afghan public accepts the Karzai government as fairly representing its interests.
Today it does not.
The American Revolution can be traced directly to the growing sense among colonists that Parliament's rule in North America was illegitimate.
The speed with which debates in the French Estates General evolved into a revolt against the Bourbons reflected the deepening sense among ordinary Frenchmen that Louis XVI's rule lacked legitimacy.
Neither the best-armed government nor the richest can long survive unless broad sections of their population accept its rule as legitimate.
Britain failed in America and the French crown failed in France because the governed ceased to recognize their authority.
Legitimacy shifted from the regime to its opponents, who soon brought it down.
Something like this is now occurring in Afghanistan.
If the causes of this development are not addressed, Karzai's government will inevitably collapse, and with it the entire international process that began a year ago.
Why do Afghans perceive as illegitimate a government put in place by an agreement to which all factions assented, a government that was confirmed by a duly constituted National Assembly (Loya Jirga) held under international patronage?
The reason is that Karzai's government, and Karzai himself, are controlled by a small group of powerful men associated with the former Northern Alliance and dominated by Minister of Defense Marshall Fahim.
Foreign commentators often acknowledge that a clique of Tajiks exerts inordinate influence in the government. This understates the government's exclusiveness.
Many key figures are from a handful of villages in just one valley, the Panjshir.
Pashtuns living in the strategically important south and east, together with Shi'a Muslim Hezaras, constitute some two-thirds of Afghanistan's population.
Neither group feels adequately represented in Karzai's councils.
Many Uzbeks, Turkmens, and even some Tajiks, feel excluded.
Every politically active person in the country understands the reality of this power grab.
They know that Fahim used the Loya Jirga to promote Karzai, a Pashtun, because he was malleable and without independent forces of his own.
They tremble at the fact that Marshall Fahim's army, the country's largest, sits in garrisons ringing Kabul.
They are frustrated at the international community's blindness to their fate.
This frustration, and Fahim's efforts to suppress it, lies at the heart of many of the recent bloody events now blamed on Taliban die-hards, uncooperative local warlords, and Al Qaeda.
Many dissenting Pashtuns did back the Taliban, mostly because it promised to bring peace and order.
Many warlords are indeed carrying on their struggle, often with foreign (and even American) backing.
Al Qaeda, too, has an interest in crippling Karzai's government and is happy to exploit its Achilles heel.
The only way to resist these threats is to address their root cause: the imbalance of power at the top of the regime and within ministry staffs that is gradually robbing Karzai's government of legitimacy.
The fact that Karzai is decent and well intentioned does not alleviate his problem, which he is incapable of addressing alone.
The solution must be to use firmness backed, if necessary, by military strength, to enable Karzai to face down Marshall Fahim.
Now that the international peacekeeping force is to operate nationally, Marshall Fahim must be told to lift his stranglehold on Kabul.
Now that aid is beginning to flow, Karzai must be told that its continuation is contingent on his bringing prominent Pashtuns and Hezaras into the inner circles of government.
The US and UN are both acting on the basis of a naïve hope that Karzai's legitimacy problem can somehow be "finessed."
They are misjudging the seriousness of the situation.
If action is not taken soon, Karzai will not survive.
The next government would likely be anti-UN, anti-western, anti-American, and anti-secular--and form its political and strategic alliances accordingly.
Of course, a new government may not emerge at all.
Either way, unless decisive measures are taken within weeks or at most months, Afghanistan will be on its way to yet another round of bloody conflict.
America’s Debt-Ceiling Debacle
NEW YORK – When Greece’s sovereign-debt crisis threatened the euro’s survival, US officials called their European counterparts to express bewilderment at their inability to resolve the issue.
Now, the tables have turned, with American leaders on the receiving end of such calls.
The most recent threat of a US debt default has been avoided, but only temporarily.
Another battle looms early next year, when the US government’s debt ceiling will have to be raised again.
In Europe, the absence of a political union – considered a necessary precondition for sharing debt obligations and, thus, putting the euro on a sound footing – is widely held to lie at the root of the continent’s crisis.
But the US crisis suggests that political union is no panacea for managing sovereign debt.
For weeks, Republicans in the House of Representatives threatened to keep the government shuttered – thereby preventing it from extending its borrowing authority beyond the October 17 deadline – in order to challenge laws that were enacted by Congress as a whole and upheld by the Supreme Court.
In the eurozone, the main source of disagreement has been how debts in need of refinancing were incurred – that is, whether they contravened agreed debt limits.
In the United States, the bone of contention has been the purpose that the funds will serve.
The difference is ultimately minor, and should not be allowed to overshadow what is really at stake: democratic self-governance in an age of high public debt.
In 1773, the so-called Sons of Liberty staged the Boston Tea Party under the slogan, “No taxation without representation.”
And America’s founders clearly regarded legislative control over the budget as a key pillar of democratic governance.
Taxation remains the dominant source of government revenue in most developed countries.
But the role of debt finance has been growing – and, with it, the need to refinance old debt when total expenditure, including debt service, exceeds total revenue.
Broad access to deep and liquid international debt markets has enabled policymakers to bypass some of the most challenging aspects of democratic governance.
Rather than tackle thorny questions about how to allocate limited resources, democratic governments seem to believe that they can have it all: low taxes and ample debt finance to fund wars or electorate-pleasing programs.
Growing debt burdens suggest that this form of cheap politics has run its course.
But the problem runs deeper than that.
Excessive reliance on debt finance has undermined basic tenets of democracy, with government finance increasingly determined not by electoral cycles and political deliberation, but by repayment schedules.
In times of economic growth, debt finance provides an easy escape from difficult choices.
When the economy falters, however, creditors – and those who are willing to entertain the prospect of default – can impose their will on everyone else.
This power follows from the nature of debt.
A tax is a quasi-equity claim of the government on its citizens’ financial expectations.
Gaining the consent of the majority of citizens to raise taxes can be a tall order politically, and has become more difficult as capital mobility has narrowed the tax base and triggered a race to the bottom on rates.
Debt, by contrast, is a contractual commitment to repay creditors who are largely oblivious to how the money is spent.
By incurring debt, states trade an element of sovereignty – the flexibility to alter course over time in response to the electorate’s demands – for the ability to fund expenditures without being compelled to navigate the political minefield of raising taxes.
Creating viable institutions for managing public debt in a democracy is difficult.
The mechanisms currently on offer are treaty-based, constitutional, and statutory debt ceilings, pegged as a ratio of GDP, or, as in the US, established in nominal terms.
Treaty-based debt ceilings are largely toothless, as Europe’s experience suggests.
Constitutional debt limits have yet to be tested in times of emergency, when new funding is needed quickly.
And, as the recent impasse in the US demonstrates, political minorities with effective veto power can abuse statutory ceilings in an economic downturn, when dependence on external debt finance increases.
Indeed, to the extent that reliance on debt finance undermines self-governance, debt-ceiling abuse for partisan gain becomes more likely.
The problem is that democracies have yet to learn how to manage debt effectively.
While political union may stabilize the euro, it will not sustain or strengthen democracy unless Europe’s leaders address this critical failing.
Even&nbsp;the world’s oldest continuous democracy is not immune to the erosion of self-governance.
Commitments never to raise taxes have left the US dependent on debt finance – and, more frightening, on those who are ready to veto refinancing it.
Central Banking’s New Club Class
NEW YORK – In the wake of the 2007-2008 financial crisis, the world’s central banks played a critical role in rescuing the global financial system.
They stepped in when private markets froze, acting as lenders and dealers of last resort, and provided additional liquidity to grease the wheels of finance.
These central banks offered their services primarily to domestic actors, but they also extended their largess to foreign private entities.
Indeed, even foreign states benefited after central banks entered into swap agreements, giving one another unlimited access to their respective currencies.
This has created a worrying precedent.
Originally created as a temporary fix in 2007, the swap lines established at that time connecting the US Federal Reserve, the European Central Bank, and the Swiss National Bank have been extended each time a new crisis has unsettled the markets.
More recently, however, six central banks announced that they had made their swap lines permanent.
But did these central banks have the legal authority to do so?
And, even if they did, should they have used it?
The original swap lines might fairly be classified as emergency measures.
But what may be permissible and justifiable in a financial emergency may not be appropriate as standard practice during normal times.
Central bankers might argue that we have entered a state of permanent market crisis analogous to the never-ending “war on terror.”
But even this frightening analogy does not answer the question of whether central banks should assume positions of power in international relations.
Of course, a central bank’s mandate is price stability in the national economy that it serves, and price stability is influenced by exchange rates.
So a case can be made that central banks should have the power to intervene in foreign-exchange markets, and that this power should – at least in times of crisis – include commitments to foreign central banks to provide unlimited liquidity in the domestic currency.
What is less clear, though, is whether the same justification can be used by central banks to create permanent swap lines with just a few other central banks of their choosing.
This is akin to an announcement on a cruise ship approaching an iceberg that the crew will definitely rescue first-class passengers but not necessarily others.
Not every country’s central bank – not even every “friendly” country’s central bank – has been invited to join the swap-lines club. Membership is restricted to the United States Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Swiss National Bank, and the Bank of Canada.
There may be a legal rationale for this neo-imperial elitism.
The so-called C-6 might argue that, given their price-stability mandate, only central banks of countries whose economic fate might destabilize domestic prices should receive privileged access to domestic currency.
But the choice of monetary partners is nonetheless a matter of judgment.
For example, why Canada and not Mexico?
Aren’t both members of NAFTA?
Why Switzerland and not Brazil, one of the largest emerging markets?
Picking partners is an inherently political act.
It bestows access to high-demand currencies on a select few, relatively strong, countries precisely when the weakest countries are at their most vulnerable. Having been left outside the club, these countries have no option but to self-insure by accumulating foreign-exchange reserves.
Indeed, empirical research suggests that countries without explicit or implicit access to liquidity tend to hold much higher reserves than the privileged few – only to be blamed by the same privileged few for contributing to global imbalances by hoarding excess reserves.
The C-6 swap club’s members may be correct in thinking that global finance requires more proactive central banking.
But is it fair or right that they should be allowed to take matters into their own hands and determine a system of international monetary management designed to serve their own interests, with little regard for other, equally exposed, countries?
The joint announcement by the C-6 cements the great divide between first-class and coach economies.
We are being asked to trust that these select central banks will do the right thing.
Trust is important.
But when it comes to political decision-making, democratic control and accountability are essential.
The False Promise of Digital Democracy
MUNICH – Most people used to think of the Internet as a force for good.
It was supposed to allow us not only to shop, stay in touch with former classmates, and find a new sushi restaurant; it was also supposed to empower us politically by allowing the disenfranchised to make their voices heard, help activists mobilize supporters, and enable ordinary citizens to publicize evidence of official corruption or police brutality.
But doubts have crept in – and not only since the revelations of government agencies’ use of the Internet to spy on us, our leaders, and one another.
The Internet’s impact on politics is deeply ambiguous.
Unless and until it becomes a space where rules and rights apply like they do in the real world, that is unlikely to change.
Early enthusiasts dreamed that mere access to the Internet would help spread democracy.
This did not happen.
At the end of the 1990’s, 4% of the world’s population was using the Internet; today, almost 40% do.
But the share of countries classified as “not free” or “partly free” by the democracy watchdog Freedom House has hardly changed over the same period.
In the battle between networks and hierarchies, the hierarchies seem to be winning more often than not.
One reason is that governments have become as skillful at using the Internet and modern communications technology as activists.
Autocratic governments use it to track down protest and opposition leaders, as we have recently seen in Ukraine.
They employ armies of people to vet and skew online conversations.
Some people even argue that the Internet acts as a political release valve that helps dictators stay in power.
But even the most determined autocrat cannot fully control political activity online.
Tech-savvy young people tend to circumvent attempts at official censorship.
And yet Internet activists are not necessarily gaining power.
Internet-inspired movements usually have lasting impact only if they generate traditional political activity, such as street protests or the establishment of political parties.
For this, they need leadership, which net activists tend to reject, because they view themselves as pure grassroots movements.
In the absence of viable strategies and clear direction, most Internet-aided uprisings have dissipated quickly.
The Internet has thus turned out to be less potent than expected in the fight against tyranny.
Nor is its effect on established democracies straightforward.
While democracies have arguably become more vibrant, their politics have become more volatile.
Consider the media.
Only 16% of Americans in their 40’s read (print) newspapers these days; the share among 20-somethings is 6%.
Digital media offer great diversity, easy access, and opportunities to comment.
But they encourage people to retrieve only information and commentaries that fit their existing views.
While traditional media can present their readers with balanced coverage, digital media can fuel political polarization.
Moreover, political firebrands, populists, and radicals, from Italy’s Beppe Grillo to American Tea Party members, use social media and the blogosphere to appeal directly to potential supporters.
The Internet allows many political upstarts to amass a large following quickly, only to disappear just as fast.
But the ebb and flow can unsettle established politics – for example, when centrist parties move to the right to lure voters away from more extreme parties.
At the same time, young people seem to think that they have exhausted their civic duties by tweeting and blogging.
They no longer join political parties, trade unions, and other interest groups.
The average age of party members in Germany is over 50.
In the United Kingdom, a retiree over 60 is more likely to be a trade-union member than a worker under 30 is. Without civil-society organizations, politics becomes more fragmented and less cohesive – and finding workable compromises becomes harder.
The revelations of snooping by the US National Security Agency (NSA) will hasten a more realistic assessment of the Internet’s effect on politics, providing a welcome opportunity to consider what has gone wrong and what could be put right.
A multitude of small steps could help – such as giving pro-democracy movements the technology needed to evade autocrats, presenting digital media in a balanced way, and making political parties more responsive to their members.
But the fundamental challenge is to suffuse the Internet with the same rules, rights, and values that pervade our democracies.
Freedom cannot be absolute, whether online or offline.
Human rights, and not only the right to personal privacy, must be respected in cyberspace.
Because no single body or government sets rules for the entire Internet, any digital code of conduct would have to emerge from the grassroots – and thus would be highly imperfect.
But perhaps the NSA has helped start the discussion: though we may not know which rules we want, we may now have gained a much better idea of which rules we do not want.
Reason and the End of Poverty
WASHINGTON, DC – The World Bank has set two new goals for itself: ending extreme and chronic poverty in the world by 2030, and promoting shared prosperity, defined in terms of progress of the poorest 40% of the population in each society.
Now that the United Nations General Assembly Open Working Group on Sustainable Development Goals has endorsed the Bank’s anti-poverty target, debate about how to achieve it has revived an old question: Will the benefits of economic growth trickle down on their own, reaching all, or will we need targeted redistributive policies?
Many people remain in the growth-only camp only because of an error in deductive reasoning; unlike committed ideologues, they can be weaned from their position.
That is why the World Bank’s second goal of promoting shared prosperity is important not only in itself, but as an essential complement to the goal of ending poverty.
Recognizing that some “frictional” poverty will inevitably persist over the next two decades, the World Bank’s formal target is to reduce the percentage of people living below the poverty line – defined as daily consumption of less than $1.25 (in purchasing-power-parity terms) per person – to less than 3%.
World Bank research predicts that if all countries grow at the same rates that they did over the past 20 years, with no change in income distribution, world poverty will fall to 7.7% by 2030, from 17.7% in 2010.
If they grow faster, at the average rates recorded in the 2000’s, the poverty rate will fall to 5.5%.
These numbers suggest that growth alone is unlikely to get us to the 3% target.
But this is mere suggestion.
One can argue that we should nonetheless rely on growth and simply adopt measures that encourage more of it.
In a new paper, David Dollar, Tatjana Kleineberg, and Aart Kraay analyze empirically the relationship between growth and poverty.
Their comprehensive study draws on high-quality survey data from 118 countries and reaches a clear conclusion: the bulk of poverty eradication that took place in recent decades was driven by economies’ overall income growth.
More specifically, 77% of the cross-country variation in the income growth of the poorest 40% of the population reflects differences in average income growth.
Findings like these lead many people to conclude that eradicating poverty requires us to rely on overall growth, and that direct government policy interventions have little merit.
But this is a wrong conclusion, which illustrates a lapse of logic.
To see why, suppose that in 1930 an economist conducted an empirical study of what cured infectious diseases, and, analyzing masses of data from previous years, concluded that 98% of all treatable illnesses were cured by non-antibiotic medicines – “tradicines,” which include all traditional medicines of various schools.
This conclusion would most likely be valid, because the use of antibiotics before 1930 – just two years after Alexander Fleming discovered penicillin and years before it was fully workable as a cure – was rare and mostly inadvertent.
But now suppose that the economist goes on to argue that, therefore, it would be silly to give patients penicillin, because we know that 98% of all treatable diseases were cured by tradicines, and penicillin is not a tradicine.
That is a wrong deduction, based on evidence that does not exist.
What the economist’s study in 1930 showed is that tradicines accounted for 98% of the cases that were successfully treated. It does not show that penicillin does not work.
This is a common mistake.
We often hear assertions like, “We must rely on the private sector to create jobs, because studies show that 90% of past jobs were created by the private sector.”
If we accepted this reasoning, we would have to accept a Soviet researcher’s assertion in the late 1980’s that we must rely on the state to create jobs, because 90% of past jobs were created by the state.
On job creation, there is both theory and evidence to support the conclusion that the private sector is the main driver of sustainable expansion (which is not to deny that there may be scope for tweaking public policies to make the private sector more employment-friendly).
But on poverty eradication, theory and evidence show that policy interventions, when skillfully designed, can play a significant role.
Some of these policies already exist; some have to be crafted – the antibiotics of our time.
In India, the government has tried for decades to get cheap food to the poor.
Cost-benefit analysis has led many to declare it a failed policy.
But the fault lies with the program’s method, which is to rely on the state both to collect the food from farmers and to deliver it to the poor.
Around 45% of food grain leaks out and disappears in this process.
This means that the program’s leaks need to be repaired, not that the entire scheme should be abandoned.
A carefully designed public-private partnership – in which the state gives a subsidy directly to the poor, who then buy food from private farmers and traders – would benefit all.
Obviously, when the poor have more (and healthier) food, their nutrition improves; when better-nourished people go to school, they become more productive; the same is true of health services.
Overall economic growth is important, but the poor should not have to wait until its benefits trickle down to them; with the right anti-poverty policies, governments can encourage trickle-up growth as well.
A Radioactive Bank to be Welcomed
CANBERRA – One of the many things the world has learned from the Iran nuclear saga is that its leaders made a mistake, when negotiating the Nuclear Non-Proliferation Treaty (NPT) in the 1960s, in not doing anything to constrain uranium enrichment and plutonium reprocessing.
This failure apparently stemmed from the belief – long since proven wrong, certainly in the case of uranium – that the only states ever likely to possess that technical capability already possessed nuclear weapons, or (like Germany) were totally committed never to acquire them.
As a result, any member state can argue for its “inalienable right” under the NPT to pursue any stage of the nuclear fuel cycle.
Although any such right extends only to activities for “peaceful purposes,” the loophole is gaping.
Any technically capable state – and there are now dozens of them – can build uranium enrichment facilities with the official purpose of producing fuel for nuclear power or research reactors, but which are nonetheless inherently capable of producing the much higher-grade fuel needed for nuclear weapons.
It is not for nothing that such facilities have been described as “bomb starter kits,” and that Iran’s progress down that path – whether deliberately designed to give it a latent weapons breakout capability or not – has spooked so many others in the international community.
That is why there was so much pressure to produce the deal now on the table, which dramatically limits Iran’s enrichment capability.
While renegotiating the NPT itself to close the enrichment loophole seems for now a lost cause, there are other ways to address this proliferation risk.
One of the most important, and long-advocated, strategies is to demonstrate to countries that rely on nuclear power, or are planning to develop it, that they do not need their own uranium-enrichment program to ensure their fuel supply’s security.
Concern about fuel-supply security has always been Iran’s main publicly stated justification for acquiring its enrichment capability – a justification that its critics assert was manufactured simply to conceal a covert weapons agenda.
Whether or not that is the case, all current and would-be nuclear power producers are entitled to be anxious about having an absolutely assured fuel supply, given the major economic and social consequences they would face in the event of a disruption.
Yes, until now, the commercial nuclear-fuel market has worked well: no power reactor has had to shut down because of fuel-supply disruptions.
But the cut-off of the supply of other energy resources (notably Russia’s disruption of natural-gas supplies to Ukraine and, by extension, to Western Europe) has raised legitimate concerns about whether this could happen with nuclear fuel.
Although the issue has been much debated, until now there has been only modest progress in developing fuel-supply assurance arrangements that would meet this concern.
Russia, with the support of the International Atomic Energy Agency (IAEA), maintains a sizeable reserve of low-enriched uranium (LEU) at its international center in Angarsk; but, in the current security environment, there has been understandable international reluctance to rely on it.
The United Kingdom has proposed a supply guarantee of its own, though it has so far attracted little attention.
Now, in an important new development, to be officially launched this month (on August 27), Kazakhstan is establishing a major new international fuel bank, which it will operate on behalf of the IAEA.
The new facility should once and for all remove the main excuse that has been advanced, sincerely or not, for building and maintaining homegrown enrichment capability.
Scheduled to commence operations in 2017, the Kazakh fuel bank will store up to 90 tons of LEU, sufficient to refuel three typical power-producing light water reactors.
While Kazakhstan will physically operate the bank, the uranium will be owned and controlled by the IAEA, and made available to non-nuclear-weapon states if, for any reason, they cannot secure the LEU they need from the commercial market.
Provided the state in question is in compliance with its comprehensive non-proliferation safeguards agreement with the IAEA, it can draw the required fuel from the bank and transfer it to a fuel fabricator to make fuel assemblies for the reactors involved.
The Kazakh fuel bank has very wide and high-level international backing, helped by the country’s credentials.
A former nuclear test-site state, Kazakhstan willingly gave up the nuclear weapons on its territory when the opportunity arose with the dissolution of the Soviet Union, and it has been a strong and consistent advocate of nuclear arms control and disarmament ever since.
The bank has been funded by voluntary contributions, including $50 million from the Nuclear Threat Initiative, a United States-based NGO, $49 million from the US government, up to $25 million from the European Union, $10 million each from Kuwait and the United Arab Emirates, and $5 million from Norway.
Aside from the Iran deal, good news on nuclear weapons has been sparse in recent years.
The new Kazakh fuel bank is a significant step toward achieving a world free of nuclear weapons.
Those who have worked to establish it deserve the world’s gratitude.
Northern Europe’s Drag on the World Economy
MADRID – In recent years, China’s current-account surpluses – which have averaged almost $220 billion annually since 2000 – have attracted much criticism from the rest of the world.
But Germany’s similar-size surpluses – which have averaged about $170 billion since the euro’s introduction in 1999 – have, until recently, largely escaped scrutiny.
The difference, it was argued, was monetary union.
So long as the eurozone as a whole was relatively balanced, Germany’s surpluses were considered irrelevant – just as, say, Texas’s surpluses have never been considered an issue in the United States.
Chinese surpluses, by contrast, were seen as a cause of global imbalances.
This argument is correct in the sense that it is the current-account surplus or deficit of a monetary union as a whole that can be expected to have exchange-rate implications.
And, unlike China, Germany no longer has a “national” exchange rate that can adjust in response to its current-account surplus.
These factors – together with the lack of trade data for regions within countries – have led economists only rarely to consider countries’ internal surpluses or deficits.
But, in net terms, a region within a country – or, like Germany, a country or sub-region within a monetary union – still “subtracts” from national and global aggregate demand if it exports more than it imports.
Witness how expenditure cuts by US state governments – many of which are constitutionally required to balance their budgets – frustrated, to some degree, America’s massive federal-government stimulus in 2010-2011.
For this reason, it is relevant to ask whether a country as large as Germany – or even a large state like California or Texas – augments or depletes global aggregate demand.
(In fact, as sovereign countries, California and Texas would have been the world’s 12th and 14th largest economies, respectively, in 2012 – ahead of the Netherlands, Mexico, and South Korea.)
That question is all the more important, because the Netherlands and Austria, two of Germany’s Northern European eurozone neighbors, continue to run current-account surpluses, while the Southern European crisis countries have reversed their previously large deficits, as austerity has squeezed domestic demand and made room for an increase in exports.
As a result, the eurozone as a whole will produce a surplus close to $260 billion this year, which represents a new global imbalance that is more directly comparable to China’s in the past decade.
Europe’s non-eurozone surplus countries – Sweden, Denmark, Switzerland, and Norway (all of which tie their exchange rates to the euro to some degree) – magnify this global imbalance.
Northern Europe – including these four countries and Germany, the Netherlands, and Austria – is running a massive current-account surplus of about $550 billion.
Meanwhile, China’s surplus is unlikely to exceed $150 billion this year.
In fact, the highest level that China’s annual surplus has ever reached was around $400 billion in 2007-2008 – when the US was poised to introduce trade sanctions against the country, because it viewed this imbalance as a threat to the stability of the US and the world economy.
What is most problematic about the eurozone’s situation is that unemployment in some of the crisis countries – Spain and Greece – remains above 20%.
These countries are trying to achieve a difficult “internal devaluation” – that is, a reduction in their domestic unit labor costs relative to the eurozone’s stronger economies – while the overall eurozone surplus caused by Northern Europe puts upward pressure on the exchange rate, undermining their competitiveness outside the monetary union.
Spain and Greece have managed to achieve an internal devaluation of about 5% this year vis-à-vis Germany, but their competitiveness vis-à-vis the US and dollar-linked countries has not improved, because the euro has appreciated by more than 5% against the dollar.
And, indeed, the euro should appreciate, because the eurozone as a whole is now running a large current-account surplus.
One can only pity the Southern European countries.
They should almost thank the French for their inability to impose effective austerity measures and thereby still run a small current-account deficit, which has prevented the eurozone surplus from becoming even larger.
But an abundance of pity alone will not help.
Northern European countries, which have ample room to increase wages and implement expansionary policies, must do so.
This would directly benefit Northern European citizens themselves, while helping to keep the euro down and stimulate growth and adjustment in Southern Europe and the global economy as a whole.
A Great Breakdown?
ISTANBUL – This month –&nbsp;the centenary of the outbreak of World War I – is an opportune time to reflect on big risks.
As Michael Spence recently warned, the international order’s widening security deficit, reflecting the weakening of whatever global governance we have, is fast becoming the biggest risk facing the world economy. The same point could have been made a century ago.
On July 30, 1914, Austrian warships bombarded Belgrade, five weeks after the assassination of Archduke Franz Ferdinand in Sarajevo.
By mid-August, the world was at war.
The armistice that was agreed four years later, after about 20 million people had died, amounted only to an interlude before the horror of World War II.
In the years preceding August 1914, until the assassination of the archduke, the global economy performed relatively well: trade expanded worldwide, financial markets seemed healthy, and the business community shrugged off political problems as either temporary or irrelevant.
Markets and economic activity can withstand a great deal of political stress and uncertainty –&nbsp;up to the point that the international order breaks down.
Today, for example, the economic mood is rather upbeat.
The International Monetary Fund forecasts 4% growth for the world economy in 2015, while stock-market indices are up in many parts of the world; indeed, the Dow Jones reached an all-time high in July.
In the last few months, however, a civilian airliner was downed in eastern Ukraine by a sophisticated Russian-made missile, tensions have increased around disputed islands in the South and East China Seas, and chaos in the Middle East has continued to spread.
The Israeli-Palestinian conflict is in one of its worst phases in decades, with the renewed frustration unleashed by the massive loss of civilian life in Gaza likely to encourage extreme reactions.
Terrorists may be on the verge of designing much less detectable weapons.
There are other, less “political” dangers.
West Africa is afflicted by a terrible outbreak of the deadly Ebola virus, which will kill thousands of people.
The outbreak has so far remained regional, but it serves as a reminder that in an age of air travel by millions, no one is safe from the spread of infectious disease.
Containing a disease or a terrorist threat by curtailing international travel or transport would devastate the world economy.
Thinking about August 1914 should remind us that great catastrophes can materialize gradually.
Leaders can be “sleepwalkers” who fail to manage risk by, say, establishing institutions that can channel the rival interests and claims that fuel international conflict.
Such sleepwalking by policymakers caused the financial meltdown of 2008 as well.
Its consequences were not as deadly, though the political effects of mass unemployment and the heightened perception of economic insecurity are still with us.
These examples should spur the world to find ways forward for cooperative action.
But the opposite appears to be happening.
The United Nations seems more paralyzed than ever. The US Congress still has not approved the IMF reform package agreed in 2010, weakening one of the most important international institutions.
Partly because the United States makes capital increases and governance reforms in global financial institutions so difficult, the BRICS countries (Brazil, Russia, India, China, and South Africa) have launched their own development bank, to be based in Shanghai.
Likewise, instead of providing a shining example of supranational cooperation and pooled sovereignty for the twenty-first century, the European Union remains mired in rather petty disputes. While it still cannot fully agree on the design of its banking union, it is allowing Prime Minister Viktor Orbán of Hungary, a member country, to denigrate the democratic and liberal values upon which the EU rests.
The way forward cannot be a return to the past, with its clashing nation-states. The future can be secured only by strong cooperation among all those committed to liberal democracy and the rule of law, with no double standards or excuses, and by patient strengthening of international institutions that embody these values and can translate them into practice.
Whenever a global or regional power acts in a way that contradicts these values, or allies itself closely with those who do, it undermines the international order, which should deliver security and increasing prosperity (and to some degree has).
The global economy holds great promise, but it is a promise that can be realized only in an international system based on rules, consent, respect, and a shared sense of justice.
The fact that neither the mayhem in the Middle East nor the crisis in Ukraine seem to touch financial markets should not lull us into complacency.
The memory of August 1914 should remind us how the world stumbled into catastrophe.
As we know – or should know – from the example of climate change, big risks must be managed, even if the probability of worse-case outcomes is low.
Catching Up at Different Speeds
PARIS – With weak demand in advanced countries now impeding growth in emerging economies, including major players in Asia and Latin America, many are arguing that the era of income convergence has come to an end.
Nothing could be further from the truth.
As I have argued before, convergence of emerging countries’ real average incomes, in the aggregate, with advanced countries’ incomes is likely to continue into the 2020’s.
That process started in the late 1980’s, and continued unabated, except in the years around the Asian financial crisis in 1997-1998. The pace of convergence accelerated further during, and just after, the global financial crisis of 2008-2009: the aggregate average differential in per capita income growth increased to more than four percentage points in the 2008-2012 period, from a little more than two percentage points in the two decades before.
As the advanced economies recover, however weakly, the growth differential is likely to narrow again, perhaps to about two percentage points, which still implies steady convergence at a decent pace.
In that sense, it is not “the end of the party” for emerging markets, as some claimed early last summer, when US Federal Reserve Chairman Ben Bernanke’s suggestion of a possible “taper” of the Fed’s policy of quantitative easing triggered a “mini-crisis” in several of the more vulnerable emerging markets.
These economies have since recovered a significant part of the lost ground in terms of exchange rates and asset prices.
A major part of the economic-convergence process that has been taking place since the late 1980’s has been due to “catch-up” growth.
The emerging markets developed the institutions and the skills base needed to import and adapt technology, which is easier than generating new technology from scratch. The pace of catch-up growth declines only gradually over time, as the less advanced economies slowly move closer to the technological frontier.
The catch-up process also takes place within countries, as labor moves from low-productivity rural activities to higher-productivity urban activities, and as low-productivity firms in all sectors emulate their more advanced domestic counterparts.
Moreover, the transfer and diffusion of technology has been facilitated greatly over the last few decades by increased foreign direct investment, the information revolution, which has facilitated access to knowledge, increased trade, and the globalization of financial markets.
These factors apply to emerging countries generally.
Why, then, do Latin American economists seem to share a cautious – even pessimistic – mood about future growth and convergence in the region, whereas most Asian economists, while conceding that further structural reforms are needed, believe strongly that Asia will continue to converge rather rapidly?
Beyond global factors that apply to all, rapid catch-up growth requires sufficient investment in both physical and human capital.
New manufacturing techniques and new products or product improvements are usually embodied in new machines and skills.
China has invested about 43% of its GDP, on average, during the 2000-2013 period.
Emerging Asia, excluding China but including India, has invested about 28% of GDP over the same period, while the investment share for Latin America has been just 21%.
That alone probably explains much of the difference among China, in a category of its own, emerging Asia, and Latin America.
The quality of skills and education cannot be measured as easily by a single figure, but there is ample evidence that Latin America has also lagged behind most of Asia when it comes to skills accumulation.
Many other factors, of course, influence growth and convergence: macroeconomic stability, the efficiency and robustness of the financial sector, the terms of trade, the quality of public administration, demographic factors, and political factors.
There also is variation within regions, including among provinces of China.
(Likewise, Africa’s growth performance has improved spectacularly since the turn of the century, but variance within the continent is even larger than elsewhere.) Nonetheless, in terms of the likely strength of the convergence process that globalization has facilitated, it is important to distinguish between Latin America and Asia, and, within Asia, to distinguish China from the rest of the continent.
China’s economy will most likely continue to converge rapidly, though its annual growth rate may fall from 9% to 7%.
The rest of emerging Asia will also converge reasonably quickly, though not as quickly as China.
Latin America, however, will likely converge only very slowly in the absence of major structural reforms that increase its ability to invest and improve the quality of education.
There will surely be exceptions to this general trend, but there are some stable regional characteristics.
Overall, however, basic economics, which has always stressed the need to save and invest in order to grow, still explains a lot.
Latin America and Asia operate in the same global economy, with access to similar technology and markets.
If Latin America invests around 20% of its national income in a sustained manner, while emerging Asia invests close to 30% – including investments in education – emerging Asia will converge significantly more rapidly.
Democracy in Europe
ROME – A real struggle over who will preside over the European Commission has begun. Though the center-right European People’s Party won only a narrow plurality of 221 seats in the 751-seat European Parliament, center-left, green, and liberal MEPs have all rallied behind the EPP’s candidate, Jean-Claude Juncker, as the “legitimate” choice.
The opposition, led by British Prime Minister David Cameron with the support of “sovereignists” across Europe, particularly in Scandinavia, but also in Hungary, contends that someone whom the majority of European citizens hardly know, cannot claim any kind of political legitimacy.
German Chancellor Angela Merkel is now in a bind.
Though she endorsed Juncker before the election, she never really backed the notion that the European Parliament should have a decisive part in selecting the Commission’s president.
She was certain that no party would win an absolute majority, but she did not foresee that almost all representatives from moderate parties would back whichever candidate won a plurality, making it difficult to appoint anyone else.
The larger issue at stake is whether Europe is prepared to establish the common political space that is needed to manage the monetary union and strengthen the European Union’s influence in world affairs.
Most economists agree that in the absence of advanced fiscal-policy coordination and a real banking union, Europe’s monetary union cannot succeed.
This does not bother the United Kingdom, which has no desire to join the eurozone.
Among eurozone members, however, the need for greater political integration is broadly accepted, and not just by the economic and political elites.
Moreover, as Russia’s recent assertions of power in Ukraine and elsewhere in the former Soviet Union demonstrate, European countries need to deepen their security cooperation and develop a common energy policy.
And, though cooperation in areas such as of data privacy, financial-sector regulation, and climate change may not require the degree of political integration that a common currency does, it would benefit greatly from stronger political cohesion and a more profound sense of shared European identity.
The pan-European parties’ nomination of Spitzenkandidaten for the Commission presidency – and the three direct debates among the nominees – marked the start of building a genuine supranational European political space.
Indeed, the endorsement of Juncker by the Social Democrats, the Greens, and the Liberals reflects their belief in the need for such a space.
The candidates, particularly Martin Schulz, the leader of the Party of European Socialists, campaigned beyond their national borders.
But Europe still has a long way to go, which is apparent from the fact that only a minority of European citizens followed the campaign.
A supra-national political space can develop only if European politics gains visibility, influence, and credibility.
For this reason, Europe’s leaders should reach a compromise on the next Commission president quickly and transparently, thereby dispelling the impression among ordinary citizens that European politics is shaped by a dysfunctional process of behind-the-scenes horse-trading.
As usual, Merkel has a critical role to play.
Her endorsement of a candidate whom she knew Cameron would vehemently oppose was a serious mistake, because it strengthened the hand of those in the UK who want to leave the EU.
Merkel must now determine how to forge a compromise that does not discredit the Europe-wide democratic process, which currently has more support in Germany than in any other large European country.
To this end, support from Italian Prime Minister Matteo Renzi – whose party won 41% of his country’s vote, arguably making him the only real winner at the national level – could help.
The stakes are high – and not just for Europe.
The world needs a thriving, cohesive EU to advance democratic principles, facilitate conflict resolution, protect the global commons, promote peace, and build trust across borders.
The alternative – already gaining traction – is the resurgence of naked power politics and dangerous xenophobia.
Without a shared European political space, everyone will be much worse off.
Revamping Europe’s Tattered Social Contract
WASHINGTON, DC – For most of the beginning of 2014, the eurozone seemed to be in a state of recovery – weak and unsteady, but nonetheless real.
In April, the International Monetary Fund estimated that overall GDP growth would reach 1.2% this year, with slowly declining unemployment, up from its previous forecast of 1% growth.
With the threat of unsustainably high interest rates in the countries of the eurozone periphery having disappeared, the path to moderate recovery was supposedly open, to be followed by some acceleration in growth in 2015.
While it is important not to overreact to quarterly figures, recent data, as well as some of the revised data for the first quarter, are deeply disappointing.
The pessimism of two years ago has returned – with good reason.
Italy is in an outright recession, and, far from showing hoped-for signs of vitality.
French growth is close to zero.
Even Germany’s GDP declined in quarterly terms in the first half of the year.
Finland, a staunch supporter of firm austerity policies, is in negative territory for the first half of the year.
Nominal interest rates for periphery countries’ sovereign debt have remained extremely low, and, even when taking into account expectations of very low inflation (or even deflation), real interest rates are low.
The eurozone now is facing not only a financial crisis, but a stagnation crisis.
Tensions with Russia may make recovery even more difficult, and it is unlikely that the eurozone can attain 1% growth in 2014 without major policy changes.
The European Central Bank has announced that it will offer new monetary-policy support and has decided to use all instruments short of direct quantitative easing (it is still not buying sovereign bonds).
But it is far from clear whether the proverbial horse led to water will actually drink.
If growth and employment expectations remain dismal, it will be difficult to rekindle demand, particularly private business investment, no matter how low interest rates are, or how many resources banks have for potential lending.
ECB President Mario Draghi’s message in his speech last month in Jackson Hole, Wyoming, as well as at his September press conference was a clear call for more fiscal support to boost effective demand.
The essential economic problem is clear: there is an almost desperate need for more fiscal space in the eurozone to boost aggregate demand, including more investment in Germany.
But there is also a persistent need for deep structural reforms on the supply side, so that fiscal stimulus translates into sustainable long-term growth, not just temporary spurts and further increases in countries’ debt ratios.
What the “best” structural reforms actually are remains a matter for debate.
But in most countries, they include some combination of tax, labor-market, service-sector, and education reforms, as well as reforms in territorial administration, particularly in France.
These reforms should seek to achieve a thoroughly revamped social contract that reflects the realities of twenty-first-century demographics and global markets, but that also remains sensitive to Europeans’ commitment to distributive fairness and political equality, and insures citizens against shocks.
It is easy to call for “reforms” without specifying their content or taking into account the social, historical, and political context.
At the same time, it will not be possible to design this new social contract country by country.
Europe has become too interwoven in myriad ways – not just in purely financial and economic terms, but also psychologically.
It must have come as a surprise to many that it was a German court, not a French one, that banned Uber, the mobile app that is revolutionizing the taxi business.
If the new social contract cannot be forged Europe-wide, it must at least apply to the eurozone to enable the necessary structural reforms.
Otherwise, given that the politics and economics of eurozone reform are inseparably linked, fiscal expansion could prove to be as ineffective as efforts by monetary policymakers to foster growth.
Italy’s finance minister, Pier Carlo Padoan, is rightly pushing for a eurozone “reform scorecard,” which would enable direct comparison among national reforms.
But, beyond such a scorecard, the will to overcome the stagnation trap must be more than a sum of national wills.
Germany must be reassured by what is happening in France and Italy; conversely, Southern Europeans must be able to trust that their efforts will gain additional traction from greater investment throughout the region, particularly in Germany.
A new social contract will not appear out of thin air.
Now is the time for the new European Commission to propose – and the new European Council and European Parliament to endorse – a political pact to legitimize and sustain the reforms needed to solve Europe’s economic problems.
Good Governance and Economic Performance
BERLIN – The debate about emerging countries’ growth prospects is now in full swing.
Pessimists stress the feared reversal of private capital flows, owing to the US Federal Reserve’s tapering of its purchases of long-term assets, as well as the difficulties of so-called second- and third-generation structural reforms and the limits to “catch up” growth outside of manufacturing.
Optimists argue that the potential for rapid growth remains immense, owing to better macroeconomic fundamentals and the promise of best-practice technology spreading throughout the emerging world.
So who is right?
Recent events point once again to the importance of good governance and responsive political systems, a familiar topic in studies of long-term economic growth.
Countries that appeared successful for a long time, such as Turkey or Thailand, suddenly seem to face obstacles related to governance and the ability to forge domestic political compromises.
The resulting divisiveness and dysfunction are surely bigger threats than the Fed’s tapering.
It is the nature of governance that determines whether people deploy their talents and energy in pursuit of innovation, production, and job creation, or in rent seeking and lobbying for political protection.
And here the contrast between Egypt and Tunisia may turn out to be an object lesson in what makes the difference between success and failure.
In Egypt, the old regime under Hosni Mubarak, having failed to democratize, collapsed in the face of massive protest.
A low-turnout election gave a plurality of the popular vote to the Muslim Brotherhood, which came to power alone and proceeded to ignore good governance and alienate all except its most fervent followers.
The Brotherhood’s approach to governance also explains the mess it made of the economy.
Instead of trying to build non-partisan and competent regulatory institutions, all positions were stacked with political followers.
Unfortunately, the military intervention last July gave rise to yet another regime that seems unable to build durable institutions that could foster political reconciliation and deliver inclusive growth.
Tunisia may give us an example of the opposite scenario: a real constitutional compromise supported by an overwhelming majority (reflected in a 200-16 vote in the National Constituent Assembly).
If that compromise holds, stability will take hold, markets will function, Tunisia will attract investment, and tourism will thrive again.
At the heart of the difference between the two cases is a vision of governance that makes such compromise possible.
Such a vision presupposes an assurance that a winner-take-all system will not be established, as well as broad agreement that regulatory institutions should be reasonably non-partisan and staffed with competent professionals.
China’s long-lasting success is sometimes given as a counterexample to the importance of good governance for economic performance.
The Chinese example certainly calls into question a strong correlation between multi-party democracy and economic growth.
Democracy is of course something valuable in itself and can be desired independently of its effect on economic growth.
But, in the context of economic performance, it is important to emphasize that there is a huge difference between dictatorial regimes, where a single individual monopolizes all power – à la Mubarak or Syrian President Bashar al-Assad – and China, where there has been competition and contestability within a large communist party.
And it is the party, operating as a fairly inclusive and meritocratic institution, not an autocratic leader, that has governed in the post-Mao period.
Lack of reasonably independent regulation and competent public administration – or, worse, one-person dictatorships – lead inexorably to economic waste and inefficiency, and eventually to political turmoil.
This is true even in cases like Venezuela, where large oil revenues masked the underlying weakness for a while.
In the complex global economy of the twenty-first century, sustained good economic performance requires a panoply of well-functioning institutions that do not fall within a single leader’s purview.
For example, successful economies require a reasonably independent central bank, and competent bank supervision that does not get dragged into short term politics.
They also need regulatory agencies in sectors such as telecommunications and energy that can pursue policies in accordance with broad goals established by the political process, but with appointees selected according to nonpartisan criteria who then exercise their authority in a way that fosters competition open to all.
When credit decisions, public procurement, construction contracts, and price determination reflect only short-term and purely political goals, good economic performance becomes impossible – even in countries with large natural-resource endowments.
In countries with little or no such endowments – where innovation, competitive efficiency, and a focus on production rather than rents is all the more important – the lack of good governance will lead to failure more rapidly.
All of this implies that analyzing the determinants of economic success is a subject not just for economists.
Why do some societies achieve the compromises needed to sustain an independent judiciary and a modern regulatory framework – both necessary for an efficient modern economy – while others perpetuate a partisan, winner-take-all approach to governance that weakens public policy and erodes private-sector confidence?
The contrast is starkest in emerging countries, but differences also exist among the advanced economies.
Perhaps Germany’s ability to reach sociopolitical compromise – again demonstrated by the formation of a right-left coalition after the 2013 elections – has been more fundamental to its recent economic success than the details of the fiscal and structural policies it has pursued to achieve it.
The Exaggerated Death of Inflation
CAMBRIDGE – Is the era of high inflation gone forever?
In a world of slow growth, high debt, and tremendous distributional pressures, whether inflation is dead or merely dormant is an important question.
Yes, massive institutional improvements concerning central banks have created formidable barriers to high inflation.
But a significant part of a central bank’s credibility ultimately derives from the broader macroeconomic environment in which it operates.
In the first half of the 1990s, annual inflation averaged 40% in Africa, 230% in Latin America, and 360% in the transition economies of Eastern Europe.
And, in the early 1980s, advanced-economy inflation averaged nearly 10%.
Today, high inflation seems so remote that many analysts treat it as little more than a theoretical curiosity.
They are wrong to do so.
No matter how much central banks may wish to present the level of inflation as a mere technocratic decision, it is ultimately a social choice.
And some of the very pressures that helped to contain inflation for the past two decades have been retreating.
In the years preceding the financial crisis, increasing globalization and technological advances made it much easier for central banks to deliver both solid growth and low inflation.
This was not the case in the 1970s, when stagnating productivity and rising commodity prices turned central bankers into scapegoats, not heroes.
True, back then, monetary authorities were working with old-fashioned Keynesian macroeconomic models, which encouraged the delusion that monetary policy could indefinitely boost the economy with low inflation and low interest rates.
Central bankers today are no longer so naive, and the public is better informed.
But a country’s long-term inflation rate is still the outcome of political choices not technocratic decisions.
As the choices become more difficult, the risk to price stability grows.
A quick tour of emerging markets reveals that inflation is far from dead.
According to the International Monetary Fund’s April 2014 World Economic Outlook, inflation in 2013 reached 6.2% in Brazil, 6.4% in Indonesia, 6.6% in Vietnam, 6.8% in Russia, 7.5% in Turkey, 8.5% in Nigeria, 9.5% in India, 10.6% in Argentina, and a whopping 40.7% in Venezuela.
These levels may be a big improvement from the early 1990s, but they certainly are not evidence of inflation’s demise.
Yes, advanced economies are in a very different position today, but they are hardly immune.
Many of the same pundits who never imagined that advanced economies could have massive financial crises are now sure that advanced economies can never have inflation crises.
More fundamentally, where, exactly, does one draw the line between advanced economies and emerging markets?
The eurozone, for example, is a blur.
Imagine that there was no euro and that the southern countries had retained their own currencies – Italy with the lira, Spain with the peseta, Greece with the drachma, and so on.
Would these countries today have an inflation profile more like the United States and Germany or more like Brazil and Turkey?
Most likely, they would be somewhere in between.
The European periphery would have benefited from the same institutional advances in central banking as everyone else; but there is no particular reason to suppose that its political structures would have evolved in a radically different way.
The public in the southern countries embraced the euro precisely because the northern countries’ commitment to price stability gave them a currency with enormous anti-inflation credibility.
As it turned out, the euro was not quite the free lunch that it seemed to be.
The gain in inflation credibility was offset by weak debt credibility.
If the European periphery countries had their own currencies, it is likely that debt problems would morph right back into elevated inflation.
I am not arguing that inflation will return anytime soon in safe-haven economies such as the US or Japan.
Though US labor markets are tightening, and the new Fed chair has emphatically emphasized the importance of maximum employment, there is still little risk of high inflation in the near future.
Still, over the longer run, there is no guarantee that any central bank will be able to hold the line in the face of adverse shocks such as continuing slow productivity growth, high debt levels, and pressure to reduce inequality through government transfers.
The risk would be particularly high in the event of other major shocks – say, a general rise in global real interest rates.
Recognizing that inflation is only dormant renders foolish the oft-stated claim that any country with a flexible exchange rate has nothing to fear from high debt, as long as debt is issued in its own currency.
Imagine again that Italy had its own currency instead of the euro.
Certainly, the country would have much less to fear from an overnight run on debt.
Nevertheless, given the huge governance problems that Italy still faces, there is every chance that its inflation rate would look more like Brazil’s or Turkey’s, with any debt problems spilling over faster price growth.
Modern central banking has worked wonders to bring down inflation.
Ultimately, however, a central bank’s anti-inflation policies can work only within the context of a macroeconomic and political framework that is consistent with price stability.
The 4% Non-Solution
PARIS – For some time now, there has been concern that central bankers have “run out of bullets.”
Having lowered their policy rates to near zero, they have engaged in increasingly extravagant measures such as “quantitative easing” and “forward guidance.”
Given the fog cast over real economic activity by the financial crisis, it is difficult to offer a definitive assessment of just how well or badly those measures have worked.
But it is clear that there must be a better way to do things.
There is no longer any reason to let the zero bound on nominal interest rates continue to hamper monetary policy.
A simple and elegant solution is to phase in a switchover to a fully electronic currency, where paying interest, positive or negative, requires only the push of a button.
And with paper money – particularly large-denomination notes – arguably doing more harm than good, currency modernization is long overdue.
Using an electronic currency, central banks could continue to stabilize inflation exactly as they do now.
(Citigroup’s chief economist, Willem Buiter, has suggested numerous ways to address the constraint of paper currency, but eliminating it is the easiest.)
A second, less elegant idea is to have central banks simply raise their target inflation rates from today’s norm of 2% to a higher but still moderate level of 4%.
The idea of permanently raising inflation targets to 4% was first proposed in an interesting and insightful paper led by IMF chief economist Olivier Blanchard, and has been endorsed by a number of other academics, including, most recently, Paul Krugman.
Unfortunately, the problem of making a smooth and convincing transition to the new target is perhaps insurmountable.
When Blanchard first proposed his idea, I was intrigued but skeptical.
Mind you, two years previously, at the outset of the financial crisis, I suggested raising inflation to 4% or more for a period of a few years to deflate the debt overhang and accelerate wage adjustment.
But there is a world of difference between temporarily raising inflation to address a crisis and unhinging long-term expectations.
After two decades of telling the public that 2% inflation is Nirvana, central bankers would baffle people were they to announce that they had changed their minds – and not in some minor way, but completely.
Just recall the market’s “taper tantrums” in May 2013, when then-Fed Chairman Ben Bernanke suggested a far more modest turn in monetary policy.
People might well ask why, if central bankers can change their long-term target from 2% to 4%, they could not later decide that it should be 5% or 6%?
Given the likelihood of a confused, mistrustful public, it is hard to find any deep rationale for a 4% target.
At least the existing 2% inflation target stands for something, because central bankers can portray it as the moral equivalent of zero.
(Most experts believe that a true welfare-based price index would show significantly lower inflation than government inflation statistics indicate, because official data fail to capture the benefits of the constant flow of new goods into the economy.)
There is an analogy to the problems countries faced when they tried to re-establish the gold standard after World War I. Until the war, money was backed by gold and could be redeemed at a fixed rate.
Though the system was highly vulnerable to bank runs and there was little scope for a monetary stabilization policy, people’s confidence in the system enabled it to anchor expectations.
Unfortunately, the system completely collapsed after the war broke out in August 1914.
Revenue-desperate combatants were forced to turn to inflation finance.
They could not simultaneously debase the currency and back it with gold at a fixed rate.
After the war, as things settled down, governments tried to return to gold, partly as a symbol of a return to normalcy.
But the revived inter-war gold standard ultimately fell apart, in no small part because it was impossible to rebuild public trust.
A move by central banks to a long-term 4% inflation target risks triggering the same dynamic.
Fortunately, there is a much better way.
Moving to an electronic government currency would not require a destabilizing change in the inflation target.
Minor technical issues could easily be ironed out.
For example, ordinary citizens could be allowed zero-interest-transactions balances (up to a limit).
Presumably, nominal interest rates would move into negative territory only in response to a deep deflationary crisis.
But when such a crisis does occur, central banks could power out of it far more quickly than is possible today.
And, as I have argued elsewhere, governments have long been penny-wise and pound-foolish to provide large-denomination notes, given that a large share are used in the underground economy and to finance illegal activities.
Moving to a twenty-first-century currency system would make it far simpler to move to a twenty-first-century central-banking regime as well.
Malthus, Marx, and Modern Growth
CAMBRIDGE – The promise that each generation will be better off than the last is a fundamental tenet of modern society.
By and large, most advanced economies have fulfilled this promise, with living standards rising over recent generations, despite setbacks from wars and financial crises.
In the developing world, too, the vast majority of people have started to experience sustained improvement in living standards and are rapidly developing similar growth expectations.
But will future generations, particularly in advanced economies, realize such expectations?
Though the likely answer is yes, the downside risks seem higher than they did a few decades ago.
So far, every prediction in the modern era that mankind’s lot will worsen, from Thomas Malthus to Karl Marx, has turned out to be spectacularly wrong.
Technological progress has trumped obstacles to economic growth.
Periodic political rebalancing, sometimes peaceful, sometimes not, has ensured that the vast majority of people have benefited, albeit some far more than others.
As a result, Malthus’s concerns about mass starvation have failed to materialize in any peaceful capitalist economy.
And, despite a disconcerting fall in labor’s share of income in recent decades, the long-run picture still defies Marx’s prediction that capitalism would prove immiserating for workers.
Living standards around the world continue to rise.
But past growth performance is no guarantee that a broadly similar trajectory can be maintained throughout this century.
Leaving aside potential geopolitical disruptions, there are some formidable challenges to overcome, mostly stemming from political underperformance and dysfunction.
The first set of issues includes slow-burn problems involving externalities, the leading example being environmental degradation.
When property rights are ill-defined, as in the case of air and water, government must step in to provide appropriate regulation.
I do not envy future generations for having to address the possible ramifications of global warming and fresh-water depletion.
A second set of problems concerns the need to ensure that the economic system is perceived as fundamentally fair, which is the key to its political sustainability.
This perception can no longer be taken for granted, as the interaction of technology and globalization has exacerbated income and wealth inequality within countries, even as cross-country gaps have narrowed.
Until now, our societies have proved remarkably adept at adjusting to disruptive technologies; but the pace of change in recent decades has caused tremendous strains, reflected in huge income disparities within countries, with near-record gaps between the wealthiest and the rest.
Inequality can corrupt and paralyze a country’s political system – and economic growth along with it.
The third problem is that of aging populations, an issue that would pose tough challenges even for the best-designed political system.
How will resources be allocated to care for the elderly, especially in slow-growing economies where existing public pension schemes and old-age health plans are patently unsustainable?
Soaring public debts surely exacerbate the problem, because future generations are being asked both to service our debt and to pay for our retirements.
The final challenge concerns a wide array of issues that require regulation of rapidly evolving technologies by governments that do not necessarily have the competence or resources to do so effectively.
We have already seen where poor regulation of rapidly evolving financial markets can lead.
There are parallel shortcomings in many other markets.
A leading example is food supply – an area where technology has continually produced ever-more highly processed and genetically refined food that scientists are only beginning to assess.
What is known so far is that childhood obesity has become an epidemic in many countries, with an alarming rise in rates of type 2 diabetes and coronary disease implying a significant negative impact on life expectancy in future generations.
Many leading health researchers, including Kelly Brownell, David Ludwig, and Walter Willett, have documented these problems.
Government interventions to date, mainly in the form of enhanced education, have proved largely ineffective.
Self-destructive addiction to processed foods, which economists would describe as an “internality,” can lower quality of life for those afflicted, and can eventually lead to externalities for society, such as higher health-care costs.
Again, despite a rising chorus of concern from researchers, political markets have seemed frozen.
All of these problems have solutions, at least in the short to medium run.
A global carbon tax would mitigate climate risks while alleviating government debt burdens.
Addressing inequality requires greater redistribution through national tax systems, together with enhanced programs for adult education, presumably making heavy use of new technologies.
The negative effects of falling population growth can be mitigated by easing restrictions on international migration, and by encouraging more women and retirees to enter or stay in the workforce.
But how long it will take for governments to act is a wide-open question.
Capitalist economies have been spectacularly efficient at enabling growing consumption of private goods, at least over the long run.
When it comes to public goods – such as education, the environment, health care, and equal opportunity – the record is not quite as impressive, and the political obstacles to improvement have seemed to grow as capitalist economies have matured.
Will each future generation continue to enjoy a better quality of life than its immediate predecessor?
In developing countries that have not yet reached the technological frontier, the answer is almost certainly yes.
In advanced economies, though the answer should still be yes, the challenges are becoming formidable.
Europe’s Debt Wish
CAMBRIDGE – Eurozone leaders continue to debate how best to reinvigorate economic growth, with French and Italian leaders now arguing that the eurozone’s rigid “fiscal compact” should be loosened.
Meanwhile, the leaders of the eurozone’s northern member countries continue to push for more serious implementation of structural reform.
Ideally, both sides will get their way, but it is difficult to see an endgame that does not involve significant debt restructuring or rescheduling.
The inability of Europe’s politicians to contemplate this scenario is placing a huge burden on the European Central Bank.
Although there are many explanations for the eurozone’s lagging recovery, it is clear that the overhang of both public and private debt looms large.
The gross debts of households and financial institutions are higher today as a share of national income than they were before the financial crisis.
Nonfinancial corporate debt has fallen only slightly.
And government debt, of course, has risen sharply, owing to bank bailouts and a sharp, recession-fueled decline in tax revenues.
Yes, Europe is also wrestling with an aging population. Southern eurozone countries such as Italy and Spain have suffered from rising competition with China in textiles and light manufacturing industries.
But just as the pre-crisis credit boom masked underlying structural problems, post-crisis credit constraints have greatly amplified the downturn.
True, German growth owes much to the country’s willingness a decade ago to engage in painful economic reforms, especially of labor-market rules.
Today, Germany appears to have full employment and above-trend growth.
German leaders believe, with some justification, that if France and Italy were to adopt similar reforms, the changes would work wonders for their economies’ long-term growth.
Yet what of Portugal, Ireland, and (especially) Spain, all of which have taken significant steps toward reform since the crisis?
All are still experiencing double-digit unemployment rates amid moribund growth, and, as the last International Monetary Fund Fiscal Monitor made abundantly clear, all still suffer from significant debt problems.
Debt overhang traps countries in a vicious circle.
Exceptionally high public and private debts constrain a country’s options and are indisputably associated with slower growth, which in turn makes it difficult to escape a debt trap.
Last spring’s campaign against anyone who dared to worry about the long-run effects of high debt largely ignored the substantial academic literature, just as a remarkably similar recent challenge to Thomas Piketty’s research on inequality took no account of a larger body of evidence.
It is true that not all debt is created equal, and there is a strong case for adding more of it if the purpose is to finance highly productive infrastructure investments.
Europe greatly lags many Asian countries in its efforts to expand the reach of broadband.
Outside the Nordic countries, electricity networks are thoroughly Balkanized, and major efforts are needed to integrate them.
Raising debt for the purposes of significantly increasing or ensuring long-run growth makes sense, especially in an environment of low real interest rates.
A similar argument can be made for expenditures aimed at improving education, for example to improve Europe’s underfunded universities.
Beyond growth-enhancing investment, however, the case for greater stimulus becomes more nuanced.
Brad Delong and Larry Summers have argued that in a repressed economy, short-term increases in borrowing can pay for themselves, even if the expenditures do not directly increase long-run potential.
By contrast, Alberto Alesina and Silvia Ardagna argue that in an economy with a large and inefficient government, debt-stabilization measures directed at reducing the size of government can actually be expansionary.
I admit to being an outsider to this debate.
(The word “austerity” does not appear once in my 2009 book with Carmen Reinhart on the history of financial crises.)
My general sense, however, is that both views are extreme.
In general, neither pure austerity nor crude Keynesian stimulus can help countries escape high-debt traps.
Throughout history, other measures, including debt rescheduling, inflation, and various forms of wealth taxation (such as financial repression), have typically played a significant role.
It is hard to see how European countries can indefinitely avoid recourse to the full debt toolkit, especially to repair the fragile economies of the eurozone’s periphery.
The ECB’s expansive “whatever it takes” guarantee may indeed be enough to help finance greater short-term stimulus than is currently being allowed; but the ECB’s guarantee will not solve long-run sustainability problems.
Indeed, the ECB will soon have to confront the fact that structural reforms and fiscal austerity fall far short of being a complete solution to Europe’s debt problems.
In October and November, the ECB will announce the results of its bank stress tests.
Because many banks hold a large volume of eurozone government debt, the results will depend very much on how the ECB assesses sovereign risk.
If the ECB grossly understates the risks, its credibility as a regulator will be badly tarnished.
If it is more forthright about the risks, there is a chance that some periphery countries might have difficulty plugging the holes, and will require help from the north.
One hopes that the ECB will be forthright.
It is high time for a conversation on debt relief for the entire eurozone periphery.
Why Wealth Taxes Are Not Enough
CAMBRIDGE – Should advanced countries implement wealth taxes as a means of stabilizing and reducing public debt over the medium term?
The normally conservative International Monetary Fund has given the idea surprisingly emphatic support.
The IMF calculates that a one-time 10% wealth levy, if introduced quickly and unexpectedly, could return many European countries to pre-crisis public debt/GDP ratios.
It is an intriguing idea.
The moral case for a wealth tax is more compelling than usual today, with unemployment still at recession levels, and with deep economic inequality straining social norms.
And, if it were really possible to ensure that the wealth levy would be temporary, such a tax would, in principle, be much less distortionary than imposing higher marginal tax rates on income.
Unfortunately, while a wealth tax may be a sound way to help a country dig out of a deep fiscal pit, it is hardly a panacea.
For starters, the revenue gains from temporary wealth taxes can be very elusive.
The economist Barry Eichengreen once explored the imposition of capital levies in the aftermath of World Wars I and II.
He found that, owing to capital flight and political pressure for delay, the results were often disappointing.
Italy’s armada of Guardia di Finanza boats would hardly forestall a massive exodus of wealth if Italians see a sizable wealth tax coming.
Over- and under-invoicing of trade, for example, is a time-tested way to spirit money out of a country.
(For example, an exporter under-reports the price received for a foreign shipment, and keeps the extra cash hidden abroad.)
And there would be a rush into jewelry and other hard-to-detect real assets.
The distortionary effects of a wealth levy would also be exacerbated by concerns that the “temporary” levy would not be a one-off tax.
After all, most temporary taxes come for lunch and stay for dinner.
Fears of future wealth taxes could discourage entrepreneurship and lower the saving rate.
In addition, the administrative difficulties of instituting a comprehensive wealth tax are formidable, raising questions about fairness.
For example, it would be extremely difficult to place market values on the family-owned businesses that pervade Mediterranean countries.
Wealth taxes that target land and structures are arguably insulated from some of these concerns, and property taxes are relatively underused outside the Anglo-Saxon countries.
In theory, taxing immobile assets is less distortionary, though taxes on structures obviously can discourage both maintenance and new construction.
So what else can eurozone governments do to raise revenue as their economies recover?
Most economists favor finding ways to broaden the tax base – for example, by eliminating special deductions and privileges – in order to keep marginal tax rates low.
Broadening the income-tax base is a central element of the highly regarded Simpson/Bowles proposals for tax reform in the United States.
In Europe, efficiency would be enhanced by a unified VAT rate, instead of creating distortions by charging different rates for different goods.
In principle, low-income individuals and families could be compensated through lump-sum transfer programs.
Another idea is to try to raise more revenue from carbon permits or taxes.
Raising funds by taxing negative externalities reduces distortions rather than creating them.
Though such taxes are spectacularly unpopular – perhaps because individuals refuse to admit that the externalities they themselves create are significant – I regard them as an important direction for future policy (and I intend to suggest other ideas along these lines in future columns).
Unfortunately, advanced countries have implemented very little fundamental tax reform so far.
Many governments are giving in to higher marginal tax rates rather than overhauling and simplifying the system.
In Europe, officials are also turning to stealth taxes, particularly financial repression, to resolve high public-debt overhangs.
Through regulation and administrative directives, banks, insurance companies, and pension funds are being forced to hold much higher shares of government debt than they might voluntarily choose to do.
But this approach is hardly progressive, as the final holders of pensions, insurance contracts, and bank deposits are typically the beleaguered middle class and the elderly.
There is also the unresolved question of how much the periphery countries really should be asked to pay on their debilitating debt burdens, whatever the tax instrument.
Although the IMF seems particularly enthusiastic about using wealth taxes to resolve debt overhangs in Spain and Italy, some burden sharing with the north seems reasonable.
As the economists Maurice Obstfeld and Galina Hale recently noted, German and French banks earned large profits intermediating flows between Asian savers and Europe’s periphery.
Unfortunately, arguing over burden sharing creates more scope for delay, potentially undermining the efficacy of any wealth tax that might finally be instituted.
Still, the IMF is right – on grounds of both fairness and efficiency – to raise the idea of temporary wealth taxes in advanced countries to relieve fiscal distress.
However, the revenues will almost certainly be lower, and the costs higher, than calculations used to promote them would imply.
Temporary wealth taxes may well be a part of the answer for countries in fiscal trouble today, and the idea should be taken seriously.
But they are no substitute for fundamental long-term reform to make tax systems simpler, fairer, and more efficient.
A Tear for Argentina
CAMBRIDGE – Argentina’s latest default poses unsettling questions for policymakers.
True, the country’s periodic debt crises are often the result of self-destructive macroeconomic policies.
But, this time, the default has been triggered by a significant shift in the international sovereign-debt regime.
The shift favors hardline creditors in bond issuances governed by US law.
With emerging-market growth slowing, and external debt rising, new legal interpretations that make debt future write-downs and reschedulings more difficult do not augur well for global financial stability.
There are no heroes in this story, certainly not Argentina’s policymakers, who a decade ago attempted unilaterally to force a massive generalized write-down on foreign bondholders.
Economists who trumpeted the “Buenos Aires consensus” as the new way to run economies also look foolish in hindsight.
The International Monetary Fund has long recognized that it made one too many loans to try to save Argentina’s unsustainable dollar peg as it collapsed back in 2001.
This is not the first time that an Argentine default has upended international capital markets.
According to the tabulation that Carmen Reinhart and I compiled in our 2009 book This Time is Different, Argentina has defaulted on seven previous occasions – in 1827, 1890, 1951, 1956, 1982, 1989, and 2001.
Argentina may be almost as famous for its defaults as it is for its soccer teams, but it is hardly alone.
Virtually every emerging-market country has experienced recurrent sovereign-debt problems.
Venezuela is the modern-day record holder, with 11 defaults since 1826 and possibly more to come.
Back in 2003, partly in response to the Argentine crisis, the IMF proposed a new framework for adjudicating sovereign debts.
But the proposal faced sharp opposition not only from creditors who feared that the IMF would be too friendly to problem debtors, but also from emerging markets that foresaw no near-term risk to their perceived creditworthiness.
The healthy borrowers worried that creditors would demand higher rates if the penalties for default softened.
Recently, as an outgrowth of a reconsideration of the IMF’s lending to the periphery of Europe (and Greece in particular), the Fund has advanced another approach to debt rescheduling, one that might be easier to implement.
The IMF now recognizes that the bulk of its financing was effectively being used to allow short-term creditors to exit loss-free.
As a result, there was not enough money left over to help soften budget cuts necessitated by the sudden stop in foreign funding.
The experience of the recent eurozone crisis stands in sharp contrast to the Latin American debt crisis in the 1980s, when banks were not allowed to exit precipitously from their loans.
If the new proposal is adopted, the IMF would conditionally refuse funds to countries carrying debt burdens that Fund staff determine are most likely unsustainable; creditors would first have to agree to a “reprofiling” of debt.
Reprofiling is a euphemism for debt restructuring, which allows countries to borrow from existing creditors for longer periods and at lower interest rates than they would be able to do on the open market.
Although it is far from clear how easily the IMF could hold the line against hard-bargaining creditors, the new policy, if adopted, would toughen the Fund’s approach to cases where it finds itself repeatedly throwing good money after bad.
At present, the United States seems reluctant to go along with the IMF’s proposal.
Evidently, US authorities believe that in some situations geopolitics trump economics (reflected, for example, in the IMF’s recent re-entry into Ukraine after a string of failed programs).
This American resistance is unfortunate.
It would be far better if the US found ways simply to organize outright grants in exceptional cases like Ukraine, rather than design the international financial system around them.
Given the recurring complications of adjudicating sovereign-debt contracts in foreign courts, and the world’s inability to organize a credible and fair procedure for foreign bankruptcies, perhaps the best idea is to steer the bulk of international debt flows through debtor-country courts.
Jeremy Bulow and I made a proposal along these lines 25 years ago; it is still the right approach.
In this scenario, countries interested in borrowing large amounts from abroad would need to develop institutions that made the promise to repay credible.
By and large, experience supports this method.
Indeed, the huge expansion in emerging-market domestic-debt issuance in recent years has helped reduce market tensions (though continuing reliance by corporates on foreign debt still leaves many countries vulnerable).
But domestic borrowing is not a panacea.
To believe that any country issuing debt in its own currency is risk-free as long as the exchange rate is flexible is astonishingly naive.
For one thing, there is still inflation risk, particularly for countries with weak fiscal institutions and heavy debt burdens.
Nonetheless, Argentina’s latest debt trauma shows that the global system for sovereign-debt workouts remains badly in need of repair.
Deepening domestic debt markets – and perhaps change along the lines proposed by the IMF – is sorely needed.
Kentucky Fried University?
Academics are easily flattered by talk about "knowledge management" and the "knowledge society."
They often think this phrase highlights the central role of universities in society.
In fact, it signals the opposite--that the wider society itself is a hotbed of knowledge production, over which universities do not enjoy any special privilege or advantage.
This has caught academics off-guard, because they have traditionally treated knowledge as something pursued for its own sake, regardless of cost or consequence.
Now they face increasing global pressure to open universities to the wider public, typically for reasons unrelated to the pursuit of pure knowledge.
Today's universities are expected to function as dispensers of credentials and engines of economic growth.
Consequently, academics are losing control of their performance standards to "knowledge managers."
Universities, according to former Fortune editor Tom Stewart, are "dumb organizations" with too much "human capital" but not enough "structural capital."
A fast food chain, on the other hand, is supposedly a "smart organization" because it makes the most of its relatively low-skilled staff through the alchemy of good management.
Academia proceeds almost exactly in reverse, as department heads and deans struggle to keep track of what the staff are doing.
McDonald's, unlike a university, is much more than the sum of its parts.
Academics remain largely in denial about the impact of knowledge management.
But the sheer increase in the number of university presidents drawn from business and industry implies that McDonald's and MIT may, at least in principle, be judged according to the same operational and performance standards.
At the same time, it is unreasonable to expect the increasing number of academics on short-term contracts to defend the integrity of an institution that cannot promise them job security.
Indeed, many academics--not just professional knowledge managers--have endorsed recent steps to disaggregate the "unity of teaching and research" that has defined the university since the early 19 th century.
With the establishment of each new on-line degree program and science park, universities appear more vulnerable to this mindset.
The two types of "post-academic" university that they represent--the one a diploma mill, the other a patent factory--share an overriding interest in benefiting those who can pay at the point of delivery.
But universities have always been hard-pressed to justify their existence in such immediate cost-benefit terms.
It would be a mistake to blame knowledge managers, or, for that matter, neo-liberal ideology, for this instrumental view of universities as "service providers."
Even in the heyday of the welfare state, service provision was precisely what lay behind academia's appeal to policymakers.
The public would pay higher taxes because either they or their children might qualify for a course of study that would improve their job prospects, or because researchers' discoveries might improve the quality of life.
The same mentality operates today in an increasingly privatized funding environment.
But this need not mean that universities become thoroughly commercialized.
The corporate origin of universities is of more than historical interest here.
Universities, along with churches, religious orders, guilds, and cities, were the original corporations.
Commercial ventures came to be regularly treated as corporations only in the 19 th century.
What originally entitled a university to corporate status under Roman law was its pursuit of aims that transcend the personal interests of any of its current members.
Corporate status enabled universities to raise their own institutionally earmarked funds, which were bestowed on individuals who were "incorporated" on a non-hereditary basis, through examination or election.
The oldest and most successful US universities were founded by British religious dissidents, for whom the corporate form remained vividly alive.
From the 17 th century on, American graduates were cultivated as "alumni" who regard their university experience as a life-defining process to be shared, and thus worthy of receiving financial support from them.
The endowments built through these donations allow successive generations to enjoy the same opportunity for enrichment. "Ivy League" universities like Harvard, Yale, and Princeton still charge the world's highest tuition fees, but only one-third of students pay the full amount.
Universities are not, in fact, such dumb organizations.
True, they must endeavor to be much greater than the sum of their parts.
But this means that a university's value must not be measured only by the short-term benefits it provides for immediate clients.
The ideal of uniting teaching and research promised just such a breadth of organizational vision, one worth updating today.
After all, universities are distinctive in producing new knowledge (through research) that is then consolidated and distributed (through teaching).
In the former phase, academia generates new forms of social advantage and privilege, while in the latter phase, it eliminates them.
It is this unique brand of creative destruction that marks the university as one of our greatest entrepreneurial organizations.
Pagar yang Baik Melindungi Spesies
NAIROBI – Negara-negara di Afrika seringkali dikritik karena gagal mengatasi tantangan-tantangan lingkungan hidup.
Para pengamat sering mengutip terjadinya penurunan luas habitat sehubungan dengan pertumbuhan populasi, degradasi lahan, dan industrialisasi.
Lalu ada satu tuduhan yang paling sering diungkapkan: bahwa kenaikan perburuan liar membuat spesies seperti gajah dan badak punah.
Meskipun demikian, di Kenya, program konservasi yang inovatif dan mendalam sedang dilakukan.
Dimulai di pegunungan Aberdare di pusat Kenya, “Rhino Ark,” awalnya dibentuk untuk melindungi badak hitam yang hampir punah dari para pemburu yang merusak, dan didukung oleh orang-orang yang dulunya mungkin menentang pendiriannya: komunitas lokal di beberapa daerah pertanian paling produktif di negara ini.
Pada tahun 1988, para ahli konservasi memutuskan akan membiayai dan membuat sebuah pagar listrik untuk melindungi area Taman Nasional Aberdare yang berbatasan dengan lahan pertanian skala kecil.
Pagar tersebut dirancang untuk menghindari penyusupan dari populasi manusia dan berkurangnya habitat taman nasional tersebut.
Tapi pagar ini juga melindungi para petani yang tanamannya sering dirusak oleh gajah atau satwa liar lainnya yang menyerang lahan mereka.
Para petani lokal menyambut baik inisiatif ini, yang mempengaruhi keputusan mereka untuk menambah panjang pagar untuk mengelilingi keseluruhan perimeter di kawasan Aberdare.
Pegunungan Aberdare, yang terdiri dari hutan adat dan penampungan air yang vital seluas 2.000 km persegi, juga berfungsi sebagai sebuah taman nasional dan sangat penting bagi Kenya.
Empat dari sungai-sungai terbesar di negara tersebut, mengalir ke utara, barat, timur, dan selatan, bermula dari pegunungan ini dan menyediakan air serta listrik bagi tujuh kota besar, termasuk ibu kota Kenya, Nairobi.
Di bagian lereng gunung yang lebih rendah, empat juta petani memanfaatkan tanah subur dan curah hujan tinggi.
Sedangkan 30% produksi teh dan 70% kopi di Kenya dihasilkan di bukit di kaki gunung dan lereng tinggi.
Selama 21 tahun, pagar di sekitar Aberdares dibuat dengan susah payah dan didukung sebagian besarnya oleh sektor swasta di Kenya, donator perorangan, dan kegiatan pengumpulan dana yang inovatif seperti Rhino Charge, sebuah acara motor off-road yang berhasil menangkap imajinasi publik Kenya dan mengumpulkan lebih dari $1 juta setiap tahunnya.
Namun, saat pagar yang sudah sepenuhnya dialiri listrik ini selesai pada tahun 2009, pemerintah yang saat itu dipimpin oleh Presiden Mwai Kibaki, telah menjadi mitra penting bagi Kenya Wildlife Service (KWS) dan Kenya Forest Service (KFS) yang terlibat secara mendalam di dalam proyek ini.
Dengan dukungan pemerintah Kenya, Rhino Ark telah dapat mengalihkan perhatiannya ke kawasan hutan lain yang mulai mengalami degradasi – seperti Gunung Eburu di Kompleks Hutan Mau, yang memiliki pemandangan Danau Naivasha di bawahnya, dan Gunung Kenya, sebuah World Heritage Site yang terkena dampak besar dari konflik antar manusia dan satwa liar.
Pagar Gunung Ebru sepanjang 45 kilometer telah selesai dibuat tahun lalu.
Pagar Gunung Kenya, sepanjang 450 kilometer, akan lebih panjang dari proyek Aberdares dan kini mengalami kemajuan pesat, sekarang pembangunan sudah mencapai 80 kilometer.
Tentu saja, pembangunan pagar hanya sebuah permulaan.
Pagar-pagar ini harus dipelihara dan dikelola (misalnya beberapa pos pagar di Aberdares sudah harus diganti), koridor satwa liar harus dibuat, dan komunitas lokal membutuhkan dukungan.
Semua area harus tetap diawasi melalui patroli udara dan darat (dengan berjalan kaki) di sepanjang garis pagar – tindakan ini merupakan sebuah proses monitoring dengan dampak biaya yang besar.
Namun manfaat-manfaat yang dihasilkan pun signifikan.
Pagar-pagar ini membuat petugas selalu waspada akan kejadian perburuan liar – khususnya gajah, badak, dan spesies yang sangat langka seperti kijang Gunung Bongo, yang sekarang hanya ada di Aberdares, Gunung Kenya, dan Kompleks Hutan Mau, termasuk Gunung Eburu.
Komunitas lokal terlibat dalam pemeliharaan seluruh area pagar dan kawasan hutan.
Sebagai hasilnya, mereka menjadi pelindung pagar, menjaga agar pagar tersebut tidak ditumbuhi tanaman dan memperbaiki kerusakan yang disebabkan oleh satwa liar dan faktor lainnya – serta mempelajari keahlian-keahlian baru selama berjalannya proses.
Tujuan jangka panjangnya adalah perlindungan hutan kritis ini selamanya.
Untuk mencapai tujuan tersebut, dana abadi (endowment funds) tengah dibentuk sebagai kerjasama publik dan swasta, menyatukan Rhino Ark, KWS dan KFS, dan perwakilan dari komunitas lokal.
Perjanjian perwaliamanatan/akta trust (trust deeds) dibuat di tingkat lokal dan mengelola dana-dana yang pada akhirnya akan dipakai untuk membiayai pemeliharaan pagar.
Aberdare Trust Deed mulai berlaku sejak bulan Oktober lalu.
Para petani yang bekerja keras di daerah ini sekarang dapat melihat nilai tambah dari hidup berdampingan dengan pagar ini.
Semenjak selesainya pembangunan pagar Aberdares, nilai tanah petani lokal meningkat empat kali lipat.
Mereka dapat mengerjakan ladangnya dengan damai untuk pertama kalinya selama lebih dari satu abad, anak-anak mereka dapat berjalan kaki dari dan menuju sekolah tanpa takut diserang satwa liar, dan pendidikan konservasi kini menjadi bagian dari kurikulum.
Kerry and Europe
Those whom the gods would destroy, they grant their wishes.
Those in Europe and around the world who yearn for a victory by John Kerry in the US presidential election ought to keep that bit of ancient Greek wisdom in mind.
During the Cold War, America was the natural leader of the Atlantic community, but the price of this leadership was that the US had to accept the autonomy and influence of its European allies.
After the terrorist attacks of September 11, 2001, President Bush embarked on a unilateral foreign policy.
The traditional Atlantic alliance was replaced by what the US called "coalitions of the willing," where "the mission determines the coalition," not historic alliances.
This policy divided Europe.
It has also fueled deep divisions in the US presidential campaign, with one of the most potent arguments used by Kerry being that he will restore trust between America and its allies; that as president he will recruit international help in Iraq.
America undoubtedly needs more allies to bring Iraq's chaos under control and to build an Iraqi state that is seen as legitimate both by Iraqis and the world.
Allies are seen as an answer to America's twin credibility and legitimacy deficits in its occupation of Iraq.
But can a Kerry-led US get a fresh start in Europe?
Will a President Kerry really be able to rally allies to America's side?
Iraq's mayhem has hardened the antagonism of countries like France and Germany, which led the opposition to the war in the first place.
Even countries that rallied to Bush's call for help, like my homeland, Poland, are now wary of their involvement.
Consider the attitudes of France and Germany.
Their leaders can scarcely hold their tongues, so badly do they want a Kerry victory.
But they are not going to change their policy to help Kerry win, and they won't change even if he does.
As a gesture intending to boost Kerry's chances, German Defense Minister Peter Struck suggested that his country might reconsider its position on troops in Iraq.
But Chancellor Gerhard Schröder instantly shot down that trial balloon, declaring: "To be clear, we will send no troops to Iraq."
Actually, Germany, like most European countries, is politically and logistically unable to send meaningful military forces to Iraq.
France, which did ponder sending 15 000 soldiers to Iraq had the UN given its blessing to the war, is as clear as Schröder.
According to Michel Barnier, France's Foreign Minister, "Neither today, nor tomorrow," will French troops be sent.
Both countries firmly believe that military success in Iraq is impossible.
So will transatlantic relations remain as poisoned as they are now if Kerry wins?
Is Texas swagger merely to be replaced by the distinguished disdain of a Boston Brahmin?
This is probably too pessimistic.
Europe cannot give an openly negative answer to Kerry's request for help, because that would be a slap in the face to the most pro-European American likely to be elected president anytime soon.
Such a rejection would not only put transatlantic relations even more at risk than they are today; it would also put relations
So some compromise must be found should Kerry win.
Fortunately, one is possible.
The first part is purely face-saving: both parties must simply declare their good will.
Today, European leaders are unlikely to throw even that slender lifeline to Bush.
The reality behind such a declaration is that Europe would deliver low-level military and economic involvement in Iraq.
Most European leaders understand the tiny wiggle room that Kerry will have if elected.
The near certainty that the House of Representatives will be in Republican hands, and perhaps the Senate, too, means that America's Congress will pounce on any supposed attempt by Kerry to "sell out" Bush's war.
So Kerry may put even more pressure on Europe to help out in Iraq than the unilateralist Bush ever did.
But there is a second, more fundamental, part to any viable compromise: a redefinition of transatlantic relations.
The key point here is joint recognition that a fundamental transatlantic community of values exists, and that both sides need each other.
That transatlantic community must jointly feel responsible for maintaining peace and stability in the world.
The US must accept this principle, and recognize that Europe is a partner, not merely a servant, whether willing or unwilling, of American orders.
If burdens are to be shared, decisions must be shared as well.
This will require that America recognize the validity of Europe's view of the Israel-Palestinian conflict as the major roadblock toward a peaceful Middle East.
Europe, for its part, must not only show that it feels responsible for the world, but that it is ready and willing to act accordingly by contributing in a significant way to reconstructing Iraq.
Europe's military means may be limited, but it has important experience in peacekeeping and "state building" that can be brought to bear.
Is Europe really ready to undertake such an effort if its wish for a Kerry victory comes true?
Kerry vs. Bush: Will Reason Prevail?
With over 1,000 US deaths in Iraq, and the huge pressures that the occupation of that benighted country has put on American troops around the world, it is clear that - for the first time in decades - foreign policy issues may determine the outcome of a US presidential election.
Ordinary Americans are asking themselves the same questions that people around the world are asking: how should America's global supremacy be used?
What price must be paid for that supremacy to be maintained?
What limits on the use of US military power are acceptable or necessary?
These have long been dominant questions in America's strategic debate.
But, after the terrorist attacks of September 11, 2001, they became confused with another debate, one far more important for a US electorate that feels threatened: how can alliances and multilateral institutions protect Americans?
John Kerry's great virtue has been to resist confusing the demand for security and peace with the hegemonic impulses of America the hyper-power.
Nationalist and neo-conservative currents within the Bush administration believe that unilateral action best serves US interests because it handcuffs American power the least.
On this view, the security of the US can be guaranteed through energetic military action, with or without allies.
Hence the Bush administration's tendency to weaken the ties of America's permanent alliances, including those that NATO represents.
Unilateral announcement of troop reductions in Europe and Asia, where US forces primarily serve (as in South Korea) to dissuade aggression, can only be seen as a corollary of this tendency.
The Bush doctrine's bedrock notion is that of "pre-emptive war," a doctrine that lacks international legitimacy and that therefore can usually count on only a limited number of allies.
The idea behind pre-emptive wars is that American force should be projected through high-tech, blitzkrieg type wars waged from US soil, or from the soil of uncritical allies.
On this view, NATO is merely to serve as a means to mobilize Europeans to tackle the inevitable postwar stabilization and reconstruction missions - obviating the need for the US to place its forces under NATO command.
This is what happened in Afghanistan.
But as NATO's Secretary General has said, if it is the mission that defines the coalition, then NATO - a permanent alliance - is no longer needed.
John Kerry is focused upon the same type of security problems as Bush.
This leaves many observers skeptical about the possibility for real change.
Where he differs fundamentally from Bush is in his belief that resolving international problems that affect the US almost always calls for the support of others.
He therefore considers the revival of America's alliances to be a key foreign policy priority, and he has proposed that US forces in Iraq should be integrated into a NATO operation, as long as this remains under US command.
Acting jointly means that the US will have to take into account other interests and views - views that may not always be in harmony with its own.
America will have to accept a world that is regulated not by the US unilaterally, but by global institutions and permanent alliances.
And the norms and rules that govern international institutions constitute a boundary on American power - and thus as a check on its hegemony.
Kerry and a growing number of Americans recognize that accepting limits on US power and the use of military force are a precondition for America's ultimate security, that what binds can also strengthen, and that such limits will reinforce America's ability to tackle the crisis in Iraq.
Kerry knows that in most cases military power alone cannot be decisive, as there are other dimensions of power - so-called "soft power" - that are essential to resolving crises and establishing peace.
These dimensions include international legitimacy, values (including tolerance), and public opinion.
The coming US election recalls a famous debate described by Thucydides in his History of the Peloponnesian War, concerning how Athens should respond to the revolt of Mytilene. The vote supported those who felt that "those who make wise decisions are more formidable to their enemies than those who rush madly into strong action."
Keynes and Social Democracy Today
LONDON – For decades, Keynesianism was associated with social democratic big-government policies.
But John Maynard Keynes’s relationship with social democracy is complex.
Although he was an architect of core components of social democratic policy – particularly its emphasis on maintaining full employment – he did not subscribe to other key social democratic objectives, such as public ownership or massive expansion of the welfare state.
In The General Theory of Employment, Interest and Money, Keynes ends by summarizing the strengths and weaknesses of the capitalist system.
On one hand, capitalism offers the best safeguard of individual freedom, choice, and entrepreneurial initiative.
On the other hand, unregulated markets fail to achieve two central goals of any civilized society: “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”
Until The General Theory was published in 1936, social democrats did not know how to go about achieving full employment.
Their policies were directed at depriving capitalists of the ownership of the means of production.
How this was to produce full employment was never worked out.
There was an idea, originally derived from Ricardo and Marx, that the capitalist class needed a “reserve army of the unemployed” to maintain its profit share.
If profits were eliminated, the need for that reserve army would disappear.
Labor would be paid what it was worth, and everyone willing to work would be able to find a job.
But, apart from the political impossibility of nationalizing the whole economy peacefully, this approach suffered from the fatal flaw of ignoring the role of aggregate demand.
It assumed that demand would always be sufficient if profits were eliminated.
Keynes demonstrated that the main cause of bouts of heavy and prolonged unemployment was not worker encroachment on profits, but the fluctuating prospects of private investment in an uncertain world.
Nearly all unemployment in a cyclical downturn was the result of the failure of investment demand.
Thus, the important thing was not to nationalize the capital stock, but to socialize investment.
Industry could be safely left in private hands, provided the state guaranteed enough spending power in the economy to maintain a full-employment level of investment.
This could be achieved by monetary and fiscal policy: low interest rates and large state investment programs.
In short, Keynes aimed to achieve a key social democratic objective without changing the ownership of industry.
Nevertheless, he did think that redistribution would help secure full employment.
A greater tendency to consume would “serve to increase at the same time the inducement to invest.”
And the low interest rates needed to maintain full employment would lead in time to the “euthanasia of the rentier” – of those who live off the rents of capital.
Moderate re-distribution was the more politically radical implication of Keynes’s economic theory, but the measures outlined above were also the limits of state intervention for him.
As long as “the state is able to determine the aggregate amount of resources devoted to augmenting the instruments [i.e., the capital base] and the basic reward to those who own them,” there is no “obvious case” for further involvement.
The public was never to substitute for the private, but merely to complement it.
Today, ideas about full employment and equality remain at the heart of social democracy.
But the political struggle needs to be conducted along new battle lines.
Whereas the front used to run between government and the owners of the means of production – the industrialists, the rentiers – now, it runs between governments and finance.
Such measures as the efforts by the European Parliament to regulate the derivatives market or the British government’s ban on short selling in the wake of the financial crisis or the demand to caps bankers’ bonuses &#160;are contemporary expressions of the wish to reduce the power of financial speculation to damage the economy.
The new focus on the need to tame the power of finance is largely a consequence of globalization.
Capital moves across borders more freely and more quickly than goods or people do.
Yet, while large global firms habitually use their high concentration of financial resources to press for further de-regulation (“or we will go somewhere else”), the crisis has turned their size into a liability.
Being too big to fail simply means being too big.
Keynes saw that “it is the financial markets’ precariousness which creates no small part of our contemporary problem of securing sufficient investment.”
That rings truer today – more than 70 years later – than in his own day.
Rather than securing investment for productive sectors of the economy, the financial industry has become adept at securing investment in itself.
This, once again, calls for an activist government policy.
Yet, as Keynes would have argued, it is important that the expansion of government involvement is informed by sound economics rather than political ideology, social democratic or otherwise.
State intervention needs to bridge gaps that the private sector cannot reasonably be expected to do on its own.
The current crisis has shown with utmost clarity that private markets are unable to self-regulate; domestic regulation is therefore a key area in which government has a role to play.
Similarly, time-inconsistency issues prevent large international firms from compartmentalizing their markets.
Re-erecting barriers to capital flows in the form of international taxes, thereby cordoning off crises before they turn global, is therefore another task for government.
Keynes’s main contribution to social democracy, however, does not lie in the specifics of policy, but in his insistence that the state as ultimate protector of the public good has a duty to supplement and regulate market forces.
If we need markets to stop the state from behaving badly, we need the state to stop markets from behaving badly.
Nowadays, that means stopping financial markets from behaving badly.
That means limiting their power, and their profits.
Keynes versus the Classics: Round Two
LONDON – The economist John Maynard Keynes wrote The General Theory of Employment, Interest, and Money (1936) to “bring to an issue the deep divergences of opinion between fellow economists which have for the time being almost destroyed the practical influence of economic theory…” Seventy years later, heavyweight economists are still at each other’s throats, in terms almost unchanged from the 1930’s.
The latest slugfest features New Keynesian champion Paul Krugman of Princeton University and New Classical champion John Cochrane of the University of Chicago. Krugman recently published a newspaper article entitled “How Did Economists Get It So Wrong?”
The reason was that “economists, as a group, mistook beauty, clad in impressive-looking math, for truth.” They purveyed an “idealized vision of an economy in which rational individuals interact in perfect markets.”
Unfortunately “this sanitized vision of the economy led most economists to ignore all the things that could go wrong.” So now economists will have to accept “the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic ‘theory of everything’ is a long way off.”
Krugman’s heavy pounding of Chicago School economics goaded Cochrane, a professor of finance, into some bad-tempered counter-punching on the university’s Web site, much of which consisted of a personal attack on Krugman’s scientific integrity.
When he gets around to economics, Cochrane aims his blows at two points: Krugman’s attack on the “efficient market theory” and his advocacy of “fiscal stimulus” for depressed economies.
Cochrane accuses Krugman of misleading his readers about the efficient market theory, which asserts that, given the available information, financial markets always get asset prices right.
Rather than defend that theory, Cochrane admits that “asset prices move more than reasonable expectations of future cash flows.”
Unfortunately, “no theory is particularly good at that right now.”
But it’s theoretical nihilism, Cochrane argues, to ascribe these excessive fluctuations to “irrationality” as Krugman does.
What Krugman is really after (“though he can’t quite come out and say this”) is for the government to “take charge of the allocation of capital.” And the one thing we do know is that however badly asset markets behave, government control “has always been much worse.”
Cochrane’s heaviest punching is reserved for Krugman’s support for President Barack Obama’s fiscal stimulus. He invokes the hoary old “Ricardian equivalence theorem,” revived by the Harvard economist Robert Barro, according to whom “debt-financed spending can’t have any effect, because people, seeing the higher future taxes that must pay off the debt, will simply save more.
They will buy the new government debt and leave all spending decisions unaltered.”
In short, Krugman “has absolutely no idea about what caused the crash, what policies might have prevented it, and what policies we should adopt going forward” – except that the government should now spend money like a drunken sailor.
Far from having too much math, economists need more, in order to “keep the logic straight.”
On the stimulus, though, Krugman achieves a knock-out punch.
The view that extra government spending “crowds out” an equal amount of private spending, so that its net stimulus effect is zero, would be true only if the economy were at full employment.
Indeed, the Chicago School tacitly assumes that economies are always at full employment. They are unfazed by the fact that America’s economy has shrunk by 4% in the last year and that over 6 million people have been added to the unemployment rolls.
To Chicago economists, an increase in the number of idle workers represents a voluntary choice for leisure.
In a concession to commonsense, they concede that people may make mistakes and, to that extent, a stimulus may be beneficial.
But they insist that the only stimulus that will work is printing money.
This will drive down interest rates and lead to an economic rebound.
Against this view, Keynes pointed out that interest-rate reductions may not do the job, because at zero or near-zero rates investors hoard cash rather than lend it out.
Hence, as he put it in 1932, there may be “no escape from prolonged and perhaps interminable depression except by direct state intervention to promote and subsidize new investment” – which is what the Obama administration is rightly doing.
On the question of what caused the crash, the debate is more even.
Krugman is hampered by the fact that he attributes the crash to “irrationality,” which, as Cochrane points out, is no theory.
This is because Krugman refuses to take seriously Keynes’s crucial distinction between risk and uncertainty.
In my view, Keynes’s major contribution to economic theory was to emphasize the “extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.”
The fact of their ignorance forces investors to fall back on certain conventions, of which the most important are that the present will continue into the future, that existing share prices sum up future prospects, and that if most people believe something, they must be right.
This makes for considerable stability in markets as long as the conventions hold .
But they are liable to being overturned suddenly in the face of passing bad news, because “there is no firm basis of conviction to hold them steady.”
It’s like what happens in a crowded theater if someone shouts “Fire!”
Everyone rushes to get out.
This is not “irrational” behavior.
It is reasonable behavior in the face of uncertainty.
In essence, this is what happened last autumn.
Chicago School economics has never been more vulnerable than it is today – and deservedly so.
But the attack on it will never succeed unless policy Keynesians like Krugman are willing to work out the implications of irreducible uncertainty for economic theory.
KGB Petroleum
MOSCOW – There is one key thing to keep in mind when talking about Russia: despite what you see on the surface, it never really changes.
Buildings, fashions, and even regimes (at least in name) may change, but the country’s core, its secret-police-state legacy, is never far from the surface.
Today, the contemporary version of the KGB, the Federal Security Bureau (FSB), runs Russia’s energy businesses in much the same top-down way that the KGB once ran the Soviet Union, with business always subordinate to the regime’s political needs.
Since current Prime Minister Vladimir Putin became Russia’s president in 2000, the country’s vast energy wealth has become increasingly concentrated in state hands.
And the actual hands at the controls of the world’s premier natural-gas economy are those of the FSB.
Indeed, today the KGB/FSB is Russia’s primary business school.
Think of the graduates as holding a master’s degree in brutal (and brutally inefficient) administration.
Former spies now sit atop the commanding heights of Russia’s energy-centric economy, but their role is not all that different from what it was in Soviet days.
Back then, the USSR promoted its interests through satellite states and military power.
Today, Russia flexes its might through its energy companies.
No company exemplifies this more than Gazprom, the state-run energy behemoth, which has gobbled up oil assets, media, banking interests, and farms within Russia, and seeks to do the same with downstream energy assets outside Russia, particularly in Europe.
So it should be no surprise that Gazprom’s former chairman is now Russia’s president, Dmitry Medvedev, who was replaced by a former KGB general, Valery Golubyev.
Among the company’s other senior leaders are more ex-KGB men, including Sergei Ushakov and Konstantin Chuichenko.
And what Gazprom is to natural gas, Rosneft (almost) is to oil.
In 2003, Rosneft became an oil giant by grabbing most of Yukos, after that oil firm’s head and chief shareholder, Mikhail Khodorkovsky, was arbitrarily prosecuted and imprisoned for embezzlement and tax evasion.
Rosneft’s chairman, Igor Sechin, a former KGB agent in Angola, is also the main ideologue of Russia’s FSB-managed economy.
When not overseeing Rosneft, Sechin just happens to be Vladimir Putin’s first deputy prime minister.
Sechin’s closest aide, Andrei Patrushev, comes from a similar background.
He is a graduate of the FSB academy and is the son of the former FSB director, Nikolai Patrushev.
The list goes on and on.
About 30% of the Kremlin elite used to work with the secret services or still do, and an astounding 80% are associated with either the Russian or Soviet-era military-industrial complex.
Whereas the KGB once shaped Kremlin decisions to move troops into Hungary or Czechoslovakia, today the same calculating minds determine how Gazprom is to be deployed in the service of Russia’s foreign policy.
Through its control of natural gas pipelines, Gazprom is by far Russia’s chief tool for maintaining influence in the former Soviet former republics of Central Asia, the Caucasus, Belarus, Ukraine, and even in the Baltic states (now EU members).
Gazprom is also Russia’s main lever of influence in the EU as a whole, because the company supplies 30% of the Union’s natural gas needs.
But the global economic crisis has weakened Russia’s oil economy, shattering the KGB’s dreams of a return to superpower status.
While energy prices remain high by historical standards, Gazprom now operates at a loss.
Its investment plans are overextended outside of Russia – part of the imperial policy – while domestic exploration for new sources is declining, as foreign companies have been forced to surrender stakes in projects such as the huge gas development on Sakhalin Island.
In addition, Gazprom is now overpaying its suppliers, because its long-term contracts are for prices that are now far above market prices.
The Sechin-led Rosneft is in the same incompetently managed boat.
So the “resource curse” has hit Russia with a vengeance.
Corruption on every level of the state bureaucracy is evident, while the state has consumed the economy’s oil revenue with little to show for it in terms of investment or improved services.
As in the 1980’s, when Mikhail Gorbachev came to power with no choice but to introduce his polices of
After all, the Soviet Union collapsed not because of Ronald Reagan’s military build-up in the 1980’s, with which communism was unable to compete, but because the Soviet command economy had already become obsolete in the 1970’s.
Similarly, while the world today searches for ways to confront dependence on fossil fuels and seeks other, cleaner energy sources, Russia continues to live off its oil and gas, which only encourages it to delay the economic and political restructuring that it will need to succeed in the long term.
Khrushchev’s Secret Speech and End of Communism
In history, some events at first appear insignificant, or their significance is hidden, but they turn out to be earthshaking.
Such a moment occurred 50 years ago, with Nikita Khrushchev’s so-called “Secret Speech” to the Twentieth Congress of the Communist Party of the Soviet Union.
It ranks, I believe, just below the Bolshevik Revolution of 1917 and the start of Hitler’s War in 1939 as the most critical moment of the twentieth century.
At that moment, the communist movement appeared to be riding the tide of history, and not only for those in the Soviet Union.
In the mid-1950’s, communism was on the offensive in Europe, as well as in the emerging Third World.
Capitalism seemed to be dying.
All of communism’s imperfections were deemed temporary, just bumps on the way to the just society that was then being born.
A third of humanity saw the Soviet Union as leading the world toward global socialism.
The Twentieth Congress put an end to that.
It was a moment of truth, a cleansing from within of the brutality of Stalinism.
Khrushchev’s speech to the Congress inspired doubt and second thoughts throughout the worldwide Communist movement.
Khrushchev’s motives as he took the podium on the morning of February 25, 1956, were, in his mind, moral ones.
After his ouster from power, in the seclusion of his dacha, he wrote: “My hands are covered with blood.
I did everything that others did.
But even today if I have to go to that podium to report on Stalin, I would do it again.
One day all that had to be over.”
Khrushchev had, of course, been an intimate part of Stalin’s repressions, but he also didn’t know half of what was going on.
The whole Stalinist system of government was built on absolute secrecy, in which only the General Secretary himself knew the whole story.
It wasn’t terror that was the basis of Stalin’s power, but his complete monopoly on information.
Khrushchev, for example, was stunned when he discovered that in the 1930’s and 1940’s, some 70% of Party members were annihilated.
Initially, Khrushchev didn’t plan to keep his denunciation of Stalin a secret.
Five days after the Congress, his speech was sent to all the leaders of the socialist countries and read at local party meetings across the Soviet Union.
But people didn’t know how to discuss it. And with good reason, for the problem with the de-Stalinization process was that, although the truth was partly revealed, no answer regarding what to do next was offered.
After the Congress, it became clear that the communist gospel was false and murderously corrupt.
But no other ideology was offered, and the crisis – the slow rot of the system that became clear during the era of stagnation under Leonid Brezhnev – that began with Khrushchev’s speech lasted another 30 years, until Mikhail Gorbachev took up his mantle of change.
The doubts inspired at the Congress may have been inchoate, but they nonetheless sowed genuine unrest.
In the first of the protests that rocked the communist world in 1956, huge crowds in Georgia demanded that Khrushchev be fired and Stalin’s memory reinstated.
An uprising in Poland and the far more tumultuous Hungarian Revolution argued for the opposite.
The Poles demanded communism with a human face, and the Hungarians, after Imre Nagy sought to reform communism, ended up wanting no communism at all.
All of these protests were brutally crushed, which resulted in many West European Communists leaving the Party in utter disillusion.
Khrushchev’s speech also ignited the feud between Mao’s China and the USSR, for it allowed Mao to claim the crown of world revolutionary leadership.
Worried by the protests, Khrushchev tried to cool off the anti-Stalin campaign.
The release of the Gulag prisoners that followed his speech continued, but it was done in silence.
Party membership was restored to purge survivors, and they received new jobs, but they were forbidden from discussing the horrors that they had endured.
That silence lasted until 1961, when Khrushchev permitted new revelations of Stalin-era crimes.
These were publicly reported and discussed on TV and radio.
Stalin’s body was removed from Red Square, Stalin monuments were destroyed, and cities restored their original Soviet names.
Stalingrad became Volgograd.
The idea of the Gulag entered our literature with Alexander Solzhenitsyn’s One Day in the Life of Ivan Denisovich.
This second anti-Stalinist campaign lasted two years, which was not nearly enough to change the country’s mentality.
The Twentieth Congress shattered the world Communist movement, and it turned out to be impossible to cement the cracks.
The Soviet Union and other socialist countries faced a crisis of faith, as the main threat to communism was not imperialism, or ideological dissidents, but the movement’s own intellectual poverty and disillusion.
So, although it is common today in Russia to blame Gorbachev and Boris Yeltsin for the collapse of the USSR, it is both useless and unfair to do so.
The system was dead already, and it is to Yeltsin’s great credit that he was able to bring Russia out of the ruins in one piece.
Although Russia’s future is uncertain, its history is becoming clearer, in part because we now know that the Twentieth Party Congress started the process that brought about the end of Soviet despotism.
Kick-Starting Employment
BERKELEY – Unemployment is currently rising like a rocket, because businesses that normally would be expanding and hiring are not, and those businesses that would normally be contracting and shedding workers are doing so very rapidly.
Businesses that ought to be expanding and hiring cannot, because the depressed general level of financial asset prices prevents them from borrowing money or selling bonds on profitable terms.
In response, central banks should purchase government bonds for cash in as large a quantity as needed to push their prices up as high as possible.
Expensive government bonds will shift demand to mortgage or corporate bonds, pushing up their prices.
Even after central banks have pushed government bond prices as high as they can go, they should keep buying government bonds for cash, in the hope that people whose pockets are full of cash will spend more of it, and that this will directly pull people out of joblessness and into employment.
In addition, governments need to run extra-large deficits.
Spending – whether by the United States government during World War II, following the Reagan tax cuts of 1981, by Silicon Valley during the late 1990’s, or by home buyers in America’s south and on its coasts in the 2000’s – boosts employment and reduces unemployment.
And government spending is as good as anybody else’s.
Finally, governments should undertake additional measures to boost financial asset prices, and so make it easier for those firms that ought to be expanding and hiring to obtain finance on terms that allow them to expand and hire.
It is this point that brings us to US Treasury Secretary Timothy Geithner’s plan to take about $465 billion of government money, combine it with $35 billion of private-sector money, and use it to buy up risky financial assets.
The US Treasury is asking the private sector to put $35 billion into this $500 billion fund so that the fund managers all have some “skin in the game,” and thus do not take excessive risks with the taxpayers’ money.
Private-sector investors ought to be more than willing to kick in that $35 billion, for they stand to make a fortune when financial asset prices close some of the gap between their current and normal values.
If the fund does well over the next five years – returns profits of 9% per year –private investors get a market rate of return on their very risky equity investment and the equivalent of an “annual management fee” equal to 2% of assets under management.
If the portfolio does less well – profits of 4% per year – the managers still get a healthy but sub-market return of 10% per year on their equity.
And if the portfolio does badly – loses 1% per year – they lose roughly 70% of their investment.
Those are attractive odds.
Time alone will tell whether the financiers who invest in and run this program make a fortune.
But if they do, they will make the US government an even bigger fortune.
And 2% of assets under management is an annual fee that many sophisticated investors have been willing to pay private hedge funds – topped off with an extra fee of 20% of annual profits, which the Treasury is not paying.
The fact that the Geithner Plan is likely to be profitable for the US government is, however, a sideshow.
The aim is to reduce unemployment.
The appearance of an extra $500 billion in demand for risky assets will reduce the quantity of risky assets that other private investors will have to hold.
And the sudden appearance of between five and ten different government-sponsored funds that make public bids for assets will convey information to the markets about what models other people are using to try to value assets in this environment.
This sharing of information will reduce risk – somewhat.
When assets are seen as less risky, their prices rise.
And when there are fewer assets to be held, their prices rise, too.
With higher financial asset prices, those firms that ought to be expanding and hiring will be able to get money on more attractive terms.
The problem is that the Geithner Plan appears to me to be too small – between one-eight and one-half of what it needs to be.
Even though the US government is doing other things as well –fiscal stimulus, quantitative easing, and other uses of bailout funds – it is not doing everything it should.
My guess is that the reason that the US government is not doing all it should can be stated in three words: Senator George Voinovich, who is the 60th vote in the Senate – the vote needed to close off debate and enact a bill.
To do anything that requires legislative action, the Obama administration needs Voinovich and the 59 other senators who are more inclined to support it.
The administration’s tacticians appear to think that they are not on board – especially after the recent AIG bonus scandal – whereas the Geithner Plan relies on authority that the administration already has.
Doing more would require a legislative coalition that is not there yet.
Kidney for Sale
NEW HAVEN – World Kidney Day, to be held on March 12, is part of a global health campaign meant to alert us to the impact of kidney disease.
Sadly, there is little to celebrate.
According to the International Society of Nephrology, kidney disease affects more than 500 million people worldwide, or 10% of the adult population.
With more people developing high blood pressure and diabetes (key risks for kidney disease), the picture will only worsen.
There are 1.8 million new cases of the most serious form of kidney disease – renal failure – each year.
Unless patients with renal failure receive a kidney transplant or undergo dialysis – an expensive life-long procedure that cleanses the blood of toxins – death is guaranteed within a few weeks.
Last year, an Australian nephrologist, Gavin Carney, held a press conference in Canberra to urge that people be allowed to sell their kidneys. “The current system isn't working,” the Sydney Morning Herald quoted him as saying.
Carney wants to keep patients from purchasing kidneys on the black market and in overseas organ bazaars.
As an American recipient of a kidney who was once desperate enough to consider doing that myself (fortunately, a friend ended up donating to me), I agree wholeheartedly that we should offer well-informed individuals a reward if they are willing to save a stranger’s life.
If not, we will continue to face a dual tragedy: on one side, the thousands of patients who die each year for want of a kidney; on the other side, a human-rights disaster in which corrupt brokers deceive indigent donors about the nature of surgery, cheat them out of payment, and ignore their post-surgical needs.
The World Health Organization estimates that 5% to 10% of all transplants performed annually – perhaps 63,000 in all – take place in the clinical netherworlds of China, Pakistan, Egypt, Colombia, and Eastern Europe.
Unfortunately, much of the world transplant establishment – including the WHO, the international Transplantation Society, and the World Medical Association – advocates only a partial remedy.
They�focus on ending organ trafficking but ignore the time-tested truth that trying to stamp out illicit markets either drives them further underground or causes corruption to�reappear elsewhere.
For example, after China, India, and Pakistan began cracking down on illicit organ markets, many patients turned to the Philippines.
Last spring, after the Philippines banned the sale of kidneys to foreigners, a headline in the Jerusalem Post read, “Kidney Transplant Candidates in Limbo after Philippines Closes Gates.” (Israel has one of the lowest donation rates in the world, so the government pays for transplant surgery performed outside the country.)
Similarly, patients from Qatar who traveled to Manila are “looking for alternative solutions,” according to The Peninsula .
True, more countries must develop efficient systems for posthumous donation, a very important source of organs. But even in Spain, which is famously successful at retrieving organs from the newly deceased, people die while waiting for a kidney.
The truth is that trafficking will stop only when the need for organs disappears.
Opponents allege that a legal system of exchange will inevitably replicate the sins of the black market.
This is utterly backward.
The remedy to this corrupt and unregulated system of exchange is a regulated and transparent regime devoted to donor protection.
My colleagues and I suggest a system in which compensation is provided by a third party (government, a charity, or insurance) with public oversight.
Because bidding and private buying would not be permitted, available organs would be distributed to the next in line – not just to the wealthy.
Donors would be carefully screened for physical and psychological problems, as is currently done for all volunteer living kidney donors.
Moreover, they would be guaranteed follow-up�care for any complications.
Many people are uneasy about offering lump-sum cash payments.
A solution is to provide in-kind rewards – such as a down payment on a house, a contribution to a retirement fund, or lifetime health insurance – so that the program would not be attractive to people who might otherwise rush to donate on the promise of a large sum of instant cash.
The only way to stop illicit markets is to create legal ones.
Indeed, there is no better justification for testing legal modes of exchange than the very depredations of the underground market.
Momentum is growing.
In the British Medical Journal , a leading British transplant surgeon called for a controlled donor compensation program for unrelated live donors.
Within the last year, the Israeli, Saudi, and Indian governments have decided to offer incentives ranging from lifelong health insurance for the donor to a cash benefit.
In the United States, the American Medical Association has endorsed a draft bill that would make it easier for states to offer various non-cash incentives for donation.
Until countries create legal means of rewarding donors, the fates of Third World donors and the patients who need their organs to survive will remain morbidly entwined.
What better way to mark World Kidney Day than for global health leaders to take a bold step and urge countries to experiment with donor rewards?
Killing Growth in Russia
I want Russia to be a boring country – at least for the next few decades.
In the twentieth century, Russia set an unquestionable record for all sorts of upheavals and social experiments that attracted the world’s attention.
A time-out is essential.
This objective seemed to be entirely within reach – or at least possible – until the first half of 2003.
Foreign correspondents accredited in Moscow complained that nothing was happening in Putin’s Russia.
Investment in the Russian economy was growing fast.
Unfortunately, Russia’s rulers are not accustomed to leaving the country and the rest of the world for long without something surprising to gawk at.
Instilling a feeling of insecurity is the best way to scare your population into submission and frighten away potential investors.
How democratic or undemocratic a regime is usually doesn't bother investors.
All they need and care about is stable, predictable rules.
Indeed, the watchword among major investors is inertia.
It takes time to reach a decision on whether or not to invest in a project, and once an investment decision is made, it becomes rather difficult to stop the process quickly.
Russia’s government is now doing its best to prove that, while difficult, it is possible to defy the laws of business physics and kill investments that are already in the pipeline.
When Mikhail Khodorkovsky and other executives of Yukos, his oil company, were arrested last year, corporations investing or interested in investing in Russia were prepared to interpret the crackdown as an isolated incident brought on by the political agenda of the company and its CEO, who should have known better.
Never mind that by the second half of 2003, it had become obvious that the government intended to use legal means – in the form of massive tax claims – to destroy the company.
When only one company faced legal and financial problems, investors who had made a decision to put their money in Russia were ready to ignore this kind of development. “This must be an exception,” they kept repeating, like a mantra or a prayer.
I’ve heard something similar when Russian problems are discussed: “Just finish this Yukos affair.
We don’t care how it goes, just put an end to it.”
Unfortunately, the genie has been let out of the bottle. Throughout 2004, it became abundantly clear that Russia’s internal security apparatus had gained the upper hand in deciding how to manage economic and political problems.
Security structures developed a taste for this kind of work, and welcomed new responsibilities.
In many ways, they began to see fighting big business as akin to fighting terrorists.
And, indeed, they share one thing in common: the fight never ends.
More and more tax claims are being produced, and not only against Yukos.
Tax claims against the telecommunications company Vympelkom (one of Russia’s leading firms, and the first to be listed on the New York Stock Exchange in 90 years) send an unambiguous signal to investors: no one is safe.
In fact, official documents have now even started questioning the legitimacy of the privatization of the leading Russian companies in the 1990’s, which has opened the way for discussions about revising the outcomes of these privatizations.
Similarly, British Petroleum, which has invested more in Russia than any other company to date, has recently discovered that its rights to the Kovytkino gas field are not guaranteed at all.
This property, it now seems, could be reclaimed by the state at any moment.
It would be wrong to draw long-term conclusions from short-term economic information, even if this information confirms reality.
The alarming tendencies we are seeing today may be short-lived and with no serious consequences.
Post-socialist growth is a process that cannot (and should not) be easily stopped.
If, however, the authorities continue their efforts to destabilize the Russian economy, today’s disturbing tendencies may actually take root.
Russia can then forget about attaining the fast, sustainable growth that China has achieved.
Instead, we Russians will find ourselves trying to avert an impending economic crisis.
Of course, no one can predict when such a crisis might occur.
But one thing is certain: we will know which path the country’s leaders have chosen sooner rather than later.
Indeed, this year could be Russia’s most fateful yet.
Killing the Death Penalty
It is finally happening.
After 13 years of negotiations, delays, and hesitation, the UN General Assembly will vote this month on the proposal for a universal moratorium on the death penalty.
A large majority of the UN adopted the proposal on 15 November, despite attempts by some member states to obstruct, amend, or bury it.
Fortunately, in the end, the opponents were forced to fight a will stronger than their own: the will of those who – after the abolition of slavery and torture – want to mark another turning point for civilization.
But will this December’s vote be a mere formality?
Experience teaches us to be prudent.
I have not opened my bottle of spumante yet.
To be honest, I am not sure that all of the world’s governments have accepted the inevitable, or that even the most inflexible will now agree to the moratorium.
But I continue to have faith that the General Assembly will know, as always, how to meet this challenge.
We are all aware that even if the vote succeeds, the UN resolution will not be binding, and that establishing and enforcing a moratorium is only a necessary mid-way step toward full abolition.
I believe the UN should push for an immediate de facto suspension, without waiting for the debates to begin on legal reforms in the respective countries.
I hope that this approach will allow a wide consensus in the General Assembly, and that any last minute change of heart will fail.
One big lesson I learned during the struggle to create the International Criminal Court (ICC), and now during the battle for a moratorium on the death penalty, is that it is often better to aim for a realistic result rather than a perfect one.
Before the international community established the ICC, there were two ad hoc tribunals – one for the former Yugoslavia and one for Rwanda. Their work paved the way for the ICC.
Some European Union countries wanted to push for complete abolition of the death penalty right away.
I understand their position.
I would have wanted the same thing myself.
But had we followed that route, we would most likely have failed.
There is an important lesson in this for the EU at a time when it is seeking to become a global actor: we must reach an internal consensus while always bearing in mind what the external ramifications of our decision might be.
On the moratorium, we remained pragmatic and built a strong European foreign policy.
And it was an advantage in the UN negotiations to have a common Europeans position and to have spoken with a single voice.
A second lesson that I learned is also useful for the EU, which finds itself in a world in which new powers are emerging and where all actors from Manila to Algiers, from Doha to Libreville, must deal with the challenges of globalization and interdependence on a daily basis.
That lesson is that Europe has more friends than it has enemies in the world.
These friends deserve respect and attention.
If Italy and the EU had not understood the need to work with non-European countries, and make them feel that they were responsible and fully-fledged protagonists, the efforts to establish the ICC and be so close to declare a universal moratorium on the death penalty would have failed.
I know that this is not exactly a new lesson, but it is what I have in mind when I think of efficient multilateralism.
Not only does it work, but, above all, in some cases, it is the only way of moving forward.
Finally, a third lesson – relevant to the fight against the death penalty and, indeed, to winning any political battle – is perseverance, which I consider to be a mix of pig-headedness and the ability to maintain one’s position.
Without perseverance, there can be no progress.
All this is a success, not only for anti-death penalty radicals, for the “Hands off Cain” association, the Italian government, and for the European Union and its friends in the world.
It is much more: it is a success for all those who believe that it is still possible to improve our world – and ultimately the human condition – every day.
King Coal’s Climate Policy
COPENHAGEN – The United Nations Climate Change Treaty, signed in 1992, committed the world to “avoiding dangerous anthropogenic interference in the climate system.”
Yet, since that time, greenhouse-gas emissions have continued to soar.
The United States has proved to be the biggest laggard in the world, refusing to sign the 1997 Kyoto Protocol or to adopt any effective domestic emissions controls.
As we head into the global summit in Copenhagen in December to negotiate a successor to the Kyoto Protocol, the US is once again the focus of concern.
Even now, American politics remains strongly divided over climate change – though President Barack Obama has new opportunities to break the logjam.
A year after the 1992 treaty, President Bill Clinton tried to pass an energy tax that would have helped the US to begin reducing its dependence on fossil fuels.
The proposal not only failed, but also triggered a political backlash.
When the Kyoto Protocol was adopted in 1997, Clinton did not even send it to the US Senate for ratification, knowing that it would be rejected.
President George W. Bush repudiated the Kyoto Protocol in 2001 and did essentially nothing on climate change during his presidency.
There are several reasons for US inaction – including ideology and scientific ignorance – but a lot comes down to one word: coal.
No fewer than 25 states produce coal, which not only generates income, jobs, and tax revenue, but also provides a disproportionately large share of their energy.
Per capita carbon emissions in US coal states tend to be much higher than the national average.
Since addressing climate change is first and foremost directed at reduced emissions from coal – the most carbon-intensive of all fuels – America’s coal states are especially fearful about the economic implications of any controls (though the oil and automobile industries are not far behind).
The US political system poses special problems as well.
To ratify a treaty requires the support of 67 of the Senate’s 100 members, a nearly impossible hurdle.
The Republican Party, with its 40 Senate seats, is simply filled with too many ideologues – and, indeed, too many senators intent on derailing any Obama initiative – to offer enough votes to reach the 67-vote threshold.
Moreover, the Democratic Party includes senators from coal and oil states who are unlikely to support decisive action.
The idea this time around is to avoid the need for 67 votes, at least at the start, by focusing on domestic legislation rather than a treaty.
Under the US Constitution, domestic legislation (as opposed to international treaties) requires a simple majority in both the House of Representatives and the Senate to be sent to the president for signature.
Getting 50 votes for a climate-change bill (with a tie vote broken by the vice president) is almost certain.
But opponents of legislation can threaten to filibuster (speak for an indefinite period and thereby paralyze Senate business), which can be ended only if 60 senators support bringing the legislation to a vote.
Otherwise, proposed legislation can be killed, even if it has the support of a simple majority.
That will certainly be true of domestic climate-change legislation.
Securing 60 votes is a steep hill to climb.
Political analysts know that the votes will depend on individual senators’ ideologies, states’ voting patterns, and states’ dependence on coal relative to other energy sources.
Based on these factors, one analysis counts 50 likely Democratic “Yes” votes and 34 Republican “No” votes, leaving 16 votes still in play.
Ten of the swing votes are Democrats, mainly from coal states; the other six are Republicans who conceivably could vote with the president and the Democratic majority.
Until recently, many believed that China and India would be the real holdouts in the global climate-change negotiations.
Yet China has announced a set of major initiatives – in solar, wind, nuclear, and carbon-capture technologies – to reduce its economy’s greenhouse-gas intensity.
India, long feared to be a spoiler, has said that it is ready to adopt a significant national action plan to move towards a trajectory of sustainable energy.
These actions put the US under growing pressure to act.
With developing countries displaying their readiness to reach a global deal, could the US Senate really prove to be the world’s last great holdout?
Obama has tools at his command to bring the US into the global mainstream on climate change.
First, he is negotiating side deals with holdout senators to cushion the economic impact on coal states and to increase US investments in the research and development, and eventually adoption, of clean-coal technologies.
Second, he can command the Environmental Protection Agency to impose administrative controls on coal plants and automobile producers even if the Congress does not pass new legislation.
The administrative route might turn out to be even more important than the legislative route.
The politics of the US Senate should not obscure the larger point: America has acted irresponsibly since signing the climate treaty in 1992.
It is the world’s largest and most powerful country, and the one most responsible for the climate change to this point, it has behaved without any sense of duty – to its own citizens, to the world, and to future generations.
Even coal-state senators should be ashamed.
Sure, their states need some extra help, but narrow interests should not be permitted to endanger our planet’s future.
It is time for the US to rejoin the global family.
King Coal’s Pyrrhic Victory
BRUSSELS – Sometimes the most important news is what is not happening.
This summer has given us one such example: the climate-change bill, for which President Barack Obama had pushed so hard, will not even be presented to the United States Senate, because it stands no chance of passage.
This means that the US is about to repeat its “Kyoto experience.”
Twenty years ago, in 1990, the US participated (at least initially) in the first global talks aimed at achieving a global accord to reduce CO2 emissions.
At the time, the European Union and the US were by far the greatest emitters, so it seemed appropriate to exempt the world’s emerging economies from any commitment.
Over time, it became apparent that the US would not live up to its commitment, owing, as now, to opposition in the Senate.
The EU then went ahead on its own, introducing its path-breaking European Emission Trading System in the hope that Europe could lead by example.
Without the American climate-change package, the promises made by the US administration only seven months ago at the Copenhagen summit have become worthless.
The European strategy is in tatters – and not only on the transatlantic front.
China’s commitment to increase the CO2 efficiency of its economy by about 3% per year is of no help, because annual GDP growth rates of close to 10% mean that the country’s emissions will soar during this decade.
Indeed, by 2020, Chinese emissions could be more than triple those of Europe and even surpass those of the US and Europe combined.
Exempting emerging markets from any commitments, as the Kyoto Protocol sought to do, no longer makes sense.
Why has every attempt to set prices for global carbon emissions failed?
The answer can be found in one word: “coal” – or, rather, the fact that coal is cheap and abundant.
Burning hydrocarbons (natural gas and petrol) yields both water and CO2.
By contrast, burning coal yields only C02.
Moreover, compared to natural gas and crude oil, coal is much cheaper per ton of CO2 released.
This implies that any tax on carbon has a much higher impact on coal than on crude oil (or gas).
Owners of coal mines and their clients are thus strongly opposed to any tax on carbon.
They constitute a small but well organized group that wields immense lobbying power to block efforts to limit CO2 emissions by putting a price on them, as the planned US cap-and-trade system would have done.
In Europe, indigenous coal production no longer plays an important economic role.
It is thus not surprising that Europe could enact a cap-and-trade system that imposes a carbon price on a large part of its industry.
Indeed, the tax seems to fall mostly on foreign suppliers of coal (and to a lesser extend on foreign suppliers of hydrocarbons in the Middle East and Russia).
By contrast, opposition by US states whose economies rely significantly on coal production proved decisive for the fate of Obama’s climate-change bill.
The US experience has wider implications.
If it proved impossible to introduce a moderate carbon tax in a rich economy, it is certain that no commitment will be forthcoming for the next generation from China, which remains much poorer and depends even more on indigenous coal than the US.
And, after China, India looms as the next emerging coal-based industrial superpower.
Without any significant commitment from the US, the Copenhagen Accord, so laboriously achieved last year, has become meaningless.
Business will now continue as usual, both in terms of climate-change diplomacy, with its wandering circus of big international meetings, and in terms of rapidly increasing emissions.
The meetings are aimed at creating the impression that the world’s leaders are still working on a solution to the problem.
But rising CO2 emissions constitute what is really happening on the ground: a rapidly growing industrial base in emerging markets is being hard-wired to intensive use of coal.
This will make it exceedingly difficult to reverse the trend in the future.
A planet composed of nation-states that in turn are dominated by special interest groups does not seem capable of solving this problem.
Unfortunately, there is enough cheap coal around to power ever-higher emissions for at least another century.
The world will thus certainly become much warmer.
The only uncertainty is how much warmer that will be.
Determined action at the global level will become possible only when climate change is no longer some scientific prediction, but a reality that people feel.
But, at that point, it will be too late to reverse the impact of decades of excessive emissions.
A world incapable of preventing climate change will have to live with it.
King Menem\u0027s Farewell
Like ancient monarchs, Latin American caudillos believe they have been granted lifetime powers.
The last days of former president Carlos Menem's political career, furiously fighting his own political extinction, has offered a pathetic example of this tradition.
If he couldn't win the May 18 th presidential run-off--and it was clear before the vote that some 70% of voters would reject him in favor of a virtual unknown--he would refuse to play.
So the old tyrant, surrounded by his bodyguards and weeping supporters, announced that he would withdraw from the race.
The scene was Argentine magical realism: Menem, the old but tireless caudillo, kissing the hands of his followers as they cheered from this despoiled garden near the Tropic of Capricorn.
The caudillo who oversaw the glory days of the 1990's exited the race to save himself, to avoid a defeat, and to weaken Nestor Kirchner, the man from Patagonia who is now Argentina's 49 th president.
Although the public's outrage at his tactics makes a comeback unlikely, Menem still dreams of retreating with his defeated troops and reshaping himself from an alternative power base.
Still, Menem's presence is not the greatest threat Kirchner faces.
The real danger to the president-elect is Menem's legacy: a judiciary that is subordinate to political might, a system of political parties that cannot stay afloat financially without engaging in corruption, and economic chaos.
The effects can be seen in a 17% unemployment rate, extraordinarily low salaries, and a high crime rate.
The Argentina that once boasted the highest social mobility in all of Latin America no longer exists.
Nevertheless, beneath the turmoil and scandal of the last few days, one can glimpse positive signs.
The country has tired of the popular but unreliable caudillo.
Menem's predecessor as president, Raúl Alfonsin, won a pathetic 2.3% of the vote in the first round of the election.
Menem's maneuvering notwithstanding, the polls show that the man twice elected president was at the end of his road.
His tactics of the last week produced an array of indignant and amused critiques.
Although only time will tell, it's possible that Argentina's suffering has readied the country for a new, efficient kind of leadership.
The man who will be president has not yet displayed any of the attributes of a caudillo.
Kirchner, descended from European immigrants, has not captivated the masses, but he did capture the votes of an electorate with hopes and dreams for a government that can bring more jobs, assure better wages, and increase security against crime.
If he can deliver, Argentines may be ready to bid farewell to the caudillo form of government that has dominated the country's history.
The difficulties Kirchner faces are enormous.
The country's new leadership must renegotiate Argentina's debts.
The IMF and other creditors are demanding economic adjustments to increase the fiscal surplus, including higher tariffs on privatized public services and a wage freeze for public employees.
At the same time, Argentines and their leaders need to consolidate the budding economy, deal with social inequality, and reconstitute the political system and the integrity of the judiciary.
Kirchner appears ready to take on this difficult agenda.
During his university days in the 1970's, his politics were shaped by the leftist militancy of Peronism.
But both the passage of time and his political maturation as the governor of Patagonia have converted him into a European-style Social Democrat.
True, Kirchner entered the campaign not so much to win as to prepare for the next presidential election, but as Menem's opponents fell, he captured the spotlight.
To succeed, Kirchner will need the energy and imagination of a great statesman.
From the moment of victory, he will have scant time to put together a pact with the principal political forces that can sustain him.
He will also immediately have to convince a skeptical populace, already hurting, that more sacrifices are needed.
If he fails to get results quickly, his government may not last beyond six months.
If, on the other hand, he experiences a quick series of successes--even small ones--he will have helped usher in a new era.
There have been moments of crisis in Argentina during which great movements have arisen.
At the turn of the 20 th century, the Radical Party offered the middle class an electoral voice.
In the middle of that century, when the country was industrializing, the Peronist Party functioned in much the same say for the working class.
These two historic moments were, however, dominated by two bosses: Hipólito Irigoyen and Juan Perón.
Now that the Radical Party is agonizing over its role and Peronism is divided into three factions, perhaps Argentines will be able to construct a political option that relies on real leaders, and relinquishes caudillos.
But if Kirchner's presidency gives rise to yet more political frustration, then we Argentines will again make the mistake of looking for a caudillo who promises to answer all our prayers.
Already, democracy has lost legitimacy here and social protest movements grow increasingly violent.
It's possible that a new caudillo in different robes could lead the masses through yet another round of "magical nationalism," hating everything foreign and underscoring the dark side of globalization.
Kipling’s Wisdom
LONDON – The beginning of October marked the seventh anniversary of the beginning of the American-led bombardment of Afghanistan.
Seven years later, the Taliban are still fighting.
Some 50 insurgents died recently in an assault on Lashkar gar, the capital of Helmand province.
Osama bin Laden is nowhere to be found.
Has the time come for NATO to declare victory and leave?
Recently, a French diplomatic cable relating a conversation on September 2 between the French ambassador to Afghanistan, Francois Fitou, and his British colleague, Sherard Cowper-Coles, was leaked in Le Canard Enchainé , a French satirical magazine.
Cowper-Coles was reported to have said that the security situation in Afghanistan was deteriorating, that NATO’s presence was making it worse, and that the two American presidential hopefuls should be dissuaded from getting bogged down further.
The only realistic policy would be to cultivate an “acceptable dictator.”
Of course, the British Foreign Office denied that these thoughts reflected the British government’s views.
The departing commander of British forces in Afghanistan, Brigadier Mark Carleton-Smith, has claimed that defeating the Taliban was “neither feasible nor supportable.”
Two days after making that gloomy assessment, the French chief of the defense staff, General Jean-Louis Georgelin, followed suit.
And Kai Eide, the United Nations Secretary-General’s special representative in Afghanistan, has agreed that the situation cannot be stabilized by military means alone.
All call for a concerted political effort implying some form of negotiation with the Taliban.
A draft report by American intelligence agencies has also concluded that Afghanistan is in a “downward spiral” and casts serious doubt on the Afghan government’s ability to stem the Taliban’s resurgence.
Moreover, King Abdullah of Saudi Arabia hosted a Ramadan breakfast for the Afghan government and Taliban representatives.
Predictably, both parties deny that any serious negotiations took place, while the United States and Britain claimed to know nothing about this “Saudi initiative.”
But Afghan Defense Minister Abdul Rahim Wardak subsequently said that resolution of the conflict required a “political settlement” with the Taliban.
Yet at the recent NATO summit in Budapest, US Defense Secretary Robert Gates called on NATO members to provide more troops for missions in Afghanistan.
He accused the British of being “defeatist” and argued that Afghanistan’s deteriorating security situation could be addressed with an Iraq-style “surge,” which has undoubtedly brought down violence levels in that country.
The Americans have already committed 8,000 extra troops for next year.
So there seems to be a split.
The British and French are busy briefing, and preparing to scale down their commitments in Afghanistan.
They believe that boosting allied forces will only increase the sense of occupation and give the Taliban more targets.
The emergence of a “realistic dictator” might allow NATO to withdraw most of its troops within a few years.
But the Americans want a “surge,” and the US general commanding NATO forces in the country said last month that he needed three more brigades, some 15,000 troops in all, and Gates has asked the Europeans either to send or pay for them.
The Americans do recognize the importance of courting those Taliban leaders they believe to be motivated by tribal loyalties rather than religious ideology, but they oppose the latest Afghan policy of negotiating directly and officially with the Taliban.
Both Barack Obama and John McCain advocate increasing troop levels in Afghanistan above the levels that the Bush administration has already pledged.
Obama has that said he would send troops from Iraq as an urgent priority.
McCain has given no details of his plans.
Obama has made it a campaign issue to criticize the Bush administration for neglecting Afghanistan and diverting resources needed there to the misguided war in Iraq.
McCain, though, has always maintained that Iraq is the more important battlefield.
What candidates promise on the stump is not always what they do in office.
In the second presidential debate, Obama said, “We will kill bin Laden.
We will crush al-Qaeda.” Are his patriotic credentials strong enough for him to renege on this pledge and pursue negotiations to withdraw without capturing the talismanic Osama?
What would a US withdrawal mean for Afghanistan, for Pakistan, and for the future of NATO?
To retreat from its first major “out of area” mission would be a damaging blow for the alliance.
Curiously, McCain may have more room for maneuver.
Republican presidents have a better record in negotiating with enemies than do Democratic ones.
Eisenhower ended the Korean War, Nixon the war in Vietnam – both wars started by their Democrat predecessors.
Nixon, a vitriolic anti-Communist, opened relations with Mao’s China and started détente with the Soviet Union.
Reagan brought the US hostages back from Iran.
Having condemned the “evil empire” of communism, he helped bring the Cold War to an end. Only recently, George W Bush evicted North Korea from his “axis of evil” by removing that country from America’s list of countries that sponsor terrorism.
And what about the British?
Have they suddenly remembered the unsustainable cost of fighting asymmetric conflicts?
Afghanistan has never been a place any foreign army could stay for long.
The British were burned there twice (1840-1, 1878-80). So were the Russians.
Rudyard Kipling got his arithmetic right in 1886:
No proposition Euclid wrote,
No formulae the text-books know,
Will turn the bullet from your coat,
Or ward the tulwar’s downward blow
Strike hard who cares – shoot straight who can –
The odds are on the cheaper man.
The Techno-Political Transformation
GENEVA – It would be an understatement to say that our world is undergoing rapid and far-reaching change.
The global economy, the geopolitical landscape, the environment, and technology are subject to constantly shifting conditions that reinforce and transform one another in a web of complex interactions.
In such an unpredictable and interconnected setting, effective leadership must be based on a radical outlook, a multifaceted skillset, and an understanding of technology and talent.
The trends that are shaping the twenty-first-century world embody both promise and peril.
Globalization, for example, has lifted hundreds of millions of people out of poverty, while contributing to social fragmentation and a massive increase in inequality, not to mention serious environmental damage.
Likewise, big data offers untold benefits to companies and consumers, but poses a real threat to privacy and personal freedom.
A similar dichotomy applies to many other critical issues, including adaptation to climate change, efforts to improve resource management, urbanization and the rise of megacities, increased labor mobility, and human-capital expansion.
The scale and complexity of the challenges that lie ahead are undoubtedly daunting.
But rapid, far-reaching change can also present great opportunities.
To make the most of them, the world needs technologically literate leaders – call them “techno-politicians” – who have an intuitive understanding of how to shape progress in this new, unpredictable environment.
Within the framework of techno-politics, economic growth and technological innovation are the two most important factors shaping the global landscape.
How we adapt to and guide their trajectories will determine our collective future.
In economic terms, the world is entering an era of diminished expectations.
If, as predicted, average annual GDP growth amounts to 3% in the foreseeable future, it will take 25 years for the world economy to double in size – ten years longer than it took before the global economic crisis, when average GDP growth stood at 5%.
Learning to live with slower growth will not be easy.
Given that debt-fueled consumption has run its course, productivity gains will become an increasingly critical driver of economic growth.
But, at a time when rising inequality is undermining social cohesion, it is far from certain that the conditions required to support such gains – that is, improved education and stronger incentives to innovate – can be met.
Perhaps most important, even as economic growth slows, technological change continues at a breakneck pace, raising seemingly unanswerable questions about its potential impact on the global economy.
While some warn that technological progress will leave many unemployed, others remain convinced that displaced workers will find new jobs that do not yet exist, as has occurred in the past.
All that is certain is that technology and innovation are disrupting virtually every aspect of life.
How can we adapt to such a world?
What underpins success in this new and challenging environment?
In a techno-polity, two inextricably linked factors are crucial: talent and innovation.
Talent is now the key factor driving competitiveness (or the lack thereof) for companies and countries alike.
Indeed, “talentism” will be the prevailing economic credo, with human or intellectual capital becoming the most critical asset – and the one most difficult to acquire and retain.
Innovation, spurred by talent, will determine success.
In the future, the distinction between high- and low-income countries, or between emerging and mature markets, will no longer matter.
The question will be whether or not an economy can innovate.
A techno-polity also recognizes the critical role of cooperation, strategic thinking, and adaptation.
The biggest challenges nowadays are global in nature, and thus can be addressed only by engaging decision-makers and interest groups from various spheres.
New partnerships must be forged, even among actors with seemingly disparate interests.
Those who struggle to cope with change must be supported, not scorned.
But effective techno-politicians must go beyond firefighting to think about the long term.
They must be able to respond to new and impending developments without delay, constantly experimenting with new ideas and processes.
Moreover, they must to be able to understand and react simultaneously to multiple competing realities.
The role of the techno-polity is to steer the world toward positive outcomes.
It will demand that decision-makers use their heads and hearts – and it will also test their nerves.
Know Thyself, Russia
मादक औषधियों के विरुद्घ पश्चिम अफ्रीका का दिशाहीन युद्घ
अक्रा – यूनाइटेड किंगडम के ऑफिस फॉर नैशनल स्टैटिस्टिक्स के अद्यातन् अनुमान के अनुसार अवैध औषधियों के कारोबार से वहां की अर्थव्यवस्था में हर साल 4.4 अरब पौंड (7.6 अरब डॉलर) जुड़ते हैं. इससे अवैध मादक पदार्थों के कारोबार के सिर चकराने वाले विशाल पैमाने का आभास होता है. पश्चिम अफ्रीका जैसे क्षेत्रों के लिए जिनकी अर्थव्यवस्था ना तो यूके जैसी विशाल है और ना ही विकसित इस गतिविधि का प्रभाव कहीं अधिक घातक हो सकता है.
आज पश्चिम अफ्रीका अधिकाधिक वैश्विक मादक पदार्थों के व्यापार में उलझता जा रहा है. इसकी अवस्थिति इसे लैटिन अमेरिकी व एशियाई उत्पादन केंद्रों और यूरोप तथा संयुक्त राज्य अमेरिका के उपभोक्ता बाजारों के बीच बड़े पारगमन बिंदु के रूप में दुरुपयोग होने के नाते और कमजोर बना रही है.
परंतु मध्य अमेरिका का अनुभव दर्शाता है कि पारगमन वाले देशों का केवल मादक पदार्थों की तस्करी के लिए गलियारे के तौर पर ही उपयोग नहीं होता है. अवैध औषधियों और उनसे जुड़े धन के कारण उनके समाज में अस्थिरता भी फैलती है. यह उद्विग्नकारी घटनाक्रम - जो ‘‘मादक औषधियों के खिलाफ विफल वैश्विक लड़ाई’’ का दुष्परिणाम है - हमारे क्षेत्र में जो कुछ आर्थिक व सामाजिक लाभ मिलने लगे हैं उन्हें उलटा कर देने का खतरा उत्पन्न कर रहा है.
अभी तक पश्चिम अफ्रीका सबसे बुरी सीमित किंतु नियमित हिंसा से बचा रहा है जिनसे मध्य अमेरिका औषधियों के पारगमन के दौरान ग्रस्त रहा है. लेकिन क्योंकि इस धंधे में भारी रकम दांव पर रहती है, अतः सुस्ती की कोई गुंजाइश नहीं है. पश्चिम अफ्रीका में कोकीन व्यापार का पैमाना तो उस क्षेत्र के अनेक देशों के मिले-जुले सरकारी बजट से भी कहीं अधिक है.
हम जानते हैं कि मादक पदार्थों के व्यापार ने गिनी-बिसाऊ और माली जैसे देशों में राजनीतिक उथल-पुथल में प्रत्यक्ष या अप्रत्यक्ष भूमिका निभाई है. इसलिए मादक पदार्थों के तस्करों के खिलाफ राष्ट्रीय व अंतर्राष्ट्रीय प्रयास तेज करने होंगे. इसमें उन लोगों को निशाना बनाना चाहिए जो नेटवर्कों को चलाते हैं बजाय इसके कि उनके प्यादों को पकड़ने में विरल कानून प्रवर्तन संसाधनों को जाया किया जाए. हमें उन लोगों को पकड़ना होगा जो इस धंधे में सबसे ज्यादा लाभ कमाते हैं भले ही वे कोई भी हों और उनकी कैसी भी हैसियत हो.
लेकिन इस क्षेत्र के देशों में केवल मादक पदार्थों के अवैध कारोबा�� के कारण ही अस्थिरता नहीं आ रही हैः इन पदार्थों की खपत/सेवन भी बड़ी समस्या बनती जा रही है. मेरे द्वारा गठित और नाइजीरिया के पूर्व राष्ट्रपति ओलुसेगुन ओबासांजो की अध्यक्षता वाले वेस्ट अफ्रीका कमीशन ऑन ड्रग्स की ताजा रिपोर्ट बताती है कि कोकीन, हैरोइन और स्थानीय स्तर पर निर्मित मेथएम्फीटामीन जैसी नशीली दवाएं इस पूरे क्षेत्र में खुलेआम बिक रही हैं. इससे इस इलाके के खासकर युवा लोगों में इन दवाओं का उपयोग और उन पर निर्भरता बढ़ रही है.
लेकिन यह पूरा क्षेत्र दवाओं के उपयोग और उन पर निर्भरता से निपटने के लिए ना तो तैयार है और ना ही उनके पास इतने साधन हैं. कुल मिला कर ये किया जा रहा है कि दवाओं का उपयोग करने वालों को प्रताडि़त और दंडित किया जाता है. पर उन्हें समाज के हाशिये पर ढकेलने या जेल में डालने मात्र से ही समस्या का समाधान नहीं होगा. इसके विपरीत इससे स्वास्थ्य समस्याएं और विकराल होंगी जिससे पश्चिम अफ्रीका की पहले से काम के बोझ से दबी न्यायिक व्यवस्था पर और भारी दबाव पड़ेगा.
इसकी बजाए कमीशन की रिपोर्ट में नशीली दवाओं के दुरुपयोग से निपटने के लिए अलग तरीका सुझाया गया है. इसमें इसे अपराध-न्याय मुद्दे के रूप में नहीं बल्कि जन-स्वास्थ्य समस्या के तौर पर देखा गया है. इसका अर्थ है कि नशीली दवाओं की लत के उपचार की सुविधाओं व कार्यक्रमों के लगभग पूर्ण अभाव को दूर किया जाए और दवाओं के दुरुपयोग के नियंत्रण व निगरानी के लिए प्रशिक्षित कर्मियों की नियुक्ति की जाए.
कमीशन को ज्ञात है कि पहले से खस्ताहाल स्वास्थ्य-सेवा बजटों पर और भी अन्य जरूरी मांगों का दबाव है. लेकिन इस चुनौती का इतना अधिक महत्त्व है - और इससे पार पाने में विफलता के गंभीर परिणाम होंगे - कि कमीशन का सुझाव है कि इस पूरे क्षेत्र में न्यूनतम मानक वाली किसी दवा-उपचार नीति को तुरंत अपनाया जाए.
इसमें दवाओं की लत के उपचार व संबंधित स्वास्थ्य सेवाओं की स्थापना शामिल हैं. नुकसान को कम करने वाले उपाय भी लागू करने होंगे, यथा सुइयों की अदला-बदली के कार्यक्रम जो एचआईवी व दवाओं से जुड़ी मौतों को कम करने में अपनी उपयोगिता साबित कर चुके हैं. आज तक पूरे पश्चिम अफ्रीका में सेनेगल ही एकमात्र देश है जिसने अपने यहां सरकार द्वारा संचालित हानि-न्यूनीकरण कार्यक्रम को कुछ हद तक लागू किया है.
नशीली दवाओं के प्रभाव से निपटने के लिए जानकारीपूर्ण, मानवीय तथा सुसंगठित नीति अपनाने के लिए नेतृत्व की जरूरत है जिसके लिए इस क्षेत्र के सभी देशों को मिल-जुल कर प्रयास करने होंगे. इसके लिए कमीशन सरकारों, नागरिक-सामाजिक समूहों तथा क्षेत्रीय संगठनों से साझी-प्रतिबद्घता का आवाह्न करता है. हम इस मुद्दे को और अधिक दरी के नीचे नहीं छिपा सकते हैं और ना ही ये कह सकते हैं कि यह हमारी समस्या नहीं है.
रिपोर्ट इन प्रयासों के लिए अंतर्राष्ट्रीय समुदाय से और अधिक समर्थन का आग्रह करती है. पश्चिमी अफ्रीकी देश अवैध नशीली दवाओं के उत्पादन व सेवन के प्रमुख केंद्र हैं. इन देशों को नशीली दवाओं की रोकथाम, उपचार तथा नुकसान को कम करने के उपायों पर धन खर्च करना चाहिए बजाए इसके कि वे धरपकड़ और कानून लागू करने में निवेश करें.
दिशा परिवर्तन के बगैर पश्चिमी अफ्रीका में दवाओं की तस्करी, उत्पादन व दुरुपयोग संस्थाओं की अहमियत कम करते रहेंगे, जन स्वास्थ्य को खतरा उत्पन्न करेंगे तथा विकास व तरक्की को नष्ट करते रहेंगे. लेकिन दवाओं संबंधी कानूनों में सुधार, पुराने नशेडि़यों को उपचार की सुविधाएं प्रदान करने तथा ऊंची हैसियत वाले तस्करों को पकड़ने से समुदायों, परिवारों व व्यक्तियों पर नशीली दवाओं के विनाशकारी प्रभाव कम होंगे. राष्ट्रीय व अंतर्राष्ट्रीय प्रयासों पर पुनः दृष्टि केंद्रित करने का साहस होना चाहिए. इससे हम यह सुनिश्चित कर सकेंगे कि हमारे युवा स्वस्थ व सुरक्षित रूप से पनप सकें.
Grading Abenomics
TOKYO – It has been almost a year since Prime Minister Shinzo Abe launched his plan to lift Japan’s economy out of two decades of deflation and recession.
How has “Abenomics” fared so far?
Answering this question requires breaking Abenomics down into its three components – massive monetary easing, expansionary fiscal policy, and a long-term growth strategy – which Abe, referring to the tale of Motonari Mori, a sixteenth-century daimyo (feudal lord), calls the “three arrows.”
According to legend, Mori instructed each of his three sons to snap an arrow in half.
After they had succeeded, he told them to tie three arrows together, and break the whole bundle at once; none was able to do it.
Like Mori’s three arrows, the three arrows of Abenomics are supposed to reinforce each other.
But Mori’s arrows were bound together in parallel, whereas Abe’s policy arrows are connected through underlying structural relationships.
While the first and second arrows aim to transform Japan’s actual growth path, the third operates on the economy’s potential growth path, which assumes the optimal use of all available resources and technologies.
Since Abenomics was launched, the “deflation gap” (the difference between actual and potential output) has dropped from roughly three percentage points to below 1.5.
This implies that, while the first two arrows are helping to improve Japan’s actual growth path, the third arrow has yet to do much for potential growth.
In fact, since Abe’s first arrow took flight, Japan’s stock market has soared with it, recording an unprecedented 40% annual gain, while the yen has depreciated against the dollar by 20%, boosting Japanese firms’ export competitiveness.
Moreover, credit growth has accelerated and asset prices have risen – trends that will encourage consumption by triggering the wealth effect (when people spend more because they feel richer).
And monetary expansion is also having a positive impact on the labor market: the unemployment rate has fallen to 4%, and the job-to-applicant ratio is nearing parity.
With real GDP growth around 4% in the first half of the year (though it did fall below 2% in the third quarter), the first arrow has already hit the bull’s eye – a performance worthy of an A+.
The second arrow entails a sharp increase in short-term fiscal expenditure, especially investment in infrastructure projects.
While those who, like me, adhere to the Mundell-Fleming framework (according to which fiscal stimulus will be offset by the resulting increase in capital inflows, currency appreciation, and reduced export competitiveness) do not stress the impact of flexible fiscal policy, Keynesians take it very seriously.
On the assumption that faster growth will neutralize any threat to debt sustainability, the second arrow receives a B.
When the first and second arrows lift actual growth above potential growth, monetary expansion will no longer be able to produce substantial GDP or employment gains.
That is when the third arrow, which aims to boost Japan’s potential growth through structural change (including increased private investment, technological innovation, improved trade links, and reformed corporate-tax policy), will become far more important.
Abe has set out the vision behind his long-term growth plan. “Japan is a country that challenges, that is open, and that innovates,” he says.
Japan’s longtime approach to industrial policy, in which the Ministry of International Trade and Industry provided support and subsidies for selected industries, helping them to compete in world markets, is now obsolete (indeed, MITI’s role was taken over by the Ministry of Economy, Trade, and Industry in 2001).
When Japanese firms operate at the frontier of industry, bureaucrats cannot choose the winners.
Given this, the government’s role should be confined to areas where externalities exist, such as carbon-emissions reduction.
Unfortunately, a new, clearly defined approach to industrial policy is still missing.
In fact, descriptions of some third-arrow projects seem to be based on little more than wishful thinking, with new technology or knowhow apparently expected simply to fall into Japan’s lap.
A more effective approach would entail achievable, concrete goals like relaxing labor- and financial-market regulations, reducing corporate income taxes, liberalizing trade by joining the Trans-Pacific Partnership, and perhaps easing immigration policy.
The problem is that bureaucrats like the power that regulation affords them.
Indeed, deregulation would require them to put their country’s long-term interests above their own short-term interests – a choice that they have so far resisted.
To paraphrase John F. Kennedy, it is time for Japan’s leaders to ask not what their country can do for its government, but what the government can undo for its country.
In this context, the third arrow of Abenomics cannot yet be fairly assessed.
While its impact has so far been lacking, it certainly cannot be deemed a failure, with Japan’s top leaders still working tirelessly to build the needed momentum.
The most appropriate grade is therefore an “E” for effort.
One hopes that it is an effort that proves adequate to overcome bureaucratic resistance to deregulation in the coming year.
With an A+, a B, and an “E,” Abenomics’s first-year report card reflects important progress, providing plenty of reason for enthusiasm.
Who’s Afraid of Tapering?
TOKYO – The US Federal Reserve’s gradual exit from so-called quantitative easing (QE) – open-ended purchases of long-term assets – has financial markets and policymakers worried, with warnings of capital flight from developing economies and collapsing asset prices dominating policy discussions worldwide.
But, given that most major economies operate under a flexible exchange-rate regime, these concerns are largely unwarranted.
The logic behind the fear of the Fed’s “tapering” of QE is straightforward.
Unconventional monetary policy in the United States – and in other advanced countries, particularly the United Kingdom and Japan – drove down domestic interest rates, while flooding international financial markets with liquidity.
In search of higher yields, investors took that liquidity – largely in the form of short-term speculative capital (“hot” money) – to emerging markets, putting upward pressure on their exchange rates and fueling the risk of asset bubbles.
Thus, the Fed’s withdrawal from QE would be accompanied by a capital-flow reversal, increasing borrowing costs and hampering GDP growth.
Of course, not all emerging markets, according to this logic, are equally exposed.
Among the most vulnerable countries are Turkey, South Africa, Brazil, India, and Indonesia – the so-called “Fragile Five” – all of which are characterized by twin fiscal and current-account deficits, high inflation, in addition to faltering GDP growth.
This logic would be correct if the world were operating under a fixed exchange-rate regime, with governments tying official exchange rates to another country’s currency or the price of gold.
Under these conditions, monetary contraction (or slowing expansion) would have a recessionary (or a less stimulative) impact on other economies.
With flexible exchange rates, however, monetary-policy contraction in a major economy would stimulate other economies in the short run, while monetary expansion would damage their performance.
(To be sure, in the medium or long run, monetary expansion can facilitate increased domestic production and trade, thereby generating positive spillover effects.)
After the collapse of Lehman Brothers in 2008, the rapid expansion of the money supply in the US and the UK triggered a sharp appreciation of the Japanese yen, as well as of some emerging-market currencies.
In short, QE is what merits concern – not its termination.
Of course, the Fed’s policy reversal could hurt countries that maintain fixed – or, like China, “managed floating” – exchange rates.
Likewise, weaker eurozone economies like Greece and Spain, which would prefer stronger monetary stimulus than their more competitive counterparts in Europe are willing to accept, may suffer.
But, given that these economies have chosen to adhere to a fixed exchange rate, the Fed cannot really be blamed for the fallout.
In fact, the Fed – and other advanced-country central banks – should not be blamed for the negative effects of monetary expansion, either.
Japan’s bold monetary easing, for example, was a critical element of Prime Minister Shinzo Abe’s strategy for lifting the Japanese economy out of more than a decade of recession – and it has led to a remarkable recovery.
The problem is that the policy has also caused the yen to depreciate, leading nearby countries to accuse Japan of adopting “beggar-thy-neighbor” policies.
Similarly, emerging-market officials warned that monetary expansion in the US and the UK would trigger a wave of competitive currency devaluations, with Brazilian Finance Minister Guido Mantega going so far as to accuse the Fed and the Bank of England of waging a full-blown “currency war.”
But, while it is true that such expansionary policies can have a recessionary impact on other economies, modern international-finance theory shows that the concept of a “currency war” is a myth.
The reality is that, under a flexible exchange-rate regime, competitive devaluations do not produce undesirable imbalances.
On the contrary, they can bolster recovery in participating economies.
In fact, currency devaluations were critical to ending the Great Depression.
As Barry Eichengreen and Jeffrey Sachs demonstrated in 1984, while abandoning the gold standard had an immediate negative impact, it quickly spurred recovery, with the first countries to devalue their currencies escaping depression earlier than others.
The fact is that, with a flexible exchange rate, a country can offset the recessionary impact of a neighboring country’s monetary easing using its own independent monetary policy, guided by carefully chosen inflation targets.
If all countries adopt this approach, the entire global economy benefits.
By working to revive the domestic economy, the Fed, like other advanced-country central banks, is simply fulfilling its mandate.
Instead of complaining about its actions, emerging-country policymakers should be devising strategies for offsetting the spillover effects on their own economies.
Japan’s Tax-Hike Test
TOKYO – As October began, Japanese Prime Minister Shinzo Abe announced that his government would raise the country’s consumption-tax rate from 5% to 8% next April, and presumably to 10% 18 months after that.
The contrast with what is now happening in the United States could not be sharper.
As US President Barack Obama’s domestic opponents resist his signature health-care legislation, owing to the wealth transfers that it implies, Japanese bureaucrats are trying to recover the authority to administer tax revenue to support social-welfare programs.
There are many arguments for raising Japan’s consumption-tax rate.
Japan’s government has a huge debt burden, and its consumption-tax rate is far lower than the value-added-tax rates that prevail in Europe.
At the same time, the effective corporate-tax rate in Japan is higher than it is elsewhere, making it difficult for Japan to attract investment, foreign or domestic.
In order to survive international tax competition – and thus be able to rely on corporate taxes as a source of revenue – Japan’s corporate-tax rate should be lowered in the long run.
Nonetheless, with Japan’s economy just beginning to recover from more than 15 years of stagnation, such a steep consumption-tax hike is not advisable.
In fact, such a large increase has seldom – if ever – been attempted, owing to the risk that it would spur consumers to spend before it takes effect, thereby reducing future consumption.
Moreover, any sudden rise in the tax burden results in deadweight losses.
A consumption-tax hike should be timed in such a way that it does not suffocate the economic recovery that Abe’s bold economic program, dubbed “Abenomics,” is facilitating.
Western economists typically favor gradual tax increases;
Jeffrey Frankel, for example, recommends a pre-announced plan to increase the tax rate by, say, one percentage point annually for five years.
But Japanese policymakers, media, and academics largely continue to favor a sudden and substantial hike.
Last year, when Japan’s Diet passed the legislation to raise the consumption tax, it included a provision calling for the plan to be reevaluated if economic conditions required it.
When the Cabinet Office called upon 60 business leaders, academics, and economists (including me) to perform such an evaluation, more than 70% favored the hike.
But the selection of experts reflected a clear bias toward the finance ministry’s views.
In fact, the ministry has used its “informational campaign” to shape public discussion, convincing scholars, business economists, and the general public to be more concerned about keeping the budget deficit under control than about the effects of a negative demand shock.
This is a typical example of what economists like Joseph Stiglitz call “cognitive capture.”
For more than two decades – a period characterized by chronic recession and deflation – Japan has retained its position as the world’s richest country in terms of net wealth abroad.
At the end of last year, Japan’s net international wealth amounted to ¥296 trillion ($3 trillion).
But Japan’s government is believed to be the world’s poorest, with the finance ministry reporting that the gross debt/GDP ratio exceeds 200%.
That is an exaggeration.
For example, Ichizo Miyamoto, a former senior finance-ministry official, claims that, accounting for the government’s assets, Japan’s net debt/GDP ratio is below 100%, similar to that of the United States.
The validity of the finance ministry’s position on the tax increase was called into question by the decline in Japan’s Nikkei index of stock futures after Abe’s October 1 announcement.
To be sure, the budget crisis in the US caused most stock futures to decline on that day.
But, if the ministry’s view of the consumption tax was correct, Nikkei futures would have gained more – or at least lost less – than futures in other countries. Instead, the index declined three times more steeply than others.
And yet, while the consumption-tax increase is not ideally timed, I am not entirely pessimistic about its impact.
The Mundell-Fleming framework – which describes the short-run relationship between the nominal exchange rate, interest rates, and output in an open economy – indicates that, under Japan’s flexible exchange-rate regime, the post-hike decline in demand could be addressed relatively easily with more expansionary monetary policy.
That is why Bank of Japan Governor Haruhiko Kuroda should respond accordingly if the tax increase has a deflationary impact.
In doing so, he would avoid the criticism that former Bank of England Governor Mervyn King faced for supporting a consumer-tax hike in 2011 but failing to use monetary policy to offset its recessionary effects.
Just a year ago, former Prime Minister Yoshihiko Noda attempted, despite a deep recession, to raise the consumption tax without monetary easing – a strategy that could have brought only continued economic stagnation.
Abe must not make the same mistake.
If Japan’s government can overcome a demand setback after the tax increase takes effect – leaving the economy functioning smoothly and initiating a recovery in government revenue – Abe will be able to declare Abenomics an unequivocal success.
Kosovo and Kostunica
PRISTINA: “Everything must change so that nothing will change.”
That aphorism, from Prince Lampedusa’s great novel The Leopard now seems applicable to Kosovo after Milosevic’s fall.
Will a democratically elected president in Belgrade mean that everything has changed for Serbia, but that nothing has changed in Serbia’s relations with Kosovo?
Whether Serbia is a democracy or not, one thing is certain: in the next five years Kosovo has little hope of becoming a prosperous democratic country.
The reason is simple: Kosovo has never been such.
Today, it is a UN administered territory undergoing a transition from 50 years of communism, 10 years of apartheid-like Serb rule, and the ravages of war.
Moreover, Kosovo’s long-term status is undefined: although a UN protectorate it remains formally under the sovereignty of the disintegrating Yugoslav federation of Serbia and Montenegro.
Becoming a democratic, economically prosperous state may, indeed, be beyond the reach of Kosovars for years to come, because Kosovo first needs to become its own state if prosperity and democracy are to take root.
UN Security Council Resolution 1244, the supreme law here, precludes this unless both sides – Serbia and Kosovo – agree to it in negotiations.
But Resolution 1244 does not rule out Kosovo acquiring a de-facto government that functions like a true national government.
Real possibilities exist for this to happen.
The first democratic local elections in Kosovo’s history – which began last weekend – will bring strong pressures from Kosovars to write a provisional constitution and hold general elections.
Furthermore, there is also a wide consensus to pursue privatization at full speed.
Indeed, there is a chance that economic reform here can be conducted in an unprecedented way in this region.
Corruption, which blighted privatization elsewhere, should be minimized because of UN supervision.
Effective privatization could change Kosovo’s dynamics.
But an improved economy is unlikely to satisfy the vast majority of Kosovo’s people.
Permanent status is what matters most, and will be determined largely by Kosovo’s political and economic transformation.
But a tolerant society living in peace with its neighboring states must also be created if international recognition is to be secured.
Vast improvement is needed on the Kosovar side for tolerance to take root.
Tolerance, however, is hard to come by when hindered by the UN’s failure to contain the lawlessness that has plagued Kosovo since the end of NATO’s bombing.
Improved relations with most of Kosovo’s neighbors should not be hard to achieve, save for one neighbor. Relations between Serbia and Kosovo, however, provide all the complications a diplomat could need.
Here, Milosevic’s fall raised hopes by offering the promise of open dialogue between Serbia and Kosovo.
Those hopes are laced with skepticism.
Kosovo’s skepticism about Serbia’s democratic credentials is derived, primarily, from knowing that conflict between Kosovo and Serbia is structural, not based on a single man.
No matter how much Milosevic exacerbated tensions, his policies toward Kosovo’s ethnic Albanians were genuinely popular among Serbs.
Indeed, throughout the decade of Yugoslavia’s wars, Serbia’s attitude toward its minorities reflected a nationalist consensus, in which the bulk of what was then the opposition participated.
Most Kosovars will find talking to Serbia about improved relations difficult if Serbia does not undergo some sort of “de-nazification” process.
President Kostunica’s refusal, so far, to even discuss putting internationally indicted war criminals on trial is not a hopeful omen here.
But Kosovo is not alone in continuing to identify the state led from Belgrade with the atrocities of the past decade.
So most of Serbia’s neighbors are surprised at the West’s euphoria at Milosevic’s fall.
Several Western diplomats, indeed, claim that the changes in Belgrade are so historic that everything in the region must be subordinated to them; that today’s Yugoslav Federation must quickly become a member of the OSCE, the UN, the IMF, and the World Bank.
But overlooking history provides no incentive for President Kostunica to critically examine Serbian actions over the past decade.
A warm international embrace may only undermine the chance for negotiated settlements between Serbia and its neighbors.
Recently I suggested that what needs to develop is something like a “Three Taiwan Scenario” in which Kosovo, Montenegro, and Serbia experience a period of internal consolidation, focusing on how their states function rather than on how they are recognized internationally.
Stripped of international recognition two decades ago, Taiwan turned inward and created a prosperous economy and new democracy.
This process, somewhat clandestinely, is underway in Kosovo.
It should begin in Serbia and Montenegro as well.
If everything has now changed in Serbia, the events of a year ago also changed everything forever in Kosovo.
Today, no politically relevant force in Kosovo is prepared to advocate or accept any solution that hinders the ability of Kosovo’s people to decide their own fate.
Kosovo\u0027s Constitutional Fiction
PRISTINA, KOSOVO: One year after NATO's war over Kosovo, renewal is to be seen everywhere: in reconstructed houses; in the many shops opened in the ground floors of ruined buildings; in the budding cultural, intellectual, and journalistic life of Pristina.
In only one area – politics – do these energies face a serious obstacle.
Kosovo's political logjam is due, in part, to the inexperience of Kosovo's political parties, but it is mostly the result of a contradiction in UN Resolution 1244 which serves, for now, as a kind of constitution for Kosovo.
This document maintains the fiction that Kosovo is subject to the "sovereignty" of the "Federal Republic of Yugoslavia."
In the resolution's words, the UN mission for Kosovo (UNMIK) must provide "substantial self-government for Kosovo" while "taking full account" of "the principles of sovereignty and territorial integrity of the Federal Republic of Yugoslavia."
Considering that it was Yugoslavia under the Slobodan Milosevic, an indicted war-criminal, which attempted genocide against the Albanian majority of Kosovo, the requirement seems akin to telling someone to jump ten feet into the air while taking into full account the need to keep his feet on the ground.
The provision, adopted to satisfy countries worried about their own potential breakaway regions (Chechnya in Russia, and Tibet in China), violates the principle, engraved in common sense if not in international law, that genocide nullifies sovereignty – that a state cannot seek to extinguish a people and yet insist on governing them.
UNMIK, of course, was not established to carry out the orders of Slobodan Milosevic and does not do so.
Nevertheless, the contradiction at the heart of 1244 hinders Kosovo's administration.
Consider privatization of the economy, formerly run on socialist lines.
Under the Yugoslavian constitution of 1974 now provisionally used in revised form by UNMIK, industry is "owned" by parliament.
(In reality, of course, the Communist Party was in charge.)
However, Kosovo has no parliament, while Yugoslavia (meaning, Serbia) does.
Theoretically, funds from privatization in Kosovo should go to Serbia.
UNMIK scarcely intends to send money to Milosevic; yet neither, thanks to 1244, can it set up a Kosovar parliament.
Legal limbo is the result. Ajri Begu, head of the Bank for Payments and Transfers and co-head of UNMIK's economic policy board, comments, "Life started here from the first day after the war.
Now we have done what we can do as citizens, and we need someone to play the role of a state to set the rules for investment."
But a state is what Resolution 1244 rules out.
Kosovo is something utterly new: an internationally mandated stateless state.
It has every form of political organization: NGOs, an international governing authority, political parties of every stripe.
But what it needs most, namely government, it is denied.
So everything is improvised.
Those doing the improvising, unfortunately, are not only UNMIK, but criminals, both international and domestic, who revel in a legal vacuum.
Their specialties are drugs, smuggling, and, recently, traffic in women.
Corruption may become what it has nearly become in Russia: not the exception to the rule but the rule itself.
This October local elections will be held.
What will be the powers, competencies, and resources of the mayors to be elected?
Whatever rules are improvised by UNMIK, they will lack the legitimacy which a Kosovar constitution would enjoy.
No matter how well intentioned, UNMIK rule cannot be democratic.
Intervention in Kosovo will succeed only when a true body politic is established.
UNMIK can act more boldly to create economic and political structures than so far.
Yet, due to Resolution1244, it cannot write a constitution for Kosovo.
Russia, China, and others on the Security Council would likely prevent this.
Can the Kosovars write a constitution on their own?
Maybe.
Given today's legal ambiguity, there appear to be few obstacle to moves by the Kosovars to establish their own governing institutions.
To suggest this is not to say that it will occur.
The degree of devotion to democracy among local parties is unknown.
Political violence has rampaged since the war – not only against Serbs but against political moderates.
In the war's aftermath, the Kosovo Liberation Army unilaterally took de-facto power in many cities.
The UN accommodated these self-appointed authorities.
Will the KLA willingly relinquish office if a democratic vote goes against them?
The answer is unclear.
Success in resolving these issues has repercussions beyond Kosovo.
It could offer an example of successful international intervention to prevent a human catastrophe.
Failure would cast a shadow over similar efforts in future.
Ardian Arifaj, managing editor of Koha Ditore, Kosovo's most alert newspaper, comments that "it is in a way a good thing that 'the internationals' don't have a vision for Kosovo.
It leaves room for us to develop a vision."
Mrs. Nekibe Kelmendi, whose son and husband were murdered at the war's outset, and who is now Co-head of the Department of Justice for Kosovo, agrees. "We do not need to ask the security council in order to become a state.
There are other paths.
In part, it will depend on other states around us, who can recognize us.
In the last analysis, self-government cannot be derived from international documents; it is in the people.
It is ours."
Kremlin Musical Chairs
It’s that time again – Russia’s pre-election season when prime ministers are changed as in a game of musical chairs.
The last one seated, it is supposed, will become Russia’s next president.
As the end of his rule approached, Boris Yeltsin went through at least a half-dozen prime ministers, looking for the one who would ensure the security not only of Russia’s new democracy and market economy, but also of his “family” and the wealth that it had accumulated during his rule.
The last man seated then was, of course, Vladimir Putin.
Now it is Putin’s turn to call the tune, dismissing Mikhail Fradkov and dissolving the government that had served him throughout his second term in order to prepare for the parliamentary elections looming in December and the presidential ballot in March 2008.
In 1999, Yeltsin picked Putin, who was then the little-known head of the FSB (formerly the KGB).
Putin chose to elevate the equally mysterious Victor Zubkov, head of the Federal Financial Monitoring Service (also known as the “finance espionage” agency).
Despite that similarity, the reasoning behind these choices appears to be somewhat different.
Yeltsin’s choice of Putin – encouraged, ironically, by Boris Berezovsky, the prominent Russian oligarch and Yeltsin advisor who is now exiled in London as Putin’s mortal enemy – was based on his belief that the quiet apparatchik, even if a former KGB spy, was a democrat at heart.
After all, Putin had been a protegé of Anatoly Sobchak, the liberal mayor of St. Petersburg as communism collapsed.
A security services insider, Putin was seen as well placed to protect Yeltsin and his oligarchic allies.
Indeed, Berezovsky intended to continue ruling the country from behind the scenes, first as Yeltsin’s health failed in the final months of his presidency, and then by controlling the successor he had helped to choose.
In Russia, however, the KGB is famous for turning the tables in any struggle with the Kremlin apparat.
So no one but Yeltsin and Berezovsky was surprised when Putin, their supposed marionette, began pulling the strings.
And pull them he did, turning Berezovsky into an international villain, exiling former media mogul Vladimir Gusinsky, jailing the oil magnate Mikhail Khodorkovsky, and eventually imposing a new authoritarian regime behind the façade of Yeltsin’s democratic institutions.
Putin’s own game of prime ministerial “musical chairs” does not reflect a desire to secure for himself a quiet position behind the scenes while someone else rules, for he knows all too well that the path from the Kremlin leads only to inner exile and the grave.
Stalin replaced the dying Lenin, Khrushchev denounced Stalin, Brezhnev banished Khrushchev to his dacha, and Gorbachev buried Chernenko.
Only Yeltsin did things differently.
He disliked his predecessor, Mikhail Gorbachev, as much his predecessors disliked their predecessors.
But all the same he treated Gorbachev in a more decent manner because Yeltsin fundamentally believed in democracy.
So he left Gorbachev a private life that could also be lived in public.
Putin, of course, did not accost the retired Yeltsin, but he didn’t have to.
He simply ignored him while reversing his achievements in building a free Russia.
Before Zubkov’s nomination, reports swirled that the next prime minister would become Putin’s presidential successor, with Sergei Ivanov, a current deputy prime minister, dubbed the most likely candidate.
But Ivanov, who is perceived as “strong,” would provide unwelcome competition to Putin, who, after all, remains a “strong” president.
Had he anointed Ivanov now, Putin’s power would already begin seeping away.
The outgoing Fradkov, surprisingly, put the matter best when he explained why he had resigned: with elections approaching, Putin needed a free hand.
So Zubkov’s nomination allows Putin to continue to keep his cards – and thus ultimate power in Russia – close to his chest.
Of course, Zubkov will continue Fradkov’s “Yes, whatever you say Mr. President” management style.
Moreover, his former position as head of the Federal Financial Monitoring Service will allow him to draw on a wealth of information to keep tabs on all possible enemies and competitors, perhaps turning them into new model Berezovsky’s, Gusinsky’s and Khodorkovsky’s, if necessary.
The only question now is whether Zubkov, or his successor, will eventually succeed in turning Czar Vladimir into the same sort of non-person that Putin’s rivals have become.
Kremlin Rules
Long before Russia's Duma election on December 7th, one could predict the outcome: victory for the Edinstvo (Unity) party, President Vladimir Putin's main parliamentary ally.
What was not predicted was the size of the victory for this so-called "party of power," or the exceedingly poor showing by the Communist Party (KPRF).
In 1999, Unity's main rival was the Fatherland /All Russia bloc (OVR), led by ex-premier Yevgeny Primakov and Moscow Mayor Yuri Luzhkov, who at the time were very popular figures.
But the government-controlled media subsequently launched fierce attacks against them, targeting Primakov especially, since he was considered a serious rival to Putin and a legitimate presidential contender.
Since then, the situation changed markedly.
The OVR first became an ally of the Unity party, and then merged with it into what became known as United Russia, helping it become this year's clear front-runner.
So the government-controlled media took aim at another antagonist, the Communist Party, which apparently never expect an attack on this scale.
Disoriented and bewildered, the party withered under the pressure of the media assault, which was mostly carried out on state-run TV channels.
The election result showed that the government's strategy paid off handsomely.
Indeed, the Communist vote collapsed to a mere 12.7%, down from 24% in 1999.
But the Communists also have themselves to blame for their electoral debacle.
Having won the most votes in two consecutive Duma elections, the Party now made a serious strategic blunder, exposing itself to attack by putting a number of major businessmen--or oligarchs--on its candidate list.
They formed perfect targets.
United Russia, on the other hand, based its campaign on the progress made during President Putin's tenure: notable economic growth and slight improvement in people's living standards.
The party actively supports Putin, but refrained from appearing in televised debates, possibly because it has no charismatic leaders of its own who can excite the public with sharp polemics.
A dull presentation could have adversely affected the party's rating.
The refusal to accept any televised challenge, of course, aroused a lot of criticism in the media.
But the election law does not require that every party take part in such events, so United Russia merely shrugged off the criticism.
Most forecasts estimated that United Russia, led by such prominent politicians as Interior Minister Boris Gryzlov, Emergencies Minister Sergei Shoigu, and Moscow Mayor Yuri Luzhkov, could take up to 30% of the popular vote.
Added to the winners in single-seat constituencies--half the total--this would ensure it a sturdy majority of 250 to 270 of the Duma's 450 seats.
In the end, United Russia secured 37% of the vote, with the additional seats it gained in the single-seat constituencies assuring it an overwhelming parliamentary majority.
This means that the pro-Kremlin bloc probably attained the two-thirds majority needed to change the constitution, which would allow it to grant Putin a third four-year term, although Putin himself ruled this out last June.
Although the Communist leader, Gennady Zyuganov, accuses the Kremlin of rigging the vote, his party is--at long last--beginning to look like a spent force.
But the strong showing by Vladimir Zhirinovsky's Liberal Democratic Party, or the LDPR, seems equally surprising.
Of course, Zhirinovsky's national/socialist rhetoric has hidden his almost slavish subservience to the Kremlin.
Yet his party now seems to have fixed itself on the political landscape.
It has a committed electorate of its own, whose sentiments are responsive to Zhirinovsky's populist slogans, and a party apparatus staffed by committed workers.
Russians are not surprised at the poor showing of the so-called reformist forces, the Union of Right-Wing Forces (SPS) and the liberal Yabloko party.
The leaders of the two parties--Boris Nemtsov and Grigory Yavlinsky, respectively, failed at the campaign's start to find common ground.
By splitting the "reform" vote, both parties failed to win any seats in the Duma because neither surpassed the 5% electoral threshold.
The "reformist" bloc will be replaced by
Because United Russia will hold a parliamentary majority, opposition to executive authority should be much weaker than when the Communists formed the largest faction.
For the first time since the Soviet collapse, the Kremlin will have firm parliamentary support.
For better or for worse, the government now has ample opportunity to enact its desired reforms, possibly including constitutional changes.
President Putin and his allies have every reason to rejoice.
But as the ancient Greeks used to say, those whom the gods will destroy, they grant their wishes.
Paul Krugman and the Obama Recovery
NEW YORK – For several years, and often several times a month, the Nobel laureate economist and New York Times columnist and blogger Paul Krugman has delivered one main message to his loyal readers: deficit-cutting “austerians” (as he calls advocates of fiscal austerity) are deluded.
Fiscal retrenchment amid weak private demand would lead to chronically high unemployment.
Indeed, deficit cuts would court a reprise of 1937, when Franklin D. Roosevelt prematurely reduced the New Deal stimulus and thereby threw the United States back into recession.
Well, Congress and the White House did indeed play the austerian card from mid-2011 onward.
The federal budget deficit has declined from 8.4% of GDP in 2011 to a predicted 2.9% of GDP for all of 2014.
And, according to the International Monetary Fund, the structural deficit (sometimes called the “full-employment deficit”), a measure of fiscal stimulus, has fallen from 7.8% of potential GDP to 4% of potential GDP from 2011 to 2014.
Krugman has vigorously protested that deficit reduction has prolonged and even intensified what he repeatedly calls a “depression” (or sometimes a “low-grade depression”).
Only fools like the United Kingdom’s leaders (who reminded him of the Three Stooges) could believe otherwise.
Yet, rather than a new recession, or an ongoing depression, the US unemployment rate has fallen from 8.6% in November 2011 to 5.8% in November 2014.
Real economic growth in 2011 stood at 1.6%, and the IMF expects it to be 2.2% for 2014 as a whole.
GDP in the third quarter of 2014 grew at a vigorous 5% annual rate, suggesting that aggregate growth for all of 2015 will be above 3%.
So much for Krugman’s predictions.
Not one of his New York Times commentaries in the first half of 2013, when “austerian” deficit cutting was taking effect, forecast a major reduction in unemployment or that economic growth would recover to brisk rates.
On the contrary, “the disastrous turn toward austerity has destroyed millions of jobs and ruined many lives,” he argued, with the US Congress exposing Americans to “the imminent threat of severe economic damage from short-term spending cuts.”
As a result, “Full recovery still looks a very long way off,” he warned.
“And I’m beginning to worry that it may never happen.”
I raise all of this because Krugman took a victory lap in his end-of-2014 column on “The Obama Recovery.”
The recovery, according to Krugman, has come not despite the austerity he railed against for years, but because we “seem to have stopped tightening the screws: Public spending isn’t surging, but at least it has stopped falling.
And the economy is doing much better as a result.”
That is an incredible claim.
The budget deficit has been brought down sharply, and unemployment has declined.
Yet Krugman now says that everything has turned out just as he predicted.
In fact, Krugman has been conflating two distinct ideas as if both were components of “progressive” thinking.
On one hand, he has been the “conscience of a liberal,” rightly focusing on how government can combat poverty, poor health, environmental degradation, rising inequality, and other social ills.
I admire that side of Krugman’s writing, and, as I wrote in my book The Price of Civilization, I agree with him.
On the other hand, Krugman has inexplicably taken up the mantle of crude aggregate-demand management, making it seem that favoring large budget deficits in recent years is also part of progressive economics.
(Krugman’s position is sometimes called Keynesianism, but John Maynard Keynes knew much better than Krugman that we should not depend on mechanistic “demand multipliers” to set the unemployment rate.)
Deficits were not increased enough in 2009 to escape from high unemployment, he insisted, and were falling dangerously fast after 2010.
Obviously, recent trends – a significant decline in the unemployment rate and a reasonably high and accelerating rate of economic growth – cast doubt on Krugman’s macroeconomic diagnosis (though not on his progressive politics).
And the same trends have been apparent in the United Kingdom, where Prime Minister David Cameron’s government has cut the structural budget deficit from 8.4% of potential GDP in 2010 to 4.1% in 2014, while the unemployment rate has fallen from 7.9% when Cameron took office to 6%, according to the most recent data for the fall of 2014.
To be clear, I believe that we do need more government spending as a share of GDP – for education, infrastructure, low-carbon energy, research and development, and family benefits for low-income families.
But we should pay for this through higher taxes on high incomes and high net worth, a carbon tax, and future tolls collected on new infrastructure.
We need the liberal conscience, but without the chronic budget deficits.
There is nothing progressive about large budget deficits and a rising debt-to-GDP ratio.
After all, large deficits have no reliable effect on reducing unemployment, and deficit reduction can be consistent with falling unemployment.
Krugman is a great economic theorist – and a great polemicist.
But he should replace his polemical hat with his analytical one and reflect more deeply on recent experience: deficit-cutting accompanied by recovery, job creation, and lower unemployment.
This should be an occasion for him to rethink his long-standing macroeconomic mantra, rather than claiming vindication for ideas that recent trends seem to contradict.
Krugman’s Anti-Cameron Contradiction
NEW YORK – It is truly odd to read Paul Krugman rail, time and again, against the British government.
His latest screed begins with the claim that “Britain’s economic performance since the financial crisis struck has been startlingly bad.” He excoriates Prime Minister David Cameron’s government for its “poor economic record,” and wonders how he and his cabinet can possibly pose “as the guardians of prosperity.”
Hmm.
In recent months, Krugman has repeatedly praised the US economic recovery under President Barack Obama, while attacking the United Kingdom’s record.
But when we compare the two economies side by side, their trajectories are broadly similar, with the UK outperforming the United States on certain indicators.
Consider, first, the unemployment rate.
In the fourth quarter of 2007, the UK’s rate was 5.2%.
When Cameron’s government took office in May 2010, it was 7.9%.
In the most recent reporting period (November 2014-January 2015), it was 5.7%.
In the US, the unemployment rate in the fourth quarter of 2007 was 4.8%, 9.8% in March-May 2010, and 5.7% in November 2014-January 2015.
In both countries, the unemployment rate is therefore slightly above the pre-crisis (end-2007) level, with no significant net difference over the business cycle from the end of 2007 until now.
Next, let’s look at the employment rate, which in the UK stood at 72.9% of the population aged 16-64 at the end of 2007.
It fell to 70.4% by the time the Cameron government came to power, but since then has risen strongly, to 73.3% in November 2014-January 2015, an all-time high.
In the US, by contrast, the employment rate was 62.8% at the end of 2007, 58.6% in March-May 2010, and then only slightly higher, at 59.2%, during November 2014-January 2015 – still below the pre-crisis level.
This suggests that there are more discouraged workers in the US than in the UK.
Finally, there is output growth.
In the UK, real (inflation-adjusted) GDP fell by 3.8% from the fourth quarter of 2007 to the second quarter of 2010.
It then rose by 8.1% from that point until the fourth quarter of 2014.
In the US, real GDP fell by 1.6% from the fourth quarter of 2007 to the second quarter of 2010, and then rose by 10.5% from then until the fourth quarter of 2014.
Thus, both countries have experienced moderately high and broadly similar growth rates since May 2010, when Cameron’s government took power.
Yes, UK growth has been slightly slower, but the British economy has also faced, among other factors, the headwind of sharply falling North Sea oil production during this period, whereas the US benefited from a shale-oil boom.
Obviously, neither of these long-term trends can be fairly attributed to the governments currently in office.
In any case, during the past two years, from the fourth quarter of 2012 to the fourth quarter of 2014, the US economy grew by a cumulative 5.6% while the UK economy grew by 5.4%, essentially the same as the US.
Krugman seems to make much of the fact that the UK did not bounce back even more strongly from a larger output decline between the fourth quarter of 2007 and the fourth quarter of 2010 – a fall that occurred before the Cameron government took office.
That is true, and measured UK productivity growth has remained low, but nobody can be sure why.
Perhaps the unsustainable pre-2008 bubble was larger in the UK; perhaps the UK’s structure (particularly the larger share of finance in its GDP and the continued decline in energy output) made the initial downturn less reversible.
The UK has been more vulnerable than the US to the eurozone’s prolonged crisis.
Moreover, subtle differences between the US and UK in national income accounting should be taken into account in comparing productivity trends.
The International Monetary Fund’s estimate of the output gap (see its World Economic Outlook database) for both countries does not suggest that, as of 2014, the UK is more cyclically depressed than the US.
Indeed, in the IMF’s estimates at least, the opposite is the case.
The IMF puts the UK output gap (as a percent of potential GDP) at 1.2%, compared to 3.5% in the US.
Of course, both estimates are subject to questions of interpretation; the IMF assumes, for example, that the UK was operating well above potential GDP in 2006-8.
The fact is that the US and UK economies look rather alike in their overall cyclical patterns, with sharp downturns from 2007 to 2010 followed by recoveries in both jobs and GDP since then, and with a fairly rapid pace of recovery in the past two years.
So, if Krugman praises the Obama recovery, he should also praise the Cameron recovery.
They are very similar.
Perhaps more notable is that both the US and UK economies have cast considerable doubt on Krugman’s oft-repeated view that a robust recovery would require further fiscal stimulus, a position that he maintained at least until 2013.
The post-2010 recoveries in both countries came despite significant cuts in the structural (cyclically adjusted) budget deficit, suggesting that both recoveries occurred in the face of fiscal contraction.
According to the IMF estimates, the structural budget deficit was cut from 8.4% of potential GDP in 2010 to 4.1% in 2014 in the UK, and from 9.1% to 4% in the US during the same period.
Rather than lambasting Cameron while lauding Obama, Krugman should be praising both countries for their recoveries.
The truth is that – barring another Greek tragedy – both the UK and US are finally out of the post-2008 crisis.
It is time for both countries to move beyond short-term macroeconomic policy and turn their attention to the challenges of long-term sustainable development.
Kuwaiti Democracy in Action
Kuwait has just held its eleventh parliamentary election since independence in 1961.
Though Kuwait is a monarchy, its parliamentary history has not been placid, and the election campaign reflected ongoing tensions between the royal family and segments of the electorate.
Originally scheduled for October 2007, the election was brought forward to break a deadlock between the parliament and the government over the number of electoral districts in the country.
Currently, there are 25 constituencies nationwide, but reformers have long argued that a smaller number – each with a larger number of voters – would be less susceptible to manipulation by the political elite.
The 29 members of parliament who support a reduced number of constituencies were unable to agree with the government on a new number.
As a result, the issue became the focus of a vigorous campaign by discontented Kuwaitis, who gathered in front of the National Assembly building and in universities to voice their criticisms.
In response, the government removed the redistricting issue from parliament to the constitutional court – an attempt, reformers argued, to hold back change.
When three members of parliament sought to question the Prime Minister – their right, under the Kuwaiti constitution – the parliament was dissolved and elections called.
The rules of political life in Kuwait have been worked out over 300 years – since this small area emerged as a self-contained polity.
The royal family is empowered to administer the country, but through consultation with different sectors, like tribal leaders or merchant groups.
With independence in 1961, these rules were codified in a constitution.
Compared to other Gulf monarchies, the Kuwaiti royal family has limited powers, though constitutional rules have frequently been ignored—charges of vote-rigging marred the 1967 election, and parliamentary dissolution has dotted the country’s history.
Nevertheless, since the liberation of Kuwait following the Iraqi occupation in August 1990, the parliament has gained both stability and respect.
The dissolutions of parliament in 1999 and 2006 were carried out according to the law, and elections were called in a timely fashion.
Parliament retains the right to interrogate cabinet members, including the Prime Minister, on financial and administrative questions and has frequently passed motions of no confidence in government.
More recently, with the death last December of the Emir, Sheikh Jabir al-Ahmad, parliamentary approval was exercised a key role in resolving succession debates among factions of the royal family.
Overall, Kuwait has always had a lively political life, with freedom of expression and less political repression than is common in neighboring countries.
Political violence has been rare.
Though political parties have not been legalized, they are nonetheless active in parliament and public life.
Kuwaiti life reflects the many and varied political trends throughout the Arab world, as the country’s open society and economic opportunities have made it a powerful magnet and regional safety valve since the 1950’s.
With this election, Kuwaiti women participated in choosing the parliament for the first time.
Though women have long been active in Kuwaiti public life, they were enfranchised only last year, after a long and difficult campaign, by a parliamentary vote, and accounted for just 28 of the 249 candidates.
The voting population is 57% female, and commentators speculated on the likely impact of women voters.
Would they follow the voting patterns of their husbands?
Clearly, women demonstrated tremendous enthusiasm for the political process, taking part in large numbers in political rallies, and as campaign workers in a range of election activities.
In the end, while a loose opposition coalition of pro-reform ex-MP’s, Islamists, and liberals gained a majority of the National Assembly’s 50 seats, no woman won.
The electorate focused almost entirely on the question of electoral districts.
Most Kuwaitis see this very technical issue as a way of pressing for reform.
Major regional issues, like the war in Iraq or Iran’s nuclear program, were barely mentioned.
Islamist candidates were in an awkward position, seeking support from women voters, whose participation they opposed.
However, Islamists were among the 29 parliamentary deputies pushing for constituency reform, a fact that eased their dilemma.
Support for reform comes from across the political spectrum, whereas opponents of reform paid a high price.
Indeed, three members of the outgoing parliament who supported the government were not candidates, having lost in their tribal primaries.
With pro-reform forces strengthening their position in the new parliament, the government has two choices.
It can go along with electoral reform, or it can find an opportunity to dissolve the new parliament.
Already, commentators are speculating on how long the new parliament will survive.
Whatever the immediate outcome, the Kuwaiti government is facing a new political horizon.
Women are now the majority of voters, and young people have taken up the reform banner.
Democracy will push the ruling family forward.
Kyoto’s Misplaced Priorities
When the Kyoto treaty enters into force on February 16, the global warming community will undoubtedly congratulate itself: to do good they have secured the most expensive worldwide treaty ever.
They have succeeded in making global warming a central moral test of our time.
They were wrong to do so.
Global warming is real and is caused by emissions of carbon dioxide (CO2).
But existing climate models show we can do little about it.
Even if everyone (including the United States) applied the Kyoto rules and stuck to them throughout the century, the change would be almost immeasurable, postponing warming for a mere six years in 2100 while costing at least $150 billion a year.
Global warming will mainly harm developing countries, because they are poorer and therefore less able to handle climate changes.
However, by 2100, even the most pessimistic forecasts from the UN expect the average person in the developing countries to be richer than now, and thus better able to cope.
So Kyoto is basically a costly way of doing little for much richer people far in the future.
We need to ask ourselves if this should be our first priority.
Of course, in the best of all worlds, we would not need to choose our priorities.
We could do all good things.
We could win the war against hunger, end conflicts, stop communicable diseases, provide clean drinking water, improve education and halt climate change.
But we can’t do everything. So we must ask the hard question: what should we do first?
Some of the world’s top economists – including three Nobel Laureates – answered this question at the Copenhagen Consensus last May.
They found that dealing with HIV/AIDS, hunger, free trade, and malaria were the world’s top priorities, where we could do the most good for our money.
Moreover, they put urgent responses to climate change at the bottom of the list.
In fact, the panel called these ventures – including Kyoto – “bad projects,” because they cost more than the good they do.
As the economics of climate change has become ever clearer, warnings from the global warming community have become shriller.
For example, the head of the UN Climate Panel says, “We are risking the ability of the human race to survive.”
Such statements make headlines, but they are nonsense.
For example:
· At a recent meeting at Exeter in the UK, some participants warned of a 50-50 chance that the Gulf Stream winds could collapse within a century.
Such a scenario looks great in the movie “The Day After Tomorrow,” but it is unsubstantiated.
As one presenter at the conference summarized: “No models have shown a complete shutdown, or a net cooling over land areas.
Hence a shutdown during the twenty-first century is regarded as unlikely.”
· Recently, a coalition of prominent environmental and development organizations claimed that malaria would increase in a warmer world.
This has some theoretical validity, but ignores malaria’s dependence on poor infrastructure and health care.
Indeed, throughout the cold 1500-1800’s, malaria was a major disease in Europe, the US, and far into the Arctic Circle.
Malaria infections didn’t end because it got colder (it actually got warmer), but because Europe and the US got rich and dealt with the problem.
With developing countries getting richer over the century, malaria is similarly likely to decrease rather than increase.
· We are told that sea levels will rise – by roughly 50 centimeters by 2100 in some scenarios.
This is correct, and it will clearly cause problems in low-lying countries like Bangladesh.
But the alarmists neglect to mention that sea levels rose through the twentieth century by 10-25 centimeters.
Did anyone notice?
The rise in the twenty-first century will be worse and should not be trivialized, but the Intergovernmental Panel on Climate Change estimates that the total cost of adaptation will be around 0.1% of GDP.
The “end-of-civilization” argument is counterproductive to serious public debate.
It makes us believe that we only have one choice.
Yet the reality is that we can choose to make climate change our first priority, or we can choose to do a lot more good first.
To say this is not to suggest laissez faire.
Far from it.
Thousands died in Haiti during recent hurricanes, but not in Florida, because Haitians are poor and cannot take preventive measures.
Breaking the circle of poverty by addressing the most pressing issues of disease, hunger, and polluted water will not only do obvious good; it will also make people less vulnerable to the effects of climate change.
We live in a world with limited resources, so caring more about some issues means caring less about others.
If we have a moral obligation, it is to spend each dollar doing the most good that we possibly can.
With Kyoto, the world will spend $150 billion a year on doing little good a century from now.
In comparison, the UN estimates that half that amount could buy clean drinking water, sanitation, basic health care, and education for every single person in the world.
Which is better?
Global warming really is the moral test of our time, but not in the way its proponents imagine.
We need to stop our obsession with global warming and start dealing with more pressing and tractable problems first.
Labor in a World of Financial Capitalism
The traditional hostility between labor unions and the world of finance should not obscure their common interest in using financial tools in an expansive and creative way.
We live in an age of financial capitalism, and the only intelligent way forward – for unions and other workers’ associations – is for these bodies to help their members make increasingly sophisticated use of the tools of risk management.
The traditional boundaries between labor and capital are becoming blurred.
For example, companies increasingly augment standard wage packages with stock options, even for rank-and-file employees.
In the United States, the Labor Department reports that in 2003, 14% of US workers in firms with 100 or more employees were offered stock options.
Expect more such packages in the future.
The problem is, most employees do not fully understand options or stocks and do not know how to evaluate them.
A recent paper by MIT Professors Nittai Bergman and Derk Jenter suggests that management tends to award employee options when employees are excessively optimistic about the outlook for company stock – thereby in effect opportunistically substituting overpriced options for full pay.
Unions and workers associations are the natural vehicles to monitor such behavior, but they must invest in the expertise to do so effectively.
They should not stand in the way of compensation that includes stock options, or that otherwise create financial risks for their employees.
But they should make sure that such programs are administered in employees’ interest, because companies that encourage their employees to hold options or to invest directly in the company’s stock are asking them to take on some of the company’s risks.
To be sure, sharing ownership can help employee morale.
But it also creates an unhealthy concentration of risks: not only the employee’s job, but also his assets now depend on the company’s fate.
The scandal at Enron, in its final days, was that management prevented employees from selling their Enron shares while executives unloaded their own shares.
Obviously, unions need to be alert to such bad behavior.
More generally, they must examine employee ownership programs both sympathetically and analytically, in order to suggest ways to hedge the risks they create.
The same is true of other financial tools.
Labor unions have long pointed with satisfaction at hard-won contracts that specified a defined-benefit pension for their members.
But these unions were often without the financial sophistication to judge whether the firm set aside sufficient capital to meet its commitments decades later.
In the US, union failure to represent members’ interests adequately contributed to a major pension default at the Studebaker Corporation in 1963.
The AFL-CIO, the United Auto Workers and the United Steel Workers then petitioned Congress – against strong opposition from business interests – to establish the Pension Benefit Guaranty Corporation in 1974 to insure private pensions against companies’ failure to honor them.
Gradually, many countries, with prodding from their trade unions, now have some form of benefit protection plan for private pensions.
The latest example is the United Kingdom, where trade unions have spurred the creation of the Pension Protection Fund, which will begin operating next year.
But it is not clear that these plans will succeed fully.
Declining stock markets and low interest rates, have left private pensions around the world more vulnerable than was expected.
Moreover, the risks to pension funds may correlate with risks to other economic factors affecting specific groups of workers.
This means that unions should not leave the complex financial problems of designing pensions entirely to governments.
Local unions need to be involved, for the issues involved are specific to companies and workers, and cannot be resolved by governments alone.
Indeed, the essence of labor unions is that they know the unique problems of a distinct group of workers, bring focused expertise on these problems, and thus intelligently represent their interests.
In today’s complex financial economies, representing workers’ interests is not so simple as battling with management for a bigger share of the pie.
Unions should instead negotiate with management the same way top executives do with their boards of directors when their complex compensation packages are worked out.
Unfortunately, instead of learning how to think in financially sophisticated ways, we still see labor unions in Europe and elsewhere dwelling too much on job security for working people.
But making it difficult for firms to lay off workers provides only an illusory benefit for workers, for it compromises companies’ ability to compete, and weakens their incentive to create jobs.
The alignment of incentives lies at the heart of modern financial theory.
Labor unions should negotiate with management about providing appropriate risk management to their employees in financial forms: the right kinds of insurance, options, and other investments to protect them realistically without guaranteeing their employment and without jeopardizing the productivity of the firm.
Complex financial capitalism is here to stay, and we all have to learn to live with it.
Union leaders must study finance rather than condemn it as evil.
They must develop a cadre of professionals with a sophisticated understanding of risk management, and must work to educate their members in the financial subtleties of their specific circumstances.
Labor’s Paradise Lost
LONDON – As people in the developed world wonder how their countries will return to full employment after the Great Recession, it might benefit us to take a look at a visionary essay that John Maynard Keynes wrote in 1930, called “Economic Possibilities for our Grandchildren.”
Keynes’s General Theory of Employment, Interest, and Money, published in 1936, equipped governments with the intellectual tools to counter the unemployment caused by slumps.
In this earlier essay, however, Keynes distinguished between unemployment caused by temporary economic breakdowns and what he called “technological unemployment” – that is, “unemployment due to the discovery of means of economizing the use of labor outrunning the pace at which we can find new uses for labor.”
Keynes reckoned that we would hear much more about this kind of unemployment in the future.&#160;But its emergence, he thought, was a cause for hope, rather than despair.
For it showed that the developed world, at least, was on track to solving the “economic problem” – the problem of scarcity that kept mankind tethered to a burdensome life of toil.
Machines were rapidly replacing human labor, holding out the prospect of vastly increased production at a fraction of the existing human effort.
In fact, Keynes thought that by about now (the early twenty-first century) most people would have to work only 15 hours a week to produce all that they needed for subsistence and comfort.
Developed countries are now about as rich as Keynes thought they would be, but most of us work much longer than 15 hours a week, though we do take longer holidays, and work has become less physically demanding, so we also live longer.
But, in broad terms, the prophecy of vastly increased leisure for all has not been fulfilled.
Automation has been proceeding apace, but most of us who work still put in an average of 40 hours a week.
In fact, working hours have not fallen since the early 1980’s.
At the same time, “technological unemployment” has been on the rise.
Since the 1980’s, we have never regained the full employment levels of the 1950’s and 1960’s.
If most people still work a 40-hour week, a substantial and growing minority have had unwanted leisure thrust upon them in the form of unemployment, under-employment, and forced withdrawal from the labor market.
And, as we recover from the current recession, most experts expect this group to grow even larger.
What this means is that we have largely failed to convert growing technological unemployment into&#160;increased voluntary leisure.
The main reason for this is that the lion’s share of the productivity gains achieved over the last 30 years has been seized by the well-off.
Particularly in the United States and Britain since the 1980’s, we have witnessed a return to the capitalism “red in tooth and claw” depicted by Karl Marx.
The rich and very rich have gotten very much richer, while everyone else’s incomes have stagnated.
So most people are not, in fact, four or five times better off than they were in 1930. It is not surprising that they are working longer than Keynes thought they would.
But there is something else.
Modern capitalism inflames through every sense and pore the hunger for consumption.
Satisfying it has become the great palliative of modern society, our counterfeit reward for working irrational hours.
Advertisers proclaim a single message: your soul is to be discovered in your shopping.
Aristotle knew of insatiability only as a personal vice; he had no inkling of the collective, politically orchestrated insatiability that we call economic growth.
The civilization of “always more” would have struck him as moral and political madness.
And, beyond a certain point, it is also economic madness.
This is not just or mainly because we will soon enough run up against the natural limits to growth. It is because we cannot go on for much longer economizing on labor faster than we can find new uses for it.
That road leads to a division of society into a minority of producers, professionals, supervisors, and financial speculators on one side, and a majority of drones and unemployables on the other.
Apart from its moral implications, such a society would face a classic dilemma: how to reconcile the relentless pressure to consume with stagnant earnings.
So far, the answer has been to borrow, leading to today’s massive debt overhangs in advanced economies.&#160;Obviously, this is unsustainable, and thus is no answer at all, for it implies periodic collapse of the wealth-producing machine.
The truth is that we cannot go on successfully automating our production without rethinking&#160;our attitudes toward consumption, work, leisure, and the distribution of income.
Without such efforts of social imagination, recovery from the current crisis will simply be a prelude to more shattering calamities in the future.
Lady Macbeth of Pyongyang
TOKYO – North Korea’s communist regime is, by most accounts, set to complete its second dynastic transfer of power, this time from Kim Jong-il, who has ruled since 1994, to his youngest son, Kim Jong-eun.
The general assembly of North Korea’s Workers’ Party, now underway for the first time in 44 years, is the clearest sign yet that “Dear Leader” Kim, who is seriously ill, is passing the crown in the hermit kingdom founded by his father, Kim Il-sung.
One reason why a dynastic succession is taking place is that Kim Il-sung created a national ideology, Juche, which mixes communism and autarky with a heavy dose of Confucian values.
Confucianism exalts an idealized bond between father and son as the model for all human relations, including between ruler and ruled.
So, just as a Confucian son’s absolute duty is to revere his father, the absolute duty of a Confucian subject is to revere the ruler.
Moreover, Kim Jong-il, like his father, has consistently appointed members of his family to positions of power.
Indeed, Kim Jong-eun, the third son of Kim Jong-il and his late consort Ko Young-hee, was mooted as his father’s successor almost a year ago.
North Korean propagandists proclaim Kim Jong-eun “the Young General,” but whether he will exercise the same absolutist authority as his father is an open question.
Not only is he young and inexperienced, but his aunt, Kim Kyong-hui, Kim Jong-il’s sister and the wife of the second-ranking figure in North Korea’s hierarchy, Chang Song-taek, may balk at power slipping through her fingers.
Although rarely seen or heard, Kim Kyong-hui, born on May 30, 1946 to Kim Il-sung and his first wife Kim Jong-suk, has served in a range of key Workers’ Party positions, including deputy director of the International Department and director of the Light Industry Department.
She became a member of the all-powerful Central Committee in 1988 – a post she retains to this day.
Kim Kyong-hui’s birth mother died when she was four.
After her father, Kim Il-sung, remarried, she was raised by various surrogates away from the family.
Observing the relationship between her father and stepmother, and their affection toward her half brothers, she is said to have become embittered and developed a fierce personality.
Indeed, Kim Jong-il is quoted as saying: “When my sister turns violent, no one can stop her.
Even I can do nothing.”
When Kim Jong-il started living with his second wife, Kim Kyong-hui sought to incite trouble, driven by a sense of rivalry.
After marrying Chang Song-taek, she began living something of a hedonistic life herself, but she scrutinized her husband’s conduct minutely, flying into a jealous rage over the slightest signs of infidelity.
Kim Jong-il has described his sister as “my only blood family whom I was asked to take care of by my mother till the moment she died.”
Their mother, Kim Jong-suk, is said to have died from hemorrhaging while giving premature birth caused by her distress over Kim Il-sung’s love affair with Kim Song-ae.
Kim Il-sung reportedly rushed to the hospital, but the door to her room was locked.
When she died, her doctor and Kim Jong-il were the only people present.
But Chan Giryok, who was Kim Jong-suk’s primary doctor and is now a doctor at Nagoya University in Japan, tells a different story.
According to Chan, Kim Jong-suk was at Kim Il-sung’s Pyongyang home near the Soviet Embassy, quarreling with him.
Watching from afar, the doctor saw Kim Il-sung holding a pistol.
The doctor, who was a surgeon, not an obstetrician, questioned the wisdom of summoning him to treat excessive bleeding from a premature delivery.
He believes that he was summoned to treat bleeding caused by something else.
Kim Jong-il, who is known to have had a powerful attachment to his birth mother, cannot help but have been psychologically affected by witnessing his mother’s killing.
From the moment of his mother’s death, he kept his young sister close to him at all times.
Indeed, in a country where trust rarely exists, Kim Kyong-hui is the only blood relation whom Kim Jong-il has ever fully trusted.
Moreover, the two share the same lineage of the Great Leader, or Suryong,linked to Kim Jong-suk on the maternal side, and are fully devoted to the absolute supremacy of the Suryong and hereditary succession.
Speaking before the Central Committee after Kim Il-sung’s death, Kim Jong-il said, “Kim Kyong-hui is myself, the words of Kim Kyong-hui are my words, and instructions issued by Kim Kyong-hui are my instructions.”
Kim Kyong-hui’s intent to exercise power after her brother’s passing is supported by rumors that she helped arrange a traffic accident in June that killed Ri Je-gang, a senior party official and perceived guardian of Kim Jong-eun who reportedly attempted to oust Kim Kyong-hui and her close allies from power.
Whether true or not, such rumors indicate the magnitude of her influence.
There is, indeed, a growing belief that Kim Jong-il might, at any moment, designate Kim Kyong-hui to serve as a caretaker for the third-generation successor after his death.
But Kim Kyong-hui may have other plans, such as becoming Kim Jong-il’s successor herself.
The threat from North Korea has always been that it might start another war, whether by miscalculation or design.
But, even if the “Young General” or his aunt turn out not to be unhinged megalomaniacs, the looming changeover opens a new era of uncertainty, particularly given North Korea’s economic woes.
Whether Kim Jong-eun or Kim Kyong-hui intend to soldier on in desperate isolation, or to bring in economic change, they lack the revolutionary credentials and grip on power needed to do so.
So when Kim Jong-il passes from the scene, and political instability meets economic blight, the regime could fall apart.
South Korean President Lee Myung-bak has wisely begun to prepare for that contingency by proposing a special “Unification Tax” to help pay the costs of the Kim dynasty’s eventual disintegration.
Japan and the rest of Asia should prepare for that day as well.
Lagarde’s Challenges
CHICAGO – Now that the dust has settled over the selection of the International Monetary Fund’s managing director, the IMF can return to its core business of managing crises.
Christine Lagarde, a competent and well-regarded technocrat, will have her hands full with three important challenges.
The first, and probably easiest, challenge is to restore the IMF’s public image.
While the criminal case against Dominique Strauss-Kahn on sexual-assault charges now seems highly uncertain, the ensuing press focus on the IMF suggests an uncontrolled international bureaucracy with unlimited expense accounts, dominated by men with little sense of restraint.
Fortunately, the truth is more prosaic.
Top IMF staff face strict limits on their allowable business expenses (no $3,000 per night hotel rooms, despite reports in the press), and are generally underpaid relative to private-sector executives with similar skills and experience.
The IMF, like many organizations where workers spend long trips together, has its share of intra-office romances.
But the environment is professional, and not hostile to women.
A previous incident in which Strauss-Kahn was let off lightly for an improper relationship with a subordinate clearly suggests that the Fund needs brighter lines for acceptable behavior and tougher punishment for transgressions.
But other organizations have dealt with similar issues; the IMF needs to make the necessary changes, and, equally important, get the message out that the DSK incident was an aberration, not the tip of the proverbial iceberg.
The second, and perhaps most difficult, challenge facing Lagarde, is the mess in Europe, where the IMF has become overly entangled in eurozone politics.
Typically, the IMF assesses whether a country, after undertaking reasonable belt-tightening measures, can service its debt – and lends only when it is satisfied that it can.
The entire objective of IMF lending is to help finance the country while it makes adjustments and regains access to private borrowing.
This also means that a country with too much debt should renegotiate it down before getting help from the IMF, thereby avoiding an unsustainable repayment burden.
Perhaps swayed by promises of eurozone financial support (and Europe’s desire to prevent default-fueled financial contagion from spreading to countries like Spain and possibly Italy), the IMF took a rosier view of debt sustainability in countries like Greece than it has in emerging markets.
But this has not “helped” such countries, for the availability of soft credit from the eurozone or the Fund only enables a greater accumulation of debt.
Ultimately, debt can be repaid only if a country produces more than it spends.
And the higher the debt, the less likely it is that the country will be able to achieve the mix of belt-tightening and growth that would enable it to generate the necessary surpluses.
Delayed restructuring eventually means more painful restructuring – after many years of lost growth.
If troubled eurozone countries, especially Spain, start growing rapidly again, there is still a “muddle-through” outcome that might work.
With too-big-to-save countries like Spain in the clear, the debt of highly-indebted peripheral countries like Greece could be written down through interest waivers, maturity extensions, and debt exchanges.
The eurozone – and the European Union – could survive its fiscal crisis intact.
But having failed to insist on an up-front restructuring, the IMF will face problems.
With private investors reluctant to lend more or even to roll over existing debt, the bulk of Greek debt at the time of any restructuring (or whatever it is euphemistically called) will be from the official sector.
How the resulting losses imposed on debt holders will be divided between the various eurozone institutions and the IMF is anyone’s guess.
For the first time in its history, the Fund might have to take a significant “haircut” on its loans, and it will have to prepare its non-European shareholders for it.
A greater dilemma will emerge if the muddle-through strategy does not seem to be working.
At some point, the IMF’s strategy, which should be focused on the distressed country’s citizens and its creditors, should depart from that of the eurozone, which is more willing to sacrifice individual countries’ interests for the larger interest of the monetary union.
Lagarde’s challenge will be to chart a strategy for the IMF that is independent of the eurozone’s strategy, even though she has been intimately involved in formulating the latter.
The third challenge for Lagarde concerns the circumstances of her election.
It is not inconceivable that a number of emerging-market countries will get into trouble in the next few years.
Will the Fund require the tough policy changes it has demanded of countries in the past, or will Lagarde’s need to show that she is not biased towards Europe mean that future IMF interventions will become more expansive and less demanding?
A kinder, gentler Fund is in no one’s interest, least of all the distressed countries and the world’s taxpayers.
Finally, there is a challenge that seems to be pressing, but is not.
In her campaign for the position, Lagarde emphasized the need for diversity among the IMF’s top management.
But what is really needed is the selection and promotion of the best people, regardless of national origin, sex, or race.
Clearly, the IMF’s existing culture and history will bias its selection and promotion of staff towards a certain type of person (for example, holders of PhDs from US universities).
That commonality in backgrounds among IMF personnel allows the Fund to move fast in country rescues, not wasting time in endless debate.
In the long run, more diversity is needed.
But if it is attempted too quickly, in order to paper over the fact that a European is in charge once again, the Fund risks jeopardizing its key strength.
The IMF is perhaps the central global multilateral economic institution at a time when such institutions are needed more than ever.
Lagarde arrives to lead it at a difficult time.
We all have a stake in her success.
La Nausée Russe
MOSCOW – The history of successive authoritarian regimes in Russia reveals a recurring pattern: they do not die from external blows or domestic insurgencies.
The illness resembles a political version of Jean-Paul Sartre’s existential nausea, and led to both the Bolshevik Revolution of 1917 and the Soviet Union’s demise with Mikhail Gorbachev’s Perestroika.
Today, Prime Minister Vladimir Putin’s regime is afflicted with the same terminal disease, despite – or because of – the seemingly impermeable political wall that it spent years constructing around itself.
Putin’s simulacrum of a large ideological regime simply couldn’t avoid this fate.
The leader’s “heroic image” and “glorious deeds” are now blasphemed daily.
And these verbal assaults are no longer limited to marginal opposition voices; they are now entering the mainstream media.
Two events have sharply accelerated the collapse of confidence in Putin’s regime, both among the “elite” and ordinary Russians.
First, in September, at the congress of Putin’s political party, United Russia, Putin and “President” Dmitri Medvedev formalized what everyone anticipated, with Putin announcing his intention to return to the presidency in March – and thus virtually declaring himself Russia’s dictator for life.
His quest for eternal rule is driven not so much by a thirst for power as by a fear that he will one day be held accountable for his actions.
The second lethal blow to Putin’s prestige came with the unprecedented scale of fraud perpetrated in December’s parliamentary elections.
According to reliable observers, such as the election-monitoring NGOs Golos (The Voice) and Citizens’ Watch, vote-rigging in favor of United Russia resulted in an estimated 15-20% advantage for what is now commonly called the party of “crooks and thieves.”
And the trickery began long before voting day, with nine opposition parties prevented from even appearing on the ballot.
These two events have rendered Putin’s regime not only illegitimate, but also ridiculous.
Even if the regime formally “wins” the presidential election on March 4, the die has already been cast.
What is happening in Russia today is part of a global phenomenon.
Despite Putin’s best efforts to isolate Russia and its post-Soviet near abroad, anti-authoritarian trends in nearby regions (like the Middle East) are infiltrating.
Russian voters, the establishment, and intellectuals sense that Putinism has already lost.
It is now only a matter of time before events make that defeat a political reality.
And, after Putin falls, the leaders of other authoritarian post-Soviet regimes – from Belarus’s Alexander Lukashenko and Kazakhstan’sNursultan Nazarbayev to Ukraine’s would-be Putin, Viktor Yanukovych – will not survive in power for long.
In fact, authoritarianism was already on the way out in the former Soviet Union, but the global economic crisis halted the process.
Georgia was the first to oust its communist apparatchiks.
Ukraine followed, but, owing to internal discord, Kremlin pressure, and the European Union’s indifference, the Orange Revolution was unable to deliver on the promise of democracy.
Now Yanukovych is trying to reverse the country’s democratic gains, but he is finding it difficult, despite imprisoning many opposition leaders.
In Moldova, a real transition to democracy has been underway for some time.
In Kazakhstan, too, rumblings against Nazarbayev’s presidency for life are growing louder.
Even the people of tiny South Ossetia, which the Kremlin annexed following its war with Georgia in 2008, are resisting the Putin regime’s local puppets.
Back at home, mass disapproval of Putin’s corrupt administration is rapidly turning into open contempt.
What began just a few months ago as an attitude of protest has quickly become a social norm.
To stop the protests now is virtually impossible.
If Putin unleashes his well-developed apparatus of coercion, he will have played his last remaining card.
Any resort to brute force to suppress demonstrations would finalize the regime’s loss of legitimacy.
“We all understand,” one of the leading Kremlin ideologues recently confided to me, “but we can’t get out.
They will come for us at once.
So we have to keep running like a squirrel in a cage.
For how long?
For as long as there is strength…”
Those who warn that the current government’s collapse will be a risky leap into the unknown are correct.
But they are mistaken to believe that preserving this government is safer.
Russia must rid itself, once and for all, of Putinism’s systemic corruption, lest the country be consumed by it.
Last Exit from Kabul?
NEW DELHI – America’s war in Afghanistan is approaching a tipping point, with doubts about President Barack Obama’s strategy growing.
Yet, after dispatching 21,000 additional troops to Afghanistan, Obama is considering sending another 14,000.
Let’s be clear: America’s Afghan war is not winnable, even though Obama has redefined American goals from defeating the Taliban to preventing Al Qaeda from using Afghanistan as a base to launch attacks on the United States.
But Al Qaeda is no longer a serious factor in the Afghan war, where the principal combatants are now the American military and the Taliban, with its associated militias and private armies.
Rather than seeking to defeat the Taliban, the US has encouraged the Pakistani, Afghan, and Saudi intelligence services to hold proxy negotiations with the Taliban’s top leadership, holed up in the Pakistani city of Quetta.
The US is fighting the wrong war.
After America’s invasion drove Al Qaeda’s leaders from Afghanistan, Pakistan emerged as the main base and sanctuary for transnational terrorists.
Support and sustenance for the Taliban and many other Afghan militants also comes from inside Pakistan.
Despite this, Obama is pursuing a military surge in Afghanistan but an aid surge to Pakistan, which is now the single largest recipient of US assistance in the world.
To defeat Al Qaeda, the US doesn’t need a troop buildup – certainly not in Afghanistan.
Without a large ground force in Afghanistan or even major ground operations, the US can hold Al Qaeda’s remnants at bay in their havens in the mountainous tribal regions of Pakistan through covert operations, Predator drones, and cruise-missile attacks.
And isn’t that what the CIA is doing already?
Indeed, US intelligence experts believe that Al Qaeda already is badly fragmented and in no position to openly challenge American interests.
According to the latest Annual Threat Assessment of the Intelligence Community released last February, “Because of the pressure we and our allies have put on Al Qaeda’s core leadership in Pakistan…Al Qaeda today is less capable and effective than it was a year ago.”
Had Obama’s goal been to rout the Taliban, a further military surge may have made sense, because a resurgent Taliban can be defeated only through major ground operations, not by airstrikes and covert action alone.
But if the US administration’s principal war target is not the Taliban but Al Qaeda remnants, why use a troop-intensive strategy based on protecting population centers to win grassroots support?
In reality, what the Obama administration calls a “clear, hold, build” strategy is actually a “surge, bribe, run” strategy – except that the muddled nature of the mission and deepening US involvement undermine the “run” component.
Before Afghanistan becomes a Vietnam-style quagmire, Obama must rethink his plan for another troop surge.
Gradually drawing down US troop levels makes more sense, because what unites the disparate elements of the Taliban syndicate is a common opposition to foreign military presence.
An American military exit from Afghanistan would not be a shot in the arm for the forces of global jihad, as many in the US seem to fear.
On the contrary, it would remove the Taliban’s unifying element and unleash developments – a vicious power struggle in Afghanistan along sectarian and ethnic lines – whose significance would be largely internal or regional.
The Taliban, with the active support of the Pakistani military, would certainly make a run for Kabul to replay the 1996 power grab.
But it wouldn’t be easy, owing in part to the Taliban’s fragmentation, with the tail (private armies and militias) wagging the dog.
Moreover, the non-Taliban and non-Pashtun forces are now stronger, more organized, and better prepared than in 1996 to resist any advance on Kabul, having been empowered by provincial autonomy or by the offices they still hold in the Afghan federal government.
And, by retaining Afghan bases to carry out covert operations, Predator missions, and other airstrikes, the US would be able to unleash punitive power to prevent a Taliban takeover.
After all, it was American air power, combined with the Northern Alliance’s ground operations, which ousted the Taliban in 2001.
In fact, the most likely outcome of any Afghan power struggle triggered by an American withdrawal would be to formalize the present de facto partition of Afghanistan along ethnic lines – the direction in which Iraq, too, is headed.
In this scenario, the Tajiks, Uzbeks, Hazaras, and other ethnic minorities would be able to ensure self-governance in the Afghan areas that they dominate, leaving the Pashtun lands on both sides of the British-drawn Durand Line in ferment.
Thanks to ethnic polarization, the Durand Line, or the Afghanistan-Pakistan border, exists today only on maps.
On the ground, it has little political and economic relevance, and it would be militarily impracticable to re-impose the line.
As in Iraq, an American withdrawal would potentially unleash forces of Balkanization.
That may sound disturbing, but it is probably an unstoppable consequence of the initial US invasion.
An American pullout actually would aid the fight against international terrorism.
Instead of remaining bogged down in Afghanistan and seeking to cajole and bribe the Pakistani military into ending their support for Islamic militants, the US would become free to pursue a broader, more balanced counterterrorism strategy.
For example, the US would better appreciate the dangers to international security posed by Pakistani terror groups like Lashkar-e-Taiba and Jaish-e-Mohammed.
The threat of an Islamist takeover of Pakistan comes not from the Taliban, but from groups that have long drawn support from the Pakistani army as part of a long-standing military-mullah alliance.
That is where the focus of the fight should be.
Latin America After Bush
Once again, America’s president has come up short in Latin America.
Granted, President George W. Bush was well received by all his hosts in the five countries he visited, with traditional Latin American hospitality and cordiality.
There were no major, unfortunate incidents; the constant protests were strident but not especially violent or well-attended; no significant slights or mishaps took place; and President Bush achieved what he probably was most interested in: sending a message back to the United States that he actually is interested in more than Iraq.
He also accomplished, in a somewhat round-about way, another goal: showing the flag, so to speak, in the face of the mounting challenge from Venezuelan president Hugo Chávez, who, thanks to virtually unlimited supplies of oil dollars and Cuban doctors and foot-soldiers, is riding high across Latin America.
Chávez baited Bush at almost every stop along the way, but the US leader evaded the provocations, and indeed, probably bested Chávez in the sense that an unpopular US president managed to dominate the agenda and take the battle of ideas directly to Latin American audiences, with whom the Venezuelans and the Cubans are in contact every day.
Bush was also able to partly change the tone of the US message in the hemisphere: from free trade and fighting terrorism, to combating poverty and strengthening democracy and human rights.
If Bush had made this trip several years ago, things would be different today.
But everyone would also be in better shape today if Bush had been able to actually deliver on the main issues his interlocutors took up with him.
Here, despite the photo-ops and the hugs and the local cuisine, the American president was simply not ready, willing or able, to give satisfaction to his colleagues, from capital to capital.
In Brasil, President Luiz Ignacio da Silva Lula’s main issue, demand and hope was for a reduction or elimination in the US tariff on ethanol imports.
Bush said no, since the tariff is congressionally mandated, and thus greatly diluted the importance of the bio-fuel cooperation agreement the two governments signed.
In Uruguay, President Tabaré Vázquez went out on a limb simply by hosting Bush, given that his problems with his Chávez-friendly neighbor in Argentina, Nestor Kirchner, can only worsen as a result of these “dangerous” acquaintances.
Vázquez needed some cover on the status of Urugayan immigrants in the US, and mainly, increases in quotas for its exports to the American market.
Again, Bush left him hanging.
Alvaro Uribe of Colombia was happy just to have a US Chief of State visit Bogotá; the last one to do so was Ronald Reagan in 1982.
In fact, Bush’s was a brave gesture: despite Uribe’s success in combating drugs, paramilitaries and guerrillas, his capital is not an especially safe place.
Bush also gave him his backing on human rights concerns, which, coming from the gentleman responsible – in the eyes of most of the world &#45;&#45; for Guantánamo and Abu Ghraib, is perhaps damning with faint praise.
But most disappointingly for Uribe, though understandably, the US President was unable to bring with him guaranteed congressional support either for Colombia’s Free Trade Agreement (FTA) with the US, nor funding renewal for the so-called Plan Colombia.
In Guatemala, once again, President Oscar Berger was obviously proud to receive Bush, but failed to obtain a commitment from him to stop the inhuman, hateful Homeland Security raids by US law enforcement officers against undocumented immigrants, exemplified by the detention and attempt at deportation, on the eve of Bush’s visit, of nearly 300 Guatemalans working at a Massachussetts, military vest factory.
Where Bush fared best, perhaps, was in Mérida, Mexico, where Felipe Calderón not only received him as the gracious host Mexican presidents always are – though he rightly slammed his guest on the fence the US is building here and there along the two countries’ border&#45;&#45; but got in return what he needed, and wanted most.
The American made a firm, explicit and apparently sincere commitment to lobby as strongly as possibly for what he calls “comprehensive immigration reform” and what in Mexico is commonly known as “the whole enchilada.”
Whether Bush can deliver the goods is obviously open to question, but since Senate Majority Leader Harry Reid traveled to Mexico City two days later to make the same commitment, it seems that Mexico’s six years of vain efforts might finally prove fruitful.
Needless to say, Calderón was thrilled, particularly because he had begun backing away from the emphasis his predecessor, Vicente Fox, placed on the immigration issue.
Conversely, if Bush cannot come up with enough Republican moderates in the US Senate – they are actually already there, probably &#45;&#45; and in the US House of Representatives, the letdown and resentment in Mexico (as well as everywhere in Central America, the Caribbean, Peru, Ecuador and Colombia) will be immense.
So where do the US and Latin America go from here?
Several crucial decisions lay ahead.
The first is for the US and the rest of the region to wholeheartedly support, and if possible reinforce, the democracy and human rights protection instruments developed over the years, given the precarious nature of democracy and respect for human rights in nations like Ecuador, Venezuela, Bolivia and others.
Second, the White House must not only get the pending free trade agreements ratified by Congress, but should improve them, learning from the NAFTA experience, make them more poverty-sensitive, more environmentally- and labor-oriented, and provide more support for infrastructure and training.
Third, and perhaps most importantly, Bush has to finally achieve the immigration reform he has promised for so long.
Stop building fences – even if they do make good neighbors &#45;&#45; and cease the harassment of undocumented people in the US.
It’s hateful, needless, and futile: as Bush said himself, the US will never, could never, and should never deport twelve million people, illegal or not.
Latin America and the New Financial Architecture
Argentina's ongoing crisis demonstrates, if demonstrations are still needed, that emerging market crises remain with us.
Indeed, so frequent have such crises been over recent years that we seem almost to take them for granted.
In the 120 months of the 1990s, 40 emerging markets (i.e., 33% of the world's developing countries), experienced serious financial distress.
So it is time to ask: what viable steps have been taken to create a financial architecture able to contain and reduce this number?
Real progress, I believe, has taken place, but it is insufficient and asymmetric.
Positive developments include the expansion and adaptation of new IMF lending facilities for crisis prevention and management, as well as an increase in the IMF's total resources.
Important institutional innovations have also been introduced, including creation of the Financial Stability Forum.
Based on a British initiative and developed by Hans Tietmeier (former head of the Bundesbank), the Forum will attempt to identify sources of systemic risk and develop consistent financial regulation across different financial sectors and countries.
The FSF was set up by the G-7 in early 1999.
The Forum was initially made up of just the G-7 countries, but four new members - Australia, Holland, Hong Kong and Singapore - were added this year.
In addition to national representatives, the Forum's members include international organizations concerned with financial stability.
In its first year of operation, the Forum commissioned five working groups to examine issues affecting international financial stability, including highly leveraged institutions, capital flows and offshore financial centers.
Yet, despite these developments, overall progress remains insufficient.
An international financial system to support - not undermine - growth and development is what the times demand.
The steps that need to be taken internationally for such a system to take root have already been mapped in what was achieved by individual countries over recent decades, when institutions, such as central banks and regulatory agencies, were created to help manage the rapid growth of private banks and financial markets.
Drawing a parallel from this national evolution, developing a financial architecture to perform similar functions in the international arena is essential.
The rapid, and seemingly ceaseless globalization of private capital makes this more urgent by the day.
Such architecture requires:
appropriate transparency and international regulation of loan and capital markets.
Such regulation should discourage severe surges of short-term capital flows to developing countries because, when these are reversed, crisis usually follows;
provision of sufficient official liquidity in when countries face distress.
One valuable suggestion is to transform the IMF Contingency Credit Line, which has never been used since its creation two years ago.
This Contingency Credit could be adapted so that any country could use it in times of crisis, provided it received a positive report in its annual consultation with the IMF;
a general framework for working out a country's debt problems, to be activated when crises occur.
Progress in reforming the international financial system is also disfigured by the fact that developing countries, most particularly those in Latin America, have not been allowed to participate sufficiently in the key discussions and institutions where decisions are made.
For example, Latin American countries have little voice in the Basle Committees and in the Financial Stability Forum.
But a Financial Stability Forum without the emerging economies of Latin America is a bit like Hamlet without the Prince!
A more sensible policy would be to have a few emerging market countries participate - on a rotating basis - in this Forum.
The issues discussed profoundly affect their economies.
Moreover, they can offer valuable insights on financial instability as they have borne the brunt of recent crises.
Across Latin America policymakers fear that if insufficient changes are made in the international financial architecture, there is a serious risk that frequent and costly crises will continue to occur.
This would not only have deeply damaging economic and political effects for those countries, such as Argentina today, but could also threaten the public good of global financial stability.
Latin America at a Crossroads
Last year witnessed a decisive turn in Latin America.
A growing number of countries in the region now seem determined to pursue their interests regardless of what the United States desires.
José Miguel Insulza’s election as Secretary General of the Organization of American States, and the consequent defeat of the candidate supported by the Bush administration, emphatically demonstrated the decline of America’s continental leadership.
The US not only lost control of the OAS, an organization that generally serves US interests, but also failed to get last month’s Summit of the Americas in Mar del Plata Argentina to endorse unanimously a declaration supporting America’s trade and political positions for the region.
This rejection came about despite the summit be structured in such a way as to promote and defend those interests.
Attempts throughout 2005 by the Bush administration to discipline Venezuela’s government also failed.
President Bush was simply unable to get other governments to back to the policy of isolation he sought to impose on President Hugo Chavez’s government.
America has also been frustrated in its desire to obtain regional support for its policy of direct involvement in the Colombia’s internal strife.
Of course, not everything went against America.
The election of the Colombian Luis Alberto Moreno as president of the Inter-American Development Bank had clear US backing. This means that the bank is likely continue its orthodox, neo-liberal policies.
But a clear line in the sand has been drawn between Latin American countries that want to pursue regional integration on their own terms, and those who see hemispheric integration as directed by the US.
Some countries – Mexico, Colombia, and Peru – appear to want a privileged direct relationship with America.
Other countries – Bolivia, Chile, the countries of Central America – prefer regional solutions in which they have a clear and equal say.
The latter group, for example, are generally supportive of the plan to build a Community of South American Nations, a scheme backed primarily by Argentina and Venezuela.
The Mercosur countries don’t want a confrontation with anyone, including the US, but do seek a more just and democratic international system.
But it is the ideological picture that presents the starkest contrasts.
Indeed, there could be political consequences that could affect the entire region if the confrontation between Venezuela and the US worsens beyond today’s tense relations, or if there were an electoral victory for the Frente Sandinista de Liberación Nacional in Nicaragua, or for Evo Morales's Movimiento al Socialismo in Bolivia.
The eventual formation of a triangle that links Cuba, Venezuela, and Nicaragua is likely to be considered a direct threat to regional stability by the United States, which would have dangerous consequence of putting Latin America atop the security agenda of the Bush administration.
Yet you cannot see Latin America in 2005 only in terms of the region’s relations with the US.
Deep concerns about the internal situation many countries who suffer almost permanent political and institutional crises, such as Haiti, Ecuador and Bolivia, abound.
As the structural causes that have pushed these countries into near permanent states of crisis seem unlikely to be resolved anytime soon, there problems may well become linked to Latin America’s tense relations with the US.
Indeed, local problems are likely to exacerbate regional tensioins.
2005 saw the return of seemingly buried territorial disputes, such as defining the maritime limits between Chile and Peru, as well as the revanchist pressures that are mounting in Bolivia for recovering access to the sea that was lost in the 19th century, an urge strengthened by Bolivia’s growing willingness to perhaps use its gas exports as a pressure point.
The dispute between Costa Rica and Nicaragua over navigation on the San Juan River, and the heated jurisdictional arguemnts between Colombia and Venezuela also help raise regional tempers.
The result of all this tension is that Latin America is seeing its biggest arms race for decades, a sad trend when the region’s worst problems are poverty, inequality, and the marginalization of indigenous people.
If these problems go unattended, destabilization will undoubtedly grow.
One last problem is contributing to the region’s anxieties: massive migration.
The problem is not just about illegal migration to the US, though those Americans who seek to play the anti-immigrant card do antagonize regional sensibilities unnecessarily.
For migration – triggered by dire economic conditions – is also happening between Latin American countries. Keeping this peaceful will be a vexing problem for the region’s leaders in the months and years ahead.
Across Latin America, if poverty and violence are not ameliorated, tensions are bound to grow.
Latin America is truly at a crossroads: 2006 may well determine whether the continent lapses back into the sad days of chaotic past, who finds a new maturity to strike out on its own path to growth and stability.
Latin America: Forgotten in the US Vote
Berkeley &#45;&#45; As voters in the United States handicap the presidential race, Latin Americans can watch and imagine what a President Hillary Clinton, Barack Obama or John McCain might do for their countries.
Which candidate is best for Latin America? Does it make any difference if Barak Obama or Hillary Clinton is the Democratic nominee and does it matter if one of them or the Republican John McCain wins in November?
For decades, trade has been the modus operandi of U.S foreign policy in the region, but some administrations have had broader agendas. Remember Jimmy Carter’s human rights driven policy?  Or the Reagan and Bush I era of interventionism that, depending on your point of view, either saved the region from revolutionaries or suppressed needed change.
Like them or not, Carter and Reagan offered sharp contrasts in how they dealt with Latin America.
In the last 16 years, however, the Democratic and Republican presidents Bill Clinton and George W. Bush have offered virtually the same take: free trade all the way.
There are only the slightest of indications that Senators Obama and Clinton or even Senator McCain have any different intentions.
So, trying to parse their positions to make a case for one over another is harder to do than guessing who will end up winning the World Cup.
For now, the biggest Latin American issue for North Americans is the estimated 12 million undocumented immigrants in the U.S.—most of whom speak Spanish. Say what you want about free trade, but in many countries, humans have replaced sugar, bananas and coffee as the number one export.
So, a first question for Latin America should be how do the candidates differ on treating the undocumented countrymen already in the US?
Will the US let them stay and continue to send the billions in remittances?
While the far right in the Republican Party would prefer these immigrants return home—a move that would be devastating to Latin America as well as the United States—all of the presidential candidates have clearer heads.
McCain, Clinton and Obama support “comprehensive reform” — code words for the ying and yang of managing anti-immigrant sentiment here: give Americans some promises of secure borders and they’ll swallow giving the undocumented a path to citizenship.  (No one mentions in this bargain, that the United States has already spent billions to secure ouitsr borders and nonetheless some 500,000 illegal immigrants a year continue to come, but that’s another story.)
The most recent Congressional legislation makes the path to citizenship almost as difficult as the trip across the border, and all three candidates supported that bill. If looking for courage on immigration, however, Senator Obama, the son of an African father and an American mother, might have more than the others.  He’s been the only candidate to defend the right of the undocumented to get a legal driver’s license – a proposal unpopular with many voters.  Although it took a prostitution ring to bring the former Governor Eliot Spitzer down, his plan to give illegal immigrants the undocumented in New York driving licenses—what most experts say makes a whole lot of sense in terms of safer highways &#45;&#45; proved his first miscalculation.  Even the then popular leader had to shelve it.
So, absent any sense of vision — maybe that comes after the election — we’re back to trade that dominates what discussion there is of Latin America in the campaign.
Although Clinton and Obama have been insistent that North America Free Trade Agreement (NAFTA) will be renegotiated around labor and environmental concerns &#45;&#45; even threatening to opt out of that trade deal — opting out is highly unlikely.
The agreements have widespread support in Congress.
But, again, Obama was the earliest and the most insistent on more equitable fair trade, so he’s the more likely to have a different take than his rivals. Also, Governor Bill Richardson of New Mexico, the former US Ambassador to the United Nations, who is of Latin American descent and now supports Obama, has an affinity for Latin America.
Indeed, he recently became involved in negotiations with Venezuela and Columbia to release the hostages held by the Revolutionary Armed Forces of Colombia or FARC.
Obama has consistently been opposed to the trade agreement with Colombia.
Clinton—although now opposed&#45;&#45; waffled earlier and McCain would charge ahead to sign on the bottom line. But, alas, this is only one trade agreement, not a vision.
And, if Obama comes close to indicating he may have one, he has yet to spell it out.
Latin Americans might even ask — do the candidates really care about us? After all, U.S. corn-based ethanol production is creating havoc on food prices and no one in the presidential race seems upset.
Go ethanol the candidates agree.
It’s a cheer that means one thing: tortillas are only going to get more expensive. Given what the candidates have said so far about Latin America, that’s a trend unlikely to change.
Latin America’s Anti-Chávez Axis
BRUSSELS – The rescue of Ingrid Betancourt and 14 other hostages who had been held for years by FARC guerrillas marks more than a turning point in Colombia’s long war against its drug-running, Marxist guerrillas.
It also confirms the emergence of a new troika of Latin American leaders – Colombia’s President Alvaro Uribe, Brazilian President Luiz Inácio Lula da Silva, and Mexican President Felipe Calderón – who are set on finishing off Latin America’s destabilizing drug cartels and guerrilla movements, as well as isolating the region’s demagogic upstart, Venezuelan President Hugo Chávez.
Uribe’s status as one of Latin America’s historic leaders was assured even before the rescue of Betancourt and the other hostages.
Uribe won an unprecedented re-election two years ago with an absolute majority in the first round of the vote.
But it is Uribe’s resolve not to negotiate with the FARC over kidnappings, and instead to pursue relentlessly the armed insurgency that murdered his father that has defined Uribe’s presidency.
In the process, he transformed a country that was in the grip of drug barons and on the verge of becoming a failed state.
The professionalism of Colombia’s armed forces, coupled with Uribe’s popularity and a growing economy, has delivered, for the first time in three decades, normality to Colombia’s cities and, increasingly, peace and the rule of law to much of its vast jungle regions. Uribe’s relentlessness has brought on waves of defections from the FARC, which is now down to 9,000 guerrillas from a peak of 16,000 in 2001.
Indeed, many FARC defectors now prefer to fight for their cause at the ballot box under the new left-wing Polo Alternativo Democratico.
But the benefits of Uribe’s apparent defeat of the FARC extend far beyond Colombia.
The hostage rescue mission has also forced Chávez, still recovering from his failed power-grab referendum of last year (a moment when Chávez’s own army high command allegedly refused his demand to fudge the result) onto the defensive.
The Uribe-Lula-Calderón axis appears set on keeping him there.
Chávez is the loser not only because he had provided the FARC moral support (he once described them as “belligerents,” not terrorists, and publicly called Uribe an American stooge), but also because it is believed that he has been providing the FARC covert military support.
That backing appeared to be part of Chávez’s “Bolivarian” socialist revolution, which has used Venezuela’s petrodollars to bankroll left-wing governments in Ecuador, Bolivia, and Cuba in the hope of building up a regional anti-American alliance.
There were serious grounds over the last three years to believe that Latin America was going through one of its regular bouts of left-wing destabilization, given the rise of Bolivian President Evo Morales, Ecuador’s President Rafael Correa, and their ringleader, Chávez.
But the recent worldwide increase in commodity prices has meant that the traditional regional powerhouses of Chile, Brazil, and Mexico have experienced economic booms of their own.
This made it easier for Lula in particular to buck his socialist allies and distance himself from Chávez, having as recently as March 2008 backed Chávez following Colombia’s brief incursion into Ecuador which killed FARC Commander Raul Reyes.
Calderón’s uncompromising hard line on drug dealers in Mexico, an unrelenting offensive that follows the precedent set by Uribe in dealing with the FARC, has also been helped because economic growth has muted domestic opposition.
The emerging Uribe-Lula-Calderón troika has geo-strategic influence because things have started to change in Cuba ever since Fidel Castro formally handed over the presidency to his brother, Raúl.
Latin America is obsessed with this transition, and Uribe, Calderón, and Lula have no intention of letting Chávez lead the way.
Last January, Lula visited the island with a string of leading Brazilian businessmen and signed trade and investment deals worth $1 billion.
Calderón, reversing his predecessor’s policy of speaking out against the lack of human rights in Cuba, has restored Mexico’s traditional close ties.
Earlier this year, Mexico’s foreign minister renegotiated $400 million of debt on which Cuba had defaulted.
Cultural exchanges have increased, and Calderón is expected to visit Havana soon.
This closer embrace of Cuba mixes self-interest with calculation.
Everywhere in Latin America, Cuba is a domestic political issue.
Some commentators argue that in repairing relations, Uribe, Calderón, and Lula hope to mollify their left-wing opponents.
Moreover, for both Uribe and Calderón, instability in Cuba could pose a domestic security threat.
Both Brazil and Mexico see business opportunities on the island, especially since Raúl Castro has already made Cuba more open to foreign investment.
But perhaps the most important reason for improving relations with Cuba is one that none of the three leaders will say in public: they see closer ties as a way of balancing the influence of Chávez, who has replaced the Soviet Union as Cuba’s main provider of aid.
Unlike Chávez, Fidel’s fawning disciple, Uribe, Calderón, and Lula are quietly supporting political liberalization in Cuba, and believe that Raúl Castro also worries about Cuba’s dependence on Venezuela, as well as on China.
Some in the Bush administration accept this argument, saying that they are happy to see Latin American democracies seeking influence where the United States cannot. Latin America, it seems, is no longer held hostage by its demagogues and guerrillas.
Latin America’s Currency Roller Coaster
BUENOS AIRES – Ever since World War II, the countries of Latin America have served as something of a currency laboratory.
Across the region, countless exchange-rate regimes have been tried – some succeeding, others failing abysmally.
In all cases, however, exchange-rate policies have played a central role in determining these countries’ overall macroeconomic results.
And today, after two turbulent decades, they seem to be converging toward a more unified and sustainable framework.
The 1980’s was a harrowing decade for most Latin American countries.
The second oil shock and high international interest rates, coupled with a lack of foreign investment, led to significant internal and external imbalances and high levels of foreign debt.
In all the major countries, this resulted in defaults, significant and continuous exchange-rate adjustments, and, by the end of the decade, a severe inflation/devaluation spiral, bordering, in some cases, on hyperinflation.
These traumatic events set the stage for Latin America’s two-decade-long currency roller coaster.
That experience was marked by the attempt to use a fixed exchange-rate regime as the main policy instrument to control inflation; that attempt’s colossal failure; and the shift, over the last decade, to more flexible regimes, freeing the exchange rate from playing a central role in controlling inflation, but not necessarily allowing a pure float in world currency markets.
At the beginning of the 1990’s, with inflation rampant, the three largest Latin American countries decided to use the exchange rate as the centerpiece of their stabilization strategies.
Given that international capital flows had restarted, they did not fear immediate external constraints.
Argentina adopted the hardest peg, introducing a quasi-currency board and fixing the exchange rate by law.
Mexico and Brazil also put in place fixed exchange rates as part of broader reform policies.
The result of these experiments reminds one of the rueful saying: the operation was a success, but the patient died.
Inflation did, indeed, come down; but the real exchange rate rapidly became overvalued.
This, together with external shocks and severe recessions, made fixed exchange-rate regimes untenable, first in Mexico, later in Brazil, and then, spectacularly, in Argentina.
During the same period, other Latin American countries, particularly Colombia and Chile, adopted an alternative strategy.
Their inflation was lower, and they oriented their policies toward maintaining a competitive exchange rate through the adoption of a so-called “crawling band,” whereby the currency is allowed to fluctuate within a band around a central parity.
Both countries managed to reduce inflation gradually while maintaining economic growth.
Their greater currency flexibility, however, did not prevent the recessionary impact of the Asian and Russian crises of 1997-98, and Colombia did experience a financial crisis in 1999.
The collapse of Latin America’s currency pegs in the financial crises of the 1990’s contributed to a shift in the world’s currency paradigm.
Coming from different experiences, most countries converged on the adoption of a floating exchange rate, many in the context of inflation targeting.
But what most characterizes Latin America’s experience is that, despite publicly preaching the virtues of a floating rate, the authorities actively intervene in currency markets, this time in different and creative ways. Thus, the exchange-rate regime in Latin America today is one of actively managed floating.
During the first part of the decade, intervention was motivated by the desire to avoid devaluation, and therefore to support the inflation-targeting objectives.
However, in later periods the objective was to avoid real exchange-rate appreciation, and, at the same time, to accumulate international reserves and strengthen credibility.
One important lesson from Latin America’s journey concerns the futility of relying on the exchange-rate regime as the main stabilization instrument.
Inflation is too stubborn to be tackled without a coordinated set of fiscal and monetary policies.
Anchoring the exchange rate is likely to result in disproportionate real appreciation, loss of competitiveness, external and financial crises, and disastrous recessions.
A second lesson is the importance of flexibility.
In the 1990’s, when hard pegs were in vogue, it was believed that flexibility reduced credibility.
Yet, in the end, credibility collapsed because of the lack of flexibility.
Now, in a low-inflation environment, flexibility is properly regarded as an important tool to avoid misalignments and to shield economies from external shocks.
But flexibility is not a synonym for “pure” floating.
In a highly integrated world of highly volatile prices and volumes, flexibility also implies the capacity to intervene and actively manage the exchange rate.
Indeed, a third lesson is that neither hard pegs nor unfettered floating facilitate the preservation of a competitive real exchange rate, which is crucial to promoting and sustaining economic development.
Managing a floating rate has also allowed Latin American countries to accumulate a significant level of international reserves.
Despite advice to the contrary, this has been highly stabilizing.
There is little doubt that substantial foreign reserves, together with the flexibility to float and intervene, have mitigated the impact of the recent crisis on Latin America, and contributed to its emergence as one of the best-performing regions in an era of deep uncertainty elsewhere.
Latin America’s Dysfunctional Democracy
In Latin America, many people live with outstretched hands.
Throughout the Hemisphere, paternalistic governments accustom people to receiving just enough to survive instead of participating in society.
Across the region, politicians that writer Octavio Paz once referred to as “philanthropic ogres” create clients instead of citizens, people who expect instead of demand.
Democratic Latin America limps sideways because it can’t run ahead.
There are too many entry barriers to the poor, the innovative, and those without access to credit.
There are too many walls erected against social mobility, competition, and fairness in politics and business.
As a result, although Latin Americans can vote in a more democratic environment, they can’t compete in a globalized world.
Standards of living fall, incomes stagnate, hopes are dampened.
So people start to march in the streets in Bolivia.
Or believe the promises of the populist President Hugo Chávez in Venezuela.
Or think about a return to the one-party past in Mexico.
Or yearn to toss all the bums out – a sentiment that now seems to be taking root in Brazil.
Or to vote with their feet, as in Mexico, where one of every five men between the age of 26 and 35 lives in the United States.
The region is both more democratic and more unequal than it was ten years ago.
United by the right to vote, Latin Americans remain divided by poverty.
Latin America’s economies are organized in a way that concentrates wealth in a few hands, but then leaves it untaxed, depriving governments of the resources needed to invest in their citizens’ human capital.
Few governments in Latin America today have committed themselves to making such an investment.
Instead, what Latin America’s people get in the democratic era is a lot of public works – bridges, highways, and massive structures that are designed to elicit short-term political support.
In such projects, politicians manipulate and buy voters instead of truly representing them.
Such distorted priorities reflect a simple reality: democracy in Latin America seems incapable of dismantling old networks of clienteles and their traditional power-sharing arrangements.
The old elites remain, locked inside their gated communities, fending off the poor, whom they have no incentive to empower, because plentiful cheap labor is so beneficial to those who employ it.
This means that broad swaths of the population don’t finish high school, don’t attend college, and don’t become empowered citizens of their own countries and the world.
They remain at the service of socio-economic systems in which personal relationships matter more than qualifications and skill, in which positions are doled out on the basis of loyalty, not merit.
Doors open to those with the right name and the right connections, and contracts are assigned with a slap on the back and the wink of an eye.
State monopolies are sold to friends who then become multibillionaires, like Mexico’s Carlos Slim.
Despite unrest in Bolivia, and populist politicians on the march, Latin America isn’t on the verge of an economic meltdown. Indeed, the region remains largely stable.
But that isn’t enough to propel people from a tortilla factory to a software company, to create a broad middle class, and thus to assure social mobility.
Democracy may be working well enough in terms of free and fair elections.
But something else is malfunctioning, and it transcends particular presidents, whether the president is Venezuela’s populist Chávez, Mexico’s conservative Fox, or Brazil’s left-leaning Lula.
It has to do with a deep, historic, structural reality.
Latin America’s dysfunctional democracy is the result of a pattern of political and economic behavior that condemns Latin America to stagnation, independently of who governs.
It stems from a pattern of postponed or partial structural reforms, of privatizations that benefit elites but hurt consumers.
This has sustained a model that places more value on the extraction of resources than on the education and empowerment of people.
Bountiful resources such as oil are a bane for democracy in developing countries, because when a government gets the revenues it needs by selling oil, it doesn’t need to collect taxes.
Governments that don’t need to broaden their tax base have few incentives to respond to the needs of their people.
Indeed, governments that are built on clientelism instead of citizenship don’t need to respond at all.
They produce skin-deep democracies in which people have a vote but don’t really have a stake, in which wealth is increasingly concentrated and income disparities are harder to breach.
Worse still, such governments – whether authoritarian or nominally democratic – turn their citizens into recipients instead of participants.
They create people who live with their hands held out instead of their heads held high.
Latin America’s Education Deficit
China’s decision to end its decade-old policy of pegging the Yuan to the dollar has been greeted in Latin America with enthusiasm and optimism.
It is argued across the continent that a more flexible exchange rate for the Yuan will reduce China’s unfair advantage in international markets.
This, we are told, will make Latin America’s exports of manufactured goods more competitive internationally.
But this optimism is misplaced.
Despite the announced reforms, it is unlikely that there will be any significant exchange-rate flexibility in China’s currency.
Indeed, China’s rulers have already stated that the new exchange-rate system will aim at maintaining currency stability.
Its policy is tailored after that of Singapore, which has avoided large currency fluctuations – and has maintained a significantly more competitive exchange rate during the last three years than all of Latin America’s countries.
This means that in order to compete successfully with China, Latin American countries will need to increase productivity growth.
Unfortunately, the continent is not well positioned for these challenges.
The main problem is the extremely low quality of the region’s educational system.
According to several international educational studies conducted in recent years, Latin American countries rank at the bottom, particularly in mathematics and science.
For example, tests administered by the OECD in 2003 found that Brazilian students ranked last in mathematics among 40 countries.
In the same tests, Mexico was in 37th place, while Uruguay, the highest-ranked Latin American country, came in 35th.
Latin American students performed especially poorly on the “problem solving” part of these tests.
This reflects the old-fashioned nature of the region’s educational systems, which still emphasize memorization and rote learning.
Sadly, results are not much better in reading ability; again, the Latin American nations were at the bottom of the 40-country sample.
Similarly, according to the prestigious Trends in International Mathematics and Science Study (TIMSS), in 2003 Chile’s eighth graders ranked 39th out of 44 countries in mathematics; in science they did only slightly better, ranking 37th.
Interestingly, many countries that performed better than Chile on these standardized tests have a lower income per capita.
Latin America’s educational performance is equally weak at the university level.
According to a 2004 survey by The Times of London, not a single Latin American university is ranked among the top 200 in the world.
This contrasts sharply with China and India, both of which have several world-class universities, especially in science and engineering.
Thailand, Turkey, and Singapore also have first-rate universities in the sciences, including biotechnology.
If Latin America is to succeed and move towards prosperity, it needs to reform its educational system.
A sustainable economic growth rate that helps reduce poverty and inequality can be achieved only with a skilled and innovative labor force.
Reforms must aim at making grade school and high school teachers accountable.
In addition, paying teachers according to performance must become the norm, while ineffective teachers should be dismissed.
Moreover, competitive funding for research at the university level must be increased substantially.
Implementing these reforms will require political courage and vision.
In particular, politicians need to be willing to confront teachers’ unions, which have traditionally resisted reforms that introduce competition and accountability.
Latin America’s Era of Milk and Honey
Whenever signs of change appear in Latin America’s economies, people ask if the change will be transitory or permanent.
Driven mainly by the almost insatiable appetites of China and India, a profound burst of growth has come to Latin America.
Over the past five years, Chile’s GDP has been expanding 5% annually, Argentina’s by almost 9%, Venezuela’s by more than 10%, and the Andean Community’s by 6%.
The continent’s aggregate growth, at 4.5%, is expected to lag behind the world average of 5% in 2007, but only because the largest countries, Mexico and Brazil, are growing more slowly.
One regular aspect of post-war Latin America has been that such bonanzas have been undermined by large current account deficits, and thus indebtedness.
But that is not happening this time.
Latin America will finish 2007 with a current account surplus and growing foreign-currency reserves, insulating them from financial crisis.
On the one hand, world trade is growing, and so are Latin America’s exports. On the other hand, the terms of trade have improved.
High commodity prices have benefited producers of oil and gas (such as Venezuela and Bolivia) and minerals (such as Chile).
Moreover, producers of foodstuffs (such as Argentina and Uruguay), which suffered for decades, are now gaining from notable biogenetic innovations that increased arable land area.
There is also a surprising phenomenon that favors everyone: prices of technology-based capital assets imported by Latin America have been falling throughout the past decade.
Another phenomenon is linked to the first.
Structural deflationary pressures in the developed countries – such as highly debated increments of productivity in the United States – help the central banks to maintain price stability, which means that growing exports and high terms of trade have been accompanied by reasonably low interest rates.
As long as this combination of factors lasts, the governments of Latin America can maintain fiscal discipline, despite higher spending, as rapid growth translates into greater revenues.
Whereas Chile, for example, recorded a slight fiscal deficit in 2003, by 2006 it boasted an almost 8%-of-GDP surplus.
With different tools – including a profound restructuring of its foreign debt – and less discipline, Argentina accomplished a similar fiscal turnaround.
Likewise, thanks to the discovery of gas, Bolivia turned its 8%-of-GDP fiscal deficit in 2003 into a surplus of 1.2 of GDP in 2006.
Of eleven of the region’s countries – the five MERCOSUR economies, the four Andean Community countries, plus Chile and Mexico – seven have had a fiscal surplus in 2006 and six will maintain it – less easily – in 2007.
Of course, skeptics warn against excessive optimism, arguing that something similar occurred in the early 1970’s, ending in a deep crisis.
But there is a key difference: whereas the economic stagnation and world-wide inflation of the 1970’s originated in the supply cartel of hydrocarbons producers, now it is the Asian latecomers in the process of industrialization that are driving growth, and inflation is a constant threat that never materializes.
Meanwhile, each government, with its own style and political discourse, seeks to associate the state with the benefits of a globalization that, for the past few years, has been showing its generosity.
The result is surprisingly orthodox: a sharp decline in Latin America’s average public and private foreign debt, from 44% to 21% of GDP between 2003 and 2007, in part because of the exchange rate appreciation generated by the foreign bonanza itself.
It seems that the region’s popular left-wing nationalist governments have discovered that fiscal stability and reducing debt constitute the key to political autonomy and economic independence.
If the neo-liberal Washington Consensus has been forgotten, perhaps it wasn’t because its tenets were misguided, but because the world offered an opportunity to realize the most important of them without having to suffer the humiliation of a shrinking economy.
Latin America’s Forbidden Debates
Twenty-five years ago, only Colombia, Costa Rica, and Venezuela were reasonably stable Latin American democracies.
Today, what might be considered electoral democracies are found throughout the region.
Indeed, at no time since independence has there been such a proliferation of democracy in Latin America.
But what has been gained is never guaranteed.
A military coup is not the only way to destroy a free society.
As the political scientist Guillermo O’Donnell observed, democracy’s flame can also be extinguished gradually when dreams of justice and social progress fail to materialize.
During the 25 years of the spectacular rise of Latin America democracy, per capita income has increased by a mere $300.
Even in Chile, which enjoyed high economic growth and cut poverty in half, and Brazil, which lowered the percentage of citizens living below the poverty line by a third during the 1990’s, the concentration of wealth has increased.
This isn’t for lack of structural reforms.
At the same time that political changes helped spread democracy across Latin America, structural economic reforms were strengthened.
Samuel Morley of the UN’s Economic Commission for Latin America and the Caribbean put together an index that graded reforms aimed at economic deregulation, trade liberalization, and opening up financial markets.
Morley’s index, on a scale of zero to one, stood at 0.52 in 1977, but rose to 0.82 by 2000.
Nevertheless, profound economic and political transformation in Latin America has masked a deep disparity between reforms and reality – indeed, between hopes and their fulfillment.
Although this gap endangers the future of Latin American democracy, many Latin American leaders consider it apostasy to admit that living standards are little better today than they were during the era of dictators.
Their first inclination is to defend these electoral democracies on the grounds they no longer engage in killing or in torture.
But consider this: Amnesty International and the US State Department have three basic indicators of human rights — the right to life, the right to physical safety, and the right to freedom from political persecution.
They use a scale of one to five, with one representing an optimal level of human rights and five indicating conditions of general terror.
During 1977, the worst year for human rights violations, the average Latin American rate of terror stood at 3.0.
In 2001, after two decades of democracy, it was 2.6. By contrast, the terror index for Western Europe was 1.1.
Still, to insist that Latin American democracy has been a major disappointment would not merely be pessimistic; it would fail to recognize that the most important values of a free society include the capacity to change, to rectify, and to improve.
The problem does not lie with our shortcomings, but with the way we choose to resolve them.
The role of the state, the market, and the region’s place in the global economy all need urgent attention and discussion.
Yet our leaders consider these subjects taboo.
Our first challenge is to recognize that electoral government has failed to lead to a true democracy of the people.
Our second challenge is to find the keys to open that door.
Latin America seems to lack the will to establish a true people’s democracy, and it has tied itself to a narrow market economy whose bad outcomes are readily apparent to everyone.
But government has a central role to play in the debate over the creation of democracy – one more important than its oversight of fiscal matters.
Certainly, merely returning to big government will not resolve anything, because it is inefficient and generates the opposite but equivalent imbalance.
Indeed, it may be that the framework for a state that can preside over a true democracy has yet to be created.
The same may be said about the market economy.
The Washington Consensus – with its emphasis on liberalization, deregulation, and privatization – does not forecast greater per capita income, nor does it eliminate poverty.
It does, however, increase inequality.
Does that mean we should abandon the market economy?
No, because, simply put, political liberty cannot be separated from economic liberty.
Ensuring Latin American nations’ autonomy in the global economy is yet another vital question that must be debated, because it is essential that national governments have the power to execute their citizens’ will.
Thus, the commercial and political aspects of government’s responsibilities must be integrated.
This does not require immediately creating new administrative structures, but skillful political coordination can and must be at the heart of this debate and ensuring its successful outcome.
We cannot base our actions solely on commercial will, because that limits us to operating strictly at the whims of international markets.
As the political scientist Samuel Huntington has said, “Business may bring communities closer but it cannot bring them into harmony.”
Today, Latin American states need political agreements that protect them from becoming the victims of both North American unilateralism and the global economy.
Failure to engage in critical debates about Latin American democracy will surely provide fertile ground for reviving the authoritarian fantasies of the past.
If, on the other hand, political leaders lose their fear of debating important issues, Latin America can move forward.
Having won some of their freedom, Latin America’s people should not be forced to pay the high price implied by their leaders’ failure to open forbidden issues to debate.
Latin America’s Glossed Decade
SANTIAGO – The Inter-American Development Bank declared last July that this would be “Latin America’s Decade.”
A couple of months later, The Economist endorsed that idea, which has since been repeated by countless apologists and experts.
There is nothing like a little economic growth to get pundits’ juices flowing.
And Latin America is growing, by 6% last year and an estimated 4.75% in 2011, according to the International Monetary Fund.
Compared with the region’s mostly sluggish performance over the last three decades, this looks like takeoff velocity.
And, compared to the dismal recent record in North America and Europe, it looks positively supersonic.
Latin America’s stock markets are up sharply since the crisis, as are property prices in those few countries that keep track of house values.
No wonder so many are so excited.
The mood about Latin America was equally optimistic at the start of the 1980’s.
Bank loans from the US were plentiful, and countries like Argentina, Chile, and Uruguay were growing fast.
But then Paul Volcker increased interest rates in the US, the dollars went home, most countries defaulted on their debts, and the 1980’s became a “lost decade” for Latin America.
The early and mid-1990’s witnessed another wave of optimism.
Commodity prices were high, external financing plentiful, and many Latin American countries grew.
Having adopted the liberalizing reforms dictated by the Washington Consensus, Latin America was thought to have turned the corner.
But then came Mexico’s Tequila Crisis in 1994, followed by the Asian meltdown, which hit Latin American economies hard.
Brazil blew up in 1998, and Argentina melted down in 2001.
I do not mean to suggest that Latin America is on the verge of another debt crisis – far from it.
In many countries – including Brazil, Peru, and Colombia – macroeconomic management is far better than it was in the 1980’s or early 1990’s.
But today’s situation shares two features with the earlier episodes of financial euphoria over Latin America: sky-high commodity prices and cheap international money.
In fact, for many of the region’s countries, the terms of trade are higher and the relevant global interest rates lower than they have ever been.
These factors, more than any virtuous policy change in recent years, are propelling growth.
Indeed, today there are two Latin Americas: natural resource-rich South America and natural resource-poor Central America and Mexico.
Not surprisingly, South America is growing much faster than its neighbors to the North – 4.4 versus 2.7% in 2010-11, according to a recent Inter-American Development Bank report.
The report estimates that Argentina’s economy will expand by 6.1% in that period, while Costa Rica’s will grow by 3.8% and El Salvador’s by just 1.6%.
Is there a single economist who believes that Argentina’s policies are almost four times better than El Salvador’s?
Plentiful international capital is also making a difference.
The financial markets’ recent darling is Brazil, which grew at a breakneck 7.5% pace in 2010, fueled by almost $100 billion in capital inflows.
By the end of 2016, Brazil will have hosted both the World Cup and the Olympic Games.
Few doubt Brazil’s primacy when it comes to soccer.
But its economic competitiveness is another story.
In this cup, Brazil does not even make it to the playoff round of 32, occupying 58th place in the competitiveness ranking of 139 countries compiled by the World Economic Forum. Ahead of Brazil one finds Montenegro, Mauritius, and Azerbaijan.
In the past, episodes of dirt-cheap money and commodity prices on steroids ended badly for Latin America.
Will this time be different?
Pardon the economist’s stock answer: it all depends.
First of all, it depends on whether countries can prevent financial bubbles from developing.
The IMF recently asked in a report: “Are bubbly conditions taking hold?”
After pointing to soaring credit growth in most South American countries (in Brazil, growth in mortgage lending exceeded 40% during 2010, more than tripling the stock of credit outstanding in 2007), the Fund concluded that “the current expansion does not yet rise to the level of a credit boom,” though “it would if the expansion were sustained for a prolonged period.”
Notice the “not yet.”
When a doctor says that a patient is “not yet” dead, family members should start to worry.
In the same report, the IMF rang alarm bells over potential equity bubbles, pointing out that “stock prices are currently above trend levels in most countries, with signs of stretched valuations in a few countries (Chile, Colombia, and Peru).”
In Chile, the report met with irate denials from the brokers and fund managers who make their living selling Chilean stocks to investors.
Whether the current episode will end in tears also depends on fiscal policy.
Once upon a time in Latin America, fiscal policies were extremely pro-cyclical: whenever commodity prices fell, governments lost access to capital markets, so they had to eliminate their deficits just when conditions called for fiscal expansion.
This has slowly begun to change.
With public debt much lower than in the past, several Latin American countries ran counter-cyclical deficits for the first time in 2009, thereby cushioning the domestic impact of the external blow from the global financial crisis.
The problem is that governments in the region have yet to realize that countercyclical fiscal policy implies rowing against the current in both parts of the cycle: spending more when times are bad (the easy part) and spending less when times are good (the true test of virtue).
Today, fiscal policy remains too expansionary in virtually every Latin American country.
That fiscal impulse, coupled with high commodity prices and abundant credit, continues to fuel economic growth today – often at the expense of stability and growth tomorrow.
Latin America’s time has finally come, too many pundits will keep saying.
If only they were right.
Latin America\u0027s Locust Years
The bad news keeps coming in Latin America these days.
Economic conditions worsen almost everywhere, social cohesion unravels and political instability mounts.
Little wonder, since much of Latin America spent the last twenty years going nowhere.
Assets were sold and national debts ballooned, but almost nothing lasting and beneficial was gained.
Truly, these were years that the locusts ate.
Over the past 20 years, annual per capita GDP growth in Latin America averaged 0.35%.
At that pace, an economy would need 200 years to double in size.
In Asia, the standard of living doubles every decade .
With such anemic growth, how can Latin America expect to compete in world trade except through ever shrinking wages?
Profound misgovernance, not bad luck, is to blame for economic stagnation.
If Latin America does not change, it may increasingly look like Africa--a region of weak states with large informal economies and widespread poverty.
Four factors have put it on this path.
First, in Latin America's privatization gold rush, everything from public utilities to manufacturing companies went on the auction block.
For a short time, asset sales helped balance national budgets, and also provided resources for sustaining consumption.
In the end, the income from privatization delivered little in the way of better infrastructure or more competitive exports.
Worse still, the sell-off of state assets was accompanied by massive external borrowing.
In some cases, notably Argentina, borrowing by domestic buyers exhausted all available lines of credit.
Other countries did not drop to Argentina's level, but creditworthiness is an issue almost everywhere in Latin America.
Second, because reform has not delivered prosperity, the region has grown sick of reform.
Capital inflows produced a wealth effect, but only while they lasted.
When the money stopped flowing in, the wealth dried up.
No sane politician will commit to another decade of structural reforms that will test the patience of ordinary Latin Americans beyond the limits of electoral survival.
But without more and deeper reforms, there will be too few of the preconditions for economic growth that lure investment--without which no growth is possible.
This development dilemma points to the third factor: ineffectual politics.
Governments that operated along technocratic lines, and that viewed economic growth as a rising tide that lifts all boats, have vanished.
In Argentina one bumbling president succeeds the next.
Institutions are torn down, property rights are called into question, and a random and ever more corrupt redistribution effort is underway.
Peru and Venezuela hardly look better; Brazil may soon follow the same course.
The popularity of Lula Ignacia da Silva and his team, who lead opinion polls in the run-up to Brazil's presidential election, serves as a warning that much of the Latin American public is prepared to reject traditional governments.
Lula and his party are so far outside the mainstream of economic thought and policy that capital has already begun fleeing--even though the election is months away.
In Mexico, democratization has brought greater stability, but this could well prove ephemeral.
The peso is now grossly overvalued.
If the external balance deteriorates further, the economy will be in for a hard landing.
For all the good news about Mexico's infant democracy, its president is beginning to justify the early fears about him: no vision, no Congress to work with, and no team that knows what to do.
The last factor is the desperately low rate of saving that is endemic in the Americas.
Indeed, this is the bottom line economically, for where there is little saving, there is little investment--and little basis for capital accumulation and productivity growth.
Venezuela now pines for the fat OPEC years of the 1970s--which it missed, because it neglected to develop its oil industry.
Argentina's wealth is now vacationing in Miami, perhaps for good. Brazil and Mexico are prime examples of countries that sold assets and borrowed rather than saved.
The contrast with Asia is arresting.
Consider China, where the saving and investment rates are near 40%, where the current account is in surplus and there is no public debt.
Government institutions are market friendly and the population is well educated, disciplined, and flexible in its learning.
Rewards for risk taking and initiative are immediate and highly motivating.
To be sure, China remains a poor country.
Its per capita GDP is only half that of Brazil.
But with growth in China's coastal region running at possibly 15% per year, who can seriously doubt that in 15 years it will surpass Brazil?
In China, for all of its massive problems, things continue to go right not least because of huge inflows of foreign direct investment and the imminent benefits of WTO membership.
In Latin America, things continue to fall apart: governments backtrack on reform and the economy loses ground to the rest of the world.
Latin America did well when soft money flowed in, but those times are largely over.
So we should expect more bad economic, social, and political news in the years ahead.
Demagogues like Venezuala's Hugo Chavez or Carlos Menem--an Argentine presidential candidate once again--may seem like a bad joke, but anyone who cares about Latin America's fate should not laughing.
Latin America’s New Regionalism
We live in a world crisscrossed by borders, drawn and redrawn throughout history, chosen by fancy or caprice, and all too often defended by bloodshed.
They have always been imperfect, and today their flaws are visible in new ways.
Waves of immigrants, driven from their homes by poverty and desperation, blend one nation’s struggles into another’s.
Climate change caused by environmental destruction in one place can cause floods, storms, drought, and famine anyplace, and easy global travel means that diseases travel more quickly.
Increasingly, we must recognize that our borders are not fortress walls. They are simply lines that we have sketched in the air.
In short, no nation on this changing, shrinking planet can truly address its own problems in isolation.
Nowhere is this more true than in Latin America and the Caribbean, where the uneven blows of history and varied national policies have resulted in a patchwork of fates for our many peoples.
Today – sometimes across borders, sometimes within them – once-unthinkable wealth exists alongside extreme poverty and all its social ills.
Ours is a region of cruel contrasts.
Fortunately, many countries in this part of the world have recognized that regional welfare must be addressed as a regional challenge.
I am proud to list Costa Rica among them.
Our nation may be small, but our commitment to improving the well-being of this region is anything but.
We have an important role to play in advancing the principles of sound knowledge, quality decision-making, and transparency.
Costa Rica is the region’s most stable democracy, a place where peace, nature, and education are valued above all.
While we rejoice in our successes, however, we have long recognized that our future is tied to our neighbors’ challenges, whether they include military conflicts, as was true 20 years ago, or hunger and disease, as is the case today.
That’s why I am pleased that in October, the Inter-American Development Bank and the Copenhagen Consensus Center will host a conference in our capital, San José, inspired by the 2004 Copenhagen Consensus summit.
At that previous meeting, a panel of the world’s leading economic thinkers was challenged to answer this question: if an extra $50 billion were spent improving the state of the world, how could the money be allocated to achieve the most good possible?
Those analysts realized that most, if not all, of the solutions to the world’s biggest challenges depend on local or regional contexts.
Therefore, the San José event will replace a global outlook with a regional one, with a new panel of experts focusing on the biggest challenges facing Latin America and the Caribbean.
The challenges fall into ten categories – a familiar list of key issues in this part of the world: democracy, education, employment, the environment, fiscal problems, health, infrastructure, poverty and inequality, public administration, and crime.
The experts will face obvious restrictions.
Our resources are scarce.
We cannot meet everyone’s demands, or solve all our problems at once.
We must choose between various good ideas, however difficult this may be.
The panel will produce a prioritized list of solutions that can serve as a set of guidelines for regional policymakers, helping us to be both ambitious and realistic.
The “ Consulta de San José ,” as the event has been dubbed, will produce practical ideas that leaders can implement, and help us to identify and promote cost-efficient initiatives.
Most importantly, however, it will serve to emphasize the importance of collective action.
Working together with a genuine sense of regional community is a challenge in itself, but one well worth addressing.
It has been said that “good fences make good neighbors.” There is undeniable wisdom in those words, but it is time to reevaluate what “good fences” really are.
In today’s world, they must be low enough for us to shake our neighbor’s hand, understand his problems as we do our own, and find feasible solutions.
They must be built with the knowledge that no fence, wall, or even an ocean or a continent can truly divide us from the problems of others.
This is the spirit of the upcoming conference.
I hope that spirit will spread far beyond San José, and that other regions will join us in recognizing that while our borders may define our territories, having the courage to reach across them defines our character – and, ultimately, our future success or failure.
Latin America’s Next Growth Challenge
Since 2003, Latin America’s economies have been thriving, with GDP, including estimates for 2006, up by 17% – an average annual growth rate of 4.3% and a 12% increase in per capita GDP.
While impressive, this is only the second time in 25 years that Latin America experienced four consecutive years of positive economic growth.
Will such good times continue?
This recent growth has been fueled by a strong boom in commodity prices, including not only energy inputs such as oil, gas and coal, but also metals, minerals, and agricultural products.
Growing demand for raw materials, owing to sharply increased industrial growth in Asia, particularly China and India, has benefited the terms of trade of many Latin American countries, and this is not expected to end anytime soon.
Historically, fiscal profligacy tends to take hold at times like these, with windfall revenues wasted on extravagant public projects.
But not this time ­– at least so far.
In Latin America’s seven principal economies (Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela), which together account for almost 90% of regional GDP, annual economic growth averaged 6% in the third quarter of 2006, while industrial output was up by 8%.
But their governments seem to be taking advantage of the bonanza to pay off pending external debt and increase their foreign reserves.
Remarkably, responsible macroeconomic policy has followed a wave of populist/socialist electoral victories in recent years.
Brazil, Chile, Ecuador, Nicaragua, and Venezuela elected socialist or populist/reformist presidential candidates in 2006, while Bolivia elected a populist indigenous president in 2005, Uruguay a socialist president the same year, and Argentina a leftist-centrist president in 2003.
An increased degree of international financial independence is among the consequences of the raw materials bonanza.
Countries such as Brazil and Argentina paid off their loans to the IMF ahead of time, while others are buying up their own debt in secondary markets.
Increased liquidity in international capital markets also reduced the need to obtain multilateral financing, and with it the need to accept conditions like privatization of natural resources and deregulation of public utilities.
But, for the most part, fiscal and monetary policies have so far not followed leaders’ rhetorical promises of deep structural reforms and redistribution to favor the indigenous and the poor.
Even so, the danger of fiscal deficits and inflation persist in several countries.
As a result, the new generation of leaders cannot introduce drastic structural reforms, badly needed in several countries, in a way that jeopardizes macroeconomic stability – without which none of their promises can be fulfilled.
In fact, whereas economic growth in Latin America is often perceived as being very unequal – which explains the shift to the left – recent United Nations data puts the region in first place among all developing-country areas.
Not only is the region’s economic performance strong; so is its score on the Human Development Index (HDI), which includes social indicators such as education and health.
Indeed, while Latin America’s GDP per capita is lower than the world average, it surpasses all other developing regions, as well as the world average, in the main social indicators.
Only one Latin American country (Haiti) appears in the group of low HDI countries, while the rest are in the medium and high HDI groups.
Of the 30 Latin American countries included in this year’s report, only one-third have lower HDI rankings than GDP rankings, and only a few – those with the region’s greatest need for significant improvements in social infrastructure, particularly provision of health and education – show large discrepancies.
But two risks to Latin America’s economic recovery loom large.
First, with the current raw materials bonanza driving up prices of exported goods, the region is increasingly vulnerable to the so-called “Dutch disease,” whereby higher wages and prices spread throughout the economy, weakening competitiveness, particularly in industrial markets.
With Asian manufacturing exporters penetrating markets worldwide, such a development would be highly damaging to Latin America’s growth prospects.
Second, at a time when economic globalization is rendering national borders porous, political leaders may get carried away by their rhetoric of independence.
All bonanzas end.
If no adequate provisions are made to sustain global competitiveness, the economic, social, and political consequences could be dire.
Latin America’s Reform Priorities
SAN JOSE, COSTA RICA &#45;&#45; We seldom acknowledge that lack of knowledge – ignorance, if you like – impairs the spending decisions of policymakers and international aid organizations.
Yet their priorities are often set in an ad hoc way with little regard for achieving the largest welfare gains possible.
Recently, a rare attempt was made to improve the quality of decision-making in Latin America and the Caribbean.
The Consulta de San José in Costa Rica asked a group of leading economic experts to rank solutions to the biggest challenges facing the region.
For the first time, all the costs and benefits of more than 40 different policy options were laid out side-by-side.
The results were eye-opening.
Over three days, experts heard evidence about the region’s biggest challenges.
It became clear that politicians often make decisions based on limited knowledge.
They put money into unproven policy initiatives.
There is no clear evidence, for example, that shows how we can actually improve the quality of education in schools.
A program to provide teachers with monetary incentives and professional training was recently established in Mexico, but research shows no significant impact on educational outcomes.
Domestic violence rates appear to be high in Latin America.
The cost and damage is significant.
Yet there is a disturbing lack of research to show what policy options have worked in the region.
Latin American and Caribbean governments need to know how to raise educational quality and combat domestic violence.
Having no proven strategies or relevant estimates of costs and benefits is frightening.
Both for domestic violence and educational quality, the Consulta highlighted a need for urgent research.
But the experts’ ranking of priorities also revealed some exciting and promising policy options.
At the top, they rated early childhood development programs.
There is a compelling case for increased public investment at the start of a child’s life.
This could mean providing day-care services and preschool activities, improving hygiene and health services, or teaching parenting skills.
Research shows that early childhood development programs in Latin America lead to higher levels of school readiness, enrollment, and academic performance.
Mothers and older siblings become free to work or to further their own education.
These programs should be emulated throughout the region.
They are relatively cheap and have benefits between five and 19 times greater than the costs.
The next most important strategy that the panel identified – better fiscal rules – may not seem sexy, but it is attractive because it effectively costs nothing.
Though Latin America’s economies are doing well now thanks to reform and high commodity prices, there are underlying problems.
The goal is to implement a comprehensive set of fiscal responsibility laws that curb the ability of legislatures and ministers to increase spending relentlessly.
The rules need to impose limits on deficits, spending, and debt, and require transparency so that the public knows what’s going on.
If matched by a genuine commitment to develop fiscal credibility, countries could increase their economic growth substantially.
Third on the panel’s list is increased investment in the construction and maintenance of infrastructure.
Most countries in Latin America and the Caribbean spend less than 2% of GDP on infrastructure, compared with 3% to 6% in China and Korea.
Investment is particularly needed in the road network to build the arteries that bring jobs and prosperity: most of the extreme poor in Latin America’s rural communities live five kilometers or more from the nearest paved road.
Other highly ranked policy options include the establishment of independent agencies to evaluate rigorously government spending programs, and more use of conditional cash transfer programs that provide regular payments to poor households for meeting conditions like sending children to school.
At the bottom of the list, the expert panel gave very low rankings to the idea of restricting alcohol sales (as a proposed solution to health problems), educational voucher programs, and prison drug treatment and reintegration programs.
This doesn’t mean that these policies don’t work, but that their benefits are much smaller than those of higher-ranked strategies.
And there is debate about how effective some of them are.
Educational voucher programs, for example, took a knock when careful analysis of a Chilean program found no positive effect on students’ performance.
While climate change and biodiversity have become hot issues elsewhere, the panel concluded that the policy option of preserving rain forests to create carbon sinks would have international benefits but local costs, so these problems should properly be thought of as global issues rather than specifically Latin American ones.
The Consulta succeeded in its goal of highlighting the most cost-effective ways to combat the region’s biggest problems.
However, it also underscored the areas where politicians are fumbling in the dark without decent research, and created a yardstick against which we can now measure policymakers’ spending decisions.
Latin America\u0027s Resilient Housing Market
New York – As the consequences of the sub-prime mortgage meltdown in the United States spread through global markets, will one of the most positive trends in Latin America – the expansion of local credit markets, which has dramatically expanded access to homeownership throughout the region –be jeopardized?
Big multinational banks and mortgage lenders have moved into markets across Latin America, providing financial services that allow lenders to better manage risk.
Banks are creatively tapping into migrant worker remittances, multiple-family households, and other previously overlooked sources of potential income and creditworthiness.
Similarly, the spread of microfinance lending has made capital available to borrowers who until recently were not seen as creditworthy.
So far, the sub-prime crisis has had a limited direct impact on Latin America’s mortgage markets.
In Mexico, the market for new low-and middle-income housing has grown rapidly, thanks to the creation of a market for residential mortgage securities in 2003.
In the last quarter of 2007 alone, Mexican issuers sold $1.5 billion in new mortgage-backed securities – a significant portion of $4.4 billion outstanding – with only a slight drop in prices to reflect globally induced risk, according to the publication Asset Securitization Report .
Chilean markets also have stayed relatively calm.
These markets have been insulated in part because most investment in real estate-backed securities has come from local investors who often need to invest in local-currency markets.
Most important, Latin America’s mortgage markets and homeowners are very different from those in the US.
“It’s natural that the state of global markets will have some kind of ripple effect,” says Greg Kabance, managing director for Latin American structured finance at Fitch Ratings, the international credit ratings agency. “But Latin American countries, from a credit standpoint, are a lot better off than they have ever been to withstand turbulence and weather global market problems.”
To their benefit, Latin American governments have applied the lessons of the past.
Mexico’s “tequila crisis” of 1994-1995 forced many homeowners into default when the peso fell by 70% and interest rates soared.
In Mexico, all mortgages carry fixed interest rates, unlike the infamous “exploding ARMs” that left US homeowners ruing their choice of adjustable-rate mortgages when interest rates rose.
Mexican mortgages are indexed to inflation, but the state mortgage agency links that index to the minimum wage and makes up the difference if mortgage interest adjustments for inflation outpace wage growth.
This protects both borrowers and lenders.
Thus, although delinquency rates have risen slightly in Mexico since the mortgage market was created in 2003, only about 5% of mortgages are between 31 and 60 days late.
Only 2% are between 61 and 90 days late.
In the US, by contrast, 21% of adjustable-rate sub-prime mortgages are 90 days late or in foreclosure.
Standard &amp;
Poor’s analyst Juan Pablo de Mollein points out that Mexico does not have a liquid secondary market where mortgage securities can be traded to buyers who are far removed from the original issuer.
That tends to make buyers more cautious.
The silver lining of past financial crises in Latin America is that most individuals carry far less debt than do Americans.
In Mexico, for example, mortgage debt represents less than 10% of GDP, compared to about 50% of GDP in Europe and 82% of GDP in the US – a ratio that has increased more than fourfold in the last two decades.
Latin America’s low personal debt levels have created an opportunity to build a constructive culture of borrowing while expanding economic opportunity.
There is no doubt that the expansion of access to financial services has enormous positive potential, when handled responsibly.
In his 2000 book The Mystery of Capital, Peruvian economist Hernando de Soto argued that access to credit is a powerful under-used force for development.
He emphasized the crucial role of housing in allowing low-income individuals to raise capital that can be used for investment in small businesses, in education, or in other projects that can significantly improve standards of living over the medium to long term.
But as the array of financial services available in Latin America expands, the danger of misuse rises.
There is a clear lesson to be learned from the US, where easy credit created complacency on the part of authorities, opportunity for charlatans, and tragedy for those who lost or will lose their homes.
Americans homeowners came to treat their houses as cash machines from which they withdrew equity lines of credit for consumption instead of investment.
The dramatic run-up of home prices made it too easy to count on real estate values to continue to rise.
Latin Americans have long regarded real estate as a long-term asset and as protection against inflation.
With much lower inflation over the past two decades, other investment opportunities were better options, which helped to keep real estate values in check.
At the same time, expanded access to credit has supported a building boom to meet vast untapped demand.
Mexico alone is estimated to have a housing deficit of six million units.
As the US and Europe lower interest rates to try to revive their economies and calm financial markets, the most significant impact of the sub-prime mortgage crisis for Latin America may turn out to be inflation.
Ironically, then, the expanded access to mortgage lending that creates new homeowners in Latin America may end up protecting the region from the disaster that too-loose credit created in the US.
Latin America’s Two Lefts
A perception has been growing over the last few years – and picking up strength in recent months – that Latin America is swinging back to the left.
The unimpressive – and sometimes dismal – results of economic reform seem to have generated a backlash that has elected leftist presidents across the continent, starting with Hugo Chávez’s victory in Venezuela at the end of the 1990’s, and continuing with those of Ricardo Lagos in Chile and Nestor Kirchner in Argentina, and more recently that of Luiz Inácio Lula da Silva in Brazil and Tabaré Vázquez in Uruguay.
More left-wing victories seem to be in store in Mexico, Peru, and Bolivia.
But while the premises underlying this broad trend are clear, Latin America’s voters are electing not one left, but two.
To be sure, although 2004 was one of the region’s better years in terms of economic growth, the outcome of two decades of so-called structural reform remains disappointing.
Inequality has increased, poverty has been reduced only slightly at best, employment remains stubbornly low, corruption, violence, crime, and political gridlock continue unabated, and foreign investment and free-trade agreements with the US have yet to deliver the goods.
In these circumstances, a strong ideological and policy reaction against the pro-market “Washington Consensus,” with its emphasis on liberalization, deregulation, and privatization, is anything but a surprise.
At the same time, however, that reaction is much less uniform and clear-cut than many observers believe.
To begin with, those parties, leaders, and movements that have truly socialist and progressive roots – such as Lagos and his Socialist Party in Chile, Lula and the Workers’ Party in Brazil, and Vázquez in Uruguay – are following pragmatic, sensible and realistic paths.
Their policies are remarkably similar to those of their predecessors; their respect for democracy is full-fledged and sincere.
Their old school anti-Americanism has been tempered by years of exile, realism, and resignation.
Conversely, leftist leaders who arise from a populist, purely nationalist past, with few ideological underpinnings – Chávez with his military background, Kirchner with his Peronist roots, and Mexico City mayor and presidential frontrunner Lopez Obrador, with his origins in the Institutional Revolutionary Party – has proven much less responsive to modernizing influences.
For them, rhetoric is more important than substance and power is more important than how it is exercised.
The despair of poor, provincial, and clientelistic constituencies is a tool rather than a problem, and belittling the US by aligning with Fidel Castro trumps promoting their countries’ real interests in the world.
Secondly, the left in general – whether of socialist or populist origins – has “spoken loudly” and carried a “small stick,” so to speak.
Actual policies, with the passing exception of Argentina’s negotiation with its international creditors – and the IMF, in particular – are remarkably similar to those of their predecessors.
Chávez continues to invite foreign oil companies to drill in the Orinoco basin, Lula maintains hefty budget surpluses, Kirchner ultimately accepts IMF conditionality, and Lagos maintains unmatched relations with Chile’s highly conservative private sector.
Overall, macroeconomic orthodoxy seems to be taking root.
Indeed, it is only on the margins where Latin America’s left is striving to differ – and partly succeeding.
The areas where this new and old left can make a difference include improving anti-poverty programs, expanding housing and property rights, effective land reform, developing education, science, and technology, and, perhaps most importantly, strengthening democracy, human rights, and the rule of law in a region where they have been woefully absent for decades.
To succeed with this bold and necessary agenda, Latin America’s left must purge its dangerous and destructive nationalist and authoritarian strains.
The new left, if it stays the course on modernization and reform, can be a boon to the region.
Law and Order, Russian-Style
Around the world, people worry that political freedom is disappearing in Vladimir Putin's Russia.
Indeed, about the only people who are unconcerned about creeping authoritarianism in Russia are the Russians themselves.
Russians seem to care less about political freedom than they do about social welfare - pensions, domestic violence, children's rights, or police brutality.
In fact, most Russians are indifferent to the government's efforts to curtail press freedom and limit the right to protest.
Such apathy makes my task as Russia's ombudsman, an office charged by the State Duma (parliament) with protecting political rights in Russia, difficult, if not impossible.
The ombudsman acts as a bridge between the authorities and the people, seeking to resolve conflicts that arise between state bodies and citizens.
My office is open not only to Russian citizens, but to foreigners and stateless people who feel their political rights have been compromised.
The standards we apply are not only those contained in Russia's constitution, but also international legal principles and human rights norms, even if they sometimes contradict our constitution.
For example, as ombudsman, I was opposed to curtailing the right of Russians to jury trials.
Those who wanted to limit the use of juries supposedly feared a risk to state security in some instances.
My office worked closely with the state to assure that, in most cases, juries are used.
Similarly, my office defended the liberal weekly newspaper Novoe Vremya (New Times), which was being pressured by Moscow's city government on the pretext of a commercial dispute about a lease.
That fight is not over, but after my intervention, Moscow's authorities must take into account the public's negative attitude to their effort to quash this publication.
Of course, Russia provides far more headline-grabbling examples of political and human rights problems, such as the low-grade war in Chechnya or the Yukos affair.
My office pays maximum attention to Chechnya, although this is not easy to do from Moscow.
Indeed, I could spend all my time in Chechnya, but Russia has 89 regions with countless human rights issues to address.
This is why I suggested to Putin that Chechnya have its own regional rights ombudsman who would spend all his time there.
The new Chechen authorities seem to welcome this prospect.
As to the Yukos affair, my office cannot intervene in any legal process until it is completed.
Former Yukos CEO Mikhail Khodorkovsky's lawyers have sent a complaint to the European Court for Human Rights in Strasbourg.
If Khodorkovsky disagrees with the final decision of the Russian courts, he will undoubtedly appeal to that court.
Only then will I be able to express an opinion.
Many observers nonetheless insist that those under criminal investigation should be released on bail instead of being kept in prison.
Others say that this is not an option in Khodorkovsky's case - being very rich, he could easily jump bail and flee abroad.
In fact, this is precisely what happened with other figures accused in the Yukos case.
All of these serious human rights questions expose the fact that Russia's legal institutions remains half-formed.
For example, the Duma has taken far too long to enact a law on lobbying, which in most developed democracies clearly defines what constitutes acceptable and unacceptable behavior.
Khodorkovsky might not be in as much trouble if such precise laws existed.
Unformed laws are directly related to unformed ideas.
Human rights in Russia are often violated simply because people are not aware that they have some particular right.
The most important strategic goal of my office is that people learn how to defend their rights better, and to make the authorities take the complaints of ordinary Russians into consideration.
Sadly, most bureaucrats still look upon human rights values with disdain.
But the real problem for my office is neither ignorance nor legal infirmity, it is that in an under-developed legal system such as Russia's, my authority is mostly personal, and requires help from the mass media.
Because concepts of human rights remain rudimentary, the best that can be hoped for is that awareness will slowly begin to take hold.
My tactical goal is thus to raise the public profile of the ombudsman's office, in order to win more respect and recognition by both citizens and the state.
This will be all but impossible without cooperation with non-governmental human rights organizations in Russia.
Indeed, I view one of my tasks as being to facilitate contacts between these groups and the authorities.
The government's response to these efforts will be an important indicator of whether and to what extent Putin's administration intends to include human and political rights within its so-called "dictatorship of law."
Leaderless Global Governance
CAMBRIDGE – The world economy is entering a new phase, in which achieving global cooperation will become increasingly difficult.
The United States and the European Union, now burdened by high debt and low growth – and therefore preoccupied with domestic concerns – are no longer able to set global rules and expect others to fall into line.
Compounding this trend, rising powers such as China and India place great value on national sovereignty and non-interference in domestic affairs.
This makes them unwilling to submit to international rules (or to demand that others comply with such rules) – and thus unlikely to invest in multilateral institutions, as the US did in the aftermath of World War II.
As a result, global leadership and cooperation will remain in limited supply, requiring a carefully calibrated response in the world economy’s governance – specifically, a thinner set of rules that recognizes the diversity of national circumstances and demands for policy autonomy.
But discussions in the G-20, World Trade Organization, and other multilateral fora proceed as if the right remedy were more of the same – more rules, more harmonization, and more discipline on national policies.
Going back to basics, the principle of “subsidiarity” provides the right way to think about global governance issues.
It tells us which kinds of policies should be coordinated or harmonized globally, and which should be left largely to domestic decision-making processes.
The principle demarcates areas where we need extensive global governance from those where only a thin layer of global rules suffices.
Economic policies come in roughly four variants.
At one extreme are domestic policies that create no (or very few) spillovers across national borders.
Education policies, for example, require no international agreement and can be safely left to domestic policymakers.
At the other extreme are policies that implicate the “global commons”: the outcome for each country is determined not by domestic policies, but by (the sum total of) other countries’ policies.
Greenhouse-gas emissions are the archetypal case.
In such policy domains, there is a strong case for establishing binding global rules, since each country, left to its own devices, has an interest in neglecting its share of the upkeep of the global commons.
Failure to reach global agreement would condemn all to collective disaster.
Between the extremes are two other types of policies that create spillovers, but that need to be treated differently.
First, there are “beggar-thy-neighbor” policies, whereby a country derives an economic benefit at the expense of other countries.
For example, its leaders restrict the supply of a natural resource in order to drive up its price on world markets, or pursue mercantilist policies in the form of large trade surpluses, especially in the presence of unemployment and excess capacity.
Because beggar-thy-neighbor policies create benefits by imposing costs on others, they, too, need to be regulated at the international level.
This is the strongest argument for subjecting China’s currency policies or large macroeconomic imbalances like Germany’s trade surplus to greater global discipline than currently exists.
Beggar-thy-neighbor policies must be distinguished from what could be called “beggar thyself” policies, whose economic costs are borne primarily at home, though they might affect others as well.
Consider agricultural subsidies, bans on genetically modified organisms, or lax financial regulation.
While these policies might impose costs on other countries, they are deployed not to extract advantages from them, but because other domestic-policy motives – such as distributional, administrative, or public-health concerns – prevail over the objective of economic efficiency.
The case for global discipline is quite a bit weaker with beggar-thyself policies.
After all, it should not be up to the “global community” to tell individual countries how they ought to weight competing goals.
Imposing costs on other countries is not, by itself, a cause for global regulation.
(Indeed, economists hardly complain when a country’s trade liberalization harms competitors.)
Democracies, in particular, ought to be allowed to make their own “mistakes.”
Of course, there is no guarantee that domestic policies accurately reflect societal demands; even democracies are frequently taken hostage by special interests.
So the case for global rulemaking takes a rather different form with beggar-thyself policies, and calls for procedural requirements designed to enhance the quality of domestic policymaking.
Global standards pertaining to transparency, broad representation, accountability, and use of empirical evidence, for example, do not constrain the end result.
Different types of policies call for different responses at the global level.
Too much global political capital nowadays is wasted on harmonizing beggar-thyself policies (particularly in the areas of trade and financial regulation), and not enough is spent on beggar-thy-neighbor policies (such as macroeconomic imbalances).
Over-ambitious and misdirected efforts at global governance will not serve us well at a time when the supply of global leadership and cooperation is bound to remain limited.
Leaders and Managers
CAMBRIDGE – For the first time in decades, a United States senator will become the next American president as all three of the remaining candidates – Hillary Clinton, Barack Obama, and John McCain – are members of the Senate.
While legislators have many leadership skills, their management ability is usually unproven.
Senators manage a roughly 100-member staff, and a campaign staff of several hundreds.
But can they manage an executive branch employing millions?
Contemporary management theory tends to distinguish between leadership and management, and places greater emphasis on leaders.
Managers are described as those who merely embrace processes and seek stability, while leaders tolerate risk and create change.
Organizations need both, but leaders are more important.
As one expert puts it, a guiding coalition with good managers but poor leaders will not succeed.
Good leaders construct teams that combine these functions, making sure to hire subordinates who can compensate for the leader’s managerial deficiencies.
More recently, there has been renewed interest in leaders as managers.
After all, vision without implementation is ineffective.
Leaders need enough managerial skill to assure that systems are in place to provide the information required for good decisions as well as effective implementation.
An effective leader manages and shapes the context of decisions by creating and maintaining well-designed systems.
Organizational skill is the ability to manage the structures, information flows, and reward systems of an institution or group.
Leaders directly manage those who report to them, and they manage indirectly by establishing and maintaining systems for their institutions.
This includes the encouragement of leadership at lower levels in their organizations.
Good leaders must manage their inner circle of advisers to ensure an accurate flow of information and influence.
They must avoid the “emperor’s trap” of hearing only about the beauty of their new clothes.
Ironically, George W. Bush, the first president with an MBA, was weaker on this dimension than his father, who knew how to manage an able group of advisers.
Stephen Hadley, Bush’s second National Security Adviser is quoted as saying about Bush’s first term, “I give us a ‘B-’ for policy development and a ‘D-’ for policy execution.”
Experts argue that well designed systems are like stage directions in a play.
They encourage actors to make correct entrances and exits without being told.
But stage directions are not enough.
People always try to bend systems to their own purposes, and good leaders play a critical role in maintaining their systems’ integrity.
If top leaders do not monitor their systems to ensure that they are producing full and accurate information flows, the systems are likely to become distorted by the most powerful subordinates.
For example, President George H. W. Bush’s National Security Adviser, Brent Scowcroft, made sure that powerful cabinet secretaries had full access to the president.
Under Bush the younger, many of the same strong personalities were involved, but the formal National Security Council system became distorted, producing a truncated flow of information.
Secretary of State Colin Powell’s chief of staff described the situation as furtive and camouflaged by the inefficiency of the formal decision-making process.
Or, in the words of Army General Wayne Downing, who worked in the White House, “over the years, the interagency system has become so lethargic and dysfunctional that it inhibits the ability to apply the vast power of the US government on problems.
You see this inability to synchronize in our operations in Iraq and in Afghanistan, across our foreign policy, and in our response to Katrina.”
The organizational skills required for leaders as managers should not be confused with the efficiency or tidiness of a well-run organization.
Nor should it be restricted to hierarchical bureaucratic organizations.
Leaders of social movements also need to manage the inward and outward flows of information.
In this broad sense, organization and management refer to leaders’ ability to ensure an accurate inflow and outflow of information for making and implementing decisions.
Effectiveness is more important than efficiency.
Franklin Roosevelt, for instance, ran an inefficient organization with overlapping jurisdictions and responsibilities.
It was costly in many ways, but it assured him of multiple, competing flows of information.
Roosevelt never thought that staffs had a monopoly on judgment or information, and has been described as seeking advice from anybody he could: cabinet members, congressmen, newspaper columnists, interest groups, citizens, and friends.
Dwight Eisenhower ran an efficiently organized presidency that some at the time believed lacked leadership, but historians later discovered his hidden hand behind most important decisions.
Ronald Reagan practiced extreme delegation, which worked when he had an able team in place, but turned into a disaster when Donald Regan, John Poindexter, and Oliver North took over.
While Reagan excelled in vision, communication, and emotional intelligence, he lacked the skills of leadership as management.
Successful leaders combine these skills so that unfiltered bad news can reach them and be acted upon promptly.
Looking at the three senators running for president, John McCain has military experience, but as an aviator rather than a commander.
Hillary Clinton has experience living close to decision-making in the White House, but not as the decision-maker.
Barack Obama has experience living overseas and working as a community organizer in Chicago, but not in the executive branch.
As elected legislators, all have demonstrated the “soft power” skills of attracting others to vote for them, but as for whether they will also be manager-leaders, the jury is still out.
Learning Economic Dynamism
Why are some of the world's most advanced economies--France, Germany, Italy, and Japan--suffering stagnant growth and high unemployment?
More fundamentally, why do these countries seemingly fail to exercise the kind of economic leadership and innovation that their histories lead us to expect, especially in the innovative high technology sectors that most define our future?
Weak economic performance in these countries is even more puzzling in view of the sharp drop in their birthrates decades ago.
Their population pyramids are now skewed towards middle-aged people who are in their most productive years and relatively free from the burden of raising children.
Their per capita living standards should thus be substantially higher than in the US, where swarms of kids must be attended to and where new investments must be made just to keep the capital stock growing in step with a swelling population.
Of course, what is advantageous today may be problematic tomorrow: Europe and Japan will face severe problems when their demographic pyramids tilt towards the elderly, eliminating the temporary demographic advantage they have relative to the US today.
But this isn't what ails their economies now .
Edmund Phelps of Columbia University says that these slow-growing countries lack "dynamism," which he defines as a combination of entrepreneurial spirit and the financial institutions to channel it.
Both spirit and the necessary financial institutions must be present to enable "creative destruction" - the force Joseph Schumpeter argued sixty years was the engine of capitalist prosperity - to be unleashed.
But is this an accurate description of slow-growing countries?
It is often said that continental Europe and Japan lack the strong risk-taking tradition that exists in America or the UK.
But it is actually difficult to see much of a difference in fundamental human values or preferences between these countries and the US.
A decade ago, Maxim Boycko of Russia, Vladimir Korobov of Ukraine, and I conducted a study of economic attitudes towards capitalism, comparing the US, Russia, Ukraine, Japan, East Germany, and West Germany.
While some variation in attitudes towards markets and enterprise did exist, the biggest differences were situational, rather than attitudinal: people in some countries had lower expectations of success and thought that government regulations would stymie their activities.
This--the effects of government policies on incentives--rather than basic cultural differences or weak financial institutions, is at the root of the sluggish growth seen in some advanced economies.
Indeed, financial institutions, at least in some of the countries surveyed, are now among the most advanced in the world.
The irrational exuberance of the late 1990's led to some setbacks in the development of new financial institutions.
But only recently many slow growing countries were eager to develop venture capital markets and foster stock exchanges--France's Nouveau Marche, Germany's Neuer Markt, Italy's Nuovo Mercato, and Mothers in Japan--devoted to risky investments.
These new stock exchanges, modeled on America's NASDAQ, ended up listing a lot of flimsy companies, and the collapse of share prices since 2000 caught them in the downdraft.
The Neuer Markt no longer exists; the others are weak, if not moribund.
But setbacks in the process of improving risk-taking are to be expected; it is important not to overreact to mistakes.
Surely, the inadequacy of financial institutions is not what really retards the growth of these countries.
So, what is the problem?
A number of books have appeared in Europe this fall about the causes of Europe's weak economies.
Of these, Hans-Werner Sinn's Ist Deutschland noch zu retten? (Can Germany Still Be Saved?) stands out for its cogent argument.
Sinn argues that German sluggishness is largely the result of government-induced bad incentives--a problem that goes far beyond Germany's notoriously rigid labor market--and that, so far, Schröder's reforms do not go far enough to eliminate them.
Sinn shows that the combined effects of the German tax and social welfare system virtually guarantee that no breadwinner in a family with two children can end up with less than €1,500 a month, even without working at all.
This rate is well above, for example, the wage of unskilled labor in the iron and steel industry.
In effect, Germany is telling its unskilled not to bother working.
The effects of the social welfare system are especially striking in Eastern Germany, where benefits are at Western German levels, despite lagging far behind in economic development.
Sinn estimates that an East German family on welfare can collect four times the average income of a family in Poland and six times the income of a family in Hungary.
With such a hurdle to hiring workers, no wonder industry is reluctant to locate in the East and the region is supported by subsidies equal to 45% of its gross product.
Because of these destructive incentives, Eastern Germany, Sinn argues, will remain a region of chronic unemployment, much like Italy's Mezzogiorno, which has been a drain on Italian finances for decades.
Moreover, the draft European constitution will prohibit discrimination in social-welfare benefits against immigrants from other EU countries.
If this provision is adopted, Sinn concludes, there will soon be "twenty Mezzogiornos in Europe."
Sinn's proposals--adjustments in tax rates and welfare benefits--are technical and would have no immediate or dramatic effect on people's behavior.
In the longer run, a system of good incentives must be created to change people's expectations of economic success and increase their opportunities to "learn by doing."
Young people will better understand from their own experiences that taking responsibility for their economic lives pays off, that submitting to hard work and short-run risks is often wise and rewarding.
Wherever this spirit takes root, financial sectors--and dynamic growth--will follow.
Learning from America
As the United States prepares to celebrate the inauguration of its first African-American president, it showcases again one of the best aspects of its national identity.
Though it took more than 200 years to reach this point, foreign observers, especially in Europe, marvel at Barack Obama’s ascendancy.
They recognize from their own relative marginalization of people of color or of immigrants that no French, German, Italian, or British Obama is on the horizon, and they wonder: how does America do it?
America certainly has its flaws and its struggles over race and national identity, but it also has much to be proud of in terms of how it assimilates those with foreign or minority backgrounds.
Obama’s example – and that of his newly formed cabinet, which includes many accomplished leaders from ethnic or racial “out-groups” – holds useful lessons for other nations, particularly in Western Europe.
So what is it that America is doing right?
First, America’s national story is different in essence from those of Western European nations.
The French story is that of French-ness, the British story one of British-ness; by definition, newcomers are “less than” or “outside of” this narrative.
But the American national drama is the drama of immigration: everyone, except Native Americans, came from somewhere else.
All who are now part of the national elite have ancestors who came, often bedraggled and harassed, from somewhere else.
Indeed, in America the qualities that lead people to become immigrants – initiative, ambition, risk-taking – are lionized.
Immigrants are seen as arriving on a journey of continual reinvention, driven to exceed their opportunities in their countries of origin.
By contrast, immigrants in Western Europe were invited to fill low-status jobs, creating a built-in incentive for natives to see them and their children as a servant class, incapable of entering, let alone leading, the larger society.
Moreover, unlike America, Western Europe must live with the uneasy conscience stirred by immigrants whose very presence serves as a reminder of a history of colonialism.
In this sense, the relationship between native-born and new Americans starts out “cleaner.”
Second, Americans don’t demand that immigrants regard their cultural or ethnic background as being in contrast to or in opposition to their American-ness.
Everyone gets to be hyphenated.
By contrast, when identity is presented as being a stark choice, people often do not choose the identity of the host country that is being so inflexible.
As a result, Britain, France, and The Netherlands contain deeply entrenched subcultures of alienated, radicalized Muslim youth.
But, while they and other radical Muslims around the world may hate Americans, it is hard to imagine a more Americanized, suburbanized immigrant subculture than Muslim immigrants in the US.
Rather then listening to radical clerics, they are busy assimilating, sending their kids to law and medical school, barbequing on weekends, and going to (American) football games – all while still maintaining devout ties to their religion and community.
That has not changed since the 9/11 terrorist attacks, despite rising hostility toward US Muslims among native-born Americans, based the assumption that they could not assimilate (a charge often directed in the past at Jews in various countries).
More generally, Americans view immigrants as being welcome to combine their culture of origin with their new American-ness, while immigrants see no conflict between their ethnicity and religion and their embrace of America.
And, most significantly when it comes to assessing the ease of integration over time, they fully expect their kids to be completely, unhesitantly “American” – a promise that, by and large, is readily fulfilled.
How different it is in Western Europe.
Three generations after West Indians began immigrating en masse to the United Kingdom, Caribbean-descended Britons still doubt that their children or grandchildren will ever be seen as fully British.
Turkish Gastarbeiter are still, two generations later, not seen as fully German.
And the unrest of the children and grandchildren of Algerian, West African, and Moroccan immigrants in the French banlieues attest to France’s failure to assimilate its immigrant population, despite the Republic’s official egalitarian rhetoric.
Third, and perhaps most importantly, Americans separate Church and State.
As long as there is a Church of England, if you are Jewish or Muslim or Sikh, there is a subtle level at which you will simply not feel fully English.
But because the US Founders – many of them descended from people fleeing official religious persecution – guaranteed that there would never be a state-sanctioned religion, no religious group in America, no matter how small, is made to feel marginalized.
It is for this reason that Americans are not alarmed by visible symbols of different religions in public settings.
It is assumed that since religion is a private matter for everyone, personal religious symbols are just that – personal.
A Muslim girl who wears a headscarf in a public school is simply wearing a headscarf, not provocatively challenging a hegemonic social order.
Fourth, America is defined in terms of a set of values that everyone can share, not as a lineage, a specific history, and a geographical area.
Immigrant kids who go to US schools learn that America – ideally – is about freedom, aspiration, and tolerance.
The history that they learn about their new home illustrates how the US fulfills (or falls short of) those ideals, whereas an immigrant schoolchild in Europe learns less about ideals and more about a monarchical lineage, a set of historical events, and a roster of “great men.”
If Western Europe took a leaf from the US, it would be more peaceful within its own borders and better able to use the talents and leadership of its Turkish, Algerian, Caribbean, and other immigrants.
Only then would we see a British, French, Dutch, or German Obama.
Learning from Crises
PRINCETON – Crises, especially very severe ones, are often learning opportunities.
Unfortunately, so far the world seems to have learned very little from the recent financial crisis.
In fact, the situation today is just as dangerous as it was in 2007, with the United States now worried by its anemic economic recovery, Europe paralyzed by fears for the survival of its currency union, and emerging markets wrestling with asset-price bubbles.
Learning from crises is partly an exercise in analyzing what went wrong.
But it is also about finding solutions.
Collectively, we have done well on the former, and very poorly on the latter.
Most explanations of the causes of the post-2007 financial crisis point to five sources of instability.
First, the crisis was precipitated by the peculiarities of the US real-estate market, by government incentives for increased homeownership, and in imprudent lending by financial institutions.
Second, perverse incentives led financial institutions to assume excessive risks.
Internally, bankers had enormous potential to benefit from risky moves, but were insulated from the costs of failure.
For individual institutions, this was not seen as a problem, because they were protected by the logic of being “too big to fail.”
When the crisis erupted – owing to a downturn in the US housing market that was clearly foreseeable but willfully unforeseen – the public sector had to absorb the contingent liabilities built up in the financial system.
Third, global imbalances led to cheap money.
Long-term current-account surpluses in some countries (China, other rapidly growing Asian economies, and Gulf oil producers) permitted the long-term financing of deficits in others (the United Kingdom, Australia, Spain, Ireland, and, above all, the US).
Fourth, central banks, especially in the US, mistakenly maintained loose monetary policy.
With dollar financing by the Federal Reserve available to large institutions, the Fed became the equivalent of a world central bank.
Finally, once the crisis erupted, the fiscal consequences of bailing out too-big-to-fail financial institutions contributed to rapid public-debt unsustainability, which threatens to boomerang on the banking sector.
None of these issues, with the possible exception of the first, has been resolved.
Of course, some discussion of financial-sector reform is taking place in a variety of forums, with a gradual consensus building around sliding or incremental capital-adequacy rules.
But many systemically important banks became bigger rather than smaller as a result of the crisis.
Moreover, while global imbalances were immediately reduced in the course of the initial crisis, with the US adjusting its deficit relatively rapidly, they are now re-emerging.
The world’s major industrial economies, meanwhile, are maintaining very low interest rates.
Before 2007, such a policy was seen as a mistake at worst; now it is interpreted as a malign strategy.
There is a widespread suspicion that the US is deliberately pursuing dollar depreciation (or “currency wars,” in the words of Brazil’s finance minister).
We do not know how to handle the fiscal issues posed by the financial crisis.
Doubts about the sustainability of government debt produce sudden surges in interest rates, as risk premia rise dramatically with perceptions of the likelihood of default.
Such surges are, by definition, abrupt – and thus highly disruptive.
For countries on the brink, a merciless logic follows.
Government debt service has in general become easier, owing to low interest rates.
But hints of new fiscal imprudence or of backsliding on long-term debt consolidation and reduction can drive up borrowing costs dramatically.
In these circumstances, the additional costs of debt service easily outweigh any gains that might come from some measure of fiscal relaxation.
As a result, fiscal uncertainty is affecting all major industrial countries, and producing political paralysis.
So, while we understand very well what may have produced the financial crisis, we find ourselves helpless to draw usable lessons from it.
In a longer historical perspective, this policy paralysis may not be surprising.
It took a good deal of time to learn what we all now take to be the lessons of the interwar Great Depression.
It was only 30 years later, in the 1960’s, that Keynesian fiscal policy was widely accepted.
It was also only in the 1960’s that Milton Friedman clearly formulated the Great Depression’s monetary lessons.
It was only in trade policy that the lesson was learned more quickly.
During the Great Depression, a spiral of protectionist trade quotas and tariff restrictions was used to combat monetary deflation, as popular demand for political action met legislative “log-rolling” by representatives of groups with very different – and often very locally oriented – policy priorities.
The political scientist E.E. Schattschneider’s analysis of the process was influential in transferring responsibility for trade measures from the US Congress to the President.
The modern equivalent of that learning about trade policy would be to think about mechanisms to ensure long-term improvement in fiscal policymaking.
In particular, it would be helpful to devise a way to identify potential risks to fiscal stability (such as those implied by an over-extended banking and financial system).
Moreover, there is a need to limit legislative pressure for additional spending on locally important projects that fuel overall fiscal dysfunction.
The constructive (and relatively quick) trade-policy response in the aftermath of the Great Depression did not pay off immediately.
But, in the long run, it produced a much better policymaking environment.
Now is the moment to launch an analogous effort to reform and rationalize the political process that produces fiscal policy.
Learning from Lebanon
NEW YORK – After watching the collapse of Lebanon’s government last week, it is hard not to think about efforts to build a stable Iraq.
The two countries have so much in common.
Both are volatile democracies where any political question can provoke not just intense debate, but also the threat of violence.
Both countries have relative freedom of speech, at least relative to their Arab neighbors, and a multitude of political parties that are always ready to use it.
Each faces a greater risk of manipulation by outsiders than other countries in the region.
Iraq and Lebanon are also the Arab world’s most ethnically and religiously diverse countries.
Though Lebanon has not conducted a reliable census in decades, its population is thought to be about 30% Sunni Muslim, 30% Shia Muslim, and 30% Christian, with Druze and others accounting for the rest.
In Iraq, about 60% are Shia, 20% are Sunni Arabs, and 20% are Kurds, who are mostly Sunni.
In both countries, representatives of each of these groups demand substantial political influence.
But, as Lebanon turns to Saudi and Syrian mediators to help rebuild a governing coalition, Iraq moves forward with a tenuous unity government of its own.
At times like these, the two countries’ similarities and differences can point Iraq’s leaders toward a stable democratic future.
Despite this week’s turmoil in Beirut, Lebanon has an advantage that Iraqis should emulate.
The personal freedoms that Lebanese citizens enjoy give their country a special resilience, and its cultural dynamism is the envy of young people throughout the Middle East.
Though some of Iraq’s conservative local clerics wield considerable influence, its current leaders will resist any drive to transform the country into a socially repressive and isolated state.
If Iraq is to keep the best of its next generation at home, cultural openness will be critically important.
Second, Lebanon’s leaders were reminded again this week that their country can be governed only with some degree of consensus among the major factions.
This principle is even more important in Iraq, where the Shia majority faces the constant temptation to punish Sunnis for years of repression under Saddam Hussein.
In Lebanon, sectarian power-sharing is enshrined in the constitution.
The president must always be a Maronite Christian, the prime minister a Sunni, and the speaker of parliament a Shia.
This system, which codifies Lebanon’s factionalism, remains a subject of much controversy, but, by ensuring that no group can govern at the expense of others, it also reinforces baseline stability in a country built atop powerful religious and ethnic fault lines.
Without opposition support, Lebanon’s government can do little more than manage the most basic day-to-day state functions, but the country is unlikely to relapse into civil war.
In Iraq, sectarian power-sharing will remain less formal, and compromise won’t come easily to many of the country’s elected leaders.
Each major faction is represented in government.
Jalal Talabani, a Kurd, retains control of Iraq’s largely ceremonial presidency.
Osama Nujaifi, a Sunni, has been elected speaker of Iraq’s parliament.
But Shia leaders will lose their constituents’ support if they formally surrender any of the powers denied them for decades under Saddam.
Government stability will remain a delicate balancing act.
Prime Minister Nouri al-Maliki will have to manage relations with firebrand Shia cleric Moqtada al-Sadr and his followers, who can provoke unrest in southern Iraq if they feel under-served.
In addition, the Kurds will expect to retain a veto over any proposal that might compromise Kurdish autonomy in the northern provinces.
Then there are the Sunni Arabs.
Support for Maliki’s government from Iraqiya, the multi-sectarian political coalition supported by most Sunnis, will remain in question.
Iraqiya won the largest share of seats in the March 2010 parliamentary elections, yet its leader, former Prime Minister Ayad Allawi, will not return to his old job.
Instead, he will lead the National Council for Strategic Policy, an institution charged with overseeing domestic security, but whose authority remains unclear.
Nor is it clear whether Maliki will finally end the de-Baathification process – another major source of tension.
Many Shia insist that the last vestiges of Saddam’s elite must be purged, but many Sunnis argue that the process is intended to bar them from good jobs and political influence.
If Sunnis come to believe that Shia and Kurds intend to treat them as second-class citizens, they will have no stake in the success of Maliki’s government and could again begin to pursue their political interests by other means, provoking another surge of sectarian violence.
Worse still, factional conflict would undermine further development of a post-Saddam Iraqi identity.
Otherwise, the country’s various interest groups could, like Lebanon’s feuding factions, turn to outsiders to negotiate solutions to their problems.
There are good reasons for Iraq to avoid Lebanon’s example in this respect.
Even in the best of times, Lebanon muddles through with a politically dysfunctional government and an army that operates in the shadow of a large Shia-dominated militant organization.
With the exception of Iran, none of Iraq’s neighbors wants to see that model in Iraq.
Lebanon’s democracy often looks a lot like a train wreck, and the country has stumbled into armed conflict many times in recent years.
But if Iraq’s leaders can create enough near-term stability to combine Lebanon’s openness and entrepreneurial energy with the revenue that comes from development of the country’s vast oil reserves – an advantage that Lebanon’s leaders can only envy – Iraq might one day offer citizens of neighboring states something they don’t have: a hopeful model for the future.
Learning from Mexico
On July 2, Mexico held a presidential election that triggered what has become a bitter political firefight.
After conservative candidate Felipe Calderon was declared the winner by less than 1% of the vote, his populist rival, Andres Manuel Lopez Obrador, quickly claimed fraud.
For the past two months, thousands of Lopez Obrador’s most fervent supporters have transformed the Zocalo, Mexico City’s central square, into a virtual sea of tents – the center of gravity of opposition to the official result.
On September 1, dozens of opposition lawmakers created a primetime spectacle inside Mexico’s parliament by occupying the speaker’s podium, thereby denying outgoing President Vicente Fox the chance to deliver his final state of the nation address in person.
Four days later, Mexico highest electoral court ruled that Fox had improperly interfered in the election but unanimously reaffirmed Calderon’s victory.
Lopez Obrador has vowed to obstruct Calderon’s presidency from the moment he takes office on December 1.
You learn a lot about a country’s underlying stability by how it responds to a crisis.
Similar electoral conflicts unfolded in the United States in 2000 and in Ukraine in 2004.
In the wake of fiercely contested presidential elections, large numbers of voters in each country questioned the legitimacy of the outcome.
The nation’s highest courts were compelled to rule on demands for a ballot recount.
But US political and economic stability was never in doubt in 2000, because public confidence in the country’s governing institutions allowed them to resolve the conflict peacefully.
These institutions proved far more powerful than the political personalities involved.
In Ukraine, on the other hand, public outrage, buttressed by international pressure, brought the government to a halt.
In a second vote, the election’s loser was crowned the winner.
But the initial euphoria that accompanied the so-called “Orange Revolution” quickly faded, and Ukraine is still dealing with the political and economic fallout.
What, then, should we make of Mexico and its disputed election?
Here, too, a large segment of the electorate told pollsters that they doubted the legitimacy of the official result.
The judiciary rejected calls for a full recount, though they did examine roughly 9% of the ballots before ruling that the review indicated no challenge to the election’s outcome.
Like Ukraine’s Viktor Yushchenko, who lost the initial vote in Ukraine, Lopez Obrador demanded that the result be overturned.
Unlike Yushchenko, he was denied.
But the good news for Mexicans is that their country’s political institutions have proven far more stable than did Ukraine’s.
Despite Lopez Obrador’s best efforts to create chaos in the streets with public demonstrations involving hundreds of thousands of protesters, domestic and international confidence remains strong.
The peso has barely budged since the election—a clear indication that investors have not lost faith in the country.
Their resilience is important, because market fears of instability often become a self-fulfilling prophecy.
The point is not that public confidence (or lack thereof) in an election outcome doesn’t matter.
It does.
But the broader picture – whether, as in Mexico, a country is able to continue to go about its business as its political institutions sort out the mess – matters far more.
Unlike in Ukraine, investors have shrugged off the noisy demonstrations in Mexico City’s streets and remained focused on interest rates and fluctuations in the global economy.
This suggests that governing principles and sturdy political institutions, not powerful individuals, have become the bedrock of Mexican governance.
Indeed, while Lopez Obrador continues to denounce the outcome and has threatened to make Mexico ungovernable, Mexico’s growing middle class has taken the political conflict in stride.
Many who supported Lopez Obrador’s candidacy do not support the post-election protests in his name.
A recent poll in the newspaper Reforma found that Calderon would now defeat him by 19 percentage points.
Voters may prefer Lopez Obrador, but they value Mexico’s stability above all.
Moreover, during the political standoff, Calderon has worked behind the scenes to form an administration and to settle on a governing strategy.
Aware that he must establish a greater sense of political legitimacy, his cabinet is likely to include representatives of other political parties.
He will probably introduce measures to tackle poverty and create jobs.
Calderon’s task will not be easy.
Lopez Obrador and his supporters can be expected to work relentlessly to thwart his plans.
But they are unlikely to derail his government.
The underlying stability highlighted by Mexico’s post-election crisis is also evident elsewhere in Latin America.
Whatever the potential for a leftward shift this year in some Latin American countries, others, including Mexico, Chile, and Brazil, are clearly less vulnerable to the type of populist rule we’ve seen in Venezuela and Bolivia.
Elected leaders in these countries face institutional constraints – parliaments that check the powers of the executive and courts that check the powers of both – on their ability to shape policy.
To be sure, political and market volatility in a broad range of emerging-market economies will continue.
But some of them appear to have “graduated” toward a stability rooted in sustainable governance.
Beyond Latin America, several Eastern European countries offer ready examples.
In these states, regulatory and taxation issues now affect confidence more deeply and consistently than does political tension.
Many in the media may not comprehend that yet.
But markets do.
Though Mexico’s election saga may continue to make headlines, its true significance is that it reveals just how politically sturdy a place Mexico has become.
Learning from the Cold War
NEW YORK – Every war is fought three times.
First comes the political discussion over whether to start or enter it.
Then comes the question of how to fight it.
And, finally, there is consideration of what lessons should be learned from it.
The Cold War, the third major conflict of the twentieth century, is no exception to this rule.
All three phases can be identified, and all three triggered intense debate.
There were, for example, those who questioned whether the Cold War was in fact necessary and whether the Soviet Union and Communism constituted a threat.
Such “revisionists” were a distinct minority, which is a good thing, as there is no reason to believe that the Soviets and Communism were a benign force.
As a result, the Cold War, a four-decade-long global struggle, became a reality.
There was also an ongoing debate about how best to wage the Cold War throughout its history.
The two principal schools of thought were “roll back” and “containment.” The former argued that nothing less than overthrowing communism – “regime-change” in today’s parlance – would do.
The latter approach held that efforts to roll back Communism in the short run were too risky, given the Soviet nuclear arsenal, and that the United States and the West should content themselves with limiting the spread of Soviet power and influence.
Containment prevailed, but this hardly settled the debate, as there were intense arguments both over where it should be applied (Vietnam, Central America, and the Middle East all come to mind) and how it should be carried out, i.e., the right mix of military force, covert action, diplomacy and arms control, and economic sanctions and assistance.
And now, exactly 20 years after the Berlin Wall came down, we are well into the third phase – the debate over why the Cold War ended when it did and how it did.
One school of thought maintains that the Cold War was won as a result of decades of sustained US and Western pressure on the Soviet Union and its allies.
This pressure at various times took the form of US, British, and French nuclear programs; NATO’s willingness to counter Warsaw Pact deployments of both conventional military and tactical nuclear forces; the decision to defend South Korea against the North’s aggression; the arming of the mujahedeen in Afghanistan to bleed Soviet occupation forces; and the decision to build a costly missile-defense system aimed both at negating the Soviet Union’s principal military investment and bankrupting its government.
A second and very different school of thought emphasizes less what the West did and more what the Soviet Union was.
In this narrative, the Cold War was not so much won by the US and the West as lost by the Soviets, the inevitable result of Soviet economic weakness and political decay.
Yet another perspective stresses that Western willingness to engage the Soviet Union as much as confront it played a major role in how history turned out.
Détente helped to keep the competition from spilling over into conflict as it exposed the Communist world to Western ideas of freedom and capitalism along with their benefits.
The Soviet and other top-heavy regimes increasingly found themselves losing the battle of ideas and, as a result, the support of their own citizens.
All of these factors played a part.
Western willingness to deny the Soviets success was an essential component of strategy.
But this alone would not have been enough; indeed, the Cold War could well have turned hot if Western strategy had consisted only of military competition and confrontation.
It was important to moderate the competition in order to allow pressure for change to build up from within the Soviet bloc.
And it was important to expose the societies under Soviet control to their shortcomings and to the advantages of outside ideas.
All of the above has implications for today’s challenges.
To be sure, there is no global threat on the scale of the former Soviet Union, but there are dangerous challenges emanating from such countries as Iran and North Korea.
What is required is a policy on the part of the global community that mixes military strength with a willingness to negotiate and interact, a policy of collective strength and collective flexibility.
It is important here to keep in mind that containment, the dominant doctrine of the Cold War era, sought to push back against Soviet and Communist expansion – not just to limit the reach of Soviet power, but to frustrate it – in order to create a context in which the inherent flaws of communism and authoritarian rule would come to the fore.
Mikhail Gorbachev could only have done what he did amidst a crisis of confidence.
Today, the world needs to create similar crises of confidence in the minds of those ruling Iran and North Korea.
The goal should be to limit what they can accomplish in the short term; to get them to change their policies in the medium term; and to set in motion forces that will bring about new and fundamentally different governments and societies in the long term.
Such an approach served the world well during the Cold War; it could do the same now.
Learning Globalization From Football
Football is not only the world’s most popular sport, but also probably its most globalized profession.
It is inconceivable that Brazilian, Cameroonian, or Japanese doctors, computer scientists, blue-collar workers, or bank tellers could move from one country to another as easily as Brazilian, Cameroonian, or Japanese football players do.
Indeed, London’s Arsenal football club is composed entirely of foreigners, including a French coach.
Even the captain roles are no longer reserved for domestic players: Thierry Henry, a Frenchman, is Arsenal’s captain, Andriy Shevchenko, a Ukrainian, is often the captain of AC Milan, and Christiano Zanetti, an Argentine, is captain of Inter Milan.
Similarly, dozens of South Americans and Africans play in Russian, Turkish, Polish, and various Southeast European leagues.
Football thus provides a glimpse of how true globalization of labor would work.
In football, as in other occupations, restrictions on labor mobility came entirely from the demand side.
No limits were ever imposed on players’ movements, except by Communist countries.
But the demand side was heavily regulated, owing to a rule that clubs could field no more than two foreign players in any single game.
The Bosman ruling, named after a Belgian player who successfully challenged the rule’s application to players from other European Union countries, eroded the limit, which collapsed altogether under the onslaught of the richest European clubs’ demand for a free hand in hiring the best players, wherever they might be found.
So wherever globalization and full commercialization reign supreme, there is an unmistakable concentration of quality and success.
Consider the number of clubs that have qualified for the European Champions’ League top eight slots.
If we look at five-year periods between 1967 and 1986, the number of different teams that qualified for the quarterfinals varied between 28 and 30. In the next two five-year periods, however, the number fell to 26, and in the most recent period (2000-2004), there were only 21.
The bottom line is simple: fewer and fewer clubs are making it into the European elite.
National leagues are similar.
Since the English Premier League was started in 1992, only one championship was not won by Manchester United, Arsenal, or Chelsea.
In Italy, all but two Serie A championships since 1991 have been won by either Juventus or AC Milan.
In Spain, all but three championships since 1985 have been won by either Real Madrid or Barcelona.
The reason for this concentration at the top is obvious: the richest clubs are now able to attract the best players in the world.
Yet this has arguably been accompanied by improved quality in the game itself, owing to what economists call “increasing returns to scale.”
When the best players play together, the quality of each, and of the team as a whole, increases exponentially.
When Ronaldinho and Messi, or Kaka and Shevchenko, play together, their combined “output” (number of goals) is greater than the sum of goals that each would score if he played in a different club with less talented co-players.
Free mobility of labor in other areas would probably produce the same effect.
If doctors, computer specialists, or engineers (let alone the proverbial Polish plumbers!) were allowed to move freely, the concentration of talent in the richest countries would most likely increase.
Inequality in the distribution of talent across countries would rise, even if total world output of goods and services, and their average quality, improved, as with football today.
Poorer or smaller countries can hardly dream of winning a European championship, as Steaua (Romania), Red Star (Serbia), or Nottingham Forest (now languishing in the English third division) once did.
But, while we see inequality and exclusion in club-level football, the opposite is true for competitions between national teams.
The average winning margin among the top eight World Cup national teams has steadily decreased, from more than two goals in the 1950’s, to about 1.5 goals in the 1960’s, 1970’s and 1980’s, and only 0.88 goals in the 2002 World Cup.
The same is true of all games played at the final tournament, not only those among the top eight national teams.
The decrease in winning margins is all the more impressive because the World Cup has grown from 16 to 32 national teams – many of them new and rather inexperienced.
Remarkably, they are not trounced by the traditional powerhouses.
On the contrary, the elite eight teams of the last four World Cups have included two “newcomers ” that had never been quarterfinalists, such as Turkey and South Korea in 2002.
There are again two reasons for this.
First, free movement has meant that good players from small leagues improve much more than they would had they stayed home.
A good Danish or Bulgarian player improves much faster if he joins Manchester United or Barcelona.
Second, that improvement in quality was “captured” by national teams thanks to FIFA’s rule requiring players to play only for their national team.
Eto’o can play for any Spanish, Italian, or English club, but in the national competitions, he can play only for Cameroon.
In other words, FIFA has introduced an institutional rule that allows small countries (in the football sense) to capture some of the benefits of today’s higher-quality game, thereby partly reversing the “leg drain.”
The same rule could be applied to other activities.
Free movement of skilled labor could be accompanied by binding international requirements that migrants from poor countries spend, say, one year in five working in their countries of origin.
They would bring home skills, technology, and connections that are as valuable as the skills that Eto’o, Essien, or Messi bring back to Cameroon, Ghana, or Argentina.
Job placement would remain a problem, but the principle is sound: the world should learn from its most popular sport.
Learning the Lessons of Iraq
NEW YORK – The Iraq war has been replaced by the declining economy as the most important issue in America’s presidential election campaign, in part because Americans have come to believe that the tide has turned in Iraq: the troop “surge” has supposedly cowed the insurgents, bringing a decline in violence.
The implications are clear: a show of power wins the day.&#160;
It is precisely this kind of macho reasoning that led America to war in Iraq in the first place.
The war was meant to demonstrate the strategic power of military might.
Instead, the war showed its limitations.
Moreover, the war undermined America’s real source of power – its moral authority.
Recent events have reinforced the risks in the Bush administration’s approach.
It was always clear that the timing of America’s departure from Iraq might not be its choice – unless it wanted to violate international law once again.
Now, Iraq is demanding that American combat troops leave within twelve months, with all troops out in 2011.
To be sure, the reduction in violence is welcome, and the surge in troops may have played some role.
Yet the level of violence, were it taking place anywhere else in the world, would make headlines; only in Iraq have we become so inured to violence that it is a good day if only 25 civilians get killed.
And the role of the troop surge in reducing violence in Iraq is not clear.
Other factors were probably far more important, including buying off Sunni insurgents so that they fight with the United States against Al Qaeda.
But that remains a dangerous strategy.
The US should be working to create a strong, unified government, rather than strengthening sectarian militias.
Now the Iraqi government has awakened to the dangers, and has begun arresting some of the leaders whom the American government has been supporting.
The prospects of a stable future look increasingly dim.
That is the key point: the surge was supposed to provide space for a political settlement, which would provide the foundations of long-term stability.
That political settlement has not occurred.
So, as with the arguments used to justify the war, and the measures of its success, the rationale behind surge, too, keeps shifting.
Meanwhile, the military and economic opportunity costs of this misadventure become increasingly clear.
Even if the US had achieved stability in Iraq, this would not have assured victory in the “war on terrorism,” let alone success in achieving broader strategic objectives.
Things have not been going well in Afghanistan, to say the least, and Pakistan looks ever more unstable.
Moreover, most analysts agree that at least part of the rationale behind Russia’s invasion of Georgia, reigniting fears of a new Cold War, was its confidence that, with America’s armed forces pre-occupied with two failing wars (and badly depleted because of a policy of not replacing military resources as fast as they are used up), there was little America could do in response.
Russia’s calculations proved correct.
Even the largest and richest country in the world has limited resources.
The Iraq war has been financed entirely on credit; and partly because of that, the US national debt has increased by two-thirds in just eight years.
But things keep getting worse: the deficit for 2009 alone is expected to be more than a half-trillion dollars, excluding the costs of financial bail-outs and the second stimulus package that almost all economists now say is urgently needed.
The war, and the way it has been conducted, has reduced America’s room for maneuver, and will almost surely deepen and prolong the economic downturn.
The belief that the surge was successful is especially dangerous because the Afghanistan war is going so poorly.
America’s European allies are tiring of the endless battles and mounting casualties.
Most European leaders are not as practiced in the art of deception as the Bush administration; they have greater difficulty hiding the numbers from their citizens.&#160;
The British, for example, are well aware of the problems that they repeatedly encountered in their imperial era in Afghanistan.
America will, of course, continue to put pressure on its allies, but democracy has a way of limiting the effectiveness of such pressure.
Popular opposition to the Iraq war made it impossible for Mexico and Chile to give into American pressure at the United Nations to endorse the invasion; the citizens of these countries were proven right.&#160;
But back in America, the belief that the surge “worked” is now leading many to argue that more troops are needed in Afghanistan.
True, the war in Iraq distracted America’s attention from Afghanistan.
But the failures in Iraq are a matter of strategy, not troop strength.
It is time for America, and Europe, to learn the lessons of Iraq – or, rather, relearn the lessons of virtually every country that tries to occupy another and determine its future.
Learning to Lead
CAMBRIDGE – Public-opinion polls show that citizens in many democracies are unhappy with their leaders.
This is particularly true in Great Britain, where a number of members of Parliament have used their housing allowances to enhance their income, sometimes legally and sometimes not.
Some analysts predict that only half of Britain’s MPs will be returned in next year’s election.
But, whatever the failures of particular British legislators, the issues go further than merely allowing voters to “throw the rascals out.”
There is also a question of how successful leadership is taught and learned in a democracy.
A successful democracy requires leadership to be widespread throughout government and civil society.
Citizens who express concern about leadership need to learn not only how to judge it, but how to practice it themselves.
Many observers say that leadership is an art rather than a science.
Good leadership is situational.
In my book The Powers to Lead , I call this skill “contextual intelligence.”
The ability to mobilize a group effectively is certainly an art rather than a predictive science, and varies with situations, but that does not mean that it cannot be profitably studied and learned.
Music and painting are based in part on innate skills, but also on training and practice.
And artists can benefit not merely from studio courses, but also from art appreciation lessons that introduce them to the full repertoires and pallets of past masters.
Learning leadership occurs in a variety of ways.
Learning from experience is the most common and most powerful.
It produces the tacit knowledge that is crucial in a crisis.
But experience and intuition can be supplemented by analytics, which is the purpose of my book.
As Mark Twain once observed, a cat that sits on a hot stove will not sit on a hot stove again, but it won’t sit on a cold one, either.
Consequently, learning to analyze situations and contexts is an important leadership skill. The United States Army categorizes leadership learning under three words: “be, know, do.”
“Be” refers to the shaping of character and values, and it comes partly from training and partly from experience. “Know” refers to analysis and skills, which can be trained.
“Do” refers to action and requires both training and fieldwork. Most important, however, is experience and the emphasis on learning from mistakes and a continuous process that results from what the military calls “after-action reviews.”
Learning can also occur in the classroom, whether through case studies, historical and analytic approaches, or experiential teaching that simulates situations that train students to increase self-awareness, distinguish their roles from their selves, and use their selves as a barometer for understanding a larger group.
Similarly, students can learn from the results of scientific studies, limited though they may be, and by studying the range of behaviors and contexts that historical episodes can illuminate.
In practice, of course, few people occupy top positions in groups or organizations.
Most people “lead from the middle.”
Effective leadership from the middle often requires attracting and persuading those above, below, and beside you.
Indeed, leaders in the middle frequently find themselves in a policy vacuum, with few clear directives from the top.
A passive follower keeps his head down, shuns risk, and avoids criticism.
An opportunist uses the slack to feather his own nest rather than help the leader or the public.
Bureaucratic entrepreneurs, on the other hand, take advantage of such opportunities to adjust and promote policies.
The key moral question is whether, and at what point, their entrepreneurial activity exceed the bounds of policies set from the top.
Since they lack the legitimate authority of elected or high-level appointed officials, bureaucratic entrepreneurs must remain cognizant of the need to balance initiative with loyalty.
Leaders should encourage such entrepreneurship among their followers as a means of increasing their effectiveness.
After all, the key to successful leadership is to surround oneself with good people, empower them by delegating authority, and then claim credit for their accomplishments.
To make this formula work, however, requires a good deal of soft power.
Without the soft power that produces attraction and loyalty to the leader’s goals, entrepreneurs run off in all directions and dissipate a group’s energies.
With soft power, however, the energy of empowered followers strengthens leaders.
Leadership is broadly distributed throughout healthy democracies, and all citizens need to learn more about what makes good and bad leaders.
Potential leaders, in turn, can learn more about the sources and limits of the soft-power skills of emotional IQ, vision, and communication, as well as hard-power political and organizational skills.
They must also better understand the nature of the contextual intelligence they will need to educate their hunches and sustain strategies of smart power.
Most important, in today’s age of globalization, revolutionary information technology, and broadened participation, citizens in democracies must learn more about the nature and limits of the new demands on leadership.
Learning to Leave Extremism
BEIRUT – Report after report from the World Bank, United Nations Development Program, and the Arab League emphasize that the education deficit in the Arab world is among the main causes of its underdevelopment.
With 5% of the world’s population and the bulk of the world’s oil and gas, the Arab world nonetheless lags behind most of the rest of the world, and suffers from what can best be termed “educational poverty.”
Without dramatic improvement at all educational levels, unemployment, illiteracy, and income inequality will continue to worsen, and the region will remain a danger to itself and its neighbors.
Even before the current economic recession, unemployment in the Arab world was estimated at 14% – the world’s highest average outside sub-Saharan Africa.
Among young people and recent graduates, the figure is more than double.
The Arab world also has the highest population growth rate in the world, with almost 40% of its population now below the age of 15.
According to some estimates, the Arab world accounts for one-quarter of the world’s unemployment among the 15-24 age group.
Just to keep up with the inflow of young people into the labor market, Arab economies will have to generate 100 million new jobs over the next 10 years, which will be impossible if education remains impoverished.
Enrollment ratios in the Arab world have improved over the past decade, but Arab countries still have one of the lowest average net enrollment ratios in the developing world.
About one-fifth of eligible children, more than seven million, are not in school, and 60% of these are girls.
The average years of schooling for Arabs is less than half that for the East Asian countries.
Not surprisingly, despite progress in recent decades, illiteracy remains at around 30% on average, and in some Arab countries reaches 50% and 60%.
The quality of Arab education is also an obstacle.
Today’s job market demands skills based on problem-solving, critical thinking, modern languages, and technology, but Arab educational systems generally remain traditional, rote-based, and authoritarian.
Research throughout the world shows that education is a key prerequisite for sustainable growth.
The East Asian tigers invested heavily in education, and it paid off in terms of a capable and modern workforce.
By contrast, development in the Arab world, driven largely by oil revenues, has left the population under-educated and economically marginalized.
Education is also important in the Arab context because of its special status in Islam, which, like Judaism and Christianity, is a religion of the book.
The Gospel of St. John says, “In the Beginning was the Word”; the first word that was revealed to the prophet Muhammad by the Angel Gabriel was “Read…” Among the Prophet’s sayings is, “It is the duty of every Muslim man and woman to seek learning.”
Moreover, Islam does not have a priesthood, just scholars.
The Arab golden ages, in eleventh-century Baghdad and fourteenth-century Andalucía, are revered as periods of great learning.
Schools and universities received large-scale support, and students and scholars traveled from city to city in pursuit of knowledge.
After these golden ages, education fell into decline.
By the 1970’s and 1980’s, the Arab world’s post-independence states had made great improvements in their education sector.
But they did not have the resources to keep up with their own growing populations.
The dramatic levels of investment of the 1950’s and 1960’s tapered off, with the result that too many children are now either outside the school system or are receiving a low-quality education that leaves them without basic literacy and numeracy skills.
And there are still too many disparities based on gender, location, wealth, disability, and other markers of marginalization.
What the West has most, and what the Arab world most needs, is education.
It requires more schools and fewer guns; more universities and fewer aircraft carriers.
The American University of Beirut, founded in 1866, has arguably done more to transform the Middle East in positive ways than any other comparable institution, yet it receives only $3 million in annual aid from the United States, which spends billions on armies and weaponry in the region.
Indeed, the cost of a single month of western military spending in Iraq or Afghanistan would be enough to triple total aid for education in the Middle East.
The cost of two cruise missiles would build a school, the cost of a Eurofighter a small university.
Education can also have a fundamental effect on forming values.
Radical Islamists recognized this long ago and plowed their resources into schools.
Saudi Arabia recognized it in the 1970’s as it sought to expand its influence, and over the years the Kingdom has funded thousands of schools and colleges that teach its stringent brand of Wahhabi Islam.
In Afghanistan and Pakistan, the radical vision is conveyed to the young in religious schools known as madrasas.
Indeed, “Taliban” means “students.”
The struggle for the future of the Arab and Muslim worlds that is being fought now will be won or lost not on the battlefield, but in the classroom.
Leaving Baghdad
The poison of terrorism has now ripped into the humanitarian work of the UN, with the tragic bombing of its Iraq mission's headquarters.
Dozens of innocent people were killed, including one of the world's most accomplished peacemakers, Sergio Vieira de Mello.
Predictably, President Bush re-stated his determination to wage war on terrorism.
Other leaders declared that the UN should not abandon its mission.
Yet the bombing raises political questions that demand answers.
Rather than bolstering its military occupation, the US should leave Iraq, allowing the UN to continue its mission.
In the early 20 th century, empires could suppress restive populations.
No longer.
Nationalist and anti-colonialist ideologies, supported by growing literacy and political mobilization, have long since made imperial rule virtually impossible.
This is especially true in the Middle East, where anti-colonialism mixes with religious fundamentalism.
It was foolhardy for the US to think it could put troops on the ground in Iraq without an extended period of violence and bloodshed.
America's leaders believed that the US would be welcomed as liberators.
The US government and many observers believe that if the US can just get basic services established in Baghdad, and perhaps catch Saddam Hussein, then the situation will quiet down.
The goal seems to be to install a regime led by friends of the Pentagon, such as Ahmed Chalabi.
That regime, in turn, is supposed to invite a longer stay by US troops, and to grant concessions to the US oil industry.
But such a regime will never have legitimacy, and will be subject to assassinations, political upheaval, and terrorist attacks.
In the end, it will squander human lives--such as the brave and dedicated workers of the UN--not to mention hundreds of billions of dollars.
Shockingly, the US is now spending around $4 billion per month to station its troops in Iraq, while at the same time President Bush fights like crazy to keep America's contribution to the Global Fund to Fight AIDS, TB, and Malaria to no more than $200 million for an entire year.
Many American voices are already saying that, whether or not the war in Iraq was a good idea, the US (and the UN) must now stay, to preserve national honor and to show that the US will not be scared away by terrorism.
These responses to terrorist attacks resonate well with US public opinion.
Nobody likes to be bullied, and no American wants the US to be frightened or coerced by the brutal and thuggish actions of car bombers.
Yet the emotional response of digging in deeper simply compounds the political errors of the war itself.
The US is not in a position to pacify Baghdad or to protect the UN or others that work alongside an occupying army, even those working in humanitarian activities.
Terrorism in this case is not just a cowardly act; it is also a reflection of the poisoned politics of US military occupation.
A political response is therefore needed.
Malaysia, a successful and stable moderate Muslim country, has put the issue just right.
Rather than defending the truly heroic work of the UN, Malaysia's Government correctly called on the US to leave Iraq.
Foreign Minister Syed Hamid Albar wisely noted that ``[t]he security threat in Iraq will remain as long as the deep-rooted resentment of the people against the occupation is not dealt with in a fair and just manner.
The UN should not be seen as part and parcel of the occupation.''
Even at this late date, with American soldiers being killed on a regular basis, and with the massive deaths resulting from the car bombing of the UN headquarters, the US resists greater UN authority, much less replacing US troops with UN-led forces.
The Bush administration is sticking to its game plan.
It is probably calculating that a few dozen casualties, or even a few hundred, will still be worth the greater prize--a US military presence in Iraq that looks over the disposition of more than 100 billion barrels of oil while breathing down the neck of Iraq's next door neighbor, Saudi Arabia.
In the end, it will prove to be a false and misguided calculation.
As long as US occupying forces remain, Iraq's politics are likely to remain unstable.
Cooperation with the US will, by itself, increasingly become a disqualification for Iraqi political leaders seeking real support within their own communities.
In the early 21 st century, merely providing electricity and running water will not prove enough to win the hearts and minds of the Iraqi people, even if the US figures out how to get these public services working.
Iraqis will demand the dignity of government by Iraqis, while criminals and terrorists will prey on such sentiments by whatever means necessary.
The US invasion was a grave mistake.
Committing more soldiers will only compound the error.
What is needed now is the quick withdrawal of US forces, and their temporary replacement by UN-led troops, which will hand power back to the Iraqi people.
Educating Syria’s Refugee Children
BEIRUT – When I took charge of Lebanon’s Ministry of Education and Higher Education in February 2014, I was presented with two huge challenges.
In addition to improving the management and quality of Lebanon’s public education system, I had to determine how to handle the unprecedented influx of refugees from Syria – around half a million of them children.
One possibility would have been to focus solely on providing education to Lebanese children – thereby upholding our country’s long-held status as an important intellectual center in the Middle East – and to outsource the refugee problem to the international community.
After all, Lebanon has already done far more than many other countries, accepting well over a million Syrian refugees despite the intense pressure on the local population and economy.
Instead, I took the view that, as long as these children were on Lebanese soil, we have a responsibility to provide them with a quality education in a structured environment, so that when they can finally return to Syria, they will have the skills and knowledge with which to rebuild their country.
The greater risk, I felt, would have been to leave these children sitting idle, losing their hopes and aspirations, or, worse, being forced into child labor or drawn in by radical ideologies.
My ministry has worked with the international community, especially UNICEF and the United Nations High Commission for Refugees, as well as international donors like the European Union, the United Kingdom, and the World Bank, to develop the strategy we call Reaching All Children with Education (RACE).
Through this initiative, we have committed to support all the children and youth displaced from Syria, a country that before the war had achieved near universal enrollment.
Despite various setbacks, during the last academic year we opened 1,000 public schools to non-Lebanese students.
By using many of the buildings in double shifts, we were able to provide 106,795 Syrian refugee children with schooling.
Next year, I want to go much further.
I am aiming to double the number of Syrian children in our public schools to 200,000 students.
This is a huge endeavor, considering that only 238,000 Lebanese students are attending public school.
So I have commissioned a number of studies to help us craft a scaled-up enrollment strategy for September, and installed a project-management team in the ministry whose sole task is to make sure that we can reach this goal.
The biggest challenge, however, will be to secure the necessary financing.
The biggest constraint we had in providing education to Syrian children last year was the lack of resources.
Indeed, despite strong demand, lack of financing hampered our ability to increase enrollment considerably.
My plan this year is to show the world that the planning, policies, and systems are in place months before the start of the school year – ready to be scaled up if the financing can be provided.
It is important to note that the Lebanese government plans to cover a large share of the cost of the program.
We estimate that providing a refugee child with a place in our public schools will cost roughly $1,800 per year; donors are being asked to contribute $363 per student in the first shift and $600 per student in the second.
Unfortunately, however, the price tag for providing children with an education is just one part of the total cost of this effort.
Some Syrian children will need psycho-social and health support to cope with the unimaginable trauma suffered because of the war.
Language difficulties mean that some will struggle to bond with their Lebanese counterparts or learn at the same rate.
New schools may need to be constructed.
Transportation will need to be found and funded.
And finally – and importantly for me – the program will have to be designed in a way that ensures that Lebanese parents don’t feel compelled to pull their children out of public school and incur debts by educating them privately.
Each of these challenges will cost money, which is why we hope that, as we approach the beginning of the school year in September, the international community will urgently increase its financial support to Lebanon.
With no end in sight to the crisis in Syria, it is likely that we will need to provide these children with education for years to come.
So I call on donors to make multi-year commitments that enable us to ensure the students are able to complete their schooling.
Lebanon is not able to bear this burden alone.
We are facing a shortfall of $100 million for the new school year.
Without additional support from the international community, our vision will not be realized – despite strong political will and rigorous planning.
Lebanon often struggles to attract funding because of its status as a middle-income country, but this label is misleading, as it does not take into account serious structural weaknesses that pre-date the Syrian crisis or the huge proportion of the resident population composed of refugees from Syria, Palestine, and Iraq living in abject poverty.
One thing I hope will become clear at the Oslo education summit is the need to help middle-income countries affected by fragility and conflict.
I am thankful to the donors who have been with us from the beginning, but we now need additional international support.
This September, we have the potential to enroll nearly half the refugee children in our country in the public-school system.
The alternative is leaving hundreds of thousands of children on the streets, languishing in informal settlements with an uncertain future.
Lebanon Goes West
BEIRUT – Lebanon’s voters have handed a clear defeat to the Hezbollah-led March 8 alliance.
In a smoothly run and peaceful election, the pro-Western March 14 alliance emerged with a clear majority of 71 seats, compared to 58 seats for its rivals.
The results elicited a nearly audible sigh of relief from Arab capitals, as well as from leaders in Europe and North America.
The fear that the pro-Syrian and pro-Iranian March 8 alliance might secure a victory was palpable prior to the vote.
Iran’s President Mahmoud Ahmadinejad had eagerly and publicly anticipated such an outcome.
The March 14 Alliance’s victory is good news for Lebanon and the region, ensuring good relations with Lebanon’s Arab and Western friends, and constituting a quiet triumph for moderation and pragmatism over extremism and confrontation.
It is also good news for the Obama administration, which had feared a regional setback soon after Obama’s historic address in Cairo on June 4.
The election also brings a much needed measure of stability and legitimacy to the governing March 14 coalition, which comprises the mainly Sunni Future movement, led by Saad Hariri (son of slain former Prime Minister Rafik al Hariri), the Socialist party, led by Druze leader Walid Junblat, and a number of Christian parties.
Although the March 14 coalition already controlled Parliament, its majority had been repeatedly attacked as the result of a severely skewed election law.
Although the March 8 alliance lost the election, not all of its members were equally distressed by the results.
Aside from Hezbollah, March 8 includes the more secular Shiite Amal movement and the Free Patriotic Movement, a large Christian group led by General Michel Aoun.
Whereas Hezbollah and Amal swept the Shiite districts in the South and the Beqaa Valley, confirming their dominant position among Lebanon’s Shiites, Aoun delivered less than half the Christian votes.
Hezbollah may be quite comfortable with the returns.
Winning would have placed Hezbollah in a challenging position.
Arab and international governments would have reacted negatively, and investor confidence in Lebanon would have been undermined, jeopardizing Lebanon’s political and economic relations.
A victory for the March 8 alliance also would have strengthened Israel’s argument that Hezbollah dominates Lebanon, leaving the country more exposed to attack.
Moreover, if the March 8 coalition had won, it would have largely been on the back of Christian voters delivered by Aoun, who might have then demanded the Lebanese presidency, which is reserved for a Christian.
Neither Hezbollah nor Amal wanted this.
With a March 14 victory, Hezbollah is more secure vis-à-vis Israeli attack or international isolation, can worry less about managing Lebanon’s economy and finances, and can maintain its alliance with Aoun without delivering him the Moon.
Moving forward, the immediate challenge will be to form the next government.
The March 14 alliance has said that it would welcome a national unity government with the March 8 coalition, but without the veto power that the opposition has been demanding.
This wrangling is likely to take weeks, but is unlikely to come to blows or to reach a complete impasse.
Neither side is interested in escalation or a breakdown.
Their patrons in the region and internationally – Saudi Arabia, the United States, Syria, and Iran – are also more interested in negotiation than escalation at this point.
On matters of national sovereignty, the new government must continue to build up the national army and police forces, negotiate with Hezbollah over the integration of its militia into the state security structure, and push for regional peace, which would strongly benefit Lebanon.
With regard to economic and social policy, the government must manage the national debt while encouraging investment and employment and strengthening public education and health programs.
The government must also move forward on further electoral reform, expand administrative decentralization, hold local elections in 2010, and come up with a credible program to combat rampant corruption.
None of these challenges will be easy.
Lebanon has undergone much in the past four years: the withdrawal of Syrian forces, a string of painful assassinations, a devastating 2006 war with Israel, a difficult battle between the Lebanese army and an entrenched terrorist group called Fateh al-Islam, a year and a half of institutional paralysis between late 2006 and early 2008, and a brief civil war in the streets of Beirut in May 2008.
However, since then, Lebanon has put together a coalition government, regained security and stability, weathered the global economic crisis, and now organized a largely free and fair election.
Much of this has been achieved through regional and international assistance, but on June 7 the Lebanese people, through the ballot box, proved that they hold ultimate decision-making power over the country’s precarious but potentially promising future.
Lebanon’s Example to Iraq
Iraq’s voters have spoken.
Now a new government must be formed and a new constitution written.
Lebanon, argues Paul Salem, may provide a guide for those Iraqis who seek a constitution that can reconcile the country’s Shi-ite, Sunni, Kurdish and Turkmen communities.
Rebuilding a country devastated by war, riven by internal divisions, and plagued by foreign intervention in a part of the world as volatile as the Middle East is one of the most daunting tasks imaginable.
Add to it a desire to create a democracy from scratch in a region characterized by authoritarian government and that task becomes almost impossible.
But the challenge has been met before, in Lebanon after its nightmarishly long civil war (1975-1990).
So perhaps there are lessons from that experience that can be applied in Iraq.
Both Lebanon and Iraq comprise ancient communities living within the borders of states outlined in the 20th century.
Although a strong sense of modern nationalism exists in both, ancient ethnic and religious communities play a critical role in shaping political identities and public life.
Both countries also possess a fairly educated middle class and intelligentsia alongside more traditional elites.
Both societies have a mixed history that included periods of peaceful, cooperative politics and periods of violence and bloodletting.
One lesson from Lebanon’s recent history stands out above all others: in divided political societies such as Lebanon and Iraq, coalition democracy is preferable to majoritarian winner-takes-all democracy.
In Lebanon, the danger of one community monopolizing power over others is avoided because the Lebanese constitution imposes permanent power-sharing arrangements on all major communities.
These arrangements apply both to parliament and the executive branch.
In Lebanon’s post-war parliament, seats are widely distributed among the various confessional communities, so that none feels excluded or fears losing political representation if it loses numerical superiority.
In the executive branch, the council of ministers is balanced among Christians and Muslims in order to encourage, indeed force, cooperation and to avoid the risk of domination the fear of oppression by one group.
In addition, the three major posts in government—the president of the republic, the prime minister, and the speaker of parliament—are counterbalanced in power and are also divided among the three largest communities.
Moreover, coexistence and cooperation among the various communities is enshrined as a basic principle in Lebanon’s constitution.
Promoting any policy or law that increases communal tension is unconstitutional.
In Iraq, some of these steps have already been taken.
The Governing Council and the interim Government are both coalition bodies of the Lebanese type, comprising studied proportions from the three main communities in Iraq—the Shia, the Sunni, and the Kurds.
Iraq, however, still has neither a parliament nor a constitution.
With regard to parliament, there is no need to follow Lebanon’s rigid apportionment of seats according to confessional identity.
All the same, Iraq’s parliamentary electoral law should be drawn up to take two important factors into account:
· First, districts should be drawn to ensure that all major communities in the country are amply represented in parliament and none feels left out;
· Second, electoral districts should be multi-member districts and should, as far as is possible, include populations of more than one community in order to encourage cross-communal politics and the election of moderate politicians that can speak to all communities and that know how to resolve tensions among them.
Until elections can be organized, it may be necessary to do what was done in Lebanon just after the war: appoint members to an interim Iraqi parliament.
This could be described as a temporary advisory parliament, or ‘Shura Council,’ but it should include hundreds of figures from throughout the country and they should be selected through the Governing Council and interim Government after nationwide consultations.
Such a large Shura Council would provide a broad Iraqi face and body to the interim administration.
It would also serve to create the beginnings of Iraqi parliamentary and local politics in advance of the elections, which should be held as soon as possible.
In terms of drawing up a new constitution, the Lebanese principle of government by power sharing must be a central pillar.
Beyond the balance of representation in parliament and government, a balance might need to be struck between the highest offices of state.
As in Lebanon, Iraqis might need to create a balance between the offices of president, prime minister, and speaker of parliament, and to agree that a leader of a different major community will occupy each.
This would reinforce the need for inter-communal cooperation and minimize the risk of a return to any form of communal domination or dictatorship.
As someone who knew Lebanon in its darkest hours—when Lebanon was a by-word for chaos, violence, and political hopelessness—and who saw its rapid reconstitution as a functioning participatory political system and its astonishing return to normalcy, I know that Iraq can be politically rebuilt.
Like the Lebanese, Iraqis have suffered enough.
By recognizing a permanent say in politics for all of the country’s mutually suspicious communities, Iraqis can pull back from the brink and build for themselves an Iraq worthy of their talents and their history.
Lebanon’s Moment of Decision
Lebanon is at a historic crossroad.
It can choose to lead the Middle East into vibrant multi-sectarian democracy or slump back into corrupt local politics under foreign tutelage.
The latter path could easily lead to civil strife and, perhaps, another civil war.
At this very moment, Lebanon’s political leaders are meeting jointly for the first time in the country’s modern history without the interference of Syria, France, or the United States.
Everyone from Saad Hariri, the son of our murdered Prime Minister Rafik Hariri, to Hizbullah’s leader, Hassan Nasrallah, is present to discuss openly the issues that divide the country, as are the leaders of Lebanon’s Shiia, Sunni, Greek Orthodox, Maronite Christian, and Druze communities.
This national dialogue, held under security measures that have basically shut down central Beirut, began March 2 and is expected to last up to ten days.
But one player is missing: Emile Lahoud, who claims Lebanon’s presidency as his by right of Syrian power.
Lahoud’s absence is not surprising, as the discussions deal with the fate of his illegal presidency and how to break the deadlock that his continuance in office has imposed on the country.
Indeed, just as Lahoud’s chair at the talks is vacant, so – in the eyes of the world and under the country’s 150-year old constitution – is Lebanon’s presidency.
It has been vacant since September 2004 when Lahoud, backed by Syria, forced an extension of his six-year term on the Lebanese parliament, which elects the president.
We Lebanese can already claim victory in our year-long non-violent fight for independence and democracy.
We have succeeded in placing the issue of the presidency at center stage in Lebanese politics.
Parliament Speaker Nabih Birri, Hizbullah Secretary General Hassan Nasrallah, and Michel Aoun, leader of the Free Patriotic Movement, remain reluctant participants in the search for a new head of state.
Nevertheless, the election of a new, democratic, and lawful president has become accepted nationally as a necessary point of departure from the murderous path taken by the country with the extension of Lahoud’s mandate.
This was clearly demonstrated on February 14, when roughly a million people assembled to commemorate the first anniversary of Rafik Hariri’s assassination.
The crowd’s sole demand was that Lahoud step down.
On that day, I urged Druze leader Walid Jumblatt and Future Movement leader Saad Hariri, a Sunni and the political heir of his slain father, to make this their paramount slogan.
The democratic movement’s main objective is to bring about a non-violent, constitutional process to replace Lahoud with a new president in free and open elections.
In this we have the clear support of the international community, with the United Nations Security Council giving its unanimous support to my demand for presidential elections.
On January 23, the Security Council issued a statement expressing regret that the conduct of “free and fair presidential elections” had not yet been carried out in accordance with Security Council Resolution 1559, which was passed on the eve of Lahoud’s extension.
At a historic gathering of the parliamentary majority on February 16, I presented a four-step process to complete, in a constitutional manner, our non-violent revolt against foreign power.
First, the popular and parliamentary majority in Lebanon must declare that no solution is possible without the election of a new president.
Second, a majority of parliamentarians must sign a petition declaring null and void the extension of Lahoud’s term.
Third, the parliamentary majority must formally acknowledge Lahoud’s illegitimacy.
Finally, Lebanon must elect a new president.
With the national dialogue now underway, we are in the midst of phase three.
If, during this dialogue, a consensus is reached on the need to elect a new president, so much the better.
If not, phases three and four will be completed by other means.
Lahoud has become irrelevant.
Once the president’s illegitimacy is formally acknowledged by a majority of parliamentarians, all his acts will be considered beyond his constitutional powers, and the process of electing a new president will be firmly on track.
This can only be reversed by violence, which is unlikely, so strong is the consensus that Lebanon needs a new president, and so ingrained is the rejection of force by all Lebanese.
While we must be vigilant in preventing extremist groups from derailing the process, the best way to do so is to accelerate transformation at the top.
As for me, I realize that in seeking Lebanon’s presidency, we must look to the future.
That is why I offer a program that addresses such key issues as the effective representation of women in government, the need to urgently address environmental problems, to strengthen rule of law, transparency, and accountability, and to move toward universal suffrage in the election of top executive positions.
I have also emphasized that Lebanon must develop its comparative advantages, particularly in education, banking, and services.
All these issues have now become part of the national debate.
Lebanon’s traditional political class may not like it, but, as more of its members are now recognizing, the momentum for a new kind of presidency will not be stopped.
Lebanon’s New Status Quo
BEIRUT – Hezbollah’s armed insurrection in May, which overran Beirut and other parts of Lebanon, has dealt a further blow to hopes of true state sovereignty in the country, strengthening Hezbollah and weakening the Western-backed government.
But it also brought about a new political accord, negotiated in Doha, Qatar, providing for election of a president after a long stalemate, formation of a national unity government, a new election law, and a return to a national dialogue over relations between the state and non-state actors, particularly Hezbollah.
There is much speculation about the reasoning behind the government’s decisions in May to dismiss the pro-Hezbollah chief of airport security and investigate Hezbollah’s private telecommunications network, which sparked the confrontations.
The government had been under longstanding international pressure to honor at least some of its international commitments to contain Hezbollah, and it wrongly calculated that the group would only respond in a limited way.
Most importantly, the government mistakenly reckoned that Hezbollah would not risk Shia-Sunni clashes in Beirut.
Similar questions surround Hezbollah’s reasoning in unleashing large-scale action that risked sectarian warfare and jeopardized its moral high ground.
But it has largely achieved its aims.
Militarily, it has nipped in the bud any potential armed militia in West Beirut that could hinder its movement beyond the southern suburbs.
It also secured key highways south and east of Beirut that Druze leader Walid Junblatt previously dominated and reasserted its access to the capital’s airport and seaports.
Politically, Hezbollah abandoned its policy of waiting out the government, in favor of pushing it to the breaking point and quickly fashioning a new status quo.
Now it has strong influence with the new president whom it helped bring to power, a blocking veto in the next government, and it has drawn a clear line in the sand regarding the untouchability of its arms and its communication and operational infrastructure.
Hezbollah and its main backer, Iran, were motivated by two concerns: fear of the next Israeli attack, which Hezbollah believes is inevitable, and concern over Syrian-Israeli peace talks that, if successful, could leave Hezbollah without its main bridge to Iran. Hezbollah has been rearming and redeploying since the 2006 war; the actions of May further consolidate its position in and around Beirut.
By reasserting its access to the airport and seaports, and by consolidating the political situation in the country, Hezbollah can better survive a shift in Syrian policy: the United States and Israel can no longer ask Syria to “deliver” Hezbollah as part of any peace deal over the Golan.
Morever, by resuscitating the weak institutions of the Lebanese state, Hezbollah gains important political protection from external attack.
It will be hard for Israel to launch a large-scale attack on Hezbollah if it is participating in a semi-stable Lebanese state headed by an internationally recognized president, with a pro-Western prime minister and a democratically elected parliament, teeming with tourists, and buffered by 10,000 UNIFIL troops in the south.
In other words, Hezbollah’s survival strategy partly depends on the protective shell of a rickety Lebanese state.
Hezbollah’s moves were clearly a defeat for the US and Saudi Arabia.
However, when they saw that Hezbollah had limited demands and wanted Lebanon’s Western-backed coalition to continue to lead the government, they chose to make advantage out of adversity.
The US and Saudi Arabia welcomed the Doha Agreement and the election of the new president, and Secretary of State Condoleezza Rice flew to Beirut to express US support for the president and the Lebanese state.
Qatar’s role in bringing about a resolution, alongside that of Turkey in mediating Syrian-Israeli talks, signals a return to pragmatism in Middle East relations.
It also indicates the dead-end to which the ideological politics of the US, Iran, and Saudi Arabia has led. Although the Doha agreement papers over serious political and institutional contradictions, it reinforces the emergence of a pragmatic approach toward managing the region’s crises.
Lebanon now limps forward carrying the contradictions of internal and regional politics with it.
The Doha agreement might allow a number of months, or years, of relative calm.
But until the Lebanese state is able to integrate or dominate non-state militias, and until some of the raging confrontations in Lebanon’s immediate environment are calmed, Lebanon is not likely to know real stability.
Lebanon’s Time of Trial
ISTANBUL – As Lebanon braces for the possible indictment of Hezbollah operatives for the murder of former Prime Minister Rafik Hariri, the country’s economy is wobbling.
The International Monetary Fund’s Mission Report of March 2009, pointing to the country’s 30 years of chronic political tumult, concluded that “Lebanon will remain vulnerable to shocks for many years” to come.
While welcoming the anti-crisis action plan of the government at that time, the Fund held no illusion that it would be up to the task.
Later that year, however, the government of Saad Hariri, Rafik Hariri’s son, brought new hope, prompting the IMF to declare that it had “opened a new window of opportunity for invigorating economic reforms.”
But the success of the planned reforms depends heavily on cooperation between Lebanon’s main political groups, the Sunni and the Shia, and there has been little of that so far.
Indeed, the influence of outside powers remains a central part of the equation.
The meeting last July in Beirut between Syria’s President al-Assad and Saudi King Abdullah was tagged as a sign of rapprochement between two Sunni antagonists.
But one of its purposes was to obtain the Syrian-backed Hezbollah’s support for an IMF-style recovery program.
It remains unclear whether or not that goal was fulfilled.
Meanwhile, Lebanon’s main economic indicators show steady improvement: GNP increased from $21 billion in 2004 to $32 billion in 2009, inflation remains under control, foreign trade is balanced, and the unemployment rate is tolerable.
Moreover, the Lebanese pound is pegged to the US dollar.
According to the IMF, “the crisis did not directly affect the Lebanese economy, the banks are solid and the funds are flowing in.”
But, although the World Bank classifies Lebanon as an “upper middle income” country, with a per capita GNP of $10,800, 28% of the population lives below the poverty line.
As many of Lebanon’s poorest are Shia, this provides fertile ground for Hezbollah recruiters.
Other economic shadows remain, with serious potential political implications.
The IMF forecasts that the Hariri government should be able to tap capital markets to cover its financial needs for 2010.
But the current budget relies on foreign aid to cover a $3 billion (10% of GNP) shortfall.
The issue is not so much where the funds will come from as the amount itself.
Lebanon’s growth rate, which has averaged 3.7% over the last 10 years, has been, according to the Fund, “lower and more volatile than (averaged) in the MENA [Middle East-North Africa] region.”
Under these conditions, it is difficult to see how the country can ever offset the damage caused by the various wars of the 1975-2006 period, estimated to have caused $35 billion in damage.
The “emergency post-conflict assistance” (under $100 million) provided by the IMF after the 2006 fighting with Israel fell well short of the amount needed to rebuild.
The Lebanese government has been boasting about the US aid that it has received.
But this assistance – military hardware and a five-year military training program – does not address the country’s fundamental economic problems.
Moreover, although the World Bank accepted the country’s reconstruction program – called “Horizon 2000” – the money for it, from the European Investment Bank and Arab funds, has barely trickled in.
In order to get further assistance, Lebanon urgently needs to strengthen its ties with the US, as well as those that it has been developing within the framework of EU Mediterranean Cooperation.
Turkish Prime Minister Recep Tayyip Erdoğan, as part of his recent drive to become the de facto leader of the Sunni world, and as part of his “zero problems with neighbors” policy, has lifted visa requirements for Lebanese traveling to Turkey.
But this did not prevent a decrease in Turkish-Lebanese trade last year.
Worse, a bilateral free-trade agreement has not been finalized, despite seven years of negotiations.
Yet this did not deter Turkey from organizing the Third Turkish-Arab Forum on July 10, 2010, with Syria, Jordan, and Lebanon.
After much old-style “Nasserite” rhetoric, they decided to create the Close Neighbors Economic and Trade Association Council.
While Turkey’s objective is a free-trade zone and economic integration between the four countries, Lebanon has been much more cautious.
The Web site of its Ministry of Economy and Trade does not even mention such a plan (but does quote the Arab League’s anti-Israel Central Boycott Office).
The four countries will hold their next meeting in Damascus this coming December to decide on further steps.
But the three Arab states are already members of the Arab Free Trade Zone GAFTA, which normally prevents participation in another free-trade zone.
Moreover, in 2009, the Lebanese set World Trade Organization membership as a priority, and the proposed new free-trade agreement may not advance that goal.
Turkey, for its part, finds itself in a similar situation with its candidacy for the EU.
Hariri’s government is set to keep its 71-member majority in Lebanon’s 128-seat parliament, helped by the 8% economic growth projected for this year.
But there is always the risk that the IMF’s recommendations calling for more taxation – an increase in value-added tax and higher energy tariffs – together with Hezbollah’s recurring demands, might create a political earthquake.
That earthquake could prove monumental, depending on how Hezbollah responds to any indictment over Hariri's murder.
Le défi Chinois6e3bd40146f86f4031f85308
Thirty-five years ago Jean_Jacques Servan_Schreiber's "Le Défi Americain" (The American Challenge) claimed that Europe was in danger of becoming a branch office for American multinationals.
A decade later, Japan's rising commercial challenge seemed paramount.
Now China makes people nervous.
But today's responses to China's economic challenge may be as misbegotten as yesterday's answers to le défi Americain .
China in 2002 resembles nothing so much as Japan in the 1960s, when it was preparing to become a global competitor, with echoes of Dickensian England and America's "robber baron" era of the late 1800s, when the US first rose to global economic power.
What is unprecedented is that something similar should occur in a Communist nation, or in one with such a massive population.
The new China is symbolized by an electronics components factory in Shenzhen in the Pearl River (Zhu Jiang) Delta.
When I visited it, the factory had 10,000 workers, each earning about $80 per month.
All were young women.
None wore eyeglasses.
"Don't you have employees with bad eyesight?" I asked.
The manager replied, "We fire them when their eyes go bad.
They can find another job--that's not my problem."
Indeed, those laid off generally do not return to peasant life, but become urban entrepreneurs in the service industries of China's new cities.
China owes its growing dynamism partly to the central authorities' shrewd pursuit of well-timed and complementary development strategies.
Less noticed than the 15-year process of gaining admission to the World Trade Organization has been the stabilization of the currency, the renminbi (RMB), pegged to the Hong Kong dollar since 1997, when the territory reverted to Chinese rule.
By prohibiting exchange of RMB abroad, the central authorities prevented the currency fluctuations that in recent years wreaked havoc in other developing nations.
But the real key to China's success is not found in Beijing, but at lower levels of government.
In most regions, officials welcome foreign businesses--offering tax-free zones and other benefits--and unfettered competition as a means of strengthening their industries.
More than 100,000 component manufacturers, mostly from Japan or Taiwan, have relocated to China's Pearl River and Yangtze River Delta regions, which always had cheap labor but now also have modern highways, port facilities, and communications links.
Nearly $45 billion in foreign direct investment entered China in 2000, compared with about $10 billion for Japan and even less for Asia's tigers.
Much of that money went directly into raising industrial productivity.
A typical Chinese factory once consisted of rows of women at workbenches.
Today factories are as modern, sophisticated, and automated as their Japanese counterparts, and their managers are mastering the skills needed to compete globally faster than in any other nation I have studied.
China's regions learned to specialize by competing fiercely for foreign investors.
Each has its cluster of component suppliers and professional service providers, with an infrastructure of transportation lines, communications networks, and research laboratories to support them.
They are also developing links to the outside world independent of China's central government.
Because China's domestic market is so huge, many companies have not yet turned their attention overseas.
But they are poised to become the most capable and competitive original equipment manufacturers--producers of goods sold under other brand names-- that the world has ever seen.
Malaysia and Thailand spent ten years building the expertise, production base, and infrastructure for precision metalworks that could sell components to Swiss watch manufacturers.
Chinese firms took over that business in only a year.
The same is happening with electronics and machinery.
China is now doing to Asia what Japan did to the West 20 years ago.
Suddenly, it is extremely difficult for a non-Chinese company to compete in any worldwide market with a strategy of low-cost, low-price commodities, even if those commodities are precision electronics components.
Few commodities are out of reach for Chinese industry, because, unlike any other nation, it can simultaneously mobilize low-cost labor and high-tech automation.
Singapore and Taiwan weathered Asia's 1997 financial crisis relatively unscathed, but their manufacturers are suffering now.
Much of Taiwan's manufacturing sector has migrated across the Taiwan Strait--despite restrictions on direct contacts with the mainland--and Singapore is becoming a kind of Asian Switzerland, betting its prosperity on investments in China.
Indonesia, the Philippines, and Thailand, which lack Singapore's resources, are likely to suffer deprivation, fragmentation, and unrest, to say nothing of countries such as Laos, Cambodia, and Myanmar.
What does this Chinese juggernaut mean for Japan, Europe, the US, and other wealthy regions?
For consumers, it is an unalloyed boon.
Chinese industries will cut costs, raise quality, and propel innovation for most consumer and industrial products--not just because of their own efforts, but because global companies vying for position in China are putting their own best practices to use there.
This will lead to a frenetic new wave of competition, but not between China, America, and Japan as monolithic entities.
In each industry and region, companies will race to internalize China's new methods in order to beat their local and immediate competitors--just as US management methods have been internalized by companies around the world, including within China.
Meanwhile, China's growth will pose a greater challenge to the global status quo, both diplomatically and economically, than, say, Islamic extremism.
Politicians and businesspeople will complain.
But consumers will have never had it so good, and they will demand the goods that China can provide better than any other nation.
When we meet the enemy, we will discover that it is us.
South Korea’s Feminine Future
SEOUL – Over the last half-century, South Korea has made considerable economic progress, with per capita income increasing from a mere $80 dollars in 1960 to more than $22,000 last year.
But its potential for sustained growth is faltering, owing to the imminent decline of its working-age population – projected to fall by 25% by 2050 – and rising competition from China and other emerging economies.
In order to improve its prospects, South Korea must pursue economic reform and restructuring, with an emphasis on maximizing its human-capital resources – especially women.
South Korea’s success over the last five decades owes much to the rapid growth of its well-educated labor force.
From 1960 to 2010, the share of adults with a secondary education soared from 20% to an impressive 87%.
By boosting productivity, increasing returns on investment, and facilitating technological adaption and innovation, South Korea’s abundance of well-educated workers has served as the foundation for its export-oriented development strategy.
But women remain underutilized, to the detriment of the entire economy.
Indeed, any effective South Korean growth strategy must create more and better economic opportunities for women, in part by establishing more accommodating working environments and instituting a more diverse and flexible education system.
To its credit, South Korea has built a relatively gender-equal society.
The gender gap in enrollment in both secondary and higher education is very small; and women’s access to elite positions in law, medicine, and the civil service has increased considerably in recent years.
The country elected its first female president, Park Geun-hye, in 2012.
But a significant gender gap remains in terms of the return on human capital.
According to OECD data, only 55% of South Korean women aged 15-64 are in the labor force, compared to an average of 65% in the advanced economies.
South Korea’s male labor-force participation rate, by contrast, stands at about 77% – close to the OECD average of 79%.
Women who have completed secondary or tertiary education are more likely to enter and remain in the labor market than their less educated counterparts.
The labor-participation rate for women with post-secondary education is 64%, far exceeding the 35% rate for those with only a primary or middle-school education.
But, even for South Korea’s most highly educated and capable female workers, child rearing is a major career obstacle.
In fact, South Korean women participate in the labor force at roughly the average rate for the OECD while they are in their late twenties.
The problem is that the rate drops sharply from 71% to 57% among women in their 30’s, as inflexible working environments and a lack of affordable childcare undermine their ability to continue investing in their careers.
The good news is that Park’s government is working to change this.
Indeed, its three-year plan for economic innovation, announced in February, aims to raise the female employment rate to 62% by 2017, through the provision of affordable, high-quality childcare facilities and expanded paid parental leave, among other measures.
But it is less clear how the government will create additional jobs for women.
It could, for example, split full-time jobs into multiple part-time positions, and offer incentives for workers to reduce their hours.
But, given that South Korea’s workforce already includes a substantial share of non-regular workers, increasing temporary employment may not contribute to economic growth.
A better approach would entail creating high-quality jobs in modern service industries.
As it stands, while the services sector accounts for more than 70% of employment in South Korea, its productivity-growth rate remains much lower than that of the manufacturing sector.
Too many people are working in traditional, low-productivity service industries, such as wholesale, retail trade, and restaurants, leaving modern, high-productivity services like communications, health, financial intermediation, and business services underdeveloped.
It is also important to narrow the mismatch between women’s abilities and their career paths.
The current system tends to reinforce gender roles, encouraging children to follow culturally framed paths, instead of nurturing their individual interests and potential.
For example, female university students are much more likely to study humanities than the so-called “STEM” subjects (science, technology, engineering, and mathematics) – key drivers of productivity gains, innovation, and economic growth.
Efforts by primary and secondary schools could help to foster more diverse interests among female students, giving talented young women the tools they need to make important contributions to key economic sectors.
Of course, the potential of educated, empowered women to drive sustained economic growth is not limited to South Korea.
Japanese Prime Minister Shinzo Abe, too, has identified increased female labor-force participation as critical to efforts to revive his country’s long-dormant economy.
In South Korea, Japan, and elsewhere, developing and maximizing women’s potential will require comprehensive education and labor-market reforms, as well as structural change, particularly on the services side of the economy.
The question is whether political leaders are ready to back their lofty pronouncements with decisive action.
Financial Safety Nets for Asia
SEOUL – Emerging economies are facing significant uncertainty and serious downside risks.
One major source of instability is the looming reversal of the US Federal Reserve’s expansionary monetary policy – the prospect of which is generating volatility in global financial markets and threatening to disrupt emerging-economy growth.
The Fed has signaled that its federal funds rate will remain near 0%, at least as long as unemployment exceeds 6.5% and inflation expectations remain well anchored.
But when and how the Fed will begin tightening monetary policy remains unclear.
What is certain is that, in making its decision, the Fed will not consider its policy’s spillover effects on the rest of the world, leaving affected countries’ policymakers and central bankers to deal with the fallout.
Tighter US monetary policy could intensify the global credit shortage, thereby increasing pressure on Asia’s economic and financial systems.
Overreaction and herding behavior by market participants could trigger a sudden reversal of capital inflows, with a severe dollar shortage – as occurred in 1997 and 2008 – straining Asian banks and corporations.
These risks explain why the Fed’s mere suggestion of a potential move toward reducing its purchases of long-term asset (so-called quantitative easing) caused emerging-market currencies and asset prices to plummet this summer.
They also underscore Asian economies’ need for stronger financial safety nets.
The 2008 global financial crisis revealed fundamental flaws in the international monetary system, as the failure to ensure sufficient liquidity weighed heavily on emerging Asian economies.
Since then, these countries have taken measures to safeguard the stability of their financial systems against volatile external shocks, strengthen financial supervision and regulation, and develop more effective macroeconomic frameworks, including better macro-prudential regulation and capital-control measures.
But their heavy reliance on international trade and capital flows means that they remain vulnerable to severe financial spillovers from the United States.
Moreover, since the 1997 Asian financial crisis, the region’s emerging economies have increased their holdings of foreign-exchange reserves, and now possess more than half of the world’s total.
Seven of the world’s top ten reserve-holding economies are in Asia. But hoarding international reserves, mostly in the form of low-yielding short-term US Treasury securities, is expensive and inefficient.
Some Asian economies, especially China, are also attempting to internationalize their currencies.
Given China’s expanding global influence, the renminbi’s emergence as a new international currency is inevitable.
For smaller economies, however, internationalization will be far more difficult.
In their quest to ensure sufficient liquidity, Asian economies have also actively pursued currency-swap arrangements.
Since 2008, China has signed 23 bilateral swap agreements, including one with South Korea.
Japan expanded bilateral swap facilities with its Asian neighbors during the global financial crisis.
And the ten ASEAN countries, together with China, Japan, and South Korea, have constructed a $240 billion regional reserve pool to provide short-term liquidity to members in an emergency.
Such swaps should help Asian countries to cope with currency turmoil in the wake of a Fed policy reversal.
But they remain untested and, given their relatively small volumes, cannot reassure markets or provide adequate emergency support to crisis countries, especially in the event of large-scale systemic shocks.
The Fed, as the de facto global lender of last resort, can improve significantly the effectiveness of Asia’s financial safety nets by establishing currency-swap arrangements with emerging economies’ central banks during the policy-reversal process.
In 2008, the Fed established currency-swap lines with the central banks of ten developed economies, including the eurozone, the United Kingdom, Japan, and Switzerland, and four emerging economies (Brazil, South Korea, Mexico, and Singapore).
These arrangements, most of which ended in 2010, responded to strains in short-term credit markets and improved liquidity conditions during the crisis.
The South Korean central bank’s $30 billion swap, though limited, averted a run on the won.
Reestablishing the Fed’s swap arrangements with emerging economies would minimize negative spillovers during the coming monetary-policy reversal.
Even an announcement by the Fed stating its willingness to do so would go a long way toward reassuring markets that emerging economies can avert a liquidity crisis.
The swap lines would also serve American interests.
After all, trouble in emerging economies would destabilize the entire global economy, threatening the fragile recoveries of advanced economies, including the US.
And, given China’s rise, it is clearly in America’s interest to maintain a balance of economic power in Asia.
Critics might cite the moral-hazard risk generated by liquidity support.
But a well-designed framework that offers swap lines only to well-qualified emerging economies – and only temporarily – would diminish this risk substantially.
In fact, some experts, such as the economist Edwin Truman, have proposed establishing an institutionalized global swap arrangement as a more effective and robust crisis-prevention mechanism – an idea that G-20 countries should consider.
But creating such a system would take time.
In the meantime, the Fed should take the initiative by re-establishing swap lines with advanced and emerging economies alike.
What Comes After Lee Kuan Yew?
LONDON – All political leaders worry about their legacies.
Lee Kuan Yew, who presided over Singapore either directly or indirectly for more than a half-century – remaining influential right up to his death at 91 – had more time in power than most to do so.
Several volumes of memoirs attest to Lee’s concern about his legacy, although Singapore’s extraordinary success under his leadership speaks for itself.
Like him or not – and many did not – there is no denying the city-state’s remarkable and enduring prosperity and stability.
Yet the effort put into those memoirs by the man who called himself “Minister Mentor” during his later years offers a clue about Lee’s ultimate concern.
His legacy in terms of Singapore’s past success may be clear, but what about the future?
That, of course, is one of the few things he could not control, beyond offering his teachings to future generations.
Yet in one crucial respect – determining who Singapore’s new generation of leaders will be – the tight control that Lee exercised in the past may now make that future more difficult.
The issue is certainly solvable, especially given an excellent education system and high-quality institutions of all kinds. But Lee’s own actions suggest that he harbored doubts.
The succession to Lee was clear: after handing over the premiership in 1990 (at the surprisingly young age of 66) to a trusted associate, Goh Chok Tong, he groomed his eldest son, Brigadier-General Lee Hsien Loong, for the job.
After serving as Singapore’s trade minister, finance minister, and deputy prime minister, Lee Hsien Loong took over the top post in 2004.
What is unresolved is where power goes next, and how.
Perhaps the answer will simply be that the ruling People’s Action Party will choose a successor in the conventional way.
Certainly, Singapore’s cadre of talented and experienced officials and ministers is deep.
Still, the question is an open one, owing to Lee Kuan Yew’s somewhat paradoxical sensitivity to the prominence of his family members in some of the country’s most senior posts.
Lee fought many battles with the international media over their coverage of Singapore, especially from the mid-1980s onward, by which point the country’s success had become abundantly clear.
As a Cambridge-trained lawyer, he was especially keen on using the law to browbeat his media (and political) critics, knowing full well that he had no serious chance of losing in Singapore’s own courts.
During my time as the editor-in-chief of The Economist (1993-2006), I received such browbeatings on many occasions.
What eventually became clear was that under no circumstances could Lee Kuan Yew countenance one particular word or concept: nepotism.
After all, he had set up Singapore as an intensely meritocratic society, in which competition, under clear and accepted rules, was king.
So when his own son became Prime Minister, and his daughter-in-law, Ho Ching, took the helm at Temasek, one of the state’s huge investment companies, any insinuation that they had done so on anything other than their own merit was unacceptable.
Lee established a high-minded committee to establish that nepotism was not the reason, and then set about suing anyone who dared to suggest otherwise.
Yet this abhorrence of nepotism was illogical – and Lee was generally nothing if not logical, even ruthlessly so – because in this case a perfectly good justification for it followed smoothly from his own analysis of Singapore.
A tiny, multi-racial society ejected from Malaysia in 1965, Singapore was born in an atmosphere of vulnerability, lack of legitimacy and trust, and ethnic conflict.
Up through the 1980s and 1990s, Lee often justified the continuation of authoritarian policies by reference to those communal riots, and to the ever-present possibility of a loss of social trust and a return to conflict.
So, in passing the baton to his eldest son, he could be said to have dealt with that risk in the most logical way possible.
If you trusted the founder of Singapore and thought him legitimate, who better to trust than the founder’s own son?
Indeed, the father would remain on the scene, first as “Senior Minister” and then in his mentor role, and had made his son prove his abilities openly in a series of prominent positions.
It worked, and Lee Hsien Loong has by all accounts done a good job as Prime Minister, whatever the explanation for his rise.
There is no current risk to Singapore’s political stability, and the younger Lee is only 63 years old; he could remain in office for a long time to come.
The question, though, remains: What happens next?
Lee Kuan Yew dealt with the question of succession by deferring it.
Legislating History
NEW YORK &#45;&#45; In October, the Spanish parliament passed a Law on Historical Memory, which bans rallies and memorials celebrating the late dictator Francisco Franco.
His Falangist regime will be officially denounced and its victims honored.
There are plausible reasons for enacting such a law.
Many people killed by the Fascists during the Spanish Civil War lie unremembered in mass graves.
There is still a certain degree of nostalgia on the far right for Fanco’s dictatorship.
People gathered at his tomb earlier this year chanted “We won the Civil War!”, while denouncing socialists and foreigners, especially Muslims.
Reason enough, one might think, for Socialist Prime Minister José Luis Rodríguez Zapatero to use the law to exorcize the demons of dictatorship for the sake of democracy’s good health.
But legislation is a blunt instrument for dealing with history.
While historical discussion won’t be out of bounds in Spain, even banning ceremonies celebrating bygone days may go a step too far.
The desire to control both past and present is, of course, a common feature of dictatorships.
This can be done through false propaganda, distorting the truth, or suppressing the facts.
Anyone in China who mentions what happened on Tiananmen Square (and many other places) in June 1989 will soon find himself in the less-than-tender embrace of the State Security Police.
Indeed, much of what happened under Chairman Mao remains taboo.
Spain, however, is a democracy.
Sometimes the wounds of the past are so fresh that even democratic governments deliberately impose silence in order to foster unity.
When Charles de Gaulle revived the French Republic after World War II, he ignored the history of Vichy France and Nazi collaboration by pretending that all French citizens had been good republican patriots.
More truthful accounts, such as Marcel Ophuls’s magisterial documentary The Sorrow and the Pity (1968) were, to say the least, unwelcome.
Ophuls’s film was not shown on French state television until 1981.
After Franco’s death in 1975, Spain, too, treated its recent history with remarkable discretion.
But memory won’t be denied.
A new generation in France, born after the war, broke the public silence with a torrent of books and films on French collaboration in the Holocaust, as well as the collaborationist Vichy regime, sometimes in an almost inquisitorial spirit.
The French historian Henri Russo dubbed this new attitude “the Vichy Syndrome.”
Spain seems to be going through a similar process.
Children of Franco’s victims are making up for their parents’ silence.
Suddenly, the Civil War is everywhere, in books, television shows, movies, academic seminars, and now in the legislature, too.
This is not only a European phenomenon.
Nor is it a sign of creeping authoritarianism.
On the contrary, it often comes with more democracy.
When South Korea was ruled by military strongmen, Korean collaboration with Japanese colonial rule in the first half of the twentieth century was not discussed – partly because some of those strongmen, notably the late Park Chung Hee, had been collaborators themselves.
Now, under President Roh Moo-hyun, a new Truth and Reconciliation Law has not only stimulated a thorough airing of historical grievances, but has also led to a hunt for past collaborators.
Lists have been drawn up of people who played a significant role in the Japanese colonial regime, ranging from university professors to police chiefs – and extending even to their children, reflecting the Confucian belief that families are responsible for the behavior of their individual members.
The fact that many family members, including Park Chung Hee’s daughter, Geon-hye, support the conservative opposition party is surely no coincidence.
Opening up the past to public scrutiny is part of maintaining an open society.
But when governments do so, history can easily become a weapon to be used against political opponents – and thus be as damaging as banning historical inquiries.
This is a good reason for leaving historical debates to writers, journalists, filmmakers, and historians.
Government intervention is justified only in a very limited sense.
Many countries enact legislation to stop people from inciting others to commit violent acts, though some go further.
For example, Nazi ideology and symbols are banned in Germany and Austria, and Holocaust denial is a crime in 13 countries, including France, Poland, and Belgium.
Last year, the French parliament introduced a bill to proscribe denial of the Armenian genocide, too.
But even if extreme caution is sometimes understandable, it may not be wise, as a matter of general principle, to ban abhorrent or simply cranky views of the past.
Banning certain opinions, no matter how perverse, has the effect of elevating their proponents into dissidents.
Last month, the British writer David Irving, who was jailed in Austria for Holocaust denial, had the bizarre distinction of defending free speech in a debate at the Oxford Union.
While the Spanish Civil war was not on a par with the Holocaust, even bitter history leaves room for interpretation.
Truth can be found only if people are free to pursue it.
Many brave people have risked – or lost – their lives in defense of this freedom.
It is right for a democracy to repudiate a dictatorship, and the new Spanish law is cautiously drafted, but it is better to leave people free to express even unsavory political sympathies, for legal bans don’t foster free thinking, they impede them.
Legislating Women into Science
Legitimacy and Elections
So Ukraine now has a legitimate government.
Or does it?
Viktor Yushchenko has been elected with 52% of the popular vote.
His opponent received 44%.
Observers confirm that infringements of the electoral rules were but minor.
Yet questions remain.
The defeated candidate, Viktor Yanukovych, contests the result.
The country is deeply divided.
Will the miners of Donetsk start the next revolution, this time in red against the orange of the protests staged by Yushchenko’s supporters against the original election with its clearly illegitimate result?
Will there be a secession movement in eastern Ukraine?
Legitimacy is a delicate, yet utterly important feature of stable democratic politics.
It is also complicated.
Was George W. Bush the legitimately elected President of the United States in his first term, having gained office only after America’s Supreme Court ordered an end to the Florida recount and with Bush having secured only a minority of the votes nationwide?
Are the presidents of some former Soviet republics who seem to command 90% of the popular vote legitimately elected?
Will the planned elections in Iraq be regarded as legitimate internally as well as externally?
It is vital to remember that elections alone do not guarantee legitimacy, even if they are seen to be free and fair.
Americans find it hard to understand this, as do others in the lucky democracies of the Anglo-Saxon world.
For them, legitimacy simply means that voting and counting votes happens according to undisputed rules.
What is legal, they think, is also legitimate.
For many others in the world, however, at least two other questions remain.
First, turnout is crucial: who has voted and who has not.
The second question is whether there remains any systematic, potentially violent opposition to the outcome.
The point about George W. Bush’s first term was that despite grumblings and continued vocal opposition, the result of the election of 2000 was generally accepted.
Or consider Tony Blair’s “landslide victory” in 2001, when Labour won 40% of the vote with turnout of 60%.
In effect, 25% of the total electorate gave him nearly two-thirds of the seats in the House of Commons.
Did anyone doubt the legitimacy of the result?
Not in Britain, nor among Britain’s partners.
But there are not many countries where that would be true.
Most others would – at the very least – demand a coalition government to reflect the existing diversity of views.
Legitimacy by election is particularly problematic in countries with what might be called “endemic minorities.”
In Canada, for example, it would be risky to overlook the special interests of Quebec.
In Ukraine, the divergent interests of the country’s west and east have to be recognized if legitimacy is to be established.
In Iraq, a technical majority in a wholly legal election is almost meaningless if the position of Sunni Muslims and Kurds is not explicitly recognized.
The occupation powers are therefore right to be worried about an election in which massive abstention among Sunnis results in a large Shiite majority.
So legitimacy is more than legality.
It rests on what the people concerned believe to be real.
At the very least, there has to be an absence of violent opposition, including the threat of secession.
In Western countries, notably in the US, people tend to assume too much when it comes to bringing democracy – meaning elections in the first instance – to others.
In particular, we assume an essentially homogenous electorate, so that even a low turnout does not involve any disadvantage for particular ethnic or cultural groups.
We also assume an automatic acceptance of rules that in fact took a long time to become embedded even in the US.
Without legitimacy, there can be no stability in any political system, and without elections – that is, an explicit expression of popular consent to the holders of power – there can be no legitimacy.
But while free elections are a necessary condition of legitimacy, they are far from being sufficient to assure it.
Constitutional arrangements must guarantee all entrenched groups a place in the countries’ political institutions.
It is equally imperative to establish the rule of law, exercised by an independent and respected judiciary.
We should remember this as we pursue the elusive objective of democracy in Iraq, so that we are not surprised if the upcoming election fails to generate a legitimate government.
Lemon Banking
Munich – After the 1982 debt crisis, the Savings &amp; Loan crisis in the United States in the late 1980’s, and the Asian financial crisis of 1997, the sub-prime mortgage crisis is the fourth major banking crisis since World War II, and by far the biggest.
According to the IMF, the total loss in terms of balance sheet write-offs will be nearly $1 trillion worldwide, of which the lion’s share probably will be borne by US financial institutions.
Given that the combined equity capital stock of all US financial institutions is roughly $1.2 trillion dollars, this is a breathtaking sum.
Why do banking crises happen?
Are bank managers ignorant?
Why do they underwrite risks that drive their banks to the brink of bankruptcy?
The answer lies in a combination of a bad accounting system and various moral-hazard effects that were not contained by existing regulatory systems.
The bad accounting system is the International Financial Reporting Standards (IFRS), which is now used by big companies throughout the world.
The deficiency of IFRS is that it does not mitigate systemic contagion resulting from asset price movements.
When asset prices move, firms that own these assets are forced to revalue them on their balance sheets quarter by quarter.
The timely reporting of non-realized capital gains and losses makes the shares of the company that holds them volatile, sending shock waves through the financial system.
An alternative would be a precautionary accounting system, like the one that all German companies used before the transition to IFRS began.
In Germany’s traditional system, a company’s assets were evaluated according to the “lowest value principle”: the lower of an asset’s historical price and its current market price must be used for accounting purposes.
This allowed managers to pursue more long-term goals and proved effective in blocking contagion effects.
Indeed, it was a major reason for the German financial system’s stability.
In the current crisis, three moral-hazard effects are particularly important. First, management pay depends too much on short-term share-price performance, probably owing to the excessive influence of investment banks on commercial banks’ policies.
Given that investment banks can only attain high rates of return in a world with volatile asset prices and short-term performance goals, companies pressure their managers to follow suit.
Second, banks’ assumption of excessive investment risks reflects their expectation that governments will bail them out if necessary.
This was the case in the S&amp;L crisis, where the government explicitly served as a deposit insurer.
Banks could take on overly risky projects without scaring off investors because the government would step in as the lender of last resort.
In the sub-prime crisis, a similar phenomenon was implicitly at work, with banks speculating that they were too big for governments to let them fail.
The fact that the Bank of England bailed out Northern Rock and the US Federal Reserve saved Bear Stearns with $30 billion suggests that they were right.
The third, and probably most important, moral hazard results from asymmetric information between banks and their lenders.
Banks issue securities with attractive nominal interest rates but unknown repayment probability.
Often, securities are created that are backed by sophisticated portfolios containing good and bad assets whose true risk cannot easily be assessed.
In the current crisis, even the private rating agencies dramatically underestimated the risks involved, which helped lure international financial investors into purchasing mortgage-backed securities at exaggerated prices.
So nothing stopped the banks from selling “lemon” bonds.
Like used cars that break down right after they are sold, tomatoes and apples that look good but taste like water, or suits that quickly become threadbare, the seller could reduce the quality of the product and cut costs without the buyer’s knowledge.
As low-quality products sell at the same price as high-quality products, the latter disappear from the market.
In capital markets, the information asymmetry between buyers and sellers of securities is even more extreme, making it hugely tempting for banks to issue securities that increase their expected profits by reducing the repayment probability below what buyers expect.
To do so, they develop complicated legal claim structures that hardly anyone can fully understand and operate with too little equity capital to cover the risks.
This destroys the market for sound financial instruments, undermining the viability of the capitalist system.
To address this problem, stricter banking regulation is needed in order to increase the probability of repayment, and hence the quality of securities.
Financial products must be made transparent, off-balance sheet operations must be limited, and, above all, the scope of leveraged operations must be reduced by requiring higher equity-asset ratios.
Banks often oppose higher equity-asset ratios, because equity capital is more expensive than debt capital.
But this is precisely because of the lemon effect.
The IMF, the G7 or a joint US-European body could be the right forum for determining new rules for financial markets aimed at enhancing the efficiency and stability of the world economy.
By contrast, setting rules unilaterally would be a recipe for global disaster, because competition between governments to create advantages for their own banking sectors would merely reproduce the inadequate regulations that resulted in lemon banking in the first place.
Less Bang for America’s Stimulus Buck
MILAN – The run-up to the economic crisis in the United States was characterized by excessive leverage in financial institutions and the household sector, inflating an asset bubble that eventually collapsed and left balance sheets damaged to varying degrees.
The aftermath involves resetting asset values, deleveraging, and rehabilitating balance sheets – resulting in today’s higher saving rate, significant shortfall in domestic demand, and sharp uptick in unemployment.
So the most important question the US now faces is whether continued fiscal and monetary stimulus can, as some believe, help to right the economy.
To be sure, at the height of the crisis, the combined effect of fiscal stimulus and massive monetary easing had a big impact in preventing a credit freeze and limiting the downward spiral in asset prices and real economic activity.
But that period is over.
The reason is simple: the pre-crisis period of consuming capital gains that turned out to be at least partly ephemeral inevitably led to a post-crisis period of inhibited spending, diminished demand, and higher unemployment.
Counter-cyclical policy can moderate these negative effects, but it cannot undo the damage or accelerate the recovery beyond fairly strict limits.
As a result, the benefits associated with deficit-financed boosts to household income are now being diminished by the propensity to save and rebuild net worth.
On the business side, investment and employment follows demand once the inventory cycle has run its course.
Until demand returns, business will remain in a cost-cutting mode.
The bottom line is that deficit spending is now fighting a losing battle with an economy that is deleveraging and restructuring its balance sheets, its exports, and its microeconomic composition – in short, its future growth potential.
That restructuring will occur, deficit spending or no deficit spending.
So policy needs to acknowledge the fact that there are limits to how fast this restructuring can be accomplished.
Attempting to exceed these speed limits not only risks damaging the fiscal balance and the dollar’s stability and resilience, but also may leave the economy and government finances highly vulnerable to future shocks that outweigh the quite modest short-term benefits of accelerated investment and employment.
Demand will revive, but only slowly.
True, asset prices have recovered enough to help balance sheets, but probably not enough to help consumption.
The impact on consumption will largely have to wait until balance sheets, for both households and businesses, are more fully repaired.
Higher foreign demand from today’s trade-surplus countries (China, Germany, and Japan, among others) could help restore some of the missing demand.
But that involves structural change in those economies as well, and thus will take time.
Moreover, responding to expanded foreign demand will require structural changes in the US economy, which will also take time.
This is not to say that rebalancing global demand is unimportant.
Quite the contrary.
But achieving that goal has more to do with restoring the underpinnings of global growth over three to five years than it does with a short-term restoration of balance and employment in the advanced economies, especially the US.
Today, the best way to use deficits and government debt is to focus on distributional issues, particularly the unemployed, both actual and potential.
In an extended balance-sheet recession of this type, unemployment benefits need to be substantial and prolonged.
The argument that this would discourage the unemployed from seeking work has merit in normal times, but not now.
Today’s unemployment, after all, is structural, rather than the result of perverse incentives.
Benefits should be expanded and extended for a limited, discretionary period.
When structural barriers to employment have diminished, unemployment benefits should revert to their old norms.
Doing this would not only reduce the unequal burden now being carried by the unemployed; it would also help to sustain consumption, and perhaps reduce some precautionary savings among those who fear losing their jobs in the future.
Monetary policy is a more complex and difficult balancing act.
A more aggressive interest-rate policy would likely reduce asset prices (or at least slow the rate of appreciation), increase adjustable-rate debt-service burdens, and trigger additional balance-sheet distress and disorderly deleveraging, such as foreclosures.
All of this would slow the recovery, perhaps even causing it to stall.
But there are consequences to abjuring this approach as well.
Low-cost credit is unlikely to have a significant impact on consumption in the short run, but it can produce asset inflation and misallocations.
Much of the rest of the world would prefer a stronger dollar, fewer capital inflows with a carry-trade flavor, and less need to manage their own currencies’ appreciation to avoid adverse consequences for their economies’ competitiveness.
In short, the sort of monetary policy now being practiced for a fragile economy like the US will cause distortions in the global economy that require policy responses in many other countries.
From a political point of view, the crisis has been portrayed as a failure of financial regulation, with irresponsible lending fueling a rapid rise in systemic risk.
That leaves the rest of the real economy populated with people who feel like victims – albeit victims who, prior to the crisis, bought a lot of houses, vacations, TVs, and cars.
Unfortunately, that perception pushes the policy response in the direction of too much remedial action, even when the marginal returns are low.
What we most need now is support for the unemployed, stable government finances with a clearly communicated deficit-reduction plan, some truth-telling about medium-term growth prospects, and an orderly healing process in which balance sheets are restored mostly without government intervention.
Lessons from a Divided Island
CAMBRIDGE: Seven hundred miles off Florida’s coast lies one of the most impoverished places on earth.
Hispaniola was Christopher Columbus’s first stop in the New World.
Just a hour-and-a-half flight south of Miami, we might expect that island to be a tropical paradise and a favored spot for offshore US business.
But reality is more cruel.
Hispaniola is home to two nations.
Haiti, on the western side, is the poorest country in the Americas.
The Dominican Republic, to the east, is more successful, with six times Haiti’s average income.
It too, however, experienced political and economic horrors until a breakthrough in the past decade.
With President Jean-Bertrand Aristide returning to office in February, Haiti’s long cycle of poverty and violence could end, but only if Haiti and the US understand the lessons of Hispaniola’s tortured history.
Hispaniola’s impoverishment has colonial era roots.
Europeans colonized the Caribbean islands as sugar plantations, ruthlessly bringing African slaves by the millions to work, and die young, on those plantations.
Tropical forests were cut down to expand the plantations.
Hispaniola suffered the worst fate of deforestation, soil erosion, and collapse of agricultural productivity, especially on the Haitian side.
After slavery ended, the once beautiful island could barely sustain the former slave populations because the soils were exhausted by overuse and erosion.
Racism in America made conditions worse.
America refused to recognize Haiti as an independent country until the 1860s, nearly six decades after Haiti’s slave rebellion successfully ended French colonial rule.
Countries like Haiti and the Dominican Republic found themselves adrift, with uneducated populations barely surviving on subsistence agriculture.
Their long-term needs required massive investment in health and education, as well as a shift to new kinds of economic activity.
In the 20th century, profitable activities in the Caribbean included tourism, offshore banking, and labor-intensive manufacturing, especially of textiles and apparel and electronics.
But the Haitian and Dominican dictatorships that ruled through most of these decades were incapable of attracting these businesses.
The Dominican Republic, despite violence, dictatorship, and periodic invasions from the US, broke through recently to embark on a two-pronged development path: expanded health and education and a shift to profitable manufacturing and services activities.
As a result, the Dominican Republic became one of the world’s fastest growing economies in the 1990s, with booming investments in tourism and in labor-intensive manufactures.
In Haiti, however, misery deepened.
America supported a series of brutal dictators uninterested in economic development.
When the Duvalier dictatorship fell, America started promoting democratization in the mid-1980s, but violence ensued and the US imposed various economic sanctions.
These chased away even the tiny levels of foreign investment that had come to Haiti.
Jean Bertrand Aristide, a leader of Haiti’s poor, won election as President in 1990, only to be overturned by a military coup in 1991.
Three years later, Aristide was returned to power through the support of the US military, but America allowed him to serve less than two years, on the grounds that his election in 1991 was for a term originally scheduled to end in 1996.
After a five-year hiatus, he has won re-election as President.
Haiti’s situation is fraught with peril.
The few rich Haitians distrust Aristide.
Aristide distrusts the rich because of their support for the coup that ousted him, and because of their traditional intransigence against reform.
America’s political leadership is also divided. Despite Aristide’s undoubted popularity, he is viewed by many US conservatives with suspicion.
Centuries of violence and poverty could finally yield to social and economic progress if all of the key actors rise above their bitter fights.
President Aristide understands that his real fight is not with Haiti’s tiny rich community but against mass poverty.
This fight requires large investments to create jobs and well as financial aid from America and the UN to fight disease, illiteracy, and environmental ills.
Aristide should, and will, endorse this two-pronged strategy of business investment and human investments in health and education.
Haiti’s elite should not view Aristide as the enemy.
For Aristide’s mass popularity is not a threat to their wealth but an opportunity for reforms that can produce long-term economic development.
The US should understand that Haiti cannot overcome its intense poverty on its own.
Haiti requires urgent financial support to put children in schools, and to reduce diseases like tuberculosis and AIDS which now cripple and kill many.
As Haiti’s first popular leader in decades, perhaps in history, President Aristide is the best chance for addressing these ills in a peaceful, effective, and democratic manner.
Haiti is an extreme example of how a cycle of poverty, disease, and violence reproduces itself for generations.
The path of economic development is not hard to see, but to get on that path, impoverished countries often require the good will and support of powerful neighbors, and usually luck as well.
Haiti’s luck today is to have a popular and freely elected leader.
When countries with tortured histories get this modicum of good fortune, the rich and powerful should seize the chance to help them develop.
Lessons from America\u0027s Fiscal Recklessness
George W. Bush has done more to wreck US economic policy than any other President in American history, exceeding even his mentor, Ronald Reagan.
In just three years in office, he has destroyed a fragile political consensus that had taken a decade to construct, and that could take another decade to re-create.
In doing so, Bush has risked America's long-term economic health and social stability.
Because the long-term budgetary challenges that the US is so badly mismanaging are not unique, America's fiscal blunders provide important lessons for other countries.
The main problem with fiscal policy is that politicians can easily make themselves temporarily popular by cutting taxes and increasing public spending while running up massive public debts, leaving repayment to the future.
This trick can last a few years, but sooner rather than later budget deficits and growing public debt force a painful policy reversal.
Yet a cynical politician can buy himself re-election and perhaps be in retirement when the crisis arrives.
One would imagine that after hundreds of such episodes of fiscal irresponsibility around the world in recent decades, voters would be allergic to such tricks.
Yet Bush is doing it again, buying popularity today by doling out massive tax cuts while simultaneously increasing military spending and even raising expenditure on education and health.
The result is a budget deficit equivalent to more than 5% of GDP.
What's worse is that America's long-term budgetary prospects were already troubling before Bush began his reckless policies.
The US population is aging, so there will be a sharp increase in the costs of publicly funded health care and pension systems.
Careful calculations show that future revenues under the tax policies favored by Bush are likely to fall tens of trillions of dollars short of the costs of public pensions, health care, and other fiscal spending expected by the public.
At some point in the future, there will thus need to be steep increases in tax collections, sharp cuts in public spending, or both, to correct Bush's actions.
So why does the public support his policies?
Because the public has little understanding or concern about these long-term consequences, even though they will eventually hurt most Americans.
The richest taxpayers are, of course, happy because they received the bulk of the tax cuts.
Amazingly, the richest 5% of US taxpayers received almost half of the tax cuts, and these rich taxpayers clearly expect the other 95%--the middle class and the poor--to bear most of the future spending cuts and tax increases.
Meanwhile, Bush has convinced many poor and middle-class voters that they should be happy, too, without telling them that they will have to pay for their small tax cuts with much larger cuts in future government services if his administration's policies prevail in the long term.
If Americans had a political memory, they would understand that they already rode this fiscal "roller coaster" once in the past 20 years.
Ronald Reagan also came to office promising massive tax cuts and large increases in military spending.
The result was a huge budget deficit by the middle of the 1980's.
Tax cuts made Reagan enormously popular and helped win him re-election in 1984.
It then took over a decade--starting in Reagan's second term, and continuing through the terms of George Bush, Sr. and Bill Clinton--to get the budget back to surplus.
Of course, this meant approving fresh tax increases, which cost George Bush, Sr. his re-election and led to the polarized politics of the 1990's.
History will almost certainly repeat.
Some right-wing ideologues in the Bush administration believe that today's budget deficits will eventually force government social spending to be cut sharply.
They hope to dismantle programs such as Social Security and Medicare.
But the US public strongly supports these social programs.
So the right-wing strategy of cutting taxes first in order to force cuts in social programs later will fail, and eventually tax rates will have to rise.
Others in the Bush administration argue that tax cuts are important for pulling the US out of recession.
This argument is also mistaken.
America's economy could have recovered without the tax cuts, and perhaps even more robustly.
In any event, it is a huge mistake to base long-term tax policies on the short-run business cycle.
There are two vital lessons for other countries.
The first is that the looming US budget deficits will sooner or later limit America's international power.
Americans supported the Iraq war only because they didn't have to pay for it with increased taxes.
When Americans are forced to choose between foreign adventures and higher taxes, they will be much less likely to support expensive military operations abroad.
Indeed, the US will be deeply divided internally as the public grapples with the fiscal mess left by Bush.
The second lesson is that countries ought to plan their budgets taking into account the rising fiscal costs of an aging population.
Long-term budgetary conditions are rarely in clear view of taxpayers or the parliament.
Governments should be required to submit long-term budget assessments together with their annual budget proposals, in order to reduce the tendency towards short-run political manipulation of the budget.
The US can serve as an early warning to other countries.
The White House ought to provide others with the same caveat that magicians on television give their viewers: "Do not try this at home."
Complacency in a Leaderless World
DAVOS – The World Economic Forum’s annual meeting in Davos has lost some of its pre-crisis panache.
After all, before the meltdown in 2008, the captains of finance and industry could trumpet the virtues of globalization, technology, and financial liberalization, which supposedly heralded a new era of relentless growth.
The benefits would be shared by all, if only they would do “the right thing.”
Those days are gone.
But Davos remains a good place to get a sense of the global zeitgeist.
It goes without saying that developing and emerging-market countries no longer look at the advanced countries as they once did.
But a remark by one mining company executive from a developing country caught the spirit of change.
In response to one development expert’s heartfelt despair that unfair trade treaties and unfulfilled promises of aid have cost the developed countries their moral authority, he retorted: “The West never had any moral authority.”
If there is a single topic that concerned the assembled leaders the most, it is economic inequality.
The shift in the debate from just a year ago seems dramatic: no one even mentions the notion of trickle-down economics anymore, and few are willing to argue that there is a close congruence between social contributions and private rewards.
While the realization that America is not the land of opportunity that it has long claimed to be is as disconcerting to others as it is to Americans, inequality of opportunity at the global scale is even greater.
One cannot really claim that the world is “flat” when a typical African receives investment in his or her human capital of a few hundred dollars, while rich Americans get a gift from their parents and society in excess of a half-million dollars.
A high point of the meeting was the speech by Christine Lagarde, the International Monetary Fund’s managing director, who stressed the marked change in her institution, at least at the top: deep concern about women’s rights; renewed emphasis on the link between inequality and instability; and recognition that collective bargaining and minimum wages could play an important role in reducing inequality.
If only the IMF programs in Greece and elsewhere fully reflected these sentiments!
The Associated Press organized a sobering session on technology and unemployment: Can countries (particularly in the developed world) create new jobs – especially good jobs – in the face of modern technology that has replaced workers with robots and other machines in any task that can be routinized?
Overall, the private sector in Europe and America has been unable to create many good jobs since the beginning of the current century.
Even in China and other parts of the world with growing manufacturing sectors, productivity improvements – often related to job-killing automated processes – account for most of the growth in output.
Those suffering the most are the young, whose life prospects will be badly hurt by the extended periods of unemployment that they face today.
But most of those in Davos put aside these problems to celebrate the euro’s survival.
The dominant note was one of complacency – or even optimism.
The “Draghi put” –&#160;the notion that the European Central Bank, with its deep pockets, would and could do whatever necessary to save the euro and each of the crisis countries – seemed to have worked, at least for a while.
The temporary calm provided some support for those who claimed that what was required, above all, was a restoration of confidence. The hope was that Draghi’s promises would be a costless way of providing that confidence, because they would never have to be fulfilled.
Critics repeatedly pointed out that the fundamental contradictions had not been resolved, and that if the euro was to survive in the long run, there would have to be a fiscal and banking union, which would require morepolitical unification than most Europeans are willing to accept.
But much of what was said in and around the meetings reflected a deep lack of solidarity.
One very senior government official of a northern European country did not even put down his fork when interrupted by an earnest dinner companion who pointed out that many Spaniards now eat out of garbage cans.
They should have reformed earlier, he replied, as he continued to eat his steak.
IMF growth forecasts released during the Davos meeting highlight the extent to which the world has become decoupled: GDP growth in the advanced industrial countries is expected to be 1.4% this year, while developing countries continue to grow at a robust 5.5% annual rate.
While Western leaders talked about a new emphasis on growth and employment, they offered no concrete policies backing these aspirations.
In Europe, there was continued emphasis on austerity, with self-congratulations on the progress made so far, and a reaffirmation of resolve to continue along a course that has now plunged Europe as a whole into recession – and the United Kingdom into a triple-dip downturn.
Perhaps the most optimistic note came from the emerging markets: while the risk of globalization was that it implied a new interdependence, so that flawed economic policies in the US and Europe could torpedo developing countries’ economies, the more successful emerging markets have managed globalization well enough to sustain growth in the face of failures in the West.
With the US politically paralyzed by the Republicans’ infantile political tantrums, and Europe focused on ensuring the survival of the ill-conceived euro project, the lack of global leadership was a major complaint at Davos.
In the last 25 years, we have moved from a world dominated by two superpowers to one dominated by one, and now to a leaderless, multi-polar world.
While we may talk about the G-7, or G-8, or G-20, the more apt description is G-0.
We will have to learn how to live, and thrive, in this new world.
The Detroit Syndrome
SINGAPORE – When the city of Detroit filed for bankruptcy last week, it became the largest such filing in United States history.
Detroit’s population has dropped from 1.8 million in 1950, when it was America’s fifth-largest city, to less than 700,000 today.
Its industrial base lies shattered.
And yet we live in a world where cities have never had it so good.
More than half of the world’s population is urban, for the first time in history, and urban hubs generate an estimated 80% of global GDP.
These proportions will rise even higher as emerging-market countries urbanize rapidly.
So, what can the world learn from Detroit’s plight?
As recently as the 1990’s, many experts were suggesting that technology would make cities irrelevant.
It was believed that the Internet and mobile communications, then infant technologies, would make it unnecessary for people to live in crowded and expensive urban hubs.
Instead, cities like New York and London have experienced sharp increases in population since 1990, after decades of decline.
One factor that has helped cities is the nature of twenty-first century life.
Previously, life in developed countries was based on daily routines: people went to work in offices and factories, returned home to eat dinner with their families, watched their favorite television programs, went to sleep, and repeated the cycle when they awoke.
Such regular cycles no longer apply to most peoples’ lives.
In the course of a work day, people mix and match many activities – they may work at a desk, but they may also meet a friend for lunch, go to the gym, do chores, travel on business, shop online, and so on.
Similarly, time at home is no longer clearly demarcated, with people working online or participating in conference calls even as they manage their family life.
We have discovered that this multi-tasking life is best done in cities, which concentrate a multiplicity of hard amenities – airports, shops, schools, parks, and sports facilities – as well as soft amenities like clubs, bars, and restaurants.
Another factor is that cities have increased in importance as hubs for innovation and creativity.
Until the nineteenth century, innovation was carried out mostly by generalists and tinkerers, which meant that the accumulation of new knowledge was slow, but that its diffusion across different fields was rapid.
In the twentieth century, knowledge creation became the job of specialists, which accelerated knowledge creation but retarded inter-disciplinary application.
But recent studies have shown that this source of innovation is rapidly decelerating (the productivity of an American research worker may now be less than 15% of a similar researcher in 1950).
Instead, innovation is increasingly based on mixing and matching knowledge from different specializations.
Certain cities are ideally suited for this, because they concentrate different kinds of human capital and encourage random interactions between people with different knowledge and skills.
The problem with this post-industrial urban model is that it strongly favors generalist cities that can cluster different kinds of soft and hard amenities and human capital.
Indeed, the growth dynamic can be so strong for some successful cities that they can hollow out smaller rivals (for example, London vis-à-vis the cities of northern England).
Some specialist cities could also do well in this world.
But, as Detroit, with its long dependence on the automotive industry, demonstrates, cities that are dependent on a single industry or on a temporary location advantage may fare extremely poorly.
All of this has important implications for emerging economies.
As it transformed itself into the “factory of the world,” the share of China’s urban population jumped from 26.4% in 1990 to around 53% today.
The big, cosmopolitan cities of Beijing and Shanghai have grown dramatically, but the bulk of the urban migration has been to cookie-cutter small and medium-size industrial towns that have mushroomed over the last decade.
By clustering industrial infrastructure and using the hukou system of city-specific residency permits, the authorities have been able to control the process surprisingly well.
This process of urban growth, however, is about to unravel.
As China shifts its economic model away from heavy infrastructure investment and bulk manufacturing, many of these small industrial cities will lose their core industry.
This will happen at a time when the country’s skewed demographics causes the workforce to shrink and the flow of migration from rural areas to cities to slow (the rural population now disproportionately comprises the elderly).
Meanwhile, the post-industrial attractions of cities like Shanghai and Beijing will attract the more talented and better-educated children of today’s industrial workers.
Unlike rural migrants heading for industrial jobs, it will be much more difficult to guide educated and creative professionals using the hukou system.
The boom in the successful cities, therefore, will hollow out human capital from less attractive industrial hubs, which will then fall into a vicious cycle of decay and falling productivity.
Stories like Detroit’s have played out several times in developed countries during the last half-century.
And, as the fate of Mexico’s northern towns suggests, emerging economies are not immune from this process.
That is why China needs to prepare for this moment.
Rather than building ever more cookie-cutter industrial towns, China needs to refit and upgrade its existing cities.
As its population begins to shrink, it may even be worthwhile to shut down unviable cities and consolidate.
Detroit’s fate should serve as a warning, not only for China, but for the next generation of urbanizing countries (for example, India) as well.
Lessons from Japan\u0027s Economic Malaise
Japan's economy has been in a state of malaise--slow growth alternating with recession--for over a decade, with intense debate meeting policy vacillation.
Some, for instance, prescribe budget deficits to stimulate the economy; others, remembering the Clinton Administration's claim that fiscal consolidation underpinned the US recovery in 1993, argue for deficit reduction.
Similarly, some argue that the country needs a mild dose of inflation, while Japan's central bank continues to resist the very idea that inflation could ameliorate any economic problem.
Confusion about what cure to prescribe is caused in part by the fact that different medicines are suited for different problems, whereas much of the policy debate fails to distinguish among them adequately.
As one of President Clinton's economic advisers during the critical period of America's economic recovery, I feel obligated to point out that circumstances in the US in the early 1990's were unique.
Normally, deficit reduction in an economic downturn makes a downturn worse--just as the British economist John Maynard Keynes demonstrated 70 years ago.
Indeed, thanks to the IMF, we have had ample opportunity to see what happens, both in East Asia and Latin America, when an economy in a downturn tries to balance its budget.
The reason deficit reduction worked in the US in 1993 was that America's banks, whose balance sheets were weak, had large holdings of long-term bonds, the value of which increased as long-term interest rates fell.
The fall in interest rates, which spurred business investment, was in part due to the long-term deficit reduction strategy.
Today, Japan faces a problem of deflation, not inflation.
During the Great Depression, the great American economist Irving Fisher focused on the adverse effects of falling prices.
My own work, with Bruce Greenwald of Columbia University, updates these theories, taking into account the imperfections of capital markets, especially those associated with asymmetries of information.
Keynes worried about price rigidities--the failure of prices and wages to fall when there is excess supply of labor or goods.
Keynes' colleague at Cambridge University, A.C. Pigou, voiced the standard theory of the time: if wages and prices fell sufficiently, then consumers with money would eventually feel well enough off (given how cheap everything had become) that they would start to spend, rejuvenating the economy.
Keynes famously retorted that in the long run we are all dead.
Fisher's criticism, however, was even more devastating--and more relevant to Japan's current circumstances: as prices fall, debtors, whose obligations are fixed in nominal terms (that is, in terms of yen) find it increasingly difficult to repay what they owe.
In real terms, they are forced to pay back more and more to their creditors.
Some debtors default--the debtor problems then become the banks' problem--while others are forced to cut back their expenditures, deepening the downturn.
Falling prices also mean that even when the nominal interest rate is very low, the real interest rate, taking into account the deflation, may be significantly higher, so investment, too, is discouraged.
In short, falling prices worsen the economy's situation in the short run.
How can Japan's deflation be reversed?
Assume that the Japanese government financed its deficit partly by printing money rather than borrowing.
Some individuals and firms who receive this money might simply hold on to the newly minted yen, but others might choose to spend it on goods and services, thereby stimulating the economy.
Similarly, higher deposits might simply add to some banks' excess liquidity, but others might find it attractive to lend more, providing a further economic boost.
A carefully paced program could add enough to aggregate demand to pick up the slack in the economy, and reverse deflation, setting into motion a virtuous cycle.
Higher prices would make debtors better off, and they might as a result begin to spend more.
More debtors would be able to repay their loans, which might lead the banks to lend more.
Meanwhile, the yen would weaken, helping exports, and even if the real exchange rate did not change much, given Japan's position as a major creditor, the yen value of its foreign holdings would increase, providing still more economic stimulus.
Of course, those infected with inflation paranoia might worry: won't such a policy simply lead to an inflationary spiral?
There is no economic research that supports such worries.
For countries with low to moderate inflation, moderate increases in inflation do not lead to runaway inflation, regardless of what central bankers may say on the matter.
To be sure, if Japan's government started printing money recklessly--as some countries have done in the past--such worries would be well grounded.
But the Japanese government has shown a remarkable record of fiscal responsibility, and could even calibrate the fraction of the deficit financed by issuing money.
What would be the impact on confidence in the Japanese economy of such fiscal stimulus?
There is nothing that undermines confidence in an economy so much as recessions; and there is nothing that undermines confidence in a government's ability to manage the economy so much as ongoing failure to address either the extremes of inflation or persistent stagnation.
Restoring growth would be good for Japan, good for Asia, and good for the world economy.
Perhaps more importantly, the lessons gleaned from a policy of determined stimulus would be invaluable for other countries facing similar problems.
Lessons from the Black Tsunami
The world has been horrified at America’s response to Hurricane Katrina and its aftermath in New Orleans.
Four years after the terrorist attacks of September 2001, and with billions of dollars allegedly spent on “preparedness” for another emergency, America has shown the world that it was not prepared – even for an event that came with ample warning.
The difference between the Tsunami in Asia last December and what is coming to be called the Black Tsunami in America – because it brought so much devastation to the poor, mostly black, people of Louisiana – is striking.
The Asian disaster showed the ability of those affected to overcome long-standing rifts, as Aceh rebels put down their arms in common cause with the rest of Indonesia.
By contrast, the disaster in New Orleans – and elsewhere along America’s Gulf Coast – exposed and aggravated such rifts.
The Bush administration’s response to the hurricane confirmed the suspicion among blacks that, while they might send their boys to fight America’s wars, they had not only been left behind in America’s prosperity, but that there was neither understanding nor concern when they needed it most.
An evacuation was ordered, but no means to do so were provided for the poor.
When help came, it was, as one New York Times columnist noted, like the Titanic: the rich and powerful got out first.
I was in Thailand right after the Tsunami, and I saw that country’s impressive response.
The Thais flew consular and embassy officials to the affected areas, aware of the sense of helplessness among those stranded far from home.
America kept foreign officials from coming to the aid of their nationals in New Orleans – embarrassed, perhaps, at what they would see.
Even the richest country in the world has limited resources.
If it gives tax cuts to the rich, it will have less to spend on repairing levees; if it deploys the National Guard and reserves to fight a hopeless war in Iraq, there will be fewer resources at home to cope with a domestic crisis.
Choices must be made, and choices matter.
Shortsighted politicians like Bush often skimp on long-term investments in favor of short-term advantage.
He recently signed a lavish infrastructure bill that included, among other payoffs to political supporters, an infamous bridge to nowhere in Alaska.
Money that could have been used to save thousands of lives was spent to win votes.
Seldom do the “chickens come home to roost” as quickly as they have in recent years – an ill-conceived war, attempted on the cheap, has not brought peace to the Middle East.
Now America has had to pay the price for ignoring loud warnings about the weakened levees of New Orleans.
Clearly, nothing could have spared New Orleans completely from Katrina’s impact, but the devastation could certainly have been lessened.
Markets, for all their virtues, often do not work well in a crisis.
Indeed, the market mechanism is often revolting to behold in emergencies.
The market did not respond to the need for evacuation by sending in huge convoys of buses to get people out; in some places, it did respond by tripling hotel prices in neighboring areas, which, while reflecting the marked change in supply and demand, is reviled as price gouging.
Such behavior is so odious because it brings little allocative benefit – no significant increase in supply in the short run – and carries a huge distributive cost, as those with resources take advantage of those without.
The Nobel Prize-winning economist Amartya Sen has emphasized that most famines are associated not with a shortage of food, but the failure to get food to the people who need it, largely because they lack purchasing power.
America, the richest country in the world, clearly had the resources to evacuate New Orleans.
Bush simply forgot the poor – the tens, perhaps hundreds of thousands, who simply did not have the resources to pay for their own evacuation.
When you’re poor, you don’t have a credit card, and most of the stranded were especially strapped for funds because it was the end of the month.
But even if they had had the money, it is not obvious that markets would have responded quickly enough to provide the needed supply; in times of crisis, they often simply don’t.
That’s one of the reasons why the military does not use a price system to allocate resources.
Last January, after the tsunami, in response to widespread calls for an early warning system, I observed that the world had been given an early warning on global warming.
The rest of the world has begun to take heed, but Bush, having ignored warnings about Al Qaeda’s plans prior to September 11, 2001, and having not only ignored the warnings about New Orleans levees, but actually gutted funding to shore them, has not led America to do likewise.
Scientists increasingly believe that global warming will be accompanied by larger climatic disturbances.
Recent evidence is at least consistent with that hypothesis.
Perhaps Bush had hoped that the consequences of global warming would be felt long after he left office – and would be felt more by poor, low-lying, tropical countries like Bangladesh than by a rich country astride the temperate zones.
Yet there is perhaps a silver lining in the clouds over New Orleans.
Perhaps America, and especially Bush, will be persuaded to join the rest of the world in the fight against poverty and to protect our planet’s environment.
In facing and planning for disasters, whether natural or man-made, we must do more than hope and pray for the best.
Lessons from the Boom
Lessons from the Kaczyńskis\u0027 Poland
The defeat of the Kaczyński twins’ Law and Justice Party (PiS) in Poland brought sighs of relief across Europe.
But, as Donald Tusk’s new government assumes office it is important to learn the lessons that their defeat holds for all of us.
Many governments waste good economic times by postponing the reforms needed to build a prosperous future.
The PiS-led government, elected in 2005, inherited a fast-growing economy, but did nothing to strengthen that legacy.
Instead, privatization was blocked, while fiscal reforms and deregulation remained paper proposals.
Indeed, the Kaczyński government embarked on a program of anti-reform.
The separation of powers (an independent judiciary and central bank) was undermined in favor of a “strong” state.
The PiS captured the public media, the general prosecutor’s office was politicized, and, with the use of the media, was turned into a tool of party propaganda aimed at showing that Poland was ruled by malicious hidden forces, known as the układ , which cheated Poles and kept them poor.
Anyone who disagreed with this diagnosis or criticized the PiS’s methods, particularly those used by its leader, Jarosław Kaczyński, was promptly classified as belonging to the układ .
No one was spared. Indeed, Lech Wałęsa and Władysław Bartoszewski, the Polish Mandela, were ruthlessly attacked.
Contrary to popular cliché, PiS’s victory in 2005 did not result from “reform fatigue,” since there were not many reforms implemented in 2000-2005 (except for an ambitious but partially blocked attempt at fiscal consolidation).
This explanation seems dubious elsewhere, too.
In Slovakia, the reformist leader Mikuláš Dzurinda won the 1998 elections after having implemented a tough stabilization program, and he could have continued to govern after the 2006 elections if not for disagreements in his coalition.
In the Czech Republic, a reformist government was elected in 2006, and in Hungary, political divisions rather than reform fatigue dominates electoral campaigns.
Of course, it is not easy for reformers to win elections.
On the contrary, reforms usually are undertaken only when the signs of an impending crisis are so strong that it is increasingly difficult to ignore them, or after the crisis has already “educated” voters.
(However, if the crisis follows reforms, populist politicians may win by blaming the reforms, instead of their incomplete nature, as in Argentina.)
Reformers can win elections if they are better at public communication than the populists.
Bad policies are, more often than not, easier to sell than good ones.
In Poland in 2005, the issue was mainly corruption.
The PiS jumped on the anticorruption bandwagon and strengthened its appeal by linking the fight against corruption to the vision of hidden forces supposedly perverting Polish society and democracy.
If not for that, the results of the 2005 elections would most likely have been quite different.
To criticize anticorruption campaigns is risky, because words can be twisted to imply indifference.
Therefore, let me first present my anticorruption credentials: as Deputy Prime Minister in 1999 I was the first Polish politician to ask the World Bank to prepare a report on corruption in Poland and ways to eradicate it.
In my public life, I emphasized eliminating discretionary regulations – the main source of both inefficiency and corruption.
But we should not be blind to what can happen when political demagogues hijack the anticorruption card.
Interestingly, all the available measures of actual corruption were already declining before the Kaczyński twins were elected.
For example, the index of the frequency of paying bribes, calculated by the World Bank and EBRD, was 2.7 in 1999 and 2.03 in 2005 (the value of 1 is the minimum).
The corruption tax (the percentage of sales paid in bribes) declined from 1.22% in 2002 to 0.7% in 2005.
Poland now has a huge gap between the levels of perceived and actual corruption.
On perception, it fares much worse than Slovakia, the Czech Republic, Hungary, and Greece, while it fares better – or at least not worse – on indicators of actual corruption.
For example, the percentage of respondents admitting to paying bribes in 2006 was 5% in Poland and 17% in the Czech Republic and Greece.
The index of the frequency of paying bribes in 2005 was 2.03 in Poland, 2.22 in Slovakia, 2.09 in the Czech Republic, and 2.37 in Greece.
The corruption tax in 2005 was 0.7% in Poland, 0.93% in Slovakia, and 0.63% in Hungary.
Of course, Poles should not settle for today’s levels of corruption.
Instead, the battle with corruption should aim at removing its root causes: the scope of the discretionary public sector and the suppression of market forces.
This is the only path that promises both less corruption and more economic growth.
Combating corruption through increased punitive action, while leaving intact a bloated and discretionary public sector, will only paralyze public officials, delay important decisions, and play into the hands of cynical demagogues and political fanatics.
Lessons From the North
Fewer debates over economics would be needed if the world spent more time examining what actually works and what does not.
Almost everywhere, debate has raged about how to combine market forces and social security.
The left calls for an expansion of social protection; the right says that doing so would undermine economic growth and widen fiscal deficits.
But the debate can be moved forward by examining the successful economies of Denmark, Finland, Iceland, the Netherlands, Norway, and Sweden.
While no regional experience is directly transferable, the Nordic countries have successfully combined social welfare with high income levels, solid economic growth, and macroeconomic stability.
They have also achieved high standards of governance.
To be sure, there are also differences among the Nordic states, with social welfare spending the highest in Denmark, the Netherlands, Norway, and Sweden, and a bit lower in Finland and Iceland.
Nevertheless, whereas the taxes at the national level in the United States are equal to around 20% of GNP, in the Nordic countries the ratio is more than 30%.
High taxation supports comprehensive national health care, education, pensions, and other social services, resulting in low levels of poverty and a relatively narrow income gap between the richest and poorest households.
In the US, the poorest 20% of households receive just 5% of total income, putting their income at around one-fourth of the national average.
In the Nordic countries, by contrast, the poorest 20% of households receive nearly 10% of total income, putting them at roughly one-half of the national average.
American conservatives argue that a large public sector is subject to inefficiency and mismanagement, corruption, and bureaucratic abuse, while the taxation needed to support it blunts economic efficiency.
But each of these propositions is refuted by the Nordic experience.
Consider the claims of inefficiency and waste.
As a result of government-funded national health insurance, the Nordic countries have a higher life expectancy and a lower infant mortality rate than the US.
Life expectancy is close to 80 years in the Nordic countries, compared to 78 years in the US, where the government does not guarantee national health insurance and millions of families are too poor to pay for it on their own.
Ironically, the heavy reliance on the private sector in the US system is so inefficient that Americans pay a larger share of GNP for health (14%) than do the Nordic countries (11%), but get less.
Similarly, although social welfare spending is lower in the US than in the Nordic countries, its budget deficit as a share of national income is much larger.
The US spends less in the public sector, but it taxes even less than it spends.
Nor has high taxation in the Nordic countries impeded economic performance.
Rather than relying mainly on income taxation, as in the US, the Nordic countries rely on value-added taxation, which provides a relatively high amount of revenue with relatively low rates of evasion and few distortions to the economy.
The Nordic experience also belies conservatives’ claim that a large social welfare state weakens incentives to work and save.
National saving in the Nordic countries averages more than 20% of national income, compared to around 10% in the US.
Moreover, economic growth in the Nordic countries has been similar to that in the US in recent years.
Income levels are higher on average in the US, but mainly because the Nordic countries work fewer hours per week.
In any case, all of the Nordic countries have very high incomes, and Norway’s per capita income actually exceeds the US.
Several factors appear to explain the Nordic countries’ economic success.
Taxation is broad-based and relatively non-distorting, while open international trade, market forces, and private ownership of industry are relied on to maintain incentives.
The Nordic countries are not “socialist” economies, based on state ownership and planning, but “social welfare” economies, based on private ownership and markets, with public provision of social protection.
Importantly, they invest heavily in higher education and in science and technology, so they remain at the cutting edge of high-technology industries.
Half a century ago, the free-market economist Friedrich von Hayek argued that a large public sector would threaten democracy itself, putting European countries on a “road to serfdom.”
Yet the Nordic states have thrived, not suffered, from a large social welfare state, with much less public-sector corruption and far higher levels of voter participation than in the US.
According to Transparency International, the Nordic countries have the world’s least corrupt political systems (with Iceland and Finland ranking as the least corrupt), while the US, with its big money politics, is fairly far down on the list.
But how replicable are the Nordic successes?
These countries have small populations, easy access to international trade, natural resources, and peaceful neighbors.
Most notably, they are ethnically homogeneous, so that social divisions are more amenable to compromise.
However, this means that the challenge of maintaining a strong social welfare state in ethnically and racially diverse societies such as the US is not economic, but one of promoting respect and inclusiveness.
Lessons from the Tsunami
There are many lessons that emerge from the tsunami that brought such devastation and loss of life to Asia.
It demonstrated the power of globalization, as television brought vivid pictures of the destruction to homes around the world.
Indeed, it is at times like this that the world truly does seem like a global village.
Of course, it seemed to take somewhat longer for news of the extent of the disaster to reach the Crawford, Texas, ranch of President Bush.
But, in the end, he decided to interrupt his vacation and offer amounts of aid that were successively revised upwards, in a global competition which promised to benefit those who were desperate for help.
America’s aid still appeared niggardly when compared with the amounts offered by countries with a fraction of America’s economic wealth.
Lightly populated Australia offered more than twice America’s assistance, Japan promised almost 50% more, and Europe pledged more than five times as much.
This led many observers to reflect on the fact that the world’s richest country was in general the most miserly in foreign assistance – all the more so in comparison to the amount it spends on war and defense.
The disaster was international, so it was appropriate that the United Nations take the lead in coordinating the relief effort.
Unfortunately, in an effort that was widely seen as another attempt to undermine multilateralism, the US tried to lead a “core group” driving the assistance program, ignoring ongoing efforts within the region and at the UN.
Whatever America’s motive, it later wisely decided to join the UN effort.
The Bush administration’s face-saving rhetoric that it had rushed to push together the core group in the absence of other efforts was quietly let to pass.
The response of some countries within the region was truly impressive, showing how far they had come in establishing efficient and effective governments.
Myriad details were addressed: Thailand flew ambassadors to the affected part of the country to help attend to the needs of their citizens, helped those who lost their money and passports return home, provided health care for the injured, set up systems to identify bodies, and dealt with the difficulties posed by shortages of body bags and the lack of cold storage facilities.
Countries, like Thailand, that felt that they could handle the finances on their own asked that assistance be directed to others.
They did ask one thing: a reduction of tariff barriers and greater access to markets abroad.
They didn’t want a handout, only a chance to earn income.
The response, at least at the time of this column’s writing, has mostly been deafening silence.
On the other hand, the G-7 made a truly important contribution in offering debt relief.
This is especially important for Indonesia, which must service a debt of $132 billion (of which $70 billion is owed to public creditors or guaranteed by government agencies).
Even without the tsunami, this debt burden would have been an enormous hindrance to the country’s development as it finally recovers from the aftermath of the 1997 financial crisis.
Indeed, there is a compelling case to be made for Indonesian debt relief in any case, given that much of the debt was incurred in loans to the corrupt Suharto government.
Lenders knew, or should have known, that not all of the money was going to help Indonesian development.
Moreover, some of the debt was incurred as part of the 1997-1998 crisis, which was aggravated and deepened by IMF-imposed policies.
No one pretends that we can prevent or alter the forces of nature.
Rather, we have to learn to cope with them.
There are now calls for improved tsunami early warning systems.
But in one area, global warming, we have already received an early warning.
Most countries have recognized this, coming together in Rio and Kyoto to do something about it—not enough, but the Kyoto protocol was intended only as a start.
Sadly, global warming will likely destroy some of the same countries ravaged by the tsunami.
Low lying islands like the Maldives will become submerged.
We are, however, still not a global village.
After first disputing that there was scientific evidence of the problem, the largest polluter in the world, the US, is now simply refusing to do anything about it (other than preaching voluntary restraint—of which there is little evidence, at least in America).
The international community has yet to figure out what to do with an aberrant member who fails to live up to its responsibilities as a global citizen.
Optimists say that technology will solve the problem.
Realists observe that in the long race between the environment and technology, it appears that technology has so far been losing.
Nature, as we have learned from the tsunami, has its own timetable.
Unless we learn how to respect it, we will all miss the boat.
Two Policy Prescriptions for the Global Crisis
WASHINGTON, DC – One thing that experts know, and that non-experts do not, is that they know less than non-experts think they do.
This much was evident at the just-completed Spring Meetings of the International Monetary Fund and the World Bank Group – three intense days of talks that brought together finance ministers, central bankers, and other policymakers.
Our economic expertise is limited in fundamental ways.
Consider monetary and fiscal policies.
Despite decades of careful data collection and mathematical and statistical research, on many large questions we have little more than rules of thumb.
For example, we know that we should lower interest rates and inject liquidity to fight stagnation, and that we should raise policy rates and banks’ cash-reserve ratios to stifle inflation. Sometimes we rely on our judgment in combining interest-rate action with open-market operations.
But the fact remains that our understanding of these policies’ mechanics is rudimentary.
These rules of thumb work (at least tolerably so) as a result of evolution.
Over time, the wrong moves are penalized, and their users either learn by watching others or disappear.
We get our monetary and fiscal policies right the same way that birds build their nests right.
As with all behaviors shaped by evolution, when the environment changes, there is a risk that existing adaptations become dysfunctional.
This has been the fate of some of our standard macroeconomic policies.
The formation of the eurozone and a half-century of relentless globalization have altered the global economic landscape, rendering once-proven policies ineffective.
When Sweden’s Riksbank was founded in 1668, followed by the Bank of England in 1694, the motivation was that a single economy should have a single central bank.
Over the next three centuries, as the benefits of instituting a monopoly over money creation became more widely recognized, a slew of central banks were established, one for each politically bounded economy.
What was not anticipated was that globalization would erode these boundaries.
As a result, we have returned to a past from which we tried to escape – a single economy, in this case the world, with multiple money-creating authorities.
This is clearly maladaptive, and it explains why the massive injections of liquidity by advanced-country central banks are failing to jump-start economies and create more jobs.
After all, in a globalized economy, much of this liquidity spills across political boundaries, giving rise to inflationary pressures in distant lands and precipitating the risk of currency wars, while unemployment at home remains dangerously high, threatening to erode workers’ skills.
The long-run damage could be devastating.
What was evident at the World Bank/IMF Spring Meetings was that virtually all policymakers are distressed and no one has a complete answer.
Neither do I. But here are two simple ideas that could help to mitigate the crisis.
First, in the absence of a single global central-banking authority, a modicum of monetary-policy coordination among major economies is required.
We need a group of the major economies – call it “G Major” – that announces monetary policies in a coordinated fashion.
To see why, consider the case of Japan.
Japanese policymakers have good reason to try to promote some inflation and even correct some of the yen’s secular appreciation over the last six or seven years.
But, in today’s unilateral world, other central banks would soon respond by injecting liquidity, prompting the Bank of Japan to act again.
These actions are usually justified as policies for boosting domestic demand, but they end up fueling a surrogate, low-grade currency war.
If, however, the G Major economies issued quarterly announcements of significant upcoming policy changes – for example, a small round of quantitative easing by country X, a larger liquidity injection by countries Y and Z, and so on – markets would be reassured that a currency war was not being fought.
Exchange-rate movements would be minimal and only as intended, and volatility would be contained, because tit-for-tat injections would no longer occur and speculation would wane.
Moreover, liquidity injections would be likely to have a greater impact on demand, because synchronization would reduce leakage across national boundaries.
The second recommendation pertains to the mechanics of liquidity injection, much of which takes place nowadays – in Europe, Japan, and elsewhere – through asset purchases.
The US Federal Reserve, for example, is currently purchasing assets (many of them mortgage-backed) worth $85 billion each month.
Liquidity injections and low interest rates have a microeconomic effect that has received little attention: they lower the cost of capital vis-à-vis the cost of labor, which causes a relative decline in demand for labor.
This is very likely exacerbating the unemployment problem; it certainly is not mitigating it.
One solution is to channel part of the liquidity injections toward countering this factor-cost asymmetry.
Thus, for every $100 of new liquidity, we could use $60 to purchase assets and the remainder to give firms a marginal job-creation subsidy, which could be especially effective in economies with flexible labor markets that enable short-term hiring.
Even if the employment subsidy were offered only for, say, one year, firms would be tempted to use more labor during this time.
And, because the current bout of high unemployment is self-reinforcing, once the equilibrium is broken for a while, the economy could move to a higher-employment equilibrium permanently, without the need for any further government support.
This prescription has one problem.
Asset purchases have no balance-sheet effect, because assets replace money.
Subsidizing labor, by contrast, is a pure injection of liquidity.
However, for precisely that reason, an employment subsidy is likely to be more effective in boosting demand, which implies that a smaller injection of this kind is likely to boost demand as much as a larger asset purchase would.
Among the few certainties in crafting economic policy is the need to adapt to external change.
Our challenge is like that of Industrial Revolution-era moths, which adapted to their new soot-laden environment by becoming darker (and thus better able to hide from predators).
In a globalized economy, national policymakers should not be left circling light bulbs.
A Better Way to Fight Climate Change
NEW YORK – Of all major world regions, Europe has worked the hardest to implement policies aimed at countering human-caused climate change.
Yet the cornerstone of Europe’s approach – a continent-wide emissions trading system for the greenhouse gases that cause climate change – is in trouble.
That experience suggests a better strategy for both Europe and the rest of the world.
The basic story of human-caused climate change is becoming clearer to the global public.
Several gases, including carbon dioxide, methane, and nitrous oxide, warm the planet as their concentrations in the atmosphere increase.
As the world economy grows, so do emissions of these gases, accelerating the pace of human-caused climate change.
The main greenhouse gas is carbon dioxide.
Most CO2 emissions result from the burning of fossil fuels – coal, oil, and natural gas – for energy, global consumption of which is rising as the world economy grows.
As a result, we are on a path to very dangerous levels of CO2 in the atmosphere.
Twenty years ago, the world agreed to reduce sharply emissions of CO2 and other greenhouse gases, but little progress has been made.
Instead, the rapid growth of the emerging economies, especially coal-burning China, has caused global CO2 emissions to soar.
Dangerous changes in climate have already begun.
If the world continues on its current trajectory, global temperatures will eventually rise by several degrees centigrade, causing higher sea levels, mega-storms, severe heat waves, massive crop failures, extreme droughts, heavy flooding, and a sharp loss of biodiversity.
Yet changing the world’s energy system is a daunting challenge, because fossil fuels are so deeply embedded in the workings of the global economy.
Oil provides the main fuel for transportation worldwide.
Coal and gas are burned in huge and growing amounts to produce electricity and to provide energy for industry.
How, then, can we sustain worldwide economic progress while cutting back sharply on carbon emissions?
There are essentially two solutions, but neither has been deployed on a large scale.
The first is to shift massively from fossil fuels to renewable energy sources, especially wind power and solar power.
Some countries will also continue to use nuclear power.
(Hydroelectric power generation emits no CO2, but there are only a few remaining places in the world where it can be expanded without major environmental or social costs.)
The second solution is to capture CO2 emissions for storage underground.
But this technology, called carbon capture and sequestration (CCS), is not yet proven on a large scale.
One approach is to capture the CO2 at the power plant as the coal or gas is burned.
Another is to capture it directly from the air using specially designed chemical processes.
Either way, CCS will require significant investment in further research and development before it becomes a viable technology.
The big problem is time.
If we had a century to change the world’s energy system, we could feel reasonably secure.
Yet we must complete most of the transformation to low-carbon energy by mid-century.
This is extraordinarily difficult given the long transition period needed to overhaul the world’s energy infrastructure, including not only power plants, transmission lines, and transport systems, but also homes and commercial buildings.
Few economic regions have made much progress in this transformation.
In fact, the United States is now investing heavily in natural gas without recognizing or caring that its shale-gas boom, based on new hydraulic-fracturing technology, is likely to make matters worse.
Even if the US economy shifts from coal to natural gas, America’s coal will probably be exported for use elsewhere in the world.
In any event, natural gas, though somewhat less carbon-intensive than coal, is a fossil fuel; burning it will cause unacceptable climate damage.
Only Europe has tried to make a serious shift away from carbon emissions, creating a system that requires each industrial emitter to obtain a permit for each ton of CO2 emissions.
Because these permits trade at a market price, companies have an incentive to reduce their emissions, thereby requiring them to buy fewer permits or enabling them to sell excess permits for a profit.
The problem is that the permits’ market price has plummeted in the midst of Europe’s economic slowdown.
Permits that used to sell for more than $30 per ton before the crisis now trade for under $10.
At this low price, companies have little incentive to cut back on their CO2 emissions – and little faith that a market-based incentive will return.
As a result, much of European industry continues on a business-as-usual energy path, even as Europe tries to lead the world in this transformation.
But there is a much better strategy than tradable permits.
Each region of the world should introduce a tax on CO2 emissions that starts low today and increases gradually and predictably in the future.
Part of the tax revenue should be channeled into subsidies for new low-carbon energy sources like wind and solar, and to cover the costs of developing CCS.
These subsidies could start fairly high and decline gradually over time, as the tax on CO2 emissions rises and the costs of new energy technologies fall with more experience and innovation.
With a long-term and predictable carbon tax and subsidy system, the world would move systematically toward low-carbon energy, greater energy efficiency, and CCS.
Time is short.
The need for all major world regions to adopt practical and far-sighted energy policies is more urgent than ever.
Lessons of the Lebanon War
Wars are won not only on battlefields, but also in people’s minds.
So, while Hezbollah has not decisively won its current war with Israel, by maintaining its ability to fight in the face of the might of the Israeli army, it has captured the imagination of Arabs, restoring lost pride in the same way as the Egyptian Army’s crossing of the Suez Canal in the war of 1973 did.
Restored pride was central to Anwar Sadat’s eventual decision to go to Jerusalem and regain the entire Sinai Peninsula for Egypt.
Although ordinary Lebanese have paid a huge human, economic, and infrastructural price, Hezbollah has made it clear to the Israelis that they can no longer take their military predominance for granted.
The limits of military power have been exposed.
Moreover, the madness of war has been clearly demonstrated to all, and, once the current fighting is over, both sides are now more likely to be cautious about actions that might push their peoples and countries into war once more.
How this war is concluded will likely change the ways in which both Israel and the international community deal with the fundamental national aspirations of Arab peoples.
Holding Arab land and prisoners indefinitely will no longer be an asset but a terrible burden.
Conventional thinking in the Middle East has largely been built on Israel’s overwhelming military strength, together with the disunity and lack of purpose of Arab leaders.
But, in less than two months, the almost mythic power of the region’s most powerful army has been dented, and Hassan Nasrallah, Hezbollah’s leader, has come across as a steadfast and determined leader, in sharp contrast to the usual behavior of heads of Arab government.
The question now is whether this determination can bring about the type of surprising breakthrough to peace that Sadat’s newfound prestige in 1973 yielded.
Ironically instead of weakening Lebanon, one clear winner of this war is the unity and independent will of Lebanon.
Whether or not the war in Lebanon has helped or hurt the Palestinians is unclear.
Because most media attention has shifted to Lebanon, the Israelis have had a free hand to continue pressing the Palestinians without international protest.
Palestinians continue to be killed on a daily basis not only in Gaza but also in Nablus, in the West Bank.
More than 170 Palestinians have died since the violence began in June.
Yet the connection between the two wars has not gone unnoticed.
In the United States, President George W. Bush and Secretary of State Condoleezza Rice see the problems as linked, as does British Prime Minister Tony Blair.
Indeed, the crises in Lebanon and Gaza have brought about a realization that two festering issues – Arab prisoners in Israel, and Israeli unilateralism – must be resolved if there is to be any hope of a return to the peace process.
Given that both conflicts were triggered by the kidnapping of Israeli soldiers to be traded for Arab prisoners, Israel must now realize that holding Arabs indefinitely in prison can only beget violence.
Israel’s National Security Advisor, Giora Eiland, appears to have recognized this even before the violence began.
In May, he is said to have advised Israeli Prime Minister Yehud Olmert that Israel should hand over the disputed Sheba Farms area on the border with Lebanon and Syria, as well as returning Lebanese prisoners.
Olmert reportedly did not see the need.
But holding 300 Lebanese and nearly 10,000 Palestinians – all of the first group and many of the second group without charge or trial – has proven to be a major source of irritation to the Arab peoples of the region.
One group of prisoners that will likely benefit from the current situation are Jordanians held in Israeli jails.
Jordan, a US ally and one of the two Arab countries with a peace agreement with Israel, previously failed to secure the release of its 30 prisoners.
They are now likely to be the first ones set free.
Important as they are, however, the prisoners are not the crux of the matter.
The real issue is the unilateralism that has been adopted by the major parties that have ruled Israel.
Both the uncoordinated withdrawals from south Lebanon (by the Labor party after 22 years of occupation) and from Gaza (by Likud after 39 years of occupation) proved that you can’t simply evacuate an area and forget about it.
The population left behind must have secure governments and institutions in place.
On the most basic level, for example, the people of south Lebanon needed maps of where Israel had laid mines, but these were never provided.
The unilateralism that Israelis overwhelmingly voted for in their recent election is based on the idea that security can somehow be achieved by erecting physical walls and barriers.
The barrage of Hezbollah and Hamas rockets has shown the folly of such thinking.
And, although the West Bank has not been used to launch rockets against Israel, there is no reason why the Palestinians who reside there will not resort to such weapons if walls continue to be built deep inside their territories and Israel continues to act with arrogance towards them.
Soldiers are the first to recognize that military power is of limited value in achieving long-term peace.
It is past time that political leaders on both sides, especially moderate ones, also come to understand this.
They need to work together through negotiations to solve problems that simply cannot and should not be solved by brute force.
Let A Thousand Growth Models Bloom
Over recent decades a simplistic view about the fundamentals that govern the theory and practice of development has taken root.
Stated nakedly, this view holds that growth requires two things: foreign technology and good institutions.
Failure to grow can be attributed to either (or both) of two pathologies.
Call one the "protection" pathology, in which governments stymie progress by reducing access to foreign investment and technology.
The other pathology is "corruption," where political leaders fail to respect property rights and the rule of law.
The natural remedies for these pathologies are claimed to be economic openness and improved governance.
Reforms focused on governance and openness thus became the cornerstones of development strategy in virtually every country during the last fifteen years.
Experience presents an awkward fit (at best) with this conception.
Consider Latin America, where there has been greater enthusiasm for the so-called "Washington Consensus" on growth than in any other corner of the world.
By the standards of the consensus view, policymaking in Latin America was better in the 1990s than ever before, nonetheless few countries in the region grew faster than in the period before 1980.
Or consider more successful countries.
Some of the most important - South Korea and Taiwan since the early 1960s, China since the late 1970s, India since the early 1980s - have done extremely well under heterodox arrangements.
All emphasized exports; none grossly violated property rights.
Their strategies bear only passing similarity to today's consensus.
South Korea and Taiwan retained high levels of protection for a long time, and made active use of industrial policies.
China's reforms are marked by partial liberalization, two-track pricing, limited deregulation, financial restraint, an unorthodox legal regime, and the absence of clear private property rights.
India barely reformed its cumbersome trade and industrial regime before its economy took off in the 1980s.
These and other success stories share one thing: they are instances of growth strategies that combine orthodoxy with local heresies - unconventional institutional innovations that relax constraints on growth at least cost to the social and political fabric.
Of course, heterodoxy does not always produce payoffs.
Most countries with protected economies and lax protection of property rights languish.
But the fact that some of the world's most successful economies prospered while doing things that are not in the rule-book is something that cannot be dismissed easily.
To grasp the conventional view's deficiencies, begin with the problem of technology adoption.
Learning what a country is (or can be) good at producing is a key challenge.
Neither economic nor management theory is of much help in helping entrepreneurs (or the state) choose appropriate investments among the range of modern-sector activities.
Yet making the right investment decisions is essential to growth, because they determine the pattern of specialization.
Today's intellectual property regime protects innovators in advanced countries by issuing temporary monopolies, i.e., patents.
But the investor in the developing country who figures out that an existing good can be produced profitably at home and sets up a model for others to emulate does not normally get such protection, even though the social returns can be high.
Laissez-faire is not the optimal solution here, just as it is not in the case of research and development of new products.
Desirable government policy consists of a carrots and stick: encouraging investment and entrepreneurship in the modern sector ex ante, but, equally important, rationalizing production and driving out poor performers ex post.
Institutional arrangements also have large elements of specificity.
Discovering which institutions are suitable to local conditions requires experimentation.
Reforms that succeed in one setting may do poorly or fail in other settings.
Two-track reform worked well in Deng's China but not in Gorbachev's Soviet Union.
Import-substitution fostered competitive industries in Brazil, but not in Argentina.
Gradualism may be appropriate to India, not Chile.
Specificity helps explain why successful countries -China, South Korea, Taiwan, and Chile among others - usually combine unorthodox elements with orthodox policies.
It may also account for why important institutional differences persist among advanced countries in areas such as the public sector's role, the nature of legal systems, corporate governance, financial markets, labor markets, and social insurance mechanisms.
It is not that economic principles work differently in different places, or need to be tailored to local conditions.
An important distinction between economic principles and their institutional embodiment is that most key economic principles are institution-free.
Incentives, competition, hard-budget constraints, sound money, fiscal sustainability, property rights are central to the ways in which economists think about policy and its reform.
But these principles do not demand specific institutional solutions.
Property rights can be implemented through common law, civil law, or, for that matter, Chinese-style socialism.
Competition can be maintained by a combination of free entry and laissez-faire, or by a well-functioning regulatory authority.
Macroeconomic stability can be achieved under a variety of fiscal institutions.
Because policymakers operate in second-best environments, optimal reform trajectories - even in apparently straightforward cases such as price reform - cannot be designed without due regard to prevailing conditions and without weighing the consequences for multiple distorted margins.
Neither technology nor good institutions can be acquired without significant domestic adaptations.
Those adaptations require a pro-active role for the state and civil society, and collaborative strategies that foster entrepreneurship and institution building.
What the world needs right now is less consensus and more experimentation in the service of such strategies.
Let Developing Nations Rule
CAMBRIDGE – There is a silver lining for developing nations in the present crisis, for they will emerge with a much bigger say in the institutions that govern economic globalization.
Once the dust settles, China, India, Brazil, South Korea, and a handful of other “emerging” nations will be able to exercise greater influence over the way that multilateral economic institutions are run, and will be in a better position to push for reforms that reflect their interests.
There are two related reasons for this.
First, the financial crisis has weakened the United States and Europe.
They will be unwilling or unable to provide the kind of leadership that sustained multilateralism in the decades that followed World War II.
Developing nations will have to step up to fill the gap.
Second, the relative weight and importance of developing nations in the global economy will have risen even more.
Many of the West’s leading financial institutions – those that have not been nationalized – as well some important industrial enterprises, will remain at the mercy of capital from China or the Gulf states.
In trade, the current round of global negotiations has demonstrated that if rich nations want developing nations to cooperate, they will need to let them shape the rules of the game.
To make the best of this outcome, developing nations will have to have a good sense of their interests and priorities.
So, what should they seek?
First, they should push for new rules that make financial crises less likely and their consequences less severe.
Left to their own devices, global financial markets provide too much credit at too cheap a price in good times, and too little credit in bad times.
The only effective response is counter-cyclical capital-account management: discouraging foreign borrowing during economic upswings and preventing capital flight during downswings.
So, instead of frowning on capital controls and pushing for financial openness, the International Monetary Fund should be in the business of actively helping countries implement such policies.
It should also enlarge its emergency credit lines to act more as a lender of last resort to developing nations hit by financial whiplash.
The crisis is an opportunity to achieve greater transparency on all fronts, including banking practices in rich countries that facilitate tax evasion in developing nations.
Wealthy citizens in the developing world evade more than $100 billion worth of taxes in their home countries each year, thanks to bank accounts in Zurich, Miami, London, and elsewhere. Developing countries’ governments should request and be given information about their nationals’ accounts.
Developing nations should also push for a Tobin tax – a tax on global foreign currency transactions.
Set at a low enough level – say, 0.25% – such a tax would have little adverse effect on the global economy while raising considerable revenue.
At worst, the efficiency costs would be minor; at best, the tax would discourage excessive short-term speculation.
The revenues collected – easily hundreds of billions of dollars annually – could be spent on global public goods such as development assistance, vaccines for tropical diseases, and the greening of technologies in use in the developing world.
The administrative difficulties in implementing a Tobin tax are not insurmountable, as long as all major advanced countries go along.
It would then be possible to get offshore financial centers to cooperate by threatening to isolate them.
Developing nations also need to enshrine the notion of “policy space” in the World Trade Organization.
The goal would be to ensure that developing countries can employ the kind of trade and industrial policies needed to restructure and diversify their economies and set the stage for economic growth.
All countries that have successfully globalized have used such policies, many of which (e.g., subsidies, domestic-content rules, reverse engineering of patented products) are currently not allowed under WTO rules.
Policy space is also required to ensure that important social and political ends – such as food security – are compatible with international trade rules.
Developing nations should argue that recognizing these economic and political realities makes the global trade regime not weaker and more susceptible to protectionism, but healthier and more sustainable.
But with increased power comes increased responsibility.
Developing nations will need to be more understanding and responsive to legitimate concerns in rich countries, and be more willing to pay for some global public goods.
Capital-exporting developing nations should be willing to accept greater transparency in the operation of sovereign wealth funds and pledge not to use them for political purposes.
The largest developing nations – China, India, and Russia – will need to shoulder some of the burden of reducing greenhouse-gas emissions.
Similarly, developing nations must understand that policy space is a two-way street.
In countries like the US, where the middle class has reaped few of the benefits of globalization in the last quarter-century, trade policy will be under severe pressure to provide some redress.
President-elect Barack Obama made the plight of the middle class a central plank of his successful campaign.
His chief economic adviser, Larry Summers, has also been vocal of late on globalization’s adverse impact on workers.
It will not do much for good for developing countries to raise the specter of protectionism each time such concerns are voiced. Political and economic reality demands a more nuanced and cooperative approach.
Developing countries should say no to obvious trade protectionism, but they should be willing to negotiate to avoid regulatory races to the bottom in such areas as labor standards or corporate taxation.
This is in their long-term self-interest.
Without support from the middle classes of rich nations, it will be difficult to maintain a global trade regime as open as the one we have had in recent years.
Let Finance Skeptics Take Over
CAMBRIDGE – The race is on to fill the most important economic policy position in the world.
United States Federal Reserve Chairman Ben Bernanke’s term ends in January, and President Barack Obama must decide before then: either re-appoint Bernanke or go with someone else – the names most often mentioned are Larry Summers and Janet Yellen – with more solid Democratic credentials.
It is a decision of momentous consequence not just for the US, but also for the world economy.
As guardians of the nation’s money supply and setters of short-term interest rates, central bankers have always played a critical role.
Lower the interest rate too much, and inflation and monetary instability result.
Raise it too much, and the economy slides into recession and unemployment.
Monetary policy is hardly a science, so a good central banker must be humble.
He must appreciate the limits of his understanding and of the efficacy of the tools at his disposal.
Yet he cannot afford to be perceived as indecisive, which would only invite destabilizing financial speculation.
Indeed, as important as their functions are, in recent decades central banks have become even more significant as a consequence of the development of financial markets.
Even when not formally designated as such, central banks have become the guardians of financial-market sanity.
The dangers of failing at this task have been made painfully clear in the sub-prime mortgage debacle.
Under Obama’s proposed new rules, the Fed will have even larger responsibilities, and will be charged with averting financial crises and ensuring that banks are not taking on too much risk.
This is a job at which former Fed Chairman Alan Greenspan proved to be a spectacular failure.
His blind spot on financial-market excesses – the little “flaw” in his thinking, as he later termed – left him oblivious to the dangers of Wall Street titans’ financial innovations.
As a member of the Fed’s Board of Governors under Greenspan during 2002-2005, Bernanke can also be faulted for having played along.
The Fed chairman exerts global influence not only through monetary policy, but also through his words.
He sets the tone for policy discussions and helps shape the belief system within which policymakers around the world operate.
What hampered Greenspan and Bernanke as financial regulators was that they were excessively in awe of Wall Street and what it does.
They operated under the assumption that what is good for Wall Street is good for Main Street.
This will no doubt change as a result of the crisis, even if Bernanke remains at the helm.
But what the world needs is a Fed chairman who is instinctively skeptical of financial markets and their social value.
Here are some of the lies that the finance industry tells itself and others, and which any new Fed chairman will need to resist.
Prices set by financial markets are the right ones for allocating capital and other resources to their most productive uses .
That is what textbooks and financiers tell you, but we have now many reasons to be wary.
In the language of economists, there are far too many “market failures” in finance for these prices to be a good guide for resource allocation.
There are “agency problems” that drive a wedge between the interests of the owners of capital and the interests of bank CEOs and other finance executives.
Asymmetric information between sellers and buyers of financial products can easily leave buyers vulnerable to abuse, as we saw with mortgage-backed securities.
Implicit or explicit bail-out guarantees, moreover, induce too much risk-taking.
Large financial intermediaries endanger the entire financial system when they use the wrong risk model and make bad decisions.
Regulation is at best a partial remedy for such problems.
So the prices that financial markets generate are as likely to send the wrong signals as they are to send the right ones.
Financial markets discipline governments.
This is one of the most commonly stated benefits of financial markets, yet the claim is patently false.
When markets are in a euphoric state, they are in no position to exert discipline on any borrower, let alone a government with a reasonable credit rating.
If in doubt, ask scores of emerging-market governments that had no difficulty borrowing in international markets, typically in the run-up to an eventual payments crisis.
In many of these cases – Turkey during the 1990’s is a good example – financial markets enabled irresponsible governments to embark on unsustainable borrowing sprees.
When “market discipline” comes, it is usually too late, too severe, and applied indiscriminately.
The spread of financial markets is an unmitigated good.
Well, no.
Financial globalization was supposed to have enabled poor, undercapitalized countries to gain access to the savings of rich countries.
It was supposed to have promoted risk-sharing globally.
In fact, neither expectation was fulfilled.
In the years before the financial crash, capital moved from poor countries to rich countries, rather than vice versa.
(This may not have been a bad thing, since it turns out that large (net) borrowers in international markets tend to grow less rapidly than others.)
And economic volatility has actually increased in emerging markets under financial globalization, owing in part to frequent financial crises spawned by mobile capital.
Financial innovation is a great engine of productivity growth and economic well-being . Again, no.
Imagine that we had asked five years ago for examples of really useful kinds of financial innovation.
We would have heard about a long-list of mortgage-related instruments, which supposedly made financing available to home buyers who would not have been able to purchase homes otherwise.
We now know where that led us.
The truth lies closer to Paul Volcker’s view that for most people the automated teller machine (ATM) has brought bigger benefits than any financially-engineered bond.
The world economy has been run for too long by finance enthusiasts.
It is time that finance skeptics began to take over.
Let History Judge Russia’s Revolutions
A plethora of anniversaries is arriving in Russia.
This month marks the 90th anniversary of the October Revolution of 1917 and the 25th anniversary of the death of Leonid Brezhnev.
Next month will see the 15th anniversary of the Soviet Union’s disintegration.
Only by understanding that first event, however, can we understand the others.
The October Revolution has always had many critics.
The Russian philosopher Ivan Shmelev named it “the great beating of Russia.”
Vasily Rozanov called it “The Massacre of Russia.”
Countless authors view it as a tragedy that broke the flow of history and destroyed Russia’s best people.
But the October Revolution also has its apologists, for whom it marked the beginning of a new era in history, a breakthrough to freedom from a world of slavery and oppression, a salvation for Russia and Europe, and a source of hope for Asia and Africa.
According to this view, there was no conspiracy, but a great social revolution that, by virtue of a powerful internal logic, brought to power workers, peasants, and the Bolshevik party, which represented their will.
For the majority of Russians who grew up in the Soviet system, there is truth in both views, but no place for ultra-radical criticism of the October Revolution and other aspects of socialist life in the 20th century USSR.
The revolution is not only history for many people; it is also a part of life and consciousness.
Of course, this does not excuse those who refuse to listen to reasoned analysis about our country’s past, but Russians will not accept glib rants.
Studying the Russian Revolution is almost as old as the revolution itself, and has yielded a massive amount of research both at home and abroad.
But, even today, we are still far from understanding many important factors, connections, motives, reasons, and consequences in what happened in 1917 and during the first years of Soviet power.
Few events in history have generated so many concepts and theories for their explanation and assessment – or so many falsifications, both crude and sophisticated.
Both the Bolsheviks and their opponents were involved in these falsifications, concealing, distorting, and concocting facts and circumstances, whether they referred to the real role of Stalin or Trotsky in the revolution or to the behavior of peasants and Cossacks.
Thousands of names fell out of the history, people’s deeds were “passed” to others, and the nature, motives, and activities of parties, groups, national movements, and classes were distorted.
The revolution and its leaders were idolized, and falsified reputations and biographies were created.
The real course of events was simplified and “straightened,” with each stage of the revolution made into the natural continuation of the previous one.
Nobody talked about the revolution leaders’ mistakes, doubts, hesitations, and ignorance.
The most important archives were inaccessible, and some documents were destroyed.
The situation started to change in 1988-1991, when the history of the USSR and the Russian revolutions moved to the center of public attention.
The collapse of the USSR and the Communist Party opened new horizons – and almost all archives – for historians.
Masses of documents and other sources related to the beginnings of Soviet power became accessible for survey and analysis.
Today, no matter what people say of Vladimir Putin’s administration, we are free from political and strict ideological censorship.
Although today’s new political reality in Russia is creating its own new myths and falsifications, this has not extended to historians’ work.
So the impartial history of the Russian Revolution that has not been written may yet be.
Putin rarely talks about the problems of Russia’s twentieth-century history, once replying to a direct question about his attitude toward the events of 1917 by saying that he considered it to be “the country’s natural reaction to defeat in the First World War.”
When he visited the Russian cemetery near Paris – where many central figures of the “White movement” and Russian emigrants are buried – Putin placed wreaths on the graves of Ivan Bunin, a Russian poet, and Vika Obolenskaya, a hero of the French resistance.
Putin also stopped near the common gravestone of generals and officers of the “White” armies. “We are children of the same mother – Russia,” said Putin, “and it’s time for us all to unite.”
The remains of Andrey Denikin, a “white” general, have recently been moved to Moscow, and the remains of Vladimir Karpel, another “White” general, to Irkutsk.
A monument to Admiral Alexander Kolchak, who led the White effort to overthrow the Bolsheviks, has been erected in Irkutsk, and a monument to Nicholas II has been built in Moscow.
Indeed, the Orthodox Church has consecrated Nicholas II a saint.
These are steps toward the unification of a state and nation, and not attempts to gain revenge or break up Russia.
Today, good conditions exist for calm and unbiased examination of Russia’s past, from the Revolution of 1917 to the days of stagnation under Brezhnev.
It is a moment that historians must seize.
Let’s Get Real About Money
Throughout the world, people suffer from a serious perception error that has inhibited them from taking concrete steps to protect themselves from inflation or deflation.
The error is called the “money illusion ” – the belief that a nominal unit of currency is the best measure of value, even though its real value is unstable.
Historically, failure to protect against inflation or deflation has helped spur calamitous outcomes.
When spectacular inflation hit Germany in 1923, it wiped out the real value of the (unhedged and unindexed) life savings and social-security benefits of millions of people, whose anger contributed to the rise of Nazism.
Similarly, spectacular deflation in many countries around the world in the early 1930’s magnified the real value of (unhedged and unindexed) debts, leading to millions of defaults and widespread bank failures.
Deflation also magnified the real value of wages and salaries, thereby fueling layoffs and unemployment.
Failure to hedge or index brought us the Great Depression.
Much of Japan’s economic malaise in recent years also reflects (unhedged and unindexed) debts magnified by deflation since 1999.
In 2003, an IMF study raised the specter of Japan-like problems around the world, and listed thirteen countries, including, China, Germany, Singapore, and Poland, with a moderate to high risk of deflation.
Yet, in the face of overwhelming evidence of the importance of inflation or deflation risk, most people – even in countries that have been warned – generally still have not taken steps to protect themselves.
Given widespread apathy about changes in consumer prices, the modest success of a new market to hedge inflation risk, the European inflation futures market at the Chicago Mercantile Exchange (CME), is noteworthy.
Since September, this new market has traded the Eurozone’s Harmonized Index of Consumer Prices, or HICP – a contract that traders call the “hiccup.”
By purchasing or selling it, companies and individuals can protect themselves against losses stemming from changes in the value of their currency.
The open interest recently was 355 contracts, with a notional value of €355 million.
This is a real beginning, and we should encourage such contracts to grow in order to help billions of people hedge their inflation and deflation risks.
But this promising start follows a long trail of failures to create inflation futures, owing to the public’s lack of interest.
This failure can be explained only by the money illusion, which ultimately is connected with what psychologists call “framing.”
How a concept is framed, the context and associations with which it is presented, affect human judgments enormously.
A tax called a “death tax” is regarded very differently from a tax called an “inheritance tax,” even though the two are really identical.
The money illusion occurs because we are accustomed to economic values almost always being framed in terms of money.
For years, I have been arguing that national governments should take some simple steps to reframe economic quantities and help the public overcome the money illusion.
They could merely create an indexed unit of account to replace currency for measuring economic quantities and defining prices.
The unit would be nothing more than a consumer price index, given a simple name, and published daily, so that people could use this unit and its name to quote prices in real terms.
This would help reframe public thinking, which is all a government really needs to do.
It would be easy and virtually costless.
Indexed units of account are not a new idea;
Chile’s government led the way in 1967 by creating the Unidad de Fomento (UF), and other Latin American countries have followed suit.
Despite the unit’s technical-sounding name, people in Chile seem to have learned to think in terms of the UF instead of the peso for important contracts.
Following Chile’s example, governments also could redefine the tax system in terms of the units of account rather than currency.
That way, people who fill out tax forms would have to learn the units of account.
As a side benefit, the tax system would be automatically, fully, and transparently indexed to inflation.
In my 2003 book The New Financial Order, I proposed that such units be called “baskets,” since a consumer price index is the price of a representative market basket of goods and services.
That name is very simple, and it conveys a new conceptual framing: by promising to pay someone so many baskets at a future date, one is promising to pay in market baskets of goods and services.
Of course, the actual payment will be made in ordinary currency at the contemporaneous exchange rate, based on the consumer price index, between baskets and the currency.
What if people really got used to expressing quantities in baskets?
Wouldn’t futures contracts sound completely different if they were reframed as contracts for ”baskets” instead of “hiccups?”
A futures market for the complete market basket that consumers buy certainly rings with importance.
Ultimately, the advance of information technology will be the salvation of ideas like the CME’s inflation futures market and indexed units of account.
Inflation futures appear to be gaining hold in part because the new contract is traded on an efficient electronic market (the Globex system) that allows futures contracts to get going without the initial splash that is required by open-outcry pit-based futures markets.
Indeed, this is also why an American exchange can make a market for European inflation; with new information technology, it no longer matters where people live.
This should help popularize indexed units of account, too, since computer technology can now handle all the calculations involved in translating them into currency.
The sooner this happens, the sooner one more scourge of financial instability will be behind us.
Letter from Palestine
Are Israelis and Palestinians really ready to strike a peace agreement?
Events have certainly moved at a brisk pace in recent months, with one obstacle after another to a lasting deal seeming to come down.
Yasir Arafat’s death was followed by the choice of his successor in a direct election with universal suffrage, which was accompanied by Israel’s decision – one unique in the world – to help, not hinder the democratic process in territories it occupies.
As a result, no one doubts Palestinian President Mahmoud Abbas’s legitimacy.
Moreover, with Israeli Prime Minister Ariel Sharon’s announcement of his intention to withdraw Israel’s army unilaterally from Gaza, the occupation itself is once again an open question, offering opportunities for further progress.
Indeed, Egyptian President Hosni Mubarak’s support for the Gaza withdrawal has helped open the door to real negotiations.
Such an impressive sequence of events has not been seen for a long time in that troubled region.
As a result, many – in and outside the Middle East – have become optimistic again.
Even Sharon ventures a few favorable comments, and American diplomats express visible sighs of relief that progress toward peace can at last be made.
I can attest to the gathering momentum towards peace, having just returned from Palestine, where I led a nearly five-week mission of European Union observers, the largest ever put in place by the EU.
The mission was 260-strong on the day of the election and the counting of the vote, while 40 of us had been there for the whole five-week period.
My testimony about the election is categorical: the circumstances were difficult, but the voting was unconstrained and without cheating.
Given the conditions, the 60% voter turnout was astonishing.
There can be no doubt that Abbas was democratically elected.
Nor is there any doubt that the Palestinian people made a choice for democracy, which entails a choice for a negotiated peace with Israel.
But this leaves out the terrorists, who have not made this choice.
They are not numerous, but they are very dangerous.
Only genuine progress towards a just peace settlement will neutralize them as a political force.
There is no question that current conditions present a unique window of opportunity.
But we must keep in mind the major difficulties that can limit our ability to seize this opportunity, and the international community must make these difficulties very clear to both parties.
The first difficulty is that, although Sharon evidently intends to go through with his military withdrawal from Gaza, he is vague about what he wants to achieve in future negotiations.
Indeed, he has never made the slightest allusion to the idea of including the West Bank and Jerusalem in such negotiations.
But, for the Palestinians, there can be no negotiations that do not include both issues.
The second difficulty concerns the fact that Sharon has always appeared to believe that it is within the means of the Palestinian Authority to eradicate all terrorism arising from Palestinian territories and aimed at Israel.
However, all external observers know very well that this is not the case, even if Abbas can undoubtedly succeed in reducing the level and number of attacks.
In order for the Palestinian people as a whole to cease to glorify, support, and shelter terrorists, they need to discover real hope for a new life for themselves.
That, in turn, depends on an economic recovery in the occupied territories and a belief that concrete steps toward a negotiated political solution are being taken.
The creation of such hope now depends exclusively on Israel, which must act immediately to boost the many Palestinians who yearn for peace, rather than insisting on a total disappearance of terrorism.
Delay will only retard terrorism’s disappearance.
The third difficulty concerns the fact that, on both sides, most religious authorities, rabbis and imams alike, have maintained a hard-line stance.
They continue to preach that the respective “taboos” of their communities, the very issues that block all efforts to make peace – in particular, the status of Jerusalem and the right of “return” to Israel for Palestinian refugees – are untouchable and non-negotiable.
To make these religious authorities acknowledge their responsibility is a duty that all of international civil society, including religious leaders, must embrace.
None of this is undoable. All of it will be demanding.
But a chance to achieve real, lasting peace between Israelis and Palestinians has clearly arrived.
We must all seize this moment.
Let the Doha Round Fail
Imagine that the world’s trade ministers simply walk away from their forthcoming Hong Kong meeting of the World Trade Organization (WTO) with this simple declaration: “We failed to reach an agreement; we’ll try to do better next time.”
This would bring the so-called Doha “Development” Round to an unsuccessful conclusion, but it would be no disaster.
Talk to World Bank and WTO officials, and you will get an earful of inflated claims about the benefits that a successful Doha round would bring.
These officials often make it sound as if the livelihood of hundreds of millions of poor people in developing nations hangs in the balance.
Look closer at these claims, and you find that they are built on sand.
The World Bank’s most recent estimate is that complete trade liberalization (including in manufactures and by developing nations themselves) would produce a net gain to the developing world of half a percentage point of their income.
But that hasn’t stopped the Bank doing its best to hide this meager impact behind impressive-sounding claims.
The fact is that the world economy is more open today than it has ever been, and will remain so even if the Doha talks collapse.
Most developing nations have opened themselves significantly to foreign trade and no longer employ the most damaging policies of the past (such as quantitative restrictions on imports).
The political balance in these countries has tilted decisively in favor of pro-trade groups with an outward-looking orientation.
In the advanced countries, trade barriers for manufactured goods and many services are at a historic low.
It would be hard to identify any poor country whose development prospects are seriously blocked by restrictions on market access abroad.
Any country with a sensible development strategy has the opportunity to make its economy grow, with assistance from trade.
But what about agriculture?
Don’t the farm subsidies and other forms of support in the United States and European Union undercut the livelihood of millions of poor farmers?
Wouldn’t phasing them out make a big dent in world poverty?
The reality is that the global impact of agricultural liberalization in rich countries would be relatively small and highly uneven.
These policies may hurt agricultural producers elsewhere, but they also benefit poor urban consumers.
The balance depends on the poverty profile of individual countries and on whether they are food exporters or importers.
Of course, there would be some big gainers from agricultural reform, but they are chiefly consumers and taxpayers in rich countries.
Some large middle-income food exporters (such as Brazil and Argentina) would also reap gains.
Such outcomes are not unimportant, but they represent a far cry from the picture painted by free-trade fundamentalists.
Indeed the only serious risk from the Doha round’s “failure” is that rich countries would take their own rhetoric seriously and react in unproductive ways that prove self-fulfilling.
The US, in particular, could intensify its pursuit of bilateral deals, by which it is able to impose increasingly inappropriate policy priorities on smaller nations.
The silver lining in an amicable break-up of the trade talks is that it would give negotiators a chance to focus on issues that are of much greater significance to developing nations.
The next time around, trade talks should take up the two most glaring omissions to date:
A comprehensive effort to enhance the mobility of temporary workers from poor countries to rich countries.
This is where the gains from liberalization would be the largest, because it is here that the barriers are the highest. Creation of a “policy space” for developing countries in WTO agreements.
Developing nations’ pursuit of growth-promoting trade and industrial policies are increasingly running afoul of restrictive WTO rules.
Growth superstars such as South Korea, Taiwan, China, and many others would not have been able to adopt the growth strategies that they did if today’s WTO strictures had applied to them.
Trade officials must acknowledge the lessons from these countries’ experience and reform the rules accordingly. There remains a possibility that trade negotiators will patch together a last-minute deal in Hong Kong and emerge claiming victory.
We will then end up with an agreement that will have been wildly oversold and is certain to lead to disappointment in the future – especially in developing nations.
We will also have given up the opportunity to have a real development round next time around.
Sometimes there is no success like failure.
The Doha round is a case in point.
Let the Good Times Roll Again?
CAMBRIDGE – Goldman Sachs announced this month plans to provide bonuses at record levels, and there are widespread expectations that bonuses and pay in many other firms will rise substantially this year.
Should the good times start rolling again so soon?
Not without reform.
Indeed, one key lesson of the financial crisis is that an overhaul of executive compensation must be high on the policy agenda.
Indeed, pay arrangements were a major contributing factor to the excessive risk-taking by financial institutions that helped bring about the financial crisis.
By rewarding executives for risky behavior, and by insulating them from some of the adverse consequences of that behavior, pay arrangements for financial-sector bosses produced perverse incentives, encouraging them to gamble.
One major factor that induced excessive risk-taking is that firms’ standard pay arrangements reward executives for short-term gains, even when those gains are subsequently reversed.
Although the financial sector lost more than half of its stock-market value during the last five years, executives were still able to cash out, prior to the stock market implosion, large amounts of equity compensation and bonus compensation.
Such pay structures gave executives excessive incentives to seek short-term gains – say, by making lending and investment decisions that would improve short-term earnings – even when doing so would increase the risks of an implosion later on.
Jesse Fried and I warned about this short-term distortion five years ago, in our book Pay without Performance .
Following the crisis, this problem has become widely recognized, including by business leaders such as Goldman Sachs’ CEO Lloyd Blankfein.
But it still needs to be effectively addressed: Goldman’s recent decision to provide record bonuses as a reward for performance in the last two quarters, for example, is a step in the wrong direction.
To avoid rewards for short-term performance and focus on long-term results, pay structures need to be re-designed.
As far as equity-based compensation is concerned, executives should not be allowed to cash out options and shares given to them for a period of, say, five years after the time of “vesting” – that is, the point at which the options and shares have been “earned“ and may not be taken away from the executive.
An executive’s inability to cash out shares and options for a substantial period would tie his or her payoff to long-term shareholder value.
The length of this period should be fixed, and should not depend on actions or conditions that are at least partly under executives’ control.
By contrast, prohibiting executives from cashing out shares and options until they leave the firm would provide executives who have accumulated shares and options with a large monetary value with counter-productive incentives to depart.
Similarly, bonus compensation should be redesigned to reward long-term performance.
For starters, the use of bonuses based on one-year results should be discouraged.
Furthermore, bonuses should not be paid immediately, but rather placed in a company account for several years and adjusted downward if the company subsequently learns that the reason for awarding a bonus no longer holds up.
In addition to the excessive focus on short-term results, a second important source of incentives to take excessive risks has thus far received little attention.
The payoffs of financial-sector executives were tied to highly leveraged bets on the value of their firms’ capital.
Executives’ interests were tied to the value of their firms’ common shares – or even to the value of options on such shares.
As a result, executives were not exposed to the potential negative consequences that large losses could bring about for preferred shareholders, bondholders, and the government as a guarantor of deposits.
These structures provided executives with incentives to give insufficient weight to the possibility of large losses, which in turn motivated executives to take excessive risks.
To address this distortion, the payoffs of financial executives should be tied not to the long-term value of their firms’ common shares but to the long-term value of a broader basket of securities.
This basket should include, at the very least, preferred shares and bonds.
Such structures would provide incentives to take risks that are closer to the optimal level.
Reforming pay arrangements in ways such as those proposed here would help ensure that firms and the economy don’t suffer in the future from the excessive risk-taking that has contributed to bringing about the financial crisis.
A thorough overhaul of compensation structures must be an important element of the new financial order.
Let the Negotiations Begin
Having successfully integrated ten new members in May – including eight former communist countries with significantly lower levels of economic development – some argue that the EU should stop there.
But drawing a line under the enlargement process would be both a missed opportunity for the EU and a cruel blow to those countries in the Balkans and elsewhere for whom the prospect of membership is an important incentive for reform and renewal.
Greece knows this very well.
It was our belief in Europe as a catalyst for peace and prosperity that led us to support Turkey’s EU aspirations.
When the Panhellenic Socialist Movement (PASOK) government launched its policy of Greek-Turkish rapprochement during my tenure as foreign minister, many people were suspicious of mending ties with an old enemy.
Changing entrenched attitudes could not happen overnight: it required a step-by-step process of confidence-building measures, from the grassroots level to the heights of political power.
Five years later, the results speak for themselves.
Greece and Turkey have signed eighteen mutually beneficial agreements in areas ranging from trade and energy, to environmental protection and the fight against organized crime.
There is no denying that strong bilateral ties are good for Greece’s economy and security.
But our proactive policy of rapprochement was not designed merely to serve national interests.
It was part of a regional vision to promote stability from the Balkans to the Middle East.
As a result, Greece and Turkey cooperated in humanitarian efforts in Kosovo and undertook a joint peace mission to Israel and Palestine.
Greece and Turkey also worked together to prevent the war in Iraq from spilling over into neighboring countries.
Greek-Turkish rapprochement has created the framework for closer relations between Turkey and the EU.
As a progressive party, PASOK has every interest in Turkey’s progress on democratic reforms.
That is why we have always supported a real rather than “virtual” European candidacy for Turkey – with full rights, but also with full responsibilities for completing the domestic reforms that have so far been implemented as a result of Turkey’s enhanced “Accession Partnership” with the EU.
Turkey’s governing Justice and Development Party (AKP) was elected on a pro-European platform, reflecting the public’s demand for modernization and democratization.
The biggest obstacles to membership are Turkey’s record on human and minority rights and the inordinate power of the military.
Clear EU benchmarks and targets for reform will help, but it is now up to the AKP government to show the necessary political will to fulfill its membership obligations.
However, Turks are all too aware of the passions that their country’s EU candidacy stokes in Europe.
Several EU leaders have claimed that Turkish membership would spark a wave of migration and strain the European economy.
Others see no place for a Muslim country in Europe.
None of these objections is persuasive.
If properly managed, migration can enhance Europe’s cultural wealth and meet its labor-market needs, as fertility rates in the EU fall and its population ages.
Immigrants come to Europe in large measure because Europe needs them.
At the same time, to deny Turkey a European future on religious grounds is to deny our Union’s diversity.
Democracy is a universal value, not the property of specific religions.
Moreover, welcoming a country like Turkey will send a positive signal to the Muslim world.
It will allay the growing tensions between Christianity and Islam fueled by international terrorism and knee-jerk nationalism.
Unlike the “war on terrorism,” European integration can serve as a model for resolving the underlying crises of the Middle East and addressing the roots of violence in the wider region.
In particular, the Ecumenical Patriarchate in Istanbul could be a great example of peaceful coexistence among Christians and Muslims.
For Orthodoxy, the Ecumenical Patriarchate is in many ways the equivalent of Mecca.
Allowing the Patriarchate to flourish, and reopening the Theological School on the island of Halki, would underscore Turkey’s progress on human and minority rights.
Turkey should view the Patriarchate not as a threat, but as an important asset ­– a bridge to Europe.
Similarly, Cyprus’s entry into the EU, coupled with Turkey’s EU aspirations, has created a unique catalyst for tearing down the “Berlin Wall” that runs through the capital, Nicosia, separating the island’s Christian and Muslim communities.
If Turkey is serious about joining the European family, it must recognize the Republic of Cyprus – like any other member state.
A road map must be drawn up for the withdrawal of Turkish troops from Cyprus and a settlement of the political division of the island.
At Helsinki in December 1999, the EU agreed that Turkey must resolve its differences with its neighbors peacefully by the end of 2004, within the framework of EU and international law; otherwise, any outstanding dispute would be settled at the International Court of Justice.
The time has now come for the EU to assess Turkey’s progress on these issues and for Turkey to fulfill its obligations.
As negotiations proceed in the years ahead, it is in the international community's interest to support Turkey’s European future, while making a constructive contribution to end the division of Cyprus, so that the progress we have achieved is not lost.
From religious and ethnic conflict, Europe can once again forge a model of peaceful cooperation – this time by creating an integrated zone of stability in the Eastern Mediterranean.
Let The Serbs Try Milosevic
A lot has been happening in Yugoslavia recently, much of it surprising.
After some procrastination and an initial failed attempt, Milosevic has been arrested, without bloodshed, though not without danger.
The peaceful vote in Montenegro last weekend may presage conflict and difficult decisions about independence, but chances are strong that the parties will settle these matters by talking rather than fighting.
These are great steps forward, and they show that despite brainwashing and the complicity of many Serbs in the crimes of the Milosevic regime, democracy and open society have a chance of taking root in what remains of Yugoslavia.
One key decision facing Serbia, and its new authorities, is whether Milosevic should be extradited to The Hague.
There seems to be almost universal agreement that he should, and international pressure is being applied on President Kostunica to comply.
But the decision may have life-and-death ramifications for Serbia’s future.
Many who agree that Milosevic is a war criminal now think that we should listen to the voices coming from Belgrade and their cry that Milosevic should face trial before his own people.
Ultimate moral responsibility for what was done by Milosevic rests with Serbia’s people.
They brought him to power, albeit not in a way that conforms precisely with democratic norms; they supported him, even when he led them into genocidal crimes and to defeat after defeat.
Finally, they brought him down, and the new democratic leadership in Belgrade has, at no little risk to its own position and standing, arrested him.
That arrest could well have ended in a bloodbath that might have destabilized a still insecure democratic government.
Yugoslavia's new leadership should now be allowed to deal with Milosevic in a way that promotes democracy within Yugoslavia.
His crimes should be judged by his own people – not by an international tribunal.
In this way the trial will gain more legitimacy and credibility, especially among the many Serbs who still need to be educated in order to realize the true extent of Milosevic's crimes.
Most importantly, by dealing with Milosevic, the Serbs, many of whom supported his regime, will be forced to confront their own behavior and deal with their own consciences.
Only through this process will Serbia be able to rejoin the ranks of free and healthy European nations.
If the trial is held before distant judges, sitting in a far�away capital, applying a not very transparent and somehow abstract code of law, many Serbs will see this not as a trial of Milosevic, but as victors’ justice meted out to the Serbian nation.
They will be wrong.
Nonetheless, political trials (and war crime trials are always political trials) must not only punish, but also teach.
The lessons from any trial of Milosevic should be taught to Serbia's citizens by Serbian judges, within a normative system that most Serbs accept as legitimate.
The international hue and cry for Milosevic to be brought to The Hague, regardless of political consequences, is understandable.
Yet this pressure is unwise, and somewhat hypocritical.
After all, the peacekeeping forces in Bosnia can, should they decide to act, arrest Radovan Karadzic and General Ratko Mladic, the leaders of the Bosnian Serbs who have been indicted by the Hague Tribunal.
They have not done so, and show no signs of doing so.
Why this inaction?
Clearly, political reasons are at the root of this: the British, US and French governments are reluctant to risk the lives of their own soldiers in order to bring these arch�criminals to justice.
Indeed, Karadzic and Mladic have evaded arrest for years; indeed, since the Dayton peace accords were signed.
Shouldn't equal consideration for the political constraints faced by President Kostunica and the sensitivities of the Serbian people be given?
Is it really worth the risk of destabilizing Yugoslavia's infant democracy to carry out trials that Yugoslavia's government shows every sign of being able to carry out?
That there will now be a Truth and Reconciliation Commission in Belgrade suggests that the current Yugoslav leadership understands that it needs to heal the wounds inflicted on its own people by the murderous Milosevic regime.
Let the international community show the same compassion and understanding to the Serbian people it applies when it has to decide whether to risk its own soldiers in an attempt to apprehend Karadzic and Mladic.
Letting Killers Guard Human Rights
If it were not so profoundly sad, it would qualify as the sick joke of the millennium: Libya has been elected to chair the United Nations Commission on Human Rights!
When Caligula appointed his horse to the Senate, the horse at least did not have blood on its hoofs.
The procedure, of course, was perfectly legal: the chairmanship rotates every year from one global region to another.
This year it was Africa's turn to nominate the chairman, and they nominated Libya.
Only the US and Canada voted against.
To their everlasting shame, European countries abstained.
It is a telling commentary on the moral bankruptcy of the UN that this decision comes at so delicate a time for the organization.
President Bush has challenged the UN to show its seriousness about its own mandatory decisions about Iraq: otherwise it may meet the same ignominious end as the League of Nations, which proved impotent in the 1930's when confronted with the aggressive policies of Nazi Germany and fascist Italy.
To have Libya elected at this moment to chair the UN body responsible for human rights hardly helps support either the legitimacy or the moral authority of the world body.
Let us remember: Libya is a totalitarian tyranny; its leader, Muammar Ghaddafi, combines sometimes erratic behavior with extremist policies, supporting dictators all over the world.
He heads one of the world's most oppressive regimes, where there is no pretense at elections and where dissent is instantly crushed.
Under his rule, Libya has supported terrorist organizations worldwide--from the IRA to various Palestinian extremist groups.
It remains under UN sanctions for its role in the downing of a Pan Am passenger flight over Lockerbie, Scotland, a decade ago.
In the last decade, the position of the UN as a symbol of the ideals of a peaceful world community has been steadily eroded.
It proved utterly unable to stop the wars in the Balkans; and in at least one case--Srebrenica--a Dutch UN peacekeeping force stood by and witnessed the worst massacre in post-1945 Europe, as Bosnian Serbs murdered around 6,000 defenseless Muslim men.
A Dutch commission of enquiry later admitted that the UN Dutch battalion was, in fact, complicit in that war crime.
In Rwanda, once the genocide started, the UN official responsible for peacekeeping operations ordered the evacuation of UN forces from the country, leaving the field wide open to the bloodiest genocidal massacre since World War II.
That UN official's name is Kofi Annan.
It is a depressing, pathetic record, which the UN is trying--probably in vain--to redeem by appearing, in the Iraq crisis, as the voice of reason and international legitimacy.
But at a time when UN inspections in Iraq seem like sending the Salvation Army to clear out a band of gangsters, raising Libya to head the Human Rights Commission may go down in history as the definitive failure of an organization whose life started with so much hope.
Organizations usually don't die--and certainly there is too much raison d'etat to make certain that the UN will continue to hobble on.
But it will be a mere shadow of what it should, and could, be.
Today's UN gives hypocrisy a bad name.
Networked Development
STOCKHOLM – The challenges that the world faces in the twenty-first century are systemic and global in nature. There will be no easy answers to any of them, but one thing is clear: we need transformative solutions that are scalable.
Incremental measures will only distract us from the scope of the challenges that we confront.
One of the best examples of scale is the mobile telecommunications industry.
There are now 6.4 billion mobile phone subscriptions, with the number expected to increase to 9.3 billion by 2017 or 2018.
Ericsson estimates that by 2018, 85% of the world’s population will have access to mobile-broadband coverage via 3G networks, and 50% will have 4G.
In this context, the near ubiquity of mobile networks has created a new paradigm for sustainable development, putting technological advances at the forefront of policymaking.
Technology is enabling us to share, collaborate, and exchange knowledge in entirely new ways, creating a dynamic shift in mindset.
A new society – what we call the Networked Society – is emerging.
And in the Networked Society, we have an obligation to ensure that we exploit mobile and broadband technologies not just for collaboration and entertainment, but also for sustainable development.
Connectivity is a basic enabler of economic growth and improved quality of life, and there is a strong business case for investing in broadband to optimize the delivery of essential services in education, health care, safety, and security, and to redefine urban landscapes through intelligent electricity grids and more efficient transportation.
In 2000, when the United Nations Millennium Development Goals (MDGs) were established, broadband was in its infancy, and most of these benefits had not even been imagined.
Today, as world leaders consider the post-2015 development agenda, we cannot overlook the importance of including broadband as a key part of the infrastructure needed to achieve future goals.
The economic benefits of broadband are immense.
A 10% increase in broadband penetration can add a full percentage point to sustainable GDP growth, and doubling broadband speed increases GDP by 0.3% on average.
Moreover, mobile commerce – expected to reach $800 billion worldwide by 2016 – has enormous potential to improve social and financial inclusion.
Likewise, cloud computing is already starting to revolutionize the way content is delivered and accessed both by teachers and students.
An example of this is the cloud-based solution for schools developed by Ericsson in the Connect To Learn program.
By addressing the challenges of access and quality of education, Connect To Learn – a collaborative effort between Ericsson, Columbia University’s Earth Institute, and Millennium Promise – identifies strategies to integrate teachers’ professional development with twenty-first-century tools and practices in classrooms.
As for health care, half could be delivered remotely and more efficiently.
Evidence of this can be seen in the Millennium Villages Project, where mobile communications have had a particularly significant impact on health care: improved response times to emergencies, reduced isolation, and better training and equipment for health-care workers.
Building on this success, the One Million Community Health Workers campaign was recently launched to expand community health-worker programs in Sub-Saharan Africa by the end of 2015.
With the use of the latest communications technology and diagnostic testing materials, the health workers will be able to link the rural poor to the broader system of doctors, nurses, hospitals, and clinics.
These transformations are the result of both scale and innovation.
But they have been set in motion without concentrated government efforts.
If these examples were deliberately and specifically considered by the 110 countries that have national broadband plans (and those that still do not), we would be much more likely to achieve the positive transformations that we all want.
This shift in awareness among policymakers will be crucial not just for socio-economic improvement, but also for creating a low-carbon economy, which will require moving from the energy-intensive physical infrastructure of the last century to the connected, information-based infrastructure of the twenty-first century.
We need a new paradigm that enables us to decouple GDP growth from CO2 emissions, thereby ensuring further poverty reduction without causing greater environmental damage.
The potential is there, but too often government talks to government and industry talks to industry.
Public-private partnerships are essential to solving these shared challenges.
Development agencies, NGOs, and the private sector should work more effectively together to create scalable and maintainable solutions.
Two forums are making great strides.
One is the Broadband Commission, which advocates for broadband as a key infrastructure of the twenty-first century.
The other is the UN’s Sustainable Development Solutions Network (SDSN), which seeks to leverage the private sector’s wealth of resources – its innovative capacity, research and development, management skills, and know-how – to turn policy ideas into reality.
Already, industries that have traditionally operated independently – from energy to utilities to transportation – are moving quickly toward cross-sector collaboration, radically altering the business environment, and creating opportunities for new low-carbon business models to thrive.
With concentrated public-private efforts, and proactive governments like those of Sweden, Australia, and India, to name a few, the Networked Society will produce transformative solutions that lift billions of people out of poverty and help us to sustain our planet.
We may not be able to imagine what the future holds, but we know that the Networked Society will shape its possibilities.
Russia and America at the Oscars
NEW YORK – Oscar has spoken.
Neither Leviathan, the Russian film nominated for the best Foreign Language Film, nor American Sniper, nominated for Best Picture, won.
Yet both, in a way, are the most representative films of the year, as each captures the essence of why Russia and the United States now seem doomed to wage a new Cold War.
Following Russia's invasion of Ukraine, Leviathan faced an uphill public-relations battle.
But Leviathan's bleak portrait of contemporary Russian life actually confirms many of the reasons why Americans have been largely dubious about Russia's ability to reform following communism's collapse.
That doubt has been reflected in popular culture.
Since 1991, Hollywood has documented American mistrust of post-Soviet Russia in a series of films – for example, The Saint, Air Force One, The Golden Compass of 2006, Salt, and The November Man.
Russian President Vladimir Putin's thuggish foreign policy has proved these Russophobes right, so nominating Leviathan, the superb biopsy of his regime, seemed only right.
And, though Oscar did not anoint Leviathan, the film deserves all of the accolades it has received.
Directed by Andrey Zvyagintsev in an eerie style that one might call the “realism of despair," the film is both epic and deeply nuanced.
The title harks back to the book of Job and recalls Herman Melville's Moby Dick.
Set in a small town on the Barents Sea, Leviathan shows that there is no escape, not even in the Arctic, from the Moscow-centric state and its hypocritical doppelganger, the Orthodox Church.
The giant skeleton of a whale – possibly Leviathan itself – is beached on the shoreline, along with the carcasses of old boats, beneath a severe gray sky that frames a human landscape of political abuse, adultery, lawlessness, and the cynicism of all-powerful priests.
The story, akin to Alexander Solzhenitsyn's ambitious 1962 masterpiece One Day in the Life of Ivan Denisovich, steadily indicts the corruption of state power – a power ever-willing to kill and to align itself with an even more corrupt power, the Orthodox Church.
Like communism, which once promised absolution for the worst crimes in exchange for loyalty, Russia's current state religion allows, even encourages, misdeeds – including murder – so long as one is loyal to God.
Nikolai, Leviathan's hotheaded main character, sees his life consumed by the fight to save his seashore property from the town's mayor. “I'll kill him if he builds a palace here," shouts Nikolai, in a reference to current Russian leaders' proclivity for erecting garish monuments to their personal splendor: Putin's Italianate palace on the Black sea, for example, allegedly cost more than $1 billion.
At the end of his struggle, Nikolai's life is ruined.
His wife is killed, and he stands accused of murdering her for an affair she briefly had with his friend.
At the end, we learn that Nikolai was persecuted to make room not for the mayor's palace, but for a cathedral.
Even the Russian clichés – tragedy stemming from overweening power, vodka, swearing, shooting, and shouting – only strengthen the film's extraordinary depiction of the local effects of distant and devastating forces.
This is Russian politics at its most debased.
In Stalin's time, the masterpieces of, say, Boris Pasternak or Dmitri Shostakovich were entrusted to give artistic voice to a silenced civil society.
So it is ironic that Leviathan was partly financed by Russia's culture ministry – and telling that the Russian authorities had no interest in its winning at the Oscars.
Indeed, Culture Minister Vladimir Medinsky recently criticized the film for its darkness and pessimism.
American Sniper, directed by Clint Eastwood, reflects US mores as much as Leviathan reflects the current Russian Zeitgeist.
But, where Leviathan examines Putin's Russia with the unflinching eye of a surgeon, American Sniper merely trumpets supposed national values with no consideration of their application around the world.
During four tours in Iraq as a soldier/missionary, a stand-up Texan, Chris Kyle (played by Bradley Cooper) becomes known as Legend, a killer with a savior complex.
American Sniper, loosely based on Kyle's memoir, touts the frontier mentality – a neo-cowboy movie made by a former cowboy-movie star.
Just as Leviathan shows a Russia caught in the throes of a political nightmare, American Sniper shows a country trapped by its heroic mythology – defined in countless Western movies – of rugged individualism at home and defense of freedom and order abroad.
But the world has changed, and many no longer view America's global role as an expression of its unique innocence and goodness.
Given everything we have learned about the Iraq War – false claims about weapons of mass destruction, nonexistent links between Saddam Hussein and Al Qaeda, and so on – Eastwood's film comes across as a work of marketing, not reflection and contemplation. Eastwood has merely updated his earlier films – think The Outlaw Josey Wales or Pale Rider – with their unwavering conviction that America's god of righteousness must prevail.
In short, American Sniper fails where Leviathan succeeds.
George Orwell neatly summarized why: “All propaganda is a lie even when it's telling the truth."
Liberia Now, Zimbabwe Next?
President Charles Taylor's resignation from Liberia's presidency and his exile in Nigeria is not only a welcome relief for the war-torn land he so misruled, but also perhaps a bellwether for other discredited dictators.
Indeed, Zimbabwe's elderly President Robert Mugabe, who is 79, must now be reckoning with the inevitability of his own political demise.
True, no rebel troops are yet besieging Harare, no US warship with 2000 marines hovers on the horizon, and President George W. Bush has not demanded that President Robert Mugabe step down after 23 years in office.
But there are nonetheless striking similarities in the crises that have bedeviled the two African nations.
Those similarities are providing Zimbabwe's citizens with the hope that they may soon see the back of Mugabe.
Before going into exile, Taylor turned over the presidency to his long-time ally, Vice President Moses Z. Blah, who is to rule until a new transitional government takes over.
Similarly, Mugabe is known to favor transferring power to an interim government led by his long-time ally, Emmerson Mnangagwa, if he decides that the time has come to step down.
Like Blah, Mnangagwa is widely unpopular, and he lost his parliamentary seat in the 2001 general election.
Mugabe, however, immediately appointed Mnangagwa, who is much feared and often linked to allegations of corruption, as Speaker of Parliament.
Moreover, like his West African counterpart, Mugabe has presided over a decaying economy and a restless population.
His regime survives only through a ruthless campaign of terror conducted by the army, of which Mugabe is commander-in-chief; the police force, whose commander publicly declares political allegiance to Mugabe; the dreaded Central Intelligence Organization, which Mnangagwa headed for many years; and, of late, the ill-trained and brutal youth militia, whose loyalty to the ruling party is unflinching.
In Liberia, Bush called for Taylor's resignation as a precondition for constructive dialogue and a more active involvement by the US in seeking a peaceful solution to the 15 years of internecine war that ruined the country's economy and infrastructure, as well inciting wars in most of its neighbors.
In Zimbabwe, Bush has not said or done anything so drastic.
But US Secretary of State Colin Powell has accused Mugabe of ``violent misrule'' and called his government a ``ruthless regime.''
According to Powell, ``If leaders on the continent do not do more to convince President Robert Mugabe to respect the rule of law and enter into a dialogue with the political opposition, he and his cronies will drag Zimbabwe down until there is nothing left to ruin.''
Zimbabweans were surprised, therefore, when Bush, during his recent tour of Africa, expressed satisfaction with the negotiations said to be taking place between Mugabe's Zanu PF party and its arch-rival, the Movement for Democratic Change (MDC), led by opposition leader Morgan Tsvangirai.
Bush expressed satisfaction with the mediating role played by South African President Thabo Mbeki, whose ineffectual ``quiet diplomacy'' has left Zimbabweans both weary and suspicious.
In an emotional address during a ceremony earlier this month to commemorate heroes of Zimbabwe's war of liberation from white minority rule, Mugabe warned the opposition: ``Those who would go together with our enemies abroad cannot at the same time want to march alongside us as our partners in the nation-building efforts that are underway.''
Mr. Taylor and Mr. Mugabe both blame the West for their countries' woes.
Mr. Mugabe routinely denounces the MDC as ``the enemy,'' claiming that the party is controlled by the British and American governments, who are allegedly hell-bent on re-colonizing Zimbabwe.
President Mbeki was one of the three heads of state present at the handover ceremony from Taylor to Blah in Monrovia, Liberia's capital.
He may have had more than the departing Taylor in mind when he said, ``It has indeed been a shameful thing that, as Africans, we have killed ourselves for such a long time.''
Mbeki's own brother, Moeletsi Mbeki, who heads the South Africa Institute for International Affairs, has a more forthright view of the political mayhem in Zimbabwe and the tardy pace of efforts to arrest the situation. ``Here's a guy breaking all the rules of democracy,'' he says, referring to Mugabe, ``and no African government is stepping forward and saying, `It's time for you to go.'''
It is to be hoped that Taylor's departure heralds the beginning of a new African era, in which Africa's rulers stop protecting the continent's dictators because they would rather incur the wrath of faceless citizens than expel a dictator from among their ranks.
If so, leaders such as Mbeki will emerge as heroes for a new Africa, where intervention in neighboring states will protect the millions on the continent who remain subjugated by elderly dictators like Mugabe, who have exploited their position as anti-colonial liberation leaders, and younger, free-booting adventurers like Taylor.
Only then will Africa's tolerance for tyrants be ended.
Liberty and Music
NEW YORK – North Korea, officially known as the Democratic People’s Republic of Korea, is one of the world’s most oppressive, closed, and vicious dictatorships.
It is perhaps the last living example of pure totalitarianism – control of the state over every aspect of human life.
Is such a place the right venue for a Western orchestra?
Can one imagine the New York Philharmonic, which performed to great acclaim in Pyongyang, entertaining Stalin or Hitler?
All totalitarian systems have one thing in common: by crushing all forms of political expression except adulation of the regime, they make everything political.
There is no such thing in North Korea as non-political sports or culture.
So there is no question that the invitation to the New York Philharmonic was meant to burnish the prestige of a regime, ruled by The Dear Leader, Kim Jong-Il, whose standing is so low – even in neighboring China – that it needs all the burnishing it can get.
Interviews with some of the musicians revealed an awareness of this.
A violinist was quoted as saying that “a lot of us are…not buying into this party line that music transcends the political.” She was “sure that it [would] be used by Pyongyang and our own government in attempting to make political points.”
The conductor, Lorin Maazel, who chose a program of Wagner, Dvorak, Gershwin, and Bernstein, was less cynical. The concert, he said, would “take on a momentum of its own,” and have a positive effect on North Korean society.
Well, he would say that, wouldn’t he?
But could he possibly be right?
No one, not even Maazel, pretends that one concert by a great Western orchestra can blow a dictatorship away, but authoritarians’ wariness of the subversive power of music dates back to Plato’s Republic .
In Plato’s view, music, if not strictly controlled, inflames the passions and makes people unruly.
He wanted to limit musical expression to sounds that were conducive to harmony and order.
This, more or less, has been the line taken by dictatorships as well.
The officially prescribed musical diet of North Koreans consists of patriotic hymns to the Communist Party, odes to the Dear Leader, to his father, the Great Leader, Kim Il-Song, and to the heroic spirit of the Korean people.
Almost nothing else is permitted – except in the inner sanctum of the rulers themselves.
The Dear Leader’s son, Kim Jong-chol, is said to be a fan of Eric Clapton.
An invitation has now gone out to the British rock star to perform in North Korea, which really would be something new.
Rock music was severely restricted in Communist dictatorships, just as jazz was in Nazi Germany, for all the Platonic reasons: uncontrolled passions were seen as a threat to the perfect order of the state.
Precisely because of this, “forbidden” music was politicized.
Subversive youths in Hitler’s Germany – the “Swing Jugend” – secretly listened to jazz.
The air of Czechoslovakia in 1968 was electric with the imported sounds of the Rolling Stones and Frank Zappa’s Mothers of Invention.
After the Soviet tanks put an end to the Prague Spring, a Russian policeman threatened one young Czech that he would “beat the Zappa music out” of him.
Václav Havel was a fan of Zappa.
So was a Czech rock band called the Plastic People of the Universe, who so upset the commissars that they were thrown in prison ­­– not because they were engaged in political activities, but because, as their singer, Milan Hlavsa, put it, “we just wanted to do what we liked doing.”
Of course, that was the point.
Hlavsa and his long-haired fans, celebrated in Tom Stoppard’s brilliant play, Rock n’Roll , didn’t want the state to spoil their party.
They didn’t care what the commissars thought.
They wanted to dance to their own tunes.
Obviously, Dvorak and Wagner are not Zappa and the Stones.
And if Clapton came to Pyongyang at the government’s guest, he might not have enough “street cred” left to light the fuse of rebellion.
When the Stones themselves finally performed in China, in 2003, they agreed to cut some of their racier numbers from the program, because, as their local promoter put it, “They know there are differences between Chinese and Western cultures.
They don’t want to do anything against the Chinese government.” So much for the spirit of 1968.
Nevertheless, Maazel may have a point.
Performing good music in North Korea just might have a positive effect.
Stalin’s empire needed no foreign classical orchestras.
They had enough of their own.
China no longer needed the Stones, either.
There are plenty of rock bands in China already.
But the stranglehold of North Korea’s dictatorship is based on total isolation.
For half a century, the North Koreans have been deprived of any art, ideas, or music not authorized by the state. They were told that North Korea was a heroic little country besieged by Satanic enemies, led by the United States.
This permanent diet of paranoia has created something akin to a nationwide insane asylum, where ignorance, terror, and suspicion rule.
In such conditions, even a conventional program of classical music by the New York Philharmonic comes as a gust of fresh air.
It may not topple the dictatorship, but it will offer some solace to those who are forced to live in it.
And that, for the time being, is a good enough reason to play.
Liberty’s Revolutionary Muse
Great social thinkers almost always start out as polarizing figures, admired by some and scorned by others, until their radical challenge to how we understand the world finally prevails.
Milton Friedman was a giant among modern social thinkers for at least two reasons. First, he profoundly influenced not only his own field of economics, but also the social sciences more broadly.
Second, judging by historical experience, his influence on public opinion and economic policymaking improved countless lives for the better.
For decades, Friedman remained stranded in the intellectual wilderness, spurning the postwar Keynesian consensus that governments should use fiscal policy to manage aggregate demand – a view that sustained statist economic policies through the 1970’s.
Indeed, in the context of his age, Friedman was a true intellectual revolutionary, combining rigorous academic research and gracefully written popular books and journalism to argue for free-market policies – and to affirm the link, defended by writers from Adam Smith to Friedrich von Hayek, between economic freedom and political liberty.
In economics, Friedman revived and developed the monetarist theory that the quantity of money in circulation is the main determinant of how economies perform.
In his masterpiece A Monetary History of the United States, 1867-1960 (written with Anna Schwartz), he famously attributed recessions, including the Great Depression of the 1930’s, to a decline in the money supply.
Likewise, he argued that it was an oversupply of money that caused inflation.
In the 1960’s, Friedman showed that Keynesian demand management through government spending constantly increased the money supply, accelerating wage and price growth.
Together with Edmund Phelps – this year’s Nobel Prize laureate – he proved that there is no stable tradeoff between unemployment and inflation.
Any attempt to use expansionary government policies to drive unemployment below a certain level, they demonstrated, would fuel inflationary expectations and undermine both economic growth and employment.
That analysis both anticipated and explained the combination of rising inflation and rising unemployment of the 1970’s that came to be known as “stagflation.”
Friedman was the catalyst for a profound shift in how governments conduct economic policy.
Rather than fiscal stimulation and control, the main tool of economic management nowadays is monetary policies conducted by independent central banks.
Keynesian demand management was thus displaced by a new understanding – which we owe largely to Friedman – that pursuing fiscal discipline and price stability is the best guarantee of macroeconomic sustainability.
Equally important were Friedman’s contributions to influencing public opinion through works that addressed the role of the state in society.
Alongside Hayek, his colleague at the University of Chicago, Friedman launched a more general intellectual assault on Keynesianism, arguing that any government permitted to regulate the economy in the name of equality posed a threat to individual liberty.
In his Newsweek columns published between 1966 and 1983, and in his books Capitalism and Freedom , Free to Choose , and The Tyranny of the Status Quo (written with his wife, Rose), Friedman offered a vision of liberty that was both appealing and achievable.
Indeed, Free to Choose – later the basis of a popular television series that he hosted – was published illegally in Poland in the 1980’s, helping to inspire me, and many others, to dream of a future of freedom during the darkest years of communist rule.
With remarkable clarity, his popular writings advanced a compelling political philosophy, together with concrete policy proposals.
For example, he pioneered the idea of school vouchers, arguing that private competition would ensure better educational performance than government systems.
Friedman’s views made him a guiding light for economic conservatives worldwide.
His influence on Margaret Thatcher’s government helped transform Britain from a post-industrial basket case dominated by class struggle into Europe’s dominant economic power.
When Vietnam launched free-market reforms in the 1980’s, senior government officials pored over his writings.
He also initiated the now common practice of measuring and comparing political and economic freedom across countries, helping to shape opinion in countries that are viewed as limiting freedom.
But Friedman’s consistent anti-statism also led him to embrace positions that ran afoul of many conservatives’ political sensibilities, underscoring the intellectual honesty that was the hallmark of his career.
For example, his opposition to governments’ authority to prohibit or regulate human behavior extended to licensing requirements for doctors and car drivers, as well as to anti-drug laws, which he believed operated as a subsidy to organized crime.
Likewise, he expended considerable effort agitating against America’s military draft.
Although he did not win all his intellectual battles, rarely can it be said with as much certainty that a man was great, and that the work that he has left behind will retain enduring influence.
I live in a Poland that is now free, and I consider Milton Friedman to be one of the main intellectual architects of our liberty.
Libya After Qaddafi
BENGHAZI – Middle Eastern autocrats routinely warn their people of rivers of blood, Western occupation, poverty, chaos, and Al Qaeda if their regimes are toppled.
Those threats were heard in Tunisia, Egypt, Yemen, Bahrain, Syria, and – rendered in black-comedy style – in Libya.
But there is a strong belief across the region that the costs of removing autocracies, as high as they might be, are low compared to the damage inflicted by the current rulers.
In short, freedom is worth the price.
In Libya, four scenarios may negatively affect prospects for democratization: civil/tribal war, military rule, becoming “stuck in transition,” and partition.
Given the high price Libyans have paid, those scenarios should be prevented rather than cured.
The civil/tribal war scenario is the worst risk.
Egypt’s revolutionaries understood this.
When sectarian violence erupted there following the removal of Hosni Mubarak, the revolutionary coalitions adopted the slogan, “You won’t gloat over this, Mubarak.”
Repressive dictatorships cannot win free and fair elections.
But they can use extreme violence to consolidate their control over the state, its people, and its institutions.
So, to win, Libya’s Colonel Muammar el-Qaddafi has deliberately and successfully turned a civil-resistance campaign into an armed conflict.
That will have ramifications in the post-authoritarian context.
A study published by Columbia University on civil resistance has shown that the probability of a country relapsing into civil war following a successful anti-dictatorship armed campaign is 43%, versus 28% when the campaign is unarmed.
According to the same study, which was based on 323 cases of armed and unarmed opposition campaigns between 1900 and 2006, the likelihood of democratic transition within five years following a successful armed opposition campaign is only 3%, compared to 51% when campaigns were unarmed.
Libya, of course, can survive the gloomy prospect of post-authoritarian civil war.
But this requires containing tribal and regional polarization, as well as the rivalries between the Interim National Council (INC) and the Military Council (MC), and between senior military commanders.
Violent polarization has developed not only between Eastern and Western tribes, but also between some of the Western tribes.
Last month, for example, armed clashes erupted between rebels in al-Zintan and the villagers of al-Rayyaniya, 15 kilometers away.
Six people were killed – a reminder of what can happen if violent polarization continues between neighboring towns and villages.
Vendetta politics is not unknown in Libya, and, in an armed society comprising more than 120 tribes – including around 30 with significant numbers and resources – it can become extremely dangerous.
Another negative scenario is military rule.
Several figures from the “free officers” – the group that plotted the 1969 coup against the monarchy – are leading the INC.
They include General Abd al-Fattah Younis, General Soliman Mahmoud, Colonel Khalifa Haftar, Major Mohamed Najm, and others.
Those figures hold a mix of historical legitimacy, for participating in the 1969 coup, and current legitimacy, for helping the 17th February revolution.
They also belong to several large tribes, guaranteeing wide tribal representation if a military council were to take power, as in Egypt.
Unlike Egypt, however, whoever takes power in Libya will not necessarily inherit poor economic conditions that could threaten their legitimacy and undermine their popularity.
This might lead a group of senior officers to rule directly, especially if victory in Libya comes militarily.
A move by army officers in Tripoli against Qaddafi and his sons might end the conflict, with military commanders getting the credit – and the political capital.
But four decades of military-based dictatorship may be enough for Libyans, a majority of whom never really benefited from their country’s wealth or potential.
When it comes to producing terrorists and undocumented immigrants – two critical issues for Europe – Arab military dictators have an inglorious record.
Algeria in the 1990’s is a potent reminder of this, and Western governments do not want the vicious cycle of repressive autocrats producing violent theocrats and refugees to restart.
Getting “stuck in transition” is a third possible scenario, with Libya remaining in a “gray zone” – neither a fully-fledged democracy nor a dictatorship, but “semi-free.”
This means regular elections, a democratic constitution, and civil society, coupled with electoral fraud, skewed representation, human rights violations, and restrictions on civil liberties.
Getting stuck in transition usually kills the momentum for democratic change, and widespread corruption, weak state institutions, and lack of security serve to reinforce a myth of the “just autocrat.”
Vladimir Putin’s rule in Russia illustrates this outcome.
Unfortunately, a study published in the Journal of Democracy showed that out of the 100 countries that were designated “in transition” between 1970 and 2000, only 20 became fully democratic (for example, Chile, Argentina, Poland, and Taiwan).
Five relapsed into brutal dictatorships (including Uzbekistan, Algeria, Turkmenistan, and Belarus), while the rest were stuck somewhere in transition.
Given Libya’s lack of democratic experience, some view this as a likely outcome in the post-Qaddafi era.
But Libya is not the only country that has tried to move from dictatorship to democracy with weak institutions and strong tribal identities.
Albania, Mongolia, and India successfully passed more complicated tests – and offer some useful lessons in democratic transitions under unfavourable conditions.
The fourth scenario is partition, with the old three-province, Ottoman-style setup commonly mentioned: Cyrenaica (east), Fezzan (south), and Tripolitania (west).
Cyrenaica is Qaddafi-free, Tripolitania is not, and Fezzan did not fully join the revolution.
But the administrative borders of these districts were never fully established, and they have changed at least eight times since 1951.
In 2007, Libya had 22 sha‘biya (administrative districts), not three.
All of these scenarios will be affected by outcomes in Egypt and Tunisia.
In the case of democratic transitions, a success nearby often helps at home.
Either country, or both, could offer Libya successful transition models, erecting an important obstacle to military dictatorship or civil war.
Libya Calling
VALLETTA, MALTA – The recent signing in Tripoli of “a comprehensive claims settlement” between the United States and Libya marks a new beginning not only in US-Libya relations, but between Libya and the rest of the world.
The agreement provides a process for compensating the victims of attacks ranging from the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, to the US air strikes on Tripoli and Benghazi in 1986.
It thus removes a final hurdle to Libya establishing normal diplomatic and economic relations with the West and opens the way for US Secretary of State Condoleezza Rice’s visit to Tripoli this week.
The Joint Statement, while clinically welcoming the agreement, states that both parties “thereby turn their focus to the future of their bilateral relationship,” underscoring “the benefits an expansion of ties would provide for both countries as well as for the American and Libyan peoples.” This is a far cry from recent years, when staying at a Libyan-owned hotel would make you subject to a US felony charge!
Clearly, the way is now open for US-Libya relations to move forward in the same way that the release of a group of Bulgarian nurses, who were jailed in Libya on charges of deliberately infecting Libyan children with AIDS, unblocked European Union-Libya relations.
Indeed, Libya has also just strengthened its relations with the EU: Seif al-Islam Gaddafi, the son of Libya’s long-serving ruler, Muammar al-Gaddafi, recently declared that soon the two sides should be able to sign an Association agreement, giving Libyan goods access to European markets.
In his effort to restore seemingly irreparably damaged relations with the West, Gaddafi has played the oil and gas cards that he holds extremely well.
Indeed, the West’s hunger for energy brought invitations for Libya’s leader to visit France, Spain, and Portugal within the past year.
This opening is welcome, because Libya remains heavily engaged with the other countries of the Sahel, and across Africa in general, as well as with Arab states.
A more development-minded Libya could help dampen tensions in these vital regions. Indeed, Gaddafi’s emphatic call for Libya to embrace the market economy could have a sort of revolutionary domino effect among North Africa’s “dirigiste” economies, improving the chances for a revitalization of plans to open and integrate the Maghreb Union economies.
Libya’s newfound engagement with the US and the EU represents not only a major shift in its international policies and diplomatic posture, but also a major internal reorientation, because the country now wants to develop an economy that is not exclusively based on oil.
Indeed, like so many post-communist countries over the past 20 years, Libya is now making the gradual and at times painful transition to a market economy.
Given that Islamic fundamentalism breeds in economic despair, Libya’s rulers seem to want to take particular care that this process does not create an underclass of victims who might fall prey to the call of religious fanatics.
Of course, it is unrealistic and naïve to expect that the changes now underway in Libya will result in a rapid transition to European-style democracy.
Libyan politics will undoubtedly continue to be based on Gaddafi’s “Green Book” and “people power,” as expressed in its People’s Congress.
But Gaddafi now seems to want to reconcile his teachings and rule with a more open economy, including foreign direct investment and market-based competition.
Internally, Libya has launched a “Go East” policy, so that development does not become clustered only in its oil and gas regions and around the capital of Tripoli.
It wants, in particular, to ensure that the people and tribes in its Eastern “Cyrenaica” territories centered in Benghazi have a chance to develop equally with the rest of the country.
A bulwark of secular government and anti-fundamentalism in a North Africa that is struggling to contain the spread of Islamic extremism, Libya is of strategic importance to Europe and the US beyond its oil riches, notwithstanding the overwhelming significance of its energy resources.
Fully aware of its growing importance in an oil-starved world, Libya will use that advantage to the full and it will no doubt guard, with Gaddafi at the forefront, its sovereign rights vociferously and assiduously.
Nevertheless, drawing Libya deeper into international discourse, despite the possibility of roadblocks along the way, is a strategic decision that, now that it has been taken, the West must pursue with patience, perseverance, and constant nurturing.
In that process, underestimating Libyan diplomacy, shrewdness and negotiating skills is the folly of the ignorant.
Libya’s Jihadist Minority
DOHA – “They are armed, I am not going to fight a losing battle and kill my men over a demolished shrine,” said Fawzi Abd al-‘Aali, the former Libyan interior minister, before he “resigned” last August.
He was referring to the armed Salafi groups that were accused of destroying Sufi shrines.
One of the accused groups was the Ansar al-Shariah Brigade, which was quick to support the demolition, but denied any responsibility for it.
Ahmed Jibril, Libya’s deputy ambassador to London, has now accused the Brigade, headed by Muhammed Ali Al-Zahawy, of perpetrating the attack on the US Consulate in Benghazi, which killed the American ambassador, Christopher Stevens, and three other US personnel, as well as Libyan guards.
Others have quickly embraced and promoted Jibril’s allegation.
But the picture is more complex.
The&nbsp;Brigade denied responsibility in a written statement, as well as in a brief interview with its spokesperson, who at the time was in charge of guarding Al Jala&nbsp;Hospital in Benghazi.
Like its statement on the destruction of Sufi shrines, it denied involvement in the attack on the US Consulate, but stressed the gravity of the insult against the Prophet that putatively triggered it.
The Brigade attracted public attention last June as well, when around 300 armed members staged a rally in Benghazi, sparking outrage among Libyans.
“We wanted to send a message to the General National Council members,” according to Hashim Al-Nawa‘, one of the Brigade’s commanders.
“They should not come near the Shariah.
It should be above the constitution, and not an article for referendum.”
But was the Ansar al-Shariah Brigade really behind the attack on the US Consulate?
The nature of Libya’s post-revolution armed Islamist forces is by no means straightforward.
Salafi jihadism is not an organization, but an ideological trend based on the core belief that armed tactics of all kinds are the most effective – and, in some versions, the most legitimate – method of bringing about social and political change.
Last year, its adherents did play an important role in the removal of Libya’s brutal dictator, Colonel Muammar el-Qaddafi.
Many subsequently matured politically, revised their worldview, and shifted from armed to unarmed activism, forming political parties and contesting elections.
The Libyan Islamic Fighting Group, for example, has produced two main political parties.
Al Watan (The Homeland) is led by former LIFG and Tripoli Military Council commander Abd al-Hakim Belhaj.
The other, Al Umma al-Wasat (The Central Nation), is led by Sami al-Saadi, the group’s former chief ideologist, and Abd al-Wahad Qaid, an LIFG military commander and the brother of the deceased Al Qaeda commander Hasan Qaid (Abu Yahya al-Libi).
Both parties fared poorly in the election in July of a new General National Congress, with only Qaid winning a seat.
Indeed, the GNC elections were in many ways a defeat for Libya’s non-violent Salafi parties(such as Al Asala), as well as for the post-jihadists.
Other armed Islamist formations, including Salafi groups, accepted integration into Libya’s new state institutions, such as the Supreme Security Committee (interior ministry) and the Libyan Shield Force (defense ministry).
The National Guard, headed by the former LIFG deputy leader, Khaled al-Sharif, absorbed more than 30 brigades, mostly from the west and southwest.
But several armed formations, such as Ansar al-Shariah and the Imprisoned Sheikh Omar Abd al-Rahman Brigades, still reject the transition to party politics and integration into state institutions.
These organizations are numerous, but small.
Some were not invited –&nbsp;or given sufficient incentive – to join official bodies.
“Nobody asked us to join the army or the police,” Sufian bin Qumu, Ansar al-Shariah’s commander in Derna and a former Guantánamo detainee, said in an interview last April.
“They did not even give me or any of my men a reward for fighting.”
Bin Qumu has a small paramilitary force training in the Bou Musafir forest on the outskirts of Derna.
He insists that if the head of the boy scouts or the city’s clan leaders asked him to disband the training camp, he would do so.
The tragic death of Stevens and his colleagues has engendered wide public outrage in Libya, adding to the isolation and de-legitimization of the armed groups.
Dozens of Libyan activist groups have uploaded videos paying tribute to Stevens, as well as issuing statements against terrorism and Al Qaeda.
One of the Muslim Brothers’ Web sites includes such a statement, and Libya’s Grand Mufti, Sheikh Sadeq al-Gheriani, also condemned the attack.
Two issues remain critical in Libya to prevent future tragedies.
The first is the need to capitalize on public support and continue the disarmament, demobilization, and reintegration process that started under the National Transitional Council but was never completed.
Second, the government must enhance its communication strategy.
Arab Spring governments condemned the outrageous movie smearing the Prophet of Islam, but they should have stressed that American official and unofficial bodies had nothing to do with the film’s production.
Collective punishment and targeting the innocent is forbidden in the Koran in more than 20 verses: “That no burdened person (with sins) shall bear the burden (sins) of another” (The Star Chapter 53:38).
Libya’s Lord of the Flies
LONDON – “I am a glory that will not be abandoned by Libya, the Arabs, the United States, and Latin America…revolution, revolution, let the attack begin,” said the self-described King of African Kings, Dean of Arab Leaders, and Imam of all Muslims, Colonel Muammar al-Qaddafi.
The statement summarizes the Libyan regime’s extremely repressive response to the popular uprising against Qaddafi’s 42-year dictatorship.
But Qaddafi’s tactics have boxed him in.
Should he be defeated, finding refuge abroad, as Tunisia’s former President Zine el Abidine Ben Ali did, will be difficult.
And internal exile, such as that currently afforded Hosni Mubarak, will be impossible.
Although the regime’s capacity to commit large-scale massacres has shrunk, Qaddafi’s defeat will come at a high cost in terms of human life.
In an extreme scenario, the regime could use chemical weapons, as Saddam Hussein did against the Kurds of Halabja in 1988, or it could launch an intensive aerial bombardment campaign, as Syria’s Hafez al-Assad’s did in Hama in 1982.
At that point, international intervention would be more likely than ever.
One and a half million Egyptians and many other foreign nationals, including British citizens, are in Libya and now are in an extremely vulnerable position.
In his first speech during the crisis, Saif al-Islam al-Qaddafi, the Colonel’s supposedly “moderate” son, alleged an international conspiracy against the regime, involving Egyptians, Tunisians, and other foreign agents.
The response of father and son has been to incite violence against foreigners.
Another possible scenario is a move by the army, or a significant part of it, against Qaddafi and his sons.
The problem is that the Libyan army has not been able to act cohesively since the protests began, in contrast to the Egyptian and Tunisian armed forces.
Senior and junior army officers have defected, often with their troops, to the regime’s opponents.
Two air-force pilots diverted to Malta, followed by a navy warship – all in defiance of Qaddafi’s orders to bomb the eastern city of Benghazi.
But, at least so far, there have been no splits reported among the Revolutionary Committees, Qaddafi’s diehard loyalists, who are estimated to total around 20,000 fighters.
The same is true of Brigade 32, which is headed by another of Qaddafi’s seven sons, Khamis al-Qaddafi.
This brigade is in charge of protecting the Bab al-Aziziya area in Tripoli, where the Colonel lives in his ersatz Bedouin tent.
Libyan military Intelligence, headed by Abdullah al-Sonosi, the Internal Security Forces, led by al-Tuhami Khaled, and the Jamahiriya Security Apparatus also remain intact, with no reported splits.
True, the deep, ingrained rivalry and mistrust between Libya’s military-security apparatuses is likely to give rise to splits that will be a key factor in undermining the regime.
But, overall, the Libyan army’s tribal nature and allegiances prevent it from functioning as a single unit, either in backing Qaddafi, or in joining the revolt against him.
Tribal allegiances will play a pivotal role if Qaddafi is defeated in the coming days.
Historical rivalries, vendettas, and weapons are widespread among Libya’s tribesmen, which suggest that tribal warfare in the post-Qaddafi era is likely.
Yet signs from Libya’s East, now a “Qaddafi-free” zone, indicate otherwise.
Of course, inter-tribal rivalries are strong in eastern Libya.
But the level of organization and coordination among those leading the rebellion has been quite impressive.
Security, medical, and other committees were rapidly established, just as similar rudimentary institutions of order were created in Egypt by rebellious protesters a few weeks ago.
Moreover, when Ahmed Qaddaf al-Dam and Said Rashwan, two leading figures in the regime, visited Egypt and attempted to recruit tribes with Libyan branches to attack the Qaddafi-free East from Egypt’s western desert, they came away with nothing.
Awlad Ali and the other tribes refused the generous bribes offered to them.
Libyan civil society is not as developed as its Egyptian and Tunisian counterparts, which further suggests that Qaddafi’s downfall could result in tribal warfare.
But the lessons of Iraq’s bloody post-Saddam civil war were learned across the Arab world, and the dedication and maturity of Tunisian and Egyptian youth has become a model for other Arabs seeking freedom and dignity.
Libya’s people may be more politically mature and sophisticated than many observers believe.
The international community has a fundamental legal duty towards Libya.
The names of those who head the forces responsible for the killings that have occurred are well known.
If generals and colonels like Abdullah al-Sonosi, Abdullah Mansour, and al-Tuhami Khaled, as well as Qaddafi and his sons, were placed on international watch lists, or if arrest warrants were issued against them, many of their subordinates would think twice before ordering their soldiers to shoot or bombard.
The West has known about crimes against humanity and terrorist plots committed by Qaddafi’s regime for decades, most notably the June 1996 Abu Selim massacre, in which more than 1,200 political prisoners were gunned down after protesting against prison conditions.
Yet there was no international inquiry, mainly because oil interests trumped moral outrage.
The West owes it to Libyans to protect them from another massacre.
So far, the Obama administration and European leaders have said all the right words.
But words are not enough; it is time for concrete action.
Libya’s Shadow on Sovereign Wealth Funds
NEW YORK – As Libya’s citizens rebuild their lives and economy, undoing the corruption in the Libyan Investment Authority (LIA), the sovereign wealth fund in which Muammar el-Qaddafi’s regime allegedly stashed and misused Libya’s oil wealth, is becoming a priority.
The National Transitional Council is debating who should take over Libya’s Central Bank and the LIA’s assets – an especially important decision, given that oil production is not expected to return to pre-war levels for several years.
Regardless of how the Libyan government eventually handles the LIA, all sovereign wealth funds – and their advisers and fundraisers – can learn several important lessons.
Of course, no one should infer from the Libyan case that other SWFs across the board are riddled with corruption and conflicts of interest.
The LIA has always been exceptional; indeed, several indices that rank SWFs on transparency, accountability, and governance issues have traditionally given only Iran a lower ranking.
Yet, while hard cases tend to make bad law and it is too early to judge, the LIA should be a wake-up call for corporations and funds both in the Middle East and around the globe.
First, governments should better clarify the sources of funding behind each particular investment.
Private funding that turns out to be public funding tied to the ruling family or government ministers presents different political and financial risks and should therefore be valued differently.
Second, the Libyan crisis has crystallized the problem of corporate shares owned by sovereign governments.
When the United States and the European Union decided to impose sanctions on the Libyan regime, including freezing shares owned by the LIA in European and American companies, many executives at these companies were surprised by how dramatically their firms were affected by the ownership structure.
Clearly, the liquidity of the shares and the perception of a lack of diligence on the part of corporate managers matters mightily.
Third, the LIA saga highlights SWFs’ potential cumulative effect on the stability of global markets.
All SWFs can respond to global political events by quickly withdrawing funds invested abroad.
As one of the WikiLeaks documents revealed, American diplomats lobbied the Libyan government during the financial crisis to keep funds in US banks, and to invest directly in a troubled US financial institution.
In this case, the Libyans did not respond by withdrawing a large amount of funds, but that could happen in the future.
Some argue that SWFs’ home governments and host countries have too many mutual interests – including the stability of the financial system and maintaining the US dollar as the world’s reserve currency – to threaten global markets.
That is true, on average and in normal times, but what happens if many SWFs, responding to sudden uncertainty and volatility, pull back at the same time for diplomatic or commercial reasons? Individually rational behavior is often collectively suicidal.
Finally, the Libyan case and the Dubai debt crisis of 2009 might increase suspicion in the developed world and lead to protectionism against SWFs, especially those from North Africa and the Gulf.
The free flow of capital from these regions’ SWFs to corporations in the advanced countries is crucial in order to balance the global economy and provide liquidity to financial markets, especially given the prospect of another recession in the West.
Both home and host states will have to make sure that the current conflict over the LIA will not impede this important process.
But are we being fair by comparing the various regions’ SWFs and expecting them to adhere to Western standards?
The current efforts to restructure Libya’s Central Bank and LIA will affect markets’ perceptions of other sovereign players in the region.
Bahrain and Dubai come to mind.
Although recent reports of the International Working Group of sovereign funds have indicated the difficulties in applying uniform governance standards, several measures are needed in order to bring Libya back to global capital markets.
Despite the unique status of Libya’s economy and political system today, scrutinizing the process of investment in foreign companies, as well as defining the nature of the relationships between the Libyan regime and fund management, is necessary to ensure healthy commercial relations between sovereigns and their portfolio investments.
Large allocations based on pragmatic political concerns, such as Libya-Italy relations, or cronyism should be reevaluated in the light of better and stronger governance practices.
Both governments and corporations should internalize the message and learn from the Libyan example.
The alternative may be too expensive for shareholders and citizens alike.
Libya’s Transition to Transition
SIRTE, LIBYA – Although Libyans are now celebrating the first anniversary of the revolution that toppled Muammar el-Qaddafi, they are increasingly frustrated with their new leaders.
Libyans complain that the interim government, known as the National Transitional Council (NTC), has not moved quickly enough to purge and prosecute senior Qaddafi officials, or to rein in the militias that overthrew his regime.
Though the NTC is dedicated to implementing Libyans’ demands, it lacks the technical capacity and time necessary to do so before the elections tentatively scheduled for this coming summer.
Facing such constraints, it must concentrate on a small number of important initiatives, before turning power over to an elected government.
Political experience has never been a prerequisite for NTC membership.
One representative was named to the Council because he defected with his MIG fighter plane 20 years ago.
Other members were previously political prisoners or exiled dissidents.
Unseasoned in the art of politics, the NTC frequently lacks the foresight needed to make critical decisions.
During last year’s eight-month revolution, the NTC concentrated on overthrowing Qaddafi, gaining international recognition, and securing access to frozen Libyan assets.
Those tasks left little room for attention to planning a post-Qaddafi Libya.
Today, the NTC simply does not have the human resources to consolidate the transition.
Libya has never been blessed with a professional bureaucracy like that of neighboring Egypt.
Qaddafi frequently farmed out power to municipalities and citizens in an attempt to bypass the civil servants who consistently thwarted his grandiose plans.
And almost two decades of international sanctions prevented a generation of Libyans from gaining the necessary technical skills by studying at Western universities.
Even the oil sector – the lifeline of the Libyan economy, accounting for 95% of the country’s foreign-currency earnings – suffers from a shortage of professional managers.
According to an American diplomatic cable released by WikiLeaks, “Libyans put forward for employment with foreign (oil) companies often lack formal qualifications or applicable practical experience.”
Instead of injecting new blood into senior government posts during his 42 years in power, Qaddafi merely shuffled cronies between ministries.
His last foreign-intelligence chief, Abu Zayd Dorda, epitomizes this trend.
During his 30-year political career, Dorda held numerous cabinet portfolios, ranging from agriculture to economics to municipalities.
Dorda later served as Speaker of Parliament, Prime Minister, and Ambassador to the United Nations.
Today, the NTC is hard-pressed to find competent, politically untainted bureaucrats to fill its ministries.
But that does not concern most Libyans, who are clamoring for the dismissal of Qaddafi loyalists.
One name on the tip of many tongues here is Central Bank Governor Sadiq al-Kabir.
Others, such as Libya’s former ambassador to France, Omar Brebesh, were found dead, apparently tortured by a militia that spearheaded the campaign to overthrow Qaddafi.
Lack of skilled civil servants is also making it difficult for the NTC to push through the changes that Libyans are demanding.
The Council is not ready to try senior Qaddafi officials, many of whom are now in the custody of militias, because the existing justice system was never tasked with prosecuting political cases.
Such trials were held in revolutionary courts staffed by Qaddafi zealots and operating outside the formal judiciary.
With no prospect for a fair trial in the foreseeable future, Qaddafi officials languish in jails.
Such bureaucratic inertia does not sit well with the many Libyans who are still undecided about the revolution.
But it is not only a shortage of capable public servants that hamstrings the NTC.
Just as pressing are the time constraints under which it is operating.
Since its inception last February, the NTC has consistently declared itself to be a transitional body that would cede power to an elected government once the country was liberated.
With elections set to be held no later than June 23, the Council has less than four months to prepare Libya for its first free vote in sixty years.
As a result, the NTC simply does not have the time necessary to implement the changes the Libyan people expect.
It will not be able to disband the myriad militias that are destabilizing the country, because it cannot find their fighters the vocational training that it hopes will entice them to return to civilian life.
It will fall on an elected government to carry out these reforms.
With the NTC confronting so many dilemmas with so little time, it must concentrate on a small number of key issues that can be resolved before it hands over power.
The Council needs to focus on establishing some degree of rule of law, and on curbing militia abuses.
It must respect and protect individual rights in order to demonstrate to Libyans that the type of arbitrary justice that characterized the Qaddafi era will not be tolerated.
The NTC may not be able to solve all of Libya’s problems.
But, by chipping away at the mountain of challenges that the country faces, it can ease the burdens that will confront the elected government that emerges from the popular vote in June.
Libya’s Unwilling Revolutionaries
TRIPOLI – Egypt is not the only place where the bright hopes of the Arab Spring are fading.
From attacks against Western governments to ethnic clashes in remote desert oases, Libya’s revolution is faltering.
The blame for Libya’s current travails rests largely with the interim government that led the uprising.
The National Transitional Council refuses to make difficult decisions, instead palming them off to a future elected government.
The NTC has preserved much of the institutional paralysis and knee-jerk behavior typical of Colonel Muammar al-Qaddafi’s overthrown regime.
If the Libyan revolution is to succeed, the country’s new leaders must make a clean break with the spirit of the past.
During his 42 years in power, Qaddafi surrounded himself with advisers who were companions from his youth, supplemented by a small coterie of technocrats.
As a result, the leaders of the revolt that overthrew him have little government experience.
And, in a country where any political activity was considered treasonous, many expected the neophyte NTC to stumble early and often.
And so it has.
Indeed, the revolution was never a smooth affair.
When fighters failed to defeat loyalist forces on their own, outside powers were compelled to intervene.
Later, the NTC was unable to impose discipline on the myriad militias that formed to fight Qaddafi’s troops, or even to direct foreign weapons efficiently to the fledgling Libyan National Army.
When the military chief of staff was assassinated in July under mysterious circumstances, the NTC could not offer concrete answers to an angry public.
With no access to Libyan assets frozen abroad, it frequently paid salaries weeks in arrears.
While the battle against Qaddafi was still raging, Libyans considered it unpatriotic to point out the NTC’s weaknesses.
Today, however, those flaws have been magnified by its paralysis.
The NTC deliberates rather than decides.
The two-thirds majority required to pass legislation means that many bills die after extensive debate.
Many NTC members believe that the Council lacks the legitimacy to make tough choices.
They argue that the NTC should limit itself to serving as a caretaker government, implementing only the most essential decisions until elected officials take office.
As a result, the NTC and the cabinet that it appointed, known as the executive committee, merely want to pass the baton of authority.
Hesitant to leave a large imprint in their wake, some ministries have no budgets, and ministers are reluctant to sign deals with foreign firms.
But, beyond the question of the proper role of custodian governments lies the indecisiveness of the NTC’s leaders, who simply prefer to defer to others.
When a colonel recently asked NTC Chairman Mustafa Abdel-Jalil why he has not moved to merge the militias into a national army, Abdel-Jalil replied, “I head the legislative branch.
You must speak with the executive (committee).”
Other senior Libyan officials suffer from the same managerial torpor.
The NTC’s first prime minister, Mahmud Jibril, was praised by the international community for his vision.
But much like Abdel-Jalil, Jibril proved unable to make decisions.
The NTC’s paralysis is clearly reflected in the trial of Qaddafi’s son, Saif al-Islam el-Qaddafi.&nbsp;
Though considered the most prized captive of the ancien regime, the Council has made little progress in prosecuting him.
Ahmad Jihani, Libya’s representative to the International Criminal Court, recently told me that, “we as Libyans cannot begin Saif’s trial.
There is no central power to prosecute him.”
The ICC prosecutor echoed his sentiments in a June 5 legal brief, noting that “the Government of Libya may be unable to move the case forward.”
With no progress toward trying Qaddafi for war crimes, the NTC is holding him on the innocuous charge of failure to possess a camel license.
Bureaucrats lament ministerial dithering.
“Everyday people come with ideas to demobilize the fighters and integrate them into society,” notes an official in the Labor Ministry, referring to the most pressing problem facing the NTC.
“But, with no one to make a decision, all of these plans just sit on our desks.”
One reason for this inertia can be found in Libya’s prevailing political culture.
For decades, Qaddafi personally reviewed every agreement worth more than $200 million and often chose which foreign firms would receive contracts.
When he devolved ministerial planning to bureaucrats in 2008, many were not pleased.
“Unused to planning and possessed of limited human capacity, senior officials in the ministries are very nervous,” an American diplomatic cable released by WikiLeaks reported.
Libya’s new leaders suffer from something worse than foot-dragging.
They are falling back on the same facile, prefabricated responses that Qaddafi used to demonize his domestic and international opponents for four decades.
For example, when eastern Libyans recently announced the formation of an interim regional council as a first step toward declaring a federalist state, Abdel-Jalil alleged “the beginning of a conspiracy against Libya” in the brewing crisis between the country’s provinces.
“Some Arab nations, unfortunately, have supported and encouraged this to happen,” he said.
But Abdel-Jalil named no specific foreign powers and offered no proof to support his allegations, which sounded much like Qaddafi’s frequent rants against “imperialist-Zionist plots.”
After an eight-month revolution that devastated the country, Libyans are demanding real reforms.
But, without a new leadership that is willing to implement them, it will be a long time before Libya turns a new page.
Life after Capitalism
LONDON – In 1995, I published a book called The World After Communism.
Today, I wonder whether there will be a world after capitalism.
That question is not prompted by the worst economic slump since the 1930’s.
Capitalism has always had crises, and will go on having them.
Rather, it comes from the feeling that Western civilization is increasingly unsatisfying, saddled with a system of incentives that are essential for accumulating wealth, but that undermine our capacity to enjoy it.
Capitalism may be close to exhausting its potential to create a better life – at least in the world’s rich countries.
By “better,” I mean better ethically, not materially.
Material gains may continue, though evidence shows that they no longer make people happier.
My discontent is with the quality of a civilization in which the production and consumption of unnecessary goods has become most people’s main occupation.
This is not to denigrate capitalism.
It was, and is, a superb system for overcoming scarcity.
By organising production efficiently, and directing it to the pursuit of welfare rather than power, it has lifted a large part of the world out of poverty.
Yet what happens to such a system when scarcity has been turned to plenty?
Does it just go on producing more of the same, stimulating jaded appetites with new gadgets, thrills, and excitements?
How much longer can this continue?
Do we spend the next century wallowing in triviality?
For most of the last century, the alternative to capitalism was socialism.
But socialism, in its classical form, failed – as it had to.
Public production is inferior to private production for any number of reasons, not least because it destroys choice and variety.
And, since the collapse of communism, there has been no coherent alternative to capitalism.
Beyond capitalism, it seems, stretches a vista of…capitalism.
There have always been huge moral questions about capitalism, which could be put to one side because capitalism was so successful at generating wealth.
Now, when we already have all the wealth we need, we are right to wonder whether the costs of capitalism are worth incurring.
Adam Smith, for example, recognized that the division of labor would make people dumber by robbing them of non-specialized skills.
Yet he thought that this was a price – possibly compensated by education – worth paying, since the widening of the market increased the growth of wealth.
This made him a fervent free trader.
Today’s apostles of free trade argue the case in much the same way as Adam Smith, ignoring the fact that wealth has expanded enormously since Smith’s day.
They typically admit that free trade costs jobs, but claim that re-training programs will fit workers into new, “higher value” jobs.
This amounts to saying that even though rich countries (or regions) no longer need the benefits of free trade, they must continue to suffer its costs.
Defenders of the current system reply: we leave such choices to individuals to make for themselves.
If people want to step off the conveyor belt, they are free to do so.
And increasing numbers do, in fact, “drop out.”
Democracy, too, means the freedom to vote capitalism out of office.
This answer is powerful but naïve.
People do not form their preferences in isolation.
Their choices are framed by their societies’ dominant culture.
Is it really supposed that constant pressure to consume has no effect on preferences?
We ban pornography and restrict violence on TV, believing that they affect people negatively, yet we should believe that unrestricted advertising of consumer goods affects only the distribution of demand, but not the total?
Capitalism’s defenders sometimes argue that the spirit of acquisitiveness is so deeply ingrained in human nature that nothing can dislodge it.
But human nature is a bundle of conflicting passions and possibilities.
It has always been the function of culture (including religion) to encourage some and limit the expression of others.
Indeed, the “spirit of capitalism” entered human affairs rather late in history.
Before then, markets for buying and selling were hedged with legal and moral restrictions.
A person who devoted his life to making money was not regarded as a good role model.
Greed, avarice, and envy were among the deadly sins.
Usury (making money from money) was an offense against God.
It was only in the eighteenth century that greed became morally respectable.
It was now considered healthily Promethean to turn wealth into money and put it to work to make more money, because by doing this one was benefiting humanity.
This inspired the American way of life, where money always talks.
The end of capitalism means simply the end of the urge to listen to it.
People would start to enjoy what they have, instead of always wanting more.
One can imagine a society of private wealth holders, whose main objective is to lead good lives, not to turn their wealth into “capital.”
Financial services would shrink, because the rich would not always want to become richer.
As more and more people find themselves with enough, one might expect the spirit of gain to lose its social approbation.
Capitalism would have done its work, and the profit motive would resume its place in the rogues’ gallery.
The dishonoring of greed is likely only in those countries whose citizens already have more than they need.
And even there, many people still have less than they need.
The evidence suggests that economies would be more stable and citizens happier if wealth and income were more evenly distributed.
The economic justification for large income inequalities – the need to stimulate people to be more productive – collapses when growth ceases to be so important.
Perhaps socialism was not an alternative to capitalism, but its heir.
It will inherit the earth not by dispossessing the rich of their property, but by providing motives and incentives for behavior that are unconnected with the further accumulation of wealth.
Life after Darwin
MARSEILLE – Many Greek philosophers perceived the world to be in perpetual motion – a process of constant evolution.
In Charles Darwin’s world, however, creationism set the rules for science. So, underpinning his theory of evolution is the literal interpretation of the Bible that dominated his era, combined with Aristotle’s vision of nature as definitively fixed.
Darwin, together with J. B. Lamarck, promoted a vision of a changing world, while upholding the idea that organisms evolved from a single root – a position held by Adam and Eve in the creationist worldview, and taken over in the modern era by the Last Universal Common Ancestor (LUCA).
And from that remnant of the Biblical story of creation sprung the notion of a tree of life, alongside major concepts such as gradualism (the view that speciation does not occur abruptly) and the idea that minor selection pressures can, over time, have a profound effect on improved fitness.
Darwin’s vision of the world deeply influenced biology in the twentieth century, despite persistent questions posed by factors such as lateral gene transfer, neutral evolution, and chaotic bottlenecks in natural selection.
But recent genetic research unequivocally refutes this worldview.
Life is primarily the expression of the information contained in genes.
All living organisms appear as mosaics of genetic tissue, or chimeras, suggesting that no two genes have the same evolutionary history.
This framework is incompatible with the “tree of life” representation.
Rather, it resembles a rhizome – an underground stem that sends out roots and shoots that develop into new plants.
Indeed, we now know that the proportion of genetic sequences on earth that belongs to visible organisms is negligible.
Furthermore, only 15% of the genetic sequences found in the samples from the environment and from feces analyzed in metagenomic studies belong to the three domains of microbes currently recognized in the tree-of-life framework – bacteria, archaea, and eukaryotes.
Viruses contain another 15-30% of these genetic sequences.
The unidentified genetic sequences pose a problem, because it is not known whether vehicles other than viruses, bacteria, archaea, and eukaryotes exist.
Conversely, we know that new genes, designated ORFans (“orphan genes”), are commonly created by gene duplication, fusion, or other unknown mechanisms. Yet, according to Darwin’s tree of life concept, this phenomenon would be impossible.
Human cells comprise genes of eukaryotic, bacterial, archaean, and viral origin.
As this chimerism increases, it occasionally integrates genes from microbes that live within the human body – as happens when a human is infected by herpesvirus 6.
Once integrated in a person’s genome, these genes can be transmitted from parent to child – making microbial genes their “grandfathers.”
This transfer of genetic sequences from parasites to hosts could involve hundreds of genes for a bacterium in different hosts.
For example, if the bacterium Wolbachia’s genes are integrated by different hosts, such as spiders, insects, or worms, the hosts’ offspring are also descendants of Wolbachia.
Moreover, certain viruses’ size and genetic repertoire is comparable with that of bacteria, archaea, or small eukaryotes.
Indeed, the life of giant viruses is as complex as that of like-sized microorganisms.
But the current classification of the domains of life is based on the ribosome – the production apparatus of proteins – which does not exist in these viruses.
Without ribosomes, traditionalists say, viruses cannot be considered biological entities comparable to other microbes.
But that is pure dogma; these viruses are akin to the other microbes.
Darwin’s theory is further used to support the belief that ancient humans – Neanderthal, Cro-Magnon, and Denisova – did not mix.
In fact, based on Darwin’s assumptions, most anthropologists claim that modern humans were simply descended from Cro-Magnons, who had exterminated their less-fit adversaries.
Given this supposition, a single name (Homo sapiens) is used for both modern humans and the preferred ancestor, Cro-Magnon.
But we now know that modern humans are chimeras of these three ancient humans.
This understanding also refutes the legend of “Mitochondrial Eve,” the woman from whom all humans supposedly descend on their mother’s side.
Research on the human leukocyte antigen genes, which are involved in the human immune response, shows that such a common ancestor could not have existed; this group of genes derives from those of all three known ancient humans.
Genetic research, in particular, must be free to find new models to explain, and enhance, twenty-first-century scientific discovery.
Today, Darwin’s theory of evolution is more a hindrance than a help, because it has become a quasi-theological creed that is preventing the benefits of improved research from being fully realized.
Life After Power
Next week's Commonwealth heads of government summit in Nigeria is a make or break moment for the New Partnership for Africa's Development (NEPAD), the initiative designed by Africans to modernize Africa's governments and economies.
Zimbabwe's ongoing economic decline under the misrule of President Robert Mugabe has raised doubts about NEPAD's key innovation, its self-monitoring instrument, the African Peer Review Mechanism.
For, if Mugabe can be let off the hook, will NEPAD's peer review process ever work?
The question is a legitimate one, because when African initiatives fail, they usually fail because of a lack of political will to follow through on commitments and declarations.
The stark inability of Africa's leaders to constructively criticize their peers contributes mightily to this.
One cause often proposed for this damaging phenomenon is the emphasis that many African cultures place on mutual respect.
But mutual respect does not preclude telling people the truth.
Africa's great hope is that its "new generation" leaders--most prominently President Olusegun Obasanjo of Nigeria and President Thabo Mbeki of South Africa, who helped spearhead NEPAD's peer review process in the first place--acknowledge this fact.
So far, 16 countries have voluntarily acceded to the peer review process: Algeria, Burkina Faso, Cameroon, Republic of Congo, Ethiopia, Gabon, Ghana, Kenya, Mali, Mauritius, Mozambique, Nigeria, Rwanda, Senegal, South Africa, and Uganda have declared their readiness to submit to scrutiny by their peers in what now constitutes the African Peer Review (APR) Forum.
The first two countries to be reviewed will be Ghana and South Africa.
A Panel of Eminent Persons and a Secretariat to oversee the process is now in place.
Review work, it is hoped, will begin early in the new year.
But given the lack of criticism of Mugabe's misrule, some critics wonder, justifiably, whether the review process will ever tackle Africa's most egregious blights--misbegotten leadership and corruption.
Arguably, one of the most encouraging features of NEPAD is its recognition and public admission that without proper governance institutions in place, Africa will remain, poor, marginalized, and conflict ridden.
The question now, however, is whether NEPAD will address the greatest cause of conflict and corruption in Africa: one-man rule.
Will NEPAD insist on mechanisms for the periodic and peaceful change of political leadership in member countries?
Will it block leaders from changing their countries' constitutions to allow them to seek re-election after their term limits are over?
NEPAD's credibility and ultimate success rests on the answers to these questions.
A cursory glance at most of the conflict-ridden countries in Africa shows that monopolization of political power over extended periods of time has not only helped institutionalize corruption, as leaders surround themselves with trusted relatives and cronies, but has also been a major cause of coups and conflict.
Notable examples include Mobutu in Zaire (now the Democratic Republic of Congo), Siaka Stevens in Sierra Leone, Samuel Doe in Liberia, Siad Barre in Somalia, and Haile Selassie and Mengistu Haile Mariam in Ethiopia.
Indeed, there is no shortage of potentially explosive situations.
In Togo, President Gnassingbe Eyadema has been in power for 38 years and, just last December, amended the constitution to allow him to seek further re-election.
In Guinea, an ailing Lansana Conteh--in power since 1984--did the same thing last year.
In Zimbabwe, Mugabe hangs tenaciously to power after 23 years.
All these states are in peril of sliding into violent conflict.
So are countries like Gabon and Cameroon--both members of the APR Forum--where Omar Bongo and Paul Biya, respectively, have been in power for decades.
Helping leaders to imagine a life after power is one of the surest ways of ridding Africa of conflict and a great deal of corruption, and putting the continent firmly on the path to sustainable peace and development.
If leaders and their close associates and cronies in high places know that there will be life after power--a period in which questions of accountability will inevitably be raised--they will act more carefully and responsibly while in office.
The realization that leaders are likely to step down some day may also make potentially militant groups more patient.
The few African countries that already have such institutions in place--among them South Africa, Kenya, Nigeria, Ghana, Zambia, and Senegal--are clearly moving in the right direction.
The improving quality of life in all those countries shows that such reforms work.
Life Made to Order
MELBOURNE – In the sixteenth century, the alchemist Paracelsus offered a recipe for creating a living being that began with putting sperm into putrefying “venter equinus.”
This is usually translated as “horse manure,” but the Latin “venter” means abdomen or uterus.
So occultists now will no doubt have a fine time with the fact that Craig Venter was the driving force behind the team of scientists that last month announced that they had created a synthetic form of life: a bacterium with a genome designed and created from chemicals in a laboratory.
The new bacterium, nicknamed “Synthia,” replicates and produces proteins.
By any reasonable definition, it is alive.
Although it is very similar to a natural bacterium from which it was largely copied, the creators put distinctive strings of DNA into its genome to prove that it is not a natural object.
These strings spell out, in code, a Web site address, the names of the researchers, and apt quotations, such as Richard Feynman’s “What I cannot build, I cannot understand.”
For some years now, synthetic biology has been looming as the next big issue in bioethics.
The scientists at the J. Craig Venter Institute expected to be told that they were “playing God,” and they were not disappointed.
Yes, if one believes that life was created by God, then this comes as close to “playing God” as humans have come, so far.
Well-known University of Pennsylvania bioethicist Art Caplan says that the achievement ranks as a discovery of historic significance, because it “would seem to extinguish the argument that life requires a special force or power to exist.”
Asked about the significance of what the team had done, Venter described it as bringing about “a giant philosophical change in how we view life.”
Others have pointed out that, although the team produced a synthetic genome, they put it into a cell from another bacterium, replacing that cell’s DNA.
We have yet to build a living organism entirely from bottles of chemicals, so anyone who believes in a “life force” that only a divine being could imbue into inert matter will no doubt continue to believe in it.
At a more practical level, Venter said, the team’s work has produced “a very powerful set of tools” for redesigning life.
He has been criticized for the fact that the research was funded by Synthetic Genomics, a company that he cofounded, which will hold the intellectual property rights resulting from the research – and has already filed for 13 patents related to it.
But the work has taken 20 scientists a decade to complete, at an estimated cost of $40 million, and commercial investors are an obvious source for such funds.
Others object that living things should not be patented.
That battle was lost in 1980, when the United States Supreme Court decided that a genetically modified micro-organism designed to clean up oil spills could be patented.
(Obviously, given the damage caused by the BP spill in the Gulf of Mexico, there is still some work to be done on that particular organism.)
Patenting life was taken a step further in 1984, when Harvard University successfully applied for a patent on its “oncomouse,” a laboratory mouse specifically designed to get cancer easily, so that it would be more useful as a research tool.
There are good grounds for objecting to turning a sentient being into a patented laboratory tool, but it is not so easy to see why patent law should not cover newly designed bacteria or algae, which can feel nothing and may be as useful as any other invention.
Indeed, Synthia’s very existence challenges the distinction between living and artificial that underlies much of the opposition to “patenting life” – though pointing this out is not to approve the granting of sweeping patents that prevent other scientists from making their own discoveries in this important new field.
As for the likely usefulness of synthetic bacteria, the fact that Synthia’s birth had to compete for headlines with news of the world’s worst-ever oil spill made the point more effectively than any public-relations effort could have done.
One day, we may be able to design bacteria that can quickly, safely, and effectively clean up oil spills.
And, according to Venter, if his team’s new technology had been available last year, it would have been possible to produce a vaccine to protect ourselves against H1N1 influenza in 24 hours, rather than several weeks.
The most exciting prospect held out by Venter, however, is a form of algae that can absorb carbon dioxide from the atmosphere and use it to create diesel fuel or gasoline.
Synthetic Genomics has a $600 million agreement with ExxonMobil to obtain fuel from algae.
Obviously, the release of any synthetic organism must be carefully regulated, just like the release of any genetically modified organism.
But any risk must be weighed against other grave threats that we face.
For example, international climate-change negotiations appear to have reached an impasse, and public skepticism about global warming is rising, even as the scientific evidence continues to show that it is real and will endanger the lives of billions of people.
In such circumstances, the admittedly very real risks of synthetic biology seem decisively outweighed by the hope that it may enable us to avert a looming environmental catastrophe.
Life without Doha
BRASILIA – In a recent commentary, I drew on the Interim Report of the High-level Trade Experts Group, appointed by the governments of Britain, Germany, Indonesia, and Turkey, which I co-chair, to explain why concluding the World Trade Organization’s ten-year-old Doha Round was important.
The column was reprinted on a blog maintained by CUTS International (Consumer Unity and Trust Society), the most important developing-country NGO today, leading to an outpouring of reactions from trade experts.
The faucet is still open, but the debate has already raised critiques that must be answered.
Some critics rushed in to declare that Doha was dead – indeed, that they, being smart, had already said so years ago.
Presumably, our attempt at resurrecting it was pathetic and hopeless.
But, if Doha was dead, one had to ask why the negotiators were still negotiating, and why nearly all G-20 leaders were still issuing endorsements of the talks each time they met.
Others argued that Doha was dead as negotiated.
Or, in the words of former United States Trade Representative Susan Schwab, writing in Foreign Affairs, the Doha talks were “doomed” and ready for burial.
However, these critics thought that one could pick at the corpse and salvage “Plan B,” though what was proposed in its many variants – always some minor fraction of the negotiated package to date – should more accurately be called Plan Z.
It sounded like a great idea: better something than nothing.
But, in multi-faceted talks that straddle several different sectors (for example, agriculture, manufactures, and services) and diverse rules (such as anti-dumping and subsidies), countries have negotiated concessions with one another in various areas.
Whatever balance of concessions has been achieved would unravel if we were to try to keep one set and let go of another.
Indeed, as Stuart Harbinson, a former special adviser to WTO Director-General Pascal Lamy, has pointed out, the haggling over what should go into Plan B would be as animated and difficult as the haggling over how to complete the entire Doha package.
Some of the critics are factually ill-informed.
The Bhagwati-Sutherland Report amply documents that much has already been agreed upon in all the major areas.
As Lamy has put it, nearly 80% of the curry is ready; we need only additional spices from the major players – India, the European Union, the US, Brazil, and China.
These can be provided in politically palatable ways, which also means that the conclusion of Doha is within our reach, not beyond our grasp.
But why bother to continue trying?
If Doha fails, some say, life will go on.
That is true, of course, but that doesn’t make this view any less naïve.
If the Doha Round fails, trade liberalization would shift from the WTO to preferential trade agreements (PTAs), which are already spreading like an epidemic.
But, if PTAs were the only game in town, the implicit constraint on trade barriers against third countries provided by the WTO’s Article 24, which is weak but real, would disappear altogether.
The WTO stands on two legs: non-discriminatory trade liberalization and uniform rule-making and enforcement.
With the former eliminated, the most important institution of global free trade would be crippled.
This would also affect the leg that survived, because the PTAs would increasingly take over the functions of rule-making as well.
This already can be seen in PTAs whose rules on conventional issues like anti-dumping are often discriminatory in favor of members.
It is also reflected in the increasing number of non-trade-related provisions being inserted into the PTA treaties proposed by the US and EU, a result of self-serving lobbies that seek concessions by weaker trading partners, without which free trade supposedly would amount to “unfair trade.”
These rules are then advertised as “avant garde,” implying that the PTAs are the “vanguard” of new rules.
As a result, the willingness of WTO members to invoke the Dispute Settlement Mechanism, the pride of the WTO – and, indeed, of international governance – would also be sapped.
Tribunals established within PTAs would take over the business, leading to the atrophy, and eventual irrelevance, of the DSM.
We can live without the Doha Round, but for many people it would not be much of a life.
Now is no time for cynical complacency.
Light At The End Of Colombia\u0027s Tunnel?
Despite dire predictions about Colombia's future, the peace process with the FARC (Revolutionary Armed Forces of Colombia) has recently been strengthened, primarily through the work of President Andrés Pastrana, but the guerrillas have contributed too.
It is now possible to speak of moving from a dishonest peace process tainted by violent ambushes and stalling tactics toward real peace.
Indeed, agreement on a bilateral cease-fire is expected before April.
After twenty years of peace talks that achieved next to nothing, in 1998, Colombia's public, sickened by assassinations, massacres, and kidnappings, required the then newly-elected President Pastrana to re-energize the search for peace.
To do so, the government took a big risk and conceded to the FARC a territory the size of Switzerland to control.
The three years of desultory talks that resulted, however, achieved little.
So President Pastrana abandoned the politics of concession in favor of a firm hand.
The government told the guerillas either to negotiate seriously or see the Colombian military move into the FARC's territory.
The FARC leaders were stunned by the president's resolve.
Despite Pastrana's vigorous pronouncements, the guerillas believed that the President would back down as he had so frequently in the past.
Instead, to the FARC's astonishment, the government's plan to retake control of the region was serious.
Given the Pastrana government's new resolve, the FARC had no option but to yield.
But more than a stern line in the peace talks spurred this promising outcome.
Another contributing factor is the fact that Colombia's armed forces have been thoroughly reorganized and restructured in recent years.
This modernization was due not only to a series of defense ministers committed to reform, but to the nation's improving financial circumstances and American military assistance provided under the rubric of the ``Plan Colombia.''
Due to these improvements, the superior tactical position that the FARC had achieved during the administration of Pastrana's predecessor, Ernesto Samper, which had resulted in serious military setbacks and the abduction of hundreds of soldiers and officials, was reversed.
The FARC, which had begun to transform itself from a guerilla force into a regular army, was forced to return to guerilla warfare.
Renewal of Colombia's Air Force and Marine Corps, an increase in the number of professional soldiers, and improvement in communication and mobilization systems all put the FARC increasingly on the defensive.
In tandem with these domestic initiatives was a change in the international climate, for the events of September 11
The changed international environment saw the European Union strip guerilla organizations of their visas and blocked their entry into EU countries of those who continued to carry out abductions.
Mexico, which provides an overseas home to the largest overseas FARC delegation, threatened to expel the FARC if the group failed to advance the peace process.
As frustration grew among ordinary Colombians about the use of violence, the FARC became ever more wary of completely antagonizing the country's civilians.
Most Colombians now view the guerillas' armed actions not as a way to advance social change, but as the cause of recession and unemployment.
In fact, less than 2% of Colombians approve of the guerillas.
In the last month, Colombia witnessed a startling change in civic protests against violence: civilians, long the victims of guerillas acts, poured into the streets in protest, filling them with flags, musical groups, and songs calling for an end to the war.
Men and women, young and old, defied the guerillas' bullets.
Some prevented villages from being taken over by the FARC; some forced the guerillas to abandon urban areas.
Here was a telling sign: the people confronting the very guerillas who purported to represent them.
Change also took place within the FARC.
Within the confines of its demilitarized zone FARC members were becoming ``sedentary guerillas'' who could not easily return to the jungles.
The FARC had acquired a hospital system, an arms factory, airplane landing strips, helicopters and small airplanes, and a communications system - resources that did not want to abandon.
Realizing the increasingly sedentary nature of the guerrillas gave the government confidence that its threat to overrun the demilitarized zone would bring the FARC back to serious negotiations.
But the failed peace talks of the past decades had depleted the faculty of both parties (guerillas and government) to agree on a major accord.
So a ``third'' party, as in the wars in El Salvador or Guatemala of the 1980s, became indispensable as a conduit to mediate between the two.
That ``third'' party is composed of three actors: a UN delegate; the ambassadors of the ten countries that make up a group of friendly nations backing the peace process, and the Catholic Church.
All of these factors contributed to bringing the FARC back to the negotiating table for the first serious discussions in twenty years.
With presidential elections approaching, both sides will likely feel heavy pressure to make progress now.
Light in Congo’s Darkness?
NEW YORK – Perhaps no country on earth – not even Iraq, Afghanistan, or Sudan – has suffered more gravely from armed conflict in the past decade and a half than the Democratic Republic of the Congo.
Several million people have died either directly in armed struggle or from forced displacement and the resulting health consequences.
The main causes of the fighting that has afflicted the DRC for so long have been competition for control of that impoverished country’s vast natural resources and neighboring Rwanda’s effort to wipe out what it sees as a potential threat posed by perpetrators of the 1994 genocide who took refuge in the DRC.
Several other African states – Angola, Namibia, Uganda, and Zimbabwe – have also at times participated in armed combat within the DRC, either directly or through proxy militias.
Suffering continues even in parts of the country where peace has been restored, manifested in the epidemic of sexual violence, much of it committed by former combatants, that has swept the country.
In these dismal circumstances, a recent development has provided a rare ray of hope: the extraordinary mobilization of Congolese civil society in defense of the DRC’s nascent democratic institutions.
No fewer than 210 Congolese nongovernmental organizations, including those enjoying the widest recognition and respect across the country, recently joined in challenging President Joseph Kabila’s attempt to take control of the National Assembly (the lower house of Parliament) that came into office after historic elections in 2006.
The episode that brought together Congolese civil society was Kabila’s insistence in March on forcing the resignation of Vital Kamerhe, the Speaker of the National Assembly.
Kamerhe had antagonized Kabila by criticizing his secret deal with President Paul Kagame of Rwanda that resulted in joint military operations earlier in the year against a Rwandan rebel force operating in the DRC.
Kamerhe’s supposed offense was diverging from the official party line, thereby weakening Kabila’s standing with the Congolese public.
What is most important about this episode is that it demonstrates the determination by groups representing a substantial share of Congolese society to pursue democratic development.
The National Assembly plays a key role in attempting to improve governance in the country.
It has had a crucial role in the effort to regularize the mining industry so that the DRC’s mineral wealth may be used to improve living standards, rather than only to enrich local warlords and the foreign governments and corporate interests allied with them.
The international community has a lot at stake in the Congo.
Its rain forest, threatened by timber companies that have made deals with some of the militias, plays an important part in slowing global warming.
Its copper, cobalt, tin, and coltan (columbite-tantalite) are essential for many industries.
The United Nation peacekeeping force in the Congo, MONUC, is the UN’s largest and most expensive intervention anywhere in the world.
International humanitarian assistance groups are deeply engaged in the DRC, and it is a substantial recipient of international assistance.
Above all, the Congo matters because of the continuing violence, wretched poverty, and misery of most of its nearly 70 million people.
The attempt by Congolese civil society to foster democratic development may be the best thing that has happened in the country in a long time.
It deserves the attention and support of all those who seek a better future for a vast country that has long endured plunder and misrule.
Lights Out?
RIO DE JANEIRO – When it comes to all things “green, ” common sense seems to have been abandoned.
Our failure to think clearly about such matters would be amusing if the potential consequences were not so serious.
Consider the recent “lights out” campaign that supposedly should energize the world about the problems of climate change by urging citizens in 27 big cities to turn out their lights for an hour.
With scores of companies and municipalities signing up, and even the monarchies of Denmark and Sweden turning off the lights in their many palaces, the World Wildlife Fund quickly called it an amazing success.
Newspapers around the world dutifully wrote feel-good stories about how engaged environmentalists celebrated as the lights went out around the world.
Nobody, it seemed, wanted to spoil the party by pointing that the event was immensely futile, that it highlighted a horrible metaphor, or that it caused much higher overall pollution.
Danish newspapers – coincidentally in the native country of the story of the Emperor’s New Clothes – happily quoted the WWF regarding the event’s overwhelming success.
But the entire savings (assuming people didn’t use more energy later in the night to make up for lost time) amounted to just ten tons of CO2 – equivalent to just one Dane’s annual emissions for a full year.
Measuring the avoided climate impact for the indefinite future, the entire combined efforts of the Queen, many companies, and the city halls of Copenhagen and other cities yielded $20 worth of good.
Are pointless gestures really the way to secure a greener future?
And what sort of message does turning out the lights send?
As some conservative commentators like to point out, the environmental movement has indeed become a dark force, not metaphorically, but literally.
Indeed, urging us to sit in darkness will probably only make us realize how unlikely it is that we will ever be convinced to give up the advantages of fossil fuels.
Curiously, nobody suggested that the “lights out” campaign should also mean no air conditioning, telephones, Internet, movies, hot food, warm coffee, or cold drinks – not to mention the loss of security when street lights and traffic signals don’t work.
Perhaps recruiting support would have been much harder had the Danes also had to turn off their heat.
Ironically, the lights-out campaign also implies much greater energy inefficiency and dramatically higher levels of air pollution.
When asked to extinguish electric lights, most people around the world would turn to candlelight instead.
Candles are cozy and seem oh-so-natural.
Yet, when measured by the light they generate, candles are almost 100 times less efficient than incandescent light bulbs, and more than 300 times less efficient than fluorescent lights.
Moreover, candles create massive amounts of highly damaging indoor particulate air pollution, which in the United States is estimated to kill more than a 100,000 people each year.
Candles can easily create indoor air pollution that is 10-100 times the level of outdoor air pollution caused by cars, industry, and electricity production.
Measured against the relative decrease in air pollution from the reduced fossil fuel energy production, candles increase health-damaging air pollution 1,000-10,000-fold.
Unfortunately, the lights-out campaign exemplifies the state of much of our environmental debate.
We are spoon fed stories that fit preconceived frameworks.
For example, the recent breakup of a massive glacier in the Antarctic supposedly proves the mounting effects of global warming.
But we don’t hear that the area was ice-free, possibly just some 400 years ago, without the help of global warming.
We don’t hear that the Wilkins glacier makes up less than 0.01% of Antarctica.
Nor do we hear that the Antarctic is experiencing record sea ice coverage since satellite measurements began.
Likewise, we all heard Al Gore talking about the dramatic hurricane years of 2004 and 2005, but we’ve heard almost nothing about the complete absence of hurricane damage in 2006 and 2007.
The insurance company Lloyds of London has now begun to fret that the absence of natural disasters is putting a squeeze on its premiums.
We are endlessly presented with stories of soaring temperatures, but over the past year, we’ve experienced the single fastest temperature change ever recorded, and it’s been downward.
In January, Hong Kong was gripped by its second-longest cold spell since 1885.
This year’s storms in central and southern China produced the worst winter weather in a half-century.
Snow fell on Baghdad for the first time in living memory.
When we get a distorted picture, we are likely to make wrong choices.
Nowhere is this clearer than with the lights-out campaign.
Doing virtually no good while dramatically decreasing energy efficiency and increasing air pollution merely threatens any hope for enlightened public policy.
Like Father, Like Son
LONDON – “The enemy of yesterday is the friend of today....[I]t was a real war, but those brothers are free men now.”
Thus spoke Saif al-Islam al-Qaddafi in March 2010, referring to the leaders of the Libyan Islamic Fighting Group (LIFG), an armed organization that had attempted to assassinate his father, Muammar al-Qaddafi, three times in the mid-1990’s.
This may seem surprising.
A few days ago, the very same man promised Libyans a “sea of blood” if his father’s regime was toppled.
Indeed, Saif al-Islam, an elegant, soft-spoken graduate of the London School of Economics, has now become a prime suspect in massive crimes against humanity.
People like me, who study the tactics of Arab dictatorships and the causes of their persistence, are less surprised, if at all, by this turn of events.
Arab authoritarian regimes, unlike others that have given way to democracy, are incapable of self-reform; they have, however, mastered the tactics needed to prolong the life spans of their aging despotisms.
Creation of a Hydra-headed security apparatus, mass-murder of opponents (both real and imagined), widespread torture, and sustained censorship and repression are some of the common tactics used by Qaddafi, former Egyptian President Hosni Mubarak, former Tunisian President Zine el-Abidine Ben Ali, Syrian President Bashar al-Assad, and other Arab autocrats.
But Qaddafi’s regime became an international pariah mainly for a series of terrorist plots abroad, not for crimes against humanity committed against Libyans.
Oil interests and the regime’s “dovish” face in recent years successfully extended its life.
Qaddafi’s dovish period coincided with the rise to prominence of his second son, Saif al-Islam, and his sister Ayesha, the latter becoming a goodwill ambassador for the United Nations.
Saif cultivated a reputation for being a “reformer”: he called for a national-reconciliation process with opposition groups, supposedly liberalized the media, supported charity and development initiatives, and most importantly, became a face that the West could talk to.
The two public fronts for those initiatives were Libya Tomorrow and the al-Qaddafi Foundation for Development.
Behind them, however, Libyan Military Intelligence, headed by Abdullah al-Sanosi, was giving conditional support and setting the general direction for their activities.
The “reforms” proposed by Saif al-Islam included releasing some political prisoners, especially those, like the LIFG, who declared their allegiance to Qaddafi’s regime.
But concrete steps leading to government transparency and accountability, such as inquiries into oil wealth and state expenditures, or serious investigation of crimes against humanity, were all beyond his will and imagination.
Despite the cosmetic nature of the “reforms,” other regime factions, most notably those led by Saif al-Islam’s brothers Mutassim, al-Sa’adi, and Khamis, challenged them.
Behind the brothers were other security agencies: the Internal Security Forces, the Revolutionary Committees, and, to a lesser extent, the Jamahiriya Security Apparatus (Foreign Intelligence).
When I visited Tripoli in March 2010 for a “national reconciliation” conference, the conflicting statements given by Saif al-Islam and security officials surprised me.
The head of Internal Security Forces, Colonel al-Tuhami Khaled, another principal suspect in the crimes currently being committed against Libyans, refused to call the process a “reconciliation.”
For him, it was “repentance from heresy.”
Given the recent wave of uprisings, it is more evident than ever that any “reform” initiatives undertaken in the Arab world previously were aimed only at sustaining repressive dictatorships and escaping punishment for criminal abuse of power.
The reform “debate” within these regimes boiled down to a struggle between different branches of the security-military apparatus over the best way to preserve the status quo.
Arabs, of course, have known for years that their rulers were beyond reform.
That is why, in order to have a chance to catch up with the rest of the free, developed world, many of them are now risking their lives to remove those regimes.
What is happening today in the Arab world is history in the making, written in the blood, sweat, and tears of the victims of decades of violent repression.
When asked by a journalist what I would like to say to Saif al-Islam if I were ever to meet him again, I replied: “I hope to see you in the International Criminal Court, beside Mubarak and Ben Ali.”
Millions of Arabs of my generation and younger would probably give the same answer if asked what should become of the men who controlled their present and sought to destroy their future.
The Real Lima Deal
LIMA – It was the agreement that everyone wanted, yet that no one much likes.
This year’s annual United Nations climate-change conference in Lima, Peru, finally concluded in the early hours of Sunday morning, more than 24 hours after the scheduled close, after fierce argument in the final days.
Negotiators from 196 countries patched together a compromise that keeps the world on course to a new global climate agreement in Paris next year; but almost everyone was left unhappy with some provision or another.
Many critics of the deal, however, have missed the point.
The Lima deal is weak in many respects.
But it also represents a fundamental breakthrough for shaping a comprehensive global climate regime.
The Lima conference had two goals.
The first was to adopt an outline of the text of the 2015 Paris agreement.
This goal was achieved – but only by creating a huge 37-page document containing every possible option that countries may want to see in next year’s deal.
Delegates did not attempt to negotiate between the various options, taking to heart the old maxim “Why do today what you can put off until tomorrow?”
That negotiation has been left to the five sessions of talks scheduled for 2015, starting in February.
Given the divergence among the positions included in the Lima text, arriving at a draft fit for signing in Paris next December will be a huge task.
The second goal was to agree on the terms under which countries will devise their national commitments – officially, their “intended nationally determined contributions” (INDCs) – in 2015.
Here, the compromises were sharply felt.
Developing countries wanted the INDCs to include plans for adaptation to climate change as well as emissions cuts, and they wanted developed countries to include financial support for poorer countries.
Instead, no commitments to new money were made, and the inclusion of adaptation plans will be optional, not compulsory.
Meanwhile, developed countries wanted all countries to provide standardized information on their emissions targets and plans, to ensure transparency and comparability.
The key elements were agreed on, but only in the form of guidance, not as requirements.
Likewise, the proposal by the European Union and the United States that countries’ plans be subject to some kind of assessment was dropped from the final text.
But the aggregate effect of all countries’ plans will be calculated, allowing evaluation next year of whether the world has done enough to limit average global warming to the agreed ceiling of 2º Celsius.
It almost certainly will have not.
For many of the agreement’s critics, particularly those in the environmental movement, these compromises made the Lima deal an excessively “bottom-up” agreement.
Countries have too much latitude to make whatever commitments they want, relatively unconstrained by a common set of “top-down” rules imposed by the agreement.
Such critics worry that this will make it harder to persuade countries to cut emissions further when it becomes clear that their collective efforts are not enough, and that it may even allow some countries to use irregular accounting methods.
But this overlooks the Lima agreement’s greatest accomplishment: It ends the longstanding division of the world into only two kinds of countries, developed and developing.
Ever since the original UN Framework Convention on Climate Change was signed in 1992, countries’ obligations have been defined according to their level of development in that year.
The rich so-called “Annex 1” countries have had compulsory obligations, while poorer “non-Annex 1” countries merely have been required to make voluntary efforts.
Over the last 22 years, that binary distinction has looked increasingly obsolete, as the larger developing countries, such as China and Brazil, have emerged as economic superpowers and major greenhouse-gas emitters.
For this reason, the developed world has long wanted to replace the “firewall” between the two historic groupings with a form of differentiation that better reflects the contemporary world.
But the developing countries – including major powers like China – have insisted that it remain.
No longer.
The Lima agreement creates obligations for countries without regard for the distinction between Annex 1 and non-Annex 1.
Rather, it uses a new phrase drawn from the recent agreement between the US and China: countries’ responsibilities will be based on “common but differentiated responsibilities and respective capabilities in light of different national circumstances.”
The firewall has been breached.
In theory, the Lima agreement on INDCs does not determine the shape of the long-term Paris agreement.
So another fierce battle on this issue can be expected next year.
But the vast majority of developing countries – including China and Brazil – are happy with the new regime.
So it is impossible to imagine the binary model being restored – and those countries that opposed the change know it, which is why the final two days in Lima were so fiercely fought.
The Lima conference has shown just how hard the negotiations in Paris next year will be, despite recent optimism about global progress.
But one highly significant decision has now effectively been made.
Abandoning the rigid distinction between developed and developing countries paves the way toward an agreement that all countries, including the US and China, can sign.
Lincoln, Roosevelt, Churchill...Obama?
PARIS – Exceptional circumstances – namely, the depth and urgency of the financial and economic crisis – have contributed to bringing an exceptional man, Barack Obama, to the American presidency.
But will they also prevent him from succeeding?
Will the spirit of hope that brought Obama to power triumph over the winds of economic and social despair, or will fear in the West of the looming global recession spread to Asia and destabilize its giants, China and India?
These are the major questions looming before us as the president-elect prepares the American people for what can only be a rough ride ahead.
The same Americans who cried with joy on the night of November 4 are now seized with apprehension as economic hardship becomes more real by the day, as they witness the consequences of the crisis for their neighbors, if not themselves.
Faced with the urgent necessity of alleviating so many Americans’ suffering, Obama knows only too well that the “audacity of hope” will not be sufficient to the immensity of the challenges confronting him.
As the world slowly moves from elation to sober realism, it is important to maintain a balanced view of what’s happening and avoid the dual risks of underestimating the truly revolutionary nature of what took place and overestimating the ability of Obama’s team to find miracle solutions.
On the positive side, a tragic legacy of American history has been transcended.
The “color wall” has fallen nearly 20 years after the collapse of the Wall that divided Germany and Europe.
The pride that Americans – and Africans – have felt since Obama’s election is important and, one hopes, will bring long-term benefits.
America has not only re-consolidated at least part of its “soft power” abroad; it has done so at home as well.
Unemployment and the housing crisis are affecting Americans without regard to their color or origins.
Dignity may not provide you with a roof or a job, but it helps in maintaining hope in hard times.
You can ask for greater sacrifices and require greater patience from people whose trust and full support you have managed to gain.
We are also witnessing the establishment of a new balance between state and market.
But this should not go too far, for there are limits to what the state can do, and the strength of private initiative constitutes one key aspect of America, which became the world’s leading nation thanks to its dynamism, flexibility, and individual inventiveness.
More importantly, beyond the decline of the market and the re-legitimization of the state, we may be witnessing a rehabilitation of politics and politicians, if not of idealism.
For the first time in America since John F. Kennedy’s presidency, politics is seen as a potentially noble venture.
The idea that you can make a difference not only for yourself but for your country and the world, that self-interest and personal enrichment are not the only possible goals in life for the “best and the brightest,” has slowly and irresistibly been gaining ground in the Obama generation.
On the night of November 4, countless Americans and non-Americans felt that ideals could indeed become facts.
But this renewal of idealism is as much a product of hope as of fear.
The moment young people became tempted to join Obama’s quiet revolution was also the moment the doors of Wall Street began closing on them.
There are no new openings in a world of banking and finance brought low by the greed and hubris of some of its key members.
Wall Street is now facing one of the worst contractions in history.
Obama has a unique combination of intellect, character, and – so far – luck, but can he prove able to channel Abraham Lincoln, Franklin Roosevelt, and Winston Churchill at the same time?
It may be too much to ask from one man.
Yet the cards Obama is holding should not be underrated.
Unlike Roosevelt, he has a perfect understanding of the nature of the economic challenges facing him, and, like Churchill, he benefits from the support of a population ready to follow him in a climate of national unity, at least in the short run.
The Two Rabbits of International Trade
SEOUL – If you chase two rabbits at once, the old saying goes, both will escape.
And yet this is precisely what many governments are required to do: pursue both growth and distributional fairness.
The two objectives, though not incompatible, are entirely different from one another, and few policy tools can simultaneously help to achieve both.
This idea matters a lot in trade policy.
Much theoretical and empirical research demonstrates that opening trade can spur a country’s GDP growth.
But increasing a pie’s size does not guarantee that it will be shared fairly.
Often, the incremental growth that comes with a trade opening is unevenly shared; moreover, in many cases, some receive a smaller share than they did before.
Here is where government must intervene using its traditional tools, taxation and redistribution, as well as complementary policies such as social safety nets and adjustment assistance.
Similarly, from a global perspective, opening trade can contribute to the world’s overall economic growth, but does not guarantee that the benefits will be fairly distributed among countries.
Some say that no country loses, in absolute terms, from opening trade; otherwise, they would not participate in free-trade deals.
Still, the uneven distribution of the benefits created by a global trade opening means that some countries, especially the least developed, gain little in comparative terms, and are possibly even hurt.
This explains growing concern about the role of trade in development, despite the obvious fact that increased global trade has lifted hundreds of millions of people out of poverty in recent decades.
Unlike individual countries, there is no central authority that can enforce redistribution of wealth around the globe, so the problem of fairness must be addressed through the development mandates embedded in trade negotiations.
A key aspect of these development concerns is identifying the appropriate balance in any trade agreement. “Special and differential treatment” is the technical term used in trade negotiations to indicate that the balance must be tilted toward developing countries, with the extent of this treatment to be decided by the parties to the talks.
But, while the tendency in current trade negotiations to allow developing countries to open their markets less than others helps to achieve more balance, it may undermine the original goals of enhancing efficiency and boosting growth.
Furthermore, it fails to encourage more South-South trade.
And, in the end, this focus on the defensive side of trade liberalization makes negotiations more difficult.
For example, one of the critical issues blocking progress on the World Trade Organization’s Doha Development Agenda of global free-trade talks centers on the extent to which major developing countries should open their markets.
A better method of seeking balance is to give developing countries greater access to global markets, including those of other developing countries.
Yet, as of now, there is neither the will nor the energy to adopt this approach.
And, for developing countries that lack supply-side capacity, greater access to the global market is a moot point, as they remain far from even considering what size their share of it should be.
This raises another concern.
Because “aid for trade” – assistance for developing countries that aims to ease their trade-related constraints – takes the form of financial support, a practical issue is whether donors can maintain their level of funding, given today’s economic difficulties.
Moreover, an intrinsic and often neglected problem is how to divide management of aid-and-trade schemes among international and domestic institutions.
Among the major multilateral institutions, the WTO maintains jurisdiction over trade.
It is the World Bank and the International Monetary Fund that are better equipped to deal with aid issues.
Within member governments, relations with the WTO are usually the responsibility of the trade or foreign ministry, while multilateral financial institutions, including the regional development banks, are generally the responsibility of the finance ministry.
Thus, aid for trade, one of the key tasks on the WTO agenda, has weak institutional links to trade negotiations.
In fact, it might be more accurate to say that it is wholly separate.
The practicable solution is more effective coordination among the relevant institutions.
The Marrakesh Agreement, which established the WTO as the successor to the General Agreement on Tariffs and Trade in 1994, sets out the purpose of achieving greater coherence between the WTO and other international agencies.
One particularly noteworthy initiative is the Enhanced Integrated Framework for least-developed countries, which encompasses extensive engagement and coordination among partner agencies, including the IMF, the United Nations Conference on Trade and Development, the World Bank, and the WTO.
A more ambitious approach would be to link aid and trade explicitly.
A concrete funding mechanism in trade agreements warrants serious consideration, particularly in areas such as the WTO’s trade-facilitation negotiations, where capacity-building in developing countries is a key issue.
Nonetheless, requiring donations from member countries would be a step in the wrong direction; the WTO is not an aid agency.
Rather, WTO trade agreements could establish effective links with multilateral and regional development banks, thereby helping to realize the principle of closer international coordination set out in the Marrakesh Agreement.
The two rabbits of international trade can be caught.
But doing so requires innovative approaches that help to ensure that trade serves developing countries, rather than vice versa.
The Liquidity Time Bomb
NEW YORK – A paradox has emerged in the financial markets of the advanced economies since the 2008 global financial crisis.
Unconventional monetary policies have created a massive overhang of liquidity.
But a series of recent shocks suggests that macro liquidity has become linked with severe market illiquidity.
Policy interest rates are near zero (and sometimes below it) in most advanced economies, and the monetary base (money created by central banks in the form of cash and liquid commercial-bank reserves) has soared – doubling, tripling, and, in the United States, quadrupling relative to the pre-crisis period.
This has kept short- and long-term interest rates low (and even negative in some cases, such as Europe and Japan), reduced the volatility of bond markets, and lifted many asset prices (including equities, real estate, and fixed-income private- and public-sector bonds).
And yet investors have reason to be concerned.
Their fears started with the “flash crash” of May 2010, when, in a matter of 30 minutes, major US stock indices fell by almost 10%, before recovering rapidly.
Then came the “taper tantrum” in the spring of 2013, when US long-term interest rates shot up by 100 basis points after then-Fed Chairman Ben Bernanke hinted at an end to the Fed’s monthly purchases of long-term securities.
Likewise, in October 2014, US Treasury yields plummeted by almost 40 basis points in minutes, which statisticians argue should occur only once in three billion years.
The latest episode came just last month, when, in the space of a few days, ten-year German bond yields went from five basis points to almost 80.
These events have fueled fears that, even very deep and liquid markets – such as US stocks and government bonds in the US and Germany – may not be liquid enough.
So what accounts for the combination of macro liquidity and market illiquidity?
For starters, in equity markets, high-frequency traders (HFTs), who use algorithmic computer programs to follow market trends, account for a larger share of transactions.
This creates, no surprise, herding behavior.
Indeed, trading in the US nowadays is concentrated at the beginning and the last hour of the trading day, when HFTs are most active; for the rest of the day, markets are illiquid, with few transactions.
A second cause lies in the fact that fixed-income assets – such as government, corporate, and emerging-market bonds – are not traded in more liquid exchanges, as stocks are.
Instead, they are traded mostly over the counter in illiquid markets.
Third, not only is fixed income more illiquid, but now most of these instruments – which have grown enormously in number, owing to the mushrooming issuance of private and public debts before and after the financial crisis – are held in open-ended funds that allow investors to exit overnight.
Imagine a bank that invests in illiquid assets but allows depositors to redeem their cash overnight: if a run on these funds occurs, the need to sell the illiquid assets can push their price very low very fast, in what is effectively a fire sale.
Fourth, before the 2008 crisis, banks were market makers in fixed-income instruments.
They held large inventories of these assets, thus providing liquidity and smoothing excess price volatility.
But, with new regulations punishing such trading (via higher capital charges), banks and other financial institutions have reduced their market-making activity.
So, in times of surprise that move bond prices and yields, the banks are not present to act as stabilizers.
In short, though central banks’ creation of macro liquidity may keep bond yields low and reduce volatility, it has also led to crowded trades (herding on market trends, exacerbated by HFTs) and more investment in illiquid bond funds, while tighter regulation means that market makers are missing in action.
As a result, when surprises occur – for example, the Fed signals an earlier-than-expected exit from zero interest rates, oil prices spike, or eurozone growth starts to pick up – the re-rating of stocks and especially bonds can be abrupt and dramatic: everyone caught in the same crowded trades needs to get out fast.
Herding in the opposite direction occurs, but, because many investments are in illiquid funds and the traditional market makers who smoothed volatility are nowhere to be found, the sellers are forced into fire sales.
This combination of macro liquidity and market illiquidity is a time bomb.
So far, it has led only to volatile flash crashes and sudden changes in bond yields and stock prices.
But, over time, the longer central banks create liquidity to suppress short-run volatility, the more they will feed price bubbles in equity, bond, and other asset markets.
As more investors pile into overvalued, increasingly illiquid assets – such as bonds – the risk of a long-term crash increases.
This is the paradoxical result of the policy response to the financial crisis.
Macro liquidity is feeding booms and bubbles; but market illiquidity will eventually trigger a bust and collapse.
Listening to Arsonists
BERKELEY – I had always thought that Barack Obama made a significant mistake in naming the Republican ex-senator Alan Simpson to co-chair the president’s deficit-reduction commission.
Simpson was a noted budget arsonist when he was in the Senate.
Indeed, he never met a budget-busting, deficit-increasing initiative from a Republican president that he would not lead the charge to pass.
Nor did he ever meet a sober deficit-reducing initiative from a Democratic president that he did not oppose with every fiber of his being.
You don’t pick an arsonist to head the fire department, I thought when Obama named him co-chair of the National Commission on Fiscal Responsibility and Reform.
But perhaps I am ungenerous.
Perhaps Simpson has had a change of heart.
Perhaps he has traveled his own road to Damascus, come face-to-face with what he had done and who he was, repented, and wanted to repair some of the damage to America and its long-run economic growth prospects that he had caused.
Even in that case, however, naming those who misbehave to important positions of high trust and acclaiming them as bipartisan statesmen gives the next generation really lousy incentives.
And it’s not as though Congressional Republicans think they owe enough to Simpson for him to swing a single vote in either chamber of the legislature.
Obama officials assured me that Simpson had, indeed, had a change of heart; that he was a smart man with a sophisticated understanding of the issues; that he could sway reporters and get them to describe the commission’s advice as “bipartisan” (even though he could not sway actual legislators); and that he would be a genuine asset to the substantive work of the commission.
John Berry recently wrote in the online journal The Fiscal Times that not even that is true.
Simpson is “condescending and derisive – and wildly wrong about important parts of the Social Security system's past.” Moreover, Simpson apparently does not understand that, as commission co-chair, his job is to build a broad coalition for necessary and mutually beneficial policy changes.
Indeed, Berry reports that Simpson now believes that it would be unfair to use general revenues to pay for any portion of Social Security benefits. In other words, the large surplus in the Social Security trust fund, which is made up of government bonds that general revenues are earmarked to pay for, does not really exist and cannot be drawn upon.
“Simpson maintained,” according to Berry, that “Social Security is already insolvent because it is paying out more than it is getting in tax revenue.” Never mind that the plan since 1983 has been for Social Security to tax more than it spends for a full generation and then use the built-up surpluses to spend more than it taxes.
“There is no surplus in there.
It’s a bunch of IOUs,” Berry reports Simpson as having said. “Listen.
It’s two-and-a-half trillion bucks in IOUs which have been used to build the interstate highway system and all of the things people have enjoyed since it has been set up.”
Simpson is not making sense.
All investments are IOUs.
A General Electric bond is just that – a promise by the General Electric Company to pay its creditors.
A dollar bill is an IOU from the government, just like a Social Security Trust Fund bond is.
Perhaps the most bizarre of Simpson’s claims that are quoted by Berry is that the Social Security Commission of 1983 “never knew there was a baby boom....” The baby boom, of course, started immediately after World War II and peaked in 1960.
As Berry writes: “Alan Greenspan, who headed...[that] commission...would tell Simpson something different.
The big demographic shift that began right after World War II was precisely why...taxes were raised and benefits were cut [in 1983] – to build up a trust fund surplus so benefits could be paid.”
Four centuries ago, the consensus, in Western Europe at least, was that good and even adequate government in this fallen world was inevitably a rarity.
Democracy always degenerated into mob rule, monarchy into tyranny, and aristocracy into oligarchy.
Even when well run, democracy took little interest in the distant future, aristocracy took little interest in the well-being of those whom Simpson calls the “little people,” and monarchy took little interest in anything other than legitimate succession.
Then, at the end of the eighteenth century, the founders of the United States of America and their intellectual successors claimed that this pessimism about government was unwarranted. “The science of politics...like most other sciences,” claimed Alexander Hamilton, “has received great improvement....The regular distribution of power into distinct departments...legislative balances and checks...judges holding their offices during good behavior; the representation of the people in the legislature by deputies of their own election...are means, and powerful means, by which the excellences of republican government may be retained and its imperfections lessened or avoided...”
Perhaps Hamilton was too much the optimist.
When I look at Barack Obama’s deficit commission – indeed, look at governance worldwide – I see many imperfections, but few or no examples of excellence.
What is Italy Saying?
NEW YORK – The outcome of the Italian elections should send a clear message to Europe’s leaders: the austerity policies that they have pursued are being rejected by voters.
The European project, as idealistic as it was, was always a top-down endeavor.
But it is another matter altogether to encourage technocrats to run countries, seemingly circumventing democratic processes, and foist upon them policies that lead to widespread public misery.
While Europe’s leaders shy away from the word, the reality is that much of the European Union is in depression.
The loss of output in Italy since the beginning of the crisis is as great as it was in the 1930’s.
Greece’s youth unemployment rate now exceeds 60%, and Spain’s is above 50%.
With the destruction of human capital, Europe’s social fabric is tearing, and its future is being thrown into jeopardy.
The economy’s doctors say that the patient must stay the course.
Political leaders who suggest otherwise are labeled as populists.
The reality, though, is that the cure is not working, and there is no hope that it will – that is, without being worse than the disease.
Indeed, it will take a decade or more to recover the losses incurred in this austerity process.
In short, it is neither populism nor shortsightedness that has led citizens to reject the policies that have been imposed on them.
It is an understanding that these policies are deeply misguided.
Europe’s talents and resources – its physical, human, and natural capital – are the same today as they were before the crisis began.
The problem is that the prescriptions being imposed are leading to massive underutilization of these resources.
Whatever Europe’s problem, a response that entails waste on this scale cannot be the solution.
The simplistic diagnosis of Europe’s woes – that the crisis countries were living beyond their means – is clearly at least partly wrong.
Spain and Ireland had fiscal surpluses and low debt/GDP ratios before the crisis.
If Greece were the only problem, Europe could have handled it easily.
An alternative set of well-discussed policies could work.
Europe needs greater fiscal federalism, not just centralized oversight of national budgets.
To be sure, Europe may not need the two-to-one ratio of federal to state spending found in the United States; but it clearly needs far more European-level expenditure, unlike the current miniscule EU budget (whittled down further by austerity advocates).
A banking union, too, is needed.
But it needs to be a real union, with common deposit insurance and common resolution procedures, as well as common supervision.
There will also have to be Eurobonds, or an equivalent instrument.
European leaders recognize that, without growth, debt burdens will continue to grow, and that austerity by itself is an anti-growth strategy.
Yet years have gone by, and no growth strategy is on the table, though its components are well known: policies that address Europe’s internal imbalances and Germany’s huge external surplus, which now is on par with China’s (and more than twice as high relative to GDP).
Concretely, that means wage increases in Germany and industrial policies that promote exports and productivity in Europe’s peripheral economies.
What will not work, at least for most eurozone countries, is internal devaluation – that is, forcing down wages and prices – as this would increase the debt burden for households, firms, and governments (which overwhelmingly hold euro-denominated debts).
And, with adjustments in different sectors occurring at different speeds, deflation would fuel massive distortions in the economy.
If internal devaluation were the solution, the gold standard would not have been a problem in the Great Depression.
Internal devaluation, combined with austerity and the single-market principle (which facilitates capital flight and the hemorrhaging of banking systems) is a toxic combination.
The European project was, and is, a great political idea.
It has the potential to promote both prosperity and peace.
But, rather than enhancing solidarity within Europe, it is sowing seeds of discord within and between countries.
Europe’s leaders repeatedly vow to do everything necessary to save the euro.
European Central Bank President Mario Draghi’s promise to do “whatever it takes” has succeeded in providing a temporary calm.
But Germany has consistently rejected every policy that would provide a long-term solution.
The Germans, it seems, will do everything except what is needed.
Of course, the Germans have reluctantly come to accept the necessity of a banking union that includes common deposit insurance.
But the pace with which they accede to such reforms is out of kilter with the markets.
Banking systems in several countries are already on life support.
How many more will be in intensive care before a banking union becomes a reality?
Yes, Europe needs structural reform, as austerity advocates insist.
But it is structural reform of the eurozone’s institutional arrangements, not reforms within individual countries, that will have the greatest impact.
Unless Europe is willing to make those reforms, it may have to let the euro die to save itself.
The EU’s Economic and Monetary Union was a means to an end, not an end in itself.
The European electorate seems to have recognized that, under current arrangements, the euro is undermining the very purposes for which it was supposedly created.
Little Big Men
CAMBRIDGE – History is often written in terms of military heroes, but the enormous potential of human leadership ranges from Attila the Hun to Mother Teresa.
Most everyday leaders remain unheralded.
The role of heroic leadership in war leads to overemphasis of command and control and hard military power.
In America today, the presidential debate is between Senator John McCain, a war hero, and Senator Barack Obama, a former community organizer.
The image of the warrior leader lingers in modern times.
The writer Robert Kaplan points to the birth of a new “warrior class as cruel as ever and better armed” ranging from Russian Mafiosi and Latin American drug kingpins to terrorists who glorify violence just as ancient Greeks did in the sacking of Troy.
Kaplan argues that modern leaders must respond in kind, and that modern leadership will demand a pagan ethos rooted in the past.
Smart warriors, however, know how to lead with more than just the use of force.
Soldiers sometimes joke that their job description is simple: “kill people and break things.”
Indeed, an oversimplified image of warrior-style leadership in President George W. Bush’s first term caused costly setbacks for America’s role in the world. It is not a manly modern Achilles who makes the best warrior leader in today’s communication age.
Military leadership today requires political and managerial skills.
Many autocratic rulers – in Zimbabwe, Myanmar, Belarus, and elsewhere – still lead the old-fashioned way. They combine fear with corruption to maintain kleptocracies dominated by “the big man” and his coterie.
A good portion of the world is ruled this way.
Some theorists try to explain this with an “alpha male theory of leadership.”
The psychiatrist Arnold M. Ludwig, for example, argues that just as male monkeys, chimps, or apes automatically begin to assume more responsibility for their particular community once they attain the dominant status of alpha male, human rulers do so as well.
But such socio-biological explanations of leadership are of only limited value.
Thus far, no leadership gene has been identified, and studies of identical and fraternal male twins find that only a third of their difference in occupying formal leadership roles can be explained by genetic factors.
While this suggests that inbred characteristics influence the extent to which people play particular roles, it leaves a lot of room for learned behavior to influence outcomes.
Even so, one effect of the traditional heroic warrior approach to leadership has been to support the belief that leaders are born rather than made, and that nature is more important than nurture.
The search for the essential traits of a leader dominated the field of leadership studies until the late 1940’s, and remains common in popular discourse today.
A tall handsome person enters a room, draws attention, and “looks like a leader.”
Various studies show that tall men are often favored, and that corporate CEOs are taller than average.
But some of the most powerful leaders in history, such as Napoleon, Stalin, and Deng Xiaoping were little over five feet tall.
The traits-centered approach has not vanished from studies of leadership, but it has been broadened and made more flexible.
Traits have come to be seen as consistent patterns of personality rather than inherited characteristics.
This definition mixes nature and nurture, and means that “traits” can to some extent be learned rather than merely inherited.
We talk about leaders being more energetic, more risk-taking, more optimistic, more persuasive, and more empathetic than other people.
These traits, however, are affected partly by a leader’s genetic makeup and partly by the environments in which the traits were learned and developed.
A persuasive experiment recently demonstrated the interaction between nature and nurture.
A group of employers was asked to hire workers who had been ranked by their looks.
If the employers saw only the resumés, beauty had no impact on hiring.
Surprisingly, however, when telephone interviews were included in the process, beautiful people did better, even though they were unseen by the employers.
A lifetime of social reinforcement based on their genetically given looks may have encoded into their voice patterns a tone of confidence that could be projected over the phone.
Nature and nurture became thoroughly intertwined.
Genetics and biology matter in human leadership, but they do not determine it in the way that the traditional heroic warrior approach to leadership suggests.
The “big man” type of leader works in societies based on networks of tribal cultures that rely on personal and family honor and loyalty.
But such social structures are not well adapted for coping with today’s complex information-based world.
In modern societies, institutional constraints such as constitutions and impersonal legal systems circumscribe such heroic figures.
Societies that rely on heroic leaders are slow to develop the civil society and broad social capital that are necessary for leading in a modern networked world.
Modern leadership turns out to be less about who you are or how you were born than about what you have learned and what you do as part of a group.
Nature and nurture intertwine, but nurture is much more important in the modern world than the heroic paradigm acknowledges.
Modern information societies require us to go beyond the “big man” approach to leadership.
It will be interesting to see how these classical stereotypes play out in the American presidential competition this year.
Live Earth, Deaf to Reality
The organizers of next Saturday’s Live Earth concerts hope that the entire world will hear a crystal clear message: climate change is the most critical threat facing the planet.
Planned by former US Vice President Al Gore, Live Earth will be the biggest, most mass-marketed show of celebrity activism in history.
But making global warming the world’s top priority means that we shuffle other major challenges down our “to do” list.
Some climate change activists actually acknowledge this: Australian author Tim Flannery recently told an interviewer that climate change is “the only issue we should worry about for the next decade.”
Tell that to the four million people starving to death, to the three million victims of HIV/AIDS, or to the billions of people who lack access to clean drinking water.
Human-caused climate change deserves attention – and it has gotten it, thanks to Gore, Flannery, and others.
Even before a single note has been played in the “awareness-raising” concerts, much of the developed world believes that global warming is the planet’s biggest problem.
Yet, the world faces many other vast challenges.
Whether we like it or not, we have limited money and a limited attention span for global causes.
We should focus first on achieving the most good for the most people.
The Copenhagen Consensus project brought together top-class thinkers, including four Nobel Laureate economists, to examine what we could achieve with a $50 billion investment designed to “do good” for the planet.
They examined the best research available and concluded that projects requiring a relatively small investment – getting micro-nutrients to those suffering from malnutrition, providing more resources for HIV/AIDS prevention, making a proper effort to get drinking water to those who lack it – would do far more good than the billions of dollars we could spend reducing carbon emissions to combat climate change.
Carbon reduction activists argue that focusing exclusively on climate change will bring many benefits.
They point out, for example, that malaria deaths will climb along with temperatures, because potentially killer mosquitoes thrive in warmer areas.
And they would be right.
But it’s not as simple as the bumper sticker slogan “Fight climate change and ward off malaria.”
If America and Australia are somehow inspired by the Live Earth concerts to sign the Kyoto Protocol, temperatures would rise by slightly less.
The number of people at risk of malaria would be reduced by about 0.2% by 2085.
Yet the cost of the Kyoto Protocol would be a staggering $180 billion a year.
In other words, climate change campaigners believe we should spend $180 billion to save just 1,000 lives a year.
For much less money, we could save 850,000 lives each and every year.
We know that dissemination of mosquito nets and malaria prevention programs could cut malaria incidence in half by 2015 for about $3 billion annually – less than 2% of the cost of Kyoto.
The choice is stark.
Some will argue that the real problem is that the Kyoto Protocol isn’t strong enough.
But, as I point out in my forthcoming book Cool It, even if we could stop global warming right now – which is impossible – we could reduce malaria infections by only 3.2% by 2085.
Should we not worry more about the 100% infected now, whom we can help much better, more cheaply, and with much greater effect?
When we look at the evidence, we discover again and again that the best solutions to the world’s biggest challenges aren’t the ones we hear about the most.
We could save many more lives during extreme weather events, for example, by insisting on hurricane-resistant building standards than we would by committing to Live Earth’s target of a 90% reduction in carbon emissions by 2050.
This would be easier, much less costly, and ultimately do far more good.
Indeed, the Copenhagen Consensus experts discovered that for every dollar invested in Kyoto-style battling climate change, we could do up to 120 times more good with in numerous other areas.
It’s honorable that the Live Earth organizers are so concerned about the far-off future, but you have to wonder why there is so little concern about the much-worse present.
I don’t want to stop anyone from caring about climate change, only to encourage a sense of perspective.
There is a massive amount of good that we can do through practical, affordable approaches like HIV/AIDS education, malaria prevention, and the provision of micro-nutrients or clean water.
This is the message I would like to ring out: we should focus on the best ideas first.
This Saturday, unfortunately, that is not what we’ll hear.
Live Long and Prosper
Living a long time is one of our deepest wishes, and medical and economic progress offers the hope that it will be fulfilled.
Some scientists say that the average human lifespan could reach 90 years or more by mid-century.
But what if our wish is granted?
What good is a longer life if we cannot maintain our standard of living?
The fundamental difficulty in planning for enhanced longevity is that we do not know whether it will really happen.
Life expectancy might well be only 80 years by mid-century – about where it is now in advanced countries – if medical progress is disappointing or is offset by new threats or hazards.
If we make provisions for long lives that are cut short, we will have wasted huge amounts of precious economic resources.
But if we fail to make provisions for lives that are longer, many elderly people will be condemned to poverty.
The whole direction of any country’s economy depends on longevity.
A huge number of elderly people would mean a lot of people wanting to live in certain locations, seeking certain kinds of living quarters, and consuming certain kinds of services.
The types of corporations that will succeed, the buildings that are constructed, and the research and development that will be needed all depend on the demographics of demand.
This is true of the global economy as well.
In his 2005 book The Future for Investors , Jeremy Siegel argues that differences across countries in longevity will interact with differences in wealth levels to form a fundamental determinant of economic relations among countries.
Trade flows may be driven substantially by longevity: countries expecting a relatively large number of elderly in the future should be running trade surpluses now and deficits later.
Retired people need life annuities – contracts that offer a stable income stream for as long as they live – to insure against the risk of outliving their wealth.
If there were no longevity risk – that is, if the probability of dying at each age in the future were reliably known – then pension funds could easily offer life annuities to large numbers of people by investing their assets in bonds of various maturities in order to pay out just the right amount each year.
But pension funds cannot do this, because they risk running out of money if, on average, people turn out to live longer than expected.
For people retiring at age 60, the difference between living to 80 and living to 90 is enormous: in the latter case, their pensions would have to pay benefits for 50% longer.
As a result, private companies do not offer life annuities at attractive rates, because they cannot be reasonably sure that they can fulfill their promises unless they are significantly overcapitalized.
Fortunately, financial markets are beginning to address longevity risk.
In November 2004, the European Investment Bank (EIB), working with the private bank BNP Paribas, announced that it would issue the world’s first long-term longevity bond.
The bonds, with a maturity of 25 years, pay out an annual sum of £50 million multiplied by the percentage of the English and Welsh male population aged 65 in 2003 that is still alive in a given year (subject to a slight data lag).
For example, if 80% of the men are still alive ten years after issuance, the bonds will pay out £40 million.
If only 40% of the men are still alive after twenty years, the bonds will pay out £20 million.
BNP Paribas hoped to place the bonds with UK pension funds, but so far the issue has not been fully subscribed.
Most of the likely buyers are slow to make up their minds, since trustees, fund managers, consultants, and employer sponsors must all become comfortable that the new concept is consistent with their fiduciary obligations.
Moreover, it is not clear that the EIB can get further help from reinsurers in managing the risks it assumes by issuing such bonds because reinsurers do not yet see how they can fully hedge the risks involved.
The slow launch of longevity bonds ultimately reflects a fundamental question: can we genuinely reduce the impact of longevity risk?
If everyone is affected by longevity risk in the same way, then no matter what the price of a longevity bond, everyone should logically want to be on the same side of the contracts – all buyers at one price, all issuers at another.
No difference means no market.
But, in fact, we are not all affected by longevity risk in the same way.
Life insurance companies, drug firms, businesses providing services for the elderly, and investors in retirement real estate would all benefit from increased longevity, while defined-benefit pension plans and annuity providers would lose.
Less affluent individuals are also more threatened by longevity than those for whom living longer mainly means leaving a smaller inheritance to their children.
Indeed, countries with higher birth rates are less exposed to longevity risk in the next half-century or so than countries with low birth rates.
We thus need a large and liquid market for longevity risk so that these different groups can creatively share their risks with each other.
In fact, creating such a market is the most important step we can take to address longevity risk, for we could then discover its true price, allowing myriad business decisions involving longevity to be made more efficiently.
There is virtually no history of the price behavior of longevity bonds, so discovering their buyers and sellers, and the prices that clear the market, will take some time.
But longevity bonds, while only experimental today, will eventually become vitally important to the world economy.
Living in a Non-Polar World
NEW YORK – Today’s world is dominated not by one or two or even several powers, but rather is influenced by dozens of state and non-state actors exercising various kinds of power.
A twentieth century dominated first by a few states, then, during the Cold War, by two states, and finally by American preeminence at the Cold War’s end, has given way to a twenty-first century dominated by no one.
Call it non-polar.
Three factors have brought this about.
First, some states have gained power in tandem with their increased economic clout.
Second, globalization has weakened the role of all states by enabling other entities to amass substantial power.
And, third, American foreign policy has accelerated the relative decline of the United States vis-à-vis others.
The result is a world in which power is increasingly distributed rather than concentrated.
The emergence of a non-polar world could prove to be mostly negative, making it more difficult to generate collective responses to pressing regional and global challenges. More decision makers make it more difficult to make decisions.
Non-polarity also increases both the number and potential severity of threats, be they rogue states, terrorist groups, or militias.
Still, if non-polarity is inevitable, its character is not.
A great deal can and should be done to shape the non-polar world.
But order will not emerge on its own.
On the contrary, left to its own devices, a non-polar world will become messier over time.
Resisting the spread of nuclear weapons and unguarded nuclear materials may be as important as any other set of undertakings.
If internationally managed enriched-uranium or spent-fuel banks are established, countries could gain access to nuclear power but not come to control the material needed for bombs.
Security assurances and defensive systems could be provided to states that might otherwise feel compelled to develop their own nuclear programs to counter those of their neighbors.
And robust sanctions could be introduced to influence the behavior of would-be nuclear weapon states.
Combating terrorism is also essential if the non-polar era is not to turn into a modern Dark Age.
There are many ways to weaken existing terrorist organizations by using intelligence, law enforcement resources, and military capabilities.
But this is a loser’s game unless something can be done to reduce recruitment.
Parents, religious figures, and political leaders must delegitimize terrorism by shaming those who embrace it.
More importantly, governments must find ways to integrate alienated young men and women into their societies, which requires greater political freedom and economic opportunity.
Trade also can be a powerful force in a non-polar world by giving states a stake in avoiding conflict, generating greater wealth, and strengthening the foundations of domestic political order – thereby decreasing the chance of state failure as well.
To this end, the scope of the World Trade Organization should be extended through the negotiation of future global arrangements that reduce subsidies and both tariff and non-tariff barriers.
A similar level of effort might be needed to ensure the continued flow of investment. The goal should be to create a World Investment Organization, which, by encouraging cross-border capital flows, would minimize the risk that “investment protectionism” impedes activities that, like trade, are economically beneficial and build political bulwarks against instability.
A WIO could encourage transparency on the part of investors, determine when national security is a legitimate reason for prohibiting or limiting investment, and establish a dispute-resolution mechanism.
More effort also will be needed to prevent state failure and deal with its consequences. The US and other developed countries should enhance their military capacities to deal with the type of threats being faced in Iraq and Afghanistan, as well as establish a pool of civilian talent to assist with basic nation-building tasks.
Greater economic and military assistance to increase states’ ability to meet their responsibilities to their citizens and neighbors will also be essential.
Multilateralism will be critical in a non-polar world.
To succeed, though, it must be recast to include entities other than the great powers.
The United Nations Security Council and the G-8 should be reconstituted to reflect the world of today rather than the post-1945 era, and the participation of non-state actors in multilateral organizations and processes will need to be considered.
Multilateralism may have to be less comprehensive and less formal, at least initially.
Networks will be needed alongside organizations.
Getting everyone to agree on everything will be difficult; instead, we should consider accords with fewer parties and narrower goals.
Trade is something of a model here, insofar as bilateral and regional accords are filling the vacuum created by the failure to conclude a global trade round.
The same is true of climate change: agreement on certain aspects of the problem (say, deforestation) or involving only some countries (the major carbon emitters, for example) may prove feasible, whereas an accord that includes every country and tries to resolve every issue may not.
Multilateralism à la carte is likely to be the order of the day.
This is less than optimal, but in a non-polar world, what is best may well prove the enemy of the possible.
Living in History
LONDON – I recently took part in a public debate with Paul Keating, Australia’s former prime minister.
He is an interesting man, a genuine intellectual driven by his inner demons both to flay those who pay insufficient credit to his transformational role in Australian politics and to expose what he regards as waffle and myths.
This regularly engulfs him in controversy, but it can serve an educational purpose.
Recently, for example, he denounced the idea that Australian sacrifices in the Gallipoli campaign of 1916 during World War I had somehow made and redeemed his nation.
For him, Australian came of age later, at Kokoda, often called Australia’s Thermopylae, when a small group of young soldiers resisted the advance of Japanese army divisions that seemed set to take Port Moresby in Papua New Guinea and threaten the Australian continent.
Keating believed that the fighting at Kokoda represented the real birth pains of an independent Australia, not some colonial appendage of Britain created to serve imperial purposes in the Far East.
I would not dare to challenge the sensitivities of Australians about their own history.
I like their country too much for that.
But Keating’s remarks raise a general question about history that goes to the heart of the sense of identity that binds every community.
Most countries fabricate at least some of their history; or they simply whitewash the bits that do not match their heroic idea of themselves.
My own country, for example, invented much of what it means to be British in order to accommodate Scotland in the eighteenth century to the idea of rule from England, and to persuade the whole of the United Kingdom that it should not object to being ruled by German kings.
For my entire adult life, Britain’s sense of its place in the world has been largely defined by Winston Churchill’s leadership during World War II and his views of our role in the world when that war was over.
He and other political leaders were keen on a united Europe.
But it was meant for others.
Britain was not to be part of it.
History had written a different role for us – sovereign, independent, detached from continental entanglements, and, if not an equal of America, then at least a senior, faithful adjutant.
A little more sharp-eyed honesty about Britain’s real weight in the post-war world might have enabled us British to play a more central role in Europe’s affairs, molding the emerging European Union more closely to our own national interests.
So, when you get history wrong, it can skew your own strategic choices.
But, worse than that, blindness to what really happened in the past can distort the development of your society.
Sooner or later, the healthiest societies face up to what they have been – good and bad – and grow in decency and self-confidence as a result.
Germany has done that admirably.
In the last couple of years, I have seen two painfully honest German films – “Downfall,” about the last days of Hitler, and “The Lives of Others,” about the operations of the former East Germany’s secret police (the Stasi).
Since those dark days, Germany has developed as a healthy vibrant democracy.
Others still have trouble confronting their own history.
Russia stumbles over Stalin and his legacy of evil.
China turns away from a reappraisal of Mao or an honest account of what happened at Tiananmen in 1989.
Some Japanese still want to write or believe fairy tales about their pre-war and wartime history, which has hugely complicated Japan’s efforts to find a confident and lasting reconciliation with China.
By contrast, consider the way France and Germany have buried the hatchet and learned to live in peace and trust.
It is this extraordinary, historic act that made possible the reconstruction and successful development of Europe over the last half-century.
There are at least three lessons to draw from these musings of a one-time university history student.
First, history teaches you about today as well as yesterday.
The English writer G.K. Chesterton once wrote, “The disadvantage of men not knowing the past is that they do not know the present.”
Second, in order to understand how to cope with the problems that plague us – from terrorism to nuclear proliferation – it is sensible to know how and whence they emerged.
Why are we faced today with worldwide economic blizzards?
How do today’s problems compare with the 1929 financial crash and the depression that followed it?
What does history tell us about the consequences of the protectionist response to those events?
Finally, while nation states remain the basic building blocs in international affairs, and loyalty to your nation – patriotism – is a fine thing, crude nationalism can be deeply destructive. “My country right or wrong” is the parent of much misery.
Rigorous historical enquiry can save us from blindness about who we are and what we can do.
Historical debate is a sign of a healthy society.
So three cheers for Keating, right or wrong.
Living on a Volcano
As I write this, violent clashes with the police have been going on for nearly two weeks in the suburbs of Paris and other French cities, with cars being set on fire at a rate of nearly 1,000 per night.
Why is this happening?
How far can it go?
The existence of thousands of unemployed young people, without income or roots, idle and knowing only violence to express their quest for recognition, is not particularly French.
Everyone remembers the Watts, Newark, and Detroit riots in the United States in the 1960’s, and the riots in Liverpool in the UK in the early 1980’s, as well as in Bradford, Oldham, and Burnley in recent years.
Likewise, France witnessed riots in Vaux-en-Velin, near Lyon, 20 years ago.
So it is important to distinguish what is common to many developed countries and what is specific to France.
All the developed economies have undergone profound changes over the last 30 years.
We have gone from managerial to stockowner capitalism, from economies with large doses of state direction to far more deregulated markets, from the active and expansive social policies of the 1960s’ and 1970’s to a world in which such spending is constantly shrinking.
Although wealth has been growing constantly – GDP has more than doubled in the last 50 years – the share of wages in the total has diminished by 10%, even while millions of the rich have become much richer.
Everywhere, this has meant massive pauperization of the least favored part of the population.
In rich countries, mass poverty, which seemed to have been eliminated around 1980, has reappeared.
Access to good education, and even more so to the labor market, is increasingly restricted for many young people, especially those who come from poor or single-parent families or from minority ethnic backgrounds, languages, or religions.
These people feel rejected and unrecognized. “Because they want to break us, we will break everything” is the motto that best expresses their mood.
There are untold reservoirs of social violence in all of our lands.
But against this shared background, France exhibits some important distinctive features.
First, demography: for the last 50 years France has had much higher fertility rates than the rest of Europe – 1.9 children per woman, compared to the European average of 1.6 and the German or Spanish rates of 1.3.
In Germany, every generation entering the labor market is smaller than the one exiting it.
In France, by contrast, 200,000 to 300,000 more people enter the labor market than leave it in each generation – and this does not include immigration, which, although slowing recently, represents a large number of job seekers.
As rates of economic growth have declined, this has meant growing unemployment.
Then there is geography: France’s massive urban concentration around the capital – Paris and its suburbs contain nearly 20% of the population – is unique in Europe.
The sheer number of confused and disoriented young people has overwhelmed the French system’s capacity to integrate them – even though its capacity in this regard is, in fact, impressive.
Indeed, France has opened its public educational system to an extraordinary degree, refusing all group rights to minorities, but vigorously affirming personal rights, including full access to all social services, regardless of language, religion, or skin color.
The system is cracking, but only because of the limits of its absorptive capacity, not because of its core principles.
In these circumstances, every French politician has known for the last 20 years that France has been living with a growing risk that isolated incidents might coalesce into a critical mass of violence.
The task of social workers and police, therefore, is to try to resolve – quickly and discreetly – each particular incident, in order to dampen the revolt.
What needs to be done also has been well known since 20 years ago, when a nonpartisan report by a cross-party group of big-city mayors unanimously agreed on measures to be taken: efficient repression, highly developed social prevention, a permanent local police presence, and a renewed effort at reintegrating delinquents.
The difficulty with implementing this policy has been that its preventive aspects – social support and reintegration of delinquents – appear to the frightened population living in the affected areas as being “soft on crime” and overly generous.
But for the past three years, France has had a government that no longer believes that a socially oriented urban policy works.
It believes only in repression and says so openly.
As a result, local police forces have been reduced from 20,000 to 11,000, while the national riot police (CRS) have been reinforced.
France is now experiencing a practical demonstration of this insane and totally inefficient policy, with the Minister of the Interior, Nicolas Sarkozy, providing a telling illustration of the new orientation when he described the rebellious young as “scum.”
It was the proverbial match thrown by a careless smoker into a parched forest.
The young responded with a vengeance to Sarkozy’s provocation.
The main risk now is that events in the suburbs of large French cities will serve as an example to other young people, whether in the less urban areas of France or in other European countries, who feel socially excluded and are, perhaps, just as prone to violent outbursts.
Solving the problems underlying the French revolt will require time, discretion, mutual respect, community-based social and police work – rather than a centralized, repressive approach – and a lot of money.
But France is by no means the only country that should be worried.
Living Under Occupation
by Ralf Dahrendorf
When I hear Americans such as US National Security Adviser Condoleeza Rice compare the occupation of Iraq with that of Germany (and sometimes Japan) after WWII, distant memories flood in, for I am a child of that experience.
Indeed, in the twelve months following the unconditional surrender of Hitler's Nazi regime in May 1945, I lived under serial Russian, American, and British occupation.
Sometimes I think of myself as an expert in comparative occupation studies.
The first conclusion I draw from such experience is this: everything depends on who the occupying power is.
When Soviet troops invaded Berlin at the end of April 1945 many of us went into the streets to welcome them.
Such enthusiasm did not last long.
One day, Red Army tanks turned from the main street in our quarter towards the crowd.
When the crowd dispersed, the soldiers started looting, raping, and pillaging.
This continued for only a few days, but fear of the occupying Soviets never left even as they began to distribute food and set up a rudimentary administration.
It soon became clear that they were in fact creating another dictatorship in place of the one they had removed.
In July, when Americans replaced the Soviets in our Berlin district, this changed.
True, my beloved wristwatch (which I had miraculously saved throughout the weeks of Soviet occupation) was taken from me by an American soldier on my way home from school. But it soon became clear that this occupation held out hope of a better future.
This was even more evident when a few months later my family moved from Berlin to Hamburg, then under British occupation.
Suddenly, non-fraternization with Germans--the American rule--was replaced by frequent contacts aimed at re-education, especially of the young.
In those months, the seeds of my conversion to all things British were planted, which flowered decades later in my becoming a British citizen.
Such differences matter no less in Iraq today, and have done so from the first days of the occupation, when the British took Basra and the Americans Baghdad.
But another difference is even more important.
When Germany was occupied, the old regime's defeat was total, utterly beyond dispute.
After five and a half years of war no one doubted the inevitability of occupation.
That was different after Germany's Blitzkrieg against Poland.
When my school was sent to the Polish spa in the town of Zakopane, we were obviously enemies, unwanted in every respect.
Soon a quarantine was imposed to prevent us from misbehaving towards the local people and, above all, to protect us from their wrath.
I can still feel, with shame, the sense of being not only unwanted but of being an illegitimate invader in a proud country.
It could be argued that the Iraq war was too short, certainly too short for Iraqis to feel, as we Germans did, that the occupation was inevitable and bound to last for a long time.
While Iraqis may be pleased to be rid of a murderous regime, they had little time to get accustomed to the notion of being an occupied country.
In Germany, we thought for a while that the occupation would last forever, and that we perhaps deserved no better.
I doubt whether many Iraqis share that feeling.
But the most important aspect of the German experience was the sense of where the occupation would lead.
In the old Soviet zone, it soon became clear that it would lead to a totalitarian satellite regime.
Those who could left the Soviet zone and settled in the West; those who could not faced the sullen existence of subjects rather than citizens.
In the Western zones, a different set of expectations soon prevailed.
As the occupying armies were replaced by civilian officials as administrators, and Germans were recruited to help them, the silver lining of Western democracy became more and more noticeable.
Again, differences mattered.
In the French zone (so I learned later), the signs were less hopeful.
More than that, there were hints of a desire for annexation, with the Saar region actually separated from Germany for a time.
In the American zone the process was slower and controls were stricter than in the British zone, where local politicians were soon entrusted with power.
On the other hand, economic life flourished earlier in the American zone, whereas the British tried to extract direct benefits by, for example, dismantling steel works and bringing the parts to Britain.
In retrospect, that turned out to be a blessing for Germany.
A reviving Germany built modern factories, whereas the occupiers were saddled with old ones.
But Germany revived because the Western occupation forces made clear their intention to let it do so, and helped indigenous forces on their way.
After initial uncertainties, there was soon a clear and widely recognised vision of where the country should go.
Western Germany's occupation forces not only set an example of how this vision could be achieved, but found the right people and the right institutions to bring about reconstruction and progress.
In principle, this can be accomplished elsewhere.
In practice however, one cannot help wondering whether the German experience resulted from a unique set of circumstances, or at any rate one not easily reproduced under the vastly different conditions of today's Iraq.
Living with Insecurity
I have often wondered why Karl Popper ended the dramatic peroration of the first volume of his Open Society and Its Enemies with the sentence: "We must go on into the unknown, the uncertain and insecure, using what reason we have to plan for both security and freedom."
Is not freedom enough?
Why put security on the same level as that supreme value?
Then one remembers that Popper was writing in the final years of World War II.
Looking around the world in 2004, you begin to understand Popper's motive: freedom always means living with risk, but without security, risk means only threats, not opportunities.
Examples abound.
Things in Iraq may not be as bad as the daily news of bomb attacks make events there sound; but it is clear that there will be no lasting progress towards a liberal order in that country without basic security.
Afghanistan's story is even more complex, though the same is true there.
But who provides security, and how?
In Europe and the West, there is the string of terrorist acts - from those on the US in 2001 to the pre-election bombings in Madrid - to think about.
London's Mayor and police chief have jointly warned that terrorist attacks in the city are "inevitable."
Almost every day there are new warnings, with heavily armed policemen in the streets, concrete barriers appearing in front of embassies and public buildings, stricter controls at airports and elsewhere - each a daily reminder of the insecurity that surrounds us.
Nor is it only bombs that add to life's general uncertainties.
Gradually, awareness is setting in that global warming is not just a gloom and doom fantasy.
Social changes add to such insecurities.
All at once we seem to hear two demographic time-bombs ticking: the continuing population explosion in parts of the third world, and the astonishing rate of aging in the first world.
What will this mean for social policy?
How will mass migration affect countries' cultural heritage?
There is also a widespread sense of economic insecurity.
No sooner is an upturn announced than it falters.
At any rate, employment seems to have become decoupled from growth.
Millions worry about their jobs - and thus the quality of their lives - in addition to fearing for their personal security.
Such examples serve to show that the most disquieting aspect of today's insecurity may well be the diversity of its sources, and that there are no clear explanations and simple solutions.
Even a formula like "war on terror" simplifies a more complex phenomenon.
So what should we do?
Perhaps we should look at Popper again and remember his advice: to use what reason we have to tackle our insecurities.
In many cases this requires drastic measures, particularly insofar as our physical security is concerned.
But while it is hard to deny that such measures are necessary, it is no less necessary to remember the other half of the phrase: "security and freedom."
Checks on security measures that curtail the freedoms that give our lives dignity are as imperative as protection.
Such checks can take many forms.
One is to make all such measures temporary by giving these new laws and regulations "sunset clauses" that limit their duration.
Security must not become a pretext for the suspending and destroying the liberal order.
A second requirement is that we look ahead more effectively.
It is not necessary for us to wait for great catastrophes to occur if we can see them coming.
Holland does not have to sink into the North Sea before we do something about the world's climate; pensions do not have to decline to near-zero before social policies are adjusted.
A third need is to preserve, and in many cases to recreate, what one might call islands of security.
Globalization must become "glo c alization": there is value in the relative certainties of local communities, small companies, human associations.
Such islands are not sheltered and protected spaces, but models for others.
They prove that up to a point security can be provided without loss of freedom.
There remains the most fundamental issue of attitude.
It is debatable whether governments should ever frighten their citizens by painting the horror scenario of "inevitable" attack.
The truth - to quote Popper again - is that "we must go on into the unknown, the uncertain and insecure," come what may.
Today's instabilities may be unusually varied and severe, but human life is one of ceaseless uncertainty at all times.
Such uncertainty can lead to a frozen state of near-entropy.
More frequently, uncertainty leads to someone claiming to know how to eliminate it - frequently through arbitrary powers that benefit but a few.
False gods have always profited from a widespread sense of insecurity.
Against them, an active effort to tackle the risks around us is the only answer.
Perhaps we need a new Enlightenment to spread the confidence we need to live with insecurity in freedom.
Greening the New Industrial Revolution
VIENNA – Manufacturing industries present society with a dilemma.
A healthy manufacturing sector helps an economy to grow, thereby raising living standards – an especially important goal for developing countries.
But, as factories try to meet ever-growing consumer demand, they deplete the world’s natural resources and pollute the environment.
For some, the world now faces a stark choice between rising prosperity and a cleaner, more sustainable environment.
In fact, with new technology and fresh thinking, policymakers can strike a durable balance between these competing interests.
In developed countries, consumers are increasingly recognizing that, while their material well-being may be higher than ever, their quality of life suffers if the environment is damaged.
For poorer countries, such concerns are dismissed as a rich-world luxury.
Industrial expansion is the best way to eradicate poverty, and must surely trump environmental concerns.
No government, rich or poor, can ignore the imperative to encourage economic growth.
The manufacturing sector creates jobs, makes affordable products for cash-strapped consumers, produces vital tax revenue that can be used to support social goals, and brings in foreign currency in the form of export revenue.
In short, a well-run manufacturing sector spreads wealth across society.
However, trying to satisfy the seemingly endless material demands of consumers at all levels of the economic pyramid has placed an unmanageable burden on the natural world.
Resources are being consumed more quickly than the planet can replace them.
The manufacturing sector is particularly voracious, devouring over half of all raw materials, around 30% of the world’s energy, and 20% of its water.
In the process, it produces too much waste for our fragile ecosystems to absorb.
Now, public opinion is starting to turn against what is increasingly perceived as plunder on a global scale.
Policymakers may not be able to compel citizens to ration their consumption.
But governments can encourage manufacturers to change how they operate, so that they use fewer resources and eliminate unnecessary waste.
Technological innovation and recyclable inputs can make a huge difference to the way the world produces and consumes.
Like the dramatic changes once wrought by mass production, there is similar potential in the development and application of 3D printing, biotechnology, nanotechnology, and other resource-efficient technologies.
And management thinkers from the late C. K. Prahalad to Jaideep Prabhu have shown how industry can be reconfigured to produce high-quality products cheaply and cleanly.
Indeed, these technologies and management ideas amount to something of a new industrial revolution – though one that will be very different from the Industrial Revolution that made Great Britain the dominant world power in the nineteenth century and helped it build a global empire.
The current transformation will be more democratic, spreading through global supply chains and modern communications to all countries that are integrated into the global economy.
And it will be characterized by partnerships between government, the private sector, and civil society.
Our challenge, and our historic opportunity, is to recognize this potential and find ways for diverse groups to collaborate and realize it.
A Green Industry Conference held recently in Guangzhou, China – following similar events in Manila in 2009 and Tokyo in 2011 – provides a template for this kind of broad cooperation.
Delegates shared best practices, discussed ways to accelerate change in a range of sectors, and sought innovative solutions to old management problems.
No one need be left out of this revolution.
Even countries with abundant natural resources do not have to fear the shift to a greener world.
By adopting new economic models, their large but finite reserves will not be rendered useless; they will simply last longer.
At the same time, countries facing shortages will gain greatly from being able to reduce their own resource needs.
Businesses, too, have been quick to adopt new practices.
Many now routinely monitor and report on their environmental impact.
Some are even starting to organize around new industrial concepts such as the “circular economy,” which focuses on reducing waste through multiple rounds of recycling.
This revolution may have been borne out of necessity; but, with ingenuity and cooperation, it will prove to be profitable, over the long run, for countries, manufacturers, and consumers worldwide.
Local Science for Large Disasters
The earth produces a reliable stream of disasters.
Some, like AIDS, are chronic; others, like earthquakes or hurricane Katrina, are sudden displays of natural force.
In each case, it is expected that a well-financed relief effort will descend from a wealthier region.
But importing assistance may not only be less effective; it might actually cause more damage in the long run.
When a tsunami hits, the first impulse is to bring in First-World experts.
Rescue is the initial priority, followed by ensuring food, shelter, and medical aid.
It is just a matter of getting things done, and it must be done the most effective way, so the operations occur according to the institutional philosophies of donor countries.
But siphoning the habits of one culture into another during a rebuilding process can trigger societal changes that are almost as damaging as the disaster itself, as happened in a small fishing villages in the Philippines in the late 1970’s.
In 1978, Typhoon Rita wiped out the fleet of handmade wooden fishing boats in a group of sea-dependant Philippine communities.
Relief was fast and effective, consisting first of subsistence aid, followed by “restoration” of the fishing fleet.
The old boats, which rotted every few years, were replaced by modern fiberglass versions with small gasoline engines.
At the time, this was touted as a textbook case of doing things right.
The fishing economy rebounded and flourished – but only for about ten years.
After that, the entire society collapsed.
Over thousands of years, the culture had come to depend on the central role of boat builders.
They were the anchor of society, acting in effect as priests, teachers, and judges.
Subsistence flowed according to their goodwill and was supported by conventions of sharing and trust.
After the relief effort, this complex human balance was replaced by a cash economy, and the power brokers became those who could dole out the rare, precious petrol.
An entire culture was effectively destroyed by efficient relief.
This scenario has been repeated over and over in diverse contexts.
The first impulse is to solve problems in the most established manner.
But, lacking sensitivity to local dynamics, the outcome is severely compromised.
The solution seems simple: create and subsidize small science centers in regions at risk of disaster.
The primary objective of these centers would be “normal” science, with missions and profiles that feed from their local context.
At-risk regions would develop culturally appropriate ways to deal with the catastrophes most likely to affect them.
In addition, local talent would be nurtured in its home context.
This philosophy would benefit places like New Orleans as much as Phuket in Thailand.
Indeed, while it might seem as though there would be no problem of cultural transposition in the case of Hurricane Katrina, an examination of the tragedy reveals otherwise.
It has been overwhelmingly observed that the worst-hit people in New Orleans were poor African-Americans living in the city’s low-lying districts.
To be sure, many of these inner-city residents simply lacked the resources to evacuate easily.
But it is beginning to emerge that many also preferred to stay in a social environment that they trusted rather than fleeing to safer, but foreign, surroundings.
Critics also cite the diversion of infrastructure funds and Louisiana National Guard troops to Iraq as contributing causes to the emergency.
These factors clearly played a role, but, overall, if a body of scientifically inclined people from the inner city had been involved in flood control and evacuation planning, the consequences of hurricane Katrina would certainly have been managed more effectively.
By contrast, the inappropriateness of transplanting troops from Iraq into an emergency rescue operation is obvious.
The fight against AIDS – a battle that depends heavily on social modification – highlights in perhaps the clearest way the problems that always occur when local culture is ignored.
Societal mechanisms simply cannot be adjusted without a crisp, practiced understanding of a culture.
And this cannot be merely intuitive.
It must be scientific, that is, based on the best methods and models.
For this reason, there should be two points of contact during a catastrophe.
Groups of critical thinkers – the “experts” – should be on hand to advise on how to avoid second-order disasters.
Even though many of them might not have studied the local culture, they can nonetheless provide guidance that has been informed by the world’s most expensive infrastructure.
At the same time, relief efforts should be managed by a local science center that is known and trusted by those in danger.
The implications of this approach extend far beyond disaster relief.
A robust scientific establishment is the root of any economy, and there will be no real development in the Third World without it.
An investment in local science is therefore a direct infusion into a community’s growth potential, one that eventually will reward investors with new breakthroughs.
After all, nothing is better for innovation than a scientist working outside conventional institutions, solving a problem that will save his or her family.
Locust Capitalism
Germany invented socialism.
Karl Marx and Friedrich Engels were Germans.
The Social Democratic movement that shaped the modern European welfare state also originated in Germany.
Although the country profited greatly from its reintegration into the world trading system after World War II, Germany never really came to terms with Anglo-Saxon capitalism and skepticism about it still runs deep.
Now, with Germany’s economy no longer functioning smoothly, capital moving abroad, and unemployment rising, criticism of capitalism is again gaining momentum.
The public is upset about top managers’ salaries and the fact that big German companies fire workers despite record profits.
In response, the government has urged managers to publish their incomes and abolished the bank secrecy laws that were once considered sacrosanct.
This new critique of capitalism recently culminated in a series of attacks by the leader of the Social Democratic Party, Franz Müntefering.
He accused entrepreneurs who outsource production to low-wage countries of showing excessive greed and lack of social responsibility, and he compared the managers of international equity funds to a plague of locusts that occupy companies, exploit them, and move on after their destructive work is done.
These attacks brought Müntefering vast public support and triggered a major debate.
Germany’s media largely supports the critique.
Günter Grass, a Nobel Prize winner in literature, joined the chorus of critics, complaining about the fading of political power in a time of globalization. He ridiculed today’s conditions as “stock market-defined liberty.”
Opposition leaders do not like the subject, but they avoid challenging it.
Only a few economic journalists and university professors are willing to object.
One Jewish professor at a Munich university actually compared Müntefering’s language to Nazi slogans.
Entrepreneurs and managers swallow their anger and show their disapproval only by silently speeding up their relocation decisions.
But Müntefering has a point. Abolition of taxes on realized capital gains increased the sales of shares enormously.
International equity funds stepped in, providing companies with urgently needed liquidity while disentangling the traditional ownership network.
Germany, Inc. is on its last legs.
The good news is that Germany’s overblown conglomerates are being scaled down to an efficient size and that the capital market is able to do its job, improving the allocation of resources.
The bad news is that financial capital is moving abroad to finance other overblown conglomerates.
In net terms, though, there may be more growth worldwide as well as in Germany.
Whatever the case, for many Germans the capitalist allocation processes they are seeing make no sense.
There were times when German capitalism was shown greater respect.
In the postwar period, Germany’s economic miracle calmed skeptics of capitalism.
Starting with extremely low wages and an underdeveloped currency, German workers succeeded in competing against the world.
Wages rose rapidly and most Germans experienced growing prosperity.
Ludwig Erhard’s liberal economic approach worked and the socialist ideas found in the party programs of the Social Democrats and Christian Democrats were forgotten.
During the 1970’s, Germans went overboard, confusing capitalism with self-service shops.
They began to expand their welfare state, pushing the government’s share in GDP from 39% to 49% and welcoming union-proposed double-digit wage increases.
The signs of the fading miracle became visible when Japanese competitors and other Asian Tigers succeeded in wiping out substantial parts of Germany’s labor-intensive textile, optical products, and precision engineering industries.
Nevertheless, the public still believed in perpetual growth.
Only after the Iron Curtain’s fall and the establishment of market economies in ex-communist countries did the lack of competitiveness of German workers become apparent.
The country with the highest labor costs in the world was confronted with low-wage competitors next door.
Wage costs in the ten new EU member countries are still only one-seventh their level in western Germany; wage costs in Rumania and Bulgaria are one-tenth.
Chinese wages are even lower, at just 4% of the western German average.
German firms reacted by outsourcing the labor-intensive parts of their production chains and curtailing their investment in Germany.
The share of net investment in GNP is now the second lowest in all OECD countries.
Because investment is so low, net capital exports from Germany are nearly 4% of GDP.
Now unemployment is Germany’s biggest problem, standing at a postwar record.
This alarms the public and incites anger against capitalists who do not reinvest their profits.
Müntefering simply caught the popular mood in developing his theory of locust capitalism.
But this useless reaction to the laws of the global market economy hides the fact that Germany’s problems are largely a result of an overblown welfare state and extremely aggressive union policies over the last thirty years.
Even Marx knew that the iron laws of economics could not be overcome by wishful thinking.
Müntefering should have consulted his party’s forefather more carefully before opening his mouth.
London vs. the Eurozone
LONDON – Ever since the United Kingdom joined the European Economic Community in 1973, after the French withdrew Charles de Gaulle’s veto of its membership, Britain’s relationship with the European integration process has been strained.
The British are reluctant Europeans, for historical and cultural reasons.
For centuries, British foreign policy strove to avoid permanent European entanglements; but, most importantly, it aimed to prevent a single continental power from achieving dominance – especially if that power happened to be France.
In the meantime, the British colonized large portions of the globe.
Later, after the sun set on their empire, they tried to maintain a “special relationship” with the United States.
Joining the European Union was not an affirmation of belief in European integration, but rather a reluctant recognition that the transatlantic strategy had run its course.
British public opinion concerning the EU has since remained lukewarm, at best.
In recent years, having opted-out of the single currency and the Schengen area (which allows Europeans to cross borders without passports), the UK has distanced itself from important EU initiatives.
Nonetheless, Prime Minister David Cameron surprised everyone by vetoing a new EU treaty on December 9 – a first for the UK since joining the Union – leaving the other 26 member states to press ahead with greater fiscal integration on their own.
More surprisingly, the negotiations broke down over arcane details of financial regulation.
For example, Cameron wanted to strike a “red line” through the proposal to subject the planned Deposit Guarantee Scheme Directive to the Qualified Majority Voting procedure (meaning that no member state would have veto power).
Cameron also objected to the requirement that third-country financial firms in London without business in other EU states be required to hold a “single passport,” which would enable them to operate in any member country, but would also require them to submit to Europe-wide regulations.
These points are not entirely insignificant, but I would not care to explain them to a meeting of ordinary voters puzzled about Britain’s new European policy.
So why has financial regulation become the unlikely casus belli between the UK and its partners?
The explanation is partly political.
Cameron’s Conservative Party includes members who have been spoiling for a fight with the EU for a long time.
For them, any excuse will do, and EU Internal Market Commissioner Michel Barnier has provided them with ammunition by pursuing what many see as an excessively restrictive regulatory agenda.
When horse-trading for Commission jobs took place in 2009, former UK Prime Minister Gordon Brown was warned of the danger of allowing the French to hold the Internal Market post.
But he chose instead to bid for the EU foreign-policy job for his Labour Party ally, Baroness Ashton.
When Barnier was appointed, French President Nicolas Sarkozy described it as a “defeat for Anglo-Saxon capitalism.”
And so it has proved – though perhaps not in the way he envisaged.
But beneath the politics, there are other substantial conflicts between the UK and its continental neighbors.
Barnier favors European directives that impose uniform rules for all member states – so called “maximum harmonization” measures.
Previously, EU directives tended to impose minimum standards, which individual countries could supplement if they wished.
They could outlaw initiatives that the UK holds dear, such as new rules to ring-fence retail banks’ subsidiaries and impose higher capital requirements on them.
The governor of the Bank of England, Mervyn King, has voiced his anxieties on that point.
British officials are also deeply concerned about measures that would oblige clearinghouses that transact their business primarily in euros to be located within the single-currency area.
Indeed, the British government was already taking the European Central Bank to court to challenge that policy before the treaty veto.
They may have a point; arguably, the ECB’s proposal is inconsistent with single-market principles.
The key point of contention, however, is the pan-European Financial Transactions Tax, which the European Commission proposed with support from both Sarkozy and German Chancellor Angela Merkel.
From a UK perspective, the FTT is highly unattractive.
Between 60% and 70% of the revenue would be raised in London, yet the EU would spend most of the money to shore up eurozone finances.
For Britons, this idea stirs sentiments akin to what Germans might feel if the EU proposed a new tax on liverwurst, with the proceeds to go into the central pot.
They also point out that, unless an FTT were agreed globally, financial companies would quickly migrate from London to New York.
This is Cameron’s best argument on the financial front.
But he did not deploy it strongly, for the simple reason that tax policies in Europe are still subject to the unanimity rule.
In other words, Britain can block the proposed FTT without a special protocol.
This lends weight to the argument that Cameron’s veto was essentially a political move, intended to bolster his domestic support.
That is a big gamble, given that the UK now appears to be shuffling towards the EU exit.
Certainly, the new status quo looks unsustainable, with 26 countries moving towards greater integration while the 27th remains aloof.
How will financial firms react?
Will they be pleased that London has stamped its collective foot, even though Cameron’s regulatory demands were not accepted?
Or will some simply begin to contact real-estate agents to line up office space in Paris or Frankfurt?
The game – London versus the eurozone – has only just begun.
It will make for fascinating viewing in the months and years to come.
Look East Again, Europe
The EU's historic decision to admit eight former communist countries as members must not be create a new division between Eurasia's haves and have nots.
Instead, the Union needs to turn its attention further east - to its new neighbours and the other countries of the former Soviet Union.
The EU spent 9billion euros between 1999 and 2002 to prepare Central European and Baltic candidate countries for membership - 10 times the amount it spent on Central Asia's impoverished non-candidate countries.
The EU will spend over 30billion euros integrating its new members into the Union.
It is in the EU's economic and security interests to extend that generosity further eastward to assist the development of stable market-economies in Central Asia, the Caucasus and other CIS countries.
Poverty and under-development undermine security and democracy.
They fuel cross-border organised crime, trafficking in human beings and illicit migration, as well as the drugs trade, religious extremism and terrorism.
Afghanistan is a stark warning of what happens when the world turns its back on an impoverished country in a volatile region.
Expanding Europe's common economic space to all territories of the former Soviet bloc will contribute to security and prosperity across the region.
In many respects, the former Soviet republics are less well-placed than their former communist neighbours to the West to cope with the transition to a market economy.
For some, indeed, the challenges look almost insurmountable.
In Georgia, Moldova, Tajikistan and Ukraine, for example, per capita GDP is now less than half of the dire levels achieved under communism.
Economic discrepancies are growing.
Foreign direct investment in 1991-2001 averaged $1,400 per capita in the eight former communist EU candidate countries.
It was only $198 per capita in the CIS.
Recent studies by the European Bank for Reconstruction and Development (EBRD), the World Bank and the CASE Foundation show that geographical distance from centres of development, mountainous terrain, lack of "market memory"- recent historical experience of an entrepreneurial tradition - and failures of economic policy are the main causes of the lack of recovery after the collapse of the Soviet-era economy.
Let me add another: Western assistance to EU non-candidate countries is neither comprehensive nor systematic.
It is scattered, sporadic and uncoordinated, leaving many areas uncovered.
It is too modest.
All of this is in sharp contrast with the treatment given the EU candidates.
They were assisted by thousands of experts in adopting the EU's legendary, 80,000-page "acquis communautaire ." legislative package.
For the first time in EU history, they received pre-accession funding to help overcome costly hurdles.
If such massive assistance was necessary to restore the market economy to Western Europe's closest neighbours, who spent "only" 45 years under Communism, how much greater is the challenge of building modern economies from scratch in remote lands like Kyrgyzstan or Tajikistan?
These countries never experienced modern market arrangements.
For 70 years, their contacts with the West were stifled by the Soviet system.
No matter how hard they try - and Kyrgyzstan has certainly tried - they are doomed to fail without co-ordinated, well-designed and adequate assistance.
Some good news is on the way.
The EU is doubling its TACIS program in Central Asia.
President Bush wants Congress to fund $5 billion of assistance over three years to the world's poorest countries.
Foreign ministers of the 55-nation Organization for Security and Co-operation in Europe (OSCE) decided last month in Porto to develop a new strategy for economic and environmental co-operation in the Euro-Atlantic area so as to address security threats resulting from the growing inequalities between countries of this region.
But this will not suffice.
From my perspective at the OSCE, it is clear that far more needs to be done:
The EU's technical capacity, which has been preoccupied by enlargement, could be redirected towards assistance for the non-candidate countries of Euro-Asia.
Building the institutions of a market economy should be the main focus, not alignment with expensive EU standards in food production or the environment;
The EU should gradually phase out its Common Agricultural Policy, which primarily benefits owners of large farms, and instead develop new instruments of financial assistance for its own poor regions and its new neighbours;
Current EU members and successful candidate countries could make available large-scale training programmes in market-relevant disciplines for the young generation in CIS countries;
Taking as a model the Stability Pact in the Balkans, the EU could offer concrete incentives, such as economic assistance and the prospect of closer integration, to stimulate parties to end unresolved regional conflicts in the Caucasus, Transdniestria and Central Asia;
The main actors providing international assistance - including the World Bank, International Monetary Fund, EBRD, the EU itself and the United Nations Development Programme - should ensure a minimum level of co-ordination to avoid duplication and waste.
The OSCE, with field offices in all the countries concerned, could play a useful role here.
By preventing a new division of the Euro-Asian region into successes and failures, the EU will make a substantial investment in its own long-term security.
Look East, Russia
MOSCOW – Over the past 18 months, Russia’s relations with Asia have begun to improve.
Both President Dmitri Medvedev and Prime Minister Vladimir Putin have repeatedly pointed to the need for an economic turn to Asia.
Dozens of protocols and agreements on new projects have been signed with China.
Some are already up and running.
Nevertheless, Russia has yet to devise a long-term and comprehensive Asian strategy.
The main force holding Russia back is, to put it bluntly, ignorance.
Indeed, for some Russians, any economic movement towards Asia is tantamount to a departure from a European path of development.
There is, of course, no Asian alternative to Russia’s cultural and political orientation towards Europe.
But a partial economic reorientation towards Asia does not pose any real risk of disengagement from Europe; on the contrary, over the past two years, Russia has officially made a decisive turn in favor of closer integration with the European Union.
Europe currently accounts for more than 50% of Russia’s trade turnover.
But the European market will not grow to any significant extent for the foreseeable future.
Europe’s retained wealth and accrued cultural resources will allow the old continent to live in relative comfort in the decades ahead, even if it gradually cedes its position in the production of goods and services.
Indeed, Europe is likely to become a tourist and leisure destination for hardworking Asians.
While Russia needs to integrate itself with Europe’s remaining islands of innovation (Germany, above all), it is the growth potential of the Asia-Pacific region that will determine the country’s future.
Here, the main partner is China, which Russia now supplies with fertilizers, seafood, timber, nonferrous metals, and increasing volumes of crude oil.
Unlike the West, Russia imports from China not so much consumer goods as engineering products.
In most industries, head-to-head competition with Asia would be senseless, given Russia’s higher labor costs.
But, if current trends persist, Russia east of the Urals, and later the entire country, will become an appendage of China – a warehouse of resources, and then an economic and political vassal.
No “aggressive” or unfriendly effort by China will be needed;
Russia will be subdued by default.
There is no immediate geopolitical threat in this situation.
Territorial expansion is not a Chinese historical trait, and the two countries have excellent political relations.
But the Chinese are already offering Russia projects that are similar to those that they promote in African states: the development of resources with Chinese money and Chinese labor.
Russia must act now to secure a more dignified and beneficial place in a future world order.
That goal requires that Russia rely on its real competitive advantages.
Consider basic foodstuffs. Rising food prices plague most of Asia, while Russia’s potential for expanding grain output is enormous.
According to some estimates, Russia could increase its arable area by 10 million hectares, and its crop yields by 250%, thereby boosting grain exports dramatically.
But an even larger vision is needed.
A modern Asian strategy for Russia – call it “Project Siberia” – should combine Russian political sovereignty with foreign capital and technologies.
Investment should come not only from China, but also from the United States, Japan, South Korea, the ASEAN countries, and the EU, all of which are keen to prevent China’s exclusive dominance east of the Urals.
The workforce can be found to undertake the development projects in Russia’s east, including clusters of high-yielding agricultural production for grain, fodder, meat, poultry, pork, and possibly beer.
There are still a few million surplus workers in Central Asia.
Seasonal workers can be brought in from India and Bangladesh.
And, yes, some will have to be brought in from China.
Of course, such a strategy will require highways, bridges, railways, and seaports.
(There are practically no grain-export terminals in Russia’s eastern regions, for example.)
Some Russians fear that if China is allowed to build these projects, crowds of Chinese will flock into the country.
My answer is this: if we stay where we are, like the proverbial dog in the manger, the hay – Russia’s economy – will rot.
The strategy should be to transform Russia’s eastern regions into one of rising Asia’s resource and food bases.
Russia’s east should become a provider of relatively high value-added goods, rather than just an exporter of timber, oil, ore, and seafood, as is the case now.
Such a scenario would reverse the gloomy demographic and economic trends in Russia’s eastern territories, and would strengthen Russia’s geopolitical position in the process.
What makes Project Siberia so efficient is that it benefits everyone.
Russia would maintain effective sovereignty over the eastern territories while creating a new platform for development.
China, Asia, and the world would get a new resource and food-supply base, easing emerging shortages.
And, last but not least, the vision of peaceful global integration would receive a powerful boost.
Look East To Save Europe\u0027s Social Market
As expansion of the EU approaches, many Europeans see in it only things to be feared: masses of economic migrants, and poor countries demanding subsidies.
But Europe's new eastern members can also act as a beacon for the Union, as Jacques Rupnik suggests.
It is often argued that Continental Europe's social and economic model, which seeks to combine competitiveness with solidarity, is the glue that binds the European Union together, as well as distinguishing Europe from the American (or Anglo-Saxon) free-market model.
Clearly, Europe's answer to globalization is that certain spheres of social life-say, healthcare, education, the environment, or culture-cannot be left to the whip of the market.
On the surface it seems that Europe's steady integration proceeded in parallel with the development of the welfare state.
But this is misleading: the European social model is, in fact, part and parcel of the identity of the EU member states more than of the EU per se.
Some, indeed, suggest that the EU often acts to erode the welfare state.
This fear contributed to the reluctance of countries like Denmark and Sweden to embrace greater European integration.
In both countries, majorities voted against adopting the euro because they feared that national welfare norms would become curtailed.
So, across Europe, a key question is this: what is the future of the European "social market" model?
Can it survive once the Union expands from 15 members to 25?
Many EU members look at the newcomers from Central and Eastern Europe and see countries that largely try to adhere to the liberal, free-market model.
Having spent a decade dismantling the debris of state socialism, most of these countries chafe at the idea of importing the European social market's idea of solidarity via the EU.
Their position goes beyond political philosophy.
A bit of opportunism is also at work, for they undoubtedly also oppose EU regulation of taxation and social norms, adoption of which would deny them their comparative advantage for Western investors.
With zero growth and 10% unemployment, Western Europe's "Rhineland model" is no longer what countries seeking to undertake root-and-branch social and economic reform want to emulate.
If Europe's social market model is to survive enlargement, it must find a way to expand eastward with the EU.
But this can be accomplished only if the model is reformed in the West.
Two factors could help the EU move in the right direction.
First, the newcomers share a problem that undermined the social market model in Western Europe: demographic decline and, consequently, the prospect of soaring health and pension costs.
The populations of the Czech Republic, Hungary, Poland, and Estonia are aging and declining just as quickly as the populations of Spain or Italy.
So the need to reform health and pension systems is similar in all of these countries.
Second, public attitudes toward the social market system are remarkably similar in both Eastern and Western Europe.
According to the Pew Global Attitude survey, there is a significant degree of convergence between East-Central Europeans and West Europeans concerning the balance between the market and a state-guaranteed social safety net.
If the newcomers are to embrace the social market model, that model must operate throughout the EU and offer to them what it offered new EU members in the past.
Sadly, this is not yet the case.
Instead, EU enlargement is being carried out according to what might be described as the principle of "asymmetrical integration."
The asymmetry facilitated an eastward transfer of EU norms and institutional convergence, but no commensurate transfer of resources.
EU regulatory power has taken precedence over its redistributive powers.
But the Union's regulatory authority is likely to be accepted by the accession countries only if it remains tied to the redistributionist ethic at the heart of the EU's social model.
Regulation without redistribution could undermine the EU's legitimacy among the newcomers.
A report for the Chair of the EU Commission by a team of experts led by Jacques Sapir argued explicitly for a reorientation of the Union's "cohesion" policies eastwards, i.e. , in favor of those who most need them.
Clearly, if the social market model is to expand eastward - thereby ensuring its viability within the whole Union - this is the only viable alternative.
But this idea threatens current beneficiaries of EU redistributive policies, namely Spain (which now gets over a third of Union cohesion funds) and Greece (which gets about a fifth), as well as Ireland.
Countries that benefited most from European solidarity over the past twenty years are thus the least eager to share with their poor Eastern relations.
The old European social model is in tatters.
Its reform - or, rather, its re-invention - implies redefining what solidarity means, within both the member states and the EU as a whole.
But for reform to succeed, a little old-fashioned solidarity extended Eastwards now is the best way to ensure the commitment of the EU's newest members to European integration.
Looking Beyond the Tribalism Taboo
A few days before Easter, people in Ghana, a heavily Christian country, were shocked by violence between members of the Dagomb, an Islamic tribe.
Members of one extended family within the Dagomb organized the murder of the tribe's own chief.
The killing caused Ghana's government to declare a national emergency, and triggered an outcry over the curse of tribalism.
Africa has long suffered under the belief that passionate tribal attachments are inefficient, irresponsible, and inhumane.
Ever since they colonized Africa, Europeans have railed against tribalism, whilst simultaneously pitting one tribe against another whenever this suited their purposes.
In drawing Africa's internal borders, imperialists ignored tribal differences, leaving some densely populated countries, such as Nigeria, without a dominant tribe or splitting famously cohesive tribes, such as the Ewe, between two countries (Ghana and Togo).
By ignoring tribal affinities, Europeans hoped to create an Africa whose allegiance was to nation first and tribe second (or not at all).
Africa's independence leaders of the late 1950s and early 1960s essentially opposed tribal power.
They sought to limit the authority of tribal chiefs and to use their powers over schools, land, and jobs to weaken, if not altogether eradicate, tribal consciousness.
Ghana's Dagomb conflict illustrates why governments should tread carefully with tribal loyalties.
The beheaded chief was appointed by Ghana's previous government in clear violation of traditional power structures.
With a new government in power, the chief's enemies seized the opportunity to redress the wrong, providing a reminder of the perils of prior efforts to de-tribalize Africa.
De-tribalization was always a doomed project.
During my twenty years of working in aid and development in Africa, I have lived in and examined five countries: Ghana, Ethiopia, Sierra Leone, Sudan, and Egypt.
All of their borders are works of European fiction, attempts to impose a monolithic image on areas honeycombed with diversity.
In Ghana one does not find Ghanaians; one finds Asante, Ewe, Ga, and Dagomb.
In Ethiopia, rather than Ethiopians, you meet Amhars, Oromos, and Tigrinians.
So it goes across the continent.
Despite the best efforts of nationalists and pan-Africanists, nation-state identities have not taken root.
African hearts beat to a tribal rhythm.
People are more open about this than they once were, but a legacy of disapproval towards those who espouse tribal loyalties lingers. Yet these loyalties are deepening.
Sub-Saharan Africa may be stuck with its political boundaries, but national identities remain less important than tribal ones.
Colonialists and African independence leaders erred when they ignored tribal preferences, rather than celebrating them and making them the cornerstone of a healthy democracy.
Tribes have their dark side, of course.
Tribal claims by Hutus against Tutsis (a rivalry long manipulated by Rwanda's colonial rulers) incited genocide and still scar neighboring Burundi.
In Nigeria, the Ibo--who fought Africa's first post-independence war of secession in the name of tribalism--remain an uneasy, defiant minority.
Tribal affiliations powerfully influence political, social, and economic life in many other African countries as well.
When decisions are made about who gets what aid in times of hardship, it is no surprise that ruling tribes get more than those out of power.
Viewed through the rosy spectacles of nation-statehood, this may look like corruption.
But from an ethnic point of view, those in power owe no allegiance to a nation-state identity.
They have strong ties to their own peoples and it is their duty to ensure that they prosper before other tribes.
Of the tribes who lack access to power, many are poorer today than at independence, despite the billions of dollars spent in their name.
So foreigners ignore tribal loyalties at their peril.
In Africa, the revival of ethnicity, which is the more civilized term that Westerners use to describe their own tribal allegiances, is at the core of social change today.
In this regard, Africans are in step with the rest of the ethnocentric world.
Failure to transcend tribalism suggests that Africans must learn to use their tribal loyalties for the good of their countries.
Signs exist that this is happening.
Many African nations are experimenting with ways of sharing power with tribal associations that often dominate local government.
Africans living outside their home countries, especially those in the US or Europe, find that they often can effectively invest in their homelands by drawing on tribal ties.
Consider the Ghanaian member of the FraFra tribe who returned from a period abroad intent on helping his group, which is a tiny minority in the country.
The FraFra live a day's drive from Accra, Ghana's capital, and tend to be overlooked by the national government.
The returnee has built schools and health clinics.
He also insists that the local schools teach the FraFra language.
Paradoxically, accepting the reality of tribal, or ethnic, power lays the foundation for national unity by letting each group first sort out its own priorities.
Only then can members of different tribes interact with each other in a common space--and from a position of strength and respect.
Look North, Sarkozy
In gearing up to take France on a new economic course, French president Nicolas Sarkozy’s choices are not confined to Anglo-American neo-liberalism and the dying French model of social protection.
There are other viable alternatives, one of which is the German model.
Germany, after all, is now one of the fastest growing countries in the euro zone.
So it must be doing something right.
That “something” is being competitive in world markets.
German competitiveness did not just happen.
It is the result of enormous corporate re-structuring over the past several years, which increased labor productivity, and of German trade unions’ willingness to accept modest wage increases.
It took several years for trade union restraint to flower into robust competitiveness, but flower it did.
Even in the current period of growing optimism about the German economy, the nation’s trade unions are showing themselves to be moderate.
IG Metall, Germany’s largest industrial union, which bargains for 3.4 million metal, electronics, and car workers, looks ready to accept an estimated 3.3% annual wage increase for 2007 and 2008 – a settlement generally considered to be “balanced and justifiable.”
Public sector unions also can affect a nation’s competitiveness in global markets, albeit indirectly.
In recent years, they too have been co-operative in Germany, though there is some concern that next year’s big wage negotiations could be difficult.
The German example is highly relevant for France and Sarkozy at this critical juncture.
Whereas many argue that France can move forward only by adopting the Anglo-American neo-liberal model, Germany’s success clearly demonstrates that the claim that only the free market can produce prosperity is bogus.
An enlightened corporate state, where unions fully support growth and competitiveness objectives, can deliver the economic goods as well as more de-centralized systems.
(Sweden is another country that proves this point.)
Particularly important for Sarkozy – a politician who wants to get things done – is that the German model can be implemented in France with the right sort of political leadership.
Transforming France into a second America, on the other hand, is no more than a pie-in-the-sky dream that would be certain to end in failure and disarray – and that few French want in any event.
There are encouraging initial signs that Sarkozy is ignoring calls from the neo- liberal camp for revolutionary change.
The fact that he has picked the moderate Francois Fillon as prime minister indicates that he is interested in obtaining real results, and that he thus plans to take the evolutionary route rather than tilting at the windmills of revolutionary change.
A further lesson for Sarkozy from Germany is that an enlightened corporate state needs supportive political leadership as well as accommodating trade unions.
German Chancellor Angela Merkel doesn’t make speeches attacking the strong euro and the European Central Bank’s price stability mandate.
On the contrary, she supports an independent ECB and has let Germany’s trade unions and companies know that they will have to live with a strong currency and an anti-inflationary monetary policy.
This does not mean that Merkel is a free market capitalist – there is little evidence of that.
Rather, she simply understands that for an economy that needs to stay competitive, bad-mouthing the euro and the ECB sends the wrong signals.
Sarkozy’s behavior during the presidential campaign was scandalous in this regard.
He consistently blamed France’s poor export performance on the strong euro, favoring a politically subservient ECB whose mandate should include economic growth as well as price stability.
His attacks on ECB President Jean-Claude Trichet were often vicious and quite personal.
They also are at odds with improving French competitiveness.
Why should the French undertake painful reforms when their newly elected leader has just promised to protect them from a strong currency and further interest rate increases?
Why not simply wait for Sarkozy to get the euro down and the ECB to lower interest rates?
According to Trichet, Sarkozy has reversed course since winning the election, and no longer will press the ECB to broaden its mandate.
Let us hope that Trichet is right.
What Sarkozy has announced so far is his intention to cut income taxes, reform public sector unions, and give tax breaks for overtime work.
These are precisely the sorts of step-by-step reform measures – both beneficial and feasible – that the new French president should be pursuing.
Sarkozy’s first foreign trip as France’s new president was to visit Chancellor Merkel.
Let’s hope that he listened attentively.
A new Franco-German axis that makes France more competitive is just what Europe needs.
Losing Latin America
When is the United States going to wake up to what is happening in Latin America?
The growing influence of Venezuela’s leftist president, Hugo Chávez, is casting a dark shadow over the region.
Some countries – Chile, Columbia, and Costa Rica, for example – remain committed to progressive growth-oriented and democratic regimes.
But over the past year, allies of Chávez have come to power in countries like Ecuador and Bolivia, and just missed winning in a few others.
In Mexico, Chávez’s admirer Andrés Manuel López Obrador would have seized the presidency, possibly for life, had he convinced just a quarter percent more Mexicans voters to support him.
With almost everyone else in the world successfully pursuing more flexible market-oriented economies, why is Latin America veering dangerously in another direction?
Is it because some voters do not realize that the region has been enjoying greater economic stability than it has in decades?
Is it because they don’t appreciate having single-digit inflation, down from a regional average of more than 300% 12 years ago?
Fortunately, at least half the voters in the region appreciate these improvements; otherwise, the situation would be far worse.
Nevertheless, a growing schism between left and right has led to a distressing level of policy paralysis.
This is nowhere more apparent than in Mexico, the region’s second largest economy after Brazil.
Despite its enviable location next door to the rich and booming US, Mexico’s growth has ranged from poor to tepid since its economic crisis a decade ago.
Why hasn’t Mexico benefited more from the 1992 North American Free Trade agreement?
Part of the problem is the emergence of China, whose ultra-low wages provide tough competition for Mexico, where wages are merely very low.
But Mexico’s real obstacle is a political system unable to achieve any consensus on essential economic reforms.
The new president, Felipe Calderón, has spoken of the need to break up Mexico’s monopolies.
Where will he start, telephones or tortillas?
There is all too much choice.
Peasants toil inefficiently on tiny plots of land, in a form of disguised unemployment similar to that seen in rural China.
The state-owned oil company, which accounts for a major chunk of government revenue, is hugely inefficient, and invests far too little in new equipment and technology.
Crime abounds.
International comparisons of corruption are not flattering.
Worst of all, the election loser, López Obrador, seems willing to throw the country into turmoil rather than accept the constitutional legitimacy of his defeat.
So how is the US planning to react?
By following through on plans to build a 2,000-mile wall across its southern border.
Brazil, meanwhile, has exhibited commendable political and macroeconomic stability.
Yet, if Brazil is to enjoy growth above the modest levels of the past few years, the country badly needs to reform its labor laws, open itself more to foreign trade, and improve the quality of its primary education system.
With Latin America’s two largest economies in a holding pattern on reform, it is that much more difficult for even the region’s high flyers, such as Chile, to achieve escape velocity into a sustained high growth orbit.
Mind you, even the weak growth of the last few years in Latin America marks the region’s best performance since the 1970’s, and incomes are actually catching up slowly to those in the US, Europe, and Japan.
Nevertheless, Latin America remains the slowest growing of any of the world’s developing regions.
It is not only China and India that are growing faster. Central Europe, Central Asia, and the violence-ridden Middle East are growing faster, too.
Even Sub-Saharan Africa, with its wars and famines, has enjoyed more rapid growth in the past few years.
Does the pied piper of Venezuela offer a fairer and better way to grow?
Unfortunately, no.
Venezuela is merely being pulled along in China’s tailwind thanks to high oil prices.
When oil prices collapse, as they will at some point over the next few years, Venezuela’s economy will collapse with them.
Over the long run, commodity exporters need to innovate just as much as manufacturers do in order to maintain profitability.
With Venezuelan oil production still running far below its level when Chávez took over, there is little doubt about how this story will end.
In today’s hyper-competitive global economy, there is no reliable “third way” for countries to avoid continued liberalization and market-oriented reforms.
Instead, the current installment of Latin American socialism is all too likely to produce a re-run of tragic episodes from the past.
In this context, the US’s inexplicable indifference towards the region is both naïve and dangerous.
The incoming Democratic US Congress has signaled that free trade deals with Peru and Columbia need to be “renegotiated.”
What kind of message does that send to the US’s few remaining allies in the region?
If Americans don’t start embracing their friends in Latin America, it may take a generation to undo the damage.
Losing the Foreign Investment Race
Latin America is in serious trouble when it comes to foreign direct investment (FDI).
True, inward FDI reached about $70 billion in 2006, but this is below the 1998-1999 peak, and a large share came from Latin American firms investing in neighboring countries, whereas inflows from Europe and the United States have fallen.
Many companies are withdrawing from the region, and large investments from China, particularly in Brazil, though promised, have failed to materialize.
At its peak in the 1970’s, and again in the 1990’s, Latin America’s share of total global FDI reached 17%.
Now it is only 8% (in 2006), after averaging 11% over the previous five years.
Among developing countries, Latin America’s share of global FDI also fell dramatically, from 40-50% in the 1970’s to about half that in 2006.
Redressing the problems of high unemployment and large informal sectors – where almost half of all goods and services are produced – is perhaps the region’s most urgent policy challenge, particularly because most investment and growth by domestic firms is related to high commodity prices, which do little to create new jobs.
Likewise, FDI inflows have been expanding only in resource-intensive sectors, while falling in services and practically stagnating in manufacturing.
What is lacking are effective government policies to attract high-quality FDI, particularly for exports, which could have a multiplier effect domestically, creating both direct and indirect employment.
But, in addition to the right legal and regulatory framework to ensure appropriate links to the national economy – which is also lacking in most of the region – the search for desirable investors requires an effective foreign investment promotion agency.
To change the way Latin American countries sell themselves to foreign investors is a creative challenge.
Selling goods for export and selling the country to foreign investors is very different.
As Padraic White, a pioneer in this field who headed the Irish Industrial Development Agency (IDA-Ireland) from 1980 to 1990 argues, FDI promotion requires imagination and the ability to think innovatively.
As White points out, promoters of FDI are not selling a product, which the country’s embassies abroad may be able to do.
The sales technique should be based on fiscal and regulatory concepts and be expressed in legal and financial jargon, which only experts can do.
For this reason, FDI has to be promoted separately from domestic investment and exports.
Furthermore, foreign investors do not want to deal with diplomats or civil servants.
They want to talk to private-sector experts who understand the technical and financial needs of their companies or sectors.
Yet, except for Costa Rica’s foreign investment promotion agency, CINDE, modeled after the IDA-Ireland, none of Latin America’s FDI promotion agencies have succeeded in adopting best practices.
Many promote both foreign and domestic investment, despite the failure of such institutional arrangements in the past.
Ireland, for example, had to separate the two functions before it became successful.
Moreover, most FDI promotion agencies in the region lack the minimum financial and human resources needed in order to be effective, owing to governments’ lack of political will to support them and to eliminate parallel processes that confuse investors.
An effective FDI promotion agency must be headed by an executive director with strong credentials and an excellent reputation in the private sector, supplemented by good international contacts and fluency in English.
Just as importantly, there cannot be any conflict of interest (or even the perception of such a conflict) with other personal or political activities, past or present.
The executive director should put together a team of analysts located in critical locations abroad and able to conduct business intelligence.
This requires investigation of markets and trends, and identification of specific firms that would be desirable for the clusters or niches that the country wants to promote.
The team will also need “promoters” in these locations, with public-relations expertise and technical knowledge of the country and the clusters.
Finally, the team will need local “service providers” with technical knowledge of specific clusters to support foreign investors once they have located in the country, thereby ensuring that they remain and expand.
International competition for investors is brutal, so waiting for them to fall from the sky is not an option.
Without the right strategy, Latin America will continue to fall behind.
Losing Turkey
OXFORD &#45;&#45; Turkey has long been a haven of geo-political stability.
But, since 2003, Turkey’s virtually unquestioned alliance with the United States has undergone a profound re-evaluation, due to the Iraq War, and the Turkish consensus on its decades-long EU candidacy has begun to wobble, owing to EU dithering. Given Turkey’s central role not only in maintaining peace in the volatile Caucasus region but also in promoting peace in the Middle East – the talks now underway between Syria and Israel are, after all, being conducted with Turkish mediation – neglecting Turkey is not only foolish, it is dangerous.
Both the dominant Justice and Development Party (AKP) and its secular rivals remain publicly committed to pursuing EU membership, but in practice doubts have emerged.
French President Nicolas Sarkozy’s insistence that a referendum should be held on Turkey’s admission suggests that years of painful adjustment to EU norms will never produce the payoff of membership.
The US and the EU are evidently convinced that Turkey has nowhere else to go.
The Turks, they think, will fatalistically accept any snub.
But this cozy assumption overlooks a tectonic shift in Turkey’s geo-political position.
Immediately after the collapse of the Soviet Union, Turkey looked to the newly-independent central Asian states in a mood of pan-Turkic romanticism.
These ancestral homelands exercised a hold on Turkish imaginations, but today it is business opportunities, energy resources, and other practical matters rather than ethnic unity that are creating a loose Turkic “commonwealth.”
Most striking is Turkey’s renewal of relations with Russia without damaging its ties to the newly independent post-Soviet states.
Turkey’s ancient antagonism toward Russia briefly revived when the Soviet Union imploded.
In the early 1990’s, some Turkish generals saw the humiliation of Russian troops in Chechnya as part of a long-awaited revenge.
But, while Russia (and Iran) were once Turkey’s great geo-political rivals, today they are export markets and energy suppliers.
Energy is the key to Turkey’s new geo-political position.
Its industry and population are growing dynamically, so its energy demands are producing geo-political synergy with Russia and Iran, neither of which can afford to cut the flow of oil and gas without provoking a massive internal crisis.
Meanwhile, as Turkey’s attitude toward its neighbors has changed, its governing elite has watched the EU embrace ex-communist countries with far shakier market economies and shorter democratic records.
As one Turkish general put it, “If we had joined the Warsaw Pact rather than NATO, we would be in the EU by now.”
Last summer’s re-election of Prime Minister Recep Tayyip Erdogan’s AKP, followed by the election of Abdullah Gul as the first president whose wife wears a headscarf, seemed to confirm the fears of anti-Islamic Europeans.
Yet, even if many AKP activists and voters are devout Muslims, Erdogan and Gul remain committed to European integration.
Time is running out, however, for them to satisfy their supporters and silence their critics by achieving it.
The problem is that the AKP’s victories, together with America’s courting of Erdogan and Gul, have triggered a crisis of direction among Turkey’s once-dominant secular and pro-western elite.
Even if the AKP can rely on the allegiance of millions of voters and swarms of new members anxious to join the winning side, the secularists are deeply entrenched in Turkey’s institutions, universities, media, and business.
But both ordinary AKP supporters and disillusioned secularists are now suspicious of America’s actions and motives in the region.
Key military figures’ tacit backing for the Turkish Parliament’s refusal to endorse the March 2003 US-led invasion of Iraq suggests that Turkish nationalism could unite the AKP’s rank-and-file MPs with their otherwise implacable foes in the secular camp.
If the EU were to snub Turkey openly over membership, or if America were to seem too lax on the Kurdish problem in Northern Iraq, a huge swathe of the two camps could well unite.
Turkey’s links with Israel, for example, have been strained by Israeli investment in Kurdistan.
While Shimon Peres made a gesture of reconciliation by choosing Ankara as the setting for the first speech by an Israeli president to the parliament of a predominantly Muslim country, Israel’s concerns about Iran are far more serious than are Turkey’s.
Israel’s two most irreconcilable enemies, Iran and Syria, are in fact among the most vocal supporters of Turkey’s hard-line stance towards the Kurds.
America’s conquest of Iraq de-stabilized Turkey’s Western orientation more than the US cares to admit.
Most Turks don’t want to see their country excluded from the West, but if the EU spurns them while speeding up entry for weaker candidates, Turkey may come to feel sufficiently strong and embittered to strike out on a new geo-political course.
Lost Horizon
In the film "Groundhog Day," Bill Murray plays a hapless TV weatherman who seems condemned to endlessly relive the same day over and over again, no matter what he does.
The process of justifying long-term basic research in the life sciences often seems like just such a repetitive loop.
The case is made, evidence is marshaled, some projects may be saved, but the next morning we find that policies and initiatives continue their inexorable march toward goals that are short-term and practical.
Not that there's anything wrong with it!
But that is not where scientific breakthroughs come from, and it is not where ultimate cost-effectiveness comes from.
The irony is that with federal and private funding of science at an all-time high, and with a record number of researchers working at laboratory benches, there is a narrowing of research activities and a shortening of the time horizon.
Back in the 1970s, when life science research was a relatively small enterprise by today's standards, the renowned cardiologist Julius Comroe made the case for basic research to the US Congress in the form of an unbiased statistical survey of medical breakthroughs.
He took 10 major medical advances of the previous three decades, agreed upon by a panel of 70 clinicians and an equal number of scientists, engineers and administrators.
The advances included heart surgery, drug treatment of high blood pressure, chemotherapy for cancer, and prevention of polio.
Comroe traced the origins of these advances back to the breakthrough discoveries that made them possible.
After sifting through 2,500 published research reports, they identified 529 "key" papers, of which nearly two-thirds were basic in nature--defined as "research to determine mechanisms by which living organisms function."
Their survey stands as solid scientific evidence in favor of basic research in life sciences.
There is no reason to believe that this fundamental truth has changed since then.
Why?
The answer lies in the nature of scientific mystery.
If it is a mystery, we cannot know what the answer will be ahead of time, nor where that answer will come.
Roentgen undertook experiments with X-rays in order to study the structure of the atom and found, to everyone's surprise, that X-rays also made living tissue transparent.
The Human Genome Project is often cited as an example of foresight and investment in the future.
In one sense it does represent an exception, but in another, it is akin to the Apollo space program as a one-time, massive investment for one specific, long-range goal.
It is also credited, however, as an advanced technology that makes old-time approaches obsolete.
A recent scientific report belies this notion.
Last month, the Icelandic biotech company, deCODE Genetics, Inc., published a map of the human genome.
Its findings are based on applying traditional gene mapping strategies to humans, making use of Iceland's unique historical circumstances of having a relatively isolated population, derived from a small founder group, with little immigration and extensive genealogical records.
Their report contains substantial corrections of the genome map generated a year earlier by the high tech DNA sequencing efforts of Celera Genomics, Inc. and a large public consortium of labs.
The Icelandic gene map would not have been possible but for the ground-breaking work that generated the first gene map in the fruit fly Drosophila 90 years ago.
Today, deCODE followed essentially the same gene-mapping approach worked out in the fruit fly, one which could never have been discovered if humans were the only subjects studied.
Back when Comroe made his study of medical advances, he was directing his arguments to the public and their elected representatives.
There was scant need to convince scientists of the importance of basic research.
One unforeseen consequence of the hefty budgets now devoted to science is that such vast funds have increased the pressure for practical outcomes.
The more money, the greater the need to show usable results.
So there is a growing incentive to medical-ize, practical-ize and commercialize the research projects because these have greater currency--they get picked up by the news media and get preferential treatment in the initiatives that emanate from funding agencies.
They have a shorter apparent time horizon, and the path towards their goal is apparently clear.
One may dispute whether these appearances have any underlying reality, but whether they do or not, this defines the best strategy to get money.
Areas of research as esoteric and fundamental as fruit fly genetics have even succumbed.
Genetic studies of the fruit fly have produced many breakthrough discoveries, three of which earned Nobel prizes--one early on for the discovery that genes are carried by chromosomes, another subsequently for the discovery that mutations can be produced by X-rays, and a third more recently for discovery of the genes underlying formation of the embryonic body plan.
None was motivated by a wish for practicality; all three had enormous practical and medical payback.
Today's climate has spawned fruit fly research projects on cocaine and alcohol abuse, degenerative aging, and disease models for Parkinson's and Alzheimer's.
Such efforts are not intrinsically bad, but a problem arises if the climate begins to obscure the value of the research defined by Comroe as aimed at "mechanisms by which living organisms function."
Despite record levels of money and personnel, the playing field for asking basic questions has shrunk.
It is essential that we remember where and how our greatest advances arose.
It requires only that we have faith in the notion that what worked in the past will continue to work in the future.
Otherwise, we may find ourselves falling victim to the ultimate irony of spending more and more money with less and less of value to show for it.
Loving America’s Deficits
With the weak dollar hanging like the sword of Damocles over the global economy, almost everyone laments America’s spendthrift habits.
But did it ever occur to anybody how hard Americans must work to make everyone else look good?
Thanks to America’s gaping trade deficits, the biggest headache of every developing country finance minister nowadays is trying to keep his or her country’s currency from going up too fast against the dollar.
When was the last time that happened?
Chronic debt-crisis countries from Mexico to Russia to South Korea are all fighting off capital inflows from investors looking for an exit as the dollar collapses.
Ordinarily, as the world comes out of a downturn and global interest rates rise, at least one or two emerging market countries suffers a spectacular blowup.
Not likely this time, at least for the next year.
True, policy in some countries has improved markedly.
Brazil and Turkey, for example, have each instituted market-friendly policies that have made their economies more flexible and growth more durable.
But can the same be said for Mexico, where reform has stalled, or for Russia, where reforms have been reversed?
America’s reckless deficit spending is making all their currencies look like good investments for 2005.
So non-Americans should be more appreciative of America’s deficits.
Do people think it is easy for a 12-trillion-dollar economy to spend beyond its means year after year just to prop up other countries’ reputations for stability?
It isn’t.
Going deep into debt when you have that much money to spend takes a lot of hard work.
Start with the American consumer, who consumes everything on earth (helping the United States eat up 25% of world oil production) but saves essentially nothing.
Thanks to America’s gold-plated financial system, its consumers can buy fancy cars with almost no down payment.
They can borrow more and more each year against the value of their homes, and spend every cent.
They can retire earlier and earlier on their smaller and smaller savings.
It takes nerve and energy to live like that.
Of course, the US government does its share, too, and more.
When President George W. Bush took office in 2001, he was staring at giant budget surpluses as far as the eye could see.
It was hard work engineering a five-trillion-dollar deterioration in America’s fiscal position.
Cutting taxes was easy, but hiking spending on virtually every program involves a lot of legislation.
Sure, the decision to invade Iraq was a big help in pushing the country’s finances off a cliff, but that is far from the whole story.
So why is the world so ungrateful?
Maybe some Europeans and Japanese are upset that they have consistently earned such poor returns on their US investments.
Part of the problem has been the sinking dollar, which makes dollar investments look bad when translated into yen or euro.
Part of the blame also lies with bad market timing.
Many Europeans bought into the US stock market at its peak in 1999 and 2000, only to find themselves selling at steep discounts after the collapse of 2001.
The same happened to the Japanese in real estate.
Japanese financiers bought up pricey trophy properties like Rockefeller Center in New York and the Pebble Beach Golf Club in California, and then had to sell later at rock-bottom prices.
These investment failures have been great for Americans, who owe a lot less to foreigners than they would otherwise.
Unfortunately, this cannot go on forever.
Foreigners are either going to start earning much better returns in the US, pushing American debt levels into unsustainable territory, or else they will pull back and invest elsewhere.
Either way, the dollar collapse has to continue.
So how low can the dollar sink?
By my calculations, the dollar still needs to go down another 15% if the US trade deficit is to go back towards balance.
Ideally, Asian currencies would rise much more than 15% while European currencies would rise less.
Unfortunately, there is a real danger that we may see the opposite, with the euro going to $1.50 or beyond.
Governments may try to resist the fall of the dollar, but in today’s world of deep and fluid capital markets, they will not succeed indefinitely, even in Asia.
Moreover, although US policy is making everyone else look good for now, things might not be so comfortable if the dollar collapse leads to skyrocketing interest rates and a sustained global slowdown.
Some of the countries that look so strong today may suddenly experience the kind of financial crises that they thought they had left behind.
Even if countries avoid the immediate blow of a dollar collapse, they still have to watch for a boomerang effect.
Exchange rates have a nasty habit of overshooting their equilibrium values, then knifing back on countries, especially those who have been spending too much based on inflated income valuations.
OK, so maybe it is too soon for the world to start toasting America’s insane consumption patterns.
Even so, isn’t it generous of the Americans to make everyone else look so sober and frugal, if only for the moment?
Alpha, Beta, and Beyond
NEW YORK – Even in normal times, individual and institutional investors alike have a hard time figuring out where to invest and in what.
Should one invest more in advanced or emerging economies? And which ones?
How does one decide when, and in what way, to rebalance one’s portfolio?
Obviously, these choices become harder still in abnormal times, when major global changes occur and central banks follow unconventional policies.
But a new, low-cost approach promises to ease the challenge confronting investors in normal and abnormal times alike.
In the asset management industry, there have traditionally been two types of investment strategies: passive and active.
The passive approach includes investment in indices that track specific benchmarks, say, the S&P 500 for the United States or an index of advanced economies or emerging-market equities.
In effect, one buys the index of the market.
Passivity is a low-cost approach – tracking a benchmark requires no work.
But it yields only the sum of the good, the bad, and the ugly, because it cannot tell you whether to buy advanced economies or emerging markets, and which countries within each group will do better.
You invest in a basket of all countries or specific regions, and what you get is referred to as “beta” – the average market return.
By contrast, the active approach entrusts investment to a professional portfolio manager.
The idea is that a professional manager who chooses assets and markets in which to invest can outperform the average return of buying the whole market.
These funds are supposed to get you “alpha”: absolute superior returns, rather than the market “beta.”
The problems with this approach are many.
Professionally managed investment funds are expensive, because managers trade a lot and are paid hefty fees.
Moreover, most active managers – indeed, 95% of them – underperform their investment benchmarks, and their returns are volatile and risky.
Moreover, superior investment managers change over time, so that past performance is no guarantee of future performance.
And some of these managers – like hedge funds – are not available to average investors.
As a result, actively managed funds typically do worse than passive funds, with returns after fees even lower and riskier.
Indeed, not only are active “alpha” strategies often worse than beta ones; some are actually disguised beta strategies (because they follow market trends) – just with more leverage and thus more risk and volatility.
But a third investment approach, known as “smart” (or “enhanced”) beta, has become more popular recently.
Suppose that you could follow quantitative rules that allowed you to weed out the bad apples, say, the countries likely to perform badly and thus have low stock returns over time.
If you weed out most of the bad and the ugly, you end up picking more of the good apples – and do better than average.
To keep costs low, smart beta strategies need to be passive.
Thus, adherence to specific rules replaces an expensive manager in choosing the good apples and avoiding the bad and ugly ones.
For example, my economic research firm has a quantitative model, updated every three months, that ranks 174 countries on more than 200 economic, financial, political, and other factors to derive a measure or score of these countries’ medium-term attractiveness to investors.
This approach provides strong signals concerning which countries will perform poorly or experience crises and which will achieve superior economic and financial results.
Weeding out the bad and the ugly based on these scores, and thus picking more of the good apples, has been shown to provide higher returns with lower risk than actively managed alpha or passive beta funds.
And, as the rankings change over time to reflect countries’ improving or worsening fundamentals, the equity markets that “smart beta” investors choose change accordingly.
With better returns than passive beta funds at a lower cost than actively managed funds, smart beta vehicles are increasingly available and becoming more popular.
(Full disclosure: my firm, together with a large global financial institution, is launching a series of tradable equity indices for stock markets of advanced economies and emerging markets, using a smart beta approach).
Given that this strategy can be applied to stocks, bonds, currencies, and many other asset classes, smart beta could be the future of asset management.
Whether one is investing in normal or abnormal times, applying a scientific, low-cost approach to get a basket with a higher-than-average share of good apples does seem like a sensible approach.
When Inequality Kills
NEW YORK – This week, Angus Deaton will receive the Nobel Memorial Prize in Economics “for his analysis of consumption, poverty, and welfare.”
Deservedly so.
Indeed, soon after the award was announced in October, Deaton published some startling work with Anne Case in the Proceedings of the National Academy of Sciences – research that is at least as newsworthy as the Nobel ceremony.
Analyzing a vast amount of data about health and deaths among Americans, Case and Deaton showed declining life expectancy and health for middle-aged white Americans, especially those with a high school education or less.
Among the causes were suicide, drugs, and alcoholism.
America prides itself on being one of the world’s most prosperous countries, and can boast that in every recent year except one (2009) per capita GDP has increased.
And a sign of prosperity is supposed to be good health and longevity.
But, while the US spends more money per capita on medical care than almost any other country (and more as a percentage of GDP), it is far from topping the world in life expectancy.
France, for example, spends less than 12% of its GDP on medical care, compared to 17% in the US.
Yet Americans can expect to live three full years less than the French.
For years, many Americans explained away this gap.
The US is a more heterogeneous society, they argued, and the gap supposedly reflected the huge difference in average life expectancy between African Americans and white Americans.
The racial gap in health is, of course, all too real.
According to a study published in 2014, life expectancy for African Americans is some four years lower for women and more than five years lower for men, relative to whites.
This disparity, however, is hardly just an innocuous result of a more heterogeneous society.
It is a symptom of America’s disgrace: pervasive discrimination against African Americans, reflected in median household income that is less than 60% that of white households.
The effects of lower income are exacerbated by the fact that the US is the only advanced country not to recognize access to health care as a basic right.
Some white Americans, however, have attempted to shift the blame for dying younger to African Americans themselves, citing their “lifestyles.”
It is perhaps true that unhealthy habits are more concentrated among poor Americans, a disproportionate number of whom are black.
But these habits themselves are a consequence of economic conditions, not to mention the stresses of racism.
The Case-Deaton results show that such theories will no longer do.
America is becoming a more divided society – divided not only between whites and African Americans, but also between the 1% and the rest, and between the highly educated and the less educated, regardless of race.
And the gap can now be measured not just in wages, but also in early deaths.
White Americans, too, are dying earlier as their incomes decline.
This evidence is hardly a shock to those of us studying inequality in America.
The median income of a full-time male employee is lower than it was 40 years ago.
Wages of male high school graduates have plummeted by some 19% in the period studied by Case and Deaton.
To stay above water, many Americans borrowed from banks at usurious interest rates.
In 2005, President George W. Bush’s administration made it far more difficult for households to declare bankruptcy and write off debt.
Then came the financial crisis, which cost millions of Americans their jobs and homes.
When unemployment insurance, designed for short-term bouts of joblessness in a full-employment world, ran out, they were left to fend for themselves, with no safety net (beyond food stamps), while the government bailed out the banks that had caused the crisis.
The basic perquisites of a middle-class life were increasingly beyond the reach of a growing share of Americans.
The Great Recession had shown their vulnerability.
Those who had invested in the stock market saw much of their wealth wiped out; those who had put their money in safe government bonds saw retirement income diminish to near zero, as the Fed relentlessly drove down both short- and long-term interest rates.
With college tuition soaring, the only way their children could get the education that would provide a modicum of hope was to borrow; but, with education loans virtually never dischargeable, student debt seemed even worse than other forms of debt.
There was no way that this mounting financial pressure could not have placed middle-class Americans and their families under greater stress.
And it is not surprising that this has been reflected in higher rates of drug abuse, alcoholism, and suicide.
I was chief economist of the World Bank in the late 1990s, when we began to receive similarly depressing news from Russia.
Our data showed that GDP had fallen some 30% since the collapse of the Soviet Union.
But we weren’t confident in our measurements.
Data showing that male life expectancy was declining, even as it was increasing in the rest of the world, confirmed the impression that things were not going very well in Russia, especially outside of the major cities.
The international Commission on the Measurement of Economic Performance and Social Progress, which I co-chaired and on which Deaton served, had earlier emphasized that GDP often is not a good measure of a society’s wellbeing.
These new data on white Americans’ declining health status confirms this conclusion.
The world’s quintessential middle-class society is on the way to becoming its first former middle-class society.
Oil’s New Normal
LAGUNA BEACH – Oil prices have been heading south again, with a barrel of US crude recently falling below $42 – the lowest level since March 2009, the nadir of the global financial crisis.
And, while last year’s sharp price drop was heavily influenced by two large supply shocks, the current decline also has an important demand dimension.
At the same time, oil markets are discovering what it is like to operate under the regime of a new swing producer: the United States.
As a result, the price formation process is much clumsier nowadays, with considerably longer adjustment lags.
The dynamics of the energy markets changed notably as shale-oil production came onstream at a market-moving scale in 2013-2014.
With this new source meeting more of world energy demand, particularly in the US, energy users were no longer as dependent on OPEC and other oil producers.
In the process, they also became less vulnerable to geopolitical concerns.
Adding to the supply-side changes was Saudi Arabia’s subsequent historic announcement that it would no longer lead OPEC in playing the role of swing producer.
It would no longer lower production when prices fell sharply, and increase output in response to large price surges.
That decision was both understandable and rational.
Playing the role of swing producer was coming at a growing cost to both current and future generations of Saudi citizens.
Non-traditional suppliers had increased their market influence, non-OPEC producers continued to plan high output, and some OPEC members failed to adhere to their production ceilings.
Given all this, Saudi Arabia could no longer be expected to incur the growing short- and long-term cost of being the stabilizing market force that it had been for decades.
Such fundamental changes in the supply side of the market naturally drove oil prices lower – a lot lower.
Prices plummeted by more than half in a period of just a few months last year, catching many oil traders and analysts by surprise.
Oil prices stabilized after a somewhat temporary overshoot, trading increasingly robustly for a while on the back of two conventional market reactions. First, the large price drop caused massive supply destruction, as some energy producers, from both the traditional and non-traditional sectors, became unprofitable.
Second, as consumers reacted to lower energy costs, demand adjusted only gradually.
But a new factor soon disturbed this relative stability, pushing oil prices even lower: Evidence that the global economy was weakening, and that much of the weakening was occurring in relatively energy-intensive countries such as China and Brazil, as well as Russia (itself an energy producer).
Today, indicators of this global slowdown are to be found everywhere – from underwhelming retail and trade data to unanticipated policy responses, including China’s surprise currency devaluation (which coincides with its leaders’ commitment to a long-term shift toward a more market-based exchange-rate regime).
The impact is not limited to economic performance and financial-market movements.
Slower global growth is also amplifying political pressures and, in some countries, adding to social strains – both of which tend to constrain policy responses.
It is hard to see the global oil market’s current configuration of supply and demand rapidly changing any time soon.
As for the new swing producer, the US has a much slower (and leakier) reaction function relative to that of Saudi Arabia and OPEC.
Over the next few months, the US will indeed alter its supply and demand conditions in a way that puts a floor under oil prices and enables a gradual recovery in the market.
But, unlike the previous swing producer, this will result from traditional market forces, not policy decisions.
Indeed, we should expect an even sharper reduction in US energy output as persistently low prices increase the pressure on domestic producers.
From the shutdown of additional rigs to the curtailment of new investment in exploiting shale resources, the US will likely experience a fall in its absolute energy production, as well as in its share of world output.
But, while demand will increase, this will not have much of an immediate effect on oil prices.
Yes, US consumers will be tempted to buy more trucks and bigger cars, drive more miles, and fly to more places.
But the creation of this demand will be very gradual, especially given all the leakages in the transmission of lower energy-input costs to consumer fuel prices.
At the end of the day, no swing producer controls the fate of today’s oil prices.
A sustained price recovery requires a healthier global economy that combines faster inclusive growth and greater financial stability.
And this will not occur quickly, especially given the policy shortcomings in both advanced and emerging countries.
The Inflation Puzzle
CAMBRIDGE – The low rate of inflation in the United States is a puzzle, especially to economists who focus on the relationship between inflation and changes in the monetary base.
After all, in the past, increases and decreases in the growth rate of the monetary base (currency in circulation plus commercial banks’ reserves held at the central bank) produced – or at least were accompanied by – rises and falls in the inflation rate.
And, because the monetary base is controlled directly by the central bank, and is not created by commercial banks, many believe that it is the best measure of the impact of monetary policy.
For example, the US monetary base rose at an annual rate of 9% from 1985 to 1995, and then slowed to 6% in the next decade.
This decelerating monetary growth was accompanied by a slowdown in the pace of inflation.
The consumer price index (CPI) rose at a 3.5% rate from 1985 to 1995, and then slowed to just 2.5% in the decade to 2005.
But then the link between the monetary base and the rate of inflation was severed.
From 2005 to 2015, the monetary base soared at an annual rate of 17.8%, whereas the CPI increased at an annual rate of just 1.9%.
To explain this abrupt and radical change requires examining more closely the relationship between the monetary base and inflation, and understanding the changing role of the reserves that commercial banks hold at the Federal Reserve.
When banks make loans, they create deposits for borrowers, who draw on these funds to make purchases.
That generally transfers the deposits from the lending bank to another bank.
Banks are required by law to maintain reserves at the Fed in proportion to the checkable deposits on their books.
So an increase in reserves allows commercial banks to create more of such deposits.
That means they can make more loans, giving borrowers more funds to spend.
The increased spending leads to higher employment, an increase in capacity utilization, and, eventually, upward pressure on wages and prices.
To increase commercial banks’ reserves, the Fed historically used open-market operations, buying Treasury bills from them.
The banks exchanged an interest-paying Treasury bill for a reserve deposit at the Fed that historically did not earn any interest.
That made sense only if the bank used the reserves to back up expanded lending and deposits.
A bank that that did not need the additional reserves could of course lend them to another bank that did, earning interest at the federal funds rate on that interbank loan.
Essentially all of the increased reserves ended up being “used” to support increased commercial lending.
All of this changed in 2008, when a legislative reform allowed the Fed to pay interest on excess reserves.
The commercial banks could sell Treasury bills and longer-term bonds to the Fed, receive reserves in exchange, and earn a small but very safe return on those reserves.
That gave the Fed the ability in 2010 to begin its massive monthly purchases of long-term bonds and mortgage-backed securities.
This quantitative easing (QE) allowed the Fed to drive down long-term interest rates directly, leading to a rise in the stock market and to a recovery in prices of owner-occupied homes.
The resulting rise in household wealth boosted consumer spending and revived residential construction.
And businesses responded to this by stepping up the pace of investment.
Although a link between the Fed’s creation of reserves and the subsequent increase in spending remained, its magnitude changed dramatically.
The Fed increased its securities holdings from less than $1 trillion in 2007 to more than $4 trillion today.
But, rather than being used to facilitate increased commercial bank lending and deposits, the additional reserves created in this process were held at the Fed – simply the by-product of the effort, via QE, to drive down long-term interest rates and increase household wealth.
That brings us back to the apparent puzzle of low inflation.
The overall CPI is actually slightly lower now than it was a year ago, implying a negative inflation rate.
A major reason is the decline in gasoline and other energy prices.
The energy component of the CPI fell over the last 12 months by 19%.
The so-called “core” CPI, which excludes volatile energy and food prices, rose (though only by 1.8%).
Moreover, the dollar’s appreciation relative to other currencies has reduced import costs, putting competitive pressure on domestic firms to reduce prices.
That is clearly reflected in the difference between the -0.2% annual inflation rate for goods and the 2.5% rate for services (over the past 12 months).
Nonetheless, inflation will head higher in the year ahead.
Labor markets have tightened significantly, with the overall unemployment rate down to 5.4%.
The unemployment rate among those who have been unemployed for less than six months – a key indicator of inflation pressure – is down to 3.8%.
And the unemployment rate among college graduates is just 2.7%.
As a result, total compensation per hour is rising more rapidly, with the annual rate increasing to 3.1% in the first quarter of 2015, from 2.5% in 2014 as a whole and 1.1% in 2013.
These higher wage costs are not showing up yet in overall inflation because of the countervailing impact of energy prices and import costs.
But, as these temporary influences fall away in the coming year, overall price inflation will begin to increase more rapidly.
Indeed, the inflation risk is on the upside, especially if the Fed sticks to its plan to keep its real short-term interest rate negative until the end of 2016 and to raise it to one percentage point only by the end of 2017.
If inflation does rise faster than the Fed expects, it may be forced to increase interest rates rapidly, with adverse effects on financial markets and potentially on the broader economy.
The Oil Price Opportunity
WASHINGTON, DC – The sharp drop in the price of crude oil since late June has been grabbing headlines worldwide – and producing a lot of contradictory explanations.
Some attribute the fall largely to declining global growth expectations.
Others focus on the expansion of America’s oil and gas production.
Still others suspect a tacit agreement between Saudi Arabia and the United States aimed at, among other things, weakening political rivals like Russia and Iran.
Regardless of the reason for the price drop – probably to be found in some combination of these factors – the consequences are the same.
Though, as International Monetary Fund Managing Director Christine Lagarde has noted, lower oil prices may boost overall global growth, with the oil-importing advanced economies gaining the most, the impact on efforts to combat climate change could be devastating.
Indeed, a sustained decline in oil prices would not only make renewable energy sources less competitive now; it would impede their future competitiveness by discouraging research and investment.
More generally, it would reduce the incentive for consumers, companies, and governments to pursue more energy-efficient practices.
Even if we remained on our current trajectory, keeping temperatures from rising more than 2º Celsius above pre-industrial levels – the threshold beyond which the most disruptive consequences of climate change would be triggered – would be next to impossible to achieve.
As the Intergovernmental Panel on Climate Change’s most recent report reinforced, we cannot afford a slowdown in progress.
Of course, climate science is not precise; instead, it works in terms of probability ranges.
But uncertain estimates do not mean that the risk is any less acute.
World leaders increasingly seem to recognize this in theory, including at the just-concluded climate-change meeting in Lima, Peru.
But they continue to depend on non-binding commitments – leaving the world on a dangerous climate trajectory.
A sharp decline in oil prices does, however, provide a rare political opportunity to introduce more carbon pricing.
After all, one of the major arguments against a “carbon tax” has been that it would make energy more expensive.
Even assurances that the revenue from such a tax would be refunded to taxpayers were inadequate to overcome political resistance, particularly in the US.
But, with declining oil prices now exerting downward pressure on oil substitutes, a carbon tax could be introduced without raising the price of energy for consumers.
Policymakers must simply be willing to forego some of the short-term stimulus effects of cheaper energy.
In fact, with low enough prices, consumers could still benefit from lower energy costs – just not quite as much as they are now.
The structure of a carbon-pricing scheme remains up for discussion.
One option would be to introduce flexible pricing, tied to the price of oil.
For example, for every $5 decline in the price per barrel, the carbon tax could be raised by a specified amount; for every $5 increase, the tax could be lowered by, say, two-thirds of that amount.
The carbon price would thus increase over time – the optimal outcome, according to growth models that account for climate constraints.
At the same time, it would buffer consumers from oil-price volatility, thereby stabilizing their energy spending.
Finally, and perhaps most important, such an approach would be more politically attractive than a fixed carbon tax, especially if it is introduced at a time of sharply declining oil prices.
In short, world leaders must take advantage of falling oil prices to move beyond indirect carbon pricing – achieved through the prices of carbon-emitting substances – to an explicit carbon tax that can help steer the world onto a more sustainable growth path.
Crucially, in order to make a real impact, carbon-pricing schemes would have to be introduced in all major economies.
Of course, given the multitude of existing taxes, fees, and subsidies on energy products in various countries, the goal of aligning the effective cost of carbon with its most economically efficient level would take time to achieve.
But introducing a modest, flexible carbon tax in major economies would be an important first step.
Today’s environment of falling oil prices enables the world to take that step.
It should be modest, so that it is politically feasible; flexible, so that it helps stabilize user prices; and it should increase over time, to place the global economy on a more sustainable path.
Most important, it should be implemented quickly.
After all, this window of opportunity will not remain open for very long.
Lucky Little Countries?
AMSTERDAM – Western Europe’s small democracies have, on the whole, been exceptionally fortunate.
Freer and richer than almost anywhere else in the world, countries such as Holland, Belgium, and Switzerland would seem to have little to worry about.
This is why the world normally hears less about them than about Afghanistan, say, or Kosovo.
Yet all three have been much in the news of late – and not for happy reasons.
The most successful political force in Switzerland today is Christoph Blocher’s Swiss People’s Party.
The party’s propaganda material tells its story.
A poster shows three white sheep kicking a black sheep off the Swiss flag.
And images of junkies and Muslim women in headscarves are contrasted in a promotional movie with idyllic pictures of Alpine scenery and efficient banks – the People’s Party’s Switzerland.
Vlaams Belang, the Flemish nationalist party, may not be the biggest party in Belgium, but it has done well in local elections.
Like the Swiss People’s Party, Vlaams Belang feeds on popular resentment of immigrants – especially Muslim immigrants – of the European Union, and, of course, of the French-speaking Walloons, from whom the Flemish nationalists would like a divorce.
This last sentiment is posing a serious threat to Belgium’s survival.
Although the Dutch government is still managed mostly by mainstream, steady-as-you-go Christian Democrats, right-wing populism is growing.
Geert Wilders’ Freedom Party wants to ban the Koran, halt Muslim immigration, and deprive delinquents with an immigrant background of Dutch citizenship.
The new Proud of the Netherlands Movement, led by Rita Verdonk, the former Minister of Integration, promotes a somewhat more respectable version of this hard line.
These parties and movements share a sense that native-born citizens have been let down by liberal political elites, who seem unable or unwilling to stem the tide of immigration, crime, and Islamist militancy, as well as the erosion of national sovereignty by EU bureaucracy and global capitalism.
Such fears are by no means confined to Europe’s small countries.
Nicolas Sarkozy’s election in France has at least something to do with similar feelings.
But anxieties about being swamped by foreigners and dominated by outside powers are more acute in smaller countries, whose political elites seem particularly impotent.
The Dutch case is the most surprising, because, unlike Belgium, the Netherlands has no significant tradition of right-wing populism.
Nor does it share Switzerland’s insularity.
On the contrary, the Dutch pride themselves on their openness and hospitality to foreigners.
The case of Somalia-born Ayaan Hirsi Ali, the bestselling author of Infidel , best illustrates both the popular resentments and the relative openness that mark contemporary Dutch society.
Much criticism and even abuse has been heaped on the Dutch for the way her adopted country has treated her.
She has received death threats from Muslim extremists ever since she renounced – indeed, denounced – her Muslim faith, and was forced to live as a virtual fugitive, albeit under the protection of the Dutch state.
Before moving to the United States, she was forced out of her apartment in The Hague by complaining neighbors, and almost deprived of her passport.
Now that she is a permanent US resident, the Dutch government no longer wants to pay for her protection.
Commentators in the US and elsewhere have accused the Dutch of “unacceptable cowardice.”
Salman Rushdie called her “the first refugee from Western Europe since the Holocaust.”
French intellectuals, never shy of public posturing, are campaigning to give her French citizenship.
The way the Dutch government handled the affair was not elegant, to say the least.
But I’m not sure how many governments do pay for the protection of private citizens who live permanently abroad.
The US doesn’t pay to protect its citizens who are under threat even at home.
It is easy to voice contempt of the Dutch government.
But what has been lost in all the commentary is the nature of Hirsi Ali’s rise to prominence.
It is hard to imagine many countries where a young African woman could become a famous member of parliament only ten years after seeking asylum.
But the reasons for her rise are not entirely salubrious.
Whatever the merits – and they are considerable – of her arguments against the bigotry of Islamic or African customs, especially those concerning the treatment of women, she lent respectability to bigotry of a different kind: the native resentment of foreigners, and Muslims in particular.
Indeed, contrary to what some commentators have written, it wasn’t cowardly liberals who hounded Hirsi Ali out of the country because of her politically incorrect views about Islam.
She was betrayed by her own former ally, Rita Verdonk, and a variety of Dutch xenophobes, who don’t like an outspoken black female immigrant from Somalia any more than they like Muslims.
But the truth in these matters counts for less than the emotions.
And the emotions in this case betray an element of Schadenfreude: look at how even the Dutch, always boasting of their superior tolerance and liberalism, have responded like cowards when their principles are truly tested.
It is true that the Dutch, proud and comfortable inside their narrow borders, have, like the Swiss, often viewed the outside world with a degree of smugness.
And for this they are now being punished.
That, too, is the natural fate of being a lucky little country in Western Europe.
Lucky Putin, Unlucky Yeltsin
Russian President Vladimir Putin’s assertive foreign policy stance of recent years reflects the confidence that comes with a booming economy.
In 1999, the year before Putin succeeded Boris Yeltsin as president, Russia’s GDP was a paltry $200 billion.
By last year, it had reached $1 trillion.
Real growth has averaged 7% for eight years, and real incomes have grown by roughly 10% per year.
Russia’s budget surplus has stood at more than 7% of GDP in the last two years, public debt has dwindled to only 8% of GDP, from 100% in 1999, and the current account surplus has averaged at 10% of GDP for the last eight years.
But Russia’s stellar economic performance has little to do with Putin’s policy, and a lot to do with the reforms Yeltsin embraced.
By 1998, Russia already had achieved a critical mass of markets and private enterprise, while the financial crash of that year worked like a catharsis, forcing the government to abolish enterprise subsidies that underpinned a devastating budget deficit of some 9% of GDP.
Moreover, world oil prices that had fallen to $10 a barrel started rising toward the stratosphere.
The whole success story thus was in place in early 1999, one year before Putin entered the stage.
To be sure, Putin should be praised for substantial economic reforms during his first three years.
A new tax code was adopted, with lower and fewer taxes, notably a flat income tax of 13%.
The civil code was completed, a new customs code was enacted, and substantial judicial reform was implemented.
At the same time, however, Putin has systematically eliminated the rudimentary democracy Yeltsin had build.
One television channel after another was taken over by the state under various pretexts, as were major newspapers.
Opposition candidates and parties were denied registration for the slightest formal complaint.
Falsification of elections became the rule.
Many prominent Russians favored the Pinochet model of authoritarian politics and liberal economics.
But growing authoritarianism also hit business.
In October 2003, Putin cracked down on Mikhail Khodorkovsky, the CEO and main owner of Yukos oil, Russia’s most valuable company, who was thrown into prison on dubious charges of tax fraud after backing Putin’s political opponents.
Moreover, Putin’s associates wanted Yukos’ wealth, which was confiscated by the state oil company Rosneft through lawless taxation, leaving Putin’s tax reform and judicial reform in tatters and severely undermining property rights.
In fact, since 2003, Putin’s main economic policy has been re-nationalization.
Well-run private companies have been more or less forced to sell out to state-dominated companies.
Gazprom is buying up oil (Sibneft), gas, and power companies at knockdown prices, reinforcing its monopoly.
That, in turn, allows Gazprom to boost its profitability through price increases, despite stagnant production.
Indeed, with state companies now producing one-third of Russia’s oil, output growth has plummeted, as owners of private enterprises – the source of dynamism in the sector – are now afraid to invest in new capacity.
Among foreign investors, both Shell and TNK-BP are being pushed out by Gazprom in their main gas fields in Russia.
Beyond oil and gas, Russia’s arms export agency, Rosoboronexport, has just seized Avtovaz, the giant dysfunctional Soviet car factory, and VSMPO-Avisma, Russia’s big titanium company, while all aircraft production has been concentrated in one state company.
The government cheers this re-nationalization, although it has reduced Russia’s industrial growth from 8.3% in 2004 to 4% in the last two years.
Similarly, inefficient state banks – far inferior to private banks even in Kazakhstan or Ukraine – dominate the banking system.
The not very profitable state-owned Vneshtorgbank, for example, is on a buying spree, aggravating the quality of Russian banking.
Increasingly, Russia’s oil surpluses drive economic growth through rising investment, which boosts construction and consumption, in turn benefiting retail trade and finance.
With personal incomes rising strongly, poverty is declining, while 68% of Russia’s college-age youth now attend universities.
But other social indicators are unimpressive.
Life expectancy for men is stuck at 59.
The murder rate is even higher under Putin than it was under Yeltsin, as is the traffic death rate.
None of the big public systems – education, health care, or the military – has been reformed, and the regime shows little interest in doing so.
Instead, the Kremlin is preoccupied with the profitability and value of the state-dominated companies that it controls.
Not surprisingly, all corruption indicators have been rising since Putin took over from Yeltsin, whereas they are falling in most post-communist countries.
Although corruption is pervasive, no top official has been prosecuted.
Putin and his KGB friends from St. Petersburg sit safely on all this wealth, thanks to their authoritarian governance and control over all security organs.
Such a powerful apparatus cannot retire to a quiet life in a dacha as Yeltsin did – it would have to privatize everything first – which implies that Putin has no choice but to remain in office, regardless of what he says about not seeking a third presidential term.
But if he holds on to power contrary to the constitution, his popularity could easily collapse, especially as his economic policy has thrived on luck, not reform.
The People’s Corporations
LONDON – Two big power shifts are occurring around the world today.
First, corporate power is growing relative to that of governments.
Second, ordinary people are also gaining greater influence.
What does it mean that these seemingly contradictory shifts are happening simultaneously?
There is, no doubt, more power in the hands of companies than ever before.
People who have not been popularly elected control more and more of our daily lives – from entertainment and energy supplies to schools, railways, and postal services.
At the same time, the speed of technological innovation is outpacing that of legislation, meaning that corporate activities are routinely entering seemingly gray areas devoid of regulation.
But, counterbalancing this trend, people now have the means and opportunities to ensure that companies’ behavior does not go unchecked.
They are becoming more educated and aware of how companies operate, and they are more proactive and outspoken when they believe a company has crossed the line.
The public increasingly acts as the conscience of companies and industries, asking hard questions and holding them to account.
In the past several years, more effective means of collective action – such as social media, open publishing platforms, and online video sharing – have given people more levers to pull.
As people pursue boycotts and disinvestment, lobby for legislation, and activate social-media campaigns with growing sophistication, they are increasingly able to influence companies’ operational and strategic decision-making, thereby imposing checks and balances on today’s enormous accretions of private power.
For some companies, this has come as a thunderbolt.
Consider the British Petroleum oil spill in the Gulf of Mexico in 2010.
The BP spill was one of the first instances in which companies were forced to contend with the power of social media – and in which people realized the potential of the tools at their disposal.
Like most companies at the time, BP was accustomed to communicating with traditional seats of power – the White House, the Kremlin, and so on – and to doing so via traditional modes of communication, such as briefing carefully selected journalists and distributing precisely worded press releases.
The Gulf oil spill changed all of that.
Communities united around an issue and found a voice on Facebook.
There was a massive conversation going on, and BP was neither a part of it nor able to control it via traditional communication-management methods.
Since then, there has been a marked increase in this sort of direct action.
Social media spread ideas in an immediate and unfettered manner.
A document, an image, or a video is shared, and suddenly what was secret or shielded is globally exposed.
And, though wrong or false information spreads just as quickly as true information, corrections are often swift as well.
For younger people today, using social media as a tool for activism is second nature.
They are fluent in using YouTube, Twitter, Facebook, and Reddit to communicate and create a community around an idea, issue, or objection – and to nurture the growth of a small group into a mass movement.
And older people are not far behind.
As corporate power rises, holding companies to account becomes increasingly important.
The scope of accountability must expand as well, in order to affect the behavior of executives and non-executives alike.
And companies’ board members will be increasingly held to account for how well they hold senior management to account.
With all of that comes a culture of questioning that which was previously unquestioned – including how companies are run and whether an organization’s actions are ethical.
Any action can be questioned by anyone, and if others find it interesting or important, the question will spread – and not just within a small community or a specialist group, but more broadly and around the world.
This shift has changed the nature of activism and collective action.
It has also made for new kinds of allies, with activist investors like Carl Icahn tweeting their intentions and markets responding.
Likewise, those who in other circumstances might see activist investors as natural adversaries can agree with the positions that they take, such as concerns about executive compensation or corporate social responsibility.
Activist investors can write open letters that may not be picked up by mainstream media outlets, but that can go viral on Twitter or Reddit.
This is often enough to make boards and executive committees sit up and take notice.
Corporate leaders who embrace this new reality, view it as an opportunity, and resist the inclination to “manage” or avoid issues will have a competitive advantage.
They will not regard meeting people where they are as a way to manipulate them, but as an opportunity to hear what they are saying.
Their first impulse will not be to figure out how to use modern means of direct communication to persuade customers, employees, and other stakeholders to think and do the things that they want them to think and do.
Instead, they will make real changes – and they will be better off for it.
Companies make our cars, our phones, and our children’s textbooks – and exercise increasing control over the daily lives and destinies of people worldwide, not only those who use their products, but also those who work for them and those who live in the communities where they are based.
If companies do not take seriously the responsibility that comes with their great and growing power, people will be there to remind them.
The Blatterball Diaries
LONDON – The World Cup has concluded with its usual flourish, and much of the world, as usual, couldn’t help but get caught up in the excitement of it all – which is exactly the outcome that Sepp Blatter wants.
Blatter, the president of FIFA, the Cup’s organizing body, wants the afterglow of an exciting month of play to blot out the corruption and backroom deals – and, most recently, a ticket scandal – that have roiled his tenure.
Times were very different in 1998, when Blatter took up his role.
Social media did not exist, and the Internet had not yet become a means of spreading the views of the voiceless and disenfranchised.
Nor was the culture of shareholder activism and corporate social responsibility as strong as it is today.
As BP, GM, and Royal Bank of Scotland have discovered, the world is watching, talking, and no longer willing to accept the old way of conducting business.
FIFA has two problems.
One is a straightforward lack of compliance with accepted business practices.
Allegations of wrongdoing range from match-fixing and bribery among members of FIFA’s Executive Committee to questions about how Qatar was chosen to host the World Cup in 2022.
The second problem is arguably more serious, for it is epiphenomenal: the damage that unethical behavior has done to the ideal of fair play.
When people see an institution that relates to something that they feel passionate about failing so publicly to abide by simple rules, they lose faith not only in that institution, but also in the idea that good governance is achievable at all.
The message sent, and understood, is that some institutions – of all kinds – are immune from scrutiny and can play by their own rules.
The code of conduct on the field – where we expect players to give their all under clear rules that are swiftly enforced by independent referees – is fundamentally the same as what we expect from governing bodies off the field.
In this sense, FIFA is not a special case: All non-profit and for-profit organizations around the world are expected to abide by this code of conduct.
And that is why FIFA’s problems are unlikely to fade from view.
They must be addressed head-on, with a clean sweep of its leadership and a complete overhaul of its governance structures.
FIFA is as complex as any large multinational private or public organization; how it is governed must reflect that.
For starters, FIFA must introduce truly independent board members to the governance process – people who will ask hard questions and challenge the organization’s executives.
Governance solely by association members has not worked – and, by encouraging a lack of transparency, may have made FIFA more vulnerable to the problems it now faces.
No organization that holds so much public influence and importance should be able to operate as a black box.
Likewise, FIFA must introduce and adhere to clearer term limits for its president and board members, starting with Blatter – and with immediate effect.
More effective checks and balances will not come easily; but they will not come at all without champions.
Before the World Cup began, some representatives of FIFA member associations spoke up in opposition to the status quo.
It will now be seen whether their actions reflect their words.
There are other glimmers of hope.
In the world of for-profit companies, investors are increasingly demanding better corporate-governance standards and more diverse boards that include independent members.
They are taking a much more active and public role in speaking out against bribery, corruption, and excessive pay packages, and in favor of corporate social responsibility and fair labor practices.
If their calls go unheeded, they vote at the annual general meeting – or with their feet.
FIFA’s sponsors must hold FIFA similarly to account, and there are signs that some are finally beginning – albeit tentatively – to speak out.
If they don’t, sponsors will leave themselves exposed to a consumer backlash as FIFA’s poor reputation rubs off on their brands.
Customers are savvier than ever before, and they, too, can vote with their feet.
Ultimately, however, change starts at the top.
Consider what a change in leadership has done for the Roman Catholic Church: Pope Francis is transforming an institution that was thought to be so byzantine, opaque, and intractable that change was all but impossible.
If the Catholic Church can change, so can the church of football.
There is another lesson here: good leadership also consists in knowing when to step down.
If Blatter genuinely cares about FIFA, he knows that remaining there would mean dragging the organization further into disrepute, damaging whatever positive contributions he has made, and quite possibly being forced to leave under a cloud.
The caption to a picture of Blatter on page six of FIFA’s 2013 financial report reads: “We have reached very high levels of accountability, transparency, and financial control.”
FIFA desperately needs to restore its public credibility.
That can happen only after the necessary changes at the top and throughout the organization have been achieved.
Lula and the Politics of the Precipice
Two weeks after his triumph, Luiz Inácio "Lula" da Silva's resounding electoral victory in Brazil is still raising eyebrows on the right and expectations among Latin America's long dispirited leftists.
His triumph represents both the symbols and realities of today's Latin America.
It symbolizes the impatience of voters who see chronic problems remain unsolved, and it highlights the pervasive belief that right-wing governments are chronically corrupt.
As the fog of leftist celebration and the chorus of rightwing laments dissipate, the outlines of what Lula can and cannot do are becoming more clear.
No question: the past ten or twelve years in Latin America represented a turning point for democracy in the region.
Honest elections were held almost everywhere, and these delivered a whole new generation of political actors.
Moreover, presidents and former presidents were jailed or interrogated for corruption in Argentina, Venezuela, Brazil, as well as in Central America's small republics.
Over all this time, however, the new political players and the old parties of the left failed to articulate any coherent alternative social/economic agenda to compete with the prevailing liberal one.
One reason they did not is that political parties across Latin America are divided and decrepit.
In Central America, they continuously fragment into ever smaller units that fight for insignificant positions of authority and irrelevant representation.
The only party in the region with a concrete political agenda is El Salvador's right-wing ARENA party, which has won three elections in a row and appears likely to win a fourth.
Elsewhere, that sad pattern of fragmentation has taken hold: Peronismo in Argentina and the Christian Democratic factions of Venezuela, Colombia, and Chile all are politically weak amalgamations.
Despite ten years of privatization programs, deepening trade liberalization, and state apparatuses cut to one-third of their former size in many countries, growth rates failed to deliver the desired social benefits.
Squalor persists while competitive markets press the region to cut costs on the backs of the poor.
Movements and parties of the left have simply failed to offer an alternative and more just model to this.
All they can manage is the hot air of anti-globalization rants that lack any concrete social agenda.
Lula's victory offers an opportunity to reconsider the neoliberal answers that hold sway despite their failures.
But this reconsideration must find new answers within fiscal and budgetary constraints, and Lula knows it.
For the left, his victory is an incentive to come up with realistic alternatives to the tried and failed liberal nostrums, and the discredited state socialism that was abandoned a decade ago.
Finding answers that work won't be easy.
Latin American populists have always sought quick fixes that fail to solve underlying problems.
Lula won because he shunned populism's easy answers, and seemed to demonstrate a determination to achieve a strategic, rather than a mere tactical political victory.
By penetrating the political establishment with progressives who can talk the language of free markets and by questioning, not rejecting outright, economic and social issues such as free trade and capital movement across borders, Lula succeeded in not frightening the daylights out of Brazil's richest people, as President Chavez did in Venezuela.
He will need to keep them calm if he is to succeed.
In dealing with the outside world, Brazil's size gives it a better hand than other, smaller Latin American countries.
All the same, the cards Lula must play are not good because his economy is in recession.
Budget tightening will continue.
Jose Barrionuevo, a financial analyst at Barclays Capital, recently stressed that Brazil's immediate challenge is likely to be a further decline in the value of the real , driving up inflation and unemployment, and thus further dissipating Lula's bargaining power with America and the outside world.
But Brazil's size need not go for nought.
Unlike other leaders, Lula can press the US over its hypocritical and protectionist agricultural policies, thus testing President Bush's commitment to freeing trade in agriculture.
If Bush is to stand for freeing trade here, he will need pressure from Brazil because US farm lobbies are gearing up to keep Latin America's agricultural exports under the same strict controls they have faced for years.
An active Brazil can inspire smaller players, like Chile and the Central America countries, to push America as well.
Although President Bush might wish to demonize Lula, the sheer scale of Lula's triumph at the polls means that America won't be able to delegitimize the Brazilian president in this way.
All the same, Brazil's election was viewed by many in the Bush administration as presaging a rebirth of socialism ("communism" to some).
Many US conservatives see Lula as a hardcore socialist unable to compromise, and refuse to recognize that he has changed significantly.
America must shed these ideological blinkers and deal realistically with the real Lula, not the bogeyman some Bush advisors have invented.
Latin America is watching Lula's attempt to bring a social conscience to modern economic policies with hope and trepidation.
If he succeeds, a moderate democratic left will become a realistic prospect in the region.
This means that the pendulum swings in power between right and left that Americans and Europeans take for granted will become not only possible but probable.
For too long, Latin America has practiced the politics of the precipice.
Every political change seemed to present a jump into the unknown.
Succeed, and Lula may bring Latin America the politics of the plateau, one where democratic change is merely an alternation, not an abyss.
Everyone on the right and left should want that.
Lula in the Shadow of Chávez
To many on Wall Street, the US State Department, and the IMF, the specter of Ché Guevara and past legions of bearded, bandana-wearing commandantés is haunting Latin America.
Not without reason.
Left-leaning military officers have been on a roll lately.
But another ghost haunts the continent: economic ignorance about Latin America in the capitals of the West.
Brazil's new President Luiz Inacio Lula da Silva was elected with the same great expectations that brought the ex-paratrooper and coup leader Hugo Chávez to power in Venezuela three years ago.
But it would be unwise to paint President Lula as a dangerous populist just because his political base resembles that of the wayward Chávez.
President Lula's poorest supporters undoubtedly expect him to transform Brazil from the world's most unequal society into a modern social democracy.
His middle-class backers are no less eager to see their living standards grow.
But despite these expectations, Lula is unlikely to pursue anything like the chaotic "Bolivarian Revolution" Chávez unleashed.
Expectations are always the hardest thing for leftist leaders to manage.
For example, Lula's Workers' Party, which rejected pension reforms submitted by the previous Cardoso administration, expects Lula to preserve far more of the scheme than former President Cardoso believed possible.
More demanding are the expectations of speculators and investors in New York and London.
They expect Lula to accomplish the equivalent of Nixon's trip to China--to be the leftist who hard-headedly balances Brazil's budget, eliminates foreign investors' fear of debt repudiation via hyperinflation, and gives them fat capital gains on their Brazilian stocks and bonds.
Unlike in Venezuela, there is a viable scenario in which both visions--macroeconomic orthodoxy and greater social justice--can be realized.
Suppose Brazilian interest rates stabilize at a high but not astronomical 10%, the economy grows at 4% per year, and the government achieves a "primary surplus"--a surplus of taxes over program spending--equivalent to 4% of GDP.
These are all feasible targets; if they are met, then Brazil's government debt will be a stable 60% of GDP.
Once investors see that Brazil's fiscal policy is sustainable, and they see continued low interest rates in the industrial core, Brazil will look more attractive.
Foreign direct investment will flow in, bringing more access to world-class technology and further boosting economic growth.
Soon, Brazil's government would find itself able to roll over its short-term debt on more favorable terms, as interest rates drop below 10%.
Reduced debt-service costs would mean that the debt/GDP ratio would start to fall, and government spending on infrastructure, education, healthcare, and redistribution could rise.
Reduced government debt would also means more money available for private investment, providing a further boost to labor productivity.
But all of this would require extraordinary patience on the part of the Workers' Party and its supporters, whose hopes must be deferred as immediate priority is given to appeasing the bond market.
Will Lula have sufficient command over Brazilian politics to keep his supporters and political cadres happy with promises of jam tomorrow when it is clear that there will be no bread today?
Indeed, a strategy of bond-market appeasement places may turn out to be futile, because it places a huge bet on the rationality of global financial markets.
But the people in New York and London who set interest rates know little about Brazil.
They know that Ipanema is a beach, that the Amazon is a river, that ex-US Treasury Secretary Paul O'Neill worried that money loaned to Brazil would re-appear in numbered European bank accounts, and that Lula is a president without administrative experience who heads a party with "workers" in its name.
Remember, these are the type of people who once thought that selling dog food over the internet was a brilliant business strategy, and that by 2010 Qualcomm would be able to sell two mobile phones a year to everyone in the northern hemisphere.
If such people cannot be appeased, or if they panic for no particular reason, then everything goes down the drain.
Lula becomes a failure and Brazil loses another decade as its economy sinks into a depression of uncertain length and suffers inflation of uncertain magnitude.
Once upon a time, Lula would have been able to rely on broad international support, as Cardoso did.
The Clinton Administration and the IMF educated financial markets about countries that they believed were following sound policies and that had bright long-run growth prospects.
The US Treasury under Robert Rubin and Larry Summers was unafraid to join the IMF in betting the store on Mexico, Thailand, Korea, and Brazil when they thought the odds were favorable.
Perhaps this assurance of broad international support made it prudent--or at least less imprudent--to appease the financial markets first.
It is not at all clear that the Bush Administration and today's IMF can offer similar support.
So Lula's odds do not look particularly high.
But they still look better than the odds attached to any alternative political-economic strategy--and certainly than anything being offered by khaki-clad would-be commandantés.
Lying Politicians
The suspicion that politicians are inclined to tell lies is as old as politics itself.
Yet when a politician is caught in a lie, the consequences are often dire, at least in democratic countries.
Indeed, proving that a politician is a liar is just about the only way to get rid of him or her quickly and terminally, which is why the attempt is so attractive to political opponents.
But what, exactly, is a lie in politics?
Few cases are as clear-cut as that of Anneli Jaatteenmaki, whose short-lived stint as Finland's first woman prime minister recently came to an end.
She had attacked her predecessor during the election campaign for being fork-tongued about Iraq, saying one thing to US President George W. Bush and another to the Finnish people.
Her knowledge was based on Finnish foreign office records.
Had she seen them?
She began to equivocate and in the end said that she had not.
When the opposite was proven and a secret document was found in her possession, she had to go.
Another campaigner under investigation by his parliament for being ``economical with the truth'' is German Chancellor Gerhard Schröder.
But his case is very different.
The opposition, still smarting from its narrow defeat in last autumn's election, accuses him of not having told the truth about Germany's weak economy and the consequences for the national budget.
Almost a year after the election, a parliamentary committee of inquiry is still interviewing ``witnesses.''
But it does not look as if it can get very far.
At most, deputies will be able to offer the public a fresh example of a favorite trick in politics: to tell the truth was told and nothing but the truth, but not exactly the whole truth.
The most serious current case concerns President Bush and British Prime Minister Tony Blair.
In fact, the charges of lying concern only Blair, for Bush has (so far) been absolved of all possible sins in view of the apparent success of the Iraq campaign.
But Blair is under heavy fire from his parliament's Foreign Affairs Committee for having overstated the threat posed by Saddam Hussein.
Intelligence dossiers (it is claimed) were ``sexed up'' by Blair's underlings.
More particularly, there was no evidence for the prime minister's claim that the Iraqi dictator could have launched ``WMD's'', as weapons of mass destruction are now called, ``within 45 minutes''.
Does it matter whether this claim was strictly true or not?
Don't we know from past evidence that Saddam Hussein was prepared to develop WMD's and to use them if the occasion presented itself?
Are not the reasons for the war overtaken by its reality?
In the end, is this really a question of lying?
In the British case, the answer is not so simple.
In the middle of his second term, Tony Blair is going through a bad patch.
Opponents within his own party are increasingly replacing the ineffectual Tory opposition.
Blair is much more vulnerable than he was a year ago, and he must tread softly if he does not want to lose further support.
But there is another point.
The reasons given for the war in Iraq were never entirely clear.
WMD's in Saddam's possession were but one in a sequence of arguments.
There was also, at least in the US, the desire to avenge the terrorist attacks on New York and Washington, as well as geopolitical interests.
Tony Blair also expressed moral outrage at the way the Iraqi dictator had behaved toward his own people in making the case for regime change.
Supporters of the war--often reluctant in any case--had picked up one or the other of these arguments, and if they focused on WMD's, they now feel betrayed.
The two cabinet ministers who resigned over the affair, Robin Cook and Clare Short, want their own revenge and thus continue to attack Blair for his ``lies.''
So far, Blair has proven his resilience to such charges.
Indeed, he has gone on the counter-attack, notably against the BBC, which had not exactly supported the war with enthusiasm.
But does the uncertainty now circling Blair like a vulture now smell the appetizingly foul scent of a lie?
Or is it more a question of a prime minister losing the trust of his people, including some his erstwhile friends and allies?
Trust is a vital commodity for all politicians. Once lost, it is difficult to regain.
Blair has used the ``Trust me!'' pose often, not least in the case of the war in Iraq.
In any case, one does not have to be found out as a liar to lose such trust. It is sufficient that clouds of doubt develop.
Indeed, a politician's reputation can be damaged even if no one doubts the truthfulness of his statements.
It suffices if people feel that he is trying to mislead them, or even that he has not got things clear in his own mind.
A leader can tell the truth, nothing but the truth, but less than the whole truth and yet still be trusted.
Once a politician has lost trust however, people will no longer believe him even if he tells the truth.
Machiavelli in Euroland
PRINCETON – Niccolò Machiavelli is trending.
More than 500 years after writing his famous treatise The Prince, Machiavelli has reemerged as one of Europe's most popular political thinkers.
And, indeed, his book – one of the earliest political “how to" manuals – has some useful advice for economic policymakers at a time when they are facing extraordinarily confusing challenges.
Monetary authorities have turned to Machiavelli to help them understand European Central Bank President Mario Draghi's policy approach.
France's new economy minister, Emmanuel Macron, is likely using Machiavelli's ideas – on which he wrote his master's thesis – to help shape his plan to modernize his country's economy.
An influential Moscow think tank called Niccolo M. advises the Kremlin on policies like offensive military communication technologies and hybrid warfare.
But Machiavelli is poorly understood.
The most notorious chapter of The Prince, Chapter XVIII, which explains the circumstances in which it is permissible – and even desirable – for rulers to break promises, appears to argue that the most successful rulers think “little about keeping faith" and know “how cunningly to manipulate men's minds."
The chapter has been widely interpreted to mean that leaders should lie as often as possible.
Machiavelli's message, however, was more complex.
With an expert analysis of the wider implications of deception and “spinning" the truth, he demonstrates that manipulation can work only if the ruler can convincingly pretend not to be engaging in it.
In short, leaders must cultivate a reputation for being dependable and sincere – a lesson that Russian President Vladimir Putin clearly never took on board.
Democratic politics and modern policymaking are based on promises.
Political parties and candidates use promises to woo voters, and then to win support for policies.
People will not respond to implausible pledges, especially if the politicians making them seem unreliable.
A variation of this conundrum emerges in monetary policymaking.
In the jargon of modern monetary technocrats, the issue is how to “anchor expectations."
Forward guidance (a promise about future interest rates) is not effective when policymakers have to admit that circumstances may force them to change their minds – and their policies – without warning.
Machiavelli saw a need for the appearance of consistency, with officials projecting the virtues that would underpin that image, thereby creating a solid foundation for effective policies. “To those seeing and hearing him, the ruler should appear to be all mercy, all faithfulness, all integrity, all humanity, and all religion.
And there is nothing more necessary than to seem to possess this last quality."
In other words, politicians should never seem – much less say – that they do not believe in anything.
Yet modern politics tends to begin with pragmatism and proceed to broken promises.
Europe likes to style itself as a postmodern construct, but one of the features of postmodernism is the reduction of political life to the playing out of cosmetically charged narratives or the convening of constantly changing focus groups.
The malleability of postmodern politics stands in stark contrast to the resoluteness that prevailed under Winston Churchill, Konrad Adenauer, Charles de Gaulle, Alcide de Gasperi, and even Jacques Delors.
The perception that fundamental convictions guided these leaders is what enabled them to engage in political trickery effectively.
Of course, the politics of conviction cannot thrive on words alone.
The only way to be consistently and deeply Machiavellian is to take action to build and maintain the right reputation.
This lesson could be key for European leaders today, at a time when so many are groping for a sense of what being European really means.
The notion that, at its core, Europe should be focused on something as mundane as tweaking fiscal rules seems disappointing, to say the least – especially as the continent confronts an intensifying humanitarian crisis, caused by the influx of refugees from war-ravaged countries like Libya and Syria.
With the Islamic State threatening to drive an ever-increasing number of such refugees to Europe, and the crisis in Ukraine likely to add to the human flood, Europeans are feeling pressure to think beyond the fiscal challenges they face.
That pressure is all the more intense, given that the countries most affected by this humanitarian challenge – Greece, Italy, and Spain – also incurred the most damage from the financial crisis.
It is time for European leaders to step up, showing the kind of conviction that Machiavelli would have promoted, to end the humanitarian crisis.
First, they must ease the suffering of refugees by including or integrating them in a constructive way.
Such an effort would demand substantial financial injections into the countries on the front line of the crisis. If handled correctly, the refugees could become a badly needed source of dynamism for weak economies and a solution to the problem of population aging.
At the same time, Europe's leaders must work to curb the influx of refugees, by developing a political program to end the violence that is driving despairing people by the millions to their countries' borders.
Europe cannot afford to be an island of relative stability in a sea of chaos.
Probably the best way to make Europe credible is to stake out a position that is genuinely bold, one that both advances its interests and upholds its deeper values.
Machiavelli's metaphor for the mystery of effective political conduct provides a potent template.
Machiavellian Economics
PRINCETON – When is it legitimate to lie?
Can lying ever be virtuous?
In the Machiavellian tradition, lying is sometimes justified by reference to the higher needs of political statecraft, and sometimes by the claim that the state, as an embodiment of the public good, represents a higher level of morality.
That tradition is once again in the spotlight, as the question of political untruth has recently resurfaced in many bitter disputes.
Did German Defense Minister Karl-Theodor zu Guttenberg have to tell the truth about the massive plagiarism that pervaded his doctoral thesis, or could a lie be justified because he was performing an important government job?
Was the 2003 United States-led invasion of Saddam Hussein’s Iraq illegitimate because it was predicated on a falsehood about the existence of weapons of mass destruction?
Or were conservative US anti-abortionists justified in sending actors with a false story into the offices of Planned Parenthood in order to discredit their opponents?
The economic variant of Machiavellianism is as powerful as the claim that political untruth can be virtuous.
Lying or hiding the truth in some circumstances can, it appears, make people better off.
Deception might be a source of comfort.
We might find ourselves warm and contented in a cocoon of untruth.
One of the most famous examples concerns the Great Depression – an epoch that policymakers frequently drew upon in trying to come to terms with the post-2007 financial crisis.
Many countries in the early 1930’s had terrible bank runs, which inflicted immense and immediate damage, decimating employment by bringing down businesses that were fundamentally creditworthy.
There was one exception to the general story of Depression-era bank runs: Italy, where Mussolini’s fascist government controlled the press, including the financial press.
Although the major Italian banks were constructed on the same model as the German and Austrian banks whose collapse had ignited the global conflagration, and although the Italian banks were just as insolvent, the press never discussed these unpleasant problems.
Financial journalism was soothing.
There were no bank panics, and the depression was milder.
Since confidence plays a large part in financial crises, Mussolini’s example immediately took hold.
States could apparently almost magically create security and trust simply by imposing it.
Adolf Hitler liked to say that the ultimate cause of the Reichsmark’s stability was the concentration camp.
Deception is instantly appealing to many individual businesses.
Would it not be desirable just to hide losses until uncertainty passed and confidence returned?
In that case, new profits could quickly be used to plug the gaps, and no one would ever know about an apparently successful deception.
They anticipate revenue in order to appear creditworthy. They reclassify foreign borrowing as domestic debt in order to look better in the International Monetary Fund’s statistics.
For individual businesses, financial misrepresentation is illegal.
Most people can easily see why.
The legal enforcement of honesty in keeping and reporting financial records is an indispensable feature of a well-functioning market economy.
Without some degree of certainty that financial statements are meaningful, there would be a complete loss of confidence.
But government dishonesty is not that different.
Deceptions, when they are revealed and the untruths unravel, are deeply disturbing.
Indeed, misrepresentation by governments – driven by the belief that political ingenuity can stabilize expectations – is actually at the root of many financial crises.
In 1994, Mexico shook the global economy when the extent of its domestic (but dollar-denominated) debt in the so-called tessobonos became apparent.
The Greek government’s misstatement of its fiscal position, coupled with the realization that the European Commission had overlooked or tolerated the Greeks’ accounting legerdemain, triggered the euro crisis in 2010.
The revelation of deception makes it impossible to believe that governments are really enforcing rules adequately and fairly.
But misrepresentation is not just at the heart of financial and economic crises; it is also the stuff that drives revolutions.
The immediate cause of the protests against President Zine al-Abidine Ben Ali in Tunisia was WikiLeaks’ revelations of US diplomatic cables detailing the regime’s corruption.
The domino effect from the Tunisian revolution has produced further vivid accounts of corruption and deception, from Egypt and Libya to the Gulf, in each case stoking even greater anger and making more regimes vulnerable.
There is a powerful pragmatic argument against Machiavellianism, as well as a principled one.
Given modern communications, a cover-up of the kind engineered by Mussolini in 1931 would most likely be unsustainable today.
Moreover, any attempt to misrepresent requires further and more complex misrepresentations, which have serious consequences as subsequent decisions come to be based on erroneous assumptions.
To revert to the example of Depression-era Italy: the state holding-company edifice created to save the banks and maintain confidence proved to be an increasingly bureaucratic and costly burden on the Italian economy.
A nearly indestructible behemoth outlasted Mussolini’s regime and survived for 50 years.
Markets work by a process of continuous discovery of information.
Choking off the flow of information leads to distortion, not confidence.
And, as we are now witnessing in the Middle East, the same is true of political systems.
Still, no economic crisis or political revolution is likely to change governments’ inherent proclivity to think that they can know better.
MAD No More?
MOSCOW – Two years ago this month in Prague, US President Barack Obama put forward his visionary idea of the world free of nuclear weapons.
A year ago, a new strategic arms treaty between Russia and the US was signed in the same city.
Now the worldwide wave of support for a full ban on nuclear weapons, or “nuclear zero,” is being transformed into a debate about nuclear deterrence.
Indeed, the four American strategists who first called for “nuclear zero” – Henry Kissinger, George Shultz, William Perry, and Sam Nunn – have partly backtracked, and are now calling for an end to the doctrine of “mutual assured destruction.”
Unfortunately, their suggestions for accomplishing this are unclear.
Their only concrete proposal is asymmetrical cuts of tactical nuclear weapons by Russia and the US.
But tactical weapons are not a serious threat to anybody.
Moreover, Russia is not interested in reducing this part of its nuclear arsenal significantly.
It needs such weapons to compensate psychologically for NATO’s preponderance – a reversal of the Cold War epoch – in conventional forces.
More importantly, Russia considers these weapons insurance against the possibility of Chinese conventional superiority.
I firmly doubt the need to dispense with deterrence.
After all, it worked successfully for decades: the unprecedented geostrategic, military, and ideological confrontation of the Cold War never escalated into open, head-to-head warfare.
The existence of nuclear weapons also curbed the conventional arms race.
The most important function of nuclear weapons during the Cold War – though little spoken of at the time – proved to be “self-deterrence.”
Of course, each side considered itself peaceful, and would not admit that it, too, had to be deterred.
But the danger that any conflict could escalate into a nuclear confrontation prevented reckless and dangerous behavior on both sides on more than one occasion.
With communism’s collapse and Russia temporarily disabled, self-deterrence softened, and the US ran off the rails as the global hyperpower.
It behaved in ways that would have been unthinkable before – for example, its attacks on Yugoslavia, Afghanistan, and Iraq.
The latter two wars have been politically self-defeating for the US, in addition to costing it trillions of dollars.
America is no less militarily powerful nowadays than previously, but it does not look so strong to the wider world.
Nuclear deterrence and “mutually assured destruction” would be passé only if we assumed that we – people, countries, and humankind at large – had become so ideal and humane that we no longer needed self-deterrence.
But, unfortunately, we are not such people, and nuclear weapons have played – and continue to play – a civilizing role in international relations: their use would be so horrible that we tailor our behavior accordingly.
As a result, we have little fear of World War III nowadays, even though unprecedentedly rapid changes in the global balance of power are creating classic conditions for unleashing it.
After all, the mere possession of nuclear weapons, even if aimed at each other, does not turn countries into enemies.
Russian and Chinese strategists assume that part of their countries’ nuclear potential may be targeted at the other side.
But this does not spoil their remarkable bilateral relations; on the contrary, it improves them.
Russia, with its formal nuclear superiority, has no serious fears regarding China’s military buildup.
In this sense, nuclear weapons facilitate normal international relations, just like a good fence helps build good neighborly relations.
Russia and the US must seek to build relations such as now exist between Russia and China, Russia and France, or the US, France, and the United Kingdom.
Limited arms reductions might be useful for improving relations.
But arms-control talks are built upon the concept of the balance of forces, which is a sure recipe for reviving confrontational and militaristic thinking.
The talks on pan-European missile-defense cooperation might come in handy.
While missile defense is most likely unnecessary, given the absence of any serious threat, the Obama administration and other American realists – who are aware of the impossibility and uselessness of creating a multi-layered anti-ballistic missile (ABM) system – need such talks.
They must at least pretend that they intend to build it, in order to appease America’s powerful nuclear “isolationists,” who long for the past golden age of US strategic invulnerability.
Talk about creating regional, cooperative ABM systems might be helpful in preventing the development of long-range missiles by Europe’s neighbors.
It might also help Russia and the US overcome their old habit of viewing each other as enemies.
But what is really needed is effective cooperation where it counts the most: containing the increasing instability in the Greater Middle East, ensuring that Afghanistan does not turn into yet another regional cancer, and preventing a chain reaction of nuclear proliferation in the region.
So far, only the US and Russia – with the assistance, one hopes, of China, India, and EU – can hope to address these problems more or less effectively.
They can offer security guarantees to responsible countries in the region.
Sooner or later, peace will have to be imposed upon the Israelis and the Palestinians, who have proven to be incapable of reaching a settlement on their own.
Similarly, Russia and the US need cooperation, not farcical rivalry, in developing new sea routes and possible energy deposits in the Arctic, and in interacting with China and other Asia-Pacific countries in joint development of the resource potential of Siberia and Russia’s Far East.
Russia will not be able to develop the region on its own.
And developing it with China alone could prove to be a dangerous strategy.
But if the two countries fail to overcome their bad old habits of mutual suspicion, their remaining – quite powerful – nuclear arsenals will continue to serve deterrence and self-deterrence.
As long as we remain unable to make ourselves think and act in a civilized way, we can – indeed, we must – ensure that we do not become barbaric.
Madonna and Child
In October, hundreds of millions of people all over the world learned about a one-year-old boy from Malawi called David.
A month before, it seems safe to assume, many of these people had never heard of his native land, a landlocked African nation of about 13 million people bordering Mozambique, Zambia, and Tanzania.
Suddenly, David became the world’s best-known Malawian because it was his good fortune to be adopted by Madonna, the pop star who is to TV cameras what honey is to bears.
But was it really good fortune?
David’s father, Yohane Banda, suddenly in the media spotlight, said he had not understood that his son no longer belonged to him and might never return to Malawi.
Madonna says that that is not what Banda said earlier, although she does not speak his language.
Was it good for the boy, people asked, to be separated from his father?
Human rights advocates began court action to demand his return.
David’s mother is dead.
After her death, his father, a villager who grows vegetables and gets other work when he can, was unable to care for him, and placed him in an orphanage.
There, until Madonna came into contact with him, he was living with about 500 other children.
Largely due to Malawi’s HIV/AIDS epidemic, the country has a million such orphans.
Resources at the orphanages are limited, and many of the children there do not live to their fifth birthday.
Madonna said that when she met David, he had severe pneumonia and was breathing with difficulty.
Malawi is one of the world’s least developed countries, with an infant mortality rate of 94 per thousand and a life expectancy at birth of 41 years.
Of the adult population, about one in seven have HIV/AIDS.
Left in the orphanage, there is no reason to think that David would have done better than the average Malawian.
Most likely, he would have done worse.
In an interview, David’s father did not deny that his son would be better off with Madonna, and he refused to support the human rights activists seeking David’s return.
That seems a wise decision.
Admittedly, David will be cut off from his cultural roots.
Although Madonna has said that she will bring him back to Malawi to see his father again, he will scarcely be able to feel at home there.
His mother tongue will be English; if he ever learns to speak his father’s language, it will be as a foreigner.
Nor will he be entirely at home in London, especially in the circles in which Madonna moves.
A black child in a largely white world, he will always be “the orphan Madonna adopted.”
The difficulties of living in such circumstances, however, are surely less daunting than the hazards David would have faced had he stayed in the orphanage – assuming that he would have survived at all.
But there is a broader issue at stake in David’s case.
In adopting a child from a poor country, Madonna is following an example set by other celebrities like Mia Farrow, Ewan McGregor, and Angelina Jolie.
Do such adoptions achieve anything more than helping the individual children adopted?
Adopting children from developing countries does not address the causes of poverty.
Despite the high rate of HIV/AIDS infections, Malawi’s population, like that of many developing nations, is growing rapidly.
It is projected to surpass 19 million by 2025.
That will put more pressure on the country’s already limited stock of agricultural land.
Educating young Malawians, especially girls, and making contraceptives widely available, would do much more to slow population growth than a few inter-country adoptions.
To her credit, Madonna is doing more than adopting David.
Her project, “Raising Malawi” ( www.raisingmalawi.com ), will help other orphans.
More importantly, with other partners, Raising Malawi collects funds for agricultural assistance, medical care, and education for villagers as well.
Along with Angelina Jolie, Bono, George Soros, and many others, Raising Malawi is assisting Millennium Promise ( www.millenniumpromise.org ), an organization founded by the prominent Columbia University economist Jeffrey Sachs.
The promises of the United Nations Millennium Summit, signed by all the world’s leaders, included halving extreme poverty, halting the spread of HIV/AIDS, and providing primary education for all children by 2015.
Although good progress in meeting these goals has been made in Asia, in Africa there are now 140 million more people living in extreme poverty than there were in 1990.
Skeptics doubt that foreign aid really helps.
Millennium Promise seeks to respond to that skepticism one village at a time.
By selecting particular villages and providing basic health care, bed nets to stop malaria, primary education, better seeds, and other agricultural assistance, the organization aims to show that well-designed, comprehensive aid plans can, at relatively modest cost, raise people out of poverty.
One can only regret that the media seem less interested in this exciting and momentous story, which has the potential to help millions of children, than in Madonna’s adoption of a single Malawian infant.
Mahmoud Abbas’s Bad Neighborhood
With Gaza poised on the brink of civil war, pity poor Mahmoud Abbas, who took over as president of the Palestinian Authority two and a half years ago, after the death of Yasser Arafat.
An academic by profession, Abbas has tried mightily to lead the Palestinian people with civility, adherence to democratic principles, and public disdain for violence.
He never had a chance.
Palestinian rivals, both from his own Fatah party and from the Islamists of Hamas, as well as the Israelis, perceived Abbas’s civility as weakness.
Abbas introduced a totally different style of management from that of Arafat.
Dressed in his military suit until his last day, Abu Ammar (Arafat’s revolutionary nom de guerre) did not believe that it was time to become a civilian president while the Israeli occupation continued.
Dressed in a suit and tie, Abbas introduced professional Western-style management to the presidency, but had no idea what to do with grass-roots militants.
One of the first comments I heard from journalists was that Abbas, a family man, went home at lunchtime and worked regular business hours.
His other name, Abu Mazen, is not a revolutionary name but reflects the practice of naming a person as the father of his eldest son.
Abbas’s son, Mazen, runs a local advertising agency.
In his attempt to counter Arafat’s political corruption and micromanagement, Abbas lost whatever chance he had to maintain the loyalty of the Fatah leadership, newly appointed PA officials, security personnel, and, most importantly, local militants.
Calling for national elections, while politically correct, was political suicide, for he lacked any idea of the possible outcome and did very little to ensure the discipline of Fatah.
An attempt at a primary to choose Fatah candidates backfired, owing to fraud and the losers’ refusal to honor the results.
Rival Fatah candidates then split the party’s vote, allowing Hamas an easy victory.
Negotiations with the Israelis was one area where Abbas, who led the Oslo process that saw the creation of the Palestinian Authority, thought he could do well.
But, unlike Oslo, when Abbas was working under Arafat and able to project power from that base, as Palestinian president he was both negotiator and supposedly the center of power.
The Israelis discerned Abbas’s weakness early on, and once Hamas was elected in a landslide, had little incentive to help him despite the prodding of the United States.
Not only was Abbas politically weak, with few friends among Fatah militants, but he also didn’t show much interest in what was happening in Gaza.
He spent as little time as he could there, preferring his Ramallah office on the West Bank and spending time with visiting politicians and meeting world leaders there or abroad.
And, while he was technically the commander-in-chief of the Palestinian forces, these forces lacked the will to stand up to Hamas’s growing power.
The economic siege on Palestine after the Hamas victory further weakened Abbas.
With no salaries to pay teachers (or even the security services), his ability to influence even his own presidential guard was severely limited.
During a meeting, which I attended, with a delegation from the International Press Institute to obtain the release of the BBC journalist Alan Johnston, abducted in Gaza in March, Abbas explained the PA’s inability and weakness.
Soldiers march on their stomachs, he said, and complained that his own forces have not been able to renew their equipment or obtain badly needed ammunition for seven years.
Ironically, the Israelis and the world community, which had basically frozen Palestinian finances, wanted Abbas to continue to control the security forces, despite Fatah’s loss in the parliamentary elections.
Israel and the US led a virtual blockade on Palestine, with Israel refusing to return collected taxes and the US pressing world banks not to recognize the signature of the Palestinian finance minister.
The nominal reason is Hamas’s refusal to recognize Israel.
But most Arab countries also don’t recognize Israel, and yet the banking world deals with them normally.
A compromise power-sharing agreement brokered by the Saudis initially seemed to be a solution.
According to the Mecca agreement signed last February, Hamas would give up important ministries such as finance, interior, and foreign affairs, while Abbas would ensure the end of the economic siege.
Four months later, however, the siege has not been lifted, and the Hamas ministers (such as former Foreign Minister Mahmoud Zahhar and Interior Minster Said Siyam) who were forced out now feel betrayed and are demanding their jobs back.
If the Israelis and the international community want Abbas to remain in power, they must change their approach dramatically, by lifting the economic siege and providing his presidency with military and political support.
And, if the Israelis are convinced that Abbas is too weak to do anything, they can help the Palestinians by releasing the Fatah strongman, Marwan Barghouti, from an Israeli jail.
Otherwise, Abbas will be left with no alternative but to follow the advice of a leading Palestinian professor, Ali Jirbawi, who suggested simply that Abbas should dissolve the Palestinian Authority and return power to the Israelis, who remain legally and practically responsible for the areas they occupied in 1967.
समावेशी विकास का आकलन
वाशिंगटन, डीसी – अगले वर्ष जब मिलेनियम डेवलपमेंट गोल्स (एमडीजी) की अवधि समाप्त हो जाएगी, तो विश्व इनके आरंभ किए जाने से लेकर अब तक की कई महत्वपूर्ण उपलब्धियों के बारे में बता सकेगा। इस अवधि के दौरान चरम गरीबी आधी हो गई है; एक अनुमान के अनुसार मलिन बस्तियों में रहने वाले 100 मिलियन लोगों को सुरक्षित पेय जल तक पहुँच प्राप्त हो गई है, और लाखों लोगों को स्वास्थ्य देखभाल उपलब्ध हो गई है; और लड़कियाँ अब बड़ी संख्या में शिक्षा प्राप्त कर रही हैं। लेकिन अभी काफी काम अधूरा बचा है और निष्पादन संबंधी महत्वपूर्ण विसंगतियाँ भी बनी हुई हैं।
2015 के बाद का विकास कार्यक्रम कार्यकलापों को वहाँ से जारी रखेगा जहाँ पर एमडीजी ने छोड़ा है, और साथ ही समावेशन, धारणीयता, रोज़गार, विकास, और नियंत्रण से संबंधित अतिरिक्त लक्ष्यों को भी इसमें सम्मिलित करेगा। आगामी धारणीय विकास के लक्ष्यों (एसडीजी) की सफलता इस बात पर निर्भर करेगी कि नए कार्यक्रमों का विकास, कार्यान्वयन और मूल्यांकन किस तरह किया जाता है।
सुदृढ़ आर्थिक विकास लोगों को अपने जीवन को सुधारने के लिए सक्षम बनाता है और नए विचारों को फलने-फूलने के लिए जगह देता है। लेकिन इस तरह का विकास अक्सर पर्यावरण क्षरण को अपने साथ लेकर आता है जिससे मानव स्वास्थ्य और जीवन की गुणवत्ता में ह्रास होता है, जल आपूर्तियों के लिए जोखिम पैदा होता है, और पारिस्थितिकी तंत्र के साथ समझौता करना पड़ता है, जिससे भविष्य की पीढ़ियों के लिए विकास में बाधा आती है। इसके अलावा, अल्पकालिक विकास जिससे प्राकृतिक पूंजी का ह्रास होता है, विस्तार और संकुचन चक्रों के लिए संवेदनशील होता है, और जो लोग गरीबी रेखा के निकट रहते हैं, उनका स्तर और नीचे गिर जाता है।
विकास पर दीर्घकालीन दृष्टि से विचार करना और सामाजिक, आर्थिक और पर्यावरणीय औचित्य के लिए उत्तरदायी होना 2015 के बाद के विकास कार्यक्रम के लिए सर्वोच्च प्राथमिकता होनी चाहिए। एसडीजी की चर्चा में अब शहरी आयोजना और जैव विविधता के साथ, भोजन, पानी, और ऊर्जा सुरक्षा को शामिल करने की आवश्यकता पर भी विचार किया जा रहा है। लेकिन देश के स्तर पर संभावित लक्ष्यों के बारे में कार्रवाई करना नीति संबंधी मार्गदर्शन और प्रगति को मापने के लिए आकलन योग्य और सार्थक संकेतकों के बिना संभव नहीं होगा।
इसके आकलन का एक तरीका "प्राकृतिक पूंजी लेखाकरण" है जिसमें विकास योजना और राष्ट्रीय खातों में प्राकृतिक संसाधनों के मूल्य का आकलन ठीक उसी तरह किया जाता है जिस तरह कोई परिवार अपनी नियमित आय में से कितनी आय का उपभोग किया जाए इसका निर्णय करने के ल���ए अपने घर की कीमत - और उसके रखरखाव की लागत - का हिसाब लगाता है। विश्व आर्थिक मंच की हाल ही की एक रिपोर्ट में समावेशी और धारणीय विकास के लिए एक “डैशबोर्ड” का प्रस्ताव किया गया है। इस मॉडल में प्राकृतिक पूंजी लेखाकरण, मानव अवसर सूचकांक, लिंग अंतराल सूचकांक, सकल घरेलू उत्पाद के प्रतिशत के रूप में सार्वजनिक निवेश के उपायों, प्रतिस्पर्धात्मक क्षमता सूचकांक, साझा समृद्धि के संकेतकों, समग्र न किए गए बेरोज़गारी के आँकड़ों को एक जगह लाया गया है।
विश्व बैंक के नेतृत्व वाली साझेदारी, संपत्ति लेखाकरण और पारिस्थितिकी तंत्र सेवाओं का मूल्यांकन (WAVES) ने सरकारों को यह दिखाया है कि किस तरह कुछ व्यवहार प्राकृतिक परिसंपत्तियों को कम करते हैं, और किस तरह प्राकृतिक पूंजी लेखाकरण अधिक टिकाऊ विकास नीतियाँ स्थापित करने में मदद कर सकता है। 2012 रियो + 20 शिखर सम्मेलन में एक अभियान के बाद, 70 सरकारों ने, 40 मध्यम और कम आय वाले देशों का प्रतिनिधित्व करने वाली सरकारों सहित, प्राकृतिक पूंजी लेखाकरण का समर्थन किया।
इस पद्धति का दुनिया भर में पहले से ही अच्छा उपयोग किया जा रहा है। उदाहरण के लिए, “वन खातों” से यह पता चला है कि मध्य और दक्षिण अमेरिका में ग्वाटेमाला में वनों की कटाई की सबसे तेज़ दर है जहाँ परिवारों द्वारा अपनी खाना पकाने की जरूरतों को पूरा करने के लिए सबसे अधिक अनियंत्रित कटाई की जाती है। इस जानकारी ने ग्वाटेमाला सरकार को देश के वानिकी कानून की समीक्षा करने, और, जलाऊ लकड़ी के उपयोग को नियंत्रित करने, नई रणनीतियों के लिए निधियाँ मुहैया करने, वनों की अनधिकृत कटाई को रोकने, और परिवारों को वैकल्पिक ऊर्जा स्रोतों का उपयोग करने के लिए प्रोत्साहित करने के लिए प्रेरित किया है।
अपनी अर्थव्यवस्था में विविधता लाने के लिए बोत्सवाना द्वारा किए गए प्रयासों में पानी की कमी के कारण बाधा आ रही है; लेकिन "पानी के खातों" से सरकार को - कृषि, खनन, और पर्यटन सहित - उन क्षेत्रों की पहचान करने में मदद मिल रही है जो पानी की कम-से-कम खपत के साथ विकास कर सकते हैं।
फिलीपींस में, जहाँ मेट्रो मनीला के लगुना झील क्षेत्र में सकल घरेलू उत्पाद का 60% उद्योगों और संबद्ध सेवाओं द्वारा उत्पन्न होता है, प्रदूषण और गाद ने झील की गहराई को कम करके पहले ही एक तिहाई तक कर दिया है। "पारिस्थितिकी तंत्र खातों" ने यह निर्धारित करने में महत्वपूर्ण भूमिका निभाई है कि इस संसाधन का प्रबंधन किस तरह बेहतर तरीके से किया जा सकता है। इन खातों का उपयोग भारत के हिमाचल प्रदेश राज्य में वन प्रबंधन में सुधार करने के लिए पहले से ही किया जा रहा है जहाँ वन दो प्रमुख विकास क्षेत्रों, पर्यटन और जल विद्युत उत्पादन के लिए एक महत्वपूर्ण संसाधन हैं।
ये अनुभव 2015 के बाद के विकास कार्यक्रम का स्वरूप निर्धारित करने के लिए महत्वपूर्ण हैं। धारणीयता को सम्मिलित करने से सरकारें और व्यवसाय अपने निर्णयों के पर्यावरणीय प्रभाव पर विचार करने के लिए मजबूर हो जाते हैं। संयुक्त राष्ट्र की एक रिपोर्ट में सभी सरकारों से आह्वान किया गया है कि वे प्राकृतिक पूंजी लेखाकरण को अपनाएँ जिसके फलस्वरूप उनके धारणीयता के प्रयास संगत, सटीक, और दीर्घकाल में तुलनीय हो सकते हैं। धारणीयता को इस रूप में संस्थागत बनाने से यह रोज़मर्रा के शासन का एक अभिन्न अंग बन जाएगी।
केवल वृद्धि और विकास की व्यापक समझ को अपनाने से दुनिया असमानता और धारणीयता की गंभीर समस्याओं का समाधान कर सकती है। इस समझ को एसडीजी के मूल में रखने से भविष्य में लंबे समय तक सभी समाजों के स्वास्थ्य और भलाई को सुधारने में मदद मिलेगी।
Saudi Arabia’s Pilgrimage to Pakistan
LONDON – Over the last few years, Saudi Arabia has become increasingly estranged from its long-time protector, the United States.
It viewed America’s backing for Hosni Mubarak’s fall from power in Egypt – and its subsequent acceptance of the Muslim Brotherhood government – as a betrayal.
Then came US President Barack Obama’s refusal to enforce his “red line” in Syria, after President Bashar al-Assad’s regime unleashed poison gas on its opponents.
But the final straw was America’s support for the recent interim agreement on Iran’s nuclear program.
Saudi Arabia’s mounting distrust of the US matters, because whenever the Kingdom has felt an existential threat – and it regards Iran’s regional ambitions as such a threat – it has relied on an external power to protect it.
But if it can no longer rely on the US, where can the Kingdom turn for sufficient military muscle?
The answer seems to be Pakistan, a country that the rest of the world views as on the verge of becoming a failed state.
Pakistan has previously served the Kingdom’s interests by sending military and security assistance during times of stress.
Saudi Arabia received some 30,000 Pakistani soldiers in 1979, at the time of Iran’s Islamic Revolution.
And these troops remained in the Kingdom until the mid-1980’s.
The Saudis also employed thousands of Pakistani soldiers during the 1991 Gulf War.
And, at the beginning of 2014, Foreign Minister Saud Al-Faisal and Crown Prince Salman visited Islamabad to renew the two countries’ military agreements on joint arms production.
The visit was also intended to lay the groundwork to bring 30,000 Pakistani soldiers and military advisers to the Kingdom.
Why Pakistan, and why now?
The Saudi rulers view Pakistan as one of three regional powers, along with Iran and Turkey, capable of having a decisive impact on the Middle East.
An alliance with Shia Iran – the Kingdom’s supreme ideological enemy, and one with regional hegemonic ambitions – is out of the question.
Turkey, for its part, is regarded as a competitor for the mantle of Sunni Muslim leadership – a position long held by the Ottoman Empire.
The frequent description of Turkish Prime Minister Recep Tayyip Erdoğan as harboring “neo-Ottoman” ambitions for his country clearly implicates this rivalry.
It was the Ottomans who brought down two historical Saudi/Wahhabi states.
The first such state (1745-1818) was destroyed by Egypt’s Mehmet Ali with Ottoman support; the second (1824-1891) was also defeated by the Ottomans.
By contrast, the Kingdom has no problematic history with Pakistan.
On the contrary, the Saudis have bankrolled the Pakistani state, and proved a generous host to its current prime minister, Mian Nawaz Sharif, during his long exile following the military coup that toppled his government in 1999.
Indeed, Saudi Arabia has invested heavily in Pakistan since the early years of its independence.
Given that Pakistan was founded in 1947 on a religious basis, it is not surprising that its leaders sought support from the source of Islam, Mecca, then under Saudi rule.
The Kingdom, in turn, exported its Wahhabi teachings to the “Land of the Pure,” ultimately fueling the Islamic extremism and sectarian violence of the Taliban and others.
Saudi Arabia also invested in Pakistan’s nuclear weapons program, the so-called Sunni Bomb, by directly financing the research of A. Q. Khan, the father of the Pakistani effort.
The Kingdom’s hope of directly benefiting from Pakistan’s nuclear capabilities was blocked in 2003, when the US discovered the prospect of a transfer of knowledge and more.
Moreover, the forces that the Pakistan has sent to the Kingdom over the years have been perceived as generally loyal.
Although up to 30% of the Pakistani army are Shia, the Saudis will only accept Sunni soldiers, and Pakistan has happily provided them as mercenaries, sent on rotation and treated as guest workers.
Part of the Saudi plan today is to use Pakistanis as the backbone for a new Gulf Cooperation Council (GCC) joint military force.
Pakistani forces under Saudi command were used in operations to quell Shia uprisings in Bahrain in 2011, and the Saudis now want a standby force ready to put down Islamist and Shia provocations whenever and wherever they may appear in the Gulf.
In the event of an existential threat in the region, in particular a confrontation with Iran, Pakistan would offer the Kingdom a form of deadly protection denied it by the West.
So to what extent can Pakistan really enhance Saudi Arabia’s security, particularly in a war against Iran?
Pakistan is badly fractured, with domestic terrorism running rampant.
Its military lacks the capacity to intervene in Saudi Arabia’s defense while maintaining not only domestic security, but also readiness for war against India (an obsession of Pakistani generals).
Moreover, Pakistan’s substantial Shia population might join the ranks of the violently disaffected if the military backed the Saudis in a sectarian war.
And the Pakistan People’s Party, now in opposition but still a powerful domestic force, shares interests with Iran.
So, although the strategic value of closer military ties with Pakistan seems highly questionable, Saudi Arabia has little choice.
The GCC is in fact disintegrating, following Qatar’s ouster for supporting the Muslim Brotherhood and Oman’s voluntary departure from the group.
That, together with the Kingdom’s deepening distrust of the US, is fueling a growing sense of isolation.
Pakistan may not be anyone’s idea of an ally when facing an existential threat; for Saudi Arabia, however, it is an idea whose time has come.
The Last of the Sudeiri Seven
LONDON – Ever since the Al Saud clan established in 1932 the kingdom to which they gave their name, the exercise of power in Saudi Arabia has been shaped by the intrigues and intricacies of royal politics.
But never before has this internal struggle had such profound ramifications for the region and beyond.
With some 22,000 members, competition is a way of life&nbsp;in the world’s largest ruling family – a dynamic set in motion by the Kingdom’s founder, Abdul Aziz Al Saud, as he sought to secure the role of his 43 sons as future rulers, and sustained today&nbsp;by King Abdullah’s succession strategy.
A Saudi prince’s status is based on his mother’s tribe and his alliances with other male royals.
From the outset, power was grouped on the basis of coalitions of full brothers, the most significant of whom were the “Sudeiri Seven,” Abdul Aziz’s sons with his wife Hissah Al Sudeiri.
With the assassination of King Faisal in 1975 by his nephew, the Sudeiri branch of the family became its dominant faction.
Fahd, the eldest Sudeiri son, ruled for 23 years, the longest reign for a Saudi king.
Abdullah’s succession in 2005 posed a direct challenge to the Sudeiri brothers’ authority.
Indeed, following Fahd’s death, Sudeiri power was reduced significantly, with only Crown Princes Sultan and Naif holding key roles.
Abdullah does not have a full brother.
To block a Sudeiri restoration, he initially grouped together a number of marginalized, likeminded princes.
Though Abdullah’s “Allegiance Council” was subject to Sultan’s control, its inclusion of Abdul Aziz’s remaining sons and the sons of his deceased brothers – in particular, King Faisal’s sons – gave the non-Sudeiri princes an institutional base of power.
The shift in power from the Sudeiris to King Abdullah and his sons was accelerated by the death of the two Sudeiri crown princes within a period of eight months.
After Sultan (who served for decades as Minister of Defense) died in October 2011, Abdullah froze the Allegiance Council.
Following the death of Naif (who was Minister of Interior for 37 years) in June 2012, he removed Abdul Rahman, a Sudeiri, and appointed Salman as Crown Prince.
Salman, too, is a Sudeiri, but his appointment represented a significant change, partly owing to his relative youth (78 years old).
Indeed, perhaps to satisfy the desire of the United States, a key ally, for a new generation of Saudi rulers, the 89-year-old Abdullah passed over his octogenarian brothers and appointed the youngest, 65-year-old Prince Migrin, as Second Deputy, putting him first in line to the throne after Salman.
Nearly a decade after succeeding Fahd, Abdullah is using his absolute power in other ways as well.
For example, he has strengthened the National Guard’s position by raising its status to that of a ministry, led by his eldest son, Mit’ib.
As a result of these and other changes, including the removal of key officials, such as Deputy Commander Badr Bin Abdul Aziz, the Guard’s power is now equal, if not superior, to that of the army.
Likewise, it is believed that Abdullah’s son, Deputy Minister of Foreign Affairs Abdul Aziz, will soon replace Saud al Faisal, the world’s longest-serving foreign minister.
Abdullah also appointed his son Mish’al as Governor of Najran, before raising Mish’al’s profile further, in December 2013, by naming him Governor of Mecca, in place of Khalid Al Faisal.
Meanwhile, Abdullah’s son Turki has been made Deputy Governor of Riyadh.
Whatever Abdullah’s consolidation of power might mean domestically, the implications for the region are profound.
In personalizing Saudi politics to the extent that he has, Abdullah has also personalized foreign policymaking.
That has meant subordinating meritocracy to kinship and loyalty, which has inevitably weakened the regime’s capacity to respond effectively to regional developments.
To be sure, the King and his courtiers are much relieved that the Arab Spring did not lead to the creation of functioning democracies in Egypt, Yemen, Bahrain, Libya, or Syria.
Better still, from their perspective, rival Islamist regimes that emerged proved to be either incompetent and easily overthrown (as with Egypt’s President Mohamed Morsi), or without appeal to others (as in Tunisia).
Nevertheless, the Arab Spring revolutions did undermine the pillars of the regional status quo, whose construction and maintenance the Kingdom had underwritten with its petrodollars.
The uprisings ousted reliable old allies like Hosni Mubarak, and turned regimes such as Syrian President Bashar al-Assad’s into implacable enemies.
Saudi Arabia’s initial response to the fracturing of the regional order was to increase its support for those of its allies – Jordan, Lebanon, and Bahrain – that were still standing, and to turn the Egyptian army into its proxy, leading to the removal of the Muslim Brotherhood’s government.
Since 2013, Syria has become the main focus of Saudi Arabia’s attention in the region.
Saudi rulers regard the battle between Assad and his opponents as part of the Kingdom’s existential struggle against its main adversary, Iran.
Thus, Saudi Arabia has become the primary source of financing and weapons for Sunni rebel forces fighting Assad’s army, which is backed heavily by Shia Iran and its proxy, the Lebanon-based Hezbollah militia.
Despite its unusually activist foreign policy, the Kingdom has failed to bring down Assad’s regime, partly owing to US President Barack Obama’s refusal to enforce his “red line” concerning the Assad regime’s use of chemical weapons.
As a result, Saudi rulers no longer feel constrained to wait for US approval of their actions – or even to refrain from acting against American interests.
Saudi Arabia feels a deep fear of abandonment by the US, and is acting accordingly.
The political transition at home, it seems, is being matched – for better or worse – by a diplomatic transition in the Kingdom’s stance toward the region.
Make Politics, Not War, in Iraq
The United States is once again learning the limits of military power.
In Iraq, America has unrivaled control of the air, but can’t hold the ground.
Its mere presence incites violence.
While President George W. Bush believes that he has protected Americans by “taking the war to the enemy,” more than 1,700 Americans have died in the Iraq war, which also has provoked terrorist attacks on US allies.
The horrific London bombings probably were inspired by Britain’s co-leadership of the war.
The Bush administration’s mistake, of course, is to neglect politics in its war calculations, or to follow blindly the dictum that war is politics by other means.
In fact, most war is a failure of politics, a failure of political imagination.
Given their self-righteousness and lack of historical and cultural awareness, Bush and his advisors believed that invading Iraq would be easy, that Saddam Hussein’s military would crumble, and that the US would be welcomed as a liberator.
They failed to comprehend that Iraq has long been an occupied and externally manipulated country.
As a result, Iraqis understandably regard the American-led occupation as just another episode of outside exploitation.
It is widely accepted that oil, not terror, was the original motivation of the war – a war planned by Mr. Bush’s senior advisors during the 1990’s, and made possible by their accession to power in 2001.
Through the 1990’s, US Vice President Dick Cheney and others made clear that Saddam’s reign threatened America’s oil security by forcing over-reliance on Saudi Arabia.
Iraq’s vast reserves, went the argument, could not be developed safely until Saddam was deposed.
The September 11, 2001, terrorist attacks in the US provided the green light, not the underlying motivation.
The Iraqis sense all of this.
Bush’s refusal to set a deadline for withdrawing troops is not taken as a sign of resolve, but as a statement of America’s intent to remain in Iraq, establish a puppet regime, control the country’s oil and set up permanent military bases.
That won’t work.
There are simply too many real political forces on the ground in Iraq for America to manage, and these forces are increasingly demanding a timetable for US withdrawal, as are legions of Iraqis in the course of public protests and mosque worships.
Every time the US reiterates its refusal to set a deadline for withdrawal, it simply stokes political opposition, not to mention the insurgency.
There are too many Iraqis ready to fight and die to oppose the American presence.
Only politics, not arms, can calm the scene.
Vietnam is a true precedent here.
Vietnamese deaths and casualties outnumbered American deaths and casualties by perhaps 20 to one, but the US still could not subdue the nationalist adversary that they faced.
The US could bomb Vietnam’s cities to rubble, as it can Iraq’s cities, but this solves nothing, claims vast numbers of innocent lives, and confirms the view of Americans as occupiers.
All of this has an economic angle as well.
American foreign policy doctrine states that US national security rests on three pillars: defense, diplomacy, and development.
Economic aid for poor nations is crucial, because poverty provides the tinder for violence, conflict, and even terrorism.
Yet diplomacy and development take a distant second and third place behind defense – or more accurately, military – approaches in US foreign policy spending.
The US will devote approximately $500 billion, or 5% of GNP, to military spending this year – half of the world’s total.
In other words, the US spends as much on arms as the rest of the world combined.
By contrast, the US spends just $18 billion, roughly 0.16% of GNP, on development aid.
In Europe, by contrast, military spending is roughly 2% of GNP, while development aid is around 0.4% of GNP and on a rising path to reach 0.7% of GNP by 2015.
If the US would pursue politics rather than war, it would understand that more development spending and a commercial approach to Asia, Africa, and the Middle East, rather than the current military approach, would best serve American interests.
Bombing Libya did not bring Muammar Qadaffi “in from the cold.”
Peaceful diplomacy did the job, showing Qadaffi that reopening diplomatic relations with the West and abandoning Libya’s nuclear ambitions would be advantageous for its own future and that of the country.
The same approach would have been far less expensive and more promising vis-à-vis Saddam Hussein.
Vast sums – and millions of lives – would have been saved if that approach had been tried with Ho Chi Minh in the 1950’s.
No one doubts that intelligence operations and police actions are needed to fight terrorists.
But the war in Iraq and enormous military expenditures are quite another matter.
The American military can protect the US from conventional military attack, and it can keep the high seas open, ensuring the flow of oil and other vital commodities.
But it can’t protect the US from politics.
For that, Americans need to be smarter, investing in peaceful development rather than military bases in long-abused lands.
The US should leave Iraq quickly.
After that, it can and should use its political and economic weight to help manage a complex and difficult situation that is significantly, though not exclusively, of its own making.
America’s sway in Iraq will be limited, but leaving now would actually make it more effective than it is now, and at much less cost in terms of money and American, allied, and Iraqi lives.
Make the UN Stand for Freedom
For Sweden, my homeland, the United Nations is a sacred cow.
But today, many Swedes, like others around the world, are having second thoughts.
Three events incited these doubts.
The first was the slaughter in Rwanda a decade ago of more than 800,000 people within 100 days – probably the fastest genocide ever.
The well-documented fact is that Kofi Annan, then the UN’s Deputy Secretary General, ordered UN soldiers in Rwanda not to intervene or protect the victims.
That Annan, after this enormous failure, was promoted to Secretary General of the UN remains a puzzle.
Doubts about the UN, and Annan personally, were compounded by the ongoing scandal within the UN administration concerning the Oil for Food program.
Although reports have so far not implicated Annan directly, his management failures are abundantly clear.
The third – and perhaps the most disillusioning – scandal concerns the Commission on Human Rights, for it lays bare much about the structural and permanent lack of balance and morality within key UN agencies.
Most people assume that this Commission exists to promote human rights and democratic freedoms.
Yet some of the worst human rights violators are Commission members.
These enemies of freedom are permanently silent about torture, oppression, and mass murder carried out by their fellow dictatorships, but are quick to rant against the world’s democracies, in particular the United States.
The recent “High Level Panel” report on the future of the UN was right when it said: “We are concerned that in recent years States have sought membership of the Commission not to strengthen human rights but to protect themselves from criticism or to criticize others.”
After more than a third of a century at the UN, even Annan has come close to admitting that the Commission on Human Rights is a source of shame.
Is it reasonable to elect a pyromaniac to the board of a fire department?
Of course not.
So why is it that tyrannies like Cuba, China, Saudi Arabia, Sudan, and Zimbabwe are members of this Commission?
Recent members also include Libya, Vietnam, Congo, and Syria – the Libyans were even elected chair-country.
How can this be?
About half of today’s UN members are democracies, the other half non-democracies.
So totalitarian or authoritarian states – more interested in hiding their own oppression than fairly judging other nations – can easily trigger a sort of political pogrom against any democracy that annoys enough tyrants.
Sadly, many free countries seem utterly indifferent to the ongoing campaign against Israel.
To prevent such vicious absurdities from continuing, the world’s democracies must unite to prevent any country that systematically violates human rights from being allowed to be a member of the Commission on Human Rights.
Ongoing democratization in regions that have known only dictatorship provides hope that the balance is tilting in a way that would enable it possible for at least one UN body should incarnate freedom.
Who should decide if a country is democratic or not?
A tremendously respected independent think tank, Freedom House, is, like the UN’s headquarters, located in New York City.
Freedom House is led and advised by experts on 190 countries.
Political rights and civil liberties are rated between 1 and 7 for each country, with 1 representing the most free and 7 the least free.
The designation of countries as “free” (1-2.5), “partly free” (3.0 – 5.0), or “not free” (5.5-7.0) is determined by combining these ratings.
Freedom House monitors developments over time and makes its conclusions public in its “Annual Survey of Political Rights and Civil Liberties.”
If there is one book that should be compulsory reading for anyone who makes public statements about human rights, this is it.
So the goal of all free countries should be that only other free countries are allowed seats on the Commission for Human Rights.
Regimes that are “partly free” or “not free” should never be elected or appointed, for the only governments with the moral legitimacy to review and criticize human rights records are those that came to power through free elections and that can lose power when a new election defeats them.
Those who have attained power through violence and fraud are not legitimate and should never more shame the UN by being members of this Commission.
Unfortunately, most democracies are often unwilling to fight against the perversion of the UN Human Rights Commission.
The European Union represents 25 democracies and often inspires countries to seek their freedom, as it has in Ukraine and Lebanon.
But the EU’s habit is not to defeat the UN’s extremists, but to make strange compromises with them.
As a result, rogue states make a few concessions to get the Europeans and others on board and then claim moral parity with the democracies.
Free peoples everywhere should remember that totalitarian forces and ideas cannot be defeated by being nice and accommodating.
The Commission on Human Rights must rid itself of members that detest freedom.
Otherwise, the sole UN agency that concentrates on freedom will be nothing more than a handmaiden to tyranny.
Making a Market for Scientific Research
Scientific advances are the fundamental cause of economic progress, and yet many nations often apparently hope to piggyback on discoveries made in more scientifically-advanced countries.
This is the most practical and efficient strategy in the early stages of development. But, to reach the advanced stages of economic growth, a country needs scientific research at home.
Every government tries to encourage scientific research through education in science.
But education by itself is of only limited use here.
After all, science is a form of enterprise, requiring a sophisticated organization of resources and workers, an adventuresome attitude, and a willingness to take risks for possibly great rewards.
Normally, the market fosters the advance of entrepreneurial endeavors.
Were such a market for science to exist, scientists would form enterprises, just like businesses, the best of which would succeed, while others would fail.
The problem is that basic scientific research is mostly a public good that cannot be withheld from those who use it and which seeps into the body of scientific know-how in unanticipated ways.
But if there is no market that impersonally values and rewards scientific achievement, how are good scientific projects to be selected and rewarded without the great waste that often accompanies non-market, bureaucratic solutions to the problems of provision of public goods?
There is a danger that scientific establishments may degenerate into fiefdoms controlled by scientific mandarins who dominate major state-funded university departments and laboratories.
Indeed, scientists in a number of countries, some with past scientific glories, may already recognize this malady in their own institutions today.
The price their countries pay is a more sclerotic and slowly growing economy.
No perfect substitutes for the market in the area of scientific discovery exist, but a good surrogate, which enables scientists to compete effectively, is the system of peer review , i.e., the anonymous evaluation of research by scientific colleagues.
Top scientists, sheltered by anonymity, can usually spot originality and can judge which scientific ideas have real value.
Peer review grew out of the first two scientific journals, the Journal des Sçavans in France and the Philosophical Transactions of the Royal Society in England, both founded in 1665.
These journals cast a wide net for the best research and relied on leading experts to evaluate ideas.
But their support of scientific research was limited to publication.
In the 1940's, Vannevar Bush, a dean at the Massachusetts Institute of Technology and science advisor to President Roosevelt, advocated the creation of a government agency that would dramatically expand the impact of peer review by using it to allocate significant financial support to research enterprises.
In his 1945 book Science, the Endless Frontier , Bush argued that basic scientific research needs substantial and stable financial support; that support should be potentially available to all researchers; and that peer review should ultimately decide how and to whom funds are allocated.
Those who dispense money, he argued, should look only at new research ideas, not at the organizational charts of research institutions.
His book led to the creation, in 1950, of the US National Science Foundation (NSF), a major factor underlying America scientific success.
The use of anonymous peer review to assess proposals and allocate financial support for scientific research is increasingly achieving recognition around the world.
Most major countries now have some kind of agency that issues general calls for proposals and uses peer review to evaluate them.
Problems remain, however, in making newly established peer-review systems work well.
Smaller countries face difficulties in ensuring anonymity: the number of qualified scientists within a specific field may be so small that researchers can easily guess who reviews which proposals, and powerful figures can retaliate for negative evaluations of their unpromising research ideas.
This is an important reason why the proposed European Research Council is a good idea.
Modeled after the NSF, it would augment the science foundations of individual European countries, creating a much larger research organization - one that draws from a larger pool of proposals.
The size of the market for peer review is not the only issue.
Countries with politicized universities, or universities where bosses with powerful connections outside academia run the research enterprise, find it difficult to fund the best scientists.
The same is true in systems where there is a strong sense of bureaucratic entitlement.
Japan is an example of a country where the science establishment has been insufficiently reformed.
Government bureaucrats used to target industrial research in the old days, but these efforts have been largely abandoned since the stock market collapse.
The government then increased funding for basic research and created "centers of excellence" at universities, but it failed to dismantle the koza system, in which powerful senior professors often dominate research departments.
Greater progress is being made in Germany, where, despite popular opposition to an elitist university system such as in the US, Chancellor Gerhard Schroeder called last year for German universities to become much more competitive with each other.
Similar changes can be expected in other countries, as the importance of scientific competition and entrepreneurship becomes better understood.
Policies that allow scientists to compete for resources nurture creative competition and allow people to construct appropriate incentives and risk-management structures.
They are part of a worldwide trend whereby natural and culturally specific obstacles to a competitive and financially sophisticated marketplace for scientific research are gradually removed.
There can be no free market for basic science in the literal sense of the term.
But the benefits of markets can and should be pursued by other means.
Making Culture Count
Constitutions express a political community's history, culture, values, and political convictions.
The Constitution for Europe now being written is no different.
It cannot create the common bonds that define Europe and hold it together.
It can only reflect and be animated by them.
Today, however, the cohesive forces that held Europe together for two generations have lost some (if not all) of their strength.
Since the collapse of the Soviet Union, peace and liberty are more or less taken for granted.
Economic integration has advanced so far that a return to the national rivalries that twice led the continent into suicidal warfare is unthinkable.
The postwar search for affluence, too, has lost much of its allure.
In Germany and other member states, economic growth no longer seems certain.
Citizens are increasingly wary of the idea of economic and social progress.
Public debate instead highlights the need for restricting government activities and reducing social transfers.
Enlargement of the European Union from 15 to 25 members will mean that for decades Europeans will need to live with greater material inequalities.
To be sure, lower standards of living having always existed between Europe's east and west. During Europe's Cold War division, that gap widened considerably.
With enlargement, those differences can no longer be hidden.
German reunification provides a sobering example in dealing with this problem.
If the enlarged EU were to attempt on a Europe-wide scale what Germany did for its eastern lands, current EU members would need to transfer roughly 4% of their combined GDP to the new member states for at least a decade.
Politics will make such transfers impossible, but even if that were not the case, the new members lack the political, economic, social, and administrative infrastructure to absorb them.
Thus, the time needed to narrow the gap between Europe's east and west will be measured in generations, not years.
If the ties that have bound Europe together for two generations are fraying, what alternative bonds can be found?
Late in his life Jean Monnet said that, were he to begin European integration again, he would start with culture.
But secularization, rationalization, and atomization of civil and social life, and the steady expansion of government into every social sphere, have lead to a privatization of culture and religion, reducing their potential to stimulate feelings of community, identity, and solidarity.
If the EU is to be durable, it must place greater emphasis on its cultural heritage.
Because of Europe's multiplicity of languages, no one language can serve as a strong element of identity.
Of course, English is developing into a lingua franca. But as a lingua franca it is limited to serving as a technical or professional language, not the language of a community.
When it comes to real cultural identity, Europe's true "common language" is composed of its musical, literary, artistic, and architectural traditions-the cultural substance perceived by all as European.
The cultivation, constant renewal, development, and protection of this cultural identity must be a key common European task.
This common cultural substance is the foundation on which European nations and states are built. Yet it is not produced by state action.
The state can support its development, preservation, and renewal, but cannot compel its existence.
People primarily determine the extent to which culture flourishes.
So cultural cohesion in Europe will have to grow from the bottom up.
But European individuals and civil societies find it hard to assert their autonomy in the face of the state.
The great European experiment will succeed only if Europe's citizens limit the scope of the state's claims on society and its resources, thus redefining those areas of self-government and autonomy where responsible community life and cultural activities flourish.
It is in these areas, however, that the constitutional drafts emerging in Brussels are wanting.
Consider the EU's Charter of Fundamental Rights.
Rather than limiting itself to basic human rights, the Charter dilutes them by engaging in detailed regulation of labor standards, social laws, and pronouncements that reflect industrial-age experience rather than address the future.
To promote such "rights" as fundamental will more likely perpetuate the status quo than help shape Europe's future.
In this sense, the Charter is reactionary: if it is included in the constitution, it will impede the development of rights and responsibilities appropriate to the future.
Europe's new constitution will be accepted as a guarantee of freedom and lawful government only if it results from a broad public dialogue reflecting the common cultural and moral assumptions that bind Europeans together.
If it is to last, it will not be enough for it to be conceived in the light only of today's experience.
If the Constitution is to guide Europeans through periods of change and yet unknown threats, its roots must reach the foundations of European history and identity as they are embodied in the shared culture that Europe's citizens freely acknowledge as their own.
Making European Defense a Reality
BRUSSELS – Anyone reflecting on the value, weight, and relevance of today’s European military forces for global affairs needs to keep two crucial questions in mind: Where do we want to go?
The EU’s goal is to be a global player with its own foreign policy, one shared by its 27 member states.
Any effective foreign policy clearly needs to rely on effective military and civilian resources.
But this goal does not mean that the EU will compete with NATO.
Whereas NATO is a political-military alliance, the EU endorses the development of a community of national destinies.
Moreover, NATO benefits from the military might of a dominant nation, while the EU must depend on the shared voluntary efforts of its members.
For two key reasons, it would be more correct to say that NATO and the European Security and Defense Policy (ESDP) are complementary.
First, certain countries turn specifically to Europe for help.
Whether in sub-Saharan Africa or the Middle East, their populations and governments are more inclined – for political, historical, or cultural reasons – to request European rather than NATO assistance.
Conversely, there are certain long-term crises, such as those provoked by terrorism, for which NATO is better placed to act.
For example, given its member states’ current resources, the EU, acting alone, would be unable to ensure a Western commitment in Afghanistan.
At the same time, the governments of Chad and the Central African Republic would never have accepted NATO’s intervention to help resolve the Darfur crisis.
Second, the EU is building its crisis management know-how on the basis of a global approach.
Military resources are only one tool among many others, and, generally speaking, their deployment is clearly defined, limited in time, and coordinated with civilian action.
As a result, the EU doesn’t need the articulated military structure that NATO possesses.
The recent creation in Brussels of the Civilian Planning Conduct Capability, based on a system comparable to that of a military chain of command, demonstrates – and, above all, guarantees – cohesive action.
In the same way, EUFOR military commanders regularly and frequently exchange information with the heads of such EU civil missions as the EUPOL police mission, the EUSEC security reform mission, the EUJUST justice mission, and so on, including, if present, the European Commission’s own representatives.
Being able to act militarily requires capable, flexible forces that are suited to their mission.
Their essential tasks should be movement, information gathering, and, if necessary, combat.
Moreover, their main qualities should be resistance – the ability to hold out – and the psychological resilience to deal successfully with an “intense” situation and to respond to it by exerting the best possible control.
This implies a high level of cohesion, which in the case of multinational forces is not guaranteed.
But the EU’s “Battlegroups” are a first response to this requirement.
As multinational forces that are built either on regional affiliations or strong bilateral relations, they bestow a “European” label on military resources while guaranteeing efficiency in the field.
Where necessary, they can be supported by air and maritime rapid response assets, and thus constitute a fully-fledged military resource for armed intervention.
However, although about 15 Battlegroups have been created – two of which are, at any time, on permanent call for six months – none has actually been deployed since the Artemis “prototype” mission to the Democratic Republic of Congo in 2003.
As time passes, a concept without real commitment in the field may eventually raise suspicions about its relevance.
The EU also suffers from a well-known lack of capacity in strategic air transport, in-theater air transport, and combat support.
The European Defense Agency has a very important role to play in proposing and running programs to address these shortfalls.
The Capability Development Plan, which the EDA is developing in close collaboration with the EU Military Committee, aims to foster and improve solidarity in terms of capability, which is what Europe needs.
There are other areas in which we must make progress if the EU’s military resources are to be brought into line with its political ambitions.
One urgent need is simplification of our operational planning and the manner in which we conduct operations.
Finally, as all of the EU’s 27 member states are now trying to reduce public spending in sustainable ways, financing for military operations, without which nothing is possible, requires a new approach.
Those member states that are most heavily involved in an operation, in terms of both human resources and military equipment, are penalized by the financial burden that this commitment places on their national budgets.
Political solidarity must be underpinned by effective financial solidarity.
As an integral part of the CFSP, today’s ESDP and tomorrow’s Common Security and Defense Policy will work only if the member states responsible for implementing them allocate the resources that they need.
This implies a Europe-based approach that takes precedence over national considerations once national and European-level foreign policies are unified.
Making Globalization Work for All
We are now in a one-year countdown to establish a new approach to globalization.
In September 2005, world leaders will meet at the UN to review the progress made since the Millennium Assembly in September 2000, when they pledged to support a set of ambitious objectives - the Millennium Development Goals ­- to help the world's poorest people escape poverty, hunger, disease, and illiteracy.
Setting goals was the easy part.
When they return next fall, world leaders must decide on how to achieve them.
Fortunately, a proposal by UK Chancellor Gordon Brown might provide the needed global breakthrough.
Here is the problem: globalization offers people everywhere the chance to escape extreme poverty, but it is not working in many parts of the developing world.
While China and India grow rapidly, most of Africa is stagnating.
Similarly, large parts of Latin America and Central Asia are experiencing rising, not falling, rates of poverty.
In most cases, geography plays an important role in success or failure.
The big development success stories are places like Shanghai, port cities with ready access to world markets.
The biggest development failures tend to be in rural areas far from the coast.
Communities living in mountainous areas, such as in the Andes, or Central Asia, or the highlands of East Africa, are especially isolated.
Geographical isolation is even more extreme if the country is landlocked, like Bolivia, Afghanistan, Ethiopia, or Burkina Faso.
In addition to isolation, other problems include droughts in Africa, where farmers depend on rainfall rather than irrigation, and high disease burdens in tropical countries suffering from malaria, dengue fever, and other killer diseases.
All of these problems are solvable, but they are not being solved in many places.
Instead of hearing more lectures from the IMF about cutting budgets, poor countries need larger budgets to pay for the required investments - roads, power supplies, ports, schools, and health clinics - to jump-start economic growth.
The IMF should spend less time telling the poorest of the poor to cut their spending, and more time telling rich countries to give more money to help the poor meet their investment needs.
Rich countries have promised more help for years, but continue to renege.
Thirty-five years ago, they promised to give 0.7% of their GNP to poor countries as development aid.
Instead they give 0.25% - a shortfall that amounts to $120 billion per year.
The United States causes half the total shortfall.
If the US lived up to its pledge of 0.7% of GNP in donor aid, it would be giving $75 billion per year.
Instead, it gives around $15 billion.
The US could easily afford to do more.
The Bush administration gave $250 billion per year in tax cuts to the richest Americans, raised military spending by $150 billion per year, and then turned to the poorest people of the world and told them that there is no money available to meet America's promise.
None of this makes sense for global security, or even for the financial interests of donor countries.
The failures of economic development in the Andes, Central Asia, and Africa contribute to global instability, local insurrections and violence, drug trafficking, and bases for terrorism.
Military approaches alone will not work, because the root of the problem is the vulnerability of poor, hungry people to the prophets of hate.
If donors keep giving only a little bit of help, but not enough to solve the problems of the poorest countries, these countries will never escape poverty's grip.
By financing a much higher level of investment in the next few years, rich countries would give poor countries the chance to achieve economic growth - promising an eventual end to further aid.
Chancellor Brown's proposal - an initiative called the International Finance Facility (IFF) - does precisely this.
The idea of the IFF is to guarantee that donor countries double their aid levels during the next decade, so that well-governed poor countries can make the investments they need to achieve the Millennium Development Goals.
Brown is exactly right: let's put Africa and other impoverished regions on a path of sustained economic growth by frontloading the aid during the period until 2015.
Great Britain has made the Millennium Development Goals, and hence the IFF, the centerpiece of the G-8 Summit, which will be held in Scotland next July.
French President Jacques Chirac has joined Blair and Brown in a bold call for rich countries to honor their promises to the poor.
The richest countries - the US, Germany, and Japan - must join this vital initiative.
Building a more peaceful and prosperous world is in everyone's best interest.
Making Globalization Work
I have written repeatedly about the problems of globalization: an unfair global trade regime that impedes development; an unstable global financial system that results in recurrent crises, with poor countries repeatedly finding themselves burdened with unsustainable debt; and a global intellectual property regime that denies access to affordable life-saving drugs, even as AIDS ravages the developing world.
I have also written about globalization’s anomalies: money should flow from rich to poor countries, but in recent years it has been going in the opposite direction.
While the rich are better able to bear the risks of currency and interest-rate fluctuations, it is the poor who bear the brunt of this volatility.
Indeed, I have complained so loudly and vociferously about the problems of globalization that many have wrongly concluded that I belong to the anti-globalization movement.
But I believe that globalization has enormous potential – as long as it is properly managed.
Some 70 years ago, during the Great Depression, John Maynard Keynes formulated his theory of unemployment, which described how government action could help restore full employment.
While conservatives vilified him, Keynes actually did more to save the capitalist system than all the pro-market financiers put together.
Had the conservatives been followed, the Great Depression would have been even worse and the demand for an alternative to capitalism would have grown stronger.
By the same token, unless we recognize and address the problems of globalization, it will be difficult to sustain.
Globalization is not inevitable: there have been setbacks before, and there can be setbacks again.
Globalization’s advocates are right that it has the potential to raise everyone’s living standards.
But it has not done that.
The questions posed by young French workers, who wonder how globalization will make them better off if it means accepting lower wages and weaker job protection, can no longer be ignored.
Nor can such questions be answered with the wistful hope that everyone will someday benefit.
As Keynes pointed out, in the long run, we are all dead.
Growing inequality in the advanced industrial countries was a long-predicted but seldom advertised consequence of globalization.
Full economic integration implies the equalization of unskilled wages everywhere in the world, and, though we are nowhere near attaining this “goal,” the downward pressure on those at the bottom is evident.
To the extent that changes in technology have contributed to the near stagnation of real wages for low-skilled workers in the United States and elsewhere for the past three decades, there is little that citizens can do.
But they can do something about globalization.
Economic theory does not say that everyone will win from globalization, but only that the net gains will be positive, and that the winners can therefore compensate the losers and still come out ahead.
But conservatives have argued that in order to remain competitive in a global world, taxes must be cut and the welfare state reduced.
This has been done in the US, where taxes have become less progressive, with tax cuts given to the winners – those who benefit from both globalization and technological changes.
As a result, the US and others following its example are becoming rich countries with poor people.
But the Scandinavian countries have shown that there is another way.
Of course, government, like the private sector, must strive for efficiency.
But investments in education and research, together with a strong social safety net, can lead to a more productive and competitive economy, with more security and higher living standards for all.
A strong safety net and an economy close to full employment provides a conducive environment for all stakeholders – workers, investors, and entrepreneurs – to engage in the risk-taking that new investments and firms require.
The problem is that economic globalization has outpaced the globalization of politics and mindsets.
We have become more interdependent, increasing the need to act together, but we do not have the institutional frameworks for doing this effectively and democratically.
Never has the need for international organizations like the IMF, the World Bank, and the World Trade Organization been greater, and seldom has confidence in these institutions been lower.
The world’s lone superpower, the US, has demonstrated its disdain for supranational institutions and worked assiduously to undermine them.
The looming failure of the Development Round of trade talks and the long delay in the United Nations Security Council’s demand for a ceasefire in Lebanon are but the latest examples of America’s contempt for multilateral initiatives.
Enhancing our understanding of globalization’s problems will help us to formulate remedies – some small, some large – aimed at both providing symptomatic relief and addressing the underlying causes.
There is a broad array of policies that can benefit people in both developing and developed countries, thereby providing globalization with the popular legitimacy that it currently lacks.
In other words, globalization can be changed; indeed, it is clear that it will be changed.
The question is whether change will be forced upon us by a crisis or result from careful, democratic deliberation and debate.
Crisis-driven change risks producing a backlash against globalization, or a haphazard reshaping of it, thus merely setting the stage for more problems later on.
By contrast, taking control of the process holds out the possibility of remaking globalization, so that it at last lives up to its potential and its promise: higher living standards for everyone in the world.
Making Growth Green
When the world's leaders met at the Millennium Summit four years ago, they agreed on a set of goals aimed at cutting global poverty in half by 2015.
They also set targets for the environment, because they understood its centrality to long-term economic growth, human development, and the stability of the planet.
The problem is that today, ten years shy of when the 2015 goals are to be met, progress on the environment is alarmingly slow. So much more is possible.
The phase-out of ozone depleting substances through the Montreal Protocol, for instance, shows what can be done when the international community works together.
Thanks to the protocol, it is estimated that up to 20 million cases of skin cancer, and 130 million eye cataracts, will be avoided.
This kind of success should encourage us.
But now we need to match our action with the scale of the challenge.
Our world is not only unbalanced, but endangered.
Deforestation is increasing, with almost 100 million hectares lost in the last decade alone - much of it due to millions of poor farmers in Africa and Latin America being forced to cut down trees because they have no other access to land or energy sources.
At the same time, carbon dioxide emissions are rising: the European Union's target is to cut greenhouse gas emissions by 8% by 2010; but with current policies, only 0.5% will be achieved.
Of the world's species, 12% of birds, 24% of mammals, and 30% of fish are either vulnerable or in immediate danger of extinction.
The environmental challenge is even more stark in developing countries, where five billion of the earth's six billion people live.
In these nations, the environment is linked directly to human development - and to poverty.
More than a billion people in developing countries lack access to clean water; more than two billion have no access to basic sanitation.
Five to six million people, mostly children, die every year due to waterborne diseases, such as diarrhea, and air pollution.
On current trends, the millennium targets for the environment will not be met.
What needs to be done?
As a starting point, we must recognize the fundamental imbalance in the global environmental equation.
Richer countries do much of the environmental damage.
Accounting for only 15% of the world's population, they cause 50% of global carbon dioxide emissions - with all their implications for climate change.
But the poorer countries pay much of the "costs" - losing up to 8% of their GDP per year due to environmental degradation, as well as suffering devastating effects on health and human welfare.
Rich countries' larger contribution to environmental damage means that they must shoulder greater responsibility for fixing the problem.
That means changing the way they produce and consume energy - reducing subsidies, ensuring appropriate pricing, and adequately taxing environmentally damaging products.
It also means providing more resources to developing countries for environmental conservation.
Between 1990 and 2000, financing for environmental concerns followed roughly the same path as overall development assistance flows: it stagnated.
Aid for the environment averaged about $2 billion per year - far short of what the international community, first at the Rio Summit in 1992 and then at the Johannesburg Summit ten years later, said was needed.
In terms of global priorities, this figure compares with the $900 billion that the world currently commits to military expenditures each year.
If the war on environmental degradation is to be won, we need a major turnaround.
Three areas can help speed progress:
· Developed countries must set the example by moving toward environmentally friendly production and consumption patterns, including more control of greenhouse gas emissions and use of innovative mechanisms such as Carbon Funds to buy offsets (reductions in greenhouse gases) from developing countries.
Richer countries must also increase bilateral and multilateral aid commitments.
Reversing the declining trend in contributions to the Global Environment Facility would be a good start.
Since its inception in 1991, GEF funding has declined by almost 10 % as a share of the combined GDP of the 38 contributing nations;
· Developing countries must improve their policies governing the critical sectors of water, energy, transport and trade, including pricing policies.
This would help reduce consumption of scarce natural resources.
Beyond this, environmental concerns must be integrated more fully into development policymaking.
· The international community must make a much more serious commitment to renewable energy, efficiency, and other environmentally friendly energy sources.
A business-as-usual approach would mean that by 2030 carbon dioxide emissions would be 70 % higher than today, and renewable energy would account for a mere 4% of total energy usage, up from 2% now.
We need the kind of common effort launched a generation ago in agriculture that led to the Green Revolution.
Another two billion people will be added to global population over the next 25 years - the vast majority in poorer nations - with huge demands for energy and economic growth.
If that growth is not achieved in an environmentally sustainable way, its effects on poverty and human well-being will be disastrous.
It will be too late 25 years from now to make the right choices.
For the sake of our children and our children's children, we must act now.
Making HIV/AIDS Investments Count
NEW YORK – It is dangerous to believe that the end of AIDS is in sight.
Around 30 million people around the world live with HIV, and another 30 million are likely to become infected in the next decade if current trends persist.
Funding from developed governments is dropping – a trend that must be reversed.
But we also need to acknowledge that billions of dollars have been spent on well-meaning attempts to save lives, with an alarming lack of high-quality evaluation of how these investments have performed.
This is true not only of abstinence campaigns, for which there is no evidence of effectiveness, but also for many other mainstays of the AIDS response.
On a systemic level, we do not know what works, where, and why – or how to replicate our successes.
In the project RethinkHIV, the Copenhagen Consensus Center and the Rush Foundation asked 30 of the world’s top HIV economists, supported by epidemiologists, demographers, and medical professionals, to analyze the most promising responses to the epidemic in the world’s worst-hit region, sub-Saharan Africa.
They were asked to examine what could be achieved with extra investments in six key areas: prevention of sexual transmission, reduction of non-sexual transmission, treatment of those who have the disease, initiatives to use social policy and health-system strengthening to fight HIV/AIDS, and vaccine research.
The resulting research papers offer the first-ever comprehensive attempt at cost-benefit analysis of AIDS priorities.
Economics can offer a fresh perspective by showing us the overall value to society of competing spending options.
Among worthwhile investments, some are very costly and achieve little good; others are remarkably cheap and incredibly effective.
Whether on AIDS or other problems, additional funds should be spent first where we can achieve the highest return for our money.
To spark a dialogue about HIV/AIDS priorities based on the RethinkHIV research, the Copenhagen Consensus Center and the Rush Foundation asked five world-class economists – including three Nobel laureates – to form their own conclusions about how best to spend additional funding.
The panel zeroed in on five investments that they believe should be at the top of policymakers’ lists.
Most importantly, they identified an urgent need for increased investment in developing an HIV vaccine.
This is clearly a longer-term response to the epidemic: research by Dean Jamison and Robert Hecht for RethinkHIV suggests that we are about 20 years away from large-scale vaccination, and that increasing current funding by around 10%, or $100 million a year, would meaningfully shorten that projection.
This would save millions of lives and potentially end the epidemic in the long run, while dramatically improving scientific understanding of the disease in the near term.
For every dollar spent, it is likely that the benefits would run into the tens of dollars.
As a shorter-term response to the epidemic, the Nobel laureates were convinced by research by the economist Lori Bollinger that we could practically wipe out mother-to-child transmission of HIV by 2015 with additional expenditures of just $140 million a year.
About 350,000 infants became HIV positive in 2008, through pregnancy, labor, delivery, or breastfeeding, accounting for approximately 20% of all new infections.
Since we have such cost-effective programs to halt this tragedy, the Nobel laureates concluded, this is a compelling investment.
So, too, is spending more to make blood transfusions safer.
Bollinger calculated that annual investment of $2 million over five years would achieve 100% safe blood transfusions by 2015 and avert more than 131,000 HIV infections, while alleviating fears of infection for the almost half-billion people who would otherwise receive blood that was not comprehensively screened.
The Nobel laureates also found that male circumcision is an excellent use of funds.
They focused particularly on the longer-term benefits of infant-male circumcision, arguing that there is massive untapped potential to introduce this very cheap practice across Africa.
We know that adult-male circumcision reduces the odds of transmission from a woman to a man by up to 60%.
Research by Jere Behrman and Hans-Peter Kohler of the University of Pennsylvania makes clear that the real focus needs to be on working out the best ways to broaden adult circumcision efforts across the region, and to convince men that getting circumcised is a good idea.
We also need to introduce counseling to ensure that men do not treat circumcision as a vaccine, and engage in riskier behavior as a result.
Finally, the panel of Nobel laureates concluded based on research by Mead Over and Geoffrey Garnett that additional resources for treatment should go first to patients who are the sickest and most infectious.
Because treatment is very expensive, coverage rates remain woefully inadequate.
But treatment is not only an ethical imperative; it also is important in preventing and reducing sexual transmission.
The expert panel did not just identify the top-priority uses for additional funds, but also highlighted promising areas where more research is needed.
As Anna Vassall, Michelle Remme, and Charlotte Watts of the London School of Hygiene and Tropical Medicine pointed out, gender inequalities and domestic violence are both associated with a significant increase in risk of HIV infection.
So, if gender training programs were to piggyback on current income-boosting microfinance and agricultural-support programs, we could undermine norms about gender roles that entrench women’s dependence on men or condone domestic violence.
It’s a proposal that deserves further investigation, as is the proposition from William McGreevey of Georgetown University to increase efforts to focus treatment of HIV positive patients to reduce opportunistic infections of Cryptococcal Meningitis.
We need to arrest the recent drop in AIDS funding and secure additional resources in order to make further headway against the disease.
By highlighting sound investments – including some that are not currently at the top of policymakers’ to-do lists – RethinkHIV makes the case in economic terms for doing just that.
Making it to the Euro
The upcoming enlargement of the European Union in May is a major focus not only for governments in the acceding countries, but also for their central banks.
Upon entry, they will become members of the European Central Bank, which means that the new members are expected to take active steps towards fulfilling the necessary conditions for future admission into the eurozone.
Even though actual enlargement of the eurozone remains in the relatively distant future - the earliest possible date being January 2007 - the accession countries must prepare their entry strategies well in advance.
This is why in most accession countries last year, central banks and governments stepped up co-operation on defining joint positions on adopting the euro.
Similarly, there were intense debates within the EU, culminating with the adoption of the ECB's Policy Position on Exchange Rate Issues Relating to the Acceding Countries.
The Policy Position expressed the ECB Governing Council's stance on membership of the exchange rate mechanism (ERM II), a key precondition for future eurozone entry.
Debate was heated.
The accession countries had to decide the optimal timing for eurozone enlargement - a difficult task, because economic theory gives no clear answers in this respect, and because several accession countries are wrestling with fiscal imbalances well above the Maastricht Treaty's ceiling of 3% of GDP.
The EU side, for its part, had to address the problem of how to balance fairness of treatment between old and new eurozone members with ensuring a smooth enlargement.
There may be a certain trade-off between these two aspects, since the EU's accession criteria were defined at a time when the eurozone did not exist and when best practices in exchange rate and monetary policy regimes differed from current ones.
Nevertheless, a broad consensus has emerged on a number of issues.
First, most people have learned that no universal solution is optimal for all accession countries.
There are many country-specific conditions, such as current economic performance, the monetary policy regime, and the fiscal stance.
In this respect, the accession countries can be divided into two broad groups.
On one side are small countries - for example, the Baltic states - which use devices such as currency boards to peg their exchange rates to the euro.
These countries have proven that they can live without their own monetary policies without severe tensions.
There is thus no reason to caution them against fast eurozone accession or to force them to change their exchange rate regimes before entry.
So EU institutions are right to acknowledge currency boards as being consistent with the ERM II regime, even though they have at the same time reserved the discretion to assess each country on a case-by-case basis.
On the other hand, it is clear that the roadmap to the eurozone might be completely different for the larger accession countries with floating exchange rates and inflation-targeting monetary policy regimes.
A second area of consensus has emerged from frequent debates on the potential conflict between nominal and real economic convergence between the EU accession countries and the current member states.
But most accession countries have already achieved substantial progress in lowering inflation and nominal interest rates.
Moreover, many empirical analyses show that real convergence should not be a serious obstacle to enlargement.
Thus the main emphasis has shifted to structural, financial, and cyclical convergence, in line with economic theory on so-called "optimum currency areas."
It is typically found that the degree of convergence is very high in terms of foreign trade, capital flows, and banking sector integration, while cyclical convergence and labor mobility have been low so far.
Important differences exist, though, among the individual countries even in this respect.
Third, although the Central European countries originally announced different target dates for eurozone accession, their plans have now moved closer together, usually ranging between 2008 and 2010.
The biggest practical constraint they face is their public budgets.
Many countries - including the Czech Republic, Hungary, and Poland - run large budget deficits and need to implement medium-term reforms to make their pension systems sustainable and to overhaul overly generous social security systems.
Given the political sensitivity of these issues, fiscal consolidation will be challenging.
Fourth, it is vital that EU institutions have spoken more openly about the convergence criteria.
Most critically, the ECB has de-emphasized in its Policy Position the former ±2.25% fluctuation band in the ERM II as the criterion for assessing exchange rate stability.
This corresponds to the view shared by many accession countries that such a narrow band would increase the risks in managing the run-up to adopting the euro.
Instead, exchange rate stability will be assessed according to economic fundamentals and countries' economic policy mix, rather than by rigidly applying mechanical rules.
Finally, the ECB has proposed a reform of the voting mechanism in its Governing Council, introducing a cap on the number of voting members.
Even though many, including myself, do not see it as an optimal final solution, it is an important compromise that will allow eurozone enlargement to start.
The work done during 2003 brought eurozone enlargement much closer.
Some countries may proceed faster, especially those with hard pegs against the euro, while for others the years 2008-2010 seem to be a more realistic target.
But in most cases, entry strategies have been set, serving as important stabilizers for financial markets and economic agents.
Making Old Age Less Safe
It is almost an optical illusion: looming on Japan’s horizon, and on Europe’s and on America’s, is a pensions crisis.
The problem is real, though exaggerated.
The illusion is in some of the plans being devised to deal with it.
The main question is whether privatizing pension systems, as President George W. Bush has proposed for Social Security in the United States, would solve the problem or merely make matters worse.
With many countries pondering whether to adopt variants of the Bush plan, the question requires careful examination.
By itself, privatization is clearly not the solution.
America’s troubled private pension system – now several hundred billion dollars in debt – already appears headed for a government bailout.
There was a time when privatization – allowing individuals to set up individual savings accounts – seemed better than Social Security, which invests in lower-yielding Treasury bills.
Advocates of privatization argued that funds would do much better if invested in stocks, predicting a return of 9%.
But the stock market does not guarantee returns; it does not even guarantee that the stock values will keep up with inflation – and there have been periods in which they have not.
America’s Social Security system insulates individuals against the vagaries of the market and inflation, providing a form of insurance that the private market does not offer.
It does so with remarkable efficiency.
The costs of managing the Social Security system are far smaller than those likely to be associated with privatized accounts.
This is understandable: private investment firms spend an enormous amount on marketing and salaries.
It is possible that to reduce these transactions costs, Bush will propose restricting choice, which was the main argument for privatization in the first place.
But these limited kinds of choices – for example, a T-bill fund with 90% in T-bills and 10% in an indexed stock fund – could easily be introduced into the public social security system.
Bush says that reform is urgently needed, because the system will be insolvent in about a quarter-century.
But the problem depends on America’s growth rate: if the growth rates of the late 1990’s return, there is no problem.
Moreover, Bush’s proposals won’t fix social security – unless they are accompanied by drastic benefit cuts.
For how could they?
He proposes diverting almost a third of the Social Security tax to private accounts.
That means less money coming in.
If benefits are not reduced, the gap between receipts and expenditures will increase.
One doesn’t need a Nobel Prize to figure that out.
So privatization would not protect retirees against the Social Security system’s insolvency; it would merely add enormously to today’s fiscal deficit, because partial privatization entails diverting money to private funds that would have been used to close the gap between government expenditures and revenue.
The anticipated increase in the fiscal deficit is striking: the central plan discussed by Bush’s Council of Economic Advisers would – according to the Council’s own estimates – increase America’s fiscal deficit by $2 trillion over the next decade.
Advocates of privatization claim to believe in markets, but they are proposing budget gimmickry that would move those losses off the books, as if markets could be easily fooled.
America and the world should remember: Argentina’s privatization of its pension system was at the center of its recent fiscal woes.
Had Argentina not privatized, its budget would have been roughly in balance.
The US is starting on its privatization venture with a fiscal deficit of 4% of GDP.
Privatization advocates insist, however, that investments in stocks would yield sufficiently higher returns to provide individuals the same retirement income as before, with the surplus used to fill the gap.
But if markets are working well, then returns will be higher only because risk is higher.
There is still no free lunch in economics.
With higher risk, there is a chance that, 40 years from now, many individuals will find themselves with less than they need to retire.
But if one really thinks that free lunches exist, there is still no reason to privatize: government could get the additional returns by investing in the stock market itself.
Indeed, President Clinton proposed doing just that.
With increased transaction costs, worsening solvency for the system, increased budget deficits, and decreasing benefits and security for retirees, why the drive for privatization?
One reason is the interest financial markets have in grabbing a piece of all those transactions costs.
A second is the Bush administration’s ideological hostility to the modest amount of wealth redistribution implied by the public system.
America’s Social Security program has been so successful in reducing poverty because the poor get back a little more than they contribute, and the rich get back a little less.
Even with Social Security’s mildly redistributive effect, poverty and inequality in America are increasing.
Privatization will only make matters worse.
Bush has tried to scare America about the magnitude of the problem, and he has tried to fool America about how privatization would solve it.
The Social Security deficit pales by comparison with the deficits created by Bush’s huge tax cuts for upper-income Americans or in comparison with the deficit in Medicare, which provides health care for the aged.
Why has he ignored these problems?
Is there another agenda?
Making or Breaking Europe
Sweden's thumbs down to the Euro strips bare the fundamental choice now facing Europe.
Slowly, very slowly, the European Union is approaching the moment of truth when its members must decide what kind of a Union they want.
Do they want a politically integrated Union, perhaps developing eventually into a true federation?
Or do they want a loose economic club, based essentially on a single economic market, with a few optional add-ons of a political nature?
This question has faced the EU from its beginning, and until now member governments answered it by proceeding at the pace of the most reluctant.
But that may be changing.
This year, or next year, it may at last become clear that the gulf between federalists and nationalists is too deep to be bridged.
At that point, the federalists will see whether they can find a way to go ahead on their own.
If they do, there will be a two-speed Europe, with a politically integrated inner core and others more loosely associated on the outside.
The idea of a two-speed or variable-geometry Union, has long been debated, mainly as a way of finessing the Euro-skeptical foot-dragging of successive British governments.
Mostly, these debates tended to reach the morose conclusion that a two-speed Europe would be hopelessly difficult to negotiate.
Then, thank goodness, the idea of a variable-geometry Union seemed to lose urgency when Tony Blair came to power.
What is now reviving the idea of variable geometry is the prospect of the EU's massive enlargement with the admission of ten new members from Eastern Europe and the Mediterranean, multiplied by the political crisis within Europe over the American war against Iraq.
Everyone knows that a much larger EU must be more integrated politically if it is not to grind to a halt through sheer weight of numbers.
This is a question of simple arithmetic, not ideology.
To deal with this problem, a draft EU constitution was submitted to member governments earlier this year, which would (among other things) expand the role of majority voting.
Formal negotiations on that draft start next month.
Unfortunately, it is increasingly clear that some peripheral EU members and many of the new members intend to revise the draft treaty, which they fear goes too far toward political integration.
Some small countries do not like the idea of a permanent President of the Council of Ministers, which they fear will strengthen the influence of big countries at their expense.
Some middle-sized countries, like Spain and Poland, do not like the proposed majority voting rules, which would operate according to population weights.
Some small countries do not like streamlining the Commission, and the proposed cutback in the number of Commissioners from member states.
Neutrals, like Finland and Austria, are opposed to plans for closer defense cooperation.
And so on.
These concerns are understandable; and it is particularly understandable that the new member states from Eastern Europe, who have no experience of voluntary integration--and far too much experience of involuntary integration--are apprehensive about some aspects of the draft constitution.
The problem is that if governments start to amend the draft constitution, the whole thing is liable to unravel.
It is hard to guess in advance the consequences of such a failure.
This will depend on how failure plays out in the conference room.
But if the negotiations break down because new members, or small countries, or middle-sized countries, or the neutrals, resist the reforms necessary to make the enlarged EU viable, it is a certainty that those member states in favor of closer integration, essentially the six original founding members (France, Germany, the three Benelux countries, and perhaps Italy) will start to work seriously on ways of building an alternative structure.
This is the real significance of last Sunday's ballot, when the Swedish people voted, by a surprisingly large margin, against joining the Euro.
They were not voting against the Euro, they were voting against more Europe.
Sweden's government wanted the country to join, because it was afraid of the consequences of staying outside.
But the government balked at arguing for it on political grounds.
The Swedes have always been half-hearted about the political aspects of EU membership.
But they could hardly be expected to vote for Euro membership on purely economic grounds at a time when the Swedish economy was doing better than the Euro economy.
The same is true of Britain.
Tony Blair wants Britain to join the Euro, because he does not want to be excluded from the European core.
But he pretends that this is an economic question, because he dare not argue, and does not believe in, the case for more political integration.
Some observers argue that Britain's prospects for joining the Euro have been damaged by the Swedish No vote or by the domestic fall-out after the war against Iraq.
But this is simplistic and wrong.
Tony Blair will not take Britain into the Euro because he cannot articulate the only real case for membership, which is political.
Even if he did articulate this case, he would not persuade the British people, who have been conditioned by 50 years of Euro-skepticism from their political leaders.
If the negotiation of a new EU Constitution is to have any chance of success, it may be decided on Saturday, at a meeting between Tony Blair of Britain, Chancellor Gerhard Schröder of Germany, and President Jacques Chirac of France.
Britain's relations with the other two states were seriously damaged by Blair's unconditional support for America's illegal war against Iraq.
One point of Saturday's meeting will be to mend fences on the next steps in Iraq.
But Blair's deeper purpose will be to try to ensure that if negotiations on the EU Constitution break down, Britain is not stranded permanently in the outer ring of a two-speed Europe.
Making Peace Between Darwinism and Christianity
Are science and religion fated to mutual enmity?
Every schoolchild learns how Galileo was forced to his knees to recant his belief that the earth revolves around the sun, or how the Church was up in arms again in 1859, when Charles Darwin published On the Origin of Species , arguing that all living organisms, including humans, result from a long, slow process of evolution.
Today, especially in America, many Christians, so-called Creationists, still argue that mankind's origins are to be found in the early chapters of Genesis, not in any scientific discovery.
But the interplay of evolution and religion is more complex than opposition and conflict.
Evolutionary ideas are born of religion.
The ancient Greeks had no idea of progress, directional time, and linear history, culminating in humankind.
This concept is a legacy of Judeo-Christianity, and in the 18 th century the earliest evolutionists--people like Charles Darwin's grandfather, Erasmus--framed their ideas within the context of this religious account of origins.
Darwin himself was much influenced by Christian ideas, especially where we least expect it: in his belief in natural selection--the bane of the Church--as evolution's motive force.
Darwin argued that more organisms are born than can survive and reproduce; that this leads to a struggle for existence; and that success in this struggle partly reflects the physical and behavioral differences between the winners and the losers.
The winners are those that are well adapted to their environment--that is, they develop features that help them to survive and reproduce.
Behind Darwin's emphasis on adaptation lay his Christian upbringing.
One traditional argument for the existence of God, the so-called "argument from design," stresses that organic parts are adapted, and argues that the only way they could have come into being is through the workings of some kind of intelligence.
The eye, for example, is like a telescope.
Since telescopes have telescope makers, the eye must have an eye maker--the Great Optician in the Sky.
Darwin accepted the design-like nature of organisms and their parts.
But rather than the Christian God, he appealed to the scientific concept of natural selection.
Science and religion still wrestle over the legacy of Darwin's theory of evolution through natural selection.
As the well-known Oxford biologist Richard Dawkins notoriously remarked, "Although atheism might have been logically tenable before Darwin, Darwin made it possible to be an intellectually fulfilled atheist."
Without natural selection, the appeal to God made sense.
But after Darwin and natural selection, we have a non-God-driven explanation for adaptation, making it possible to be a non-believer, even in the face of design-like organisms and their parts.
But Dawkins goes further and argues that if one is a follower of Darwin, then sensibly one ought to be an atheist. Dawkins agrees with the Creationists on one thing: the incompatibility of Darwinism and Christianity.
In his book River out of Eden , he writes, "The universe we observe has precisely the properties we should expect if there is, at bottom, no design, no purpose, no evil and no good, nothing but blind, pitiless indifference."
Elsewhere he attacks religion directly: "The kinds of views of the universe which religious people have traditionally embraced have been puny, pathetic, and measly in comparison to the way the universe actually is.
The universe presented by organized religions is a poky little medieval universe, and extremely limited."
Now, I, for one, am not quite sure how poky the medieval universe actually was.
Most thinkers back then accepted the Arab estimates that the universe was two hundred million miles across, which is enough room to swing quite a few cats--or Oxford atheists!
But obviously, whether or not you do believe in the existence of the Christian God (or any other kind of god), Dawkins's gloomy conclusions do not follow.
You may not have to be a Christian in the light of Darwinism, but this does not mean that you cannot be one.
In fact, Pope John Paul II, a man not usually described as soft in his religious commitments, has openly endorsed evolution, even Darwinism.
True, he demands a special intervention for the arrival of human souls, but souls (if such there be) are hardly scientific concepts anyway.
People like Dawkins, and the Creationists for that matter, make a mistake about the purposes of science and religion.
Science tries to tell us about the physical world and how it works.
Religion aims at giving a meaning to the world and to our place in it.
Science asks immediate questions.
Religion asks ultimate questions.
There is no conflict here, except when people mistakenly think that questions from one domain demand answers from the other.
Science and religion, evolution and Christianity, need not conflict, but only if each knows its place in human affairs--and stays within these boundaries.
Making Room for China
CAMBRIDGE – China’s undervalued currency and huge trade surplus pose great risks to the world economy.
They threaten a major protectionist backlash in the United States and Europe; and they undermine the recovery in developing and emerging markets.
Left unchecked, they will generate growing acrimony between China and other countries.
But the solution is not nearly as simple as some pundits make it out to be.
Listen to what comes out of Washington and Brussels, or read the financial press, and you would think you were witnessing a straightforward morality play.
It is in China’s own interests, these officials and commentators say, to let the renminbi appreciate.
After all, the Chinese economy can no longer rely on external demand and exports to sustain its remarkable growth, and Chinese consumers, who are still poor on average, deserve a break and should be encouraged to spend rather than save.
This story casts China’s policymakers in the role of evil and misguided currency manipulators, who, inexplicably, choose to harm not only the rest of the world, but their own society as well.
In fact, an appreciating renminbi would likely deal a serious blow to China’s growth, which essentially relies on a simple, time-tested recipe: encourage industrialization.
Currency undervaluation is currently the Chinese government’s main instrument for subsidizing manufacturing and other tradable sectors, and therefore promoting growth through structural change.
Before it joined the World Trade Organization in 2001, China had a wider range of policy instruments for achieving this end.
It could promote its industries through high tariffs, explicit subsidies, domestic content requirements on foreign firms, investment incentives, and many other forms of industrial policy.
But WTO membership has made it difficult, if not impossible, to resort to these traditional forms of industrial support.
China’s tariffs declined precipitously in the late 1990’s, and many of the other inducements were also phased out.
Currency undervaluation has become a substitute.
It is not just China that benefits from a competitive currency.
There is a strong positive relationship across all developing countries between currency undervaluation and economic growth.
But this relationship is much stronger in China, presumably because the productivity gap between the rural, traditional parts of the economy and the modern, industrial sectors is so huge.
The trouble with currency undervaluation is that, unlike conventional industrial policy, it spills over into the trade balance.
It acts as a subsidy on the production of tradable goods (which is desirable), along with a tax on their domestic consumption (which is incidental and undesirable).
Indeed, China’s current-account imbalance, which had remained moderate until the current decade, began its inexorable rise in 2001 – precisely when the country joined the WTO.
Given that WTO rules tie China’s hands on industrial policy, how much of a growth penalty would the Chinese economy suffer if the renminbi were to appreciate?
My estimates, crude as they are, suggest a steep trade-off.
An appreciation of 25% – roughly the extent by which the renminbi currently is undervalued – would reduce China’s growth by somewhat more than two percentage points.
This is a significant effect, even by the standards of China’s superlative growth performance.
Most importantly, a slowdown of this magnitude would put China below the 8% growth threshold that its leadership apparently believes is necessary to avert social strife.
No one knows where the 8% figure really comes from, and many experts believe that China’s society and polity are capable of handling much lower growth.
But, even if political implications are put aside, it would be a tragedy if the most potent poverty-reduction engine the world has ever known were to experience a notable slowdown.
To be sure, other countries that relied on exports to grow rapidly – such as Germany, Japan, and South Korea – eventually had to let their currencies appreciate.
But China is still a very poor country, at barely one-tenth the income level of the US.
It has a huge reservoir of surplus labor in the countryside.
In addition, China must live with restrictions on its industrial policies that none of these other countries, in pre-WTO days, had to abide by.
So we are left, it seems, with two equally unappetizing options.
China can maintain its currency practices, but at the risk of large global macroeconomic imbalances and a major political backlash in the US and elsewhere.
Or it can let its currency appreciate, at the risk of inducing a growth slowdown and political and social unrest at home.
It is not clear that advocates of this option have fully comprehended its potentially severe adverse consequences.
There is, of course, a third path, but it would require re-writing the WTO’s rules.
If China were allowed a free hand with industrial policies, it could promote manufactures directly while allowing the renminbi to appreciate.
This way the increased demand for its industrial output would come from domestic rather than foreign consumers.
It is not a pretty solution, but it is the only one.
The great advantage of industrial policies is that they enable growth-promoting structural change without generating trade surpluses.
They are the only way to reconcile China’s continued need for industrialization with the world economy’s requirement of lower current-account imbalances.
Making Sense of the Climate Impasse
NEW YORK – All signs suggest that the planet is still hurtling headlong toward climatic disaster.
The United States’ National Oceanographic and Atmospheric Administration has issued its “State of the Climate Report” covering January-May.
The first five months of this year were the warmest on record going back to 1880.
May was the warmest month ever.
Intense heat waves are currently hitting many parts of the world.
Yet still we fail to act.
There are several reasons for this, and we should understand them in order to break today’s deadlock.
First, the economic challenge of controlling human-induced climate change is truly complex.
Human-induced climate change stems from two principal sources of emissions of greenhouse gases (mainly carbon dioxide, methane, and nitrous oxide): fossil-fuel use for energy and agriculture (including deforestation to create new farmland and pastureland).
Changing the world’s energy and agricultural systems is no small matter.
It is not enough to just wave our hands and declare that climate change is an emergency.
We need a practical strategy for overhauling two economic sectors that stand at the center of the global economy and involve the entire world’s population.
The second major challenge in addressing climate change is the complexity of the science itself.
Today’s understanding of Earth’s climate and the human-induced component of climate change is the result of extremely difficult scientific work involving many thousands of scientists in all parts of the world.
This scientific understanding is incomplete, and there remain significant uncertainties about the precise magnitudes, timing, and dangers of climate change.
The general public naturally has a hard time grappling with this complexity and uncertainty, especially since the changes in climate are occurring over a timetable of decades and centuries, rather than months and years.
Moreover, year-to-year and even decade-to-decade natural variations in climate are intermixed with human-induced climate change, making it even more difficult to target damaging behavior.
This has given rise to a third problem in addressing climate change, which stems from a combination of the economic implications of the issue and the uncertainty that surrounds it.
This is reflected in the brutal, destructive campaign against climate science by powerful vested interests and ideologues, apparently aimed at creating an atmosphere of ignorance and confusion.
The Wall Street Journal, for example, America’s leading business newspaper, has run an aggressive editorial campaign against climate science for decades.
The individuals involved in this campaign are not only scientifically uninformed, but show absolutely no interest in becoming better informed.
They have turned down repeated offers by climate scientists to meet and conduct serious discussions about the issues.
Major oil companies and other big corporate interests also are playing this game, and have financed disreputable public-relations campaigns against climate science.
Their general approach is to exaggerate the uncertainties of climate science and to leave the impression that climate scientists are engaged in some kind of conspiracy to frighten the public.
It is an absurd charge, but absurd charges can curry public support if presented in a slick, well-funded format.
If we add up these three factors – the enormous economic challenge of reducing greenhouse gases, the complexity of climate science, and deliberate campaigns to confuse the public and discredit the science – we arrive at the fourth and over-arching problem: US politicians’ unwillingness or inability to formulate a sensible climate-change policy.
The US bears disproportionate responsibility for inaction on climate change, because it was long the world’s largest emitter of greenhouse gases, until last year, when China overtook it.
Even today, per capita US emissions are more than four times higher than China’s.
Yet, despite America’s central role in global emissions, the US Senate has done nothing about climate change since ratifying the United Nations climate change treaty 16 years ago.
When Barack Obama was elected US president, there was hope for progress.
Yet, while it is clear that Obama would like to move forward on the issue, so far he has pursued a failed strategy of negotiating with senators and key industries to try to forge an agreement.
Yet the special interest groups have dominated the process, and Obama has failed to make any headway.
The Obama administration should have tried – and should still try – an alternative approach.
Instead of negotiating with vested interests in the backrooms of the White House and Congress, Obama should present a coherent plan to the American people.
He should propose a sound strategy over the next 20 years for reducing America’s dependence on fossil fuels, converting to electric vehicles, and expanding non-carbon energy sources such as solar and wind power.
He could then present an estimated price tag for phasing in these changes over time, and demonstrate that the costs would be modest compared to the enormous benefits.
Strangely, despite being a candidate of change, Obama has not taken the approach of presenting real plans of action for change.
His administration is trapped more and more in the paralyzing grip of special-interest groups.
Whether this is an intended outcome, so that Obama and his party can continue to mobilize large campaign contributions, or the result of poor decision-making is difficult to determine – and may reflect a bit of both.
What is clear is that we are courting disaster as a result.
Nature doesn’t care about our political machinations.
And nature is telling us that our current economic model is dangerous and self-defeating.
Unless we find some real global leadership in the next few years, we will learn that lesson in the hardest ways possible.
Making the Euro Whole
NEW YORK – The architects of the euro knew that it was incomplete when they designed it.
The euro had a common central bank but no common treasury.
This was unavoidable, because the Maastricht Treaty was meant to bring about a monetary union without a political union.
European authorities were confident, however, that if and when the euro ran into a crisis, they would be able to overcome it.
After all, that is how the European Union was created, taking one step at a time, knowing full well that additional steps would be required.
With hindsight, one can identify other deficiencies in the euro of which its architects were unaware.
The euro was supposed to bring about economic convergence, but it produced divergences instead, because its architects did not realize that imbalances may emerge not only in the public sector, but in the private sector as well.
After the euro came into force, commercial banks could refinance their holdings of government bonds at the discount window of the European Central Bank, and regulators treated government bonds as riskless.
This caused interest-rate differentials between various countries to shrink, which generated real-estate booms in the weaker economies and reduced their competitiveness.
At the same time, Germany, suffering from the after-effects of reunification, had to tighten its belt.
Trade unions agreed to concessions on wages and working conditions in exchange for job security.
That is how the divergences emerged.
Yet the banks continued to load up on the government bonds of the weaker countries in order to benefit from the minuscule interest-rate differentials that still remained.
The consequences of the lack of a common treasury first became apparent after the bankruptcy of Lehman Brothers in 2008, when governments, in order to prevent financial markets from collapsing, had to guarantee that no other systemically important financial institution would be allowed to fail.
At that time, Angela Merkel rejected a Europe-wide guarantee, insisting that each country should guarantee its own institutions.
Interestingly, interest-rate differentials widened only in 2010, when the newly elected Greek government announced that the previous government had vastly understated the true fiscal deficit.
That was the start of the euro crisis.
The lack of a common treasury is now in the process of being remedied, first by a rescue package for Greece, then by creating a temporary emergency facility, and – the financial authorities being a little bit pregnant – eventually by establishing some permanent institution.
Unfortunately, it is equally certain that the new arrangements will also be flawed.
Besides the lack of a common treasury, the euro suffers from other shortcomings, which the authorities do not seem to have fully understood. This complicates matters enormously.
The authorities are confronted by not only a currency crisis, but also a banking crisis and a crisis in macroeconomic theory.
The authorities are committing at least two mistakes.
One is that the bondholders of insolvent banks are being protected at the expense of taxpayers for fear of provoking a financial crisis.
This is politically unacceptable.
The Irish government elected next spring is bound to repudiate the current arrangements.
Markets recognize this, which is why the Irish rescue brought no relief.
Second, high interest rates charged on rescue packages make it impossible for weaker countries to improve their competitiveness vis-à-vis stronger ones.
Divergences will continue to widen, and weaker countries will continue to weaken indefinitely.
Mutual resentment between creditors and debtors is liable to grow, and there is a real danger that the euro may destroy the EU’s political and social cohesion.
Both mistakes can be corrected.
With regard to the first, emergency funds ought to be used to recapitalize the banking systems, as well as to provide loans to sovereign states.
The former would be a more efficient use of funds than the latter.
Properly capitalizing the banking system would leave countries with smaller deficits, enabling them to regain access to capital markets sooner.
It is better to inject equity into the banks now rather than later, and it is better to do it on a Europe-wide basis than leave each country to act on its own.
This would create a European regulatory regime.
Europe-wide regulation of banks encroaches on national sovereignty less than European control over fiscal policy.
And European control over banks is less amenable to political abuse than national control.
With regard to the second problem, the interest rate on rescue packages should be reduced to the rate at which the EU itself can borrow on the market.
This would have the advantage of developing an active Eurobond market.
These two structural changes may not be sufficient to provide the eurozone countries in need of rescue an escape route from their predicament.
Additional measures, such as “haircuts” for holders of sovereign debt, may be needed.
Having been properly recapitalized, banks could absorb this, and two obvious mistakes that condemn the EU to a bleak future would be remedied.
Making the IMF and World Bank Work for the Poor
The World Bank has long proclaimed its dream of “a world free from poverty.”
Likewise, the International Monetary Fund may arguably desire “a world free from financial crisis.”
These are crucial and daunting objectives, but they are too narrow for the twenty-first century.
To remain relevant, the Bretton Woods institutions must fully adapt to the needs of the world’s rapidly emerging countries, and they can begin that process at this spring’s IMF-World Bank meetings in Washington.
As many now acknowledge, the IMF should look beyond managing financial crises and start addressing non-cooperative economic behaviors – notably in the monetary field.
The international community would gain from the IMF’s becoming a center of joint-monitoring and permanent dialogue among the world’s rich, poor and emerging nations.
But for that to happen, the latter two need a greater say.
Fortunately, such reform is at last on the agenda.
Last autumn’s IMF-World Bank meetings approved an increase in voting quotas for some of the most under-represented emerging economies: China, Mexico, South Korea, and Turkey.
A second round of adjustment will need to involve other fast-paced economies without crushing the voice of the poorest.
As for the World Bank, it does not need to “reposition” itself so much as to root itself in emerging countries, as does the development aid industry in general.
The international community must resist shortsighted calls to withdraw from middle-income nations on the ground that they could now “go it alone.”
When it comes to global governance, communicable diseases, climate change, or threats to biodiversity, these countries’ importance speaks for itself.
They account for 44% of people living with HIV/AIDS, 47% of global CO2 emissions, and 52% of the planet’s protected natural areas.
The international community simply cannot leave them to their own devices on such crucial issues without jeopardizing its own future.
Fighting poverty is a non-negotiable objective.
But it cannot be the sole purpose of international aid, nor of the World Bank.
In fact, a genuine commitment to poverty reduction implies working with these countries.
They are home to 70% of the population that lives on less than $2 a day, facing massive unemployment, gross inequalities, lack of infrastructure, regional imbalances, and a litany of other challenges.
Some critics argue that lending public money to middle-income countries is no longer necessary, due to their access to financial markets.
True, private capital flows have surged in the wake of global liberalization and these countries’ privatization schemes. But private capital flows have proven to be volatile and prone to sudden interruptions, as exemplified by the Asian and Russian financial crises of the late 1990’s, or more recently by investors pulling out from infrastructure sectors.
Another line of suspicion against public lending is that it crowds out private investment.
However, an increasing body of evidence documents the positive impact of public investment on productivity and economic growth.
It suggests complementarity rather than substitutability between private and public funds.
Detractors ultimately fall back on the argument that multilateral lending to middle-income countries is waning along with demand.
But, while loan volumes have decreased by a third since the last financial crisis, this is only a return to normalcy.
After an all-time high due to emergency aid to countries like South Korea or Argentina, lending is back to its trend line of around $25 billion a year.
While lending by the World Bank did fall below its mid-1990’s level, it is growing again, reflecting the expansion of regional multilateral banks and a policy pendulum that is swinging back to publicly-financed infrastructure projects.
This does not mean that business as usual should be good enough for the World Bank.
Its products need to be adapted.
With decentralization taking place in many emerging economies, sub-national authorities are taking on more responsibilities.
The Bank should be able to work with them in the absence of sovereign guarantees, and increase its loan offerings in local currencies, since these partners cannot afford currency risk.
To further “crowd in ” the private sector, insurance and guarantees can help.
Beyond this, more financial engineering is needed to draw upon the creativity of financial markets.
Finally, as David de Ferranti, a former World Bank vice-president, has pointed out, the Bank should expand its intellectual partnerships and engage with the highly trained professionals, consulting firms, and research institutions that emerging countries now boast.
The Bank must be open to local invention if it is to be accepted by and relevant to middle-income nations.
In terms of purchasing power parity, per capita income in middle-income countries is still about 15% of that of developed nations.
The time has not yet come to shake hands and part company.
Convergence is on the way, but minimizing its global costs requires redesigning the Bretton Woods institutions to meet the challenges faced by emerging countries.
Malaya and Sri Lanka: Communal Politics or Communal War?
Sri Lanka's bitter war of terror - one that practically invented the infamy of the suicide bomber - had been showing signs of abating of late.
But a bitter power struggle between Sri Lanka's President Chandrika Kumaratunga and Prime Minister Ranil Wickremesinghe, and a schism among the rebel Tamil tigers, now threatens to reignite the violence.
Their political duel was aggravated recently when the President, wary that her prime ministerial rival was "too soft" in dealing with the rebel Tamil Tigers, sacked three ministers and took over their portfolios.
Now she has dissolved parliament and set new elections for April, three years before they are due.
Having lived through the Malayan war of 1947-1960, I often wonder why Sri Lanka's war has been so much more difficult to end.
On the surface, much about those two wars seem similar.
In Malaya, ethnic Chinese fought British and Malay regiments and police, which is roughly comparable to the Tamils' fight against the Sinhalese in Sri Lanka.
Like the Tamil Tigers, the Malayan Communists were also damned as terrorists, but the casualties they inflicted were small compared to the mass killings caused by both sides in Sri Lanka's war.
Back then, Malaysia's ethnic tensions produced communal riots in which both Chinese and Malays were killed.
These, however, were never allowed to degenerate into the outright communal slaughter that the war in Sri Lanka has often produced.
Could Sri Lanka have learned anything from the Malayan experience?
Could the Malayan military strategy to contain the rebellion have been imported?
British experts from the Malayan emergency tried to help the Americans in Vietnam - obviously without success.
Of course, one reason for that failure is that the South Vietnamese were not different enough from the North Vietnamese for the Malayan formula of identifying and isolating rebel communities by race to work.
But Sri Lanka's war, with its ethnic origins, is closer to the Malayan experience and so this strategy could, perhaps, have been tested.
A second similarity comes from the fact that the British were the imperial power in both countries.
At independence, national leaders in both countries inherited similar sets of laws and administrative practices.
Indeed, at the time Ceylon (now Sri Lanka) achieved independence, it was far more committed to democracy and the common-law legal system than Malaya.
So why did multi-communal politics ultimately work in Malaya, and then in both Malaysia and Singapore, and fail so badly in Ceylon?
One key reason must be the historical experience of the Sinhalese. For two thousand years, they had to defend themselves against attacks by expansionist Tamil kingdoms from the Indian mainland.
As I traveled around the island admiring its ancient capitals, notably the ones sacked by Tamil kings, and Buddhist shrines set up to counter the impact of Hinduism, I began to understand the traumas endured by the Sinhalese.
Sadly, the Tamils now living in the Jaffna districts in the northern and eastern parts of the island are probably descended from Tamils who were also victims of the same external attacks.
Another factor arose from the fact that Tamils, on the whole, had been open to a succession of Portuguese, Dutch, and British administrations from the 16th century onwards, while most Sinhalese lived under their own king in the Kandyan kingdom until the 19th century.
In particular, the Buddhist priests, who are the guardians of the faith and have wielded much influence in Sri Lanka politics since the mid-1950's, were the least touched by foreign rule.
They are determined to limit Hindu Tamil power in Sri Lankan affairs and encourage the country's leaders to make few concessions to Tamil autonomy.
Furthermore, the degree of rigidity in inter-ethnic negotiations since the rise to power of the Bandaranaike family (of which the current President is a member) was accompanied by a series of ideological struggles among Sinhalese politicians, not least those led by various socialist and communist parties.
This ongoing disunity among the Sinhalese contributed to making Sri Lanka's governments much more fragile than those that succeeded the British in Kuala Lumpur and Singapore.
What was decisively different between Ceylon and Malaya, however, is found in the fact that, in Ceylon, both major communities consider themselves to be natives, having both lived on the land they hold for over twenty centuries.
In contrast, the Malay Peninsula, including the island of Singapore, was the land of the Malays (Tanah Melayu) before the first Chinese and Indian immigrants came and settled there.
The British, who did not depose the Malay rulers as they did the Singhalese king in Kandy, made sure that the native position of the Malays was constitutionally secure from the start.
Once the Chinese recognized their place as newcomers, they had to accept that becoming full nationals of the new nation state was a status that needed to be earned.
Although most Chinese in Malaysia now feel that they deserve the full rights of citizenship, they have not insisted on absolute equality.
In any case, they never claim to be indigenous to any particular locale, not even in Singapore, where ethnic Chinese make up three-quarters of the population.
Sri Lanka's tragedy reminds us how many things can go wrong when old Asian polities seek to establish modern nation states.
It becomes even more difficult when the complex historical baggage calls for sensitivity and tolerance while the protagonists are determined to see every concession as surrender.
Malaysia Goes Islamic
SINGAPORE – In Malaysia’s current political climate, it is no longer possible to distinguish Islamic radicals from Islamic moderates.
Despite official boasting about the country’s diverse population and commitment to pluralism, Islam and the government have essentially merged.
For two decades, the ruling United Malays National Organization (UMNO) government invested enormous public resources in building up a network of Islamic institutions.
The government’s initial intention was to deflect radical demands for an extreme version of Islamic governance.
Over time, however, the effort to out-do its critics led the UMNO to over-Islamicize the state.
The UMNO’s program has put Sharia law, Sharia courts, and an extensive Islamic bureaucracy in place, a collective effort that has taken on a life of its own.
The number of Islamic laws instituted has quadrupled in just over ten years.
After Iran or Saudi Arabia, Malaysia’s Sharia court system is probably the most extensive in the Muslim world, and the accompanying bureaucracy is not only big but has more bite than the national parliament.
Islamic laws in Malaysia are based on religious doctrine but codified and passed as statutes by state parliaments.
Not much debate attends their enactment, because a fear of heresy keeps most critics from questioning anything deemed Islamic.
While the UMNO still trumpets its Islamic advocacy, the party is facing difficult choices, particularly as it wishes to maintain foreign investment in an increasingly polarized environment.
For example, Minister of Home Affairs Hishamuddin Hussein recently held a press conference to support Muslims who demonstrated against the construction of a Hindu temple in their neighborhood.
The protestors paraded a severed, bloodied cow’s head in the street, then spat and stomped on it.
This was an offense to Malaysia’s Hindus, who consider the cow a sacred animal.
Just a week earlier, a young mother by the name of Kartika was sentenced by Malaysia’s Sharia court to six lashes by cane and fined $1500 after she was caught drinking beer at a hotel.
Although the sentence is still in limbo, Hussein publicized his acceptance of the punishment by inviting the official floggers to his office to demonstrate how an Islamic caning would be carried out.
They used a chair as a mock target, leaving him satisfied that Islamic caning can be appropriately used as a punishment for women.
Ironically, Hishamuddin Hussein is far from an Islamic hard-liner.
The son of Malaysia’s third prime minister and a cousin of the current prime minister, he is widely considered modern, moderate, and cosmopolitan.
A true hard-liner is Nik Aziz, the chief minister of Kelantan state, who is also the spiritual leader of Malaysia’s largest Islamic party, PAS, which now controls two state governments.
However, Aziz opposed the anti-Hindu protest, even calling a group of anti-Muslim protestors in the United Kingdom more civilized in their approach.
Hence, it is no longer accurate to think of the PAS as a fundamentalist party and the UMNO as moderate.
Party strategies are leading them in unexpected directions.
The UMNO’s more radical turn is being matched by the PAS’s attempts at moderation.
The PAS is aiming for the most unlikely of voters: non-Muslims, who account for 40% of Malaysia’s population and are increasingly alienated from the UMNO.
The UMNO, meanwhile, is intent on dividing the opposition coalition, of which the PAS is a member.
The coalition is currently led by former Deputy Prime Minister Anwar Ibrahim, and has picked up political momentum from real gains in last year’s general election.
Concerned by its losses, the UMNO has staked a claim to the defense of Islam in Malaysia.
The “cow head” protest, which was led by UMNO members, quickly fuelled racially-charged manipulation of public sentiment.
The formula is simple: portray Islam as being threatened by infidels, and then have the UMNO ride to the rescue of the besieged Muslim community.
The caning of Kartika, on the other hand, is not an example of political manipulation, and for this reason is perhaps even more worrisome.
Her sentence was roundly supported by modernist Muslim intellectuals, who insisted that the punishment was justly applied and cannot be questioned because it has divine sanction.
These are not politicians, but former idealists who are happy that their goals of Islamicizing the state are being realized.
Most are anti-UMNO and support the PAS.
As a result, the UMNO finds itself squeezed between an Islamic lobby that presses for greater “Talibanization” of the country and the rising voices of international critics, who cannot be ignored, because the party needs both radical supporters and foreign investors to stay in power.
Balancing these two constituencies is becoming increasingly difficult for the UMNO.
Islamic politics has now taken on a life of its own.
But the opposition will also be forced to figure out the role of religion in Malaysia, if ever they get an opportunity to form a government.
As a young Islamic radical, Anwar Ibrahim used to ask: How does one Islamicize government? Now he has to figure out how one governs it.
Malaysia’s Opposition Reborn
In Malaysia’s recent elections, opposition parties managed their strongest showing since the country gained its independence from Britain in 1957, cutting the ruling coalition’s parliamentary majority to below two-thirds.
Where the country’s newly invigorated democracy goes from here rests with one man, Anwar Ibrahim, the deputy prime minister sacked by former premier Mahathir Mohamad and later jailed.
Anwar can finally make the opposition a credible check on the National Front ruling coalition, but knows that he will never become prime minister this way. No one, after all, expects the opposition to win enough seats to form a government in the conceivable future.
He can allow himself to be wooed back by his former party, the United Malays National Organization (UMNO), the National Front’s leading member.
UMNO is widely believed to have held talks with Anwar before.
Now, more than ever, it needs Anwar to reestablish its credibility.
And, to become prime minister, Anwar needs UMNO.
Arguably, being inside UMNO and the government would allow Anwar to better institute the reforms he has so ardently advocated.
But, before all that, Anwar needs to get himself elected to parliament again.
Because of his prison term, Anwar was not able to run in the latest election.
Instead, he acted as the de facto leader of a loose alliance between the three leading opposition forces – the Democratic Action Party (DAP), the Justice Party, and the Islamist PAS.
Political restrictions on Anwar, however, end next month, and an MP from his Justice Party – probably his wife – is expected to step aside to allow him to run in a by-election.
If Anwar were to marry his leadership and charisma to the opposition’s newfound heft in the federal legislature – 82 MPs, compared with 20 in the last parliament – serious policy alternatives to the government’s might be expected.
Until now, the opposition has chiefly acted as an irritant, and voters viewed debates as entertainment, rather than as exchanges that informed policy.
For the same reason, policy platforms have never been important for the opposition in elections.
Many who voted for the DAP on Saturday, for example, are unlikely to have known or cared about what the party stood for. Traditionally, people voted for the DAP or the Justice Party to show their displeasure with the National Front.
Indeed, if ideas were important, a leftist party like the DAP would have found it difficult to cooperate with the PAS.
But cooperate they did.
All this changes now that the National Front no longer has a two-thirds majority – which had allowed it to amend the constitution 40 times in 50 years.
Parliament now will have to pay attention to any serious policy that the opposition proposes.
But serious opposition will require serious leadership.
Strong leadership also is needed to protect the interests of the five states in which the opposition has now won control for the first time.
Because the federal government disburses fiscal allocations to Malaysia’s 13 states, the government will be tempted to squeeze opposition-held states.
Thus, they will need strong advocacy at the federal level to ensure they receive their fair due.
What makes the National Front’s loss particularly dramatic has been its defeat in the state legislatures of Penang, Selangor, Perak, and Kedah – large states with important industrial bases.
(Kelantan state, however, was always expected to continue to be held by PAS.)
Urban and middle-class voters such as those in Penang – a predominantly Chinese state with strong opposition sentiment – had always voted to keep the state legislature under the National Front in order to ensure continued funding, while sending opposition candidates to parliament to “pester” the National Front there.
This calculation has been abandoned, reflecting deep dissatisfaction with Prime Minister Abdullah Badawi’s administration and impatience for change.
Malaysia is now at a crossroads.
For five decades, its democracy has not been premised on a daily test of ideas – whether between political parties or through grassroots engagement – that is then confirmed at the ballot box.
There is still a newfound opportunity to improve governance, but only Anwar has the experience to provide that direction, because no one else in the opposition has worked in government at such a senior level as he has.
That said, it is also likely that the UMNO, in its hour of crisis, will try to recruit Anwar.
Arguably, the best legacy Anwar might eventually leave Malaysia would not be what he can achieve for the UMNO and the National Front, but what role he might play in entrenching a contest of ideas into Malaysian politics – a project he has shown himself keen to promote.
Managing China’s Crisis Management
BEIJING – China’s “Central Economic Work Meeting,” comprising top government decision makers, recently chose to continue the expansionary fiscal and monetary policy launched in the last quarter of 2008.
But it also called for greater emphasis on transforming China’s development pattern and rebalancing its economic structure.
The move thus signaled the start – well ahead of other countries – of China’s “exit” from crisis-driven economic policies.
Indeed, China should accelerate its change of course.
While expansionary policies have succeeded in ensuring a V-shape recession, their medium and long-term effects are worrisome.
First, China’s crisis management has made its growth pattern, marked by massive investment demand, even more problematic.
China’s investment rate is extremely high in comparison with other major economies, and has been increasing steadily since 2001, creating first overheating and then overcapacity.
Until the global financial/economic crisis that began in 2008, however, strong export performance concealed China’s overcapacity problem, which, thanks to the stimulus package, is now set to become more serious.
Indeed, China’s investment rate may have surpassed 50% in 2009.
Second, China’s external imbalance may also worsen.
Trade and exports accounted for 67% and 37% of the country’s GDP, respectively, before the global crisis, but have since fallen significantly.
And yet reliance on external demand remains fundamentally unchanged, even as the contribution of net exports to GDP growth has turned negative.
In fact, worsening overcapacity, together with all the many types of price distortions still in place, may push Chinese enterprises to boost production for export markets, like the United States, where protectionist tendencies are likely to intensify in 2010 and onwards.
Third, China’s financial stability and fiscal position may deteriorate in the medium term.
The government, well aware of the overcapacity problem, focused the country’s stimulus package on investment in infrastructure, rather than new factories.
But infrastructure is a long-term investment, revenues from which will be lower without accompanying investment in manufacturing capacity.
An eight-lane highway must carry traffic to generate tolls.
Moreover, due to hasty and poorly supervised implementation, waste in infrastructure construction can be serious.
With an investment rate of 50% and a GDP growth rate of 8%, the incremental capital-output ratio could be higher than six, compared to 4.1 in 1991-2003, implying not only low efficiency, but also the possibility of a significant increase in nonperforming loans.
Finally, monetary policy has been far too loose.
Unlike the US, China did not suffer from a liquidity shortage and a credit crunch during the global financial crisis.
Thus, low interest rates and non-market interference, rather than demand from enterprises, fueled explosive credit growth in the first half of 2009, surpassing the full-year target.
If commercial banks had been allowed to base lending decisions solely on economic considerations, credit and money supply would have grown more slowly, limiting the risk of rising bad-loan ratios, stalled enterprise reform, inflationary pressure, and a resurgence of asset bubbles as excess liquidity enters equity and real-estate markets.
Indeed, China’s housing prices have been skyrocketing in recent months.
The government was too generous in helping revive real-estate demand, and, overwhelmed by fear of the negative impact of falling asset prices on economic growth, has been too cautious in dealing with bubbles when they have reappeared.
With the housing sector accounting for 10% of GDP and investment in real-estate development accounting for 25% of total fixed investment, any decision to rein in runaway housing prices will be difficult.
All in all, the negative impact of the Chinese government’s crisis-management measures on China’s long-term growth may be serious if the authorities fail to tackle the economy’s structural problems head on.
But it is also worth noting that the government is well aware of the problems, and has begun to take measures to put structural adjustment back at the top of the policy agenda.
In 2010, for example, the government may seek to stimulate domestic consumption by making income distribution more favorable to the household sector relative to the enterprise sector, and by providing more public goods to reduce households’ precautionary savings.
Certainly, without a more equitable income distribution, official talk of creating a “harmonious society” will sound empty.
Furthermore, the government should continue to eliminate price distortions by creating more flexible mechanisms, including for the exchange rate.
The government’s goal should be to succeed not only in reviving the economy, but also in reversing the deterioration of China’s structural problems, thereby laying a solid foundation for economic growth in the future.
In this respect, the Chinese have good reason to be optimistic, for their country has defied predictions of economic demise repeatedly over the past three decades.
Managing Iraq\u0027s Oil
In recent months, Iraq's oil production has grown to more than two million barrels per day.
At this rate, current oil output and oil exports now exceed post-invasion predictions.
Experts had argued that funding shortages, lack of security, the problems of stabilizing a legitimate government, and technology shortfalls would severely limit Iraq's output.
Despite the odds, Iraq's daily output reached a post-invasion record of 2.5 million barrels in March.
A number of factors enabled Iraq to increase its output.
Most significantly, the Bush administration gave Iraq $2.3 billion to restore its oil production.
After the invasion, no one expected Iraq to get loans, let alone outright grants.
Instead, $2.3 billion was invested directly into the Iraqi oil sector.
To protect the oil fields and other facilities, the Americans dedicated a massive, overwhelming force of soldiers and private contractors.
The level of protection was unprecedented even compared to Saddam's regime.
On the technical side, the Bush administration hired the world's best oil service companies to revamp Iraq's technologically challenged oil fields.
They still have a long way to go, but significant improvements are already evident.
Moreover, the war didn't change the quality of Iraqi fields, which are still among the richest in the world and can produce oil with relatively little effort and investment.
Finally, high oil prices in the past 12 months provided an unexpectedly large windfall to the Iraqi budget, allowing for the financing of other sectors without slighting the oil industry.
High prices also enabled the Coalition Provisional Authority to add even more private security personnel to protect refineries and pipelines.
Granting Iraq the money to restore its oil industry was one of the best post-war decisions that the Bush administration has made.
The money allowed Iraq to begin to address security, production, and technology issues throughout its oil system.
But the question remains: will output growth continue following the transfer of sovereignty to an Iraqi government at the end of June?
Despite massive injections of funds and unprecedented security, insurgents have still managed to halt or reduce oil production and exports several times since the invasion.
The bombing of a pipeline or other oil facility somewhere in Iraq remains almost a daily occurrence, and the transfer of power has not reduced these attacks so far.
Like the Bush administration and Saddam himself, the insurgents understand that whoever controls Iraqi oil controls Iraq's destiny.
The new Iraqi government, even supported by US military might, will simply not be able to guarantee a predictable flow of oil, and output will remain quite volatile.
At the same time, maintaining the flow of funds into the Iraqi oil sector is essential, not only for its growth, but for its very survival.
Money brings technological regeneration as well as security.
Under even the best circumstances for Iraq, with oil prices remaining high, the funds available to maintain and modernize the oil industry are limited.
If oil prices decline in the future, the oil industry will suffer severely.
This makes for an interesting relationship between Iraq and Saudi Arabia.
Only Saudi Arabia can manage the global output of oil in such a way that will make room for Iraqi oil and keep prices high.
In contrast, only Saudi Arabia can flood the market and reduce prices far below their current level.
A decline in oil revenues could be devastating to the fledgling Iraqi government.
Current oil revenues are barely enough to cover state expenses, let alone pay for reconstruction, debt, and war reparations.
Even if President Bush wins reelection, it is highly unlikely that the US will make another outright grant to a sovereign Iraq.
Theoretically, international loans could be an alternative, but who would lend to an unstable government, let alone a government whose legitimacy has not been fully established?
Likewise, privatization is out of the picture for now.
The new government will have to make do and chart a slow path for its oil recovery, just as Saddam's regime did.
At the same time, the logic of renewed American support for the Iraqi oil industry remains powerful.
Normal financing is not forthcoming.
Only grants from the US will reduce output volatility.
Saddam's regime caused most of the volatility in the oil market in the last 30 years.
In fact, every peak in oil prices since 1973 was caused by an event related to Iraq.
One would hope that his removal would reduce market volatility and stabilize oil prices.
Unfortunately, Iraq appears set to continue to be a major source of high oil prices, owing to highly erratic output.
For the foreseeable future, one of the principal outcomes of the invasion of Iraq will be greater volatility and thus higher prices.
Managing Risk to Save the Poor
The G-8 finance ministers have agreed to cancel $40 billion of debt owed by eighteen of the world’s poorest countries.
This is a triumph for common sense. But, at only $238 per person in the eighteen countries, debt relief alone is hardly enough to help the poor.
Fortunately, other efforts will complement the developed countries’ increased generosity.
The most notable is a significant movement towards providing finely focused risk-management services to the poor, which could ultimately prove to be worth far more than $40 billion.
We tend to think that new risk-management products, such as novel types of insurance or financial derivatives, will primarily interest the rich, or at least relatively wealthy people.
In fact, new risk-management products are being developed for some of the poorest people in Africa, Asia, and Latin America.
It is important to recognize that the world’s poorest people are not the same people from year to year.
Good fortune and bad fortune alternate randomly, and the poorest people are particularly vulnerable when misfortune – like a hurricane in a fishing village – strikes.
So risk management, by smoothing out bumps in income, can be extremely important in alleviating the effects of poverty.
Moreover, if unmanaged, risk destroys the prospect of economic growth.
Without risk management, poor people will not experiment with new crops or more productive methods, because any mistake could be disastrous.
For example, in subsistence rural areas, a bad harvest may lead to starvation before the next year’s crop is in.
More typically, it leads “merely” to a sudden collapse in the economic base, leading to years of hardship in the future.
If a poor family in subsistence farming receives no help during the year after a bad harvest, its members may eat their beasts of burden, cut down the trees that provide nutrients to the soil, sell whatever farming equipment they have, and even eat the seeds that were set aside for planting the following season.
Providing money when it is needed is essential.
Unfortunately, according to Joanna Syroka of the World Bank’s Commodity Risk Management Group, official foreign aid and private charity tends to arrive too late, often after starvation has actually begun, and long after the families have taken extreme measures, consuming their capital to survive.
While the aid may keep them alive, they are left economically paralyzed for years to come.
Syroka and her colleagues are striving to promote the use of modern financial technology to make sure that aid arrives in time – and in sufficient volume – to avert such outcomes.
The old tool for managing farmers’ risks is crop insurance, which responds directly to the failure of a crop.
But crop insurance suffers from what economists call a “moral hazard,” because it reduces farmers’ incentives to ensure the crop’s success.
The farmer may neglect the crop or refuse to invest in saving a failing crop if he knows that a payout is forthcoming.
The farmer may even plant a crop that he knows will fail.
This is why private crop insurers are in short supply, and why crop insurance often requires expensive government subsidies.
But insurance technology is improving, aided by improved information technology.
The moral hazard implicit in crop insurance can be addressed by making payouts depend not on the actual crop failure but on the bad weather that caused it.
Since the farmer cannot influence the weather, there is no moral hazard.
In the past, weather insurance could not manage a farmer’s risk effectively because we could not measure well enough the effects of weather on crops.
For insurance to be effective as a risk-management device, weather must be measured at a finely-detailed local level, and the correct measurements must be taken at the correct time.
Crops are especially vulnerable at certain times, for example, when seeds begin germinating or when bad weather the previous year puts perennials at risk.
Today, weather insurance uses an expanded number of sophisticated weather stations and deep knowledge of the science of agriculture to measure weather’s effects on local agriculture.
Different crops are affected differently, and weather insurance must take account of a farm’s various crops and when they were planted – complexities that modern information technology can solve.
Many companies are already involved in offering improved weather insurance to poor farmers, with notable successes from ICICI Lombard and BASIX in India, and from the International Finance Corporation and the insurance company Credo Classic in Ukraine.
Similar work is underway in Africa, led by the World Bank and in Central America various countries’ governments are collaborating with the Inter-American Development Bank and the Central American Bank for Economic Integration.
The number of agencies and governments involved in the movement towards sophisticated risks management for the poor is inspiring.
At the same time, the application of risk-management technology, insurance, and finance requires little of stretched foreign-aid budgets: a relatively small number of office workers, cell phones, and computers.
With the ongoing revolution in information and communications technology, the phones and computers will cost less and less, even as the costs of many commodities needed for development grow.
Jeffrey Sachs’s new book The End of Poverty argues that with proper help from advanced countries the world could see the end of poverty as we know it in coming decades, prompting some to describe him as a starry-eyed idealist.
But if we take account of both the increased generosity of rich nations and the application of improved financial and insurance technology, he just might be right.
Managing the Earth
Sometime in the next twenty years, the relationship between human beings and the natural world is going to change, profoundly and forever.
It won't happen suddenly, but current scientific developments will make change inevitable.
Like it or not, ready or not, these scientific developments are putting us on the road to becoming the managers of the global ecosystem, rather than just a participant in it.
I like to think about this coming revolution in historical terms. For most of the three and a half million years that beings we might call "human" have walked the Earth, they were unambiguously part of the natural system.
The iron laws of evolution governed their survival, and those who couldn't compete died early and were soon forgotten.
Our only defenses against a hostile world were primitive stone tools and fire - a minimal kind of protection at best.
Then, about 10,000 years ago, something extraordinary happened.
Somewhere in the Taurus mountains in what is now Turkey, a group of people, probably women, began to develop a new set of technologies that would change the way that human beings interacted with their environment.
We call these technologies "agriculture," and, for the first time, they gave human beings the power to move outside the laws of natural selection.
No longer would our ancestors have to content themselves with the food that nature offered - they could start to grow their own, far surpassing nature's meager supply.
Since the birth of agriculture, human history has been a steady progression of further liberation from the restraints of nature.
Instead of generating power using human and animal muscles, we developed machines that could liberate sunlight stored in coal and oil.
Instead of relying on natural defenses against diseases, we developed antibiotics and the other tools of modern medicine.
The result is that human beings are no longer really a part of nature - the survival of our species no longer depends on our ability to compete in the Darwinian jungle.
We depend on our social structure and technology, rather than on our genes.
Today, we are poised to take another giant step, one that will bring us back into the natural system of our planet rather than remove us farther from it.
For the first time in history, we are starting to understand how the living things around us work, how all the pieces fit together.
Some of these advances are theoretical, allowing us to build computer models of complex systems like continent-wide forests or entire oceans.
Others are more mundane, involving long-term experiments and observation of smaller ecosystems, such as plots of prairie grass or swamplands.
Finally, of course, we have the spectacular advances in our knowledge of genomics, the science that lets us understand the basic mechanisms that operate inside all living systems, including humans.
Together these new areas of science will allow us to manage the ecosystems on our planet, predicting the effects of human interventions, anticipating the flow of natural cycles.
We truly have the power to become the managers of planet Earth.
This is not a responsibility we can shirk.
The analogy I like to use involves the homely example of caring for a suburban lawn.
You can decide to mow the grass, in which case you produce one kind of ecosystem, one kind of future.
Or you can decide not to mow the grass, in which case you produce another kind of ecosystem, another kind of future.
Either way, your actions determine what happens to the lawn.
The one thing you cannot do is fail to decide.
No matter what you do, even if you decide to do nothing, the future of the lawn depends on you.
In fact, our relation to the planet will be like that of a gardener to a garden.
The gardener doesn't destroy his plants indiscriminately, but he does regularly pull up weeds.
The gardener doesn't "conquer" his or her plants, but studies them to produce the garden that is desired.
Most importantly, the gardener does not manage the garden for the sake of the plants, but for some other goal - to raise food, produce flowers, or just to look pretty.
In the same way, human beings are on the brink of being able to manage the planet, and the decisions we make will determine what the future of the planet will be.
Given the phenomenal rate at which science advances these days, it is not too early to start thinking about how we are going to handle this awesome new responsibility.
The People Chase
LONDON – When it comes to talent, CEOs agree: while there have never been so many educated and mobile people in the world, recruiting the right ones – and getting them to where they are needed most – is more difficult than ever.
This challenge comes up time and again in my conversations with business leaders around the world.
And it was also one of the key findings of PricewaterhouseCoopers’ recent Global CEO Survey.
Over half of the CEOs surveyed by PwC – and 62% in the Asia-Pacific region, home to the world’s largest workforce and fastest-growing economies – said that being unable to find key skills could hurt their ability to grow.
The reason is a chronic skills gaps and a mismatch between supply and demand.
The rise of emerging markets is creating jobs in places where it is hard to find the right people.
International and local competition for workers who do have the right skills is growing increasingly intense.
New kinds of jobs are being created – in old and new industries – for which many recent university graduates are poorly equipped.
And the demand is not limited to technical know-how; companies are looking for international experience, wide-ranging “soft” skills, and adaptability.
Meanwhile, demographic trends, particularly in developed economies, are causing the workforce to shrink and giving rise to a new generation of employees with different expectations.
The labor pool is getting smaller as people age and birth rates fall.
And highly demanding young people, weaned on technology, have a much different perspective on work, flexibility, and rewards.
Retention is also a major problem in many countries, particularly in emerging markets.
Spiraling compensation is partly to blame for job-hopping, but loyalty is falling for other reasons as well.
There is no easy solution to these problems.
Tapping into under-used areas of the labor pool – like women and older workers – can help companies as they face the talent crisis.
But, while more and more companies are investing in diversity and inclusion, they are still struggling to get real results.
One thing is certain: to meet these challenges, companies cannot keep doing what they have done before.
Business leaders need to think more strategically about how they manage their workforce – fueling planned growth with the right people, who have the right skills, in the right locations.
This sounds like a simple plan, but implementing it in our interconnected global marketplace is increasingly difficult.
Better workforce planning is a start.
This can help businesses to make informed decisions about what resources they need and what is available in which locations.
A deep understanding of, and respect for, what employees genuinely value is a vital step toward shaping an organization that attracts, motivates, and retains the best talent, at every level, in every location.
Another important step is to forge ties with the providers of new talent – schools, universities, and apprenticeship programs.
The traditional education curriculum is not keeping pace with change or meeting the needs of business; but effecting change requires business leaders to engage fully with educators and policymakers.
There are signs that things are changing for the better.
Companies are starting to take a longer-term, strategic approach to closing the gap between what they have, what they need, and what’s out there.
This includes focusing at the leadership level on good succession plans, mobility strategies, and diversity programs – not relegating these initiatives to a business-planning afterthought.
Undertaking this kind of analysis and forecasting becomes even more crucial when companies enter new markets where different risks (for example, local skills shortages, high turnover, or soaring costs) can easily mean the difference between success and failure.
As the alignment of personnel strategies with business goals become more critical, the role of human-resources issues grows in significance.
Talent plans become an integral element of business plans.
I will be moderating a session at the 2013 World Economic Forum Annual Meeting in Davos called “The Human Capital Context.”
The session will look at the strategic shifts and transformational issues that are making human-resources challenges a central concern for companies.
The session will address the true depth of the talent problem, the structural nature of youth unemployment, and the impact of technology on workforce education.
It promises to be an interesting, lively, and significant debate.
The Unbearable Lightness of BMI
KIEL – Now is the time of year when many people most dread stepping onto the bathroom scale.
But, while all of that holiday feasting may have led to greater girth, how should we understand what higher or lower body weight means?
The body mass index (BMI) has long been used in epidemiology, medicine, and nutritional sciences.
But its value is increasingly being questioned, especially in obesity research, where body-composition measurements are proving to be far more relevant.
The BMI is calculated by dividing a person’s body weight in kilograms by the square of his height in meters (kg/m2).
First named after the Belgian astronomer, mathematician, and statistician Adolphe Quetelet, who demonstrated in 1835 how adult weight normally increases in proportion to height squared, the index provides a measure of body weight, independent of stature, allowing us to compare the weight of short and tall people.
In 1972, an American scientist, Ancel Keys, working in the area of human nutrition, public health, and epidemiology, renamed it the BMI after finding that its values also correlated with body fat mass as derived from skin-fold or body-density measurements.
However, recent findings have cast doubt on the BMI’s value.
For example, although the BMI is associated with fat mass in obese people, there is little or no association with that of normal or underweight individuals.
At any given BMI score, fat mass varies widely, and other variables, such as gender or age, further distort findings, with greater increases in fat mass per BMI unit seen in women and in the elderly.
Although the BMI is an unscientific way to characterize a person’s nutritional status, it is nonetheless used as a measure of total body fat mass in medical practice and epidemiological studies, not least because it is easy to calculate and document regularly in personal health records.
Typically, doctors use it to categorize patients as “underweight” (a BMI value below 18.5), “normal weight” (18.5-25), “overweight” (25-30), or “obese” (above 30).
This categorization is determined by data drawn from the general population and based on the assumption that there is a higher risk of metabolic or cardiovascular disease found at the high end (and sometimes the low end) of the BMI scale.
Although recent studies suggest that high BMI scores do not necessarily increase risk of death, doctors find the BMI categories a useful basis for prevention and treatment.
Such usage, however, has serious limitations.
Because the index is calculated from two biological measures (weight and height), the resulting score has no biological meaning in itself.
Thus, studies of the genetics of obesity that are based on a relationship between certain genetic markers and the BMI are also meaningless.
In fact, the use of the BMI is likely to obscure our understanding of genetic effects on body weight.
This is because body weight is the sum of our organs and body tissues; and each organ or body part has its own regulatory (and thus partly genetic) basis.
We can understand more about organ and tissue masses, for example, or fatty infiltrations in individual organs like the liver and pancreas, by focusing on the nature of each body component, rather than by relying on an overall body score.
Indeed, the regulation of body weight overall is determined by the sum of the specific regulatory outcomes affecting individual body components.
Because individual body components are inter-related, control of body weight seems to occur in the relationships between tissues and organs, rather than within individual components.
Adjusting weight by height squared is also likely to yield a different outcome for different organs.
Although many body components do scale to height by a power close to two, others do not.
The brain, bone, and mineral mass scale to height by a power greater than two; while fat mass scales to height by a power of 1.8-2.6, depending on the population being studied and the means of measurement used.
In short, body weight and body fat mass may not scale to height by the same power.
This power may vary by population; and short and tall subjects with equal BMI scores, from the same population, may have a different body composition.
Further evidence supporting the use of body-composition analysis, rather than the BMI, comes from the metabolic heterogeneity observed within each BMI category.
For example, a subgroup of normal-weight subjects may have low subcutaneous fat mass but high visceral fat mass (“thin on the outside and fat on the inside”).
Despite their normal BMI, metabolically obese individuals – who may comprise as much as 24% of a normal-weight population – may be insulin-resistant and suffer increased cardio-metabolic risks.
Likewise, around half of overweight subjects, and 15-45% of obese subjects, appear to have a favorable metabolic profile (that is, no metabolic complications, inflammation, dyslipidaemia, or hypertension).
At a BMI above 30, these subjects are deemed “metabolically healthy obese.”
Like obese patients suffering from cardio-metabolic risks (the “metabolically abnormal obese”), they have high visceral and subcutaneous fat mass, though metabolically healthy obese patients sometimes have excessive body fat but lower fat infiltration in the liver and in skeletal muscle.
But the differences between the metabolically healthy obese and the metabolically abnormal obese are inconsistent.
And, though age, sex, ethnicity, waist circumference, physical activity, smoking, and alcohol consumption all correlate with metabolic phenotypes, the BMI is unable to distinguish between the two groups.
It would be unfair to say that the BMI has no clinical value; it can be a useful indicator of nutritional health in patients, and help doctors make day-to-day decisions about whom they should treat.
But one must turn to body-composition measurements for any serious epidemiological and etiological studies on obesity.
Man, Machine, and in Between
TÜBINGEN, GERMANY ­– We are so surrounded by gadgetry nowadays that it is sometimes hard to tell where devices end and people begin.
From computers and scanners to mobile devices, an increasing number of humans spend much of their conscious lives interacting with the world through electronics, the only barrier between brain and machine being the senses — sight, sound, and touch — through which humans and devices interface.
But remove those senses from the equation, and electronic devices can become our eyes, ears and even arms and legs, taking in the world around us and interacting with it through software and hardware.
This is no mere prediction.
Brain-machine interfaces are already clinically well established – for example, in restoring hearing through cochlear implants.
And patients with end-stage Parkinson’s disease can be treated with deep brain stimulation (DBS).
Current experiments on neural prosthetics point to the enormous future potential of similar interventions, whether retinal or brain-stem implants for the blind or brain-recording devices for controlling prostheses.
Non-invasive brain-machine interfaces based on electroencephalogram recordings have restored the communication skills of paralyzed patients.
Animal research and some human studies suggest that full control of artificial limbs in real time could further offer the paralyzed an opportunity to grasp or even to stand and walk on brain-controlled, artificial legs, albeit likely through invasive means, with electrodes implanted directly in the brain.
Future advances in neurosciences, together with miniaturization of microelectronic devices, will enable more widespread application of brain-machine interfaces.
This could be seen to challenge our notions of personhood and moral agency.
And the question will certainly loom that if functions can be restored for those in need, is it right to use these technologies to enhance the abilities of healthy individuals?
But the ethical problems that these technologies pose are conceptually similar to those presented by existing therapies, such as antidepressants.
Although the technologies and situations that brain-machine interfacing devices present might seem new and unfamiliar, they pose few new ethical challenges.
In brain-controlled prosthetic devices, a computer that sits in the device decodes signals from the brain.
These signals are then used to predict what a user intends to do.
Invariably, predictions will sometimes fail, which could lead to dangerous, or at least embarrassing, situations.
Who is responsible for involuntary acts?
Is it the fault of the computer or the user?
Will a user need some kind of license and obligatory insurance to operate a prosthesis?
Fortunately, there are precedents for dealing with liability when biology and technology fail.
Increasing knowledge of human genetics, for example, led to attempts to reject criminal responsibility, based on the inappropriate belief that genes predetermine actions.
These attempts failed, and neuroscientific pursuits seem similarly unlikely to overturn our views on human free will and responsibility.
Moreover, humans often control dangerous and unpredictable tools, such as cars and guns.
Brain-machine interfaces represent a highly sophisticated case of tool use, but they are still just that.
Legal responsibility should not be much harder to disentangle.
But what if machines change the brain?
Evidence from early brain stimulation experiments a half-century ago suggests that sending a current into the brain may cause shifts in personality and alter behavior.
And, while many Parkinson’s patients report significant benefits from DBS, it has shown a greater incidence of serious adverse effects, such as nervous system and psychiatric disorders and a higher suicide rate.
Case studies revealed hypomania and personality changes of which patients were unaware, and which disrupted family relationships before the stimulation parameters were readjusted.
Such examples illustrate the possible dramatic side-effects of DBS, but subtler effects are also possible.
Even without stimulation, mere recording devices such as brain-controlled motor prostheses may alter the patient’s personality.
Patients will need to be trained in generating the appropriate neural signals to direct the prosthetic limb.
Doing so might have slight effects on mood or memory function or impair speech control.
Nevertheless, this does not raise a new ethical problem.
Side-effects are common in most medical interventions, including treatment with psychoactive drugs.
In 2004, for example, the United States Food and Drug Administration told drug manufacturers to print warnings on certain antidepressants about the increased short-term risk of suicide in adolescents using them, and required increased monitoring of young people as they started medication.
Similar safeguards will be needed for neuroprostheses, including in research.
The classic approach of biomedical ethics is to weigh the benefits for the patient against the risk of the intervention, and to respect the patient’s autonomous decisions.
None of the new technologies warrants changing that approach.
Nevertheless, the availability of such technologies has already begun to cause friction.
For example, many in the deaf community have rejected cochlear implants, because they do not regard deafness as a disability that needs to be corrected, but as a part of their life and cultural identity.
To them, cochlear implants are an enhancement beyond normal functioning.
Distinguishing between enhancement and treatment requires defining normality and disease, which is notoriously difficult.
For example, Christopher Boorse, a philosopher at the University of Delaware, defines disease as a statistical deviation from “species-typical functioning.”
From this perspective, cochlear implants seem ethically unproblematic.
Nevertheless, Anita Silvers, a philosopher at San Francisco State University and a disability scholar and activist, has described such treatments as “tyranny of the normal,” aimed at adjusting the deaf to a world designed by the hearing, ultimately implying the inferiority of deafness.
We should take such concerns seriously, but they should not prevent further research on brain-machine interfaces.
Brain technologies should be presented as one option, but not the only solution, for, say, paralysis or deafness.
In this and other medical applications, we are well prepared to deal with ethical questions in parallel to and in cooperation with neuroscientific research.
Man or Monster?
PHNOM PENH &#45;&#45; The appearance of the first former Khmer Rouge leader in a special hybrid court established in Cambodia to bring that movement’s surviving leaders to justice provoked a question on which the tribunal’s integrity will depend: should an accused mass murderer be released from prison pending his trial?
Kaing Guek Eav, commonly known as “Duch,” presided over the deaths of more than 14,000 people at S-21, a former Phnom Penh high school turned into a torture center.
He is one of five former senior Khmer Rouge leaders who will be made to answer for their roles during Pol Pot’s genocide, in which an estimated 1.7 million Cambodians perished.
Until recently, Duch was the only one imprisoned, after being exposed in 1999.
The court – with its improbable blend of Cambodian and foreign judges and attorneys as well as laws – is meant to be a model for judicial reform and independent justice in a country where impunity has long been the rule.
The five red-robed judges who preside over the Extraordinary Chambers in the Courts of Cambodia (the tribunal’s official name) are the final arbiters of Duch’s detention, but the question they are now considering belongs as much to the people of Cambodia as it does to the court.
Should mass murderers be afforded the same rights as everyone else?
One of my aunts has a strong opinion on the matter.
Khmer Rouge soldiers beat her father to death, and she remembers being shot at for sport by communist cadres as she and dozens of other peasants scuttled up a mountainside. She now lives one block from S-21.
“Human rights are for humans,” she said emphatically when I asked her about Duch's case. “He is a monster.”
I once believed that, too.
When I first visited Duch’s house of horrors in 1990, I was 15 and full of wonder about the country where I was born but had never lived.
My family escaped the Khmer Rouge on April 17, 1975, the day they claimed victory.
When my mother and I journeyed home to reunite with relatives who had survived the genocide, S-21 (also known as Tuol Sleng) was among our first stops.
By then, the torture facility had been turned into a museum.
I remember feeling claustrophobic as I walked down its narrow halls and into classrooms turned into crude cellblocks.
The air was stale but heavy with the stench of death in interrogation chambers, barren save for a single bed frame, shackles, and a chair.
Flecks of dried blood peeled up from the floor.
This was a place where fingernails of countless victims were ripped out, where others were strung upside down and dunked in barrels of water, where many were brutalized with metal prongs and batons.
This was a place of utter brokenness.
This was Duch’s place.
Mostly, I remember the hundreds of black and white mug shots of prisoners and victims that covered every inch of the walls – a ghastly montage of human suffering that haunts me to this day.
I couldn’t help but think: this was somebody’s daughter, somebody’s son.
This was somebody’s mother or sister or brother.
Back then, I thought: What monster could do such things?
Now, that monster was sitting in a courtroom, looking scared and meek as prosecutors catalogued his alleged war crimes.
Sitting in the packed auditorium where snatches of Duch’s face flash by on a movie screen, I’m struck by what I see: a face that belongs to someone.
This alleged perpetrator of unspeakable misdeeds is, like his victims, someone’s son, someone’s brother, someone’s father.
This might have been only a fleeting thought had I not seen Duch’s family members, who attended the hearings.
Hang Seav Heang, 28, described the defendant as a gentle man, a good father.
One of his sisters said he was a caring, protective brother, and that she would always love him.
Outside the courtroom and in the community, most of the Khmers I talked to were, like my aunt, quick to categorize Duch as something other than human.
Duch must have thought much the same thing about his victims when he ordered them to their deaths.
When we start to see each other as less than human, we respond with inhuman acts.
It is this narrow, black-and-white view of humanity that has perpetuated a cycle of violence in Cambodia, where raging mobs beat to death robbery suspects and young mistresses suffer acid attacks by jealous wives.
To say that Duch is a monster who does not deserve rights ignores the gray area between good and evil, between man and monster, where anything is possible.
This trial is about that gray area, about that place in us all where morality decays and evil takes root and grows, the way mold prevails given the right conditions.
Each of us carries this potential for rot.
There is no dispute that Duch violated the rights of thousands of Khmers.
But if the basic premise of these trials is to uphold human rights, then we are obliged to extend that same principle to Duch.
What does it say to the country and the world if a court convened to mete out justice flouts the law?
Isn’t lawlessness the plague we are finally trying to eradicate in Cambodia?
The judges have offered no indication when they will make a decision.
And no one would blame them for taking their time to consider their options.
This is, after all, the court’s first test of fairness before the trials of Duch and four of Pol Pot’s other henchmen begin next year.
We all want justice, but that justice should not come at the cost of our humanity.
Man’s Fate/Man’s Hope
For quite a while now—certainly since the terrorist attacks on the US of September 11, 2001, and before as we watched the slaughters in Kosovo, Sarajevo, Srebrenica, Rwanda, and Congo on our televisions—the news has been dominated by war and rumors of war, by violent death and threats of violent death.
Everyone, everywhere is keenly aware of the power of our weapons.
From nuclear-tipped missiles down to trucks full of fertilizer or explosives worn as belts, we have used our technology to amplify greatly the dark parts of our nature as a violent—and not even a properly predatory—species.
I certainly do not want to downplay or dismiss this side of humanity’s history and our current events.
I do not want anyone to forget that over less than half of the years contained in the past century—from the outbreak of World War I to the famine that followed Mao’s “Great Leap Forward”—about one in every ten people alive on this planet was shot, gassed, stabbed, burned, or starved to death by his or her fellow human beings.
But that is not the whole story.
Indeed, the human abattoirs of the twentieth century—and even the slaughterhouses that various humans are preparing now—may not appear from the perspective of the future to be the most important part of our experience and condition, and of what our descendants will regard as their history.
For them, the most important features of what our experience may instead be:
· What UN demographers foresee as the end of the population explosion: the halting of the growth of the human population at ten billion or so around the middle of this century;
· The coming of a truly humane world as the numbers of those engaged in subsistence agriculture, or those whose wages are kept at subsistence-agriculture levels by labor market pressure from those who have migrated from the countryside into teeming cities, fall to a small fraction of human populations.
For most of the twentieth century, large chunks of the world remained desperately poor for one or more of four related reasons: (1) criminal misgovernment; (2) lack of the machines to do anything useful and productive in the world economy besides subsistence agriculture and unskilled service work; (3) lack of the public education system needed to give people the literacy and the skills to operate the machines; and (4) barriers (legal and physical) that kept people where demand was low from selling the products of their work where demand was high.
But over the course of the late twentieth century, these four causes of desperate poverty have largely fallen away.
Governments as bad as Kim Jong-Il’s in North Korea are now extremely rare.
Nearly all countries in the world are at most one generation away from near-universal literacy.
The fast pace of technological progress has created a cornucopia of invention and innovation that is open to every place that can send someone away to get a master’s degree in engineering.
Most important, the barriers to making goods and services in Mauritius, Mozambique, or Mauritania and selling them in New York or Berlin, Santiago or Tokyo are dropping swiftly.
The gargantuan container ships that first appeared a generation ago brought one revolution to world trade.
The use of information technology to manage transportation and distribution channels is likely to have a similarly profound effect.
Moreover, the advent of the Internet and the fiber-optic cable will do as much to make service-sector work internationally tradable as the coming of the iron-hulled steamship a century and a half ago did to make bulk agricultural products and manufactures internationally tradable.
It will take at least a generation for these changes to make themselves felt in most corners of the world.
But inside the industrial core of the world’s rich countries there is already concern about these looming revolutions.
Indeed, this concern will only become sharper and stronger, as citizens in rich countries fear that as the remaining barriers to international trade fall, industrial-core income distributions, social orders, and politics will be shaken to their foundations.
For the world as a whole, however, the next two generations are ones that will bring an extraordinary opportunity for economic growth and world prosperity.
Perhaps at the end of history there is a pot of gold, after all.
Manufacturing Scientific Uncertainty
For decades, the tobacco industry manufactured more than just cigarettes.
While aggressively marketing tobacco products, they also waged a successful public relations campaign designed to create uncertainty about the destructive and lethal characteristics of their products.
Though discovery of these efforts has come too late for many tobacco smokers, documents unearthed in lawsuits have revealed concerted efforts to avoid the imposition of government regulation by attacking public health science and scientists.
There are few scientific challenges more complex than understanding the causes of disease in humans.
Scientists cannot feed toxic chemicals to people, for example, to see what doses cause cancer.
Instead, scientists must harness the “natural experiments” in which exposures have already occurred.
To be sure, in the laboratory, scientists use animals in controlled experimental conditions to investigate the workings of toxic agents.
But, like epidemiological evidence, laboratory studies have many uncertainties, and scientists must extrapolate from study-specific evidence to make judgments about causation and recommend protective measures.
Absolute certainty is rarely an option.
Nevertheless, much scientific “uncertainty” about the causes of disease is not real, but manufactured.
Years ago, a tobacco executive unwisely committed to paper the perfect slogan for his industry’s disinformation campaign: “Doubt is our product.”
For 50 years, tobacco companies employed a stable of scientists to assert (sometimes under oath) that they did not believe there was conclusive evidence that smoking cigarettes causes lung cancer.
Less well known, but following the same pattern, are efforts being mounted to question studies documenting the adverse health effects of exposure to lead, mercury, vinyl chloride, chromium, beryllium, benzene, and a long list of pesticides and other toxic chemicals.
Polluters and manufacturers of dangerous products hire experts in what they call “product defense” to dissect every study whose findings they oppose, highlighting flaws and inconsistencies.
In many cases, they won’t deny that a relationship exists between the exposure and the disease, but are quick to proclaim that “the evidence is inconclusive.”
These industries have learned that by focusing the debate on uncertainties in the science (and the need for more research), it is possible to avoid a debate on public policy.
This can delay for years the expenditures required to protect people’s health and the environment.
Nowadays, the most well known (and probably best financed) campaign to manufacture scientific doubt is being waged by the fossil fuel industry in an effort to impugn scientists’ work on issues related to climate change.
When confronted by an overwhelming worldwide scientific consensus on the contribution of human activity to global warming over the past century, the industry and its political allies follow the tobacco road.
Evidence of this surfaced when Frank Luntz, a leading Republican political consultant, sent a strategy memo to his clients in 2002.
Luntz asserted that “ The scientific debate remains open. Voters believe that there is no consensus about global warming in the scientific community.
Should the public come to believe that the scientific issues are settled, their views about global warming will change accordingly.”
In parallel to their attempts to delay or prevent regulation through assertions of scientific uncertainty, polluters and manufacturers of hazardous products have promoted the “junk science” movement, which attempts to influence public opinion by ridiculing scientists whose research threatens powerful interests, irrespective of the quality of that scientist’s research.
“Junk science” advocates allege that many scientific studies (and even scientific methods) used in the regulatory and legal arenas are fundamentally flawed, contradictory, or incomplete.
Every first-year public health student is taught how John Snow stopped a cholera epidemic in London.
During a ten-day period in September 1854, during which more than 500 Londoners died from the disease, Snow used a city map to mark the location of each household with a case of cholera.
He determined that Londoners who drank from one particular water source were at the highest risk for the disease, and he recommended removal of the handle from the pump supplying drinking water from that source.
By using the best evidence available at the time, hundreds of additional deaths were avoided.
If government officials in London had demanded absolute certainty, the epidemic might have continued for another 30 years until the cholera bacterium was identified.
The manufacturing of scientific uncertainty endangers the public’s health, as well as programs to protect public health and to compensate victims.
It is time to return to first principles: use the best science available, but do not demand certainty where it does not exist.
Many Laws, Little Justice in China
The image on the computer screen is shocking: a man, lying on a hospital bed, his head bandaged, with long trickles of blood running from the top of his scalp.
The man, now sitting next to me, explains with a bit of understatement, “Of course I must continue to have faith in the Chinese legal system, although I must admit that this incident has somewhat dampened my optimism.”
The “incident” occurred last December, as he and another attorney traveled to prepare the re-trial of a blind, self-taught legal activist.
That activist had been framed by local authorities after he had denounced abuses by the local family planning authorities.
As the two lawyers were traveling on a bus, a gang of men, some of them wielding metal pipes, boarded it and brutally assaulted them.
The injuries proved minor, but the incident embodies the paradox of China’s legal system: over the past two decades, China has enacted hundreds of laws and elevated “ruling the country according to law” to ideological and constitutional prominence.
Legal awareness in society has soared to unprecedented levels.
Last week, China finally enshrined private property by passing the long-awaited property rights law, in what the government called “significant progress in promoting rule of law in the country.”
Yet access to justice remains tightly constrained, courts are still controlled by the Communist Party of China (CPC), and lawyers involved in litigation against local state agencies remain highly vulnerable to retaliation by state and non-state actors.
Reprisals range from suspension of lawyers’ licenses by the judicial bureaus to physical intimidation or assault by criminal elements.
After their attackers left, the two lawyers made repeated calls to the police to report the incident, but police did nothing beyond take the call.
Formal complaints to the justice ministry and the national bar association weren’t even acknowledged, let alone answered.
Ever since Deng Xiaoping ushered in the “reform and opening” era in 1978, the Chinese leadership has seen the legal system as an instrument to carry out state policies.
But as China’s society progressively emancipated itself from direct state control – with the notable exception of sectors viewed by the CPC as crucial to maintaining its monopoly on power – citizens increasingly appealed to the law for protection against arbitrary administrative interference and to limit the bureaucracy’s discretionary powers.
In turn, the government encouraged the idea that ordinary citizens had legal rights as a way to ensure social stability, check petty corruption, and channel social grievances through a party-controlled mechanism.
The new property rights law undoubtedly offers stronger protection to Chinese citizens, in particular homeowners, by equalizing the legal status of private and state property.
Greater predictability and clarity in the property system is likely to bring economic benefits, reassure international investors, and signal the leadership’s determination to pursue further economic reforms.
Perhaps more importantly, the law indirectly consolidates, at least in theory, the concept of a private sphere in Chinese society: a physical and legal area protected from arbitrary state intervention that could potentially serve as a basis for demanding greater political participation.
What the new law will not do, however, is address the most serious property rights disputes: land seizures and forced evictions for urban redevelopment.
Most of these protests stem from acts by local officials that were already clearly illegal under existing Chinese law.
The real problem is to make officials respect legality.
With little oversight from the central government, and no independent judiciary or a free press to hold them accountable, local authorities in rural areas are often a law unto themselves.
According to China’s Ministry of Land Resources, there were more than 90,000 cases of illegal land transfers last year, yet there were precious few prosecutions.
Local courts, whose judges are appointed and paid by the local government, often simply refuse to file cases that challenge official decisions.
In the few cases where a court rules in favor of the plaintiffs, the judgments often remain un-enforced.
When lawyers and legal activists try to help villagers or evicted residents to fight through the legal system, they often become victims of retaliation.
Because people cannot get justice through the courts, unrest has skyrocketed nationwide in recent years: official statistics record more than 200 protests a day, four times the number a decade ago.
The central authorities have recognized the link between abuses, unrest, and the need to develop legal services for preventing the escalation of disputes.
Wen Jiabao, China’s Premier, acknowledged last year that protests in the countryside were caused by “some localities [that] are unlawfully occupying farmers’ land” and promised “effective legal services and legal aid so as to provide effective help to people who have difficulty filing lawsuits.”
But reality doesn’t match official rhetoric.
In the past year, three prominent lawyers and rights activists were arrested.
Administrative restrictions on lawyers were tightened to discourage class action or multiple plaintiff suits – typically cases against arbitrary or corrupt government actions – and to facilitate local authorities’ intervention and control over cases.
And the media were prohibited from reporting cases involving land disputes and forced evictions.
The new property law won’t be the breakthrough for rights protection that the government claims it is until it is matched by increased access to justice for ordinary citizens.
The government is fortunate to have my lawyer friend’s faith in the legal system, but now it must earn ordinary citizens’ trust by enacting reforms.
Removing constraints on lawyers and ensuring that they are not attacked with impunity would be a good place to start.
Mao’s China at 60
LONDON – Every country is shaped by its history, but countries fabricate and rewrite their histories, too.
The story of how we became who we are needs to accommodate our sense of tribal solidarity and accomplishment.
Our triumphs and virtues are exaggerated; our villains externalized; our failings covered up.
All this makes the study of history potentially insurrectionary, but hugely valuable.
Good historians encourage us to be honest about ourselves.
They destroy our self-delusions.
This is especially true of our flawed heroes, as we see today with the Chinese Communist Party’s treatment of Mao Zedong.
Sixty years ago this October, Mao stood on the rostrum of Tiananmen, the Gate of Heavenly Peace in Beijing, and declared the founding of the People’s Republic.
That moment marked the end of years of war and terrible hardship; the revolution had been won through blood, sacrifice, heroism, the mistakes of enemies, and the manipulative assistance of Stalin, who purported to be a friend.
The decades of rapacious war lords, greedy imperialists, and Japanese invaders were over;
China could stand up – though much misery still lay ahead as Mao’s tyranny put down its roots.
Verdicts on Mao differ wildly.
For hard-line Communists, he was a hero three times over – historical, patriotic, and world-class.
For the brave and charismatic dissident Wei Jingsheng, Mao “cast virtually the whole of China into a state of violence, duplicity, and poverty.”
The Communist Party’s official verdict, undoubtedly the product of fierce ideological disputes, is that he was a great Marxist and revolutionary, whose “gross mistakes” during the Cultural Revolution were outweighed by his contribution to China. “His merits,” it argues, “are primary and his errors secondary.”
China’s Communist Party will not tolerate any questioning of this assessment.
Mao’s establishment of authority over China, his injection of patriotic pride into a land that had been appallingly sundered and humiliated by external and internal forces for a century and a half, and his romantic legend as a global revolutionary leader – all contribute to the moral and political legitimacy for which China’s leaders search.
What they cannot gain through democratic elections they acquire through the history of the revolution and today’s economic triumphs.
But the dark side of Mao cannot be totally expunged.
Too many people remember what happened.
It is an intimate part of their family stories.
There was the Great Leap Forward, which led to mass starvation and perhaps as many as 38 million deaths.
Then the madness of the Cultural Revolution, when millions suffered terribly, many died, and many more behaved disgracefully as Mao sought to destroy those who had rescued China from his earlier follies.
Jung Chang’s famous biography of Mao, published in 2005, recounts those awful events in the sort of bleak detail that makes Communist propagandists nervous – and some academic Sinologists critical that Mao’s achievements go too little recognized.
Mao is certainly a more interesting figure than were many tyrants – a poet, an intellectual, a student of history as well as a serial philanderer, who, according to his doctor, Li Zhisui, liked to swim in water, not bathe in it.
I know of no better, more fascinating “warts and all” portrait of any political leader than Li’s book, The Private Life of Chairman Mao .
I remember being told a story about China that gives credence to the Communist leadership’s generous verdict on Mao.
The mother of a Chinese journalist (now living outside the country) had been one of those who returned after 1949 to her homeland with her husband and family from a comfortable life at an American university.
They regarded returning as their patriotic duty.
The family sacrificed everything.
They were hit by round after round of Mao’s tyrannical campaigns against “Rightists,” beginning with the silencing of critics after the Hundred Flowers Movement in 1956.
The family lived in penury.
The father died from ill-treatment during the Cultural Revolution.
But the mother never complained.
She believed that her family’s sacrifices were justified by the liberation and rise of China.
Towards the end of her life, this mood changed.
She saw in the 1990’s the beginning of China’s economic ascent – the early years of spectacular growth.
She witnessed the return of the greed and corruption that she believed had destroyed the Kuomintang in the 1930’s and 1940’s.
Why, she asked herself, had her family suffered so much if it was only to prepare the way for this?
Yet it is China’s economic renaissance – some of whose effects so disturbed this patriotic old woman – which has been the most remarkable event in recent world history.
The economic turnaround began under the leadership of Deng Xiaoping, who had survived Mao’s purges to follow in his footsteps and become the architect of China’s rise as a world power.
The hundreds of millions of Chinese who have been lifted out of poverty as a result of Deng’s reforms will in time regard him as a greater hero than Mao.
But, whatever Mao’s terrible failings, during his years of absolute power there was a sense of common purpose and solidarity that went with shared hardship.
Maoism was a curious and unique mixture of class warfare and socialist leveling, all enunciated by a man who believed that individuals – or at least Mao himself – could shape history rather than be formed by its tides and currents.
This creed has clearly not survived its creator.
Pragmatism with a Leninist face is the order of the day.
The glories of getting rich have overwhelmed the deprivations of patriotic self-sacrifice.
Mao made China proud.
Deng made it prosperous.
What happens next?
For all our sakes, I hope that the future does not derail China’s economic progress, though it will be a surprise if it does not challenge its arthritic and adamantine political system.
Mao, the False God
Should Chairman Mao’s huge portrait still hang above the front gate of Tiananmen Square?
Should China’s ruling party still call itself Communist?
These are not idle questions.
Unless and until China’s leaders answer both questions with a simple “No” they will continue to have blood on their hands and a tainted legitimacy.
Many Chinese do not accept communist rule precisely because the Communist Party denies its past, (and remains) unapologetic about its cruelty.
This is one reason why China has a Taiwan “problem.”
The Chinese Communists insist that being Chinese means accepting the political reality of a sole Communist sovereign.
Indeed, many Taiwanese think that, if being Chinese means accepting all that goes under the name of Mao Zedong and the Chinese Communist Party, they will gladly deny their “Chineseness” than assume some of that shame.
Similarly, while a recent poll found that 70% of Hong Kong’s people are proud of being ethnic Chinese, a similar percentage are ashamed of the conduct of the mainland government.
Their message to the government in Beijing is this: you cannot take away our ethnicity but you have soiled our dignity through your barbarism.
For Hong Kong, the defining symbol of the Communist government is the killing of students with abandon on June 4, 1989.
Enshrined in the Chinese Communist Party’s constitution are the following words: “Mao Zedong, the Party’s chief representative, created Mao Zedong Thought, which has been proved correct by practice and based on which the Communist Party developed the basic system of socialism economically, politically, and culturally after the founding of the People’s Republic.”
But how “correct” was Mao?
In her devastating new book Mao: The Unknown Story , Jung Chang (author of the international bestseller Wild Swans ) exposes startling new details that prove beyond doubt that Mao was a tyrannical, cruel hypocrite whose disregard for human lives and suffering surpassed that of even Stalin and Hitler.
Her catalogue of Mao’s “correct practice” is numbing in its immorality and bloodthirstiness.
To help finance his communist movement in the 1930’s, Mao squeezed poor peasant families with any assets in the “Red” zone he controlled.
Many “counter-revolutionary” families were forced out of their homes to live in buffalo sheds so that their meager assets could be requisitioned.
While hiding out in the caves of Yenan, Mao became a distributor of opium.
Contrary to myths that he and his insurgents lived frugally during the Yenan days, they lived well on trading profits.
After the Nationalist government collapsed in 1949, Mao’s “New China” emerged.
Almost immediately, he launched another campaign to suppress “counter-revolutionaries,” berating one province for “being too lenient, not killing enough.”
Killing “enemies” was not the sole purpose.
Mao wanted to instill obedience by having as many people as possible witness the terror.
As he put it in 1951, “Many places don’t dare to kill counter-revolutionaries on a grand scale with big publicity.
This situation must be changed.”
In Beijing millions of inhabitants were ordered to witness some 30,000 sentencing and execution rallies during the early 1950’s.
Indeed, in 1950 and 1951 an estimated three million people perished by execution, torture, or suicide.
Masses of Chinese were sent to work camps, where prisoners endured harsh physical labor to “reform” their “bourgeois” habits and thoughts.
In any given year, roughly 10 million such “laborers” existed.
During Mao’s rule, an estimated 27 million died in the camps.
Close to 38 million people died of starvation and overwork during the infamous Great Leap Forward (1958-61) to catch up with the West. Mao’s reaction?
“With all these projects, half of China may well have to die.
If not half, one-third, or one-tenth – 50 million – die….but you can’t blame me when people die.”
Mao launched the Cultural Revolution (1965-76) to take revenge against those who opposed his mad programs.
Millions more died.
Mao also ordered the country to destroy the “Four Olds”: old ideas, old culture, old customs, and old habits.
As a result, his Red Guards destroyed ancient books, priceless antiques, monuments across the land, and nearly all Buddhist monasteries in Tibet.
In all, it is estimated that more than 70 million people died in the “New China” Mao and the present Communist Party leaders so proudly proclaim as their accomplishment.
When Japanese Prime Minister Kakuei Tanaka went to China in 1974, he bowed deeply to the Chairman, apologizing for the suffering that invading Japanese had caused.
Mao famously said: “No need to apologize.
We should thank you instead.
Without your invasion, we Communists would not have won.”
What about today’s “New New China,” with its skyscrapers, modern highways, and unbridled capitalism?
The reality is not as gleaming as it first looks.
Annual per capita GDP in Shanghai, China’s showcase city, remains, at $3,000, a small fraction of the levels in Taiwan and Hong Kong.
Fifty years of communist misrule have left what was once the most advanced city in Asia a distant also-ran.
China’s communist rulers must own up to their history and drop Mao and the communist legacy.
The country needs a new constitution – one that enshrines genuine democracy.
China’s people have long been ready for this.
Maintaining the false label of communism while reviving capitalism and insisting that Mao, for all his mistakes and crimes, was 70% “correct” is the bedrock of the moral corruption that afflicts China today.
It is as if the Nazis were still in power, with the current leaders claiming that Hitler was only 30% wrong.
China deserves better; it requires better in order to reclaim the glory that was China.
Maradona: Priest and Victim of a Dark Argentine Ritual
At the edge of death, but still clinging to life, Diego Maradona seems these days both priest and victim of a tragic Argentine ritual.
Intense and long suffering, Argentines know how to create universal heroes like Eva Perón and Ché Guevara.
The Argentine football star nearly rose to that lofty pedestal.
Evita and Ché were serious people throughout their public careers.
They gave themselves over to huge, dangerous, and heroic deeds.
They fought to change the world and they willingly carried the burdens of legions of people on their shoulders.
Both demanded too much from their fragile health.
Death at an early age ended their lives.
Political failure killed Ché, and illness took Evita's life, possibly saving her from the kind of political calamity that befell her husband a few years later.
For both, early death elevated their stature in the alchemy of history.
The old never make good heroes.
Early death evokes a beautiful destiny interrupted before its pinnacle - and hence before it tumbles into inevitable collapse.
However irrational, this is a powerful idea.
So what we celebrate in these tragic heroes are people much like us, but with an uncommon talent and capacity to lend historical resonance to their destiny.
We celebrate them as individuals who demonstrate how far we can travel in life, how beautiful human beings can actually be.
But to be effective in the cause of heroism, the hero must die promptly.
Maradona, however, is no tragic hero.
He is a hero of happiness.
His battles were in a decidedly popular art.
His was a theatrical performance staged in a marvelous setting; and his victories were triumphs of beauty and intelligence.
His expulsion from the 1982 World Cup for illegal drug use placed him, in the public's mind, on the path to tragedy, but the long cord of death, already tugging at him, had put him there years before.
Like Evita and Ché, he bore the people's burden of expectation on his shoulders.
True, his task was lighter, but that didn't lessen the weight of the burden.
Maradona's helpless soul was suffocated by the people's obsessive and suffocating love; at the same time, he couldn't live without that addictive drug.
He was a prisoner of both his genius and his insatiable need for the Argentine public's love.
Now that he's no longer playing football, Argentines demand even more.
They want to hear him speak, to know his stories, to feel his presence.
But life, unlike football, has more difficult consequences than losing a game.
Maradona fails to understand this.
He fails to face his addictions - to the fast life and to his not always healthy, but always demanding and unreal relationship with Argentines.
Each time, he moves a little closer toward death.
He likes to proclaim, "I'm only a football player.
I'm no role model for anyone."
But no one hears him.
Instead, photographers stake out his hospital room, seeking to show us our hero in his struggle with death.
There he is, vulnerable, fat, and weak, but we expect strength.
Maradona has been condemned to lie naked in front of millions of his fans, and his country has been condemned to pursue and reclaim him with its suffocating passion.
So tragic a ritual can have no good end.
But it tells us something about Argentine heroes and their fans.
The ritual tells us that we are desperately zealous people, seeking mirrors that show our heroes as beautiful, youthful, and exceptional; that we are fascinated with a form of death that freezes our illusions into permanent images, like Evita's embalmed corpse.
Poor Maradona.
We, his fellow Argentines, bear ancient sorrows as well as new ones.
We have not yet properly mourned, nor reflected upon, our nation's systematic fall into poverty; nor the disappearance of former President Carlos Saúl Menem's mirage of a First World Argentina; nor our institutions' loss of legitimacy; nor our corruption and our violence.
I don't blame Maradona for staying away from the country in the last few years.
There is enough sorrow in Argentina without him.
Sadly, he has now become the victim of our collective sorrow.
It's no surprise that his health has grown worse since his return.
Even when he could scarcely breathe with the help of an automatic respirator, Argentines wanted him to assume his role in their dark ritual: "Show us a good time, bring our hearts some fun."
Near the hospital, in the clear air, on a street of the sad city that invented the tango, the dark ceremony is nearing completion, just as if it were taking place in a temple.
Messages, snatches of diary entries, and photos are plastered on the hospital's walls.
Many people gather outside; some pray; others have built pagan altars.
The songs of Fito Paéz, another popular artist, rise through the air, accompanied by the necessary melancholy intoned by the crowds.
This seems a desperate farewell:
"Show us a good time, bring our hearts some fun."
But what can our hero do at this hour?
He's preoccupied with his own enlarged heart, which, though weary, continues to beat.
I have some advice for you, Diego: now that the hospital has discharged you, pack your bags and head for the airport.
Sanctions Blowback
BERLIN – With the crisis in Ukraine intensifying, the United States and the European Union are locked in a battle of wills – and sanctions – with Russia.
Indeed, in retaliation for the intensification of Western financial sanctions, Russia has announced a ban on food and agricultural imports from the US and the EU.
But the real threat to the West lies in the potential impact of a financial crisis sparked by its own sanctions against Russia.
Consider Russia’s 1998 financial crisis.
In August of that year, then-President Boris Yeltsin declared, “There will be no devaluation – that is firm and definite.” Three days later, the ruble was devalued, and Russian financial markets went into a tailspin.
With capital pouring out of the country, the Russian government was forced to restructure its debt, and the economy entered a deep recession.
Though Russia was relatively insignificant financially, its crisis had far-reaching consequences.
Among the worst affected was Argentina; the Russian crisis exacerbated a decline in investors’ confidence in emerging markets that culminated in Argentina’s sovereign default less than four years later.
Even the US and Europe were not immune, with the collapse of the major hedge fund Long-Term Capital Management (LTCM) fueling anxiety about the viability of many other financial institutions.
Today’s financial dramas bear a striking resemblance to this experience.
Argentina has technically defaulted; American and European financial institutions and markets are jittery; and Russia is promising that the sanctions it faces will have no impact on its economy.
The most obvious similarity is Russian President Vladimir Putin’s assertions that his country can weather any and all Western sanctions.
That may be wishful thinking.
In fact, barring most major Russian banks from operating freely in Western capital markets could affect the entire Russian economy, not just the banks themselves.
And the central bank’s decision to raise interest rates to buttress the ruble may lead to much tighter credit conditions for companies and households, pushing the Russian economy into recession this year and next.
The problem with financial sanctions is that no one knows precisely how they will unfold – especially in an economy as large as Russia’s.
If they prove to be more effective than intended, they will pose a serious threat to global financial stability.
The restrictions on Russian banks operating in Europe and the US appear modest.
The banks can still access money markets, cover their short-term financing needs, and count on the central bank for support.
But investors’ risk appetite could easily shift, spurring them to withdraw large amounts of capital.
Though Russia’s public debt is modest, its foreign-exchange reserves large, and its economy much stronger than in 1998, once the herd is running, it is impossible to stop it.
Europe’s banks have extended almost €200 billion ($268 billion) in loans to Russian institutions and firms, and hold a significant share of Russia’s euro-denominated assets, making them especially vulnerable.
Moreover, the eurozone’s current stress tests may well reveal significant capital holes in major European banks in the coming months.
Having just emerged from a deep recession, financial disruptions could easily cause Europe to slide back into recession, particularly given the eurozone economy’s close links to Russia via trade and energy.
Compounding the problem, no one truly understands the precise connections among Russian and European institutions and markets.
The collapse of LTCM in 1998 was completely unexpected.
Is Europe today prepared to deal with a similar failure of an important financial institution?
The financial sanctions on Russia are not targeted, temporary, or fully credible.
If they affect Russia’s entire economy, hitting ordinary citizens the hardest, popular support for Putin’s regime may solidify further.
Of course, an economic slowdown could erode Putin’s popular support, which is based on the gains in living standards made under his leadership.
In that case, Putin’s response could be even more damaging.
Another problem is that implementing sanctions that cannot be reversed quickly removes the incentive for Russia to return to the negotiating table, especially because the threat of an escalation of financial sanctions lacks credibility, given the risk to European and US financial stability.
Once these sanctions begin to bite, no one can say who will be hurt – or how badly.
And, as Russia’s experience in 1998, and Argentina’s after 2002, demonstrated, the process of restoring confidence among market participants is a long and painful one.
These concerns do not mean that the US and the EU should not impose sanctions on Russia for its illegal annexation of Crimea and continuing efforts to destabilize eastern Ukraine.
But sanctions that hit the real side of the Russian economy – such as energy, natural resources, and the military – could provide a better solution.
Though such sanctions may not work as quickly, they would be targeted, temporary, and credible, enabling the US and Europe to control – and adjust – the impact on the Russian leadership and economy.
In any case, US and European leaders must recognize that all sanctions will have costs – many of them unexpected – for both sides.
If they are not willing to risk global financial stability in an unpredictable game of chicken with Putin, perhaps it would be wise to re-think the composition of the sanctions that they impose.
Poland’s Eurozone Tests
WARSAW – The European Union’s new member states from Central and Eastern Europe are required to join the eurozone as part of their accession agreements.
But deciding when to adopt the euro is a matter of heated debate.
At stake is not just an economic calculation, but also a judgment about the outlook of the single currency itself.
For many, the benefits of membership have diminished since the financial crisis, and prospective members, such as Poland, can derive maximum advantage from joining only if they are clear about the economic conditions that must first prevail in their own countries.
The formal criteria for entry are contained in the 1992 Maastricht Treaty, which sets targets for government debt, budget deficits, inflation, interest rates, and exchange rates.
But merely hitting these targets (or, worse, just approaching them) at any given point in time has proved to be an inadequate foundation for membership.
Indeed, the malleability of the Maastricht criteria has caused many of the eurozone’s problems.
As long as eurozone debts continue to rise and member economies diverge rather than converge, prospective members should also be stress-tested to see if they can withstand external shocks and sustain the membership criteria over the long term.
Before Poland decides to share a currency with its main trading partners, it should consider three vital economic conditions: its international competitiveness, the flexibility of its labor market, and the health of its public finances.
Poland’s export markets are growing steadily.
But this is not because the country trades mainly with other dynamic emerging economies, or because there is huge global demand for uniquely Polish products.
Rather, Poland simply combines low costs (including wages) and high-quality production.
For this reason, Poland is sometimes called the “China of Europe.”
But competitiveness based on cost, rather than brand value or innovation, makes the Polish economy vulnerable.
Poland lacks the deeply rooted competitiveness of, say, Germany, the Netherlands, Austria, Sweden, or Switzerland.
Polish exports are sold under non-Polish names (Italian for shoes, for example, or English for clothing).
Its machinery exports are part of larger multinational networks run by German, Dutch, or other global companies.
And Poland’s cost advantage would disappear if the złoty were to strengthen sharply.
Although Polish companies are working hard to build brands abroad, this can take decades.
In the meantime, the country must be careful about joining the exchange rate mechanism (ERM II) – the narrow band within which applicant currencies must operate for at least two years prior to adopting the euro.
Doing so could cause the złoty to strengthen, as it did to the Slovak koruna, and wipe out Poland’s competitive advantage.
Another important aspect of Poland’s competitiveness is its flexible labor market.
One in four employees is on a fixed-term contract or self-employed.
A quarter of the typical Polish wage comprises variable elements, making it easy to freeze, or even lower, compensation during tougher economic times.
This means that firms can hire workers on short-term contracts when they are unsure of the business outlook; more generally, such flexibility helps the economy withstand external shocks.
But flexible labor markets have disadvantages, too.
Companies tend not to invest in talent or develop new skills, and the quality of existing skills can suffer.
In the longer run, flexible labor markets also increase structural unemployment and fuel the informal economy.
Furthermore, shortages in Poland’s residential rental market restrict workers’ ability to move to where the jobs are.
Arguably, Poland’s labor market is more akin to Spain’s than that of Scandinavia, where generous social protection allows for extensive employee training.
Finally, Poland needs sound public finances – that is, fiscal space for automatic stabilizers during economic crises.
By saving money for hard times, the government can implement countercyclical measures, while ensuring stable finances throughout the economic cycle.
Such a policy was successfully implemented in 2009 and 2010, but the government lacked the funds it needed when economic conditions subsequently deteriorated.
Sound public finances require not only low public debt, but also appropriate budgetary policy, which includes cutting spending (or raising taxes) during boom times, not during downturns, as was recently the case.
Broad-based competitiveness, truly flexible labor markets, and prudent budgeting are not beyond Poland’s reach.
In each case, there are other national examples to emulate: Switzerland’s competitiveness, Denmark’s labor markets, and Estonia’s public finances, for example.
Before Poland joins the eurozone, its economic policy should be directed toward these three criteria of long-term economic success.
The World Economy’s Impossible Demand
WARSAW – The global economy’s glory days are surely over.
Yet policymakers continue to focus on short-term demand management in the hope of resurrecting the heady growth rates enjoyed before the 2008-09 financial crisis.
This is a mistake.
When one analyzes the neo-classical growth factors – labor, capital, and total factor productivity – it is doubtful whether stimulating demand can be sustainable over the longer term, or even serve as an effective short-term policy.
Consider each of those growth factors. Over the next 15 years, demographic changes will reverse, or at least slow, labor-supply growth everywhere except Africa, the Middle East, and South Central Asia.
Europe, Japan, the United States, and eventually China and East Asia will face labor shortages.
Although large-scale migration from labor-surplus regions to deficit regions would benefit recipient economies, it would almost certainly trigger popular resistance, especially in Europe and East Asia, making it difficult to support.
Increasing the labor-force participation rate, especially among women and the elderly, might ease tight labor markets, but this alone would be insufficient to counter the decline in working-age populations.
The world economy cannot count on higher investment levels either.
The global investment/GDP ratio, especially in advanced economies, has been gradually declining over the past 30 years, and there is no obvious reason why it would pick up again in the medium to long-term.
Until recently, falling investment in the developed world had been offset by rapid increases in investment in emerging markets, mostly in Asia.
But high rates of investment there are also unsustainable.
As in Japan, China’s investment rate (running at almost 50% of GDP since 2009) will decline as its per capita income rises.
The third engine of growth, total factor productivity, will also be unable to maintain the relentless gains witnessed from the late 1990’s to the mid-2000’s.
During this time, the global economy benefited from the confluence of several unique developments: an information and communications revolution; a “peace dividend” resulting from the end of the Cold War; and the implementation of market reforms in many former communist and other developing economies.
Moreover, global growth received a further boost from the completion of the Uruguay Round of free-trade negotiations in 1994 and the overall liberalization of capital flows.
It is difficult to point to any growth impetus of similar magnitude – whether innovation or public policy – in today’s economy.
No new technological revolution appears to be on the horizon.
The World Trade Organization produced only a limited agreement in Bali in December, despite 12 years of negotiations, while numerous bilateral and regional free-trade agreements might even reduce world trade overall.
Worse, in the wake of the 2008 financial crisis, sluggish growth and high unemployment in developed countries have fueled demands for more protectionism.
Thus, the financial liberalization of the 1990’s and early 2000’s is also under threat.
The far-reaching macroeconomic and political reforms of the post-Cold War era also seem to have run their course.
The easy gains have already been banked; any further structural change will take longer to agree and be tougher to implement.
Thus, with supply-side factors no longer driving global growth, we must reassess our expectations of what monetary and fiscal policies can achieve.
If actual growth is already close to potential growth, then continuing the current fiscal and monetary stimulus will only create more bubbles, exacerbate sovereign-debt problems, and, by reducing the pool of global savings available to finance private investment, undercut long-term growth prospects.
Instead, policymakers should focus on removing their economies’ structural and institutional bottlenecks.
In advanced markets, these stem largely from a declining and aging population, labor-market rigidities, an unaffordable welfare state, high and distorting taxes, and government indebtedness.
The list of growth obstacles in emerging markets is even longer: corruption and weak rule of law, state capture, organized crime, poor infrastructure, an unskilled workforce, limited access to finance, and too much state ownership.
In addition, markets of all sizes and levels of development continue to suffer from protectionism, restrictions on foreign capital flows, rising economic populism, and profligate or poorly targeted welfare programs.
If these problems can be addressed, both globally and at the national level, we can end the dangerous fiscal and monetary expansionism on which the world economy has come to rely and allow growth to be sustained over the long term – though at lower rates than in recent years.
Thatcherism’s Bellicose Soul
LONDON – Margaret Thatcher was Britain’s greatest twentieth-century peacetime prime minister.
In the 1980’s, the near-simultaneous crisis of communism in the East and social democracy in the West gave her the opportunity to do great deeds.
But it required a great leader to take advantage of it.
Her relationship with Soviet leader Mikhail Gorbachev opened up the way to ending the Cold War; her privatization policies showed the world how to dismantle state socialism.
The neo-liberal revival of the 1980’s will always be known as the Reagan-Thatcher revolution.
She was also the most divisive British prime minister of modern times, admired and reviled in equal measure, owing as much to the self-righteous way she pursued her policies as to the policies themselves.
She rightly described herself as a “conviction politician.”
A conviction is a settled belief that brooks no argument.
And she did not deign to conciliate, instead dividing the political world into “us” and “them.” “Where there is error, may we bring truth,” she announced on her entry to No. 10 Downing Street, quoting Saint Francis of Assisi.
“In victory, magnanimity,” Winston Churchill advised.
Thatcher was brave and resolute, but she was not magnanimous.
She won famous victories, but showed no generosity to the defeated, in word or deed.
As a result, she failed to create harmony out of discord.
Her mission was projected from a narrow ideological base.
In instinct and language, she was a follower of Friedrich von Hayek.
For Thatcher, as for Hayek, the great intellectual error of the twentieth century was the belief that the state could improve on the spontaneous efforts of individuals.
What others saw as the state’s role in elevating the condition of the people, she saw as the insidious road to serfdom.
It is easy to see why this message resonated in Eastern Europe.
Translated into British terms, it meant releasing the impulse to wealth creation from the dead hand of socialism, bureaucracy, and trade unions, which in her reading of history had brought about Britain’s decline.
The Good Samaritan, she said, was to be admired because he helped himself before helping the poor.
This insular program of national revival increasingly estranged her from continental Europe’s more dirigiste approach.
In her famous Bruges speech in 1988, she thundered: “We have not successfully rolled back the frontiers of the state in Britain, only to see them re-imposed at a European level, with a European super-state exercising a new dominance from Brussels.”
Of course, like any shrewd politician, Thatcher knew which battles were unwinnable, or had to be postponed; but she always preferred winning a fight to reaching a compromise.
She won the sobriquet “Iron Lady” for her decisive leadership in the Falklands War; yet most of her battles were fought against sections of her own people – the “enemy within,” like the miners whom she crushed in the strike of 1984-1985, or Ken Livingstone’s Greater London Council, which she abolished in 1986.
She made much of her humble origins as the daughter of a Grantham grocer, and had no time for the Establishment, which she blamed for Britain’s moral and economic decline.
She understood the lower middle class, shared its material aspirations and moral prejudices, and argued for government spending cuts in the language of the housewife managing the weekly accounts.
She rewarded “aspirational” members of the working class by selling off council houses at discounted prices.
Support for the deserving poor was to her like charity wrung from the household budget.
And, while she was Britain’s most successful female politician ever, she regarded feminism as “poison,” and did little to encourage women to follow her.
Thatcher’s answers to the growing industrial disorder of the 1970’s were “monetarism” to liquidate inflation, legal curbs on trade-union power, and privatization of bloated state-owned industries – “selling off the family silver” as former Conservative Prime Minister Harold Macmillan called it.
The aim of all three measures was to restore both state authority and economic dynamism.
With the help of North Sea oil, Thatcher reversed Britain’s relative economic decline.
But her victories came at a huge social cost, with unemployment rising to 12% of the labor force (three million people) in 1984, the highest since the 1930’s.
For those growing up in the industrial north, Thatcherism foreclosed the future.
The new economy based on finance and shopping skipped a generation.
Much as they may have admired her, most Britons were never convinced that the Thatcher way was the only way.
Although she won three consecutive elections, the Conservatives never polled more than 43% of the popular vote, well below the levels achieved by Conservative leaders – Churchill, Anthony Eden, and Macmillan – in the 1950’s.
Her approval rating exceeded 50% in only five of her 137 months in office.
Indeed, in economic and social affairs, the electorate grew steadily less Thatcherite during her years in office.
Her missionary zeal fell on deaf ears.
She owed her power to a divided opposition and a first-past-the-post electoral system.
Thatcher offered her own summary of her political project: “Economics are the method.
The object is to change the soul.” If that is the metric, then, despite her achievements, Thatcherism was a failure.
The shift toward finance that Thatcher promoted heightened inequality and made the economy more volatile.
Her “right to buy” policy triggered an upward spiral in house prices, which encouraged households to take on more and more debt.
The “Big Bang” of 1986, which de-regulated financial services, made risky behavior in the City the norm.
These reforms sowed the seeds of the financial crisis of 2008.
The “Victorian values” that Thatcher sought to foster fell afoul of the unrestrained celebration of material wealth that her rule brought about.
The moral society, based on decent self-interest, that Thatcher hoped to establish became the greedy society, based on coarse self-regard.
If she experienced any retrospective doubt, she gave no sign of it.
Marginalizing Malaria
SAN FRANCISCO – Last fall, Bill and Melinda Gates sent shock waves through the global health community when they announced the audacious goal of eradicating human malaria from the face of the planet.
Nothing less, they urged, would be enough.
Heated debate immediately erupted, with some experienced practitioners questioning the feasibility of such a goal.
These skeptics pointed to the first Global Eradication Program, an ambitious effort in the 1950’s to clear malaria from many areas of the world (Africa was excluded).
Despite initial progress, eradication programs crumbled as donors, governments, and populations grew tired and turned their attention elsewhere, allowing malaria to resurge to devastating levels.
No one is suggesting a return to the failed strategies of the first eradication program.
The Gates Foundation has sensibly begun to facilitate consultations with leading scientists on accelerating the development of potent new tools, and is already funding the development of a vaccine, as well as new drugs and diagnostics.
At the same time, the Roll Back Malaria Partnership has recently launched a long-term Global Action Plan to unify the actions of the malaria community and spur additional investment.
All agree that eradication is decades away.
Yet, while total eradication is beyond the horizon, and new tools are needed to get there, there is much that can be achieved in the near term with our current armory.
Recent success in countries such as Ethiopia and Rwanda in expanding access to impregnated bed nets and slashing malaria rates is building confidence that the disease can be dramatically reduced around the world and, in some areas, eliminated entirely.
To realize this opportunity, a sound strategy must rapidly be developed and executed.
In a recent article in the British scientific journal The Lancet , Oliver Sabot and I proposed such a strategy.
The approach is simple: a redoubled effort to reduce infections and deaths rapidly in the malaria “heartland” (i.e., equatorial Africa and a handful of other areas around the world) should be accompanied by a campaign to roll back the disease from its current margins.
Malaria has natural limits, determined by latitude, altitude and, in some cases, human intervention.
The countries at the fringe of this zone typically benefit from a range of factors that make complete elimination of malaria possible, including lower transmission of the disease, stronger health systems, and relative national wealth.
Most importantly, these countries are not surrounded by malaria.
As they successfully eliminate malaria, they will provide a new malaria-free anchor that will enable their neighbors, which have been pursuing aggressive control measures in the interim, to embark on their own eradication campaigns.
In this way, malaria will literally be rolled back from its current borders.
This strategy has begun to emerge organically, without prompting from the global community.
In the Pacific, Vanuatu and the Solomon Islands, at the far southeastern margin of the malaria endemic zone, have embarked on an eradication campaign with support from the Australian government.
Across the globe, the Southern Africa Development Community has set a goal of eliminating malaria from its four southernmost members – Botswana, Namibia, South Africa, and Swaziland – by 2015.
To do so, they are in active discussions with their northern neighbors, and innovative cross-border collaborations are being developed, building on the model of the highly successful partnership between Mozambique, South Africa, and Swaziland.
Other malaria margins where eradication efforts are underway are China, the Philippines, and Central America.
More than one million people die each year from malaria, most of them are children.
Yet malaria is a preventable and treatable disease.
The task of eliminating malaria, country by country, and eventually reaching global eradication, is underway.
This time, we must not rest until it is completed.
Patriotism in the Age of Globalization
LONDON – The new fault line in politics, according to Marine Le Pen, leader of France’s far-right National Front, is between globalists and patriots.
It is an argument similar to those being made by euroskeptics in the United Kingdom and Republican presidential candidate Donald Trump in the United States.
It is, however, as false as it is dangerous.
Judging by the results of the second and final round of France’s regional elections on December 13, it is also an argument that French voters, at least, roundly rejected.
They cast 73% of their ballots for the National Front’s rivals, depriving the party of even a single victory.
Le Pen accused the mainstream parties of ganging up on her, describing their cooperation as a denial of democracy.
Her argument is, of course, a classic example of sour grapes; the entire point of a two-round voting system is to force parties and their supporters to seek a consensus and form partnerships.
Unless and until the National Front finds a way to win allies, it will not achieve an electoral breakthrough.
(The same is likely to prove true about Trump.)
That is not to say that Le Pen’s claim – that those who vote for her party are the only true patriots – should be casually dismissed.
She has homed in on a powerful message, one with the potential to attract supporters from other parties.
That’s why it must be rebutted, both in France and elsewhere.
The assumption underlying such nationalist bombast – that a country’s interests are better served by being closed rather than open – is extremely dangerous.
The belief that openness is treason and closure is patriotic is a rejection of the entire post-1945 framework of politics and policy in the developed world.
It is an attempt to turn back the clock to the interwar period, when the focus was on closing off: imposing onerous trade restrictions and persecuting or expelling minority groups.
This was true even in the United States, which enacted the most restrictive immigration laws since the country’s founding.
The postwar years marked a complete change of direction, as countries opened up, allowing freer flows of trade, capital, ideas, and people.
This process became known as globalization only after China and India joined in during the 1980s, but it had started long before.
It was globalization, after all, that created what in France became known as Les Trente Glorieuses – the 30 glorious years of rapidly rising living standards following the end of WWII.
Le Pen and her fellow populists claim that globalization was either an act of foolish generosity that helped the rest of the world at the expense of the nation, or a phenomenon that benefited only the elites and not ordinary people.
For them, patriotism means being harder-headed about protecting the national interest and adopting more democratic policies that help the working masses, not jet-setting fat cats.
The second part of this argument – that the interests of ordinary people have been subordinated to those of the elite – must be heard and responded to.
A democracy in which a majority feels neglected or exploited is not sustainable.
Either the government or the entire system will be overturned.
Elected officials clearly need to find answers to high unemployment and declining living standards.
What mainstream parties need to be make clear, however, is that the answers to those problems do not lie in closing borders or minds.
There is no example, anywhere in history, of a society or an economy that has prospered over the long term by rejecting globalism.
Moreover, though openness may not guarantee prosperity, it has always been a prerequisite for growth.
To be sure, the optimal amount of openness is a matter of debate.
But the bigger, more productive arguments are about how to shape education, labor markets, scientific research, and social-welfare policies in order to help societies adapt to the world around them.
The patriotic choice – the national interest – has always consisted in crafting domestic policies that best take advantage of globalization.
For mainstream parties in France, the Conservatives in the UK, and Trump’s more internationally minded Republican rivals in the US, there is nothing to be gained from copying the arguments of their extremist counterparts.
Doing so would yield crucial ground in the political battle over how best to serve the country and its people.
Mainstream parties must reclaim the mantle of patriotism and redefine the national interest accordingly.
In today’s world, the national interest lies in managing openness – not in throwing it away.
Mario Draghi’s Guns of August
WASHINGTON, DC – August has been a dangerous month in European history, but this year it could be the turning point for the eurozone – and perhaps for the world economy.
On July 26, Mario Draghi, President of the European Central Bank, declared that his institution would do “whatever it takes” to preserve the euro, and added: “Believe me, it will be enough.”
Draghi’s strong – indeed, unprecedented – statement was widely interpreted as signaling that the ECB would soon revive its bond-purchase program, focusing on Spanish debt in particular.
Stock markets around the world soared.
Jens Weidemann of the Bundesbank immediately expressed reservations, but the next day German Chancellor Angela Merkel and French President François Hollande issued a joint statement expressing their determination “to do everything in order to protect the eurozone.”
I recently argued that the ECB, working with the nascent European Stability Mechanism (ESM), was the only institution that could save the eurozone.
It could do so by buying Italian and Spanish bonds in the secondary market with the pre-announced intention of keeping their sovereign interest rates below a certain threshold for a certain time.
It is likely that Draghi’s statement will indeed be followed by ECB purchases of Spanish (and Italian) sovereign bonds.
A man like Draghi would not have issued such a statement without believing that he could follow through on it.
But, if this is to become a decisive turning point in the eurozone crisis, three things must happen.
First, the ECB’s renewed bond purchases must express the clear intention of reducing sovereign interest rates to sustainable levels, which are at least 200 basis points below their July averages.
A high-level German diplomat reportedly dismissed Spain’s 6.5-7% interest rates recently, on the grounds that Spain borrowed at nearly the same rates in the 1990’s.
But that statement, amazingly, ignored Spain’s higher pre-euro inflation – thus confusing real and nominal rates – and more rapid GDP growth.
For countries that are following agreed reform programs, the ECB should commit itself to bringing down interest rates to levels compatible with projected inflation and growth rates, and announce how long (say, nine months) this will continue.
A sporadic program without such announced objectives is unlikely to work, and could even be counterproductive, as private investors might well demand even higher returns because the growing ECB share of the debt would be considered senior, augmenting their risk.
That would not happen if the ECB announced – and demonstrated – its determination to bring down interest rates, whatever it takes, for a significant period of time.
Doing so would allow the eurozone to establish the institutional and legal means to achieve greater cooperation and integration, as agreed at the European Council’s meeting in June.
The second thing that must happen is that eurozone leaders and parliaments, with the cooperation of the courts, must be seen to push ahead with institutional reforms to establish not only the ESM, but also a banking union and partial debt mutualization.
But, while greater merging of economic sovereignty is the only long-term solution to the eurozone’s woes, such reforms cannot happen very quickly, which is why the ECB’s role is so crucial.
The eurozone can no longer sustain continued uncertainty and high real interest rates in the peripheral countries, so the ECB must provide a solid and credible bridge to the future.
Finally, the adjustment programs themselves must be carefully re-calibrated.
It should be clear by now that excessive, front-loaded austerity measures tend to be self-defeating, because they trigger a downward spiral of output, employment, and tax revenues.
Indeed, the International Monetary Fund’s most recent report on the eurozone says as much (if cautiously).
The pace of deficit reduction must be slowed, particularly in Spain, because output is determined in the short run by demand, and private demand cannot replace public demand until a degree of faith in the future is restored.
This move toward support of effective demand must be combined with the kind of structural reforms that will allow more rapid, supply-side growth in the longer term.
If these three steps – an ECB bond-buying program to hold down sovereign interest rates, concrete progress on establishing a real economic union, and realistic revision of current adjustment programs – could be achieved as a package, the resources that the ECB would need to use for its bond purchases would drop, because credibility would be restored.
Even if there is further bad news for Europe – from Greece, for example, or from a sharper-than-expected slowdown in China – the eurozone could begin to move out of crisis mode this month.
But that is possible only if, this time, the “big bazooka” really is put in place.
Otherwise, the eurozone’s position – financially, politically, and socially – will soon become undefendable.
Brilliant Blunders
BALTIMORE – Thomas Edison is reputed to have said, “I have not failed.
I’ve just found 10,000 ways that won’t work.” This statement sums up a fundamental – but often misunderstood – truth about scientific inquiry.
Progress in science – as in any creative discipline – is not a direct march to the answer, but a complex, zigzag path, involving many false starts and blind alleys.
Blunders are not only inevitable; they are essential to innovative thinking, because they point the way for other explorers.
One may wonder whether today’s highly competitive, funding-starved scientific atmosphere, in which publications and citations have become a primary criterion for success, can accommodate such mistakes.
The simple answer is yes.
Indeed, they are as important as ever – and not only in academia.
In fact, the entire scientific method is based on the notion that discovering what does not work is vital to learning what does.
Any scientific theory must be falsifiable – that is, based on existing observations or experimental results.
For a theory to be considered scientific, it must yield specific predictions of future observations or experimental results.
If those observations or results contradict the predictions, the theory is discarded, or at least must be modified.
The mistakes that are integral to scientific progress are not those that result from haste, sloppiness, or inexperience.
Rather, they are the mistakes that arise from thoughtful, meticulous experimentation based on bold ideas – the kind of ideas that can lead to major breakthroughs.
Fred Hoyle, one of the twentieth century’s greatest astrophysicists, provided a perfect example of such a “brilliant blunder.”
Hoyle and two of his colleagues proposed what became known as the Steady State model of the universe, according to which the universe did not evolve following the so-called “big bang” (a term that Hoyle coined); instead, it was constant, remaining the same throughout eternity.
The idea was brilliantly elegant: just as our universe is homogeneous (the same at every point in space) and isotropic (looking the same in all directions), it remains the same at every point in time.
While the Steady State theory was eventually falsified – our universe is expanding, and it most likely started from a big bang – it energized the entire field of cosmology, because it brought into sharp focus the questions that had to be addressed.
In fact, currently fashionable models of the multiverse – the concept that our universe is but one of a huge ensemble of universes – are consistent with the idea that they are collectively in a kind of steady state.
The nineteenth-century physicist William Thomson, later known as Lord Kelvin, made his own brilliant blunder when he calculated that the Earth was less than 100 million years old – about fifty times younger than the age deduced from modern radiometric measurements.
Though Kelvin’s estimate was seriously flawed, the effort remains central to the history of knowledge, because it applied real science – the laws of physics – to what had long been a subject of vague speculation.
Kelvin’s insights helped to launch a fruitful dialogue between geologists and physicists – a dialogue that eventually resolved even problems related to the length of time needed for Darwin’s theory of evolution to operate.
And the oversight that warped Kelvin’s estimate – the possibility that fluid motion could efficiently transport heat within the Earth’s interior – turned out to be critical to understanding plate tectonics and continental drift.
Startup companies exemplify the potential benefits of risk-taking.
While only about 49% of manufacturing startups and 37% of information startups survive for four or more years, those that do have managed to produce breakthrough innovations.
Tom Watson, Jr., who led IBM through decades of strong growth, is known for having supported brilliant blunders.
As he put it, “We should have the courage to take risks when they are thoughtful risks….We must forgive mistakes which have been made because someone was trying to act aggressively in the company’s interest.”
Funding agencies for academic research should adopt a similar philosophy, awarding a certain share of financing to thoughtful, unconventional proposals – those deemed risky, owing to a relatively low probability of success, but that could lead to important discoveries.
Such a scheme would create opportunities to take advantage of serendipity – a major component of scientific discovery.
Until about a decade ago, the Space Telescope Science Institute adopted a similar policy for allocating observation time for the Hubble Space Telescope.
In addition, each year, the institute’s director was allotted a certain amount of discretionary time to grant to special projects that he or she deemed worthwhile.
In 1995, Robert Williams used that time to take a major risk: he aimed the telescope at a seemingly uninteresting area for nearly ten days.
The result was an image of more than 3,000 galaxies some 12 billion light-years away – the so-called Hubble Deep Field.
Likewise, closer to home, as many as half of our discoveries of new medicines have originated from accidents.
For example, isoniazid was initially tested as a tuberculosis drug; iproniazid, one of its derivatives, later proved to be effective in the treatment of depression.
Space for brilliant blunders is vital to achieving the kind of creative breakthroughs that drive scientific progress.
The Bank of England’s Knockout Artist
LONDON – In Canada, if you say you come from London, the natives often ask if you mean London, Ontario, or London, England.
I always find the question somewhat irritating, perhaps revealing the persistence of an arrogant imperial mindset.
But soon, perhaps, they will no longer need to ask: in London, we are all Canadians now.
With what one commentator described as “his rock star looks and PR charm,” Mark Carney, the former governor of the Bank of Canada, has taken the city by storm in his first weeks as Governor of the Bank of England.
Change is the order of the day at the Old Lady of Threadneedle Street.
Out goes the fusty old inflation-targeting regime, with its fixation on the consumer price index and disregard for financial-sector imbalances.
In comes a brave new world of “state-contingent threshold-based forward guidance,” complete with three conditional “knockouts” that would cause the guidance to be changed.
We have had to learn a whole new lexicon of central-bank speak.
These are heady times at the BoE (in the heart of the financial district of Ontario-on-Thames).
The simple point that Carney made in his first policy pronouncement was that interest rates will remain unchanged, and the BoE’s variant of quantitative easing will remain in place, at least until unemployment falls below 7% (from its current rate of 7.8%).
Though it all sounded straightforward, markets were confused.
The pound initially fell sharply, and then recovered, while long-term government borrowing rates have risen by around 30 basis points.
This outcome may not have been what the new governor intended, but it is perhaps not surprising.
Though forward guidance is a useful part of the modern central banker’s tool kit, the Anglo-Canadian version on display in London is highly complex, mainly because it has been shoehorned into a policy framework designed for another purpose.
There are four related problems.
The first is that the United Kingdom retains policymaking by committee.
To his credit, Carney has succeeded in persuading most of his new colleagues on the Monetary Policy Committee (MPC) to sign up to the new approach (we now know there was one holdout).
That could not be taken for granted.
Their views have often been split in recent years.
But individual voting remains in place, so Carney is not in sole charge of policymaking, as he was at the Bank of Canada.
Any future commitments are conditional on keeping a majority of the committee in line.
That leads to the second problem: the so-called knockouts – the other factors that can change the direction of policy – are clearly matters of judgment, not of fact.
The first knockout would occur if, “in the MPC’s view, it is more likely than not that CPI inflation 18 to 24 months ahead will be 0.5 percentage points or more above the 2% target.”
The second is that “medium-term inflation expectations no longer remain sufficiently well anchored.”
There is plenty of scope for different judgments on both issues, neither of which lends itself to definitive answers based on solid numbers.
And, sadly, when it comes to forecasting inflation, the BoE’s record has not been very good.
The final knockout – which would occur if “the Financial Policy Committee (FPC) judges that the stance of monetary policy poses a significant threat to financial stability” – points to the third problem.
The FPC is part of the complex new UK regulatory structure, in which the former Financial Services Authority has been split in two: a prudential and business-conduct regulator and a new body to monitor financial stability.
The new FPC must give its advice publicly to the MPC when it has concerns.
The FPC, it should be emphasized, is chaired by the BoE’s governor, so there is an element of smoke and mirrors here.
But its composition is different from that of the MPC, so its view on a particular policy stance may be different as well, and here, too, the governor has only one vote.
Some argue that it would have been simpler to merge the two, and the unwieldiness of the new means of articulating policy suggests that this might indeed have been a good idea.
The BoE’s governor is now in the odd position of being invited to knock himself out – and in public, too.
That would be fun to watch.
The fourth problem is the most fundamental.
The government has chosen not to change the BoE’s formal mandate.
Its prime objective remains price stability, with real-economy factors relegated to the second order of importance.
By contrast, the US Federal Reserve has a dual mandate: price stability and full employment.
Of course it must continuously balance the two, but both have equal weight.
It is the failure of the UK government to amend the statute that dictates the complex structure of knockouts that the BoE’s ingenious staff has been obliged to devise.
The unemployment threshold, linked to forward guidance, can be seen as a backdoor way of adding a second objective.
But one would surely not start from there if that were the long-term policy aim.
It would have been far clearer to address the issue head on and change the BoE’s mandate.
That would have painted the new regime with a veneer of democratic legitimacy, giving it greater authority.
The government, however, decided not to open up the issue in parliament.
The objectives of the new monetary-policy approach are admirable.
The UK economy, while moving forward, is still operating well below capacity.
But to keep all these balls in the air, and avoid knocking himself out, Carney will need all the creativity and agility of that other great Canadian export – Cirque du Soleil.
Marketing Nationalism in China
Explanations abound for the fevered anti-Japanese protests that broke out across China last month.
From the Chinese perspective, of course, the blame falls on the Japanese government for its reluctance to apologize for the crimes Japan committed in WW II.
But the Chinese media also played an ignominious role, publishing slanted articles on Japan that helped to fan the fire.
Nationalism has been a prominent element in Chinese media in recent years.
Strident articles critical of the United States, Japan, and Taiwan appear with increasing frequency and receive ever more prominent placement.
Many see the government’s hand behind this trend, but focusing on official influence risks overlooking how market pressures have pushed China’s media in this direction.
Before China began opening its economy in 1978, all newspapers and magazines were “Party newspapers” and “Party magazines.”
Media bosses were appointed and controlled by the government.
Journalists and editors were, in effect, government officials.
Needless to say, all operating costs were born by the Communist Party and the state, and nobody was much concerned about making money.
The main concern was not attracting readers, listeners, and viewers, but avoiding political mistakes.
For newspapers and magazines, circulation was guaranteed by the government, which urged people to “study the Party newspapers” and forced work units to buy them.
Radio and TV enjoyed the same built-in audience.
In the 30 years following the establishment of the People’s Republic of China, no media outlet ran even a single commercial advertisement.
As Deng Xiaoping’s reforms evolved, and especially after Deng’s “tour of the South” in 1992, when he signaled permission for high-speed marketization of the economy, China’s media changed beyond recognition.
Whereas in 1978 there were only 186 newspapers and a handful of magazines and broadcast outlets, today China has roughly 2,200 newspapers, 9,000 magazines, 1,000 radio stations, and 420 TV stations, plus a growing proliferation of cable TV outlets.
Most of these outlets no longer receive full financial support from the government and must rely on advertising revenue to survive and grow.
What topics do consumers most care about?
One is government corruption.
As economic inequities and social conflict in China have grown more acute, ordinary people have become increasingly angry.
In these circumstances, many on the business side of the Chinese media regard critical reports on crime and official corruption as a powerful weapon in the fight for greater market share and profitability.
Owing to great sensitivity about stories that cast China’s leadership in a bad light, these popular reports are frequently banned, editors are fired, and media outlets that publish or broadcast them are often punished.
In some cases, they are shut down.
Prevented from criticizing the country’s leaders and reporting fully and objectively on domestic affairs, China’s media often finds it expedient to turn its critical gaze outwards.
This is politically safe, since, in one sense, to criticize the outside world, especially countries such as Japan and the US, is to praise China’s government.
It is also profitable.
Even as China’s position in the world continues to rise and its people become more self-confident, China’s history of weakness before the Western powers and Japan sustains a “victim culture” that leaves most Chinese sensitive to any foreign challenge.
Publishing jingoistic, anti-foreign articles plays to national sensitivities that always simmer, and thus can easily be brought to a boil, with obvious benefits for the bottom line.
A personal anecdote serves to illustrate how the market, as much as government censorship by the Department of Propaganda and the Press and Publications Administration, is often responsible for this type of editorial decision.
A few years ago, the editors of a Beijing-based weekly with which I am acquainted were deadlocked over which article to put on their front page.
The choice was between a minor story critical of Taiwan and a larger piece about a domestic issue of potentially historic significance.
Unable to get his staff to reach a consensus, the chief executive decided to ask the newspaper’s distributor for his opinion.
The distributor had not graduated from high school, but he knew readers’ tastes well. “Condemn Taiwan, of course,” he said.
The chief executive issued his order accordingly.
While reports that cater to the sometimes virulent nationalist sentiments of readers, viewers, and listeners can succeed in garnering a larger market share – as in any other capitalist country – they can also mislead.
The media may make money, but as the recent anti-Japan protests suggests, an excess of such market-driven jingoism can damage a nation’s interests and international standing.
As the old Chinese expression goes, qihu, nanxia : “Once one gets on the back of a tiger, it is hard to get off.”
Markets vs. Market Psychology
The sharp one-day drop in the Chinese stock market on February 27 apparently had an enduring negative effect on major stock markets around the world.
By the time the exchange closed at 7:00 GMT that Tuesday, the Shanghai Composite Index had fallen 8.8% for the day – the biggest one-day fall in China in ten years.
A cascade of declines in other countries immediately followed.
In Singapore, the Straits Times Index was down 2.3% when the market closed.
In Bombay, the Sensex 30 fell by 1.3% that day at the market’s closing.
In Moscow, the RTSI index was down by 3.3% at its closing bell.
In London, the FTSE 100 was off by 2.3% when trading ended that day.
In Sao Paolo, the Bovespa index was down by 6.6%, and in New York the Dow Jones Industrial Average was down by 3.3%, when those markets closed at 21:00 GMT.
These were significant declines – larger one-day drops in the Dow, for example, have occurred only 35 times since January 1950, or about once every twenty months.
Moreover, two weeks later, all these markets outside of China were down from 4.3% to 7.8% compared to their close on February 26.
This large and enduring effect has surprised many, since the “story” about the Chinese drop – that the trigger was a rumor that China’s government, concerned about speculation, planned to impose controls on the stock market – seems to have no logical relevance elsewhere.
But, unless one believes that stock markets move only in response to information about economic fundamentals, there really is no reason to be surprised.
One-day drops in important stock markets have always had enduring and general effects, owing to market psychology.
Given the international preoccupation with China’s economic success, the country is now a highly salient market to investors all over the world.
If history is any guide, markets can be severely destabilized by one-day drops, which make powerful stories that have more psychological salience to investors than much larger drops that occur over longer time intervals.
For example, people were really agitated when the Dow dropped 3.8% on December 6, 1928, nearly a year before the famous 13.5% crash on Monday, October 29, 1929.
Nowadays, of course, no one remembers that one-day slide in 1928, but, from the participants’ perspective, it was an enormous event.
Newspapers the next day described it as “one of the severest declines the market has ever gone through,” and “the worst money scare since July 1, 1920.”
No news story that day discussed economic fundamentals or gave a clear indication of the cause of the decline, relying instead on sensational prose – “the house that Jack built threatened to topple over” and “traders were quaking in their boots.”
But the December 6, 1928, event began a sequence of increasingly severe one-day drops in the Dow over the course of the following year. Despite a generally rising market, the Dow fell by 3.6% on February 7, 1929, 4.1% on March 25, 4.2% on May 22, 4% on May 27 and August 9, 4.2% on October 3, and 6.3% on October 23, before the infamous “Black Monday” crash.
On each occasion, newspaper accounts further established the 1929 market psychology.
The story was always that speculation in the markets had government leaders worried, which is, of course, essentially the same story that we heard from China on February 27.
The historical parallels do not stop there.
On September 11, 1986, the Dow dropped 4.6%, the steepest one-day decline since May 28, 1962.
This was followed the next day by a further 1.9% decline, and then, over succeeding months, by a series of sharp one-day drops that were precursors to the 22.6% collapse on October 19, 1987 – the largest-ever one-day correction.
At the time of the September 11-12, 1986, event, I thought very hard about what could have caused it.
Media accounts were vague, with the respectable story pointing to the “rekindling of inflation fears,” which, in fact, was not news.
I wondered what people were really thinking, apart from what could be read in the newspapers.
Immediately afterward, I sent out a short questionnaire to 175 institutional investors and 125 individual investors in the United States.
I asked, “Can you remember any reason to buy or sell that you thought about on those days?
(Please try hard to remember.
Don’t cite something you thought or talked about later).” The response rate was 38%, and no reason was repeated by more than three respondents, except the stock-market drop itself.
This, and a more elaborate questionnaire that I sent out after the next “Black Monday” crash on October 19, 1987, convinced me that nothing more sensible is occurring than just what newspapers describe: speculators, responding to changing market prices, and fearing further changes in the same direction, simply decide to bail out.
The actual decision to do so often can wait until the next stimulus, that is, the next day that a big drop occurs – hence, the possibility of a sequence of large one-day declines.
Unfortunately, this behavioral theory of stock market movements is not amenable to easy quantification and forecasting.
After February 27, 2007, it looked as if the markets were settling down, and the VIX measure of stock market volatility had fallen back nearly to earlier levels.
But then a 2% fall in the Dow on March 13 pushed the VIX back up.
The bright side is that one-day stock market declines occur more commonly as isolated events with no long-term repercussions.
So investors must now hope that the latest episode will be forgotten – unless and until hope succumbs to market psychology.
Privacy Since Snowden
LONDON – A year has passed since the American former intelligence contractor Edward J. Snowden began revealing the massive scope of Internet surveillance by the US National Security Agency.
His disclosures have elicited public outrage and sharp rebukes from close US allies like Germany, upending rosy assumptions about how free and secure the Internet and telecommunications networks really are.
Singlehandedly, Snowden has changed how people regard their phones, tablets, and laptops, and sparked a public debate about the protection of personal data.
What his revelations have not done is bring about significant reforms.
To be sure, US President Barack Obama, spurred by an alliance between civil-society organizations and the technology industry, has taken some action.
In a January speech, and an accompanying presidential policy directive, Obama ordered American spies to recognize that “all persons should be treated with dignity and respect, regardless of their nationality or wherever they might reside, and that all persons have legitimate privacy interests in the handling of their personal information.”
Some specific advances, unprecedented in the shadowy world of intelligence agencies, have accompanied this rhetorical commitment to privacy.
When technology companies sued the government to release details about intelligence requests, the Obama administration compromised, supporting a settlement that allows for more detailed reporting.
Under this agreement, companies have the option of publishing figures on data requests by intelligence agencies in ranges of 250 or 1,000, depending on the degree of disaggregation of the types of orders.
Though this represents a step forward, it is far from adequate, with gaping loopholes that prohibit reporting on some of the most notorious NSA programs, such as the dragnet collection of phone records under section 215 of the USA PATRIOT Act.
Moreover, Obama has demurred on the most significant recommendations of the independent review group that he appointed.
And the “USA FREEDOM Act,” which was meant to stop the mass collection of Americans’ phone records, is being diluted by a set of amendments that would enable the government to continue collecting metadata on millions of individuals, without their consent.
This metadata – covering whom we talk to, when, and for how long – can reveal as much about our private lives as the content itself.
Worse, relative to the rest of the world, the US has taken the strongest action since the Snowden revelations began.
Of course, Snowden exposed more about the US government’s surveillance activities than any other country.
But the documents also included egregious examples of overreach by the Government Communications Headquarters, the United Kingdom’s signals intelligence agency, and information about intelligence sharing in the so-called “Five Eyes” network of the US, the UK, Canada, Australia, and New Zealand.
The agreements that govern the pooling and exchange of intelligence among these governments remain closely guarded secrets.
In the UK, public and parliamentary debate on surveillance practices has been minimal, at best.
And not only does Canadian law prohibit companies from reporting virtually any information about government requests for data; Prime Minister Stephen Harper has nominated a lawyer who spent his career advising intelligence agencies to serve as an official privacy commissioner, raising the ire of activists.
Some countries have even intensified their surveillance activities.
Immediately following the Snowden revelations, the French government snuck into a military appropriations bill the authority to increase government surveillance of the Internet dramatically, including for “commercial” reasons.
The European Parliament’s criticism of the mass surveillance practiced by the UK, Sweden, France, and Germany (and potentially soon by the Netherlands) seems not to carry much weight for national governments.
With the 800th anniversary of Magna Carta this month, Snowden’s revelations have also fueled a new movement to create country-specific Internet “bills of rights” establishing the principles of privacy, free speech, and responsible anonymity.
In a stirring speech at the United Nations last September, Brazilian President Dilma Rousseff placed her country at the forefront of this movement by promoting Brazil’s historic Marco Civil bill.
But the proposed bill included the requirement that Internet companies keep their servers in Brazil – purportedly to protect information from American intelligence agencies’ prying eyes – while easing access to these data for Brazil’s own law-enforcement and security agencies.
Fortunately, Brazil’s legislators kept these provisions out of the final Marco Civil, which was adopted in April.
Alas, other governments are threatening to impose similar forced data-localization requirements.
Such rules run not only contrary to the fundamental principles of an open and interconnected Internet infrastructure; they also create new privacy risks.
And they do nothing to solve the basic problem of restricting government access to personal data held by private companies.
How companies worldwide respond to Snowden’s revelations will have a profound impact on their users’ rights.
So far, some have taken the right approach, pressing for greater transparency, while strengthening encryption on their networks to keep intelligence agencies out.
Companies throughout the information and communication technology sector have started to make transparency reports an industry standard.
But more telecommunications companies and hardware manufacturers should join Internet companies and privacy rights advocates to build a broad reform coalition.
A year ago, Snowden alerted the world to governments’ egregious violation of people’s privacy.
It is up to the technology industry, civil-society organizations, and the general public to keep governments honest in pursuing much-needed reforms.
Only then can the Internet provide the boon to freedom that it has long promised.
Marriage Counseling for America and Europe
Disputes between the United States and Europe are nothing new, as past tensions over Korea, Suez, and Vietnam demonstrate.
But these earlier disputes occurred within a very different geopolitical context – the Cold War – and the bygone intellectual and political framework of containment.
This context and framework disciplined transatlantic ties.
Europeans and Americans alike recognized the need to limit and manage their differences in order to conserve their ability to deter and, if necessary, to defeat the Soviet Union.
The Cold War’s end changed everything.
Can the winning alliance survive its own success?
The fundamental features of the post-Cold War geopolitical context are relatively clear.
They include American strategic primacy; massive and rapid cross-border flows of people, technology, goods, services, ideas, germs, money, arms, e-mails, carbon dioxide, and just about anything else; and relatively peaceful relations among the major powers – the US, China, Japan, Russia, India, and an increasingly integrated and enlarged Europe.
But if the geopolitical context is clear, the intellectual and political framework – the successor to containment – is not.
The challenge for Europeans and Americans today could hardly be greater: to cooperate in a very different context than the one for which the relationship and its institutions were designed – and to do so without any agreement on a new strategic framework.
Cooperation is possible. In 1990, Europeans and Americans joined forces to reverse Iraq’s invasion and occupation of Kuwait.
Later in the decade, Europeans and Americans combined to stop ethnic conflict in Bosnia and Kosovo.
Europeans and Americans also worked to enlarge NATO and collaborated against terrorism in Afghanistan.
But recent rifts over a range of issues – including the International Criminal Court, the Kyoto Protocol, the ABM Treaty, and the role of the UN – are impossible to ignore. Europeans tend to believe that the US is uncritically supportive of Israel and insufficiently sympathetic to Palestinian rights.
Even when Americans and Europeans agree in principle, such as on trade, this does not always translate into practice.
Most pronounced have been disagreements over how to deal with what the US terms “rogue actors” – Iran, North Korea, Syria, Libya, and Saddam Hussein’s Iraq.
Europeans lean toward dialogue and incentives, the US toward isolation and penalties.
Bridging these differences will not be easy, even though the US, for all its power, needs partners to fight terrorism, nuclear weapons proliferation, and global climate change.
But Europe, too, has a stake in maintaining the transatlantic bond, for there is no guarantee that it will remain an island of stability and prosperity.
European integration cannot become all-consuming; a parochial Europe is vulnerable to unsettled regional conflicts and to globalization’s challenges.
Translating mutual recognition of this into reality will require intellectual honesty and political investment on both sides of the Atlantic.
Europeans must shed their illusions about what they can accomplish in the world on their own.
Loose talk about resurrecting a multi-polar world is just that – loose talk.
It is neither feasible nor desirable for Europe to establish itself as a geopolitical equal or competitor of the US.
Europe must develop greater military capabilities, not to become a major power on par with the US, but so that it can act as America’s partner if it so chooses and to pursue its own goals.
A division of labor whereby the US employs military force and Europe uses other policy instruments will gradually divide the US from Europe.
Europeans also must admit that effective diplomacy requires not only dialogue and incentives, but credibility – a willingness to use sanctions and military force, if need be.
Americans, for their part, must accept that a strong Europe will not be content to simply do America’s bidding.
The US should support European integration, because a strong Europe is at least a potential strategic partner, whereas a weak Europe is not.
Indeed, the sort of troop-intensive nation-building exercises taking place in Iraq and Afghanistan are hardly unique; they are sure to be repeated, and European contributions will be required.
That American troops are being withdrawn from Korea and sent to Iraq is both unfortunate and revealing.
But genuine consultation will be necessary.
Consultation cannot consist of simply informing others of what has already been decided, not adapting policies, and yet still expecting support.
Nor can consultations on how to deal with today’s central global challenges wait until a crisis.
Most importantly, the US and Europe must learn how to disagree.
The best guideline is to not permit disagreements to spill over and complicate or infect the relationship.
Such “compartmentalization” is as essential now as it was during the Cold War.
In order to limit the consequences of disagreement, Americans should explain their position and offer alternatives when a proposed international arrangement is deemed undesirable.
Likewise, the US must employ incentives as well as penalties – and not sequence its diplomacy so that a problem country must meet every requirement before it can receive meaningful benefits.
Europeans, too, have special responsibilities.
There is a profound difference between not supporting an undertaking deemed essential by the US and working actively to block it.
The latter is inconsistent with being an ally.
European leaders also must do more to stem rising anti-Americanism, so that they remain able to work with the US when they judge it to be desirable.
We are entering a new and different era of US-European relations.
There will be issues arising where Americans and Europeans see things differently and are attracted to different prescriptions.
But transatlantic relations – no less than relations among the 25 members of the EU or the 26 members of NATO – cannot be an all-or-nothing proposition, lest they run the risk of becoming nothing.
A Healthy Path to Chinese Consumption Growth
CAMBRIDGE – China’s economic policymakers want to shift the country’s production away from exports and heavy industry, and to increase the share of consumption in GDP.
A relatively simple institutional change to encourage health-care insurance could do much to promote the latter goal.
A higher level of consumer spending would raise the average Chinese family’s standard of living, a primary component of what China’s leaders now call the “Chinese Dream.”
Faster growth in consumer spending would also reverse the recent slowdown in GDP growth, providing the extra demand needed to create employment for the millions of Chinese who are leaving agriculture and the millions more who are graduating from the country’s universities.
Consumer spending in China now accounts for just 36% of GDP, about half the consumption share of GDP in the United States and Western Europe.
This remarkably low level reflects both the small share of household income in total GDP and the high rate of household saving.
Chinese officials hope that higher household incomes will boost consumer spending, as the tightening labor market causes wages to rise and as urbanization shifts workers from low-productivity farm work to higher-wage employment in the cities.
Reducing the share of income that Chinese households save could also raise consumer spending faster and more easily.
The high rate of household saving in China reflects many factors, including the risk of job loss and the lack of a reliable government pension program.
But the main reason why Chinese households save so much of their relatively low salaries is to ensure that they have the funds to meet high medical costs if a family member requires surgery or other inpatient care.
People save so much because insurance is so inadequate.
The government’s universal health-care insurance is very rudimentary, and private health insurance is not widely available.
So households accumulate large amounts of cash as a hedge against the possibility that those funds will be needed some day for hospital care.
Private health insurance would make such excessive saving unnecessary by pooling relatively small premiums from individuals – or from their employers – and then paying out to those who are hit with large medical bills.
Thus, by encouraging the purchase of health insurance by individuals or employers, the Chinese government could reduce significantly the overall household saving rate.
Individuals who have such insurance would be better off, because they would not face the risk of large medical bills and would be able to spend more on other forms of consumption.
The most direct way to encourage the purchase of health insurance would be to exclude employer payments for such insurance from employees’ taxable income.
That has been a very effective incentive for the purchase of private insurance in the United States and Britain.
Tax benefits could also be extended to individual purchases of health insurance by allowing individuals to deduct the premiums that they pay from their taxable incomes.
Tax incentives are now used in China to encourage employer plans for retirement saving.
The Chinese government recently modified the tax law to exclude employers’ contributions to employee pension plans from taxable income and to allow the funds in those plans to accumulate tax-free.
This tax-favored employee saving plan is a good substitute for more comprehensive social-security pensions, but it has had the undesirable effect of increasing household saving, rather than increasing consumer spending.
By contrast, a similar tax rule to exempt employer payments for health insurance would reduce national saving by causing employees to substitute health insurance for large personal cash accumulations.
If the Chinese government does use this approach to stimulate the purchase of insurance, it should limit the favorable tax treatment to insurance for expensive medical conditions like surgery or the treatment of diabetes.
In other words, tax-favored health-insurance policies should have high deductibles.
It is the fear of having to pay for expensive medical conditions that now drives individuals to accumulate substantial cash reserves.
And focusing the favorable tax treatment on such major risk insurance would reduce the wasteful distortion to spend more on minor health conditions that do not stimulate household saving and do not need insurance protection.
A general expansion of health insurance would also lead to an increase in the provision of hospital services.
Private providers will enter the market when they see that insurance has increased demand for such services.
And the Chinese government will be able to expand the provision of health services without having to pay for them, because consumers’ insurance will be available to pick up the tab.
In short, favorable tax treatment of the purchase of insurance for major medical costs would reduce the national saving rate, increase consumer spending, lower the public’s anxiety about the cost of treatment, and increase the quantity of health care.
The sooner the authorities act, the faster the Chinese Dream will be realized.
Fighting the Fed
CAMBRIDGE – The US Federal Reserve is battling with members of Congress over a proposed law, the Federal Reserve Accountability and Transparency Act, that would require the Fed to use a formal rule to guide monetary policy.
The Fed fears that the law would limit its independence, while the bill’s proponents argue that it would produce more predictable growth with low inflation.
Who is right?
In order to understand the conflict, it is useful to compare the Fed’s independence with that of the Bank of England and the European Central Bank.
In Britain, the BoE has “instrument independence” but not “target independence.”
The head of the Treasury sets a goal for the inflation rate and leaves it to the BoE to decide which policies will achieve that goal.
If the target is missed by more than one percentage point on either side, the BoE’s governor must send an open letter to the head of the Treasury explaining why (and what the Bank proposes to do about it).
By contrast, the Maastricht Treaty tasked the ECB with maintaining “price stability,” but left it free to provide its own operational definition.
The ECB defined price stability to be annual inflation of less than but close to 2%.
Given the structure of the European Monetary Union, there is no government oversight of the ECB, which thus has both “target independence” and “instrument independence,” though restrictions preclude specific policies.
The Fed is “independent,” but only in a very special sense: vis-à-vis the government’s executive branch.
While the US president can instruct administrative agencies like the Commerce Department or the Treasury Department to take specific actions (as long as they do not conflict with valid legislation), the administration cannot tell the Fed how to manage interest rates, reserve requirements, or any other aspects of monetary policy.
But, though the Fed is independent of the White House, it is not independent of Congress.
The Fed was created by Congressional legislation that now stipulates a “dual mandate” of price stability and maximum employment.
It is up to the Fed to formulate operational definitions of these goals and the policies it will pursue to achieve them.
The proposed legislation would affect both “target” and “instrument” independence.
The Fed decided to define price stability as a “two percent annual inflation over the medium term of the price index of consumer expenditures.”
For the past 12 months, that rate of increase has been about 1.5%.
While full employment has not been defined, many economists believe it is equivalent to an unemployment rate of about 5.5%.
The most recent rate was 6.1%.
Reflecting the fear that the Fed’s current policy of sustained low interest rates will lead to higher inflation, the law would require the Fed to adopt a formal procedure for setting its key short-term interest rate, the “federal funds rate.”
More specifically, the law suggests a specific interest-rate rule (the Reference Policy Rule) while giving the Fed the opportunity to adopt a different rule if it explains to Congress why it prefers the alternative.
The Reference Policy Rule is essentially the rule first proposed in 1993 by John Taylor of Stanford University, based on his statistical estimate of what the Fed appeared to have been doing under Paul Volcker and Alan Greenspan during a period of both low inflation and low unemployment.
It states that the federal funds rate should be 2% plus the current inflation rate plus one-half of the difference between current and target inflation and one-half of the percentage difference between current and full-employment GDP.
All of this implies that if the economy is at full employment and targeted inflation, the federal funds rate should equal 2% plus the rate of inflation.
It should be higher if the inflation rate is above the target level and lower if current GDP is less than the full-employment level.
Given uncertainty about the level of full-employment GDP, this rule still leaves the Fed substantial discretion.
The Fed could argue that the gap between current and full-employment GDP is larger than the 6.1% unemployment rate implies, owing to the large number of part-time workers who would prefer full-time employment and the sharp decline in the labor force participation rate.
If the GDP gap is 4%, as a recent Congressional Budget Office estimate implied, the Taylor rule would indicate an optimal federal funds rate of about 1.25% (2 + 1.5 – 0.25 – 2), compared to the current rate of only 0.1%.
While the federal funds rate may be heading to 1% over the next 12 or 18 months, by then the narrowing GDP gap will imply an even higher Taylor-rule interest rate.
And, complicating things further, given US banks’ vast holdings of excess reserves as a result of the Fed’s bond-buying policies (quantitative easing), the federal funds rate is no longer the key policy rate that it once was.
Instead, the Fed will be focusing on the interest rate on excess reserves.
The proposed legislation is full of excessive and impossible requirements, and the Republican-controlled House of Representatives may not be able to pass it, even in modified form.
Even if it does, it will not get through the Democratic-controlled Senate.
But if the Republicans hold a Senate majority after the next election, some form of legislation requiring a monetary-policy rule could land on the president’s desk.
He or she might veto it, but a Republican president after the 2016 election might not.
The Fed no doubt fears that if the principle of requiring a formal rule is accepted, Congress could tighten the requirement, forcing a more restrictive monetary policy.
That is why the new Fed chair, Janet Yellen, forcefully opposed such legislation in recent congressional testimony.
One thing is certain: The bill will put pressure on the Fed to pay more attention to inflation, avoiding a persistent rate above its own 2% target.
Otherwise, the Fed’s operational independence could be restricted, forcing it to focus its policies more sharply on its inflation mandate.
The Greek Budget Myth
CAMBRIDGE – Recently, newspaper headlines declared that Greece would have a balanced budget for 2013 as a whole.
The news came as quite a shock: Recall that when Greek officials came clean about the true state of their country’s public finances in 2010, the budget deficit was more than 10% of GDP – a moment of statistical honesty that triggered the eurozone debt crisis.
It seemed too good to be true that the Greek deficit would be completely eliminated in just three years.
In fact, it is too good to be true.
Any reader who went beyond the headlines soon discovered that the prediction of a zero budget deficit was in fact misleading.
The International Monetary Fund was predicting only that Greece would have a zero “primary” budget deficit in 2013.
A “primary” budget deficit (or surplus) is the difference between a government’s outlays for everything excluding the interest payments that it must pay on its debt and its receipts from taxes and other charges.
In the case of Greece, the interest payments apply to government debt held by Greek individuals and institutions, as well as to government debt held by the IMF, the European Central Bank, and other foreign lenders.
The overall budget deficit is still predicted to be 4.1% of Greece’s GDP in 2013 – a substantial improvement compared to 2010 but still far from fiscal balance.
The difference between the overall deficit and the primary deficit implies that the interest on the Greek national debt this year will be 4.1% of GDP.
Moreover, the Greek government’s interest payments are exceptionally low.
Given that its debt will still be about 170% of GDP this year, the 4.1%-of-GDP interest bill implies that the Greek government pays an average interest rate of just 2.4% – far less than the nearly 9% rate that the market is now charging on ten-year Greek government bonds.
The difference reflects a combination of the lower rate on short-term debt and the highly favorable terms on which Greece is now able to borrow from official lenders at the IMF and the ECB.
If Greece had to borrow at the market interest rate on ten-year bonds, its deficit would rise by 6.5% of the Greek government debt or 11% of GDP.
In this case, the overall Greek deficit would be about 15% of GDP, putting its debt on a rapidly exploding path.
Greece’s economic weakness increases the current level of the deficit.
Five years of declining GDP have depressed tax receipts and increased transfer payments.
The IMF estimates that these cyclical effects on revenue and outlays have raised the overall deficit by nearly 5% of Greek GDP.
On a cyclically adjusted basis, Greece’s overall budget would show a surplus of 0.6% of GDP this year.
This also implies that if Greece could escape from its current recession, its national debt would decline, both absolutely and as a share of GDP.
More generally, the national debt of any country grows by the size of its budget deficit or declines by the size of its budget surplus.
Even an economy with an overall budget deficit will have a declining government debt/GDP ratio if the growth rate of its nominal GDP exceeds that of its debt.
For Greece, with an overall deficit of 4.1% of GDP and a debt/GDP ratio of 170%, the debt ratio would fall if the combination of inflation and real (inflation-adjusted) GDP growth exceeded 2.4%.
Stated differently, now that Greece has achieved a zero primary budget deficit, its debt burden will decline if its nominal growth rate exceeds the average interest that it pays on its government debt.
Budget deficits and the resulting national debt are important not only in themselves; they also contribute to a country’s current-account deficit, which is the difference between its level of domestic investment by businesses and households in structures and equipment and the amount that it saves to finance those investments.
That amount, which includes the saving of businesses and households, is reduced by the amount that the government borrows.
In the case of Greece, the saving of businesses and households exceeds the level of investment in businesses and housing by just enough to outweigh the dissaving by the government, resulting in a very small current-account surplus.
Stated differently, Greece is now able to finance its current level of consumption and investment, including government and private spending, without relying on capital inflows from the rest of the world.
Looking ahead, the IMF predicts that Greece will have a gradually rising primary surplus and a gradually declining overall deficit over the next several years.
But, unless Greece is able to increase its rate of economic growth, the budget will remain in deficit and the debt will remain at nearly its current share of GDP.
Obamacare’s Fatal Flaw
CAMBRIDGE – Obamacare, officially known as the Patient Protection and Affordable Care Act, is the health-insurance program enacted by US President Barack Obama and Congressional Democrats over the unanimous opposition of congressional Republicans.
It was designed to cover those Americans without private or public health insurance – about 15% of the US population.
Opponents of Obamacare have failed to stop it in the courts and, more recently, in Congress.
The program was therefore formally launched on October 1.
Although it has been hampered by a wide range of computer problems and other technical difficulties, the program is likely to be operating by sometime in 2014.
The big question is whether it will function as intended and survive permanently.
There is a serious risk that it will not.
The potentially fatal flaw in Obamacare is the very same feature that appeals most to its supporters: the ability of even those with a serious preexisting health condition to buy insurance at the standard premium.
That feature will encourage those who are not ill to become or remain uninsured until they have a potentially costly medical diagnosis.
The resulting shift in enrollment away from low-cost healthy patients to those with predictably high costs will raise insurance companies’ cost per insured person, driving up the premiums that they must charge.
As premiums rise, even more relatively healthy individuals will be encouraged to forego insurance until illness strikes, causing average costs and premiums to rise further.
With this in mind, Obamacare’s drafters made the purchase of insurance “mandatory.”
More specifically, employers with more than 50 employees will be required after 2014 to purchase an approved insurance policy for their “full-time” employees.
Individuals who do not receive insurance from their employers are required to purchase insurance on their own, with low-income buyers receiving a government subsidy.
But neither the employer mandate nor the personal requirement is likely to prove effective.
Employers can avoid the mandate by reducing an employee’s workweek to less than 30 hours (which the law defines as full-time employment).
But even for full-time employees, firms can opt to pay a relatively small fine rather than provide insurance.
That fine is $2,000 per employee, much less than the current average premium of $16,000 for employer-provided family policies.
Not providing insurance and paying the fine is a particularly attractive option for a firm if its employees have incomes that entitle them to the government subsidies (which are now available to anyone whose income is below four times the poverty level).
Rather than incur the cost of the premium for an approved policy, a smart employer can pay the fine for not providing insurance and increase employees’ pay by enough so that they have more spendable cash after purchasing the subsidized insurance policy.
Even after both payments, employers can be better off financially.
News reports indicate that many employers are already taking such steps.
But the biggest danger to Obamacare’s survival is that many individuals who do not receive insurance from their employer will choose not to insure themselves and will instead pay the fine of just 1% of income (rising permanently after 2015 to 2.5%).
The preferred alternative for these individuals is to wait to buy insurance until they are ill and are facing large medical bills.
That wait-to-insure strategy makes sense if the medical condition is a chronic disease like diabetes or a condition requiring surgery, like cancer or a hernia.
In either case, the individual would be able to purchase insurance after he or she receives the diagnosis.
But what about conditions like a heart attack or injuries sustained in an automobile accident?
In those cases, the individual would not have time to purchase the health insurance that the law allows.
If they are not insured in advance, they will face major hospital bills that could cause serious financial hardship or even cause them not to receive needed care.
Anyone contemplating that prospect might choose to forego the wait-to-insure strategy and enroll immediately.
But private insurance companies could solve that problem by creating a new type of “emergency insurance” that would make enrolling now unnecessary and allow individuals to take advantage of the wait-to-insure option.
Such insurance would cover the costs that a patient would incur after a medical event that left no time to purchase the policies offered in the Obamacare insurance exchanges.
Emergency insurance might also cover the cost of care until the “open enrollment” period for purchasing insurance at the end of each year (if political pressure does not lead to the repeal of that temporary barrier to insurance).
This type of insurance is very different from existing high-deductible policies.
Given the very limited scope and unpredictable nature of the conditions that it would cover, the premium for such a policy would be very low.
It would not satisfy the broad coverage requirements that Obamacare mandates, forcing individuals to pay the relatively small penalty for being uninsured and to incur the subsequent cost of buying a full policy if one is needed later.
But the combination of emergency insurance and the wait-to-insure strategy would still be financially preferable for many individuals, and the number would grow as premiums are driven higher.
Employers with a large number of full-time employees could encourage their existing insurance companies to create the emergency policies.
They might even choose to self-insure the emergency risk for their employees.
The “wait-to-insure” option could cause the number of insured individuals to decline rapidly as premiums rise for those who remain insured.
In this scenario, the unraveling of Obamacare could lead to renewed political pressure from the left for a European-style single-payer health-care system.
But it might also provide an opportunity for a better plan: eliminate the current enormously expensive tax subsidy for employer-financed insurance and use the revenue savings to subsidize everyone to buy comprehensive private insurance policies with income-related copayments.
That restructuring of insurance would simultaneously protect individuals, increase labor mobility, and help to control health-care costs.
Bringing It Back Home
CAMBRIDGE – An increasing number of American companies are making plans to shift their headquarters to Europe.
These so-called “inversions” would reduce these companies’ total tax bill by allowing them to escape from the United States’ uniquely unfavorable corporate tax rules.
So what should US policymakers do?
President Barack Obama’s administration is seeking to block corporate inversion through administrative measures that may not hold up in US courts.
It would be far better to develop a bipartisan legislative plan aimed at removing the temptation to shift corporate headquarters in the first place.
Such a plan, if attractive to US multinational corporations, could result in a shift in employment and production to the US and higher tax revenue.
Under current law, US corporate profits are taxed at a rate of 35% – the highest rate among OECD countries, where the average is 25%.
That tax is paid on profits earned in the US and on repatriated profits earned by US companies’ foreign subsidiaries.
For example, the subsidiary of a US firm that operates in Ireland pays the Irish corporate tax of 12.5% on the profits earned in that country.
If it repatriates the after-tax profits, it pays a 22.5% tax (the difference between the 35% US rate and the 12.5% tax that it already paid to the Irish government).
But if it reinvests the profits in Ireland – or in any other country – no further tax must be paid.
Not surprisingly, American firms prefer to leave those profits abroad, either in financial instruments or by investing in new or existing subsidiaries.
As a result, American companies now hold abroad roughly $2 trillion in profits that have never been subject to US tax.
All other OECD countries treat the profits of their companies’ foreign subsidiaries very differently, relying on the so-called “territorial” method of taxing foreign earnings.
For example, a French firm that invests in Ireland pays the 12.5% Irish corporate tax but is then free to repatriate the after-tax profits with a tax of less than 5%.
America’s current tax system adversely affects the US economy in several ways.
The extra tax that US firms pay if they repatriate profits raises their cost of capital, thus reducing their ability to compete in international markets.
Foreign firms can also outbid their US counterparts in acquiring new high-tech firms in other countries.
And when a foreign firm acquires a US company, it pays US tax on the profits earned in the US but not on the profits earned by that firm’s other foreign subsidiaries, thus lowering its total tax bill.
A shift to a territorial system of taxation would remove the disadvantages faced by American multinational corporations and encourage them to reinvest their overseas profits at home, increasing US employment and profits.
Because only a small share of overseas profits is now repatriated, the US government would lose very little tax revenue by shifting to a territorial system.
A few years ago, the US Treasury Department estimated that shifting to a territorial system would reduce corporate tax revenue by only $130 billion over ten years.
It would also be desirable to reduce the US corporate tax rate gradually, bringing it closer to the 25% OECD average.
That, too, would encourage more repatriation of overseas earnings.
Given that American companies have large amounts of profits abroad that have never been subject to US tax, the transition could even be carried out in a way that raises net revenue.
In exchange for shifting to a territorial system and reducing the tax rate, the federal government could tax all of these untaxed past earnings at a low rate to be paid over a ten-year period.
Companies would then be free to repatriate their pre-existing earnings without paying any additional tax, while future foreign earnings could, as in other countries, be repatriated by paying a low 5% tax.
A 10% tax on those existing accumulated foreign earnings would raise about $200 billion over the ten years.
A 15% tax would raise $300 billion.
The choice of tax rate would be part of the negotiation over how far to reduce the overall US corporate tax rate.
For example, with a 10% tax, a company with $500 million of accumulated overseas earnings would incur a tax liability of $50 million, to be paid over ten years.
It could repatriate $500 million at any time with no additional tax liability.
Repatriation of any earnings in excess of $500 million would be subject to a 5% tax.
The shift to a territorial system and a lower corporate tax rate would appeal to American multinational corporations even if they had to pay a 10-15% tax on accumulated past earnings.
If Obama is looking for an opportunity to negotiate a bipartisan deal that would strengthen the US economy and increase employment, he should seriously consider such a package of reforms.
The Future of American Growth
CAMBRIDGE – The near-term outlook for the US economy has improved, owing to the sharp increase in household wealth in 2013, together with the end of the fiscal drag caused by the increase in tax rates in 2012.
The United States now has a chance to raise real (inflation-adjusted) per capita GDP faster than the feeble 1.7% average rate recorded during the four years since growth resumed in the summer of 2009.
Of course, significantly faster GDP growth in 2014 is not guaranteed.
For starters, achieving it requires overcoming the negative impact of the jump in long-term interest rates that followed the Federal Reserve’s announcement last June that it would likely end its asset-purchase program this year.
Moreover, the cloud of rising budget deficits at the end of the decade – and exploding national debt after that – is also discouraging investment and consumer spending.
But let’s look beyond 2014 and ask what will happen to US economic growth over the longer term.
The Congressional Budget Office (CBO) projects that real per capita GDP growth will slow from an annual rate of 2.1% in the 40 years before the start of the recent recession to just 1.6% between 2023 and 2088.
The primary reason for the projected slowdown is the decrease in employment relative to the population, which reflects the aging of American society, a lower birth rate, and a decelerating rise in women’s participation in the labor force.
While the number of persons working increased by 1.6% per year, on average, from 1970 to 2010, the CBO forecasts that the rate of annual employment growth will fall to just 0.4% in the coming decades.
A drop in annual growth of real per capita GDP from 2.1% to 1.6% looks like a substantial decline.
But even if these figures are taken at face value as an indication of future living standards, they do not support the common worry that the children of today’s generation will not be as well off as their parents.
An annual per capita growth rate of 1.6% means that a child born today will have a real income that, on average, is 60% higher at age 30 than his or her parents had at the same age.
Of course, not everyone will experience the average rate of growth.
Some will outperform the average 60% rise over the next three decades, and some will not reach that level.
But a 30-year-old in 2044 who experiences only half the average growth rate will still have a real income that is nearly 30% higher than the average in 2014.
But things are even better than those numbers imply.
Although government statisticians do their best to gauge the rise in real GDP through time, there are two problems that are very difficult to overcome in measuring real incomes: increases in the quality of goods and services, and the introduction of new ones.
I believe that both of these problems cause the official measure of real GDP growth to understate the true growth of the standard of living that real GDP is supposed to indicate.
Consider the problem of accounting for quality improvements.
If I pay the same price for some product or service this year as I did last year, but the quality of the product or service is better, my standard of living has increased.
The same is true if the price rises but the quality increases even more.
Unfortunately, a government statistician cannot judge the increase in quality of everything from restaurant meals to medical care.
So looking only at the cost of a meal or of a day in the hospital causes an overestimate in the price index and an underestimate of the rise in the real standard of living.
The problem of taking new products into account is even more difficult.
Virtually everyone around us uses a smart phone, a laptop computer, or a tablet.
We know what these cost and how much they add to the total nominal value of GDP.
But how much more than the standard retail price would individuals pay to keep these “must-have” products?
Likewise, what is the value to patients of laparoscopic surgery or drugs that relieve anxiety or prevent heart attacks?
In short, I am convinced that the real standard of living produced by the goods and services that we buy is increasing faster than our official data reveal.
That is true now, and it is likely to continue to be true in the future.
That is not a reason for complacency.
The US can and should adopt policies that will cause real incomes to rise even faster.
New Hope for India
CAMBRIDGE – India’s recent general election could be the most important positive economic event of 2014.
Indian voters decisively rejected the Congress party, which had governed India virtually without interruption since it gained independence from Britain in 1947.
They are likely to be happy they did.
Sonia Gandhi, the head of Congress and the widow of former Prime Minister Rajiv Gandhi, has been the power behind the throne since 1998, turning Prime Minister Manmohan Singh into little more than a figurehead.
Under her leadership, Congress has pursued a populist agenda that increased transfer payments and reduced India’s annual economic-growth rate to less than 4% in 2013.
GDP per capita is still only about $4,000, less than half the level in China.
The newly elected prime minister, Narendra Modi, campaigned on a platform that promises to deliver to India as a whole the rapid growth in employment and income that the state of Gujarat achieved when he was its chief minister.
Under Modi’s leadership, Gujarat became a business-friendly state that expanded economic activity, and attracted business investment from both Indian and overseas companies.
A remarkable feature of the recent election is that Modi’s Bharatiya Janata Party (BJP) received an absolute majority in the national parliament, an almost unprecedented achievement in India.
As a result, Modi will not have to compromise with the other national or regional parties to pursue his legislative agenda.
Two key officials will help Modi manage his economic program.
The new finance minister, Arun Jaitley, is an experienced political leader who served in ministerial positions in previous BJP governments.
Jaitley is also known as a strategic thinker who is sympathetic to business interests.
The head of the Reserve Bank of India (the central bank) will continue to be Raghuram Rajan, a distinguished economist who has already shown his desire to reduce India’s near-double-digit annual inflation rate, and to reform some of the inherited counterproductive restrictions on the country’s financial sector.
The measures needed to stimulate economic growth will take time to implement and to produce results.
But anyone who wants to see whether the new government is acting to achieve faster long-term growth should examine whether progress is being made in the following ten policy areas.
Education. Although India has excellent institutions of higher education and technology, only a small share of the population can take advantage of the opportunities they offer, because primary and secondary education is so inadequate.
Only 60% of the adult population can read and write at an elementary level.
Teachers themselves are poorly educated, and many are so unmotivated that they do not even show up at the schools where they are supposed to work.
Infrastructure. India needs better roads and ports to enable efficient transport of products domestically and to the rest of the world.
The recent expansion of private airlines and airports shows what private firms in this sector can accomplish.
Fiscal consolidation. Large budget deficits are absorbing the national savings that should be used to expand business investment, and are increasing the national debt that will have to be financed by future taxes.
Privatization. The enterprises owned by the Indian government in manufacturing and other sectors operate inefficiently and often produce losses that absorb national saving.
Selling off these enterprises would contribute directly to accelerating the pace of economic growth.
Removal of subsidies. Subsidized electricity and fuel leads to wasteful overconsumption and contributes to the fiscal deficit.
Though these subsidies are politically difficult to eliminate, they should be replaced by cash transfers, which can now be done efficiently in India, owing to a remarkable new system of fingerprint-based cash transfers.
Agricultural reform. In the current system, the government buys, warehouses, and distributes agricultural products.
As a result, an enormous amount of goods are spoiled in storage, while production incentives are misdirected.
Agricultural markets should be privatized.
Property rights and zoning. Anyone who visits Mumbai or other major Indian cities sees how zoning restrictions cause misuse of urban land and limit modernization.
Ambiguous property rights, especially to agricultural land, prevent industrialization in rural areas.
Relaxing limits on foreign investment. Foreign firms are now barred from majority ownership of banks and insurance companies.
Relaxing such restrictions would strengthen the financial sector and play an important role in economic growth.
Tax reform. India’s complex system of national and state sales taxes distorts domestic trade.
Replacing these taxes with a national value-added tax and using revenue-sharing to the states has been long debated and should now be enacted.
Corruption. Major cases of high-level corruption have undermined economic confidence and impeded official decision-making.
India is also handicapped by small-scale corruption, with bribery a common feature of all forms of business and personal transactions.
The government should crack down on instances of high-level graft and use the new system of cash transfers to limit the scope of petty corruption.
The Indian stock market is up about 20% this year in anticipation of stronger growth and rising profits.
Now it is up to Modi and the BJP to show that they can deliver on their campaign promises.
Looking Up in 2014?
CAMBRIDGE – For the past six years, I have been skeptical about the standard optimistic forecasts of the pace of US economic growth in the year ahead.
Where most forecasters and policy officials saw green shoots and reasons for confidence, I saw strong headwinds that would cause an economic downturn and then a subpar recovery.
But I think the evidence for 2014 is more balanced.
Although there are serious risks facing the US economy in the coming year, there is also a good chance that growth will be substantially stronger than it has been since before the recession began.
The economy was still expanding in the late summer of 2007, when I spoke at the US Federal Reserve’s annual Jackson Hole conference about serious risks to the economic outlook.
I warned that house prices had begun to fall in the summer of 2006 from dangerously high levels, implying a future collapse of construction activity and large losses of household wealth.
Reduced household wealth would lead, in turn, to lower consumer spending, further depressing GDP.
I also stressed that financial markets had become dysfunctional.
Banks and other financial institutions had doubts about the value of various asset-backed securities on their own balance sheets and on those of potential counterparties.
No one knew the real value of credit-default swaps and of the various tranches of collateralized debt obligations.
Financial institutions were therefore reluctant to lend to other financial institutions.
With credit flows disrupted, the economy could not continue to expand.
Moreover, I warned that the Fed was too complacent and should be reducing sharply the federal funds rate, which was above 5%.
The economy peaked a few months later, and the Fed began aggressive easing in 2008.
Although the Fed and the US Treasury cooperated in addressing financial-market dysfunction, this was not enough to restore solid economic growth.
The restoration of normalcy to financial markets and lower interest rates did cause an economic upturn in the summer of 2009, leading many forecasters and market participants to expect a typical rapid post-recession recovery.
I warned that the upturn would be much more tepid than expected: unlike previous business cycles, the recession that began at the end of 2007 was not caused by high interest rates, so lowering rates would have little impact.
US President Barack Obama’s new administration announced a three-year fiscal package intended to stimulate aggregate demand.
Administration officials and others predicted that fiscal stimulus would cause the economy to rebound, as it had in the past.
But the fiscal package was not very effective.
It was too small to close the output gap, leaving continued downward pressure on demand.
Much of the “stimulus” merely financed increased spending by state governments that would have been paid for in other ways.
Other parts of the stimulus went to individuals, but, given the nature of the fiscal package, increased transfers and spending added more to the national debt than to GDP.
When the Fed saw how weak the upturn remained, it launched a strategy of “unconventional monetary policy,” combining large-scale purchases of long-term securities (quantitative easing) with promises to keep the short-term federal funds rate extremely low for an extended period of time.
The goal was to encourage portfolio investors to shift into equities and other assets, with the resulting increase in their prices pushing up household wealth and consumer spending.
Lower long-term rates were also expected to reduce the cost of mortgage credit, raising the value of homes.
The Fed and others were again overly optimistic about the extent to which these policies would boost GDP growth.
Despite the fall in long-term interest rates, house prices reached bottom only in 2012, and the stock market did not rise faster than corporate earnings until 2013.
The economy therefore limped along year after year, with real GDP in the final quarter of each year less than 2% higher than it had been a year earlier.
Employment grew more slowly than the population, and annual real-wage increases averaged only about 1%.
Fortunately, the outlook may now be changing for the better.
Real GDP growth reached 4.1% in the third quarter of 2013, and fourth-quarter growth appears to have been relatively strong, driven by a dramatic rise in housing starts and industrial production.
The sharp increases in the prices of homes and equities contributed to a roughly $6 trillion rise in real household wealth in the 12 months ending in September 2013 – a harbinger of increased consumer spending (at least by higher-wealth households) in 2014.
There are, of course, risks to the pace of expansion in the coming year.
Nearly half of 2013 third-quarter GDP growth was inventory accumulation, implying that final sales rose by only about 2.5%.
Businesses worry about the potential for higher corporate taxes, especially if the Republican Party loses its majority in the US House of Representatives.
Although fiscal deficits are temporarily down, the combination of population aging and higher future interest rates will cause the national debt to rise faster than GDP by the end of the decade.
And debt and equity markets may not continue to respond benignly to the Fed’s wind-down of quantitative easing.
So there is still much to worry about.
But the US economy has a better chance of achieving a significantly higher real growth rate in the coming year than at any time since the downturn began.
Why the Fed Will Go Faster
CAMBRIDGE – The US Federal Reserve has emphasized that its monetary policy will be determined by what economic indicators show.
But it would require some extremely unlikely data to change the Fed’s implicit plan to end its purchases of long-term assets (so-called quantitative easing) in October 2014 and to start raising the federal funds rate from its current near-zero level sometime in the first half of 2015.
The financial markets are obsessed with anticipating whether rates will rise in March or June. Although my own best guess is that the Fed will start to raise rates in March, the starting date is less important than the pace of the rate increase and where the rate will be by the end of 2015.
There is a substantial range of views among the members of the rate-setting Federal Open Market Committee.
The midpoint of the opinions recorded at most recent FOMC meeting implies a federal funds rate of 1.25-1.5% at the end of 2015.
Even by the end of 2016, the midpoint of the range is less than 3%.
In my judgment, such rates would be too low.
At a time when inflation is already close to 2% or higher, depending on how it is measured, the real federal funds rate would be at zero at the end of 2015. Instead of ensuring price stability, monetary policy would be feeding a further increase in the inflation rate.
Although it is possible to argue about the precise appropriate level of the fed funds rate, the Fed’s own analysis points to a long-term rate of about 4% when the long-term inflation rate is 2%.
The most recent value of the consumer price index was up 1.7% year on year, and the 12-month figure would have been even higher but for the anomalous decline in the most recent month. In the second quarter of this year, the annualized inflation rate was 4%.
The Fed prefers to measure inflation by the price index for personal consumption expenditure.
Its relaxed attitude about inflation reflects its focus on the longer-term past, with PCE inflation at just 1.5% for the 12 months to August of this year, the same as the “core” PCE inflation rate, which excludes food and energy. But PCE inflation has also been rising, with the most recent quarterly value at 2.3% year on year in the April-June period.
So if price stability were the Fed’s only goal, the federal funds rate should now be close to 4%.
The Fed’s rationale for continuing its ultra-easy monetary policy is that its “dual mandate” requires it to be concerned with employment as well.
Its monthly statements emphasize that there is still “a significant underutilization of labor resources,” reflecting not only the 6.1% unemployment rate, but also the millions of part-time employees seeking a full-time job and those who are not officially counted as unemployed because they are not actively looking for work.
The Fed is certainly correct that current labor-market conditions imply significant economic waste and personal hardship.
But economists debate the extent to which these conditions reflect a cyclical demand shortfall or more structural problems that a monetary stimulus cannot remedy.
A recent study by a team of Fed economists concluded that nearly all of the current decline in the labor-force participation rate reflects the aging of the population and other structural causes.
Recent research also indicates that increases in demand that would cause a further reduction in the current unemployment rate would boost the inflation rate. An important study co-authored by Alan Krueger of Princeton University, who served as Chairman of President Obama’s Council of Economic Advisers until last year, showed that the inflation rate reflects the level of short-term unemployment (lasting less than six months), rather than the overall unemployment rate.
Longer-term unemployment implies a waste of potential output and a source of personal suffering, but it does not have an impact on the rate of inflation.
Krueger’s analysis indicates that the rate of inflation begins to increase when the short-term unemployment rate falls to 4-4.5%.
With short-term unemployment currently at 4.2%, the inflation rate is indeed rising, and Krueger’s research suggests that it will increase further in the months ahead.
Similar studies by Robert Gordon of Northwestern University and by Glenn Rudebusch and John Williams of the San Francisco Federal Reserve Bank point to the same conclusion about the role of short-term unemployment and the irrelevance of long-term unemployment in the inflation process. While not all researchers agree with this analysis, I think the evidence is strong enough to represent a warning to the Fed and to market participants.
Indeed, I would not be surprised by a continued rise in the inflation rate in 2015.
In that case, the Fed is likely to raise the federal funds rate more rapidly and to a higher year-end level than its recent statements imply.
America’s Move to Faster Growth
CAMBRIDGE – Last December, I speculated that GDP growth in the United States would rise in 2014 from the subpar 2% annual rate of the previous four years to about 3%, effectively doubling the per capita growth rate.
Now that the US economy is past the impact of the terrible weather during the first months of the year, output appears to be on track to grow at a healthy pace.
The primary driver of this year’s faster GDP growth is the $10 trillion rise in household wealth that occurred in 2013.
According to the Federal Reserve, that increase reflected a $2 trillion increase in the value of homes and an $8 trillion rise in the value of shares, unincorporated businesses, and other net financial assets.
As former Fed Chair Ben Bernanke explained when he launched large-scale asset purchases, or quantitative easing, that increase in wealth – and the resulting rise in consumer spending – was the intended result.
Past experience suggests that each $100 increase in household wealth leads to a gradual rise in consumer spending until the spending level has increased by about $4.
That implies that the $10 trillion wealth gain will raise the annual level of consumer spending by some $400 billion, or roughly 2.5% of GDP.
Even if less than half of that increase occurs in 2014, it will be enough to raise the total GDP growth rate by one percentage point.
The data show that a significant increase in consumption already is happening.
Real personal consumption expenditures rose at a 3% rate from the fourth quarter of 2013 to the first quarter of this year.
Within the first quarter, the monthly increase in real consumer spending accelerated from just 0.1% in January to 0.4% in February and 0.7% in March.
That was faster than the 0.3% monthly growth in real personal disposable income during this period, highlighting the importance of wealth as a driver of spending.
Another indication of the role of wealth in fueling higher consumer spending is the decline in the household saving rate.
Total household saving as a percentage of disposable income fell from about 6% in 2011 and 2012 to just 3.8% in the most recent quarter.
Housing starts are also responding to the increase in wealth.
The number of housing starts and the value of residential construction fell after the Fed’s announced withdrawal from quantitative easing caused interest rates on mortgages to rise.
But that has turned around, with housing starts in April up 26% year on year.
And sales of both new and existing homes have recently been rising more rapidly as well.
Higher consumer spending and increased residential investment boosted demand for labor, resulting in a rise in payroll employment of 288,000 in April, up from a monthly average of less than 200,000 earlier in the year.
If that continues, it will lead to a faster rate of increase in household incomes and spending.
The favorable effect of the increase in household wealth is being reinforced this year by the improved fiscal position.
The economy in 2013 was held back by tax increases, government spending cuts mandated by the sequester process, the temporary government shutdown, and the possibility that a binding debt ceiling would require further cuts in government outlays.
Though the prospect of a rising deficit and national debt in the longer term remains, the two-year budget agreement enacted by the US Congress means that the economy will not be subject to such negative fiscal shocks in 2014 or 2015.
The key challenge confronting the economy in the next two years will be faced by the Fed, which must control the inflationary pressures that could emerge as commercial banks respond to a healthier economy by increasing lending to businesses and households.
The commercial banks have a great deal of liquidity, in the form of excess reserve deposits at the Fed, which could make inflationary lending a significant risk.
The banks are now content to leave those funds at the Fed, where they earn a mere 0.25% because they are risk-free, completely liquid, and unburdened by capital requirements.
The alternative is to lend commercially at relatively low interest rates, with less liquidity, more risk, and the need to provide capital.
But the time will come when the banks will want to use their excess reserves to support more profitable lending.
The Fed will then need to raise the interest rate that it pays on excess reserves to limit the extent to which the commercial banks can draw down those reserves to create additional lending and deposits.
That will be a difficult balancing act.
If the interest rate is raised too little, banks will use more reserves to support lending, leading to higher inflation.
If the interest rate is raised too much, economic activity will be constrained and growth could fizzle.
The situation now has diverged from the traditional scenario in which the Fed controlled the banks’ use of reserves by adjusting the federal funds rate (the rate at which banks lend their reserves to one another).
The principle difference is that the Fed will now have to pay the interest on the nearly $2.5 trillion of excess reserves that it holds.
The US economy is now on a favorable path of expansion.
But keeping it there will be a major challenge for the Fed in the year ahead.
अरब दुनिया के विकल्प
अम्मान - जब 2011 में अरब जागरण शुरू हुआ, तो इसका प्रमुख लक्ष्य बहुलवाद और लोकतंत्र को आगे बढ़ाना होना चाहिए था - वे कारण जिनकी बीसवीं सदी में अरब दुनिया के पहले, औपनिवेशिक-विरोधी जागरण में उपेक्षा की गई थी। लेकिन, संघर्ष के तीन साल बाद, यह प्रक्रिया केवल अभी शुरू ही हुई है। क्या दूसरा अरब जागरण अंततः अपने लक्ष्य प्राप्त कर सकेगा?
इसका जवाब इस बात पर निर्भर करता है कि अरब देश अपने संक्रमण के मार्गदर्शन के लिए तीन मॉडलों में से कौन-सा मॉडल इस्तेमाल करेंगे: समावेशी, दूरदर्शी मॉडल जिसका लक्ष्य आम सहमति बनाना है; ‘सब कुछ विजेता का’ वाला दृष्टिकोण जो आबादी के बड़े हिस्सों को अलग कर देता है; या शासन के अस्तित्व पर फ़ोकस करने वाला ‘कहीं न थमने वाला’ दृष्टिकोण। ये मॉडल अरब देशों की वर्तमान परिस्थितियों और भविष्य की संभावनाओं के बीच भारी अंतर को दर्शाते हैं।
समावेशी मॉडल का सबसे मज़बूत उदाहरण ट्यूनीशिया है, जहाँ पूर्व विरोधियों ने, सेना के हस्तक्षेप के बिना, गठबंधन सरकार का गठन किया है। बेशक, यह प्रक्रिया आसान नहीं थी। लेकिन, तनावपूर्ण संघर्ष के बाद, ट्यूनीशियाई लोगों ने समझ लिया कि आगे बढ़ने के लिए सहयोग ही एकमात्र रास्ता है।
फ़रवरी में, ट्यूनीशिया ने अरब दुनिया का सबसे प्रगतिशील संविधान को अपनाया, जो पुरुषों और महिलाओं के बीच समानता स्थापित करता है, सरकार में शांतिपूर्ण फेरबदल की सुविधा प्रदान करता है, और नागरिकों के धार्मिक विश्वास के बिना होने के अधिकार को मान्यता देता है - जो इस क्षेत्र में इस्लामवादी और धर्मनिरपेक्ष दोनों ताक़तों द्वारा समर्थित अभूतपूर्व क़दम है। ट्यूनीशिया के अनुभव में बहुलवाद और लोकतंत्र के लिए प्रतिबद्धता का प्रतीक है जिसका दूसरा अरब जागरण समर्थन करता है।
सौभाग्य से, ट्यूनीशिया इस मार्ग का अनुसरण करने वाला अकेला देश नहीं है। यमन और मोरक्को दोनों ने अपेक्षाकृत समावेशी राजनीतिक प्रक्रिया शुरू की है, जिसमें यमन राष्ट्रीय संवाद का पालन कर रहा है और मोरक्को गठबंधन सरकार का गठन कर रहा है।
लेकिन यह मॉडल कई अन्य देशों में कामयाब नहीं हो पाया था। मिस्र को लीजिए, जिसने दूसरा, अपवर्जनात्मक दृष्टिकोण अपनाया है, जिसमें सभी दल मानते हैं कि उनका सत्य पर एकाधिकार है और इसलिए वे अपने विरोधियों की उपेक्षा कर सकते हैं या उन्हें दबा सकते हैं। मुस्लिम ब्रदरहुड के नेतृत्व में, मिस्र के इस्लामवादियों ने सत्ता में रहते हुए इस दर्शन को अपनाया था; पिछली जुलाई में हुए सैन्य तख्तापलट के द्���ारा उन्हें सत्ता से बाहर करने वाली धर्मनिरपेक्ष ताक़तें भी अब इसी दृष्टिकोण को अपना रही हैं।
संक्षेप में, मिस्र की राजनीति लाभ-हानि-योग शून्य का खेल बन गई है – और लाभ-हानि योग वास्तव में शून्य रहा है। देश सुरक्षा के ख़तरों, आर्थिक अराजकता, और राजनीतिक अस्थिरता से ग्रस्त बना हुआ है - जो इतनी व्यापक समस्याएँ हैं जिन्हें कोई भी पक्ष अकेले हल नहीं कर सकता। अगर दोनों पक्षों के नेता साथ मिलकर काम करना शुरू नहीं करते, तो मिस्र का जागरण दूर का सपना बना रहेगा, जिसके सामाजिक और आर्थिक परिणाम आम नागरिकों को भुगतने पड़ेंगे।
लेकिन तीसरा दृष्टिकोण सबसे अधिक विनाशकारी है - जिसका उदाहरण सीरिया ने पेश किया है। राष्ट्रपति बशर अल-असद का शासन जीतने के लिए कहीं नहीं थमता जो अब अस्तित्व का खेल बन गया है। इस बीच, विपक्ष खंडित बना हुआ है, जिसने सुरक्षा का ख़तरा बना दिया है - जो काफ़ी हद तक विदेशी लड़ाकुओं से बना है - जिसका शोषण कट्टरपंथी समूह कर रहे हैं। इसका परिणाम भीषण गृह युद्ध के रूप में हुआ है, जिसके कारण पहले ही कम-से-कम 150,000 मौतें हो चुकी हैं और लाखों लोगों को अपने घरों से पलायन करने पर मजबूर होना पड़ा है, और जिसका कोई अंत नज़र नहीं आ रहा है।
इन तीन मॉडलों और इनके परिणामों के बीच भारी अंतर साफ़ सबक पेश करता है: स्थिरता के लिए समावेशन ही एकमात्र मार्ग है। सही दृष्टिकोण के साथ, कोई भी देश बेहतर भविष्य के निर्माण में सफल हो सकता है।
बेशक, दूसरे अरब जागरण का मार्ग पूरी तरह से राष्ट्रीय सीमाओं द्वारा परिभाषित नहीं हुआ है। समूची अरब दुनिया में लंबे समय से चली आ रही वर्जनाएँ ढीली पड़ गई हैं। विशेष रूप से, लंबे समय तक राजनीतिक परिदृश्य पर हावी रहने वाली दो शक्तियों - धर्मनिरपेक्ष, जो अकसर सेना या सेना-समर्थित शासक थे, और धार्मिक विपक्ष - ने अपनी अभेद्य स्थिति खो दी है; आज, वे अधिकाधिक रूप से आलोचना का विषय बन रहे हैं जो लोकतांत्रिक प्रणालियों की विशेषताएँ हैं। अनेक अरब देशों में, उदार होना भी स्वीकार्य है।
लेकिन, जबकि पिछले तीन सालों में लंबे समय तक प्रगति को अवरुद्ध करने वाली कड़ी सामाजिक प्रणालियाँ अनेक अरब देशों में कमज़ोर पड़ गई हैं, और उदारवाद ज़्यादा स्वीकार्य वैश्विक नज़रिया बनता जा रहा है, मिस्र और सीरिया के अनुभवों से पता चलता है कि दूसरे अरब जागरण के लक्ष्य सार्वभौमिक रूप से साझा नहीं किए गए। पुरानी प्रतिद्वंद्विताएँ, पुरानी वैचारिक मान्यताएँ, और अनुत्पादक आदतें सामाजिक-आर्थिक समस्याओं के वास्तविक समाधान खोजने के प्रयासों को निरंतर अवरुद्ध करती आ रही हैं।
अरब समाज इससे बेहतर स्थिति के योग्य हैं। जैसा कि ट्यूनीशिया ने दिखाया है, अगर वे बहुलवाद और समावेशिता की राजनीति अपना लेते हैं, तो वे इसे हासिल कर लेंगे।
Marxism, Back From the Grave in Uruguay
MONTEVIDEO: Across Latin America, comrades and caudillos are supposedly consigned to the dustbin of history.
Only Cuba holds out against the continent's push toward democracy and open economies.
Marx, however, is far from dead; not least in Uruguay, and perhaps not elsewhere.
Jorge Batlle, taking office as President March 1, must bear this in mind.
In last year's presidential elections, Tabaré Vázquez, the Left's charismatic leader, easily won the first round, though not by enough votes to avoid a second round run off.
Suspense gripped the country.
Jorge Batlle, representing the long dominant Colorado party, needed solid support from the rival Blanco party to overcome Vázquez.
After 150 years of feuding, that support seemed as likely as the Capulets rescuing the Montagues.
Called "red" and "white" after the colored ribbons on their hats – worn since the 1830s to avoid being shot at by one's own side – the Colorados and Blancos are nowadays divided by little ideologically.
But could ancestral wounds be forgotten?
No one knew.
Pollsters predicted a technical draw.
Fear of the Left overcame history's open wounds: Batlle won by 7%, implying that almost all Blancos flocked to him.
Uruguay's voters divided along lines of ideology, not old loyalties.
That divide is likely to deepen, and be repeated at the next election.
But – and here's the rub – next time there may be no second round.
Statisticians suggest that, on a ceteris paribus basis, the Left will attain an absolute majority in the first round in five years.What sort of a Left is on the march in Uruguay?
The Left's rank and file is faceless, with Communists, former guerrillas, and other radical fellow travelers marching side-by-side with a moderate majority of Social and Christian Democrats.
Unlike in Chile, where modernized Socialists recently secured the presidency for the first time since the coup against Allende, even Uruguay's moderate Leftists cling to a passionate militancy, Cuba, and Che Guevara.
Looking at the Left's leadership – dominated by Tabaré Vázquez and a few others – there is an undoubted and longstanding commitment to Marxism-Leninism.
Of late, that ideology is kept in cold storage, but never disavowed.
Those commitments, no matter how hidden, spell trouble in the future.
What incited the Left's rise?
Not current economics.
Uruguay suffered cruel stagnation from the middle 1950s to the 1970s, brought about by rampant protectionism, irresponsible public finance, and tight exchange controls.
All this was long ago.
Leftist support has surged at a time when growth averages something like 3% per year in real terms, and is coupled with the most egalitarian income distribution in Latin America, as well as relatively high government spending for social purposes.
Yet a pervasive malaise grips Uruguay, prompting people to seek systemic change.
The irony of this yearning is that, instead of encouraging policies that would get the economy humming, discontent drives many voters back to the tried and failed policies of the past.
Uruguay is often credited (debited?) with establishing the first welfare state in Latin America.
In 1915 it mandated the first 48-hour week seen anywhere in the world.
Labor market regulation became an almost annual event, stifling innovation.
State-owned commercial banks account for half the financial system; all large companies are State monopolies, bureaucratically staffed and poorly managed.
There is no room for an equities market.
Careers in business are rare.
Ambitious young people seek their fortunes abroad.
A paramount figure in shaping the country was José Batlle, the president elect's great-uncle.
A populist, twice president, he frowned on foreign investment, favored small firms, wanted large ones nationalized, and disparaged entrepreneurship.
Like Marx, he believed that profits resulted from labor's exploitation.
Instead of revolution, he looked to social legislation to put things right.
The elder Batlle was revered in his lifetime and beyond.
His faction eventually absorbed the entire Colorado Party.
Unwittingly, the Blancos borrowed his ideology.
Paradoxically, today's Left benefits from a nostalgia for those Colorado times, when Uruguay's wealth made the elder Batlle's populism possible.
Daunting challenges face Batlle's great-nephew.
If he is merely competent, he will likely end up handing over power to the Left, and thus risks being remembered as Uruguay's Kerenski.
To prevent that fate, he must battle the sprawling bureaucracy and the State's financial/ industrial empire.
Suffocating regulations must be lifted.
A clash with powerful unions awaits.
The choice facing President Batlle is to be either a Kerenski or a Thatcher.
Five earlier presidential bids by Jorge Batlle failed, many believe, because he promised daring, free-market ideas that frightened voters.
During his victorious campaign his advisors kept his mouth shut on everything but trivialities.
Since his election, he has said little more.
The few announced appointments have won lukewarm nods but no enthusiasm from those looking for bold leadership.
President Batlle doesn't have time to dither; if he wants to hold off the hard Left, the economy must turn right before the next election.
Real modernization and real growth are the only things that will block Uruguay's unmodernized Left from power next time.
Europe’s Educational Evolution
DUBLIN – Europe is grappling with great challenges – too great for any one country to address.
Facing economic crisis, widespread unemployment, and rising competition from developing economies, Europe must adjust to technological advances and new modes of working – all while an aging population puts increasing strain on exhausted public budgets.
In this fragile context, the European Union must focus on education in order to nurture people’s talents and potential, and thus to spur economic and social recovery.
Education holds the key not only to better jobs and stronger GDP growth, but also to the cultural, political, and social development that is needed to ensure that citizens are well-rounded and grounded enough to lead at the local, national, and international levels.
By focusing on the right policies, EU leaders can ensure that Europeans’ education enables them to be articulate global citizens and potent economic actors.
The good news is that European leaders seem to recognize the value of the pursuit of knowledge.
When allocating funds in the 2014-2020 European budget, EU governments wisely decided to increase funding for education and research – the only areas in which they did so.
This commitment to safeguarding education and research funding should be reflected at all levels of policymaking.
Moreover, in order to drive Europe’s transformation into a hub of responsible innovation and ethically sound production, policymakers must ensure that higher-education institutions equip students with cutting-edge knowledge and high-level flexible skills grounded in shared values.
This means developing differentiated education systems, ranging from vocational schools to doctoral programs, and giving students access to international experience, which can expose them to opportunities beyond national frontiers.
For example, the Erasmus program, which enables university students to study or work abroad as part of their degree, broadens participants’ outlook while enhancing their willingness and ability to go where the jobs are.
Such programs also enrich local students and offer valuable insights to professors about other traditions of higher education.
Furthermore, EU leaders must recognize that high-quality instruction is as central to universities as, say, pioneering research.
As it stands, while everyone agrees that researchers need extensive training, the prevailing assumption is that great teachers are born and great teaching just happens – a view that is hampering education at all levels.
Improving the quality of instruction in higher education is at the focus of the first report to the European Commission by the High-Level Group on the Modernization of Higher Education (of which I am President).
Among the report’s 16 recommendations is to develop quality teaching through compulsory continuous professional training, and to recognize and reward achievement.
This approach would give educators the skills and motivation that they require to provide the kind of education that Europe needs.
Another crucial issue – and the topic of the group’s next report – concerns new modes of delivering education, such as Massive Open Online Courses (MOOCs).
In fact, some claim that a revolution in the way knowledge and information is created and transmitted is imminent.
While these new modes of delivery are undoubtedly transforming education, especially higher education, what is happening may be more evolution than revolution.
In other words, rather than bringing about the end of brick-and-mortar education, MOOCs and other innovations will spur the progression to so-called “click-and-mortar” education.
This suggests that the group’s recommendations in this area will include complementary improvements to existing formal and non-formal systems, as well as mechanisms for reviving lifelong learning in higher education.
For students, the foundations for success must be laid early, beginning with pre-primary and primary education.
And policymakers must recognize the risk of perpetuating a digital divide that favors those who are already advantaged.
Studies show, for example, that the vast majority of participants in MOOCs – which have been praised for their supposed accessibility – already have higher-education qualifications.
Europe’s leaders must work to ensure that new modes of delivering education translate into better opportunities for a broader range of people.
The pace and scope of technological progress makes predicting impending developments, and how they will affect education, virtually impossible.
Regardless of which new technologies arise, however, education will boil down to teachers and students.
Providing tools and opportunities that support the evolution of their respective roles is essential to creating a labor force capable of adapting to changing circumstances.
The Path to Altruism
SHECHEN, NEPAL – “Cooperation,” the Harvard University biologist Martin Nowak has written, is “the architect of creativity throughout evolution, from cells to multicellular creatures to anthills to villages to cities.” As mankind now tries to solve new, global challenges, we must also find new ways to cooperate.
The basis for this cooperation must be altruism.
The desire to help others without consideration for ourselves is not just a noble ideal.
Selflessness raises the quality and elevates the meaning of our lives, and that of our descendants; in fact, our very survival may even depend on it.
We must have the insight to recognize this, and the audacity to say so.
Humanity faces three monumental challenges: ensuring everyone decent living conditions, improving life satisfaction, and protecting our planet.
Traditional cost-benefit analysis struggles to reconcile these demands, because they span different time frames.
We worry about the state of the economy from year to year; but we consider our happiness over the course of a lifetime, while our concern for the environment will mainly benefit future generations.
But an altruistic approach requires few trade-offs.
A considerate investor will never speculate recklessly with his clients’ life savings, despite the potential gain for himself.
A caring citizen will always think first how his actions affect his community.
A selfless generation will exercise care with the planet, precisely in order to leave a livable world to its children.
Altruism makes us all better off.
This vision of the world may seem idealistic.
After all, psychology, economics, and evolutionary biology have often claimed that humans share an essentially selfish nature.
But research over the past 30 years indicates that true altruism does exist and can extend beyond kin and community to encompass the welfare of humans generally – and that of other species.
Moreover, the altruist does not have to suffer for his good deeds; on the contrary, he often benefits indirectly from them, while the selfish actor often creates misery for himself as well as others.
Studies have also shown that an individual can learn to be altruistic.
Neuroscientists have identified three components of altruism that anyone can develop as acquired skills: empathy (understanding and sharing the feelings of another), loving kindness (the wish to spread happiness), and compassion (a desire to relieve the suffering of another).
Societies, too, can become more altruistic (and may even enjoy an evolutionary advantage over their more selfish counterparts).
Research on the evolution of cultures suggests that human values can change more quickly than our genes.
Thus, if we are to engender a more caring world, we must first recognize the importance of altruism – and then cultivate it among individuals and promote cultural change in our societies.
Nowhere is the need to cultivate this recognition clearer than it is in our economic system.
The unrealistic pursuit of endless quantitative growth places intolerable strains on our planet and widens inequalities.
But reversing that growth would create other problems; forcing people to compete for diminishing assets and resources would spread unemployment, poverty, and even violence.
So a balance must be struck: the global community must lift 1.5 billion people out of poverty, while the excesses of the world’s richest consumers – which cause the vast majority of ecological degradation – must be limited.
We need not impose more taxes to achieve this, but we can persuade the wealthy that the eternal pursuit of material gain is both unsustainable and unnecessary for their own quality of life.
This concept of “sustainable harmony” can be promoted by publishing indices of personal well-being and environmental preservation, alongside standard GDP data.
The government of Bhutan, for example, already accounts for the “social wealth” and “natural wealth” of its people, in addition to its GDP figures.
We could also establish a stock exchange, alongside traditional securities markets, comprising so-called ethical organizations, such as social enterprises, cooperative banks, microcredit agencies, and fair-trade groups. Several initiatives – for example, in Brazil, South Africa, and the United Kingdom – have already taken small steps in this direction.
Small steps lead to big changes.
As the value of altruism becomes increasingly obvious, the new approach will spread through the economy, benefiting all of society, future generations, and the planet, too.
Addicted to Putin
MOSCOW – Watching Russia’s worrying trajectory under President Vladimir Putin, many foreign observers ask how a leader who is so apparently driving his country toward the abyss can remain so popular.
The answer is simple: Putin’s supporters – that is, a hefty majority of Russians – do not see the danger ahead.
According to the independent Levada Center, Putin’s approval rating increased from 65% in January to 80% in March, immediately after Russia’s annexation of Crimea.
The rate reached its peak in early August, at 87%, when many believed that Russia and Ukraine were on the brink of all-out war.
Though it fell after that, to 84% in early September, the drop is within the margin of error.
In other words, there is no basis to claim that Putin’s approval rating is declining.
Putin’s startlingly high popularity certainly cannot be attributed to a positive view of state structures in general.
Like most people, Russians are generally dismissive of bureaucracy.
They give low grades to specific agencies, consider most officials to be corrupt, and rate the government’s performance on most issues as mediocre, at best.
Instead, Russians’ approval of Putin is rooted in the fact that there is no alternative.
The Russian political field has been carefully cleared of all competition.
Approval ratings in this context are not tools for comparing politicians’ performance and prospects, and thus for compelling them to do better or risk being voted out in the next election.
Rather, they are a reservoir of the population’s hopes and fears.
During his first two terms, Putin was a strong source of hope, owing largely to the rapid increase in Russians’ incomes.
In 2012, this growth began to wane – and so did Putin’s popularity.
His 63-65% approval rating prior to the annexation of Crimea appeared high by Western standards, but was low compared to his previous record – and dangerously close to levels that would threaten his leadership.
After all, an authoritarian regime built around a charismatic leader requires more than middling public support if it is to avoid unrest and violence.
In an attempt to recapture his former popularity, Putin implemented salary increases for teachers, doctors, and police officers, putting regional budgets under strain in the process.
But higher incomes did not translate into improvements in people’s standard of living or the quality of public services, leaving Putin’s approval rating flat, with some of his opponents even taking to the streets to protest his leadership.
And, contrary to the regime’s expectations, the Winter Olympics in Sochi also failed to revive Putin’s popularity.
With the economy showing no sign of recovering the robust growth rates that had bolstered Putin’s popularity in the past, regaining support would have required undertaking the daunting task of fulfilling citizens’ demands for better education, improved health-care services, and more affordable housing.
For Putin, the timing of the political eruption in Ukraine – with protesters eventually forcing the Kremlin-supported president, Viktor Yanukovych, to flee the country – could not have been more ominous.
Quashing perceptions of Putin as a “loser” in Ukraine became a top priority in Moscow.
The strategy that emerged, beginning with the annexation of Crimea, delivered results almost immediately.
The Russian public moved into “emergency mode,” with Putin’s approval rating soaring above 80%.
In such a politically charged context, the sociologist Boris Dubin observed, symbolic acts are more compelling than, say, economic considerations.
Indeed, complaints about stagnating incomes and poor public services gave way to displays of unqualified support for the government, with citizens declaring their willingness to shoulder the costs of confronting the West.
Why did the Russian public accept confrontation so easily?
Sharply divisive official rhetoric and the evocation of war imagery by state-owned media certainly played a role.
But there is another, less obvious factor at work: Russia’s lack of debt.
It is easier to get carried away when not much is keeping you anchored.
According to the professional services firm Deloitte, mortgage debt in Russia is 20 times lower, on average, than in the European Union.
And the National Agency for Financial Studies reports that only 2% of Russians are prepared to take on a mortgage, owing largely to the uncertainty that plagues the market.
For Western societies – weighed down by credits, contracts, and other obligations – conflict is extremely costly, so they tend to resist it, and even turn on leaders who suggest it.
Ordinary Russians, by contrast, are willing to pin their hopes on a single charismatic figure, not only because they have fewer promising alternatives, but also because they face fewer constraints in doing so.
In this sense, Russians have come to depend on their belief in Putin as much as he depends on their support.
Instead of serving as a source of stability, as it did in the past, this mutual dependence is driving Russia toward political and economic isolation – with serious consequences for ordinary Russians’ livelihoods.
Sooner or later, Putin’s approval rating will plummet.
The challenge facing Russians is to ensure that, when it does, they have broken their destructive dependence on belief in him.
(Foreign observers, too, should abandon the habit of focusing all of their attention on the person at the top.)
In the meantime, no one can predict the ends to which Putin will go to prop up his presidency.
May Day Madness
May 1, 2006, is a crucial date for Europe, for it is the deadline for implementing the European Union’s directive on freedom of movement into national law.
Most countries have already changed their immigration laws, or have promised to do so before the deadline.
Only Belgium, Italy, Finland, and Luxemburg lag behind.
True, some of the old EU countries have opted for a prohibition of labor migration during a transition period that is initially set at two years and may be extended to April 2011.
However, this prohibition does not apply to people who are self-employed or not working.
Such people already enjoy full freedom of free migration today.
While the directive’s rules governing migration of employed and self-employed people hardly differ from previous EU law, the migration and social-welfare rights of non-working EU citizens have been significantly extended.
According to the directive, every EU citizen has the right to a residence permit for up to five years in any member state, followed by the right to permanent residence.
In principle, even inactive immigrants will then be eligible for social-welfare benefits, just like nationals.
The directive contains safeguards to limit potential abuse of welfare-state benefits during the first five years, including proof of health insurance coverage and a requirement that sufficient “resources” be shown when a residence permit of up to five years is requested.
But it is not clear what these resources are meant to be.
According to the directive’s preamble, the state cannot cite insufficient assets as a reason to refuse a residence permit, as this would be inadmissible discrimination.
In theory, the resource requirement must be tailored to the individual circumstances of the immigrant. In practice, however, financial means in the form of assets or regular income are uniformly required from all immigrants, regardless of their individual characteristics.
Nevertheless, even during the five-year period, an immigrant will enjoy greater rights.
If he becomes indigent after receiving a residence permit, he cannot automatically be returned to his home country, as was possible before.
Instead, the welfare state must make its services available to him.
Only “unreasonable” claims may be refused, but the state will bear the burden of proving unreasonableness.
Nor can the duration of the residence permit be shortened simply because the immigrant claims welfare assistance.
When the five years of legal residence are completed, an immigrant automatically gains the inalienable right to permanent residence.
The host country cannot deny this right even if an immigrant has no health insurance and no resources to live on.
The immigrant will be fully eligible for all benefits the host country offers its domestic residents.
The incentives to make use of the new directive will be especially strong for East Europeans.
Today, average nominal wages in the eight post-communist EU countries are about one-fifth of the West European level and often only a quarter to a half of Western levels of social assistance.
The real differences in living standards are not quite as large, but they are a temptation nonetheless.
This will be particularly true for Bulgarians and Rumanians, who are invited to join the EU in 2007.
Currently their nominal wages are only about 7% of the West European average.
Western Europe has already experienced three decades of indirect migration into the welfare state, as social benefits have created artificially high wages for the unskilled, simultaneously fueling excessive immigration and unemployment.
Immigrants have crowded out domestic residents who prefer the benefits to engaging in low-wage competition with the newcomers.
The directive on free movement implies a new era of direct migration into West European welfare states.
The result may be an erosion of these welfare states themselves.
As no West European state wants welfare immigration, and because they are unable to discriminate between nationals and EU immigrants, they will begin to reduce their services.
Europe will enter an extended period of competitive deterrence, during which it will gradually abandon its old social values.
To be sure, countervailing political forces will press for harmonization of Europe’s social-welfare systems.
The draft EU constitution, which failed in the French and Dutch referenda last year, breathes the spirit of this approach.
Unfortunately, harmonization would probably apply to wage replacement payments, implying uniform minimum wage constraints for EU countries.
Given the EU’s economic heterogeneity, this outcome would likely boost unemployment.
There is still time to avert these frightening effects.
But, to do so, the directive on free movement must be changed, so that the right to immigrate does not automatically imply a right to social benefits.
If the home country were to remain responsible for welfare services to non-working immigrants, the erosion of West European welfare states that the theory of systems competition predicts could be halted.
But that would mean a substantial change in the direction of EU social policies, including revision of the draft constitution.
McCain, Obama, and Hot Air
WASHINGTON, DC – Whatever the outcome of the United States’ presidential election, climate change policy will be transformed.
Both candidates have placed great importance on global warming.
Republican John McCain believes that it presents “a test of foresight, of political courage, and of the unselfish concern that one generation owes to the next,” while Democrat Barack Obama calls it “one of the greatest moral challenges of our generation.”
It remains far from clear, however, whether the shift in rhetoric and policy will move the planet any closer to embracing the best response.
Both McCain and Obama could leave future generations lumbered with the costs of major cuts in carbon emissions – without major cuts in temperatures.
Both politicians are keen to tap into voters’ concerns about global warming.
McCain launched a television commercial declaring that he had “stood up to President George Bush” on global warming. If elected, Obama plans to count on former vice president and passionate campaigner Al Gore to help “lead the fight” against warming.
Each would introduce aggressive targets for reductions in greenhouse gas emissions.
Obama’s plan would reduce emissions by 80% below 1990 levels by 2050, while McCain aims to ensure that emissions are 60% lower by then.
Both would achieve these ambitious cuts by the same method: a cap-and-trade system that imposes limits on industry emissions and forces businesses to buy rights to any additional emissions.
A cap-and-trade system can seem like a neat market solution.
In fact, it is worse than a straightforward carbon tax.
With a tax, the costs are obvious.
With a cap-and-trade system, the costs – in terms of jobs, household consumption, and economic growth – are hidden, shifted around, and not easy to estimate, though models indicate they will run into trillions of dollars.
Not everybody would lose.
Some big businesses in privileged positions would make a fortune from exploiting this rather rigged market.
And politicians would have an opportunity to control the number and distribution of emission permits and the flow of billions of dollars in subsidies and sweeteners.
This is a very expensive, unwieldy way to achieve a very small reduction in temperatures.
The Warner-Lieberman bill on climate change – a piece of legislation which was recently abandoned in the US Senate but is seen as a precursor of future policy – would have postponed the temperature increase in 2050 by about two years.
Recently, the Copenhagen Consensus project gathered eight of the world’s top economists – including five Nobel laureates – to examine research on the best ways to tackle 10 global challenges: air pollution, conflict, disease, global warming, hunger and malnutrition, lack of education, gender inequity, lack of water and sanitation, terrorism, and trade barriers.
Their goal was to create a prioritized list showing how money could best be spent combating these problems.
The panel concluded that the least-effective use of resources would come from simply cutting CO2 emissions.
A lead author of the Intergovernmental Panel on Climate Change – the group that shared last year’s Nobel Peace Prize with Gore – told the experts that spending $800 billion over 100 years solely on mitigating emissions would reduce inevitable temperature increases by just 0.4 degrees Fahrenheit by the end of this century.
Even accounting for the key environmental damage from warming, we would lose money, with avoided damages of just $685 billion for our $800 billion investment.
The expert panel concluded that investing in research and development into low-carbon energy would be a much sounder, more effective option – an effort that both McCain and Obama support.
But this, not carbon emissions, should be the core of their climate change policy.
Currently, low-carbon energy solutions are prohibitively expensive.
The typical cost of cutting a ton of CO2 is now about $20, but the damage from a ton of carbon in the atmosphere is about $2. So we need to reduce by roughly ten-fold the cost of cutting emissions.
We can achieve this by spending dramatically more researching and developing low-carbon energy.
The US could provide leadership by committing to spending 0.05% of its GDP exploring non-carbon-emitting energy technologies – wind, wave, or solar power – or capturing CO2 emissions from power plants.
It would then have the moral authority to demand that other nations do the same. By focusing more on research and development, and less in carbon cuts, both candidates could embrace a solution that encourages the best of the American innovative spirit and leaves the best possible legacy to future generations: a high-income, low-carbon energy world.
Measuring the Revolutionary Wave
NEW YORK – A prediction three months ago that popular protests would soon topple a dictatorship in Tunisia, sweep Hosni Mubarak from power in Egypt, provoke civil war in Muammar el-Qaddafi’s Libya, and rattle regimes from Morocco to Yemen would have drawn serious skepticism.
We knew that the tinder was dry, but we could never know how or when, exactly, it would combust.
Now that it has, how far can the flames spread?
Some commentators have taken to calling this moment the “Arab Spring,” an awakening that might permanently cripple autocracy in the Middle East.
The contagion effect seems clear.
Countries across the region have large numbers of young people and too few jobs.
Food prices are rising.
Corruption fuels anger.
In Egypt, young people, inspired by satellite television images and empowered by modern communications, lit and fed the fire.
Given the easy availability of these technologies, their ability to catalyze protest might transcend borders once thought impregnable.
But, with their survival at stake, authoritarian regimes are good at spotting threats in the neighborhood and adapting to meet them.
Though satellite television, mobile phones, and online social networking can force some authoritarians to become more responsive to popular demands, governments can also use these technologies to identify and isolate threats, monitor communications among activists, and transmit messages of their own.
Or, when necessary, they can simply turn them off.
More to the point, the protests now roiling the Arab world have little to do with the “Prague Spring” of 1968 or the revolutions that swept through Eastern Europe in 1989.
Unlike Cold War-era East Germans, Czechs, and Poles, protesters in today’s Middle East are not unified by opposition to foreign control.
To be sure, many Arab young people blame America for bolstering the local dictator, but their resentment doesn’t begin to compare with anti-Soviet attitudes in the Warsaw Pact.
Arab youth have no Soviet Union to cast off – and no Europe to join.
Instead, today’s Middle East is most usefully compared to the increasingly restive former Soviet republics of a few years ago.
In 2003, a “Rose Revolution” in Georgia elevated a younger generation led by a president without ties to Soviet communism.
Mikhail Saakashvili remains in power, though a brutal four-day war with Russia in 2008 sharply limited Georgia’s ability to influence events beyond its borders.
In Ukraine, the “Orange Revolution” in 2004 overturned the results of a rigged election, sidelining Viktor Yanukovych in favor of Viktor Yushchenko.
But in 2010, with Yushchenko’s popularity at an all-time low, Yanukovych won a vote that international observers pronounced free and fair.
In Kyrgyzstan in 2005, the “Tulip Revolution” forced the ouster of Askar Akayev.
Hastily held elections lifted Kurmanbek Bakiyev to the presidency.
Yet, in 2010, a new round of protests forced Bakiyev from power.
As in the Middle East, each of these upheavals reflected the willingness of many people to risk their lives and livelihoods to topple a corrupt government that could or would not generate opportunity and prosperity for them.
All three arrived like bolts from the blue.
So far, their main lasting effect has been to frighten neighboring autocrats into action.
Governments in Armenia, Azerbaijan, Belarus, and Uzbekistan have infiltrated and undermined civil-society organizations, kicked out Western observers and aid workers, and leaned on local courts to guarantee favorable election-related rulings.
Uzbekistan, in particular, has proven its willingness to brutalize protesters.
The wealthiest of the post-Soviet states, Russia and Kazakhstan, took similar preemptive steps against instability that never came.
As in Georgia and Ukraine, Tunisia and Egypt will have new governments to grapple with old problems.
Other Arab regimes are now spending their way back to stability with money that most former Soviet states didn’t have.
Some have enough cash for new subsidies and direct handouts, as well as to pay their military and security forces more and reinforce their tools and methods of crowd control.
Threats to the wealthier Persian Gulf states, in particular, are exaggerated.
Bahrain, the world’s only Shia-majority country governed by a Sunni monarch, remains on edge.
But King Hamad bin Isa Al Khalifa can continue to count on help from his deep-pocketed friends in Saudi Arabia, who are determined to prevent Bahrain’s unrest from spilling over into their country’s oil-rich Eastern Province, where most Saudi Shia live.
In the end, Bahrain’s Shia majority will likely gain more rights and political representation, as well as cash payments and jobs, but Khalifa will remain in charge.
There is even less risk in Saudi Arabia itself, where King Abdullah recently promised more than $130 billion in stimulus spending.
The few Saudi demonstrations appear populated almost entirely by minority Shia, who find little sympathy among majority Sunnis, and by foreign construction workers petitioning for higher wages and better working conditions.
Syria’s President Bashar al-Assad has more domestic support than recent media accounts of unrest in the country’s south suggest.
Nor does Iran’s government appear to face real danger.
The brutal crackdown on post-election protests in 2009 demonstrated the regime’s determination to maintain order by any means necessary.
For the moment, most of Iran’s opposition will continue to try to change the country from within the limits of the current system.
In the Middle East, only in Yemen is unrest likely to bring about another regime change.
Outside of Libya, where violent stalemate could continue for some time, embattled North African regimes also will muddle through.
Protests in Morocco have not cut into King Mohammad’s broad popular support, and promises of economic and political reform will probably satisfy opposition parties for the time being.
In Algeria, demonstrations have lost momentum, and President Abdelaziz Bouteflika can rely on his military to keep diehard activists in check.
The Arab Spring has upended assumptions about popular patience in the region.
A new chapter has begun.
But we must never overestimate the ability of new governments to solve old problems – or underestimate the ingenuity and brutality of the old regimes.
Meeting Medvedev
LONDON – In 2001, George W. Bush claimed that he had looked into Vladimir Putin’s eyes and found a soulmate for the West.
Putin then proceeded to restore authoritarian rule in Russia. Today, Western leaders may well be about to repeat the same mistake with Dmitry Medvedev.
Sunday’s election was a coronation rather than a competition.
Medvedev’s only opponents were has-beens from the 1990’s like Vladimir Zhirinovsky, who long ago converted himself from proto-fascist into a Kremlin loyalist, and Andrey Bogdanov, an ersatz “democrat” permitted to run by the Kremlin in order to dupe the West into thinking that a real contest was taking place.
It is therefore surprising that Medvedev should be hailed by so many in the West as a “liberal.”
Is this just because we have been maneuvered into fearing someone worse, a sabre-rattling silovik (past or present member of the security services), like former Defense Minister Sergey Ivanov?
Or does Medvedev represent a genuine opportunity to unfreeze the current mini-Cold War between Russia and the West?
Medvedev is indeed personable.
Putin’s background was in the KGB, while Medvedev is a lawyer who has attacked Russia’s “legal nihilism” and denounced the fashionable concept of “sovereign democracy.”
Medvedev is familiar to the business world after seven years as Chairman of the Board of Gazprom. He can talk the talk at Davos.
He wears nice suits.
He does not look like an archetypal post-Soviet bureaucrat or KGB agent.
He is a big fan of 1970’s rockers Deep Purple.
But we need to understand the system that made Medvedev before rushing to embrace a new face that may turn out to be only a cosmetic improvement.
Russia’s problem is not that it is an imperfect democracy, but that its governance is corrupted by so-called “political technology.” This involves more than just stuffing the ballot box.
Political technology means secretly sponsoring fake politicians like Bogdanov, setting up fake NGO’s and “patriotic” youth movements like Nashi (Ours) to prevent a Russian version of Ukraine’s Orange Revolution, and mobilizing voters against a carefully scripted “enemy.”
In 1996, the enemy was the Communists; in 1999-2000, the Chechens; in 2003-04, the “oligarchs.”
Now it is us – the supposedly hostile West and the threat posed by “color revolutions” to Russia’s hard-won stability.
Medvedev himself may find some or all of this distasteful, but Russia now has an entire industry of political manipulation that is hardly likely to disappear overnight.
We also need to understand the mechanics of Russian succession politics.
In the Russian context, “liberal” does not mean little more than opposing the siloviki .
It means being in a different clan, at a different part of the feeding trough.
The uncertainties of the succession have created a covert war for property and influence between a handful of different clans, but the system cannot afford an outright winner.
In recent months, the most powerful clan, led by Deputy Head of Kremlin Administration Igor Sechin, whose company, Rosneft, received the biggest chunk of Yukos in 2004, has threatened to engulf the others.
Another company, Russneft, worth an estimated $8-9 billion, seems to be heading its way, after its owner, Mikhail Gutseriyev, was evicted by the same recipe of legal threats and tax liens that was used against Yukos, and after the mysterious death of his son in a car crash.
There are rumors that Sechin’s clan has designs on Russia’s Stabilization Fund, which soaring energy prices have pumped up to over $140 billion.
In other words, rebalancing the system, not any sudden desire to reverse the increasingly illiberal course Russia has taken since 2003, was the key reason for choosing Medvedev.
Putin’s ambition to stay in power as prime minister is also rooted in this rebalancing act.
He needs to stay on as Medvedev’s “minder” to keep any one clan from dominating the others. Medvedev and the siloviki heartily dislike each other.
Sechin and Ivanov will be watching him closely for any signs of weakness.
Medvedev will not become his own man until he can cut free.
Putin himself honored his succession deal with Boris Yeltsin for about three years.
It is often forgotten that Yeltsin loyalists like Alexander Voloshin and former Prime Minister Mikhail Kasyanov survived in office until the Yukos affair of 2003-04.
Medvedev may one day have his own Yukos moment, but we should not assume that he is an independent player until he does.
European governments can therefore welcome Medvedev’s election, but their response should be carefully calibrated to the real changes he will be able to make.
Europe should avoid repeating the over-reaction of many leaders when Putin succeeded the ailing Yeltsin in 2000.
There should be no race to be Medvedev’s new best friend, and no staring into his eyes and speculating about his soul.
We should concentrate on what Medvedev does, not on what he says, because there can be no real transition in Russia unless and until he begins to define the system rather than being defined by it.
Fiscal Discipline and Educational Quality
ANKARA – The world is moving into a post-industrial age in which manufacturing is becoming ever more complex and competition has become global.
To succeed, countries increasingly need a highly skilled and educated workforce.
Therefore, raising the level of skills conferred by secondary schools has become an urgent priority for developing and developed countries alike.
For me, the issue of education is no mere academic matter.
I was born into a family of nine children.
My parents were illiterate, and none of my sisters attended school beyond the primary level.
However, in my family’s next generation, all of my nieces and nephews have a high-school diploma and most have attended university.
Improving the education system of a country with more than 16 million primary and secondary school students – more than the combined population of 20 European Union member states – poses considerable fiscal challenges.
So the first step is to create a sound macroeconomic basis for reform.
For many years, high public debt and macroeconomic mismanagement forced Turkey to pay a huge interest-rate premium in international financial markets – money that might have otherwise been invested in schools.
However, since assuming office in 2003, Prime Minister Recep Tayyip Erdoğan’s government has reduced the fiscal deficit as a share of GDP by nearly ten percentage points, from 10.8% in 2002 to 1% in 2013, and cut the public debt/GDP ratio from 74% in 2002 to 36.3% in 2013.
As a result, government interest payments as a share of tax revenues fell from 85.7% to 15.3% during this period.
These fiscal improvements have freed up funds for sizable investments in education, without adding to public debt.
From 2002 to 2014, Turkey doubled the proportion of education spending in the total budget to 18% without hurting the country’s fiscal position.
Since 2003, this extra money has allowed the government to hire some 410,000 more teachers, add 205,000 classrooms, and distribute 1.8 billion free textbooks.
But to compete with the world’s economic powerhouses, like China, we also needed to improve the overall quality of our labor stock.
From the 2002-03 academic year to 2012-13, gross schooling rates (which includes students whose age exceeds or falls short of the official age group) increased from 96.5% to 107.6% in primary education; 80.8% to 96.8% in secondary education; and 35.8% to 92.1% in higher education.
Pupil-teacher ratios have also fallen.
In the 2002-03 school year, there were 28 students per teacher in primary education and 18 in secondary schools; by 2012-13, this had fallen to 20 and 16, respectively.
And in 2012, Turkey raised the minimum period of compulsory education to 12 years.
This is an important reform, given that the average schooling of people over 25 is only 6.5 years in Turkey, compared to an OECD average of more than 11.
Moreover, the government has improved educational opportunities.
As part of the FATIH project to help underprivileged students, Turkey has allocated 1.4 billion lira ($665 million) in 2014 to equip its schools with broadband Internet and the latest information technology.
Other initiatives, such as “Baba Beni Okula Gönder” (Daddy, Please Send Me to School) and “Haydi Kızlar Okula” (Girls, Let’s Go to School), have improved enrollment gender ratios, from 91.1 girls for every 100 boys in 2002, to 101.8 girls for every 100 boys in 2012.
This is likely to improve female labor-force participation in Turkey, which is around 30% on average, but 72% for those with a university diploma.
Given Turkey’s geographic size (twice that of Germany but with a similar-size population), it has been a challenge to ensure that all pupils, regardless of their location or socioeconomic background, receive a good education.
But one of Turkey’s most remarkable successes since 2003 has been to break the intolerable link between a child’s household circumstances and his or her chances to succeed in school.
Consider that in 2003, the test scores of 28% of Turkish students could be explained by their socioeconomic standing – in other words, the poorer the pupil, the lower his or her PISA scores.
This was in line with the OECD average.
But the OECD’s 2012 report found that only 15% of lower test scores among Turkish students could be explained by their socioeconomic standing, a better outcome than the OECD average.
Turkey is also narrowing the gap with OECD countries in terms of educational quality.
In 2006, Turkey scored 76 points lower than the OECD average in science exams and 74 points lower in math.
By 2012, the gap had fallen to 38 points in sciences and 46 points in math.
Given these achievements, it may be no coincidence that Turkey’s youth unemployment rate has also declined, from 25.3% in 2009 to 17.3% in January 2014, below the EU average of 22.8%.
What is clear is that improving education and bolstering economic growth go hand in hand.
Of course, more needs to be done to realize Turkey’s human-development potential; but the past decade of educational reforms and their beneficial economic effects demonstrate that the foundations are being laid for rapid, sustainable, and inclusive growth.
अफ़्रीका के कृषि संबंधी लैंगिक अंतर को समाप्त करना
सिएटल – किसी भी अन्य महाद्वीप की तुलना में अफ़्रीका के सकल घरेलू उत्पाद में अब तेज़ी से वृद्धि हो रही है। बहुत से लोग जब इस विकास को सफल बनानेवाले कारणों पर विचार करते हैं तो वे तेल, सोना, और कोको जैसी वस्तुओं, या शायद बैंकिंग और दूरसंचार जैसे उद्योगों के बारे में सोचते हैं। मेरे मन में जॉयस सैंडिर नाम की महिला का नाम आता है।
जॉयस एक किसान है जो ग्रामीण तंज़ानिया में भूमि के एक छोटे से टुकड़े पर केले, सब्ज़ियाँ, और मक्का उगाती है। जब मैं 2012 में उससे पहली बार मिली थी तो उसने विशेष रूप से तंज़ानिया की जलवायु के लिए अनुकूलित एक बीज से उगाई गई मक्का की अपनी पहली फसल की खेती की थी। ख़राब फसल वाले वर्ष के दौरान जॉयस की बहुत-सी सब्ज़ियाँ ख़राब होकर नष्ट हो गई थीं, पर उसकी मक्का की फसल लहलहा रही थी। उसके बिना, उसके परिवार के लिए शायद भूखे रहने का ख़तरा हो सकता था। इसके बजाय, मक्का की फसल से यह सुनिश्चित हो सका कि जॉयस के परिवार के पास खाने के लिए पर्याप्त अन्न हो - और साथ ही जॉयस को इतनी पर्याप्त अतिरिक्त आय भी हो कि उसके बच्चों की स्कूल की फ़ीस भरी जा सके।
जैसा कि जॉयस की इस कहानी से पता चलता है, कृषि अफ़्रीका के भविष्य के लिए अत्यंत महत्वपूर्ण है। अफ़्रीका की श्रमिक जनसंख्या में 70% किसान हैं। वे इसकी अर्थव्यवस्था की नींव हैं, और व्यापक विकास को गति देने में इनकी प्रमुख भूमिका है। अनुसंधान से पता चलता है कि कृषि उत्पादकता में वृद्धि करना उप-मरुस्थलीय अफ़्रीका में ग़रीबी को दूर करने का सबसे अधिक कारगर उपाय है।
वास्तव में, इस महाद्वीप में कृषि ग़रीबी के कुचक्र को विकास के सुचक्र में बदलने का एक सुनहरा मौका उपलब्ध करती है। यही कारण है कि इस पूरे महाद्वीप के नेताओं और नीति-निर्माताओं ने वर्ष 2014 को अफ़्रीका का कृषि और खाद्य सुरक्षा वर्ष घोषित किया है।
जॉयस की कहानी एक अन्य कारण से भी प्रासंगिक है। वह अफ़्रीका के भविष्य के लिए न केवल इसलिए महत्वपूर्ण है कि वह एक किसान है बल्कि इसलिए भी कि वह एक महिला है।
गेट्स फ़ाउंडेशन में मैं अपना काफी समय उन बहुत-से तरीकों को समझने में लगाती हूँ जिनसे महिलाएँ और बालिकाएँ विकास कार्य को आगे बढ़ात�� हैं: अपने बच्चों के पोषण, बुनियादी स्वास्थ्य और शिक्षा में निवेश करके - तथा कृषि श्रम उपलब्ध करके भी। अब मैं जो समझ पा रही हूँ वह यह है कि अगर अफ़्रीका किसी कृषि क्रांति की उम्मीद करता है तो इसके देशों को पहले एक मुख्य रुकावट, अर्थात व्यापक लैंगिक अंतर को दूर करना होगा जिसके कारण यह क्षेत्र पिछड़ा हुआ है।
यह अंतर महिला किसानों की संख्या का नहीं है। वास्तव में, अफ़्रीका के किसानों में लगभग आधी संख्या महिलाओं की है। यह अंतर उत्पादकता का है। पूरे महाद्वीप में, महिलाओं द्वारा नियंत्रित खेतों में पुरुषों द्वारा नियंत्रित खेतों की तुलना में प्रति हेक्टेयर कम उपज होती है।
इस लैंगिक अंतर के प्रमाण दुनिया को 2011 से ही मिलने शुरू हो गए थे, लेकिन इसकी व्याप्ति, स्वरूप, और कारणों के बारे में आँकड़े केवल सीमित रूप से उपलब्ध थे। हम इस समस्या को ठीक तरह से समझ सकें, इसके लिए विश्व बैंक और ONE अभियान ने हाल ही में महिला किसानों के सामने आनेवाली चुनौतियों का एक अभूतपूर्व विश्लेषण किया।
उनकी रिपोर्ट में आरंभ से ही एक कठोर तथ्य की ओर ध्यान आकर्षित किया गया है: लैंगिक अंतर वास्तविक है, और कुछ मामलों में यह बहुत अधिक है। जब हम समान परिस्थितियों में समान भूमि आकारों वाले पुरुष और महिला किसानों की तुलना करते हैं तो उत्पादकता अंतराल 66% जितना अधिक पाते हैं, जैसा कि नाइजर के मामले में है।
इससे पूर्व, विशेषज्ञों का यह मानना था कि महिलाओं के खेतों में उपज इसलिए कम होती है कि महिलाओं की उर्वरकों, जल और यहाँ तक कि सूचना जैसी निविष्टियों तक पहुँच कम होती है। लेकिन अब हम यह जानते हैं कि यह मामला इससे कहीं अधिक पेचीदा है। अब चूँकि नए डेटा उपलब्ध हो गए हैं, हम देख सकते हैं कि आश्चर्यजनक बात यह है कि महिलाओं की निविष्टियों तक पहुँच समान होने पर भी उत्पादकता का अंतर बना हुआ है। इसके वास्तविक कारण अलग-अलग देशों में अलग-अलग हो सकते हैं - परंतु अधिकतर कारणों के मूल में कठोर सांस्कृतिक मानदंड हैं जो महिलाओं को उनकी पूर्ण अंतर्निहित शक्ति तक नहीं पहुँचने देते।
उदाहरण के लिए, रिपोर्ट से यह पता चलता है कि महिलाओं को अपने खेतों में अधिक उपज पैदा करने के लिए जिस श्रम की ज़रूरत होती है उसे जुटाने में उन्हें कई अड़चनों का सामना करना पड़ता है। महिलाओं पर पुरुषों की तुलना में आम तौर पर बच्चों की देखभाल और परिवार की जिम्मेदारियाँ अधिक होती हैं जिसके फलस्वरूप उनके लिए खेती के काम के लिए उतना समय दे पाना, या भाड़े पर लिए गए मज़दूरों की देखरेख करना भी कठिन होता है। यह समस्या इस कारण और भी जटिल हो जाती है क्योंकि सबसे पहली बात तो यह है कि संभवतः महिलाओं के पास मज़दूर भाड़े पर लेने के लिए आय भी कम होती है।
सौभाग्यवश, नए डेटा में न केवल इस समस्या की जटिलता और गहनता का आकलन किया गया है; बल्कि उनमें ऐसी लैंगिक-प्रतिक्रियात्मक नीतियाँ बनाने के लिए ठोस अवसरों के बारे में भी बताया गया है जिनसे अफ़्रीका के सभी किसानों की उम्मीदों को फलीभूत करने में मदद मिलेगी।
कुछ स्थानों पर इसका अर्थ यह होगा कि कृषि विस्तार कार्यकर्ताओं को इस बारे में शिक्षित किया जाए कि वे अपने संदेशों को महिला सहभागियों के लिए किस प्रकार अधिक प्रासंगिक बना सकते हैं या उन्हें प्रोत्साहित किया जाए कि वे ऐसे समय पर जाएँ जब महिलाओं के घर पर होने की अधिक संभावना हो। अन्य स्थानों पर इसका अर्थ यह होगा कि महिलाओं की बाज़ारों तक पहुँच को बढ़ाया जाए, अथवा उन्हें अपनी भूमि से अधिकतम उपज प्राप्त करने में मदद करने के लिए श्रम की बचत करनेवाले उपकरण उपलब्ध किए जाएँ।
इसके लिए सामुदायिक शिशु देखभाल केंद्र स्थापित करने की भी आवश्यकता हो सकती है ताकि महिला किसानों को खेती करने में अधिक समय लगाने का विकल्प मिल सके। हर मामले में, इसके लिए यह ज़रूरी होगा कि अफ़्रीकी नीति-निर्माता महिला किसानों को आवश्यक आर्थिक भागीदार के रूप में मानना शुरू कर दें जो कि वे हैं।
इस वर्ष जून में, अगले दशक के लिए कृषि नीति का कार्यक्रम निर्धारित करने के लिए पूरे अफ़्रीका के नेताओं की मालाबो, इक्वेटोरियल गिनी में एक बैठक होगी। यदि अफ़्रीका के कृषि क्षेत्र को अपना वायदा पूरा करना है - और यदि अफ़्रीका के आर्थिक विकास को जारी रखना है - तो नीति-निर्माताओं को जॉयस जैसे किसानों की आवश्यकताओं को ध्यान में रखना होगा। उसकी कहानी सफलता की एक ऐसी कहानी है जिसे पूरे महाद्वीप में दुहराया जा सकता है - और अवश्य दुहराया जाना चाहिए।
Me Medicine
Francis Collins, Director of the United States’ National Institutes of Health, guides us through the upheaval in his new book The Language of Life – DNA and the Revolution in Personalized Medicine.
As he puts it, “We are on the leading edge of a true revolution in medicine, one that promises to transform the traditional ‘one size fits all’ approach into a much more powerful strategy that considers each individual as unique and as having special characteristics that should guide an approach to staying healthy.
But you have to be ready to embrace this new world.”
This seismic shift toward genetic personalized medicine promises to give each of us insight into our deepest personal identity – our genetic selves – and let us sip the elixir of life in the form of individually tailored testing and drugs.
But can we really believe these promises?
Genetic personalized medicine isn’t the only important new development.
Commercial ventures like private blood banks play up the uniqueness of your baby’s umbilical-cord blood.
Enhancement technologies like deep-brain stimulation – “Botox for the brain” – promote the idea that you have a duty to be the best “me” possible.
In fact, modern biotechnology is increasingly about “me” medicine, the “brand” being individual patients’ supposed distinctiveness.
But all these technologies remain more hype than reality – and sometimes dangerous hype.
Personalized genetic testing is now under investigation by the US Congress and the US Food and Drug Administration for misleading customers into thinking we know much more than we actually do about the link between particular genes and the probability of developing particular illnesses.
Likewise, privately banked cord blood has been shown to be clinically less effective than publicly banked and pooled blood, leading to two skeptical reports from leading obstetricians’ associations warning against its routine collection at childbirth.
And enhancement technologies, supposedly enabling us to become “trans-human,” have attracted much publicity, but remain largely speculative.
Credit for the greatest advances in human health and longevity over the last two centuries should go to “we” medicine, not “me” medicine.
Public-health and sanitation programs, polio and smallpox vaccinations, and tuberculosis screening in schools and workplaces have contributed the most to improved health in the Western world and beyond.
But when parents buy into scares linking childhood vaccines to autism, when media pundits scoff at public-health measures to prevent swine flu from spreading, or when a UK researcher claims that “the scourge of aging is worse than smallpox,” vaccination, epidemic prevention, and screening fall by the wayside.
Conversely, there is an unchallenged and unthinking preference for “me” medicine, partly because it pushes all the right buttons in our psyches, the ones marked “choice,” “individuality” and “special.”
The new biomedicine was originally funded and promoted as a public-health initiative that would benefit all of us.
Hopes for widespread cures were high when the Human Genome Project – financed by a private medical charity, a UK research council, and the US National Institutes of Health – was completed ten years ago.
Instead, one-fifth of the human genome is now subject to private patents, meaning that patients can’t afford tests for genes that cause cancer and researchers can’t make progress if another team owns the patents on the genes that they want to study.
What went wrong?
Part of the answer has to do with the genetic mystique: the notion that I simply am my genes, and that’s why I’m unique.
The genetic mystique plays on the individualism of Western culture and seems to give it a scientific basis.
There are also powerful commercial interests at stake, meaning that research frequently concentrates on genetic links to diseases whose diagnosis and treatment will produce the greatest profit, rather than the greatest reduction in global mortality.
Some genetically personalized treatments may well be signs of progress, such as pharmacogenetics, which promises drug regimes tailored to the patient’s own genome.
If this new technology works, it could lessen the direst side-effects of chemotherapy for cancer care: oncologists would no longer have to prescribe one-size-fits-all regimes if patients who are genetically more receptive to the drug could be differentiated and given lighter regimes.
But the high cost of developing new drugs means that pharmaceutical companies need substantial patient markets to make their investments profitable.
Will minority ethnic groups miss out?
For a while it looked as if the reverse would happen, with niche markets in pharmacogenetics targeting ethnic minorities.
Race-based medicine hit the scene in 2005 when the FDA approved BiDil, the first drug to treat a specific racial group – African-Americans suffering from heart failure.
But there was no real clinical evidence that the drug worked better in African-Americans, and it has been withdrawn from the market.
Nevertheless, major advances like the Human Genome Project have certainly geneticized medicine: there is a growing popular tendency to define all conditions as genetically determined.
And that means that public-health measures are likely to be neglected in favor of individual genetic scans or personalized genetic-testing services.
Genetic tests, if properly administered, can save lives, but they also tend to create a feeling that the responsibility for your health rests with you, the individual patient.
The genetic mystique, the legally doubtful view that we own our bodies, and the widening reach of the market in our lives lead many to believe that “me” medicine is the only game in town.
When health care is paid for by individuals or their employers, “me” medicine becomes a natural outlook.
But, like the drunk who looks for his lost keys only under the streetlight, biomedicine is in danger of concentrating only where the glare is brightest – not on the most effective health interventions, but on the most personalized and profitable, which nowadays go hand-in-hand.
Memoirs of an Anti-Semite
Romania's most vicious anti-Semitic and ultra-nationalist politician, Corneliu Vadim Tudor, is trying hard to persuade people that he has changed his ways.
For most journalists and political pundits in Romania, this self-proclaimed Damascene conversion looks like just another political farce from someone with unrivaled histrionic gifts.
If Tudor were a mere political clown, the question of whether or not he still hates Jews would not matter.
But Tudor is a political power to be reckoned with.
As parliamentary and presidential elections loom, everyone wants to figure out just what he is up to.
Tudor was ex-dictator Nicolae Ceausescu's court poet.
He supported the Securitate (Romania's communist-era secret police) and praised Ceausescu's patriotism.
When communism collapsed, he blamed every shortcoming in the reform process on "foreigners" - meaning the West, Romania's ethnic Hungarian minority, and especially the Jews.
Indeed, he developed a cult for Marshall Ion Antonescu, Romania's dictator between 1940-1944 and Hitler's ally, who was responsible of ordering the massacre of about 200,000 Jews.
The violence of Tudor's rhetoric, directed against everybody who opposed him, rose to heights not seen since the Fascist era.
In 1990, Tudor set up a weekly magazine through which he incited vicious and reactionary campaigns.
Soon after he founded the extreme nationalist Greater Romania Party (PRM), as well as a so-called "national treason list," on which almost every notable political and cultural figure had his or her place.
He threatened (or promised) that criminals would be herded into stadiums and machine-gunned should he come to power.
Although Tudor faced innumerable lawsuits for libel, he could not be silenced.
In the 2000 general election, as the ruling center-right coalition imploded, the PRM received about 20% of the popular vote, becoming the second-largest party in parliament.
Tudor subsequently finished second in the presidential election.
Then, suddenly, a few months ago, Tudor announced that he had undergone a religious experience and had changed his mind about the Jews.
He admitted that he had been anti-Semitic, but he claimed that God had opened his eyes and that he now loved Jews as much as he used to hate them.
Indeed, he began apologizing for his earlier anti-Semitic hate speech.
The man who once said that he could "well imagine world culture without Jews" now claimed to realize how quintessential the Jews are for world culture.
He announced that he had hired Eyal Arad, a well-known Israeli spin-doctor, to run his presidential campaign.
"The Jews" were not his enemies any more, he said; they were even working for him.
But Tudor didn't stop with prolix apologies.
He soon sponsored the unveiling of a bust of the assassinated Israeli premier Yitzak Rabin at Brasov in Transylvania.
For the occasion, Tudor wore a yarmulke and spoke about his "philo-Semitism" for more than two hours .
Other PRM representatives, provided with yarmulkes by Tudor, shuffled their feet awkwardly.
A chorus sang Romanian and Jewish songs and everybody expressed the vow that Vadim would be the "next and the first Christian President" of Romania, the yarmulke notwithstanding!
Next, Tudor headed a PRM delegation to lay a wreath at Auschwitz, where the one-time Holocaust denier declared that Jews had been exterminated in Romania.
What lies behind this political opportunism?
Tudor knows that his electoral success in 2000 belongs to the past.
At the local elections held in June, the PRM did poorly.
The really big battle this November will be joined by the Social Democrats (PDSR) and by the centrist alliance Democratic Alliance.
Tudor has no chance of becoming "the first Christian President of Romania."
His only chance of gaining even a share of power is to join in a future coalition, and for this he has to look semi-respectable.
In fact, Tudor's strategy may work, because the ex-communist PDSR, led by President Ion Iliescu and Prime Minister Adrian Nastase, will probably not oppose such an alliance if it is necessary to give them a majority after November's general election.
They are desperate to cling to power, no matter what, and so are unlikely to question Tudor's democratic pedigree.
After all, they governed together with the PRM from1992 to 1996.
Yet, there is a hitch: Romania is due to join the EU in 2007, and with the PRM in the government but branded as an extremist, anti-Semitic party, the integration process could be derailed.
No EU government will want to invite into the club an administration that contains Romania's far uglier version of Le Pen and Haider.
This is why Tudor desperately needs a patina of democratic respectability.
Tudor seems to hope that by putting on a yarmulke and repenting his anti-Semitism, he will deceive a few naive Western politicians.
But no one should be fooled.
Despite his political zigzags, Tudor has been extremely consistent.
He has always thought and written that "the Jews" brought capitalism, communism, spiritualism, alcoholism, decadent Hollywood movies, and pornography to Romania.
But saying that publicly won't work anymore, not because Romanians do not think this way (many certainly do), but because the political class from left to right wants to be part of Europe and won't associate with anyone who puts that desire at risk.
So Tudor's embrace of the Jews is a conversion of convenience.
If Paris was worth a mass to the French kings of old, Bucharest is worth a yarmulke to Tudor.
Mengele in America
LONDON – It’s 1946.
On one side of the Atlantic, American lawyers are prosecuting Nazi doctors at Nuremberg for crimes against humanity – so-called “research” carried out on concentration camp prisoners.
On the other side of the Atlantic, in Guatemala, the United States Public Health Service (PHS) is deliberately infecting prisoners and mental patients with syphilis in another “experiment” aimed at replacing the ineffective drugs used by soldiers during the war that had just ended.
It sounds too perverse to be true.
Yet a special commission appointed by President Barack Obama has just confirmed that the Guatemalan experiments really did take place.
Obama has also issued an apology to the people of Guatemala.
But why did it take so long to get to this point?
Sixty-three years after the Guatemalan experiments, an American historian, Susan Reverby, was rummaging through archived medical papers from the 1940’s.
Reverby was completing a final task in her two decades of studying the PHS’s detestable Tuskegee experiments, in which hundreds of African-American men with late-stage syphilis were observed but not treated, even after penicillin was developed.
She was examining the papers of Thomas Parran, US surgeon-general from 1936-1948, when the Tuskegee research was already in full swing.
So, too, she found, was the previously unknown Guatemalan experiment.
For years, Tuskegee has been a byword for ethical abuses in scientific research – to the extent that President Bill Clinton apologized to its surviving “subjects.”
Hard as it may be to believe, as Reverby was to discover, the abuse in Guatemala was even more egregious.
As Reverby put it, “I’d spent nearly two decades explaining that there had been no inoculation at Tuskegee, that while the PHS had used deplorable ethics, they had never infected anyone with syphilis.” That was not true in Guatemala.
There, “the US government’s health service had deliberately infected 427 Guatemalan men and women, prisoners and mental patients, with syphilis.”
The US prosecutors at Nuremberg didn’t know about the Guatemala experiments, so there’s no allegation of deliberate hypocrisy.
But the case is no less troubling for that.
How could the public-health authorities override medicine’s basic ethical rule – “First do no harm”?
Why was informed consent from the research “subjects” considered unnecessary?
Could such a thing happen again?
Most experts believe that the answer to the last question is no – at least not in the same form.
In fact, one should view the Guatemalan study, with its incontrovertible horrors, as an extreme example of the biggest ethical problems in research today.
Now, as then, richer developed countries are able to put pressure on weaker, poorer ones.
A report in 2010 revealed that foreign citizens made up more than three-quarters of all the subjects in clinical trials conducted by US firms and researchers.
The US Food and Drug Administration inspected only 45 of these sites, about 0.7%.
There is no suggestion that Third World patients are deliberately being made ill when research is outsourced – unlike in the Guatemalan case – but that does not attenuate the inherent vulnerability of populations lacking basic medical care or experiencing epidemics.
During a major meningitis epidemic in northern Nigeria in 1996, the drug company Pfizer supplied doctors with the oral antibiotic Trovan, which the firm wanted to test against the most effective known drug, Ceftriaxone, as a “control.”
This procedure is consistent with the general consensus in research ethics that the control group must receive the best-known treatment for comparison.
The Trovan trial nonetheless caused a storm of controversy, for two reasons.
First, even if the trials proved favorable, Trovan was never intended for sale in Africa, but rather for the US and European markets. Second, the sparsely staffed clinical teams were already facing measles and cholera epidemics as well.
As Jean Hervé Bradol, who was president of Médecins sans Frontières at the time and led its African teams, put it: “It was not a time for a drug trial at all.
They were panicking in the hospital, overrun by cases on the verge of dying.
The team were shocked that Pfizer continued the so-called scientific work in the middle of hell.”
Nowadays, another major controversy has erupted in several Indian states, owing to a research project to vaccinate girls against cervical cancer – an issue that has now entered the US presidential campaign, because Texas’s governor, Rick Perry, now seeking the Republican presidential nomination, backed a similar mandatory program.
While preventing cervical cancer might seem a genuine benefit, critics charge that the program seems to be mainly about meeting targets, rather than serving the health-care needs of disadvantaged groups.
Apart from one recommendation – to create a government compensation program for Third World nationals harmed by trials intended to benefit First World subjects – US Presidential Commission for the Study of Bioethical Issues, chaired by Dr. Amy Gutmann, the president of the University of Pennsylvania, did not get much beyond vague notions of community engagement and transparency.
But, with 70% of all drug trials now conducted by private companies, such concepts won’t go very far towards tougher regulation.
And why should government should pay the costs anyway?
Because private companies reap the benefits of the trials that do succeed, they should also shoulder the risks.
Facing Down Mental Illness
DAVOS – Contrary to common perception, mental illness is a problem that is neither new nor unique to the developed world.
What we call schizophrenia and bipolar disorder are recognizable in literature dating back to ancient Greece, and The Anatomy of Melancholy, published in 1621 by the English scholar Robert Burton, remains one of the most astute descriptions of depression.
Today, low- and middle-income countries account for most of the morbidity and 75% of the suicides that result from mental illness.
What is new, and encouraging, is the heightened attention now being given to the problem.
Last year at Davos, I helped launch a new&nbsp;Global Agenda Council on Mental Health, after a study by the World Economic Forum and Harvard School of Public Health projected that the global economic costs of mental illness over the next two decades would exceed the costs of cancer, diabetes, and respiratory ailments combined.
With the stakes so high, the human and economic case for leaders to take mental health seriously is clearly compelling.
As policymakers act, they would be wise to bear in mind that mental disorders are brain disorders.
Too many people dismiss mental illnesses as problems of character or lack of will, rather than recognizing them as serious, often fatal, medical disorders.
The brain is a bodily organ just like any other.
We should no more blame a person for a malfunctioning brain than for a malfunctioning pancreas, liver, or heart.
People with brain disorders deserve exactly the same level and quality of medical care as we expect when confronted with disorders of any other part of the body.
Consider depression, the most common mental illness, which must be distinguished from the sadness, disappointment, or frustration we all experience in our lives.
William Styron’s 1989 memoir, Darkness Visible, rightly calls “depression” a weak word for a debilitating condition that is marked by hopelessness, helplessness, and dread.
In extreme forms, depression can be so disabling that the thought of getting out of bed or making a phone call becomes overwhelming.
Functioning effectively at the workplace can be intensely challenging, which is reflected in the growing recognition of a condition known as “presenteeism,” a variation on “absenteeism”: depressed employees are physically present but mentally absent.
Mental illnesses can often lead to other health problems.
Brain disorders like depression and schizophrenia greatly increase the risk of developing chronic ailments, such as cardiovascular and respiratory diseases. People with mental illnesses and substance-abuse issues are at increased risk of infectious diseases like HIV/AIDS.
Furthermore, mental disorders have a profound impact on the outcome of other illnesses. After a heart attack, for example, the prognosis depends on the presence or absence of depression more than on virtually any measure of cardiac function.
That is why health-care policymakers should embrace a simple adage: “no health without mental health.”
Indeed, mental illnesses can be as fatal as physical ones.
Suicide causes more deaths than homicide.
Around 7% of people with major depressive disorder will take their own lives. Globally, more than 800,000 people kill themselves every year.
The number of people scarred by a loved one’s death is much greater; every suicide has many victims.
Tackling the problem will require innovative approaches.
It is not enough simply to make treatment available.
People with psychotic disorders may deny that they are ill, and those suffering from depression may be too consumed by self-loathing to feel worthy of help.
Even in the developed world, it is estimated that only about half of all people suffering from depression are diagnosed and treated.
According to the World Health Organization, in developing countries, 76-85% of people with severe mental disorders are not treated.
We need sensitive ways to identify those at risk and to help those who are most disabled.
Not everybody with a mental illness needs expensive drugs, hospital care, or even direct access to highly trained psychiatrists.
We may not have the equivalent of a vaccine for measles or a bed net for malaria, but low-cost, highly effective interventions are possible for most people either at risk for, or already suffering from, a mental illness. In low-resource environments, local residents or family members can be trained to provide brief, effective psychotherapies that treat moderate forms of depression or anxiety.
Phone- or Internet-based therapy can be used as well.
That said, it should be acknowledged that treatments for mental illness remain far from infallible.
Of those who get help, only about half receive the right treatment, and about half of those receiving treatment regress.
The only way to improve these percentages is to deepen our understanding of normal and abnormal brain functioning. We need research to develop better treatments for brain disorders in general, and for mental illnesses in particular.
Fortunately, some important initiatives launched in the last year are moving us in the right direction.
In April, the United States National Institutes of Health introduced a ten-year&nbsp;BRAIN Initiative, joining similar efforts in the European Union, Israel, Japan, China, Australia, and Canada.
We have also seen unprecedented levels of support from philanthropists.
In the US, for example, $650 million was donated recently to the Stanley Center for Psychiatric Research.
In the United Kingdom, a new charity,&nbsp;MQ, is awarding funds for research on psychological treatments.
Breakthroughs in biomedical research offer hope that cures for brain disorders will be found.
By broadening access to existing treatments and investing in research to develop new therapies, we can aspire to eliminate one of the oldest and most widespread causes of human misery.
Mercantilism Reconsidered
CAMBRIDGE – A businessman walks into a government minister’s office and says he needs help.
What should the minister do?
Invite him in for a cup of coffee and ask how the government can be of help?
Or throw him out, on the principle that government should not be handing out favors to business?
This question constitutes a Rorschach test for policymakers and economists.
On one side are free-market enthusiasts and neo-classical economists, who believe in a stark separation between state and business.
In their view, the government’s role is to establish clear rules and regulations and then let businesses sink or swim on their own.
Public officials should hold private interests at arm’s length and never cozy up to them.
It is consumers, not producers, who are king.
This view reflects a venerable tradition that goes back to Adam Smith and continues a proud existence in today’s economics textbooks.
It is also the dominant perspective of governance in the United States, Britain, and other societies organized along Anglo-American lines – even though actual practice often deviates from idealized principles.
On the other side are what we may call corporatists or neo-mercantilists, who view an alliance between government and business as critical to good economic performance and social harmony.
In this model, the economy needs a state that eagerly lends an ear to business, and, when necessary, greases the wheels of commerce by providing incentives, subsidies, and other discretionary benefits.
Because investment and job creation ensure economic prosperity, the objective of government policy should be to make producers happy.
Rigid rules and distant policymakers merely suffocate the animal spirits of the business class.
This view reflects an even older tradition that goes back to the mercantilist practices of the seventeenth century.
Mercantilists believed in an active economic role for the state – to promote exports, discourage finished imports, and establish trade monopolies that would enrich business and the crown alike.
This idea survives today in the practices of Asian export superpowers (most notably China).
Adam Smith and his followers decisively won the intellectual battle between these two models of capitalism.
But the facts on the ground tell a more ambiguous story.
The growth champions of the past few decades – Japan in the 1950’s and 1960’s, South Korea from the 1960’s to the 1980’s, and China since the early 1980’s – have all had activist governments collaborating closely with large business.
All aggressively promoted investment and exports while discouraging (or remaining agnostic about) imports.
China’s pursuit of a high-saving, large-trade-surplus economy in recent years embodies mercantilist teachings.
Early mercantilism deserves a rethink too.
It is doubtful that the great expansion of intercontinental trade in the sixteenth and seventeenth centuries would have been possible without the incentives that states provided, such as monopoly charters.
As many economic historians argue, the trade networks and profits that mercantilism provided for Britain may have been critical in launching the country’s industrial revolution around the middle of the eighteenth century.
None of this is to idealize mercantilist practices, whose harmful effects are easy to see.
Governments can too easily end up in the pockets of business, resulting in cronyism and rent-seeking instead of economic growth.
Even when initially successful, government intervention in favor of business can outlive its usefulness and become ossified.
The pursuit of trade surpluses inevitably triggers conflicts with trade partners, and the effectiveness of mercantilist policies depends in part on the absence of similar policies elsewhere.
Moreover, unilateral mercantilism is no guarantee of success.
The Chinese-US trade relationship may have seemed like a marriage made in heaven – between practitioners of the mercantilist and liberal models, respectively – but in hindsight it is clear that it merely led to a blowup.
As a result, China will have to make important changes to its economic strategy, a necessity for which it has yet to prepare itself.
Nonetheless, the mercantilist mindset provides policymakers with some important advantages: better feedback about the constraints and opportunities that private economic activity faces, and the ability to create a sense of national purpose around economic goals.
There is much that liberals can learn from it.
Indeed, the inability to see the advantages of close state-business relations is the blind spot of modern economic liberalism.
Just look at how the search for the causes of the financial crisis has played out in the US.
Current conventional wisdom places the blame squarely on the close ties that developed between policymakers and the financial industry in recent decades.
For textbook liberals, the state should have kept its distance, acting purely as Platonic guardians of consumer sovereignty.
But the problem is not that government listened too much to Wall Street; rather, the problem is that it didn’t listen enough to Main Street, where the real producers and innovators were.
That is how untested economic theories about efficient markets and self-regulation could substitute for common sense, enabling financial interests to gain hegemony, while leaving everyone else, including governments, to pick up the pieces.
Merkel in China
NEW DELHI – German Chancellor Angela Merkel’s second visit to China in a year comes against the backdrop of dire forecasts of a difficult September for the eurozone.
Mindful of such concerns and persistent pessimism in global financial markets, Merkel is now taking bold political initiatives at home and overseas.
Indeed, her China trip should be seen as an effort to assert leadership across the eurozone.
At home, Merkel recently sent out a clear message to her critics that Germany must pay a price for eurozone leadership.
She cautioned her colleagues against loose talk about a “Grexit” – Greece’s exit from the eurozone – and assured visiting Greek Prime Minister Antonis Samaras that Germany remained committed to his country’s membership of the eurozone.
While it required courage to take such a tough stance, doing so helped to bolster her position at home and throughout the eurozone.
There is now no doubt that Merkel is willing to commit Germany to the cause of preserving both the European Union and the eurozone, and that she will work to achieve that goal.
If she succeeds, she will emerge as the first great European leader of the twenty-first century.
This stance suggests that Merkel appreciates the essence of the argument that François Heisbourg, the chairman of the council of the International Institute for Strategic Studies (IISS), advanced in a recent essay: a federal arrangement does not fall apart because of problems at the periphery but because of “failure at the heart of the system.”
Merkel has come to terms with Germany’s position – and that it must act to preserve the unity of the whole.
The eurozone (and probably the EU) cannot be saved in Greece or Finland if it cannot be saved in Germany.
Committing Germany to that objective is precisely what Merkel has defined as her political goal for the rest of her term in office.
Within hours of declaring her leadership at home, Merkel announced her visit to Beijing.
The timing was highly significant: Merkel goes to China, the emerging global power, after declaring her own commitment to strengthening the eurozone, if not the EU as a whole, as a credible pole of an emerging multipolar world.
In recognition of Germany’s growing significance, Chinese Prime Minister Wen Jiabao welcomed a delegation of German business leaders to Beijing this May with the words: “Stronger Chinese-German cooperation is good for the two countries, good for China-EU relations, and good for world prosperity and stability.
The strategic dimension of Chinese-German relations, therefore, can only be strengthened, not weakened.”
There are several dimensions to the bilateral relationship.
Germany needs both China’s markets and the funds that its government can deploy to purchase German and European bonds.
It also has more than 7,500 enterprises operating in China, with gross investment totaling $18.5 billion.
Moreover, Germany has sold $15 billion worth of technology to China, and bilateral trade hit a high of $169 billion in 2011, accounting for 30% of total China-EU trade.
The two countries have set a bilateral trade target of $280 billion for 2015.
Trade, however, is not the only immediate concern.
Far more important, especially for Germany, is to get China to invest in and hold its bonds.
In mid-August, at the First IISS Oberoi Lecture in Mumbai, Klaus Regling, the CEO of the European Financial Stability Facility, underscored the importance of Chinese demand for EFSF bonds and China’s role in stabilizing the eurozone.
Regling also revealed that there is now increased and frequent coordination between monetary authorities in the United States, Germany, and China, drawing attention to the fact that the “old Triad” of the dollar, euro, and yen may now have been replaced by a “new Triad” of the dollar, euro, and Chinese renminbi.
While Regling spoke of an emerging “multipolar monetary system,” his remarks clearly indicated the functioning of a “tripolar” system.
Lying at two ends of that monetary triangle, the eurozone and China have acquired a geopolitical stake in helping each other.
Hans Kundnani and Jonas Parello-Plesner of the European Council on Foreign Relations view the China-Germany relationship as one that will shape the overall China-EU relationship.
Like many strategic analysts, they worry whether Germany, in pursuit of purely short-term economic interests, might forsake long-term strategic interests and concerns about human rights, environmental problems, press freedoms, and other political and geopolitical issues.
It is significant, therefore, that German political parties have emphasized the need for Merkel to raise such matters in her talks with Chinese leaders.
However, Merkel’s focus may well remain on trade, investment, and currency flows.
After all, unless she can turn around the eurozone, her rising profile at home and in Europe could easily wither.
What this means is that to secure German leadership of Europe, and her own leadership of Germany, Merkel has to “walk on two legs,” so to speak.
She needs to balance both geo-economic and geopolitical factors – both interests and values – in advancing Germany’s relations with China.
Merkel’s Next Crisis
BERLIN – With Europe bogged down by the financial crisis and its national governments failing or being voted out of office across the continent, Germany has looked like an island of prosperity and stability.
Chancellor Angela Merkel has appeared to be the embodiment of the new strength of old Europe’s problem child, a country admired by some and hated by others.
But that was last month. Since then, the country’s president, Christian Wulff, who was elected with Merkel’s support, has been forced to resign, owing to mistakes he made as Minister President of Lower Saxony.
Befittingly, his fall came at the high point of German carnival: while Catholics in Germany’s West and South celebrated, East German Protestants in Berlin consolidated their hold on power.
This is hardly an issue for ordinary Germans, because religion plays almost no role in German public life (so long as the religion in queston is not Islam).
But it is a huge issue for the main governing party in Germany, the Christian Democratic Union (CDU), and even more so for its Bavarian sister party, the Christian Social Union (CSU).
Both parties are successors to the Catholic German Center Party, which fought against Protestant predominance in Prussia and Bismarck’s Reich.
With the backing of Catholic majorities in western and southern Germany, the CDU and the CSU have been the traditional governing parties in the post-war German Federal Republic since the days of Konrad Adenauer. Loud grumbling over the protestant ascendancy can be expected within both parties.
The real danger of the current presidential crisis and its solution for Merkel lies elsewhere, namely in the political calculations that made Joachim Gauck, the new German president, a candidate in the first place.
As a rule, German presidential elections are highly charged events, because they can be an early indicator of emerging new political majorities. Moreover, the chancellor is not directly elected, and can be removed only by a constructive motion of no confidence, meaning that a parliamentary majority selects a new chancellor.
This makes all majorities against a governing chancellor highly dramatic, because they reflect his or her declining power.
This is particularly true if such a majority is assembled against the chancellor on a central personnel issue, as the selection of the president certainly is.
That is what happened in Gauck’s election.
Until last weekend, Merkel seemed to be standing on rock-solid political ground.
She is highly respected internationally, at the height of her popularity at home, and has no rivals to fend off within her own party.
True, popular support for her coalition partners, the Free Democrats (FDP), has plummeted to 2%; but the CDU/CSU are still clearly leading the Social Democrats (SPD, the largest opposition party), and the left is fragmented into four parties, two of which are not government material.
So, even if Merkel’s coalition should fail at, or even before, the next federal election, it was always assumed that no one could seriously challenge her chancellorship, and certainly not within a renewed “grand coalition” with the SPD. There simply seemed to be no majority against Merkel.
This gross miscalculation overlooked the growing angst of her ailing coalition partners, the FDP, about their chances of survival.
In the short time since the decision to elevate Gauck to the presidency, the granite beneath Merkel’s feet has become political quicksand.
What happened?
Quite simply, the FDP ditched her and changed sides on a critical issue, aligning itself with the main opposition parties in supporting Gauck.
Suddenly, the prospect of a new majority beckoned, and Merkel was faced with the choice of giving in or ending the coalition. She grit her teeth and gave in.
But the rupture within her coalition can no longer be papered over.
Gauck’s candidacy was forced through by an SPD/Green/FDP majority, which emerged from intersecting political interests.
But this only makes the matter more dangerous for Merkel, because such episodes are what the beginning of the end for German chancellors usually look like.
The trust between the governing parties is gone. State elections this spring will show whether the FDP&nbsp;maneuver lifts the party above the 5% electoral threshold needed to remain in parliament, or whether fear of certain death led them to political suicide.
If the FDPsurvives and a center-right coalition cannot gain a majority (which is likely), the party will seek an alliance with the SPD and the Greens, costing Merkel the chancellorship in 2013.
This means that the CDU/CSUwill no longer show any consideration for the FDP.
If Merkel wants to protect her chancellorship, her only option after the 2013 general election is a grand coalition with the SPD, and, to emerge on top in such an arrangement, she needs every vote within the center-right camp that she can get.
For Merkel, the situation will be very serious from now on.
She may have kept Europe’s crisis from Germany’s door, but that does not mean that Germany will not soon enter a crisis of its own.
Escaping the Bear Hug
PRAGUE – Three former Soviet republics – Georgia, Moldova, and Ukraine – have now signed association agreements with the European Union, despite Russia’s sometimes brutal attempts to obstruct the process.
This is certainly a promising development for these countries, all of which have struggled to achieve stability since the Soviet Union’s dissolution.
But it would be naive to think that Russia will give up so easily.
As Ukraine’s ongoing crisis has demonstrated yet again, former Soviet republics that attempt to make geopolitical decisions without the Kremlin’s assent do not remain intact for long.
In Georgia, the breakaway regions of Abkhazia and South Ossetia have had de facto independence since receiving Russian recognition in 2008.
Today, the prospect of their return seems more distant than ever.
For its part, Moldova has been struggling for two decades to assert control over the breakaway Transnistria region.
Moreover, in February, the tiny autonomous region of Gagauzia, with its indigenous Turkic population, announced through a Russia-backed referendum that it has the right to secede if Moldova “loses its statehood.”
The danger now is that pro-secession leaders may twist the loss of sovereignty supposedly inherent in association with the EU into precisely such a claim.
Beyond discouraging former Soviet republics from pursuing deeper ties with the EU, Russia has created a sort of “EU” of its own: the Eurasian Economic Union.
In May, the leaders of Russia, Belarus, and Kazakhstan established the EaEU by signing a treaty that will enter into effect next year, assuming that all three countries’ parliaments ratify it.
Russian President Vladimir Putin has insisted that the EaEU is not intended to function as a “resurrected” Soviet Union, but that any former Soviet republic is free to join.
And some are eager to do so.
According to a recent poll, some 80% of Kazakhs support Putin, and about 70% back Kazakhstan’s EaEU membership.
Though some countries have persevered in the face of Russia’s threats to bring separatist, ethnic, or other problems to their doorstep should they choose integration with the EU, others have responded to the pressure.
In September, Armenia, which has been locked in a conflict with neighboring Azerbaijan over the breakaway region of Nagorno-Karabakh for more than two decades, suddenly halted its integration talks with the EU and announced its intention to join Russia-led structures.
Kyrgyzstan, one of the poorest post-Soviet countries in Central Asia, has no obvious separatism-related problems, though it struggles with ethnic tensions in its south, where clashes between local Uzbeks and Kyrgyz in 2010 left more than 400 people dead.
This month, the country closed the United States’ military transit center near Bishkek, and declared its intention to join the customs union that preceded the EaEU by the end of this year.
The Kremlin is using other mechanisms to exert additional pressure on former Soviet republics.
Russia’s foreign ministry has just announced that, as of January 1, citizens of post-Soviet countries that are not members of the customs union and the EaEU will no longer be allowed to enter Russia without passports.
This will likely soon be followed by visa requirements for these countries’ citizens, which for some would pose a major challenge.
For example, the remittances that the estimated 1.5 million Tajiks who live and work in Russia send to their families back home are critical to Tajikistan’s economy.
Likewise, in April, Putin signed legislation simplifying the procedure for Russian speakers in former Soviet republics to obtain Russian citizenship.
The law, enacted just a month after Russia’s annexation of Crimea, was undoubtedly intended to provide a legal basis for expediting the citizenship-application process for residents of Crimea and the rest of eastern Ukraine.
But it may enable millions of other Russian-speaking citizens of EaEU member countries to become Russian citizens, and it could be used to apply pressure on countries like Estonia and Latvia, which have large Russophone populations.
But the EaEU’s development is not proceeding entirely according to Putin’s plan.
At a recent Eurasian Economic Commission session in Sochi, Belarus and Kazakhstan rejected the Kremlin’s proposal to introduce customs duties for goods imported from Ukraine if the country signed the EU association agreement.
The Belarusian government considers it to be Ukraine’s sovereign right to sign agreements with the EU – a flat contradiction of Russia’s stance – and appears likely to introduce customs fees of its own for electronic goods imported from Russia.
As it stands, the EaEU seems to have two major goals: to obstruct the integration of former Soviet republics into the West, and to help secure Putin’s power.
Economic advancement does not appear to be on the agenda.
Unless it somehow manages to deliver tangible economic benefits anyway, the EaEU seems destined to become another failed institutional initiative, like the Commonwealth of Independent States, the Russian-Belarusian Union State, or the Central Asian Union.
Mexico After the Pri: First Impressions Only Come Once
CAMBRIDGE: Credit where credit is due: Mexico's outgoing President, Ernesto Zedillo provided both the political opening and the economic stability that made his country's leap to full democracy possible.
Until the last moment, no surprise, there was lingering fear that the Institutional Revolutionary Party (PRI) would steal the election.
After all, that is what the PRI has done for 71 years to retain power and the ability to systematically loot the state.
Not so this time.
The opposition candidate won a sweeping victory with a mandate for democracy and a fresh start across the board.
Mexico has done well enough economically to have the courage to change.
Now comes the hard part.
Incoming President Vicente Fox will soon discover that you make a first impression only once.
He is a new President without much experience, without a team and mostly without an agenda other than to oust the PRI.
It is, of course, always easier to win than it is to govern.
That task of governance will be extra hard because, with a real democracy, economics becomes more difficult as compromise is necessary, controlling budgets is harder, and shortcuts more tempting.
Capital markets, after a short elation with the arrival of Mexico as a full-fledged democracy, will soon start asking hard questions.
President-elect Fox must either introduce sweeping change or opt for a conventional strategy of continuing along today's current not-so-bad lines B ie, keeping a few of the ruling technocrats, making generally favorable free market noises, really just muddling on.
Unless he stakes out a set of clear policies before he comes to the bargaining table, Mr Fox will find his powers and his mandate eroded in no time.
But there is a silver bullet unlike any other which he can adopt and which can change Mexico dramatically: a currency board.
A currency board or, going even further, full dollarization of Mexico's economy would do away with the country's almost ceaseless currency instability.
The exchange rate would be gone, Mexico would be (almost) like Texas or New Jersey in its link to the dollar.
Abolishing Mexico's central bank B a good central bank today but handicapped by a truly awful history B and pegging the peso irrevocably to the dollar would bring about these consequences: a dramatic fall in Mexican interest rates, a boom in Mexican asset prices, and a shift to a significantly higher growth rate on a medium term basis.
No other way exists for Mexico to secure these benefits anytime soon.
The European experience with currency convergence (the prelude to the launch of the euro) suggests that it takes over a decade for financially delinquent countries to start building credibility.
There is no reason that Mexico could build a better record sooner than, say, Spain, Portugal, Italy or Greece.
Mexico needs nothing more urgently than a period of sustained high growth so as to start eroding endemic poverty.
Failing that, the Left will come to power and reverse years of reform and progress.
But a currency board will also help to start financial intermediation for the benefit of small and medium sized firms who have been starved of capital by the experience of recurrent crisis and bad credit. Small and medium sized firms need to become part of Mexican capitalism.
Mexico's economy has had a good few years now; not very hard to achieve given a booming America next door and great liquidity in global capital markets.
Mexico's own skillful success at rebuilding OPEC (boosting the value of its oil exports) contributed to good performance as did the determination to hang on to and even widen the reforms of Mr. Zedilla's predecessor, President Salinas.
In the coming year and beyond, however, Mexico must count on a more difficult external environment as credit becomes far more selective and the US economy slows down.
That is the new game President-elect Fox must play, just as he must be more skilled at domestic politics than the PRI ever was, because of the democratic divisions in Mexico's congress.
These are two good reasons for Mr Fox to stake out a powerful position on the currency front that does away with uncertainties and offers a genuine free lunch in the form of a collapse of interest rates and the cost of capital.
Mexico saves little, but its investment needs are huge.
This implies current account deficits that need to be financed.
Direct investment from the US and Europe are the obvious answers - Mexico is a natural manufacturing platform for Latin America.
The only question is how to leverage its location more significantly so that money arrives more readily and with a far smaller risk premium attached.
The obvious answer is to make Mexico far more like the US in all economic matters.
Most prominent among these issues is total financial and trade integration.
NAFTA is doing its part, the financial part still goes begging.
Full currency integration on a lasting basis is the key step to complete the bold trade opening that is already producing formidable payoffs in the north of Mexico.
A currency board is no panacea but it is a powerful tool that can provide the new Fox government with a chance to make a quantum improvement in Mexico's economic outlook.
Against that background, President-elect Fox will have a stronger opportunity to evict government from its stranglehold on many areas of the economy, thus reducing both poor performance and corruption.
A currency board is ultimately a powerful complement in strengthening democracy by delivering a strong wind of prosperity at its back.
Mexico’s Powerful Energy Reforms
MEXICO CITY – Mexico is poised to become Latin America’s economic star in the coming decade.
The government’s recent reform of the energy sector will contribute directly to economic performance by reducing the cost of manufacturing.
In the context of the North American Free Trade Agreement (NAFTA), the resulting increase in manufacturing competitiveness promises to boost Mexico’s growth substantially.
Until the government adopted the necessary constitutional amendment and enacted the associated enabling legislation, Mexico’s energy sector was entirely state-owned.
The sector’s most important component, Pemex, owned all of Mexico’s oil and gas reserves, and was exclusively responsible for exploration, production, and retail distribution.
Electricity production and distribution, too, was entirely in the hands of the government.
Pemex’s limited technical know-how meant that it could not fully develop and exploit Mexico’s vast oil and gas resources.
There are substantial oil reserves that require deep-water drilling technology that the company lacks.
There are also old wells that have stopped producing but that could be made productive again with modern technologies.
And there are potential gas and oil fields that can be tapped only with the new technologies of fracking and horizontal drilling.
Until the reform, energy reserves had long been regarded as a national patrimony that could be developed only by Pemex.
Because the constitution prohibited any direct or indirect foreign ownership, there was no way to provide incentives for foreign firms to share their technology.
But that foreign technology offered such important potential gains that President Enrique Peña Nieto was able to marshal a majority in the Mexican congress to amend the constitution and pass legislation that will bring foreign energy firms to the country.
Opening the energy sector completes the agenda of economic integration that began when NAFTA was approved in 1994.
That agreement transformed Mexico from a very closed economy with few manufacturing exports into an economy that is now closely linked with the United States.
The expansion of Mexican oil and gas production will consolidate those links and contribute to North American energy independence.
Mexico’s manufactured exports have increased tenfold since NAFTA began, with roughly 80% now going to the US.
Many multinational US companies have located plants in Mexico as part of their overall production process, which is closely tied to inputs sourced domestically.
Indeed, manufacturing relations between the US and Mexico are such that some 40% of the value added in Mexican exports to the US is actually of US origin.
The new energy reforms will also allow Mexico to benefit from lower-cost gas from Canada.
The price of gas in the US and Canada is only about half the current price in Mexico (and less than half the price in Europe and Asia).
Mexican access to cheaper gas will boost Mexican petrochemical industries and lower energy costs for manufacturing.
Experts estimate that the cost of electricity to Mexican manufacturers could fall by as much as 20%.
Privatizing Pemex and the national electric company will also allow trained, professional managers to replace state bureaucrats and bring an end to trade unions’ current major role in the management process.
Furthermore, privatization will remove the constraints on investment that the government budget has imposed on Pemex and the electric company.
Even before the energy-sector reforms, Mexico had been pursuing sound macroeconomic policies for a considerable period of time.
As a result, the country has benefited from low inflation, small fiscal deficits, and manageable current-account deficits.
And, though Mexico operates a free-floating exchange-rate regime, the peso’s value against the dollar has been stable.
None of this is to deny that Mexico still must confront other significant problems.
For example, primary and secondary education needs improvements that the teachers’ unions are blocking, and criminal activity, much of it drug-related, makes personal security a serious concern throughout the country.
But, despite such problems, the energy and electricity reforms, and the deeper links with the US and Canada that they imply, promises to accelerate Mexico’s growth rate, boost employment and income, and thus raise Mexicans’ standard of living.
Mexico Breaking Good?
MEXICO CITY – For a glimpse of the average American’s understanding of the relationship between the United States and Mexico, one only has to watch the critically acclaimed television series Breaking Bad.
Set in Albuquerque, New Mexico, a few hundred miles from the border, the series chronicles the rise and fall of Walter White, a high school chemistry teacher who becomes a methamphetamine tycoon.
Most of the characters on the US side of the border are portrayed with sympathy and depth.
The main protagonist’s step-by-step descent into the drug underworld unfolds with such subtlety that each individual decision he makes along the way seems almost reasonable.
Unfortunately, the other side of the border receives more superficial treatment.
In one scene, two Mexican hit men ruthlessly slaughter a dozen innocent compatriots who could bear witness to their border crossing.
In another episode, members of the Mexican Federal Police are seen assaulting a drug lord in his hacienda, with the implication that they are only doing the bidding of a rival dealer.
“Breaking Bad” is brilliant television, but it is regrettable that so many Americans see only this side of things.
Mexico has profound security problems in some regions, but it is also a country that just might be on the threshold of a huge political and economic transformation.
Indeed, for a couple of years now, Mexico’s GDP growth rates have been near the top of the OECD, and recently above Brazil’s.
Rather than continue fighting (as in the US) after a heated presidential election, Mexico’s major political parties appear poised to cooperate on a number of critical structural reforms that could energize economic growth for decades to come.
The agenda includes an expansion of the tax base to reduce dependency on oil, an initiative to increase competition in media and telecommunications, and a constitutional change that will permit the state-owned oil company Pemex to enter into joint ventures with foreign firms.
This last reform is critical, because much of Mexico’s geology is very similar to that of the southwestern US.
In principle, Mexico’s economy should be benefiting from the same shale-gas revolution that is providing a huge boost to the US, where natural-gas prices are now less than one-quarter of what Europeans pay.
Mexico is already enjoying a manufacturing boom that has increased its exports to the US, following a long secular decline.
With China’s wages soaring and rising oil prices driving up shipping costs, production in Mexico is suddenly looking much more attractive, even taking security concerns into account.
Of course, any number of things can go wrong.
First and foremost, the political elite might suddenly back away from essential structural reforms, and the Mexican business community’s current optimism could collapse.
It wouldn’t be the first time.
There is also a risk that foreign investors, who already are starting to like Mexico, might come to love it a little too much.
A huge influx of capital could lead to a significant appreciation of the peso’s exchange rate, causing an increase in Mexico’s currently very attractive labor costs.
Or the US could slip into recession (though modest growth is certainly the central scenario nowadays).
Then there is the matter of security, which constitutes a huge tax on business in many parts of Mexico.
For example, one important achievement of former President Felipe Calderón’s administration was to push through a 140-mile highway connecting the interior city of Durango and the Pacific port at Mazatlán.
Traversing extremely rough terrain with 200 tunnels and bridges, it promises to cut the transit time by three or four hours.
Except for the weather, the highway has the feel of Switzerland.
But the new road has raised concerns, particularly in the US, that it could serve as a smuggling route for drugs and weapons, so the military feels obliged to set up checkpoints.
Unfortunately, early anecdotal evidence suggests that these safeguards may ultimately slow down traffic by roughly the same amount of time that the project was meant to speed it up!
Mexican leaders acknowledge the country’s internal problems, but place three of them at America’s doorstep.
First and foremost, the US generates the huge demand for illicit drugs that sustains the entire Latin American mafia, just as the US experiment with alcohol prohibition in the 1920’s fueled the rise of gangsters like Al Capone.
No one knows precisely the Mexican drug cartels’ annual profits, but they certainly amount to billions of dollars.
Second, the US, with its incredibly lax restrictions on gun purchases, serves as a veritable arms depot for rich Mexican drug lords.
True, they could arguably acquire similar weapons elsewhere, but not necessarily as cheaply and conveniently.
Finally, the US could do more to curtail money laundering.
One simple step would be to restrict the circulation of $100 bills, which are mostly used in the underground economy.
Many of the problems that characterize the complex US-Mexican relationship will be ameliorated if Mexico can sustain rapid economic growth.
Net immigration to the US, which has already tapered off, might reverse.
The US stands to benefit as much as Mexico if conditions south of the border begin breaking good.
Mexico\u0027s Labyrinth of Uncertainty
What makes countries grow is perhaps the most fascinating issue in economics, and one of tremendous political-indeed, geopolitical-importance as well.
In pondering this question, the case of Mexico-neither an economic tiger like China or Singapore nor a sluggard like many African and Carribean countries-may be especially instructive.
On a recent trip to Mexico I spoke to many Mexicans about the state of their economy and about their hopes for the future.
I asked about their long-term expectations, and about their thoughts concerning Mexico's economic prospects in the decades ahead.
What I heard suggested that the dominant feeling for most Mexicans is one of a great uncertainty about their future-perhaps the very uncertainty at the root of our imperfect knowledge about growth in general.
Mexicans seem to believe that they could be living at close to US living standards in another few decades.
But they find it equally likely that their living standards might drop even lower than they are today.
This mixture of optimism and fear applies to everyone, Mexican businesses and Mexican families alike.
People do have strong reasons to be optimistic.
The 1994 North American Free Trade Agreement (NAFTA) between Mexico, the US, and Canada helped Mexico's economy recover quickly from the 1994-95 peso crisis.
Indeed, NAFTA membership has proven to be so popular that Mexico's government has forged many other free trade agreements, including one with the EU in 2000.
So Mexico's current economic slowdown appears to reflect nothing more than weak global conditions.
In fact, the economy has shown signs of recovery recently.
If these are sustained, Mexico should soon find itself on a solid upward path.
Once again, Mexicans can thank NAFTA for the quick recovery. True, NAFTA is only an economic-not a political - union, and no symbolic gesture like the creation of a common currency is contemplated.
But the obvious advantages of economic integration with the prosperous US are no less important to Mexico's economic stability and development than accession to the EU is for countries like Poland, Latvia, or Slovakia.
Indeed, the most important benefit of NAFTA for Mexico is that it represents a long-term commitment among the three member countries to work together.
With over 20 million Mexicans in the US already, and with Hispanic voters so potent a political force that President Bush makes a show of speaking Spanish, that commitment appears genuine.
But alongside those strong grounds for optimism are significant worries.
As Pedro Aspe, a much-admired former finance minister, emphasized to me, NAFTA did give a sudden boost to Mexico's economy at the outset.
Labor productivity soared, as Mexicans were forced to adapt to the rules of the US economy in order to compete.
But that improvement appears to have been only a so-called "impact effect."
Mexican productivity growth has since fallen back to its levels in the 1980's.
Mexicans also point to their economy's disappointing growth on a per capita basis since 1982.
Twenty years is a long time to have almost no economic growth.
It was also a time when many Mexicans were abandoning their economy and leaving to work in the US.
The situation would have been even worse had this safety valve not been in place
Meanwhile, China, a country with more than ten times Mexico's population, managed to grow spectacularly in this period.
Why, Mexicans ask, should their country's growth have been so disappointing-and this just as they were establishing free-market institutions, privatizing assets, and developing a more robust democracy?
China's one-child policy must have been an advantage for its per capita GDP growth, allowing more time to be spent on business activities rather than childrearing.
But Mexico has recently also shown a sharp decline in population growth rates, as Mexican women opt for more birth control and smaller families.
Mexicans' obsession with China is no accident.
China's much lower labor costs mean that Mexican jobs and income levels are directly at risk.
Mexican autoworkers earn three times as much as Chinese autoworkers.
So Mexico's auto industry must make huge advances in productivity if it is to maintain the same wage level in the future.
Part of Mexico's problem is due to suffering two major financial crises since 1982: the Less-Developed-Country Debt crisis of the early 1980's and the peso crisis of 1994-95.
Both were random hits generated by sudden shifts in investor confidence; both represented big setbacks that required years to recover from fully.
Worse, no one can be sure that such setbacks will not occur again.
Confidence crises beget the risk of further confidence crises.
More political and legal change is needed if confidence is to have a more solid footing.
For example, corruption in all economic sectors-as well as government and labor unions-impedes growth by destroying trust.
This means that personal and family connections mean a lot more in Mexican business than they do elsewhere, which prevents people from moving freely through the economy to exploit their personal talents.
Mexicans generally do not want to go to college abroad because they would miss opportunities to form the necessary bonds with other Mexicans.
But if corruption were reduced and social trust strengthened, such inhibitions would become irrelevant, and investor confidence would rise.
Moreover, though Mexico elected its first president, Vicente Fox, from an opposition party after 71 years of one-party rule, this new democratic government appears ineffective.
No party has a majority in the Chamber of Deputies.
Political bickering seems to take priority over action.
Disaffection with an ineffective government might lead voters to acquiesce in a more authoritarian government.
Little wonder, then, that Mexicans express fundamental uncertainty about where their country is heading.
That uncertainty will be a major factor in how Mexico's economy does or does not develop.
Mexico\u0027s Machismo Machine
Monica rummages frantically in her bag as we dine at a Mexico City restaurant.
She pulls out her cell phone and checks for messages.
"Is anything wrong?" I ask.
"No, it's nothing," she smiles, "just my husband.
He becomes upset if he calls and I don't answer.
I'm always supposed to have my cell phone on--he likes to know where I am."
"You mean he likes to keep track of you," I say, and she laughs.
As Monica explains, sheepishly, that Esteban is actually open-minded, it dawns on me that I've been hearing a lot of similar stories recently, from female friends and patients.
The cell phone has become a new way for men to keep tabs on their wives, calling them and pressuring them to come home as soon as possible.
Machismo might be out of fashion in today's Mexico, but control is definitely in.
You rarely hear of men not allowing their wives to study, work, or go out during the day.
Almost 40% of working-age women hold jobs, school and university enrollment is evenly split between the sexes, and the average wage differential, whereby women earn about 70% of what men make, is comparable to that of industrialized nations.
Women are increasingly aware of their rights, demanding equal treatment in the workplace and in politics.
Under these conditions, machismo mutated.
Nowadays, it relies more on psychological coercion and control than on discrimination or physical constraints.
In a sense, machismo has gone underground.
Deeply buried within our daily customs, it is all but invisible among the educated classes--invisible, but ever present.
Women may be considered equal in many areas, but men remain more equal.
In Mexico, women's time is not their own.
When they go out, spend money, see friends, they are still expected to render accounts.
Fathers, brothers, boyfriends, and husbands feel entitled to a detailed explanation of their everyday activities--but refuse to be questioned about their own.
At home, men can say, "Don't bother me now, I'm watching TV"; women can't, because they are expected to be available, day and night, for their husband and children.
These double standards form a pillar of today's machismo.
Of course, it is far more evident in the privacy of the home than in the workplace or in public.
Surveys show that men are willing to go to the supermarket once a week or mind the children for a while; but they refuse to iron, sew, chop vegetables, or clean the oven or toilet, because these tasks are considered unmanly.
Men help out, but within rigidly defined parameters.
This division of labor in all areas of life means that men and women remain surprisingly inept at tasks assigned to the other sex.
We see educated men who don't know how to make a cup of coffee, and professional women with no idea about how to change a fuse.
Men know little about babies; women know little about checkbooks--because they aren't supposed to.
So machismo creates people with only half the skills that modern life requires.
Far from creating a healthy complementarity between the sexes, it perpetuates dependence on both sides and creates widespread inefficiency.
Part of the problem is the deep-seated assumption that women are meant to attend to men's needs.
From the moment of their birth, men are surrounded by the constant care of women.
Mothers, aunts, grandmothers, sisters, and later girlfriends, wives, and daughters are expected to fulfill--even anticipate--a man's every desire.
Mothers tell little girls to "attend" their brothers, while little boys are instructed to "watch over" their sisters.
This non-stop pampering is aggravated by female domestic servants, ranging from the high society governess to the part-time maid of a middle-class family.
Servants, indeed, are a bulwark of Mexican machismo.
Though they allow women to go out and work, they ensure that men continue to be pampered like oriental potentates, never lifting a finger in the home.
Where wives and daughters now refuse to drop everything to prepare lunch for the man of the house, the maid takes up the slack.
The implications of these attitudes and behaviors go beyond the domestic sphere.
Pampered Mexican boys grow into men accustomed to being obeyed instantly, who feel entitled to special attention, refuse to negotiate with those whom they consider inferior, and reject any form of criticism.
The men who dominate public life often fit this mold: they are demanding, impatient, intolerant, and self-centered.
There is an inescapable contradiction between machismo and our supposed transition to democracy.
As Monica sums it up with mock exasperation after our lunch, twice interrupted by her husband, "This machismo business doesn't make sense any more.
How can we continue to be governed by men who have never set foot in a supermarket?"
Mexico’s New President
CAMBRIDGE: With Vincente Fox assuming Mexico’s Presidency on December 1, Mexico celebrates much more than a simple leadership transition.
For the first time in its history, Mexico is on the verge of four simultaneous accomplishments: real democracy, economic prosperity, social cohesion, and good relations with the United States.
Mexico’s mood is palpable: high expectations that the country will escape its past demons - instability, corruption, and massive social divisions - to become a dynamic society built upon strong, distinctive cultures, social inclusion, and a growing role in the world.
Few Mexicans could be sure that the previously ruling party, the PRI, would relinquish power after 71 years of continuous rule.
Yet when Fox defeated the PRI candidate this summer, Mexicans were treated to a peaceful transition of power based on an honest count at the ballot box.
Much credit for this goes to outgoing President Ernesto Zedillo, last in line of a dozen PRI presidents.
Zedillo championed democratic reforms during his term, enabling the elections and political transition to proceed smoothly.
Zedillo bequeaths an economy in remarkably strong shape, thanks mostly to the North American Free Trade Agreement (NAFTA), the free-trade arrangements that link the economies of Canada, Mexico, and the US.
NAFTA came into force on January 1, 1994.
Ironically, Mexico fell into a temporary financial crisis later that same year, the result not of the trade agreement, but of a sudden reversal in capital flows to Mexico - the kind of crisis that hit East Asia three years later.
NAFTA became the main mechanism for Mexico to overcome the crisis, as its economy dramatically multiplied exports to the US, achieving an export-led economic recovery.
The US/Mexican economic relationship may be the world’s most important example of how rich and poor economies can be harmonized for mutual benefit.
Under NAFTA, US firms are flocking across the 2,000-mile Mexican border in order to set up operations in Mexico to benefit from lower wage levels, and hence lower production costs.
In recent years, Mexico has been able to attract more than $10 billion per year of foreign direct investment into Mexico, mainly from US multinational firms.
US firms bring their technologies and capital goods into Mexico, and then make final products in Mexico which are re-exported to the US economy.
Under these arrangements, Mexico’s overall exports have grown from around $40 billion in 1990 to an estimated $140 billion in 1999.
In the process Mexico has also shifted from being dependent on oil earnings to becoming a diversified exporter of manufactured goods.
With a democratic transition and an economy primed for growth on the basis of inward investments into Mexico and an export boom to the US, President Fox assumes power at a time of great promise.
He carries with him into office the goodwill of most of the country, impressed by Fox’s sincerity, intelligence, and eagerness to lead Mexico in an open and professional manner.
Fox lived up to this promise with his choice of cabinet ministers.
To an amazing extent, he reached out to experts in many areas, choosing professionals of impeccable reputations for probity and accomplishment, rather than politicians eager for patronage.
Of course expertise is only part of the story of good governance.
These new cabinet ministers will have to show that they can be effective in politics in the best sense as well as – building coalitions, gaining public support, and helping to galvanize the public’s current optimism into practical programs.
The Fox Administration will benefit from a basically sound framework for Mexican economic growth, in which Mexico’s economic prosperity will emerge in part from increasing economic integration with Canada and the US.
President Fox will be the first to acknowledge that NAFTA is just part of the story.
After seventy-one years of one party rule in Mexico, and decades of under-investment in key areas of Mexican economic life, there remains much to accomplish.
The first goal is to create the rule of law in Mexico.
Decades of lawlessness have given Mexico a corrupt judicial system, lack of legal protection for minority groups, massive tax evasion, organized crime, and police viewed more as a threat than source of protection.
Part of the problem can indeed be addressed by honest leadership and a more democratic system.
Part of the problem, alas, may lie beyond Mexico’s control.
America’s insatiable demand for cocaine has made Mexico a transit route from South American producers.
The US treats its drug problem in criminal terms, trying to use police and military tactics to block drug supplies.
This has been a losing battle, but has dramatically increased violence and corruption in Mexico by ensuring that drug trafficking is a lucrative business.
The US would help Mexico by focusing on drug treatment and reducing demand and much less on military and police solutions.
Fox’s second goal should be to prepare Mexicans for life in the global knowledge economy.
One key to competitiveness will be high levels of education for a broad population.
Mexico still has low levels of enrolment for secondary school and only around 16% of the university-aged population is enrolled in high education.
Universal access to secondary school for rich and poor alike, and a rapidly rising proportion of students going to University must be the goal.
Mexico also ranks very low in comparison with high-income countries in the quality of its science and mathematics education, and its efforts in scientific research.
For example, Mexico spends only around one-third of one percent of GNP on research and development, while Korea (as a comparison) spends more than 2% of GNP on research and development.
Other major goals include upgrading health care, reforming financial markets, and aiming to reduce the high levels of income inequality.
Also, Mexico needs to diversify its economy, so that it is not completely dependent on US prosperity.
But despite the huge challenges ahead, the basic message is clear. With the arrival of the Fox Administration, Mexico’s chances for democracy and prosperity are the best they’ve been at any time in Mexico’s modern history.
Mexico’s Next Revolution
While it might take days or even weeks before Mexico’s cliff-hanger presidential election is officially settled, it seems almost certain that right-of-center, liberal candidate Felipe Calderón will be the country’s next president.
He may not have won by more than a percentage point and his 36% of the vote is hardly a mandate.
His opponents will challenge the results in the streets, the courts and the political arena, and he will face a strong, though divided, opposition in Congress.
Still, winning is better than losing, and Mexico is better off today than it was yesterday, when many thought the left-of-center populist contender, Andrés Manuel López Obrador, would receive a thumping endorsement from the electorate.
Calderón means continuity; that’s probably why he won, and that is what Mexico needs.
In the end, Mexico’s voters did not fall for López Obrador’s stratagem.
His case was simple: Mexico is a basket case today, let’s throw out the rascals responsible for it and replace them with leaders who will represent and help the poor – still half of Mexico’s population.
Regardless of the fact that this description is largely, though not entirely, inaccurate, the voters decided that the last people they wanted to fix the mess were … those who created it in the first place.
López Obrador surrounded himself with former high-level officials of the Echeverría (1970-1976), López Portillo (1976-1982), De la Madrid (1982-1988), and Salinas de Gortari administrations.
It simply didn’t fly with the electorate.
Conversely, Calderón’s argument did.
He basically argued that over the past ten years, Mexico, while hardly a paradise, was on something of a roll: inflation came under control, growth began to pick up, poverty was being reduced, and lower interest rates made credit available to the lower middle class.
And all of this came about without repression, human rights violations, uprisings, political assassinations, or runaway corruption.
According to exit polls, 60% of Mexico’s voters who thought that things had improved over the past year voted for Calderón; 60% of those who approve of President Vicente Fox (who in turn has a 65% approval rate), chose Calderón as well.
Calderón ran on Fox’s coat-tails, but without any Fox entourage, and he won… big-time.
Nonetheless the challenges he faces are enormous.
Mexico today is victim of a gaping ideological divide that most other countries in Latin America have put behind them.
The election was not over policies, simplistic or not, such as war or peace, lower or higher taxes, more or less public spending, how to combat poverty or create jobs, to permit or prohibit capital punishment, abortion, gay marriage, or whatever.
The campaign was over Mexico’s soul, over the highly abstract, partly imaginary, broad ideological themes of nationalism, separation of church and state, the market versus the state, law enforcement versus eradicating privilege and poverty, belonging to Latin America or to North America, poor versus rich.
Viewed from afar, such campaign themes might not have been a bad thing: after all, countries need these types of discussion every now and then.
But in fact, the discussion was largely meaningless, because the policies that theoretically would have sprung from the electorate favoring one world-view or the other were either unviable or already in place.
Calderón cannot hand education over to the Church, privatize Pemex (the state owned oil company) or abolish social anti-poverty programs, as his adversaries falsely claimed he would do.
And López Obrador would not have been able to move Mexico away from the United States, revise NAFTA, massively and overnight re-orient public spending, eliminate poverty, and create millions of jobs through unfunded infrastructure programs, as he said, and truly seemed to believe, he would do.
As in most cases, Byzantine ideological debates such as these lead nowhere, but they do crowd out meaningful policy discussions.
Since debates over those policies did not take place, they will have to begin now, and inevitably they will further polarize a society that is already deeply divided.
Calderón will not only be plagued by this artificial ideological divide; he will also have to confront the same paralysis that Fox and his predecessor, Ernesto Zedillo, have encountered since 1997.
Mexico’s current institutions were designed and built for an authoritarian rule, not for democracy, and they worked while Mexico was governed by a single party, the PRI.
When democracy came, everyone – Zedillo, Fox, this writer, and many more - thought that the same institutions would remain functional, despite a radically different context.
We were all wrong, and the new president must face the same challenge: not how to govern with these dysfunctional institutions, but how to replace them with something that works.
This is the single most important challenge facing Calderón; designing and building new institutions should be his first priority.
Achieving, at long last, re-election of parliamentary representatives; calling a referendum to amend the Constitution; creating a hybrid, semi-presidential, semi-parliamentary system that will encourage the formation of legislative majorities in a three-party environment; allowing independent candidates to run for office, thus forcing party realignment; and abolishing the US-style campaign-financing, where air time is purchased instead of allotted, and which led to Sunday’s election probably being, dollar for vote, the most expensive in the world.
These are the most important and urgent reforms.
With these reforms, Mexico can finally begin to harvest the fruits of ten years of stability and continuity -- not a mean feat for a country which had previously had major crises in every decade since the 1960s.
With the reforms, the urgently needed substantive decisions that will directly affect the lives of the Mexicans -- energy, tax, and labor reform, the improvement of education, and poverty reduction -- can be made.
Without the reforms, the country will continue to plod along and, no matter how intensely people may feel about it, real change will remain impossible.
Mexico’s Paradox of Reform
Sometimes no reform is better than the wrong type of reform.
That seems to be the case in Mexico, which recently passed new tax and electoral laws – but not the ones the country needs.
While tax reform was high on President Felipe Calderón’s agenda during last year’s presidential campaign, electoral reform was not.
Instead, it has been imposed upon him by a strange and extreme version of political horse-trading.
Opposition legislators wanted electoral reform, but no new taxes; the administration wanted more revenues, but no new election laws.
Both sides got part of what they wanted, and Mexico got the short end of the stick.
An alternative minimum tax was established, along with a slight increase in gasoline taxes, but both were so watered down that they barely add up to anything.
According to the government’s own figures, they equal just 1% of GDP – a pathetic increase in an economy with one of Latin America’s lowest tax takes.
Meanwhile, the three main parties – the National Action Party (PAN), the Institutional Revolutionary Party (PRI), and the Party of the Democratic Revolution (PRD) – united in order to keep newcomers out of the electoral arena.
They evicted the Federal Electoral Institute (IFE) directors, who organized last year’s presidential vote; strengthened the ban on independent candidates; made it practically impossible to create new parties; and established a series of arbitrary, quasi-Stalinist restrictions on the content of campaign advertising, speeches, and exchanges among candidates.
All of these changes were rammed through the Congress as constitutional amendments, exempting them from appeals to the courts.
The one positive feature of the reforms – a scheme aimed at ensuring equal radio and television airtime for parties during electoral campaigns – was tainted by serious legislative omissions.
Given the absence of any regulation regarding fairness in news coverage of campaigns, the blatant corruption of many news organizations, and the absence of a current affairs program on national, prime-time television, banning the purchase of airtime merely erects an insurmountable barrier to potential new political entrants.
Against this backdrop, the ejection of the IFE directors stands out all the more glaringly.
While the IFE undoubtedly committed several serious public-relations mistakes during last year’s election, it remains one of Mexico’s most respected institutions, with credibility ratings that are regularly double or triple those of Congress and the three political parties.
The IFE shepherded Mexico through several crisis in 2006, when the PRD’s presidential candidate, Andrés Manuel López Obrador, refused to accept his razor-thin margin of defeat and took his battle to the streets.
Now, the same people who certified that last year’s vote was free and fair, and that Calderón had indeed won, are being fired for exactly that reason.
Their removal, as everyone in Mexico acknowledges, is a sop to the PRI and the PRD in exchange for Calderón’s miserly tax reform.
Bismarck was right when he said one should never look too closely at how laws and sausages are made.
Unfortunately, the attack on the IFE’s autonomy is not an isolated event in Latin America.
Although independent central banks have been crucial in helping the region achieve macroeconomic stability over the past two decades, they, like electoral authorities, are being subjected to increasing pressure.
Venezuelan Preseident Hugo Chávez has openly proposed abolishing the central bank’s independence, submitting a constitutional reform that would allow him to use the country’s international reserves as he sees fit.
Likewise, electoral commissions there and in Bolivia, Ecuador, Nicaragua, and, according to some accounts, in Argentina are being packed with political loyalists.
Mexico now seems poised to join this dubious club.
It shouldn’t, and if anyone should know that, it is Calderón.
It is understandable that he wishes to distinguish himself from his predecessor, Vicente Fox, who was unable to get meaningful reforms through Congress.
But it is not reasonable to do so by proposing a cure that is worse than the disease.
Mexico Steps Beyond the Labyrinth of Solitude
Where Iraq is concerned, Mexico's foreign policy doesn't seem to please anyone in Mexico.
Opposition groups here applaud President Vincente Fox's recent anti-American stance in the UN Security Council, while Mexican businessmen oppose it.
With the US seeking to line up nine votes in the security council in favor of declaring Iraq in "material breach" of Security Council resolution 1441, Mexico's stance toward the US will become vital in the coming days and weeks.
But Mexicans themselves are divided about what to do.
Some Mexicans congratulate President Fox for not caving in to US pressure to cast a vote in the Security Council for war, while others argue that he should.
The debate over Iraq in Mexico reveals a deep divide between those who seek closer ties with the US, and those wary of that possibility.
These polarized positions reflect an uncomfortable reality.
Almost a decade into a free trade agreement that institutionalized integration, most Mexicans still don't know how to behave toward Americans.
They don't know whether to love them or hate them, support them or denounce them, foster a close relationship or remain distant neighbors.
These opposing postures--and the pressures they bring to bear on President Fox--are place the country in the dilemma of either fighting against or kowtowing to its neighbor to the North.
At the same time, it is apparent that Mexico must redefine the bilateral relationship according to the country's specific needs and interests on a case-by-case basis.
Sometimes Mexico should open the door to neighborly requests and sometimes it should refuse them.
As in all close relationships, there will be ups and downs, issues that unite and issues that divide.
Mexico and the US don't need to be the worst of enemies or the best of friends; they can just be neighbors.
In the Security Council vote on Resolution 1441, Mexico initially supported the French position, and ultimately contributed to moderating America's position.
By opposing a resolution that was unacceptable, Mexico helped craft one that was acceptable.
In distancing itself from the US, Mexico was able to reach out to the broader world.
By rejecting a unilateral stance, Mexico enabled a multilateral outcome.
In effect, Mexico told the US: "I can criticize you first, and help you later."
However small, however limited, Mexico played a valuable role.
Indeed, Mexico is slowly learning how to carry out a dual task: to defend its national interests and also be part of the international community, to support the US at times and oppose it at others.
Many Mexicans--and Americans--find this shift difficult to understand.
What Octavio Paz once called Mexico's "labyrinth of solitude" toward the world beyond its borders was built on a sense of inferiority and a propensity for passivity.
As he put it: "We are not secure people."
Where the wider world is concerned, this meant that Mexicans were too often afraid to act; they opted for stoicism and resignation instead of planning and action.
For many years, Mexico avoided service on the Security Council, thinking that a seat there would entail many costs and few benefits.
But Mexico today does have interests--including the price of oil--and being on the Security Council allows it to defend them.
Mexico should use its current position in the Security Council to send a message: the country has matured and its foreign policy has matured with it.
If Mexico votes against a US-sponsored resolution pushing for the use of force in Iraq in the next several days, the US shouldn't interpret the decision as a knee-jerk nationalistic response, but rather as a reflection of Mexico's interests.
In this instance, Mexico prefers multilateralism to unilateralism, and peaceful disarmament over military might, because Mexico's interests diverge from those of the US.
More broadly, the US must accept that times have changed and that Mexico cannot be simply classified as either an historic antagonist that has to be bought off or an unconditional ally that can be taken for granted.
Nor, of course, should the direction of Mexico's vote ultimately be determined by allegiance to an anti-American axis.
Mexican foreign policy must not be driven by the resentments of the past but by the pursuit of concrete interests in the future.
Mexico should show that it is possible to be in favor of multilateralism without being against the US.
Mexico has spent the last 150 years defining itself in opposition to America.
Now the time has come to think differently. As a democratic state with an elected government, Mexico should feel self-confident enough to fight for its interests as they evolve, independently of American approval or disapproval.
That task is a difficult one, but it is unavoidable.
As Paz warned: "We live, as the rest of the planet, a decisive and mortal moment, orphans of the past and with a future to invent."
Policy “Crimes”
STANFORD – When the Berlin Wall fell a quarter-century ago this November, pundits led by Francis Fukuyama proclaimed the end of history – the triumph of democratic capitalism over all rival systems. America’s economic success and the collapse of communism fed the narrative.
The long political, intellectual, and, at times, military confrontation that we knew as the Cold War was over.
Indeed, at a meeting in Warsaw in the winter of 1990, General Wojciech Jaruzelski, Poland’s President and communist party boss, declared to me and my cabinet colleagues that “The forces of history have inevitably led us to capitalism.”
He could not free himself of the Hegelian dialectic, but he admitted that communism had gotten history’s end point entirely wrong.
A couple of decades later, various forms of capitalism have worked wonders for some former communist and socialist countries.
Poland is an excellent example of a successful economic and political transition.
But capitalism is far from flourishing everywhere.
North Korea, which never had a transition and maintains heavy-handed central planning, is an economic basket case.
And soft socialism combined with subsidized “national champions” is decaying in France.
Moreover, in many countries, capitalism arrived without democracy.
China is an obvious example of capitalist success and lagging political reform.
For these countries, honest competition at the ballot box, free and open debate, and respect for minority rights – the foundation of liberal democracy – are not currently on the agenda.
The champagne corks were popped prematurely in 1989.&nbsp;
Indeed, precisely because liberal democracy did not triumph worldwide, many pressing crises now require attention and action. But we must also focus – in the media and in the classroom – on the less dramatic but nonetheless dangerous attacks on democracy and democratic values, including in the Americas, where statist regimes and others have been attacking freedom of speech and of the press.
As a result, policy disputes can become criminal.
In a pernicious recent example, Venezuela’s President Nicolás Maduro, in a nationally televised speech, ordered the country’s attorney-general and public prosecutor to take “action” against the Harvard economist Ricardo Hausmann for daring to ask, “Should Venezuela Default?”
Hausmann was right to ask that question.
Research overwhelmingly shows that successful economic development requires inclusive property rights, the enforcement of contracts, and even-handed rule of law.
Venezuela currently has none of these ingredients.
So it is not surprising that massive government deficits financed by explosive monetary growth have caused the currency to collapse, with multinationals writing down the value of their Venezuelan subsidiaries each time the official exchange rate is lowered.
Nor is it surprising that, with inadequate foreign exchange, the country is having difficulty paying its bills, or that price controls and police-state regulation have severely worsened food shortages.
Finally, amid widespread speculation that Venezuela may indeed default on up to $80 billion of foreign debt, it is not surprising that yields on its sovereign debt have hit 15%.
Venezuela, with some of the world’s largest hydrocarbon reserves, should be enjoying an era of prosperity amid high oil prices.
But corruption, political control of the national oil company, and nationalization of foreign-owned oil assets have caused exactly the opposite.
(Disclosure: I serve on the board of one such company, ExxonMobil, which is awaiting the results of arbitration in international court.)
The combination of authoritarian rule, extreme populism, socialist ideology, and incompetence under former President Hugo Chávez and Maduro has wreaked havoc on Venezuela.
But when Hausmann, a Venezuelan citizen and former government minister, discusses an important question that is being asked by investors around the world, he is not merely chastised, but threatened. The implication is clear: Speak out and you may be jailed.
This is not the first such treatment of a prominent economist in Latin America. A decade ago, it was Domingo Cavallo, who, as Argentina’s finance minister, had pegged the peso to the dollar to bring down the 1,000% inflation that was destroying the economy – and the fabric of society.
When he abruptly ended the peg in 2001, a severe recession followed, and he was arrested and jailed.
Fortunately, international outrage, including a campaign organized by North American economists, helped to free Cavallo.
I do not agree with all of the policies advocated by Cavallo or Hausmann, or any other policymaker for that matter.
But should we really criminalize not corruption or self-dealing, but policy disagreements?
Do we want every new government to jail its political opponents – as Ukraine’s deposed President Viktor Yanukovych did to former Prime Minister Yuliya Tymoshenko – because it rejects the policies they enacted or condemns the perceived outcomes?
We have not fallen so far yet in the United States.
But even here, it has become far too common to impugn the motives and values, not just the ideas, of those with whom we disagree.
Journalists, politicians, and public intellectuals who should know better routinely argue not just that policies and proposals are wrong-headed, but that the proponents themselves must be evil to have enacted or suggested them.
Criticism and disagreement should not be allowed to curdle into the hateful vitriol that demeans so much public discourse today.
Words have consequences and can inflame thuggery or worse.
Even attempted suppression of free and open debate, or official delegitimization of those with alternative policy proposals, is dangerous.
Such outrages must be resisted, before more people like Cavallo and Hausmann are threatened – and before the disease spreads to North America and Europe.
An Economist for the Ages
STANFORD – Like many others, I first met the Nobel laureate economist Gary Becker, who died earlier this month, by reading his seminal works Human Capital and The Economics of Discrimination.
Several dozen outstanding economists have won the Nobel Prize in Economics since Sweden’s central bank began awarding it in 1969, but Becker is among the handful who have fundamentally transformed how economists (and social scientists more generally) think about a wide array of important economic issues.
Becker was remarkable for applying his penetrating insights, especially concerning economic incentives, to issues that had been mostly underexplored by economic analysis.
This included viewing education as an investment, asking who gained and lost from discrimination, examining how families allocated their time, and explaining women’s fertility decisions.
His research on any one or two of these issues might well have won him a Nobel Prize on its own; to develop important insights into such a wide range of questions is truly remarkable.
He amply deserved the rare accolade accorded to him by his long-time mentor and friend, the late Milton Friedman (himself a Nobel laureate who, like Becker, transformed economists’ thinking in many areas). Becker, declared Friedman, was “the greatest social scientist who has lived and worked in the last half-century.”
Becker’s constant focus was on the main forces driving human behavior and people’s interaction both in markets and in non-market activities.
Early in his career, his work was often criticized for being overly dependent on economic analysis in dealing with big social problems, sometimes touching raw nerves on very sensitive issues.
For example, the notion of modeling children as a durable good seemed crass to some but led Becker to analyze the allocation of parental time and financial resources.
He showed how this insight could predict trends in female labor-force participation and birth rates, and led to the policy conclusion that the best way to lower high birth rates in poor countries was to educate women.
Better education would raise women’s wages, making staying at home more costly, and would lead to higher female labor-force participation and a voluntary decline in birth rates.
This analysis reflected Becker’s deep belief in the power of incentives to lead people, in pursuit of their own interest and interacting within and outside markets, to achieve great things with minimal government input.
In this sense, he was very much in the tradition of the great eighteenth-century Scottish economist Adam Smith, whose writings Becker regarded as one of the greatest influences on his career.
Equally off-putting to some was the notion that education was an investment – that an important reason to pursue post-secondary schooling, for example, was to raise one’s future earnings.
The education establishment recoiled at what it considered a less-than-noble reason to seek higher education.
And the idea that one could model the economics of racial discrimination as rational, if deplorable, behavior and trace out the implications was sometimes misconstrued as paying insufficient attention to the character and behavior flaws of those who discriminate.
Truth will out, as Shakespeare reminds us, and eventually even Becker’s harshest early critics came around to appreciating his deep insights and conclusions.
For example, the education industry now touts the economic value of a college degree.
And governments around the world conduct vast surveys of households’ time use.
Few economists today work on these and related problems without building on Becker’s foundations or laboring under his strong influence.
On a personal note, some of my early research on the best way to tax families and on the effects of taxes on human-capital investment built on Becker’s insights.
Becker was a rarity among economists in recent decades.
He often looked at broad, long-range trends and data, comparing things like family structure, number of children, and women’s roles in the home and the market across many decades and even from one century to the next, or across very different societies.
Cumulatively, his work yielded powerful conclusions, not only explaining trends in birth rates, but also showing that preferences for discrimination led to a tradeoff with profits.
Workers who did not face discrimination in sectors where animus was rife would win, while the losers would include not just those directly being discriminated against, but also workers forced to compete when those workers sought employment elsewhere.
Becker relied on rigorous standards in evaluating government policy.
He knew, and documented, that government solutions to market failures could themselves fail, with the cure turning out to be worse than the disease.
He sought to compare what was likely to be the actual government program, tax, or regulation to the problem it purported to solve, not to the idealized textbook solution academics favor but that is rarely adopted.
The basic economic analysis that Becker developed was applicable everywhere, for everyone, and for all time.
Conditions in the US in the nineteenth and late twentieth centuries – or in North America and Europe and developing Asia, Africa, or Latin America – might differ; but the same economic models could be used to understand changing events and circumstances.
In this sense, Becker was a great economist and a truly remarkable social scientist.
His work stands as a testament to the power of deep thinking and the courage to follow it to its logical conclusions.
That seems especially relevant in today’s world, in which technology tempts us merely to scratch the surface of so many issues.
He was a tremendous colleague at the Hoover Institution, a true and supportive friend, and admirably humble despite his incredible intellectual influence.
A Dutch Cure for the Dutch Disease
STANFORD – Far too few governments rein in their countries’ bloated welfare states before disaster strikes.
As a result, some citizens eventually suffer the economic equivalent of a heart attack: wrenching declines in living standards as they are victimized by unsustainable programs’ endgame.
Greece and the city of Detroit are only the most recent grim examples.
Many more suffer from the meager growth and barely rising incomes that result from the toxic combination of government overspending, burdensome regulations, and corrosive taxation.
Much of Europe fits this category of economic stagnation.
Occasionally, however, governments stage successful retreats from welfare-state dysfunction.
Canada reduced spending by over 8% of GDP in the 1990’s, and the United States reduced non-military spending by 5% of GDP beginning in the mid-1980’s – a trend sustained by center-right and center-left governments alike.
So, when a European country reverses course to reduce welfare dependency and restore work incentives, it is worth noting – especially when that country is the Netherlands, which built one of the world’s most expansive welfare states in the 1960’s and 1970’s.
Recently, the Netherlands’ King Willem-Alexander, delivering his first annual address to Parliament, said, “Our labor market and system of public services no longer fully meet the demands of the twenty-first century….The classical welfare state is slowly but surely evolving into a participation society.”
That represents a genuinely remarkable shift.
From the 1960’s and 1970’s on, those writing about the Netherlands often lamented the “Dutch disease.”
There were so many generous subsidies, grants, and transfer payments – aimed at everyone from the truly needy to artists unable to sell their work – that after-tax wages were often barely higher than benefits.
So people rarely returned to work after they lost or left a job, or did so in the underground economy, with its unreported cash payments.
Whether one considered the Dutch welfare state humane and generous, or bloated and foolhardy, its largesse took a heavy toll on the economy.
But unlike, say, the French, the Dutch have responded to their past excesses with a series of policies designed to promote a return to work in the formal labor market.
Indeed, they deserve an orange-hued salute for innovative reforms that governments worldwide might usefully emulate in the interest of maintaining a targeted, effective, and affordable safety net.
For example, disability insurance has become a huge, rapidly growing problem in many countries, despite the dramatic decline in the share of workers in physically demanding and dangerous jobs like construction and manufacturing.
To stem the dramatic rise in disability payments, the Dutch now require firms with high claim rates to pay more for disability insurance, thereby creating a strong incentive to ensure greater workplace safety.
But reducing disability claims (and thus payments) is only half of the equation.
The other half is returning those who can do so to gainful employment.
(In America, fewer than 1% of the disabled return to work.)
Early intervention and informational campaigns about return-to-work options are promising possibilities.
Much economic research shows that job skills deteriorate the longer one is away from work; so retraining, information, and re-entry programs are very important.
Similarly, the Dutch have embraced welfare reform, much as the United States did in 1996, when a Democratic president, Bill Clinton, and a Republican Congress agreed on time limits, as well as work and training requirements.
As a result, the Dutch welfare system now requires beneficiaries to show proof of an active job search prior to eligibility; to perform work or volunteer community service while receiving benefits; and to take a job even if it requires a long commute.
America’s 1996 welfare reform grew out of initiatives in the US state of Wisconsin.
And, just as Wisconsin’s reform proved to be a model that was successfully adopted nationally, so reforms in one European Union country could spur policy innovations elsewhere in the EU and around the world.
And contagious successful policy reforms are precisely what Europe and most of the world need.
To see why, consider the tax rate necessary to pay for social benefits, which equals the replacement rate (the average level of benefits relative to taxpayer incomes) multiplied by the dependency ratio (the share of the population receiving the benefits).
The higher the replacement rate and/or dependency ratio, the higher the tax rate needed to pay for the benefits.
What is absolutely certain is that the dependency ratio will rise virtually everywhere, owing to inexorable demographic trends.
The combination of rising life expectancy, lower fertility rates, and, in some countries (including the US), the retirement of the post-World War II baby-boom generation, implies a rapid increase in the old-age dependency ratio.
The US, for example, will go from one retiree for every three workers today to a 1:2 ratio in the next three decades.
Italy and Germany will have a 1:1 ratio.
And the share of China’s population that will be over 65 a generation from now will be larger than in the US.
Common-sense policy reforms that ought to be adopted for their own sake, like the Dutch disability and welfare reforms, will provide a second dividend by lowering the dependency ratio.
That will not be enough to maintain sound public finances indefinitely.
But, by demonstrating cures to the “Dutch disease,” the Netherlands is giving all of us an invaluable lesson.
Coming Together and Falling Apart
STANFORD – Millions of people worldwide watched the athletic achievements at the Sochi Olympics and the opening and closing ceremonies’ majestic portrayals of Russian history and culture.
But the cost was immense, the alleged corruption dispiriting, and the contrast with the political situation in nearby Ukraine alarming.
After lining up for an Association Agreement with the European Union, former Ukrainian President Viktor Yanukovych instead opted for closer ties with Russia, following immense pressure from the Kremlin, as well as a promise of $15 billion in financing.
Three months of protests and riots ensued.
A parliamentary vote stripped the high-living Yanukovych of power, and he fled to Russia.
The situation remains tense and fluid.
Russian troops have occupied Crimea, and European and American leaders are threatening to impose stiff sanctions on Russia if it does not respect Ukraine’s sovereignty.
But Ukraine’s disunity is obvious.
Eastern Ukraine has close linguistic, cultural, and economic ties to Russia, while western Ukraine leans more toward continental Europe.
Some of Ukraine’s regions have historically been a part of Russia, Poland, or the Ottoman Empire.
Peter the Great, whose eighteenth-century Westernization of Russia was portrayed in Sochi, fought the Crimean Tatars, many of whose descendants were dispersed by Stalin to other parts of the former Soviet Union.
Some fear that Ukraine could break apart.
An EU Association Agreement could be a huge boon to the Ukrainian economy.
When smaller economies gain access to a much larger market, trade volumes expand and wages rise, with a small part of the trade expansion diverted from other countries (one of Russia’s concerns).
But, beyond the direct gains from trade, such a pact holds the promise of opening up and accelerating the transformation of Ukraine’s economy and polity.
Competing for the EU’s more discriminating consumers would force Ukrainian producers to improve their competitiveness by raising productivity, quality control, and marketing and logistical capabilities.
Over time, Ukrainian producers would become part of an integrated supply chain alongside EU producers.
Canada and Mexico were transformed in this way by the 1987 US-Canada Free Trade Agreement and the 1994 North American Free Trade Agreement.
On average, 40% of Mexican exports to the United States now have US content.
But free-trade agreements presuppose the existence of established political borders, and Ukraine is not the only country that might come apart.
The United Kingdom, Canada, Spain, Iraq – and even the US state of California – among others, face a similar possibility, albeit more or less remote.
What all of these situations have in common is a wide diversity of cultural, ethnic, and economic interests.
Scotland, for example, has much local authority, yet will vote on independence in September.
The secessionists hark back to eighteenth-century English brutality and claim that Scotland will be able to keep all of its North Sea oil and shed its share of the UK’s debt.
In fact, both are likely to be shared.
Those who prefer to remain in the UK cite a loss of markets, possible loss of the pound sterling, and reduced significance on the European and world stage.
The betting is that the Scots will vote to remain.
In Spain, some Catalonians have episodically demanded independence, as have some Flemish in Belgium and some Québécois in Canada.
Iraq periodically verges on splitting into Sunni, Shia, and Kurdish states (the Kurds already have considerable autonomy).
In California, every decade or two, proposals surface to split the state into a North and South California.
The more arid and populous south has traditionally been more politically conservative than the north (Los Angeles is an exception).
Water diversion in a difficult drought year, along with Governor Jerry Brown’s proposal for massive new infrastructure to send water south, has heightened tensions.
A prominent venture capitalist, Tim Draper, wants to put a proposition on the ballot to split California into six separate states.
(California often makes big decisions – from limiting property taxes to formulaic restrictions on state spending – by ballot initiative.)
Even if Draper’s proposed initiative qualifies and passes, it would require approval by the US Congress, which is unlikely.
Which responsibilities should be left primarily to individuals acting within markets, families, and communities, and which fall to government?
And at what level of government – federal, regional, municipal, or supranational – are the latter responsibilities best exercised?
These are timeless questions; but, in an era of increased and instantaneous communication, centralized, big-government bureaucracies are creaking or worse.
People want more effective and more affordable government that responds to their concerns, and are demanding that decisions be decentralized.
We may be in the early stages of reversing the trend toward increases in the size, scope, and centralization of government, with authority devolving on more localized environments, closer to where people live and work.
More and more people seem to be increasingly unwilling to live by current government decision-making processes.
Even with democratic majority rule, minorities believe that their interests and rights – economic, cultural, or religious – are not being protected.
The proliferation of calls for devolution, secession, and independence is but one manifestation of this tectonic shift.
Europe’s Options
STANFORD – Many Europeans have come to believe that they have weathered the economic and financial storm.
In the last two years, deficits and debt have stabilized.
Yields on the sovereign debt of the eurozone periphery’s weak economies have fallen sharply.
Portugal and Ireland have exited their bailout programs.
Talk of Greece leaving the euro has subsided.
All of that is true, but there is a big catch: economic growth in the European Union remains anemic.
GDP in Holland and Italy shrank in the last quarter, and France’s barely budged.
Forecasters are revising down their estimates for 2014 eurozone growth to just 1% year on year.
Unemployment remains at a staggering 11.6% in the eurozone as a whole, compared to 10% in the United States at the worst of America’s Great Recession.
It is above 25% in Greece and Spain – and even higher among the young.
Europe’s economy remains shackled by three problems – sovereign debt, the euro, and wobbly banks – despite several new policy backstops: the European Stability Mechanism (ESM); the European Central Bank’s easy-money policies and holdings of sovereign debt; and the ECB’s takeover in November of supervision of the 130 or so largest pan-eurozone banks.
None of these reforms has been sufficient to restore the stronger growth that Europe desperately needs.
Widespread economic discontent is reflected in recent political instability.
The European Parliament election in May shocked Europe’s elites, as parties of the far right, assorted euroskeptics, and even leftists made strong gains in many countries, fueled in part by popular frustration with the European Commission’s concentration of power.
Great Britain may be headed for a referendum on EU membership in 2017 unless certain terms of its membership are revised.
Elected leaders face a daunting task: enacting difficult structural reforms of labor markets, pension systems, and taxes.
All were long overdue prior to the crisis, and they remain in the very early stages, at best, in most countries, while the high-debt countries’ fiscal condition has improved only modestly.
And Italy and France demand relief from the eurozone’s budget deficit and debt rules.
Economists are not certain whether there are short-run costs or benefits to rapid fiscal consolidation.
My view is that it depends on facts and circumstances, such as the size, credibility, and timing of the consolidation; the mix of spending and tax cuts; whether consolidation is mostly permanent and structural (for example, a change in pension formulas); and, of course, the stance of monetary policy.
Given most European countries’ increasingly daunting demographic outlook, the current pace of structural reform is woefully insufficient.
Italy and Germany are headed toward a ratio of one retiree per worker; without more rapid GDP growth, new immigration policies, higher retirement ages, and efforts to stem the increase in welfare spending, taxes will inexorably rise from already damaging levels.
Europe has three broad options.
The first is the status quo – which would entail cobbling together responses to future mini-crises as they arise, following the pattern of the past few years.
Given the divergent interests and problems facing different countries within the eurozone and the EU, together with cumbersome governance structures and the difficulty of treaty changes, this is the path of least resistance for elected leaders – and thus the one most likely to be followed.
The second option is serious, concerted structural reform.
This would include, at a minimum, reforms of labor rules, pension systems, and anti-growth provisions of tax codes.
It would also include an aggressive attempt to reduce the sovereign-debt overhang that remains a major impediment to growth and continues to threaten some European banks.
Existing debt agreements are not sufficient without a decade of strong growth, which appears unlikely, to say the least.
European governments and banks ultimately will need a solution similar to Brady bonds, which worked quite well in overcoming the 1990s Latin American debt crisis and the threat that it posed to highly exposed US money-center banks.
As was true then, a menu of exit options and credit extensions will have to be negotiated.
The politics of this approach will be difficult, particularly in the rich countries; but, structured properly, concerted structural reform could help to restore growth, which would feed back into healthier budgets, more jobs, better balance sheets, and less financial risk.
The third option is rethinking and reworking the EU itself, from the euro to its basic institutions.
As a free-trade arrangement, the EU has been a major success.
But the euro makes economic sense only for a subset of its current members, not for countries such as Greece in its current situation.
Some economists have proposed a two-track euro, with “problem” countries using a “euro-B” that floats against the “euro-A” until they abide by the economic and financial rules and earn re-entry.
Enhanced labor mobility has been another great benefit brought about by the EU.
But the European Commission’s rigid bureaucratic diktats have taken some regulation too far, and efforts to force lower-tax countries to “harmonize” their rates would be devastating to their citizens and firms.
While it is unlikely that much progress will be made along the lines of the second or third options in the near future, Europe’s elected leaders should constantly test what makes sense and what needs to be reformed.
The recent election was a wake-up call;
The Irrelevant German Consumer
MUNICH – With global rebalancing set to be high on the agenda at the next G-7 and G-20 meetings, Germany, with its persistent export surplus, will again come under pressure to boost domestic demand and household consumption.
But the German consumer is a sideshow.
What is needed is an investment surge in Germany and Europe, and a coordinated exit from ultra-loose monetary policies.
Massive external-account imbalances were a major factor behind the global financial and economic crisis that erupted in 2008, as well as in the eurozone instability that followed.
Now the world economy is in the process of rebalancing – but not in a way that many people had expected.
Asia’s formerly huge external surpluses have declined astonishingly fast, and Japan’s trade balance has even slipped into deficit.
China’s current-account surplus has fallen to 2% of GDP, from 10% in 2007. Investment is still the Chinese economy’s main driver, but it has led to soaring debt and a bloated shadow banking sector, which the authorities are trying to rein in.
The European Union, however, has built up a large external surplus, owing mainly to positive trade balances in the eurozone. The EU’s current-account surplus in 2014, at around $250 billion, will be even higher than that of emerging Asia.
With oil prices still above $100 a barrel, the combined surplus of oil-exporting countries is of a similar magnitude.
The United States, meanwhile, continues to run a sizeable current-account deficit of around $350-400 billion.
The surprise here is the continued growth in the EU’s surplus.
The collapse in imports suffered by bailed-out countries – Greece, Ireland, Portugal, and Spain – was entirely predictable, given how sharply their economies declined.
But few economists expected that these countries’ exports would improve as quickly as they did, especially in a subdued international environment.
While Germany’s current-account surplus is roughly where it was in 2007, the combined external balance of the bailout beneficiaries plus Italy (which has been part of the trade turnaround) has swung from a pre-crisis deficit of more than $300 billion to an expected surplus of around $60 billion this year.
Looking ahead, the appreciating euro (another surprise, especially to the many observers who doubted its survival less than two years ago) will compress the eurozone’s current-account surplus to some extent.
An exchange rate of close to $1.40 poses a challenge for many European exporters, including German companies.
And the euro has revalued even more against the yen and a number of emerging-market currencies.
Nonetheless, the European surplus is too large to ignore, and Germany in particular will be asked once more to rebalance its economy toward higher domestic demand, which for many people implies the need for a fiscal boost.
But the government is not obliging: Finance Minister Wolfgang Schäuble has just presented a balanced budget for 2015 – the first since 1969.
And, while some observers are calling for Germany to “end wage restraint” and thereby encourage higher household spending, this has actually happened already.
There is, however, a lot that the government could do about investment, which has fallen by almost four percentage points of GDP since 2000, to just over 17% in 2013 – low by international standards.
The government could shift more government spending toward infrastructure investment. But, even more important, it should improve conditions for corporate investment at home, rather than watch German businesses move their capital expenditures abroad.
Germany’s attractiveness to investors would rise with simpler and more investment-friendly taxation, improved incentives for business start-ups and R&amp;D, less bureaucracy and red tape, and no further energy-cost increases.
Getting there will take time. But, given the favorable earnings situation and the corporate sector’s large cash balances, a rebalancing of the tax system could have a rapid impact.
Investment from retained earnings should be as attractive as debt financing.
And some temporary adjustments of depreciation allowances could kick-start capital spending.
The need for more investment in transport, telecoms, energy, and education certainly is not only a German issue.
Given most European governments’ debt problems, the challenge is to attract more private capital into these areas.
Improved regulatory conditions for long-term investments and savings would help. So would expansion of financing instruments for infrastructure investment – for example, by substantially increasing the supply of project bonds supported by the European Investment Bank.
Indeed, why not create “European Infrastructure Bonds,” backed by revenues generated by the investments or tax income from the countries that emit EIBs? This would not only spur jobs and long-term growth; it would also stem the rise in Europe’s external surplus.
But the challenge of rebalancing the global economy is also closely connected to central banks’ monetary policies.
With credit and asset bubbles slowly but surely reappearing, the authorities’ goal should be to keep growth on a balanced and sustainable path – and thus to discouraging excessive risk taking.
This justifies the US Federal Reserve’s gradual exit from ultra-loose policies.
Somewhat surprisingly, the Fed’s reduction of its monthly asset purchases has been accompanied so far by dollar weakness against the euro, which is fostering external adjustment.
Looking forward, however, this may change.
If the Fed remains alone in scaling back its monetary stimulus and bond yields rise further, the dollar will almost certainly strengthen.
Clearly, a coordinated effort to limit exchange-rate variations is advisable.
If all countries try to keep their currencies weak, monetary expansion on a global scale will be over-extended.
The fact that inflationary pressure is still low is not a reason to postpone planning an exit from ultra-loose policy; on the contrary, the time for such discussions is when inflation is low and markets are calm.
Twenty years ago, markets panicked and bond rates soared as central banks hiked interest rates in the face of rising inflation.
They should not repeat that mistake by waiting for inflationary pressures – fueled by rising oil and commodity prices and economic recovery – to return.
The Climate-Change Agenda Heats Up
LONDON – For many people around the world this year, the weather has become anything but a topic for small talk.
Typhoon Haiyan in the Philippines, America’s record-breaking freeze, California’s year-long drought, and flooding in Europe have put the long-term dangers of climate change back on the political agenda.
In response, United Nations Secretary-General Ban Ki-moon has sent an urgent letter to government, business, civil society, and finance leaders, urging them to attend a special Climate Summit in New York in September.
The event will be the first time that world leaders have met to discuss global warming since the UN’s fateful Copenhagen climate-change summit in 2009.
Amid high expectations – and subsequent recriminations – that meeting failed to achieve a comprehensive, legally-binding agreement to reduce greenhouse-gas emissions.
So, at September’s summit, leaders will be asked to re-boot the diplomatic process.
The goal is a new agreement in 2015 to prevent average global temperatures from rising by two degrees Celsius, the level that the international community has deemed “dangerous” to human society.
At first sight, that looks like a hard task.
Since Copenhagen, climate change has slipped down the global agenda, as the restoration of economic growth, voter concern about jobs and living standards, and violent conflict in key trouble spots have taken precedence.
But the tide may be turning.
More people are grasping the true extent of the dangers ahead.
In its latest authoritative assessment, the Intergovernmental Panel on Climate Change (IPCC) concluded last year that scientists are now 95% certain that human activities are the principal cause of rising temperatures.
Over the next two months the IPCC will release further reports detailing the human and economic impacts of probable climate change and the costs and benefits of combating it.
US Secretary of State John Kerry recently described climate change as “perhaps the world’s most fearsome weapon of mass destruction,” warning of “a tipping-point of no return.” Few serious commentators now dispute the science.
So the key question now is how the world’s leaders will respond.
There are grounds for cautious optimism.
First, New York will not be like Copenhagen.
Leaders are not being asked to negotiate a new agreement themselves; that job will remain with their professional negotiators and environment ministers.
Moreover, the process will not be concluded this year but at the UN climate conference in Paris in December 2015.
That provides plenty of time to translate political commitments made in New York into a legally-binding accord.
Second, the world’s two largest greenhouse-gas emitters, the United States and China, are now more committed to action than they were five years ago.
US President Barack Obama has announced a far-reaching plan that authorizes the Environment Protection Agency to take dramatic measures in the next few months to limit power-station emissions, virtually ending coal-fired electricity generation altogether.
In China, worsening air pollution and growing concerns about energy security have led the government to consider a cap on coal use and an absolute reduction in emissions within the next 10-15 years.
The government is experimenting with carbon pricing, and investing heavily in low-carbon wind, solar, and nuclear energy.
Further, the two countries are actively cooperating.
Last year Obama and Chinese President Xi Jinping committed to phase out hydrofluorcarbons, a potent greenhouse gas.
In February, they announced their intention to work together on climate policy – a marked contrast to Sino-US tensions over Pacific security and trade issues.
With the European Union also preparing to commit to new 2030 climate targets, hopes for a global deal are rising.
A third cause for optimism is the re-appraisal of climate-change economics.
Five years ago, policies aimed at cutting greenhouse-gas emissions were seen as a cost burden on the economy.
Negotiations were therefore a zero-sum game, with countries seeking to minimize their obligations while asking others to do more.
However, new evidence may be altering the economic calculus.
According to research conducted by the Global Commission on the Economy and Climate, far from hurting the economy, well-designed climate policy may actually boost growth.
Chaired by former Mexican President Felipe Calderón and comprising former prime ministers, presidents, and finance ministers, the Commission is analyzing how investments in clean-energy infrastructure, agricultural productivity, and urban transport could stimulate sluggish economies.
Its conclusions will be presented at September’s summit; if accepted, the Commission’s work could mark a turning point, transforming the way in which climate policy is perceived by the world’s economic policymakers.
None of this guarantees success.
Powerful vested interests – not least the world’s fossil-fuel industries – will no doubt seek to limit progress, and most governments are not yet focused on the problem.
But one thing is certain: the reality of climate change is making it impossible to ignore.
कोनज़ो का मुकाबला करना
ईस्ट लैंसिंग, मिशिगन – ऐड्स से लेकर पीत-ज्वर तक रोकथाम किए जा सकनेवाले अनेक रोगों ने उप मरूस्थलीय अफ़्रीका को काफी समय से अपनी चपेट में लिया हुआ है। लेकिन उन्हें दूर करने के लिए संबंधित रोग के बारे में जानकारी, धन, शिक्षा, सरकारी सहायता, योजना और सबसे अधिक समस्या का समाधान करने के लिए समुदाय और विश्व की रुचि का होना ज़रूरी है।
आइए एक ऐसे रोकथाम किए जा सकनेवाले रोग पर विचार करें जिसके बारे में अधिकतर लोगों ने कभी सुना भी नहीं है: कोनज़ो, ऊर्ध्व प्रेरक तंत्रिका कोशिका का एक स्थायी लाइलाज विकार है जो उप मरूस्थलीय अफ़्रीका के उन ग्रामीण क्षेत्रों में आम तौर से होता है जो मुख्य फसल के तौर पर कसावा के पौधे की कड़वी किस्मों पर निर्भर करते हैं। कोनज़ो तब होता है जब कसावा कंद को खाने से पहले ठीक तरह से पकाया नहीं जाता है, जिसमें आम तौर पर उन्हें ख़मीर उठने तक भिगोना पड़ता है और फिर उन्हें धूप में सुखाना होता है ताकि उनमें मौजूद विषैले यौगिक निकल जाएँ। हर बार इसका प्रकोप होने पर ग्रामीण क्षेत्र के सैकड़ों या हज़ारों लोग इससे प्रभावित हो सकते हैं।
कोनज़ो विशेष रूप से कांगो लोकतांत्रिक गणराज्य, मध्य अफ्रीकी गणराज्य, मोजाम्बिक, और तंजानिया में होता है और यह अक्सर सूखा पड़ने या संघर्ष के बाद तब होता है जब खाद्यान्न की कमी होती है। महिलाओं और बच्चों पर इसका सबसे बुरा असर पड़ता है, विशेष रूप से आर्थिक संकट के दौरान, जब उन्हें शरीर में विषाक्त तत्वों को विषरहित करने के लिए यकृत के लिए आवश्यक माँस, लोबिया, और सल्फर अमीनो अम्लों के अन्य स्रोत सबसे कम उपलब्ध होते हैं।
इसके प्रभावों को सहज ही अनदेखा नहीं किया जा सकता है। विश्व स्वास्थ्य संगठन ने कोंज़ो की परिभाषा चलते या दौड़ते समय चाल में दिखाई देनेवाली जकड़न की असामान्यता के रूप में की है; जिसमें पहले से स्वस्थ किसी व्यक्ति में एक सप्ताह के भीतर इसके प्रारंभ होने का इतिहास होता है और उसके बाद यह रोग तेज़ी से नहीं बढ़ता है; और मेरुदंडीय रोग के लक्षणों के बिना घुटनों या टखनों में भारी झटके लगते हैं।
कोनज़ो की ���ंभीरता अलग-अलग होती है। विश्व स्वास्थ्य संगठन के 1996 के वर्गीकरण के अनुसार, रोग को पीड़ित व्यक्ति को चलने-फिरने के लिए नियमित रूप से किसी सहारे की ज़रूरत नहीं पड़ने पर मामूली; एक या दो छड़ियों या बैसाखियों का उपयोग करने पर मध्यम; और उसके शय्याग्रस्त हो जाने या बिना सहारे के नहीं चल पाने पर गंभीर माना जाता है।
क्योंकि कोनज़ो को प्रारंभ में केंद्रीय तंत्रिका तंत्र में प्रेरक तंत्रकोशिका मार्ग तक सीमित रहनेवाले ऊर्ध्व प्रेरक तंत्रिका कोशिका रोग के रूप में ही माना जाता था, यह सुझाया गया था कि बोध संबंधी प्रभाव न्यूनतम होते हैं। लेकिन बाद में उभर कर आए विद्युत शरीरक्रिया विज्ञान साक्ष्य में यह सुझाया गया कि उच्च-स्तरीय मस्तिष्क कार्यप्रणाली भी प्रभावित हो सकती है। कोनज़ो से प्रभावित बच्चों में तंत्रिका-बोध संबंधी विकृतियों के प्रमाण प्रस्तुत करते समय मेरे सहकर्मी और मैंने कोनज़ो-प्रभावित परिवारों में रहनेवाले कोनज़ो-मुक्त बच्चों के उप-नैदानिक लक्षणों को भी सम्मिलित किया, यह निष्कर्ष स्मरणशक्ति और सीखने के अधिक विशेषीकृत तंत्रिकाबोध संबंधी परीक्षणों के अनुसार उनके कार्य-निष्पादन पर आधारित था।
ये जटिल लक्षण कोनज़ो-पूर्व स्थिति के रूप में हो सकते हैं, जिनसे यह चेतावनी मिल सकती है कि कोई बच्चा इस रोग की प्रारंभिक अवस्था में पहुँच रहा है। इस प्रकार, कोनज़ो-प्रभावित परिवारों और समुदायों में रहनेवाले कोनज़ो-मुक्त बच्चों के तंत्रिका-बोध संबंधी प्रभावों के जो प्रमाण प्रस्तुत किए गए उनके फलस्वरूप यह और भी महत्वपूर्ण हो जाता है कि विषैले यौगिकों के उच्च स्तरों वाली कसावा की कड़वी किस्मों पर निर्भर क्षेत्रों में खाद्य सुरक्षा को सुनिश्चित किया जाए।
इस उद्देश्य से, बिल एंड मेलिंडा गेट्स फ़ाउंडेशन ने कसावा की गैर-विषाक्त, अधिक-उपज वाली किस्मों के विकास के लिए किए जानेवाले अनुसंधान का समर्थन किया है। आनुवंशिक अभियांत्रिकी से विकसित ये प्रजातियाँ कम-स्तरीय मिट्टी में भी फल-फूल सकती हैं, इसलिए अब लोगों को अधिक विषाक्त किस्मों की ओर जाने की ज़रूरत नहीं है।
लेकिन इन अधिक सुरक्षित प्रजातियों का प्रचार-प्रसार करना मुश्किल हो रहा है। कोनज़ो-प्रभावित क्षेत्रों में आवश्यक परिवर्तनों को लागू करने के लिए ज़रूरी कृषि, शिक्षा, और सार्वजनिक-स्वास्थ्य संबंधी क्षमता और आधारिक संरचना की कमी है। इन्हीं कारणों से, ये क्षेत्र अपनी खाद्य फसलों में बाजरा, मक्का या सेम जैसी सुरक्षित फसलों को शामिल नहीं कर पाते हैं।
चूंकि कोनज़ो से होनेवाली तंत्रिका-संबंधी क्षति का कोई इलाज नहीं है, इसलिए इस रोग के खिलाफ़ लड़ाई में रोकथाम पर ध्यान केंद्रित किया जाना चाहिए। यद्यपि इसका अर्थ यह है कि कसावा और अन्य फसलों की नई प्रजातियों के लाभों के बारे में बताया जाना जारी रखा जाए, परंतु पहली प्राथमिकता लोगों को, विशेष रूप से ग्रामीण महिलाओं को अनपका कसावा खाने के ख़तरों के बारे में शिक्षित करने और उहें यह सिखाने की होनी चाहिए कि इसे किस प्रकार सुरक्षित रूप से तैयार किया जाए। सांस्कृतिक रूप से उपयुक्त किसी ऐसे सामाजिक प्रचार का उपयोग करके, जिस प्रकार के प्रचार का उपयोग ऐड्स-रोधी शिक्षा में किया गया था, इस संदेश को सोशल नेटवर्क, मोबाइल फ़ोन, रेडियो, और टेलीविज़न के माध्यम से प्रसारित किया जा सकता है।
यह सुनिश्चित किया जाना चाहिए कि प्रभावित क्षेत्रों के समुदाय लंबे समय तक सुरक्षित पारंपरिक प्रथाओं का पालन करते हैं। लेकिन हो सकता है कि उन्हें यह पता न हो कि ये प्रथाएँ इतनी महत्वपूर्ण क्यों हैं, और इसलिए उनका पालन न करने के परिणामों के बारे में भी पता न हो। विशेष रूप से उथल-पुथल के समय और खाद्य की बहुत अधिक कमी होने के दौरान,छिले हुए कंद को तीन दिन तक पानी में तब तक भिगोकर रखना जब तक उनमें ख़मीर न बन जाए, फिर एक दिन तक उन्हें धूप में सुखाना, उनके लिए उनके बस के बाहर एक महँगी विलासिता होगी। ऐसा नहीं है।
लाखों लोगों को कोनज़ो होने का ख़तरा है, और यह किसी भी समय फैल सकता है। तंत्रिका-संबंधी क्षति बलनाशक हो सकती है, और यह स्थायी होती है। क्योंकि हम जानते हैं कि इसे कैसे रोका जा सकता है, हमारे लिए यह ज़रूरी है कि हम कार्रवाई करें।
मोदी का जनादेश
वाशिंगटन, डीसी – लोकतंत्र की एक प्रभावशाली प्रक्रिया में, 800 मिलियन पात्र मतदाताओं ने भारत के 16वें आम चुनाव में भाग लिया। अनुदार भारतीय जनता पार्टी (भाजपा) के नए प्रधानमंत्री नरेंद्र मोदी होंगे जिन्होंने भारत के उत्तर-पश्चिमी तट पर स्थित गुजरात राज्य के मुख्यमंत्री के रूप में अपने 13 वर्षों के कार्यकाल में तीव्र आर्थिक विकास का संचालन किया। मोदी इसलिए जीते कि ज़्यादातर भारतीयों का मानना है कि वे देश में समग्र रूप से अधिक तीव्र विकास ला सकते हैं।
चुनाव ने एक बार फिर यह दिखा दिया कि राजनीतिक दृष्टि से भारत अपने विशाल पड़ोसी, निरंकुश चीन से कितना अलग है। तथापि, अब नई सरकार को यह कोशिश करनी चाहिए कि चीन ने पिछले तीन दशकों में जो बेहतर आर्थिक प्रगति हासिल की है, वह उसके मुकाबले की प्रगति करे। ऐसा करने के लिए, इसे एक भिन्न राजनीतिक संदर्भ में, चीन की आर्थिक सफलता के दो प्रमुख तत्वों को प्रोत्साहन देना होगा।
पहला तत्व वह मजबूत औद्योगिक क्षेत्र है जो अकुशल श्रम का उपयोग करने वाले विनिर्माण उद्योगों से बना है और जो भारत के लाखों करोड़ों ग्रामीण मज़दूरों और उनके परिवारों को गरीबी से बाहर निकलने का एक रास्ता उपलब्ध करेगा। यह वह रास्ता है जिसे चीन ने, और उससे पहले अन्य देशों ने अपनाया है। इसके विपरीत, भारत में औद्योगिक क्षेत्र के अल्प-विकास ने देश को अपनी पूरी आर्थिक क्षमता को प्राप्त नहीं करने दिया है।
दूसरा तत्व बुनियादी सुविधाएँ है जिसकी सभी प्रकार के आर्थिक विकास के लिए ज़रूरत होती है: सड़कें, पुल, बंदरगाह, और विद्यालय, और साथ ही बिजली और साफ पानी की विश्वसनीय आपूर्ति। भारत में अपर्याप्त बुनियादी सुविधाएँ होने के कारण उद्योग मजबूर हैं। कारखानों को सुचारू रूप से प्रचालन करने के लिए बिजली की विश्वसनीय आपूर्ति, निविष्टियाँ प्राप्त करने और उत्पादों का वितरण करने के लिए अच्छी सड़कें और रेलवे, और अगर उन्हें उन उत्पादों का निर्यात करना हो तो मालवाहक जहाज़ों के लिए बंदरगाहों और उच्च मूल्य की वस्तुओं और कारोबारी यात्रा के लिए विमानपत्तनों की ज़रूरत होती है। चीन के पास ये चीज़ें भारी मात्रा में हैं। भारत के पास नहीं हैं।
भारत में बिजली की कटौती होना सामान्य बात है, देश के लगभग आधे घरों में बिजली कतई नहीं है, और आधुनिक राजमार्ग दुर्लभ हैं। अमेरिका में ट्रकचालक किसी माल को 20 घंटे में हज़ारों मील तक ढो सकता है, जबकि भारत में उतनी ही ढुलाई में 4-5 दिन लग जाते हैं।
इन दोनों कमियों का मूल कारण भारतीय लोकतंत्र की, और वास्तव में सभी लोकतंत्रों की, मूलभूत विशेषता है: अल्पसंख्यकों की शक्ति। लोकतांत्रिक देशों में, लोग खुद को संगठित करने के लिए स्वतंत्र हैं, और अक्सर वे ऐसा सामान्य आर्थिक हितों के आधार पर करते हैं। इस तरह के समूह अपने सदस्यों को लाभ पहुँचाने के लिए राजनीतिक रूप से काम करते हैं, लेकिन ये लाभ सामान्य कल्याण की कीमत पर मिल सकते हैं – और भारत में इन्होंने कम कुशल उद्योगों और उच्च गुणवत्ता वाली बुनियादी सुविधाओं के विकास को अवरुद्ध किया हुआ है।
हालाँकि भारत में कम (या बिना) कुशलताओं वाले कामगारों की भरमार है, रोज़गार को नियंत्रित करनेवाले कानूनों के कारण बड़ी कंपनियों के लिए कामगारों को नौकरी से निकालना लगभग असंभव होता है, और पहले तो वे उन्हें काम पर रखने के लिए ही हतोत्साहित हो जाते हैं। सर्वाधिक कुशल कंपनियाँ ऐसे उद्योगों को लगाने से ही बचती हैं, जिन्हें बड़े पैमाने पर लगाए जाने पर लाखों भारतीयों की गरीबी को दूर किया जा सकता है। इसी तरह, भूमि के उपयोग को प्रतिबंधित करनेवाले कानूनों के कारण कारखानों और होटल जैसी सुविधाओं का निर्माण करना मुश्किल हो जाता है जिनसे लोगों को बड़ी संख्या में रोज़गार मिल सकता है।
ट्रेड यूनियनों का समूह एक विशेष प्रकार का समूह है जो ऐसे कानूनों को बढ़ावा देता है और उनका समर्थन करता है जो बड़ी कंपनियों को ऐसे उद्योगों में प्रवेश करने से हतोत्साहित करते हैं जिनमें अकुशल श्रमिकों को रोज़गार दिया जाता है। हालाँकि ये कानून यूनियन के सदस्यों को लाभ पहुँचाते हैं जो कुल कर्मचारियों की संख्या का एक बहुत छोटा सा हिस्सा होते हैं, लेकिन वे समग्र रूप में भारत को दंडित करते हैं। हित वाले अन्य समूह रोज़गार सृजन करनेवाले व्यवसायों के विकास में बाधा डालते हैं। उदाहरण के लिए, स्थानीय प्रदर्शनकारी कभी-कभार औद्योगिक और अन्य वाणिज्यिक प्रयोजनों के लिए भूमि का उपयोग करने में रुकावट पैदा करते हैं।
राजनीतिक अल्पसंख्यक भी लोकतांत्रिक प्रक्रिया का उपयोग करके ऐसी बुनियादी सुविधाओं के निर्माण और शिक्षा प्रणाली के विकास में अड़चन डालते हैं जिनकी भारत को ज़रूरत है ताकि ये संसाधन स्वयं उनको मिल जाएँ, जिससे इनका उपयोग सड़कों के निर्माण या शिक्षकों को वेतन का भुगतान करने के लिए नहीं किया जा सकता। सभी हित समूहों की कानूनी उपलब्धियों के रूप में विभिन्न प्रकार की आर्थिक सहायता की राशियों का देश के सकल घरेलू उत्पाद में पूरा 2.4% जितना हिस्सा होता है।
भारतीय नौकरशाही स्वयं एक विशाल, शक्तिशाली, और महापेटू हित समूह है। इसके वेतन उन संसाधनों को हड़प लेते हैं जिनका उपयोग अधिक उत्पादक कार्यों के लिए बेहतर रूप में किया जा सकता है। विशेष हित पर होनेवाले खर्च के फलस्वरूप बजट घाटे होते हैं, जबकि इन घाटों के वित्तपोषण के लिए आवश्यक उधारों के कारण बुनियादी सुविधाओं और शिक्षा की मद में से और अधिक राशि निकल जाती है।
मोदी की नई सरकार अल्पसंख्यकों को पनपने देनेवाले ऐसे लोकतांत्रिक नियमों को समाप्त नहीं कर सकती है - वास्तव में ऐसा करना भी नहीं चाहिए। इसके अपने विभिन्न जातीय समूहों, धर्मों, जातियों, एक लाख से अधिक भाषाओं को मूल रूप से बोलनेवाले लोगों में से प्रत्येक द्वारा प्रयुक्त 30 भाषाओं (और कम-से-कम 10,000 लोगों द्वारा बोली जानेवाली अन्य 105 भाषाओं) के साथ, भारत पूरे यूरोपीय संघ की तुलना में सांस्कृतिक दृष्टि से अधिक विविधता वाला देश है - लेकिन इसके लोगों की संख्या उससे दुगुनी है। समझौता, विवादों का शांतिपूर्ण समाधान, और लोकतंत्र के मूल में विद्यमान अल्पसंख्यकों के अधिकारों पर ज़ोर दिए बिना, संगठित भारत का अस्तित्व नहीं हो सकता।
इसलिए मोदी के सामने चुनौती यह है कि वे विकास को बढ़ावा देने वाली नीतियों की राह में आनेवाली बाधाओं को लोकतांत्रिक तरीकों का उपयोग करके दूर करें। यहाँ, चुनाव अच्छी खबर लेकर आया है: भारत के बढ़ते मध्यम वर्ग की बढ़ती हुई ताकत, आवश्यक आर्थिक सुधारों को लागू करने की दृष्टि से एक शक्तिशाली संबल है।
इस मध्यम वर्ग में संपत्तिधारी, वेतनभोगी लोग शामिल हैं, इनमें से बहुत से लोग युवा हैं जो सरकार को निर्वैयक्तिक प्रवर्तक और विवादों के एक तटस्थ मध्यस्थ के रूप में देखते हैं, न कि निधियों के स्रोत और अनुदानों के रूप में। ऐसे लोगों के वोटों ने मोदी को चुनाव जीतने में मदद की। पद पर उनकी सफलता इस पर निर्भर करेगी कि वे आर्थिक विकास की राह में आनेवाली राजनीतिक बाधाओं को दूर करने के लिए मध्यम वर्ग की शक्ति का कितनी अच्छी तरह से उपयोग कर पाते हैं जो इसके सदस्यों की माँग है।
The UN’s Half-Full Glass
NAIROBI – Families trapped by the fighting in Syria are reportedly eating “salads’’ made of leaves and grass to stave off hunger.
According to the United Nations refugee agency, more than two million Syrians have fled to neighboring countries.
Back home, many more face a brutal winter without adequate food, medicine, or shelter.
And, as if conditions could not be worse, the country is facing a polio outbreak.
The international response to Syria’s crisis has been nothing short of disastrous.
Indeed, Syria seems to be the embodiment of failure on the part of the UN.
The Security Council is deadlocked.
In Damascus, would-be peacemakers come and go, talking diplomacy but achieving nothing.
Relief agencies are blocked from operating where they are needed most.
Yet it is clear that without the UN, the situation would be even worse.
Lebanon, Jordan, and Turkey would be under even more pressure from the refugees flooding across their borders.
And while efforts to achieve a ceasefire have failed, diplomacy has not – at least not entirely.
In October, UN inspectors took initial steps to destroy Syria’s chemical-weapons stockpiles and facilities, with the government’s full cooperation.
In Syria – as in so many other conflict-affected areas, where the UN is fighting to promote peace and stability – there is no such thing as a clear victory.
As an experienced statesman once told me, “At the UN, we do not settle for failure, nor do we expect success.” In diplomatic negotiations, you take what you can get.
In humanitarian crises, you do what is possible – usually too little, and often too late. “We drink from a cup that is eternally half full,” he concluded.
This conflicted view aligns with public perceptions of the UN.
In the United States, for example, a recent poll by Better World Campaign suggested that 57% of Americans view the UN favorably; but, according to a more recent Gallup survey, only 35% of Americans believe the UN is doing a good job.
When the UN was founded in 1945, polls showed similarly conflicted views.
While slightly more than 60% of Americans embraced the importance of the UN and its global mission, only 39% believed that its lofty goals for peace and human development were achievable.
This discrepancy reflects a deep divide – in the US and elsewhere – between people’s hopes for the UN and their expectations of its ability to deliver.
In fact, the UN’s contribution to peace and development should not be understated, though its successes clearly do not receive the publicity they deserve.
For example, UN peacekeepers were recently deployed successfully in Mali.
Last month, they defeated the M23 rebels in the Democratic Republic of Congo, ending a major threat to regional peace and security.
But most of the UN’s achievements have had shortcomings.
In 2011, after Côte d’Ivoire’s President Laurent Gbagbo refused to cede power following his electoral defeat the previous year, the UN, backed by French forces, arrested him and transferred him to the International Criminal Court, cutting short a potentially devastating civil war.
Nonetheless, their intervention came too late for the hundreds of civilians who were killed in the city of Duékoué.
When Libya’s Muammar el-Qaddafi threatened to kill his rebellious detractors like “rats,” a UN coalition intervened under an emerging global doctrine: the responsibility to protect.
But three years after Qaddafi’s ouster, Libya remains hobbled by weak national institutions and roiled by factional fighting.
During the early days of the Arab Spring protests, the UN, led by Secretary-General Ban Ki-moon, spoke out forcefully for human rights and democracy.
But the UN’s capacity to ensure desirable outcomes is limited; while the hope that drove the Arab Spring may not be depleted, it has clearly diminished significantly.
In just a few years, the UN has managed to push climate change – which, until recently, was barely understood by world leaders – toward the top of the global agenda.
But a comprehensive agreement on climate change remains a distant hope.
And while the Millennium Development Goals have produced remarkable progress in key areas – including education, infant mortality, and diseases like malaria and tuberculosis – there is still a long way to go.
In pursuing a political solution in Syria, it is important to set realistic expectations.
The country has descended into warlordism – a take-no-prisoners fight among armed groups, some allied with the government, others with Al Qaeda, and all preying on innocent civilians.
In such an environment, the prospects for diplomacy are dim.
The UN must settle for what it can get and do the most it can to help those in need.
After all, a half-full glass is better than an empty one.
Good and Bad Inequality
MILAN – Rising income and wealth inequality in many countries around the world has been a long-term trend for three decades or more.
But the attention devoted to it has increased substantially since the 2008 financial crisis: With slow growth, rising inequality bites harder.
The “old” theory about inequality was that redistribution via the tax system weakened incentives and undermined economic growth.
But the relationship between inequality and growth is far more complex and multi-dimensional than this simple trade-off suggests.
Multiple channels of influence and feedback mechanisms make definitive conclusions difficult.
For example, the United States and China are the fastest-growing major economies today.
Both have similarly high and rising levels of income inequality.
Though one should not conclude from this that growth and inequality are either unrelated or positively correlated, the unqualified statement that inequality is bad for growth does not really accord with the facts.
Moreover, in global terms, inequality has been falling as developing countries prosper – even though it is increasing within many developed and developing countries.
This may seem counterintuitive, but it makes sense.
The dominant trend in the global economy is the convergence process that began after World War II.
A substantial share of the 85% of the world’s population living in developing countries experienced sustained rapid real growth for the first time.
This global trend overwhelms that of rising domestic inequality.
Nonetheless, experience in a wide range of countries suggests that high and rising levels of inequality, especially inequality of opportunity, can indeed be detrimental to growth. One reason is that inequality undercuts the political and social consensus around growth-oriented strategies and policies.
It can lead to gridlock, conflict, or poor policy choices. The evidence supports the view that the systematic exclusion of subgroups on any arbitrary basis (for example, ethnicity, race, or religion) is particularly damaging in this respect.
Intergenerational mobility is a key indicator of equality of opportunity.
Rising inequality of outcomes need not lead to reduced intergenerational mobility. Whether it does depends heavily on whether important instruments that support equality of opportunity, principally education and health care, are universally accessible.
For example, if public education systems start to fail, they are often replaced at the upper end of the income distribution by a private system, with adverse consequences for intergenerational mobility.
There are other links between inequality and growth.
High levels of income and wealth inequality (as in much of South America and parts of Africa) often lead to and reinforce unequal political influence.
Rather than seeking to generate inclusive patterns of growth, policymakers seek to protect the wealth and rent-capturing advantage of the rich.
Generally, this has meant less openness to trade and investment flows, because they lead to unwanted external competition.
This suggests that all inequality (of outcomes) should not be viewed in the same way.
Inequality based on successful rent seeking and privileged access to resources and market opportunities is highly toxic with respect to social cohesion and stability – and hence growth-oriented policies. In a generally meritocratic environment, outcomes based on creativity, innovation, or extraordinary talent are usually viewed benignly and believed to have far less damaging effects.
That is partly why China’s current “anti-corruption” campaign, for example, is so important.
It is not so much China’s relatively high income inequality, but the social tensions created by insiders’ privileged access to markets and transactions, that threatens the Chinese Communist Party’s legitimacy and the effectiveness of its governance.
In the US, how much of the increase in income inequality over the past three decades reflects technological change and globalization (both favoring those with higher levels of education and skills), and how much reflects privileged access to the policymaking process, is a complex and unsettled question.
But it is important to ask for two reasons. First, the policy responses are different; second, the effects on social cohesion and the social contract’s credibility are also different.
Rapid growth helps.
In a high-growth environment, with rising incomes for almost everyone, people will accept rising inequality up to a point, particularly if it occurs in a context that is substantially meritocratic.
But in a low-growth (or, worse, negative-growth) environment, rapidly rising inequality means that many people are experiencing no income growth or are losing ground in absolute as well as relative terms.
The consequences of rising income inequality can tempt policymakers down a dangerous path: the use of debt, sometimes combined with an asset bubble, to sustain consumption.
This arguably occurred in the 1920s, prior to the Great Depression; it certainly occurred in the US (and Spain and the United Kingdom) in the decade prior to the 2008 crisis.
A variant, seen in Europe, is the use of government borrowing to fill a demand and employment gap created by deficient private domestic and external demand.
To the extent that the latter is associated with productivity and competitiveness problems, and exacerbated by the common currency, this is an inappropriate policy response.
Similar concerns have been raised about the rapid increase in debt ratios in China.
Perhaps debt seems like the path of least resistance in dealing with the effects of inequality or slow growth.
But there are better and worse ways to deal with rising inequality.
Leverage is one of the worst.
So where does that leave us?
For me, the high-priority items are fairly clear.
In the short run, the top priority is income support for the poor and the unemployed, who are the immediate victims of crises and the underlying imbalances and structural problems, which take time to remove.
Second, especially with rising income inequality, universal access to high-quality public services, particularly education, is crucial.
Inclusion sustains social and political cohesion – and hence the very growth needed to help mitigate the effects of rising inequality.
There are many ways for economies to fall short of their growth potential, but underinvestment, especially within the public sector, is one of the most potent and common.
Labor’s Digital Displacement
MILAN – Digital technologies are once again transforming global value chains and, with them, the structure of the global economy.
What do businesses, citizens, and policymakers need to know as they scramble to keep up?
Digitally enabled supply chains initially increased efficiency and dramatically shortened lead times.
Capital was mobile; labor less so.
Economic activity (production, research, design, etc.) moved to any accessible country or region that had relatively inexpensive labor and human capital.
With only a slight lag, complexity became manageable, and global supply chains’ linear model (something produced in country A is consumed in country B) gave way to a more complex model with more fragmented but more efficient supply networks.
Meanwhile, a dramatic shift occurred on the demand side, as emerging economies grew and became middle-income countries.
Developing country producers, who in an earlier era accounted for a relatively small fraction of global demand, became major consumers.
Global supply networks shifted again, accommodating fragmentation and dispersion on both the supply and demand sides of their structure, a process sometimes called technologically enabled atomization: the division of supply networks into finer and finer parts, breaking the bonds of proximity and the resulting transaction-cost constraints that previously prevailed.
For example, many services related to intermediate and final demand require knowledge, expertise, information, and communication for their delivery.
What they do not require is geographical nearness or the physical movement of goods.
They represent a large share of the global economy, and they are gravitating rapidly toward the tradable sector, with increasingly powerful digital and information technology chasing imperfectly mobile human resources and new rapidly growing markets.
In the course of this transformation, millions of people joined the global economy, with wide-ranging consequences – many of which remain challenging – for poverty, prices, wages, and income distributions.
Now comes a second, potentially even more powerful, wave of digital technology that is replacing labor in increasingly complex tasks.
This process of labor substitution and disintermediation has been underway for some time in service sectors – think of ATMs, online banking, enterprise resource planning, customer relationship management, mobile payment systems, and much more. This revolution is spreading to the production of goods, where robots and 3D printing are displacing labor.
It is important to understand the economics of these technologies.
The vast majority of the cost comes at the start, in the design of hardware (like sensors) and, more important, in creating the software that produces the capability to carry out various tasks.
Once this is achieved, the marginal cost of the hardware is relatively low (and declines as scale rises), and the marginal cost of replicating the software is essentially zero.
With a huge potential global market to amortize the upfront fixed costs of design and testing, the incentives to invest are compelling.
In other words, unlike the preceding wave of digital technology, which motivated firms to gain access to and deploy underutilized pools of valuable labor around the world, the driving force in this round is cost reduction via the replacement of labor.
This transformation has important side effects.
For physical goods, there are costs associated with logistics and lead times, owing to inventories and poor forecasts of the market. With digital capital-intensive technology, however, production will inevitably move toward the final market, wherever it is.
This re-localization constitutes a major shift in the structure of global supply networks.
An extreme form of this may be coming in the form of 3D printing, a technology that makes it possible to produce an astonishingly wide and growing range of products by printing them one layer at a time. Examples include buildings, athletic shoes, designer lamps, aircraft wings, and much more.
As the costs of this technology decline, it is easy to imagine that production will become extremely local and customized.
Moreover, production may occur in response to actual demand, not anticipated or forecast demand.
In some sense, this represents the ultimate compression of supply chains, as firms produce to final demand with minimal delay.
Meanwhile, the impact of robotics (another technology with digital foundations), is not confined to production.
Though self-driving cars and drones are the most attention-getting examples, the impact on logistics is no less transformative.
Computers and robotic cranes that schedule and move containers around and load ships now control the Port of Singapore, one of the most efficient in the world.
Developing countries in the early stages of growth need to understand these trends. Labor, no matter how inexpensive, will become a less important asset for growth and employment expansion, with labor-intensive, process-oriented manufacturing becoming a less effective way for early-stage developing countries to enter the global economy.
Re-localization will be seen everywhere, including lower-income countries.
Production will not vanish; it will just be less labor intensive.
All countries will eventually need to rebuild their growth models around digital technologies and the human capital that supports their deployment and expansion.
The retail sector, too, is being transformed.
Online retail and supporting logistics is expanding in a wide range of advanced and developing economies.
In China, where the expansion is occurring extremely quickly, estimates suggest that only part of the expansion is at the expense of traditional retail.
In fact, online retail appears to be accelerating the expansion of the overall consumer market.
Knowledgeable participants expect the new retail model to be an integrated form of online and physical retail, each modified by the presence of the other.
Think again of the 3D printing model, a potential form of demand-driven mass-customization, and its combination with online mobile payments systems and social media.
The integration of sourcing with logistics and retail will become the third leg of the stool.
The world we are entering is one in which the most powerful global flows will be ideas and digital capital, not goods, services, and traditional capital. Adapting to this will require shifts in mindsets, policies, investments (especially in human capital), and quite possibly models of employment and distribution.
No one knows fully how all of this will play out.
The Gain in Spain
MILAN – The Spanish economy is beginning to attract investors’ attention – and not only because asset prices are depressed in the current climate (arguably implying a good buy for longer-term, value investors).
While there are huge problems that must still be overcome, there is also a clear sense on the ground that the economy has passed a turning point, roughly at the start of this year.
To skeptics, green shoots of recovery will not bloom without access to the credit spigot, which is still clogged by balance-sheet damage in many banks.
But, though the road back to full employment and sustainable growth will not be built overnight, progress on it may be faster than most observers expect.
It is easy to get lost in the details of recovery patterns, so a sound framework for assessing potential growth helps.
In fact, the Spanish economy is a classic case of a defective growth pattern followed by a predictable, policy-assisted recovery that is driven (with a delay) mostly by the tradable sector.
Prior to the crisis, Spain’s economy relied on demand created by a leveraged real-estate bubble – a pattern not dissimilar in some respects to that in the United States.
Thus, both growth and employment came at the expense of the tradable side of the economy.
Unit labor costs rose steadily relative to Germany – not only in Spain but also in all of southern Europe, and in France – in the decade beginning in 2000, following the euro’s introduction.
The crisis struck domestic demand, and the tradable sector was incapacitated, because the rapid rise in relative unit labor costs, combined with an over-valued euro, had undermined competitiveness.
Moreover, the crisis-related damage to banks’ balance sheets constrained demand by severely limiting household credit and lending to small and medium-size businesses.
Spain was not in an enviable position.
The rapid deterioration of fiscal position after the crisis made any substantial countercyclical response impossible, while regulatory constraints limited the economy’s structural flexibility.
The path to recovery, though difficult and lengthy, has been relatively clear and specific.
First, unit labor costs needed to decline toward productivity levels to restore competitiveness – a painful process without the exchange-rate mechanism.
In fact, there has been substantial post-crisis re-convergence toward German levels.
Second, both capital and labor needed to flow to the tradable sector, where demand constraints can be relaxed as relative productivity converges.
Like many other southern European countries, however, labor-market and other rigidities dramatically reduced the speed and increased the costs of structural economic adjustment, resulting in lower levels of growth and employment, especially for young people and first-time job-seekers.
But Spanish policymakers and business leaders appeared to grasp the nature of the pre-crisis economic imbalances – and the importance of the tradable sector as a recovery engine.
Recognizing that the economy could not benefit from a partial restoration of competitiveness without structural shifts, the government passed a significant labor-market reform in the spring of 2013.
It was controversial, because, like all such measures, it rescinded certain kinds of protections for workers.
But the ultimate protection is growing employment.
With a lag, the reform now appears to be bearing fruit.
Indeed, though domestic investment is constrained by credit availability, major European and Latin American multinationals have begun investing in the Spanish economy, attracted partly by its enhanced competitive posture and structural flexibility, and, on a slightly longer time horizon, by a recovery in domestic demand.
Private equity is flowing in as well, not only because the valuations are attractive, but also because potential growth in Spain now seems within reach.
Though Spain and Italy are similarly depressed in terms of current growth and employment, especially for the young, two significant differences stand out.
One is that, unlike Spain, Italy has experienced relatively little convergence of unit labor costs with productivity.
That restricts the potential of the tradable part of the economy as a growth engine.
The second difference is that labor-market reform and market liberalization in Italy remain on the to-do list for Prime Minister Matteo Renzi’s new government.
If Italy is to take advantage of the growth potential on the tradable side of the economy, following through is crucial – just as it was for Spain.
There is no chance in either country that domestic demand alone will support sustained growth in the short to medium term.
Moreover, both countries need growth-oriented policies to help with deleveraging.
As Spain’s experience has shown, though structural flexibility is difficult to achieve politically, it is essential for strong economic performance.
One reason is that rebalancing is needed when a defective growth pattern distorts the economy’s structure, particularly the balance between the tradable and non-tradable sectors.
Another is that technological and global market forces are imposing structural change on all advanced economies, even those that are not unbalanced.
Built-in rigidities impede adaptation and adversely affect growth and employment.
Generally, the successful economies in the past three decades have been those that adopted reforms and policies aimed at increasing structural adaptability: one thinks of the US after Ronald Reagan, the United Kingdom after Margaret Thatcher, Germany after Gerhard Schröder, and China after Deng Xiaoping.
Spain appears to be in the early stages of restoring a balanced and sustainable growth pattern.
What’s Stopping Robust Recovery?
MILAN – The growth map of the global economy is relatively clear.
The US is in a partial recovery, with growth at 1.5-2% and lagging employment.
Europe as a whole is barely above zero growth, with large variations among countries, though with some evidence of painful re-convergence, at least in terms of nominal unit labor costs.
China’s growth, meanwhile, is leveling off at 7%, with other developing countries preparing for higher interest rates.
Many advanced economies must still address the end of the pre-crisis growth pattern generated by excessive domestic demand.
In such economies, that pattern not only typically depended on leverage; it also enlarged the non-tradable side of the economy and shrank the tradable side.
And yet, given that the non-tradable sector is constrained by its reliance on domestic demand, recovery – if it comes – will depend on the tradable sector’s growth potential.
To realize that potential, the tradable sector has to re-expand at the margin: as a weakening currency causes imports to fall and real unit labor costs decline as nominal wages flatten out, unemployed labor and capital flow toward external markets for goods, services, and resources.
This is already happening in the United States, where exports are above their previous peak while imports remain subdued; the current-account deficit is declining; and even net employment in the tradable sector is increasing (for the first time in two decades).
Indeed, recent data suggest that more than half of the acceleration in US growth is occurring on the tradable side, even though it accounts for only about one-third of the economy.
And that contribution is probably an underestimate, because income generated on the tradable supply side produces income that becomes demand on the non-tradable side – a multiplier effect that crosses the tradable/non-tradable boundary.
The US economy is relatively flexible, and this kind of structural adjustment in the private sector occurs reasonably quickly.
And yet employment still lags, owing to longer-term factors like labor-saving technology and reconfigurations of global supply chains, in which lower-value-added segments and functions tend to be concentrated in lower-income countries.
One reason the US recovery is only partial is fiscal drag, a lingering effect of the post-2008 downturn, which shifted some leverage to the public sector, resulting in a growing debt burden that has been addressed – controversially so – by immediate austerity.
But the main problem is that public-sector investment remains well below growth-sustaining levels.
The hard part of fully realizing potential growth is shifting the composition of domestic demand from consumption to investment without adding leverage.
That means paying for it on the public-sector side, via taxes and a reduction in household consumption (and in wealth accumulation).
It also means getting the balance between domestic and external demand right, and appreciating the sensitivity of medium- and long-term growth to the composition (and size) of domestic aggregate demand.
Against this background, monetary policymakers must be cautious, because low interest rates can shift the growth model back toward leverage and domestic consumer demand, stalling the structural shift to the tradable side that is underway.
Several European countries also became too dependent on domestic demand and need to rebalance toward the tradable side.
But the challenge for them is much bigger and the process slower.
In the first decade of the euro, nominal unit labor costs rose sharply in Greece, Ireland, Italy, Portugal, and Spain, while virtually flatlining in Germany.
Absent the common currency, these divergences would have been accompanied by exchange-rate adjustments – certainly after (and perhaps even before) the pattern of excessive leverage and domestic demand ended.
But such adjustments cannot happen in a monetary union, so unit labor costs are slowly re-converging via a protracted process of flat nominal wage growth and slowly declining real wages (a process that would be quicker with higher inflation in Germany and Northern Europe).
With domestic demand in short supply, this slow road essentially postpones or impedes growth via expansion of the tradable sector.
The speed of structural adjustment is also strongly influenced by how easily employment can shift from an economy’s non-tradable to its tradable side and across segments of global supply chains.
Countries’ degree of labor-market flexibility varies considerably, and the reforms that increase it are critically important.
For example, the German reforms of 2003-2006 increased flexibility significantly (though in a more benign global and eurozone setting).
Much is made of Germany’s large current-account surpluses.
But, just as the eurozone’s struggling economies have an overvalued currency, Germany has an undervalued one, which tends to produce external surpluses and, by definition, an excess of savings over investment.
An undervalued currency also tends to produce an unbalanced growth model of the opposite kind: an outsize tradable sector and insufficient domestic aggregate demand.
Because the non-tradable sector in advanced economies tends to create more jobs, this model can lead to an employment problem (even if it is partly masked by cutting hours rather than workers).
In principle, Germany could try to boost domestic demand by leveraging up; but, unless the exchange rate adjusts upward to shrink the tradable sector at the margin, doing so would be inflationary.
The European Central Bank would then have to intervene to maintain the credibility of its commitment to price stability, which is its primary mandate.
It is little wonder that Germany finds it difficult to achieve a sustainable pattern of balanced growth in the eurozone as it is currently configured.
Anyone familiar with China’s structural shifts on the supply and demand side will recognize some similarities with the German case.
The main point is that restoring growth requires a careful analysis of structural balance, attention to demand constraints in the non-tradable sector, and a focus on the impediments to expanding the tradable sector.
Some of those impediments are supply-side rigidities; others have more to do with bloated domestic demand.
Neither can be ignored if robust recovery is to be achieved.
Rebooting China
MILAN – Despite China’s widely discussed economic slowdown, annual GDP growth remains above 7%, implying little cause for alarm – at least for now.
The question is whether the government’s efforts to implement structural reforms and transform the economy’s growth model are working – that is, whether internal imbalances continue to threaten long-term economic performance.
Given that China remains the global economy’s most important growth engine, the answer matters to everyone.
Assessing China’s economic stability requires considering the conflicts and tensions affecting the country – none of which advances the cause of growth.
For starters, China’s territorial disputes with many of its neighbors, including Japan, Vietnam, and the Philippines, are undermining regional peace, not to mention economic integration.
Moreover, China’s relationship with the United States is deteriorating, owing to conflict over America’s foreign-policy “pivot” toward Asia and disputes over cyber security.
China has already restricted access to its market for some US-based technology firms, and more such actions may follow.
Meanwhile, China’s domestic political system is being shaken up by President Xi Jinping’s anti-corruption campaign – an effort that is essential to boosting the government’s accountability and legitimacy as it pursues deep systemic reforms.
But, at a time of rising international tension, there is a risk that Xi’s campaign could mutate into a broader assault on political dissent attributed to “corrupt” foreign influences.
Since China launched its process of “reform and opening up” more than three decades ago, it has benefited from its willingness to consider – if not adapt – foreign ideas.
In many areas – economic policy in a market economy, business management, technology, energy, the environment, and health care, to name a few – selective learning has accelerated China’s development (and benefited the countries that have learned from Chinese experience).
Lumping outside influences together with a legitimate anti-corruption campaign would undermine this positive dynamic, with potentially serious consequences for China’s quest to transform its growth model and achieve high-income status.
The good news is that the data – while incomplete – show progress in China’s economic transformation.
Weak growth in China’s major export markets (particularly in Europe, North America, and Japan), together with rapidly rising domestic wages and incomes, is driving the tradable part of the economy toward higher-value components in global supply chains.
Meanwhile, inflation, rising wages, and the renminbi’s nominal appreciation have driven up the real effective exchange rate, though this trend has been tempered, to some extent, by the euro’s persistently high value.
How businesses handle this transition – which is already contributing to China’s growth slowdown – will determine the transformation’s progress.
China has no choice but to change its growth model.
Its share in global markets is now so large that the economy could be demand-constrained for the first time in four decades.
The only way to avoid this outcome is by pursuing a balanced program comprising high-return investment, high-value government services, and a higher level of household consumption.
Public and private investment – which has served as a key driver of China’s growth over the last four decades – can play a central role in expanding domestic demand, but only if returns are high. While low-return investments generate aggregate demand, they do not increase future income or productive potential, and thus do not foster sustainable growth.
Given this, China’s leaders must use a combination of financial-sector reforms and improved public-sector incentives to increase access to capital in sectors with high potential rates of return.
In fact, this process is underway with the licensing of new private banks and the development of China’s shadow banking system.
Given the limited capacity of investment demand to drive growth, high-value government services and increased household consumption are also needed.
As it stands, private consumption accounts for an unusually small share of China’s GDP.
But rising wages – partly the result of mandated minimum-wage increases in some regions – are boosting household incomes, and there is already some evidence that the downward trend in consumption’s share of GDP has reversed.
Consider the telecommunications-equipment industry, which has been growing at more than 15% annually in the past couple of years.
Gross merchandise volume in online retail sales is approaching CN¥2 trillion ($316 billion), and growing at a rate of 40-60% annually.
Many other industry segments serving domestic demand are also growing at double-digit rates, suggesting that domestic consumption is already making a more significant contribution to China’s GDP growth.
But there remains the question of whether consumption share growth is sustainable – that is, whether it is the result of income share growth or rising leverage.
If it is supported by excessive leverage, effectively shifting future consumption to the present, China could face a significant slowdown – or even a major crisis.
Leverage has undoubtedly increased at unsustainable rates in recent years.
But, given that debt growth began from a low base, it will not necessarily lead to a crisis – as long as appropriate risk management is in place.
Most important, shadow banks’ activities must be regulated in a way that enhances transparency and deters excessive risk-taking, while allowing the sector to continue to contribute to financial-sector development by providing savings options to households and credit to small and medium-size firms.
As for the official banking sector, liberalization of interest rates on deposits, scheduled for 2016, will reduce financial repression and implicit investment subsidies.
That, in turn, should help to rebalance the demand side of the growth pattern.
Such complex structural changes cannot be perfectly synchronized and thus are likely to be accompanied by a dip in growth rates.
The government has expressed a willingness to accept somewhat slower growth in pursuit of a more stable, sustainable economy.
But whether a slowdown is the start of a trend or a temporary part of a complex transition, will not be apparent from the start.
Ensuring that it is the latter will require the patience and discipline – in both domestic and foreign policy – befitting the major transformation now underway.
Microbiology\u0027s World Wide Web
All the fashionable talk nowadays about computer “viruses” explains what these culprits do by forging an analogy to their biological namesakes.
But it is equally enlightening to portray the biosphere of real, living microbes as a world wide web of informational exchange.
Indeed, microbes exchange information with each other and their environment, with DNA serving as the packets of data going every which way.
Microbes differ from computer viruses because they not only spread but evolve, and do so at a faster pace than their hosts.
Microbes are in fact well designed to exploit this difference to their advantage in the war that occasionally erupts between them and other species - a war we see as disease and death.
It is the microbe’s capacity to transfer information to other organisms that makes the analogy with the World Wide Web plausible.
Like computer viruses, many living viruses can integrate (download) their own DNA into their host’s genetic material (the genome), and this can be copied and passed on.
Indeed, even our own, human, evolution is partly explained by these encounters with microbes.
Many segments of human DNA originated from historical encounters with a particular type of viruses, known as retroviruses, which “downloaded” their information into human cells and integrated it into human DNA.
The field of molecular genetics, which began in 1944, when DNA was proven to be the mechanism by which inherited characteristics are passed on, brought microbes to the center of many biological investigations.
Systems composed of microbes are often the most convenient models to study evolution in a laboratory.
What makes the evolution of microbes so intriguing - and worrisome - is their combination of vast populations and intense fluctuations within those populations.
Some microbes possess a gene that enhances their variability, and this allows them to mutate at different rates in response to factors in the environment - something larger organisms rarely do.
Also, while more advanced life forms, like humans, cannot mate with members of other species, microbial evolution is less constrained by this “species barrier.”
Indeed, through a processes known as Aplasmid transfer,” microbes can exchange biological innovations among themselves, including - most importantly and dangerously - resistance to antibiotics, which one species of microbes can pass on to another.
The sheer number of microbes and their ability to exchange information is a formula for high-speed evolution.
Populations of microbes fluctuate by many billions on a daily basis as they move between their host organisms and encounter antibiotics, antibodies, drought, or other natural hazards to which their genetic evolution may respond.
A simple comparison of the pace of the evolution of microbes and their multicellular hosts suggests a millionfold or billionfold advantage to the microbe.
One year in the life of a microbe, indeed, easily surpasses the ages it took for all mammals to evolve!
By that measure, mankind is playing out of its evolutionary league.
Indeed, many complex species lost the war with microbes to become extinct.
Human history, too, has been marked by catastrophic microbe-caused plagues.
While humanity has survived all these microbe-inspired disasters so far, maintaining our survival in a world in which germs/viruses and their hosts continuously interact in new ways will require us to think in innovative ways as well, and to bring ever more sophisticated technical wit and social intelligence to the contest.
In my recent work, I explore the implications of this gross imbalance in the evolutionary pace of humans as compared to microbes and viruses.
Had the entire evolutionary drive of microbes been directed at optimizing their virulence and lethality, larger species would not have survived such murderous competition.
But, of course, neither would many microbes have survived, because they depend on other species for their habitat.
Despite the fact that microbes do not ordinarily seek to maximize their virulence, most research on infectious disease focuses on the mechanisms by which the harmful effects of microbes are felt, as well as on the ways in which host organisms adapt (mainly through the immune system) to fight that virulence.
Very little attention has been given to the microbes’ internal mechanisms for sustaining themselves as inhabitants within their hosts, which includes the interest the microbe shares with its host in controlling and limiting the damage it does.
After all, microbes reside in their hosts in order to gain from the exchange.
Startling examples show that a microbe’s goal is, indeed, joint survival with its host.
In some cases, the host’s immune system is even manipulated by one parasite in order to enhance the host's resistance to super-infection by rival, invading parasites.
We may thus have to learn how to exploit these synergies and use the weapons that microbes provide us, rather than look at them only as mortal enemies marked for peremptory extermination.
Just as scientists study entire ecological systems to see how the various parts interact, we must regard the human body as an extended genome.
Its parts consist of the nuclear DNA genome (karyome), a chondriome (mitochondria), and what I call the microbiome: the menagerie of the body’s attendant microbes.
We must study the microbes that we carry within us and on our surfaces as part of a shared embodiment.
If you can't beat them, join them! the old saying goes, and for better and worse our fates are joined with the microbes that share our bodies.
We can and will benefit from a deeper understanding of just how they work within and with us.
The Arab World’s Vanishing Christians
PRINCETON – This Christmas, like every Christmas, thousands of pilgrims and tourists will travel to the Middle East to celebrate the holiday in the land of the Bible.
In Bethlehem, the birthplace of Jesus, the Latin Patriarch of Jerusalem will lead a midnight mass, while in Syria – where some Christians still speak dialects of Aramaic, similar to the ancient language Jesus spoke – celebrations are likely to be subdued, curtailed by the dangers of a war that is tearing the country apart.
At a time when the Middle East is aflame with sectarian strife, the observance of the Christian holiday is a sad reminder that the region’s distinctive religious, ethnic, and cultural diversity is rapidly disappearing.
At the beginning of the twentieth century, Christians made up roughly 20% of the Arab world.
In certain areas – including southern Egypt, the mountains of Lebanon, and southeastern Anatolia – they formed an absolute majority.
Today, just 5% of the Arab world is Christian, and many of those who remain are leaving, forced out by persecution and war.
Jews, too – once a vital presence in cities like Cairo, Damascus, and Baghdad – have all but disappeared from the predominantly Muslim parts of the Middle East, relocating to Israel, Europe, and North America.
Even in Muslim communities, diversity has been dwindling.
In cities like Beirut and Baghdad, mixed neighborhoods have been homogenized, as Sunni and Shia seek shelter from sectarian attacks and civil war.
The waning of diversity in the Middle East goes back more than a century, to the bouts of ethnic and religious cleansing that took place during the Ottoman Empire, including the murder and displacement of 1.5 million Armenian and Syriac Christians in eastern Anatolia.
After the empire’s collapse in 1918, the rise of Arab nationalism placed Arabic language and culture at the center of political identity, thereby disenfranchising many non-Arab ethnic groups, including Kurds, Jews, and Syriacs.
Many Greeks who had been living in Egypt for generations, for example, lost their livelihoods in the 1950s, when President Gamal Abdel Nasser, the great standard-bearer of pan-Arabism, nationalized privately owned businesses and industries.
Others were forced to flee the country altogether.
The rise of political Islam following the Arab-Israeli Six-Day War in 1967 dealt another blow to religious minorities.
By promoting Islamic revival as a solution to the region’s ills, Islamism led to the marginalization of non-Muslims, including groups that had played outsize roles in the region’s economic, cultural, and political life for centuries.
As a result, in places like Egypt, Christians have faced harsh social discrimination and violence, sometimes at the hands of the nominally secular state.
The Arab Spring upheavals have given rise to grave new challenges to cultural and religious diversity in the Middle East.
Many of the authoritarian regimes now under threat of collapse cultivated the support of minorities.
This was especially true in Syria, where the Alawite-dominated Baath Party fostered ties to Christians and other small communities by presenting itself as a bulwark of secularism and stability in the face of a supposedly threatening Sunni majority.
Now that Syria’s Sunnis have risen up against their Alawite rulers, Christians’ loyalty to the regime has become a liability, even a danger.
In some corners, Christians are regarded as complicit in the government’s brutal crackdown, making them targets for attack.
The rise of the Islamic State over the last year has sparked even more violence against minorities.
Powered by a fundamentalist Wahhabi ideology and a boundless appetite for bloodshed, the Islamic State seeks a return to an imagined pre-modern caliphate that subjugates Shia and treats non-Muslims as second-class citizens.
When the Islamic State captures a city, its fighters give Christians the choice of paying a medieval tax known as the jizya, converting to Islam, or being killed.
Many simply flee.
The Yazidis of northern Iraq – whose plight on Mount Sinjar was much publicized this past summer – are even less lucky.
The Islamic State regards them as pagans, and therefore, undeserving of the protections traditionally accorded to Christians or Jews under Islamic law.
As a result, many Yazidis are murdered or enslaved.
In addition to persecuting minorities, the Islamic State has set about erasing all physical traces of religious diversity.
Its forces have demolished Sufi shrines, Shia mosques, Christian churches, and ancient monuments they consider to be remnants of a corrupt and profane past.
Western governments’ protection of ethnic and religious minorities in the region has been a controversial matter for more than a century, and it remains so today.
Many Sunnis, for example, accuse America of favoritism: the United States intervenes to protect Kurds, Yazidis, and Christians in northern Iraq, they say, but does little to stop the slaughter of hundreds of thousands of Sunnis in Syria.
In fact, America’s complicated history of church-state relations at home has made it reluctant to intervene on the part of any religious groups abroad, especially when the population is small.
The end of diversity in the Middle East is a tragedy not only for those who have died, fled, or suffered.
The region as a whole will be worse off as a result of their absence.
Minorities have historically served as brokers between the Middle East and the outside world, and if they disappear, the region will lose an important class of cultural, economic, and intellectual leaders.
How a society handles ethnic and religious diversity can tell us a great deal about its capacity to negotiate disagreements and transform pluralism from a liability into an asset.
Yet diversity is all too often considered a source of weakness in the Middle East.
It should be considered a strength, and one that is worth protecting.
Middle East Integration
The attempts now being made to revive the “road map” to a final settlement of the Palestinian-Israeli conflict and the creation of a Palestinian state are at only a preliminary stage.
The recent international conference in London, aimed at supporting reforms in the Palestinian Authority and shoring up support for renewed negotiations with Israel, is one of those preliminary efforts.
I suggest, however, that it is not mediation that is needed: what the Palestinians need now are partners.
In their conflict with Israel, their natural and historical partner has always been Jordan.
That partnership was never broken.
Articles 3 and 8 of Jordan’s peace treaty with Israel refer explicitly to the refugee problem as one of the major issues still to be resolved, as well as citing the unresolved status of trans-border arrangements and of Jerusalem.
Jordan is not outside the peace process, but an essential part of it.
The original road map sketched out at the Madrid Conference in 1991 envisaged two stages: the final settlement of disputes between the Palestinians and Israel, and the permanent settlement of regional conflicts.
Jordan’s participation in both stages is crucial.
Indeed, the interests of the inhabitants of the three areas – Palestine, Jordan, and Israel – are so intertwined that their representatives will have no choice but to come to terms with one another if negotiations are to succeed.
For example, the refugee problem cannot be separated from wider problems concerning the integration of all inhabitants of Palestine, Jordan, and Israel – where the refugees are most numerous – into civil societies where they may enjoy equal legal status and equal access to economic and cultural opportunities.
Such integration cannot be achieved on a unilateral basis but only by programs adopted by the host and donor countries in co-operation with each other; nor can it be achieved in conditions where there is complete political and administrative separation between the populations which places them under exclusive controls and fails to acknowledge the human needs of community and conviviality.
The economic and social development of the three areas demands an integrated approach to the exploitation of energy and other natural resources, particularly water.
Without agreements on the conditions of such exploitation there will remain imbalances of living conditions and the persistence of rival claims with their potential for future conflicts.
A recognized community of water and energy interests and programs for their joint exploitation, for example in the rift valley, may lead, as was the motivation for the first stage of European integration, to a wider integration on a wider scale in the region.
The status of Jerusalem is still an unresolved question on both the local and international scenes.
That question was specifically listed in the Jordanian-Israel Peace Treaty.
The recognition by the three parties of the primacy of the moral and spiritual over the political importance of the city could lead to arrangements on the ground which satisfy the legitimate claims of the three Abrahamic faiths, and subsume the eventual political status of the city to this moral authority.
The alternative to an accepted resolution of their problems by the three parties is the permanent fragmentation of the Holy Land, which can only lead to more confrontation and violent conflicts.
The shadow of such fragmentation, with its unfathomable perils, now hangs over Iraq.
In this troubled part of the world, the choice is, quite simply, one between regionalism and barbarism.
The Middle East Meltdown and Global Risk
NEW YORK – Among today’s geopolitical risks, none is greater than the long arc of instability stretching from the Maghreb to the Afghanistan-Pakistan border.
With the Arab Spring an increasingly distant memory, the instability along this arc is deepening.
Indeed, of the three initial Arab Spring countries, Libya has become a failed state, Egypt has returned to authoritarian rule, and Tunisia is being economically and politically destabilized by terrorist attacks.
The violence and instability of North Africa is now spreading into Sub-Saharan Africa, with the Sahel – one of the world’s poorest and most environmentally damaged regions – now gripped by jihadism, which is also seeping into the Horn of Africa to its east.
And, as in Libya, civil wars are raging in Iraq, Syria, Yemen, and Somalia, all of which increasingly look like failed states.
The region’s turmoil (which the United States and its allies, in their pursuit of regime change in Iraq, Libya, Syria, Egypt and elsewhere, helped to fuel) is also undermining previously secure states.
The influx of refugees from Syria and Iraq is destabilizing Jordan, Lebanon, and now even Turkey, which is becoming increasingly authoritarian under President Recep Tayyip Erdoğan.
Meanwhile, with the conflict between Israel and the Palestinians unresolved, Hamas in Gaza and Hezbollah in Lebanon represent a chronic threat of violent clashes with Israel.
In this fluid regional environment, a great proxy struggle for regional dominance between Sunni Saudi Arabia and Shia Iran is playing out violently in Iraq, Syria, Yemen, Bahrain, and Lebanon.
And while the recent nuclear deal with Iran may reduce the proliferation risk, the lifting of economic sanctions on Iran will provide its leaders with more financial resources to support their Shia proxies.
Further east, Afghanistan (where the resurgent Taliban could return to power) and Pakistan (where domestic Islamists pose a continued security threat) risk becoming semi-failed states.
And yet, remarkably, even as most of the region began to burn, oil prices collapsed.
In the past, geopolitical instability in the region triggered three global recessions. The 1973 Yom Kippur War between Israel and the Arab states caused an oil embargo that tripled prices and led to the stagflation (high unemployment plus inflation) of 1974-1975.
The Iranian revolution of 1979 led to another embargo and price shock that triggered the global stagflation of 1980-1982.
And the Iraq invasion of Kuwait in 1990 led to another spike in oil prices that triggered the US and global recession of 1990-1991.
This time around, instability in the Middle East is far more severe and widespread.
But there appears to be no “fear premium” on oil prices; on the contrary, oil prices have declined sharply since 2014.
Why?
Perhaps the most important reason is that, unlike in the past, the turmoil in the Middle East has not caused a supply shock.
Even in the parts of Iraq now controlled by the Islamic State, oil production continues, with output smuggled and sold in foreign markets.
And the prospect that sanctions on Iran’s oil exports will be phased out implies significant inflows of foreign direct investment aimed at increasing production and export capacity.
Indeed, there is a global glut of oil.
In North America, the shale-energy revolution in the US, Canada’s oil sands, and the prospect of more onshore and offshore oil production in Mexico (now that its energy sector is open to private and foreign investment) have made the continent less dependent on Middle East supplies.
Moreover, South America holds vast hydrocarbon reserves, from Colombia all the way to Argentina, as does East Africa, from Kenya all the way to Mozambique.
With the US on the way to achieving energy independence, there is a risk that America and its Western allies will consider the Middle East less strategically important.
That belief is wishful thinking: a burning Middle East can destabilize the world in many ways.
First, some of these conflicts may yet lead to an actual supply disruption, as in 1973, 1979, and 1990.
Second, civil wars that turn millions of people into refugees will destabilize Europe economically and socially, which is bound to hit the global economy hard.
And the economies and societies of frontline states like Lebanon, Jordan, and Turkey, already under severe stress from absorbing millions of such refugees, face even greater risks.
Third, prolonged misery and hopelessness for millions of Arab young people will create a new generation of desperate jihadists who blame the West for their despair.
Some will undoubtedly find their way to Europe and the US and stage terrorist attacks.
So, if the West ignores the Middle East or addresses the region’s problems only through military means (the US has spent $2 trillion in its Afghan and Iraqi wars, only to create more instability), rather than relying on diplomacy and financial resources to support growth and job creation, the region’s instability will only worsen.
Such a choice would haunt the US and Europe – and thus the global economy – for decades to come.
Middle East Modesty
“Ripeness is all,” concludes Edgar in King Lear .
I will leave it to Shakespeare scholars to decipher what he had in mind.
But for diplomats and historians, understanding the concept of ripeness is central to their jobs: it refers to how ready a negotiation or conflict is to be resolved.
This may sound academic, but it is anything but.
The United States and the three other members of the Quartet – the European Union, Russia, and the United Nations – are planning to convene many of the parties to the Israeli-Arab conflict at a meeting near Washington in November.
The problem is that the conflict is not even close to being ripe for resolution.
Ignoring this reality will lead to failure, if not catastrophe.
Ripeness has several elements: there must be a formula for the parties involved to adopt, a diplomatic process to get them to that point, and protagonists who are able and willing to make a deal.
It is not clear that any of these conditions exist in today’s Middle East.
Much has been said or written about what “final status” or peace between Israel and the Palestinians would look like, but important differences remain regarding borders, the status of Jerusalem and its holy places, the rights of refugees, the future of Israeli settlements, and security arrangements.
There is also a question of process.
Who should be involved in negotiations?
What issues should be on the agenda?
What sort of activities, including violence and settlement activity, are to be precluded while negotiations take place?
Most critical, though, is the condition of local leadership.
Palestinian Authority President Mahmoud Abbas may want to sign a peace accord with Israel, but there is little evidence that he is in a position to do so.
He has lost all authority in Gaza, and has a tenuous hold over the West Bank.
If Palestine were a state, it would be judged to have failed.
Israeli Prime Minister Ehud Olmert is in a stronger but still uncertain position.
His coalition government survives mainly because many members of Israel’s parliament know that they would lose their seats in an early election.
It is an open question whether the most that Olmert would likely be able and willing to offer would meet the least that Abbas would be able to accept.
Trying to end the Middle East conflict in such a climate would be futile.
Worse yet, failure would strengthen those on both sides of the dispute who argue that diplomacy is a waste of time.
So what, then, should be done?
First, it is important that expectations be kept modest. “Success” needs to be defined narrowly.
Calls for an agreement on the most controversial elements of a final peace settlement are unrealistic.
Simply agreeing to an agenda for follow-up meetings would be an accomplishment.
Here, and elsewhere, the US will need to take the lead; the parties cannot be expected to reach consensus by themselves.
Second, it is essential that this meeting be the start of a serious process, not a one-time event.
Rigid timetables that history suggests would not be met should be eschewed.
But no one should walk away doubting the determination of the US and other members of the Quartet to see this process succeed as quickly as possible.
Third, diplomacy cannot survive, much less thrive, amidst a deterioration of the day-to-day circumstances on the ground.
More than anything else, Palestinians must come to associate peace and diplomacy with improvement in their living conditions.
This requires improved security, inflows of aid and investment, and the curtailment of land expropriations that deny the promise of statehood.
Israelis require and also deserve improved security.
Fourth, a path must be provided for those who did not attend the meeting to join the process at a later date.
The most critical barrier for Hamas and others should be a clear commitment to forego armed violence in the pursuit of political ends.
Fifth, the Palestinian leadership cannot be expected to take risks for peace without political protection.
This means that Arab governments, led by Egypt and Jordan, but including Saudi Arabia and other members of the Arab League, must publicly declare their willingness to support a peace that is based on coexistence with Israel.
It would also help if those countries in a position to do so underscored their preparedness to make funds available to help build a Palestinian state and to resettle both refugees and those living in settlements that are vacated under any peace accord.
For some, this approach will seem overly modest.
But this is not yet the time for great ambition.
The context for peace in the Middle East has deteriorated sharply in the seven years since the Clinton administration last convened the parties. Today’s Israeli and Palestinian leaders are far weaker than their predecessors;
Hamas controls Gaza; Iran is more influential; additional settlements and a fence have been built; and the US is bogged down in Iraq and has lost standing throughout the region.
This is not an argument for drift.
Neglect in the Middle East is rarely benign.
But it is vital that new efforts do not cause more harm than good.
Avoiding failure is sometimes a better objective than achieving great success.
This is one such occasion.
Today’s diplomats could do worse than recall the warning of the great French statesman Talleyrand: “ Surtout, messieurs, point de zéle .”
Middle East Peace by Any Means Available
RAMALLAH – Something is happening with the Middle East conflict, but it is hard to say what. A breakthrough appears to be at hand, though all the parties still seem to be clinging to their traditional positions.
The Arab League gave the go-ahead to indirect Palestinian-Israeli talks, and the various Palestinian leadership forums have approved the resumption of talks. Even the usually boisterous Palestinian negotiator Saeb Erekat has toned down his rhetoric, and Palestinian President Mahmoud Abbas gave an optimistic interview to Israel TV.
But Israel has not publicly agreed to the American and Palestinian request to rescind the settlement construction in Jerusalem approved during US Vice President Joe Biden’s recent visit to Israel.
On the contrary, Israeli officials, denying the Palestinians’ assertion that a secret US-Israel agreement exists, clearly intend to continue building Jewish homes in occupied East Jerusalem.
So what is going on?
For starters, we are again moving into what Henry Kissinger called the realm of “constructive ambiguity.”
Palestinians have been assured via a message from President Barack Obama, delivered by his special envoy George Mitchell, that the Israelis will not carry out any “provocations” during the coming four months of indirect negotiations.
Pressed to clarify, the Palestinians admitted that there is no written promise to this effect.
But, on a recent trip to Israel, White House adviser Dan Shapiro is said to have been reassured that the Israelis will not embarrass their American friends.
In exchange, Shapiro handed the ultra-orthodox leader of Israel’s Shas party an invitation to the White House.
Mitchell gave a similar invitation to Abbas.
Palestinians understand that without pressure little change will take place.
They have also clearly understood the folly of violent resistance, and have made a dramatic shift to nonviolent action – with the acceptance (and possibly encouragement) of the international community – in order to maintain pressure on the occupiers.
The PLO’s main faction, Fatah, made this shift at their sixth congress, held in Bethlehem last winter after a 20-year hiatus.
Senior PLO officials have participated in demonstrations and protest activities, with some being injured and Executive Committee member Abbas Zaki imprisoned for a couple of days.
Other senior Fatah officials have been banned from travel outside the West Bank, owing largely to their involvement in nonviolent protests.
In addition to nonviolent activities, Palestinian state-building efforts have been put in high gear.
Salam Fayyad, the energetic Western-trained Palestinian prime minister, has implemented a detailed blueprint for declaring a de facto Palestinian state by August 2011.
While state-building is handled by the civilian Palestinian Authority, political efforts are handled by the PLO, whose chairman, Abbas, is the head of Fatah as well as the Palestinian Authority’s president.
Abbas and his negotiating team, headed by Erekat, have been successful in securing the support of all members of the Arab League.
The PLO has succeeded in obtaining European support for a unilateral Palestinian declaration of statehood.
The only obstacle remaining to Palestinian leaders are the Americans.
When Palestinians asked Mitchell for assurances that the US would support such a statehood declaration if talks failed, Mitchell responded that such a commitment would make negotiations pointless.
Instead, the Americans have their own ideas about how to achieve a breakthrough, especially with Israel, which the Obama administration believes is now the major obstacle.
To effect change in Israel, the Americans are launching various trial balloons.
One is that, if the current process fails, Obama might issue his own plan, which many expect would be a near-carbon copy of the proposal made by Bill Clinton’s administration in its last days ten years ago.
At the time, Palestinian and Israeli negotiators were quoted as saying that the two sides had never been closer to an agreement.
A US peace plan that is fair and reasonable would certainly have many ordinary Israelis and Palestinians cheering.
It could cause some major damage to right-wing Israeli political forces that came to power as a result of eight years of former US president George Bush’s so-called war on terror.
Hiding behind that anti-Islamic façade, the Israelis have found it easy to stonewall all reasonable peace efforts, including the 2002 Arab peace plan, according to which Arab states and Muslim-majority countries agreed to normalize relations with Israel if it withdrew from areas occupied in 1967.
The plan also gave Israel a role equal to that of the Palestinians in resolving the refugee issue.
It called for the “achievement of a just solution to the Palestinian refugee problem to be agreed upon in accordance with UN General Assembly Resolution 194.”
Yet another US trial balloon has been the suggestion that if all of the above fails, the Americans might suggest that the Arab-Israeli conflict be resolved through the convening of an international conference.
Such a conference is in fact listed in the “road map” as part of phase III in the talks.
Until now, Israelis and Palestinians have insisted on various “red lines” that they proclaimed they would never cross.
The coming months will show whether these public postures are negotiable, with obvious consequences for both parties and their relationship with the international community, especially the US.
Abad Baru bagi Timur Tengah
NEW YORK – Amerika Serikat, Uni Eropa, dan beberapa lembaga yang dipimpin negara Barat seperti Bank Dunia berulang kali bertanya mengapa Timur Tengah tidak bisa memerintah sendiri.
Pertanyaan ini sifatnya jujur namun diajukan tanpa kesadaran diri yang tinggi.
Bagaimanapun juga, satu hambatan terbesar bagi terbentuknya tata kelola pemerintahan yang baik di kawasan tersebut adalah rendahnya self-governance: lembaga-lembaga politik di kawasan ini telah lumpuh akibat intervensi Amerika Serikat dan Eropa yang berulang dimulai sejak Perang Dunia I, dan bahkan lebih awal di beberapa tempat.
Satu abad sudah cukup.
Tahun 2016 harus menandai awal abad baru politik homegrown (dalam negeri) Timur Tengah yang berfokus langsung pada tantangan-tantangan pembangunan berkelanjutan.
Nasib Timur Tengah selama 100 tahun terakhir ditentukan pada bulan November 1914 ketika kekaisaran Ottoman memihak pada pihak yang kalah dalam Perang Dunia I. Hasilnya adalah kekaisaran pun dibubarkan, dengan kekuatan kemenangan lalu Inggris dan Perancis meraih kendali hegemoni atas sisa-sisa peperangan.
Inggris, yang sudah menguasai Mesir sejak tahun 1882, memegang kendali efektif atas pemerintahan sekarang di sejumlah negara seperti Irak, Yordania, Israel dan Palestina, dan Arab Saudi, sementara Perancis, yang sudah mengendalikan sebagian besar Afrika Utara, lalu menguasai Lebanon dan Suriah.
Kewenangan formal Liga Bangsa-Bangsa dan instrumen hegemoni lainnya diterapkan untuk memastikan agar Inggris dan Perancis menguasai minyak, pelabuhan, jalur pelayaran, dan kebijakan luar negeri pemimpin lokal.
Sebelum berdirinya negara Arab Saudi, gerakan fundamentalisme Wahabi yang dipimpin Ibnu Saud mendapat dukungan Inggris melawan nasionalisme Arab berdasarkan Bani Hashim di Hijaz.
Setelah Perang Dunia II, Amerika Serikat menjalankan dominasinya dan melakukan operasi CIA lain untuk menggulingkan Mohammad Mossadegh di Iran tahun 1953 (untuk mempertahankan kendali Barat atas minyak di Iran) setelah sebelumnya mensponsori kudeta militer di Suriah tahun 1949 yang juga didukung CIA.
Perilaku yang sama masih dijalankan sampai hari ini: pencopotan pemimpin Libya, Muammar Khadafi di tahun 2011, penggulingan pemimpin Mesir, Mohamed Morsi di tahun 2013, dan kini perang di Suriah melawan Presiden Bashar al-Assad yang masih berlangsung.
Hampir selama tujuh dekade, Amerika Serikat dan sekutunya telah berulang kali melakukan intervensi (atau mendukung kudeta internal) untuk menggulingkan pemerintah yang kurang berhasil mereka kendalikan.
Negara-negara Barat juga mempersenjatai seluruh kawasan melalui penjualan senjata senilai ratusan miliar dolar.
Amerika Serikat juga mendirikan pangkalan militernya di berbagai lokasi di kawasan dan beberapa operasi CIA yang gagal meninggalkan pasokan senjata dalam jumlah besar di tangan musuh-musuh Amerika Serikat dan Eropa yang beringas.
Jadi ketika pemimpin negara-negara Barat bertanya kepada penduduk Arab dan penduduk lain di Timur Tengah alasan mengapa mereka tidak bisa memerintah sendiri, harusnya mereka sudah siap mendengar jawabannya: “Selama satu abad penuh, intervensi kalian telah melumpuhkan lembaga-lembaga demokratis (dengan menolak hasil pemilu di Aljazair, Palestina, Mesir, dan negara lainnya); memicu peperangan yang berkepanjangan; mempersenjatai para pejuang jihad yang paling kejam demi kebutuhan sinis kalian; dan menciptakan wilayah pembantaian yang terbentang dari Bamako hingga Kabul.”
Lalu apa yang harus dilakukan untuk menciptakan Timur Tengah yang baru?
Saya mengusulkan lima prinsip.
Pertama dan terpenting, Amerika Serikat harus mengakhiri operasi-operasi rahasia CIA yang bertujuan menggulingkan atau melemahkan pemerintah negara manapun di dunia.
CIA dibentuk pada tahun 1947 dengan dua kewenangan, satu diantaranya sah (pengumpulan intelijen) dan lainnya bersifat bencana (operasi-operasi rahasia untuk menggulingkan rezim-rezim yang dianggap “musuh” (hostile) bagi kepentingan Amerika Serikat).
Presiden Amerika Serikat, bisa dan harus, berdasarkan perintah eksekutif (executive order), menghentikan operasi-operasi rahasia CIA – dengan demikian mengakhiri warisan efek “blowback” dan kekacauan yang diciptakan, terutama di Timur Tengah.
Kedua, Amerika Serikat harus mewujudkan tujuan-tujuan kebijakan luar negeri yang terkadang sah di kawasan ini melalui Dewan Keamanan PBB.
Pendekatan yang diterapkan sekarang melalui pembentukan koalisi yang dipimpin Amerika Serikat disebut “coalitions of the willing” tidak hanya gagal; tapi berarti bahkan tujuan-tujuan yang valid seperti menghentikan ISIS (Islamic State) dihambat oleh persaingan geopolitik.
Amerika Serikat akan memperoleh banyak hasil dengan membiarkan inisiatif-inisiatif kebijakan luar negerinya diuji oleh pengambilan suara di Dewan Keamanan.
Ketika Dewan Keamanan menolak perang di Irak pada tahun 2003, Amerika Serikat seharusnya cukup bijaksana untuk tidak melakukan invasinya.
Ketika Rusia, salah satu anggota tetap Dewan Keamanan yang memiliki hak veto, menolak upaya penggulingan yang didukung oleh Amerika Serikat terhadap Presiden Suriah, Bashar al-Assad, seharusnya Amerika Serikat cukup bijaksana untuk tidak menjalankan operasi rahasia yang menggulingkan rezimnya.
Sekarang, seluruh anggota Dewan Keamanan akan bergabung dalam rencana global (bukan Amerika Serikat saja) untuk melawan ISIS.
Ketiga, Amerika Serikat dan Eropa harus menerima kenyataan bahwa demokrasi di Timur Tengah akan menghasilkan tingginya kemenangan Islamist di kotak suara.
Sebagian besar rezim Islamist yang terpilih akan gagal, sama halnya dengan pemerintah yang memiliki kinerja buruk.
Rezim-rezim ini akan digantikan pada pemilihan berikutnya, atau di jalanan, atau bahkan oleh jenderal-jenderal lokal. namun upaya berulang yang dilakukan Inggris, Perancis, dan Amerika Serikat untuk menghalangi semua pemerintah Islamist agar tidak berkuasa, hanya menghambat kedewasaan politik di kawasan dan tidak sepenuhnya berhasil atau menghasilkan manfaat jangka panjang apapun.
Keempat, pemimpin lokal (homegrown) dari kawasan Sahel hingga Afrika Utara dan Timur Tengah ke Asia Tengah harus mengakui bahwa tantangan terbesar yang dihadapi dunia Islam saat ini adalah kualitas pendidikan.
Kawasan ini tertinggal jauh dibandingkan negara-negara berpendapatan menengah dalam hal ilmu pengetahuan, matematika, inovasi teknologi, kewirausahaan, pengembangan usaha kecil, dan (oleh karena itu) penciptaan lapangan kerja.
Tanpa pendidikan berkualitas tinggi, sedikit peluang bagi terwujudnya kemakmuran ekonomi dan stabilitas politik di negara manapun.
Akhirnya, kawasan harus mengatasi kerentanan yang luar biasa terhadap kerusakan lingkungan hidup dan kebergantungan yang berlebihan pada hidrokarbon, terutama mengingat pergeseran global menuju energi rendah karbon.
Kawasan dengan mayoritas penduduk muslim dari Afrika Barat hingga Asia Tengah adalah wilayah kering terbesar yang padat penduduk, dengan luas 5.000 mil (8.000 kilometer) yang menderita krisis air, desertification, kenaikan suhu, dan kerawanan pangan.
Ini merupakan tantangan-tantangan nyata yang dihadapi Timur Tengah.
Perpecahan Sunni-Syiah, masa depan politik Assad, dan perselisihan doktrinal jelas sekali merupakan kebutuhan jangka panjang yang kurang penting dibandingkan rendahnya pemenuhan atas pendidikan yang berkualitas, keterampilan kerja, teknologi canggih, dan pembangunan berkelanjutan.
Banyak pemikir berani dan progresif harus membantu membangkitkan masyarakat agar sadar akan kenyataan ini dan orang-orang yang beritikad baik dari seluruh dunia harus membantu mereka melalui kerjasama damai dan mengakhiri perang dan manipulasi yang bersifat imperialis.
Migration Is Development
LONDON – In September 2000, the United Nations Millennium Development Goals rallied the international community behind a shared vision.
The MDGs, which expire in 2015, signaled a new era of global cooperation, and triggered real progress in terms of lifting millions of people out of extreme poverty, improving health and access to education, and empowering women.
The eight original MDGs, which include reducing child mortality and achieving universal primary education, are lauded for their simplicity and measurability.
They took an abstract, outsize challenge and distilled it into achievable ends.
But, as Albert Einstein loved to say, “Not everything that counts can be counted, and not everything that can be counted counts.”
Today, it is important that we not become trapped by what worked in the past.
To succeed, the post-2015 agenda must break the original mold.
It must be grounded in a fuller narrative about how development occurs – a narrative that accounts for complex issues such as migration.
Otherwise, the global development agenda could lose its relevance, and thus its grip on stakeholders.
It is perhaps understandable that the original MDGs did not mention either internal or international migration.
These are politically sensitive topics that could have polarized, rather than united, the international community.
Moreover, our empirical understanding of how migration interacts with development was limited at the time; there was little data with which to shape measurable goals.
Yet migration is the original strategyfor people seeking to escape poverty, mitigate risk, and build a better life.
It has been with us since the dawn of mankind, and its economic impact today is massive.
Migrant remittances exceed the value of all overseas development aid combined, to say nothing of the taxes that migrants pay, the investments they make, and the trade they stimulate.
As we consider the next-generation development agenda, it is also critical to understand that migration was a vital force in achieving the original MDGs.
There are an estimated 215 million international migrants today –&#160;a number expected to grow to 400 million by 2040 –&#160;and another 740 million internal migrants who have moved from rural to urban areas within countries.
Each typically supports many family members back home, which also helps to lift entire communities.
In Bangladesh, for example, just 13% of households that receive remittances from abroad are below the poverty line, compared to 34% of non-remittance-receiving households.
Evidence from Latin America, Africa, South Asia, and elsewhere shows that remittances reduce the depth and severity of poverty, and that the additional income is disproportionately spent on education and health.
In rural Pakistan, remittances are associated with higher school enrollment, especially for girls.
The list goes on.
Beyond the data, there is no greater symbol of the world’s growing interdependence than the movement of people.
If we can make meaningful economic progress in the coming generations, one of the pivotal reasons will be that people are allowed to move more freely.
Advanced countries, with their adverse demographic trends, need migrants, as do developing countries – not only for migrants’ economic contributions, but also for the social and cultural diversity that they bring.
This is not to deny that migration has downsides.
But migration is here to stay, and it is growing.
There can be no return to a monoethnic past, so successful societies will need to adapt to diversity.
Typically, development experts regard migration as a sign of failure: if development policies work, people should not want to move.
Accordingly, migration has been viewed as a problem to be solved –&#160;not as a solution to a problem.
But migration should not be considered good or bad; it is simply natural to the human condition.
People migrate from poor countries, from middle-income countries, and from rich countries.
They go from north to south, south to north, south to south, and north to north.
The likeliest outcome of the debate on the post-2015 global development agenda will be something between the MDG-style approach – concrete, measurable targets for reducing extreme poverty – and the emerging sustainable development narrative, which emphasizes the complex forces of interdependence, such as migration and climate change.
In the imperfect world of politics, this middle ground would be a positive outcome.
Fortunately, the type of measurable outcomes that the MDGs have thus far demanded are being developed for migration.
The overarching goal is to design a roadmap that can take us from today’s poorly managed, exploitative system of human mobility to one that is well managed, protects migrant rights, and plans for the consequences and opportunities of migration.
An ideal result would focus attention on the need to reduce the barriers to all kinds of human mobility – both internal and across national borders – by lowering its economic and social costs.
Such an agenda includes simple measures, like reducing fees for visas, and more complex reforms, like allowing migrants to switch employers without penalty and increasing the proportion of migrants who enjoy legal protections and labor rights.
The bottom line is that making migration part of the world’s development strategy will have a meaningful impact on the lives of migrants, affording them greater access to rights and to the fruits of their labor.
Perhaps even more important, it could change public perceptions of migrants, so that they are viewed as a blessing rather than a scourge.
Mikhail Gorbachev and the End of the Cold War
Earlier this month, Mikhail Gorbachev celebrated his 75th birthday with a concert and conference at his foundation in Moscow.
Unfortunately, he is not popular with the Russian people, who blame him for the loss of Soviet power.
But, as Gorbachev has replied to those who shout abuse at him, “Remember, I am the one who gave you the right to shout.”
When he came to power in 1985, Gorbachev tried to discipline the Soviet people as a way to overcome economic stagnation.
When discipline failed to solve the problem, he launched perestroika (“restructuring”).
And when bureaucrats continually thwarted his orders, he used glasnost, or open discussion and democratization.
But once glasnost let people say what they thought, many people said, “We want out.” By December 1991, the Soviet Union ceased to exist.
Gorbachev’s foreign policy, which he called “new thinking,” also contributed to the Cold War’s end.
Gorbachev said that security was a game from which all could benefit through cooperation.
Rather than try to build as many nuclear weapons as possible, he proclaimed a doctrine of “sufficiency,” holding only a minimal number for protection.
He also believed that Soviet control over an empire in Eastern Europe was costing too much and providing too little benefit, and that the invasion of Afghanistan had been a costly disaster.
By the summer of 1989, East Europeans were given more degrees of freedom.
Gorbachev refused to sanction the use of force to put down demonstrations.
By November, the Berlin Wall had fallen.
Some of these events stemmed from Gorbachev’s miscalculations.
After all, he wanted to reform communism, not replace it.
But his reforms snowballed into a revolution driven from below rather than controlled from above.
In trying to repair communism, he punched a hole in it. Like a hole in a dam, once pent-up pressure began to escape, it widened the opening and tore apart the system.
By contrast, if the Communist Party’s Politburo had chosen one of Gorbachev’s hard-line competitors in 1985, it is plausible that the declining Soviet Union could have held on for another decade or so.
It did not have to collapse so quickly.
Gorbachev’s humanitarian tinkering contributed greatly to the timing.
But there were also deeper causes for the Soviet demise.
One was the “soft” power of liberal ideas, whose spread was aided by the growth of transnational communications and contacts, while the demonstration effect of Western economic success gave them additional appeal.
In addition, the huge Soviet defense budget began to undermine other aspects of Soviet society.
Health care deteriorated and the mortality rate increased (the only developed country where that occurred).
Eventually, even the military became aware of the tremendous burden caused by imperial overstretch.
Ultimately, the deepest causes of the Soviet collapse were the decline of communist ideology and economic failure. This would have happened even without Gorbachev.
In the early Cold War, communism and the Soviet Union had considerable soft power.
Many communists led the resistance against fascism in Europe, and many people believed that communism was the wave of the future.
But Soviet soft power was undercut by the exposure of Stalin’s crimes in 1956, and by the repression in Hungary in 1956, Czechoslovakia in 1968, and Poland in 1981.
Although in theory communism aimed to establish a system of class justice, Lenin’s heirs maintained domestic power through a brutal security apparatus involving lethal purges, gulags, broad censorship, and ubiquitous informants.
The net effect of these brutal measures was a general loss of faith in the system.
The Soviet economy’s decline, meanwhile, reflected the diminished ability of central planning to respond to global economic change.
Stalin had created a command economy that emphasized heavy manufacturing and smokestack industries, making it highly inflexible – all thumbs and no fingers.
As the economist Joseph Schumpeter pointed out, capitalism is “creative destruction,” a way of responding flexibly to major waves of technological change.
At the end of the twentieth century, the major technological change of the third industrial revolution was the growing role of information as the scarcest resource in an economy.
The Soviet system was particularly inept at handling information. The deep secrecy of its political system meant that the flow of information was slow and cumbersome.
Economic globalization created turmoil throughout the world at the end of the twentieth century, but the Western market economies were able to re-allocate labor to services, restructure their heavy industries, and switch to computers.
The Soviet Union could not keep up.
Indeed, when Gorbachev came to power in 1985, there were 50,000 personal computers in the Soviet Union; in the US, there were 30 million.
Four years later, there were about 400,000 personal computers in the Soviet Union, and 40 million in the US.
According to one Soviet economist, by the late 1980’s, only 8% of Soviet industry was globally competitive.
It is difficult for a country to remain a superpower when the world doesn’t want 92% of what it produces.
The lessons for today are clear.
While military power remains important, it is a mistake for any country to discount the role of economic power and soft power.
But it is also a mistake to discount the importance of leaders with humanitarian values.
The Soviet Union may have been doomed, but the world has Gorbachev to thank for the fact that the empire he oversaw ended without a bloody conflagration.
जल की एकता
मॉस्को. इस साल मई माह में विएतनाम संयुक्तराष्ट्र के कन्वेंशन ऑन द लॉ ऑफ द नॉन-नैविगेशनल यूजेज ऑफ इंटरनैशनल वाटर कोर्सेज (अंतर्राष्ट्रीय जल मार्गों के गैर-नौपरिवहनीय उपयोगों के कानून पर कन्वेंशन) पर हस्ताक्षर बरने वाला 35वां निर्णायक देश बन गया. यह कन्वेंशन 1997 में अस्तित्व में आया था और विएतनाम द्वारा इस पर हस्ताक्षर करने के 90 दिन बाद 17 अगस्त को यह कन्वेंशन प्रभाव में आ जाएगा.
इस तथ्य के आलोक में कि कन्वेंशन के प्रारूप को तैयार करने और अंततः स्वीकार कराने के लिए न्यूनतम सदस्यों का समर्थन जुटाने में लगभग 50 साल लगे ऐसा प्रतीत होता है कि आधुनिक बहुपक्षीय व्यवस्था में बहुत बड़ी खामी है. देशों की सीमाओं के आर-पार फैले ताजे पानी के स्रोतों पर लंबे समय से असहमति रही है और सरकारों तथा पानी से जुड़े पेशेवरों की वरीयता को समझा जा सकता है कि कैसे इन स्रोतों का आवंटन और प्रबंधन किया जाए. निसंदेह ये सभी पक्ष अंतर्राष्ट्रीय न्यायिक व्यवस्थाओं की बजाय जल स्रोत के थाले पर सहमति पर ज्यादा भरोसा करते हैं. लेकिन आधी सदी तक इंतजार करना दर्शाता है कि राजनीतिक नेतृत्व का अभाव है. इसलिए दुनिया भले ही इस कन्वेंशन के लागू होने का जश्न मनाए, मगर हम इतने से ही संतुष्ट नहीं हो सकते हैं.
मोटे तौर पर ताजे पानी के 60% स्रोत सीमापार थालों में फैले हुए हैं. इनमें से केवल 40% थाले ही किसी किस्म के समझौतों के अधीन आते हैं. आज अधिकाधिक पानी की तंगी झेल रही दुनिया में साझे के जल संसाधन ताकत दिखाने के हथियार बनते जा रहे हैं और देशों के बीच प्रतियोगिता को बढ़ावा दे रहे हैं. पानी के लिए संघर्ष राजनीतिक तनावों को बढ़ा रहा है और परिस्थिति तंत्र पर दुष्प्रभाव डाल रहा है.
लेकिन सचमुच में बुरी खबर यह है कि पानी की खपत जनसंख्या के मुकाबले ज्यादा तेजी से बढ़ रही है.
20वीं सदी में तो यह दुगुनी रफ्तार से बढ़ी है. परिणामस्वरूप संयुक्तराष्ट्र की अनेक एजेंसियां भविष्यवाणी करती हैं कि सन् 2025 तक 1.8 अरब आबादी ऐसे इलाकों में रह रही होगी जहां पानी की घोर किल्लत होगी. इसका अर्थ है कि इनसानों और पर्यावरणीय उपयोग के लिए पानी तक पहुंच नहीं होगी. इसके अलावा, दुनिया की दो-तिहाई आबादी को पानी की कमी का सामना करना होगा यानी उनके पास दुबारा उपयोग करने लायक ताजा पानी नहीं होगा.
इस स्थिति का सामना करने के लिए दृढ़ संकल्प के साथ उपाय करने होंगे. इनके बगैर पानी की मांग अनेक समाजों की खुद को परिस्थिति में ढालने की क्षमताओं को पार कर जाएगी. नतीजतन बड़े पैमाने पर आबादी का विस्थापन होगा, अर्थव्यवस्था ठप पड़ जाएगी, अस्थिरता व हिंसा फैलेगी तथा राष्ट्रीय व अंतर्राष्ट्रीय सुरक्षा को नया खतरा पैदा हो जाएगा.
संयुक्तराष्ट्र वाटर कोर्सेज कन्वेंशन मात्र एक और अंतर्राष्ट्रीय सहमति बन कर ही नहीं रह जाना चाहिए जिसे अनदेखा कर दराज में डाल दिया जाए. इस बार दॉव बहुत ऊंचे हैं. आज जलवायु परिवर्तन, बढ़ती मांग, बढ़ती आबादी, बढ़ते प्रदूषण और जल संसाधनों के अति-दोहन के संदर्भ में विश्व के जल स्रोतों के प्रबंधन के लिए कानूनी ढांचे को मजबूत बनाने के लिए सब कुछ किया जाना चाहिए. हमारी पर्यावरणीय सुरक्षा, आर्थिक विकास तथा राजनीतिक स्थिरता इस पर सीधे-सीधे निर्भर होगी.
शीघ्र ही यह कन्वेंशन केवल सबसे बड़े नदी थालों पर ही नहीं बल्कि इस में शामिल सभी देशों की सीमाओं के आर-पार बहने वाली नदियों पर लागू हो जाएगा. यह संधि वर्तमान समझौतों में मौजूद छिद्रों और कमियों को पूरा करेगी तथा उन अनेकों सीमा-पार नदियों को कानूनी संरक्षण प्रदान करेगी जो अधिकाधिक दबाव में आती जा रही हैं.
आज दुनिया में ताजे पानी के 276 थाले हैं जो सीमा के आर-पार विस्तारित हैं और लगभग इतने ही जलस्रोत हैं. पर्याप्त वित्तप्रबंधन, राजनीतिक इच्छाशक्ति और सभी दावेदारों के प्रयासों की बदौलत यह कन्वेंशन पानी से जुड़ी उन चुनौतियों को संबोधित कर सकता है जिनका हम सामना कर रहे हैं. लेकिन क्या सचमुच ऐसा ही होगा?
आज महत्त्वाकांक्षी कार्य योजना को अपनाने की जरूरत है खासकर तब जबकि अंतर्राष्ट्रीय समुदाय सस्टेनेबल डेवलपमेंट गोल्स (SDGs या निर्वहनीय विकास लक्ष्यों) के प्रावधानों पर मोलभाव कर रहा है और संयुक्तराष्ट्र सहस्त्राब्दि विकास लक्ष्यों के कारगर विकल्प की तलाश कर रहा है. इन लक्ष्यों की मियाद 2015 में समाप्त हो जाएगी. ग्रीन क्रॉस में हम उम्मीद करते हैं कि नए लक्ष्य, जिन्हें 2030 तक हासिल किया जाना है, में पहले छोड़ दिए गए लक्ष्य को शामिल किया जाएगा जो जल संसाधन प्रबंधन को संबोधित करता है.
और फिर अंतर्राष्ट्रीय समुदाय को क्योटो प्रोटोकॉल के विकल्प के तौर पर जलवायु परिवर्तन के ढांचे पर जल्द ही सहमति बनानी पड़ेगी. जलवायु परिवर्तन जल चक्र को सीधे प्रभावित करता है. इसका अर्थ है कि ग्रीन हाउस गैसों के उत्सर्जन को नियंत्रित करने के लिए किए सभी उपाय वर्षा प्रारूपों को स्थिर करने और बाढ़-सूखे आदि की घटनाओं के असर को कम करने में सहायता कर सकते हैं. ढेर सारे इलाके इन जल आपदाओं के असर को झेल रहे हैं.
लेकिन संयुक्तराष्ट्र वाटर कोर्सेज कन्वेंशन को लागू करने में उतने ही नए प्रश्न उठ रहे हैं जितने इसे स्वीकार करने से पहले थे. व्यवहार में इसे लागू करने का जरिया क्या होगा? इसमें शामिल देश किस प्रकार अपनी सीमाओं के भीतर तथा अपने नदीय पड़ोसी के संबंध में इसकी शर्तों को लागू करेंगे? अमेरिकी और एशियाई देश, जो कन्वेंशन की अनदेखी करते रहे हैं इसके प्रति क्या रवैया अपनाएंगे?
इसके अलावा यह संधि पहले से लागू संधि कन्वेंशन ऑन द प्रोटेक्शन एंड यूज ऑफ ट्रांसबाउंडरी वाटरकोर्सेज एंड इंटरनैशनल लेक्स से किस प्रकार संबंधित होगी? फरवरी 2013 से इस कन्वेंशन की सदस्यता बाकी दुनिया के लिए खुली है. इसी तरह इस कन्वेंशन को लागू करने का क्षेत्रीय व स्थानीय सीमापार ताजे जल के मौजूदा समझौतों पर क्या असर पड़ेगा?
संयुक्तराष्ट्र वाटर कोर्सेज कन्वेंशन को स्वीकार करने वाले देशों से आशा की जाती है कि वे इसके प्रावधानों को अपने यहां लागू करेंगे तथा अपने सीमापार जल संसाधनों के संरक्षण व निर्वहनीय उपयोग के अपने प्रयासों को आगे बढ़ाएंगे. वित्तीय सहायता सहित कन्वेंशन उन्हें और क्या सहायता उपलब्ध कराएगा?
अनेक कानूनी प्रावधान संयुक्त रूप से तथा मिलजुल कर लागू किए जा सकते हैं: रामसर कन्वेंशन ऑन वेटलैंड्स, यूएन कन्वेंशन टू कम्बैट डेजर्टिफिकेशन तथा यूएन फ्रेमवर्क कन्वेंशन ऑन क्लाइमेट चेंज कुछ ऐसे ही समझौते हैं. संयुक्तराष्ट्र वाटरकोर्सेज कन्वेंशन के विलंबित अमल को इसमें शामिल देशों के लिए अवसर के रूप में देखा जाना चाहिए. इससे उन देशों को प्रोत्साहन मिलना चाहिए जो अभी सहकारिता समझौतों से बाहर हैं कि वे इन मुद्दों पर गंभीरतापूर्वक कार्य करें.
स्पष्टतया, राजनीतिज्ञ और कूटनीतिज्ञ अकेले ही कारगर रूप से उन चुनौतियों का सामना नहीं कर सकते हैं जो दुनिया के सामने मौजूद हैं. आज दुनिया को जिस चीज की जरूरत है वह है राजनीतिक, व्यापारिक व नागरिक-सामाजिक नेताओं को एकजुट करना क्योंकि इसके बगैर संयुक्तराष्ट्र वाटर कोर्सेज कन्वेंशन को लागू करना असंभव होगा.
इस तथ्य को अकसर अनदेखा किया जाता रहा है पर सहयोग की सफलता की कुंजी इसी में छिपी है जिससे सभी को लाभ पहुंच सकता है. प्रभावित समुदायों सहित सभी दावेदारों की समन्वित भागीदारी तथा सीमापार जल संसाधनों के लाभों को पहचानने, उनके मूल्यांकन व साझेदारी की क्षमता के विकास को किसी भी रणनीति का अभिन्न अंग बनाना होगा ताकि प्रभावी बहुपक्षीय सहयोग हासिल किया जा सके.
Militarizing the Andes
While the world’s attention is riveted on Iraq, the Colombia Plan, developed by the United States to fight drugs and left-wing guerrillas in Colombia, may soon be applied as a general strategy across the nations of the Andes, if not all of Latin America.
Colombia, it seems, is only mentioned nowadays in connection with President Alvaro Uribe’s re-election bid later this month.
As a result, the spread of the Colombia Plan, despite its meager and ambivalent results, has remained obscured.
When it was unveiled in 2000, the Colombia Plan had a double rationale: to slash narcotics production and exports while strengthening Colombia’s counterinsurgency campaign against the Revolutionary Armed Forces of Colombia (FARC) rebels.
Back then, the US saw Colombia as hosting two increasingly interwoven threats, which, without a successful military response, heralded the grim prospect of Colombia becoming a failed state.
Indeed, despite receiving almost $1.4 billion from the US between 1989 and 1999 to fight drug trafficking, Colombia had not reduced the problem.
Worse still, the economic, territorial, and military insurgency of the FARC guerrillas was growing stronger.
Indeed, between 1995 and 1998, the Colombian army suffered its worst setbacks – including casualties, captures, and ambushes – in the four decades of the insurgency.
With the attacks of September 11, 2001, and the response of the Bush administration, the “war against terrorism” became relevant to Colombia.
As a result, the failed three-year dialogue between the government of Andrés Pastrana, Uribe’s predecessor, and FARC was buried in February 2002, with the conflict definitively internationalized through massive and indirect US intervention.
Between 2000 and 2005, Washington paid out nearly $4 billion to Colombia, with approximately 75% of the total going to the military and the police, and increased its presence in the country with 800 soldiers and 600 private security contractors.
Indeed, Colombia is now the fifth largest recipient of US aid in the world.
US policy was (and remains) aimed primarily at the “war on drugs,” to be fought mainly by Colombians themselves.
But the “war on terrorism” in Latin America has also fallen to the Colombians, with a US rear guard backing up the Colombian state in order to avoid American casualties on a new front, and an overextension of US military commitments.
When evaluated as an anti-narcotics strategy, the Colombia Plan’s failure is self-evident.
Even though the Colombian government chemically eradicated 523,000 hectares of coca between 2000 and 2004, 114,000 hectares of coca remained under cultivation last year.
Likewise, although Uribe’s government approved the extradition of 304 Colombian nationals and 11 foreigners (most to the US) between 2002 and 2005, drugs-linked organized crime continues to thrive and expand in Colombia.
Of course, the large cartels no longer exist.
Instead, the business has become more “democratic” with the multiplication of so-called “boutique cartels.”
This has created an even greater diversity of drugs (natural and synthetic) at lower prices and higher purity than fifteen years ago, during the heyday of the Medellin drug barons.
The results of the Colombia Plan’s counter-insurgency effort are equally mixed.
The military strengthening of Colombia in the last five years has been massive, with the offensive capacity, geographic deployment, and public credibility of the armed forces much greater than before.
Until 2002, some 3,000 kidnappings were reported each year in Colombia; by 2005, the government had reduced that figure to less than 1,000.
Between 2000 and 2004, the National Liberation Army (ELN) was seriously weakened, and the FARC retreated to a smaller area, notably reducing its combat potential.
However, while ELN may be strategically beaten, the FARC is not.
On the contrary, since 2005, the FARC has been escalating its attacks.
Moreover, Colombia has not effectively recovered territorial sovereignty in areas controlled by armed right-wing groups like the United Self Defenses of Colombia.
The implicit immunity from prosecution these groups received in exchange for their demobilization has done little to help.
So, after five years, the Colombia Plan, a part of two simultaneous global wars – against drugs and terrorism – has produced only uncertain and scanty results.
Yet this has not led to any official questioning of tactics.
On the contrary, both the US and the Uribe government regard what has happened in Colombia as “model” to be emulated across the Andes in order to prevent other countries in the region from becoming failed states.
In fact, this “model” is already being applied in the region.
In Ecuador, the US has deployed its military power through the renovation of the Manta military base.
The US continues to pressure Peru’s government to shoot down planes supposedly linked to drug trafficking, and is trying to convince Evo Morales’s new government in Bolivia to continue a failed “war on drugs.”
But, as in Colombia, the effort to militarize the “war on drugs” and the “war on terrorism” seems likely only to generate more disorder.
Millennium Development Miles
PARIS – The global economic crisis has claimed many victims – unemployed workers, underwater homeowners, and bankrupt pensioners – but nowhere have the repercussions been as devastating as in the developing world.
The setback to the fragile gains of recent years, particularly in Africa, threatens to return millions of people to the extreme poverty from which they had just managed to escape.
In addition to the prospect of enormous human suffering, severe economic, political, and social pressures now threaten to overwhelm and destabilize developing countries, triggering conflict on an unprecedented scale.
What makes today’s downward spiral particularly disheartening is that the economic crisis has hit at a time of the first glimmerings of progress, notably in health care.
Since 2000, the rate of people dying from AIDS has declined, child-killing diseases like malaria and measles are being tackled more effectively, universal primary education is inching forward, and the targets for safe drinking water are in sight.
Now, though, the global economic crisis is sapping developed countries’ shaky efforts to fulfill their commitments for official development assistance (ODA) in order to achieve the United Nations’ Millennium Development Goals (MDGs).
A UN report warns that annual investment from these donor countries is falling $35 billion short of the $150 billion goal.
Unless something changes, there is little chance that the MDG targets can be sustained in the long run.
Indeed, the consequences of the fall-off in ODA are already dramatic; the number of people going hungry and in extreme poverty is now far greater than before, and the same is true of the unemployed, those who work in vulnerable jobs, or earn less than $1.25 a day.
Progress in health and literacy is being undermined.
World Bank data link the economic downturn to an increase, by 200,000, in mortality among children under the age of five.
Moreover, 536,000 women a year die in childbirth, and maternal health is also the one MDG progress towards which has stagnated since the targets were established 10 years ago.
Every minute that passes means one less mother, and it is shameful that 99% of these deaths occur in developing countries.
So should we despair of achieving the MDGs, not just by the original deadline of 2015 but even by the end of the century?
Viewed through the traditional ODA prism, with its one-year budgets, public-finance constraints, and competing national priorities, there seems little cause for optimism.
But there is a way to replace the traditional paradigm with an internationally accepted model that has a proven record of success, particularly in health care.
Innovative financing mechanisms offer the means to tap incrementally into global financial flows without disrupting economic activity.
Among the best-known examples is UNITAID, a UN-sponsored international drug-purchase facility funded largely through a small fee added to airline tickets, which has raised $1.5 billion since 2007.
This reliable funding source has spearheaded the fight on the three health-related MDGs: treating and fighting life-threatening diseases like HIV/AIDS, malaria, and tuberculosis; reducing childhood mortality; and improving maternal health.
Providing funding in 93 countries, UNITAID today finances drugs for three-quarters of the children around the world who receive anti-retrovirals.
Widespread coverage has been achieved through UNITAID’s influence on the price of life-saving drugs: it guarantees a market through long-term commitments to purchase high volumes of medicines and diagnostics – a commitment made possible by the sustainable and predictable funding of the “air tax.”
As a result, the price of anti-retrovirals has been cut by more than 50%.
Similarly, UNITAID is attacking child mortality through UNICEF’s extensive program to eradicate mother-to-child HIV transmission.
By the end of 2010, four million African women will be screened, and tri-therapies treatment provided to 500,000 pregnant women worldwide.
UNITAID is now building on this success by teaming up with the Millennium Foundation to give individuals a chance to help fight major diseases through micro-contributions.
An innovative fundraising mechanism called Voluntary Solidarity Contribution will allow air travelers and others to make a voluntary micro-donation to UNITAID simply by checking a box when buying, say, a plane ticket, and adding $2 to the total cost.
The “air tax” currently applies to only 7-10% of all airline tickets sold, yet the $400 million it brings in yearly accounts for three-quarters of UNITAID’s financing.
With more than a billion people now traveling by air every year, and with a total of 2.2 billion flights sold, extending the “air tax” approach to a voluntary contributions model would vastly multiply the program’s benefits.
Such new financing mechanisms, in addition to national ODA investments, are an important means of supporting the beleaguered MDGs.
In September, when UN Secretary-General Ban Ki-moon convenes a summit in New York to renew the drive toward reaching the MDGs, the world leaders in attendance should endorse their use to address MDG priorities in areas other than health.
When the MDGs were adopted in 2000, the sense of urgency was powered by the moral conviction that extreme poverty had become an unacceptable anachronism in our globally connected world.
But more is needed, and September’s summit in New York will be an important opportunity for countries to voice their full-throated support for innovative financing mechanisms, and thus give the MDGs a fighting chance.
Milosevic and Hussein: Trial by Farce
Trials of war criminals were once serious business.
Recall the photographs of Herman Goering and Rudolf Hess sitting glumly in the dock at Nuremberg.
Some Nazi leaders were even hanged after relatively short but fair trials.
Nowadays, legal proceedings against the world's most wicked leaders have become farce.
The trial of Saddam Hussein and his Ba’athist cronies offers an ongoing series of embarrassments.
The defendants try one antic after another, and Hussein shows every form of contempt possible except “mooning” the judge.
It is hard to expect an outcome that will appear legitimate in the eyes of Iraqis or the world.
Meanwhile, Slobodan Milosevic’s trial morphed into a funeral after four boring years of testimony and a sunken cost of more than $200 million.
In Cambodia, the United Nations and the government have dickered for almost a decade about how to bring surviving Khmer Rouge figures to trial.
The mass killers who took power in the twentieth century were doomed to being killed in popular revolts or to being tried for their crimes – that is, if they did not die in power.
Who can be proud that Romania’s last Communist boss, Nicolai Ceaucescu, and his wife were shot without even the semblance of a fair trial?
The formal trappings of a real court always seem better than instant justice, even if the end result is also death.
Today there are two plausible ways to proceed against a deposed tyrant.
A nation could put its own former leaders on trial, as the Argentines did in the 1980’s with the generals responsible for the disappearance of more than 5,000 fellow citizens.
At the international level, the Nuremberg model remains available to generate further trials, though under the dubious conditions that victorious powers sometimes impose liability for crimes, such as “crimes against humanity” that were are not properly defined at the time they are committed.
There was a time when we could see the advantages of both national and international trials.
Home grown trials enabled the local community to work out its grief by participating closely in the process.
As judges and juries, the defendant’s compatriots could also bring greater sensitivity to the assessment of guilt because they appreciated the tough conditions under which a deposed dictator made his decisions.
Argentina’s trial of the generals was a successful ritual in the painstaking transition from military junta to democracy, but the experience ended with weeping self-doubt.
Even after conviction, the generals were sufficiently strong to exact a termination of the trials and then a pardon from the succeeding president.
Argentine politics is still embroiled in the legal consequences of those trials of 20 years ago.
At the international level, the UN Security Council’s decision to establish the International Criminal Tribunal for the Former Yugoslavia (ICTY) was also greeted with great confidence.
The ICTY did make several foundational decisions under the leadership of Antonio Cassese.
But then the judges had the misfortune of realizing their fondest dream – trying in their court the arch-villain Slobodan Milosevic.
It is not clear how the Serbs would have handled Milosevic in a local trial.
A lot would have depended on the political party that controlled the court.
At the international level, the fear was not of too much politics but of too much law.
Milosevic’s trial had to be more than fair, it had to be an emblem of UN Justice.
Thus Milosevic was allowed to defend himself – a huge mistake in terms of the trial’s length and efficiency.
There was no limit on the number of witnesses the prosecution called to testify about the same gruesome story of Serbian aggression and brutality.
It will take many months to determine what went wrong and why the trial lasted a scandalous four years.
My hunch is that the court’s well-meaning officials were too influenced by the South African Peace and Reconciliation Commission, a model touted in law schools as the desired alternative to retributive justice.
In the South African proceedings the most important question was not the future of the defendant but the past of the victims.
Every victim was encouraged to tell his story and the defendant listened.
In the case of massacres endured in the twentieth century, such storytelling can last decades.
Encouraging victims to speak and then giving the defendant the right to filibuster the proceedings by touting his merits as a political leader amounts to a formula for infinite delay.
One lesson we have learned from both the Milosevic and Hussein trials is that one should not put men or women on trial in order to terminate their charismatic appeal.
They will turn the trial around – particularly if they are allowed to defend themselves – and use the courtroom to vindicate their careers.
Tyrants should be tried only after they are clearly defeated.
Ironically, it was an advantage of the Nuremberg courts that they were staffed by the representatives of the victorious powers.
They were a constant reminder to Goering, Hess, and their henchmen that the Allies were in charge, that the Nazis were irreversibly defeated.
Punishing the guilty, rather than shaping the way history would be written, was always the clear objective of the trial.
The tragedy of the Milosevic and Hussein trials is that the “i”s of history were not yet fully dotted and history itself was on trial.
The resulting hesitancy of those in charge gave rise to procedures – both international and national – that facilitated fantasies of vindication and return.
In the case of Hussein, that fantasy may yet become real.
Milosevic\u0027s Long Shadow
Six weeks into his war crimes trial in the Hague - a process expected to last two years - Slobodan Milosevic still casts a long shadow over Serbia.
Last weekend's arrest of Serbia's Vice-Prime Minister Momcilo Perisic and a senior US diplomat on espionage charges is but a hint of this.
Whether or not Perisic provided confidential military information to the American remains to be seen, but the fact that Serbia's Prime Minister Zoran Djindjic demanded Perisic's resignation suggests that, at the least, Perisic overstepped the acceptable limits of contacts with foreign diplomats.
In any case, this reflects the open wound that the Milosevic trial is for Serbia.
Djindjic accuses the Yugoslav National Army, controlled by President Vojislav Kostunica, of meddling in politics with these arrests.
Kostunica says that the military was doing its job.
Djindjic's problems are compounded because Perisic seems an unlikely reformer.
A general during the Croatian War, a Croat court sentenced Perisic, in absentia, for war crimes.
Later he became Milosevic's chief of staff and joined the opposition when Milosevic began to lose his grip on power.
The possible connection between Perisic's arrest and Milosevic's trial is this: Perisic might have been attempting to give information about the Army's involvement in actions of interest to the Hague prosecutors.
Perisic's motives are many: a desire to take revenge on his former colleagues, or to destabilize Kostunica and/or to secure a promise that he will not be indicted by the Hague Tribunal.
If this last is true, it will help confirm Serb suspicions that the Hague process stinks of politics.
But a clear majority of Serbs are already convinced of this.
So when Serbian politicians seek public support to extradite indicted Serbs to the Hague, they never say that justice demands such an action or that the Hague is providing a necessary national moral catharsis.
Instead, they use the language of realpolitik and remind us that we are too weak to challenge the West, and that our economy - devastated by war, sanctions and NATO bombing - desperately needs the loans and credits that come under the condition that extraditions to the Hague are made.
Why do Serbs react in this way?
Many think that the Serbs remain what they have so long been: paranoid, self-pitying nationalists in denial about their guilt.
Undoubtedly, some truth exists here.
But it is not the whole truth.
Many Western observers and journalists report Milosevic's trial in a lazy way.
Because Milosevic is obviously guilty and can defend himself in open court, they fail to look for imperfections.
Rejoice that justice is served appears to be the mantra. An evil man is getting his just deserts.
But take, for example, last week's confrontation between Milosevic and Paddy Ashdown.
The Western media presented Lord Ashdown as a reliable witness of Serbian atrocities against Albanian civilians.
In 1998 he personally warned Milosevic that if such continued, NATO's intervention was inevitable.
Serbian attention was drawn to other points made by Ashdown.
He called the Kosovo Liberation Army (KLA) a terrorist organization.
So Serbs now ask why no Albanian guerilla is on trial.
Ashdown also revealed how Croatian president Franjo Tudjman said at a dinner party in 1995 that Milosevic and he had agreed to carve up Bosnia.
Again, Serbs ask, why wasn't Tudjman ever indicted and why, when he died in 1999, did Western diplomats attend his funeral.
Moreover, no Albanian witness dared mention KLA crimes.
On the witness stand these Albanians often appeared to Serbs as foolish or disingenuous or both.
For most Serbs, any lie or avoidance of a clear answer was proof that the entire testimony was false.
Though many Western journalists think differently, Milosevic is no hero to Serbs.
They are impressed that in many, perhaps most cross-examinations of the witnesses, he seems to win, and they like it when he fights to prove that he and his people were victims of NATO and KLA terrorists backed by the West.
He also appears shrewd and tough.
That he is cold and callous when discussing victims - not only Albanian, but Serbian too - Serbs tend to overlook.
None of this helps Milosevic and his Socialist Party in opinion polls.
Serbs consider him incompetent and responsible for their defeats of the 1990s, not least for making Serbia the country with largest refugee population in Europe - around 700,000.
This view is unlikely to change, no matter how much bravura Milosevic's defense portays.
But if Milosevic and his followers are finished for good, he may yet succeed in completely compromising the tribunal.
For years to come Serbs will retain a cynical view of Western justice and look at the West with fear and hostility.
What Milosevic's trial is succeeding in doing is turning many Serbs against Djindjic's 18-party coalition government.
A hyper-pragmatic politician, Djindjic's primary interest is economics, and so he is willing to cooperate completely with the tribunal.
But with his reforms since Milosevic's rule collapsed the economy has improved only slightly.
Western moral admonitions were not accompanied with real generosity, and little aid has arrived.
Cooperating with the Hague, it seems, brings only pain, humiliation and shame.
President Kostunica also accepts the need to cooperate with the Hague but is more concerned to protect the country's sovereignty and preserve a semblance of national dignity.
If Djindjic is blamed for a lack of scruples, Kostunica appears as an anachronistic and rather conservative nationalist (though no one accuses him of extremism).
If elections were held tomorrow, Kostunica would clearly defeat Djindjic, and the Hague would be one of the main reasons.
Milosevic is gone, but so long as his trial is perceived as a show trial and not real justice, he will continue to distort our democracy.
Milosevic’s Trial Was Not in Vain
Slobodan Milosevic cheated justice, and by doing so demonstrated the futility of attempting to deal with war crimes and crimes against humanity through international prosecutions.
That, at least, is the conclusion that some people have reached after Milosevic’s death in a Hague prison: the fact that he was able to drag out his trial for four years and still escape a verdict is considered proof that the international community is wasting its resources by putting such people on trial for their misdeeds.
Even the most dedicated partisans of international justice concede that the International Criminal Tribunal for the Former Yugoslavia (ICTY) has had many shortcomings.
All those associated with it were new to such proceedings, and had to learn on the job, as there had been no such bodies since the courts at Nuremberg and Tokyo after World War II.
Moreover, the post-WWII bodies were tribunals in which the war’s victors judged the losers, and those prosecuted were already in custody.
The ICTY, by contrast, has no capacity of its own to arrest defendants.
It must rely on persuasion to secure cooperation by others – cooperation that is still being withheld in the case of the two most notorious defendants from the Bosnian War, Radovan Karadzic and Ratko Mladic..
Until Tony Blair and Robin Cook became, respectively, Prime Minister and Foreign Secretary of the United Kingdom in 1997, four years after the ICTY was established, NATO troops in Bosnia failed to arrest indicted suspects even when they ran into them.
By now, of course, 133 defendants from all parties to the wars in ex-Yugoslavia have appeared before the Tribunal, charged with war crimes, crimes against humanity, and even genocide.
These are highly complex cases, frequently involving not only novel issues under international law, but also thousands of witnesses – often traumatized by their suffering – dispersed to many lands, the constant need for high-quality simultaneous translations, and disruptive tactics by some defendants.
Yet the proceedings against 85 of them, including appeals, have been completed.
In trying them, the ICTY has been a model of fairness at all times.
The mountains of evidence in its records make the horrendous crimes committed in the wars in ex-Yugoslavia comparable in the extent of their documentation to those by the Nazis.
Inevitable efforts by demagogues to revise the history of what took place in ex-Yugoslavia in the 1990’s will be complicated by the availability of that evidence, including the facts compiled during the Milosevic trial.
Far from being a failure, the ICTY has inspired the establishment of several other such courts, including those for Rwanda, Sierra Leone, Cambodia, and the permanent International Criminal Court.
Even heads of state have not escaped these bodies.
Milosevic, the former president of Yugoslavia, and then Serbia, died in prison.
Biljana Plavsic, the President of the Bosnian Serb Republic after Karadzic, expressed remorse for her crimes, pled guilty, and is serving a prison sentence.
Jean Kambanda, former Prime Minister of Rwanda, pled guilty to crimes against humanity and genocide and is serving a life sentence in prison.
We are thus slowly reaching the point where some of those contemplating crimes such as those committed by Slobodan Milosevic must recognize that one day they could be held accountable.
Charles Taylor was President of Liberia when the Tribunal for Sierra Leone indicted him.
He had to flee his country, paving the way for the democratic transition that resulted in the recent election of Ellen Johnson Sirleaf.
Taylor still faces the prospect of trial and, another former dictator, Saddam Hussein, is now on trial before a national court in Iraq.
Persisting on the path of international justice will continue to require substantial resources.
Great as they are, the costs are trivial in comparison to the expense of humanitarian aid, international military intervention, and reconstruction assistance.
Most important, of course, is the need to prevent the suffering caused by the crimes that lead to international prosecutions; and when those crimes cannot be prevented, we must provide some comfort and redress to the victims and their families by doing justice.
Of course, the slow, tortuous process of international justice is often frustrating to the victims.
But it would be worse if those responsible for great crimes got away with it, as happened all too often in the past.
In the wake of Milosevic’s death, Karadzic and Mladic should be brought before the ICTY, both to reinforce its work and to demonstrate to their victims that the international community is resolved not to allow their suffering to be forgotten.
The ICTY’s mission is as valid and as vital as ever: to show that the era of impunity for some of humanity’s worst crimes is coming to an end.
Milton Friedman’s Magical Thinking
CAMBRIDGE – Next year will mark the 100th anniversary of Milton Friedman’s birth.
Friedman was one of the twentieth century’s leading economists, a Nobel Prize winner who made notable contributions to monetary policy and consumption theory.
But he will be remembered primarily as the visionary who provided the intellectual firepower for free-market enthusiasts during the second half of the century, and as the éminence grise behind the dramatic shift in the economic policies that took place after 1980.
At a time when skepticism about markets ran rampant, Friedman explained in clear, accessible language that private enterprise is the foundation of economic prosperity.
All successful economies are built on thrift, hard work, and individual initiative.
He railed against government regulations that encumber entrepreneurship and restrict markets.
What Adam Smith was to the eighteenth century, Milton Friedman was to the twentieth.
As Friedman’s landmark television series “Free to Choose” was being broadcast in 1980, the world economy stood in the throes of a singular transformation.
Inspired by Friedman’s ideas, Ronald Reagan, Margaret Thatcher, and many other government leaders began to dismantle the government restrictions and regulations that had been built up over the preceding decades.
China moved away from central planning and allowed markets to flourish – first in agricultural products and, eventually, in industrial goods.
Latin America sharply reduced its trade barriers and privatized its state-owned firms.
When the Berlin Wall fell in 1989, there was no doubt as to which direction the former command economies would take: towards free markets.
But Friedman also produced a less felicitous legacy.
In his zeal to promote the power of markets, he drew too sharp a distinction between the market and the state.
In effect, he presented government as the enemy of the market.
He therefore blinded us to the evident reality that all successful economies are, in fact, mixed.
Unfortunately, the world economy is still contending with that blindness in the aftermath of a financial crisis that resulted, in no small part, from letting financial markets run too free.
The Friedmanite perspective greatly underestimates the institutional prerequisites of markets.
Let the government simply enforce property rights and contracts, and – presto! – markets can work their magic.
In fact, the kind of markets that modern economies need are not self-creating, self-regulating, self-stabilizing, or self-legitimizing.
Governments must invest in transport and communication networks; counteract asymmetric information, externalities, and unequal bargaining power; moderate financial panics and recessions; and respond to popular demands for safety nets and social insurance.
Markets are the essence of a market economy in the same sense that lemons are the essence of lemonade.
Pure lemon juice is barely drinkable.
To make good lemonade, you need to mix it with water and sugar.
Of course, if you put too much water in the mix, you ruin the lemonade, just as too much government meddling can make markets dysfunctional.
The trick is not to discard the water and the sugar, but to get the proportions right.
Hong Kong, which Friedman held up as the exemplar of a free-market society, remains the exception to the mixed-economy rule – and even there the government has played a large role in providing land for housing.
The image most people will retain of Friedman is the smiling, diminutive, unassuming professor holding up a pencil in front of the cameras in “Free to Choose” to illustrate the power of markets.
It took thousands of people all over the world to make this pencil, Friedman said – to mine the graphite, cut the wood, assemble the components, and market the final product.
No single central authority coordinated their actions; that feat was accomplished by the magic of free markets and the price system.
More than 30 years later, there is an interesting coda to the pencil story (which in fact was based on an article by the economist Leonard E. Read).
Today, most of the world’s pencils are produced in China – an economy that is a peculiar mix of private entrepreneurship and state direction.
A modern-day Friedman might want to ask how China has come to dominate the pencil industry, as it has so many others.
There are better sources of graphite in Mexico and South Korea.
Forest reserves are more plentiful in Indonesia and Brazil.
Germany and the United States have better technology.
China has lots of low-cost labor, but so does Bangladesh, Ethiopia, and many other populous low-income countries.
Undoubtedly, most of the credit belongs to the initiative and hard work Chinese entrepreneurs and laborers.
But the present-day pencil story would be incomplete without citing China’s state-owned firms, which made the initial investments in technology and labor training; lax forest management policies, which kept wood artificially cheap; generous export subsidies; and government intervention in currency markets, which gives Chinese producers a significant cost advantage.
China’s government has subsidized, protected, and goaded its firms to ensure rapid industrialization, thereby altering the global division of labor in its favor.
Friedman himself would have rued these government policies.
Yet the tens of thousands of workers that pencil factories in China employ would most likely have remained poor farmers if the government had not given market forces a nudge to get the industry off the ground.
Given China’s economic success, it is hard to deny the contribution made by the government’s industrialization policies.
Free-market enthusiasts’ place in the history of economic thought will remain secure.
But thinkers like Friedman leave an ambiguous and puzzling legacy, because it is the interventionists who have succeeded in economic history, where it really matters.
Mind the Gap
Within today’s booming world economy, most developing countries have been growing rapidly.
Yet this has not diminished the pressure to reduce the yawning gap in income between developed and developing countries that has shaped global debates for over a half-century.
International inequalities, while large three decades ago, have worsened ever since.
The most disturbing feature of this trend is the high number of “growth collapses” during the last decades of the twentieth century, with only a few developing economies (East Asia, India) able to sustain high growth rates.
But there is another international income divergence that demands attention.
Since 1980, the world has witnessed a widening income gap among developing countries.
As underscored by a recent United Nations report, World Economic and Social Survey 2006 , this “dual divergence” holds four key lessons for economic growth in the developing world.
First, success and failure in achieving sustained economic growth appear to be concentrated in time and space. This means that the growth of individual developing countries depends not only on their domestic economic policies – the focus of debates on economic development in recent decades.
It also depends on factors beyond the control of individual countries: global economic conditions and regional economic environments.
Second, while pushing the technological frontier is the crucial element of growth in industrial countries, what matters for developing countries is transforming production and export structures, particularly by shifting resources to activities with higher levels of productivity.
The key to achieving this is the capacity to diversify domestic production by generating new activities, strengthening economic linkages within the country, and creating new domestic technological capabilities.
Building industrial and modern service sectors is critical for successful diversification.
Conversely, de-industrialization and concentration of growth in informal service activities is a proven recipe for failure, as has been demonstrated by the sad experiences of most developing countries in recent decades.
The form of integration into world markets also plays a central role in economic diversification.
Countries that integrate into dynamic world markets for manufactures and services perform better than those that specialize in natural-resource intensive sectors.
But exports are not the only key factor: even more important are the export sector’s links with other domestic sectors.
Pure extraction of mineral resources, as well as maquila -type manufacturing – common in Mexico and Central America – generate little additional demand for domestic industries and thus have only limited growth effects.
A successful export strategy hinges not on how much countries export, but on what they export and how their export sectors are integrated with other domestic economic activities.
The same is true of foreign direct investment (FDI).
Countries that benefit most from FDI are those whose domestic firms and institutions also benefit, and thus those that have the requisite absorptive capacity.
Third, macroeconomic stability, investment, and growth are mutually reinforcing.
But maintaining stability involves not only keeping inflation low, but also, and crucially, avoiding large swings in economic activity, external imbalances, and financial crises.
This explains why, in a world where developing countries are faced with increasing shocks, macroeconomic policies aimed at smoothing the business cycle (that is, counter-cyclical macro-economic policies) play a vital role in economic growth.
In recent decades, however, macroeconomic policy in most developing countries has become more pro-cyclical , largely exacerbating the volatility of international financial markets and commodity prices.
Pro-cyclical fiscal adjustment tends to encourage a short-term orientation towards economic policy, which limits long-term investments in infrastructure and human capital, thus constraining growth.
More fiscal space can be created by improving governance and strengthening the tax base, and, for the poorest countries, by achieving additional stable official development assistance (ODA) channeled through national budgets.
Indeed, when ODA is not determined by geopolitics, it can have a strong positive effect on long-term growth, essentially because it supports investment in infrastructure and human development.
Finally, institutional reform encompasses more than creating markets and guaranteeing property rights.
It also includes creating the regulatory and institutional framework that markets require to function well, providing necessary public goods and guaranteeing the fairness of rules.
“Big bangs” in institutional reform, however, may generate more harm than good.
Minor and gradual institutional change can have a powerful impact on growth if it is perceived as initiating further credible reform.
So what will it take to start closing international income gaps without damaging development prospects globally?
We need to maintain a stable, growing world economy with international trade rules that are truly development-oriented – the great expectation of the current (but so far frustrated) trade negotiations.
This should be matched by the creation of “supply capacities” in developing countries, which requires production and trade sector policies that encourage structural transformation.
We must also open up more space for counter-cyclical macroeconomic policies, approaching price stability less as an objective in itself than as an intermediate goal on the path to economic growth and employment creation.
We need to ensure sustained levels of public spending to make the necessary investments in infrastructure and human capital, and to increase ODA channeled through the budgets of poor countries.
Last but not least, we should promote gradual, home-made, and country-specific institutional reforms.
By pursuing an aggressive, yet flexible, agenda for domestic development, facilitated by international cooperation and rules that guarantee the appropriate “policy space” for developing countries, we can reduce global income inequality.
If we mind the gap, we can make the leap to a better, more inclusive form of globalization.
Mind the Neighbors
PRINCETON – The conventional wisdom last week on whether Syria would comply with former United Nations Secretary-General Kofi Annan’s ceasefire plan was that it was up to Russia.
We were reverting to Cold War politics, in which the West was unwilling to use force and Russia was willing to keep arming and supporting its client.
Thus, Russia held the trump card: the choice of how much pressure it was willing to put on Syrian President Bashar al-Assad to comply with the plan.
If this view were correct, Iran would surely be holding an equally powerful hand.
Annan, after all, traveled to Tehran as well.
Traditional balance-of-power geopolitics, it seems, is alive and well.
But this is, at best, a partial view that obscures as much as it reveals.
In particular, it misses the crucial and growing importance of regional politics and institutions.
A longer-term resolution of the Syrian crisis depends as much on Turkey and the Arab League as it does on the United States, Europe, and Russia.
Consider what else happened last week: Turkey’s government made clear that it would turn to new measures if Annan’s plan does not produce results.
Turkish officials have been issuing similar proclamations for months, but now Syrian troops have fired into Turkey, chasing Free Syrian Army rebels who fled across the border, while the number of Syrian civilian refugees has increased sharply.
Last week, Prime Minister Recep Tayyip Erdoğan raised the stakes dramatically with talk of having “many options,” and by adding: “Also, NATO has responsibilities to do with Turkey’s borders, according to Article 5.”
Article 5 of the NATO treaty stipulates that an attack on one NATO member is to be considered an attack on all, and that all will come to the member’s aid.
Of course, other NATO members could disagree that Syria has in fact attacked Turkey, but if Turkey were to invoke Article 5, a refusal to offer assistance could have unpleasant consequences for the alliance as a whole.
And Assad knows full well that it will be impossible to avoid further border incidents unless he is prepared to allow the Free Syrian Army to use Turkey as a safe zone.
The significance of Article 5 is that if a credible case can be made that Turkey and its allies are acting in self-defense, they do not need to seek the UN Security Council’s approval.
That makes Erdoğan’s suggestion a game-changer, forcing Assad to reckon with the prospect of a de facto militarily-enforced safe zone for the civilian opposition.
The deeper point here is that regional organizations, including NATO, provide the first level of legality and legitimacy required for a successful use of force.
The US would not have supported intervention in Libya if the Arab League had not supported a no-fly zone and been willing to go to the UN on that basis.
Indeed, assuming that Assad does not start bulldozing entire cities, I cannot imagine any circumstances under which the US would support even limited military intervention in Syria without public approval by the Arab League and Turkey.
That is why we have seen a game of “after you” with respect to Syria, with the Turks saying that they need Western support, the US saying that it needs regional support, and both saying that they need UN support.
Looking beyond the Middle East, Africa provides the best evidence for a geopolitics based as much on regional powers and institutions as on traditional great powers.
While Annan has been trying his diplomatic best to resolve Syria’s crisis, upheavals in Senegal, Mali, Malawi, and Guinea-Bissau have been swiftly addressed by other regional powers.
In particular, the African Union (AU) has acted repeatedly in the name of enforcing the African Charter on Democracy, Elections, and Governance.
In Senegal, simmering violence accompanied recent elections in which President Abdoulaye Wade was allowed to stand for an unprecedented third term.
The first round forced Wade into a run-off with Macky Sall, at which point the AU promptly sent an Elections Observer Mission, drawn from 18 African countries, to assess whether the elections were legal and the results “reflected the will of the Senegalese people.”
We cannot be sure what impact the mission had on Wade’s ultimate decision to concede defeat to Sall, but knowing that the region was watching must have focused his mind.
The situation in Mali is more complicated, for it involves an ongoing secessionist movement, as well as a coup on March 21.
But, after the coup the AU and the Economic Community of West African States (ECOWAS), backed by the UN, immediately suspended Mali’s membership in the AU, imposed economic and diplomatic sanctions on the country, and placed travel restrictions on coup leaders.
Just over two weeks later, ECOWAS announced that it had reached an agreement with the coup leaders to return the government to civilian rule in exchange for lifting the sanctions.
Likewise, AU President Jean Ping condemned a coup in Guinea-Bissau in early April immediately and in the strongest terms.
Those who interpret all moves on the international stage in terms of states’ eternal jockeying for power and prestige will never lack for evidence.
The way in which the Saudi-Iranian rivalry is playing out in Syria is a prominent example.
But countries’ desire to stop mass murder in their neighborhood, or to enforce regional norms, has its own force.
Increasingly, when a regional institution will not act, powers from outside the region find it difficult to intervene.
And, when a region does unite on a course of action, intervention by outside powers becomes either less necessary or more effective.
Hunting Tigers in China
CLAREMONT, CALIFORNIA – In the boldest move yet since President Xi Jinping launched his anti-corruption campaign, China has announced the start of a formal investigation into “serious disciplinary violations” by one of the Chinese Communist Party’s most senior figures, Zhou Yongkang.
Though rumors of Zhou’s political demise had been circulating for nearly a year, anyone familiar with Chinese political intrigue knew that, until the CCP made it official, Zhou’s many powerful patrons and cronies could still save him.
Now it is official: a “mega-tiger” has been brought down.
But is that what China really needs?
Since 2012, when Xi began “hunting tigers,” as he put it, three dozen government ministers, provincial governors, and other high-level officials have fallen into his net.
But Zhou is no ordinary tiger.
A former member of the Politburo Standing Committee, the CCP’s top decision-making body, Zhou was considered untouchable.
Since the end of the Cultural Revolution, the CCP has adhered to the implicit rule that members of the Politburo Standing Committee, sitting or retired, enjoy immunity from criminal prosecution.
Some have, of course, been purged in power struggles, such as the one that led to the fall of Hua Guofeng, Mao’s immediate successor, in the early 1980s.
But the defeated have typically retired quietly, and never faced formal corruption charges.
Given this history, the prosecution of Zhou is a watershed event – far more significant than the riveting trial of the disgraced former Chongqing Communist Party Secretary Bo Xilai a year ago.
It unambiguously demonstrates Xi’s personal authority and political resolve.
But the question remains: What exactly does Xi hope to achieve with China’s most fearsome anti-corruption campaign in more than three decades?
The conventional wisdom is that the threat of prosecution serves Xi’s goals of consolidating power and compelling the bureaucracy to implement economic reforms that run counter to its interests.
The two prongs of Xi’s political strategy – cleansing the Party and reinvigorating China’s economy – are thus complementary and interdependent.
This strategy has considerable merit.
But even the Machiavellian dictum that a ruler should encourage his citizens’ fear rather than their love can go only so far.
The most successful political leaders are skilled coalition-builders.
Consider Deng Xiaoping, China’s most successful reformer (the Tiananmen Square massacre of 1989 notwithstanding).
The grand coalition that he forged, against all odds, upon his return to power in 1979 was essential to bringing about the economic transformation that followed.
The question today is thus not whether Xi has amassed enough authority to effect change in China (he has), but whether he has built a coalition capable of advancing his declared goal of reviving pro-market reforms.
And, so far, the answer seems to be no.
Since taking over the presidency, Xi’s actions have been both resolute and contradictory.
On one hand, he has been aggressively pursuing “tigers” and “flies” (lower-level officials), while curbing, at least temporarily, the privileges enjoyed by Chinese officials.
On the other hand, he has launched an equally ferocious campaign against political liberalization, arresting and jailing leading human-rights activists and cracking down on China’s once-vibrant social media.
The risks of waging a two-front war are obvious.
If Xi’s fight against corruption is genuine, it will engender fear and resentment among the Chinese bureaucracy.
While officials feign compliance with Xi’s economic-reform agenda, they will seek any opportunity to stymie it.
The absence of significant real progress since Xi unveiled his economic blueprint last November suggests that this is already happening.
At the same time, Xi’s tough stance against political reform is diminishing hope among liberals.
Of course, this group – including intellectuals, social activists, journalists, and progressive private entrepreneurs – has little institutional power.
What it does have is the capacity to influence ordinary Chinese – making them a valuable addition to a pro-reform coalition.
Deng recognized this potential in the 1980s; unless Xi follows suit, he will find it increasingly difficult to rally the public behind his vision for China’s future.
This is not to say that caging Zhou was not a good move.
But Xi must now shift his focus from bagging another quarry to winning over new and perhaps unexpected allies.
His long-term success – and that of China – depends on it.
China’s Plenum Test
TOKYO – There is something odd and disturbing about the conventional wisdom surrounding the upcoming Third Plenum of the 18th Central Committee of the Chinese Communist Party (CCP).
As the November 9-12 conclave draws near, the international community’s attention seems to be focused mainly on technocratic policy changes deemed essential to restructuring China’s state-dominated economy and reenergizing growth.
Will the government liberalize interest rates or loosen capital controls?
How will the fiscal system be revamped?
Will land reform be part of the package?
The list of such questions goes on.
Outside China, the prevalent view among business leaders is that President Xi Jinping’s new administration has consolidated its power and acquired enough authority to push through far-reaching economic reforms.
He and his colleagues need only to get the specific policies right.
On the surface, such thinking may seem reasonable.
In China’s top-down political system, a unified leadership is seen as fully capable of forcing the bureaucracy to comply with its wishes. With Xi’s anti-corruption campaign in full swing, and the example of Bo Xilai’s imprisonment serving as a warning to the new president’s adversaries (no matter how senior they are), Chinese officials at all levels, it is widely believed, are likely to toe the line.
Unfortunately, this view is both too sanguine and naïve.
It overestimates the effectiveness of anti-corruption campaigns in contemporary China (there have been many in the last three decades), and it overlooks the political sources of the country’s economic slowdown. While Xi’s efforts to cleanse the rot inside the Chinese party-state should be applauded, it is no less important to recognize their limits.
So far, Xi’s campaign has remained a conventional affair involving selective prosecution. Given the central government’s well-known inability to enforce its policies at the local level and the prevalence of tight-knit patronage networks in Chinese provinces and cities, it is unrealistic to expect that the current anti-corruption drive will produce significantly better results than in the past.
Indeed, the fight against corruption is at war with itself, because Xi is simultaneously seeking to buttress one-party rule. But it is precisely the absence of effective checks on the exercise of power that encourages and sustains rampant corruption in the first place.
Optimism about the CCP’s ability to push through market-oriented reforms also ignores the real obstacles to future growth and prosperity, which do not include a lack of economic ideas or policy expertise; on the contrary, it is well known – even obvious – what kind of economic reforms are needed.
What prevents China from pursuing these reforms is a combination of opposition from powerful entrenched interest groups – state-owned enterprises, local governments, the economic-policy bureaucracy, and family members of political elites and well-connected businessmen – and flawed political institutions.
Unless Xi and his colleagues demonstrate their resolve to overcome such opposition and launch comprehensive reforms, their chances of success are not high.
Compared with the two previous breakthroughs in reforming China’s economy, in 1978 and 1992, Xi faces a different environment and a much tougher challenge. Opponents of Deng Xiaoping’s reforms were ideologically driven; they had no personal stake in the Maoist political economy.
Defeating them required building a winning coalition within the party, discrediting the communist ideology, and rallying public support, all of which Deng did.
Today, by contrast, members of the ruling elite benefit directly and immensely from the state-dominated economy.
Market-oriented reform, by leveling the competitive playing field, would hurt their interests and reduce their privileges, making fierce opposition likely. Only by mobilizing pressure outside the party-state can these insiders be forced to accept some of the decentralizing and liberalizing reforms that China’s economy needs.
At that point, China will have a better chance of improving its legal institutions, increasing political accountability, strengthening protection of private property rights, and making the government genuinely – in Mao’s words – “serve the people.”
Without real and significant political change, technocratic reform proposals will treat only the symptoms of China’s economic malaise, without addressing its underlying institutional causes.
In assessing the outcome of the Third Plenum, what observers should really be looking for is evidence of a bold strategy for political reform.
If Xi and his colleagues produce no credible sign of such a commitment, everything else will be eyewash – and skepticism about China’s fate under their leadership eventually will be vindicated.
Mirror, Mirror, on the Screen
NEW YORK – Suppose a group of workers frequently communicate among themselves, and then suddenly one of them gets left off all the “copy-tos.” “It could be that they’re planning a surprise birthday party,” says Elizabeth Charnock, whose company, Cataphora, analyzes e-mail traffic and content as well as other documents, primarily for clients involved in litigation and crime detection. “It’s more likely that they’re planning to engage in fraud and they know this one person won't go along with it.”
“All abnormal behavior may not be bad,” says Charnock, “but virtually all really bad behavior is abnormal.
From years of analyzing the abnormal, I’ve developed a keen appreciation for the myriad peccadilloes that are quite normal: the dull co-worker whom others scheme to avoid, the eleventh-hour passing of the buck, the ex you promised to ‘stay friends’ with but never wrote to again, the small but telling things that really get under your skin.”
Now she, and Cataphora, are applying those same analytics to a different market: people who want to analyze their own e-mail correspondence (and eventually other content) to see a reflection of their interactions with others.
Call it a visualization of your social graph in action.
With Cataphora’s new software tool called Digital Mirror, you can see the top asymmetries in your own relationships: whom you respond to before others versus whom you postpone, reschedule, or otherwise delay – and who does the same to you.
To the extent that you are cc’ed, you can also see patterns among your friends or colleagues: Which topics provoke huge amounts of stress or argument?
Which are dismissed with little comment?
The software works by analyzing not just the “shape” of a conversation – who writes to whom, who answers, and when – but also the content.
What are the key words?
And what – judging by everything from words such as “must” or “immediately” to slang or profanity, to “softeners” such as “if you don't mind” and “please,” and text written in ALL CAPS – is the tone?
Obviously, some cultures have their own jargon and tone, so Digital Mirror looks at the relative as well as absolute frequency of the values that it measures.
Is Juan obsequiously polite to Alice, but abrupt to Marvin?
Does he respond promptly to Teresa, but ignore Anatoly?
The sofware offers nine visualizations that reflect behavior and trends over time, including quality time (a pie chart of whom you spend time with online and offline), pecking order (illustrated with chickens!), blow-off scorecard (relationship asymmetry), and temperature gauge.
The result is a startlingly clear look at what is going on in a circle of people: who defers to whom, who takes charge, who passes the buck.
Digital Mirror – along with a book written by Charnock called E-Habits, which serves as a kind of extended documentation – can be used for self-analysis or analysis of the local ecosystem.
The program is targeted at individuals, but a company systems administrator or human-resources manager could use it to identify company- or group-wide patterns – though to do so without informing employees that their mail is being monitored would be illegal in Europe and bad practice at best in the United States.
Of course, transparency is unsettling – whether it’s seeing your own wrinkles in the mirror, or confirming unpleasant aspects of how others treat you.
Transparency is unambiguously good for companies and for governments; by and large they don’t welcome it, but it makes them more accountable to their constituents and to society.
Personal transparency and accountability, on the other hand, are harder, owing both to a lack of visibility and to people’s reluctance to confront one another – or themselves.
Once you see your own digital reflection, will you improve your behavior?
(Surely you are not already perfect?)
Though personal transparency is uncomfortable, wouldn’t you rather answer to a piece of software than confront your friends’ candor face-to-face?
Conversely, if someone at work is bothering you, you don’t need to tell them directly; you can just e-mail them a link to Digital Mirror (just like the old trick of dropping a can of deodorant on a co-worker’s desk – difficult but sometimes necessary).
Indeed, I suspect that the people who need Digital Mirror the most are the ones who will recognize that need the least.
Still, it may help the semi-self-aware to improve their personal relations – or at least to be more aware of the trade-offs they make when they favor one friend or colleague over another.
According to Charnock, “People believe that the digital world largely masks their preferences for different individuals.
For example, in a real-world office, you can see who goes out to lunch together or gossips at the water cooler, who has a line in front of their door, and so on.
Not only are many of the equivalent online activities harder to see or quantify, but things like Facebook encourage you to ‘friend’ everyone….Everyone is more popular, more intelligent, and better looking than average.
Digital Mirror does the reverse.
It is like the difference between a bar or club where the lights are low, and a good make-up mirror.”
This all reflects a trend toward greater clarity in our relations.
Facebook and other social tools operate under the covers: Facebook notices which friends you interact with and whose photos you comment on in order to select the items in your NewsFeed or the ads you see.
But Facebook does not show that information to you.
Digital Mirror does.
Within a few years, this kind of transparency will probably be commonplace, both from Facebook and from ad networks and behavioral targeters trying to derive information about your likely purchases.
But right now, only Digital Mirror is one of the few to give you the ability to do the same for yourself.
Missiles, Oil, and Europe Re-Divided
As if things weren’t bad enough for Europe after the French and Dutch “No” to the European Union Constitution, a new divisive issue now threatens to strain Europe’s cohesion.
The United States wants to establish an anti-missile defense system that is supposed to protect America and parts of Europe against missiles from the Middle East.
The American missiles are to be stationed in Poland, with a radar system to be set up in the Czech Republic.
Russia is up in arms about the US plan.
A month ago, Russian President Vladimir Putin made a fiery speech against the project during the Munich Conference on Security Policy.
The US representatives were perplexed; the Europeans were shocked.
Now the US says it has reached agreement with Poland and the Czech Republic to study the concrete details of the stationing of the necessary defense systems.
Once again, Europe is shocked: the two great powers of the Cold War seem not to be taking Brussels seriously.
Are we threatened with a new arms race between Russia and the US, with Europe once again the theater of their rivalry?
Indeed, is a new Cold War looming?
There is no reason to panic about America’s proposed anti-missile defense system.
Nor can the political climate, old differences, and the by-no-means new power rivalry between Russia and the US justify pessimism.
No doubt, Russia has regained strength from high oil and gas prices, and it is reclaiming its position as an independent global actor.
Putin’s policies are popular in Russia, which of course does not make them right.
But, in criticizing Putin, the West should be mindful of his domestic support.
Russia’s return to the world stage means that new and old rivalries will develop and may even intensify in the future.
But we are light years away from a new Cold War.
There is now no longer any ideological hostility between Russia and the West.
Estrangement?
Yes.
But hostility?
No.
Eleven defensive US missiles in Poland will not threaten Russia's security.
And they will not mark the beginning of a new arms race.
But it is also hard to understand, why the US needs this decision now.
Timing?
Priorities?
The US policy seems unreasonable.
The threat from Iran, against which the missiles are to defend, is still far away and can be avoided by diplomatic means.
In fact, the West needs Russia’s cooperation on almost every important international issue of the day, be it North Korea, Iran, Iraq, the Middle East, South Caucasus, Central Asia, Kosovo, Darfur, climate change, energy security, or nuclear non-proliferation.
For some time now, American policy towards Russia has been anything but consistent.
Apparently, the US can’t decide whether to treat Russia as a rival power or a difficult partner.
It would be in America’s interest, with Iraq, Iran, and the broader Middle East as its foreign-policy priorities, to pursue the partnership option.
Europe’s policy towards Russia is in even worse shape.
Indeed, it increasingly resembles a chicken farm after a fox has broken in.
And now, with the US announcement that it will build the anti-missile defense system on a bilateral basis with Poland and the Czech Republic, there is also a hawk circling overhead.
Confusion and panic are spreading in Europe.
What is most frightening about all this is not the American anti-missile project or Putin’s rhetorical muscle-flexing, but rather the increasingly dramatic European weakness that the episode has exposed.
The EU has been working for a decade on a common foreign and security policy.
So how can discussion of an issue as crucial as the establishment of an American anti-missile defense system in Europe be ignored at the EU level, with no attempt being made to find a joint European position?
An anti-missile defense system in Europe is a European, not a bilateral, issue.
However important NATO may be, it would be a dramatic admission of its own helplessness and insignificance if the EU were to remain silent on this crucial issue for Europe’s future.
Europe’s weakness becomes even more obvious given that it is not at all clear whether the American missile defense system will ever work.
This doubtful project is not worth a serious division of Europe!
But bilateral treatment of the issue threatens to do just that: to divide Europe along the same fault lines as did the war in Iraq.
All the while, Moscow is playing a game of “divide and rule” by exploiting Europe’s dependence on Russian oil and gas supplies.
As the EU’s Russia policy is blocked by the Polish government’s intransigence, Russia blithely continues to sign more bilateral treaties with individual EU member states, most recently with Greece and Bulgaria.
The only effective answer that Europeans can give to the Kremlin is to adopt a common energy policy that will hinder any further division of Europe.
This will not be easy to achieve, but the EU has accomplished more difficult tasks in the past.
The EU must develop a common position with respect to all significant, strategic issues in its foreign relations.
Otherwise, Europe will be at the mercy of the interests of others.
No European country – not even the Big Three (France, Great Britain, and Germany) – can any longer assert its central foreign policy interests alone, outside of the common European framework.
So any weakening of the EU in its foreign relations entails a corresponding weakening of the member states’ individual interests.
Everyone agrees to a “Europe of Common Values.”
What we need now is a “Europe of Common Interests.”
Objectively, it is already a reality.
Subjectively, the only remaining question is this: how long will it take before Europe’s governments finally start taking it into account?
Misusing the Inaction Argument
SAN JOSÉ, COSTA RICA – One commonly repeated argument for doing something about climate change sounds compelling, but turns out to be almost fraudulent.
It is based on comparing the cost of action with the cost of inaction, and almost every major politician in the world uses it.
The president of the European Commission, José Manuel Barroso, for example, used this argument when he presented the European Union’s proposal to tackle climate change earlier this year.
The EU promised to cut its CO2 emissions by 20% by 2020, at a cost that the Commission’s own estimates put at about 0.5% of GDP, or roughly €60 billion per year.
This is obviously a hefty price tag – at least a 50% increase in the total cost of the EU – and it will likely be much higher (the Commission has previously estimated the cost to be double its current estimate).
But Barroso’s punchline was that “the cost is low compared to the high price of inaction.”
In fact, he forecasted that the price of doing nothing “could even approach 20% of GDP.”
(Never mind that this cost estimate is probably wildly overestimated – most models show about 3% damages.)
So there you have it.
Of course, politicians should be willing to spend 0.5% of GDP to avoid a 20% cost of GDP.
This sounds eminently sensible – until you realize that Barroso is comparing two entirely different issues.
The 0.5%-of-GDP expense will reduce emissions ever so slightly (if everyone in the EU actually fulfills their requirements for the rest of the century, global emissions will fall by about 4%).
This would reduce the temperature increase expected by the end of the century by just five-hundredths of a degree Celsius (nine-hundredths Fahrenheit).
Thus, the EU’s immensely ambitious program will not stop or even significantly impact global warming.
In other words, if Barroso fears costs of 20% of GDP in the year 2100, the 0.5% payment every year of this century will do virtually nothing to change that cost.
We would still have to pay by the end of the century, only now we would also have made ourselves poorer in the 90 years preceding it.
The sleight of hand works because we assume that the action will cancel all the effects of inaction, whereas of course, nothing like that is true.
This becomes much clearer if we substitute much smaller action than Barroso envisions.
For example, say that the EU decides to put up a diamond-studded wind turbine at the Berlaymont headquarters, which will save one ton of CO2 each year.
The cost will be $1 billion, but the EU says that this is incredibly cheap when compared to the cost of inaction on climate change, which will run into the trillions.
It should be obvious that the $1 billion windmill doesn’t negate the trillions of dollars of damage from climate change that we still have to pay by the end of the century.
The EU’s argument is similar to advising a man with a gangrenous leg that paying $50,000 for an aspirin is a good deal because the cost compares favorably to the cost of inaction, which is losing the leg.
Of course, the aspirin doesn’t prevent that outcome.
The inaction argument is really terribly negligent, because it causes us to recommend aspirin and lose sight of smarter actions that might actually save the leg.
Likewise, it is negligent to focus on inefficiently cutting CO2 now because of costs in the distant future that in reality will not be avoided.
It stops us from focusing on long-term strategies like investment in energy R&amp;D that would actually solve climate change and at a much lower cost.
If Barroso were alone, perhaps we could let his statement go, but the same argument is used again and again by influential politicians.
Germany’s Angela Merkel says it “makes economic sense” to cut CO2, because the “the economic consequences of inaction will be dramatic for us all.”
Australia’s Kevin Rudd agrees that “the cost of inaction will be far greater than the cost of action.” United Nations Secretary General Ban Ki-Moon has gone on record with the exact same words.
In the United States, both John McCain and Barack Obama use the cost of inaction as a pivotal reason to support carbon cuts.
California senator Diane Feinstein argues that we should curb carbon emissions because the Sierra snowpack, which accounts for much of California’s drinking water, will be reduced by 40% by 2050 due to global warming.
What she fails to tell us is that even a substantial reduction in emissions – at a high cost – will have an immeasurable effect on snowmelt by 2050.
Instead, we should perhaps invest in water storage facilities.
Likewise, when politicians fret that we will lose a significant proportion of polar bears by 2050, they use it as an argument for cutting carbon, but forget to tell us that doing so will have no measurable effect on polar bear populations.
Instead, we should perhaps stop shooting the 300 polar bears we hunt each year.
The inaction argument makes us spend vast resources on policies that will do virtually nothing to deal with climate change, thereby diverting those resources from policies that could actually make an impact.
We would never accept medical practitioners advising ultra-expensive and ineffective aspirins for gangrene because the cost of aspirin outweighs the cost of losing the leg.
Why, then, should we tolerate such fallacious arguments when debating the costliest public policy decision in the history of mankind?
Managing Europe’s Perfect Storm
NEW YORK – The Chinese often point out that in their language the character for crisis and opportunity are one and the same.
But, while it is indeed true that crisis and opportunity often go hand in hand, it is difficult to see much opportunity in Europe’s current circumstances.
One reason the current situation facing Europe is so difficult is that it was so unexpected.
Here we are, 70 years after the end of World War II, a quarter-century after the end of the Cold War, and some two decades after the Balkan wars, and suddenly Europe’s political, economic, and strategic future seems much more uncertain than anyone predicted as recently as a year ago.
Another reason to be worried is that Europe faces not one crisis, but several.
The first is economic: not just the current reality of slow growth, but the prospect that slow growth will continue without respite, owing above all to policies that often discourage businesses from investing and hiring.
The rise of populist political parties of both the left and the right across the continent attests to popular frustrations and fears.
Making matters worse for Europe’s economy was the decision taken decades back to introduce a common currency without a common fiscal policy.
Discipline disappeared at the national level in many countries;
Greece was the most recent casualty, but it is unlikely to be the last.
The second crisis results from Russian actions in Ukraine.
There is no prospect of Russia giving up Crimea, and questions about its intentions in eastern Ukraine and the Baltics are mounting.
The result is the return of geopolitics to Europe at a time when defense spending is modest and public support for armed intervention is largely absent.
The third, and most pressing, crisis is the result of massive flows of migrants from the Middle East and elsewhere into Europe.
The flood of people is exposing new rifts among EU members, raising questions about the principle of open borders and free movement that has long been at the core of the EU.
Germany and a few other countries have stepped up to the challenge in ways that are admirable but unsustainable.
Some 8,000 refugees a day – a modern day Volkerwanderung – are entering Germany, partly because of harsh conditions back home, and partly because of Germany’s willingness to take them in.
The challenge of caring for, employing, and integrating such numbers will soon run up against the limits of physical capacity, financial resources, and public tolerance.
It is obvious that public policy cannot succeed if it is focused on the consequences, rather than the causes, of the refugee crisis.
The change that would have the greatest positive impact would be the emergence of a new government in Damascus that was acceptable to the bulk of the Syrian people and a satisfactory partner for the United States and Europe.
Unfortunately, this seems likely to come about only with the blessing of Russia and Iran, both of which appear more inclined to increase their support for President Bashar al-Assad than to work for his removal.
Other steps, however, would improve the situation.
Increased international financial support for countries in Europe or the Middle East hosting large numbers of refugees is one.
Ideally, such funding would help persuade more countries to follow Germany’s example.
Another useful development would be the creation of enclaves inside Syria where people could gather with some expectation of security.
Such enclaves would require local support from Kurdish forces or select Arab tribes, with military backing by the US and others.
A new comprehensive arrangement with Turkey is also needed to reduce the flow of jihadist recruits to Syria and the number of refugees heading north.
Turkey would receive financial and military assistance in exchange for asserting greater control over its borders, while the question of Turkey’s long-term relationship with Europe would be set aside until the crisis passed.
The US has a special obligation to help.
Both by what it has done and what it has failed to do in Iraq, Syria, and elsewhere in the Middle East, American foreign policy bears more than a little responsibility for outcomes that have led to the refugee exodus.
The US also has a strategic interest in helping Germany and Europe contend with this crisis.
Europe still constitutes a quarter of the world’s economy and remains one of America’s principal geopolitical partners.
A Europe overwhelmed by a demographic challenge, in addition to its economic and security challenges, would be neither able nor willing to be an effective ally.
In all of this, time is of the essence.
Europe – and Germany in particular – cannot sustain the status quo.
Waiting for a solution to the Syrian situation is no answer; while lesser steps will not resolve Europe’s predicament, they could make it manageable.
Mitt and the Moochers
WASHINGTON, DC – The Republican Party has some potentially winning themes for America’s presidential and congressional elections in November.
Americans have long been skeptical of government, with a tradition of resistance to perceived government overreach that extends back to their country’s founding years.
This tradition has bequeathed to today’s Americans a related rejection of public subsidies and a cultural aversion to “dependence” on state support.
But Republican presidential candidate Mitt Romney and other leading members of his party have played these cards completely wrong in this election cycle.
Romney is apparently taken with the idea that many Americans, the so-called 47%, do not pay federal income tax.
He believes that they view themselves as “victims” and have become “dependent” on the government.
But this misses two obvious points.
First, most of the 47% pay a great deal of tax on their earnings, property, and goods purchased.
They also work hard to make a living in a country where median household income has declined to a level last seen in the mid-1990’s.
Second, the really big subsidies in modern America flow to a part of its financial elite – the privileged few who are in charge of the biggest firms on Wall Street.
Seen in broad historical perspective, this is not such an unusual situation.
In their recent bestselling economic history, Why Nations Fail, Daron Acemoglu and James Robinson cite many past and current cases in which powerful individuals attain control over the state and use this power to enrich themselves.
In many pre-industrial societies, for example, control over the state was the best way to assure wealth.
And, in many developing countries endowed with valuable natural resources, fighting to gain control of the government has proved a very attractive strategy.
(I have worked with Acemoglu and Robinson on related issues, though I was not involved in writing the book.)
The traditional mechanism of state capture in much of the world is violence.
But that is not true in the United States.
Nor is it the case that US government officials are typically bribed in an open fashion (though there have been some prominent exceptions).
Instead, special interests compete for influence through campaign contributions and other forms of political donations.
They also run large, sophisticated media campaigns aimed at persuading policymakers and the public that what is good for their special interest is good for the country.
No one has succeeded in the modern American political game like the biggest banks on Wall Street, which lobbied for deregulation during the three decades prior to the crisis of 2008, and then pushed back effectively against almost all dimensions of financial reform.
Their success has paid off handsomely.
The top executives at 14 leading financial firms received cash compensation (as salary, bonus, and/or stock options exercised) totaling roughly $2.5 billion in 2000-2008 – with five individuals alone receiving $2 billion.
But these masters of the universe did not earn that money without massive government assistance.
By being perceived as “too big to fail,” their banks benefit from a government backstop or downside guarantee. They can take on more risk – running a more highly leveraged business with less shareholder capital.
They get bigger returns when things go well and receive state support when fortune turns against them: heads they win, tails we lose.
And the losses are colossal.
According to a recent report on the aftermath of the 2008 crisis, prepared by Better Markets, an advocacy group that pushes for stronger financial reforms, the cost to the US economy of the financial crisis – caused by financial institutions’ reckless risk-taking – amounts to at least $12.8 trillion.
A big part of this cost has come in the form of jobs lost and lives derailed for the bottom 47% of the American income distribution.
Former Utah Governor and Republican presidential candidate Jon Huntsman addressed this issue clearly and repeatedly as he sought – unsuccessfully – to win his party’s nomination to challenge President Barack Obama.
Force the banks to break up, he argued, in order to cut off their subsidies.
Make these financial institutions small enough and simple enough to fail – then let the market decide which of them should sink or swim.
That is an argument around which all conservatives should be able to rally.
After all, the emergence of global megabanks was not a market outcome; these banks are government-sponsored and subsidized enterprises, propped up by taxpayers.
(This is as true in Europe today as it is in the US.)
Romney is right to raise the issue of subsidies, but he badly misstates what has happened in the US during the last four years.
The big, nontransparent, and dangerous subsidies are off-budget, contingent liabilities generated by government support for too-big-to-fail financial institutions.&nbsp;
These subsidies do not appear in any annual appropriation, and they are not well measured by the government – which is part of what makes them so appealing to the big banks and so damaging to everyone else.
If only Romney had turned popular disdain for subsidies against the global megabanks, he would now be coasting into the White House.
Instead, by going after the hard-pressed 47% of America – the very people who have been hurt the most by reckless bank behavior – his prospect of victory in November has been severely damaged.
Mitt Romney and America’s Four Deficits
BERKELEY – The United States is beset by four deficits: a fiscal deficit, a jobs deficit, a deficit in public investment, and an opportunity deficit.
The budget proposals put forward by presidential candidate Mitt Romney and his running mate, Paul Ryan, could reduce the fiscal deficit, but would exacerbate the other three.
To be sure, Romney and Ryan have failed to provide specifics about how they would reduce the fiscal deficit, relying on “trust me” assertions.
But the overarching direction of their proposals is clear: more tax cuts, disproportionately benefiting those at the top, coupled with significantly lower non-defense discretionary spending, disproportionately hurting everybody else – and weakening the economy’s growth prospects.
Despite 30 months of private-sector job growth, the US still confronts a large jobs deficit.
The unemployment rate remains more than two percentage points above the “normal” rate (when the economy is operating near capacity).
Moreover, the labor-force participation rate remains near historic lows.
More than 11 million additional jobs are needed to return the US to its pre-recession employment level.
At the current pace of recovery, that is more than eight years away.
In the meantime, persistent high unemployment reduces the economy’s growth potential by robbing today’s workers of skills and experience.
When weak aggregate demand causes the economy to operate far below its potential, cuts in government spending enlarge the jobs deficit.
Indeed, in his recent speech in Jackson Hole, Wyoming, US Federal Reserve Chairman Ben Bernanke warned that such cuts significantly inhibit job creation.
Without revealing which programs he would reduce, Romney promises to slash federal spending by more than $500 billion in 2016, capping it at 20% of GDP thereafter.
He also promises an immediate 5% cut in non-defense discretionary spending in 2013, on top of the huge cuts already scheduled to take effect.
And he has ruled out additional temporary fiscal measures aimed at job creation, like President Barack Obama’s proposals for additional grants to states and additional infrastructure spending.
Romney acknowledges that large spending cuts, along with the scheduled expiration of tax cuts at the end of this year, could throw the economy back into recession in 2013.
But he vows to steer the economy from the fiscal cliff by extending the tax cuts enacted under George W. Bush, doubling down with a further 20% across-the-board cut in income-tax rates and cutting the corporate rate from 35% to 25%.
With the possible exception of the extension of the Bush-era tax cuts, these changes would take considerable time to implement.
Even when enacted, their near-term effects on job creation would be minimal.
An across-the-board reduction in tax rates performs poorly in terms of budgetary effectiveness (the number of jobs created per dollar of foregone revenue).
Payroll-tax relief and spending on programs like food stamps and unemployment compensation are much more effective.
Romney overstates his tax proposals’ long-term growth effects as well.
Reducing individual tax rates and taxes on savings and investment at best fosters modest increases in employment, work effort, and income.
Despite the Bush-era tax cuts, the 2001-2007 expansion was the worst of the post-war period in terms of investment, employment, wage, and GDP growth.
Job creation and growth were much stronger following President Bill Clinton’s tax increases in the 1990’s.
Moreover, if all of Romney’s additional tax cuts were financed in a revenue-neutral way, as he promises, only the composition of taxes would change; the overall tax share of GDP would not.
There is no evidence that this would significantly boost growth, as Romney claims.
Based on what Romney has told us, we can conclude that his plan would exacerbate the public-investment deficit as well.
Romney’s vow to cap federal spending at 20% of GDP by 2016, while maintaining defense spending at 4% of GDP and leaving both Social Security and Medicare unchanged for those 55 or older, implies exempting more than 50% of government spending from cuts for the next decade.
So, to hit the 20% cap, spending on everything else would have to be slashed by an average of roughly 40% by 2016 and 57% by 2022.
Everything else includes government investments in three major areas on which growth and high-wage jobs depend: education, infrastructure, and research.
These areas account for less than 8% of federal spending, and their share has been declining steadily.
Under Romney, it would plummet to new lows.
Everything else also includes spending on programs that help low-income families, like food stamps, student grants, and Medicaid.
The Center on Budget and Policy Priorities finds that almost two-thirds of the Ryan budget’s spending cuts would come from such programs.
Romney offers few specifics, but simple arithmetic shows that his plan would require even deeper cuts in these programs than Ryan’s plan would.
Meanwhile, Romney’s plan would actually increase taxes on middle-income families.
His plan would pay for lower income-tax rates by eliminating tax deductions like those for charitable giving and mortgages, while maintaining tax preferences for saving and investment.
But there are not enough tax breaks for the rich to cover another 20% reduction in their income-tax rate.
That is why the nonpartisan Tax Policy Center found that Romney’s plan would cut overall taxes for households with incomes above $200,000, but would require an average annual tax increase of at least $2,000 for households with incomes between $100,000 and $200,000.
Romney’s budget plan would also make the federal tax-and-transfer system considerably less progressive, thereby worsening income inequality, which is already at its highest level since the Great Depression.
Rising income inequality fuels a growing opportunity deficit for children born into poor and middle-income families, reflected in disparities in educational attainment by family background, and a decline in intergenerational mobility.
Under Romney, the opportunity deficit would widen, robbing the country of future talent and productivity.
Romney has provided few details about his deficit-reduction plan.
But, based on what he has revealed, we know that it would increase the jobs deficit, the investment deficit, and the opportunity deficit, with negative consequences for future growth and prosperity.
Mitt Romney’s Reality Check
NEW YORK – There is a kind of war underway in the United States nowadays between fact and fantasy.
President Barack Obama’s re-election marked a victory, limited but unmistakable, for the cause of fact.
Events in the days leading up to America’s presidential election provided a stark illustration of the struggle.
Among senior aides to Republican challenger Mitt Romney, a belief developed that he was on the cusp of victory.
Their conviction had no basis in poll results.
Nevertheless, the feeling grew so strong that aides began to address Romney as “Mr. President.”
But wanting that to be true was not enough for them to make it true.
It would be as close to becoming President as Romney would get, and he apparently wanted to enjoy it while he could, however prematurely.
Then, on election night, when the television networks projected Romney’s defeat in Ohio and therefore Barack Obama’s re-election, the Romney campaign, in a further denial of fact, refused to accept the result.
A very awkward hour passed before he accepted reality and made a gracious concession speech.
The same disregard for reality has been the hallmark not only of the Republican campaign but of the entire Republican Party in recent times.
When the Bureau of Labor Statistics issued a report in October showing that the national unemployment rate remained “essentially unchanged at 7.9%,” Republican operatives sought to discredit the highly respected BLS.
When polls showed that Romney was falling behind President Barack Obama, they sought to discredit the polls.
When the non-partisan Congressional Research Service reported that a Republican tax plan would do nothing to foster economic growth, Republican Senators muscled the CRS into withdrawing its report.
These refusals to accept matters of plain fact reflect a still wider pattern.
Increasingly, the Republican Party, once a fairly normal political party, has granted itself a license to live in an alternate reality – a world in which George W. Bush did find the weapons of mass destruction that he had thought were in Iraq; tax cuts eliminate budget deficits; Obama is not only a Muslim but was born in Kenya and thus should be disqualified from the presidency; and global warming is a hoax concocted by a cabal of socialist scientists.
(The Democrats, for their part, have had one foot in the camp of unreality as well.)
Of all of the Republicans’ unreal beliefs, their full-throated denial of human-induced climate change was surely the most consequential.
After all, if left unchecked, global warming has the potential to degrade and destroy the climactic conditions that underlay and made possible the rise of human civilization over the last ten millennia.
Romney, as governor of Massachusetts, had expressed belief in the reality of global warming.
As a presidential candidate, however, he joined the deniers – a switch made clear when he accepted the party’s nomination in Tampa, Florida, in August. “President Obama promised to begin to slow the rise of the oceans,” Romney told the Republican convention, and then paused, with the expectant smile of a comedian waiting for the audience to catch on to the joke.
It did.
Laughter broke and built.
Romney let it grow, then delivered the punch line:&nbsp;
The crowd cracked up. It was perhaps the most memorable and lamentable moment in a lamentable campaign – a moment that, in the history now to be written of humanity’s effort to preserve a livable planet, is destined for immortal notoriety.
There was an astonishing sequel.
Eight weeks later, Hurricane Sandy struck the New Jersey shore and New York City.
Its 14-foot surge of seawater was backed by the sea-level rise already caused by a century of global warming, and the storm’s sweep and intensity was fueled by a warming planet’s warmer ocean waters.
That tide of reality – what Alexander Solzhenitsyn once called “the pitiless crowbar of events”— burst the closed bubble of Romney’s campaign, its walls breached as decisively as those of lower Manhattan and Far Rockaway.
In the contest between fact and fantasy, fact suddenly had a powerful ally.
The political map was subtly but consequentially redrawn.
Obama swung into action, now not just a suspect candidate but a trusted president whose services were sorely needed by the battered population of the East Coast.
Eight of ten voters, as polls showed, viewed his performance favorably, and many declared that the impression influenced their vote.
In a surprising, politically potent twist, New Jersey’s governor, Chris Christie, who had been the keynote speaker at the Republican convention at which Romney had mocked the dangers of global warming, turned out to be one of those impressed with Obama’s performance, and said so publicly.
The American political world – not only Republicans, but also Democrats (albeit to a lesser extent) – had fenced out huge, ominous realities.
But those realities, as if listening and responding, entered the fray.
They voted early, and they may very well have swayed the outcome.
Mitt Romney’s Fair Share
NEW YORK – Mitt Romney’s income taxes have become a major issue in the American presidential campaign.
Is this just petty politics, or does it really matter?
In fact, it does matter – and not just for Americans.
A major theme of the underlying political debate in the United States is the role of the state and the need for collective action.
The private sector, while central in a modern economy, cannot ensure its success alone.
For example, the financial crisis that began in 2008 demonstrated the need for adequate regulation.
Moreover, beyond effective regulation (including ensuring a level playing field for competition), modern economies are founded on technological innovation, which in turn presupposes basic research funded by government.
This is an example of a public good – things from which we all benefit, but that would be undersupplied (or not supplied at all) were we to rely on the private sector.
Conservative politicians in the US underestimate the importance of publicly provided education, technology, and infrastructure.
Economies in which government provides these public goods perform far better than those in which it does not.
But public goods must be paid for, and it is imperative that everyone pays their fair share.
While there may be disagreement about what that entails, those at the top of the income distribution who pay 15% of their reported income (money accruing in tax shelters in the Cayman Islands and other tax havens may not be reported to US authorities) clearly are not paying their fair share.
There is an old adage that a fish rots from the head.
If presidents and those around them do not pay their fair share of taxes, how can we expect that anyone else will?
And if no one does, how can we expect to finance the public goods that we need?
Democracies rely on a spirit of trust and cooperation in paying taxes.
If every individual devoted as much energy and resources as the rich do to avoiding their fair share of taxes, the tax system either would collapse, or would have to be replaced by a far more intrusive and coercive scheme.
Both alternatives are unacceptable.
More broadly, a market economy could not work if every contract had to be enforced through legal action.
But trust and cooperation can survive only if there is a belief that the system is fair.
Recent research has shown that a belief that the economic system is unfair undermines both cooperation and effort.
Yet, increasingly, Americans are coming to believe that their economic system is unfair; and the tax system is emblematic of that sense of injustice.
The billionaire investor Warren Buffett argues that he should pay only the taxes that he must, but that there is something fundamentally wrong with a system that taxes his income at a lower rate than his secretary is required to pay.
He is right.
Romney might be forgiven were he to take a similar position.
Indeed, it might be a Nixon-in-China moment: a wealthy politician at the pinnacle of power advocating higher taxes for the rich could change the course of history.
But Romney has not chosen to do so.
He evidently does not recognize that a system that taxes speculation at a lower rate than hard work distorts the economy.
Indeed, much of the money that accrues to those at the top is what economists call rents, which arise not from increasing the size of the economic pie, but from grabbing a larger slice of the existing pie.
Those at the top include a disproportionate number of monopolists who increase their income by restricting production and engaging in anti-competitive practices; CEOs who exploit deficiencies in corporate-governance laws to grab a larger share of corporate revenues for themselves (leaving less for workers); and bankers who have engaged in predatory lending and abusive credit-card practices (often targeting poor and middle-class households).
It is perhaps no accident that rent-seeking and inequality have increased as top tax rates have fallen, regulations have been eviscerated, and enforcement of existing rules has been weakened: the opportunity and returns from rent-seeking have increased.
Today, a deficiency of aggregate demand afflicts almost all advanced countries, leading to high unemployment, lower wages, greater inequality, and – coming full, vicious circle – constrained consumption.
There is now a growing recognition of the link between inequality and economic instability and weakness.
There is another vicious circle: Economic inequality translates into political inequality, which in turn reinforces the former, including through a tax system that allows people like Romney – who insists that he has been subject to an income-tax rate of “at least 13%” for the last ten years – not to pay their fair share.
The resulting economic inequality – a result of politics as much as market forces – contributes to today’s overall economic weakness.
Romney may not be a tax evader; only a thorough investigation by the US Internal Revenue Service could reach that conclusion.
But, given that the top US marginal income-tax rate is 35%, he certainly is a tax avoider on a grand scale.
And, of course, the problem is not just Romney; writ large, his level of tax avoidance makes it difficult to finance the public goods without which a modern economy cannot flourish.
But, even more important, tax avoidance on Romney’s scale undermines belief in the system’s fundamental fairness, and thus weakens the bonds that hold a society together.
Did Hamas Win?
GAZA CITY – This summer’s 51-day war on Gaza left more than 2,100 Palestinians dead, over 11,000 injured, and vast areas of devastation that will take years to rebuild.
After the third Israeli war on Gaza in less than six years, many Palestinians are questioning the purpose of continuing to fight – and hoping for a solution that does not increase their suffering.
Can Hamas, with its newly acquired position at the forefront of Palestinian politics, provide such a solution?
Before the latest war erupted, Hamas was politically isolated.
It had lost traditional allies in Syria, Iran, and Hezbollah.
Most damaging, the ouster of former Egyptian President Mohamed Morsi’s Muslim Brotherhood government had deprived Hamas of its lifeline of supplies and armaments.
Egypt’s military regime, led by General Abdel Fattah el-Sisi, has been unrelentingly hostile toward Hamas, blaming it for the fighting in Sinai between the army and insurgent groups.
Egypt even mounted an operation to destroy the tunnels between Gaza and Sinai, isolating Gaza completely.
Hamas faced an intensifying crisis.
Unable to pay the salaries of more than 40,000 public employees in Gaza, it was being slowly strangled by the Israeli and Egyptian authorities.
And the unity government that it established with the Palestinian Authority in June brought no relief.
With nothing to lose, Hamas decided that another round of fighting with Israel was the only way to shake things up.
Despite its modest military capabilities, Hamas managed to hold out for 51 days – and, in the process, place itself at the center of Palestinian and regional politics.
Israel, by contrast, failed to achieve any of its goals – beginning with restoring its deterrent capacity.
Indeed, despite Israel’s best efforts, Hamas continued to launch long-range missiles at major populated areas from Haifa in the north to Ashkelon and Dimona in the south, and it repeatedly crossed Israeli lines using underground tunnels.
Such achievements shattered the indomitable image of the Israeli army, exposing a weakness that other radical Islamist groups may attempt to exploit.
Against this background, it is perhaps unsurprising that Hamas managed to compel most Israelis living in areas adjacent to Gaza to flee, with many Israelis accusing their government of failing to protect its citizens adequately.
In short, the war in Gaza shook the status quo.
It did not, however, bring about any progress toward resolving the outstanding issues underlying the dispute between Israel and Hamas, or change the conditions that spurred the latest conflict in the first place.
Israel did agree to terms much like those that ended its last assault on Gaza in 2012; but that agreement was never implemented.
Israel is now expected, for example, to ease its blockade of Gaza and allow the transport of humanitarian and construction supplies.
But more complicated issues, such as the release of Palestinian prisoners and the establishment of a Gaza airport and seaport, will be left for next month’s discussions.
And there is no guarantee that Israel will accede to Hamas’s demands without disarming Gaza.
The stakes for Hamas could not be higher.
By breaking Gaza’s political isolation, the ceasefire has fueled hope of relief from economic and financial deprivation.
Given Hamas’s leading role, it will be held accountable not only for the success of Gaza’s reconstruction, but also for any further delays in Palestinian reconciliation.
Hamas also faces pressure from the international community, which, despite supporting the Palestinians’ demand for an end to the Israeli siege and blockade, is adamant that Israel’s security concerns also be addressed.
As United Nations Secretary-General Ban Ki-moon warned, “Any peace effort that does not tackle the root causes of the crisis will do little other than set the stage for the next cycle of violence.”
In other words, achieving a lasting peace deal will require compromises from both sides – the kind of compromises that Hamas has long resisted.
For its part, the international community must embrace Hamas’s involvement in the pursuit of a peaceful settlement of the Palestine-Israel conflict.
Former Israeli President Shimon Peres once said, “The real challenge is to transform any crisis, however large, into new opportunities for action.” It is time for all of the relevant actors in the conflict between Israel and Palestine to address this challenge, and to take concrete, productive, and creative action to bring peace to Gaza at last.
Hamas has proved its staying power.
After decades of standoffs and stalemate, perhaps it can focus less on its own survival and more on helping to achieve a just and lasting peace.
The Changing Development Order
DUBAI – The Millennium Development Goals established a successful framework for the world to address fundamental social issues such as poverty, health, hunger, and education.
As discussions commence on the shape and scope of the global development agenda that will succeed the MDGs, which expire in 2015, it would be helpful to consider the role of the private sector and rethink the international community’s overall approach to development.
Economic development is the best way – indeed, the only way – to achieve sustainable poverty reduction.
It creates a virtuous circle.
Growth creates jobs, and jobs reduce poverty.
The private sector has a key role to play.
Private-sector capital flows now dwarf traditional public-sector aid flows.
For example, of the $200 billion in total US resources dedicated to development in 2010, 87% came from private flows.
By contrast, in the 1960’s, official overseas development assistance accounted for 70% of capital flows into developing countries.
A similar picture prevails globally.
Domestic resource mobilization, remittances from expatriate workers, private debt and equity flows, and philanthropic contributions exceed official international aid by a wide margin.
Private flows are no longer the tail, but the dog that wags the development agenda.
Nonetheless, much of the development-policy community remains stuck in the distant past.
For example, policymakers insist on the importance of “public-private partnerships” and argue that the private sector needs “to learn to work with the public sector.”
But today’s reality would be better described as “private-philanthropic-public partnerships” (expressed in that order to reflect each component’s relative importance), or “P-4.”
We need to persuade public institutions to focus on how to work better with their private counterparts, not vice versa, because the public and private sectors have a shared interest in accelerating economic development and ensuring that everyone benefits from globalization.
This is not meant to diminish the important role played by the public sector, which alone can create the conditions – the rule of law, sound macroeconomic policies, and good regulatory regimes – needed for the private sector to flourish.
For example, they catalyze the development of supportive property and customs regimes, including the establishment of credit bureaus and laws to protect creditors’ rights – all necessary prerequisites to channel financing flows.
Possibly the biggest prize in aligning private- and public-sector development efforts lies in the relatively unexplored area of blended finance.
We have barely scratched the surface in integrating the efforts of development finance institutions (DFIs) with private and philanthropic initiatives, which could make the whole greater than the sum of its parts.
A World Economic Forum study estimates that, when aligned, an annual increase of only $36 billion in public-sector investment in climate change could be leveraged to 16 times that amount by mobilizing $570 billion of private capital.
In fact, to improve alignment and reflect the new P-4 order, government agencies and DFIs should be encouraged to establish explicit targets for leveraging private capital.
Particularly in an age of lean governments and public austerity, success in meeting such targets should become a key performance indicator.
What should the private sector do better?
While there are many examples of responsible companies that want to “do well by doing good,” sustainability and development goals are not always integrated into businesses’ core agenda.
Total shareholder return (TSR) and corporate social responsibility (CSR) often seem completely divorced from each other.
The thinking, mostly implicit, is that maximizing TSR by polluting the environment is acceptable as long as some compensating contributions are made to CSR initiatives – the corporate equivalent of bathing in the Ganges to wash away one’s sins.
We need a new standard that requires companies to report not just their financial metrics, but also their performance on social, developmental, and environmental issues.
For maximum impact, and in order to restore public trust in corporations, the standards must be global, clear, and consistent.
The other reality of the post-MDG world is the multi-directionality of development flows.
Traditionally, development flows were unidirectional, going from the wealthy North to the impoverished South.
But the world order has changed.
Emerging markets and developing countries now account for 50% of global GDP and 75% of global growth, and demographics will further accentuate the shift in the center of economic gravity.
“Southern” countries such as Brazil, China, and India, to name only a few, are enhancing their contributions to overseas development.
Domestic resources and diaspora remittances are increasingly funding development.
As countries become less reliant on traditional sources of financing, they are less likely to follow foreign diktats blindly.
Indeed, people in developing countries are increasingly demanding a stronger voice in determining what is good for them.
The North’s old “we know what is good for you” approach, however well-informed or well-intentioned, will no longer work.
A more inclusive approach that reflects local conditions and preferences is essential.
The P-4 approach reflects the new global realities and seeks to leverage the best qualities of the private, philanthropic, and public sectors.
Models of Madness
Mental health services around the world are largely based on the assumption that being upset or disoriented is a sort of condition like medical illnesses.
Here in Australasia, we imported this perspective from overseas, actively suppressing more holistic Maori and Aboriginal understandings about human distress.
We did so despite numerous studies that show that recovery rates from “mental illness” in “underdeveloped” countries are far superior to those in “advanced” societies.
Nowadays, more and more problems are being redefined as “disorders” or “illnesses,” supposedly caused by genetic predispositions and biochemical imbalances.
Life events are relegated to mere triggers of an underlying biological time bomb.
Thus, feeling very sad has become “depressive disorder.”
Worrying too much is “anxiety disorder.”
Being painfully shy has become “avoidant personality disorder.” Beating up people is “intermittent explosive disorder.”
Excessive gambling, drinking, drug use, or eating are also illnesses. The same applies to having too little food, sleep, or sex.
Our Diagnostic and Statistical Manual of Mental Disorders has 886 pages of such illnesses.
Unusual or undesirable behaviors are called “symptoms” and the labels are “diagnoses.”
Our children are labeled, too.
Being bad at math has become “mathematics disorder.”
Ignoring other people’s feelings (once called being naughty) means that the child is suffering from “conduct disorder.”
If this includes getting angry at grownups, he or she (usually he) has “oppositional defiant disorder.”
A “diagnosis” frequently in the news is “attention-deficit/hyperactivity disorder.”
The “symptoms” include fidgeting, losing things, talking excessively, and difficulty playing quietly or taking turns.
Of course some children sometimes have problems.
But does anyone help them?
Perhaps it sometimes conceals the causes, while locating the problem entirely within the child, who is often stigmatized as a result.
Indeed, making lists of behaviors, applying medical-sounding labels to people who manifest them, and then using the presence of those behaviors to prove that a person has the illness in question is scientifically meaningless. It tells us nothing about causes or solutions.
How did this simplistic, certainly unscientific, and frequently damaging approach gain such dominance?
First, it is tempting to avoid facing the painful events in our lives that might be the cause of our difficulties.
If we just accept the diagnosis on offer, nobody is to blame.
Nobody needs do anything differently – except take the tablets.
We were just unlucky enough to get the “illness.”
Second, a model of individual pathology is invaluable to politicians. They don’t need to spend money on prevention programs to address the psycho-social problems –overwhelming stress, poverty, discrimination, child neglect and abuse, and loneliness, to name but a few – that research has repeatedly demonstrated play a large role in undermining mental health.
Third, exciting developments in technologies for studying our brains and genes have created the hope that we are about to discover the biological causes of, and solutions to, human misery and confusion.
Finally, a new player has entered the nature-nurture debate. The pharmaceutical industry, fueled by our desire for quick fixes, has effectively deployed its considerable power to promulgate the notion of “disorders” and “illnesses” in all domains of our lives.
The fundamental purpose of drug companies is to produce profits for shareholders.
Naturally, they encourage us to diagnose eating, sleeping, or feeling too much (or too little) as illnesses requiring a chemical cure.
Having listened for 20 years to people unfortunate enough to be labeled “schizophrenic,” considered to be the most extreme form of “mental illness,” and having subsequently researched the causes of hallucinations and delusions for ten years, I believe that the public understands madness better than we experts.
Surveys of public opinion all over the world find that most people believe that emotional problems, including those deemed severe, such as hearing voices, are primarily caused by bad things happening to us rather than by faulty brains or genes.
The public also favors psycho-social approaches, such as talking to someone and getting advice, or help finding friends or a job, rather than drugs, electro-shocks, or admission to psychiatric hospital.
Some experts, however, dismiss these views as “mental health illiteracy.”
They continue to insist that mental illness is an illness like any other, despite many studies showing that the more we adopt this medical model, the more prejudiced and frightened we become.
Mental health services should offer something more than having our feelings chemically suppressed, or having our children’s difficulties sitting still controlled by amphetamines (which, apart from teaching children that problems are best solved with drugs, stunt growth by an average of one centimeter per year).
A wide range of effective treatments are available that don’t cause weight gain, sexual dysfunction, diabetes, memory loss, or addiction.
Funders and policymakers who keep up with the relevant research are slowly beginning to introduce more talking therapies (such as cognitive therapy and trauma-focused counseling), more alternatives to hospitalization, more culturally appropriate services, more family-focused therapy and, most importantly, more genuine consultation with service users about what actually works.
If these new treatments aren’t used more frequently, this isn’t because they don’t work.
The main obstacle is that they won’t increase the profits of drug companies, on which, in the absence of adequate government funding, our professional organizations, conferences, journals, research, and teaching institutions have become so dependent.
Modernization Versus Westernization
Everyone nowadays seems obsessed about the question as to whether or not Islam can be reconciled with modernization.
In discussing this issue, what constitutes modernization is often confused with westernization.
Understanding the difference is vital.
India's encounter with the West over the past three centuries underscores the distinction between the two processes - modernization and Westernization - that are often assumed to be synonymous.
In fact, modernization does not entail Westernization, as the example of contemporary Japan demonstrates.
Whereas modernization entails a change in belief about the way the material world operates, Westernization entails a change in cosmological beliefs about the way that one should live.
Like China and unlike Japan, India resisted changes in its ancient beliefs about the way the world works (and should work) which modernization entails.
Instead, like many Islamic countries today, India wrongly believed Gandhi's doctrine that modernization necessarily means Westernization.
Fitfully, and under the influence of the British Raj, parts of the economy and society were modernized during the second half of the 19 th century of laissez-faire and free trade.
Some of the traditional literary castes also embraced Westernization.
British policy turned India into a pioneer of Third World industrialization, with an economy increasingly based on domestic capital and entrepreneurship combined with imported technology.
But modernization stalled when protectionist pressures from Lancashire and the exigencies of Imperial finance led the British to abandon free trade and laissez faire .
At the same time, Westernization fueled the rise of a nationalist movement.
The introduction of income taxes and UK labor laws in the late 19 th century led to nearly a century of mounting state intervention in the economy, a process that accelerated after independence.
This damaged India's growth prospects and hopes of alleviating its ancient scourge of mass poverty.
The breakdown of the global economy in the first half of the 20 th century in the wake of the First World War further eroded India's incipient integration into the world economy during the British Raj.
Finally, beginning with the economic reforms of 1991, India at last rejected inward-looking policies, returning to where it left off at the end of the 19 th century.
We now have a fairly clear quantitative picture of the performance of the Indian economy throughout this period.
During the 130 years from 1868 until 1999-2000, per capita income more than tripled, as national income increased by a factor of eight while the population grew nearly five-fold.
This suggests that the age-old combination of economic stagnation and cultural stability that I call the "Hindu Equilibrium" seems finally to have been broken.
But on closer inspection, it turns out that this was largely due to the economic performance of the last two decades.
The sub-period from 1868-1900 saw the beginning of industrialization and India's partial integration into the world economy under the Raj.
National income did not stagnate, as nationalist historians once maintained, but grew modestly, at an average annual rate of 1.1%.
Growth was fastest from 1870-1890, followed by large fluctuations in output.
A fairly low rate of population growth ensured a modest annual rise in per capita income of about 0.7% during this period.
The second sub-period, 1900-1945, saw the breakdown of the global economy and the start of India's population explosion.
Growth of per capita income decelerated between 1902 and 1930 and declined further in the last fifteen years of British rule until 1947.
After 1920, this was due entirely to the rise in population growth, to 1.22 % per year, which outpaced fairly high output growth throughout the decade until 1930.
Over this entire 45-year sub-period, output grew at just above 1% annually--the same rate as under the Raj--but yearly population growth soared to 0.8%, causing virtual stagnation of per capita income.
The third sub-period, 1950-1980, marked the heyday of economic planning.
Infrastructure investment - which had been difficult for the embattled British Raj to finance--suddenly boomed.
This, together with high agricultural growth rates, led to a dramatic rise in output, which increased at an annual average rate of 4.5%.
But the demographic explosion that began in the 1920's had by now driven the rate of population growth up to 3% per year, so that annual per capita income grew by only 1.5%.
A departure from what the late Raj Krishna dubbed the "Hindu rate of growth" came only in the fourth sub-period, from 1980-1999.
Partial economic liberalization, undertaken by the Rajiv Gandhi government in the mid-1980s, and the more substantial Narasimha Rao-Manmohan Singh economic reforms in 1991, boosted national income growth to an average annual rate of 6.8%.
At the same time, yearly population growth slowed to an average of 2.3%, so that per capita income rose at an impressive annual rate of 4.5%, making a dent in India's mass structural poverty for the first time in millennia.
If India can now complete the unfinished business of fully integrating into the global economy, there is no reason why it cannot improve upon its impressive recent growth performance.
If it succeeds, Nehru's pledge, on the eve of Indian independence, "to wipe every tear from every eye," will finally be redeemed.
India's Economic Performance : 1868-2000
Year Per Capita Income
(at 1948-49 prices- Rs.)
Population
(million)
1868 176 209
1900 213 238
1945 244 319
1950 221 359
1980 318 679
1999-00 602 991
Average Annual Growth Rates (per cent per annum)
1868-2000 1868-1900 1900-1945 1950-1980 1980-2000
per capita income 2.6 0.7 0.3 1.5 4.5
population 3.6 0.4 0.8 3.0 2.3
national income 6.2 1.1 1.1 4.5 6.8
Modernizing Multilateralism
WASHINGTON, DC – 2008 will be remembered as a year of extraordinary turmoil.
The financial crisis came on the heels of food and fuel crises. Now the world is in the midst of an economic crisis, which will lead to many job losses.
Virtually no country has escaped. We are moving into a new danger zone, with heightened risks to exports and investment, to credit, banking systems, budgets, and balances of payments.
In 2009, we may see the first decline in global trade since 1982.
As always, the poor are the most defenseless.
For developing countries, tighter credit conditions and much weaker growth mean that governments are less able to meet education and health goals, and to invest in the infrastructure needed to sustain growth.
Remittances are drying up.
Already 100 million people have been driven into poverty as a result of high food and fuel prices, and current estimates suggest that every 1% decline in developing-country growth rates pushes an additional 20 million people into poverty.
Countries are trying to break the credit freeze, bolster financial institutions, ease interest rates, strengthen safety nets, and revive consumption and investment in order to boost business, enable people to work, and lay the foundation for future growth.
These steps will be most effective if countries act in concert, in a mutually supportive way.
Economic nationalism that seeks gains from the disadvantage of others will trigger ever more dangers.
Global challenges require global solutions.
In October, I called for modernizing multilateralism and markets to better reflect the changing world economy and to enable countries to act in concert to address interconnected problems.
Looking beyond the old G-7 system, we need a twenty-first-century approach to multilateralism through the dynamism of a flexible network, not new hierarchies of a fixed or static system. ampnbsp;
The new multilateralism must maximize the strengths of interdependent and overlapping actors and institutions, public and private.
It should reach beyond the traditional focus on finance and trade, to include other pressing economic and political issues: development, energy, climate change, and stabilizing fragile and post-conflict states.
Multilateralism, at its best, is a means for solving problems among countries, with the group at the table willing and able to take constructive action together.
It needs to draw its strength – and legitimacy – from both broader participation and by achieving results.
November’s G-20 summit brought to the table for the first time the rising powers as active stakeholders to address the global financial crisis.
They agreed to a good agenda, but the true test will be the follow-up.
It is a positive step that leaders of major developed economies are now meeting with leaders from the rising economic powers.
But the poorest developing countries must not be left out in the cold.
We will not solve this crisis, or put in place sustainable long-term solutions, by accepting a two-tier world.
The goal must be to build an inclusive and sustainable globalization.
Trillions of dollars are now being spent on a financial rescue in the developed world.
By comparison, about $100 billion a year is currently being spent on overseas aid.
We need a “human” rescue as well as a financial rescue.
In this environment, the global commitment to provide development assistance to the poorest countries must be paramount.ampnbsp;
At the World Bank Group, we are scaling up our financial support for those in need.
We are speeding up grants and long-term, interest-free loans to the world’s 78 poorest countries, half of them in Africa.
Donors last year pledged $42 billion over three years for the World Bank’s fund for these countries, the International Development Association (IDA).ampnbsp;
This money is vital if we are to meet the Millennium Development Goals.
In addition, the Bank’s lending arm to developing countries, the International Bank for Reconstruction and Development (IBRD), could make new commitments of more than $35 billion this fiscal year – almost triple last year’s – and up to $100 billion over the next three years.
This increase is aimed at protecting the poorest and most vulnerable from harm, supporting countries that face borrowing problems because of broken credit markets, and helping to sustain investments upon which recovery and long-term development will depend.
Our private sector arm, the International Finance Corporation (IFC), is launching or expanding three facilities to help the private sector, expected to total around $30 billion over the next three years.
They will address high-priority problems that have emerged in recent months: expanding trade finance, recapitalizing banks in poorer countries, and sustaining infrastructure investment by helping viable projects facing a liquidity crisis.ampnbsp;
At the same time, we will continue special efforts to counter malnutrition and hunger, and provide energy to the poor.ampnbsp;
Our newly launched $6 billion Climate Investment Funds will build practical experience with technology, forestation, and adaptation to support the United Nations negotiations on climate change and assist developing countries.
As the world digs out of the current financial and economic hole, we need to look further ahead.
Today’s crises reflect the lightning speed of an interconnected world.ampnbsp;
The factors that produced this globalization offer great opportunities to overcome poverty, increase opportunity, and open societies.ampnbsp;
But we will need a new multilateralism to expand the availability of these benefits to all.
Modernizing the Middle East’s Economies
AMMAN – Rather than speak of the Middle East or the Arab world, I increasingly prefer to use the term WANA, meaning West Asia-North Africa.
But, whatever we choose to call it, the danger is that the global economic crisis is providing an almost perfect alibi for governments and others in the region to continue with “business as usual,” when what is needed is a loud wake-up call.
The global economic crisis has merely helped to mask chronic structural imbalances within the region.
Over-dependence on aid and oil revenues characterizes almost all the economies of WANA.
Indeed, it is no exaggeration to say that they represent a form of life-support system.
The problem of how to wean these countries off this addiction seems to be insurmountable.
For the “Dutch disease” and a rentier spirit prevail in WANA, and have affected oil-producing and non-oil-producing countries, ranging from migrant workers’ remittances and financial investment flows from the oil countries (mainly into real estate) to stock-exchange bubbles and foreign aid.
A side-effect of this has been the widening of income gaps, both within and between the WANA countries.
Political scientists tell us that rentier economies, or economies that depend on oil and foreign aid, stimulate greed and grievances.
Indeed, oil rents eventually weaken state institutions, and this hollowing out of the state often gives rise to growing discontent.
In a non-oil economy, labor is the main engine of wealth.
But in a rentier economy, huge revenues from oil or external financial transfers actually create a disincentive to work.
Wealth and work are de-linked, and this applies to most industrial and agricultural activities.
Social and political mobility become extremely limited, and societies turn from production to consumption.
This helps to explain the high level of unemployment in the Arab world.
According to World Bank figures, the Middle East North Africa (MENA) region suffered a 25% fall in per capita incomes during the last 25 years of the twentieth century, when oil prices were low.
In this decade, thanks to record-high oil prices, GDP growth rates soared.
A recent study by India’s Strategic Foresight Group entitled The Cost of Conflict in the Middle East suggested that the past 20 years of conflict have cost WANA countries some $12 trillion.
Rent-seeking tends to lead to policy failure in the form of intense political competition aimed at gaining short-term access to revenues and benefits, as opposed to political competition over what policies might be in the long-term public interest.
The politics of greed and grievance replace more far-sighted policymaking.
So what, then, are the possible policy options?
The absence of a modern industrial base diminishes the WANA economies’ ability to absorb the surplus generated by oil revenues.
As a result, many countries have established sovereign wealth funds to invest their surpluses in international markets.
These funds’ managers rightly complain that insufficient investment opportunities exist in the region in agriculture and manufacturing.
The question is how to increase the absorptive capacity of the region and build a modern industrial base.
A precondition for any effective change is a shift in policy orientation from the national to the regional level.
For this to be made concrete, new instruments are needed, such as a Regional Stabilization Fund, a Water and Energy Community, regional social cohesion, and a regional industrial policy.
Without a regional focus, WANA countries risk sleepwalking into conflict and more pronounced economic decline.
Indeed, funds for “needy countries” may never reach the neediest of individuals, such as internally displaced or stateless persons, because no one takes responsibility for them.
How can this be done?
Three years ago, the Commission on Legal Empowerment of the Poor considered ways of empowering the “bottom billion” by expanding and deepening the means by which they could pull themselves out of poverty.
Its 2008 report Making the Law Work for Everyone argues that legal empowerment is not about aid, but about policy and institutional reforms that expand the legal opportunities and protection of the poor.
It is an example of the methodology urgently needed to initiate a paradigm shift in WANA.
The nations of WANA missed the first industrial revolution based on coal and the steam engine, and then the second industrial revolution based on oil and the internal combustion engine.
The silver lining is that the absence of a modern industrial base means that, unlike more developed economies, WANA has no ailing industries to rescue.
But what is needed now are policies that will allow WANA to join the third industrial revolution – the post-carbon economy of renewable energy and the fuel-cell plug-in car.
The Future of Force
MUNICH – At the World Economic Forum’s recent annual meeting in Davos, I participated in a panel of defense leaders to discuss the future of the military.
The issue we addressed is a critical one: What kind of war should militaries today be preparing to fight?
Governments have a very poor track record when it comes to answering this question.
After the Vietnam War, for example, the United States’ armed forces suppressed what it had learned about counter-insurgency, only to rediscover it the hard way in Iraq and Afghanistan.
America’s military interventions in these countries exemplify another key challenge of modern warfare.
As outgoing US Secretary of Defense Chuck Hagel pointed out in a recent interview, in war, “things can get out of control, and drift and wander” in ways that can cause a military to fall into a more “accelerated” use of force than was initially anticipated.
Against this background, the notion that force alone can transform conflict-riven societies in the Middle East and elsewhere is a dangerous fallacy.
But, while war and force may be down, they are not out.
They are simply evolving according to a new “generation” of rules and tactics.
The first generation of modern warfare comprised battles fought with massed manpower, using Napoleonic line and column formations.
The second, which culminated in World War I, was driven by massed firepower, and is expressed in the saying, reportedly coined at the Battle of Verdun in 1916, “artillery conquers, infantry occupies.”
And the third generation – perfected by Germany with the “blitzkrieg” method employed in World War II – emphasized maneuver over force, with militaries using infiltration to bypass the enemy and collapse its force from the rear, rather than attacking frontally.
Fourth-generation warfare takes this decentralized approach one step further, with no definable fronts at all.
Instead, it focuses on the enemy’s society, reaching deep into its territory to destroy political will.
One might even add a fifth generation, in which technologies like drones and offensive cyber tactics allow soldiers to remain a continent away from their civilian targets.
While particular generational delineations are somewhat arbitrary, they reflect an important trend: the blurring of the military front and the civilian rear.
Accelerating this shift is the replacement of interstate war by armed conflict involving non-state actors such as insurgent groups, terrorist networks, militias, and criminal organizations.
Confusing matters further is the overlap among these groups, with some even receiving state support.
The Revolutionary Armed Forces of Colombia – Latin America’s oldest guerilla group – formed alliances with narcotics cartels.
Some Taliban groups in Afghanistan and elsewhere developed close ties with transnational Al Qaeda terrorists.
The insurgents in eastern Ukraine are fighting alongside Russian troops (bearing no insignias).
Such organizations often take advantage of states that lack the legitimacy or capacity to administer their own territory effectively, launching a mix of political and armed operations that, over time, give them coercive control over local populations.
The result is what General Sir Rupert Smith, a former British commander in Northern Ireland and the Balkans, called “war among the people” – a kind of struggle that is rarely decided on conventional battlefields by traditional armies.
These hybrid wars are fought using a wide variety of weapons – not all of which have firepower.
With cameras in every cell phone and photo-editing software on every computer – not to mention the prevalence of social media – the information contest has become a critical aspect of modern warfare, exemplified in the current wars in Syria and Ukraine.
In hybrid warfare, conventional and unconventional forces, combatants and civilians, physical destruction and information manipulation become thoroughly intertwined.
In Lebanon in 2006, Hezbollah fought Israel through well-trained cells that combined propaganda, conventional military tactics, and rockets launched from densely populated civilian areas, achieving what many in the region considered a political victory.
More recently, Hamas and Israel have conducted air and land operations in the densely populated Gaza Strip.
This kind of warfare emerged largely in response to America’s overwhelming conventional military advantage after the Soviet Union’s collapse, underscored by its victory in the 1991 Iraq War, with only 148 American casualties, and its intervention in the 1999 conflict in Kosovo, in which no American lives were lost.
In the face of this asymmetry, America’s opponents – both state and non-state actors – began to emphasize unconventional tactics.
In China, for example, military planners developed a strategy of “unrestricted warfare” that combines electronic, diplomatic, cyber, terrorist-proxy, economic, and propaganda tools to deceive and exhaust US systems.
As one Chinese military official put it, “the first rule of unrestricted warfare is that there are no rules.”
For their part, terrorist groups, recognizing that they cannot defeat a conventional military in a direct war, attempt to use governments’ own power against them.
With violent theatrics, Osama bin Laden outraged and provoked the US, driving it to overreact in ways that destroyed its credibility, weakened its alliances in the Muslim world, and ultimately exhausted its military – and, in a sense, its society.
The Islamic State is now employing a similar strategy, mixing ruthless military operations with an incendiary social-media campaign, punctuated by photos and videos of brutal executions, including the beheading of US and other Western citizens.
These efforts have mobilized the Islamic State’s enemies, while inspiring a growing number of discontented individuals and groups to self-recruit to its banner.
The unpredictable evolution of warfare poses a serious challenge for defense planners.
For some weak states, internal threats provide clear objectives.
The US, for its part, must balance continued support for its conventional military forces, which remain an important deterrent in Asia and Europe, with investment in a broad portfolio of alternative capabilities that conflicts in the Middle East require.
At a time of unprecedented change, the US – and other major powers – must be ready for anything.
Modesty in our Crises
Markets’ Federal Reserve Love Story
LAGUNA BEACH – The morning drive to my 11-year old daughter’s school is always fun, and often a source of insight.
That was certainly the case last week when she pointed out something about Frozen, the hugely popular Disney film, that had totally escaped me. “It’s unusual,” she said, “to see a Disney movie in which they end up telling us not to marry someone we’ve just met.”
Quite early on in the movie, Princess Anna meets Prince Hans at her sister Princess Elsa’s coronation ball.
They immediately connect on many levels and, yes, “fall in love.”
He quickly proposes, and she accepts, but Elsa refuses to give her blessing.
It then takes Anna most of the movie to figure out that Hans is evil – set on getting rid of both her and her older sister in order to take over the kingdom.
Luckily for her, there is a wonderful commoner – Kristoff – whom she has gotten to know during the course of her adventures.
Unlike Hans, he is genuine and dependable; they end up together.
After many decades of Disney movies, we have been conditioned to expect princesses to fall in love quickly with their charming princes and “live happily ever after.”
And when there are challenges or obstacles (mostly in the more recent movies), these are quickly overcome (and with humor).
Similarly, for many years market participants have been richly rewarded for falling in love – quickly and decisively – with the new policy measures adopted by America’s Federal Reserve.
Indeed, the romance has overwhelmingly followed the Disney script.
Yes, there may have been some bumps along the way, but they have been overcome quickly.
And the romance has resulted in both parties living happily: the Fed feels better positioned to pursue its dual mandate of high employment and stable inflation, while investors feel that they have the opportunity for sizeable financial rewards.
This relationship has been so comfortable that market participants have adopted the mantra “Never fight the Fed” – and for good reason.
The Fed is the world’s most powerful central bank.
It owns the printing press that produces the world’s main reserve currency.
It enjoys a significant amount of political independence.
And it has not been shy about using its considerable operational autonomy.
Market participants also know that the Fed needs them to leverage its policy influence and deliver on its mandate, which, in recent years, has rightly been broadened in practice to incorporate the goal of financial stability.
To this end, the Fed has become much more “transparent” with markets in the last few years, sharing more readily the minutes and transcripts of its policy discussions.
The Chair of the Federal Reserve Board has even taken to holding periodic press conferences that are closely watched on trading floors around the world.
Since the 2008 global financial crisis, the romance has become particularly intense, especially as the Fed has been compelled to use a range of unconventional measures to overcome the capital-market disruptions that almost tipped the world economy into a deep depression.
In doing so, the Fed has become more involved in how markets function, the valuation of assets, and fluctuations in their prices.
And the markets have come to depend much more on the Fed, expecting more frequent attention and support from it (and throwing a short tantrum when they feel disappointed, as was the case a year ago).
Initially, central bankers were keen to cultivate this romance as a means of meeting their broader policy objectives of growth, employment, stable inflation, and financial stability.
More recently, however, some have become less comfortable, warning that the codependence is encouraging excessive risk-taking and, in some cases, bubbly valuations.
Some worry that it may even undermine the Fed’s political independence. And, only two weeks ago, an outgoing Fed governor, Jeremy Stein, declared that the Fed is in the middle of a policy transition that renders its guidance to markets “more qualitative,” “less deterministic” and, therefore, less precise.
Like Princess Anna in Frozen, it will take time for markets to recognize that their relationship with the Fed is changing (and should change); and, similar to the movie, some sort of shock may be involved in socializing the new understanding.
Having said that, the outcome will certainly not be as dramatic as in the movie – if only because, unlike Hans, the Fed is not out to take over the markets.
So the romance will survive, but it is unlikely to be as intense, and it is unlikely to be unconditional.
The hope is that, by that time, a more vibrant real economy will perform the role that Kristoff played in the movie.
The best and most sustainable love story for markets is one based on a healthy and dynamic real economy that creates jobs and opportunities for many more people.
Unfortunately, on that count, it is too soon to predict whether we will live happily ever after.
Markets’ Rose-Tinted World
LAGUNA BEACH – This has been an unusual year for the global economy, characterized by a series of unanticipated economic, geopolitical, and market shifts – and the final quarter is likely to be no different.
How these shifts ultimately play out will have a major impact on the effectiveness of government policies – and much more.
So why have financial markets been behaving as if they were in a world of their own?
Apparently unfazed by disappointing growth in both advanced and emerging economies, or by surging geopolitical tensions in Eastern Europe and the Middle East, equity markets have set record after record this year.
This impressive rally has ignored a host of historical relationships, including the long-established correlation between the performance of stocks and government bonds.
In fact, correlations among a number of different financial-asset classes have behaved in an atypical and, at times, unstable manner.
Meanwhile, on the policy front, advanced-country monetary-policy cohesion is giving way to a multi-track system, with the European Central Bank stepping harder on the stimulus accelerator, while the US Federal Reserve eases off.
These factors are sending the global economy into the final quarter of the year encumbered by profound uncertainty in several areas.
Looming particularly large over the next few months are escalating geopolitical conflicts that are nearing a tipping point, beyond which lies the specter of serious systemic disruptions in the global economy.
This is particularly true in Ukraine, where, despite the current ceasefire, Russia and the West have yet to find a way to ease tensions definitively.
Absent a breakthrough, the inevitable new round of sanctions and counter-sanctions would likely push Russia and Europe into recession, dampening global economic activity.
Even without such complications, invigorating Europe’s increasingly sluggish economic recovery will be no easy feat.
In order to kick-start progress, ECB President Mario Draghi has proposed a grand policy bargain to European governments: if they implement structural reforms and improve fiscal flexibility, the central bank will expand its balance sheet to boost growth and thwart deflation.
If member states do not uphold their end of the bargain, the ECB will find it difficult to carry the policy burden effectively – exposing it to criticism and political pressure.
Across the Atlantic, the Fed is set to complete its exit from quantitative easing (QE) – its policy of large-scale asset purchases – in the next few weeks, leaving it completely dependent on interest rates and forward policy guidance to boost the economy.
The withdrawal of QE, beyond being unpopular among some policymakers and politicians, has highlighted concerns about the risk of increased financial instability and rising inequality – both of which could undermine America’s already weak economic recovery.
Complicating matters further are the US congressional elections in November.
Given the likelihood that the Republicans will continue to control at least one house of Congress, Democratic President Barack Obama’s policy flexibility will probably remain severely constrained – unless, of course, the White House and Congress finally find a way to work together.
Meanwhile, in Japan, the private sector’s patience with Prime Minister Shinzo Abe’s three-pronged strategy to reinvigorate the long-stagnant economy – so-called “Abenomics” – will be tested, particularly with regard to the long-awaited implementation of structural reforms to complement fiscal stimulus and monetary easing.
If the third “arrow” of Abenomics fails to materialize, investors’ risk aversion will rise yet again, hampering efforts to stimulate growth and avoid deflation.
Systemically important emerging economies are also subject to considerable uncertainty.
Brazil’s presidential election in October will determine whether the country makes progress toward a new, more sustainable growth model or becomes more deeply mired in a largely exhausted economic strategy that reinforces its stagflationary tendencies.
In India, the question is whether newly elected Prime Minister Narendra Modi will move decisively to fulfill voters’ high expectations for economic reform before his post-victory honeymoon is over.
And China will have to mitigate financial risks if it hopes to avoid a hard landing.
The final source of uncertainty is the corporate sector.
So far this year, healthy companies have slowly been loosening their purse strings – a notable departure from the risk-averse behavior that has prevailed since the global financial crisis.
Indeed, an increasing number of firms have started to deploy the massive stocks of cash held on their balance sheets, first to increase dividends and buy back shares, and then to pursue mergers and acquisitions at a rate last seen in 2007.
The question is whether companies also will finally devote more cash to new investments in plant, equipment, and people – a key source of support for the global economy.
This is a rather weighty list of questions.
Yet financial-market participants have largely bypassed them, brushing aside today’s major risks and ignoring the potential volatility that they imply.
Instead, financial investors have trusted in the steadfast support of central banks, confident that the monetary authorities will eventually succeed in transforming policy-induced growth into genuine growth.
And, of course, they have benefited considerably from the deployment of corporate cash.
In the next few months, the buoyant optimism pervading financial markets may prove to be justified.
Unfortunately, it is more likely that investors’ outlook is excessively rosy.
Achieving Escape Velocity
NEWPORT BEACH – It is not often that one can confidently claim that a single remedy could make billions of people around the world significantly better off; do so in a durable and mutually supportive manner; and thus improve the well-being of both current and future generations.
Yet that is the case today.
The remedy I have in mind, of course, is faster economic growth – the one thing that can raise living standards, reduce excessive inequalities, improve job prospects, alleviate trade tensions, and even moderate geopolitical pressures.
And most forecasters – including the International Monetary Fund and the World Bank – are now predicting that global growth will pick up in 2014, and that it will be more balanced among the world’s major economic regions.
Such forecasts reflect three welcome developments.
For starters, Europe will exit recession, with the peripheral economies benefiting from the strongest relative improvement in growth prospects.
Meanwhile, 3% annual GDP growth is no longer out of reach for the United States.
And emerging economies will be anchored by China’s slower but still-robust 7% annual growth.
But, while the prospect of faster global growth is indeed good news, especially given still-high unemployment in many countries and the associated pressures on social safety nets, it is too early to celebrate.
There is a risk that, by tempting policy complacency, this year’s economic upturn could end up being counterproductive.
This is not because the predicted acceleration in growth is still quite modest.
After all, even a limited uptick can make a significant difference if it is part of an encouraging medium-term growth dynamic.
Rather, the risk lies in the manner in which this growth is likely to materialize – namely, by depending too much on old and exhausted growth models, rather than by comprehensively embracing new ones.
In Europe, growth this year will largely reflect the impact of financial stabilization, not deep structural reforms.
With interest-rate spreads having compressed sharply, and with the threat of a meltdown averted, both domestic and foreign investors continue to return to peripheral economies, thereby alleviating severe credit rationing.
That is certainly good news, especially if the source of stabilization is shifted from the European Central Bank’s unconventional policies to more durable endogenous balance-sheet healing among a broader set of financial institutions, non-financial firms, and households.
But few of these economies are prepared to embark on the type of internal reforms that promise sustained high growth rates and a substantial reduction in unemployment, which has been at alarming levels for young people and in terms of duration.
Meanwhile, exchange-rate appreciation is beginning to undermine exports in the eurozone’s core countries, particularly Germany, which has been the regional growth engine in recent years.
The predicted acceleration in US growth this year is more notable, because it reflects the positive impact of a multi-year process of economic and financial healing.
We are also starting to see the macro-level impact of certain productivity revolutions – particularly in the energy and technology sectors – that, so far, have mainly been industrial and sectoral phenomena.
Yet America’s actual economic growth in 2014 will remain well below potential.
Moreover, the US economy’s performance remains overly dependent on the Federal Reserve’s experimental monetary policies, courageously adopted in the absence of adequate measures by other economic policymakers.
The US economy is certainly capable of reaching the “escape velocity” that the country needs if unemployment is to fall in a more definitive and lasting manner.
But this requires Congress to support President Barack Obama’s administration in three areas: improving the composition and level of aggregate demand; enhancing the economy’s supply responsiveness; and removing residual debt overhangs that continue to inhibit economic activity.
Only decisive progress on these fronts will unlock the trillions of corporate dollars that, rather than being invested in new plants and equipment, remain stranded on companies’ balance sheets or are handed over to shareholders via higher dividends and share buybacks.
The issues in the emerging world are more complex and diverse.
Some countries are making consistent efforts to revamp exhausted growth models.
In China, for example, this involves less reliance on exports and public investment, and more on the private components of domestic aggregate demand.
Other countries, however, have responded to their growth slowdown in 2012 and 2013 by reverting to old practices that offer the temptation of immediate expansion at the cost of growth-dampening outcomes down the road.
This is the case, for example, in Brazil and Turkey.
All of this implies that the emerging world as a whole is unlikely in 2014 to resume its role as a major engine of the global economy, and that the quality of what growth there is will be far from optimal.
Indeed, the more detailed one’s analysis of today’s global growth dynamics is, the more likely one is to conclude that this year’s brighter prospects are just that – brighter prospects for 2014.
There is still much that can (and should) be done if this year’s predicted upturn is to provide a springboard for a meaningful medium-term growth spurt that improves prospects for current and future generations.
Unless policymakers keep in mind the larger tasks at hand, they risk falling into a trap of comfortable underachievement.
The Democratic Disruption of Finance
LAGUNA BEACH – There seems to be no limit to the exciting possibilities that come from combining technical innovations, the Internet, and social media.
It is a phenomenon that has been revolutionizing journalism and entertainment; and, by helping to overcome coordination challenges, it has also had political consequences in a growing number of countries – all of which means an ever-evolving set of opportunities and risks.
What is less appreciated, however, is the extent to which a broadly similar phenomenon may be starting to play out in finance, via a democratization process that could gradually reconfigure a notable part of the institutional landscape, particularly in consumer finance, while challenging regulators to adapt.
Bitcoin is the most visible – albeit far from a good – example of this nascent development, having attracted attention from specialists, regulators, and, slowly but surely, the public.
But the crypto-currency phenomenon is far from the only example, and it is certainly not the most consequential one.
Its impact, both actual and potential, is relatively limited when compared to ongoing attempts to enhance and democratize lending, borrowing, investing, and payments and settlements.
The underlying sequence of disruptive technology is historically familiar.
A bold innovation suddenly lowers entry barriers for certain activities.
Mechanisms emerge to enable a larger part of the population to participate in what is deemed desirable but, until now, had been hard to access.
As the disruptive forces gain traction, existing business models face difficult adaptation challenges, and regulators begin to fall behind.
The situation is often amplified by a natural human tendency to overproduce and over-consume hitherto restricted goods and services.
This, of course, is what has been occurring in media for several years.
The result is a proliferation of platforms for producing, aggregating, disseminating, and consuming content.
Falling entry barriers and lower access costs have significantly democratized participation, whether in production or consumption.
And, as hard as they try, many traditional media outlets – especially those unable to claim quite distinctive content – find it increasingly difficult to compete.
Now something somewhat similar is starting to happen in finance as well, albeit at a less frantic pace and – at least until now – in a less disruptive manner. And, as with media, the main innovations are being spearheaded by those outside the traditional institutional setup.
Most consequentially, an emerging cohort of technology entrepreneurs understand the power of online/social media innovation to disrupt components of traditional finance, and are now leading efforts that include behavioral scientists and finance experts.
Recall that Bitcoin started in 2009 as an attempt to produce a “better” currency, championed especially by those who mistrust central banks’ management of fiat money.
These early adopters were joined by a growing number of financial speculators attracted by highly volatile price movements.
But Bitcoin’s success, which remains highly uncertain, ultimately depends on it attaining sufficient stability to perform the most essential function of any currency (as opposed to a speculative commodity) – that of providing a relatively predictable medium of exchange.
Fulfilling that function would require a lot to happen.
At a minimum, Bitcoin would need a more solid institutional foundation; and broad acceptance of it would require much greater clarity concerning regulatory and supervisory approaches.
More promising examples, albeit less well-known, may be found in Internet-driven lending and borrowing clubs or, more generally, the peer-to-peer initiatives in consumer financial services.
By seeking to compress net interest margins, including through lower expenses and more efficient data assessments and aggregation, and by targeting an enhanced consumer experience, such empowerment schemes could serve to reduce the cost of financial intermediation while providing for fairer risk-pooling outcomes and better credit underwriting.
Likewise, so-called digital wallets and mobile transfers are efforts to improve payments and settlement in a retail financial sector that gets a lot less attention than its institutional peers.
The prospects for each of these democratizing developments vary significantly, as do the probable cost-benefit equations.
Much will depend on whether the underlying technology is stable and secure, trust is established, transparency is convincing, consumer protection is effective, new content is coupled well with strong distribution channels, and broad-based validation and institutional verification boost credibility.
Looking ahead, we should expect the underlying forces of innovation to remain strong.
Some existing businesses will fend off disruptive threats, including through takeovers; others will adjust (for example, Walmart recently announced an expansion of its financial-services offerings); but many may well prove insufficiently agile.
Regulators will also likely lag initially in their response to new structures and activities.
The challenges of getting this right in finance are considerably more difficult than they are in media; and the consequences are far more profound, given the centrality of finance to broad swaths of the real economy.
Anyone who doubts that should recall how last decade’s securitization boom and bust – another example of a disruptive financial innovation that was over-produced and over-consumed – contributed to a credit and liquidity crisis that pushed the global economy to the verge of Great Depression II.
In their recent book, Google’s Jared Cohen and Eric Schmidt brilliantly remind us of the opportunities and risks afforded by multi-speed developments in the real and virtual worlds.
Having redefined media, similar developments are slowly beginning to play out in finance – in a rather isolated way for now, but soon likely to start transforming how capital is mobilized and allocated in support of economic growth and employment.
Individuals, companies, and governments would be well advised to devote more time and other resources to comprehending this important and transformative phenomenon.
America’s Partisan Peril
NEWPORT BEACH – The United States’ reputation for sound economic policymaking took a beating in 2013.
Some of this was warranted; some of it was not.
And now a related distorted narrative – one that in 2014 could needlessly undermine policies that are key to improving America’s economic recovery – is gaining traction.
The 2008 global financial crisis left the US economy mired in a low-level equilibrium, characterized by sluggish job creation, persistently high long-term and youth unemployment, and growing inequalities of income, wealth, and opportunity.
Many Americans started 2013 with high hopes that congressional leaders would overcome, even if only partly, the polarization and political dysfunction that had slowed recovery.
Expectations of less political turbulence were enhanced at the start of 2013 by a bipartisan agreement that avoided the so-called fiscal cliff (though at the last minute and with much rancor) and a deal reached later in January to raise the debt ceiling (albeit temporarily).
With expectations of less political brinkmanship and lower policy uncertainty ahead, consensus projections foresaw faster, more inclusive economic growth.
In turn, faster growth was expected to revitalize the labor market, counteract worsening income inequality, mollify concerns about debt and deficit levels, and enable the Federal Reserve to start normalizing monetary policy in an orderly fashion.
It would also facilitate a return by Congress to more normal economic governance – whether passing an annual budget, something not accomplished in four years, or finally taking steps to enhance rather than impede growth and job creation.
But optimism foundered over the course of 2013, and frustration soared.
Growth has again fallen short of expectations.
With another year of uneven job creation, the problems associated with long-term and youth unemployment have become more deeply embedded in the economy’s structure.
Inequalities remain too high, and continue to grow.
Congressional paralysis has reached levels unparalleled in recent history.
And, again, lawmakers have not enacted an annual budget.
This is not to say that there has been no economic or financial progress in 2013.
After all, economic growth, while unnecessarily held below potential by Congress (and vulnerable to decline if Congress is not careful), has again outpaced that of Europe.
The budget deficit has fallen markedly, while companies and households, too, have continued to strengthen their balance sheets.
Many segments of the equities market have bounced back strongly, with price indexes hitting record highs.
And Americans are on the verge of obtaining much better access to health care.
What is frustrating is that the country could have – and should have – done a lot better.
Recognizing this, Americans are not hesitant to blame a Congress that seems more eager to manufacture problems than to enable the economy to reach its considerable potential.
Rather than building on some of the fledgling bipartisanship from earlier in the year, Congress decided to produce a mid-year government-financing drama.
Even immigration reform – a bipartisan pro-growth issue with considerable support from much of American society – has languished unnecessarily.
More broadly, Congress took no significant action to avoid headwinds that impose a drag on growth and discourage companies and individuals from investing in their future.
According to a survey based on data from the Office of the Clerk of the US House of Representatives, the current 113th Congress has delivered the lowest legislative activity “since at least 1947, when the data collection began.”
And Americans know it.
According to Gallup, the 9% approval rating for Congress is the lowest level in the survey’s 39-year history.
Partisan polarization in Congress has also undermined the executive branch, unduly blocking government appointments – including routine and essentially uncontroversial ones – and placing unwarranted obstacles in the way of implementing even the most sensible and seemingly bipartisan legislative proposals.
The resulting sense of political drift and dysfunction has been exacerbated by the poor rollout of the Affordable Care Act (Obamacare) – a massive, avoidable distraction that has been allowed to cast doubt on this landmark initiative.
Yes, 2013 was not a good year for public-sector decision-making, especially given that most of the slippages were “own goals.”
In the process, the US damaged the reputation for effective economic management that it had earned during the global financial crisis, when bold and timely measures prevented a period of reckless private risk-taking and financial leverage from ending in Great Depression II.
The Congress-imposed government shutdown and near-default in October were particularly harmful to the country’s global standing.
As a result, the popular narrative is shifting to the danger of “government failure.”
More and more Americans are being led to forget how, just a few years ago, a united US government reacted decisively to “market failures” and thus helped to avoid a global economic meltdown that would have devastated millions of lives and undermined future generations’ prospects.
Now, as the pendulum swings back, it risks overshooting the optimal combination of private and public activity and ending up at a simplistic view of government as the problem and the private sector as the solution.
If this occurs, the outlook for faster, more inclusive growth would be weakened further.
Government has a long pro-growth to-do list heading into 2014.
The top priorities include modernizing the country’s transport and energy infrastructure, reforming an underperforming education system, improving the labor market, bringing order to an overly-fragmented fiscal structure, enhancing the provision of public goods, and safeguarding America’s interests abroad.
It is tempting for politicians and analysts to overplay simple narratives that place the blame entirely on one side or the other.
The truth is more nuanced and complex.
America is in desperate need of a Congress that encourages, rather than impedes, better partnerships between the public and private sectors.
Constantly pitting one side against the other may make for entertaining roundtables on cable television and energizing political rallies.
But it comes at the cost of undermining an economy that could – and therefore should – be performing much better.
Mexico’s Breakout Moment?
MEXICO CITY – Less than two years into Enrique Peña Nieto’s presidency, Mexico is implementing an ambitious structural-reform package designed to lift its economy out of a multi-decade low-growth trap and create new opportunities for its citizens.
The reforms involve restructuring economic sectors once deemed politically untouchable, and are backed by constitutional amendments and a bold legislative agenda.
Indeed, thanks to the “Pact for Mexico,” much of this agenda has the support not only of Peña Nieto’s government, but also of the two main opposition parties.
This unique arrangement soon will be tested as the reforms begin to bite, and the outcome could have important and lasting consequences for efforts to implement structural reforms elsewhere around the world.
Such reforms are never easy to initiate and are usually difficult to complete.
Politicians advocate them when they are in opposition, but rarely embrace and sustain them when in government.
The reason is simple: front-loaded costs and back-loaded benefits make structural reforms politically perilous.
Governments that do embark on structural reform often find it frustrating to wait for that often-elusive “critical mass” of revitalized sectors to materialize; and economists find it very difficult to predict the timing and magnitude of the growth liftoff that should follow.
Complicating matters further, the inevitability of unanticipated developments, whether homegrown or external in origin, means that course corrections often are needed.
As a result, there are only a few good historical examples – including China, Poland, and South Korea – of successful structural reforms.
And many dismiss countries that succeed as “special” or “unique” – and thus of little value as a model for other countries to emulate.
Against this background, it is fascinating to observe what is happening in Mexico.
The “why,” “how,” and “what” of the country’s ambitious structural-reform efforts could – and should – have important signaling effects around the world.
Mexican officials are the first to point out their country’s relatively poor economic performance over the last 33 years.
Average annual growth, at only 2.4%, is well below what is needed and possible for a country with such enormous human and natural endowments, a prime location on the United States’ doorstep, and considerable catch-up potential.
Moreover, Mexico’s growth record is far inferior to that of some other countries that started with a lot less and yet leap-frogged it (and other Latin American economies).
Policymakers could easily dodge responsibility for Mexico’s middling performance by hiding behind the various emerging-market crises, Latin America’s “lost decade,” and the impact of the 2008 global financial crisis and the subsequent Great Recession.
But Mexico’s officials are not looking for excuses.
Instead, they point to domestic indicators showing poor productivity and competitiveness, both over time and relative to other countries.
They also note that Mexico’s impressive accomplishments in terms of macroeconomic stabilization, while necessary, have not proved sufficient to unleash the country’s growth potential.
Yes, Mexico has built strong domestic and foreign financial buffers, put its fiscal house in order, opened up its economy to the outside world, and concluded many free-trade arrangements, led by the North American Free Trade Agreement.
But now the time has come to build on this progress by simultaneously reforming five large and influential sectors: education, energy, finance, telecommunications, and the labor market.
And Peña Nieto’s government has worked hard – and successfully – in recent months to adopt the necessary constitutional amendments and enact initial legislation.
At least three of these areas – education, energy, and the labor market – were long deemed untouchable or nearly so.
Indeed, I remember my own experience in Mexico in the late 1980s and early 1990s, when I was part of the International Monetary Fund’s team working with officials there to assist with the country’s recovery from the Latin American debt crisis.
Any mention of energy reforms was met with immediate resistance, including references to national sovereignty and constitutional protections.
Today, Mexico is seeking long-term foreign investors to support ambitious and comprehensive reform efforts, with foreign participation particularly important for infrastructure investments in telecom networks, toll roads, gas pipelines, and, down the road, the oil sector.
All of this is anchored by a clear political mandate, as well as by Peña Nieto’s stated personal commitment to overcome three decades of inadequate growth and productivity deficits.
Given the possibility of a domestic political backlash, the inherent complexities of implementing a multi-dimensional reform package, and the cyclical headwinds implied by still-sluggish growth in the US (which accounts for roughly 80% of exports), Mexico may need both anchors if it is to sustain reform momentum.
Fortunately, the government has room for countercyclical policy, and has already responded with more accommodating fiscal and monetary policies.
Mexico has a good chance to realize its impressive structural-reform agenda.
Doing so would give the rest of the world an important example of how such programs can be designed and implemented for the long term, thereby enabling a critical mass of strong sectors – and thus faster growth and greater prosperity – to be achieved and citizens’ legitimate aspirations to be met.
Wallets Wide Shut
NEWPORT BEACH, CALIFORNIA – Some economists, like Larry Summers, call it “secular stagnation.”
Others refer to it as “Japanization.”
But all agree that after too many years of inadequate growth in advanced economies, substantial longer-term risks have emerged, not only for the wellbeing of these countries’ citizens but also for the health and stability of the global economy.
Those looking for ways to reduce the risks of inadequate growth agree that, of all possible solutions, increased business investment can make the biggest difference.
And many medium-size and large companies, having recovered impressively from the huge shock of the 2008 global financial crisis and subsequent recession, now have the wherewithal to invest in new plants, equipment, and hiring.
Indeed, with profitability at or near record levels, cash holdings by the corporate sector in the United States have piled up quarter after quarter, reaching all-time highs – and earning very little at today’s near-zero interest rates.
Moreover, because companies have significantly improved their operating efficiency and lengthened the maturities on their debt, they need a lot less precautionary savings than they did in the past.
However one looks at it, the corporate sector in advanced economies in general, and in the US in particular, is as strong as it has been in many years.
Non-financial firms have achieved a mix of resilience and agility that contrasts sharply with prevailing conditions for some households and governments around the world that have yet to confront adequately a legacy of over-leverage.
But, rather than deploy their abundant cash in new investments to expand capacity and tap new markets – which they have been very hesitant to do since the global financial crisis erupted – many companies have so far preferred (or have been pressured by activist investors) to give it back to shareholders.
Last year alone, US companies authorized more than $600 billion of share buybacks – an impressive amount by any measure, and a record high.
Moreover, many companies boosted their quarterly dividend payouts to shareholders.
Such activity continued in the first two months of 2014.
But, while shareholders have clearly benefited from companies’ unwillingness to invest their ample cash, the bulk of the injected money has been circulating only in the financial sector.
Little of it has directly benefited economies that are struggling to boost their growth rates, expand employment, avoid creating a lost generation of workers, and address excessive income inequality.
If advanced economies are to prosper, it is necessary (though not sufficient) that the corporate sector’s willingness to invest match its considerable wallet.
Six factors appear to pose particularly important constraints.
First, companies are concerned about future demand for their products.
The recent economic recovery, as muted as it has been (both in absolute terms and relative to most expectations), has been driven by the experimental policies that central banks have pursued to sustain consumption.
Now, with the US Federal Reserve beginning to withdraw monetary stimulus, and with growth in emerging countries slowing, most companies are simply unable to point to massive expansion opportunities.
Second, with China such an influential driver of global demand (both directly and indirectly through important network effects), the outlook for the world’s second-largest economy has a disproportionate impact on projections of global corporate revenues.
And, as China’s excessive domestic credit growth and shadow-banking system attract increased attention, many companies are becoming anxious.
Third, while companies recognize that innovation is a key comparative advantage in today’s global economy, they are also humbled by its increasingly winner-take-all nature.
Successful innovation today is a lot less about financing and much more about finding the “killer app.”
As a result, many companies, less convinced that “normal” innovation yields big payoffs, end up investing less overall than they did before.
Fourth, the longer-term cost-benefit analysis for would-be investors is clouded by legitimate questions about certain operating environments.
In the US, many companies expect major budgetary reform; but they are not yet able to assess the impact on their future operating profits.
In Europe, politicians are aware of the need for major structural reforms, including those required to solidify regional integration; but companies lack adequate clarity about the components of such reforms.
Fifth, the scope for risk mitigation is not as large as financial advances would initially suggest.
Yes, companies have more hedging tools at their disposal.
But the ability to manage downside risk comprehensively is still limited by incomplete longer-term markets and public-private partnerships that cannot be sufficiently leveraged.
Finally, most corporate leaders recognize that they owe a large debt of gratitude to central bankers for the relative tranquility of recent years.
Through bold policy experiments, central bankers succeeded in avoiding a global multi-year depression and buying time for companies to heal.
But, working essentially alone, central banks have not been able to revamp properly the advanced economies’ growth engines; nor do they have the tools to do so.
Though many corporate leaders may still be unable to grasp the precise threats, they seem uneasy about the longer-term collateral damage implied by running modern market economies at artificially repressed interest rates and with bloated central-bank balance sheets.
The good news is that each of these constraints on investment can – and should – be addressed; and recent US business investment data suggest some progress.
The bad news is that it will take a lot more time, effort, and global coordination.
In the meantime, the corporate sector will only gradually take on more of the heavy lifting.
That will be enough to keep the advanced economies growing this year; unfortunately, it will not be enough to attain the faster growth that their citizens’ wellbeing – and that of the global economy – urgently requires.
The Uncertain Future of Central Bank Supremacy
NEWPORT BEACH – History is full of people and institutions that rose to positions of supremacy only to come crashing down.
In most cases, hubris – a sense of invincibility fed by uncontested power – was their undoing.
In other cases, however, both the rise and the fall stemmed more from the unwarranted expectations of those around them.
Over the last few years, the central banks of the largest advanced economies have assumed a quasi-dominant policymaking position.
In 2008, they were called upon to fix financial-market dysfunction before it tipped the world into Great Depression II.
In the five years since then, they have taken on greater responsibility for delivering a growing list of economic and financial outcomes.
The more responsibilities central banks have acquired, the greater the expectations for what they can achieve, especially with regard to the much-sought-after trifecta of greater financial stability, faster economic growth, and more buoyant job creation.
And governments that once resented central banks’ power are now happy to have them compensate for their own economic-governance shortfalls – so much so that some legislatures seem to feel empowered to lapse repeatedly into irresponsible behavior.
Advanced-country central banks never aspired to their current position; they got there because, at every stage, the alternatives seemed to imply a worse outcome for society.
Indeed, central banks’ assumption of additional responsibilities has been motivated less by a desire for greater power than by a sense of moral obligation, and most central bankers are only reluctantly embracing their new role and visibility.
With other policymaking entities sidelined by an unusual degree of domestic and regional political polarization, advanced-country central banks felt obliged to act on their greater operational autonomy and relative political independence.
At every stage, their hope was to buy time for other policymakers to get their act together, only to find themselves forced to look for ways to buy even more time.
Central banks were among the first to warn that their ability to compensate for others’ inaction is neither endless nor risk-free.
They acknowledged early on that they were using imperfect and untested tools.
And they have repeatedly cautioned that the longer they remain in their current position, the greater the risk that their good work will be associated with mounting collateral damage and unintended consequences.
The trouble is that few outsiders seem to be listening, much less preparing to confront the eventual limits of central-bank effectiveness.
As a result, they risk aggravating the potential challenges.
This is particularly true of those policymaking entities that possess much better tools for addressing advanced economies’ growth and employment problems. Rather than use the opportunity provided by central banks’ unconventional monetary policies to respond effectively, too many of them have slipped into an essentially dormant mode of inaction and denial.
In the United States, for the fifth year in a row, Congress has yet to pass a full-fledged budget, let alone dealt with the economy’s growth and employment headwinds.
In the eurozone, fiscal integration and pro-growth regional initiatives have essentially stalled, as have banking initiatives that are outside the direct purview of the European Central Bank.
Even Japan is a question mark, though it was a change of government that pushed the central bank to exceed (in relative terms) the Federal Reserve’s own unconventional balance-sheet operations.
Markets, too, have fallen into a state of relative complacency.
Comforted by the notion of a “central-bank put,” many investors have been willing to “look through” countries’ unbalanced economic policies, as well as the severe political polarization that now prevails in some of them.
The result is financial risk-taking that exceeds what would be warranted strictly by underlying fundamentals – a phenomenon that has been turbocharged by the short-term nature of incentive structures and the lucrative market opportunities afforded until now by central banks’ assurance of generous liquidity conditions.
By contrast, non-financial companies seem to take a more nuanced approach to central banks’ role.
Central banks’ mystique, enigmatic policy instruments, and virtually unconstrained access to the printing press undoubtedly captivate some.
Others, particularly large corporates, appear more skeptical.
Doubting the multi-year sustainability of current economic policy, they are holding back on long-term investments and, instead, opting for higher self-insurance.
Of course, all problems would quickly disappear if central banks were to succeed in delivering a durable economic recovery: sustained rapid growth, strong job creation, stable financial conditions, and more inclusive prosperity.
But central banks cannot do it alone. Their inevitably imperfect measures need to be supplemented by more timely and comprehensive responses by other policymaking entities – and that, in turn, requires much more constructive national, regional, and global political paradigms.
Having been pushed into an abnormal position of policy supremacy, central banks – and those who have become dependent on their ultra-activist policymaking – would be well advised to consider what may lie ahead and what to do now to minimize related risks.
Based on current trends, central banks’ reputation increasingly will be in the hands of outsiders – feuding politicians, other (less-responsive) policymaking entities, and markets that have over-estimated the monetary authorities’ power.
Pushed into an unenviable position, advanced-country central banks are risking more than their standing in society. They are also putting on the line their political independence and the hard-won credibility needed to influence private-sector behavior.
It is in no one’s interest to see these critical institutions come crashing down.
The Fragmentation of Bretton Woods
LAGUNA BEACH – The world has changed considerably since political leaders from the 44 Allied countries met in 1944 in Bretton Woods, New Hampshire, to create the institutional framework for the post-World War II economic and monetary order.
What has not changed in the last 70 years is the need for strong multilateral institutions.
Yet national political support for the Bretton Woods institutions – the International Monetary Fund and the World Bank – seems to have reached an all-time low, undermining the global economy’s ability to meet its potential and contributing to geopolitical insecurity.
When the Bretton Woods conference was convened, its participants understood that the IMF and the World Bank were integral to global stability.
Indeed, both institutions were designed to discourage individual countries from adopting short-sighted policies that would harm other economies’ performance, incite retaliatory action, and ultimately damage the entire world economy.
In other words, they were intended to prevent the kind of beggar-thy-neighbor policies that many major economies adopted during the Great Depression of the 1930s.
Moreover, by encouraging better policy coordination and the pooling of financial resources, the Bretton Woods institutions boosted the effectiveness of international cooperation.
And they enhanced stability by offering collective insurance to countries facing temporary hardship or struggling to meet their development-financing needs.
It is difficult to identify more than a small handful of countries that have not benefited in some way from the IMF or the World Bank.
Yet countries seem hesitant to contribute to the reform and strengthening of these institutions.
In fact, a growing number of systemically important countries have taken measures that are undermining the Fund and the Bank, albeit largely inadvertently.
In recent years, mounting domestic political pressure has driven Western governments to adopt increasingly insular policies.
And, just a few weeks ago, the BRICS countries (Brazil, Russia, India, China, and South Africa) acted to bolster a currency-reserve pool to help ease short-term liquidity pressures and to establish their own development bank – a direct challenge to the IMF and the World Bank.
Indeed, unlike existing parallel arrangements, which have always been regional in nature and intended to complement the work of the IMF and the World Bank, the BRICS’ New Development Bank and contingent reserve agreement are not based on cultural, geographical, or historical links.
Instead, they are founded on a shared frustration with the outmoded entitlements to which the US and Europe are clinging – entitlements that are diminishing the Bretton Woods institutions’ credibility and effectiveness.
Most important, Europe and the US continue to resist the full dismantling of a nationality-based appointment system that favors their citizens for the highest leadership positions at the IMF and the World Bank, despite offering the occasional promise of change.
Moreover, they have stifled efforts to recalibrate the balance of representation even marginally.
As a result, Western Europe enjoys a massively disproportionate level of representation, and emerging economies, despite their increasing systemic importance, barely have a voice.
And, during the eurozone’s debt crisis, European leaders showed little hesitation in bullying the IMF into flouting its own lending rules.
In this sense, it is the countries that spearheaded the creation of the Bretton Woods institutions that pose the greatest threat to their legitimacy, impact, and, ultimately, relevance.
After all, emerging economies cannot reasonably be expected to support institutions that offer unfair advantages to countries that so often preach the importance of meritocracy, competition, and transparency.
That is why they are now determined to use their collective economic weight to circumvent these institutions.
Another challenge to the international monetary system lies in the proliferation of bilateral payment agreements.
By bypassing more efficient and inclusive structures, these arrangements undermine multilateralism.
In some cases, they even conflict with countries’ obligations under the Bretton Woods Articles of Agreement.
The consequences of this gradual process of fragmentation extend well beyond lost economic and financial opportunities, to include weaker political cooperation, reduced interdependencies, and, in turn, growing geopolitical risks.
One need look no further than the current turmoil in Ukraine or Iraq to understand what can happen in the absence of credible multilateral structures capable of shaping developments in crisis situations.
So much for the problems.
What about the solutions?
Simply put, the IMF and the World Bank urgently need self-reinforcing reforms.
With a few key measures – none of which is technically complicated – the Bretton Woods institutions can move beyond the mindset of 1944 to reflect today’s realities and enhance tomorrow’s opportunities.
Such reforms include the elimination of nationality-based hiring; adjustments to representation, with emerging economies gaining more influence at the expense of Europe; and more equality and evenhandedness in lending and economic-surveillance decisions.
The challenge will be to overcome political resistance – no small feat at a time when domestic polarization has made politicians wary of publicly supporting economic multilateralism.
The repeated rejection by the US Congress of a much more limited set of reforms – which was approved by most other countries in 2010-12, imposes no incremental financial obligations on the US, and implies no reduction in America’s voting power or influence – is a case in point.
Enlightened self-interest must overcome such political obstacles.
The longer that world leaders resist the overwhelming need for reform, the worse the world’s future economic and financial prospects – not to mention its security situation – will be.
Egypt’s Monster in the Making
BRUSSELS – On December 15, Egypt’s draft constitution is due to be put to a referendum.
A year ago, Egyptians were thrilled to know that finally their country’s constitution would reflect their democratic hopes and aspirations.
Yet the document that they will now vote on is more likely to dash those hopes and dim Egyptians’ prospects for democracy.
The constitutional drafting process was rushed, without the input of liberals, non-Muslims, and women, all of whom boycotted the process, owing to the preponderance of Islamists.
The Muslim Brotherhood, and primarily President Mohamed Morsi, is banking on the assumption that the strength of Egypt’s Islamist vote will earn him enough support among “regular Egyptians,” and that the opposition will have little impact on the referendum’s outcome.
One political adviser for the ruling Freedom and Justice Party – the Muslim Brotherhood’s political wing – even boasted that the Brothers could easily mobilize 20 million supporters.
The Brothers dismiss those who have demonstrated in the streets during the past three weeks as Mubarak sympathizers.
Morsi’s decision on November 22 to grant himself absolute authority for the spurious purpose of defending the revolution is not new for Egypt.
A succession of dictator-presidents ruled the country under a state of emergency for more than 40 years.
While Morsi has now bowed to pressure to annul a decree granting him powers without judicial oversight, it seems only yesterday that people were prepared to put their fears aside and trust that Morsi was ready to rule in the interests of all Egyptians.
Eric Trager of the Washington Institute for Near East Policy notes that Morsi’s previous role in the Muslim Brotherhood’s Guidance Council sheds some light on the motives behind his current behavior.
In the past, Morsi advocated a platform that excluded Christians from political life and granted Islamic scholars oversight authority to ensure that all legislation complied with Sharia law.
He also worked to expunge young members of the Freedom and Justice Party that he deemed to hold dissenting views.
While the draft constitution does contain positive provisions, many are causing concern.
For example, Article 11 authorizes the state to “safeguard ethics, public morality, and public order, and foster a high level of education and of religious and patriotic values.” This leaves plenty of room for interpretation by the government.
In addition, the mosque of al-Azhar is promised an advisory role in Islamic legislation.
The Brothers’ political opponents have not been silent.
On December 8, the National Salvation Front announced that the draft “does not represent the Egyptian people.” Moreover, ordinary Egyptians have responded viscerally and swiftly to Morsi’s moves, perhaps more so than he had anticipated.
Strikes were called, newspapers halted publication, and fears of widespread insurrection remain high.
Hundreds have been injured in street clashes in Cairo.
The president’s supporters have declared that “defending Morsi is defending Islam.”
Today, Morsi seems as besieged as Syria’s President Bashar al-Assad.
The military has barricaded the presidential palace and, until the results of the referendum are announced, they are under orders to protect Egypt’s state institutions.
Outside the Middle East, the United States has scaled back its relations with Egypt since the government’s weak response to the attack on the US embassy in September, which signaled a rapid deterioration in bilateral relations.
America’s main priority now is to ensure that the peace treaty with Israel is maintained.
The European Union cannot afford to engage in wishful thinking when it comes to Morsi’s ambitions and the Muslim Brotherhood’s agenda.
The EU’s “more for more” policy has made human rights a cornerstone of its foreign policy toward states in the Union’s neighborhood.
And, though Morsi’s recent role in mediating discussions between Hamas and the Israeli government was invaluable in preventing a serious regional conflict, his government’s actions are undermining prospects for further cooperation with Europe.
No matter how Morsi attempts to sideline his domestic opponents, Egypt is in no shape to ignore the rest of the world.
It lacks a stable economy, relying heavily on tourism and imports to feed the country’s more than 80 million people.
Power cuts and public-service strikes are a regular feature of daily life.
Egypt’s government needs to secure consistent foreign financing to keep the country afloat, providing leverage for international opposition to Morsi’s efforts to impose an agenda that runs contrary to Egyptians’ fundamental rights.
Egypt can thrive only on the basis of honest adherence to a democratic process.
The current constitutional crisis has caused many to wonder how Egypt will face future political tests.
The referendum’s outcome will prove an important guide regarding the direction the country is likely to take.
Will it embrace a new Islamic authoritarianism, or build the democracy that Egyptians have risked their lives to secure?
Egypt’s Democratic Dictator?
CAIRO – Mohamed Morsi, Egypt’s first-ever elected civilian president, recently granted himself sweeping temporary powers in order, he claims, to attain the objectives of the revolution that overthrew Hosni Mubarak’s dictatorship.
But the decrees incited strong opposition from many of the revolutionary forces that helped to overthrow Mubarak (as well as from forces loyal to him), with protests erupting anew in Cairo’s Tahrir Square.
Morsi has thus been put in the odd position of having to defend his decision against the protesters while simultaneously making common cause with them. “I share your dream of a constitution for all Egyptians and with three separate powers: executive, legislative, and judicial,” he told his opponents.
The new Constitutional Declaration, the Revolution Protection Law, and the new presidential decrees have several aims:
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To remove the public prosecutor, a Mubarak-era holdover who failed to convict dozens of that regime’s officials who had been charged with corruption and/or abuse of power;
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To protect the remaining elected and indirectly elected institutions (all of which have an Islamist majority) from dissolution by Constitutional Court judges (mostly Mubarak-era holdovers);
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To bring about retrials of Mubarak’s security generals;
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To compensate and provide pensions for the victims of repression during and after the revolution.
While most Egyptians may support Morsi’s aims, a dramatic expansion of presidential power in order to attain them was, for many, a step too far.&#160;
Given Egypt’s extreme polarization and distrust between its Islamist and secular forces, Morsi should have anticipated the protests.
Suspicion of the powerful, after all, has been one of the revolution’s animating factors.
Another is a “zero-sum” attitude: any achievement by Morsi is perceived by his opponents as a loss.
The anti-Morsi forces are sharply divided ideologically and politically.
Nobel laureate Mohamed ElBaradei, a liberal reformer, has little in common with Ahmed El-Zind, the head of the Judges Club and a Mubarak loyalist.
But the anti-Morsi forces that backed the revolution regard the price of cleansing the judiciary as too high, arguing that the constitutional declaration will lead to dictatorship.
Indeed, the declaration protects presidential decrees from judicial review (although Morsi stipulated that it pertains only to “sovereignty” matters, and stressed its temporary nature).
It also gives the president emergency-like power to fight vague threats, such as those “endangering the life of the nation.”
Only if the new draft constitution is upheld in a popular referendum on December 15 will these provisions be annulled.
But the opposition factions have not been adhering to democratic principles, either.
Mostly comprising electoral losers and remnants of Mubarak’s regime, some aim to topple Morsi, not just get him to backtrack on his decree.
ElBaradei, for example, “expects” the army to do its national duty and intervene if “things get out of hand” – hardly a compelling democratic stance, given the army’s track record.
Morsi’s decrees have undoubtedly polarized Egyptian politics further.
The worst-case scenario is street clashes between pro- and anti-Morsi hardliners.
Historically, such clashes have often sparked civil war (for example, Spain in 1936 or Tajikistan in 1992) or brutal military coups (as in Indonesia in 1965 and Turkey in 1980).
For Morsi and his supporters, it was imperative to neutralize the Constitutional Court judges, whose ruling last June dissolved the first freely elected, post-revolution People’s Assembly (the parliament’s lower house).
According to the Morsi camp, the politicized Court intended to dissolve the Consultative Council (the upper house) and the Constitutional Assembly, as some of its judges publicly hinted.
Likewise, the sacked public prosecutor had failed to present any solid evidence against those of Mubarak’s security chiefs and officers who were accused of killing protestors, leading to acquittals for almost all of them.
As a president who was elected with only a 51.7% majority, Morsi needs to be sensitive to the demands of his supporters, mainly the Islamists and revolutionaries victimized by the security forces.
But, for many revolutionaries, there were other ways to sack a tainted prosecutor and cleanse the judiciary.
For example, a new law regulating the judiciary has been a demand of the revolution since its early weeks.
For Morsi, the dilemma was that the Constitutional Court could strike down the law, rendering the effort meaningless.
He had already backed off twice: once in July 2012, when he abandoned his effort, under pressure from the Supreme Council of the Armed Forces, to reinstate the elected parliament; and once when he tried to remove the public prosecutor by making him Egypt’s ambassador to the Holy See.
Morsi’s “Constitutional Declaration” was a decisive – though undemocratic, polarizing, and thus politically costly – step to break the impasse.
And, while such decrees have led to dictatorships, not democracies, in other countries undergoing political transition, none had a politicized judicial entity that played the role of spoiler in the democratization process.
Indeed, almost two years after the revolution began, Egypt’s security forces have not been reformed in any meaningful way.
Now, Morsi, in his effort to force out the prosecutor, will have to avoid opening another front with the Mubarak-era security generals, whom he will need to protect state institutions and maintain a minimum level of public security.
The security sector may, it seems, emerge from this crisis as the only winner.
It will enforce the rule of law, but only for a price.
That price will be reflected in the constitution, as well as in the unwritten rules of Egypt’s new politics.
This constitutes a much more serious and lasting threat to Egypt’s democratization than do Morsi’s temporary decrees.
The End of the Two-State Solution
BANGALORE – US Secretary of State John Kerry’s valiant effort to save the Israeli-Palestinian peace process is about to end in failure.
Though achieving a substantive settlement was always a pipe dream, this latest disappointment will render the United States unable to preserve even the façade of a “peace process” that was all process and no peace.
And that might not be such a bad thing.
The negotiations are failing for several reasons, beginning with Israel’s continued colonization of lands occupied in 1967, despite opposition from the international community, including the US.
If anything, Israel has accelerated settlement construction since the latest round of talks began, while escalating its demands, especially regarding the stationing of Israeli troops in the Jordan Valley.
Releasing a few dozen Palestinian prisoners is no substitute for genuine concessions on these contentious issues.
Making matters worse, the US has continually refrained from using its substantial leverage to compel Israel to change course, owing to the domestic political strength of the pro-Israel lobby, especially the American Israel Public Affairs Committee.
Tellingly, Kerry appointed Martin Indyk – a British-born Australian citizen, who began his political career in the US working for AIPAC in the early 1980s – as the principal US facilitator.
Another obstacle to a peace agreement has been the division between Hamas-controlled Gaza and the Fatah-controlled West Bank.
This, too, is rooted in American and Israeli intransigence – specifically, their refusal to accept Hamas’s victory in the 2006 election and recognize the group as the legitimate Palestinian representative.
This policy encouraged Fatah not to cede any power to Hamas in the West Bank, engendering the split in occupied Palestine.
In the latest round of negotiations, however, this division has not been a major obstacle, because Hamas remained on the sidelines – neither participating nor seeking to play a spoiler role.
This decision may have stemmed from an assumption that the talks would collapse, thereby discrediting the Fatah-dominated Palestinian Authority.
Regardless, the division among Palestinians cannot be blamed for the talks’ failure this time.
This brings us back to Israel’s continued colonization of Palestinian land, which all but excludes the possibility of a two-state solution.
Add to that the Israeli right’s insistence that no concessions are possible on territorial issues, Jerusalem, or the Palestinians’ right of return, and it is clear that Kerry never really had a chance.
Perhaps the clearest indication of Israel’s obstinacy came from its economy minister, Naftali Bennett, last July. “The idea that a Palestinian state should be established within the Land of Israel has reached a dead end,” he declared.
Paradoxically, the discerning Palestinian observer may find comfort in America’s failure to stop Israel from expanding its settlements (and thus effectively annexing a growing share of Palestinian land), for it ends the charade on which the peace process has been based.
The most likely outcome now is the establishment of a single unified country within the borders of the 1922 British Mandate for Palestine, including all of present-day Israel and the occupied territories.
In other words, Israel and Palestine are moving inexorably toward the establishment of a binational state between the Jordan River and the Mediterranean Sea.
Such a state will be based on one of two mutually exclusive principles: equal rights for all of its inhabitants or some form of apartheid, characterized by Jewish control and Palestinian subordination.
The problem for Palestinians is that Jewish Israelis would have more clout in directing this unified state’s development, and they are unlikely to choose equality on their own.
After all, granting equal political and civil rights to all citizens would diminish the country’s exclusivist Jewish character, reversing Zionist goals and achievements – an outcome that most of Israel’s Jewish population would reject.
Calling the country “Israel” would be inadequate to moderate this resistance.
The international community would probably respond to the emergence of an apartheid state with opprobrium and ostracize Israel, regardless of American protests.
Moreover, conflict within such a country would be bound to spill over its borders, possibly sparking a major regional conflagration.
This would have serious consequences for the US and other staunch Western supporters of Israel that have major strategic and economic interests in the region.
It is time, therefore, for the US to rethink its policy toward the Israel-Palestine conflict.
Instead of pursuing the mirage of a two-state solution, the US should use its leverage in the region to clear the way for the emergence of a binational, democratic state that guarantees full political and civil equality for all of its inhabitants.
This may not be an ideal solution for any of the parties to the Israel-Palestine conflict, but it is far better than the alternative: an apartheid state that is likely to further destabilize the Middle East and lead to a never-ending cycle of conflict in the region.
ISIS के ख़िलाफ़ बौद्धिक लड़ाई
दुबई - वैश्विक वित्तीय संकट ने दुनिया को सिखाया है कि हमारी अर्थव्यवस्थाएँ कितनी गहराई से अन्योन्याश्रित बन गई हैं। उग्रवाद के आज के संकट में, हमें इस बात को समझना चाहिए कि हम अपनी सुरक्षा के लिए उतने ही अन्योन्याश्रित हैं, जितना ISIS को हराने के लिए वर्तमान संघर्ष में स्पष्ट है।
अगर हमें ISIS को यह पाठ हमें कठोर तरीके से सिखाने से रोकना है, तो हमें यह स्वीकार करना होगा कि हम कट्टरता की आग को केवल बल के द्वारा नहीं बुझा सकते। दुनिया को ऐसी विचारधारा की साख को ख़त्म करने के लिए एकजुट होकर समग्र संचालन करना होगा जो चरमपंथियों को उनकी शक्ति देती है, और उन लोगों के लिए आशा और गरिमा बहाल करनी होगी जिन्हें वे भरती करेंगे।
ISIS निश्चित रूप से अंतर्राष्ट्रीय गठबंधन द्वारा सेना से पराजित की जा सकती है - और की जाएगी - जो अब इकट्ठा हो रहा है और जिसका संयुक्त अरब अमीरात सक्रिय रूप से समर्थन कर रहा है। लेकिन सेना द्वारा काबू किया जाना केवल आंशिक समाधान है। स्थायी शांति के लिए तीन अन्य घटकों की ज़रूरत है: विचारों की लड़ाई जीतना; कमज़ोर शासन का उन्नयन करना; और ज़मीनी स्तर पर मानव विकास का समर्थन करना।
इस तरह का समाधान ठोस अंतर्राष्ट्रीय राजनीतिक इच्छाशक्ति के साथ शुरू होना चाहिए। उत्तरी अमेरिका, यूरोप, अफ़्रीका, या एशिया में एक भी राजनेता मध्य पूर्व में घटनाओं की अनदेखी नहीं कर सकता। वैश्विक ख़तरे के लिए वैश्विक प्रतिक्रिया की ज़रूरत है। हर किसी को आँच महसूस होगी, क्योंकि ऐसी लपटें किसी सीमा को नहीं जानतीं; दरअसल, ISIS ने कम-से-कम 80 राष्ट्रिकताओं के सदस्यों को भरती किया है।
ISIS बर्बर और क्रूर संगठन है। यह न तो इस्लाम का प्रतिनिधित्व करता है और न ही मानवता के सबसे बुनियादी मूल्यों का। बहरहाल, यह उभरा है, फैला है, और इसने उनक��� विरोध किया है जो इसका विरोध करते हैं। हम जिससे लड़ रहे हैं वह केवल आतंकवादी संगठन नहीं है, बल्कि दुर्भावनापूर्ण विचारधारा का अवतार है जिसे बौद्धिक रूप से पराजित किया जाना चाहिए।
मैं इस विचारधारा को ऐसे सबसे बड़े ख़तरे के रूप में देखता हूँ जिसका दुनिया अगले दशक में सामना करेगी। इसके बीज यूरोप, अमेरिका, एशिया और अन्य जगहों पर विकसित हो रहे हैं। अपने विकृत धार्मिक मकसद के साथ, नफ़रत की यह पूर्व-पैकेज की गई फ़्रेंचाइज़ किसी भी आतंकवादी समूह द्वारा अपनाने के लिए उपलब्ध है। यह हज़ारों हताश, तामसिक, या क्रोधित युवाओं को जुटाने और सभ्यता की नींव पर हमला करने के लिए उनका इस्तेमाल करने की शक्ति रखती है।
ISIS को बल देने वाली यह विचारधारा अल कायदा और नाइजीरिया, पाकिस्तान, अफ़गानिस्तान, सोमालिया, यमन, उत्तरी अफ़्रीका, और अरब प्रायद्वीप में इसके सहयोगियों की विचारधारा के बहुत कुछ समान है। मेरे लिए सबसे चिंता की बात यह है कि एक दशक पहले, अल कायदा को, अफ़गानिस्तान की गुफाओं में आदिम आधार से भी, दुनिया को अस्थिर करने के लिए केवल ऐसी ही विचारधारा की ज़रूरत थी। आज, ISIS के अंतर्गत, अनुयायियों के पास प्रौद्योगिकी, वित्त, विशाल भूमि का आधार, और अंतर्राष्ट्रीय जिहादी नेटवर्क तक पहुँच है। पराजित होने की बात तो दूर है, क्रोध और नफरत की उनकी विचारधारा, ज़्यादा कठोर, ज़्यादा हानिकारक है, और ज़्यादा व्यापक बन गई है।
आतंकवादी समूहों का विनाश स्थायी शांति लाने के लिए काफ़ी नहीं है। हमें उनकी जड़ पर भी हमला करना चाहिए ताकि उनकी ख़तरनाक विचारधारा उस शक्ति से वंचित हो जाए जिससे वह निराशा और हताशा के माहौल से कमज़ोर लोगों के बीच फिर से पनप सके। और, इस बात पर, आइए हम सकारात्मक हो जाएँ।
समाधान के तीन घटक हैं। पहला है, घातक विचारों का मुकाबला प्रबुद्ध सोच, खुले दिमाग़, और सहिष्णुता और स्वीकृति के दृष्टिकोण से किया जाए। यह दृष्टिकोण हमारे इस्लामी धर्म से उत्पन्न होता है, जो शांति का आह्वान करता है, जीवन का सम्मान करता है, गरिमा का आदर करता है, मानव विकास को बढ़ावा देता है, और हमें दूसरों के लिए अच्छा करने का निर्देश देता है।
केवल एक बात उन आत्मघाती युवाओं को रोक सकती है जो ISIS के लिए मरने के लिए तैयार हैं: मज़बूत विचारधारा जो उनका सही रास्ते पर मार्गदर्शन करे और उनमें यह बोध पैदा करे कि भगवान ने हमें इस दुनिया को बेहतर बनाने के लिए बनाया है न कि इसे नष्ट करने के लिए। हम सऊदी अरब में अपने पड़ोसियों को देख सकते हैं जिन्होंने परामर्श केन्द्रों और कार्यक्रमों के माध्यम से अनेक युवाओं को कट्टरपंथ से दूर करने में शानदार सफलता हासिल की है। विचारधाराओं की इस लड़ाई में, मुसलमानों के बीच आध्यात्मिक और बौद्धिक दृष्टि से महत्वपूर्ण विचारक और वैज्ञानिक इस कार्य का नेतृत्व करने के लिए सबसे बेहतर स्थिति में हैं।
दूसरा घटक ऐसी स्थिर संस्थाएँ बनाने के लिए सरकारों के प्रयासों का समर्थन करना है जो अपने लोगों को असली सेवाएँ प्रदान कर सकती हैं। यह बात हर किसी को स्पष्ट होनी चाहिए कि ISIS के तीव्र विकास को सीरियाई और इराकी सरकार की असफलताओं ने गति दी थी: सीरिया ने अपने ही लोगों से युद्ध किया, और इराक ने सांप्रदायिक विभाजन को बढ़ावा दिया। जब सरकारें अस्थिरता, उचित शिकायतों, और लगातार गंभीर चुनौतियों के संबंध में कार्रवाई करने में विफल रहती हैं, तो वे घृणित विचारधारा के पनपने - और आतंकवादी संगठनों द्वारा उचितता के शून्य को भरने के लिए - आदर्श वातावरण तैयार करती हैं।
अंतिम घटक मानव विकास में व्याप्त उस कालिमा को तत्काल दूर करना है जिससे मध्य पूर्व के अनेक क्षेत्र पीड़ित हैं। यह केवल अरब देशों की ज़िम्मेदारी ही नहीं है, बल्कि अंतर्राष्ट्रीय ज़िम्मेदारी भी है, क्योंकि इस क्षेत्र के लोगों के लिए ज़मीनी स्तर पर अवसर और जीवन की बेहतर गुणवत्ता प्रदान करना अस्थिरता और संघर्ष की हमारी साझा समस्याओं के हल की गारंटी है। हमें ग़रीबी ख़त्म करने, शिक्षा और स्वास्थ्य में सुधार करने, बुनियादी ढाँचे का निर्माण करने, और आर्थिक अवसर पैदा करने के लिए लंबी अवधि की परियोजनाओं और पहल किए जाने की महत्वपूर्ण ज़रूरत है। सतत विकास आतंकवाद को दूर करने का सबसे टिकाऊ इलाज है।
हमारा क्षेत्र 200 मिलियन से ज़्यादा युवाओं का घर है। हमारे पास उन्हें आशा के साथ प्रेरित करने और उनकी ऊर्जा को उनके जीवन और उनके आसपास के लोगों के जीवन में सुधार लाने की ओर निर्देशित करने का अवसर है। अगर हम विफल होते हैं, तो हम उन्हें खालीपन, बेरोज़गारी और आतंकवाद की दुर्भावनापूर्ण विचारधाराओं के लिए छोड़ देंगे ।
हर रोज़ जब हम आर्थिक विकास उपलब्ध करने, नौकरियों का सृजन करने और जीवन स्तर को ऊपर उठाने की ओर क़दम उठाते हैं, तो हम निराशा का पोषण करने वाली भय और नफ़रत की विचारधारा को कमज़ोर करते हैं। हम आतंकवादी संगठनों के अस्तित्व में बने रहने के कारण को हटाते हैं।
मैं आशापूर्ण हूँ, क्योंकि मैं जानता हूँ कि मध्य पूर्व के लोगों के पास आशा की शक्ति और स्थिरता और समृद्धि के लिए इच्छा है जो अवसरवादी और विनाशकारी विचारों से ज़्यादा मज़बूत और ज़्यादा टिकाऊ हैं। बेहतर जीवन के लिए आशा से ज़्यादा मज़बूत कोई शक्ति नहीं होती।
प्रतिभा पुनआर्गमन
दुबई. सन् 1968 में जब मैं युनाइटेड किंगडम के मॉन्स ऑफिसर कैडेट स्कूल में पढ़ रहा था तब मुझे अस्पताल जाने की जरूरत पड़ी. वहां पर मुझे एक डॉक्टर मिला जो धाराप्रवाह अरबी बोल रहा था. मुझे घोर आश्चर्य हुआ. बातचीत में मुझे पता चला कि वह यूके में नया था. इसलिए मैंने उससे जानना चाहा कि उसका वहां लंबे समय तक रुकने का इरादा था या वह जल्द ही घर लौट जाएगा. उसने अरबी की एक कहावत में जवाब दिया जिसका अर्थ हैः ‘मेरा घर वहीं है जहां मैं खाना खा सकता हूं’.
डॉक्टर के शब्द वर्षों तक मेरे जहन में गूंजते रहे. दरअसल वे उस विरोधाभास को रेखांकित करते हैं जो ‘घर’ के बारे में हमारी आदर्शवादी कल्पना और जीवन की कठोर सच्चाइयों के बीच विद्यमान है जिनके कारण प्रतिभाशाली लोग घर छोड़ देते हैं.
डॉक्टर ‘प्रतिभा पलायन’ का ठेठ उदाहरण था जिससे विकासशील देश दशकों से ग्रस्त हैं. ये देश अपने दुर्लभ संसाधनों का उपयोग कर डॉक्टर, इंजिनियर और वैज्ञानिक पैदा करते हैं इस उम्मीद में कि वे अपने देश को संपन्न बनाएंगे. लेकिन फिर वे निराश देखते रहते हैं कि वही डॉक्टर, इंजिनियर और वैज्ञानिक पश्चिम में जा बसते हैं और अपने साथ अपनी संभावनाओं से भरी प्रतिभा भी ले जाते हैं.
अवश्य ही हर व्यक्ति का अधिकार है कि वह दुनिया में कहीं भी बेहतर जिंदगी जी सके. हम समझते हैं कि वे क्यों जाते हैं. चुम्बक की तरह अवसर प्रतिभा को अपनी ओर खींचता है.
लेकिन जो देश वे छोड़ते हैं उनमें यह दुष्चक्र के समान हैः अवसर के निर्माण के लिए उन्हें प्रतिभा चाहिए; लेकिन अवसर के अभाव में यही प्रतिभा पश्चिम की चमकदार जीवनशैली की ओर आकर्षित होती है. संयुक्त राष्ट्र और ओईसीडी की रिपोर्ट कहती है कि सन् 2000 से काम की तलाश में प्रतिभा पलायन एक-तिहाई बढ़ा है. अफ्रीका के नौ में से एक स्नातक छात्र आज पश्चिम में रहता है और काम करता है. इनमें से अनेक कभी वापस नहीं आएंगे. कुशल कर्मिकों के तो बाहर बसने की संभ��वना छह गुना ज्यादा है.
पर अब कुछ उल्लेखनीय हो रहा है. कुछ देशों में प्रतिभा पलायन की दिशा उलटी हो गई है. इसके कारण अद्भुत हैं और आशावादी होने का कारण भी है कि अब इस दुष्चक्र को तोड़ा जा सकता है, और विकासशील व विकसित देशों के बीच उम्मीद और अवसर के बीच संतुलन कायम किया जा सकता है.
विश्व के सबसे बड़े पेशेवर नेटवर्क और नियुक्ति प्लैटफॉर्म लिंक्डइन के नए अध्ययन में इसके सदस्यों के बीच अंतर्राष्ट्रीय आवागमन को मापा गया. गंतव्य स्थलों की सूची में मेरा अपना देश संयुक्त अरब अमीरात सबसे ऊपर है.
2013 में यहां काम के लिए आने वाले कुशल कर्मिकों की तादाद में 1.3% का इजाफा हुआ. अन्य देश जिन्हें ‘प्रतिभा का चुम्बक’ कह सकते हैं उनमें साउदी अरब, नाइजीरिया, दक्षिण अफ्रीका, भारत और ब्राजील शामिल हैं.
सबसे दिलचस्प बात यह है कि इस प्रतिभा आगमन में एक-तिहाई से कुछ कम विकसित देशों से है. दरअसल, इस अध्ययन में जिन देशों से प्रतिभा का आगमन हुआ वे हैं स्पेन, फ्रांस, अमेरिका, इटली और आयरलैंड. अभी तक अमीर देश हमारे सबसे प्रखर मस्तिष्कों को अपने यहां खींचते थे. अब वही अपनी प्रतिभाओं को हमारे यहां भेज रहे हैं.
किन्तु यह मात्र एक अध्ययन है. अनेक गरीब देश अभी भी प्रतिभा पलायन की पुरानी बीमारी से पीडि़त हैं. ओईसीडी के आंकड़े दर्शाते हैं कि अफ्रीका और लैटिन अमेरिका के अनेक देशों से स्नातक लोगों के पलायन की दर आज भी 50% से ऊपर है.
हम जानते हैं कि सुरक्षा, संरक्षा और आर्थिक अवसरों के कारण प्रतिभा पलायन होता है. आपसी झगड़ों और अस्थिरता में उलझे मध्यपूर्वी देशों में त्रासदी ये है कि अगर उनके सर्वाधिक प्रतिभावान् बेटे-बेटियां अपने हुनर का अपने देश में ही उपयोग करें तभी वे समाधान का हिस्सा बन पाएंगे. यानी विकास के जरिये शांति को ला पाएंगे. इससे यह और भी महत्वपूर्ण बन जाता है कि इस बात की जांच की जाए कि कैसे कुछ विकासशील देश प्रतिभा पलायन के रुख को अपनी ओर मोड़ने में कामयाब रहे हैं.
इसमें बुनियादी अवयव है अवसर. प्रतिभा सहज ही उन देशों की ओर जाती है जो आर्थिक वृद्धि के अवसर निर्मित करते हैं; जो उद्यमी के जीवन को आसान बनाते हैं; जो निवेश को आकर्षित करते हैं, उसका स्वागत करते हैं और जो उपलब्धि हासिल करने के माहौल का पोषण करते हैं. हुनर चुनौती और संभावना की ओर आकर्षित होता है.
इस पैमाने पर पश्चिम के अनेक भागों में अवसर एक दुर्लभ वस्तु बन रहा है. लेकिन विकासशील देशों में ऐसा नहीं है - कम से कम उन देशों में जहां सशक्त शासन देने और प्रतिस्पर्धा निरंतर बढ़ाने की क्षुधा और दृढ़ता है.
दूसरे, जीवन की गुणवत्ता का बड़ा महत्त्व है. एक पीढ़ी पहले तक अनेक प्रतिभावान् लोग पश्चिम में काम करने को ‘मजबूरी भरा कदम’ मानते थे. आज मसलन संयुक्त अरब अमीरात में जीवन स्तर सारी दुनिया के मुकाबले सबसे ऊंचा है. हमने दिखा दिया है कि प्रतिभा पलायन को उलटने का व्यवसाय नागरिकों व रहवासियों के लिए बेहतर जिंदगी बनाने का व्यवसाय भी है. आखिर सभी जगह अच्छी सरकार का यही तो काम है - खुशियों का निर्माण.
खासकर मध्यपूर्व में हमारी कामयाबी की कहानी बड़ी उम्मीद की गाथा है. यहां पीढि़यों तक चले संघर्ष और निराशा के कारण ऊंचे स्तर पर प्रतिभा पलायन हुआ है. मैंने हमेशा कहा है कि अच्छे शासन के अलावा, अरब देशों में विभाजन और संघर्ष के सबसे अच्छे हल बुनियादी स्तर पर और आर्थिक अवसरों में छिपे हैं. अब हमने दिखा दिया है कि उन कारकों को उलटा जा सकता है जिनसे हमारे सर्वाधिक प्रतिभावान् युवा हमसे दूर चले गए थे.
एक और आशाजनक बात ये है कि यह बदलाव उल्लेखनीय रूप से जल्दी लाया जा सकता है. शोध दर्शाते हैं कि छोटे देश आनुपातिक तौर पर प्रतिभा पलायन से ज्यादा पीडि़त हैं. पर हमने दर्शाया है कि यूएई जैसे छोटे देश के लिए और संघर्ष के कारण विभाजित क्षेत्रों में भी अवसरों के निर्माण से वांछित परिणाम मिलते हैं.
एक बात साफ करना चाहूंगा कि प्रतिभा पलायन को उलटना मात्र एक छिद्र को भरने से कहीं अधिक है. इसका अर्थ है किसी दुष्चक्र को गुणात्मक रूप से बदलना. दुनियाभर से सर्वश्रेष्ठ प्रतिभाओं को आकर्षित कर हम एक जीवंत और विविधतापूर्ण समाज का निर्माण कर सकते हैं जो नवाचार और सम्पन्नता को गति प्रदान करे - जिससे और अधिक प्रतिभाओं को आकर्षित कर सकें.
इसे कारगर बनाने के लिए हमें लोगों में विश्वास करना होगा. मनुष्य, उनके विचार, अविष्कार, सपने और संपर्क भविष्य की पूंजी हैं. इस अर्थ में ‘प्रतिभा पुनआर्गमन’ अपने आप में कोई बड़ी उपलब्धि नहीं है. बल्कि यह विकास का अग्रणि संकेतक है. क्योंकि आज जहां महान मस्तिष्क जाते हैं वहां कल महान चीजें होती हैं.
The BIS Bashers
PRAGUE – It might seem an unlikely proposition, but central banking has become exciting.
This is not necessarily a welcome development.
Decisions taken by the leading monetary authorities since the 2008-2009 global financial crisis have been unorthodox, creative, and at times risky.
Their high-stakes choices today will affect the global economy for decades to come.
Moreover, central bankers have become more vocal in expressing strongly held positions in the mass media, as if seeking to win over popular opinion.
It is a potent and dangerous mix.
In this environment, sober, informed voices, like that of the Bank for International Settlements, the central bank of central banks, should also be given a fair hearing.
Unfortunately, many central bankers have sought to marginalize the BIS rather than engage with it.
One of the most contentious debates has been over when to end the “unconventional” monetary-policy measures that were introduced in the aftermath of the financial crisis to ensure that banks continued to lend, thereby stimulating growth and averting deflation.
Some central bankers now worry that ending these measures prematurely will tip the economy back into recession.
Yet others fear that the current strategy, though originally intended to prevent an economic collapse, is now sowing the seeds of future instability, including the emergence of another asset-price bubble.
In their efforts to resolve such dilemmas, policymakers are also wrestling over whether to focus on traditional monetary tools such as interest rates, or make greater use of so-called “macro-prudential measures,” such as capital add-ons and buffers or adjustments to banks’ loan-to-value ratios.
At the heart of the debate – currently being conducted within leading economies’ treasuries and central banks, as well as in supranational bodies such as the International Monetary Fund and the BIS – is the relationship between monetary policy and financial stability.
The BIS, for example, has suggested that financial stability is closely connected with monetary policy, and has advised policymakers to start weaning their economies off of easy money sooner rather than later.
Central bankers, however, seem to want to try macro-prudential tools first (and sometimes exclusively).
It is unusual to witness a clash of views among monetary policymakers that is so radical and clear-cut that it has grabbed wider political and media attention.
And, under the public spotlight, some central bankers have sought to downplay the BIS’s assessment, arguing that it is all too easy to issue far-reaching policy recommendations when one suffers none of the consequences should one’s prescription turn out to be wrong.
To be sure, a country’s domestic economic circumstances, and the tools available to policymakers, should guide policy. And, though monetary tightening may well be advisable in some economies, it might be inappropriate in others.
But the harsh reactions to the BIS’s analysis seem misplaced and unfair.
It is always difficult to find the right monetary-policy stance for any given economy at a given moment. Central banks employ an army of experts to try to get it right, and other institutions are seldom so well resourced to present equally sophisticated counter-arguments.
The BIS, however, is one of the few organizations that not only has the necessary research and analytical capabilities, but also a track record of making good calls.
One should not forget – as many central bankers appear to have done – that the BIS was one of the first to warn of the dangers of financial excesses, several years before the 2008 crisis.
The BIS has a right to be heard. It exists not just to represent central banks, but also to offer ideas and intellectual feedback.
Indeed, it serves policymakers well by challenging, debating, and perhaps swaying opinion.
Rather than bash the BIS, monetary authorities should be grateful for the informed perspectives that it provides.
Closing the Skills Gap
WASHINGTON, DC – In an age of skyrocketing unemployment, it may seem reasonable to assume that companies do not have to worry about finding workers.
But a recent McKinsey survey of more than 2,800 employers worldwide has underscored just how flawed that perception is.
Four out of ten employers said that they cannot find workers to fill entry-level positions in their firms, with more than one-third of respondents saying that their businesses are suffering from a lack of appropriate skills in the labor market.
Meanwhile, young people worldwide are struggling to find jobs.
While the eurozone crisis helps to explain why more than half of young people in Greece and Spain are unemployed, rapidly growing economies like South Africa and Nigeria are experiencing similar rates of youth joblessness.
In the Middle East and North Africa, one in three young people are unemployed.
And, in the United States, roughly half of bachelor’s degree-holders under the age of 25 were jobless or underemployed upon graduation last year.
All of this points to the costly skills mismatch at play in today’s economy.
In the US alone, the opportunity cost of failing to improve education would amount to $1.7 trillion by 2030.
Similarly, by bridging its growing skills gap, China could augment its GDP by $250 billion by 2020.
So why isn’t more being done to ensure that young people acquire the skills they need?
The problem is rooted in divergent perceptions among the various players in the labor market.
More than 70% of the educational institutions surveyed by McKinsey believe that their graduates are ready for the job market; more than half of employers and young people disagree.
Closing this gap requires that educators and employers work together more closely.
Employers should communicate their requirements to educators; educators need to give their graduates the tools that will enable them to meet these requirements.
The problem is missed connections, so the solution is to make more of them.
But such synchronization will not be easy to achieve.
One-third of employers never interact with education providers, while only 15% do so once a month or more.
Both sides would benefit from building strong reciprocal ties, with employers telling educators what they need (and even helping to design curricula and offering their employees as faculty) and educators providing students with practical experience and hands-on learning.
In fact, some promising initiatives are underway.
Many employers in the auto, tourism, advanced manufacturing, and shipbuilding industries have taken to “pre-hiring” young people – that is, guaranteeing them a job if they complete a rigorous training program.
A useful example is the cooperation between Brazil’s state-owned energy giant Petrobras and Prominp – a coalition of government agencies, businesses, trade associations, and labor unions – aimed at unleashing the full potential of the country’s oil and gas sector.
First, Petrobras and Prominp develop a five-year personnel projection in specific skill areas, such as shipyard welding, pipefitting, and petroleum engineering.
Prominp then identifies an education provider to co-develop an appropriate curriculum with selected companies and train 30,000 people annually.
Petrobras pays 90% of the costs, and the government covers the rest.
But such initiatives remain too few in number and too narrow in scope to resolve the global skills mismatch.
Moreover, developing effective programs requires far more data about young people’s journey from education to employment than is currently available.
Governments can play a critical role in collecting the data needed to determine which skills are in demand and what kind of training is effective.
For example, Colombia’s Labor Observatory tracks students’ progress – including where they attended university, what they studied, when and where they were first employed, what their starting salaries were, and whether they were promoted – for up to five years after graduation.
Prospective students can use this information to gain a far more accurate picture of their future prospects.
Of course, young people must become proactive if such schemes are to be effective.
Fewer than half of the young people that McKinsey surveyed claimed to have even basic knowledge of average wages or the prevalence of job opportunities in their chosen field.
Little wonder, then, that half of them were not convinced that their post-secondary studies had improved their employment opportunities.
Students must take ownership of their education.
Before enrolling in an academic or vocational program, prospective students should research job-placement rates and learn how and how often the institution interacts with employers.
Furthermore, they should gain a comprehensive understanding of how they can build and demonstrate applied skills in their chosen field.
More generally, they should use existing labor-market data to make better-informed choices.
If the world continues on its current course, labor-market imbalances will worsen significantly in the coming years.
Indeed, the world faces a potential shortage of 30-40 million college-educated workers in 2020, and a potential surplus of 95 million low-skilled workers.
The economic benefits of rebalancing the global labor market are compelling; the human costs of failing to do so are enormous.
The imperative for businesses, educators, governments, and young people to take action could not be stronger.
Monetary Policy and European Growth
An Accidental Currency War?
LAGUNA BEACH – Six and a half years after the global financial crisis, central banks in emerging and developed economies alike are continuing to pursue unprecedentedly activist – and unpredictable – monetary policy. How much road remains in this extraordinary journey?
In the last month alone, Australia, India, Mexico, and others have cut interest rates.
China has reduced reserve requirements on banks.
Denmark has taken its official deposit rate into negative territory.
Even the most stability-obsessed countries have made unexpected moves.
Beyond cutting interest rates, Switzerland suddenly abandoned its policy of partly pegging the franc's value to that of the euro.
A few days later, Singapore unexpectedly altered its exchange-rate regime, too.
More consequential, the European Central Bank has committed to a large and relatively open-ended program of large-scale asset purchases.
The ECB acted despite a growing chorus of warnings that monetary stimulus is not sufficient to promote durable growth, and that it encourages excessive risk-taking in financial markets, which could ultimately threaten economic stability and prosperity (as it did in 2008).
Even the US Federal Reserve, which is presiding over an economy that is performing far better than its developed-world counterparts, has reiterated the need for "patience" when it comes to raising interest rates.
This stance will be difficult to maintain, if continued robust job creation is accompanied by much-needed wage growth.
This new round of central-bank activism reflects persistent concerns about economic growth.
Despite a once-unthinkable amount of monetary stimulus, global output remains well below potential, with the potential itself at risk of being suppressed.
Making matters worse, weak demand and debt overhangs are fueling concerns about deflation in the eurozone and Japan.
Anticipating falling prices, households could postpone their consumption decisions, and companies could defer investment, pushing the economy into a downward spiral from which it would be very difficult to escape.
If weak demand and high debt were the only factors in play, the latest round of monetary stimulus would be analytically straightforward.
But they are not.
Key barriers to economic growth remain largely unaddressed – and central banks cannot tackle them alone.
For starters, central banks cannot deliver the structural components – for example, infrastructure investments, better-functioning labor markets, and pro-growth budget reforms – needed to drive robust and sustained recovery.
Nor can they resolve the aggregate-demand imbalance – that is, the disparity between the ability and the willingness of households, companies, and governments to spend.
And they cannot eliminate pockets of excessive indebtedness that inhibit new investment and growth.
It is little wonder, then, that monetary-policy instruments have become increasingly unreliable in generating economic growth, steady inflation, and financial stability.
Central banks have been forced onto a policy path that is far from ideal – not least because they increasingly risk inciting some of the zero-sum elements of an undeclared currency war.
With the notable exception of the Fed, central banks fear the impact of an appreciating currency on domestic companies' competitiveness too much not to intervene; indeed, an increasing number of them are working actively to weaken their currencies.
The "divergence" of economic performance and monetary policy among three of the world's most systemically important economies – the eurozone, Japan, and the United States – has added another layer of confusion for the rest of the world, with particularly significant implications for small, open economies.
Indeed, the surprising actions taken by Singapore and Switzerland were a direct response to this divergence, as was Denmark's decision to halt all sales of government securities, in order to push interest rates lower and counter upward pressure on the krone.
Of course, not all currencies can depreciate against one another at the same time.
But the current wave of efforts, despite being far from optimal, can persist for a while, so long as at least two conditions are met.
The first condition is America's continued willingness to tolerate a sharp appreciation of the dollar's exchange rate.
Given warnings from US companies about the impact of a stronger dollar on their earnings – not to mention signs of declining inward tourism and a deteriorating trade balance – this is not guaranteed.
Still, as long as the US maintains its pace of overall growth and job creation – a feasible outcome, given the relatively small contribution of foreign economic activity to the country's GDP – these developments are unlikely to trigger a political response for quite a while.
Indeed, America's intricate trade relations with the rest of the world – which place households and companies on both sides of the production and consumption equation – make it particularly difficult to stimulate significant political support for protectionism there.
The second condition for broad-based currency depreciation is financial markets' willingness to assume and maintain risk postures that are not yet validated by the economy's fundamentals.
With central banks – the de facto best friend of financial markets these days – pushing for increasingly large financial risk-taking (as a means of stimulating productive economic risk-taking), this is no easy feat. But, given the danger that this poses, one hopes that they succeed.
In any case, central banks will have to back off eventually.
The question is how hard the global economy's addiction to partial monetary-policy fixes will be to break – and whether a slide into a currency war could accelerate the timetable.
The Price Paradox
LONDON – In 1923, John Maynard Keynes addressed a fundamental economic question that remains valid today. “[I]nflation is unjust and deflation is inexpedient," he wrote.
“Of the two perhaps deflation is…the worse; because it is worse…to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other."
The logic of the argument seems irrefutable.
Because many contracts are “sticky" (that is, not easily revised) in monetary terms, inflation and deflation would both inflict damage on the economy.
Rising prices reduce the value of savings and pensions, while falling prices reduce profit expectations, encourage hoarding, and increase the real burden of debt.
Keynes's dictum has become the ruling wisdom of monetary policy (one of his few to survive).
Governments, according to the conventional wisdom, should aim for stable prices, with a slight bias toward inflation to stimulate the “animal spirits" of businessmen and shoppers.
In the ten years prior to the 2008 financial crisis, independent central banks set an inflation target of about 2%, in order to provide economies with a price-stability “anchor."
There should be no expectation that prices would be allowed to deviate, except temporarily, from the target.
Uncertainty relating to the future course of prices would be eliminated from business calculations.
Since 2008, the Federal Reserve Board and the European Central Bank have failed to meet the 2% inflation target in any year; the Bank of England (BoE) has been on target in only one year out of seven.
Moreover, in 2015, prices in the United States, the eurozone, and the United Kingdom are set to fall.
So what is left of the inflation anchor?
And what do falling prices mean for economic recovery?
The first thing to bear in mind is that the “anchor" was always as flimsy as the monetary theory on which it was based.
The price level at any time is the result of many factors, of which monetary policy is perhaps the least important.
Today, the collapse in the price of crude oil is probably the most significant factor driving inflation below target, just as in 2011 it was the rise in oil prices that drove it above target.
As British economist Roger Bootle pointed out in his 1996 book The Death of Inflation, the price-cutting effects of globalization have been a much more important influence on the price level than the anti-inflation policies of central banks.
Indeed, the post-crisis experience of quantitative easing has highlighted monetary policy's relative powerlessness to offset the global deflationary trend.
From 2009 to 2011, the BoE pumped £375 billion ($578 billion) into the British economy “to bring inflation back to target."
The Fed injected $3 trillion over a slightly longer period.
The most that can be claimed for this vast monetary expansion is that it produced a temporary “spike" in inflation.
The old adage applies: “You can lead a horse to water, but you can't make it drink."
If business prospects are weak, companies are unlikely to invest; if households are drowning in debt, they are unlikely to go on a spending spree.
The ECB is about to discover the truth of this as it starts on its own €1 trillion program of monetary expansion in an effort to stimulate the stagnant eurozone economy.
So what happens to the recovery if we fall into what is euphemistically called “negative inflation"?
Until now, the consensus view has been that this would be bad for output and employment.
Keynes gave the reason in 1923: “the fact of falling prices," he wrote, “injures entrepreneurs; consequently the fear of falling prices causes them to protect themselves by curtailing their operations."
But many commentators have been cheered by the prospect of falling prices.
They distinguish between “benign disinflation" and “bad deflation."
Benign disinflation means rising real incomes for lenders, pensioners, and workers, and falling energy prices for industry.
All sectors of the economy will spend more, pushing up output and employment (and sustaining the price level, too).
By contrast, “bad deflation" means an increase in the real burden of debt.
A debtor contracts to pay a fixed sum in interest every year.
If the value of money goes up (prices fall), the interest he pays will cost him more, in terms of goods and services he can buy, than if prices had stayed the same.
(In the reverse, inflationary case, the interest will cost him less.)
Thus, price deflation means debt inflation; and a higher debt burden means lower spending.
Given the huge levels of outstanding private and public debt, bad deflation, as Bootle writes, “is a nightmare almost beyond imagining."
But how can we stop benign disinflation from turning into bad deflation?
Apostles of monetary expansion believe that all you have to do is speed up the printing press.
But why should this be any more successful in the future than it has been in the last few years?
Avoiding deflation – and thus sustaining economic recovery – would seem to depend on one of two scenarios: either a rapid reversal in the fall of energy prices, or a deliberate policy to raise output and employment by means of public investment (which, as a byproduct, would bring about a rise in prices).
But this would mean reversing the priority given to deficit reduction.
No one can tell when the first will happen; and no governments are prepared to do the second.
So the most likely outcome is more of the same: continued drift in a state of semi-stagnation.
Farewell to Inflation Targeting?
NEWPORT BEACH – In a four-day period in mid-December, three seemingly unrelated developments suggested that modern central banking is in the midst of an historic change. The implications go well beyond academia and policy circles.
To the extent that this shift gains momentum – which appears likely – it will affect economic performance, the functioning of markets, and asset-price valuations.
The three developments began on December 12 in the United States, where the Federal Reserve, led by Ben Bernanke, announced that it will go much further than doubling (to $1 trillion) the volume of market securities that it intends to buy in 2013 in order to stimulate the economy.
The Fed also left no doubt that it will maintain its foot on the accelerator until the US unemployment rate declines significantly, at least to 6.5%, and as long as inflation is contained at or below 2.5%.
According to most analysts, the novelty in the announcement was the Fed’s willingness to be explicit about its quantitative policy thresholds and, therefore, about the future course of its monetary policy.
But my reading of what the Fed announced (and what Bernanke said in the subsequent press conference) suggests that the innovation goes beyond this.
The Fed is taking very different approaches to the specification of the two quantitative thresholds: unemployment will be based on historical data, while inflation will be based on the Fed’s own projections.
Most important, it prioritizes the unemployment objective over the inflation target.
This realignment of the Fed’s dual mandate, which I have called the “reverse Volcker moment,” has been evident for a few months.
Let me explain by going back to the end of the inflationary 1970’s, when President Jimmy Carter appointed Paul Volcker to lead the Fed.
In order to prevent pathological inflationary dynamics from becoming embedded even more deeply in the structure of the economy (including through wage indexation), Volcker dramatically changed the policy stance and made inflation public enemy number one.
The equivalent of today’s policy rate rose to 22% as he launched a bold anti-inflationary crusade, accepting significant upfront costs for gains down the road.
This “Volcker moment” was, as students of economic history know, the catalyst not only for “winning the war against inflation,” but also for a multi-decade shift in conventional wisdom about central banking.
Most important, inflation targeting and independence from the fiscal authorities became core features of mainstream policy – a requirement for any country seeking the macroeconomic stability deemed crucial for sustained economic growth and high rates of job creation.
I suspect that historians one day will view last month’s Fed announcement as the catalyst for a similar change in conventional wisdom – both in America and around the world.
They will conclude that two factors motivated Bernanke: persistently high US unemployment – which, like the inflation problem that Volcker faced, risks becoming deeply embedded in the structure of the economy – and virtual paralysis on the part of other policymaking agencies.
There are almost five million “long-term unemployed” Americans, constituting more than 40% of total unemployment.
Millions more have dropped out of the measured labor force altogether.
And about a quarter of 16-19-year-olds in the labor force are unemployed.
All of this risks serious skill atrophy.
And the unemployed young face the additional risk of becoming a lost generation.
It is therefore doubly surprising that, aside from the Fed, America’s policymaking agencies are essentially missing in action.
The problem is not a lack of leadership from President Barack Obama, who has put forward several proposals to address the country’s unemployment problem, including a comprehensive jobs initiative.
Rather, the problem is a polarized Congress that has taken no major economic decisions in the last few years – other than missteps (like the fiscal cliff) that risk tripping the economy into recession.
With political paralysis likely to continue in 2013, notwithstanding occasional agreements, the Fed will be busy implementing the paradigm shift for central banking.
And the impact could well spread.
Which brings us to the two other developments in that four-day period in mid-December.
A few hours after the Fed’s announcement, news came that the British government was open to considering a change in the Bank of England’s policy anchor.
Unlike the Fed, the BoE’s sole objective for years has been price stability, with no additional employment mandate.
If the target is missed repeatedly, as it has been, the governor must send a public explanatory letter to the government.
Now it looks like politicians may be looking to offload onto the Bank responsibility for generating economic growth and jobs.
The third development occurred in Japan, where the newly-elected Liberal Democratic government of Shinzo Abe, commanding a two-thirds parliamentary majority, is pressing the Bank of Japan to stimulate growth – a “discussion” that looks set to evolve into something much more assertive.
In short, expect central banks to devote greater attention to unemployment.
And it is a good thing that the official sector is paying more attention to joblessness – a very good thing.
Yet, unfortunately, this shift will not solve a problem that eats away at the social fabric of any society.
As much as Bernanke and others wish otherwise – and as much as bickering politicians seek to dump policy responsibilities on others – central banks do not have the proper tools to deal with the component of the unemployment crisis that results from insufficient investment in education, training, and physical capital.
Likewise, they cannot fix debt overhangs, repair broken home financing, or address medium-term fiscal-reform challenges on their own.
The best that central banks can do is to buy time, albeit at an increasing cost, for other policymaking entities to get their act together.
If this window closes, the monetary-policy paradigm shift now visible in the US, Britain, and Japan would risk a damaging loss of credibility and political independence for institutions that are critical to well-managed economies.
Money Can\u0027t Buy Reform
MOSCOW: A big squeeze is on in Moscow, as President Putin seeks to drill the country's wayward regions into line with Kremlin policies.
Soon a squeeze of a different type will be put on the West, as the Kremlin bids for new international loans.
With the IMF and Russia engaged in talks over such loans, and as the summit of the Group of Eight (G8) big industrial countries approaches, the time is ripe to assess a decade of economic cooperation between Russia and the West.
The verdict may determine the success of Vladimir Putin's presidency.
Until recently, flashy aid packages for Russia were fashionable.
For seven years the G8 and the IMF shipped billions of dollars to Russia and Western banks surged into Moscow.
All of them made every mistake imaginable, then wrote off or reduced the debts owed to them.
Russian and foreign investors alike were duped by the Kremlin's debt pyramid schemes.
The only concrete things to result from the vast inflow of money are to be found in Russian-owned villas on the French Riviera, a money-laundering scandal at the Bank of New York, and the secret Swiss accounts of Kremlin officials.
Ten years and $20 billion dollars of official debt later, indeed, Russia's economy remains a shambles.
Faith in the ruble is negligible: 70% of business transactions are conducted in dollars.
Indeed, Russia's dollar money supply is much larger in value than its ruble money supply.
It is as if Russia is a rogue subsidiary of America's monetary system.
For a credible banking system remains the stuff of dreams; external debt and corruption are as high as ever, and capital flight continues unabated.
And I have not even mentioned such minor things as tax reform, pension reform, and privatizing land ownership.
Despite all this, it is boasted that Russia's economy is rebounding.
But no economics diploma is needed to understand that today's upturn results mostly from a fourfold devaluation of the ruble and big increases in prices for commodities such as oil.
Sadly, history suggests that when oil prices rise everybody starts lending Russia money again, bringing reform to a standstill.
Nobody in Russia - aside from a few corrupt officials - is grateful for this aid.
Antipathy toward the West, especially among young people, deepened as corruption spread.
Everyone notices that the capital which fled Russia ended up in Western banks; no one hears of money being hidden in North Korea.
A new president, however, means a new beginning, the right time to sort out the rot.
I am not sure that President Putin will assemble a talented government.
His early appointments are no worse, and little different, indeed, than Yeltsin's final cabinet.
Putin's administration may lack informed economic leadership and the resolve needed to get Russia on track.
Still, President Putin has a unique chance to reform because of his reputation for competence and his support in the Duma and among regional governors.
Change, however, cannot be made in Moscow alone.
Over the years, Western aid came with a double standard.
Early on, Western and IMF officials overlooked fundamental economic axioms they would never neglect at home.
They turned a blind eye when corrupt loans-for-shares deals or rigged privatizations appeared.
Such continuous and willful blindness helped corruption to thrive and a tiny group of oligarchs gain control of the economy.
Corruption will abate, and the rule of law take hold, only when the West holds Russia to global standards.
This is why the attitudes of the IMF and the G8 matter.
What they must do is simple:
- make Russia play by the rules.
Don't make exceptions for political reasons.
Propose only policies Western governments would follow themselves.
No double standards.
Let there be less diplomatic doublespeak and more hardheaded finance ministry number crunching in Western policy toward Russia;
- concentrate on the private sector.
Most financial and other assistance to the Kremlin failed abysmally.
A few billion dollars here or there is no big deal for G8 countries, but it matters to Russia because the corruptive influence is enormous.
Dealing with Russia's infant private sector may be risky, but it is a matter of assessing the professionalism of credit officers rather than testing the honesty of politicians;
- concentrate on people.
Imagine if, after 1993, $20 billion of Western aid had been spent sending 150,000 Russian students abroad to university.
They would have transformed Russia more than all the aid programs put together.
Some would even have been grateful.
In July, President Putin goes to the G8 summit in Okinawa to "make his ones" in the world of summit diplomacy.
The new German boss of the IMF is, so far, making the right noises in negotiations with the Kremlin.
The time seems right to leave behind the scandals and stupidities of the past.
For the West cannot buy economic reform, and Russia cannot import reformers.
Russians must do the dirty work themselves.
Russia must demand that it not be mocked by patronizing Western applause for its parody of reform.
It should not be given new loans and debt reductions if it fails to implement sensible programs.
Psychologists call such a stance tough love.
Only when the West adopts a similar posture will Russia stop being a special case, baffling both experts as well as itself.
The Beatles used to sing that "Money can't buy love."
It can't buy effective reform, either.
Money for Nothing
COPENHAGEN – When it comes to global warming, we have plenty of hot rhetoric but very little cool reason.
This matters immensely, because the Kyoto Protocol is already among the most expensive global public policies ever enacted, and the follow-up in Copenhagen in late 2009 promises to break all records.
We better get it right, but right now we’re more likely to pay for virtually nothing.
A good example is the European Union’s newly instituted policy of cutting CO2 emissions by 20% by 2020.
Of course, it is always easier to promise than to deliver – a concern that is especially relevant in the EU.
Yet, even if the promise is kept, will the benefit outweigh the cost?
Curiously, but not surprisingly, this is not discussed very much.
A 20% reduction in the EU’s CO2 emissions, vigorously enforced throughout this century, would merely postpone temperature increases due to global warming by two years at the end of the century, from 2100 to 2102 – a negligible change.
Yet the cost would be anything but negligible.
The EU’s own estimate is about €60 billion annually , which is almost certainly a vast underestimate (its previous estimate was almost twice as much), since it requires the EU to make the reductions in the smartest way possible.
However, the EU doesn’t just want to cut emissions in the smartest possible way, but also to increase the share of renewable energy in the Union by 20% by 2020.
This increase has no separate climate effect, since we’ve already promised to cut emissions by 20%.
However, it does manage to make a poor policy decision dramatically worse.
The debate in my native Denmark is instructive, as the relevant government ministries have outlined what this decision will end up costing here, which in turn suggests the total cost for the EU.
The annual cost of an increase in renewable energy of less than 20% (18 percentage points) – and five years later, by 2025 – will be more than €2.5 billion.
And the benefit? If Denmark sticks to this decision throughout the rest of this century, it will spend more than €200 billion to postpone global warming by five days.
Is that a sensible decision?
The total advantage to the world (measured according to all relevant criteria, such as lives saved, agricultural production increased, wetlands preserved, etc.) from Denmark’s policy would be about €11 million.
Or, for every euro spent, we would do a bit less than half a cent worth of good.
To put this in perspective, €2.5 billion could double the number of hospitals in Denmark.
And, if we really wanted to benefit the world, €2 billion could halve the number of malaria infections, saving 850 million lives this century.
People in the affected countries would live much better and become more productive, benefiting their children and grandchildren in 2100.
The last €500 million could fund an eight-fold increase in research and development aimed at improving CO2-efficient energy technologies, enabling everyone in the long run to reduce emissions much more dramatically, and at much lower cost.
So, should we halve malaria while dramatically increasing the possibility of solving global warming in the medium term?
Or should we make a pledge that does 2,000 times less good and barely alters the global climate?
It gets worse.
The €2.5 billion estimate assumes that politicians pick the cheapest renewable energy alternative.
Yet Danish politicians seem intent on choosing much more expensive solutions, implying a two-fold (or more) increase in cost.
The opposition – trying to trump the government – insists on an almost 40% increase in renewable energy, at a cost of almost €10 billion annually, with every euro doing just €0.025 worth of good for the world.
Using the Danish figures to calculate EU-wide costs, the total is likely to be more than €150 billion annually, with every euro doing just half a cent worth of good.
And this assumes that politicians pick the best options, and that oppositions don’t try to out-do their governments.
The same money could triple the global development aid budget.
It could easily provide clean drinking water, sanitation, education, and health care to every human being on the planet, while increasing CO2-reducing R&amp;D ten-fold.
The EU’s goal of a 20% reduction by 2020 is an incredibly expensive way to signal good intentions. But wouldn’t we rather do real good?
The EU believes it is showing the way, but if the world follows the Union, it seems that we are more likely simply to become lost.
Money Magic
CHICAGO – Economic growth in the United States seems to be slowing again.
This might reflect temporary factors, like the Japanese tsunami, which disrupted supply chains and caused some factories to suspend operations.
Also, high oil prices have taken a toll on disposable income, impeding growth in consumption demand.
This has led to a build-up of inventory –&#160;and thus to cuts in production.
Recoveries are rarely without blips, especially when they are as weak as this one.
But, regardless of whether the factors behind the latest slowdown are fleeting or enduring, there will be calls on the US Federal Reserve to do something.
Some Americans view Fed Chairman Ben Bernanke as a modern-day wizard, able to revive the economy through a swish of his monetary wand – first ultra-low interest rates, then quantitative easing, and perhaps eventually money-printing.
If inflation is low, they want the Fed to use every spell it knows to revive the economy.
Like the World War I generals who reacted to every slaughter of their men by sending even more over the top of their trenches in a vain attempt to overwhelm the enemy, “free money” types react with “More!” if their policy does not seem to be working.
More than any other policy action, monetary policy suffers from the sense that there is a free lunch to be had.
Yet the interest rate is a price for the savings that are transferred to spenders.
To the extent that the Fed manages to push this price down (and some economists will dispute its ability to push any meaningful interest rate down), it taxes the producers of savings and subsidizes the spenders of savings.
Clearly, no government considers pushing down the price of any real good an effective way to stimulate the economy – any gain to consumers is a loss to producers, and the loss typically will outweigh the gain if the market price is a fair one.
So why are savings different?
One view is that corporate investment is held back by labor-market rigidities (wages are stubbornly too high).
Moreover, significant societal benefits – for example, more cohesive families and communities – come from investment that creates jobs, so a lower interest rate will give corporations the necessary subsidy to invest.
There is, however, scant evidence that the real problem holding back investment is excessively high wages (many corporations reduced overtime and benefit contributions, and even cut wages during the recession).
Moreover, with interest rates for large corporations at their lowest level in decades (negative in real terms for the largest, so that savers are in fact paying corporations to borrow their money), the cost of capital is probably not the main reason why they are not investing more in the US.
A huge subsidy would certainly induce them to reconsider, but should we not ask whether there are more effective ways to fix the problems holding them back?
A second view is that households are scared and saving too much – they need to be pushed into consuming by lowering the returns to savings.
It is hard to imagine, though, that with the US household savings rate at about 5%, and with households severely indebted, they are saving too much.
While it might be nice to get them to spend a little more now, and save more later, it is hard to engineer this easily.
After all, the housing bubble was caused, in part, by pushing credit on households so that they would spend the US out of the recession that followed the dot-com bust.
A third channel through which easy money might work is by pushing up the value of assets like stocks, bonds, and houses, making people feel wealthier – and thus more likely to spend.
For this channel to be sustainable, though, the wealth gains must be permanent.
Otherwise, what goes up will come down, leaving households even more frightened of financial markets.
Clearly, someone is paying a price for ultra-low interest rates: the patient and uncomplaining saver.
Interestingly, if traditional spenders such as firms and young households are unwilling or unable to take advantage of low interest rates, low rates could even hurt overall spending, because savers like retirees receive lower financial incomes and curtail spending.
This is not a heretical concern.
As with any tax and subsidy, the net effect depends on whether those taxed cut back spending less than those subsidized.
Economists have sensibly advocated that China raise the interest rates that it pays on bank deposits so that Chinese households earn more and consume more.
Some Japanese now wonder whether their ultra-low interest-rate policy could be contractionary.
Equally worrisome are the distortions that easy money creates.
Evidence from the recent crisis suggests that ultra-low rates prompted a wide range of portfolio adjustments, whereby Asian and Middle East central banks and funds ended up holding the safest low-interest securities, while the US and European financial sectors went on a risk-taking binge.
History never repeats itself exactly, and those singed by fire do learn not to play with matches, but we should be aware that unnaturally low interest rates have consequences other than inflation.
Finally, what of inflation itself?
While wage inflation in the US is contained, global monetary policy is probably excessively loose – one reason that oil prices have taken off.
The Fed blames (rightly) foreign central banks that are keeping interest rates too low to prevent their currencies from appreciating against the dollar; but the Fed cannot set policy assuming others respond with a theoretical ideal.
High oil prices now curtailing growth in the US are partly an unintended consequence of current policy.
There are many things that the US needs to do to create sustainable growth, including improving the quality of its work force and infrastructure.
Easier money is not one of them.
Money, Politics, and Opposition to Bush
Money and its role in American politics is a subject of constant debate.
Despite many attempts at reform, the funds spent on US national elections grow every time voters go to the polls.
Many believe that essentially unlimited private money favors the Republicans.
Billionaire and philanthropist George Soros, a proponent of reform, has been accused of hypocrisy because of his large financial contributions in connection with the upcoming presidential election.
In this article, Soros explains his reasons, and his views on the subject of money in politics.
I and a number of other wealthy Americans are contributing millions of dollars to grass-roots organizations engaged in the 2004 presidential election.
We are deeply concerned with the direction in which the Bush administration is taking the United States and the world.
If Americans reject the president's policies at the polls, America can write off the Bush Doctrine as a temporary aberration and resume its rightful place in the world.
If American voters endorse those policies, the US shall have to live with the hostility of the world and endure a vicious cycle of escalating violence.
In this effort, I have committed $10 million to 'America Coming Together, (ACT)' a grass-roots get-out-the-vote operation, and $2.5 million to the 'MoveOn.org Voter Fund,' a popular Internet advocacy group that is airing advertisements to highlight the administration's misdeeds.
This is a pittance in comparison with money raised and spent by US conservative groups.
Rather than a debate on the issues, there's been a lot of name-calling about my donations by such groups as the Republican National Committee and the National Rifle Association.
In an attempt to taint the groups I support and intimidate other donors, they imply that my contributions are illegitimate or that I have somehow broken the law.
In fact, I have scrupulously abided by both the letter and the spirit of the law.
Both 'America Coming Together' and the 'MoveOn.org Voter Fund' are organizations that, according to a specific reference in the US tax code are entitled to receive unlimited contributions from individuals.
Both groups are fully transparent about their motives and activities.
Both file detailed and frequent reports with government regulators.
America's most recent campaign finance law attempts to limit the influence that special interests can gain by financing candidates and so level the playing field between the Republican and Democratic parties.
My contributions are made in that spirit.
President Bush has a huge fundraising advantage because he has figured out a clever way to raise money.
He relies on donors he calls "Pioneers," who collect $100,000 apiece in campaign contributions in increments that fall within the legal limit of $2,000 that any individual can give, and on those he calls "Rangers," who collect at least $200,000.
Many of these Pioneers and Rangers are corporate officials who are well situated to raise funds from their business associates, bundle them together and pass them along with tracking numbers to ensure proper "credit" to each individual donor of $2,000.
Thus they are buying the same level of access and influence for their corporate interests that they previously obtained with their own and corporate funds.
With the help of these Pioneers and Rangers, President Bush is on track to collect $200 million.
To counter the fundraising advantage obtained by this strategy, I have contributed to independent organizations that by law are forbidden to coordinate their activities with the political parties or candidates.
That law minimizes or eliminates the ability to purchase influence in exchange for my contribution.
Moreover, I don't seek such influence.
My contributions are made in what I believe to be the common interest.
ACT is working to register voters, and MoveOn is getting more people engaged in the national debate over Bush's policies.
I recognize that the system is imperfect, and I wish there were a different way to level the playing field.
Making contributions to ACT and the MoveOn.org Voter Fund is the best approach I have found.
I have been an advocate of campaign finance reform for almost a decade, including the legal defense of the current legislation.
I recognize that every new regulation has unintended adverse consequences, but this does not mean reform should be abandoned.
Clearly, the rules need to be updated in the light of the 2004 experience.
Some good proposals have already surfaced, including one from the major sponsors of the current campaign finance legislation.
This bill should be supported.
Among other measures, it calls for an increase in the federal match for small contributions and would raise the spending limit for candidates who accept public funding to $75 million -- changes that would reduce the bias toward big-money donors.
Free airtime for candidates is also important.
This would reduce the cost of campaigns and the distorting effect of commercials.
Full disclosure and transparency are clearly beneficial.
It is important that people know where financial support is coming from.
I have been open about my contributions, and I welcome the debate they have sparked.
In the meantime, as the debate continues, my contributions help to ensure that the money spent by those trying to reelect President Bush doesn't overwhelm the process.
Monnet’s Ghost
LONDON – Some fine ideas are rather like a beautiful object with a time bomb inside.
The ideal of a unified Europe, though not designed to explode, could well disintegrate nonetheless.
To understand why, it helps to revisit the intellectual origins of the European Union.
One of the EU’s main architects, Jean Monnet, a French diplomat and economist, spent much of World War II in Washington, DC, as a negotiator for the European allies.
After Germany’s defeat, he was convinced that only a united Europe could prevent another devastating war in the West.
“There will be no peace in Europe,” he wrote in his memoir, “if states are reconstituted on the basis of national sovereignty.”
Almost everyone on the European continent, exhausted by war, and faced with the shattered institutions of their ravaged nation-states, agreed.
Only the victorious British, with their old institutions more or less intact, voiced skepticism, not so much about continental unity as about their own participation in Europe’s ambitious project.
Of course, the ideal of a united Europe is much older than Monnet’s scheme.
If not as old as ancient Rome, it certainly goes as far back as the tenth-century Holy Roman Empire.
Since then, the European ideal has gone through many changes, but two themes remained constant.
One ideal was that of a unified Christendom, with Europe at its center.
The Duke of Sully (1559-1641) conceived of a Christian European republic, which the Turks could join only if they converted to Christianity.
The other ideal was eternal peace.
In 1713, another Catholic Frenchman, Charles-Irénée Castel, abbé de Saint-Pierre, published his Project for Perpetual Peace in Europe.
There would be a European senate, a European army, and the larger member states would have equal voting rights.
In fact, the ideals of eternal peace and Christian unity were identical in the minds of the early pan-European thinkers.
Peaceful unification was a religious notion, a Christian utopia.
Never meant to be confined to the European continent, it was, like Christianity itself, a universalist aspiration.
National borders ought to be abolished in God’s earthly kingdom.
After the Enlightenment, the rationalists easily adopted religious universalism.
The French nineteenth-century statesman Alphonse de Lamartine wrote an ode to European unity along rationalist lines, entitled the Marseillaise of Peace: “In the course of enlightenment, the world rises to unity/I am the fellow citizen of every thinking person/Truth is my country.”
As France’s foreign minister in the revolutionary year of 1848, Lamartine published his Manifesto for Europe, promoting not just European unity, but that of mankind.
The European ideal has parallels in other parts of the world.
Chinese rulers, to this day, have been obsessed with central control, continental unity, and social harmony – that is, a society without political conflict.
The idea that people’s interests can and do naturally conflict is not readily admissible.
Mao’s idea of permanent revolution was an aberration in the history of Chinese political thought.
It is not difficult to imagine why the notion of a borderless, peaceful world in which political divisions and conflicts were overcome was deeply appealing after WWII.
Many blamed nationalism as the ultimate evil that had almost destroyed Europe.
A world without political strife seemed like a recipe for bliss.
Monnet was a born technocrat, who hated political conflict and almost made a fetish of unity.
(In 1940, when Hitler seemed indomitable, Monnet suggested to Winston Churchill that France and Britain might be rolled into one country.)
Like all technocrats, Monnet was also a born planner.
In this, too, he was a man of his time.
Many people believed already before the war that economies and societies should be planned as much as possible.
Franklin Roosevelt’s New Deal was one example; so, in a much more sinister way, was the fascist state.
And so, still, is China, ruled by engineers and other faceless technocrats.
The post-1945 ideal of a united Europe was very much a planner’s archetype, a technocratic Utopia.
And, certainly for Monnet and the other founders of postwar Europe, it was an entirely benign, even noble, ideal.
The problem with technocrats, however, is that they tend to be oblivious to the political consequences of their own plans.
They proceed as if politics did not exist or did not really matter.
Christine Lagarde, Managing Director of the International Monetary Fund, is a case in point.
Her recent statement that she feels no sympathy for the suffering Greeks, because they should have paid their taxes, has been widely criticized for being not just unfeeling, but hypocritical (as a diplomat she pays no taxes herself).
In fact, it is the typical sentiment of a technocrat who lacks political sense.
Crippling economic austerity, imposed by unelected bureaucrats in Brussels and Washington, is not only a social calamity; it is also poses a dangerous threat to democracy.
When people lose faith in democratic institutions to protect them, they will reach for extremism.
And so, barring a miracle, the time bomb within post-war Europe’s beautiful ideal is about to explode.
The limits of technocratic utopianism have been reached.
Fiscal union – that is, more imposed unity – may well be the rational answer to the current financial crisis, but it is a technocratic answer which would do nothing to make Europe more democratic, and would most likely provoke an extremist backlash.
Technocracy, it seems, can work well as long as most people feel that they are benefiting materially, as was true in Europe for almost 50 years, and might still be true in China.
But its legitimacy cracks as soon as a crisis erupts.
Europe is feeling the consequences today.
Moral Dilemmas for Fannie and Freddie
NEW HAVEN – The United States government’s takeover of mortgage giants Fannie Mae and Freddie Mac constitutes a huge bailout of these institutions’ creditors, whose losses have ballooned as house prices continue to plummet.
With the government now fully guaranteeing Fannie’s and Freddie’s debts, American taxpayers will have to pay for everything not covered by their creditors’ inadequate capital.
Why is this bailout happening in the world’s most avowedly capitalist country?
Don’t venerable capitalist principles imply that anyone who believed in the real estate bubble and who invested in Fannie and Freddie must accept their losses?
Is it fair that innocent taxpayers must now pay for their mistakes?
The answers to such questions would be obvious if the moral issues in the current financial crisis were clear-cut.
But they are not.
Most importantly, it is not clear that the bailout will actually impose any net costs on US taxpayers, since it may prevent further systemic effects that bring down the financial sector and, with it, the world economy.
Just because systemic effects are difficult to quantify does not mean that they are not real.
The bonds issued by Fannie and Freddie were widely thought to carry an implicit US government guarantee.
Even though there was no official guarantee, the US government’s failure to come to the rescue could destroy confidence in government debt, and, by association, other financial paper as well.
The issues go far beyond the US economy.
The global economy has been driven in recent years by remarkable speculative asset booms and busts, which bring into the equation questions of confidence and trust, as well as fairness.
Similar housing booms in many other countries are now ending, and they may face the pain – and the moral dilemmas – that the US economy is now experiencing.
Moreover, housing markets are not the only issue.
So are stock markets.
The Shanghai Composite in China rose by a factor of five in real terms from 2005 to 2007, and then lost two-thirds of its real value.
The Sensex in India rose by a factor of five in real terms over 2003 to 2007, and has since lost a third of its value.
Similar stock market booms and busts have occurred in many other countries.
While they lasted, the booms that preceded these busts caused these economies to overheat.
Now that the booms have been reversed, a decline in confidence could engulf the world economy, throwing it into recession.
To prevent that, some selective bailouts will likely be needed, not to support the market but to deal with injustices.
There is no accurate science of confidence, no way of knowing how people will react to a failure to help when markets collapse.
People’s reactions to these events depend on their emotions and their sense of justice.
The booms and busts have caused great redistributions of wealth.
People who bought into the stock market or housing market did either well or poorly, depending on their timing.
People will judge the fairness of these outcomes in terms of what they were told, and what kinds of implicit promises they inferred.
What were people in all these countries told about the markets in which they invested?
Was it all really truthful?
Unfortunately, there is no way to find out.
Policymakers can provide only general responses, not deal with all cases individually.
We do know that recent economic growth in many countries has been spectacular.
But were investments in their markets oversold?
Did cynical salespeople in these and other countries lead people to believe that the boom times would produce wealth for everyone?
To be sure, while there may have been much “cheap talk” – general advice with disclaimers – most of the losers in this game are not starving.
But we cannot blithely conclude that all the losses should be allowed to stand in full force.
The gnawing problem is one of “good faith.”
Economies prosper only on the perception that “good faith” exists.
The current situation, in which speculative booms have driven the world economy – and, having collapsed, are now driving it into recession – suggests that there may have been a lot of bad faith by people promoting certain investments.
Consider investors in Fannie and Freddie bonds.
While the US government never officially promised to bail them out, it did create a special agency, the Office of Federal Housing Enterprise Oversight, which was to assess their strength in an annual report.
But this agency never even acknowledged that there was a housing bubble.
Government leaders gave no warnings.
So can we really say that investors must suffer the full consequences of any losses?
How can this be fair?
The world is discovering capitalism and its power to transform economies.
But capitalism relies on good faith.
A perception of unfair treatment can be deadly to economic growth, because it means that people will lose trust in businesses, and hence be less willing to offer to them their precious capital and labor.
Is that outcome morally superior to a bailout?
Moral Progress and Animal Welfare
PRINCETON – Mahatma Gandhi acutely observed that “the greatness of a nation and its moral progress can be judged by the way its animals are treated.”
To seek to reduce the suffering of those who are completely under one’s domination, and unable to fight back, is truly a mark of a civilized society.
Charting the progress of animal-welfare legislation around the world is therefore an indication of moral progress more generally.
Last month, parallel developments on opposite sides of the world gave us grounds for thinking that the world may, slowly and haltingly, be becoming a little more civilized.
First, the British House of Commons passed a motion directing the government to impose a ban on the use of wild animals in circuses.
The motion followed the release of undercover footage, obtained by Animal Defenders International, of a circus worker repeatedly beating Anne, an elephant.
The measure was, at least initially, opposed by the Conservative government, but supported by members of all political parties.
In a triumph for parliamentary democracy, the motion passed without dissent.
More controversially, the lower house of the Dutch parliament passed a law giving the Jewish and Islamic communities a year to provide evidence that animals slaughtered by traditional methods do not experience greater pain than those that are stunned before they are killed.
If the evidence cannot be provided, stunning before slaughter will be required in the Netherlands.
At times, it has seemed that gains for animals in Western countries have been outweighed by increasing animal abuse in China, as growing prosperity there boosts demand for animal products.
I found it difficult to watch the videotape of the beating of Anne, but that recording did not compare to videos I have seen of animal cruelty in China.
The sickening footage available online shows bears kept in cages so small that they cannot stand up, or in some cases move at all, so that bile can be taken from them.
Worse still (if one can compare such atrocities) is a video showing fur-bearing animals being skinned alive and thrown onto a pile of other animals, where they are left to die slowly.
In light – perhaps one should say darkness – of such images, it is sometimes suggested that animal welfare is exclusively a Western concern.
But that is implausible, given that Buddhist tradition places more emphasis on concern for animals than Judaism, Christianity, or Islam.
Long before Western philosophers included animals in their ethics, Chinese philosophers like Zhuangzi said that love should permeate relations not only between humans, but between all sentient beings.
Nowadays, China has its own animal-rights campaigners, and there are signs that their message is beginning to be heard.
One recent sign again concerns circuses.
Chinese zoos have drawn crowds by staging animal spectacles, and by allowing members of the public to buy live chickens, goats, and horses in order to watch them being pulled apart by lions, tigers, and other big cats.
Now the Chinese government has forbidden state-owned zoos from taking part in such cruelty.
Welcome as these initiatives are, the number of animals in circuses and zoos is tiny compared to the tens of billions of animals suffering in factory farms.
In this area, Western countries have set a deplorable example.
Recently, however, the European Union has recognized that the intensive confinement of farm animals has gone too far. It has already outlawed keeping veal calves in individual stalls,and, in six months, it will be illegal in all 27 EU countries, from Portugal to Poland and from Britain to Greece, to keep laying hens in the bare-wire cages that today dominate the egg industry around the world.
In January 2013, keeping breeding sows in individual stalls will also be prohibited.
The United States lags behind Europe in getting rid of the worst forms of abuse of farm animals.
The problem does not lie with voters, who, in states like Florida, Arizona, and California, have shown that they want farm animals to have better protection than the animal industries typically provide.
The biggest problems are in those states that lack a mechanism for citizens to initiate a referendum on how farm animals should be treated.
Unfortunately, this group includes the Midwestern and southern states, where the majority of America’s farmed animals are produced.
China’s centralized government can, if it so chooses, ensure that animal-welfare laws apply throughout the country.
The animal-welfare movement in China should not be satisfied with its small but conspicuous success regarding animal abuse in zoos.
It must move on to the far more significant target of better living conditions and more humane deaths for bears and fur-bearing animals, as well as for cows, pigs, laying hens, and chickens.
There remain many other countries with deplorable animal-welfare standards.
In Indonesia, for example, Animals Australia recorded undercover videos showing such brutal treatment of Australian-raised cattle that Australia’s government suspended cattle exports to the country.
Now some MPs are calling for a permanent ban.
The best hope for further progress, it seems, lies in animal welfare becoming, like human rights, an international issue that affects countries’ reputations.
What Drives Moral Progress?
DAVOS – What would happen if the ancient Greek philosopher Plato partook in contemporary dialogues about the types of questions that he first posed, and that continue to vex us?
In my view, he would have many new questions – including about our increasingly psychological approach to philosophical discussion.
Plato would probably head to a leading global technology hub: Google’s California headquarters.
There, he might fall into a discussion with a software engineer about, say, whether ethical questions can be answered through crowdsourcing.
He would probably love the idea of the information cloud – so abstract, so Platonic – and find Google to be the ideal tool to catch up on the vast scientific and technical advances of the last couple of millennia.
But Plato would probably be most amazed by the world’s moral progress.
After all, he believed that being a “philosopher” meant assuming the responsibilities of moral reformer.
Yet, though morality was always at the center of his thinking, many of the moral truths that we now take for granted never occurred to him.
For example, though Plato opposed the enslavement of Greeks, he – like every other ancient Greek – condoned the enslavement of “barbarians” (non-Greeks).
Today, by contrast, even an emphatically non-philosophical person – say, Plato’s “media escort” – could easily explain why slavery is wrong: “A person is a person.
Everybody’s life is just as important as anybody else’s.”
As obvious as this conclusion might seem, the world has taken millennia to reach it – and, in many ways, has yet to accept it fully.
Nonetheless, we can now collectively look back at our slave-owning, wife-beating, child-brutalizing, heretic-burning, colonizing forebears and wonder how even the most profoundly moral among them failed to see that they should not behave that way.
What drove this progress?
Plato held that moral progress is essentially an intellectual process, driven by reasoned arguments – a stance that many of the most influential moral philosophers, from Baruch Spinoza and Immanuel Kant to John Rawls and Peter Singer, have supported.
Yet many other philosophers have rejected the autocracy of reason in humans’ moral lives, agreeing with David Hume’s assertion that “reason, in itself, is perfectly inert.”
They believe that no purely abstract argument can get us to do anything that we do not want to do.
If a reasoned argument cannot move us, what can?
One simple answer stands out: emotions.
Moral emotions, notably empathy, can accomplish what no bloodless ratiocination can: they make us feel – and thus want to account for – the experience of others.
The more we feel, the more we care – and the more moral our motivations.
In short, a stronger sense of empathy spurs moral progress.
With this shift in focus from reason to emotion, moral philosophy is increasingly giving way to moral psychology, which, by incorporating ideas from evolutionary biology, has more and more to say about human nature and our moral lives.
It all comes down to natural selection.
Moral emotions like empathy are as much an outcome of the blind workings of adaptation as our upright stance and opposable thumbs – traits that are entrenched in a species through the proliferation of particular genes.
We humans are most strongly empathetic toward those who share the greatest proportion of our genes: our children, our parents, our siblings, and, by lessening gradations, our extended family and tribe.
Our empathy toward them might even drive us to make sacrifices that jeopardize our individual survival, but that makes perfect sense in terms of preserving our shared genes.
Of course, empathy is not the only part of our inherited nature that shapes our behavior toward others.
In fact, there is also a compelling evolutionary explanation for xenophobia.
Humans evolved from primates who formed communities that worked together to survive.
Given the obvious benefits of having access to more territory in which to gather and hunt, outsiders – particularly those who bear characteristics that mark them as genetically distant – were treated as foes.
In this sense, the notion of “us versus them” has been fundamental to human evolution, and it continues to shape our interactions.
Just as both empathy and xenophobia can be explained by natural selection, both can be modulated by cultural factors.
But do they have equal claims to being moral emotions?
Within the strict domain of moral psychology, they do.
After all, a psychological telling of the story of our moral development provides no basis for encouraging us to dampen one natural inclination and nurture another.
But moral psychology does not have to tell the whole story.
There is no reason why we cannot have moral psychology and moral philosophy: moral psychology to explain why moral progress is both possible and painfully slow, and moral philosophy to clarify what constitutes moral progress and to push us in the appropriate direction.
We are reasoning, deliberating human beings, and our genes are not the masters of our fate.
We should not become so enthralled by the explanatory power of the behavioral sciences that we succumb to the belief that moral progress is predetermined.
Psychology tells a diminished story that leaves out our past moral advances and the hard argumentative work required to expand those advances in the future.
Plato would reject this view.
Morals and the Meltdown
LONDON – After World War I, H.G. Wells wrote that a race was on between morality and destruction.
Humanity had to abandon its warlike ways, Wells said, or technology would decimate it.
Economic writing, however, conveyed a completely different world.
Here technology was deservedly king.
Prometheus was a benevolent monarch who scattered the fruits of progress among his people.
In the economists’ world, morality should not seek to control technology, but should adapt to its demands.
Only by doing so could economic growth be assured and poverty eliminated.
Traditional morality faded away as technology multiplied productive power.
We have clung to this faith in technological salvation as the old faiths waned and technology became ever more inventive.
Our faith in the market – for the market is the midwife of technological invention – was a result of this.
In the name of this faith, we have embraced globalization, the widest possible extension of the market economy.
For the sake of globalization, communities are de-natured, jobs off-shored, and skills continually re-configured.
We are told by its apostles that the wholesale impairment of most of what gave meaning to life is necessary to achieve an “efficient allocation of capital” and a “reduction in transaction costs.”
Moralities that resist this logic are branded “obstacles to progress.”
Protection – the duty the strong owe to the weak – becomes Protectionism, an evil thing that breeds war and corruption.
That today’s global financial meltdown is the direct consequence of the West’s worship of false gods is a proposition that cannot be discussed, much less acknowledged.
One of its leading deities is the “efficient market hypothesis” – the belief that the market accurately prices all trades at each moment in time, ruling out booms and slumps, manias and panics.
Theological language that might have decried the credit crunch as the “wages of sin,” a come-uppance for prodigious profligacy, has become unusable.
But consider the way in which the term “debt” (the original sin against God, with Satan as the great loan shark) has become “leverage,” a metaphor from engineering that has turned the classical injunction against “getting into debt” into a virtual duty to be “highly leveraged.”
To be in debt feeds the double temptation of getting what we want as quickly as possible as well as getting “something for nothing.”
Financial innovation has enlarged both temptations.
Mathematical whiz kids developed new financial instruments, which, by promising to rob debt of its sting, broke down the barriers of prudence and self-restraint.
The great economist Hyman Minsky’s “merchants of debt” sold their toxic products not only to the credulous and ignorant, but also to greedy corporations and supposedly savvy individuals.
The result was a global explosion of “Ponzi” finance – named after the notorious Italian-American swindler Charles Ponzi – which purported to make such paper as safe and valuable as houses.
By contrast, the virtuous Chinese, who save a large proportion of their incomes, were castigated by Western economists for their failure to understand that their duty to humanity was to spend.
The key theoretical point in the transition to a debt-fueled economy was the redefinition of uncertainty as risk.
This was the main achievement of mathematical economics.
Whereas guarding against uncertainty had traditionally been a moral issue, hedging against risk is a purely technical question.
The main uncertainty in life – the destination of one’s immortal soul – nudges one toward morality.
Even the existence of mundane uncertainty gives rise to conventions and rules of thumb that embody the best of human experience in dealing with the unknown.
The abolition of uncertainty abolishes the need for moral rules.
Future events could now be decomposed into calculable risks, and strategies and instruments could be developed to satisfy the full range of “risk preferences.”
Moreover, because competition between financial intermediaries steadily drives down the “price of risk,” the future became (in theory) virtually risk-free.
This monstrous conceit of contemporary economics has brought the world to the edge of disaster.
Obviously, the traditional moral taboos surrounding money had to be loosened for capitalism to get going centuries ago.
For example, the classical prohibition on usury was softened from a ban on charging interest on all loans to a ban on charging interest on loans for which the lender had no alternative use, i.e., for charging interest on “hoards” or cash balances.
Without the development of debt finance, the world would be a lot poorer than it is.&#160;
Yet going from one extreme (keeping one’s spare cash under the bed) to the other (lending out money one does not have) is to cut out the sensible middle.
The prudential supervision regime initiated by the Bank of Spain in response to the Spanish banking crises of the 1980’s and 1990’s shows what a sensible middle way might look like.
Spanish banks are required to increase their deposits in proportion to their lending and set aside capital against assets in their off-balance sheets.
With little incentive to manufacture “structured investment vehicles,” few Spanish banks created them, thereby avoiding excessive leverage.
As a result, Spanish banks typically make provision to cover 150% of bad debts whereas British banks cover only 80-100%, and Spanish homebuyers must pay between 20% and 30% deposit on a house, whereas 100% mortgages have routinely been given in the United States and the United Kingdom in recent years.
H.G. Wells was only partly right: the race between morality and destruction encompasses not just war, but economic life as well.
As long as we rely on technical fixes to plug moral gaps and governments rush in with rescue packages that enable the merry-go-round to start up again, we are bound to keep lurching from frenzy to frenzy, punctuated by intervals of collapse.
But, at some point, we will confront some limit to growth.
More Bad News at the IMF
CAMBRIDGE: Bad news is all the IMF has been getting in the last year.
First came a divisive fight over naming a new Managing Director: Germany pushed a little known and unqualified bureaucrat and failed to have him accepted.
In the end, Chancellor Schroder was given a fig leaf to hide his embarrassment in the form of the present managing director, Horst Kohler, whose main qualification for the job is being German, unlike his two predecessors De Larosiere and Camdessus, who were distinguished French inspecteusr de finances, i.e. they belonged to the cream of cream in the bureaucratic elite of France.
The next slap came from criticism by American Republicans of the IMF’s strategy as nothing but unending bailouts.
That criticism was enshrined in the Meltzer Report, which now hangs even more ominously over the IMF because the Republicans now rule in Washington.
America’s Congress has never had much sympathy for the IMF.
Democrats question tough-minded programs; Republicans criticize bailouts; nobody has anything constructive to offer.
But criticism of the IMF not only comes from the American right.
A few shots across the bow came from inside the community, from just across the street at the World Bank.
The most notable barrage here was the affaire Stiglitz, when the World Bank’s chief economist accused the IMF of malpractice, gaining applause from bad economists and failed policy makers worldwide.
The latest hits have just happened.
First came the resignation of IMF chief economist Michael Mussa, a formidable University of Chicago-educated economist renowned for good judgment.
He predicted most of the crises that came along but that did not raise his popularity with the IMF’s board.
Mussa was also remarkable for a flamboyant presentation of his views, which was hard for some IMF folk to tolerate in so stuffy environment.
The final hit is comes in the form of the resignation of the IMF’s first deputy managing director, Stanley Fischer, who was in charge of assuring continuity and good sense as well as staff morale.
These two departures come on top of a steady exodus of talent to Wall Street in recent years.
So the IMF is at a cross roads, it is weak in leadership, weak on economics knowledge at its top, weak in the support it gets from its member countries.
The IMF has become a household word, but one with unfavorable connotations.
Ask any undergraduate about the IMF and the answer, however vague, is invariably negative.
Ask any leftist activist, and the IMF competes with greedy multinationals as the lowest form of life.
Part of this negative assessment is inevitable: by the time a country comes to the IMF it is on its way to the economic emergency room.
Radical surgery usually follows.
The fact that recovery does come is noted less than the time spent in hospital.
IMF policies are criticized more than the awful policies that incited a country to collapse in the first place.
Turkey today is a case in point, or Russia, or Asia in 1997-98.
What can the IMF do?
Little by itself, of course, because it is governed by its member countries and that means the US, Europe (which does not speak with one voice), and Japan (which has no voice).
The most important issue now is the Fischer succession.
The right person should not necessarily be an American as that would unduly limit the choice and risks bringing an appointment more distinguished by ideology than competence.
Doling out top international jobs by nationality is a terrible practice and choosing Fischer’s replacement presents a wonderful opportunity to make a break with this routine.
The successful appointee should be, above all, an effective administrator and a top economist experienced in policymaking.
But the IMF must also reinvent itself to become far more focused; it may not be able to change its image but it can become more effective.
There are two ways to do this:
- resist the temptation of mission creep: the IMF is widening its focus to poverty issues, corruption issues, environment issues, governance issues.
All these are important, all these are remotely affected by IMF policies, none of them can get around the central truth that a country which has hit the ropes needs to practice austerity.
The IMF is well advised to stay away from the details and not stretch its little political capital to so broad a range of issues with an inevitable failure in satisfying the whole range of partners in an ever-wider dialogue;
- increase transparency.
The IMF staff must begin to report, publicly and for everyone to see, the shortcomings in countries' balance sheets and currency strategies because these are invariably the causes of collapse.
Over and over again, Turkey being the latest example, the IMF is mute for too long.
The IMF board must learn that muzzling the IMF staff contributes to crisis by postponing a reckoning.
The IMF is an important part of the international financial architecture, but it is in great need of repair.
It needs a strong and respected leadership in the top ranks and it needs a refocusing of its mission and a shift from emergency operations to preventive medicine.
Because the IMF is at a crossroads, now is the time for serious reforms, not a quick fix.
More Walls to Fall
MOSCOW – The German people, and the whole world alongside them, are celebrating a landmark date in history, the 20th anniversary of the fall of the Berlin Wall.
Not many events remain in the collective memory as a watershed that divides two distinct periods.
The dismantling of the Berlin Wall – that stark, concrete symbol of a world divided into hostile camps – is such a defining moment.
The fall of the Berlin Wall brought hope and opportunity to people everywhere, and provided the 1980’s with a truly jubilant finale.
That is something to think about as this decade draws to a close – and as the chance for humanity to take another momentous leap forward appears to be slipping away.
The road to the end of the Cold War was certainly not easy, or universally welcomed at the time, but it is for just this reason that its lessons remain relevant.
In the 1980’s, the world was at a historic crossroads.
The East-West arms race had created an explosive situation.
Nuclear deterrents could have failed at any moment.
We were heading for disaster, while stifling creativity and development.
Today, another planetary threat has emerged.
The climate crisis is the new wall that divides us from our future, and current leaders are vastly underestimating the urgency, and potentially catastrophic scale, of the emergency.
People used to joke that we will struggle for peace until there is nothing left on the planet; the threat of climate change makes this prophesy more literal than ever.
Comparisons with the period immediately before the Berlin Wall came down are striking.
Like 20 years ago, we face a threat to global security and our very existence that no one nation can deal with alone.
And, again, it is the people who are calling for change.
Just as the German people declared their will for unity, the world’s citizens today are demanding that action be taken to tackle climate change and redress the deep injustices that surround it.
Twenty years ago, key world leaders demonstrated resolve, faced up to opposition and immense pressure, and the Wall came down.
It remains to be seen whether today’s leaders will do the same.
Addressing climate change demands a paradigm shift on a scale akin to that required to end the Cold War.
But we need a “circuit-breaker” to escape from the business-as-usual approach that currently dominates the political agenda.
It was the transformation brought about by perestroika and glasnost that set the stage for the quantum leap to freedom for the Soviet Union and Eastern Europe, and opened the way for the democratic revolution that saved history.
Climate change is complex and closely entwined with a host of other challenges, but a similar breakthrough in our values and priorities is needed.
There is not just one wall to topple, but many.
There is the wall between those states that are already industrialized and those that do not want to be held back in their economic development.
There is the wall between those who cause climate change and those who suffer the consequences.
There is the wall between those who heed the scientific evidence and those who pander to vested interests.
And there is the wall between the citizens who are changing their own behavior and want strong global action, and the leaders who are so far letting them down.
In 1989, incredible changes that were deemed impossible just a few years earlier were implemented.
But this was no accident.
The changes resonated with the hopes of the time, and leaders responded.
We brought down the Berlin Wall in the belief that future generations would be able to solve challenges together.
Today, looking at the cavernous gulf between rich and poor, the irresponsibility that caused the global financial crisis, and the weak and divided responses to climate change, I feel bitter.
The opportunity to build a safer, fairer, and more united world has been largely squandered.
To echo the demand made of me by my late friend and sparring partner President Ronald Reagan: Mr. Obama, Mr. Hu, Mr. Singh, and, back in Berlin, Ms. Merkel and her European counterparts, “Tear down this wall!” For this is your Wall, your defining moment.
You cannot dodge the call of history.
I appeal to heads of state and government to come in person to the climate change conference in Copenhagen this December and dismantle the wall.
The people of the world expect you to deliver.
Do not fail them.
Morocco’s Veiled Feminists
It is often assumed that modern feminism has no place, and thus can make little headway, in societies undergoing a religious revival, particularly in the Islamic world.
But the real progress made in recent years on women’s rights in Morocco suggests otherwise: a unique combination of activism by secular and religious women, the calculations of political parties, and a significant role for the King has led to real progress.
Pioneering Moroccan feminists began their work soon after independence in 1956.
By and large representative of a liberal perspective, they nonetheless recognized the importance of Islam throughout Moroccan society.
As a result, they took care to frame their demands in ways that provided a measure of Islamic identity.
This first generation of Moroccan feminists was guided by a key insight: the interactions of men and women were not dictated by religion, but by social practices that had often used religion as a means of reinforcement.
For example, women and their sexual purity were linked with the honor of men and their families – a connection that was defended by grounding it in Islam.
For these activists, such linkages were intended to maintain control over women, and were part of Moroccan society, not Islam.
By the 1990’s, Morocco was feeling the impact of the Iranian Revolution and America’s post-Cold War emergence as the sole global superpower.
Like many Muslim countries in this new era, Morocco began to experience a revitalization of political Islam.
This threatened the authority of the King, who had overseen the religious establishment, as well as feminists’ efforts to moderate Morocco’s Family Law, which had been based on a rigid view of religious teachings.
But the same de-centralization of authority that had empowered Islamist movements also empowered Moroccan women.
Better educated and more in touch with global currents through the media or their own travel, women began participating in Moroccan political debates.
They challenged the disparities in legal treatment of women, broached new ideas concerning the role of women in Moroccan society, and questioned practices that had long been understood as Islamic.
Their strategy shifted as well, focusing on the growing importance of religious values in shaping societies and global relations.
As a result, the veil became a mechanism for making their presence felt publicly and gaining credibility within religious debates.
Over the past decade, the number of Moroccan women taking an active role in Islamist associations or political parties increased dramatically.
The growing significance of the veil also highlighted important differences between men and women in Morocco.
For many men, Islamist or not, the veil remains a sign of Islamic affiliation and traditional piety.
For many women, however, the veil is a token of liberation – an indication that they have engaged with the Moroccan public in ways that reflect their own sense of religious practice.
Liberal Moroccan feminists understand this use of the veil by many Moroccan women, and they have encouraged a dialogue with veiled activists from the Islamist camp.
The signs of cooperation have been clear: increasing use of Arabic, rather than French, discussions that incorporate real knowledge of Islamic scripture, and recognition that Islam remains distinct from traditional practices.
At the same time, liberal feminists began to invest more effort in civic associations, rather than political parties.
This broadened their focus to Moroccan society as a whole and questions of how people could be empowered to improve their lives.
As a result, liberal feminists have increased their influence among both decision makers and religious women.
All of this comes at a time of greater political openness and democratization: the first ever socialist government in 1998, a younger and more open King – described by democrats of both sexes of Morocco’s “first feminist” – who took the throne in 1999, and a quota system that brought 35 women into the Parliament in 2002.
This Parliament enacted a new Family Law in 2004 that mandates full equality between men and women as “head of household,” full authority for state courts in matters of divorce, creation of special family courts, and the possibility of maternal custody in the event of divorce.
Thus, in Morocco, it is difficult to speak of separate “secular” and “Islamic” feminisms.
Women are increasingly making the argument that they have been deliberately excluded from a full role in society not because Islam prescribes it, but because Islam was revealed in a deeply patriarchal social context.
Feminist interpretations of religious texts – encouraged by increasing numbers of women in prominent religious positions – continue to challenge traditionalists of all stripes.
The women’s movement in Morocco – which now bridges secular and religious communities – is setting an example of the power of social thought in a traditional society.
Re-visiting traditional interpretations of Scripture is not the end of the story.
Out of this ferment, Morocco has not only revised its Family Law, but also fundamental laws governing nationality, media ownership, and political organizations.
Women’s advocacy has also shaped a new approach to poverty alleviation in Morocco, in the form of the National Initiative for Human Development, which integrates efforts to improve education with better sanitation and housing.
It is no exaggeration to say that the Moroccan women’s movement has become the cutting edge of reform, engaging Islamization, modernization, democratization, and feminism.
Moscow and the Middle East
Iran’s influence in the Middle East is being strengthened not only because of the opportunities created by the frustration of US power in Iraq, but because of the diplomatic protection it has been receiving from China, and most importantly, from Russia.
With President Putin recently completing a Middle East tour to flex Russia’s diplomatic muscles and sell arms, now is a good moment to assess his country’s influence in the region.
Russia, by wielding the threat of its Security Council veto, spent much of the past two years whittling away the proposed list of sanctions that might be slapped on Iran for its refusal to honor its commitments to the International Atomic Energy Agency over its nuclear program.
As a result, the sanctions that have been imposed by the UN Security Council are so tepid that they are unlikely to be effective.
Russia sees its relations with Iran as a means to leverage its influence in wider Middle East diplomacy, where the US has successfully sought to exclude the Kremlin from influence since the end of the Cold War.
Russia’s other selfish aim has been to exempt from sanctions the Bushehr nuclear-reactor project it is building for Iran, and to ward off a UN-sponsored financial squeeze on Iran that might put at risk the profits Russia hopes to earn from providing nuclear fuel for the reactor, which is due to be commissioned late this year.
Russian President Vladimir Putin argues that Iran, unlike North Korea, has not expelled IAEA nuclear inspectors, quit the Non-Proliferation Treaty (NPT) or tested a weapon — so it should be dealt with gently.
But without making Iran weigh real costs against its nuclear plans, Iran will have little reason to consider the suspension of uranium enrichment and plutonium dabbling (both are usable for nuclear fuel-making but abusable for bomb-making) that the Europeans and the United States have made a condition for serious negotiations to take place.
Russia trades heavily with Iran, which is another reason it is wary of sanctions on that country.
But America has been leaning on foreign banks to curb their dealings with Iran.
Last month, it added five companies (four in China, and another in the US but representing a Chinese outfit) to its list of those fingered for assisting Iran's weapons program and thus banned from doing business with American companies.
There is a growing fear in Moscow that the US administration is now looking at Russian companies with similar ties to Iran and its nuclear ambitions.
Russian policy, based on immediate monetary gain and a hope of diplomatic influence, is dangerously short-sighted.
(Ukraine, for its part, opted not to participate in building the Bushehr reactor.)
If suspicions are correct that Iran has been secretly learning how to build and trigger a nuclear device, and also to shape a missile cone to carry such a warhead (as well as publicly developing nuclear-capable, far-flying missiles), then once it has fully mastered uranium enrichment it will soon be poised to break out at short notice, at a moment of its choosing, from the NPT’s limits.
By enfeebling diplomacy, Russia is taking the world into more dangerous territory.
This is doubly short-sighted as a nuclear armed Iran on Russia’s border is not in Russia’s national interest, particularly with Russia’s own 20 million Muslim citizens becoming increasingly radicalized.
Indeed, Russia’s Muslim population is the only part of the Russian population that is growing, which means that Muslims will become a bigger and bigger factor in Russian domestic politics in the decades ahead.
That Iran is often seen as a principle backer of the Chechen separatists is also testimony to the truly short-sighted nature of Russian policy.
But in its quest to enhance its great power prestige today, Russia seems willing to sacrifice its long term security interests in the region for immediate diplomatic gratification. And it is doing so not only in respect to Iran.
The big question about Turkmenistan today is whether the vacuum left by Niyazov/Turkmanbashi’s death will allow Islamic extremism to spill over from neighbouring Iran and Afghanistan.
But the only thing that Russia appears to be concerned about is that, whatever successor regime emerges, it is willing to do the Kremlin’s bidding.
Russia has long had the upper hand in Turkmenistan.
Most of Turkmenistan's gas is exported through the Russian pipeline system.
Gazprom, the Russian state giant, buys gas at relatively low prices, and then distributes it in Russia or sells it at a profit elsewhere in Europe.
Israel, like Turkey and the US, must be hoping that Turkmenistan’s new rulers will seek to diversify gas distribution by adopting a project to build a gas pipeline beneath the Caspian Sea.
But diversification is also needed in that country’s politics, because the only opposition that has any strength in the country is worryingly Islamic fundamentalist.
Russia has had centuries of influence in the Middle East and Central Asia, much of which used to be incorporated in the Russian and Soviet empires.
It could serve as a powerful force for good in the region, if it stops seeking short term advantage and begins to act in its own long term interests, which will best be served by a prosperous, non-nuclear armed Iran, and a far more open Turkmenistan.
Motor City Meltdown
WASHINGTON, DC – The financial crisis that began in 2007 has been persistently marked by muddled thinking and haphazard policymaking.
Now, the United States Treasury is headed for a mistake of historic and catastrophic proportions by refusing to bail out America’s Big Three automakers.
Make no mistake.
If Detroit’s Big Three go bankrupt, the perfect storm really will have arrived with a collapse in both the real economy and the financial sector.
This threat means that the financial bailout funds authorized by Congress can legitimately be used to support the automakers.
Treasury’s refusal to do so is a monumental blunder that risks a general meltdown, the consequences of which will extend far beyond America’s shores.
Proponents of a bailout for the Big Three have emphasized the enormous job losses associated with a bankruptcy scenario, including not only jobs directly provided by the automakers, but also jobs with parts suppliers, auto dealers, and in the transport and advertising industries.
These job losses will then be multiplied locally and nationally.
Lost wages will reduce consumption, causing additional job cuts, while factory closures will reduce investment, hitting employment in capital goods industries.
Lost incomes will also drive down tax revenues, resulting in public-sector employment cutbacks.
Moreover, the automakers are essential for closing the trade deficit, and their demise could bring another surge in imports.
The automakers are also the backbone of American manufacturing, driving advances in manufacturing technology that will be needed if America is to be a world leader in the coming “green” transportation revolution.
Additionally, the Big Three are vital to national security, supplying important military transportation assets.
Lastly, bankruptcy will impose massive costs on the government’s Pension Benefit Guaranty Corporation (PBGC), further worsening the fiscal outlook.
All of this is true.
But missing from this array of arguments is the damage a bankruptcy of the Big Three would do to financial markets.
In one fell swoop, the hard-won gains in stabilizing the financial system would be blown away.
The Big Three and their auto finance associates (such as GMAC) are huge debtors whose liabilities are held throughout the financial system.
If they go bankrupt, the insurance industry, which is likely a large holder of these debts, would quickly enter a spiral of collapse.
Pension funds would also be hit, imposing further costs on the PBGC.
But the greatest damage may come from the credit default swaps (CDS) market that brought down AIG.
Huge bets have undoubtedly been placed on the bonds of GM, Ford, Chrysler, and GMAC, and bankruptcy will be a CDS triggering event requiring repayment of these bonds. Moreover, a Big Three bankruptcy will bankrupt other companies, risking a cascade of financial damage as their bonds and equities fall in value and further CDS events are triggered.
This is the nightmare outcome that risks replicating the Crash of 1929.
Opposition to the bailout is bringing back to the surface the worst of the conservative economic thought that got America and the world into this mess in the first place. The opposition of the Federal Reserve and Treasury to hands-on intervention meant that they were slow to understand that merely ring-fencing the commercial banks could not save the financial system.
Now, they are failing to understand the financial significance of the Big Three.
Conservative animus toward trade unions is also once again on display.
But it is union weakness that has caused wages to stagnate and forced America to rely on debt and asset price inflation as the engines of growth.
Another conservative accusation is that a bailout would infringe free-trade rules.
But it is these rules that have fostered the trade deficits that have destabilized and undermined the American economy.
The reality is that world trade would suffer far greater damage from the global economic fallout of a Big Three bankruptcy.
Lastly, conservatives have trotted out the old moral hazard story in order to argue that a bailout would turn American manufacturing into a permanent beggar of government funds.
In fact, business has always lobbied Congress for favors and tax breaks, and the Lehman Brothers experience proved the foolishness of confusing parables about moral hazard with crisis management.
There are undoubtedly colossal problems in Detroit, and the bosses of the Big Three automakers could never be convicted of an excess of imagination.
Economic policy has also contributed to their current condition as trade agreements and an over-valued dollar promoted auto imports, and incoherent energy and environmental policy stifled innovation.
All of this must be fixed.
But sacrificing the Big Three automakers will accomplish nothing while risking a tragic economic depression.
Learning About Growth from Austerity
MILAN – In a recent set of studies, Carmen Reinhart and Kenneth Rogoff used a vast array of historical data to show that the accumulation of high levels of public (and private) debt relative to GDP has an extended negative effect on growth.
The size of the effect incited debate about errors in their calculations.
Few, however, doubt the validity of the pattern.
This should not be surprising.
Accumulating excessive debt usually entails moving some part of domestic aggregate demand forward in time, so the exit from that debt must include more savings and diminished demand.
The negative shock adversely impacts the non-tradable sector, which is large (roughly two-thirds of an advanced economy) and wholly dependent on domestic demand.
As a result, growth and employment rates fall during the deleveraging period.
In an open economy, deleveraging does not necessarily impair the tradable sector so thoroughly. But, even in such an economy, years of debt-fueled domestic demand may produce a loss of competitiveness and structural distortions.
And the crises that often divide the leveraging and deleveraging phases cause additional balance-sheet damage and prolong the healing process.
Thanks in part to research by Reinhart and Rogoff, we know that excessive leverage is unsustainable, and that restoring balance takes time.
As a result, questions and doubts remain about an eventual return to the pre-crisis trend line for GDP, and especially for employment.
What this line of research explicitly does not tell us is that deleveraging will restore growth by itself.
No one believes that fiscal balance is the whole growth model anywhere.
Consider southern Europe.
From the standpoint of growth and employment, public and private debt masked an absence of productivity growth, declining competitiveness in the tradable sector, and a range of underlying structural shortcomings – including labor-market rigidities, deficiencies in education and skills training, and underinvestment in infrastructure.
Debt drove growth, creating aggregate demand that would not have existed otherwise.
(The same is true of the United States and Japan, though the details differ.)
Government is not the sole actor in this.
When the deleveraging cycle begins, the private sector starts to adjust structurally – a pattern clearly seen in the data on growth in the tradable side of the US economy.
Muted wage growth increases competitiveness, and underutilized labor and capital are redeployed.
How fast this happens partly depends on the private sector’s flexibility and dynamism.
But it also depends on the ability and willingness of government to provide a bridging function for the deficiency in aggregate demand, and to pursue reforms and investments that boost long-term growth prospects.
If public-sector deleveraging is not a complete growth policy – and it isn’t – why is there so much attention on fiscal austerity and so little action (as opposed to lip service) on growth and employment?
Several possibilities – not mutually exclusive – come to mind.
One is that some policymakers think that fiscal balance really is the main pillar in a growth strategy: Deleverage quickly and get on with it.
The belief that the fiscal multiplier is usually low may have contributed to underestimation of the short-run economic costs of austerity policies – and thus to persistently optimistic forecasts of growth and employment.
Recent research by the International Monetary Fund on the context-specific variability of fiscal multipliers has raised serious questions about the costs and effectiveness of rapid fiscal consolidation.
Estimates of the fiscal multiplier must be based on an assumption or a model that says what would have happened in the absence of government spending of some type.
If the assumption or the model is wrong, so is the estimate.
The counterfactual needs to be made explicit and assessed carefully and in context.
In some countries with high levels of debt and impaired growth, fiscal stimulus could raise the risk premium on sovereign debt and be counterproductive; others have more flexibility.
Countries vary widely in terms of household balance-sheet damage, which clearly affects the propensity to save – and hence the multiplier effect.
Uncertainty is a reality, and judgment is required.
Then there is the time dimension.
If infrastructure investment, for example, generates some growth and employment in the short to medium term and higher sustainable growth in the longer term, should we rule it out because some estimates of the multiplier are less than one?
Similarly, if fiscal stimulus has a muted effect because the recipients of the income are saving to restore damaged household balance sheets, it is not clear we want to discount the accelerated deleveraging benefit, even if it shows up in domestic demand only later.
Policymakers (and perhaps financial markets) may have believed that central banks would provide an adequate bridging function through aggressive unconventional monetary policy designed to hold down short- and long-term interest rates.
Certainly central banks have played a critical role. But central banks have stated that they do not have the policy instruments to accelerate the pace of economic recovery.
Among the costs and risks of their low-interest-rate policies are a return to the leveraged growth pattern and growing uncertainty about the limits of a central bank’s balance-sheet expansion.
In other words, will the elevated asset values caused by low discount rates suddenly reset downward at some point?
No one knows.
Countries are subject to varying degrees of fiscal constraint, assuming (especially in the case of Europe) a limited appetite for unlimited, unconditional cross-border transfers.
Those that have some flexibility can and should use it to protect the unemployed and the young, accelerate deleveraging, and implement reforms designed to support growth and employment; others’ options – and thus their medium-term growth prospects – are more constrained.
All countries – and policymakers – face difficult choices concerning the timing of austerity, perceived sovereign-credit risk, growth-oriented reforms, and equitable sharing of the costs of restoring growth.
So far, the burden-sharing challenge, along with naive and incomplete growth models, may have contributed to gridlock and inaction.
Experience can be a harsh, though necessary, teacher.
Growth will not be restored easily or quickly.
Perhaps we needed the preoccupation with austerity to teach us the value of a balanced growth agenda.
Moving Pictures
CANNES – This year’s Cannes Film Festival was marked by a profound contrast between what unfolded along La Croisette, the palm-lined sweep of pedestrian walkway that stretches between swathes of luxury hotels and the azure Mediterranean, and the films debuting onscreen.
Outside all was glitter, excess, posturing, and brand names.
Young women in five-inch heels and revealing clothing prowled for wealthy men – or were imported by them to decorate boats and premiere parties.
Every night, the parade of stars up the red carpet, flanked by photographers, played out like a relic of a more ritualistic time.
Inside the Palais, the hulking brutalist structure where the films are screened, this year’s lineup was filled with tales of ordinary people, or poor people, struggling with the fallout of the global issues that increasingly unite us – or confronting painful political conflicts that official histories had laid to rest.
If in the past Cannes showcased films telling a hundred different kinds of stories, this year’s offerings made clear that in an increasingly flattened and wired world, there is really only one story – with a hundred different inflections.
Thai cinema’s gifted young director Apichatpong Weerasethakul’s film, Uncle Boonmee Who Can Recall His Past Lives, won the Palme d’Or.
It is a Spanish-German-French-British-Thai co-production, the kind of international collaborative effort we are increasingly seeing in film – a form of cross-border collaboration that should point the way to other forms of global civil-society projects.
The film, whose production was slowed by the “red shirt” revolt in Thailand, deals in part with themes of past violence.
At one point, the project – which is also part of a massive art installation – refers to the history of a village: local teenagers recount that, “Soldiers once occupied this place.
They killed and tortured villagers and forced them to flee to the jungle.”
Poetry, by South Korean director Lee Chang-Dong, also deals with a family reconciling themselves through pain to a prior conflict.
It tells the story of an elderly woman who is forced to face her past as a torturer.
Other films address a conflict that is closer to home here in France.
Outside the Law, directed by Rachid Bouchareb, narrates the story of the massacre at Setif, Algeria, in May 1945.
The film tracks the events surrounding three Algerian brothers over a 35-year period, and brings to light aspects of the massacre that had been considered taboo in France.
Strikingly, Outside the Law is a Franco-Algerian production, and it has already caused political controversy: it was denounced by Lionnel Luca, a French deputy who is, as one French periodical put it, “nostalgic for a French Algeria.”
The film actually sparked a noisy protest along La Croisette, with French veterans defensively and aggressively singing “La Marseillaise,” even as couples dressed in black tie and gowns swept in a parallel path to the evening's festivities.
In response, the mayor of Cannes organized a ceremony to commemorate all victims of the French-Algerian conflict.
Still another film reawakens not-so-distant American history and casts it in a radically altered light: Doug Liman’s Fair Game reinterprets the Valerie Plame/Joe Wilson scandal of 2003, and reveals that Plame was far from being a glorified secretary, as the Bush administration had portrayed her.
On the contrary, she led a team that intercepted components of nuclear weapons at their source, whisked them away to the United States, altered them slightly so that they would not work, and replaced them.
So the Bush administration’s leak of her identity ended not just her career, but also a sensitive program that had kept us all safe.
Other films simply tell stories of people who are not usually portrayed by film.
Los Labios, an Argentine project directed by Santiago Loza and Ivan Fund, simply follows three government-funded nurses who go to a rural area to serve the needs of the impoverished local population.
It humbly tracks their accounting of cases of malnourishment, alcoholism, diseases of poverty, and the ravages of unemployment and inadequate medical care.
Similarly, Sergei Loznitsa’s My Joy simply explores the life of a Ukrainian truck driver named Georgy, who gets lost and finds himself in an archetypal Russian village, where he is drawn into daily life.
This is a real cinema of humility – the directors again and again have chosen to take seriously the dramas and struggles of ordinary people and find the heroism or tragedy therein.
What does it all mean?
The many movies that critically revise settled national narratives suggest that people are no longer willing to accept history that has been crafted by elites for their own purposes.
In most cases, the directors researched their own films by interviewing sources who were close to the action, or close to the main events at a grassroots level.
That is an exciting development, though initially it implies a messier historical narrative.
In Bouchareb’s film, for example, there is not a unified story of the occupation of Algeria, but many points of view that a young French teenager (or French-Algerian teenager) can witness and draw from.
That is surely good, especially in an open society.
So is the focus of other films on the struggles of ordinary people.
To be sure, simply championing populism for its own sake – a Stalinist or New Left reflex – makes for bad art.
But the flattening of the world has led to a flattening of the kinds of people who can be seen as heroes or seekers.
By bringing these subjects into focus, great film directors have gained a larger and more representative world of stories from which to work their magic.
Mubarak’s Last Laugh?
CAIRO – August 3, 2011, will be remembered as a historic day in Egypt.
Former President Hosni Mubarak was put on public trial, together with his two sons and his ex-interior minister, General Habib el-Adly.
The repercussions for Egypt, indeed for the entire Arab world, will be profound.
This is not the first time that an Arab dictator has been put on trial.
Saddam Hussein and Zine El Abidine Ben Ali preceded Mubarak in the dock.
Hussein was tried with the help of a United States-led coalition;
Ben Ali was tried and convicted in absentia, after fleeing to Saudi Arabia.
But in Egypt, “It was done exclusively by Egyptians for Egypt,” as a friend put it to me.
“That is why we are so proud of it.”
But the run-up to the trial was contentious.
On July 29, many organizations staged a large protest in Cairo’s Tahrir to highlight the unity of Egypt’s revolutionaries (whose demands included a public trial of Mubarak).
Instead, the protest exposed the dramatic polarization between Islamists and secularists since Mubarak’s ouster.
Moreover, it revealed the potent capacity of Egypt’s Salafis to mobilize supporters, who were the overwhelming majority in Tahrir Square that day.
Other groups, including the leftist April 6 Youth Movement and the multi-ideological Coalition of the Revolution’s Youth, looked minute and insignificant.
As a result, many secular activists ended their week-long sit-in and withdrew from Tahrir Square.
Ironically, this was what the ruling Supreme Council of the Armed Forces (SCAF) wanted, and it was achieved at no cost in violence or military tribunals.
Chants of “islamiyya, islamiyya” (Islamic, Islamic) were enough.
With no representative institutions and the military in control of the country, street mobilization has become the main tool of Egyptian politics.
Following the March 19 referendum, in which most Islamists campaigned for a package of constitutional amendments and got 77% support, secularists took to the streets, mobilizing behind their own demands.
Those demands were mostly uncontroversial for Egypt’s revolutionaries, including Islamists: the release of political prisoners; a halt to military tribunals for civilians; prosecution of the murderers of protesters (many of whom are senior police officers); a purge of corrupt Mubarak allies from the police force; and a public trial for Mubarak and his regime’s top henchmen.
But then came some controversial demands. Fearing that elections might bring an Islamist majority to Parliament and to the assembly that will write a new constitution, most secularists demanded supra-constitutional principles (akin to a bill of rights, with a few twists) or a constitution to be enforced by the SCAF before elections.
They staged street demonstrations, mobilized media pressure, and lobbied the SCAF.
It worked.
The SCAF announced that it is forming a body of constitutional experts to craft several versions of a potential constitution.
Obviously, the SCAF has its own calculations, which probably have less to do with protecting a liberal Egypt than with protecting the military’s financial independence and shielding itself from accountability to civilian institutions.
The secularists’ gains were a wake-up call for the Islamists, and they responded en masse on July 29.
But Egypt’s old-line Muslim Brotherhood, with all of its factions, tendencies, and offshoots, no longer appears to be the country’s dominant Islamist force, as Salafis challenge the Brotherhood’s traditional hegemony.
The Salafis are defined in part by their strict theological orthodoxy.
Their belief in the superiority of literal interpretations of Islamic texts and their deep animosity towards religious innovation (broadly defined) reflect their certainty that the first three generations of Muslims possessed the best understanding of Islam, and should provide guidance for future generations.
But Salafism is also a powerful source of personal identity, shaped and reinforced by a common form of dress and style of beard, a high degree of social conservatism, and a generally negative (but nuanced) perception of liberal individualism. “I raise my head high as I am an Egyptian, and I raise my head even higher as I am a Salafi,” an assistant of a leading Salafi sheikh proudly told me.
At the same time, Salafis’ social origins, organizational structures, political behavior, and even their views on democracy, violence, and state authority, are quite varied.
Decentralized organization, multiple leaderships, and conflicting ideological stances make the Salafi trend amorphous, volatile, and susceptible to manipulation and infiltration.
That has been the pattern observed in Algeria, Saudi Arabia, and Yemen.
Egypt may follow.
At the moment, Egyptian liberals’ main concern should be their popular appeal and ability to mobilize support, rather than picking fights with the Salafis and trying to enforce a constitution by any means, democratic or not.
During its transition period (1988-1991), Algeria’s secularists crafted a pluralist constitution that excluded religious parties.
Yet, when parliamentary elections were held in 1991 – more than two years after the constitution was adopted – the Islamic Salvation Front still won.
The Algerian secularists’ strategy of exclusion, fraud, cheating, and gerrymandering backfired badly: Islamists were perceived as victims, while secularists – with some exceptions – were cast as unprincipled opportunists.
Enforcing a secular constitution before elections does not guarantee a secular outcome.
Popular support does.
Unity among the former revolutionary opposition is critical for the success of any democratic transition, and Egypt is no exception.
The public trial of Mubarak shows what united demands can achieve.
Egyptian and other Arab revolutionaries should therefore keep the lessons of July 29 and August 3 in minds.
Unity now can bring justice and freedom later.
Polarization will bring neither.
Mubarak’s Odious Debts
NEW YORK – A glance at Egypt’s public finances reveals a disturbing fact: the interest that the country pays on its foreign loans is larger than its budget for education, healthcare, and housing combined.
Indeed, these debt-service costs alone account for 22% of the Egyptian government’s total expenditures.
The impact has become impossible to ignore.
With growing political uncertainty and a slowing economy, Egypt is likely to witness decreasing government revenues, increasing demands for urgent spending, and rising interest rates on government borrowing.
This could lead to a fiscal catastrophe for the government at the very moment when the country is attempting a complicated political transition.
Egypt’s public debt is around 80% of GDP, very close to the 90% level that economists Kenneth Rogoff and Carmen Reinhart identify as a harbinger of slower growth and heightened vulnerability to financial and fiscal crises.
Egyptians need only glance north, at the European debt crisis, to understand they should sort out their debt problem now, rather than waiting until it reaches Greek proportions.
This debt was incurred during the 30-year reign of the deposed president, Hosni Mubarak.
In international law, debt that is incurred without the consent of the people, and that is not used to their benefit, is referred to as “odious”; as such, it is not considered transferable to successor regimes.
The reasoning is simple and logical: if someone fraudulently borrows money in my name, I am not expected to pay it back, and neither should a country’s population when an unrepresentative leader borrows in their name and to their detriment.
For three decades, Mubarak’s borrowing only enriched him and his ruling clique while impoverishing and repressing the rest of Egypt.
Corruption was rife, but not just the covert type: public money was openly used to support many businesses under flimsy pretexts like “fostering economic growth” and “creating employment.”
Along with regulatory capture, this harmed competitiveness, market openness, and Egypt’s small and medium-size businesses.
The beneficiaries of this largesse are now mostly sitting in prison awaiting trial.
The rest of Egypt, however, only felt this money in the form of an ever-expanding state apparatus that solidified Mubarak’s rule, crushed dissent, and repressed millions.
When Egyptians rose up against Mubarak in January, they were confronted by weapons paid for with borrowed money.
Is it fair to expect Egyptians to continue paying for their previous repression and impoverishment at the hands of Mubarak and his cronies?
Since this money clearly benefited Mubarak but not his people, should it not be Mubarak, rather than his victims, who is held responsible for it?
The type of regime Mubarak was running had been clear for many years, and it was also clear how the money was being used.
A prudent lender should have considered these facts before making the loans.
So the banks and international institutions that lent money to Mubarak should bear the responsibility of their choice to bankroll his repressive regime.
The new Egypt should make a clean break with Mubarak and his creditors, and let them sort out their business among themselves without involving the Egyptian people.
The Egyptian government’s only role should be to help liquidate Mubarak assets for repayment should the need arise.
This would be not only fair, but it also would teach an important lesson to those who bankroll dictators – a lesson that is likely to have an immediate positive impact worldwide.
Lenders to a repressive regime will no longer expect these debts to be repaid by its successors, immediately making lenders worldwide careful about lending to them.
An Egyptian precedent would bring awareness and sobriety to an entire generation of lenders that is not accustomed to considering this type of risk, and that may even be unfamiliar with the doctrine of odious debt.
Repressive regimes would find it harder to borrow, which would, in turn, make it harder for them to repress their people, and make it easier and cheaper for responsible and legitimate governments to secure important funding when they need it.
Transferring liability for foreign debt to Mubarak should not have negative economic consequences for Egypt in the long run.
This move should not be understood as a move towards fiscal recklessness, but as a one-time break from it.
With a smaller debt burden and interest payments, Egypt’s fiscal position would improve significantly, and threats to economic growth would recede.
Foreign lenders’ resulting caution would prevent future Egyptian governments from irresponsibly saddling their populace with debt.
Perhaps most importantly, the days of borrowing to build a large state security apparatus would be gone for good – worldwide.
For the sake of Egyptians and people living under tyranny everywhere, Egypt’s government must take a brave stand.
Muddling Out of Freefall
NEW YORK – Defeat in the Massachusetts senatorial election has deprived America’s Democrats of the 60 votes needed to pass health-care reform and other legislation, and it has changed American politics – at least for the moment.
But what does that vote say about American voters and the economy?
It does not herald a shift to the right, as some pundits suggest.
Rather, the message it sends is the same as that sent by voters to President Bill Clinton 17 years ago: &nbsp;
Indeed, on the other side of the United States from Massachusetts, voters in Oregon passed a referendum supporting a tax increase.
The US economy is in a mess – even if growth has resumed, and bankers are once again receiving huge bonuses.
More than one out of six Americans who would like a full-time job cannot get one; and 40% of the unemployed have been out of a job for more than six months.
As Europe learned long ago, hardship increases with the length of unemployment, as job skills and prospects deteriorate and savings gets wiped out.
The 2.5-3.5 million foreclosures expected this year will exceed those of 2009, and the year began with what is expected to be the first of many large commercial real-estate bankruptcies.
Even the Congressional Budget Office is predicting that it will be the middle of the decade before unemployment returns to more normal levels, as America experiences its own version of “Japanese malaise.”
As I wrote in my new book Freefall , President Barack Obama took a big gamble at the start of his administration.
Instead of the marked change that his campaign had promised, he kept many of the same officials and maintained the same “trickle down” strategy to confront the financial crisis.
Providing enough money to the banks was, his team seemed to say, the best way to help ordinary homeowners and workers.
When America reformed its welfare programs for the poor under Clinton, it put conditions on recipients: they had to look for a job or enroll in training programs.
But when the banks received welfare benefits, no conditions were imposed on them.
Had Obama’s attempt at muddling through worked, it would have avoided some big philosophical battles.
But it didn’t work, and it has been a long time since popular antipathy to banks has been so great.
Obama wanted to bridge the divides among Americans that George W. Bush had opened.
But now those divides are wider.
His attempts to please everyone, so evident in the last few weeks, are likely to mollify no one.
Deficit hawks – especially among the bankers who laid low during the government bailout of their institutions, but who have now come back with a vengeance –&nbsp;use worries about the growing deficit to justify cutbacks in spending. &nbsp;
But these views on how to run the economy are no better than the bankers’ approach to running their own institutions.
Cutting spending now will weaken the economy.
So long as spending goes to investments yielding a modest return of 6%, the long-term debt will be reduced, even as the short-term deficit increases, owing to the higher tax revenues generated by the larger output in the short run and the more rapid growth in the long run.
Trying to “square the circle” between the need to stimulate the economy and please the deficit hawks, Obama has proposed deficit reductions that, while alienating liberal democrats, were too small to please the hawks.
Other gestures to help struggling middle-class Americans may show where his heart is, but are too small to make a meaningful difference.
Three things can make a difference: a second stimulus, stemming the tide of housing foreclosures by addressing the roughly 25% of mortgages that are worth more than the value the house, and reshaping our financial system to rein in the banks.
There was a moment a year ago when Obama, with his enormous political capital, might have been able to achieve this ambitious agenda, and, building on these successes, go on to deal with America’s other problems.
But anger about the bailout, confusion between the bailout (which didn’t restart lending, as it was supposed to do) and the stimulus (which did what it was supposed to do, but was too small), and disappointment about mounting job losses, has vastly circumscribed his room for maneuver.
Indeed, there is even skepticism about whether Obama will be able to push through his welcome and long overdue efforts to curtail the too-big-to-fail banks and their reckless risk-taking.
And, without that, more likely than not, the economy will face another crisis in the not-too-distant future.
Most Americans, however, are focused on today’s downturn, not tomorrow’s.
Growth over the next two years is expected to be so anemic that it will barely be able to create enough jobs for new entrants to the labor force, let alone to return unemployment to an acceptable level.
Unfettered markets may have caused this calamity, and markets by themselves won’t get us out, at least any time soon.
Government action is needed, and that will require effective and forceful political leadership.
The Drug Industry’s Poison Pills
BOSTON – One does not need to spend a lifetime in the global health-care sector to appreciate that substandard or counterfeit drugs are a major public-health hazard.
These bogus products have infiltrated pharmaceutical supply chains from Azerbaijan to Zambia, wrecking the most promising programs to control, manage, and eradicate deadly diseases.
Yet little is being done to stop this criminal activity.
Growing up in Pakistan, I realized how vital it was for my mother, like any educated parent, to know which drugs and pharmacies could be trusted.
Little has changed since then.
Local pharmacists from Lahore to Lusaka continue to sell a variety of brands of the same drug at different prices; and shopkeepers are called upon to give a candid opinion of their benefits and shortcomings.
Unfortunately, the problem runs a lot deeper than a few bad drugs sold at the corner pharmacy.
Around $75 billion of substandard drugs are sold annually, causing an estimated 100,000 deaths worldwide, and making many more people seriously ill.
The trade in inferior drugs also undermines fragile public-health systems in poor countries.
As well as killing consumers, the effects of bad drugs can be passed from parent to child, and even create new drug-resistant strains of diseases that threaten us all.
Yet the fight against substandard drugs has never been taken as seriously as other global health crises such as malaria, HIV, or maternal and infant mortality.
This may be because there is no obvious solution.
But, in seeking answers, we must first acknowledge that the issue is larger than just counterfeit medicines.
Many legitimate manufacturers worldwide, whether through complacency or incompetence, lack adequate quality controls.
In some cases, deficient storage and refrigeration systems turn safe medicines into dangerous substances.
Unfortunately, those drug makers then take advantage of developing countries’ weak or poorly implemented legislation and corrupt officials to pass their products through local supply chains and into shops.
Public ignorance or apathy means that those responsible are able to avoid prosecution.
The technical expertise and equipment needed to detect inferior products is usually beyond the financial reach of many developing countries.
But there are low-cost alternatives.
One approach, for example, would be to include on packaging a “scratch code” that includes a phone number for consumers to call in order to check that the batch number matches an authentic product.
But, while this approach would certainly help to catch counterfeits, it would miss the substandard or degraded products made by legitimate firms, which are tested only by the consumer – and often at great cost in terms of health risks.
It is therefore imperative to develop new detection technologies that will work in poorer countries, and that complement existing systems such as bar codes.
Detection technology must be capable of analyzing all forms of a drug – whether powder, pill, capsule, or syrup – and of detecting several different grades of quality, not just the junk.
It must be simple, affordable, adaptable, and scalable; and it must work at all stages of distribution, whether at customs, in hospitals, or in remote villages.
But technology alone will not be enough.
Regulators, hospitals, and drug-safety authorities must take the lead, rather than placing the burden on often poor and uneducated citizens who are struggling to care for loved ones.
The search for new, sustainable solutions, requires at least three initiatives.
First, we must encourage innovation by offering research grants to support small initiatives or large-scale projects (like campaigns to fight HIV, malaria, and maternal mortality). Ideally, an international group would coordinate and develop all of the ideas and products, and take them from the laboratory to the field.
Second, we need to harness the creativity and commitment of young students, so that they understand the devastating impact of bad pharmaceuticals and become motivated to make a difference in people’s lives.
Third, we must make use of the media.
Just as the world cries foul when an illegal shipment of ivory is uncovered, we must launch campaigns in the press, on television, and online to bring to account any trader, state official, or company caught selling or promoting low-quality drugs.
In this way, we will remind those in the industry of a fundamental premise: their most precious commodity is not a blockbuster drug, but the public’s trust.
Multilateral Engagement for Energy Security
Our global need for energy reliability binds us together as surely as the global network that delivers it; a failure in one part of our network will inevitably affect everyone.
Local interests and persistent conflicts that sit astride our networks, including the as yet unresolved issue of Russian gas supply to Ukraine and Europe, have again raised the specter of energy being used as a weapon to gain political leverage.
Energy security is at the top of the agenda of the G-8 meeting hosted by President Vladimir Putin in Saint Petersburg.
The G-8 has correctly identified the key economic issue, energy interdependence, and now is the time for focused multilateral engagement on this issue.
For some countries that are blessed with vast supplies of oil and gas, the use of energy exports to reward friends and punish foes seems a tempting option.
Today, however, it is more likely to prove disruptive to friend and foe alike, as well as damaging to those countries that indulge this temptation.
Energy embargoes have generally proven counterproductive.
The price rises that followed OPEC’s oil embargoes of the 1970’s were unsustainable and led to conservation efforts and expansion of non-OPEC production.
As a result, OPEC’s share of world oil exports dropped sharply in the twelve years following the embargo of 1973-1974.
Experience has taught us that transparency and price stability is in everyone's interest.
Pursuit of these principals while encouraging the development of global markets is essential to greater overall growth prospects for the world economy.
So when Russia sought earlier this year to quadruple the price of its gas exports to Ukraine, it argued that it was simply demanding market rates.
The message sounded fair and it did, for a short time, appeal to some policymakers and investors not fully apprised of the situation.
To be clear, measured price changes implemented over time was never in dispute; indeed, some internal price adjustments for Ukraine were in order.
Unfortunately for Russia’s neighbors, it is not the market that determines what price is paid for Russia’s gas or transport; it is Gazprom and its chairman, Dmitry Medvedev, who is also the Russian government’s First Deputy Prime Minister.
The price charged by Gazprom for each country bordering Russia is different and is largely determined by political relationships with the Kremlin.
Economically speaking, gas supply and transport prices are more correlated to political relationships than to fundamental supply-demand or gas transport basis calculations.
Ukraine was threatened with an immediate quadrupling of its prices – or interruption of its gas supply - as a result of it new-found independence from Russia during the Orange Revolution.
Georgia, also feeling the wrath of Moscow following the Rose Revolution, faced potentially harmful price increases as well.
Belarus, however, still in strong alignment with the Kremlin, continues to enjoy highly subsidized gas.
Of course, Ukraine was not the only country put at risk by this brinksmanship; suppliers such as Turkmenistan, geographically locked into transit requirements through Russia, also suffer.
And for the consuming nations of Western and Central Europe, the price effects and supply disruption anxieties were of significant consequence.
Immediate multilateral intervention by the European Union and the United States probably are what probably caused Gazprom to turn the gas back on.
Natural gas may be the commodity most vulnerable to event-driven supply disruptions.
The fixed interconnected pipelines lock producers and consumers in a near-exclusive embrace.
Diversification in natural gas transportations is a long-term cross-border asset development proposition requiring enormous investment and political commitment on a multilateral level.
Many solutions are already under consideration: new gas storage capacity, increased efficiency, expansion of domestic production of both oil and gas, and alternative energy supplies such as coal-bed methane.
Additionally, a market in tradable liquefied natural gas (LNG) is rapidly emerging.
It is more feasible to diversify the supply chain, albeit incrementally, by importing gas from distant producers rather than from monopolistic suppliers next door.
All of these efforts together will soften shocks somewhat and create more energy self-sufficiency.
Yet more is required.
First, G-8 leaders should consider implementing standards in energy transactions requiring open and transparent contracts in line with best practices in business.
It is important to dilute the global impact of local politicians pursuing non‑energy agendas, or simply their own limited interests.
We see these problems today in state-owned firms in Latin America, political unrest in Africa, tensions in the Middle East or through opaque business intermediaries, as in the questionable gas deal between Ukraine and Russia, known now as RUE (RosUkrEnergo).
In the end, energy security for all of us in Europe requires recognizing that the linked nature of our supply and transmission systems makes us interdependent.
This is where an “Energy Alliance” of consumers and suppliers could be useful, starting with the nations of Europe helping to guarantee the energy supplies of others in a major disruption.
The Energy Charter, which emphasizes market access and transparency, is a laudable effort but it is not sufficient for those moments of crisis; our markets are not yet well enough equipped to deal with event-driven disruptions.
The Energy Charter might be a vehicle for this collective energy security, if deepened and broadened.
It is our duty as leaders to chart a course for a secure energy future.
Tolerance of questionable dealing today for the sake of political expediency will cost more in the future for us all.
When the inevitable conflict occurs, public confidence, political credibility and market reliability are needlessly sacrificed – this has clearly occurred for Russia and for Ukraine.
Threats to energy security must be challenged and resolved on a multilateral basis, with all stakeholders present.
The interdependent nature of our energy infrastructure requires a multilateral approach.
We are all depending on it.
The Right Choices for 2015
WASHINGTON, DC – As 2015 begins, policymakers around the world are faced with three fundamental choices: to strive for economic growth or accept stagnation; to work to improve stability or risk succumbing to fragility; and to cooperate or go it alone.
The stakes could not be higher; 2015 promises to be a make-or-break year for the global community.
For starters, growth and jobs are needed to support prosperity and social cohesion in the wake of the Great Recession that began in 2008.
Six years after the eruption of the financial crisis, the recovery remains weak and uneven.
Global growth is projected at just 3.3% in 2014 and 3.8% in 2015.
Some important economies are still fighting deflation.
More than 200 million people are unemployed.
The global economy risks getting stuck in a “new mediocre” – a prolonged period of slow growth and feeble job creation.
To break free from stagnation, we need renewed policy momentum.
If the measures agreed by the leaders assembled at the G-20 in November are implemented, they will lift world GDP by more than 2% by 2018 – the equivalent of adding $2 trillion in global income.
Furthermore, by 2025, if the laudable – yet not overly ambitious – goal of closing the gender gap by 25% is achieved, 100 million women could have jobs that they didn’t have before.
Global leaders have asked the International Monetary Fund to monitor the implementation of these growth strategies.
We will do so, country by country, reform by reform.
Besides structural reforms, building new momentum will require pulling all possible levers that can support global demand.
Accommodative monetary policy will remain essential for as long as growth remains anemic – though we must pay careful attention to potential spillovers.
Fiscal policy should be focused on promoting growth and creating jobs, while maintaining medium-term credibility.
And labor-market policies should continue to emphasize training, affordable childcare, and workplace flexibility.
As we ponder the second choice, between stability and fragility, we must consider how we can make our increasingly interconnected world a safer place.
Financial integration has risen tenfold since World War II.
National economies are so interconnected that shifts in market sentiment tend to cascade globally.
It is therefore critical that we complete the agenda on financial-sector reform.
To be sure, there has been progress, especially on banking regulation and on addressing too-big-to-fail financial institutions.
But countries must now implement the reforms and improve the quality of supervision.
We also need better rules for nonbanks, stricter monitoring of shadow banks, and improved safeguards and more transparency in the derivatives markets.
Progress on closing data gaps in the financial sector is urgently needed as well, so that regulators can properly assess risks to financial stability.
Most important, the culture of the financial sector needs to change.
The principal purpose of finance is to provide services to the other parts of the economy, which it cannot do unless it enjoys the confidence of those who depend on those services – that is, all of us.
Restoring trust should therefore start with an all-out effort to promote and enforce ethical behavior throughout the industry.
The third choice, whether to cooperate or go it alone, is the most critical.
No economy is an island; indeed, the global economy is more integrated than ever before.
Consider this: Fifty years ago, emerging markets and developing economies accounted for about a quarter of world GDP.
Today, they generate half of global income, a share that will continue to rise.
But sovereign states are no longer the only actors on the scene.
A global network of new stakeholders has emerged, including NGOs and citizen activists – often empowered by social media.
This new reality demands a new response.
We will need to update, adapt, and deepen our methods of working together.
This can be done by building on effective institutions of cooperation that already exist.
Institutions like the IMF should be made even more representative in light of the dynamic shifts taking place in the global economy.
The new networks of influence should be embraced and given space in the twenty-first century architecture of global governance.
This is what I have called the “new multilateralism.”
I believe it is the only way to address the challenges that the global community faces.
The year 2014 was a tough one.
The recovery was slow, a series of dangerous geopolitical risks emerged, and the world was confronted with a devastating Ebola outbreak.
This year may be another tough one, but it could also be a good one – a truly multilateral year.
New momentum on global trade could help unlock investment worldwide, and I am hopeful about the new Sustainable Development Goals (which will succeed the Millennium Development Goals in 2015), and about the prospects for a comprehensive climate-change agreement at the end of this year.
Against this backdrop, the adoption of the IMF reforms by the United States Congress would send a long-overdue signal to rapidly growing emerging economies that the world counts on their voices, and their resources, to find global solutions to global problems.
Growth, trade, development, and climate change: 2015 will be a rendezvous of important multilateral initiatives.
We cannot afford to see them fail.
Muppets and Middle East Peace
NEW YORK – Can furry puppets in Day-Glo colors provide the lessons we need to calm the fires of the Israeli-Palestinian conflict?
The Muppet empire is now worldwide.
Those who grew up with the children’s educational TV show Sesame Street know that it gives five-year-olds easy-to-take lessons in literacy, numeracy, and social skills.
But Sesame Street has a loftier agenda, finding partners in the developing world – including Saudi Arabia, South Africa, and Pakistan – to bring the fuzzy little creatures, with their message of peace and tolerance, to local audiences.
A new documentary, “When Muppets Dream of Peace,” tracks the harrowing joint production of Sesame Street in Israel and Palestine, with a Jordanian production team brought in to help facilitate.
This program, like so many educational or cultural Israeli-Palestinian partnerships, began in starry-eyed idealism.
But, based on the film – and on a recent panel discussion with the filmmakers and a Muppets spokesman in New York City – it was undermined by a common flaw in such partnerships.
The original plan – like with so many of these programs – was based on a notion of parity: Israeli and Palestinian production teams would work together.
But the Palestinian partners vetoed that idea – “We aren’t there yet,” they explained.
Could they have a stand-alone Palestinian Sesame Street?
No funding for that, came the reply.
The Palestinian team finally agreed to parallel productions with a major “cultural exchange” element – rather than creating segments together, they would produce a series with Palestinian Muppets and adults that also incorporated cartoons and mini-documentaries produced by the Israelis and Jordanians. The other two teams would do likewise.
Some unifying characters – such as an Arab- Israeli girl who explains each “side” to the other – would create a measure of continuity.
The New York-based management wanted the Palestinians and Israelis to portray each other in a humanizing way.
Again, the Palestinians resisted.
Rather than focus on creating scenarios that showed Israelis – even Israeli kids – in a positive light, they wanted to focus on showing Palestinian culture in a positive light, portraying Palestinian youths as role models, and providing images to kids that offered alternatives to violence.
But then reality intervened again.
A suicide bomber attacked in Israel, and, in retaliation, the Israel Defense Forces took over Ramallah, where the tiny Palestinian Sesame Street studio was located.
Day after day, the talented Palestinian team of animators, puppeteers, designers, cameramen, and producers could not get to work – even as the Israeli team was churning out their own material in a brightly lit, well-funded studio in Tel Aviv.
Then the IDF occupied the TV station itself and destroyed it, along with the team’s computers and cameras.
The documentary’s footage of shot-out computer screens and piles of smashed printers and cameras – under graffiti reading “Palestine Never” – makes one despair.
Meanwhile, New York was growing impatient, letting the Palestinian team know that their segments were late – and, under what was essentially a military occupation, the Palestinians began to rethink whether this was the right kind of project to which to devote their energies.
The New York producer overseeing the project, a single mother, was reluctant initially to visit Ramallah – so the Palestinian team’s inability to produce their segments on time was, like so many aspects of the Palestinian experience, hidden behind a barrier of fear, not fully witnessed, and thus not fully comprehended.
The co-production has ended.
But there is a Palestinian Sesame Street and an Israeli Sesame Street, and there are positive Arab-Israeli characters in the Israeli version.
And the creators of these programs, together with the filmmakers behind “When Muppets Dream of Peace,” offer important lessons for all of us.
One quote from a Palestinian TV production team member stayed with me: “This is a shotgun wedding,” he explained when he was advocating for a Palestine-only Sesame Street.
The Palestinian team is utterly indistinguishable, superficially, from their European or Israeli counterparts: they are hip, young, talented, sophisticated, and more than anything they want to work to create a positive environment for their kids – or at least a psychological respite from the reality of occupation, violence, and war.
But how often does the outside world – even the best-intentioned donors and program creators – reach out to Palestinian civil society on its own terms, without insisting on that “shotgun wedding?”
How often are resources invested in Palestinian films, books, newspapers, high schools, dance troupes, teachers, etc. without requiring the recipients to make friendly gestures to Israel?
Many civil-society elements in the Muslim world have turned their backs on possible partnerships with Israeli counterparts.
One Egyptian actor was boycotted at home for merely appearing in Cannes with an Israeli actress.
But I am certain that the more intently outsiders invest in Palestinian civil society on its own terms, the less exasperated the Palestinian intelligentsia – and the Muslim world – will become with the often-coerced terms of Palestine's creativity.
A vibrant Palestinian civil society could become more flexible and open toward possible partnerships – including more natural, holistic Israeli-Palestinian joint ventures – thus benefiting the region as a whole.
The Muppets have taught generations of kids worldwide how to count to ten and share cookies.
In the 1970’s in the United States, they taught us about an interracial couple on Sesame Street.
In South Africa, the creators asked for – and got – a puppet that was an HIV-positive child, since acceptance of such kids was a lesson that local educators told the New York team they needed to teach.
In the Sesame Street of Palestine and Israel, the failure of the joint venture was really a success: the Muppets and their creators have given us another valuable lesson, this time in how – and how not – to help others.
Murder Unincorporated
NEW YORK – What possessed the young French Muslim Mohammed Merah to murder three Jewish schoolchildren, a rabbi, and three soldiers, two of them fellow Muslims?
What possessed another man, Anders Breivik, to gun down more than 60 teenagers in a Norwegian summer camp last year?
These murder sprees are so unusual that people demand explanations.
To call these killers “monsters,” as some were quick to do, sheds little light on the problem.
They were not monsters; they were young men.
And to dismiss them as madmen is equally evasive.
If they were clinically insane, nothing more would need to be explained.
Two accounts, both broadly socio-political, stand out.
One was put forward by the controversial Muslim activist Tariq Ramadan.
He blames French society.
More specifically, he blames the fact that young Frenchmen of Muslim origin are marginalized on the grounds of their faith and the color of their skin.
Even though these people have French passports, they are treated as unwanted foreigners.
When French President Nicolas Sarkozy, himself the son of immigrants, says that there are too many foreigners in France, he drives young men like Merah farther into a corner.
A tiny minority of such men might lash out in desperation.
The other explanation, favored by Sarkozy, takes Merah at his word.
He said that he was protesting French military operations in Muslim countries and avenging the killing of Palestinian children.
He wanted to bring down the French state as an Islamic holy warrior.
He was inspired by al-Qaeda.
So why not believe him?
Hence Sarkozy’s decision to arrest other Muslim men suspected of Islamic extremism and bar certain imams from attending a religious conference in France.
Those who view Islamic extremism as the problem also tend to hold up young killers like Merah as examples of failed integration.
They never became sufficiently French.
Immigrants must be forced to share “Western values.”
Although no one would argue that Anders Breivik is insufficiently Norwegian, he, too, could be taken at his word.
The rhetoric of xenophobic demagogues appears to have convinced him that he had to kill the children of the social-democratic elites in order to protect Western civilization against the dangers of multiculturalism and Islam. His murders were the extreme result of dangerous ideas.
Neither explanation is entirely wrong.
Many young Muslims feel unwanted in their countries of birth, and extreme language, whether used by Islamists or their opponents, helps to create an atmosphere conducive to violence.
But both Ramadan and Sarkozy are too simplistic, for they reduce extraordinary murders to single explanations.
Even when they are faced with rejection, most young Muslim men do not become mass murderers.
Merah is too anomalous to serve as a typical example of anything, including racial or religious discrimination.
Far from being a religious fanatic, Merah grew up as a petty criminal with no interest in religion.
The appeal of Islamist extremism may have been its glorification of violence more than any religious content.
He enjoyed watching jihadist videos of beheadings. He also tried to join the French army and the Foreign Legion.
The army turned him down because of his criminal record.
If the French wouldn’t have him, he would join the holy warriors: anything to give him a sense of power and an excuse to indulge his violent impulses.
Many young men are drawn to the fantasy of violence; far fewer feel the need to act it out.
Ideology can serve as an excuse or justification, but it is rarely the main source of individual acts of brutality.
Murder sprees are more often than not a form of personal revenge – losers wishing to blow up the world around them, because they feel humiliated or rejected, whether socially, professionally, or sexually.
Sometimes, the killers appear to lack any excuse at all, as in the case of Eric Harris and Dylan Klebold, who in 1999 shot 12 fellow-students and a teacher at their high school in Columbine, Colorado.
In that case, people blamed the sadistic video games and movies that the killers had been watching.
Still, most enthusiasts of this type of entertainment do not actually go out and kill people.
Breivik had fantasies of being a knight fighting the enemies of the West.
Merah imagined that he was a jihadi.
Who knows what the Columbine killers thought they were doing.
But the reasons why they killed lie within them, and cannot be principally attributed to the entertainment or other materials that they consumed.
Banning such materials has an aesthetic appeal, to be sure, and public figures who preach violence should always be condemned.
Hate speech and violent ideology are not irrelevant.
But to make too much of them in cases such as those of Merah or Breivik can be misleading.
Censorship is unlikely to solve the problem.
Banning Hitler’s Mein Kampf or forbidding the display of Nazi symbols has not stopped neo-Nazis in Germany from murdering immigrants.
Suppressing violent pornography will not get rid of rapists or high-school killers.
Preventing demagogues from ranting about Muslims or multi-culturalists will not deter a future Anders Breivik.
And barring radical imams from entering France won’t stop another Merah from going on a murderous rampage.
In fact, to compare Merah’s savage deeds to the killings of September 11, 2001, as Sarkozy has done, is to give the killer too much credit.
There is no evidence that he is part of any organized group, or in the vanguard of a revolutionary movement.
Using his case to stoke fear of an Islamic threat to society might make electoral sense for Sarkozy.
But provoking fear is seldom the best recipe for avoiding further violence.
On the contrary, it is more likely to fuel it.
Musharraf and the Jihad Industry
General Pervez Musharraf is poised to rule Pakistan for another five years.
Not because he wants to, he says, but because no one but he can reform Pakistan.
General Musharraf is the third Pakistani general in fifty years to seize power proclaiming a self-anointed reform agenda.
Each time the United States and its allies nodded in agreement.
But Musharraf is no Gorbachev, nor is he Kamal Ataturk, who pushed internal reform on their societies after recognizing the rot within.
All of Musharraf's attempts at reform resulted from international pressure.
Feeble at best, they have invariably avoided the type of structural changes Pakistan needs if it is ever to break out of its recurring, worsening crisis.
Given General Musharraf's diminishing domestic popularity, some fear for his survival.
But a real threat "from the street" seems most unlikely.
The public, disillusioned by the kleptocratic regimes of Benazir Bhutto and Nawaz Sharif that preceded Musharraf, is far too wretched and ambivalent to rise up.
Moreover, militant groups cannot match the state's firepower.
While intrigues and coups are possible, Musharraf's survival is likely because he will not threaten the enormous powers and privileges of the institution he heads and which is the only one that can seriously threaten him--Pakistan's military.
All countries have armies, but in Pakistan the army has a country.
Defense expenditures consume between one-third and one-half of the national budget.
In recent decades, senior military officers have been transformed into powerful landlords through grants of choice agricultural lands and real estate.
Retired officers head many, if not most, public corporations.
This garrison economy is increasingly unsustainable, as Pakistan's poor multiply and the economy falters.
While the army has always been the most powerful political force in Pakistan, it has undergone important changes in the decades since independence.
The army's British colonial traditions were slowly Americanized during the Cold War.
With his coup in 1977, General Zia ul Haq injected a messianic zeal to redefine Pakistan as an Islamic state governed by Sharia (Islamic Law).
"Islam, Pakistan, Jihad" became emblazoned on banners at Pakistani army recruitment centers, beards proliferated, promotions went with piety, and few could be seen to miss Friday prayers.
A new ethos was created; this was to be an army not just for Pakistan, but for the greater glory of Islam.
It was, after all, a different historical epoch.
The global jihad industry, financed by the US and Saudi Arabia, welcomed it.
But today, the army's jihad philosophy lies buried under the rubble of the World Trade Center.
When faced by a US bent upon bloody vengeance, an acute institutional sense of survival sent the military establishment scurrying to join the US-led coalition and take up arms against its former creation, the Taliban and their Amir-ul-Momineen (leader of the pious).
It was a straightforward betrayal, resisted only by a few senior officers with an Islamic bent.
They were quickly rendered irrelevant.
General Musharraf knew the alternative.
In all likelihood the Americans would "have done an Iraq on Pakistan," as one highly placed member of the foreign ministry conceded to me in the week after September 11 th .
He was probably right.
The internal contradictions of Pakistan's volte face are now being exposed as the army's bloody encounters with Al-Qaida become more frequent, casualties mount, and hostile tribal reaction to joint US/Pakistani search-and-destroy operations on the western border increases.
Officers and soldiers are asking, What is the purpose of the current campaign?
To die in Kashmir officially qualifies a soldier or officer as a "shaheed" (martyr).
But is fighting America's war a jihad, and are soldiers slain by Al-Qaida or other former allies also martyrs?
Since official certification of martyrdom is tied to land grants and compensation to families, this question carries very real material significance.
Inevitably the anger--visible or otherwise--at having to fight America's war against Al-Qaida and the Taliban focuses on Musharraf, a man who received high praise from the United Jihad Council after incursions and battles fought against India around Kargil in Kashmir two years ago.
Right-wing religious groups in Pakistan warmly welcomed Musharraf's successful coup.
But today he lives in mortal danger, aware that he is silently stalked by the forces that once sided with him.
Ironically, fate has yoked his survival to George W. Bush, who could not recall the name of this Pakistani leader at the time of the US presidential elections.
Seeking to make permanent his coup, Musharraf has proposed amendments to Pakistan's constitution.
A new National Security Council would formalize the army's political domination of Pakistani society, with the armed forces chiefs having the power to sack the Prime Minister and dismiss an elected Parliament.
All of this in the name of "reform," of course.
But if Pakistan is to overcome its double challenge of escaping its army's Bonapartism and winning the war against jihadists, the military--not just society--must be reformed.
The imperatives are clear: first, the army must accept that the social and economic needs of Pakistan's people come first and that it must be downsized to live within Pakistan's means.
Second, the army must focus upon defending Pakistan's frontiers while accepting that there can be only a political, not a military, solution for Kashmir.
Surely, given all that Pakistan stands to gain from genuine reform, this is not too much to ask.
Musharraf’s Ambiguous Legacy
Pakistani President Pervez Musharraf’s resignation brings to an end one of the more interesting curiosities of subcontinental politics: for more than four years, Pakistan had a president who was born in India, while India had a Prime Minister (Manmohan Singh) who was born in Pakistan.
Since the two countries’ separation is now more than six decades old, that anomaly is unlikely to be repeated.
But it is not the only reason Indians are greeting Musharraf’s exit with mixed feelings.
Musharraf was someone who was easy to hate across the border.
He had, after all, risen to the top of the military on the back of the Pakistani army’s Islamist elements, who came into their own (in what had previously been a rather Anglophile, British- and American-trained officer corps) during the decade-long reign of a fundamentalist military ruler, General Muhammad Zia-ul-Haq.
Indeed, though Musharraf displayed an urbane image, enjoyed his Scotch, and admired Turkey, he was not one of the Pakistani secularists so admired by Indian liberals.
Instead, he cultivated a reputation as an anti-Indian hardliner.
The fact that his family had fled India upon Partition gave him an additional chip on his shoulder: it was widely said that he saw relations with India as a series of opportunities to wreak vengeance for what his family had suffered in the refugee upheavals of 1947.
As Chief of the Army Staff, Musharraf directed the disastrous Kargil invasion of 1999, when Pakistan sent its soldiers surreptitiously across the cease-fire lines to capture strategically vital heights overlooking a key Indian road.
Musharraf was recorded by Indian intelligence boasting about the action on an open telephone line during a visit to Beijing.
Because the invasion was manifestly illegal and provocative, Pakistan denied that official soldiers were involved, with the result that when they were repulsed, at great cost to both sides, Musharraf refused to accept his own soldiers’ bodies.
It was a low point in Indo-Pakistan relations, and no one in Delhi was prepared to trust Musharraf ever again.
Within months, however, Musharraf had conducted a coup against the hapless Nawaz Sharif, and a year later declared himself president, a title meant to enhance his stature when he visited India for peace talks in July 2001.
But Musharraf had come to power as the patron of the jihadi s his army was financing, equipping, and training for their forays into Indian territory, and few in New Delhi thought genuine peace could be made with such a duplicitous man.
Then came 9/11, when – under intense pressure from the United States to support American retaliation in Afghanistan or face the consequences – he was forced to disown his protégés.
The Taliban, under whose rule Osama bin Laden had found a safe haven, had been created (and, in crucial battles, led) by Pakistan’s Inter-Services Intelligence (ISI).
Now, Musharraf, in order to preserve his country’s alliance with the world’s sole superpower (and his country’s largest donor), had to betray his own.
For at least two years, though, Musharraf tried to have it both ways, cracking down at America’s behest on the Islamists on Pakistan’s western border with Afghanistan while sponsoring them on the eastern border with India.
A Pakistani-sponsored jihadi attack on India’s Parliament in December 2001 nearly provoked all-out war.
But the double game proved unsustainable: the Islamists were less inclined than their now-ambivalent patron to draw sophistical distinctions between one kind of enemy and another.
The result was two assassination attempts against Musharraf in December 2003.
If Musharraf had previously been unwilling to choose sides, the attempts to kill him finally showed him which side he had to be on.
From then on, Musharraf seems genuinely to have tried to clamp down on the Frankenstein’s monster that he had sustained as an instrument of Pakistani policy.
For roughly four years, he represented the best that the West and India could hope for in a Pakistani leader – someone with military authority, who seemed convinced that his own survival, and the interests of his state, demanded a clampdown on terrorism. “I never thought I’d say this,” one senior national security figure in New Delhi said to me, “but Pervez Musharraf…may be India’s best hope for peace with Pakistan.”
It could not last indefinitely.
The first problems arose in the lawless “federally administered tribal areas” (FATA) in western Pakistan.
Musharraf, concerned at all costs to avoid any military action that might provoke a tribal rebellion against his forces, tried to buy himself more political space by cutting deals with insurgent leaders in the FATA, signing peace agreements with the very chiefs his army should have been pursuing.
Meanwhile, internal difficulties worsened.
As anti-Musharraf sentiment grew within Pakistan, and repressive measures aimed at the judiciary and the press cost him ever more support among the intelligentsia, his hold on power began to slip.
His effort to cut a deal with Benazir Bhutto was a final attempt to remain in office through the election of a civilian leader acceptable to the public (and the West).
Her assassination by Islamist elements foreclosed that option.
Musharraf’s fraying authority made him less effective and, indeed, less useful: the Taliban re-emerged in strength on Pakistan’s Afghan border, and his own ISI was proved to have been involved in the bombing of India’s embassy in Kabul.
By the summer of 2008, both the West and India were facing a Pakistan again in the grip of chaos, its border areas in Islamist hands and its ISI out of the control of the elected civilian government.
The prospects of an implosion of effective governmental authority in Pakistan are strong, and the consequences would be dire.
But, by the time Musharraf resigned, he had already lost the ability to do anything about it.
Musharraf’s Last Act?
Desperate to hold onto power, Pervez Musharraf has discarded Pakistan’s constitutional framework and declared a state of emergency.
His goal?
To stifle the independent judiciary and free media.
Artfully, though shamelessly, he has tried to sell this action as an effort to bring about stability and help fight the war on terror more effectively.
Nothing could be further from the truth.
If Pakistan’s history is any indicator, his decision to impose martial law may prove to be the proverbial straw that breaks the camel’s back.
General Musharraf appeared on the national scene on October 12, 1999, when he ousted an elected government and announced an ambitious “nation-building” project.
Many Pakistanis, disillusioned with Pakistan’s political class, remained mute, thinking that he might deliver.
The September 11, 2001, terrorist attacks on America brought Musharraf into the international limelight as he agreed to ditch the Taliban and support the United States-led war on terror.
Musharraf clamped down on some religious militants operating inside Pakistan and also on those fighting Indian forces in Kashmir.
As a result, Pakistan was rewarded with American financial assistance and arms.
In furtherance of his re-alignment, Musharraf sent the Pakistani army into the tribal areas bordering Afghanistan for the first time since Pakistan’s independence.
Operations there against Taliban and al-Qaeda forces brought mixed results.
Although the US viewed Musharraf as an agent of change, he has never achieved domestic political legitimacy, and his policies were seen as rife with contradictions.
For example, he made alliances with Islamist political forces (who in 2004 voted for constitutional changes legitimizing his position and actions).
At the same time, he sidelined moderate, mainstream political leaders while claiming that he stood for “enlightened moderation.”
A series of ill-planned military operations in the tribal areas further complicated the situation in the volatile border region.
Last March, Musharraf took his boldest step, removing the Chief Justice of the Supreme Court, Iftikhar Chaudhry.
To the surprise of many, the country’s legal community organized a nation-wide movement to restore the Chief Justice to his post.
Hundreds of thousands of ordinary people demanded the rule of law and the supremacy of the constitution, emboldening the judiciary and changing the country’s political dynamic.
In a historic ruling that Musharraf had little choice but to accept, the Supreme Court itself reinstated the Chief Justice in July.
Subsequently, the energized judiciary continued ruling against government decisions, embarrassing the government – especially its intelligence agencies.
Government officials were held accountable for actions that were usually beyond the reach of the law, ranging from brutal beatings of journalists, to illegal confinement for “national security.”
Musharraf and his political allies tried to adjust to this new reality, but their patience ran out when the Supreme Court took up petitions against Musharraf’s decision to run for president.
According to the constitution (originally promulgated in 1973 by an elected parliament), a serving military official cannot run for an elected office.
Musharraf was not ready to give up his military post, but also wanted to be a civilian president.
While he announced that he would leave his military position “if” he was elected president, his track record of reneging on his promises haunted the judiciary.
The proceedings of the court over the last few weeks made Musharraf jittery.
The decision of the 11-member bench might easily have gone against him.
Legally cornered, Musharraf has now decided to abandon constitutionality, removing the leading judges of the Supreme Court and provincial high courts and putting curbs on the media.
Lawyers, human rights activists, and political leaders have since been arrested.
There is widespread public resentment in response to these moves.
Rather than taking responsibility for the deteriorating security situation (as evidenced by regular suicide bomb attacks) and the increasing Talibanization of the tribal areas, Musharraf has tried to blame the judiciary and media.
To be sure, in some cases, judicial activism was obvious (though within the realm of constitutional law), and the media also made mistakes; but by no stretch of the imagination can these be linked to religious extremism or support for militancy.
It is unlikely that Musharraf’s latest gambit will succeed, as his popular support is at its lowest ebb.
Pakistan’s armed forces – repeated targets of suicide bombers – have become demoralized.
It is difficult to imagine them standing with Musharraf should civil conflict erupt.
Nor can a weak, embattled, and disoriented Musharraf be expected to fight Islamic militancy effectively or bring political stability to Pakistan.
Opposition political parties are drawing closer together, and former Prime Minister Benazir Bhutto, despite progress in her power-sharing negotiations with Musharraf, has strongly condemned his actions.
Human rights bodies, media associations, and lawyers’ organizations are expected to defy the emergency, which will pit them against the security forces.
Terrorists may also benefit by attacking a preoccupied army and political forces aligned with Musharraf.
In the event of sustained protests and potential violence, top military commanders may decide to send Musharraf home – a decision that would not be unprecedented in Pakistan’s chronically turbulent history.
My Body, My Capital?
LONDON &#45;&#45; In the 1960’s, feminists coined the slogan, “Our bodies, our selves.”
But that liberating sentiment has recently undergone an ironic twist. As an anonymous American woman, justifying her decision to undergo cosmetic surgery, put it, “All we have in life is ourselves, and what we can put out there every day for the world to see… Me is all I got.”
The French commentator Hervé Juvin extolled this new attitude towards the body in his 2005 surprise bestseller, L’avènement du corps (The Coming of the Body) .
Plastic surgery, the implantation of biochips, piercings – all emblazon the belief that our bodies are our unique property.
At the same time, Juvin asserts, because everyone has a body, property has suddenly become democratized.
We appear to live in a time that has witnessed the absolute failure of the grand Enlightenment dreams of linear progress, universal peace, and equality between rich and poor.
Together with widespread hostility to organized religion, manifested in such hugely popular books as Richard Dawkins’s The God Delusion , disappointment with social ideals means that we turn inward.
In the absence of a belief in eternal life, everything becomes invested in this life, this body.
Long life is our desire, eternal youth our supposed right, and the myth of the body without origin or limits our new religion.
That might be why governments are so widely seen to have a positive duty to promote stem cell research and other forms of medical progress.
Biotechnology industries flourish, with state sanction and support, because they add extra value to the body, the object of supreme worth to us.
Indeed, the infinite renewal of the body isn’t confined to superficial repairs through cosmetic surgery.
External substitutes for organic structures can be surgically implanted, breaking down the barrier between the body and the outside world.
At the same time, tissue removed from the body enters into commerce and trade as a commodity like any other, in the form of stem cell lines, human eggs, and other “products.”
The American law professor James Boyle believes that we can grasp the way in which the body has become an object of trade by likening it to the historical process of enclosure. In eighteenth-century Britain, land, which was previously a public resource, was “enclosed” by private owners.
Freed of feudal-style legal restrictions on transfer of ownership and of traditional rights held by commoners who used communal land to pasture their animals, landholdings could now be sold to raise capital, which helped to finance the industrial revolution.
In modern biotechnology, Boyle thinks, things previously outside the market-once thought to be impossible to commodify-are becoming routinely privatized.
One in five human genes is now patented, even though the human genome might be thought to be our common heritage.
And although Boyle doesn’t mention this latest development, umbilical cord blood, taken in the final stage of labor, is now banked by profit-making firms as a potential – though unlikely – source of stem cells for the baby.
In biomedicine, a series of legal cases have generated powerful momentum toward the transfer of rights over the body and its component parts from the individual “owner” to corporations and research institutions.
So the body has entered the market, becoming capital, just as land did, though not everyone benefits, any more than the dispossessed commoners grew wealthy during the agricultural enclosures.
Most people are shocked when they learn that one-fifth of the human genome has been patented, mostly by private firms.
But why be so surprised?
After all, female bodies have been subject to various forms of property-holding over many centuries and in many societies.
Women’s bodies are used to sell everything from cars to pop music, of course.
But female tissue has been objectified and commodified in much more profound ways, in legal systems from Athens onwards.
While men were also made into objects of ownership and trade, as slaves, in general women were much more likely to be treated as commodities in non-slave-owning systems.
Once a woman had given her initial consent to the marriage “contract,” she had no right to retract her consent to sexual relations – ever.
There are clear parallels between that situation and the way in which the common law has offered little redress to patients who have tried to claim property rights in tissue taken from them, or to activists seeking to limit the powers of Big Biotech over human genetic patents.
All bodies are assumed to be “open access” now, just as women’s have always been.
But the assault on freedom is perceived as such only when it begins to apply to men.
It took a long time for people to notice that women’s eggs were required in large quantities for stem cell technologies: a phenomenon I call “the lady vanishes.”
The stem cell debates often seem to be premised on the assumption that only the status of the embryo matters.
Many people are still unaware that women’s eggs are a crucial part of “therapeutic cloning.”
By contrast, genetic patenting, which affects both sexes, has (rightly) generated a huge scholarly literature and a very vigorous popular debate.
Just a coincidence?
The new enclosures of the genetic commons or of body tissue threaten to extend the objectification and commodification of the body to both sexes.
Everyone has a female body now, or, more properly, a feminized body.
Rather than holding an investment in our bodies, we’re all at risk of becoming capital: my body, but somebody else’s capital.
My Journey with Che
For millions of young people around the world, their introduction to Ernesto Che Guevara will be Gael Garia Bernal as Che and Rodrigo De la Serna as his friend Alberto, kicking back the stand of an overloaded motorcycle, hopping aboard, and lumbering north on an 8,000-mile journey through South America in the film version of Che's Motorcycle Diaries .
For those of us in Cuba old enough to take a similar trip, our journey with Che, the young man with the funny accent and starred beret, began with less romance.
"Pioneros por el comunismo, seremos como el Che!
(Pioneers for Communism, like Che we shall be!)," we repeated day after day before starting class.
The chant became so tedious that inevitably, the class clown would ask if the incantation would end up turning us all into asthmatics, as Che was.
Che's life and deeds all became part of a modern bible for young Cubans.
Even if we wanted to reject what was force-fed in chants or poems like "Che Comandante," it was hard to resist the charm and passion that came from his letters and diaries.
In his speeches, I discovered the brilliant Che, mercilessly railing against inefficiency, false politics, and double standards.
"If we lack organization, the ideas, after the impetus of the first moment, lose their effectiveness, fall into the basic routines and conformity, and become simply a memory," he once said.
I looked around our island and wondered: was anyone listening?
I discovered the Che who scribbled love poems and coveted his solitude.
I wanted to sit with him for a beer and a cigarette to talk about his love for chess or his favorite books.
With the crisis of the 1990's brought on by the collapse of our Soviet patron, many Cubans returned to what Che said about economics, and admit the value of what is achieved with effort.
We felt once again the integrity of what it's like to share the burden of a common predicament.
The value of our homemade solutions increased to some who had always favored ideas imported from the East.
Then Che's face flooded our lives, staring at us from T-shirts, banners, walls, and key rings, with a look as vigilant as those on the faces in the murals of the Committees for the Defense of the Revolution.
The solemn face that Alberto Korda caught in his photographs became tough and unsympathetic.
He stopped being San Ernesto de la Izquierda, the saint or talisman who delivered us from injustice.
Instead, he rose like the flag of the trivial in a global mass culture - a sign associated with consumer tastes in fashion, music, and drugs.
To rediscover the Che who could inspire, I returned to the young Ernesto of Che's diary.
I thought again about how on his trip through Latin America, he acquired his revolutionary ideals, clarified certain questions, and added more.
I loved how he was brave enough to postpone his life for a while to find his own answers.
Today, a photo of Che's image displayed on the façade of Cuba's Interior Ministry is a must-have for tourists.
Visitors leave and continue their imaginary leftist lives with full refrigerators.
We Cubans remain, in charge of keeping the flame alive.
I wonder, Ernesto, what you would have turned into had you lived?
An archetype feeding the legend?
A general talking down to us with reprimands?
A favorite leader?
A twenty-first century Quixote tilting at the windmills of canned politics?
A postcard?
A repressor of feelings?
Or just another dinosaur?
My Outlook for 2009
DAVOS – The future of the global economy will depend greatly on whether President Barack Obama launches a comprehensive and coherent set of measures, and on how successfully he carries them out.
How the Chinese, Europeans, and other major players respond will be almost as important.
If there is good international cooperation, the world economy may start climbing out of a deep hole by the end of 2009.
If not, we will face a much longer period of economic and political disorder and decline.
There is no way to reestablish economic equilibrium in one fell swoop.
Instead,&nbsp; the economy must first be pumped full of money to make up for the collapse of credit; then, when credit begins to flow again, the liquidity must be drained from the system almost as fast as it was injected.
This second operation will be both politically and technically more difficult than the first: it is much easier to give money away than to take it back.
It is all the more important that stimulus packages be channeled into relatively productive investments.
The bailout of the motor industry ought to be the exception, not the rule.
The Dollar
The effort to pump the American economy full of money will run into difficulties on two fronts: the exchange rate and interest rates.
The dollar came under pressure early in the current financial crisis, but staged a strong recovery as the crisis worsened.
The dollar’s strength in the latter part of 2008 was due not to an increased desire to hold dollars but to increased difficulties in borrowing them.
European and other international banks had acquired a lot of dollar-denominated assets which they habitually funded in the interbank market; as the market dried up, they were forced to buy dollars.
At the same time, periphery countries held a lot of dollar-denominated obligations which they had to repay when they could not roll them over.
Russia and East European countries on the periphery of the euro were tied much more to the euro; but when the Russian market collapsed, the effect on the dollar was the same, because the Russian central bank had overbought euros and had to sell them to defend the ruble.
The trend was temporarily reversed at the end of 2008 when the Federal Reserve lowered interest rates to practically zero and embarked on quantitative easing.
The euro staged an explosive rally, but the rally was short lived because the eurozone developed its own internal difficulties.
Widespread riots in Greece drew attention to the plight of the Southern Tier countries— Spain, Italy and Greece— and of Ireland.
CDS rates for these countries rose, their credit ratings were lowered and the yield spreads on their government bonds versus Germany widened to an alarming extent.
The euro headed lower right from the beginning of 2009 and it was even outpaced by sterling.
Going forward the fact that Germany and the European Central Bank hold a different view of the problem confronting the global economy from the rest of the world is liable to cause wide swings in exchange rates and hinder the recovery.
The ECB operates under asymmetric guidelines: it is constitutionally obliged to be concerned only with maintaining price stability, not full employment;
Germany still lives with the memory of the Weimar Republic’s runaway inflation, which served as a prelude to the Nazi regime.
Both considerations militate against fiscal irresponsibility and unlimited money creation.
This should favor the euro as a store of value, but the internal tensions within Europe work in the opposite direction.
The fact that there is no Europe-wide mechanism for protecting the banking system and each country has to act on its own raises doubts about their ability to do so.
Is Ireland’s credit good enough?
And can the ECB accept the government debt of Greece as collateral beyond certain limits?
The foundations of the Maastricht Treaty are shaking—not to mention the difficulties that the United Kingdom and Switzerland are facing in protecting their overgrown banks.
As national regulators seek to protect their own banks, they may hurt the banking systems of other countries.
For instance, Austrian and Italian banks are heavily exposed in Eastern Europe; the Royal Bank of Scotland which is now majority owned by the British government does the bulk of its business abroad while a significant portion of UK housing is financed by foreign banks.
Eventually the various national authorities will have to protect each other, but it is only a common danger that will force them to do so.&nbsp;
The owners of wealth may increasingly turn to the yen and gold for safety but the may run into resistance from the authorities—sooner in the case of the yen than gold.
And there will be a tug of war between those who seek safety and those who need to use their reserves to save their businesses.
With all these contradictory forces at work we can expect wild currency fluctuations.
Interest Rates
The way out of a deflationary trap is to first induce inflation and then to reduce it.
That is an intricate operation and success is far from assured.
As soon as economic activity in the United States revives, interest rates on government bonds are liable to shoot up; indeed, the yield curve is likely to steepen in anticipation.
Either way, a rise in long-term interest rates is liable to choke off the recovery.
The prospect of the greatly increased money supply turning into inflation is likely to lead to a period of stagflation.
That, however, would be a high-class, desirable outcome because it would avoid prolonged depression.
It is difficult, but not impossible, to imagine the U.S. economy growing at a rate of 3 percent or more in the decade ahead.
The United States has been running a chronic current account deficit, which exceeded 6 percent of GDP at its peak.
That will disappear, and it will leave behind a heavy burden of foreign debt that will be further swollen by the budget deficits of the next few years.
Consumption as a share of GDP has to fall.
The financial services sector, which has been the fastest growing segment of the economy, will shrink.
With baby boomers retiring in increasing numbers, demographic trends have turned unfavorable.
All these are negative influences.
What is to be expected on the positive side?
More equitable income distribution, both domestically and internationally.
Better social services, including education.
A constructive energy policy leading to large-scale investments in alternative energy and energy saving.
Reduced military expenditures.
Faster growth in the developing world providing better export markets and investment opportunities.
But even with the best policies, domestic growth is liable to lag behind the global economy.
China
What China does will have almost as much influence as President Obama on the future of the global economy, and Chinese-American relations will be the most important bilateral relationship in the world.
China has a tremendous interest in the prosperity of the global economy.
Obama can build on this in reconstructing the international financial system, but it will require great tact and foresight on both sides.
The emergence of a new world power is a dangerous process.
Twice it has led to world war in which the emergent power was defeated.
China has to go out of its way to make itself acceptable if it wants to be accepted as a world leader.
It has adapted the doctrine of harmonious development, which is the right approach, but it also has other doctrines, notably those relating to Taiwan and Tibet, that work in the opposite direction.
Due to the erroneous policies of the Bush administration and the bursting of the super-bubble, China has gained too much power too soon. &nbsp;
For a constructive partnership, both sides will have to lean over backward.
President Obama has to treat China as an equal partner and China has to accept continuing American leadership.
That will not be easy for either side.
China has much to lose.
It is not a democracy, and there is no established routine for changing governments.
Failure to achieve a satisfactory growth rate—generally defined as 8 percent per annum—could lead to political turmoil, and political turmoil in China would be disastrous for the world.
Fortunately, China has developed a method of elaborate consultations that, while not democratic, do give the various interest groups involved a voice in determining policy.
The main drawback of the consensus-building process is that it is slow and cumbersome, and there is a danger is that the Chinese leadership will not move fast enough to counteract the sudden drop in the global economy.
Here again, a strong lead from the new Obama administration could have a beneficial effect.
The Indian Subcontinent
India is more self-contained than China, and it should have less difficulty in maintaining its upside momentum.
The Indian stock market has been harder hit than that of most countries, but its banking system, which is still largely in government hands, has been less affected.
Remittances from the Gulf States will suffer and its outsourcing business will languish, but hopefully infrastructure investments, of which India has a great backlog, will continue apace.
The macro-economic outlook is more favorable than for most of the world.
The greatest uncertainties are political, and they revolve around Pakistan, which is a failing state.
Some elements in the military and intelligence services have been closely involved with terrorists, and there is a real danger that they may gain the upper hand.
The November 26, 2008, terrorist attacks on Mumbai were brilliantly planned, timed, and executed.
Coming before the Indian elections, it was meant to set India and Pakistan against each other, allowing the Islamist influence in Pakistan at least to survive or at most to gain control of the State.
The Bush administration allowed all the various players to be set against each other: Pakistan against India and Afghanistan; the military against the civilian government within Pakistan;
Nawaz Sharif against Asif Ali Zardari, within the civilian government—not to mention the various tribes that have been armed by the military in order to fight the Pakistani Taliban fighting each other.
The task of the Obama administration will be to bring the various factions together to fight the common enemy, the people behind the terrorist attacks on Mumbai.
The problem of Pakistan is closely interlinked with the problem of Afghanistan.
The American forces invading Afghanistan were originally welcomed as liberators, but NATO got involved without a proper plan of engagement, and after eight years the presence of foreign troops is no longer welcome.
A New NATO plan ought to call for an orderly exit, but that is not possible while al Qaeda and the Taliban are gathering strength.
Yet they cannot be defeated without the active support of the local population.
Three obstacles stand in the way of success: the drug war that sets the local population against the occupying powers; the existence of a safe haven in the tribal areas of Pakistan and; the Karzai government’s loss of legitimacy and popularity.
The situation is not insoluble, but it will require extraordinary skill and perseverance to bring it under control..
The Oil-Producing Countries
The oil-producing countries have suffered a sudden reversal of fortune.
Their surpluses have turned into deficits, and their sovereign wealth funds and currency reserves have suffered major losses.
The Gulf States have been badly hit, because their private sectors, including some banks, were greatly overextended.
Dubai was the world’s most spectacular real estate bubble and will have to be rescued by the deep pockets of Abu Dhabi.
But the oil producers’ woes are not necessarily bad news.
Some of the major oil-surplus countries, notably Iran, Venezuela, and Russia, have been enemies of the current world order, and their wings are being trimmed.
The decline in Iran’s capacity to sponsor political and terrorist movements in neighboring countries is already having beneficial effects.
The political and security situation in Iraq seems to be stabilizing, and Syria seems to be more amenable to negotiation.
The chances are good that Iranian President Mahmoud Ahmadinejad will not be re-elected in June 2009.
By contrast, Russia may become more of a menace due to the decline in oil prices.
Under Vladimir Putin, nationalism has replaced communism as the country’s guiding ideology.
The Kremlin is now using its control over natural resources to reestablish Russia’s position as a political power, enrich the rulers and ensure their own control over Russia, and to bribe and suborn the rulers of the former Soviet. &nbsp;The various objectives mutually reinforce each other; together, they constitute the new order – a sham democracy built on petrol-patronage.
In the Putin regime, economic power has been concentrated in the hands of two groups: those who acquired property and those who take a slice of cash flows.
By and large, the first group is more sophisticated and more Western-oriented: it keeps its money and its children abroad.
The second group exploits the state’s arbitrary powers more directly.
The first group was decimated by the financial crisis; the second was left relatively unscathed.
The crisis reinforced the arbitrary powers of the state, as a large part of official currency reserves was spent to bail out and reacquire the first group’s assets.
This is important, because, as the economic outlook deteriorates and the Putin regime will no longer be able to satisfy people’s economic expectations, it is likely to rely more actively on arbitrary state powers.
After all, the Kremlin is occupied not by the cautious bureaucrats of the Soviet era, but by buccaneers who were willing to take risks to get where they are.
This may translate into military adventures abroad and repression at home.
Europe
Different European countries have reacted differently to the rise of a hostile Russia, influenced by their historical experience and their economic interests.
Europe must resist the geopolitical challenge that Russia is posing, and it must be unified to have any chance of success.
But a unified European policy must not be purely geopolitical, because Europe’s common interest would not be strong enough to override national interests.
Russia could divide and conquer, as it is doing already.&nbsp;
The key to Europe’s ability to neutralize Russia’s geopolitical advantage is to establish a unified energy policy, with a Europe-wide distribution network and a Europe-wide regulatory authority that has precedence over national regulators.
This would deprive Russia of its ability to play one country off against another, because a concession granted to one national distributor would immediately become available to customers in all the other countries.
It no less necessary to continue promoting the rule of law, international cooperation, and the principles of open society, mainly by reforming the international financial system and by paying special attention to Russia’s near-abroad.
Ukraine, in particular, is in a perilous state, but financing public works that would create jobs in Eastern Ukraine, where the steel industry is in distress, could make a major difference both politically and economically.
Georgia must be helped to recover from the damage inflicted by the Russian invasion, but help should be contingent on the Saakashvili government observing the principles of open society.
Russia cannot be helped directly because of its excessive reliance on arbitrary state power, but when Russia sees progress in international cooperation, particularly with China, it will not want to be left out in the cold.
The financial crisis and its aftermath will be a period of testing and, one hopes, development for the European Union’s institutions, particularly its financial institutions, which are relatively new.
The EU has a common currency and the ECB, but it does not have a common fiscal policy or treasury.
This shortcoming has become increasingly evident and it may lead to a breakup of the eurozone.
But belonging to the eurozone proved to be very valuable—Greece is hurting less than Denmark although its problems are much greater.
Therefore the odds favor that the euro will emerge from the current crisis with the ECB given greater powers over the banking system.
The Bush administration distinguished itself by driving a wedge between “old Europe” and “new Europe.”
It is to be hoped that the Obama administration will adopt the opposite course.
The world badly needs a more united Europe, both politically and financially.
The Developing World
A few countries like Brazil and Chile are reasonably well positioned to engage in countercyclical policies on their own with only a light assist from the IFIs.
But most of the rest of the developing world is heavily dependent on the initiatives outlined in the previous chapter.
In the absence of a radical international initiative, they face a very grim future.
Countries like Pakistan, Egypt, Morocco, and Haiti have already experienced food riots.
Others, such as South Africa and Turkey, suffer from serious power outages.
Mexico has a serious security problem because of drug trafficking.
As the economic situation deteriorates, the chances of civil unrest rise.
The collapse of credit in the global financial system is having an even more devastating effect on the countries of the periphery than those at the center.&nbsp;
Credit lines are withdrawn, maturing loans cannot be rolled over and trade finance has dried up.
Hopefully, the leaders of the world recognize that it is in their own enlightened self-interest to come to the rescue of the developing world.
The attraction of the SDR donation scheme is that it does not impose any direct costs on donor countries.
All they have to do is vote for the creation of SDR and then pass on the benefits to less-developed countries.
I hope they will rise to the occasion.
My Speech to the Finance Graduates
NEW HAVEN – At this time of year, at graduation ceremonies in America and elsewhere, those about to leave university often hear some final words of advice before receiving their diplomas.
To those interested in pursuing careers in finance – or related careers in insurance, accounting, auditing, law, or corporate management – I submit the following address:
Best of luck to you as you leave the academy for your chosen professions in finance.
Over the course of your careers, Wall Street and its kindred institutions will need you.
Your training in financial theory, economics, mathematics, and statistics will serve you well.
But your lessons in history, philosophy, and literature will be just as important, because it is vital not only that you have the right tools, but also that you never lose sight of the purposes and overriding social goals of finance.
Unless you have been studying at the bottom of the ocean, you know that the financial sector has come under severe criticism – much of it justified – for thrusting the world economy into its worst crisis since the Great Depression.
And you need only check in with some of your classmates who have populated the Occupy movements around the world to sense the widespread resentment of financiers and the top 1% of income earners to whom they largely cater (and often belong).
While some of this criticism may be over-stated or misplaced, it nonetheless underscores the need to reform financial institutions and practices.
Finance has long been central to thriving market democracies, which is why its current problems need to be addressed.
With your improved sense of our interconnectedness and diverse needs, you can do that.
Indeed, it is the real professional challenge ahead of you, and you should embrace it as an opportunity.
Young finance professionals need to familiarize themselves with the history of banking, and recognize that it is at its best when it serves ever-broadening spheres of society.
Here, the savings-bank movement in the United Kingdom and Europe in the nineteenth century, and the microfinance movement pioneered by the Grameen Bank in Bangladesh in the twentieth century, comes to mind.
Today, the best way forward is to update financial and communications technology to offer a full array of enlightened banking services to the lower middle class and the poor.
Graduates going into mortgage banking are faced with a different, but equally vital, challenge: to design new, more flexible loans that will better help homeowners to weather the kind of economic turbulence that has buried millions of people today in debt.
Young investment bankers, for their part, have a great opportunity to devise more participatory forms of venture capital – embodied in the new crowd-funding Web sites – to spur the growth of innovative new small businesses.&nbsp;Meanwhile, opportunities will abound for rookie insurance professionals to devise new ways to hedge risks that real people worry about, and that really matter –&nbsp;those involving their jobs, livelihoods, and home values.
Beyond investment banks and brokerage houses, modern finance has a public and governmental dimension, which clearly needs reinventing in the wake of the recent financial crisis.
Setting the rules of the game for a robust, socially useful financial sector has never been more important.
Recent graduates are needed in legislative and administrative agencies to analyze the legal infrastructure of finance, and regulate it so that it produces the greatest results for society.
A new generation of political leaders needs to understand the importance of financial literacy and find ways to supply citizens with the legal and financial advice that they need.
Meanwhile, economic policymakers face the great challenge of designing new financial institutions, such as pension systems and public entitlements based on the solid grounding of intergenerational risk-sharing.
Those of you deciding to pursue careers as economists and finance scholars need to develop a better understanding of asset bubbles – and better ways to communicate this understanding to the finance profession and to the public.
As much as Wall Street had a hand in the current crisis, it began as a broadly held belief that housing prices could not fall – a belief that fueled a full-blown social contagion.
Learning how to spot such bubbles and deal with them before they infect entire economies will be a major challenge for the next generation of finance scholars.
Equipped with sophisticated financial ideas ranging from the capital asset pricing model to intricate options-pricing formulas, you are certainly and justifiably interested in building materially rewarding careers.
There is no shame in this, and your financial success will reflect to a large degree your effectiveness in producing strong results for the firms that employ you.
But, however imperceptibly, the rewards for success on Wall Street, and in finance more generally, are changing, just as the definition of finance must change if is to reclaim its stature in society and the trust of citizens and leaders.
Finance, at its best, does not merely manage risk, but also acts as the steward of society’s assets and an advocate of its deepest goals.
Beyond compensation, the next generation of finance professionals will be paid its truest rewards in the satisfaction that comes with the gains made in democratizing finance – extending its benefits into corners of society where they are most needed.
This is a new challenge for a new generation, and will require all of the imagination and skill that you can bring to bear.
Good luck in reinventing finance.
The Next Trade Breakthroughs
STANFORD – Economic news is grim all around the world.
This year’s output growth has been disappointing, and the International Monetary Fund expects only a slight improvement in 2015.
Europe may be sliding back into recession, with even the once-robust German economy teetering on the brink.
China is downshifting, and Brazil, Russia, and India are struggling to avoid a stall.
So it is a pity that three important opportunities for growth from trade liberalization – the World Trade Organization’s Doha Development Round, the Trans-Pacific Partnership (TPP) in the Asia-Pacific region, and the Transatlantic Trade and Investment Partnership (TTIP) between the United States and Europe – are being neglected.
If designed properly, all three have the potential to spur global growth.
Through the reduction of tariffs and non-tariff barriers, the protection of intellectual property, and the harmonization of regulations, hundreds of billions of dollars of output – and millions of better-paying jobs – could be generated.
This is the lesson of the North American Free Trade Agreement (NAFTA), which celebrates its 20th birthday this year.
In NAFTA at 20, a book that I edited, policymakers and scholars explain how the landmark trade treaty exemplifies the benefits of trade liberalization – and why political leaders should pursue it.
The elimination of tariffs among Canada, Mexico, and the US was innovative, risky, and controversial.
NAFTA became a lightning rod for complaints about globalization, capitalism, and the decline of organized labor.
Many claimed that the treaty would depress wages, destroy jobs, and ravage the agricultural industry in the US.
Instead, NAFTA boosted all three signatories’ economies and became the template for hundreds of subsequent free-trade agreements.
NAFTA helped open what former Mexican Trade Minister Jaime Serra Puche says had been “a highly protectionist economy for five or six decades.”
US agricultural exports threatened some Mexican farmers, but others were able to boost their exports – and profits – to the US.
Meanwhile, the country’s consumers, especially the urban poor, benefited from lower food prices.
According to Stephen Haber, my colleague at Stanford University’s Hoover Institution, “After, and to a considerable extent because of, NAFTA, the Mexican economy and political process became far more competitive.”
Canada also benefited.
The country’s firms and workers saw their productivity rise by 14%, leading to what the University of Toronto economist Daniel Trefler estimates is the equivalent of a decade’s improvement in living standards.
“Canada&hellip;is a much more modern economy today than it would have been,” says the country’s former finance minister, Michael Wilson.
Meanwhile, Canada and Mexico have become the United States’ top two export markets, accounting for a combined $625 billion in 2013, more than the next ten largest export markets combined.
Prior to NAFTA, exports to Mexico roughly equaled those to the United Kingdom and about half of what was going to Japan.
Moreover, this surge in trade has created myriad well-paying jobs.
NAFTA produced something far different from the outsourcing its opponents predicted.
Some 40% of what the US imports from Mexico actually originates in the US.
For Canada, the figure is 25%.
For China, by contrast, the share is just 4%.
“We’re not just selling things to each other,” explains Serra Puche. “Now, we’re producing things jointly.”
According to Lorenzo Caliendo, an economist at the Yale School of Management, a surge in cross-border trade and increases in real (inflation-adjusted) wages in all three countries can be attributed to NAFTA – even once other factors, like the opening of China, the peso crisis, the dot-com bubble, and the Great Recession, are taken into account.
In short, as former US Secretary of State George Shultz has noted, “NAFTA has transformed the region.”
Today, NAFTA can continue to serve as a model for ongoing trade negotiations.
A NAFTA 2.0 could focus on areas that were originally excluded, such as labor mobility and energy.
The development of Canadian oil sands, the shale-energy revolution in the US, and the opening of Mexico’s oil sector to foreign investment imply the biggest geopolitical shift since the collapse of communism.
Moreover, the finalization of either the TPP or the TTIP could spur progress in the WTO’s Doha Round.
“There is no question that a high quality major agreement today, as the NAFTA was in 1994, could cause multilateralism to take a giant leap forward,” says former US Trade Representative Carla A. Hills.
Trade liberalization has been stalled for too long.
Since the end of World War II, American presidents, Democrat and Republican alike, have promoted free trade as a key pillar of growth.
John F. Kennedy launched what became the Kennedy Round of the General Agreement on Tariffs and Trade, and Bill Clinton helped secure congressional passage of NAFTA and the Uruguay Round of trade talks, which had been initiated and negotiated under Presidents George H.W. Bush and Ronald Reagan.
President Barack Obama has promoted the TPP in Asia, but he only recently asked Congress for fast-track negotiating authority (the ability to request an up-or-down congressional vote without amendments).
Obama’s request was rebuffed by the US Senate’s Democratic majority leader, Harry Reid.
The new Republican-controlled Senate should act quickly to approve it.
“There is no way we would have completed the NAFTA negotiation without fast track,” according to Hills.
Nobody will negotiate seriously with the US if Congress can cherry-pick amendments.&nbsp;Former US Trade Representative Mickey Kantor recalls Clinton’s horse-trading with congressional Democrats to persuade them to join Republicans in passing NAFTA, overcoming both parties’ protectionist wings.
Obama and the new Republican majority must now decide if they will follow in their predecessors’ footsteps and spark a new era of economic growth.
In Defense of World Government
WASHINGTON, DC – Unlike in the past, there probably will not be large protests at the upcoming Annual Meetings of the International Monetary Fund and the World Bank, or at the subsequent World Trade Organization meeting of trade ministers in Bali.
But that is not because these international institutions are perceived as effective and legitimate.
It is because, compared to a decade ago, they are seen as too small and impotent in the face of larger market forces to bother about.
The 2008 global financial crisis and its aftermath have caused a loss of faith not only in markets, but also in the ability of democratic governments to ensure that the benefits of market-led growth are widely shared.
On economic, financial, tax, trade, and climate issues, many people around the world are fearful or angry, believing&nbsp; that a worldwide cabal of bankers, corporations, and G-20 elites uses insider deals to monopolize the benefits of globalization.
But few people – whether ordinary citizens or internationally oriented economists – recognize that our seemingly weak and ineffectual multilateral institutions are the world’s best hope for managing and democratizing the global market.
Only these institutions are capable of preventing the elite capture and insider rents that are putting global prosperity at long-term risk.
To be sure, a growing number of mainstream economists are paying attention to the costs of unfettered global markets.
There is greater concern that cross-border capital mobility makes it harder to collect taxes and enforce financial regulations at home; and that trade agreements, combined with global supply chains, are exacerbating job losses in developed economies.
Likewise, global integration means that eurozone distress threatens the US economy, while the US debt-ceiling standoff threatens financial markets everywhere.
Yet many economists are as ambivalent about “global” rules and institutions as ordinary people are.
They worry that international bodies, lacking democratic oversight, make it easier for the rich, powerful, and well connected to run things to their own advantage.
Dani Rodrik’s 2011 book The Globalization Paradox criticizes globalization enthusiasts for wanting full liberalization of foreign trade and capital movements; he argues that when democratically established social arrangements clash with the demands of globalization, national priorities should take precedence.
True, global “government” can go too far – for example, when WTO rules conflict with sensible local environmental safeguards, or when IMF requirements for developing-country borrowers narrow the scope for creative heterodoxy in growth and poverty-reducing policies.
It is also true that countries dependent on official aid and IMF loans can face unwarranted pressure to conform to outsiders’ wrongheaded policy views – from premature opening of capital markets in Asia in the 1990’s to force-fed austerity in Greece and Spain today.
But there is a more positive way to look at the issue.
Sometimes, even powerful sovereign states use global commitments to help them lock in sensible policies that might otherwise be difficult to initiate and sustain.
A 2009 G-20 agreement to refrain from protectionism in the aftermath of the global financial crisis helped to fend off protectionism.
Today, a G-8 or G-20 agreement on exchanges of tax information could help to shore up national revenue bases and the reputations of governments for tax fairness.
Less obviously, when governments provide funding for the IMF, they can side-step domestic political resistance to assisting countries in trouble and to rules that yield benefits only in the long term.
Indeed, embedding fair rules on trade, finance, development, climate change, and other issues in the major global institutions such as the IMF and the World Bank is more important than ever, given the rise of China and other emerging-market economies.
With these new powers seeking a place at the geopolitical table, they and the older powers can benefit from mutually agreed global “containment” of their domestic parochialism and short-sightedness.
In other words, global rules and institutions can make it easier and more likely that all involved will hew to their own citizens’ broader interests – and thus to the global commonweal as well.
For example, pledges to cut carbon emissions, while lacking any enforcement mechanism, may be helping countries to do the right thing for their own citizens’ children and grandchildren.
Moreover, fair global rules can help to “democratize” the global market, especially if they are embedded in institutions with a degree of autonomy for highly professional staff who can act with some independence from short-term political pressures.
It should come as no surprise that the anti-globalists’ erstwhile punching bags – the World Bank and, increasingly, the IMF and the WTO – are more open and transparent than many of their member states.
They thus provide a vehicle for ordinary people to lobby for fairer rules and policies, not only in their own countries but also in others.
One example of this was the citizen-based movement that fought WTO intellectual-property rules, adopted at the behest of the US and other rich countries, that were sustaining high prices for anti-AIDS drugs in Africa.
The campaign succeeded, resulting in changes that dramatically increased poor countries’ access to such drugs.
Ultimately, as I argue in greater detail in a paper for the Global Citizens Foundation, ordinary people are better off with global institutions, notwithstanding their weakness relative to their most powerful sovereign members and their lack of legitimacy relative to their democratic members.
Of course, a world “government” could never have democratic legitimacy; for this reason, it is a scary idea.
But, like a socialist utopia or pure libertarianism, the idea of world government can illuminate a sensible path for capturing the benefits of a more effective global polity.
Given a fully interdependent global market, we should worry less about the risk of bad rules and policies from imperfect global institutions and more about how to exploit these institutions’ potential to lock in policies at home and abroad that minimize risks and maximize opportunities for people everywhere.
Powerless Women in Power?
NEW YORK – Are women political leaders finally coming into their own?
Are they not only winning more elections, but also finally able to campaign and govern with no more – or less – scrutiny, scandal, and mockery than their males peers?
Superficially, it may seem as if we have reached that breakthrough moment at which gender is no longer the most important issue.
In the United States, Hillary Clinton is preparing for her second run for the presidency, and Janet Yellen is the first woman Chair of the US Federal Reserve Board – widely regarded as one of the world’s most powerful offices.
Moreover, TV shows that feature women portraying top political leaders are filling America’s airwaves, including “Madame Secretary,” starring the improbably comely Téa Leoni as US Secretary of State, and “Veep,” with Julia Louis-Dreyfus as a charming, comical vice president.
The central issue in these television programs is not that the main roles are played by women.
Character, not gender, drives the narrative.
Outside of the United States, women have already reached the highest level of power.
In Germany, Chancellor Angela Merkel, having won three general elections, is respected or resented for her austerity policies, not for her gender.
Argentina’s President Cristina Fernández de Kirchner is attacked for mismanaging the economy, and by US banking interests for forcing debt restructuring on her country’s creditors, not because she is a woman.
In Israel, hawks attack Justice Minister Tzipi Livni for leaning slightly to the left on Palestinian statehood – just as they would attack a man in her position.
And women have achieved the premiership in all Scandinavian countries except Sweden.
Most intriguingly of all, Brazil’s first female president, Dilma Rousseff, is now in a neck-and-neck race with another woman, Marina Silva.
Rousseff’s popularity has plummeted in the wake of public protests over spending on the World Cup, together with a sharp economic slowdown.
Now Silva is drawing broad support, including from evangelical Christians – a bloc not known for backing women leadership contenders anywhere.
So has democratic politics around the world reached the point where voters judge politicians, male or female, strictly on their merits?
Certainly, many of the women now in power, or running for office, are doing so on the basis of their track records.
The last three decades have yielded a cadre of women leaders even where women otherwise lag far behind in terms of opportunity – for example, South Korean President Park Geun-hye, Ukraine’s two-time former prime minister, Yuliya Tymoshenko, and Presidents Ellen Johnson Sirleaf of Liberia and Joyce Banda of Malawi.
But the sad irony is that women are finally finding their moment in the political sun at a time when the nation-states they are leading are finding their ability to forge national solutions to their problems extremely limited.
With increasing frequency – as, for example, with international trade treaties, such as the Trans-Pacific Partnership – private actors are taking the place of governments, legislatures, and heads of state in setting policy.
Some even suggest that women are emerging at the top because men do not want to take the blame for impending failure.
Senior executives – those who are drawn to the arguments presented in such groundbreaking analyses of the workplace as Sheryl Sandberg’s Lean In – know that corporate realpolitik can include calling in a woman when the ship is sinking.
This reflex might explain the presence of a woman at the helm of GM during its current damaging recall of defective cars, for example.
Similarly, African-American leaders sometimes joke wryly about gaining the reins of municipal power just when a city is about to go bankrupt.
Powerful white men, it is suggested, do not like to sign their names to projects or enterprises in trouble, and they are often happy to have the cosmetic benefit of a female – or nonwhite – face at the helm, when the real power may be draining away behind the scenes, or moving on elsewhere.
But, though nation-states and their politicians are more constrained than ever before, the records of women like Merkel and Rousseff suggest that individual leaders remain a potent force, for better or worse.
Most international business leaders bitterly oppose the austerity program that Merkel has imposed on the European Union.
And Rousseff’s use of revenues from the Brazilian energy giant Petrobras to fund domestic social programs has caused the firm’s share price to halve – alienating oil investors.
So are today’s women leaders the real deal or just figureheads?
The answer is likely to be the same for men and women.
India’s Women on the March
CHENNAI – Sometimes countries suddenly take a mighty leap forward, forcing everyone else to take notice.
On one critical issue – sexual harassment and rape – India has moved far into the lead.
Following a number of brutal rapes that became notorious worldwide, Indian women are pushing back in radical, innovative, and transformational ways.
The attacks have been ceaseless and indiscriminate.
A 51-year-old Danish tourist and an 18-year-old German aid worker are among the most recent non-Indians to be raped.
But so is the coverage of them by India’s media.
On January 14, The Weekreported on the case of Suzette Jordan, a 39-year-old Anglo-Indian mother of two in Kolkata, who survived what has become a numbingly familiar story.
In 2012, she had a drink in a bar and agreed to a ride home with a man she had met; when she entered the car, four other men piled in.
They put a gun in her mouth, beat her savagely, raped her, and dumped her on the roadside.
Her reporting of the crime brought new recriminations: the member of Parliament for her constituency, Kakoli Ghosh Dastidar, called the rape “a deal gone wrong”; another minister called her experience “a concocted story.”
The level of sexual violence directed against women in India is not unusual; what is unusual is that the country’s media are now covering the issue as a burning social problem, rather than sweeping it under the rug.
And women themselves are politicizing the issue, rather than blaming themselves for being too friendly, not careful enough, or in the wrong place at the wrong time. They – and the men who support them – are standing up to rape in ways that should be a model for the rest of the world.
Indian rape laws were changed in the wake of the rape and murder in 2011 of Bhanwari Devi, a 36-year-old midwife whose accusations of sexual misconduct implicated senior political figures.
But Indian activists often refer to the case of another Bhanwari Devi, a social worker who was gang-raped in 1992, as an early turning point, for it resulted in 1997 in the Indian Supreme Court’s Vishaka judgment, which proposed guidelines to prevent sexual harassment in the workplace.
With pressure mounting for legislative action, India last year finally adopted a law banning workplace sexual harassment.
Perhaps some of the impetus for Indian women’s radicalism stems from the raw punitiveness with which rape is sometimes deployed – that is, as a weapon or a way to enforce social control.
India currently is reeling from news that a 20-year-old woman was gang-raped by 13 men on orders from a West Bengali village court for having a relationship with a man from another village.
Some of the radicalism may have to do with the extreme violence of many of the rapes.
Marchers in Kolkata, for example, recently protested the rape and murder of a teenage girl in Kamduni last year.
The girl was burned to death soon after – and some believe as a penalty for – reporting the rape.
Another recent case of an Indian woman fighting back shows how transformational this spirit of resistance can be.
The Hindu newspaper recently reported on the case of a 24-year-old lawyer, Anima Muyarath, who was suspended from the Calicut Bar Association after posting a remark on her Facebook page about sexist behavior in the workplace by her male superiors.
Muyarath has won the support of Indira Jaising, India’s first woman Additional Solicitor-General.
And Jaising has another brave young attorney to champion: a former law intern who has alleged sexual harassment against retired Supreme Court judge Swatanter Kumar.
This dramatic and outrageous gag order – keeping journalists from reporting on a matter of public record and a situation that is of the public interest – led to a furious protest by the Editors’ Guild of India against what it called an “unwarranted intrusion into media freedom.” The gag order worked, though: by the end of the week, it was impossible to follow the story.
Across India today one sees a feminist fight from the highest levels to the grassroots.
Women at the pinnacle of the bar bravely protest mistreatment and harassment, doing what I have long argued is necessary: naming names in public – even as powerful men circle the wagons and throw institutional tantrums.
And women on the street protest the violence inflicted on them by strangers, neighbors, and acquaintances – and confront the police and officials who condone it.
It may not be entirely clear what has made Indian women so brave and so effectively combative.
But that should not stop the rest of us from taking inspiration from their courage and strategic daring.
Fascism with a Feminist Face
NEW YORK – Western feminism has made some memorable theoretical mistakes; a major one is the frequent assumption that, if women held the decision-making power in society, they would be “kinder and gentler” (a phrase devised for George H.W. Bush in 1988 to appeal to the female vote).
Indeed, so-called “second-wave” feminist theory abounds in assertions that war, racism, love of hierarchy, and general repressiveness belong to “patriarchy”; women’s leadership, by contrast, would naturally create a more inclusive, collaborative world.
The problem is that it has never worked out that way, as the rise of women to leadership positions in Western Europe’s far-right parties should remind us.
Leaders such as Marine Le Pen of France’s National Front, Pia Kjaersgaard of Denmark’s People’s Party, and Siv Jensen of Norway’s Progress Party reflect the enduring appeal of neofascist movements to many modern women in egalitarian, inclusive liberal democracies.
The past is prologue: Wendy Lower’s recent book Hitler’s Furies: German Women in the Nazi Killing Fields adds more data to the long record of women embracing violent right-wing movements.
And the rise of far-right movements in Europe – often with women in charge – confronts us with the fact that the heirs to the fascism of the 1930’s have their own gender-based appeal.
One obvious reason for the success of women like Le Pen, Kjaersgaard, and Jensen is their value for packaging and marketing their parties.
Just as Bush sought to revamp the Republican Party’s “brand’ of cold-hearted elitism and hostility to women, so Europe’s far-right parties today must appeal to citizens by not seeming dangerously extreme and marginal.
How dangerous can the movement be, after all, if women are speaking for it?
Such parties come to be seen as more mainstream, and their appeal to traditionally harder-to-win women supporters receives a boost.
As Lower shows, the Nazis reached out with special programs – from organizing homemakers to colonizing the conquered Eastern territories – that gave working-class women things they craved: a sense of belonging to something larger than themselves (fascism’s eternal draw), backed by a complex official iconography in which the traditionally devalued roles of wife and mother held a crucial place in the national drama.
Young unmarried women who were sent to administer the neocolonial efforts in conquered Poland and other territories gained adventure, advanced professional training, and opportunity.
And, for all of these women, as for any subordinate group anywhere, fascism appealed to what social scientists call “last-place aversion”: the desire to outrank other groups.
Add, finally, the gendered appeal of the strong authority figure and rigid hierarchy, which attracts some women as much as some men, if in different psychodynamic ways. As Sylvia Plath, the daughter of a German father, put it in her poem “Daddy”: “Every woman adores a Fascist/The boot in the face, the brute/Brute heart of a brute like you.”
Certainly, many of the same themes in far-right ideology attract the support of some women in Europe today.
And we can add the fact that right-wing movements benefit from the limitations of a postfeminist, post-sexual-revolution society, and the spiritual and emotional void produced by secular materialism.
Many lower-income women in Western Europe today – often single parents working pink-collar ghetto jobs that leave them exhausted and without realistic hope of advancement – can reasonably enough feel a sense of nostalgia for past values and certainties.
For them, the idealized vision of an earlier age, one in which social roles were intact and women’s traditional contribution supposedly valued, can be highly compelling.
And, of course, parties that promote such a vision promise women – including those habituated to second-class status at work and the bulk of the labor at home – that they are not just faceless atoms in the postmodern mass.
Rather, you, the lowly clerical worker, are a “true” Danish, Norwegian, or French woman.
You are an heiress to a noble heritage, and thus not only better than the mass of immigrants, but also part of something larger and more compelling than is implied by the cog status that a multiracial, secular society offers you.
The attraction of right-wing parties to women should be examined, not merely condemned.
If a society does not offer individuals a community life that takes them beyond themselves, values only production and the bottom line, and opens itself to immigrants without asserting and cherishing what is special and valuable about Danish, Norwegian, or French culture, it is asking for trouble.
For example, upholding the heritage of the Enlightenment and progressive social ideals does not require racism or pejorative treatment of other cultures; but politically correct curricula no longer even make the attempt to do so.
Until we stop regarding cultural pluralism as being incompatible with the defense of legitimate universal values, fascist movements will attract those who need the false hope and sense of self-worth that such movements offer, regardless of gender.
Justice from Tomatoes
NEW YORK – The last fast-food hamburger you ate may have cost you next to nothing.
But what did the tomato slice on that burger cost the worker who got it there?
Almost anywhere in the world – including in the United States – the cost can be shockingly high.
Appalling wages are just the start.
In Florida, tomato pickers earn an average of just $0.50 for every 32-pound (14.5-kilogram) bucket.
A worker who picks all day – backbreaking labor that starts before dawn – is lucky to earn $10,500 a year, placing him below the poverty line.
Then there are the alarming human-rights violations.
In Mexico, authorities recently freed almost 300 people, including 39 teenagers, who were being “held in slave-like conditions at a camp where tomatoes are sorted and packed for export.”
US federal authorities have called Florida’s tomato fields “ground zero for modern-day slavery.”
The abuses of farm workers by agribusiness interests there have been serious and systematic.
Enter the Campaign for Fair Food – a fight for better wages and conditions that Florida tomato pickers and their allies have fought and largely won.
Their struggle not only underscores the obstacles confronting workers’ organizations in an era of outsourcing and global supply chains, but also might serve as a model for workers in other industries.
For many years, the tomato industry in Florida depended on poor white and African American laborers.
Today, it relies mainly on low-wage farmworkers from Haiti, Mexico, Guatemala, and other Central American countries – a change that owes much to two decades of trade liberalization.
Policies like the North American Free Trade Agreement allowed multinational companies to sell cheap produce in Mexico and other countries, undercutting local farmers and driving millions of people off their land.
In search of employment, many migrated to the US, where, as disempowered laborers, they went to work for the same (or similar) multinationals.
But globalization is now affecting the tactics that farmworkers have chosen.
As Jake Ratner, a young activist who works for Just Harvest USA, points out, global corporations are often insulated from traditional tactics like boycotts.
So farmworkers and their allies have chosen a novel “brand-busting” approach that targets companies’ public image – and that has gotten the attention of decision-makers at the top of the global food hierarchy.
The Campaign for Fair Food’s agenda is to persuade every major tomato purchaser to sign on to the Fair Food Program, which, for a small premium – a penny per pound – changes the lives of workers and their families’ substantially.
Under the FFP, workers who were paid $0.50 cents per 32-pound bucket (a rate that has not risen in more than 30 years) receive $0.82 – a 64% increase.
A third-party organization, the Fair Food Standards Council, monitors the industry for compliance with wage and human-rights standards.
Before the FFP was launched in November 2010, Florida’s powerful tomato industry had long resisted increasing the per-bucket rate or signing on to codes of conduct to safeguard workers against abuses.
That changed when activists began targeting the multinational corporations at the top of the pyramid, rather than the growers (who are now merely middlemen squeezed by global companies).
As a result, eleven of the biggest global food corporations that buy their tomatoes from Florida growers – including McDonald’s, Taco Bell, and Burger King, and supermarket chains like Whole Foods and Trader Joe’s – have adopted the FFP.
The FFP has not only lifted workers’ wages.
A confidential complaint hotline enables workers to report human-rights violations; more than 300 calls have been received since 2011 (all were investigated, and the vast majority were resolved).
And corporations that sign on to the FFP also commit to a zero-tolerance policy for forced labor, which creates a market incentive for their growers to police their own operations actively; in the past, market forces created an incentive to look the other way.
Likewise, before the FFP, Florida tomato workers had to wake up at three or four in the morning to get on buses and be in the fields the minute that orders came in.
But they often were not allowed to start picking until 2-3 hours later, when the dew on the plants dried – time for which they were not paid.
Now, with the introduction of FFP-mandated time clocks, workers can punch in and record their hours, ensuring that at least they will receive the state’s minimum wage.
As a result, growers no longer want them starting so early, which gives them more time to sleep – and have breakfast with their families.
Without such programs, the multinational squeeze goes on.
By leveraging their massive purchasing power, big multinational food corporations drive down prices, not only impoverishing farmworkers, but also eroding the profits of the growers who employ them.
Meanwhile, the disaggregation and “disintermediation” of global corporations enables them to create formal barriers that prevent senior management from ever seeing, let alone being influenced by, their own workers (and growers).
I experienced this firsthand when I joined a protest organized by the Coalition of Immokalee Workers against a Wendy’s fast-food outlet in New York City’s Union Square.
(Though four of the five largest US fast-food corporations have signed on to the FFP, Wendy’s is the holdout.)
Citing company policy, Wendy’s managers refused even to accept a letter from the protesters about signing on to the FFP and gave them the telephone number of Wendy’s corporate spokesperson.
Activists say that calling that number elicits a form-letter statement, and that no one ever speaks with them directly.
Nonetheless, the FFP campaigners may eventually get Wendy’s to sign on – making that tomato slice a little tastier for customers with a conscience.
Perhaps more important, building a coalition of workers, consumers, and allied activists to apply pressure at the top could be a model for positive change for workers in globalized industries in India, Bangladesh, China, and elsewhere.
Hope for High-Tech Mothers
NEW YORK – Have two highly skilled women – with four babies and toddlers between them – finally found a way to achieve an ideal work-family balance?
It looks as if PowerToFly, a new startup launched to place women around the world in tech jobs with flexible hours and the ability to work remotely, has done just that.
The founders have deep roots in news media, social media, and technology: Katharine Zaleski is former Executive Director of the digital Washington Post and the first news editor of the Huffington Post;
Milena Berry is former Chief Technology Officer of Avaaz.org, the global donations platform.
Both women experienced firsthand how even distinguished careers did not save them – and thousands of their high-achieving peers – from feeling derailed, without adequate options for work-family balance.
When Zaleski had her first child, she thought that three months away from work would be enough – and then found that she was wrong. “I was at home scratching at the walls.
I was thinking, ‘This sucks.
I either have to go back into the office ten hours a day or I start dropping out.’
I was getting really depressed knowing that I only had two options.”
Then she thought: “If I have this problem, millions of women must have this problem.
What is the third way?
Women have changed, yet the nature of work hasn’t.
There are more highly skilled women than ever before – they can be productive from anywhere – yet the structure of work is from another century.”
Meanwhile, Berry had contacted Zaleski to explain her latest idea. “She said, ‘I am starting this company.
I am building a network of female developers and will try to place them with companies.’” Zaleski had seen firsthand at Huffington Post how efficient global remote teams could be.
“It was cost effective,” she said. “Our principle managers were in Ukraine and Morocco.
A lot of work could be done while we were sleeping, so we were twice as fast.” Indeed, Berry had been working remotely for Avaaz.org with three kids at home.
Zaleski realized that the startup Berry was proposing was a way to solve her own problem.
So they joined forces to build a platform that could place skilled women globally to work remotely with American tech companies.
The site has grown 25% since launching, and now is branching out into editorial jobs in journalism and other industries.
Their goal is to change the nature of work across the board for women. “You can’t expect a woman with ten years’ experience and a family to uproot and move to your campus in Silicon Valley,” Zaleski explains, adding that many campuses are deliberately designed so that one never has to leave.
That is great if you are 22, but terrible if you have small children who need to be picked up from school.
The expectation is archaic.
Many jobs do not require work to be done during certain hours.
PowerToFly finds that remote workers are so happy for the flexibility that their efficiency goes through the roof.
As a one-time working mother of small children, I sometimes wished that I worked only for other people who understood the exigencies of that situation, so I can understand that sense of motivation.
PowerToFly already represents women from 147 countries, working with employers like Buzzfeed, Hearst, and The Washington Post.
It has placed women who are based in Egypt, India, Jordan, and Russia, among other countries.
Their home page shows a smiling young manager based in Chile, and the company is pushing to enlist women in the Palestinian Territories – not for ideological reasons but because there are so many talented programmers there to hire.
“Thirty percent of women in many countries in the Middle East have university degrees,” Zaleski explains, but they often cannot get jobs commensurate with their training for cultural reasons.
With PowerToFly’s technological ability to transcend cultural barriers, a woman can contribute at the highest levels to an American company – even if local laws prohibit her from driving a car.
Not surprisingly, given such a model, many men want to participate as well.
The founders do not rule out eventually expanding to address that need.
In the meantime, putting substantial pay directly into the hands of women in countries where their legal status is low is bound to bring about social change.
Considering the efficiencies that the founders have identified in highly skilled, underemployed women available for global teams, it is clear that the “disruptive” potential of PowerToFly is vast.
Indeed, the platform is likely to integrate more women into the US technology sector and heighten cultural exchange.
As more Jordanian, Moroccan, Ukrainian, Chilean and other women chat every day with their US counterparts, they will lessen the “otherness” of the other.
But, most disruptive of all, PowerToFly could subvert our old-fashioned and unimaginative idea of what “work” has to be and where and when it has to be carried out.
In short, Zaleski and Berry’s venture promises to put positive pressure on other workplaces.
That is good news for anyone, male or female, who has young children or aging parents – or simply wants a more balanced life.
The Feminine Leadership Mystique
NEW YORK – In a single week earlier this month, Jill Abramson, the first woman to serve as Executive Editor of the New York Times, resigned under duress, and Natalie Nougayrède resigned as Editor-in-Chief of France’s leading newspaper, Le Monde, complaining in an open letter of having been undermined.
What, if anything, do these high-profile dismissals tell us about women in senior workplace positions?
The Times announced Abramson’s departure in a front-page story filled with barbs and swipes, the kind of piece that even the most ineffectual senior male editor never sees in print upon his dismissal from a job.
Abramson fought back assertively in a brief battle for public perception, with someone having leaked details of an $80,000-plus gap between her salary and that of her male predecessor in the same role.
On both sides of the Atlantic, observers mused predictably over the women’s “management style.”
Abramson was described as “pushy,” while Nougayrède was “authoritarian” and “Putin-like.”
No one, incidentally, friend or foe, made the case that either woman failed in their business objectives during their tenures.
Their style was the substance of the coverage – and thus of the backlash to that coverage.
It was bizarre to see Abramson, a top investigative reporter whose task was to help reporters get the story against many obstacles, be castigated as “peremptory,” aggressive, tough, and “sharp”-tempered.
How was she to do her job without those attributes?
Had she been otherwise, she would have been castigated as a weak, indecisive leader.
One would think that by now we had moved beyond a double standard in how men’s and women’s leadership styles are perceived.
Unfortunately, for women in charge, a “management myth” – akin to the “beauty myth” or to Betty Friedan’s “problem that has no name” – persists.
And, as long as there is a perceived problem with women’s leadership styles, no woman can lead a major organization so soothingly, diplomatically, and charmingly that epithets like “pushy,” “bossy,” and “Putin-like” will not follow her the minute someone wants to shove her out the door.
The question is not about women’s leadership styles at all; it is simply about moving the goalposts.
So let us speak frankly, facing a taboo, about what it means to be a senior woman leading effectively: it means that one will occasionally contradict a man, however politely; overrule a man, however courteously; disregard a man’s strategic advice, no matter how gently the decision is put; and tell a junior man, however tactfully, that he is not performing well enough.
And this is the problem with women’s leadership style: By definition, doing one’s job means angering certain kinds of men.
The truth is that there are not two kinds of women who lead in different ways, one magically soothing and impeccably feminine, and the other dictatorial and insufferable.
Rather, there are two kinds of men: those who can handle the moments described above, and who can, through their own maturity, personal evolution, or fortunate family upbringing, manage to process those moments in a purely professional context, and those who, for whatever reason, simply cannot.
The problem with senior women’s management style lies with the second category of men at work.
This is the untold secret of women’s struggle in the workplace: if you ask any senior woman off the record, she is likely to agree that most of her male colleagues have no problem with women’s authority, but that some simply cannot abide it, no matter how it is wielded.
So we should stop analyzing women’s management style as if there were some foolproof way to cross the minefield of power.
Instead, we should start to analyze why most men have evolved to the point that they accept women’s authority, while others – like whoever commissioned that front-page annihilation of Abramson at a time when smearing her served no professional purpose – still cannot.
Interestingly, in fields where women hold many senior positions, like book publishing, it is rare to see analyses of women’s management styles.
The same is true of academic administrators, whether they are presidents of women’s colleges or mixed-gender colleges and universities. Women lead on the micro level as well, as development projects like Grameen Bank have shown, and outperform men in comparable roles.
These publishers, presidents, and micro-entrepreneurs all have track records of accomplishment.
Could their matter-of-fact achievement be due in part to the fact that their presence is taken for granted and that they are often allowed simply to get on with being effective?
What if all workplaces were like that?
What if we dropped once and for all the impossible mirror that always distorts female leadership into something monstrous?
Part of strong leadership is to trust your gut instincts.
The cultural second-guessing surrounding the dismissal of Abramson and Nougayrède ensures that women leaders cannot do that without having their leadership instincts held up to constant inspection.
The Poverty of Hillary Clinton
NEW YORK – Hillary Clinton is annoying people again.
Recently, she said in an interview that she and her husband were “dead broke” when they left the White House.
This led to unhelpful headlines such as “Bill Clinton: Hillary Is ‘Not Out of Touch.’”
The gaffe also opened the door for Republican attacks – this being a standard campaign strategy that has dogged wealthy major-party candidates (as they all are) since George H.W. Bush was astonished by a grocery scanner.
You would think that Clinton, the first wife and mother to have a good shot at being America’s next president, would easily pass the “relatability” test.
But last weekend, she did it again, telling The Guardian that, “unlike a lot of people who are truly well off,” she and her husband “pay ordinary income tax,” and that their wealth came only “through dint of hard work.”
Clinton’s supporters are right to worry about her nails-on-blackboard elitism.
Her presumptive candidacy’s trump card is supposed to be her advantage among critically important women voters – the deciding factor for Democrats in national elections.
Had Al Gore maintained her husband’s high margin among women in the presidential elections of 1992 and 1996, the Supreme Court would not have decided his 2000 election fight with George W. Bush.
Hillary Clinton has raised millions on the premise that she can restore the Democrats’ traditional advantage.
But most of the women sought as voters are not corporate attorneys or secretaries of state.
The gender gap that has benefited the Democratic Party is attributable mainly to struggling working-class and pink-collar women; someone on Clinton’s staff needs to tell her to stop offending them.
Clinton’s rhetoric, as I wrote in a review of the hagiographic “campaign biography” HRC, often alienates many women because of flaws in how she views and expresses herself and her mission.
For starters, she frames her quest in terms of outdated, unappealing, and irrelevant rhetoric. HRC’s iconography includes all-female pictures of her former staff, as if a single-gender – or single-race – photograph would not affront thoughtful people in 2014.
She also seems to believe that women voters see in her the embodiment of their own struggles and will cheer her on vicariously when, by becoming America’s president, she shatters the last “glass ceiling.”
But American women voters know quite well what their own struggles are: paying the bills, educating their kids, dealing with a degenerated, costly health-care system, and so on.
They are interested in a candidate, male or female, who speaks to their life issues, and are turned off by a woman who assumes that they are just waiting, sheep-like, for a Joan of Arc figure who will serve “lesser” women as what Jungian psychologists call an “ego ideal.”
The term “glass ceiling” is itself elitist, deriving as it does from the corporate struggles of a few professional women.
Most American women are having a hard enough time on the factory floor or the unemployment line or making minimum wage at Wal-Mart; when working-class women hear a former corporate attorney carry on about a glass ceiling, they think not about gender identification but about the class divide that has widened since the term came into vogue in the 1980s.
Yet Clinton keeps telling her angry female constituents – as a campaign message! – that she is a member of the 1%.
Finally, she alienates her potential gender-based voters by being perfect.
Clinton’s advisers confirm that never showing weakness is a key component of her strategy.
This was her approach with the Monica Lewinsky scandal – which is predictably rearing its head again, as Lewinsky has come forward (we can’t know the machinations that may have been behind that timing) to muse on old events.
As one of her advisers told me in a TV debate, Clinton’s approach was not to address any pain that she might have felt, as that would have been “the biggest press conference ever.”
That may be true, but it is bad advice nonetheless.
By never showing weakness or honesty about her own suffering or any imperfection in her life, negative stories and hostility continue to percolate.
If she had held a press conference and said something like, “I feel what anyone would feel at this painful time, and I ask for privacy for myself and my family as we try to get through this,” the scrutiny of her would have ended much sooner, along with the story itself.
But the larger issue concerning Clinton’s perfectionism is what it means for her possible role as leader of the free world.
At a time of ever-increasing income disparity in America, is it not a serious political flaw in any presidential candidate not to know how to speak sensitively about wealth and poverty?
And, given diminishing government transparency in the US and more and more secret law, is it not a serious issue that a presidential candidate will not address his or her mistakes and shortcomings?
Hillary Clinton’s campaign badly miscalculated in 2008, losing the Democratic Party nomination to Barack Obama.
She may well get the nomination in 2016; but when she faces the Republican candidate in the election, she may be in for another rude awakening.
Football Versus Freedom
NEW YORK – Last year, Brazilian authorities were taken by surprise when a wave of protests erupted during the Confederations Cup soccer tournament, a sort of warm-up to this year’s main event, the World Cup, which will be staged in 12 cities across the country beginning in June.
The protesters, complaining that the $11 billion spent on new stadiums and other World Cup-related infrastructure would be better invested in improving Brazil’s poor public services, were met with official violence.
And yet the protests have continued throughout the year.
Not surprisingly, soccer’s international governing body, FIFA, and the World Cup’s corporate sponsors are worried – so worried that they and Brazilian government officials are planning carefully for protests during the month-long tournament.
Worse, a raft of proposed security legislation would almost certainly restrict freedom of assembly.
The trouble with this backlash is that the World Cup is merely a focal point for a diffuse set of popular grievances concerning issues ranging from education to police corruption and abuse of power.
Last June, a million people took to the streets across the country.
In Brasilia, 45,000 protesters simply walked into the capital’s legislative district and stood quietly.
Recent demonstrations have followed on the heels of the government’s forced relocation of low-income Brazilians from their favelas overlooking Rio de Janeiro into newly built housing far away – an effort aimed at preventing the World Cup from being marred by scenes of poverty and unrest.
Last week, protests erupted in the city’s Copacabana district after a dancer died.
Locals say he was shot by the police, who have now been joined by the military to maintain order.
The use of soldiers in civil policing is of course the hallmark of an authoritarian regime, not a democracy.
And the proposed security legislation includes use of the bogeyman of “terrorism,” which is pretty much nonexistent in Brazil (but always useful to police states), to stifle dissent.
A bill proposed in February would make it a crime to protest a sporting event.
In an atmosphere in which violent anarchists are not holding civil society hostage, the government has intervened to do so.
I was in Brasilia two weeks ago, when the entire country was commemorating the 50th anniversary of the military coup with cultural events and public activities.
Indeed, it was the theme of the Second Biennial Book Fair, sponsored by the Ministry of Culture.
Exhibits at the fair drew attention to what life was like under the military regime and promoted reading and writing as a central component of a free civil society.
It was moving to witness this homage to freedom and be reminded of what tyranny looks and feels like.
One of the exhibits at the event featured a display of cartoons published during the dictatorship in Pasquim, an alternative magazine similar to the British satirical weekly magazine Private Eye.
As so often happens with satire and allegory, Paquim’s cartoonists were able to sneak into print quite radical critiques of the military regime – its brutality, arbitrary arrests, and censorship – in graphic form, right under the nose of the state’s humorless generals.
But eventually the generals caught on.
When Paquim was one of the last relatively unmuzzled press voices in Brazil, its cartoonists were arrested, and a live bomb was found in the magazine’s offices.
According to Ricky Goodwin, a former Paquim journalist and the exhibit’s curator, at one point, when the magazine’s main cartoonists and writers were in prison, a mass of ordinary Brazilians surrounded its offices, insisting that publication continue.
Other journalists volunteered, at great risk to themselves, to get the magazine out.
FIFA and the government’s response to Brazil’s recent protests are putting at risk what the Paquim exhibit commemorates: the rebirth of freedom and democracy.
The problem for the government of President Dilma Rousseff, who was herself imprisoned and tortured under the military regime, is that Brazilians know exactly what is at stake.
When pundits weigh in on emerging powers like Brazil and India, they typically point to the rise of the middle class and booms in education and connectivity.
But they rarely appreciate the texture of their democracy and civil society – the relative newness of hard-won freedoms and the intimate understanding of what tyranny, whether a homegrown dictatorship or a colonial administration, means to individual liberty.
(Still less do they notice the role that women’s empowerment and feminism have played in development.)
The role of FIFA, in particular, in pressuring Brazil’s government to enact anti-democratic legislation is a dangerous precedent.
This extra-national effort on behalf of the World Cup’s sponsors underscores the threat to newly empowered civil societies from global corporate entities, many of which are increasingly chafing at the constraints imposed on them by strong democracies.
Who is supposed to pass Brazil’s laws, the people of Brazil or Coca-Cola?
When Coca-Cola, backed by the military, sets national policy in what is supposed to be a free society, a new and darker page in the fight for freedom has been turned.
भारत का राजकोषीय सौभाग्य
कैम्ब्रिज – भारतीय प्रधानमंत्री नरेंद्र मोदी की सरकार सौभाग्यशाली महसूस कर रही होगी। कच्चे तेल के कारण विश्व में वस्तुओं की कीमतों में गिरावट आने के फलस्वरूप, राष्ट्रीय बजट का प्रबंध करना अधिक आसान हो गया है। और अब, केंद्रीय सांख्यिकी कार्यालय (सीएसओ) द्वारा जीडीपी डेटा की गणना के लिए अपनी कार्यप्रणाली को संशोधित करने के बाद यह कार्य और भी आसान हो गया है। सीएसओ के अनुसार, पद्धति में किए गए इस परिवर्तन के परिणामस्वरूप 2014 की दूसरी तिमाही में वार्षिक उत्पादन में वृद्धि 5.3% के मूल अनुमान से बहुत अधिक बढ़कर 8.2% पर पहुँच गई।
जीडीपी के संशोधित आंकड़ों के आधार पर, मार्च 2015 को समाप्त होनेवाले राजकोषीय वर्ष में भारत की औसत विकास दर 7.4% होने की आशा है। इसके अलावा, अगले राजकोषीय वर्ष में देश में 8-8.5% की दर से विकास होने का अनुमान है। बजट में किसी प्रकार के भी परिवर्तनों से विकास में ऐसी उल्लेखनीय, लागत-रहित तेज़ी नहीं लाई जा सकती थी। यह कहना उचित होगा कि आमतौर पर गंभीर रहनेवाले सांख्यिकी विभाग ने इस साल के बजट में वाहवाही लूट ली।
फिर भी, वित्त मंत्री अरुण जेटली के बजट को कई मोर्चों पर सफलता मिली है – कम-से-कम इसकी कल्पना और कार्यान्वयन के सामंजस्य में तो मिली ही है। विशेष रूप से, यह बजट सरकार के विकास समर्थक एजेंडा की कल्पना को आगे बढ़ानेवाला है जिसमें कल्याणकारी योजनाओं के लिए बेहतर सुपुर्दगी तंत्र को लक्षित करते हुए यह भारत में कारोबार करने में आसानी को और बढ़ाता है।
व्यय पक्ष को देखा जाए तो बजट में विस्तार है, इसमें निवेश व्यय में भारी वृद्धि की गई है, नए कल्याणकारी कार्यक्रम शुरू किए गए हैं, और विभिन्न क्षेत्रों के लिए ऋण में वृद्धि की गई है। हालाँकि राष्ट्रीय ग्रामीण रोजगार गारंटी अधिनियम (जो ग्रामीण परिवारों को 100 दिनों के लिए मजदूरी की गारंटी देता है) या उर्वरक सब्सिडी जैसे कुछ सबसे बड़े राजकोषीय कार्यक्रमों पर किए जानेवाले ख़र्च के लिए उच्चतम सीमा निर्धारित करने के लिए कोई महत्वपूर्ण प्रयास नहीं किया गया है, कार्यान्वयन में सुधार करने और अपव्यय कम करने के उपाय निर्धारित किए गए हैं। हालाँकि, बजट में घाटे में चल रही सार्वजनिक क्षेत्र की इकाइयों में विनिवेश का उल्लेख तो किया गया है, पर बजट में इस मोर्चे पर शीघ्र कार्रवाई किए जाने के बारे में कुछ नहीं कहा गया है।
कॉर्पोरेट क्षेत्र के ऋण के भारी बोझ और बैंकों की भारी मात्रा में ख़राब आस्तियों के कारण निजी निवेश के कमजोर बने रहने के कारण, सरकार ने स्पष्ट रूप से यह निर्णय किया है कि बुनियादी सुविधाओं पर खर्च के ज़रिए इस प्रक्रिया को तुरंत आरंभ कर दिया जाए। लेकिन भारत के बुनियादी ढांचे की जरूरतें जितना सरकार खर्च कर सकती है उससे कहीं अधिक हैं। इस अर्थ में, सार्वजनिक-निजी भागीदारियों के लिए "प्लग करो और खेलो" की नई योजना पिछले पीपीपी मॉडल की तुलना में एक बहुत बड़ा सुधार है, जिसके द्वारा "किसी परियोजना को कार्यान्वयन के लिए दिए जाने से पहले सभी तरह की मंजूरियाँ और संबद्ध सुविधाएँ उपलब्ध होंगी।"
बजट की सफलता इस बात पर निर्भर करेगी कि सार्वजनिक क्षेत्र के ये निवेश कितने सफल रहते हैं, और यह अन्य नीतियों, विशेष रूप से भूमि अधिग्रहण विधेयक (जो ग्रामीण क्षेत्रों में औद्योगिक विकास के लिए बनाया गया है) पर निर्भर करेगा, जो अभी से मुश्किलों में पड़ गया है। इसके अलावा, सरकारी निवेश और संसाधनों का आवंटन एक अरसे से भ्रष्टाचार में लिप्त रहा है, और मोदी की सरकार को अभी यह दिखाना बाकी है कि यह बजट के वादों को पारदर्शी और टिकाऊ तरीके से लागू कर सकती है।
कर के मोर्चे पर, एक प्रमुख घोषणा की गई है: अगले चार वर्षों में कॉर्पोरेट टैक्स की दर 30% से कम करके 25% की जाएगी, जिससे निजी क्षेत्र के निवेश को प्रोत्साहन मिला है। वस्तु और सेवा कर - जो एक तरह का मूल्य वर्धित कर है जिसके बारे में सरकार ने सराहनीय प्रगति की है - का कार्यान्वयन एक बड़ी उपलब्धि होगी और इससे अर्थव्यवस्था को बहुत अधिक प्रोत्साहन मिलेगा। तथापि, व्यय में भारी वृद्धि किए जाने के बावजूद, बजट देश के राजकोषीय घाटे को उचित सीमा के भीतर रखने के लिए मुख्य रूप से विकास और अधिक कर संग्रह पर निर्भर करता है।
बजट में विदेशी निवेश के अंतर्वाहों को प्रोत्साहन देने के लिए किए गए कई प्रस्तावित उपायों में से एक उपाय मैक्रो-प्रूडेंशियल की दृष्टि से जोखिमपूर्ण दिखाई देता है। सरकार "विभिन्न प्रकार के विदेशी निवेशों, विशेष रूप से विदेशी पोर्टफोलियो निवेशों और विदेशी प्रत्यक्ष निवेशों के बीच के अंतर को समाप्त कर देगी, और उनके स्थान पर समग्र उच्चतम सीमाएँ लाएगी।"
निवेश के इन दोनों प्रकारों को अलग मानने के कई कारण हैं। पोर्टफोलियो निवेश, जिसे इसकी अस्थिर प्रकृति के कारण अक्सर अतिशीघ्र चलायमान मुद्रा (हॉट मनी) कहा जाता है, अंतर्राष्ट्रीय वित्त की अनिश्चितताओं के कारण अर्थव्यवस्था के जोखिमों को बढ़ा सकता है। दूसरी ओर, विदेशी प्रत्यक्ष निवेश कहीं अधिक स्थिर और घरेलू बुनियादी सिद्धांतों से प्रेरित होता है। इस वर्ष संयुक्त राज्य अमेरिका में ब्याज दरों में वृद्धि होने की संभावना को देखते हुए, अंतर्राष्ट्रीय पूंजी बाज़ारों में अधिक उतार-चढ़ावों के होने की उम्मीद की जा सकती है। इस संदर्भ में, पोर्टफोलियो और प्रत्यक्ष विदेशी निवेश में अंतर को बनाए रखना विवेकपूर्ण होगा।
सामान्य तौर पर, बजट की योजना में उन प्रमुख मुद्दों पर ध्यान दिया गया है जिनका भारत की अर्थव्यवस्था को सामना करना पड़ रहा है। लेकिन अच्छे इरादों से वांछित परिणाम हासिल कर पाना मुख्य रूप से इस बात पर निर्भर करेगा कि सरकार भूमि, श्रम, और पर्यावरण जैसे अति तात्कालिक विनियामक मुद्दों पर अनुपूरक और तत्काल आवश्यक सुधारों को लागू करने में सरकार कितनी सफल रहती है।
किसी भी स्थिति में, बजट में मोदी सरकार के इरादों के बारे में स्पष्ट संकेत मिलता है। कम-से-कम निकट भविष्य में, यह अपनी "न्यूनतम सरकार और अधिकतम शासन" की कार्यप्रणाली के स्थान पर "साधारण सरकार और अधिकतम शासन" को ला रही है।
The French Rally to the Republic
PARIS – Before the second round of France’s regional elections on Sunday, most predictions suggested that five, perhaps six, of the country’s regional governments would fall into the hands of the National Front (FN).
But the French people pulled themselves together and turned out to vote in much greater numbers than anyone expected.
The result is that a xenophobic, racist party, one hostile to everything essential to the spirit and greatness of France, was defeated in all of the contests that it was supposed to win.
Some will express surprise at this strange country, which is never so great as when it is on the edge of a cliff.
They will worry – and they are right to worry – that a situation of extreme peril, a veritable threat to the nation, was required before the French recovered their senses and took the path of reason.
And they will regret that the French are not the prosaic sort of people who know how to be themselves at normal cruising speed, without having to hear a cannonball whistle past.
But that is how it is.
And I, like many others, will not try to hide my satisfaction at seeing the smug scoundrels of the FN break down and resume speaking in their historic register, with their authentic voice, which is one of hatred and mob rage.
This, truly, was a victory for the republic – a triumph of popular resistance.
The French turned out, en masse, to say that they did not want to see the Le Pen gang take possession of their regions.
That is the most important lesson from Sunday’s vote, and it is a reassuring one.
But what caused the nation to right itself?
Obviously, nothing happened between the elections’ first and second rounds that addressed the “malaise” of the French people.
Nor was any particular promise made in response to the “hard questions” raised by FN voters just a week earlier.
No.
What we saw, instead, was a moral surge among the French – an act of self-defense by the body politic.
Between the two rounds, the following simple idea sank in among the electorate: The National Front can revamp its façade all it wants, but it has never been, is not, and can never be a normal party.
For how long have France’s moral and political authorities been telling us that “stigmatization” of the National Front doesn’t work, that it strengthens the party instead of weakening it?
Well, that was wrong 20 years ago, and it is still wrong.
It cannot be repeated often enough that when the moral left and right have been strong, when groups like SOS Racisme set boundaries that are bright and clear, the FN has been contained electorally.
But when those boundary lines are blurred, when the dikes crumble and the antiracist watchdogs allow themselves to be intimidated or lower their guard, the FN tries to make itself at home.
The same is true today.
The happy surprise of the regional vote owes absolutely nothing to accommodations with the FN by major parties that supposedly “heard the message” of “angry” voters (rhetoric that they relentlessly drummed into us).
On the contrary, a sufficient number of voters came to understand that in that very anger – in its spokespeople and in the words used to express it – lurked a threat to the republic, to democracy, and to the nation’s fundamental values.
That is the second lesson.
What awaits us tomorrow?
How can we be sure that the FN wave, having receded, will not regain strength and break with even greater destructive force in the upcoming presidential election?
Better “unemployment figures” will be required, no doubt. Faster “growth,” certainly.
We will also need “efforts” and “gestures” directed toward the one-third of people under 30 and the nearly one-half of industrial and service workers who are said to have expressed their “frustration” and “anxiety” by voting for the FN.
Fine.
But none of that will ever be a substitute for leaders taking the moral high ground and restoring to our public discourse its lost luster.
No strategy will work if it is implemented by mediocrities who, in a political comedy as dishonorable as it is vain, rush to the television studios to declare, hand over heart, that they have heard the voters “loud and clear.”
The key will be for French leaders to say – as loudly as possible and as often as necessary – that there is no answer to the “hard questions” as the FN poses them.
And, like it or not, it must be said not only to the FN’s leaders, but also to its voters.
There have been other times in France’s history when entire segments of the electorate have ejected themselves from the game, without the rest of the players rushing over to beg them to get back on the field.
Georges Clémenceau, Jean Jaurès, and Raymond Poincaré, at the outset of the twentieth century, did not pander to the nearly half of the electorate that, during the Dreyfus Affair, had exiled themselves from the republic.
Nor did Charles de Gaulle have any qualms about telling the proponents of French Algeria that, in the end, he did not understand them.
Nor did Pierre Mendès France in the 1950s hesitate to tell the Communists that he didn’t want their votes to support his government.
France must now recall these great moments in its republican tradition and hold them up as a model for today’s leaders.
For what will be needed to hold the territory that the republic nearly lost to the FN is political courage of a sort that, for the moment, is in short supply.
Nationalism and Terrorism
BOSTON – September 11, 2001, may – at least at first – seem like an inappropriate addition to the history of nationalism, given Al Qaeda’s explicitly stated global pretensions.
In fact, now that the initial shock and confusion have given way to a more sober perspective, the terrorist attacks of that awful day are increasingly seen – as they should be – as one among numerous other nationalist milestones.
From this perspective, the attacks no longer appear, as they did to so many immediately afterwards, to reflect an incomprehensible, irrational, and uncivilized mentality, or a different civilization altogether – pre-modern, unenlightened, and fundamentally “traditional” (in other words, undeveloped).
It is in this unflattering sense that Islam, the dominant religion of an economically backward part of the world, was said to have motivated the attacks of September 11, 2001.
And, because those who believed this (virtually everyone whose voices were heard) belatedly perceived its insulting connotation, discussing the matter has caused considerable anguish in the years since.
There are no euphemisms that can inoffensively imply that one of the great world religions is a murderous, irrational ideology, unacceptable for modern, civilized human beings.
And yet two different American administrations have implied – and consistently acted upon – this assumption.
But, once we place the tragedy of September 11, 2001, and the broader political phenomenon of international terrorism, in the context of other historical tragedies in the past century, religion becomes an unlikely explanation.
It is here where the influence of nationalism becomes obvious.
Nationalism has been the major motive force in the West since the beginning of the modern period.
Historians have noted its influence in Elizabethan England (which produced the spirit animating the Puritan Rebellion and migration to America), and increasingly recognize it as the motive force behind the French and the Russian Revolutions.
Meanwhile, Chinese scholars are beginning to view it as the inspiration for Mao Zedong’s struggle against the Kuomintang (the openly self-named “Nationalist Movement”) and the policies of the People’s Republic.
And no historical acumen is needed to understand that nationalism was the source of Hitler’s National Socialism and, therefore, World War II.
In fact, it would be puzzling if this were not the case, given that nationalism is the cultural foundation of modernity – the framework of its social consciousness.
And, precisely because nationalism shapes the way we think, its role in phenomena that do not trumpet their nationalist motivation – like Al Qaeda’s attacks in 2001 – can easily be overlooked.
As a rule, most nationalists do not call themselves nationalists.
Like the rest of us, they believe that their nationalism is natural and does not have to be emphasized.
But a little self-examination should lead any thinking person to recognize that we all are nationalists – we feel, think, and react to the world as nationalism prescribes.
Nationalism is a temporal vision (and thus secular, even when using religion in its rhetoric) that divides people into sovereign communities of equal members.
The equality of national membership (which, at the same time, may be exclusively defined) elevates every member’s status to that of the elite, making it dependent on the dignity of the nation as a whole.
As a result, those who possess national consciousness become committed to and defensive of the dignity of the nation – measured by its standing, or prestige, vis-à-vis other nations.
That is why competition for national prestige has been the main motive in international politics since the beginning of the twentieth century.
Specifically, the aggressor in many international conflicts in this period has been motivated by perceived injury to national dignity.
Actual injury is not necessary: the perceived superiority of another nation is enough.
In an advanced modern society, such as Germany, intellectuals have no difficulty using openly nationalist language to convince a nationally conscious populace of threats to national prestige.
By contrast, in a society where national consciousness is limited to the better educated (for example, the Arab Middle East), they must resort to traditional means of mobilization.
In the case of the Middle East, that traditional mobilizer is Islam, and so threats to national prestige are presented as threats to Islam.
Some nations do not feel threatened by imaginary insults to national dignity – for various historical reasons, they believe themselves to be superior to others.
But, if their prestige is in fact at stake, the perception of a threat becomes decisive.
Why else would citizens across the developed world be so preoccupied with their economic competitiveness?
Is it not enough for us to be well off?
Why do we need to be better off than others?
Why, for example, do Americans feel so threatened by the peaceful economic rise of China (as they did by Japan’s economic success in the 1980’s)?
To no longer be “Number One” would offend America’s sense of dignity.
There is no more to it than that.
China is now also motivated by nationalism, and it will rise as high as a motivated population of 1.3 billion people can.
The threat to America’s international standing is real; but, blinded by it, Americans believe that they are still in a position to condescend to China as they would to an inferior power.
For the time being, the Chinese may be too preoccupied with their own backyard to pay attention to such insults, but it is foolish to offend them deliberately.
Because Americans misunderstood the motives behind the attacks of September 11, 2001, the United States fought two costly wars, which did not defeat its enemies and have left the Middle East more volatile than ever.
Being blind to the connection between nationalism and dignity in China – and in America’s own conduct when dealing with China – may cost the US even more.
NATO After Istanbul
Last week, the heads of state and government of NATO's 26 member nations gathered in Istanbul for a major summit.
The symbolism of a city that bridges two continents was especially appropriate.
In Istanbul, we not only reinforced the alliance's vital transatlantic link, but also built bridges of cooperation to other regions.
After the discord over Iraq, the summit demonstrated a new momentum in transatlantic security cooperation, and reinforced NATO's role as the major instrument for that cooperation.
The key decisions that we took at the summit make this very clear.
First, Afghanistan.
NATO decided in Istanbul to expand its stabilising presence.
We will increase the number of Provincial Reconstruction Teams in order to support the expansion of the central government's authority and facilitate development and reconstruction.
We will also provide enhanced support for the forthcoming elections, which are crucial to ensuring long-term peace and stability and making sure that the country will never again become a safe haven for terrorists.
Second, Iraq.
At the request of Prime Minister Iyad Allawi, NATO decided to offer to help train Iraqi security forces.
In addition to our continued support for Poland in its leadership of the multinational division in Iraq, NATO will now play a distinct role in helping Iraq.
That this decision was taken in conjunction with the transfer of authority to a new Iraqi Government only adds to its significance.
The Allies affirmed unambiguously that a stable Iraq is in their common interest and that NATO is part of achieving this.
Training is an area that is critical to Iraq's stability, and one in which NATO has valuable experience and expertise to share.
Third, the Balkans.
While our presence in Kosovo remains unchanged, the much improved security situation in Bosnia and Herzegovina allows us to conclude our successful SFOR mission there by the end of this year.
The European Union will then follow with a mission of its own, and we will support the EU in this endeavor.
But NATO will retain a presence in Sarajevo, in particular to help Bosnia and Herzegovina with defense reform.
We want to welcome this country, as well as Serbia and Montenegro, into our Partnership for Peace program as soon as they meet the relevant criteria, which include full cooperation with the International Criminal Tribunal for the former Yugoslavia.
Fourth, military transformation.
The allies decided to accelerate their efforts to equip NATO with the forces and technologies it needs to perform twenty-first century missions, from the Balkans to Afghanistan.
The NATO Response Force will soon achieve its initial operational capability, and our new Multinational Defense Battalion to deal with chemical, biological, radiological and nuclear threats is already fully operational - all ideas proposed by the United States, and implemented rapidly by the alliance.
In addition, we endorsed on several measures to strengthen the link between political agreement to commence operations and the provision of the necessary forces, including through usability targets and changes to NATO's planning processes.
Fifth, NATO enlargement and partnership.
Although the Istanbul summit was the first to include NATO's seven new member countries-Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia-we gave a strong signal that the door remains open, and encouraged those who want to join to continue pursuing the reforms needed to make themselves ready for membership.
We also launched a new phase in our relations with partner countries: opportunities for more individualized cooperation, a greater emphasis on defense reform, and a stronger focus on the Caucasus and Central Asia.
Furthermore, we welcomed the interest shown by Russia and Ukraine in contributing to "Active Endeavor," our anti-terrorist naval operation in the Mediterranean, as another sign of the growing strategic value of our partnership with these countries.
Finally, the Mediterranean and the broader Middle East.
NATO decided in Istanbul to reach out to new regions of strategic importance, in particular the broader Middle East.
No other region's development will affect our security more profoundly in coming years.
We need a coherent transatlantic effort to engage this region, and NATO will be part of that effort.
We agreed to strengthen our Mediterranean Dialogue with seven countries in North Africa and the Middle East and to transform it into a genuine partnership.
We also launched the "Istanbul Cooperation Initiative," to offer practical security-related cooperation to countries in the broader Middle East.
Several members of the Gulf Cooperation Council have already expressed an interest in working together with NATO, so we are off to a good start.
The NATO Istanbul summit was a strong demonstration of an Atlanticism that looks to the challenges of today and tomorrow and is prepared to tackle security challenges wherever they emerge.
The summit gave NATO more political and military means to project stability where it matters.
Most importantly, the summit reaffirmed the role of the transatlantic community of democratic nations and shared values as the most powerful force for shaping our future.
NATO after Riga
When the Soviet Union collapsed, many predicted the end of the North Atlantic Treaty Organization (NATO).
Yet a few weeks ago, NATO held its summit meeting in the Latvian capital of Riga, formerly part of the USSR.
NATO was created in 1949 as an alliance to contain Soviet power.
Its focus was on Western Europe, and, as one joke went, it was designed to keep the Russians out, the Germans down, and the Americans in.
But that Cold War world is long gone. Germany is a democracy firmly anchored in the European Union, and there is no threat of Soviet tanks sweeping across the North German plains.
NATO survived by transforming itself.
While some Central European members that were formerly occupied by the USSR continue to see NATO as a political insurance policy against a revival of Russian ambitions, NATO is no longer aimed against Russia.
In fact, Russian officers are welcome to participate in military exercises and to visit NATO headquarters under the Partnership for Peace program.
Residual suspicions and Russian pride limit the NATO-Russia agreement, but the organization is no longer focused on Russia.
One major task that NATO performed in the first decade after the Cold War was to attract the newly freed countries of Central Europe toward the West, with the prospect of membership conditioned on meeting democratic standards.
Another important task was to help bring stability to the troubled Balkan region after the breakup of Yugoslavia and the resultant wars in Bosnia and Kosovo.
NATO peacekeeping operations have been a stabilizing factor in the region. For example, NATO and EU diplomacy prevented ethnic conflict in Macedonia from erupting into a crisis.
While these actions were important, many observers argued that NATO would have to look beyond Europe.
A common quip was that NATO would have to go “out of area or out of business.”
This became particularly important after the Al Qaeda attacks on September 11, 2001, shifted the focus of American foreign policy toward transnational terrorism.
The European members of NATO responded by invoking the Article 5 mutual defense clause of the NATO charter and coming to the aid of the US in Afghanistan, where today there are 32,000 NATO troops.
Because they train together, NATO countries can operate effectively even when not all members of the organization are officially involved.
For example, NATO did not conduct the Gulf War in 1991 or the initial Afghan campaign, but NATO planning and training meant that members could cooperate effectively when called upon to do so.
At the same time, NATO after Riga faces a number of problems.
Europe split over the American invasion of Iraq, and there is no political will to involve NATO there.
The new relationship with Russia needs careful management, and rapid extension of membership to former Soviet republics like Ukraine and Georgia could prove difficult.
In military terms, European countries need to spend more on secure communications, airlift capabilities, special operations, and dealing with chemical and biological battlefields in order to be able to fight the war on terrorism effectively.
France is concerned that America’s influence in NATO is too large, and opposes a global role in which NATO establishes special partnerships with Australia, New Zealand, Japan, and other countries.
The French worry that NATO’s global ambition, particularly in East Asia, could produce friction with China.
But by far the biggest problem that NATO faces today is Afghanistan.
Hamid Karzai’s government remains weak, and the economy continues to be heavily dependent upon opium production.
The Taliban and Al Qaeda networks are re-emerging as political and military threats.
Many NATO countries with troops in Afghanistan have “national caveats” that restrict how their troops may be used.
While the Riga summit relaxed some of these caveats to allow assistance to allies in dire circumstances, Britain, Canada, the Netherlands, and the US are doing most of the fighting in southern Afghanistan, while French, German, and Italian troops are deployed in the quieter north.
It is difficult to see how NATO can succeed in stabilizing Afghanistan unless it is willing to commit more troops and give commanders more flexibility.
Success will also require more funds for reconstruction, development, and alternatives to opium poppy cultivation.
Governments in Europe and the US are concerned about budget problems, but in a larger perspective, providing significantly greater resources to Afghanistan now may turn out to save more funds later.
One of the great costs of the Bush administration’s mistaken Iraq policy has been to divert attention and resources away from the just war in Afghanistan.
If only a small portion of the money and forces invested in Iraq had been devoted to Afghanistan, the current threat of a resurgent Taliban and Al Qaeda might not be so great.
Unfortunately, Iraq is draining all the oxygen out of the policy process in Washington.
Few people are focused on saving NATO from a significant failure in its first major test outside of Europe.
NATO and Romania\u0027s Nightmares
Hundreds of thousands of Romanians cheered President Bush as he welcomed us into NATO, and we meant it.
Just like we meant it when we cheered Nicolae Ceausescu - both when he spoke and when he was executed.
We are good at cheering.
What we are not good at is understanding what we are cheering for.
Our new NATO membership sounds great, but we really don't know why.
In 1998, Radu Vasile, then Romania's Prime Minister, visited Israel.
Vasile expressed interest in purchasing Israeli military helicopters.
Israel's President Ezer Weizmann, a former pilot, responded: "You must have serious enemies if you need these helicopters.
Who are they?"
"Not at all," Vasile answered, "we're at peace with our neighbours...our frontiers are secure.
But we need up-to-date aircraft ... to join NATO.'
"So," Weizmann said, "you don't have any enemies after all!
But don't worry: NATO will find enemies for you!"
Most Romanians see NATO membership as a huge national victory, but some wonder if there is truth in Weizmann's joke: because, if the rationale for entering a military alliance is that you feel threatened, entering NATO is nonsense.
For the first time in its troubled history, Romania has nothing to fear from its neighbours.
Russia, "the hereditary enemy," now seems far away and consumed by its domestic troubles.
Hungary, the other "hereditary enemy," is a fellow NATO ally; relations with Ukraine are nasty, but peaceful.
Bulgaria is too small to matter; and Yugoslavia's wars are over.
Even so, the country must now, year after year, increase its military expenses so that it can begin to approximate NATO standards.
That will be a hard thing to do for an economy whose recent economic growth, though real, remains shaky.
Unlike joining the EU, which can provide important development funds, joining NATO means only sacrifice.
Given our poverty, spending more money on military equipment seems irresponsible.
Although 73% of Romanians approve of entering NATO, less than 20% agree with Romanian participation in a war against Iraq.
No matter how inconsistent such attitudes appear to be, they remain widespread and cannot be overlooked, because they suggest that people here conceive of NATO as a protective umbrella, not something to which they must contribute.
Romania's security problems are not external, but internal, for the enemies of Romania establishing a stable, democratic-liberal government are the Romanian people themselves.
Democracy here is a reality, but a delicate one.
Too many dictatorships have accustomed Romanians with habits of obedience, conformity and irresponsibility.
The ruling PSD (Social Democrat) government is efficient, but has a worrying record of corruption, non-transparency, and of using its power to influence judicial decisions.
The second largest party - Greater Romania Party - is a half-fascist, xenophobic, anti-Semitic party, whose leader - a populist radical - received 22% of the vote in last year's elections.
How can NATO help with this?
Directly, it can do nothing; indirectly, it can do a lot.
NATO is no longer only a military alliance.
Instead, it is now a military-political alliance that sets democratic standards for new members and aspirants.
No Romanian government can neglect these standards.
Such openly thuggish rulers as Kuchma of Ukraine or Lukashenka of Belarus, are almost impossible to imagine in Romania nowadays.
Moreover, joining NATO means subsuming Romania's military and intelligence services under NATO command (i.e. American) control, thus any attempt at staging a coup, or stirring up trouble between Romanians and our sizeable Hungarian minority, can be prevented.
The more tightly bound to the democratic world a country like Romania is, the less likely it is to experience dramatic social or political unrest or to eviscerate its democratic system.
NATO fixes hard limits on the autonomy of local political elites to do what they want.
Of course, NATO cannot safeguard democracy alone and it is no panacea for our many social and political illnesses; yet it can act (and has already done so during the process of admission) as an incentive for governments and parties to behave responsibly and to abide by the rule of law.
This is vital because, in the past, when Romania's political elites enjoyed too much autonomy or real national sovereignty, they abused it.
Ceausescu's rule demonstrates this.
The "room to maneuver" he carved from the Warsaw Pact with the support of the West brought no benefits to the Romanian people.
It only increased the opportunity for Ceausescu's clan and cronies to act arbitrarily, making the lives of most citizens hell.
Comparatively, the Hungarians, the Polish and the Bulgarians, whose governments were much more dependent on the Soviets, were better off.
So, it is not joining NATO the military alliance that will benefit Romania.
What matters is Romania's integration into a strong international organisation, which will curb its sovereignty.
Entering NATO marks a formal acknowledgement that Romania (or Bulgaria, or Hungary, or Poland for that matter) is surrendering its claims to unlimited sovereignty, and to all the dreams of grandeur that go with it.
In the past, those dreams brought only underdevelopment, dictatorship, nationalism and untold amounts of suffering.
Killing that dream will prevent us from reliving our political nightmares.
NATO Must Prevail
DENVER – US Secretary of Defense Robert Gates’s recent prognosis of a “dim” and “dismal” future for NATO has triggered much debate, but it could well prove optimistic.
June, it turns out, marks another milestone on the alliance’s uncertain path: its operation in Libya has now surpassed in length the one in Kosovo 12 years ago.
After 78 days in 1999, Serbia’s Slobodan Milosevic gave up, while Libya’s Col. Muammar el-Qaddafi has yet to get the message – and may in fact be getting the wrong message.
For those of us who were engaged in the Kosovo crisis, the Libya intervention seems like déjà vu.
In the skies of Serbia and Kosovo, NATO warplanes attacked target after target, not to support the liberation of territory or in furtherance of a strategic bombing campaign, but rather to change Milosevic’s mind.
To be sure, denying Milosevic the means to engage in “ethnic cleansing” was added as a rationale in the days after the campaign began, but the real purpose was to convince him that he had to allow NATO forces into Kosovo.
It was a classic strategy/policy mismatch.
No war is without its list of false assumptions, and the Kosovo campaign had its share.
Perhaps the most important was the memorable – but erroneous – view that Milosevic would give up after a few days of bombing.
Instead, like many a leader in such circumstances, he entered a bunker, both figuratively and literally, and stayed there with little communication.
Meanwhile, NATO planners desperately sought to identify targets that would either deny him the means of ethnic cleansing, or, more often, encourage him to reconsider his position.
The intervention had its low points, perhaps none lower than the bombing of the Chinese Embassy, which was misidentified as a building that housed Serbian security assets – instruments of repression against Kosovo.
There were also moments of great concern about whether the allies would be willing to stay the course as the days, weeks, and months passed, with no end in sight.
Surely, those engaged in Libya today are feeling some of those same pressures.
Back in March 1999, few NATO leaders doubted that removing Milosevic from Kosovo by force was the right thing to do.
Nor was there much doubt that the leaders of Europe and the United States had made a good-faith effort to convince Milosevic through negotiations and peaceful means.
War was a last resort.
Indeed, by March 1999, the decision to go to war was understood to be correct, because all other possibilities had been exhausted.
The nineteenth-century Prussian military theorist Carl von Clausewitz is (too) often cited for his dictum that war is a continuation of politics by other means.
But a more pertinent thought of his came to mind during those days of decision: war is a serious means to serious ends.
Nobody involved in the Kosovo operation thought otherwise, or entertained the idea that NATO could give up.
That is why NATO began to assemble a ground component.
Ground troops ultimately proved unnecessary, but failure was not an option.
Nor can it be an option today.
In Libya, there is also a strategy/policy mismatch.
The policy is to remove Qaddafi from power.
The strategy – that is, the mandate for the means – is to protect civilians.
The latter will not ensure the success of the former.
This gap is beginning to close as NATO begins to deploy assets, such as attack helicopters, aimed more directly and boldly at the real goal of removing Qaddafi from power. But far more needs to be done to ensure success.
Complaints about the fecklessness of the rebels are not going to help.
Libya’s opposition is what it is.
Gates has appropriately focused on the question of NATO’s financial sustainability.
As European military leaders engaged in the operation discuss publicly the limitations of their budgets, it is easy to see why he raised the issue.
(Note to European military leaders: please don’t signal to Qaddafi that you are running out of bombs.)
But another point made by Gates is far more serious: lack of political will.
Some countries with needed capabilities have not brought them to the fight, and others have not even provided political support.
This à la carte approach is how NATO has always worked.
What is new is the possibility that NATO will fail.
The alliance’s reluctant warriors ought to consider that risk as they stand on the sideline.
These are difficult days for NATO, as Gates, in the twilight of his illustrious tenure, has pointed out.
A decision was made to engage militarily in a situation of arguably marginal interest, but now all of the allies must understand that they are using serious means to a serious end.
All of the countries that took the decision to intervene in Libya, including the US, must conduct themselves with a sense of renewed vigor, and with the understanding that NATO – whatever its shortcomings and shortfalls – must prevail.
NATO’s Dangerous Signals
COPENHAGEN – Two dangerous signals were sent from NATO’s Bucharest summit.
The first was that Russia has reestablished a “sphere of interest” in Europe, where countries are no longer allowed to pursue their own goals without Moscow accepting them.
The other was that all NATO member states are free to blackmail their partners into supporting their own narrow goals.
The first signal was sent when Ukraine and Georgia were denied the “Membership Action Plan” (MAP) that they sought.
Several European heavyweights, led by Germany and France, said no, despite strong support for the idea from the United States.
The second signal was sent when Greece successfully vetoed membership for Macedonia, a move that reflected the two countries’ unresolved conflict over Macedonia’s name (which Greece insists must be Former Yugoslav Republic Of Macedonia – FYROM – one of the most disgraceful acronyms harassing international politics today).
The dispute with Macedonia goes back to the early 1990’s, when Yugoslavia collapsed into independent states.
Greece vehemently opposed its tiny northern neighbor – with only two million inhabitants – using the name Macedonia and symbols from the days of Alexander the Great in its flag and crest.
Macedonia at one point agreed to design a new flag and remove the symbols, as well as to amend its constitution to clarify that it had no territorial claims on Greece, but it flatly refused to live under one of the tongue-twisting names suggested by its bigger neighbor.
So there you are: a Greek veto on Macedonia’s national aspirations until it has chosen a name that does not make the Greeks shiver in fear of aggression from the north.
With Macedonia in NATO, any adventurous policy that undermined regional stability would certainly be stopped in its tracks.
If the Greeks cannot see that, their partners must let them know that there is a price for their obstructive behavior.
The problem with Ukraine and Georgia is far more serious.
In a sense, Russia has behaved like Greece in claiming that NATO enlargement threatens its security.
That is nonsense, and Russia knows it.
But the Kremlin has found that behaving like a spoiled child gets results: the right to influence developments in ex-Soviet countries.
In other words, Russia is being allowed to re-assert its “sphere of influence” – a concept that should have been superceded by that of “Europe Whole and Free,” which the entire European Union appeared to have embraced when communism collapsed.
But no: 1989 was not the end of history.
History threatens to return.
European opponents of a MAP for Ukraine and Georgia argue that neither country is ready for NATO membership.
Too many question marks about their national unity are said to exist, too many internal conflicts linger, and their records on political and judicial reforms are supposedly dubious.
But the MAP process does not imply an automatic right to NATO membership.
On the contrary, MAPs would put heavy demands on Ukraine and Georgia.
Both would have to answer a lot of difficult questions and convince others that they are able to live up to NATO’s democratic requirements before being allowed to join.
Therefore, it would also be in Russia’s interest to see such a process started.
Russia has valid concerns regarding the huge Russian-speaking minorities in both countries, and these concerns are best dealt within the framework of the MAP process, where the Organization for Security and Cooperation in Europe’s very strict rules on treatment of minorities provide the benchmark.
Indeed, the MAP process ensured protections for Russian minorities in Estonia, Latvia, and Lithuania – all ex-Soviet republics that are now NATO members.
The crux of the matter is Europe’s lack of political will to forge a unified stand toward Russia.
This has led Russia to pursue a classic “divide and rule” strategy by tempting some big European countries into bilateral agreements – particularly on energy issues – that preclude a common EU position.
This is sad – both for Russia and Europeans – because it strengthens the hand of those in Moscow who want to pursue a policy of national pride rather than national interest, and it weakens the possibilities of establishing a real common European foreign and security policy.
But it is saddest for the countries that are once again being left out in the cold.
NATO is supposed to be a beacon for countries struggling to establish democracy and freedom.
The Bucharest summit suggests that the beacon has been switched off.
NATO\u0027s Transformation
Can NATO play a role in the struggle against international terrorism?
Will the Atlantic Alliance be able to defend our safety and security in a radically altered strategic environment?
Can the old dog learn new tricks?
Next week, NATO heads of state and government will answer these questions with an unequivocal "yes."
The months since the terrorist attacks on New York and Washington have been characterized by intense transatlantic debate.
No holds were barred.
Some Americans argued that the US no longer needed allies.
Some Europeans argued that the US was irreversibly bent on unilateralism.
Both views are wrong, and the Prague NATO summit will demonstrate why.
The summit will bring home to even the greatest skeptics that when it comes to managing our long-term security, there is no alternative to Europe and North America acting together.
Tackling Terrorism: The events of September 11 th , 2001 clearly invalidated the conventional wisdom that terrorists want a lot of people watching, not a lot of people dead.
Once a largely domestic concern, terrorism has become a major threat to international security.
This is why NATO will help tackle terrorism.
The invocation of NATO's collective self-defense obligation on September 12 th , 2001 was only the beginning.
A new NATO military concept for defense against terrorism will now follow, supported by the development of specific counter-terrorism capabilities.
We will further increase our cooperation in preventing the spread of weapons of mass destruction and in dealing with the consequences should prevention fail.
In short, NATO will become the focus for coordinating and planning the multinational military contribution to our defense against terrorism and other new threats.
Enhancing Military Capabilities: Military capability is the crucial underpinning of our safety and security.
It translates directly into political credibility.
But we need capabilities that are different from those needed during the Cold War.
We need forces that react more quickly, reach further, and can remain in the field longer.
Enhancing NATO's capabilities will thus prove to be the litmus test for the future of the Alliance.
NATO will pass this test.
A new NATO Response Force will bring together the most advanced forces within the Alliance for taking ultra-quick action against new security threats.
We will address shortfalls in our military posture through specific national commitments.
Re-prioritization, less duplication, and better armaments cooperation are further steps that will ensure that the Alliance retains its military edge.
We will also see to it that our efforts tie in with steps by the European Union to bolster its military capabilities.
Inviting New Members: The venue of the Prague summit--the capital of one of NATO's most recent member states--is a powerful symbol of the Alliance's success in advancing Europe's unification.
But this job is not yet complete.
That is why, at Prague, we will invite additional countries to join.
This will end Europe's Cold War division for good and foreclose any return to the darker chapters of the continent's past.
Admission of new members will repeat the positive experience of the last enlargement round.
Countries that will receive invitations to join NATO during the Prague Summit will have had years of experience working with the Alliance as partners, notably in bringing peace and stability to the Balkans and Southeast Europe.
Moreover, each will have benefited from several years of NATO-assisted defense reform.
They will thus be net security contributors rather than mere consumers, making our Alliance even stronger.
Deepening Partnerships: The attacks of "9/11" were masterminded by a Saudi who lived in Central Asia, planned by people from the Eastern and Southern shores of the Mediterranean living in Western Europe, and carried out in North America.
These facts illustrate better than anything the need for security partnerships that extend to Central Asia and across the Mediterranean.
These partnership mechanisms already exist.
At Prague, we will make them even more effective.
We will focus much more on combating terrorism together.
We will intensify our cooperation on security sector reform.
By enabling meetings in more flexible formats, we will make our partnership mechanisms even more responsive to the interests and concerns of each individual partner country.
Enhancing NATO-Russia Relations : Once upon a time, most people in the West looked at Russia as part of the security problem.
No longer.
Today, in a strategic environment marked by terrorism and the proliferation of weapons of mass destruction, Russia is very much part of the solution.
If the Prague summit will not showcase any grand new initiative, it is simply because we already launched a new NATO-Russia relationship last May at our special summit in Rome.
The new NATO-Russia Council created in Rome offers us an effective and flexible mechanism for joint analysis, joint decisions, and even joint action.
Much has already been achieved over the past six months to transform the political message of Rome into practical cooperation.
It was Henry Kissinger who argued after the terrorist attacks on New York and Washington of 2001 that tragedy could be turned into opportunity.
NATO has been heeding this insight.
With stronger capabilities, new members, and deepened partnerships, the Alliance will demonstrate that it remains the premier instrument to address current and future security challenges.
At Prague, this message will ring out loud and clear.
Nato to Lebanon – but on one condition
The current discussion surrounding an international force for southern Lebanon has focused almost exclusively on which countries and organizations – NATO, the European Union, the United Nations – will provide the troops.
This is an important issue, to be sure, but the real question concerns the changes that Israel must undertake in exchange for this force being put in place and assuming the risk of such a mission.
No international force will simply protect Israel from Hezbollah rockets while Israel continues its current strategy.
After all, the recent military escalation in the region is at least partly due to that strategy.
If an international force simply allows Ehud Olmert’s government to pursue its plans further, the countries that provide troops for the international force will not only be seen as rubberstamping Israeli policy, but will also be dragged into its failure.
To criticize Israel’s strategy as flawed is not to condone the acts of Hamas or Hezbollah or to deny Israel’s right to self-defense.
It is merely to point out what should be obvious: Israel’s efforts to find a unilateral solution to its security problems – whether occupation, withdrawal, or separation – have failed.
Unilateral occupation without commitment to a viable Palestinian state has produced only the intifada and suicide bombers.
Unilateral withdrawal from Gaza without the prior establishment of a local authority to maintain order has only led to renewed intervention.
And the “security fence,” which was to allow for unilateral separation, may hold back suicide bombers but not modern missiles of the kind currently employed by Hezbollah.
So far, the only lesson Israel seems to have drawn from its failed strategies is that it must extend and intensify the use of unilateral force: re-invade Gaza, devastate Lebanon, and threaten Syria and, by implication, Iran, which the Israeli government hints, had a hand in orchestrating the recent crisis.
It takes little foresight, however, to predict that more force will not produce more security for Israel.
The policy, reminiscent of terrorist stratagems, of bombing civilians in order to force the hands of their leaders will only strengthen the radicals and boost their popular support.
It will not hide the fact that Israel has run out of unilateral options.
Israel has so far been unwilling to accept this fact.
Instead, its leaders hope that a robust international force in southern Lebanon will provide protection for northern Israel, leaving them with a free hand to deal unilaterally with Gaza and the West Bank, while committing the international community to Israel’s failed unilateralism.
To join such an international force under these conditions would be irresponsible.
Countries that contribute troops would appear to be siding unequivocally with Israel, thereby losing all credibility with Israel’s adversaries.
They would also risk being drawn into renewed Israeli operations against Hezbollah and its backers.
Most important, they would forego what may be the last chance to promote a consensual peace.
So the prior condition for setting up and joining an international force for Southern Lebanon must be that Israel renews its commitment to the “road map” and negotiations with the Palestinians for a viable Palestinian state.
With this aim in mind, it must enter into talks with democratically elected Palestinian representatives.
True, such talks will be difficult, and they may not succeed. But that can no longer be an argument against diplomacy now that Israeli unilateralism has once again proven to be a strategic blind alley.
Only an Israel seriously willing to seek security through agreement, not one that wants to impose her security on her neighborhood by fiat, can be partner to an international effort to bring stability to Lebanon and beyond. Of course, some countries, not least the US, would oppose making such a reversal in Israeli policy a condition of creating an international force and consensus in NATO, the EU, or the UN may not be found or, if it were to emerge, Israel might simply refuse to abide.
Both prospects would be reason enough for staying away from the project altogether.
Creating an international force for southern Lebanon makes sense only as an investment in regional peace, not as an appendix to Israel’s current strategy.
Naturalized Killers
The arrest of 17 people in Canada on terrorist charges underscores, across the West, a growing sense of dread and inevitability that is rooted in the homegrown nature of the threat.
But what do we really know about these killers among us?
We know, of course, the broad outline of their all-encompassing fundamentalism, and we have some vague ideas about Al Qaeda as a decentralized network of cells in many countries that seeks to acquire chemical, biological, and perhaps even nuclear weapons.
We also know their leaders’ long-term goals: seize power in Muslim countries and attack the Western states that support secular regimes in the Islamic world.
Finally, we also know that the leaders of this fanatical tide are few, but now have the sympathy of millions of ordinary Muslims.
There have always been fanatical individuals ready to die and kill in the name of their beliefs.
But they seem far more dangerous nowadays as a result of technological advances that have “democratized” bomb making.
After all, as the London and Madrid bombings demonstrated, a cell phone is all that is needed to time an explosion – or a series of explosions – with deadly efficiency.
Our freedoms and social fluidity also contribute to the threat.
People move about the globe cheaply and with relative ease.
Immigrants can establish themselves in new societies, and in democratic states they can live completely free of supervision.
Our freedoms are their tools.
So how do we fight such an amorphous enemy?
President George W. Bush has demonstrated one way not to do it: his invasion and occupation of Iraq show that directly attacking Muslim states only fuels fanaticism.
Of course, civilized countries should not give up the fight against extremist Islam because of the bloodshed in Iraq; but we must recognize that war, occupation, and forced submission to military power have merely caused mass humiliation and resentment among many ordinary Muslims – emotions that are then channeled into terrorist networks.
Prime Minister Tony Blair can loudly proclaim that the London bombings of July last year are unrelated to Britain’s participation in the Iraq war, but the terrorists themselves, once arrested, said exactly the opposite.
Indeed, here is how one of the Madrid bombers described the psychological preparation to which he had been submitted: his leader “made us watch DVDs showing pictures of war in Iraq, mostly pictures of women and children killed by American and British soldiers.”
Simply put, bombs dropped from several thousands meters do not kill less indiscriminately than explosive charges placed in train cars.
Acknowledging this is not to excuse terrorism, but it is a first step toward understanding terrorism’s underlying causes, and thus toward their elimination.
Above all, it is to acknowledge that democratic societies must use both political and police tactics in confronting fanatical terrorists.
Politics is necessary for the simple reason that occupying armies and police cannot force hundreds of millions of Muslims to shed their hostility.
Political action implies actually leaving Iraq quickly and finding a fair solution to the Palestinian conflict, which in turn requires ending the occupation of all Palestinian territories.
Of course, extinguishing these hot spots will not erode the fanaticism of diehard and suicidal activists; nor will it rid us of the avidity and hatred that is so evident among the leaders of Islamic rage.
But it will deprive them of the masses of sympathetic Muslims who view the fanatics as the only people seeking to defend “Islamic” values and oppressed Muslim peoples.
Policing is the second part of any effective strategy.
Greater efforts at infiltrating terror networks are needed, as is a deeper knowledge of the social structures created by the terrorists, in order to block their financial support.
This may mean eliminating shadowy “tax havens,” tapping phone lines, and identifying individuals considered highly dangerous.
Police actions must be merciless, even if this means more controls and surveillance.
It is precisely to prevent the development of a collective security fear that we need to alter the equilibrium between security and freedom.
While the European Union lags behind the US in terms of conventional weapons, its capacity to fight terrorism is probably higher.
For historical reasons, Europe benefits from a political maturity that has allowed it to avoid Bush’s Manichean worldview, which has merely reinforced, rather than undermined, the enemy’s fanaticism.
Moreover, for geographical reasons, Europe also benefits from a better knowledge of Arab and Muslim countries and extensive familiarity with their populations.
The West can and must prevail in this fight and in the defense of the values that it cherishes.
It might even find, along the way, a new and urgently needed motivation to reinforce its fraying unity.
Nature\u0027s Warnings to the Johannesburg Summiteers
Nature's awesome powers have been on frightening display lately.
As world leaders gather in Johannesburg to discuss global environmental threats, many parts of the planet are battered by floods, droughts, harvest failures, massive forest fires, and even new diseases.
Man's relationship to nature is a theme as old as our species, but that relationship is changing in complex ways.
The most important result of the Johannesburg Summit should be a recognition that more scientific research and much more global cooperation is needed.
Floods and droughts have been scourges from ancient times, yet the frequency, size, and economic impact of these disasters has grown in recent years.
Insurance claims against natural disasters rose to unprecedented levels during the 1990s, suggesting that the social costs of environmental upheavals have intensified.
Climate shocks such as the fierce El Nino of 1997-98 played a major role in recent economic upheavals.
Indonesia and Ecuador, among other countries, succumbed to financial crises in 1997-98 that were linked (in part) to agricultural crises caused by the severe El Nino.
Part of the growing climate effect results from our sheer numbers.
Largely as a result of technological successes in the past 200 years, the human population has grown seven-fold since 1800, from around 900 million in 1800 to more than 6 billion people today, crowding humanity into vulnerable spots throughout the world.
More than 2 billion of the world's 6 billion people live within 100 kilometers of a coastline, and so are vulnerable to ocean storms, flooding, and rising sea levels due to global warming.
Hundreds of millions more live in fragile habitats on the steep slopes of mountains, or in semi-deserts, or in rain-fed regions where crops fail regularly when rain doesn't arrive.
Human beings are also changing the environment everywhere, often in ways that make societies more vulnerable.
This is especially the case in impoverished countries.
The increasing population density in rural Africa, with its intensification of farming, is leading to massive soil depletion.
When drought comes to Southern Africa, as it has this year, tens of millions of impoverished peasant families struggle for survival.
Because African poverty contributed to the uncontrolled spread of AIDS, the combination of climate shocks and epidemic disease is devastating.
Millions of AIDS orphans in Southern Africa live with grandparents too old and weak to produce food or to secure it.
Because of the onset of the El Nino, it's likely that the drought will continue into the coming year.
The most remarkable feature of these environmental changes is that they are not limited to local environments.
For the first time in human history, human society is undermining the environment at the global scale, through climate change, extinctions, and degraded ecosystems.
Man-made global warming, caused mainly by fossil-fuel burning in rich countries, may well be a factor in the frequency and severity of major droughts, floods, and tropical storms.
The frequency and intensity of the El Nino cycle in the past 25 years may also be the result of global warming.
China's heavy floods in recent years are partly the result, it seems, of the excessive melting of mountain snows on the Tibetan Plateau, which was caused by higher temperatures.
These growing environmental risks are complex.
The effects of environmental change may occur only after many years and may be felt halfway around the world.
Or the effects may be indirect.
Land use changes, say, can amplify the spread of infectious diseases by changing the mix of species or the ways that animals and humans interact.
Politicians are inept at handling such problems, so environmental risks continue to grow without adequate changes in public policy.
When disasters hit (such as this year's droughts or floods), politicians cannot be held accountable for mistakes made over the course of many decades.
The summit in Johannesburg can draw the world's attention to these pressing problems.
Even if the summit produces few specific results, it can make a difference if three demands are made of the summiteers:
we should insist that the world's politicians recognize the overwhelming scientific evidence that points to the major environmental perils humanity faces;
we should press these leaders to invest more public money in basic environmental research and in the development of new technologies to address environmental risks.
For example, investments in research on alternative energy systems that can limit global warming are vital;
third, we should insist that our politicians agree to greater international environmental cooperation, lest the neglectful and shortsighted policies within each nation end up destroying the global ecosystem.
Navigating Lebanon’s Political Minefield
On the face of it, the donor conference of Western and oil-rich Arab nations in Paris this week merely continues the work of two previous multilateral conferences in 2001 and 2002, aimed at helping Lebanon to rebuild its infrastructure after years of civil war and Israeli occupation and to tackle its massive debt.
This time, donors will additionally help offset the $3.5 billion in direct and indirect losses caused by last summer’s war between Israel and Hezbollah, and the further rise of debt to $40.6 billion, a staggering 180% of Lebanon’s GDP.
The agenda appears straightforward, but “Paris III” has acquired a barely concealed political purpose: to bolster the government of Lebanese Prime Minister Fouad Siniora in the face of a powerful domestic challenge led by Hezbollah, and by extension to curb the influence of Hezbollah’s regional backers, Syria and Iran.
The West should tread carefully. There is a real risk that it will become entangled as a partisan actor in Lebanese domestic politics.
Nor should it seek to play into the regional agendas of Saudi Arabia, Egypt, and Jordan – hardly paragons of democracy – which are anxious to confront what they portray as a menacing “arc” of Shi’a Muslim power extending from Iran to Lebanon via Syria, and in Iraq.
Consider this. The United States and France, which have taken the West’s lead on Lebanon, have both confirmed the “democratic and constitutional nature” of the Siniora government.
This is true, but only up to a point, for Lebanon’s confessional-based political system assigns the Shi’a, who make up close to 40% of the population, only 21% of parliamentary seats.
The Sunnis, who comprise at most 20% of the population, are given the state office with the greatest executive power, that of prime minister.
Furthermore, the Sunni-based, anti-Syrian Future Movement to which Siniora belongs effectively extended this inequity into the present parliament when it overrode the opposition and insisted on conducting the 2005 general elections on the basis of the Electoral Law gerrymandered by Syria in 2000.
The West should therefore be wary of dismissing the Lebanese opposition out of hand as the cat’s paw of Syria and Iran.
Rather, it should welcome proposals by Arab League mediators for immediate electoral reform and early parliamentary elections.
At the same time, it should expect the opposition to endorse the establishment of an international tribunal to adjudicate the matter of the assassination of former Prime Minister Rafiq Hariri, albeit after clarifying and narrowing the current excessively broad United Nations rules governing the investigation.
The West should also recognize that the constituencies of Hezbollah and its allied, largely Christian, Free Patriotic Movement, led by presidential contender Michel Aoun, will be hit hardest by many of Siniora’s proposed economic and administrative reforms, such as lifting fuel subsidies and sharply raising value added tax.
Already the 200,000-member Federation of Labour Unions has joined the opposition bandwagon, and Siniora’s proposals will further fuel grassroots populist nationalism.
All this might be seen as a predictable, conservative reaction to urgently needed reforms, were it not for the poor track record of the Sunni economic establishment, which for many years adapted well enough to Syrian domination.
Part of Hariri’s legacy was the award of quasi-monopolistic licences to cronies – for mobile telephones, for example – and the sale of government debt at highly profitable rates to local banks in which had a direct interest.
So were the profligate borrow-and-spend policies and the use of public-sector hiring to co-opt political factions, both of which resulted in Lebanon’s massive debt problem.
Yet the real challenge for Western policy in Lebanon is neither constitutional reform nor establishment of the Hariri tribunal.
The Siniora government and the opposition are likely to reach a compromise within the next few months, probably on the basis of some variant of Arab League proposals.
The tougher challenge is to solve the Gordian knot that binds Hezbollah (and the issue of its disarmament), Syria, and Israel together in a fateful triangle.
In short, the West needs to pre-empt a resumption of hostilities in Lebanon by seeking unconditional talks between Syria and Israel over the Golan Heights.
Failing that, Paris III will represent a sidestepping of the key political issues that must be addressed, and thus merely stock up trouble for the future.
Needed But Not Wanted
NEW YORK – Baruch Spinoza, the seventeenth-century Dutch philosopher, Benjamin Disraeli, the nineteenth-century British prime minister, and Nicolas Sarkozy, the twenty-first century French president, have one thing in common: all were sons of immigrants.
People have migrated to other countries for thousands of years – to escape, prosper, be free, or just to start again.
Not a few enriched their adopted homelands by achieving great things, or producing children who did.
New waves of immigrants are rarely, if ever, popular.
But they are often needed.
Many people have migrated to Western European countries from North Africa and Turkey during the last half-century, not because of Western generosity, but because they were required for jobs that natives no longer wanted.
They were treated as temporary workers, however, not as immigrants.
Once the job was done, it was assumed that the migrants would go home.
When it became clear that most had elected to stay, and were joined by extended families, many were grudgingly allowed to become citizens of European states, without necessarily being treated as such.
Xenophobes, as well as leftist multi-cultural ideologues, regarded these new Europeans as utterly different from the native born, albeit for different reasons.
Multi-culturalists saw attempts to integrate non-Westerners into the Western mainstream as a form of neo-colonialist racism, while xenophobes just didn’t like anything that looked, talked, or smelled foreign.
We who live in rapidly aging societies, such as Western Europe or Japan, still need immigrants.
Without them, necessary institutions, such as hospitals, would be unstaffed, and more and more elderly people would have to be supported by fewer and fewer young people.
And yet many politicians, especially in Europe, now treat immigration as a disaster.
New populist parties garner large numbers of votes simply by frightening people about the supposed horrors of Islam, or of clashing civilizations.
For the populists, however, the real enemies – perhaps even more nefarious than the immigrants themselves – are the “cosmopolitan elites” who tolerate and even encourage these horrors.
Mainstream politicians are so afraid of this populist demagoguery that they often end up mimicking it.
The failure of integration of non-Western immigrants in such countries as France, Germany, or The Netherlands is often exaggerated by hysterical alarmists;
Europe, after all, is not about to be “Islamized.”
But the fact that some young people of African, South Asian, or Middle Eastern descent feel so alienated in the European countries of their birth that they are happy to murder their fellow citizens in the name of a revolutionary religious ideology, means that something is amiss.
Children of immigrants in the past, however unwelcome they were made to feel, rarely wished to blow up the places to which their parents had chosen to move.
Politics in many Muslim countries is partly to blame.
Islamist extremism is a handy revolutionary creed for vulnerable young people to latch onto, to gain a sense of power and belonging.
Hindus, Christians, or Buddhists lack such a cause, which is why political terrorism is largely confined to Muslims.
But, as the occasional riots in French immigrant areas show, violence is not confined to Muslims.
National policies have something to do with this, but so do the deeply flawed immigration policies in all European Union countries.
Apart from EU citizens, who in theory are allowed to seek work anywhere in the Union (Romanian gypsies in France might argue otherwise), three other categories of people have been allowed to settle in Europe: former colonial subjects, such as Algerians in France, Indians and Pakistanis in Britain, or Surinamese in The Netherlands; “guest laborers” who arrived in the 1960’s and 1970’s; and political refugees, the so-called asylum-seekers.
Unlike in Canada or the United States, economic immigrants are not allowed to become citizens in exchange for their necessary labor.
Immigrants – not “guest workers” – who come for work are more likely to want to integrate to some degree, and to be treated as fellow citizens, than people who come with the baggage of empire, or simply as refugees, or, worse, people pretending to be refugees because they have no other way to gain access to wealthy countries’ job markets.
But European welfare states are better equipped to deal with asylum-seekers and other newcomers as needy dependents than as people in need of a job.
When European politicians claim that France, Britain, or The Netherlands are not traditional “immigrant countries” like the US, they are right only up to a point, as the examples of Spinoza, Disraeli, and Sarkozy show.
What is true is that large numbers of de facto immigrants have accumulated in many countries in a very short time, in a haphazard way that makes it seem as though no government was ever in control.
Children of guest workers feel unwanted.
Refugees languish helplessly in welfare nets, or are suspected of being cheats.
And former colonial subjects, though in many cases remarkably well integrated, still bear the scars of troubled imperial histories.
Japan, and even the US, is not immune to these problems, either.
The Japanese government simply got rid of its Iranian guest workers when jobs dried up.
But it won’t be as easy to deal with the hundreds of thousands of Chinese who live in Japan without the rights of citizenship.
The same is true of Mexicans working in the US, often illegally.
Millions of people around the world remain in limbo – often needed, or pitied, but nonetheless unwanted.
There is no quick or easy way out of this problem, especially in bad economic times.
But Europe – and Japan, for that matter – should start by making economic migration legitimate.
This means working out what jobs need to be filled, and welcoming those who will fill them, not as guests, but as equal citizens.
Need Versus Greed
NEW YORK – India’s great moral leader Mohandas Gandhi famously said that there is enough on Earth for everybody’s need, but not enough for everybody’s greed.
Today, Gandhi’s insight is being put to the test as never before.
The world is hitting global limits in its use of resources.
We are feeling the shocks each day in catastrophic floods, droughts, and storms – and in the resulting surge in prices in the marketplace.
Our fate now depends on whether we cooperate or fall victim to self-defeating greed.
The limits to the global economy are new, resulting from the unprecedented size of the world’s population and the unprecedented spread of economic growth to nearly the entire world.
There are now seven billion people on the planet, compared to just three billion a half-century ago.
Today, average per capita income is $10,000, with the rich world averaging around $40,000 and the developing world around $4,000.
That means that the world economy is now producing around $70 trillion in total annual output, compared to around $10 trillion in 1960.
China’s economy is growing at around 10% annually.
India’s is growing at nearly the same rate.
Africa, long the world’s slowest-growing region, is now averaging roughly 5% annual GDP growth.
Overall, the developing countries are growing at around 7% per year, and the developed economies at around 2%, yielding a global average of around 4.5%.
This is very good news in many ways.
Rapid economic growth in developing countries is helping to alleviate poverty.
In China, for example, extreme poverty has been cut from well over half of the population 30 years ago to around 10% or less today.
Yet there is another side to the global growth story that we must understand clearly.
With the world economy growing at 4-5% per year, it will be on a path to double in size in less than 20 years.
Today’s $70 trillion world economy will be at $140 trillion before 2030, and $280 trillion before 2050 if we extrapolate from today’s growth rate.
Our planet will not physically support this exponential economic growth if we let greed take the upper hand.
Even today, the weight of the world economy is already crushing nature, rapidly depleting the supplies of fossil-fuel energy resources that nature created over millions of years, while the resulting climate change has led to massive instabilities in terms of rainfall, temperature, and extreme storms.
We see these pressures every day in the marketplace.
Oil prices have surged to more than $100 per barrel, as China, India, and other oil-importing countries join the United States in a massive scramble to buy up supplies, especially from the Middle East.
Food prices, too, are at historical highs, contributing to poverty and political unrest.
On the one hand, there are more mouths to feed, and with greater purchasing power on average. On the other hand, heat waves, droughts, floods, and other disasters induced by climate change are destroying crops and reducing the supplies of grains on world markets.
In recent months, massive droughts have struck the grain-producing regions of Russia and Ukraine, and enormous floods have hit Brazil and Australia; now, another drought is menacing northern China’s grain belt.
There is something else hidden from view that is very dangerous.
In many populous parts of the world, including the grain-growing regions of northern India, northern China, and the American Midwest, farmers are tapping into groundwater to irrigate their crops.
The great aquifers that supply water for irrigation are being depleted.
In some places in India, the water table has been falling by several meters annually in recent years.
Some deep wells are approaching the point of exhaustion, with salinity set to rise as ocean water infiltrates the aquifer.
A calamity is inevitable unless we change.
And here is where Gandhi comes in.
If our societies are run according to the greed principle, with the rich doing everything to get richer, the growing resource crisis will lead to a widening divide between the rich and the poor – and quite possibly to an increasingly violent struggle for survival.
The rich will try to use their power to commandeer more land, more water, and more energy for themselves, and many will support violent means to do so, if necessary.
The US has already followed a strategy of militarization in the Middle East in the naïve hope that such an approach can ensure secure energy supplies.
Now competition for those supplies is intensifying, as China, India, and others bid for the same (depleting) resources.
An analogous power grab is being attempted in Africa.
The rise in food prices is leading to a land grab, as powerful politicians sell foreign investors massive tracts of farmland, brushing aside the traditional land rights of poor smallholders.
Foreign investors hope to use large mechanized farms to produce output for export, leaving little or nothing for the local populations.
Everywhere in the leading countries – the US, the United Kingdom, China, India, and elsewhere – the rich have enjoyed soaring incomes and growing political power.
The US economy has been taken over by billionaires, the oil industry, and other key sectors.
The same trends threaten the emerging economies, where wealth and corruption are on the rise.
If greed dominates, the engine of economic growth will deplete our resources, push the poor aside, and drive us into a deep social, political, and economic crisis.
The alternative is a path of political and social cooperation, both within countries and internationally.
There will be enough resources and prosperity to go around if we convert our economies to renewable energy sources, sustainable agricultural practices, and reasonable taxation of the rich.
This is the path to shared prosperity through improved technologies, political fairness, and ethical awareness.
The Negative Way to Growth?
NEW YORK – Monetary policy has become increasingly unconventional in the last six years, with central banks implementing zero-interest-rate policies, quantitative easing, credit easing, forward guidance, and unlimited exchange-rate intervention.
But now we have come to the most unconventional policy tool of them all: negative nominal interest rates.
Such rates currently prevail in the eurozone, Switzerland, Denmark, and Sweden.
And it is not just short-term policy rates that are now negative in nominal terms: about $3 trillion of assets in Europe and Japan, at maturities as long as ten years (in the case of Swiss government bonds), now have negative interest rates.
At first blush, this seems absurd: Why would anyone want to lend money for a negative nominal return when they could simply hold on to the cash and at least not lose in nominal terms?
In fact, investors have long accepted real (inflation-adjusted) negative returns.
When you hold a checking or current account in your bank at a zero interest rate – as most people do in advanced economies – the real return is negative (the nominal zero return minus inflation): a year from now, your cash balances buy you less goods than they do today.
And if you consider the fees that many banks impose on these accounts, the effective nominal return was already negative even before central banks went for negative nominal rates.
In other words, negative nominal rates merely make your return more negative than it already was.
Investors accept negative returns for the convenience of holding cash balances, so, in a sense, there is nothing new about negative nominal interest rates.
Moreover, if deflation were to become entrenched in the eurozone and other parts of the world, a negative nominal return could be associated with a positive real return.
That has been the story for the last 20 years in Japan, owing to persistent deflation and near-zero interest rates on many assets.
One still might think that it makes sense to hold cash directly, rather than holding an asset with a negative return.
But holding cash can be risky, as Greek savers, worried about the safety of their bank deposits, learned after stuffing it into their mattresses and walls: the number of armed home robberies rose sharply, and some cash was devoured by rodents.
So, if you include the costs of holding cash safely – and include the benefits of check writing – it makes sense to accept a negative return.
Beyond retail savers, banks that are holding cash in excess of required reserves have no choice but to accept the negative interest rates that central banks impose; indeed, they could not hold, manage, and transfer those excess reserves if they were held as cash, rather than in a negative-yielding account with the central bank.
Of course, this is true only so long as the nominal interest rate is not too negative; otherwise, switching to cash – despite the storage and safety costs – starts to make more sense.
But why would investors accept a negative nominal return for three, five, or even ten years?
In Switzerland and Denmark, investors want exposure to a currency that is expected to appreciate in nominal terms.
If you were holding Swiss franc assets at a negative nominal return right before its central bank abandoned its euro peg in mid-January, you could have made a 20% return overnight; a negative nominal return is a small price to pay for a large capital gain.
And yet negative bonds yields are also occurring in countries and regions where the currency is depreciating and likely to depreciate further, including Germany, other parts of the eurozone core, and Japan.
So, why are investors holding such assets?
Many long-term investors, like insurance companies and pension funds, have no alternative, as they are required to hold safer bonds.
Of course, negative returns make their balance sheets shakier: a defined-benefit pension plan needs positive returns to break even, and when most of its assets yield a negative nominal return, such results become increasingly difficult to achieve.
But, given such investors' long-term liabilities (claims and benefits), their mandate is to invest mostly in bonds, which are less risky than stocks or other volatile assets.
Even if their nominal returns are negative, they must defer to safety.
Moreover, in a “risk-off" environment, when investors are risk-averse or when equities and other risky assets are subject to market and/or credit uncertainty, it may be better to hold negative-yielding bonds than riskier and more volatile assets.
Over time, of course, negative nominal and real returns may lead savers to save less and spend more.
And that is precisely the goal of negative interest rates: In a world where supply outstrips demand and too much saving chases too few productive investments, the equilibrium interest rate is low, if not negative.
Indeed, if the advanced economies were to suffer from secular stagnation, a world with negative interest rates on both short- and long-term bonds could become the new normal.
To avoid that, central banks and fiscal authorities need to pursue policies to jump-start growth and induce positive inflation.
Paradoxically, that implies a period of negative interest rates to induce savers to save less and spend more.
But it also requires fiscal stimulus, especially public investment in productive infrastructure projects, which yield higher returns than the bonds used to finance them.
The longer such policies are postponed, the longer we may inhabit the inverted world of negative nominal interest rates.
Neighbors
TEL AVIV – During the military operations in Gaza, code-named “Fused Lead” (after a Hanukkah song about a small spinning top – one of that holiday’s symbols – made out of fused lead), we Israelis have been reminded of a fundamental fact: Gaza is not Vietnam, Iraq, Afghanistan, or even Lebanon.
It is a region composed of a common country that we share with the Palestinians.
It is a country that we call Israel and they call Palestine.
One and a half million people live in Gaza.
They are part of a people of whom another 1.3 million live in Israel, and another two million in the West Bank.
The men and women of Gaza are our neighbors and have lived back to back with us for a long time, even if we are separated from them by a border.
Our homes and our cities are just a few kilometers from each other, our fields brush up against theirs.
The men of Gaza, the activists or policemen of Hamas whom we observe through our military binoculars, were in the past the activists and policemen of Fatah.
They were born in Gaza or pushed there as refugees during the war of 1948, or in other wars.
Over the course of the years, they were the masons who built our homes, they washed dishes in the restaurants where we ate, they were the merchants from whom we used to buy goods, and workers in the greenhouses of the kibbutzim.
They are our neighbors, and they will be our neighbors in the future.
So, when we decide to fight a war against them, we have to consider very carefully the character of that war, its duration, and the effect of its violence.
We Israelis have no power to extirpate the Hamas government from Gaza, much as we did not have the power to eliminate the Palestine Liberation Organization (PLO) as the voice of the Palestinian people’s national aspirations, or Hezbollah from Lebanon in the war of 2006.
Ariel Sharon and Menachem Begin went all the way to Beirut in the early 1980’s, paying a terrible and bloody price, to try to eliminate the PLO – a result that could never be obtained.
And what happened?
In the end, Sharon and then Binyamin Netanyahu both ended up sitting down at the negotiating table with Yassir Arafat and his representatives to try to reach an agreement.
Now Arafat’s former deputy, Abu Mazen, is a frequent and welcome guest in our country.
We Israelis must begin to realize this simple fact: the Arabs are not metaphysical creatures, but human beings, and human beings have it within themselves to change.
After all, we Israelis change our positions, mitigate our opinions, and open ourselves up to new ideas.
So we would do well to get out of our heads as quickly as possible the illusion that we can somehow annihilate Hamas or eradicate them from the Gaza strip.
Instead, we have to work, with caution and good sense, to reach a reasonable and detailed agreement for a lasting ceasefire that has within it the perspective that Hamas can change .
Such a change is possible and can be acted upon.
Such fundamental changes of heart and mind have happened many times in the course of history.
To be sure, even if, beginning today, we start working for such a lasting truce, there will inevitably be further days of war ahead.
Rockets will, no doubt, again be launched against us.
But at least we will know that we are not fighting for an impossible objective that can only result in blood and devastation – blood and devastation that will weigh on the collective memories of the sons and grandsons of our neighbors, who will remain our enemies, even if the spinning top continues to turn.
Kremlin Murder Incorporated
NEW YORK – In his play Murder in the Cathedral, T. S. Eliot describes the murder of the Archbishop of Canterbury, Thomas Becket, as a silently ordered hit.
The English king, Henry II, did not need to give a direct order; his knights knew what to do with somebody seen to be undermining the state.
Eliot may have set his play in twelfth-century England, but he wrote it in 1935, barely two years after Adolf Hitler had come to power in Germany.
So it is, at least in part, a cautionary tale about the rise of fascism in Europe.
Sadly, it has lost none of its relevance.
Today, Eliot's masterpiece can be read as a warning about the path being taken by Russia, where politics under President Vladimir Putin has been growing murderously medieval.
One by one, Putin's critics have been eliminated.
In 2006, the journalist Anna Politkovskaya was gunned down in an elevator, and Alexander Litvinenko, a former KGB agent who had been critical of Putin, died of polonium poison while in exile in London.
In 2009, Sergei Magnitsky, a lawyer campaigning against corruption, died in prison after being denied medical care for life-threatening conditions.
The same year, another lawyer, Stanislav Markelov, a champion of human rights, was shot following a news conference.
The murder last week of Boris Nemtsov, a leading opposition politician and a former deputy prime minister under Boris Yeltsin, should come as no surprise.
But it should come as a shock – and as a wake-up call for those Russians who until now have tolerated a culture of lawlessness and impunity, unseen since the darkest days of Stalin's personal rule in the Soviet Union.
Before his death, Nemtsov was said to be working on a report titled “Putin and the War," providing proof of Russia's involvement in the conflict in eastern Ukraine.
He was scheduled to lead a protest against the war two days after his murder.
Some have wondered if Putin was afraid of what Nemtsov had uncovered, and thus ordered the assassination.
That is unlikely, at least in terms of someone receiving a direct order from Putin.
Simply put, orchestrating Nemtsov's murder was not worth the trouble; after all, the Kremlin's propaganda machine would have had little problem twisting Nemtsov's report to Putin's benefit.
Indeed, even Nemtsov's brazen murder is unlikely to hurt Putin politically.
His popularity now stands at 86%.
For many Russians, Nemtsov's opposition to the war in Ukraine made him a traitor, whose death was justified – indeed, almost demanded – by national necessity.
Putin has announced that he will personally oversee the investigation into the assassination.
But those leading the effort have already indicated its likely conclusion: Nemtsov's murder was an attempt to destabilize Russia.
We can be all but certain that some culprit or another will be “found," and that his crime will be part of a conspiracy by the CIA or Ukrainian authorities.
The Kremlin is no stranger to twisting the truth to fit its needs.
Before Russia's annexation of Crimea, it argued that the United States had hired snipers to fire at pro-Western protesters in Kyiv in order to blame Russia for their deaths.
When a Malaysian airliner was shot down over Ukraine – most likely by pro-Russia rebels – the official Kremlin story was that Western secret services downed it to undermine Putin's reputation.
Allegations like these have whipped up nationalism, hatred, and anti-Western hysteria, distracting Russians from Putin's culpability for their country's economic crisis.
As menacing as Putin's Russia may be, however, nothing about it is original.
In 1934, Joseph Stalin, too, ordered a thorough investigation into the murder of a rival: Sergei Kirov, the head of the Communist Party in Leningrad.
The NKVD, the precursor to the KGB, orchestrated the assassination on Stalin's order, but the inquiry gave the Soviet dictator a pretext for eliminating other opponents.
The search for Kirov's murderers eventually culminated in the Great Terror, a massive purge of Party leaders, military commanders, and intellectuals.
Putin may not have ordered the hit on Nemtsov or any of the others.
But, like Stalin, he has nurtured a climate of fear and lawlessness, in which those who rally behind the Kremlin feel a duty to eliminate the leader's opponents however they can, and in anticipation of his will.
An atmosphere in which unlawful deeds become heroic acts was a signature feature of Stalin's rule.
That stifling dynamic has returned under Putin.
During the darkest days of the Soviet Union, the chiefs of the NKVD were the country's second most important officials.
Today, Andrei Lugovoi, the KGB agent that the British government suspects of delivering the polonium that killed Litvinenko, sits in the Russian Duma.
So what will happen next?
Will Putin, like Stalin, unleash his own great terror, and murderously pursue supposed adversaries?
Or will Nemtsov's death finally move complacent and obedient Russians to action?
In the first decade of this century, it was easy to love Putin.
He made Russians rich, cosmopolitan, and respected.
Today, as low oil prices and Western sanctions bite, he is making them poor and nearly universally despised.
On March 1, the day Nemtsov was to lead his protest, tens of thousands of Russians took to the streets with slogans like “Nemtsov is love, Putin is war."
Could it be that Russia's culture of impunity has reached an inflection point?
Putin's regime relies on the promise of economic prosperity, without which it could begin to unravel – if not as a result of mass protest, then because insiders no longer have a stake in its political survival.
At that point, when Putin is at his most vulnerable, his allies will have to act carefully – and keep looking over their shoulders.
Neo-Liberalism Meets Neo-Confucianism
The West has dominated the world ever since the industrial revolution.
Today that dominance seems threatened by the East Asian heirs to Confucianism, the ideology par excellence of state cohesion.
Centuries of inculcation with Confucianism was as important to the rise of East Asia’s hyper-growth economies as the conjunction of Protestantism and the rise of capitalism was to the west.
Confucianism’s tenets still provide an inner compass to most East Asians in a post-Confucian age, just as Biblical admonitions remain standards for the West in a post-religious age.
The basic thrust of Confucianism has changed little since Confucius’s disciples recorded his aphorisms a generation before Socrates.
Indeed, Confucianism became the official ideology of the Chinese state two centuries before the birth of Christ.
Confucianism was essentially a philosophical justification of government by benevolent bureaucracy under a virtuous ruler.
Virtue ensured harmony between man and nature, as well as obedience within a stratified society.
As one Confucian classic put it: Possessing virtue will give the ruler the people.
Possessing the people will give him the territory.
Possessing the territory will give him its wealth.
Possessing the wealth, he will have resources for expenditure.
Virtue is the root; wealth is the result.
During the neo-Confucian renaissance of the eleventh and twelfth centuries, a metaphysical dimension was added to fill a gap exposed by Buddhism’s inroads into China.
Thereafter, a good Confucian could, with untroubled conscience, scorn the Buddhist renunciation of the world.
This restatement of fundamental precepts restored Confucianism to a primacy in China and neighboring states that remained unchallenged for 700 years.
Neo-Confucianism provided the basic ideology for China’s admiring neighbors – Japan, Korea, and Vietnam – until the advent of the West.
Its tenets were highly appropriate to the settled, sophisticated agrarian civilizations of pre-nineteenth-century East Asia, for they knitted together society and polity in a manner calculated to promote stability and harmony.
The ultimate guarantee of harmony was the ruler’s justness, which permitted him to enjoy the “mandate of heaven”; the people had a right, indeed an obligation, to rebel against a tyrant.
But while the ethical basis of Neo-Confucianism was crucial, the Chinese also understood the need for a morally motivated bureaucracy, and thus perfected in the seventh century the world’s first examination system for selecting bureaucrats, with the Confucian canon as the syllabus.
Of course, the Neo-Confucian system was not immune to mankind’s appetites.
Many Confucian emperors were brutal.
Yet stability was achieved.
There was only one change of dynasty in China between 1368 and the end of the imperial era in 1911.
The Tokugawa Shoguns, who completed the reunification of Japan in 1600, remained in power for more than two and a half centuries.
In Korea, the Yi dynasty ruled from 1382 until the Japanese conquest of 1910.
Periodic civil strife and rebellion were not eliminated, but only in Vietnam was the longevity of a dynasty a cloak for inextinguishable internecine warfare.
Like a happy and secure childhood, Confucian civilization bestowed upon its practitioners the self-confidence to meet the challenge of the West.
Since Confucianism was essentially an agnostic ideology, concerned with the management of the visible world, the post-Confucians experienced little of the spiritual angst that afflicted Hindus, Muslims, and Christians in their collision with the “materialism” of industrial society.
Confucian civic culture also provided the basis for a long history of successful self-government.
East Asians entered the modern world of nation states in self-consciously discrete secular units.
By contrast, the Indian subcontinent, with two major religions and a dozen major linguistic groups, was united in modern times only under British rule.
Applied learning is the key to the post-Confucian states’ success.
Confucian literati, shunning manual labor, grew their fingernails long, but they never displayed antipathy towards the world of affairs.
The Chinese myth of success was the bright peasant boy whose village clubbed together to educate him and whose subsequent success resulted in the elevation of all who had helped him on his way into the civil service.
Ideally, state and family were mirror images.
The emperor was the supreme paterfamilias, his benevolent rule reciprocated by the obedience of his ministers and subjects, while family members were fixed in their appropriate hierarchical relationships.
Families and nations that obeyed together stayed together.
Meiji Japan grasped the advantages of making the nation a macrocosm of the family.
An imperial order in 1890 outlined the objectives of education: the Confucian concepts of loyalty, obedience, and filial piety were to be transferred from the family to the nation.
At about the same time, the Chinese scholar Yen Fu – whose translations of Adam Smith, John Stuart Mill, Herbert Spencer, and Montesquieu were read even by the young Mao – also concluded that filial piety fostered habits of disciplined subordination to authority that could be applied to the factory and the polity.
During the past century, the post-Confucian states have accustomed themselves to a pluralistic world of theoretically equal nation states.
But it is difficult to know how deep that adjustment has gone.
If the West is perceived to be attempting to maintain the leadership it snatched 200 years ago by industrializing first, thereby denying the post-Confucians the fruits of their dynamism permanently, the Chinese, in particular, will conclude that pluralism is eyewash and that the West’s worldview in fact replicates their traditional one.
Today’s trade and currency battles would then become a Kulturkampf.
In a few decades, when China’s economy equals America’s in size, the winner will be hard to pick.
Better for the West to accept equality now – and struggle to maintain it.
Neo-liberalism\u0027s Argentine Failure
In the 1990s Argentina implemented perhaps 80% of the neoliberal economic policy agenda.
It opened up its economy to world trade and international capital; it sought to guarantee low inflation and sound money.
It strove to improve its legal system so that decisions would accord with general rules and foster confidence that contracts would be enforced--whether or not a bribe had been paid.
It failed.
This is not to say that the 1990s, even with their aftermath leading into the terrible summer of 2002, were catastrophic.
Life was clearly worse during the Dirty War of the 1970s, when an army with no honor threw women out of helicopters into the South Atlantic, and urban guerrillas shot people because... because... well, just because!
The 1980s were hardly better.
Starting with a full-fledged debt crisis triggered by a massive rise in both US interest rates and the value of the American dollar, the decade ended with domestically-generated hyperinflation, causing Argentina to fall a decade further behind the world's leading economies.
In the 1990s, by contrast, Argentina's GDP per capita grow by 25% from trough to peak--only to lose this entire income gain over the past four years.
Until late last winter, Argentina's problems seemed merely an unpleasant but temporary bump, in the same way that the 1994-1995 Mexican "tequila" crisis or the East Asian crises of 1997-1998 proved to be only temporary interruptions, not watersheds.
Such optimism is impossible today, and there is little hope that the country's recent meltdown is only temporary.
The establishment view--say, in US Treasury Undersecretary John Taylor's office--is that Argentina's collapse is the fault of its politicians.
I half-agree with this view.
Argentine leaders were repeatedly warned that keeping the exchange rate constant and fixing the peso's value against the US dollar risked sending the economy into recession if the dollar gained value.
Argentine politicians were also warned that their peso policy could not be sustained unless the ratio of national debt to GDP was falling.
Yet during the boom years of 1993-1998, public spending outran taxes enough to push Argentina's debt-to-GDP ratio from 29 to 44%.
When the dollar appreciated and recession came, politicians with too little statesmanship to balance the budget in good times turned out to have too little courage to balance the budget when times turned hard.
The coup de grâce was delivered by the government's decision (when the crisis came) to keep bank deposits fixed in dollars and to change debts owed to banks into pesos, thereby bankrupting the country's financial system with a single stroke of the pen.
The establishment position is that if any of these three disastrous policies had not been implemented, Argentina would not have fallen into crisis, or at worst it would have suffered a small tequila-style crisis.
Argentina's 1990's neo-liberal program was nearly idiot-proof, according to this view, but Argentine politicians turned out to form a large and ingenious class of idiots.
There is, however, another way of looking at the Argentine tragedy.
It is based on the observation that the country's political system has long performed in a predictable way, consistently producing governments that promise more than they can deliver.
They promise rich oligarchs that they will not collect much in taxes.
They promise workers and consumers generous social insurance.
They promise rapid economic development, generous infrastructure spending, cushy low-work jobs for the politically connected, and so forth.
Taken together, these promises mean that claims on national product always exceed 100% of the total.
Popular demands that the government fulfills all of them cannot possibly be met.
Add to this an unfair distribution of income and wealth, lack of social comity between the working and middle classes, and a long tradition of political violence, and you have the recipe for a politics of all-against-all.
The basic political fight about how wealth should be distributed in Argentina remains unresolved.
Any political force that tries to curb the bidding by promising only what it can deliver is doomed to defeat.
So in Argentina big government deficits are a law of nature, a fact of life.
Hence Argentine interest rates can be low and affordable only for rare, short periods.
Everyone knew that Argentina's political system generates chronic deficits, and this meant that interest payments on the debt were likely to explode.
Because the dynamics of Argentine debt were so unstable, a hard-currency exchange-rate peg could not last.
Free access to international capital markets and dollar-denominated bank accounts meant that when the exchange-rate peg finally collided with the deficit-producing logic of Argentine politics, the result could be nothing short of catastrophic.
Had today's crisis been finessed, had Argentina another decade of rapid growth, its conflicts over wealth distribution might have moderated.
After all, Europe before WWII possessed the nastiest politics on earth: rioting right-wing mobs in France, general strikes in Britain, civil war in Spain, fascism in Italy, and the Nazis' vicious consolidation of power in Germany.
Yet postwar Western Europe encountered no public problems that could not be resolved in ways that preserved sound money and growth.
I half-agree with this view, too.
Yes, Argentina's government made huge mistakes; its politicians sinned against the gods of monetary economics.
But did the punishment need to be so swift and so severe?
“Neo-Ottoman” Turkey?
ANKARA – Nowadays, the international media are obsessed with the question of who “lost” Turkey and what that supposed loss means for Europe and the West.
More alarmingly, some commentators liken Turkey’s neighborhood policy to a revival of Ottoman imperialism.
Recently, a senior Turkish columnist went so far as to quote Foreign Minister Ahmet Davutoğlu as saying that “we are indeed neo-Ottoman.”
As someone who was present when Davutoğlu made his presentation to the parliamentary faction of Turkey’s ruling Justice and Development Party (AKP), I can attest to the fact that he did not use such terminology.
In fact, Davutoğlu and all of us in the AKP foreign-policy community never use this term, because it is simply a mispresentation of our position.
Turkey’s neighborhood policy is devised to reintegrate Turkey into its immediate neighborhoods, including the Balkans, the Black Sea, the Caucasus, the Middle East, and the Eastern Mediterranean.
We aim to deepen our political dialogue, increase our trade, and multiply our people-to-people contacts with our neighbors in the form of sports, tourism, and cultural actvities.
When Egon Bahr formulated his Ostpolitik in the 1960’s, no one asked Will Brandt whether Germany was lost.
God bestowed upon Turkey a geographical position that fundamentally requires for us to engage with East and West, North and South.
This is neither a choice nor a luxury – it is a necessity.
The symbol of the Byzantine and the Selçuk Empires, which occupied roughly the same geography that Turkey does today, was a double-headed eagle looking both east and west.
It should be no wonder that Turkey is also seeking to engage both ends of its territories and feels that its security is best consolidated by minimizing risks together with its neighbors.
So we find the current debate on Turkey’s orientation rather superflous, and in some cases ill-intentioned.
Our neighborhood policy needs support, not criticism.
Turkey has become an invaluable asset in the make-up of our surrounding regions, and is already changing the status quo in favor of more stability and predictability.
Our efforts at normalization with Armenia, for example, are destined to bring change to the entire South Caucasus.
We are doing our part in terms of burden-sharing.
Sensible Europeans understand that.
To be sure, some of our neighbors are difficult.
But no country has the luxury of choosing its neighbors.
Turkey’s neighborhood policy is very realistic, based on genuine interests, not some romantic neo-Ottoman nostagia, as more than a few international commentators have suggested.
True, there is a neo-Ottoman revival in the cultural field, and our citizens are eager to rediscover Ottoman life, culture, and practices.
As Turkey is normalizing domestically, it is also reinterpreting its national historical narrative.
This is a natural byproduct of consolidating our democracy.
However, trying to paint our carefully constructed foreign-policy initiatives with imperialist overtones is not only a stark mispresentation, but also does gross injustice to our well-intentioned efforts to stabilize our region.
In Roman mythology, Janus was the god of gates, doorways, beginnings, and endings.
Turkey today is a Janus-like geography that offers gates and doorways to the East and West.
It offers beginnings and endings to the Caucasus, the Black Sea, the Balkans, and the Mediterranean.
In this capacity, Turkey complements and contributes to a unique transitional passage between otherwise difficult regions, for it signifies centuries-old co-existence and adjustment.
Turkish foreign policy contributes to that coming together and helps its immeditate neighborhoods to connect with one another.
Contrary to recent charges, Turkey’s foreign policymakers are not seeking to revive the Ottoman Empire.
Instead, we seek Turkey’s historic reintegration into its immediate neighborhoods, thereby correcting an anomaly of the Cold War years.
Such re-integration would only benefit the European Union and our other Western, NATO allies.
None of them, therefore, has any reason to express discomfort with Turkey.
The Lesson of Nepal
LONDON – A disaster happens.
Bilateral aid is promised.
Then the waiting game begins.
It is a pattern that is all too common, and it is one that, sadly, is being repeated in Nepal. More than a week after the earthquake and aftershocks killed more than 7,000 people and devastated the capital, Kathmandu, and despite the mobilization of massive amounts of aid from international agencies, the country’s finance minister had yet to receive any of the money promised by foreign countries.
Disaster aid for education in such circumstances almost always flows far too slowly, because there is no central pool of funds available to be distributed when a crisis erupts.
And for the children of Nepal, the consequences are doubly devastating.
More than 1.7 million children require immediate aid, according to UNICEF Australia.
More than 16,000 schools have been damaged, including some 5,000 that were completely destroyed.
Of the 500 schools in the hard-hit Gorkha district, 450 have been leveled or are now derelict.
The United Nations is doing what it can.
According to the UN resident coordinator, there has been a quick airlift and supply of materials – such as the well-known “School in a Box,” a pre-packaged educational kit suitable for teaching up to 40 children, Early Childhood Development Kit, and Recreation Kits – for displaced boys and girls.
In the meantime, the best that can be hoped for Nepal’s children is that tents and shelters can be brought in to create Child-Friendly Spaces.
An entire education system is under threat.
Schools that remain intact are now housing the homeless, and school buses have been requisitioned to help victims travel out of Kathmandu.
As the death toll spirals upward and the full horror unfolds, much of the relief effort is on hold, unable to move ahead until the funds that have been promised arrive – a process that could take weeks or months.
The world must end this paralysis.
With established pools of aid being stretched to address immediate needs – medical assistance, shelter, and food – education is being neglected.
Indeed, only a fraction of humanitarian aid budgets, roughly 1%, is allocated to education.
Meanwhile, long-term development budgets are set in stone years in advance and lack the flexibility to respond to natural and man-made disasters.
A humanitarian fund for education in emergencies needs to be established, and soon, so that when calamity strikes, vulnerable children are not forced to wait in misery and insecurity while the adults pass around the begging bowl.
Such a pool of money would help the roughly 50% of the world’s children who are out of school – some 28 million boys and girls – because of conflicts, civil wars, or humanitarian emergencies.
It would have been helpful during the Ebola outbreak, when extra funding would have helped to reopen schools quickly, rather than leaving five million children unable to pursue their studies.
It could provide opportunities for students in Iraq and Palestine whose schools were destroyed and have yet to be reopened, as well as for some half-million Syrian children in Lebanon, displaced by four years of mayhem.
In the case of Nepal and other disaster-prone regions, the fund could, and should, be used to strengthen immediate relief plans, improve coordinated responses, and support longer-term efforts to bridge humanitarian relief and development, including preventive measures, such as retrofitting schools.
Initial reports following the recent disaster suggest that schools that were retrofitted as a precaution against earthquakes (the typical cost was $8,000) escaped most of the damage.
No one is asking donors to make education a priority over immediate life-saving responses, or that financing be diverted from other emergency relief efforts.
But it is crucial to realize that, for children, educational opportunity underpins all humanitarian and development interventions.
Schools provide more than the skills that children will need in later life; they also serve as vehicles for disseminating lifesaving health and safety information.
The average refugee child spends more than ten years in exile; that child’s education cannot wait until he or she is able to return home.
Education may not provide humanitarian support in exactly the same way that the provision of medical care, food, or shelter does, but the risks facing children out of school during crises – including labor, marriage, human trafficking, and recruitment as soldiers – can be as grim as any other type of suffering.
On July 7, the Norwegian government will convene a conference on education in Oslo.
The assembled leaders and policymakers should take the opportunity to heed the call of organizations – such as the International Network for Education in Emergencies, UNICEF, and UNHCR – to ensure that no child falls into the gap between humanitarian and development assistance.
Schools provide their students with something that no other service or humanitarian assistance program can offer: hope of a return to normalcy and of a future worth planning for after those delivering the emergency response have left.
Nepal\u0027s Remarkable Peace
KATMANDU – Nepal’s Maoist leader, Pushpa Kamal Dahal, known as “Prachanda,” has now been sworn in as the first prime minister of the Federal Democratic Republic of Nepal, having won an overwhelming vote in the Constituent Assembly elected in April.
The Assembly’s opening action had been to vote almost unanimously to abolish the 239-year-old monarchy, and in June former King Gyanendra Shah departed from the palace, remaining in the country as an ordinary citizen.
Nepal fleetingly made headlines after the 2001 palace massacre of the previous monarch and his family.
Its bloody ten-year civil war, however, was seldom in the international limelight.
So, too, the country’s unique peace process has rarely gained outside attention since the guns fell silent two years ago.
Yet, amid too many continuing conflicts and failing peace processes around the world, a success story deserves to be recognized and supported.
I came to Nepal in mid-2005, when human rights violations committed by both sides in the armed conflict, together with Gyanendra’s crackdown on democratic rights as he seized absolute power, led the international community to support a monitoring presence from the United Nations High Commissioner for Human Rights.
With no end in sight to a war with thousands of civilian victims, and democracy far from the horizon, nobody could have foreseen how Nepal’s people would express their demand for peace and change.
The turning point was the April 2006 people’s movement, when hundreds of thousands took to the streets for nineteen successive days.
The king was compelled to hand power back to the political parties, while a peace agreement emerged that ended the conflict, bringing the Maoists into an interim parliament and government and promising elections to a Constituent Assembly.
The people’s movement also took the lid off social pressures often disregarded by Nepal’s elites.
Although established as a unitary Hindu kingdom, with politics directed from the Himalayan foothills, today around half the population live in the fertile southern plains and more than one-third are from over 50 indigenous, largely non-Hindu communities.
Others are also historically marginalized from the social and political life of the nation, notably the Dalits, sometimes known as “untouchables,” who are at the bottom of the Hindu caste system.
For these groups, the restoration of democracy was a step toward social transformation, enabling them to participate more equally in the life of the country.
Given that the elections to the Constituent Assembly needed to ensure their representation, a complex system of quotas was devised.
Along with the success of socially diverse candidates fielded by the Maoists, the Constituent Assembly that was elected in April represents an unprecedented array of marginalized groups.
Women, too, had been almost invisible in political life – and, indeed, in the peace process.
Now nearly one-third of the Constituent Assembly’s members are women – the highest proportion in South Asia and fourteenth place in the world for nationally elected bodies.
The challenges that face Prime Minister Prachanda, the incoming coalition government, and the Constituent Assembly, are immense, and trust is fragile.
The Nepali Congress Party, for example, has chosen to remain in opposition, dubious of the Maoists’ commitment to democratic politics.
Nowhere in the world is the transformation of an armed insurgent group into a peaceful political movement quick or easy.
The Maoists enter the government still with their own army – confined to cantonments, with their weapons stored under UN monitoring – and a Young Communist League that has persistently acted outside the law.
Commitments to resolve the future of the Maoist combatants, along with what the peace agreements call the “democratization” of the state army, must now be implemented.
But the biggest challenges go to the roots of the insurgency: poverty, injustice, and discrimination.
One cost of the conflict has been the retreat of local governance and arrested development in a desperately poor country where over 80% of the population lives in rural districts.
Moreover, as Nepal aspires to become a federal democratic republic, expectations are high among diverse groups for greater control of their lives and resources.
But what federalism will mean in practice, taking account of the geographic and ethnic peculiarities of Nepal, remains elusive and potentially divisive.
Reaching a national consensus will be a formidable task for the Constituent Assembly, and meanwhile the Nepali people cannot be expected to wait patiently until a new constitution is drafted to see real improvement in their daily lives.
But there is reason to be hopeful.
Nepal’s peace process has been truly indigenous: it has not been mediated or managed by any external party.
The UN has encouraged and facilitated the process – through quiet good offices during the last years of the conflict, human rights monitoring, assistance to the Constituent Assembly election, and monitoring arms and armies during the transition.
The Maoist and non-Maoist parties have asked the UN to maintain a political presence while the issue of the former combatants is resolved, and we stand ready to support peace-building, recovery, and long-term development.
But the world, too, must be generous and steady in assisting Nepal to sustain the still fragile success of a remarkable peace process.
Bibi Goes to Washington
NEW YORK – Why did he do it?
What possessed Israeli Prime Minister Binyamin “Bibi" Netanyahu to accept an invitation from the Republicans in the US Congress to come and attack President Barack Obama's policy on Iran without letting the White House know?
Netanyahu claims that his was “a fateful, even historic mission" to voice his concern for the fate of Israel and all Jews.
But we already knew about his concerns – and that many Jews, in the US and elsewhere, do not feel that he was speaking for them.
Did Netanyahu crave the applause of his Republican supporters?
Is he gambling on the chance of a Republican presidency in 2016?
If so, he got the applause; but, given the current polls, the latter motive would be quite a gamble.
Or was Netanyahu simply using the US Congress as a venue for his own campaign to keep his job?
Did he wish to impress voters back home with a starring role on a world stage?
This, too, would seem to be a gamble: many Israelis, however worried they might be about an Iranian nuclear bomb, have been highly critical of Netanyahu's provocation of Obama, and of many Jewish Democrats.
Two former Mossad directors joined a chorus of Israelis in arguing that he should no longer be prime minister.
Meir Dagan, who resigned as the Israeli intelligence chief in 2011, called Bibi's grandstanding in Washington “destructive to the future and security of Israel."
Whatever his motives, Netanyahu has achieved what no Israeli leader ever has: not only infuriating the US president (who was already quite angry with him), but also earning the public rebuke of people who would normally have supported any Israeli leader, whatever they might have thought in private.
If an Israeli prime minister cannot even count on the backing of a man like Abraham Foxman, the national director of the Anti-Defamation League, he is in trouble.
By forcing Americans – and not just Jews or Democrats – to choose between their loyalty to Israel and the president of their own country, Netanyahu has punched a large hole in Americans' normally bipartisan support for Israel.
This is not to say that US politicians have always agreed with Israeli policies.
But few have thought it worth their while to express their criticism in public.
The benefits of doing so rarely outweigh the costs: lost campaign contributions, accusations of anti-Semitism, charges of betraying a close ally (“the only democracy in the Middle East"), and so on.
The fact that Israel could always count on US backing, especially on such public occasions as congressional speeches by an Israeli leader, only confirmed the assumption of many people around the world that Israel and the US are joined like Siamese twins.
Some think that Israel is the cat's paw of the US; others believe it is the other way around.
In the spirit of that notorious nineteenth-century czarist forgery, The Protocols of the Elders of Zion, anti-Semites think “the Jews" run the US government, Wall Street, and the media.
Such beliefs, of course, have been around for much longer than the modern state of Israel.
Nineteenth- and twentieth-century European nationalists often regarded the US as the natural home for capitalists and “rootless cosmopolitans" without any loyalty to their native soil.
Only money ruled in America, it was thought, so that meant that the Jews ruled.
Though it was Stalin who used the phrase “rootless cosmopolitans" to describe unwanted Jews, anti-Semites believed that Jews were natural Bolsheviks and probably pulled the strings in the Soviet Union, too.
It was widely assumed than Jews, whether capitalist or communist, knew no allegiance except to their own people; after 1948, that increasingly came to mean the state of Israel.
By claiming to be the leader of all Jewish people, wherever they live, Netanyahu has only strengthened that notion.
In fact, the US was not always as pro-Israel as it is today.
The French were Israel's greatest supporters until President Charles de Gaulle turned away from the Jewish state after the Six-Day War in 1967.
America's subsequent patronage of Israel had less to do with evangelical passion for the Holy Land, or a spontaneous love for the Jewish people, than with the Cold War.
But over time, especially in conservative political discourse, criticism of Israel increasingly came to be regarded as not just anti-Semitic but also anti-American.
There is some truth to this view.
The old anti-Semitic myth about America being run by Jews has not completely disappeared – especially (but by no means only) in the Middle East.
But the almost automatic identification in Washington of US interests with Israel's has made it difficult to criticize either country without criticizing the other.
Now, by openly seeking to undermine the US president, Netanyahu is breaking that link.
He has made it easier for American Jews, even those who feel a deep devotion to Israel, to be critical of its leaders.
This will also make it less costly for American politicians to oppose Israeli policies with which they disagree.
Some might see this as a defeat for Israel.
In fact, the opposite may be true.
Bibi's ill-considered trip to Washington might be the best thing that could have happen to Israel.
It is in neither country's interest to be seen as the other's pawn.
And a tougher US stance toward its ally might force the Israelis to try harder to come to terms with the Palestinians.
This is not what Netanyahu intended.
But it might end up being his greatest achievement.
A Raisin in the Israeli Sun
WASHINGTON, DC – Decades of efforts to reduce the death toll from drunk driving in the United States produced the mantra, “Friends don’t let friends drive drunk.” After Israel’s election last week, the country’s friends around the world should adopt a similar slogan: “Friends don’t let friends govern blind.”
Israel’s blindness is self-induced.
Its government cannot solve the conflict with the Palestinians on Israeli terms, so it has decided to behave as if the entire issue did not exist.
Astonishingly, when Prime Minister Binyamin Netanyahu addressed the United States Congress earlier this month, his 39-minute speech about Iran’s existential threat to Israel did not contain a single mention of the Palestinian people.
Campaigning at home, however, he talked only about the threat some Palestinians pose to Israeli security today, never of the opportunity that other Palestinians offer for peace tomorrow.
Israeli voters chose the politics of fear over the politics of possibility.
Whether to support the right or the center-left was a classic choice between guns and butter, security and prosperity.
The Zionist Union, the principal opponent of Netanyahu’s Likud party, focused mostly on domestic issues like housing, the high cost of living, and growing economic inequality.
Netanyahu emphasized the threat Israel faces from Iran, the Islamic State, and Hamas.
He even added a racist dimension to the fear mongering on Election Day, warning that, “Arab voters are coming out in droves to the polls.”
During the campaign, Netanyahu also renounced any possibility under his government of a two-state solution to the Israeli-Palestinian conflict.
An interviewer with an Israeli news site asked, “Are you saying that if you are Prime Minister, a Palestinian state will not be created.”
Netanyahu answered: “Correct.”
Once secure in his victory, Netanyahu immediately retracted the statement.
He claimed that he meant only that a two-state solution was not achievable under current conditions, as long as the Palestinian Authority is in a coalition with Hamas and as long as vacated territories bring the “rise of militant Islam.”
But it is too late for clarifications.
Palestinians heard clearly and explicitly what they have long assumed: the Israeli government has no interest in reaching a peace deal.
It would prefer to keep building settlements and to hunker down behind security walls.
That is a tragedy, because it drives both sides into a cycle of action and reaction that ultimately will make impossible a negotiated two-state solution – the kind of solution in which each side gives up something it wants in order to gain something that both sides want more.
Israel now faces three scenarios, all of them bad.
One is increasing international isolation and the politicization of support for Israel in the US, traditionally its staunchest military and diplomatic ally.
Younger US voters, generations removed from the Holocaust, do not share most of their elders’ reflexive habit of support for Israel.
They do not see Israel the way Israel sees itself, as a nation under threat; instead, they see a government that has explicitly aligned itself with the Republican Party.
They will also begin to question why the US stands with Israel in the United Nations when even America’s closest allies in Europe and elsewhere have begun to peel away.
Though Netanyahu received many rounds of applause when he addressed Congress, more than 60 Democrats boycotted his speech.
Losing the support of Europeans and a significant number of Americans cannot be good for Israel’s security and prosperity.
The Palestinians will now pursue with renewed determination and vigor a path to statehood through unilateral recognition.
If they succeed, Israel will face a Palestinian state with borders to which it did not agree and a continuing conflict that will become a formal inter-state war, subject to international law.
If the Palestinians fail, they will most likely turn again to violence: a third intifada, bigger and with greater international support than the first two.
Israel will have no option but to repeat the horrors of recent Gaza wars on a much larger scale, filling the world’s media with images of dead children, destroyed schools and hospitals, and heavily armed Israeli troops taking on rock-throwing teenagers.
That is not an experience that Israel or its friends could possibly want.
Netanyahu thinks that he can build a fence and let the problem simply fester forever.
But one should heed the words of Langston Hughes’ famous poem, which became a refrain of the US civil rights movement.
In a slightly abridged version, it reads:
“What happens to a dream deferred?
Does it dry up
like a raisin in the sun?
Or fester like a sore—
And then run?
Maybe it just sags
like a heavy load.
Or does it explode?”
Successive Israeli governments have shown that they can meet and contain explosions of Palestinian frustration and rage.
But each time they do, Israel loses a little more of its soul.
Israel is a special and vibrant country, filled with talented, hard-working, and committed people who have much to contribute to the world.
But right now its leaders, by ignoring Palestinian dreams, are courting a nightmare.
Netanyahu’s Border War
TEL AVIV – Binyamin Netanyahu’s furious rejection of US President Barack Obama’s proposal to use the 1967 borders as the basis for a two-state solution to the Israeli-Palestinian dispute – frontiers that he called “utterly indefensible” – reflects not only the Israeli prime minister’s poor statesmanship, but also his antiquated military philosophy.
In an era of ballistic missiles and other weapons of mass destruction, and in which the planned Palestinian state is supposed to be demilitarized, why is it so vital for Israel to see its army “sit along the Jordan River”?
If such a tripwire is really necessary, why shouldn’t a reliable international force carry out that task?
And how can hundreds of isolated settlements spread amidst a hostile Palestinian population ever be considered a strategic asset?
Netanyahu should, perhaps, have studied the lessons of the 1973 Yom Kippur war on the Golan Heights before denouncing Obama’s idea.
When the war started, the first thing the Israeli army command sought was the evacuation of the area’s settlements, which Israel’s generals knew would quickly become an impossible burden, and an obstacle to maneuver, for their troops.
Indeed, the last war that Israel won “elegantly” – in the way that Netanyahu imagines that wars should be won – began from the supposedly “indefensible” 1967 lines.
That is no accident.
Israel’s occupation of Arab lands in that war, and its subsequent deployment of military forces amidst the Arab population of the West Bank and close to the powerful military machines of Egypt in the south and Syria in the north, exposed it to Palestinian terrorism from the east.
At the same time, occupation denied Israel’s army the advantage of a buffer – the demilitarized zones that were the key to the 1967 victory against both Egypt and Syria.
For borders to be defensible, they need first to be legitimate and internationally recognized.
But Netanyahu does not really trust “the gentiles” to supply that type of international recognition of Israel’s borders, not even when America is behind him, and not even when Israel today has the most powerful military capabilities in the Middle East.
The son of a renowned historian who served as the personal secretary of Zeev Jabotinski, the founder of the Zionist right, Netanyahu absorbed from childhood his father’s interpretation of Jewish history as a series of tragedies.
The lesson was simple: the gentiles cannot be relied upon, for Jewish history is one of betrayal and extermination at their hands.
The only remedy to our fragile existence in the Diaspora lies in the return to the Biblical Land of Israel.
Our Arab neighbors should never be trusted; hence, as Jabotinski preached, the new Israeli nation must erect an Iron Wall of Jewish power to deter its enemies forever.
To be fair, such an existential philosophy was not the right’s monopoly.
The legendary General Moshe Dayan, who was born in a socialist Kibbutz on the shores of the Sea of Galilee, was no less a skeptic about the chances of coexisting with the Arabs.
A gifted orator, this is how he put it in a eulogy to a fallen soldier in 1956:
“Let us not be deterred from seeing the loathing that is inflaming and filling the lives of the hundreds of thousands of Arabs who live around us.
Let us not avert our eyes lest our arms weaken….This is the fate of our generation, this is our life choice, to be prepared and armed, strong and determined, lest the sword be stricken from our fist and our lives cut down….We are a generation of settlers, and, without the steel helmet and the cannon’s fire, we will not be able to plant a tree and build a home.”
Yet the same Dayan, who in 1970 said that “the only peace negotiations are those where we settle the land and we build, and we settle, and from time to time we go to war,” was forced by cruel reality to admit that the best security to which Israel can aspire is that based on peace with its neighbors.
Eventually, he became the architect of a historic peace with Egypt.
His book Are We Truly Condemned to Live by the Sword to Eternity? marked the transformation of the soldier into a statesman.
If Netanyahu is ever to lead a historic reconciliation with the Palestinian people, he should start by endorsing a courageous, almost post-Zionist insight reflected in Dayan’s 1956 eulogy.
Fully aware of the bitter legacy of Palestinian disinheritance following the 1948 war, Dayan refused to blame the murderers.
On the contrary, he understood their “burning hatred.”
Unfortunately, Israel today has a prime minister with the mentality of a platoon commander who nonetheless likes to cast himself as a latter day Churchill fighting the forces of evil bent on destroying the Third Jewish Temple.
Of course, a great leader must always have a sense of history.
But, as the French philosopher Paul Valéry put it, history, “the science of things which are not repeated,” is also “the most dangerous product which the chemistry of the intellect has ever evolved,” especially when manipulated by politicians.
Menachem Begin, a hawkish predecessor of Netanyahu as prime minister, once had the insolence to say to the great historian Yaakov Talmon that, “when it comes to the twentieth century, I am more an expert than you are.”
Talmon responded with “The Fatherland is Imperiled,” a pivotal article whose conclusions are as relevant today as they were in 1981.
Not until occupation ends, Israel lives within internationally recognized borders, and the Palestinians recover their dignity as a nation will the Jewish state’s existence be finally secured.
Netanyahu’s Choice
Ramallah – As the summit between US President Barack Obama and Israeli Prime Minister Benjamin Netanyahu approaches, most of the discussion has focused on whether or not the newly elected Israeli leader will finally say that he backs a two-state solution.
This is the wrong approach.
Israelis should not determine the status of the Palestinian entity, nor should Palestinians have a say in what Israelis call their own state.
The only question that Obama should ask Netanyahu is, When will Israel quit the occupied Palestinian territories? Attempts at obfuscation – whether by talking about an “economic peace,” or insisting that Arabs recognize the Jewishness of the state of Israel – should not be allowed to derail the goal of ending the inadmissible occupation.
During Obama’s first meeting with a Middle East leader, a simple and courageous Arab plan was outlined. Empowered by Arab leaders, Jordan’s King Abdullah II officially presented the peace plan devised by the Arab League and the Organization of Islamic States.
Despite the Israeli wars on Lebanon and Gaza, Arabs offered normal relations with Israel once it quits the lands that it occupied in 1967.
The plan also calls for a “fair” and “agreed upon” resolution of the Palestinian refugee problem.
The fact that Israelis and Palestinians need to agree on a solution of the refugee issue neutralizes unwarranted Israeli fears about the demographic threat posed by the Palestinians’ right of return.
Last summer, when he was shown a poster with 57 flags representing the Arab and Islamic countries that will normalize relations with Israel, then candidate Obama told Palestinian President Mahmoud Abbas that the Israelis would be “crazy” to reject that plan.
Obama’s impressive signals since taking office – telephoning Arab leaders before European allies, appointing special envoy George Mitchell and speaking on Al-Arabiyeh for his first interview – reflect a different approach from the staid and unimaginative past.
The US has repeatedly opposed the 1967 Israeli occupation of Palestinian territories and has called for its end.
It has consistently voiced disapproval of settlement activities.
Leaders of both major US parties have articulated a policy that calls for a viable, contiguous Palestinian state on the lands occupied in 1967.
The US has also opposed Israel’s unilateral annexation of East Jerusalem, and – along with every country on the planet – refused to recognize the application of Israeli law to residents of East Jerusalem.
Yet Israel's actions on the ground have gone counter to American and international positions.
The newly established Israeli government refuses even to pay lip service to the internationally accepted requirements for peace.
On the other hand, the freely elected Palestinian leadership faces international boycott until it accepts a solution that the Netanyahu government rejects.
Among the international community's demands of Israel has been a total freeze on all settlement activity, including expansion and natural growth.
Freezing settlement will certainly be a central focus of the robust diplomacy of Mitchell and his team.
Mitchell, who was deeply involved in crafting the settlements language of the Mitchell Report of 2001, understands the capacity of the settlements to destroy the prospect for a two-state solution.
Jerusalem is another on-the-ground issue that will be a litmus test for the Obama administration.
Demolition of Palestinian houses and Israeli provocations in East Jerusalem highlight the need to confront this issue without delay.
The focus of Pope Benedict XVI’s visit to the Middle East was Jerusalem’s importance to Christians, Muslims, and Jews, so that attempts to Judaize the Holy City must stop immediately.
A third imperative for Palestinians is to reunite the Gaza Strip and the West Bank.
Irrespective of the outcome of the internal Palestinian dialogue taking place in Cairo, there is a need to reconnect Palestinians.
There is no excuse why Palestinians living in either remaining sliver of Mandatory Palestine should be barred from traveling to the other part of the occupied Palestinian territories.
Israeli officials’ claims that barring the movement of people and goods is required for security reasons do not withstand scrutiny.
Under the leadership of US General Keith Dayton (Mitchell’s security deputy), the most vigorous security checks can be made to allow such travel.
With renewed peace talks, results must be stressed over endless process.
The last failed promise by President George W. Bush came at Annapolis in late 2007, when he vowed that an independent, viable, and contiguous Palestinian state would be created before the end of his term.
More than four decades after United Nations Security Council resolution 242, occupying land by force, illegal construction of exclusive Jewish settlements, and restrictions on movement continue unabated.
Time is no longer on the side of those who favor two states.
The Obama administration must seize the initiative and insist that Netanyahu unequivocally support Israeli withdrawal from the Occupied Territories – the sine qua non for a two-state solution.
Otherwise, tension looms in the Israeli-American relationship, and calls for one state with equal rights for all will begin to drown out older ideological visions, as settlement activity forecloses the prospect of two states.
Netanyahu the Palestinian
PHILADELPHIA – In January, Israeli voters will go to the polls for an election that promises to hand Prime Minister Binyamin Netanyahu a renewed mandate.
Few prospects are more loathsome to the Israeli left, US President Barack Obama’s administration, most European leaders, or many American Jews.
But no one regards the prospect of another Netanyahu government with more anguish than the Palestinians.
In the Arab-Israeli conflict’s long, tortured history, they have reviled no Israeli prime minister – with the possible exception of Ariel Sharon – more than Netanyahu.
The reason is simple: he is one of them.
Literally, of course, he is not.
But, unlike previous Israeli prime ministers (again, with the possible exception of Sharon), Netanyahu has emulated the Palestinian political strategy of sumud, or steadfastness.
The philosophy of sumud is rooted in Palestinians’ implacable belief in the righteousness of their cause and the justness of their methods.
It operates both passively and actively in Palestinian culture, demanding stubbornness and tolerating ruthlessness, violence, and duplicity.
At sumud’s core lies the unswerving, blinkered view that Israel is illegitimate and its duration limited.
As a result, Palestinian leaders have for decades mobilized their society to outlast Israel.
Indoctrination begins at a young age through family, education, and media, and later encourages more aggressive resistance, including terrorism.
In other words, Palestinians are playing a long game.
But plans for a functioning Palestinian state that do not depend on foreign aid have been conspicuously absent, save for the recent efforts of Palestinian Authority Prime Minister Salam Fayyad.
Netanyahu’s version of sumud is evident in his policies and rhetoric, which focus on Israel’s legitimacy, necessity, and permanence.
Indeed, his speeches frequently offer lessons in Jewish history, while casting the “Holy Land” as both a Jewish right and an Israeli national symbol.
Addressing the United Nations in September, Netanyahu highlighted his core message for all, especially Israelis: “Three thousand years ago, King David reigned over the Jewish state in our eternal capital, Jerusalem.
I say that to all those who proclaim that the Jewish state has no roots in our region, and that it will soon disappear.”
Such rhetoric compliments a long-term strategy of strengthening Israeli control over core areas, especially Jerusalem and its suburbs.
Indeed, while settlement-building in the West Bank has slackened, it continues.
Moreover, aggressive counter-terrorism activities and the separation barrier have decisively reduced cross-border attacks, containing mounting pressure in Palestine as the conflict remains on the back burner.
And Netanyahu continues to oversee economic expansion and improved foreign relations, despite hostile rhetoric from Europe and elsewhere.
The Palestinians seem to recognize Netanyahu’s variety of sumud for what it is.
His steadfastness – and declining international interest in their struggle, as the world’s focus shifts to the Arab Spring’s Islamist winter – stymies any advance toward an agreement.
The US is, perhaps, equally frustrated.
Israeli prime ministers are supposed to come in two varieties: heavily accented Eastern European men and grizzled military officers who talk a good game before acquiescing to the latest American or international demands for concessions, talks, and aid.
While previous prime ministers like Menachem Begin and Yitzhak Shamir were not averse to lecturing, they lacked strategic cunning.
Netanyahu’s unwillingness to compromise disconcerts, confuses, and often enrages Americans.
His relentless disquisitions on Israel’s strategic environment, security requirements, red lines, and Jewish history are offset only by conciliatory talk about reopening negotiations, which are immediately reject by the Palestinians, who, like him, fear showing weakness.
Furthermore, Netanyahu’s unsentimental assessment of the Middle East does not line up with that of the Obama administration – in thrall to its collapsing romance with moderate Islamists – and its devoted supporters among Jewish Americans.
These groups do not understand Netanyahu, who proclaims Jewish rights, defends his country’s interests, and hints at conciliation but gives up little – much like a traditional Arab leader.
Despite considerable Israeli disgust with Netanyahu’s party, allies, and policies, no credible rival exists.
Israelis grudgingly accept that the country and its geopolitical situation are relatively stable, especially in view of its immediate neighborhood – a burning Syria, a smoldering Egypt, and a volatile Lebanon.
Moreover, those variables that could upend Netanyahu’s re-election – the situation in Gaza and Lebanon, for example, or deteriorating conditions in Sinai and Jordan, any of which could drag Israel into unwanted military operations – now appear unlikely to influence the outcome.
As a result, Netanyahu’s position is strong.
The Palestinians initiated a zero-sum game that has given him the upper hand.
By using the Palestinians’ own strategy, he has cornered them.
After all, genuine peace efforts by the Palestinians – based on a two-state solution with no “right of return” for post-1948 refugees – would enrage Hamas and revive factional violence, adding another self-defeat to an already long list.
With such help from the Palestinians – for example, Hamas bitterly castigated Palestinian President Mahmoud Abbas recently after he inadvertently implied giving up the right of return – Netanyahu may well rule Israel and Palestine for the foreseeable future.
Netanyahu’s Useless Demand
HAIFA – Ever since the Six Day War of June 1967, a small number of Israelis, not all on the left, supported the idea of two states as a solution to the Israeli-Palestinian conflict.
Most of their compatriots rejected it, as did the Palestinians.
Israelis justified their stance with this question: Just when did the Palestinians become a nation deserving of statehood?
The Palestinians were asking in return: Why should the Jews, a religious community dispersed around the world, have their own state?
A lot of water had to pass under the bridge before the idea of a two-state solution, whether as a moral or a practical matter, began to filter into the Israeli and Palestinian political and ideological environments.
People gradually became accustomed to the expression “Palestinian state,” and those who embraced it received support and gained prestige on the international scene.
After the Labor leaders Shimon Peres, Yitzhak Rabin, and Ehud Barak embraced the two-state concept, there came the first tentative movements in that direction from Likud members: Tzipi Livni, Ehud Olmert, and Ariel Sharon.
Now, from the very bastion of the right, came Benjamin Netanyahu.
We can congratulate ourselves: better late than never!
We are all aware that the road toward the realization of this dream is full of obstacles and difficulties, both on the Israeli and the Palestinian side.
I believe that some of the preconditions posed by the Israeli prime minister in his recent, widely reported speech are fully justified.
Others, however, are useless and only complicate further an already complex and problematic situation.
Netanyahu’s demand that the future Palestinian state be demilitarized is just, reasonable, and necessary.
One look at a map is enough to understand this.
Even Egypt, a great and sovereign nation, accepted demilitarization of Sinai as a part of its peace process with Israel.
Indeed, demilitarization of Sinai is one of the fundamental elements of the stability of Egypt’s peace with Israel.
Other great and independent countries, such as Japan, Germany, and Austria, have been subjected for decades to limitations on their acquisition of certain weapons and military equipment.
Similarly, the refusal of Palestinian refugees’ claim to a right of return to Israel proper is understandable, logical, and just.
What sense would it make to bring back millions of Palestinians into a state whose character and symbols are foreign to them – a state where the majority belongs to another ethnic group?
Are they to go back to homes and farms that no longer exist?
These refugees could much more properly establish themselves in the new state of Palestine, their mother country, among their compatriots, under a Palestinian flag and Palestinian authority, merely 30 kilometers from the homes and farms that they abandoned, or from which they were expelled, more than 60 years ago.
But the other condition demanded by Netanyahu, that the Palestinians recognize the right of the Jewish people to their own state, or the existence of the Jewish nation, is completely arbitrary.
In my opinion, it is superfluous to ask the Palestinians to recognize the nationhood of a people with thousands of years of history and a state that maintains diplomatic relations with 150 countries around the world.
A demand of this kind was not made of Egypt or Jordan when Israel signed peace agreements with those countries, and it constitutes an entirely useless obstacle on the road to peace with the Palestinians.
It will be more than sufficient to ask the Palestinians to recognize the legitimacy of the state of Israel, a state whose territorial boundaries and political identity are known to all.
On our part, we also will be recognizing not so much the Palestinian people, which one day may merge with the people of Jordan, as an independent and sovereign Palestinian state within the 1967 borders.
Framing the issue in this way makes sense for two reasons.
First, the question of Jewish nationality is, in fact, very complicated, even for Jews themselves, as many consider themselves Jewish only in a religious sense.
Second, the Palestinians’ refusal to recognize Israel as a Jewish state is motivated by, among other things, the presence of a Palestinian minority in Israel.
But relations between Israel’s Jewish majority and Arab minority is an internal, delicate question in which it is not wise to involve Palestinians outside of Israel.
For more than 60 years, the two groups have managed to live together in an acceptable manner, confronting with relative dignity the inferno of terrorism and the occupation of the West Bank and Gaza strip.
With the advent of peace, we all hope that this bond will become consolidated around a common Israeli citizenship.
There will be enough problems in negotiating the creation of a Palestinian state, so we should avoid adding other, gratuitous obstacles.
Let’s focus on resolving the most important of the problems – demilitarization, settlements, borders, and refugees – and allow the reality of peace to leave behind, or postpone until the distant future, the solution of problems that are essentially historical and theological.
Networked Leaders
CAMBRIDGE – In an environment of mobile phones, computers, and Web sites such as MySpace, Facebook, and LinkedIn, it is commonplace to say that we live in a networked world.
But different networks provide new forms of power, and require different styles of leadership.
Barack Obama understands this; indeed, it helped to secure his victory.
While Obama was hardly the first American politician to use the Internet, he was the most effective in using new technology to raise money from small donors, energize and coordinate volunteers, and convey his messages directly to voters.
Now he is faced with the question of how to use networks to govern.
Networks come in many shapes and sizes.
Some create strong ties, while others produce weak ties.
Think of the difference between friendships and acquaintances.
Valuable information is more likely to be shared by friends than among acquaintances.
But weak ties extend further and provide more novel, innovative, and non-redundant information.
Networks based on strong ties produce the power of loyalty, but may become cliques that re-circulate conventional wisdom.
They may succumb to “group think.”
That is why the diversity in Obama’s cabinet choices is important.
He has been compared to Abraham Lincoln in his willingness to include rivals as well as friends on his team.
Weak ties, such as one finds on the Internet, are more effective than strong ties for providing the necessary information to link diverse groups together in a cooperative manner.
In other words, weak networks are part of the glue that holds diverse societies together.
They are also�the basis of democratic leadership.
The greatest democratic politicians have a large capacity for shallow friendships.
As leaders increasingly need to understand the relationship of networks to power, they will have to adapt strategies and create teams that benefit from both strong and weak ties.
Information creates power, and more people have more information today than at any time in human history.
Technology “democratizes” social and political processes and, for better and worse, institutions play less of a mediating role.
In fact, the basic concept that is sometimes called “Web 2.0” rests on the idea of user-based content bubbling up from below rather than descending from the top of a traditional information hierarchy.
Institutions like Wikipedia and Linux are examples of social production that involve very different roles for leaders than do their traditional counterparts, Encyclopedia Britannica and Microsoft.
Now governments are experimenting with similar means to create and distribute information, but they still have a long way to go.
Governments have traditionally been very hierarchical, but the information revolution is affecting the structure of organizations.
Hierarchies are becoming flatter and embedded in fluid networks of contacts.
White-collar knowledge workers respond to different incentives and political appeals than do blue-collar industrial workers.
Polls show that people today are less deferential to authority in organizations and politics.
In business, too, networks are becoming more important.
In some cases, one can orchestrate a complex network simply with carefully specified contracts.
But the friction of normal life usually creates ambiguities that cannot be fully met in advance.
In describing the success of the Toyota and Linux networks, the Boston Consulting Group concludes that the hard power of monetary carrots and accountability sticks motivates people to perform narrow, specified tasks, but that the soft power of admiration and applause are far more effective stimulants of extraordinary behavior.
Traditional business leadership styles have become less effective.
According to Sam Palmisano, the CEO of IBM, hierarchical, command-and-control approaches simply do not work anymore.
They impede information flows inside companies, hampering the fluid and collaborative nature of work today.
A study of a major “bricks and clicks” company (one that combines offline and online operations) found that distributed leadership was essential.
In the Internet environment, the traditional view of a leader being decisively in control is difficult to reconcile with reality.
Instead, effective leadership depends on the use of multiple leaders for capable decision-making.
Harvard Business School professor John Quelch writes that “business success increasingly depends on the subtleties of soft power.”
Former President George W. Bush called himself “the decider,” but leadership today is more collaborative and integrative than that implies.
One management expert summarizes recent studies as describing an increase in the use of more participative processes.
In other words, the Internet age requires new styles of leadership in which attractive soft power must supplement the traditional hard power of command.
In a networked world, leadership is more like being in the middle of the circle and attracting others than being “king of the mountain” and issuing orders to subordinates down below.
Barack Obama understands this networked dimension of leadership and the importance of the soft power of attraction.
Not only did he successfully use networks in his campaign; he has continued to use the Internet to reach out to citizens.
He has supplemented his major television and radio speeches with Internet-based video clips on YouTube, and his political style has been marked by reaching out in a bipartisan fashion to broad circles of political leaders.
While it is still too early in his presidency to judge the outcome, it is clear that he is attempting to change processes and adapt leadership to a more networked world.
Never Again to Genocide Trials
HEIDELBERG – Rarely does one read such hopeful news: in late June, the International Criminal Tribunal for the former Yugoslavia (ICTY) acquitted former Bosnian Serb leader Radovan Karadžić of genocide.
That might sound like a bad thing: Karadžić, who once warned Bosnia’s Muslims that war would lead them down the road to hell, surely deserves to be sentenced for the acts of which he was just acquitted – murder, siege, and slaughter almost beyond naming.
But for genocide?
Better not.
In fact, we would be better off getting rid of genocide as a crime altogether.
The legal concept of genocide is so incoherent, so harmful to the purposes that international law serves, that it would be better if we had never invented it.
Karadžić’s acquittal – precisely because he is still on trial on other counts related to the same atrocities – is an opportunity to move toward the sensible goal of retiring it.
This was not just any acquittal.
The ICTY decided that, after a two-year trial, the prosecution had not presented enough evidence for&nbsp;any&nbsp;judge to find Karadžić guilty of genocide early in the Bosnian War (he faces a separate count for the July 1995 massacre at Srebrenica, and the prosecution is appealing the acquittal).
The court has been consistent: with just a few trials left, it has issued no convictions for genocide apart from Srebrenica.
The broader charge was always risky, but, for many advocates, it is an article of faith that genocide was Bosnia-wide.
Still, the problem with genocide is not narrow judging, but that the crime itself is doubly irredeemable: it is defective in its definition and troubling in its moral and political effects.
Genocide requires “special intent.”
A&nbsp;genocidaire&nbsp;must intend both to commit a defined crime and to destroy the victim’s group.
In domestic law, the motive behind a crime is usually irrelevant – and for good reason.
People have complex reasons for acting illegally.
War – a collective enterprise in which killing your enemies can be legal – increases that complexity.
Trying to prove genocidal intent has drawn prosecutors into thickets of interpretation – such as giving lessons on the history of Greater Serbia – that distract from trials’ forensic core and encourage their politicization, as defendants “hijack” proceedings with their own justificatory glosses.
But the alternative – relaxing evidentiary standards – would undermine values such as legality and reasonable doubt, which are essential to a fair trial.
Genocide’s stringent requirements mean that it is – and should be – difficult to convict a defendant.
That is consistent with our intuition that genocide is unique.
But, while granting supreme status to the “crime of crimes” may seem morally attractive, the gravitational effect of genocide distorts international law and politics.
Genocide makes other crimes seem less important.
When Goran Jelisić – a camp guard in Bosnia who called himself “the Serb Adolf” – was acquitted of genocide in 1999, one might have concluded from the prosecution’s stunned reaction that Jelisić had walked free.
In fact, he confessed to 31 other counts covering the same underlying acts, and was sentenced to 40 years in prison.
Likewise, reactions to the Karadžić decision show how inflated the perceived stakes are.
Some say that acquitting him denies his victims’ suffering – as if only genocide mattered.
But it is only because acknowledgement of suffering has become identified so dogmatically with one crime that anything else seems inadequate.
The problem extends beyond Bosnia.
Asking “Was it genocide?” does little to illuminate what was done to which Armenians by which Ottomans during World War I. Today, Turks willing to discuss or even apologize for the massacres refuse to confess to the “supreme crime,” but Armenians can accept no other label.
Any group whose suffering is not called “genocide” feels like a second-class victim.
This is morally perverse.
It is not more&nbsp;wrong to kill people because of their ethnicity than it is to kill them because of their political beliefs, gender, or for the sheer pleasure of watching them die.
Yet this is precisely what elevating genocide presupposes.
The political cost is high.
Genocide’s status eases the pressure to intervene in crises that are “only murderous.”
Yet crying genocide too liberally quickly cheapens its value, entangling efforts to respond to ongoing exterminations in debates about their precise legal nature.
Despite these problems, prosecuting genocide might be worthwhile if it were the only way to hold mass murderers accountable.
But it is not.
Buried beneath the headlines about Karadžić’s acquittal are those other charges: he will be tried for the same acts, but classified as crimes against humanity and war crimes.
If the prosecution produces enough evidence, Karadžić will be sentenced for the same shelling and sniping, the same killings and rape.
All that will be lost is the opportunity to label those acts “genocide.”
This is the real reason to drop “the crime of crimes”: its redundancy.
There is no act of genocide that is not also another crime.
Genocide is a crime of characterization, an interpretation.
Rather than parse killers’ motives, we better affirm our own values by denying that any reasons could ever justify such acts.
Genocide is a socially meaningful way to describe a species of annihilation; it is the legal category that we must question.
We need international crimes that are minimally characterized – commonsensical analogues of domestic crimes – with as little room for interpretation as possible.
In court, we need not know why men slaughter to condemn them for it.
So let us end genocide as we know it – by stopping genocides, but also by abandoning the crime of genocide.
Let us call its constituent evils by their ancient names.
That will do for Karadžić, when judgment comes: he is still on trial, and we can still name his crimes.
Neville Chamberlain was Right
BERKELEY – Neville Chamberlain is remembered today as the British prime minister who, as an avatar of appeasement of Nazi Germany in the late 1930’s, helped to usher Europe into World War II.
But, earlier in that fateful decade, relatively soon after the start of the Great Depression, the British economy was rapidly returning to its previous level of output, thanks to Chancellor of the Exchequer Neville Chamberlain’s reliance on fiscal stimulus to restore the price level to its pre-depression trajectory.
Compare that approach to the expansion-through-austerity policy being pursued nowadays by British Prime Minister David Cameron’s government (with Chancellor of the Exchequer George Osborne leading the cheering squad).
The country’s real GDP has flat-lined, and the odds are high that British real GDP is headed down again.
Indeed, in less than a year, if current forecasts are correct, Britain’s Cameron-Osborne Depression will not merely be the worst depression in Britain since the Great Depression, but probably the worst depression in Britain…ever.
That is quite an accomplishment.
As Phillip Inman of The Guardian recently put it: “[T]he UK’s plan for recovery from the financial crisis was based on a full-throttle recovery in 2012....[C]onsumer confidence, business investment, and general spending would converge to send the economy on a trajectory of above-average growth.”
It did not work: government ministers “have done what the right-wing economists told them to do and moved out of the way – the theory being that public-sector spending and investment was ‘crowding out’ the private sector.”
Instead, as Inman says, “Spain is showing the way with its austerity-driven recession.
Where the weak tread, we [in Britain] look keen to follow...”
The failure of expansionary austerity in Britain should give all of its advocates around the world reason to reflect on and rethink their policy calculations.
Britain is a highly open economy with a flexible exchange rate and some room for further monetary easing. There is no risk or default premium baked into British interest rates to indicate that fear of political-economic chaos down the road is discouraging investment.
There is an argument – not necessarily true, but an argument nonetheless – that, while in office from 1997 to May 2010, the Labour governments of Tony Blair and Gordon Brown overshot long-term sustainable government spending as a share of GDP.
Their actions stand in contrast to countries that reduced their debt-to-GDP levels in the 2000’s, and to the United States, where the problem was not excessive spending but insufficient taxation under the Bush administration.
Yet, if one takes this view seriously, Britain, with a ten-year nominal interest rate of less than 2.1% per year, should already be in a boom.
If there was ever a place where expansionary austerity should work well – where private investment and exports should stand up as government purchases stood down, confirming its advocates’ view of the world – it is Britain today.
But Britain today is not that place.
And if expansionary austerity is not working in Britain, how well can it possibly work in countries that are less open, that can’t use the exchange-rate channel to boost exports, and that lack the long-term confidence that investors and businesses have in Britain?
Nick Clegg, Britain’s deputy prime minister and the leader of Cameron’s coalition partner, the Liberal Democrats, should end this farce today.
He ought to tell Queen Elizabeth II that his party has no confidence in Her Majesty’s government, and humbly suggest that she ask Labour Party leader Ed Miliband to form a new one.
To be sure, if Clegg did this, his political career would probably be finished, and his party’s electoral prospects would be damaged for a long time to come.
But Clegg’s political career and his party’s fortunes will be shaky for a long time to come in any case, given the economic hardship that Britain is enduring (and will continue to endure).
At least defection from the ill-advised Conservative-Liberal coalition now would benefit his country.
Policymakers elsewhere in the world take note: starving yourself is not the road to health, and pushing unemployment higher is not a formula for market confidence.
New Alliances for a New Century
In 1970, I traveled to Egypt as part of a delegation representing the United States at the funeral of President Gamal Abdel Nasser.
Back then, Egypt was closely aligned with the Soviet Union.
When we arrived in Cairo, it seemed that everywhere one looked there was evidence of the Soviet presence – Soviet tanks, missiles, and troops.
During the visit, we were scheduled to meet with Anwar Sadat.
No one in our delegation was sure what to expect, given the uneasy relations between our two countries at the time.
To our surprise, Sadat told us that he, in fact, had respect for the US.
The reason?
As a young military officer, he had visited our country and had had an excellent experience.
And, indeed, within two years of taking power, Sadat expelled the Soviets from Egypt and began to build a friendship with the US that, despite challenges and periodic differences, has proven important and valuable ever since.
I mention the importance of these military-to-military relationships because the US in this new century is undergoing a significant transformation of its military arrangements and partnerships around the globe – necessary adjustments based on the new realities, and new threats, that have emerged since the end of the Cold War.
It is important to note that since 2001, the US has probably done more things, with more nations, in more constructive ways, and in more parts of the world, than at any other time in its history.
In the wake of the September 11, 2001, terrorist attacks, President George W. Bush helped fashion and lead the largest coalition in history – 80-plus nations – to fight the global war on terror.
Furthermore, roughly 60 nations are currently cooperating in the Proliferation Security Initiative to prevent dangerous weapons and materials from being transported to terrorists or outlaw regimes.
There has been a rethinking of the structure and role of our traditional military alliances, including the North Atlantic Treaty Organization, which is setting up a new NATO Response Force and has moved outside Europe for the first time with the International Security Assistance Force in Afghanistan.
The focus of attention today is on Iraq and Afghanistan.
But in future decades, priorities will change.
And much of what we may be called on to do in the future will likely be determined by choices made by others.
Consider Russia, a nation with vast natural resources, an educated population, and a rich heritage of scientific and cultural achievements.
Like Americans and others around the world, they are threatened by violent extremism.
Russia is a partner with the US on some security issues, and our overall relationship is the best it has been in decades.
But in other ways Russia has been unhelpful – using energy resources as a political weapon, for example, and in their resistance to positive political changes in neighboring countries.
The same holds true for China.
The Chinese people are educated and talented, and their country has great potential, with high economic growth rates and an industrious work force.
Nonetheless, some aspects of Chinese behavior remain unsettling and complicate our relationship.
Last year, a US Department of Defense report noted that China’s defense expenditures appear to be much higher than acknowledged by the Chinese government.
Coupled with a notable lack of transparency, this understandably concerns China’s neighbors.
In addition to the choices that these and other countries make, America’s own choices will be an important factor determining what kind of future it faces.
From time to time, US public sentiment has opposed playing an active role in the world and fulfilling our commitments to allies – and, indeed, to the cause of freedom.
In the early 1970’s, as US ambassador to NATO, I remember having to fly back from Europe to testify against legislation in our Congress that would have pulled US troops out of Western Europe and NATO, just as the Soviet Union was in the midst of a huge military buildup.
Today, nations that were members of the Soviet Union’s Warsaw Pact, as well as some of the former Soviet Republics – countries that we used to call “captive nations” – are valued members of NATO and represent some of our most stalwart allies in the War on Terror.
This did not happen by accident or by chance.
Looking forward, I am convinced that if we have the wisdom, courage, and strength to adjust long-standing strategic arrangements, embrace new partners, and, above all, persevere in the face of adversity and difficulty, we will see a similar victory in this “long war” against violence extremism and the other threats that may emerge in an uncertain new century.
New and True Europeans
The fiasco of the European Union’s summit in Brussels has brought into sharp relief differences in attitudes between most new member countries from East Central Europe and the “old” members.
Perhaps surprisingly for many, such differences were not played out according to the expected script, in which the new members would be ruthlessly pragmatic, and demanding as much EU money as they could get, while most Western countries would in the end tone down their national egoism in favor of the decades-old ideals of European integration.
In the end, it was the EU’s eastern flank—the supposedly money-hungry and immature democracies—that called most loudly for a compromise in the name of salvaging political integration, while most of the old European democracies ruthlessly fought for their own “national interests.”
In view of some big countries’ intense national egoism, the failure to agree on the EU’s 2007-2013 budget could have ominous political consequences for Europe.
Statements by new EU members’ leaders at the summit indicated that they were aware of such a possibility.
They were worried about the EU’s future—certainly more so than their Western counterparts.
Some warned that the rejection of the European Constitution in the French and the Dutch referendums, combined with the summit’s decision effectively to suspend the ratification process and its failure to agree on EU finances, could trigger a serious political crisis in the EU.
This is why most new members were ultimately willing to support Luxembourg’s proposed compromise, under which the budget would be only 1.06% of the EU’s overall GDP and Great Britain’s annual rebate would be frozen at €4.6 billion.
Indeed, just before the ultimate collapse of the talks, five new members, including the Czech Republic and Slovakia, agreed to an even more radical plan, under which the budget would be only 1% of the EU’s GDP.
Cynics may argue that the new member countries could afford to make such concessions because they would end up with hefty EU subsidies anyway.
The net contributors to the EU budget were the ones who stood to lose the most.
Viewed in strictly economic terms, it is not surprising that Great Britain would not give up its rebate, while France would reject attempts to cut farm subsidies.
But what is surprising is that it was the old, experienced European democracies that so blithely ignored the political dangers stemming from the potential revival of intense nationalism on the European continent, while it was the new, inexperienced democracies from Europe’s east that called for caution.
Perhaps this was because the eastern countries’ attitudes are more driven by recent historical memories and experiences.
In a mere 15 years, all of these countries have endured economic and political changes unprecedented in their scope and speed in the history of Europe.
For most of these countries, EU membership was not merely a ticket to economic prosperity, paid for by rich EU old-timers.
On the contrary, they knew that they would have to do most of the work themselves—albeit under EU guidance and with the help of EU know-how.
Perhaps this is one reason why many in East Central Europe believe that EU funds, while helpful, are less important than being part of a united Europe, with the expanded opportunities that its common rules imply.
Moreover, the EU offers the small countries sandwiched between Germany and Russia a degree of political stability and security that they never had in modern history.
The rest they can manage on their own.
In contrast, West European states do no longer seem so concerned with the political dimension of European integration.
They take it for granted and are more concerned with their domestic constituencies.
Perhaps understandably, most citizens of West European states—accustomed to the political stability and economic prosperity of the last several decades—do not want to give up the benefits that the European integration process has brought to them.
The French, for example, do not want to lose farm subsidies, just as they are not eager to give more money to the new members, whose reformed economies are taking away French jobs.
British leeriness about giving up the EU rebate in the face of what is perceived as French egoism is equally understandable—despite the fact that this stance harms the enlargement process, which Great Britain otherwise supports.
Even so, East Central Europeans, who are still recovering from the terrible political calamities caused by Europe’s historical demons, find the intensity of their Western counterparts’ national egoism a bit frightening.
Europe’s history is full of catastrophes that were produced by the shortsightedness of national political elites.
How many times have European leaders thought they had things under control, only to unleash the demons again?
This is not to suggest, of course, that just because the EU cannot agree on a budget or a constitution Europe is approaching yet another historical calamity.
But caution is in order, and the political elites of big national states, in particular, should ponder whether they are not overplaying their hands once again.
Although the collapse of the common currency area owing to political squabbles seems unlikely at this point, it cannot be ruled out entirely. Obviously, we also cannot completely rule out the possibility of a subsequent weakening or disintegration of Europe’s common political structures.
For the small, economically still-fragile states of East Central Europe, a Europe of national states, once again fighting ruthlessly for their own interests, is a nightmare.
But it should be a nightmare scenario for all European states.
Perhaps those in the West should listen more to their new partners.
By agreeing to significant compromises, the leaders of some new member states were, among other things, trying to show that rekindling strong national egoism in Europe is a dangerous, if not uncontrollable, game.
A New Beginning for Greece – and Europe
KIEL – Greece is in urgent need of clear thinking.
The only reason the country has not long since defaulted on its debts is that the European Central Bank continues to provide funds to the Greek central bank through its emergency liquidity assistance (ELA) scheme.
The Greek central bank, in turn, lends money to the country’s commercial banks, which lend it to Greek citizens and foreign creditors.
The problem is that both groups of borrowers have been transferring large sums of money to other countries.
The result is that overdraft credits to the Greek central bank have grown by nearly €1 billion a day in recent months.
If Greece defaults and leaves the eurozone, these overdrafts will not be repaid.
ELA funding assumes that the Greek economy is temporarily illiquid, but not insolvent.
This assumption is patently false.
Despite all the pain Greece has suffered – a 30% drop in aggregate demand since the last cyclical peak and a rise in unemployment to more than 25% of the workforce – the Greek economy is still nowhere near competitive enough to repay its debts.
Part of the reason is that corruption remains high and administrative capacity to levy taxes remains woefully limited.
Meanwhile, low-income Greek households have borne the brunt of austerity.
In short, the mess continues.
But allowing Greece to default and still remain in the eurozone is not an option: it would signal that other eurozone countries could amass huge debts, funded by the ECB, without having any intention of repaying.
Fiscal responsibility in the eurozone would be fatally undermined.
Yet forcing a defaulting Greece out of the eurozone – against its will – is not an option, either: it would plunge the country into economic, social, and political instability, and there would doubtless be serious repercussions beyond the country’s borders.
In my judgment, there are only two viable options left.
The first – and more desirable – is for the ECB to assess realistically Greece’s lack of solvency and so stop providing ELA funds to its banking system.
This would precipitate a payment crisis for Greece.
But, recognizing the impending disaster, Greece would genuinely commit itself to the structural reforms that are in its own long-term interests: boosting the labor market’s flexibility, selling state-owned enterprises that most other European countries have already placed in private hands, and spending less on public-sector bureaucracy.
At the same time, Greece would ensure that these reforms do not hurt the poorest by introducing active labor-market policies (such as subsidies to train and hire the long-term unemployed).
Furthermore, Greece would commit itself to an automatically implemented fiscal plan, specifying the long-run ratio of national debt to GDP, the convergence rate to this ratio, and the degree of fiscal counter-cyclicality.
So much for what Greece must do.
In return, its creditors would agree to another one-time debt write-off – large enough to enable Greece realistically to repay its debts in the future, but small enough to avoid unnecessary transfers of credit.
Greece would remain within the eurozone, having lost some of its fiscal and structural sovereignty.
If this first option is not taken – the likely outcome, given the current game of political brinkmanship – Greece will default.
But that could set the stage for the second option, which I would call the “New Beginning Program.”
Under this program, creditor countries would write off Greece’s debts, on the condition that the country left the eurozone voluntarily.
This would give Greece the opportunity to start afresh from outside the monetary union: it could restructure its economy without outside interference, and could be ready to re-enter the eurozone at a later point under new conditions – this time without false statistical pretenses or unrealistic expectations.
Such an option would allow the Greek government to make a new start in stimulating competition, fighting corruption, and otherwise building a basis for long-term growth.
This would not be easy, but it would no longer be a process that Greece finds humiliating and creditor countries find exasperating.
This second option would be less desirable than the first.
The speculative uncertainties associated with a “Grexit” might well threaten other eurozone economies (for example, Cyprus and Portugal), while Greece, with a devalued drachma, would find it painfully expensive to import the capital goods it needs to generate a broad base of high-wage jobs.
But the second option would also be a new beginning for the whole eurozone.
Its member states would accept that monetary union is impossible without fiscal and structural coordination.
The minimum fiscal coordination needed would involve automatically implemented national plans, formulated by each government in advance.
As a counterpart, structural coordination must, at a minimum, focus European Union funds on countries with long-term current-account deficits, the aim being to improve their competitiveness through investments in their human capital.
Given that its current arrangements are neither credible nor sustainable, the eurozone needs this “new beginning,” regardless of which option Greece eventually takes.
New Directions for the UN
NEW YORK – The United Nations today leads what seems at times like a double life.
On the one hand, pundits criticize it for not solving all the world’s ills.
On the other hand, UN member states and people around the world are asking it to do more, in more places, than ever before – a trend that will continue in 2011.
It is not hard to see why.
We have only to read the newspaper, turn on the television, or go online to appreciate the sheer scale of the need.
Conflicts rage in too many places.
Natural disasters strike with greater fury, and in greater numbers, than ever before.
On top of all this, we face a new generation of threats, unlike any in history, which spill across borders and have global reach.
No single country or group, however powerful, can deal with them alone.
All must work together – in common cause for common solutions – to address challenges like climate change, poverty, and nuclear disarmament.
But there is profound skepticism that we can do so.
The world looks to the UN as never before, yet the conventional wisdom is that we are not up to the job.
The problems are too complicated.
Resources are too few.
The UN itself appears too divided to make the vital difference.
The conventional wisdom is, however, wrong; worse, it is dangerous, for we have all seen how quickly it can take hold, distort reality, and then harden like cement.
For example, four years ago, when I came to office, only a handful of global leaders knew enough even to talk about climate change – the defining challenge of our times, whose effects we see every day, all around us.
Today, we have moved climate change to the top of the global agenda.
But make no mistake: it has been a difficult road.
In December 2009 in Copenhagen, world leaders talked far into the night, and emerged, according to the conventional wisdom, with virtually nothing.
In fact, though we did not get a comprehensive, legally binding treaty that would usher in an era of sustainable, low-carbon prosperity, as we had hoped, there were significant achievements in Copenhagen.
For the first time ever, developed and developing countries acknowledged their responsibility to curb emissions of greenhouse gasses and agreed on the goal of limiting global temperature rise to below two degrees Celsius.
And, for the first time ever, countries made large pledges to finance mitigation and adaptation efforts: $30 billion over the next three years for fast-start financing, and $100 billion per year by 2020.
The lesson is that we should not dream of overnight breakthroughs, or allow ourselves to fall into despair in the absence of immediate progress.
Let us work, instead, to build on many smaller advances, wherever we can make them – by mobilizing support, creating broad alliances, building coalitions, and taking into account a web of moving parts and complex issues – because that will set the stage for the eventual breakthroughs of tomorrow.
Collective action has never been easy, but it has never been more necessary than in achieving the UN’s Millennium Development Goals – the world’s blueprint for ending extreme poverty.
The conventional wisdom will tell you that the MDGs targets – reducing poverty and hunger, improving the health of mothers and children, combating HIV/AIDS, increasing access to education, protecting the environment, and forging a global partnership for development – are simply unattainable.
In fact, we are controlling disease – polio, malaria, and AIDS – better than ever before, and making big new investments in women’s and children’s health – the key to progress in many other areas.
Nevertheless, on climate change, poverty, and other issues, the conventional wisdom is that the UN should cede responsibility to the G-20.
But the G-20, by itself, is not the answer.
Despite strenuous debate about currency issues and trade imbalances at its summit in Seoul in November, the sole area of agreement concerned an issue on the G-20’s agenda for the first time – economic development.
Recognizing that global recovery depends on the emerging economies – that is, the developing world – G-20 leaders embraced investments aimed at lifting the world’s most vulnerable people out of poverty.
That is why G-20 leaders accept the need to work closely with the UN – after all, no organization does development better.
The G-20 and the UN are finding new ways to work constructively together – not as rivals, but as increasingly close partners.
And that is the way it should be.
Forty years ago, a great American statesman, Dean Acheson, looked back at the excitement he felt in helping to build the post-World War II order.
“Present at the Creation,” he called his memoir.
Today, we find ourselves at an equally exciting moment, no less critical to the future of humankind.
We, too, are present at a new creation.
And the UN must constantly re-create itself as well.
We must evolve and keep pace with a rapidly changing world.
We must be faster and more flexible, efficient, transparent, and accountable.
In an age of austerity, resources are precious; we must make every dollar count.
These are testing times for everyone.
People everywhere live in growing anxiety and fear.
There is near-universal loss of trust in institutions and leaders.
Amid such uncertainty, our future depends on a UN that brings together the countries of the world not only to talk and debate, but also to agree and to act; that mobilizes civil society, business, philanthropists, and ordinary citizens to help the world’s governments solve current problems; and that delivers peace, development, human rights, and global public goods – in a word, hope – to people around the world every day.
New Economy, Same Old Realities
NEW YORK: Let me begin with a warning: avoid the hype.
In the US, anybody who was ever a VP of marketing can go to Palo Alto in Silicon Valley, stand on the corner of Sand Hill Road, and get $25 million for a website for Siamese cats.
Next week someone will start a website for Persian cats.
Meanwhile, anybody who was ever in finance can leave JP Morgan or Citibank, find three friends, one of whom took a computer programming course in college, and raise $100 million to invest in the internet.
These people sell ideas to each other.
Prices shoot up and they deem themselves brilliant.
It’s scary. Little real value is created.
Say 20 companies start sites for cats.
Each expects a 20% market share. Do the math: it won’t work.
So though I welcome the advent of venture capital for internet investments outside America, I worry.
I see the same silliness happening.
Three guys – and I won’t say who they are because I am not impressed with them – decide to start a venture fund to invest in high tech in Europe and off they go; they raise a $100 million easily.
Even people who used to invest in Russian oil and steel companies have jumped on the bandwagon.
I got a fax from one, Boris Jordan, telling me he was starting a European high-tech venture fund and would I care to work with him.
So, from a time when there was a shortage of venture capital, a shortage of interest, we are moving quickly to a point where there is too much.
What remains in short supply are people who know what they are doing.
Most internet ideas are fine as ideas, but what will make them profitable?
People who know how to run a business.
There is no magic in starting a website.
There is a lot of magic in hiring people, making sure your VP of sales gets along with your VP of marketing, making sure that what is ordered electronically is delivered physically, finding someone to answer the phones, dealing with everything that happens in a business.
The fact that sales increase 20% a month does not mean that you can grow your business 20% a month.
Beware those who say starting an internet business is easy.
I learned this lesson the old-fashioned way.
My first investment was with a guy I knew from Hungary who was going to create a joint venture to bring CompuServe into Hungary.
The guy was not the best guy in the world, but CompuServe had a good brand name.
The investment was a mistake, but I learned a lot more than I would have from a success.
The lesson? Rely on people more than on brands, especially in a specific market.
Relying on people matters because much information about the internet is lacking.
Of course, we lack the same information about our roadways: we don’t know how many roads there are; we don’t how many people travel those roads; we don’t know exactly how many cars there are, because some were thrown away or destroyed in crashes.
Yet we all understand the impact of the automobile on the economy.
Like the road network, the internet is an integrated channel, but one for communication.
It supports not just people and PC’s, but television broadcasts and radio; it supports many different formats.
Within a few years there will be more devices connected to the internet than people.
For the first 40 years we put all these computers in place and the computers knew nothing except the data fed them by humans.
Most data was financial and business information, and fairly abstract.
Now, we are connecting this virtual network to the real world.
Suddenly, you are going to find – yes! your refrigerator online.
Your luggage is going to have a little tag so you know where the airline sent it, which is different from where the airline sent you.
Your children’s school bus is going to tell you that it is coming so you can send your children out to catch it; trains will report when they’re late.
Suddenly we won’t know only about the virtual world at the push of a button; we’ll also know about the physical world at the push of a button.
That’s going to make for a huge change in how we think about our world; it’s going to make for big distinctions between the parts of the world that are wired and the parts of the world that are not.
So, my second warning: everyone must take the internet seriously.
I spent the last ten years watching huge changes sweep Eastern Europe.
Societies and economies, formerly inefficient and just plain stupid, were rationalized.
Established companies crumbled.
People with high positions found that they were worthless.
The same thing will happen everywhere because of the internet.
This change will be far more disruptive than in the US, because America was already a fluid, fairly efficient, and often overhyped economy.
Western Europe is not terribly efficient, let’s face it, with too many regulations and restrictions and different laws that are not harmonized.
Governments put out directives but the directives are implemented differently from country to country.
Pricing in Europe is considered a moral or legal issue, whereas in the US it is a practical issue: what the market will bear.
And the elite, though it welcomes the advent of high technology and supports the advent of high-tech businesses, also reminds me of what a Russian said to me back in 1990: "Our government is going to set free-market prices just like yours!"
But you cannot have an internet economy without an internet society.
That means people who talk back.
It means consumers who don’t want to be protected; who want to make their own choices.
It means the end of the ‘official story.’
Suddenly you can’t control the press: you may control how many hours of television is broadcast in a particular language, but you can’t control what people choose to see on the internet.
Established companies, established ways of doing business, established pricing structures, established channels of distribution are all under threat.
The question facing every country is this: do you want to jump over the river before the rest of the world or after.
The best and surest way to jump it is to have a clear vision of where you want to land.
New Europe’s Old Problems
The riots in Budapest, incited by leaked tapes that show Prime Minister Ferenc Gyurcsany openly admitting that his government had lied for over a year about the country’s dire finances, are but the latest evidence that things are going seriously wrong across Eastern Europe.
Last June, the Slovaks evicted the government that brought the country out of the international isolation and economic malaise that it had suffered under the autocratic regime of Vladimir Meciar.
Mikulas Dzurinda, whose reforms provided the country with growth and economic stability, was replaced by Robert Fico, a leftist who, having forged an alliance with Meciar and a neo-fascist party, has also adopted a worrisomely populist tone.
That same month, Hungary reelected Gyurcsany, who had pursued a supposedly reformist program, but also oversaw a massive accumulation of public debt.
Earlier plans to adopt the euro quickly have now been shelved, with the target date pushed back to 2011 or 2012.
But even that may be wishful thinking.
Meanwhile, financial markets fret about the country’s budget deficit and talk of a serious crisis.
Meanwhile, the Czechs managed to elect a perfectly hung parliament.
Prime Minister Mirek Topolanek is an advocate of urgently needed reforms, but he lacks a parliamentary majority and is pressing for a fresh general election in the first half of 2007.
With no means of stemming election-year fiscal expansion, the Czechs, too, have been forced to abandon their 2010 target date for euro adoption.
Then consider Poland, where the Kaczynski twins, who hold the presidency and the prime ministership, have allied themselves with populist, xenophobic, and anti-Semitic parties.
One of their priorities is to attack the central bank and slander its governor, Leszek Balcerowicz, the iconic father of Poland’s economic transformation, with accusations that echo those of the Stalinist era.
So much for the region’s “big four” countries.
But bad news is emerging from the smaller countries as well, including the Baltic states.
Across Central and Eastern Europe, the scene is almost universally depressing.
When so much goes wrong at the same time, it is tempting to look for a common cause.
One factor that is often cited is “reform fatigue.”
In barely 15 years, these countries have moved from central planning and economic backwardness to “normal” market economies with impressive GDP growth.
But rapid change is always unnerving, and not everyone has emerged better off.
Above all, uncertainty has become the norm, in contrast to the gray but predictable future offered by the old communist regimes.
Today, many people now long for that period, which they see as less driven by material values.
Communist parties, more or less reformed as socialists, appeal to a surprising number of voters.
In some countries, like Slovakia and Poland, far-right nationalist parties provide another alternative, by offering the soothing appeal of traditional values and familiar enemies.
Reform fatigue implies that Central and Eastern Europe needs a respite to catch its breath.
But another explanation of recent developments in the region begins by noting that post-communist reforms were largely dictated from outside, as a condition of admission to the European Union.
With membership achieved and EU money starting to pour in, leaders feel secure enough to let economic policy slip.
Thus, budget deficits are the rule, and where they are largest, as in the Czech Republic and Hungary, they have gained priority over euro adoption.
Indeed, only Slovenia has been admitted to join the euro area in 2007, the earliest possible date.
Estonia and Lithuania applied as well, but were refused entry.
There is some truth in both explanations of Eastern Europe’s backsliding.
But what is the phenomenon that such explanations are supposed to clarify?
There has been no general tilt to the right or left in the region.
Reforms that are attacked in one country continue to guide others.
Nevertheless, the EU’s newest members share some key features.
Most importantly, they inherited from the Soviet era bloated and inefficient public sectors, which they are finding hard to downsize and professionalize.
The private sector has been entirely rebuilt and is vibrant, but it cannot remain competitive if fiscal demands are not reduced – a familiar problem in Europe as a whole.
For now, the tension has been left unresolved, leading to high budget deficits.
But the EU’s new member countries have no access to any safety net.
They could well squander the significant transfers that they receive through the agricultural and structural funds, as many previous EU recipients did.
If they abandon macroeconomic discipline, as Hungary and possibly the Czech Republic may be doing, they alone will face the consequences.
Being outside the euro area, their currencies would fall, undermining growth in purchasing power and living standards.
As they are economically small, the rest of the EU would barely shudder.
Fortunately, the main lesson to emerge from the region’s current troubles is that economies adapt faster than polities to changing conditions.
Growth has been strong; while it could have been stronger under more favorable policies, only huge mistakes could break the rise in living standards, given the region’s productivity gains.
Western Europe went through a similar phase of economic development in the 1950’s and 1960’s; now it is Central and Eastern Europe’s turn.
Sadly, then as now, countries never seem to learn from others’ mistakes.
New Europe’s Surprising Resilience
KIEV – Two years ago, five of the ten new East European members of the European Union – the three Baltic states, Hungary, and Romania – appeared to be devastated by the global financial crisis.
Social unrest, huge devaluations, and populist protests loomed.
And then nothing.
Today, all of these countries are returning to financial health and economic growth without significant disruption.
No country has even changed its exchange-rate regime.
Old Europe should learn from New Europe’s untold success.
The cause of the East European financial crisis was a standard credit boom-and-bust cycle.
East European countries attracted large international capital flows, owing to loose global monetary policy and accommodating business conditions.
In the end, short-term bank lending became excessive and was used to finance a splurge on real-estate investment and consumption, while inflation took hold.
Moreover, current-account deficits piled up into substantial private-sector foreign debt, while public finances were in good order everywhere but Socialist-led Hungary.
This crisis of success and overheating was reminiscent of East Asia in 1997-1998.
East Asia’s nations, as well as Russia in 1998 and Argentina in 2001, exited their crises through devaluation.
A choir of prominent American economists, including Paul Krugman, Kenneth Rogoff, and Nouriel Roubini, claimed that Latvia, Estonia, and Lithuania must also devalue.
None of them did, yet they raised themselves out of the crisis.
The Baltic states had many reasons not to devalue.
Their aim is to adopt the euro as soon as possible, which devaluation would have complicated.
As their small and open economies were already heavily “euro-ized,” the pass-though of higher foreign prices into inflation would have been huge following any devaluation, which would also have broken their otherwise reasonably healthy banking systems.
Instead, the three Baltic governments opted for “internal devaluation,” reducing public-sector wages and costs.
In 2009, all three countries cut public expenditures by 8-10% of GDP, which – remarkably – was politically easier than marginal cuts.
When cuts are big, people realize how severe the crisis is, and the politically impossible becomes necessary.
Small cuts are usually delivered evenly, aggravating all public services, while deep cuts have to be selective and structural. Therefore, they may improve economic efficiency.
All the countries in crisis cut their public administration and wages.
Latvia slashed state salaries by 35% and the number of public agencies by half.
It also closed half of its excessive number of hospitals and sacked superfluous teachers, of which there was one for every six children before the crisis.
Estonia, Lithuania, Hungary, Romania, and Bulgaria have carried out similar reforms, though not quite as radical. (Lithuania, for example, pursued a higher-education reform to enhance efficiency and quality.)
And, though state revenues have fallen with recession, forcing a few countries to hike value-added taxes, none has increased income taxes, and none of the seven countries that had in place a flat-rate income tax has abandoned it.
As a result, these countries exit the crisis more productive.
Contrary to expectations – and to the Greek and French experiences – social unrest has been minimal.
Extremists on neither the right nor the left have benefited.
In the European Parliament elections in June 2009, center-right parties won a majority in all ten eastern EU countries, and center-right parties now govern in nine of them, with Slovenia the sole exception.
The liberal right has never been stronger in Eastern Europe.
The communists have been wiped out and the socialists badly weakened.
The extreme right has lost support everywhere but Hungary.
This year, responsible center-right parties have won three surprise victories – in the Czech Republic, Slovakia, and Latvia.
The new Czech foreign minister, Karel Schwarzenberg, stated: “We won by telling the truth.
Populism is no longer popular.”
Most remarkable was the victory of Latvian Prime Minister Valdis Dombrovskis on October 2.
His coalition increased its share of parliamentary seats from 45% to 63%, although GDP fell last year by a shocking 18%.
Dombrovskis blamed his irresponsible predecessors, and voters clearly saw him as the most credible problem solver.
Three countries in the region – Hungary, Latvia, and Romania – required emergency standby programs with the International Monetary Fund.
The IMF had learned from East Asia, posing fewer conditions and offering more budget financing, because the problems were temporary and not structural.
In addition, the EU provided financing, whereas the European Central Bank, which could have given swap credits, played no helpful role.
As a result of their successful crisis resolution, the EU’s East European members look better both fiscally and structurally than the old eurozone members.
Of the 12 members of the eurozone in 2001, only two (Finland and Luxembourg) have public debts of less than 60% of GDP to compare with nine of the ten new eastern members.
Only Hungary has a large public debt.
East Europeans suffered from high private-sector debt, which they largely avoided transforming into public debt.
All of this, together with post-crisis improvement in EU institutions (such as financial regulators) contributes to greater European convergence.
Whereas Eastern Europe’s economies look healthier than the eurozone countries, they are not abandoning the EU project.
On the contrary, this year Estonia qualified to enter the eurozone in January 2011.
Innovation in Development Finance
ROME – More than four decades ago, the world’s wealthiest countries pledged that at least 0.7% of their GDP would be devoted to official development assistance (ODA).
But fewer than a half-dozen countries have actually met this goal.
In fact, ODA disbursements have not been stable, reliable, or reflective of need, and doubts about their effectiveness linger.
ODA declined significantly after the Cold War, dropping to 0.22% of developed countries’ combined GDP in 1997-2001, before rising again after the September 11, 2001, terrorist attacks in the United States and the International Conference on Financing for Development in Monterrey, Mexico, the following year.
Then, as developed-country governments imposed strict fiscal austerity in the wake of the global economic crisis, ODA fell again, to 0.31% of GDP in 2010-2011.
But, since the Monterrey conference, major additional development-finance needs have been identified, including aid-for-trade schemes and financing for climate-change mitigation and adaptation.
And, while the Leading Group on Innovative Financing for Development – which includes 63 governments, as well as international organizations and civil-society groups – has contributed to significant progress in the last decade, the definition of innovative development finance remains in dispute.
Indeed, critics contend that the international taxes – for example, on carbon emissions – that the Leading Group has identified as a potential source of finance infringe on national sovereignty.
Moreover, the sources of finance do not necessarily determine how the funds are allocated, let alone how they are ultimately used.
For example, although the so-called Tobin tax (a small levy on financial transactions) was originally intended to fund development assistance, a version of it was recently adopted in Europe in order to supplement national budget revenues.
Of course, such “off-label” uses of innovations in development finance do not discredit them.
The UN’s 2012 World Economic and Social Survey on new development finance discusses various existing and proposed innovations in financing, intermediation, and disbursement.
Aside from allocating and trading greenhouse-gas (mainly carbon or “carbon equivalent”) emissions allowances, “solidarity levies” could be imposed on airplane tickets, and taxes imposed on aviation or ship fuel.
Another proposal involves creating new international liquidity by issuing special drawing rights (international reserve assets maintained by the International Monetary Fund).
The resulting funds, as well as those from existing unused SDRs, would be allocated or re-allocated to development projects and leveraged to augment investment resources.
Yet another scheme would deploy royalties for natural-resource extraction from the global commons, such as Antarctica and other areas beyond “exclusive [national] economic zones.”
Some initiatives are already underway.
For example, the project (RED) is a corporate campaign that aims to raise money for The Global Fund to Fight AIDS, Tuberculosis, and Malaria by donating a portion of proceeds from consumer products branded with the cause.
While some are critical of the disparity between what these “altruistic” companies spend on advertising and the amount of money that they actually raise, such “cause marketing” could prove to be an effective mechanism for generating additional development finance.
Furthermore, some proposals entail no additional funds.
Development-finance flows could be restructured, so that they are channeled through mechanisms like the International Finance Facility for Immunization, which binds ODA commitments over a long period and securitizes them in order to generate funds for immediate use.
Similarly, debt-conversion schemes such as Debt2Health and debt-for-nature swaps would allow countries to redirect debt-service payments to development projects.
Some worthwhile new risk-management proposals include advance commitments for new vaccines, subsidies to drug manufacturers to make their products more affordable, and regionally pooled catastrophe insurance.
Over the last six years, roughly $6 billion has been allotted to innovative sources of financing, compared to current annual ODA of more than $120 billion – and far less than the almost $20 trillion committed by G-20 countries to economic recovery (including bailouts) since 2008.
But some recent proposals promise to raise far more resources for sustainable development.
An internationally coordinated carbon tax could raise $250 billion annually, while a small financial-transaction tax could raise another $40 billion.
Likewise, regular SDR emissions to keep pace with the growth of global liquidity could yield roughly $100 billion annually for international development cooperation.
Such emissions would reduce demand for US Treasury bonds and other liquid assets of preferred currencies.
At the same time, if the world’s most powerful countries stopped promoting full capital-account liberalization, developing countries would feel less pressure to protect themselves by accumulating foreign-exchange reserves.
By investing the funds in development projects instead, they could address both savings and foreign-exchange constraints.
Finally, innovative strategies are needed to align development finance with national development goals, transforming the multilateral system operationally so that it works more effectively with stakeholders on the ground.
One model is the Montreal Protocol on Substances that Deplete the Ozone Layer, which has succeeded spectacularly in reducing levels of chlorofluorocarbons, highlighting the continued potential of inclusive multilateralism.
New-Model Development Finance
WASHINGTON, DC – China’s success in establishing the Asian Infrastructure Investment Bank has been widely regarded as a diplomatic fiasco for the United States.
After discouraging all US allies from joining the AIIB, President Barack Obama’s administration watched as Great Britain led a raft of Western European countries, followed by Australia and South Korea, into doing just that.
Worse, the Obama administration found itself in the position of trying to block Chinese efforts to create a regional financial institution after the US itself was unable to deliver on promises to give China and other major emerging economies a greater say in the governance of the International Monetary Fund.
The administration had pushed European countries to accept less representation on the IMF Board and increase China’s voting share from 3.65% to 6.07%, only to prove unable to win the support of the US Congress.
Once again, Obama found himself stymied abroad because of political paralysis at home.
From a geopolitical perspective, China’s AIIB initiative is a bold and successful gambit in what Ely Ratner, a senior fellow at the Center for a New American Security, describes as “an institutional competition for global governance that has now officially begun.”
China will control a majority of the voting shares in the AIIB, initially capitalized at $100 billion.
Unless the Western victors of World War II can update the rules and institutions that underpinned the post-war international order, they will find themselves in a world with multiple competing regional orders and even dueling multilateral institutions.
From the point of view of developing countries in need of capital, competing banks probably look like a good thing.
Developing-country governments will be only too pleased to borrow without the pesky conditions that the World Bank and existing regional development banks typically attach to their loans.
And, as a region, East Asia will now get more of the roughly $8 trillion that the Asian Development Bank has estimated that the region will need to keep growing through 2020.
But what about the impact on actual development, the likelihood that individual citizens of poor countries will live richer, healthier, more educated lives?
World Bank conditionality often includes provisions on human rights and environmental protections that make it more difficult for governments bent on growth at any cost to run roughshod over their people.
Competition is good, but unregulated competition typically ends up in a race to the bottom.
China’s establishment of the AIIB is the latest sign of a broader move away from the view that aid to developing countries is best provided in the form of massive government-to-government transfers.
Power and wealth are not only diffusing across the international system, but also within states, such that corporations, foundations, wealthy individuals, private investment funds, civil-society groups, and most recently, municipal governments all have a role to play in development.
Consider the second Quadrennial Diplomacy and Development Review, released last month by the State Department and the US Agency for International Development.
The QDDR emphasizes a “new model of development,” one based on the recognition “that the United States is one of many actors, and that countries require investments from multiple sources to achieve sustained and inclusive economic growth.”
Initiatives such as Feed the Future, the US Global Development Lab, and Power Africa combine “local ownership, private investment, innovation, multi-stakeholder partnerships, and mutual accountability.”
This new model moves beyond the mantra of “public-private partnership.”
It genuinely leverages multiple sources of money and expertise in broad coalitions pursuing the same big goal.
Power Africa, for example, includes six US government agencies: the Overseas Private Investment Corporation, the US Export-Import Bank, the US Trade and Development Corporation, the Millennium Challenge Corporation, and the US African Development Foundation.
Together, they will commit more than $7 billion over five years in financing, trade credits, insurance, small business grants, and direct government support to the energy sector in six partner countries.
Those investments will leverage billions in private-sector commitments, starting with more than $9 billion from a range of companies, including General Electric.
Power Africa takes a “transaction-centered approach,” creating teams to align incentives among “host governments, the private sector, and donors.”
Unlike big government-to-government transfers, which can often end up in the pockets of officials, the point is to ensure that deals actually get done and investments flow to their intended destination.
This pragmatic focus on results is equally evident in the QDDR’s emphasis on working with mayors around the world on issues like climate change.
Targeting government officials with the incentives and ability to make a difference in regulating emissions on the ground yields results much more quickly than negotiations on an international treaty.
Skeptics will say that the US is simply making a virtue of necessity.
The federal government no longer has billions of dollars to dole out to foreign governments, while China is far more centralized and less beholden to its taxpayers.
China and its partners in the AIIB can thus build the big things – roads, bridges, dams, railroads and ports – that unquestionably power an economy and that citizens notice, but that the US, and for that matter the World Bank, no longer funds.
The days of the Marshall Plan are long gone.
That criticism contains some truth.
But, over the longer term, the new US model of development is actually far more resilient and sustainable than the old government-to-government model.
Only societies with thriving sectors free of government control can participate in these broad coalitions of public, private, and civic actors.
Corporations, foundations, and civil-society groups, in turn, are much more likely to forge lasting ties with their counterparts in local communities in the host countries – relationships that will survive changes of government and fiscal turbulence.
Overall, the AIIB is a positive development.
More money aimed at helping poor countries become middle-income countries and at middle-income countries to help them provide transport, energy, and communication for their people is a good thing.
New Hope on Climate Change
The world has taken an important step toward controlling climate change by agreeing to the Bali Action Plan at the global negotiations in Indonesia earlier this month.
The plan may not look like much, since it basically committed the world to more talking rather than specific actions, but I am optimistic for three reasons.
First, the world was sufficiently united that it forced the United States to end its intransigence.
Second, the road map marks a sensible balance of considerations.
And, third, realistic solutions are possible, which will allow the world to combine economic development and control of greenhouse gases.
The first step at Bali was to break the deadlock that has crippled the global response to climate change since the signing of the Kyoto Protocol a decade ago.
This time the world united, even booing the US lead negotiator until she reversed position and agreed to sign the Bali Action Plan.
Likewise, the unwillingness of major developing countries such as China and India to sign on to a plan also seems to be ending, though considerable work remains to craft a global agreement to which both rich and poor countries can agree.
Doing so requires balancing many concerns.
First, we must stabilize greenhouse gases in order to avoid dangerous human interference in the climate system – the key goal of the 1992 United Nations Framework Convention on Climate Change, the global treaty under which the Bali negotiations took place.
Second, we must accomplish this while leaving room for continued rapid economic development and poverty reduction.
Poor countries do not and will not accept a system of climate control that condemns them to continued poverty.
Third, we must help countries adapt to the climate change that is already occurring and that will intensify in the future.
The Bali Action Plan addresses all three concerns.
The plan’s main point is to establish an Ad Hoc Working Group to reach a detailed global agreement by 2009 that will set “measurable, reportable, and verifiable” commitments to reduce greenhouse-gas emissions.
Such commitments are to be taken in the context of “sustainable development,” meaning that “economic and social development and poverty reduction are global priorities.”
The plan also calls for knowledge transfer to enable poor countries to adopt environmentally sound technologies.
The great question, of course, is whether stabilization of greenhouse gases, continued economic development, and adaptation to climate change can be achieved simultaneously.
Using our current technologies, no; but if we develop and rapidly adopt new technologies that are within our scientific reach, yes.
The most important challenge is to reduce, and eventually nearly eliminate, carbon dioxide emissions from burning fossil fuels such as oil, natural gas, and coal.
These fuels are at the core of the modern world economy, supplying around four-fifths of the world’s commercial energy.
Such emissions can be eliminated by either shifting to renewable forms of energy or reducing the emissions from fossil fuels.
The key insight is that roughly 75% of our fossil fuel use goes for just a few purposes: to produce electricity and heat at power plants, to drive automobiles, to heat buildings, and to power a few key industries such as refineries, petrochemicals, cement, and steel.
We need new environmentally sound technologies in each of these sectors.
For example, power plants can adopt solar energy or capture and safely dispose of the carbon dioxide they produce with fossil fuels – as can large factories.
Automobiles can be engineered for much greater mileage through hybrid technology combining battery power and gasoline.
Buildings can reduce their heating needs through improved insulation, or by converting from heating oil to electricity produced by clean technology.
According to the best economic and engineering estimates, if each key economic sector develops and adopts environmentally sound technologies in the coming decades, the world will be able to reduce carbon emissions dramatically for less than 1% of annual global income, thereby avoiding long-term damage that would cost far more.
In other words, the world can combine economic growth with declining emissions of carbon dioxide.
And rich countries will be able to afford to help poor countries pay for the new, cleaner technologies.
To reach agreement by 2009, we must move beyond current generalities by which rich and poor countries argue about who should be blamed for climate change and who should pay the costs.
We will need a true global business plan that spells out how the new technologies are developed, tested, and adopted on an expedited basis worldwide.
We must ensure that all countries adopt a verifiable strategy for environmentally sound technology, and that rich countries fulfill the Bali Action Plan’s promise to provide “financial and other incentives” to enable poor countries to adopt the new technologies.
With so many crises afflicting our world, there is perhaps cynicism that yet another global conference did little more than promise to continue talking.
But let’s see the positive message instead: 190 countries agreed on a sensible plan, and the underlying science and technology gives us realistic hopes for achieving it.
There is considerable and difficult work ahead, but the situation is better as a result of the deliberations in Bali.
Now it’s time to role up our sleeves and achieve what we’ve promised.
New Model China
China's leaders are gathered for their annual retreat at the seaside resort of Beidaihe.
They, and the world at large, are focusing on the succession to President Jiang Zemin and Premier Zhu Rongji.
What sort of China will Jiang's successors inherit?
Kenichi Ohmae offers his analysis.
Over the coming decades, China will become a thoroughly new form of political and economic entity.
Brutally competitive in both politics and world markets, innovative and resilient, China will be more dominant than any nation save America.
Such a shift in the global balance of power occurs only about once every century and is comparable to the emergence of the US as a world power a century ago.
The magnitude of this change is due, in part, to a radical and rapid shift in China's governance.
Because of its suddenness, it is tempting to write this shift off as a fluke. But China's restructuring is permanent and will affect every aspect of its national life, as well as its global standing.
The People's Republic now embodies two systems: the centralized, autocratic Communist administration, dominated by an outdated ideology and military interests, and the decentralized free-market economic regime.
Whether deliberately or not, China is reorganizing itself to balance central authority and common purpose with decentralized freedom, in the same way that nimble companies balance home-office and divisional control.
The result is an entirely new geopolitical model--the country as corporation.
Call the new China "Chung-hua, Inc." ( Chunghua translates as "China" and actually means "the prosperous center of the universe.")
Like many corporations, China is moving most decisionmaking to the "business unit" level--semi-autonomous, self-governing economic region-states that compete fiercely against each other for capital, technology, and human resources (just as America's states do).
This new, decentralized free-market regime currently encompasses only a small part of China's vast territory, and many Chinese officials still refuse to acknowledge its existence.
Indeed, only seven years ago, the word federation was banned from the Chinese language; companies like Federal Transport or Federation Merchants were required to change their names.
Today, China has the most federal governance structure of any large nation except the US.
Two broad categories of region-states exist.
The first are relatively small, composed of cities and their surrounding areas, generally with a population of 5-7 million people.
Some of these--Shenzhen, Shanghai, Dalian, Tianjin, Shenyang, Xiamen, Qingdao, and Suzhou--are now growing economically at a rate of 15-20% per year--faster than such Asian "tigers" as Malaysia, Taiwan, Thailand, and Korea ever did.
These smaller region-states, in turn, are propelling the growth of larger mega-regions, with populations approaching 100 million each.
The mega-regions, which tend to share common dialects, ethnic identities, and histories, are becoming economic powerhouses in their own right.
If they were separate nations, five of them--the Yangtze Delta, the Northeastern Tristates area (formerly known as Manchuria), the Pearl River Delta, the Beijing-Tianjin corridor, and Shandong--would rank among Asia's ten largest economies.
Regional governments have also been toughened up by the Chung-hua , Inc. ethic.
Most officials are appointed, not elected, but their posts are not sinecures.
Not only are they held to targets of 7% annual economic growth or better (like many corporate executives), they must also improve environmental quality, build better infrastructure, and reduce local crime levels.
In October 2001, a half-dozen bureaucrats were expelled from one of China's major cities for not meeting their economic growth and security targets.
Local officials are often considered heroes, not oppressors.
In January 2001, Bo Xhi Lai, then mayor of Dalian, was promoted to governor of Liaoning province.
Thousands of women, many in tears, spontaneously came to a park to bid him farewell.
During his nine-year tenure, Dalian evolved from a ramshackle port into one of the cleanest and most prosperous cities in Asia.
It now has a street life more vibrant than Singapore, a layout reminiscent of Paris before the automobile, and a reputation among Japanese tourists for high-quality hotels, transportation, and restaurants.
All of this is taking place in a nation where Communist ideology remains strong and that remains in many respects a military dictatorship which threatens to conquer Taiwan by force, as well as uses North Korea, Pakistan, and Libya as stalking horses for weapons development.
Introduction of foreign companies, technologies, and unfettered mobility for corporations and people would all be viewed as a threat to the Communist system if it were publicly acknowledged.
Instead, China's highest officials publicly insist that they run the most centrally controlled government in the world, with full authority to appoint or dismiss mayors, governments, and bureaucrats.
Strictly speaking, they are right.
But they dare not overrun the open, commercial ethic of China's region-states--the source of their country's prosperity.
So debates about China should not be cast as a simple matter of right or wrong, but of when and how.
Politically, China is comparable to the US in 1800: an emerging nation with high ideals but widespread poverty and many practices that others find intolerable.
A decade or two of economic freedom and growth will give China's people an appetite for self-determination and participation that may surprise the rest of us.
Already, some village leaders are elected; this may slowly spread to regional officials, and then upward to the central government.
Even top communists appear to acknowledge and embrace change.
Recently, China's head of state, Jiang Zemin, said that the Communist Party "represents" every good aspect of China, including wealthy capitalists, not just the poor, the exploited, and the proletariat.
We should not be surprised if soon--perhaps at the Party's 2002 General Assembly--China's leaders formally call for a new doctrine to match its new model.
The Curing Machine
VIRGINIA BEACH – Last year, the Nobel Prize in Medicine was awarded for a discovery that took 44 years to develop, and involved two different research teams.
The breakthrough promises new kinds of diagnosis and therapy, but what if such insights could be developed by computers in minutes, rather than decades?
The recent appearance of a new coronavirus, which has killed nine people in the United Kingdom and the Middle East, is a reminder that novel treatments are sometimes needed in a hurry.
With different modeling abstractions, it might be possible to build an artificial-intelligence system (AI) that could design new treatments.
That system would suggest surprising, effective therapies, because it would understand disease in ways that are difficult for humans to imagine.
The notion seems like science fiction: everyone knows that AI is not particularly clever.
In order to build a “curing machine” of this kind, at least one far-reaching innovation is needed: a better way of modeling entire systems, which would deliver new conceptual tools to both biology and computer science.
In both fields, the conventional approach has been reductionist, with problems modeled at the level of their most basic components.
While this makes it possible to build “expert systems” that reason in narrow domains, or to design search engines that can find discrete facts, we are no closer to AI that reasons the way that we do – in and across multiple contexts, including time.
AI cannot integrate information about seemingly distinct processes, such as chemical, physiological, and psychological events, or anticipate novel outcomes.
We do these things over dinner.
Novelty is key.
To build a curing machine, we would need a way for computers to assemble concepts so that unexpected arrangements could emerge.
In biology, there has been a similar reductionist approach, best exemplified by the Human Genome Project, which catalogued the molecular “recipe” for every aspect of the body, in order to discover how the most basic pieces interacted.
Alas, the expected revolution in therapies is yet to occur.
Worldwide, total annual investment in biomedical research is about $110 billion.
HIV alone attracts many billions per year.
Yet, despite 25 years of intense investment in structural biology, we remain unable to move from understanding molecules to an understanding of whole systems.
A model of the dynamics between multiple processes – chemical, physiological, and psychological – would lend new insight into how diseases operate.
Consider, for example, the sense of smell.
The nasal cavity is unique, as the only place where brain cells (neurons) are directly exposed to the environment.
If we model smell on local terms, we can trace how nasal neurons interact with scent particles, sending signals through a network of other neurons to the brain.
We have good abstractions in structural biology to describe this.
But these neurons are also part of an adaptive, regenerative system.
Sensory neurons die a programmed death; you literally have a new sense of smell every month.
Modeling it requires the consideration of more than just local signaling.
Neurons operate as a cooperative group: more arrive at the location than are needed for a simple replacement.
In order to facilitate the replacement, the extras become part of a dialog with surrounding cells, and others deep in the brain, then sacrifice themselves.
To explain why they voluntarily die, we would need a new system-level vocabulary.
It does not stop there.
When your neurons are replaced, they change.
If you are newly in love (or experience a trauma) and a scent is associated with it, you may develop a heightened sensitivity to that scent.
Your physio-cognitive apparatus evolves.
This process interests researchers enormously, because it is one of only two contexts in which neural regeneration occurs.
If it were understood, it could lead to cures for many crippling diseases, both neurological (like Parkinson’s and Alzheimer’s) and degenerative (including those, like cancer, associated with aging).
One way to understand how this higher-level coherence emerges is to study it in a more accessible form.
As it happens, there is a naturally occurring information structure in which the needed behaviors are easier to observe and explain.
That structure can be found in stories.
Stories are remarkable for the way that they allow us to comprehend new concepts, and continue to make sense of them, even when they involve numerous contexts and unexpected associations.
We take the resulting narrative effects for granted: surprise endings, intriguing situations, and a compulsion to read or watch until the finish.
If models of biology and AI included these dynamics, they would demonstrate how unexpected elements can emerge from an evolving coherence.
Indeed, incorporating this principle into both fields could result in new diagnostic capabilities and new forms of individualized treatment, with a different therapy designed for each person.
An infection such as the coronavirus is currently countered with a vaccine tailored to block it.
But what if there was a way to “tune” bodies to reject all infections?
For example, there are a few cases of natural immunity to HIV, but we are unable to understand why.
The challenge in biomedical and computational research is to model the dynamics between diverse processes at the level of whole systems.
Once we can do this, we are much more likely to develop AI tools that are capable of unexpected breakthroughs in understanding how the body supports and resists illness.
New Policy Paradigms for a New World
WASHINGTON, DC – Over the last quarter-century, the global economy enjoyed a remarkable stretch of stable growth and low inflation.
The so-called “Great Moderation” lulled many policymakers into a false sense of security about their ability to manage the economy and deal with financial crises.
But, as the Great Moderation metastasized into the Great Recession, fatal flaws in conventional thinking came to light.
One of the most notable was just how poorly we grasped the linkages between the financial system and the broader economy – as well as the linkages between countries.
Today, as policymakers seek new paradigms for managing the economy in 2011 and beyond, a better understanding of these linkages will be essential to promoting economic growth and reducing the risk of crises.
Equally important is the realization that by working together, we can build a more successful and more stable global economy, for the benefit of all countries.
Let me spell out what this means for three policy objectives: building a stronger and safer financial sector, achieving more balanced and more stable growth, and managing large and volatile capital flows.
A stronger and safer financial system is the bedrock of a successful economy.
This requires strong regulation, with a sensible rulebook for financial markets and institutions.
And, to ensure that everyone plays by the rules, financial institutions must be supervised intensively.
Now, even with the best rules and supervision, crises will still occur – which is why we need effective resolution mechanisms to deal with institutions that get into trouble.
And, finally, given powerful interactions within the financial sector and across the broader economy, we need an overarching framework to manage risks in the financial system as a whole.
Much has already been done to advance regulatory reform, notably the recent agreement to strengthen bank capital (Basel III).
Yet we are far from having the supervision needed for proper implementation of the rules.
Effective resolution mechanisms and systemic frameworks remain even more elusive.
Moving to the broader economy, we have learned that growth must be balanced in order to be healthy.
At the national level, this requires tools to prevent excesses in one sector from bringing down the entire economy.
At the global level, it requires a better distribution of growth across countries, in order to prevent destabilizing imbalances.
What are the implications for macroeconomic policy?
Monetary policy needs to look beyond its core focus on low and stable inflation and pay much greater attention to financial stability.
The debate now is how, exactly, to factor this imperative into monetary policy, and how to coordinate the work of monetary and regulatory authorities.
For fiscal policy, the crisis showed the value of maintaining low public debt and deficits during good times: countries with healthier public finances have more space to cushion the economic impact of crises.
But the Great Recession has caused public debt and deficits in many advanced economies to soar.
How quickly fiscal retrenchment should be launched – and the right balance between higher taxes and lower spending – will vary by country, reflecting factors like the strength of the economic recovery, the market’s appetite for debt, and initial spending and revenue ratios.
But the common objective for fiscal policy must be to support durable medium-term growth and job creation.
The distribution of income is another important issue.
In the years leading up to the crisis, inequality rose in many countries, with worrisome consequences for social cohesion.
Rising inequality may also have increased vulnerability to crisis: with fewer people able to dip into savings during bad times, the impact on growth is even larger.
Turning to the international dimension, understanding better how policies adopted in one country spill over onto other economies is key.
This approach lies at the heart of the G-20’s efforts to achieve strong, stable, and balanced global growth.
The International Monetary Fund is also stepping up its work in this area, through “spillover reports” on China, the euro zone, Japan, the United Kingdom, and the United States.
Gaining a better appreciation of the financial linkages between countries is also important.
During the crisis, we saw how quickly capital fled from countries previously considered safe bets.
Today, many of these countries are reeling from a veritable tsunami of returning money.
Policymakers in many emerging-market countries worry that surging capital inflows will drive up the value of the local currency, destabilize financial markets, and fuel economic overheating.
Their reactions range from buying up the foreign money to prevent currency appreciation to adopting capital controls, and, in extreme cases, to keeping the money out altogether.
The situation has become quite tense, with talk of “currency wars” and a real risk of financial protectionism.
Clearly, we need to get a better handle on what is driving these capital inflows.
We also need to identify the best policies for dealing with them – keeping in mind the impact of these policies on the global economy as a whole.
And we should explore whether a system of global rules aimed at reducing the volatility of capital flows would be useful.
Global financial insurance is an important related issue.
Just as a family backstops its savings with insurance, countries should be able to tap into a global financial safety net.
Much has already been achieved since the crisis, through more resources for the IMF and new financing instruments.
But more is needed, and the Fund is exploring cooperation with regional financing mechanisms, as well as new ways to use its instruments in a systemic crisis.
Let me tie all of this together.
One principal policy failure in the run-up to the crisis was a lack of imagination: we failed to appreciate just how intricate the global economic and financial web had become.
Let our next failing not be the result of a lack of cooperation.
We must reach across old dividing lines – both within economies and between them – and work together to build a stronger, more resilient global economy.
New Refugee Homelands
WASHINGTON, DC – Countries across Europe and states across the United States are debating the danger of admitting more refugees from Syria or, indeed, any majority Muslim country where Al Qaeda or Islamic State (ISIS) members or sympathizers could slip in with their families.
This debate misses the point in two important ways.
First, no evidence yet exists that any of the Paris attackers actually came from Syria as refugees.
The Syrian passport found near the body of one attacker appears to have been stolen.
The attackers that the police have identified grew up in Belgium or France.
They are radicalized citizens, not fleeing foreigners.
Second, the world now has 60 million refugees.
That is a number roughly the size of six Belgiums, Hungarys, or Swedens.
If they were to create their own country, it would be the size of France.
In the face of such staggering numbers, commitments to take thousands or even tens of thousands of people will do almost nothing to alleviate the misery of millions.
Rather than conflating the issues of refugees and terrorism, politicians and policymakers should be addressing each separately.
On the question of refugees, Western countries should take in as many as their populations can assimilate, demonstrating a willingness to make good on the universal values they profess for both moral and political reasons.
But the world also needs far bolder solutions than twentieth-century approaches like limited asylum quotas and “temporary” refugee camps.
In particular, it is time to embrace the prospect not of camps but of cities – places where up to a million refugees of any particular nationality can live safely and learn how to build a better future.
The National Democratic Institute has begun to reimagine refugee camps and camps for internally displaced persons as places where citizens can “find their voice” as voters and participants in democratic processes.
Rather than remaining concentrations of desperate, dispossessed, and vulnerable people waiting for a day of return that may never come, refugee settlements should be fundamentally reconceived – as hubs of education, enterprise, and equal rights that can anchor networks of relatives and friends that extend back home and around the world.
Individuals seeking refuge from a toxic and deadly environment could be welcomed not into camps, but rather proto-cities where the “global community,” represented by international institutions, NGOs, governments, and citizens, can encourage hope of a different, more secure life by nurturing positive seeds of knowledge, capital, and liberal self-government.
Impossible?
The Egyptian billionaire Naguib Sawaris is currently negotiating with the owners of two Greek islands a plan to resettle hundreds of thousands of refugees and put them to work building homes and infrastructure.
If multi-millionaires already can buy an island as a vacation destination – through, for example, the website Private Islands Online – why not buy them as a destination for hundreds of thousands of displaced people who could then build the infrastructure necessary for a new life?
And why shouldn’t international organizations do the same?
Alternatively, neighboring countries could take the opportunity, with enough international assistance, to build cities that would be valuable centers of commerce and education for their own people.
After all, China is pursuing precisely this strategy, building cities for millions of people to create nodes of economic and social activity across the countryside.
This approach would enable all countries to be better prepared for and resilient to the continuing flows of millions of miserable and ultimately angry people.
Today’s refugee camps are often breeding grounds for terrorism, revenge fantasies, and armed insurgency.
By contrast, cities of stateless people under the protection of international organizations could provide their citizens with the tools for a better life.
At the same time, we know far more about the radicalized Western citizens fighting for ISIS than most media reports suggest.
New America, the think tank I head, has compiled a database on 466 individuals from 25 Western countries who have left their homes to go to Syria.
Last week, researchers Peter Bergen, Courtney Schuster, and David Sterman released ISIS In The West: The New Faces of Extremism, in which a distinct profile of many of these individuals emerges.
Perhaps most important, the majority are linked by family ties to other jihadists.
Recent reports on Brussels’ Molenbeek municipality as a major incubator of ISIS and Al Qaeda supporters suggest that family and community ties are both important.
“Hotspot mosques” have long been in the sights of counter-terrorist researchers and police task forces.
Charting these families, mosques, and suburbs reveals networks that look just like disease maps, tracking the spread of a microbe as it travels along routes where it can infect others.
Applying epidemiological techniques to finding, isolating, and disrupting the transmission of violence and the radical ideologies that breed it has already proved successful in the US context.
For example, the organization Cure Violence works with urban gangs and treats violence “like an epidemic,” preventing it by “stopping it at its source.”
The ideological source of jihadist terrorism may ultimately be in Syria, Iraq, Afghanistan, or Mali, but the source of foot soldiers in the West is communities containing radically alienated youth.
Frightened populations can all too easily summon images of radical refugees slipping across borders intent on wreaking mayhem.
The realities for both refugees and terrorists are considerably more complicated.
Fortunately, taking the time to study the facts in both cases can yield promising new paths to longer-term solutions that balance security and humanity.
New Rules for Finance At Last
PARIS – The World Monetary and Economic Conference took place in London 76 years ago, in June 1933, with 66 countries meeting to put an end to the unfolding monetary disorder and trade wars while trying to draw the lessons of the Great Depression.
When it was over, the negotiators admitted failure.
On April 2, 2009, world leaders will head to London again to find a solution to a financial and economic crisis as dire as that of 1929.
We cannot let history repeat itself.
If collective inaction prevails, we risk a return to the political and economic woes of the 1930’s, which paved the way to a devastating world conflict.
Of course, we must respond to both the weakening economy and financial instability in a virtual state of emergency.
This is why stimulus packages and financial rescue plans were for the first time adopted concomitantly in Europe, the United States, and some large Asian countries.
At the G-20 finance ministers meeting on March 14, all of our countries did their best and made massive efforts to repair their economic machinery as fast as possible.
The policies chosen are different, but all states favor solutions that seem most appropriate to them.
All are daring and realistic regarding the tasks that await us.
Like its partners, France has launched significant stimulus measures, with a plan announced by President Nicolas Sarkozy last December, as well as public investments and early repayment of government debt.
If we also take into account the strengthening of social services and legal policies launched last month, France’s stimulus in 2009 totals more than 2% of its GDP, with committed future outflows equaling the US.
Moreover, the impact of automatic stabilizers – which enable the government to mobilize more or less fiscal resources, depending on economic conditions – is more powerful in Western Europe than in most of the Anglo-Saxon countries.
Yet America’s macroeconomic situation seems worse than Europe’s in terms of consumption, banking, or employment and housing markets.
But, as both Sarkozy and US President Barack Obama have insisted, we must go further.
Economic stimulus will work efficiently only if confidence is restored.
And confidence can be restored only if the financial system is fully overhauled.
We obviously need to strike at the root of the problem, which requires us to redefine the basic principles of the system.
It would be counterproductive to focus on treating the symptoms, only to realize later that the unprecedented budgets for structural policies are neither economically efficient nor politically acceptable.
At the Washington Summit last November, the EU suggested a basic principle: all markets, all territories, and all actors putting the global financial system at risk should be monitored.
This principle, to which all agreed, must be enforced even if it upsets old habits and comfortable incomes.
I am especially convinced that we must closely monitor actors in financial markets such as hedge funds.
Although hedge funds sometimes account for 50% of market transactions, they are not registered or subject to rules on transparency.
This is not sustainable.
Fighting for transparency also implies confronting states that refuse to collaborate on financial issues at a global level or to combat money laundering or prevent financial risks.
We cannot build a safer system if we do not raise global requirements and if we tolerate non-compliance with the rules.
Together with Germany, France intends to draw up a list of uncooperative countries and to design a tool kit of appropriate sanctions.
New auditing standards must reflect an overhauled financial architecture that focuses on transparency.
The aim of such standards must be to attenuate the impact of financial failure, not amplify it, as has occurred in the crisis.
Indeed, the rating agencies, whose malfunctions contributed to the crisis, must be regulated.
We demand an easy policy: stricter rules (especially when fighting conflicts of interest), a specific rating scale for complex products, and regular publication of their returns.
Europe followed this path when preparing, under the recent French presidency, a European regulation that will soon be adopted.
We expect all of our partners to do the same.
Responsibility must be put back at the heart of a system that has sunk into excess.
The methods used to pay market operators reflected our collective mistakes.
We yielded to short-term incentives, and everything seemed to conspire to push us to accepting excessive risks.
We must revise compensation schemes and delay bonus payments until the long-term profitability of a firm’s investments is known.
Finally, we must express our solidarity for emerging and poor countries.
Weakened by this crisis, they are the first to suffer from the cuts in financial flows.
The international financial institutions must support them massively, and also have the resources needed to foresee global unbalances and prevent crises, rather than respond only when events become urgent.
France and its European partners, in particular Germany, with which we worked in tight collaboration, will suggest all these points to the G-20.
Indeed, just as a national fiscal stimulus is less efficient than a coordinated effort, strengthening financial regulations without combating the laxity that prevails elsewhere makes no sense in a globalized world.
We should not delude ourselves; we cannot solve all the problems of this crisis in the coming days.
We must, however, reach several objectives and give clear signs of a true collective ambition.
History has shown how risky it is to miss some opportunities.
On April 2, France and Europe will be present.
New Rules for Hot Money
NEW YORK – Capital flows to emerging-market economies have been on a boom-bust merry-go-round for decades.
In the past year, the world has seen another boom, with a tsunami of capital, portfolio equity, and fixed-income investments surging into emerging-market countries perceived as having strong macroeconomic, policy, and financial fundamentals.
Such inflows are driven in part by short-term cyclical factors (interest-rate differentials and a wall of liquidity chasing higher-yielding assets as zero policy rates and more quantitative easing reduce opportunities in the sluggish advanced economies).
But longer-term secular factors also play a role.
These include emerging markets’ long-term growth differentials relative to advanced economies; investors’ greater willingness to diversify beyond their home markets; and the expectation of long-term nominal and real appreciation of emerging-market currencies.
Given all this, the most critical policy question in emerging markets today is how to respond to inflows that will inevitably drive up their exchange rates and threaten export-led growth.
The first option is to do nothing and allow the currency to appreciate.
This may be the right response if the inflows and upward pressure on the exchange rate are driven by fundamental factors (a current-account surplus, an undervalued currency, a large and persistent growth differential).
But, in many cases, inflows are driven by short-term factors, fads, and irrational exuberance, which can lead to an overvalued currency, the crowding out of non-traditional export sectors or import-competing sectors, a loss of competitiveness, and eventually a large current-account deficit and thus tighter external constraints on growth.
This problem is exacerbated by the fact that the world’s biggest exporter, China, is aggressively intervening to minimize any appreciation of the renminbi.
If China doesn’t allow the renminbi to strengthen, other emerging markets will remain wary of letting their currencies appreciate too much and lose competitiveness.
If allowing a currency to appreciate freely is costly, the second option is unsterilized foreign-exchange intervention.
This is effective in stemming upward exchange-rate pressure, but it feeds the beast: it exacerbates overheating in already fast-growing emerging markets, causing inflation and leading to excessive credit growth, which can fuel dangerous asset bubbles.
The third option is sterilized intervention.
This prevents monetary and credit growth, but, by keeping interest-rate differentials high, sterilized intervention feeds carry-trade inflows, thus contributing to the problem that it was supposed to solve.
The fourth option is to impose capital controls on inflows (or liberalize controls on outflows). Leaving aside the issue of whether or not such controls are “leaky,” evidence suggests that controls on inflows of short-term “hot money” do not affect the overall amount of capital inflows.
Thus, such controls are ineffective in reducing short-term cyclical pressure on the currency to appreciate.
The fifth option is to tighten fiscal policy and reduce budget deficits with the aim of lowering the high interest rates that drive the inflows.
But sounder fiscal policy might lead to even higher inflows as the country’s external balance and sovereign-risk outlook improve.
A sixth option – especially where a country has carried out partially sterilized intervention to prevent excessive currency appreciation – is to reduce the risk of credit and asset bubbles by imposing prudential supervision of the financial system.
This should be aimed at restraining excessive credit growth, which the monetary growth that follows currency intervention would otherwise cause.
However, direct controls on credit growth, while necessary, are often leaky and not very binding in practice.
The final option is massive, large-scale, and permanent sterilized intervention – or, equivalently, the use of sovereign wealth funds or other fiscal-stabilization mechanisms – to accumulate the foreign assets needed to compensate for the effects on the currency’s value brought about by long-term inflows.
The argument for this option is that long-term secular factors are important drivers of capital inflows, as advanced-economy investors discover that they are underweight in emerging-market assets and reduce their portfolios’ “home bias.”
Sterilized intervention usually doesn’t work: if assets in advanced economies and emerging markets remain perfectly substitutable, inflows will continue as long as interest-rate differentials persist.
But the demand for emerging-market assets is neither infinite nor perfectly substitutable for the assets of advanced economies – even for given interest-rate differentials – because these assets have very different liquidity and credit risks.
This means that at some point large-scale, persistent sterilized foreign-exchange intervention – amounting to several percentage points of GDP – would satisfy the additional demand for emerging-market assets and stop the inflows, even if interest-rate differentials remain.
As sterilization induces issuance of domestic assets, global investors’ desire for diversification would be met without causing excessive currency appreciation, with all its collateral damage, in emerging markets.
Of course, currency appreciation should not be prevented altogether.
When justified by economic fundamentals, the exchange rate should be allowed to rise gradually.
But when a currency’s appreciation is triggered by capital inflows that represent the asset-diversification preferences of advanced-economy investors, it can and should be resisted.
New Rules for the Global Economy
CAMBRIDGE – Suppose that the world’s leading policymakers were to meet again in Bretton Woods, New Hamp­shire, to design a new global economic order.
They would natu­rally be preoccupied with today’s problems: the eurozone crisis, global recovery, financial regulation, international macroeconomic imbal­ances, and so on.
Here are seven commonsense principles of global economic governance that they might agree on.
(I discuss them in more detail in my new book, The Globalization Paradox.)
1. Markets must be deeply embedded in systems of governance.
The idea that markets are self-regulating received a mortal blow in the recent financial crisis and should be buried once and for all.
Markets require other social institutions to support them.
They rely on courts, legal frameworks, and regulators to set and enforce rules.
They depend on the stabilizing functions that central banks and countercyclical fiscal policy provide.
They need the political buy-in that redistributive taxation, safety nets, and social insurance help generate.
And all of this is true of global markets as well.
2. For the foreseeable future, democratic governance is likely to be organized largely within national political communities.
The nation state lives, if not entirely well, and remains essen­tially the only game in town.
The quest for global governance is a fool’s errand.
National governments are unlikely to cede significant control to transnational institutions, and harmonizing rules would not benefit societies with diverse needs and preferences.
The European Union may be the sole excep­tion to this axiom, though its current crisis tends to prove the point.
Too often we waste international cooperation on overly ambitious goals, ultimately producing weak results that are the lowest common denominator among major states.
When international cooperation does “succeed,” it spawns rules that are either toothless or reflect the preferences of only the more powerful states.
The Basle rules on capital requirements and the World Trade Organization’s rules on subsidies, intellectual property, and investment measures typify this kind of overreaching.
We can enhance the efficiency and legitimacy of globalization by supporting rather than crippling democratic procedures at home.
Pluralist prosperity. Acknowledging that the core institutional infrastructure of the global economy must be built at the national level frees countries to develop the institutions that suit them best.
The United States, Europe, and Japan have produced comparable amounts of wealth over the long term.
Yet their labor markets, cor­porate governance, antitrust rules, social protection, and financial systems differ considerably, with a succession of these “models” – a different one each decade – anointed the great success to be emulated.
The most successful societies of the future will leave room for experimentation and allow for further evolution of institutions.
A global economy that recognizes the need for and value of institutional diversity would foster rather than stifle such experimentation and evolution.
4. Countries have the right to protect their own regulations and institutions.
The previous principles may seem innocuous.
But they carry powerful implications that clash with the received wisdom of globalization’s advocates.
One such impli­cation is the right of individual countries to safeguard their domestic institutional choices.
Recognition of institutional diversity would be meaningless if countries did not have the instru­ments available to shape and maintain – in a word, “protect” – their own institutions.
We should therefore accept that countries may uphold national rules – tax policies, financial regulations, labor standards, or consumer health and safety rules – and may do so by raising barriers at the border if necessary, when trade demonstrably threat­ens domestic practices enjoying broad popular support.
If globalization’s boosters are right, the clamor for protection will fail for lack of evidence or support.
If wrong, there will be a safety valve in place to ensure that contending values – the benefits of open economies versus the gains from upholding domestic regulations – both receive a proper hearing in public debates.
5. Countries have no right to impose their institutions on others.
Using restrictions on cross-border trade or finance to uphold values and regulations at home must be distinguished from using them to impose these values and regulations on other countries.
Globalization’s rules should not force Americans or Europeans to consume goods that are produced in ways that most citizens in those countries find unacceptable.
But nor should they allow the US or the EU to use trade sanctions or other pressure to alter foreign countries’ labor-market rules, environmen­tal policies, or financial regulations.
Countries have a right to difference, not to imposed convergence.
International economic arrangements must establish rules for managing interaction among national institutions. Relying on nation states to provide the essential governance functions of the world economy does not mean that we should aban­don international rules.
The Bretton Woods regime, after all, had clear rules, though they were limited in scope and depth.
A completely decentralized free-for-all would benefit no one.
What we need are traffic rules for the global economy that help vehicles of varying size, shape, and speed navigate around each other, rather than imposing an identical car or a uniform speed limit.
We should strive to attain maximum globalization consistent with the maintenance of space for diversity in national institu­tional arrangements.
7. Non-democratic countries cannot count on the same rights and privileges in the international economic order as democracies.
What gives the previous principles their appeal and legitimacy is that they are based on democratic deliberation – where it really occurs, within national states.
When states are not democratic, this scaffolding col­lapses.
We can no longer presume that its institutional arrangements reflect its citizens’ preferences.
So non-democracies need to play by different, less permissive rules.
These are the principles that the architects of the next global economic order must accept.
Most importantly, they must comprehend the ultimate paradox that each of these principles highlights: globalization works best when it is not pushed too far.
New Security Laws Increase Hong Kong\u0027s Insecurity
No news is not necessarily good news for Hong Kong.
Before its reunification with mainland China, many people expected the former British colony to grab headlines as Beijing progressively stripped its freedoms.
Instead, Hong Kong mostly vanished from the world's news radar after 1997.
Five years since its handover, and contrary to expectation, Hong Kong retains its rights.
But this could be changing.
C.H. Tung, Hong Kong's Chief Executive, began his second term last year by proposing new security laws, causing a few news blips of worry.
The legislation is meant to comply with Article 23 of the Basic Law, the mini-constitution that governs Hong Kong and that requires the government to enact laws against treason, sedition, subversion, and theft of national secrets.
Article 23 has been a sensitive issue from the moment Hong Kong was returned to China, because its inclusion in the Basic Law came in the wake of the Hong Kong population's strong support for the 1989 pro-democracy movement in Beijing.
To maintain political stability, both the Chinese and Hong Kong governments willingly shelved the issue during Tung's first term.
With his re-election, they abruptly decided that they had waited long enough and would enact the Article 23 security laws before mid-2003.
Vague in wording and unnecessarily broad in scope, the new laws sparked widespread fear that Article 23 will lead to curtailment of basic rights.
Lawyers warn of a threat to individual liberty and due process.
Journalists argue that defending the public's interest sometimes requires reporting state secrets.
Teachers worry that banning possession of seditious materials will undermine academic freedom.
Religious and sociopolitical associations fear that their global ties will be severed and their existence threatened if their counterparts abroad are declared subversive in mainland China.
Hong Kong's people do not reject all security legislation.
They only demand that the proposed laws be less arbitrary and that their scope be minimized.
But government officials merely reiterate the political righteousness of the proposed anti-subversion laws.
In one of the more desperate and egregious examples, Regina Ip, the Secretary for Security, attributed Hitler's rise to power to flaws in the workings of democracy. The government, she hints, will correct similar flaws.
Heated exchanges between the authorities and opponents of the laws led many to believe that the devil is, indeed, in the details.
What has emerged is an almost unanimous demand that the Tung government publish a detailed draft of the laws for one more round of consultation.
The government, under intense pressure from Beijing to enact the blessed version, calls this unnecessary.
Blocked in their efforts to change the law through consultation, Hong Kong's people have taken to the streets.
At one demonstration, 60,000 participants marched against Article 23--the largest protests in Hong Kong since the 1989 pro-democracy demonstrations.
A counter-demonstration mobilized by pro-China forces drew a smaller crowd.
The government claims extensive support, but opinion polls consistently show that an overwhelming majority of Hong Kong's people oppose the legislation.
The three-month consultation period before any piece of legislation enters into force ended in December.
Will the Tung government consider opposing views in redrafting the Article 23 laws?
Given the undemocratic nature of the Legislative Council, it is almost certain that the government has enough votes to pass almost any law it wants.
But the seriousness of the current situation extends beyond particular laws, no matter how noxious they may be.
Slighting public opinion in so direct a way will have more far-reaching implications for Hong Kong's future.
First, Tung's repeated policy failures over the last five years caused public confidence in his administration to evaporate.
Ignoring public opinion concerning an issue as critical as the security laws will only alienate the middle class further and deepen a festering crisis of legitimacy.
Second, Hong Kong has an international image to maintain, and in international politics what is perceived is often as important as what really happens.
The bottom line is that Hong Kong's image as an open society has been tarnished, with criticism coming from international rights organizations, academics, and the global media.
This damage will become permanent if those who oppose the security laws go completely unheeded.
Finally, Hong Kong represents a test of the "one country, two systems" model proclaimed in 1997, and thus of the feasibility of China's applying the same scheme to its reunification plans for Taiwan.
The prevailing attitude in Taiwan toward reunification is highly skeptical; enactment of strict security laws in Hong Kong will hardly be seen as reassuring.
Hong Kong's people have spoken.
They are waiting to be heard.
A shortsighted decision on the part of the Tung government will have serious negative repercussions not only in Hong Kong, but for Taiwan and around the world.
Any ruler in his right mind should be concerned whether making such a move will not ultimately harm rather than advance his interests.
New Tremors in Global Finance and Trade
PALO ALTO – With the American and global economies in the early stages of post-recession recovery, serious questions remain about that recovery’s strength and sustainability.
In addition to traditional business-cycle concerns, there is a long list of policy tensions threatening to curb growth, including: 1) protectionism; 2) currencies; 3) monetary- and fiscal-stimulus exit strategies; and 4) the explosion of public debt.
Recovery from deep recessions is usually strong – the American economy recovered from the two other deep post-World War II recessions with annual real growth over 6% for three years.
But nobody forecasts strong growth like that now, because recoveries from financial crises are usually slow and painful.
It is worth remembering the real dimensions of the 1930’s Great Depression, with which politicians compare this recession to justify massive government intervention.
From 1929 to 1933, real GDP in the United States fell 30%, and the unemployment rate reached almost 25%, while the depression itself lasted more than a decade – all large multiples of the recent decline, and of the somewhat larger decline that the intervention helped to avert.
Policy mistakes ranging from tax hikes to poor central-bank decisions to a global wave of protectionism (most famously America’s Smoot-Hawley tariff) turned a deep recession into the Great Depression.
We should not repeat those mistakes now.
While global leaders expand IMF resources and attempt to coordinate international financial regulation, trade and currency tensions are growing.
French President Nicolas Sarkozy and Chinese Premier Wen Jiabao chastise American protectionism.
Meanwhile, there has been virtually no progress in restarting the Doha round of global trade reforms.
When progress is not being made, non-tariff barriers grow like weeds in response to domestic interests.
Tensions are rising over currencies as well.
Given the expansion of the US Federal Reserve’s balance sheet, its purchase of long-term Treasuries, the Fed’s historical record of being late and slow in raising interest rates, and the explosion of US public debt, there is fear of an eventual monetization of the US debt and future inflation.
Today, there is little short-run inflation risk in the advanced economies; core inflation will decline, both in the euro zone and in America, and Japan’s problem will be deflation. But inflation is a risk in some emerging economies, including India and China, whose central bank governor, Zhou Xiaochuan, suggests considering a basket of currencies to replace the dollar as the global reserve currency.
Conversely, US President Barack Obama promises to “get tough on China’s currency,” and America’s Congress is considering a move to force the US Treasury to label China a currency manipulator, paving the way for retaliatory tariffs.
But China’s trade surplus with the US is not primarily due to undervaluing its currency.
The tremendous growth in global current-account imbalances magnified problems that led to the financial crisis.
Indeed, the surplus in developing Asia, Japan, and the Middle East soared from less than $200 billion in 2001 to more than $1 trillion in 2008, while the deficit of the US and the European Union rose from $425 billion to more than $900 billion.
So the last thing the global economy needs now is a trade war.
Not only has the euro gyrated recently, but some now question its long-term viability.
On balance, the euro has been a success, but it does balance gains from price transparency and decreased transaction costs against the loss of independent monetary policies and a currency adjustment shock absorber.
With no separate currencies to adjust, the only shock absorber left is labor migration to areas with lower unemployment – for example, from southern to northern Europe.
Such migration is easier in the US than within the euro-zone or even within European countries.
Thus, countries on the EU’s periphery – Portugal, Italy, Greece, and Spain – with large public debt and current-account deficits, face lower real wages and high unemployment for some time.
The greatest systemic risk to the global economy, far greater than that associated with any financial institution, is the explosion of public debt.
The IMF forecasts the debt-to-GDP ratio in the US to rise to 85% by 2014 (prompting the rating agency Moody’s to threaten a downgrade in America’s bond ratings), and to 82% in Germany, 85% in France, 126% in Italy, and 144% in Japan.
As recovery continues, this public-sector debt will increasingly crowd out private-sector, local-government and developing-country borrowing.
Uncertainty over the resolution of the debt is likely to provoke political instability over tax hikes and spending cuts, and therefore volatility in financial markets.
Worse still, high levels of public debt, like high taxes, cause serious problems for economic performance.
The IMF estimates that every increase of ten percentage points in the debt-to-GDP ratio reduces long-term growth by a quarter of a percentage point.
In other words, the projected increase in debt ratios could slow long-term annual growth by 0.6 percentage points in the euro zone, almost one percentage point in the US, more than one percentage point in the United Kingdom, and 1.3 percentage points in Japan.
Cutting growth rates by 40-70% is surely a recipe for stagnant societies with insufficient growth to satisfy private wants and public needs.
Moreover, such a slowdown would devastate the developing world, as weaker performance in the advanced economies reduces the growth of export markets.
These tremors in the international financial system are serious and must be contained.
A long period of sluggish growth as a result of bloated government debt would be the equivalent of an extended bout with cancer after the heart attack that our economies have just survived. Prevention begins by curbing trade friction and developing sensible post-crisis monetary and fiscal exit strategies, sooner rather than later.
तपेदिक के विरुद्ध लड़ाई
सोलना, स्वीडन - तपेदिक विश्व की सबसे घातक बीमारियों में से है। केवल 2013 में, इसके कारण 1.5 मिलियन मौतें हुई थीं जिनमें से वयस्क मौतों का पाँचवाँ हिस्सा कम-आय वाले देशों में हुई मौतों का था। हालांकि हर वर्ष टीबी की चपेट में आने वाले लोगों की अनुमानित संख्या में कमी हो रही है, लेकिन कमी की रफ्तार बहुत धीमी रही है। और, बहु-औषधि-प्रतिरोधी टीबी के बढ़ते फैलाव को देखते हुए, इस प्रवृत्ति को उलटा जा सकता है।
फिर भी, विश्व के पास अब टीबी का उन्मूलन करने के लिए बहुत कम अवसर उपलब्ध हैं। इसका लाभ उठाने के लिए यह जरूरी होगा कि बीमारी का पता लगाने के प्रभावी साधनों, नवीन औषधि उपचारों और नवोन्मेषी टीकों का त्वरित विकास और प्रसार हो, और इसके साथ ही यह भी सुनिश्चित करने के प्रयास किए जाएँ कि स्वास्थ्य-देखभाल की प्रणालियां सही देखभाल प्रदान करने में सक्षम हों। यह आसान काम नहीं होगा।
अच्छी खबर यह है कि अंतर्राष्ट्रीय समुदाय कार्रवाई करने के लिए उत्सुक जान पड़ता है। विश्व स्वास्थ्य संगठन की 2015 के बाद की वैश्विक टीबी रणनीति का लक्ष्य 2035 तक टीबी का उन्मूलन करना है, जिसका विश्व स्वास्थ्य सभा ने मई 2014 में अनुमोदन किया था। संयुक्त राष्ट्र के 193 सदस्य देशों द्वारा औपचारिक रूप से सितंबर में स्वीकार किए जानेवाले टिकाऊ विकास लक्ष्यों में इस लक्ष्य को पांच वर्ष पहले प्राप्त कर लेने का पूर्वानुमान लगाया गया है।
औषधि-प्रतिरोधी टीबी के विकास और फैलाव को रोकने के लिए दो स्तरों पर वैश्विक प्रयास की जरूरत है: रोग का शुरूआत में ही पता लगाना और टीबी वाले औषधि-संवेदनशील रोगियों का पर्याप्त उपचार सुनिश्चित करना, और औषधि-प्रतिरोधी जीवाणुओं से संक्रमित रोगियों का उपचार करने के लिए नए तरीकों की तलाश करना। समस्या यह है कि टीबी के निदान, उपचार और रोकथाम के लिए मौजूद साधनों की गंभीर सीमाएं हैं।
जिन लोगों में टीबी की शुरूआत हो रही होती है उनके लिए त्वरित नैदानिक परीक्षण सुलभ नहीं होता। कम आय वाले देशों में, निदान की प्रभावी पद्धति बलगम की सूक्ष्मदर्शी यंत्र से जाँच करना है, जो ऐसी पुरानी पड़ चुकी पद्धति है जो सभी संक्रमित रोगियों में से तकरीबन आधे में टीबी का पता लगाने में विफल रहती है, छोटे बच्चों और HIV से संक्रमित रोगियों में तो इसकी सफलता की दर और भी कम है। वास्तव में, बलगम की सूक्ष्मदर्शी यंत्र से जाँच के द्वारा टीबी से ग्रस्त दस में से एक बच्चे से अधिक का निदान नहीं हो पाता।
इसके अलावा, बहु-औषधि प्रतिरोधी टीबी से संक्रमित रोगियों के लिए वर्तमान में मौजूद औषधि उपचार केवल आधे अवसरों पर ही सफल रहता है, यहां तक कि सर्वश्रेष्ठ दशाओं में भी। और इसकी उपचारात्मक प्रक्रिया कठिन है, जो कम से कम 2 वर्ष चलती है तथा इसमें 14,600 गोलियों का सेवन और सैकड़ों इंजेक्शन लगवाना शामिल होता है - जिसके दुष्प्रभाव भी तीव्र होते हैं।
कार्रवाई करने के अनूठे तरीकों के साथ टीबी की नई दवाओं की अत्यधिक जरूरत है, न केवल बहु-औषधि प्रतिरोधी टीबी के लिए, बल्कि औषधि-संवेदनशील टीबी के लिए उपचार के समय को कम करने के लिए भी। यहां कुछ आशाजनक समाचार भी है: हाल ही में बीडाक्विलीन 40 वर्षों में अमेरिकी खाद्य और औषधि प्रशासन द्वारा मंजूर की जाने वाली टीबी की पहली नई दवा बन गई है। लेकिन बीडाक्विलीन को औषधि-प्रतिरोधी टीबी का प्रभावी ढंग से उपचार करने की अपनी क्षमता अभी साबित करनी है, और आनेवाली दूसरी दवाओं में अभी तक बहुत थोड़ी दवाएं ही हैं।
रोकथाम में भी इसी तरह की समस्याएं आती हैं। इस बीमारी के लिए उपलब्ध एकमात्र टीका, और टीबी की रोकथाम का मुख्य आधार बीसीजी का टीका केवल आंशिक रूप से प्रभावी है। निश्चित रूप से, जहां यह बच्चों की बीमारी के सबसे खराब रूपों से रक्षा करता है, वहीं यह सबसे आम प्रकार, फेफड़े की टीबी से किसी की रक्षा नहीं करता है। इसके परिणामस्वरूप, इसने टीबी के मामलों की संख्या में कमी लाने में बहुत कम भूमिका निभाई है। और, हालाँकि टीके के अनेक नए रूप प्रारंभिक नैदानिक परीक्षण में सफल हो चुके हैं, पर आने वाले कई वर्षों तक बीसीजी का टीका एकमात्र उपलब्ध टीका बना रहेगा।
चुनौतियां स्पष्ट रूप से भयानक हैं। लेकिन, चूंकि लाखों-करोड़ों लोगों का जीवन दाँव पर लगा है, इसलिए पीछे हटना कोई विकल्प नहीं है।
इसके लिए अनुसंधान की जरूरत है – यह एक ऐसा तथ्य है जिसे डब्ल्यूएचओ की वैश्विक रणनीति स्वीकार करती है। लेकिन टीबी के लिए नैदानिक टूल और उपचारों में निवेश बढ़ाने पर उससे कहीं अधिक खर्च आ रहा है, जितना आबंटित किया गया है। अनुसंधान और विकास के लिए हर वर्ष जरूरी अनुमानित €1.73 बिलियन ($2 बिलियन) में से 2013 में केवल €589 मिलियन का निवेश किया गया।
स्थिति तब और भी खराब हो गई जब अति महत्वपूर्ण दाता वित्तपोषण - जो बहुत सीमित संख्या में कर्ताओं द्वारा मुहैया कराया जाता है, और इनमें अधिकतर सरकारी एजेंसियाँ और ओईसीडी देशों के परोपकारी समूह हैं - पिछले वर्ष लगभग 10% कम हो गया। वर्तमान समय में, एकमात्र परोपकारी दाता बिल एंड मेलिंडा गेट्स फाउंडेशन द्वारा टीबी से लड़ने के लिए नए साधनों पर अनुसंधान के 25 प्रतिशत से अधिक के लिए सहायता प्रदान की जा रही है।
जहां तक निजी क्षेत्र की बात है, दवा कंपनियां, चिरकालिक बीमारियों हेतु नई दवाओं के विकास की दिशा में रोगजनक-रोधी दवाओं से दूरी बनाने की आम प्रवृत्ति के रूप में टीबी अनुसंधान से पीछे हट रही हैं। फाइज़र 2012 में, उसके बाद 2013 में एस्ट्राज़ेनेका और गत वर्ष नोवार्टिस टीबी अनुसंधान से बाहर हो गईं।
वित्तपोषण के अंतराल को खत्म करने और टीबी के अभिशाप को समाप्त करने के लिए ज्यादा से ज्यादा विविध दाताओं के शामिल होने की जरूरत पड़ेगी। अगर निजी क्षेत्र अपने हिस्से की भूमिका निभाने का इच्छुक नहीं है तो सरकारों का दायित्व बनता है कि वे जिस एसडीजी लक्ष्य को प्राप्त करने के लिए सहमत हुए हैं, टिकाऊ वचनबद्धता के साथ इसमें शामिल हों - जो प्रत्यक्ष अंशदानों, और साथ ही सही प्रोत्साहन देने के लिए किए गए प्रयासों से प्रकट होनी चाहिए।
संक्षेप में, टीबी की महामारी का उन्मूलन यह सुनिश्चित करने के प्रयासों की पहले से अपेक्षा करता है कि स्वास्थ्य की देखभाल करने वाली प्रणालियां सही देखभाल प्रदान करने में सक्षम हैं। और सही देखभाल के लिए समय पर नैदानिक परीक्षणों के लिए आसानी से सुलभ केंद्रों, सुरक्षित और तेजी से असर करने वाली दवाओं, और टीबी के प्रभावी टीके सहित नए साधनों के त्वरित विकास और फैलाव की जरूरत है।
Suffer the Children, Suffer the Country
NEW YORK – Children are every country’s most vital resource. This is true not just morally, but also economically.
Investing in the health, education, and skills of children offers the highest economic returns to a country.
A new study by the UN Children’s Fund (UNICEF) shows which high-income countries are doing well when it comes to making these investments – and which are doing poorly.
The report, Child Well-Being in Rich Countries, takes a holistic view of the conditions of children in the United States, Canada, and Europe – 29 countries in all.
The top-ranked countries, where children are best off, are the social democracies of Western Europe.
The Netherlands heads the list, followed by Norway, Iceland, Finland, Sweden, and Germany.
At the bottom one finds a major surprise: the US, the richest large economy in the world, is in 26th place, followed by three much poorer countries: Lithuania, Latvia, and Romania.
France and the United Kingdom are ranked in the middle.
The study assesses children’s well-being in terms of material conditions (related to household-income levels); health and safety; education; risky behavior (such as excessive alcohol consumption); and physical environment, including housing conditions.
Although the study is limited to high-income countries, national governments – and even cities – in other parts of the world should replicate it to analyze their own children’s well-being.
The gaps between the northern European countries and the US are the most telling.
Northern European countries generally provide cash support to families to ensure that all children are raised in decent conditions, and they undertake ambitious social programs to provide high-quality day care, pre-school, and primary and secondary education.
Moreover, all children are well covered by effective health-care systems.
The US, with its individualist, free-market ideology, is very different.
There is little cash support for families.
Government programs supposedly provide a social safety net, but politicians are, in fact, largely indifferent to the well-being of the poor, because poor voters turn out in lower numbers and do not finance America’s expensive election campaigns.
Indeed, the evidence strongly suggests that US politicians tend to listen and respond only to their richer constituents.
The so-called safety net has suffered accordingly, as have America’s poor.
The differences between the social democracies and the US show up strongly in category after category.
In the social democracies, less than 10% of children grow up in relative poverty (meaning households with less than half of the country’s median income).
In the US, the rate of relative poverty exceeds 20%.
American children suffer far more from low birth weight (a major danger signal for later life); being overweight at ages 11, 13, and 15; and very high rates of teenage fertility.
There are around 35 births for every 1,000 girls aged 15-19, compared to fewer than ten per thousand in the northern European countries.
Likewise, US children face considerably more violence in society than children in other high-income countries do.
That may not be surprising, but it is deeply troubling, because children’s exposure to violence is a major threat to their physical, emotional, and cognitive development.
Homicide rates in the US are roughly five times higher than in northern Europe.
One fascinating aspect of the UNICEF study is its use of what is now called “subjective well-being.”
This means asking a person directly about his or her life satisfaction.
There have been many recent studies of the subjective well-being of adults around the world.&nbsp; But I know of no comparable research in which children were asked directly about their sense of well-being – a very smart question indeed.
Here, the evidence suggests that northern Europe’s children generally appreciate their remarkable advantages.
The children were asked to rate their “life satisfaction” on an 11-step ladder.
In the Netherlands, a remarkable 95% of children set their rating at six or higher.
In the US, the proportion is much lower, at around 84%.
These subjective rankings also correlate highly with the children’s reported quality of interactions with their peers and parents.
Some 80% of Dutch children report their classmates to be “kind and helpful,” compared to just 56% of American children.
The costs to the US of allowing so many of its children to grow up in poverty, poor health, poor schools, and poor housing are staggering.
A shocking proportion ends up serving time in prison – especially in the case of non-white poor children.
Even those fortunate not to fall into the trap of America’s vast prison system often end up unemployed and even unemployable, without the skills needed to obtain and keep a decent job.
Americans have been blinded to these calamitous mistakes partly by a long history of racism, as well as by a misplaced faith in “rugged individualism.”
For example, some white families have opposed public financing for education, because they believe that their tax money goes disproportionately to help poorer non-white students.
The result, however, is that everybody loses.
Schools underperform; poverty remains high; and the resulting high rates of unemployment and crime impose huge financial and social costs on US society.
The UNICEF findings are powerful.
High national incomes are not enough to ensure children’s well-being.
Societies that have a strong commitment to equal opportunity for all of their children – and that are prepared to invest public funds on their behalf – end up with much better outcomes.
Every country should compare the conditions of its young people with those reported by UNICEF, and use the results to help guide expanded investment in their children’s well-being.
Nothing could be more important for any society’s future health and prosperity.
A New Vision for the World Bank
LIMA – Finance ministers, central bankers, and development economists are gathering in Lima, Peru, for the World Bank’s annual meetings, where the debate will focus on how the institution’s agenda fits our changing world.
Holding the event in a developing country represents a welcome shift from the usual Washington, DC venue.
Now, the Bank should make some other important shifts: It should reframe its mission and undertake new tasks, while its biggest shareholder, the United States, should rethink its role in the organization.
The World Bank’s current mission – to end extreme poverty within a generation and boost shared prosperity – is undoubtedly important.
But, by reframing that mission to emphasize support for member governments’ pursuit of inclusive and sustainable growth, the Bank could do even more good.
Such an approach would reflect and reinforce the recently adopted Sustainable Development Goals (SDGs), which will guide global development efforts until 2030.
And, far from excluding the current goal of ending poverty, it would embrace poverty reduction as an outcome of building stable, prosperous societies, in which citizens, through their taxes, are able and willing to fund capable and responsive states that honor agreed global standards and rules.
Such a reframed mission would align the World Bank more closely with its founders’ original vision of a “global credit cooperative” generating benefits for all members through collective action.
That vision was built on a simple and brilliant idea: to borrow against the secure capital of creditor members (at the time, primarily the US) and lend to members where investment capital was scarce and returns would be high.
That idea took advantage of the positive externality associated with borrowing costs as low as those merited by the credit risk of any single creditor (or lower).
A return to that original dynamic would be good for everyone, from creditor countries (which would benefit from a more stable global system) to borrowers (whose economies would enjoy faster growth and poverty reduction).
Moreover, re-casting the World Bank’s mission in this way taps the Bank’s distinct comparative advantage relative to the dozens of bilateral aid agencies and hundreds of non-governmental organizations that work in developing countries.
This makes the Bank’s involvement particularly valuable.
The World Bank has knowledge and experience in sectors as diverse as infrastructure, agriculture, health, education, pensions, and financial regulation.
It has the ability to deploy a variety of financing and risk-sharing instruments in support of both private and public investment.
And its staff possesses unparalleled expertise about individual countries, including insight into the difficult local politics that sometimes inhibit the reforms needed to ensure returns on investment.
In adapting its mission to twenty-first-century needs, the World Bank should also take on the responsibility of providing development-relevant global public goods.
Today, the biggest risks to stable and prosperous societies – such as unabated climate change, overwhelming pandemics, and the rise of antimicrobial resistance – are global in nature, and therefore need to be addressed collectively.
Given that the returns on investment in development-relevant global public goods are collectively high, but remain limited on a country-by-country basis, this is an ideal area of focus for the World Bank as a global cooperative.
Specifically, the Bank should become a prime mover in fostering investments to promote environmental sustainability; supporting research in agriculture, health, and clean energy; and collecting and analyzing economic and social data.
Of course, it need not assume responsibility for providing all of these public goods.
But it can help by setting priorities, raising and channeling funds, and assessing the impact of relevant investments.
To succeed, the Bank must broaden its toolkit beyond country-specific loans – the key instrument on which it has relied for seven decades.
For this, it needs a clear mandate from member countries, as well as new instruments for financial and technical assistance that are geared toward the provision of development-relevant global public goods.
The final internal shift that must occur involves just one member: the US.
During the last half-century, America has been a reasonably good steward of international stability – a kind of benign bully operating in the collective interest.
But while the US remains an economic and military superpower, other countries are catching up fast.
And the US seems unwilling to make space for them, as evidenced by its resistance to the establishment of the Chinese-led Asian Infrastructure Investment Bank.
The US should recognize that, while still globally powerful, it must now lead more by influence and persuasion, and less by holding fast to the rules and customs set 70 years ago, when it was, for all practical purposes, the sole creditor backing the creation of new international financial institutions.
So in Lima this week, the discussion of China’s economic health and the Fed’s timetable for interest rate hikes must be accompanied by a genuine debate on the need for these three shifts.
With a reframed mission, an updated agenda, and a more inclusive US, the Bank would be well positioned to play a pivotal role in advancing the kind of development the world needs now.
New Wave Nationalism
PARIS – Could the world be on the verge of a new period of re-ordering itself, similar to the one experienced nearly 20 years ago?
In the 1990’s, the fall of the Soviet empire and the brutal implosion of Yugoslavia led to a spectacular increase in the number of independent states.
To follow the Olympic Games or the World Cup, the world had to learn to recognize new flags and new national anthems.
Now a new wave of identity fragmentation, spanning Africa and perhaps Europe, may be approaching.
In January, a referendum on independence is scheduled to be held in South Sudan.
If it does actually take place, there is little doubt that it will lead to the creation of a new state within the African continent, a first since the breakup of Ethiopia in 1993.
Somalia, Côte d’Ivoire, and even Nigeria may also give birth to new states.
For decades, Africa’s boundaries have been denounced as the artificial and arbitrary work of ignorant and cynical colonial officers, which has contributed to a long train of tribal rivalries, if not ethnic cleansings.
But no one, especially not the pan-African organizations, wishes to redefine borders.
The more fragile and unstable the balance, the more imperative it is to maintain the status quo.
So, is a new Pandora’s box about to be opened in Africa, freeing demons that should be contained?
Or is it the artificial status quo itself that has caused organized violence to explode with fateful regularity?
The brutal behavior of the Sudanese regime based in Khartoum has made the country’s evolution towards partition both inevitable and legitimate.
The main question now is whether partition will be held up as a model and a precedent elsewhere in Africa.
In Côte d’Ivoire, for example, former President Laurent Gbagbo takes inspiration from Zimbabwe’s autocratic President Robert Mugabe, clinging to power after his clear defeat in the last presidential elections.
As a result, the country’s division on a partly ethnic and religious basis along north-south lines is no longer unthinkable; on the contrary, it is increasingly likely.
This trend towards identity fragmentation is not only an African phenomoenon.
Much closer to where I write, in Europe, it affects Belgium, a country that seems resigned to live with absolute political paralysis as the price of its survival.
But entropy in Belgium has sent tremors into Spain, in Catalonia, where last November’s elections to the regional parliament turned out the left-wing alliance that had dominated for seven years in favor of a pro-sovereignty coalition.
The economic crisis affects all parts of Spain.
But, like supporters of the Northern League in Italy, a significant number of Catalans are starting to oppose their supposedly serious, hard-working character and relative success to the “laziness of the Spaniards.”
Why should they work for “them”?
And, of course, a growing number of Germans speak about the rest of Europe the way Catalans speak about Spaniards.
Of course, Europe is not Africa, where violence and despair are the engines of fragmentation.
In Europe today, if there is violence, it is only economic in nature.
But, as the economic crisis persists – and perhaps even worsens – we may witness further explosions of populism and nationalism that could translate into a new wave of fragmentation.
A Europe of 27 states is already very difficult to manage.
The European Union, which is in the midst of a profound identity crisis, does not need new states, but rather new ideas and a new narrative – a qualitative, not quantitative, change.
Of course, one can dream, as some once did, of a “Europe of Regions” based on the model of the city-states of Renaissance Italy.
The American sociologist Daniel Bell once famously said that the state is too big for the small problems and too small for the big ones.
But, in a global age, “the nation” becomes a more powerful form of identity protection, just as “the state,” following the crisis of Western financial capitalism, nowadays appears stronger than a “market” destabilized by its excesses.
At the same time, the quest for identity that is causing some states to fragment is pushing others to envision neo-imperial vistas.
Each reflects the same logic.
The imperial nature of identity in Russia, for example, is deeply ingrained.
And Turkey, encouraged by the power vacuum that exists all around it, as well as by the obstinate resistance of most EU members to admit the Turks to their “Christian club,” is starting to think in neo-Ottoman terms.
Imperial traditions never fade away completely.
Maybe one day people will look at the first decade of the twenty-first century as the logical continuation of the last decade of the twentieth century.
If so, ours will be an era worthy of careful study, a moment when the world was in the midst of a difficult and uncertain process of re-composition.
New World, Less Order
Looking back to the revolutions that shook Europe and the world 15 years ago this month, we should rejoice in what has been gained - freedom, democracy, and transcendence of Europe's 40-year division.
But we should also take stock of missed opportunities in the wake of the Cold War's peaceful end.
Ultimately, the end of the Cold War came because of the revolution underway in the Soviet Union.
But the pro-democratic policies of glasnost and perestroika that I unveiled in the mid-1980's did not appear out of thin air.
They arose from Nikita Khrushchev's reforms of the 1950's and 1960's, and from Alexei Kosygin's reforms later on.
Many people now view such efforts to "renew" the socialist system - to make it actually work for the people - as having been doomed from the start.
But these earlier reforms were in fact more difficult to undertake than the ones that I launched in the 1980's and 1990's.
During my presidency, we had to nurture a democratic atmosphere, but this was possible only because fear was no longer overpowering.
We also tried to curtail the arms race and address other areas of conflict between East and West.
But the Berlin Wall remained, standing in the heart of Europe as a symbol of division.
When Chancellor Helmut Kohl and I talked about this in July 1989, we thought that the time had not come to end the division of Germany.
Dismantling the Wall, we agreed, would likely be an issue for the twenty-first century.
Of course, the German people decided otherwise; they took history into their own hands by insisting that the Wall come down.
The rest of Eastern and Central Europe quickly followed, knocking down their own barriers to freedom.
My conception of my role as Soviet president compelled me not to intervene.
I believed that I could not open our country while dictating to others.
Indeed, from my first appearance as General Secretary of the USSR, at the funeral of my predecessor, Constantine Chernyenko, I said that every country should be responsible for its own politics.
So the fall of the Berlin Wall less than half a decade later was a consequence of these thoughts.
(But, even here, my ideas and policies were not novel: in 1955 Khrushchev talked - albeit in a very different context - about uniting two Germanys.)
My task, as I saw it, was to ensure Central and Eastern Europe's peaceful return to full sovereignty with a minimum of Soviet interference.
To the surprise and delight of the world, the changes did take place peacefully almost everywhere.
But did the Cold War's end merely make the world a more dangerous place - one of terrorism, insecurity, uncertainty, and growing disparities of wealth?
My response is to remind people what terrors the Cold War held.
The threat of nuclear Armageddon was real, with three trillion dollars spent on the arms race that could have been used to help the world's poor.
On the other hand, an opportunity to create a safer, more secure post-Cold War world was lost.
In the 1980's, when the communist-capitalist confrontation ended, there was a chance to create a "new world order."
But the collapse of the Soviet Union meant that there was no negotiated settlement of this new order.
As a result, the subsequent spurt of globalization has proceeded with no one steering the wheel - and thus with no means to implement new thinking for a better world.
We Russians obviously bear the most responsibility for the USSR's collapse, but America should also be called to account.
When change came, instead of following a slow democratic process, Russia replaced its discredited communist model overnight with a Harvard-designed blueprint that was also unfit for the country.
Eventually, the plan threw the country on its back.
This was no US-led conspiracy, but the collapse of the Soviet Union was convenient for America.
The US conceived of itself as the Cold War's winner, and winners, it seems, make the rules.
The Iraq war proves this: a new American empire is asserting itself.
The victor of the Cold War now expects other nations to indulge its philosophy of self-righteousness.
Unfortunately, this type of old thinking breeds more crises than it can ever resolve.
Indeed, unilateral policies can never succeed in a global world defined more and more by shared concerns rather than national interests.
So, fifteen years after the fall of the Berlin Wall, the world remains more in need of new thinking than ever.
We need a new world order that benefits all, a global civil society that will help fight terrorism.
We know that bombs and special operations alone won't make us safer, for we must fight the poverty that breeds terrorism.
That is no easy task. On the contrary, as in 1989, we are faced with the urgent need for change and responsible leadership.
New Year, Same Crisis
DAVOS – The measures introduced by the European Central Bank last December, especially the Long Term Refinancing Operation (LTRO), have relieved the liquidity problems of European banks, but have not cured the financing disadvantage of the highly indebted member states.
Since high-risk premiums on government bonds endanger the capital adequacy of banks, half a solution is not enough.
Indeed, that supposed solution leaves half the eurozone relegated to the status of Third World countries that have become highly indebted in a foreign currency.
Instead of the International Monetary Fund, it is Germany that is acting as the taskmaster imposing tough fiscal discipline on them.
This will generate both economic and political tensions that could destroy the European Union.
I have proposed a plan that would allow Italy and Spain to refinance their debt by issuing treasury bills at around 1%.
I named it in memory of my friend Tomasso Padoa-Schioppa, who, as Italy’s central banker in the 1990’s, helped to stabilize that country’s finances.
The plan is rather complicated, but it is legally and technically sound.
I describe it in detail in my new book Financial Turmoil in Europe and the United States.
European authorities rejected my plan in favor of the LTRO.
The difference between the two schemes is that mine would provide instant relief to Italy and Spain.
By contrast, the LTRO allows Italian and Spanish banks to engage in a very profitable and practically riskless arbitrage, but has kept government bonds hovering on the edge of a precipice – although the last few days brought some relief.
My proposal is to use the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) to insure the European Central Bank against the solvency risk on any newly issued Italian or Spanish treasury bills that it may buy from commercial banks.
This would allow the European Banking Authority to treat these various T-bills as the equivalent of cash, because they could be sold to the ECB at any time.
Banks would then find it advantageous to hold their surplus liquidity in the form of T-bills as long as these bills yielded more than bank deposits held at the ECB.
Italy and Spain would then be able to refinance their debt at close to the ECB’s deposit rate, which is currently 1% on mandatory reserves and 25 basis points on excess-reserve accounts.
This would greatly improve the sustainability of these countries’ debt.
Italy, for instance, would see its average borrowing cost decline from the current 4.3%.
Confidence would gradually return, yields on outstanding bonds would decline, banks would no longer be penalized for owning Italian government bonds, and Italy would gradually regain access to the market at more reasonable interest rates.
One obvious objection to this strategy is that it would reduce the average maturity of Italian and Spanish debt.
I believe that, on the contrary, this would be an advantage in the current exceptional circumstances, because it would keep the Italian and Spanish governments on a short leash; no country concerned could afford to lose the ECB facility.
In the case of Italy, the short leash would dissuade former Prime Minister Silvio Berlusconi from seeking to topple Mario Monti’s new government (which has only a fragile majority), because if Berlusconi precipitated an election, the electorate would punish him.
This would help to reestablish political stability and accelerate Italy’s return to the market.
My proposal fulfills both the letter and the spirit of Article 123 of the Lisbon Treaty.
The ECB’s task is to provide liquidity to banks, while the EFSF and ESM are designed to absorb solvency risk.
The ECB would not be facilitating additional borrowing by member countries; it would merely allow them to refinance their debt at a lower cost.
Together, the ECB and the EFSF could do what the ECB cannot do on its own.
This would provide temporary relief from a fatal flaw in the euro design’s until the member countries devise a more permanent solution.
The EFSF would have practically unlimited capacity to insure eurozone T-bills in this way, because no country could default as long as the scheme was in operation.
Nor could a country abuse the privilege, lest it be automatically withdrawn, causing the country’s cost of borrowing to rise immediately.
For the first time in this crisis, the European authorities would undertake an operation for which they have more than sufficient resources.
Coming as a positive surprise to the markets, it would reverse their mood.
After all, markets do have moods; indeed, that is what the authorities have to learn in order to deal with financial crises.
Contrary to the current discourse, the long-term solution must provide a stimulus to get Europe out of a deflationary vicious circle – structural reform alone will not do it.
The stimulus must come from the EU, because individual countries will be under strict fiscal discipline.
It will have to be guaranteed jointly and severally – and that means eurobonds in one guise or another.
New Year’s Hope against Hope
NEW YORK – The time has come for New Year’s resolutions, a moment of reflection.
When the last year hasn’t gone so well, it is a time for hope that the next year will be better.
For Europe and the United States, 2010 was a year of disappointment.
It’s been three years since the bubble broke, and more than two since Lehman Brothers’ collapse.
In 2009, we were pulled back from the brink of depression, and 2010 was supposed to be the year of transition: as the economy got back on its feet, stimulus spending could smoothly be brought down.
Growth, it was thought, might slow slightly in 2011, but it would be a minor bump on the way to robust recovery.
We could then look back at the Great Recession as a bad dream; the market economy – supported by prudent government action – would have shown its resilience.
In fact, 2010 was a nightmare.
The crises in Ireland and Greece called into question the euro’s viability and raised the prospect of a debt default.
On both sides of the Atlantic, unemployment remained stubbornly high, at around 10%.
Even though 10% of US households with mortgages had already lost their homes, the pace of foreclosures appeared to be increasing – or would have, were it not for legal snafus that raised doubts about America’s vaunted “rule of law.”
Unfortunately, the New Year’s resolutions made in Europe and America were the wrong ones.
The response to the private-sector failures and profligacy that had caused the crisis was to demand public-sector austerity!
The consequence will almost surely be a slower recovery and an even longer delay before unemployment falls to acceptable levels.
There will also be a decline in competitiveness.
While China has kept its economy going by making investments in education, technology, and infrastructure, Europe and America have been cutting back.
It has become fashionable among politicians to preach the virtues of pain and suffering, no doubt because those bearing the brunt of it are those with little voice – the poor and future generations.
To get the economy going, some people will, in fact, have to bear some pain, but the increasingly skewed income distribution gives clear guidance to whom this should be: Approximately a quarter of all income in the US now goes to the top 1%, while most Americans’ income is lower today than it was a dozen years ago.
Simply put, most Americans didn’t share in what many called the Great Moderation, but was really the Mother of All Bubbles.
So, should innocent victims and those who gained nothing from fake prosperity really be made to pay even more?
Europe and America have the same talented people, the same resources, and the same capital that they had before the recession.
They may have overvalued some of these assets; but the assets are, by and large, still there.
Private financial markets misallocated capital on a massive scale in the years before the crisis, and the waste resulting from underutilization of resources has been even greater since the crisis began.
The question is, how do we get these resources back to work?
Debt restructuring – writing down the debts of homeowners and, in some cases, governments – will be key.
It will eventually happen.
But delay is very costly – and largely unnecessary.
Banks never wanted to admit to their bad loans, and now they don’t want to recognize the losses, at least not until they can adequately recapitalize themselves through their trading profits and the large spread between their high lending rates and rock-bottom borrowing costs.
The financial sector will press governments to ensure full repayment, even when it leads to massive social waste, huge unemployment, and high social distress – and even when it is a consequence of their own mistakes in lending.
But, as we know from experience, there is life after debt restructuring.
No one would wish the trauma that Argentina went through in 1999-2002 on any other country.
But the country also suffered in the years before the crisis – years of IMF bailouts and austerity –from high unemployment and poverty rates and low and negative growth.
Since the debt restructuring and currency devaluation, Argentina has had years of extraordinarily rapid GDP growth, with the annual rate averaging nearly 9% from 2003 to 2007.
By 2009, national income was twice what it was at the nadir of the crisis, in 2002, and more than 75% above its pre-crisis peak.
Likewise, Argentina’s poverty rate has fallen by some three-quarters from its crisis peak, and the country weathered the global financial crisis far better than the US did –unemployment is high, but still only around 8%.
We could only conjecture what would have happened if it had not postponed the day of reckoning for so long – or if it had tried to put it off further.
So this is my hope for the New Year: we stop paying attention to the so-called financial wizards who got us into this mess – and who are now calling for austerity and delayed restructuring – and start using a little common sense.
If there is pain to be borne, the brunt of it should be felt by those responsible for the crisis, and those who benefited most from the bubble that preceded it.
Civilizing the Marketplace of Ideas
CAMBRIDGE – “When men have realized that time has upset many fighting faiths,” US Supreme Court Justice Oliver Wendell Holmes wrote in a famous dissenting opinion in 1919, “they may come to believe…that the ultimate good desired is better reached by free trade in ideas – that the best test of truth is the power of the thought to get itself accepted in the competition of the market, and that truth is the only ground upon which their wishes safely can be carried out.”
Like any market, however, the marketplace of ideas needs regulation: in particular, its participants should be bound by norms of honesty, humility, and civility.
Moreover, every idea-trader should adhere to these principles.
Of course, politicians through the ages have polluted the marketplace of ideas with invective.
But in American politics, surprisingly, there has been progress.
According to a study by the Annenberg Public Policy Center, there has been less incivility in Congress in recent years than in the 1990’s or the 1940’s. Republican Senator Ted Cruz was widely condemned for his aggressive questioning of incoming Defense Secretary Chuck Hagel back in January.
But casting aspersions on a nominee’s patriotism was the norm in the McCarthy era; it is less common today.
Academia, by contrast, appears to be moving in the opposite direction.
A “social science” like economics is supposed to be free of partisan vitriol.
Yet economists now routinely stoop to ad hominem attacks and inflammatory polemics.
As economists go, they do not come much mightier or more influential than Paul Krugman.
A Nobel laureate who teaches at Princeton University, Krugman is also a columnist for the New York Times, whose commentaries and blog, “The Conscience of a Liberal,” are read with an almost religious fervor by liberal (in the American sense) economists and journalists around the world.
He is a Twitter superstar, with more than a million followers.
A dozen ardent epigones blog in sync with him, re-posting the wisdom of the master.
Many people today naively believe that the Internet is an unmitigated boon for free speech.
They underestimate the extent to which such a concentration of online power corrupts, just as surely as all forms of power corrupt.
Since Krugman and I began debating fiscal and monetary policy back in 2009, I have become increasingly alarmed by the way he abuses his power.
Last week, I resolved to speak out in a three-article series, published squarely in the heart of the liberal blogosphere, the Huffington Post.
As historians are trained to do, I based my argument on the archives.
By quoting his past writings, I showed, first, that Krugman’s repeated claims to have been “right about everything” in his economic commentary are false. Although (like many others) he identified a housing bubble in 2006, he did not foresee the financial chain reaction that would fuel a global crisis.
Having failed to predict the US crisis, he then incorrectly predicted the imminent disintegration of Europe’s monetary union, publishing more than 20 statements on that subject in 2011 and 2012.
He has never admitted these errors; on the contrary, he has retrospectively exaggerated his own prescience.
Second, Krugman’s claim that a vastly larger fiscal stimulus would have generated a more rapid economic recovery in the US depends entirely on conjecture.
But the macroeconomic model on which he bases his claim can hardly be called reliable, given its manifest failures to predict either the crisis or the euro’s survival.
Moreover, at least one of his pre-crisis columns flatly contradicts his view today that current – or even higher – levels of federal debt carry no risk whatsoever.
So he has no right to claim, as he has, “a stunning victory” in “an epic intellectual debate.”
Finally – and most important – even if Krugman had been “right about everything,” there would still be no justification for the numerous crude and often personal attacks he has made on those who disagree with him.
Words like “cockroach,” “delusional,” “derp,” “dope,” “fool,” “knave,” “mendacious idiot,” and “zombie” have no place in civilized debate.
I consider myself lucky that he has called me only a “poseur,” a “whiner,” “inane” – and, last week, a “troll.”
Far from engaging in Holmes’s free trade in ideas, Krugman has been the intellectual equivalent of a robber baron, exploiting his power to the point of driving decent people away from the public sphere – particularly younger scholars, who understandably dread a “takedown” by the “Invincible Krugtron.”
My preferred solution would be accountability.
But I have given up hope that the New York Times will perform its proper editorial function.
So, instead, I would suggest the intellectual equivalent of an antitrust law.
For every word that Krugman publishes, he must henceforth commit to having first read at least a hundred words by other writers.
I cannot guarantee that reading more widely will teach him honesty, humility, and civility.
But it will at least reduce his unjustifiably large share of the marketplace of economic ideas.
As a Supreme Court justice, of course, Holmes opposed antitrust regulations.
But his arguments in this area failed his own “test of truth,” for they lacked “the power…to get…accepted in the competition of the market.”
Holmes accepted defeat with his customary grace.
Populism Without the People
PRINCETON – Nicolás Maduro’s narrow victory in Venezuela’s presidential election raises an important question (quite apart from the opposition’s question as to whether Maduro really won): Can populism thrive without a genuinely popular, charismatic leader, or are movements like Chávismo doomed to fade into insignificance once they have lost their quasi-deities?
For many observers, populism is unthinkable without a strong, direct bond between an anti-establishment leader and citizens who feel neglected by mainstream political parties.
Yet the role of leadership in populism is vastly overestimated.
Indeed, given populism’s importance as a political phenomenon, that view, along with two others – that populism is somehow a call for direct democracy, and that populists can only protest, but never govern –&#160;needs to be challenged.
Populism, unlike, say, liberalism or Marxism, is not a coherent body of distinct political ideas.
But it also cannot be defined simply as any political movement that panders to the masses by promoting simplistic policy proposals.
While populists might be particularly prone to advocating facile solutions, they hardly have a monopoly on that tactic.
Moreover, impugning populists’ intelligence and seriousness only plays into their hands: See how the arrogant, entrenched elites, they will counter, dismiss the common sense of the people.
Populism cannot be understood at the level of policies; rather, it is a particular way of imagining politics.
It pits the innocent, always hard-working people against both a corrupt elite (who do not really work, other than to further their own interests) and those on the very bottom of society (who also do not work and live off others).
In the populist imagination, both the very top and the very bottom of society are not really a part of it: they are directly or indirectly supported by outside powers (think of pro-European liberal elites in Central and Eastern Europe); more obviously, they are immigrants or minorities, like the Roma.
Typically, in the populist political imagination, elites disproportionately care for &#160;those who, like themselves, do not really belong.
Europe’s elites are regularly accused of lavishing benefits on ethnic minorities in the name of protecting their rights.
America’s Tea Party populists often imagine an unholy alliance of left-liberal, bi-coastal elites and the African-American underclass (an alliance that in their eyes is embodied in President Barack Obama).
A leader who can represent this purely moral – as opposed to political – image helps to provide a focus for voters.
But it is not crucial.
It mattered that Chávez reassured the masses that “I am a little of all of you.” Yet it could be someone else, or a group; or it could be no one in particular (who really leads the Tea Party?).
Voters who support populist movements do so because they believe that current elites fail truly to represent them.
They are not against representative democracy as such: they just want different representatives – people whom they consider morally pure.
Thus, calls for more popular participation are not essential to populism; rather, they are a symptom of perceived exclusion (which might well be a reality, especially in Latin America).
But cries for political inclusion are different from demands for direct democracy.
Where direct democracy is very much a part of normal politics – in Switzerland, for example – populist parties have been doing better, not worse, than elsewhere.
It is similarly misguided to think that populist politicians, once in power, will not be able to govern effectively, because they have emerged from protest parties whose agendas are defined entirely by what they oppose.
Rather, what is distinctive about populists in power is that they attend only to their clientele (the rest of the population is utterly undeserving) and ride roughshod over checks and balances.
From a populist perspective, this makes perfect sense: Why should they accept checks on their power if they represent the authentic will of the people?
Populists can live with representative democracy; what they cannot accept is political pluralism and the notion of legitimate opposition.
It was this tendency to demonize opponents, not particular policies favoring the poor, that made Chávez a populist.
In Finland, to take another example, it is the claim of uniquely authentic representation, not criticism of the European Union, that makes the revealingly named True Finns a populist party.
Likewise, the Italian populist Beppe Grillo’s attempt to empower ordinary citizens is not a cause for concern; but his claim that his Five Star Movement deserves nothing less than 100% of seats in parliament, because all other contenders are corrupt and immoral, certainly is.
It is this feature of populism – the idea that the people want only one thing, and that only true representatives can give it to them – that explains a symmetry (often evoked, but seldom spelled out) between populism and technocratic government.
Just as technocrats assume that there is only one right solution to every policy challenge – hence political debate is not necessary – so, for populists, the people have one, and only one, uncorrupted will.
Liberal democracy assumes just the opposite: space for different perspectives – and for political alternatives.
Nicolas Sarkozy’s French Lessons
France has chosen – and it has chosen decisively.
The next French president will be Nicolas Sarkozy, elected with 53.1% of the popular vote, with turnout, at 84.8%, the highest since 1981.
This election is particularly rich in lessons.
France was said to be to be a country mired in apathy and increasingly uninterested in politics.
For the last 20 years, the number of citizens who registered to vote had been declining and the number of registered voters who stayed home had been increasing.
Among those who voted, the number who cast their votes for the parties of the extreme right or the extreme left – that is, parties unsuited for government – was steadily rising.
All this changed in the two rounds of this year’s election.
The first lesson, then, is that France is re-politicizing.
With voter turnout beating all European records, France’s new president will have unusually strong legitimacy.
Second, and equally important, the extremist vote is weakening.
Support for Jean-Marie Le Pen’s quasi-fascist National Front fell from 18% in 2002 to 10% this time around, representing an important gain in democratic stabilization.
Likewise, the extreme left, which together put up six presidential candidates, was politically annihilated.
Only one Trotskyite candidate received more than 4% of the vote, while the rest – including the French Communist party, which for more than 30 years received a stable 20% of the vote – gained less than 2%.
It is the end of an adventure that was not at all good for France.
The third key feature of the election was the emergence of a centrist constituency seeking to distinguish – indeed, separate – itself from the right.
This is a critical development in France.
The brave candidate of the new center, François Bayrou, managed to triple his support relative to 2002, gaining 17% of the vote, although this was not enough to place him in the second round.
It was still too early in terms of the development of French political culture for the formation of an alliance between Bayrou and the Socialist candidate, Ségolène Royal – a proposal that I made before the elections.
The absence of an agreement between Royal and Bayrou to back the first-round winner in the run-off with Sarkozy largely explains the ultimate defeat of both.
But this is understandable.
Historically, the Socialist Party has no tradition of coalition governments, much less of looking for coalition partners to its right.
That day will come, but its arrival will require more time.
The fourth lesson follows from Sarkozy’s stance as a classical ultra-liberal.
While he is very French in his upbringing and education – he does not speak English! – he is nevertheless neither a Jacobin nor a Gaullist.
Indeed, the Gaullist tradition ends with him.
Sarkozy made public his disagreement with outgoing President Jacques Chirac about the French position against the American-led war in Iraq.
President George W. Bush, who was the first to congratulate Sarkozy, has a new ally in Europe.
Sarkozy believes in the efficiency of markets and will shy away from state intervention in the economy.
He will thus contribute to a reconciliation of the hitherto nationalist French right and modern conservatism as it is practiced elsewhere.
The fifth lesson may be the most serious.
The French left, represented by the Socialists, has suffered its third consecutive defeat in a presidential election.
Given the erosion of the right’s power and Sarkozy’s not very attractive personality, the road was wide open for the Socialists to win.
The disastrous failure of the left has many causes.
But the most important one, in my view, was the absence of a clear strategy on the part of the Socialists, who consistently refuse to make the choices that have gradually been accepted by international social democracy, embodied today in the Party of European Socialists.
The international left has opted for a reformist course, including, where necessary, coalition governments with centrist partners.
The reformist option fully accepts the internationalization of today’s market economy.
The French Socialist Party’s lingering statism, ethnocentrism, and reluctance to accept coalitions with movements to its right reflects its violent and troubled history and the long intellectual domination of the French Communists.
But these features constitute an obstacle to the Socialists’ becoming the party of government, and were reflected in their electoral program, which was full of uncertainty and indifferent with respect to Europe and the broader international context.
The voters did not find it credible.
This lesson is so evident that the French Socialist Party now faces a clear choice.
Either it modernizes its program to come closer to international social democracy, or it enters a period of slow and prolonged decline.
The Socialists now have no choice but to engage in a debate that is certain to be loud and contentious.
But the outcome is far less clear.
Nigeria: Debt or Democracy?
CAMBRIDGE: When poor, heavily indebted countries are struggling to make their way from dictatorship to democracy, the actions of rich countries can be decisive.
If rich countries insist on debt repayments and austerity measures, they are likely to destroy the social stability needed for a new democracy to take root.
Greed, short-sightedness, and general unconcern among rich countries, however, should never be underestimated.
In recent weeks, European countries – and apparently the IMF – have been rejecting the pleas of Nigeria's new democracy to grant it debt reduction.
Instead, they say, Nigeria should increase its debt servicing this year, and should abandon its call for debt reduction.
The French Government, as organizer of the creditor committee of governments (the so-called Paris Club)bears most responsibility for this egregious policy, but many other governments and international agencies share the blame.
You would think that France, the United Kingdom, the United States, and the IMF would be more aware of recent history.
Seven years ago, Nigeria was on a rocky and treacherous course to democratization.
A caretaker government was charged with overseeing the transition to national elections in early 1994.
Yet in late 1993, the IMF and World Bank pressured Nigeria to eliminate subsidies on domestic petroleum products as part of austerity moves insisted on by its creditors.
The timing could not have been worse.
Elimination of fuel subsidies caused riots and widespread strikes against the transition government, which gave an excuse for Nigeria's generals to re-assert military control.
It would take six long years under rapacious military rule before Nigeria received another chance at democracy.
Last year, Nigeria celebrated a remarkable escape from dictatorship.
After the brutal and hyper-corrupt military ruler General Sani Abacha – who suddenly dropped dead – the military sullenly agreed to another national election.
The election brought to power the remarkable Olusegun Obasanjo, a nationally unifying figure of impeccable democratic credentials, and an internationally respected Nigerian.
It was President Obasanjo, who as head of the military in the late 1970s, successfully led an earlier transition to democracy.
But the challenges facing the new state are awesome.
The country remains impoverished, ethnically divided, and with collapsed social services after years of military-led corruption and plunder.
A spiralling AIDS epidemic could swamp the whole society.
Already, life expectancy has declined from around 58 years to 54 years as a result of AIDS.
Western nations cynically claim that Nigeria is a rich country and should therefore be held to its debt service payments.
If they believe this, they are simply foolish.
Even though Nigeria is a considerable oil producer, of around 2 million barrels per day, because there is a vast population of 120 million people, income per Nigerian from this oil is only around $100/ $150 per year.
And because oil constitutes more than 90% of the country's exports, oil income is all that Nigerians have to live on in the world economy.
The result is an average income per person (counting the oil plus the non-oil economy) of around $300 per person per year, making Nigeria one of the poorest countries in the world.
Social conditions are abysmal, in line with such poverty.
There is massive disease, low life expectancy, high malnutrition, and low school attendance.
History could now repeat itself.
Reportedly, Nigeria is being pushed to increase debt service payments.
So far, creditors reject Nigeria's calls for debt reduction, and instead offer Nigeria the phony solution of "debt rescheduling."
This means that Nigeria would be able to postpone some payments, but will be charged full market interest rates on the postponement, and is expected to eventually pay off the debts in full.
Nigeria is supposed to agree to these terms to win a small new loan from the IMF, which itself will be on commercial terms.
With behavior like this, it's hard to believe much of the words coming out of Washington, London, Paris, and Berlin about their new commitment to Africa and the new commitment to poverty reduction in the poorest countries.
Either there is a total disconnect between the political leaders voicing these words and their treasuries and finance ministries, or it's all a cynical game for rich countries to enjoy the bounty of booming wealth and prosperity while doing precious little for the rest of the world.
My own guess is that conservative finance ministries in rich countries, and the IMF staff as well, are blind to the political ramifications of their actions.
Nigerian Democracy Grows Up
ABUJA – Nigeria’s legislative elections, to be followed by a presidential poll on April 16, indicate that the ruling Peoples’ Democratic Party (PDP) has lost its near-total grip on the country’s politics.
Of the four main opposition parties that fielded candidates for the 469 parliamentary seats in contention, the Action Congress of Nigeria (ACN) took the bulk of the votes in the southwest of the country, felling such PDP stalwarts as House speaker Dimeji Bankole and Senator Iyabo Obasanjo-Bello, daughter of former President Olusegun Obasanjo.
The PDP did, however, fend off challenge in the oil-producing Niger Delta, President Goodluck Jonathan’s home region.
It also held its own in the predominantly Igbo southeast and the middle belt, home to several small ethnic groups.
Bitter controversy marked Jonathan’s ascension to power in May 2010, following the death of President Umaru Yar’Adua after only three years in office.
Some PDP politicians in the Muslim north insisted that their region be allowed to present a candidate, as Obasanjo, who was viewed as representing the Christian south, had served eight years.
They were rebuffed.
The party then hemorrhaged influential members, particularly in the north.
Analysts predicted that a large share of the region’s votes would go to the Congress for Progressive Change (CPC), led by Muhammadu Buhari, a northern Muslim from the state of Katsina.
Buhari is also the party’s presidential candidate.
The CPC won the majority of the seats in Katsina, but the PDP still managed to maintain its dominance of that volatile region’s politics.
The parliamentary polls, originally scheduled for April 2 but postponed a week after the Independent National Electoral Commission (INEC) failed to print adequate ballot papers and other election materials, took place in an atmosphere of fear, violence, and uncertainty.
Bombs went off in the INEC office in Suleja, near the federal capital, on the eve of the polling, killing several election officials.
Explosions in Maiduguri, a large city in the northeast where Boko Haram, a violent Muslim sect, remains a threatening presence despite a 2009 government crackdown, forced many voters to stay home.
Seventy-four million Nigerians were registered to vote, but turnout was far below that.
Attahiru Jega, a university teacher and chairman of the INEC from August 2010, overhauled a sclerotic and corrupt election machinery, put in place a new and credible voting register, and retrained and deployed his staff to 120,000 polling stations in a vast country – all in six months.
The election was always going to be a challenge, all the more so because, following the end of military rule in 1999, Nigerian politicians had become habituated to rigging polls.
After all, the 2007 election that brought Yar’Adua to power – the PDP’s third straight “victory” – was judged by local and international observers to be the worst in the country’s history.
Indeed, prior to the vote earlier this month, Nigeria had settled into a rut of “electoral authoritarianism.”
The all-powerful PDP, relying on its control of the security agencies, the considerable oil revenues to which the president and his retinue had untrammeled access, and an intricate patronage network radiating through the local councils of Nigeria’s 36 states, seemed set to govern indefinitely.
Elections had become a hollow ritual, matters of public policy were not important campaign issues, and the opposition was divided, poorly funded, and unable to devise a strategy to cut the PDP juggernaut to size.
To President Jonathan’s credit, he delivered clean elections.
As the INEC proceeded to implement an elaborate device to check potential vote riggers, he stood his ground and backed Jega, even as hawks within his party began to mutter that Jega was a “dangerous radical” whom the president should sack.
Opposition parties found their feet, and the PDP’s power monopoly was finally broken – but not obliterated.
In fact, Jonathan and the PDP look set to turn in a good performance in the presidential polls.
The CPC’s poor showing in the North’s parliamentary polls could be an indication that the region’s influential conservative politicians, whom Buhari took on when, as an army general, he toppled the Second Republic in a bloodless coup in December 1983, have neither forgiven nor forgotten.
Talks are ongoing between the CPC, the ACN, which is fielding Nuhu Ribadu, the former anti-corruption czar as presidential candidate, and the All Nigeria Peoples Party, a minor party running Ibrahim Shekarau as its nominee, to field a joint candidate.
Buhari has more name recognition nationwide than the other two, but Ribadu’s ACN outperformed the CPC during in the parliamentary election.
So who will step aside for whom remains unclear.
If, however, the opposition parties resolve their differences and manage to stitch together a firm common platform, they could force Jonathan into a runoff.
That the elections were held at all – and without violent conflict between the country’s north and south – is a remarkable achievement.
The country’s mounting problems – rampant official corruption, decaying social and physical infrastructure, and growing ethnic and religious insurgencies in the northeast, central region, the southeast, and Niger Delta – are yet to be seriously tackled.
Nevertheless, ordinary Nigerians hope that the presidential election this week, and governorship and state-assembly polls on April 26, will put into office politicians who will, at long last, take on these challenges.
As the parliamentary elections showed, it is time that Nigerians receive democracy’s dividend: a government that reflects their interests and responds to their demands.
Nigeria\u0027s Battle of the Generals
Nigeria has never held successful civilian-run elections.
The last one, which returned President Shehu Shagari and his National Party of Nigeria to power in 1983, was marked by widespread violence and vote-rigging.
Three months later, the Army staged a coup--Nigeria's fifth since independence in 1960.
Governance has never been easy in Nigeria, a conglomerate of over 150 million people and some 250 ethnic or language groups.
Not all share the same vision of Nigeria's future, and they are exceptionally vigorous in disputing what it should be.
Civic virtue is rare.
No leader can be expected to run this giant of Africa as if it were Singapore.
Nigerians once again fear that chaos will accompany the second elections since the Army returned power to civilians in May 1999.
Legislative elections will be held on April 12 th , followed by the presidential election a week later.
Opposing President Olusegun Obasanjo, a retired general seeking a second term on the platform of the People's Democratic Party (PDP), is Muhammadu Buhari, another retired general, from the All Nigeria People's Party (ANPP).
General Buhari led the coup against Shagari in 1983.
Two other candidates stand out.
Emeka Odumegwu-Ojukwu is an Oxford-trained historian and retired army officer who led the Biafran secessionist attempt in 1967, which plunged the country into civil war.
Gani Fawehinmi, a fiery lawyer who made his name as a human rights campaigner under military rule, is the candidate of the National Conscience Party (NCP).
The PDP and ANPP are broadly center-right parties, while the NCP styles itself as the "party of the poor" and espouses social democratic policies.
In reality, however, the election is a straightforward fight between Obasanjo, a born-again Christian from the Yoruba southwest, and Buhari, an ascetic Muslim from the Hausa-Fulani-dominated north.
So far, bleak predictions that the campaign would split Nigerians along Islamic/Christian lines, triggering sectarian violence before the voting, have not come to pass.
Buhari, whose running mate is a Christian, has toned down his support for Shari'ah, the strict Islamic legal system adopted by 12 northern states over the past three years.
While taking care not to anger northern voters by openly distancing himself from Shari'ah, Buhari pledges to uphold the nation's secular constitution.
The power behind Obasanjo is his Vice President, Abubakar Atiku, a northern Muslim.
Atiku, a formidable political operator, is positioning himself for his own presidential bid in 2007.
Atiku's huge influence balances the perceived Christian-millenarian strain of Obasanjo's presidency.
Faced with meeting the constitutional requirement of getting votes from each state in the Federation, the candidates and their handlers have gone out of their way to avoid taking positions that ruffle feathers.
This is not to say that parochial sentiments are unimportant.
The Alliance for Democracy, the dominant Yoruba party, is not fielding a candidate because it does not want to divide the Yoruba vote and deny victory to Obasanjo, their kinsman.
Nevertheless, Nigerians have seen little of the crude "vote for my tribe" politicking that doomed previous attempts at democratic rule.
Still, political violence has increased as the campaign enters its final stage.
Marshall Harry, an ANPP chieftain and General Buhari's point man in the volatile Niger delta region, was murdered on March 5
Moreover, communal violence has combined with deep-seated local resentment against western oil companies to render the oil-rich delta a battlefront.
Youth of the Ijo tribe demand that the government redraw local government boundaries, which they claim favor the Itsekiri, a rival group, before the elections.
Violent clashes between the two groups have left hundreds dead and wounded.
The presence of federal troops did not stop the warring factions from disrupting oil production, forcing Chevron/Texaco and Shell--which account for more than half of Nigeria's daily oil production--to suspend operations.
Some calm has returned, and oil production is resuming.
But the lethal mix of poverty, youth unemployment, and the mesmerizing spectacle of millions of petrodollars flowing out of the delta and into the pockets of the powerful, casts a long shadow.
Ethnic militias are also making a show of strength elsewhere in the south, mainly among the Igbo and the Yoruba, whose political elites call for greater political and fiscal autonomy.
Federal authorities have curbed their excesses so far, but in the heady, chaotic atmosphere surrounding the elections, uncertainty prevails.
Rattled, leading politicians from all the parties met in Abuja, the capital, and promised to eschew violence and intimidation during the elections--an encouraging sign that the political class is keen not to repeat the coup-inciting mistakes of the past.
Of course, the army is in no hurry to seize power.
Revulsion for military rule runs deep.
Ordinary Nigerians hold the "Khaki Boys," as army officers are derisively called, responsible for today's wrecked economy and social malaise.
But four years of democratic rule have not brought Nigerians much relief, with the majority still living below the poverty line.
Obasanjo's government has no clear idea about how to address the nation's key problems--an ailing, oil-dependent economy hobbled by $30 billion in external debt, a deeply flawed unitary constitution forced on a socially-diverse people by the military in 1999, and an exploding youth population.
If Buhari beats Obasanjo, he is unlikely to do better.
Ordinary Nigerians, brutalized by a dizzying succession of corrupt and inept military juntas, have, like a drowning man, clutched at "democracy" as their lifeline.
This hope alone keeps the country from disintegrating into a thousand warring parts.
Nigeria’s Lost Chance
Nigeria’s first attempt since independence in 1960 to transfer power from one civilian government to another has just ended – farcically.
Indeed, the presidential election degenerated into a crude exercise in ballot rigging and voter intimidation.
As a result, the victory of Umaru Yar’Adua, the candidate of the ruling Peoples Democratic Party and President Olusegun Obasanjo’s hand-picked successor, is now hotly disputed.
The major opposition candidates – Muhammadu Buhari of the All Nigeria Peoples Party (ANPP), Patrick Utomi of the African Democratic Party (ADP), Atiku Abubakar of the Action Congress (AC), and Orji Uzor Kalu of the Progressive Peoples Alliance (PPA) – reject the results and are calling on Nigerians to protest peacefully.
Both local and Western election monitors have said that the poll fell far below acceptable standards.
Although American officials had said that the United States would not support Obasanjo if the election were flawed, it was an open secret long before polling began that the PDP would manipulate the outcome to remain in power.
Obasanjo made it clear that he considered the election a “do or die affair” and would hand over power only to Yar’Adua.
Even so, the scale and brazenness of the fraud were unprecedented, indicating Obasanjo’s desperation.
Obasanjo is understandably anxious.
Last May, the National Assembly slapped down his attempt to re-write the constitution in order to remain in office beyond the stipulated two terms.
His effort to use corruption charges to exclude from the election his vice president, Atiku Abububar, with whom he had been feuding since 2004, also failed when the Supreme Court ruled that Abububar’s name had to be restored to the ballot.
Moreover, Obasanjo has a long and sorry track record when it comes to elections.
In his first incarnation as military head of state in the late 1970’s, he had a relatively free hand to shape the outcome of the 1979 elections.
He gave power to Shehu Shagari, the presidential candidate of the National Party of Nigeria, who was widely viewed as incompetent and yoked to feudal interests in Nigeria’s Muslim north.
The Shagari government quickly became mired in corruption and inefficiency, plunging the country into debt and a vicious cycle of unemployment, declining productivity, and social unrest.
So the military, which had terminated the First Republic in January 1966 with a bloody coup, returned to power in December 1983 and did not quit until 1999, when pro-democracy forces, galvanized by economic decline and reports of military graft, forced the democratic elections that brought back Obasanjo to power.
Obasanjo’s eight years in office did not resolve Nigeria’s economic and political problems – key among them a new political framework to fit the country’s social diversity.
And, given its past performance, it is unlikely that the PDP will allow for a new and cleaner vote.
Buhari, the ANPP candidate, has asked the National Assembly to begin impeachment proceedings against Obasanjo.
Some prominent Nigerians have also suggested that if the electoral crisis is not resolved before Obasanjo steps down on May 29, the chief justice should take over as interim president and organize new elections.
Buhari has wide support in the north and Abubakar has a formidable and well-resourced party machine; but mutual distrust run deep in both camps.
If they unite in their moment of adversity and take their grievance into the streets, they will have to confront the generals, notorious for their disregard of civil rights and liberties.
Obasanjo retains the backing of the army, some of whose members openly participated in stuffing ballot boxes and intimidating the opposition.
Any significant move to tackle the PDP machine will likely need to come from the Senate and its president, Ken Nnamani, who played a key role in thwarting Obasanjo’s quest for a third term.
Nnamani’s sudden decision to recall the lawmakers in the wake of the vote may be the first step in this direction.
But impeachment proceedings are not likely to be concluded before Obasanjo quits on May 29.
The Supreme Court has a new chief justice whose ruling in the Abubakar case demonstrated that he could be counted on to intervene on the side of fair play, but it is not clear what constitutional instrument could be used to resolve the election crisis before the hand-over date.
So once again, democracy in Nigeria is at a knife’s edge.
Armed militias in the Niger Delta are becoming bolder.
The price of Nigerian crude is rising, a sure sign that the world sees instability ahead.
Only swift and firm intervention from impartial external parties working in concert with the National Assembly and the courts can avert a looming disaster.
Nigeria’s Resurgent Oil Diplomacy
Russia is not alone in seeing oil as a means to transform its global standing.
Nowadays, the mantra of President Umar Yar’Adua, who took power in June 2007, following controversial elections, is to transform the country into one of the world’s 20 largest economies by 2020.
Yar’Adua and his Peoples Democratic Party (PDP) are struggling to stamp their authority on an unwieldy and restive country of 140 million people, and the government views rapid growth as a means to achieving that aim.
Nigerians can use a dose of hope.
Olusegun Obasanjo, who became Nigeria’s first elected president in 1999 after nearly two decades of military dictatorship, left vast swathes of the country trapped in poverty when he handed power to Yar’Adua last year.
With oil reaching $100 dollars per barrel, and energy-hungry giants like the United States and China beating a path to Nigeria’s door, Africa’s leading oil producer wants to use petrodollars to cure the country’s economic ills and flex its muscles in the international arena.
While riding the crest of the last oil boom in the late 1970’s, Nigeria’s military leaders nationalized the assets of British Petroleum and became champions of pan-African co-operation, financing several African liberation movements.
The interests of the West and Nigeria repeatedly clashed, but Nigeria always stood its ground.
Inept government and economic decline in the 1980’s and 1990’s obliged Nigeria’s leaders to focus on problems closer to home, like the civil wars in Liberia and Sierra Leone.
But old habits die hard.
Nigeria has always sought a leadership role in Africa and its diaspora.
Even in the turbulent 1990’s, when Nigeria was temporarily suspended from the British Commonwealth following the execution of minority rights campaigner Ken Saro-Wiwa by General Sani Abacha’s regime, the governing elite sought to achieve Nigeria’s “rightful” place in global affairs.
There are now signs of a resurgent oil-driven foreign policy.
Last October, Yar’Adua joined South Africa and Libya in opposing US plans to deploy AFRICOM, its new African regional military command, on the continent.
He then asked Nigeria’s National Assembly to write off $13 million of Liberia’s $43 million bilateral debt after Liberian President Ellen Johnson-Sirleaf withdrew her offer to host the new command.
Nigerian officials are careful to disavow any link between this financial gift and Johnson’s turn away from AFRICOM.
Nor do they voice their concern that AFRICOM could be part of an American effort to exert control on West Africa’s oil-producing countries.
But, in confidential briefings, Nigeria has strongly hinted that it will not tolerate any foreign incursions on a vital and strategic resource in its own backyard.
Domestically, the renewed flexing of Nigeria’s foreign policy muscles is being played out in the ongoing face-off between the new National Energy Council, which reports to the President, and Western oil companies, led by Shell’s Nigerian subsidiary, over when to end production-related gas flaring.
The government insists on a January 2008 deadline, but the companies complain that the government’s reluctance to fund its share of operating costs fully and rising political violence in the Niger Delta make this deadline unrealistic, and want it extended three years.
The Department of Petroleum Resources (DPR), the regulatory agency for the oil industry, has dismissed these claims, vowing to impose hefty fines on companies that flout the deadline.
In the early 1990’s, desperately short of hard currency, Nigeria negotiated contracts permitting the oil companies to develop new fields and recoup their investment before sharing profits.
Now, following the companies’ discovery of massive reserves, technocrats appointed by Yar’Adua to take charge of oil policy want Nigeria to get a larger slice of the pie.
That also means ending government co-financing of operating costs and demanding that the oil companies tap capital markets to bridge the shortfall.
Moreover, Tony Chukwueke, the DPR’s head, has announced plans to create an African version of Petronas, Malaysia’s state-run oil company, and transform the sclerotic Nigerian National Petroleum Corporation into a powerful oil-producing firm that can dominate the market in the Gulf of Guinea and other emerging regions.
Intense Western pressure has been brought to bear on Yar’Adua to re-consider the January deadline.
His election is being challenged in court by other candidates, and Western backing could play a role in stabilizing his government.
But his advisers, some of whom played a key role in shaping Nigeria’s foreign policy in the 1970’s, are keen to use the gas-flaring issue to demonstrate Yar’Adua’s resolve and standing as a pan-African leader.
But, as in the 1970’s, the success of Nigerian diplomacy will depend on the government’s ability to win legitimacy at home.
That will require repairing and improving damaged infrastructure, generating economic prosperity, running efficient social services, and taming the unrest in the delta region.
It is not yet clear whether Yar’Adua’s government can meet these challenges.
Nigeria’s Road to Ruin
With so much political friction in Iran and Iraq, it is easy to overlook the growing unrest in Nigeria, the world’s eighth-largest oil exporter.
But Nigeria’s mounting social and political problems reveal how violence and uncertainty in yet another major energy producer is driving foreign investors out and global oil prices up.
Nigerian President Olusegun Obasanjo appears poised to try to amend the country’s constitution to allow himself a chance at a third term.
To that end, he has marginalized many of his political rivals.
Vice President Atiku Abubakar – a likely presidential aspirant in 2007 – has been harassed and isolated.
Ministers suspected of less than full loyalty have been sidelined.
But Obasanjo’s adversaries have joined the battle, and the president lacks the two-thirds majority needed in both the federal and state legislatures to remain in power after next year.
Two former Nigerian presidents, Generals Muhammadu Buhari and Ibrahim Babangida, publicly oppose Obasanjo’s constitutional meddling, and several governors of Nigeria’s Muslim-dominated northern states have made clear that they are determined to see Obasanjo off when his term expires in 2007.
As a result, the uncertainty surrounding Obasanjo’s plans is increasing sectional tensions.
At stake is the cohesion of a state that many argue is yet another example of an artificial nation cobbled together by Europeans who did not understand their creation’s social, tribal, and religious forces.
Northern governors oppose a third term for Obasanjo because they believe it is now their turn to choose Nigeria’s president under a deal, struck with their southern counterparts when democracy was introduced in 1999, for regional rotation of the presidency.
Southern governors argue that control of the presidency should remain with the south for years to come, because the north controlled the country during more than three decades of dictatorship.
Indeed, even southern governors who are not reliable Obasanjo allies appear determined to maintain their influence within the central government by ensuring that the country’s next president is a southerner.
For the moment, Obasanjo offers them their best opportunity to realize that goal.
Last December, 16 of Nigeria’s 17 southern governors signed the “Enugu Declaration” in support of the constitutional amendment that would permit him a third term.
This is a bad time for Nigeria’s federal government to face these distractions.
The Niger Delta region, home to most of Nigeria’s oil and many of its poor people, is in turmoil.
In October 2004, violence in the region forced Obasanjo’s government to negotiate with militia leader Asari Dokubu, after his men attacked a series of Royal Dutch Shell oil facilities and threatened to “burn down the area.”
In December 2004, Dokubu’s militias took 75 oil workers hostage and forced Shell to shut down about 10% of the country’s oil supply.
Dokubu then forced Obasanjo into a peace deal.
The deal did not last long.
After Dokubu renewed threats to oil infrastructure last September, he was arrested on sedition charges and now faces the possibility of execution or life in prison.
Dokubu’s allies have responded with new attacks.
A splinter group, the Movement for the Emancipation of the Niger Delta, has claimed credit for several recent attacks and kidnappings of foreign workers, and says it will not retreat until Delta states gain control of the revenue produced by locally extracted oil.
There are also fears that the splintering of Dokubu’s militias has created fertile ground in the Delta for Islamist groups.
A few weeks ago, a previously unknown organization called “The Martyr’s Brigade” claimed credit for attacks on Delta pipelines, raising concerns among multinationals that mercenary resistance in the region is becoming ideological.
Whatever the motivations of the various groups, a surge of militia attacks and kidnappings over the past several weeks has now shut down roughly 20% of Nigeria’s oil exports and killed dozens of people.
Shell has closed key facilities in the Delta after the abduction of several workers.
Once a verdict is reached in Dokubu’s trial, probably this summer, violence is expected to intensify.
In addition, religious violence sparked by the Danish cartoons mocking the prophet Muhammad ripped through Nigeria in February.
Angry Muslim and Christian mobs burned churches and mosques, killing dozens of people in a series of attacks and reprisals that have deepened the sectional divide between the Muslim north and the Christian south.
If all this turmoil weren’t enough, the discovery of avian flu in the northern provinces further undermines political stability.
Obasanjo has called on Muslim farmers in the area to cull their birds, a key source of protein in a region where malnutrition is a constant threat.
In some ways, Nigeria is plagued with the same problems facing Iraq.
Various ethnic and religious groups, based in different regions, are battling for oil revenue and political clout.
As in Iraq, the conflict could provoke large-scale bloodletting.
Yet, unlike Iraq, Nigeria has a recent history of relatively stable democratic governance.
The country’s factions each have good reason to compromise before the conflict comes to a head.
Northern governors could, for example, offer the southern states a larger share of Nigeria's oil revenue in exchange for their support for a northern president.
But achieving such a compromise won’t be a smooth or predictable process.
On the contrary, the risks of extended political instability and further large-scale disruptions to Nigeria’s oil output will remain high, at a time when the world can least afford it.
Nigeria’s Sick Man Democracy
How sick is Nigerian president Umaru Yar’Adua?
In May, he admitted during a live television broadcast that he suffers from a kidney ailment, but sought to quell rumors that he was terminally ill by insisting that fears for his health are greatly exaggerated and politically motivated.
There are plenty of world leaders in less-than-perfect health.
But the stakes are especially high in Nigeria, where Yar’Adua embodies the country’s delicate political balance.
With the fall of Nigeria’s dictatorship and the introduction of democracy in 1999, governors in the mainly Muslim northern provinces believed they had struck a deal with their southern counterparts on a regional rotation of the country’s presidency.
In 2007, arguing that it was their turn to choose a chief executive, they bitterly opposed a bid by then-President Olusegun Obasanjo, a southerner and a Christian, to rewrite Nigeria’s constitution in hopes of winning a third term.
Southern governors countered that the north had controlled the country through more than three decades of authoritarian rule and that a southerner should hold the presidency for years to come.
Tensions mounted.
Once it became clear that his gambit would fail, Obasanjo found a compromise: he named a man he trusted, Yar’Adua, a little-known northern governor and devout Muslim, as his preferred successor.
Western and African observers charged that widespread vote-rigging had tainted the official result, and Nigeria’s Supreme Court has yet to rule on challenges to the election’s legality.
But Yar’Adua shrugged off charges of electoral fraud, and in the first days of his presidency, he drew praise, both at home and abroad, for promises to tackle corruption and pursue an agreement with militia groups in the oil-rich, violence-plagued Niger Delta region.
In reaching out to armed groups like the Movement for Emancipation of the Niger Delta (MEND), one of his primary assets has been his vice president, Goodluck Jonathan, a native of the area.
Pacifying the Delta is vitally important, because Nigeria, the world’s eighth-largest oil producer, earns 86% of its export revenue from oil.
Attacks on pipelines have recently intensified ahead of a planned summit meeting between the government and various militia leaders, as small groups of militants stage attacks on oil infrastructure in the Delta to establish their relevance and win a potentially lucrative seat at the negotiating table.
The summit is likely to generate an agreement and positive media coverage, but northern Muslim members of parliament could complicate efforts to implement the deal.
The Nigerian government could use some good news.
Electricity shortages have intensified on Yar’Adua’s watch, producing blackouts in many areas of the country and darkening the foreign investment climate.
Rising food and energy prices pushed inflation up to 9.7% in May, from 8.2% in April.
Corruption investigations launched by Yar’Adua’s government have uncovered broader and deeper problems than many knew existed.
A battle between the president and legislature over control of federal spending has not been fully resolved.
For foreign investors, the greatest near-term concern may be a broad range of attacks from parliament and some of Yar’Adua’s economic advisors on Charles Soludo, the central bank governor, who is widely credited for Nigeria’s improved economic performance in the past several years.
Under Obasanjo, Soludo initiated much needed banking reforms and argued strenuously that Nigeria should pay its foreign debt.
But Soludo’s recent decision to create a sovereign wealth fund has ignited a firestorm.
Lawmakers complain they weren’t consulted.
Northern Muslims wonder why Soludo, a southern Christian, believes the government should horde excess cash that could be spent to relieve poverty among their constituents.
A favorite of the West, Soludo may not survive the year.
With so many challenges ahead, Nigeria can ill afford an ailing president.
Yar’Adua insists that he’s fine and that his trips to Germany for medical treatment, during the election campaign last year and again this April, have been unfairly politicized.
But there are plenty of unanswered questions about his kidney condition and rumors that he may even have Churg-Strauss Syndrome, a life-threatening autoimmune disease.
The true state of his health may matter less than public fears that he’s hiding something.
Yar’Adua’s health worries are creating risks to Nigeria’s stability that run far beyond questions about the Niger Delta or any single political issue.
If Yar’Adua were to die in office, his vice president would succeed him – returning the presidency to a southern Christian.
Nigeria’s northern Muslims are highly unlikely to accept that result without protest.
There is no reason to believe that Goodluck Jonathan will preemptively resign, and removing him from office if he assumes the presidency might well stoke unprecedented violence in the Delta.
Given the political friction and violence generated by last year’s election campaign, new balloting would prove a less-than-appealing prospect.
Only Umaru Yar’Adua’s doctors know for sure how sick he is.
But as answers begin to emerge, we will learn much more about the health of Nigeria’s fragile democracy.
The Silver Fox of Dictatorship and Democracy
MOSCOW – Throughout his years in power, Eduard Shevardnadze was known as the “silver fox,” a man who seemed to glide effortlessly from leader of Soviet Georgia and Kremlin Politburo member to Mikhail Gorbachev’s reform-minded foreign minister, before reemerging as post-Soviet Georgia’s pro-Western president, ironically opposing Gorbachev.
He regarded himself as a hero who liberated Georgia from Russia’s tight embrace.
He was also one of the most corrupt politicians his country ever saw.
By the end of his life, Shevardnadze had become a political pariah in Georgia, the West, and Russia, where he was viewed as an architect of the Soviet Union’s dissolution.
Yet, even if he was largely forgotten after the Rose Revolution of 2003, when he was ousted by his one-time protégé, Mikheil Saakashvili, his cunning and skill at manipulating political forces still enabled him to manage his legacy to his advantage.
The staunchly pro-American Saakashvili launched successful economic reforms and an all-out assault on police corruption, though he, too, eventually was accused of taking bribes and indulging autocratic impulses.
Having come to power in the revolt that overthrew the corrupt Shevardnadze, he resorted to the same Soviet-style techniques – intimidating and discrediting opponents, dispersing dissenters by force – to keep his opponents at bay.
The question Georgians have been asking ever since is whether Shevardnadze was really overthrown at all.
Knowing the extent of his unpopularity in 2003, many believe that he was ready to leave power but needed a successor who would ensure that his legacy (and his wealth) survived.
To be sure, Saakashvili became famous as Georgia’s justice minister for submitting corruption charges against the Shevardnadze family, and early in his presidency was able to reclaim for the state $15 million dollars of the Shevardnadze fortune.
But Saakashvili’s government never touched Shevardnadze and his family.
Regardless of whether this theory is true, its persistence lies at the core of Shevardnadze’s legacy.
Throughout his career, he was known to play all sides, at times threatening his resignation, only to stay on – or accusing enemies of assassination plots, only to stay alive.
In the 1970s, he would flatter Soviet leader Leonid Brezhnev with spectacular displays of fealty to the Kremlin, only to meet with protesting Georgian students in support of their right, in opposition to the Kremlin’s wishes, to speak Georgian, not Russian, as a state language.
Everything at which Georgians excelled under Shevardnadze in the Soviet era – entrepreneurship, education, and culture – was greatly neglected by him in the 1990s.
Similarly, whereas tens of thousands of functionaries were indicted for corruption or lost their jobs under his leadership in the 1970s, the post-Soviet Shevardnadze of the 1990s reportedly joked that he should have arrested himself, but that he deserved his wealth for his priceless political contribution.
In 1999, during the New York celebrations marking the tenth anniversary of the fall of the Berlin Wall, I myself heard Shevardnadze assert that Georgia had given the twentieth century two historic figures: “One who erected the Iron Curtain [Joseph Stalin], and one who tore it down” – meaning himself.
Surely, Shevardnadze’s political skills were worthy of another great Soviet politician from the Caucasus, the Armenian Anastas Mikoyan, once Stalin’s trusted trade minister and later Nikita Khrushchev’s fellow anti-Stalinist and deputy prime minister.
Mikoyan, as one joke had it, left the Kremlin one day in heavy rain and refused to share a colleague’s umbrella. “It’s ok,” he said, “I will walk between the raindrops.”
Likewise, Shevardnadze resigned as General Secretary of the Communist Party of Georgia in the 1980s, ostensibly in protest against Soviet rule, only to be appointed Soviet Foreign Minister by Gorbachev.
Having gained the trust of Western leaders and overseen the dismantling of the Soviet empire in Eastern Europe, he then resigned in 1990, declaring that Russia – under Gorbachev – was returning to dictatorship.
That pose as democracy’s guardian earned Shevardnadze independent Georgia’s presidency at a time when the country was vulnerable to civil war.
He held the post for 11 years.
Was Shevardnadze ever honest?
Was he a democrat or a despot?
The reality of the times was that he was both.
His death brings closer the end of the Gorbachev generation of reform communists, those who – like Shevardnadze and the late Boris Yeltsin – presented a stark contrast in the late 1980s to the dour Brezhnev-era hard-liners, spurring (mostly inadvertently) the collapse of the Soviet empire and the long transition to democracy.
As Russian President Vladimir Putin’s corrupt and authoritarian rule demonstrates every day, that transition is far from finished.
Yet there is some good news.
Last year, Georgia elected its new president, Giorgi Margvelashvili, through a peaceful and legitimate process; earlier this summer, the country signed a European Union Association Agreement, implying closer connections to the West.
None of this would have been possible without Shevardnadze’s decades-long career of cunning, yet brave, political triangulation.
Putin’s Tipping Point?
NEW YORK – When incompetence in the Kremlin turns murderous, its incumbents can begin to tremble.
As news of the downing of Malaysia Airlines Flight 17 over Ukraine trickled into Russia, people with a long memory recalled the Soviet Union’s attack, 31 years ago this September, on Korean Air Lines Flight 007, and its political consequences.
Back then, the Kremlin first lied to the world by saying that it had nothing to do with the missing KAL plane.
Later it claimed that the South Korean jet was on an American spy mission.
But, within the Soviet leadership, the incident was a tipping point.
It ended the career of Marshal Nikolai Ogarkov, Chief of the General Staff and a hardliner of the hardest sort, whose inconsistent and unconvincing efforts to justify the downing of the plane proved deeply embarrassing to the Kremlin.
Ogarkov’s ineptness (and inept mendacity), together with the mounting failure since 1979 of the Soviet Union’s war in Afghanistan, exposed the system’s advanced decrepitude.
The stagnation that had begun during Leonid Brezhnev’s rule deepened after his death in 1982.
His successors, first the KGB’s Yuri Andropov and then the Communist Party Central Committee’s Konstantin Chernenko, not only had one foot in the grave when they came to power, but were also completely unequipped to reform the Soviet Union.
The huge loss of life in Afghanistan (equal to the United States’ losses in Vietnam, but in a far shorter period of time) already suggested to many that the Kremlin was becoming a danger to itself; the attack on a civilian airliner seemed to confirm that emerging view.
It was this realization that spurred Mikhail Gorbachev’s rise to power, as well as support among the leadership for Gorbachev’s reformist policies of perestroika and glasnost.
Of course, history is not destiny, but one can be sure that at least some in Russian President Vladimir Putin’s entourage, if not Putin himself, have been thinking about Ogarkov’s failure and its impact on the Soviet elite.
After all, Kremlin leaders, Putin included, define themselves through what was, not what could be.
Indeed, Putin’s rationale for annexing Crimea closely resembles Brezhnev’s reasoning for invading Afghanistan: to confound enemies seeking to surround the country.
In 2004, speaking to Russian veterans about the Afghan invasion, Putin explained that there were legitimate geopolitical reasons to protect the Soviet Central Asian border, just as in March he cited security concerns to justify his Ukrainian land grab.
In the Brezhnev era, expansionist policies reflected the country’s new energy-derived wealth.
Putin’s military build-up and modernization of the past decade was also fueled by energy exports.
But Russia’s latest energy windfall has masked Putin’s incompetent economic management, with growth and government revenues now entirely reliant on the hydrocarbons sector.
Moreover, Putin’s incompetence extends far beyond the economy.
His security forces remain brutal and unaccountable; in some parts of the country, they have merged with criminal gangs.
His managed judiciary provides no comfort to ordinary people; and the country’s military installations, submarines, oilrigs, mining shafts, hospitals, and retirement homes regularly blow up, collapse, or sink, owing to neglect and zero liability.
When public support for Putin’s annexation of Crimea wanes – as it will – his failings will shine more starkly in the light of the MH17 catastrophe.
If the Russian state functioned well, Putin could continue to withstand pressure from opposition leaders.
But the opposition’s charge that Putin’s regime is composed of “swindlers and thieves” will resonate more strongly, because Russians can now see the results all around them.
By making himself, in effect, the state, Putin, like the gerontocracy that collapsed with Gorbachev’s rise, is increasingly viewed as responsible for all state failures.
And though thoughtful Russians may be hostages to Putin’s arrogance and blunders, the rest of the world is not.
Indeed, his partners – particularly the other BRICS countries (Brazil, India, China, and South Africa) – are now unlikely to be able to turn a blind eye to his contempt for international law and for his neighbors’ national sovereignty, as they did during their recent Brazilian summit.
And Europe’s last blinders about Putin seem to have fallen, with the result that serious sanctions are almost certain to be imposed.
Putin is only 61, a decade younger than the leaders who led the Soviet Union to the precipice, and the constitution permits him to remain in power for at least another ten years.
But with GDP up by just 1.3% in 2013 – and with sanctions likely to hasten the economy’s decline – patriotic pride will not be able to shield him much longer.
By overplaying its hand in Afghanistan and lying to the world about the downing of KAL 007, the Soviet regime exposed and accelerated the rot that made its collapse inevitable.
There is no reason to believe in a different fate for Putin’s effort to re-establish Russia as an imperial power.
Nixon Then, China Now
CLAREMONT, CALIFORNIA – When US President Richard Nixon embarked on his historic trip to China 40 years ago, he could not have imagined what his gamble would unleash.
The immediate diplomatic impact, of course, was to reshape Eurasia’s geopolitical balance and put the Soviet Union on the defensive.
But the long-term outcome of America’s rapprochement with China became visible only recently, with the economic integration of the People’s Republic into the world economy.
Had Nixon not acted in 1972, China’s self-imposed isolation would have continued.
Deng Xiaoping’s reform and opening of China to the world would have been far more difficult. amp#160;
Four decades after the “Nixon shock,” no one disputes that China has benefited enormously Today, the impoverished and autarkic country that Nixon visited is history.
Global reintegration has turned China into an economic powerhouse.
It is the world’s largest exporter in volume terms, and is the world’s second-largest economy.
China’s presence is felt around the world, from mines in Africa to Apple stores in the United States.
As we reflect on China’s remarkable progress since 1972, it is also an opportune time to consider how China continues to fall short in overcoming systemic obstacles to long-term success.
Because China is widely regarded as a winner of globalization, it is natural to assume that the country has developed the means to meet its challenges.
But, while China has implemented policies to maximize the benefits of free trade (undervaluing its currency, investing in infrastructure, and luring foreign manufacturing to increase competitiveness), the country remains unprepared for deeper integration with the world.
One sign of this is China’s lack of the necessary institutions and rules.
For example, China has become a significant player in providing economic development assistance (often tied to its strategy for acquiring natural resources).
Its loans and grants to Africa have now surpassed those made by the World Bank.
But China has no specialized agency in charge of international development assistance.
As a result, its foreign-aid programs are poorly coordinated and often seem counterproductive.
Instead of earning goodwill, they are viewed as part of a sinister neocolonial plot to grab natural resources in poverty-stricken nations.amp#160;
Another example is China’s lack of an immigration policy.
Even though China is beginning to attract labor from around the world, it has yet to promulgate a comprehensive legal framework that would allow the country to compete for the most talented people or to deal with the complexities of international migration.
A third example is the absence of independent policy-research organizations.
Owing to political control and inadequate professional development, government-run research institutions can seldom provide the high-quality, unbiased analysis of global issues on which sound policymaking depends.
Perhaps most importantly, two decades of rapid GDP growth have masked serious weaknesses on the economic front.
Because China continues to favor state capitalism and discriminates against the private sector, it lacks strong private firms that can take on Western multinational giants.
Except for Huawei, Lenovo, and perhaps Haier (which is nominally collectively owned), there are no private Chinese firms with a global footprint.
Until now, China has not paid dearly for this.
Its role in the global economy is confined to low-to-medium-end processing and assembly functions.
The most critical, sophisticated, and profitable parts of the value chain – research and development, product design, branding, marketing, service, and distribution – are occupied by American, European, Japanese, South Korean, and Taiwanese companies.
China simply “outsources” these high value-added functions to the likes of Apple and Walmart.
Of course, China does have huge firms, but they are inefficient state-owned behemoths that owe their size and profitability to their legal monopolies and government subsidies.
They may have the heft needed for global operations, but they lack the motivation to compete with world-class Western firms and are greeted with suspicion and fear around the world.
A China deeply embedded in globalization also needs a large pool of talented people, comparable to the best that the West can produce.
Today’s China lacks that pool.
While tens of millions of Chinese young people display impressive innate abilities, the country’s system of higher education does an abysmal job cultivating their talents.
For most, the curriculum is largely obsolete, and skewed toward rote learning of theory at the expense of basic analytical and critical-thinking skills.
Education in social sciences and humanities is particularly deficient, owing to lack of investment in these disciplines and excessive political control of curricula.
As a result, Chinese graduate from colleges and universities having learned relatively little about the outside world in fields such as anthropology, sociology, international relations, comparative literature, and history.
Unless China reforms its ossified system, the country will not be able to produce enough highly trained talent to compete with the world’s best and brightest.
None of these shortcomings – the lack of globalization-friendly institutions, rules, corporations, and talent – is an insurmountable obstacle.
The real question is whether China can remove them under a one-party regime that is hostile to the liberal values that inspire and underpin globalization.
Nixon himself was probably not bothered by the nature of the Chinese regime four decades ago.
The fact that the question must be addressed now attests to China’s astonishing progress since then.
But it also shows that China’s long march toward global integration remains unfinished.
NMD Offers Russia A Chance
"We have lived like pigs for half-a-century, so why not keep living like that for another fifty years?"
In essence, that is what those who stonewall in defence of the 1972 ABM Treaty are saying when they reject all options to create anti-ballistic missile defensive systems.
By opposing the development of such systems, however, the pro-ABM Treaty position creates a situation in which unsuspecting and peaceful citizens in Russia, the United States, and other countries are held permanently hostage to nuclear blackmail.
The "ABM at any cost" view could only have "guaranteed peace" during the insanity of the Cold War.
It certainly did not prevent an accelerated arms race.
Indeed, the first strategic nuclear arms reductions were not agreed upon until two decades later with the START-2 Treaty of 1993, a time when relations between Moscow and Washington had become more reasonable and realistic.
Although the START-2 Treaty confirmed the ABM Treaty's importance, it also implied that new and more radical steps towards disarmament would follow.
Unfortunately, this did not happen; it took Moscow 8 years to ratify START-2.
In the interim, new threats have arisen.
Today, it is not only the superpowers who are capable of blackmailing the world with "super-murder."
Mini-powers and even terrorist groups can adopt mass blackmail as their policy.
Russia is as vulnerable as any country to such blackmail.
So standing in support of the ABM Treaty and its ban on all national missile defenses is of no help to anyone.
Despite this, Russia automatically opposes change.
Why?
When will Russians stop being maniac and obsessive about America?
The inferiority complex of Russia's derzhavniki (advocates of a powerful, effective state) reflects only weakness, not strength.
It is similar to the fanatic feelings of a mouse who thinks that there is nothing more fearful than a cat.
But with its gigantic financial, economic, and technological resources, America can be an exceptional partner for Russia as well as a nemesis.
It is to that positive partnership that Russia should look.
For example, everyone knows how hard it was for Russia over the past decade to maintain its image as a space power.
Today, due to American cooperation, Russia can do things in space that only yesterday seemed impossible.
Tourists are going into space!
The Russian goes for free, the American pays a fee of $20 million.
As strange as "space tourism" seemed two months ago, what seems like a fairy-tale today - cooperation with America to develop systems to prevent nuclear and missile terrorism - can become a reality tomorrow if Russia acts in its own interests.
Those interests are crystal clear.
Today, Pakistani generals who are notorious for organizing coups and helping the Taliban, possess atomic bombs.
Tomorrow, Iranian generals may acquire atomic weapons.
North Korea already assists them with arms.
Russia is threatened by this as much as anyone.
So it is in Russia's national interest - in the interest of its territorial integrity, the development of its military-industrial complex, the stoppage of a "brain drain" of its best minds to the West - to find the means to participate in this American "project of the century" - the National Missile Defense.
But if we want to be partners in the development of modern defensive systems, we must negotiate in good faith, not bargain hard just to walk away in a pre-planned way at the end.
Indeed, it is important not to overplay our hand.
Otherwise Russia may look like a country whose main interest is in maintaining an option where all of America is vulnerable to nuclear blackmail.
The door to partnership is open;
Russia need not break it down.
From his first mention of the ABM Treaty, President Bush has suggested that it is crucial for America to cooperate with Russia.
Of course, we must make sure that President Bush means what he says, but it is time for both sides to overcome Cold War militancy.
Leftovers from the past - conspiracy theories, mistrust, spy-hunting, and embargoes on technological exchanges - should be consigned to the past.
US/Russian diplomacy can either create difficulties that will cost both countries huge sums, or the conditions in which Russian industries can develop into world class competitors.
Instead of engaging in bitterness and spy mania, it is time for Russia to find its "place under the capitalist sun."
The competitive fight between Russian industries and businesses around the world for commissions and contracts should have started "yesterday."
Europeans and Chinese who oppose missile defense do so in a very measured way; they keep their options open (and the hope of big contracts for their possible participation) by hiding behind Russia's defense of the ABM Treaty.
They understand that the issue is not just black and white.
To avoid confrontation with America, Russia should call for the creation of a special international committee to deal with all ABM questions, and this committee should be responsible for international cooperation in the field of missile defense.
It should not be confined to the political, diplomatic, and military aspects but should take in business concerns as well.
This will give Russia a unique opportunity to step into the international business arena by providing some of the technologies involved, rather than just the usual raw materials.
It is also important for us to mobilize state and private lobbying - both in Washington and in other Western capitals - for Russia's participation in the project.
When Presidents Putin and Bush meet in Slovenia on June 16th, the ABM Treaty will top the agenda.
That summit marks the moment to begin fulfilling President Putin's call to subordinate foreign policy to Russia's economic interests.
Pragmatism - not old-fashioned and outlived stereotypes - should form the heart of Russian/American diplomacy.
The Assad Dead End
PARIS – Forget principles and morality.
Forget, or try to forget, the quarter-million deaths for which Bashar al-Assad is responsible, directly or indirectly, since choosing to respond with violence to a peaceful uprising of the Syrian people.
Set aside the fact that Assad’s forces have caused 10-15 times more civilian deaths thus far than the Islamic State, whose horrific execution videos have overshadowed the Syrian dictator’s invisible massacres.
But even if you can purge all of this from your thoughts, a policy for Syria that posits Assad as an “alternative” to the Islamic State is simply not viable.
Assad, after all, literally unleashed the Islamic State’s current savagery: in May 2011, he released hundreds of Islamic radicals from prison, quickly supplying the infant group with fighters and leaders.
And then, in mid-2014, he allowed Iraqi elements of the Islamic State to find sanctuary in eastern Syria.
In other words, Assad created the monster that he is now pretending to fight.
Is all that not a little much for a potential ally?
Can working with Assad possibly provide a sound basis for what is supposed to be a common effort?
The bottom line is that Assad has no interest in winning.
The man who now holds himself up as civilization’s last bulwark against the Islamic State is also the last man who wants to see it eliminated.
After all, does a chess player, even a bad one, intentionally sacrifice his most powerful piece?
Do any of us ever tear up our insurance policies?
Do we really believe that Assad and his cronies are too stupid to have realized that their political survival depends on that of the Islamic State and on maintaining themselves as the keepers of the gate through which the rest of us must pass to wage war against it?
“Of course not,” the advocates of working with him concede. “But let’s take a two-step approach.
Let’s defeat the Islamic State and then worry about Assad.”
But this, too, assumes that dictators are more stupid than they really are.
Worse, it ignores that politics follows its own logic, or at least its own dynamics.
What the sorcerer’s apprentices who want to work with Assad ignore is that they would most likely have a great deal of trouble, when the time comes, distancing themselves from an ally who would not be shy about claiming his share of the victory.
As a result, jihadism would rush back in, though perhaps in a different guise.
“Bashar al-Assad is the Syrian state,” the same people say. “And we must not commit the fatal error of destroying the state.”
But this argument is not valid, either. The state has already failed: Assad's regime controls only a fifth of Syria’s territory, and the remaining four-fifths will never willingly resubmit to its terrifying control.
If the regime prevails, Syria’s citizens will continue to flee in droves to Turkey, Lebanon, and Europe.
In fact, Assad’s regime cares so little for its pseudo-state that it abandons its own soldiers caught beyond the territory it controls, as occurred in Tabqa, near Raqqa.
Baathist Syria, whatever its friends in the Kremlin and elsewhere say, is dead and buried.
And no military trompe l’œil can revive it.
But the supposed realists refuse to accept reality.
Just as it was necessary to ally with Stalin to defeat Hitler, they claim, we should not be afraid to play the Assad card to rid ourselves of the Islamic State.
Yes, jihadism is the fascism of our day, infected with plans, ideas, and a will to purity comparable to those of the Nazis.
I was one of the first to suggest the comparison some 20 years ago.
And yet it is absurd to compare the power of the two phenomena, or to suggest that in the confrontation with the butchers of Mosul and Palmyra, the democracies face a strategic challenge analogous to that of the Nazi Wehrmacht.
This historical leap is possible only for people whose political irresponsibility is matched by their proclivity for lazy analogy.
Make no mistake: the Islamic State is strong.
But it is not so strong as to leave those who would fight it with only the politics of the lesser of two evils.
The West must decide what to do.
In the aftermath of last week’s peace talks in Vienna – which convened the United States, Russia, Iran, China, Egypt, Turkey, Saudi Arabia and other Gulf states, Jordan, Lebanon, and key European Union members – that question becomes increasingly difficult.
Should we equip what remains of the Free Syrian Army?
Should we deal with the few remaining Alawite leaders whose hands are not stained with blood, or those members of Assad’s clan who chose exile early and thus were not involved in the massacres?
Perhaps there is still time to bring together, on neutral ground, some of the elements that comprised the old Syria.
Or perhaps more radical solutions – of the type implemented in Germany and Japan after World War II – are now required.
All of these paths remain open, but they are narrowing.
And none of them depends on the political survival of Bashar al-Assad.
Nobel Injustice
SINGAPORE – Martti Ahtisaari is a great man.
He deserves the Nobel Peace Prize for his life work.
But it was a mistake for the Norwegian Nobel Committee to cite his work in Aceh as a reason for giving him the prize.
As a recent story by Agence France Presse put it, Ahtisaari’s “most notable achievement was overseeing the 2005 reconciliation of the Indonesian government and the Free Aceh Movement rebels, bringing an end to a three-decade-old conflict that killed some 15,000 people.” But it was Indonesia’s people and leaders who should have received the Nobel Peace Prize for the Aceh political miracle.
More fundamentally, the mentioning of Aceh in this Nobel citation raises serious questions about the mental maps used by the Nobel Prize Committee in making these awards.
The committee members increasingly seem to be prisoners of the past.
They continue to assume that we live in an era of Western domination of world history.
But that era is over.
Increasingly, the rest of the world has gone from being objects of world history to becoming its subjects.
By giving the Nobel Peace Prize to the Indonesians instead of a European mediator for Aceh, the Nobel Prize Committee would have recognized that the world has changed.
Three other big benefits would also have resulted from giving the award to an Indonesian.
First, the West associates the Islamic world with violence and instability.
Few believe that Muslims are capable of solving their political problems by themselves.
But this is precisely what the Aceh story was all about.
Two key Indonesian leaders, President Susilo Bambang Yudhoyono and Vice President Jusuf Kalla, showed remarkable political skill and courage in working out the peace deal for Aceh.
A Nobel Peace Prize for them would have shown the West that Muslims can be good peacemakers and, equally important, it would have sent a message of hope to the Islamic populations of the world that have seen their self-esteem eroded by stories of failure.
Aceh was essentially a spectacular Muslim success story.
Hence, the Nobel Peace Prize Committee has squandered a valuable opportunity to send out a message of hope to the world’s 1.2 billion Muslims, one that would have rid the world of the grand global illusion that peacemaking is a “white man’s burden.”
No Blank Check for Paulson
NEW YORK – US Treasury Secretary Hank Paulson’s $700billion rescue package has run into difficulty on Capitol Hill.
Rightly so: it is ill-conceived.
Congress would be abdicating its responsibility if it gave the Treasury secretary a blank cheque.
The bill submitted to Congress even had language in it that would exempt the secretary’s decisions from review by any court or administrative agency - the ultimate fulfillment of the Bush administration’s dream of a unitary executive.
Paulson’s record does not inspire the confidence necessary to give him discretion over $700billion.
His actions last week brought on the crisis that makes rescue necessary.
On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG.
By Tuesday he had to reverse himself and provide an $85billion loan to AIG on punitive terms.
The demise of Lehman disrupted the commercial paper market.
A large money market fund “broke the buck” and investment banks that relied on the commercial paper market had difficulty financing their operations.
By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s.
Paulson reversed again and proposed a systemic rescue.
Paulson had gotten a blank cheque from Congress once before. That was to deal with Fannie Mae and Freddie Mac.
His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available.
Within a few weeks the market forced Paulson’s hand and he had to take them over.
Paulson’s proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information.
The securities are hard to value but the sellers know more about them than the buyer: in any auction process the Treasury would end up with the dregs.
The proposal is also rife with latent conflict of interest issues.
Unless the Treasury overpays for the securities, the scheme would not bring relief.
But if the scheme is used to bail out insolvent banks, what will the taxpayers get in return?
Barack Obama has outlined four conditions that ought to be imposed: an upside for the taxpayers as well as a downside; a bipartisan board to oversee the process; help for homeowners as well as the holders of the mortgages; and some limits on the compensation of those who benefit from taxpayers’ money.
These are the right principles.
They could be applied more effectively by capitalizing the institutions that are burdened by distressed securities directly rather than by relieving them of the distressed securities.
The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700billion in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble.
By contrast, the addition of $700billion on the demand side may not be sufficient to arrest the decline of housing prices.
Something also needs to be done on the supply side.
To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum.
The terms of mortgages need to be adjusted to the homeowners’ ability to pay.
The rescue package leaves this task undone.
Making the necessary modifications is a delicate task rendered more difficult by the fact that many mortgages have been sliced up and repackaged in the form of collateralized debt obligations.
The holders of the various slices have conflicting interests.
It would take too long to work out the conflicts to include a mortgage modification scheme in the rescue package.
The package can, however, prepare the ground by modifying bankruptcy law as it relates to principal residences.
Now that the crisis has been unleashed, a large-scale rescue package is probably indispensable if the crisis is to be brought under control.
Rebuilding the depleted balance sheets of the banking system is the right way to go.
Not every bank deserves to be saved, but the experts at the Federal Reserve, with proper supervision, can be counted on to make the right judgments.
Managements that are reluctant to accept the consequences of past mistakes could be penalized by depriving them of the Fed’s credit facilities.
Making government funds available should also encourage the private sector to participate in recapitalizing the banking sector and bringing the financial crisis to a close.
No Clash of Civilizations
No Country for Young Oligarchs
CAMBRIDGE – Mikhail Prokhorov, the owner of gold mines in Siberia and a professional basketball team in the United States, is one of Russia’s richest men, with a net worth of $18 billion.
This past June, he agreed to lead a center-right political party to contest December’s parliamentary elections.
Prokhorov, who is 46, seemed to believe that his business experience would boost his political prospects.
Prokhorov was wrong, and resigned in September from the party he had led.
But, whatever embarrassment he may now be feeling is certainly a better fate than that meted out to Mikhail Khodorkovsky, another Russian oligarch with political ambitions, who is now languishing in his eighth year of imprisonment since boldly challenging Vladimir Putin’s ideas about how Russia should be run.
Prokhorov’s withdrawal preceded by just a few days the announcement by United Russia, the country’s ruling party, that Putin will seek a third presidential term in 2012, swapping jobs with the incumbent, President Dmitri Medvedev, who will become Prime Minister.
That may have been too much for Alexei Kudrin, the finance minister since 2000, whose disagreement with Medvedev’s increased spending led to his resignation.
In the absence of new faces or ideas, the only prospect for the coming election year will be to pump more petrodollars into a struggling and grossly inefficient economy.
That spending binge will feed corruption, inflation, and natural-resource dependency – the three evils with which Kudrin has fought throughout his tenure.
While Prokhorov is one of several respected Russian oligarchs, Kudrin was the most respected member of the government.
Their departure from political life is becoming widely viewed as a symptom of deepening divisions among the Putin-era governing elite, even a harbinger of political crisis.
To be sure, there are many subtle signs of panic at the top about the state of the country’s economy; but there is no hint that United Russia has a new program to meet these challenges in Putin’s next administration, apart from more censorship of the Internet.
But all signs of conflict within Russia’s supreme leadership of two – Putin and Medvedev – have disappeared.
Until September, Medvedev made great efforts to encourage hopes for change.
But Putin never lost control over the governmental apparatus, and the prospect of his regaining the presidency never dimmed.
So those hopes were always false.&nbsp; Indeed, most of Russia’s rulers have been in office for the better part of a decade.
Some, like Kudrin, had become visibly impatient for change; but most remained very content with the status quo.
As happened during the Cold War, a bureaucratic crisis suddenly exposed the mechanisms by which this elite has wielded power.
When resigning from his party, Prokhorov publicly accused a Kremlin insider, Vladislav Surkov, of foul play, calling him “the puppet-master” who had “privatized politics in Russia.”
Surkov, the deputy chief of the presidential administration since 1999, co-chairs the “Working Group on Civil Society” – one of several bodies created in 2009 to “reset” Russian-American relations – with Michael McFaul, US President Barack Obama’s adviser on Russia.
The working group may have contributed to ending the war of words, at least on the American side, and McFaul has now been nominated to become US Ambassador to Russia.
But members of the US Senate, which must confirm McFaul’s nomination, would do well to ask him about Surkov, a man who has overseen the destruction of Russian democratic politics.
In taking on Surkov, Prokhorov demonstrated his refusal to be a puppet.
In fact, Prokhorov has much to offer his country.
His articulate speech and self-made success are unusual among Russian politicians.
And, with housing, healthcare, and education less accessible now than at the end of the 1980’s, his political program focuses on what should be done to improve Russia’s human capital – the key problem holding back Russia’s economy.
According to Prokhorov, productivity in Russia is just 6-10% of that in the US, which is why the economy struggles even when the price of oil, its main export, is peaking.
Two million educated professionals have recently emigrated from Russia.
During the last 20 years, social inequality has grown threefold.
Russia, Prokhorov concludes, is a feudal society, with Putin’s political monopoly and economic mismanagement exacerbating the so-called “natural-resource curse” that afflicts many oil-exporting countries.
Such a bleak diagnosis of Russia’s ills could never be the basis for a Kremlin-sponsored political party.
Nevertheless, for a while Prokhorov tried to play politics according to the Byzantine rules that govern Russian elections – and that benefit United Russia, the Putin-built replica of the Soviet-era Communist Party.
But playing politics by Putin’s rules requires scores of hired professionals, the so-called “political technologists.”
Despite his acumen, Prokhorov surrounded himself with such people, pretentious wizards who have turned Russian politics into the revolting spectacle that it is.
He hoped to break up Putin’s monopoly by using its own tools.
Today, Prokhorov’s program remains the only tangible result of the $26 million that he and his friends invested in his campaign.
He is probably sorrier for the loss of three months of his time.
Although he claims that he will not leave politics completely, he now looks like just another oligarch who must choose between capitulation, emigration, and imprisonment.
Kudrin’s future is no less obscure.
Japan’s Coming Political Earthquake
OSAKA – Japan is now confronting challenges at home and abroad that are as serious as any it has had to face since World War II’s end.
Yet the Japanese public is displaying remarkable apathy.
The country’s two major political parties, the governing Democratic Party of Japan (DPJ) and the Liberal Democratic Party (LDP) recently chose their leaders, yet ordinary Japanese responded with a collective shrug.
But Japan’s political system is unlikely to remain a matter of popular indifference for much longer.
The DPJ first came to power in September 2009, with an ambitious program promising comprehensive administrative reform, no tax increases, and a freer hand in Japan’s alliance with the United States.
But, owing to the party’s inexperience and incompetence at every level of policymaking – shortcomings that were compounded by the unprecedented devastation of the great earthquake of March 11, 2011 – the first two DPJ governments, under Yukio Hatoyama and Naoto Kan, ended with those pledges in tatters.
Consequently, several dozen legislators, led by the perpetual rebel Ichiro Ozawa, defected from the DPJ, forming a new rump opposition party.
The DPJ has now reelected incumbent Prime Minister Yoshihiko Noda as its president, despite his very low public-approval rating.
With a thin majority in the lower house and a narrow plurality in the upper house (which has adopted a censure resolution against Noda), the DPJ on its own is unable to pass fiscal and other legislation essential to running a government.
As a result, the prime minister is barely muddling through – and only by agreeing with the major opposition parties to dissolve the lower house.
Though he has not specified exactly when he will do so, the endgame for the DPJ government has begun.
Yet the rival LDP, which had governed almost uninterruptedly for several decades until 2009, has proven itself to be an ineffective opposition party.
Unable to overcome popular distrust, owing to its longstanding symbiosis with the bureaucrats and subservience to the US, the LDP has been incapable of holding the DPJ accountable in the legislature.
Instead, the LDP, having failed to reinvigorate itself and attract allies, has occasionally taken a buck-passing approach, such as permitting the DPJ to pass an unpopular but inevitable and necessary increase in the consumption tax.
In an effort to enhance popular support for the party, the LDP presidential campaign took advantage of a heightened sense of crisis centered on Japan’s territorial disputes with Russia, South Korea, and, most recently and alarmingly, China.
The party chose as its leader former Prime Minister Shinzo Abe, who is known as the hardest of hardliners on nationalist matters, but who is also widely perceived as having acted irresponsibly when he abruptly gave up his premiership in 2007, after only one year in office, due to health problems.
His comeback has given the country a rather odd feeling of déjà vu.
So, the Japanese public is now searching for a party that can take on the tasks of reforming the country, reviving the economy, and enhancing national security.
Neither the DPJ nor the LDP appears dependable in any of these areas.
As a result, the public is paying increasing attention to the newly created Japan Restoration Party (JRP) and its populist leader, Osaka City Mayor Toru Hashimoto, a former governor of Osaka prefecture and the son of a minor Yakuza (mafioso).
The JRP aspires to be a ruling party, or at least a kingmaker in Japanese politics, but it has an almost exclusively domestic agenda and suffers from a dearth of talent below Hashimoto.
Without a comprehensive agenda and expertise in foreign and security policy, the party will most likely stumble badly should it come to power.
It is almost certain that the next general election will not produce a parliamentary majority for a single party.
Given the parties’ ideological, organizational, and policy disarray, Japan will enter a period of profound uncertainty, ultimately leading to an unprecedented political shakeup.
This prospect may seem surprising, given that Japan has already lost two decades since its economy’s bubble burst in the early 1990’s.
But, after a short-lived non-LDP government, successive coalition governments until 2009 had the LDP at their core.
Japan’s hidebound postwar regime has been insulated, externally and internally, by relatively unchanging geostrategic and economic conditions.
The country remains the world’s largest creditor, and has slowly but steadily eliminated enormous non-performing loans in its banking sector.
Moreover, the Cold War never ended in East Asia, requiring the preservation of a US-led security system centered on the US-Japan alliance – an alliance that appears to presuppose a pliant Japanese political system.
In fact, the system’s resilience in absorbing huge disruptions – the 2008 financial crisis and the 2011 earthquake – is one key reason for its survival.
Thus, Japan remains broadly credible, at least relative to the US and the European Union.
The yen’s appreciation reflects markets’ assessment that Japan’s economic position is stronger than that of the US and the EU, which are burdened with serious structural problems of their own.
Indeed, with a huge capital surplus and very low interest rates in a time of creeping deflation, Japan now has a golden opportunity to invest in public infrastructure, education, defense, and overseas projects – a burst comparable to the British Empire in the late nineteenth century.
But Japan is unable to seize these opportunities, because its political system is incapable of producing competent leadership.
Given rising tensions in Asia, the question is how long this can last.
China’s rise and America’s relative decline present not only a danger for Japan, but also an opportunity – and perhaps the needed momentum boost – for real reform.
No Development, No Peace
Anyone interested in peacemaking, poverty reduction, and Africa’s future should read the new United Nations Environment Program (UNEP) report Sudan: Post-Conflict Environmental Assessment .
This may sound like a technical report on Sudan’s environment, but it is much more.
It is a vivid study of how the natural environment, poverty, and population growth can interact to provoke terrible human-made disasters like the violence in Darfur.
When a war erupts, as in Darfur, most policymakers look for a political explanation and a political solution.
This is understandable, but it misses a basic point.
By understanding the role of geography, climate, and population growth in the conflict, we can find more realistic solutions than if we stick with politics alone.
Extreme poverty is a major cause, and predictor, of violence.
The world’s poorest places, like Darfur, are much more likely to go to war than richer places.
This is not only common sense, but has been verified by studies and statistical analyses.
In the UNEP’s words, “There is a very strong link between land degradation, desertification, and conflict in Darfur.”
Extreme poverty has several effects on conflict.
First, it leads to desperation among parts of the population.
Competing groups struggle to stay alive in the face of a shortage of food, water, pasture land, and other basic needs.
Second, the government loses legitimacy and the support of its citizens.
Third, the government may be captured by one faction or another, and then use violent means to suppress rivals.
Darfur, the poorest part of a very poor country, fits that dire pattern.
Livelihoods are supported by semi-nomadic livestock-rearing in the north and subsistence farming in the south.
It is far from ports and international trade, lacks basic infrastructure such as roads and electricity, and is extremely arid.
It has become even drier in recent decades because of a decline in rainfall, which is probably the result, at least in part, of man-made climate change, caused mostly by energy use in rich countries.
Declining rainfall contributed directly or indirectly to crop failures, the encroachment of the desert into pasturelands, the decline of water and grassland for livestock, and massive deforestation.
Rapid population growth – from around one million in 1920 to around seven million today – made all of this far more deadly by slashing living standards.
The result has been increasing conflict between pastoralists and farmers, and the migration of populations from the north to the south.
After years of simmering conflicts, clashes broke out in 2003 between rival ethnic and political groups, and between Darfur rebels and the national government, which in turn has supported brutal militias in “scorched earth” policies, leading to massive death and displacement.
While international diplomacy focused on peacekeeping and on humanitarian efforts to save the lives of displaced and desperate people, peace in Darfur can be neither achieved nor sustained until the underlying crises of poverty, environmental degradation, declining access to water, and chronic hunger are addressed.
Stationing soldiers will not pacify hungry, impoverished, and desperate people.
Only with improved access to food, water, health care, schools, and income-generating livelihoods can peace be achieved.
The people of Darfur, Sudan’s government, and international development institutions should urgently search for common ground to find a path out of desperate violence through Darfur’s economic development, helped and supported by the outside world.
The UNEP report, and experiences elsewhere in Africa, suggests how to promote economic development in Darfur.
Both people and livestock need assured water supplies.
In some areas, this can be obtained through boreholes that tap underground aquifers.
In other areas, rivers or seasonal surface runoff can be used for irrigation.
In still other areas, longer-distance water pipelines might be needed.
In all cases, the world community will have to help pay the tab, since Sudan is too poor to bear the burden on its own.
With outside help, Darfur could increase the productivity of its livestock through improved breeds, veterinary care, collection of fodder, and other strategies.
A meat industry could be developed in which Darfur’s pastoralists would multiply their incomes by selling whole animals, meat products, processed goods (such as leather), dairy products, and more.
The Middle East is a potentially lucrative nearby market.
To build this export market, Darfur will need help with transport and storage, cell phone coverage, power, veterinary care, and technical advice.
Social services, including health care and disease control, education, and adult literacy programs should also be promoted.
Living standards could be improved significantly and rapidly through low-cost targeted investments in malaria control, school feeding programs, rainwater harvesting for drinking water, mobile health clinics, and boreholes for livestock and irrigation in appropriate locations.
Cell phone coverage could revolutionize communications for sparse populations in Darfur’s vast territory, with major benefits for livelihoods, physical survival, and the maintenance of family ties.
The only way to sustainable peace is through sustainable development.
If we are to reduce the risk of war, we must help impoverished people everywhere, not only in Darfur, to meet their basic needs, protect their natural environments, and get onto the ladder of economic development.
No Diseases for Old Men
PRINCETON – Pneumonia used to be called “the old man’s friend” because it often brought a fairly swift and painless end to a life that was already of poor quality and would otherwise have continued to decline.
Now a study of severely demented patients in Boston-area nursing homes shows that the “friend” is often being fought with antibiotics.
Such practices raise the obvious question: are we routinely treating illnesses because we can, rather than because we ought to?
The study, carried out by Erika D’Agata and Susan Mitchell and recently published in the Archives of Internal Medicine, showed that over 18 months, two-thirds of 214 severely demented patients were treated with antibiotics.
The mean age of these patients was 85.
On the Test for Severe Impairment, where scores can range from zero to 24, three-quarters of these patients scored zero.
Their ability to communicate verbally ranged from non-existent to minimal.
It isn’t clear that using antibiotics in these circumstances prolongs life, but even if it did, one would have to ask: what is the point?
How many people want their lives to be prolonged if they are incontinent, need to be fed by others, can no longer walk, and their mental capacities have irreversibly deteriorated so that they can neither speak nor recognize their children?
In many cases, the antibiotics were administered intravenously, which can cause discomfort.
The interests of patients should come first, but when it is dubious that continued treatment is in a patient’s interests and there is no way to find out what the patients wants, or would have wanted, it is reasonable to consider other factors, including the views of the family and the cost to the community.
Medicare costs for beneficiaries with Alzheimer’s disease were $91 billion in 2005, and are expected to increase to $160 billion by 2010.
(For comparison, in 2005 the United States spent $27 billion on foreign aid.)
Moreover, D’Agata and Mitchell suggest that the use of so many antibiotics by patients with dementia carries a different kind of cost: it exacerbates the growing problem of antibiotic-resistant bacteria, putting other patients at risk.
Pneumonia also has not been able to play its friendly role for 84-year-old Samuel Golubchuk of Winnipeg, Canada, who for years has had limited physical and mental capacities as a result of a brain injury.
Golubchuk’s doctors thought it best not to prolong his life, but his children, arguing that discontinuing life-support would violate their Orthodox Jewish beliefs, obtained a court order compelling the doctors to keep their father alive.
So, for the past three months, Golubchuk has had a tube down his throat to help him breathe and another in his stomach to feed him.
He does not speak or get out of bed.
How much awareness he has is in dispute.
His case will now go to trial, and how long that will take is unclear.
Normally, when patients are unable to make decisions about their treatment, the family’s wishes should be given great weight.
But a family’s wishes should not override doctors’ ethical responsibility to act in the best interests of their patients.
Golubchuk’s children argue that he interacts with them.
But establishing their father’s awareness could be a double-edged sword, since it could also mean that keeping him alive is pointless torture, and it is in his best interests to be allowed to die peacefully.
The other important issue raised by Golubchuk’s case is how far a publicly-funded health care system such as Canada’s has to go to satisfy the family’s wishes.
When a family seeks treatment that, in the professional judgment of the physicians, is not in the patient’s best interests, the answer should be: not far at all.
If Golubchuk’s children can convince the court that their father is not suffering, the court might reasonably order the hospital to grant them custody of their father. They can then decide for themselves, at their own expense, how much further treatment he should have.
What the court should not do is order the hospital to continue to care for Golubchuk against the better judgment of its health care professionals.
Canada’s taxpayers are not required to support the religious beliefs held by their fellow-citizens.
Don’t Fear a Rising Dollar
LONDON – The US Federal Reserve is almost certain to start raising interest rates when the policy-setting Federal Open Markets Committee next meets, on December 16.
How worried should businesses, investors, and policymakers around the world be about the end of near-zero interest rates and the start of the first monetary-tightening cycle since 2004-2008?
Janet Yellen, the Fed chair, has repeatedly said that the impending sequence of rate hikes will be much slower than previous monetary cycles, and predicts that it will end at a lower peak level.
While central bankers cannot always be trusted when they make such promises, since their jobs often require them deliberately to mislead investors, there are good reasons to believe that the Fed’s commitment to “lower for longer” interest rates is sincere.
The Fed’s overriding objective is to lift inflation and ensure that it remains above 2%.
To do this, Yellen will have to keep interest rates very low, even after inflation starts rising, just as her predecessor Paul Volcker had to keep interest rates in the 1980s very high, even after inflation started falling.
This policy reversal follows logically from the inversion of central banks’ objectives, both in America and around the world, since the 2008 crisis.
In the 1980s, Volcker’s historic responsibility was to reduce inflation and prevent it from ever rising again to dangerously high levels.
Today, Yellen’s historic responsibility is to increase inflation and prevent it from ever falling again to dangerously low levels.
Under these conditions, the direct economic effects of the Fed’s move should be minimal.
It is hard to imagine many businesses, consumers, or homeowners changing their behavior because of a quarter-point change in short-term interest rates, especially if long-term rates hardly move.
And even assuming that interest rates reach 1-1.5% by the end of 2016, they will still be very low by historic standards, both in absolute terms and relative to inflation.
The media and official publications from the International Monetary Fund and other institutions have raised dire warnings about the impact of the Fed’s first move on financial markets and other economies.
Many Asian and Latin America countries, in particular, are considered vulnerable to a reversal of the capital inflows from which they benefited when US interest rates were at rock-bottom levels.
But, as an empirical matter, these fears are hard to understand.
The imminent US rate hike is perhaps the most predictable, and predicted, event in economic history.
Nobody will be caught unawares if the Fed acts next month, as many investors were in February 1994 and June 2004, the only previous occasions remotely comparable to the current one.
And even in those cases, stock markets barely reacted to the Fed tightening, while bond-market volatility proved short-lived.
But what about currencies?
The dollar is almost universally expected to appreciate when US interest rates start rising, especially because the EU and Japan will continue easing monetary conditions for many months, even years.
This fear of a stronger dollar is the real reason for concern, bordering on panic, in many emerging economies and at the IMF.
A significant strengthening of the dollar would indeed cause serious problems for emerging economies where businesses and governments have taken on large dollar-denominated debts and currency devaluation threatens to spin out of control.
Fortunately, the market consensus concerning the dollar’s inevitable rise as US interest rates increase is almost certainly wrong, for three reasons.
First, the divergence of monetary policies between the US and other major economies is already universally understood and expected.
Thus, the interest-rate differential, like the US rate hike itself, should already be priced into currency values.
Moreover, monetary policy is not the only determinant of exchange rates.
Trade deficits and surpluses also matter, as do stock-market and property valuations, the cyclical outlook for corporate profits, and positive or negative surprises for economic growth and inflation.
On most of these grounds, the dollar has been the world’s most attractive currency since 2009; but as economic recovery spreads from the US to Japan and Europe, the tables are starting to turn.
Finally, the widely assumed correlation between monetary policy and currency values does not stand up to empirical examination.
In some cases, currencies move in the same direction as monetary policy – for example, when the yen dropped in response to the Bank of Japan’s 2013 quantitative easing.
But in other cases the opposite happens, for example when the euro and the pound both strengthened after their central banks began quantitative easing.
For the US, the evidence has been very mixed. Looking at the monetary tightening that began in February 1994 and June 2004, the dollar strengthened substantially in both cases before the first rate hike, but then weakened by around 8% (as gauged by the Fed’s dollar index) in the subsequent six months.
Over the next 2-3 years, the dollar index remained consistently below its level on the day of the first rate hike.
For currency traders, therefore, the last two cycles of Fed tightening turned out to be classic examples of “buy on the rumor; sell on the news.”
Of course, past performance is no guarantee of future results, and two cases do not constitute a statistically significant sample.
Just because the dollar weakened twice during the last two periods of Fed tightening does not prove that the same thing will happen again.
But it does mean that a rise in the dollar is not automatic or inevitable if the Fed raises interest rates next month.
The globally disruptive effects of US monetary tightening – a rapidly rising dollar, capital outflows from emerging markets, financial distress for international dollar borrowers, and chaotic currency devaluations in Asia and Latin America – may loom less large in next year’s economic outlook than in a rear-view glimpse of 2015.
A No-Fly Zone for Syria
WASHINGTON, DC – A recent front-page photo in the New York Times of a boatload of Syrian refugees drifting on the Mediterranean Sea beneath an enormous setting sun could not have been more apt.
The sun seems to be setting on Syria itself.
In the words of David Miliband, a former British foreign secretary and current president of the International Rescue Committee, the disaster in Syria has reached “almost biblical proportions.”
The Syrian Observatory for Human Rights estimates that, over the last four years, nearly 250,000 people have been killed, including more than 100,000 civilians, many of whom were killed in horrific ways by their own government.
The United Nations estimates that over half of the country’s 22 million citizens have left their homes, something the world has not seen since World War II.
Today’s rising tide of disease, hunger, squalor, and illiteracy – more than half of the refugee children are not in school – will affect an entire generation for life.
Fortunately, the United States’ foreign-policy elite finally seems ready to do something to protect Syria’s people.
Generals, diplomats, national-security officials, and development professionals are approaching a consensus in favor of a no-fly “safe zone” along one of Syria’s borders.
In fact, Turkey’s government proposed such a sanctuary (calling it a “buffer zone”) four years ago.
But the Turkish authorities never proved willing to turn words into action – not that they received any encouragement.
Indeed, until recently, the US and most NATO countries were resolutely opposed to the idea.
The change of heart was driven by four factors.
First, there is the migrant crisis in southern Europe, a threat more diffuse but no less dangerous and challenging than Russia’s invasion of Ukraine.
According to the International Organization for Migration, as of July, some 150,000 migrants had reached Europe by sea this year, double the number during the same period in 2014.
But the headline-making stories of sinking boats and drowning children are just the beginning.
An estimated 30,000 migrants are now crossing the Serbian border into Hungary every month, spurring the country’s right-wing government to launch the construction of a 110-mile fence to keep them out.
And, in July alone, almost 50,000 migrants entered the European Union through Greece.
While Syria is not the only country fueling this refugee crisis, it is the largest contributor.
Indeed, according to the UN High Commissioner for Refugees, 34% of the 137,000 people who arrived in the EU from January 1 to June 29 were from Syria, with the next-largest contributor, Afghanistan, accounting for 12%.
Other notable contributors include Eritrea (12%), Somalia (5%), and Iraq (3%).
The number of Syrians is thus essentially triple that of the next highest group, a proportion that holds true among European asylum-seekers as well.
With more than ten million Syrians displaced, this trend will only continue unless something is done to ensure that they can live safely within their home country.
The second factor that is spurring a shift in America’s attitude is the recognition that a new Syrian government is vital to defeat – or even contain – the Islamic State.
The fact is that the Islamic State is not the only violent and destructive force in the country;
Syrian President Bashar al-Assad, whom the militant group is committed to overthrow, is also a mass murderer and war criminal.
According to the Violations Documentation Center, the leading cause of death among Syrian civilians this year has been the indiscriminate use of aerial weapons – barrel bombs and chlorine gas dropped from helicopters by the Syrian army.
For Syria’s many rebel groups, Assad represents the greater threat, and thus will have to be removed from power before attention can be focused on defeating the Islamic State.
Third, the nuclear deal with Iran, despite facing continued scrutiny in Iran and the US, has raised hopes that the country could play an important role in pushing for a political solution in Syria.
Not only is Iran’s policy of supplying weapons and fighters to keep Assad in power unpopular at home; the country’s leaders also recognize that fighting the Islamic State in Iraq is a half-measure at best, as long as the group controls vast swaths of Syrian territory.
Finally, longer-term thinkers understand that a generation growing up alienated and angry in refugee camps, as several generations of Palestinians have done, is a generation of potential radicals.
With nothing to lose, they seek revenge for their parents’ expulsion from a homeland that, over time, becomes increasingly idealized.
From this perspective, the current humanitarian crisis is, in the longer term, a strategic crisis.
Taken together, these factors are compelling the US and Europe to change course.
And the Western perspective is not the only one that is evolving.
Syria’s neighbors finally seem to understand that the country could fragment into a Kurdish state that destabilizes Turkey and an Islamic State territory that destabilizes Iraq, Jordan, and Saudi Arabia.
By establishing a no-fly zone – which could be defended using sea-based missile systems – the US and its partners would demonstrate to Assad that their patience has finally run out, and that they are prepared to defend Syrians within Syria.
This, together with the knowledge that his army is weakening and the pool of new recruits is drying up, would force Assad to reconsider his long-term prospects and, most likely, force him to the negotiating table.
After all, the only time he has been prepared to strike any kind of deal over the last four years was when he believed that the US was prepared to intervene militarily in response to his use of chemical weapons.
Syria will take decades to rebuild, with future generations scarred by the political and psychological consequences of the current turmoil – much like Bosnia, but on a much larger scale.
The arms and money flowing to self-proclaimed holy fighters over the last four years have fanned revolutionary flames that may yet lead to a redrawing of the map of the Middle East.
But we cannot simply write off the millions of people caught in the middle.
For both moral and strategic reasons, the time for a no-fly zone is now.
No Licenses to Kill
NEW YORK – In the last year, we endured a remarkable experience; after the bankruptcy of Lehman Brothers in September 2008, financial markets actually collapsed and required artificial life support.
Nothing like this had happened since the Great Depression of the 1930’s.
What made this collapse so remarkable is that it was not caused by some external factor, but originated within the financial system itself and spread from there throughout the global economy.
This was almost completely unexpected, as the prevailing view was that financial markets are self-correcting.
We now know that they are not.
But, having gone too far in deregulating markets, we must resist a natural tendency to overcompensate.
While markets are imperfect, regulators are not only human but bureaucratic and subject to political influence.
Therefore, new regulations should be kept to a minimum.
Three principles should guide reform.
First and foremost, financial authorities must accept responsibility for preventing asset bubbles from growing too big.
Former United States Federal Reserve Chairman Alan Greenspan and others have argued that if markets can’t recognize bubbles, neither can regulators.
Even so, financial authorities must accept the assignment: while they are bound to be wrong, feedback from the markets will tell them whether they have done too much or too little.
They can then correct their mistakes.
Second, controlling asset bubbles requires control not only of the money supply, but also of the availability of credit.
The best-known tools for this are margin requirements and minimum capital requirements.
Similarly, financial authorities should vary the loan-to-value ratio on commercial and residential mortgages for risk-weighting purposes in order to forestall real estate bubbles.
Regulators may also have to revive old tools.
For example, we had no financial crises when central banks instructed commercial banks to limit their lending to particular economic sectors that they believed were overheating, such as real estate or consumer loans.
The Chinese authorities do it today, and they also set the minimum deposits banks must maintain with the central bank.
Or consider the Internet bubble, which Greenspan recognized early but then did nothing to address.
He rightly believed that reducing the money supply would have been too blunt an instrument to use.
But he could have devised more specific measures, such as asking the Securities and Exchange Commission to freeze new share issues, because equity leveraging was fueling the bubble.
The Internet bubble was unusual in this regard.
Usually, it is credit that provides the leverage, and credit is by nature reflexive.
That is, an increase in the willingness to lend tends to increase the value of the collateral, and also improves the borrowers’ performance, thereby encouraging a relaxation of credit criteria.
Bubbles recur, especially in real estate, because this reflexive relationship is repeatedly ignored.
This brings me to my third point: we must reconceptualize the meaning of market risk.
According to conventional theory, markets tend towards equilibrium, function without any discontinuity in the sequence of prices, and deviations occur in a random fashion.
As a result, market risks can be equated with the risks confronting individual market participants.
As long as they manage their risks properly, regulators should be happy.
But markets are subject to imbalances that individual participants may ignore if they think they can offload their positions on someone else.
Regulators, by contrast, cannot ignore these imbalances, because if too many participants are on the same side, positions cannot be liquidated without causing a discontinuity or, worse, financial collapse.
Thus, there is systemic market risk, and unregulated securitization of banking assets, which was the main cause of the recent collapse, adds to it.
To avert a repetition, securities held by banks must carry a much higher risk rating than they currently do. Banks must pay for their implicit government guarantee by using less leverage and accepting restrictions on how they invest depositors’ money.
At a minimum, proprietary trading ought to be financed by banks’ own capital.
If a bank is too big to fail, regulators should go even further, and regulate proprietary traders’ compensation packages to ensure that risks and rewards are properly aligned.
Hedge funds and other large investors must also be closely monitored to ensure that they don’t build up dangerous imbalances.
Moreover, the issuance and trading of derivatives ought to be at least as strictly regulated as that of stocks.
Regulators should insist that traded derivatives are homogenous, standardized, and transparent.
Some derivatives, particularly credit default swaps should not be traded at all.
To see why, note that being long and selling short in the stock market has an asymmetric risk/reward profile.
Losing on a long position reduces one’s risk exposure, while losing on a short position increases it, so one can be more patient being long and wrong than being short and wrong.
Now, the CDS market offers a convenient way of shorting bonds, but the risk/reward asymmetry works in the opposite way.
Shorting bonds by purchasing a CDS contract carries limited risk but almost unlimited profit potential, whereas selling a CDS contract offers limited profits but practically unlimited risks.
This encourages short-side speculation, which places downward pressure on the underlying bonds.
The negative effect is reinforced by the fact that, because CDS contracts are tradable, they tend to be priced as warrants, which can be sold at any time, rather than as options, which would require an actual default to be cashed in.
People buy CDS contracts not because they expect a default, but because they expect the CDS to appreciate in response to adverse developments.
That is what destroyed AIG, and what led to the recent bankruptcy of Abitibi-Bowater and the pending bankruptcy of General Motors.
In both cases, because some bondholders owned CDS contracts, they stood to gain more from bankruptcy than from reorganization.
Purchasing CDS contracts is like buying insurance on someone else’s life and owning a license to kill him.
It is the job of regulators to ensure that no one is ever granted such a license.
No Nukes?
NEW YORK – When parts of Japan were devastated recently by an earthquake and subsequent tsunami, news of the human toll was quickly overshadowed by global fears of radioactive fallout from the Fukushima Daichi nuclear power plant.
The concern was understandable: radiation is very frightening.
I grew up in Denmark at a time when fear of nuclear power was pervasive.
But our latest nuclear fears have broader implications, especially for energy supply and our desire to shift away from reliance on fossil fuels.
It is difficult to step back at the time of a natural disaster to gain a broader perspective; even attempting to do so can feel crass.
But there are some facts that we should not overlook.
During the round-the-clock coverage of the nuclear drama, the specter of Chernobyl has been raised repeatedly.
It is worth noting that the worst nuclear disaster in history directly caused only 31 fatalities.
The World Health Organization estimates that 4,000 deaths could be linked to the disaster over 70 years, whereas the OECD projects a range of 9,000-33,000 deaths during this period.
That is substantial.
But consider that, according to the OECD, every year nearly one million people die from fine-particle outdoor air pollution.
Yet this massive death toll provokes no discernible fear in the developed world, and receives virtually no news coverage.
Of course, every country with nuclear power facilities should revise its safety measures in light of the Japanese disaster, which raised obvious questions about the sites chosen for such facilities.
Clearly, plants located near tsunami-prone areas need to be reconsidered, and some countries have power plants in disturbingly close proximity to seismic faults – and to large cities.
But while America’s commitment to nuclear power was quickly reaffirmed by President Barack Obama, some European governments took the knee-jerk decision to freeze all new nuclear-energy projects immediately, and, in the case of Germany, not to extend the life of existing reactors.
For Germany, this will leave a gap that it cannot fill with alternative energy sources, leaving it little choice but to rely more heavily on coal power.
We see coal as a polluting but reasonably “safe” energy source compared to nuclear energy.
Yet, in China alone, coal-mining accidents kill more than 2,000 people each year – and coal is a leading cause of smog, acid rain, global warming, and air toxicity.
As a result of Germany’s decision, its annual carbon emissions are now expected to rise by as much as 10% – at a time when European Union emissions are rising as the continent shakes off the effects of the financial crisis.
Germany doesn’t have a low-carbon alternative if it shutters its nuclear plants, and the same is true of most other countries.
Alternative energy sources are too expensive and nowhere near reliable enough to replace fossil fuels.
Although safety concerns are paramount right now, the construction of new nuclear plants faces another hurdle: they are very expensive.
New nuclear power plants have high up-front costs (which can be politically challenging), including a very complicated, slow, and fraught planning process.
When completed, the total cost of nuclear power is significantly higher than the cheapest fossil-fuel source.
And society must bear significant additional costs in terms of the risks of spent-fuel storage and large-scale accidents.
Moreover, in most parts of the world where energy consumption is expanding, nuclear proliferation is an issue.
Then there is the question of maintaining existing plants.
Decommissioning nuclear reactors may make us feel safer, but we should acknowledge that this will often mean compensating for the lost output with more reliance on coal, meaning more emissions that contribute to global warming, and more deaths, both from coal extraction and air pollution.
Moreover, given that the plants are already paid for, waste facilities are already in place, and the high decommissioning cost will have to be paid regardless of timing, the actual operating costs are very low – half or lower per kilowatt-hour than the cost of the cheapest fossil fuels.
The long-term answer is more research and development – not only into next-generation, safer nuclear energy, but also into energy sources like solar and wind, which currently provide well below 1% of the planet’s energy.
Alarmingly, this research has decreased over the last three decades.
At protests calling on politicians to respond to climate change, a cry has rung out: “No coal, no gas, no nukes, no kidding!”
Until we can find a feasible alternative, reducing reliance on one of them means that another must take its place.
No Pause, Please
Pressure is building on the European Central Bank to pause from further increases in interest rates after the New Year. The ECB must not give in.
So far, the credibility of Europe’s central bank has been sufficient to firmly anchor inflationary expectations. But to pause now when Europe’s economic strength continues at a robust pace carries with it an un-necessary risk to price stability.
Even though 2006 has been an excellent growth year for Europe, real interest rates—interest rates expressed in terms of goods and services as opposed to money—have not budged from the beginning of the year. This means Europe’s monetary policy continues to stimulate economic growth despite the fact that, by December, money rates will have been raised 150 basis points during 2006.
With real rates so low, a pause at the New Year would be pre-mature.
Some of the pressure for a pause has to do with the French presidential elections this spring. A rate increase during the election period clearly would make the central bank even more of an issue in the French campaign than already is the case.
This is not good.
Still, the ECB can’t go on hold simply because the French—or anyone else&#45;&#45; are having an election (though the bank could be sensitive to the need to pick an appropriate month should a rate adjustment be needed during the election season.)
Politics must take a back seat when it comes to monetary policy decisions—otherwise, inflationary expectations won’t be firmly anchored for very long.
A second argument put forth for a pause is the increase in the value-added tax in Germany from 16 to 19% at the beginning of next year.
The argument for a pause is that the central bank may want to wait and see how much damage, if any, the VAT hike imposes on the German economy before continuing on with the process of rate hikes.
But for an inflation-fighting central bank like the ECB, the risks from a pre-mature pause are greater than those from pausing too late.
With the ECB in its current tightening mode, “better too late than too early” must be its rule of thumb.
Finally, and perhaps most important, there is the powerful example of the US Federal Reserve.
Because the Fed has decided to pause, there is substantial pressure &#45;&#45; coming both from inside and outside the ECB &#45;&#45; that Europe’s central bank follow suit.
The effect of Fed’s policies on other central banks should not be underestimated.
ECB critics already claim there has been a certain “follow the Fed” quality to ECB monetary decisions, notwithstanding clear differences between the two central banks over the role the money supply should play in monetary policy decisions.
When the Fed dramatically cut interest rates to fight recession, so did the ECB.
When the Fed kept interest at unusually low levels for an extended period of time, so did the ECB.
And when the Fed decided to exit this strategy and raise rates in a steady and predictable fashion, so did the ECB.
This, by the way, may not be mere copycat, but an attempt by Europe’s central bankers, wary of exchange rate volatility, to loosely co-ordinate interest rates to promote stable exchange rates.
But stabilizing the euro by following the Fed carries with it an unnecessary risk for price stability.
Europe and the United States are at different phases of the business and interest rate cycles.
When the Fed paused, the US economy was in a more mature phase of the business cycle &#45;&#45; and the weight of accumulated interest rate increases greater—than presently is the case in Europe.
This made pausing in order to see whether past rate hikes sufficiently slow the economy to moderate inflationary pressures a good bet for the US.
It is not a good bet for Europe, however, where growth momentum remains strong despite some recent backing and filling after the torrid pace of the second quarter, where interest rates remain too low and money supply growth too high.
“No Pause Please, We’re Europeans!” is the proper ECB response to those advocating a break after the New Year even if the euro does go up a bit as a result.
The Escalating Arab Wars
BEIRUT – The violence unleashed in Arab countries in the last four years may turn out to be just a first taste of what is to come.
Escalating brutality and the actions of governments have put Arab citizens under immense pressure.
Without a change of course, the outcome could easily be further conflict and a new wave of uprisings – this time not peaceful.
Not since the end of World War I have Arab countries undergone such a momentous upheaval.
Conflict has broken out in no fewer than nine Arab countries, and the carnage has reached unimaginable levels of inhumanity.
Tensions are mounting even in countries that are nominally at peace.
Long-standing value systems are weakening, and once-solid societal foundations are crumbling.
Fighting in Syria, Iraq, Sudan, Libya, and Yemen has torn apart entire communities.
Ethnic cleansing perpetuated by the Islamic State has reversed centuries of religious, ethnic, and cultural intermingling, and pushed close to two million people from their homes.
Indeed, although the Middle East and North Africa is home to just 5% of the world’s population, it has produced more than one-third of its refugees.
In Syria alone, 11 million people have been forcibly displaced within and outside the country.
These population movements are exacerbating preexisting social tensions across the Arab world.
In Lebanon, for example, the arrival of more than one million Syrians has sparked worries that the country’s sectarian balance could be altered, undermining its fragile political system.
These huge demographic upheavals are irrevocably transforming the region’s social and political identity.
Indeed, throughout the region, warring parties are relying on sectarian identity politics to mobilize support, further polarizing populations along religious, ethnic, and ideological lines.
Saudi Arabia and Iran are using Yemen’s internal divisions over historic political and socioeconomic grievances in their proxy war there, presenting the conflict as a manifestation of the historic Sunni-Shia rift.
Even in countries not at war, poisonous identity politics is becoming increasingly widespread and accepted.
In Egypt, for example, the public has been broadly supportive of a brutal crackdown on the Muslim Brotherhood and its Islamist supporters.
These convulsions are further impoverishing Arab countries and limiting future opportunities for their citizens.
Some 21 million Arab children are out of school, and more than 50 million Arabs are considered poor.
In Syria, 80% of the population is unable to meet its basic needs.
In Yemen, more than one-third of the population – some 11.5 million people – suffered from food insecurity prior to the conflict.
Another two million have since been added to the tally.
This turmoil has created a fertile breeding ground for militarized and radicalized youth.
Tunisia, the fêted success story of the Arab uprisings, has contributed the largest number of foreign fighters to the Islamic State – an estimated 3,000 (mainly young) people.
Anecdotal evidence shows that many of the parties in the various conflicts are using children to fight their wars.
In Yemen, around one-third of the fighters are children.
The Islamic State boasts that it is training children for future battles.
Rather than trying to ease dissatisfaction or attempt reconciliation, Arab governments are using brute force to shut down every possible space for dissent or debate.
In the name of national security, citizens are stripped of their nationality, demonstrators are shot in the street, and thousands are held in arbitrary detention.
In Egypt, danger lurks in the squares, universities, football stadiums, and even bathhouses, with the security services having detained anywhere from 22,000 to 41,000 citizens in the last year.
Torture and forced disappearances are also widespread.
In Syria, 85,000 individuals are said to have disappeared since the beginning of the conflict.
Another 12,000 have been brutally tortured.
Shutting out citizens from formal democratic processes is forcing political discontent further into the shadows, where it risks becoming militarized.
In Egypt, there have been growing calls for more violent and radical responses to the government’s clampdown.
In Jordan and Morocco, the authorities are facing a rising challenge in containing militant tendencies.
Indeed, as political leaders choose military repression over engagement, they will increasingly lose ground to groups like the Islamic State, the only entities in the region offering a clear – albeit brutal, and regressive – vision of the future.
At this point, an end to current hostilities in Syria, Iraq, and Yemen requires national, regional, and international consensus.
But averting further catastrophic violence in the region will require that governments go back to basics, introduce inclusive political processes, end state-sanctioned violence, ensure due process, and address socioeconomic injustices.
Obviously, that is a tall order.
The scale of the challenges requires courageous thinking, bold initiatives, and ingenuity by national and regional political and development leaders.
Otherwise, violence will engulf the region and far beyond.
A Korean Helsinki Process?
SEOUL – Last month, North and South Korea narrowly avoided a catastrophic military confrontation.
After 40 hours of strenuous negotiations, the South agreed to stop loudspeaker broadcasts into the demilitarized zone between the two countries, in exchange for the North expressing “regret” for the South Korean soldiers killed by a landmine blast in the DMZ three weeks earlier.
While the crisis featured North Korea’s familiar belligerence and aggressive rhetoric, there were also some interesting new twists.
Understanding these developments could help to generate enough momentum to initiate, after more than seven years of confrontation, genuine inter-Korean cooperation and help guide the peninsula toward a more peaceful and secure future.
The first new development is the South Korean leadership’s much firmer response to provocations from the North.
In 2010, the South Korean public was sharply critical of the military’s failure to retaliate immediately following the North’s sinking of the Cheonan, a South Korean warship carrying more than 100 personnel, and its shelling of Yeonpyeong Island later that year.
After the recent landmine blasts, by contrast, President Park Geun-hye would not back down from her demands that the North, which denied planting the mines, apologize.
Her approval ratings soared to 50%, from around 34% the previous month.
This shift, while popular in South Korea, carries serious risks for the peninsula.
If an unyielding South becomes engaged in another military game of chicken with the often-audacious and always-erratic North, the results could be catastrophic.
In this sense, an institutional framework for permanent inter-Korean peace is more urgent than ever.
The second development relates to China, which remained silent throughout the latest crisis – a significant departure from its stance in 2010, when it actively sided with North Korea on the international diplomatic stage.
Of course, it is impossible to know whether China’s response this time marks a genuine strategic withdrawal from its role as the North’s only ally and key economic benefactor.
China’s leaders may simply have decided that a tactical disciplining of the North’s leadership was in order.
But, at a time when China’s relationship with South Korea is deepening, the silence has been deafening.
If China really is distancing itself from North Korea, Kim Jong-un’s regime will be almost entirely isolated internationally.
Will Kim respond to that isolation recklessly, by continuing to antagonize the South, or pragmatically, by becoming more flexible?
That is not an easy question to answer.
It should be clear to Kim by now that his parade of provocations is not benefiting his country.
His bellicose behavior in 2013, for example, worsened his relationships with China, South Korea, and the United States simultaneously; and in the recent crisis, all he earned was a halt to mocking loudspeaker broadcasts.
But Kim is not exactly known for his pragmatism or diplomacy.
Kim’s intentions may become clearer next month, when the North is expected to commemorate the 70th anniversary of the founding of the ruling Korean Workers’ Party by conducting a nuclear test and launching a new intercontinental missile.
But China, South Korea, and the US – whose policies toward North Korea are now more closely aligned than ever – should not simply wait to see what happens.
They should initiate a dialogue with the North and take steps to dissuade Kim from continuing on his path of antagonism.
The third new development on the peninsula is a growing awareness among North Koreans of their country’s dire situation.
At this point, the shift is most apparent among North Korean soldiers in the DMZ, for whom the South’s recent broadcasts were highly demoralizing.
Today’s young soldiers represent the so-called Jangmadang (“black market”) generation that came of age under the marketization process that followed the massive famine in the mid-1990s.
Exposed to South Korean movies, music, and other products, they recognize the yawning gap between their government’s propaganda and the country’s grim reality.
The South’s loudspeaker broadcasts drove the point home.
As the marketization process continues, soon it won’t be just the soldiers who see through the regime’s propaganda.
The time for bottom-up change in the North may not be far off.
This opens up a new policy option for the West: impelling North Korea to dial back its foreign and security policy by deepening its economic and social engagement with the rest of the world.
The benefits for the North would drastically change the regime’s strategic calculus, particularly concerning nuclear weapons.
International linkages – or, rather, sanctions that blocked the benefits of such linkages – were vital to Libya’s decision to denuclearize and Iran’s willingness to reach an agreement with world powers regarding its nuclear program.
Sanctions have been less effective in North Korea, largely because the population did not know what it was missing.
Similarly, growing connections between groups within the Soviet bloc and the West played a major role in bringing about the 1975 Helsinki Accords.
The accords represented an effort to improve East-West relations during the Cold War, and included an emphasis on human rights.
Most important, they achieved the kind of sustained engagement that is badly needed on the Korean Peninsula today.
The aftermath of the August crisis may be the moment to think seriously about how to balance continued sanctions on North Korea with deeper economic and social ties.
Without such an approach, North and South Korea could, before long, be locked in another military standoff.
North Korea Makes History
Historical turning points are normally easier to identify in retrospect.
But it will not require years to determine whether North Korea’s test of a nuclear explosive device qualifies as one.
It does.
The question is whether it proves to be a turn for the better or for the worse.
Some argue that little has changed as a result of the test.
The world assumed for years that North Korea possesses enough nuclear material to make a half-dozen or more basic nuclear bombs.
The test made explicit what was implicit.
But what was assumed is now known.
So much has changed.
North Korea has challenged the world; the question is how the world responds.
The stakes could hardly be higher.
North Korea’s leaders have a history of aggressiveness, a demonstrated contempt for their people, and a record of selling just about anything (from drugs and counterfeit dollars to missile parts) to earn hard currency.
The danger is that they might be tempted to use a nuclear weapon, act irresponsibly in the belief that such weapons shield them, or sell one to terrorists.
A second danger concerns the regional consequences of North Korea’s test.
Northeast Asia is a dynamic arena, home to many of the world’s powers, including China, Russia, Japan, the two Koreas, and in many ways the United States.
This dynamism could lead to instability, owing to multiple sources of mistrust and the lack of strong regional institutions to help manage rivalries.
Global consequences exist as well.
North Korea is now the ninth state with nuclear weapons, joining the five permanent members of the UN Security Council, Israel, India, and Pakistan.
The danger is that we may fast be approaching a tipping point.
How the world responds to North Korea is likely to affect the calculations of other would-be nuclear powers, including Iran.
Maintaining peace in a world in which literally dozens of fingers are on nuclear triggers will be far more difficult—and the consequences of failure far more destructive.
Initial reactions to North Korea’s nuclear test were uniformly critical, culminating (thus far) in UN Security Council Resolution 1718, which condemns the test, demands that North Korea resume full cooperation with the International Atomic Energy Agency, and imposes a range of military, political, and economic sanctions.
Nevertheless, North Korea’s leaders are clearly betting that they can get away with what they have done, and that the world will get used to their nuclear weapons program, much as it did with Israel, India, and Pakistan.
They may be right.
Both South Korea and China are reluctant to support robust sanctions.
South Korea’s “Sunshine Policy” is best understood as “unconditional engagement.”
Not surprisingly, this “all carrot, no stick” approach has failed to affect North Korean behavior.
China, for its part, has made clear that it does not intend to inspect cargo moving in and out of North Korea across their long common border to ensure it does not contain items prohibited by Resolution 1718.
While China opposes North Korea’s pursuit of nuclear weapons, it is even more opposed to policies that could threaten the North’s stability and lead to massive refugee crossings into China or to a unified Korea with its capital in Seoul.
So the challenge remains to devise a response that will gain widespread international backing and influence North Korean behavior and capabilities.
One option is a “preventive” military strike.
The problem is that it would almost surely trigger a massive, costly war, and it would not necessarily succeed in destroying all of North Korea’s hidden capabilities.
Moreover, both China and South Korea strongly oppose such a scenario, while the United States is poorly positioned to implement it, given its involvement in Iraq.
A second option is living with a nuclear North Korea.
The danger is less that North Korea might use nuclear weapons (although it might) than that it might sell them.
President Bush’s warning that “the transfer of nuclear weapons or material by North Korea to states or non-state entities would be considered a grave threat to the United States, and we would hold North Korea fully accountable of the consequences of such action,” is meant to deter this outcome.
The problem, of course, is that deterrence sometimes fails.
The third option is diplomacy.
North Korea would be expected to give up its nuclear weapons and place its nuclear material under international safeguards in exchange for formal security assurances, energy resources, and a range of political and economic benefits.
Such efforts should be renewed as soon as possible; the US should agree to bilateral as well as six-party talks with the North, possibly in exchange for a moratorium on nuclear tests.
It will take a blend of the three options – the threat of military force, the reality of economic sanctions, and the resumption of diplomacy —to deal with North Korea’s challenge.
This will not be easy, but it is worth pursuing, because the alternative—a desperate, hostile, nuclear-armed, and isolated North Korea—should alarm everyone.
North Korea’s Powerful Weakness
CAMBRIDGE – When US President Barack Obama and Chinese President Xi Jinping met for their “shirt-sleeves summit” in California last month, North Korea was a major topic of conversation.
The subject was not new, but the tone was.
More than two decades ago, the International Atomic Energy Agency caught North Korea violating its safeguards agreement and reprocessing plutonium.
After the North renounced the subsequent Agreed Framework, negotiated by President Bill Clinton’s administration, in 2003, it expelled IAEA inspectors, withdrew from the Nuclear Non-Proliferation Treaty, and has since detonated three nuclear devices and conducted a variety of missile tests.
During those two decades, American and Chinese officials frequently discussed North Korea’s behavior, both privately and in public meetings.
The Chinese consistently said that they did not want North Korea to develop nuclear weapons, but claimed that they had limited influence over the regime, despite being its major supplier of food and fuel.
The result was a somewhat scripted exchange in which China and the US would accomplish little more than professing denuclearization as a shared goal.
China was sincere in expressing its desire for a non-nuclear Korean Peninsula, but the nuclear issue was not its primary concern.
It also sought to prevent the collapse of the North Korean regime and the resulting potential for chaos on its border – not only flows of refugees, but also the possibility that South Korean or US troops could move into the North.
Torn between its two objectives, China placed a higher priority on preserving the Kim family dynasty.
That choice gave rise to a seeming paradox: North Korea gained surprisingly powerful influence over China.
North Korea has what I call “the power of weakness.”
In certain bargaining situations, weakness and the threat of collapse can be a source of power.
To take a well-known example, if you owe a bank $1,000, the bank has power over you; but if you owe the bank $1 billion, you may have considerable bargaining power over the bank.
China is, in this sense, North Korea’s over-exposed banker.
As a result, China has tried to persuade North Korea to follow its market-oriented example.
But, with the Kim regime terrified that economic liberalization would eventually provoke demands for greater political freedom, China’s influence over the regime is limited.
As a Chinese official once told me in an unguarded moment, “North Korea has hijacked our foreign policy.”
North Korea has amplified its power by playing its weak hand audaciously.
The North’s leaders know that superior South Korean and US military forces would win a full-scale military conflict.
And yet, with 15,000 artillery tubes in the Demilitarized Zone, just 30 miles (48 kilometers) north of Seoul, the South Korean capital, they also know that they could wreak havoc on South Korea’s economy, whereas the North has relatively less to lose.
North Korea has long been adept at flaunting its willingness to take risks, provoking a crisis in 2010 by sinking a South Korean naval vessel and shelling a South Korean island.
This spring, it conducted a nuclear test and a series of missile tests, accompanied by a stream of bellicose rhetoric.
Now it appears that China is beginning to lose patience.
It has less confidence in the North’s inexperienced new ruler, Kim Jong-un, than it had in his father, Kim Jong-il.
Chinese leaders are also beginning to recognize the risks that North Korea is imposing on China.
With more nuclear tests, a demand for nuclear weapons could grow in South Korea and Japan.
Moreover, if this spring’s sharp rhetoric from the Kim regime is followed by provocations against South Korea like those that occurred in 2010, South Korea could respond forcefully, and China might be drawn in.
The signs of a change are intriguing.
Following the “frank” discussion of North Korea by Xi and Obama, Xi hosted a summit with South Korean President Park Geun-hye, without first meeting with its official North Korean ally.
Instead, two senior North Korean officials subsequently visited Beijing and were scolded for the North’s behavior.
By contrast, Xi and Park issued a joint statement proclaiming the importance of faithfully implementing United Nations Security Council resolutions that call for sanctions against North Korea, as well as a multilateral agreement in 2005 that obliges the North to exchange its nuclear-weapons programs for economic and diplomatic benefits.
Both leaders urged a resumption of the six-party talks on denuclearization, which have been suspended since 2009.
What comes next is uncertain.
North Korea has tempered its rhetoric and behavior, but the Kim regime has given no indication that it is willing to give up the nuclear-weapons program that it regards as vital to its security and prestige.
In the long run, economic and social change may help to resolve the situation.
China’s dilemma remains that if it pushes too fast for reform, the Kim regime may collapse.
Faced with that prospect, the US and South Korea could take steps to reassure China that they would not exploit such a situation by moving their troops to China’s border.
In the past, when the US has suggested quiet talks to discuss contingency planning in the case of regime collapse, China has been wary of offending and weakening North Korea.
But finding a formula to talk about such contingencies may be the next step for China as it seeks to overcome its quandary.
North Korea’s Missile Tantrum
SEOUL – Once again, tension is rising across Asia over North Korea’s missile program.
Unlike its previous “surprise” missile launches, North Korea’s government this time notified international agencies in advance that it will launch a “satellite” sometime between April 4 and 8.
The question for the world now is not whether the North Korean regime will launch its missile, but what happens afterward.
The United States, Japan, and South Korea have already publicly condemned the launch as a “provocative act” and a violation of United Nations Security Council Resolution 1718, adopted in October 2006, five days after North Korea conducted a nuclear weapons test.
But, instead of hot rhetoric, what is needed now is a cool-headed assessment of the military implications of the missile launch.
If Japan, the US, and others attempt to intercept or counter the missile, military tension – even possible combat – is likely to ensue.
How to prevent unnecessary military measures and countermeasures is the most immediate concern for the region’s governments.
Above all, the ongoing six-party talks (China, the US, Japan, Russia, South Korea, and North Korea) that have sought to bring North Korea’s nuclear program to an end must not become a casualty of the missile launch.
In dealing with North Korea, two fundamental issues must be addressed.
First, although governments are justified in criticizing North Korea for its foolhardy, counterproductive, and self-destructive behavior over many years, including numerous inhuman acts perpetrated against its own people and others, North Korea is not solely to blame for its “missile tantrum.”
Indeed, the Bush administration’s unilateral behavior, including the dismantling of the 1994 Geneva Agreed Framework with North Korea, the hyping of an enriched uranium deal, and the infamous “axis of evil” speech, have all increased the paranoia of an already paranoid regime.
So former President Bush’s foreign policy toward North Korea, especially during his first term in office, must take a fair share of responsibility for the present mess.
More fundamentally, no one should think that North Korea’s totalitarian communist system can be changed overnight.
No one inside or outside can remove its anachronistic dynastic-communist regime, and no outsider can hope to modify quickly the policy behavior of its fossilized military, party, and administrative bureaucrats.
These are the cold realities of North Korea today.
But cold realities do not necessarily have to turn into hot combat.
Indeed, the idea of warfare on the Korean peninsula should be unthinkable, given the grotesque levels of deaths that it would likely cause.
Even to contemplate such a possibility is proof of diplomatic failure, not a triumph of real leadership.
A leadership mismatch has, moreover, been a central obstacle in resolving the problem of North Korea’s weapons of mass destruction and the ultimate question of achieving a unified Korea.
Since the emergence of two separate regimes and systems on the Korean Peninsula in 1948, South Korea and the US (its only defense ally) have dealt with only two “supreme leaders,” Kim Il-sung and Kim Jong-il.
During the same period, there have been 10 South Korean presidents and 11 US presidents.
For the past 10 years, three South Korean presidents and three US presidents have been attempting to deal with the same “perpetual” leader – Kim Jong-il.
From Kim’s perspective, encountering such leadership changes and subsequent policy clashes are both bewildering and difficult to assimilate.
Just on the South Korean side, he has had to cope with Kim Dae-jung’s “sunshine policy” of engagement, Roh Moo-hyun’s on again, off again diplomacy, and current President Lee Myung-bak’s confrontational stance.
From the US, he has confronted engagement on the part of Bill Clinton, unilateral confrontation from George W. Bush, and the nascent “principled engagement” of Barack Obama.
This form of leadership mismatch has also disturbed relations between South Korea and the US.
The discrepancy between the two-term, four-year US presidency and one-term, five-year South Korean presidency has sometimes been problematic, and the respective policies toward North Korea of US and South Korean administrations have often collided.
When they do, both sides must spend an enormous amount of time and effort in reaching a consensus on North Korea, which leaves the isolated North breeding all sorts of conspiracy theories.
The Korean question is even more intractable and perplexing if the leadership changes of other concerned parties in the region such as China, Japan, and Russia are factored into the political equation.
The long-term result of all this is oscillation between dialogue and deadlock, which has led to periods of uncertain engagement or heated confrontation.
To break this sterile cycle, what is needed now is not more hot rhetoric about North Korea’s missiles, but a commitment to steady, patient diplomacy that transcends changes in the political cycle.
There is no quick fix in disentangling the Korean knot.
Only persistence and commitment will do.
The Battle for Santa Claus’s Home
STOCKHOLM – A couple of years ago, a Canadian minister proudly declared that Santa Claus was a citizen of Canada.
After all, his home and toy factory are at the North Pole, which, according to the minister’s interpretation, belongs to Canada.
Though Santa Claus has not commented on the matter, it is now clear that he could choose several passports when he travels the world on December 24th.
In 2007, a privately funded mini-submarine planted a Russian flag directly beneath his alleged home.
And two weeks ago, Denmark, which has sovereignty over Greenland, staked its own territorial claim, also covering the North Pole.
By filing its claim with the United Nations Commission on the Limits of the Continental Shelf, Denmark has joined our era’s “great game”: the contest for economic control over a large part of the Arctic.
And Denmark’s claim is massive.
Not only does it seek sovereignty over everything between Greenland and the North Pole; it is also extending its claim to nearly 900,000 square kilometers, all the way to the existing limits of the Russian economic zone on the other side of the Pole – an area 20 times Denmark’s size.
How to assess countries’ claims to Arctic territory hinges on the status of the Lomonosov Ridge, a vast formation that rises from the sea floor and stretches 1,800 kilometers from Greenland to the East Siberian continental shelf.
Everyone agrees that it is a ridge.
The key question is whether it is an extension of the Greenland shelf or an extension of the East Siberia shelf.
Denmark, together with the government of Greenland, now claims that it is the former, giving it the right to extend its economic zone across a huge area at the top of the world.
Though nothing is yet known about the claim that Russia says it will present in the spring, there is no doubt that it will argue the opposite.
And what about the Canadians and their claim?
That remains to be seen, but there have been reports that Prime Minister Stephen Harper is dissatisfied that Canadian scientists are not being sufficiently aggressive in pressing the country’s case.
Nonetheless, for all the hype about a “race for the Arctic,” and despite the rather icy atmosphere among the claimants, there is little reason to fear conflict.
Under the terms of the 2008 Ilulissat Declaration, all of the countries bordering the Arctic Ocean agree to resolve their claims peacefully and based on the UN Convention on the Law of the Sea.
According to settled procedure, a UN commission will first judge whether the claims have merit.
If they are overlapping, which is highly probable, bilateral negotiations will be held.
Such talks, to put it mildly, could take time.
Norway and Russia negotiated over a far smaller territorial delimitation for four decades.
Both Denmark and Russia have been devoting significant resources to exploring the Lomonosov Ridge.
Denmark has hired Swedish icebreakers for repeated expeditions, and Russia has been deploying special submarines to obtain samples from the ridge and the ocean floor.
The Arctic region has always been strategically vital for Russia, accounting for roughly 85% of Russia’s natural-gas production, which is based primarily in Western Siberia.
The Kremlin has activated a new military command for the Arctic, and is busy reopening air bases and radar stations along its Arctic shoreline.
But it is a very long way from these new Russian bases to virtually everywhere.
And, in addition to the vast distances, there is the harsh climate.
A Canadian military commander, asked what he would do if foreign soldiers attacked his country’s Far North, calmly replied that he would dispatch an expedition to rescue them.
Though Russia had hoped for a rapid increase in shipping along the Northern Sea Route, commercial traffic this year fell by 77%.
Of course, the stakes are too high for Canada, Denmark, and Russia to allow the region’s remoteness and its hostile environment to influence how resolutely they press their claims.
Boundaries like these are fixed once and forever, and no one knows what discoveries, technologies, and opportunities the future might bring.
But for the time being, neither Santa Claus, nor anyone else, has reason to be worried.
The nature of the Lomonosov Ridge will be debated for years to come, while his thoughts – and ours – are likely to be focused on more immediate issues.
Good People, Bad Judgments
NEW YORK – Vidkun Quisling, Norway’s wartime fascist leader whose name has become synonymous with collaboration with evil, lived with his wife in a rather grandiose villa outside of Oslo.
That villa is now the Norwegian Center for Studies of the Holocaust and Religious Minorities, a fine transformation of a tainted place.
Earlier this year, I visited the center for a fascinating exhibition on the first independent Norwegian constitution promulgated in 1814.
It was a remarkably enlightened and progressive document, composed by learned scholars, steeped in history, law, and philosophy.
Some were experts on the Greek classics, others on ancient Hebrew; all were keen readers of Kant and Voltaire.
There is, however, one extraordinary clause: Article II proclaims freedom of religion in the Lutheran state, with the caveat that “Jews shall still be banned from entering the Realm.”
Napoleon, defeated in that same year, had secured civil rights for Jews in the countries he had conquered.
And just before the clause entered Norwegian law, the King of Denmark had granted citizenship to Jews in his realm.
What is most interesting about Norway’s 1814 constitution is not that it contains this clause, but why.
The stated motives of the intellectuals who created it were not racist; they did not assume Jews to be biologically inferior.
Rather, the question was argued in terms of culture and faith, with Jewish beliefs and customs deemed incompatible with modern, enlightened Western values.
One of the writers of the constitution, Frederik Motzfeldt, argued that Jews would never assimilate themselves with the people of any country.
Another asserted that Judaism encourages its followers to deceive Christians and other Gentiles.
Jews, it was believed, would always form a “state within a state.”
The constitution’s writers were undoubtedly aware that Jews had long been persecuted in other countries, but they concluded that it was not Norway’s problem.
For Norway, it was best not to let them become citizens at all.
Experts in Hebrew culture explained that Judaism and Norway’s constitution were irreconcilable.
Mosaic law was, so the experts said, the only constitution recognized by Jews, and so it should be feared, in the way modern critics of Islam fear Sharia law.
So the main issue was religion, not race – though the two could easily be confused.
As Håkon Harket, the greatest Norwegian scholar on the subject of the anti-Jewish clause, explains: “Even those who fought for civil rights for the Jews held often an ambition to liberate Jews from Judaism.”
The parallels with current notions about Muslims and Islam hardly need to be pointed out.
Now, too, the Enlightenment is often invoked as shorthand for the Western values that are supposedly in danger of “Islamization.”
Now, too, people warn of Muslim tricksters, states within states, the impossibility of assimilation, and the necessity for staunch secularists to free the benighted Muslims from their faith.
To be sure, in 1814, there was no Jewish equivalent of the violent Jihadism that poisons relations with Muslims in the West today.
Nonetheless, there are lessons to be learned from the Norwegian constitution’s misguided anti-Jewish clause, which, it should be noted, was repealed just a few decades later.
Bad judgment can arise even from decent motives, and knowledge (of Islam or of Judaism) is no prophylactic against stupid ideas.
The most important lesson, however, is that it is always foolish – and, indeed, dangerous – to judge people by what we think they believe.
To assume that all Muslims think alike because of their religious background, that they have “a mind” rather than individual thoughts, is as big a mistake as to assume to know the minds of Jews, Christians, or anyone else.
And to claim that something as diverse, and sometimes vague, as a religious faith can be pinned to a fixed ideological position, because of certain ancient texts, is utterly misleading.
There are populist demagogues in the West who would ban the Koran and prohibit Muslims from immigrating to their countries.
They have a following, which might be growing, fueled by the widespread anxiety about terrorism spilling over from the Middle East.
But they are not yet in the majority, and the belief that the West is in imminent danger of being “Arabized” or “Islamized” is not quite yet mainstream.
Yet even mainstream politicians, sometimes for the best of reasons, are in danger of making the same kinds of mistakes as the members of the 1814 Norwegian Constituent Assembly.
British Prime Minister David Cameron, for example, is aiming to crack down on Islamist extremism by banning the expression of ideas that the government deems to be promoting or glorifying it.
People who “reject our values” will be prosecuted, he has declared, “whether they are violent in their means or not.”
Cameron is not a known racist, or a bigot.
He is attempting to tackle a real problem: the promotion of violent extremist ideologies.
But, while people should certainly be punished for acts of violence, going after people purely for what they think – or, worse, what we think they think – has the air of a witch-hunt.
Cameron is right: “key values” like “democracy and tolerance” are fine things, and they ought to be defended.
But it is hard to see how banning ideas, or penalizing those who do nothing more than express them, is the best way to do so.
No Smile Limit
If you were to walk along the streets of your neighborhood with your face up and an open expression, how many of those who passed you would smile, or greet you in some way?
Smiling is a universal human practice, although readiness to smile at strangers varies according to culture.
In Australia, where being open and friendly to strangers is not unusual, the city of Port Phillip, an area covering some of the bayside suburbs of Melbourne, has been using volunteers to find out how often people smile at those who pass them in the street.
It then put up signs that look like speed limits, but tell pedestrians that they are in, for example, a “10 Smiles Per Hour Zone.”
Frivolous nonsense?
A waste of taxpayers’ money?
Mayor Janet Bolitho says that putting up the signs is an attempt to encourage people to smile or say “G’day” – the standard Australian greeting – to both neighbors and strangers as they stroll down the street.
Smiling, she adds, encourages people to feel more connected with each other and safer, so it reduces fear of crime – an important element in the quality of life of many neighborhoods.
In a related effort to get its residents to know each other, the city government also facilitates street parties.
It leaves the details to the locals, but offers organizational advice, loans out barbecues and sun umbrellas, and covers the public liability insurance.
Many people who have lived in the same street for many years meet each other for the first time at a street party.
All of this is part of a larger program that attempts to measure changes in the city’s quality of life, so that the city council can know whether it is taking the community in a desirable direction.
The council wants Port Phillip to be a sustainable community, not merely in an environmental sense, but also in terms of social equity, economic viability, and cultural vitality.
Port Phillip is serious about being a good global citizen.
Instead of seeing private car ownership as a sign of prosperity, the city hails a declining number of cars – and rising use of public transport – as a sign of progress in reducing greenhouse gas emissions while encouraging a healthier lifestyle in which people are more inclined to walk or ride a bike.
The city is also seeking less energy-intensive designs for new buildings.
Some local governments see their role as being to provide basic services like collecting the trash and maintaining the roads – and of course, collecting the taxes to pay for this.
Others promote the area’s economy, by encouraging industry to move to the area, thus increasing jobs and the local tax base.
The Port Phillip city government takes a broader and longer-term view.
It wants those who live in the community after the present generation has gone to have the same opportunities for a good quality of life as today’s residents have.
To protect that quality of life, it has to be able to measure all the varied aspects that contribute to it – and friendliness is one of them.
For many governments, both national and local, preventing crime is a far higher priority than encouraging friendship and cooperation.
But, as Professor Richard Layard of the London School of Economics has argued in his recent book Happiness: Lessons from a New Science , promoting friendship is often easy, cheap, and can have big payoffs in making people happier.
So why shouldn’t that be a focus of public policy?
Very small positive experiences can make people not only feel better about themselves, but also be more helpful to others.
In the 1970’s, American psychologists Alice Isen and Paula Levin conducted an experiment in which some randomly selected people making a phone call found a ten-cent coin left behind by a previous caller, and others did not. All subjects were then given an opportunity to help a woman pick up a folder of papers she dropped in front of them.
Isen and Levin claimed that of the 16 who found a coin, 14 helped the woman, while of the 25 who did not find a coin, only one helped her.
A further study found a similar difference in willingness to mail an addressed letter that had been left behind in the phone booth: those who found the coin were more likely to mail the letter.
Although later research has cast doubt on the existence of such dramatic differences, there is little doubt that being in a good mood makes people feel better about themselves and more likely to help others. Psychologists refer to it as the “glow of goodwill.”
Here is one measure of success: over the past year and a half, the proportion of people who smile at you in Port Phillip has risen, from 8% to 10%.
No Time for a Trade War
NEW YORK – The battle with the United States over China’s exchange rate continues.
When the Great Recession began, many worried that protectionism would rear its ugly head.
True, G-20 leaders promised that they had learned the lessons of the Great Depression.
But 17 of the G-20’s members introduced protectionist measures just months after the first summit in November 2008.
The “Buy American” provision in the United States’ stimulus bill got the most attention.
Still, protectionism was contained, partly due to the World Trade Organization.
Continuing economic weakness in the advanced economies risks a new round of protectionism.
In America, for example, more than one in six workers who would like a full-time job can’t find one.
These were among the risks associated with America’s insufficient stimulus, which was designed to placate members of Congress as much as it was to revive the economy.
With soaring deficits, a second stimulus appears unlikely, and, with monetary policy at its limits and inflation hawks being barely kept at bay, there is little hope of help from that department, either.
So protectionism is taking pride of place.
The US Treasury has been charged by Congress to assess whether China is a “currency manipulator.”
Although President Obama has now delayed for some months when Treasury Secretary Timothy Geithner must issue his report, the very concept of “currency manipulation” itself is flawed: all governments take actions that directly or indirectly affect the exchange rate.
Reckless budget deficits can lead to a weak currency; so can low interest rates.
Until the recent crisis in Greece, the US benefited from a weak dollar/euro exchange rate.
Should Europeans have accused the US of “manipulating” the exchange rate to expand exports at its expense?
Although US politicians focus on the bilateral trade deficit with China – which is persistently large – what matters is the multilateral balance.
When demands for China to adjust its exchange rate began during George W. Bush’s administration, its multilateral trade surplus was small.
More recently, however, China has been running a large multilateral surplus as well.
Saudi Arabia also has a bilateral and multilateral surplus: Americans want its oil, and Saudis want fewer US products.
Even in absolute value, Saudi Arabia’s multilateral merchandise surplus of $212 billion in 2008 dwarfs China’s $175 billion surplus; as a percentage of GDP, Saudi Arabia’s current-account surplus, at 11.5% of GDP, is more than twice that of China.
Saudi Arabia’s surplus would be far higher were it not for US armaments exports.
In a global economy with deficient aggregate demand, current-account surpluses are a problem.
But China’s current-account surplus is actually less than the combined figure for Japan and Germany; as a percentage of GDP, it is 5%, compared to Germany’s 5.2%.
Many factors other than exchange rates affect a country’s trade balance. A key determinant is national savings.
America’s multilateral trade deficit will not be significantly narrowed until America saves significantly more; while the Great Recession induced higher household savings (which were near zero), this has been more than offset by the increased government deficits.
Adjustment in the exchange rate is likely simply to shift to where America buys its textiles and apparel – from Bangladesh or Sri Lanka, rather than China.
Meanwhile, an increase in the exchange rate is likely to contribute to inequality in China, as its poor farmers face increasing competition from America’s highly subsidized farms.
This is the real trade distortion in the global economy – one in which millions of poor people in developing countries are hurt as America helps some of the world’s richest farmers.
During the 1997-1998 Asian financial crisis, the renminbi’s stability played an important role in stabilizing the region.
So, too, the renminbi’s stability has helped the region maintain strong growth, from which the world as a whole benefits.
Some argue that China needs to adjust its exchange rate to prevent inflation or bubbles.
Inflation remains contained, but, more to the point, China’s government has an arsenal of other weapons (from taxes on capital inflows and capital-gains taxes to a variety of monetary instruments) at its disposal.
But exchange rates do affect the pattern of growth, and it is in China’s own interest to restructure and move away from high dependence on export-led growth.
China recognizes that its currency needs to appreciate over the long run, and politicizing the speed at which it does so has been counterproductive.
(Since it began revaluing its exchange rate in July 2005, the adjustment has been half or more of what most experts think is required.)
Moreover, starting a bilateral confrontation is unwise.
Since China’s multilateral surplus is the economic issue and many countries are concerned about it, the US should seek a multilateral, rules-based solution.
Imposing unilateral duties after unilaterally labeling China a “currency manipulator” would undermine the multilateral system, with little payoff.
China might respond by imposing duties on those American products effectively directly or indirectly subsidized by America’s massive bailouts of its banks and car companies.
No one wins from a trade war.
So America should be wary of igniting one in the midst of an uncertain global recovery – as popular as it might be with politicians whose constituents are justly concerned about high unemployment, and as easy as it is to look for blame elsewhere.
Unfortunately, this global crisis was made in America, and America must look inward, not only to revive its economy, but also to prevent a recurrence.
No Time for Complacency
LONDON – After years of rapid growth, the countries of Eastern Europe have been especially hard hit by the world financial crisis.
Some required billions of dollars of international support.
Even those countries that were better prepared were made painfully aware of the after-effects of crisis: export markets collapsed, commodity prices fell, and credit markets seized up.
In many countries, economic output sank dramatically, more so than in Europe’s west.
This decline seems to have stopped, and the most recent data indicate that the bottom may have been reached.
Yet it is premature to declare the crisis over, because much of the impact and many of the consequences of the crisis have yet to be felt.
We must reckon with a huge increase in bankruptcies – as well as with impaired credit markets and high unemployment.
This, in turn, will place a burden on national budgets and banking systems – and will challenge politicians across the region.
A number of countries have already been forced into drastic budget cuts, which have had a knock-on effect on standards of living.
One must add structural problems to this mix – problems that have not been dealt with since the crisis erupted.
For Eastern Europe, this boils down to four major areas: (1) an overdependence on natural resources; (2) export imbalances, in terms of product mix and foreign markets; (3) small, inadequate capital markets; and (4) inefficient production and use of energy.
But the past 12 months have also underscored Eastern Europe’s strengths.
Twenty years after the fall of the Iron Curtain, the countries of the east are more integrated into international markets than ever before.
This brought strong growth rates in good times.
In times of crisis it had a negative impact – although integration has prevented currency collapse or the write-off of national debt, occurrences that we have witnessed during previous crises in emerging markets.
The IMF, the World Bank, and other international financial institutions, such as the European Investment Bank and the European Bank for Reconstruction and Development, as well as the European Central Bank and the European Commission, have worked together to stabilize the situation.
The G20 has led the way on the international level.
Cooperation and coordination of this kind and at this level were unattainable during earlier financial crises.
Another difference with past financial downturns in emerging markets is that investments in the EBRD region – Eastern Europe, Southeastern Europe, Turkey, and the former Soviet Union – have turned out to be long term, rather than short-term or speculative.
Western entrepreneurs and investors have increasingly come to view Europe’s east as a part of a (now broader) domestic market and have behaved with a longer-term view.
This has brought the region much needed stability.
A healthy banking and financial sector is crucial for stability.
International cooperation has succeeded in preventing banks headquartered in Western Europe, with extensive branch networks in the Eastern Europe, from pulling out.
Yet serious problems remain.
An unwillingness to lend and expensive loans in foreign currencies are a real burden to eastern balance sheets.
That is why it has become so difficult for small and medium-sized companies to get new loans or to refinance existing loans.
The EBRD has experienced the change in market conditions first-hand.
We have implemented an anti-crisis program that has concentrated on the financial sector, the real economy, and especially important infrastructure investments, particularly in the crucial area of energy efficiency.
Demand for our loans and project finance is higher than ever: in the first nine months of 2009, we have invested more than €6 billion, twice as much as we did in the same period a year ago.
Yet the EBRD does more than make much-needed loans.
Our investments are aimed at the development and support of market economies across the region.
We work with the private sector and not in competition with it.
We mobilize private financing for public goods, such as infrastructure.
Our investments are aimed at overcoming structural problems that have plagued the region.
This crisis has shown that the need for adequately capitalized public institutions is enormous.
This will remain the case for the foreseeable future.
For years to come, the private banking sector will be preoccupied with the consequences of the financial crisis. As a result, investors value a strong public partner now more than ever before.
The current economic situation has pushed the EBRD to its limits.
It is for this reason that I have suggested a capital increase to the shareholders of the bank – to €30 billion from the current €20 billion.
This would mean that the EBRD could invest up to €10 billion annually over the next five years, enabling us to continue to fulfill our role, providing vital backing and financial support to Eastern Europe and the private sector.
Such investment is more necessary than ever, even at a time of gradual economic recovery.
No Time for Nostalgia
France and Germany have every reason to celebrate the miracle of their friendship, sealed forty years ago by the Elysée Treaty.
But they have no reason to be satisfied with its current condition.
Neither has Europe.
For most of modern history, the Franco-German antagonism-the two countries' so-called "hereditary enmity"-haunted Europe and the world.
In his famous University of Zurich speech in 1946, Winston Churchill urged that "The first step in the re-creation of the European Family must be a partnership between France and Germany."
Franco-German reconciliation, guided by the leadership of men like General Charles de Gaulle and Konrad Adenauer, made post-war Europe's amazing successes possible.
The last landmark in the Franco-German partnership was the Treaty of Maastricht, concluded in 1991.
Reunited Germany surrendered its beloved currency, the Deutsche Mark, to boost European integration, but also to calm French fears that Germany was poised to establish monetary hegemony over the continent.
However, the legendary tandems of the past-de Gaulle and Adenauer, Valéry Giscard d'Estaing and Helmut Schmidt, François Mitterrand and Helmut Kohl-have not been succeeded by a comparable duo.
This is not only a problem of personal chemistry between Jacques Chirac and Gerhard Schröder.
The deeper cause of recent estrangement and national rivalry has been German reunification, which disturbed the bilateral balance.
Until 1990, France-or, rather, much of its political class-tacitly agreed with Nobel laureate François Mauriac's famous confession: "I love Germany so much that I prefer it to be split into two parts ."
Germany's division created a rough demographic parity between French and West Germans.
By contrast, reunited Germany has some 80 million people, France only 60 million.
Moreover, a "balance of imbalance" promoted a sense of equality.
While West Germany's economy was stronger, France was a nuclear power and a permanent, veto-wielding, member of the UN Security Council.
Germany long ago renounced possession of nuclear weapons, and it is unlikely to become a permanent member of the Security Council soon.
Yet, from a French perspective, eastward enlargement of the EU augments Germany's weight.
The future "Europe of 27" (or 28, with Turkey, but not counting the post-Yugoslav republics and Albania) will be very different from the "Europe of Six" that de Gaulle and Adenauer oversaw.
Berlin's geographical position in the EU of tomorrow now seems more central, with Paris on the fringe.
Moreover, whereas German Chancellors' tone towards the French government had always been moderate, Schröder's behavior has been assertive, with the EU's Nice summit in December 2000 driving Franco-German relations to a forty-year low point.
Chirac insisted on absolute parity of votes between France and Germany in the EU Council of Ministers, ignoring their demographic disparity.
Schröder did not seem to grasp the enormous symbolic relevance his partner attached to the issue.
More importantly, the Nice meeting showed how far French and German ideas about European integration had drifted apart.
While France prefers an intergovernmental approach, Germany remains prepared to transfer more national sovereignty to the Brussels.
Now, like a squabbling old couple, France and Germany are using the their wedding anniversary as an opportunity to revive their partnership.
Chirac and Schröder gave a foretaste of what that means in practice when they made a joint proposal that the EU be led by a twin-presidency: a European Council president (chosen by the heads of government), and a Commission president (elected by the European parliament).
This compromise attempts to square the circle by combining the intergovernmental and unionist approaches.
Both governments seem convinced that more Franco-German summitry (now including joint sessions of their cabinets) will remedy their marital crisis.
Likewise, the extravagance of the jubilee celebrations in Versailles-far more pompous than the modest ceremony in the Elysée 40 years ago-will be inversely proportional to their political relevance.
The real problem is that revitalizing the Franco-German alliance must be based on a pro-European agenda, rather than each simply sticking to bad national habits.
Unfortunately, there are worrying signs that this is happening.
For example, France remains unwilling to accept a fundamental reform of the EU's Common Agricultural Policy (CAP), of which it is the chief beneficiary.
Last fall, Germany, the largest contributor to the EU budget, accepted a compromise prolonging the present CAP for a decade.
As a result, farmers in future member countries will only receive 25% of West European levels of direct payments when they join in 2004, reaching parity only in 2013.
Germany, for its part, is better at signing agreements on enhanced defense cooperation among Europeans than it is at honoring them.
It recently refused to purchase the full number of Airbus troop transport planes that it had promised to buy.
Most importantly, the political determination needed to begin long overdue social-welfare and labor-market reforms is weak in both countries.
This is not only a domestic issue.
As the most important Euro countries, France and Germany have a special responsibility for the health of Europe's economy and the credibility of its currency.
So let France and Germany enjoy their celebration in Versailles.
When the party is over, hard choices must be made.
No more time for nostalgia.
No to Green Fundamentalism
BORDEAUX – Climatology and its emphasis on global warming is a comparatively recent addition to science.
Yet, despite the relative youth of this research, a clear consensus has emerged: climate change – for which human activity is significantly, though not exclusively, responsible – now threatens our way of life, so we must develop the means to combat it.
But I also believe that the fundamentalist approach that can be sensed in certain circles is skirting the limits of the acceptable.
How can fundamentalists advocate limiting economic growth as a solution to the problem of global warming when there are men, women, and children in their hundreds of millions, all over the world, who still lead lives of abject poverty and are in desperate need of help?
People in poor parts of the world have a right to economic development so that they can produce their own food, gain access to clean water, live in adequate shelter, and have all the benefits represented by hospitals and schools.
These are essential human rights, and they can be realized only through economic growth, not stagnation.
At the twentieth century’s start, only one person in ten lived in a town or city.
Today that figure is one in two – 3.3 billion people, according to United Nations statistics – and the percentage of urban dwellers is expected to reach 70% by 2050.
Cities, then, represent the most important development challenge of all.
As cities continue to grow and spread across the world, reducing energy consumption and improving our quality of life require us to ensure that their inhabitants can travel relatively short distances to work
The common expression in France that great rivers are created out of tiny streams captures the sort of strategy for countering global warming through sustainable development that I believe could be effective.
Local actions that are then developed as part of an exchange between cities could have a global impact in the long term.
That is why I am keen to encourage local initiatives that have a global perspective.
Among the issues raised at the Copenhagen climate conference last December was the EU member states’ failure to perfect a post-Kyoto international system for fighting global warming.
Fortunately, though, things have changed since then, with the 110 countries responsible for 80% of greenhouse-gas emissions – including India, China, and Brazil – now giving their support to the Copenhagen agreement.
But it is important not to stop there.
We must try to ensure that future climate-change meetings, like the Cancún summit this winter, are fully exploited as an opportunity to transform well-intentioned declarations into international agreements that apply to developed and developing countries alike.
The Copenhagen agreement envisages the world’s industrialized nations financing emissions reduction and other necessary adjustments in developing countries through a $30 billion aid package, which will rise to $100 billion between now and 2020.
But the agreement fails to specify who will undertake what costs.
Instead, the agreement limits itself to responding to the widely accepted goal of keeping carbon-dioxide levels below 450 parts per million, and the rise in average global temperature below 2°C. But are these targets realistic?
If not, we must bear in mind the warning of the Stern Report that failure to act now would make taking action in the future much more costly.
That all countries taking part in the political process on climate change should be treated equally has ensured that Europe still exerts a good deal of influence.
Things have clearly moved on from Copenhagen, when the priority was to reach agreement between those countries that have been chiefly responsible for global warming.
And if my own country, France, has failed to set a good example to developing countries by equivocating over the terms of a carbon tax, then perhaps the time has come for its national carbon footprint to be linked with the European trading system for CO2.
The sad truth, though, is that the solution of mixing quotas and taxes will not deliver results quickly enough to bring about a genuine and immediate move to low-carbon or even carbon-free economies.
Ever since Copenhagen, a majority of the main greenhouse-gas-emitting countries have been setting out ambitious goals – without hedging them with restrictive conditions.
At the same time, new mechanisms are being put in place to measure and evaluate emissions, which will allow much clearer comparisons between countries.
What remains to be done is to share these efforts in a way that is fair and manageable for all countries.
Will we, then, manage to sign a legal and binding agreement in Cancún?
Will we be able to implement cooperation mechanisms between countries such as the UN’s Collaborative Program on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries – the REDD program – so as to prevent deforestation and encourage technology transfer and financing?
This is the real challenge, and although it may prove ambitious, many countries will arrive at the Cancún conference with renewed hope for the future, thanks to the progress made since Copenhagen.
Not Only The Dutch Were Disgraced at Srebrenica
Atrocities cast long shadows.
The Dutch government has resigned over the Srebrenica massacre of 1995, which occurred when the supposedly "safe" enclave of Srebrenica, supposedly defended by a battalion of Dutch UN troops, surrendered to heavily armed Serb militias.
The massacre of at least 7,000 Bosnian boys and men followed.
The Dutch government of Premier Wim Kok resigned after a report that it had commissioned accused the government of 1995 (also headed by Mr. Kok) of acting irresponsibly in underestimating the threats faced by Dutch peacekeepers.
It is, of course, an honorable act for a government to take responsibility for so grave a failing and resign.
Too few governments or politicians ever accept this debt to honor.
But the resignation of the Kok government does not deal with the disgrace of Srebrenica.
It only underlines the fact that the international community still has scores to settle with the largest massacre on European soil in the last half century.
What we should have seen in The Hague was not only the resignation of a Dutch government - but more importantly the appearance of General Ratko Mladic and his accomplices to face the International Criminal Tribunal for the Former Yugoslavia.
So long as these men remain at large, the shame over Srebrenica will stick to the international community.
Most people remember the televised images of General Mladic humiliating the Dutch commander of the "safe" Srebrenica enclave, Colonel Ton Karremans, offering him drinks and gifts for his family.
Then the Dutch peacekeepers were sent on their way, as were women and children.
Only the men and the boys remained, to be slaughtered.
I retain not only these images forever in my head, but also the sights and smells of thousands of decayed corpses stacked in two mine tunnels near Tuzla.
They were picked up from the mass graves that appeared around Srebrenica.
They were in Tuzla awaiting the long and laborious process of identifying the remains.
Many of Srebrenica's survivors were clinging to the desperate hope that a missing husband or son might still be alive in a remote camp.
They needed to know what had happened before they could try to get on with their lives.
After the Dayton Agreement of Bosnia an International Commission on Missing Persons (ICMP) was established to clarify what had happened to the more than 20,000 persons missing from the civil war in Bosnia.
Another 10,000 missing were later added to this remit from Kosovo.
That task seemed overwhelming.
But in recent months there has been a breakthrough.
New DNA technology, combined with computer programs that match the findings with DNA from bereaved relatives, has led to increasing numbers of identifications.
Every day names can be put on the anonymous body bags, and a decent burial can take place.
Now survivors at least know that the dead are dead.
So this sad chapter of Srebrenica is finally being told.
But we still need to bring those who committed the crime to account.
It is totally unacceptable that people like Ratko Mladic remain at large.
The government of the Federal Republic of Yugoslavia (FRY) could seize and extradite them - if it wished to.
Until now it has not.
The FRY wants to integrate with the Euro-Atlantic community.
It pursues three goals: accession to the Council of Europe, membership in NATO's Partnership for Peace, and a Stabilisation and Association Agreement with the European Union.
But the international community must hold the FRY to the same high standards for inclusion in intergovernmental structures that have been rightly required of Croatia and Bosnia since 1996.
So long as General Mladic and his henchmen do not join Mr. Milosevic in The Hague, we cannot believe that the FRY really belongs in the company of democratic European states in respect to the rule of law.
If the FRY is not confronted with the same demands others had to meet, this will only strengthen obstructionist forces within Serbia and undermine the security of Serbia's neighbours.
Membership in the international community cannot be given away at a discount.
Not the End of the World as We Know It
CAMBRIDGE: “Reports of my demise are greatly exaggerated,” Mark Twain once quipped.
Yes, things have become tougher – from high tech to financial markets – but it is just that. What’s is happening is not even a recession; definitely not the end of the world.
Recent Gallup polls report that Americans are no longer feeling exuberant, but certainly still feel comfortable.
As to their satisfaction with America’s quality of life, 33% said they were very satisfied and another 56% somewhat satisfied.
Economic conditions in the country were found good or excellent by 67% of respondents; 63% judged that they would be better off a year from now; 73% reported that they were unworried about losing their job.
They are right.
Unemployment will rise to 5% at most. Six months from now the economy will be out of the doldrums.
After a 5 year boom with over 4% growth, the US economy has slowed to almost zero.
The impetus for this slowdown was, as always, the Federal Reserve.
No period of expansion in the US has ever just fizzled out.
They all were killed by the Fed, and for the same reason: fear of inflation.
Things were different this time though.
The Fed acted preemptively while inflation was still very low.
As a result the cure can afford to be much milder – a moderate rise in unemployment and a brief pause in growth rather than a full blown recession with massive increases in joblessness.
True, the disappearance of growth is abrupt and more drastic than a soft landing; the carnage in high tech is pretty awful. For a moment there was real fear of a real recession.
But all that is giving way to the question of what comes next. The answer, obviously, is recovery and expansion.
Nothing is fundamentally wrong with America’s economy; nothing, at least, to which a recession is the answer.
Overheating and the risk of inflation were at issue; both have been attended to by two slow quarters already, and perhaps two more to come.
So its time to think about where and when the upswing will arise.
The answer, as in every downturn, is that monetary and fiscal policy will determine the course of events.
With inflation abated, monetary policy is free to reduce the cost of capital and renew the consumer spending spree as well as financial stability.
Fiscal policy has a lot of freedom, as record surpluses cry out for tax cuts.
Yes, 71% of Gallup respondents feel they pay too much in taxes; they can’t wait for their rebate checks and are set to go shopping.
Monetary and fiscal policy work in America; they have gotten the country out of every recession. They certainly can overcome this growth pause.
Of course, there are risks to this rosy scenario.
Downward adjustments in profit expectations for corporations and hence for stocks may not reverse quickly; consumer confidence may decline another notch.
But that is unlikely to be the source of trouble. The real problem is more likely to be too vigorous an upswing.
The Fed is under pressure to make good for a growth slump that turned out to be bigger than expected.
The Treasury, on the other hand, is under pressure to produce tax cuts that have bipartisan support, which means putting money into the pockets of people who go out and spend, here and now.
With so much pressure, how can policy makers avoid stepping on the accelerator just a bit too hard? This is America’s real problem now – too little gas is the way to a meltdown, too much propels the economy beyond full employment.
The Fed’s dilemma results form the long lag that occurs before monetary policy takes effect – nine months or so – which means that the Fed must front-load its action before it gets to see what the Treasury does. The Treasury will act under the pressure of today’s slackness, before the Fed’s injection of stimulus take effect.
Some observers will feel that this discussion misses the point: how can the US keep spending itself out of trouble?
But no, don’t wait for collapse – not in stocks, not in confidence, not in credit.
The US economy is fundamentally sound: everybody works, there is plenty of cost cutting and innovation, and there is plenty of investor support.
That includes support from outside, because surely nobody can imagine that Japan or Europe offers a more dynamic economy with better potential.
But imagine this is all wrong and a collapse does occur?
Be careful with the Schadenfreude.
If the America’s problem is not a pothole but an abyss, the whole world is bound to fall into it.
We all have a great interest in America’s turning around, sound and soon.
Markets’ Rational Complacency
NEW YORK – An increasingly obvious paradox has emerged in global financial markets this year.
Though geopolitical risks – the Russia-Ukraine conflict, the rise of the Islamic State and growing turmoil across the Middle East, China’s territorial disputes with its neighbors, and now mass protests in Hong Kong and the risk of a crackdown – have multiplied, markets have remained buoyant, if not downright bubbly.
Indeed, oil prices have been falling, not rising.
Global stock markets have, overall, reached new highs.
And credit markets show low spreads, while long-term bond yields have fallen in most advanced economies.
Yes, financial markets in troubled countries – for example, Russia’s currency, equity, and bond markets – have been negatively affected.
But the more generalized contagion to global financial markets that geopolitical tensions typically engender has failed to materialize.
Why the indifference?
Are investors too complacent, or is their apparent lack of concern rational, given that the actual economic and financial impact of current geopolitical risks – at least so far – has been modest?
Global markets have not reacted for several reasons.
For starters, central banks in advanced economies (the United States, the eurozone, the United Kingdom, and Japan) are holding policy rates near zero, and long-term interest rates have been kept low.
This is boosting the prices of other risky assets such as equities and credit.
Second, markets have taken the view that the Russia-Ukraine conflict will remain contained, rather than escalating into a full-scale war.
So, though sanctions and counter-sanctions between the West and Russia have increased, they are not causing significant economic and financial damage to the European Union or the US.
More important, Russia has not cut off natural-gas supplies to Western Europe, which would be a major shock for gas-dependent EU economies.
Third, the turmoil in the Middle East has not triggered a massive shock to oil supplies and prices like those that occurred in 1973, 1979, or 1990.
On the contrary, there is excess capacity in global oil markets.
Iraq may be in trouble, but about 90% of its oil is produced in the south, near Basra, which is fully under Shia control, or in the north, under the control of the Kurds.
Only about 10% is produced near Mosul, now under the control of the Islamic State.
Finally, the one Middle East conflict that could cause oil prices to spike – a war between Israel and Iran – is a risk that, for now, is contained by ongoing international negotiations with Iran to contain its nuclear program.
So there appear to be good reasons why global markets so far have reacted benignly to today’s geopolitical risks.
What could change that?
Several scenarios come to mind.
First, the Middle East turmoil could affect global markets if one or more terrorist attack were to occur in Europe or the US – a plausible development, given that several hundred Islamic State jihadists are reported to have European or US passports.
Markets tend to disregard the risks of events whose probability is hard to assess but that have a major impact on confidence when they do occur.
Thus, a surprise terrorist attack could unnerve global markets.
Second, markets could be incorrect in their assessment that conflicts like that between Russia and Ukraine, or Syria’s civil war, will not escalate or spread.
Russian President Vladimir Putin’s foreign policy may become more aggressive in response to challenges to his power at home, while Jordan, Lebanon, and Turkey are all being destabilized by Syria’s ongoing meltdown.
Third, geopolitical and political tensions are more likely to trigger global contagion when a systemic factor shaping the global economy comes into play.
For example, the mini-perfect storm that roiled emerging markets earlier this year – even spilling over for a while to advanced economies – occurred when political turbulence in a few countries (Turkey, Thailand, and Argentina) met bad news about Chinese growth.
China, with its systemic importance, was the match that ignited a tinderbox of regional and local uncertainty.
Today (or soon), the situation in Hong Kong, together with the news of further weakening in the Chinese economy, could trigger global financial havoc.
Or the US Federal Reserve could spark financial contagion by exiting zero rates sooner and faster than markets expect.
Or the eurozone could relapse into recession and crisis, reviving the risk of redenomination in the event that the monetary union breaks up.
The interaction of any of these global factors with a variety of regional and local sources of geopolitical tension could be dangerously combustible.
So, while global markets arguably have been rationally complacent, financial contagion cannot be ruled out.
A century ago, financial markets priced in a very low probability that a major conflict would occur, blissfully ignoring the risks that led to World War I until late in the summer of 1914.
Back then, markets were poor at correctly pricing low-probability, high-impact tail risks.
Gouging the Gauchos
NEW YORK – Like individuals, corporations, and other private firms that rely on bankruptcy procedures to reduce an excessive debt burden, countries sometimes need orderly debt restructuring or reduction.
But the ongoing legal saga of Argentina’s fight with holdout creditors shows that the international system for orderly sovereign-debt restructuring may be broken.
Individuals, firms, or governments may end up with too much debt because of bad luck, bad decisions, or a combination of the two.
If you get a mortgage but then lose your job, you have bad luck.
If your debt becomes unsustainable because you borrowed too much to take long vacations or buy expensive appliances, your bad behavior is to blame.
The same applies to corporate firms: some have bad luck and their business plans fail, while others borrow too much to pay their mediocre managers excessively.
Bad luck and bad behavior (policies) can also lead to unsustainable debt burdens for governments.
If a country’s terms of trade (the price of its exports) deteriorate and a large recession persists for a long time, its government’s revenue base may shrink and its debt burden may become excessive.
But an unsustainable debt burden may also result from borrowing to spend too much, failure to collect sufficient taxes, and other policies that undermine the economy’s growth potential.
When the debt burden of an individual, firm, or government is too high, legal systems need to provide orderly ways to reduce it to a more sustainable level (closer to the debtor’s potential income).
If it is too easy to default and reduce one’s debt burden, the result is moral hazard, because debtors gain an incentive to indulge in bad behavior.
But if it is too difficult to restructure and reduce debts when bad luck leads to unsustainable debts, the result is bad for both the debtor and its creditors, who are better off when a reduced debt ratio is serviced than when a debtor defaults.
Finding the right balance is not easy.
Formal legal bankruptcy regimes for individuals and firms have evolved over time to accomplish this.
Because a formal bankruptcy regime for governments does not exist (though Anne Krueger, the International Monetary Fund’s then-deputy managing director, proposed one more than a decade ago), countries have had to rely on a market-based approach to resolve excessive debt problems.
Following this approach, the country offers to exchange old bonds for new bonds with a lower face value and/or lower interest payments and longer maturities.
If most investors accept this offer, the restructuring occurs successfully.
But this implies a key problem: Whereas a bankruptcy court can force holdout creditors to accept the exchange offer as long as a significant majority of creditors have already done so (a so-called “cram down”), the market-based approach allows some creditors to continue to hold out and sue to be paid in full.
That is why, over the last decade, governments have augmented the market-based approach with a contractual approach that resolves the holdout problem by introducing collective-action clauses (CACs) that can also cram down on holdouts the terms accepted by a majority of creditors.
These clauses became standard in sovereign bonds but were missing in those issued by Argentina before 2001, when the crisis hit.
Though 93% of Argentina’s creditors accepted new terms for their bonds in 2005 and 2010 in two exchange offers, a small group of holdouts sued Argentina in the United States, and, with the US Supreme Court recently ruling on the issue, have now won the right to be paid in full.
The US court decision is dangerous for two reasons.
First, the court ruled for the first time that a country cannot continue to pay those creditors who accepted a big reduction (or “haircut”) on their claims until the holdouts are paid in full.
So, why would any future creditor who benefits from an orderly restructuring vote for it if its new claims can be blocked by even a single holdout creditor?
Second, if the holdouts are paid in full, the majority of creditors who accepted a haircut can request to be paid in full, too.
If that happens, the country’s debt burden will surge again, become unsustainable, and force the government – in this case Argentina, which is servicing most of its debt – to default again on all creditors.
The inclusion of CACs in new bond contracts may help other countries avoid the holdout problem in the future.
But even CACs may not fully help, because they are designed in a way that still allows a small minority of creditors to hold out and thus prevent an orderly restructuring.
Either super-CACs need to be designed and introduced (though it will take years to include them in all new bond contracts) or the international community may want to reconsider whether the 2002 IMF proposal for a formal bankruptcy court for sovereign borrowers should be resurrected.
Holdouts must not be permitted to block orderly restructurings that benefit debtors and creditors.
The Great Backlash
NEW YORK – In the immediate aftermath of the 2008 global financial crisis, policymakers’ success in preventing the Great Recession from turning into Great Depression II held in check demands for protectionist and inward-looking measures.
But now the backlash against globalization – and the freer movement of goods, services, capital, labor, and technology that came with it – has arrived.
This new nationalism takes different economic forms: trade barriers, asset protection, reaction against foreign direct investment, policies favoring domestic workers and firms, anti-immigration measures, state capitalism, and resource nationalism.
In the political realm, populist, anti-globalization, anti-immigration, and in some cases outright racist and anti-Semitic parties are on the rise.
These forces loathe the alphabet soup of supra-national governance institutions – the EU, the UN, the WTO, and the IMF, among others – that globalization requires.
Even the Internet, the epitome of globalization for the past two decades, is at risk of being balkanized as more authoritarian countries – including China, Iran, Turkey, and Russia – seek to restrict access to social media and crack down on free expression.
The main causes of these trends are clear.
Anemic economic recovery has provided an opening for populist parties, promoting protectionist policies, to blame foreign trade and foreign workers for the prolonged malaise.
Add to this the rise in income and wealth inequality in most countries, and it is no wonder that the perception of a winner-take-all economy that benefits only elites and distorts the political system has become widespread.
Nowadays, both advanced economies (like the United States, where unlimited financing of elected officials by financially powerful business interests is simply legalized corruption) and emerging markets (where oligarchs often dominate the economy and the political system) seem to be run for the few.
For the many, by contrast, there has been only secular stagnation, with depressed employment and stagnating wages.
The resulting economic insecurity for the working and middle classes is most acute in Europe and the eurozone, where in many countries populist parties – mainly on the far right – outperformed mainstream forces in last weekend’s European Parliament election.
As in the 1930’s, when the Great Depression gave rise to authoritarian governments in Italy, Germany, and Spain, a similar trend now may be underway.
If income and job growth do not pick up soon, populist parties may come closer to power at the national level in Europe, with anti-EU sentiments stalling the process of European economic and political integration.
Worse, the eurozone may again be at risk: some countries (the United Kingdom) may exit the EU; others (the UK, Spain, and Belgium) eventually may break up.
Even in the US, the economic insecurity of a vast white underclass that feels threatened by immigration and global trade can be seen in the rising influence of the extreme right and Tea Party factions of the Republican Party.
These groups are characterized by economic nativism, anti-immigration and protectionist leanings, religious fanaticism, and geopolitical isolationism.
A variant of this dynamic can be seen in Russia and many parts of Eastern Europe and Central Asia, where the fall of the Berlin Wall did not usher in democracy, economic liberalization, and rapid output growth.
Instead, nationalist and authoritarian regimes have been in power for most of the past quarter-century, pursuing state-capitalist growth models that ensure only mediocre economic performance.
In this context, Russian President Vladimir Putin’s destabilization of Ukraine cannot be separated from his dream of leading a “Eurasian Union” – a thinly disguised effort to recreate the former Soviet Union.
In Asia, too, nationalism is resurgent.
New leaders in China, Japan, South Korea, and now India are political nationalists in regions where territorial disputes remain serious and long-held historical grievances fester.
These leaders – as well as those in Thailand, Malaysia, and Indonesia, who are moving in a similar nationalist direction – must address major structural-reform challenges if they are to revive falling economic growth and, in the case of emerging markets, avoid a middle-income trap.
Economic failure could fuel further nationalist, xenophobic tendencies – and even trigger military conflict.
Meanwhile, the Middle East remains a region mired in backwardness.
The Arab Spring – triggered by slow growth, high youth unemployment, and widespread economic desperation – has given way to a long winter in Egypt and Libya, where the alternatives are a return to authoritarian strongmen and political chaos. In Syria and Yemen, there is civil war;
Lebanon and Iraq could face a similar fate; Iran is both unstable and dangerous to others; and Afghanistan and Pakistan look increasingly like failed states.
In all of these cases, economic failure and a lack of opportunities and hope for the poor and young are fueling political and religious extremism, resentment of the West and, in some cases, outright terrorism.
In the 1930’s, the failure to prevent the Great Depression empowered authoritarian regimes in Europe and Asia, eventually leading to World War II.
This time, the damage caused by the Great Recession is subjecting most advanced economies to secular stagnation and creating major structural growth challenges for emerging markets.
This is ideal terrain for economic and political nationalism to take root and flourish.
Today’s backlash against trade and globalization should be viewed in the context of what, as we know from experience, could come next.
Russia’s Eurasian Vision
NEW YORK – The escalating conflict in Ukraine between the Western-backed government and Russian-backed separatists has focused attention on a fundamental question: What are the Kremlin’s long-term objectives?
Though Russian President Vladimir Putin’s immediate goal may have been limited to regaining control of Crimea and retaining some influence in Ukrainian affairs, his longer-term ambition is much bolder.
That ambition is not difficult to discern. Putin once famously observed that the Soviet Union’s collapse was the greatest catastrophe of the twentieth century.
Thus, his long-term objective has been to rebuild it in some form, perhaps as a supra-national union of member states like the European Union.
This goal is not surprising: declining or not, Russia has always seen itself as a great power that should be surrounded by buffer states.
Under the Czars, Imperial Russia extended its reach over time.
Under the Bolsheviks, Russia built the Soviet Union and a sphere of influence that encompassed most of Central and Eastern Europe.
And now, under Putin’s similarly autocratic regime, Russia plans to create, over time, a vast Eurasian Union.
While the EAU is still only a customs union, the European Union’s experience suggests that a successful free-trade area leads over time to broader economic, monetary, and eventually political integration.
Russia’s goal is not to create another North American Free Trade Agreement; it is to create another EU, with the Kremlin holding all of the real levers of power.
The plan has been clear: Start with a customs union – initially Russia, Belarus, and Kazakhstan – and add most of the other former Soviet republics.
Indeed, now Armenia and Kyrgyzstan are in play.
Once a broad customs union is established, trade, financial, and investment links within it grow to the point that its members stabilize their exchange rates vis-à-vis one another.
Then, perhaps a couple of decades after the customs union is formed, its members consider creating a true monetary union with a common currency (the Eurasian ruble?) that can be used as a unit of account, means of payment, and store of value.
As the eurozone experience proves, sustaining a monetary union requires banking, fiscal, and full economic union.
And, once members give up their sovereignty over fiscal, banking, and economic affairs, they may eventually need a partial political union to ensure democratic legitimacy.
Realizing such a plan may require overcoming serious challenges and the commitment of large financial resources over a period of many decades.
But the first step is a customs union, and, in the case of the Eurasian Union, it had to include Ukraine, Russia’s largest neighbor to the west.
That is why Putin put so much pressure on former President Viktor Yanukovych to abandon an association agreement with the EU.
It is also why Putin reacted to the ouster of Yanukovych’s government by taking over Crimea and destabilizing eastern Ukraine.
Recent events have further weakened market-oriented, Western-leaning factions in Russia and strengthened the state-capitalist, nationalist factions, who are now pushing for faster establishment of the EAU.
In particular, the tension with Europe and the United States over Ukraine will shift Russia’s energy and raw-material exports – and the related pipelines – toward Asia and China.
Likewise, Russia and its BRICS partners (Brazil, India, China, and South Africa) are creating a development bank that is to serve as an alternative to the Western-controlled International Monetary Fund and the World Bank.
Revelations of electronic surveillance by the US may lead Russia – and other illiberal states – to restrict Internet access and create their own nationally controlled data networks.
There is even talk of Russia and China creating an alternative international payment system to replace the SWIFT system, which the US and Europe can use to impose financial sanctions against Russia.
Creating a full EAU – one that is gradually less tied to the West by trade, financial, economic, payments, communications, and political links – may be a pipe dream.
Russia’s lack of reform and adverse demographic trends imply low potential growth and insufficient financial resources to create the fiscal and transfer union that is needed to bring other countries in.
But Putin is ambitious, and – like other autocrats in Central Asian nations – he may remain in power for decades to come.
And, like it or not, even a Russia that lacks the dynamism needed to succeed in manufacturing and the industries of the future will remain a commodity-producing superpower.
Revisionist powers like Russia, China, and Iran appear ready to confront the global economic and political order that the US and the West built after the collapse of the Soviet Union.
But now one of these revisionists powers – Russia – is pushing ahead aggressively to recreate a near-empire and a sphere of influence.
Unfortunately, the sanctions that the US and Europe are imposing on Russia, though necessary, may merely reinforce the conviction among Putin and his nationalist Slavophile advisers that Russia’s future lies not in the West, but in a separate integration project in the East.
US President Barack Obama says that this is not the beginning of a new Cold War; current trends may soon suggest otherwise.
Bubbles in the Broth
NEW YORK – As below-trend GDP growth and high unemployment continue to afflict most advanced economies, their central banks have resorted to increasingly unconventional monetary policy. An alphabet soup of measures has been served up: ZIRP (zero-interest-rate policy);
QE (quantitative easing, or purchases of government bonds to reduce long-term rates when short-term policy rates are zero); CE (credit easing, or purchases of private assets aimed at lowering the private sector’s cost of capital); and FG (forward guidance, or the commitment to maintain QE or ZIRP until, say, the unemployment rate reaches a certain target).
Some have gone as far as proposing NIPR (negative-interest-rate policy).
And yet, through it all, growth rates have remained stubbornly low and unemployment rates unacceptably high, partly because the increase in money supply following QE has not led to credit creation to finance private consumption or investment.
Instead, banks have hoarded the increase in the monetary base in the form of idle excess reserves.
There is a credit crunch, as banks with insufficient capital do not want to lend to risky borrowers, while slow growth and high levels of household debt have also depressed credit demand.
As a result, all of this excess liquidity is flowing to the financial sector rather than the real economy.
Near-zero policy rates encourage “carry trades” – debt-financed investment in higher-yielding risky assets such as longer-term government and private bonds, equities, commodities and currencies of countries with high interest rates.
The result has been frothy financial markets that could eventually turn bubbly.
Indeed, the US stock market and many others have rebounded more than 100% since the lows of 2009; issuance of high-yield “junk bonds” is back to its 2007 level; and interest rates on such bonds are falling.
Moreover, low interest rates are leading to high and rising home prices – possibly real-estate bubbles – in advanced economies and emerging markets alike, including Switzerland, Sweden, Norway, Germany, France, Hong Kong, Singapore, Brazil, China, Australia, New Zealand, and Canada.
The collapse from 2007 to 2009 of equity, credit, and housing bubbles in the United States, the United Kingdom, Spain, Ireland, Iceland, and Dubai led to severe financial crises and economic damage.
So, are we at risk of another cycle of financial boom and bust?
Some policymakers – like Janet Yellen, who is likely to be confirmed as the next Chair of the US Federal Reserve – argue that we should not worry too much.
Central banks, they argue, now have two goals: restoring robust growth and low unemployment with low inflation, and maintaining financial stability without bubbles.
Moreover, they have two instruments to achieve these goals: the policy interest rate, which will be kept low for long and raised only gradually to boost growth; and macro-prudential regulation and supervision of the financial system (macro-pru for short), which will be used to control credit and prevent bubbles.
But some critics, like Fed Governor Jeremy Stein, argue that macro-pru policies to control credit and leverage – such as limits on loan-to-value ratios for mortgages, bigger capital buffers for banks that extend risky loans, and tighter underwriting standards – may not work. Not only are they untested, but restricting leverage in some parts of the banking system would merely cause the liquidity from zero rates to flow to other parts of it, while trying to restrict leverage entirely would simply drive the liquidity into the less-regulated shadow banking system.
According to Stein, only monetary policy (higher policy interest rates) “gets in all of the cracks” of the financial system and prevents asset bubbles.
The trouble is that if macro-pru does not work, the interest rate would have to serve two opposing goals: economic recovery and financial stability.
If policymakers go slow on raising rates to encourage faster economic recovery, they risk causing the mother of all asset bubbles, eventually leading to a bust, another massive financial crisis, and a rapid slide into recession.
But if they try to prick bubbles early on with higher interest rates, they will crash bond markets and kill the recovery, causing much economic and financial damage.
So, unless macro-pru works as planned, policymakers are damned if they do and damned if they don’t.
For now, policymakers in countries with frothy credit, equity, and housing markets have avoided raising policy rates, given slow economic growth.
But it is still too early to tell whether the macro-pru policies on which they are relying will ensure financial stability.
If not, policymakers will eventually face an ugly tradeoff: kill the recovery to avoid risky bubbles, or go for growth at the risk of fueling the next financial crisis.
For now, with asset prices continuing to rise, many economies may have had as much soup as they can stand.
The Changing Face of Global Risk
NEW YORK – The world’s economic, financial, and geopolitical risks are shifting.
Some risks now have a lower probability – even if they are not fully extinguished.
Others are becoming more likely and important.
A year or two ago, six main risks stood at center stage:
· A eurozone breakup (including a Greek exit and loss of access to capital markets for Italy and/or Spain).
· A fiscal crisis in the United States (owing to further political fights over the debt ceiling and another government shutdown).
· A public-debt crisis in Japan (as the combination of recession, deflation, and high deficits drove up the debt/GDP ratio).
· Deflation in many advanced economies.
· War between Israel and Iran over alleged Iranian nuclear proliferation.
· A wider breakdown of regional order in the Middle East.
These risks have now been reduced.
Thanks to European Central Bank President Mario Draghi’s “whatever it takes” speech, new financial facilities to stabilize distressed sovereign debtors, and the beginning of a banking union, the eurozone is no longer on the verge of collapse.
In the US, President Barack Obama and Congressional Republicans have for now agreed on a truce to avoid the threat of another government shutdown over the need to raise the debt ceiling.
In Japan, the first two “arrows” of Prime Minister Shinzo Abe’s economic strategy – monetary easing and fiscal expansion – have boosted growth and stopped deflation.
Now the third arrow of “Abenomics” – structural reforms – together with the start of long-term fiscal consolidation, could lead to debt stabilization (though the economic impact of the coming consumption-tax hike is uncertain).
Similarly, the risk of deflation worldwide has been contained via exotic and unconventional monetary policies: near-zero interest rates, quantitative easing, credit easing, and forward guidance.
And the risk of a war between Israel and Iran has been reduced by the interim agreement on Iran’s nuclear program concluded last November.
The falling fear premium has led to a drop in oil prices, even if many doubt Iran’s sincerity and worry that it is merely trying to buy time while still enriching uranium.
Though many Middle East countries remain highly unstable, none of them is systemically important in financial terms, and no conflict so far has seriously shocked global oil and gas supplies.
But, of course, exacerbation of some of these crises and conflicts could lead to renewed concerns about energy security.
More important, as the risks of recent years have receded, six other risks have been growing.
For starters, there is the risk of a hard landing in China.
The rebalancing of growth away from fixed investment and toward private consumption is occurring too slowly, because every time annual GDP growth slows toward 7%, the authorities panic and double down on another round of credit-fueled capital investment.
This then leads to more bad assets and non-performing loans, more excessive investment in real estate, infrastructure, and industrial capacity, and more public and private debt.
By next year, there may be no road left down which to kick the can.
There is also the risk of policy mistakes by the US Federal Reserve as it exits monetary easing.
Last year, the Fed’s mere announcement that it would gradually wind down its monthly purchases of long-term financial assets triggered a “taper” tantrum in global financial markets and emerging markets.
This year, tapering is priced in, but uncertainty about the timing and speed of the Fed’s efforts to normalize policy interest rates is creating volatility.
Some investors and governments now worry that the Fed may raise rates too soon and too fast, causing economic and financial shockwaves.
Third, the Fed may actually exit zero rates too late and too slowly (its current plan would normalize rates to 4% only by 2018), thus causing another asset-price boom – and an eventual bust.
Indeed, unconventional monetary policies in the US and other advanced economies have already led to massive asset-price reflation, which in due course could cause bubbles in real estate, credit, and equity markets.
Fourth, the crises in some fragile emerging markets may worsen.
Emerging markets are facing headwinds (owing to a fall in commodity prices and the risks associated with China’s structural transformation and the Fed’s monetary-policy shift) at a time when their own macroeconomic policies are still too loose and the lack of structural reforms has undermined potential growth.
Moreover many of these emerging markets face political and electoral risks.
Fifth, there is a serious risk that the current conflict in Ukraine will lead to Cold War II – and possibly even a hot war if Russia invades the east of the country.
The economic consequences of such an outcome – owing to its impact on energy supplies and investment flows, in addition to the destruction of lives and physical capital – would be immense.
Finally, there is a similar risk that Asia’s terrestrial and maritime territorial disagreements (starting with the disputes between China and Japan) could escalate into outright military conflict.
Such geopolitical risks – were they to materialize – would have a systemic economic and financial impact.
So far, financial markets have been sanguine about these new rising risks.
Volatility has increased only modestly, while asset prices have held up.
Noise about these risks has occasionally (but only briefly) shaken investors’ confidence, and modest market corrections have tended to reverse themselves.
Investors may be right that these risks will not materialize in their more severe form, or that loose monetary policies in advanced economies and continued recovery will contain such risks.
But investors may be deluding themselves that the probability of these risks is low – and thus may be unpleasantly surprised when one or more of them materializes.
Indeed, as was the case with the global financial crisis, investors seem unable to estimate, price, and hedge such tail risks properly.
Only time will tell whether their current nonchalance constitutes another failure to assess and prepare for extreme events.
Back to Housing Bubbles
NEW YORK – It is widely agreed that a series of collapsing housing-market bubbles triggered the global financial crisis of 2008-2009, along with the severe recession that followed.
While the United States is the best-known case, a combination of lax regulation and supervision of banks and low policy interest rates fueled similar bubbles in the United Kingdom, Spain, Ireland, Iceland, and Dubai.
Now, five years later, signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the UK (well, London).
In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centers in Turkey, India, Indonesia, and Brazil.
Signs that home prices are entering bubble territory in these economies include fast-rising home prices, high and rising price-to-income ratios, and high levels of mortgage debt as a share of household debt.
In most advanced economies, bubbles are being inflated by very low short- and long-term interest rates.
Given anemic GDP growth, high unemployment, and low inflation, the wall of liquidity generated by conventional and unconventional monetary easing is driving up asset prices, starting with home prices.
The situation is more varied in emerging-market economies.
Some that have high per capita income – for example, Israel, Hong Kong, and Singapore – have low inflation and want to maintain low policy interest rates to prevent exchange-rate appreciation against major currencies.
Others are characterized by high inflation (even above the central-bank target, as in Turkey, India, Indonesia, and Brazil).
In China and India, savings are going into home purchases, because financial repression leaves households with few other assets that provide a good hedge against inflation.
Rapid urbanization in many emerging markets has also driven up home prices, as demand outstrips supply.
With central banks – especially in advanced economies and the high-income emerging economies – wary of using policy rates to fight bubbles, most countries are relying on macro-prudential regulation and supervision of the financial system to address frothy housing markets.
That means lower loan-to-value ratios, stricter mortgage-underwriting standards, limits on second-home financing, higher counter-cyclical capital buffers for mortgage lending, higher permanent capital charges for mortgages, and restrictions on the use of pension funds for down payments on home purchases.
In most economies, these macro-prudential policies are modest, owing to policymakers’ political constraints: households, real-estate developers, and elected officials protest loudly when the central bank or the regulatory authority in charge of financial stability tries to take away the punch bowl of liquidity.
They complain bitterly about regulators’ “interference” with the free market, property rights, and the sacrosanct ideal of home ownership.
Thus, the political economy of housing finance limits regulators’ ability to do the right thing.
To be clear, macro-prudential restrictions are certainly called for; but they have been inadequate to control housing bubbles.
With short- and long-term interest rates so low, mortgage-credit restrictions seem to have a limited effect on the incentives to borrow to purchase a home.
Moreover, the higher the gap between official interest rates and the higher rates on mortgage lending as a result of macro-prudential restrictions, the more room there is for regulatory arbitrage.
For example, if loan-to-value ratios are reduced and down payments on home purchases are higher, households may have an incentive to borrow from friends and family – or from banks in the form of personal unsecured loans – to finance a down payment.
After all, though home-price inflation has slowed modestly in some countries, home prices in general are still rising in economies where macro-prudential restrictions on mortgage lending are being used.
So long as official policy rates – and thus long-term mortgage rates – remain low, such restrictions are not as binding as they otherwise would be.
But the global economy’s new housing bubbles may not be about to burst just yet, because the forces feeding them – especially easy money and the need to hedge against inflation – are still fully operative.
Moreover, many banking systems have bigger capital buffers than in the past, enabling them to absorb losses from a correction in home prices; and, in most countries, households’ equity in their homes is greater than it was in the US subprime mortgage bubble.
But the higher home prices rise, the further they will fall – and the greater the collateral economic and financial damage will be – when the bubble deflates.
In countries where non-recourse loans allow borrowers to walk away from a mortgage when its value exceeds that of their home, the housing bust may lead to massive defaults and banking crises.
In countries (for example, Sweden) where recourse loans allow seizure of household income to enforce payment of mortgage obligations, private consumption may plummet as debt payments (and eventually rising interest rates) crowd out discretionary spending.
Either way, the result would be the same: recession and stagnation.
What we are witnessing in many countries looks like a slow-motion replay of the last housing-market train wreck.
And, like last time, the bigger the bubbles become, the nastier the collision with reality will be.
No War, No Famine
STOCKHOLM: Two hundred years ago in his essay “Perpetual Peace” Immanuel Kant imagined a future “union of liberal republics.”
In 1795, however, liberal republics were abstract ideas.
Yet Kant imagined our present reality of flourishing liberal democracies.
Moreover, Kant’s idea of perpetual peace seems even less far-fetched because no democracy has ever made war on another.
Indeed, “No War Between Democracies” is as close as we are likely to get to an immutable diplomatic law.
Scholars have demonstrated the truth of this.
Professor R J Rummel of the University of Hawaii investigated 353 pairs of combatants between 1816 and 1991. Democracy fought non-democracy in 155 cases.
Dictatorship fought dictatorship in 198 cases.
He found no examples of democracies at war with each other.
Some pedants quibble, claiming that exceptions exist.
Study the details, however, and you find that the conflict in question was either some type of civil war or in which one participant was not a real democracy (Germany in 1914), or that the number of people killed was too low to call the conflict a war at all.
This is no mere statistical error or lucky coincidence.
In a democracy it would be almost impossible to secure sufficient public support for a military confrontation with another democracy.
Democratic peoples know and trust each other. Democratic governments find it natural to negotiate with one another.
The costs humanity has paid in waiting for Kant’s vision to near reality is horrific and was exacted in places other than the battlefield.
Between 1900 and 1987 about 170 million people were killed for political reasons not involving war.
Totalitarian states murdered 138 million out of those 170 million. Authoritarian countries killed another 28 million.
Democracies killed about 2 million people, primarily through intentional bombing of civilian targets.
No matter how controversial examples of democratic excess are, however, they do not change the overall picture.
Most of this slaughter was triggered by Marxism/Leninism’s fusion of absolutist ideology with absolute power.
To paraphrase Lord Acton’s dictum: power kills and absolute power kills absolutely.
Many people reached other conclusions.
When Marxists were strong and liberalism weak, writers, politicians, political parties, and newspapers often told us: democracy is unimportant for the Third World.
Freedom in such countries is a “formality.” Far more urgent is not going hungry.
So, we were lectured: liberalism is no solution for developing countries.
“Don’t measure others by our yardsticks,” a leading Swedish playright/novelist wrote as Pol Pot’s regime exterminated a quarter of Cambodia’s population.
What he meant was that the mass murder of Cambodians was not deplorable in the same way as the mass murder of Europeans is.
This is inverted racism: you pretend to respect other peoples when, in fact, you despise them.
Indeed, those in the West who praised Mao, Castro or Honecker seldom wanted to import their terror.
Try introducing the slightest limitation on free speech in any Western country and you will meet storms of protest from those who seldom champion it in Third World nations.
Oppression is only acceptable for others.
Hypocrisy, of course, is not confined to the West.
When leaders in, say, Singapore, Malaysia and mainland China talk about “Asian values” to romanticize their regimes, they, too, challenge the values of democracy.
But Taiwan’s former President Lee Teng-hui thinks these arguments thin alibis for anti-democratic policies.
When it comes to human rights, says Mr. Lee, there are no special Asian values.
Freedom is a universal value.
Despite communism’s collapse, assaults on liberalism remain.
Amartya Sen, a Nobel Laureate in economics, demonstrated empirically that no famine - mass starvation leading to mass death - ever occurred in a democratically governed country.
During the Bengal famine of 1943, two to three million people died from hunger.
That happened under British rule.
Since India became independent in 1947 with a multiparty democratic system, the country has never suffered such a disaster.
Undernourishment, malnutrition, crop failures, and food scarcities have occurred, but there have been no famines.
Compare that with Mao’s “Great Leap Forward” of 1958-1961 when 30 million Chinese died of hunger.
That’s ten times the number of Indians who died in the gigantic starvation of British India less than twenty years before.
Sen also examined various African countries that experienced crop failures and food shortages.
Governments under democratic pressures usually act forcefully and decently on such occasions; people under dictatorial regimes are often hit by government-induced and manipulated famines.
Where political opposition and a free press are active, governments cannot neglect thousands of people starving to death.
When opposition is silenced and mass media voices only the dictator’s propaganda, millions of people dying from famine can be kept secret and/or ignored.
Elie Wiesel, survivor of Auschwitz and Buchenwald and a Nobel Peace Laureate, once said: “Let us remember the heroes of Warsaw, the martyrs of Treblinka, the children of Auschwitz.
They fought alone, they suffered alone, they lived alone, but they did not die alone, for something in all of us died with them”. What died with them?
My answer is this: the idea that there are limits to human cruelty.
Now we recognize that there are no limits.
Knowing empirically the benefits in terms of peace and human welfare which democracy delivers, we must reaffirm our commitment to, and the necessity of, spreading Kant’s vision.
No War of Civilizations
Now, A World in Recession
Now is Our Time
New York – Every September, the world’s leaders gather at the United Nations to reaffirm our founding Charter – our faith in fundamental principles of peace, justice, human rights, and equal opportunity for all.
We assess the state of the world, engage key issues of the day, and lay out our vision for the way ahead.
But this year is different.
The 64th opening of the General Assembly asks us to rise to an exceptional moment.
We are facing many crises – food, energy, recession, and pandemic flu – occurring all at once.
If ever there were a time to act in a spirit of renewed multilateralism, a time to put the “united” back into the United Nations, it is now.
And that is what we are doing, as action on three issues of historic consequence demonstrates.
First, world leaders are uniting to address the greatest challenge we face as a human family – the threat of catastrophic climate change.
Last week, 101 leaders from 163 countries met to chart the next steps toward December’s all-important UN climate change conference in Copenhagen.
They recognized the need for an agreement that all nations can embrace – in line with their capabilities, consistent with what science requires, and grounded in “green jobs” and “green growth,” the lifeline of a twenty-first century global economy.
We at the UN have prepared carefully for this moment.
For two and a half years, ever since I became Secretary-General, we have worked to put climate change at the top of the global agenda.
Today, we have entered a new phase.
Last week’s summit sharply defined the issue and focused attention in capitals the world over.
To be sure, the issues are complex and difficult, especially those of financing adaptation and mitigation efforts in poorer countries.
Yet leaders left New York committed to clear and firm instructions for their negotiators: seal a deal in Copenhagen.
Japan issued a challenge, agreeing to cut CO2 emissions by 25% by 2020 if other nations follow.
China’s President Hu Jintao spoke about all that his country is already doing to reduce energy intensity and invest in “green” alternatives.
He emphasized that China is prepared to do more under an international agreement, as did US President Barack Obama.
Negotiators will gather for another round of UN talks on September 28 in Bangkok, and we are considering a smaller meeting of major emitting and most vulnerable nations in November.
We need a breakthrough in this make-or-break year.
We saw another turning point on a second issue of existential importance: nuclear disarmament.
Finally, the assumption that such weapons are needed to keep the peace is crumbling.
At a special summit called by the President Obama, the Security Council unanimously adopted a resolution that opens a new chapter in the UN’s efforts to address nuclear proliferation and disarmament.
That resolution improves prospects for expanding the Nuclear Non-Proliferation Treaty next May, and offers hope for bringing the Comprehensive Nuclear Test Ban Treaty into force.
It also sets establishes the contours of a legal framework for action against misuse of civilian nuclear technology for military purposes and reflects an emerging consensus, seen in meeting after meeting, that the time has come to increase pressure on countries that fail to respect these principles.
The world is united on a third front, as well.
Though some may speak of “turning the corner to recovery,” we see a new crisis emerging.
According to our recent report, “Voices of the Vulnerable,” the near-poor are becoming the new poor.
An estimated 100 million people could fall below the poverty line this year.
Markets may be bouncing back, but jobs and incomes are not.
That is why, earlier this year, the UN put forward a Global Jobs Pact for balanced and sustainable growth.
It is also why we are creating a new Global Impact Vulnerability Alert System, giving us real-time data and analysis on socio-economic conditions around the world.
We need to know precisely who is being hurt by the financial crisis, and where, so that we can best respond.
That is also why, next year at this time, we will convene a special summit on the Millennium Development Goals.
We have only five years to meet the targets for health, education, and human security that we set for 2015.
At the various G-20 summits over the past year, including the latest in Pittsburg, the UN has stood firm to speak and act for all those being left behind.
Rhetoric has always been abundant at the General Assembly, action sometimes less so.
Yet listening to the world’s leaders speak, last week, I was struck by their passion, commitment, and collective determination to turn a page from a past of countries divided by narrow interests to nations united in the cause of a global common good.
From confronting climate change to creating a world without nuclear weapons to building a more equitable and sustainable global economy, I saw a sprit of renewed multilateralism, with the UN at the fore.
No country can deal with any of these challenges by itself.
But as nations united, the United Nations can.
Now or Never in Cyprus
ANKARA – Cyprus is back on the international agenda, with leaders of the island’s rival Greek and Turkish communities engaged in intense negotiations to resolve the divided country’s status.
But, although new talks are underway, the international community is, not surprisingly, tired of dealing with the issue.
After all, the Cyprus conflict has dragged on since 1974, wearing out United Nations Secretary-Generals and special representatives of all sorts, as well as bringing down governments in both Greece and Cyprus.
In 2004, the European Union, the United States, and a good part of the international community invested considerable energy in trying to resolve the conflict once and for all.
Then UN Secretary-General Kofi Annan and his team drafted a plan, which Turkey’s government took very significant political risks in supporting.
The government convinced the Turkish Cypriots to make a leap of faith and vote in favor of the Annan plan in order to reunite the island.
Regrettably, the Greek Cypriot leadership at that time actively campaigned against the UN plan.
Consequently, whereas 65% of Turkish Cypriots voted in favor of the plan when it was put to a vote on the island, 76% of Greek Cypriots rejected it.
Worse yet, Greek Cyprus joined the EU literally days after it spurned the will of the international community, while the EU reneged on its promises to end the Turkish community’s isolation if it supported Annan’s plan.
Today, many people might think that all of this is water under the bridge.
But the fate of the Annan plan remains very much a part of Turkish thinking on the Cyprus issue.
In 2008, the UN started a new negotiation process for Cyprus.
Turkish Prime Minister Recep Tayyip Erdogan has given his full blessing to a negotiated settlement, and, similar to 2004, Turkey supports the Turkish Cypriots’ willingness to find a viable solution to the division of Cyprus under the UN umbrella.
But it should be clear that the current talks are the last chance for a negotiated settlement on the island.
So it is imperative that the transatlantic community recognize that the current talks constitute a historic opportunity.
No one – not the US, the EU, Turkey, Greece, or the two Cypriot communities – can afford to waste it.
Either the island will reunite under a UN plan accepted by both sides or the status quo will need to change by some other means.
The isolation of the Turkish Cypriots, who opted in favor of an internationally acceptable solution, cannot be sustained any longer.
The talks between Turkish Cypriot President Mehmet Ali Talat and Greek Cypriot President Dimitris Christofias are now entering a critical phase.
Both leaders need the full support of the transatlantic community.
The US is particularly well situated to contribute to the process in a positive manner, and its engagement at the appropriate level will be needed in the coming months.
The US-Turkish partnership, badly strained by the war in Iraq, was reinvigorated by President Barack Obama’s visit to Turkey in June.
American participation in resolving the Cyprus conflict would ensure that the relationship remains on a sound footing.
Contrary to many previous rounds of Cyprus negotiations, the issue this time is not confined to the island alone but embraces the wider region.
The outcome of the ongoing talks, for example, will have a big impact on how Turkey assesses its relations with the EU.
Should the talks fail, the side that behaves in an uncompromising manner will bear full responsibility for dividing the island forever.
Moreover, failure to resolve the Cyprus issue would deadlock already strained security cooperation between NATO and the EU.
The recent visit to Ankara by the new NATO Secretary-General, Anders Fogh Rasmussen, only highlighted again how urgent a Cyprus settlement really is.
Failure might also have security implications in the Balkans, the Black Sea, and the Eastern Mediterranean – all areas where the US and the EU have vital interests.
It is for these reasons that the transatlantic community should invest its time and energy in the ongoing UN-sponsored talks.
Neither the US nor the EU can afford another failure in Cyprus.
There is simply too much at stake.
Now the EU is Balkanizing the Balkans
SOFIA: Residents of the sleepy town of Schengen, near Luxembourg’s border with France and Germany, would marvel at the hatred in which their hometown is held across Eastern Europe.
For the freedom of movement without passport controls that the Schengen agreements brought within much of the EU was paid for at the price of ridiculously complicated procedures for entry by other Europeans.
The worst aspect of all is the so-called “Schengen black list”.
Citizens from European countries outside the Schengen zone face Alice in Wonderland justice; they must prove that they are not criminals or job-poachers if they are to secure a Schengen visa.
But everyone knows that it is almost impossible to disprove a negative.
“Schengen” Europeans shrug nonchalantly; they seem to think that everyone beyond the Schengen zone is part of some low post-Soviet breed, always up to no good.
In recent weeks angry Bulgarians protested against the Schengen visa process.
These demonstrations were more passionate even than those that took place during NATO's bombing of Yugoslavia.
Most Bulgarian rage is targeted at Europe.
Some of it, however, is directed against neighboring Romania because the forthcoming meeting of the EU Council of Justice & Interior to decide when and whether to lift the Schengen restrictions on both countries, is pitting Bulgaria against Romania in a classic case of divide and misrule.
Romania and Bulgaria were blacklisted at Schengen’s inception.
When invited to begin negotiations to join the EU, both were told what must be done to get off the list: tighten border and custom controls, stiffen penalties against drug traffikers and illegal immigrants, and make identification papers impossible to forge.
By everyone’s reckoning, Bulgaria complied and now expects the EU to keep its part of the bargain.
In the last year alone, indeed, Bulgaria’s border police confiscated over 1000 kilograms of illegal narcotics, almost as much as confiscated in all Europe combined.
This fact inspired the US ambassador to Sofia - no slouch in condemning narcotics smugglers - to call Bulgaria “one of America's most reliable partners” in the drug war.
As to Romania, EU-members are divided.
Germany appears unconvinced that Romania is ready for Schengen membership and suggests that Romania and Bulgaria be looked at separately, on their own merits.
Everyone knows, of course, that this means that the Germans want to keep the Romanians waiting at the EU gate as long as possible.
France, among others, is concerned about antagonizing Romanians, perhaps the only people in Eastern Europe who take their diplomatic cues from Paris.
French diplomats (with assenting nods, it appears, from the Greeks and Dutch) suggest that where Schengen is concerned Romania and Bulgaria are Siamese twins.
So now Bulgarians are beginning to blame Romanians for keeping them out in the cold.
Assen Agov, head of our parliament’s foreign policy committee, responded to fears that Bulgaria must wait until Romania catches up by saying that, if EU visa restrictions do not fall in a timely way, Bulgaria should withdraw from the Stability Pact for the Balkans, perhaps capsizing it.
The argument here is that the Stability Pact has grouped Bulgaria with fragile Balkan democracies like Macedonia and Croatia, which may never see the Euro-light, at least not soon.
Bulgarians, it seems, are guilty by mere geographical association with the Balkan Wars.
Bulgaria’s national co-ordinator for the Stability Pact resigned to protest Agov’s rant, and the government has tried to distance itself even more.
But because the opposition is attacking our reforming government for its supposed cravenness before the EU, several ministers have nonetheless echoed Agov.
So, too, many members of the governing majority during a special debate in parliament.
Deputy Prime Minister Petr Zhotev was caught by news cameras saying that “obviously, we are physically unacceptable for Europe.
They don't want us there.”
More than national pride and economics are wounded by the Schengen restrictions.
For the EU’s handling - so far - of this relatively minor issue shows that the road to EU membership appears to be paved with hypocritical intentions.
Are friendship and prejudice to rule in the EU’s membership determinations, or will objective facts determine things?
For example: Latvia and Lithuania saw their visas vanish without a fuss because their neighbors lobby hard for them.
In the words of the Danish foreign minister, “bringing the Balts into the EU is Denmark’s foreign policy priority.” Bulgaria’s nearest EU members, however, seem to yearn for the Iron Curtain.
The EU’s Justice & Interior Council is to meet on 30 November to determine the fates of Romania and Bulgaria in regard to Schengen.
They must not conceive of their decision so narrowly because, in Bulgaria at least, their words and actions are beginning to twist the very meaning of what it is to be “in” Europe.
If objective facts and fulfilled commitments can be deliberately ignored, Bulgarians may become convinced that the EU is only interested in promoting a Europe of the “balkanizing” kind.
No, You Can’t
COPENHAGEN – Several thousand officials from 194 countries just gathered in Cancún, Mexico, for yet another global climate summit.
Dissatisfied with the pace of climate diplomacy, many individuals are now wondering what they can do about climate change on their own.
For years now, climate activists from Al Gore to Leonardo DiCaprio have argued that individual actions like driving more economical cars and using more efficient light bulbs are a crucial element in the effort to address global warming.
The United Nations’ climate panel and the International Energy Agency both echo this sentiment, insisting that higher energy efficiency could reduce energy consumption by up to 30% – making improved efficiency an effective remedy for climate change.
But is this really true?
Here’s something to think about. Back in the early 1970’s, the average American expended roughly 70 million British thermal units per year to heat, cool, and power his or her home.
Since then, of course, we have made great strides in energy efficiency.
As The Washington Post recently reported, dishwashers now use 45% less power than they did two decades ago, and refrigerators 51% less.
So how much energy do Americans use in their homes today?
On a per capita basis, the figure is roughly what it was 40 years ago: 70 million BTUs.
This surprising lack of change is the result of something economists call the “rebound effect.”
It’s a phenomenon familiar to urban planners, who long ago discovered that building more roads doesn’t ease traffic jams – it merely encourages more people to get in their cars and drive.
The underlying principle is a decidedly counterintuitive fact of life.
You might think that learning to use something more efficiently will result in your using less of it, but the opposite is true: the more efficient we get at using something, the more of it we are likely to use.
Efficiency doesn’t reduce consumption; it increases it.
The Breakthrough Institute recently highlighted on its blog some startling – and important – research findings along these lines, published in August in The Journal of Physics by energy economist Harry Saunders and four colleagues from the US Department of Energy’s Sandia National Laboratories.
As Saunders noted in a summary on the blog, he and his colleagues, drawing on “300 years of evidence,” found that, “as lighting becomes more energy efficient, and thus cheaper, we use ever-more of it.”
For this reason, the proportion of resources that we expend on lighting has remained virtually unchanged for the past three centuries, at about 0.72% of gross domestic product.
As Saunders and his colleagues observe in their journal article, “This was the case in the UK in 1700, is the case in the undeveloped world not on grid electricity in modern times, and is the case for the developed world in modern times using the most advanced lighting technologies.”
The conclusion that Saunders and his co-authors draw from this is both surprising and hard to dispute: rather than shrinking our electricity use, the introduction of ever more efficient lighting technologies is much more likely to lead to “massive…growth in the consumption of light.”
It’s difficult to overstate what these findings mean for climate policy.
In a nutshell, they tell us that, while increasing energy efficiency is undoubtedly a good thing, it is most assuredly not a remedy for global warming.
Or, as Saunders puts it, “energy efficiency may be a net positive in increasing economic productivity and growth, but should not be relied upon as a way to reduce energy consumption and thus greenhouse gas emissions.”
This is not an argument that should encourage anyone to go out and buy a Hummer.
But we shouldn’t fool ourselves into thinking that swapping our current car for a Prius, or replacing our incandescent lights with energy-efficient fluorescent bulbs, will strike a meaningful blow against climate change.
The real fix to this problem will come when governments focus on research and development aimed at boosting the proportion of green energy sources in overall consumption.
It may be reassuring to believe there are cheap and easy things we can do as individuals to stop global warming, or that the answer is to continue chasing a chimerical global agreement on carbon cuts, as in Cancún.
But the real action that we can take is to press our politicians to put smarter ideas on the table.
Relearning to Love the Bomb
WASHINGTON, DC – The shocking thing about nuclear weapons is that they seem to have lost their power to shock.
While the nuclear deal that was just reached with Iran in Lausanne might suggest otherwise and is very good news, that effort should not obscure the bad news elsewhere.
The momentum toward a nuclear-weapon-free world driven by US President Barack Obama’s landmark 2009 speech in Prague, having faltered for the last few years, has now gone into sharp reverse.
When Russia annexed Crimea last year, President Vladimir Putin announced his readiness to put Russian nuclear forces on alert, and even signaled plans to “surprise the West with our new developments in offensive nuclear weapons.”
The world barely stirred.
Meanwhile, China and India are steadily increasing the size of their nuclear arsenals, and Pakistan is doing so even faster, even spelling out plans to combine battlefield nukes with conventional weapons.
Again, the world shrugs.
For its part, the United States plans to spend $355 billion upgrading and modernizing its vast nuclear arsenal over the next ten years.
Far from moving toward disarmament, the intention seems to be to maintain and enhance every component of America’s current land, sea, and airborne nuclear capability.
There was more amusement than alarm at a conference of 800 nuclear specialists in Washington, DC, in March, when a senior Air Force general, eerily channeling George C. Scott in “Dr. Strangelove,” offered a nostrils-bared defense of “an ability to allow no adversary to have sanctuary anywhere in the world.”
Spooked by Russia’s incursions into Ukraine, North Korea’s erratic intransigence, and China’s new foreign-policy assertiveness, US allies and partners in East Asia and Europe have rushed back to unthinking embrace of Cold War assumptions about the deterrent utility of nuclear weapons and their central importance in security policy.
As my colleagues and I put it in our book-length report Nuclear Weapons: The State of Play 2015, launched in Geneva, Vienna, and Washington in March: “On the evidence of the size of their weapons arsenals, fissile material stocks, force modernization plans, stated doctrine and known deployment practices, all nine nuclear-armed states foresee indefinite retention of nuclear weapons and a continuing role for them in their security policies.”
All of this has serious implications for the five-year review conference of the Nuclear Non-Proliferation Treaty (NPT), scheduled to begin in New York in late April.
The NPT has been the single most crucial factor in limiting the world’s nuclear-armed states to the current nine, rather than the 20-30 widely feared a generation ago.
But its credibility now hangs by a thread.
The NPT, after all, is based on a bargain: states that do not possess nuclear weapons promise not to acquire them, in exchange for a pledge by those that do to move seriously toward eliminating their arsenals.
And recent developments have once again jeopardized that bargain, with many states again asking why, if the US, Russia, and others need nuclear weapons, they do not.
Given such sentiments, it will prove almost impossible at the review conference to build a consensus in favor of further necessary strengthening of the non-proliferation regime, with improved safeguards, export controls, security disciplines, and sanctions against withdrawal from the treaty.
The irrationality of such resistance is not likely to weaken it.
Not all the news is bleak.
Aside from the Iran negotiations, other arms control cooperation is continuing, including between the US and Russia over the New START treaty to reduce strategic deployments, and over chemical weapons in Syria.
Despite lack of any visible progress toward ridding the Middle East of weapons of mass destruction, the signs are encouraging that Egypt and others in the region want to keep trying, and will not use the issue of a WMD-free zone to blow up the review conference, as had been feared.
Most encouraging of all, a major new international movement is gathering pace to focus policy attention on the horrific humanitarian consequences of any use of nuclear weapons, and to create the conditions for a treaty to ban them once and for all.
Since 2012, major conferences have been hosted by Norway, Mexico, and Austria, and more than 155 states have pledged support for appropriate action, with only the nuclear-armed states and their allies and partners dragging their feet.
The nuclear-armed states will not sign on any time soon to any treaty that bans the use of their weapons under all circumstances.
They will resist even more strongly the outright elimination of their weapons, given that the world is probably still decades away from devising sufficient verification and enforcement measures.
But if the NPT review conference is not to end in tears, with all the accompanying risks for world order that failure would entail, the five nuclear-armed states that are NPT signatories can and must be prepared to bring more to the table than they have so far.
Baby steps – improving their transparency in reporting, or agreeing on the meaning of technical terms like “strategic,” “deployed,” and “reserve” – will not begin to satisfy the many NPT countries that have been appalled by the recent re-emergence of Cold War mindsets and behavior.
The nuclear-armed states can and should make serious commitments to dramatic further reductions in the size of their arsenals; hold the number of weapons physically deployed and ready for immediate launch to an absolute minimum; and change their strategic doctrines to limit the role and salience of nuclear weapons, ideally by committing to “no first use.”
Most important, they should agree on indicative target dates – from five to 15 years – for achieving all of these initial objectives.
Deadlines have been indispensable for achieving sustainable-development and carbon-reduction goals: saving the world from the threat of nuclear annihilation is hardly a less urgent and important objective.
Nuclear Disarmament and Neighborhood Bullies
MADRID – Twenty-five years ago, at a summit in Rejkjavik, Iceland, US President Ronald Reagan stunned the world and his Soviet counterpart, Mikhail Gorbachev, by proposing global and comprehensive elimination of all nuclear weapons.
Unfortunately, the skepticism of the United States’ defense establishment, together with Reagan’s adamant refusal to abandon his Strategic Defense Initiative nipped this bold move in the bud.
That was a tragic missed opportunity, for a US-Soviet agreement, reached in what was still an essentially binary international system, might have had truly global meaning.
Although US and Russian stockpiles still account for more than 90% of the world’s nuclear warheads, US President Barack Obama’s disarmament goal, Global Zero, is proving far harder to accomplish now, given how much the world has changed since the Cold War’s end.
Not only has the number of nuclear states increased, but the so-called “nuclear renaissance” – the revival of nuclear power, owing to rising oil prices and environmental concerns – has put nuclear technologies into growing use.
This revival holds important implications for nuclear proliferation.
More importantly, China, India, Pakistan, Iran, and Israel might not be particularly impressed by Russian and American assumptions that they can meet their defense needs with far smaller nuclear arsenals.
Nuclear disarmament must therefore focus not only on a truly total elimination of stockpiles by the major powers, but also on regional powers’ concerns.
Global Zero must go hand in hand with a robust strategy of conflict resolution and confidence-building in trouble spots such as Southeast Asia and the Middle East.
All the nuclear-weapon-free zones that were created in the last decades – for example, by the Tlatelolco Treaty for Latin America or the Treaty of Rarotonga for the South Pacific – were made possible by understandings that were reached freely by regional powers in an atmosphere of multilateral confidence.
Conspicuously, the 1992 Declaration on the Denuclearization of the Korean Peninsula remains to this day a dead letter simply because of the latent state of war between the two Koreas.
Another case in point is the Middle East.
Unless conditions in the region change dramatically for the better, the creation of a WMD-free zone (WMDFZ) in the Middle East – an idea launched at the Nuclear Non-Proliferation Treaty Review Conference in 2010 – might prove a stillborn initiative.
How can a meeting be convened in 2012, as stipulated by the 2010 NPT conference’s final document, “on the basis of arrangements freely arrived at by the states of the region,” when many of those states are in turmoil, inter-state relations are strained, and the threat of conflict is mounting?
The Middle East has already had its own missed opportunity, the 1992-1995 Arms Control and Regional Security multilateral working group, which was launched within the Madrid peace process.
Conceived as a confidence-building endeavor and accompanied by a robust peacemaking track, ACRS was interrupted by the difficulties in the peace process, by Arab states’ insistence that Israel’s nuclear capabilities be addressed before anything else, and by the underlying struggle for mastery in the region.
If the 2012 conference is conceived as yet one more opportunity to pressure Israel to join the NPT – possibly in exchange for the Arabs joining the Chemical Weapons Convention and the Biological Weapons Convention – the conference might soon reach an impasse.
But the same outcome is assured if the US and Israel conceive the conference solely as a way to isolate and force NPT compliance on Iran and Syria.
The nuclear deadlock in the Middle East can be resolved only if all of the regional players are ready to change old patterns of behavior.
The Arab position has traditionally been that Israel cannot be offered the fruits of peace, such as recognition and normal relations, before it has paid its full territorial price – that is, a complete withdrawal from occupied Arab lands and the creation of a Palestinian state.
But the Arab states nonetheless insist that, even before the end of conflict, Israel unilaterally must give up its (undeclared) nuclear capabilities.
This is a futile exercise, not only because Israel would never disarm unilaterally, but also because without normal inter-state relations in the region it is impossible to engage seriously in an effective dialogue on such vital issues.
Indeed, Israel’s concept of “peace first and denuclearization last” was vindicated in the 1994 Israeli-Jordanian peace treaty, which speaks of a WMDFZ as a goal “to be achieved in the context of a comprehensive, lasting and stable peace.”
Nor can Israel expect to have the best of all worlds – making nuclear disarmament conditional on a comprehensive peace, while simultaneously conducting a policy aimed at stalling the peace process.
There might be no better formula for progress towards a WMDFZ in the Middle East than a return to the ACRS concept, whereby two parallel tracks move toward a comprehensive Israeli-Arab peace along the lines of the Arab Peace Initiative, and to the establishment of a WMDFZ in the region.
To work, the Arabs must accord to Israel key benefits of peace before peace has been formally achieved.
Israel, for its part, must recommit itself to the late Yitzak Rabin’s doctrine that only a comprehensive regional peace agreement can prevent the Middle East from declining into nuclear chaos.
Nuclear Steps Undermine Peace
By abandoning many of the nuclear arms agreements negotiated in the last 50 years, the United States has been sending mixed signals to North Korea, Iran, and other nations with the technical knowledge to create nuclear weapons.
Currently proposed agreements with India compound this quagmire and further undermine the global pact for peace represented by the nuclear nonproliferation regime.
At the same time, no significant steps are being taken to reduce the worldwide arsenal of almost 30,000 nuclear weapons now possessed by the US, Russia, China, France, Israel, Britain, India, Pakistan, and perhaps North Korea.
A global holocaust is just as possible now, through mistakes or misjudgments, as it was during the depths of the Cold War.
The key restraining commitment among the five original nuclear powers and more than 180 other nations is the 1970 Non-Proliferation Treaty (NPT).
Its key objective is “to prevent the spread of nuclear weapons and weapons technology...and to further the goal of achieving nuclear disarmament.”
In the last five-year review conference at the United Nations in 2005, only Israel, India, Pakistan, and North Korea were not participating – the first three have nuclear arsenals that are advanced, and the fourth’s is embryonic.
The American government has not set a good example, having already abandoned the Anti-Ballistic Missile treaty, binding limitations on testing nuclear weapons and developing new ones, and a long-standing policy of foregoing threats of “first use” of nuclear weapons against non-nuclear states.
These recent decisions have encouraged China, Russia, and other NPT signatories to respond with similar actions.
Knowing since 1974 of India’s nuclear ambitions, I and other American presidents imposed a consistent policy: no sales of nuclear technology or uncontrolled fuel to India or any other country that refused to sign the NPT.
Today, these restraints are in the process of being abandoned.
I have no doubt that India’s political leaders are just as responsible in handling their country’s arsenal as leaders of the five original nuclear powers.
But there is a significant difference: the original five have signed the NPT, and have stopped producing fissile material for weapons.
India’s leaders should make the same pledges, and should also join other nuclear powers in signing the Comprehensive Nuclear Test Ban Treaty.
Instead, they have rejected these steps and insist on unrestricted access to international assistance in producing enough fissile material for as many as 50 weapons a year, far exceeding what is believed to be India’s current capacity.
If India’s demand is acceptable, why should other technologically advanced NPT signatories, such as Brazil, Egypt, Saudi Arabia, and Japan – to say nothing of less responsible nations – continue to restrain themselves?
Having received at least tentative approval from the US for its policy, India still faces two further obstacles: an acceptable agreement with the International Atomic Energy Agency (IAEA) and an exemption from the Nuclear Suppliers Group (NSG), a 45-nation body that – until now – has barred nuclear trade with any nation that refuses to accept international nuclear standards.
The non-nuclear NSG members are Argentina, Australia, Austria, Belarus, Belgium, Brazil, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, Germany, Greece, Hungary, Ireland, Italy, Japan, Kazakhstan, Latvia, Lithuania, Luxembourg, Malta, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Turkey, and Ukraine.
The role of these nations and the IAEA is not to prevent India’s development of nuclear power or even nuclear weapons, but rather to assure that it proceeds as almost all other responsible nations on earth do, by signing the Non-Proliferation Treaty and accepting other reasonable restraints.
Nuclear powers must show leadership, by restraining themselves and by curtailing further departures from the NPT's international restraints.
One-by-one, the choices they make today will create a legacy -- deadly or peaceful -- for the future.
Nuclear Targets
LOS ANGELES &#45;&#45; Nuclear facilities as military targets?
The drumbeat appears to be growing louder.
Western leaders repeatedly declare that no option is off the table to stem Iran’s nuclear ambitions.
And, in mid-November, London’s Sunday Times reported that Israel put defenses around its Dimona nuclear reactor on “red alert” 30 times, as worries grew that Syria would avenge Israel’s September attack on a suspected nuclear site in Syria.
Israel’s fear reflects the region’s unique history.
Since World War II, strikes to halt nuclear activities have taken place exclusively in the Middle East: Iraq was struck by Iran (1980), Israel (1981), and the United States (1991, 2003), while Iraq bombed Iran (1984-87) and Israel (1991).
But raids never generated significant radiological consequences, because plants were under construction, contained inconsequential amounts of nuclear material, had radioactive elements removed prior to the attack, or because the attacker missed the mark.
A successful strike on Dimona, however, would be another matter.
So, given the threat of radioactive releases, does the plant’s continued operation outweigh the risks?
Dimona is unique.
It is the region’s largest nuclear plant and sole producer of atomic weapons materials.
Since it went into operation in the mid-1960’s, it has generated elements for an estimated 200 nuclear weapons.
Israel’s first prime minister, David Ben Gurion, inaugurated the enterprise to compensate for Israel’s strategic vulnerability, a fledgling army, and the West’s unwillingness to enter into a formal alliance to defend the Jewish state.
Dimona is no Chernobyl.
It generates only about 5% of that failed Soviet reactor’s power.
Still, the plant – along with its spent nuclear fuel, extracted plutonium, and nuclear reprocessing waste – poses significant radiological hazards that a military strike could disperse into the environment.
Israeli officials tacitly acknowledge the risk.
Authorities have distributed potassium iodide tablets to the nearby towns of Yerham, Dimona, and Aruar.
Potassium iodide blocks thyroid absorption of radioactive iodine, an early risk in a nuclear release.
But it would not obstruct serious health consequences from other radioactive elements.
And, depending on weather and the nuclear discharge, the radioactive consequences may not remain localized.
Light contamination and hot spots could impact Israeli, Palestinian, and Jordanian urban centers some distance away.
Beyond health effects, contamination could terrorize affected populations, prompting temporary flight and permanent relocation.
Serious, long-term economic consequences would follow.
For decades, Israel dealt with this risk through effective air defenses and disdain for its adversaries’ ability to strike Dimona.
In May 1984, after I authored a book about the consequences of military attacks on nuclear facilities, an Israeli intelligence officer came to California to question me about the vulnerability of the reactor and a proposed nuclear power plant.
The officer belittled the risk, arguing that no Arab air force had ever overcome Israeli air defenses, and none ever would.
At that time, history provided odd support.
Although Egyptian reconnaissance aircraft had flown near Dimona in 1965 and 1967 without incident, during the 1967 war, Israel shot down one of its own Mirage jet fighters when it strayed over the facility.
In 1973, Dimona’s defenders downed a wayward Libyan civilian airliner heading for the reactor, killing 108 people.
But the 1991 Persian Gulf War upset whatever solace Israel could take from the past.
Iraqi Scud missiles bombarded Tel Aviv, and one came close to hitting Dimona.
Hezbollah’s bombardment of northern Israel in 2006, further demonstrated the country’s vulnerability to missile attack.
And, while Israel’s Arrow ballistic missile defenses, which now surround Dimona, may be superior to the Patriot system that failed in 1991, Syria’s more advanced Scuds and Iran’s Shahab 3 rocket present a more capable challenge than Saddam’s projectiles.
Dimona has produced all the plutonium that Israel reasonably needs, and the reactor – one of the world’s oldest – has suffered minor mishaps and evident deterioration, raising the specter of more serious accidents.
So, if Israel cannot guarantee the plant’s defense against attack, it should close it.
By doing so, Israel could also derive political benefits.
It could claim that closure demonstrates its commitment to reducing regional nuclear tensions, while sending a message about the wisdom of building reactors in the world’s most volatile region.
Indeed, about a dozen Middle East and North African countries propose to build nuclear power plants.
Given the historic targeting of atomic installations, planners should consider whether providing adversaries with radiological targets far larger than Dimona makes sense.
Until the Middle East resolves its political differences, it may not.
Nuclear Vigilantes
LOS ANGELES – Forty years ago this month, more than 50 nations gathered in the East Room of the White House to sign the Treaty on the Nonproliferation of Nuclear Weapons.
In his memoirs, US President Lyndon B. Johnson called it “the most significant step we had yet taken to reduce the possibility of nuclear war.”
Today, with the benefit of time, we can evaluate whether the accord truly marks the “historic turning point” President Johnson hoped for.
The evidence suggests that while the pact’s dikes have largely held, serious leaks have developed, prompting nuclear vigilantes to apply force when they have concluded that diplomacy would fail to halt the Bomb’s spread.
Whether this behavior is a harbinger for the future remains unclear, but it raises a continuing specter given the failure of the NPT to include an effective enforcement mechanism.
One fact is not in doubt: the NPT is the legal linchpin for the nuclear nonproliferation regime now signed and ratified by all but three nations – India, Pakistan, and Israel – and one drop-out, North Korea.
The Treaty’s principles remain bold: the pact’s five acknowledged nuclear weapons states – the US, Britain, France, Russia, and China – promise to eliminate their nuclear arsenals, and the remaining parties commit not to acquire nuclear weapons in exchange for the right to develop civil nuclear power, with international assistance, subject to binding safeguards.
While the NPT is not entirely responsible for the absence of dozens of nuclear-armed states that many people once feared would emerge, it generated a standard of behavior that continues to guide most countries.
Still, the accord never fulfilled its disarmament objective.
The five nuclear powers continue to hang on to their weapons, giving mere lip service to their elimination.
More disturbing for international calm, a handful of non-nuclear signatories have secretly flouted the agreement.
Eventually exposed, their perfidy demonstrated the NPT’s imperfect ability to deter, catch, and reverse nuclear cheats.
Six cases mark the most egregious cheating.
Twice, Iraq bucked safeguards – first when it built the Osirak reactor and failed to provide inspectors full transparency and convincing assurance it would not use the plant to produce plutonium for weapons, and, second, when it nearly completed its secret enrichment program prior to the 1991 Persian Gulf War.
North Korea proved more successful, becoming the eighth country to detonate a nuclear weapon. At least two other NPT parties – Libya and Syria – engaged in significant nuclear subterfuge but failed.
And then there is Iran.
Equally disturbing has been the failure of International Atomic Energy Agency safeguards to catch such violations.
In only one case, North Korea, did the IAEA succeed.
In Iran, a dissident group, not the IAEA, blew the whistle.
Lack of confidence in Treaty enforcement inspired three instances of military vigilantism: Israel’s strike on Osirak in 1981, its attack on Syria’s suspect site in 2007, and Washington’s 2003 invasion of Iraq.
Mixed results followed.
Osirak’s destruction inspired Saddam to try again.
The US became mired in Iraq.
And, for the moment, Israel’s Syrian strike appears to have eliminated a potential threat.
For the Jewish state, military strikes have suggested another lesson.
A nuclear vigilante could apply force with impunity.
No retaliation followed.
In other instances when countries contemplated the same thing, they were not as sanguine.
Hence, the Soviet Union, the US, Egypt, and India decided that it is better to live with a nuclear-armed China, North Korea, Israel, and Pakistan, respectively, than risk war.
The United Nations Security Council, which remains the NPT’s enforcer, could better address proliferation breakouts and the compulsion of some to take matters into their own hands were it to grant itself predetermined authority to promptly stop cheaters by any and all means.
The result would make the prospective treaty violator think twice.
But political divisions among the Council’s permanent members make achieving this goal unlikely.
This leaves only two options to buttress the NPT’s objectives.
First, there is ad hoc diplomacy, which succeeded in eliminating Libya’s nuclear program and closing North Korea’s nuclear weapons production reactor.
But diplomacy takes time – a lot of time – and there is no guarantee that it will succeed.
For states that believe that time will merely enhance a lethal adversary’s ability to get the Bomb – Israel’s concern about Iran today – only vigilantism remains.
Rebooting Nuclear Security
VIENNA – In these days of economic woe, potential pandemic disease, and widespread civil unrest, it may come as a surprise that so many people around the world still view nuclear conflict as the greatest threat facing humanity.
They do so with good reason.
Consider the potential effects of a 50-megaton nuclear explosion, similar to the Tsar Bomba, detonated in October 1961, which shattered windows 900 kilometers (560 miles) away and sent a mushroom cloud rising above the stratosphere.
Global agreements such as the Nuclear Non-Proliferation Treaty (NPT), along with the general sense of goodwill immediately following the Cold War, may have led to the perception that such a weapon would never be used in combat.
But there is an increasing realization that we cannot breathe easy just yet.
In considering the risks, the emphasis has shifted over the last decade from preventing additional states from acquiring nuclear weapons to preventing terrorist groups and other non-state actors from acquiring them (or critical components).
The stakes are high and the threat is real. The danger of nuclear terrorism constitutes one of the gravest threats to our collective security.
Even a small amount of nuclear material could kill and injure hundreds of thousands of innocent people. Terrorist networks could acquire the materials to assemble a nuclear weapon, wreaking havoc on global peace and stability, with the possibility of extraordinary loss of life and economic damage.
This has been the main focus of the biennial Nuclear Security Summit, which began in 2010 with 47 countries and three international organizations.
But the NSS has so far restricted its scope to protecting nuclear infrastructure and material from active misuse.
We should be wary about defining nuclear security so narrowly.
We do not have the luxury of approaching the linked issues of arms control, disarmament, and non-proliferation separately.
In today’s highly complex, interconnected world, we must consider all nuclear threats in a holistic way.
A good starting point is to consider how the Comprehensive Nuclear-Test-Ban Treaty is contributing to nuclear security.
By banning all nuclear explosions, the CTBT hampers both first-time development of nuclear weapons and substantial improvements to them.
In the last 15 years, only one country – North Korea – has tested a nuclear weapon. And, by doing so, it has cemented its status as a rogue state.
It is clear that the NPT and the CTBT have reinforced nuclear security.
Only a handful of countries have developed nuclear weapons outside of the NPT, and the CTBT has reduced the number of nuclear tests from an average of 500 per decade to a mere trickle.
Yet the failure of eight countries to ratify the CTBT has prevented it from entering into force, and its contribution to global security has so far not been included on the NSS agenda.
Given the existence of a technologically advanced verification regime that can detect even small underground nuclear tests – what US Secretary of State John Kerry recently called “one of the great accomplishments of the modern world” – this is especially disappointing.
The international community’s failure to bring the CTBT into force is one of the reasons why the Bulletin of Atomic Scientists’ iconic Doomsday Clock remains poised at five minutes to midnight – the closest it has been to midnight since the height of the Cold War.
But, while there clearly is cause for concern, there is no reason to lose hope.
With the next Nuclear Security Summit to take place in the United States in 2016, a window of opportunity will be opened by next year’s NPT Review Conference, which will allow the world to address the issue of nuclear security in a long-term, inclusive manner.
What is most needed in the run-up to the 2016 NSS is a process that advances global action to address the nuclear threat comprehensively, including by ensuring that the CTBT enters into force.
We owe it to ourselves and to future generations to use all opportunities to create the conditions for increased trust and mutual understanding that are needed to free the world of the nuclear threat.
Broadening our understanding of that threat, and devising a comprehensive approach to nuclear security does not mean diluting efforts or losing focus.
On the contrary, it means taking care not to exclude any significant advocate or useful tool in reducing the risk of the unthinkable becoming reality.
Nuremberg Judgments in Baghdad
When American troops were captured in Iraq, President Bush said that he expects them to be treated humanely.
"If not," the President warned, "the people who mistreat the prisoners will be treated as war criminals."
President Bush's remarks drove home the importance of strict adherence to the Geneva Conventions and the question of how war crimes trials may be convened in post-war Iraq and who will conduct them.
The US plan for war crimes trials covers violations committed before the current conflict began.
American officials recently released a list of Iraqis who would face trial for past crimes.
The American military takes the Geneva Conventions seriously.
The main provisions of the Conventions are repeated in the rules of combat of the US armed services.
Similar rules to govern the conduct of the United States Army during the Civil War have guided the American military since 1863, when a code of 159 articles was drafted by Francis Lieber, a German immigrant who became a professor of law at Columbia University.
Among the reasons the American military is committed to respect for the Geneva Conventions is a concern about reciprocity.
By treating others properly, American forces strengthen their argument that they themselves should be dealt with in accordance with the Geneva Conventions.
But the treatment accorded the prisoners of various nationalities (Arab, Uzbek, Ughuir, Chinese) at the US military base at Guantanamo Bay, Cuba, shows that President Bush and his top advisors apply the Conventions when it suits them.
Not one detainee has been accorded prisoner-of-war status; none has been granted a hearing as required by the Geneva Conventions in cases of doubt.
Prisoners, it seems, are denied legal protection so that coercive interrogations can proceed without interference.
This is no way to set an example for the humane treatment of captured combatants.
Having said that, whatever America does at Guantanamo does not justify Iraqi mistreatment of American or British prisoners.
Every government has an independent duty to comply with the Geneva Conventions.
Unfortunately, judging by the past record of Saddam Hussein's forces, it is likely that they will commit many war crimes.
As a long-time advocate of bringing Saddam and his cohorts to justice for their crimes against the Kurds, the Marsh Arabs and many others, I endorse the Bush Administration's view that proceedings should not be limited to offenses committed in the current war.
But those charged with responsibility for such crimes should be brought before an international--not American--tribunal.
Following World War Two, the victorious allies tried Germans and Japanese for war crimes at Nuremberg and Tokyo.
Although those proceedings were admirable in many ways, including in the care taken to protect the procedural rights of the defendants, they have always been tainted by the charge of "victor's justice."
Nearly a half-century later, the world embarked on a better course with the establishment of the International Criminal Tribunal for ex-Yugoslavia (ICTY) in 1993.
It is not susceptible to the charge of victor's justice, because the entire world is represented by its judgments.
The ICTY has convicted Serbs, Croats, and Bosnians, and recently indicted several leaders of the Kosovo Liberation Army.
Although the most high-profile defendants, Slobodan Milosevic and Vojislav Seselj, are doing their best to discredit the tribunal, they will fail.
The charge of bias is simply not sustainable.
If the US tries Iraqi officials before a US military commission, as leading American defense officials have suggested, it would reverse the progress made in the decade since the establishment of the tribunal for ex-Yugoslavia.
Ironically, the American proposal coincided with the inauguration of the International Criminal Court.
An even blacker irony is that America and Iraq were two of the seven governments that voted against its establishment in Rome in 1998 when the treaty for the court was adopted.
If the US continues to do all that it can to minimize civilian casualties, it has nothing to fear from an international tribunal.
The fact that errant bombs or missiles kill some civilians does not make their deaths war crimes.
The US, having flouted international justice by disregarding the Geneva Conventions at Guantanamo, would make matters worse by reverting to a system in which military victors doff their uniforms and attire themselves in judicial robes.
"Military justice is to justice what military music is to music," George Bernard Shaw once quipped.
The bite in his comment is justified.
"Victor's justice" is no longer acceptable.
Nurturing the Creative Roots of Growth
Governments all over the world try to encourage economic growth.
But growth--with the high employment and rising living standards that politicians crave--results from creativity.
As people pursue new directions in business, science, and the arts, they develop innovations and improvements that drive the economy forward.
So how, beyond mere rhetoric, can governments promote creativity?
Intellectual property law--patents and copyrights--is the clearest example of a government policy designed to stimulate creativity.
The idea dates back to renaissance Italy, but modern patent law originated in England, where, in 1624, the Statute of Monopolies was enacted to grant a 14-year exclusive right to the "true and first inventor" of any manufacturing method.
The law benefited inventors in a way that tied an invention's reward to its economic dividends.
This approach can result in large rewards for important inventions--precisely what is needed if maximum incentive is to be given to people to develop bold new concepts--and has served us well over the centuries since 1624.
But until recently, patent law was based on a rather narrow definition of creativity, usually the kind embodied in the invention of devices or industrial processes.
In recent years, however, patent law widened enormously with the acceptance, in the United States, Australia, Japan, and Korea, of business-method patents --that is, patents not on a technological process but on a way of doing business.
The turning point in the US came in 1998, when a federal court decision upheld a patent on an accounting system, which launched a flood of business-method patents--over a thousand a year in 1999 and 2000.
The expanding scope of patents increases their value as a tool to promote creativity.
While previously most patentable inventions were produced in laboratories, with business-method patents the rewards for creativity can now motivate all kinds of people throughout a business organization.
Indeed, countries that do not allow business-method patents--even though some of their citizens apply for patents in the US--run the risk that their businesses will lose some of their creative edge.
One area where business-method patents promise to spur innovation is financial markets.
Despite dramatic theoretical advances, financial institutions were, until recently, slow to develop and expand new instruments allowing people to exploit many risk-sharing opportunities.
Yet, as I argued in a recent book, financial instruments that increase our ability to manage risks that are now regarded as "non-diversifiable" would be of great economic importance.
Introducing such instruments, however, is likely to be costly.
People will probably not buy and sell them unless the markets for them are liquid, which means that a lot of traders must be there at the same time.
But generating enough liquidity implies huge expenses: the public must be educated to understand the concept of risk management and overcome serious psychological barriers before it can be persuaded of the usefulness of the new instruments.
Financial innovators might not incur these costs if they expect that others will copy their ideas at little or no cost to themselves as soon as they are shown to work.
The harm of inadequate patent protection in the financial world before 1998 was clear.
In 1993, the American Stock Exchange (AMEX) expended considerable resources to develop and promote its new concept of an exchange-traded fund (ETF), with its first embodiment as Standard & Poor's Depository Receipts (SPDR's).
The ETF was a key innovation that made it possible for investors to hold an instrument that effectively tracked the value of a specified portfolio, such as the S&P index, with low trading costs.
But once the idea was proven successful, it was widely imitated by other organizations, depriving the AMEX of a big share of the returns on its innovation.
The recent expansion of patent protection is designed to prevent these problems and to bring a faster pace of innovation.
Of course, there are downsides to patent law expansion, prime among them the increased incidence and cost of litigation.
Firms are discovering that their competitors with business-method patents may seek to block them from improving their business strategies.
For example, Amazon.com sued Barnes & Noble.com for offering to its customers Amazon's patented "one-click shopping" method.
The matter was made worse by the fact that one-click shopping seemed to be an "obvious" idea that shouldn't have been granted a patent in the first place.
(The case was settled out of court last year, with royalties paid to Amazon.com.)
The lesson is that whenever patents are extended to a new domain, we must be attentive to whether their positive incentive effects are outweighed by the main disadvantage of granting what is in essence a monopoly to the inventor: slower adoption by others.
Patents work well to promote creativity when innovation involves high costs for the innovator and low adoption costs for everyone else.
In such cases, the innovation would never be implemented without patent protection, because no inventor could ever recoup costs.
But patents work poorly when an invention depends on many small sequential innovations.
In these cases, too many patents can drive up licensing and legal costs prohibitively, lowering the payoffs to inventors and discouraging them from innovating.
It should be a top priority for policymakers to ensure that patent offices have the financial and human resources needed to grant business-method patents judiciously, and that they do not award patents to obvious or merely incremental ideas.
If correct patent policies are followed, business-method patents have the potential to boost dramatically business creativity--and the economic growth that goes with it.
Obama Across the Pacific
MANILA – Unlike his predecessor, US President Barack Obama is popular from the Atlantic to the Pacific.
He has reached out to the Muslim world and pledged to address the Israeli-Palestinian conflict without delay.
The nations of Asia have a particular affection for him, owing to the years he spent as a child in Indonesia.
If Obama improves America’s global standing with support from political heavyweights such as Vice President Joe Biden, Secretary of State Hillary Clinton, Defense Secretary Bob Gates, National Security Adviser James Jones (a former NATO Supreme Commander), and Secretary of Veterans Affairs Eric Shinseki (a former United States Army Chief), he should be able to ask more from America’s allies, particularly for NATO to send more troops to Afghanistan.
He will also be able to push Israel to reinvigorate the derailed Middle East peace process.
Although his national security team consists of people who largely supported the war in Iraq, Obama has made it clear that his agenda includes withdrawing troops from that country.
International goodwill will probably be the key to his success, if not in re-establishing American hegemony, then at least in making America the “indispensable nation” once more.
Although Obama is likely to give priority in his diplomacy to the wars in Iraq and Afghanistan, he cannot take the Asia-Pacific region’s stability for granted.
The sources of uncertainty are many: tension between South and North Korea; anxiety over nuclear proliferation posed by cooperation between North Korea and Iran; managing the rise of China and India; and continued Islamist extremism on the Indian sub-continent, particularly Pakistan, as well as in Southeast Asia, where Al-Qaeda has established a second front through Indonesia’s Jemaah Islamiyah .
Vast changes in America’s presence across the Asia-Pacific region are underway and are likely to continue.
So far, none of these changes have unsettled the region.
Substantial redeployments of US military forces and assets, triggered by the need for additional troops in Afghanistan and ongoing problems over the US-Japan status-of-forces agreement, are already taking place.
Media reports indicate, for example, that nearly 25,000 US marines, soldiers, family members, and civilian employees are to descend on the tiny island of Guam in the next five years to ease the overconcentration of US forces on the Japanese island of Okinawa without pulling back too far from the flashpoints of Taiwan and North Korea.
But the future of security in the Pacific should not be left to US decision-makers alone.
Regional leaders must now develop their own strategy to transform Asia’s many challenges into opportunities, with Obama playing the role of “good neighbor” who expects other peoples to help themselves and put their own houses in order before turning to the US for assistance.
The Philippines is in an advantageous position to take advantage of the many diplomatic opportunities that will be generated by Obama’s potential activism in the Pacific. To be sure, the country’s “America” card – the result of the two countries’ longstanding strategic relationship (I myself was educated at West Point and fought alongside US troops in the Korean War) – must be played carefully and not be taken for granted.
But it offers the potential for a relationship of the sort that arises only between countries with deep and many-layered ties.
By strategizing “out of the box” and finding ways to link Obama’s Asian agenda with that of their own nations, Philippines President Gloria Macapagal-Arroyo and other Asian leaders will be able to truly make the Pacific the central focus of the Obama administration’s diplomacy.
Obama and Asia’s Two Futures
TOKYO – Despite the relentless shift of global economic might to Asia, and China’s rise as a great power – the central historical events of our time, which will drive world affairs for the foreseeable future – America’s focus has been elsewhere.
The terrorist attacks of 2001, followed by the Afghanistan and Iraq wars, the Great Contraction of 2008, the Arab Spring, and Europe’s sovereign debt crisis, all diverted the United States from helping to create a lasting structure of peace to accommodate today’s resurgent Asia.
In November, US President Barack Obama can begin to redress this imbalance when he hosts the Asia Pacific Economic Cooperation summit in his native state of Hawaii.
The meeting’s timing is fortunate, because a number of critical Asian issues are coming to a boil.
The South China Sea, for example, is now churning with competing claims to its islands, atolls, and sea bed, including China’s bold assertion that all of it is Chinese sovereign territory.
At this year’s ASEAN summit in Bali, it was agreed that these territorial disputes be settled through bilateral negotiations.
But the scope of Chinese claims doomed that agreement from the start; indeed, China now insists that the sea constitutes a core national interest, on a level with Taiwan and Tibet, for which it is prepared to fight.
China’s willingness to throw its weight around amplifies the grave imbalance in size, and leverage, between it and the other countries bordering the South China Sea.
This has made bilateral negotiations to settle these disputes unviable.
Vietnam and the Philippines have been bullied in this way recently, with both pushing back rather than submit to Chinese imposed terms.
The presidential elections scheduled for next year in two of Asia’s strongest democracies – South Korea and Taiwan – are also likely to cause diplomatic temperatures to rise in the months ahead.
The risk stems not from the conduct of the South Koreans or the Taiwanese, but from the democratic choices that they make, which may offend two of Asia’s last dictatorships.
In South Korea, the remarkable Park Guen-hye’s bid to become her country’s first woman president may provide an excuse – as if any were needed – for North Korean mischief-making.
The regime in Pyongyang is seeking to ensure that power passes to a third generation of Kims, represented by the pudgy and well-fed “Dear Young General,” Kim Jong-un, and appears to believe that provocations such as its bombardment of a South Korean island earlier this year are the way to secure the succession.
Taiwan, too, may elect a woman president, Tsai Ing-wen, the leader of the opposition Democratic Peoples’ Party, next year.
That outcome would stoke Chinese ire, not because of Tsai’s gender, but owing to her politics.
The DPP has long been the Taiwanese party keenest on securing independence for the country.
A third Asian issue with combustible potential is Burma, where another unique woman, the Nobel Peace Prize winner Aung San Suu Kyi, is at the heart of events.
The elections earlier this year, which many at first assumed were a sham, now appear to have produced changes to which Asia’s countries will need to collectively and individually respond.
The government not only freed Suu Kyi after two decades of house arrest, but has even begun a dialogue with her – talks for which the meticulous opposition leader has expressed real hope.
Indeed, President Thein Sein’s government has begun to release thousands of political prisoners, including the monk who led the massive street protests of 2007.
Sein’s government has also listened to Burmese public disquiet at China’s massive influence in the country, and has canceled a huge $3.6 billion dam that Chinese firms were building.
China, it is plain to see, is at the root of most of the disputes troubling Asia.
Two main issues must be managed – one philosophical, the other structural – in seeking to ameliorate the problems caused by China’s unconstrained rise.
Only by resolving the structural issue will Asia succeed in overcoming the philosophical problem.
The philosophical problem concerns China’s renewed conception of itself as the “Middle Kingdom,” a state with no sovereign equal.
Throughout its history, China has sought to treat its neighbors as vassals – a mindset currently reflected in the way that it has approached negotiations with Vietnam and the Philippines over the South China Sea.
China’s free-floating rise, unanchored in any regional structure or settlement, makes this mindset particularly worrying.
At the Hawaii summit, Obama must orchestrate the first steps toward constructing an effective multilateral framework within which the complications posed by China’s rise can be addressed.
The absence of such a structure of peace has been obscured, to some extent, by America’s dominant role in Asia since the Pacific War.
But China’s rise and America’s other global and domestic concerns have left many Asians wondering just how enduring those commitments will be in the future.
Nevertheless, China’s recent strategic assertiveness has led many Asian democracies to seek to deepen their ties with the US, as South Korea has done with a bilateral free-trade agreement.
The US is reciprocating by pledging not to cut Asia-related defense spending, despite the big reduction in overall US defense spending that lies ahead.
What Asia most needs today is a well-conceived regional system, embedded in binding multilateral institutions.
A “Trans-Pacific Partnership” between Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, the US, and Vietnam to govern supply-chain management, intellectual-property protection, investment, rules on state-owned firms, and other trade issues – likely to be announced in Hawaii – is a good start in the economic sphere.
But much more is needed.
Ultimately, the best way for peace to prevail in the region is for the US and China to share responsibility for a regional order with Asia’s other powers, particularly India, Indonesia, Japan, and South Korea.
Asia’s choice is clear: either the region embraces a multilateral structure of peace, or it will find itself constrained by a system of strategic military alliances.
In Hawaii, Obama and the other assembled Asian leaders – particularly the Chinese – must begin to choose between these two Asian futures.
Obama and Global Warming
COPENHAGEN – In one of his first public policy statements as America’s president-elect, Barack Obama focused on climate change, and clearly stated both his priorities and the facts on which these priorities rest.
Unfortunately, both are weak, or even wrong.
Obama’s policy outline was presented via video to California Governor Arnold Schwarzenegger’s Governors’ Global Warming Summit, and has again been shown in Poznan, Poland, to leaders assembled to flesh out a global warming roadmap.
According to Obama, “few challenges facing America and the world are more urgent than combating climate change.”
Such a statement is now commonplace for most political leaders around the world, even though it neglects to address the question of how much we can do to help America and the world through climate policies versus other policies.
Consider, for example, hurricanes in America.
Clearly, a policy of reducing CO2 emissions would have had zero consequence on Katrina’s devastating impact on New Orleans, where such a disaster was long expected.
Over the next half-century, even large reductions in CO2 emissions would have only a negligible impact.
Instead, direct policies to address New Orleans’ vulnerabilities could have avoided the huge and unnecessary cost in human misery and economic loss. These should have included stricter building codes, smarter evacuation policies, and better preservation of wetlands (which could have reduced the ferociousness of the hurricane).
Most importantly, a greater focus on upkeep and restoration of the levees could have spared the city entirely.
Perhaps these types of preventive actions should be Obama’s priority.
Likewise, consider world hunger.
Pleas for action on climate change reflect fears that global warming might undermine agricultural production, especially in the developing world.
But global agricultural/economic models indicate that even under the most pessimistic assumptions, global warming would reduce agricultural production by just 1.4% by the end of the century.
Because agricultural output will more than double over this period, climate change would at worst cause global food production to double not in 2080 but in 2081.
Moreover, by implementing the Kyoto Protocol at a cost of $180 billion annually would keep two million people from going hungry only by the end of the century. Yet by spending just $10 billion annually, the United Nations estimates that we could help 229 million hungry people today .
Every time spending on climate policies saves one person from hunger in a hundred years, the same amount could have saved 5,000 people now.
Arguably, this should be among Obama’s top priorities.
Obama went on to say why he wants to prioritize global warming policies: “The science is beyond dispute and the facts are clear.
Sea levels are rising.
Coastlines are shrinking.
We’ve seen record drought, spreading famine, and storms that are growing stronger with each passing hurricane season.”
Yes, global warming is happening, and mankind is partly responsible, but these statements are – however eloquent – seriously wrong or misleading.
Sea levels are rising, but they have been rising at least since the early 1800’s.
In the era of satellite measurements, the rise has not accelerated (actually we’ve seen a sea-level fall over the past two years). The UN expects about a 30-centimeter sea-level rise over this century – about what we saw over the past 150 years.
In that period, many coastlines increased , most obviously in Holland, because rich countries can easily protect and even expand their territory.
But even for oft-cited Bangladesh, scientists just this year showed that the country grows by 20 square kilometers each year, because river sedimentation win out over rising sea levels.
Obama’s claim about record droughts similarly fails even on a cursory level – the United States has in all academic estimates been getting wetter over the century (with the 1930’s “dust bowl” setting the drought high point).
This is even true globally over the past half-century, as one of the most recent scientific studies of actual soil moisture shows: “there is an overall small wetting trend in global soil moisture.”
Furthermore, famine has rapidly declined over the past half century.
The main deviation has been the past two years of record-high food prices, caused not by climate change but by the policies designed to combat it: the dash for ethanol, which put food into cars and thus upward pressure on food prices.
The World Bank estimates that this policy has driven at least 30 million more people into hunger.
To cite policy-driven famine as an argument for more of the same policy seems unreasonable, to say the least.
Finally, it is simply wrong to say that storms are growing stronger every hurricane season.
Even for the Atlantic hurricane basin, which we tend to hear about the most, the total hurricane energy (ACE) as measured by the US National Oceanic and Atmospheric Administration has declined by two-thirds since the record was set in 2005.
For the world, this trend has been more decisive: maximum ACE was reached in 1994, and has plummeted for the past three years, while hurricanes around the world have for the past year been about as inactive as at any time since records began being kept.
Global warming should be tackled, but smartly through research and development of low-carbon alternatives.
If we are to get our policies right, it is crucial that we get our facts right.
Obama and India
NEW DELHI – India has stood out around the world for being one of the few countries indifferent to America’s presidential election.
Indeed, an astounding 87% of Indians polled said that they did not think the election mattered to them.
President-elect Barack Obama will have to deal with disasters on many fronts as his administration takes over the reins of government.
India, presumably, will not be one of them.
If there is one bilateral relationship that the Bush administration is seen to have handled successfully, it is that with India.
This impression is no accident.
A powerful lobbying effort included millions of dollars spent to support passage of one of the crowning achievements of Bush’s foreign policy: the United States-India Civil Nuclear Cooperation Agreement.
Senator Obama voted for the deal, as did Senator Joe Biden, one of its champions as chairman of the Senate Foreign Relations Committee.
In the heady first months after it came to power, the Bush administration laid out a bold new vision that gave India – a rising Asian democracy on China’s border, proximate to the shipping lanes of the Indian Ocean and to the epicenter of Islamist terrorism – a starring role in US foreign policy.
The argument to India was essentially this: You need us to realize your ambition to become a major world power, and we share a concern over China’s rise and Islamist terrorism, so let’s work together.
But the Bush administration’s vision was, and remains, flawed, for it regards the US-India relationship solely as a strategic one that enhances both countries’ military reach.
Indeed, India’s $5 billion of US weapons purchases accounts for an astonishing 20% of the $24.8 billion in US arms sales in 2007.
The flaw consists partly in viewing China, India’s largest trading partner, as a threat.
Moreover, while it is true that the US and India face terrorist threats, both have erred in their approach to dealing with them.
America’s mistakes include the Patriot Act, the invasion of Iraq, the mishandling of Afghanistan, the torture committed at Abu Ghraib, and the prison at Guantánamo Bay.
India’s list of misguided responses to terrorism is almost as long.
Its Prevention of Terrorism Act (POTA), enacted after the September 11, 2001, attacks on America by the then ruling Bharatiya Janata Party (BJP)-led government, contains many of the features enshrined in the Patriot Act: an overly vague definition of what constitutes terrorism or unlawful acts, immunity from prosecution for law-enforcement or government agents, and expansion of wire-tapping.
This law remained in effect until the current Congress Party-led government repealed it in 2004.
But the BJP may well win India’s national elections next spring, and has pledged to bring back POTA, or something even more draconian.
At the same time, in the face of an alarming increase in the number of terrorist attacks, Manmohan Singh’s government has also indulged in a heavy-handed response to suspected Islamist terrorists, who are hauled off on flimsy evidence and killed before they can be convicted of any crime.
Meanwhile, a commission that the government charged with investigating the state-condoned massacres of Muslim citizens in Gujarat in 2002 produced only a whitewash, absolving the perpetrators of any wrongdoing – and fueling a further rise in homegrown terrorism by deeply disaffected Indian Muslims.
This sort of behavior has had terrible consequences for the moral credibility of democracy, for security in India, and for regional security in South Asia.
The Obama administration should make as bold a break with the Bush administration’s policy toward India as the Bush administration did with its predecessor by refocusing the relationship on tackling the real sources of insecurity.
President Obama must shift the fundamental basis of the US-India relationship away from a strategic partnership based on a militarized notion of security toward a holistic vision of human security in which military force plays an appropriate but not a defining role.
A new vision of the US-India relationship would focus on global warming, the collapse of industrial agriculture, the widening gap between rich and poor, the conventional and nuclear arms race in Asia, and the intensification of ethnic and religious conflict.
The elements of a new Obama vision for the US-India relationship would be: an emergency joint task force to fast-track the development of sustainable solutions to meet India’s and the world’s burgeoning energy, water and food needs.
It also should build a partnership for the elimination of nuclear weapons within a set time frame in which the US must take a leadership role.
A vigorous new commitment to protecting the rights and freedoms of all citizens and residents and a zero-tolerance policy toward any state collusion with or tolerance of ethnic cleansing, torture, summary detention, citizen surveillance or other insults to democracy, is also necessary.
A McCain presidency would have offered no hope for a radical break with the military swagger and crony capitalism of the Bush years, on which the bilateral relationship with India was built.
For the sake of the future of the people of the world’s oldest and largest democracies, let’s hope that an Obama presidency fulfills this hope.
Obama and Iran
NEW YORK – While talking to an Iranian official in Tehran earlier this year, he reminded me of Ayatollah Khomeini’s fondness for comparing the relationship between the United States and Iran to that between a wolf and a lamb.
But the official went on to add his own twist, “Nearly 30 years have passed, and we are not that lamb anymore, and maybe the US is not the same wolf it once was.” His point was that Iran no longer feels the deep inequality with the US that it did in the past, and that it may be time to try engagement.
Over the past three decades, five American presidents have struggled to figure out what to do about Iran.
All five failed.
As US President-elect Barack Obama and his advisers assess their foreign-policy priorities, they will encounter the immediate challenge of addressing Iran’s nuclear program and the country’s growing strategic importance in the Middle East and South Asia.
They will need quickly to face up to the reality that in order to pursue US interests in the region, including stabilizing Iraq and Afghanistan, the current standoff with Iran cannot continue, and that a greater degree of cooperation is unavoidable.
If they do not want to repeat the failures of past administrations, they will be well advised to do what none of Obama’s predecessors have tried.
They should make a strategic decision to engage Iran – without any pre-conditions – in discussions on a broad range of issues of significance to both sides. During his candidacy, Obama said of Iran that, “For us not to be in a conversation with them doesn’t make sense.” Now, he has the opportunity to follow through.
Such an approach does not mean having Obama sit down with Iranian Supreme Leader Ali Khamenei or President Mahmoud Ahmadinejad anytime soon.
A great deal of preparatory work will be required first.
This can be carried out by a small team, which would hammer out the details of a mutually acceptable framework for a wide-ranging and unconditional dialogue that enables both governments to produce some modest initial successes, and gradually build the confidence and trust required to imagine solutions to larger problems.
The process could include appointing a US envoy to Iran. Ultimately, direct dialogue at the highest levels should be a key objective.
This will not be easy.
At the heart of the American-Iranian conflict is a deep mistrust about each nation’s readiness to tolerate the presence of the other on the world stage.
Each nation feels that it has been humiliated and demonized by the other.
What is needed is a process that rebuilds trust and communication so that the give-and-take of negotiation is perceived as serving mutual interests rather than serving up insults to national dignity or identity.
Although it is far from an exact precedent, the historic 1972 Shanghai Communiqué signed by China and the US, which allowed both governments to “agree to disagree” on many issues while committing themselves to dialogue at the highest levels, offers a promising model. This far-sighted framework’s effectiveness has been well proven over time.
Dialogue with Iran will inevitably be frustrating and difficult, but it offers the only way to lay out possible grounds for constructive engagement and to devise a strategy for heading off a potentially disastrous confrontation.
Dialogue focused on Iran’s nuclear program or on Iraq alone will not work.
Instead, the full range of issues that are significant to US-Iran relationship must be on the table.
Such an approach will require that each side exercise broad restraint and live with the ambiguity of working with a strong adversary to manage profound differences.
Distrust will continue, signals will be confused, setbacks will be frequent, but the results could well lead over time to greater mutual understanding and a learned capacity to work on some of the most pressing problems, just as the US learned to do with the Soviet Union and China.
Direct diplomatic and strategic engagement between the US and Iran at the highest levels is a proposition yet to be tested.
By pursuing this route after he takes office, Obama will force Iran to make a choice: does it want to be a state that is fully integrated into the global economy, or does it want to be an “ideology” with rogue status?
Obama and the Rise of the Rest
NEW YORK – American elections usually produce a brief euphoria; the public sense of renewal, of future possibilities, acts as a shot of adrenaline.
This year, however, the palpable relief and celebration will be tempered by the widely shared sense that all is not well in America.
The economic data are almost uniformly bleak and will not improve soon, and, while national security issues appear less pressing because of the financial crisis, they have hardly disappeared, given the tenuous situation in Afghanistan and Pakistan and the unresolved problems in Iraq, Iran, and North Korea.
Moreover, the power of America’s presidency, and of the United States, has undergone dramatic shifts in recent years, making our era unlike earlier periods when the world was in flux and a new American president faced deep challenges.
Until recently, it was possible to speak of “the rise of the rest” without forecasting a decrease in American power.
Now, with the US military at its limit in Iraq and Afghanistan and the US fiscal position weakening, America is confronted with stark choices.
That is an unfamiliar position for a new US president.
Even in the dark years after Vietnam in the late 1970’s and early 1980’s, there was a sense that America could still make its economic choices without much reference to the wider world.
That was the privilege of having the largest, most dynamic economy – and one that acted as a world creditor.
No more.
There is no small irony in the fact that on November 15, America’s lame duck president, the unilateralist George W. Bush, is hosting a multilateral conference to discuss reshaping the global economic system.
It also speaks to America’s relative position that even the less-than-organized ministers of the European Union acted more quickly to create a floor for the financial crisis than did the US president and congress.
And it speaks volumes to the changing world that, as panic recedes and the wreckage is revealed, Asia in general and China in particular are emerging as clear winners.
The credit crisis exposed the flimsy foundations of the sustained growth that the US and Europe enjoyed during the past four to five years.
While many had noted the extraordinary wealth transfer to oil-producing states and China, the implications of this were not fully appreciated.
It is not just that the US has become a debtor nation; it is that large pools of capital and liquidity now reside in places like the Gulf region and China, with no sign of that trend reversing.
In fact, the current crisis has even put Japan, which has spent nearly two decades in the doldrums, in a position of relative strength, given its large currency reserves and the clean-up of its major banks’ balance sheets.
There was a brief period in the 1970’s when a similar transfer took place.
But, unlike then, the countries that are accumulating the capital today are not spending it on consumption – remember the endless pictures of Saudi princes buying up real estate on the French Riviera – but on investment, infrastructure, and education.
Yes, there are bubbles here and there, whether it is real estate in Shanghai and Dubai or stocks in Mumbai, but there has also been serious long-range planning that is likely to give these countries a strong position for years to come.
Even China, which is trying to shift its economy more toward consumption in order to reduce its dependence on capital spending, has put in place an infrastructure of roads, power grids, ports, and railways that will serve its domestic economy for decades.
Meanwhile, it can use its $2 trillion of reserves as a cushion when the US and global economy sag.
China’s economic growth may slow as its exports to the US and Europe weaken, but it is less dependent on these markets than most people assume.
The talk now is of a global recession that will be steep and prolonged.
Perhaps, but the more likely scenario is continued stagnation in the US and Europe and a more accelerated shift in economic power toward Asia.
Few parts of Asia are structurally exposed to the credit implosion, and the balance sheets of Asian banks and companies are on the whole cleaner than their counterparts elsewhere.
Yes, many companies took on too much debt, and some countries, such as Korea, are more compromised than others.
But China, which is Asia’s anchor, is not, and in a world where everyone else is falling down, the one left standing is that much taller.
The US will remain a powerful part of the global system, but the task of the new president is to recognize lasting strengths and accept new limits.
President-elect Obama has shown pragmatism and realism, and seems to understand that accepting limitations is not weakness; refusal to acknowledge reality is.
Obama at Halftime
NEW YORK – In September 2008, the global economy and financial system was hit by an earthquake, whose epicenter was in the United States.
It was the end of the Bush administration.
The presidential election was two months away.
The timing, from the point of view of crisis management, could not have been worse.
The level of uncertainty about asset values, solvency, and the connectedness of balance sheets that prevailed at the time was extraordinarily high.
Uncertainty bred fear, causing banks, businesses, and households to hoard cash.
Consumption plummeted, taking down retail sales with it, and, after a short lag, employment and investment as well.
Individually rational choices were giving rise to collectively irrational results.
These conditions had all the makings of a depression scenario, with credit rationing destroying businesses indiscriminately, and thus required fast, aggressive, and unconventional action by the US government and the Federal Reserve.
The response, mounted by the Bush administration and taken over by the Obama administration, was all of the above.
A combination of financial-sector recapitalization and rapid expansion of the Fed’s balance sheet prevented a complete credit lockup.
Policies sometimes missed their target and had to be modified.
For example, the Troubled Asset Relief Program (TARP) originally targeted the purchase of complex securitized assets that had lost value and stopped trading, but had to be partly altered to direct infusions of capital into banks.
Financial support for Wall Street villains infuriated many, but no one proposed a better alternative at the time – or has since.
The Bush and Obama administrations both understood that wise policymaking in crisis circumstances requires selecting the least bad option, accepting the inevitable anger and criticism, and implementing the decision quickly.
The first priority, after all, was to stabilize a highly dangerous situation.
The Obama administration then assumed responsibility for organizing the government’s efforts to boost recovery, the centerpiece being a large stimulus package to shore up the real economy.
Following the capital injections and Fed programs aimed at supporting the financial system, the stimulus package was an important step, notwithstanding disagreements about its size, effectiveness, and targeting.
After its enactment in late February 2009, the markets’ downward plunge began to decelerate, and prices stabilized the following month.
The Obama administration was not responsible for poor US economic performance in the immediate post-crisis period; that was inevitable.
But it was responsible for allowing flawed expectations of a sharp recovery to pre-crisis levels of output and consumption to persist.
And that left the administration open to the charge that bad policy was the cause of poor economic performance.
The administration needed to see – and to say – that the debt-fueled pre-crisis economy was on a dangerously unsustainable path, and that the challenge now, having averted a depression, was to make a difficult transition to a new path.
Instead, it treated the Great Recession as similar to others in the recent past, albeit deeper.
Perhaps that outcome was foreordained.
Shortly after taking office, the administration faced a crucial strategic decision about the scope and breadth of its agenda.
One option was to defer important policy initiatives (in health care, energy, and the environment, including climate change) and focus political capital and fiscal resources on restoring growth and employment.
The alternative was to pursue a full policy agenda aligned with the priorities and commitments enunciated in Obama’s election campaign.
The narrower agenda – financial reform, stabilizing the housing market, restoring balance sheets, addressing structural deficiencies, and restoring growth and employment – would not have captured the public’s imagination, and almost certainly would have disappointed Obama’s enthusiastic supporters.
But, if adopted, it would have had the advantage of clarity and focus, in an area of central importance to everyone.
And, if successful over time, it might have made the rest of Obama’s agenda seem less overwhelming and more affordable.
Obama chose the second, more expansive, option, which generated more or less the opposite dynamic: benefits became risks.
The full agenda would have been much easier to implement successfully if the assumptions about the nature of the recession and the likely path of recovery had been accurate.
But they weren’t. And now, as the administration shifts to a more central focus on restoring growth and employment, it risks getting bogged down as declining economic performance relative to expectations translates into waning political support.
The administration is not entirely to blame, of course.
It has had to deal with a widespread and understandable loss of confidence in elites – academics, policy analysts, Wall Street, business leaders, regulators, and politicians – which makes implementing pragmatic, centrist policies more difficult.
This phenomenon precedes the crisis, but the crisis has certainly made it worse.
Elites, after all, failed to see the crisis coming and to take steps to prevent it, and some of them appear to be the only ones who are recovering: profits are up, but employment is not.
Moreover, many Americans’ anxiety is rooted in deepening income inequality.
The economic and political implications of this long-term trend have been widely discussed but left largely unattended, betraying the general lack of concern for distributional issues that shadows elites’ excessive faith in markets to provide beneficial outcomes.
Indeed, a lack of clarity about means and ends spans American politics.
Markets, regulatory frameworks, and public-sector investments are means to attain shared goals. The administration, political and policy elites, and private-sector leaders need to state clearly that the main goal of domestic economic policy and strategy is to reestablish a pattern of inclusive growth and employment.
The choices to be made are not simple, obvious, or clear-cut.
Persistence, pragmatism, and some willingness to experiment will help.
But Obama needs to take the lead in redirecting a highly polarized political environment engaged in a debate about the appropriate role and size of government toward a more pragmatic, results-oriented agenda.
Obama Joins the Greek Chorus
PRINCETON – US President Barack Obama’s&nbsp;recent call to ease the austerity imposed on Greece is remarkable – and not only for his endorsement of the newly elected Greek government’s negotiating position in the face of its official creditors.
Obama’s comments represent a break with the long-standing tradition of official American silence on European monetary affairs.
While scholars in the United States have frequently denounced the policies of Europe’s monetary union, their government has looked the other way.
Those who criticize the euro or how it is managed have long run the risk of being dismissed as Anglo-Saxons or, worse, anti-Europeans.
British Prime Minister Margaret Thatcher accurately foresaw the folly of a European monetary union.
Gordon Brown, as British Chancellor of the Exchequer, followed in Thatcher’s footsteps.
When his staff presented carefully researched reasons for not joining the euro, many Europeans sneered.
And that is why Obama’s statement was such a breath of fresh air.
It came a day after German Chancellor Angela Merkel said that Greece should not expect more debt relief and must maintain austerity.
Meanwhile, after days of not-so-veiled threats, the European Central Bank is on the verge of cutting funding to Greek banks.
The guardians of financial stability are amplifying a destabilizing bank run.
Obama’s breach of Europe’s intellectual insularity is all the more remarkable because even the International Monetary Fund has acquiesced in German-imposed orthodoxy.
As IMF Managing Director Christine Lagarde told the Irish Times: “A debt is a debt, and it is a contract.
Defaulting, restructuring, changing the terms has consequences.”
The Fund stood by in the 1990s, when the eurozone misadventure was concocted.
In 2002, the director of the IMF’s European Department described the fiscal rules that institutionalized the culture of persistent austerity as a “sound framework.”
And, in May 2010, the IMF endorsed the European authorities’ decision not to impose losses on Greece’s private creditors – a move that was reversed only after unprecedented fiscal belt-tightening sent the Greek economy into a tailspin.
The delays and errors in managing the Greek crisis started early.
In July 2010, Lagarde, who was France’s finance minister at the time, recognized the damage incurred by those initial delays, “If we had been able to address [Greece’s debt] right from the start, say in February, I think we would have been able to prevent it from snowballing the way that it did.” Even the IMF acknowledged that it had been a mistake not to impose losses on private creditors preemptively; it finally did so only in June 2013, when the damage had already been done.
There is plenty of blame to go around.
Former US Treasury Secretary Timothy Geithner championed a hardline stance against debt restructuring during a crisis.
As a result, despite warnings by several IMF Directors in May 2010 that restructuring was inevitable, the US supported the European position that private creditors needed to be paid in full. &nbsp;
Lee Buchheit, a leading sovereign-debt attorney and the man who managed the eventual Greek debt restructuring in 2012, was harshly critical of the authorities’ failure to face up to reality.
As he put it, “I find it hard to imagine they will now man up to the proposition that they delayed – at appalling cost to Greece, its creditors, and its official-sector sponsors – an essential debt restructuring.”
Obama may have arrived late to the right conclusion, but he expressed what should be an obvious truth: “You cannot keep on squeezing countries that are in the midst of depression.”
If Obama’s words are to count, he must continue to push for the kind of deal Greece needs – one that errs on the side of too much debt forgiveness, rather than too little.
Recent analysis shows that forgiveness of Greece’s official debt is unambiguously desirable, as another bogus deal will keep the Greek economy depressed, ensuring that the problem soon recurs.
If European sensitivities must be assuaged, Greece’s debt repayment could be drawn out over 100 years.
At the end of the day, debt forgiveness benefits creditors as much as it helps debtors.
Creditors have known this since at least the sixteenth century, when Spain’s King Philip II became the world’s first known serial sovereign defaulter.
As Jesus put it, “It is more blessed to give than to receive.”
European authorities must come to understand that the next act of the Greek tragedy will not be confined to Greece.
If relief fails to materialize, political discontent will spread, extremist forces will gain strength, and the survival of the European Union itself could be endangered.
Obama Steps Up
WASHINGTON, DC – For the past six years, US President Barack Obama's administration has, more often than not, sided with the interests of big banks on financial-sector policy.
But this week, announcing a new proposal to prevent conflicts of interest in financial advising, Obama seemed to turn an important corner.
From the outset of his first presidential term, Obama maintained the approach taken by George W. Bush's administration.
Large financial firms benefited from the provision of massive government support in early 2009, and their executives and shareholders received generous terms.
Citigroup, in particular, benefited from this approach, which allowed it to carry on with substantially the same business model and management team.
And the Dodd-Frank financial-reform legislation of 2010 could have done much more to curtail large banks' power and limit the damage they can cause.
Most recently, in December 2014, the administration abandoned an important part of the Dodd-Frank reforms – a move that directly benefited Citigroup by allowing its management team to take on more risk (of the kind that almost broke the financial system in 2007-08).
Among financial-industry lobbyists and House Republicans, the knives are out to roll back more of the constraints imposed on Citigroup and other big banks.
But now, in an abrupt and commendable turnabout, the Obama administration put the issue of conflicts of interest in the financial sector firmly on the table.
The specific context involves the investment advice given to people saving for retirement.
The decisions these savers must make are complex and can have profound consequences.
Getting it right is difficult even under the best of circumstances.
What will interest rates be?
How long will you and your spouse live?
What will your commitments to your children be, and for how long?
But perhaps the most important question is whether you can trust your financial adviser.
Some financial advisers in the United States are paid not on the basis of how their clients do, but according to what financial products they persuade them to buy.
Dennis Kelleher of Better Markets, a pro-reform group, recently summed up the current situation well: “[A]dvisers can recommend investments that generate lucrative commissions for them, even though their clients get stuck with high fees, subpar performance, and unacceptably risky products."
Kelleher has been an effective critic of the administration in recent years, pushing long and hard to address all potential conflicts of interest in finance.
And now his analysis and recommendations are being echoed in a new report issued by the Council of Economic Advisers. “Such fee structures," the CEA warns, “generate acute conflicts of interest: the best recommendation for the saver may not be the best recommendation for the adviser's bottom line."
And the CEA goes further, estimating that conflicted investment advice leads to a one-percentage-point drop in return.
In today's low-interest-rate environment, that's a huge potential loss.
(The actual impact will also depend on what happens to equity prices in the coming years.)
The CEA report provides a useful primer on the issues and data.
I wish they weighed in more frequently on finance-related issues, rather than deferring to the US Treasury.
Or they could just listen to Senator Elizabeth Warren as she speaks out repeatedly on a broad range of financial-reform issues.
(Warren joined Obama in unveiling the proposal to protect retirement savers.)
Not surprisingly, at least some people at the US Securities and Exchange Commission have reacted negatively – this is stepping onto their turf, after all.
And the lobbyists are, naturally, out in full force.
But with sufficient White House willpower, the administration can see this through.
What is needed is a change in the rules set by the Department of Labor, which has jurisdiction over retirement-related issues.
No doubt industry defenders will claim that current practices benefit small investors – a point disputed directly by the CEA.
The broader and more interesting question is: Where are the statesmen in the financial industry?
Where are the leaders who push for a race to the top, by better serving their clients' best interests?
Jack Bogle, who built his investment-management company, the Vanguard Group, on exactly this principle, with a clear focus on lower fees at every opportunity, has come out strongly in favor of the administration's proposal.
Unfortunately, his remains a lonely voice.
Everyone who provides investment advice to retirement savers should act solely in their clients' best interests.
And, judging by the high number of distinguished and honorable professionals in the industry, many advisers, if not most, already do.
But there also are too many people being exploited, which harms them individually and discourages savings more broadly.
That is why the law should be amended to eliminate as many potential conflicts of interest as possible, by requiring all retirement advisers to act in their clients' best interests at all times.
Such a requirement would be a promising start, but there is still a long way to go.
All retail investors, not just retirement savers, deserve the same legal protection.
Until they get it, the best investment advice may be to assess your adviser carefully, bearing in mind a well-tested performance metric: “Where are the customers' yachts?"
Rapprochements with Rogue States
SEOUL – In his State of the Union address to the US Congress in 2002, President George W. Bush famously described Iraq, Iran, and North Korea as an “axis of evil.”
In the years since, however, America has not treated each in the same way.
The differences are highly instructive.
Bush and his hardline advisers believed that only force or “regime change” would stop these “rogue” states’ terrorism or their programs to acquire “weapons of mass destruction.”
So, in March 2003, the United States invaded Iraq, resulting in a state of near-constant civil war for over a decade; an ineffectual central government in Baghdad; and now the rise of the Islamic State.
In Iran, then-President Mohammad Khatami, a political moderate, offered what might have been a reasonable deal to curb the country’s nuclear program.
But Bush and his team preferred to pressure Iran with sanctions and military threats, and any hope for a negotiated solution vanished when Mahmoud Ahmadinejad succeeded Khatami in 2005.
It was only when another moderate president, Hassan Rouhani, took office in 2013 that hope for a negotiated solution could be revived.
Fortunately, US President Barack Obama has not missed the opportunities that were presented to him.
Indeed, the recent agreement with Iran, coming after diplomatic breakthroughs with Myanmar and Cuba, should make those who speak of an America in decline think again.
But what of North Korea, the last member of that notorious axis?
For the Bush administration, the Geneva Agreed Framework, signed in 1994 by North Korea and the US with the aim of freezing the North’s nuclear activity and gradually decommissioning its graphite-moderated reactors, was an act of appeasement by the “naive” administration of President Bill Clinton.
Bush’s administration preferred a harder line, using the so-called six-party talks, begun in 2003 and involving the US, China, Russia, Japan, and North and South Korea, to act almost as a pressure-cooker.
Though not publicly declared, it was widely believed that key American policymakers wanted regime change.
But, though Bush maintained America’s hard line toward Iran, in 2006 he changed tack in dealing with North Korea and began seeking a deal – doubtless influenced by the North’s first nuclear test, carried out in October of that year.
An eventual agreement, reached in the fifth round of the six-party talks in February 2007, could not be implemented because of North Korea’s refusal to agree on a verification protocol.
When Obama entered office in January 2009 and offered to “extend a hand” to Bush’s rogue states, optimists hoped for the negotiated denuclearization of North Korea.
Sadly, North Korea has betrayed the US at least three times since then: it conducted a second nuclear test in May 2009; launched a satellite in April 2012 in defiance of UN Security Council Resolutions 1718 and 1874; and carried out a third nuclear test in February 2013.
Given the North Korean regime’s frequent threats to turn American targets, from Hawaii to Washington, into “a sea of fire,” optimism is hard to sustain.
What should experience with the “axis of evil” trio since 2002 tell US policymakers?
First, aiming for “policy change” makes more sense than striving for regime change.
The Bush administration changed the regime in Iraq, but at a monumental cost that is still being paid.
In contrast, Obama’s goal concerning Iran was modest and focused on denuclearization.
It has borne fruit.
What, then, does this imply with respect to North Korea?
Given the Kim regime’s past negotiating tactics, Obama is understandably reluctant to launch any new diplomatic initiative and may well believe that negotiating with North Korea would provide his domestic political opponents with ammunition to ruin his Iran deal.
So the wait-and-see approach is likely to continue.
Yet just waiting for North Korea to collapse is a regime-change strategy by default – and the cost of a chaotic or violent collapse could be frighteningly high.
Indeed, the fear of this cost is what keeps China so passive where its North Korean client is concerned.
But time is not on America’s side.
North Korea continues to enlarge its nuclear stockpile and develop long-range missile technologies (it can already launch a ballistic missile capable of hitting America’s west coast).
In short, the country is becoming a direct security threat to the US.
Accordingly, US policymakers should have only limited aims in dealing with North Korea, and they should recognize that they will be achieved only by linking them to economic benefits for the Kim regime.
Libya’s decision to abandon its nuclear option in December 2003 and the Iran deal this year were both possible for precisely this reason.
North Korea, of course, is neither Libya nor Iran.
But it is also not the hermit state of the 1950s, having moved significantly toward a market economy in recent years.
Indeed, by the early 2000s, more than four-fifths of an average North Korean’s household income comprised unofficial earnings from market activities.
At the same time, the regime depends on taxes on international trade to support itself.
North Korea’s leader, Kim Jong-un, is no reformist like China’s Deng Xiaoping; but his regime is becoming more like China’s every day, owing to the irreversible expansion of market forces.
This will certainly change the context in which Kim calculates the cost and benefits of his nuclear program.
The West should facilitate this change in his calculus.
Moreover, the fact that the US, China, and Russia could cooperate on the Iran deal might prove helpful.
In particular, Chinese President Xi Jinping’s position on North Korea’s nuclear program is closer to America’s than that of any of his predecessors.
Given North Korea’s economic dependence on China – which accounts for some 90% of its trade nowadays – it is critical to take advantage of this policy convergence.
The best way to do that would be to forgo “strategic patience” and begin informal contact with the North to probe Kim’s intentions.
After all, with a regime as volatile as North Korea’s, patience is never a virtue.
Leading By Engaging
WASHINGTON, DC – In his first inaugural address, US President Barack Obama offered an invitation to the world’s most closed countries. “We will extend a hand,” he said, “if you are willing to unclench your fist.”
This statement encapsulated the foreign policy of “engagement” that he endorsed during his first term – an approach that, despite some shortcomings, has a lot of merit.
Obama rejected his predecessor George W. Bush’s policy of isolating “rogue states,” recognizing that America’s only hope for influencing isolated countries’ behavior was to engage directly with them in a bilateral context.
And, as a bilateral strategy, engagement has proved to be astonishingly successful, having led to historic openings, first to Myanmar and now to Cuba, while driving progress toward an enduring nuclear agreement with Iran.
From the beginning, however, the Obama administration has made clear that engagement is not an end in itself, but a means to various goals, both bilateral and regional.
In Myanmar, the bilateral goal was to nudge the government toward greater openness and democracy – something that has unquestionably happened.
The pro-democracy leader and Nobel laureate Aung San Suu Kyi was released from house arrest; her party won seats in parliament; and millions of Burmese are now studying their country’s constitution and have petitioned for amendments.
To be sure, much remains to be done.
The journalist Martin Woolacott describes Myanmar as a “halfway house between military and civilian rule,” observing that the country’s generals have been promising to complete the transition to democracy for several years now, yet remain unwilling to allow Suu Kyi to run for President.
But this should not obscure the progress that has been made; compared to 2009, when Obama took office, Myanmar and its politics are unrecognizable.
While Obama would likely acknowledge that US policy did not bring about these changes (which resulted from an internal process of recalculation by the president, General Thein Sein), the US was responsive and flexible enough to encourage them.
On the regional front, Obama hoped that an opening with Myanmar would ensure that the country did not become wholly dependent on China, while enabling the US to deepen its relationship with the Association of Southeast Asian Nations.
The resumption of diplomatic relations with Myanmar was a critical feature of the Obama administration’s “rebalancing” toward Asia.
As for Cuba, Obama’s primary goal seems to be to bolster respect for ordinary Cubans’ human rights, not to bring about regime change.
While it is too soon to assess the opening’s impact in terms of reducing repression, the opportunity it presents for Cubans to engage with Americans – first family to family, then business to business – is significant.
In regional terms, Obama’s restoration of relations with Cuba merits a place in the history books alongside Richard Nixon and Henry Kissinger’s opening to China.
As grandiose as that claim may seem, the fact is that crossing the straits to Cuba signals a new, more open, and far more productive approach to relations with all of Latin America.
Over the last decade, US leaders’ efforts to establish productive frameworks for multilateral cooperation with Latin America – including attempts to reinvigorate the Organization of American States and build up new forums like the Summit of the Americas – have run aground on their continued isolation of Cuba.
Indeed, the 2012 Summit of the Americas in Cartagena became an exercise in America-bashing, with countries threatening to boycott the 2015 summit if Cuba was not invited.
Fortunately, the US stepped up to the challenge, and, with Cuba at the table, the summit was held in Panama this month.
As a result, the Summit of the Americas and other regional organizations are better positioned to address regional crises, like the coming meltdown in Venezuela, and opportunities, such as the establishment of a hemispheric energy, trade, and law-enforcement infrastructure.
A nuclear deal with Iran would have similarly important implications in the Middle East and Southwest Asia – a prospect that largely explains fervent opposition to negotiations by Israel and Saudi Arabia.
While the deal will stand or fall on the extent to which it pulls Iran back from the nuclear brink, it can also open the door to further bilateral negotiations on matters of common interest, from ending the war in Syria to cracking down on drug-running in Afghanistan.
Already, Obama’s policy of engagement has led to the most bilateral interaction since the Iranian revolution and hostage crisis in 1979.
Whatever America’s Republican Party tries to claim during the 2016 presidential election campaign, Obama’s policy of engagement has worked, enabling the US to shape events in even the most closed countries.
So why do pundits continue to debate America’s supposedly declining global influence?
(Just last week, the topic made the front page of the New York Times, in an article that quoted a former treasury official as saying, “We’re withdrawing from the central place we held on the international stage.”)
One answer is that domestic political dysfunction has severely handicapped the president in international negotiations.
For example, the US Congress has blocked changes to countries’ quota allocations at the International Monetary Fund.
And a group of 47 Republican senators wrote a letter to Iran’s leaders announcing that the next Congress may not honor whatever nuclear deal they reach with Obama.
Another source of doubt about America’s enduring influence lies in the fact that multilateral engagement is still needed, and this is always more difficult than bilateral engagement.
Indeed, multilateral leadership requires not only clearer and bolder rules, but also a demonstrated willingness to bear the costs of those rules, whether by creating safe zones to uphold the “responsibility to protect” civilians or taking concrete steps to reduce – and eventually eliminate – nuclear arsenals.
Bilateral engagement will prove to be one of Obama’s most important foreign-policy legacies.
But ensuring that the US can continue to lead in the twenty-first century will require a different kind of engagement.
That will be a critical task for America’s next president.
Obama in Africa
BERKELEY – On July 10, one very important descendant of black Africa will make a triumphant return to the motherland.
Scholars speak of “the empire striking back,” referring to former colonized peoples, such as immigrants from Africa and India, settling in Europe and North America and then challenging norms of race and identity.
In his first official trip to Africa, US President Barack Obama is striking back in a novel way.
His visit to Ghana highlights the desirability of prominent people from the diaspora making a positive contribution to African affairs.
But Obama’s visit, while heavy on symbolism, reveals the limits of his power.
Burdened by economic problems in America and wars in Iraq and Afghanistan, he can’t act boldly in Africa or make big promises.
Indeed, six months into his presidency, he has already undercut expectations.
He has approached with great caution the task of settling the region’s violent conflicts – in Darfur, eastern Congo, and Somalia.
He has also kept a safe distance from Africa’s political failures, notably in Zimbabwe, where he has resisted calls to assist in the removal of Robert Mugabe.
Obama’s caution is reasonable.
He doesn’t want to be pigeon-holed, after all, as “the president of Africa.”
But, in choosing restraint over intervention, he has disappointed ordinary Africans and international activists alike.
Like his predecessors, George W. Bush and Bill Clinton, Obama wants to avoid messy entanglements in Africa’s internal politics.
Bush did nothing to stop the killings in Darfur or hasten Mugabe’s exit from power.
Clinton, meanwhile, shamefully abandoned Somalia after the deaths of American soldiers in Mogadishu – and did nothing in the face of Rwanda’s genocide.
For Obama, Africa so far chiefly remains a backdrop against which he defines his American identity.
As he explained in his memoir Dreams from My Father , visiting his father’s native Kenya for the first time made him feel more American – and less African – than ever.
In deciding to visit Ghana, a former British colony and a leading node in the global slave trade of the eighteenth and nineteenth centuries, Obama bypassed the Kenya of his father. Kenya is embroiled in bitter tribal disputes, and saddled with a brazenly corrupt government.
By contrast, Ghana represents the sunny side Africa.
The country recently completed a well-run election in which the opposition took power.
Its economy is growing. Ethnic relations in this highly diverse nation are as good as they are anywhere in the world.
Obama will be on African soil for a mere two days, during which time he is expected to emphasize America’s role in promoting good governance and non-violence in Africa – goals long high on America’s public agenda.
Obama’s one new priority – to expand US support for African farmers – reflects a shrewd appreciation of how the expansion of agriculture can quickly lift many rural Africans out of poverty.
“The administration plans over a number of years to put a substantial amount of money into agricultural development,” Obama’s choice for Secretary of State for African Affairs, Johnnie Carson, said in advance of the president’s trip.
Don’t expect Obama to confront the most controversial aspect of US relations with Africa: the American military’s new African command.
Bush, who created the command, gave the US Department of Defense new powers to work on civilian issues in Africa and to expand its military partnerships with governments in the region.
Obama isn’t likely to say whether he’ll scale back the US military role in the region, or whether America’s growing reliance on African oil is the real reason – not Obama’s heritage – for wooing Africans. Obama’s lack of candor won’t hurt him in the US, where domestic political calculations take precedence.
In truth, his visit to Africa is a reward to his stalwart African-American supporters, who voted overwhelmingly for him in the November election and who remain one pillar of his base.
For African-Americans, Ghana has special meaning.
The country played an important role in the push for civil rights in America, for instance.
In 1957, when legal segregation seemed entrenched in the US, Ghana’s first president, Kwame Nkrumah, used the occasion of his country’s independence from Britain to highlight the injustices experienced daily by black Americans.
He invited Martin Luther King, Jr. to his inauguration, giving the Atlanta-based civil rights leader a global platform for the first time.
Malcolm X, the black nationalist leader, visited Ghana two years later, and again in 1964.
Nkrumah invited W.E.B. Du Bois, the most important black intellectual of the twentieth century, to Ghana in 1961.
Du Bois became a citizen and lived in Ghana until his death.
Hundreds of African-Americans live year round in Ghana today, some within a short walk of Cape Coast Castle, the slaving fort that shipped human cargo until Britain halted the trade in 1807.
Learned and deeply reflective, Obama knows that black Americans will view his visit to Ghana very differently than white Americans will.
His tendency to view Africa through an American lens is thus both understandable and inevitable.
Yet his African roots give him a unique capacity to transform American relations with Africa, elevating the importance of African self-reliance and achievement, while striving to make American aid more intelligent and effective.
Obama in India
NEW DELHI – Barack Obama, the sixth American president to visit India since it gained independence, arrives at a trying time, both for the United States and for India.
Some of Obama’s closest advisers have just resigned, opening an awkward gap on national security and the economy – the focus of his meetings with India’s government.
For India, the issues on the agenda for Obama’s visit are immense and complex, and the options for resolving them are extremely limited.
Those related to security in Afghanistan and Pakistan are as treacherous as they have ever been.
Bilateral economic, trade, and currency disagreements may not be as bitter as they are between the US and China, but they are thorny, and lack of resolution is making them more intractable.
Nuclear non-proliferation remains one of Obama’s priorities, as does the sale of US civilian nuclear technology to India, for which former President George W. Bush cleared the way.
And Obama will be keen to know what help India can provide with Iran, a country with which India has smooth relations, owing to their shared worries over Afghanistan and Pakistan.
Given this potent list of challenges, what are the prospects for Obama’s passage to India?
Some years ago, I was queried by then US Deputy Secretary of State Strobe Talbott, who was helping to prepare President Bill Clinton’s visit.
As India’s foreign minister at the time, I told him: “Why make the visit destinational?
Be content with the directional,” or some such words. That response retains its flavor today: as new directions in India-US relations are set, new destinations will follow.
All state visits are overloaded with lofty, superfluous rhetoric.
US-India summits are particularly prone to this hubris: the Great Republic meets the World’s Largest Democracy.
It would be better for both countries to shed some of these marigold garlands of cloying adjectives.
Another feature of such summits – the trading of lists of “must do” and “can do” items – also should be retired.
It is both demeaning and tedious to treat an arriving US president as a stars-and-stripes Santa Claus, to be presented with lengthy wish lists.
Likewise, despite America’s pinched economic circumstances, Obama would do well not to use his visit to peddle US wares.
Although trade is an effective lubricant of good relations, these sorts of talks are for the “sherpas,” not Obama and Prime Minister Manmohan Singh, to handle.
These two great countries, “natural allies” in the words of former Prime Minister Atal Bihari Vajpayee, should reflect on what they have accomplished together since 1998, in order to map what lies ahead.
Theirs is now a relationship of equals, so their national interests need to be reconciled on everything from Pakistan to climate change.
Indeed, Obama is placed in a unique position for an American president, a position that he appears to comprehend, though his opponents in the US do not.
Power today begins in the acceptance of the limits upon it.
This is also true of an India that is only now coming to recognize its new status in the world, in which the country’s limits and responsibilities have expanded mightily.
Ours is an unstable neighborhood, one that America has entered without fully understanding the consequences – for India and for the neighborhood.
India must ask Obama hard questions about how security is to be assured, but, before doing so, it needs to ask the same questions of itself.
India must make clear – and the US must recognize – that a sub-continental country of a billion-plus people cannot be kept within the categorical confines of “South Asia.”
The US must accept and candidly discuss the damaging consequences of its military, diplomatic, and political overreach – of a “war too far” that has brought the region to its current ugly impasse.
What can the two countries do, separately and together?
Both leaders must accept that history is destiny, and that the irrefutable logic of geography is a determinant of it.
This is the only relevant and reliable guide in meeting the region’s complex challenges.
The constraints on US options, the veto of circumstances, offers little room for diplomatic improvisation.
Here the greatest constraint is America’s difficult and worsening relationship with Pakistan.
India must understand this troubled partnership, into which America entered with its eyes wide open, though it would help if the US accepted that India has paid – and continues to pay – a very high price on this account.
Only through such acceptance can the two countries chart a common future.
Likewise, it would be unwise for the US gratuitously to offer China a role in the affairs of a region that includes India itself – something that Obama appeared to do during his visit to China earlier this year, when he mentioned China as having a role to play in Kashmir.
The US should also stop questioning India’s relationship with Iran, a neighbor with which India is linked by many centuries of economic, cultural, and even civilizational ties.
Two great peoples and countries, although now locked in a “strategic alliance,” may occasionally fall out of step with one another, as India and the US have – for example, over global climate negotiations.
But, at such moments, Obama might do well to recall Vajpayee’s words during Clinton’s visit, when he quoted Walt Whitman’s poem “Passage to India”:
“Sail forth – steer for the deep waters only,
Reckless O soul, exploring, I with thee, and thou with me,
For we are bound where mariner has not yet dared to go.”
Obamamania
NEW YORK – Why do Europeans adore America’s president-elect, Barack Obama?
Stupid question, you might say.
He is young, handsome, smart, inspiring, educated, cosmopolitan, and above all, he promises a radical change from the most unpopular American administration in history.
Compare that to his rival John McCain, who talked about change, but to most Europeans represented the opposite.
And yet, there is something odd about the European mania for a black American politician, even as we all know that a black president or prime minister (let alone one whose middle name is Hussein) is still unthinkable in Europe.
Or perhaps that is precisely the point.
Europeans have long been hospitable to black American stars.
Think of Josephine Baker, who wowed Parisians and Berliners at a time when blacks could not vote – or even use the same bathrooms as whites – in many parts of the United States.
Cities like Paris, Copenhagen, and Amsterdam offered refuge to black American jazz musicians, who needed a break from institutionalized racism.
The same was true for other artists.
James Baldwin, for example, found a home in France.
Since there were only very few black people in Europe, the adoration of black American stars came easily.
It made Europeans feel superior to Americans. They could pat themselves on the back for their lack of racial prejudice.
When large numbers of people from non-Western countries started to come to Europe after the 1960’s, this proved to be something of an illusion.
Still, the illusion was nice while it lasted, and Obamamania may contain an element of nostalgia, as well as hope.
The other reason for the European love affair with Obama is that he is seen as something more than an American.
Unlike McCain, the all-American war hero, Obama looks like a citizen of the world.
With his Kenyan father, he carries the glamour once associated with Third World liberation movements.
Nelson Mandela inherited that glamour; indeed, he personified it.
Some of that has rubbed off on Obama, too.
This did not help him much at home.
Indeed, it could easily have hurt him.
Republican populists have long tried to depict their Democratic opponents, often with great success, as “un-American” elitists, intellectuals, and the kind of guys who speak French – in short, “Europeans.”
When Obama made his rousing speech at the Berlin Tiergarten in July, in front of 200,000 cheering Germans, his popularity ratings at home actually fell, especially in the old industrial “rustbelt” of Ohio and Pennsylvania.
He came dangerously close to looking too “European.”
But the real Europeans loved him for it.
But the main reason for Obamamania may be more complex.
It has become popular of late for European pundits and commentators to write the US off as a great power, let alone an inspirational one.
In this, they have more or less followed public opinion.
Many liberal-minded people expressed, often sorrowfully, their deep disillusion with America during the dark Bush years.
The nation they had grown up looking up to, as a beacon of hope – a place that, while flawed, still inspired dreams of a better future and produced great movies, soaring buildings, rock ‘n’ roll, John F. Kennedy, and Martin Luther King – had been hopelessly tainted by reckless wars, officially sanctioned torture, coarse chauvinism, and extraordinary political arrogance.
Others expressed the same disillusion with a gloating air of schadenfreude .
At last, that big, arrogant, fatally seductive nation, which left the Old World in its shade for so long, had been brought to its knees.
Watching the economic rise of China, Russia, and India, and the American debacles in the Middle East, it was tempting to believe that US power really did not count for very much anymore.
A multi-polar world, many thought, would be vastly preferable to more Pax Americana.
Yet such projections could never entirely disguise a nagging anxiety.
How many Europeans (or Asians, for that matter) would really be happier being subjected to the superior power of China or Russia?
Under all the confident-sounding dismissals of US power, there is still some yearning to return to a more reassuring time, when the democratic world could lay its collective head on Uncle Sam’s broad shoulders.
This, too, is probably an illusion.
Too much has changed since the Marshall Plan, the Berlin Airlift, and the Cuban Missile Crisis.
But I do not believe that the American dream has died in Europe quite yet.
Obamamania seems to have revived it.
Obama’s election has demonstrated that things are still achievable in the US that remain unthinkable elsewhere.
As long as this is so, the US, as primus inter pares , can still be looked up to as the defender of our freedoms.
Europeans – and others – may regard China’s rise with awe, and hope to find a modus vivendi with Russia, but without the hopes inspired by that extraordinary republic, which represents the worst and the best of our battered Western world, we would all be much worse off.
In their hearts, most Europeans know this.
That is why they are going crazy over Barack Obama’s election.
Obama Meets the World
CAMBRIDGE – Many people will try to set President Barack Obama’s priorities, but one person is sure to have a major effect.
George W. Bush has bequeathed an unenviable legacy: an economic crisis, two wars, a struggle against terrorism, and problems across the Middle East and elsewhere.
If Obama fails to fight these fires successfully, they will consume his political capital, but if all he does is fight them, he will inherit Bush’s priorities.
The new president must deal with the past and chart a new future at the same time.
Foremost on Obama’s agenda will be the economic crisis, where his domestic and international priorities intersect.
He will need to stimulate the economy and avoid protectionist pressures at home, while also taking the lead in restructuring the global financial system.
Cooperation with others will be essential.
That Bush convened a G-20 meeting in November sets a useful precedent of going beyond the G-7 to include emerging economies such as China, India, and Brazil.
In second place must be America’s two current wars.
Obama campaigned on a promise to withdraw American combat brigades (but not troops engaged in training and counterterrorism) from Iraq by mid-2010. Now the Bush administration and the Iraq government have signed an agreement for troop withdrawal by late 2011.
These timetables’ effectiveness will depend on events on the ground, including political compromises inside Iraq and dialogue with Iraq’s neighbors, but a clear sense of direction has been established.
Afghanistan looks more difficult, given the Taliban’s reinvigoration with help from groups in Pakistan.
Obama has called for additional United States and NATO troops to stabilize the situation, but too many foreign troops will only increase Afghan nationalist reactions.
We cannot simply shoot our way out of the problem.
Increased training of the Afghan army and police, and a political dialogue inside the country and with neighbors will be important components of any solution.
The third priority will be what Bush misleadingly called a “global war on terrorism.”
The Obama administration will have to pursue the struggle against Al Qaeda, but should drop the war rhetoric.
It makes little sense to declare war on a tactic, and experience has proven that the terminology merely reinforces the narrative that bin Laden seeks to promote, which is why Britain now avoids the phrase.
A successful strategy against Al Qaeda will require close intelligence cooperation with other countries and policies that attract the support of mainstream Muslim opinion.
The Middle East represents a fourth set of urgent priorities.
Iran has now enriched enough uranium to produce (in principle) one nuclear bomb.
Nonetheless, there remains time for a diplomatic initiative that includes Europe, Russia, and China.
Given the unattractiveness of choosing between a pre-emptive attack on Iran or allowing Iranian nuclear weapons to destabilize the Gulf region, Obama has pledged to conduct a broad diplomatic dialogue with Iran without the preconditions that hampered Bush.
But successful diplomacy will require repairing relations with Russia.
Also high on the priority list in the Middle East will be to sustain and enhance Bush’s efforts to bring about a two-state solution between Israel and Palestine, and to encourage the incipient dialogue between Israel and Syria.
Major issues will also arise in Africa, Latin America, and Asia, and relations with these areas will grow in importance.
Fortunately, none of them became political footballs in the recent election campaign.
In Asian policy, with the exception of North Korea, the Bush legacy is better, bequeathing good relations with the key states of Japan, China, and India.
The “Bush Doctrine” of preemptive war and coercive democratization, coupled with a unilateralist style, was based on a flawed analysis of power in today’s world.
The paradox of American power is that the strongest country since the days of Rome cannot achieve its objectives acting alone.
Obama’s election has done much to restore American “soft” power, but he will need to follow up with policies that combine hard and soft power into a smart strategy of the sort that won the Cold War.
Democracy promotion is better accomplished by soft attraction than hard coercion, and it takes time and patience.
Here Obama should lead by example and remember the historical wisdom of being Reagan’s “shining city on a hill.”
Closing the prison camp at Guantánamo Bay, Cuba, would send such a signal.
Right now, Bush’s calls for democracy are heard as an imperial imposition of American institutions.
We need less Wilsonian rhetoric about making the world safe for democracy, unless combined with John F. Kennedy’s calls to “make the world safe for diversity.”ampnbsp;
A “liberal realist” policy should look to the long-term evolution of world order and realize the responsibility of the international system’s strongest country to produce global public goods – things people and governments around the world want but cannot otherwise attain – as Britain did in the nineteenth century.
America should similarly promote an open international economy and commons (seas, space, Internet), mediate international disputes before they escalate, and develop international rules and institutions.
Early signals that the US will take the lead in dealing with global climate change will be an important start.
The US can become a smart power by once again investing in global public goods.
That means support for international institutions, aligning America with the cause of international development, promoting public health, increasing cultural exchanges, maintaining an open economy, and dealing seriously with climate change.
Indeed, Obama’s most important priority must be to show that America is back in the business of exporting hope rather than fear.
Obama’s Passage to India
CAMBRIDGE – Indian Prime Minister Narendra Modi’s vigorous foreign policy in the seven months since he took office has surprised observers.
After inviting the leaders of Pakistan and other neighboring countries to his inauguration, he embarked on trips to China, Australia, and the United States.
More recently, he welcomed Russian President Vladimir Putin to New Delhi and signed a large number of trade deals and orders to import Russian nuclear reactors.
India, Modi is telling his fellow citizens, is strong and well regarded around the world.
Next month, US President Barack Obama will travel to New Delhi as Modi’s special guest at events commemorating Republic Day, India’s national holiday – just three months after the two leaders held substantive talks in Washington, DC.
The visit should thus be regarded as a clear signal of Obama’s desire, no less than Modi’s, to strengthen US-India relations.
So what is likely to be on Obama’s mind when he meets his Indian counterpart again, and what does he think can be done to cement bilateral ties?
Three issues stand out – beginning with trade, which is as important politically as it is economically.
Obama hopes that the Trans-Pacific Partnership will be concluded in 2015 and ratified by the US Senate.
The TPP will not be as powerful a free-trade agreement as originally intended, owing to exclusions and a very long phase-in period.
But it will tie the US and 11 other Pacific Rim countries (including Japan but excluding China) together in a new economic bloc.
Obama should be eager to stress that India’s exclusion from the TPP is a matter solely of geography – India does not abut the Pacific – and that the US wants to increase bilateral trade and direct investment by American firms.
The second issue is terrorism.
The US authorities are worried that American citizens who have been fighting with the Islamic State and Al Qaeda in the Middle East will return home to commit terrorist acts.
India has experienced horrific acts of terrorism on its own territory.
Continued cooperation between the US and Indian intelligence agencies can help both countries prevent future incidents.
Terrorism includes not just physical violence, but also assaults in cyberspace.
China, Russia, and Iran have been the source of frequent cyber attacks on banks, companies, and government agencies;
North Korea, the US alleges, was behind the recent breach of Sony Pictures’ computers.
Though Obama presented evidence to Chinese President Xi Jinping of technology theft by hackers based in China, the Chinese authorities continue to deny it.
More recently, Russia and others have been planting malware in the control systems of the US power grid and other sensitive networks.
Looking ahead, the US worries about cyber attacks by non-state actors like the Islamic State and Al Qaeda.
Although these groups’ members may lack the sophistication to commit such acts, they may try to hire individuals with the necessary skills.
India has a large number of talented computer engineers, including some who might be sympathetic to the Islamist cause.
The US and India could both benefit from cooperating to prevent and disrupt such recruitment efforts.
The third issue on Obama’s mind is bound to be China’s asserted goal of dominating Asia and excluding the US from the region.
Chinese hegemonic ambition runs counter to India’s strategic interests as well – reason enough for Modi’s eagerness to strengthen his country’s relations with its neighbors as well as with the US.
Obama has already made it clear that the US understands that Modi’s willingness to cooperate with Russia, despite Western sanctions imposed on the country, stems from India’s desire to discourage a Sino-Russian alliance against it.
Modi won a landslide victory in an election that reflected the Indian public’s disappointment with the policies and performance of the previous government, led by the Indian National Congress.
Though India had experienced annual real GDP growth of more than 8% for several years, growth has slowed since 2010, to less than 5% in 2013, owing to a populist shift in policies dictated by Congress party leader Sonia Gandhi.
By contrast, the Modi government plans to pursue a pro-growth agenda that includes reducing bureaucratic delays, increasing infrastructure investment, stimulating manufacturing activity, and shifting to a simpler unified tax system.
Modi’s agenda also evidently includes an active foreign policy – as it should.
Cultivating India as a reliable partner in the global economy and in international affairs is a high priority for the US as well.
Obama’s visit to India can help to realize that relationship’s potential.
Immigration and American Power
CAMBRIDGE – The United States is a nation of immigrants.
Except for a small number of Native Americans, everyone is originally from somewhere else, and even recent immigrants can rise to top economic and political roles.
President Franklin Roosevelt once famously addressed the Daughters of the American Revolution – a group that prided itself on the early arrival of its ancestors – as “fellow immigrants.”
In recent years, however, US politics has had a strong anti-immigration slant, and the issue played an important role in the Republican Party’s presidential nomination battle in 2012.
But Barack Obama’s re-election demonstrated the electoral power of Latino voters, who rejected Republican presidential candidate Mitt Romney by a 3-1 majority, as did Asian-Americans.
As a result, several prominent Republican politicians are now urging their party to reconsider its anti-immigration policies, and plans for immigration reform will be on the agenda at the beginning of Obama’s second term.
Successful reform will be an important step in preventing the decline of American power.
Fears about the impact of immigration on national values and on a coherent sense of American identity are not new.
The nineteenth-century “Know Nothing” movement was built on opposition to immigrants, particularly the Irish.
Chinese were singled out for exclusion from 1882 onward, and, with the more restrictive Immigration Act of 1924, immigration in general slowed for the next four decades.
During the twentieth century, the US recorded its highest percentage of foreign-born residents, 14.7%, in 1910.
A century later, according to the 2010 census, 13% of the American population is foreign born.
But, despite being a nation of immigrants, more Americans are skeptical about immigration than are sympathetic to it.
Various opinion polls show either a plurality or a majority favoring less immigration.
The recession exacerbated such views: in 2009, one-half of the US public favored allowing fewer immigrants, up from 39% in 2008.
Both the number of immigrants and their origin have caused concerns about immigration’s effects on American culture.
Demographers portray a country in 2050 in which non-Hispanic whites will be only a slim majority.
Hispanics will comprise 25% of the population, with African- and Asian-Americans making up 14% and 8%, respectively.
But mass communications and market forces produce powerful incentives to master the English language and accept a degree of assimilation.
Modern media help new immigrants to learn more about their new country beforehand than immigrants did a century ago.
Indeed, most of the evidence suggests that the latest immigrants are assimilating at least as quickly as their predecessors.
While too rapid a rate of immigration can cause social problems, over the long term, immigration strengthens US power.
It is estimated that at least 83 countries and territories currently have fertility rates that are below the level needed to keep their population constant.
Whereas most developed countries will experience a shortage of people as the century progresses, America is one of the few that may avoid demographic decline and maintain its share of world population.
For example, to maintain its current population size, Japan would have to accept 350,000 newcomers annually for the next 50 years, which is difficult for a culture that has historically been hostile to immigration.
In contrast, the Census Bureau projects that the US population will grow by 49% over the next four decades.
Today, the US is the world’s third most populous country; 50 years from now it is still likely to be third (after only China and India).
This is highly relevant to economic power: whereas nearly all other developed countries will face a growing burden of providing for the older generation, immigration could help to attenuate the policy problem for the US.
In addition, though studies suggest that the short-term economic benefits of immigration are relatively small, and that unskilled workers may suffer from competition, skilled immigrants can be important to particular sectors – and to long-term growth.
There is a strong correlation between the number of visas for skilled applicants and patents filed in the US.
At the beginning of this century, Chinese- and Indian-born engineers were running one-quarter of Silicon Valley’s technology businesses, which accounted for $17.8 billion in sales; and, in 2005, immigrants had helped to start one-quarter of all US technology start-ups during the previous decade.
Immigrants or children of immigrants founded roughly 40% of the 2010 Fortune 500 companies.
Equally important are immigration’s benefits for America’s soft power.
The fact that people want to come to the US enhances its appeal, and immigrants’ upward mobility is attractive to people in other countries.
The US is a magnet, and many people can envisage themselves as Americans, in part because so many successful Americans look like them.
Moreover, connections between immigrants and their families and friends back home help to convey accurate and positive information about the US.
Likewise, because the presence of many cultures creates avenues of connection with other countries, it helps to broaden Americans’ attitudes and views of the world in an era of globalization.
Rather than diluting hard and soft power, immigration enhances both.
Singapore’s former leader, Lee Kwan Yew, an astute observer of both the US and China, argues that China will not surpass the US as the leading power of the twenty-first century, precisely because the US attracts the best and brightest from the rest of the world and melds them into a diverse culture of creativity.
China has a larger population to recruit from domestically, but, in Lee’s view, its Sino-centric culture will make it less creative than the US.
That is a view that Americans should take to heart.
If Obama succeeds in enacting immigration reform in his second term, he will have gone a long way toward fulfilling his promise to maintain the strength of the US.
Obama of Arabia?
DENVER – Not since 1989 has the world seen such an all-consuming, all-engulfing wildfire of freedom and democracy, whose burning passions are sweeping across a region vast and old and desperately in need of reform.
From the Maghreb to the Levant to the Arabian Peninsula, Arab history is on the move.
A new generation of leadership seems poised to take over.
Moments like these are especially challenging for foreign policymakers, who must keep one eye on the world as it is and the other on the world as it might be in the future.
In trying to do just that, US President Barack Obama has been harangued about the need to “get on the right side of history,” or, to quote Bob Dylan, “to get out of the new [road] if you can’t lend your hand.”
These are, indeed, delicate and changing times for the United States, especially at a time when Americans expect their president to be the “emoter” in chief.
How Obama manages calls from both the left and the right for more action could well shape the environment in which the process – owned and managed by Arabs – eventually unfolds.
As it picks its way through crisis after crisis in the Arab world, the Obama administration would do well to follow a few guidelines that do not change with every news cycle.
First, staying on the right side of history is one thing, but suggesting that the US is inspiring, if not directing, the Arab revolts is quite another.
Avoiding this perception is sometimes difficult: in much of the region, US media are perceived as an arm of a supposedly omnipotent America.
So, when the reporting of US correspondents borders on cheerleading (a relatively common occurrence), the perception that America is masterminding events is given fresh impetus.
It is thus wise for Obama not to be out directing traffic in the crise du jour.
There are times when it is best for a US president to lay low, even if it makes him seem absent and disengaged.
This is one of those times.
Second, Americans often pride themselves on taking a transactional approach to the world.
But what is happening in the Arab world is not a series of transactions; it is a tectonic cultural shift in terms of generational attitudes, gender relations, and urban-rural tensions.
Democracy versus dictatorship is, of course, one fault line, but so, too, as we know from Bahrain and Saudi Arabia, is the 1,300-year-old Shia-Sunni divide.
Policies designed for one fault line are not necessarily appropriate for the latter.
Accurate analysis of what is taking place on the ground is essential, but this can prove difficult in an echo chamber of globalized cultural icons.
While many Americans would like to think that the battle lines have been drawn between Tweeters and non-Tweeters, between those on Facebook and those without profiles, it is more likely that some other identities account for what is happening.
Of course, nobody likes to refer to “tribalism” or “clan” conflict, but these elements of identity often play a key role in determining people’s willingness to take to the streets.
In fact, the aura of political incorrectness that surrounds such terms reflects the absence of any similar organizing principle in contemporary globalized societies.
But that is no reason to rule out such categories of analysis where they do apply.
Third, there is at least one motivation behind the Arab revolts that permeates Western politics as well: the urge to forget the facts, the risks, and the future, and just throw the rascals out.
We see this sentiment reflected in the slogan that has become ubiquitous in the region: “The people want to bring down the regime.”
Some of these rascals are indeed, to put it gently, past their shelf life.
In some cases, they and their cronies have stolen much of the national wealth.
Who is to say that this motivation should be held in any lower regard than that of those manning the ramparts of democracy?
There is much to respect in the “throw the rascals out” approach.
Unfortunately, it does not always lead to more democracy.
Finally, the Obama administration should bear in mind that in some countries, the old order will be replaced quickly.
In time, however, the changes might amount to less than was first hoped, and could actually bring about a situation that arguably is worse than the status quo ante (the French Revolution, the Bolshevik Revolution, and the Iranian Revolution come to mind).
In other countries, of course, the outcome might be much more promising (The American Revolution, Eastern Europe in 1989).
Some historical processes, however quickly launched, will eventually falter.
A dictator who has shown no concern for his people might actually prove quite talented at clinging to power.
In these circumstances, there will be inevitable calls for the West – namely the US – to overthrow the tyrant militarily.
When such prescriptions present themselves, policymakers should take a deep breath and ask how the tyrant got there in the first place.
When US-led forces overthrew Saddam Hussein in 2003, far too little effort was made to understand how a peasant tyrant like Saddam was able to seize power and hold it for so long.
How did he manipulate Sunni-Shia relations, or manage the complexities of Iraq’s tribal system, so well?
Of course, terror was at the root of Saddam’s approach, but so, too, was a grasp of internal political and social processes.
The US – now in the ninth year of an engagement that has cost it more than $1 trillion, with thousands of American and Iraqi lives lost –would have done well to understand those processes with equal thoroughness.
Surely, that lesson should be applied as the US responds to the emergence of a new – but not necessarily newly democratic – Arab world.
Obama’s Asian Vision
NEW YORK – Now that Barack Obama has made history by being elected President of the United States, people throughout the Asia-Pacific region fervently hope he will focus on Asia in a way that he did not during the election season.
In the past few months, every time I visited an Asian country – whether South Korea or India, China or Japan – I was asked repeatedly about candidate Obama’s positions on three issues: trade, foreign policy, and the new geo-economic order.
We all now hope that President-elect Obama will provide the answers, not only in words, but also in actions.
Policy wonks and interested Asians alike often say that when Republicans are in power in America, Asians breathe a confident sigh of relief.
Their assumption is that Republicans will back free trade and oppose protectionism.
This time around, they have not heard much from the President-elect, who is a Democrat, on trade with Asia, and what they have heard about his position on the North American Free Trade Agreement – an alleged desire to rewrite that trade pact unilaterally – does not inspire confidence.
At the same time, countries like India feel that the US, along with Europe, have been on both sides of “free” and “fair” trade – but always from a narrow nationalistic perspective.
If the US is serious about “fair” trade, they say, the new administration will need, for example, to deal with the unfairness of agricultural subsidies, which led to the collapse of the Doha round of World Trade Organization talks.
Most importantly, a trade policy must be articulated that is both free and fair (not only for US workers, but also for Asian workers), and that reassures Asians that Obama will be aware of their needs.
While the US economy falls into a deep recession, the economies of large Asian countries like China and India will continue to grow at an annual rate of 7% to 9%.
They will remain an important source of import demand, especially for high technology and industrial goods.
This could be a great boon to the US economy.
Asian leaders have often complained that at a time when Asia became increasingly interconnected and China began to enlarge its sphere of influence, America was largely absent in the region.
Indeed, for the past seven years America’s foreign policy seems to have been conducted entirely through the prism of the “war on terror” and the Iraq war.
While there were some singular bilateral accomplishments, such as the adoption of the US-India civil nuclear energy deal, the US has been perceived to be less effective in dealing with the region’s burgeoning multilateral frameworks.
Now, fully aware of Obama’s claims for a presidency that will be about the future, Asians are eager to hear about his vision of the Asia-Pacific region and how the US will deal with Asia’s giants – China and India – while maintaining strong connections to Japan.
The need for Obama to address the region’s new realities early in his tenure has been underlined by the current financial crisis, which has made abundantly clear that the center of global economic power has shifted toward the East.
It is also clear that the West’s future role will depend on how America manages this new distribution of power.
British Prime Minister Gordon Brown has begun to talk about a Bretton Woods II that would give a bigger voice to Asia in the world’s great multilateral financial and economic institutions, and French President Nicolas Sarkozy has asked that China help the West during these difficult times.
And, while scholars have begun to talk about building an Asia-Pacific community that can match the Atlantic community’s extensive network of relationships, there has been no clear signal from the US government about America’s role in this transformation. So Asians are keen to hear Obama’s thoughts about a new or renewed international system, and hope that his vision of a new global order will incorporate the rising countries of Asia as America’s partners.
I was in Korea last week, and several of my friends and colleagues, some in prominent public positions, were thrilled at the prospect of the new US president.
They marveled at the fact that America’s democracy can actually make it possible for a youngish African-American to become the leader of the free world.
Now, this rising region is desperate to hear Obama’s thoughts about America’s role in Asia, thoughts that are commensurate with Asia’s importance – and with the scope of his vision.
Battleground Budget
MILAN – The world’s developed economies, of which the United States is by far the largest and systemically most important, face a range of difficult political and social choices.
President Barack Obama’s proposed US budget acknowledges and addresses those choices and tradeoffs directly and fully for the first time in the post-crisis period.
Obama’s proposal is an important, honest, and politically courageous document.
The debate that follows will largely determine whether the US shifts toward a strong, inclusive, and sustainable pattern of growth and employment, and how the burden of moving to such a path will be shared by Americans of various ages, educational levels, incomes, and wealth.
We know that powerful technological and global market forces have reduced dramatically the number of routine professional and blue-collar jobs, shifted employment options for the middle class toward the non-tradable side of the economy, and channeled growth in national income toward capital and high-end employment, with stagnating income elsewhere.
Job creation remains weak, and employment continues to diverge from growth.
These trends cannot be blamed entirely on poor policy choices or shortsighted government.
They arise mainly from an increasingly integrated global economy’s shifting technological landscape; but they have been exacerbated by a systematic pattern of public-sector underinvestment.
The lesson from many developed and developing countries is that underinvestment in infrastructure, human capital, institutions, and the economy’s knowledge and technology base reduces long-term growth.
Short- and medium-term growth can be sustained for a while by substituting public and private debt for investment – that is, borrowing against future income and consumption.
But this approach establishes a self-limiting pattern, because balance sheets are damaged, demand falters, and expectations have to be adjusted downward.
This brings us to the choices that Obama’s budget embodies.
First there is the issue of how fast to reduce government deficits and the accumulation of public debt.
Sudden fiscal contraction would reduce domestic aggregate demand faster than the economy’s deleveraging and structural shifts could replace it, thereby killing off growth and hiring, with adverse feedback effects on budget deficits.
But delaying the debt reckoning for too long would undermine confidence in the US government’s capacity for fiscal discipline.
Deficits have to fall within a time horizon of 5-10 years.
The alternative is either a sovereign-debt crisis, followed by a destructive spike in borrowing costs, or a growing burden for subsequent generations of taxpayers.
In an ideal world, where compromise is unnecessary, US fiscal policy would maintain the commitments embedded in the social-welfare system, even as demographic and other forces drive up costs (especially for health care).
It would also maintain current consumptions levels and avoid tax increases, while redressing public-investment shortfalls in order to boost growth and expand employment options for today’s middle class and future generations.
Finally, future generations would not be asked to bear the entire burden of rebalancing.
Obviously, it is impossible to reconcile all of these objectives.
To be fair, some reforms – including tax, regulatory, and health-care measures – will help to restore balance without imposing large additional costs on the public sector.
But these are not sufficient to rebalance the economy and restore its growth momentum.
Simply put, one cannot sustain current levels of consumption and entitlements without crowding out public-sector investment, unless one believes that the state’s borrowing power is unlimited, and that the intergenerational burden shift is unimportant.
So choices have to be made.
Gridlock, too, implies a choice –&#160;one that ensures that some version of the status quo will be the outcome.
What would that look like?
Here some guess work is required.
Entitlement programs would likely be reduced, but not enough to offset a substantial intergenerational burden transfer.
Taxes might rise somewhat in the high-income ranges, with the proceeds going to fund entitlements and redistribution.
The desire to avoid substantial tax increases (and to sustain consumption levels) will almost surely be reflected in a continuing shortfall of public-sector investment, in turn undermining long-term growth.&#160;
Obama’s proposed budget recognizes that all objectives and expectations cannot be met, and that growth is partly a distributional issue now and an intergenerational issue (and potentially one of inclusiveness and social stability) in the longer term.
It is an invitation to the US Congress and the American public to acknowledge and address the choices and tradeoffs that are needed to establish a sustainable pattern of economic growth – and to ensure a fair distribution of the burden of getting there.
The choices are more extreme in countries where the imbalances are more severe and markets suffer more policy-induced impediments to the private-sector flexibility, mobility, and dynamism that continue to benefit the US.
In Italy and Spain, growth is negative, and youth unemployment is 35% and 55%, respectively.
To be sure, this is a moral issue, but it is also an issue of political and social stability.
Every country has its own version of a social contract that defines the rights and responsibilities of citizens, the role of the state, and the idea of inclusiveness.
The most successful public policies and fiscal choices are those that are not only guided by the enduring values embedded in the social contract, but that are also adapted to changing demographic, technological, and global circumstances.
That sometime means making hard choices of the type that the US and many other developed countries are facing now.
If we make these choices poorly, growth will suffer and future distributional choices will be far more painful.
Obama’s China Card?
MELBOURNE – According to the United States Federal Reserve, Americans’ net worth has fallen 40% since 2007, returning to its 1992 level.
Progress towards recovery will be slow and difficult, and the US economy will be weak throughout the run-up to November’s presidential and congressional elections.
Can any incumbent – and especially President Barack Obama – win re-election in such conditions?
To be sure, the blame for America’s malaise lies squarely with Obama’s predecessors: Bill Clinton, for encouraging the Fed to take its eye off financial-market supervision and regulation, and George W. Bush, for his costly wars, which added massively to US government debt.
But, come Election Day, many (if not most) Americans are likely to ignore recent history and vote against the incumbent.
Given this, it would not be surprising if Obama and others in his administration were seeking non-economic issues to energize his campaign.
National-security problems in general, and the challenge posed by China in particular, may be shaping up as just such issues.
Obama’s foreign and defense policies have been assertive, to say the least, especially in the Middle East and the Pacific.
He has sanctioned far more unmanned drone strikes than Bush did; extended the security services’ intrusion into Americans’ privacy; allowed the CIA to continue its rendition program; approved trials of accused terrorists by flawed military tribunals; and has not shut Guantánamo Bay.
Moreover, the US is increasing its troop presence in the Pacific at a time when it already has more military force in the region than all other countries combined.
Six aircraft carriers, with their accompanying support vessels – indeed, 60% of America’s entire navy – are now stationed in the Pacific.
In addition, Obama’s administration has been conducting talks with the Philippines to increase and enhance naval cooperation.
And Singapore has been persuaded to host four advanced naval ships.
Australia has established a base for marines in Darwin and another for unmanned spy planes on the Cocos Islands.
That is not all.
In a move that has received little or no publicity, congressional Republicans added a clause to the Defense Appropriation Bill for next year requiring the Obama administration to consult with countries in the Western Pacific about stationing even more forces – including tactical nuclear weapons – in the region.
Senator Richard Lugar has advised me that since there has been little or no objection to the amendment from the White House, he sees no reason why it will not pass the Senate.
At a recent security conference in Singapore, US Secretary of Defense Leon Panetta emphasized the American military build-up in the region.
Afterwards, he went to Vietnam, allegedly for discussions about the US Navy’s use of Cam Ranh Bay, a major American base during the Vietnam War.
The US, like Australia, denies that all of this adds up to a policy of containment aimed at China.
But few in the Western Pacific see it that way.
Panetta’s visit to Vietnam followed hard on US Secretary of State Hillary Clinton’s visit to Beijing for strategic and economic talks.
Those talks seemed to go well, but it is becoming increasingly clear that the US is pursuing a two-track policy: talks, yes, but a build-up and repositioning of US military power in the Pacific just in case.
All of this is happening at a time when China is preparing for a change of leadership.
I happen to believe that the political transition will occur smoothly.
Others suggest that it will be – and already is – a difficult period of turmoil and uncertainty.
The Obama administration may believe that toughness directed at China will generate electoral support in the US.
During major international incidents or crises, America has seldom voted against an incumbent president.
But has he properly reckoned with how provocative his policies are to China?&#160; &#160;&#160;&#160;
None of this is meant to suggest that the Pacific region does not need America.
But, while America obviously has a significant role to play in the region, the US should have learned by now that its political objectives are unlikely to be achieved by military means.
The Chinese themselves do not want the Americans to leave the Western Pacific, as that would make smaller countries on China’s periphery even more nervous about Chinese power.
China is mature enough to understand this; nonetheless, a major US military build-up throughout the region is another matter.
These are dangerous days, not only economically, but also strategically.
We really do need to ask whether Obama is trying to play a China card to shift the electoral scales in his favor.
If that is his intention, it is a move fraught with great danger.
Australia should be saying to the US that it will have none of this.
I would sooner abrogate the ANZUS Treaty with New Zealand and the US – that is, I would sooner end defense cooperation with the US – than allow nuclear missiles to be sited on Australian territory.
The current Australian government would not take such a step, and the opposition would be unlikely to do so as well.
But more and more Australians are beginning to question the closeness and wisdom of our strategic ties to the US.
Perhaps our best hope for stability and peace lies in China’s refusal to be provoked.
The Chinese understand the game being played.
I suspect that they will remain on the sidelines during the US election campaign.
Obama’s Chinese Balance Sheet
CAMBRIDGE, UK – US President Barack Obama’s first trip to China was like a splendid stage play.
The performance was long rehearsed in both Washington and Beijing, because both governments needed at least the appearance of a successful visit.
China’s ruling Communist Party needed Obama’s unequivocal endorsement of China’s increasingly important international role in order to buttress its domestic legitimacy.
The US needed China’s cooperation to demonstrate the effectiveness of Obama’s new strategy of collaborative global leadership.
Now that the play is over and the applause has died down, it is time to check the balance sheet and see how much Obama achieved and how much he conceded.
On the positive side of the ledger, Obama received ceremonial treatment not normally accorded to visiting foreign leaders, even other visiting US presidents, demonstrating the importance China’s government attached to the visit.
China’s President Hu Jintao sent his likely successor, Vice President Xi Jinping, to greet Obama at Beijing Airport, going well beyond the usual protocol.
And Hu himself dined with Obama twice during his two-day stay in Beijing – a gesture never made to any visiting foreign leader, including Obama’s predecessor, George W. Bush.
Obama also initially appeared to make some progress in giving voice to the universal values of human rights and democracy.
He met with students in Shanghai in his favorite “town-hall” format, which allowed for face-to-face discussions with young Chinese.
Moreover, China’s government allowed Nanfang Zhoumo , the country’s most liberal newspaper, to conduct a 12-minute exclusive interview with Obama.
But the Chinese public soon discounted the value of these political set pieces.
People quickly discovered that the “students” allowed to ask questions at Obama’s town-hall meeting in Shanghai were young Communist party activists.
Moreover, unlike with other US presidents, the event was not broadcast nationwide, and Nanfang Zhoumo’s full interview with Obama did not appear in the newspaper, despite the Communist Party propaganda departments’ advance approval of all the interview questions.
And the negative side of the ledger?
Obama gave up two things that have usually been at the top of the agenda when US presidents meet with Chinese leaders.
First, Obama did not openly criticize the Chinese government’s notorious human rights record, nor did he use his influence to persuade China to release any prisoner of conscience, as his US predecessors always did when visiting the country.
While Obama toasted President Hu, Liu Xiaobo, a famous Chinese dissident, remained shut away in an unknown location, having vanished last December because of his leading role in drafting a written appeal for constitutional rights.
Soon after Obama left China, two other writers, Huang Qi and Tan Tiandun, were sentenced to prison.
Their crime was to investigate cases of corruption by local government officials that were linked to the deaths of tens of thousands of students in the Sichuan earthquake of May 2008.
Second, Obama did not seriously seek to resolve existing US-China economic disagreements, particularly over trade.
With China running a seemingly perpetual external surplus, foreign-currency reserves have continued to mount even during the global economic crisis, with net growth reaching $140 billion in the third quarter of this year.
China’s main trade partners are deeply worried about the consequences of this continuing imbalance.
They urge China’s government to reduce its export subsidies and to allow the yuan to appreciate, expecting such measures to reduce their trade deficits, help their economies recover, and create more jobs.
On this front, however, China’s leaders made no compromise with Obama.
So, on balance, Obama’s first trip to China achieved relatively little.
Moreover, what he did achieve looks superficial, while what he gave up seems substantial.
Of course, this is partly because of the changes in the relative economic and political power of the US and China over the past decade, and especially during the current global economic crisis.
However, the sizable deficit on the balance sheet of Obama’s China trip could have been much lower if Obama had paid more attention to substance.
It seems that Hu Jintao is more skillful than the polished Obama at maximizing his gains at little cost.
Obama’s Difficult Fiscal Summer
PALO ALTO – Barack Obama’s administration suffered a string of fiscal setbacks this summer.
But has it learned anything in recent months?
First, at the G-20 Summit in Canada, President Obama was soundly rebuffed by Canadian Prime Minister Stephen Harper, Great Britain’s new prime minister, David Cameron, and German Chancellor Angela Merkel, among others, on his demand for additional fiscal stimulus (more government spending).
They are instead pursuing fiscal consolidation, following the immense explosion of public deficits and debt in the 2008-09 recession, and have called for cutting deficits in half by 2013 and stabilizing the government debt-to-GDP ratio by 2016.
Obama said at the summit that he will propose tough deficit-reduction measures next year.
But talk is always cheaper than action.
Thus far, the Obama administration has followed the opposite strategy, letting rip with new spending, while hoping that concern over deficits and debt will lead to pressure for higher taxes, possibly even a European-style value-added tax.
But American voters aren’t cooperating.
To the surprise of many on the political left and most pundits, the clamor for a big expansion of government has not materialized.
Instead, there has been a backlash against the barrage of federal government spending, deficits, and debt.
Most political prognosticators are expecting large losses for Democrats in the November 2010 mid-term elections over this issue.
Voters want less spending, not higher taxes.
They sense that the American economy has out-performed the Western European economies largely because of its less expansive government.
Second, the International Monetary Fund, under the G-20’s “Mutual Assessment Process,” suggested that the United States cut its fiscal deficit by 3% of GDP more than planned – over $400 billion in additional cuts per year.
The IMF believes current fiscal plans will deter US economic growth.
Recently, the European Central Bank reiterated its position that serious fiscal consolidation would generate enough increase in private-sector confidence that gains in spending by households and businesses would more than offset lower spending by governments.
The OECD, however, cautions governments not to consolidate too rapidly in a slow global recovery.
America’s major trading partners want the US to grow and buy more of their exports.
As their economies recover, massive US government borrowing also will crowd out their government and private borrowers.
The US deficit for 2010 is roughly $1.3 trillion.
That is larger than the elevated borrowing by all other G-7 countries – the United Kingdom, France, Germany, Italy, Japan, and Canada– combined, plus profligate Portugal and Greece.
In short, the rest of the world wants the US to get its fiscal house in order as soon as possible.
Third, the administration issued its mid-year budget update, which projects huge deficits as far as the eye can see.
The proposed solution: a commission to recommend a path to balance the primary deficit (the deficit excluding interest payments) in 2015.
Presidents used to propose paths to a balanced budget.
Now Obama wants to shift responsibility to an independent commission composed of Democrats and Republicans.
Moreover, the goal of balancing the primary budget in 2015 is hardly encouraging.
By then, Obama would have almost doubled the government debt-to-GDP ratio from an inherited safety zone of 40% to a danger zone of almost 80%, a level not seen since the immediate aftermath of World War II.
And, of course, the longer-term deficits, driven by baby-boomer retirements and rising health and pension costs per beneficiary, grow progressively worse thereafter (the commission will also recommend how to get the longer-term deficit under control).
Fourth, the House of Representatives decided not even to attempt to pass a budget this year.
This remarkable evasion is the first time the House has not passed a budget since the procedural reforms 35 years ago created the congressional budget committees and rules that legislators were supposed to use to control deficits.
Fifth, Obama announced a new series of stimulus proposals just weeks before the mid-term elections.
His political opponents quickly observed that this amounted to an admission that the first stimulus had failed.
One proposal – immediate tax deductibility for capital investment – should be part of a permanent (and overdue) corporate-tax reform, but Obama has proposed it as a one-year measure to induce businesses to move capital spending forward to 2011.
Sixth, Budget Director Peter Orszag, the Obama administration’s leading deficit hawk – at least prior to joining the administration – has resigned (to be replaced by Jack Lew, a budget director under former President Bill Clinton).
So who will now counsel Obama that piling on additional deficits and debt to fund a vast expansion of spending is bad economics, that the costs are likely to far outweigh the benefits, and that raising taxes will do permanent long-term damage to the economy?
Certainly not his effusive cheerleaders for the costly, ineffective February 2009 stimulus bill, a vast array of social engineering and pork that was ill suited to deal with the sharp contraction in private employment in the recession.
Certainly not the businessmen and women in the Cabinet, based on their real world experience; there aren’t any.
Let’s hope that the late conversion to tough deficit rhetoric gets a lot of play.
Voters have a way of holding elected officials accountable for their pronouncements.
Without that, political leaders cannot be expected to show a lot of courage.
Fortunately, it appears that voters in the US are far ahead of the politicians.
Obama’s Flawed Peace Process
MADRID – Since its inception in Oslo almost two decades ago, the Israeli-Palestinian peace process has been stymied by the dysfunctional political systems of both sides.
Hostage of an impossible coalition and of a settlement movement of free-lance fanatics, Israeli Prime Minister Binyamin Netanyahu’s leadership is seriously compromised.
His Palestinian counterparts are hardly in a better position.
Today, the clique that surrounds Palestinian President Mahmoud Abbas embodies the bitter deception which the peace process that began with the Oslo agreement has meant for the Palestinians.
Moreover, the Palestinian Authority has come neither to represent the majority of Palestinians nor to rule by democratic means.
Abbas’ presidential term has expired, and elections are constantly being postponed.
The PA prime minister, Salam Fayyad, like his Hamas counterparts in Gaza, rules by decree, keeps parliament inactive, and silences the opposition.
With no institutionalized democratic legitimacy, the PA is bound to rely on its security forces and on those of the occupier, Israel, to enforce its will.
Of course, throughout history, national liberation movements have had to marginalize their own radicals and fanatics in order to reach the Promised Land.
This was true of Zionism, of the Italian Risorgimento, and most recently of the Catholics in Northern Ireland.
But never did the outcast faction actually represent the democratically elected majority.
A peace process conceived as a means to weaken and isolate the winners of an election – Hamas – is unlikely to gain much traction.
Like George W. Bush, President Barack Obama confines his diplomatic engagement largely to friends rather than adversaries.
This, more than anything else, explains the growing disconnect between Arab public opinion and the Obama administration.
The assumption – dear to the architects of the current process – that peace can be achieved by driving a wedge between “moderates’ and “extremists” is a fatal misconception. The paradox here is double.
Not only does one negotiate with the illegitimate “moderates,” but it is precisely because of their legitimacy deficit that the moderates are forced to be unyielding on core issues, lest the radicals label them treasonous.
The Palestinian negotiators’ dangerous deficit of legitimacy – and, indeed, the disorientation of the entire Palestinian national movement – is reflected in the return of the PLO to its pre-Arafat days, when it was the tool of Arab regimes instead of an autonomous movement.
The green light was given to the current negotiators by the Arab League, not by the elected representatives of the Palestinian people.
Obama’s endorsement of Israeli Prime Minister Binyamin Netanyahu’s claim that if Israel is recognized as a Jewish state and its security needs accepted, “I will surprise, and the sky is the limit,” has made the current process possible.
But maximal security – for example, an insufferably long timetable for withdrawal, unreasonable territorial demands wrapped up as security needs, an Israeli presence in the Jordan valley, and full control of Palestinian airspace and the electromagnetic spectrum – would inevitably clash with Palestinians’ view of what sovereignty entails.
For Netanyahu, creation of a Palestinian state means the end of conflict and the finality of claims.
By reopening Israel’s demand to be recognized as the state of the Jewish people, he is forcing the Palestinians to insist even more on the constituent issues of the conflict, first and foremost on the so-called “right of return” of Palestinians who fled or were driven out after Israeli independence in 1948.
Abbas is too weak and compromised to accept any final settlement with which Netanyahu can live.
Arafat set the standard as to what is acceptable and what is not, and Abbas cannot allow himself the luxury of deviating from it.
As he admitted in a recent interview with the Palestinian newspaper Al Quds, if pressured to concede on sacred Palestinian principles such as refugees, Jerusalem, and borders, he “would pack his suitcase and go away.”
It is not impossible that with Hamas in the picture, an agreement could end the occupation, if not the conflict.
In other words, such a process would deal with the issues of 1967 – defining a border (including Jerusalem), withdrawing and dismantling settlements, putting in place security arrangements, and the Palestinians’ assumption of full governance responsibility – while shelving for the future those of 1948.
Hamas is a far more convenient partner for such a settlement than the PLO.
Oddly, Hamas and Israel might have more common ground than Israel and the PLO.
Israel wants an end to the conflict but is incapable of paying the price, whereas Hamas can better reconcile its ideology with a peace agreement with Israel if it is not defined as final.
The end of the conflict, like the requirement that Israel be recognized as a Jewish state, is a concept that has unnecessarily acquired mythical meaning.
Instead of insisting on what the Palestinians cannot give, Israel should focus on what is essential: the international legitimacy of its borders.
United Nations Resolution 181 in 1947 has already recognized Israel as a Jewish state.
And, even if Palestinian negotiators agreed to end the conflict once and for all, the chances that all Palestinian factions would abide by such a settlement are nil.
Whatever route is taken, the great question today concerns the enigma that is Bibi Netanyahu, a would-be Churchill who believes that his mission is to thwart the designs of Iran’s evil new Shia empire, something which requires the goodwill of the international community, particularly of the Obama administration. It is not entirely far-fetched to assume that Netanyahu finally calculated that if he wants more room to maneuver to deal with Iran, he must participate in the peace process with the Palestinians.
But, in that case, Iranian quiescence, not peaceful relations with an independent Palestine, might be Bibi’s true objective.
Obama’s Global Ethical Challenges
PRINCETON – The astonishing story of Barack Obama’s election as president has already done much to restore America’s global image.
In place of a president whose only qualification for the office was his father’s name, we now have one whose intelligence and vision overcame the formidable obstacle of being the exotically named son of an African Muslim.
Who would have believed, after the last two elections, that the American public was capable of electing such a candidate?
Obama’s achievement raises the stakes for his first term in office.
He campaigned on the theme that he is different from other politicians and will deliver real change.
That appeal drew large and enthusiastic crowds, which, together with astute use of the Internet, gained him an unprecedented four million donors, and induced a huge number of African-Americans and young people to register to vote.
This is the chance of a lifetime to break through the cynicism that has pervaded American politics for decades.
But if Obama fails to make good on his promise of change, it will be decades before the electorate again places its trust in a candidate who claims to be different from the usual run of politicians.
Many Americans will judge the new administration by what it does at home.
That includes raising taxes on those earning more than $250,000 a year, and using the money to extend health insurance to the tens of millions of Americans who – uniquely for an industrialized nation – do not have it.
He has also pledged tax cuts for medium and lower-paid workers, and improvements to America’s education system.
Keeping those promises despite America’s gloomy economic prospects will not be easy.
The biggest impact that Obama can make, however, is beyond America’s borders.
Last year, when speaking to the Chicago Council on Global Affairs, he called for a president who can speak directly to everyone in the world who longs for dignity and security, and say: “You matter to us.
Your future is our future.
And our moment is now.” Indeed, it is now.
If Obama is to be that president, he should begin by keeping his promises to close the prison camp at Cuba’s Guantánamo Bay and to end the Bush administration’s practice of locking people away without ever telling them why or what they are charged with.
He must also begin the process of withdrawing combat troops from Iraq, a task that he said would be completed in 16 months.
Keeping these promises will be significant steps towards restoring America’s image around the world.
Playing a constructive role in bringing about reform at the United Nations is also vital.
The structure of the Security Council is 60 years old.
It still gives the victors of the Second World War permanent membership of the Council, and a veto over its decisions.
To change that will inevitably dilute the privileges of those nations, including the United States.
But if any US president can overcome that historical shadow hanging over the UN, Obama can.
Given that Obama has a Kenyan father and has spent time in the African villages where his kin still live, it is no surprise that he understands the need for rich nations to assist developing nations.
Last year, he pledged to double US foreign aid by 2012, raising it to $50 billion a year. (That still leaves the US lagging behind many European nations in the percentage of its national income that it gives in aid.)
US aid also must be better targeted toward helping those living in extreme poverty.
Regrettably, when then-Senator, now Vice-President Joe Biden was asked what spending an Obama administration might have to curtail because of the financial crisis, he mentioned the pledge to increase foreign aid.
But doubling US foreign aid involves a modest amount of money, compared to what will be saved by pulling out of Iraq.
Perhaps the most difficult aspect of turning the US into a good global citizen is cutting back on its grossly excessive greenhouse gas emissions – roughly five times the global per capita average.
On this issue, the Bush administration wasted eight precious years during which we have gotten perilously close to the point at which an irreversible chain of events could occur that leads to catastrophe.
Ugandan President Yoweri Museveni last year accused the industrialized countries of committing aggression against Africa by causing global warming.
That may sound like hyperbole, but raising the temperature and reducing the rainfall of a predominantly agricultural nation can be as devastating to its people as dropping bombs on it.
Obama needs to make the US a leader in reducing emissions.
Then, having demonstrated his good faith, he and European leaders should be able to work out a deal that will bring China and India into whatever agreement replaces the Kyoto protocol when it expires in 2012.
This may be the greatest ethical challenge of the Obama presidency, but, because so much hangs on it, the way in which he responds to it is likely to play a decisive role in how his presidency will be judged.
Obama’s Hardest Choices Lie Ahead
TEL AVIV – It was only natural that Barack Obama, a president whose election was one of the most revolutionary events in American history, should fill his first 100 days in office with a breathtaking, all-embracing agenda.
These are times of trial and upheaval that call for such daring.
Strikingly energetic and self-confident, Obama has set out on a titanic journey to remake America’s economy and redress a broken and dysfunctional international system.
It is perhaps especially in Obama’s domestic policy – the shift to a more social-democratic tax system and universal health care – that one can best see the new president’s ideological drive.
But emphasizing the reduction of social inequalities does not sit easily with America’s profoundly individualistic ethos, and the attempt to “Europeanize” the nature of the social contract between the state and its citizens might yet crash against the constitutive principles of the American system.
When it comes to salvaging America’s collapsing financial system, Obama has been far more interventionist than any European government.
For once, the faltering Czech presidency of the EU reflected a European consensus when it defined Obama’s astronomic financial stimulus as a “road to hell.”
The unprecedented explosion of America’s fiscal deficit raises the risk of high inflation in the future – exactly the kind of scenario that Europeans want to prevent at all cost.
Obama’s foreign policy agenda has been no less audacious than his domestic undertakings.
After eight years of American unilateralism that left behind a broken transatlantic alliance, resuscitated the specter of a cold war with Russia, and saw the Middle East decline into a doomsday politics, Obama’s injection of new thinking to endemic problems is extremely welcome.
The organizing principle in the new president’s foreign policy is one of not having principled, ideological guidelines.
Essentially, his approach to international issues is pragmatic, and, in departing from his predecessor’s penchant for machtpolitik , Obama has pledged always to exhaust diplomacy first.
But Obama might soon realize that most of his predecessors started as believers in international cooperation, until events forced them to fall back on a strategy of confrontation.
Not even George W. Bush seemed to be committed to any particular doctrine in foreign affairs before the terrorist attacks of September 11, 2001, drove him to unleash his ill-conceived “global war on terror.”
The real test of Obama’s strategy of dialogue and cooperation will come only when it fails, and tough choices will have to be made.
Repairing old alliances is vital not only for the exercise of American power, but also for Europe’s empowerment as a global player.
Yet America’s European allies administered Obama’s first setback.
They applauded him everywhere on his recent trip to Europe, but sent him home almost empty-handed, resisting the idea of a coordinated fiscal stimulus and, after years of preaching multilateralism, turning down his call for more European troops for Afghanistan.
For many in Europe, it was easier to live against Bush than to make sacrifices with Obama.
Obama also pushed the “reset button” with Russia, and suggested that he might freeze Bush’s plan to deploy a missile defense system in the Czech Republic and Poland.
The expectation was that Russia would join the United States in putting pressure on Iran to abandon its nuclear ambitions.
But this has not yet happened.
Nor was North Korea impressed by Obama’s warnings that America might shoot down its rocket if they went ahead with their launch in defiance of the United Nations.
Shielded behind a protective China, Kim Jong-il launched his rocket anyway, and the US refrained from action.
Iran is another front where Obama might be forced to recognize the limits of his conciliatory approach.
He has waived America’s long-standing demand that Iran stop uranium enrichment as a precondition for negotiations, and he has sworn off any idea of regime change.
But the Iranians are the subtlest negotiators to be found anywhere, and will make certain that their nuclear program outpaces the negotiations.
If that happens, then what?
Nor is it clear what Obama really means by saying that he recognizes Iran’s “rightful place in the community of nations.”
If this means a special status at the expense of other Middle East powers such as Egypt or the Gulf states, Obama might run into strong opposition from America’s traditional allies in the region.
It is right and refreshing that Obama has made clear that America’s aspiration is to lead, not dominate.
But even an exercise in modesty and realism requires strong alliances, with partners ready for sacrifices.
Nor would old enemies and competitors like Russia and China readily abandon the benefits of spoiling American plans.
It is when this becomes crystal clear, and also when some worn-out foreign-policy paradigms, such as the fetish of a two-state solution for the Israeli-Palestinian conflict fail once again, that real choices will have to be made.
Obama’s Middle East Malady
PARIS – No sooner did US President Barack Obama welcome home American troops from Iraq and laud that country’s stability and democracy than an unprecedented wave of violence – across Baghdad and elsewhere – revealed the severity of Iraq’s political crisis.
Is that crisis an unfortunate exception, or, rather, a symptom of the failure of Obama’s Middle East diplomacy, from Egypt to Afghanistan?
Upon taking office, Obama set four objectives in the Middle East: stabilize Iraq before leaving it; withdraw from Afghanistan from a position of strength and on the basis of minimal political convergence with Pakistan; achieve a major breakthrough in the Middle East peace process by pushing Israeli Prime Minister Binyamin Netanyahu to freeze settlements; and open a dialogue with Iran on the future of its nuclear program.
On these four major issues, Obama has clearly achieved little.
With regard to Iraq, since George W. Bush’s presidency, the United States has strived to exert a moderating influence on Shia power, so that the country can create a more inclusive political system – specifically, by passing a new law on sharing oil-export revenues among the Shia, Sunni, and Kurdish communities.
Unfortunately, the precise opposite happened.&nbsp;
Kurdistan has embarked on a path toward increased autonomy, while the Sunnis are increasingly marginalized by a sectarian and authoritarian Shia-dominated central government.
This has implications for the regional balance of power, because Iraq is growing closer to Iran in order to offset Turkey, which is seen as protecting the Sunnis.
Iraqi Prime Minister Nouri al-Maliki’s remark during a recent trip to Washington that he was more concerned about Turkey than Iran exposed the huge gulf between Iraq and the US, which now appears to have lost all significant political influence on Iraqi affairs.
Indeed, in a disturbing development, the US decided not to play its last remaining card in dealing with al-Maliki: arms sales.
There can no longer be any doubt that the occupation of Iraq was a huge strategic defeat for the US, because it ultimately served only to strengthen Iran.
Yet Obama lacks a medium-term vision to deal with the seriousness of the situation – an oversight that, sooner or later, will cost the US dearly.
One of two things will happen: either tighter containment of Iran through sanctions on oil exports will produce positive results and weaken Iran, or containment will fail, leading the US inexorably toward a new war in the Middle East.
It is not unlikely that some in US foreign-policy circles regard the deepening Iraqi crisis as a building block in constructing the case for military intervention in Iran.
But Obama is nobody’s fool.
He has registered the US Congress’s hostility toward Iran and the desire to confront the Islamic Republic militarily.
He believes, however, that he can avoid extreme solutions; in diplomacy, anything can happen, and the worst-case scenario is never guaranteed.
The problem is that Obama has a strong tendency to overestimate America’s ability to influence weaker actors.
What is true for Iraq is also true for Afghanistan: Obama can pride himself on having eliminated Osama bin Laden, which was undoubtedly a success, but one that failed to address the root of the problem.
Despite a 10-year military presence, involving the deployment of more than 100,000 troops at a cost of $550 billion, the US still has not succeeded in creating a credible alternative to the Taliban.
Worse, its political alliance with Pakistan has frayed.
Indeed, US-Pakistan relations have regressed to their level before September 11, 2001, a time marked by deep mutual distrust.
Pakistani leaders obviously bear a heavy responsibility for this state of affairs.
But if the US has been unable to involve Pakistan in resolving the Afghanistan conflict, that failure simply reflects America’s refusal to give the Pakistanis what they wanted: a shift in the regional balance of power at the expense of India.
Pakistan, accordingly, froze cooperation with the US, because its leaders no longer saw much to gain in fighting the Taliban.
The risk is that when the American withdrawal from Afghanistan begins – a process that has just been brought forward to next year, from 2014 – the US will again seek to impose sanctions on Pakistan, an unreliable nuclear state that will react by strengthening ties with China and deploying Islamist terrorism.
Obama also sought to use America’s influence to resolve the Israeli-Palestinian conflict as part of his strategy for the broader Middle East.
He initially thought that by pressuring Netanyahu to freeze settlements, he would succeed in reviving the peace process.
But he was quickly and skillfully outmaneuvered by his ally, who knows how important the Israeli issue is to US domestic politics.
By putting Obama at odds with the rest of the US establishment, Netanyahu forced him to retreat.
In 2009, Obama envisioned a settlement of the conflict through the strong commitment of the international community.
In 2011, he asserted that only both sides’ willingness could ensure a successful outcome.
Clearly, the US cannot do much to resolve the conflict.
There is no overarching explanation for Obama’s successive Middle East failures, but there are a few factors worth considering: the increase in the number of asymmetrical conflicts, in which the traditional use of force is largely ineffective; increasingly blurred lines between difficult allies and intransigent adversaries; and major political differences between a centrist US president and a Congress that is dominated more than ever by extreme ideas.&nbsp;
But Obama himself bears a large part of the blame.
Contrary to what one might think, he does not have a real strategic vision of the world – a shortcoming reflected in his quick capitulation in the face of opposition to his proposals.
Obama often has a plan A, but never a plan B. When it comes to conducting a successful foreign policy, plan A is never enough.
Obama’s Middle East
JERUSALEM – President-elect Barack Obama’s plans for the Middle East, the region where his predecessor’s policies shattered America’s standing around the world as a benign superpower, represent a welcome departure from President Bush’s grand design to redress the region’s ills through “constructive chaos.”
Unfortunately, Obama’s all-encompassing promises might prove to be just as unrealistic.
Obama’s agenda is breathtaking.
It includes extrication from the Iraqi morass and lifting its burden from America’s foreign policy, resolving the festering Israeli-Palestinian conflict while confronting the “hawkish” Israel lobby, using dialogue to curb Iran’s nuclear ambitions and wean Syria from its radical agenda – thereby dissolving the region’s “axis of evil” (Iran-Syria-Hezbollah-Hamas) – freeing Lebanon from Syria’s grip, and pushing for an Israel-Syria peace.
And you can add to this a reorientation of America’s military effort to the war in Afghanistan.
The magnitude of this agenda must be seen against the region’s depressing legacy.
The entire region is going through a dangerous process of “Somaliazation,” with an expanding chain of non-state agents, mostly radical Islamist groups, challenging the idea of the state almost everywhere.
This is the case in Lebanon with Hezbollah, in Palestine with Hamas, in Iraq with Moqtada al-Sadr’s Mahdi Army and scores of other groups, with the Taliban and tribal warlords in Afghanistan, and with breakaway movements in Pakistan that have been emboldened by Pervez Musharaf’s resignation.
The looming end of President Hosni Mubarak’s long rule in Egypt might lead to the emergence of a formidable bid by the Muslim Brotherhood for power in Cairo, possibly forcing Mubarak’s successor either to reach a modus vivendi or to wage a fight to the death.
Obama may soon learn that his timetable for withdrawal from Iraq is unrealistic.
A rapid American disengagement might ultimately cause the country’s disintegration into fragmented political entities, one of which would likely be an Iran-controlled Islamic republic.
The resurgence of the Taliban in Afghanistan requires a more robust military response, but with the American army bogged down in Iraq and the Western allies reluctant to send additional troops, the country’s dismemberment by local warlords is not a far-fetched scenario.
And, with the allies’ military operations eroding President Hamid Karzai’s domestic legitimacy, Obama might consider the advice of French Foreign Minister Bernard Kouchner, who warns that the answer in Afghanistan will have to be more political than military.
As for Iran, Obama might have to fall back on a strategy of military pressure sooner than he would like.
As the protracted dialogue conducted by the European Union’s special representative, Javier Solana, on behalf of the Security Council’s permanent members and Germany has proved, Iran has no intention of deviating from its drive to nuclear status.
Unless Obama reaches an uneasy understanding with Russia – which would require revising post-Cold War strategic agreements – the chances of imposing a tight sanctions regime on Iran are slim.
The specter of a Middle East nuclear arms race, with Iran’s Sunni rivals in the region – Saudi Arabia, Egypt and others – redoubling their efforts to attain nuclear status, cannot be ruled out.
In the Middle East, Obama faces an almost impossible task of redressing historical and political ills.
Meanwhile, he inherits an America that is no longer an undisputed hegemony, and that, together with its allies, is immersed in the most severe economic crisis since 1929.
Struggling with a crisis that is shaking the foundations of capitalism and the American way of life, and laden with a $10 trillion national debt and a $1 trillion budget deficit, the United States is bound to opt for a realistic foreign policy, one that departs from the haughty disregard for history, tradition, and religion that characterized the Bush administration.
Obama’s ascension to the US presidency represents a revolutionary landmark in America’s history that should not be allowed to fall victim to inflated expectations.
His idealism needs to be tempered by the limits of American power.
The challenge of his foreign policy is not to change the Middle East – this is the long-term task of the region’s peoples – but to redress America’s damaged reputation in the Muslim world.
To achieve this objective requires resolution of the Arab-Israeli conflict, particularly the Palestinian question.
This is the real wound that infects America’s entire foreign policy, particularly its standing in the Arab and Muslim world.
During his visit to the region last July, Obama vowed to address the Israeli-Palestinian conflict “starting from the minute I’m sworn into office.”
He cannot lose any time in fulfilling that pledge.
Unlike the insoluble mess that he inherits in the broader Middle East, the road to a comprehensive solution of the Arab-Israeli dispute has already been paved, and no wheels would have to be reinvented.
Leadership and commitment are what is required, and Obama’s “Yes, we can” campaign has already shown that he has both.
Obama’s New World Order
As the world digests President Barack Obama’s recent historic speech in Cairo, one conclusion is readily apparent: it will take more than a single speech to effect reconciliation between the United States and the Islamic world, after years of hostility and mistrust.
But this was a significant start.
There is a second conclusion to be drawn, less evident but even more important: Obama’s ambition is not confined to cutting the root of Islamic terrorism, or even to bringing peace to the Middle East.
It extends to nothing less than a complete reshaping of the global order.
Obama’s dramatic overture to the Islamic world was only the latest in a series of such openings by this remarkable US president.
The economic crisis arguably forced the new American rapprochement with China (the “emerging” power that has now emerged as the big winner from the world’s financial turmoil).
But no such circumstance prompted the move to “re-set” relations with Russia, the journeys to mend fences with Latin America and Turkey, or efforts to reach out to Iran.
These are all products of a deliberate policy.
The unilateral moment has passed.
The US had its few short years as a hyper-power, and it did neither America nor the world much good.
Now, before our eyes, Obama is repositioning the US at the centre of a web of global bilateral relationships – the “G-2” economic relationship with China, the nuclear relationship with Russia, and now the search for a relationship of mutual respect and cooperation with the Muslim world.
As in a Venn diagram, Obama is placing the US at that central point where all the different ellipses overlap.
First among equals, and the indispensable nation.
Where, one might wonder, does this leave Europe?
Europeans have grown used to the idea that the transatlantic relationship is the foundation of the international order.
Following the difficult years of the Bush presidency, Obama has duly sought to restore transatlantic harmony as well, visiting Europe in April and extending the hand of partnership there, too.
To be sure, Europe gave Obama very little back for his pains, whether in terms of help in Afghanistan or support in stimulating the global economy.
But if Obama lost sleep over this tepid European response, he showed no signs of it.
In the new Obama world order, transatlantic relations are not the foundation, but just one of the Venn diagram’s ellipses – as significant or insignificant as Europeans choose to make it.
While Europeans chew on that, they should also reflect on what the Cairo speech could mean for their own position in the Middle East.
Europeans have long cherished the belief that centuries of history and the facts of geography, not to mention more recent patterns of immigration, have given them some sort of special relationship with the Islamic world – an often strained and sometimes bloody relationship, but nonetheless one based on deep mutual familiarity.
In European eyes, Americans lack such sophisticated understanding, and often have no interest in acquiring it, seeing the land around and beyond Israel as populated largely by greedy oil sheikhs and dangerous religious fanatics.
Like all caricatures, this European view has had some truth to it.
And, though Europeans have lamented that fate has allocated the real power in the Middle East to their crass cousins, they have nonetheless done pretty well there, not least commercially, simply by not being American.
Now, after listening to Obama in Cairo, they will have to ask themselves whether this is not another aspect of how the world works, and of Europe’s position in it, that is about to change.
It was a fine speech, and Europeans will duly applaud it; but listen for the growing undertone of anxiety that this bold young US president has just helped himself to some more of Europe’s clothes.
Obama’s Nuclear Agenda
CAMBRIDGE – The announcement of a secret uranium enrichment facility located on a military base in Iran has sharpened President Barack Obama’s efforts to place nuclear proliferation issues at the top of the world agenda.
2010 will be a critical year.
In September, both at the United Nations and at the G-20 Summit in Pittsburgh, many countries agreed to work on Obama’s nuclear agenda.
But, in the midst of those meetings, it was revealed that Iran has been secretly building a second enrichment facility with the potential to produce weapons-grade uranium.
In early October, Iranian officials met in Geneva with representatives of the permanent members of the UN Security Council (plus Germany) and agreed to allow the International Atomic Energy Agency to inspect the hitherto secret plant.
In addition, the Iranians said that they would export their existing low-enriched uranium to be fabricated into nuclear fuel outside of Iran.
If these measures are implemented, they will represent important steps.
There has been widespread fear that Iran would abrogate the Nuclear Non-Proliferation Treaty (NPT) and use its enrichment facilities to develop a nuclear weapon.
It is not yet clear whether words will be matched with deeds.
Meanwhile, the United States and Russia, whose stockpiles contain more than 90% of the world’s nuclear weapons, are negotiating in Geneva to produce a strategic arms reduction treaty to replace their START I arms-control agreement, which expires in December.
If those talks are successful, they may yield cuts of up to one-third of all strategic nuclear warheads.
The US Senate would then consider the new treaty for ratification next year.
The Obama administration is also consulting with Congress on when to re-submit the Comprehensive Nuclear Test Ban Treaty (CTBT), which was rejected by the Senate 10 years ago.
International agreements regulating the size and composition of national defenses have often been controversial in the Senate.
The new strategic arms-reduction treaty, which is still a work in progress, and the CTBT have already aroused skepticism from opposition legislators and opinion-makers.
If Obama submits both treaties to the Senate in 2010, he will need to convince the public that they serve an integrated strategy for enhancing national and international security.
If he fails and the Senate rejects one or both of the treaties, it could have a strong negative effect on the non-proliferation regime.
In May, 189 member states of the NPT will meet in Vienna to review its status.
When the NPT entered into force in 1970, it was intended to limit the number of nuclear-weapons states to five (the US, the Soviet Union, Britain, France, and China).
Overall, the treaty has been a success.
Many people, including President John F. Kennedy, believed in the 1960’s that there would be dozens of countries with nuclear weapons by now, and that their use would be highly probable.
Fortunately, this has not been the case.
Since 1970, three states that never signed the treaty have acquired nuclear weapons (India, Israel, and Pakistan).
In addition, North Korea violated its treaty obligations and exploded two crude devices.
Iran’s suspected nuclear-weapons program has now raised new fears that the global nonproliferation regime may unravel.
Averting that danger will require multiple, coordinated, and sustained efforts for many years to come, but ratification of post-START and the CTBT would help.
For example, a new arms-reduction agreement would improve the US-Russian relationship, and that, in turn, could translate into a more constructive Russian position on Iran in the Security Council.
Senate approval of the CTBT would also restore America’s credibility in its efforts to get other countries to forgo nuclear testing.
Next March, Obama will host a Global Nuclear Security Summit with the aim of developing new means to combat nuclear smuggling and terrorism.
In addition, his proposed long-term goal of abolishing nuclear weapons will require a great deal of preparatory work before it becomes an operational rather than an aspirational objective.
Obama will need to begin discussions with the Russians, for example, on how to handle the question of short-range nuclear weapons, and how to regulate anti-ballistic missile defenses to maintain stability in a world of fewer offensive weapons.
At some point, he must open discussions with countries like China, France, and Britain to understand better the conditions for transparency and verification that would be necessary for a clearer path toward eventual elimination of nuclear weapons in accordance with Article VI of the NPT.
At the same time, Obama cannot allow these long-term issues to divert his attention from crucial short-term issues.
So long as the world remains a dangerous place with several nuclear weapons states, Obama must reassure its allies about the credibility of American guarantees of extended deterrence.
Otherwise, reductions that create anxieties in other countries could lead them to develop their own weapons and thus increase the number of nuclear weapons states.
Obama will also need to pursue negotiations to persuade North Korea to return to the Six-Party talks with the objective of eventually giving up its nuclear weapons (as South Africa once did).
And, of course, he will need to pursue the negotiations with Iran to persuade them to keep their word and remain in the NPT as a non-nuclear weapon state.
How successful Obama is in managing the domestic politics and international diplomacy of his nuclear agenda will be an important factor in his effectiveness as a world leader.
Even more important, his progress in 2010 will say a lot about the world’s ability to maintain the existing 60-year taboo against the use of nuclear weapons.
Obama’s Pacific Pivot
CAMBRIDGE – Asia’s return to the center of world affairs is the great power shift of the twenty-first century.
In 1750, Asia had roughly three-fifths of the world’s population and accounted for three-fifths of global output.
By 1900, after the Industrial Revolution in Europe and America, Asia’s share of global output had shrunk to one-fifth.
By 2050, Asia will be well on its way back to where it was 300 years earlier.
But, rather than keeping an eye on that ball, the United States wasted the first decade of this century mired in wars in Iraq and Afghanistan.
Now, as US Secretary of State Hillary Clinton put it in a recent speech, American foreign policy will “pivot” toward East Asia.
President Barack Obama’s decision to rotate 2,500 US Marines through a base in northern Australia is an early sign of that pivot.
In addition, the November Asia-Pacific Economic Cooperation meeting, held in Obama’s home state of Hawaii, promoted a new set of trade talks called the Trans-Pacific Partnership.
Both events reinforce Obama’s message to the Asia-Pacific region that the US intends to remain an engaged power.
The pivot toward Asia does not mean that other parts of the world are no longer important; on the contrary, Europe, for example, has a much larger and richer economy than China’s.
But, as Obama’s national security adviser, Tom Donilon, recently explained, US foreign policy over the past few years has been buffeted by the wars in Iraq and Afghanistan, concerns about terrorism, nuclear-proliferation threats in Iran and North Korea, and the recent Arab uprisings.
Obama’s November trip to Asia was an effort to align US foreign-policy priorities with the region’s long-term importance.
In Donilon’s words, “by elevating this dynamic region to one of our top strategic priorities, Obama is showing his determination not to let our ship of state be pushed off course by prevailing crises.”
The Obama administration also announced that, whatever the outcome of the defense-budget debates, “we are going to make sure that we protect the capabilities that we need to maintain our presence in the Asia-Pacific” region.
Obama’s November trip was also a message to China.
After the 2008 financial crisis, many Chinese expressed the mistaken belief that the US was in terminal decline, and that China should be more assertive – particularly in pursuing its maritime claims in the South China Sea – at the expense of America’s allies and friends.
During Obama’s first year in office, his administration placed a high priority on cooperation with China, but Chinese leaders seemed to misread US policy as a sign of weakness.
The administration took a tougher line when Clinton addressed the South China Sea question at the Association of Southeast Asian Nations meeting in Hanoi in July 2010.
Chinese President Hu Jintao’s subsequent official visit to Washington in January 2011 was successful, but many Chinese editorialists complained that the US was trying to “contain” China and prevent its peaceful rise.
China’s anxiety about a supposed US containment policy is on the rise again, now that Clinton is insisting that the country’s maritime disputes with its neighbors be placed on the agenda at next year’s East Asia Summit in Manila, which will be attended by Obama, Hu Jintao, and other regional leaders.
But American policy toward China is different from Cold War containment of the Soviet bloc.
Whereas the US and the Soviet Union had limited trade and social contact, the US is China’s largest overseas market, welcomed and facilitated China’s entry into the World Trade Organization, and opens its universities’ gates to 125,000 Chinese students each year.
If current US policy towards China is supposed to be Cold War-style containment, it seems unusually warm.
The Pentagon’s East Asia Strategy Review, which has guided American policy since 1995, offered China integration into the international system through trade and exchange programs.
Although the US hedged its bet by simultaneously strengthening its alliance with Japan, this does not constitute containment.
After all, China’s leaders cannot predict their successors’ intentions.
The US is betting that they will be peaceful, but no one knows.
A hedge expresses caution, not aggression.
American military forces do not aspire to “contain” China in Cold War fashion, but they can help to shape the environment in which future Chinese leaders make their choices.
I stand by my testimony before the US Congress of 1995 in response to those who, even then, wanted a policy of containment rather than engagement: “Only China can contain China.”
If China becomes a bully in the Asia-Pacific region, other countries will join the US to confront it.
Indeed, that is why many of China’s neighbors have strengthened their ties with the US since 2008, when China’s foreign policy became more assertive.
But the last thing the US wants is a Cold War II in Asia.
Whatever the two sides’ competitive positions, Sino-American cooperation on issues like trade, financial stability, energy security, climate change, and pandemics will benefit both countries.
The rest of the region stands to gain, too.
The Obama administration’s pivot towards Asia signals recognition of the region’s great potential, not a clarion call for containment.
Obama’s Policy of Nuclear Balance
WASHINGTON, DC – Perhaps never in history have nuclear security, non-proliferation, and arms control received the prominence that they will during this month’s strategic trifecta: the April 6 release of the latest United States Nuclear Posture Review (NPR), the April 8 signing in Prague of the New START Treaty, and the April 12-13 Nuclear Security Summit.
These events will flow into May’s Nuclear Non-Proliferation Treaty (NPT) Review Conference.
US President Barack Obama has become one of the most prominent global advocates of abolishing nuclear weapons, a position for which he unexpectedly received a Noble Peace Prize last year.
But Obama’s actions have been considerably more restrained than is often assumed.
In general, Obama has pursued a policy of nuclear balance in which steps towards disarmament are accompanied by measures to retain America’s nuclear primacy.
The former underscore his administration’s commitment to meeting its obligations under the NPT, while the latter reassure the US Congress and allies skeptical of bold new approaches.
The administration’s policies strive to address the aspirations of global disarmament advocates in several ways.
The NPR, for example, further reduces America’s reliance on nuclear weapons by adopting an almost no-first-use doctrine.
Only in “extreme circumstances” would the US consider using nuclear weapons.
For the first time, the US pledges not to retaliate with a nuclear strike even if attacked by chemical or biological weapons.
The NPR also commits the US not to develop new nuclear weapons, missions, or capabilities.
Obama’s administration will instead continue to enhance the roles and capabilities of US conventional forces to perform missions previously assigned to nuclear weapons.
In addition, his administration pledges not to resume testing nuclear weapons by detonating them, and to seek to bring the Comprehensive Test Ban Treaty (CTBT) into force by securing its ratification by the US Senate and all other countries.
Symbolic of the administration’s commitment to transparency and openness, the Obama NPR is the first such document to be entirely unclassified.
In describing the New START Treaty, Obama administration officials stress the magnitude of the reductions.
The number of permissible deployed warheads, 1,550, is 74% lower than the limit of the 1991 START Treaty and 30% below the cap set by the 2002 Moscow Treaty.
The limit for strategic nuclear-delivery vehicles is less than half that of the original START Treaty.
The administration describes these lower ceilings, and its pursuit of other arms control measures, as meeting America’s non-proliferation and disarmament obligations under the NPT.
Nevertheless, the administration has sought to meet the concerns of those Americans and US allies worried that Obama might pursue a naïve and reckless path toward nuclear disarmament.
Although Obama has endorsed the goal of abolishing nuclear weapons, he has described this as a long-term effort, and offered no concrete time-line for achieving it.
No date has been set when Obama will ask the Senate to reconsider the CTBT.
Whereas advocates of abolishing nuclear weapons wanted his administration to employ a zero-based approach to nuclear planning, with the burden of proof on those seeking to retain nuclear weapons to fulfill essential military functions, the NPR presumes the continuation of current nuclear roles and missions unless convincing arguments exist to end them.
It presumes that “the United States will sustain a safe, secure, and effective nuclear deterrent…as long as nuclear weapons exist.”
The NPR affirms the policy of extended nuclear deterrence, under which the US retains the option to employ nuclear weapons to defend its allies.
Skeptics doubt the credibility of this policy, which in principle obliges the US to sacrifice New York in response to an attack on Warsaw, or endanger Los Angeles to defend Taipei.
But proponents of such US guarantees believe that they discourage aggression and contribute to nuclear non-proliferation by reducing the incentive of US allies to seek their own nuclear deterrents.
In this context, the administration has rejected calls to withdraw US tactical nuclear weapons from Europe unilaterally, insisting that it will only do so with the consent of all NATO members.
Moreover, the no-first-use pledge in the NPR contains an important hedge.
It commits the US not to employ or threaten to employ nuclear weapons against states that do not possess them, provided that these countries remain in compliance with the NPT and their other nuclear non-proliferation obligations.
The Obama administration considers both Iran and North Korea to be outside this category.
American START negotiators argued with their Russian colleagues for months to exclude legally binding language that might constrain missile defenses or the use of non-nuclear warheads on long-range ballistic missiles.
Although some US officials remain skeptical about these capabilities, they appreciate that Congress might not ratify a START Treaty that included formal limitations on these options.
Even with the lower ceilings found in the New START Treaty, the US will maintain thousands of nuclear weapons, as well as the long-standing US “strategic triad” of intercontinental land-based and submarine-launched ballistic missiles and nuclear-capable bombers.
Having this mixture helps ensure that if technological developments render one leg vulnerable, the others can still threaten sufficient retaliation.
The US will seek to guarantee the reliability of its nuclear weapons by spending billions of dollars to improve its nuclear weapons infrastructure and conduct tests not involving nuclear detonations.
The Nuclear Security Summit plays an essential role in linking both strands of Obama’s nuclear policies.
American liberals and conservatives, as well as US friends and allies, all favor the principle of enhancing the security of dangerous nuclear materials and reducing the risk of nuclear terrorism, which could plausibly threaten anyone.
Obama has introduced important innovations in US nuclear policy, but much important continuity with previous policies exist.
Given the stakes, continuing to rely on proven approaches, even while trying to promote a world with fewer and safer nuclear weapons, is a judicious strategy.
A Man Without a Plan
NEW HAVEN – During the United States’ recent presidential election campaign, public-opinion polls consistently showed that the economy – and especially unemployment – was voters’ number one concern.
The Republican challenger, Mitt Romney, sought to capitalize on the issue, asserting: “The president’s plans haven’t worked – he doesn’t have a plan to get the economy going.”
Nonetheless, Barack Obama was reelected.
The outcome may reflect the economy’s slight improvement at election time (as happened when Franklin Roosevelt defeated the Republican Alf Landon in 1936, despite the continuing Great Depression).
But Obama’s victory might also be a testament to most US voters’ basic sense of economic reality.
Economic theory does not provide an unambiguous prescription for policymakers.
Professional opinion in macroeconomics is, as always, in disarray.
Because controlled experiments to test policy prescriptions are impossible, we will never have a definitive test of macroeconomic measures.
Romney had no miracle cure, either, but he attempted to tap into voters’ wishful-thinking bias, by promising to reduce the size of the government and cut marginal tax rates.
That would work if it were true that the best way to ensure economic recovery were to leave more money on the table for individuals.
But the electorate did not succumb to wishful thinking.
The idea that Obama lacks a plan is right in a sense: nothing he has proposed has been big enough to boost the US economy’s painfully slow recovery from the 2007-9 recession, nor to insulate it from shocks coming from Europe and from weakening growth in the rest of the world.
What Obama does have is a history of bringing in capable economic advisers.
Is there anything more, really, that one can ask of a president?
And yet US presidential campaigns generally neglect discussion of advisers or intellectual influences.
Although a president’s advisers may change, one would think that candidates would acknowledge them, if only to suggest where their own ideas come from; after all, realistically what they are selling is their ability to judge and manage expertise, not their own ability as economists.
This time, too, however, there was no mention by name of any deep economic thinker, or of any specific economic model.
Obama originally had a wonder team of economic advisers, including Lawrence Summers, Christina Romer, Austan Goolsbee, and Cass Sunstein.
But they are gone now.
Today, the most powerful economic adviser remaining in the White House is Gene Sperling, head of the National Economic Council (NEC), the agency created by President Bill Clinton in 1993 to serve as his main source of economic policy (somewhat shunting aside the Council of Economic Advisers).
Because this position does not require Congressional approval, the president may appoint whomever he wants, without having his choice raked over the coals in the US Senate.
That is why Obama could appoint the highly talented but politically unpopular Summers, the former president of Harvard University.
Sperling is not nearly so well known as Summers.
But his record of influence in government is striking; indeed, he has been at the pinnacle of economic-policymaking power in the US for almost a decade.
He was the NEC’s deputy director from its beginning in 1993 until 1996, and its director from 1996 to 2000.
Obama reappointed him as head of the NEC in January 2011.
His 2005 book The Pro-Growth Progressive contains many ideas about how to make the economy perform better.
None is grandiose, but together they might help substantially.
Some of these ideas found their way into the American Jobs Act, which might have had some real impact had Congress passed it in 2011.
The AJA embodied some of what Sperling describes in his book: subsidies for hiring, wage insurance, and job training, as well as support for education and early learning.
Moreover, the AJA would have offered some balanced-budget stimulus – the kind of stimulus that would boost the level of economic activity without increasing the volume of government debt.
But the public, despite its concern about unemployment, is not very interested in the details of concrete plans to create more jobs.
Sperling is just not very visible to the public.
His book was not a best seller: in commercial terms, it might be better described as a dud.
Sperling is fundamentally different from the typical academic economist, who tends to concentrate on advancing economic theory and statistics.
He concentrates on legislation – that is, practical things that might be accomplished to lift the economy.
He listens to academic economists, but is focused differently.
At one point in his book, Sperling jokes that maybe the US needs a third political party, called the “Humility Party.” Its members would admit that there are no miraculous solutions to America’s economic problems, and they would focus on the “practical options” that are actually available to make things a little better.
In fact, Americans do not need a new political party: with Obama’s reelection, voters have endorsed precisely that credo of pragmatic idealism.
Obama’s Recovery?
CAMBRIDGE –&nbsp;With November’s election in the United States fast approaching, the Republican candidates seeking to challenge President Barack Obama claim that his policies have done nothing to support recovery from the recession that he inherited in January 2009.
If anything, they claim, his fiscal stimulus, the bank bailouts, and US Federal Reserve Chairman Ben Bernanke’s aggressive monetary policy made matters worse.
Obama’s Democratic defenders counter that his policies staved off a second Great Depression, and that the US economy has been steadily working its way out of a deep hole ever since.
Middle-ground observers, meanwhile, typically conclude that one cannot settle the debate, because one cannot know what would have happened otherwise.
There is a good case to be made that government policies – while not strong enough to return the economy rapidly to health – did halt an accelerating economic decline.
But the middle-ground observers are right that one cannot prove what would have happened otherwise.
It is also true that it is rare for a government’s policies to have a major impact on the economy immediately.
But here is the remarkable thing: whether one listens to the Republicans, the Democrats, or the middle-ground observers, one gets the impression that economic statistics show no discernible improvement around the time that Obama took office.
In fact, the reality could hardly be more different.
This is especially true if one looks at revised data, which show the US economy to have been in far worse shape in January 2009 than was reported at the time.
In January 2009, the annualized growth rate in the second half of 2008 was officially estimated to have been -2.2%; but current figures reveal the contraction to have been much sharper – a horrendous -6.3%.
This is the main reason why economic activity in 2009 and 2010 was so much lower than had been forecast – and why unemployment was so much higher.
The maximum rate of economic contraction – a veritable freefall – came in the last quarter of 2008.
More specifically, according to the monthly GDP estimates from the highly respected forecaster Macroeconomic Advisers, it came in December – the month before Obama was inaugurated.
As the graphs below plainly show, the growth trajectory miraculously reversed as soon as Obama’s term began, yielding a clear “V” pattern in 2008-09.
The full force of the fiscal stimulus package began to go into effect in the second quarter of 2009, with the US National Bureau of Economic Research officially designating the end of the recession as having come in June of that year.
Real GDP growth turned positive in the third quarter, but slowed again in late 2010 and early 2011, which coincides with the beginning of the withdrawal of the Obama administration’s fiscal stimulus.
Other economic indicators, such as interest-rate spreads and the rate of job loss, also turned around in early 2009.
Labor-market recovery normally lags behind that of GDP – hence the “jobless recoveries” of recent decades.
But official data on monthly job losses and gains reveal an obvious V-shape here, too: as the graph below shows, the end of the free-fall for private-sector employment came precisely when Obama was inaugurated.
Again, such data do not demonstrate that Obama’s policies yielded an immediate payoff.
In addition to the lags in policies’ effects, many other factors influence the economy every month, making it difficult to disentangle the true causes underlying particular outcomes.
Given that difficulty, the right way to assess whether the fiscal stimulus enacted in January 2009 had a positive impact is to start with common sense.
When the government spends $800 billion on such things as highway construction, salaries for teachers and policemen who were about to be laid off, and so on, it has an effect.
Workers who otherwise would not have a job now have one, and may spend some of their income on goods and services produced by other people, creating a multiplier effect.
Those who claim that this spending does not boost income and employment (or that it causes harm) apparently believe that as soon as a teacher is laid off, a new job is created somewhere else in the economy, or even that the same teacher finds a new job right away.
Neither can be true, not with unemployment so high and the average spell of unemployment much longer than usual.
They also believe that the government deficit drives up inflation and interest rates, thereby crowding out other spending by consumers and firms.
But interest rates are at rock-bottom levels – even lower than in January 2009 – while core inflation has slowed to a pace unseen since the early 1960’s.
The conditions of the last four years – high unemployment, depressed output, low inflation, and low interest rates – are precisely those for which traditional “Keynesian” remedies were designed.
Economists’ more sophisticated forecasting models also show that the fiscal stimulus had an important positive effect, for much the same reasons as the common-sense approach.
The non-partisan US Congressional Budget Office reports that the 2009 spending increase and tax cuts gave a positive boost to the economy, and indeed had the extra multiplier effects predicted by traditional Keynesian models.
Allowing for a wide range of uncertainty, the CBO estimates that the stimulus added 1.5-3.5% to GDP by the fourth quarter, relative to where it otherwise would have been.
The boost to 2010 GDP, when the peak effect of the stimulus kicked in, was roughly twice as great.
Of course, econometric models do not much interest most of the public.
A turnaround needs to be visible to the naked eye to impress voters.
Given this, one can only wonder why basic charts, such as the 2008-2009 “V” shape in growth and employment, have not been used –&nbsp;and reused – to make the case.
Obama’s Tightrope
CAMBRIDGE – According to a United States State Department official, the concept of “smart power” – the intelligent integration and networking of diplomacy, defense, development, and other tools of so-called “hard” and “soft” power – is at the heart of the Obama administration’s foreign-policy vision.
Currently, however, Obama’s smart-power strategy is facing a stiff challenge from events in the Middle East.
If Obama fails to support the governments in Egypt, Bahrain, Saudi Arabia, or Yemen, he may jeopardize important foreign-policy goals such as Middle East peace, a naval base in the Persian gulf, stability in oil markets, or cooperation against Al Qaeda terrorists.
On the other hand, if he merely supports such governments, he will antagonize those countries’ new information-empowered civil society, thus jeopardizing longer-term stability.
Balancing hard-power relations with governments with soft-power support for democracy is like walking a tightrope.
The Obama administration has wobbled in this balancing act, but thus far it has not fallen off.
Because the Obama administration has used the term “smart power,” some people think that it refers only to the US, and critics complain that it is merely a slogan, like “tough love,” used to sugar-coat American foreign policy.
But smart power is by no means limited to the US.
Combining hard and soft power is a difficult task for many states – but no less necessary for that.
In fact, some small states have proven highly adept at smart-power strategies.
Singapore has invested enough in its military defense to make itself seem as indigestible as “a poisoned shrimp” to neighbors that it wishes to deter.
At the same time, it has combined this hard-power approach with attractive soft-power activities in the Association of Southeast Asian Nations (ASEAN), as well as efforts to use its universities as hubs of regional non-governmental activities.
Likewise, Switzerland long used mandatory military service and mountainous geography as hard-power resources for deterrence, while making itself attractive to others through banking, commercial, and cultural networks.
Qatar, a small peninsula off the coast of Saudi Arabia, allowed its territory to be used as the US military headquarters in the invasion of Iraq, while at the same time sponsoring Al Jazeera, the most popular television station in the region, which was highly critical of American actions. Norway joined NATO for defense, but developed forward-looking policies on overseas development assistance and peace mediation to increase its soft power.
Historically, rising states used smart-power strategies to good avail.
In the nineteenth century, Bismarck’s Prussia employed an aggressive military strategy to defeat Denmark, Austria, and France in three wars that led to the unification of Germany.
But once Bismarck had accomplished that goal, he focused German diplomacy on creating alliances with neighbors and made Berlin the hub of European diplomacy and conflict resolution.
One of Kaiser Wilhelm II’s great mistakes two decades later was to fire Bismarck, fail to renew his “reinsurance treaty” with Russia, and challenge Britain for naval supremacy on the high seas.
After the Meiji Restoration of 1867-1868, a rising Japan built the military strength that enabled it to defeat Russia in 1905.
But it also followed a conciliatory diplomatic policy toward Britain and the US, and spent considerable resources to make itself attractive overseas.
After the failure of its imperialist Greater East Asia Co-Prosperity scheme of the 1930’s (which had a soft-power component of anti-European propaganda) and its defeat in World War II, Japan turned to a strategy that minimized military power and relied on strategic alliance with the US.
Japan’s single-minded focus on economic growth achieved its goal, but the country developed only modest military and soft power.
In its first decades, communist China built its military strength and simultaneously used the soft power of Maoist revolutionary doctrine and Third World solidarity to cultivate allies abroad. But, after the exhaustion of the Maoist strategy in the 1970’s, Chinese leaders turned to market mechanisms to foster economic development.
Deng Xiaoping warned his compatriots to eschew external adventures that might jeopardize internal development.
In 2007, President Hu Jintao proclaimed the importance of investing in China’s soft power.
Given China’s rising economic and military power, this was a smart decision.
By accompanying its growing hard power with efforts to make itself more attractive, China aimed to stem its neighbors’ fears and tendency to balance Chinese power.
In 2009, China was justly proud of its success in emerging from the global recession with a high rate of economic growth.
Many Chinese mistakenly concluded that this represented a shift in the balance of global power, and that the US was in decline.
But such narratives can lead to conflict.
Indeed, overconfidence in assessing its power led to more assertive Chinese foreign-policy behavior in the latter part of 2009 and 2010.
China miscalculated by deviating from the smart strategy of a rising power and violating Deng’s dictum that China should proceed cautiously and “skillfully keep a low profile.” After Chinese leaders faced international criticism and deteriorating relations with the US, Japan, India, and other countries, they decided to return to Deng’s smart-power strategy.
So, as the Obama administration struggles to implement its smart-power strategy in the current revolutionary conditions of the Middle East, it is worth noting that the US is not alone in confronting the difficulties of combining hard and soft power successfully.
Smart power is an important strategy for success in world politics, but no one said that it would be easy.
Obama’s Vietnam Syndrome
NEW HAVEN – There can be no military resolution to the war in Afghanistan, only a political one.
Writing that sentence almost makes me faint with boredom.
As US President Barack Obama ponders what to do about the war, who wants to repeat a point that’s been made thousands of times?
Is there anyone on earth who does not know that a guerilla war cannot be won without winning the “hearts and minds” of the people?
The American public has known this since its defeat in Vietnam.
Americans are accustomed to thinking that their country’s bitter experience in Vietnam taught certain lessons that became cautionary principles.
But historical documents recently made available reveal something much stranger.
Most of those lessons were in fact known – though not publicly admitted – before the US escalated the war in Vietnam.
That difference is important.
If the Vietnam disaster was launched in full awareness of the “lessons,” why should those lessons be any more effective this time?
It would seem that some other lessons are needed.
Why did President Lyndon Johnson’s administration steer the US into a war that looked like a lost cause even to its own officials?
One possible explanation is that Johnson was thoroughly frightened by America’s right wing.
Urged by Senator Mike Mansfield to withdraw from Vietnam, he replied that he did not want another “China in Vietnam.”
His national security adviser, McGeorge Bundy, fueled Johnson’s fears.
In a memo of 1964, he wrote that “the political damage to Truman and Acheson from the fall of China arose because most Americans came to believe that we could and should have done more than we did to prevent it.
This is exactly what would happen now if we should be seen to be the first to quit in Saigon.” In another memo, Bundy argued that neutrality would be viewed by “all anti-communist Vietnamese” as a “betrayal,” thus angering a US domestic constituency powerful enough “to lose us an election.”
Did Johnson’s advisers push the country into a disastrous war in order to win an election – or, to be more exact, to avoid losing one?
Johnson, Bundy, and the others of course believed the “domino” theory, which says that one country “falling” to communism would cause others to fall.
But that theory meshed with suspicious ease with the perceived domestic political need for the president to appear “tough” – to avoid appearing “less of a hawk than your more respectable opponents,” as Bundy later put it.
What is uncanny about the current debate about Afghanistan is the degree to which it displays continuity with the Vietnam debates, and the Obama administration knows it.
To most Americans, Vietnam taught one big lesson: “Don’t do it again!”
Indeed, the military has in effect militarized the arguments of the peace movement of the 1960’s.
If hearts and minds are the key, be nice to local people.
If civilian casualties are a problem, cut them to a minimum.
If corruption is losing the client government support, “pressure” it to be honest, as Obama did in recent comments following President Hamid Karzai’s fraud-ridden re-election.
The domestic political lessons of Vietnam have also been transmitted down to the present.
George McGovern, the Democratic presidential candidate in 1972, proposed to end the war, which by then was unpopular, yet lost the election in a landslide. That electoral loss seemed to confirm Johnson’s earlier fears: those who pull out of wars lose elections.
That lesson instilled in the Democratic Party a bone-deep fear of “McGovernism” that continues to this day.
There is unmistakable continuity between Joseph McCarthy’s attacks on President Harry Truman’s administration for “losing” China, and for supposed “appeasement” and even “treason” and Dick Cheney’s and Karl Rove’s refrains assailing Obama for opposing the Iraq war, not to mention Sarah Palin’s charge during the election campaign that Obama had been “palling around with terrorists.”
It is no secret that Obama’s support for the war in Afghanistan, which he has called “necessary for the defense of our people,” served as protection against charges of weakness over his policy of withdrawing from Iraq.
So the politics of the Vietnam dilemma has been handed down to Obama virtually intact.
Now as then, the issue is whether the US is able to fail in a war without becoming unhinged.
Does the American body politic have a reverse gear?
Does it know how to cut losses?
Is it capable of learning from experience?
Or must it plunge over every cliff that it approaches?
At the heart of these questions is another: must liberals and moderates always bow down before the crazy right over national security?
What is the source of this right-wing veto over presidents, congressmen, and public opinion?
Whoever can answer these questions will have discovered one of the keys to a half-century of American history – and the forces that, even now, bear down on Obama over Afghanistan.
Recently, Obama paid a nighttime visit to Dover Air Force base to view the return of the remains of 16 soldiers killed in Afghanistan.
The event was minutely choreographed.
Obama saluted in slow motion, in unison with four uniformed soldiers, then walked in step with them past the van that had just received the remains from the cargo plane that had brought them home.
No one spoke.
Had Obama become caught in the military’s somber spell?
Or was his presence a silent public vow, as he makes his decisions, to keep his mind fixed on matters of life and death, rather than on the next election?
Obama’s actions in Afghanistan will provide the answer.
Obama’s Vision Thing
MADRID – Humbled by the Republicans’ landslide mid-term election victory, US President Barack Obama will now need to negotiate every minor detail of his domestic agenda with a confrontational Congress – at least until the next elections in 2012.
Congress can obstruct Obama’s foreign policy as well, but this remains a domain where any US president “enjoys almost royal prerogatives,” to use Alexis de Tocqueville’s somewhat inflated description.
These prerogatives, however, have so far allowed Obama only to describe the world that he wants, not to bring it about.
George W. Bush committed the cardinal sin of all fallen empires – that of overreach.
The Obama alternative was supposed to be collective global security sustained by multilateral structures.
Rather than containing rising powers such as China and India, they would be drawn into a civilized world order, one based on global governance and “smart diplomacy.”
Yet, instead of building such an order, Obama’s presidency has so far been a mighty struggle to stem the decline in American power.
He has fallen desperately short in making real progress towards the Promised Land, in which America lives in peace with the Muslim world, thanks to an Israeli-Palestinian settlement; brings about a nuclear-free planet (a noble, yet entirely delusional pledge); gets Russia’s support in addressing other global problems; contains China’s quest to translate its growing economic power into major strategic gains; ends its two diversionary wars in Muslim countries; and leads a solid international alliance to cut short Iran’s nuclear ambitions.
Foreign policy has almost invariably been the refuge of US presidents hit by mid-term defeats.
But foreign policy cannot be detached from its domestic foundations altogether.
Can a president shown to be hesitant in the Middle East and Afghanistan even before his mid-term setback muster the authority needed to advance his global vision after such a domestic debacle?
One should hope so, if only because no better alternative to Obama’s vision is in view.
And now, with a Republican-controlled House of Representatives, Obama might not be able to fulfill major foreign-policy promises, including ratification of the Comprehensive Test Ban Treaty, a key item in the president’s vision for reinvigorating the Non-Proliferation Treaty.
Should Congress not ratify the new Strategic Arms Reduction Treaty with Russia, Obama’s most tangible foreign-policy achievement so far, the entire inspection system for nuclear arms might collapse.
But, with respect to most other foreign-policy issues, the question is one of presidential leadership.
Obama’s problem lies not in his vision for America and the world, but in his deficient efforts to move from theory to practice.
Nevertheless, despite the new Congress’s overwhelmingly pro-Israel cast, Israeli Prime Minister Binyamin Netanyahu should not assume that the Republicans will stymie Obama if he pushes resolutely for an Israeli-Palestinian peace deal.
After all, it was a Republican who produced the Reagan Plan, calling on Israel to withdraw to the 1967 borders.
Thus, however much they despised Bill Clinton, the Republicans were prepared to allow him the glory of being a Middle East peacemaker, believing that any agreement reached with the Palestinians at the 2000 Camp David Summit was in America’s interest.
Obama was recently advised by David Broder, a long-time Washington Post columnist, to launch an attack on Iran.
Convinced that history will judge the president by his success in containing the Iranian threat, Broder also assumes that a war with Iran would reignite the American economy.
That is a strange idea, given that today’s two ongoing wars have only compounded the US economy’s weaknesses.
An American war against Iran is plausible only as a response to a blatant and immediate Iranian challenge to vital US interests, such as a major terrorist attack, an invasion of an ally in the Gulf, or disruption of the free flow of Middle East oil to the West.
The Iranian regime is far too astute to cross any of these red lines.
Iran, like North Korea, will continue to test Obama’s capacity to build international alliances aimed at putting pressure on defiant states.
Those, like Netanyahu, who stick to the lunacy of a military operation against Iran, will not find a ready ally in Obama.
Such an operation would make America appear to be doing Israel’s bidding – even George W. Bush refused when former Israeli Prime Minister Ehud Olmert asked the US to attack a Syrian nuclear reactor – and destroy Obama’s strategy of reconciliation with the Muslim world.
Glory in foreign policy is no guarantee of future electoral gains.
Conversely, Obama did not lose the mid-term elections because of his foreign policy’s inconsistencies.
He lost because US unemployment remains near 10%, with no prospect of rapid improvement.
And only one major foreign-policy test for Obama has clear implications for the US economy and job creation: the need to recalibrate relations with China in a way that restores balance to bilateral trade.
At the end of the day, Bill Clinton was right: now, as then, “It’s the economy, stupid.”
It certainly wasn’t – and isn’t – foreign policy, as George H. W. Bush, one of America’s most proficient presidents in international affairs – can attest.
Obama the Centrist
BERKELEY – Despite the frequent cries of American Republicans that Barack Obama is trying to bring European-style socialism to the United States, it is now very clear that the US president wishes to govern from one place and one place only: the center.
In fighting the recession, Obama decided early on that he would push for a fiscal stimulus program about half the size of what his Democratic economic advisers recommended, and he decided to count that as a total victory rather than press for expanding half a loaf into the full amount.
Obama has been so committed to that cautious policy that even now, with the unemployment rate kissing 10%, he will not grab for the low-hanging fruit and call for an additional $200 billion of federal aid to the states over the next three years in order to prevent further layoffs of teachers.
Rather than stemming further erosion of the national commitment to educate the next generation, Obama has shifted his focus to the long-term goal of balancing the budget – even while the macroeconomic storm is still raging.
And, in order to move forward on long-term budget balance, Obama has appointed a fiscal arsonist, Republican ex-Senator Alan Simpson, as one of his fire chiefs – one of the two co-chairs of his deficit reduction commission.
Simpson never met an unfunded tax cut proposed by a Republican president that he would vote against, and he never met a balanced deficit-reduction program proposed by a Democratic president that he would support.
Partisans whose commitment to deficit reduction vanishes whenever political expedience dictates simply do not belong running bipartisan deficit-reduction commissions.
Likewise, in dealing with the financial sector’s distress, Obama has acquiesced in the Bush-era policy of bailouts for banks without demanding anything of them in return – no nationalizations and no imposition of the second half of Walter Bagehot’s rule that aid be given to banks in a crisis only on the harsh terms of a “penalty rate.”
Obama has thus positioned himself to the right not only of Joseph Stiglitz, Simon Johnson, and Paul Krugman, but also of his advisers Paul Volcker and Larry Summers.
On environmental policy, Obama has pressed not for a carbon tax, but for a cap-and-trade system that, for the first generation, pays the polluter.
If you were a major emitter in the past, then for the next generation you are given a property right to very valuable emissions permits whose worth will only rise over time.
On anti-discrimination efforts, the repeal of the US military’s “don’t ask, don't tell” policy toward gay soldiers is on an extremely slow track – if, that is, it is hooked up to an engine at all.
On policy towards the rule of law, the closure of the mistake that is Guantánamo Bay is on a similarly slow track.
Moreover, Obama has joined George W. Bush in claiming executive powers that rival those claimed by Charles II of Britain in the seventeenth century.
On healthcare reform, Obama’s proudest moment, his achievement is...drum roll...a scheme that almost precisely mimics the reform that Mitt Romney, a Republican who sought the presidency in 2008, brought to the state of Massachusetts.
The reform’s centerpiece is a requirement imposed by the government that people choose responsibly and provide themselves with insurance – albeit with the government willing to subsidize the poor and strengthen the bargaining power of the weak.
In all of these cases, Obama is ruling, or trying to rule, by taking positions that are at the technocratic good-government center, and then taking two steps to the right – sacrificing some important policy goals – in the hope of attracting Republican votes and thereby demonstrating his commitment to bipartisanship.
On all of these policies – anti-recession, banking, fiscal, environmental, anti-discrimination, rule of law, healthcare – you could close your eyes and convince yourself that, at least as far as the substance is concerned, Obama is in fact a moderate Republican named George H.W. Bush, Mitt Romney, John McCain, or Colin Powell.
Now, don’t get me wrong.
My complaints about Obama are not that he is too bipartisan or too centrist.
I am at bottom a weak-tea Dewey-Eisenhower-Rockefeller social democrat – that is, with a small “s” and a small “d.”
My complaints are that he is not technocratic enough, that he is pursuing the chimera of “bipartisanship” too far, and that, as a result, many of his policies will not work well, or at all.
I understand that politics is the art of the possible, and that good-government technocracy is limited to the attainable.
But it would be good if Obama remembered that we dwell not in the Republic of Plato, but in the Roman sewer of Romulus.
Obama the Statesman
PRINCETON – The world may see Barack Obama as a leader weakened by the intractability of American domestic politics, but, as the 2012 presidential campaign heats up, the American public still sees him as a strong, capable leader in foreign affairs.
Some 49% of Americans approve of his overall handling of foreign affairs, with 63% approving of his approach to terrorism and 52% approving of the withdrawal from Iraq.
Contrast that with the 30% of Americans who approve of his handling of the economy, or the scant 26% who back his approach to the federal budget deficit.
With numbers like that, it would hardly be surprising if Obama tried to keep voters focused on foreign affairs in 2012, with high-profile initiatives like Secretary of State Hillary Clinton’s trip to Burma (Myanmar), carefully brokered diplomatic deals, and important international conferences at home, such as the NATO summit in Chicago in May.
But presidential trips overseas in the coming election year are likely to backfire at home, particularly with unemployment above 9%.
The Obama administration knows the iron law of American politics – “It’s the economy, stupid” – as well as anyone else.
Nevertheless, highlighting Obama’s ability to get things done abroad is more than an attempt at distraction; it also sends the message that the domestic-policy impasse is not his fault.
So expect plenty of foreign-policy news in the coming months.
Election-year tactics aside, American voters are right.
Obama has performed much better in foreign policy than in domestic policy, which is all the more surprising given the weak hand that he was dealt: an America that had lost its moral authority, its military invincibility, and its credibility as an economic model.
It is easy to focus on what has not been achieved, because Obama raised high expectations and then failed to deliver.
On his second day in office, he appointed two Special Representatives: George Mitchell for Middle East Peace and Richard Holbrooke for Afghanistan and Pakistan.
A month later, Dennis Ross was named Special Adviser for the Gulf and Southwest Asia (read: Iran).
Three years later, Ross and Mitchell have resigned, with no agreement in sight in the Middle East, and Holbrooke died unexpectedly, without having brought the Taliban and the Afghan and Pakistani governments to the negotiating table.
Relations between the United States and Iran are frostier than ever.
But none of Obama’s predecessors achieved any of these goals, either, whereas he can claim credit for the killing of Osama bin Laden and more than half of al-Qaeda’s top leadership.
Indeed, it is now believed that al-Qaeda could fragment and cease to exist as a military organization within two years.
Obama has also improved relations with Russia and negotiated a major arms-control treaty with the Kremlin.
Moreover, Obama has dramatically increased America’s presence in Asia, including signing a Treaty of Amity and Cooperation with ASEAN and joining the East Asia Summit, and moved quickly and flexibly in response to the revolutions across the Middle East.
He changed a 30-year relationship with Egypt in a week; helped to convince the Egyptian military not to fire on citizens in the first stage of the revolution; assembled and enabled a successful coalition to intervene in Libya; worked closely with Turkey, the European Union, and Saudi Arabia to increase pressure on Syria; cooperated with Egypt to broker a settlement in Yemen; and worked behind the scenes to convince Bahrain’s government to investigate its own violence against Shia protesters.
Moving south, Obama dedicated considerable resources to ensuring that the Comprehensive Peace Agreement, which ended Sudan’s civil war, was actually implemented, allowing South Sudan’s peaceful secession.
Although engagement with Iran and North Korea may have failed, Obama did help to engineer a historic breakthrough with Burma.
Finally, the US Senate ratified free-trade agreements with South Korea, Panama, and Colombia, clearing the way for the new Trans-Pacific Partnership.
The common thread in all of these achievements is old-fashioned diplomacy.
In choosing Clinton as Secretary of State, Obama appointed one of the world’s most admired women.
She has lived up to her reputation.
Similarly, Susan Rice has been a remarkably successful US ambassador to the United Nations, consistently delivering votes in the Security Council.
Obama is pursuing a coherent grand strategy –&nbsp;what he called in his 2009 inaugural address a “new era of responsibility.”
On the international side, his national-security strategy holds that “the burdens of a young century cannot fall on American shoulders alone.” The US strategic is committed to an “international order based on rights and responsibilities,” including a “broader voice – and greater responsibilities” for emerging powers, and the imposition of real consequences on countries that violate their international obligations.
Within two years of taking office, Obama helped to transform the G-8 into the G-20, secured the re-weighting of votes on the International Monetary Fund’s board away from Europe and toward new economic powers, and committed to supporting the candidacies of India and Japan for membership of a reformed UN Security Council.
His administration also devoted enormous energy to building and strengthening regional institutions.
For the first time, the Arab League is playing an active role in addressing political upheaval and government brutality in its midst, as is the Gulf Cooperation Council.
The African Union helped to restore democracy in Madagascar, aided in forcing Côte d’Ivoire’s president to leave office after losing an election, and sent troops to Somalia.
The East Asian Summit is becoming a forum for region-wide security discussions, from the resolution of maritime disputes to fighting pirates.
Obama’s Republican opponents love to hammer home the phrase “leading from behind.”
But they miss the point, for they imagine leadership as the equivalent of a nineteenth-century cavalry charge, in which the general is either out front carrying the flag or following along in the rear.
Obama is actually far in front in terms of shaping the world’s norms and expectations.
He leads from wherever he needs to lead in order to get results.
And he’s gotten plenty.
Obama versus Romney on Jobs
BERKELEY – The United States has just completed its third year of economic recovery, but the unemployment rate remains above 8%, and there are worrisome signs of a slowdown.
So it is no surprise that jobs have become a major focus in the presidential campaign – or that the candidates have very different ideas about how to boost employment.
Last autumn, President Barack Obama proposed the American Jobs Act, a $450 billion package of fiscal measures aimed at job creation.
The AJA amounted to about 3% of GDP and was designed to take effect in 2012, providing a timely employment boost and insurance for the US recovery against global headwinds.
Most of its measures had enjoyed bipartisan support in the past; tax cuts comprised about 56% of the total cost; and the package was paid for in Obama’s long-term deficit reduction plan.
Several independent economists concluded that Obama’s plan would provide a significant lift to the job market in 2012-2013.
Indeed, two of the nation’s most respected forecasters predicted that the AJA would add 1.3-1.9 million jobs in 2012 and more than two million jobs by the end of 2013.
The non-partisan Congressional Budget Office (CBO) also found that most of the AJA’s policies ranked high in budgetary effectiveness, measured by the number of jobs created in 2012-2013 per dollar of budgetary cost.
The AJA was filibustered by Senate Republicans, and the Republican-controlled House of Representatives likewise prevented the bill from coming to a vote.
Mitt Romney, now the Republican presidential candidate, attacked the plan as “mere stimulus” that would “throw a cup of gasoline on the embers” of the recovery.
Ultimately, Obama, bolstered by polls endorsing his plan, won partial passage of two AJA policies: a one-third cut in employees’ payroll taxes (he had proposed one-half), and an extension of unemployment benefits by about 60% of what he had recommended.
But Congress failed to approve a 50% cut in employers’ payroll taxes – a business tax cut that many Republicans favored in the past and that ranks high on budgetary effectiveness.
Nor did Congress approve $30 billion in federal grants to states to enable them to employ about 135,000 teachers, police, and firemen, despite strong voter support.
Such grants between 2009 and 2011, totaling $130 billion, helped states to maintain vital services and retain the public employees providing them.
Romney opposes more federal money for the states, arguing that “it is time to cut back on government and help the American people.”
But teachers, firemen, and police are American people who help other American people.
Government employment is falling at the fastest rate since the 1940’s, and is now at its 2006 level.
If public employment had grown during the last three years at about the same rate as the population, as it did during George W. Bush’s presidency, the unemployment rate would be around 7% rather than 8.2%, owing to about 800,000 additional jobs.
Likewise, Congress failed to approve Obama’s call for $90 billion in additional infrastructure spending, which would have supported about 400,000 jobs, despite the fact that the US has at least $1.1 trillion in unfunded infrastructure needs.
Moreover, infrastructure investment not only creates jobs in the near term, but also promotes long-term competitiveness.
Altogether, Congress left at least one million jobs on the negotiating table, holding unemployed workers hostage to the outcome of November’s election.
Meanwhile, in response to persistent media pressure, Romney has unveiled his policies to boost short-term job creation.
They are not convincing. Romney says that he would ensure that the US puts more people to work in the energy sector.
But, while the oil and gas industry has grown significantly since 2007, it employs fewer than 200,000 people, implying a negligible effect even if employment in this sector doubled in the short run.
And, while Romney says that he would open new foreign markets, Obama has been doing just that, winning passage of three major trade agreements and increasing federal support for US exports, which have been growing nearly twice as fast as they did during the recovery from the 2001 recession.
Moreover, Romney’s promise to charge China, America’s third-largest export market, with currency manipulation, and to impose large tariffs on Chinese imports, would almost certainly invite retaliation, causing a decline in US exports and jobs.
Romney would also repeal “Obamacare” – the 2010 health-care reform legislation – because it “is scaring small business from hiring.”
But the evidence for this claim is meager and anecdotal. &nbsp;A recent survey found that most small businesses support the reform.
Most businesses, large and small, cite insufficient demand as the primary reason they are not hiring.
Nor is Romney’s promise to enact immediate cuts in federal discretionary spending by an additional 5% likely to boost job growth, as he asserts.
When an economy is suffering from high unemployment and weak aggregate demand, spending cuts are contractionary.
Romney conceded this point recently, acknowledging that the “fiscal cliff” – the expiration of Bush-era tax cuts at the end of this year, combined with large spending cuts already scheduled to take effect – would push the economy back into recession.
Finally, in addition to extending Bush’s tax cuts, Romney promises an across-the-board 20% reduction in marginal personal-income-tax rates and a significant cut in the corporate rate to encourage businesses to hire more workers.
Despite large cuts in marginal income-tax rates at the start of the Bush administration, however, job growth between 2000 and 2007 was half the rate of the previous three decades.
Even if Romney’s new tax cuts strengthened investment and growth in the long run (a debatable proposition that depends on how they are financed), their short-term effect on job creation would be minimal, and they would entail a significant loss of revenue.
Indeed, these cuts perform poorly on the CBO’s measure of budgetary effectiveness.
Obama’s proposals to boost job creation are convincing, whereas Romney’s proposals would have little or no effect – and some could even make matters worse.
Obesity Unbound
Transatlantic Trade’s Transformative Potential
NEWPORT BEACH – After instant and seemingly coordinated fanfare in Europe and the United States, the proposal for a European Union-US free-trade area has been generating little media attention.
There are three reasons for this, and all three highlight broader constraints on good national economic policymaking and productive cross-border coordination.
In his “State of the Union” address in February, US President Barack Obama proposed a “comprehensive Transatlantic Trade and Investment Partnership” with Europe based on trade that is “fair and free.”
His administration regards this as part of a comprehensive approach to generating “good-paying American jobs.”
Obama’s bold proposal received an immediate and enthusiastic reception in Europe.
Taking to the airwaves within hours, European Commission President José Manuel Barroso and European Council President Herman Van Rompuy called the proposal “ground-breaking.”
Arguing that it could increase Europe’s annual economic growth rate by half a percentage point, they declared that formal negotiations would start quickly.
At first, there was quite a bit of general interest, and understandably so.
The proposal involves the world’s two largest economic areas, with national, regional, and global implications.
Yet, despite the realization that an agreement could fundamentally alter the nature of global trade and production networks, it only took a few weeks for interest to drop off.
One reason is rooted in initial conditions that limit direct gains from increased trade while widening the scope for tension and conflict.
Free-trade agreements that promise the greatest benefits are those that link economies characterized by high tariffs, low levels of trade, and little overlap in consumption and production patterns.
This is not the case for the EU and the US.
Average tariff levels are only 3%.
The EU already accounts for almost 20% of US imports, and the US for 11% of EU imports.
And, given similar per capita income levels and cultural orientations, overlaps in production and consumption are considerable.
Having said this, there would be immediate upside potential, owing to better resource allocation, more harmonized investment regimes, stronger standards, and the elimination of outdated non-tariff and regulatory barriers. Aerospace, auto manufacturing, biotechnology, cosmetics, and pharmaceuticals are among the sectors that stand to gain.
There is also the potential for reforming inefficient approaches to food and agriculture, particularly in Europe.
The second reason for waning attention to the proposed partnership speaks to a broader issue: A seemingly endless stream of short-term political dramas has made it extremely difficult for both Europe and the US to focus for long on any secular and structural initiative.
In Europe, broad-based discussion was undermined by the outcome of the Italian election – just the latest sign of how frustrated citizens in a growing number of countries are rejecting conventional political parties and the political status quo.
With that, it becomes more difficult to pursue longer-term policy objectives, which merely adds further uncertainty about the precise path of European economic and financial integration.
In the US, the disruption took the form of yet another fiscal mini-drama.
With a dysfunctional Congress again letting down the American people, the country is now on the receiving end of a budgetary sequester – another self-manufactured headwind to economic growth, job creation, and progress on reducing income and wealth inequalities.
Put the two together and you get a barrier to EU-US trade negotiations – one that renders ambitious (though not entirely unrealistic) the two-year timeline that has been set for completing the deal.
The third reason concerns the poor state of global policy dialogue, notwithstanding all the happy talk about global challenges and shared responsibilities.
Last month’s G-20 meeting ended up as yet another expensive summit lacking sufficient content and follow through.
Rather than catalyzing constructive policy coordination, it has inadvertently encouraged complacency.
All three reasons are highly regrettable.
They underscore the West’s seeming inability to break out of a short-term mindset in order to respond to the risks and opportunities related to historic national and global re-alignments.
The real promise of freer transatlantic trade consists in its potential to transform global trade, production networks, and multilateral organizations to the benefit of all.
At the most general level, it would act to rationalize the current system of four poorly functioning blocs – centered on China, Europe, the US, and the rest – to three, and eventually (and perhaps quite quickly) to two better-functioning blocs that would have little choice but to work well together: one dominated by China, and the other by the EU/US.
Such a global structure has the potential to encourage better medium-term alignments to reduce trade barriers, set proper standards, and enhance mutually beneficial cooperation.
It would facilitate coordination on stronger global rules and principles, including those pertaining to intellectual-property rights and trade in services.
And it would force multilateral organizations to reform if they wish to retain even the limited relevance that they have now.
The proposal for freer transatlantic trade is potentially transformational.
It comes at a time when the West is increasingly being dragged down by short-term disruptions and continued policy inertia.
Yet the implementation prospects are far from promising.
The proposal has the capacity to act as a catalyst for adapting policy approaches to current realities; but it is subject to the dulling forces of twentieth-century mindsets and institutions that are too slow to adapt to twenty-first-century challenges and opportunities.
Occupy the Classroom?
CAMBRIDGE – Early last month, a group of students staged a walkout in Harvard’s popular introductory economics course, Economics 10, taught by my colleague Greg Mankiw.
Their complaint: the course propagates conservative ideology in the guise of economic science and helps perpetuate social inequality.
The students were part of a growing chorus of protest against modern economics as it is taught in the world’s leading academic institutions.
Economics has always had its critics, of course, but the financial crisis and its aftermath have given them fresh ammunition, seeming to validate long-standing charges against the profession’s unrealistic assumptions, reification of markets, and disregard for social concerns.
Mankiw, for his part, found the protesting students “poorly informed.”
Economics does not have an ideology, he retorted.
Quoting John Maynard Keynes, he pointed out that economics is a method that helps people to think straight and reach the correct answers, with no foreordained policy conclusions.
Indeed, though you may be excused for skepticism if you have not immersed yourself in years of advanced study in economics, coursework in a typical economics doctoral program produces a bewildering variety of policy prescriptions depending on the specific context.
Some of the frameworks economists use to analyze the world favor free markets, while others don’t.
In fact, much economic research is devoted to understanding how government intervention can improve economic performance.
And non-economic motives and socially cooperative behavior are increasingly part of what economists study.
As the late great international economist Carlos Diaz-Alejandro once put it, “by now any bright graduate student, by choosing his assumptions….carefully, can produce a consistent model yielding just about any policy recommendation he favored at the start.” And that was in the 1970’s!
An apprentice economist no longer needs to be particularly bright to produce unorthodox policy conclusions.
Nevertheless, economists get stuck with the charge of being narrowly ideological, because they are their own worst enemy when it comes to applying their theories to the real world.
Instead of communicating the full panoply of perspectives that their discipline offers, they display excessive confidence in particular remedies – often those that best accord with their own personal ideologies.
Consider the global financial crisis.
Macroeconomics and finance did not lack the tools needed to understand how the crisis arose and unfolded.
Indeed, the academic literature was chock-full of models of financial bubbles, asymmetric information, incentive distortions, self-fulfilling crises, and systemic risk.
But, in the years leading up to the crisis, many economists downplayed these models’ lessons in favor of models of efficient and self-correcting markets, which, in policy terms, resulted in inadequate governmental oversight over financial markets.
In my book The Globalization Paradox, I contemplate the following thought experiment.
Let a journalist call an economics professor for his view on whether free trade with country X or Y is a good idea.
We can be fairly certain that the economist, like the vast majority of the profession, will be enthusiastic in his support of free trade.
Now let the reporter go undercover as a student in the professor’s advanced graduate seminar on international trade theory. Let him pose the same question: Is free trade good?
I doubt that the answer will come as quickly and be as succinct this time around. In fact, the professor is likely to be stymied by the question.
The professor would then launch into a long and tortured exegesis that will ultimately culminate in a heavily hedged statement: “So if the long list of conditions I have just described are satisfied, and assuming we can tax the beneficiaries to compensate the losers, freer trade has the potential to increase everyone’s well-being.”
A direct, unqualified assertion about the benefits of free trade has now been transformed into a statement adorned by all kinds of ifs and buts.
Oddly, the knowledge that the professor willingly imparts with great pride to his advanced students is deemed to be inappropriate (or dangerous) for the general public.&#160;
Economics instruction at the undergraduate level suffers from the same problem.
In our zeal to display the profession’s crown jewels in untarnished form – market efficiency, the invisible hand, comparative advantage – we skip over the real-world complications and nuances, well recognized as they are in the discipline.
It is as if introductory physics courses assumed a world without gravity, because everything becomes so much simpler that way.
Applied appropriately and with a healthy dose of common sense, economics would have prepared us for the financial crisis and pointed us in the right direction to fix what caused it.
But the economics we need is of the “seminar room” variety, not the “rule-of-thumb” kind.
It is an economics that recognizes its limitations and knows that the right message depends on the context.
Downplaying the diversity of intellectual frameworks within their own discipline does not make economists better analysts of the real world.
Nor does it make them more popular.
Occupy the Mortgage Lenders
WASHINGTON, DC – Participants in the Occupy Wall Street movement are right to argue that the big banks have never properly been investigated for the mortgage origination, aggregation, and securitization behavior that was central to the financial crisis – and to the loss of more than eight million jobs.
But, thanks to the efforts of New York’s attorney general, Eric Schneiderman, and others, serious discussion has started in the United States about an out-of court mortgage settlement between state attorney generals and prominent financial-sector firms.
Talks among state officials, the Obama administration, and the banks are currently focused on reported abuses in servicing mortgages, foreclosing on homes, and evicting their residents.
But leading banks are also accused of illegal behavior – inducing people to borrow, for example, by deceiving them about the interest rate that would actually be paid, while misrepresenting the resulting mortgage-backed securities to investors.
If these charges are true, the bank executives involved may fear that civil lawsuits would uncover evidence that could be used in criminal prosecutions.
In that case, their interest would naturally lie in seeking – as they now are – to keep that evidence from ever seeing the inside of a courtroom.
The scale and structure of any out-of-court mortgage settlement should address the damage inflicted by the alleged pattern of behavior.
Many Americans now have too much debt.
About 10 million mortgages are estimated to be “underwater” (the house is worth less than the loan).
And, in key markets around the US, four years into the housing slump, home prices continue to fall.
If these were commercial loans, creditors would consider restructuring them – extending the payment schedule and typically writing down principal.
But, in America’s home mortgage market, this is much less common.
Banks want neither millions of negotiations nor, most importantly, the need to face the losses implied on their loan portfolio.
As a result, households want to spend less and pay down their debts.
To some extent, this is the natural aftermath of any credit boom.
And household deleveraging in the US will take a long time.
Policymakers can respond in three ways.
First, they could do nothing – apparently the preference of the Republican congressional leadership, which recently wrote to Fed Chairman Ben Bernanke to demand that he not try to stimulate the economy further.
Second, they could continue to rely on conventional monetary and fiscal policy to pull the economy out of the doldrums.
This is the approach still preferred by the Obama administration, despite its poor performance.
Third, we could adopt an alternative approach that directly reduces the value of underwater mortgages.
At this point, any improvement in consumer balance sheets would directly stimulate the economy and create jobs.
Start with the proposal made by Martin Feldstein, who recommends a trade: the government should reduce the value of mortgages when they are sufficiently underwater, with the government and the banks splitting the losses; in exchange, the borrower must agree that the new loan becomes “full recourse.”
That means that lenders could pursue borrowers’ other assets – not just the house – in case of default.
The key to this proposal is that banks must agree; it is a voluntary debt restructuring, compelled by no legal authority.
In principle, banks should be attracted to the proposal, because restructured loans are less likely to default.
In practice, the banks have consistently dragged their feet on mortgage restructuring – and are laying off staff, rather than hiring people who could help them deal with an initiative of the required scale.
Feldstein calculates that the one-time cost of principal reduction would be around $350 billion.
Of course, in our current fiscal environment, it will be hard to find additional resources from the budget.
But $350 billion is roughly what the financial sector as a whole earned in an average quarter during the credit boom – and profit levels in recent quarters have reached or exceeded those levels.
So, if the entire write-down cost were covered by banks, most of them would lose the equivalent of no more than one year’s profits – spread over several years.
Those boom-time profits were in any case overstated, because they were not adjusted for risk.
And when the downside risks materialized, the losses were largely socialized – the primary reason why US public debt has soared in recent years.
Asking shareholders and management to pay a relatively small amount is entirely fair and appropriate under these circumstances.
Some in the financial sector would, of course, threaten dire consequences.
In fact, bank stock prices might drop, and it is entirely possible that compensation and bonuses would be curtailed, at least in the short term.
On the other hand, a large-scale settlement that legitimately and finally removed the threat of future legal action would lift an enormous cloud that hangs over some of the largest lenders, including Bank of America, and creates significant risks for the rest of the financial system.
If the banks were ever really held accountable for the social costs of their behavior, the bill would far exceed $300-400 billion.
Realistically assessed, the full downside legal risks to financial institutions are in excess of $1 trillion – particularly if it can be demonstrated that the “mortgage-backed securities” sold to investors were not backed by mortgages at all, because the proper legal paperwork was never done.
Any settlement should also include the banks’ explicit agreement that they will support modifying America’s bankruptcy law to enable inclusion of mortgages in the usual court-run processes.
If the Occupy Wall Street movement tells us anything, it is that the last thing the US economy needs is more households overwhelmed by debt.
Of Apes and Men
Of Banks and Bailouts
PALO ALTO – Early signs of a manufacturing rebound, already strong in Asia, lend hope for some modest recovery from today’s deep global recession.
But a strong and durable economic expansion is unlikely until progress is made in dealing with the toxic assets poisoning the balance sheets of financial institutions and bedeviling policymakers almost everywhere.
The financial system is a complex interaction of lenders and borrowers, buyers and sellers, and savers and investors.
When it functions well, it balances risk and reward, and innovation and safety.
Banks and other financial firms borrow short – increasingly in recent years from the commercial securities market, not deposits – and lend long at higher interest rates, taking on both credit risk (of default) and interest-rate risk.
Increasing leverage boosts returns on the upside but is very risky on the downside.
No surprise, then, that the large financial firms that failed – Bear Stearns, Fannie Mae and Freddie Mac, AIG, and Lehman Brothers – had the highest leverage, in the range of 30 or 40 times their capital.
From 2002-2007, trillions of dollars were loaned for sub-prime and prime mortgages, autos, credit cards, commercial real estate, private equity, and more, on the assumption by (most) borrowers and lenders that strong global growth, rising home prices and cheap, readily available short-term credit would continue for the foreseeable future.
Once the music stopped, the assets plunged in value.
The complexity of securitized pools of loans that were sold worldwide – bilaterally over the counter – as pieces of various tranches, meant that nobody was certain about who owned what or what it was worth.
This difficulty in valuing the now so-called toxic assets remains at the core of today’s credit difficulties.
The immense response by central banks and finance ministries has eased the strain.
The United States Federal Reserve’s commercial paper facility was helpful in reopening the commercial paper market (although other of its facilities have been less successful).
The barometer of stress watched most closely by experts, the LIBOR-OIS (Overnight Indexed Swap) spread is down substantially from its stratospheric crisis levels.
Some government programs are shrinking from lack of demand.
But there remain little new securitization and bank debt offerings without government backup.
The original idea for the US government to buy up (some of the) toxic assets with the $700 billion Troubled Asset Relief Program (TARP) gave way to capital infusions (and auto bailouts).
Treasury Secretary Timothy Geithner’s new public-private investment program to buy toxic assets has few takers, despite subsidized non-recourse financing. So the toxic assets remain on bank (and other) balance sheets.
Can banks generate enough profits for long enough to buy time to write down smaller losses and raise private capital later in a stronger economy?
Or are the losses so large –and in danger of mounting further as others (such as commercial real estate) are added – that a gradual workout is unlikely, if not impossible?
Estimates of the losses on US loans and securities range from under $1 trillion to almost $4 trillion.
The IMF puts them at $2.7 trillion, but the range of uncertainty is enormous. More than half is held by banks and broker-dealers.
And analogous problems exist in Western Europe (e.g., for loans to Eastern Europe) and Asia.
Gradualism and profitability, and eventually US Brady bonds, worked in the Latin American debt crisis in the 1980’s.
But a difficult economy will drive down the value of toxic assets and make more assets toxic. For example, falling home prices put more families in negative equity – mortgages worth more than the home.
This creates an incentive to default, which increases foreclosures and lowers the value of the mortgage-backed securities on financial firms’ books.
Policymakers need a Plan B in the event that one proves necessary, modeled on America’s rapid resolution of insolvent savings and loans in the early 1990s, together with sales of toxic assets in large blocks (to prevent so-called adverse selection from unraveling any bidding process).
History is instructive.
Of the $500 billion that America required for the Resolution Trust Corporation (equivalent to $1¼ trillion today), $400 billion was returned from asset sales, for a net cost of $100 billion, one-tenth the worst-case private forecasts of $1 trillion.
The final tab on the toxic mortgage bailout and other assets is likely to be a larger percentage of a larger amount, but still far less than the face value of the loans, because the underlying assets will in many cases retain considerable value.
In addition to bailouts and toxic asset plans, governments worldwide want central banks to monitor macroeconomic and overall financial-sector risk (as opposed to focusing on individual firms).
Barack Obama’s administration would anoint the Fed, whose history has been to recognize crises late. The Bank of England seeks similar powers.
The European Union wants to establish a European Systemic Risk Board composed of the national central bank governors, chaired by the European Central Bank.
What will these central bankers do to advise on macro-prudential risk?
Demand adjustments in large current-account imbalances?
Call for reductions in taxes, spending, and government debt, which are the primary systemic risks?
To do that could jeopardize monetary policy independence and heighten the threat of future inflation.
Dealing with financial institutions deemed too big to fail won’t be easy.
The current system, which allows privatized gains from highly leveraged risk-taking but socializes losses in the event of failure, must be changed to avoid episodic financial meltdowns.
To balance the benefits of scale and scope with the socialized losses to taxpayers, firms deemed too big to fail should be required to have more capital, and the amount should rise disproportionately with size.
Converting some portion of debt to equity under predetermined solvency-threatening conditions would provide an extra layer of protection.
Add a higher bar for government bailouts, and these stronger incentives would induce private financial institutions and investors to take responsibility before disaster strikes.
Britain’s Gas Chance
PRAGUE – In late June, the British Geological Survey announced the world’s largest shale-gas field.
The Bowland Shale, which lies beneath Lancashire and Yorkshire, contains 50% more gas than the combined reserves of two of the largest fields in the United States, the Barnett Shale and the Marcellus Shale.
The United Kingdom has been reluctant to join the hydraulic-fracturing (or fracking) revolution.
Yet tapping the Bowland Shale could reignite the UK economy and deliver huge cuts in CO2 emissions.
At the same time, the UK Parliament has approved stringent new measures to reduce carbon emissions by 2020, with the biggest CO2 cuts by far to come from an increase of more than 800% in offshore wind power over the next seven years.
But offshore wind power is so expensive that it will receive at least three times the traded cost of regular electricity in subsidies – more than even solar power, which was never at an advantage in the UK.
For minimal CO2 reduction, the UK economy will pay dearly.
This is just one example of current climate policy’s utter remove from reality – and not just in the UK.
We are focusing on insignificant – but very costly – green policies that make us feel good, while ignoring or actively discouraging policies that would dramatically reduce emissions and make economic sense.
Consider the three standard arguments for a green economy: climate change, energy security, and jobs.
As it turns out, fracking does better on all three.
Assuming complete success for the UK’s scheme, offshore wind power could produce more than 10% of the country’s electricity in 2020 and reduce its CO2 emissions by up to 22Mt, or 5%, per year.
But the cost would also be phenomenal.
The UK would pay at least $8 billion annually in subsidies to support this inherently inefficient technology.
Compare this to the opportunity of the Bowland Shale.
If, by 2020, the UK could exploit its reserves there at just one-third the intensity of the exploitation of the Barnett and Marcellus Shales today, the outcome would be phenomenal.
Natural gas is much more environmentally friendly than coal, which continues to be the mainstay of electricity production around the world and in the UK.
Gas emits less than half the CO2 per kWh produced, and it emits much lower amounts of other pollutants like NOx, SO2, black carbon, CO, mercury, and particulates.
If the UK sold its shale gas both domestically and abroad to replace coal, it could reduce local air pollution significantly and reduce global carbon emissions by 170Mt, or more than a third of UK carbon emissions.
At the same time, instead of costing $8 billion per year, shale-gas production would add about $10 billion per year to the UK economy.
Likewise, it is often argued that the green economy will increase energy security, as green resources will leave countries less dependent on fossil-fuel imports.
But even much higher supplies of wind power would improve security only marginally, because the UK would still have to import just as much oil (wind replaces mostly coal, rarely oil) and much of its gas, leaving it dependent on Russia.
For countries closer to Russia’s sphere of influence, like Poland and Ukraine, this dependence becomes palpable.
And yet the UK could improve its energy security dramatically, because it has enough gas reserves to cover roughly the entirety of its gas consumption for a half-century or more.
Moreover, increased UK production would lower world prices, making countries with fewer or no shale-gas resources safer.
And, of course, any country that is $10 billion richer, rather than $8 billion poorer, will have a better chance to handle future problems.
Finally, green-economy advocates promise a surfeit of green jobs.
But economic research convincingly shows that while subsidies can buy extra jobs, they eventually have to be financed with increased taxes, costing an equal number of jobs elsewhere.
In comparison, shale gas in the US has created an estimated 600,000 jobs that are generating about $100 billion in added GDP and almost $20 billion in public revenue.
Current global climate policy is unsustainable; the UK’s commitment to boosting offshore wind power is only the latest example.
Distressed economies cannot afford to pay more than $350 to avoid each ton of CO2, which could be cut on the European market for about 50 times less.
Shale gas could cut the cost of reducing CO2 seven times more while actually helping Europe’s ailing economy.
Though it is not the ultimate solution, shale gas is greener.
With good regulation, during the coming decade it can do the most good worldwide in terms of cutting CO2 emissions and improving living conditions.
Mindless subsidies that we cannot afford will not create a green economy; what will is investment in research and development to bring down costs, so that green energy eventually can outcompete gas.
Of Saints and Servants
MOSCOW: In July 1918, the last Tsar, Nikolai II, his family, three servants and a doctor were executed by a Cheka firing squad in a cellar in the Urals city of Ekaterinburg.
Their bodies were then chopped up, covered in quicklime, burnt, buried, dug up, and buried again in an unmarked pit.
In the summer of 1998 they were re-buried with honour in Saint Petersburg.
This summer, the Russian Orthodox Church canonized our last Royal family as martyrs.
The four servants who died with the Tsar’s family, however, were not canonized.
Those four could leave; they could have chosen to go but didn’t.
They never asked whether their fate was their Master’s fault.
They never expected benefits or rewards.
They were faithful until the end and were killed for it.
Our family, all through the Stalin, Khrushchev, and Brezhnev years, also had servants.
There were many of them and they carried out different tasks.
We never called them servants, however; it was not a polite word.
When reading tales as a girl about kings and grandees surrounded by servants, my child’s heart wept at those crimes against equality and justice.
No, the people who lived with us, who cooked for us, who walked the baby carriages, washed windows and cleaned fur-coats in summer time were never called “servants.”
They had names and would never be asked to carry out dreadful or dangerous tasks.
The most ancient in our family was Nanny Grusha.
She was small and light, with white fluffy hair.
Once, awakened by a nightmare, I shouted for her in panic.
She sighed, muttered, and noiselessly took her seat nearby my bed.
Her cheeks gurgled: “psh-sh-sh.”
Nanny Grusha smelt of lamp oil, soap flakes, and chimney smoke.
I held her by her dress; it was a dark-brown dress with small white spots.
For me, that shade of brown remains the colour of safety.
The monsters who lived under my bed couldn't kidnap me so long as Nanny was near.
In daytime I cried in Nanny's skirt; if I was hungry I ran to Nanny. Nanny never said: “Eat what is on your plate.”
She never said: “You must share with others,” or “don't be greedy.”
Nanny never taught. Right and wrong were not her tasks.
She never took anything away from me; never held somebody up as an example; never put me to shame.
If I beat my sister or spat, pulled her hair or took away her toys, Nanny would wait for my storm to blow itself out, then take me to a distant room and feed me sweets and pies, taken from an old pillowcase.
Nanny had no idea about limits and fairness.
Hers was not kindness but the pure, strong poison of love.
For a long time I was sure that “nanny” was a kind of blood relationship.
You can be “a granny” smelling of perfume and wearing a pearl necklace, but you can also be “a nanny” smelling of smoke and oil and with a cross on a string under your brown dress.
I once asked Nanny: “Do you believe in God?
Stop it now!
There is no God!
The Cosmonauts haven't seen anybody up there.” But Nanny only muttered: “He would never come into sight.”
Nanny never married; never had children of her own.
She raised other’s babies.
She loved them blindly, greedily, saving them from wind, hunger, monsters, parents and, most of all, other people.
I noted the chill between my father and Nanny; they didn’t even say “hello” to each other.
Nanny loved my mother because my mother was once her baby.
Sometimes it seemed to me that she would kill anyone who would dare to hurt us.
Only years after her death did I learn of the crime she committed for us.
In the days of the Nazi blockade of Leningrad, Nanny took out of the city a sack of flour.
She did it when Leningrad was dying of hunger, when dead bodies lay everywhere and people ate people.
She removed a sack of flour from a city where people were killing each other for a crust of bread.
She went onto the icy Neva river during a bombardment, together with a baby committed to her care – my mother’s 30 year-old brother.
He was a grown man to everyone but Nanny, always remaining for her a small, pink, frightened, tear-stained child.
Nanny’s small nephews died from hunger in Leningrad during the siege. “How could you do it?” – my Grandmother asked.
Nanny stayed in our family forever. She raised my mother’s seven children and five grandchildren and reached a great age without asking anything for herself.
I have never loved anyone in the world as strongly as I loved Nanny.
No one has loved me as strongly as she.
I did nothing to deserve her love.
More: if it were not for her, I would never have known that love is bottomless.
White hair, brown dress, a crucifix on a string – she was my small guardian angel, given to me for nothing.
So Russia’s Church blessed the last Tsar but forgot his servants.
But we should remember who, it is said, will pass through the eye of a needle to find salvation.
The Moscow Patriarch would likely become stuck in that needle’s eye because of his pearl-encrusted chasubles, his gold and his Mercedes.
In this hideous century of ours, only beggars and faithful people pass through in the end.
My sinful and simple Nanny got through, but probably not before stopping for a moment to look back and check one last time at how her children were doing.
Oil Currency Hypocrisy
CAMBRIDGE – Does it make sense for United States Treasury Secretary Hank Paulson to be touring the Middle East supporting the region’s hard dollar exchange-rate pegs, while the Bush administration simultaneously blasts Asian countries for not letting their currencies appreciate faster against the dollar?
Unfortunately, this blatant inconsistency stems from the US’s continuing economic and financial vulnerability rather than reflecting any compelling economic logic.
Instead of promoting dollar pegs, as Paulson is, the US should be supporting the International Monetary Fund’s behind-the-scenes efforts to promote de-linking of oil currencies and the dollar.
Perhaps the Bush administration worries that if oil countries abandoned the dollar standard, today’s dollar weakness would turn into a rout.
But the US should be far more worried about promoting faster adjustment of its still-gaping trade deficit, which in many ways lies at the root of the recent sub-prime mortgage crisis.
The administration’s multi-pronged effort to postpone pain to US consumers, including super easy monetary and fiscal policy, only risks a greater crisis in the not-too-distant future.
It is not at all hard to imagine the whole strategy boomeranging in early 2009, soon after the next US president takes office.
Of course, a strengthening of the oil currencies (including not only the Gulf States, but also other Middle East countries and Russia) would not turn around the US trade balance overnight.
But oil countries do account for a large share of the world’s trade surpluses, and a weaker dollar would help promote US exports to some degree, even in the short run.
More importantly, it is imperative for US policies to be consistent across regions.
How can the US Treasury, on the one hand, periodically flirt with labeling China a “currency manipulator” and, on the other hand, condone a similar strategy in oil-exporting countries?
Of course, one can imagine other reasons for US supplication to the oil states.
Perhaps the administration worries that it cannot simultaneously beg for lower dollar oil prices and help promote a weaker dollar.
But, contrary to popular opinion, the two actually have little to do with each other.
Oil prices are set in a world market, and depend mainly on the quantities demanded and supplied by different regions, not the currency of payment.
It is not at all clear that the dollar price of oil would evolve any differently if the euro, rather than the dollar, were the reference currency.
Secretary Paulson has emphasized that the US is “open for business” from sovereign wealth funds.
One can hope that his confidence is justified.
There is no cause for the US to place any significant new restrictions on sovereign investments in the US beyond those that it already has on trade.
Besides, the US needs these investments to help re-capitalize its badly weakened financial system.
However, even if we can agree on keeping the US open to sovereign wealth fund investments, that is no reason for promoting exchange-rate policies that exacerbate the very trade imbalances that are driving the whole sovereign wealth fund phenomenon in the first place.
Then again, perhaps the Bush administration is worried that if the oil currencies strengthen too much against the dollar, it will start becoming too expensive for the US to scale up its military operations in the Middle East.
This, too, is wrong-headed.
If a cheaper dollar leads to an invasion of US exports to the Middle East and rising living standards in the region, all parties will be far better served.
What about the interests of the oil countries themselves?
Are they right to fear potentially catastrophic results from abandoning the dollar?
As with China, these concerns are overblown.
Even with the prevalence of dollar indexation across the region, exchange-rate appreciation would still help promote cheaper imports and higher living standards.
Moreover, as public confidence in the de-linked oil currencies increases over time, dollar indexation of private contracts will diminish, and currency movements will have a greater impact on overall prices.
More immediately, inflation across the oil states is soaring today, with CPI inflation in the Middle East averaging more than 6% after years of relative stability.
If this inflation is allowed to continue and deepen, it is likely to have effects easily as pernicious as the exchange-rate appreciation the region’s leaders are striving so hard to avoid.
Perhaps the most important positive effect of exchange-rate appreciation would be to help promote the development of domestically-oriented industries such as health care, education, and banking, thereby alleviating some of the region’s mass underemployment.
To be sure, there are important differences between the oil exporters and the Asian economies.
With world energy prices at record highs, it makes sense for oil economies to run surpluses, thereby saving for when oil supplies eventually peter out.
But flexible exchange rates are still the right way for the region to develop a more balanced economic and financial base.
As for the US, it makes little sense to support dollar currency pegs in any large emerging market, at least until its trade balance normalizes. This is no time for oil currency hypocrisy.
Oiling Russia\u0027s Finances
The global oil situation is particularly interesting at the moment.
At around $30 a barrel, oil prices are remaining high even though a soft global economy means that world demand is low.
The previously fashionable view that the American seizure of Iraqi oil resources would break OPEC and send the price of oil plummeting has turned out to be nonsense.
Even with improved security, it will take five years to get Iraq oil fully on stream.
With the American economy now recovering strongly, the price of oil should stay high, or even rise further, in the foreseeable future.
So the announcement by Russian Finance Minister Alexei Kudrin that Russia will start an oil stabilization fund comes at a good moment.
It means that the fund can look forward to several years of surpluses.
This is both an opportunity and a danger.
An oil fund should be seen as an instrument of macroeconomic stabilization, segregated from normal revenue streams.
Today most of the world's finance ministers are committed to balancing the budget over the business cycle.
Government revenues are set to equal government spending when the economy is growing normally.
If output grows above trend, the budget is in surplus; if it grows below trend, the budget is in deficit.
Surpluses are applied to repaying debt, and borrowing finances deficits.
If the finance minister gets his sums right, the national debt remains the same over the cycle, with no tendency to grow or contract.
A constant debt-GDP ratio is thus a key indicator of fiscal sustainability.
In a country like Russia, half of whose budget revenues are derived from taxes on oil, setting up an oil fund is the equivalent of a commitment to balance the budget over the cycle.
Only in this case, it is an oil price cycle.
This strategy is dictated by the fact that oil prices are more volatile--and therefore more destabilizing for the budget--than fluctuations in GDP.
Government taxes and spending are set to balance at the average oil price over a period of years.
(Over the last five years, the average would have been $22 a barrel.)
The oil fund accumulates surpluses and incurs deficits when the price of oil is above or below the average.
Surpluses are used to pay off debt, and the deficits are financed by acquiring debt, leaving the debt-GDP ratio constant over the cycle.
A fund that works like this sends a strong signal that the government is committed to sound long-term finance.
The key to success is to realize that an oil fund is a limited instrument for a specific purpose.
The danger is that officials will be tempted to use it to solve other problems, which will destroy its usefulness as a stabilising mechanism.
The first danger is that politicians will spend the surpluses on vote-winning social programmes.
This happened in Venezuela. The best way to guard against this is to open a special account with an independent central bank, where the fund can be kept safely out of the reach of politicians.
This is what Norway does.
A more subtle danger is that the fund will be seen as a direct means to combat the so-called "Dutch disease."
This is a situation where earnings from oil exports drive up the value of the currency, reducing the competitiveness of other domestically produced products.
Investing fund surpluses in foreign securities would counteract the tendency for the exchange rate to rise.
This is true, but the same result can be achieved by paying off foreign debt, which is a better policy, especially at the outset, when the fund is trying to build up credibility.
Of course, it is important that Russia becomes less dependent on energy exports.
Properly used, an oil fund can contribute to this aim, but it should do so indirectly, by promoting domestic financial stability.
This will enable low real interest rates, which (together with bank reform) is the main condition for the growth of small and medium-sized enterprises needed to diversify the economic structure and ensure a more stable pattern of growth.
Oil in the Gulf, Then and Now
VIENNA – On April 20, an explosion on Deepwater Horizon, a British Petroleum (BP)- operated oil rig in the Gulf of Mexico, led to the most publicized oil spill in decades.
Another blowout in the same waters 31 years ago, farther south on the Mexican side of the Gulf, turned into the largest peacetime oil spill ever.
The platform where that accident happened, called Ixtoc 1, was operated by Pemex, the state-owned Mexican oil company.
The two accidents and the spills they caused have a number of similar features, although marine oil spills in general have profoundly changed in character in the three decades between the two events.
Oil tankers used to be responsible for the bulk of oil that was spilled.
Tank-washing gave rise to a huge number of small spills, and tanker accidents such as those involving the Torrey Canyon, Exxon Valdez, Metula, and St. Peter resulted in huge, concentrated spills.
Blowouts were not infrequent, but most occurred on land or in shallow water, and most could be stopped relatively easily.
The ban on tank-washing, technical features such as double hulls and sectioning of tanks, introduction of one-way sea lanes and, most important, the use of Global Positioning Systems, have greatly reduced the amount of oil entering the sea from tankers.
Meanwhile, the technology used at drilling and production platforms has developed tremendously, but the challenges regarding depth, weather, and sediment structure have grown even more, as easy-to-exploit oil fields have been exhausted.
Blowouts have become the most troublesome type of oil spills, and in deep water they tend to continue for a considerable time because of the difficulties faced in containing them.
After the explosions at Deepwater Horizon and Ixtoc, oil and gas under high pressure entered the water at the seabed.
This resulted in a three-phase emulsion of oil, gas, and water that also contained sand and dirt particles.
The properties of this oil emulsion differ from normal crude oil.
Some part of it will float on the surface, but parts may also form plumes at different depths in the water mass.
Standard aerial or satellite imaging techniques to measure the quantity of oil spilled do not work well.
In the Ixtoc case, using such methods, Pemex (wanting to keep the loss figure low) estimated the spill to amount to a little under a half-million tons.
A United Nations expert group that I led put the figure significantly higher. Similarly, whereas BP has been using a release figure of 800 tons per day From Deepwater Horizon, estimates by independent experts are many times higher.
Pemex tried to put a device called a “sombrero” over the Ixtoc leak to collect the oil at the ocean floor, but the plan failed because the structure could not be kept in place.
Formation of methane hydrate was noted, but was not decisive.
In the case of Deepwater Horizon, a huge dome could be put in place, despite the greater depth, thanks to deployment of modern unmanned underwater vehicles, robots, and positioning tools, but the formation of methane hydrates clogged the device and rendered it useless.
In both cases, efforts were made to burn off the oil from the ocean’s surface.
But, as the 1967 Torrey Canyon experience showed – the stranded tanker was bombed with napalm – oil on water doesn’t burn well, and the emulsified oil called “chocolate mousse” hardly burned at all.
Whether or not to “disperse” oil has been a key strategic question since combating spills began in earnest in the 1960’s.
The answer depends on whether the priority for protection is birds and beaches, or other forms of marine life such as fish, shrimps, and mollusks.
If it’s birds and beaches, disperse; if it’s fisheries, don’t.
The decision has an obvious public-relations dimension.
Oil-contaminated birds and beaches make appalling pictures, whereas dead fish and shrimp larvae go unnoticed by cameras.
The damage caused by the Ixtoc spill was huge.
Beaches, mostly in Mexico but to some extent also in the United States, were hit, and birds succumbed in large numbers, despite the dispersion efforts.
Because of the dispersion, shrimp, squid, and some fish populations suffered, with fisheries hit even harder.
Where the concentrations of un-weathered oil components are highest, water-breathing organisms die.
In a much larger area, they become tainted and rendered useless as food products.
In an even larger area – and for a much longer time – consumers reject the products.
After Ixtoc, the blow to the Mexican fisheries became a blessing in disguise.
The dramatic reduction in fishing pressure allowed the devastated populations to recover, and five years later one had to look carefully to spot either remaining oil or damaged populations.
The high temperatures of the Gulf of Mexico helped, as recovery proceeds much faster in warm waters than in cold.
It took nine months to cap the Ixtoc well.
Drilling a release well finally did the job of stopping the flow of oil.
Deepwater Horizon is still spewing oil into the Gulf of Mexico, even though BP has succeeded in inserting a smaller pipe into the main leakage to suck off part of the flow.
It is far too early to assess the ecological damage and economic losses to fisheries and tourism from the Deepwater Horizon spill.
It is a safe bet that shrimp and squid populations will suffer, as they did in the Ixtoc case, but so is a close-to-complete recovery within a limited number of years.
Oil is America\u0027s Motive for War
All around the world people ask: what is the real motive for the Bush Administration's threatened war with Iraq?
Is it to curb weapons of mass destruction?
Is it more personal, an act of vengeance by a son against the man who attempted to assassinate his father?
Is it to defend Israel?
Is it to reinvent the Middle East as a more democratic region, as many of the Bush Administration's leading voices insist?
Or is it, as some suspect, so that America can get its hands on Iraqi oil?
The Bush administration has offered a range of justifications for its plans, although with a fairly consistent emphasis on weapons of mass destruction.
Deputy Secretary of Defense Paul Wolfowitz talks about making Iraq the "first Arab democracy."
Many in the Bush Administration argue that aggressive policies toward Iraq can ultimately bring down autocratic governments in the Middle East the same way that the Reagan Administration supposedly brought down the "evil" Soviet empire.
Outside of America, almost nobody buys these arguments.
Most believe that oil ranks at the top of America's list of motives.
Short of the US national security archives suddenly falling open, we are unlikely to find a definitive account of the President's innermost thoughts.
Moreover, different US officials certainly have different priorities.
President Bush may focus on weapons of mass destruction;
Mr. Wolfowitz may target democracy. Others may have their eyes firmly on the prize of Iraqi oil.
A more fruitful question than an inquiry into America's motives is how the US will act once war comes.
Here we don't have to rely on second-guessing individuals.
We can examine America's behavior in recent history.
Looking at the historical record, it is difficult to believe that the US will give the Middle East a democratic makeover.
Today's Middle East is a construction of the US and Europe.
Its despots and monarchs owe their positions to the machinations and connivance of the West.
Even if America goes off to war waving the banner of democracy, the results are likely to be less glorious.
In the end, this will likely be a war for Iraqi oil.
Throughout the 20 th century, Arab self-determination, democracy, and economic reform took a back seat to oil.
When the British inveigled Arab chieftains to fight on behalf of the British empire in World War I, the Arabs were not rewarded with sovereignty at the Great War's end, but with ongoing British and French suzerainty.
Whenever real democracy in the Middle East threatened American control over oil reserves, democracy was jettisoned.
Consider the CIA-backed coup against Iranian Prime Minister Mussadegh.
In 1951, Mussadegh nationalized Iran's oil industry, prompting a British boycott the next year and then US-backed intervention (which toppled and jailed the popular Prime Minister) in 1953.
A similarly instructive case is the West's support for a military crackdown in Algeria after democratic elections in early 1992 threatened to bring the Islamic Salvation Front (FIS) to power.
When the FIS seemed headed to victory, Algeria's army stepped in to prevent continuation of the vote.
Western governments, led by France but with US backing, gave moral and financial support to Algeria's generals.
American behavior in former Soviet Central Asia is equally vivid.
Many in the Bush Administration point to its work in this region as a showcase for how they will reshape the Middle East.
Yet democracy has absolutely nothing to do with American policy in Central Asia, where US oil companies and diplomats trip over each other promoting deals in despotic Kazakhstan, Turkmenistan, and Uzbekistan.
A good window on postwar US policy in Iraq can be found in key documents written by and for the Bush Administration before September 11, when the analysis of the Middle East was much less infected by today's fears.
Probably the most interesting document is a study entitled "Strategic Energy Policy Challenges of the 21 st Century," produced by the James Baker III Institute for Public Policy at Rice University in Texas and the Council on Foreign Relations.
The study makes clear two points.
First, Iraq is vital to oil flows from the Middle East, as it sits on the second largest reserves in the world.
The report agonizes over the fact that for economic security reasons America needs Iraqi oil, but that for military security reasons the US can't allow Saddam to develop the oil.
The implication seems clear: the US needs a new Iraqi regime for its energy security.
Democracy is not mentioned anywhere in the study.
This document also provides an interesting glimpse into the preoccupations of officials like Vice President Dick Cheney and Defense Secretary Donald Rumsfeld.
Both men entered national leadership under President Gerald Ford in 1974, during the Arab oil embargo, which unleashed huge economic shocks that doomed Ford's presidency.
The "Strategic Energy Policy Challenges" study puts enormous weight on the threats of a similar disruption today.
The 1970s embargo was evidently a defining moment in the strategic thinking of Messrs. Cheney and Rumsfeld.
The Bush Administration may believe that it is going to war to fight for democracy in the Middle East, but US support for real democracy stands to be an early victim.
Sadly, a war fought for oil will be one that further destabilizes international politics and society, and undermines the true security of the US and the world.
तेल की कीमतों के लिए एक नई उच्चतम सीमा
लंदन – अगर कोई एक तत्व विश्व की अर्थव्यवस्था के भाग्य का निर्धारण करता है, तो यह तेल के एक बैरल की कीमत है। 1970 के बाद से हर वैश्विक मंदी से पहले तेल की कीमत कम-से-कम दुगुनी हुई है, और हर बार जब तेल की कीमत गिर कर आधी हुई है और लगभग छह महीने तक कम बनी रही है, तो उसके बाद वैश्विक विकास में भारी तेज़ी आई है।
तेल की कीमत $100 से गिर कर $50 तक पहुँच जाने के बाद, अब वास्तव में ठीक इसी महत्वपूर्ण स्तर के आस-पास बनी हुई है। इसलिए क्या हमें यह आशा करनी चाहिए कि $50 तेल के लिए नई ट्रेडिंग रेंज की न्यूनतम नियत दर या उच्चतम सीमा होगी?
अधिकतर विश्लेषक अभी भी $50 को न्यूनतम नियत दर – या यहाँ तक कि एक उछाल दर के रूप में देखते हैं, क्योंकि वायदा बाजार में ख़रीद-फरोख्त की स्थिति से अपेक्षाकृत तेज़ वापसी होने की आशा के फलस्वरूप इसके $70 या $80 तक बढ़ जाने की उम्मीदों का पता चलता है। लेकिन अर्थशास्त्र और इतिहास इशारा करते हैं कि आज की कीमत को बहुत कम ट्रेडिंग रेंज के लिए एक संभावित उच्चतम सीमा के रूप में देखा जाना चाहिए, जो और भी अधिक कम होकर $20 तक नीचे आ सकती है।
ऐसा क्यों हो सकता है, यह देखने के लिए हमें पहले आज के ऊर्जा अर्थशास्त्र के मूल में व्याप्त वैचारिक विडंबना पर विचार करना होगा। तेल बाजार में हमेशा से एकाधिकार और प्रतिस्पर्धा के बीच संघर्ष की स्थिति बनी रही है। लेकिन पश्चिमी टीकाकार जिस बात को मानने के लिए तैयार नहीं हैं वह यह है कि आजकल प्रतिस्पर्धा का चैंपियन सऊदी अरब है जबकि टेक्सास के स्वतंत्रता-प्रेमी तेलपुरुष ओपेक को अपनी एकाधिकार शक्ति को फिर से स्थापित करने के लिए दुआ कर रहे हैं।
आइए अब इतिहास पर नज़र डालें - विशेष रूप से, 1974 के बाद से ओपेक का पहली बार उद्भव होने पर मुद्रास्फीति-समायोजित तेल की कीमतों के इतिहास पर। इस इतिहास से कीमत निर्धारण की दो अलग-अलग व्यवस्थाओं का पता चलता है। 1974 से 1985 तक, अमेरिका के बेंचमार्क तेल की कीमत में आज के मूल्य की दृष्टि से $50 और $120 के बीच घट-बढ़ होती रही। 1986 से 2004 तक, इसमें $20 से $50 के बीच, आज के मूल्य की दृष्टि से $50 और $120 के बीच घट-बढ़ होती रही (1990 में कुवैत के आक्रमण और 1998 में हुए रूसी अवमूल्यन के बाद थोड़े समय के लिए इस घट-बढ़ का स्वरूप कुछ हटकर रहा)। अंत में, 2005 से 2014 तक, तेल का कारोबार फिर से लगभग $50 से $120 की 1974-1985 की सीमा में होना शुरू हो गया, 2008-09 के वित्तीय संकट की अवधि के दौरान दो बहुत ही कम अवधि में हुए परिवर्तन इसके अपवाद हैं।
दूसरे शब्दों में, पिछले दस वर्षों की ट्रेडिंग रेंज, ओपेक के पहले दशक की रेंज के समान थी, जबकि 1986 से 2004 तक के 19 सा���ों में पूरी तरह से अलग तरह की व्यवस्था रही। यह विश्वसनीय लगता है कि इन दोनों व्यवस्थाओं के अंतर को 1985 में ओपेक शक्ति के टूटने के रूप में समझाया जा सकता है जो उत्तरी सागर और अलास्का तेल की गतिविधियों के कारण हुआ जिसके फलस्वरूप एकाधिकार कीमत का स्थान प्रतिस्पर्धात्मक कीमतों ने ले लिया था। यह अवधि 2005 में तब समाप्त हो गई जब चीन की बढ़ती मांग के कारण अस्थायी रूप से वैश्विक तेल की कमी की स्थिति बन गई जिसके फलस्वरूप ओपेक का कीमत "अनुशासन" फिर से लागू हो गया।
यह रिकॉर्ड एकाधिकारात्मक और प्रतिस्पर्धात्मक व्यवस्थाओं के बीच $50 को एक संभव विभाजक रेखा के रूप में दर्शाता है। और प्रतिस्पर्धात्मक बाजारों बनाम एकाधिकार मूल्य निर्धारण का अर्थशास्त्र यह दर्शाता है कि $50 न्यूनतम नियत दर न होकर उच्चतम दर क्यों होगी।
प्रतिस्पर्धी बाजार में, कीमतों को सीमांत लागतों के बराबर होना चाहिए। सीधे-सीधे कहा जाए तो कीमतों में वे लागतें प्रतिबिंबित होंगी जो किसी कुशल आपूर्तिकर्ता को वैश्विक मांग को पूरा करने के लिए आवश्यक तेल के अंतिम बैरल का उत्पादन करने में वसूल करनी चाहिए। इसके विपरीत, एकाधिकार कीमत की व्यवस्था में, एकाधिकारी एक ऐसी कीमत का चयन कर सकते हैं जो सीमांत लागतों से बहुत अधिक हो और फिर यह सुनिश्चित करने के लिए उत्पादन को सीमित कर सकते हैं कि आपूर्ति मांग से अधिक न हो (जो अन्यथा कृत्रिम रूप से उच्च मूल्य के कारण होगी)।
पिछले ग्रीष्म तक, तेल एकाधिकार कीमत वाली व्यवस्था के तहत संचालित था क्योंकि सऊदी अरब एक "स्विंग निर्माता" बन गया था, जब भी आपूर्ति मांग से अधिक होती थी तो वह आपूर्ति को सीमित कर देता था। लेकिन इस व्यवस्था के फलस्वरूप अन्य तेल उत्पादकों के लिए, विशेष रूप से अमेरिका और कनाडा में, उत्पादन को बहुत अधिक बढ़ाने के लिए भारी प्रोत्साहन मिले। बहुत अधिक उत्पादन लागतों का सामना करने के बावजूद, शेल तेल और गैस के उत्तर अमेरिकी उत्पादक बहुत भारी लाभ अर्जित कर सके, जिसका श्रेय सऊदी की कीमत की गारंटी को जाता है।
तथापि, अमेरिका के लगातार बढ़ते उत्पादन के लिए वैश्विक बाजार में जगह बनाने के लिए अपने स्वयं के उत्पादन को कम करके ही सऊदी ऊँची कीमतों को बनाए रख सके। पिछले शरद तक, सऊदी नेताओं ने स्पष्ट रूप से यह तय किया कि यह एक हारनेवाली रणनीति है - और वे सही थे। इसका तार्किक निष्कर्ष यह होता कि अमेरिका का उद्भव दुनिया के शीर्ष तेल उत्पादक के रूप में हो गया होता जबकि सऊदी अरब की स्थिति न केवल तेल निर्यातक के रूप में तुच्छ और महत्वहीन हो जाती, बल्कि शायद वह एक ऐसा देश बन जाता जिसकी रक्षा करने के लिए अमेरिका को बाध्य होना पड़ता।
मध्य पूर्व के तेल महारथी अब अपनी इस खराब स्थिति से उबरने के लिए कटिबद्ध हैं जैसा कि ओपेक में उनका हाल ही का व्यवहार स्पष्ट करता है। लेकिन ओपेक के लिए अपनी बाजार हिस्सेदारी को बहाल करने, या बनाए रखने के लिए एकमात्र रास्ता यही बचा है कि वह कीमतों को इतना नीचे धकेल दे कि अमेरिकी उत्पादक वैश्विक आपूर्ति और मांग को संतुलित करने के लिए अपने उत्पादन को बहुत कम कर दें। संक्षेप में, सऊदी को "स्विंग निर्माता" बने रहना बंद कर देना चाहिए और इसके बजाय अमेरिका के उत्पादकों को इस भूमिका में आने के लिए मजबूर कर देना चाहिए।
अर्थशास्त्र की कोई भी पाठ्यपुस्तक बिलकुल इसी परिणाम की सिफारिश करेगी। तेल निकालने की दृष्टि से शेल तेल महंगा है और इसलिए इसे तब तक जमीन में ही रहना चाहिए जब तक दुनिया के कम लागत वाले सभी पारंपरिक तेल कूपों से अधिकतम उत्पादन प्राप्त किया जा रहा है। इसके अलावा, शेल उत्पादन को सस्ते में चालू और बंद किया जा सकता है।
इसलिए प्रतिस्पर्धात्मक बाजार की स्थितियाँ यह तय करेंगी कि सऊदी अरब और अन्य कम लागतवाले उत्पादक हमेशा पूरी क्षमता से प्रचालन करें जबकि अमेरिका के तेल उत्पादक पण्य बाजारों के लिए सामान्य तेजी-मंदी के चक्रों का अनुभव करेंगे, वैश्विक मांग कम होने पर, या इराक, लीबिया, ईरान, या रूस से नई कम लागत वाली आपूर्तियाँ भारी मात्रा में बाजार में आ जाने पर वे उत्पादन बंद कर देंगे, और उत्पादन को केवल वैश्विक तेजी के दौरान तभी बढ़ाएँगे जब तेल की मांग सर्वोच्च स्तर पर हो।
इस प्रतिस्पर्धात्मक तर्क के तहत, अमेरिका के शेल तेल की सीमांत लागत वैश्विक तेल कीमतों के लिए उच्चतम सीमा होगी, जबकि ओपेक और रूस में अपेक्षाकृत दूरस्थ और सीमांत पारंपरिक तेल कूपों की लागतें न्यूनतम नियत दर निर्धारित करेंगी। स्थिति यह है कि शेल तेल के उत्पादन की अनुमानित लागतें अधिकतर $50 के आसपास हैं, जबकि सीमांत पारंपरिक तेल कूपों के लिए आम तौर $20 के आसपास बराबर की स्थिति होती है। इस प्रकार, प्रतिस्पर्धात्मक तेल की उम्मीदों की दुनिया में ट्रेडिंग रेंज मोटे तौर पर $20 से $50 के बीच होनी चाहिए।
The Geopolitical Impact of Cheap Oil
CAMBRIDGE – The price of oil has fallen more than 25% in the past five months, to less than $80 a barrel.
If the price remains at this level, it will have important implications – some good, some bad – for many countries around the world.
If it falls further, as seems likely, the geopolitical consequences on some oil-producing countries could be dramatic.
The price of oil at any time depends on market participants’ expectations about future supply and demand.
The role of expectations makes the oil market very different from most others.
In the market for fresh vegetables, for example, prices must balance the supply and demand for the current harvest.
By contrast, oil producers and others in the industry can keep supply off the market if they think that its price will rise later, or they can put extra supply on the market if they think the price will fall.
Oil companies around the world keep supply off the market by reducing the amount of oil that they take out of the ground.
Oil producers can also restrict supply by holding oil inventory in tankers at sea or in other storage facilities.
Conversely, producers can put more oil on the market by increasing production or by running down their inventories.
The market expectations reflected in today’s price reflect lower future demand and increased future supply.
Lower demand reflects both the current weakness of economic activity, particularly in Europe and China, and, more important, the longer-term changes in technology, which will increase cars’ fuel efficiency and induce the use of solar power and other non-oil energy sources.
The increase in the future potential supply of oil reflects new output produced by fracking, the development of Canada’s tar sands, and Mexico’s recent decision to allow foreign oil companies to develop the country’s energy sources.
These changes in demand and supply suggest that the future price of oil will be lower than industry participants expected until just a few months ago.
Some of the recent changes in expected future demand and supply could have been anticipated earlier.
But there is no way to know when attitudes and expectations will change.
The historic volatility of oil prices reflects these psychological shifts as well as changes in objective reality.
Today’s oil price is also linked to anticipated future interest rates.
More specifically, oil producers have an investment choice: They can increase production now, selling the additional oil at today’s price and investing the proceeds at the existing long-term interest rate, or they can leave the oil in the ground as an investment.
A low rate of interest encourages producers to leave oil in the ground.
When the current abnormally low interest rates on long-term bonds rise over the next few years, it will become more attractive for producers to increase the supply of oil and invest the resulting income at the higher rate.
Unless expectations about the fundamentals of future supply and demand change, the rise in the interest rate will cause oil prices to fall further.
The low price of oil is good news for the United States economy, because it implies higher real incomes for American consumers.
Within the US, the lower price is transferring real income from oil producers to households, which raises short-term demand because households spend a higher proportion of their incomes than oil firms do.
For the same reason, the lower price also gives a boost to aggregate demand in Europe, Asia, and other oil-importing regions.
The big losers from falling oil prices include several countries that are not friends of the US and its allies, such as Venezuela, Iran, and Russia.
These countries are heavily dependent on their oil revenue to support their governments’ spending – especially massive transfer programs.
Even at $75 or $80 a barrel, these governments will have a difficult time financing the populist programs that they need to maintain public support.
Although Saudi Arabia and several of the Gulf states are also major oil exporters, they differ from other producers in two important ways.
First, their cost of extracting oil is extremely low, which means that they will be able to produce profitably at the current price – or even at a much lower price.
Second, their enormous financial reserves allow them to finance their domestic and international activities for an extended period of time, as they seek to transform their economies to reduce their dependence on oil revenue.
A further decline in the price of oil could have major geopolitical repercussions.
A price of $60 a barrel would create severe problems for Russia in particular.
President Vladimir Putin would no longer be able to maintain the transfer programs that currently sustain his popular support.
There would be similar consequences in Iran and Venezuela.
It is not clear whether these countries’ current regimes could survive a substantial and sustained future decline in oil prices.
By contrast, it is obvious that oil-importing countries would benefit greatly – as they already are.
Oil Prices and Global Growth
CAMBRIDGE – One of the biggest economic surprises of 2015 is that the stunning drop in global oil prices did not deliver a bigger boost to global growth.
Despite the collapse in prices, from over $115 per barrel in June 2014 to $45 at the end of November 2015, most macroeconomic models suggest that the impact on global growth has been less than expected – perhaps 0.5% of global GDP.
The good news is that this welcome but modest effect on growth probably will not die out in 2016.
The bad news is that low prices will place even greater strains on the main oil-exporting countries.
The recent decline in oil prices is on par with the supply-driven drop in 1985-1986, when OPEC members (read: Saudi Arabia) decided to reverse supply cuts to regain market share.
It is also comparable to the demand-driven collapse in 2008-2009, following the global financial crisis.
To the extent that demand factors drive an oil-price drop, one would not expect a major positive impact; the oil price is more of an automatic stabilizer than an exogenous force driving the global economy.
Supply shocks, on the other hand, ought to have a significant positive impact.
Although parsing the 2014-2015 oil-price shock is not as straightforward as in the two previous episodes, the driving forces seem to be roughly evenly split between demand and supply factors.
Certainly, a slowing China that is rebalancing toward domestic consumption has put a damper on all global commodity prices, with metal indices also falling sharply in 2015.
(Gold prices, for example, at $1,050 per ounce at the end of November, are far off their peak of nearly $1,890 in September 2011, and copper prices have fallen almost as much since 2011.)
New sources of oil supply, however, have been at least as important.
Thanks to the shale-energy revolution, American oil production has risen from five million barrels per day in 2008 to 9.3 million barrels in 2015, a supply boom that has so far persisted, despite the price collapse.
Anticipation of post-sanctions Iranian oil production has also affected markets.
A decline in oil prices is to some extent a zero-sum game, with producers losing and consumers gaining.
The usual thinking is that lower prices stimulate global demand, because consumers are likely to spend most of the windfall, whereas producers typically adjust by cutting back savings.
In 2015, though, this behavioral difference has been less pronounced than usual.
One reason is that emerging-market energy importers have a much larger global economic footprint than they did in the 1980s, and their approach to oil markets is much more interventionist than in the advanced countries.
Countries such as India and China stabilize retail energy markets through government-financed subsidies to keep price down for consumers.
The costs of these subsidies had become quite massive as oil prices peaked, and many countries were already looking hard for ways to cut back.
Thus, as oil prices have fallen, emerging-market governments have taken advantage of the opportunity to reduce the fiscal subsidies.
At the same time, many oil exporters are being forced to scale back expenditure plans in the face of sharply falling revenues.
Even Saudi Arabia, despite its vast oil and financial reserves, has come under strain, owing to a rapidly rising population and higher military spending associated with conflicts in the Middle East.
The muted effect of oil prices on global growth should not have come as a complete surprise.
Academic research has been pointing in this direction for a long time.
Oil is now thought to be less of an independent driver of business cycles than was previously believed.
Also restraining growth is a sharp decline in energy-related investment.
After years of rapid growth, global investment in oil production and exploration has fallen by $150 billion dollars in 2015.
Eventually, this will feed back into prices, but only slowly and gradually: Futures markets have oil prices rising to $60 per barrel only by 2020.
The good news for 2016 is that most macroeconomic models suggest that the impact of lower oil prices on growth tends to stretch out for a couple years.
Thus, low prices should continue to support growth, even if emerging-market importers continue to use the savings to cut subsidies.
For oil producers, though, the risks are rising.
Only a couple – notably governance-challenged Venezuela – are in outright collapse; but many are teetering on the brink of recession.
Countries with floating exchange rates, including Colombia, Mexico, and Russia, have managed to adjust so far, despite facing significantly tighter fiscal constraints (though Russia’s situation remains especially vulnerable if low oil prices endure).
By contrast, countries with rigid exchange-rate regimes are being tested more severely.
Saudi Arabia’s long-standing peg to the dollar, once apparently invulnerable, has come under enormous pressure in recent weeks.
In short, oil prices were not quite as consequential for global growth in 2015 as seemed likely at the beginning of the year.
And strong reserve positions and relatively conservative macroeconomic policies have enabled most major producers to weather enormous fiscal stress so far, without falling into crisis.
But next year could be different, and not in a good way – especially for producers.
Oil’s Upward March
IRVING, TEXAS – When OPEC members met in Vienna recently, the Saudis failed to control the meeting, OPEC’s production ceiling remained unchanged, and member countries are setting their own output levels.
But talk of an OPEC breakup is premature.
After all, it has survived major wars, numerous diplomatic disputes, and two major market collapses.
In fact, the secret to OPEC’s survival is its weakness, not its strength.
Friction or no friction, OPEC has been, and will always be, irrelevant to market forces on the ground.
OPEC has never had market power, but Saudi Arabia has, and Saudi market power has always been assigned, mistakenly, to OPEC.
The Saudis did not like the recent meeting.
They decided to go it alone.
Can they deliver?
The answer is no.
The recent move by the 28-member International Energy Agency to release oil from strategic reserves proves this point.
The global oil market has become a large sea that generates its own storms, which guarantee that the sea will continue to grow.
Looking at recent history, one can identify four factors that will continue to drive oil prices higher unless a major earthquake brings the market to its knees.
The first factor is the relationship between oil prices and economic growth in the oil-producing countries.
Higher prices fuel higher growth in these countries, which, accompanied by a population boom, leads to higher domestic energy consumption.
That, in turn, reduces oil exports, driving up prices further.
Only a major recession could break this cycle; otherwise, we are headed for an energy crisis.
Of course, prices cannot continue to rise indefinitely – the price increase will ration demand.
The increase in energy demand has already led to power shortages in the oil-producing countries, which are expected to reduce exports this summer.
More crude oil will be burned in power plants, more diesel will be burned in private generators, and more gasoline will be burned in SUVs from Riyadh to Kuwait City during blackouts in which the only place to keep cool will be in a moving car.
Second, there is the relationship between oil prices and the need for income diversification in the oil-producing countries.
As oil prices rise, these countries’ dependence on the oil sector increases, despite all efforts to diversify their economies.
To combat the impact of such dependence, they spend oil revenues on other sectors, leaving the oil sector with little investment.
As global oil demand increases, there is not enough capacity to meet it – a cycle that will continue until demand collapses.
The rhetoric of energy independence in the oil-consuming countries makes the situation even worse: the oil-producing countries are building energy-intensive industries to guarantee a market for their oil once consuming nations wean themselves of imported oil.
And they can build such plants in faster than the oil-consuming countries can establish alternatives to oil imports, exacerbating future shortages.
Again, higher prices will ration global oil demand, but only after a period of economic pain in some regions around the world.
The third factor is the vicious circle of oil prices and the value of the US dollar.
Higher oil prices increase America’s trade deficits, which in turn lower the value of the dollar. Owing to the inverse relationship between oil prices and the dollar, the weaker dollar increases oil prices, which increases the trade deficit further, putting more downward pressure on the dollar.
Oil prices will continue to rise until demand collapses. Statistical evidence suggests that this relationship will weaken once the real-estate market recovers, but this remains a long-run prospect.
Finally, there is the relationship between oil prices and fiscal and monetary policies in the oil-consuming countries.
To combat the effect of high oil prices, consuming countries adopt expansionary economic policies, lowering interest rates and increasing government spending.
This enables continued economic growth with high oil prices.
But continued growth increases demand for oil, sending prices even higher. The alternative to monetary and fiscal expansion is recession, at which point oil prices would stop rising.
Given the current turmoil in the Middle East, the loss of Libyan and Yemeni oil, and increasing energy demand in the oil-producing countries, any increase in Saudi oil exports, if any, would have a limited impact on the market.
Oil production does not matter; exports do, which means that announcements of increases in oil output are irrelevant for prices.
Indeed, regardless of what OPEC or its members decide, the vicious cycles described here will support oil prices around the world probably in the range of $70-$90 per barrel.
That said, OPEC members and oil-consuming countries policymakers alike should not forget that nothing cures high prices like high prices.
स्वास्थ्य-देखभाल में नवोन्मेष
लागोस- हालहीमेंनाइजीरियाकीराजधानी, अबुजामेंरेस्तरांमें, रातकेखानेकेसमयमैंनेएकबेमेलजोड़ीदेखी।आदमीकीउम्रकम-से-कम60 साल की लगरहीथी, लेकिनउसने तंगजीन्सऔर बिना बाजू वालीतंगटॉपपहनी हुई थी, उसकेगलेमेंसोनेकीलंबीचेनथीऔरआँखोंपरकालाचश्माथा, हालाँकिवहशामकाआठबजे के बादकासमयथा।उसकीसंगिनी, जो22 सालसेबड़ीनहींलगरहीथी, अपनेतीनदोस्तोंकेसाथफुदक कर उसके पीछे जाखड़ी हुईथी।वहउसे उनकीबातचीतमेंशामिलकरनेकीकोशिशकररहीथी, यहाँतककिवहकभी-कभीउसकाचुंबनलेनेकेलिएझुकभीजातीथी, लेकिनबुझी-सीमुस्कानउसकेअमीरअधेड़प्रेमीकीबढ़तीबेचैनीकोछिपानहींपारहीथी।
बेशक, इसतरहकेरिश्तेनाइजीरियाकेलिएनतोनएहैंऔरनही येनाइजीरिया तक सीमितहैं।बहुतकमलोगअधेड़उम्रकेअमीरआदमीकोयुवा, औरग़रीबमहिलाकेसाथदेखकरहैरानहोतेहैं, जोउसकेसाथ रहनेकेबदलेमेंउसेशिक्षा, यात्रा, याख़रीदारीकेलिएपैसादेनेकावायदाकरताहै।आश्चर्यकीबात तोतबहोतीहैजबइनमेंसेकोईरिश्तागहराऔरस्थायीहोनेलगताहै।
अफ़्रीकाऔरपश्चिमीदेशोंकेबीचसंबंधकाफ़ीहदतकइसअमीरअधेड़प्रेमीकीसक्रियताजैसादिखताहै, ख़ासकरजबबातस्वास्थ्य-देखभालकीहोतीहै।दशकोंतक, स्वास्थ्य-देखभालकेनवोन्मेषोंकीथोड़ी-बहुतविविधताकेसाथविकसितदेशोंसेनकलकीजातीरहीहै, जिसकेपीछेशायदयहधारणाहोतीथीकिपिताबेहतरजानताहै।लेकिनइसकेपरिणामकष्टकर औरमहँगेरहेहैं, औरलगभगकभीभीटिकाऊनहींरहे हैं।
वास्तविकस्थितियहहैकिअफ़्रीकीदेशोंकीज़रूरतें, हित, औरसंसाधनअपनेपश्चिमीसमकक्षदेशोंसेकाफ़़ीअलगहैं।उदाहरणकेलिए, ज़्यादातरयूरोपीयदेशोंमें, हर 1,000 रोगियों के लिए लगभग 30 डॉक्टर हैं; लेकिननाइजीरियामेंयहअनुपात लगभग 4:100,000 है।इसतरहकेअंतरकोदेखतेहुए, इसबातमेंकोईआश्चर्यनहींहैकिचिकित्साकेपश्चिमीप्रोटोकॉलविकासशीलदेशोंमेंकामनहींकरते।
समस्यायहहैकिइसधारणाकोबदलनामुश्किलरहाहैकिनवीनताकामार्गकेवलएकहै: उत्तरसेदक्षिणका।लेकिनविकासशीलदेशपश्चिमीदेशोंकीस्वास्थ्य-देखभालप्रणालीमेंसुधारकरनेमेंमददकरसकतेहैं, जोपरिपूर्णता सेबहुतदूरहैं(अपने घरमें भी)।
वास्तव में, विकसित-देशोंकेलोगोंकीउम्र में ज्यों-ज्यों बढ़ोतरी होती जा रही है, स्वास्थ्य-देखभालकीलागतें उत्तरोत्तरनियंत्रणसेबाहरहोतीजारहीहैं।संयुक्तराज्यअमेरिकामें2021 मेंकुलस्वास्थ्य-देखभालख़र्च4.8 ट्रिलियन डॉलर तक पहुँचने की उम्मीद है- जोसकलघरेलूउत्पादकालगभगपाँचवाँहिस्साहै– यह 2010 में2.6 ट्रिलियनडॉलरथाऔर1970 में75 अरब डॉलर।इसीतरह, यूरोपमें, स्वास्थ्य-देखभाल पर सरकारी ख़र्च 2000 मेंसकलघरेलूउत्पादके8% सेबढ़कर2030 में14% होसकताहै।
रॉबर्ट वुड जॉनसन फ़ाउंडेशन केअनुसार- चिकित्साप्रौद्योगिकीकेक्षेत्रमेंप्रगतिभीस्वास्थ्य-देखभालके इसख़र्चमें होनेवालीवृद्धिमेंकाफ़ी, यानी38-65%, योगदानकरतीहै।ऐसीप्रौद्योगिकियाँरोगियोंकेलिएउपलब्धइलाजकीरेंजकाविस्तारकरतीहैं, लेकिनअकसरकमलागतकेविकल्पोंकीजगहउच्चलागतवालीसेवाएँलेलेतीहैं।यहसुनिश्चितकरनेकेलिएज़्यादाकिफ़ायतीसमाधानमहत्वपूर्णहैंकिज़्यादा-से-ज़्यादालोगजीवन-रक्षकचिकित्साप्रौद्योगिकियोंतकपहुँच प्राप्तकरसकें।
विकासशीलदेशोंकेनवोन्मेषयहींमहत्वपूर्णहोजातेहैं।लगातारबढ़रहीवैश्विकसंबद्धतानेनवोन्मेषकेपरिदृश्यकोनयारूपदेदियाहै, जिससेमोबाइलफ़ोनयाइंटरनेटकनेक्शनकेसाथकोईभीव्यक्तिखेलकारुखबदलनेवालीप्रणालियाँपेशकरनेकेलिएज़रूरीविचारोंऔरसंसाधनोंतकपहुँचकरसकताहै।अगरइसमेंज़रूरतकेउसस्तरकोजोड़लियाजाएजिसेविकसितदेशसाझानहींकरते हैं, तोविकासशीलदेशनकेवलअपनीखुदकीस्वास्थ्य-देखभालप्रणालियोंमेंक्रांतिकारीबदलावलासकतेहैं; बल्किवेविकसितदुनियाकीस्वास्थ्य-देखभालकीदुर्दशाकेलिएसमाधानखोजनेमेंभीमददकरसकतेहैं।
अच्छीख़बरयहहैकिविकासशीलदेशोंकीयहनवोन्मेषीसंभावनाअधिकाधिकस्पष्टहोतीजारहीहै।उनके अपनेदेशोंकीआधुनिकबुनियादीसुविधाओंकीकमीसेपैदाहुईबाधाओंको दूर करनेकेलिए, अफ़्रीकीलोगमोबाइलप्रौद्योगिकीऔरसौर ऊर्जाजैसेअक्षयऊर्जास्रोतोंकाअधिकाधिकलाभउठारहेहैं
स्वास्थ्य-देखभालकेमामलेमें, घानाकीmPedigree नेटवर्क- नकलीदवाओंकापतालगानेकेलिएमोबाइलशॉर्टकोडप्रणालीलागूकरनेवालीपहलीकंपनीहै, जिनके कारणदुनियाभरमेंहररोज़औसतन2,000 लोगोंकीमृत्युहोतीहै।बुनियादीमोबाइलफोनकाइस्तेमालकरके, लोगतुरंत- औरबिनाकिसीख़र्चके- जाँच करसकतेहैंकिकोईदवाअसलीहैयानहीं।इसीतरह, भारतमेंविकसितएंब्रेस शिशु वार्मर कीलागत- अमेरिकामें2,000 डॉलर में मिलनेवाले पारंपरिकइन्क्यूबेटरकी कीतुलनामें -लगभग200 डॉलरहै- जिससेजन्मकेसमयकमवज़नवालेऔरसमयसेपूर्वजन्मलेनेवालेलाखोंबच्चोंकीइसजीवन-रक्षकसंसाधनतकपहुँचहोजातीहै।
इसीतरहकेसैकड़ोंनवोन्मेष, अमेरिका, यूरोप, याजापानमेंलागतकी तुलना मेंकेवल1% जितनी कम लागत परउनलोगोंकोउच्च-गुणवत्ताकीस्वास्थ्य-देखभालप्रदानकररहेहैंजिन्हेंउनकीसबसेज़्यादाज़रूरतहै।इसतरहकेनवोन्मेषपश्चिममेंस्वास्थ्य-देखभालकीभारीलागतोंकोकमकरनेमेंमददकरनेकेसाथ-साथ, विकासशीलदेशोंमेंलाखोंलोगोंकेजीवनमेंसुधारलासकतेहैं।
अधेड़उम्रकेप्रेमियोंऔरउनकेसाथियोंकेबीचरिश्तेशायदहीकभीचलतेहों।लेकिनबराबरीकीसाझेदारीमेंमुकाबला करनेकामौक़ाहोताहै।दुनियाकेनेताओंऔरबहुपक्षीयसंगठनोंकेलिएअब समय आ गया है कि वे- हरकिसीकीख़ातिर- अफ़्रीकाकी नवोन्मेषक्षमताकोपहचानेंऔरउसकासमर्थनकरें।
Old and Aging Europe
When US Secretary of Defence Donald Rumsfeld spoke recently of "Old Europe," he was right, but not in the way he intended.
Europe is indeed old, and growing older.
Across the continent children are increasingly scarce.
Fertility rates (the number of children per woman in the population) have fallen to 1.2% in Germany and Italy.
The rate is even lower in Spain --in fact, the lowest in Europe.
Spain is still a young society, but a society without children is doomed.
The fertility rate for the US, by contrast, is 2.4, and it is 2.1 for the UK.
These differences are extraordinary, particularly in view of the far less generous maternity leave policies that apply in the US and the UK relative to continental Europe.
France stands out on the Continent with a fertility rate of 1.8, which is most likely the result of years of generous tax policies towards large families.
Migration is also an important explanation for these differences.
Higher fertility rates in the US, the UK, and France reflect the large number of immigrant families in each country. Fertility rates among immigrants are typically higher than in native European or North American families.
But increasing the number of immigrant workers will not necessarily raise fertility rates.
Germany, for example, has a large population of guest workers, but few settle there with their families; most leave their children in their homeland.
An aging population contributes to Europe's poor economic performance.
The old do not work, and a smaller and smaller share of the population (the disappearing young) is taxed to support them.
In turn, the high tax rates needed to support the old discourage the young from working, creating a vicious cycle: ever increasing tax rates on a disappearing labor force, lower growth rates, and fewer resources available to support those that retire at 60 and live into their 90's.
The effects of this are partly offset by the fact that, with fewer children, more women enter the labor force.
But then these women also retire (often at an even younger age than men) adding to the "unsupported" army of retirees.
Compare this with the US, where participation by women in the labor force also is increasing, despite America's higher fertility rate.
Indeed, female participation in the workforce is higher in the US than in the European Union (70% versus 60%).
The saving rates among Europe's old people indicate that they are worried about the dwindling number of workers who can be taxed to support them.
Consider Germany.
Any economic textbook will tell you (the famous "life-cycle" model) that the young save for their retirement, while the old spend what they accumulate.
But in Germany, the data seem to suggest a puzzling fact: the old save until their final days.
Even more remarkable is not the level of savings among the old, but how it changes over time.
Recent German surveys have detected a small increase in their savings rate.
Why should old people save?
The most plausible reason is that many now realize that they will live far longer than they anticipated--often spending one-third of their lives in retirement--but that the State may no longer deliver on its promises.
Default is unlikely, although not impossible, on pension benefits.
But it is more likely on the provision of health services, by far the most important service for old people.
When you understand that you are likely to live into your late 80's or beyond, and you also understand that the quality of public health services is deteriorating, you save more to take care of yourself.
So why do Europeans have fewer and fewer children?
Indeed, non-working time even for those who hold jobs is increasing, offering ample opportunity to rear children.
Working hours in Europe as a whole fell from 1713 hours per year in 1980 to about 1576 today, with Germans putting in the least number of hours at work.
One explanation often mentioned points to a lack of support, such as public childcare, for mothers raising children.
But, then, why is America's birth rate higher than in many countries in Europe that have much larger public support for childbearing mothers?
High housing costs and imperfection in lending markets are the more likely explanation behind Europe's falling fertility rates.
It is easier for a young couple to borrow and buy a house in the US than in Europe.
Rental markets are also more flexible in the US.
So another dangerously vicious circle seems to be operating: high taxes discourage work, and because fewer jobs are created, fertility is discouraged.
But with fewer children, higher tax rates are needed to support the growing army of the old.
Gunther Grass famously titled one of his novels "Headbirths, or the Germans are Dying Out."
Little could he know how true his fantasy would just three decades later.
Old Left Versus New Left in Latin America
There are two ways to interpret Latin America’s recent election results.
First, and most obviously, the supposed turn to the left is running out of steam, fast.
In recent weeks, the hyper-nationalist Ollanta Humala, a clone of Venezuelan President Hugo Chávez, was defeated in Peru, the conservative Alvaro Uribe won a landslide victory in Colombia, with 62% of the vote, and Andrés Manuel López Obrador has fallen behind in Mexico’s July 2 presidential election.
All of these isolated developments seemingly contradict the leftward trend in Latin America.
But there is another way of looking at these events.
Yes, President Uribe won re-election, but the big surprise in Colombia was the end of the two-party system that had dominated the country for decades, and the emergence of the left-wing Polo Democrático as the second largest political force in the nation.
Similarly, while Alan García won in Peru, he does not come from a hard-left party that has finally seen the light (like Lula da Silva in Brazil, Michelle Bachelet in Chile, and Tabaré Vázquez in Uruguay).
His APRA party, founded by Victor Raúl Haya de la Torre in the 1920’s, is one of the region’s oldest and most anachronistic populist organizations.
Like Chávez in Venezuela, Kirchner in Argentina, Evo Morales in Bolivia, and López Obrador in Mexico, President García belongs to the unreconstructed left that springs from the great Latin American populist tradition.
He may have learned many lessons from his disastrous presidency in the 1980’s, but he is much closer to the wrong left than to the right one.
In Mexico, López Obrador has both begun picking up in the polls in recent days, and showing his true colors, promising the stars and the moon to the Mexican electorate.
In fact, the more important recent developments within the Latin American left may lie not so much in the horserace results of elections, but in the growing differences between modernists and revanchists, between national interests and ideology.
As Morales cozies up to Chávez and Fidel Castro more quickly than most people expected – nationalizing Bolivia’s natural gas, inviting large numbers of Cuban doctors and advisers to his country, and signing myriad cooperation agreements with Venezuela – he is also fueling increasing tensions with Brazil and Chile.
Both countries are his neighbors, and in theory at least, their leaders are his ideological soul mates.
But the differences between the modern and archaic left, and the three countries’ contradictory national interests, seem to be trumping more superficial political affinities.
For example, Saõ Paulo, Brazil’s industrial powerhouse, now depends for most of its energy on Bolivian natural gas.
As a result, Petrobras, the Brazilian energy company, has invested huge sums in Bolivia in everything from exploration to pipelines.
Now, with the election of Evo Morales, the main source of Petrobras’s natural gas has suddenly been nationalized.
Indeed, domestic royalties on Bolivian gas production are being increased by more than 50%, and the price charged to Bolivia’s foreign clients may well be doubled.
Contracts are being respected only in the breach, and technicians and lawyers from PDVESA, the Venezuelan oil giant, are auditing Petrobras installations in Bolivia.
Lula wants to be nice to Morales, but he can’t be nice to his expropriating neighbor and at the same time keep the industrialists and consumers of Saõ Paulo happy.
Similar frictions are arising with Chile.
President Bachelet would like to solve the century-old problem of landlocked Bolivia’s access to the Pacific, but she is finding this task to be trickier than expected, as Morales increases gas prices and reduces gas exports to Argentina, Chile’s largest foreign supplier of energy.
Nor does Morales’s rhetoric help: accusing the United States of attempting to assassinate him, as he did last week, does not endear him to the elites of a country that has signed a free-trade agreement with the US and whose president will be visiting Washington soon.
At the end of the day, Bolivia’s immediate national interests may be served by Morales’s strategic alliance with Cuba and Venezuela.
On the other hand, Chávez’s unabashed meddling in the Peruvian elections may have so alienated Alan García that he actually becomes a European-style social democrat, and López Obrador may deliver on his promises to respect NAFTA, adhere to macro-economic orthodoxy, and pursue good relations with the US.
But the cleavage between the two lefts in Latin America is steadily deepening.
This is inevitable, because that rupture is being fueled by the simple acknowledgement that responsible governments must place national interests ahead of nostalgia, grandstanding rhetoric, and strident ideology.
The Right to Eat
NEW YORK – Food systems have gone global.
The average North American meal now travels 2,400 kilometers (1,491 miles) from field to plate.
As the food-supply chain has been transformed, efforts to ensure that it is accessible to all have intensified, with the “right to food” serving as an important driver of bottom-up change.
In September, India adopted a landmark law on food security, guaranteeing five kilograms of subsidized wheat, rice, and other foodstuffs monthly for two-thirds of the population, and enhancing support for pregnant women, schoolchildren, and the elderly.
Though there are undoubtedly numerous holes in the system, treating access to food as a legal entitlement is an important step in the right direction.
Such progress, which extends far beyond India, follows a decade of global activism that has challenged the logic of existing food systems like never before.
Since the Universal Declaration of Human Rights was adopted in 1948, political rights like freedom of speech have been widely claimed, while the right to food has been largely neglected.
To be sure, since the declaration was signed, a plethora of tools has been introduced in the effort to combat hunger.
Some countries have opened their markets to imports; others have closed them.
Many became dependent on food aid, while some acted on the conviction that eradicating hunger is merely a matter of fostering GDP growth.
But such efforts have had limited success.
Meanwhile, the most powerful institutional tool has been neglected.
Unlike the top-down, technical solutions that policymakers have usually favored, a solution based on the concept of food as an entitlement, not a privilege, would involve – and empower – multiple actors.
Such an approach would be centered on upholding the right of all people to produce or gain access to food.
This approach has clearly found an audience in India, where millions of people live in hunger and poverty, even as the country’s net wealth grows.
Over the last decade, a right-to-food movement has taken root in the country, putting pressure on policymakers and approaching the problem from legal and political angles.
In 2001, a lawsuit brought by public-interest NGOs resulted in the Indian Supreme Court recognizing the right to food as an aspect of the constitutionally protected “right to life.”
The court ruled that a series of social programs should be expanded, in order to provide a basic nutritional floor for all.
This activated a virtuous circle; by strengthening the social movements rallying around the right to food, the Supreme Court’s decision enabled them to ratchet up pressure on state governments to build an effective food-security apparatus.
The recent law is a milestone in this process, but by no means the end point.
In a country characterized by massive regional wealth disparities and deep-rooted poverty, the road to eradicating hunger is sure to be long and difficult.
The key to ensuring continued progress is to establish accountability.
In this sense, the social audits used by India’s Right to Food Campaign to assess compliance with court-mandated policies, such as the delivery of school meals, will be essential in the coming years.
Peasant farmers, parliamentarians, civil-society groups, and institutional actors have come together in similar ways elsewhere – including in Brazil, South Africa, and Mexico – to demand legal protections against hunger.
Right-to-food framework legislation has been adopted in Argentina, Guatemala, Ecuador, Brazil, Venezuela, Colombia, Nicaragua, and Honduras.
This has often led to the kind of participatory approach to policymaking that empowers the poor and enables lasting inroads against hunger to be made.
In Brazil, for example, civil-society representatives comprise two-thirds of the National Council on Food and Nutrition Security, and thus have the opportunity to influence policymaking at the highest level.
In Mexico – where the right to food was constitutionally recognized in 2011 – an inter-ministerial commission includes 19 government departments and institutions.
It is no coincidence that these countries now boast bold social programs that are dramatically reducing hunger among the poorest groups.
Clearly, courts have made a signal contribution to the fight against hunger, by upholding and making fully operational the right to food.
In 2012, South Africa’s High Court ordered a revision of fisheries legislation to protect the livelihoods of small-scale fishers.
In Nigeria, Argentina, and Nepal, the right to food has recently been invoked on behalf of regions and population groups – including indigenous peoples – whose access to food was threatened.
Breakthrough crops, fertilizer subsidies, and aid campaigns may grab the headlines, but it is the right-to-food movement that holds the greatest promise for ending hunger.
The good news is that its power is only just being realized.
With a truly global right-to-food movement now emerging, the best is yet to come.
Ollanta Humala’s Limited Options
BUENOS AIRES – The big question in Latin America today is this: Will Peru’s newly elected president, Ollanta Humala, orient his country toward Venezuela’s Hugo Chávez and his radical allies?
Or will he choose the path taken by Brazil’s former president Luiz Inácio Lula da Silva and the region’s other moderate politicians?
Humala’s own ambiguous words offer little guidance.
So the direction in which he intends to lead must be read from his actions, and these are unlikely to be definitive in the short term.
Peru’s domestic and international situation, however, will frame his main decisions.
Humala is no novice politician rising to victory on charm and luck.
In the presidential election of June 2006, he received 45.5 % of the vote – not enough to defeat Alan García, but sufficient to show how deeply he had tapped into the hopes and trust of many Peruvians.
At that time, populism seemed an unstoppable force in Latin America.
Fueled by an oil boom and vast social spending, Chávez was flying high, blessed and supported by the aging but still active Fidel Castro.
Across the región, Chávez’s influence was strong.
His backing was a decisive influence in the election of Bolivia’s President Evo Morales in 2006, and the following year he supported Daniel Ortega in Nicaragua and Rafael Correa in Ecuador, though his impact on their victories is hotly debated.
In 2006, Humala praised Chavez’s policies as a sign of a new era in Latin America.
But, in the recent presidential campaign, he suggested that his policies would resemble those of Lula, not Chávez.
In particular, he would seek to emulate Lula’s efforts to include vast sectors of the population in the benefits of a strong economy.
Today, with Venezuela’s economy mired in high inflation and overly dependent on oil, Chávez is fading as a regional model and guide.
He has also been startled by the rise of domestic opposition.
So Brazil’s mix of diversified economic growth and redistribution is a far more appealing example.
Indeed, a major reason for Humala’s victory was García’s inability to secure the benefits of growth for Peru’s poorest people.
Humala’s main campaign argument was that he would not risk the “success” of Peru’s economy, but would, on the contrary, strengthen it.
His fight against poverty and social exclusion would be undertaken as part of that effort.
Humala comes to power in a regional environment of moderation and growing economic integration, which he would disturb at his peril.
García recently signed an economic agreement with Chile, Colombia, and Mexico, called Pacto del Pacífico, which is destined to reorient Latin America’s economies.
These countries will jointly seek to develop a bigger presence in Asian markets, and to offer developed countries a safe option for capital investments in emerging markets.
Moreover, each of the countries has bilateral free-trade agreements with the others and with the United States (though the US Congress has yet to approve the United States-Colombia Trade Promotion Agreement, as it is officially known).
Breaking with these strategic policies would harm Peru’s economy.
It would also harm Humala’s domestic political base and isolate him in the region.
He would not be able to lean on Brazil, the moderating regional power, but would inevitably fall under the sway of Chávez and Morales, deterring foreign investors and harming the country’s foreign relations.
Cuba is out of the question as a patron, due to its preoccupation with Raúl Castro’s efforts to reshape its depleted economy in an improbable bid for Chinese-style capitalism in a one-party state.
So Humala’s Latin American options are limited: Venezuela, Brazil, or the countries of the Pacto del Pacífico.
Although the last two options might be difficult to merge –Mexico might not want the competition of such a large player as Brazil – they are not mutually exclusive.
In fact, Brazil’s leaders have good reason to be flexible: their country needs the access to the Pacific that Peru and Chile offer.
The local stock market’s fall immediately after Humala’s victory is a clear sign that the most influential forces in the Peruvian economy will continue to press for deeds, not promises – deeds that benefit their interests, of course.
Humala most likely will not follow market dictates robotically.
But he will not be able wholly to avoid them.
Finally, there is the question of political effectiveness.
Humala’s coalition, Gana Perú, will have a plurality of representatives in Peru’s congress, but will need the votes of ex-president Alejandro Toledo’s party to have a controlling majority.
Toledo, a Stanford graduate and a moderate politician, supported Humala during the campaign and provided him with economic advisers, which proved to be decisive in establishing the credibility of Humala’s retreat from radical policies.
Both the internal and external environments in which Humala finds himself – and the fact that he won by a margin of only three percentage points – seem to call for moderation and consensus.
Half of Peru’s citizens did not side with him.
Polarization may have proved functional to winning an election, but Humala will have to broaden his support in order to forge the consensus he needs in order to govern.
Olympian Economics
LONDON – As Olympic mania swept the world in recent weeks, it transported the host country, Great Britain, to a rare display of public exultation.
Indeed, the successes of “Team GB” produced an upsurge of patriotic rejoicing akin to victory in war.
Britain finished third in the gold medal count, behind the United States and China, much larger countries, but ahead of Russia, which traditionally competes with America for first place.
So, what is the secret of Olympic success?
The acquisition of medals, precisely because it gives so much satisfaction, has become the object of scientific inquiry and national endeavor.
Before the 2012 Games, the Financial Times combined four economic models to produce the following “consensus” prediction of gold medals (the actual results are in brackets): 1.
Germany, 9 (11). The gold medal rankings and overall medal placement (gold, silver, and bronze) were correctly predicted in all cases.
The most striking finding is that the medal count can be predicted with great accuracy from four key variables: population, GDP per capita, past performance, and host status.
Everything else – different training structures, better equipment, and so forth – is pretty much noise.
The impact of population and GDP is obvious: A large population increases the chance that a country will have athletes with the natural talent to win medals, and a high GDP means that it will have the money to invest in the infrastructure and training needed to develop medal-winning athletes.
Past performance is also important: the visibility and prestige of a sport increases after Olympic success, as does funding.
Medals attract money; failure results in cuts.
Finally, the “home advantage” includes not just the benefit of morale and the opportunity to train in the actual Olympic venues, but also the funding boost that host status brings.
In 2004, British athletes received £70 million ($110 million).
By 2008, after London was awarded the 2012 Games, the total was £245 million, and stood at £264 million this year.
Over the past ten Olympics, the host country has won 54% more medals on average than when it was not the host.
Hosting the Olympics boosts performance before the hosted Games, and has effects that outlast them.
Some sports are more sensitive to income and host-nation effects than others.
Equestrianism, sailing, cycling, and swimming, for example, are far more expensive than running, and this reduces the participation of low-income countries.
It is almost impossible for some countries to produce medal-winning athletes in some sports – Ethiopia has only one swimming pool per six million people.
Sometimes, poor countries are priced out of a sport.
India was historically strong at field hockey, winning almost all of the gold medals between 1928 and 1968, but, since the Games switched from grass to expensive synthetic turf, the Indians have won just one field hockey medal.
Some of the sports at which Britain has done particularly well, like cycling and rowing, are most highly influenced by income and host effects.
Brazil can therefore expect to improve considerably on its modest haul (15 medals) and 21st-place finish when it hosts the 2016 Games.
As for the others, the formula for success is fairly simple: select your potentially winning sports, pick the potential medalists in those sports, pour money into them, and stick with both the sports and the players until the medals roll in.
The funding can be corporate sponsorship (as in the United States), state money (as in China), or a mixture of National Lottery and state money (as in the United Kingdom).
Two questions arise. First, why should a country concentrate on accumulating trophies at the expense of other desirable goods?
And, second, can the formula for “picking winners” in sports be replicated for competitive success in international trade?
The answer to the first is not obvious.
An economist would probably argue that money spent on education, housing, and health care brings more “welfare” than money spent in the quest for medals.
When all is said and done, sports is entertainment; the others are necessities.
But that argument ignores the effect of sporting success on national morale, an intangible factor in a country’s success in other, more “serious,” spheres of endeavor.
A country that can succeed in one sphere of peaceful competition is encouraged to feel that it can do well in others.
One can treat this claim with a certain degree of skepticism – after all, the 2004 Athens Olympics failed to produce a Greek economic miracle.
But it does lead to the second question: Can the methods that produce Olympic winners be applied elsewhere?
Nothing is more discredited in Anglo-American economics than the policy of “picking winners.”
The consensus has been that it inevitably leads to the state “backing losers.”
Economic success, on this view, is best left to the unfettered play of market forces.
This philosophy has been heavily jolted by two inconvenient facts: the financial collapse of 2007-2008 and the experience of countries like Japan, South Korea, Taiwan, Germany, and even the US, where economic success depended heavily on sustained government investment of the kind that has produced Olympic medals.
As in sports, so in economic life: government commitment can start a virtuous circle of success, while government neglect can trigger a vicious circle of decline.
Nevertheless, the popular hunger for sporting success, and the celebratory outpouring that it evokes, is bound to provoke some disquiet.
It seems to mark humanity’s retreat into infantilism.
But if the douceur of sports can channel aggressive passions into benign, if trivial pursuits, why should we deny our star performers their heroic stature?
Olympic Gamesmanship
NEW YORK – China lobbied long and hard to host this summer’s Olympics, and thousands of Chinese literally danced in the streets when the decision was made to award Beijing the games.
This was to be a chance for the Chinese to show the world just how far they and their country had come.
I do not know if there is a Mandarin equivalent for “Be careful what you wish for,” but if there is, it surely applies.
China is getting a great deal of international attention, but not the sort it bargained for.
On the contrary, China is finding itself under intense international scrutiny for everything from its policy toward Tibet, human rights, and product safety to the level of its currency, its policy in Sudan, and global climate change. What was meant to be a moment of celebration has turned into one of criticism.
Indeed, it is likely that several prominent world leaders, including British Prime Minster Gordon Brown, German Chancellor Angela Merkel, and United Nations Secretary General Ban Ki-moon, will not attend the opening ceremonies.
Several prominent American politicians have voiced support for a boycott.
Still other heads of state, including French President Sarkozy, are weighing staying away.
Of course, China merits criticism in many areas of its domestic and foreign policy.
But snubbing China is misguided.
It ignores what the country has accomplished, and it risks consequences that are inconsistent with what the critics themselves want to see.
Some perspective is called for.
Modern China is only some six decades old.
Its economic growth has been and is truly astounding. Hundreds of millions of Chinese have been lifted out of poverty.
Indeed, Chinese economic growth must be acknowledged as one of history’s great achievements in poverty reduction.
China is not simply wealthier; it is also a far more open place politically than it was during the Mao era.
Civil society is growing; there are now more than 300,000 NGOs. Official statistics show that more than 85,000 public protests occurred in 2005 (and probably more each year since) over issues such as corruption, public health, the environment, and land use.
Even the recent earthquake in Sichuan revealed how Chinese politics are changing. Cameras were allowed in; senior officials were seen and heard.
There are also indications that China’s foreign policy is evolving.
China has played a helpful role of late in encouraging North Korean cooperation with demands to limit its nuclear capabilities.
In Sudan, China supported a UN Security Council resolution establishing an international operation and committed 315 engineers to the UN-African Union force.
None of this excuses or justifies the shortcomings in Chinese behavior at home or abroad, which are many and real.
But reality is not one-dimensional.
China is changing, in many ways for the better, and further change in the right direction is not likely to result from a policy of isolating or sanctioning China.
If we want China to become a full participant, a stakeholder, in the international system, we are more likely to achieve this outcome by integrating China into the world’s institutions.
The Chinese need to see how they benefit from inclusion – and how they would suffer from not being one of the countries shaping and buttressing today’s international institutions.
We should seek China’s integration as a matter of self-interest.
In a globalized world, global challenges largely require global responses, which are impossible if a country of China’s size and population and wealth does not participate.
Stopping the spread of nuclear weapons, promoting more efficient energy use, taking action on climate change, and maintaining an open global economy – these and other tasks require Chinese participation, even cooperation, if globalization is not to overwhelm us all.
One useful step on our part would be to end the anachronism of bringing together many of the world’s principal leaders in the annual G-8 meeting of industrialized countries and not including China (or India or Brazil, for that matter) as a matter of course.
But integration will succeed only if China and its leaders are open to it.
Communism and socialism do not command public support as they once did.
Materialism and consumerism cannot be a substitute for political and religious freedoms, which remain severely constrained.
Nationalism can all too easily fill a void.
This is dangerous, as history demonstrates that leaders who allow or stimulate excessive nationalism can all too easily become trapped by it.
This argues not simply for keeping nationalism in check, but for allowing greater political and religious freedom so that there are alternative sources of legitimacy and allegiance in Chinese society beyond that of economic advancement.
This is something that the Chinese will largely have to do by and for themselves.
Outsiders can and should make their views known, but mostly in private and without saying and doing things likely to stimulate the very nationalism we want to discourage.
All of which brings us back to this summer’s events in Beijing.
China needs to show respect for human rights and allow journalists to report.
Rather than boycott Beijing, the world’s leaders should embrace the Olympics and what they represent.
The Olympics are a venue in which individuals and countries compete, but in conformity with a set of rules. This is exactly what we want from China in the twenty-first century.
Olympolitik
PARIS – Is there a link between economic power and Olympic medals?
Is a form of multipolarity in sports emerging as political multipolarity sets in?
In 1992, immediately after the Cold War’s end, the United States and the former Soviet Union’s “Unified Team” won a quarter of the medals in Barcelona.
Global bipolarity had not yet vanished.
By the 2008 Beijing games, the world had changed significantly.
The Soviet-American duopoly had given way to a Sino-American duopoly, which won a combined 20% of the medals.
The London games confirmed this trend.
The Sino-American duopoly has loomed large in the medal count (22% of the total), but not outrageously so.
Europe remains strong, while Asia and the Caribbean have made significant headway.
There are, in fact, four factors behind Olympic power: population size, sports traditions, sports policy, and level of development.
Taken separately, none of these factors can explain a country’s Olympic record.
Collectively, however, their explanatory power is relatively large.
For starters, population size is a source of power simply because large countries can take advantage of their greater human potential to shine in a broad array of disciplines.
Countries with great demographic potential therefore inherently have great Olympic potential.
Conversely, Australia appears to be the only country with less than 50 million inhabitants gaining more than 3% of the medals at a Summer Olympic Games.
But, of course, a large population is not always a recipe for success.
The most striking example is India, one of the least sports-oriented countries in the world, given its demographics: six medals for more than 1.2 billion inhabitants – the same number as Croatia, which has a population of just 4.3 million!
Clearly, Indian society has a complex relationship with sports.
But the disparity between its demographic size and its Olympic success also shows that political multipolarity and sports multipolarity are not cast from the same mold.
India is probably the most spectacular counter-example, but it is not the only one.&nbsp;
Countries like Brazil, Argentina, Turkey, and Mexico are dwarfed by countries like South Korea.
Overall, it is fair to say that South America and the Middle East remain fringe players at the Olympics.
The Caribbean, for example, far outranks Brazil.
National traditions are the second important factor in Olympic success.
First, there are physical and natural realities.
Ethiopians begin running in childhood as a means to reach, say, a distant school in the highlands.
And the Caribbean does not necessarily offer many sports activities besides track and field, for which relatively few material resources are needed to create champions.
This is one of the reasons why East Africa, the Caribbean, and to a lesser extent the Maghreb are prominently represented in Olympic running disciplines.
But traditions can also be created.
The French are not culturally or physically predisposed to dominate sports such as judo, canoeing, and swimming, in which they have achieved distinction for more than 50 years.
A national sports policy can be conducive to good results.
Such policies embody a country’s choice in developing one or several sports.
They can grant a great deal of autonomy to various federations (as in the US and Great Britain); devote significant public resources to sports for political purposes (as in Russia and other dictatorships); or insulate publicly financed sports institutions from partisan politics in order to ensure continuity (as in Italy and France).
On the other hand, the absence of a real sports policy (or its unraveling) can become a decisive handicap.
Indeed, how else to explain the poor performance of a country as well-endowed as Switzerland, or as highly populated as Nigeria?
And what accounts for South Korea’s exceptional performance if not a coherent sports policy?
Finally, a country’s level of development, as we have seen, is far from being decisive to Olympic success, especially in the running disciplines.
Runners can travel and train individually on the best tracks.
Obviously, however, development does play a significant role.
While sports like running are relatively inexpensive, others – including gymnastics, swimming, and even more so team games and equestrian events – require significant resources.
It is no coincidence that the Caribbean and Africa do not have a presence in these disciplines at the highest levels of competition.
Indeed, of the ten countries that received the most medals at the London games, all except China and Russia are OECD members.
There are no less-developed countries, with the possible exception of Ukraine, in the top 15.
Thus, while economic power is not a prerequisite to Olympic power, multipolarity in sports remains positively correlated with it.
Africa received only 3% of all medals in London.
But, if the continent can sustain its recent economic growth, that number will almost surely rise.
Omar and Osama\u0027s Kampf
History possesses many stories like this: a political party emerges, and most people think it a bad or sick joke.
Everyone tries to ignore it; that is, when they are not laughing at it.
Suddenly, the economy becomes bad or an external threat looms and that party marches toward power.
When it seizes the government - think of Hitler, Lenin, Mussolini, even of Mullah Omar in Afghanistan - all laughter stops.
In Poland, a ``joke'' party of malignant intentions is emerging.
Called ``Self-defense,'' it voices (it says) the discontents of poor farmers and those displaced and radically dissatisfied with politics here.
The leader of ``Self-defense'' is a shrill primitive named Andrzej Lepper.
A thuggish guttersnipe more akin to Aleksander Lukashenka, the dictator of Belarus, than to the great dictators, Lepper nonetheless represents a hideous post-modern form of irrational politics.
For this reason, I cannot laugh at him.
Hitler, Lenin, and Mussolini sought power in order to use the state to impose their will and their programs.
Today's anti-democrats, however, view the state as an obstacle.
They want to gut state power so that jackals like themselves can feed on the corpse.
``Self-defense'' has participated in several parliamentary elections but never received more than 2% of the vote before this year.
Three weeks before last September's elections, opinion polls gave it 7-8 % of the vote.
Everyone thought this an exaggeration, but when the balloting ended, ``Self-defense'' had secured nearly 11% of the vote and was parliament's third largest party.
Everyone was shocked. But most Poles are committed to democratic norms and believe in civilizing the uncivilized.
So Lepper became parliament's deputy speaker (one of four).
Because he is provocative, political commentators and TV and newspaper interviewers were drawn to him.
Not for long.
Within a month the media elite was bored.
Lepper sought to reclaim their attention by calling the foreign minister a traitor, and threatening violence if his program was not enacted.
Ideas about civilizing ``Self-defense'' ended.
Parliament evicted Lepper from his deputy speakers's position.
In Lepper's last speech as deputy speaker he accused many famous politicians of taking bribes, naming the amounts, times, and places where the bribery took place.
Now Lepper seems unable to prove his accusations or offer any substantiation of them.
No matter: he kept his profile high by asking to meet America's Ambassador, saying that he knew of a Polish role in the events of September 11 th .
I wish that I could say that by discrediting himself, Lepper self-destructed.
This is what should happen in a democracy.
After all, the American demagogue Joe McCarthy imploded when he failed to prove his charge that there were hundreds of Soviet spies infesting the US State Department.
But Lepper is no empty windbag like McCarthy.
He is not a nationalist like France's Le Pen; he is neither rightist nor leftist.
Instead, he loathes the political system and wants to overturn and replace it with a nothingness in which feral politicians run amuck.
Lepper's supporters are not the poor and excluded, but are remnants of the lower Communist nomenclatura (the apparatchiks too stupid to steal as Communism collapsed) and those who made money during the grey period of 1989-1991, when state controls were practically nonexistent and when all that you needed to make money was a truck and enough petrol to drive to Berlin.
You smuggled and you became relatively rich.
Lepper's people are nostalgic for the profitable anarchy of a crippled state.
So who is their enemy?
Not the Jews, masons or gypsies who were the traditional targets of lumpen anti-democrats. ``Self-defense'' loathes, instead, democratic government.
They repudiate not only parliament and its necessary compromises, but the rule of law itself.
Parliamentary democracy was born centuries ago by Europeans sickened by domestic (mainly religious) wars.
Indeed, parliamentary democracy's greatest enemy remains domestic war.
I do not want to exaggerate the threat that Lepper poses, but I believe he represents a poisonous model of irrational politics.
From Indonesia to Afghanistan, from Georgia to Ukraine, Lepper's movement is part of a new nihilism that seeks to make countries ungovernable.
As a political philosopher, I find democracy's internal enemies a true intellectual problem.
Law, I believe, cannot be democracy's only defense, because even if Lepper's countless lies are proven false and he is jailed, his followers (and their rage) will remain.
Like Hitler, he will likely emerge from prison even more beloved by them.
You cannot win domestic wars (even non-violent ones) through legal processes alone.
America could not defeat Osama bin Laden's terrorists through arrests, indictments, and trials.
Political means are not the only tools that can be employed against political dangers.
All the ordinary - and the extraordinary - weapons that democracy possesses must be employed.
We must - to repeat the idea of the German political philosopher Carl Schmitt (no friend of democracy himself) - treat enemies as enemies.
When democracy is at stake you must defend it, to borrow a line from Malcolm X, ``by any means necessary.''
This may be difficult for liberals to understand; more difficult for democratic-minded peoples to accept. But hard choices are inevitable if democracy is to prevail.
The Draghi Put on Trial
CAMBRIDGE – In the summer of 2012, European Central Bank President Mario Draghi pledged to do “whatever it takes” to save the euro, including purchasing “unlimited” amounts of struggling governments’ bonds.
The move, which has come to be known as the “Draghi put,” almost immediately reduced borrowing costs for Spain and Italy, and is widely touted as having pulled the eurozone back from the brink of disaster – without ever using the so-called “outright monetary transactions.”
That may sound like a resounding success: the mere announcement of the OMT scheme was enough to end the monetary union’s existential crisis.
But, according to the German Constitutional Court, the policy violates European Union treaties – a ruling that the European Court of Justice is now reviewing.
The ECJ’s decision will have important implications for the eurozone’s future, for it will define what authority, if any, the ECB has to intervene in a debt crisis.
And yet, in a fundamental way, the current debate about OMT misses the point.
Rather than asking whether the ECB’s mandate allows it&nbsp;to intervene in a debt crisis, EU leaders should be asking whether it should.
The Bundesbank’s position on this question is well known; a leaked submission to the Constitutional Court last year declared unequivocally that, “It is not the duty of the ECB to rescue states in crisis.”
But there is a strong case for allowing the ECB to act as lender of last resort.
One key argument for forcing central banks to adhere to strict inflation targets is that it eliminates the temptation to use “monetary financing” (purchases of government bonds) unexpectedly, either to stimulate the economy or to inflate away its debt.
After all, such action rarely works: markets anticipate it and raise interest rates to compensate lenders for expected inflation.
The result is typically both high inflation and high borrowing costs.
What is worse, the argument goes, the expectation of monetary financing would drive governments to borrow excessively.
This could trigger a vicious circle of mounting debt and uncontrollable inflation, with devastating consequences.
These are convincing arguments.
But they fail to account for one critical factor: historical context.
If a debt crisis results from government profligacy and mismanagement, rather than from a market failure, it is true that the central bank should not intervene.
If, however, the crisis results from a coordination failure among investors – when each investor refuses to roll over the government’s debt for fear that others will do the same, leading to a default – monetary policy can play an important role.
Indeed, by putting a floor on the price of sovereign debt and any accompanying inflation, central-bank intervention would reduce the real value of the debt and facilitate repayment.
Moreover, as the OMT announcement demonstrated, a credible promise to use monetary financing in the event of such a crisis can prevent it from arising in the first place – with no inflationary action required.
Without central-bank involvement, investors’ panicky prophecy would be self-fulfilling, with the resulting spike in borrowing costs making it impossible for the government to repay its creditors.
In other words, prohibiting the central bank from acting as lender of last resort can push solvent economies into a needless debt crisis, undermining output and employment.
By most accounts, this is precisely what happened to Spain and Italy in 2012.
In this context, the Draghi put was a highly defensible action.
Refusing to consider any amount of monetary financing, and continuing to adhere to a strict inflation target, would have been much more difficult to justify.
To be sure, central-bank intervention is not the only way to quell self-fulfilling crises in the eurozone.
Fiscal transfers, whereby eurozone countries commit to provide funds to their distressed counterparts, could also work.
But this approach is far less practicable, and thus less credible.
Opponents of central-bank intervention are right about one thing: monetary financing carries serious risks.
In order to ensure that it is as safe and effective as possible, it must be used primarily&nbsp;in the event of self-fulfilling debt crises.
In terms of institutional design, it is thus optimal for the central bank to maintain a strong commitment to keeping inflation low in normal times and to be willing to intervene in a crisis.
On Censorship in Hong Kong
No jackboots are to be seen marching through Hong Kong's sleek shopping malls, but a distinct whiff of totalitarianism is in the air.
The tell-tale phrases are on everyone's lips: talk of the need for anti-subversion laws, press controls, strong leadership, of adjusting to Hong Kong's new reality.
Everyone looks to the great Northern neighbor for direction and mutters about expediency.
Most of the world lost interest in Hong Kong after 1997 when the "Anschluss" with China did not instantly deliver vast changes.
Over the last year or two, however, the pace of integration into the People's Republic of China has quickened decisively.
Life at the South China Morning Post , Hong Kong's leading English language newspaper, and so a visible political gauge, offers a window into what is going on all across Hong Kong's institutions.
The atmosphere at the paper began to darken noticeably as one after another of its leading editorial lights was pushed out.
It would be an exaggeration to compare the situation to the way the Nazis took over institutions in Germany in the 1930s, and to how people back then fell in line, because no one is disappearing into concentration camps.
Hong Kong remains a rich and prosperous place.
Yet the dictatorship in Beijing has made its presence felt, if only through proxies and collaborators.
Before I chose to protest to the editor who sacked me a week ago, I was guilty of complicity too.
I stayed silent when the paper's popular cartoonist (Larry Feign) was unjustly dismissed, and remained silent even after its best satirical writer (Nury Vittachi) was sacked.
I only became uneasy when the British editor (Jonathan Fenby) was fired and replaced.
"I am still OK," I reasoned.
"They still let me write what I want..."
My job as bureau chief in Beijing isolated me from the struggles in the head office in distant Hong Kong.
Besides, working in Beijing is itself a constant struggle of conscience and compromise.
Foreign reporters are under constant surveillance and risk compromising their contacts.
That means one begins to avoid tough subjects, like the repression of Falun Gong and its followers.
Gradually, you also noticed a change in the behavior of your HK colleagues.
As the government proposed to introduce an anti-subversion law and strengthened its control over the civil service, they became guarded in what they said and tightlipped about mentioning the pressures from above.
Whispered rumors of daily interference from management were only confirmed in private.
Some people responded opportunistically, seeing the way to promotion open as talented colleagues disappeared.
So the internationally recognized editor, Willy Lam, was replaced by a mainlander, Wang Xiangwei.
Those who organized this coup hoped that it would lead to greater things for themselves; those who signed a petition of protest were fired not long after.
Management then began to quietly spread word that the paper needed people able to "negotiate" with the sensibilities of the Communist Party.
Curiously, some officials in Beijing complained about the crude tactics of those sent to run Hong Kong.
It seemed the urge to collaborate actually ran ahead of the party's demands.
The paper's tone began to change, becoming increasingly deferential toward China's rulers.
Reporting became blander and blander.
Management talked of the virtues of writing to allow readers to read between the lines.
These changes speeded up over recent months.
Even the office photographer began to notice different photographic choices.
The Hong Kong and Macao Affairs Office took charge of the paper's correspondents based on the mainland, demanding that they be replaced by ethnic Chinese.
Then they began to offer guidance on reporting in exchange for favors like access to officials.
Despite the obviousness as to where all this was leading, individuals responded differently.
Some continued to deny what was happening, and became indignant if the issue was raised.
Others reasoned that if they kept their head down and compromised, the crisis would pass.
A sort of listlessness now grips Hong Kong, particularly the civil service.
The business sector remains unaffected and continues to talk optimistically of the prospects opened up by closer integration with the mainland.
But Hong Kong is surrendering the uniqueness and exceptional position it once held over the Chinese world.
As other Chinese cities become more free and more confident, Hong Kong is submissively abandoning the freedoms it once held with pride.
In 1997, China promised to preserve these freedoms for 50 years under the one county, two systems mantra.
Now Hong Kong itself is undoing the system.
Many of its tycoons (one of whom, Robert Kuok, controls the South Morning China Post ) are jettisoning their autonomy for the sake of business - even when such action is not requested.
They seem blind to the value of what they are sacrificing.
The intangibles of freedom will determine the vitality and future of Hong Kong.
Tragically, such losses never appear on the profit sheets measured by accountants.
One Big Union
PARIS – In the last few weeks, the idea of establishing a European banking union has become the latest remedy advanced as a solution to the long-running euro crisis.
But, whatever the merits of a banking union – and there are many – proposals to establish one raise more questions than can currently be answered.
The motivations of those who advocate a banking union differ markedly.
For some, particularly in southern Europe, it is seen as a means of shifting the burden of supporting their indigent banks to those with deeper pockets.
For others, especially in the European Union’s Brussels Eurocracy, it is seen as another leap forward in the construction of a European super-state.
Taking their cue from the sacred Rome Treaty’s reference to “ever closer union,” the European Commission’s theologians view every crisis as an opportunity to advance their federalist agenda.
The European Central Bank has been more thoughtful, though no less enthusiastic, arguing that a banking union should have three objectives.
First, stronger eurozone-wide supervision should reinforce financial integration, “mitigate macroeconomic imbalances,” and improve the conduct of monetary policy.
How a single EU supervisor would address the problem of imbalances is not explained, but it is surely a worthy aim.
The second objective should be to “break the link between banks and sovereigns,” which has been a particularly dangerous feature of the last year, while the third is to “minimize the risks for taxpayers through adequate contributions by the financial industry.”
The third aim could be achieved country by country, but it is certainly arguable that an across-the-board banking levy, or a Europe-wide financial-transaction tax, would eliminate competitive distortions.
How might these laudable objectives be achieved?
The European Commission has argued that a fully-fledged banking union would need to rest on four pillars: a single deposit protection scheme covering all EU (or eurozone) banks; a common resolution authority and common resolution fund, at least for systemically important and cross-border banks; a single European supervisor for the same banks; and a uniform rule book for prudential supervision of all banks in Europe.
Anyone who has been involved in banking supervision can see at once that these four pillars will require careful construction.
Many individual countries have taken a generation to develop their own domestic schemes.
And, in this case, three big political issues have yet to be resolved.
First, the identity of the single European banking supervisor remains undecided, and the ECB has seen an opportunity for a power grab.
Central bankers in Europe have always resented the narrow monetary-policy mandate given to the ECB under the Maastricht Treaty. Banking supervision was not included among the ECB’s objectives, though one article of the treaty gives the system of European central banks as a whole the task of contributing to effective supervision.
They now argue that the simplest solution would be to expand that remit and make the ECB the de facto pan-European supervisor.
That is not the outcome favored by the European Commission, which has only just set up the European Banking Authority.
The EBA is closely linked to the Commission itself, and is seen as the natural candidate for a broader role.
The Commission has a case, but it also has a problem.
During the political horse-trading that preceded the creation of the EBA (together with two equivalent bodies for securities and insurance), it was agreed that the new authority would be based in London.
That seemed logical at the time, but not if the EBA’s role is to be broadened.
How could a eurozone supervisor be based outside the eurozone?
The second unresolved question is how to achieve a banking union in legal terms.
Constitutional change on this scale would normally require a new European treaty.
But that would take time, and Europe’s leaders have run out of it.
Furthermore, there is no guarantee that voters in countries that require a referendum on treaty changes would support a further transfer of sovereignty.
So the likely outcome is that, in the EU’s time-honored fashion, the banking union will be constructed using existing powers, finessing the sovereignty question, and avoiding any reference to public opinion.
That points towards reliance on the ECB.
The final question is what such a eurozone banking union would mean for the single financial market, and especially for EU countries that are outside the single currency.
Many of them would sign up willingly, as they intend to join as soon as possible, in spite of the euro’s difficulties.
But that is not the case for the United Kingdom, and London remains the continent’s biggest financial center, by far.
I fear that the French and Germans have now lost patience with the troublesome British, and are reluctant to cut a deal.
And Euroskeptic British politicians see this as an opportunity to recast the UK’s relationship with the EU; indeed, for some, it means a chance to negotiate an exit.
Opinion in the City of London tends to favor a middle way, which would allow the UK to cling to the benefits of the single market, without conceding unified regulation. That will be hard to pull off.
I suspect that a banking union of some kind will be implemented, and soon.
Otherwise, the eurozone banking system will collapse. But the consequences of such a step for Europe’s great free-trade experiment could be serious, and, if not managed carefully, could lead to Britain’s withdrawal.
The political stakes are high, and the outcome is likely to reflect that.
One Europe
"One Europe" will be the rallying-call of the Danish Presidency of the EU, which begins this week.
One Europe to seal the definitive unwinding of the 20 th century: its wars, divisions and tragedy.
One Europe in pursuit of freedom, security and justice.
One Europe with a competitive and resource-efficient economy.
One Europe with food policies for the long-term.
One Europe that shoulders its global responsibility for managing international crises, for avoiding new iron curtains in Europe, and for spreading the benefits of globalization.
The bloodiest century in European history started in August 1914.
We can end it in December 2002.
1945 brought peace and freedom - but only to some of us.
While Western Europe was free to construct common institutions for peace and prosperity, the Soviet Union subjugated our Central and Eastern heartland.
The dream of One Europe was put off for almost two generations.
The fall of the Berlin Wall revived that dream.
The time has come to realize it.
Preparations have been under way for almost a decade since conditions for membership were first defined in Copenhagen in 1993.
Candidate countries deployed immense efforts to comply with those conditions.
Today the goal is moving from the dream world to the real world.
We have a historic chance of closing enlargement negotiations with up to ten countries in Copenhagen in 2002.
The EU is determined to make it happen.
Enlargement is the geo-strategic choice of a generation.
It is about uniting a continent.
It is about lasting peace and shared prosperity.
We know we can do it.
The evidence is the track record of the institutions and policies that enlargement will extend to new members.
For decades they have created a zone where war has become unthinkable, where might is not right, where the poorer catch up with the richer.
Not only is the EU one of history's greatest peace projects, it also delivers the goods in terms of higher incomes, more jobs, and greater opportunities for its citizens.
One look at the economic transformation of, say, Ireland or Spain since they joined the Union suffices to drive home this point.
By enlarging the EU, we will stimulate economies to grow and catch up, adding tens of millions of new consumers to the internal market.
The resulting trade and investment will make everyone better off.
When some object to the budgetary costs of enlargement and others to transitional periods, the prospect of stimulating growth across Europe is the perspective to keep in mind. One Europe.
Lasting stability. Shared prosperity.
This year provides a historic window of opportunity.
We must seize it.
Room for manoeuvre in the enlargement negotiations is limited.
To make minds meet in Copenhagen, both sides must be flexible and willing to make necessary compromises.
Not only do we owe it to the victims of the century that we lay behind, we owe it to the children to come.
If we don't grasp the moment it will vanish.
But some candidates will not be able to conclude negotiations this year.
A special effort should be made in order to strengthen their prospects.
We will also continue the efforts to bring Turkey closer to the EU.
The door remains open to the countries of the Balkans too.
They chose the path towards Europe as they entered the EU Stabilisation and Association Process.
Enlargement will make Russia an even more important partner for the EU.
The ultimate goal is far-reaching integration in a Common Economic Space.
Together we can prevent a new silver curtain from replacing Europe's old iron curtain.
In parallel with enlargement, we will set the stage for reinforced relations with Russia and the EU's new neighbours to the East.
Our guiding principle always remaining: One Europe.
While enlargement remains the EU's most important geo-strategic goal, we must shoulder our global responsibility in other ways as well.
To this end, we must strengthen the Common Foreign and Security Policy.
Not only will we strive to ensure a concerted, clear and speedy reaction to international events and crises, we will also continue the dynamic development of the EU's crisis management capabilities.
As is well known, this will happen in close cooperation with Greece.
The EU has a special responsibility for peace and stability in a world characterised by increasing interdependence.
The transatlantic relationship embedded in our shared values remains the bedrock of our global efforts.
This applies in particular to the fight against terrorism and to efforts to reduce poverty.
We neither could nor should seek to put an end to globalization.
But we can and should contribute to spreading the benefits of globalization more evenly.
The World Summit on Sustainable Development in Johannesburg and the new WTO round are both important means to this end.
Today's new challenges require common solutions in the form of enhanced co-operation at European and global levels.
To ensure the safety and security of our citizens, we must fight terrorism, trafficking in human beings and international crime.
At the same time, we must promote fair and equal treatment of refugees and legal aliens.
One Europe in the service of freedom, justice and security.
We must also continually improve the capacity of the EU to deliver the goods expected by its citizens.
A competitive, innovative and resource-efficient economy.
One Europe with more jobs, freer competition and simpler and better rules for the benefit of companies, consumers and workers.
One Europe able to stand its ground in the coming global competition.
Last but not least, we need food policies for the long term.
One Europe with the highest standards of food safety.
One Europe that starts pondering how to steer its agricultural policy in a more market oriented and green direction.
One Europe with a new fisheries policy that safeguards marine natural resources for the future while taking due account of the importance of the fishing industry to local communities.
The Danish Presidency will consistently put the common interest at the forefront.
We intend to achieve results through clear priorities and strong cooperation with all of our partners.
One Forest, Two Tigers
When Japan’s government recently decided to ignore Chinese protests and allow Taiwan’s former president, Lee Teng-hui, to visit Japan, China lashed out at its Asian neighbor, even threatening retaliation. But this latest dispute is characteristic of a remarkable flurry of anti-Japanese activity in China since 2003.
That August, construction workers in Qiqihar mistakenly ruptured mustard gas canisters left from the wartime Japanese occupation, injuring dozens and killing at least one.
The reaction by China’s public to the gory photos of the injured was furious.
One million signatures were rapidly gathered on an Internet petition demanding that the Japanese government thoroughly resolve the chemical weapons issue, while Internet chat rooms filled with anti-Japanese invective.
Two weeks later, 400 Japanese businessmen hired as many as 500 local Chinese prostitutes for a weekend sex party in a Zhu Hai hotel.
Racy reports in China’s press sparked another round of righteous fury, drawing on the trope of China as a raped woman, an image long suppressed under Mao.
Occurring on the 72nd anniversary of the 1931 Mukden Incident that led to the Japanese occupation of Manchuria, 90% of Chinese respondents to an Internet poll said they believed that the Japanese businessmen intended to humiliate China.
The following month, at a party thrown by Northwestern University in Xian, three Japanese students and one of their Japanese teachers performed a skit, during which they pranced around the stage with red bras over their t-shirts.
In Japan, such skits are apparently regarded as humorous; in China, the skit was seen as lewd and insulting.
The Japanese students received death threats.
Thousands of Chinese demonstrated on campus and through the city, shouting “Boycott Japanese goods!” and “Japanese dogs, get out!” A Japanese flag was burned outside the foreign students’ dorm.
Even though the Japanese students apologized, they were expelled.
Then, last August, during the Asian Cup soccer tournament, Chinese fans in Chongqing, Jinan, and Beijing hurled insults at the Japanese team – and bottles at their team bus.
During the Cup final between China and Japan in Beijing, which Japan won, Chinese fans reportedly chanted “Kill!
Kill!
Kill!” and “May a big sword decapitate the Japanese!”
Sino-Japanese amity was hardly enhanced in mid-November, when a Chinese nuclear sub encroached into Japanese waters.
Nor did it help when Chinese Premier Wen Jiabao snubbed Japanese Prime Minister Junichiro Koizumi’s invitation to visit his country.
Why has this popular nationalism emerged?
And why is it directed at Japan?
The short answer is that after a quarter-century of economic reform, Chinese today are much freer to express themselves.
Under Mao, when the Chinese Communist Party sought accommodation, diplomatic recognition, and overseas development aid from Japan, Chinese were not allowed to confront their past victimization at the hands of Western and Japanese imperialism.
Today, however, Chinese are facing past atrocities from the “Century of Humiliation” that ended with the Communist takeover in 1948, and a long suppressed anger has resurfaced.
To most Chinese, the Japanese are paradigmatic “devils,” not only because of the brutality of Japanese imperialism and the sheer number of Chinese killed by Japanese troops.
Anti-Japanese anger has an ethical justification rooted in the perceived injustice of “little brother” Japan’s impertinent behavior towards “big brother” China, from China’s loss in the Sino-Japanese Jiawu War and the humiliating Treaty of Shimonoseki of 1895 to the insulting “21 Demands” of 1915 and on to WWII atrocities like the Rape of Nanking.
The complexity and depth of these anti-Japanese sentiments helps sustain them and sets them apart from other, more fleeting and contradictory anti-foreign sentiments, such as those Chinese sometimes harbor towards Americans.
The emergence of a deep-rooted and popular anti-Japanese enmity in China does not bode well.
As the Party uses nationalist sentiment to keep China unified, these sentiments have become fiercer, and the political leadership is increasingly held hostage to nationalist opinion in formulating China’s foreign policy towards Japan.
As a result, Japanese increasingly fear China’s rise and possible future retribution for their country’s wartime aggressions.
Indeed, Japanese public-opinion surveys also reveal a marked decline in favorable views of China.
Meanwhile, an emergent Japanese nationalism argues that Japan should revise its pacifist constitution and develop its military capability – possibly including nuclear weapons to balance threats like that from North Korea.
The possibility of a Sino-Japanese arms race is becoming increasingly real.
Indeed, the Japan Defense Agency recently outlined three scenarios for a Chinese attack against Japan, and announced that it is planning to redeploy its troops from the north (where they were originally stationed to defend Japan against the former Soviet Union) to the south, facing China.
Pessimists now fret that Asia is not big enough for both China and Japan: you “can’t have two tigers in one forest.”
Japan expert Feng Zhaokui takes the middle ground, arguing that Sino-Japanese relations will be marked by the coexistence of both cooperation and conflict.
Recent developments suggest that a purely cooperative bilateral relationship is unlikely, to say the least.
If we are lucky, Feng may be right. But if we are not, we could witness the emergence of a new and dangerous political fault line in East Asia.
One Hand Clapping for Ben Bernanke
WASHINGTON, DC – President Barack Obama’s nomination of Ben Bernanke to a second term as Chairman of the United States Federal Reserve represents a sensible and pragmatic decision, but it is nothing to celebrate.
Instead, it should be an occasion for reflection on the role of ideological groupthink among economists, including Bernanke, in contributing to the global economic and financial crisis.
The decision to nominate Bernanke is sensible on two counts.
First, the US and global economies remain mired in recession.
Though the crisis may be over in the sense that outright collapse has been avoided, the economy remains vulnerable. As such, it makes sense not to risk a shock to confidence that could trigger a renewed downturn.
Second, Bernanke is the best among his peers.
He did eventually come to understand the nature and severity of the crisis, and then took decisive steps that contributed to halting the economic freefall.
That record, combined with doubts that any of his peers would have done better, means replacing him with another mainstream candidate makes little sense.
These two factors justify Bernanke’s reappointment, but the faintness of praise is indicative of the deeper problems that his leadership has exposed.
Those problems concern the state of economics and economic policy advice.
One such problem is Wall Street’s implicit veto over the Fed.
After all, a major reason for reappointing Bernanke is to avoid rocking financial markets.
This also explains why Bernanke’s only rivals are from his peer group – the only people whom financial markets would be willing to accept.
In the 1990’s, placating financial markets was also invoked to justify the reappointment of Bernanke’s predecessor, Alan Greenspan, and it is now perennially invoked to block change at the Fed and other central banks.
In effect, financial markets have established an implicit veto over much of economic policy and the people who can hold top policymaking positions, and it is time to think how we can escape that hold.
A second problem concerns the state of economics.
Though Bernanke may be the best in his peer group, the fact is that the economic crisis decisively proved him and his peers to have been wrong.
As a group, they joined in the adulation of Greenspan, whom one leading economist proclaimed “the greatest central banker who ever lived.”
Almost without exception, mainstream economists failed to foresee the crisis, and even the few who did get the logic and unfolding of events wrong.
For his part, Bernanke led the intellectual charge toward inflation targeting by central banks, arguing that setting a target for annual inflation was a full and sufficient framework for monetary policy.
Such thinking contributed to neglect of asset and credit markets, promoted intellectual disregard for regulation, and fostered laissez-faire excess, because macroeconomic belief in the sufficiency of inflation targeting paired logically with microeconomic belief that credit markets would take care of themselves.
In Greenspan’s words, the “self-interest of lending institutions” would protect shareholders and the economy from lending excess.
This thinking explains why the Fed under Bernanke’s leadership was so slow to respond to the crisis, which began in August 2007 yet did not elicit a coherent and comprehensive response until November 2008.
The Fed certainly would have reacted sooner had it not been attached to a model of banking more appropriate to the 1950’s.
Oblivious to the role of the shadow banking system, the Fed did not understand how its implosion would undermine the traditional banking system.
The Fed simply failed to comprehend the significance of traditional banks’ large holdings of mark-to-market assets and their own engagement in shadow banking via off-balance-sheet “structured investment vehicles.”
Any dispassionate assessment of the Fed’s thinking before and well into the crisis shows that it failed to understand the economics of its own bailiwick, banking and financial markets.
Moreover, the Fed promoted broader economic views about deregulation and the self-stabilizing nature of markets that the crisis has discredited.
Though circumstances dictate that Bernanke is the best candidate and should be reappointed, the real challenge is to ensure a thorough intellectual housecleaning at the Fed in order to open space for alternative economic views.
The great danger is that reappointing Bernanke will be interpreted as a green flag for a flawed status quo .
That is where public debate and Bernanke’s Senate confirmation hearings enter the picture.
Those hearings should be an occasion for critical examination of what went wrong, and why.
If that happens, Bernanke’s reappointment can serve as a trigger for constructive change rather than an endorsement of a discredited paradigm.
O’Neill’s Cheap Shot
One Number Says it All
NEW HAVEN – The number is 0.2%.
It is the average annualized growth of US consumer spending over the past 14 quarters – calculated in inflation-adjusted terms from the first quarter of 2008 to the second quarter of 2011.
Never before in the post-World War II era have American consumers been so weak for so long.
This one number encapsulates much of what is wrong today in the US – and in the global economy.
There are two distinct phases to this period of unprecedented US consumer weakness.
From the first quarter of 2008 through the second period of 2009, consumer demand fell for six consecutive quarters at a 2.2% annual rate.
Not surprisingly, the contraction was most acute during the depths of the Great Crisis, when consumption plunged at a 4.5% rate in the third and fourth quarters of 2008.
As the US economy bottomed out in mid-2009, consumers entered a second phase – a very subdued recovery.
Annualized real consumption growth over the subsequent eight-quarter period from the third quarter of 2009 through the second quarter of 2011 averaged 2.1%.
That is the most anemic consumer recovery on record – fully 1.5 percentage points slower than the 12-year pre-crisis trend of 3.6% that prevailed between 1996 and 2007.
These figures are a good deal weaker than originally stated.
As part of the annual reworking of the US National Income and Product Accounts that was released in July 2011, Commerce Department statisticians slashed their earlier estimates of consumer spending.
The 14-quarter growth trend from early 2008 to mid-2011 was cut from 0.5% to 0.2%; the bulk of the downward revision was concentrated in the first six quarters of this period – for which the estimate of the annualized consumption decline was doubled, from 1.1% to 2.2%.
I have been tracking these so-called benchmark revisions for about 40 years.
This is, by far, one of the most significant I have ever seen.
We all knew it was tough for the American consumer – but this revision portrays the crisis-induced cutbacks and subsequent anemic recovery in a much dimmer light.
The reasons behind this are not hard to fathom.
By exploiting a record credit bubble to borrow against an unprecedented property bubble, American consumers spent well beyond their means for many years.
When both bubbles burst, over-extended US households had no choice but to cut back and rebuild their damaged balance sheets by paying down outsize debt burdens and rebuilding depleted savings.
Yet, on both counts, balance-sheet repair has only just begun.
While household-sector debt was pruned to 115% of disposable personal income in early 2011 from the peak of 130% hit in 2007, it remains well in excess of the 75% average of the 1970-2000 period.
And, while the personal saving rate rose to 5% of disposable income in the first half of 2011 from the rock-bottom 1.2% low hit in mid-2005, this is far short of the nearly 8% norm that prevailed during the last 30 years of the twentieth century.
With retrenchment and balance-sheet repair only in its early stages, the zombie-like behavior of American consumers should persist.
The 2.1% consumption growth trend realized during the anemic recovery of the past two years could well be indicative of what lies ahead for years to come.
Such an outcome would have three profound implications for the economic outlook: First, since consumer demand still accounts for 71% of real GDP, a protracted shortfall in trend consumption represents a major headwind for overall US economic growth.
While misguided Washington policymakers would like nothing better than for consumers to return to their old risky ways and start spending again, over-extended American households now know better.
The heavy artillery of monetary and fiscal stimulus is being wasted on attempts to short-circuit balance-sheet repair.
Second, persistent weakness in consumption and GDP growth puts the US economy on a much weaker growth trajectory than that which is built into the government’s long-term budget estimates.
The Congressional Budget Office is assuming 3.4% average growth in real GDP over the 2013 to 2016 period.
If the growth trend is one percentage point lower – a distinct possibility in an era of protracted consumption weakness – budget deficits would be a significantly higher.
Indeed, a CBO rule of thumb equates a sustained one-percentage-point shortfall in real GDP growth with budget deficits that are roughly $3 trillion larger over a ten-year period.
Needless to say, such an outcome would spell serious trouble for America’s already-contentious deficit-and-debt debate.
Finally, no other economy is capable of filling the void left by a protracted shortfall of US consumption.
Europe and Japan are in no position to take up the slack, and consumer sectors in the world’s major developing economies – especially China – lack the scale and dynamism to take over.
So enduring weakness in US consumption implies pressure on the growth of export-led developing economies. The good news is that will force them to embrace long-overdue rebalancing strategies aimed at stimulating domestic consumer demand.
What can be done?
While measures adapted in the depths of the crisis – massive fiscal and monetary stimuli – were effective in placing a bottom under the free-fall, they have been ineffective in sparking meaningful recovery.
That should hardly be surprising in an era of balance-sheet repair.
Instead, the US needs a menu of policies tailored to the needs and pressures bearing down on American consumers.
Some possibilities: debt forgiveness to speed up the deleveraging process; creative saving policies that restore financial security to crisis-battered Americans; and, of course, jobs and the income they generate.
The US economy – as well as the global economy – cannot get back on its feet without the American consumer.
It is time to look beyond ideology – on the left as well as on the right – and frame the policy debate with that key consideration in mind.
One World, One Europe
PARIS – G-8, G-5, G-20, G-2, G-3, and now the G-14 (the G-8 plus the G-5 plus Egypt): never have the “mathematics” of world order seemed more complex and confusing.
Kofi Annan, on the occasion of the 60th anniversary of the United Nations in 2005, attempted to adjust the multilateral institutions of our world to fit its new realities.
It was a brave effort that came too soon.
The Northern industrial world was not yet ready to recognize the new weight of the emerging powers and the need to strike a new balance between North and South, East and West.
Has the current financial and economic crisis, given its traumatic depth and the obvious responsibility of the United States as its source, created the necessary conditions and a more favourable climate for a major re-foundation of the multilateral institutions?
It is too early to be confident that true change will come.
What is certain is that a rebalancing between North and South must start with an honest and hard-headed look at Europe’s current status in our multilateral system.
Nowadays, there is both too much and too little Europe, or, to put it differently, too many European countries are represented in the world’s premier forums, with too many voices.
But, in terms of weight and influence, there is not enough united Europe.
In the early 1980’s, a former French foreign minister, Jean François-Poncet suggested that France and the United Kingdom give up their seats on the UN Security Council in favour of a single European Union seat.
Germany would no longer seek a seat, Italy would not feel left out, and Europe’s international identity would be strengthened in a spectacular way.
Of course, this was not to be.
France and the UK were not willing to give up the symbol of their nuclear and international status.
They are probably are even less willing to do so today in the name of a Union that is less popular than ever, at least in the British Isles.
But let’s be reasonable: the absurdity of Italy’s presence in the G-8, together with the lack of official membership for countries such as China, India, and Brazil, is no longer acceptable or tenable.
Yet, because of that anomaly, Europe suffers from a grave deficit of legitimacy and presence internationally.
Of course, the US cannot be compared with a Union that is nowhere near becoming a United States of Europe.
But if the contrast between the two sides of the Atlantic, between the continent of “Yes, we can” and the continent of “Yes, we should,” is so immense, it is for reasons that Europeans are refusing to face or even to discuss.
The first one is the EU’s lack of anything that incarnates it.
It would be absurd to set US President Barack Obama and EU Commission President José Manuel Barroso against each other as equals.
Whereas Obama owes his election in large part to his charisma, Barroso is likely to succeed himself precisely because of his lack of charisma, because he says very little in so many languages.
But, for national leaders in the EU whose last ambition is to have to deal with a new Jacques Delors, i.e., a man with ideas of his own, a cipher like Barroso is just the man for the job.
On the other hand, the EU is paying a steep price for the bureaucratic anonymity of its leaders.
A process of escalating alienation and indifference between the Union and its citizens is at work, illustrated by low turnout in the last European Parliament elections.
As a result, there is less Union in Europe and less Europe in the world.
A strong European voice, such as Nicolas Sarkozy’s during the French presidency of the EU, may make a difference, but only for six months, and at the cost of reinforcing other European countries’ nationalist feelings in reaction to the expression of “Gallic pride.”
If Europeans want to regain self-confidence, pride and, collective hope, they must seize the opportunity that the necessary and inevitable adjustment of the multilateral system represents for them.
They should make of necessity an opportunity.
Of course, a single European voice in the major multilateral institutions appears more unrealistic than ever: who wants it, except maybe the EU’s smaller members?
But Europe’s last chance to be a credible actor in a multi-polar world rests precisely on its ability to present a single, united, responsible voice.
Europe currently exists as an economic actor, not as an international political actor.
If Europeans were to set for themselves the goal of speaking with one voice, of having one representative in the spectrum of multilateral institutions – starting with the UN Security Council – they would be taken more seriously.
In this case, one can really say that “less is more.”
Such a move would be deemed premature by numerous critics.
Twenty years ago, right after the fall of the Berlin Wall, one could say “I want Europe so much that I am willing to accept one Germany” – a revolutionary move if one had in mind the French writer François Mauriac’s famous joke, “I like Germany so much, I want two of them.”
In today’s global age, with the rise of emerging powers and the relative decline of the West, the only Europe that will be taken seriously is a Europe that can speak and be seen as one.
Only the Weak Survive
TOKYO – The risk of global currency and trade wars is rising, with most economies now engaged in competitive devaluations.
All are playing a game that some must lose.
Today’s tensions are rooted in paralysis on global rebalancing.
Over-spending countries – such as the United States and other “Anglo-Saxon” economies – that were over-leveraged and running current-account deficits now must save more and spend less on domestic demand.
To maintain growth, they need a nominal and real depreciation of their currency to reduce their trade deficits.
But over-saving countries – such as China, Japan, and Germany – that were running current-account surpluses are resisting their currencies’ nominal appreciation.
A higher exchange rate would reduce their current-account surpluses, because they are unable or unwilling to reduce their savings and sustain growth through higher spending on domestic consumption.
Within the eurozone, this problem is exacerbated by the fact that Germany, with its large surpluses, can live with a stronger euro, whereas the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) cannot.
On the contrary, with their large external deficits, the PIIGS need a sharp depreciation to restore growth as they implement painful fiscal and other structural reforms.
A world where over-spending countries need to reduce domestic demand and boost net exports, while over-saving countries are unwilling to reduce their reliance on export-led growth, is a world where currency tensions must inevitably come to a boil.
Aside from the eurozone, the US, Japan, and the United Kingdom all need a weaker currency.
Even Switzerland is intervening to weaken the franc.
Meanwhile, China is intervening massively to resist appreciation of the renminbi and thus maintain its export performance.
As a result, most emerging-market economies are now similarly worried about currency appreciation, lest they lose competitiveness relative to China, and are intervening aggressively and/or imposing capital controls to stem upward exchange-rate pressure.
The trouble, of course, is that not all currencies can be weak at the same time: if one is weaker, another must, by definition, be stronger.
Likewise, not all economies can improve net exports at the same time: the global total is, by definition, equal to zero.
So the competitive devaluation war in which we find ourselves is a zero-sum game: one country’s gain is some other country’s loss.
The first salvos in this war came in the form foreign-exchange intervention.
To diversify away from US dollar assets while maintaining its effective dollar peg, China started to buy Japanese yen and South Korean won, hurting their competitiveness.
So the Japanese started to intervene to weaken the yen.
This intervention upset the EU, as it has put upward pressure on the euro at a time when the European Central Bank has placed interest rates on hold while the Bank of Japan (BoJ) and the US Federal Reserve are easing monetary policy further.
The euro’s rise will soon cause massive pain to the PIIGS, whose recessions will deepen, causing their sovereign risk to rise.
The Europeans have thus already started verbal currency intervention and may soon be forced to make it formal.
In the US, influential voices are proposing that the authorities respond to China’s massive accumulation of dollar reserves by selling an equivalent amount of dollars and buying an equivalent amount of renminbi.
Meanwhile, China and most emerging markets are accelerating their currency interventions to prevent more appreciation.
The next stage of these wars is more quantitative easing, or QE2.
The BoJ has already announced it, the Bank of England (BoE) is likely to do so soon, and the Fed will certainly announce it at its November meeting.
In principle, there is little difference between monetary easing – lower policy rates or more QE – that leads to currency weakening and direct intervention in currency markets to achieve the same goal.
In fact, quantitative easing is a more effective tool to weaken a currency, as foreign exchange intervention is usually sterilized.
Expectations of aggressive QE by the Fed have already weakened the dollar and raised serious concerns in Europe, emerging markets, and Japan.
Indeed, though the US pretends not to intervene to weaken the dollar, it is actively doing precisely that via more QE.
The BoJ and the BoE are following suit, putting even more pressure on the eurozone, where a stubborn ECB would rather kill any chance of recovery for the PIIGS than do more QE, ostensibly owing to fears of a rise in inflation.
But that is a phantom risk, because it is the risk of deflation, not inflation, that haunts the PIIGS.
Currency wars eventually lead to trade wars, as the recent US congressional threat against China shows.
With US unemployment and Chinese growth both at almost 10%, the only mystery is that the drums of trade war are not louder than they are.
If China, emerging markets, and other surplus countries prevent nominal currency appreciation via intervention – and prevent real appreciation via sterilization of such intervention – the only way deficit countries can achieve real depreciation is via deflation.
That will lead to double-dip recession, even larger fiscal deficits, and runaway debt.
If nominal and real depreciation (appreciation) of the deficit (surplus) countries fails to occur, the deficit countries’ falling domestic demand and the surplus countries’ failure to reduce savings and increase consumption will lead to a global shortfall in aggregate demand in the face of a capacity glut.
This will fuel more global deflation and private and public debt defaults in debtor countries, which will ultimately undermine creditor countries’ growth and wealth.
Ending the Syrian Horror
RIYADH – No issue in the world today is of greater immediate importance than the need to end the civil war in Syria.
The past two and a half years have been a disaster for peace, stability, and our sense of common humanity.
Gut-wrenching images of unspeakable, indiscriminate violence against civilians have shocked the world.
According to the latest United Nations estimates, more than 100,000 Syrians, including many children, have lost their lives as a result of the criminal behavior of Bashar al-Assad’s regime.
There are now more than two million Syrian refugees in bordering countries and more than four million displaced persons inside Syria.
With the murder of peaceful protesters, the shelling of residential quarters, the execution of soldiers who refuse to fire on their countrymen, and the use of chemical weapons, a picture has emerged of a regime that is systematically defying the most basic international moral and legal standards.
Unless the world is content to watch the carnage continue, the Syrian regime and its instruments of oppression must be removed.
The international community’s shameful acceptance of impunity for Assad and his henchmen is a blot on the conscience of the world.
Western leaders’ dithering, and the callous, cynical, and cavalier support of Russia and China for Assad, is a stigma that they will bear forever.
Iran’s support for the regime is nothing less than a war crime.
The current charade of international control over Assad’s chemical arsenal would be amusing if it were not so blatantly perfidious.
While it has allowed US President Barack Obama to back down from his threat of military intervention in response to the regime’s use of chemical weapons, it has also allowed Assad to continue to butcher his people.
It is ludicrous to believe that US Secretary of State John Kerry’s “offhand” comment about destroying Syria’s chemical-weapons stockpile was anything but a well-choreographed opening for Russia to make its diplomatic play, thereby letting the US off the hook.
If the world, and especially the American people, believe that removing Assad’s chemical weapons will end his government’s slaughter of innocent men, women, and children, then all semblance of rational thought, humanitarian care, and regard for national interest has been thrown to the wind.
Preventing Assad from using his killing machine by any means, including targeted strikes on his air force and command-and-control centers, is the only way to end the bloodshed in Syria.
Yet, despite public promises by Kerry to supply the Syrian opposition with weapons – and even after Obama declared that Assad must go – Martin Dempsey, Chairman of the US Joint Chiefs of Staff, announced that the Pentagon had no such plans.
Why make such a statement, when it can bring only chagrin and despair to the victims, and comfort and solace to a criminal regime?
How one can reconcile such contradictions is beyond me.
If we continue to delay military action, we will have to intervene with greater force when the carnage spreads to Lebanon, Israel, Jordan, Turkey, and Iraq.
Indeed, Lebanon, following the collapse of Najib Mikati’s government, is already on the brink of civil war, as direct intervention in Syria by Hezbollah, Iran’s Lebanese proxy, to prevent Assad’s overthrow has exacerbated the country’s own longstanding sectarian tensions.
Witness the recent car-bomb attacks in a Hezbollah-controlled neighborhood of Beirut and in the northern city of Tripoli.
If law and order are to prevail, Hezbollah must be neutralized, and the Syrian-dispatched assassins of former Lebanese Prime Minister Rafik Hariri must be brought to justice.
Saudi Arabia is doing what it can to help.
The Kingdom is providing financial aid to Lebanon in an effort to rebuild a stronger, more stable country, and to roll back the influence of Iran.
We have long pushed for the disarming of Hezbollah, and we have assisted the government with nearly $1 billion in financial support and credit to purchase weapons for the Lebanese Army, and we will continue to do so in the coming decade.
But, unless the international community –particularly the permanent members of the United Nations Security Council – begins to fulfill its obligations in Syria, money will not be enough to prevent further chaos and destruction.
Opening China, Then and Now
WASHINGTON, DC – America’s opening to China by Richard Nixon and Henry Kissinger in 1971-1972 was a historic breakthrough.
Less famous, but of equal importance, was the next major step, taken by Jimmy Carter exactly 30 years ago, establishing full diplomatic relations between China and the United States.
Without this action, announced on December 15, 1978, US-China relations could not have moved beyond a small, high-level connection with a limited agenda.
As they left office in 1977, President Gerald Ford and Kissinger left behind an incomplete and therefore unstable relationship with China.
The US still recognized Taiwan, under the name of The Republic of China, as the legitimate and sole government of China.
Since 1972, America and China maintained small “liaison offices” in each other’s capitals, without recognition.
Official communications were very limited, and annual bilateral trade was under $1 billion.
(Today, it is a staggering $387 billion.)
Carter took office hoping to normalize relations with China.
This would require switching American recognition from Taiwan to the mainland.
Some saw this as a simple acknowledgement of reality, but in fact it was a momentous step that required diplomatic skill and political courage.
A way would have to be found for the US, while recognizing China, to continue dealing with the government on Taiwan without recognizing their claim to represent China; most important, the US had to retain the right to sell arms to Taiwan.
From a political point of view, there was the famed Taiwan lobby, one of the most powerful in the US, still dominated by the conservative wing of American politics.&
Led by America’s “Mr. Conservative,” Senator Barry Goldwater, and the leading contender for the 1980 Republican nomination, Ronald Reagan, the Taiwan lobby would fight normalization all the way.
(Goldwater took the US government to the Supreme Court to challenge, unsuccessfully, Carter’s action;
Reagan, in the 1980 presidential campaign, pledged partially to undo normalization, only to abandon that position after he was elected.)
The saga unfolded over the first two years of the Carter administration, entirely out of public view, except for two important trips to China, one by Secretary of State Cyrus Vance, the other by National Security Advisor Zbigniew Brzezinski.
Incredibly, those of us involved in the process (I was then Assistant Secretary of State for East Asian and Pacific Affairs) managed to keep our intense negotiations completely secret. &
The Chinese demanded a complete severing of all official ties between Taiwan and the US, including arms sales.
Knowing that such a move would provoke an enormous backlash domestically, we looked for a formula for continuing official contacts and arms sales with Taiwan even after we had de-recognized them and terminated the mutual security treaty ratified during the Eisenhower years.
There was no precedent for this in American or international law.
With advice from Eisenhower’s former Attorney General, Herbert Brownell, State Department lawyers drafted the Taiwan Relations Act, a law like no other in American history, which allowed the US government to conduct business with Taiwan, including arms sales, without recognition.
But when we explained to China why this was necessary in order to recognize them, they balked.
They wanted trade and other benefits of recognition, which would benefit both nations in those Cold War days, when China was fiercely hostile to the Soviet Union, with which it had almost gone to war only a few years earlier.
But Taiwan remained a huge, seemingly impossible obstacle.
The breakthrough came in late 1978, and was carefully timed by Carter to follow the mid-term congressional elections.
The most important factor in the breakthrough was probably the emergence of Deng Xiaoping as China’s new paramount leader.
(Mao had died in 1976).
Deng, who had been forced to wear a dunce cap and denounce himself during the insanity of the Cultural Revolution, had achieved the greatest comeback imaginable, and in the fall of 1978, he finally got enough power to cut a deal with the US: China would not “agree” to American arms sales or other activities with Taiwan, but they would proceed with normalization anyway.
It was a classic example of Chinese negotiating style: firm on principle, flexible on specifics.
I am leaving a lot out here – this was a very complicated negotiation – but that was the essence of it.
In January 1979, Deng made his historic trip to the US, which began with a private dinner at Brzezinski’s house and climaxed with the most sought-after State dinner of the Carter years (also remarkable for Richard Nixon’s first visit to Washington since he had resigned; I sat at Nixon’s table, and retain a menu that everyone signed that night).&
At Brzezinski’s house, Deng talked of his dreams for a China that he knew he would not live to see.
He believed China could leapfrog the lost years in which the world had passed it by, but only with American support.
He was ready to cooperate on containing the Soviet Union, even agreeing to the installation of secret American intelligence listening posts along China’s border to track Soviet missiles.
Deng accurately foresaw a vast exchange of students, modern technology, and trade.
More than any American official, he anticipated what the American opening to China would accomplish.
But even Deng could not fully imagine what would be unleashed by that announcement of December 15, 1978 – nothing less than the development of the most important bilateral relationship in the world today.
Opening Up Japan
After a dozen years of stagnation, Japan's economy seems to be looking up.
But appearances can deceive.
Despite improvements and reforms, many of Japan's fundamentals remain woeful.
Japan's decline has been palpable.
In the late 1980's, it was fashionable in some Japanese policy circles to argue that the Pax Americana was over, to be replaced in Asia by Pax Japonica.
America's economy seemed to be tanking, Japan's was soaring, and projections favored 2005 as the date when it would overtake the United States.
That things have turned out far differently reflects Japan's inertia.
The problems underlying Japan's decline are legion.
Japanese policymakers and business leaders do not understand the concept of "creative destruction."
Too many industrial dinosaurs are kept on life support.
So, although some firms do extremely well - say, Toyota and Canon - there is little space for new ventures and entrepreneurs.
If Japan's economy were a computer, it would have a hard disk full of obsolescent programs and a "delete" button that doesn't work.
No matter what criterion one uses, Japan's economy remains the most closed among OECD countries and one of the most closed in the world.
Not only is foreign capital conspicuously absent, but so are foreign managers, workers, intellectuals, and ideas.
Universities, think tanks, and the media are for the most part insular institutions.
Similarly, while non-government organizations (NGO's) are a dynamic component in most societies nowadays, Japan has few, and major international NGO's are nonexistent or have only a weak presence.
Oxfam, one of the world's leading NGOs, with offices and branches all over the world, is absent altogether.
The closed nature of Japanese society and the dearth of ideas are partly attributable to the linguistic barrier.
Where Japan really falls short is in English - the global language, and thus the main purveyor of global ideas.
In Asia, Japan ranks above only North Korea in scores on the Test of English as a Foreign Language (TOEFL) examination.
Moreover, Japan's demographics are among the worst in the world.
In this respect, Europe is not much better, although its current restrictive immigration policies will likely be eased over the next decade or so.
No such assumption can be made about Japan, where an aging population will intensify the closed and intellectually arid nature of its society.
As one of the world's major trading powers, Japan should be a leading player in the World Trade Organization and in trade policy forums.
Yet despite being one of the main beneficiaries of the post-World War II open and multilateral trading system, Japan stands out as a retrograde mercantilist state.
Isolation has brought confusion about Japan's place in the world.
While Japan's government lobbies hard to get a permanent seat on the UN Security Council, its Prime Minister regularly flouts Asian opinion by paying his respects to war criminals at the Yasukuni Shrine.
Apart from the immorality of such public behavior (imagine a German chancellor paying his respects at Goebbels' grave!), the fact that both China and the US have veto power at the UN suggests that it is stupid even from the standpoint of Realpolitik .
Indeed, relations with China are Japan's most profound problem.
Japan's emergence as East Asia's leading power in the nineteenth and early twentieth centuries involved three brutal wars in China, in which the Japanese army committed dreadful atrocities.
The 1949 communist takeover in China, the Cold War, America's adoption of Japan as its pampered protégé, and the failure to prosecute Emperor Hirohito for war crimes, allowed Japan to avoid a moral reckoning.
Now, as China rises and Japan declines, the old, deep-seated suspicions, tensions, and distrust are resurfacing.
Japan's grim outlook is bad news for the world because it is the globe's second leading economic power.
Prospects for Japan acting as a global economic locomotive and of playing a role in poverty reduction and economic development are, for now, almost nil.
Indeed, Japan's current growth is being driven overwhelmingly by trade with China - a country with only one-thirtieth of Japan per capita GDP!
From a broader geopolitical perspective, the situation becomes alarming.
Despite its frequent economic booms, Asia is also a strategic and security minefield.
A sclerotic, atavistic, nationalist, and inward-looking Japan can only aggravate the situation.
What should Japan do?
The only solution for Japan is to open up - not only its economy, but its society, its universities, its media, its think tanks, and, indeed, its bars and bathhouses.
Many young Japanese - often the brightest and most entrepreneurial - demand to live in an open society, but the option they are choosing now is emigration.
An open Japan would, by definition, be more outward-looking, would speak better English so that it could communicate across Asia and the world, would be more influenced by foreign ideas - including ideas concerning war guilt.
It has been 150 years since the "black ships" of America's Navy forcibly opened up Japan.
Today, the Japanese must open up their country themselves.
Osama bin Laden, Bard of Terror
PRINCETON – In Riyadh last March, King Abdullah of Saudi Arabia decorated American Vice President Dick Cheney with the Kingdom’s Order of Merit.
This gesture elicited hundreds of Internet postings from Arabs condemning the award as treachery and lamenting the pitiful state of leadership in the Arab world.
To cite only one comment, addressed to the King: “Shame on you for claiming to be Custodian of the Two Holy Sanctuaries” in Mecca and Medina.
At the same time, Osama bin Laden released two audio statements condemning Western and Israeli attacks on Muslims and reiterating the need for violent warfare to liberate occupied Muslim territories from the infidels.
In terms of media strategy, the contrast between the leaders of the Arab countries and bin Laden could not be starker.
On the one hand, Arab kings and presidents lack charisma, seem politically impotent and are rarely, if ever, on message with respect to the “big issue” concerns of the peoples of the Middle East.
Bin Laden, however, is mesmerizing, framing the perceived frustrations of many Arabs in his use of classical Arabic, including the recitation of medieval-style poetry.
He deliberately projects an image of himself as a leader who speaks truthfully, conveying a muscular ideology that articulates the sense of humiliation that Muslims feel today and offers a plan of action to remedy the situation.
Arab culture places a high value on poetic expression, so it is no coincidence that it appears repeatedly in Al Qaeda’s propaganda.
Bin Laden often recites poetry to underscore a point and to associate himself with chivalrous and learned warriors who were willing to become martyrs for Islam’s honor and glory.
Here are a few lines of the kind of poetry that Al Qaeda uses:
I do not sell our honor like a pimp
that I should lower my eyes, or surrender.
I see the army of the Cross in our land,
invading Iraq and rubbing our face in the dirt.
You who ask me to give up our jihad,
and to live a life of comfort and happiness,
Don’t waste your breath.
I will not give up the jihad while our community
is gored with a poisoned knife;
No indeed, I will not give up the jihad
while their Crosses attack in the dark of night,
Pollute Sacred Arabia, and proclaim
the establishment of “security” while chaining my wrists.
It is difficult to know what to make of this literary material, and at times to understand it because of its archaic style, allusions and metaphors.
But Al Qaeda’s poetry deserves closer attention, because it is a medium of communication between members of the movement.
Indeed, through poetry, Al Qaeda defines what it means to be a member of the movement and commemorates the big episodes in the group’s history by glorifying the exploits of “martyrs.”
Although much of this poetry is not necessarily of high quality, it nonetheless underscores the image that Al Qaeda’s leadership wishes to project, namely that Al Qaeda’s message is authentic and reflects “real Islam.”
Moreover, Al Qaeda uses poetry to address the challenges that it faces.
Contrasting its fighters’ bravery and commitment with the “comfort” of Muslim bystanders, Al Qaeda tries to rally more fighters to its cause in Iraq.
Its dilemma is stark.
The Shia of the Mahdi Army defeated Iraq’s Sunnis in the last bout of fighting, and thousands of Iraqi Sunnis, under the so-called Awakening Movement, have rallied to the side of the United States forces and have fought against Al Qaeda.
In addition, many Sunni scholars have argued that Al Qaeda’s ideology and tactics are illegitimate, and that Muslims should refrain from jihad and remain obedient to their rulers.
The term for those who have not joined Al Qaeda’s jihad is the “sitters” or the “immobile ones” ( qaaidun ).
Bin Laden wants these people to feel like sinners.
Poetically, he attacks Muslim men’s masculinity and sense of honor for not defending Islam.
This is the core of bin Laden’s appeal: the ability to articulate the profound sense of injustice and humiliation that many Arabs and Muslims feel today.
For all the violence perpetrated by Al Qaeda, bin Laden also relies on “soft” power, using arguments about injustice that resonate with his audience.
A path between the extremes of jihad and blind obedience to the Middle East’s authoritarian rulers must be found before Al Qaeda’s message begins to lose some of its luster.
Osama bin Laden’s Pakistan
NEW DELHI – The killing of Osama bin Laden by United States special forces in a helicopter assault on a sprawling luxury mansion near Islamabad recalls the capture of other Al Qaeda leaders in Pakistani cities.
Once again, we see that the real terrorist sanctuaries are located not along Pakistan’s borders with Afghanistan and India, but in the Pakistani heartland.
This, in turn, underlines another fundamental reality – that the fight against international terrorism cannot be won without demilitarizing and de-radicalizing Pakistan, including by rebalancing civil-military relations there and reining in the country’s rogue Inter-Services Intelligence agency.
Other terrorist leaders captured in Pakistan since 9/11 – including Khalid Sheikh Mohammed, Al Qaeda’s third in command;
Abu Zubeida, the network’s operations chief;
Yasser Jazeeri;
Abu Faraj Farj; and Ramzi Binalshibh, one of the coordinators of 9/11 – were also found living in cities across Pakistan.
If there is any surprise about bin Laden’s hideout, it is its location in a military town, Abbottabad, in the shadow of an army academy.
This only underscores the major protection that bin Laden must have received from elements of the Pakistani security establishment to help him elude the US dragnet for nearly a decade.
The breakthrough in hunting him down came only after the US, even at the risk of rupturing its longstanding ties with the Pakistani army and ISI, deployed a number of CIA operatives, Special Operations forces, and contractors deep inside Pakistan without the knowledge of the Pakistani military.
In recent years, with its senior operations men captured or killed and bin Laden holed up in Pakistan, the badly splintered Al Qaeda had already lost the ability to mount a major international attack or openly challenge US interests.
With bin Laden’s death, Al Qaeda is likely to wither away as an organization.
Yet its dangerous ideology is expected to live on and motivate state-sponsored non-state actors.
It will be mainly such elements that will have the capacity to launch major transnational terrorist attacks, like the 2008 Mumbai strikes.
Even in Afghanistan, the US military’s main foe is not Al Qaeda but a resurgent Taliban, which enjoys safe haven in Pakistan.
That is why the spotlight is likely to turn on the terrorist nexus within Pakistan and the role of, and relationship between, state and non-state actors there.
Significantly, as the CIA closed in on bin Laden, the chairman of the US Joint Chiefs of Staff, Admiral Mike Mullen, for the first time publicly linked the Pakistani military with some of the militants attacking US forces in Afghanistan.
Pakistan’s homegrown Islamist militias continue to operate openly, and the Pakistani army and intelligence remain loath to sever their cozy ties with extremist and terrorist elements.
For the US, Pakistan poses a particularly difficult challenge.
Despite providing $20 billion to Pakistan in counterterrorism aid since 9/11, the US has received grudging assistance, at best, and duplicitous cooperation, at worst.
Today, amid a rising tide of anti-Americanism, US policy on Pakistan is rapidly unraveling.
Yet Pakistan, with one of the world’s lowest tax-to-GDP ratios, has become more dependent than ever on US aid.
Even as Americans exult over bin Laden’s killing, the US government must recognize that its failed policy on Pakistan has inadvertently made that country the world’s main terrorist sanctuary.
Rather than helping to build robust civilian institutions there, the US has pampered the jihadist-penetrated Pakistani military establishment, best illustrated by the fresh $3 billion military aid package earmarked for the next fiscal year.
After dictator Pervez Musharraf was driven out of office, the new Pakistani civilian government ordered the ISI to report to the interior ministry, but received no support from the US for this effort to assert civilian control, allowing the army to quickly frustrate the effort.
After coming to office, US President Barack Obama implemented a military surge in Afghanistan.
In Pakistan, however, he implemented an aid surge, turning it into the largest recipient of US aid, even though the Afghan Taliban leadership and Al Qaeda remnants remained ensconced in the country.
This only deepened US involvement in the wrong war and emboldened Pakistan to fatten the Afghan Taliban, even as sustained US attacks continued to severely weaken Al Qaeda.
Make no mistake: the scourge of Pakistani terrorism emanates more from the country’s Scotch whisky-sipping generals than from the bead-rubbing mullahs.
It is the self-styled secular generals who have reared the forces of jihad and fathered the Taliban, Lashkar-e-Taiba, Jalaluddin Haqqani militia, and other groups.
Yet, by passing the blame for their ongoing terrorist-proxy policy to their mullah puppets, the generals have made the US believe that the key is to contain the religious fringe, not the puppeteers.
In fact, Pakistan’s descent into a jihadist dungeon occurred not under civilian rule, but under two military dictators – one who nurtured and let loose jihadist forces, and another who took his country to the very edge of the precipice.
Without reform of the Pakistani army and ISI, there can be no end to transnational terrorism – and no genuine nation-building in Pakistan.
How can Pakistan be a “normal” state if its army and intelligence agency remain outside civilian oversight and decisive power remains with military generals?
With bin Laden dead, the only way that Al Qaeda can reconstitute itself is if the Pakistani military succeeds in reinstalling a proxy regime in Afghanistan.
Until the Pakistani military’s vise-like grip on power is broken and the ISI cut down to size, Pakistan is likely to remain Ground Zero for the terrorist threat that the world confronts.
Britain’s Closet Keynesian
LONDON – There is a growing apprehension among Britain’s financial pundits that Chancellor of the Exchequer George Osborne is not nearly as determined to cut public spending as he pretends to be.
He sets himself deadlines to balance the books, but when the date arrives, with the books still unbalanced, he simply sets another.
Consider some fiscal arithmetic. When Osborne became Chancellor in 2010, the budget deficit – spending minus revenue – was £153 billion ($239 billion), or 10.2% of GDP.
He promised that by 2015 the deficit would stand at only £37 billion, or 2.1% of GDP – equivalent to balancing current&nbsp;spending and revenue.
Instead, the deficit for 2014-2015 is expected to be £97 billion.
The conclusion of Osborne’s balancing act has been postponed until the 2019-2020 budget.
Osborne talks about the need to cut spending, but his actions say otherwise.
Though he vowed to reduce spending by more than £100 billion by now, he has cut less than half of that, simply extending his five-year rolling program of cuts for another few years.
As a result, Osborne, the poster child for British austerity, is starting to look like a closet Keynesian.
There is a school of thought that holds that commitment, not achievement, gives a policy credibility.
For example, the Bank of England is committed to achieve 2% inflation “in the medium term.”
Annual inflation has not been 2% at any time in the last six years, but it is possible that the BoE’s commitment has had some effect in lowering interest rates.
Osborne’s defenders might make the same argument for his fiscal policy.
A credible policy of fiscal consolidation, they might say, will have the same exhilarating effect on confidence as fiscal consolidation itself.
Economists call this the “signaling effect.”
If you announce that you intend to balance the books over five years and pencil in a lot of spending cuts, consumers, relieved of their fears of future tax increases, will start spending more freely.
This will cause national income to rise, and, with luck, the budget deficit will start shrinking, more or less according to plan, without requiring any, or much, retrenchment.
In its emphasis on the importance of the signal, economics enters postmodernist territory.
The signal – in this case the promise to balance the books – creates the reality.
People start behaving as though the books were balanced, ignoring the fact that they are not.
When one believes the narrative, one acts in ways that make it come true.
In fact, I do not believe that Osborne himself ever attached importance to the signaling effects of his pronouncements.
He really did want to balance the budget by making the spending cuts that he promised.
If he turned out to be more Keynesian than he intended to be, it was for pragmatic reasons.
What free-market ideologues often fail to grasp is that politics eventually makes all policymakers Keynesian to some degree.
No matter how much a politician advocates short-term pain for long-term benefits, voters will stomach only a certain amount of suffering.
So sensible politicians slow down the cuts that markets demand, and take loans that they know they will be unable to pay, in order to keep public services going.
To be sure, Osborne must not be given too much credit for his closet Keynesianism.
A true Keynesian would have said that what was needed in 2010 was fiscal expansion, not consolidation.
Osborne believed, or appeared to believe, that austerity would speed up economic recovery, by restoring confidence in government finance.
But there is a strong case to be made that the cuts that Osborne did make impeded recovery, by removing spending power from an economy already suffering from a deficiency of aggregate demand.
The result was economic stagnation from 2010 to 2013, undermining Osborne’s ability to meet his deficit-reduction targets.
Now that Osborne has once again promised new cuts and a new five-year timetable for balancing the books, the question is whether he will keep his word this time.
Yes, the British economy has finally started to grow; and, yes, growth is expected to continue.
But is there any reason to believe that the recovery will not be undermined by another five years of austerity, leading Osborne (or his successor) to postpone the deadline once again?
We can all agree that what happens to the budget affects the economy.
But I would argue, as Keynes did, that “the boom, not the slump, is the time for austerity at the Treasury.”
To try to cut spending in a slump, as Osborne is doing, is to prolong the slump.
And, as he is learning, to his displeasure, that means postponing the day when the books will be balanced.
Education in Emergencies
NEW YORK – Some time ago, I met a young girl in Jordan’s vast Zaatari refugee camp.
Like the tens of thousands of other children there, she and her family had fled the ever-worsening conflict in Syria.
I first met her in a makeshift classroom situated in a sea of tents; later, I saw her again, playing with other children on a rough playground.
I asked her where she would rather be, learning in the classroom or playing with her friends.
I know what my answer would have been at her age.
But she chose the classroom – and her answer speaks volumes.
Of all the things she was forced to leave behind in Syria, her education was the one thing she could not afford to lose – not if she were ever going to realize her dream of being a doctor and avoid a future dictated by deprivation, violence, and loss.
I’ve heard that same hunger for learning voiced by so many children affected by the crisis in Syria and other emergencies around the world.
Children desperately want to go to school.
Their families desperately want them to get an education.
In the midst of violence and instability, school is a place of learning and opportunity, a sanctuary for healing and health, and a haven of normalcy and hope for the future.
Education not only increases the chances that, someday, children will be able to support themselves and seek a better life for their families; it also provides them with the skills to rebuild their societies.
And it can instill in them a desire to seek reconciliation when the conflicts have been resolved and the catastrophes have ended.
So reaching the children affected by emergencies – and providing them with the opportunity to learn – serves both humanitarian needs and development goals.
In fact, it is an area where humanitarian and development interests are almost perfectly aligned.
As global leaders prepare to adopt the new Sustainable Development Goals (SDGs) that will guide development efforts for the next 15 years, this could not be more important.
The good news is that there is a growing global consensus on the centrality of schooling in breaking intergenerational cycles of inequality and building stronger, more stable societies.
The proposed education SDG reflects this consensus, as it calls for inclusive, equitable access to the classroom.
Unlike the Millennium Development Goal for education, which called for universal access to primary education, the SDG calls for universal access to learning – from early childhood development to secondary school, and beyond.
As we embrace the new education goal, we should consider one of the primary obstacles to its achievement: the rising number of emergencies around the world.
According to a new report by the Overseas Development Institute, nearly one in three children out of school today is living in a country affected by crisis.
In the 35 countries most affected by violence, 65 million children from age three to 15 are at risk of missing out on learning.
For the youngest children, crisis and conflict mean that schooling never starts.
For others, it means that education is interrupted, never to be restarted.
For still others, the quality of education is so poor – owing to a lack of adequately trained teachers or appropriate materials – that they are not acquiring even basic reading and writing skills.
Some groups face particularly serious challenges.
Children with disabilities – most of whom never enter school in developing countries – see their already-minimal prospects decline even further in times of crisis. And according to new data released by the Education for All Global Monitoring Report, young women living in conflict-affected areas are nearly 90% more likely to be out of secondary school than their counterparts in more stable countries.
This is all the more problematic, given that even a single year of additional schooling for girls increases both their earning power and the likelihood that they will send their own children to school.
Though the number of children affected by crisis is reaching an all-time high, financing for education in emergencies remains outrageously low.
In 2013, less than 2% of emergency aid went to education and learning opportunities.
And though education is clearly a development priority, less than 10% of official development aid for education that year went toward children trapped in emergencies.
To meet the new SDG target on education, our investments need to respond to the realities of a more volatile world.
That begins with acceptance of a basic truth: that learning is not only a critical element of relief for every child in an emergency, but also a crucial investment in the future development of their societies.
We must act on this knowledge, by securing greater and more predictable funding for education in unpredictable emergencies.
Over the last few months – on the margins of the Spring Meetings of the World Bank and the International Monetary Fund, and at the World Education Forum in May – an informal group has been considering a proposal to establish a new global fund for education in emergencies.
Though many details remain to be discussed, the idea is gaining strength.
We should build on that momentum.
For we face a choice, one that we must make collectively: Should we spend more now on education in emergencies, or pay the price of a lost generation of poorly educated children who will someday be inadequately equipped to rebuild their shattered societies?
A generation of children who are denied the chance to reach their own dreams will find it much harder to give their own children a chance at a better future.
And the long-term costs of that vicious cycle will be borne by us all.
प्रगति के लिए ज्ञान
लंदन - लगभग 236 साल पहले, अमेरिका के वर्जीनिया राज्य से एक युवा राज्यपाल ने शिक्षा सुधार को एक नई दिशा दी थी। अपने ज्ञान के अधिक सामान्य प्रसार के लिए विधेयक में, थॉमस जेफ़रसन ने ऐसी "सामान्य शिक्षा प्रणाली" का आह्वान किया था जो "सबसे अमीर से लेकर सबसे ग़रीब तक" सभी नागरिकों तक पहुँचे। यह अमेरिकी सार्वजनिक शिक्षा प्रणाली अर्थात ऐसी संस्था तैयार करने की दिशा में पहला क़दम था जिसकी मदद से देश वैश्विक प्रमुखता तक पहुँच सका।
बीसवीं सदी के आरंभ तक, संयुक्त राज्य अमेरिका सार्वजनिक स्कूली शिक्षा में वैश्विक नेता बन गया था। शिक्षा के क्षेत्र में निवेश ने आर्थिक विकास, रोज़गार सृजन, और अधिक सामाजिक गतिशीलता के लिए प्रेरणा प्रदान की। जैसा कि क्लाउडिया गोल्डिन और लॉरेंस काट्ज़ ने दिखाया है, यह शिक्षा के क्षेत्र में अमेरिकी "अनूठापन" था जिसने इस देश को यूरोपीय देशों पर बढ़त दिलाई जिन्होंने मानव पूँजी में कम निवेश किया था।
जब दुनिया के नेता इस हफ़्ते विकास के लिए शिक्षा पर ओस्लो शिखर सम्मेलन में इकट्ठे होंगे, तो इस अनुभव से मिलनेवाला सबक और अधिक प्रासंगिक नहीं हो सकता है। वास्तव में, जैसे-जैसे वैश्विक अर्थव्यवस्था अधिकाधिक ज्ञान-आधारित बनती जा रही है, वैसे-वैसे देश के लोगों की शिक्षा और कौशल इसका भविष्य सुरक्षित करने के लिए पहले से कहीं अधिक महत्वपूर्ण होते जा रहे हैं। जो देश समावेशी शिक्षा प्रणाली तैयार करने में विफल रहते हैं, वे धीमे विकास, बढ़ती असमानता, और विश्व व्यापार में अवसरों के खोने की संभावना का सामना करते हैं।
इस संदर्भ में, शिक्षा पर आज के कुछ विचार-विमर्श आश्चर्यजनक रूप से कालातीत प्रतीत होते हैं। हार्वर्ड अर्थशास्त्री रिकार्डो हॉउसमैनने हाल ही में उसकी भर्त्सना की है जिसका उन्होंने विकास के लिए "केवल-शिक्षा" की रणनीति की वकालत के लिए "शिक्षा, शिक्षा, शिक्षा भीड़" के रूप में वर्णन किया है। यह एक ऐसे दृष्टिकोण पर प्रभावशाली हमला था, जो मेरी पूरी जानकारी के अनुसार, किसी का भी नहीं है।
बेशक शिक्षा विकास के लिए स्वचालित मार्ग नहीं है। ऐसे देशों में शिक्षा का विस्तार करना कम उत्पादकता और अधिक बेरोज़गारी के लिए नुस्खा होगा, जिनमें संस्थागत विफलता, ख़राब प्रशासन, और समष्टि-आर्थिक कुप्रबंधन निवेश में गतिरोध का काम करते हैं। उत्तरी अफ्रीका में, शिक्षा प्रणाली और रोज़गार बाज़ार के बीच तालमेल न होने से, युवा, शिक्षित लोग अच्छे अवसरों से वंचित रहे - इस स्थिति ने अरब स्प्रिंग की क्रांतियों में योगदान किया।
इसमें से कुछ भी विकास के अनिवार्य घटक के रूप में शिक्षा की महत्वपूर्ण भूमिका - न केवल स्कूली शिक्षा के कई सालों, बल्कि वास्तविक रूप से सीखने - की राह में बाधक नहीं है। एडम स्मिथ से लेकर रॉबर्ट सोलो और गैरी बेकर और, सबसे हाल में, एरिक हनुशेक द्वारा किए गए व्यापक अनुसंधान से उत्पादक मानव पूँजी के निर्माण में शिक्षा के महत्व की पुष्टि होती है। OECD के अंतर्राष्ट्रीय विद्यार्थी मूल्यांकन के लिए कार्यक्रम के मानक विचलन स्कोर से एक चरण ऊपर का संबंध देश की दीर्घावधि प्रति व्यक्ति विकास दर में 2% की वृद्धि से है।
शिक्षा धीमी गति से विकास का तुरत-फुरत का इलाज नहीं हो सकती। लेकिन क्या आप किसी ऐसे देश का नाम बता सकते हैं जो शिक्षा के क्षेत्र में प्रगति के ���िना आर्थिक बदलाव ला सका है।
विश्व बैंक में अर्थशास्त्रियों ने शिक्षा की बहस के लिए अपने कुछ बिजूखे खड़े करने के रूप में योगदान किया है। एक योगदान में, शांता देवराजन ने इस दृष्टिकोण की आलोचना की है कि शिक्षा ऐसी अनिवार्य सार्वजनिक वस्तु है जिसके वित्तपोषण और प्रदान करने का कार्य सरकारों को करना चाहिए, और उन्होंने यह तर्क दिया है कि इसके बजाय इसे ऐसी निजी वस्तु माना जाना चाहिए, जो ग्राहकों अर्थात माता-पिता और बच्चों के लिए बाज़ारों के माध्यम से प्रदान की जाए ताकि निजी लाभ प्राप्त हों।
समस्या यह है कि वास्तविक दुनिया में शिक्षा स्वतः स्पष्ट रूप से सार्वजनिक वस्तु नहीं है, जबकि कुछ चीज़ें हैं। तथापि, यह "योग्यता" की ऐसी वस्तु है जिसे सरकारों द्वारा निःशुल्क प्रदान किया जाना चाहिए, क्योंकि अगर माता-पिता कम निवेश करते हैं, या ग़रीबों को बाहर रखा जाता है, तो विभिन्न प्रकार के निजी और सामाजिक लाभ नहीं मिल पाएँगे। उदाहरण के लिए, शिक्षा - विशेष रूप से लड़कियों की शिक्षा - के क्षेत्र में प्रगति बच्चे के जीवित रहने और पोषण में सुधारों, और मातृ स्वास्थ्य, साथ ही उच्च मजदूरी के साथ निकटता से जुड़ी है।
अब समय आ गया है कि शिक्षा के क्षेत्र में वास्तविक चुनौतियों पर ध्यान केंद्रित करने के लिए दोषपूर्ण तर्कों पर आधारित व्यर्थ के विचार-विमर्श से आगे बढ़ा जाए - अगर हमें 2030 तक सभी के लिए उच्च गुणवत्ता की प्राथमिक और माध्यमिक शिक्षा प्रदान करने के सतत विकास का लक्ष्य हासिल करना है तो ऐसी चुनौतियों पर कार्रवाई की जानी चाहिए। ओस्लो शिखर सम्मेलन सफलता की आधारशिला रखने के लिए महत्वपूर्ण अवसर प्रस्तुत कर रहा है। यह देखते हुए कि 59 मिलियन प्राथमिक स्कूल की उम्र के बच्चे और 65 मिलियन किशोर स्कूल से बाहर हैं, इस अवसर को दोनों हाथों से लपक लेना चाहिए।
सफल शिखर सम्मेलन में चार प्रमुख अनिवार्यताओं पर बल दिया जाना चाहिए। सबसे पहले, सरकारों को शिक्षा के लिए ज़्यादा घरेलू कोष प्रतिबद्ध करने चाहिए। शिखर सम्मेलन के लिए एक लेख में पाकिस्तान में एक के बाद एक सरकारों की शिक्षा के क्षेत्र में निवेश करने में विफलता पर प्रकाश डाला गया है, जिसमें अब स्कूल से बाहर रहनेवाली दुनिया की दूसरी सबसे बड़ी आबादी है। इस समस्या के मूल में राजनीतिज्ञ हैं, जिनकी रुचि ग़रीबों के लिए सीखने के अवसरों में सुधार करने के बजाय अमीरों द्वारा कर चोरी को सुविधाजनक बनाने में अधिक है।
दूसरे, अंतर्राष्ट्रीय दाताओं को शिक्षा के लिए सहायता में गिरावट की प्रवृत्ति को उलट देना चाहिए। यहाँ तक ​​कि संसाधन जुटाने के लिए अधिक प्रयास किए जाने के बावजूद, सार्वभौमिक निम्न-माध्यमिक शिक्षा प्राप्त करने के लिए, सहायता के रूप में सालाना लगभग $22 बिलियन की ज़रूरत होगी। यह मौजूदा स्तरों से लगभग पाँच गुना है। सहायता की इस खाई को पाटने के अलावा, संयुक्त राष्ट्र के शिक्षा के विशेष दूत गोर्डन ब्राउन ने ठीक ही संघर्ष और मानवीय आपातस्थितियों से प्रभावित बच्चों को शिक्षा देने के लिए वित्त-पोषण तंत्रों का आह्वान किया है।
तीसरे, दुनिया के नेताओं को असमानता के बारे में गंभीर हो जाना चाहिए। हर सरकार को स्पष्ट रूप से शिक्षा में असमानताओं - लिंग, धन, और ग्रामीण-शहरी विभाजन - को सीमित करने के लक्ष्य निर्धारित करने चाहिए और अपने बजटों को उन लक्ष्यों के अनुरूप बनाना चाहिए। आज की स्थिति के अनुसार, असमानताएँ बहुत ज़्यादा हैं। उदाहरण के लिए, नाइजीरिया में, सबसे धनी 20% परिवारों से शहरी लड़कों का स्कूली शिक्षा का औसत दस साल का है, जबकि उत्तरी क्षेत्रों में ग़रीब ग्रामीण लड़कियाँ दो साल से कम की उम्मीद कर सकती हैं। फिर भी, जैसा कि ओस्लो शिखर सम्मेलन के एक और पृष्ठभूमि लेख से पता चलता है, ज़्यादातर देशों में शिक्षा के वित्तपोषण का झुकाव अमीरों की ओर है।
अंत में, सरकारों और सहायता एजेंसियों को बाज़ार-आधारित प्रयोगों को छोड़ देना चाहिए, और वास्तविक प्रणाली-आधारित सुधार के लिए प्रतिबद्ध होना चाहिए। शिक्षक प्राथमिकता का एक प्रमुख क्षेत्र हैं, जिन्हें वास्तविक ज्ञान देने के लिए भारी प्रोत्साहन, प्रभावी प्रशिक्षण, और भरोसेमंद समर्थन प्रणाली की ज़रूरत है। आखिरकार, शिक्षा प्रणाली उतनी ही अच्छी होगी जितने अच्छे उसके शिक्षक होंगे।
दुनिया के नेता जब ओस्लो में इकट्ठे हो रहे होंगे, तो लाखों माता-पिता यह सुनिश्चित करने के लिए संघर्ष कर रहे होंगे कि उनके बच्चे वह शिक्षा प्राप्त कर सकें जिसके वे हकदार हैं – ऐसी शिक्षा जो उन्हें खुद के और अपने परिवारों के लिए बेहतर जीवन का निर्माण करने में सक्षम करे। इन माता-पिता के लिए, स्कूली शिक्षा आशा का स्रोत है। हमारी उनके और उनके बच्चों के प्रति ज़िम्मेदारी है कि हम सर्वोत्तम प्रयास करें।
Our Double-Dip Future
NEW YORK – We are at a moment when the range of uncertainties facing the global economy is unusually wide.
We have just passed through the worst financial crisis since World War II.
The only relevant comparisons are with the Japanese real-estate bubble, which burst in 1991 (and from which Japan has not recovered), and the Great Depression of the 1930’s – except that this crisis has been quantitatively much larger and qualitatively different.
Unlike the Japanese experience, this crisis involved the entire world, rather than being confined to a single country.
And, unlike the Great Depression, this time the financial system was put on artificial life-support, rather than being allowed to collapse.
In fact, the magnitude of the problem today is even greater than during the Great Depression.
In 1929, total credit outstanding in the United States was 160% of GDP, and it rose to 250% by 1932.
In 2008, we started at 365% – and this calculation leaves out the pervasive use of derivatives, which was absent in the 1930’s.
Despite this, artificial life-support has worked.
Barely a year after the bankruptcy of Lehman Brothers, financial markets have stabilized, stock markets have rebounded, and the economy is showing signs of recovery.
People want to return to business as usual – and to think of the Crash of 2008 as a bad dream.
Unfortunately, the recovery is liable to run out of steam, and may even be followed by a second economic downturn, though I am not sure whether it will occur in 2010 or 2011.
My views are far from unique, but they are at variance with the prevailing mood.
The longer the turnaround lasts, the more people will believe that it will continue.
But in my judgment, this is characteristic of far-from-equilibrium situations when perceptions tend to lag behind reality.
To complicate matters, the lag works in both directions.
Most people have not yet realized that this crisis is different from previous ones – that we are at the end of an era.
Others – including me – failed to anticipate the extent of the rebound.
Overall, the international financial authorities have handled this crisis the same way as they handled previous ones: they bailed out failing institutions and applied monetary and fiscal stimulus.
But this crisis was much bigger, and the same techniques did not work.
The failed rescue of Lehman Brothers was a game-changing event: financial markets actually ceased to function.
This meant that governments had to effectively guarantee that no other institution whose collapse could endanger the system would be allowed to fail.
That is when the crisis spread to the periphery of the world economy, because countries on the periphery could not provide equally credible guarantees.
Eastern Europe was the worst hit.
Countries at the center used their central banks’ strong balance sheets to pump money into the system and to guarantee the liabilities of commercial banks, while governments engaged in deficit financing to stimulate the economy on an unprecedented scale.
But the growing belief that the global financial system has escaped collapse, and that we are slowly returning to business as usual, is a grave misinterpretation of the current situation.
Humpty Dumpty cannot be put together again.
The globalization of financial markets that took place since the 1980’s allowed financial capital to move freely around the world, making it difficult to tax or regulate.
This put financial capital in a privileged position: governments had to pay more attention to the requirements of international capital than to the aspirations of their own people.
Individual countries found it difficult to offer resistance.
But the global financial system that emerged was fundamentally unstable, because it was built on the false premise that financial markets can be safely left to their own devices.
That is why it broke down, and that is why it cannot be put together again.
Global markets need global regulations, but the regulations that are currently in force are rooted in the principle of national sovereignty.
There are some international agreements, notably the Basel Accords on minimum capital requirements; and there is also good cooperation among market regulators.
But the source of the authority is always the sovereign state.
This means that it is not enough to restart a mechanism that has stalled; we need to create a regulatory mechanism that has never existed.
As things stand now, each country’s financial system is being sustained and supported by its own government.
But governments are primarily concerned with their own economies.
This gives rise to what may be called financial protectionism, which threatens to disrupt and perhaps destroy global financial markets.
British regulators will never again rely on the Icelandic authorities, and Eastern European countries will be reluctant to remain dependent on foreign-owned banks.
So regulations must become international in scope.
Otherwise, global financial markets will be destroyed by regulatory arbitrage.
Businesses would move to countries where the regulatory climate is the most benign, exposing other countries to risks that they cannot afford to run.
Globalization was successful because it forced countries to remove regulations; but the process does not work in reverse.
It will be difficult to get countries to agree on uniform regulations.
Different countries have different interests, which drive them towards different solutions.
This can be seen in Europe, where the European Union’s member states cannot agree among themselves on a uniform set of financial rules.
How, then, can the rest of the world?
In the 1930’s, trade protectionism made a bad situation worse.
In today’s global economy, the rise of financial protectionism constitutes a greater danger.
Our Energy Future
Where energy is concerned, everything seemed simple before the Iraq War. The US would topple Saddam, Iraq's vast oil reserves would be unleashed after a short period of reconstruction, and world petroleum prices would drop to under $20 per barrel.
Instead, world oil prices have soared to $35 per barrel.
No surprise, then, that new attention is being focused on energy supplies.
But the basic message is clear: current energy patterns are risky and must change.
Two interconnected energy issues will shape our economic and geopolitical future for decades to come.
The first is that dependence on Middle East oil is increasingly risky.
Nobody knows how much oil is left and how much it will cost to extract, but the peak of global oil production will probably be reached sometime in the next quarter century, perhaps even in the next few years.
Remaining oil supplies will be concentrated in the volatile Middle East.
Meanwhile, global demand for energy will soar as the economies of China, India, Brazil, and other countries grow.
If the Middle East is already at a breaking point, imagine what could happen if competition for Middle East oil intensifies among America, Europe, China, India, Japan, and others.
The second great challenge is that our modern energy system is destabilizing the global climate.
Petroleum and other fossil fuels (coal and natural gas) are causing long-term changes in the global climate, but few people appreciate the risks.
There are three largely unrecognized problems:
· climate change will shift every aspect, such as temperature, rainfall, and storm patterns, as well as bringing fundamental changes in the physical environment, such as rising sea levels and changes in ocean chemistry.
The effects are unpredictable but likely to be huge, in terms of crop production, diseases, costs and availability of irrigation and drinking water, coastal erosion, and so forth;
· climate change may not be gradual.
The long history of climate change shows the risks of dramatic and abrupt changes over the course of but a few decades;
· humans might react badly to such changes, because changes in monsoon patterns or sea levels and the ensuing economic distress could provoke massive political unrest, refugee movements, and violent conflict.
These challenges - petroleum scarcity, growing instability in the Middle East, and climate change - require clear thinking.
Some alarmists declare that we need to drastically reduce energy use on a global scale, undermining the global economy.
Efficiencies in energy use are possible, but they cannot solve either the problem of long-run oil supplies or climate change.
Others declare that we must kick the fossil fuel habit and make a mad dash for renewable energy sources such as solar or wind power.
Yet these alternatives are expensive, and cannot realistically replace fossil fuels.
Fortunately, if we plan for the long term on a global scale, we can find our way through these challenges.
Our goals should be reliable supplies of energy that are environmentally safe at affordable prices.
There are two key ideas here.
First, we should recognize that even as oil becomes scarce, other fossil fuels such as coal, gas, and unconventional sources such as shale and tar sands, will remain plentiful for centuries.
We should aim to develop technologies and infrastructure so that these other fossil fuels can be used efficiently and safely.
Chemical processes already exist, for example, to convert coal into gasoline.
Coal can also be converted into hydrogen if we choose to go down the road of a hydrogen-based economy, in which hydrogen-powered fuel cells replace the internal combustion engine in automobiles.
The jury is still out on whether the hydrogen economy will be cost effective.
Second, as these other fossil fuels take up the slack when oil production reaches a plateau or starts to decline, the effects of fossil fuels on the climate must be brought under control.
The environmentally sound manner for using fossil fuels in the future will involve capturing the carbon dioxide at the power plant before it is emitted into the atmosphere, and then disposing of it by somehow burying it in the ground.
This process, called "carbon capture and disposal," is being pursued by some of the world's leading engineers.
Our energy future will depend not on one solution, but on a variety of steps: exploration and development of new petroleum sources, especially outside the Middle East; increased energy efficiency; long-term development and adoption of affordable renewable sources; and the environmentally safe use of alternative fossil fuels such as coal.
Today's course of action - in which we neglect the coming squeeze in global oil supplies, rely too heavily on Middle East oil, and ignore the environmental consequences of fossil fuels - is reaching a dead end.
Reality will catch up with us.
How then to think ahead?
The world's largest energy users, starting with the US, Europe, China, Japan, and India, need to agree on collective actions to develop new technologies for carbon capture and storage, and for the affordable development and use of alternative energy supplies.
We need to make certain that market prices for energy use reflect the true social costs of using energy, so that energy users and energy suppliers make better choices regarding energy efficiency, the development of alternative energy sources, and the adoption of environmentally safe technologies.
Our G-Zero World
NEW YORK – We live in a world where, in theory, global economic and political governance is in the hands of the G-20.
In practice, however, there is no global leadership and severe disarray and disagreement among G-20 members about monetary and fiscal policy, exchange rates and global imbalances, climate change, trade, financial stability, the international monetary system, and energy, food and global security.
Indeed, the major powers now see these issues as zero-sum games rather than positive-sum games.
So ours is, in essence, a G-Zero world.
In the nineteenth century, the stable hegemon was the United Kingdom, with the British Empire imposing the global public goods of free trade, free capital mobility, the gold standard, and the British pound as the major global reserve currency.
In the twentieth century, the United States took over that role, imposing its Pax Americana to provide security to most of Western Europe, Asia, the Middle East, and Latin America.
The US also dominated the Bretton Woods institutions – the International Monetary Fund, the World Bank, and, later, the World Trade Organization – to determine the global trade and financial rules, with the dollar as the main reserve currency.
Today, however, the US “empire” is in relative decline and fiscally over-stretched.
Moreover, the rising power, China, which is not a liberal democracy, is pursuing a model of state capitalism, and is free-riding on the current global system – on trade, exchange rates, climate change – rather than sharing in the provision of global public goods.
And, while there is general unhappiness with the US dollar, the Chinese renminbi is still far from becoming a major global reserve currency, let alone the dominant one.
This power vacuum has reinforced the absence of leadership on global economic and political governance within the G-20 since it succeeded the G-7 at the onset of the recent economic and financial crisis.
Indeed, with the exception of the London summit in April 2009, when a consensus was reached on joint monetary and fiscal stimulus, the G-20 has become just another bureaucratic forum where much is discussed, but little is agreed upon.
As a result, the global economic powers have been left bickering about whether we need more monetary and fiscal stimulus or less of it. There are also major disagreements about whether to reduce global current-account imbalances – and about the role that currency movements should play in this adjustment.
Exchange-rate tensions are leading to currency wars, which may eventually lead to trade wars and protectionism.
Indeed, not only is the Doha round of multilateral free-trade negotiations effectively dead, but there is also a rising risk of financial protectionism as countries re-impose capital controls on volatile global financial flows and on foreign direct investment.
Likewise, there is very little consensus on how to reform the regulation and supervision of financial institutions – and even less on how to reform an international monetary system based on flexible exchange rates and the dollar’s central role as the leading reserve currency.
Global climate-change negotiations have similarly ended in failure, and disagreement reigns concerning how to address food and energy security amid a new scramble for global resources.
And, on global geopolitical issues – the tensions on the Korean peninsula, Iran’s nuclear ambitions, the Arab-Israeli conflict, the disorder in Afghanistan and Pakistan, and the political transition in autocratic Middle East regimes – the great powers disagree and are impotent to impose stable solutions.
There are several reasons why the G-20 world has become a G-Zero world.
First, when discussion moves beyond generic principles into detailed policy proposals, it’s much more difficult to reach clear agreements among 20 negotiators than among seven.
Second, G-7 leaders share a belief in the power of free markets to generate long-term prosperity and in the importance of democracy for political stability and social justice.
The G-20, on the other hand, includes autocratic governments with different views about the role of the state in the economy, and on the rule of law, property rights, transparency, and freedom of speech.
Third, the Western powers now lack the domestic political consensus and financial resources to advance an international agenda.
The US is politically polarized, and must at some point begin to reduce its budget deficit.
Europe is preoccupied with its attempt to save the eurozone, and has no common foreign or defense policy.
And Japan’s political stalemate on structural reforms has left it helpless to stem long-term economic decline.
Finally, rising powers like China, India, and Brazil are far too focused on managing the next stage of their domestic development to bear the financial and political costs that come with new international responsibilities.
In short, for the first time since the end of World War II, no country or strong alliance of countries has the political will and economic leverage to secure its goals on the global stage.
This vacuum may encourage, as in previous historical periods, the ambitious and the aggressive to seek their own advantage.
In such a world, the absence of a high-level agreement on creating a new collective-security system – focused on economics rather than military power – is not merely irresponsible, but dangerous.
A G-Zero world without leadership and multilateral cooperation is an unstable equilibrium for global economic prosperity and security.
Our Kind of Truth
NEW YORK – Rick Santorum, a former United States senator seeking the Republican Party’s nomination to challenge President Barack Obama this year, has been saying some very strange things about the Netherlands.
Ten percent of all deaths in that country, he recently claimed, are from euthanasia, half of which are forced upon helpless patients.
Old people are so frightened of being killed by homicidal doctors that they wear bracelets that read: “Do not euthanize me.”
In a way, Santorum’s canards must come as a relief to a country that has increasingly been in the news for outrageous statements by right-wing populists about Muslims and Greeks.
Indeed, Santorum’s view of the Netherlands as a kind of progressive dystopia has a slightly old-fashioned ring to it nowadays.
The Dutch were nonetheless disturbed.
Some in the country’s parliament even asked whether the foreign minister should lodge a complaint in Washington.
In fact, Santorum’s fantasies were swiftly refuted in the US itself.
The Washington Post concluded that “there was not a shred of evidence to back up Santorum’s claims,” and found it “telling” that his campaign managers did not even bother to defend them.
One US television station even apologized to a Dutch reporter in the name of the American people.
As the Post pointed out, there is no such thing as involuntary euthanasia in the Netherlands.
The patient’s consent is essential, and at least two doctors must agree that the patient’s suffering is unbearable and beyond cure.
Besides, the share of assisted deaths in Dutch mortality is nowhere near 10%.
As for those bracelets, well…
But does any of this matter to Santorum’s followers?
Probably not.
Corrections from the “elitist” mainstream media are dismissed as enemy propaganda.
As a blogger sympathetic to Santorum put it: “The Washington Post, as one would expect, attempted to discredit Santorum.”
It is disturbing, to say the least, that the most cogent refutations of bald-faced lies no longer make any impression.
After all, a democracy cannot function without a public that is properly informed.
Informing the public used to be the role of serious newspapers and television networks.
Of course, not everything in the mainstream media is always true.
Mistakes are made.
News organizations have political biases, sometimes reflecting the views and interests of their owners.
But high-quality journalism has always relied on its reputation for probity.
Editors, as well as reporters, at least tried to get the facts right.
That is why people read Le Monde, The New York Times, or, indeed, the Washington Post.
Filtering nonsense was one of their duties –amp#160;and their main selling point.
That has changed.
Populist demagogues in politics and the mass media are doing everything they can to discredit the quality press as propaganda organs for left-wing elites who sneer at the views of ordinary Americans.
Santorum pretends to speak for these people – that is, for a minority of Americans who are mostly white, provincial, highly religious, deeply conservative on cultural and social issues, and convinced that Obama and all Europeans are dangerous godless socialists.
The point is not whether Santorum is right or wrong factually.
What he says “feels” right to his followers, because it conforms to their prejudices.
And the Internet, having swamped the quality press, feeds and reinforces those prejudices, making it more difficult to distinguish the truth from lies.
The public is increasingly segmented into groups of likeminded people who see their views echoed back to them in blogs, comments, and tweets.
There is no need to be exposed to different opinions, which are, in any case, considered to be propaganda. Indeed, Santorum’s new fame will afford him a rich career as a media demagogue, even if he fails as a politician.
The first people to argue that all truth is relative, and that all information is a form of propaganda that reflects society’s power relations, were far removed from the world inhabited by Santorum and his supporters.
Several decades ago, a number of European and American intellectuals, often with a background in Marxism, developed a “post-modern” critique of the written word.
We might think, they argued, that what we read in The New York Times or Le Monde is objectively true, but everything that appears there is, in fact, a disguised form of propaganda for bourgeois class interests.
There is no such thing, the post-modern critic believes, as independence of thought.
Objective truth is an illusion.
Everyone is promoting class interests of one kind or another.
The real lie, in this view, is the claim of objectivity.
What is necessary to change the world is not the truth, but another form of propaganda, promoting different interests.
Everything is political.
That is the only truth that counts.
It is unlikely that Rick Santorum, or many of his followers, have read any post-modern theorists.
Santorum, after all, recently called Obama a “snob” for claiming that all Americans should be entitled to a college education.
So he must surely loath writers who represent everything that the Tea Party and other radical right-wingers abhor: the highly educated, intellectual, urban, secular, and not always white.
These writers are the left-wing elite, at least in academia.
But, as so often happens, ideas have a way of migrating in unexpected ways.
The blogger who dismissed The Washington Post’s corrections of Santorum’s fictional portrayal of the Netherlands expressed himself like a perfect post-modernist.
The most faithful followers of obscure leftist thinkers in Paris, New York, or Berkeley are the most reactionary elements in the American heartland.
Of course, if this were pointed out to them, they would no doubt dismiss it as elitist propaganda.
Our Low-Carbon Future
LONDON – The United Nations climate change conference, to be held in Copenhagen this December, should provide the climax to two years of international negotiations over a new global treaty aimed at addressing the causes and consequences of greenhouse-gas emissions.
A global deal on climate change is urgently needed.
Concentrations of carbon dioxide and other greenhouse gases in the atmosphere have reached 435 parts per million (ppm) of CO2-equivalent, compared with about 280 ppm before industrialization in the nineteenth century.
If we continue with business-as-usual emissions from activities such as burning fossil fuels and cutting down forests, concentrations could reach 750 ppm by the end of the century.
Should that happen, the probable rise in global average temperature relative to pre-industrial times will be 5˚C or more.
It has been more than 30 million years since the earth’s temperature was that high.
The human species, which has been around for no more than 200,000 years, would have to deal with a more hostile physical environment than it has ever experienced.
Floods and droughts would become more intense and global sea levels would be several meters higher, severely disrupting lives and livelihoods, and causing massive population movements and inevitable conflict around the world.
Some parts of the world would be under water; other would become deserts.
Developing countries recognize and are angered by the inequity of the current situation.
Current greenhouse-gas levels are largely due to industrialization in the developed world since the nineteenth century.
Yet developing countries are the most vulnerable to the consequences of climate change, which threaten the economic growth that is necessary to overcome poverty.
At the same time, emissions cannot be reduced at the extent required without the central contribution of the developing world.
Climate change and poverty, the two defining challenges of this century, must be tackled together.
If we fail on one, we will fail on the other.
The task facing the world is to meet the environment’s “carbon constraints” while creating the growth necessary to raise living standards for the poor.
To avoid the severe risks that would result from a rise in global average temperature of more than 2˚C, we must get atmospheric concentrations below 450 ppm.
This will require a cut in annual global emissions from about 50 gigatonnes of CO2-equivalent today to below 35 gigatonnes in 2030, and less than 20 gigatonnes by 2050.
Today, per-capita annual emissions in the European Union are 12 tonnes, and 23.6 tonnes in the United States, compared to six tons for China and 1.7 tons for India.
As the projections for 2050 suggest that the world’s population will be about nine billion, annual per-capita emissions must be reduced to approximately two tons of CO2-equivalent, on average, if the global annual total is to be less than 20 gigatonnes.
Most developed countries are targeting reductions in annual emissions of at least 80% – relative to levels in 1990 – by 2050.
If they are to convince developing countries that the 2050 goal is credible, they must be both ambitious and realistic about the domestic political challenges they face in adopting and implementing demanding targets for 2020, 2030, and 2040.
Developing countries need substantial help and support from rich nations in order to implement their plans for low-carbon economic growth, and to adapt to the effects of climate change that are now inevitable over the next few decades.
Developed countries should also provide strong support for measures to halt deforestation in developing countries, and for reducing emissions substantially, quickly, and at reasonable cost.
Based on recent estimates of the developing world’s extra requests as a result of climate change, rich countries should be providing annual financial support – in addition to existing foreign-aid commitments– of about $100 billion for adaptation and $100 billion for mitigation by the early 2020’s.
Some of the latter can come through carbon market.
Rich countries must also demonstrate that low-carbon growth is possible by investing in new technologies, which should be shared with developing countries to boost their mitigation efforts.
We are already seeing extraordinary innovation by the private sector, which will drive the transition towards a low-carbon global economy.
Investments in energy efficiency and low-carbon technologies could also pull the global economy out of its economic slowdown over the next couple of years.
More importantly, in driving the transition to low-carbon growth, these technologies could create the most dynamic and innovative period in economic history, surpassing that of the introduction of railways, electricity grids, or the internet.
There is no real alternative.
High-carbon growth is doomed, crippled by high prices for fossil fuels and killed off by the hostile physical environment that climate change will create.
Low-carbon growth will be more energy-secure, cleaner, quieter, safer and more bio-diverse.
We should learn from the financial crisis that if risks are ignored, the eventual consequences are inevitably worse.
If we do not start to combat the flow of greenhouse-gas emissions now, the stock in the atmosphere will continue to grow, making future action more difficult and costly.
Other public expenditure can be postponed, but delaying climate-change measures is a high-risk, high-cost option.
Climate change poses a profound threat to our economic future, while low-carbon growth promises decades of increased prosperity.
The choice in Copenhagen will be stark, and the stakes could not be higher.
We know what we must do, and we can do it.
Our Other Drug Problem
MILAN – With all the official and media attention given to the worldwide trade in illicit drugs, the public has at most a dim awareness of the serious problems affecting the production, testing, and sale of the legal kind: the medicines that we take to treat or cure everything from AIDS to Yellow Fever.
The development of new drugs is a complex and lengthy process.
It starts with an idea and requires a wide range of skills to bring that idea to fruition: synthesis or extraction of more or less complicated molecules, proof of their therapeutic effect in cell cultures and animals, testing for toxicity, and clinical studies.
Along this path, many potential drugs are withdrawn, and even successfully tested drugs face the additional hurdle of regulatory approval.
Finally, the drug reaches the market, where it must be followed closely, because many adverse reactions are detected only with a large number of patients and after years of use.
There are several thousand drugs currently on the market, with a worldwide value of about $3 trillion.
But conditions in the drug market are far from optimal.
Ideally, drugs should have a favorable risk-benefit ratio.
Compared with other drugs with the same indications, new drugs should be selected on the basis of their safety, effectiveness, and cost.
But the financial interests involved tend to distort the process by creating incentives to overestimate the benefits of new drugs, underestimate the risks, and, above all, boost prescriptions.
What can be done?
First, new drugs should always offer added value – better efficacy, lower toxicity, or greater ease of treatment.
Unfortunately, this is not required by current legislation in Europe, where only quality, efficacy, and safety must be demonstrated, without any need for comparative studies.
There is therefore the risk that new drugs may in fact be worse than products already on the market.
New drugs are often tested against placebos or drugs that are not the best treatment available, the point being to demonstrate that the new drug is not inferior to any already on the market.
But it is ethically questionable to test a drug for “non-inferiority,” because patients are exposed to potential risks while contributing, in the best case, to the development of a drug that is no better than those already available.
Patients’ informed consent usually does not provide a clear description of a non-inferiority trial, and the lack of added value indicates that in many cases the development of a new drug is driven by commercial aims rather than patients’ needs.
Second, improvement of drug development requires more transparency from the regulatory bodies.
At present, a new drug’s producer prepares the entire dossier presented to the regulatory authority for approval; in the interests of the public, at least one of the clinical trials should be carried out by an independent non-profit organization.
Moreover, only the regulators can examine the dossiers, which are highly confidential.
It is unacceptable that patients participating voluntarily in clinical trials, and their representatives, have no right to see data that would not exist without them.
Third, better conditions for the approval of new drugs should be matched by better use of drugs, which requires better information for prescribers.
Today, information provided by drug makers largely predominates over independent information.
As a result, certain drugs are used much more frequently than would be expected from their approved indications.
This so-called “off-label” use is sustained by continuous propaganda aimed not only at doctors, but also directly at the public.
Direct but shadowy information tends to lead to “disease mongering” – the creation of diseases in order to boost prescriptions.
For example, the concept of “pre-hypertension” could extend the use of anti-hypertensive drugs dramatically, because everybody’s blood pressure rises with age.
Likewise, the notion that blood cholesterol should be as low as possible clears a path to treating healthy people with anti-cholesteremic agents.
Clearly, health authorities must take closer control of information by becoming more responsible for physicians’ continuous education.
If the conditions for drug approval and marketing become more severe, pharmaceutical companies will be forced to produce fewer me-too drugs and more products of clinical importance.
Requiring longer testing periods, and possibly extra resources, could be compensated by new drugs’ greater longevity on the market, and patent coverage could be extended.
Finally, incentives must be found to encourage pharmaceutical companies to develop drugs that fulfill the needs of patients still awaiting therapy.
There are more than 6,000 rare and neglected diseases – many in developing countries – that lack remedies.
The challenge is how to produce new drugs that – because patients are too few or too poor – promise very limited returns.
A partnership between governments, non-profit research institutions, charities and pharmaceutical companies might be one way to clean up the approval process for new drugs.
If public awareness of the current problems stimulates politicians to find a solution that works, better drugs and better drug use will be achievable.
Our Summer of Extremes
BERLIN – This summer has been one of weather-related extremes in Russia, Pakistan, China, Europe, the Arctic – you name it.
But does this have anything to do with global warming, and are human emissions to blame?
While it cannot be scientifically proven (or disproven, for that matter) that global warming caused any particular extreme event, we can say that global warming very likely makes many kinds of extreme weather both more frequent and more severe.
For weeks, central Russia has been in the grips of its worst-ever heat wave, which has caused probably thousands of fatalities.
As a result of drought and heat, more than 500 wildfires have raged out of control, smothering Moscow in smoke and threatening several nuclear facilities.
Russia’s government has banned wheat exports, sending world grain prices soaring.
Meanwhile, Pakistan is struggling with unprecedented flooding that has killed more than a thousand people and affected millions more.
In China, flash floods have so far killed more than a thousand people and destroyed more than a million homes.
On a smaller scale, European countries like Germany, Poland, and the Czech Republic have also suffered serious flooding.
Meanwhile, global temperatures in recent months have been at their highest levels in records that go back 130 years.
Arctic sea-ice cover reached its lowest recorded average level for the month of June ever. In Greenland two huge chunks of ice broke off in July and August.
Are these events connected?
Looking only at individual extreme events will not reveal their cause, just like watching a few scenes from a movie does not reveal the plot.
But, viewed in a broader context, and using the logic of physics, important parts of the plot can be understood.
This decade has been marked by a number of stunning extremes.
In 2003, the most severe heat wave in living memory broke previous temperature records by a large margin and caused 70,000 deaths in Europe.
In 2005, the most severe hurricane season ever witnessed in the Atlantic devastated New Orleans and broke records in terms of the number and intensity of storms.
In 2007, unprecedented wildfires raged across Greece, nearly destroying the ancient site of Olympia. And the Northwest Passage in the Arctic became ice-free for the first time in living memory.
Last year, more than a hundred people were killed in bush fires in Australia, following drought and record-breaking heat.
This cluster of record-breaking events could be merely an astonishing streak of bad luck.
But that is extremely unlikely.
This is far more likely to be the result of a warming climate – a consequence of this decade being, worldwide, the hottest for a thousand years.
All weather is driven by energy, and the sun ultimately provides this energy.
But the biggest change in Earth’s energy budget by far over the past hundred years is due to the accumulation in our atmosphere of greenhouse gases, which limit the exit of heat into space.
Owing to fossil-fuel emissions, there is now one-third more carbon dioxide in the atmosphere than at any time in at least a million years, as the latest ice drilling in Antarctica has revealed.
The changes in the planet’s energy budget caused by solar variations are at least ten times smaller in comparison.
And they go in the wrong direction: in recent years, the sun has been at its dimmest since satellite measurements began in the 1970’s.
So, when unprecedented extreme weather events occur, the prime suspect is naturally the biggest atmospheric change that has happened over the past hundred years – one that has been caused by human emissions.
The fact that heat waves like the one in Russia become more frequent and extreme in a warmer world is easy to understand.
Extreme rainfall events will also become more frequent and intense in a warmer climate, owing to another simple fact of physics: warm air can hold more moisture.
For each degree Celsius of warming, 7% more water is available to rain down from saturated air masses.
Drought risk also increases with warming: even where rainfall does not decline, increased evaporation dries out the soils.
The carbon-dioxide effect can also change the preferred patterns of atmospheric circulation, which can exacerbate extremes of heat, drought, or rainfall in some regions, while reducing them in others.
The problem is that a reduction in those extremes to which we are already well-adapted provides only modest benefits, whereas the new extremes to which we are not adapted can be devastating, as recent events in Pakistan show.
The events of this summer show how vulnerable our societies are to weather-related extremes.
But what we see now is happening after only 0.8º Celsius of global warming.
With swift and decisive action, we can still limit global warming to a total of 2º Celsius or a bit less.
Even that much warming would require a massive effort to adapt to weather extremes and rising sea levels, which needs to start now.
With weak action, like that promised by governments in Copenhagen last December, we will be on course for 3-4º Celsius of global warming.
This is bound to outstrip the ability of many societies and ecosystems to adapt.
And, with no action at all, the planet could even heat up by 5-7º Celsius by the end of this century – and more thereafter.
Knowingly marching down that road would be insane.
We must face the facts: our emissions of greenhouse gases probably are at least partly to blame for this summer of extremes.
Clinging to the hope that it is all chance, and all natural, seems naive.
Let us hope that this summer of extremes is a last-minute wake-up call to policy makers, the corporate world, and citizens alike.
Our Virtual Middle Ages
Wikipedia , the online encyclopedia, is the most impressive collective intellectual project ever attempted – and perhaps achieved.
It demands both the attention and the contribution of anyone concerned with the future of knowledge.
Because of the speed with which it has become a fixture in cyberspace, Wikipedia ’s true significance has gone largely unremarked.
Since its sixth anniversary in 2007, Wikipedia has consistently ranked in the top ten most frequently viewed Web sites worldwide.
Everyday it is consulted by 7% of all 1.2 billion Internet users, and its rate of usage is growing faster than that of Internet usage as a whole.
Wikipedia is an encyclopedia to which anyone with a modicum of time, articulateness, and computer skills can contribute.
Anyone can change any entry or add a new entry, and the results will immediately appear for all to see – and potentially contest.
“Wiki” is a Hawaiian root that was officially added to English in 2007 to signify something done quickly – in this case, changes in the collective body of knowledge.
Some 4.7 million “Wikipedians” have now contributed to 5.3 million entries, one-third of which are in English, with the rest in more than 250 other languages.
Moreover, there is a relatively large group of hardcore contributors: roughly 75,000 Wikipedians have made at least five contributions in any given 30-day period.
The quality of articles is uneven, as might be expected of a self-organizing process, but it is not uniformly bad.
True, topics favored by sex-starved male geeks have been elaborated in disturbingly exquisite detail, while less alluring matters often lie fallow.
Nevertheless, according to University of Chicago Law professor Cass Sunstein, Wikipedia is now cited four times more often than the Encyclopedia Britannica in US judicial decisions.
Moreover, Nature ’s 2005 evaluation of the two encyclopedias in terms of comparably developed scientific articles found that Wikipedia averaged four errors to the Britannica ’s three.
That difference probably has been narrowed since then.
Wikipedia’s boosters trumpet it as heralding the arrival of “Web 2.0.”
Whereas “Web 1.0” facilitated the storage and transmission of vast amounts of different kinds of information in cyberspace, “Web 2.0” supposedly renders the whole process interactive, removing the final frontier separating the transmitter and receiver of information.
But we have been here before – in fact, for most of human history.
The sharp divide between producers and consumers of knowledge began only about 300 years ago, when book printers secured royal protection for their trade in the face of piracy in a rapidly expanding literary market.
The legacy of their success, copyright law, continues to impede attempts to render cyberspace a free marketplace of ideas.
Before, there were fewer readers and writers, but they were the same people, and had relatively direct access to each other’s work.
Indeed, a much smaller, slower, and more fragmented version of the Wikipedia community came into existence with the rise of universities in twelfth- and thirteenth-century Europe.
The large ornamental codices of the early Middle Ages gave way to portable “handbooks” designed for the lighter touch of a quill pen.
However, the pages of these books continued to be made of animal hide, which could easily be written over.
This often made it difficult to attribute authorship, because a text might consist of a copied lecture in which the copyist’s comments were inserted and then perhaps altered as the book passed to other hands.
Wikipedia has remedied many of those technical problems.
Any change to an entry automatically generates a historical trace, so entries can be read as what medieval scholars call a “palimpsest,” a text that has been successively overwritten.
Moreover, “talk pages” provide ample opportunity to discuss actual and possible changes.
While Wikipedians do not need to pass around copies of their text – everyone owns a virtual copy – Wikipedia ’s content policy remains deeply medieval in spirit.
That policy consists of three rules: 1) no original research; 2) a neutral point of view; and 3) verifiability.
These rules are designed for people with reference material at their disposal but no authority to evaluate it.
Such was the epistemic position of the Middle Ages, which presumed all humans to be mutually equal but subordinate to an inscrutable God.
The most one could hope for, then, was a perfectly balanced dialectic.
In the Middle Ages, this attitude spawned scholastic disputation.
In cyberspace, the same practice, often dismissed as “trolling,” remains the backbone of Wikipedia ’s quality control.
Wikipedia embodies a democratic medievalism that does not respect claims to personal expertise in the absence of verifiable sources.
To fully realize this ideal, participation in Wikipedia might be made compulsory for advanced undergraduates and Master’s degree candidates worldwide.
The expected norms of conduct of these students correspond exactly to Wikipedia ’s content policy: one is not expected to do original research, but to know where the research material is and how to argue about it.
Compulsory student participation would not only improve Wikipedia ’s already impressive collective knowledge base, but also might help curb the elitist pretensions of researchers in the global knowledge system.
Out in Eighteen Months or One Hundred Years?
BLOOMINGTON, INDIANA – Winston Churchill once said that, in wartime, truth was so precious that it needed to be surrounded by a “bodyguard of lies.”
In America’s presidential campaign – and, sadly, within Iraq itself nowadays – the Iraq War may not be surrounded by a bodyguard of lies, but it has certainly picked up a vast entourage of partisan half-truths, cynical indifference, and uninformed stubbornness.
America’s Democrats continue to argue for complete withdrawal of United States forces from Iraq within 18 months, despite the fact that no rational observer believes that Iraqi forces will by then be able to secure Iraq’s borders and face down the country’s numerous militias, which remain armed to the teeth.
Indeed, the Democratic plan (if it can be called one) ignores Iran’s ongoing subversion of Iraq’s state institutions, which will continue unless and until they become strong enough to resist such machinations.
Moreover, Barack Obama’s insistence that Iraq has never constituted a central front in the war on terror insults the memory of tens of thousands – perhaps hundreds of thousands – of Iraqi civilians and US troops murdered by al-Qaeda’s suicide bombers since 2003.
Indeed, by 2004, the terrorists themselves regarded Iraq as the central front of their campaign.
Nor can one be buoyed by Joseph Biden’s repeated calls for a “soft partition” of Iraq, even though the entire Iraqi political class has rejected the notion.
As for the Republicans, setting aside Sarah Palin’s talk of America’s divine mission in the war on terror, it is inconceivable that John McCain truly believes that a US presence is sustainable in Iraq into the indefinite future.
To be fair, McCain never suggested that US troops will wage 100 years of war, as some of his critics claim.
What McCain was referring to was a peaceable presence of US forces in the country for a long period, rather like their continued presence in Japan since 1945.
Still, even assuming that the American public would tolerate such a presence, the Iraqi public would not.
America has made too many policy mistakes, US forces are too closely associated with an unpopular and incompetent occupation, and, until recently, their tactics have been too thuggish to permit talk of a permanent presence.
While most Iraqis understand the need for US forces to be in their country for the short term, they will not abide a permanent deployment.
McCain’s advisors would do well to consider a historical precedent: the failed British attempt at World War I’s close to maintain a long-term military presence in Iraq.
Iraqi politicians have not been exempt from posturing for political gain.
The government committed a number of blunders in its negotiations on the continued presence of US troops.
Indeed, this summer it injected itself into the US elections by seeming to endorse Obama’s plan for early withdrawal.
Then again, for three consecutive years, Iraq’s national security advisor – a physician with no credentials for the job when appointed by the US occupation authority, except that he spoke tolerable English – insisted that the next year would be the last in which American troops were needed.
Iraq’s government is demanding a withdrawal timetable from the US, not because it believes that Iraqi forces will be ready to take over soon, but to burnish its nationalist credentials ahead of next year’s parliamentary elections.
Thus, it hopes to divert public attention from still non-existent basic services, continuing sectarianism, weak oil production, scant infrastructure investment, and rampant corruption and cronyism.
Whether this strategy will succeed in obscuring the government’s record of failure in the minds of voters remains to be seen.
The problem now for Iraqi and US politicians is that, to act rationally, they will need to face down elements within their own constituencies.
They must recognize that a long-term presence by US troops is out of the question, but that US combat forces will be needed in Iraq – albeit with a diminishing role – for the next five years.
Only such a presence can consolidate the palpable, but still reversible, gains made over the past year.
Such a force is needed to continue pursuing al-Qaeda, and to counteract pro-Iranian activities.
Ending US involvement before the Iraqis can achieve these goals on their own would be disastrous for both US and Iraqi interests.
In the meantime, US forces must support Iraqi efforts to strengthen the country’s own military and security forces, while simultaneously disbanding all militias.
Iraq’s militias will not go quietly, yet their dissolution is essential for long-term stability, itself a sine qua non for stability in the region.
When these missions are accomplished – but not sooner – US forces should withdraw from Iraq.
Bracing for Stagnation
MUMBAI – As 2015 begins, the global economy remains weak.
The United States may be seeing signs of a strengthening recovery, but the eurozone risks following Japan into recession, and emerging markets worry that their export-led growth strategies have left them vulnerable to stagnation abroad.
With few signs that this year&nbsp;will bring any improvement, policymakers would be wise to understand the factors underlying the global economy’s anemic performance – and the implications of continued feebleness.
In the words of Christine Lagarde, the International Monetary Fund’s managing director, we are experiencing the “new mediocre.”
The implication is that growth is unacceptably low relative to potential and that more can be done to lift it, especially given that some major economies are flirting with deflation.
Conventional policy advice urges innovative monetary interventions bearing an ever expanding array of acronyms, even as governments are admonished to spend on “obvious” needs such as infrastructure.
The need for structural reforms is acknowledged, but they are typically deemed painful, and possibly growth-reducing in the short run.
So the focus remains on monetary and fiscal stimulus – and as much of it as possible, given the deadening effects of debt overhang.
And yet, the efficacy of such policy advice remains to be seen.
It is worth noting that the Japanese checked each of these boxes over the last two decades: They held interest rates low, introduced quantitative easing, and launched massive debt-financed spending on infrastructure.
Few would argue that Japan has recovered fully from its malaise.
An emerging narrative might better explain why stimulus efforts have been unsuccessful: As former US Treasury Secretary Larry Summers has argued, the world economy may be going through a sustained period of “secular stagnation.”
The causes of the stagnation very much depend on which economist one asks.
Summers emphasizes the inadequacy of aggregate demand, exacerbated by the inability of central banks to reduce nominal interest rates below zero.
The reasons for weak aggregate demand include aging populations that consume less and the growing concentration of wealth among the very rich, whose marginal propensity to consume is small.
The economists Tyler Cowen and Robert Gordon, on the other hand, argue that the problem is on the supply side.
In their view, the years following World War II were an aberration, with industrial countries’ growth helped by post-war reconstruction, rising education levels, higher workforce participation rates (owing to the entry of women), restored global trade, increasing investment, and the diffusion of technologies such as electricity, telephones, and automobiles.
Whatever the causes, growth started to slow in the 1970s, and adverse consequences like high unemployment rates among immigrants and the young were compounded by the growing realization that governments would struggle to deliver on their promises of social security.
These promises, notes the sociologist Wolfgang Streeck, had been made in the 1960s, when economies were surging and visions of a “Great Society” seemed affordable.
Promises have since been augmented with pension hikes and old-age health-care commitments for public-sector workers.
To meet their obligations, governments needed growth.
So, from the 1970s on, they began to spend to stimulate the economy.
Because of the supply-side problems, however, the spending translated into spiraling inflation.
Price stability needed to be restored, but the spending had to be maintained.
The ultimate solution was to finance spending not with the inflation tax, but with debt: first public debt, and then, as governments cut their deficits, private-sector debt.
In 2008, these elevated debt levels – in banks, businesses, households, and governments – sparked the financial crisis.
Today, debt is making it difficult for developed countries to resume pre-2008 growth rates, let alone restore the levels of GDP that would have been attained if the subsequent Great Recession had not happened.
Meanwhile, industrial countries’ overall debt/GDP ratios are continuing to grow.
In emerging markets, slow growth in the advanced economies has shut down a traditional development path: export-led growth.
As a result, emerging markets have had to rely once again on domestic demand.
This is always a difficult task, given the temptation to over-stimulate.
The abundance of liquidity sloshing around the world – the result of developed countries’ ultra-accommodative monetary policies – has made the task more difficult still, as the smallest sign of growth in an emerging economy can attract foreign capital.
If not properly managed, these flows can precipitate a credit and asset-price boom and drive up exchange rates.
When developed-country monetary policies are eventually tightened, some of the capital is likely to depart.
Emerging markets will have to ensure that they are not vulnerable.
To be sure, the world’s economic outlook could still take a turn for the better.
The US may become the world’s engine of growth.
Declining oil prices could provide a major boost, especially to oil-importing developed economies.
Technological advances could still come to the rescue.
But, overall, there is a palpable sense of gloom in the developed world, a feeling that growth is unlikely to take off in the foreseeable future.
If secular stagnation persists, these countries will have to undertake painful structural reforms, figure out how to restructure their promises (debts, social-security commitments, and pledges to keep taxes low), and distribute the resulting burden.
After the city of Detroit filed for bankruptcy in 2013, it had to make tough choices between servicing its pensioners or its debt, keeping its museums open or its police force intact.
As 2015 begins, similar difficult decisions may become increasingly common.
Out of Step at the ECB
The European Central Bank remains seriously out of step with other key central banks in the industrial world despite recently announced coordinated efforts to increase short-term liquidity in the banking system.
The United States, Canada, and the United Kingdom all have cut interest rates recently.
But the ECB holds firm against cutting; indeed, after the Governing Council’s December meeting, ECB President Jean-Claude Trichet said that some members were in favor of raising rates.
Who are they kidding?
Everyone knows that the ECB cannot raise interest rates now, and for some time to come.
In the midst of the most serious financial crisis in recent memory, the ECB has resorted to an unconvincing bluff, because it has an inflationary expectations problem.
Past policy missteps are responsible for the ECB’s present predicament.
The first misstep was the ECB’s delay in tightening monetary policy, long after it had become obvious that interest rates had been held too low (at 2%) for too long (from June 2003 to December 2005).
The ECB’s hawks, understanding the dangers of abnormally low interest rates for a central bank whose primary objective is price stability, had been eager to start raising rates earlier.
But the leadership was too timid.
A faster pace for rates hikes could have offset the slow start, but the ECB again erred on the side of caution.
For reasons that are unclear, Trichet, in contrast to the ECB’s first president, Wim Duisenberg, has wanted to raise rates by only 25 basis points at a time.
Many in the Governing Council wanted to go faster, because they knew they had a long journey in front of them, but Trichet refused.
The hawks were right to be in a hurry.
Because of the late start and slow pace, the Governing Council had reached only the 4% mark when the current financial crisis effectively put a lid on further rate hikes.
Trichet even had to rescind the rate hike he had signaled for September, though he still claims the increase has been merely postponed, not abandoned.
Not a chance.
The truth is that ECB would not be in its current predicament if the central bank had reached the 4.75% or even 5% level by now.
Higher rates would have meant lower inflation, so that inflationary expectations would not be the issue they have become.
Moreover, from a higher rate level, the ECB would be in a better position to cut rates now that the economy is slowing.
Several frustrated hawks on the Governing Council are dead set against cutting interest rates precisely because they believe that, at 4%, rates already have been “cut” from the 5% or so levels they had expected to achieve.
They don’t want to go further, and one can understand their chagrin, if not agree with their policy stance.
The ECB will have to cut interest rates in 2008 if it wants to avoid a hard landing for the euro-zone economy.
Being out of step has consequences.
The euro has sharply appreciated, for example, causing Trichet to condemn “brutal” currency moves.
When the Canadian dollar sharply appreciated, the Bank of Canada did more than talk – it cut interest rates.
The ECB has the same option, but refuses to use it.
Along with its empty threats of interest rate hikes, there is a real danger the ECB will be labeled the central bank that barks but doesn’t bite (animal behaviorists know that barking and biting are substitutes, not complements).
The ECB’s credibility is on the line.
How seriously, one wonders, did the Chinese take Trichet when he came to China to protest the euro’s “brutal” appreciation against the renminbi? Cut your own interest rates, they must have thought to themselves, and you will have less to complain about.
Being out of step also focuses attention on the fact that the ECB is in danger of losing control over inflationary expectations.
The US Federal Reserve can cut 100 basis points from the federal funds rate and not lose control over US inflationary expectations.
Yet, the ECB cannot cut interest rates 1 basis point because it fears euro-zone inflationary expectations are becoming unglued.
This is clear and convincing evidence of the ECB’s previous policy missteps in the normalization of interest rate process.
If Europe’s central bank had not been too late and too slow in the past, it would have been truer to its own price stability mandate, and not now out of step with central banks in other industrial countries.
Outsourced and Out of Work
The latest buzzword in the globalization debate is outsourcing.
Suddenly Americans - long champions of globalization - seem concerned about its adverse effects on their economy.
Its ardent defenders are, of course, untroubled by the loss of jobs.
They stress that outsourcing cuts costs - just like a technological change that improves productivity, thus increasing profits - and what is good for profits must be good for the American economy.
The laws of economics, they assert, ensure that in the long run there will be jobs for everyone who wants them, so long as government does not interfere in market processes by setting minimum wages or ensuring job security, or so long as unions don't drive up wages excessively.
In competitive markets, the law of demand and supply ensures that eventually , in the long run, the demand for labor will equal the supply - there will be no unemployment.
But as Keynes put it so poignantly, in the long run, we are all dead.
Those who summarily dismiss the loss of jobs miss a key points: America's economy has not been performing well.
In addition to the trade and budget deficits, there is a jobs deficit.
Over the past three and a half years, the economy should have created some 4 to 6 million jobs to provide employment for new entrants into the labor force.
In fact, more than 2 million jobs have been destroyed - the first time since Herbert Hoover's presidency at the beginning of the Great Depression that there has been a net job loss in the US economy over the term of an entire presidential administration.
At the very least, this shows that markets by themselves do not quickly work to ensure that there is a job for everyone who wishes to work.
There is an important role for government in ensuring full employment - a role that the Bush administration has badly mismanaged.
Were unemployment lower, the worries about outsourcing would be less.
But there is, I think, an even deeper reason for concerns about outsourcing of, say, hi-tech jobs to India: it destroys the myth - which has been a central tenet of the globalization debate in the US and other advanced industrial countries - that workers should not be afraid of globalization.
Yes, apologists of outsourcing say, rich countries will lose low-skilled jobs in areas like textiles to low wage labor in China and elsewhere.
But this is supposedly a good thing, not a bad thing, because America should be specializing in its areas of comparative advantage, involving skilled labor and advanced technology.
What is required is "upskilling," improving the quality of education, especially in science and technology.
But this argument no longer seems convincing.
America is producing fewer engineers than China and India, and, even if engineers from those developing countries are at some disadvantage, either because of training or location, that disadvantage is more than offset by wage differentials.
American and rich country engineers and computer specialists will either have to accept a wage cut and/or they will be forced into unemployment and/or to seek other employment - almost surely at lower wages.
If America's highly trained engineers and computer specialists are unable to withstand the onslaught of outsourcing, what about those who are even less trained?
Yes, America may be able to maintain a competitive advantage at the very top , the breakthrough research, the invention of the next laser.
But a majority of even highly training engineers and scientists are involved in what is called "ordinary science," the important, day-to-day improvements in technology that are the basis of long-term increases in productivity - and it is not clear that America has a long-term competitive advantage here.
Two lessons emerge from the outsourcing debate.
First, as America grapples with the challenges of adjusting to globalization, it should be more sensitive to the plight of developing countries, which have far fewer resources to cope.
After all, if America, with its relatively low level of unemployment and social safety net, finds it must take action to protect its workers and firms against competition from abroad - whether in software or steel - such action by developing countries is all the more justified.
Second, the time for America to worry is now.
Many of globalization's advocates continue to claim that the number of jobs outsourced is relatively small.
There is controversy, of course, about the eventual size, with some claiming that as many as one job in two might eventually be outsourced, others contending that the potential is much more limited.
Haircuts, like a host of other activities requiring detailed local knowledge, cannot be outsourced.
But even if the eventual numbers are limited, there can be dramatic effects on workers and the distribution of income.
Growth will be enhanced, but workers may be worse off - and not just those who lose their jobs.
This has, indeed, already happened in some developed countries: in the ten years that have passed since the signing of the North American Free Trade Agreement, average real wages in the US have actually declined.
Putting one's head in the sand and pretending that everyone will benefit from globalization is foolish.
The problem with globalization today is precisely that a few may benefit and a majority may be worse off, unless government takes an active role in managing and shaping it .
This is the most important lesson of the ongoing debate over outsourcing.
Outsourcing in Africa
In the past 40 years, advanced computers and communications have transformed one part of the world after another - first, the US and Europe, then Japan, Korea, and Taiwan, and most recently, India, China, and Eastern Europe.
Is Africa next?
Despite civil wars, malnutrition, and the anguish of the AIDS epidemic, something remarkable is happening in black Africa: the stealthy rise of a high-technology sector.
If not quite representing an African "Silicon Valley," these shoots of high-tech industry nonetheless can and must be nurtured if Africa is to thrive.
Consider what is happening on several floors of a single high-rise office building in Accra, Ghana's capital.
There some 1,500 Africans process American health-insurance claims - working around the clock, in three shifts.
The Africans speak English, type at least 50 words a minute on a computer, take data from paper claim forms supplied by US health insurers via satellite in electronic form, put it into new digital forms, and ship them back to the US.
So connected are these Africans that their forms can be reviewed - as they fill them in - by an American supervisor 8,000 miles away.
Ghana is best known for producing cocoa and gold, but today Affiliated Computer Services (ACS), a Texas company that runs the outsourcing operation, is the country's largest private employer.
African "key punchers" earn $4 to $5 a day - four times the legal minimum wage - and receive health insurance, meals, and subsidized transport.
A small number of African engineers and professionals earn much more, and receive periodic training in advanced technologies.
ACS's employees are but the first Africans to benefit from the hottest trend in the global economy: outsourcing, or the shift of service jobs from high-wage to low-wage countries.
To be sure, the number of jobs moving to Africa is tiny compared to those going to Asia, Latin America, and Eastern Europe.
But the big news is that Africa is finally competing in the economic contest that is reshaping the world economy.
Still, Africa remains burdened by severe disadvantages, not the least of which is a terrible image. "Big corporations don't even have Africa on the map when they consider outsourcing locations," says Sambou Makalou, a native of Mali who tries to persuade US employers to shift service jobs to Africa.
African governments also must be willing to start small: expend a lot of effort to attract pilot projects in the hope of larger employment in the future.
With sensible reforms, many barriers can be removed or at least eased.
Start with the following:
· Better Governance : African governments often boast when they simply stop the corrosive effects of corruption and irrational business regulation.
But little attention is given to the high cost of telecommunications, unreliable electrical-power systems, and the poor transport infrastructure.
• Greater Competitiveness : African leaders have been slow to realize that they must woo foreign corporations with special services, training programs for workers, and even subsidized offices.
Asian countries attract many jobs by creating "industrial parks," with more reliable services, including ultra-reliable communications networks, offered at competitive prices.
By restructuring their secondary schools and universities to train graduates with skills demanded by multinational corporations, Asian countries also create more competitive workforces.
To be sure, Africa is a far better place to do business than five years ago.
The spread of mobile telephony has revolutionized ordinary life in a continent with the world's lowest penetration of fixed-line telephones.
Satellite links have vastly improved Internet access, and a new undersea cable that runs along the coast of Africa (SAT-3) promises to improve and reduce the cost of all types of communications.
The problem is that, although Africa's economic appeal is increasing, India and China are improving more quickly, widening the gap.
African cities are increasingly finding their way onto the short lists of corporate location experts, only to lose out to Asian cities.
Africans can start winning only if they move faster.
Surprisingly, wage competitiveness is a problem.
Although Africa is the world's poorest region on average, wages in the formal economy generally exceed those paid in China and India, where government keeps basic food, housing, and transport costs relatively low through subsidies and controls.
In urban Africa, costs - for food and transport in particular - are relatively high, which forces wages up.
The supply of African professionals and skilled workers, meanwhile, is tight; shortages also drive up wages.
Indeed, an Indian software programmer typically earns less than a comparable African programmer.
Even wages for routine data-entry tasks in Africa are usually no less than those paid in south Asia.
The odds that Africa one day will receive a fair share of outsourcing jobs are improving.
But there is a risk that the region will fall further behind.
When ACS decided to expand recently, it opened a new operation in India rather than in Ghana or another African country.
The message was sobering.
Even as hundreds of similar outsourcing centers spring up in Asia, Eastern Europe, and Latin America, the Accra center remains a rarity in Africa.
That is a shame, but it need not be Africa's fate.
Overcoming Africa’s North-South Divide
The late President Mobutu Sese Seko of former Zaire once declared that the North African countries, which pride themselves on their Arabic descent, should be excluded from the then Organization of African Unity.
Mobutu’s rule was, of course, deeply flawed, but he was not alone within the pan-African movement in such thinking.
The antagonism between the blacks of sub-Saharan Africa and the inhabitants of the continent’s north remains a reality that impedes the prospect of any union between them.
Northern hostility, separatism, and racism toward the southerners are at the center of this split.
However, in our current era of political correctness, outright separation between the north and the south remains unmentionable.
In declaring that Egypt was an Arab republic, President Gamel Abdel Nasser was falsifying history, erasing 3000 years of a culture neatly intertwined with black Africa.
Indeed, for nearly three centuries, from 950 to 663 BC, black pharaohs and queens such as Tii from the “land of Kush” – today’s black Sudan – ruled Egypt.
More grotesquely, when the Americans decided to finance a film on the life of Anwar Sadat, the Egyptians objected because the actor chosen to play Sadat was black.
Similarly, when Morocco quit the OAU in 1984, it dreamed of European Union membership.
Sudan’s ruling class – descendants of Arab slaves – have no qualms about bombing, killing, and displacing millions of their black citizens in the south and now in the Darfur region, with the backing of the Arab League.
And when Libyan leader Colonel Muammar Khadafi, disappointed by the pan-Arabism he advocated, turned to championing pan-Africanism, his people continued to riot to chase out black immigrants.
Mauritania’s leaders quit ECOWAS, the West African regional grouping, to join the union formed by the North African countries.
These countries’ attitude reflects that of the Arabs themselves.
When al-Qaeda decided to take on the United States, it targeted the US embassies in Kenya and Tanzania, killing more than 260 people.
With the exception of 12 US citizens, all were black civilians, while more than 4,000 Kenyans and Tanzanians were injured.
Justifying the killings of black Africans, a leading Arab commentator invoked Stalin: “One can’t make an omelet without breaking eggs.”
In Saudi Arabia, the racism against black Muslims is so acute that one wonders if it is worth it for them to perform the pilgrimage to Mecca, one of the five pillars of the Muslim faith.
As a Muslim and a world traveler, I have never experienced as much ostracism as I did in Saudi Arabia as a pilgrim.
Why then, should sub-Saharan black Africans keep alive the mirage of a union with the North African countries?
The Egyptians, with a historical civilization second to none in terms of achievements in all walks of life, want desperately to associate with the Arabs, with whom they have no kinship other than colonization.
Likewise, the other people of North African countries are Berbers who, less than half a century ago, were given cash incentives to learn Arabic.
The African Union needs thorough rethinking.
Diversity must be a source of richness, not antagonism, and countries that favor the latter must be excluded.
This would entail the dismantling of the African Union in its current form, which in any case is built on shaky grounds, since its designers seemed to favor plagiarizing the European Union – hardly a bureaucratic model worth emulating.
But African leaders have no interest in a real African Union.
They derive their powers from the fragmentation of the continent, and one cannot expect them to renounce that stance for the sake of the well-being of the masses.
Consequently, a United States of Africa would have to stem from the grassroots, through existing institutions of civil society like professional associations, trade unions, and other non-governmental organizations.
It is worth remembering that the people who were instrumental in establishing the best and most enduring union of states in history, the United States of America, were political activists, not heads of states.
In Latin America, the only breakthrough that dented post-independence domination by the descendants of European colonizers came from a black freedom fighter and unifier, Simon Bolivar, who united the region before being forced into exile in Jamaica.
Now, Bolivar has an heir in Hugo Chávez, and the Latin American political landscape is changing at breakneck speed under his inspiration and leadership.
Inspired leadership is crucial to any process of nation building, and Africans should look to figures such as Bolivar, Martin Luther King, Jr., Georges Padmore, W.E.B. Dubois, Kwame Nkrumah, and Cheikh Anta Diop to mount a resistance movement against their mostly corrupt and incompetent leaders (a Herculean task, indeed).
Only then could they fulfill the dream of a common African identity and the establishment of a United States of Africa.
Overcoming the Copenhagen Failure
NEW YORK – Pretty speeches can take you only so far.
A month after the Copenhagen climate conference, it is clear that the world’s leaders were unable to translate rhetoric about global warming into action.
It was, of course, nice that world leaders could agree that it would be bad to risk the devastation that could be wrought by an increase in global temperatures of more than two degrees Celsius.
At least they paid some attention to the mounting scientific evidence. And certain principles set out in the 1992 Rio Framework Convention, including “common but differentiated responsibilities and respective capabilities,” were affirmed.
So, too, was the developed countries’ agreement to “provide adequate, predictable and sustainable financial resources, technology, and capacity-building….” to developing countries.
The failure of Copenhagen was not the absence of a legally binding agreement.
The real failure was that there was no agreement about how to achieve the lofty goal of saving the planet, no agreement about reductions in carbon emissions, no agreement on how to share the burden, and no agreement on help for developing countries.
Even the commitment of the accord to provide amounts approaching $30 billion for the period 2010-2012 for adaptation and mitigation appears paltry next to the hundreds of billions of dollars that have been doled out to the banks in the bailouts of 2008-2009.
If we can afford that much to save banks, we can afford something more to save the planet.
The consequences of the failure are already apparent: the price of emission rights in the European Union Emission Trading System has fallen, which means that firms will have less incentive to reduce emissions now and less incentive to invest in innovations that will reduce emissions in the future.
Firms that wanted to do the right thing, to spend the money to reduce their emissions, now worry that doing so would put them at a competitive disadvantage as others continue to emit without restraint.
European firms will continue to be at a competitive disadvantage relative to American firms, which bear no cost for their emissions.
Underlying the failure in Copenhagen are some deep problems.
The Kyoto approach allocated emission rights, which are a valuable asset.
If emissions were appropriately restricted, the value of emission rights would be a couple trillion dollars a year – no wonder that there is a squabble over who should get them.
Clearly, the idea that those who emitted more in the past should get more emission rights for the future is unacceptable.
The “minimally” fair allocation to the developing countries requires equal emission rights per capita.
Most ethical principles would suggest that, if one is distributing what amounts to “money” around the world, one should give more (per capita) to the poor.
So, too, most ethical principles would suggest that those that have polluted more in the past – especially after the problem was recognized in 1992 – should have less right to pollute in the future.
But such an allocation would implicitly transfer hundreds of billions of dollars from rich to poor.
Given the difficulty of coming up with even $10 billion a year – let alone the $200 billion a year that is needed for mitigation and adaptation – it is wishful thinking to expect an agreement along these lines.
Perhaps it is time to try another approach: a commitment by each country to raise the price of emissions (whether through a carbon tax or emissions caps) to an agreed level, say, $80 per ton.
Countries could use the revenues as an alternative to other taxes – it makes much more sense to tax bad things than good things.
Developed countries could use some of the revenues generated to fulfill their obligations to help the developing countries in terms of adaptation and to compensate them for maintaining forests, which provide a global public good through carbon sequestration.
We have seen that goodwill alone can get us only so far.
We must now conjoin self-interest with good intentions, especially because leaders in some countries (particularly the United States) seem afraid of competition from emerging markets even without any advantage they might receive from not having to pay for carbon emissions .
A system of border taxes – imposed on imports from countries where firms do not have to pay appropriately for carbon emissions – would level the playing field and provide economic and political incentives for countries to adopt a carbon tax or emission caps.
That, in turn, would provide economic incentives for firms to reduce their emissions.
Time is of the essence.
While the world dawdles, greenhouse gases are building up in the atmosphere, and the likelihood that the world will meet even the agreed-upon target of limiting global warming to two degrees Celsius is diminishing.
We have given the Kyoto approach, based on emission rights, more than a fair chance.
Given the fundamental problems underlying it, Copenhagen’s failure should not be a surprise.
At the very least, it is worth giving the alternative a chance.
The Eurozone’s Agenda in 2013
PARIS – European Union leaders concluded 2012 with a landmark agreement that places all eurozone banks under a single supervisor.
But the difficult negotiations that led to the agreement eclipsed European Council President Herman Van Rompuy’s recent report, Towards a Genuine Economic and Monetary Union, which calls for unity far beyond a banking union.
Although “no door was closed,” in the words of European Commission President José Manuel Barroso, EU leaders have clearly refused, at least for now, to hold a serious discussion about deeper integration.
Van Rompuy’s report raises a fundamental question: What factors are preventing the eurozone from functioning as everyone would wish?
Answering this question requires, first and foremost, comparing the dynamics at play during the euro’s first decade, 1999-2009, when the eurozone ostensibly performed well, with those of the last three years, which have been marred by crisis.
At first, the eurozone seemed to function like a true currency union: capital-market integration was accelerated; cross-border activity increased; and the per capita income gap between member countries decreased.
But, unlike in a complete currency union, such as that of the United States, eurozone members retained full financial sovereignty, meaning that they controlled all of the levers of macroeconomic policy.
Without external constraints, public and private expenditure grew precipitously in many countries on the eurozone periphery, while wages rose faster than productivity.
As these countries posted current-account deficits, northern European countries accumulated current-account surpluses, exposing a widening competitiveness gap.
In a genuine currency union, wealth transfers and automatic stabilizers mean that such discrepancies do not pose a problem.
With the eurozone as a whole benefiting from a relatively solid balance-of-payments position, European leaders initially failed to foresee the risk incurred by letting competitiveness differentials grow, and underestimated the threat posed by some countries’ accumulation of significant external debt.
Indeed, for ten years, north-to-south income transfers and lending financed excessive aggregate demand, making the eurozone seem stable.
As markets underpriced risk in order to lend to increasingly indebted countries, pressure on interest rates diminished.
(Over the course of the euro’s first decade, interest-rate spreads between ten-year government bonds nearly disappeared.)
The global financial crisis exposed the eurozone’s underlying flaw.
Meanwhile, international bodies, including the International Monetary Fund and the G-20, encouraged struggling countries to implement loose fiscal policies, claiming that they were needed to overcome the crisis.
But fiscal stimulus merely aggravated the problem.
Financial investors soon recognized that risk had been underestimated in some countries, causing interest rates to rise, sometimes to unsustainable levels, as in Greece, Portugal, and Ireland.
While the decline in aggregate demand led to reduced imports, the combination of higher interest rates, lower public expenditure, tax increases, and wage deflation boosted unemployment and triggered recession.
Normally, by decreasing prices relative to their more fiscally sound neighbors, struggling countries can boost exports, thereby reducing their current-account deficits.
But, in the case of the euro crisis, price stickiness caused inflation to increase more in debtor countries than in creditor countries, making adjustment even more painful.
In this context, Van Rompuy’s report is crucial.
It maps out the architecture needed to “guarantee the minimum level of convergence required for the EMU to function effectively,” and calls for a more integrated financial, budgetary, and economic policy framework.
Specifically, the report highlights the need for the eurozone to make two fundamental commitments.
First, eurozone countries must implement reforms aimed at boosting wage and price flexibility through enhanced competition and improved labor and capital mobility within and between member countries.
Second, wealth transfers to peripheral countries, while controversial, are necessary.
To surmount the associated political hurdles, eurozone leaders must create a limited “fiscal capacity,” which should act as a “common but limited shock-absorption function” that would “contribute to cushioning the impact of country-specific shocks and help to prevent contagion across the euro area and beyond.”
This mechanism should also provide financial support for structural reforms through “limited, temporary, flexible, and targeted financial incentives.”
But Van Rompuy’s minimal proposal may be insufficient.
Currency unions require a mechanism for permanent transfers to poorer regions.
The EU budget should facilitate such transfers in the eurozone, using structural funds.
Tax transfers should also act as an automatic stabilizer in the case of asymmetric shocks.
Such reforms undoubtedly require a much more politically integrated, or federalized, eurozone.
Facing up to that reality will be the main challenge for Europe’s leaders in 2013.
Test-Driving Driverless Cars
ANN ARBOR – It is June 15, 2030, and for Sam and Sue of Ann Arbor, Michigan, it is going to be a busy day.
Their daughter Sophia has a 9 a.m. karate match.
At noon, her older sister Sally’s high school graduation will begin. And, by 3 p.m., the house must be ready for Sally’s graduation party.
At 8:40, Sam uses a smartphone app to order a ride from Maghicle, Ann Arbor’s mobility service, which uses self-driving robotic vehicles.
Within minutes, Sam, Sue, and Sophia are headed for the karate club.
En route, Sophia studies videos of her opponent’s past matches, while Sue catches up on emails and Sam orders appetizers and flowers for the party.
They arrive at the club on time, and the robot proceeds to pick up someone else nearby.
Sally, who must arrive at school by 10:30, has already ordered a Maghicle ride.
When she boards at 10:15, she receives a text message from her best friend Amanda, who wants to ride with her.
Sally enters Amanda’s address in the Maghicle app, and the robot chooses the best route.
At 11:30, as a victorious Sophia trades her karate uniform for something better suited for her sister’s graduation, Sam receives a text message confirming that a small temperature-controlled pod has delivered the appetizers for Sally’s party in the secure, refrigerated drop-box at the house.
When Sophia is ready, the family orders another Maghicle ride, this time to Sally’s school.
They take their seats and, as Sam waves to Sally sitting with her classmates, he is struck by how quickly 17 years have passed.
In 2013, Sam’s day would have been far more difficult, stressful, and expensive.
He would have wasted far too much time in his gas-guzzling SUV, stuck in traffic jams or searching for parking spaces.
Now, because he does not need to own a car, he spends far less money on transportation and has more time to do as he pleases.
With services like Maghicle enabling people to get around safely, affordably, conveniently, and sustainably, Sam does not have to worry about his wife or daughters getting into automobile accidents, as his parents worried about him.
By contrast, today’s road transportation system is inconvenient, unsustainable, and dangerous.
Of the nearly one billion motor vehicles worldwide – enough to circle the planet 100 times if parked end to end – some 95% depend on oil for energy, making car travel subject to resource geopolitics and price volatility.
Furthermore, combustion engines account for more than one-fifth of the world’s carbon emissions, contributing significantly to climate change.
And, with more than 1.2 million people dying on the road each year, car travel remains a proven killer.
Sam’s world of 2030 is not mere fantasy.
But achieving it will require a thorough overhaul of the existing road transportation system – and that means overcoming the complex combination of public and private elements, vested interests, ingrained business models, and massive inertia that has so far impeded its development.
Indeed, with certain institutions and industries benefiting when all of the system’s components – vehicles, roads, fuel stations, traffic laws, regulations, vehicle standards, and licensed drivers – work together, no transformational development has occurred in road transportation since Karl Benz invented the car and Henry Ford popularized it.
A narrow focus on, say, developing better batteries, improving fuel efficiency, or making automobile production more sustainable is inadequate to catalyze the needed transformation.
A genuinely transformational solution is needed – one that meets the needs of consumers, businesses, and governments.
An integrated network of driverless, electric vehicles that are connected, coordinated, and shared should form the core of that solution.
Such vehicles would be programmed to avoid crashes, leading to fewer deaths and injuries and less property damage.
In order to minimize the excessive resource consumption associated with driving, the vehicles would be tailored to trip characteristics, such as the number of passengers.
For example, lightweight, two-passenger vehicles can be up to ten times more energy efficient than a typical car.
In the United States, where 90% of automobiles carry one or two people, reliance on such vehicles would result in a dramatic decline in carbon emissions, which would fall even further as a result of less road congestion and smoother traffic flows.
Moreover, the land and infrastructure needed for parking would be significantly reduced.
Under such a system, personal mobility could cost up to 80% less than owning and operating a car, with time efficiencies augmenting those savings further.
For Americans earning minimum wage ($7.25 per hour), time spent driving at a rate of 30 miles (48 kilometers) per hour costs $0.24 per mile.
At the US median hourly wage of $25, each mile costs $0.83.
Given that Americans drive roughly three trillion miles annually, saving just one cent per mile implies $30 billion in annual savings.
The technology needed to advance such a scheme exists.
The task now is to introduce prototype systems in representative communities, in order to prove what is possible, discover consumers’ preferences, determine the most attractive business models, and identify and avert unexpected consequences.
Once the prototypes have proved effective and practical, they should scale quickly without public incentives.
As with other innovations – such as mobile phones, e-books, digital photography and music, and flat-screen televisions – large-scale deployment will occur when the new technologies reach the market tipping point, when their value to consumers exceeds the costs to businesses of supplying them.
Policymakers would be responsible only for guaranteeing the expanding system’s safety.
A cleaner, safer, more convenient road transportation system is possible – and closer to being realized than many believe.
Owning Up to Israel’s Bomb
TEL AVIV – President Barack Obama’s vision of a world without nuclear weapons, and the recent agreement he signed with Russia aimed at cutting back the nuclear stockpiles of both countries, enhances his moral and political leadership. But how will his campaign against nuclear proliferation affect Israel, widely seen as the world’s sixth nuclear weapon state, and so far the only one in the Middle East?
US Assistant Secretary of State Rose Gottemoeller’s recent call for Israel to join the nuclear Non-Proliferation Treaty (NPT), which would require it to declare and relinquish its nuclear arsenal, has incited fears that America’s diplomatic umbrella for Israel’s nuclear status is ending.
From now on, it appeared to Israelis, the US will treat all states the same when it comes to nuclear weapons.
Israel is especially concerned that Obama might be willing to address Iran’s nuclear ambition by equating it with Israel’s nuclear status.
The intellectual foundations of the new American attitude were laid down in a famous article by Henry Kissinger, Sam Nunn, George Schultz, and William Perry entitled “Toward a Nuclear-Free World.” In calling upon the world’s nuclear powers to preach by example and dramatically reduce their nuclear arsenals, the article was also a call for equality among nations in the nuclear domain.
Bruce Riedel, who until recently headed the Obama administration’s strategy review for Afghanistan and Pakistan, and who is by no means hostile to America’s unique relations with Israel, has been explicit about this. “If you are really serious about a deal with Iran, Israel has to come out of the closet.
A policy based on fiction and double standards is bound to fail sooner or later.
What is remarkable is that it has lasted so long.”
But it was a recent statement to Congress by Secretary of Defense Robert Gates that was especially shocking to Israelis.
He expressed understanding for Iran’s desire to acquire nuclear weapons because, as he said, the Iranians are surrounded by nuclear powers such as Pakistan, India, Russia, and Israel.
Israel is bound to fight against this emerging new American doctrine that equates it with Iran, or even with India and Pakistan for that matter.
Political contexts matter, the Israelis will argue.
Not only has Iran developed its nuclear capabilities while a party to the NPT, the Israelis will say, but it also has put Israel’s destruction high on its agenda.
Israel’s nuclear deterrence is its ultimate defense against an existential threat.
Across-the-board nuclear equality can, in the end, only boost to Iran’s nuclear claims.
India and Pakistan, unlike Israel, which has been committed to a strategy of nuclear opacity, both see themselves as nuclear states and want the world to accept that status. Moreover, Israel never tested a nuclear weapon, and has unequivocally accepted the Nuclear Suppliers Group (NSG) guidelines, which seek to stem proliferation through the control of nuclear exports.
Israel expects the Obama administration not only to appreciate the unique context of its ambiguous nuclear status, but also to recognize that it cannot be forthcoming in assuring its neighbors or the rest of the world regarding its nuclear program unless the Middle East political environment changes in a radically positive way. Here, a change in Iran’s pattern of behavior toward Israel is an absolute prerequisite.
The potential for export of nuclear material and know-how by countries such as Pakistan – and perhaps one day Iran – is also a matter of concern for Israel.
Indeed, Israel insists that it is, after all, Iran, not Israel’s supposed nuclear capabilities, that triggered the current Middle East nuclear arms race.
But, as with the issue of the West Bank settlements, the Obama administration seems to be moving definitively away from an automatic endorsement of Israel’s understandings with previous US administrations.
A revision of US policy towards Israel’s nuclear status can by no means be ruled out.
Gottemoeller’s declaration, as well as Gates’ explicit recognition of Israel’s nuclear status should be interpreted within the context of the Obama administration’s broader disarmament agenda.
Israel’s policy of nuclear ambiguity has remained practically unchallenged for almost 50 years, not least within Israel itself, where the issue has been a sacred taboo.
But the changing international environment, the threat of uncontrolled nuclear proliferation in the Middle East, and the new policies being worked out in the US might all be good reasons for Israel to consider revising its nuclear doctrine.
After all, the current strategy has not really worked either as a deterrent against conventional attacks (which persisted throughout the years that Israel supposedly developed its nuclear arsenal) or as a warning to rivals (such as Iran) against developing a nuclear weapon.
Israel’s official policy is that of a Middle East Free of Weapons of Mass Destruction.
By abandoning ambiguity and taking its own bomb out of the “basement,” Israel might be able to affirm its capacity for nuclear deterrence more convincingly, and, more importantly, enhance a serious debate about the urgency of a nuclear-free zone in the Middle East.
Pain without Purpose
BERKELEY – Three times in my life (so far), I have concluded that my understanding of the world was substantially wrong.
The first time was after the passage in 1994 of the North America Free Trade Agreement (NAFTA), when the flow of finance to Mexico to build factories to export to the largest consumer market in the world was overwhelmed by the flow of capital headed to the United States in search of a friendlier investment climate.
The result was the Mexican peso crisis of later that year (which I, as US Assistant Secretary of the Treasury, had to help contain).
My second epiphany came in the fall and winter of 2008, when it became clear that large banks had no control over either their leverage or their derivatives books, and that the world’s central banks had neither the power nor the will to maintain aggregate demand in the face of a large financial crisis.
The third moment is now.
Today, we face a nominal demand shortfall of 8% relative to the pre-recession trend, no signs of gathering inflation, and unemployment rates in the North Atlantic region that are at least three percentage points higher than any credible estimate of the sustainable rate.
And yet, even though politicians who fail to safeguard economic growth and high employment tend to lose the next election, leaders in Europe and the US are clamoring to enact policies that would reduce output and employment in the short run.
Am I missing something here?
I had thought that the fundamental issues in macroeconomics were settled in 1829.
Back then, even Jean-Baptiste Say no longer believed in Say’s Law of business-cycle frequencies.
He knew very well that a financial panic and excessive demand for financial assets could produce deficient demand for currently-produced commodities and for labor, and that while such a short-run breakdown of Say’s Law might be temporary, it was nonetheless highly destructive.
Armed with that insight, the disease of the business cycle should be addressed in one or more of three ways.
1. Don’t go there in the first place.
Avoid whatever it is – whether an external drain under the gold standard or a collapse of long-term wealth as with the collapse of the dot-com bubble or a panicked flight to safety as in 2007-2008 – that creates a shortage of, and excess demand for, financial assets.
2. If you fail to avoid the problem, then have the government step in and spend on currently produced goods and services in order to keep employment at its normal levels to offset private-sector spending cuts.
3. If you fail to avoid the problem, then have the government create and provide the financial assets that the private sector wants to hold in order to get the private sector to resume its spending on currently produced goods and services.
There are a great many subtleties to how a government should attempt to pursue each of these policy options.
Attempts to carry out one of the three may exclude or interfere with attempts to carry out the others.
And, if inflationary expectations become embedded in an economy, it may be impossible for any of the three cures to work.
But that is not our situation today.
Likewise, if the perceived creditworthiness of the government is shaken, then intervention from some outside lender of last resort might be essential for either the second or third cure to work.
But that, too, is not the situation today in the core economies of the North Atlantic.
Yet, somehow, all three of these cures are now off the table.
There is no likelihood of reforms of Wall Street and Canary Wharf aimed at diminishing the likelihood and severity of any future financial panic, and no likelihood of government intervention to restore the normal flow of risky finance through the banking system.
Nor is there any political pressure to expand or even extend the anemic government stimulus measures that have been undertaken.
Meanwhile, the European Central Bank is actively looking for ways to shrink the supply of financial assets that it provides to the private sector, and the US Federal Reserve is under pressure to do the same.
In both cases, it is claimed that further expansionary asset-provision policies run the risk of igniting inflation.
Yet no likelihood of inflation can be seen when tracking price indexes or financial-market readings of forecast expectations.
And no approaching government debt crisis in the core economies can be seen when tracking government interest rates.
Nevertheless, when you listen to the speeches of policymakers on both sides of the Atlantic, you hear presidents and prime ministers say things like: “Just as families and companies have had to be cautious about spending, government must tighten its belt as well.”
And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, and as a mainstream neoclassical economist.
Right now, the global economy is suffering a grand mal seizure of slack demand and high unemployment.
We know the cures.
Yet we seem determined to inflict further suffering on the patient.
Pakistan after Bhutto
The assassination of former Prime Minister Benazir Bhutto has brought Pakistan’s state of turmoil to new heights.
As head of the nation’s most popular political party, Bhutto largely transcended Pakistan’s ethnic and sectarian divides.
Her return from exile in October was seen as a step toward curbing the country’s dangerous fragmentation; her murder shatters those hopes.
President Pervez Musharraf must take immediate steps – most importantly, the formation of a national unity government – to prevent Pakistan from tearing apart at the seams.
In deciding that her People’s Party would participate in the January parliamentary election, Bhutto threw a lifeline to Musharraf, who has been beset by multiple insurgencies, a nationwide terrorist threat, and rock-bottom legitimacy.
Both Musharraf and his supporters in Washington hoped that mainstream parties’ participation in the election would end Pakistan’s governance crisis and provide popular support for a decisive confrontation with the Taliban and al-Qaeda.
Now, however, the election will likely be postponed.
Indeed, Musharraf might be compelled to impose emergency rule again, as he did in November, should Pakistan’s stability further deteriorate.
There are reports of violence in cities across Pakistan.
Karachi, a multi-ethnic metropolis, could erupt into full-scale chaos.
During the 1990’s, violence there between Bhutto’s party and a local ethnic party – now allied with Musharraf – took thousands of lives.
In these circumstances, a state of emergency could be warranted.
But, given Musharraf’s lack of legitimacy, such a move would further infuriate Bhutto’s supporters, whose street power Bhutto had contained since October.
This could set the stage for a violent confrontation between the Pakistani masses and Musharraf’s regime.
The nightmare scenario envisioned by many in Pakistan ­­– a nuclear-armed country actively targeted by al-Qaeda and the Taliban – could become a reality.
But this need not be a foregone conclusion.
Musharraf, who regularly claims to act on the basis of a “Pakistan first” policy, must now let go of partisan objectives and form a national unity government led by a prime minister from the opposition.
Any subsequent measures, including temporary imposition of emergency rule and full-scale war against the terrorists, require the complete support of the opposition parties.
Musharraf and his political allies cannot be seen as benefiting from Bhutto’s assassination; nor can they afford the perception of a cover-up.
His opponents must be incorporated into the decision-making process.
A national unity government must assume three major responsibilities.
First, it must establish an independent commission to determine who was responsible for Bhutto’s murder.
While political assassination is not unfamiliar – Pakistan’s first prime minister was killed in the same park where Bhutto was murdered – it is imperative that the culprits be apprehended and tried.
Anything short of this would permanently taint Pakistan’s leadership and impede all attempts at political reconciliation.
Second, it must take necessary measures to ensure public safety and political stability, while paving the way for free and fair elections.
It must offer Pakistan a consensual path toward winning back its tribal areas from the insurgents, end the wave of terror in its cities, and ensure the election of a new, legitimate government.
Finally, it must begin a dialogue with Musharraf and the military on a permanent, constitutional separation of powers.
If Bhutto had not been assassinated and, instead, successfully became prime minister, she would likely have clashed with Musharraf over his arbitrary empowerment of the presidency at the expense of the premiership.
The issue will not go away with Bhutto’s death.
Pakistan’s civil and military elite must create a broad consensus – perhaps with foreign assistance, but never with foreign meddling – on the constitutional roles of the prime minister, president, and the military.
Ravaged by endemic elite discord since its founding, Pakistan desperately needs an elite reconciliation that includes all of the country’s major stakeholders.
Otherwise, Pakistan’s terrorists, who feed off of political instability, will continue to gain, while the country’s poor and illiterate majority will continue to lose ground.
The murder of Benazir Bhutto need not result in the country’s demise.
Pakistan’s elite have an opportunity to overcome their differences, unite in opposition to militants, and transform their failing state into a stable and prosperous democracy.
If they succeed in bringing about a national renewal, Bhutto, a monumental political figure in Pakistani history, will not have died in vain.
Pakistan’s New Leaf?
NEW DELHI – As US Secretary of State, Hillary Clinton bluntly told Pakistan in 2011 that “you can’t keep snakes in your backyard and expect them only to bite your neighbors.” But her warning (“eventually those snakes are going to turn on” their keeper), like those of other American officials over the years, including presidents and CIA chiefs, went unheeded.
The snake-keeper’s deepening troubles were exemplified by the recent massacre of 132 schoolchildren in Peshawar by militants no longer under the control of Pakistan’s generals.
Such horror is the direct result of the systematic manner in which the Pakistani military establishment has reared jihadist militants since the 1980s as an instrument of state policy against India and Afghanistan.
By continuing to nurture terrorist proxies, the Pakistani military has enabled other militants to become entrenched in the country, making the culture of jihad pervasive.
The Peshawar massacre was not the first time that the world’s leading state sponsor of terrorism became a terror victim.
But the attack has underscored how the contradiction between battling one set of terror groups while shielding others for cross-border undertakings has hobbled the Pakistani state.
As a result, the question many are asking is whether, in the wake of the Peshawar killings, the Pakistani military, including its rogue Inter-Services Intelligence (ISI) agency, will be willing to break its ties with militant groups and dismantle the state-run terrorist infrastructure.
Unfortunately, developments in recent months, including in the aftermath of the Peshawar attack, offer little hope.
On the contrary, with the military back in de facto control, the civilian government led by Prime Minister Nawaz Sharif is in no position to shape developments.
And, despite the increasing blowback from state-aided militancy, the generals remain too wedded to sponsoring terrorist groups that are under United Nations sanctions – including Lashkar-e-Tayyiba (LeT) and the Haqqani network – to reverse course.
Reliance on jihadist terror has become part of the generals’ DNA.
Who can forget their repeated denial that they knew the whereabouts of Osama bin Laden before he was killed by US naval commandos in a 2011 raid on his safe house in the Pakistani garrison city of Abbottabad?
Recently, in an apparent slip, a senior civilian official – Sharif’s national security adviser, Sartaj Aziz – said that Pakistan should do nothing to stop militants who do not intend to harm Pakistan.
The nexus among military officers, jihadists, and hardline nationalists has created a nuclear-armed “Terroristan” that will most likely continue to threaten regional and global security.
State-reared terror groups and their splinter cells, some now operating autonomously, have morphed into a hydra.
Indeed, as the country’s civilian political institutions corrode, its nuclear arsenal, ominously, is becoming increasingly unsafe.
Pakistan is already a quasi-failed state.
Its anti-India identity is no longer sufficient to stem its mounting contradictions, which are most apparent in the two incarnations of the Taliban: the Afghan Taliban, which is the Pakistani military’s surrogate, and the Pakistani Taliban – formally known as Tehreek-e-Taliban Pakistan (TTP) – which is the military’s nemesis.
Pakistan also provides sanctuary to the Afghan Taliban’s chief, Mullah Mohammad Omar (and also harbors a well-known international fugitive, the Indian organized crime boss Dawood Ibrahim).
Meanwhile, Hafiz Saeed, the founder of the ISI’s largest surrogate terror organization, LeT, remains the generals’ darling, leading a public life that mocks America’s $10 million bounty on his head and the UN’s inclusion of him on a terrorist list.
Earlier this month, Pakistani authorities aided a large public rally by Saeed in Lahore, including by running special trains to ferry in participants, so that the architect of the November 2008 Mumbai terrorist attack (among many others) could project himself as some sort of messiah of the Pakistani people.
Yet none of that stopped Pakistan’s Chief of Army Staff, Raheel Sharif, and ISI Director-General Rizwan Akhter from rushing to Kabul after the Peshawar attack to demand that President Ashraf Ghani and the US-led military coalition extradite TTP chief Mullah Fazlullah or allow Pakistani forces to go in after him.
In other words, they seek the help of Afghanistan and the US to fight the Pakistani Taliban while unflinchingly aiding the Afghan Taliban, which has been killing Afghan and NATO troops.
Such is the generals’ Janus-faced approach to terrorism that six years after the Mumbai attacks, Pakistan has yet to try the seven Pakistani perpetrators in its custody.
Indeed, under the cover of indignation over the Peshawar attack, the leading suspect in the case – UN-designated terrorist Zaki-ur-Rehman Lakhvi, who served as LeT’s operations chief – secured bail.
International outrage soon forced Pakistan to place him in preventive detention for up to three months.
Those who believe that the Peshawar massacre might serve as a wakeup call to the Pakistani military should ask why the generals have ignored hundreds of earlier wakeup calls.
Despite the blowback imperiling Pakistan’s future, the generals show no sign that they have tired of running with the hare and hunting with the hounds.
The international community should stop placing its hope in some abrupt change of heart on the generals’ part.
Creating a moderate Pakistan at peace with itself can only be a long-term project, because it hinges on empowering a feeble civil society and, ultimately, reining in the military’s role in politics.
As long as the military, intelligence, and nuclear establishments remain unaccountable to the civilian government, Pakistan, the region, and the world will continue to be at risk from the jihadist snake pit that the country has become.
The Pakistani Nuclear Deal That Wasn’t
LAHORE – Recently, it came to light that the United States was attempting to negotiate with Pakistan a deal to constrain the Pakistanis’ fast-growing nuclear weapons program.
That sounds like good news: Any move toward non-proliferation seems like a positive step.
Unfortunately, in this case the effort has had some dangerous unintended consequences.
It all started last month, when US media reported that an agreement was already near completion.
First, David Ignatius of The Washington Post reported, on the basis of conversations with senior US officials, that agreement had already been reached on a number of steps Pakistan would take to reduce its dependence on nuclear weapons for deterrence.
A few days later, David Sanger of The New York Times confirmed.
Both accounts suggested that the agreement would be announced in a joint statement following the October 23 meeting in Washington, DC, between US President Barack Obama and Pakistani Prime Minister Nawaz Sharif.
But the reality is that those media reports were the beginning, not the end, of the process.
According to senior Pakistani officials – including Sartaj Aziz, a key adviser on foreign affairs and national security – there was no agreement in the works when the stories appeared.
Rather, it seemed that the US was using the media to put pressure on Pakistan’s government to respond more readily to America’s pleas to cap production of tactical weapons and the short-range missiles that could deliver them.
The reports put Pakistan’s political leaders in an awkward position.
They could not possibly succeed in convincing the country’s powerful military establishment to place constraints on the development of the country’s nuclear arsenal.
Indeed, the US effort merely widened the divide on security issues within Pakistani– a situation that serves no one’s interests.
Pakistan’s leaders were determined to turn attention back toward their country’s rapidly deteriorating relations with India, a challenge with which the US could help.
So when they received America’s draft of the statement to be issued after the Obama-Sharif meeting, and saw that it focused almost entirely on nuclear issues, it was decided that Aziz would head to Washington a day early to agree on revisions.
From Pakistan’s perspective, the draft statement seemed to be driven by the White House.
It seemed that “the office of the National Security Adviser wanted to add another ‘nuclear feather’ to Obama’s cap, following the successful negotiations with Iran,” Aziz speculated to me in a private conversation.
Believing that the US State Department was not “kept in the loop,” Aziz requested that, if he could not agree on the statement’s wording with the designated official, he could meet with Secretary of State John Kerry.
To be sure, the US government’s agenda would have some benefits for Pakistan.
The US would press the Nuclear Supplier Group to issue a waiver to Pakistan, as it has already done for India, so that Pakistan could import the technology, parts, and components needed to build nuclear power plants.
And, in fact, Pakistan needs to build about a half-dozen such plants – in addition to the two already being built by the Chinese near Karachi – to address its energy shortfall, which amounts to an estimated 5,000 megawatts annually.
With voters heading to the polls in early 2018, genuine progress toward resolving the energy crisis would presumably be good for Pakistan’s political leaders.
In exchange for this, however, Pakistan would have to limit the number of tactical nuclear weapons in its arsenal and cease development work on them.
Moreover, Pakistan would have to mothball the short-range “Nasr” missile, which has already been shown to be capable of delivering small nuclear weapons over a distance of 50-75 kilometers.
The US believed that shifting Pakistani leaders’ attention from nuclear-weapons development to power-plant construction would, in addition to bolstering efforts to close the energy gap, limit Pakistan’s dependence on China for nuclear technology and reduce the risk of an immensely destructive war in South Asia.
But these calculations failed to take into account Pakistani security considerations – in particular, the military’s renewed fears about India’s intentions.
For some time, senior military officials have been concentrating on rooting out terrorism at home, and they have scored some impressive successes.
But recent base-building activity by India near its border with Pakistan has been raising red flags in Islamabad.
According to a senior Pakistani military official, India, in pursuit of its “Cold Start” military doctrine, is constructing eight bases at which heavy armor would be stationed.
Developed after the 2001 attack on the Indian Parliament, the doctrine calls for Indian troops to move rapidly to occupy 300-500 square kilometers of Pakistani territory in the event of another terrorist attack.
The occupation would end only when Pakistan formally relinquished its claim to Kashmir and dismantled all terrorist training camps operating within its borders. “Tactical nuclear weapons,” the Pakistani military official explained, “will deter India from following through on this strategy.”
Against this background, the US should have known that trying to compel Pakistan to limit its nuclear-weapons capability would fail.
But it pushed anyway.
As a result, Pakistan’s reliance on China has been strengthened, not weakened.
And, instead of reducing the chances of a nuclear standoff in South Asia, the White House plan served only to distract attention from efforts to address tensions between India and Pakistan.
Ultimately, the Obama-Sharif statement did emphasize India-Pakistan relations, and made no reference to the nuclear issue.
Obama mentioned Kashmir as an unresolved issue, while pleading for stability in South Asian affairs.
According to Aziz, Pakistan was satisfied with the final statement.
Pakistan on the Precipice
ISLAMABAD – Pakistani President Asif Ali Zardari abruptly returned to Karachi on the morning of December 19, following a 13-day absence for medical treatment in Dubai, where he lived while in exile.
The government issued no a formal statement about Zadari’s health, but his supporters disclosed that he had suffered a mild stroke, which left him unconscious for several minutes.
Zardari’s sudden return fueled speculation about his future, but, more importantly, about the future of civilian rule in Pakistan.
His decision followed a three-hour meeting between Prime Minister Yusuf Raza Gilani and General Ashfaq Pervez Kayani, the Pakistani army’s chief of the army.
His choice of destination – Karachi, Pakistan’s largest city and his political base, rather than Islamabad, the county’s capital – suggests the depth of the crisis now bubbling below the surface.
Zardari has held power since 2008, having been elected eight months after the assassination of his wife, Benazir Bhutto.
Even after a constitutional amendment in 2010 made the prime minister the country’s chief executive, Zardari has continued to be the main decision-maker.
His political rise is thus in keeping with South Asia’s tradition of quasi-democratic dynastic politics: he assumed leadership of Bhutto’s Pakistan People’s Party (PPP) – founded in 1967 by her father, Zulfikar Ali Bhutto – and appointed his son Bilawal as the party’s co-chairperson, basing his decision on a handwritten will left by his wife.
To underscore the link, the son was renamed Bilawal Bhutto Zardari.
But, having deftly out-maneuvered his opponents for three years, Zardari seems to have misread the current political environment, for Pakistan is not the same country in which his wife and father-in-law wielded power.
By trying to play by the old rules, he committed several mistakes that may ultimately cost him his job and the Bhutto family its hold on power.
As many other Pakistani leaders have done before before him, Zardari has relied on American support to stay where he is.
This worked for some time, but an alleged attempt to involve the United States more openly in Pakistani politics weakened, rather than strengthened, his hold on power.
Indeed, while the Arab Spring ended the old corrupt bargain that kept so many autocratic rulers in power across the Muslim world, Zardari and his associates appear not to have received the message.
It was widely believed that Husain Haqqani, Pakistan’s ambassador to the US, had attempted to enlist America’s help in preventing yet another military coup.
An unsigned memorandum, believed to have been written at Haqqani’s suggestion, was sent to Admiral Mike Mullen, then Chairman of the US Joint Chiefs of Staff, seeking American help in exchange for fighting extremists in Pakistan’s tribal areas who were complicating America’s efforts to extract itself from Afghanistan.
What the lively Pakistani media dubbed “memogate” forced Haqqani to resign and enabled the Supreme Court to assert its authority by deciding to investigate the matter.
The court was already casting an eye at Zadari by examining the deal between former President Pervez Musharraf and Benazir Bhutto.
In exchange for the withdrawal of corruption cases against her, Zardari, and several of their friends and associates, Bhutto agreed to support Musharraf after the elections scheduled for December 2007.
The Bush administration, eager to have a democratically elected government in Pakistan to continue the fight against terrorism, was believed to have brokered the agreement.
That arrangement has now been struck down by the Supreme Court, which ordered the government to reopen corruption cases, including one in Switzerland, where Zardari is alleged to have parked tens of millions of dollars.
The government balked, and now the Court is working to ensure that the executive branch carries out its orders.
But Zardari’s decision to begin grooming his 23-year old son for power may have been his gravest mistake.
Zulfikar Ali Bhutto anointed his wife and daughter to be the PPP’s co-chairpersons in case he was executed by the military regime that had overthrown him.
Benazir Bhutto, in turn, placed control of the party in the hands of her husband and son.
But, this time, an awakened citizenry was not inclined to readily accept that political leadership could be passed on so easily from father to daughter, from wife to husband, from father to son.
Political change in Pakistan is assured, but it will come about in a way that cannot be foreseen.
The Arab Spring, America’s declining influence in the Muslim world, and citizens’ determination to be heard have combined to create an environment in which the unprecedented and the unpredictable are the only certainties.
Pakistan’s Black Revolution
SHANGHAI -- Immediately after taking office last month, Pakistani Prime Minister Yousuf Raza Gilani ordered the release of the 60 judges who had been detained by President Pervez Musharraf since November.
This is a triumph for the rule of law in Pakistan, and above all a triumph for the brave Pakistani lawyers who took to the streets to protest Musharraf’s imposition of a state of emergency last autumn.
The lawyers marched, sang, danced, and exchanged their briefcases for signs and, occasionally, eggs and stones.
As one Pakistani blogger wrote, “They danced in black coats and they danced in black ties.
Their black coats their Kalashnikovs and their black ties their bullets.” In a world of color revolutions, Pakistan’s was clothed in the sober hues of the law.
Last November, Musharraf effectively declared war on both the bar and the judiciary, dismissing all judges who refused to recognize his declaration of a state of emergency, purportedly aimed at protecting the nation from terrorists.
The seven-member Supreme Court, headed by Chief Justice Iftikar Mohammad Chaudhry, countered by issuing an order barring the government from proclaiming emergency rule.
Musharraf dissolved the Supreme Court and the four High Courts, put Chaudhry and his entire family under house arrest, sealed the Supreme Court premises under army guard, and proceeded to arrest and detain all judges who refused to swear allegiance to the Provisional Constitutional Order upholding the state of emergency.
The result was the detention of most of the senior judiciary, as well as bar association presidents across the country and all leading lawyers and human rights activists seeking to defend judicial independence.
In the ensuing protests, lawyers were routinely beaten, gassed, brutalized, and humiliated.
They stood with and for their judges, making it virtually impossible for judges willing to take Musharraf’s oath of allegiance to operate.
The lawyer’s movement, it seems, drove a historic wedge between the judiciary and the executive.
Yet in Pakistan, the United States, and other countries where lawyers have helped to lead fights for human rights and the rule of law, lofty ideals cloak an equally important set of interests.
The Pakistani lawyers were safeguarding their livelihoods as much as their principles.
Lawyers cannot practice without judges to hear their cases.
And clients will not bring those cases unless they believe that the judges are independent enough to decide cases on the merits, rather than on the basis of bribes or political considerations.
These interests also help explain why Kenya’s lawyers were at the forefront of protests against the corruption of President Daniel Arap Moi’s regime in the early 1990’s, but much less visible in the eruption of tribal violence this past year.
Corruption corrodes the possibility of making a living through the law, which becomes a preserve of the rich.
By contrast, in crises fueled by ethnic conflict, lawyers’ interests are not so clear.
Noting the convergence between ideals and interests does not in any way demean the Pakistani lawyers’ courage and the importance of their protests.
America’s founders, for instance, fully understood that the two must go hand in hand.
Their design for constitutional democracy ensured, in James Madison’s words, that ambition would counter ambition and “the interests of the man” would be “connected to the constitutional rights of the place.”
The best foundation for the rule of law is to build an island of legality wherever it is most needed to advance legitimate government goals – to stop corruption, to protect the environment, to clean up the financial system, or to enforce contracts with foreign investors.
Within these limited areas, independent judges and the lawyers who can argue before them have a home.
As these islands begin to form an archipelago, a legal class emerges, supported by the clients who need them.
And on the day that a judge finally crosses a political line, speaking constitutional truth to usurped power, the government’s refusal to comply threatens the interests and ideals of an articulate and motivated segment of society.
The coming weeks will reveal whether Pakistan’s new government has the courage and integrity not only to release the fired judges, but to restore them to the bench and perhaps to face their scrutiny down the road.
If it does, Pakistan’s lawyers will be able to return to the courtrooms, and Pakistani citizens will have another chance to make democracy work.
If they succeed, perhaps they should add a black border around the proud Islamic green of their flag – the black not of mourning, but of justice.
Pakistan’s Cruel Summer
LAHORE – July was one of the roughest months in Pakistan’s history.
The country’s establishment was blamed for duplicity in the American war effort in Afghanistan, backing both sides – the United States and the Taliban – at the same time.
There was considerable public anger in Pakistan at the way British Prime Minister David Cameron handled such suspicions, some of which was directed at President Asif Ali Zardari, who decided to proceed with a planned official visit to London despite Cameron’s harsh language.
Public anger at the charges coming from America and Britain about Pakistan’s Inter-Services Intelligence (ISI) increased as round-the-clock television coverage showed the devastation and suffering caused by floods in the country’s northwest, the worst in more than 80 years.
The military launched a major effort to help those affected.
Its commander, General Ashfaq Pervez Kayani, whose tenure in office was recently, and unusually, extended for an additional three years, was alone among Pakistan’s senior leaders in visiting the flood-affected areas and showing concern about the suffering.
And this was not the only crisis in which the military leadership seemed to be doing what the public thought was right.
The Wikileaks publication of raw US intelligence reports from Afghanistan confirmed what had long been suspected.
A number of field reports described contacts between the ISI and the Taliban, even as the ISI was engaged in fighting some the Taliban in Pakistan.
The records contained firsthand accounts of the anger felt by Americans at the ISI’s unwillingness to confront the insurgents, in particular those who were attacking US and NATO troops near the Pakistani border.
The ISI seemed to be keeping its lines of communications open to some Taliban in the hope that they could be used as a reserve force in case of another military confrontation with India or a precipitous American withdrawal from Afghanistan.
This theme of apparent Pakistani duplicity was picked up by Cameron.
In a speech delivered before an audience of Indian business leaders in Bangalore, he accused Pakistan of being on both sides of the Afghan equation.
Cameron’s remarks were deeply resented in Pakistan.
They left the impression that Britain was prepared to humiliate Pakistan publicly in order to curry favor with the Indians.
The strategy may work over the short term in winning export orders for British firms from India.
Indeed, the prime minister’s team won at least one major contract – for the sale of military aircraft worth more than a billion dollars.
But, over the long run, British behavior is likely to contribute to the worsening of Indian-Pakistani relations.
The Pakistani public demanded a quick, decisive rebuke of Britain from the country’s leadership.
It came from the military.
Lt. Gen. Ahmad Shuja Pasha, the head of the ISI, canceled his planned visit to London, where he was to discuss intelligence matters, while the civilian leadership seemed to dither.
After hesitating, Zardari arrived in London three days later.
Pakistan’s civilian government also seemed to be dropping the ball in the economic field, as poor management by the authorities was driving the country towards another crisis.
Partly because of the floods, which will shave off at least 1% from GDP, partly because of the administration’s inability and unwillingness to curb non-essential expenditures, and partly because of slowing export growth, Pakistan is once again facing serious fiscal and balance-of-payments problems.
This time, however, foreign help might not be as readily available as it was in, say, 2008.
The government anticipated 4.1% GDP growth in 2010-2011.
It will be lucky if it manages to achieve 2.8%, one half of that expected in Bangladesh and one-third of that projected for India.
Pakistan is now the sick man of South Asia, with three consecutive years of growth below 3% causing the number of people living in absolute poverty to increase by 10 million.
Much of this increase is occurring in large cities where discontent was already mounting in response to the government’s palpable failure to provide basic goods and services.
These deepening crises on several fronts – some attributed to poor governance – raise the question once again as to whether Pakistan can sustain its democracy.
The military’s high and positive profile seems to suggest that it is the only institution left in a tottering state that seems able to stabilize a delicate situation.
But will Pakistan’s military once more inject itself directly into the political arena, as it has done four times in the six decades since independence?
Or will the country’s civilian leaders mend their ways?
The difference between today and the periods that preceded other Pakistani coups is that an active civil society, an unconstrained electronic and print media, and an assertive judiciary may be able to keep the military in the barracks and force the politicians onto the right track.
Nevertheless, July was a cruel month for Pakistan, and more seem certain to follow.
Pakistan’s Iranian Shadow
As the future of both Pakistan and its president, Pervez Musharraf, wallow in uncertainty in the wake of Benazir Bhutto’s assassination, parallels are being drawn to the 1979 fall of the Shah and the Islamic Revolution in Iran.
Once again, a “pro-American” autocrat seems to be rapidly losing his grip on power, with his US ally only half-heartedly standing by him.
The liberal elite and intelligentsia rail against the dictator, confident that their country is primed for secular democracy.
The obvious lesson to be drawn from 1979 is that America unwisely rested its entire strategic relationship with Iran on the shoulders of an unpopular dictator.
When his regime crumbled, so did America’s ability to realize its interests there.
But the Iranian revolution holds another lesson for Pakistani liberals: obsessed with evicting the Shah, Iran’s intelligentsia was delusional about their own society and their potential to emerge victorious via an abrupt political upheaval.
Once the Shah left, the radical minority that was willing to fight and die for its cause devoured the “moderate majority,” establishing Islamist rule in short order.
To be sure, profound political and cultural distinctions exist between Iran in the 1970’s and contemporary Pakistan.
Iran lacked an independent judiciary, basic press freedoms, and civil society organizations.
Contemporary Pakistan has, to varying degrees, all of these.
More importantly, Iran’s Shia clerics were both organized and politically active in a way that Pakistan’s Sunni clergy have not been.
Indeed, Pakistan’s Islamist parties have never won more than 12% of the popular vote.
It would be wrong, however, to think that Pakistan is immune from the Muslim world’s Islamist undercurrents.
Around 40% of Pakistanis live below the poverty line, half the population is illiterate, and, among those who are literate, many have been schooled in Wahhabi-funded madrasas.
Various opinion polls consistently show that a sizable minority of Pakistanis has a favorable view of Osama bin Laden, an unfavorable view of the US, and believe that implementing Islamic law (Sharia) should be a priority.
A Pakistani intellectual once confessed to me, “I fear the weak electoral showings of Islamists in Pakistan has more to do with the fact that a compelling, charismatic Islamist leader – a Pakistani Hassan Nasrallah – has yet to emerge, not that his message wouldn't resonate.” Few Iranians had ever heard of Ayatollah Khomeini until 1978, but it didn’t take long for his message to electrify millions.
The army has always been the strongest bulwark in assuring that Pakistan does not go the way of Iran.
But while the officer corps may be steadfast defenders of secular rule, the rank and file reflects Pakistani society.
In the event of an Islamist political awakening, the army’s allegiances are not guaranteed.
In Iran, apart from senior commanders, who were either killed or fled the country, the Shah’s powerful, staunchly secular army switched sides to Khomeini’s revolutionary government virtually overnight.
This is not to suggest than an Islamist awakening in Pakistan is on the horizon, or that Pakistanis must choose between an unpopular autocrat or a Taliban-style government.
On the contrary, Pakistan’s liberals are brave to agitate for democracy, the rule of law, and accountability for Musharraf, whose presidency appears beyond rehabilitation.
But they should learn from Iran’s revolution that their means of agitating for political reform are relevant to the political ends they hope to achieve.
Emotions are raw in the aftermath of Bhutto’s death.
More than 50 people have been killed in riots, and both her party and that of former Prime Minister Nawaz Sharif are contemplating mass demonstrations to bring down Musharraf's government.
But the politics of rage, retribution, and rioting will not bring the kind of tranquil, pluralistic democracy that Bhutto envisioned.
The desire to exact revenge on Musharraf for stifling democracy and failing to provide Bhutto with sufficient security will only inflame a political atmosphere that Pakistani liberals seek to de-radicalize.
Not only in Iran, but also in Lebanon, Palestine, and Iraq, history has shown that Islamists thrive amid political chaos and violence.
Similarly in Pakistan, it is dangerous to bet that the country’s pro-democracy lawyers, intellectuals, and students will emerge victorious in the tumult and potential carnage of street politics.
As John Limbert, the erudite Iran scholar and retired US diplomat (taken hostage in Iran for 444 days) once reflected on the 1979 Iranian revolution, “Our liberal-minded Iranian friends proved to be helpless in political turmoil....[T]hey could write biting editorials,” but lacked the stomach to “throw acid, beat up opponents, organize street gangs...and engage in the brutality that wins” in political uprisings.
Pakistani liberals may be right that their country is invulnerable to an Islamist power grab.
But the costs are too high to be impulsive, and the storms of political Islam are difficult to forecast.
In 1978, Iran’s liberals were bent on removing the Shah by any means.
Instead of creating an atmosphere conducive to an Iranian Gandhi, they unwittingly helped usher into power Ayatollah Khomeini and a theocratic regime less tolerant than the one they helped unseat.
Three decades later, millions of chastened Iranians wish they could relive those heady days differently; their Pakistani counterparts would be wise to heed their hindsight.
Pakistan’s Moral-Hazard Economy
LAHORE – Hillary Clinton’s just-concluded visit to Islamabad – for the second session of the strategic dialogue that she and her Pakistani counterpart, Shah Mehmood Qureshi, launched in Washington earlier this year – brought some comfort to her hosts.
The United States promised to provide $500 million of funding for several “highly visible” projects in Pakistan.
This was to be part of the $1.5 billion allocated to Pakistan in legislation signed by President Barack Obama last year.
The day before Clinton arrived in Islamabad, the Friends of Democratic Pakistan met there.
An earlier meeting of the group was chaired by Obama on the sidelines of the United Nations General Assembly session in New York last year.
It was attended by then-Prime Minister Gordon Brown of Britain, the heads of the World Bank and the International Monetary Fund, and government ministers from several countries.
At the Islamabad meeting, the FDP agreed to provide finance for Pakistan’s energy-development program, and requested proposals from the Pakistanis for the development of other sectors considered vital for the economy.
A few days before that, President Asif Ali Zardari paid his fifth visit to Beijing since taking office in August 2008 – this one a state visit – and received pledges of support for developing nuclear power and constructing a railway line over the Karakoram mountain range, linking the two countries.
This would facilitate western China’s access to the sea, via the Pakistani port of Gwadar.
These promises and pledges underscore Islamabad’s growing dependence on foreign assistance, which is not surprising, given that Pakistan’s tax-to-GDP ratio has declined to less than 9%, the lowest among the 22 largest emerging economies.
They also suggest the continuance of a sort of moral-hazard approach to economic management that ensures foreign help whenever the country drives itself to the edge of an abyss.
Today, Pakistan is Asia’s worst-performing economy.
Its GDP growth rate of 3% is half that of Bangladesh and one-third that of India.
And, while there is a good chance that this latest infusion of foreign money will help the country to pull out of a deep economic crisis, it will simply be history repeating itself.
Pakistan does well when it receives large flows of foreign assistance, as in the 1960’s, during President Ayub Khan’s term in power, the 1980’s, when General Zia-ul-Haq ran the country, or the early 2000’s, when General Pervez Musharraf was in charge.
During these three periods of military rule, the country was able to align itself quickly with the US.
In the 1960’s, America wanted Pakistan to be on its side as it sought to contain the spread of communism in Asia.
In the 1980’s, the US wanted Pakistan to help it force the Soviet Union out of Afghanistan.
After the terrorist attacks of September 11, 2001, the US wanted Pakistan to help end Taliban rule in Afghanistan.
Now, for the first time, the US is providing large amounts of assistance to a democratic government.
Will this relationship help Pakistan get off the economic rollercoaster it has been riding for the last half-century?
To ensure that its economy’s performance is no longer dictated by the availability of foreign aid, Pakistan must undertake some fundamental restructuring.
If carried out by a representative government, such economic reforms have a better chance of being sustained.
On the other hand, there is no assurance that the right policies would be maintained if power once again passed to a military ruler.
The foreign governments that are currently engaging Pakistan should encourage its leaders to move forward on at least two related fronts: trade and better relations with India are crucial.
At independence more than 60 years ago, Pakistan had a larger trade-to-GDP ratio, owing in part to trade with India. That came to a sudden stop in 1949, as a result of the first of many trade wars that the two countries have fought.
Before 1949, India absorbed roughly 60% of Pakistan’s exports and accounted for 70% of its imports.
Nowadays, India accounts for less than 5% of Pakistan’s total trade turnover.
This is contrary to what would be predicted by the so-called gravity model of trade, which is based on both the size of the trading partner and its distance.
According to this model, China and India, not the US, should be Pakistan’s largest trading partners.
Thus, Pakistan should not devote so much of its energy to improving its access to the US textile market, as it now does.
Indeed, given competition from low-wage economies such as Bangladesh and Cambodia, Pakistan should abandon its focus on textiles altogether and expend much greater effort to develop its knowledge-based industries.
Another area of emphasis for donor dialogue with Pakistan is governance – not just reducing and controlling corruption, but also bringing policymaking closer to the people.
Long stretches of military rule, with its emphasis on command and control, has left policymaking in Pakistan highly centralized.
More power needs to be devolved to the provinces.
Today’s democratic government has taken a step in this direction by amending Pakistan’s constitution.
The country’s “friends” should encourage this effort, perhaps by requiring that the country’s provinces be given a voice in their dialogue with Zardari’s government.
Foreign donors must insist that Pakistan reform its economy in order to escape the moral hazard implied by continued dependence on aid flows.
But that outcome is much more likely if democracy flourishes throughout the country.
Pakistan’s Next Fight
NEW YORK – The terrorist sanctuary in the South Waziristan region of Pakistan’s tribal frontier with Afghanistan is coming apart.
It took a while for the Pakistani Army to move against the region’s rising violence and chaos, but its campaign in South Waziristan is making progress.
The campaign’s immediate impact consists in Pakistan’s determination to establish its authority in the area.
But the window for the military to fill the power vacuum will be open only briefly.
The terrorists have shown before that they can take a punch, strike back, and even rebuild their networks.
Indeed, even as the Pakistani Army launched operation Rah-e-Nijat (Path to Salvation) in October, a dozen devastating terrorist attacks in Pakistan’s major cities demonstrated the reach of the South Waziristan militants.
In a few instances, senior army and intelligence officers were targeted outside their homes in Islamabad, despite extensive security measures in and around the capital.
The October 11 attack on Army Headquarters in Rawalpindi was the most daring of all – and sent shudders across the military command, because the terrorists knew the layout of the military and security buildings.
But this inside knowledge also worked against the militants, because it demonstrated what was at stake for the country at large.
No large street protests against the military operation in South Waziristan have been reported from anywhere in Pakistan.
But success in South Waziristan is only the starting point for dealing with the problem.
Militant hubs are scattered throughout the sparsely-populated tribal areas, including the North Waziristan, Orakzai, and Mohmand regions.
Moreover, violent militancy has now spread into Pakistan proper.
Southern Punjab is seeing a rapid growth in the number of religious fanatics, and rooting out the problem there is much more challenging than acting in the Pashtun tribal areas.
Many militants in Punjab worked closely with the Pakistani intelligence services for years, and their infrastructure is dispersed and hidden in various towns and villages.
The Army, which recruits heavily in the Punjab, will not use force there in the way it is doing in the tribal areas.
Only a concerted law-enforcement effort, with the full support of the intelligence services, can succeed in the Pakistani heartland.
The deep security crisis in Pakistan is mirrored across the border in Afghanistan, which offers a model of what not to do.
The Afghan Taliban, removed from power and routed from the country by the end of 2001, needed only a few years to revive itself, owing to the failure of the Afghan government and its international backers to rebuild and stabilize the country.
A critical factor in the Taliban’s revival was the haven that it found in the distant reaches of the Pakistan-Afghanistan border, and the support that it continued to receive from elements within Pakistan.
This time, as the Afghan Taliban are expelled from Pakistan, NATO and Afghan forces must be ready to take them on.
Observing the fighting in Pakistan, the United States, Afghanistan, and India expect the Pakistani army to take on both the Afghan Taliban and the Pakistani militants.
But thousands of fighters are thought to be dispersed in the Pashtun tribal areas of Pakistan, with many of them focused on operations in Afghanistan.
The cross-border movement of radicals suggests the importance of international cooperation.
Moreover, alliances among radical groups are constantly shifting, a reflection of tribal traditions and opportunism.
Outsiders watching these shifts, and the Pakistani government’s handling of them, have been unable to discern a consistent pattern that would explain Pakistani policy.
But here, regional politics must be taken into account, especially the continuing rivalry between India and Pakistan.
At every stage of the lengthy conflict that has brought the US into the region, Pakistan has sought to limit Indian influence in Afghanistan.
Indeed, India’s growing influence and investment in Afghanistan is disturbing to Pakistan’s national security apparatus.
Ultimately, the dynamics of Afghan politics will determine Afghanistan’s fate.
But a collaborative India-Pakistan effort to stabilize the country could work wonders.
For both Pakistan and India, Afghanistan risks turning into a new disputed territory, like Kashmir, where conflict has damaged both countries for more than 60 years.
In Afghanistan today, they have an opportunity to reject that precedent and act on their mutual interest in stability.
Pakistan must be able to focus internally on its future.
Financially insolvent and politically paralyzed, Pakistan needs international help to bring development to its liberated tribal areas and hope to the young people – 65% of the population – who live there.
For India, stability in Pakistan and Afghanistan would ease its rise to global economic power.
Both countries should take advantage of the opportunity for cooperation provided by the Pakistani Army’s campaign against Waziristan’s militants.
Pakistan\u0027s War of All Against All
The alliance in the fight against terrorism between Pakistani President General Pervez Musharraf and the United States is imperative not only for America, but for Pakistan-a Muslim-majority nation whose social fabric is being torn apart by militancy and lawlessness.
But will an exclusive focus on military power ultimately prove to be counter-productive?
The Human Rights Commission of Pakistan, perhaps the country's most credible human rights body, argues that while "the violence now deeply embedded in society is to be rooted out over the coming years," that task "presents bigger challenges than merely picking up, detaining, and torturing those who authorities claim are militants."
In opposing how the war against Al-Qaeda and the Taliban is fought, many in Pakistan's minuscule middle class find themselves aligned with people they abhor: extremists whose distorted religiosity violates the tolerant version of Islam prevalent in this region.
Many upwardly mobile urbanites thus find themselves caught on the horns of a dilemma: how to reconcile aspirations for a better lifestyle, as symbolized by America, with increasing abhorrence of US policies.
Those on the religious right have no dilemma: they just hate America and its policies outright, and oppose all things "un-Islamic," including television, films, radio, and even indigenous forms of dance and music.
Interestingly, computer technology is exempted, as it can be used to further the extremist cause.
However, while Pakistan's progressives oppose militarism and violence in principle, religious fundamentalists have no compunction in resorting to violence to reinforce their point of view - thus posing a threat not just to General Musharraf, who has survived at least two assassination attempts, but also to human rights workers.
Indeed, the prominent feminist lawyer Asma Jahangir has 24-hour armed guards.
Militants have also attacked non-governmental organizations, particularly those located in the undeveloped tribal Northern Areas that lie beyond the writ of Pakistani law.
Sharing a mountainous - and porous - border with Afghanistan, this region includes many Taliban sympathizers among their fellow Pashtuns.
Human rights groups have long urged the necessity of extending the writ of Pakistan's Constitution to the tribal belt, where religion-based parties have wide support.
These religious parties, a coalition of which now heads the provincial government in the North West Frontier Province, were politically marginalized until given a central role by Pakistan's military dictator of the 1980's, General Zia ul Haq, who led Pakistan's covert intervention in the war against the Soviet occupation of Afghanistan.
Throughout his rule, religion-based politics grew along with the number of madrassahs and fighters trained and equipped by Pakistani and US intelligence agencies.
The terrorist attacks of September 11, 2001, and subsequent pressure from Washington, led to a U-turn by Pakistan away from pro-jihadi policies.
Today, many former officials associated with those policies, such as Mushahid Hussain, a former information minister, concede that Pakistan should have contained militancy long ago.
Cautious steps are being taken, like the review of religion-based laws and curricula that have contributed to a creeping talibanization of Pakistani society.
For human rights activists, it is ironic that an elected (but basically military-led) government that they oppose in principle should be undertaking reforms they have long advocated, but that elected civilian governments ignored.
Despite fierce opposition from religious parties, there have been minor victories, like a couple of madrassahs agreeing to include secular subjects like math, English, and computer studies in their curricula.
There has also been administrative action against a few religious institutions for encroaching on public space - practically unheard of since official patronage of religious parties began in the 1970's, when their cadres were needed in the war against the Soviets.
But the "war on terror" has also provided this government with an excuse to arrest and detain suspects without charge.
More heinous human rights violations have also come to light.
Qari Noor Mohammad, a religious activist in Faisalabad in Punjab province, was arrested recently and held without charge for several days before his corpse was dumped in front of his house.
The lack of transparency that surrounds Pakistan's fight against "terrorism" is contributing to a growing public sentiment against the anti-militancy drive, which is largely perceived to be taking place under US pressure.
Particularly contentious is the ongoing military operation in Wana district in the Northern Areas, which the Pakistani army has entered for the first time ever.
The army action in Wana, aimed against Al Qaeda and Taliban operatives who are believed to be hiding there, has led to several civilian casualties, including women and children, and rendered over 30,000 people homeless.
But human rights groups question how the five to six hundred Al-Qaeda operatives that the government claims were holed up in the area came to be based there in the first place.
Locals interviewed independently say that some of those captured are in fact innocent local people from Wana, not foreign militants.
Compared to his military predecessor, Musharraf, who touts the catch-phrase of "enlightened moderation," is conveniently progressive.
Whereas the devoutly religious Zia was useful for boosting religious Islamic sentiments against the Soviets, Musharraf is needed nowadays to contain those very forces, which threaten not just global security but Pakistan itself.
It remains to be seen, however, whether he will be progressive enough.
Pakistan’s War with Itself
LAHORE – Pakistan is now a nation caught between its army and the Taliban, fighting a war not of its own making.
Its population lives in fear of bombings and suicide attacks – the next one could be at the local mosque, an internet café, or a roadside restaurant.
Most Pakistanis are now resigned to full-scale army action being extended across the country.
Despite all the stakeholders – Pakistan’s army and government, as well as Western countries – knowing the scale of recent army action in Swat and Buner, millions of innocent people were left to fend for themselves as bombs rained down on them from the sky.
They were not evacuated. They were left to walk for miles and days to safety.
The United States and the Pakistani army, meanwhile, evidently believe that their sole responsibility is to keep the Taliban at bay.
Indeed, only when the mass of internally displaced people swelled to 1.5 million – the worst humanitarian disaster since the Rwanda genocide – did foreign countries, including the US, decided to provide emergency aid.
If the government of Pakistan and its friends do not accept that this human suffering was preventable, a chain of similar disasters will take place as army action heats up in Waziristan and other parts of the country.
The US administration is extremely concerned about the Taliban’s advances in Pakistan.
So are Pakistan’s people.
But the two have different sets of concerns – and herein lie their inherently different perceptions of the situation.
The US media and government focus their rhetoric on the possibility of Pakistan’s nuclear arsenal falling into Taliban hands.
The other obvious Western concern – recently expressed by British Prime Minister Gordon Brown – is the threat of a “crucible of terrorism” in the border areas of Afghanistan and Pakistan endangering world security.
Pakistanis, on the other hand, are the people actually living with that threat.
The Taliban have brought violence and terror.
The innumerable blasts and attacks all across the country, the killing of Benazir Bhutto, and the routine television images of splatters of blood covered with flies have wrecked their nerves.
Now the Taliban are blasting girls’ schools and flogging women.
This is not Pakistan.
Had it been Pakistan’s ethos, the Taliban in Swat wouldn’t have needed to blast schools – people would have happily pulled their daughters from the schools themselves.
Ordinary men and women in Swat believe in education, but the Taliban were terrorizing them out of exercising their legal and constitutional rights.
This illiterate, armed, Wahhabi brand of ideology was imported – as US Secretary of State Hillary Clinton admitted recently before House Appropriations Committee – by the US from Saudi Arabia and other Middle Eastern countries in order to undermine the Soviet occupation of Afghanistan in the 1980’s.
Once the mission was accomplished and the Soviets vanquished, the Wahhabi virus was left to fester in Pakistan’s border areas.
In the eight years of General Pervez Musharraf's dictatorship, the US and Pakistan’s army fought against the Taliban in Pakistan’s tribal regions.
Only occasionally was the fighting “officially” reported.
Access to the area was denied to independent media.
Many locally-based correspondents were killed in suspicious circumstances.
There was a simple reason why Musharraf was the Western media’s blue-eyed boy: he delivered.
He and the Pakistani army delivered many of the Al Qaeda members most wanted by the US – Khalid Sheikh Mohammed, Egyptians, Yemenis, Saudis, and so on.
For Pakistanis, however, Musharraf’s martial rule emasculated civil liberties, pressured media whenever he disagreed with editorial content, massively increased the intelligence service’s meddling in politics, and papered over the genuine grievances of disenfranchised people.
Eight years and many billions of dollars later, the Pakistani Taliban seized control of the Swat region, terrorizing the adjoining district of Buner and raising alarm and consternation through the rest of Pakistan.
Post-Musharraf Pakistan is a rather fragile democracy.
Even today, the government’s focus remains killing and bombing.
There is no genuine attempt at politically mainstreaming the troubled areas, no understanding of what democracy entails.
There is not even any money being spent on equipping hospitals in Peshawar and the rest of Pakistan with adequate blood banks and trauma units, despite the regular inflow of bombing victims.
The Pakistani army would rather be seen as the country’s savior than own up to its own shortsightedness and make clear whether it has decided to change course by obeying the constitution.
Meanwhile, many worries and concerns remain: Will the internally displaced be able to return home and – despite the countless hastily dug graves that scar their beautiful landscape – reconnect with their old lives?
Will the political parties finally realize that they must stop looking to the US and start being more responsive to their own people?
But the most important questions are these: Will the face of the enemy become clear?
Who is providing the Taliban with guns and money?
And will army shelling really end the war?
Palestine after Abbas?
RAMALLAH – A political leader’s decision not to seek re-election usually triggers fervent discussion about potential heirs.
Yet, President Mahmoud Abbas’s withdrawal from the presidential election scheduled for January 24, 2010, has produced nothing of the kind in Palestine – not because of a dearth of leadership or a reluctance to mention possible successors, but because the presidency of the Palestinian Authority has become irrelevant.
Abbas’s withdrawal comes at a time when Palestinian frustration with the political process has rendered suspect the entire rationale behind the PA, established in the mid-1990’s, following the Oslo Accords.
The main component of the PLO’s agreement with Israel was a five-year interim period during which negotiations were expected to lead to an independent Palestinian state alongside Israel.
Sixteen years later, it has become clear that the Israelis have made no effort to come to terms with Palestinian national aspirations – and that no effective effort has been made to convince them.
The number of illegal Jewish settlers in Palestinian areas has doubled, leaving Palestinians increasingly convinced that negotiations are a waste of time.
Many recall the preferred strategy of former Israeli Prime Minister Yitzhak Shamir: “I would have conducted negotiations on autonomy for ten years, and in the meantime we would have reached a half-million people in the West Bank.”
Initially, the five-year interim agreement called for the election of a Palestinian Legislative Council and an executive leader whom the Israelis wanted to call a “chairman,” spurning the word “president.”
Because Arabic makes no distinction between chairman and president, the Israelis accepted use of the Arabic word rayyes in the official English text.
Palestinian refugees in exile and other Palestinians living in the diaspora were not allowed to vote.
East Jerusalem Palestinians were allowed to vote only at the post office or at booths outside the city limits.
Abbas’s withdrawal merely confirms the obvious.
Another such election in the near future, including the one set for January, is unlikely to occur, mainly owing to the continuing rift between the PLO and Hamas, which controls Gaza.
Hamas participated in the 2006 legislative elections, which followed Israel’s military withdrawal from Gaza.
But for years Hamas and other radical Palestinian groups have rejected the Oslo process, on the grounds that free elections under Israeli occupation would be absurd.
Hamas has the power to stymie the vote and has indicated that it would do so.
Moreover, Abbas has not given up his positions as head of the PLO and leader of its biggest faction, Fatah, which remains in control in the West Bank.
Abbas cannot resign from his post for the foreseeable future, lest the Hamas-backed speaker of the Palestinian Legislative Council take over.
At the same time, no PLO official is likely to seek the presidency without Abbas’s approval, which he will withhold until a new mechanism for ending the occupation is found.
The PLO will likely gain much from Abbas’s decision, because it de-emphasizes the status of the PA president and raises the profile of his post as chairman of the PLO’s executive committee.
That shift, in turn, clears the way for a generational change in leadership – and, more importantly, a transition to post-Oslo politics.
The PLO’s old guard – men like Yasser Arafat and Abbas, who led the liberation organization from exile and returned home with the Oslo Accords – dominated the Palestinian political landscape up to now.
After they depart the scene, Palestinian leaders who were born under occupation and spent time in Israeli prisons will most likely fill the vacuum.
The most prominent such figure is Marwan Barghouti, the leader of the student movement at Birzeit University in the 1980’s and one of the main organizers of the First Intifada, resulting in his deportation by Israel in the late 1980’s.
In 2002, he was arrested and sentenced to a long prison term on charges that he led the Second Intifada, which had begun two years earlier, and ordered some of its military attacks.
Despite being imprisoned, Barghouti was recently elected to Fatah’s central council, and a number of others who spent time in Israeli prisons will join him.
One is Jibril Rajoub, imprisoned for 19 years and deported in the First Intifada, only to return to lead one of the security services after the PA was established.
Another is Mahmoud Dahlan, also an ex-prisoner and former security official, although the loss of Gaza to Hamas, for which many Palestinians hold him partly responsible, has dimmed his leadership prospects.
Finally, there is Nasser al-Qudwa, the former PLO representative at the United Nations.
Qudwa is a dark-horse candidate to succeed Abbas – a possible compromise figure who has never been directly involved in security or military activities. For many Palestinians, Qudwa, a soft-spoken, multi-lingual nationalist (and Arafat’s nephew), presents an acceptable face for Palestine locally and internationally.
The coming months will reveal whether we are, indeed, witnessing the dawn of the post-Oslo era in Palestinian politics, and whether a new leader, with new supporters, will be required to revive the Palestinian cause.
Whoever emerges on top will have to present an effective strategy to end four decades of military occupation and bring about a truly independent state that a majority of Palestinians can embrace.
Palestine as a Failed State
Every week, it seems, brings another backward step for Palestine.
President Mahmoud Abbas’s failure to convene the Palestinian Legislative Assembly, due to a Hamas boycott, may lead inexorably to the final breakdown of the political structures created under the Oslo Accords.
Sadly, this is only the latest chapter in the Palestinians’ tragic history of failed attempts to create a nation-state.
Palestinians see their history as one of struggle against Zionism and Israel.
But the reality is more complicated, and marked by repeated failures to create a coherent body politic, even when historical opportunities beckoned.
Perhaps the first failure occurred in the 1920’s, when the British Mandatory government in Palestine encouraged the two national communities – Jewish and Arab – to establish communal institutions of self-government to look after education, welfare, housing, and local administration.
The Jews – then less than 20% of British Palestine’s population – set up what became known as the National Committee (Va’ad Leumi), based on an elected body, the Representative Assembly of Palestinian Jews.
Regular elections to this Assembly took place, sometimes with more than a dozen parties competing.
This autonomous institution became the forerunner of the political structure of the nascent Jewish state, and its leaders – David Ben-Gurion among them – emerged as Israel’s future political elite.
Israel succeeded as a nation, with a vibrant and sometimes obstreperous parliamentary life, precisely because its leaders used this opportunity.
The Palestinians, however, never created similar embryonic state structures: an Arab Higher Committee was established, made up of regional and tribal notables, but no elections ever took place.
The Mufti of Jerusalem, Haj Amin al-Husseini (later an ally of Nazi Germany), became its chairman, but it never succeeded in creating a generally accepted national leadership or in providing the Arab community the panoply of educational and welfare services offered to the Jewish community by its elected institutions.
The second failure occurred during the Arab Revolt against British rule in Palestine in 1936-1939, which was accompanied by massive terror attacks against Jewish civilians.
The revolt itself was brutally suppressed by the British army, but not before a split within the Palestinian community resulted in two armed militias – one based on the Husseini clan, the other on the more moderate Nashashibis – that turned viciously on each other.
More Palestinians were killed by contending militias than by the British army or the Jewish self-defense forces.
The third failure – even more tragic – occurred in 1947-48, when Palestinian Arabs rejected the United Nations partition plan, which envisaged separate Arab and Jewish states after the departure of the British.
While Jews accepted this compromise, the Palestinian Arabs, supported by the Arab League countries, rejected it and went to war against the emerging State of Israel.
The Palestinian Arab defeat in this endeavor, and the resulting refugee problem, is a defining moment for Palestinians.
But what sometimes gets lost in this narrative is that, while practically all sectors of Palestinian Arab society rejected the UN plan, Palestinians were unable to devise coherent political institutions and a unified military command with which to confront the much smaller Jewish community.
By contrast, the besieged Jewish community, under David Ben-Gurion and the Jewish self-defense force (the Hagannah) was able to mobilize, through its democratic institutions and with only marginal dissent, the resources needed for a successful military campaign.
Indeed, many Palestinian political leaders absconded to Beirut or Cairo once violence broke out.
The Husseini clan set up its militia in the Jerusalem area.
Near Tel Aviv, in adjoining Jaffa, a competing militia under Hassan Salameh, took control.
In the north of the country, a Syrian-based militia, under Fawzi al-Kaukji, attacked Jewish villages.
The more moderate Haifa Arabs tried, not very successfully, to stay out of the fray.
Disunity made the Arab defeat almost inevitable.
Moreover, the scars of the 1930’s virtual civil war have still not healed: mutual suspicion and memories of internecine massacres vitiated cooperation and trust.
The last failure occurred when the 1993 Oslo Accords between Israel and the PLO set up the autonomous Palestinian Authority under Yasser Arafat.
Instead of creating the infrastructure of the future Palestinian state, with various functions slowly transferred from the Israeli army to the Palestinian Authority, Arafat created a mukhabarat (security services) state, as in Egypt, Syria, and (until Saddam Hussein’s fall) in Iraq.
Arafat and his Fatah-based supporters established almost a dozen competing security services – sometimes indistinguishable from clan-based militias – which consumed more than 60% the Palestinian Authority’s budget, at the expense of education, housing, welfare, and refugee rehabilitation.
Into this vacuum burst Hamas, with its network of schools, welfare services, community centers, and support organizations.
The Hamas takeover of Gaza was but the latest step in this development.
It is easy to blame the current Palestinian crisis on individuals – be it Arafat or Abbas.
It is even easier to blame the Israeli occupation or American policies.
To be sure, there is a lot of blame to go around. But all national movements – the Greek as well as the Polish, the Jewish as well as the Kurdish – begin in adversity.
The Palestinians have a difficult history – one of internal disunity and murderous internecine conflict – to overcome.
They now stand again at a crossroads, and whether they will be able to transcend their tragic heritage depends on them.
No one can help them if they cannot come up with a coherent, consensual, and reasonably united leadership – what Abbas himself calls “one law, one authority, one gun.”
Palestine’s House Divided
President George W. Bush’s call for a new peace conference for Israel, Palestine, and neighboring states that back a two-state solution is a welcome, if very tardy, development.
But efforts to re-start the peace process now confront a stark new reality: two mutually hostile Palestinian entities in Hamas-ruled Gaza and the Fatah-led West Bank must now be factored into the process.
The Hamas/Fatah face-off marks a dramatic shift in Palestinian politics, whose top priorities until now has been an end to the Israeli occupation and the establishment of an independent state.
It also tremendously complicates peace negotiations, which both the Palestinians and the “Quartet” (the United States, the European Union, the United Nations, and Russia) had premised on maintaining the Gaza Strip and the West Bank as a single territorial unit.
Ironically, these territories were reunited by Israel’s victory in the 1967 war, after 19 years of separation.
Previously, Egypt had ruled in Gaza, while Jordan annexed the West Bank.
Under Israel’s occupation, and then with the establishment of the Palestinian Authority (PA) in 1994, the territories remained separated geographically, but not politically.
The Hamas takeover in Gaza has – at least for now – ended that political unification.
Palestinian President Mahmoud Abbas has now set his conditions for dialogue.
Hamas must withdraw its armed men from all security headquarters they occupied, return power to the legitimate authority, and apologize to the Palestinian people.
Although internal division harms Palestinians’ national interest, it is unlikely amid mutual accusations and incitements that dialogue between Fatah and Hamas will be conducted soon.
But the fear that is most consuming Abbas and Fatah is that the conflict with Hamas might spread to the West Bank.
To avoid such a scenario, Abbas has banned all militias and military groups in the West Bank, including his Fatah Party’s al-Aqsa Martyrs Brigades.
Abbas has succeeded in convincing Israel to grant amnesty to many Fatah fugitives in the West Bank who will join his security apparatuses.
Abbas has also asked Israel to allow the PLO’s Badr Brigade, currently stationed in Jordan, to enter the West Bank.
That would give Abbas an additional 3,000 well-equipped and trained troops.
Following King Abdullah II of Jordan’s intervention, Israel appears to have agreed to allow the Badr Brigade’s entry with full arms and ammunition.
If Fatah is to become a viable partner for peace and regain its grassroots support, it must reform itself and end the widespread corruption that has undermined its reputation.
Abbas must also share power with more disciplined, younger leaders.
Israel can help Abbas by releasing senior Fatah leader Marwan Barghouti, who is currently serving five life sentences in an Israeli prison.
Owing to his influence with the Fatah militias, Barghouti’s release could help Abbas and the discredited Fatah leadership, and boost the younger generation of Fatah leaders.
Israel is divided on how to deal with Hamas, which will also complicate the start of peace talks.
Some Israelis argue that Hamas should be encouraged to establish order in Gaza and provide assurances to its neighbors.
If Hamas can establish order inside Gaza, prevent violence against Israel, and stop missile attacks against Israeli towns and villages, it might avoid Israeli military intervention.
But the dominant view in Israel is that Hamas is a direct threat, unwilling to stop attacks on Israel.
For Israel, last summer’s fight with Hezbollah in Lebanon demonstrated the risks of allowing radical Islamists to consolidate their power on Israel’s border.
Sooner or later, Israel is likely to deal with Hamas militarily, perhaps even by re-occupying Gaza.
One reason neighboring countries may take part in peace talks is that Egypt and Jordan fear that Hamas could begin actively to support these countries’ own Islamic opposition groups.
Moreover, Egypt, Jordan, and Saudi Arabia – the three main Sunni Muslim regimes – are concerned that Gaza could provide a base for their regional non-Arab foe, Shiite Iran.
Their fear is based on Iranian support for Islamist groups – Sunni and Shiite – in Iraq, Lebanon, and Palestine, as well as its ongoing relationship with Syria.
If the Hamas-Fatah split brings about another territorial partition, Palestinians’ national aspirations will suffer their gravest setback in the last half-century.
Although the overwhelming majority of Palestinians reject the use of force to settle this power struggle, many welcome the change in Gaza, where Hamas has cleared the streets of armed militias and restored some law and order.
The Palestinians confront a harsh reality.
Whatever actions are taken to confront Hamas will undermine the Palestinian national project. A house divided against itself cannot stand, said Abraham Lincoln.
And a Palestine divided against itself will never secure its independence.
Palestine’s Moment of Decision
NOT TO BE PUBLISHED BEFORE JANUARY 10
The victory of Mahmoud Abbas in the Palestinian presidential election poses a huge challenge to the Palestinian leadership.
By being voted chairman of the PLO’s executive committee hours after the death of Yasser Arafat, Abbas clinched the support of the organization that represents all Palestinians, including those in the diaspora.
Popular election as President of the Palestinian National Authority gives Abbas the grassroots legitimacy to carry out his political program.
That program, while similar to Arafat’s, differs in key ways.
Abbas (also known as Abu Mazen) has been publicly and consistently critical of what he calls the “militarization of the intifada.”
Even before Arafat’s death, Abbas argued that the use of force by militants weakens the Palestinian negotiating position.
He stuck to this position throughout his electoral campaign, refusing the demands of hard-line Palestinian factions that he apologize for his previous statements.
Abbas conducts himself in a business-like manner, and he strongly believes in the rule of law and in the need for real civilian governance to assume preeminence in Palestinian politics.
In this he also differs from Arafat, who believed that the revolutionary mindset must continue so as long as Palestinians lived under an illegal foreign occupation.
Until liberation, there could be no business as usual.
By winning election on a clear anti-violence and pro-rule of law platform, Abbas has the mandate and the responsibility to carry out this policy.
He needs to make it clear to every armed Palestinian that there will be no tolerance for any unofficial group carrying arms or conducting military attacks from Palestinian territory.
In order to preserve national unity, Abbas will obviously need to use all his persuasive skills to convince radical groups (some in his own Fatah movement) to respect that approach.
As chairman of the PLO, he will be under extreme pressure not to delegitimize the internationally sanctioned acts of resistance against Israeli military targets.
In order to counter that pressure, he will have to show that a cessation of violence is in the higher interest of Palestinians.
Abbas will find it equally challenging to apply rule-of-law principles to a traumatized community that is reeling after nearly five years of violence, oppression, and draconian travel restrictions imposed by the Israelis.
As in the issue of the militarization of the intifada, this is not a simple matter, as it concerns forces outside the control of Abbas and his government.
Nevertheless, internal policies will be of grave importance.
The day-to-day lives – and livelihoods – of Palestinians need immediate improvement.
The Israeli-built wall to the west of the West Bank means that Palestinian unemployment will continue to rise and living standards will continue to drop.
To counter this, Abbas will have to seek external Arab and international support.
The real need is to encourage investment, primarily from Palestinians and Arabs.
But this is unlikely without major legal and administrative reforms, and, more generally, good governance and ironclad application of the rule of law.
The key to establishing civil order is peace.
No matter how persuasive Abbas is in convincing radical groups to put down their arms, a unilateral ceasefire will not last long if it is not mutual.
The role of the Israeli occupation forces will thus be crucial in determining the success of Abbas’s daunting mission.
Indeed, the task that Abbas faces will become impossible if the Israeli policy of “targeted killings” is allowed to continue while Palestinian leaders are working seriously to put an end to acts of violence against Israelis.
Ultimately, the main agenda for the new Palestinian president in negotiations with Israel will be to push the Israelis to make good on their repeated international assurances that a viable contiguous Palestinian state is a realistic goal in the near future.
But if left to Israelis and Palestinians alone, the goal of Palestinian independence within the 1967 borders of Palestine will most likely remain out of reach.
The international community, lead by the United States, must invest effort and political capital to realize this goal.
The new Palestinian president faces a challenging agenda and high popular expectations.
Much will depend on how Abbas handles himself and how he governs.
But the ultimate question is what Israel and the international community will do if Abbas fulfills his pledge to end anti-Israeli violence and apply the rule of law in a functioning democracy.
Palestinians have chosen; now the world must do so as well.
Palestine’s State of Mind
RAMALLAH – The idea of Palestine becoming a permanent member of the United Nations originated, say Palestinians, with none other than US President Barack Obama.
Speaking at the UN General Assembly on September 23, 2010, Obama said that he hoped that “when we come back here next year, we can have an agreement that will lead to a new member of the United Nations – an independent, sovereign state of Palestine, living in peace with Israel.”
Palestinians decided to take Obama at his word.
Obama’s&#160;efforts to rekindle the Middle East peace process&#160;began with Israel’s refusal to carry out a&#160;temporary settlement freeze.
The United States was even willing to offer a $3 billion arms deal to Israel in return for&#160;the suspension of building Jewish-only settlements in areas earmarked for the Palestinian state.
But Israel’s prime minister, Binyamin Netanyahu,&#160;rejected the US offer.
Nine months later, Obama made another effort to kick-start the talks.
“The borders of Israel and Palestine should be based on the 1967 lines with mutually agreed swaps, so that secure and recognized borders are established for both states,”&#160;he said in&#160;May.
Once again, Palestinians accepted Obama’s formula, while Netanyahu publicly rejected it, leaving Palestinians with no other nonviolent alternative but to go to the UN to seek a state&#160;based on the 1967 borders.
In 1967, it should be recalled, Israel occupied the remainder of historic Palestine and other Arab territories following the June War.
Shortly after the war, the UN Security Council declared in the preamble to Resolution 242 that “it is inadmissible to occupy land by force.”
This is not the first time that the UN&#160;has been called upon to arbitrate the intractable Middle East conflict; nor have only Palestinians approached.
Back in 1947, when the UN&#160;General Assembly voted to partition the British Mandate of Palestine into a Jewish state and an Arab state, Jews of the British Mandatory state of Palestine danced in the streets of Tel Aviv.
Today’s Israelis are rejecting recognition of Palestinian statehood on a much smaller territory than that assigned to Arabs by the original partition.
In more recent history, since 1991’s Madrid Conference, direct talks between Israelis and Palestinians have taken place in various formats.
Palestinians made one compromise after another, hoping that partial agreements would lead to statehood.
The 1993 Oslo accords set in motion a peace process that was&#160;supposed to last five years, with the end goal being an independent Palestinian state and a safe, secure, and recognized Israel.
But the peace process&#160;exposed a permanent inability to agree on anything of real substance.
Worse, direct talks have not only failed to produce the desired results; their continuation has also helped to mask widespread construction of Israeli colonies on Palestinian territory.
Palestinian lands continue to be confiscated, Jewish-only settlements continue to be built, and Israel’s so-called “security wall” has strangled the Palestinians socially and economically.
The International Court of Justice at The Hague has ruled that the wall built inside Palestinian territory is illegal under international law, yet nothing has been done to enforce that ruling.
Mahmoud Abbas, the chairman of the PLO and President of the Palestinian Authority, who has vowed not to run for re-election, has chosen to&#160;take the path of UN recognition&#160;rather than continue&#160;with the charade of useless – indeed, harmful – direct talks.
And, clearly, that change in tactics has hit a raw nerve with Israelis and frustrated the US.
Few Palestinians see anything wrong with the move, although many are not certain that it will produce much&#160;in the way of immediate and tangible results.
Nonetheless, the Palestinian public is pleased for now with a leadership that has found the backbone to stand up to pressure from Israel and the US.
This will certainly help Abbas in the short term.
But if the UN move does not&#160;bear fruit within a reasonable timeframe, the public might turn against its political leaders – as well as against the Israeli occupiers.
So what, exactly, is Abbas hoping to achieve?
The UN General Assembly, unlike the Security Council, cannot declare a state, and the US has vowed to veto any Security Council resolution that recognizes Palestine’s independence.
But, if two-thirds of its members agree, the General Assembly can recognize Palestine as a state with observer status, similar to the Vatican.
At that point, the international community would be obliged to begin acting against any party that was denying Palestine the right to behave as a fully functional and sovereign state.
Moreover, as a state (even with observer status), Palestine could seek legal relief from the International Court of Justice.
It might also try, within the General Assembly, to invoke the rarely used Uniting for Peace resolution (the last time was against South Africa’s apartheid regime).
Palestinians’ desire to obtain a UN vote on statehood (in whatever form) does not mean that they cannot have direct negotiations with Israel.
Palestinian spokesmen, including Abbas, have said that they see no reason why representatives of the newly recognized state cannot negotiate with representatives of Israel.&#160;If the UN vote succeeds, however,&#160;it will not be a people talking with their occupiers, but two states negotiating about how to manage their relations in peace and harmony.
Palestine Stands Up
JERUSALEM – Although the crisis over Israel’s naval interventions to defend its blockade of Gaza is gaining all the headlines around the world, something of far more historic importance is taking place in the Middle East.
The Palestine National Authority is preparing to issue a unilateral declaration of independence, and it is taking concrete steps on the ground to make any such declaration viable.
When US President Barack Obama appointed former Senator George Mitchell as his special envoy for Middle East peace negotiations, Mitchell’s mandate was to achieve within two years not only an agreement between Israel and the Palestinians, but also overall peace between the Jewish state and the whole Arab world.
But, after 15 months on the job, and innumerable visits to the region, all Mitchell has to show for his efforts is an agreement between Israel and the Palestinian Authority to start indirect “proximity talks” – which it is hoped will lead to direct talks in due course.
When one bears in mind that both sides have been negotiating directly for 15 years, Mitchell’s achievement appears even more minuscule.
Under such circumstances, calling Mitchell’s work up to now a failure is the only polite – and realistic – thing to do.
It is as easy to blame Israeli Prime Minister Binyamin Netanyahu’s intransigence – his enforcement of the Gaza blockade, for example – as it is to point out that the Palestinian Authority does not control Hamas-ruled Gaza, with its 1.2 million inhabitants, leaving it in no position to speak authoritatively for Palestinians.
As a result, one thing that both Israelis and Palestinians agree on is that the proximity talks will most likely lead nowhere, so both sides are currently busy ensuring that the other side will be blamed for the failure.
On too many issues – borders, settlements, refugees, Jerusalem – the gaps between the two sides are too deep to be easily bridged.
In these circumstances, an idea recently raised – tentatively but courageously – by Palestinian Prime Minister Salam Fayyad should be eagerly welcomed.
It may or may not fly, but it is arrestingly novel: if negotiations fail – so Fayyad says – sometime in 2011 the Palestinians should declare independence unilaterally.
This may be a real game changer.
Obviously, it would not resolve the conflict; it might not even immediately change the situation on the ground.
Indeed, it could even precipitate some unforeseen Israeli countermeasures.
But it would certainly mean a paradigm shift for a conflict in which everyone has been treading water for almost two decades.
If the Palestinians declared independence unilaterally, and if, as is expected, some sort of recognition by at least some states followed, the contours of the Israeli-Palestinian conflict would change dramatically.
Indeed, the conflict would become, if one can use the expression, more “normal” – no longer between an occupying power and an occupied people, but between two countries, two states, that disagree about a lot of issues, including borders, mutual relations, and control over populations.
In a way, a unilateral declaration of independence would make the Israeli-Palestinian conflict a bit more like the Israeli-Syrian conflict – an inter-state conflict.
It might even force Israel to make decisions that until now it found easier to avoid.
Such a declaration would also be an enormous act of self-empowerment for the Palestinians.
Until now, they have failed abysmally in institutional nation-building, a necessary requirement for any successful national movement.
Palestinian nationalism is deeply ingrained in the consciousness of most Palestinians – yet, since 1948, when the United Nations proposed partitioning British Palestine into two states, a Jewish and an Arab one, it has failed to move from ideology towards reality.
Neither violence nor terrorism nor relying on outside powers (the UN, the Arab League, the Soviet Union, the US, the European Union) succeeded in delivering statehood, which a people can achieve only by its own agency – what Zionist ideology calls “auto-emancipation.”
Fayyad is the first Palestinian leader who did not emerge from the Fatah movement, and he may thus understand what other Palestinian leaders failed to comprehend, mired as they were in a toxic combination of self-righteous ideology and violence.
It may just be that the Palestinians are on the verge of a new chapter in their history – and in the history of Israel and the whole region as well.
Palestine’s War of Generations
Yasir Arafat may be dead, but his Machiavellian strategies linger.
Ever protective of his position as sole leader of the Palestinian people, Arafat sought to block any means by which a potential rival could challenge him.
But in protecting his position, Arafat also blocked the appointment of a successor in his lifetime.
In the first weeks after Arafat’s death, that seemed not to matter.
Mahmoud Abbas, Arafat’s longtime deputy and the architect of the Oslo accords, quickly secured the backing of Fatah, the PLO’s core body.
A seamless transition appeared possible.
But now Marwan Barghouti, Fatah’s leader in the West Bank during the current Intifada, has decided to contest Abbas for the presidency of the Palestinian Authority (PA) from his Israeli jail cell.
Facing economic stagnation and what Palestinian Authority Prime Minister Ahmed Qurei calls “the anarchy of weapons,” a succession struggle is the last thing Palestinians need.
Any new leader must spur the economy, enforce the rule of law, fight corruption, unify the PA’s security agencies, and preserve public safety – and he must do so quickly or lose authority.
Abbas (also known as Abu Mazen) represents the Old Guard of Palestinian politics.
But the Young Guard – those who led the first Intifada (1987-1993), as well as those making their names in the current Intifada – want a share of power.
Abbas will thus need to find support within this rising generation of nationalist leaders if he is to succeed.
Resolving this generational struggle peacefully will require democratic elections within Fatah for membership of both the Revolutionary Council and the Central Committee.
The Sixth Fatah Congress, the first in sixteen years, will take place in August 2005 and will seek to reconcile the conflict between the Old and Young Guard.
Unlike Arafat and his fellow exiles, Barghouti, the most prominent leader among the Young Guard, grew up under Israeli occupation, and was arrested and detained several times.
Barghouti’s popularity also stems from his refusal from the beginning to take any office in Arafat’s corrupt PA and its institutions.
Although he was elected to the Palestinian Legislative Council in 1996, Barghouti’s reputation soared when the current Intifada began in September 2000.
His support for attacks against Israeli soldiers and settlers in the occupied territories, which he argues is legitimate under international law, has earned him immense popularity among Palestinians, but also a sentence of five life terms plus 40 years in an Israeli prison.
Whether he can be released from prison is now a source of intense speculation.
But Barghouti has begun speaking out from his jail cell on the political situation, and his presence is growing.
His decision to challenge Abbas means that the “secular” forces within the Palestinian movement may be divided at a time when rivals with a robust Islamic agenda – principally Hamas and Islamic Jihad – are challenging them.
Both Hamas and Islamic Jihad are highly disciplined organizations, exercising tight control over their political and military wings.
Although Hamas has been weakened by Israel’s targeted assassinations of Sheik Ahmad Yassin and Abdel-Aziz Rantisi, it retains strong military capabilities and popular support ranging between 25-30%, making it the second leading faction in the West Bank and Gaza.
Hamas has declared that it will not nominate its own candidate for the PA presidency.
Hassan Yusuf, a Hamas leader who was recently released from an Israeli jail after 28 months of administrative internment, explained to Al-Jazeera that “if Hamas assumed the leadership at this time, it would be vilified and isolated by the international community, and then the people would suffer.”
Although Hamas is boycotting the election, many Hamas sympathizers will vote for the candidate most committed to defending the Palestinians’ core demands.
Here Hamas members are simply reiterating Arafat’s views, which will continue to limit the concessions any new leader can make.
Arafat set forth a blueprint including an independent Palestinian state in the West Bank and Gaza, with East Jerusalem as its capital, and a fair and just solution to the refugee problem.
Changing leaders will in no way alter these conditions for making peace.
So the question is this: who will Palestinians, in particular the Hamas constituency, think is better able to secure these goals, Abbas or Barghouti?
That answer will most likely determine who will be the PA’s next leader.
But in the end, Israel will also have to make a choice, because peace will require Israeli concessions, not just compromises from the Palestinians.
Israel must freeze its settlement activity in the West Bank and stop constructing its barrier wall on Palestinian territories.
Israel must also free Palestinian prisoners, remove all checkpoints between Palestinian villages and town, and redeploy its forces to positions held prior to September 28, 2000, in accordance with phase I of the Road Map.
Either Abbas or Barghouti would certainly meet such a demonstration of good faith with good faith of his own.
Palestinian Hopes for Barack Obama
RAMALLAH – President-elect Barack Obama’s defiantly positive campaign for change has inspired hope not only in the millions of Americans who voted for him, but also in the billions of others worldwide who could not.
Across the Middle East, as elsewhere, expectations are building that his presidency will herald a new era for America’s role in the world.
Palestinians identify strongly with the civil rights movement in the United States.
Many recall the dark days when American society enforced racial segregation.
That the same society elected an African-American president only a few decades later renews Palestinian hopes that, in our ongoing struggle for justice and freedom, we, too, shall overcome.
Obama’s electoral triumph arrives at a symbolic moment in Palestinian history.
This month marks the twentieth anniversary of the Palestinian Declaration of Independence.
Drafted by the poetic hand of my late friend, Mahmoud Darwish, the text is nothing short of visionary.
Whereas previously the Palestine Liberation Organization (PLO) had campaigned for a single, secular, and democratic state across the entirety of mandatory Palestine, our Declaration of Independence endorsed a two-state solution.
The depth of this compromise can be fully appreciated only in its historical context.
In the war and violence that surrounded Israel’s establishment in 1948, our losses were immense.
Over 726,000 Palestinian Christians and Muslims – the majority of the Arab population of mandatory Palestine – fled or were forced to leave their homes by Zionist militias.
Over 400 Palestinian villages in what became Israel were destroyed or depopulated.
Endorsing a two-state solution meant recognizing Israeli sovereignty over 78% of our homeland and exercising our right to self-determination on only the remaining 22% that Israel has occupied militarily since 1967: the West Bank, including East Jerusalem, and the Gaza Strip.
Yet we made this historic compromise because we believed that doing so would bring us to the threshold of liberty.
Of course, that is not how things have turned out: Palestinians have been living under Israeli occupation for 41 years.
As Obama prepares to enter the White House, we are confident that he will consider the constructive role America can play in the search for peace and security.
In the year since Palestinians and Israelis renewed their commitment to their obligations under the “road map,” we may have failed to reach a conclusive settlement to our conflict, but that does not mean that the efforts made were in vain.
With the determination of both sides, I am confident that we can reach a final agreement in relatively short order.
The US can take four practical steps to help negotiations move forward immediately.
The first step is early engagement.
The Bush administration’s efforts to assist our peace-making project faltered in part because our conflict was neglected during the early part of its tenure.
Allowing this conflict to fester will only aggravate our peoples’ insecurity and our region’s instability.
Second, the US should establish a credible enforcement mechanism to ensure that the parties comply with their respective obligations, particularly an immediate freeze on Israeli settlement activity throughout the occupied Palestinian territory.
Not only has Israel failed to halt its settlement activity since Annapolis – in violation of international law and its renewed road map commitments – but it has actually accelerated such activity.
Construction of settlement housing units is over 45% higher now than in the nine months prior to Annapolis.
Israeli demolitions of Palestinian homes have also increased, particularly in occupied East Jerusalem.
Nothing undermines Palestinian faith in the peace process like watching the homes of our families flattened, while the architecture of our oppression is strengthened.
Third, the new administration should encourage the re-engagement of its Quartet partners – the United Nations, the European Union, and Russia – in the mediation process.
International cooperation is key to securing the legitimacy of negotiations, and it will be critical when the time comes for the enforcement and implementation of any agreement.
The US cannot be expected to shoulder the post-conflict burdens of peacekeeping alone.
Fourth, the US should renew its respect for international law by recognizing three principles: that the 1967 pre-occupation boundaries must be respected in any negotiations; that Palestinian sovereignty over East Jerusalem must be safeguarded, with guaranteed access for Muslims, Christians, and Jews to their holy sites; and that the plight of Palestinian refugees, whose 60-year ordeal remains emblematic of the Palestinian predicament, must be acknowledged and fairly addressed.
Fortunately, a framework already exists that supports these concerns.
The 2002 Arab Peace Initiative offers Israel a unique opportunity: full normalization of relations with 57 Arab and Muslim states in return for a comprehensive peace agreement, including an end to Israel’s occupation of Arab lands and a just and agreed upon solution for refugees.
Our Declaration of Independence is now twenty years old.
The Arab Peace Initiative has been collecting dust for over six years.
Palestinian patience is not infinite.
Some have already resigned themselves to believing a viable Palestinian state will never emerge.
Others, like me, argue that we must not lose faith.
But if we are to realize our dream of freedom and statehood -and prove the cynics wrong- we will need President Obama’s help.
Palestinian Refugees and German Expellees
The atmosphere could not have been more tranquil: a former royal castle in the rolling hills of the Taunus region near Frankfurt, where statesmen and politicians held an annual meeting dealing with the Middle East.
Europeans and Americans, Israelis and Iranians, Egyptians and Turks, Palestinians and Tunisians rubbed shoulders.
The novelty this year was the presence of representatives from post-Saddam Iraq, among them an official from the Kurdish Regional Government, as well as a high ranking Shi'a representative.
The new situation in Iraq, along with the Middle East road map, were at the center of attention.
On the opening night, a senior German government minister, himself deeply involved in Middle Eastern affairs, addressed both subjects, displaying great sensitivity both to Israeli and Palestinian concerns.
The evening proceeded along the expected anodyne trajectory until a Lebanese academic raised the issue of the right of Palestinian refugees to return to Israel.
The senior German minister listened attentively, and then said: ``This is an issue with which we in Germany are familiar; may I ask my German colleagues in the audience to raise their hand if they, or their families, have been refugees from Eastern Europe?''
There was a moment of silence.
The issue is embarrassing in Germany, fraught with political and moral landmines.
Slowly, hands were raised: by my count, more than half of the Germans present (government officials, journalists, businessmen) raised a hand: they, or their families, had been Vertriebene --expelled from their ancestral homes in Poland, Czechoslovakia, Hungary, and Yugoslavia after World War II.
It is estimated that up to 10 million were expelled, and with their descendants they make up today almost double that number--almost one in four Germans.
In the hushed room, the senior German minister continued: he himself was born in Eastern Europe, and his family was expelled in the post-1945 anti-German atmosphere. ``But,'' he added, ``neither I nor any of my colleagues claim the right to go back.
It is precisely because of this that I can now visit my ancestral hometown and talk to the people who now live in the house in which I was born--because they do not feel threatened, because they know I don't want to displace them or take their house.''
The minister went on to explain that peace in Europe is today embedded in this realization: if East European countries had thought that millions of ethnic Germans would like to return, ``the Iron Curtain would have never come down.''
It was a highly emotional response to the Lebanese academic's question--one that Arab representatives chose later on to ignore.
But it was just one more expression of the context in which the issue of the 1948 Palestinian refugees has to be addressed.
As the German senior minister reminded the audience, there are numerous parallels in recent history to the Palestinian refugee problem.
Anyone who now claims that the 1948 Palestinian refugees have a claim, in principle, to return to Israel, must confront the question: should the millions of Germans expelled from Eastern Europe after 1945 also have the same right of return to their lost homes?
The German minister supplied the answer.
Similarly, if Helmut Kohl's government had insisted in 1990 that all Germans expelled from Poland and Czechoslovakia have a right to return to those countries, German reunification would not have gained the broad international agreement that it did.
It would be clear that what West Germany had in mind was not reunification, but reversing the consequences of Nazi Germany's defeat in 1945.
The Palestinians' demand for the right of return has an analogous meaning.
Insistence on it in 2000 at Camp David and Taba made clear to most Israelis that what the Palestinians have in mind is not undoing the consequences of the Six Day War in 1967.
Rather, the demand for a right of return amounts to an effort to reverse the consequences of their defeat in 1948, when the Arab world went to war to prevent the state of Israel from being born.
It is worth keeping in mind what advocates of a Palestinian right of return now prefer to forget: Palestinian Arabs and four Arab members of the UN went to war in 1948 not only against Israel, but against international legitimacy and the UN plan for a two-state solution.
There is no other example of UN member countries going to war to prevent implementation of UN decisions.
This is what the Arab countries and the Palestinians did.
Clearly there is a serious humanitarian issue involved.
The fact that the refugees' plight was compounded by their use as political pawns for half a century is a measure of the cynicism and immorality of Arab political leadership.
Nonetheless, the humanitarian issue remains.
The senior German minister referred to it explicitly, both with regard to the Palestinians and the post-1945 German refugees.
But the political consequences for him were clear: the revanchist call for a return of refugees--in both the German and the Palestinian case--is a formula for instability, if not war.
Palme\u0027s Legacy 15 Years On
STOCKHOLM: Olof Palme, Sweden's then Prime Minister, was assassinated 15 years ago on February 28th.
His death shocked millions everywhere.
The murderer has still not been found, at least he has not been convicted.
The crime was an attack not only on Palme, but on democracy itself.
Murdered, Palme is now part of history.
But history is something that must be freely analysed, not silenced out of deference.
So, as we recall Palme's assassination we should also remember how he behaved and what he represented.
What, for example, is Olof Palme's legacy in foreign policy?
Palme was a powerful, eloquent critic of the US and the war in Vietnam.
He cursed Soviet oppression in Czechoslovakia and General Pinochet's murders in Chile.
Because of these stands, Palme has often been portrayed as a consistent adversary of tyrannies.
But this is not quite true. In fact, Palme systematically refrained from criticizing many oppressive regimes and, indeed, embraced some of the cruelest dictators, or at least tried not to offend them.
Do not "vilify" the Soviet Union, said Palme, Chairman of Sweden's Social Democratic Party for 17 years and Prime Minister from 1969-1976 and, again, from 1982-86. Do not engage in "anti-Soviet agitation" or "the business of anti-Sovietism," he declared in 1984, a typical neutralist stand in Palme's Sweden.
No doubt, Palme reflected the spirit of his times.
The West's Marxist revival after 1968 deeply impressed journalists and socialists, not least in Sweden.
The Vietnam War changed the world view of many young people.
Palme, however, carried this spirit forward so long after many others had seen the liberal light.
"Neither communism nor capitalism represents a dream of liberty for the peoples of Europe," he said only a few years before the peoples of East and Central Europe freed themselves from Communism to embrace democracy and capitalism.
Palme also exploited ideological differences over diplomacy to wound other democratic parties in Sweden.
The conservatives were lapsing into "the crusading spirit, aimed at the liberation of Eastern Europe, which prevailed in conservative quarters in the West during the Cold War," he said in 1983--a moment of heightened tension between the West and the USSR.
Eventually, Sweden's Liberals and Conservatives, after 44 years of Socialist rule, came to power in 1976.
None of the threats to Sweden's foreign policy, which Palme confidently predicted, materialized in their nine years in office during the last quarter century.
Divisive at home, Palme tried hard to divide the West at a critical moment.
In the 1980s Social Democrats in Sweden and Germany developed a close ideological collaboration in foreign affairs.
The so-called "Palme Commission" (including the influential Egon Bahr) suggested a policy of "common security" between East and West, and nuclear weapon-free zones instead of NATO's policy of deploying cruise and Pershing II missiles to counter the Soviet advantage in theater nuclear weapons.
This alliance between the two parties led to serious distortions of fundamental Western values.
Palme and Oskar Lafontaine, then one of the leaders of the opposition in Germany, did not see the Cold War as primarily a conflict between freedom and tyranny.
When Palme visited East Germany in 1984 he never criticized repression there, nor the Berlin Wall.
Instead, Palme praised East Germany's leader, Erich Honecker, underlining shared goals and the mutual struggle for peace and development.
Palme's main speech mentioned "détente," "trust,"and "friendship," but never "freedom".
Much the same happened when Palme visited Cuba.
He shared a podium with Fidel Castro at a mass rally in Santiago de Cuba.
Palme spoke appreciatively of "socialist revolution," never mentioning his own party's conviction that "revolution" should take place only after free and honest elections.
Indeed, Palme used Marxist slogans, but said nothing about human rights and political freedom, giving the impression that Sweden and Cuba embraced similar ideologies.
In a joint statement with Castro, Palme claimed that the two men were united in all the areas they had discussed.
They even confirmed their happiness that the struggles for freedom of "the Vietnamese and Cambodian peoples have been crowned with victory."
This was said in the summer of 1975, two months after Cambodia's Khmer Rouge embarked on a genocide that killed two million of the country's seven million people.
Was Olof Palme unaware of Pol Pot's massacres?
Newspapers in almost all democracies, including Sweden, were informing us of the Cambodian horrors.
Palme, however, thought it more important to present a united front with Cuba's tyrant than to worry about atrocities committed by Communists in Indochina.
Palme, indeed, seldom condemned oppression in Third World countries.
He constantly condemned apartheid in South Africa, yet he never criticized Mao's China, the most murderous regime to arise after World War II.
This double standard was particularly pernicious in the Middle East, where Palme never censured an Arab country, regardless of its corruption or cruelty.
The only nation in that region he repeatedly attacked was its only democracy, Israel.
He even equated the Israelis with the Nazis.
Fifteen years after his murder, Sweden and the West must grapple with what Palme left behind, his anti-Western agitation and his willingness to see fundamental ideals of freedom as merely relative values.
For people seeking or defending democracy and human rights, Palme was an unreliable partner.
It is that aspect of his moral "example" that should be recalled.
The Last Gentlemen’s Club
LONDON – Is one of the last bastions of gender inequality in the rich democracies finally starting to crumble?
In the past few weeks, Janet Yellen was nominated as the first female chair of the US Federal Reserve Board, and Karnit Flug became the first woman to be appointed Governor of Israel’s central bank.
If money is power, then women must no longer be excluded from controlling the supply of it.
Although women do head central banks in 17 emerging markets – including Malaysia, Russia, Argentina, South Africa, Lesotho, and Botswana – they are the exceptions that prove a general rule: women are excluded from the world of monetary policymaking.
Yellen’s appointment is particularly important, because she breaks the glass ceiling in the advanced economies.
Until her promotion, no member of the G-7 had a woman heading its central bank.
Moreover, men occupy all 23 seats on the European Central Bank’s (ECB) Governing Council.
Since the Bank of England’s Monetary Policy Committee was established in 1997, only three women have been appointed as external members – and no woman has even been nominated since 2002.
The Bank of Japan has only one woman on its Policy Board.
Women, nowadays, are more likely to occupy top political jobs.
Angela Merkel was recently reelected for a third term as German Chancellor; Britain’s voters elected Margaret Thatcher three times as Prime Minister; and France has had a female prime minister.
But no woman has come close to leading these countries’ central banks.
Equality seems to have eluded central banks even in gender-conscious Scandinavia.
For example, Norway, which has been promoting positive gender discrimination for years and recently elected Erna Solberg as its first female prime minister, has yet to allow a woman to control the purse strings – at either the central bank or the finance ministry, with its powerful sovereign wealth fund.
Recent attempts to compel change have been counter-productive.
In an effort to promote diversity and gender equality in the ECB, the European Parliament in 2012 blocked the appointment of Luxembourg’s Yves Mersch to the bank’s executive board. But MEPs then failed to propose a plausible female alternative, leaving the ECB understaffed for weeks during the eurozone sovereign-debt crisis.
Unsurprisingly, the European Parliament’s handling of Mersch’s appointment was widely ridiculed, and his nomination was eventually confirmed.
But many people drew the wrong conclusion from the episode, which they viewed as affirming the idea that competence and experience must always trump ill-conceived ideas about positive discrimination.
If there are no suitable female candidates, it was argued, then the best candidate should prevail, regardless of gender.
But this view misses the point.
Why were there no suitable female candidates in the first place?
Women hold around 30% of economics doctorates in developed countries, including Europe, and not one of them could be brought forward for the ECB post?
The more reasonable conclusion to be drawn from Mersch’s appointment is that no serious effort was made to identify qualified women early on.
On the contrary, female candidates tend simply to be overlooked.
This was the case for both Yellen and Flug – until the preferred, male applicants dropped out.
Flug was finally offered the top job only in the absence of a male rival, though she was already occupying the position temporarily while the board searched for Stanley Fischer’s successor.
Neither Yellen nor Flug was held back by a lack of academic credentials – both are accomplished scholars – or by the catch-all charge of having “limited experience.”
Flug has been the Bank of Israel’s deputy governor since 2011; Yellen has been involved in the Fed system for almost two decades, first in San Francisco and subsequently as Vice Chair of the Fed’s Board of Governors.
If a lack of skills or experience is not preventing women from reaching the summit of monetary policymaking, what is?
The most plausible explanation is that, as organizations with non-elected leaders and limited transparency, central banks tend to function as clubs whose largely male membership hire and promote familiar types; governments usually reinforce this by simply rubber-stamping the banks’ preferred candidate for the top job.
If gender is a proxy for diversity, then central banks fail a basic test of it.
Promoting diversity – not only in terms of gender, but also with respect to age and, in many countries, ethnic background – is a matter of effectiveness as much as a question of social justice.
A broader, more transparent recruitment process would reduce groupthink, challenge the status quo, and, one hopes, leave central banks better equipped to handle a financial crisis.
The promotion of Yellen and Flug is a good start; now the doors of these fusty male-dominated clubs must be flung wide open.
Parents or Gods?
The birth of Louise Brown in 1978, and with her that of human in vitro fertilization (IVF), was a landmark in medical science.
Surgically harvesting eggs from a woman's ovaries, fertilizing them outside her body, and transferring the resulting embryos into her uterus enabled effective treatment of female infertility caused by irreparably damaged fallopian tubes.
Since then, rapid innovation has led to new applications for IVF and other assisted reproductive technologies.
Many infertile couples now turn to such advanced technologies when other "low tech" options fail, and they are the treatment of choice not only for tubal damage, but also for significant forms of male infertility.
For example, intracytoplasmic sperm injection is a technique in which a single viable sperm is injected into an egg, allowing fertilization to occur even in cases where few healthy sperm are available.
Freezing unimplanted embryos is now standard procedure; freezing unfertilized eggs is under development.
Perhaps inevitably, our access to human eggs and embryos now enables us to extend prenatal genetic diagnosis to the pre-implantation embryo.
Conventional prenatal diagnosis entails removing fetal cells, either from the amniotic fluid (amniocentesis) or from the placenta (chorionic villus sampling, CVS).
Both procedures are routinely offered to pregnant women 35 years and over to diagnose chromosomal abnormalities such as Down's syndrome, or to screen for cystic fibrosis, sickle cell disease, or Tay Sachs disease.
However, amniocentesis and CVS both entail a 0.5-1% risk of pregnancy loss, and if an abnormality is diagnosed the only clinical option is to terminate the pregnancy.
Preimplantation genetic diagnosis (PGD) is fundamentally different from its prenatal counterpart.
Because the diagnosis is made prior to placement of the embryo in the woman's uterus, the exclusion of specific abnormalities is possible without terminating an established, ongoing pregnancy.
Clearly, couples carrying a transmissible genetic defect and otherwise requiring IVF should be offered the option of PGD, and if necessary, referral to a center that can perform this specialized procedure.
But genetically affected couples who do not suffer from infertility may also be candidates for IVF with PGD.
They could well prefer this option to natural conception and the prospect of therapeutic abortion following a conventional prenatal genetic diagnosis.
But now consider a more morally complicated scenario: a couple has a naturally conceived child affected with a life-threatening genetic disease for which the only possible cure is a bone marrow transplant from a matched donor.
Understandably, they may want PGD to prevent similar defects in their future children.
But they also want those embryos to be tissue typed in search of a sibling who could serve as a bone marrow donor to their first child.
In this case, an embryo is being selected not only to avoid congenital disease and thus directly benefit the resulting child, but also to produce a child whose very existence could provide a cure for an older sibling, and with virtually no risk to the donor child.
Ethicists have grappled with such scenarios, and many would find this clinical option to be ethically sound.
But what if the older sibling requires a donated kidney?
The more the donor child is placed in physical jeopardy the thornier the issue becomes.
Gender selection is another hotly debated potential application of PGD.
Gender selection may be clinically justified in order to prevent transmission of a sex-linked disease, such as hemophilia.
Under such circumstances, it should be no more controversial than using PGD to screen for sickle cell disease.
But is PGD ethically sound if an infertile couple merely prefers a boy or a girl?
If so, then would it not be acceptable for "family balancing," when a fertile couple with three boys strongly desires a girl, or if a couple wants to choose the sex of their first-born child?
Obviously, analogous questions can be extended to the selection of many other traits that are not essential to the health of the resulting offspring.
To all of these questions, there are no simple answers.
The essential goal of medicine is diagnosis and alleviation of disease, and infertility is a disease.
The extension of prenatal diagnosis to an embryo in a laboratory dish will, in turn, reduce the incidence of certain types of genetically transmitted diseases.
But new medical technologies also offer applications that fall outside of these conventional precepts.
As always, the rapid advancement of science and technology should be accompanied and tempered by careful and thoughtful consideration of the appropriate uses of newly realized capabilities.
Pre-Judging Paris
COPENHAGEN – The United Nations Climate Change Conference in Paris later this month is being billed as an opportunity to save the planet.
It is no such thing.
As I show in a new peer-reviewed paper, even if successful, the agreement reached in Paris would cut temperatures in 2100 by just 0.05° Celsius.
The rise in sea level would be reduced by only 1.3 centimeters.
This may seem surprising: we constantly hear how every country has made important commitments to reduce CO2 emissions – the so-called “Intended Nationally Determined Contributions,” or INDCs.
According to the UN’s climate chief, Christiana Figueres, “the INDCs have the capability of limiting the forecast temperature rise to around 2.7ºC by 2100, by no means enough but a lot lower than the estimated four, five, or more degrees of warming projected by many prior.”
Figueres suggested that the Paris agreement will cut almost 2°C of warming, from 4.5°C to 2.7°C. Though her wording was crafted to avoid actually saying this, it was, predictably, what most people heard.
But the reduction consists almost entirely of made-up numbers and wishful thinking.
The expected rise of 4.5°C is based on almost 10,000 gigatons (Gt, or billion tons) of CO2 emitted during this century, with all other greenhouse gasses converted to CO2 equivalents.
But nobody actually believes this figure – even the UN Environment Programme estimates that with absolutely no climate policies, we would emit 7,750Gt, which might lead to a 3.8°C rise.
So, the extra 0.7°C rise is simply made up: climate policies can’t take credit for reducing it, because it was never going to happen in the first place.
Keeping temperature rises to 2.7°C will require the world to restrict emissions to about 4,700Gt.
So, in order to live up to Figueres’ promise, we should expect Paris to cut about 3,000Gt.
It will not.
Figueres’s own organization estimates that the total reduction promised from 2016 to 2030 will amount to 29-33Gt, or 1% of what is needed to get to 2.7°C. Achieving the other 99% is based on the aspiration that, while little will happen from 2016-2030, right after that countries will step up and begin dramatic emissions cuts.
Recent history renders this implausible.
Back in 1997, when the world signed the Kyoto Protocol, almost everyone expected that it would be just the first step toward deep emissions reductions.
Yet the cuts envisioned in Paris by 2030 are just one-third higher than what was promised in Kyoto.
And the Kyoto treaty, which required no action from developing counties, was repeatedly renegotiated to the point where it didn’t require any cuts at all.
The United States dropped out, and Canada, Russia and Japan eventually abandoned it as well.
Just 12 years later, great expectations were met with utter failure at the 2009 climate summit in Copenhagen.
It is only slightly less far-fetched to hope that countries won’t just live up to their Paris promises in 2030, but will extend these cuts throughout the twenty-first century.
After all, that is certainly not what governments are offering.
The US, for example, clearly says that its “target is for a single year: 2025.”
(Under the Kyoto Protocol, about 40% of emissions leaked this way, with the EU’s entire reduction circumvented through higher imports just from China.)
And we could believe that every single country will fulfill every single promise.
Yet, even with these heroic assumptions, the total temperature reduction would be a very modest 0.17°C. A simple model of sea-level rise reveals that we would avoid perhaps 2.6cm.
And, though more than 500Gt of emissions would be cut, we would still be 2,500Gt short of Figueres’s promise.
Many environmental campaigners are outraged by my scientific analysis showing how little Paris will matter.
Their anger is surprising, because the math is simple: we’re hoping for 3,000Gt but only committing to 30Gt, and history strongly suggests that even those promises are unlikely to be met.
But, along with much of the climate-policy establishment, campaigners have invested two decades in pushing for the Kyoto-Copenhagen-Paris process that has so far delivered so little.
Wishful thinking, it seems, is easier than acknowledging the flaws in their approach.
Just as we saw in Kyoto, many argue that countries will go far beyond their promises in coming decades.
The US has suggested it might cut emissions by 80% by 2050.
Yet the average of all the top energy-economic models suggest that such a cut would cost more than one trillion present-day dollars annually, with realistic annual costs approaching $2.5 trillion.
Similarly, the EU has vowed to cut at least 80% by 2050; but, again, the average cost estimated by seven models runs to €3-6 trillion annually – possibly almost a quarter of Europe’s GDP.
Such costs indicate that, given current technological expectations, the proposed reductions are merely wishful thinking.
Much has been made of China’s promise to reach peak emissions around 2030.
I did not include this promise in my calculations, because for now it is mostly political grandstanding, being at least 15-20 years away from having any real-world impact.
I did include China’s promise to cut about 2Gt by 2030, which will cost about $200 billion annually.
Models indicate that reaching peak emissions in 2030 could end up costing China about 500 billion to one trillion present-day dollars every year by 2050.
With the EU and the US unlikely to inflict economic self-harm to achieve their hand-waving targets after 2030, it strains credibility to expect China to do so.
Nonetheless, China’s peak is not the holy grail, as it will reduce emissions only about 300Gt, or a little less than 0.1°C, by the end of the century.
Our approach to climate change is broken.
The Paris agreement will likely cost the world at least a trillion dollars each year, yet deliver only a tiny reduction in temperature by the end of the century.
We should accept that trying to make fossil fuels too expensive to use will never work.
Instead, we should make green energy so cheap that nobody can resist it.
The Changing Climate on Climate Change
OSLO – In the early 1990s, when I was Prime Minister of Norway, I once found myself debating sustainable development with an opposition leader who insisted that I tell him the government’s single most important priority in that field.
Frustrated, I replied that what he was asking was impossible to answer.
I concluded our exchange by explaining why: “Because everything is connected to everything.”
Fortunately, such thinking is now more widely held than it was back then, thanks partly to the human development approach, which emphasizes the complexity of nature and recognizes that one-dimensional solutions cannot address multidimensional problems like those we currently face.
Indeed, today’s challenges are seldom simply environmental, social, or economic, and their solutions do not lie within the area of competence of a single government ministry.
Without broad, multidisciplinary impact analysis, such narrow thinking can lead to new problems.
This is particularly true of climate change.
Fortunately, a growing realization that rising global temperatures are not simply an environmental concern provides reason to hope that world leaders are finally ready to address the problem in an effective way.
Later this year, the member states of the United Nations will meet in Paris to adopt a comprehensive agreement to combat climate change.
In the talks leading up to the conference, a consensus has emerged that climate change is not only linked to many other major environmental problems (climate, water, soil, and biodiversity are all a part of the same system); it is also intertwined with social and economic challenges, like poverty, sustainable development, and the wellbeing of future generations.
There is no guarantee that the agreement reached in Paris will work.
As former UN Secretary-General Kofi Annan wrote in December, “All too frequently, leaders will concern themselves with matters that are closest at hand, while the most serious issues are often more distant – geographically or in time.
For example, if we fail to tackle climate change, the worst effects will be suffered by future generations and by poor countries far from global power centers.”
At the same time, it is not only the future that should concern us.
As the economists Amartya Sen and Sudhir Anand argued more than a decade ago, “It would be a gross violation of the universalist principle if we were to be obsessed about intergenerational equity without at the same time seizing the problem of intragenerational equity.”
After ignoring the universalist principle for too long, world leaders finally seem to be acknowledging the magnitude of the problem – as well as their responsibilities to people far beyond their immediate electoral constituencies.
The climate agreement between the United States and China, announced last year, indicates that one of the major stumbling blocks in the negotiations – the schism between rich and poor countries – is being overcome.
With China now working to reverse the growth in its greenhouse-gas emissions, other developing countries will find it increasingly hard to argue against controlling their own emissions.
The European Union continues to set a high bar for action on climate change.
Last year, the EU pledged to cut greenhouse-gas emissions by at least 40%, relative to 1990 levels, by 2030.
By that year, at least 27% of the EU’s energy is to come from renewable sources.
The EU’s pioneering carbon-trading scheme is also an important step forward, though emission allowances will have to be cut and the cost of emitting increased if the system is to be effective.
Investments in tomorrow’s energy supply and production processes will largely come from the private sector; but it is up to government to develop the institutional and regulatory frameworks that ensure that these investments are allocated in ways that are environmentally sustainable.
Finally, the sharp rise in pledges to the “Green Climate Fund” indicates a growing recognition of the disproportionate impact of climate change on the world’s poorest and most vulnerable people.
Total national contributions have surpassed the preliminary target of $10 billion.
Countries such as Mexico, Panama, Indonesia, and Mongolia are now contributors, even if the main responsibility for the problem rests with the world’s major economies.
For billions of people, the stakes could not be higher.
This month, the UN is expected to adopt the Sustainable Development Goals, a set of global targets that represent a quantum leap forward from their predecessor, the Millennium Development Goals, in that they embed sustainability in every aspect of policy and practice.
But the SDG targets are unlikely to be met if world leaders are unable to forge a credible accord to limit the rise in global temperatures to 2° Celsius.
A stable climate provides the underpinnings for poverty reduction, prosperity, and the rule of law – in short, human development.
That, I might have told my opponent a generation ago, is the positive side of everything being connected.
Pragmatisme Kebijakan Perubahan Iklim
BERLIN – Upaya diplomatik untuk menyusun perjanjian internasional tentang mitigasi perubahan iklim sedang mengalami perubahan fundamental.
Pendekatan top-down yang memandu upaya ini sejak tahun 1992 secara perlahan digantikan oleh model bottom-up.
Alih-alih mencoba untuk merumuskan kesepakatan berdasarkan pembatasan emisi gas rumah kaca yang mengikat secara hukum, pendekatan baru bergantung pada komitmen sukarela masing-masing negara untuk mengurangi kontribusi mereka terhadap perubahan iklim.
Di satu sisi ini ibarat pengakuan kalah; pendekatan semacam ini tidak mungkin bisa menekan kenaikan suhu global kurang dari 2° Celsius, yakni target yang ditetapkan PBB pada tahun 2010.
Akan tetapi, mengingat lambatnya kemajuan yang dicapai sejauh ini, langkah-langkah pragmatis yang diterapkan masing-masing negara mungkin jauh lebih produktif dibandingkan upaya mewujudkan grand bargain yang mustahil bisa dicapai.
Para negosiator internasional telah membuat kemajuan yang signifikan selama lima tahun terakhir, namun jauh dari keberhasilan mencapai perjanjian yang dapat memenuhi target 2°C. Akibatnya, para diplomat yang khawatir bahwa kegagalan mencapai kesepakatan global akan justru mendiskreditkan seluruh proses perundingan, kini menurunkan ambisi mereka.
Secara khusus, upaya menetapkan batas emisi yang lebih ketat perlahan dikesampingkan.
Fokusnya tidak lagi pada upaya yang diperlukan bagi lingkungan atau upaya yang dibutuhkan untuk mengendalikan perubahan iklim; namun pada upaya yang politically feasible – peluang dan keterbatasan dalam proses perundingan, terutama dengan tujuan memastikan partisipasi lebih luas.
Mengingat lambatnya kemajuan sejak konferensi perubahan iklim PBB yang pertama pada tahun 1995, perjanjijan apapun yang melibatkan semua anggota Konvensi Kerangka Kerja Perubahan Iklim PBB akan dianggap sebagai kesuksesan bersejarah.
Itu sebabnya, ketika para pemimpin dunia dan menteri lingkungan hidup sedang mempersiapkan diri untuk menghadiri konferensi perubahan iklim di Paris pada bulan November dan Desember, upaya membujuk negara-negara emitor terbesar untuk berkomitmen pada target penurunan emisi yang ambisius dan mengikat secara hukum tidak lagi realistis.
Pencemar terbesar di dunia – khususnya Tiongkok, India, dan Amerika Serikat – telah menyatakan dengan jelas bahwa mereka akan memutuskan sendiri tindakan-tindakan apa yang akan diambil.
Dengan menetapkan target mereka secara sepihak, kecil kemungkinan bagi negara-negara tersebut untuk terlibat lebih jauh dalam perundingan multilateral.
Tentu saja hanya sedikit diplomat yang akan membuat penyataan secara blak-blakan, sebab itu berarti mereka mengakui kegagalan kebijakan iklim PBB selama 20 tahun terakhir.
Sebaliknya, mereka cenderung menyusun pendekatan bottom-up bukan untuk menghapuskan paradigm top-down, tapi sebagai pelengkap pragmatis yang mengakomodasi beberapa emitor terbesar dan menciptakan kerangka kerja prakarsa iklim bagi pelaku di tingkat daerah, seperti kota-kota besar dan perusahaan.
Tetapi kenyataannya adalah pendekatan top-down sudah dikesampingkan.
Bagaimanapun juga, ciri khasnya bukan arena politik dimana kesepakatan akan dihasilkan (sistem PBB); tapi tujuan kebijakan yang menyeluruh (mencegah perubahan iklim yang berbahaya).
Dan jelas bahwa perundingan di Paris akan gagal memenuhi target 2°C yang ditetapkan pada tahun 2010 – atau ambang batas lainnya yang mengikat.
Ketika kontribusi lebih dari 160 negara yang telah menyerahkan komitmen mitigasi sukarelanya meningkat – disebut “intended nationally determined contributions” – skala kegagalan menjadi nyata.
Meskipun semua negara bersungguh-sungguh memenuhi janjinya, dunia akan mengalami kenaikan suhu setidaknya 3°C.
Memang, tujuan yang dinyatakan dalam perjanjian Paris akan berupaya “mempertahankan pencapaian target 2°C”. Para diplomat berencana memasukkan “ratcheting-up mechanisms” yang memungkinkan peningkatan aspirasi secara bertahap.
Namun berkaca dari pengalaman sebelumnya, kecil kemungkinannya mekanisme tersebut dapat diberlakukan dalam sepuluh tahun ke depan; fungsi utamanya adalah memberikan penafsiran positif pada hasil yang mengecewakan dan memberi harapan pada kebijakan-kebijakan yang lebih ambisius.
Meskipun demikian kita perlu bersikap optimis: pragmatisme terbukti lebih kuat dibanding idealisme.
Setelah banyak tindakan untuk menetapkan batasan emisi yang ketat diupayakan selama lebih dari satu dekade, jelas bahwa pendekatan top-down telah gagal.
Penerapan pendekatan bottom-up merupakan pengakuan diam-diam bahwa negara tidak dapat dipaksa untuk mematuhi rezim yang ketat dan terpusat, walaupun rezim itu dibentuk berdasarkan bukti ilmiah.
Penerapan tindakan sukarela telah memicu kemajuan, terutama komitmen terkoordinasi oleh Amerika Serikat dan Tiongkok.
Karena pendekatan bottom-up menghormati cara-cara negara berdaulat akan bertindak di kancah internasional, maka pendekatan ini berpotensi menghasilkan momentum positif.
Sebagai besar pemerintah memprioritaskan kelangsungan hidup politik dan keberhasilan ekonomi jangka pendek, sehingga mereka akan berkontribusi pada aksi iklim global apabila pesaing-pesaing utama mereka melakukan hal yang sama.
Dengan demikian, kebangkitan pendekatan bottom-up dalam perjuangan melawan perubahan iklim merupakan kemajuan yang berharga.
Dunia dengan suhu 3°C lebih hangat memang tidak sempurna, tapi masih lebih baik dibandingkan dunia yang menderita perubahan iklim yang terjadi di luar kendali.
The French 9/11
PARIS – “France’s 9/11.” In the immediate aftermath of the massacre at the satirical magazine Charlie Hebdo, the comparison with Al Qaeda’s 2001 attack on the United States has taken hold across France.
Indeed, the January 7 attack was the most murderous France has known since the end of the Algerian War in 1962.
But how accurate is the analogy?
At first blush, the comparison seems artificial and far-fetched.
Twelve people died in Paris, whereas nearly 3,000 were killed in the attacks on New York and Washington, DC.
The attackers used Kalashnikovs, not hijacked planes.
And, unlike the 9/11 attackers, they were all citizens of the country they were attacking.
That is why the attack in Paris 2015 looks more like a combination of two other attacks: the London Underground bombing in 2005 (the terrorists were all national citizens) and the plot executed in Mumbai in 2008 (the terrorists used small arms and targeted people individually).
Yet, despite the major differences, the attacks in Paris and in New York share the same essence.
Both cities incarnate a similar universal dream.
Both are metaphors for light and freedom.
Both belong to the world, not only to their respective countries.
Moreover, in both cases, the targets chosen by the terrorists were highly symbolic.
In New York, the Twin Towers embodied capitalist ambition and achievement.
In Paris, Charlie Hebdo has given form to the spirit of democratic freedom: the ability to write, draw, and publish anything – even extreme (and at times vulgar) provocations.
There is a strong sense in Paris, as there was in New York, that the real target was Western civilization itself.
Like most Frenchmen, I say, out of disgust for the attack and empathy for the victims, Je suis Charlie – a phrase that recalls the newspaper Le Monde’s declaration, immediately after 9/11: Nous sommes tous Américains.
But I must admit that I did not always feel that way.
In 2005, I had reservations about the decision by the Danish newspaper Jyllands-Posten to publish a series of caricatures of the Prophet Muhammad – and about Charlie Hebdo’s choice to reproduce the cartoons the following year.
At the time, I felt that it was a dangerous and unnecessary – and thus politically irresponsible – provocation.
One does not play with matches next to a gas pipeline or a bundle of dynamite.
Our era is probably much more religious than the eighteenth century ever was.
To invoke Voltaire is one thing, I thought at the time, but to act responsibly may presuppose refraining from insulting what is most sacred to others, whether it be Christ, Muhammad, or the Shoah.
Today, given the nature of the attack, I leave those reservations behind, though I resist the temptation to sacralize the victims’ memories, as so many Frenchmen are doing.
In France, laïcité, wrongly translated in English as “secularism,” is the equivalent of a religion – the religion of the Republic.
For the cartoonists of Charlie Hebdo, religion was just another ideology, and they took aim at all three major monotheistic faiths (though perhaps with a greater emphasis on Islam, probably owing to its more visible fundamentalist face).
So far, a climate of national unity is prevailing in France, just as it did in America immediately after 9/11.
And that is as it should be, for unity is crucial to countering terrorists, whose priority is to create division, incite confrontation, and marginalize moderates.
Indeed, even Marine Le Pen, the leader of the far-right National Front, initially warned against the dangers of an anti-Muslim backlash, stating that a few lost young men were in no way representative of the majority of French Muslims.
But how long will national unity prevail?
The scars of colonialism are fresher in France than anywhere else in Europe; the country has Europe’s largest Muslim minority; and, with moderates seeming particularly weak and divided, the extreme right is cresting in opinion polls.
These ingredients could constitute a recipe for disaster.
Already, Le Pen appears to be reverting to form. “National unity is a pathetic political maneuver,” she complained, after she was not invited to a rally the day after the attack.
But, if the right leaders are at the helm, the January 7 attack could spur a renewed sense of collective purpose and political revival.
We French must face this terrorist attack the same way the Americans did after 9/11: firmly and clearly, but also with responsibility.
That means, above all, that we must avoid becoming like America in 2003, when President George W. Bush extended the “global war on terror” to Iraq.
France’s task now is to uphold the values that have made it a target.
Parties and Populists
This is not a good time for political parties, especially those with traditional orientations.
Gone are the times in the older democracies when one could count on two major parties – one social democratic, the other more to the right of center – dominating the political scene.
In the new democracies of the postcommunist world, such two-party systems never came into being.
Nowadays the two largest parties can rarely hope to muster two-thirds of the popular vote.
Not infrequently they have to form a “grand coalition.”
The rest of the vote is split many ways – unless a political force emerges to cut right through the old party structures by arousing popular nationalist or socialist sentiments, or a combination of the two.
The decline of parties reflects the decline of class.
The old proletariat and the old bourgeoisie are gone.
Instead we see what has sometimes been called a “levelled-in middle-class society,” albeit one with an important elite of the super-rich at one end and an underclass at the other.
The very structure of society has come to be shaky.
There are no social groups on which lasting organizations can be built.
People are, in a sense, socially homeless.
This means that their interests vary as situations change.
It also means that they no longer find a political home in parties, but react to situations, to vague moods, and above all to appeals to sentiments, if not resentments.
This is the condition in which populists thrive.
In some cases, they are individuals like President Hugo Chávez of Venezuela (and other Latin American leaders) or Italy’s ex-Prime Minister Silvio Berlusconi.
Mostly they enter the political scene from the fringes but manage to form a highly personalized grouping, like Jörg Haider and his Austrian Freedom Party, Jean-Marie LePen and his French Nationalists, Andrzej Lepper and his Polish Peasant Party, or Prime Minister Robert Fico and his Direction in Slovakia.
Many other names could be added to the list.
The list tells us two things.
One is that a surprising number of populist leaders have managed to get themselves into power in recent years.
Their success reflects the electorate’s uncertainties and, increasingly, the perceived injustices of globalization, as well as the fear of many about minorities, immigrants, and foreigners in general.
These populists promise solutions that dispense with the habits and norms of moderation, notably with centrist democratic policies and an internationalism that seeks to promote peace and prosperity.
One sometimes wonders whether we are experiencing not so much the end of history as the end of enlightened history, perhaps of the enlightenment itself.
But another look at the list of populists tells us something else as well: most of them do not last.
As long as they accept elections and election results, they may be gone almost as quickly as they arrived.
It does not take long for voters to discover that the promises of populists were empty.
Once in power, they simply make for bad government.
Taking two recent European examples, Poles and Slovaks will likely soon realize that their new populist governments do more harm than good to the people and their country.
To be sure, this is not much of a consolation. For one thing, some populist leaders may not accept the result of the next elections.
It took Silvio Berlusconi quite a while to admit that he had lost.
Beyond that, populist episodes are signs of an underlying instability that neither serves national progress nor contributes to international order.
Austria paid a price for its Haider interlude, and France did not exactly benefit from the runoff between President Jacques Chirac and Le Pen in the last Presidential election.
Is there a remedy?
Political parties have had a bad press in recent years, and there are good reasons for this.
Still, they do fulfill a useful function by bundling interests and issues, thereby providing an element of stability in the political system.
Existing parties urgently need to recapture the support of citizens.
To succeed requires programmatic clarity, organizational honesty, and an understanding of the concerns of societies that have lost their traditional structures.
Those structures are gone forever, but a liberal-democratic order cannot succeed through situational politics built on popular resentments.
It requires a sense of the medium term and a commitment to rational debate of issues, for one tradition that can be revived – that of enlightened thinking – is the most important of all.
Partnerless in Pakistan
President George W. Bush rightly called Pakistan’s recent national and provincial elections “a victory for [its] people.” But, even as he uttered those words, his administration was working behind the scenes to subvert the will of Pakistan’s people by trying to dictate the composition of their next coalition government and prop up the election’s biggest loser, President Pervez Musharraf.
Bush is playing a dangerous game, risking the collapse of Pakistan’s political process for the sake of his own legacy.
Millions of Pakistanis delivered a clear message at the polls.
Collectively, they voted against Musharraf and religious extremists, and in favor of democracy, the rule of law, and good governance.
Nationally, no single party received a majority, but the centrist, democratic opposition won more than 70% of the National Assembly seats.
The Musharraf-allied faction of the Muslim League party (PML-Q) came in third, polling only 15%, despite the assistance of surgical vote-rigging.
Most of its senior leaders were defeated in their constituencies – including one who hadn’t lost an election in 26 years.
The PML-Q, created in 1999 by Pakistan’s intelligence agencies, is now political deadwood.
An alliance between the two largest parties, the late Benazir Bhutto’s Pakistan People’s Party (PPP) and Nawaz Sharif’s Muslim League faction (PML-N) is what the country needs and what most Pakistanis want.
The PPP and PML-N have the numbers to form a unity government.
They also realize that this is perhaps their last chance to “save” Pakistan.
Together with the pro-democracy army chief, Gen. Ashfaq Kayani, this coalition can address Pakistan’s most pressing challenges, including terrorism.
With the addition of smaller parties and independents to the coalition, they can also impeach Musharraf and restore the judiciary, which he had deposed.
This is unpalatable to the Bush administration, which has helped keep Musharraf in power, despite the fact that 75% of Pakistanis want him to resign.
The Bush administration finds the PML-N’s nationalism and antagonism to Musharraf particularly troublesome.
Sharif has called for Pakistan’s foreign policy to be debated in parliament, but supports continued cooperation with the United States.
His party also wants the sacked Supreme Court justices to be restored.
The US government, however, endorsed the justice’s illegal removal, seeing the court’s insistence on constitutional accountability for Musharraf as complicating its regional objectives.
The court, for example, required Musharraf to present alleged terror suspects – some of whome were likely “rendered” to Pakistan by the CIA – detained for years without government acknowledgment.
Of course, a popular, democratically elected government and an independent judiciary in Islamabad complicate relations with the US.
Democracy is intrinsically messy, but it won’t jeopardize Pakistan’s partnership in the war on terror.
The Bush administration, however, has become used to dealing with one man and is increasingly impatient.
In its final year, it would like to increase the odds of a Republican victory in November’s US presidential election.
Toward this end, progress in Pakistan and Afghanistan would be highly valuable.
As a result, the Bush administration is aggressively interfering in coalition talks between Pakistan’s political parties.
It wants to pair the PPP with the discredited PML-Q and isolate the PML-N.
US Ambassador to Pakistan Anne Patterson, for example, has held a joint meeting with senior Musharraf advisor Tariq Aziz and PPP Co-Chairman Asif Ali Zardari, Bhutto’s widower.
Vice President Dick Cheney’s office also is reportedly playing an active role.
Zardari, in a joint press conference with Sharif, refused to answer a question about whether there is pressure from the US to ally with Musharraf.
But he and Sharif did agree “in principle” to form a government.
The Bush administration’s forceful manipulation of Pakistan’s political leadership is dangerous for both Pakistan and the US.
Its favored arrangement could divide the opposition, keep Musharraf ascendant, and provide continuity in the Pakistan army’s campaign against militants.
But it would also likely de-legitimize the next government before it comes into power, rupture Pakistan’s largest political party, and create a nationalist backlash against the US.
The US needs to take a step back and let Pakistan's political process proceed naturally.
The end result might not be optimal, but if the Bush administration overplays its hand, it could find itself partnerless in Pakistan.
Past-time for Pension Reform
Patents and the Poor
CAMBRIDGE: Debates over drug pricing and intellectual property rights are raging.
Many life-saving drugs, notably those used to fight AIDS, are produced under patents mainly by US and European pharmaceutical companies.
The patent-protected prices of these drugs often puts them out of reach of poor people in the poorest countries.
Thus, while many AIDS patients in rich countries are kept alive by these drugs, millions of people in poor countries are dying before they should, leaving behind misery, millions of orphans, and economic devastation.
A typical AIDS drug regimen is priced at about $10,000 per patient, per year in rich countries.
The costs of producing these drugs, however, are much less than the market price, perhaps as low as $350-$500 per year for some of the three-drug combinations used to treat AIDS.
Some quality producers of generic drugs, such as Cipla of India, have offered to provide these drugs at prices near to the cost of production.
In response to this offer (and to bad publicity), Merck, Abbott Laboratories, and Bristol Myers Squibb, three large patent-holding companies, announced that their willingness to supply the African market at "zero profit" – ie, at around $500 per patient per year for the AIDS drugs they produce.
The tragedy of millions of impoverished people dying of AIDS even when drugs exist to treat them raises deep questions about global intellectual property rights, because patent protection is creating a barrier to essential medicines reaching the world's poor.
But how can the benefits of a global patent system that provides incentives for innovation and new discoveries be combined with an assurance that poor people gain access to the medical care that they desperately need?
One way is to set drug prices at different levels in rich and poor countries.
In rich countries, patent protection should continue so that the pharmaceutical industry keeps innovating.
This is particularly important in the case of AIDS, because the spread of drug resistant viruses and the unwanted side-effects of existing medicines, means that new anti-retroviral drugs will be needed to keep treatments effective.
Thus drug companies must keep plowing their earnings back into research and development.
To assure that, profits – protected by patents – are needed.
Yet poor countries – or donors acting on behalf of the poor – cannot pay the same prices paid by rich countries.
America’s average annual income is over $35,000 per person; in much of Africa, annual income is less than $350 per person.
Poor countries are, indeed, so poor that they cannot afford the drugs even at the production cost of around $350 per patient, per year, because even these reduced prices amount to a year's average income.
Thus, few Africans can afford AIDS treatment even when supplied by generic drug producers.
Any viable solution requires that the following conditions be satisfied:
- drug companies – whether patent holders or generic drug producers – must provide drugs to poor countries at prices near to production costs;
- drug prices in rich countries must remain higher through patent protection to preserve incentives for innovation;
- rich and poor markets must be separated, so that cheap drugs from poor countries are not smuggled into rich countries (or are not allowed in legally through parallel-market imports);
- governments in rich countries must provide substantial assistance to poor countries, so that the poor – who are too poor to afford these drugs even at reduced prices – can make use of them.
Indeed, rich countries should create a “Global Health Fund” to help less fortunate countries buy drugs and medical services to fight killer diseases like AIDS, tuberculosis, and malaria.
This fund would be aimed not only at poor countries, but at some middle income countries like South Africa where diseases like AIDS are so rampant that the volume of drugs needed to combat disease cannot be purchased even at reduced prices.
But rich-country voters may demand that drug prices for them should also fall.
If politicians cave in here – say, by eliminating patent protection, imposing price controls, or allowing re-import of drugs from poor countries – innovation for new drugs will stall.
Still, rich country drug purchasers, however, should not fear the worst: there is no reason to believe that the drug prices they pay would rise just because drug companies agree to lower prices in poor countries.
During the recent court fights over AIDS drugs in South Africa, patents received a black eye.
But without them, the stream of new antiretroviral products used to fight AIDS would not have flowed, because the incentives for developing new drugs would be lacking.
Some opponents of patents argue that government-sponsored research is enough to develop new drugs, but history shows that, although government-sponsored research is good at basic science, the profit-based private sector is best at developing and introducing new products.
So, reform the international patent system to guarantee the poor access to essential medicines, but don’t kill the goose that lays the golden egg by undermining the patent system.
The Fall of the House of Samuelson
LONDON – To read The Samuelson Sampler in the shadow of the Great Recession is to gain a glimpse into the mindset of a bygone era.
The sample is of the late Paul Samuelson’s weekly columns for the magazine Newsweek from 1966-1973.
Samuelson, a Nobel laureate, was the doyen of American economists: his famous textbook, Economics went through 14 editions in its author’s lifetime, introducing future economists worldwide to the rudiments of their craft.
If not the sole originator, he was the great popularizer of the “neoclassical synthesis” – the mix of neoclassical and Keynesian economics that defined the mainstream of the field for 50 years.
Samuelson was a convinced Keynesian, though in a limited sense.
He dismissed most of Keynes’s attack on the orthodox economics of his day as unnecessary, writing “had Keynes [started] with the simple statement that he found it realistic to assume that money wages&hellip;were sticky and resistant to downward movements...most of his insights would have remained just as valid.” For Samuelson, Keynes’s real contribution was the tools he gave governments to prevent depressions.
Reading The Samuelson Sampler, it is extraordinary to realize just how confident economists of his generation were that the New Economics (as the Keynesian approach was called in America) had solved the problem of depression and mass unemployment.
As Samuelson put it in his 1973 introduction, “the specter of a repetition of the depression of the 1930s has been reduced to a negligible probability.”
Yes, there would still be small fluctuations; but, as he wrote in 1966, “Great Depressions – cumulative slumps that feed on themselves – are indeed extinct.” The reason was that governments now had the tools, especially discretionary fiscal policy, to check any incipient downturn.
“What is important about the budget,” he said in 1970, “is whether it is inflationary or deflationary, not whether [it is] balanced or unbalanced.” In other words, “A deficit in a good cause is good business.”
Because governments knew how to stop depressions, voters would insist that they use this knowledge. “If printing bits of green can save banks and business from ruin,” he argued in 1966, “today’s electorate will ensure that either party in power will [so] act.”
This was irrespective, Samuelson thought, of the ideological preferences of those in power.
The Republican Richard Nixon was elected US President in 1968 on a platform of scaling down the Democrats’ expensive Great Society programs. “I am not an economic determinist,” Samuelson wrote in November 1968, “But I can predict with confidence that Richard Nixon will be using the New Economics if only for the reason that new times make it inescapable.”
And so it turned out.
Rather than deflating the economy, Nixon took America off the gold standard in 1971 and imposed wage, price, and import controls, proclaiming bluntly, “I am now a Keynesian in economics.”
But that was the last of Samuelson’s successful predictions.
Less than a decade after his Newsweek columns ended, the New Economics, which he had extolled as a permanent addition to knowledge, was in flight from the ideological assaults of Ronald Reagan and Margaret Thatcher.
Despite his faith that voters would not allow a return to depression, Thatcher’s third election victory, in 1987, came just after unemployment in the United Kingdom had peaked at three million, the highest level since the 1930s.
So what went wrong?
“Still to be argued out within the guild [of economists],” Samuelson wrote in 1969, “is the proper quantitative potency of monetary versus fiscal policy.” This question eventually was resolved in favor of monetary policy.
More important, as he pointed out in 1970, was that “even Keynes could not guarantee that mankind would live happily ever after. He left us with an unsolved problem.
How can we have full employment and also price stability?”
Reluctantly, Samuelson concluded that there needed to be permanent controls over prices and wages to stop cost-push inflation.
“Our mixed economy,” he wrote in 1970, “does not know how to have a satisfactory incomes policy that will back up monetary and fiscal policy....Here then lies the unsolved frontier in modern economics.”
It was the same frontier that Friedrich von Hayek first surveyed in The Road to Serfdom in 1944.
Hayek feared that deliberate policies to maintain full employment would lead to increasing state encroachment on the free market and political liberty.
It was this fear that led, from the 1980s onwards, to the piecemeal abandonment of the policy system of the mixed economy – indeed, to the dismantling of the mixed economy itself.
Samuelson was half right: Governments do know how to stop a slide into another Great Depression.
They used this knowledge in the autumn of 2008 and 2009, which is why we had only a Great Recession.
But, contrary to what Samuelson believed, governments are haunted by fears of large fiscal deficits.
With few exceptions, they have not been prepared to use fiscal policy to jolt their economies out of post-crisis stagnation.
Instead, they have relied on monetary expansion, which is politically more acceptable, but also much weaker in its effects, as it is undermined – just as Keynes predicted – by “several slips between the cup and the lip.”
More important, governments have abandoned the goal of full employment; as a result, all of those bits of interventionist policy previously thought necessary to keep economic activity on an even keel have gone by the wayside as well.
The New Economics may be temporarily resurrected to deal with extreme situations, but policymakers no longer take precautions to prevent extreme situations from arising.
How to do this, while preserving freedom and efficiency, is now the “unsolved frontier in modern economics.”
Microeconomics for All
TOULOUSE – For the last half-century, the world’s leading universities have taught microeconomics through the lens of the Arrow-Debreu model of general competitive equilibrium.
The model, formalizing a central insight of Adam Smith’s The Wealth of Nations, embodies the beauty, simplicity, and lack of realism of the two fundamental theorems of competitive equilibrium, in contrast to the messiness and complexity of modifications made by economists in an effort to capture better the way the world actually functions.
In other words, while researchers attempt to grasp complex, real-world situations, students are pondering unrealistic hypotheticals.
This educational approach stems largely from the sensible idea that a framework for thinking about economic problems is more useful to students than a ragbag of models.
But it has become burdened with another, more pernicious notion: as departures from the Arrow-Debreu model become more realistic, and thus more complex, they become less suitable for the classroom.
In other words, “real” microeconomic thinking should be left to the experts.
To be sure, basic models – for example, theories of monopoly and simple oligopoly, the theory of public goods, or simple asymmetric-information theory – have some educational value.
But few researchers actually work with them.
The bread-and-butter theories for microeconomics research – incomplete contracts, two-sided markets, risk analysis, inter-temporal choice, market signaling, financial-market microstructure, optimal taxation, and mechanism design – are far more complicated, and require exceptional finesse to avoid inelegance.
Given this, they are largely excluded from textbooks.
In fact, microeconomics textbooks have remained practically unchanged for at least two decades.
As a result, undergraduate students struggle to understand even the abstracts of papers on the complex representations of microeconomic reality that fill research journals.
And, in many areas – such as antitrust analysis, auction design, taxation, environmental policy, and industrial and financial regulation – policy applications have come to be considered the domain of specialists.
This does not have to be the case.
While it is true that realistic microeconomic models are more complex than their idealized textbook counterparts, grasping them does not necessarily require years of research experience.
A case in point is the economics of two-sided markets, which involve competition between platforms whose principal “product” consists in connecting two categories of users, who then offer each other network benefits.
When markets are two-sided, many of the standard assumptions of antitrust analysis no longer hold: market entry can be bad for consumers, exclusive contracts can increase the number of firms in a market, and pricing below cost may not be predatory.
A survey by David Evans and Richard Schmalensee describes numerous situations in which applying old assumptions could lead to mistakes by, say, an anti-trust regulator with only an undergraduate degree.
The unmistakable message is, “Don’t try this at home.”
But every behavioral divergence between two-sided and traditional markets can be understood using simple tools of elementary microeconomics, such as the distinction between substitute and complementary products.
When producers of substitutes collude, they usually raise prices; producers of complements, by contrast, collaborate to lower them.
So, if two platforms that appear to be performing similar services are complementary – for example, because one platform connects consumers with a set of users that helps them to value another set of users more highly – market entry can be bad for consumers.
In fact, two platforms can even be complementary for one set of users and substitutes for another.
The different stages of a televised soccer (football) tournament, for example, are complementary for viewers and substitutes for advertisers.
Moreover, exclusive dealing can increase competition by allowing two platforms to occupy distinct market niches, with the alternative being that one drives out the other.
In short, with a solid understanding of the difference between complements and substitutes, one can do almost everything the fancy models do – without hiring a single expensive expert.
Undergraduate-level microeconomics should empower students, not alienate them.
While the Arrow-Debreu model has its value – namely, it explains why an unplanned economy can produce order – it is discouraging for students to find that what they are deemed capable of comprehending offers little insight into real-life situations.
Restructuring the microeconomics syllabus would send a far more inspiring – and accurate – message: even complex ideas developed by experts can be understood and applied by educated laypeople.
Paying the Price of Reform
Angela Merkel’s poor showing in Germany’s recent election has now put into cold storage any hope of a serious overhaul of the country’s famously rigid economy.
Tony Blair was waiting for her to help launch a drive to make the current British Presidency of the European Union a historical turning point for the Union’s economy.
Now Blair has no project, and all would-be reformers are most likely downsizing their ambitions.
Europe appears to be more stuck than ever.
But is it?
To start with, the private sector is doing well.
Technology travels fast and is swiftly adopted.
Firms have responded to inhospitable conditions by cutting workforces and boosting productivity through more capital-intensive production processes and, when needed, by offshoring their capacities.
The laggards are to be found only in the service industry, which is largely insulated from international production chains and even from internal European competition.
More fundamentally, there is no such thing as a “European economy.”
The Union’s 25 member countries are very diverse.
The Nordic countries are high-tech leaders; Spain has slashed its unemployment rate by half (it stood at 25% not so long ago); and the new members from Central and Eastern Europe are cruising briskly along a steady catch-up path.
The really sick countries are three of the EU’s four biggest: France, Germany, and Italy.
But even they have carried out some reforms – not enough and too recently to make a difference yet; nonetheless, they have started to move.
More importantly, no one ignores that the old ways have to go if prosperity is to be maintained.
Except for a fringe of die-hard Marxists – which can still collect up to 10% of the votes – there is a keen sense that deep reforms are needed to come to grip with the high unemployment and poor growth of the last decade.
Continuing budget deficits have visibly failed to deliver what die-hard Keynesians had promised.
These days, no politician dares to suggest that continuing to pile up debt is the way to go, even though few are prepared to articulate a credible plan for fiscal consolidation.
The problem, of course is that the most urgently needed reforms will hurt a lot of people.
Most economists agree that high levels of employment protection merely hold down the creation of new jobs rather than reduce joblessness.
But reducing employment protection scares every worker in the private sector.
This is understandable, given an unemployment rate of around 10% in France, Germany, and Italy; with so few new jobs, becoming unemployed is a major disaster.
To be sure, comfortable unemployment benefits soften the blow.
The problem, though, is that some people have even become addicted; they now aim at living on welfare benefits alone.
This is why economists want to change the unemployment and welfare systems to raise the incentives to go back to work.
Successful experience notwithstanding, most people interpret “incentives” as painful kicks in the butt, and they want none of it.
Then consider these countries’ bloated public services, where jobs are guaranteed for life, promotion is by seniority rather than merit, and customers are seen as a nuisance.
The result is red tape all over and a huge drag on productivity.
Shaping up the public sector is an obvious goal, but civil servants are adamantly opposed to what would in effect mean new and much less attractive work contracts.&nbsp;
Economists know that important parts of the population are bound to lose from reform.
Their answer is that more people stand to benefit, and that the benefits far outweigh the costs.
This is true, but it provides little solace for the potential losers.
Reforms are relatively easier in smaller countries, probably because winners and losers are likely to be personally connected to each other as relatives, neighbors, or friends.
In large countries, the fear of being on the losing side is not outweighed by people’s appreciation that the country as a whole will do better.
One solution is just to go ahead and reform anyway, regardless of the resistance.
This is the Thatcher solution, which took almost everyone by surprise.
Angela Merkel was sometimes called the German Iron Lady, and that seems to have scared enough people to rob her of an expected victory.
Even if she becomes Chancellor, she has no mandate for deep reform.
Meanwhile, the French presidential hopeful, Nicolas Sarkozy, who was associating himself with Merkel and articulating a bold reform program, suddenly seems weak.
Clearly, if reforms are to be carried out in Europe, something else must be tried.
Here is one idea.
Why shouldn’t winners compensate the losers?
Surely, for example, there is a price tag that can be attached to breaking civil servants’ existing work contracts.
If a fair one-time payment is offered, it is likely to be taken up by a majority of civil servants, and public opinion will frown upon the greedy or lazy ones who turn it down.
It might be expensive to compensate all potential losers, but we must put our money where our mouth is; if a reform is certain to pay off handsomely, it will pay for the buy-offs, and more.
Governments can borrow what they need to pay out now, and service this debt as reforms yield benefits.
Not only is paying up-front against future benefits efficient and fair, but it also can provide strong incentives for policy makers to weed out bad reforms.
If a reform is as good as we think it is, then so is public debt to finance its political acceptability.
Peace, Not a Peace Offensive
TOKYO – When a North Korean dove clutching an olive branch suddenly appears, the world should challenge it to reveal its hidden talons.
This is the only prudent stance for South Korea to adopt when face-to-face negotiations with the North begin on February 8.
For what Kim is now offering is not peace, but a “peace offensive” – a tactic used by the North repeatedly since the armistice of 1953 in order to sow division whenever the regime’s adversaries have demonstrated unity and resolve.
Kim’s less-than-innocent intentions are demonstrated by his regime’s secret construction of a massive uranium-enrichment facility, containing more than 2,000 centrifuges, revealed to Stanford University’s Siegfried Hecker, a former director of America’s Los Alamos National Laboratory.
The existence of the facility seems as clear a declaration as possible that the regime is committed to achieving the capacity to intimidate its neighbors with its nuclear arsenal.
Some believe that North Korea has begun displaying its growing nuclear threat in order to secure the succession to power of Kim Jong-un, Kim Jong-il’s rotund, twenty-something youngest son.
But, given how long this facility must have been under construction, this cannot possibly be the sole, or even the main, motivation.
The “Dear Leader’s” key objective is most likely to secure his own position, given the North’s dire economic condition. For it now seems that the only way for Kim Jong-il to defend his family dynasty against any domestic challenge is to make a show of force as a nuclear power.
The challenges facing Kim are piling up.
Deification of the leader, once the foundation of the regime, is disintegrating.
Economic failure, chronic food shortages, mounting public distrust of and animosity toward Kim’s government, and an apparent reluctance within elements of the North Korean military to go to war all point to the regime’s increasing fragility.
There are also signs of growing adoration of liberal countries such as the US and South Korea throughout North Korean society – a sentiment that the regime has sought to appease by broadcasting one or two Western films on state television.
More ominously, crime is on the rise and a breakdown in state-controlled health care is fueling the spread of various types of infectious disease.
Kim’s hope must be that, by showing off his nuclear arsenal, he can bully the US, Japan, and South Korea into helping him to resolve some of his regime’s domestic crises.
Most immediately, Kim’s aim is to pressure Barack Obama’s administration into weakening the US-led sanctions against North Korea, having evidently decided that his dynasty has no future so long as the sanctions remain in place.
To drive the point home, his regime has been refusing to attend multilateral talks.
Here Kim has shown just how fundamentally flawed his understanding of the workings of Western democracy is.
He apparently believed that, following the defeat that Obama absorbed in the mid-term elections, the US would lack the will to stand up to a fresh nuclear threat and would move to conclude a peace accord with his regime, thus perpetuating his dynasty. “We are ready for both dialogue and war,” Kim has declared.
But, of course, just the opposite is true: the victory of conservative Republicans in Congress has left Obama with even less room to offer carrots to the North.
Moreover, nuclear brinkmanship is a particularly poor tactic, since Kim’s behavior is now becoming fused in American minds with arguably the most serious strategic threat on the US agenda: Iran’s push to secure nuclear weapons of its own.
Indeed, there is considerable talk among Western security services that the recently disclosed centrifuges were not actually assembled in the Nyeongbyeon facility, implying that Kim’s regime is hiding another facility.
The question then becomes, who helped Kim build these facilities?
Who transferred the technology that the North needed?
Although there is mounting circumstantial evidence of cooperative exchanges between North Korea and Iran, no conclusive proof has been found.
It has been reported that more than 200 North Koreans are currently working surreptitiously in Iran.
If these include personnel from Room 99, Kim’s secret nuclear directorate, and Room 39, the bureau that controls his slush fund of hard currencies, more attention is needed.
Of course, the inner workings of Kim’s regime are shrouded in mystery, not only to the outside world, but also to most of North Korea’s government.
The only way to increase transparency from outside is to shine a light on North Korea’s external activities, which means exposing as many connections and links between North Korea and Iran as can be found.
Nuclear cooperation between North Korea and Iran is no doubt assisting both countries to flaunt international norms – and now it appears that Burma has joined this axis of illicit nuclear proliferation.
One country could help the world gain the transparency – and the leverage – that it needs: China, over whose territory Iran and North Korea must be conducting their nuclear relations.
Vague expressions of concern, such as those offered by President Hu Jintao during his Washington summit, will not do the job.
Peace, Not Process
RAMALLAH – The United States should stop pushing for the resumption of the Palestinian-Israeli peace process.
Doing so might be the best way to achieve peace – a paradox that reflects the huge gap between a peace process and achieving genuine peace.
Make no mistake: this is not a call to arms or an appeal for a violent uprising.
Peace between the conflicting parties east of the Mediterranean and west of the Jordan river can and must be achieved through negotiations.
But if one party is more interested in a process than in the need for peace, something must be wrong.
For Israel, an occupying power whose people enjoy democratic civilian authority and a GDP tens times that of the people it is denying basic rights of freedom and independence, photo opportunities provided by meeting and greeting Palestinian leaders has replaced achieving peace.
A serious look back at the 17 years since Yassir Arafat and Yitzhak Rabin shook hands on the White House lawn is revealing.
The number of illegal Jewish settlements and settlers has more than doubled in the areas Israel occupied in 1967.
Negotiators have parsed every possible solution to the permanent-status issues of Jerusalem, borders, settlements, refugees, and economic relations.
Leaders of the world’s superpowers, United Nations officials, the Elders, and tens of people of goodwill have offered their goodwill offices and their services to bring about peace.
All to no avail.
The US efforts, led by Special Envoy George Mitchell, have shown clearly that the current ruling coalition in Israel is incapable of doing the minimum required for peace.
The Obama administration staked its reputation on getting Israelis and Palestinians to agree at least on security and borders.
The results are mixed, at best.
Palestinians complied with all Israeli and international requirements for security, while Binyamin Netanyahu’s Israeli government, which gives lip-service to the two-state solution, has yet to elucidate where Israel’s borders will be.
Meanwhile, the Israeli government wants to continue building settlements in occupied areas, in total violation of international law and the minimum requirements for peace detailed in the “roadmap” sponsored by the Quartet (the US, UN, European Union, and Russia).
The US tried to bribe the Israelis – with $3 billion in fighter jets and political support at the UN – into suspending settlement activities for three months.
Instead, Netanyahu stuck his fingers in America’s eyes, counting on the Republicans’ mid-term election victory to help him afterwards.
Not only did Israel’s leaders reject the world community’s requests, but they had the chutzpah to claim that they had convinced the US to drop this requirement for the resumption of talks.
Withdrawal by the US from the current push to restart negotiations would send a clear message that bad behavior will not be tolerated, and would encourage Israelis, who overwhelmingly want peace, to force a change in their own government’s position.
Israel’s Labor Party has consistently said that it would bolt from the current coalition if peace talks were halted.
This would force at least a change in the coalition’s makeup (possibly the replacement of the right-wing Yisrael Beitenu, headed by Foreign Minister Avigdor Lieberman, with the more moderate Kadima, headed by Tzipi Livni, Lieberman’s predecessor as foreign minister).
Public-opinion polls have consistently shown that the majority of Israelis and Palestinians want peace (not a peace process) based on a two-state solution.
Almost every learned pundit, expert, or politician in the Middle East and around the world knows pretty much what a solution to the conflict would look like – a Palestinian state on the 1967 borders with slight land swaps and an equitable negotiated solution of the Palestinian refugee issue.
One group of respected Israelis and Palestinians, the Geneva Group, even drew up a peace plan that tackles every possible negotiating point honestly and fairly.
So what is needed is not negotiations, but political will.
The Palestinians, for their part, have the necessary will.
Prime Minister Salam Fayyad’s latest chapter in his two-year plan – the “home stretch to freedom” – will be complete in August 2011.
In Fayyad’s vision, Palestinians, who bear the brunt of the occupation and are in a greater hurry than the Israelis are to be free of it, are to accept a peace strategy that aims at realizing statehood.
Once the institutions of the Palestinian state are in place, the will of the people, coupled with world support, will nonviolently overcome all efforts at denying Palestinians their right to self-determination.
In the meantime, there is no need for a process that has no chance of accomplishing peace.
Peace Now
Despite the fragile ceasefire in Lebanon, the risks of a widening war in the Middle East remain.
Too many political leaders, including President George W. Bush, Prime Minister Tony Blair, and the leaders of radical groups in the Middle East, prefer military solutions to peaceful compromise.
When Bush paints the Middle East as a struggle of good versus evil, or terror versus freedom, he abandons politics.
When Israel attempts vainly to defeat Hezbollah, it tries to avoid painful but necessary political compromises over disputed territory.
The problems of the Middle East are much more about politics and culture than about terror versus freedom.
Part of the problem is Israel’s continuing occupation of the West Bank as well as a piece of southern Lebanon.
Until Israel agrees to return to the 1967 borders with minor modifications, and to end its political control over millions of West Bank Arabs, unrest will continue.
Another part of the problem is the brazen manipulation of the Persian Gulf region by the UK and US to ensure their oil security.
There can be little doubt that the current war in Iraq is fundamentally about oil.
For nearly 100 years, first the British empire and then the US manipulated Middle Eastern governments, launched coups, bought puppet regimes, and supported wars, with the main purpose of controlling the region’s oil flows.
This approach continues despite its persistent failure.
The key to oil security is peace, not military occupation and puppet regimes.
The US embraced the Shah of Iran, and got the Iranian Revolution.
The US embraced, and later toppled, Saddam Hussein, inciting chaos, with an unintended boost for Iran.
The US stationed troops in Saudi Arabia and thus helped to create al-Qaeda’s political agenda.
The US pushed for elections in Palestine, but then championed the financial strangulation of the newly elected Hamas government.
These factors, together with the obvious failings of many Middle Eastern governments, have fueled the surge of fundamentalism among Muslims, American Christians, and some Israeli Jews that has now boiled over to rampant extremism, terror, and messianic visions of good versus evil.
True, fundamentalists are a minority everywhere, but they are stoking widespread fear, loathing, and dreams of salvation, provoking violence and war while weakening moderates forces.
Many warmongers in Washington, including apparently some in the White House, are seeking to expand their endless military campaign to Iran and Syria.
Indeed, the daily demonizing of Iran, Syria, and Hezbollah is the same as the morbid demonization of Saddam before the Iraq War.
The war party appears to be trying to whip up American public opinion in support of a wider conflict.
Political operatives may also judge that an increased sense of danger and insecurity will tilt votes to the Republicans in the US congressional elections in November.
We need to reject “us-versus-them” logic, in which Israel is pure and the Arabs are evil (or vice versa).
Every state in the region must embrace compromise and mutual respect as the basis of a lasting settlement.
Israel will not be able to avoid territorial withdrawals to the 1967 borders by exercising its military might; the US will not be able to ensure oil security through continued military occupation in the Middle East; and terrorists will not be able to destroy Israel or foist their fundamentalist ideas by force on moderate societies.
This is no pipe dream.
In my work throughout the world, as an economist and development practitioner, I find that the vast majority of individuals and political leaders of all religions, races, and creeds are ready to work together to achieve the shared goals of prosperity and wellbeing for their children.
The claim by many Israelis that there are “no partners for peace” is absurd.
Israel’s neighbors will make peace on the basis of fair borders and fair play.
Similarly, the claim that we are headed toward an inevitable clash of civilizations is sheer madness, propounded by people who think the worst of other groups but don’t really know them through personal contact or shared experience.
What unites us is vastly greater than what divides us.
We can’t depend on our political leaders to do what is needed, because many of them are captives or promoters of extremist views.
Our independent media need to seek out voices not only of the warmongers who make so much noise, but also of civil society leaders whose voices we do not regularly hear.
American newspapers need to publish op-ed pieces not only by Americans “interpreting” the Middle East, but also by representative thinkers from the Middle East itself.
Scientists in Europe, the US, Asia, and the Middle East need to deepen their contacts and work together.
The same is true with artists, musicians, sports teams, and community leaders.
Crass tribalism now threatens to overwhelm all that unites us in our common care for our children, our planet, and our future.
This is a challenge far too important to be left to Bush, Blair, Mahmoud Ahmedinejad, and Ehud Olmert.
Peace will be won by the moderate voices around the world that demand an end to senseless violence and to the tragic illusions of those who believe in a “final victory” over their foes.
Peace On All Fronts?
JERUSALEM – Not since the collapse of the Israeli-Palestinian peace talks during President Bill Clinton’s last days in the White House has the Middle East seen such a frenetic pace of peace diplomacy as it is seeing today.
A cease-fire has been brokered between Israel and Hamas in the Gaza Strip, Israel and Syria have started peace negotiations, and Israel has offered Lebanon a chance to resolve the issues that block a bilateral settlement.
Less dramatic perhaps, yet persistent nonetheless, are the peace talks between Israel and President Mahmoud Abbas’s Palestinian Authority.
So is the Middle East at the gates of a lasting, comprehensive peace?
Not quite.
Aside from the Annapolis talks, which seem to be going nowhere because of the parties’ irreconcilable differences over the core issues, all the other peace efforts are more tactical than strategic. In none of them do the conditions yet exist for an immediate leap from war to peace, nor do the parties themselves expect that to happen.
It would require bold statesmanship to turn the cease-fire with Hamas into a prelude to political talks.
Indeed, both Israel and the United States are adamant about excluding Hamas from the Annapolis process unless and until it recognizes Israel’s right to exist, while Hamas will not abandon its identity as a resistance movement merely to join negotiations that seem unlikely to satisfy the Palestinian people’s minimal requirements.
For Israel, the cease-fire with Hamas reflects its reluctance to become mired in another asymmetric war like the one it fought in Lebanon two summers ago, this time in the alleys of Gaza’s refugee camps.
Ehud Olmert, an especially unpopular prime minister whose days leading the government are probably numbered, lacks the legitimacy to throw the country into another bloody war, which given conditions in Gaza would be both costly and inconclusive.
Israel’s leaders believe that the day of reckoning with Hamas will come only when the conditions for a major military showdown are riper.
The Syrian track – requiring Israel’s withdrawal from the strategically vital Golan Heights and the evacuation of tens of thousand of settlers – is hampered not only by the Israeli leadership’s legitimacy deficit, but also by US opposition to the talks.
For the Syrians, the major objective in concluding peace with Israel is rapprochement with the US, but they will balk at the Americans’ demand that they stop flirting with terrorism as a precondition for talks.
In fact, it is doubtful that they will ever agree to this.
As Buthaina Shaaban, a Syrian minister, put it, “To demand that Syria forsake Hamas and Hezbollah is like demanding that the United States forsake Israel.”
The US has been absent from Middle East peacemaking for too long.
Indeed, for the first time in the history of its special relationship with Israel, America is not speaking to Israel’s enemies, be they Syria, Iran, Hamas, or Hezbollah.
As a result, Israel, embattled and facing a gathering storm of regional threats, had to find its own way to talk, without the diplomatic assistance of its big brother.
The demarche with Lebanon, to which US Secretary of State Condoleezza Rice devoted most of her recent surprise visit to Beirut, has much to do with America’s desperate attempt to revive its role as the main regional peace broker.
After all, it was tiny Qatar that brokered Lebanon’s domestic settlement, Egypt that mediated the Gaza cease-fire, and Turkey that is facilitating the Israeli-Syrian talks.
Israel’s shift in policy towards Syria, and that of French President Nicolas Sarkozy, was a powerful message to the Americans that they should not miss the Lebanese train as well.
But America’s dwindling leverage cannot match the influence of the region’s “axis of evil.”
Lebanon is too vulnerable to pressure from Syria and Iran, neither of which wants to see their local clients relieve the Israelis of the burden of a “Lebanese front” before their own grievances are addressed.
Nor is Hezbollah keen to see the end of Israel’s occupation of the Sheba Farms on the Lebanon border undermine its claim to the formidable independent military force that it has built with Iranian and Syrian help.
Tactical moves, however, can always develop into strategic shifts.
The Gaza cease-fire should be allowed to facilitate reconciliation between Fatah and Hamas, which would make the Annapolis process more legitimate and inclusive.
It was none other than the Hamas spokesman in Gaza, Salah al-Bardawil, who defined the cease-fire as “a historic opportunity for all the sides involved to live in peace, and to build a future for the next generations.”
Nor are the other peace tracks – Lebanon, Syria, and maybe also Iran – doomed to permanent failure.
But their success, so urgently needed to save the region from the politics of Doomsday, will have to wait for a new US administration to inject into them the necessary balance of realism and idealism, military power tempered by a genuine commitment to diplomacy.
Peace or Poison
HAIFA – Contrary to the hopes of many, the end of the Second World War and the shock of the Nazi atrocities did not mean the end of war and genocide.
Indeed, the decades following it have been rife with bloody conflicts in which entire population groups have been murdered.
Remember Angola’s civil war, the Khmer Rouge’s massacre of millions of Cambodians, Rwanda’s tribal wars, the bloody disintegration of Yugoslavia, and the extermination of Christians in Southern Sudan.
Nor should we forget the Stalinist crimes against the peoples of the former Soviet Empire.
And yet there is something unique about the Holocaust that made the United Nations single it out and devote a special day to its commemoration.
The difference lies not only in the mind-boggling number of victims and the ferocity with which it was perpetuated, but also in the absence of the usual motives found in other massacres and genocides.
The Nazis did not kill the Jews because they wanted their territory – the Jews had none; or because the Jews were followers of a rival religious faith – the Nazis and their henchmen were atheists and enemies of all religion.
Even less did the Nazis kill Jews because of their ideological differences – Jews had no peculiarly “Jewish” ideology.
Nor did the Nazis exterminate the Jews in order to take their property – most Jews were poor, and those who owned anything probably would have given it up gladly in order to save themselves.
The Nazis looked at Jews as a strain of “microbes,” and it was for this reason that they wanted to destroy them so brutally and meticulously.
The Holocaust was born of an absurd and hallucinatory mechanism that associated the Jews with an invented congenital threat, and that gave rise to a deranged, burning, irrational hatred. It is a hatred that did not disappear with Nazism, and that one can still, 65 years after the liberation of Auschwitz, glimpse in terrifying manifestations.
The world must therefore be alert, so that this hatred does not reawaken and direct itself against Jews or other peoples.
Israel’s leaders, in particular, have sought to reinforce the defenses against the anti-Semitism that still persists in the world.
That is why they have tried to obtain political support against the nuclear ambitions of Iran, which periodically threatens Israel, at times proclaiming its desire to wipe it off the face of the earth.
Iran is not Nazi Germany.
Its political regime, its ideology, and its military and economic potential are very different from that of Hitler’s state.
Modern Israel is also not like the weak Jewish communities dispersed throughout Europe in the past.
Still, Iran’s rulers have adopted a bizarre and total opposition to Israel’s very existence, a position that can revive the same nefarious mechanism that led to the genocidal hatred of the Holocaust.
If Iran gains nuclear weapons, it may, like Nazi Germany before it, be engulfed by murderous folly, threatening disaster for Israel.
What can be done to prevent this?
The sanctions directed by the international community against Iran are not guaranteed to convince its leaders to desist from developing nuclear weapons.
And any attempt to destroy militarily Iran’s nuclear potential could entangle Israel in a prolonged and exhausting struggle that might unite all the enemies of the Jewish state. The bleakness of these alternatives has led many to believe that the best and most moral way of neutralizing the Iranian threat would be for Israel to sign a peace treaty with the Palestinians.
Last month, during a public prayer in Ramallah, the Palestinian Minister of Religion, Mahmoud Habash, delivered a speech that gives hope to proponents of this solution.
Before TV cameras and in the presence of the Palestinian Authority’s senior leaders, he lambasted Iran’s interference in the Israeli-Palestinian conflict.
Essentially, what he said to the Iranians was this: “Why are you entering this conflict?
We don’t need your patronage or your support.
Instead of helping us and the Israelis reach a solution acceptable to all – two states for two peoples – you do everything to exacerbate the conflict.
For your own reasons that have nothing to do with our struggle, you encourage the extremism of Hamas, thus provoking Israel’s violent reaction, aggravating our suffering, and pushing back the solution that we all want.
Not one Iranian soldier has ever shed his blood for our people the way the soldiers of Egypt and Jordan did, yet their governments later signed peace agreements with Israel.”
The Palestinian leadership knows that if Iran ever launches a nuclear attack against Israel, their people would suffer terribly as well.
On the other hand, peace between Israel and the Palestinians might neutralize the poison of Iranian hatred and break the hallucinatory political mechanism that identifies Israel with absolute evil – the “small Satan” that should be annihilated at all cost.
The conclusion of the Israeli-Palestinian conflict would be far more effective than any military undertaking.
A united front of Israelis and Palestinians could push the Iranian people, who until recently maintained good relations with the Jewish state, to rebel against the folly that seems to have taken hold of their leaders. By contrast, Israeli or American military action against Iran would risk worsening the situation, prolonging and intensifying the suffering in this very sensitive region of the world.
Peace Process or Real Peace?
RAMALLAH – Direct talks between Palestinian and Israeli leaders are the most obvious way to achieve peace in the Middle East conflict.
But history has shown time and again that a high-profile peace process alone is no recipe for success.
The Arab League is set to meet later this month to advise the Palestinian leadership whether or not to engage in direct talks with Israel.
Palestinian officials say that there is no use in holding direct talks that are nothing more than a photo opportunity intended to create the impression of a peace process while avoiding any substantive commitments.
For Palestinians, the first step in real peace talks must include some accord on the basic issues of borders and security.
The Palestinians have presented to their Israeli counterparts (through the Americans) a written offer that includes giving up lands occupied by Israel in 1967 and now populated by Israeli settlers.
These lands would be swapped for other lands equal in size and importance.
Israel has yet to produce a single written document outlining its position on the territory that will become a Palestinian state alongside Israel.
Israel insists that any serious progress will happen only if both sides can sit at the negotiating table face to face.
According to this view, Netanyahu's right-wing coalition might be persuaded to accept the continuation of the partial settlement freeze, but only if the Israeli public sees President Mahmoud Abbas and Netanyahu publicly engaged in negotiations.
But the history of such negotiations tells a much different story.
All successful efforts in the Middle East conflict have not occurred in front of cameras and through publicly declared direct talks.
The visit to Jerusalem of Egypt's then-President Anwar el-Sadat, and the ensuing Egypt-Israel breakthrough at Camp David, took place only after successful behind-the-scenes understandings.
The public Madrid talks failed to bring about any breakthroughs, whereas the much more secretive Oslo channel brought about the PLO-Israel agreement.
Even some of the most explosive situations on the ground between Israel and its northern neighbors have been defused as a result of understandings that often included neutral third parties.
Former United States senator George Mitchell represents a relatively neutral third party supervising the current talks.
These “proximity talks” allow Mitchell to ensure that each side is making serious offers.
If the proximity talks are replaced with direct talks in which the US is not physically inside the negotiating room, there is no guarantee that the stronger partner will not try to bully the weaker one.
Direct talks also have some well-known liabilities.
Failed direct talks have often led to a spike in violence.
Neither side, nor the rest of the world, wants that.
When former US president Bill Clinton tried to set up the second Camp David summit, Palestinian leader Yasser Arafat hesitated.
He felt that the situation was not right for direct talks.
What worried Arafat was the possibility of failure and the potential of a blame game if the talks didn't produce the desired goal.
Clinton, who was embroiled in domestic problems, badly needed an international success, and assured Arafat that fingers would not be pointed at either party if the talks failed.
But no sooner had the parties left Washington after the talks broke down than Clinton joined Israel's then-Prime Minister Ehud Barak in blaming the Palestinians.
That failure, and the emotional responses from both sides as to what was or was not offered in the talks, helped spark the violence which led to the second intifada in the winter of 2000.
To his credit, Clinton and his staff decided, despite the violence, to make one last attempt in Taba, Egypt late in his presidency.
That effort is said to have been the closest the two parties have ever been to a breakthrough.
It would be helpful if the Taba understanding or the more recent efforts by Abbas and former Israeli Prime Minister Ehud Olmert could become the basis for direct talks.
The Netanyahu government has refused to agree to any such clear reference point before talks begin.
The Israelis want talks without conditions, even though Netanyahu has imposed his own condition on the Palestinians: recognition of Israel as a Jewish state, and acceptance of a demilitarized Palestinian state that does not include Jerusalem and the Jordan valley.
Every expert on the Middle East agrees that the best avenue to a serious breakthrough in Palestinian-Israeli negotiations is quiet, behind-the-scenes negotiations.
The biggest stumbling block for any successful conclusion is the public on both sides, so the more the public is kept out of the day-to-day talks, the better.
Of course, the public can and should be included through a national referendum in assessing the results once the talks have reached fruition and a comprehensive settlement is reached that both leaders say they can live with.
But, until that happy day arrives, or at least until the two sides have reached the contours of an agreement, direct talks and photo opportunities should be considered counter-productive.
After all, Palestinians and Israelis are no longer interested in the peace process.
They just want peace.
Peace this Time?
JERUSALEM – The imminent resumption in Washington of direct Israeli-Palestinian peace talks is good news.
But whether these talks will lead to an agreement, let alone within one year as US President Barack Obama hopes, is another matter.
When Obama, two days into his presidency, appointed former Senator George Mitchell as his special envoy to the Middle East, many hoped that within two years his efforts would lead to an agreement between Israel and the Palestinians – and to a comprehensive peace between Israel and all its Arab neighbors.
Whether these exaggerated hopes should be traced to Obama’s inexperience or to hubris – or both – is a moot point: what is clear is that, after 18 months and numerous visits to the region, Mitchell was able to achieve only an agreement in principle by Israel and the Palestinians to start talking to each other.
The problem is that they have been talking to each other now for 17 years, under different Israeli and Palestinian leaders, and under two US Presidents.
To bring them to the negotiating table again is not a breakthrough, but rather an attempt at damage control.
And, while Mitchell’s successful track record in achieving reconciliation in Northern Ireland seemed like an excellent credential for his current job, it may have hindered him in the Middle East.
The conflict in Northern Ireland was always territorial: not even the most radical Irish Republican group ever denied the legitimacy of Great Britain – only its rule over the six northern provinces of what they consider United Ireland. The crux of the Palestinian-Israeli conflict, by contrast, only partly concerns Israel’s borders.
The Palestinians contest not just the post-1967 occupation of the West Bank; since the United Nations partition plan of 1947 – which called for the establishment of two states, one Jewish and one Arab – Palestinians have refused to recognize Israel’s right to exist, and most Israelis are not convinced that they have totally abandoned that stance.
Being tone-deaf to these fundamental issues, Mitchell started on the wrong foot by initially acceding, with Obama’s encouragement, to the Palestinians’ demand for a freeze on further construction in Israeli settlements on the West Bank prior to the start of negotiations.
A stop to settlement activities in Palestinian territories is a reasonable demand, and the Palestinians could naturally insist on it in the negotiations.
But making a settlement freeze a precondition for negotiations was obviously unacceptable to the Israeli government, which maintained that no preconditions for negotiations should be set.
More than a year was wasted on this, causing, among other things, tensions between Prime Minister Benjamin Netanyahu’s government and the Obama administration.
With a lack of grace, Netanyahu finally agreed to a temporary freeze – due to expire at the end of September – and eventually the Palestinians, this time under US pressure, relented to open negotiations without an explicit Israeli assurance that the freeze would be continued.
Not only was precious time wasted, but further damage was done.
Even Israelis who do not agree with Netanyahu’s hard-line positions didn’t like to see their prime minister treated by the US as if he were the leader of Upper Volta.
Indeed, he did, after all, announce last year that contrary to his Likud Party’s previous position, he was now willing to accept a two-state solution – a position that is still anathema to many Likud members, as well to at least three of the smaller parties in his government coalition.
Now that the talks are to begin, will they achieve anything substantial, or will the summit in Washington merely be another photo opportunity, like President George W. Bush’s Annapolis summit in 2007?
Only an unreconstructed optimist would give the talks more than a 50% chance of succeeding.
The reasons are more immediate than the intractable character of Middle East peace-making.
Even if Netanyahu is willing to bow to realism, some of his coalition partners might leave his government.
On the Palestinian side, Mahmoud Abbas’s Palestinian Authority lost control in 2006 of the Gaza Strip – now ruled by an illegitimate Hamas-led government – and thus cannot speak anymore for all Palestinians.
With more than 600 Palestinians killed in Gaza since Hamas’s violent putsch, making peace among the Palestinians may be as difficult as making peace between them and Israel.
Moreover, before Israeli-Palestinian talks broke down two years ago, the previous Israeli government, under Prime Minister Ehud Olmert and Foreign Minister Tzipi Livni, negotiated for two years with the Palestinian Authority.
This was the most moderate Israeli government conceivable, and the same can be said about the Fatah movement controlling the Palestinian Authority.
Yet, after dozens of meetings, public and private, the two sides failed to reach an agreement.
Even the most moderate leaders on both sides could not agree on the core issues of the conflict: borders, settlements, Jerusalem, and the fate of 1947-1948 Palestinian refugees and their descendants.
Both sides had an immediate stake in reaching an agreement: for Olmert, an agreement might have rescued his position as prime minister, and it would have been a trump card for Abbas in Fatah’s de facto civil war with Hamas.
The failure to reach agreement under such apparently auspicious conditions does not bode well for the coming talks.
But Netanyahu has said that once negotiations start, “we will surprise everyone,” and the Palestinians have gone further than ever before in building the institutions needed for national independence.
Even a lapsed optimist can see that this time the chances for reconciliation just might be better after all.
Peace Through Development
New York – American foreign policy has failed in recent years mainly because the United States relied on military force to address problems that demand development assistance and diplomacy.
Young men become fighters in places like Sudan, Somalia, Pakistan, and Afghanistan because they lack gainful employment.
Extreme ideologies influence people when they can’t feed their families, and when lack of access to family planning leads to an unwanted population explosion.
President Barack Obama has raised hopes for a new strategy, but so far the forces of continuity in US policy are dominating the forces of change.
The first rule in assessing a government’s real strategy is to follow the money.
America vastly overspends on the military compared with other areas of government.
Obama’s projected budgets do not change that.
For the coming 2010 fiscal year, Obama’s budget calls for $755 billion in military spending, an amount that exceeds US budget spending in all other areas except so-called “mandatory” spending on social security, health care, interest payments on the national debt, and a few other items.
Indeed, US military spending exceeds the sum of federal budgetary outlays for education, agriculture, climate change, environmental protection, ocean protection, energy systems, homeland security, low-income housing, national parks and national land management, the judicial system, international development, diplomatic operations, highways, public transport, veterans affairs, space exploration and science, civilian research and development, civil engineering for waterways, dams, bridges, sewerage and waste treatment, community development, and many other areas.
This preponderance of military spending applies to all ten years of Obama’s medium-term scenario.
By 2019, total military spending is projected to be $8.2 trillion, exceeding by $2 trillion the budgeted outlays for all non-mandatory budget spending.
US military spending is equally remarkable when viewed from an international perspective.
According to the Swedish International Peace Research Institute, total military spending in constant 2005 dollars reached roughly $1.4 trillion in 2007.
In other words, the US spends roughly the same amount spent by the rest of the world combined – a pattern that the Obama administration shows no signs of ending.
The policy decisions of recent months offer little more hope for a fundamental change in US foreign policy direction.
While the US has signed an agreement with Iraq to leave by the end of 2011, there is talk in the Pentagon that US “non-combat” troops will remain in the country for years or decades to come.
It is easy to see how the persistence of instability in Iraq, Iranian influence, and al-Qaeda’s presence will lead American policymakers to take the “safe” route of continued military involvement.
Some opponents of the Iraq War, including me, believe that a fundamental – and deeply misguided – objective of the war from the outset has been to create a long-term military base (or bases) in Iraq, ostensibly to protect oil routes and oil concessions.
As the examples of Iran and Saudi Arabia show, however, such a long-term presence sooner or later creates an explosive backlash.
The worries are even worse in Afghanistan and Pakistan.
NATO’s war with the Taliban in Afghanistan is going badly, so much so that the commanding US general was sacked this month.
The Taliban are also extending their reach into neighboring Pakistan.
Both Afghanistan and the neighboring provinces of Pakistan are impoverished regions, with vast unemployment, bulging youth populations, prolonged droughts, widespread hunger, and pervasive economic deprivation.
It is easy for the Taliban and al-Qaeda to mobilize fighters under such conditions.
The problem is that a US military response is essentially useless under these conditions, and can easily inflame the situation rather than resolve it.
Among other problems, the US relies heavily on drones and bombers, leading to a high civilian death toll, which is inflaming public attitudes against the US.
After one recent disaster, in which more than 100 civilians died, the Pentagon immediately insisted that such bombing operations would continue.
A recent survey showed overwhelming Pakistani opposition to US military incursions into their country.
Obama is doubling down in Afghanistan, by raising the number of US troops from 38,000 to 68,000, and perhaps more later.
There are also risks that the US will get involved much more heavily in the fighting in Pakistan.
The new US commanding general in Afghanistan is reportedly a specialist in “counter-insurgency,” which could well involve surreptitious engagement by US operatives in Pakistan. If so, the results could prove catastrophic, leading to a spreading war in an unstable country of 180 million people.
What is disconcerting, however, is not only the relentless financing and spread of war, but also the lack of an alternative US strategy.
Obama and his top advisers have spoken regularly about the need to address the underlying sources of conflict, including poverty and unemployment. A few billion dollars has been recommended to fund economic aid for Afghanistan and Pakistan.
But this remains a small amount compared to military outlays, and an overarching framework to support economic development is missing.
Before investing hundreds of billions of dollars more in failing military operations, the Obama administration should re-think its policy and lay out a viable strategy to US citizens and the world.
It’s high time for a strategy of peace through sustainable development – including investments in health, education, livelihoods, water and sanitation, and irrigation – in today’s hotspots, starting with Afghanistan and Pakistan.
Such a strategy cannot simply emerge as a byproduct of US military campaigns.
Rather, it will have to be developed proactively, with a sense of urgency and in close partnership with the affected countries and the communities within them.
A shift in focus to economic development will save a vast number of lives and convert the unthinkably large economic costs of war into economic benefits through development.
Obama must act before today’s crisis explodes into an even larger disaster.
Brazil’s Statute of Virtual Liberty
RIO DE JANEIRO – It seems like the plot of a horror movie – the type where a little-noticed glitch in the matrix threatens to cause global chaos.
This time, it was a simple, but fateful, programming misstep that suddenly left millions of consumers’ most sensitive information vulnerable to hackers.
News headlines screamed about online dangers that we could barely understand, alerting swarms of digital pirates to a bounty of new criminal opportunities.
Companies worldwide scrambled to secure their online safety.
The story of the so-called “Heartbleed” bug, however, is all too real. It points to a stark truth: In a shockingly short time, we have become completely dependent on the Internet, a frontier we are only beginning to comprehend, let alone map and regulate.
Important debates – such as freedom versus security, privacy versus piracy, and cyberspace’s impact on democracy – are far from being resolved.
Yet fears over Heartbleed and similar such threats, and the furor surrounding the aggressive American surveillance tactics revealed by former intelligence contractor Edward J. Snowden, have already put many countries in a defensive posture.
In many places, efforts to protect Internet freedom have been stymied.
But, as my home country, Brazil, has shown, a different path is possible.
Brazil’s House of Representatives has passed a genuine Internet “Bill of Rights,” which was unanimously approved by the senate and signed into law by President Dilma Rousseff last week – much to the delight of civil-society advocates.
The legislation, widely described as an Internet constitution, seeks to safeguard online freedom of expression and limit government collection and usage of Internet users’ metadata.
The bill ensures “net neutrality” (meaning that Internet service providers must treat all information and users equally), and subjects global companies, such as Google and Facebook, to Brazilian law and precedent in cases involving its own citizens.
Inspiration for Brazil’s embrace of Internet freedom stemmed in part from US President Barack Obama’s historic election campaign in 2008.
By tapping millions of small donations through social networking sites, he revolutionized election fundraising and seemed to open up new horizons for democracy and civic engagement.
But not everyone was convinced.
A wave of legislation – criminalizing various types of Internet use, such as music sharing, and allowing greater government surveillance – appeared to be turning back the liberal tide.
In Brazil, too, the authorities acquired greater control over the Internet, as the country moved to the forefront of the international fight against cybercrime.
The situation started to change in 2009, after Brazil’s then-president, Luiz Inácio Lula da Silva, participated in an Internet freedom event, and vowed afterwards to block any legislation restricting online freedoms.
He also pledged to submit the bill that resulted in the newly adopted law.
Interestingly, the bill was not drafted by the usual cast of bureaucrats.
Instead, the process was opened up to the public, with ordinary citizens allowed to contribute via a government blog.
Advocates of free software mixed it up with law enforcers and lobbyists from the likes of Google and Yahoo, in a pioneering example of “wiki-democracy.”
In 2011, after two years of debate and discussion, a draft bill was sent to Congress.
Opposition was fierce.
Lobbyists sought to water down the proposed legislation, with telecommunications companies particularly opposed to its net-neutrality provisions.
Nevertheless, the coalition of forces backing the bill – civil-society groups supported by a 350,000-strong petition organized by legendary Brazilian musician and former Minister of Culture Gilberto Gil – overcame traditional political interests.
In the process, they seem to have ushered in a new model of lawmaking.
Elsewhere in the world, however, developments have moved in a different direction.
Obama’s electoral afterglow dimmed.
The Internet-inspired uprisings in Iran and then in much of the Arab world were brutally crushed.
New revelations about government surveillance, together with Heartbleed-type security scares, continue to test the world’s faith in online freedom.
Yet, despite the fears – and the dangers inherent in a free Internet – the world must not give up exploring the transformative potential of cyberspace.
Those who are losing their resolve need to only look south, where Brazil is leading the way.
People Power in the Caucasus
For the past month, women in Georgia who were displaced from Abkhazia during the 1993 conflict have witnessed history moving backwards; everything they lived through 15 years ago is repeating itself.
These women are now hosting a new flood of displaced civilians from Abkhazia and South Ossetia after Russia’s aggression in those regions, as well as within the Georgian territories that Russian forces have occupied since the invasion.
In Tbilisi alone, there are more than 500 camps for internally displaced people, many of them women and children living with shortages of food and medical supplies.
Georgians today hardly feel supportive of their president, Mikheil Saakashvili, who, in a foolish attempt to regain control over South Ossetia, provoked Russia to drop its peacekeeping mission in the region and turn its full military might to pushing Georgian troops out of South Ossetia and Abkhazia, and then to occupying much of Georgia.
The Russians bombed numerous strategic and civilian targets in Georgia, destroying infrastructure and producing growing shortages of food, fuel, and medicine.
People are in despair; they are angry at Russia for its aggression and at their own government for provoking this uneven conflict.
People of different nationalities and ethnicities have been living in this region side by side for centuries, sharing customs, traditions, bread and wine, and mutual respect for each another’s cultures and languages.
But, going back to the Russian, British, and Ottoman Empires that once battled here, they have been continually exploited by politicians and generals.
Women and children suffer the most in times of conflict.
Add to this centuries-old patriarchal traditions, 15-year-old post-war traumas, a 20-year economic crisis, and current Russian aggression, and you may begin to grasp what women in South Ossetia, Abkhazia, and Georgia are enduring these days.
Besides the general devastation that modern warfare brings, impoverished and angry Russian soldiers were wreaking havoc on civilians by stealing belongings left behind and raping women.
In addition, lawlessness was enticing bandits to cross the border and vandalize and rob properties left by fleeing refugees.
News reports and “analysis” by state-controlled channels in both Russia and Georgia that promote negative images of “the enemy” serve only to widen the gap between ethnic groups.
Over the past month, concerned citizens in both Russia and Georgia have started to make attempts to build alliances and reach out to each other outside of the government-controlled media and structures.
There have been action calls and statements circulated on the Web calling on the people of the region to unite and not allow governments to build bigger walls between them.
Despite government propaganda, the region’s people must remember that Russians are not superior to Georgians, Georgians to Ossetians or Abkhazians, and so on.
We need to stop these territorial battles based on national pride and desire to control and rule.
Saakashvili must be pressured to abandon his effort to wield full control over Abkhazia and South Ossetia.
At the same time, the Russian government must be pressured to pull out of the Caucasus and let people there decide their future for themselves.
Now is the time for Georgian, Russian, Abkazian, and Ossetian civilians who are bearing the brunt of the conflict to come together to stop imperial chess games that kill thousands of people and leave thousands more displaced and emotionally wounded.
It is time to help civil society in this area build a world where peace, not warfare, is the rule.
Women’s rights activists in the region should not fall into a brainwashing trap of nationalism and territorial disputes, becoming another tool in the hands of politicians.
They should demonstrate to their governments that they will not succumb to divisive ideology.
Perfect Losers
LONDON – Economics, it seems, has very little to tell us about the current economic crisis.
Indeed, no less a figure than former United States Federal Reserve Chairman Alan Greenspan recently confessed that his entire “intellectual edifice” had been “demolished” by recent events.
Scratch around the rubble, however, and one can come up with useful fragments.
One of them is called “asymmetric information.”
This means that some people know more about some things than other people.
Not a very startling insight, perhaps.
But apply it to buyers and sellers.
Suppose the seller of a product knows more about its quality than the buyer does, or vice versa.
Interesting things happen – so interesting that the inventors of this idea received Nobel Prizes in economics.
In 1970, George Akerlof published a famous paper called “The Market for Lemons.”
His main example was a used-car market.
The buyer doesn’t know whether what is being offered is a good car or a “lemon.”
His best guess is that it is a car of average quality, for which he will pay only the average price.
Because the owner won’t be able to get a good price for a good car, he won’t place good cars on the market.
So the average quality of used cars offered for sale will go down.
The lemons squeeze out the oranges.
Another well-known example concerns insurance.
This time it is the buyer who knows more than the seller, since the buyer knows his risk behavior, physical health, and so on.
The insurer faces “adverse selection,” because he cannot distinguish between good and bad risks.
He therefore sets an average premium too high for healthy contributors and too low for unhealthy ones.
This will drive out the healthy contributors, saddling the insurer with a portfolio of bad risks – the quick road to bankruptcy.
There are various ways to “equalize” the information available – for example, warranties for used cars and medical certificates for insurance.
But, since these devices cost money, asymmetric information always leads to worse results than would otherwise occur.
All of this is relevant to financial markets because the “efficient market hypothesis” – the dominant paradigm in finance – assumes that everyone has perfect information, and therefore that all prices express the real value of goods for sale.
But any finance professional will tell you that some know more than others, and they earn more, too.
Information is king.
But just as in used-car and insurance markets, asymmetric information in finance leads to trouble.
A typical “adverse selection” problem arises when banks can’t tell the difference between a good and bad investment – a situation analogous to the insurance market.
The borrower knows the risk is high, but tells the lender it is low.
The lender who can’t judge the risk goes for investments that promise higher yields.
This particular model predicts that banks will over-invest in high-risk, high-yield projects, i.e., asymmetric information lets toxic loans onto the credit market.
Other models use principal/agent behavior to explain “momentum” (herd behavior) in financial markets.
Although designed before the current crisis, these models seem to fit current observations rather well: banks lending to entrepreneurs who could never repay, and asset prices changing even if there were no changes in conditions.
But a moment’s thought will show why these models cannot explain today’s general crisis.
They rely on someone getting the better of someone else: the better informed gain – at least in the short-term – at the expense of the worse informed.
In fact, they are in the nature of swindles.
So these models cannot explain a situation in which everyone, or almost everyone, is losing – or, for that matter, winning – at the same time.
The theorists of asymmetric information occupy a deviant branch of mainstream economics.
They agree with the mainstream that there is perfect information available somewhere out there, including perfect knowledge about how the different parts of the economy fit together.
They differ only in believing that not everyone possesses it.
In Akerlof’s example, the problem with selling a used car at an efficient price is not that no one knows how likely it is to break down, but rather that the seller knows perfectly well how likely it is to break down, and the buyer does not.
And yet the true problem is that, in the real world, no one is perfectly informed.
Those who have better information try to deceive those who have worse; but they are deceiving themselves that they know more than they do.
If only one person were perfectly informed, there could never be a crisis – someone would always make the right calls at the right time. But only God is perfectly informed, and He does not play the stock market.
“The outstanding fact,” John Maynard Keynes wrote in his General Theory of Employment, Interest, and Money , “is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made.” There is no perfect knowledge “out there” about the correct value of assets, because there is no way we can tell what the future will be like.
Rather than dealing with asymmetric information, we are dealing with different degrees of no information.
Herd behavior arises, Keynes thought, not from attempts to deceive, but from the fact that, in the face of the unknown, we seek safety in numbers.
Economics, in other words, must start from the premise of imperfect rather than perfect knowledge.
It may then get nearer to explaining why we are where we are today.
Peril or Promise in North Korea?
MADRID – Two days after Kim Jong-il, North Korea’s leader, died in a train in his country, South Korean authorities still knew nothing about it.
Meanwhile, American officials seemed at a loss, with the State Department at first merely acknowledging that press reports had mentioned his death.
The South Korean and US intelligence services’ inability to pick up any sign of what had happened attests to the North Korean regime’s opaque character, but also to their own deficiencies.
American planes and satellites watch North Korea day and night, and the most sensitive intelligence-gathering equipment covers the frontier between the two Koreas.
Nonetheless, we know very little of that country, because all vital information is restricted to a small group of leaders obsessed with secrecy.
The leadership change is occurring at the worst possible time.
It is known that Chinese leaders had hoped that Kim Jong-il would survive long enough to consolidate support among the country’s various factions for the succession of his son, Kim Jong-un.
All of the symbolic attributes of power have been transferred to Kim Jong-un – reflected in his official position in the funeral ceremonies, his presidency of the Military Commission, and his assumption of the ruling party’s highest rank – with remarkable speed.
But such trappings will not make the transition process any easier for a young man of less than 30 in a society where veteran military chiefs retain so much power.
The economic situation, which is still very precarious, with many people living close to starvation, constitutes another key challenge.
Two examples suffice to illustrate the impact: the price of rice has tripled while consumption of electricity is down by two-thirds from two decades ago.
My personal memories of North Korea, now almost ten years old, are of a poor and depressed country.
Pyongyang, the capital, was dark and deserted, illuminated by the cavalcade taking us from the official housing to the opera house, only to return to darkness behind us.
Kim Jong-il was greeted with the same fervor when he entered the opera house that today marks public mourning of his death.
My trip took place in April 2002, a somewhat optimistic time.
The European Union had joined an agreement initiated by the two Koreas and the US within the Korean Energy Development Organization program, the objective being to persuade North Korea to freeze and later dismantle its nuclear program.
In exchange, two light-water nuclear reactors would be built to generate electric energy, and 500,000 metric tons of oil would be supplied annually until the first reactor began operating.
In turn, the EU initiated an extensive humanitarian aid project.
The talks with Kim Jong-il and his collaborators seemed promising.
Unfortunately, the agreement did not last long.
In 2003, North Korea abandoned the Nuclear Non-Proliferation Treaty.
From that moment, all optimism was lost, until contacts were subsequently reinitiated in a complex six-party format (China, Russia, the US, Japan, and the two Koreas) that continued, with ups and downs, until the end of 2007.
Since the maritime incidents of 2009 and 2010, in which North Korean forces attacked South Korean assets, there has been virtually no contact at all between the two sides.
Given North Korea’s behavior over the last decade, the sudden change of leadership increases the threat of unexpected incidents.
In order to limit the risk, it is essential to keep relations with China as transparent as possible.
It is China that has the most direct contact with North Korea, and that could best catalyze resumption of the six-party talks.
China recognizes that North Korea cannot continue in its present form, and would like to see its leaders transform the economy without undertaking substantial political change.
Is that possible?
Could it be done quickly enough to boost other regional players’ confidence that the country’s evolution will be predictable?
For China, problems are judged according to the country’s own history and from the standpoint of domestic policy – all the more so the closer the problem is to its borders.
For the West, especially the US, every problem should have a solution within a finite period of time.
While the US breaks down problems and tries to find solutions for each part, China considers political problems unhurriedly, as an extended process that might have no resolution.
Beyond the six-party talks, it is necessary to create a framework from which a cooperative dialogue between the US and China might emerge.
In the case of Korea – as Christopher Hill, one of the most effective US negotiators on these matters, remembers – the US should make it clear that no possible solution for the divided peninsula would mean a strategic loss for China.
After the armistice that ended the Korean War in 1953, the 38th parallel was established as the limit for US forces’ presence; the importance of that war for China should not be forgotten.
This approach could be one way to stabilize the region during this period of heightened uncertainty.
There might be others.
The ongoing opening in Myanmar (Burma) shows that potentially significant political change does not need to be accompanied by regional instability.
In the case of North Korea, where nuclear arms are in play, it cannot afford to be.
Your Data or Your Life
LONDON – Apple’s new watch keeps track of your health.
Google Now gathers the information needed to compute the ideal time for you to leave for the airport.
Amazon tells you the books you want, the groceries you need, the films you will like – and sells you the tablet that enables you to order them and more.
Your lights turn on when you get close to home, and your house adjusts to your choice of ambient temperature.
This amalgamation and synthesis of digital services and hardware is designed to make our lives easier, and there is no doubt that it has.
But have we stopped asking fundamental questions, both of ourselves and of the companies we entrust to do all of these things?
Have we given sufficient consideration to the potential cost of all of this comfort and ease, and asked ourselves if the price is worth it?
Every time we add a new device, we give away a little piece of ourselves.
We often do this with very little knowledge about who is getting it, much less whether we share their ethics and values.
We may have a superficial check-box understanding of what the companies behind this convenience do with our data; but, beyond the marketing, the actual people running these organizations are faceless and nameless.
We know little about them, but they sure know a lot about us.
The idea that companies can know where we are, what we have watched, or the content of our medical records was anathema a generation ago.
The vast array of details that defined a person was widely distributed.
The bank knew a bit, the doctor knew a bit, the tax authority knew a bit, but they did not all talk to one another.
Now Apple and Google know it all and store it in one handy place.
That is great for convenience, but not so great if they decide to use that information in ways with which we do not proactively agree.
And we have reason to call into question companies’ judgment in using that data.
The backlash to the news that Facebook used people’s news feeds to test whether what they viewed could alter their moods was proof of that.
I do not recall checking a box to say that that was okay.
Recently, hackers misappropriated photos sent via Snapchat, a service used primarily by young people that promises auto-deletion of all files upon viewing.
Likewise, health-care data were always considered private, so that patients would be open and honest with health-care professionals.
As the lines between health care and technology businesses become hazy, some manufacturers of “wearables” and the software that runs on them are lobbying to have their products exempted from being considered medical devices – and thus from regulatory requirements for reliability and data protection.
Privacy is only one part of a larger discussion around data ownership and data monopoly, security, and competition.
It is also about control and destiny. It is about choice and proactively deciding how people’s data are used and how people use their own data.
More mature firms have phased in formal protocols, with ethics officers, risk committees, and other structures that oversee how data are collected and used, though not always successfully (indeed, they often depend on trial and error). Small new companies may have neither such protocols nor the people – for example, independent board members – to impose them.
If serious ethical lapses occur, many consumers will no longer use the service, regardless of how promising the business model is.
We like new applications and try them out, handing over access to our Facebook or Twitter accounts without much thought about the migration of our personal data from big companies with some modicum of oversight to small companies without rigorous structures and limits.
Consumers believe or expect that someone somewhere is keeping an eye on this, but who exactly would that be?
In Europe, legislation to protect personal data is not comprehensive, and much of the rest of the world lacks even rudimentary safeguards.
After exploring this issue with legislators in several countries over the past couple of months, it has become abundantly clear that many do not have a full grasp of the myriad issues that need to be considered.
It is a difficult subject to address, and doing so is impeded by lobbying efforts and incomplete information.
In the short term, young companies should view ethics not as a marketing gimmick, but as a core concern.
All organizations should invest in ethics officers or some sort of review process involving people who can assess all of the implications of a great-sounding idea.
Legislators need to educate themselves – and the public – and exercise more oversight.
For example, just as many countries did with car seatbelts a generation ago, a public-safety campaign could be paired with legislation to explain and promote two-step verification.
In the longer term, as we rightly move toward universal Internet access, we need to ask: How much of ourselves are we willing to give away?
What happens when sharing becomes mandatory – when giving access to a personal Facebook account is a job requirement, and health services are withheld unless a patient submits their historical Fitbit data?
If that is the future we want, we should stride toward it with full awareness and a sense of purpose, not meander carelessly until we fall into a hole, look up, and wonder how we got there.
Pervez Musharraf’s Long Goodbye
ISLAMABAD – Pervez Musharraf of Pakistan stands virtually alone today while facing the most serious challenge to his presidency: possible impeachment by the new democratically-elected government.
The potential charges are serious: conspiring to destabilize the government that was elected last February, unlawfully removing the country’s top judges in November 2007, and failing to provide adequate security to Benazir Bhutto before her assassination last December.
Allying himself with the Bush administration has increased his unpopularity, especially following missile attacks by the United States in Pakistan’s tribal areas.
Despite earlier differences on how to deal with Musharraf, Pakistan’s leading political parties are now united against him.
Feuding between the Pakistan People’s Party, led by Benazir’s widower, Asif Ali Zardari, and the Pakistan Muslim League (N), led by former Prime Minister Nawaz Sharif, had given Musharraf a chance to regain some standing after his allies were defeated in the February elections.
American reluctance to abandon Musharraf – together with prolonged electricity shortages, which made the new government appear incompetent – also raised his hopes.
Musharraf may be counting on the army, his primary constituency, to bail him out of this crisis.
Though such support remains a possibility, it is unlikely that the army leadership will extend itself on his behalf.
Though a protégé of Musharraf, the army’s chief of staff, General Ashfaq Kayani, is a professional soldier for whom the army’s institutional interests are more important than the political interests of his former army boss.
Kayani has repeatedly declared that the army will not interfere in political affairs, and that the parliament and constitution are supreme.
Even if the army is tempted to step in on Musharraf’s behalf, it has been chastened by political developments during the past year.
The entire legal community arose to demand restoration of the country’s judges and reinforcement of the rule of law.
The public’s demand for free elections and the resulting creation of a democratic government have forced the military to accept the public will.
The army has also paid a heavy price for Musharraf’s approach to the war on terror.
Suicide bombers have struck repeatedly at military installations and personnel around the army’s headquarters in Rawalpindi.
An increase in deadly attacks on army convoys in the Pakistan-Afghanistan tribal areas has also pushed the army away from Musharraf.
Though the army has reaped a financial windfall from US military aid, and has targeted many foreign militants allied with al-Qaeda in the region, its performance against Pakistani militants has been mixed at best.
Consequently, the prestige of the Taliban and other militant groups operating in the area has grown.
In this context, the army, seeking to avoid sole responsibility for reverses, wants a popular government to take charge of policy.
No such government can emerge if the elected parties are unseated.
Nevertheless, there are signs of disagreement on important matters between the government and the army.
The military recently blocked a government move to place Pakistan’s infamous intelligence service, the ISI, under the control of the interior minister rather than the prime minister.
Musharraf backed the military’s opposition to this reform, gaining some gratitude from military commanders.
During Prime Minister Yousaf Raza Gilani’s recent visit to the US, President Bush repeatedly said that his administration supports Pakistan’s democracy, a policy since reiterated by Secretary of State Condoleezza Rice.
This indicates that the US will not back Musharraf in any confrontation between him and Pakistan’s democratic forces.
Most Pakistanis hope so.
Musharraf must assess what will be his legacy.
Rather than trying to face down impeachment and prolonging the crisis, he should recognize that Pakistan cannot afford more instability, and that giving up honorably will bring him some respect.
For the sake of argument, even if Musharraf faces impeachment and by some stroke of luck is saved from being thrown out of office, his future will be bleak.
In March 2009, the current ruling coalition will gain more seats in the Senate, and the government would almost certainly try to impeach him again.
Moreover, any attempt by Musharraf to dislodge the government by using his constitutional authority would trigger another election, the results of which would not be much different from the vote in February.
It is time for Musharraf’s friends in the West to press him to serve his country one last time, by avoiding confrontation with his country’s democratic forces and calling it quits.
Pervez Musharraf’s Minions of Terror
After his ill-advised dismissal of the chief justice of Pakistan’s Supreme Court ignited a firestorm of violent protests, President General Pervez Musharraf may be banking on Islamic fanatics to create chaos in the nation’s capital, Islamabad.
Many suspect that an engineered bloodbath that leads to army intervention, and the declaration of a national emergency, could serve as a pretext to postpone the October 2007 elections.
This could make way for Musharraf’s dictatorial rule to continue into its eighth year – and perhaps well beyond.
This perverse strategy sounds almost unbelievable.
Musharraf, who President George W. Bush describes as his “buddy” and supports an “enlightened moderate” version of Islam, wears religious extremists’ two close attempts on his life as a badge of honor.
But his secret reliance upon the Taliban card – one that he has been accused of playing for years – increases as his authority weakens.
Signs of government-engineered chaos abound.
In the heart of Islamabad, vigilante groups from a government-funded mosque, the Lal Masjid, roam the streets and bazaars imposing Islamic morality and terrorizing citizens in full view of the police.
Openly sympathetic to the Taliban and tribal militants fighting the Pakistan army, the two cleric brothers who head Lal Masjid, Maulana Abdul Aziz and Maulana Abdur Rashid Ghazi, have attracted a core of banned militant organizations around them.
These include the Jaish-e-Muhammad, considered to be the pioneer of suicide bombings in the region.
The clerics openly defy the state.
Since January 21, baton-wielding, burqa-clad students of the Jamia Hafsa, the woman’s Islamic university located next to Lal Masjid, have forcibly occupied a government building, the Children’s Library.
In one of their many forays outside the seminary, this burqa brigade swooped upon a house, which they claimed was a brothel, and kidnapped three women and a baby.
Jamia Hafsa students in Islamabad demonstrating for enforcement of Islamic law, March 2007.
Male students from Islamabad’s many madrasas are even more active in terrorizing video shop owners, whom they accuse of spreading pornography.
Newspapers have carried pictures of grand bonfires made with seized cassettes and CD’s.
Most video stores in Islamabad have now closed.
Their owners duly repented after a fresh campaign on May 4 by militants blew up a dozen music and video stores, barbershops and a girl’s school in the Northwest Frontier Province.
Astonishing patience has been shown by the Pakistani state, which on other occasions freely used air and artillery power to combat such challengers.
The Lal Masjid clerics operate with impunity – no attempt has been made to cut off its electricity, gas, phone, or Web site – or even to shut down its illegal FM radio station.
The chief negotiator appointed by Musharraf, Chaudhry Shujaat Husain, described the burqa brigade kidnappers as “our daughters,” with whom negotiations would continue and against whom “no operation could be contemplated.”
Clerics realize that the government wants to play ball.
Their initial demand – the rebuilding of eight illegally constructed mosques that had been knocked down by Islamabad’s civic administration – became a call for enforcement of Sharia law across Pakistan.
In a radio broadcast on April 12, the clerics issued a threat: “ There will be suicide blasts in the nook and cranny of the country.
We have weapons, grenades, and we are expert in manufacturing bombs.
We are not afraid of death…. ”
The Lal Masjid head cleric, a former student of my university in Islamabad, added the following chilling message for our women students:
The government should abolish coeducation.
Quaid-e-Azam University has become a brothel.
Its female professors and students roam in objectionable dresses.
I think I will have to send my daughters of Jamia Hafsa to these immoral women.
They will have to hide themselves in hijab, otherwise they will be punished according to Islam….
Our female students have not issued the threat of throwing acid on the uncovered faces of women.
However, such a threat could be used for creating the fear of Islam among sinful women.
There is no harm in it.
There are far more horrible punishments in the hereafter for such women.
Indeed, on May 7, a female teacher in the QAU history department was physically assaulted in her office by a bearded, Taliban-looking man who screamed that he had instructions from Allah.
What’s next?
As Islamabad heads the way of Pakistan’s tribal towns, the next targets will be girls’ schools, Internet cafes, bookshops, and stores selling Western clothing, followed by purveyors of toilet paper, tampons, underwear, mannequins, and other un-Islamic goods.
In a sense, the inevitable is coming to pass.
Until a few years ago, Islamabad was a quiet, orderly, modern city no different from any other in Pakistan.
Still earlier, it was largely the abode of Pakistan’s hyper-elite and foreign diplomats.
But the rapid transformation of its demography brought with it hundreds of mosques with multi-barreled audio cannons mounted on minarets, as well as scores of madrasas illegally constructed in what used to be public parks and green areas.
Now, tens of thousands of their students with little prayer caps dutifully chant the Koran all day.
In the evenings, they roam in packs through the city’s streets and bazaars, gaping at store windows and lustfully ogling bare-faced women.
The stage is being set for transforming Islamabad into a Taliban stronghold.
When Musharraf exits – which may be sooner rather than later – he will leave a bitter legacy that will last for generations, all for a little more taste of power.
Dying for Europe
LONDON – This summer, a gruesome tragedy unfolded aboard a ship in the Mediterranean Sea.
Twenty-nine men, women, and children fleeing crisis-torn countries succumbed to engine fumes in the vessel’s hold.
As 60 others scrambled to escape, the human traffickers carrying them to Europe stabbed them and threw them into the sea off the coast of Lampedusa.
Eventually, a Danish petrol tanker rescued 569 survivors.
More recently, some 500 migrants died off the coast of Malta, when a group of human traffickers responded to the passengers’ refusal to move onto smaller vessels by deliberately ramming the boat that had carried them from Egypt.
Less than a week later, dozens of asylum-seekers perished when their boat capsized near the Libyan coast.
Such large numbers of deaths in and around Europe should do more than briefly seize headlines.
But Europeans seem inured to the plight of asylum-seekers and migrants, almost 3,000 of whom have died in the Mediterranean this year.
This situation is untenable, both morally and politically.
Of course, Europe cannot help all of those fleeing violence and destitution.
But, as the world’s wealthiest continent, it can certainly do more, especially if it adopts a unified approach.
At a time when the number of displaced people is at an historic high, the European Union – which accounts for 29% of global wealth – hosts just 9% of refugees, leaving far poorer countries to carry most of the burden.
For example, tiny Lebanon shelters more than one million of the three million Syrians who are displaced, whereas the EU – 100 times larger – has taken in only about 100,000.
The EU is hardly powerless to address the tragic situation in and around the Mediterranean.
The new European Commission, Council, and Parliament should be able to uphold the EU’s humanitarian obligations by reducing the number of deaths at sea, thereby setting the stage for a more reasonable public debate about migration, while improving strained relations with Africa.
This will demand, first and foremost, that EU leaders overcome the forces that have so far impeded action.
One obstacle is anti-migrant populism, which has intensified owing to the serious economic challenges that Europeans have faced.
With far-right political parties nipping at their heels, most mainstream politicians have avoided taking a stance on migration that might make them seem “soft.”
Equally paralyzing is the way that the tragic episodes in the Mediterranean are portrayed: as sudden crises, rather than as part of a long-term trend.
As such, they often provoke fiery rhetoric and defensiveness, instead of thoughtful debate.
For example, when the Arab Spring rebellions erupted in 2011, many Europeans immediately feared that millions of North Africans would descend on their shores.
In the three years since then, just 30,000 have arrived.
Worse, this portrayal implies that little can be done to mitigate, or even prevent, such occurrences.
But the longer-term trends driving such tragedies – including demographic shifts, inadequate legal routes to Europe, poor governance and economic prospects in origin countries, and skewed public perceptions of refugees and migrants – can, to various degrees, be addressed.
For starters, European Commission President Jean-Claude Juncker, European Council President Donald Tusk, and the European Parliament should work to ensure that the public debate about refugees and migrants is anchored in fact.
As it stands, misconceptions are rampant, with residents of many EU countries believing, for example, that they host three times as many foreigners as they actually do.
By debunking such myths, EU leaders can create space for action, while undercutting the credibility of populists.
Second, in designing asylum and migration policies, the European Commission should involve member states’ foreign, employment, and development ministers, instead of just their interior ministers.
The European Council also should deepen its engagement on these issues.
Third, the EU should craft asylum, migration, and border systems that equitably distribute financial, political, and other costs.
The so-called&nbsp;Common European Asylum System that prevails today is perceived as unfair by many member states, and violates the rights of many asylum seekers.
Fourth, the EU should increase the number of refugees that it accepts, and give more people the option of applying for asylum without having to reach Europe’s borders.
This would result in fewer asylum-seekers making life-threatening voyages that leave their families deeply indebted – human traffickers charge as much as €15,000 ($19,700) to cross the Mediterranean – only to be turned away.
Finally, in order to help prevent the crises that lead to displacement, the EU should work to strengthen its relationships with African countries, especially those bordering the Mediterranean.
Talk of an African Marshall Plan – with loans issued to local businesses, which would repay them to their national governments to use for infrastructure development – proliferated after the Arab Spring, but led nowhere.
But such investment in Africa’s development, together with a regular, structured dialogue, could help to ease many Africans’ plight.
This would reduce their incentive to migrate and, in cases where people still aspire to reach Europe, facilitate a more orderly process.
The EU’s new leaders have an important opportunity to fashion a fresh approach to asylum and migration – one that recognizes that safe, orderly migration can bring major benefits to countries of origin and destination alike.
Given Europeans’ tendency toward generosity and reason – qualities that their political leaders often underestimate – such an initiative would likely even bring political gains.
In short, there is no compelling reason not to extend the principled policy approach on which Europe prides itself to those who would risk their lives to reach its shores.
A Step Closer to Brexit?
LONDON – The referendum on Scottish independence, due on September 18, comes at a time of growing opposition in the United Kingdom to remaining in the European Union.
This is significant, because Scotland is the strongest base of pro-European sentiment in the UK.
For example, a poll conducted earlier this year determined that if a referendum on continued EU membership had been held in June in the UK as a whole, 47.1% would have voted to leave, with 39.4% voting to remain.
But a poll in February 2014 showed that in Scotland, 48.7% would vote for the UK to remain in the EU, with 35.4% voting to leave.
Other polls have also shown a consistent and markedly more positive attitude toward the EU in Scotland than in England.
Of course, it is premature to draw any firm conclusions from these figures.
The referendum on exiting the EU that Prime Minister David Cameron has proposed may not take place, regardless of the success (whatever that may mean) of his promised “renegotiation” of the terms of British membership.
But, as a result of various ostensibly minor issues, the likelihood of a British exit seems to be increasing – which fundamentally alters the importance of the vote in Scotland.
For example, the proposal of the relatively unknown Jonathan Hill, the leader of the UK House of Lords, as the British member of the new European Commission headed by Jean-Claude Juncker was just the latest in a long series of British EU errors.
Cameron’s spokesmen said in July that, at his first meeting with the new Commission president, Cameron would seek a prestigious portfolio, such as the internal market, for Hill.
Juncker’s office coldly replied that important portfolios in the new Commission would go to major political figures, and that Juncker “does not owe [Cameron] anything.”
Given Cameron’s opposition to Juncker’s candidacy for the Commission presidency, the abuse to which Juncker has been subjected by the British press, and Hill’s lack of centrality within British politics, Cameron may be justifiably nervous when Juncker announces his appointments to the new Commission.
Juncker, after all, has many senior politicians to accommodate, and their approval by the European Parliament is no minor matter.
And, though it was perhaps unsurprising that Cameron should be unenthusiastic about Juncker’s candidacy, the vehemence of his opposition was extraordinary.
Cameron no doubt wished to reassure those in his Conservative Party who doubt his euroskeptic zeal.
Even so, Cameron’s supposed remark that the UK was more likely to leave the EU if Juncker’s candidacy succeeded was strange and disquieting, not least because any renegotiation of the terms of British membership will be carried out primarily with other member states, not with the Commission.
Cameron’s bid to thwart Juncker’s candidacy mirrored his unsuccessful attempt to prevent the adoption of the EU’s fiscal compact in 2012.
He overestimated German Chancellor Angela Merkel’s willingness and ability to support the British position.
Many influential Germans are reluctant to help Cameron in what they regard as his self-created European problem.
They will not allow Merkel much latitude here, even if she seeks it.
If Cameron’s advisers overestimated the support that they might have received from Merkel and others, they clearly underestimated the power and effectiveness of the European Parliament.
For many months, the European Parliament had made it clear that it had specific ideas about how it would exercise its new powers, granted by the Treaty of Lisbon, over the Commission presidency.
But the rapid post-election agreement among the Parliament’s major political groups to support Juncker caught Cameron off guard.
Far from enhancing British influence, threats of withdrawal have undermined the Cameron government’s credibility and influence within the EU, as colleagues have become disinclined to engage in significant compromises with a UK that may not be a member in two years.
Traditionally, EU heads of state and governments try to help one another with their domestic political problems.
But there is a growing sense in the European Council that Cameron is abusing this goodwill.
Thus, Cameron’s claim that Juncker’s election would make it more difficult to ensure the UK’s continued EU membership risks becoming a self-fulfilling prophecy.
To present Juncker’s candidacy as a matter of high political principle, with Cameron heroically but unsuccessfully standing alone against the dark forces of federalism and centralization, could have only reinforced English feelings of alienation from Europe.
That is less likely to be the case in Scotland.
If Cameron returns as prime minister after the general election in 2015, he will face an uphill battle in renegotiating the terms of British EU membership, owing to resistance not only from his European partners, but also from his own Conservative Party, which is close to advocating British withdrawal.
Indeed, it is difficult to see how a re-elected Cameron could maintain the Conservative Party’s unity without endorsing a “no” vote in the referendum on the outcome of his own renegotiation.
Britain’s EU membership will be one of the major issues at stake in next year’s election.
It would be a tragedy if British voters cast their ballots without fully understanding the European implications of their choice.
One thing, however, seems certain: If Scotland votes for independence in September, a referendum within the rump UK on continued EU membership would be even less likely to produce a victory for those who wish to remain.
Migration’s Hall of Mirrors
LONDON – On both sides of the Atlantic, anti-immigrant politics are undermining democracies and damaging lives.
Far-right nationalist parties are gaining traction in Europe, while millions of undocumented migrants suffer in the shadows.
In the United States, President Barack Obama, concerned about his party’s ability to retain control of the Senate, has decided to put off immigration reform until after the election in November.
Yet that may be the wrong approach.
A new public-opinion survey by the German Marshall Fund (GMF) reveals that anti-immigrant sentiment stems largely from misinformation, not entrenched animus.
The most important finding of the GMF’s Transatlantic Trends survey is that concern about immigrants falls sharply when people are given even the most basic facts.
For example, when asked if there are too many immigrants in their country, 38% of the Americans surveyed agreed.
But when respondents were told how many foreigners actually reside in the US before being asked that question, their views changed significantly: just 21% replied that there were too many.
The same was true in country after country.
In the United Kingdom, 54% of respondents said that there were too many immigrants; that number fell to 31% among those who were given the facts about foreigners.
In Greece, 58% became 27%; Italy went from 44% to 22%; and so on.
The only countries without such a gap were those with either very little immigration, like Poland, or those with a more open, informed, and progressive political debate about immigration, like Sweden and Germany.
Other surveys have exposed extraordinary inaccuracies in perceptions of migrants.
In many developed countries, for example, the public believes that there are three times as many immigrants residing in their country as there really are.
The average Briton believes that 34% of UK residents are foreigners; the true number is just 11%.
Such distortions disappear in countries where migration challenges are confronted openly, discussed reasonably, and addressed with conviction.
The average Swede, for example, believes that 18% of the country’s population is composed of migrants; the actual number is close to 13%.
As a result, populism in these societies is not on the rise, and mainstream politicians do not vilify minorities and migrants.
This constitutes strong evidence that reality-based debate and policymaking can fundamentally transform the negative political dynamics generated by migration.
It also suggests that, by failing to engage voters on the reality of migration, mainstream politicians in Europe are manufacturing support for extremist parties.
This self-inflicted political wound is extremely dangerous.
The Transatlantic Trends survey also shows that the American public is not worried about legal migration, while around two-thirds believe that the children of immigrants are being well integrated into their communities.
These findings should embolden policymakers to be more proactive in designing pathways for legal migration and policies to integrate migrants.
Even when it comes to illegal immigrants, though US citizens express concern, they are more reasonable than their political leaders about how to solve the problem.
A plurality of Americans surveyed by the GMF, for example, said that illegal immigrants should be allowed to obtain legal status.
A deliberative approach to engaging the public on other aspects of migration also could help quell anti-migrant sentiment.
For example, recent research&nbsp;in several countries shows that immigrants as a whole contribute more economically to their communities than they take from them.
In Germany, a study by the Bertelsmann Foundation, to be released next month, shows that the net fiscal contribution per migrant amounted to €3,300 ($4,260) in 2012.
Such data upend the conventional wisdom that migrants are a drain on public services.
Of course, migration creates real challenges for communities and can lead to job losses and lower wages for native workers.
But here, too, it is the absence of attention to these issues, not necessarily the presence of migrants, that is the problem.
Implementing vigorous retraining policies, for example, would be a better way to counter these adverse effects than calling for mass deportations.
This is one reason why labor unions, which once opposed immigration across the board, are now far more supportive of measures that would legalize undocumented workers and create more pathways for migration.
Informed public debate is the sine qua non of a democratic polity.
In its absence, bias and populism prevail.
The immigration debate will never be an easy one, but it can become less tendentious and more deliberative if its participants consider the facts.
Buy Back or Pay Forward?
LONDON – When British Prime Minister David Cameron asked me to lead a review into the problem of antimicrobial resistance, the last thing I expected was that accepting the position would lead me to question one of the most popular tools for corporate financial management: share buybacks.
The problem of antimicrobial resistance is a serious one.
Left unaddressed, it could be responsible by 2050 for the deaths of some ten million people a year, more than currently die of cancer, along with an astonishing $100 trillion in economic damage.
Fortunately, however, there is much we can do to mitigate the threat – provided that adequate resources are made available.
One important avenue to pursue is the development of new drugs.
In a forthcoming paper, the Review on Antimicrobial Resistance estimates that bringing new antimicrobials to market and improving their administration will cost about $25 billion – a significant sum, but one that pales in comparison to the costs to society if the problem is not checked.
It is also roughly what two of the world’s largest pharmaceutical companies will spend this year buying back their own shares.
While the review has yet to come up with recommendations for financing the development of new drugs, it seems clear to me that it is well within the capacity of the pharmaceutical industry to contribute.
A common argument made by drug companies is that they need to be guaranteed a reward if they are to invest in developing medicines that are unlikely to deliver the kind of returns that other investments may provide.
The only sure way to guarantee drug development, the argument goes, is to allow prices to rise until demand matches supply.
And yet there is a good reason why the pharmaceutical industry can and should play a major role in financing something like a common “Innovation Fund” to provide financing for early-stage research into solving the problem of antimicrobial resistance.
And that reason is one that I became familiar with during my years at Goldman Sachs: enlightened self-interest.
Six years after the eruption of the global financial crisis, the banking industry is still widely blamed for the catastrophe.
And, as a result, banks are being hit with regulatory constraints that limit some aspects of their business.
I suspect that if the industry had shown greater leadership on issues – for example, excessive executive pay – they would have found themselves in a much more favorable environment today.
The same is true of the pharmaceutical industry.
Share buybacks can sometimes be legitimate, but on other occasions they do not seem justified – especially when considered from the standpoint of enlightened self-interest.
In December, the pharmaceutical giant Merck spent $8.4 billion to acquire Cubist Pharmaceuticals, a Massachusetts-based drug-maker that specializes in combating Methicillin-resistant Staphylococcus aureus (MRSA), a bacteria that has become resistant to many types of antibiotics.
In early March – less than three months after the acquisition – Merck announced it would close down Cubist’s early-stage research unit, laying off some 120 staff and perhaps crippling its efforts to introduce new drugs into the pipeline.
Three weeks later, Merck announced that it would spend an additional $10 billion to buy back some of its shares.
It is difficult for an outside observer not to draw a connection between the two decisions.
Of course, dubious buybacks are not confined to the pharmaceutical industry.
Apple is another good example.
The company’s latest quarterly sales results show how the company has become something more than a technology firm; it is now a major middle-class Chinese consumer brand.
Within a year, China will likely be a bigger market for its products than the United States.
And yet, even more striking than this confirmation of the still-rising importance of the BRIC (Brazil, Russia, India, and China) economies is the sheer size of Apple’s ongoing buyback program.
In April, the company announced it had authorized an additional $50 billion to be used for repurchasing shares, bringing the total to $140 billion.
Coming at a time when the technology industry is under increasing scrutiny in the developed world as governments struggle with budget shortfalls and rising debt, this seems to me to be a questionable decision.
Companies’ ability to minimize their global tax burden, while boosting their earnings per share through buybacks – in some cases financed with debt – does not strike me as a stable trend.
When companies are genuinely unable to identify areas of research and investment that would help their business (and employees and clients), they are better off returning the savings to shareholders in the form of higher dividends than authorizing buybacks.
Or, better yet, in a world confronted with a host of problems – from climate change to antimicrobial resistance – industry leaders should begin asking themselves how they can contribute to averting the crises of the future.
Pharmaceutical Myths
Drug companies want us to believe that soaring prices for prescription drugs are necessary to cover their research and development (R&D) costs – a claim that implies that they spend most of their money on R&D, and that after they pay for it, they have only modest profits left over.
Curtailing prices, they say, would choke off R&D and stifle innovation.
But the real story is very different.
Big drug companies actually spend relatively little on R&D – far less than they spend on marketing and administration and even less than what they have left over in profits.
In 2002, for example, the top ten American drug companies had sales of $217 billion.
According to their own figures, they spent 14% of sales revenues on R&D. But they spent over twice as much, a whopping 31%, on marketing and administration. And they had 17% left over as profits.
Most drug companies lump marketing and administration together in their annual reports, but one reported that 85% of the total went to marketing.
Assuming that the figure is roughly the same for the other big companies – and there’s reason to think that it is – then they spent nearly twice as much on marketing alone as they did on R&D.
In its public pronouncements, the industry denies this by counting just four specific activities as marketing – sales visits to doctors, the value of free samples, direct-to-consumer advertisements, and advertisements in medical journals.
But, in fact, marketing budgets cover a lot more than this, most importantly the “education” of doctors (which teaches them to prescribe more drugs).
And what about profits?
For many years, drug companies in the United States have had higher profits than any other industry – after they’ve paid for R&D and all their other expenses.
Compare the 17% profit margin for the top ten American drug companies in 2002 with the median of only 3.1% for all of America’s “Fortune 500” industries that year.
In 2003, for the first time, the industry fell slightly from first place to third in terms of profitability, but its profits were still well above the median.
The recent claim that drug companies spend on average $802 million to bring each new drug to market is based on secret, proprietary data and is wildly inflated.
But, whatever they spend on R&D, if drug companies spend more on marketing and have more left over as profits, they can hardly claim that high prices are necessary to cover their R&D. Instead, high prices are necessary to cover their stupendous marketing expenditures and maintain their enormous profits.
There is now some pushback on prices, but drug companies are compensating by convincing more people to take more drugs for dubious or exaggerated ailments, thereby increasing volume.
The important issue is not how much drug companies spend on R&D, but whether we consumers get our money’s worth.
Remarkable as it seems, only a small fraction of drugs are innovative in any meaningful sense of the word.
In the six years from 1998 to 2003, of the 487 drugs that entered the market, fully 78% were classified by the US Food and Drug Administration as likely to be no better than drugs already on the market.
Moreover, 68% were not even new chemical compounds, but just old drugs in new forms or combinations.
In other words, the major output of the industry is not important new drugs, but minor variations of drugs that are already on the market – called copycat or “me-too” drugs.
For example, the top-selling drug in the world, Pfizer’s Lipitor, is the fourth of six cholesterol-lowering drugs of the same type.
There are now whole families of me-too drugs, and little reason to think one is better than another at comparable doses.
Far from being a model of free enterprise, the pharmaceutical industry is utterly dependent on government-funded research and government-granted monopolies in the form of patents and exclusive marketing rights.
The few innovative drugs usually stem from publicly funded research done at government or university labs.
Even among related me-too drugs, the original is usually based on government-sponsored work.
For example, the first of the Lipitor-type drugs, Mevacor, came on the market in 1987 and was based largely on university research.
Most of today’s top-selling drugs have progenitors that date back to the 1980’s or even earlier.
The bottom line is that, despite industry rhetoric, drug companies are growing less and less innovative.
They’re just re-jiggering the same old drugs, getting new patents and exclusivity, and relying on their marketing muscle to convince doctors and patients that they’re producing medical miracles.
Every advanced country regulates prescription drug prices in some way.
Even in the US, Medicare regulates doctors’ fees and hospital payments.
So we need not worry about stifling innovative R&D. Drug companies do much less of it than they claim, and what they do they can easily afford.
The Disenchantment of Europe
LONDON – The recent European Parliament elections were dominated by disillusion and despair.
Only 43% of Europeans bothered to vote – and many of them deserted establishment parties, often for anti-EU extremists.
Indeed, the official results understate the extent of popular dissatisfaction; many who stuck with traditional parties did so reluctantly, faute de mieux.
There are many reasons for this political earthquake, but the biggest are the enduring misery of depressed living standards, double-digit unemployment rates, and diminished hopes for the future.
Europe’s rolling crisis has shredded trust in the competence and motives of policymakers, who failed to prevent it, have so far failed to resolve it, and bailed out banks and their creditors while inflicting pain on voters (but not on themselves).
The crisis has lasted so long that most governing parties (and technocrats) have been found wanting.
In the eurozone, successive governments of all stripes have been bullied into implementing flawed and unjust policies demanded by Germany’s government and imposed by the European Commission.
Though German Chancellor Angela Merkel calls the surge in support for extremists “regrettable,” her administration – and EU institutions more generally – is substantially responsible for it.
Start with Greece.
Merkel, together with the European Commission and the European Central Bank, threatened to deprive Greeks of the use of their own currency, the euro, unless their government accepted punitive conditions.
Greeks have been forced to accept brutal austerity measures in order to continue to service an unbearable debt burden, thereby limiting losses for French and German banks and for eurozone taxpayers whose loans to Greece bailed out those banks.
As a result, Greece has suffered a slump worse than Germany’s in the 1930’s.
Is it really any wonder that popular support for the governing parties that complied with this diktat plunged from 69% in the 2009 European Parliament election to 31% in 2014, that a far-left coalition demanding debt justice topped the poll, or that the neo-Nazi Golden Dawn party finished third?
In Ireland, Portugal, and Spain, the bad lending of German and French banks in the bubble years was primarily to local banks rather than to the government.
But here, too, the Berlin-Brussels-Frankfurt axis blackmailed local taxpayers into paying for foreign banks’ mistakes – presenting the Irish with a €64 billion ($87 billion) bill, roughly €14,000 per person, for banks’ bad debt – while imposing massive austerity.
Support for compliant establishment parties duly collapsed – from 81% in 2009 to 49% in 2014 in Spain.
Fortunately, memories of fascist dictatorship may have inoculated Spain and Portugal against the far-right virus, with left-wing anti-austerity parties and regionalists benefiting instead.
In Ireland, independents topped the poll.
The misconception that northern European taxpayers are bailing out southern ones also prompted a backlash in Finland, where the far-right Finns won 13% of the vote, and in Germany, where the new anti-euro Alternative für Deutschland won 7%.
At Merkel’s behest and with the complicity of the ECB, which waited until July 2012 to quell a bond-market panic sparked by eurozone policymakers’ mistakes, the Commission also imposed eurozone-wide austerity, causing a cumulative loss of nearly 10% of GDP in 2011-13, according to the Commission’s own economic model.
By plunging Italy into a deep recession (from which it has yet to recover), austerity sank interim Prime Minister Mario Monti’s broad-based coalition and boosted Beppe Grillo’s anti-establishment, anti-euro Five Star Movement, which finished second in the European Parliament election.
Merkel also demanded a stifling and undemocratic EU fiscal straightjacket, which the Commission duly enforces.
So when voters throw out a government, EU fiscal enforcer Olli Rehn immediately insists that the new administration stick to its predecessor’s failed policies, alienating voters from the EU and pushing them toward the extremes.
Consider France.
After François Hollande became President in 2012 on a pledge to end austerity, his Socialist Party won a large majority in parliamentary elections.
But Berlin browbeat him into further austerity.
Now, with both the center right and the center left discredited – together, they received only 35% of the popular vote – Marine Le Pen’s racist Front National topped the poll by promising radical change.
Along with a chronic economic crisis, Europe now has an acute political crisis.
Yet the EU establishment seems bent on pursuing business as usual.
In the parliament, a vocal but fragmented minority of critics, cranks, and bigots is likely to push the center-right and center-left groups, which still have a combined majority, to club together even more closely.
The low turnout and weakening of mainstream parties gives the European Council – national leaders of the EU’s member states – a pretext to continue cutting deals in smoke-free rooms.
First up will be the choice of the European Commission’s next president.
The outgoing president, José Manuel Barroso, claims that “the political forces that led and supported…the Union’s joint crisis response…have overall won once again.” Merkel wants to stick to current policies that have failed to deliver growth and jobs.
Perhaps the man to shake things up is Matteo Renzi, Italy’s dynamic 39-year-old prime minister.
In office since February, he won a resounding 41% of the vote, twice that of his nearest rival.
Already committed to reforming his country’s crony capitalism, he now has a mandate to challenge Merkel’s crisis response.
The timing is perfect: Italy takes over the EU’s rotating presidency in July.
Renzi has already called for a €150 billion EU investment boost and greater fiscal flexibility.
Instead of a eurozone caged in by Germany’s narrow interests as a creditor, Europe needs a monetary union that works for all of its citizens.
Zombie banks should be restructured, excessive debts (both private and public) written down, and increased investment combined with reforms to boost productivity (and thus wages).
The fiscal straightjacket should be scrapped, with governments that borrow too much allowed to default.
Ultimately, the fairer, freer, and richer eurozone that would emerge is in Germany’s interest, too.
Europeans also need a greater say over the EU’s direction – and the right to change course.
They need a European Spring of economic and political renewal.
Germany’s Economic Mirage
LONDON – For 60 years, successive German governments sought a more European Germany.
But now, Chancellor Angela Merkel’s administration wants to reshape Europe’s economies in Germany’s image.
This is politically unwise and economically dangerous.
Far from being Europe’s most successful economy – as German Finance Minister Wolfgang Schäuble and others boast – Germany’s economy is dysfunctional.
To be sure, Germany has its strengths: world-renowned companies, low unemployment, and an excellent credit rating.
But it also has stagnant wages, busted banks, inadequate investment, weak productivity gains, dismal demographics, and anemic output growth.
Its “beggar-thy-neighbor” economic model – suppressing wages to subsidize exports – should not serve as an example for the rest of the eurozone to follow.
Germany’s economy contracted in the second quarter of 2014, and has grown by a mere 3.6% since the 2008 global financial crisis – slightly more than France and the United Kingdom, but less than half the rate in Sweden, Switzerland, and the United States.
Since 2000, GDP growth has averaged just 1.1% annually, ranking 13th in the 18-member eurozone.
Written off as the “sick man of Europe” when the euro was launched in 1999, Germany responded not by boosting dynamism, but by cutting costs.
Investment has fallen from 22.3% of GDP in 2000 to 17% in 2013.
Infrastructure, such as highways, bridges, and even the Kiel Canal, is crumbling after years of neglect.
The education system is creaking: the number of new apprentices is at a post-reunification low, the country has fewer young graduates (29%) than Greece (34%), and its best universities barely scrape into the global top 50.
Hobbled by underinvestment, Germany’s arthritic economy struggles to adapt.
Despite former Chancellor Gerhard Schröder’s labor-market reforms, it is harder to lay off a permanent employee in Germany than anywhere else in the OECD.
Germany languishes in 111th place globally for ease of starting a business, according to the World Bank’s Doing Business rankings.
Its largest firms are old and entrenched; it has produced no equivalent of Google or Facebook; and the service sector is particularly hidebound.
The government has introduced fewer pro-growth reforms over the past seven years than any other advanced economy, according to the OECD.
Average annual productivity growth over the past decade, at a mere 0.9%, has been slower even than Portugal’s.
The brunt of the stagnation has been borne by German workers.
Though their productivity has risen by 17.8% over the past 15 years, they now earn less in real terms than in 1999, when a tripartite agreement among the government, companies, and unions effectively capped wages.
Business owners might cheer, but suppressing wages harms the economy’s longer-term prospects by discouraging workers from upgrading skills, and companies from investing in higher-value production.
Wage compression saps domestic demand, while subsidizing exports, on which Germany’s growth relies.
The euro, which is undoubtedly much weaker than the Deutschmark would have been, has also helped, by reducing the prices of German goods and preventing France and Italy from pursuing currency depreciation.
Until recently, the euro also provided booming external demand in southern Europe, while China’s breakneck industrial development raised demand for Germany’s traditional exports.
But, with southern Europe now depressed, and China’s economy decelerating and shifting away from investment spending, the German export machine has slowed.
Its share of global exports fell from 9.1% in 2007 to 8% in 2013 – as low as in the “sick man” era, when Germany was struggling with reunification.
Because cars and other exports “made in Germany” now contain many parts produced in central and eastern Europe, Germany’s share of global exports is at a record low in value-added terms.
German policymakers pride themselves on the country’s vast current-account surplus – €197 billion ($262 billion) as of June 2014 – viewing it as a sign of Germany’s superior competitiveness.
Why, then, are businesses unwilling to invest more in the country?
External surpluses are in fact symptomatic of an ailing economy.
Stagnant wages boost corporate surpluses, while subdued spending, a stifled service sector, and stunted start-ups suppress domestic investment, with the resulting surplus savings often squandered overseas.
The Berlin-based DIW institute calculates that from 2006 to 2012, the value of Germany’s foreign portfolio holdings fell by €600 billion, or 22% of GDP.
Worse, rather than being an “anchor of stability” for the eurozone, as Schäuble claims, Germany spreads instability.
Its banks’ poor approach to lending their surplus savings inflated asset-price bubbles in the run-up to the financial crisis, and have imposed debt deflation since then.
Nor is Germany a “growth engine” for the eurozone.
In fact, its weak domestic demand has dampened growth elsewhere.
As a result, German banks and taxpayers are less likely to recover their bad loans to southern Europe.
Given how bad wage compression has been for Germany’s economy, foisting wage cuts on the rest of the eurozone would be disastrous.
Slashing incomes depresses domestic spending and makes debts even less manageable.
With global demand weak, the eurozone as a whole cannot rely on exports to grow out of its debts.
For struggling southern European economies whose traditional exports have been undercut by Chinese and Turkish competition, the solution is to invest in moving up the value chain by producing new and better products.
Germany’s economy needs an overhaul.
Policymakers should focus on boosting productivity, not “competitiveness,” with workers being paid their due.
The government should take advantage of near-zero interest rates to invest, and encourage businesses – especially start-ups – to do likewise.
Finally, Germany should welcome more dynamic young immigrants to stem its demographic decline.
This would be a better economic model for Germany.
It would also set the right example for the rest of Europe.
Europe’s Bogus Banking Union
LONDON – After a 16-hour marathon negotiating session ending on March 20, politicians, technocrats, and journalists were all keen to declare the deal on the final piece of Europe’s banking union a success.
But appearances are deceptive.
While the “banking union” may soon exist on paper, in practice the eurozone banking system is likely to remain fragmented along national lines and divided between a northern “core,” where governments continue to stand behind local banks, and a southern “periphery,” where governments have run out of money.
Think back to June 2012.
Spain’s busted banks threatened to drag down the Spanish state, as Ireland’s had done to the Irish state 18 months earlier, while panic tore through the eurozone.
European Union leaders resolved to break the link between weak banks and cash-strapped governments.
A European banking union would move responsibility for dealing with bank failures to the eurozone level – akin to America, where distressed banks in, say, Florida are dealt with by federal authorities with the power to bail in bondholders, inject federal funds, and close down financial institutions.
But, a month later, the European Central Bank finally intervened to quell the panic.
That saved the euro, but it also relieved the pressure on Germany to cede control of its oft-distressed banks.
Since then, the German government has used its clout to eviscerate the proposed banking union; all that remains is a shell to keep up appearances.
For starters, it will not apply to the huge losses incurred during the current crisis.
The ECB will directly supervise bigger eurozone banks starting in November (the first step of the banking union), and now it is assessing the strength of their balance sheets.
If this exercise is conducted properly – a big if – undercapitalized banks that are viable would be forced to raise additional equity, from bondholders if necessary, while unviable ones would be wound down.
But EU rules on national bank resolution will not yet be in force, while the eurozone’s single resolution mechanism will be initiated only in 2015.
So banks in northern Europe that are still backed by creditworthy governments would be treated differently than those in cash-strapped southern Europe: Germany can afford to bail out its banks;
Italy cannot.
More likely, the ECB will fudge the exercise, owing to fear of reigniting the financial crisis and pressure from national governments.
Small countries will be singled out to make the exercise look tough, while bigger problems will be swept under the carpet: German banks have already succeeded in excluding many of their assets from the assessment.
One argument for making the ECB the watchdog for eurozone banks was that it was less captured by the banks than national supervisors were.
But its behavior throughout the crisis suggests otherwise.
It has repeatedly prioritized the interests of banks in “core” countries and proved more pliable to political pressure from Berlin and Paris than from Madrid or Rome, let alone Dublin or Athens.
Even after the new banking union framework is fully in place, it will be full of holes.
At Germany’s insistence, the ECB will supervise only the eurozone’s 130 or so biggest banks.
That will leave the smaller Ländesbanks (state-owned regional banks), many of which made spectacularly bad lending decisions in the bubble years, and Sparkassen (smaller savings banks) in the hands of local politicians and Germany’s pliable financial supervisor.
The argument that smaller lenders are not a systemic threat is spurious: consider Spain’s cajas.
In any case, there will not be a level playing field.
Above all, the single resolution mechanism is a mirage, because national governments retain a veto over closing down any bank.
The mechanism is deliberately complex to the point of being unworkable; it is inconceivable that a bank could be wound down over a weekend to avert market panic.
And the collective funds that eventually will be at its disposal are meager: a mere €55 billion ($76 billion).
In practice, then, rescuing banks will remain in the hands of national governments, all of which are captured by “their” banks but whose capacity to bail them out varies: French and German banks will be rescued;
To increase their chances of a bailout, banks in the eurozone periphery will doubtless borrow as much as they can from politically connected banks and investors in the core countries.
Thus, national taxpayers will remain on the hook for bankers’ losses.
The upshot is that the eurozone as a whole is likely to struggle with a zombie banking system, with only patchy efforts to restructure banks decisively and fairly.
Worse, the north-south, core-periphery divide will harden, with taxpayer-backed banks on one side and banks that must fend for themselves on the other.
That is a bonus for struggling southern taxpayers, but it implies that even sound banks could have higher funding costs than dubious northern European banks for the foreseeable future.
Southern businesses would then face higher borrowing costs than northern businesses, hindering growth.
The bogus banking union is thus a recipe for entrenching economic and political division.
Disaster and Development
NEW YORK – When Typhoon Hagupit made landfall in the Philippines on December 6, memories of Typhoon Haiyan, which killed more than 6,300 people, were fresh in people’s minds.
Some 227,000 families – more than a million people – were evacuated ahead of Hagupit’s arrival, according to the United Nations.
The typhoon, one of the strongest of the season, killed some 30 people.
All deaths from disasters are a tragedy, but the fact that this number was not much higher attests to the efforts that the Philippines has made to prepare for natural disasters.
As Administrator of the United Nations Development Programme, I have seen firsthand the devastation and heartbreak caused by disasters around the world.
Since the beginning of the century, more than a million people have died in storms like Hagupit and other major disasters, such as the 2010 Haitian earthquake, with economic damage totaling nearly $2 trillion.
These losses are tragic, but they are also avoidable.
They serve as a reminder that disaster preparedness is not an optional luxury; it is a constant, intensive process that is necessary to save lives, protect infrastructure, and safeguard development.
The argument for investing in disaster preparedness is simple. If countries expect to experience natural hazards, such as violent storm seasons or major earthquakes, then investing time and resources in preparing for shocks will save lives and protect communities from other losses.
Unfortunately, governments often put different priorities ahead of disaster preparation.
Other investments often take precedence, and donors have historically funded emergency relief much more readily than pre-disaster preparedness.
The measures that are implemented tend to be stand-alone and piecemeal, rather than part of a larger, systematic risk-reduction plan.
That needs to change.
Countries like the Philippines continue to demonstrate the benefits of investing in preparedness, especially when done as part of a larger risk-mitigation effort.
Typhoon Hagupit is just the latest event to showcase this.
The Philippine government’s quick, effective response saved many lives.
But it is important to note that its efforts were not simply an overnight reaction to the oncoming storm.
They were part of a national, comprehensive effort that was long in the making.
Officials were wise to acknowledge their country’s vulnerabilities and to commit the resources and capital needed to build resilience.
The Philippines includes preparedness as a core component in its overall strategy for reducing disaster risk.
Over the last decade, the country’s authorities have raised awareness, established and strengthened disaster-management institutions, and worked on recovering from past disasters, including Typhoon Haiyan.
National and local disaster plans have been improved, standard operating procedures have been developed, and early warning systems have been put in place.
The end result has been nothing short of a transformation of how the Philippines reacts to disasters.
The UNDP, and the wider UN system, is supporting governments as they place greater emphasis on disaster-risk reduction, including preparedness, by strengthening their institutional capacity to plan and act when needed.
In addition to assisting with emergency relief, it is crucial that the international community help to introduce basic procedures for responding long before disaster strikes.
First responders, for example, need training and tools.
Emergency shelters and evacuation routes must be planned and established using risk assessments and actual simulations.
If communities are to be expected to make use of available resources, they need to be involved in the design and development of emergency plans.
Risk reduction, including preparedness, is also, first and foremost, rooted in responsive governance.
In March 2015 a new global framework for disaster reduction will be agreed in Sendai, Japan.
It is crucial that delegates push for transformational change that enables preparedness and saves lives.
Furthermore, risk reduction needs to be integral to sustainable-development strategies.
The Philippines can serve as an example.
The archipelago will always be in the path of tropical storms.
There is little officials can do about that.
But what they can do – and have done – is emphasize risk reduction and strengthen preparedness, thereby saving lives and building greater resilience.
Physics Confidential
PRINCETON – Each February, I begin the introductory electricity and magnetism course at Princeton University by telling my students that the material we will cover during the semester provides the basis for modern civilization.
Who could quibble with such an innocent statement?
Without the discoveries of nineteenth-century physicists and their successors, we could hardly imagine today’s world: no electrical power grid, no televisions, no satellites, no iPads.
Physicists are justly proud of the many ways that their achievements have benefited humankind.
But building a light bulb or a telephone doesn’t mean that you understand its basic principles (Thomas Edison and Alexander Bell certainly didn’t).
Unfortunately, many of my colleagues – particularly those who write textbooks – present physics as a towering, seamless basilica, ignoring the gaps in our hodge-podge of skewed models.
In fact, what is presented as a shimmering cathedral often more closely resembles a hastily erected shantytown.
For example, one needs only first-semester equations to describe reasonably well the behavior of a gyroscope; engineers can then go off and build gyrocompasses that guide aircraft or missiles to their destinations.
But if you merely ask, “At what, exactly, is the gyroscope pointed?” you are plunged headlong into one of physics’ deepest questions, one that led Einstein to develop his general theory of relativity – and that, even today, has no definitive answer.
I know of no undergraduate textbook that acknowledges the question.
On a more blatant, if less exalted, level, the force of friction makes its appearance in the first days of any first-year course.
We declare, as if there can be no doubt, that friction impedes the motion between two bodies, and we invoke sophisticated microscopic models that show how the soles of running shoes bind to a track.
Yet friction produces heat and thus an increase in entropy – which measures the amount of energy that cannot be used to perform work – and it therefore distinguishes past from future.
The increase in entropy – the second law of thermodynamics – is the only law of nature that makes this fundamental distinction.
If Newtonian mechanics is at the bottom of everything, then one should be able to derive the second law of thermodynamics from Newtonian physics.
But this has never been accomplished satisfactorily: the incompatibility of the second law with the other fundamental laws is perhaps the greatest paradox in all of physics.
Still, we brazenly drop this enigma into the first days of a first-year course without batting an eye.
We write down equations that show how friction slows the motion of sliding objects or dampens the vibrations in springs, but, ultimately, the math merely reproduces our observations while disguising our ignorance of what underlies them.
After decades – indeed, centuries – of employing such tricks, physicists have forgotten that they are modeling phenomena, not necessarily uncovering Divine Truth.
For instance, we can easily write down the equations for a ball on a swinging spring, but if we stretch the spring enough and swing the ball hard enough, we can’t solve those equations.
The motion becomes chaotic, making an exact mathematical solution impossible.
Nowadays, with computers, we can approximate the trajectory as closely as we want.
But that is the point: most physicists and students have lost sight of the distinction between the approximate and the exact.
We can certainly learn something about chaotic systems without actually solving the equations, but if an old-fashioned mathematician demanded that a student predict where that ball was heading, the student would inevitably fail.
Even something as fundamental as Newton’s law of gravity is ultimately an approximation.
Textbook authors dutifully write down the famous law without remarking that it results in infinite forces when the two attracting objects get infinitely close together.
Never mind that infinite forces are a sure sign that your theory has gone up in smoke: in the current crop of textbooks sitting on my desk, not one mentions the obvious pathology.
Our Princeton text compounds the oversight by declaring that, “strictly speaking” Newton’s law of gravity is valid only for particles.
Well, particles are exactly where Newton goes awry – and not just in first-semester physics.
The basic equation of electricity is “Coulomb’s law,” which governs the electrical attraction or repulsion between charged particles and looks exactly like Newton’s law of gravity.
Now, we always tell students to imagine electrons as point particles, in which case they really do need to worry about those infinite forces.
The problems that arise from modeling particles as vanishingly small points infect all advanced areas of physics.
Central to any quantum mechanics course is the concept of electron “spin,” but what, exactly, is spinning is never made clear.
Wolfgang Pauli, one of the concept’s originators, at first rejected the idea, because if the electron has a finite radius, then the surface would be spinning faster than the speed of light.
On the other hand, if you view the electron as a point particle, how are you to imagine something without a radius spinning?
To cure the point-particle pathologies, physicists invented modern field theories, with impressive names such as quantum electrodynamics.
But these theories turned out to be as riddled with infinities as their grandparents, and elaborate ad hoc schemes were invented to deal with the new problems encountered.
And so, despite headline-grabbing advances such as string theory, it goes to this very day.
One can hardly challenge the predictive success of modern physics, but one should remember that one is describing nature, and not always understanding it.
Piñata Politics
George Bush's immigration policy is a big piñata hanging across the border between Mexico and the United States.
Some immigrants believe it's shaped like a star to guide them across the Rio Grande to work in the promised land, others think it resembles a devil, offering the tantalizing prospect of legal jobs in the US, only to discover that this is a mirage.
Many are thankful that the piñata is available to liven up bilateral relations and can't wait to give it a good whack.
But if Mexico's President Vicente Fox is to benefit from his turn hitting the piñata, he will need to take off the blindfold he wears in public where President Bush is concerned.
Fox has every right to celebrate the recent initiative announced by President Bush to assist some currently illegal immigrants to the US come out of the shadow economy, and he should congratulate himself for pressing Bush to make this effort.
It was his constant prodding that helped design and fill the piñata.
But Fox needs to move quickly from self-congratulation to action, because Mexico needs a more fulfilling relationship with America than the scanty prizes that are now dropping from Bush's piñata.
He will have time to do so, because no new proposal is likely to be launched in a US presidential election year.
To start, Fox must listen more carefully than he has to the people he governs.
For some immigrants, the Bush proposal offers the possibility of stepping out of the shadows into legal jobs, for others it represents the possibility of legalization today but deportation from the US tomorrow.
On one side, there is the carrot of living and earning like a US resident. On the other, there's the stick of probably never becoming a citizen.
While many immigrants would welcome the idea of returning to Mexico after temporary employment in the US, many others would prefer to immigrate permanently to the US.
In fact, a majority of Mexican immigrants already in the US don't know exactly how to respond to Bush's proposal, and Vicente Fox will have to listen to them, too, if he wants to speak in their name.
There are those who welcome what Bush has brought to the bilateral party because it will allow them to live without fear.
For them, Bush's proposal is a big step forward.
Others, however, have reacted skeptically, and for good reason.
They think that the piñata is a distraction from the goal of earned legalization.
They don't want a job that will solve their problems for three years, but rather a precise path to residency in the US that will solve their problems forever.
For those who have worked in the US for 10 or 15 years, the Bush piñata is a mere decoration.
They don't want a legal status that will vanish in three years.
Vicente Fox will have to acknowledge these differences and work with them.
Immigrants themselves are divided and Vicente Fox will have to understand why.
Therefore, he should not embrace the Bush proposal as is.
Three years ago, Fox wanted the "whole enchilada": a temporary workers accord, more Green Cards to allow Mexicans to work in the US, legalization of immigrants already in the US, development funds for Mexican communities that send immigrants to the US, and a bilateral approach to managing the problem.
Without these five components, any immigration proposal will not cut back on the number of deaths among those seeking to cross the border, or the existence of an abused underclass, or the persistence of temporary and legal employment that becomes permanent and illegal employment.
Vicente Fox probably feels tempted to hit the piñata as it hangs there and go back home with whatever he can get.
But he has long-term responsibilities - both to Mexicans in Mexico and to Mexicans in the US - that go beyond obtaining a short-term political victory.
Bush's proposal is full of holes, and Fox should figure out how to fill them.
Since Bush's proposal doesn't incorporate Mexico's interests, Fox should spell them out.
If Bush's piñata can't spell out all the details, Fox should define them in Mexican and bilateral terms.
The Italian word "pignatta" means "fragile pot."
Bush's immigration piñata is indeed a fragile one.
It is swaying in fierce electoral winds, it was made exclusively in the USA without Mexican help, and it doesn't contain enough candy.
Vicente Fox has said that he wants more, and he should keep his word.
He needs to remember that in Mexico, piñatas are symbols of hope.
Pigs, Calves, and American Democracy
Amidst all the headlines about the Democrats gaining control of the United States Congress in the November elections, one big election result was largely ignored.
Although it illuminated the flaws of America’s political system, it also restored my belief in the compassion of ordinary Americans.
In Arizona, citizens can, by gathering a sufficient number of signatures, put a proposed law to a direct popular vote.
This year, one of the issues on the ballot was an act to prohibit tethering or confining a pregnant pig, or a calf raised for veal, in a manner that prevents the animal from turning around freely, lying down, and fully extending his or her limbs.
Those who know little about modern factory farming may wonder why such legislation would be necessary.
Under farming methods that were universal 50 years ago, and that are still common in some countries today, all animals have the space to turn around and stretch their limbs.
Today, however, about 90% of US breeding sows – the mothers of the pigs that are raised and killed for pork, bacon, and ham – spend most of their lives locked in cages that measure about two feet by seven feet (0.6 meters by 2.2 meters).
They are unable to turn around, lie down with their legs fully extended, or move more than a step forward or backward.
Other sows are kept on short tethers that also prevent them turning around.
Veal calves are similarly confined for all their lives in individual stalls that do not permit them to turn around, lie down, or stretch their limbs.
These methods are, essentially, labor-saving devices – they make management of the animals easier and enable units with thousands or tens of thousands of animals to employ fewer and less skilled workers.
They also prevent the animals from wasting energy by moving around or fighting with each other.
Several years ago, following protests from animal welfare organizations, the European Union commissioned a report from its Scientific Veterinary Committee on these methods.
The committee found that animals suffer from being unable to move freely and from the total lack of anything to do all day.
Common sense would, of course, have reached the same conclusion.
Following the report, the EU set dates by which close confinement of these animals would be prohibited.
For veal calves, that date, January 1, 2007, is almost here.
Individual stalls for sows, already outlawed in the United Kingdom and Sweden, will be banned across the entire EU from 2013.
Measures to improve the welfare of laying hens, which are typically kept crammed into bare wire cages with no room to stretch their wings, are also being phased in.
In the US, no such national measures are anywhere in sight.
In the past, when my European friends have asked me why the US lags so far behind Europe in matters of animal welfare, I have had no answer.
When they pressed me, I had to admit that the explanation could be that Americans care less about animals than Europeans.
Then, in 2002, animal welfare advocates put a proposal to ban sow stalls on the ballot in Florida.
To the surprise of many, it gained the approval of 55% of those voting.
Last month in Arizona, despite well-funded opposition from agribusiness, the ban on small cages for sows and veal calves also passed, with 62% support.
Neither Florida nor Arizona are particularly progressive states – both voted for George W. Bush over John Kerry in 2004.
So the results strongly suggest that if all Americans were given a chance to vote on keeping pregnant pigs and calves in such tight confinement, the majority would vote no.
Americans seem to care just as much about animal welfare as Europeans do.
So, to explain the gap between Europe and the US on farm animal welfare, we should look to the political system.
In Europe, the concerns of voters about animal welfare have been effective in influencing members of national parliaments, as well as members of the European Parliament, resulting in national legislation and EU directives that respond to those concerns.
In the US, by contrast, similar concerns have had no discernible effect on members of Congress.
There is no federal legislation at all on the welfare of farm animals – and very little state legislation, either.
That, I believe, is because agribusiness is able to put tens of millions of dollars into the pockets of congressional representatives seeking re-election.
The animal welfare movement, despite its broad public support, has been unable to compete in the arena of political lobbying and campaign donations.
In US electoral politics, money counts for more than the opinions of voters.
Party discipline is weak, and Congressmen must themselves raise most of the money that they need for re-election – and that happens every two years for members of the House of Representatives.
In Europe, where party discipline is strong and the parties, not the individual candidates, finance election campaigns, money plays a smaller role.
In the US, a nation that prides itself on its democratic traditions, pigs and calves are hardly the only losers.
Ping-Pong and Political Economy
PRINCETON – For the last century, economic-policy debate has been locked in orbit around the respective roles and virtues of the state and the market.
Does the market control the state, in the sense that it sets a limit on governments’ ability to borrow?
Or does the state take charge when the market fails to perform socially necessary functions – such as fighting wars or maintaining full employment?
This old debate is at the core of today’s profound divisions over how Europe should respond to its debt crisis.
The same question is dividing American politics in the lead-up to November’s presidential and congressional elections.
During the two decades prior to the financial crisis, most people – including most politicians – assumed that the market was supreme.
Now the intellectual pendulum may be swinging back to the belief that state action can mop up markets’ messes – just as veneration of the state in the 1930’s followed market worship in the 1920’s.
Two decades ago, judicious European politicians looked for a “third way,” steering a zigzag course between the importance of market mechanisms and that of other social priorities, according to which the market needed to be directed.
For example, when the Delors Committee prepared its report in 1988-1989 on how a monetary union could be established in Europe, experts devoted considerable attention to the issue of whether market pressure would suffice to discipline states.
Many warned that it would not – that bond yields might converge at the outset, permitting spendthrift countries to borrow more cheaply than they otherwise could.
The result of the debates of the early 1990’s was a set of rough and ready rules on deficits and debt levels that was never taken quite seriously.
Economists mocked them and Romano Prodi, the president of the European Commission at the time, called them “stupid.”
Until the second half of 2008, Europe seemed to have reached fiscal Paradise: the market did not differentiate between eurozone governments’ bonds.
Some assumed an implicit debt guarantee, but that was always implausible, given that the Treaty on the Functioning of the European Union explicitly ruled it out.
Rather, investors’ undivided confidence in all eurozone borrowers reflected something else – a general belief in the capacity of rich countries’ governments.
According to this view, advanced countries have a greater degree of fiscal sophistication.
They are always able to raise tax rates in order to service their debt.
In poor countries, by contrast, powerful vested interests often resist higher taxes on the wealthy, and widespread poverty makes it difficult to impose universal consumption taxes on the poor.
That lesson was reinforced by the experience of countless debt crises in peripheral countries, the most destructive of which hit Latin America exactly 30 years ago, after ecstatic borrowing fueled economic booms.
Sometimes these were simply consumption booms – whether for households or for military outlays and presidential palaces – and sometimes they were investment booms, though much of the investment had been misallocated as a result of political priorities.
The novelty of the world since 2008 is that, for the first time in more than a generation, advanced countries are experiencing debt crises – and starting to look like poor countries with weak institutions.
Was this just a peculiarity of the eurozone, in which sovereign countries did not control their own currencies?
Europe’s debt crisis has produced a profound division of political – and also economic – opinion.
Those who emphasize the historical uniqueness of Europe’s monetary solution insist that other countries – which control their own monies – could not possibly fall into such a predicament.
Here the statist thesis is reflected in its boldest form: there cannot be a bond strike in the United States or the United Kingdom, because their central banks have at their disposal the full panoply of policy tools – including unconventional operations – needed to ensure that debt is monetized.
That theory runs counter to much historical experience, as well as to the prevailing approach to central banking that emerged in the 1990’s.
According to that view, investors punish profligate states by demanding higher interest rates to hedge against the likelihood of inflation; so the best way to ensure low borrowing costs is to give central banks as much independence from politicians as possible, and then make price stability their primary mandate.
The European Central Bank is probably the most perfect expression of this philosophy.
Its independence was secured not only by national legislation within the member states, but also by a treaty between them.
Treaties are more binding than national legislation, because they are more difficult to revoke, amend, or repeal.
Because the debts of the large industrial borrowers – the UK and the US – are externally financed, the argument that their governments can always monetize debt is not convincing.
A moment may come when foreign investors do not believe that their sterling or dollar assets are protected against inflation, and at that point their willingness to hold low-yield sterling and dollar assets will end.
The thinking behind the 1990’s approach to monetary policy is still fundamentally valid, but it requires institutional strengthening.
It would be better to stop the twentieth-century ideological pendulum and return to some older precepts.
Both states and markets work well only when adequately enforced legal rules provide the necessary certainty.
Pinochet’s Trial, Chile’s Dignity
The court battle on whether or not to punish former Chilean dictator Augusto Pinochet is now over.
After prolonged reflection on medical reports regarding Pinochet’s health, Judge Juan Guzmán found him mentally fit to stand trial on nine counts of kidnapping and one count of homicide.
Chile’s Supreme Court has now upheld that indictment.
All of those crimes were committed during "Operation Condor," a Latin America-wide program among the continent’s dictators to physically eliminate their opponents on the left.
Judge Guzmán also determined that the former dictator is not insane and knows right from wrong.
This is critical, as Pinochet has sought to deny his competency.
A recent "vascular incident" that sent him to a military hospital – where he regained consciousness and motor skills – will furnish excuses to request new medical examinations and delays as criminal proceedings move forward.
But Guzmán’s efforts to bring the dictator to justice should not remain isolated.
Other judges and official bodies need to keep the pressure on Pinochet.
Much, for example, is still to be learned in cases such as the assassination of General Carlos Prats and his wife in Buenos Aires in 1974.
Moreover, investigations by the US Congress into the Riggs Bank have uncovered the suspicious means by which Pinochet and his family obtained their wealth.
These investigations need to be followed up with judicial action.
The investigation into the death in 1980 of ex-president Frei Montalva, the principal opponent of the dictatorship, has advanced but needs to be pursued vigorously in the courts.
Frei’s death implicates the repressive apparatus that Pinochet and Manuel Contreras, his “right hand,” managed in lockstep.
Operation Condor, the Riggs, Frei, and Prats affairs, and many other crimes are documented in the recent report on torture and political imprisonment written by the special commission established by President Ricardo Lagos.
Arriving 30 years after the military coup that brought Pinochet to power, the report has both unsettled and empowered Chileans.
Seemingly invincible for many years, the former dictator’s final collapse began in London in October 1998, when Spanish lawyers, Judge Baltasar Garzón of Spain, and Scotland Yard brought charges against him.
Pinochet responded with arrogance, provoking a huge sense of shame for Chile’s young democracy.
Pinochet’s ability to evade the courts cast a dark shadow over the country’s military institutions and made many Chileans wonder how far the country had really gone in its transition to democracy.
Without Judge Garzón’s insistence on pursuing the matter, prosecuting Pinochet would have been nearly impossible, owing to powerful opposition from wealthy and media-savvy Chileans.
The Chilean government’s excessive caution – rooted in fear of instability that could affect the basic rights regained after the dictatorship – also helped Pinochet evade justice.
Indeed, Chile’s courts could not have garnered the necessary public support to free them from their inertia without the push Garzón provided.
It would also have been impossible to consider bringing Pinochet to justice without the extraordinarily important human rights struggles waged by victims’ organizations, victims’ families, and jurists who, against all the odds, remained true to their cause for decades.
Few organizations in Chile have been as capable or as successful as those dedicated to human rights.
Because of the tenacity and passion of ordinary Chileans demanding that the state fulfill its mandate to protect their human rights, Pinochet finds himself before the bar of justice, and others who used their power to kill, torture, or exile their fellow citizens are being pursued.
Yet many still wonder, “Will Pinochet ever pay for his deeds?”
International public opinion and history have already condemned him.
Chile’s dignity now hinges on whether or not its legal system reaches the same conclusion.
Doubts that Pinochet will be punished exist because “pinochetismo” remains alive in Chile.
Powerful supporters defend him, using any underhanded means they can muster.
They are aided by the fact that some within the government would prefer to close a sorrowful chapter of human rights violations rather than bringing it to a conclusion.
Depending on the course the nation takes, Chileans may in time reconcile themselves to their past.
For now, their different views coexist and they live together peacefully.
But citizens and the state must also face the truth and bring human rights abusers to justice if people are to live honestly in their society and in history.
To the extent that Chileans do so, they will create the conditions for a more dignified and honorable society.
A judicial judgment against Pinochet is an important step forward.
Pity the Policymakers
NEWPORT BEACH – I don’t know about you, but whenever I am in an airplane experiencing turbulence, I draw comfort from the belief that the pilots sitting behind the cockpit’s closed door know what to do.
I would feel very differently if, through an open door, I observed pilots who were frustrated at the poor responsiveness of the plane’s controls, arguing about their next step, and getting no help whatsoever from the operator’s manuals.
So it is unsettling that policymakers in many Western economies today resemble the second group of pilots.
This perception reflects not only the contradictory pronouncements and behavior of policymakers, but also the extent to which economic outcomes have consistently fallen short of their expectations.
This perception is evident in Europe, the United States, and Japan, where indicators of economic sentiment are deteriorating again, already-weak recoveries are stalling, and over-stretched balance sheets are becoming even more precarious.
Understandably, companies and households are becoming even more cautious – inevitably making a difficult job for policymakers that much harder.
In Europe, policymakers have failed to counter an expanding sovereign-debt crisis in the eurozone’s periphery, despite many summits and programs, multiple expensive bailouts, and the imposition of painful economic sacrifices on societies.
Like an airplane piloted in confusion, the European economy has not behaved according to the instructions.
As Greek Prime Minister George Papandreou put it last week in his powerful letter to the head of the Eurogroup, Luxembourg’s Prime Minister Jean-Claude Juncker, “The markets and rating agencies have not responded as we had all expected.”
With outcomes that fall far short of policymakers’ projections, it is not surprising that there is little harmony in official circles.
Narratives increasingly conflict – and in an astonishingly open and unsettling way.
Disagreement in Europe is not limited to that between “solution providers” (the troika of the European Central Bank, the European Union, and the International Monetary Fund) and countries now implementing painful austerity measures (Greece, Ireland, and Portugal).
Damaging discord has emerged within the troika itself, with a particularly disruptive impasse between Frankfurt, where the ECB resides, and Berlin, the seat of the German government.
The situation in the US is not as acute as it is in Europe, but policy impotency prevails here, too.
Despite unprecedented fiscal and monetary stimulus, economic growth remains sluggish, and unemployment is stuck at a worrisomely high level.
The medium-term fiscal outlook continues to deteriorate while, in the short term, politicians play with the country’s valuable AAA credit rating by arguing like schoolchildren over how to extend the debt ceiling.
Then there are the complex technical difficulties facing policymakers, to which US Federal Reserve Chairman Ben Bernanke referred in his refreshingly candid manner, acknowledging that “We don’t have a precise read.”
The Fed’s economic manuals, including technical models and historical analyses, shed insufficient light on today’s economic situation.
Little wonder, then, that the latest release of the closely followed minutes of the Federal Open Market Committee meeting points to a divided body, whose members anticipate divergent paths for monetary policy, with some expecting further accommodation and others expecting a round of tightening.
Meanwhile, Japan continues to languish.
Four months after a major earthquake, a devastating tsunami, and the start of persistent nuclear uncertainties, a comprehensive reconstruction program has yet to be launched.
The resulting economic uncertainties are compounding years of inadequate growth and deteriorating public-debt dynamics.
Six important issues speak to the problem for policymakers in Europe, the US, and Japan.
First, all three economic areas are struggling with unsettling de-leveraging dynamics.
Like oxygen being sucked out of our metaphorical airplane in midflight, deleveraging destabilizes societies and undermines the traditional effectiveness of official policies.
Indeed, left completely to their own dynamics, these economies would probably shed excessive debt and alter long-standing social contracts in a manner that is both highly disorderly and that leads to economic contraction and a higher risk of another financial crisis.
Second, domestic de-leveraging dynamics are aggravating other structural impediments.
While the specifics vary by economic region and sector (housing, labor markets, credit intermediation, etc.), it is a combination with a common and unfortunate outcome: it inhibits economies’ ability to grow, and thus to overcome debt overhangs in an orderly way.
Third, policymakers are operating in a global economy that is in the midst of major re-alignments, as several systemically important emerging economies, led by China, continue to plow through their developmental breakout phase.
Fourth, in choosing cyclical measures to deal with structural problems, policymakers have complicated matters even more – a reflection, again, of their inability to understand the unusual challenges that they face.
Fifth, politics is complicating matters significantly.
The reason is simple: in most cases, the required structural measures involve immediate pain for longer-term gain – a tradeoff that politicians abhor, especially when they are subject to short election cycles.
Finally, communication has been dreadful.
Rarely have I witnessed such failure by policymakers to provide a clear vision of their medium-term economic vision – a failure that has added to the general and unsettling sense of uncertainty.
All of this speaks to why we should pity today’s policymakers, who must confront unusually difficult challenges with abnormally ineffective tools.
But pity is not a free pass: we should also urge policymakers to shift from their traditional cyclical mindset to one that can better comprehend, and effectively address, the more complicated, yet critically important, structural issues that underlie today’s malaise.
Unfortunately, this will not happen overnight; and, in some cases, conditions might have to become a lot worse in order to focus policymakers’ minds.
In the meantime, companies and households lucky enough to be in a position to build precautionary cushions will inevitably continue to do so.
Others, unfortunately, will be vulnerable to even greater stomach-churning turbulence – without the perceived benefit of a closed cockpit door.
Playboy and the Mullah
Indonesia recently witnessed a pair of dramatic releases: one a radical Muslim cleric from prison, the other a saucy men’s magazine from its editors.
Both Abu Bakar Ba’asyir and Playboy are now out on the streets and in the public eye, but neither is as significant as its opponents claim.
Their releases and the public debate to which they have contributed, however, cut straight to the heart of the ongoing struggle for Indonesia’s self-identity – a struggle which has taken a dramatic turn of late.
Abu Bakar Ba’asyir is a radical Muslim cleric who was convicted of blessing the original 2002 Bali bombing, and suspected by some of providing much more.
His name is on a UN list of terrorists, and undoubtedly Indonesia and the rest of the world would be safer if he were still in prison.
But his release in itself is not, as some charge, evidence that Indonesia is becoming more radicalized.
Ba’asyir was released for the simple reason that the law required it: he had completed his 30-month sentence.
Indonesia’s government would undoubtedly prefer to see Ba’asyir languish in jail, but without any legal measure to justify continued detention, it had little option but to release him.
Having done so, the government has been quick to impose a travel ban, freeze his bank accounts, and make clear that it will monitor his activities closely.
Ba’asyir’s release is undeniably unfortunate and possibly dangerous – but it is the consequence of legal proceedings, not any sudden radicalization of Indonesia.
The case of Playboy is a much more accurate barometer of the state of religious radicalism in Indonesia.
When Playboy unveiled plans for a nudity-free Indonesian edition early this year, it was denounced by politicians and conservative religious leaders as a threat to traditional values.
The national parliament introduced an “Anti-Pornography Bill,” which turned out to be a vaguely-worded document with the potential to outlaw not only pornography, but also certain traditional dances, sunbathing, and public kissing.
The proposed bill attracted support from moderate Muslim leaders, but its most vocal advocates were a collection of radical religious groups with a predilection for violence, led by the Islamic Defenders Front (known by its Indonesian acronym, FPI).
This year alone, these self-appointed moral vigilantes have ransacked bars and nightclubs, attacked the American and Danish embassies, and stoned the offices of Playboy after its first edition – all with only occasional protests from the police.
The FPI and its brethren took up the anti-pornography bill with vigor, organizing demonstrations in support and denouncing anyone who dared oppose it.
In the months following Playboy’s announcement, the public backlash against the magazine appeared to have pushed the Indonesian mainstream firmly to the right, an impression only furthered by the high visibility and loud belligerence of radical groups.
Moderate Muslim activists and intellectuals tried valiantly to counter the radicals, but seemed unable to gain traction.
Late this spring, something changed, and within a few weeks moderates made dramatic public advances.
The most striking demonstration of this political shift came after an incident in central Java, in which a speech by former President Gus Dur was interrupted by FPI members who denounced him for supporting pluralism and opposing the anti-pornography bill.
It was a public attack on a respected national and religious leader, and it was answered quickly by the leaders of the two most important Muslim organizations in the country.
Representing a combined membership of more than sixty million Indonesians, they called directly upon the government to act against groups who engage in violence in the name of Islam, and denounced the behavior of such groups as un-Islamic, criminal, and a threat to national unity.
Newly emboldened, the government pledged to crackdown on groups that engage in violence, and announced plans to empower authorities to disband organizations that threaten ‘security and order.’
The Jakarta police have begun acting with new vigor: they charged one prominent radical leader with defamation for publicly calling women opposed to the anti-pornography bill “evil, wretched, and immoral,” and then arrested the chairman and twenty members of FPI for attacking a group of cafes.
A national dialogue about fostering pluralism is now in progress, and has inspired renewed public interest in Pancasila, the national philosophy discredited during the Suharto years but now seen by some as a symbol of Indonesia’s historic pluralism.
Meanwhile, legislators have said they will work to transform the controversial anti-pornography bill into a more targeted anti-smut ordinance.
As for the Playboy , it has been met with the expected criticism – but no attacks and indeed, not even any demonstrations.
In sum, a remarkable shift in the national debate &#45;&#45; from how to make Indonesia more conservatively Islamic, to how to sustain Indonesia’s tradition of religious pluralism into the future – has taken place.
The releases of Ba’asyir and publication of Playboy , however controversial, will not themselves alter this new discourse, but they offer an insightful glimpse into just how dramatically things are changing in Indonesia.
The moderate agenda has gained important ground this month – but the struggle to establish Indonesia’s political and religious identity is far from over.
Playing at Democracy
In Calcutta, when some younger kid came along and insisted on joining the game my friends were playing, we would let the new kid in, but only after whispering into each other's ears the words, elé belé .
An elé belé is a player who thinks he is participating but, in truth, is merely going through the motions.
Everybody knew that a goal scored by him was not a real goal.
As a child, mastering the cruel art of elé belé was important.
When a new kid arrived, accompanied by a doting mother, we could convey to one another with a mere glance that the kid would be an elé belé.
The technique of elé belé also thrives in the adult world.
All of us can recall collective decision-making situations--a selection committee, a team for drafting rules--where some members were elé belés.
All of us have been elé belés at one time or another, though we may not be aware of it.
What's true of children and adults is also true of international institutions.
Indeed, organizations that are officially committed to involving all nations in their decision making are often controlled by small groups of powerful nations, while others merely go through the motions of participation.
The World Trade Organization (WTO), supposedly run on the principle of one country one vote, actually has its agenda selected behind the stage by a small group of nations.
It is now standard practice for international organizations publishing a report to involve all the "stakeholders" and to reflect their opinions.
So the evolving report is usually put up on a Web site and suggestions are invited from one and all--NGOs, trade unions, and other organizations of civil society.
This promotes a sense of participation, but as a friend, seasoned in such matters, informed me, the key in the end is to ignore all the comments received and to write up the report as if there were no Web site and no participation.
Increasingly, free expression of opinion does not influence or restrain how government behaves.
Consider the United States.
People expressed their opinion freely--in newspapers, on television, in Internet chat rooms--concerning George Bush's planned war on Iraq.
Never before was there so much opposition to a war before it occurred.
Yet the invasion went ahead.
The same holds true for Britain and Australia, where public opposition to war counted for naught.
Part of what happened--or, rather what didn't happen--is admirable: almost no effort was made to muzzle criticism of the government, as happens in China and scores of dictatorial countries.
But the world's great democracies--the US, India, the UK, and others--are increasingly adept at not allowing freely expressed opinions to constrain what the government does.
The current war in Iraq is perhaps the strongest proof of this.
Leaving aside the immorality of this war--and immoral it is--I wish to draw attention to this increasing ability and inclination of democracies to "deal" with (meaning neutralize) public opinion.
They have embraced the elé belé strategy: let people believe that their opinion counts, that they are participating in their nation's decision making, while keeping them out of the real game.
As democracies mature they become ever more practiced at managing opinion, and in many cases, at shaping opinion.
Every time Hans Blix commented on the UN inspections of Iraq that he was conducting, members of the Bush administration would paraphrase what Blix said.
The paraphrasing would subtly change Blix's comments to suit America's case for war.
By repeating the altered comments, it was hoped, mass opinion would shift in favor of the war.
Overthrowing a totalitarian regime and organizing elections may be hard, but the harder task is to go from voting to establishing a true democracy.
For people accustomed to living in a totalitarian state, learn what participation means is not easy.
Hence the popular belief that democracies, like wine, improve with age.
While this may be true, there is a downside to maturity.
Just as citizens in a democracy continuously learn to participate, democratic governments continuously learn how to get their way despite the participation.
It is no use denying that civic participation too often serves only to legitimize a sham.
We must recognize and confront this problem to prevent established democracies from atrophying and to help new democracies become more effective.
For it is not only morally wrong to leave nations and communities feeling marginalized and without voice; it is a recipe for frustration, rage, and terrorism.
Plugging the Leaks
MUNICH – With pain and misgiving, the United States Congress bailed out Wall Street in order to prevent a meltdown of America’s financial system.
But the $700 billion to be used may flow into a leaky bucket, and so may the billions provided by governments throughout the world.
The US financial institutions that went bankrupt in 2008 – or that would have gone bankrupt without government help – were in trouble because they lacked equity capital.
They did not lack that capital because they never had it, but because they paid out too much of their abundant earnings in previous years to shareholders, leveraging their operations excessively with debt capital.
If no measures are taken to increase the minimum equity requirements for banks and other financial institutions, financial crises like the current one could recur.
Anglo-Saxon financial institutions are known for their high dividend-payout ratios.
From a European perspective, the hunger for dividends and the emphasis on short-term performance goals that characterize these institutions is both amazing and frightening.
Investment banks, in particular, are known for their minimalist equity approach.
While normal banks need an equity-asset ratio of at least 7%, investment banks typically operated on a ratio of only 4%.
The lack of equity resulted largely from the concept of “limited liability,” which provided an incentive for excessive leveraging.
Earnings left inside a financial institution can easily be lost in turbulent times.
Only earnings taken out in time can be secured.
Lack of equity capital, in turn, made risk-averse shareholders hire gamblers to manage their limited-liability investment companies.
The managers chose overly risky operations, because they knew that the shareholders would not participate symmetrically in the risks.
While upside risks would be turned into dividends, downside risks would be limited to the stock of equity invested.
Claims against the personal wealth of shareholders would be blocked by the limited liability constraint.
The banks’ creditors or governments ultimately would bear any losses.
The mutual interaction between the incentive to minimize equity capital and the incentive to gamble in order to exploit the upside risks caused America’s crisis.
In theory, bank lenders and the government could anticipate the additional risks they encounter when a company chooses a high-leverage strategy.
Lenders may charge higher interest rates, and the government may charge higher taxes or fees.
But this theory fails to match reality.
Governments do not tax the return on equity less than debt interest, and lenders do not sufficiently honor the benefits of high equity with lower interest rates, owing to a lack of information about the true repayment probability.
This is why equity capital held by financial institutions typically is more than twice as expensive as debt capital and why these institutions try to minimize its use.
The provision of limited liability not only turned Wall Street into a casino, but so-called “Main Street” also was induced to gamble, because homeowners enjoyed a limited liability similar to that of the companies.
When low-income borrowers took out a loan to buy their homes – often 100% of the purchase price – they typically could use the home as collateral without warranting the repayment with additional wealth or even their income.
Thus, they were protected against the downside risk of falling house prices and profited by speculating on the upside risk of appreciation.
Such homeowners knew that with rising prices they would be able to realize a gain by either selling their homes or increasing their debt, while in the case of falling prices they could simply hand over the keys to their banks.
Given the uncertainty about future house prices, they could reasonably expect gains, which induced them to pay even more in the first place.
Gambling by Main Street caused the sub-prime crisis.
The crisis spread because the banking system was not sufficiently risk-averse – and in some cases even seemed to relish risk.
Mortgage banks kept some claims on their books, but sold most of them to investment banks as “mortgage-backed securities.”
The investment banks blended these securities into “asset-backed securities” and “collateralized debt obligations” (CDOs) and sold them on to financial institutions throughout the world. These institutions, attracted by the high rates of return that were promised, invariably neglected the downside risks.
The buyers of the CDOs were often misguided by rating agencies that performed badly and did not provide reliable information.
As private rating agencies live on the fees they collect from rated companies, they cannot easily downgrade important clients or the assets they sell.
The big American investment banks received excellent ratings up to the last moment, and so did the CDOs with which they betrayed the world.
All of this explains why the US had such a formidable period of growth in recent years, despite the fact that household savings were close to zero, and why foreigners were willing to finance a record US current-account deficit of more than 5% of GDP – higher than it has been since 1929.
That period is now over.
The US must carry out fundamental reforms of its financial system to plug the equity leaks and recover investors’ confidence.
But even then it will have a hard time continuing to sell financial assets to the rest of the world.
American households will need to learn to accumulate wealth by cutting consumption rather than speculating on real estate.
A painful decade of stagnation for America lies ahead.
बच्चों के हत्यारों को रोकना
सिएटल – दुनिया भर में दूर दराज़ के बहुत से स्थानों में, बच्चों के सबसे बड़े हत्यारे सबसे छोटे जीवाणुओं - वायरस, बैक्टीरिया, और एकल कोशिका वाले उन परजीवियों से पैदा होते हैं जिनके कारण डायरिया और निमोनिया होते हैं। यह देखते हुए कि सार्वजनिक स्वास्थ्य के क्षेत्र में जो भारी प्रगति हुई है उसके फलस्वरूप इन दोनों रोगों को रोका जा सकता है और इनका इलाज किया जा सकता है - यह अक्षम्य है।  यह जरूरी है कि सभी बच्चों को, विशेष रूप जिन बच्चों को सबसे अधिक खतरा है, जीवन रक्षक स्वास्थ्य देखभाल सेवाओं तक पहुँच प्राप्त हो।
यूनिसेफ के अनुसार, हर साल पांच साल की उम्र से कम के जिन 5.9 मिलियन बच्चों की मृत्यु होती है उनमें से पूरे एक चौथाई की मृत्यु निमोनिया और डायरिया से होती है। और अंतर्राष्ट्रीय वैक्सीन प्रवेश केंद्र की एक नई रिपोर्ट से यह पता चलता है कि निमोनिया और डायरिया से होने वाली मौतों में से लगभग तीन-चौथाई मौतें सिर्फ 15 देशों में होती हैं। इन देशों और अन्य जगहों में, ऐसी सबसे अधिक मौतें सबसे गरीब और सबसे वंचित समुदायों में ही होती हैं।
हालांकि ये आंकड़े हाल के दशकों में हुई प्रगति को प्रतिबिंबित करते हैं, दुःख की बात तो यह है कि यदि सरकारें लगातार एक समय में केवल एक या दो उपायों पर ध्यान केंद्रित करने के प्रलोभन के आगे झुक नहीं जातीं तो इसमें बहुत अधिक सुधार हो सकता था। इन बीमारियों से होनेवाली बच्चों की मौतों को सदा के लिए समाप्त करने के लिए, सरकारों को चाहिए कि दो साल पहले विश्व स्वास्थ्य संगठन और यूनिसेफ द्वारा अपनी एकीकृत निमोनिया और डायरिया के लिए वैश्विक कार्य योजना में जिन हस्तक्षेपों की पहचान की गई थी वे उनका पूर्णरूपेण पालन करने के लिए प्रतिबद्धता दर्शाएँ।
जीवन के पहले छह महीनों में विशेष रूप से स्तनपान को बढ़ावा देना एक ऐसा महत्वपूर्ण - और असाधारण रूप से लागत प्रभावी - हस्तक्षेप है जिसके चलन से बच्चे की प्रतिरक्षा प्रणाली के विकसित होने में मदद मिलती है। वर्तमान स्थिति के अनुसार, जिन देशों में निमोनिया और डायरिया से सबसे ज्यादा बच्चों की मौत होती है उन 15 देशों में से 12 में, विशेष रूप से स्तनपान दरें डब्ल्यूएचओ के 50% के वैश्विक लक्ष्य से कम हैं।
इसके अलावा, सरकारों को यह सुनिश्चित करना चाहिए कि सभी बच्चों को जीवन-रक्षक टीके मुहैया होते हैं। हालांकि न्यूमोकोकल संक्रमण - जो निमोनिया का एक प्रमुख कारण है - के लिए टीका सदी के आरंभ में विकसित किया गया था, जिन पांच देशों (चाड, चीन, भारत, इंडोनेशिया, और सोमालिया) में निमोनिया सबसे अधिक व्यापक है उनमें इसे नियमित टीकाकरण कार्यक्रमों में शामिल नहीं किया जाता है। इस स्थिति को अवश्य बदला जाना चाहिए।
जहाँ तक डायरिया का संबंध है, एक व्यापक वैश्विक अध्ययन से यह पता चला है कि इसके मामूली से लेकर गंभीर मामले मुख्य रूप से रोटावायरस की वजह से होते हैं जिससे यह वायरस दुनिया भर में शिशुओं और छोटे बच्चों का प्रमुख हत्यारा बना हुआ है। लेकिन हालांकि, रोटावायरस के टीके 79 देशों में उपलब्ध किए गए हैं – जो एक मह���्वपूर्ण उपलब्धि है – फिर भी दुनिया के 74% शिशुओं को इस साल टीका लगाए जाने की संभावना नहीं है। भारतीय शिशुओं के लिए अगले साल टीके की शुरूआत किया जाना एक प्रमुख मील का पत्थर होगा। लेकिन बांग्लादेश और पाकिस्तान जैसे अन्य एशियाई देशों ने अभी तक ऐसा करने का कोई फैसला नहीं किया है।
जब बच्चों को डायरिया हो, तो उन्हें सही उपचार अवश्य मिलना चाहिए। मौखिक पुनर्जलीकरण लवणों और जिंक की खुराकों से न केवल मृत्यु दरों में भारी कमी होती है; उनका उपयोग करना बहुत सस्ता भी पड़ता है।  निमोनिया के इलाज के लिए, एंटीबायोटिक दवाओं का मिल पाना आवश्यक  है।
इन हस्तक्षेपों में समान बात यह है कि इनमें गरीब समुदायों की सेवा करनेवाले पर्याप्त रूप से सुप्रशिक्षित स्वास्थ्य कार्यकर्ताओं की जरूरत पड़ती है। वास्तव में, माताएँ जब स्तनपान कराना शुरू करती हैं तो उनका मार्गदर्शन करने और इस परिपाटी के महत्व को समझाने के लिए स्वास्थ्य कार्यकर्ताओं की आवश्यकता होती है - और यह काम हमेशा इतना आसान नहीं होता है जितना कि यह लगता है। टीके लगाने और उपचार करने के लिए उनकी आवश्यकता होती है।  परिवारों को इस बारे में सलाह देने के लिए उनकी आवश्यकता होती है कि वे निमोनिया, दस्तों, और अन्य बीमारियों से होने वाली मौत से अपने बच्चों की रक्षा किस तरह कर सकते हैं, और इसमें यह जानकारी देना भी शामिल है कि अगर वे ऐसा करते हैं तो उन्हें देखभाल कब प्राप्त करनी चाहिए।
स्वास्थ्य कार्यकर्ताओं को सही प्रशिक्षण, उपकरण, पर्यवेक्षण, धन, और लॉजिस्टिक सहायता प्रदान करके, यह सुनिश्चित करने में सरकारों की निर्णायक भूमिका होती है कि सबसे गरीब और सबसे वंचित समुदायों को महत्वपूर्ण स्वास्थ्य सेवाओं तक पहुँच प्राप्त होती है। साफ पानी और प्रभावी स्वच्छता सुविधाओं जैसे अन्य महत्वपूर्ण हस्तक्षेपों सहित, इसके लिए एक मजबूत और निरंतर राजनीतिक प्रतिबद्धता की आवश्यकता होगी, जिसे नागरिक समाज और मीडिया अपनी सरकारों को जवाबदेह बनाकर प्राप्त करने में मदद कर सकते हैं।
दुनिया भर में अभी भी ऐसे बच्चों की संख्या बहुत अधिक है जिन्हें उन आवश्यक स्वास्थ्य सेवाओं तक पहुँच प्राप्त नहीं है जिनकी उन्हें जीवित रहने और बढ़ने के लिए जरूरत होती है। निमोनिया और डायरिया को रोकने, इनका इलाज करने, और इनसे मुक्ति के लिए सिद्ध, कम लागत वाली विधियों की चर्चा को तेज करना इस दृष्टि से महत्वपूर्ण है कि सभी बच्चों को वह मौका दिया जाए जिसके वे हकदार हैं।  आप कहाँ रहते हैं इससे यह तय नहीं होना चाहिए कि क्या आप ज़िंदा भी रहते हैं।
Poland’s Successful Losers
WARSAW – How can a government with the best economic record in Europe (indeed in the entire OECD) be humiliated at the polls by a Euroskeptic, nationalistic, and economically illiterate opposition – one deemed unelectable only a year ago?
That is the question many Poles, and friends of Poland, are now asking, following the defeat on October 25 of the Civic Platform government.
If creating jobs and boosting incomes can’t get you re-elected, what can?
One reason for the opposition’s victory is, of course, universal: after a time, people everywhere want change, and Civic Platform had been in power since 2007.
And impatience with the status quo is arguably stronger in the post-communist countries of Central and Eastern Europe, where much of the social, political, and economic order is yet to be generally accepted.
Indeed, Civic Platform’s Donald Tusk was Poland’s first post-communist prime minister to win successive terms.
Moreover, as parties govern longer, their strongest personalities tend to be replaced by weaker ones.
Civic Platform contested this election after replacing Tusk with Ewa Kopacz, and has had the same problem with a number of other “substitutions.”
What is specific to Poland is that the past eight years have apparently created a pronounced case of cognitive dissonance.
Annual GDP growth averaged 3.2% over this period; and, unlike in the rich West, both inequality and unemployment have actually fallen, with growth mainly benefiting the middle three quintiles of the income distribution.
This segment of the population – usually politically crucial – enjoyed a 28% rise in per capita real income from 2007 to 2014.
At one level, Poles are aware of this, with large majorities describing financial conditions in their own families, workplaces, and social environments as either “good” or “very good.”
The dissonance is that equally large majorities also describe Poland’s economic situation and the “direction in which the country is moving” as either “bad” or “very bad.”
Poland’s transformation is visible not only in the form of new motorways, local roads, airports, hospitals and stadiums, but also in the appearance of vast numbers of new and refurbished housing units, supermarkets, and modern factories.
And this has not been achieved by mortgaging the future.
Poland has recorded the fourth lowest increase in public debt (as a percentage of GDP) in the European Union.
And yet the disconnect between this reality and the Poland “in ruins” or “on the verge of catastrophe” perceived by many voters was too strong to ignore.
Even Kopacz admitted the contrast between the “public affluence” that everyone sees and the “private penury” that many feel persists (at least relative to Germany, the preferred benchmark for Poles).
In today’s Poland, it is harder to accept wages – nominally about a third of those in Germany – that had seemed perfectly adequate in 2007, when they were only a quarter of the German level.
But, unsurprisingly, Kopacz’s campaign slogan, “A strong economy – higher wages,” and her implicit promise to address the issue in one parliamentary term, did not appear credible.
Although the problem faced by Kopacz and Civic Platform was specifically Polish, it contains a universal truth: to win, politicians must define the context in which they operate.
During Tusk’s premiership, the government was perversely reluctant to claim credit for Poland’s economic success.
Tusk praised Poles themselves for their hard work, but neglected to emphasize that without the government’s effective macroeconomic policies, that work would have been wasted.
He never even reminded voters that the government’s choices in managing the fallout from the 2008 global financial crisis – which were neither obvious nor easy, because they required rejecting the EU’s austerity consensus – was the right one.
Given that most voters do not consider themselves able to judge competence in government, they base their choice of party on the general direction in which it intends to take the country and the overarching principles by which it intends to govern.
Civic Platform came to power in 2007 with a strongly pro-business and free-market ethos.
During the financial crisis, it had to moderate these views considerably, taking steps that ran counter to its ideology: increasing deficits in the trough of the crisis (2009-2010) and raising taxes once growth resumed (2011).
And then, when the government reduced the size of the absurdly expensive, but popular, funded pension system (2011-2014), Tusk attempted to compensate voters by pumping all additional free resources into family benefits.
Although this was justified, given Poland’s very low birth rate, it was also intended to appeal to his urban electorate.
But, to many voters, it seemed that Civic Platform, which had identified itself in 2007 as socially conservative and economically liberal, was drifting to the economic (as well as the cultural) left.
By 2014, the government was perceived as being so pragmatic as to be almost value-free.
That perception naturally raised the suspicion that self-interest had become Civic Platform’s main motivation.
As the party’s narrative became an endless litany of the good social things it had done (or was about to do), Poles came to view the campaign as a cynical attempt to buy their votes – and to do so with their own money.
Even the fact that these promises, though plentiful, were mostly inexpensive (certainly compared to those of the opposition) was not used to convey a commitment to fiscal responsibility.
Elections are a choice, not an auction between competing lists of promises, with victory simply going to the highest bidder.
Civic Platform lost because it failed to explain to Poles its own view of that choice.
It hardly mattered that the opposition’s program lacked credibility: Civic Platform had already become the architect of its own defeat.
Poland’s New Golden Age
FRANKFURT – Today’s world is not the stable, post-historical place some had imagined in 1989, when the Iron Curtain fell and communist rule in Eastern Europe came to an end.
But, though the events of 1989 did not bring about perpetual peace and prosperity, they did set in motion some true success stories.
One of the most impressive is Poland’s rise as a political and economic heavyweight in Europe.
This year’s triple anniversary – 25 years of democracy, 15 years of NATO membership, and ten years of European Union membership – is a source of pride for the Polish people, and rightly so.
Imagine how miraculous Poland’s success is.
Here is a country that disappeared from the map of Europe in the eighteenth century and was divided and ruled by imperial occupiers for 150 years.
In the twentieth century, Poland was the victim of two inhuman ideologies, fascism and Stalinism.
Its golden age was some 500 years ago, and at the beginning of this century many still viewed it as a symbol of backwardness.
But the Polish people struggled and sacrificed to bring about their nation’s rebirth – and in the process ushered in a new era for Europe and the world.
The Berlin Wall would not have fallen when and how it did without Poland’s Solidarność movement and its struggle for freedom and human rights.
Nonetheless, Poland, like the EU’s other “new” member states (a term that, after ten years, has become inadequate), remains relatively unknown to many in the “old” member states.
To discover Poland is to find a country that offers a rich cultural heritage, a vibrant civic life, and industrious, creative people who can overwhelm guests with their hospitality.
As a German, I am happy that German-Polish relations have never been better than they have been since Poland’s accession to the EU.
That is a crucial development, and one that must be carefully protected, for it provides a powerful guarantee of peace and stability in the center of Europe.
Last month, Donald Tusk, Poland’s former prime minister, was appointed President of the European Council, thus becoming one of Europe’s three top leaders.
This decision not only reflected Tusk’s successful leadership in Poland, where he ensured political stability and oversaw impressive economic progress; it was also a clear signal that EU leaders fully acknowledge Poland’s political and economic importance.
It also signaled to the other new member states that they are true equals in European decision-making.
Again, it was Poland that paved the way, reminding the old member states from the outset of the accession process that it was not an outsider or a poor relative in need of charity, but rather a source of inspiration in the European integration process, its impact delayed only by World War II and its aftermath.
Now, after ten years of EU membership, a new Golden Age for Poland may be on the horizon.
Poland has the potential to become a European leader again.
Firmly anchored in the community of Western democracies, its role transcends the technical aspects of the European integration process, for it bears the responsibility of ensuring that no new barrier excludes our Eastern neighbors from taking part in this process.
It was logical that Poland was the spiritus rector of the EU’s Eastern Partnership, which led to EU association agreements with Ukraine, Georgia, and Moldova.
No other country has a stronger interest in the successful transformation of the EU’s eastern neighbors, particularly Ukraine.
Indeed, during the ongoing crisis, Poland has taken a firm stand: no one has the right to deny a European country its sovereign decision about its relationship with Europe.
The two countries’ historical ties have put Poland in a better position than others to understand the nature of Ukraine’s problems, and it would therefore be wise to listen carefully to Polish officials’ advice.
The Polish people deserve a bright future.
Their lesson for the rest of Europe is that dreams can come true if we fully engage in realizing them.
And, just as Tusk promised to polish his English as he moves to the center of the European stage, perhaps the rest of us should start brushing up on our Polish.
Poland\u0027s Christian Mission in Europe
Last week, Poland's (ex-communist) president called for an explicit reference to Europe's Christian heritage to be inserted into the forthcoming EU constitution.
Others have only whispered their longing for such a statement.
José Casanova explains why Poland publicly took the lead.
The link between Christianity and European civilization is breaking.
Western Europe is less and less the core of Christian civilization, and the most dynamic forms of Christianity today are less and less European.
Yet it is at this moment that Catholic Poland is ``rejoining Europe.''
During the years when West European societies were undergoing their process of secularization--indeed, of ``de-Christianization''--Polish Catholicism underwent an extraordinary revival.
All attempts by the communist regime to sever the links between the Catholic Church and the Polish nation failed.
Forced secularization from above--relatively successful in the Soviet Union--failed abjectly.
The hope that economic development would have the same secularizing effect as in the West also proved false.
Not unlike 19 th Century Poland's doomed, romantic uprisings against Tsarist Russia, most European observers viewed the country's religious vitality under communism as anachronistic, if not reactionary.
Yet the Poles confounded the Zeitgeist .
The surprising--some say miraculous--elevation of Cardinal Karol Wojtyla to the Papacy as John Paul II, his triumphal visit to Poland in 1979, the rise of Solidarity a year later, and the collapse of the Soviet system in 1989 changed the march of history.
Given this background, it is no surprise that Poland has forged a type of Catholic ``Europhobe'' who objects to the EU not because of the Euro or some supposed threat to national sovereignty, but because of what Europe represents morally and spiritually.
These anti-Europe Catholics reject European integration because they think Europe's secular, materialist, and hedonist values threaten Poland's Catholic identity.
They fear the threat of secularization implied by European integration.
That fear is not unjustified. After all, it is a fundamental premise of the theory of secularization that the more modern a society, the more secular it becomes.
Because modernization, in the sense of catching up with European levels of political, economic, social, and cultural development, is one reason Poland sought integration with the EU, one can anticipate that the general historical pattern of modernization will lead to secularization across Central Europe, including Poland.
Belief in a progressive religious decline is part of Europe's definition of what constitutes the modern situation, and this has real consequences for religiosity.
The assumed normality of belief in the inevitability of secularization tends to reproduce itself, as well as to appear increasingly irreversible.
Yet it is on this point that Polish Catholicism sees for itself a special, historic role.
Despite initial ambivalence toward Europe, the Polish Catholic Church has maintained -at least officially--an unambiguous position in support of European integration ever since 1996, when a delegation of Polish Bishops visited the European Commission in Brussels.
That position is fully in line with the vision of European unity stressed by the Polish Pope.
During John Paul II's 1999 visit to Poland, he stated explicitly his support for EU integration.
One reason for this positive attitude may be connected with the apostolic assignment the Pope has reserved for the Polish Church.
As the first Slavic pope in history, John Paul II felt a special mission to liberate the Slavic peoples from communism and to deepen ecumenical dialogue with the predominantly Orthodox churches of Eastern Europe.
The fall of the Berlin Wall confirmed the Pope in his mission to reunify and spiritually regenerate Christian Europe.
But the Pope's vision confronts a Western Europe that he perceives as increasingly pagan, hedonist, and unresponsive to his revivalist message.
Frustrated, he turned to an Eastern Europe--particularly Catholic Poland--that was seemingly less corrupted by capitalist materialism, urging the region's peoples to serve as the ``spiritual reservoir'' of Christian Europe.
What he discovered, however, was that Western material goods and values were flooding the East and polluting that reservoir.
Poland's Catholic bishops, however, accepted the assignment given to them by the Pope and have repeatedly stressed that one of the Church's goals in a united Europe is to foster a revival of Christianity.
But given the loss of demand for religion, the supply of surplus Polish priests for a pan-European evangelizing effort is unlikely to change things much.
Europe's lukewarm--if not outright hostile--response to John Paul II's revivalist preaching testifies to the difficulty of this assignment.
A less ambitious apostolic assignment, however, could work.
Let Poland prove that the link between modernization and secularization is wrong.
Let Poland be Poland.
Let Polonia semper fidelis keep faith with its Catholic identity and tradition while succeeding in its integration within Europe, becoming in the process a ``normal'' European country.
In so doing, it could prove that the decline of religion in Europe is not an inevitable process tightly linked to modernization, but a historical choice Europeans have made.
A modern, religious Poland could force secular Europeans to rethink their assumptions and realize that it is not so much Poland that is out of sync with Europe, but secular Europe that is out of sync with the rest of the world.
Polish Catholicism has confounded skeptics and critics before.
It may do so again.
Poland’s Double Trouble
Much of the world seems fascinated by the fact that Poland is now governed by a set of identical twins who first became famous as child movie actors: President Lech Kaczynski and Prime Minister Jaroslaw Kaczynski.
They are indeed intriguing, but the political forces they represent are even more interesting – and worrying.
Since the fall of 2005, the Kaczynskis have led a conservative-populist coalition, with a dose of nationalism – represented by the small League of Polish Families (LPR) – thrown in.
The Polish right was last in power in 1997, having previously governed in the years 1990-1993.
The post-communist Party of the Democratic Left (SLD) was voted out in 1997, despite a five-year streak of economic prosperity and rapidly falling unemployment.
Although the SLD’s popularity remained high, the previously fragmented right prevailed due to temporary unity.
In 1998, however, prosperity vanished.
So the right’s turn in government was followed by years of stagnation and exploding unemployment.
Unable to cope with the downturn, the right was replaced by another SLD-led government in 2001.
During this period, the right disintegrated.
Among the splinter groups that arose were the conservative Law and Justice (PiS) and the nationalist LPR.
As they emerged on the political stage, the left was failing: the economy did not improve, unemployment remained high, and the SLD, which attracted all kinds of riffraff, became mired in corruption scandals.
The scandals provided the right with an opportunity to deliver a coup de grace to the SLD in the form of parliamentary investigative commissions.
The hearings, reminiscent of Joe McCarthy’s witch hunts in 1950’s America, humiliated the SLD and, in large part, compromised the entire post-1989 period.
But the large swings in Polish politics are not merely the result of political shenanigans. They reflect the instincts of Polish voters.
People vote for all kinds of parties, from the far right all the way to the left, so long as they are convinced that the parties will deal with their social concerns and grievances.
The fusion of an irresponsible right-wing campaign and economic stagnation made Poland’s “wandering” electorate shift in the direction of the PiS, whose success was mostly due to its leader, Jaroslaw Kaczynski, currently the right’s most prominent politician.
Kaczynski presented this fluid electorate with a credible vision of a state concerned with social solidarity (with no one’s refrigerator standing empty) and opposed to heartless liberalism (which brings empty refrigerators for the poor and full ones for the rich).
This contrast, and a strong attack on the liberal Civic Platform, made it impossible to create a moderate right-wing coalition.
Having rejected Civic Platform as a partner, Kaczynski decided to ally his minority PiS with the populist Self-Defense party and the nationalist LPR.
The stated goal of the new alliance was to establish what Kaczynski calls the “Fourth Republic” (implying a constitutional break with the supposedly compromised post-1989 Third Republic).
The Kaczynskis want to destroy the “corrupt system composed of careerist politicians, post-communists, former secret service functionaries, and criminal organizations,” who, according to the twins, have ruled Poland since 1989.
The Fourth Republic is supposed to be republican, rather than liberal, with greater state involvement in the economy.
It is to be a democracy steered from above, with only a limited division of power and a streak of authoritarianism, guided by a mixture conservatism, populism, and nationalism.
It is to be assertive in its dealings with the EU – perhaps not so much Euro-skeptical as “Euro-difficult” – aping Margaret Thatcher’s Britain of the 1980’s, despite Poland’s being much poorer and less politically influential than Thatcher’s Britain was.
The notion of a Fourth Republic incites heated opposition.
President Lech Kaczynski’s approval ratings, are dramatically lower than those of his predecessor, the SLD’s Aleksander Kwasniewski.
His brother, Jaroslaw, has always evoked popular mistrust.
Most Poles did not vote for the Kaczynskis and still do not want to follow them.
But they did not see the risk in letting them gain so much power, and so did not mobilize to block them.
New elections are not due until 2009.
To be sure, a political crisis can bring the coalition down, but this can happen only if Poland’s “wandering” electorate decides that the PiS has let it down.
That looks unlikely.
The coalition took power at the start of what seems to be a new period of prosperity, underpinned by large EU subsidies.
As a result, there will be room for myriad favors for special interests and for boosting social benefits, which may buy time for the PiS and its vision of a Fourth Republic.
How far will the twins push their idea?
Jaroslaw Kaczynski is an intelligent politician who understands the link between currency stability and political success.
So he will not allow government largesse to become excessive and thus risk a negative reaction in the financial markets.
Yet the strong link between the fate of the coalition (and that of the Fourth Republic) and a fickle electorate addicted to social benefits will block the serious reforms that are needed to put the economy on a sound footing in the long term.
This will likely result in a gradual loss of economic competitiveness ­– all the more dangerous for being obscured by the temporary boost from EU funds, which will help maintain the government’s popular support.
In that case, life with the twins could become more interesting than Poland needs.
Poland\u0027s House Divided
WARSAW: Voters can be merciless judges.
Ten years after leading Poland to freedom, Lech Walesa received less than 1% of the vote in Sunday’s presidential elections, in which President Aleksander Kwasniewski romped to a second term in office.
Like Mikhail Gorbachev in Russia, Walesa is now a prophet without honor - indeed, invisible - in his own country.
In the years to come, both Walesa and Gorbachev may yet be recognized for the gifts of liberty they delivered.
For now, the verdict of voters is for complacency.
Of course, Poland’s presidential elections provoked heated discussions about the state of the country.
But our chattering classes now find life so pleasant that we forgot to discuss - or omited on purpose - the problem of those who were left behind by the train called freedom, democracy and the free market.
According to various estimates, between 35% and 50% of Poles are excluded from the economic benefits of Poland’s new society.
Some of these people are old and uneducated and don’t realize that they are excluded.
But my neighbor in the country, who is twenty-years-old, also has no chance: no chance to go to university; no chance of getting a decent job; no chance of even buying a slice of pizza in the local village.
He, however, belongs to that half of the excluded who understand what is happening to them and who have no illusions.
For him, all the days and years ahead look black; for him, there is only resentment and controlled rage.
In that balance between “fear of falling” and “hope of rising” which Alexis de Tocqueville saw as the driving force of free societies, fear of having fallen into an abyss beyond hope is carrying the day and paralyzing millions.
Even those who claim to represent the Left avoid mentioning inequality and do not offer the excluded, like my neighbor, any reason to hope.
Why is this happening?
First, (and here I speak about all postcommunist democracies) we accepted - almost unanimously and with little debate, for even the postcommunists accept the basic rules of the market - the neo-liberal package.
In Poland, this is called the politics of Balcerowicz, after the architect of our reforms of the early 1990s, Leszek Balcerowicz.
We uncritically accepted the idea that maximizing economic growth is the best medicine for society’s problems.
Supposedly, the more money we the people have, the less poverty and exclusion there will be.
After ten years of implementing these policies, we know this is false.
Morally neutral, free markets are heedless of the fact that those who have the most - and grabbed what they have first - keep getting more.
Those that cannot pass the market’s starting line, either because they are too poor or too uneducated, and who lack modern skills, are politically free but consigned to a kind of permanent second class citizenship.
The shame in this is obvious.
Those of us who have prospered are now so pleased with our new money and new toys that we explain away poverty and exclusion by saying that the excluded lack an entrepreneurial spirit.
Poverty is a personal flaw.
Somewhere in the recesses of our consciences we know that we should think about those left behind, but we are so happy rushing forward that we fail to look back at what is happening in our new democratic ghettoes.
Luckily for us, the excluded and the poor tend not to revolt, precisely because they are so excluded.
To revolt requires you to be active.
Being able to revolt means being able to work together and fight together.
But when you are excluded, you are permanently alone.
We must not delude ourselves that this situation is stable.
We must understand that exclusion is bad for our economy and national well-being because about 40% of society cannot participate in the market economy we are building.
This fact is known in the boardrooms of foreign companies that invest in Poland; these foreign bosses recognize that there are nowhere near 40 million Poles able to buy their cars, TV sets and mobile phones.
Mass exclusion also has its political side.
Today, we do not fear primitive populism or peasant protests; we should, however, begin to fear for the future of Polish democracy, indeed for all the postcommunist democracies. For in every democracy the excluded retain certain inalienable rights, including the right to vote.
The excluded - as most sociological research shows - vote at about the same rate as other adults.
Whom do they vote for?
They never vote “for” anyone; they only vote against.
Against Balcerowicz; against the free market; against democracy.
As their votes today are dispersed, they pose no immediate danger.
Eventually, their exclusion will rot our democratic culture from within.
Ten years ago “Solidarity” represented an ideal “political community”.
Now the idea of a political community in any form, of a demos offering all its citizens equality of opportunity, is patently ridiculous.
We - the new democracies of Eastern Europe – are becoming more and more like those countries that provide opportunity only for the rich, leaving everyone else to fend for themselves.
Perhaps we are slightly more civilized than those countries.
But, strange irony, this civility is due to the remnants of the social protections left behind by the distinctly uncivilized communists.
Like the rich in Jakarta and Rio de Janeiro, isolated behind steel doors at night and with armed guards on the watch, perhaps we too should begin to fear the everyday squalor from which we avert our eyes.
On the eve of America’s civil war, Abraham Lincoln said that his country could not long endure if it remained a society half-free and half-slave.
“A House divided against itself,” said Lincoln, “cannot stand.”
Can our postcommunist democracies continue to stand if they remain divided against themselves, half-rich and half without hope?
Poland\u0027s Jacquerie
"Bless... the peasant who is born, eats, and dies without anyone bothering about his affairs."
So wrote that some-time Italian journalist best known for his musical compositions, Giuseppe Verdi.
What Verdi believed was possible in the 19 th century and the thousand years that preceded it, but is no longer.
Indeed, the opposite is more likely.
In Poland, for example, peasants not only want to shout news of their affairs to the world, but they want to shape Poland in their own image.
In his The Age of Extremes, Eric Hobsbawm argued that the greatest change in the West in the 20 th century was the vast reduction in the number of people employed as farmers.
Everywhere you look peasants have almost disappeared.
Not here in Eastern Europe.
Soviet-style economies may have posed as avatars of industrial modernization, but in most of the USSR's former satellite states Marxist-Leninist economics locked vast numbers of people onto farms.
Today, this reserve army of peasants is creating the most serious political conflicts seen in Poland since communism's fall as the country seeks membership in the European Union.
Most people in most societies feel something mystical about rural land and the people who work it.
But in the Western world too much land is agricultural, so there is surplus food production.
People recognize this, but still find the gradual disappearance of peasants troubling.
Poland's peasants, who gained a glimpse of the wider world since 1989, see what is going on and fear it.
As 38% of Poland's people live in villages or work on farms, this poses a serious political problem.
No imaginable solution to their plight seems available.
Like everyone else, our peasants vote their fears and choose as their representatives the peasant parties who think that political stalemate is the only way to preserve Poland's rural way of life.
No EU membership; no more privatization; no pension reform.
Standstill.
Mysticism about the land plays into their hands.
Many Poles believe that they should not sell their land to foreigners, because Poland's identity is somehow buried within its poor soil.
Given the history, it is no surprise that Poles do not want to sell to Germans, and luckily few Germans are interested.
But there is interest in the Netherlands, and some Poles bizarrely suspect the Dutch of wanting to take over the country.
Fear of speculators, of people who want to sell Poland piece-by-piece, are rampant.
Pure nonsense, of course.
There are few buyers because Polish land is too poor.
Yet everyone thinks that the country's independence will be lost in an instant when farms can be sold to other Europeans, a condition of EU membership.
With communism discredited and Catholicism waning, the connection - mental, psychological, even spiritual - of the land with defense of the fatherland, appears to be Poland's last political certainty.
After 1989 Poles (as happened in other postcommunist countries) gained freedom but lost their national identity, which had been constructed on the revulsion they felt towards their oppressors.
You can deplore such social feelings, as I do, but the myth of the Polish peasant hero standing against communist collectivization on his small private plot seems ineradicable, even if it is undeserved.
In reality, the peasants were not much help in the Solidarity era and they now constitute the main obstacle to modernization.
Besides, heroes are no longer needed here.
The sad thing about the power that Poland's peasants now exert is that theirs is a wholly negative one.
Poles, who lost nearly all their patriotic ideas over the past decade, now seem poised to rediscover their national identity solely on a negative basis forged by our peasants.
The European Union wants to steal (or buy for nothing) our land, they say.
We Poles must fight them.
If national pride demands eternal Polish ownership of Polish land, and thus scuttles membership in the EU, Poland will be condemned to a future as a kind of a gigantic museum of the peasantry. One horse carriages.
A lone cow standing in a meadow. Pigs eating greedily from the family table.
Cottages with TV satellite antennas may be seen, but they will be surrounded by straw, mud, chopped wood and the aromatic stench of livestock.
Then, instead of buying Polish farms and modernizing them, Dutch and Germans and Danes and others will visit the farms as a type of rural Disneyland, a place where you see what the long-ago past was like.
They will come, give some money to quaint and slightly lunatic looking farmers ploughing behind their mules, and they will leave.
It may annoy the Polish to recognize this, but if they make such a choice they will be condemned to a perpetual third rate status, scarcely above the most wretched places on earth and without any illusion of progress.
Verdi at least offered his peasants that illusion.
Europe Moves East
PARIS – Madrid and Warsaw recently looked very similar: both were the sites of massive demonstrations.
But the crowds gathered at Europe’s western and eastern extremities had very different agendas in mind.
In Spain, citizens were united by economic and social despair.
They took to the streets to express their rejection of a European Union-imposed austerity policy that they believe is leading them into an abyss.
They want jobs and the dignity and salaries that go with them.
The indignation of some had a clear anti-capitalist and anti-globalization tone.
In the Polish capital, Catholic and conservative parties, together with the “Solidarity” Trade Union, inspired by a reactionary Christian radio network, “Radio Maria,” gathered for political and cultural, rather than economic, reasons.
In the name of the defense of media freedom, they were denouncing a government that they found too “centrist” and insufficiently “Polish.”
Ten years ago, then-US Defense Secretary Donald Rumsfeld famously distinguished between “Old” and “New” Europe on the basis of their attitudes toward the United States and the war in Iraq.
New Europe (at least its governments), understanding the need to exercise power, was from Mars, whereas Old Europe (with the main exception of Great Britain), having decayed into a culture of weakness, was from Venus.
The differences between the demonstrations in Madrid and Warsaw suggest that the distinction between Old and New Europe remains valid, though not in the way that Rumsfeld meant.
Of course, it would be inaccurate to oppose a thriving Poland to a collapsing Spain.
Given the overall European crisis, even Poland’s economy is no longer booming.
Unemployment is around 10% (still less than half the Spanish rate), and annual GDP growth is around 1% (Spain’s growth rate is negative).
But the moods in the two countries, as well as their perceptions of Europe and their role in it, contrast starkly.
Poland, which is not yet part of the eurozone, sees no alternative to the EU.
The country has fully reconciled itself with America’s strategic shift away from the European continent, even though Poles are as obsessively fearful of Russia as ever.
And can one blame them, given that Russia seems more nostalgic for its imperial tradition than ever?
But, given the political evolution of Ukraine, not to mention Belarus, Poland can no longer dream of an Eastern future.
Poland’s only way is West – but the European West more than the American one.
Poland is benefiting from economic growth and prosperity in Germany, its immediate western neighbor and closest ally.
Reconciliation between the two countries has been one of their greatest achievements, and Poland may, for the first time in its history, be in the right place – close to Berlin – at the right time.
By contrast, Spain seems to be moving south, figuratively if not literally (witness the desertification affecting some parts of Andalusia).
But Spain adamantly – and legitimately – refuses to be compared with Greece.
Consider its modern infrastructure, the dynamism of its young entrepreneurs, and the internationally recognized quality of its cultural goods.
The Spaniards are right.
But Spain increasingly regards Europe more as a problem than as a solution.
It is not so much that its people want to leave the eurozone (or, for that matter, that many want their regions to leave Spain); rather, the country wants to remain itself – that is, to maintain a lifestyle that is largely the product of climate.
For Poles, the EU is still a tool for modernization, whereas Spaniards increasingly consider it synonymous with an attack on their dignity, if not on their essence.
How can one unite member countries with such different emotional calendars?
And how can Europe move ahead with such vivid pecking orders?
Spaniards are offended when they are compared to Greeks, Poles are shocked when they are compared with Spaniards, the French refuse to be compared to Italians, and so on, in an infernal spiral.
Yet not long ago – after the fall of Franco – Poles looked with envy at Spain.
Here I am reminded of a conversation with the Polish historian, statesman, and politician Bronisław Geremek in 1978, when we shared an office in Washington, DC.
For him, Poland and Spain had long had a somewhat parallel history.
Both were unable to integrate modernity into their institutions, and both had fallen into decline after a brilliant historical period between the late fifteenth and early eighteenth centuries.
Poland had even disappeared from the map of Europe – the victim of its immediate neighbors’ virulent greed.
Democracy returned to Spain in 1975, and the country soon recovered its place within Europe, just when Poland seemed trapped in its tragic history.
But, 11 years after my conversation with Geremek, communism collapsed in Poland, and in 2004 the country’s “return” to Europe was complete.
Today’s Poles do not believe that Europe has cheated them.
Nearly everywhere, you can see tangible signs of the EU’s support: a bridge here, a school there.
In Spain, by contrast, disillusion with the Union has replaced the early enthusiasm of the “movida” period.
Whether that remains true will most likely determine the future of Europe.
महासंक्रमणों का दमन करना
लंदन - वर्तमान एंटीबायोटिक दवाएँ, न केवल निमोनिया और मूत्र पथ संक्रमणों जैसी आम बीमारियों से लड़ने में, बल्कि तपेदिक और मलेरिया जैसे कई प्रकार के संक्रमणों का इलाज करने में भी अधिकाधिक निष्प्रभावी होती जा रही हैं, जो अब फिर से लाइलाज होने का जोखिम पैदा कर रहे हैं। जी-7 के नेताओं द्वारा "रोगाणुरोधी प्रतिरोध" (AMR) से निपटने के लिए प्रतिबद्ध होने के हाल ही के संयुक्त प्रस्ताव के साथ, अब अधिक समावेशी जी-20 - और चीन के लिए, जो पहली बार इस समूह की अध्यक्षता कर रहा है - इस लड़ाई को अगले स्तर तक ले जाने की बारी है।
AMR पर कार्रवाई करने में विफलता का असर सब पर पड़ेगा, चाहे उनकी राष्ट्रीयता या उनके देश के विकास का स्तर कुछ भी हो। निश्चित रूप से, 2050 तक AMR के फलस्वरूप दस मिलियन लोगों की मृत्यु होने की संभावना है, जबकि आज यह संख्या लगभग 7,00,000 है, जिनमें से चीन और भारत प्रत्येक में लगभग एक मिलियन पीड़ित लोग होंगे। उस बिंदु पर, वैश्विक सकल घरेलू उत्पाद में हम पहले ही अनुमानित रूप से $100 ट्रिलियन डॉलर खो चुके होंगे।
तथापि, शेष अंतर्राष्ट्रीय समुदाय की भागीदारी के बिना जी-7 की कोई भी रणनीति सफल नहीं हो सकती, चाहे वह कितनी भी अच्छी तरह क्यों न तैयार की जाए। आखिरकार, अगर संक्रमण उन लोगों के साथ यात्रा करते हैं जिनमें वह होता है, तो प्रतिरोध भी ऐसा ही करता है, जिसका मतलब यह है कि AMR का एकमात्र समाधान साझेदारी है। यही कारण है कि विश्व स्वास्थ्य संगठन के सदस्य "AMR पर वैश्विक कार्रवाई योजना" को लागू करने के लिए सहमत हो गए हैं, और उन्होंने संयुक्त राष्ट्र से 2016 में राजनीतिक नेताओं की उच्च-स्तरीय बैठक बुलाने का आह्वान किया है।
इस प्रयास में, अपनी बढ़ती आबादियों, बढ़ती हुई दौलत, और बढ़ते हुए अंतर्राष्ट्रीय प्रभाव के साथ – उभरती हुई अर्थव्यवस्थाओं को ख़ास तौर से महत्वपूर्ण भूमिका निभानी होगी, और चीन को इसका नेतृत्व करना होगा। हमने रोगाणुरोधी प्रतिरोध की समीक्षा में (जिसका मैं अध्यक्ष हूँ) पहले ही चीन के लिए ऐसी भूमिका की सिफारिश की है, जिसमें में कुछ चीनी नीति-निर्माताओं के साथ विचार-विमर्श करने की बात कही गई है।
अब और 2016 के बीच, चीन के लिए कार्रवाई करने के लिए मंच बन जाना चाहिए। जी-7 के देशों द्वारा अपनी संयुक्त घोषणा में किए गए वायदे को पूरा करने के लिए ठोस कदम उठाने के लिए इस प्रयास को आगे बढ़ाना चाहिए।
इस तरह की एक प्रतिबद्धता पशु-पालन में एंटीबायोटिक दवाओं का इस्तेमाल कम करना है। कुछ यूरोपीय सरकारों ने पहले ही इस प्रथा को विनियमित करने में महत्वपूर्ण प्रगति कर ली है। संयुक्त राज्य अमेरिका ने धीमी कार्रवाई की है, लेकिन हाल ही में उसने कुछ महत्वपूर्ण नीतिगत कदम उठाए हैं।
लेकिन पशुओं के पालन-पोषण करने के तरीके को बदलने का सबसे अच्छा रास्ता शायद प्रमुख खाद्य कंपनियों पर दबाव डालना होगा – यह एक ऐसा काम है जिस��� उपभोक्ता सबसे अधिक प्रभावी ढंग से कर सकते हैं। निश्चित रूप से, एंटीबायोटिक-रहित मांस सहित, स्वस्थ खाद्य पदार्थों के लिए बढ़ती हुई मांग ने पहले ही मैकडॉनल्ड्स, कॉस्टको, और केएफ़सी जैसी खाद्य उद्योग की प्रमुख कंपनियों को एंटीबायोटिक से लदे मांस को क्रमशः समाप्त करने के अपने इरादे की घोषणा करने के लिए मजबूर कर दिया है।
सरकारों को प्रमुख सामाजिक मीडिया अभियान लागू करके इस प्रवृत्ति का लाभ उठाना चाहिए, जिसमें ऐसी चुस्त, निरोगी आदतों को उजागर किया जाए जिन्हें सभी लोगों को अपनाना चाहिए - इन आदतें से परोक्ष रूप से एंटीमाइक्रोबियल्स के लिए मांग कम होगी। ऐसे अभियान की कम लागत और संभावित रूप से मिलनेवाला उच्च लाभ इसे और भी ज़्यादा आकर्षक बना देता है।
संयुक्त घोषणा में शामिल दूसरी प्रतिबद्धता - यह सुनिश्चित करने में मदद करना कि दवाओं का इस्तेमाल केवल तभी किया जाए जब उनकी ज़रूरत हो – स्वाभाविक लग सकती है, लेकिन वास्तव में यह AMR को संचालित करने वाली प्रमुख समस्या का प्रतिनिधित्व करती है। जैसी कि प्रस्ताव में माना गया है, इस समस्या पर कार्रवाई करने के लिए त्वरित देखभाल बिंदु नैदानिक उपायों का विकास करना और उस तक पहुँच में सुधार करना महत्वपूर्ण है।
बेहतर नैदानिक प्रौद्योगिकियाँ निस्संदेह विश्व की शीर्ष प्रौद्योगिकी फर्मों की पहुँच में हैं। लेकिन वे केवल तभी निवेश करेंगी जब उन्हें विश्वास होगा कि स्वास्थ्य प्रणालियाँ उनके नवाचारों का इस्तेमाल करेंगी। उदाहरण के लिए, अगर सरकारें इस बात को अनिवार्य बना देती हैं कि एंटीबायोटिक दवाएँ निर्धारित करने से पहले, ख़ास नैदानिक परीक्षण किए जाने चाहिए, तो कंपनियों को आवश्यक प्रोत्साहन मिलेगा।
ऐसी आवश्यकता को आलोचना का सामना करना पड़ेगा, और कुछ लोग दावा करेंगे कि परीक्षण में लंबा समय लगता है, और इसलिए यह इलाज शुरू करने से पहले हमेशा संभव नहीं होगा। हालाँकि विरल मामलों में यह सच हो सकता है, लेकिन ऐसे कई क्षेत्र हैं जहाँ तीव्र और प्रभावी परीक्षण मौजूद हैं, लेकिन अभी तक – विकासशील देशों या विकसित देशों में - उनका व्यापक रूप से इस्तेमाल नहीं होता है।
सबसे आम संक्रमणों में से एक पर विचार करें: गले में ख़राश। हालांकि वे अकसर जीवाणु के बजाय, वायरल होते हैं, लेकिन उनका इलाज अकसर एंटीबायोटिक दवाओं से किया जाता है - यह ऐसा उपाय है जो न केवल निष्प्रभावी है, बल्कि यह AMR को भी बढ़ावा देता है।
फाहे का त्वरित और आसान परीक्षण इस समस्या को हल कर सकता है और वास्तव में ऐसा एक परीक्षण पहले ही मौजूद है। ब्रिटिश फ़ार्मेसी शृंखला द्वारा किए गए एक परीक्षण में (उसने खुद स्वीकार किया कि इसमें छोटे नमूने का इस्तेमाल किया गया था), परीक्षण के कारण एंटीबायोटिक्स की खपत में लगभग 60% की कमी हुई। इस प्रौद्योगिकी के विकास और नियोजन में निवेश करके गले में खराश के लिए गैर-ज़रूरी एंटीबायोटिक इलाज में काफ़ी कमी लाई जा सकती है, और साथ ही इससे स्वास्थ्य प्रणालियों पर दबाव कम होगा और डॉक्टरों का समय बचेगा।
समीक्षा द्वारा अनुशंसित और जी-7 द्वारा मान्यता प्राप्त तीसरी अनिवार्य बात है, दवा प्रतिरोधी संक्रमण के प्रसार की बेहतर निगरानी, ख़ास तौर से विकासशील देशों में, जहाँ इस तरह के आंकड़े सबसे विरल हैं। इस मोर्चे पर, हमारी खुद की सरकार रास्ता दिखा रही है, जहाँ चांसलर जॉर्ज ओसबोर्न ने मार्च में AMR के खिलाफ लड़ाई के लिए उभरते हुए देशों की मदद करने के लिए £195 मिलियन ($307 मिलियन) आबंटित करने का वचन दिया है। ऐसी संभावना है कि फ़ाउंडेशनों द्वारा इस पहल के लिए अपना खुद का धन लगाने की वचनबद्धता की जाएगी। इस बीच, यूएस सरकार बायोमेडिकल उन्नत अनुसंधान और विकास प्राधिकरण के जरिए नई दवाओं के विकास के समर्थन पर ध्यान केंद्रित कर रही है।
दुनिया कई चुनौतियों और संकटों का सामना कर रही है, और वस्तुतः इन सब समाधानों के लिए ठोस राजनीतिक प्रतिबद्धता और महत्वपूर्ण निवेश की आवश्यकता होगी। लेकिन तथ्य यह है कि जब AMR की बात आती है, तो सरकारों के पास इस प्रमुख संकट का हल उसके बढ़ जाने के समय आनेवाली लागत की तुलना में एक छोटे से अंश के द्वारा करने का दुर्लभ अवसर उपलब्ध होता है। उदाहरण के लिए, पश्चिम अफ़्रीक़ा में हाल ही में इबोला के प्रकोप पर कार्रवाई करने की जद्दोजहद में, अकेले यूएस को सार्वजनिक धन में $5.4 बिलियन का योगदान करना पड़ा। अगर इसमें स्वास्थ्य प्रणालियों की और यहाँ तक कि नियोक्ताओं की बचतों को जोड़ लिया जाए, तो AMR का मुकाबला करने के लिए ठोस कार्रवाई करना और भी किफ़ायती हो जाता है।
यही कारण है कि जी-7 सरकारों को AMR पर कार्रवाई करने की अपनी कोशिशें तेज़ करनी चाहिए। और इसी कारण चीन और अन्य उभरती अर्थव्यवस्थाओं को इस लड़ाई में शामिल होना चाहिए। साथ मिलकर, हम अपनी दवाओं की उपचारात्मक शक्तियों की रक्षा कर सकते हैं।
Political Evolution
People everywhere want a new relationship with power – more autonomy and more respect.
This reflects our current era, in which new knowledge, ideas, and possibilities have made our identities richer, more fluid, and less subject to fate.
At the same time, the information society and globalization have made ours a more insecure world, where we experience risks that politics-as-usual has been unable to address.
As the leader of a political party, the central idea for me nowadays is to empower individuals.
A traditional party leader says to his followers, “You can trust me. ” I think the future for progressive politics lies in leaders trusting citizens .
It’s a new kind of relationship.
We in PASOK, the party that I lead, have started to think through what we want out of politics in a practical sense and how this can be delivered in a way that respects people’s lives.
We’re making changes at the top in order to open up our party to greater participation.
We need to highlight, not hide , different views, and see our parties less as “war headquarters” and more as bio-diverse think tanks or workshops.
People can easily become lost in today’s ocean of information.
They will always be looking for a lighthouse, faros , as we say in Greek.
But what are these lighthouses?
In an information society they will be those who are trusted to be able to help interpret or analyse what is happening.
So I believe that the future for political parties is to develop a culture of debate, dialogue, and critical understanding of issues, where people can help set a nation’s priorities and are not simply told by experts or their leaders what is right and wrong for them.
Big issues, such as migration, narcotics, or the environment, no longer fall within a traditional left-right framework.
For example, people may see an inevitable tradeoff between tough environmental standards and jobs. But these same people often want both.
It is no longer just one side against the other.
The nature of capitalist growth requires us to take a more holistic view and work out how we can achieve sustainable development.
Of course, bringing more democracy into our daily lives cannot mean perpetual debate, without actually making decisions.
Rather, it should mean that certain principles of respect, consultation, and deliberation become part of everyday life.
There is, by contrast, a traditional style of leadership that almost encourages fear and insecurity, so that a savior can come along and say, “I am the one who will solve this.” President George W. Bush projects this style very openly.
I opposed the Bush administration’s policy on Iraq because this type of foreign policy is associated with a form of power – resurgent, I believe, in conservative parties around the world – that projects leadership as command.
I know this mindset well.
When I was first elected as a member of parliament in 1981, people said, “Now George, you’ve got to bang the table.” People would say you look weak if you’re not cursing the opposition and driving around in a big black car wearing a tie.
Above all, to be “strong,” you’re supposed to be giving orders.
I said to myself, “I’m going to have to go about things in a more democratic way.” I realized that I would have to fight to communicate what I wanted to achieve.
There was a whole political culture that had to change.
Part of my thinking concerns personal style, but also something deeper: the relationship between professional politicians and voters.
Obviously, there is a point where a leader must commit to a decision.
But one can do this in ways that are not violent and aggressive, by defending the principles of that new relationship.
Power by itself has no principles.
Our societies and citizens need more freedom if we are to build a more peaceful, prosperous, and secure world.
Consider the example of Greek-Turkish relations, which had hardened under the compressed weight of “establishment” views that were long entrenched in both countries.
Only a new approach could break the mold of conventional wisdom.
Quite often in confrontational situations, people and politicians create a zero-sum game culture, which results in authoritarian and militaristic leadership.
We in the former PASOK government instead helped create a more positive framework by declaring our commitment to work for consensus, thereby creating the basis for trust and mutual understanding.
Political parties everywhere must now become an agent for similar change.
Nowadays, the framework of power itself – the old-fashioned party hierarchy that takes command of the state or municipality – is a kind of abuse.
It takes power away from people in their own names, but gives them fear rather than confidence.
Not surprisingly, my party is now seeking to return to power in the next election.
But we’re also looking deeper and further ahead.
We will not be returned to government unless we offer a better kind of democracy in the long term.
In this enedeavor, we hope to set an example to the world.
Political Islam’s Loss of Democratic Legitimacy
DURHAM – This year, Islamist politics has faced massive setbacks in two major predominantly Muslim countries: Egypt and Turkey.
But it is too soon to write political Islam off as a capable participant – even a leading force – in a pluralist democracy.
Just one year after the Muslim Brotherhood’s Mohamed Morsi became Egypt’s first elected president, millions of Egyptians took to the street, triggering the military coup that ousted him. Morsi’s political incompetence and lack of vision in the face of economic collapse would have been enough to diminish support for his government.
But his rejection of pluralism and pursuit of an Islamic dictatorship, exemplified by his efforts to centralize power in the hands of the Brothers and place himself beyond the review of Egypt’s judiciary, proved to be his undoing.
Similarly, Turkey’s Prime Minister Recep Tayyip Erdoğan, of the Justice and Development Party (AKP), has taken to governing in a way that is unraveling a decade of progress,&#160;one marked by economic dynamism, rapid growth, and the subordination of the armed forces to civilian control.
The Erdoğan government’s recent brutal crackdown on popular protests against planned construction in Istanbul’s Taksim Gezi Park made Turkey look like a one-party dictatorship.
To make things worse, Erdoğan then spent weeks subverting pluralism through polarizing speeches that stigmatized Turks who do not share his social conservatism or subscribe to his particular interpretation of Islam.
Given that Egypt and Turkey are two of the three most populous countries of Islam’s historic core (the third is theocratic Iran), one might infer that their ongoing difficulties have destroyed any prospect of reconciling political Islam with pluralist democracy.
But the two countries’ situations include fundamental differences, as do political Islam’s prospects for renewal.
In Egypt, the economic challenges are so dire, and traditions of consensual governance so shallow, that it may be impossible for any party to rule democratically in the foreseeable future, let alone the Muslim Brotherhood, which would have to reinvent itself completely.
And non-Islamists are even less likely to trust the hardline Salafist Nour Party – the Islamist party that participated in Morsi’s ouster – to uphold democratic principles.
In contrast, Turkey’s AKP still stands a chance of re-legitimizing itself in the eyes of offended constituencies, because its retreat from pluralism is strongly identified with Erdoğan himself.
In fact, some AKP heavyweights, including Erdoğan’s longtime associate, President Abdullah Gül, believe that he badly mismanaged the recent protests.
By replacing Erdoğan as party leader, the AKP could dissociate itself from his Islamization campaign and rehabilitate its potential as a democratic political force.
Many AKP constituencies are wary of cultural conflict, if only because it threatens their economic interests.
Hence, such a move would probably be enough to restore much of the AKP’s lost support and to calm opponents who fear that their personal freedoms will continue to erode under its governance.
An opportunity to replace Erdoğan will arise next year, when Gül’s term expires.
Erdoğan wants to deny Gül a second term, taking his place under an amended constitution that would transfer full executive authority to the president.
By denying his wish, AKP parliamentarians would weaken Erdoğan’s standing, possibly enabling the party to push him aside.
If this proves insufficient to drive Erdoğan from power, the arrival of his self-imposed prime ministerial term limit in 2015 will allow the AKP Executive Council to force him to retire simply by holding him to his word.
With the AKP having demonstrated its disapproval of Erdoğan’s undemocratic behavior, its new leadership could begin to rebuild its legitimacy as a party that respects minority rights.
To keep it from losing its way again, the AKP must also address the root cause of Erdoğan’s metamorphosis into an intolerant autocrat.
Early in Erdoğan’s premiership, he was restrained by the president, the judiciary, and the military, which were all committed to upholding the secularism enshrined in Turkey’s constitution.
As recently as 2008, Turkey’s highest court considered shutting down the AKP for violating that principle.
But changes in the judiciary’s composition, Gül’s 2008 accession to the presidency, and a 2010 constitutional amendment allowing military officials to be tried in civilian courts contributed to the gradual loosening of restrictions on Erdoğan’s authority.
More than 400 generals have been imprisoned for allegedly plotting coups, in many cases on the basis of patently fabricated evidence.
Erdoğan has also misused the legal system to stifle the media and repress citizens’ freedom of expression.
Clearly, Turkey’s political institutions lack adequate safeguards.
They have allowed an enormous concentration of power in the hands of one person and the parliamentary majority that he leads.
Turkish policymakers must now guarantee the judiciary’s autonomy and political impartiality, restore freedom of expression for all citizens, and establish a system of checks and balances to replace the military as the guardian of secularism.
Pursuing the latter objective would require the AKP to relinquish some power voluntarily.
It might sell the requisite constitutional reforms to its conservative base by conveying that, in the long run, Islamists have as much to gain from effective political checks and balances as do the targets of Erdoğan’s social engineering.
After all, as Morsi’s overthrow demonstrated, public opinion can quickly turn against a ruling party, especially in an economic crisis.
Egypt’s recent experience offers a glimpse into Turkey’s potential future should it fail to establish effective political safeguards.
Morsi was able to rule without restraint, trampling freely on citizens’ fundamental rights, because the military regime that assumed control after Hosni Mubarak’s 2011 ouster scheduled presidential elections before a constitution was adopted.
The only way the Muslim Brotherhood can hope to regain broad acceptance as a legitimate democratic player is with a constitution that includes credible mechanisms for guaranteeing pluralism and due process.
Political Islam has reached a critical juncture on the road toward democratic legitimacy.
Its continued progress will depend on the commitment of two of its leading promoters – Turkey’s AKP and Egypt’s Muslim Brotherhood – to design and implement political systems that safeguard the basic democratic principles of pluralism, freedom, and the rule of law.
The Mealy-Mouthed West
MADRID – Among the numerous challenges the West faces, one is consistently overlooked: its addiction to meaningless rhetoric.
From US President Barack Obama’s oxymoronic first-term mantra “leading from behind” to the recent German variant “leading from the center,” empty phrases have become the currency of Western governments’ foreign policies.
Of course, the inherent complexity and unpredictability of international affairs intensify politicians’ inclination to equivocate.
And today, with the geopolitical environment more complicated and less predictable than ever, our leaders have even less incentive to offer the kind of boldness and clarity that effective policymaking demands.
Unfortunately, the result has been to make a bad situation worse.
Strategic statements play an important role in signaling a country’s direction and intentions to its adversaries, allies, citizens, and government agencies.
When such statements require endless interpretation and explanation, their impact is weakened dramatically.
This is not to say that there is no place for ambiguity in international affairs.
History abounds with episodes when strategic ambiguity would have been beneficial.
For example, some historians suggest that then-US Secretary of State Dean Acheson’s decision in 1950 to exclude South Korea from America’s “defense perimeter” signaled to North Korea and the Soviet Union that the United States would not defend the South in the event of an attack.
The problem with today’s ambiguity is that it is not particularly strategic.
Consider Obama’s underlying rationale for his foreign policy – the so-called “Obama doctrine” – which he finally provided following the announcement of the framework agreement on Iran’s nuclear program. “We will engage,” Obama declared, “but we preserve all our capabilities.”
On the surface, that statement makes sense.
But it leaves us with more questions than answers.
What has Obama really signaled?
What, in his view, are the boundaries for US engagement?
Under what conditions would the US use its capabilities?
Nearly 70 years ago, when George Orwell examined the tendency toward ambiguity, he offered the rather simple explanation that “political speech and writing are largely the defense of the indefensible.” In other words, hazy language is necessary to obscure unsavory realities.
Massive violence against civilian populations is “pacification,” and ethnic cleansing is a “transfer of population.”
As Orwell noted, “[t]he great enemy of clear language is insincerity.”
To some extent, Orwell’s observations still ring true.
But the issue today is different: politicians are using vague rhetoric less because their policies are fundamentally indefensible than because they fear having to defend any position at all.
While there are myriad reasons for this reticence, when it comes to international relations, two stand out.
The first is the hyperbolic political atmosphere in Western democracies, where the 24-hour news cycle and social media have made “gotcha politics” the order of the day.
Add to that the intrinsic uncertainty of foreign affairs, and it is unsurprising that politicians would rather spout empty lines than risk saying something that might blow up in their faces.
Indeed, one need only consider the years-long stream of commentary – characterized by partisanship, hearsay, and hostility – following the 2012 attack on the US diplomatic compound in Benghazi to understand leaders’ angst.
The second reason is more fundamental: the waning sense of purpose and conviction that characterizes Western democracies today.
Whereas, say, Presidents John F. Kennedy and Ronald Reagan clearly confronted the Soviet Union in their speeches at the Berlin Wall, a succession of Western leaders has spoken in nods and winks about the crisis in Ukraine and China’s aggressive stance toward its neighbors.
The difference is not difficult to discern.
During the Cold War, the West’s certainty that it occupied the moral high ground inspired confidence in both word and deed.
Though the West still occupies the moral high ground on many important issues – such as the Islamic State and Russia’s invasion of Ukraine – the global system is far less clear-cut today.
Internal social challenges, which have called into question the justness of Western countries’ liberal model, have exacerbated politicians’ reticence.
As diffident Western leaders offer garbled messages or, worse, mere verbal fluff, they allow cynical actors with simpler and more forceful narratives, often based on lies and distortions, to win support more easily.
In Europe, the rise of demagogic populists on both ends of the political spectrum exemplifies this phenomenon.
Likewise, Russian President Vladimir Putin, unburdened by facts or guilt, has taken advantage of domestic and international audiences’ deep-seated resentments and insecurities to craft compelling narratives in support of his policy toward Ukraine.
Western leaders should see no need to dispense with the truth; the facts are on their side.
What is needed is the confidence to defend the liberal rules-based international order – and to back up arguments with action.
After all, powerful declarations mean nothing if leaders do not follow through; worse, they undermine the credibility of the speaker’s future statements.
Obama learned this the hard way, when he drew a “red line” against Syria’s use of chemical weapons and then failed to act forcefully when Syria crossed that line.
The Obama doctrine cannot be credible if the US is not willing to use the capabilities that the president has pledged to preserve.
This imperative is not limited to Obama.
All Western policymakers will, before long, have to move beyond their parochial political considerations and anxieties to present a clear strategic vision.
The habit of bland rhetoric is a hard one to break.
Indeed, Orwell warned of its potential to weaken one’s capacity for critical thought, because “every such phrase anaesthetizes a portion of one’s brain.” But, as the global balance of power shifts toward the East and the South, the West must do what it takes to secure its continued influence – and that means taking a firm, clear, and credible stance on the strategic challenges it faces.
No Hiding From Sustainable Development
NEW YORK – One year ago, I was in Brazil to launch the Brazilian chapter of the United Nations Sustainable Development Solutions Network (SDSN), an initiative of UN Secretary-General Ban Ki-moon.
The main message I heard that day was that São Paulo was suffering from a mega-drought, but that state and local politicians were keeping it quiet.
This is a reality around the world: too many political leaders are ignoring a growing environmental crisis, imperiling their own countries and others.
In the case of Brazil, state and local officials had other things on their mind in 2014: hosting the World Cup soccer tournament in June and July and winning elections later in the year.
So they relied on a time-tested political tactic: hide the bad news behind a “feel-good" message.
Some places have been even more foolish than simply ignoring the risks.
North Carolina's coastlands, like coastal areas around the world, are threatened by rising sea levels caused by human-induced climate change.
Yet in 2012, land developers convinced the state legislature to bar the use of scientific evidence on rising sea levels in the state's coastal management policies, at least until 2016.
The issue is equally flagrant at the federal level: US Congress members, on the take from Big Oil, simply deny the reality of climate change.
But growing environmental threats are forcing their way into the headlines whether politicians and land developers like it or not.
The bad news about mega-droughts and freshwater scarcity stretches from Brazil to California to conflict-ridden countries in the Middle East.
São Paulo's metropolitan region of 20 million people is now on the verge of water rationing, an unprecedented threat for one of the world's leading cities.
In California, this winter has been another dry season in a bitter four-year drought, one of the most severe in the region's history.
In Pakistan, the minister of water and energy recently declared that, “Under the present situation, in the next six to seven years Pakistan can be a water-starved country." In Iran, the Hamoun wetlands bordering Afghanistan are disappearing, posing a grave threat to the local population.
Looking back, it is also clear that a decade-long drought in neighboring Syria helped to trigger the unrest that escalated into a catastrophic civil war, with at least 200,000 Syrians dead and no end to the violence in sight.
The drought had displaced an estimated 1.5 million people and caused food prices to soar, leading to a spiral of protest, crackdown, and eventually war.
Though drought does not explain all of the ensuing violence, it certainly played a role.
Each of these droughts reflects a complex mix of factors: long-term climate change, short-term or decade-long weather patterns, growing populations' rising demand for freshwater, mismanagement of local resources, and, of course, a lack of political attention and will.
Every drought must therefore be confronted locally, addressing local realities.
Yet the global message is also clear: the world's growing population (now at 7.3 billion, but likely to reach eight billion by 2024 and nine billion by around 2040), human-induced climate change, and the overuse of freshwater for irrigation and urban needs (especially when cities are built up in dry regions) are all fueling the potential for catastrophe.
Recent research indicates that these trends are likely to intensify.
Almost all studies of human-induced climate change show that the Mediterranean region, including security hotspots like Libya, Egypt, Israel, Palestine, and Syria, is likely to experience a further significant decline in rainfall, compounding the drying trend that has occurred during the past quarter-century.
Likewise, a recent study by my colleagues at Columbia University's Earth Institute has shown that human-induced climate change is likely to cause increasingly frequent mega-droughts in the American southwest and Great Plains states in the second half of this century.
In September of this year, world leaders will gather at the United Nations to adopt a set of Sustainable Development Goals to address these rising threats.
The SDGs will not ensure global action, but, as US President John F. Kennedy once said about UN agreements, they can serve as a lever to help move the world toward action.
That is why it is so important to start planning for the SDGs now.
Ban launched the SDSN to help countries achieve the new goals.
Its key members include universities and think tanks around the world, with leading businesses and NGOs serving as important partners.
National and regional SDSN chapters are being formed worldwide, in the Americas, Europe, the Middle East, South Asia, East Asia, Africa, and Oceania.
The goal is to ensure strong participation in the SDSN in every country by the time the SDGs are adopted in September.
This spring and summer, in countries around the world, SDSN-affiliated institutions will invite governments to begin brainstorming about how to achieve sustainable development in their cities, countries, and regions.
Many politicians, no doubt, will be grateful for the support of their universities, NGOs, and leading businesses.
And those who want to hide from reality will find that they no longer can.
That is because our new reality is one of droughts, heat waves, extreme storms, rising sea levels, and unstable climate patterns.
Unless we act with foresight and base our actions on scientific evidence, water stress, food insecurity, and social crises will not be far behind.
In other words, today's mounting threats cannot be covered up.
The Age of Sustainable Development must be built on openness, participation, and science.
Politics and Corporate Money
CAMBRIDGE – A recent decision issued by the United States Supreme Court expanded the freedom of corporations to spend money on political campaigns and candidates – a freedom enjoyed by corporations in other countries around the world.
This raises well-known questions about democracy and private power, but another important question is often overlooked: who should decide for a publicly traded corporation whether to spend funds on politics, how much, and to what ends?
Under traditional corporate-law rules, the political-speech decisions of public companies are subject to the same rules as ordinary business decisions.
Consequently, such decisions can be made without input from ordinary shareholders or independent directors, and without detailed disclosure – all safeguards that corporate law establishes for other managerial decisions, such as those concerning executive compensation or related-party transactions.
In a recent article, however, Robert Jackson and I argue that political-speech decisions are fundamentally different from ordinary business decisions.
The interests of directors, executives, and dominant shareholders with respect to such decisions may often diverge significantly from those of public investors.
Consider a public corporation whose CEO or controlling shareholder supports a political movement to the country’s right or left and wishes to support it with corporate funds.
There is little reason to expect the political preferences of corporate insiders to mirror those of the public investors funding the company.
Furthermore, when such divergence of interest exists, using the corporation’s funds to support political causes that the corporation’s public investors do not favor – or even oppose – may well impose on them costs that exceed the monetary amounts spent.
To prevent this, lawmakers should adopt safeguards for political spending decisions that would limit the divergence of such decisions from shareholder interests.
For starters, it is important to require traded companies to provide detailed disclosure to public investors about the amounts and beneficiaries of any funds that the company spends, either directly or indirectly.
In expanding corporations’ rights to spend money on politics, the US Supreme Court relied on “the processes of corporate democracy” to ensure that such spending does not deviate from shareholder interests.
Clearly, however, such processes can have little effect if political spending is not transparent to public investors.
For such disclosure to be effective, it must include robust rules with respect to political spending via intermediaries.
In the US, for example, organizations that seek to speak for the business sector, or for specific industries, raise funds from corporations and spend more than $1 billion annually on efforts to influence politics and policymaking.
While the targets of these organizations’ spending are disclosed, there is no public disclosure that enables investors in any public corporation to know whether their corporation contributes to such organizations and how much.
Investors deserve to know.
Moreover, a public company’s political spending decisions should not be solely the province of management, as they often are.
Independent directors should have an important oversight role, as they do on other sensitive issues that may involve a divergence of interest between insiders and public investors.
And these directors should provide an annual report explaining their choices during the preceding year.
Lawmakers also should consider providing public investors with a say over political spending decisions.
In the United Kingdom, for example, public companies have been subject to such a requirement for more than a decade.
Shareholders of British companies must approve, by majority vote on a shareholder resolution, any political spending that exceeds £5,000.
Following the adoption of this legislation, political spending remained significant but fell somewhat below previous levels.
Shareholders may have different views from those of corporate insiders not only with respect to the amount of political spending, but also with respect to how that spending is targeted.
This problem can be addressed by permitting shareholders to adopt at the annual meeting binding resolutions concerning corporate political spending.
For example, shareholders could direct that the corporation may not spend funds for certain types of political purposes, or that it must follow certain principles in allocating whatever budget is authorized.
The mere existence of shareholder power to adopt such resolutions could well increase insiders’ incentives to target the corporation’s political spending in ways that are consistent with shareholder interests.
Legal rules allowing corporations to spend on politics are premised on the view that expression of corporations’ positions has a legitimate role in the political marketplace.
But a corporation’s wishes should not be automatically and necessarily equated with those of its management.
That is why we need new legislation to ensure that the use of corporate funds in politics does not stray from the interests of shareholders.
Politics With a Human Face
Without anyone much noticing, Russia has become the most liberal country in Europe - at least insofar as taxes are concerned.
Today, no one here pays more than 13% in personal income taxes.
As a result, people pay their taxes more willingly and state revenues are increasing.
Russia's President Putin may be few people's idea of a liberal, but his policies are undoubtedly such.
Only for reasons that are peculiar to Russia, his is a liberalism that dare not speak its name.
I have opposed Putin in the past, and may oppose him in the future, but credit should be given where it belongs.
Serious judicial reform is under way.
At long last, Russia's ``third branch of government'' is becoming less Leninist and less corrupt.
Land sales, too, have moved beyond the talking stage, with a Land Code near to adoption.
Labor relations are becoming more predictable, serving both employers and employees.
Indeed, a new Labor Code was approved on its first reading in the Duma.
Many of Putin's social policies are also quite sensible.
Expenditures on education are to increase by almost 60%.
Pensions are rising.
Of course, there is a need to update the pension system, or else many of the elderly will remain indigent.
We also need a more effective system of social security: after all, 100 million Russians are nowadays entitled to various privileges, and far from all of them are poor.
Reform should give everyone a chance to make a decent living, but not subsidize those who are not really eligible.
Thus, for the most part, Putin and his ministers know what needs to be done.
The problem they face in creating viable policies is that too many Russians want to live simultaneously under both market conditions and socialism.
Blame our traditional and deeply ingrained belief in miracles for this.
Think about it: Christmas is the main Catholic holiday, but we put more emphasis on the miraculous Resurrection of Christ at Easter.
What is our favorite advertisement?
One in which a simple potato is turned into gold.
It is the lack of realism and a belief in a miraculous ``free lunch'' that made Russians so susceptible to the various financial pyramid schemes run by a variety of unscrupulous individuals.
People believed that they could ``just sit on the bank with a fishing pole and reel in the money.''
Many soon learned that criminals had reeled in their small savings.
A similar belief in miracles also bedevils Russian politics and makes it very difficult for political parties to play their normal role in a democratic society.
It is the purpose of political parties to run on political programs, and, if elected, to transform their programs into government policy.
But Russians, because of their belief in miracles that are expected to get them what they want without effort, fall prey not only to financial speculators, but also to politicians who will play on their wishes as unscrupulously as the criminals who ran the pyramid schemes.
How then can serious parties run on their political programs and agendas?
Instead of being governed by the electorate choosing between parties and policies, Russian politics are ruled by a type of pendulum effect.
People get sick and tired of looking at the same faces in power, become disillusioned with politics, and demand change.
The paradox is that the only party that seems to survive no matter what are the Communists.
They retain the biggest faction in parliament and control government in 20 regions.
Even more control is exercised at the municipal level.
People say that liberal democrats held power during the Yeltsin years, and that this is the reason why liberal groupings, such as the Union of Right Forces of which I was the leader, could not garner mass support.
Russia's liberals are thus blamed for the woes of the last decade, not the Communists who had created the crushing system that the liberals sought to change.
That, of course, is nonsense.
Viktor Chernomyrdin, an apparatchik from the gas industry, was premier for five-and-a-half years during the Yeltsin presidency.
I have a good relationship with him, and think him a good man, but he is neither a democrat nor a liberal, and he was more concerned with not rocking the boat than with building a better future for Russians.
Meanwhile, Yegor Gaidar, whom many still vilify as the man who took all security out of their lives, actually held power only for a brief nine months.
People complain that in that time he managed to arouse so much hatred toward the idea of reform that he strengthened the Communists' position.
That may be true, but Russia was in a coma when his premiership began, and he brought the country back to life.
This history lesson is important for understanding Putin's presidency.
He has been consistent in pursuing many liberal policies, but without portraying himself as liberal.
Instead, he satisfies the Russian people's craving for a figure of authority and order, and so enjoys colossal support.
That support, however, is for the man, not his policies.
History, though not the rigid construct of Marx, does follow a type of logic.
The rebellious Yeltsin had to be followed by an even-tempered individual.
In this light, Putin's arrival on the scene seems almost predestined.
Some people like him, and some do not, but the stabilization he brought was overwhelmingly desired.
Meanwhile my associates - Gaidar, Anatole Chubais, and Irina Khakamada - and I are establishing a new democratic party with an explicit platform to assure that, together with others, we provide checks and balances to President Putin.
Although Russian voters remain more likely to judge political forces by personalities and not devote time to scrutinizing their platforms, we believe in the political education of Russia's people.
Just as no revolution lasts forever, political ignorance and disillusion can also be overcome.
The Pope’s Dangerous Sex Appeal
NEW YORK – Human sexual behavior can be perilous, as the ghastly rape of a 23-year-old woman by six men on a Delhi bus in December once again showed.
After going to the cinema, she and her boyfriend were beaten, before she was brutally assaulted and attacked with an iron rod for more than an hour.
Thirteen days later, she died from her wounds.
It is often claimed that rape is not really about sex, but about power.
True enough. But it is not unrelated to sex.
The sexual act is used as a form of torture, or even, in some cases, as a deadly weapon.
But that was not what Pope Benedict XVI had in mind when he spoke recently about the dangers of sexual behavior.
In his pre-Christmas speech to the Roman Curia, the pope did not mention rape, let alone the sexual murder in Delhi.
Instead, in his defense of the family – or, as he would put it, the sacred union between man and woman – he pointed out how sexual arrangements outside that union were a threat to human civilization.
What he had in mind, without quite saying so, were same-sex unions.
It was a deeply confused speech.
His disquisition on the dangers posed by same-sex marriage followed a passage deploring the modern tendency to avoid lifelong commitments in human relationships, as if that were not precisely what gay marriage is about.
Of course, in the pope’s view, commitment in gay relationships is part of the problem: more and more people, especially in the Western world, now claim the freedom to choose their own sexual identities instead of sticking to the “natural” roles “ordained by God.”
The pope’s words suggest that homosexuality is a kind of lifestyle choice, a form of modern decadence – a secular, even blasphemous act against God and nature – rather than a fact of birth.
This is a common belief among religious believers, be they conservative Catholics, Protestants, Jews, or Muslims.
Tellingly, Benedict quoted Gilles Bernheim, the Chief Rabbi of France, who has expressed similar views on the threats to conventional family life.
Fear of sexual behavior is one of the main reasons why most religions establish strict rules concerning sexual relationships.
Marriage is a way to contain our dangerous desires.
Restricting sexual conduct to procreation is supposed to make the world safer and more peaceful.
Because women excite the desires of men, they are thought to pose a threat outside the confines of the family home.
That is why, in some societies, they are not allowed to emerge from those confines, or may do so only if fully covered and accompanied by a male relative.
Benedict is not so extreme.
Nor does he advocate violence against homosexuals.
On the contrary, he sees himself as a deeply civilized man of peace.
But I would argue that his speech actually encourages the kind of sexual aggression that can result in the savagery that took place in Delhi.
The six rapists who killed the young woman were not modern decadents who chose to defy God and nature by claiming new secular freedoms, let alone heterodox sexual identities.
From what we can surmise from this case – and many others like it – they are the semi-urbanized products of a highly conventional rural society where the roles of men, and especially women, are tightly regulated.
Their victim, a well-educated physiotherapy intern, seems to have been a great deal more modern than her attackers.
The men were not uneducated, but they were unable to cope with the freedoms of contemporary women.
For that reason, the six rapists saw her as a “loose” woman, a city slut, fair game.
After all, she was out late with her boyfriend.
That is precisely how the men taunted the young couple: What was an unmarried young woman doing out in the Delhi streets with a young man?
She deserved what was coming to her.
The reaction in some quarters followed similar lines.
When demonstrations against sexual violence erupted in Delhi, the Indian president’s son denounced the protesters as “dented and painted.”
Some politicians have described rape victims as “adventurous.”
Violent hatred of homosexuals comes from a similar source.
Just as women outside the family home – women who stake a claim to public space, working and living among men – are seen as dangerous temptresses, men who love men are often regarded as predators, ready to pounce on society’s children.
What many people fear is not just uncontrolled sexual behavior, but sex itself.
But the more sex is repressed and people are made to fear it the greater the chance of sexual violence, because anyone who might possibly stir our sexual desires, man or woman, becomes a potential target of our rage.
This might help to explain what happened in Delhi, but it does not in any way excuse it.
After all, most men in that city would not beat a young couple with metal pipes and rape the woman to death.
Hundreds of thousands of Indians are demonstrating in the streets to show their loathing of such atrocities.
One wishes that the pope had said something about that, and had offered some words of encouragement to the men and women in India who have had enough of sexual violence coming not from modern libertines, but from deeply repressed men. But that is too much to expect from a man who appears to understand little about sexual life.
That is why, instead of talking about rapists, he targeted peaceful homosexual men and women who wish to show their commitment to their lovers by marrying them.
Fransiskus yang Peduli Hutan
WASHINGTON, DC – Ketika Paus Fransiskus mengunjungi Amerika Latin pada bulan Juli, beliau menyatakan permohonan yang berapi-api demi perlindungan hutan hujan Amazon dan penduduk yang tinggal disana. “Rumah kita dijarah, dikotori dan dirugikan dengan impunitas,” beliau berseru di hadapan aktivitas yang berkumpul di Bolivia untuk menghadiri World Meeting of Popular Movements (Rapat Dunia untuk Gerakan Populer).
Mengikuti seruan Paus Fransiskus untuk mengambil tindakan bukan hanya isu moral; tapi merupakan isu praktis.
Saat para pemimpin dunia bertemu di United Nations Climate Change Conference (Konferensi Perubahan Iklim PBB) di Paris pada akhir tahun nanti untuk merancang tanggapan terhadap tantangan-tantangan pemanasan global, mereka harus membuat kebijakan untuk melindungi hutan tropis dan penduduk yang tinggal di hutan tersebut.
Paus Fransiskus bukan misionaris pertama yang mengunjungi Amazon.
Pastor dan Imam dari ordo Fransiskan, Yesuit, dan Dominikan telah mengabarkan injil ke daerah tersebut selama berabad-abad.
Yang menarik dari pernyataan Paus Fransiskus adalah hal tersebut tidak ditujukan untuk penduduk lokal, melainkan kepada penduduk kawasan Amerika Utara dan Eropa, yang karena permintaan mereka akan kayu, biofuel, dan produk pertanian menyebabkan kerusakan hutan hujan dan membahayakan hidup masyarakat adat yang tinggal disana.
Masyarakat Amazon telah banyak menderita karena insentif ekonomi untuk menebang hutan hujan.
Di seluruh dunia, masyarakat adat diancam, dibunuh, dan diusir dari kampung halaman mereka, Dari 116 aktivis lingkungan yang dibunuh di 2014, 40% diantaranya adalah pemimpin masyarakat adat.
Pada bulan September 2014, misalnya, Edwin Chota dan tiga pemimpin komunitas Asháninka di Peru dibunuh secara brutal, kemungkinan besar oleh pembalak liar.
Dua bulan kemudian, José Isidro Tendetza Antún, pemimpin masyarakat Shuar di Ekuador, disiksa dan dibunuh ketika dalam perjalanan untuk melakukan protes melawan proyek tambang yang mengancam keberadaan kampung halamannya.
Selain merupakan penghinaan terhadap hak asasi manusia, deforestasi bersamaan dengan serangan terhadap budaya masyarakat adat adalah ancaman serius pada perlawanan terhadap perjuangan melawan perubahan iklim.
Hubungan antara berkurangnya jumlah tutupan hutan dan pemanasan global telah didokumentasikan dengan baik.
Emisi karbon dioksida dari penebangan dan pembakaran hutan setara dengan 10% emisi global.
Sementara itu, masyarakat yang tinggal di hutan telah menunjukkan bahwa mereka seringkali adalah penjaga hutan terbaik karena penghidupan mereka tergantung pada hal tersebut.
Hutan dimana masyarakat adat tinggal seringkali menyimpan karbon dalam jumlah lebih besar dibandingkan dengan hutan yang dikelola oleh pemilik lain, baik pemerintah atau swasta.
Memang benar bahwa cadangan bagi masyarakat adat di Amazon Brasil mempunyai peranan penting dalam menurunkan laju deforestasi – tapi dengan biaya besar.
Dalam 12 tahun terakhir, jumlah aktivis dan pemimpin masyarakat adat yang dibunuh di Brasil lebih tinggi dibandingkan negara-negara lain.
Pada pertemuan di Paris akhir tahun ini, negara-negara diharapkan untuk menyampaikan rencana nasional – yang dikenal sebagai Intended Nationally Determined Contributiosn/INDCs (Rencana Kontribusi Nasional) – yang menguraikan langkah-langkah spesifik yang akan diambil untuk menurunkan emisi karbon dioksida.
Jika memperhitungkan permohonan Paus Fransiskus, maka langkah-langkah tersebut harus menyertakan komitmen membantu masyarakat adat untuk mengamankan hak-hak atas kampung halaman mereka dan memberdayakan mereka untuk melindungi hutan dari kerusakan.
Sejauh ini, hanya sekitar seperempat negara-negara di dunia yang telah menyerahkan draf awal INDC untuk dikaji. Namun sayangnya, baru sedikit negara-negara yang memiliki hutan tropis yang telah menyerahkan rencana mereka dan belum satu pun negara-negara di Amazon yang telah melakukannya.
Meksiko, sebaliknya, telah memberikan contoh yang baik.
Pemerintah Meksiko telah menggunakan INDC mereka untuk menetapkan beberapa tujuan yang ambisius, termasuk komitmen terhadap deforestasi nihil pada tahun 2030 dan untuk mengembalikan ekosistem hutan di daerah aliran sungai negara tersebut.
Namun demikian, meskipun Meksiko mempunyai hak kepemilikan lahan dan properti yang kokoh bagi masyarakat adat dan komunitas lokal, hak-hak tersebut belum terintegrasi dengan peraturan-peraturan lainnya – sehingga menghambat segala bentuk pertumbuhan ekonomi.
Negara-negara industri, seperti Amerika Serikat dan anggota Uni Eropa, mempunyai tanggung jawab khusus untuk memberikan solusi terhadap masalah deforestasi.
Komunitas hutan harus diberikan bantuan dalam mengelola sumber daya dan mempertahankan sumber penghidupan mereka.
The Green Climate Fund, yang didirikan oleh PBB untuk membantu negara-negara berkembang mengurangi emisi karbon dioksida dan beradaptasi dengan perubahan iklim, harus mencantumkan ketentuan khusus bagi masyarakat adat, yang sesuai dengan Dedicated Grant Mechanism (Mekanisme Hibah Khusus) di bawah Climate Investment Fund.
Kunjungan Paus Fransiskus yang akan datang akan meliputi perjalanan ke Washington, DC dan Paris, dimana beliau diharapkan akan meneruskan advokasi gerakan atas nama lingkungan hidup.
Keputusan untuk menjawab permohonan Paus Fransiskus dan mengubah doa menjadi kebijakan berada di tangan para pemimpin kita.
The Real Mission for Pope Francis
GLENDALE, CALIFORNIA – Catholicism, among the most tradition-bound religions, contains at its core a paradox that has become increasingly sharp.
As Pope Francis begins his first overseas trip – to Brazil, the world’s most populous Catholic country – it is difficult, despite the inertia of the past, to tell where the church is headed.
The accession of Jorge Mario Bergoglio to the papacy adds to the puzzle.
The chief Jesuit confessor at the papal court used to be called “the black pope,” owing to his simple black cassock (if not his sinister intent).
Now, for the first time, a Jesuit has become pope – and has compounded the novelty by assuming the very un-Jesuit name of Francis.
As curious as such gestures are in an institution that thrives on imagery, they are symbolic frills.
We already have plenty of pictures of Francis kissing babies; what he faces now – in Brazil and around the world – are strategic matters of genuine substance.
One such challenge, the Vatican Bank, is equivalent to cleaning up the Augean stables.
It is enough to mention the words “Vatican” and “bank” in the same sentence to start a cascade of jokes about comic-opera ineptness and skullduggery.
In order to find a remedy, Francis has appointed a special papal financial commission.
But the bank known as the Institute for Works of Religion, founded in 1942, does not have deep roots in Catholicism.
Though notoriously secretive, the operation is far removed from the Church’s more sensitive, doctrinal core.
Besides, the commission’s members have impeccable loyalist credentials, which is also true of the cardinals appointed by Francis to look into broader issues of reform.
At the same time, Francis has launched a series of initiatives aimed at pleasing just about everyone.
He has expedited the canonization process for John XXIII, who inaugurated Vatican II almost a half-century ago, and John Paul II, the autocratic Pole who reined in many of Vatican II’s liberating impulses.
He has also announced plenary indulgences – time off from “the pains of purgatory” – for those who follow his visit to the Catholic youth festival in Rio de Janeiro on the Internet.
Such measures are difficult to get worked up about – both for Catholics who do not take them seriously and for “the simple faithful.”
They have feel-good value, but little else.
The heart of the matter is that Francis’s actions have been in line with the “revolution from above” style of reform associated with Vatican II.
In particular, none of the changes promoted by Francis envision a reduction in papal power.
The “primacy of the papacy” – a term Catholic theologians use when talking with their Protestant counterparts – remains sacrosanct.
The larger lesson is that this monarchical model of Catholicism, together with the hierarchy that attends it, has remained pretty much the same since the Counter-Reformation.
For example, when priests leave “holy orders,” they are “reduced to the lay state” – a bit of condescending terminology that says a lot about the Church’s archaic mindset.
This is not a new situation.
What is new are the circumstances under which it is unfolding.
Catholicism in its heyday combined a fairly decentralized administration, under the sway of stand-alone bishops, with a uniform set of beliefs.
One reason why it used to take roughly 13 years for a Jesuit to reach ordination was the long indoctrination in orthodoxy required for priests who, unlike “regular clergy” (whose training lasted half that time), would be mobile and beyond the direct control of bishops.
This situation is now close to being reversed.
Church administration has become increasingly subject to uniform civil codes.
At the same time, since Vatican II – and in tandem with the decline of close-knit ethnic enclaves – churchgoers no longer feel obliged to hew to the letter of canon law. “Relativism,” “cafeteria Catholicism,” and the like are ubiquitous.
Papal authority stands on shaky ground, especially in the comparatively secular West.
Francis can attract attention by opining about social justice outside the church, but it is difficult for any pope to influence the habits and theological views of Catholics themselves, who think and act as they please.
He can scold – a tack that Francis has so far tried to avoid – but he cannot convince.
If the Church’s first dilemma concerns the basis and effectiveness of papal authority, the second concerns sexuality.
The two are linked.
Francis shies away from the retrograde rhetoric that his predecessors used in raising alarms about the role of women, and he has not gone out of his way to follow up on the Vatican’s “visitation” (read “Inquisition”) of uppity American nuns.
But he has kept that last episode on the books, and he continues to wax traditional about homosexuality.
Catholicism – or, more accurately, the celibate male mythos at the heart of the institutional church – rests on centuries of sexism.
An antifeminist culture pervades the organization.
Thoughtful theologians can distinguish among psycho-sexual issues; in practice, however, fear of a slippery slope to calamity prevails.
Pull one thread – the celibacy requirement for priests, for example – and the whole edifice comes crashing down.
Consider what has happened to liberalizing Protestant denominations, which, for all their good intentions, have lost adherents.
One could argue that concessions on this front would simply acknowledge attitudinal and behavioral reality and allow the church to move on.
One could also argue that the consequences of reform would not be as organizationally disastrous as feared – in the same way that cleaning up backwaters like the Vatican Bank would restore credibility to the Church’s spiritual message.
But this is a conversation that Francis has yet to initiate, and that the people around him show little sign of understanding.
Poppy Power
This month, the European Parliament adopted a resolution on Afghanistan that could pave the way for a new and more open-minded approach to counter-narcotics strategies worldwide.
In fact, the resolution calls on the participants at a conference of donors, to take place in London at the end of January, “to take into consideration the proposal of licensed production of opium for medical purposes, as already granted to a number of countries.”
This proposal was originally made by the Senlis Council, an independent organization based in Paris, during a workshop in Kabul last September.
The text introduced by the European Liberal Democrats, with the support of virtually all political groups in the European Parliament, is revolutionary, not only because it goes against conventional thinking, but also because it raises the issue above the stagnant reality of the “war on drugs.”
In Afghanistan, that so-called war has essentially been based on eradication campaigns and alternative livelihood projects, which have achieved only scant results.
The European Parliament’s new stance may, I hope, mark the beginning of a radical policy shift by all actors involved in rebuilding Afghanistan.
According to the United Nations Office on Drugs and Crime, despite concerted efforts at eradication and crop substitution, Afghanistan produced 87% of the world’s opium in 2005 – roughly 4.1 tons – generating $2.7 billion of illegal revenue, which amounts to roughly 52% of the country’s GDP.
The 2005 Afghanistan Opium Survey, released last November, estimates that the total value of this opium, once turned into heroin and distributed around the world, could reach more than $40 billion.
Moreover, in recent years, factories and laboratories for processing opium into heroin have been sprouting in Afghanistan, producing 420 tons of heroin last year alone.
The increase in domestic heroin production has provided a massive boost to the local retail market, giving rise to concerns about HIV/AIDS spreading in a country with poor infrastructure and nonexistent health services.
In addition, the itineraries used by the export convoys are no longer limited to the infamous “golden route” through Pakistan and Iran, but have multiplied, employing exit points in former Soviet Republics such as Tajikistan, Uzbekistan, and Turkmenistan.
This is helping to promote further instability in already volatile political contexts.
International counter-narcotics policy is currently driven by pressure for rapid and visible results.
But eradication and alternative livelihood projects mainly affect the lowest end of the value-added chain, the farmers, with no real impact on those higher up, such as large landowners and local traffickers, not to mention the extremely powerful drug lords and the international cartels and mafias.
Most landless farmers find it difficult to switch to different crops, being caught up as they are in the illegal opium-denominated market, which forces them to live at the mercy of the drug traffickers, who provide them with access to credit and market outlets.
The result of this was laid out in a report by the European Union’s Election Observation Mission that I presented in Kabul last December: Afghanistan risks becoming a “rentier” state with easy access to resources that lubricate corruption throughout its entire political system, finance illegal armed groups, and fuel regional destabilization.
Illicit Afghan networks, replicating well-known methods that organized crime has applied successfully for decades in other parts of the world, are mobile and resourceful, and can plug into a range of legal economic activities to sustain themselves.
This might lead Afghanistan into a situation of no return: becoming a narco-state that drifts away from any form of rule of law and disengages itself from the fragile social contract with its own citizens that it has started to establish.
As New York University’s Barnett Rubin, an expert on Afghan society, has put it: “Afghanistan cannot be stabilized while the most dynamic sector of its economy is illegal, nor if more than half of its economy is destroyed.”
So what should be done?
Because of the serious threat that the illegal drug economy poses to stability and democracy in Afghanistan, we must start thinking in terms of regulated poppy growing for medical purposes, in particular for painkillers, with the active participation of donor countries and the UN itself.
Indeed, the UN estimates that just six countries prescribe 78% of the total legal production of opiates, implying shortages of opium-based painkillers in many of the UN’s 185 other member states.
Hence the potential legal demand is huge.
Moreover, the UN also estimates that there are 45 million people living with HIV/AIDS in countries where health systems are either absent or very poor, and that over the next 20 years there will be some 10 million new cases of cancer in the developing world.
These estimates, together with poor countries’ additional needs when natural catastrophes strike, imply that the potential legal demand for medicinal opiates is even higher.
An increase in production of “medical” opium would address its lack of availability worldwide.
It would also provide Afghan peasants, who have been growing poppy despite forced eradication of the plant and incentives to change crops, with an option that is regulated by law and that, in time, could have an impact on the heroin trade.
Governments, international organizations and individuals that participate in the London conference must not dismiss the call made by the European Parliament, for it offers a far more workable strategy to promote Afghanistan’s future than the current counter-narcotics policies permit.
Population Change and Challenge
Like everything else in our world, change in population is swifter than ever.
The most profound changes in population, however, are not demographic but social, and they go deep into personal and family life.
Women are tasting new freedoms—new expressions of their fundamental human rights—and these have profound implications for both men and the social structures they traditionally dominate.
Demographic change has certainly been swift.
In 1970, world population was less than 4 billion: today, it is over 6 billion and will stand at 8 billion by 2025, with nearly all of that growth concentrated in what are still called “developing countries”-- most of Asia and nearly all of Latin America and Africa.
Hidden within those astounding numbers, however, are some more hopeful figures.
Over the last 30 years, family size in developing countries has fallen by half, from 6 children to 3; there are many more women today, but compared with their mothers--or any previous generation--they have fewer children.
On a scale unknown to history, women are making choices for themselves, and their choice is for smaller families.
Back in 1970, the issue of population growth was controversial.
It divided north and south, developed and developing countries, in a way that few other issues did—with blame and counter-suspicions cast widely – and with the result that population concerns tended to sink toward the bottom of the agenda of most countries and international organizations.
Few developing countries had family planning programs.
The people who carried most of the responsibility for bearing and raising children—women--were not heard from at all.
Nothing could be further from the way population issues are viewed today.
There is a global consensus that population issues are part of daily life.
Reproductive health and gender equality have become an integral part of the human rights agenda.
The amazing though little-known fact is that this epochal change marks a real and visible success for the United Nations and its ponderous but painstaking way of reaching consensus.
Slowly, over years of long discussion and hard-won practice, divisions between the various population camps have been closing.
Or not so much closing as shown to grow from false premises.
A generation of practice has shown that if women have choices--real choices--they will have smaller families than their parents’ generation.
The reasons are complex and not completely understood, but the facts are clear.
Family size and population growth rates thus become not so much a matter for high-level decision, but the results of many private decisions further down the power structure.
Many things flow from this.
In the past, policy and politics were a matter for men: now women increasingly play an equal part.
In countries like India and Uganda, for example, women sit on local and regional legislatures by right.
That women need access to health care for themselves and their children, in particular family planning, is more widely accepted every day.
Nearly all countries now officially support family planning.
Even this is not enough.
If women are going to use contraception successfully, they must be able to make their own decisions about it.
The implications of this are revolutionary for societies where women traditionally have not been allowed to make decisions for themselves.
After all, if women can decide about family planning, why not about other things?
The whole power structure of the family, and the community in which the family lives, begins to change.
In Bangladesh, for example, where women have traditionally been kept from public view, they now use cell-phones to contact one another, raise loans and do business.
In some families, women are now the main earners.
In many developing countries, there has been an explosion of women’s groups in the last decade, and these assert themselves as never before.
In Chile, for example, mothers went on the street in favor of a move by the education ministry, but opposed by the Church, to include sex education in school.
Government, of course, is still needed: governments provide health care and education, the two most critical elements of the mix.
And leadership is needed, though in new and unfamiliar ways.
Political leaders must pay attention to social needs: economic growth by itself won’t solve social problems; in fact the realization is spreading that sustained economic growth depends on dealing with social issues.
The “Asian tigers,” for example, made heavy investments in education and health, including family planning, early in their development.
This investment paid off a thousandfold in terms of social stability, a healthy and educated workforce and faster economic growth
Governments today must pay attention to women, though, granted, for many, this is proving hard to do.
International agreements have been reached: human rights structures are in place.
Agreement, however, is one thing: implementation another.
Women are willing to make partnerships to make progress.
The problem lies with men.
Somehow men must learn that equal power for women does not threaten their own power: that being a man does not depend on controlling a woman; that sharing power makes everyone more powerful.
Men in all countries, from poorest to richest, at all levels of society, are learning that they must change.
That is the lesson of the last 30 years, and the great success for all of us who have spent our lives in population and development.
We have changed population concerns from a divisive political issue to a social force, behind which women and men can unite.
In the process, the structures of both politics and society are changing.
This is a quiet revolution: and it has only just begun.
Populism’s Short March in Central Europe
A specter is haunting the European Union’s new members in Central Europe ­– the specter of populist nationalism.
The Law and Justice Party (PiS) has just won Poland’s parliamentary and presidential elections, while populist and nationalist political forces could gain the upper hand in elections in Hungary, the Czech Republic, and Slovakia next year.
These are momentous developments.
For 15 years, Central Europe has been a model student of democratization.
Now, according to former Czech President Václav Havel, the region could become trapped in a “suffocating atmosphere.”
Even Havel’s own successor, Václav Klaus, rails against multiculturalism and the decline of the traditional European nation-state.
What happened?
Paradoxically, the EU – seen as a guarantee of stability and progress – is itself part of the problem.
Attracted by the promise of membership, the countries that joined the EU last year underwent 15 years of social, economic, legal, and political changes whose scope was unprecedented in modern European history.
Public institutions were rapidly modernized, political democracy adopted, and a standard market economy created.
But ordinary people were put under tremendous pressure to adjust quickly, and sometimes painfully.
As long as EU membership remained only a goal, it had a disciplining effect on the region’s political elites.
In fact, the promise of EU membership now seems to have been a more effective means of promoting reform than membership itself: aspiration, unlike membership, gave the EU far greater political leverage.
To be sure, Poland, the Czech Republic, Hungary, and Slovakia have rightly viewed EU accession as an act of political emancipation, and have begun asserting themselves as political equals.
At the same time, the political parties that led their countries into the EU all came under pressure, because they were associated with painful reforms.
This cleared the way for politicians with a simple message: our countries have had enough of Western tutelage and belt-tightening; the time has come to return to our national values and interests.
Some warned even before EU accession that their nations could lose their identity.
As President Klaus put it, the Czech Republic could “dissolve in the EU like a sugar cube in a cup of coffee.”
Tomas G. Masaryk, Czechoslovakia’s first president after its establishment in 1918, used to say that his country was a democracy, but “so far, without democrats.”
Havel reasons along similar lines when he warns of the emerging dangers of nationalism and populism in the region.
In his opinion, the underlying “old” patterns of political behavior (some a legacy of the pre-communist era) were temporarily pushed to the background by the wave of pro-Western civic liberalism that followed the collapse of communism in the region.
Now the old patterns of political behavior are returning to the fore.
But there is also evidence that Havel is right to argue that the re-emergence of these patterns represents a mere “hangover” from 15 years of sustained – and often traumatic – reform.
Unlike before World War II, when democratization efforts were undermined by the rise of authoritarianism in Germany, the region’s countries are now fully integrated into a network of highly stable Western democracies.
Attempts by political parties to thrive on nationalism, xenophobia and populism will soon be confronted with the limits set by the EU and other international organizations.
For example, the PiS’s promises to reintroduce the death penalty and return Poland to its conservative Christian roots violate EU and Council of Europe standards.
One can predict with a high degree of confidence that the Polish “Fourth Republic” that the PiS would like to build will have to come to terms with the limited space in Europe for messianic visions and “Christian fundamentalism.”
The same is true of Klaus’s nationalism; it may appeal to a popular streak of Czech provincialism, but even if the conservative Civic Democratic Party, which Klaus founded, wins the parliamentary election next year, EU membership will temper nationalist ambitions.
Leftist populists in Slovakia, represented by Robert Fico’s Smer (Direction) party, which is leading in opinion polls ahead of the next year’s elections, will most likely reach a similar conclusion.
Viktor Orban’s Fidesz party, which could win Hungary’s elections next spring, provides a particularly instructive example.
In the mid-1990’s, before becoming the governing party, it pandered openly to nationalist and populist sentiment in order to win votes.
But by the time its government was replaced in 2002, by the current Socialist-led administration, Fidesz’s record was rather pro-European.
In other words, while populist-nationalist forces could well make further gains next year – even allying themselves, like the PiS, with far-right parties to win support for their policies – Central Europe is unlikely to revert to the virulent nationalism for which it was once infamous.
Havel is right that the region will sober up after its political hangover.
But, as with real hangovers, it won’t be pretty to watch.
Populists Are Sometimes Right
Developing countries are often advised (or instructed) to undertake reforms recommended by "experts" who are called "technocrats" and are often backed by the IMF.
Opposition to the reforms they propose is usually dismissed as "populist."
Countries that fail to undertake these reforms are dismissed as craven or lacking political will, and soon suffer the consequences: higher interest rates when borrowing abroad.
But look closely at some of these "technocratic" proposals: many are more often based on ideology than economic science.
Technocrats can of course reliably make an electricity plant work better.
The goal is simple: to produce electricity at as low a price as possible.
This is mostly a matter of engineering, not politics.
Economic policies are usually not technocratic in this sense.
They involve tradeoffs: some may lead to higher inflation but lower unemployment; some help investors, others workers.
Economists call policies where no one can be made better off without making someone else worse off Pareto efficient.
If a single policy is better than all others for everyone , i.e., has no Pareto-efficient alternatives, it is said to be Pareto dominant .
If choices among policies were purely Paretian, i.e., if no one was made worse off by choosing one policy, as against another, the choices involved would indeed be purely "technical."
But in reality, few policy choices are Paretian.
Instead, some policies are better for some groups, but worse for others.
Different policies benefit and hurt different groups.
In East Asia, for example, IMF bailouts helped international lenders, but hit workers and domestic firms hard.
Different policies might have imposed more risk on international lenders, and less on workers and domestic firms.
Deciding which policy to choose involves choices among values, not just technical questions about which policy is in some morally uncontroversial sense "better."
These value choices are political choices , which cannot be left to technocrats.
Of course, there is scope for technical analysis even when political choices are at the crux of the decision.
Technocrats can sometimes help avoid Pareto inferior policies, that is, policies that make everyone worse off.
Sometimes there are policies that can promote both growth and equality, and the job of good economists is to search for them.
The problem is that many policies advanced by technocrats as if they were Pareto efficient are in fact flawed and make many people--sometimes entire countries--worse off.
Look at the litany of technocratically inspired examples of privatization and deregulation in the 1990's.
Banking "reform," for example, frequently soon required government bail-outs, leaving a few people much richer, but the country much poorer.
These failures suggest that we should have less confidence in the supposed professional skills of technocrats--or at least less confidence than they have in themselves.
But there is also a more fundamental point here.
Democratic processes are likely to be more sensitive to the real consequences of policies, to the real tradeoffs involved.
Of course, some criticisms of technocratic remedies may be populist posturing, but sometimes they contain insights that ivory-towered (and usually US-trained) technocrats miss.
Consider the case of Mexico, where a proposal to raise revenue by taxing food and medicines consumed by the poor was, unsurprisingly, rejected by a democratically accountable legislature.
Rejecting this proposal was not a matter of unbridled populism.
The problem was with the proposal.
Its advocates argued that efficiency required adopting a comprehensive Value Added Tax.
Advanced industrial countries in Europe use such a tax.
Developing countries, the technocrats said, should do likewise.
But there is a fundamental difference between developed European countries and emerging markets: the size of the informal sector, from which VAT is not collected.
This vast "black economy" makes VAT inefficient in most developing countries.
Indeed, because VAT is a tax on the formal sector--the new factories, banks, and so forth that pay regular salaries and whose incomes and expenditures can easily be traced (as distinct from those of the cash-based street vendors, village enterprises, and poor farmers)--VAT impedes development.
The logic is simple.
Developing countries that impose a VAT perversely encourage production to remain in the informal sector, which often produces the goods that are consumed domestically or used as inputs in the developed world.
But it is the formal sector that produces higher value-added manufactured goods that compete with developed countries.
There are other sources of tax revenue in many developing countries that are both more equitable and distort economic incentives far less than VAT.
Many developing countries lack a corporate income tax: the huge profits of the telecom, cement, and other monopoly sectors escape taxation.
(If one worried about double taxation, one could allow a credit for corporate taxes on individual tax returns.)
It may also be possible to impose taxes on luxury goods (many of which are imported), thereby promoting equity without stifling growth.
Economic theory supports a VAT only if one does not care about distribution and if one can impose a tax on all commodities.
You don't need an economics doctorate to recognize that, in developing countries, you can't impose a tax on all commodities.
Moreover, you should care about equity.
So the next time you hear rumblings in the legislature of an emerging democratic country against this or that "technocratic" proposal, think twice before dismissing the deputies' doubts as populist rants.
Perhaps the populists are popular because they know something that the technocrats don't.
Populists Can be Right
Does the rise of left-leaning governments in Latin America, particularly the election of Evo Morales as President of Bolivia, presage a shift to the hard left across the continent?
Does it mark a repudiation of United States foreign policy in the region?
Will it, for example, lead to a re-nationalization of Bolivia’s vast natural gas deposits?
These are vital questions, but they miss the larger significance of the rise of someone like Morales, for he is Bolivia’s first indigenous elected head of state.
His victory marks a step forward in Latin America’s overall democratization, with positive long-term significance for economic and social development in the region.
To understand why, it is helpful to take a broad view of Latin America’s history and economic development.
The societies of the Americas were forged by European conquests of indigenous populations, and by the racial and ethnic divisions that followed.
Both the US and Latin America are still coming to terms with those historic divisions.
The Europeans who conquered and colonized the Americas after 1492 did not find vast empty lands, as they sometimes proclaimed, but rather lands populated by communities dating back thousands of years.
A large portion of the indigenous populations quickly succumbed to diseases and hardships brought by the European colonizers, but many survived, often in dominant numbers, as in Bolivia and much of the highlands of the Andes mountain region.
Almost everywhere, these surviving indigenous populations became subservient members of European-led societies.
The Europeans then brought millions of African slaves to the Americas.
After emancipation in the nineteenth century, the African-American communities remained impoverished and largely bereft of political rights.
Thus, vast inequalities of power, social standing, and economic well-being were part and parcel of the forging of the Americas.
Indigenous, African-American, and mestizo (mixed) communities have been fighting for their social, political, and economic rights ever since.
Democracy in Latin America has been a hard-won struggle.
Even in the US, a country that fancies itself as a model of democracy, African-Americans were not truly enfranchised until the mid-1960’s.
In Latin America, democracy has similarly been incomplete, unstable, and often inaccessible to indigenous, African-American, and mixed populations.
Moreover, given the vast inequalities of power and wealth in Latin America, and with a large part of the population bereft of land and education, the region has long been vulnerable to populist politics and rebellions, with leaders promising quick gains for the dispossessed by seizing property from the elites.
The elites have fought back, often brutally, to protect their property.
Politics has therefore often been more a violent than an electoral struggle, and property rights have often been tenuous.
A dominant pattern in both the US and Latin America has been the resistance of the dominant white communities to sharing in the financing of public investments in the “human capital” (health and education) of the black and indigenous communities.
While European societies have developed social welfare states with universal access to public health and education services, elites throughout the Americas have tended to favor private-sector provision of health and education, in part reflecting white populations’ unwillingness to pay for social services for other ethnic and racial groups.
Morales’ election in Bolivia – where indigenous groups are estimated to comprise around 55% of the population and mixed-race people account for another 30% – should be viewed against this historical backdrop.
Moreover, Bolivia is not alone: the shift from military rule to democratic politics in Latin America during the past 20 years is gradually, fitfully, but consistently, broadening political empowerment beyond the traditional elites and dominant ethnic groups.
In Peru, for example, Alejandro Toledo is that country’s first indigenous president.
In the longer term, the spread of democracy in Latin America promises not only fairer societies, but also economically more dynamic societies, through increased public investments in health, education, and job skills.
The region’s chronic under-investment in education, particularly in science and technology, is partly responsible for its economic stagnation during the past quarter-century.
Unlike East Asia and India, most of Latin America did not make a breakthrough to high-technology industries, instead suffering a period of low GDP growth, debt crises, and macroeconomic instability.
This can now change, at least gradually.
Bolivia would do well to follow the example of its eastern neighbor, Brazil, which has experienced a surge in educational and scientific investments since its democratization in the 1980’s.
Rising educational attainment is helping to promote more technologically sophisticated exports as well.
Of course, Morales’ election also raises many important short-term doubts and questions.
Will the new government follow responsible economic policies, or will Bolivia flirt yet again with destabilizing populist measures, as it has done so often in the past?
Will Morales renegotiate the laws and contracts governing Bolivia’s vast natural gas reserves, as his government is rightly committed to do, in a way that does not scare away urgently needed foreign investment?
Bolivia has entered a new era of mass mobilization of its long-suffering but now victorious indigenous communities.
The short-term outlook is uncertain. In the longer run, however, it’s right to bet on the economic benefits of democratization.
Measuring the Next Global Development Goals
COPENHAGEN – At the start of the twenty-first century, the international community made some smart and simple promises with the so-called Millennium Development Goals.
The world would halve the proportion of people suffering from hunger and living in extreme poverty, achieve universal primary education, and dramatically reduce child mortality by 2015.
There have been many successes, though not all of the MDGs’ targets will be achieved.
The target of halving hunger, for example, may be missed – though not by much.
In 1991, 23.4% of all people in the developing world were malnourished; more than a billion people went to bed hungry.
By 2013, the proportion had dropped to 13.5%.
Though the developing world had 1.7 billion more people than in 1991, 209 million fewer were starving.
Over the past 22 years, the world has managed to feed almost two billion more people adequately – no small feat.
Over the next year, the world’s 193 governments will come together to set new global targets to be met by 2030.
The task amounts to this generation’s greatest opportunity to translate high aspirations into concrete targets.
But choosing the targets that will do the most good requires learning from current experience.
That choice should be based on a comparison of the proposed targets’ economic, social, and environmental costs and benefits.
My think tank, the Copenhagen Consensus, has asked 60 teams of the world’s top economists to examine most of them.
Of course, high-profile issues that affect people’s daily lives – for example, health, education, food security, clean water and sanitation, and the environment – attract the most attention.
But we cannot simply assume that efforts to improve the situation are effective; we also need to measure how well we address these issues, and measurement has real costs.
After all, money spent on one priority is not available for others.
In a recent paper for the Copenhagen Consensus, Morten Jerven of Simon Fraser University examines how much measurement will cost – and how much the international community can justify spending.
And measuring turns out to be much harder than one might expect.
For many indicators in the developing world, there is only a small amount of information about what has been achieved.
There is no shortage of information available online about the number of poor people in almost any country in any year since 1990; but much of it is based on sketchy data.
To estimate the number of poor in a country requires a household survey of consumption.
But six of the 49 countries in Sub-Saharan Africa have never had a household survey, and only 28 countries have had one in the past seven years.
For example, according to the World Bank, 11.92% of Botswana’s population was poor in 2008.
But these data are based on just one household survey – from 1993.
Actually, there have been very few recent surveys, and most of the available numbers are projections and estimates, not hard data.
Overall, there are more gaps than real observations, and the observations themselves are often dubious.
Data collection for the MDGs was patchy, and the quality of much of the information collected was questionable.
After assembling available information about survey costs around the world, Jerven estimates that proper monitoring of all 18 targets and 48 indicators would have cost $27 billion.
This sounds like a lot, but it is only 1.4% of the roughly $1.9 trillion spent on development aid during this period.
In 2013, a high-level panel of politicians and civil-society and private-sector leaders advocated the creation of “better data-collection systems, especially in developing countries.”
Likewise, the so-called Open Working Group called on the world to “increase significantly the availability of high-quality, timely, and reliable data disaggregated by income, gender, age, race, ethnicity, migratory status, disability, geographic location and other characteristics relevant in national contexts.”
And this month, UN Secretary-General Ban Ki-moon specifically proposed establishing a “comprehensive program of action on data.”
The problem is that the next set of targets is growing ever larger.
The high-level panel suggested 59, compared to 18 under the MDGs, and the Open Working Group nearly tripled the total number again, to 169 targets.
Jerven estimates that carrying out even minimal data collection for all 169 would cost at least $254 billion – almost twice the entire annual global development budget.
Even this is a low estimate.
For starters, it does not includes the costs of national governments’ gathering of basic administrative data, or of all of the recommended household surveys, because these costs were impossible to obtain.
And gathering data in countries where none has yet been collected will likely prove even costlier.
Moreover, there is no allowance for maintaining national statistical offices, training and retaining personnel, or analyzing and disseminating the data.
Given capacity constraints, particularly in the poor countries, this cost is likely to be high.
Indeed, analyzing more long-term data for the international donor community may impede finance ministries’ ability to make high-frequency data available for running the country.
The MDG agenda has already stretched statistical capacity; 169 new targets will only make the situation worse.
The MDGs were effective in part because the number of targets was limited.
So it is reasonable to consider how many targets we could measure properly, rather than how to collect data on a large number of them.
A useful point of comparison is what industrialized countries spend on their statistical services.
For example, the Norwegian and British governments spend about 0.2% of GDP.
Using this figure as a rough indicator of willingness to pay for proper measurement and monitoring suggests that the post-2015 goals should include just four targets.
As the international community gears up for the next development agenda, the danger is that we let our ambition overpower our reason.
If we embrace too many targets – and especially an unwieldy 169 – we risk doing a disservice to the world’s neediest people.
Post-American Israel
PARIS – Israel is one of the only places in the world where Georges W. Bush can be greeted with real enthusiasm and even affection.
The most unpopular American president in recent history thus relished his recent triumphal welcome in Jerusalem, where he was the guest of honor of the International Conference planned and devised by Israeli President Shimon Peres on the occasion of the 60th anniversary of the creation of the Jewish state.
Historical revisionism was near the top of the agenda, with the United States portrayed as Israel’s most faithful supporter and ally since 1948.
But in fact, George C. Marshall, the US secretary of state in 1948, sought to prevent President Harry Truman from recognizing Israel.
Likewise, the Suez crisis of 1956, when the US thwarted a joint French, British, and Israeli plan to seize the Suez Canal, was presented in a politically correct light, as were Henry Kissinger’s complex diplomacy during the Yom Kippur War of 1973.
The hugging and kissing between Bush, Peres, and Israeli Prime Minister Olmert were undeniably moving, but they were also troubling – and not only because serious references to the Palestinians were, for the most part, not on the agenda.
One had the feeling that this was something akin to dancing on the Titanic – the culmination of a privileged partnership at its tipping point, a grand gala for something that was about to disappear.
This is not only a matter of leaders – Bush and Olmert – on their way out.
Beyond the celebration of eight exceptional years of “unique friendship” under Bush, it also seemed clear that the 41-year-old special relationship inaugurated by the Six Day War in 1967, when the US became Israel’s main backer, might be coming to an end.
The next US president, whether he is Barack Obama or John McCain, will certainly maintain the close bilateral alliance.
But it will not be the same: even if America remains an indispensable nation, it will no longer be the only one.
While Bush was in Jerusalem, so was India’s Lakmar Mittal, the king of the world’s steel industry.
If Bush was the departing present, Mittal represents the incipient future, in which America will have to share influence with emerging powers such as China, India, Russia, Brazil, and eventually, if its members get their act together, the European Union.
In fact, Israelis are already debating the meaning of the emerging post-American “multi-polar world” for their country’s security.
Will it really be such a bad thing, or might it hold some redeeming value?
The close bond between Israel and Bush’s America can in retrospect be seen as a mixed blessing – a special relationship that contributed to the declining attractiveness of both countries.
Israel, rightly, may not be ready to exchange US support for that of any other power, but Israeli leaders, having kept all their eggs in one basket for so long, will now have to factor not only American concerns and interests into their decision-making, but those of the other powers as well.
Thus, the problem for Israel is not to replace the backing provided by “300 million Americans,” as Bush put it in Jerusalem, but to add to it the sympathetic interest of more than three billion Chinese, Indians, Russians and others in Israel’s future in a pacified Middle East.
The question is not so much one of substituting alliances, but of creating a complementary system of security.
In their effort to achieve international respect and legitimacy as responsible stakeholders in today’s evolving international system, countries such as China, India, and even Russia have a greater interest in stability than in global confusion.
For them, a nuclear Iran led by President Mahmoud Ahmadinejad is seen more as a threat than as a card they can play, even if their actions thus far in regard to Iran do not always match their long-term strategic interests.
In fact, when it comes to deterring Iran from developing nuclear weapons – or, for that matter, exerting pressure on Israel and the Palestinians (including Hamas) to reach a compromise – a group of powers such as the US, China, India, and Russia might produce better results than a sole superpower imprisoned by its own contradictions and limitations.
Israel’s nimble society and economy seem perfectly designed for the post-American era of political and economic globalization.
Equally important, Israel will be forced to confront the reality of Palestinian despair, which the unique relationship with America has allowed it to obfuscate and evade for too long.
Post-EU Depression
The government of Poland collapsed first, followed by the Czech government.
Then the Hungarian prime minister resigned.
The government of Slovakia lost its majority and is unstable.
Within months, if not weeks, of realizing the long-sought goal of European Union membership, a wave of political instability surged through Central Europe.
Why should this historic event cause such political upheaval?
Some argue that these countries are inherently unstable. Their political cultures are underdeveloped.
They were admitted to the EU only fifteen years after the fall of communism, and not all of them had previous experience with democracy.
Unlike EU members admitted during earlier rounds of enlargement, the Central Europeans suffer from widespread corruption, political nepotism, fragile political parties with unclear identities, and weak civil societies.
All of these problems were to some extent hidden due to the external pressure of EU accession, and have now erupted into full view.
But there are more obvious causes for Central Europe's current problems.
Above all, every government that successfully led its country into the EU had to adopt-often under pressure and hastily-a range of unpopular steps.
Although most citizens in these countries supported EU membership, many thought that their governments paid too high a price.
This was partly because the EU was not as generous toward its newest members as it had been toward new members in the past.
Moreover, only fifteen years ago, eight of the ten new members had state-controlled economies, which meant that a period of painful transition toward a market economy was followed by, or overlapped with, sometimes painful reforms necessary for EU membership.
Even before attaining EU membership, all candidate countries' governments had to start adopting measures aimed at meeting the Maastricht criteria within several years, because the new members had committed themselves in their accession treaties to adopting the euro.
The most important measures required cutting budget deficits, often at the cost of lowering public expenditures.
In the Czech Republic, Hungary, and Poland, the task of completing such difficult reforms just before crossing the "finish line" fell to socialist parties, forcing them to betray their socialist identity in the eyes of leftist voters.
As a result, their historic mission doomed them.
In Poland, the Democratic Left Alliance fell apart shortly before accession, while the Czech Social Democrats came close to a similar split.
Ruling coalitions were at the same time in disadvantageous positions vis-à-vis opposition parties, which attacked the incumbents for failing to negotiate good membership terms, without themselves having to pass the test of negotiating better conditions.
Government parties were also hurt by the nationalistic rhetoric of center-right parties, which repeatedly warned against a betrayal of national interests.
The overlap between the end of the accession process and heated discussions about the new European Constitution played into the hands of the opposition.
The political right in Hungary, Poland, and the Czech Republic warned against a possible loss of sovereignty should the Constitution be adopted.
Such rhetoric resonates powerfully in former Soviet satellites that have only recently regained their sovereignty.
Despite all this pressure, the ruling coalitions in the Poland, the Czech Republic, and Hungary held together, as the historical mission of attaining EU membership worked like a lid on a pressure cooker.
Addressing conflicts among government coalition parties, as well as within individual government parties, was postponed until after official EU entry.
Not surprisingly, accession untied politicians' hands, and conflicts came to the fore.
Polish Prime Minister Lezsek Miller resigned one day after his country's official admission to the EU.
Czech Prime Minister Vladimir Spidla was forced to resign by his own party several weeks later.
Hungarian Prime Minister Peter Medgyessy was pushed out in late August.
Even the center-right Slovak government was not spared.
It took it upon itself not only to meet EU membership criteria, but also push forward with other painful reforms.
The comfortable role of criticizing the government fell into the hands of leftist populists, for a change.
The Slovak government is still in power, but it has lost its majority and could fall soon.
In Poland, Hungary, and the Czech Republic, we will now witness a period of unabashed populism.
The ruling coalitions were reconstructed, with new faces at the helm.
The main objective of the new prime ministers and cabinet members is to regain popularity for their parties.
The ruling coalitions can finally afford, at least temporarily, "the luxury" of populism that opposition parties used as their main weapon in the last few years.
Those who hope for further progress on economic reforms in Central Europe will have to wait.
Post-National Football?
NEW YORK – Some of the more hysterical German newspapers blamed Germany’s defeat against Italy in the semi-finals of the European championship on the fact that few players bothered to sing the national anthem.
Contrast that with the Italian players, all of whom belted out the words of Il Canto degli Italiani (The Song of the Italians).
Indeed, the captain, Gigi Buffon, sang with his eyes closed, as though in prayer.
But the Italians had no chance in the final against Spain, the best team in the world, none of whose players opened their mouths during the Spanish anthem, Marcha Real – which stands to reason, given that the “Royal March”&nbsp;has no lyrics.
And, besides, the Catalonian players feel uncomfortable with the national anthem, which was much promoted under the late dictator Francisco Franco, who hated Catalan nationalism.
We know that in football, the most successful teams are not always those with the greatest stars.
Champions operate as teams – cohesive, untroubled by the egotism of prima donnas, each player prepared to work for the others.
Is patriotism really the key to this kind of spirit for national teams, as the German critics of their team believe?
Football has often been called a substitute for war – a symbolic, more or less peaceful, way to fight out international rivalries.
The fans of national sides are actors in a kind of patriotic carnival, dressed in the costumes of their national stereotypes: English fans as medieval knights, the Dutch in clogs, the Spanish as bullfighters.
Germans, understandably, have a problem with national symbolism, but I spotted a few fans in quasi-Bavarian dress.
The prize for the most humorous masquerade must go to the Italians dressed as popes and cardinals.
In the past, English fans – but they were not the only ones – took the war metaphor too far and acted more like invading armies on the continent of Europe, terrorizing towns unlucky enough to stage an England game.
But players, too, sometimes have failed to conceal national animosities: when Holland beat Germany in a memorable European semi-final in 1988, one of the Dutch players ostentatiously wiped his bottom with a German shirt.
Given the strength of national feeling in these contests, it is not surprising that people like to project national characteristics onto the style of play.
On the rare occasion that England wins a big match these days, victory is attributed to a “typically” English fighting spirit, coupled with “fair play.”
The Germans play with “discipline,” the Italians with the defensive strength of Roman warriors, the Dutch with free-spirited individualism, the Spanish with the elegance of toreadors, and so on.
When the French won the World Cup in 1998, they ascribed it to their team’s multi-ethnicity – the embodiment of France’s commitment to liberté, égalité, fraternité.
But, when teams lose, these stereotypical virtues are damned with equal conviction as characteristic defects: German lack of imagination, Italian fear of attack, Dutch selfishness, the absence of national feeling among ethnic minorities in France, and so on.
In fact, the reality of football styles is rather more complicated.
The provenance of the great Spanish game of today is not the bullring, but the Barcelona team built by Johan Cruyff in the 1970’s and 1980’s.
The origin of his “total football” philosophy of keeping possession of the ball with quick, short passes and lightning switches from defense to offense was Ajax, Amsterdam, in the late 1960’s.
As often happens with innovative models, others adopt them, and, as in the Spanish case, improve and refine them.
Now everyone tries to play “total football” – except the English, who “typically” remain aloof from foreign ideas.
Italians have abandoned their defensive tactics.
Even the Germans play the passing game with flair and imagination.
The difference between Spain and the others is that the Spaniards do it better.
Daniel Cohn-Bendit, the Franco-German former student leader of 1968 and Green member of the European parliament, argued in a recent article that modern football stars don’t really play for their countries.
As hardened professionals, they primarily play for themselves.
They are, to use his phrase, “mercenaries.”
That is perhaps a little too cynical.
The tears streaming down the cheeks of Andrea Pirlo and Mario Balotelli after Italy’s defeat were not those of hardened pros.
They wanted to win, not just for the money or for the sake of their careers, but for the glory.
It still must feel good to be a national hero, hailed in the streets of Rome, Madrid, London, or Berlin as a returning warrior from a successful campaign.
And yet Cohn-Bendit is not entirely wrong.
What was striking during this European championship was the intimate collegiality between opposing players.
They consoled and congratulated each other, embracing like the old friends and colleagues that they often are.
Most of the top players play for the same clubs in Spain, Germany, England, or Italy.
Many speak several European languages with the fluency of the international businessmen that they also are.
The best European clubs are all multinational now.
Players follow the money.
And the top clubs also happen to be the richest: Real Madrid, Chelsea, Barcelona, Manchester City, Bayern Munich, etc.
Some of the most difficult and demanding prima donnas often cause less friction in these multinational outfits than they do on their national teams.
If there is a moral to this story, it is this: a common flag, language, or national history can certainly help to induce people to work together in harmony for a shared cause.
But so can enlightened self-interest.
At the highest levels of human achievement – whether in art, science, or football – it might actually be the more important factor.
Unnecessary Instability
PARIS – In normal life, technicalities are better left to technicians.
A car owner does not need – or usually want – to bother to find out what exactly goes on under the hood.
But when the car breaks down, he or she often has no choice.
What is true of cars applies to the economy: arcane issues are for specialists.
Yet in recent years, topics about which most people had never heard or cared – for example, securitization, credit default swaps, and the European payment system known as Target 2 – have imposed themselves on public debate, forcing ordinary people to grapple with their intricacies.
The same has started to happen with the notion of “potential output growth.”
Originally a concept created by economists for economists, its use for determining when, and by how much, a public deficit must be corrected is becoming a matter for wider discussion.
Indeed, its unreliability is seriously weakening the EU’s fiscal pact – which makes it necessary to open the hood and look inside.
The aim of the concept of potential – as opposed to actual – GDP is to take into account that, like an engine, an economy often operates below or above potential.
In a demand-driven recession, actual output falls below potential, which results in a rise in unemployment.
Similarly, a credit-fueled construction boom drives output above potential, resulting in inflation.
The gap between actual and potential GDP is thus a gauge of an economy’s spare capacity.
The distinction is also useful for policy purposes: weak potential growth cannot be addressed by demand-side initiatives; supply-side measures are needed.
But potential GDP can be only estimated, not observed.
Estimates are based on the amount of labor and capital available for production and an assessment of their joint productivity.
And, because estimates differ, depending on the data and methods used, the concept is clear whereas its value is imprecise.
Moreover, the global financial crisis has created new puzzles.
GDP in nearly all advanced economies is currently far below pre-crisis projections, yet few expect the gap ever to be bridged.
Policymakers struggle to get their assessment right.
Some wonder what is left of the notion of potential output.
The European Union has an additional problem: in response to the sovereign crisis, most of its members agreed in 2011 to a “fiscal compact” requiring them to keep their structural budget deficit – the one they would record were output equal to potential – below 0.5% of GDP.
Failure to converge on this target may open the door to financial penalties.
The virtue of such a framework is to take into account the impact of temporarily weaker output on fiscal outcomes.
Thus, a deficit is acceptable when it results from abnormally low tax revenues, but not when revenues are at their normal level.
Indeed, a major flaw in the initial European Stability and Growth Pact was that it did not include such corrections (I was among those advocating its reform in a 2003 report to the president of the European Commission).
The 2011 treaty actually built on a series of previous reforms that put increasing emphasis on potential-output-based assessments of the fiscal situation.
The problem is that an unobservable and imprecise variable – whose estimates are too inexact and volatile to provide more than a rough roadmap for a country’s journey toward fiscal rectitude – has become part of an international treaty and the national rules (sometimes of constitutional status) through which it is implemented.
Estimates of short-term or current potential output are also constantly reworked, implying continuous change in the assessment of the underlying fiscal situation.
For example, the European Commission’s projection of the Netherlands’ potential growth for 2013 was 0.9% in spring 2012, when the government started preparing its budget. By that autumn, when a real-time assessment of fiscal performance was carried out, it had been revised sharply downward, by 0.2%.
For France, the estimate fell from 1.2% to 0.9%, and for Italy it went from -0.1% to -0.4%.
The estimate of Spain’s potential growth rate fell from -1.2% to -1.4%, but the Commission later changed its mind and now says it was -0.7%.
These are not exceptions.
For actual GDP, such frequent and large forecast revisions are inevitable.
Potential GDP, however, is supposed to be more stable, as it does not depend on demand-side developments.
True, there are reasons to reassess a country’s potential growth in line with new information on labor-market conditions, investment, and productivity.
But relentless attempts at accuracy easily result in noise.
Furthermore, instability confuses the policymaking process.
Even a downward revision by 0.2% of GDP is meaningful: it implies a deterioration of the structural deficit by about 0.1% of GDP – not a trivial number in a fiscally constrained environment.
Members of parliament – who are not technicians – are understandably disturbed when they are asked to pass a revised budget in response to an updated estimate.
Not knowing the whys and wherefores, they end up perceiving such revisions as a source of artificial instability.
The purpose of the European fiscal framework is to lengthen the time horizon of policy and to make decision-makers more aware of the debt-sustainability challenges that they face.
This requires consistency.
Yet volatility in the assessment of potential growth prevents politicians from “owning” the already abstruse structural deficit and causes volatility in the policies based on this assessment, paradoxically resulting in a shortening of decision-makers’ time horizon.
The focus of policy discussions should not be the latest potential GDP revision, but whether a country is on track to ensure public finance sustainability.
Too often, the European fiscal pact is perceived by national policymakers as an external constraint, not as a framework conducive to better decisions.
A greater degree of stability in the assessment of an economy’s potential would strengthen decision-makers’ awareness and appreciation of longer-term challenges, thereby putting policymaking on a sounder footing.
Poverty versus Growth
The debate among governments, economists, and NGOs about how much the world’s poor benefit from economic growth seems unending.
Last year The Economist claimed that “Growth really does help the poor: in fact it raises their incomes by about as much as it raises the incomes of everybody else.”
Yet, in a letter published soon after by the same magazine, Justin Forsyth of Oxfam claimed that “..current patterns of growth and globalization are widening income disparities and hence acting as a brake on poverty reduction.”
Irreconcilable positions?
Not necessarily: for both sides in this debate are, in many respects, talking about different things.
One side may be talking about absolute poverty, the other about relative poverty.
Moreover, average findings conceal large differences: in some countries the poor can benefit from economic growth, in others they may be too deprived to take advantage of it.
In short, some truth resides on both sides.
The full picture, however, is more complicated than either point of view.
New data from the 1990s confirms earlier studies that there is little or no evidence that economic growth is associated with increases in income inequality as measured by national household surveys.
This finding is important.
For if the share of national income going to the poor does not fall with economic growth then of course the poor will gain in absolute terms; growth will be poverty reducing, and contraction will be poverty increasing.
Moreover, the available data confirms that the higher the rate of growth, the higher the average rate of poverty reduction.
That is the type of evidence that The Economist was promoting.
Yet it is deceptive to conclude from this that growth raises the incomes of the poor “.. by about as much as it raises the incomes of everybody else.” Given existing inequality, the absolute income gain to the rich will be greater - much greater - than the gains to the poor.
For the richest 10% of people in India the income gain from aggregate economic growth tends to be about four times higher than the gain to the poorest 20%; in Brazil it tends to be almost 20 times higher.
This is consistent with growth having no overall effect on inequality as conventionally measured.
Focusing on average outcomes also misses the fact that the experiences of poor people during times of economic growth are diverse.
The same growth rate can bring anything from a modest drop in poverty to a dramatic decline.
One finds plenty of cases of rising inequality during spells of growth.
Indeed, the best data available suggests that inequality increases about half the time, and falls the other half.
Even when inequality does not change with growth, one finds both gainers and losers at all levels of living.
In cases where household survey data has tracked the same families over time it is common to find considerable churning under the surface.
Many people escape poverty while others fall into poverty, even when the overall poverty rate moves rather little.
An important factor in the heterogenous experiences of developing countries in the 1990s is that starting conditions varied immensely between countries undergoing economic reform.
The most important differences appear to be in the physical and human assets of the poor.
In economies where poor people tend to be illiterate, sick, hard to reach and/or marginalized socially, they have less chance of sharing in the gains from growth than in an economy in which such debilities are less severe.
In other words, in countries where the level of income inequality is high, inequality is reduced less by growth than in countries where inequality is relatively low.
These differences are, in turn, associated with long-standing differences in policy regimes.
Suppose you could divide reforming countries into two categories: those whose previous policies benefited the rich, keeping inequality artificially high; and those whose previous policies had the opposite effect, keeping inequality low.
Opening the economy and freeing internal markets may well entail sizable redistribution between rich and poor, but in opposite directions in the two groups of countries.
In fact, the average impact of policy reform on inequality is zero.
Yet there is abundant distributional change going on under the surface.
Policy reforms shift the distribution of income in different directions in different developing countries, as expected, given the diverse starting conditions.
As a result, behind the averages, people are often hurting.
So, both sides in this debate have valid points.
One side smoothes over the diversity in country experiences; the other often ignores the averages, and focuses instead on cases in which high or rising inequality dulls the gains to the poor from growth.
Yet the evidence is compelling that, on average, the gains to the poor from growth outweigh the losses.
It is equally important, however, to understand the variety in outcomes for the poor, so as to understand better what else must be done to assure more growth that directly benefits them.
That is where the debate should now turn.
A World of Vulnerability
ROME – In 2010, global leaders achieved the Millennium Development Goal (MDG) of reducing the share of the world’s poor to half of its 1990 level – five years ahead of schedule.
But rising unemployment and falling incomes underscore the enduring threat of poverty worldwide.
After all, poverty is not an unchanging attribute of a fixed group; it is a condition that threatens billions of vulnerable people.
Despite their shortcomings, income measures are useful in gaining a better understanding of the extent of poverty and vulnerability worldwide.
But the World Bank’s poverty line of $1.25 per day (in purchasing-power-parity terms), which is used in measuring progress toward the MDGs’ poverty-reduction target, is not the only relevant threshold.
When the poverty line is raised to per capita daily spending of $2, the global poverty rate rises from 18% to roughly 40%, suggesting that many people are living just above the established poverty line, vulnerable to external shocks or changes in personal circumstances, such as price increases or income losses.
Three-quarters of the world’s poor live in rural areas, where agricultural workers suffer the highest incidence of poverty, largely owing to low productivity, seasonal unemployment, and the low wages paid by most rural employers.
In recent decades, vulnerability and economic insecurity have increased with the rise of transient, casual, and precarious employment, including self-employment, and part-time, fixed-term, temporary, and on-call jobs.
At-home positions, frequently filled by women, are also on the rise.
Labor-market liberalization, globalization, and unions’ declining influence have exacerbated these employment trends.
At the same time, macroeconomic policies have focused on achieving and maintaining low-single-digit inflation, rather than full employment, while limited social protection has heightened economic insecurity and vulnerability.
During the East Asian crisis of 1997-1998, poverty rose sharply.
For example, Indonesia’s poverty rate soared from roughly 11% to 37% during the crisis, mainly owing to the massive depreciation of the rupiah.
Likewise, following the 2008 global economic crisis, food-price spikes and recession caused the United Nations Food and Agriculture Organization to revise its hunger estimates upward, to more than one billion people.
Considering the FAO’s conservative definition of chronic severe hunger, this is a serious indictment of global poverty-reduction efforts.
Most poor adults in developing countries have to work, if only to survive.
Aside from the working poor, an additional 215 million workers worldwide slipped below the poverty line in 2008-2009, owing to the Great Recession.
Another 5.9%, or 185 million workers, were living on less than $2 per day.
The estimated 330 million working women who lived below the poverty line in 2008-2009 accounted for roughly 60% of the 550 million working poor worldwide.
New estimates by the International Labor Organization (ILO), based on a different methodology from that used by the World Bank, demonstrate that, while the number of those classified as working poor worldwide declined by 158 million from 2000 to 2011 (from 25.4% of workers to 14.8%), progress has slowed markedly since 2008.
Indeed, only 15% of workers, or 24 million people, managed to rise above the poverty line in 2007-2011.
The other 134 million workers who escaped poverty did so earlier, in 2000-2007.
As a result, there were 50 million more working poor in 2011 than projected by pre-crisis trends for 2002-2007.
The lack of basic social protection in most countries exacerbates vulnerability.
The ILO World Social Security Report found high or very high vulnerability, in terms of poverty and labor-market informality, in 58 countries, mainly in Africa and Asia.
Most such countries do not provide unemployment insurance, while more than 80% of their populations lack social-security coverage and access to basic health services.
Indeed, few countries currently provide comprehensive social protection, as defined by ILO Convention 102 (the instrument establishing internationally-agreed minimum social-security standards).
According to the ILO, only one-third of countries worldwide – accounting for roughly 28% of the global population – provide all nine types of protection, meaning that only about 20% of the world’s working-age population (and their families) enjoys comprehensive coverage.
Although all countries offer some kind of social protection or security, in most countries, coverage is severely limited and targeted at specific groups.
As a result, only a small minority of the global population has full, legally guaranteed access to existing social-protection schemes – leaving roughly 5.6 billion people worldwide vulnerable to various degrees.
Vulnerability exists at levels far above the World Bank’s $1.25/day poverty threshold, especially given rising job insecurity and inadequate social protection worldwide.
To address global poverty effectively, global leaders must take a more comprehensive approach that focuses on reducing citizens’ vulnerability.
Powers of the Future
Looking back over the turbulent year that is now coming to an end, one is tempted to focus on what American leaders have come to call the Greater Middle East.
Such a survey would obviously take us to Iraq, to Israel, and Palestine – and to terrorism.
Lasting peace in the Middle East could lead to greater prosperity and cooperation in the world.
But if we take a wider view, the problems of the Middle East appear to be but one aspect of deeper shifts among the powers of the world.
Indeed, tectonic changes became visible in 2004.
We have begun to see the “powers of the future,” to borrow the title of former German Chancellor Helmut Schmidt’s recent bestselling book.
Chancellor Schmidt is certain of two developments. The United States remains the key player, and China’s power will continue to grow.
He is less certain about the future of Europe, Russia, and the Middle East.
To be sure, 2004 has seen the confirmation of America’s hard power – and its voters’ choice of a politics of values rather than of interests.
Americans may not want their soldiers and military hardware in dozens, if not hundreds, of places around the world, but they accept a president who offers simple – often martial – certainties.
One may also wonder whether this president could lead them in another direction, to traditional Republican isolationism.
After all, it is the Democrats who have traditionally taken America to war.
In any case, security guaranteed by military power will continue to be an American concern.
But while America’s hard power dominates the world scene, its soft power declined this year.
The US lost some of its attractiveness for many, and Americans are unpopular in many parts of the world.
The decline in overseas visitors, and notably in the number of foreign students in the US, is the immediate result of stricter visa laws, but it is an important factor in the weakening of America’s global hegemony.
Soft power begins with economic power.
America’s twin fiscal and trade deficits may prove to be solvable problems, but new ways will have to be tried to resolve them.
At a recent conference, US government representatives were unimpressed by European pleas to do something about the deficits – and the falling dollar that has resulted from them. “That is not a European problem,” the Americans responded.
All at once, China is rapidly emerging as a growing economic force.
It not only has considerable dollar reserves, but has also become the manufacturing capital of the world.
American and European jobs increasingly migrate to China.
Early hints at the reaction could be heard in the American presidential election campaign, with the frequent protests against outsourcing and China’s pegged exchange rate.
But the trend will not be stopped.
It is surely only a matter of time – a short time – before China makes its political and military weight felt.
This leaves the uncertain future of Russia and those still in the Russian orbit, like Ukraine.
This year witnessed a decline in democracy and the rule of law across what Mr Putin calls the “former Soviet space.”
The problem is a challenge especially for Europe.
At first sight, 2004 was a good year for the European Union, with enlargement to 25 members completed in May a notable success.
Enlargement was not only a triumph for democracy and the rule of law in the postcommunist countries to the west of Russia, but it is also an indication of the magnetism of the EU, and thus of its soft power.
Eastward expansion of the EU enables the New Europe to emulate the economic dynamism of other recent members, like Spain and Ireland.
Enlargement has produced a Union confident enough to engage more explicitly – and even with elements of hard power – in the Balkans, Afghanistan, and elsewhere.
It has also provided the courage to open accession negotiations with Turkey.
Yet one cannot help agreeing with Chancellor Schmidt when he sees Europe’s future shrouded in uncertainty.
There is no clear recognition of the fact that Europe’s soft power means little unless it is allied with the hard power of the US.
But there was no progress in 2004 in recreating a transatlantic partnership that recognizes the massive changes occurring in world affairs.
Pathetic attempts to go it alone have not made Europe stronger, and anti-Americanism harms Europe more than the US.
Thus, at the end of 2004, the most important global task remains unresolved: creation of a confident nucleus for the Free World.
An alliance of those who espouse and practice liberal democracy might provide a pole of certainty in a highly uncertain world.
Let us hope that 2005 will bring us a few steps closer to that objective.
इबोला के काल में स्वास्थ्य
न्यूयॉर्क - उप-सहारा अफ्रीका में यदि किसी बच्चे को बुखार हो तो उसे तुरंत चिकित्सा मिलनी चाहिए ताकि उसे मलेरिया या निमोनिया से मरने से बचाया जा सके. लेकिन आज जब लाइबेरिया, सिएरा लियोन, गिनी और नाइजीरिया जैसे देशों में इबोला महामारी की तरह फैल रहा है, इससे घबराए लोग ज्यादा से ज्यादा स्वास्थ्यकर्मियों और स्वास्थ्य-सेवा सुविधाओं को बीमारी फैलाने के लिए दोषी ठहरा रहे हैं. यह सुनिश्चित करने के लिए कि जरूरत के वक्त लोगों को इलाज की सुविधा मिल सके यह आवश्यक है कि अग्रिम क्षेत्रों में कार्यरत क्लिनिकों को सुधारा जाए और स्थानीय स्तर पर नियुक्त सामुदायिक स्वास्थ्यकर्मियों में निवेश किया जाए ताकि रोगग्रस्त लोगों तक उनके घर में ही पहुंचा जा सके.
लाइबेरिया में इबोला के फैलने में वहां की स्वास्थ्य सेवा प्रणालियों में मौजूद कमियों का बड़ा हाथ है. आज भी वहां की 40 लाख आबादी में से करीब 28% तक पर्याप्त चिकित्सा सुविधा की पहुंच नहीं है.
2003 की अक्रा व्यापक शांति संधि से वर्षों तक चला गृह युद्ध खत्म हो सकता है, लेकिन इस युद्ध के परिणामस्वरूप वहां केवल 51 डॉक्टर और छिन्न-भिन्न स्वास्थ्य संरचना बची है.
केवल कुछ गिने-चुने सुयोग्य स्वास्थ्य-सेवा पेशेवरों के साथ स्वास्थ्य सेवा प्रणाली के पुनर्निर्माण के लिए समूचे लाइबेरिया के घने वर्षा वनों से आच्छादित ग्रामीण अंचलों में अस्पताल और क्लिनिक बनाने से भी अधिक कुछ करने की जरूरत है. सौभाग्यवश उप-सहारा अफ्रीका की अन्य सरकारों की तरह लाइबेरिया की सरकार भी जानती है कि ग्रामीण क्षेत्रों में हैजा, निमोनिया और मलेरिया के इलाज के लिए सामुदायिक स्वास्थ्यकर्मियों के प्रशिक्षण में निवेश की जरूरत है. पांच साल से कम उम्र के बच्चों की मौत का सबसे बड़ा कारण हैं ये तीन बीमारियां.
स्वाभाविक तौर पर सामुदायिक स्वास्थ्यकर्मियों का अपने समुदायों से गहरा नाता होता है. इनमें पारंपारिक उपचार करने वाले भी शामिल हैं जिससे स्वास्थ्यकर्मियों को औपचारिक स्वास्थ्य-सेवा प्रणाली की पहुंच बढ़ाने में मदद मिलती है. साथ ही, मोबाइल तकनीकें गुणवत्ता नियंत्रण तथा निगरानी में सहायक हैं और सामुदायिक स्वास्थ्यकर्मियों को विशेषज्ञ चिकित्सा सहायता उपलब्ध कराती हैं.
इस साल मार्च में लाइबेरिया के स्वास्थ्य मंत्रालय ने संयुक्त राष्ट्र की एजेंसियों, यूएसऐड तथा स्थानीय व अंतर्राष्ट्रीय गैर सरकारी संगठनों और निजि कंपनियों के सहयोग से अपने सामुदायिक स्वास्थ्य प्रणाली कार्यक्रम के लिए व्यापक उन्नयन योजना बनाई है. लेकिन उसके तुरंत बाद इबोला अपना कहर बरपाने लगा जिससे क्लिनिकों व निरोधक संस्थाओं तथा बीमारों के उपचार के समाचारों पर सबका ध्यान केंद्रित हो गया.
विश्व स्वास्थ्य संगठन (डब्ल्यूएचओ) ने इस महामारी से निबटने में अंतर्राष्ट्रीय मदद जुटाने में केंद्रीय भूमिका निभाई है. इसमें राष्ट्रीय सरकारों तथा डॉक्टर्स विदआउट बॉर्डर्स और अमेरिकी रोग नियंत्रण एवं रोकथाम केंद्रों ने भी अहम योगदान दिया. महामारी अभी भी फैल रही है. जन-स्वास्थ्य समुदाय इससे निपटने के लिए गंभीर प्रयास कर रहा है. क्लिनिक कर्मियों, महामारी विशेषज्ञों तथा अन्य विशेषज्ञों की तैनाती के लिए 10 करोड़ डॉलर कोष का इस्तेमाल किया जा रहा है.
इस संदर्भ में देखा जाए तो मार्च में लाइबेरिया द्वारा पेश की गई योजना में अनुमान लगाया गया है कि राष्ट्रीय स्तर पर सामुदायिक स्वास्थ्यकर्मियों का नेटवर्क बनाने में हर साल 2 करोड़ डॉलर खर्च होंगे. निश्चित तौर पर सामुदायिक स्वास्थ्यकर्मियों पर अन्य अनिवार्य सार्वजनिक-स्वास्थ्य उपायों की कीमत पर निवेश नहीं होना चाहिए सिर्फ इसलिए कि इबोला का प्रसार थम जाए या अग्रिम मोर्चे पर सक्रिय क्लिनिकों को सहायता मिल सके. लेकिन सामुदायिक स्वास्थ्यकर्मियों पर निरंतर निवेश के बगैर अंतर्राष्ट्रीय समुदाय तथा राष्ट्रीय सरकारों के लिए इबोला तथा अन्य महामारियों के प्रसार को रोकना तथा उनके दुबारा फूटने की रोकथाम करना अत्यंत कठिन होगा. याद रखना चाहिए कि पारंपरिक स्वास्थ्य-सेवा प्रणालियों के मुकाबले इन कर्मियों की लागतें बेहद मामुली हैं.
स्वास्थ्य-सेवा प्रणाली के गठन के दो बुनियादी रास्ते हैं. एक में बीच में अस्पताल होता है और चारों ओर क्लिनिक होते हैं. दूसरा रास्ता सामाजिक नेटवर्कों पर आधारित है और इसे समुदाय स्वास्थ्यकर्मियों से गति मिलती है. यदि पहला रास्ता अत्यधिक अनम्य है तो बीमारियां और उनका समाज पर प्रभाव इसके साधनों से भी परे जाता है. यदि दूसरा रास्ता अत्यधिक नम्य (लचीला) है तो तकनीकी रूप से जटिल कार्य करने की क्षमता पर समझौता करना पड़ता है.
उन क्षेत्रों में जहां पहुंच सीमित है और आपसी भरोसे का अभाव है वहां पर संतुलन कायम करना खासतौर पर चुनौतीपूर्ण है. किसी महामारी के बीच में तो ऐसा करना और भी जटिल है क्योंकि इसमें महामारियों के सामाजिक प्रभाव आड़े आते हैं. दूसरे शब्दों में, जब कोई बच्चा या परिवार का सदस्य बीमार पड़ता है तो लोगों की क्या प्रतिक्रिया होगी यह उनके मित्रों और पड़ोसियों के अनुभवों, स्वास्थ्य-सेवा की उपलब्धता तथा इन सेवाओं के प्रति समुदाय के नजरिए पर निर्भर करता है. तदनंतर, यह प्रतिक्रिया तय करती है कि बीमारी किस स्तर तक फैलेगी.
जैसाकि अमेरिकी स्वास्थ्य केंद्रों के विशेषज्ञ बताते हैं, इबोला की रोकथाम में समुदाय स्वास्थ्यकर्मियों की अहम भूमिका है, क्योंकि जिस किसी में भी इसके लक्षण दिखते हैं वह संदिग्ध मरीज बन जाता है. उसके संपर्क में आने वाले सभी लोगों पर तीन सपताह तक नजर रखी जाती है. और रविवार को छोड़कर स्वास्थ्यकर्मी हर दिन सुपरवाइजर को अपने काम की रिपोर्ट देते हैं.
एक संगठन लास्ट माइल हेल्थ ने 300 समुदाय स्वास्थ्यकर्मियों का नेटवर्क खड़ा किया है जो 30 हजार मरीजों की देखभाल करते हैं, तथा लाइबेरिया में कोनोबो जैसी दुर्गभ जगहों पर बुनियादी चिकित्सा सुविधा उपलब्ध करते हैं. संगठन की संकर संरचना नियमित चुनौतियों से निबटने में सक्षम है तथा इसमें अचानक आए किसी बललाव का सामना करने के लिए पर्याप्त लचीलापन भी है.
बरसात का मौसम निकट आ रहा है. इस मौसम में तरह-तरह की महामारियों के फैलने का खतरा बढ़ जाता है. इससे स्वास्थ्य-सेवा प्रणालियों की क्षमताओं पर जोर पड़ता है. तब इस बात की जरूरत बढ़ जाती है कि नागरिकों को इन महामारियों से निबटने के लिए प्रेरित किया जाए, प्रशिक्षित और न्यूनतम् सुविधाओं से सुसज्जित किया जाए. इस कार्य के लिए लक्षित विकास सहायता, घरेलू निवेश, विशेषज्ञ सहायता जैसे मिलेजुले प्रयासों के अलावा उप-सहारा देशों से जमीनी-स्तर का परिप्रेक्ष्य भी चाहिए जिन्होंने अपने समुदाय स्वास्थ्यकर्मियों के नेटवर्कों को सफलतापूर्वक ऊपर उठाया है.
यह बात उन देशों पर भी लागू होती है जहां इबोला के सक्रिय मामले सामने आ रहे हैं. सचमुच, वन मिलियन (दस लाख) समुदाय स्वास्थ्यकर्मी अभियान के पीछे सक्रिय संगठनों के सहयोग की बदौलत ये देश अपने समुदाय स्वास्थ्यकर्मी नेटवर्क को बढ़ाने के लिए कार्य कर रहे हैं. लेकिन उन्हें और ज्यादा सहायता की जरूरत है. पर अंतर्राष्ट्रीय एजेंसियों और विकास बैंकों का ध्यान इबोला महामारी पर केंद्रित है बजाए इसके कि वे इन नेटवर्कों को सुदृढ़ बनाने में सहयोग दें.
अंतर्राष्ट्रीय संगठनों को जानना चाहिए कि उन्हें पारंपरिक स्वास्थ्य-सेवा में निवेश और आपातकालीन-प्रतिक्रिया प्रयासों के बीच चुनाव नहीं करना है. विश्वसनीय स्वास्थ्य-सेवा प्रणालियों में दीर्घकालीन निवेश ही एकमात्र रास्ता है जिससे भविष्य में महामारियों से निबटा जा सकता है. अन्यथा, उप-सहारा अफ्रीका के लोग हमेशा ऐसे स्वास्थ्य संबंधी संकटों से जूझते रहेंगे जिनसे बचा जा सकता है.
स्वास्थ्य सेवा की नई दुनिया
न्यूयॉर्क - पारंपरिक स्वास्थ्य सेवा प्रणालियां संकट में हैं. ओईसीडी में मंहगे अस्पताल व क्लिनिकों का स्वास्थ्य सेवाओं में दबदबा है. इन पर अमेरिका में कुल स्वास्थ्य सेवा व्यय का 97% खर्च होता है. इसके चलते पारंपरिक प्रणालियां लागत संबंधी तंगियों, उच्च गुणवत्ता के लिए जनता की मांग और अत्याधिक प्रत्याशाओं के कारण संघर्ष कर रही हैं.
लेकिन एक बिलकुल अलग प्रणाली है जो गरीब देशों में प्रचलित हैं जो पश्चिमी शैली के अस्पतालों के महंगे खर्च को वहन नहीं कर सकते हैं. यह समुदाय-केंद्रित स्वास्थ्य सेवा है. हमें दोनों तरह की पहुंच की जरूरत हैं, और जरूरत है कि दोनों मिलकर काम करें. अवश्य ही, स्वास्थ्य सेवा के वायदे और वास्तविकता के बीच बढ़ते अंतर ने विकसित व विकासशील देशों में समान रूप से यह गुंजाइश पैदा की है कि नए खिलाड़ी इस क्षेत्र में उतरें जिनका मात्र जीव विज्ञान से ज्यादा सामाजिक व्यवहार से सरोकार हो.
1996 में हार्वर्ड बिजिनेस रिव्यू में अपने सशक्त व प्रभावशाली लेख में डब्ल्यू. ब्रायन आर्थर ने योजना, वर्ग तथा नियंत्रण द्वारा परिभाषित स्वास्थ्य सेवा प्रणाली तथा प्रेक्षण, अवस्थिति और वर्ग रहित संगठन द्वारा परिलाक्षित स्वास्थ्य सेवा प्रणाली के बीच मौजूद महत्त्वपूर्ण भेदों की पहचान की थी. उनके अनुसार, पहली किस्म की प्रणाली का सामग्रियों (पदार्थों), प्रक्रियाओं तथा अनुकूलीकरण से ज्यादा सरोकार है. यह मुख्यतः स्वास्थ्य सेवा तक पहुंच पर केद्रित है और आमतौर पर इससे घटते हुए लाभ मिलते हैं.
इसके विपरीत दूसरी किस्म की प्रणाली मनोविज्ञान, संज्ञान और अपनाने की आपस में जुड़ी दुनिया है. अपनी लचीली संरचना तथा विविध, स्थानीय जरूरतों को पूरा करने की क्षमता की बदौलत यह अपने लाभों को बढ़ा सकती है. यह किसी विशिष्ट उद्योग के हितों द्वारा हांकी नहीं जाती है. यह महंगी स्वास्थ्य सेवा प्रणालियों से होड़ करने की बजाए उन्हें सम्पूरित करती है. आम जन का स्वास्थ्य, स्वस्थ व्यवहार और स्वास्थ्य संबंधी चुनाव कैसे किए जाए ये सब इसकी प्राथमिकताएं हैं.
यह पहुंच हृदय रोग, उच्च रक्तचाप और मधुमेह जैसी अवस्थाओं के लिए विशेष तौर पर प्रासंगिक है जो व्यक्तिगत व्यवहार, शारीरिक संदर्भ और सामाजिक-आर्थिक कारकों को सबसे निकट से परिलाक्षित करते हैं.
मधुमेह का उदाहरण लें. मधुमेह से पीडि़त व्यक्तियों के छोटे से समूह के लिए कुछ बड़ी दवा कंपनियां आपस में होड़ करती हैं. वे उन्हें रक्त-शर्करा नियंत्रण में मामुली सुधार के लिए प्रतियोगी दरों पर नई-नई दवाइयां (नुस्खे) पेश करती हैं. और उनका स्वास्थ्य बीमा कर्ताओं से और स्वास्थ्य सेवा प्रदाताओं से रणनीतिक गठजोड़ होता है. ये कंपनियां मूल रूप से बाजार में अपनी प��ड़ बनाए रखने से सरोकार रखती हैं. उनकी गतिविधियों से उन हजारों-लाखों मोटापे के शिकार लोगों को कोई लाभ नहीं मिलता जिन्हें मधुमेह का खतरा है. उन्हें भी कोई लाभ नहीं मिलता जिनपर इस रोग के प्रचलित उपचार का असर नहीं पड़ता.
परंतु मधुमेह के साथ सुखपूर्वक जीवन बिताने की कुंजी पौष्टिक आहार, सक्रिय जीवनशैली, सामाजिक सहायता और हरेक व्यक्ति की परिस्थितियों के अनुरूप प्रशिक्षण में छिपी है. यह बुनियादी सूत्र मधुमेह व अन्य अधिकांश पुराने रोगों की रोकथाम के प्रयासों का आधार भी बनता है. इतना ही नहीं इससे स्वस्थ लोगों को भी लाभ मिलता है.
सचमुच, हमारे जीवन की गुणवत्ता और प्रत्याशा में पारंपरिक चिकित्सा सेवाओं की बहुत कम (शायद 20%) भागीदारी है. बाकी 80% हमारे स्वस्थ व्यवहार, सामाजिक व आर्थिक कारकों तथा भौतिक पर्यावरण द्वारा निर्धारित होता है. पुरानी बीमारियों की वैश्विक महामारी से निबटने के लिए इस 80% भाग को जानना जरूरी है. और इस कार्य को पारंपरिक स्वास्थ्य सेवा संगठनों के भरोसे नहीं छोड़ा जा सकता है.
अवश्य ही पहले से मौजूद सामाजिक ढांचे पर निर्मित अनेक सफल उद्यम ज्ञात स्वास्थ्य समस्याओं को हल करते हैं और नए मसलों को अनावृत भी करते हैं. इस नई पहुंच की उदाहरण हैं वे तकनीकी कंपनियां, यथा ओमाडा हेल्थ, जो मधुमेह का खतरा झेल रहे लोगों तक उनके घर पर उनकी जरूरत के मुताबिक ऑनलाइन स्वास्थ्य प्रशिक्षण पहुंचाती हैं. ग्रामीण बैंक जैसे सामाजिक उपक्रम भी इसी श्रेणी में आते हैं जो अपने माइक्रोलेंडिंग नेटवर्कों के आधार पर कम खर्चीली प्राथमिक स्वास्थ्य सेवा प्रणालियों का निर्माण कर रहा है. एक और उदाहरण है वन मिलियन कम्युनिटी हेल्थ वर्कर कैम्पेन (दस लाख सामुदायिक स्वास्थ्य कार्यकर्ता अभियान) जो सामान्य जनों को अपने समुदायों में स्वास्थ्य सेवा उपलब्ध कराने का प्रशिक्षण देता है. ये अभियान इथियोपिया, रवांडा तथा अन्य उप-सहारा अफ्रीका में समान माडलों के अनुभवों पर आधारित है.
ऐसी स्वास्थ्य सेवा पहलकदमियों को व्यवहारिक तरीकों से गति प्रदान की जा सकती है. शुरूआत के लिए पूरे ओईसीडी में स्वास्थ्य सेवा पर राष्ट्रीय खर्च को चिकित्सा सेवा पर दिए जा रहे लगभग विशेष ध्यान को हटा कर उन नए खिलाडि़यों को अपनाना चाहिए जो स्वास्थ्य में सुधार लाते हों. इसके अलावा इन नए खिलाडि़यों की महंगे आंकड़ों और पारंपरिक स्वास्थ्य सेवा प्रणालियों की वित्तीय संरचना तक पहुंच होनी चाहिए. चिकित्सकों और नर्सों को नए स्वास्थ्य कर्मियों के साथ काम करने का प्रोत्साहन दिया जाना चाहिए ताकि इस क्षेत्र में बाहरी दावेदारों, यथा विद्यालयों, खाद्य कंपनियों, वित्तीय फर्मों और सामाजिक सेवाओं को भी इस अभियान में शामिल किया जा सके. अंत में सामुदायिक समूहों और पारिवारिक सेवा प्रदाताओं को अधिक समर्थन की जरूरत है जो बेहतर स्वास्थ्य पाने की कोशिश कर रहे लोगों की मदद करते हैं.
पश्चिमी स्वास्थ्य सेवा प्राधिकरण इस बात पर गौर कर रहे हैं. मसलन, वेल्स में ब्रिटेन की नैशनल हेल्थ सर्विस उन सामुदायिक प्रथाओं के साथ परीक्षण कर रही है जो ब्राजील में प्रयुक्त प्रथाओं के समान हैं. अफ्रीकी स्वास्थ्य नेटवर्कों से प्रेरित हो कर न्यूयॉर्क अपने सामुदायिक स्वास्थ्य नेटवर्कों का विस्तार कर रहा है जिससे शहर की अव्यवस्थित सेवाएं आपस में जुड़ सकें.
निश्चित है कि जब तक स्वास्थ्य ढांचे तथा सेवा वितरण के ढांचे को बढ़ाने के लिए तकनीकी प्रगति होती रहेगी तब तक पारंपरिक स्वास्थ्य सेवा का वादा हमेशा ही प्रतिबद्धताकारी रहेगा. तिस पर भी स्वास्थ्य विशेषज्ञों की नई पीढ़ी से सीखने के लिए बहुत कुछ जो समझते हैं कि लोग कैसे फैसले लेते हैं, किस प्रकार सामुहिक प्रयास अधिक स्वस्थ परिवेश का निर्माण करते हैं और किस प्रकार अच्छा स्वास्थ्य बेहतर जिंदगी का साधन है.
अंत में, स्वास्थ्य सेवा की नई दुनिया में असीमित संभावना है क्योंकि इसकी सरहद उस स्थान को छूती है जहां हम रहते हैं और खेलते हैं. यह हम सभी को स्वास्थ्य सेवा विशेषज्ञ और अविष्कारक बनाती है. आखिरकार, किसी चिर रोग के खिलाफ लड़ाई घर में ही जीती या हारी जाएगी.
Precautionary Absurdity
PRINCETON – Many people who advocate draconian measures to counteract climate change base their argument on the so-called “precautionary principle,” which holds that when a possible future disaster would be unacceptably severe, action to prevent it is imperative.
Cost-benefit analysis – balancing the cost of remedial action against the benefit of avoiding disaster – is no longer permissible.
Action to counter the disaster must be taken, regardless of the cost.
This principle leads people to advocate enormously costly actions to prevent disasters that are even more enormous but whose likelihood highly uncertain.
If a disaster is unacceptable, then, no matter how uncertain the likelihood of its occurrence, it must be prevented.
As a result of widespread reliance on the precautionary principle, doomsday scenarios have come to dominate discussion of climate change.
It is easy to imagine disasters so severe that drastic action to prevent them would be reasonable, and advocates of drastic action can easily scare the public with imagined disasters.
Nobody knows enough about the causes of climate change to prove that an imagined disaster is impossible.
What is wrong with the precautionary principle?
It appears to be a statement of the obvious: unacceptable disasters require extraordinary counter-measures.
The problem is that the principle cannot be applied consistently.
The world in which we live is a small garden of well-explored territory surrounded by a dim and dark forest of disasters.
Disasters lurking in the distance are legion: asteroids and comets; world-wide pandemics and plagues; nuclear and non-nuclear wars; droughts, famines, and floods; volcanic eruptions, earthquakes, and tsunamis; human over-population and extinction of non-humans; rising temperatures and sea-levels; falling temperatures and spreading ice ages; exhaustion of clean air and water; disappearance of forests, farms, and fish.
All these disasters – and many others still to be imagined – are possible, and many of them are unacceptable.
The precautionary principle prescribes action, regardless of cost, to prevent all of them.
But this is impossible.
There is no future free of risk.
No matter what we do or fail to do, the risk of unacceptable disasters will persist.
Our resources are limited, and so are the costs we can pay for remedial actions.
There is no escape from balancing costs and benefits.
There is no way we can avoid making difficult choices.
Some disasters are less likely than others, and some remedies are more costly than others.
These are the facts of life that the precautionary principle tells us to ignore.
It sometimes happens that a drastic action designed to prevent an unacceptable disaster may make the disaster worse.
Catastrophic disasters associated with climate change are easy to invent, but the effects of remedial actions may be difficult to predict.
For example, one of the most immediate and severe consequences of climate change could be a rapid rise in sea level.
It is generally believed that the appropriate preventive measure is to stop burning fossil fuels and reduce the abundance of carbon dioxide in the atmosphere.
But the preventive measure is extremely costly, and it might have an effect opposite to our intention.
We know that the sea level rose by roughly 100 meters during the last 12,000 years.
This rise was clearly connected with the melting of the continental ice sheets at the end of the last ice age – that is, it had nothing to do with human activities.
During the last 200 years, a period when we have had accurate measurements from tide gauges, the sea level has continued to rise slowly.
We do not know how much of the recent rise is caused by human activities.
Some of the recent rise, associated with the shrinking of glaciers, is not caused by human activities, since the glaciers have been shrinking for hundreds of years while human activities became significant only in the last century.
The air surrounding Greenland and Antarctica has recently become warmer and more humid.
Warm and humid air will increase melting of ice in low regions at the edges of the ice sheets while boosting snowfall over cold high regions in the interior.
The melting causes the sea level to rise, whereas the snow causes it to fall.
We do not know which of the two effects predominates.
If the Arctic Ocean becomes ice-free in summer, the melting and the snowfall will probably increase sharply.
At that point, the precautionary principle might suggest that we take drastic action to stop burning fossil fuels.
But we had better know for sure which way the response will go before we apply the remedy.
It would be unfortunate if China and India were to impoverish themselves by ceasing to burn coal, only to have the resulting decrease of snowfall over Greenland and Antarctica cause sea levels to rise faster.
The precautionary principle is not a useful substitute for scientific understanding.
Greece’s Bogus Debt Deal
PRINCETON – The process of official forgiveness of Greek debt has begun.
Referred to as “official sector involvement” (OSI), it includes several initiatives aimed at reducing Greece’s debt/GDP ratio to 124% in 2020, from roughly 200% today.
Even as the deal was announced, however, newspaper reports suggested that officials recognized that the measures would be insufficient to meet the target; further negotiations on additional steps would be needed at a politically more convenient moment.
The economist Larry Summers has invoked the analogy of the Vietnam War to describe European decision-making. “At every juncture they made the minimum commitments necessary to avoid imminent disaster – offering optimistic rhetoric, but never taking the steps that even they believed could offer the prospect of decisive victory.”
This strategy needs to be inverted – and Greece offers a real opportunity to get ahead of the curve.
Instead of driblets of relief, a sizeable package, composed of two elements, is the way forward.
First, as Lee Buchheit, the attorney who oversaw the Greek private restructuring, has proposed, maturities on official Greek debt could be greatly extended.
A simple structure would be to make all debt payable over 40 years, carrying an interest rate of 2%.
This would move Greece and its official creditors beyond the continuous angst that now prevails.
The second element of the debt-relief package would be more innovative: If Greece’s economy performs well, the generous extension of maturities can be clawed back or the interest rate raised.
A formula for this could be linked to the debt/GDP ratio – a scheme with advantages that transcend the Greek case.
The idea of linking debt relief to a country’s debt/GDP ratio has been around for a while, but has never gained significant acceptance.
Applying it in Greece would be a highly visible test; if successful, it would set a valuable precedent.
Why bother?
Because the very premise of the current deal and the expectations it sets out are wrong.
First, the notion that there is a smooth transition path for the debt/GDP ratio from 200% to 124% is fanciful.
Second, even if, by some miracle, Greece did reach the 124% mark by 2020, the claim that its debt will then be “sustainable” is absurd.
Thus, continuing down this path will further erode policymakers’ credibility – not that they seem to care – while imposing on the rest of the world a persistent sense of crisis and uncertainty, with real financial and economic costs.
Make no mistake: policymakers’ track record on forecasting Greek economic performance during the crisis has been an embarrassment.
In May 2010, the International Monetary Fund projected – presumably in concurrence with its European partners – that Greece’s annual GDP growth would exceed 1% in 2012.
Instead, the Greek economy will shrink by 6%.
The unemployment rate, expected to peak this year at 15%, is now above 25% – and is still rising.
The debt/GDP ratio was expected to top out at 150%; absent the substantial write-down of privately held debt, which was deemed unnecessary, the ratio would have been close to 250%.
In September 2010, four months after the official Greek bailout was put in place, the IMF issued a pamphlet asserting that “default in today’s advanced economies is unnecessary, undesirable, and unlikely.” The conclusion was that official financing would carry Greece past its short-term liquidity problems.
Calls for immediate debt restructuring went unheeded.
Six months later, after substantial official funds had been used to pay private creditors, the outstanding private debt was substantially restructured.
Such were the errors committed over short time horizons.
Relatively speaking, 2020 is an eternity away.
Even assuming better forecasts, the projection of 124% could be a gross underestimate.
The precision of the numbers underpinning the deal is a façade, if not a reflection of an alternate reality.
And, again, even if Greece somehow did achieve the 124% milestone, its debt would still not be sustainable.
At that point, Greece would merely be where it started in May 2010.
The most reasonable comparison is with Latin American countries during their debt crises in the 1980’s and 1990’s.
Despite significantly lower debt/GDP ratios and continuous debt restructuring, they eventually needed the large debt reduction that came with the issuance of Brady bonds to achieve some breathing room.
Getting ahead of the curve will give Greece a realistic chance of controlling its own destiny.
It will also be a reminder of the dangers of rushing in with official money where private debts have become unsustainable.
Staying the course, as Summers warns, will lead only to “needless suffering” before that course inevitably collapses, bringing Greece – and much else –­ crashing down.
Prepare Now for the Return of SARS
Every winter, millions of people around the world suffering from flu-like illnesses visit their doctor.
Some patients actually are infected with flu; others have colds or other respiratory infections, many of which also peak in the winter.
This coming flu season there will be a new twist: physicians will have to be aware that hidden among these patients could be a small number with SARS, a respiratory disease that is also likely to be seasonal and whose early symptoms are almost indistinguishable from those of the flu.
If even a few SARS cases are present among the millions of flu-like cases that will appear this autumn, it will be critical to identify and isolate them to prevent a repeat of the epidemic that scourged China earlier this year.
But among the vast number of flu and other cases, finding these cases will be difficult.
Paradoxically, the best way for health authorities to prepare for a possible return of SARS this winter is to make special efforts to reduce the spread of flu and speed its diagnosis.
This may be a tough sell politically.
Unfortunately, if predictably, the remarkable success of efforts around the world to control the transmission of SARS--particularly in Taiwan and mainland China--has led some to question whether the threat of SARS was ``overblown.''
But the very reason we have the luxury to ask such questions is that the spread of the infection was contained by exceedingly stringent measures.
Rapid and effective isolation of infected cases, together with efficient tracing and monitoring of the contacts made by those infected with SARS, allowed public health officials in Hong Kong, Toronto, Singapore, and Vietnam to contain the epidemic.
Screening travelers from affected regions may have prevented significant epidemics elsewhere.
Health officials around the world should maintain their vigilance and prepare for the possibility that renewed control efforts will be required if SARS resurges.
Indeed, the experience with SARS in Toronto, where cases escaped detection and led to a second outbreak, stands as a warning against excessive optimism about the apparent control of the larger and more geographically dispersed outbreaks in Taiwan and mainland China.
These epidemics may, in fact, be eliminated entirely in coming months. But it is at least as likely that some transmission will persist, or that the virus will be reintroduced into human populations from animals.
Like other respiratory infections, SARS may be easier to contract, more severe, or both, during winter.
Continued surveillance and infection control measures will be required to ensure that the accomplishments of the last few months are not undone by a few undetected cases that touch off new SARS hot spots.
Surveillance will not be easy.
SARS is difficult to diagnose definitively, and during flu season, it will be much easier to miss a case of SARS.
With current tests, it is impossible to verify that a patient has been infected with SARS until several weeks after symptoms begin.
Experience around the world shows that SARS cases must be isolated within a few days of the onset of symptoms in order to control the spread of the virus.
The dilemma is that playing it safe--by treating every flu-like illness with the precautions appropriate for SARS--would present an enormous logistical, operational and financial burden to health care systems.
But to ignore the possibility that some such patients are SARS cases risks the start of new outbreaks.
We don't have vaccines or rapid tests for SARS, but we do have them for flu.
We need to use them.
Influenza vaccine supplies should be increased so that more individuals are inoculated.
Extra efforts should be made to encourage more people to get a flu shot, including those outside the traditional ``target'' groups, such as elderly people and health care workers.
By preventing influenza, these vaccines reduce the number of individuals to be evaluated for SARS.
Kits for rapid diagnosis of influenza infection already exist.
If more physicians had routine access to these kits, they could tell on the spot whether a patient had influenza and eliminate the need to treat him or her as a possible SARS patient.
Even assuming the best-case scenario--that SARS is eliminated by the end of this year--increased flu vaccination and better availability of diagnostics will benefit millions of people worldwide.
According to the World Health Organization, as many as half a million people die each year from influenza.
Many more are hospitalized with severe illness.
Wider vaccination will protect people from infection and block the spread of the virus.
Broader use of rapid diagnostics will permit more effective treatment for flu cases at risk of developing serious complications.
If SARS is brought under control worldwide in the next few months, public health authorities will have achieved a great triumph.
Successful containment of SARS might mark the first time in history that person-to-person, respiratory transmission of a major pathogen has been halted globally without the use of antibiotics or a vaccine.
But we would be foolish to think we have seen the last of SARS, and it will take time for scientists to develop diagnostics, treatments, and vaccines.
In the meantime, we should intensify the fight against an older nemesis, influenza, both for its own sake and as a way to prepare for the return of SARS.
Prescription Financial Products
NEW DELHI – One positive fallout of the financial crisis of 2007-201? is our realization that financial products can be as complex and dangerous as drugs.
This realization has led to innovative ideas and experimentation with new laws, regulations, and institutions around the world.
In India, the government has announced the establishment of the Financial Stability and Development Council (FSDC) to address inter-regulatory coordination issues and provide macro-prudential supervision.
In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and new initiatives to monitor the safety of financial products, could alter the architecture of finance.
Several proponents of these new ideas have openly used the analogy with drugs.
It has been argued that if, in 2007, the US had a Financial Products Safety Commission akin to its Food and Drugs Administration, the market would not have been flooded with “teaser” mortgages that entangled millions of households in chains of predatory credit.
What is especially sophisticated about the new ideas cropping up in the US, Europe, India, China and elsewhere is the recognition that, as with drugs and toys, it is impossible to say in advance which financial products we should allow and which we should not, because we cannot conceive of all the products that can and will come to market.
Hence, the need for a judgmental body that can look at a new product and form an opinion about its desirability.
Indeed, there is a worrying aspect to the new plans: they must tread a narrow path between reckless freedom for financial institutions, which contributed to the recent global financial crisis, and over-caution, which can suffocate innovation and create inefficiencies.
Consider a teaser loan, which initially charges low or even no interest, with much higher rates kicking in at a later date.
To be sure, this is a dangerous product, and it did cause many families to fall into an unsustainable debt trap.
But such loans can be of great value to sophisticated firms and households that may have good reason to believe that their future earnings will be higher than their current earnings.
Such entities would be able to make investments that would not be possible otherwise.
This is just one example.
It is impossible to anticipate the numerous financial products that human ingenuity can create, and that can be dangerous to use but of great value to some.
The risk created by many of the regulatory measures under consideration in today’s crisis-scarred world is that they may end up over-regulating our markets to the point of blocking the emergence of valuable new products.
But there is a way out of this conundrum.
In creating new financial regulations, we need to take the medical analogy one step further – by creating the equivalent of the prescription.
Instead of banning or freely allowing all dangerous products, we need to identify products that are valuable to some customers but not all – call them “prescription financial products” – and create a body of registered finance professionals (RFPs) who are empowered to certify the purchase of these products by individuals.
For example, you are planning to buy a house.
Your local bank offers you what is certified to be a teaser loan – a prescription product.
You can take such a loan provided that an RFP approves such a contract.
In brief, just as we do not ban steroids because they are dangerous, but require that buyers have a valid prescription, we should institutionalize caution in how financial products can be used – and by whom.
This option could vastly shorten the list of products that will need to be banned outright.
We should, however, avoid the medical convention whereby each product is either over-the-counter or prescription, regardless of who is buying the product.
In order to keep the system lean, there should be a provision for exempting some individuals and firms – those sophisticated enough to handle their own affairs, or well off enough to deal with financial failure – from the requirement of an RFP’s approval before buying a prescription financial product.
The reason I argue for this provision is my positive experience in India, having recently moved here from the US.
A few months ago, I went to meet the owner of our local drugstore.
Without encumbering him with any prescription, I told him somewhat sheepishly that I was going on an extended foreign trip and wanted to keep a precautionary strip of antibiotic tablets with me.
He looked me up and down, sized me up, and then said, “Since you are going for so long, I would suggest you keep two strips.”
President Bush Goes Soft
The first term of George W. Bush’s presidency was marked by unilateralism and military power.
The United States was the world’s only superpower, so others had to follow.
The result was a dramatic decline in America’s “soft” or attractive power.
Secretary of Defense Donald Rumsfeld said he did not know what soft power was.
Now it is back in fashion in Washington.
Bush’s second inaugural address was devoted to the power of liberty and democracy.
Such rhetoric is not new to American presidents.
Harry Truman spoke of defending free people everywhere, and Woodrow Wilson spoke of promoting democracy.
The neo-conservatives in Bush’s first administration were in that tradition, but ignored the fact that both Wilson and Truman were also institution-builders who consulted other countries.
In dropping that half of Wilson’s approach, they stepped on their own message, reducing its effectiveness.
The tone at the beginning of the second Bush administration is different.
As Secretary of State Condoleezza Rice said recently in Paris: “I use the word ‘power’ broadly, because even more important than military and indeed economic power is the power of ideas, the power of compassion, and the power of hope.”
Bush not only chose to visit Brussels, the capital of the European Union, on his February trip to Europe, but stated that what “we seek to achieve in the world requires that America and Europe remain close partners.”
Even Rumsfeld is trying to be conciliatory!
Will Bush’s new approach succeed?
On a recent trip to Europe, I encountered both encouragement and skepticism.
Many people welcomed the new tone, but wondered if it was simply sugarcoated cynicism.
Words must be matched by deeds before people are convinced.
One place to look to see if deeds are forthcoming is in Bush’s latest budget.
The budget cuts discretionary spending (other than defense and homeland security) by nearly 1%, and slashes as many as 150 domestic programs.
Yet, in this climate of fiscal stringency, he calls for increased contributions to international organizations, the Millennium Challenge Account to provide assistance to countries with a commitment to making progress in poverty reduction, and the Global HIV/AIDS Initiative.
Bush’s new budget also includes an increase in funding for public diplomacy.
The allocation for the State Department’s educational and cultural exchange programs, including overseas research centers, libraries, and visitor programs, is boosted by nearly 25%.
As Bush’s budget request to Congress puts it, “Rarely has the need for a sustained effort to ensure foreign understanding for our country and society been so clearly evident.”
This comes after a first term in which public diplomacy was a neglected stepchild, and a Pentagon advisory panel summed up the situation as a “crisis.”
Even with these increases, there is a long way to go to improve America’s standing.
A recent non-partisan report by the Public Diplomacy Council called for a new Agency for Public Diplomacy within the State Department, 24-hour English-language broadcasts by the Voice of America, and a fourfold budget increase over the next five years.
The Bush administration still has much to do in promoting ideas, but early indications suggest a change from the neglect of the first term.
But it will not be enough for Bush to start his second term with grand rhetoric about values and increased investment in public diplomacy.
A country’s attractiveness or soft power stems partly from its culture and values (where they are attractive to others), but it also grows out of a country’s policies when they are seen as legitimate, consultative, and inclusive of the interests of others.
Unless the policies fit the values, the discrepancy will give rise to charges of hypocrisy.
At a minimum, Bush will need to pursue policies – in a more consultative manner – that seek a political solution in Iraq and progress in the Israel-Palestine peace process.
Here too, the early signs are encouraging.
The 60% turnout in the January elections and the scenes of Iraqis risking their lives to vote has led to hopes that a political settlement in Iraq may be possible.
The elections are but a first step; the insurgency continues; civil war remains possible.
Nonetheless, the elections may have softened some of the sense of illegitimacy that has clouded Bush’s Iraq policy.
Similarly, with regard to the Middle East peace process, the replacement of Yasir Arafat by Mahmoud Abbas, the Palestinian elections, and the meetings between Abbas and Ariel Sharon suggest progress.
On difficult nuclear issues, such as North Korea and Iran, Bush has pursued multilateral consultation and coordination with other powers.
Of course, this still leaves unresolved other multilateral issues, like the International Criminal Court and global climate change.
There is little prospect that Bush will reverse his rejection of the Kyoto Treaty, but it will be interesting to see how far he accommodates Prime Minister Tony Blair’s efforts to make climate change a priority during Britain’s period as chair of the Group of Eight major economies.
It is much too early for a verdict on Bush’s second term policies.
As he looks ahead to the verdict of history, he seems to realize that hard power alone will not consolidate his reputation, but he remains hostage to incidents and accidents that could drive even his best-laid plans off course.
Nonetheless, the most striking thing at this point in Bush’s second term is his belated discovery of the importance of diplomacy and soft power.
President Lyndon Ronald Bush
President Bush has fired and replaced his Treasury Secretary and chief economic advisor.
Will those changes make any difference?
Economic historian Harold James sets the Bush economic strategy in its historical context and hears dangerous echoes of past American failures.
In the 1990s, the international economic and financial system was more stable than in previous decades, despite the turbulence of 1997-98.
But that stability is now disappearing fast--along with the fundamental consensus on which it rested.
One of the most important elements of the 1990s consensus--exported globally as the "Washington Consensus"--was the idea of fiscal responsibility.
In the US, the commitment to fiscal rectitude followed President Clinton's early realization that balanced budgets would stabilize financial markets, reduce borrowing costs, and thus generate higher growth.
He carried this policy through a skeptical Congress, even at the price of abandoning many of the social welfare promises he made during his 1992 presidential campaign.
In Europe, meanwhile, the consensus was embodied in the European Union's Growth and Stability Pact and made operational in the rigid Maastricht criteria that capped government budget deficits at 3% of GDP.
Now the fiscal consensus of the 1990s is under sustained attack worldwide.
Portugal, Germany, and France proudly declare their intention to deviate from the Maastricht criteria.
But it is America that is leading the attack on fiscal discipline.
The US federal budget deficit for 2001-2 was $159 billion, quite respectable (in percentage terms) by European standards.
But more red ink is likely, owing to the current administration's irresponsible commitment to tax reduction, and, unlike Clinton, or, indeed, the first President Bush, George W. Bush does not intend to break his campaign promises.
President Bush's view on taxation is strikingly different from his predecessor's.
Bush's election program promised big tax cuts, which he followed through on.
When asked about the ballooning deficit, he explained that "we have a deficit because tax revenues are down;" and that the tax relief package "has helped the economy, and that the deficit would have been bigger without the tax-relief package."
So, in Bush's eyes, tax cuts reduce the federal deficit.
But this is precisely the so-called "supply side" argument that the President's father once famously mocked as "voodoo" economics when Ronald Reagan expounded it.
Two scare stories underlie this theory.
The Japanese scare story of the 1990s, in which monetary and fiscal policy prove powerless in the face of a sustained deflation, is the economic trauma now used to rationalize Bush's vast 10-year program of tax cutting.
September 11 th is the second scare story.
At the beginning of 2002, the President proposed a $48 billion boost in military spending--a sum larger than the total defense budget of every country except Russia.
Overall, the new US military budget is $396 billion, just under 4% of GDP.
A war with Iraq would add around another $100 billion, or 1% of GDP, to the defense budget (the war in Afghanistan cost a humble $10 billion.)
Precedents abound in American history for using scare stories to justify fiscal expansion.
Indeed, today's bout of fiscal stimulation seems historically better founded than the brief episode of stability in the 1990s.
In the 1980s, President Reagan believed that America was losing its entrepreneurial edge, and that Japan and Europe were overtaking it, so he let the deficit rip.
In the 1960s, President Johnson feared the risk of a new 1930s-style Great Depression, and responded with an increase in domestic social spending ("the Great Society") at the same time as the escalation of the war in Vietnam boosted military expenditure.
In both periods, fiscal laxity stoked volatility in the foreign exchange markets, where the surge in inflation in the 1960s destroyed the fixed exchange rate system of Bretton Woods.
This generated a wave of mutual recrimination across the Atlantic, with Europeans (especially the French and the Germans) accusing the US of irresponsible inflationism, while Americans blamed Europe for refusing to grow fast enough.
The episode greatly strengthened anti-Americanism in Europe.
In the 1980s, the dollar first soared against the Yen and European currencies, then it collapsed.
Again, both sides of the Atlantic played a mutual blame game.
Such instability would matter little if it produced only dizzying movements on currency traders' computer screens.
But those movements produce big changes in real exchange rates, i.e., in manufacturing competitiveness, and thus fuel demands for trade protection.
When the dollar strengthened at the end of the 1960s and in the mid-1980s, American industry felt threatened by foreign imports and pressed for changes in the trading regime.
A new wave of deficits and exchange-rate instability would thus call into question the most fundamental and beneficial legacy of the 1990s: the major push for trade opening and liberalization.
Sometimes people are so confident about the robustness of globalization that they assume that it can't be reversed: but this is exactly what each round of financial and economic turbulence threatens.
The world is now more integrated now than in the 1960s or in the 1980s.
Recent events suggest that we are more vulnerable that ever to a sudden and sharp backlash.
Tolerance or War
WASHINGTON, DC – Throughout history, mistreatment of minorities – whether ethnic, religious, linguistic, cultural, regional, ideological, sexual, or other – has fueled violence and devastated societies worldwide.
Egregious cases in the last century include the Holocaust in Nazi Germany, the Khmer Rouge killing fields in Cambodia, and the genocide in Rwanda.
The abuse of minorities, and reactions to it, often are linked to fault lines in conflicted societies.
Minorities tend to experience economic inequality and political marginalization.
This negative trend shows no sign of waning.
While international treaties, national laws, more and stronger institutions, improved education, and efforts by organized religious groups to foster respect for minorities can help to ameliorate the problem, collective efforts have so far fallen woefully short.
The problem will not disappear until people stop tolerating intolerance.
And recent history – from the indiscriminate killings by the Lord’s Resistance Army in central and eastern Africa to the attacks against Christians by the Pakistani Taliban – shows that bigotry remains deeply embedded.
Moreover, globalization and instantaneous communication technologies have made it impossible to contain conflict within national borders.
Domestic economic and political grievances can now buttress discontent across regions and continents.
Ethnic conflict in countries such as Kenya, Sudan, Sri Lanka, and the former Yugoslavia underscores the challenge of reducing – and eventually eliminating – intolerance.
But some other multiethnic societies such as Tanzania and Burkina Faso have largely escaped communal conflict.
Others, including Belgium and Cameroon, have avoided serious conflict, but have experienced significant acrimony over the treatment of linguistic and regional minorities.
And, in different periods, Lebanon has managed and mismanaged official policy toward religious and ethnic minorities.
Understanding the factors at play in these countries can help policymakers and religious and civil-society leaders to address intolerance.
Intolerance emanating from organized religion is perhaps the most inexcusable.
On the one hand, all organized religions teach peace and love for others, and they have often intervened successfully to prevent or mitigate conflict.
On the other hand, at certain times in their history, organized religions have allowed, encouraged, and even propagated hatred and violence.
And fringe elements often use religion to espouse violence against particular groups.
In recent decades, Roman Catholic and Protestant leaders failed to speak out early and effectively against the genocide in Rwanda.
Similarly, rather than condemning the adoption of terrorist tactics by the Taliban in Afghanistan, Boko Haram in Nigeria, and al-Shabaab in Somalia, and the destruction of Sufi shrines in Mali by Ansar Dine, a radical Islamist sect, Muslim leaders have remained largely silent.
While none of these groups represents a majority point of view, they do exert significant influence and probably believe that they are acting in the interest of the majority.
Developments following the Arab Spring might provide some indication of the prospects for religious tolerance.
In Egypt, with its 10% Coptic Orthodox Christian minority, the Muslim Brotherhood’s Mohamed Morsi won the presidency in a free and fair election, after which Morsi resigned from the party, saying that this would allow him to represent all Egyptians more effectively, and promised that he would respect minority rights.
Yet subsequent actions designed to give him unprecedented executive power raise concerns about these early positive steps.
By protecting minorities, Morsi could demonstrate to other governments and political movements the importance of minority rights and encourage them to behave likewise.
But it remains to be seen whether his Islamist political base, including hardline Salafists, who won some 20% of the parliamentary vote, will be tolerant of the Christian minority in the months and years to come.
Syria will be an even more important test.
The Alawites, who comprise only 11% of the population, dominate President Bashar al-Assad’s crumbling regime.
While the ruling minority has been generally tolerant of Christians, Kurds, Druze, and Turks, who together comprise 29% of the population, the regime has long oppressed the Sunni majority.
If a Sunni-controlled government replaces the current leadership, its decision to protect minorities’ rights would be particularly encouraging.
Democratic governments are often perceived as more respectful of minorities, given that, unlike autocratic regimes, a democratic system with an elected legislature, independent judicial system, strong civil society, and free press provides citizens with opportunities to express their views and pursue justice.
But, while democracies do have a better record of protecting minorities, a democratic system does not guarantee respect for minorities any more than autocracy ensures their repression.
An enlightened autocrat can be just as protective of minority rights as a solidly democratic government.
That said, when it comes to respecting minority rights, democracies have a far better record than autocracies.
This is one of the main reasons why, throughout history, democracies have rarely fought each other.
This commentary is part of the Carnegie Council Centennial projects.
Preventing Europe’s Next Banking Crisis
As shockwaves from America’s subprime disaster continue to reverberate, there is growing doubt about Europe’s ability to handle a financial crisis on a major scale.
Severe lapses in bank regulation – in Germany, Britain, and perhaps France – have damaged the credibility of national systems of supervision.
But this is only part of the problem.
The European Union remains hopelessly ill-equipped to handle the crises that haven’t yet happened: cross-border crises sparked by EU banks’ increasing interdependence.
EU financial integration began in earnest in the 1980’s, and the European Commission and European Council made great strides in financial-sector reform.
Among the milestones were the decisions in 1986-1988 to remove all restrictions on cross-border capital flows, and the launch in 1999 of a legislative action plan on financial services.
The euro was introduced and quickly became the world’s second currency, behind the dollar.
Perhaps less conspicuous, the EU’s decision to adopt International Financial Reporting Standards in 2000-2002 triggered an extraordinary move toward the global harmonization of accounting rules.
Meanwhile, the Commission’s steadfast defense of competition in the banking sector – particularly in Portugal, Germany, Italy, and Poland – ended an era of protectionism in the guise of prudential control; this helped to spur cross-border financial integration to an extent unprecedented in developed economies.
These achievements came during a period of remarkable stability in Europe’s financial markets.
Even during the 1992-1993 dark days of the European Monetary System, Europe looked like a safe haven in an unsettled financial world.
Many countries outside the European Community suffered banking crises, including neighboring Norway, Sweden, Finland, and Turkey, as well as many East European nations during their transitions from communism.
By contrast, the most serious bank failures inside the EC in the 1990’s – including BCCI, Crédit Lyonnais, and Barings – had only a limited fiscal cost and a negligible impact on growth.
Later, corporate governance scandals in Asia and then in the US, notably after the dot-com bubble and the accounting debacles at Enron, WorldCom, and others, encouraged Europeans to think that the “old continent” had somehow preserved higher standards.
The subprime-induced storm ended that fair-weather complacency.
From the point of view of public policy, three points can already be made in its wake.
First, the good news: the European Central Bank proved itself an efficient lender of last resort to Europe’s financial system.
When the crisis started in earnest in August 2007, the ECB reacted quickly and intervened as long as the inter-bank market needed support.
Banks in the euro zone and beyond all benefited.
By contrast, the Bank of England’s reluctance to provide liquidity – because of concerns about “moral hazard” – was a poor choice.
Second, however, national banking supervision in Europe fell far short of requirements and its overall credibility is now in question.
German authorities have been deplorably tolerant of commercial bank involvement in complex asset-backed securities investments, which were kept off their balance sheets via so-called “conduit” operations in Ireland.
Even if the three German banks most stricken by the credit crunch – Sachsen LB, IKB, and West LB – had technically complied with capital adequacy requirements, their “conduits” represented high risk factors at around 30%, 20%, and 13% of their total assets, respectively.
Much stronger supervision was needed.
In Britain, the Northern Rock meltdown highlighted problems with the three bodies responsible for financial stability: the Treasury, the Financial Services Authority, and the Bank of England.
In France, doubts were cast on the risk controls at major investment banks – first Calyon, then Natixis, and then most dramatically in January 2008, Société Générale.
Finally, the current financial turmoil highlights a long-standing but urgent problem for Europe: the lack of credible arrangements for the management of cross-border banking crises.
Until recently, most banks focused on their country of origin, so risks largely arose under national systems of supervision.
But Europeans banks have now dramatically expanded their operations across the EU.
Ten years ago, non-domestic assets were barely one-sixth of the total European assets of the EU’s largest banks; the proportion today has grown to one-third.
By contrast, the proportion of assets held outside the EU is almost unchanged.
Cross-border mergers and acquisitions are likely to continue apace once the current market turbulence is over, further increasing the likelihood of a major cross-border banking crisis.
Both economic theory and past experience show that scattered national regulators who face conflicting pressures cannot efficiently manage such crises.
Without a framework for more centralized supervision of a limited number of major international banks, the cost of a future cross-border crisis involving one of them is likely to be larger than Europe’s economy can afford.
There are therefore very good reasons to put discussion about new EU-level prudential institutions high on the policy agenda.
The exact arrangements will have to be decided, but they must allow quicker and better-informed decision-making while respecting national fiscal prerogatives.
A system built on a strictly limited mandate could be both more efficient and less controversial than some single, all-encompassing financial regulator.
No doubt there will be difficult political and technical issues to resolve, but the current credit chaos has generated a fresh feeling of urgency.
Even Britain, an enduring opponent of EU institutions for financial regulation, may decide that its own interests as Europe’s financial hub would be better served by reform.
As Walter Bagehot once famously said, “Money will not manage itself.” The private sector cannot act alone to sort out the financial mess; it needs support from well-adapted public institutions.
An up-to-date system of EU supervision is more crucial than ever if Europe’s financial system is to serve its proper purpose.
Preventing the Euro’s Next Crisis
LUXEMBOURG – Much dedication and energy are currently being devoted to institutionalizing a crisis-management mechanism for the euro area.
This is a good and important goal.
But a far more significant challenge – largely covered in the accompanying debate – is the need for crisis prevention.
At the European Union’s pre-Christmas summit, European heads of state and government agreed in principle to replace the Luxembourg-based European Financial Stability Facility (EFSF), which was thrown together practically overnight in May 2010, with a new, permanent European stability mechanism in 2013.
That decision – and the speed with which it was reached – reflects the insight that the euro area’s institutional framework will remain incomplete until there are clear rules for handling financial crises.
But, while it is clear that the euro area will have solid and well-equipped quarantine wards should it once again be afflicted by financial contagion, a vaccine to prevent the infection would be far more effective.
Unfortunately, developing one is receiving too little attention in the political arena.
The starting point should be the weaknesses of the euro area’s rules and regulations.
The monetary union’s distinctive feature is the absence of a common state, despite the single currency.
The euro’s architects were well aware that the participating states’ maintenance of sound public finances was a vital precondition for the new currency’s stability.
A compromise was found with the Stability and Growth Pact (SGP) and its provisions for adhering to the Maastricht criteria, which sought to quantify the fiscal soundness of sovereign states without actually interfering with their budget and tax policies.
Today, we know that this was a poor compromise.
There has been a lack of political will to make a clear commitment to a stability-oriented fiscal policy, illustrated by the weakening of the SGP at the instigation of Germany and France in 2005.
And individual euro-area members have since neglected to observe even the discipline required under the weakened version of the pact.
Indeed, there have been nearly a hundred violations of the SGP’s deficit ceiling (3% of GDP) since the euro was introduced – and all have gone unpunished.
Given these repeated breaches of the SGP’s deficit requirements, together with a similar lack of commitment to the pact’s debt limit (60% of GDP), it is hardly surprising that punishment for some states has come from the markets.
The debt crisis in the euro area has highlighted the unwillingness or inability of politicians to maintain a fiscal policy consistent with the stability requirements.
Instead, both long-term objectives and sustainable public finances have been sacrificed for the short-term promise of electoral success.
This implies the need to separate national debt management in the euro area from short-term electoral constraints.
What is required is a stronger emphasis on automatic sanctions for fiscal profligacy and excessive debt than is contained in the EU Commission’s current proposal for reform.
It is all well and good to counter undesirable economic developments at an early stage, as the Commission’s plan promises, but the time to begin is not when fiscal distortions actually threaten.
Such distortions are generally preceded by a buildup of macroeconomic imbalances.
For a while, booming or overheating real-estate markets and a thriving, but oversized banking sector can disguise a gradual loss of competitiveness and risks to fiscal sustainability, as occurred in the euro area.
Only when it was too late did seemingly solid national budgets come under substantial pressure.
Effective prevention must start when undesirable economic trends arise.
An independent body of experts that publicly calls for member states to correct their macroeconomic course – based on objective and comprehensible indicators, such as unit labour costs – could make an important contribution in this regard.
Of course, Europe’s political class doesn’t like suggestions like this, because they entail surrendering some degree of national sovereignty.
After all, public finances are a major&#160; competency of politics.
But wouldn’t that loss be offset by greater solidarity in case of a crisis?
It is worth noting that sovereignty’s defenders never complained when the euro brought their countries the low inflation and interest rates of the euro’s most stable predecessor currencies in exchange for handing over their monetary-policy competencies to the European Central Bank.
A stable currency and sound public finances are two sides of the same coin – that’s just how it is.
Recent experience offers us an opportunity to extend EU institutions in a way that markedly reduces the likelihood of a new crisis.
That means improved rules and regulations that place greater emphasis on crisis prevention than on crisis management.
Those unwilling to pay the price of handing over national sovereignty in some areas tacitly accept that the eruption of a new crisis is only a matter of time.
When it does, better-equipped quarantine wards will be poor consolation.
Preventing Toxic Stress in Children
Cambridge – What if political leaders around the world could improve school achievement and job readiness, reduce crime, and extend healthy life expectancy – but the results would not be seen until after they left public office?
Would they have the political courage to act now in the best long-term interest of their people?
Or would they become mired in ineffective, poorly-funded attempts to obtain quick results, and then say it couldn’t be done?
Thanks to a remarkable convergence of new scientific knowledge about the developing brain, the human genome, and the effects of early experiences on later learning, behavior, and health, these are not hypothetical questions.
We have the knowledge to secure our future by improving the life prospects of all our young children.
What is needed now is political vision and leadership.
Scientists can now credibly say that the early childhood years – from birth to age 5 – lay the foundation for later economic productivity, responsible citizenship, and a lifetime of sound physical and mental health.
Conversely, deep poverty, abuse, neglect, and exposure to violence in early childhood can all lead to toxic stress.
In contrast to normal or tolerable stress, which can build resilience and properly calibrate a child’s stress-response system, toxic stress is caused by extreme, prolonged adversity in the absence of a supportive network of adults to help the child adapt.
When it occurs, toxic stress can actually damage the architecture of the developing brain, leading to disrupted circuits and a weakened foundation for future learning and health.
The lasting, neurobiological effect on young children who experience toxic stress leads to a far greater likelihood of anti-social behavior, lower achievement in school and at work, and poor physical and mental health – all of which society addresses at great cost.
Deep poverty is but one risk factor for toxic stress and its long-term consequences.
The greatest harm comes from the cumulative burden of multiple risk factors, including neglect, abuse, parental substance abuse or mental illness, and exposure to violence.
With each additional risk factor, the odds of long-term damage to brain architecture increase.
Neuroscience and the biology of stress help us to begin to understand how poverty and other adversities are literally built into our bodies.
Prolonged activation of the body’s stress system during early development can damage the formation of the neural connections that comprise our brain architecture and set our stress-response system at a hair-trigger level.
We can thus comprehend why children born into such circumstances have more problems in school, are more likely to commit crimes, and are more prone to heart disease, diabetes, and a host of other physical and mental illnesses later in life.
By addressing the circumstances that can produce toxic stress – always asking, “How can we best protect our children?” – local, national, and global leaders would improve not only the life prospects of their youngest citizens, but also outcomes for their societies.
A wide range of policies and practices that support positive relationships and quality learning experiences – at home, in early care and education programs, and through targeted interventions – can have a positive impact if based on solid evidence and matched to the specific needs they are expected to address.
Beyond their short-term benefits to individuals, extensive economic analysis also has demonstrated significant financial benefits to society for years to come.
Science points to three things that we can do to level the playing field:
· Make basic medical services and early care and education available to all young children;
· Provide greater financial support and rich learning experiences for young children living in poverty; and
· Offer specialized services for young children experiencing toxic stress from difficult life circumstances.
The scientific principles of early childhood development do not vary by family income, program type, or funding source.
In advanced countries, programs that screen for adversity and respond to the specific health and developmental needs of individual children and families can yield benefits that far exceed their costs.
In developing countries, shifting the focus of international investments from an exclusive focus on child survival to an integrated approach to early childhood health and development offers greater promise than addressing either domain alone.
Children burdened by significant economic insecurity, discrimination, or maltreatment benefit most from effective interventions.
Neuroscience, child development, and the economics of human capital formation all point to the same conclusion: creating the right conditions for early childhood development is far more effective than trying to fix problems later.
Finally, leadership is about more than smart economic decisions.
It is also about moral responsibility, wisdom, judgment and courage – and about leveraging knowledge to promote positive social change.
The negative consequences of poverty and other forms of adversity are not inevitable.
The gap between what we know and what we do is growing and increasingly unconscionable.
The time for leadership on behalf of vulnerable children is now.
Preying on Pensions?
As Argentina's economy lost access to credit in late 2001, the government resorted to desperate measures in a vain attempt to avert disaster.
Privatized pension funds--created in 1994 as a result of a Social Security reform based on individual accounts vested in bonds and equities--were one casualty.
The government forcibly rescheduled the public debt holdings of these funds, known locally as AFJP.
It also "pesofied" these holdings, which in mid-2001 amounted to more than 60% of the pension funds' portfolios, in effect converting dollar-denominated assets into local pesos overnight.
This "confiscation" occurred after several years in which high-risk government securities obtained very large returns.
Between September 1994 (the year of their inception) and January 2001, the AFJP yielded an average annual rate of return of 10.9% in US dollars--nearly 600 basis points above the return obtainable from US Treasury Bills.
There is an obvious lesson to be learned from Argentina's experience: if pension funds invest heavily in risky public-sector obligations--a common strategy in Latin America throughout the transition from state-funded pay-as-you-go systems to schemes based on individual capitalized accounts--repayment will be at risk from the outset.
Pension funds might be subjected to arbitrary treatment.
But this is precisely the situation that Social Security reform was supposed to eliminate.
How badly were the AFJP's actually treated?
As the dust settles, it is becoming apparent that they have fared rather well.
The rate of return on their portfolio holdings from September 1994 to December 2002 is around 9.5% per year in real terms, which appears more than reasonable by any account.
Even accounting for the very large peso devaluation, the US dollar rate of return varies between -2.5% and 4% per year, depending on the real exchange rate used to value the peso assets of AFJP's after the devaluation in January 2002.
This outcome stands in stark contrast to that of external private creditors, who have not seen a cent of what they are owed for more than one year and so far do not have even a hint about terms of repayment.
Based on market valuation, their US dollar rate of return over the same period is around -11% per year.
Put differently, even after default, `pesofication' and devaluation, Argentina's pension funds yielded a very decent return in real terms.
Furthermore, they fared well relative to other classes of creditors, especially foreign bondholders.
Thus, pension funds were de facto treated as senior creditors, but by means of a highly disruptive mechanism: huge excess returns followed by default and pesofication.
This brings us to the second, less obvious lesson from Argentina's experience, namely that privatizing Social Security at a time when the government's fiscal credibility is suspect may give rise to favoritism toward pension funds and, as a result, impose burdensome (and unjustified) fiscal costs.
Suppose pension funds are de facto treated as senior creditors (as suggested by the case of Argentina).
Under these conditions, the premium paid on pension funds' holdings of government bonds involves a rent on those holdings, because pension funds would be willing to hold government bonds even if they yielded a lower-than-market interest rate.
There is no justification for this rent if the retirees' income is never at stake.
Moreover, the interest premium paid on government bonds held in pension funds imposes burdensome and unjustified fiscal costs, since it adds to budget deficits and the public debt.
In fact, experience indicates that the interest-rate gap increases dramatically when fiscal crisis looms.
Thus, until crisis erupts, and the government defaults on its bonds, the (excess) financial costs of government bonds held by pension funds could represent a large portion of the total fiscal deficit and actually help provoke the crisis.
In sum, privatizing Social Security under conditions of weak government credibility may lead to actions that betray the fundamental principles on which such a pension reform are based and unduly increase the fiscal burden.
There are at least two ways in which these pension reform transition problems might be diminished.
First, the status of senior claimants of pension funds could be made explicit and, to the extent that there is no solvency risk, the above problems could be addressed by creating a pension fund bond that yields a rate of return that is not subject to repudiation risk .
Second, and more radically, pension funds could be barred from investing in domestic government bonds that are not rated, say, A- or higher.
Moreover, pension funds could be allowed to invest in low-risk foreign assets such as US government securities, and the government could finance transitional fiscal gaps by placing bonds at market rates and among market participants who are in the business of taking risks.
In practice, these proposals are likely to remove pension funds from the list of large investors in high-risk domestic securities (including public debt), which may partially impair the development of the local capital market.
Even if that is the case, the costs of letting pension funds bet on high-risk securities may ultimately be far greater.
Pricing Corporate Governance
CAMBRIDGE – Do markets appreciate and correctly price the corporate-governance provisions of companies?
In new empirical research, Alma Cohen, Charles C.Y. Wang, and I show how stock markets have learned to price anti-takeover provisions.
This learning by markets has important implications for both managements of publicly traded companies and their investors.
In 2001, three financial economists – Paul Gompers, Joy Ishii, and Andrew Metrick – identified a governance-based investment strategy that would have yielded superior stock-market returns during the 1990’s.
The strategy was based on the presence of “entrenching” governance provisions, such as a classified board or a poison pill, which insulate managements from the discipline of the market for corporate control.
During the 1990’s, holding shares of firms with no or few entrenching provisions, and shorting shares of firms with many such provisions, would have outperformed the market.
These findings have intrigued firms, investors, and corporate-governance experts ever since they were made public, and have led shareholder advisers to develop governance-based investment products.
Even if anti-takeover provisions hurt firms’ performance, however, investors may be unable to make trading profits if prices come to reflect the effects of these publicly-known provisions.
Indeed, in our study, Cohen, Wang, and I show that the association between governance and returns documented for the 1990’s subsequently disappeared.
No such association existed during the 2000’s or any sub-period within this decade.
After out-performing the market during the 1990’s, the governance-based strategy subsequently performed on par with it.
How can one make sense of the association between governance and returns during the 1990’s and its subsequent disappearance?
We find that this pattern is due to markets’ learning over time to appreciate the difference in expected future profitability between firms that have good and bad governance (in terms of their levels of anti-takeover protection).
Consistent with such learning, the attention to governance by the media, institutional investors, and researchers jumped sharply at the beginning of the 2000’s, and has remained at historically high levels.
For example, the number of governance-related articles in US newspapers tripled from 2000 to 2002, and the number of governance-related resolutions brought to a vote by institutional investors (many focusing on anti-takeover provisions) more than doubled, with both figures remaining at elevated levels ever since.
Market prices seem to have been affected by the increase in attention to governance.
We found evidence that, by 2001, markets learned to appreciate the difference between good-governance and bad-governance firms in terms of their expected future profitability.
We examined the extent to which firms’ earning announcements surprised markets (as reflected in stock-price reactions to these announcements) and stock analysts (as measured by the gap between announced and forecast earnings).
We found that, during the 1990-2001 period, but not afterwards, the earning announcements of good-governance firms were more likely to surprise both markets and analysts than the earning announcements of bad-governance firms.
It should be emphasized that, while trading on anti-takeover provisions could no longer be used to out-perform the market during the 2000’s, such provisions remain quite consequential for firms’ valuation.
Throughout the 2000’s, firms with higher entrenchment levels have had lower market capitalization (relative to their book value).
Indeed, the incorporation of entrenchment levels into market prices is what made it impossible to trade profitably using information on such levels.
Overall, our findings support the view that markets might be unable to price new governance provisions and practices accurately right away, but that they can be expected to learn over time to do so.
Such learning can take considerable time, but it does happen.
Both managements and investors should take market learning into account, paying close attention to the potential increase in market capitalization that eliminating anti-takeover provisions could produce.
Many firms have already eliminated anti-takeover provisions in recent years, removing staggered boards and supermajority requirements for mergers.
Lowering entrenchment levels, rather than trading on them, continues to offer opportunities for substantial returns to firms’ shareholders.
Furthermore, while markets now price anti-takeover provisions, our findings raise the possibility that markets do not (yet) price other governance features whose emergence is relatively more recent.
The introduction of new governance arrangements and their subsequent incorporation into prices is a gradual process, a work constantly in progress.
Thus, while investors can no longer profit by basing their trading decisions on standard anti-takeover provisions, our findings leave open the possibility that an investment strategy based on other features of corporate governance might be worthwhile.
Thus, managements should not dismiss governance reforms that are potentially valuable, but that investors are not yet focused on, and that markets do not yet price.
Investors eventually do learn.
And, when they do, they appropriately reward or penalize firms for their governance choices.
Privatizing Africa’s Development
Lagos – There has been considerable progress on achieving the Millennium Development Goals since their inception in 2000.
But, despite the best efforts of governments, reaching those goals by the 2015 target date still remains a distant prospect for many countries, not the least of in Africa.
Many of us in Africa’s private sector are keen to make a difference in meeting these goals.
At the Africa Finance Corporation (AFC), reducing poverty on the African continent through private-sector initiative is our mission.
For, in the end, the private sector is and will be the engine of growth in Africa, and its increasingly active involvement in the development process bodes well for the continent.
Africa’s development challenges are well known.
More than 40% of its population lives on less than a dollar a day.
Over half a billion people live without modern forms of energy, and the continent’s share of global trade remains a paltry 3%.
Lack of basic infrastructure and industrial capacity remains one of Africa’s biggest problems, for it sustains poverty and undermines the continent’s ability to compete with the rest of the world.
Transport costs for sub-regional trade are double that of other developing regions, and high energy costs contribute significantly to the prohibitive cost of doing business.
Africa needs substantial investments to correct these shortfalls: $75 billion to close its 135-gigawatt power deficit by 2015, and $37 billion to improve transport infrastructure.
And, despite Africa’s huge natural-resource deposits, heavy manufacturing remains elusive.
As a result, most of the value chain for the fossil fuel and mining sectors continues to be outside the continent.
But these challenges have not dampened optimism about Africa’s growth prospects.
The continent’s economy, after all, has been experiencing its strongest growth in three decades, with annual GDP up by 6% in the past three years.
The rebirth of Africa’s private sector – a critical missing ingredient in past development efforts – has played a significant role in driving this performance, and it can fill the investment gap while generating returns in the process.
The AFC is promoting such investment, based on a new development-oriented banking style in Africa that involves the proactive creation and management of infrastructure, industrial, and financial assets, including the six leading industrial sectors: power, transport infrastructure, telecoms, oil and gas, mining, and heavy industries.
These areas offer the greatest development impact and the most attractive returns to investors.
An AFC-led consortium is financing a project that will develop Sub-Saharan Africa’s first deep-sea container port on the Atlantic coastline area of Olokola, Nigeria.
The completion of this $1 billion landmark project is expected to transform Africa’s shipping and port capacity dramatically.
Guinea-Bissau is also taking advantage of this new private sector-led development approach.
As a member country of the AFC, it will benefit from a private sector-driven initiative to accelerate economic development and reduce poverty.
The AFC, with its project development subsidiary, Africa Infrastructure, and Chinese equity and technical partners, WEMPCO, is launching a power generation initiative in Bissau.
The investment will lead to a rapid deployment of emergency power using heavy fuel power generation, and will involve the rehabilitation and management of transmission and distribution.
There is a huge window of opportunity for private sector-led development in Africa.
But taking advantage of this opportunity requires a new approach to private financing of Africa’s development, in which Africa is the lead investor in its own economic renaissance.
Privatizing Nigeria\u0027s Government
Nigeria can be bold at diplomacy, as its offer of asylum to President Charles Taylor of Liberia demonstrates.
It will require similar audacity if it is to turn its moribund economy around.
Nigeria is a paradigm of failed development.
Average incomes are amongst the lowest in the world.
Poverty is endemic, with more than three-quarters of Nigerians living on less than US$2 per day and distribution of income more skewed in favor of the rich than anywhere else in the world.
The top 2% of Nigerians earn the same as the bottom 55%.
With Nigeria on the verge of burying the ghosts of its past dictatorships the time is ripe for daring reforms.
Its leaders should focus on one key issue: managing Nigeria's oil revenues.
Paradoxically, the boldest course would be for the government to stop managing these revenues and turn over a large fraction of these funds directly to the people, as is done in the US state of Alaska and the Canadian province of Alberta.
At the earliest opportunity, Nigeria's government should convene a conference of all national and regional leaders and secure agreement on a constitutional provision whereby each household would be guaranteed a share of oil revenues, with the amount determined by prevailing prices and quotas.
What is the rationale of this proposal and how might it be implemented?
Recent research I conducted with the IMF's Arvind Subramanian demonstrates that Nigeria's poor economic performance is primarily a story of the mismanagement of oil revenues.
Based on evidence from a cross-section of countries, natural resources such as oil and minerals do seem to be a ``curse'' rather than a blessing, as they impose a heavy drag on long-run economic growth.
But the real curse of possessing oil is not so much that it incites the infamous ``Dutch disease''--the misallocation of resources away from tradable sectors--or that it generates uncertainty due to oil's price volatility.
Rather, the main problem with oil booms is that they give rise to a series of pathologies--rent seeking, patronage, corruption, plunder--that corrode vital domestic public institutions and undermine governance.
Indeed, asked at a conference in London what would be the worst news his staff could bring him, Senegal's President Wade quipped: ``that oil has been discovered just off our coast.''
The surest way to avoid these debilities is to remove the conditions in which they thrive.
Oil revenues should be taken out of public hands to the greatest degree possible and handed over to the private sector.
This solution is rendered more urgent in Nigeria by the prospect of exploiting the country's vast reserves of natural gas, which may aggravate and prolong the resource ``curse.''
Our proposal has a number of advantages, most importantly creating the right incentives for effective and responsive governance.
Currently, oil accounts for a substantial share of Nigeria's total government revenues.
With no need to tax the public, Nigeria's government has little incentive to provide services efficiently: oil revenues are manna from heaven and keep flowing regardless of what the public sector delivers.
Moreover, while Nigeria is formally a democracy, the balance of power between citizens and public officials, including those at state and local government levels, is skewed in favor of the latter by virtue of their easy access to oil revenues.
This perpetuates politics, even democratic politics, as patronage.
Empowering citizens by giving them money could rectify this imbalance and so improve accountability and the functioning of democracy.
Finally, our proposal offers a way out of the ongoing and sterile debate between international donors and Nigeria on the issue of debt relief.
Nigerian officials and the public wish to see the external debt burden lifted, especially because a big part of it is ``odious''-- contracted by dictators, with a large degree of creditor complicity.
But donors are wary.
They justifiably fear that any savings from relief may well be misused, just as other public resources have been.
Under our proposal, the savings from debt relief would be distributed directly to the private sector, alleviating donors' legitimate concerns while also responding to Nigerian grievances.
The details for implementing our proposal need to be worked out by Nigerian politicians.
For example, a decision needs to be made as to whether the transfers go to each citizen or each household (a yearly check for each person in the family may have undesirable consequences on fertility as parents have children to collect checks).
Also, Nigerians need to decide whether all beneficiaries receive equal shares, or whether those who face the environmental consequences of oil exploration and production -- for example, in the Nigerian delta -- should receive more.
Another question is how much of the revenues should be transferred, and how transfers can be effected in a country as large, complex, and financially backward as Nigeria.
But even with all the difficulties of corruption and inefficiency that will no doubt plague its actual implementation, our proposal is superior to the status quo.
After all, today's terrible conditions are the result of staggering corruption and waste over the last 40 years.
At best, our proposal could fundamentally improve the quality of public institutions and thus transform economics and politics in Nigeria for decades to come.
The time to act is now.
Prizes, Not Patents
Part of modern medicine’s success is built on new drugs, in which pharmaceutical companies invest billions of dollars on research.
The companies can recover their expenses thanks to patents, which give them a temporary monopoly and thus allow them to charge prices well above the cost of producing the drugs.
We cannot expect innovation without paying for it.
But are the incentives provided by the patent system appropriate, so that all this money is well spent and contributes to treatments for diseases of the greatest concern?
Sadly, the answer is a resounding “no.”
The fundamental problem with the patent system is simple: it is based on restricting the use of knowledge.
Because there is no extra cost associated with an additional individual enjoying the benefits of any piece of knowledge, restricting knowledge is inefficient.
But the patent system not only restricts the use of knowledge; by granting (temporary) monopoly power, it often makes medications unaffordable for people who don’t have insurance.
In the Third World, this can be a matter of life and death for people who cannot afford new brand-name drugs but might be able to afford generics.
For example, generic drugs for first-line AIDS defenses have brought down the cost of treatment by almost 99% since 2000 alone, from $10,000 to $130.
But, despite the high price they pay, developing countries get little in return.
Drug companies spend far more money on advertising and marketing than they do on research, far more on research for lifestyle drugs (for conditions like impotence and hair loss) than for lifesaving drugs, and almost no money on diseases that afflict hundreds of millions of poor people, such as malaria.
It is a matter of simple economics: companies direct their research where the money is, regardless of the relative value to society.
The poor can’t pay for drugs, so there is little research on their diseases, no matter what the overall costs.
A “me-too” drug, for example, which nets its manufacturer some portion of the income that otherwise accrues only to the company that dominates a niche, may be highly profitable, even if its value to society is quite limited.
Similarly, companies raced to beat the human genome project in order to patent genes such as that associated with breast cancer.
The value of these efforts was minimal: the knowledge was produced just a little sooner than it would have been otherwise.
But the cost to society was enormous: the high price that Myriad, the patent holder, places on genetic tests (between $3,000 and $4,000) may well mean that thousands of women who would otherwise have been tested, discovered that they were at risk, and taken appropriate remediation, will die instead.
There is an alternative way of financing and incentivizing research that, at least in some instances, could do a far better job than patents, both in directing innovation and ensuring that the benefits of that knowledge are enjoyed as widely as possible: a medical prize fund that would reward those who discover cures and vaccines.
Since governments already pay the cost of much drug research directly or indirectly, through prescription benefits, they could finance the prize fund, which would award the biggest prizes for developers of treatments or preventions for costly diseases affecting hundreds of millions of people.
Especially when it comes to diseases in developing countries, it would make sense for some of the prize money to come from foreign assistance budgets, as few contributions could do more to improve the quality of life, and even productivity, than attacking the debilitating diseases that are so prevalent in many developing countries.
A scientific panel could establish a set of priorities by assessing the number of people affected and the impact on mortality, morbidity, and productivity.
Once the discovery is made, it would be licensed.
Of course, the patent system is itself a prize system, albeit a peculiar one: the prize is temporary monopoly power, implying high prices and restricted access to the benefits that can be derived from the new knowledge.
By contrast, the type of prize system I have in mind would rely on competitive markets to lower prices and make the fruits of the knowledge available as widely as possible.
With better-directed incentives (more research dollars spent on more important diseases, less money spent on wasteful and distorted marketing), we could have better health at lower cost.
That said, the prize fund would not replace patents.
It would be part of the portfolio of methods for encouraging and supporting research.
A prize fund would work well in areas in which needs are well known – the case for many diseases afflicting the poor – allowing clear goals to be set in advance.
For innovations that solve problems or meet needs that have not previously been widely recognized, the patent system would still play a role.
The market economy and the profit motive have led to extremely high living standards in many places.
But the health care market is not an ordinary market.
Most people do not pay for what they consume; they rely on others to judge what they should consume, and prices do not influence these judgments as they do with conventional commodities.
The market is thus rife with distortions.
It is accordingly not surprising that in the area of health, the patent system, with all of its distortions, has failed in so many ways.
A medical prize fund would not provide a panacea, but it would be a step in the right direction, redirecting our scarce research resources toward more efficient uses and ensuring that the benefits of that research reach the many people who are currently denied them.
The Changing Mood on Migration
LONDON – Headlines about migration can seem unbearably stark: attacks on foreigners by neo-fascists in Greece, dozens of domestic workers on death row in the Gulf, a crass and callous campaign by the British government to drive out migrants.
Yet, despite persistent and even rising anti-immigrant sentiment in much of the world, promising signs of a more enlightened approach to migration are emerging.
The United States is in the midst of an intense debate on a sweeping immigration overhaul.
After a quarter-century of near-paralysis, American legislators are close to agreeing on reforms that would allow 11 million undocumented migrants to earn citizenship.
The proposed changes also would make the US a magnet for talent and creativity from around the world.
The fiscal and economic arguments for a more liberal approach to migration have shaped the American debate.
According to the non-partisan Congressional Budget Office, the US Senate’s reform legislation, passed in June, would result in fiscal benefits worth almost $1 trillion over the next two decades.
Supporters also point out that immigrants launched 28% of all new American businesses in 2011, even though they accounted for just 13% of the population.
The voices of both grassroots and establishment advocates have been equally decisive. “Dreamers” – children raised in the US but without legal status – have become the human face of reform.
Business leaders, long afraid to participate in such a polarized debate, have finally entered the fray, arguing forcefully that immigration is critical to American competitiveness.
Thanks in part to all this spirited work, 72% of Americans, according to a recent Gallup poll, now consider immigration a net benefit for the country.
Given its history, America’s leadership on immigration is natural.
Germany, on the other hand, is not widely considered progressive in this realm.
Yet, fairly quietly, Germany has done as much as any other country in recent years to court foreigners and refashion itself as a country of immigration.
One million people relocated to Germany in 2012 alone.
Today, one-fifth of Germany’s residents – and one-third of its schoolchildren – have a migrant background.
In July, Germany jettisoned 40% of its immigration rules, lowering barriers for mid-skilled workers like train drivers and machinists.
For the highly skilled, its immigration laws are among the OECD’s most liberal.
And yet the German government estimates that the country will face a shortfall of two million skilled workers by 2020.
Recent reforms not only seek to attract immigrants, but also to help them fulfill their potential.
Germany, for instance, is focused on helping foreigners get their qualifications recognized – so that, for example, doctors do not have to drive taxis.
Public institutions like the police are hiring more immigrants.
A “Diversity Charter,” launched in 2006 and originally endorsed by a mere four companies, now has more than 1,500 corporate signatories.
And 4% of candidates in September’s parliamentary election have a migrant background, the highest ratio ever.
Other countries have also gotten on the reform bandwagon.
The United Arab Emirates has been revamping its laws to improve migrants’ living conditions and strengthen protection of their rights.
Its activism is noteworthy, given the benighted approach to migrants typical in other Gulf countries, such as Saudi Arabia.
Brazil, meanwhile, aims to gain a competitive edge by making it easier for foreigners to immigrate with their families.
The list of reformers is growing.
Even more surprising, new international norms are being advanced.
The Domestic Workers Convention, adopted in 2011, enters into force on September 5, promising to extend labor protections to tens of millions of the most vulnerable migrant workers.
The treaty is quickly gaining momentum, having been ratified in recent months by Germany, Italy, Argentina, and South Africa, among others.
All this progress is coming at an opportune moment.
In October, for only the second time in its history, the United Nations General Assembly will address international migration.
The first such summit, in 2006, gave birth to an important new institution, the Global Forum on Migration and Development.
In the seven years since, the Forum has helped to foster trust, knowledge, and cooperation among states and other stakeholders.
Collaboration has led to some stunning gains.
Migrants used to pay a fee of almost 15% on average to send money back home; this has fallen to less than 9%, and in some cases nearly to zero, which should be the universal goal.
Given that migrants remitted $401 billion last year to developing countries alone, such progress is freeing up tens of billions of dollars for some of the world’s poorest households.
But even more ambitious action is needed.
When they gather at the UN in October, policymakers should take courage from the reform trailblazers in the US, Germany, the UAE, and elsewhere.
If profound change is possible at the national level in the face of toxic populism, it should come more easily at the international level, where cooperation produces mostly winners.
(The losers generally are bad actors: smugglers, traffickers, abusive recruiters, and exploitative employers.)
States need not agree on all aspects of migration in order to settle on an agenda for common action.
There is no shortage of problems to confront and opportunities to seize.
We need to rein in the bad actors; eliminate discrimination against migrants; sharply reduce human trafficking; increase the share of migrants working at their highest skill level; decriminalize migration violations; end the detention of migrant children; recast refugees as productive members of our communities; and lower the proportion of migrants lacking residency rights.
Some advocates of open borders estimate that unrestricted movement across borders could double global GDP.
While a borderless world is a political non-starter, that figure does point to the scale of the development gains that a truly well-managed system of global mobility might produce.
Migration reform is not for the faint-hearted.
But those who want to leave their mark on one of the twenty-first century’s most vital issues – and to create a world in which international migrants are treated equitably and with dignity – will embrace it.
The Tuberculosis Front
BERLIN – This has been a good decade in the fight against tuberculosis.
We are likely to achieve the United Nations Millennium Development Goal of cutting TB prevalence and mortality in half by 2015, from 1990 levels.
At least a dozen new vaccines and drug candidates are in clinical trials, and the World Health Organization has endorsed a new diagnostic test called the GeneXpert.
This progress is all the more important given the complacency that led to a complete standstill in research and development for new TB interventions toward the end of the twentieth century.
The TB drugs currently in use were developed between 1950 and 1970.
Indeed, the Bacille Calmette–Guérin (BCG) vaccine is almost 100 years old, while the most widely used diagnostic test, microscopic detection of bacilli in sputum, was developed 130 years ago.
No wonder that the efficacy of these tools has weakened.
The current vaccine prevents severe TB in infants, but not the most prevalent pulmonary TB in all age groups.
The microscopic test gives false results in nearly half of all cases.
We like to think of TB as a malady of the past.
In fact, nine million people develop the active disease every year, and one in five will die.
This places the tubercle bacillus second only to human immunodeficiency virus (HIV) on the list of top microbial killers.
One-third of the world’s population is infected with the causative agent, though only one in ten develops the active disease.
The bad news is that infected individuals carry the agent with them for their entire lives.
When one’s immune system weakens, the disease may erupt.
With the emergence in the 1980’s of HIV, which compromises the immune system, TB reemerged, and is the number-one killer of HIV-infected individuals.
Roughly 15 million people suffer from co-infection of HIV and Mycobacterium tuberculosis, the primary causative agent in most TB cases.
Moreover, the tubercle bacillus engages in trench warfare, gaining resistance to conventional antibiotics and canonical vaccination approaches, as well as delaying diagnosis and determination of drug sensitivity.
Whereas pandemics appear suddenly, spread rapidly, and raise enormous fears of an impending threat, TB has been spreading slowly but consistently for tens of thousands of years, patiently waiting for new opportunities.
Treatment of TB requires a minimum of three drugs administered over at least six months.
Compare this with antibiotic treatment of, say, a urogenital infection, which lasts a few weeks at most.
As a result, compliance with TB drug treatment is particularly weak, paving the way for the emergence of multidrug-resistant (MDR) TB, which can no longer be treated by conventional therapeutic regimes.
Some 50 million people are infected with tubercle bacilli that are MDR.
While treating MDR-TB remains possible, doing so is arduous, with a treatment time of roughly two years, using drugs that are neither as efficient nor as benign as canonical drugs – and at a cost that rises by a factor of 10-100.
While this additional cost can be borne by health-care systems in the rich world, it is excessive for poor countries, implying no, or insufficient, treatment.
Moreover, in 85 countries, extensively drug-resistant (XDR) TB, which is virtually untreatable, has been diagnosed.
Indeed, surgical resection of affected lungs has become the treatment of choice in many XDR-TB hotspots.
Welcome back to the pre-antibiotic era!
So, the question is not whether we need novel drugs, vaccines, and diagnostics, but when they will become available.
The new GeneXpert test diagnoses not only TB, but also, in the same step, MDR-TB, which means that it can rapidly direct adequate treatment and prevent infection of contacts – a true breakthrough.
Unfortunately, the test is expensive and sophisticated, putting it out of reach for many poor countries.
A number of other drugs – some new and some repurposed – are currently in the last stage of clinical trials, and one new drug has been approved by US regulators for treatment of MDR-TB even before such trials have been completed.
But the first potential vaccine to be tested for efficacy recently failed miserably.
So, the good news of the last decade is just a glimmer of hope.
We still have a long way to go, and accelerated R&D to develop new drugs and vaccines can be achieved only with increased funding.
Unfortunately, private-sector incentives for developing new TB interventions are too weak.
New approaches, such as partnerships between public research institutions and private industry, are needed.
While clinical trials of the most promising drugs and vaccines need to be pursued, we also need to go back to the drawing board and develop entirely new tactics.
Current annual funding for R&D devoted to TB is estimated to be $500 million.
But more than $2 billion is needed annually.
That amount may seem unrealistically high, but it is a negligible proportion of the estimated $160 billion spent on health-related R&D worldwide.
More important, the economic burden of TB has been put as high as $20 billion annually – and even higher if the losses in human capital are included.
If we choose to continue suffering these losses, we might save some money in the short term.
The wiser course, however, is to make the necessary investments today, thereby averting a much larger bill tomorrow.
Sustainable Development Economics
PARIS – Two schools of thought tend to dominate today’s economic debates.
According to free-market economists, governments should cut taxes, reduce regulations, reform labor laws, and then get out of the way to let consumers consume and producers create jobs.
According to Keynesian economics, governments should boost total demand through quantitative easing and fiscal stimulus.
Yet neither approach is delivering good results.
We need a new Sustainable Development Economics, with governments promoting new types of investments.
Free-market economics leads to great outcomes for the rich, but pretty miserable outcomes for everyone else.
Governments in the United States and parts of Europe are cutting back on social spending, job creation, infrastructure investment, and job training because the rich bosses who pay for politicians’ election campaigns are doing very well for themselves, even as the societies around them are crumbling.
Yet Keynesian solutions – easy money and large budget deficits – have also fallen far short of their promised results.
Many governments tried stimulus spending after the 2008 financial crisis.
After all, most politicians love to spend money they don’t have.
Yet the short-term boost failed in two big ways.
First, governments’ debt soared and their credit ratings plummeted.
Even the US lost its AAA standing.
Second, the private sector did not respond by increasing business investment and hiring enough new workers.
Instead, companies hoarded vast cash reserves, mainly in tax-free offshore accounts.
The problem with both free-market and Keynesian economics is that they misunderstand the nature of modern investment.
Both schools believe that investment is led by the private sector, either because taxes and regulations are low (in the free-market model) or because aggregate demand is high (in the Keynesian model).
Yet private-sector investment today depends on investment by the public sector.
Our age is defined by this complementarity.
Unless the public sector invests, and invests wisely, the private sector will continue to hoard its funds or return them to shareholders in the forms of dividends or buybacks.
The key is to reflect on six kinds of capital goods: business capital, infrastructure, human capital, intellectual capital, natural capital, and social capital.
All of these are productive, but each has a distinctive role.
Business capital includes private companies’ factories, machines, transport equipment, and information systems.
Infrastructure includes roads, railways, power and water systems, fiber optics, pipelines, and airports and seaports.
Human capital is the education, skills, and health of the workforce.
Intellectual capital includes society’s core scientific and technological know-how.
Natural capital is the ecosystems and primary resources that support agriculture, health, and cities.
And social capital is the communal trust that makes efficient trade, finance, and governance possible.
These six forms of capital work in a complementary way.
Business investment without infrastructure and human capital cannot be profitable.
Nor can financial markets work if social capital (trust) is depleted.
Without natural capital (including a safe climate, productive soils, available water, and protection against flooding), the other kinds of capital are easily lost.
And without universal access to public investments in human capital, societies will succumb to extreme inequalities of income and wealth.
Investment used to be a far simpler matter.
The key to development was basic education, a network of roads and power, a functioning port, and access to world markets.
Today, however, basic public education is no longer enough; workers need highly specialized skills that come through vocational training, advanced degrees, and apprenticeship programs that combine public and private funding.
Transport must be smarter than mere government road building; power grids must reflect the urgent need for low-carbon electricity; and governments everywhere must invest in new kinds of intellectual capital to solve unprecedented problems of public health, climate change, environmental degradation, information systems management, and more.
Yet in most countries, governments are not leading, guiding, or even sharing in the investment process.
They are cutting back.
Free-market ideologues claim that governments are incapable of productive investment.
Nor do Keynesians think through the kinds of public investments that are needed; for them, spending is spending.
The result is a public-sector vacuum and a dearth of public investments, which in turn holds back necessary private-sector investment.
Governments, in short, need long-term investment strategies and ways to pay for them.
They need to understand much better how to prioritize road, rail, power, and port investments; how to make investments environmentally sustainable by moving to a low-carbon energy system; how to train young workers for decent jobs, not only low-wage service-sector employment; and how to build social capital, in an age when there is little trust and considerable corruption.
In short, governments need to learn to think ahead.
This, too, runs counter to the economic mainstream.
Free-market ideologues don’t want governments to think at all; and Keynesians want governments to think only about the short run, because they take to an extreme John Maynard Keynes’ famous quip, “In the long run we are all dead.”
Here’s a thought that is anathema in Washington, DC, but worthy of reflection.
The world’s fastest growing economy, China, relies on five-year plans for public investment, which is managed by the National Development and Reform Commission.
The US has no such institution, or indeed any agency that looks systematically at public-investment strategies.
But all countries now need more than five-year plans; they need 20-year, generation-long strategies to build the skills, infrastructure, and low-carbon economy of the twenty-first century.
The G-20 recently took a small step in the right direction, by placing new emphasis on increased infrastructure investment as a shared responsibility of both the public and private sectors.
We need much more of this kind of thinking in the year ahead, as governments negotiate new global agreements on financing for sustainable development (in Addis Ababa in July 2015); Sustainable Development Goals (at the United Nations in September 2015), and climate change (in Paris in December 2015).
These agreements promise to shape humanity’s future for the better.
If they are to succeed, the new Age of Sustainable Development should give rise to a new Economics of Sustainable Development as well.
Underinvesting in Resilience
NEW YORK – The hurricane on America’s eastern seaboard last week (which I experienced in lower Manhattan) adds to a growing collection of extreme weather events from which lessons should be drawn.
Climate experts have long argued that the frequency and magnitude of such events are increasing, and evidence of this should certainly influence precautionary steps – and cause us to review such measures regularly.
There are two distinct and crucial components of disaster preparedness.
The one that understandably gets the most attention is the capacity to mount a rapid and effective response.
Such a capacity will always be necessary, and few doubt its importance.
When it is absent or deficient, the loss of life and livelihoods can be horrific – witness Hurricane Katrina, which ravaged Haiti and New Orleans in 2005.
The second component comprises investments that minimize the expected damage to the economy.
This aspect of preparedness typically receives far less attention.
Indeed, in the United States, lessons from the Katrina experience appear to have strengthened response capacity, as shown by the rapid and effective intervention following Hurricane Sandy.
But investments designed to control the extent of damage seem to be persistently neglected.
Redressing this imbalance requires a focus on key infrastructure.
Of course, one cannot at reasonable cost prevent all possible damage from calamities, which strike randomly and in locations that cannot always be predicted.
But certain kinds of damage have large multiplier effects.
This includes damage to critical systems like the electricity grid and the information, communication, and transport networks that constitute the platform on which modern economies run.
Relatively modest investments in the resilience, redundancy, and integrity of these systems pay high dividends, albeit at random intervals.
Redundancy is the key.&#160;
The case of New York City is instructive.
The southern part of Manhattan was without power for almost a full workweek, apparently because a major substation hub in the electrical grid, located beside the East River, was knocked out in a fiery display when Hurricane Sandy and a tidal surge caused it to flood.
There was no pre-built workaround to deliver power by an alternate route.
The cost of this power failure, though difficult to calculate, is surely huge.
Unlike the economic boost that may occur from recovery spending to restore damaged physical assets, this is a deadweight loss.
Local power outages may be unavoidable, but one can create grids that are less vulnerable – and less prone to bringing large parts of the economy to a halt – by building in redundancy.
Similar lessons were learned with respect to global supply chains, following the earthquake and tsunami that hit northeast Japan in 2011.
Global supply chains are now becoming more resilient, owing to the duplication of singular bottlenecks that can bring much larger systems down.
Cyber security experts rightly worry about the possibility of bringing an entire economy to a halt by attacking and disabling the control systems in its electrical, communication, and transportation networks.
Admittedly, the impact of natural disasters is less systemic; but if a calamity takes out key components of networks that lack redundancy and backup, the effects are similar.
Even rapid response is more effective if key networks and systems – particularly the electricity grid – are resilient.
Why do we tend to underinvest in the resilience of our economies’ key systems?
One argument is that redundancy looks like waste in normal times, with cost-benefit calculations ruling out higher investment.
That seems clearly wrong: Numerous expert estimates indicate that built-in redundancy pays off unless one assigns unrealistically low probabilities to disruptive events.
That leads to a second and more plausible explanation, which is psychological and behavioral in character.
We have a tendency to underestimate both the probabilities and consequences of what in the investment world are called “left-tailed events.”
Compounding this pattern are poor incentives.
Principals, be they investors or voters, determine the incentives of agents, be they asset managers or elected officials and policymakers.
If principals misunderstand systemic risk, their agents, even if they do understand it, may not be able to respond without losing support, whether in the form of votes or assets under management.
Another line of reasoning is that businesses that depend heavily on continuity – for example, hospitals, outsourcing firms in India, and stock exchanges – will invest in their own backup systems.
In fact, they do. But that ignores a host of issues concerning the mobility, safety, and housing of employees.
A broad pattern of self-insurance caused by underinvestment in resilient infrastructure is an inefficient and distinctly inferior option.
Underinvestment in infrastructure (including deferred maintenance) is widespread where the consequences are uncertain and/or not immediate.
In reality, underinvestment and investment with debt financing are equivalent in one crucial respect: they both transfer costs to a future cohort.
But even debt financing would be better than no investment at all, given the deadweight losses.
Cities and countries that aspire to be hubs or critical components in national or global financial and economic systems need to be predictable, reliable, and resilient.
That implies a transparent rule of law, and competent, conservative, and countercyclical macroeconomic management.
But it also includes physical resilience and the ability to withstand shocks.
Hubs that lack resilience create cascades of collateral damage when they fail.
Over time, they will be bypassed and replaced by more resilient alternatives.
Protecting Research and Discovery
Protectionism Made in the USA
America's imposition of tariffs on imported steel has been greeted with a howl of protest around the world.
But harsh words have not been followed by a strong counter-attack.
Now is the time to confront America's hypocrisy, not to bluster.
The global financial crisis of 1997/1998 - mismanaged by the IMF, largely at the direction of the US Treasury - led to an increased flow of steel imports.
But that is part of the market adjustment process the US trumpets so loudly at other times.
The argument put forward by the US, that it was entitled to safeguard against a surge of imports - utilizing safeguard measures that are part of the WTO - is unlikely to past muster with a WTO panel when one is eventually convened, but the argument itself is disingenuous.
Europe pushed to restructure its steel industry in the 1980s and early 1990s, and succeeded mostly.
In America, many efficient new firms (mini-mills) were indeed created, but yesterday's lumbering giants stood still.
They cannot compete with efficient steel mills elsewhere - including (perish the thought) Korea's state-owned steel company.
Many of America's problems are made in the USA.
America's deteriorating fiscal position is leading to a strong dollar, just as the deteriorating fiscal position of the US after Reagan's irresponsible tax cut of two decades ago did.
While countries may pride themselves on a strong currency, a strong dollar is bad for exports and good for imports.
In a dynamic economy, if jobs are lost in one sector, new jobs are being created in another.
Government's role is to facilitate the movement of labor from one to the other.
It is a primary responsibility of government to maintain full employment.
Both in assisting shifts in employment and in maintaining full employment, the Bush Administration has failed.
President Bush recognized that a fiscal stimulus was needed when he arrived in office, but rather than pushing for genuine stimulus, it pushed for regressive tax changes under the name of a fiscal stimulus.
Aid to old economy firms that spent more on avoiding taxes than in restructuring took the form of a repeal of the alternative minimum tax, a tax provision designed to limit the extent to which firms could make use of loopholes in the tax code.
Lowering taxes for the rich: under the Bush administration's original proposal, a family of four earning $50,000 would have received zero - yes zero - benefits over four years, while a $5 million dollar a year family of four "struggling to make ends meet" would have received a whopping $500,000!
The Democrats rightly resisted; the number of jobs that would have been created was miniscule.
But the weaknesses in the economy as a result of this economic mismanagement mean that those who lose their jobs will face a tougher time.
While America loses, Europe loses, many in the developing world lose, and much more is at stake.
Globalization, well and equitably managed, can benefit all countries.
But under globalization, as currently managed, many have not gained; and some of the poorest have lost out.
Instead, globalization is an unfair game, with the rules written by rich advanced industrial countries for rich industrial countries.
But the US believes that even this is not enough: it will interpret these rules in ways which suit its political interests, bending and breaking them at will, challenging those who do not like it to do something about it.
The motto of the Bush Administration seems to be, "Trade is good, but imports are bad! "
Think of the lessons that poor developing countries learn.
Lowering import duties lead to a surge of imports.
So, under the "new" US rules, that country is entitled to reinstate tariffs as "safeguards."
If the US needs to worry about unemployment with an unemployment rate of less than 6%, what is a poor country with unemployment at 10% or 20% to say?
The US pleads for understanding; elections are coming in November, and voters in West Virginia and other states must be "bribed" to accept a new round of trade negotiations.
But democracies exist across the developing world, and their voters have even more legitimate concerns about the jobs that result from liberalization.
The IMF - in which the US is the only country with veto power - shows little sympathy with such political concerns in the developing world.
Why the double standard?
If the increase in steel tariffs were an isolated incident it would be bad enough.
But, while preaching free market doctrines abroad, the US bails out its airlines and increases agricultural subsidies at home.
Even before these increases, subsidies to agriculture by the advanced industrial countries were enormous - exceeding the total incomes of sub-Saharan Africa.
The rich effectively close their markets to many goods that represent the comparative advantage of the poor.
Argentina's economic position today, indeed, would be vastly different if America and Europe opened their markets to its agricultural goods.
The same can be said for country after country in the developing world.
Globalization entails increasing interdependence.
Given the volatility in the global economy, this entails bearing some risks.
Rich countries - like the US - are in the best position to bear those risks.
Much discussion has taken place of late of the advantages to be gained by the world adopting global standards, e.g. in banking.
Inevitably globalization will entail adopting such standards.
America's actions over steel seem to suggest that the US embraces a double standard.
This cannot be allowed.
Countries, particularly in Europe, that are capable of standing up to the US must oppose it here.
Taking strong measures will be in their interests, will be in America's interest (even if it is not in the interests of particular special interests, or President Bush's political interests), and will be in the broader interests of the world.
Protectionism Rides Again
Round up the usual suspects.
In any US presidential election campaign, you can be sure that protectionism will break in, as it has.
But America's swing back toward protectionism started long before, with President George W. Bush's steel tariff of 2001.
It was hard to understand what the underlying calculus was when the Bush administration imposed that tariff on steel imports.
The tariff was bad economics: it made America poorer.
The tariff was bad mercantilism: it robbed more in profits and unionized jobs from steel-consuming industries than it gave to steel-making industries, and the former were at least as well-organized and vocal in Washington as the latter.
Finally, the tariff was also bad diplomacy: why should anyone enter into an agreement with a US government that appears eager to demonstrate that it will break its commitments for the tiniest of imagined domestic political benefits?
Unfortunately, America's swing back toward protectionism did not stop there.
It continued last year when the Bush administration, recognizing that it had no policies to boost employment, explored whether China's undervalued exchange rate might be blamed for closed factories in Ohio.
No surprise, then, that the Democratic Party has now picked up the protectionist baton.
Its leading candidate for the presidential nomination, John Kerry, talks about how "Benedict Arnold CEO's" betray America by outsourcing jobs.
Kerry's remaining competitor, John Edwards, talks about how the gap on trade between him and Kerry is wide and deep - with Kerry on the free-trade side.
The past three years have seen much less progress on freeing up world trade than almost any free-trade advocate would have hoped.
Unless the swing of the pendulum in the US can be stopped, the rest of this decade will be as bad.
Neither the European Union nor Japan can be counted upon to do anything more than allow themselves to be dragged kicking and screaming into trade liberalization agreements.
Without aggressive US leadership - which means a US executive and congress that believe in free trade - trade liberalization simply will not happen, and there will be more "emergency" tariffs, "extraordinary" quotas and "voluntary" export restraints.
All of these steps will have minimal impact on the US.
But they have the potential to cause countless disasters for emerging market countries that export to America.
Can anything halt this swing of the pendulum?
Absent a sudden, immediate, and strong boost in US domestic demand that turns into a durable boom with rapid employment growth, probably not.
The fall over the past three years in the proportion of the working-age population with jobs in America has been the biggest in percentage terms since the Great Depression.
American workers and voters are more anxious about job security and more willing to blame anything for job insecurity because they have seen the most profound deterioration in labor market conditions in the memory of anyone younger than eighty-five.
That slack labor market is powering this swing of the protectionist pendulum.
So we probably must accept that protectionist sentiment will remain strong.
But we should seek ways to diminish the time spent and the damage done at the protectionist end of this political cycle.
There are two arguments and one economic shift that could accelerate a return to trade liberalization.
The two arguments in favor of free trade are powerful, but by and large they have not been deployed.
The first argument needs to be made by countries that export to the US: they should tell journalists, politicians, voters, and workers in the US about all the American jobs that would not exist without their exports to America.
Fear that expanded trade will destroy jobs and disrupt the American economy needs to be balanced by fear that reduced trade will destroy jobs and disrupt the American economy.
The second argument needs to be made by those who care about America's national security.
The 21st century will see the world constantly at war against terrorism.
An important part of that war will consist of shaping the foes of terrorism into a durable alliance.
Increased world trade can be an important part of that alliance-building process.
An economic shift also needs to be carried out by Europe and Japan: a shift from deflation to reflation.
Strong demand growth in Japan and Europe that produces a higher level of American exports would be the most powerful pro-trade liberalization force imaginable.
For too long, Europe and Japan have subordinated the quest for full employment to other goals, whether extremely low inflation (Europe) or avoiding the costs of a bubble economy (Japan).
Convincing ordinary American voters that trade liberalization is a positive force will be easier when the US is not the only locomotive pulling world demand forward, and not the world's importer of last resort.
Protectionist Myths
NEW YORK – At a debate in New York last year entitled “Buy American/Hire American Policies Will Backfire,” with hundreds of people in attendance, my team of three free-trade proponents took on a trio of protectionists who are often in the public eye.
We expected that we would lose the final audience vote by 55% to 45%.
As it happened, we wiped the floor with them, winning by an unprecedented margin of 80% to 20%.
The feedback from several voters was that we had won handily because we had the “arguments and the evidence,” whereas our opponents had “assertions and invective.”
Evidently, the pessimism and despair that often overwhelms free traders today is unwarranted.
The arguments of protectionists, new and old, are just so many myths that can be successfully challenged.
Consider some of the most egregious examples.
Myth 1: “The cost of protection and its flipside, gains from trade, are negligible.”
This means, of course, that if protectionism is politically convenient, you need not shed tears over harming the country by surrendering to it, an attitude that many Democrats in the United States find convenient to adopt.
Ironically, this myth was a product of inappropriate methodology and resulted from the research of my eminent Cambridge teacher Harry Johnson; and it has inexplicably been a favorite thesis since 1990 of my celebrated MIT student Paul Krugman.
But, while this theme continues to play well in Washington, no serious scholar buys into it, owing to the compelling refutations published in 1992 by Robert Feenstra, the most accomplished trade policy empiricist today, and in 1994 by Stanford’s Paul Romer.
Myth 2: “Free trade may increase economic prosperity, but it is bad for the working class.”
This claim has great credibility with labor unions that believe that trade with poor countries produces paupers in rich countries.
They therefore argue for leveling the playing field – i.e., that the costs for their rivals in poor countries must be raised by imposing the same labor standards that exist in rich countries.
Orwellian use of terms like “fair trade” masks the fact that this is nothing but an insidious form of protectionism that seeks to reduce import competition.
Many economists have concluded, however, that continual and deep labor-saving technological change, not trade with poor countries, is a principal culprit in the stagnation seen in rich-country wages nowadays.
Moreover, workers profit from lower prices for imported goods like clothing and electronics.
Myth 3: “Free trade requires that other countries also open their markets.”
This is a refrain that recurs each time a new US administration takes office.
But the facts are often fiction, and the logic is not compelling.
US automakers were convinced during the years of Japan-bashing in the 1980’s that Japan was closed and the US was open.
But it was the US that had a quota of 2.2 million units for Japanese cars, while the Japanese market was open but difficult to penetrate.
The refrain is recurring with China today.
Even if other economies are closed, open economies still profit from their own free trade.
There was skepticism about this long-standing wisdom when it was argued that, if Japan was closed and the US was open, Japanese firms would have two markets and American firms would have one.
The former, it was claimed, would have lower unit costs than the latter.
But the problem here, as always, is with the assumption that Japanese firms would continue to be as efficient as American firms, despite protectionism.
Myth 4: “Paul Samuelson abandoned free trade, and he was the greatest economist of his time.”
The latter is indeed true; but the former, asserted by many protectionists, is not.
Even Hillary Clinton, in her campaign for the US presidency, mistakenly embraced this fallacy.
All that Samuelson showed was that any exogenous change could harm a trading economy; he did not argue that an appropriate response to that unfortunate situation was to abandon free trade.
Consider an analogy.
If Florida is devastated by a hurricane, its governor would only make matters worse if he responded by abandoning trade with other states.
Myth 5: “Offshoring of jobs will devastate rich countries.”
This scare arose during Senator John Kerry’s failed presidential campaign in 2004, when digitized x-rays were sent from Massachusetts General Hospital in Boston to be read in India.
But no radiologists have lost jobs in the US since then, nor have their earnings fallen.
Indeed, it is clear that the increased tradability of services has not unleashed an economic tsunami on rich countries.
Often, jobs that would have disappeared anyway, owing to high costs in the US and other rich countries, have resurfaced where costs are lower, thus providing services that would have been lost otherwise.
So noted offshoring worriers like the economist Alan Blinder have now shifted to arguing merely that increased tradability of services means that we should extend long-standing Adjustment Assistance Programs for trade-distressed activities to include services.
To which the free trader responds: no problem there!
Akhir Kehidupan dan Harapan di Laut Lepas
HALIFAX, KANADA – Kehidupan hiu dan kerabat dekatnya, ikan pari, sudah dimulai bahkan sebelum dinosaurus ada.
Jenis hiu dan pari bertahan dari malapetaka kepunahan massal yang membinasakan Tyrannosaurus Rex dan seluruh dinosaurus lainnya, termasuk kepunahan Permian-Triassic yang memusnahkan 96% spesies laut.
Bahkan garis keturunan hiu yang lebih baru berevolusi, seperti hiu martil, sudah ada selama lebih dari 30 juta tahun.
Namun dalam beberapa dekade saja, seperempat jenis hiu dan pari terancam punah.
Kejadian ini timbul karena kesalahan kita sendiri – dan menjadi tanggung jawab kita untuk memperbaikinya.
Populasi hiu dan pari bukan satu-satunya spesies yang terancam punah.
Sebagian besar keanekaragaman hayati di laut – khususnya karang, mamalia laut, burung laut, dan penyu – juga kesulitan melawan tekanan manusia.
Sebagai akibatnya, ekosistem laut berisiko menjadi terurai, tidak stabil dan kurang produktif.
Mengingat besarnya ancaman terhadap kehidupan laut – termasuk penangkapan ikan berlebih (overfishing), perubahan iklim, polusi dan pembangunan tepi pantai – mudah bagi kita, bahkan mungkin sangat wajar, untuk bersikap pesimis.
Tetapi tahun ini bisa menandai awal dari suatu pendekatan yang lebih kuat untuk melindungi ekosistem laut, khususnya terkait dengan maraknya overfishing yang merupakan penyebab penurunan jumlah sebagian besar spesies secara drastis.
Tantangan di masa depan tidak bisa diremehkan.
Guna mengatasi tantangan yang ada, kita perlu menyelesaikan salah satu hambatan terbesar yang paling membahayakan konservasi laut: menjamin keberlanjutan keanekaragaman hayati di sekitar 60% perairan dunia yang hidup di bawah jurisdiksi masing-masing negara.
Dalam batas wilayah perairan 200 mil laut yang meliputi zona ekonomi eksklusif (ZEE), sejumlah negara telah menerapkan upaya gabungan berupa peraturan perundang-undangan yang kuat, pengelolaan yang baik, dan penegakan secara efektif untuk menjaga cadangan ikan dan ekosistem (walaupun terdapat banyak contoh lain yang menunjukkan sebaliknya).
Timbul persoalan buruk lainnya di luar ZEE: sebagian besar sumber daya hayati secara de facto bersifat terbuka sehingga menjadikan mereka rentan terhadap eksploitasi berlebihan.
Meskipun terdapat sejumlah upaya dengan itikad baik untuk memperbaiki pengelolaan sumber daya hayati, akan tetapi upaya-upaya tersebut bergantung pada kemauan setiap pihak untuk mengesampingkan keuntungan ekonomi jangka pendek dari pemanfaatan sumber daya yang melimpah ini demi kepentingan umum jangka panjang.
Apabila keterlibatan dalam proses internasional menciptakan beban atau pengorbanan, akan selalu muncul alasan untuk menghindari peraturan, melemahkan upaya penegakan, atau bahkan sama sekali tidak mau melibatkan diri dalam proses tersebut.
Kondisi seperti ini umum diamati dalam persoalan lingkungan hidup, dimana modal politik yang diperlukan cukup besar; kebutuhan akan dukungan suara mayoritas sangat vital; isu-isu yang dibahas bersifat kontroversial; dan keuntungan yang diperoleh atasnya tidak didistribusikan secara merata dan dicapai dalam periode yang sangat lama.
Kedekatan yang erat dengan Realpolitik perubahan iklim menunjukkan bahwa hal ini merupakan tantangan yang mengintimidasi, atau bahkan terlampau sulit untuk dikendalikan, serta mengungkap unsur-unsur dilema politik dan sosial yang sangat sulit, seperti: dilema narapidana (prisoner’s dilemma), masalah penumpang gelap (free-rider problem), dan tragedi kepemilikan bersama (tragedy of the commons).
Saat ini, sejumlah peraturan – termasuk Konvensi PBB tentang Hukum Laut (UN Convention on Law of the Sea), pedoman-pedoman yang diterbitkan FAO (Food and Agriculture Organization guidelines), Perjanjian Stok Ikan (Fish Stocks Agreement), serta Konvensi tentang Konservasi Spesies Hewan Migrasi Liar (Convention on the Conservation of Migratory Species of Wild Animals) – mengatur tindakan-tindakan yang berdampak pada keanekaragaman hayati di laut lepas.
Namun perlindungan terhadap sumber daya hayati masih terbatas dan penuh dengan celah.
Sebagai contoh, tidak semua negara menandatangani perjanjian-perjanjian tersebut, sehingga kapal dapat memilih berbendera negara asing tertentu untuk menghindari kepatuhan peraturan-peraturan (“flag of convenience”/penggunaan bendera negara kemudahan).
Beberapa kegiatan penangkapan ikan masih dilakukan di luar jurisdiksi lembaga internasional yang berwenang di bidang pengelolaan sumber daya.
Sebagai dampaknya, marak terjadi penangkapan ikan yang melanggar hukum, tidak dilaporkan serta tidak diatur yang bernilai milyaran dolar per tahun.
Satu langkah yang memberi harapan, hasil rekomendasi kelompok kerja di PBB pada bulan Januari, adalah perumusan perjanjian baru yang mengikat secara hukum tentang keanekaragaman hayati di laut lepas yang saat ini tengah dipersiapkan untuk tinjauan di hadapan Majelis Umum PBB pada bulan September yang akan datang.
Kerangka kerja yang terkoordinasi dan selaras akan membantu mengurangi kesenjangan mengenai pengelolaan di kawasan; memaksa lembaga yang mengatur bekerja demi meningkatkan pengaruhnya; dan pada akhirnya memungkinkan pembentukan lembaga-lembaga baru yang berfokus pada pengelolaan dan perlindungan ekosistem, tidak hanya cadangan ikan.
Hal ini dapat mendorong kerjasama yang diperlukan untuk menciptakan kawasan perlindungan laut di laut lepas, sehingga memungkinkan pemulihan ekosistem yang rusak atau habis.
Tentu saja kawasan tersebut harus diawasi supaya efektif.
Terdapat perkembangan yang menjanjikan melalui penggunaan teknologi satelit yang mampu mendeteksi dan mengambil tindakan atas pelanggaran penangkapan ikan yang dilakukan kapal.
Teknologi ini dapat menciptakan perubahan yang sangat besar dalam perbaikan pengelolaan di laut, khususnya bagi negara-negara dengan ZEE yang luas dan memiliki keterbatasan penegakan di laut.
Keberadaan suatu sistem terkoordinasi yang mampu merespon terjadi pelanggaran juga sangat penting.
Penutupan pelabuhan dan penghentian kapal-kapal yang melanggar peraturan akan dimungkinkan melalui Port State Measures Agreement, yang saat ini menunggu proses ratifikasi.
Pengelolaan dan konservasi laut merupakan persoalan kritis.
Sumber daya laut tidak bisa selamanya dieksploitasi secara berlebihan.
Perjanjian berikutnya mengenai “keanekaragaman hayati di luar wilayah jurisdiksi nasional”, yang didasarkan pada cara-cara terbaru untuk memantau kepatuhan, dapat meningkatkan pengelolaan laut dengan pesat.
Kesulitannya adalah, bagaimana pun juga, pengelolaan yang lebih baik mengharuskan kita memilih keberlanjutan jangka panjang dibandingkan keuntungan jangka pendek.
Saat ini belum terlihat apakah kita akan mampu mengalahkan keinginan untuk memilih keuntungan semata.
Psychiatry’s Conceptual Malpractice
NEW YORK – The American Psychiatric Association’s recent proposed changes to its official diagnostic manual – the Diagnostic and Statistical Manual of Mental Disorders (“DSM”), often called the “bible of psychiatry” – may discredit psychiatric diagnosis more than improve it.
The DSM specifies the symptoms by which every mental disorder is diagnosed, in effect defining what is psychologically normal and abnormal in the United States – and, increasingly, for much of the rest of the world as well.
Revising the DSM’s diagnostic criteria for the upcoming fifth edition (“DSM-5”) is a heavy responsibility.
Draw the line between normality and disorder too broadly, and individuals may suffer incorrect diagnoses and undergo needless and potentially harmful treatment.
Indeed, the DSM’s history reveals many such errors of over-inclusiveness.
But if the line is drawn too narrowly, individuals may not get needed help.
Although psychiatrists tend to worry more about identifying potential patients in need of help and less about eliminating normal eccentricity and distress from diagnosis, it is crucial in any society that respects human variation and encourages individual moral responsibility to distinguish normal suffering and eccentricity from mental disorder.
These are delicate issues of conceptual analysis.
Yet the psychiatrists who formulated the DSM-5’s proposed changes are not trained in conceptual analysis, and, though amply forewarned, they have addressed the normal-versus-disordered issue in an unsystematic, ad hoc manner.
The result is a form of conceptual malpractice: intellectual negligence resulting in the formulation of invalid diagnostic criteria that will misdiagnose normal individuals as disordered.
Consider the following proposed new disorders:
(1)&#160;&#160;
Binge eating disorder.
If you overeat once a week for three months, lacking self-control and experiencing over-fullness afterward, and are distressed, embarrassed, and disgusted with yourself, you are diagnosable.
Apparently, people who feel bad about not being fully controlled in their eating when confronted by weekend buffet-style feasts are disordered.
(2)&#160;&#160;
Hoarding disorder.
If you resist discarding possessions that others (a spouse, say, or a clinician) find of limited value, and consequently clutter your living space, and you are distressed about this or are creating what others consider an unsafe environment, you are diagnosable.
This category will be welcomed by neatniks irritated by acquisitive partners.
(3)&#160;&#160;
Hypersexual disorder.
If you are highly sexual for six months in a way that feels uncontrolled and becomes distressing, and use sexuality for relieving feelings of stress and boredom or without consideration of the emotional effect on others (formerly known as being a “cad”), you are diagnosable.
This disorder presumes that using sex to relieve unhappiness, and feeling guilty about it, is also diagnosable.
Other proposed DSM-5 changes open the door to future abuses. “Pathological gambling” would be placed in a new super-category of “behavioral addictions,” opening the way for “internet addiction” and many other behaviors to be deemed pathological.
Likewise, loose or quirky thinking that is not now a disorder but indicates an increased risk of developing a psychotic disorder would be classified as a “psychotic risk disorder.”
Those diagnosed with this condition would be more likely to be treated with potent drugs, though most never develop a psychotic disorder – setting a precedent for confusing risk factors with actual disorders.
Other changes undermine the validity of existing categories.
For example, the DSM currently distinguishes substance dependence – essentially addiction (a disorder) – from substance abuse, a weaker category that includes dubious criteria such as driving while intoxicated or arguing with others about substance use.
The DSM-5 proposes to eliminate the weak “abuse” category, but only by combining its misconceived criteria with current dependence criteria to form a unified “substance use disorder” category, and reducing the number of symptoms needed for diagnosis from three to two.
As a result, substance dependence would disappear as a valid category.
Under the proposal, if you occasionally drive your car home from parties after drinking and argue with your spouse about it afterwards, you would have alcohol-use disorder.
The vacuity of the abuse category will now infect the dependence category.
A second example: it has been known since antiquity that normal people who recently experienced a significant loss – especially of a loved one – can have the same symptoms (e.g., sadness, insomnia, fatigue, loss of interest in usual activities, lessened appetite) as those indicating major depressive disorder.
Thus, the DSM currently eliminates the recently bereaved from depression diagnosis unless they have certain extreme symptoms suggesting more than intense grief.
By contrast, the DSM-5 proposes to eliminate the bereavement exclusion.
Anyone with depressive symptoms for just two weeks after suffering a significant loss would be diagnosed with major depressive disorder, massively pathologizing normal intense grief.
Moreover, some obviously invalid current categories have not been addressed.
For example, if you are sad for two weeks and have one other related symptom, such as fatigue, insomnia, or lessened appetite, and you are distressed or impaired at work or in other roles, then you have “subsyndromal depression.”
But research shows that virtually anyone with two weeks of sadness feels distressed and is likely to be role-impaired, so in effect this category elevates moderately prolonged normal sadness into a mental disorder.
All the above categories encompass some genuine disorders.
The problem is that the criteria are drawn so broadly that they pathologize mostly the non-disordered.
Normal individuals often need and deserve help, but the decision as to the kind of help they get should not be biased by incorrect labeling of their conditions as mental disorders that suggest something is internally wrong with them.&#160;
The current symptom-based diagnostic system was developed partly to answer criticism that psychiatry is just social control of undesirable behavior dressed up as medicine.
By failing to distinguish adequately normal distress and eccentricity from disorder, the DSM-5’s proposals threaten to increase dramatically the types of abuses that the DSM was designed to prevent.
Another anti-psychiatric backlash may not be far behind.
Public Health versus Private Freedom?
PRINCETON – In contrasting decisions last month, a United States Court of Appeals struck down a US Food and Drug Administration requirement that cigarettes be sold in packs with graphic health warnings, while Australia’s highest court upheld a law that goes much further.
The Australian law requires not only health warnings and images of the physical damage that smoking causes, but also that the packs themselves be plain, with brand names in small generic type, no logos, and no color other than a drab olive-brown.
The US decision was based on America’s constitutional protection of free speech.
The court accepted that the government may require factually accurate health warnings, but the majority, in a split decision, said that it could not go as far as requiring images.
In Australia, the issue was whether the law implied uncompensated expropriation – in this case, of the tobacco companies’ intellectual property in their brands.
The High Court ruled that it did not.
Underlying these differences, however, is the larger issue: who decides the proper balance between public health and freedom of expression?
In the US, courts make that decision, essentially by interpreting a 225-year-old text, and if that deprives the government of some techniques that might reduce the death toll from cigarettes – currently estimated at 443,000 Americans every year – so be it.
In Australia, where freedom of expression is not given explicit constitutional protection, courts are much more likely to respect the right of democratically elected governments to strike the proper balance.
There is widespread agreement that governments ought to prohibit the sale of at least some dangerous products.
Countless food additives are either banned or permitted only in limited quantities, as are children’s toys painted with substances that could be harmful if ingested.
New York City has banned trans fats from restaurants and is now limiting the permitted serving size of sugary drinks.
Many countries prohibit the sale of unsafe tools, such as power saws without safety guards.
Although there are arguments for prohibiting a variety of different dangerous products, cigarettes are unique, because no other product, legal or illegal, comes close to killing the same number of people – more than traffic accidents, malaria, and AIDS combined.
Cigarettes are also highly addictive.
Moreover, wherever health-care costs are paid by everyone – including the US, with its public health-care programs for the poor and the elderly – everyone pays the cost of efforts to treat the diseases caused by cigarettes.
Whether to prohibit cigarettes altogether is another question, because doing so would no doubt create a new revenue source for organized crime.
It seems odd, however, to hold that the state may, in principle, prohibit the sale of a product, but may not permit it to be sold only in packs that carry graphic images of the damage it causes to human health.
The tobacco industry will now take its battle against Australia’s legislation to the World Trade Organization.
The industry fears that the law could be copied in much larger markets, like India and China.
That is, after all, where such legislation is most needed.
Indeed, only about 15% of Australians and 20% of Americans smoke, but in 14 low and middle-income countries covered in a survey recently published in The Lancet, an average of 41% of men smoked, with an increasing number of young women taking up the habit.
The World Health Organization estimates that about 100 million people died from smoking in the twentieth century, but smoking will kill up to one billion people in the twenty-first century.
Discussions of how far the state may go in promoting the health of its population often start with John Stuart Mill’s principle of limiting the state’s coercive power to acts that prevent harm to others.
Mill could have accepted requirements for health warnings on cigarette packs, and even graphic photos of diseased lungs if that helps people to understand the choice that they are making; but he would have rejected a ban.
Mill’s defense of individual liberty, however, assumes that individuals are the best judges and guardians of their own interests – an idea that today verges on naiveté.
The development of modern advertising techniques marks an important difference between Mill’s era and ours.
Corporations have learned how to sell us unhealthy products by appealing to our unconscious desires for status, attractiveness, and social acceptance.
As a result, we find ourselves drawn to a product without quite knowing why.
And cigarette makers have learned how to manipulate the properties of their product to make it maximally addictive.
Graphic images of the damage that smoking causes can counter-balance the power of these appeals to the unconscious, thereby facilitating more deliberative decision-making and making it easier for people to stick to a resolution to quit smoking.
Instead of rejecting such laws as restricting freedom, therefore, we should defend them as ways to level the playing field between individuals and giant corporations that make no pretense of appealing to our capacities for reasoning and reflection.
Requiring that cigarettes be sold in plain packs with health warnings and graphic images is equal-opportunity legislation for the rational beings inside us.
Why Public Investment?
MILAN – The world is facing the prospect of an extended period of weak economic growth.
But risk is not fate: The best way to avoid such an outcome is to figure out how to channel large pools of savings into productivity-enhancing public-sector investment.
Productivity gains are vital to long-term growth, because they typically translate into higher incomes, in turn boosting demand.
That process takes time, of course – especially if, say, the initial recipients of increased income already have a high savings rate.
But, with ample investment in the right areas, productivity growth can be sustained.
The danger lies in debt-fueled investment that shifts future demand to the present, without stimulating productivity growth.
This approach inevitably leads to a growth slowdown, possibly even triggering a financial crisis like the one that recently shook the United States and Europe.
Such crises cause major negative demand shocks, as excess debt and falling asset prices damage balance sheets, which then require increased savings to heal – a combination that is lethal to growth.
If the crisis occurs in a systemically important economy – such as the US or Europe (emerging economies' two largest external markets) – the result is a global shortage of aggregate demand.
And, indeed, severe demand constraints are a key feature of today's global economic environment.
Though the US is finally emerging from an extended period in which potential output exceeded demand, high unemployment continues to suppress demand in Europe.
One of the main casualties is the tradable sector in China, where domestic demand remains inadequate to cover the shortfall and prevent a slowdown in GDP growth.
Another notable trend is that individual economies are recovering from the recent demand shocks at varying rates, with the more flexible and dynamic economies of the US and China performing better than their counterparts in the advanced and emerging worlds.
Excessive regulation of Japan's non-tradable sector has constrained GDP growth for years, while structural rigidities in Europe's economies impede adaptation to technological advances and global market forces.
Reforms aimed at increasing an economy's flexibility are always hard – and even more so at a time of weak growth – because they require eliminating protections for vested interests in the short term for the sake of greater long-term prosperity.
Given this, finding ways to boost demand is key to facilitating structural reform in the relevant economies.
That brings us to the third factor behind the global economy's anemic performance: underinvestment, particularly by the public sector.
In the US, infrastructure investment remains suboptimal, and investment in the economy's knowledge and technology base is declining, partly because the pressure to remain ahead in these areas has waned since the Cold War ended.
Europe, for its part, is constrained by excessive public debt and weak fiscal positions.
In the emerging world, India and Brazil are just two examples of economies where inadequate investment has kept growth below potential (though that may be changing in India).
The notable exception is China, which has maintained high (and occasionally perhaps excessive) levels of public investment throughout the post-crisis period.
Properly targeted public investment can do much to boost economic performance, generating aggregate demand quickly, fueling productivity growth by improving human capital, encouraging technological innovation, and spurring private-sector investment by increasing returns.
Though public investment cannot fix a large demand shortfall overnight, it can accelerate the recovery and establish more sustainable growth patterns.
The problem is that unconventional monetary policies in some major economies have created a low-yield environment, leaving investors somewhat desperate for high-yield options.
Many pension funds are underwater, because the returns required to meet their longer-term liabilities seem unattainable.
Meanwhile, capital is accumulating on high-net-worth balance sheets and in sovereign-wealth funds.
Though monetary stimulus is important to facilitate deleveraging, prevent financial-system dysfunction, and bolster investor confidence, it cannot place an economy on a sustainable growth path alone – a point that central bankers themselves have repeatedly emphasized.
Structural reforms, together with increased investment, are also needed.
Given the extent to which insufficient demand is constraining growth, investment should come first.
Faced with tight fiscal (and political) constraints, policymakers should abandon the flawed notion that investments with broad – and, to some extent, non-appropriable – public benefits must be financed entirely with public funds.
Instead, they should establish intermediation channels for long-term financing.
At the same time, this approach means that policymakers must find ways to ensure that public investments provide returns for private investors.
Fortunately, there are existing models, such as those applied to ports, roads, and rail systems, as well as the royalties system for intellectual property.
Such efforts should not be constrained by national borders.
Given that roughly one-third of output in advanced economies is tradable – a share that will only increase, as technological advances enable more services to be traded – the benefits of a program to channel savings into public investment would spill over to other economies.
That is why the G-20 should work to encourage public investment within member countries, while international financial institutions, development banks, and national governments should seek to channel private capital toward public investment, with appropriate returns.
With such an approach, the global economy's “new normal" could shift from its current mediocre trajectory to one of strong and sustainable growth.
सार्वजनिक वित्त-पोषित असमानता
वाशिंग्टन, डी सी - वैश्विक असमानता में भारी वृद्धि और आय वितरण के एकदम शीर्ष पर धन के संकेंद्रण को संचालित करने वाले कारकों में से एक कारक नवाचार और वैश्विक बाज़ारों के बीच पारस्परिक प्रभाव है। सक्षम उद्यमी के हाथों में प्रौद्योगिकी सफलता अरबों डॉलर के बराबर हो सकती है, जिसका कारण विनियामक संरक्षण और वैश्विक बाज़ारों की, विजेता-सब-कुछ-ले-जाए की प्रकृति होना है। तथापि, जिस बात की अकसर अनदेखी की जाती है, वह जनता के पैसे द्वारा निजी धन के इस आधुनिक संकेंद्रण में निभाई जाने वाली भूमिका है।
जैसा कि विकास अर्थशास्त्री डानी रोड्रिक ने हाल ही में उल्लेख किया है, संयुक्त राज्य अमेरिका में नई प्रौद्योगिकियों में ज़्यादातर बुनियादी निवेश का वित्त-पोषण जनता के पैसे से किया गया है। यह वित्त-पोषण रक्षा विभाग या राष्ट्रीय स्वास्थ्य संस्थान (NIH) जैसे संस्थानों के माध्यम से प्रत्यक्ष रूप से हो सकता है, या कर अवकाश, सरकारी ख़रीद की प्रथाओं, और शैक्षिक प्रयोगशालाओं या शोध केंद्रों को दी जानेवाली आर्थिक सहायता के द्वारा अप्रत्यक्ष रूप से हो सकता है।
जब किसी शोध का मार्ग अवरुद्ध हो जाता है - जैसा कि कई मामलों में अनिवार्य रूप से होता है - तो इसकी लागत सार्वजनिक क्षेत्र को वहन करनी पड़ती है। तथापि, उन लोगों के लिए स्थिति अक्सर बहुत अलग होती है, जो इसका फल प्राप्त करते हैं। जब कोई नई प्रौद्योगिकी स्थापित हो जाती है, तो निजी उद्यमी उद्यम पूँजी की मदद से, इसे वैश्विक बाज़ार की माँग के लिए अनुकूलित करते हैं, अस्थायी या दीर्घकालीन एकाधिकार की स्थितियाँ बनाते हैं, और इस तरह भारी मुनाफ़े कमाने लगते हैं। जिस सरकार ने इसके विकास के बड़े हिस्से का बोझ वहन किया होता है, उसे बहुत कम लाभ मिलता है या बिल्कुल नहीं मिलता है।
अर्थशास्त्री जेफ़री सैश द्वारा दिया गया एक उदाहरण, हेपेटाइटिस सी के इलाज में इस्तेमाल की जाने वाली दवा, सोवाल्डी है। जैसा कि सैश ने बताया है, जो कंपनी इसकी बिक्री करती है, यानी गिलीड साइंसेज़, उसके पास इसके इलाज का पेटेंट है जो 2028 तक समाप्त नहीं होगा। नतीजतन, गिलीड एकाधिकार क़ीमतें वसूल कर सकती है: 12-हफ़्ते के इलाज के कोर्स के लिए $84,000, जो इस दवा का उत्पादन करने में लगनेवाली क़ीमत यानी कुछ सौ डॉलर की तुलना में बहुत ही ज़्यादा है। पिछले साल, सोवाल्डी और हार्वोनी - जो कंपनी द्वारा $94,000 पर बेची जाने वाली एक और दवा है - की बिक्री की राशि $12.4 बिलियन थी।
सैश का अनुमान है कि निजी क्षेत्र ने सोवाल्डी विकसित करने के लिए शोध और विकास पर $500 मिलियन से कम ख़र्च किया था - इस राशि को गिलीड ने बिक्री के कुछ हफ़्तों में वसूल कर लिया था। तथापि, NIH और यूएस के वयोवृद्ध मामलों के विभाग ने उस स्टार्ट-अप का भारी मात्रा में वित्त-पोषण किया था जिसने दवा विकसित की थी जिसका बाद में गिलीड ने अधिग्रहण कर लिया।
इसमें कोई संदेह नहीं है कि निजी उद्यमियों की कल्पना, मार्केटिंग की जानकारी, और प्रबंधन कौशल नई प्रौद्योगिकी को सफल रूप में लागू किए जाने के लिए महत्वपूर्ण हैं। और अनेक नवाचारों के वाणिज्यीकरण द्वारा पेश की जाने वाली कम क़ीमतें, बेहतर उत्पाद, और उपभोक्ता की बचत स्पष्ट रूप से बड़े सामाजिक लाभ प्रदान करते हैं। लेकिन हमें इन सफलताओं में सरकार की भूमिका को नज़रअंदाज़ नहीं करना चाहिए।
संयुक्त OECD-यूरोस्टेट डेटा से पता चलता है कि 2012 में यूएस में अनुसंधान व विकास में प्रत्यक्ष सरकारी व्यय 31% था। कर अवकाश जैसे अप्रत्यक्ष ख़र्च को जोड़ने पर, यह आँकड़ा 35% तक हो जाएगा। इस तरह के सार्वजनिक परिव्यय की बदौलत कुछ निजी कंपनियाँ अक्सर भारी लाभ कमाती हैं, जो अत्यधिक आय संकेंद्रण का प्रमुख कारण है।
ऐसी प्रणाली को बदलने के अनेक तरीके हैं। रोड्रिक ने इसके लिए सार्वजनिक उद्यम पूँजी फ़र्मों - सरकारी धन निधियों - के सृजन का प्रस्ताव किया है जो सार्वजनिक वित्त-पोषण के ज़रिए हासिल की गई बौद्धिक प्रगति के बदले में इक्विटी पोज़िशन लेती है। एक अन्य समाधान यह हो सकता है कि कर कोड में सुधार किया जाए ताकि जब किसी व्यक्ति या फ़र्म द्वारा सार्वजनिक रूप से वित्त-पोषित शोध का नाजायज़ लाभ उठाया जा रहा हो तो उसके लाभों को कम किया जा सके।
दोनों समाधानों में ही कठिनाइयों का सामना करना पड़ेगा। सरकारी धन निधियों को शायद उन्हें केवल गैर-वोटिंग शेयर देकर, दलगत राजनीति से रक्षित करना होगा। यह देखते हुए कि मूल सफलता और इसके द्वारा पैदा किए गए धन के बीच की कड़ी स्थापित करना मुश्किल हो सकता है, सार्वजनिक रूप से वित्त-पोषित शोध के लाभार्थियों पर करों में बढ़ोतरी करना चुनौतीपूर्ण होगा। इसमें वैश्विक पूँजी गतिशीलता और कर परिहार की जटिलता भी है, जिस पर G-20 ने अभी कार्रवाई करना शुरू ही किया है।
अन्य उपाय भी संभव हैं: पेटेंट क़ानूनों को सख़्त बनाना या फ़ार्मास्यूटिकल जैसे एकाधिकार उद्योगों पर मूल्य नियंत्रण लागू करना , जैसा कि अनेक बाज़ार अर्थव्यवस्थाओं ने किया है। तथापि, जो समाधान नहीं होगा, वह है शोध और नवाचार में कम सार्वजनिक संसाधन लगाना- जो आर्थिक विकास के मुख्य संचालक हैं।
बहुत अधिक प्रतिभा को जुटाने के लिए भारी मात्रा में प्रतिलाभ की ज़रूरत नहीं होती; ख़ास तौर से अच्छी उद्यमशीलता के लिए कुछ सालों तक 50% लाभ जैसा मार्जिन स्वीकार्य लाभ होगा। तथापि, उस राशि का कई गुना बस कुछ व्यक्तियों को जनता द्वारा दिए गए तोहफ़े जैसा बनकर रह जाता है। ऐसे उपायों और अंतर्राष्ट्रीय समझौतों के संयोजन जैसा कोई उपाय ढूँढ़ा जा सकता है जिससे करदाताओं को, जानकार उद्यमियों के लिए अभिनव उत्पादों को वाणिज्यिक बनाने के प्रोत्साहनों को हटाए बिना, अपने निवेश पर अच्छे प्रतिलाभ मिल सकते हों।
इस समस्या की गंभीरता के महत्व को कम करके नहीं आँका जाना चाहिए। इसमें शामिल धनराशियाँ नए अभिजात वर्ग के निर्माण में योगदान करती हैं जो अपने धन को उत्तराधिकार के ज़रिए आगे बढ़ा सकता है। अगर चुनाव अभियानों के वित्त-पोषण के द्वारा विशेषाधिकार की रक्षा के लिए भारी धन ख़र्च किया जा सकता है (जो अब यूएस में होता है), तो लोकतंत्र और दीर्घकालीन आर्थिक दक्षता दोनों के लिए, इस समस्या के निहितार्थ व्यवस्थित हो सकते हैं। संभावित समाधान साधारण इतने आसान नहीं हैं, लेकिन वे तलाश करने लायक हैं।
Muzzling the Dogs of War
WASHINGTON, DC – Sitting in Paris as the United States’s first ambassador to France, Thomas Jefferson reflected on how the new US government could avoid the errors of European “despots” who kept their people subjugated through war and debt.
Writing to James Madison, he observed that the US Constitution had at least checked “the Dog of war,” by transferring “the power of letting him loose from the Executive to the Legislative body, from those who are to spend to those who are to pay.”
At the same time, however, the Constitution designates the executive as the “Commander in Chief,” a power that American presidents have invoked to use military force without Congressional authorization on more than 200 occasions.
President Barack Obama relied on that power when he told both Congress and the American people that he had the authority to order limited strikes on Syria without going to Congress.
By simultaneously claiming that authority and seeking Congressional authorization to use it, Obama enters a small class of leaders who actively seek to constrain their own power.
That is because he sees his historical legacy as that of a president who ended wars and made them harder to start, instead reinvesting America’s resources in its own people.
He opposed the Iraq war in 2003 and promised in 2008 that he would end the unlimited “war on terror,” which had become a potential blank check for US presidents to use force anywhere in the world.
But, beyond the system of political “checks and balances” created by the US Constitution, does it make sense for leaders to take decisions regarding the use of force to the people?
It certainly makes the leaders’ lives harder.
British Prime Minister David Cameron came up short when he turned to Parliament to authorize British participation in US strikes against Syria.
French President François Hollande faced intense criticism from right-wing parties in the National Assembly for his agreement to participate in the strikes.
And Turkish Prime Minister Recep Tayyip Erdoğan, who volunteered to participate in a military coalition, is facing strong domestic opposition to his Syria policy.
There are several arguments for not allowing the people’s representatives to intervene in the complicated foreign-policy dance between force and diplomacy.
For starters, there is the traditional idea that politics end at the water’s edge, where messy domestic disagreements are supposed to give way to the abstraction of one state with a unified national interest.
A related argument is that domestic political processes can hamstring a government in the great game of poker or chess that international politics is supposed to be.
As Obama has just discovered, having a legislature that clearly does not want to go to war weakens the executive’s hand in international negotiations.
Timing is another problem.
Legislative processes are slow and often tortuous, while international diplomacy can change overnight, owing to shifting coalitions, unexpected opportunities, and well-hidden traps.
Moreover, diplomacy thrives on back-room deals of the kind that US Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov have just struck over Syria’s chemical weapons.
In high-stakes negotiations, the last thing the players need is public debate about the cards that each of them holds.
A threat to turn from talks to tanks must be credible, which it will not be if an opposing player can simply count votes to see if the necessary legislative majority exists.
Still, Jefferson had it right.
Though turning to the legislature may prove to be inconvenient, frustrating, and even counter-productive, it is the right thing to do, for three reasons.
First, the use of force is costly in terms of lives, money, and leaders’ energy and attention.
The people pay these costs, so their representatives should decide whether to incur them.
Second, it is never more important for a democracy to follow its procedures and uphold its principles than in an armed conflict involving non-democracies.
The Syrian people, oppressed and brutalized by their own government, should see that the American people have a different relationship with their leaders.
Finally, a core component of democracy is a set of rules and procedures designed to require public officials to justify their policies with reasons that can be accepted or countered in public debate.
When contemplating foreign military intervention, leaders must explain their actions in ways that make clear how their country’s strategic and moral interests are at stake – for example, how unbridled aggression and hideous suffering can fester and spread.
Leaders would prefer to speak in the language of readily calculable interests.
Talk of care and moral scruples is uncomfortable and unstable terrain.
As the Turkish political analyst Mustafa Akyol has put it, for most of the Turkish population, “care for Syria does not translate into, ‘Let’s go liberate it.’” Yet leaders who need their people’s support to address complex, interdependent problems beyond their borders must socialize them into a twenty-first-century world in which caring without acting imperils us all.
These arguments do not mean that leaders will not use force from time to time without turning to their people first.
Obama does have constitutional authority to conduct limited military strikes to deter and degrade Syrian President Bashar al-Assad’s ability to use chemical weapons.
All leaders can order their forces into battle in cases of national emergency or self-defense.
They must preserve their legal and operational ability to act swiftly and decisively when necessary.
But, two centuries after Jefferson, states are no longer merely colored shapes on a map; increasingly, they are transparent and open territories that we view as home to millions of fellow human beings.
It is thus ever more important that the people of one country participate in the decision to attack the people of another.
Investing in Happy Endings
LONDON – Public and private investment in the real economy has been under attack since the 2008 financial crisis.
In difficult economic times, it may seem logical to cut investments that yield results only in the long term, and thereby conserve money and resources to address short-term problems.
In fact, cutting investment in our future – be it in people, the planet, political institutions, or business – is deeply irrational.
It is only through investment in visionary ideas, blue-skies thinking, research and development, and innovation that we can ensure that the future will be better – freer, more peaceful, and more prosperous – than the past.
Early-childhood education, preventive medicine, libraries, physical infrastructure, and basic scientific research, for example, all cost money – and studies show that they are worthwhile.
But when policymakers need to cut spending, investment in these public goods is often the first thing to go, because voters do not feel the effects in the short term.
Most of the pain is deferred, which is precisely why such cuts are politically attractive.
But this is low-hanging fruit that societies cannot afford to pick.
We must start investing in people at the earliest possible moment – right from birth.
Universal access to high-quality nutrition and preventive health care, as well as early-childhood learning programs, are necessary to provide strong foundations upon which countries around the world can ensure their future social advancement and economic growth.
Likewise, for children and adults alike, there is real value in, say, public libraries – secular and free gathering spaces that offer universal access to learning and, increasingly, provide a gateway to digital services.
The same is true of cultural programs and institutions that stimulate growth in the arts and sciences; they, too, are necessary to ensure that citizens can contribute productively to their societies and economies.
The temptation to cut long-term investment in economic hard times stalks the private sphere as well.
And companies around the world, big and small, have been succumbing to it since the beginning of the global economic downturn.
As companies are forced to look to their bottom line and become leaner, they cut investment in research and development, employee development and training, infrastructure, and more.
Making matters worse, these budget lines are the last to be restored when economic prospects brighten.
For example, in the face of investor pressure, pharmaceutical companies have cut their research activities dramatically, relying instead on acquisition strategies.
The aim is to “de-risk” by buying up firms that have already carried out all of the costly blue skies research and have developed proven drugs.
Obviously, such strategies will not work in the long term if no one is willing to invest in the earliest stages of research in critical areas like biotechnology, digital technology, renewable energy sources, and the like.
With early-stage investors scarce, governments turning away from blue-sky science, and funders of university-based research increasingly demanding that grantees’ show the “impact” of their work, who will fund risk-taking?
If no one does, the well will run dry, and there will be nothing to acquire.
Likewise, instead of investing in new infrastructure, companies patch up the old.
But patching broken things can work for only so long.
By not committing resources to invest in new, cost-efficient, environmentally-friendly operations, or in developing the skills and knowledge of employees, or in innovation, companies will find that their short-term savings come at the expense of their long-term success.
The choices that companies are making not only affect their own operations, but also have profound consequences for their customers, suppliers, and the societies in which they are embedded. Failure to invest in the future will affect that future for everyone.
Not everything that is worthwhile has an immediate positive effect on financial bottom lines, or can be put neatly in a box.
If public and private investment decisions are driven only by the easily measured and easily defined, we will miss out on the breakthrough moments that characterize so much of human achievement and advancement.
In both the public and private sectors, we need to commit ourselves to long-term investment, whether in children and education, science and technology, and health and medicine, or in building strong institutions that can serve as the sustainable foundations of peaceful, democratic, and prosperous societies.
An investment in our future is never wasted.
Investing in beginnings is the only way we will live to see happy endings.
Publish or Perish
OXFORD – A few years ago, two Norwegian researchers presented their version of a scientific-research slippery slope, with honest errors (mistaken observations and analyses) at the top and intentional fraud (plagiarism, falsification, and fabrication) at the bottom.
They placed “publication bias” about halfway down the scale – but it should have been much lower.
Indeed, failure to publish research results is by far the most common and worrying form of scientific and ethical misconduct in health research – and it has had lethal consequences.
Anecdotal evidence of publication bias has existed for a long time.
But, as requirements for registering clinical trials have become more stringent, its magnitude has become quantifiable: the results of at least half of the clinical trials involving patients and healthy volunteers remain unpublished years after completion.
Studies with “negative” results are particularly unlikely to see the light of day.
But neglecting to report research can lead to distorted clinical-practice recommendations, suffering, and death.
For example, anti-arrhythmic drugs were prescribed widely – with the United States Food and Drug Administration’s approval – to heart-attack victims for more than a decade, under the assumption that reducing heart-rhythm abnormalities would decrease mortality rates.
But, as the investigative journalist Thomas J. Moore reported in his book Deadly Medicine, at the peak of their use, these drugs were killing more Americans each year than were killed during the entire Vietnam War.
Following this revelation, a British research team reported a clinical trial that they had carried out more than a decade earlier.
Their study had found a higher death rate among patients receiving a new anti-arrhythmic drug than among those receiving a placebo. They had not published the results, they explained, because the drug’s development had been abandoned for commercial reasons.
In retrospect, however, they observed that their results “might have provided early warning of trouble ahead.”
Beyond avoidable suffering and death, failure to report research also slows the pace of scientific discovery.
It is widely acknowledged that the high current level of investment in pharmaceutical research is yielding too few substantive discoveries.
At a meeting on “translational research,” a senior member of a contract-research organization – a company that provides outsourced research services to the pharmaceutical and biotechnology industries – articulated the problem. “What really frustrates us,” he commented, “is to be commissioned by a pharmaceutical company to design an early-phase trial when we know already that it is going up a blind alley.
And the reason we know that is that we’ve been up the blind alley with another company; but that experience remains unreported for commercial reasons.”
In other words, the drug-discovery process suffers from built-in inefficiency, owing to inadequate reporting.
But, while waste may be tolerable, avoidable harm to patients is not.
Drug-trial volunteers should not accept this abuse of their participation in research.
Failing to publish the results of clinical trials is a betrayal of the implicit trust that they have placed in researchers to use their contribution to increase and improve the stock of scientific knowledge.
Nor should the public accept this squandering of resources.
There is simply no justification for withholding the results of health-research studies.
Pulling Nigeria Back from the Brink
Once again, Nigeria seems at the brink of disintegration, this time with the threat by parliament to impeach President Olesegun Obasanjo.
But Nigeria has always been remarkable for producing surprising outcomes.
Time and again, Africa "experts" issue dire warnings about the country's impending implosion, and time and again, Nigeria holds together, however precariously.
The forces working to undermine Nigeria's unity and stability are as varied as they are powerful.
But the factors that hold together this huge, socially diverse country of over 120 million people are equally potent and tenacious, constantly pulling the country back from the brink--even as the most sanguine foreign observers brace themselves for the worst.
This time, ethnic and religious tensions are rising with the approach of next year's presidential elections, the second since military rule ended in 1999.
Unemployed urban youth and ethnic militias are driving an upsurge of armed robbery and political violence in such cities as Lagos and Warri in the south, and Kaduna and Kano in the north.
The political/ecological crisis in the oil-producing communities of the Niger River delta threatens to spin out of control as irate youth and impoverished women accuse the oil companies and state officials of despoiling their habitat and taking their oil without giving back much in return.
But most outsiders fail to grasp the maze of living threads that bind Nigerians to one another.
Fulani cattle herdsmen and butchers, originally from the country's north, are a familiar scene in eastern cities and towns.
Igbo merchants and artisans crowd the famous market of Kano and other northern cities.
Lagos, the nation's commercial capital, is a city of mongrels and hybrids, with no ethnic group in command.
The corporate boardrooms exert an even stronger influence in preventing Nigeria from falling apart.
A mesh of interlocking share-holdings in the finance and banking sector, upstream petroleum refining, and the booming telecoms industry draws business barons, retired generals, and powerful traditional rulers into a rancorous but surprisingly stable family.
While the majority of the business elite is from one of the three main ethnic groups--Hausa-Fulani, Igbo, and Yoruba--its members recognize that oil drives the economy, and that the bulk of it comes from the Niger delta, inhabited by minority groups such as the Ogoni and the Ijo.
This recognition of mutual dependence on a valuable resource outside their territory aligns the interests of the three main ethnic groups.
Each group's self-interest in sustaining the flow of petrodollars serves to unite much of Nigeria's patchwork of emirates, kingdoms, village republics, and autonomous clans.
A single Nigerian nation is slowly but surely emerging from this cacophony of dissonant voices.
Realizing that no single group is powerful enough to impose its habits on others, Nigeria's peoples are working out ingenious ways to accommodate one another's differences.
Increasingly, Nigerians are assuming multiple identities, drawing on their ethnic or religious origins or both, and using these as a basis for their "Nigerian-ness."
More and more Nigerians do not find balancing their different identities irksome because they recognize that there are advantages--economic, cultural, and political--to be derived from straddling them.
A typical restaurant menu in any Nigerian city reads like a symptom of such fluid identities.
It might include "Suya," (barbecued meat), originally of Hausa origin, but now a national favorite.
And upper and middle class Nigerians everywhere might well choose "Gulder" and "Star" lagers, which are brewed in Lagos.
Similarly, support for the "Super Eagles," the country's soccer team, cuts across all ethnic groups. while a thriving local video film industry, akin to India's "Bollywood," is drawing actors, producers, directors and marketers to Lagos, where the majority of these films are made.
This is not to say that the forces of disintegration have been defeated.
A clear reminder that the fault lines of disunity still run deep is the recent sentence of death by stoning issued to a woman by a Muslim Sharia court in Nigeria's northern region.
The upsurge in Islamic fundamentalism in northern Nigeria is partly driven by the deep insecurity of the region's political elite over a possible loss of power and influence.
But crude Sharia punishments, while condemned by foreigners, could well represent an opportunity for advocates of Nigerian unity.
Reducing destructive ethnic tensions and competition between the country's diverse regions requires transferring real power to local governments, giving them the sort of authority over taxes, schools, police, and land-use controls that American states, counties, and cities typically enjoy.
Of course, there is a danger that building up local and regional governments will encourage secessionist movements.
After all, memories of the bloody civil war over "Biafra" 30 years ago still run deep.
Nevertheless, the risk is worth taking. Loosening the ties that bind Nigeria's peoples in an overly centralized, authoritarian state would allow them to assert themselves more freely and recognize on their own the benefits of maintaining and deepening their growing sense of unity.
Purpose beyond Power
BUDAPEST – The re-run of the Greek parliamentary election on June 17 is only the latest symptom of the most serious crisis to plague Western democracies and open societies since the 1960’s.
Liberal democracies in the West today are struggling to avoid – and in doing so are exacerbating – a crisis of identity, which puts the existing social contract at risk and threatens their implosion.
The end of the Cold War bequeathed our leaders with a new set of governance challenges, which promptly grew in magnitude, in large part owing to faster globalization, the consequences of the 1980’s economic liberalization, and the 1990’s revolution in information technology.
These challenges, insufficiently addressed, soon led many to question the sustainability of liberal democracy’s appeal at home and its universality abroad, and to probe the alleged merits of the “Chinese model,” best characterized as a form of authoritarian or state capitalism.
The financial meltdown of 2008, which soon metamorphosed into the deepest Western economic recession since the 1930’s, added fuel to the fire, as policymakers hunkered down in a non-transparent crisis-management mode, condoning massive state intervention in the economy and socialization of private-sector losses on a previously unprecedented scale.
The resulting fiscal austerity plunged many below the poverty line and accelerated economic inequality, while many private institutions, having caused the 2008 bust, recovered on the public dime.
Adding insult to injury, in Greece and Italy, two of the hardest-hit countries, financial markets effectively deposed elected, if imperfect, governments.
The hapless former Greek prime minister, George Papandreou, had to resign last year after daring to suggest a referendum to decide the economic future of his fellow citizens.
(Ironically, the upcoming election will de facto serve as the referendum that Papandreou suggested in October 2011.)
At the root of the European crisis (and its equivalent crisis in the United States) is a shift in the configuration of economic, social, and political power. Liberal democracies and open societies have traditionally relied on a fine balance of these three forms of power.
Over the last two decades, our elites have been unable to maintain it, as economic power has long since gone global and dislodged itself from political power, often corrupting democratic politics in the process.
At the same time, social power, which provides the oxygen for democratic legitimacy, has been marginalized and disillusioned, and is increasingly turning away from the traditional transmission belts of politics.
The result is an erosion of the stature of mainstream political parties and trade unions, and all-time low levels of trust in governments writ large.
Powered by new media, identities are beginning to form around new networks of social interaction that often defy state boundaries and have little connection to liberal democracy’s traditional institutions of governance.
The refusal of today’s elites to promote an effective balance of the three powers – to recognize a larger purpose beyond maximizing each individual power – has visibly translated into a waning regard for the public good.
This has dramatic consequences for liberal democracy and open societies.
With political power diminished (and sometimes usurped) by the transformation of its economic counterpart, and its detachment from its social base rendering it increasingly illegitimate, this is the hour of populists and extremists.
We now see them feast on enfeebled democracies in many European countries, as fringe movements become serious contenders for power and threaten to wipe out the achievements of more than 60 years of European integration.
In the US, the political system has descended into seemingly intractable partisan paralysis, gravely undermining the system of checks and balances and generating a deepening sense of malaise and frustration.
We stand at a critical juncture.
Recreating democracy and open societies in a global age requires investment in new ideas to rebalance political, economic, and social power at both the national and the global level.
Nationally, we need to experiment with new mechanisms for policymaking and implementation, reconnecting democratic institutions to citizens and emerging networks of civil society.
Globally, we must allow political and social power to establish their rightful place next to economic power.
Mere tinkering will not do; we need a transformation of the global institutional architecture.
Unless we can establish a global socio-political space, we cannot legitimately deliberate over the provision of global public goods, let alone deliver them successfully.
The push toward such a space needs to be spearheaded by risk takers – social and political entrepreneurs who are unafraid to work across lines traditionally dividing sectors and states, and who help to re-create a global community of purpose beyond power.
The French philosopher Jean-Paul Sartre once described the Berlin Wall as a mirror.
In view of the Soviet system, it was indeed easy to overlook our own weakness and fallibilities.
As the Wall came down, our elites struggled to maintain the fiction of an inherently imminent victory march for liberal democracy worldwide, now laid bare by the economic crisis on both sides of the Atlantic.
We have lost two valuable decades to respond adequately to globalization and the crisis of liberal democracy and open societies.
It is time to begin an honest reflection about power and its purpose in today’s rapidly changing world.
Putin and Medvedev: Teammates or Rivals?
Vladimir Putin’s decision to serve as prime minister should Dmitri Medvedev become Russia’s next president has made their electoral success in March a virtual certainty.
Although the Communist Party’s leader, Gennadi Zyuganov, and the Liberal Democrats’ Vladimir Zhirinovsky are running – in contrast to 2004, when they fielded stand-ins – neither will get more than 15% of the vote.
Even assuming that Mikhail Kasyanov, Boris Nemtsov, and Democratic Party leader Andrei Bogdanov somehow collect two million signatures each to get on the ballot, the outcome will be the same.
Indeed, so far, none of them has more than 2% popular support.
But, while Medvedev’s victory in the first round of voting appears assured, the important questions will arise after the ballots are counted.
How will power be distributed between Medvedev and Putin?
Who will be in charge?
Will Russia have to rewrite its laws and Constitution to give the prime minister more official power?
Is Putin risking his political future by accepting a formally secondary role and making himself accountable for all socio-economic policy?
Russia’s Constitution does not allow for a “technical presidency.”
The head of state has extensive powers, which alone indicates that Medvedev will be a strong president.
Moreover, Medvedev is a strong-willed politician and very experienced administrator.
But Putin will be a strong prime minister, if only because he’s Putin.
He is set to remain the most popular person in Russia for a long time to come.
That implies a system of governance with at least two decision-making centers – perhaps in addition to United Russia, the party of Putin and Medvedev, which won 64% of the vote in the recent parliamentary election up from 37% in 2003.
All this represents obvious progress from the standpoint of the separation of powers.
In consenting to become prime minister, Putin is well aware of what to expect.
After all, he served as prime minister for several months in 1999.
Many commentators underestimate the prime minister’s powers.
According to the Constitution, the prime minister is head of the executive branch, and the government is empowered to determine the main direction of domestic and foreign policy.
Much depends on who is prime minister; heavyweight politicians holding the office can potentially eclipse the president.
Recall Yevgeny Primakov – or Putin at the end of Boris Yeltsin’s last presidential term, when it was obvious to everyone that the prime minister was running the country.
The 2008 version of Prime Minister Putin will undoubtedly be stronger than the 1999 version.
So no changes are required to the laws or the Constitution for him to remain a key political player.
But Medvedev – youthful and energetic, with a fresh mandate – will be far stronger than Yeltsin was in 1999.
A powerful prime minister seems preferable.
One of the chief weaknesses in Russia's constitutional design is that power is separated from accountability: the president has the most power, but the government is held accountable for policy results.
From this standpoint, the American model, for example, is more successful: the head of state also leads the government.
While not entirely addressing the flaws in the design, the new situation – with the strongest political figure heading the executive branch – will permit more effective performance by the government, which is still battling to recover from Putin’s administrative reforms of 2004.
Many commentators have reproached Putin for agreeing to take a job that they say is beneath him – assuming responsibility for road-building, social services, inflation, and many other problems that could undermine his popularity.
However, he should be thanked rather than reproached.
But how stable will this new polycentric system of governance be?
How long will Medvedev remain president and Putin prime minister?
What if they quarrel?
Of course, stability requires agreement between the two key actors; and there are sure to be plenty of opponents and allies trying to stir up trouble between them.
But Putin and Medvedev have worked together for more than 17 years with no serious conflicts.
Moreover, Putin has never made a mistake about the loyalty of the people he promotes.
In the Yeltsin era, sacked officials often took revenge by publishing their memoirs and “telling all” about their ex-boss.
In the Putin era, no one has done so.
Mikhail Kasyanov, a former prime minister and now an opposition critic, was inherited from Yeltsin.
When Putin made the most important appointment of his life – the choice of his successor – one can be sure that his calculations were thorough.
So Medvedev will become the next president, and will hold that office for at least one full term.
And Putin will remain prime minister throughout that time, with a good chance of becoming president again in 2012 or 2016 – or after any other presidential election over the next two decades.
Putin and Pushkin
MOSCOW: By arresting media mogul Vladimir Gusinsky, the Kremlin -- whether by order of President Putin or not -- revived fears of censorship and thought control.
Are those fears justified, and what does Gusinksy's arrest presage, if anything?
Neither censorship nor the gulag ever completely suppressed intellectual life in Russia.
Witness the genius of Akhmatova, Mandelstam, Shostakovich, Pasternak and Prokofiev who created great works even in the nightmare years of the Stalinist era.
Recognizing this indestructibility, Russian leaders have always sought to keep the mass media under their thumb, and artists on their side.
Newspapers buckled and often artists returned the state's embrace.
Pushkin, for example, announced that AI am not a flatterer when I sing praises to my Tsar." Even Mandelstam, although he did it under duress, wrote an Ode to Stalin, which nevertheless failed to save him from the gulag and death.
Lenin, Khrushchev, Brezhnev, Gorbachev -- all constructed their ruling Soviet ideology on the foundation of the Russian intelligentsia.
When communism imploded, however, Yeltsin sought to divert Russia's intellectual energy toward money and the media.
High culture was abandoned as a Kremlin plaything and left to survive -- or not -- on its own.
The Internet and mass media, not poetry, was to be the catalyst in jump-starting Russia's civil society.
As President, Vladimir Putin vowed last January to revive the moral fiber of the Russian people, their glory and international respect.
To achieve this goal he has sought to restore high culture to a position of primacy in Russian life, and to put mass media back in its (politically) subservient place.
If geniuses like Solzhenitsyn and Sakharov helped dismantle the USSR, Putin appears to believe, other artists and thinkers could revive Russian greatness.
But politics in Russia has never been a matter of greatness, only control; and because the media is key to controlling politics, it seems almost natural that Putin is now seeking to manage it more directly.
Indeed, in his half-year as acting and elected president, Putin has posed as a great supporter of Russian culture in all its aspects: film, literature, music, architecture, science.
Mass media, because of its political usefulness, now seems exempted from these tender concerns.
For Russians, Gusinsky's arrest incites a sinister sense of déjŕ vu. Stalin also posed as a "best friend of Soviet linguists, athletes, children and soldiers," but most of all as the "friend" of writers, composers, poets, and artists even as he kept an iron grip on newspapers and broadcasters.
Stalin's "friendship," of course, sent Mandelstam to his grave, and Pasternak, Shostakovich, and Bulgakov all found themselves isolated.
Again and again Josef Vissarionovich would repeatedly telephone Bulgakov after viewing the film version of his novel "The White Guard" in his favorite Moscow Art Theater (MkhAT), to express his admiration. "Mikhail Afanasievich, Stalin speaking," would come the voice down the receiver, freezing the author in terror.
With Shostakovich Stalin discussed the need to write songs rather than symphonies, particularly for the movies. "One cannot underestimate the ideological effect of cinematography -- 120 million people can be the viewers," Stalin added.
Vladimir Putin's new "dictatorship of law" also seeks to play the "culture card" of his "law and order" predecessors.
Thankfully (so far), Putin's cultural involvements have assumed less grandiose and intimidating forms.
Gusinsky, after all, was arrested in the glare of news cameras, not shipped off to the gulag in the dark of night.
But this gentleness may merely be the result of the fact that democratic/capitalist governance now affords its own forms of surveillance to replace Soviet-style censorship.
Putin's state influences editors, publishers, and theater owners by raising licensing fees, auditing taxes, even applying fire and pest-control regulations to close down the offices of disagreeable magazine, theater, and film companies.
The point is to atomize and isolate.
Great voices can speak, but these voices must be singular; the chorus of opinion that mass media outlets like those controlled by Gusinksy offers, it seems, must be overseen, monitored, and if necessary, controlled when they get too far out of line, as Kremlin power brokers seem to believe Gusinsky has been.
Gusinsky's Media-Most empire, including television and influential newspapers and magazines, bridled at earlier Kremlin attempts to control them by other means.
Gusinsky's arrest seems a signal that the old whips can still be taken out of storage.
On the other hand, Putin's benevolent gestures towards mastera cultury (maestros of culture) -- Kremlin benevolence that was once so life-threatening -- are complacently accepted by today's mastera.
Valery Gergiev, the renowned conductor of the Kirov (now Mariinsky) Opera in St. Petersburg, was pleased by the President's direct interest in his new production of Prokofiev's opera War and Peace; as was Nani Bregvadze, a legendary Georgian singer, whom Putin begged on his knees to sing for him after missing her concert at the Moscow Conservatory.
In treating cultural masters different from media barons, Putin's calculations have been proven right so far.
Recently, Nikita Mikhalkov, director of the Oscar-winning film "Burnt by the Sun," the pianist and president of Russia's Art Academy Nikolai Petrov, the singer and composer Alexander Gradsky and other members of the intelligentsia spoke to the press in Moscow in defense of Putin's strategy in Chechnya.
"When the nation mobilizes its forces to achieve some task, that imposes obligations on everyone including the media," they said in a written statement. Sentiments of which Josef Stalin would heartily approve.
Vladimir Gusinsky may be just the first to learn the limits of freedom, and the depth of those obligations.
United With Putin Against Terror?
NEW YORK – Russian President Vladimir Putin has just vowed to “find and punish” those responsible for using a homemade bomb to bring down a Russian airliner over Egypt in October, killing 224 people.
The timing of his announcement, just days after terrorists used suicide bombs and Kalashnikovs to kill 129 people in Paris, is no coincidence.
Putin sees an opening to the West, and he wants to take advantage of it.
The West should not shut him out.
For weeks, the Russian government seemed to be dithering over the proper response to the plane crash, as if it were worried that the loss of life would be blamed on its decision to intervene in Syria’s civil war.
The bloodshed in France, however, has changed the calculus completely, pointing toward the possibility of a rapprochement between Russia and the West.
By striking Paris, the Islamic State has turned the Syrian war into a global conflict.
And, as Putin’s performance at the G-20 summit in Turkey showed, Russia is firmly in the middle of the fight.
It must be noted that an adversarial relationship with the West was not part of Putin’s original plan. “Russia is part of European culture,” Putin told the BBC in 2000, shortly before his election as President.
“I cannot imagine my own country in isolation from Europe and what we often call the civilized world. It is hard for me to visualize NATO as an enemy.”
It was only in 2002, after NATO began talks to admit Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia, that relations began to sour.
As former British Prime Minister Tony Blair described the turning point in his memoirs, “Vladimir later came to believe that the Americans did not give him his due place.”
Putin’s bellicosity was later reinforced by domestic political concerns – a deep recession that made it necessary to channel voters’ anger – and perceived slights, especially at the hands of the United States (President Barack Obama once referred to Putin as “the bored kid in the back of the classroom”).
But it was only with Russia’s intervention in Ukraine and its annexation of Crimea in March 2014 that Putin became openly confrontational, portraying his country as the victim of aggression.
The West has “lied to us many times, made decisions behind our backs, placed before us a fait accompli,” Putin said in a televised address, shortly after a dubious referendum in Crimea cemented Russia’s control over the region. “This happened with NATO’s expansion to the East, and the deployment of military infrastructure at our borders.”
At the G-20 summit in Turkey, however, Putin struck a markedly different tone, extending an open hand: “We proposed cooperation on antiterrorism; unfortunately our partners in the United States in the initial stage responded with a refusal… [But now] it seems to me that everyone is coming around to the realization that we can wage an effective fight only together… If our partners think the time has come to change our relations, then we will welcome that.”
The logic behind Putin’s overtures is clear.
Russia has achieved its objective in Ukraine: a frozen conflict that will provide the Kremlin a continuous role in the country’s politics.
His goal now is to convince the West to lift its sanctions.
As analysts at Stratfor Global Intelligence put it, “Unless the Kremlin is willing to let Russian companies default on their debts or make bigger cuts to their current operations or future investments in the coming years, Moscow will need to convince the Europeans to let at least the harshest sanctions expire.”
The attacks in Paris have provided Putin with the opportunity to present his military operations in Syria as a service to the West, an example of Russia’s willingness to perform the dirty work of attacking the Islamic State in its own territory.
And Putin is already making concessions in the diplomatic sphere.
At a summit in Vienna on November 15, just two days after the attacks in Paris, Russia and the US seemed to set aside some of their differences on how to end Syria’s civil war, agreeing to a timeline in which a new government would be elected in early 2017.
The US and its European allies have suddenly gained a great deal of leverage over the Kremlin, and they should not be shy about using it.
While the West should not be quick to lift its sanctions – the dispute over Crimea is unlikely to be resolved quickly – harnessing the Kremlin’s desire to be recognized as a great, global power is a sound strategy.
The frozen conflict in eastern Ukraine can be thawed if Russia is convinced to observe the Minsk Protocol, withdraw its troops from the border, and help facilitate local elections under international standards.
If Putin is willing to create some goodwill by cooperating in Ukraine, the West should consider offering some small concessions in return.
Russia’s participation in the battle against the Islamic State – and its return to the rule-abiding ranks of the international community – may be worth the price.
Europe Versus Gazprom
NEW YORK – For years, Russian President Vladimir Putin has wielded Europe’s dependence on his country’s natural gas as a foreign-policy weapon, without fear of the European Union calling his bluff – until now.
With the EU launching an antitrust case against the state-controlled gas conglomerate Gazprom, Europe has sent a clear signal that Putin’s brutishness is no longer as intimidating as it once was.
The message from the European Commissioner on Competition – that market rules apply to everyone – is one that Putin has dismissed for years.
Reliance on economic and legal means to achieve his political goals has long been a hallmark of his rule.
More than a decade ago, the Kremlin expropriated Yukos Oil, which at the time produced 20% of Russia’s output, and jailed its founder, Mikhail Khodorkovsky, for ten years on trumped-up tax evasion charges after he dared to oppose Putin.
All major players in Russia’s energy-centric economy quickly fell into line politically, enabling Putin to use the country’s oil and gas exports as a geopolitical cudgel.
EU countries that he could not intimidate militarily, owing to NATO, were wooed with discounts – or punished with price hikes.
Hungarian Prime Minister Victor Orbán is Putin’s staunchest friend in Europe (though Greek Prime Minister Alexis Tsipras seems to want to change that), while Poland’s leaders have consistently warned that Russia could become a menace to the continent again. As a result, whereas Hungary pays Gazprom $260 per thousand cubic meters of gas, Poland pays $526 – the highest price in the EU.
The Poles have paid a steep price, but they were right. The downing of Malaysian Airlines Flight 17 over eastern Ukraine last July seemed to mark the beginning of the end of Russia’s reputation, such as it is, as a civilized country.
And now there is the hearing, currently underway in London, into the murder of Alexander Litvenenko, a dissident ex-KGB officer. Early in that hearing, the barrister acting for Litvenenko’s family claimed that the evidence in the case led to Putin’s door.
Russia’s economy has already been reeling under Western sanctions imposed in response to the Kremlin’s annexation of Crimea and continued aggression in eastern Ukraine.
Output is expected to shrink by almost 4% this year, and the country’s credit ratings have been reduced to “junk” or “near junk” status.
And now the European Commission is taking a page from Putin’s playbook.
By seeking to punish Gazprom for its manipulation of energy prices, it is aiming a dagger at the heart of Putin’s regime.
Moreover, the EU’s antitrust action seems to be part of a coordinated legal assault.
Last summer, the Permanent Court of Arbitration in The Hague ruled that Russia must pay $50 billion to Yukos’s shareholders – a judgment expected to be upheld on appeal.
In essence, the decision sent the same message as the EU’s anti-trust action against Gazprom: rules apply to everyone, and stolen property must be returned.
Of course, Europe could not easily withstand a 30% cut in natural-gas deliveries if Putin ordered Gazprom to stop doing business there. But that is unlikely: Natural resources comprise 70% of Russia’s exports, and transfers from Gazprom’s revenues alone account for at least 5% of the national budget.
Over the past decade, rising oil and gas prices fueled rapid GDP growth, securing Putin’s popularity and giving him the resources to reconstruct Russia’s military might, now on display in Ukraine.
In other words, Gazprom (and the Russian government) are less capable of withstanding the loss of the European market than vice versa.
Indeed, given the hard bargains that China has been driving during Putin’s desperate search for alternative buyers, threatening to cut exports to Europe has proven to be an exceedingly unwise tactic.
A moment of truth is slowly approaching.
Much of the world is working to reduce its dependence on volatile or unsavory energy suppliers by adopting new technologies such as hydraulic fracturing and increasing purchases from places like Australia, Norway, Qatar, and the United States, which has eased restrictions on the export of natural resources.
Whether Putin likes it or not, this trend will force him to become accountable for his actions.
The EU may be unable to return Crimea to Ukraine, but its legal actions should put Putin on notice that his strong-arm tactics will not work for much longer.
Putin Is An Island
No man is an island, the poet John Donne said.
If he is well briefed for his summit in Moscow and Saint Petersburg, President Bush should discount Donne's wisdom.
For within Russia, President Putin does appear to be an isolated island, at least among the Russian elite who have singularly failed to embrace his decision to anchor Russia firmly to the West.
The elite's gripes about Putin's foreign policy are many, but they center mostly on the notion that America is running roughshod over Russian interests.
American troops, they complain, are on the ground in the former Soviet republics of Georgia, Kyrgizstan, Tadjikistan, and Uzbelistan.
The next wave of NATO expansion promises to lap onto Russia's border and indeed surpass the old Soviet borders by taking in the Baltic states.
Foreign investment has scarcely increased.
Putin, they allege, has surrendered Russia' traditional notions of security and received nothing from the West in return.
The crimes they attribute to Putin sound like the indictment for a treason trial.
After making his bold moves towards the West after September 11 th, Putin undoubtedly expected to receive praise and favors in return.
Of course, the West's ingratitude has been marked: America withdrew from the 1972 ABM Treaty and has now rammed a vague disarmament agreement - to be signed during the summit and which will allow the US not to destroy surplus missiles and warheads but rather to put them in cold storage - down Putin's throat.
Even Putin's Defense Minister Sergei Ivanov, a former KGB colleague and a man often considered to be Putin's closest advisor within his government, does not fully agree with him on the terms of collaboration with America.
If the Russian-Western alliance fails to bring tangible benefits to Russia soon, there is a growing fear that the loss of confidence in Putin may weaken him fatally.
There is an eerie sense of déja vu in all this.
Khrushchev, Gorbachev and Yeltsin all saw their hold on power undermined when they sought to please or placate the West only to receive nothing in return.
Weakened by the perception of allowing the West to mistreat Russia, their influence among Russia's ruling elite disintegrated.
But there is a critical difference between the Russia of today and even Yeltsin's early postcommunist Russia.
Under Khrushchev and Gorbachev (and also Yeltsin), Russia was an autocratic society in which control of the elite was the key to power.
Civil society didn't exist.
Only the power bureaucracy mattered.
The faceless mass was just that: faceless and powerless.
Public opinion didn't matter; it didn't even exist.
That elite, the old politburo nomenclature, was united by homogenized opinions.
You kept power by sticking together in thought and word and deed.
Change was anathema, risk to be avoided at all costs.
Better to stick to a tried and failed policy than to upset the apple cart, even if the apples were rotten.
Today's Russia is no longer a two-tier society.
It is a society with a diversity of opinions, options, opportunities and interest groups.
Democracy, every Westerner will tell you, is not founded on what the élite think; it's what the people think that matters - or at least what a contending rabble of rival interests think.
But the most important thing is that people are free to think, which Russia's people undoubtedly are now free to do.
What they think is that Vladimir Putin is looking after Russian interests, which now include being an unconditional part of the West.
Public opinion matters, and Russia's elite knows it.
Yes, Putin cares that the elite are keeping their distance from his foreign policy.
But he knows something that they don't seem to recognize: Russia's people endorse his policies and do not want them overturned.
Of course, the elite works behind the scenes to retard Putin's efforts, which is one reason why his ideas for military reform have gone almost nowhere under Sergei Ivanov's direction.
But obstructing is far from overthrowing.
Putin may well be as isolated as my grandfather Nikita Khrushchev was in 1964, when Leonid Brezhnev organized his palace coup against him.
Yet he is nowhere near as vulnerable, thanks to his widespread grassroots support among ordinary Russians.
Indeed, in the old days, Russia relied on its strength, mostly military, to determine its self-image.
Russia's elite still embraces this vision.
But after the disasters of the last two decades, including the military debacle in Afghanistan and the ruinous barbarity of the Chechen war which has blown back its violence into Russia's cities, ordinary Russians are less enamored of military might.
They still revere their country, of course, and want the world to respect it.
But it is respect for Russia's culture that matters most to them, and such does not come at the barrel of a gun.
The obsession with power and prestige that galvanizes Russia's elite hardly matters at all.
Russian society today is diversified and democratic, and its support for Putin is stronger than the grudges Russia's élite hold against him.
So perhaps John Donne was partly right: if Putin is an island, he is one in a sea of millions of islands.
The bell of a coup will not toll for him.
Putinism’s Authoritarian Allure
PARIS – A surprising phenomenon is increasingly apparent in Western Europe: far-right parties are moving away from their traditional anti-communist and anti-Russia ideologies, with many expressing admiration – and even outright support – for Russian President Vladimir Putin’s regime.
To be sure, several former and current European political leaders have sought to ally themselves with Putin’s regime.
Former German Chancellor Gerhard Schröder, for example, joined the board of the Nord Stream gas-pipeline project (ensuring Germany direct access to Russian supplies via the Baltic Sea) immediately after leaving office.
Similarly, The Economist described former Czech President Václav Klaus, a prominent Euro-skeptic, as one of Putin’s “warmest admirers abroad.”
But opportunism is not ideological affinity.
By contrast, Germany’s far-right National Democratic Party has demonstrated nostalgia for East German virtues, calling the defunct German Democratic Republic “a better Germany” than the Federal Republic.
In 2011, the NPD officially merged with another far-right party, the German People’s Union, which has long been linked to Russia’s Liberal Democratic Party (LDPR) and its founder and leader, the ultra-nationalist Vladimir Zhirinovsky.
While Zhirinovsky has long been a prominent member of Putin’s opposition, he has displayed similarly authoritarian tendencies, for example, by promising to establish a police state if elected President.
And his communist links are clear.
Not only was the LDPR’s establishment a joint project of the Communist Party of the Soviet Union and the KGB, but Zhirinovsky has also advocated returning to Germany the eastern territories – including much of Poland and the Baltic region – that it lost in World War II.
In France, the extreme right’s shifting allegiances are even more pronounced, exemplified in its budding friendship with the new Russia.
In a 2011 interview, Marine Le Pen, leader of the National Front, conveyed her admiration for Putin, before announcing that, if she were elected President in 2012, France would leave NATO and seek a trilateral alliance with Germany and Russia.
Moreover, Marion Maréchal-Le Pen, Le Pen’s niece and one of the party’s two MPs, is a prominent member of the National Front-sponsored France-Europe-Russia group, which advocates a “multipolar” – or, more accurately, a less American – world.
Last December, Maréchal-Le Pen allegedly visited Aleksey Pushkov, chairman of the Duma’s international affairs committee and a reputed Putinist hardliner.
Given Putinism’s uncertain ideological roots, this turn toward Russia might seem puzzling.
After all, Putinism is characterized less by what it endorses than by what it opposes – the West and Western-style democracy, liberalism, communism, and individualism.
In fact, Western Europe’s extreme-right parties’ attraction to Putin’s negative agenda can be understood in relation to another authoritarian anti-ideology: Benito Mussolini’s fascism.
According to Mussolini’s 1932 essay La dottrina del fascismo (The Doctrine of Fascism), written with the philosopher Giovanni Gentile, fascism opposes democracy, socialism, liberalism, and individualism (in addition to Bolshevism, parliamentarianism, Freemasonry, pacifism, and egalitarianism).
But, while Putinism and Italian Fascism share the rare characteristic of rejecting both communist and democratic ideologies, there is an important distinction in their approach to the latter.
While Mussolini formally declared fascism to be anti-democratic, Putin does not openly reject democracy, or explicitly advocate a one-party state.
Rather, he claims to have established a “managed” or “sovereign” democracy – a system that prevents the alternation of power, thereby establishing a one-party state as a matter of fact, if not of principle.
In this sense, Putinism can serve as a model for extreme-right parties, which, in post-World War II Europe, cannot openly advocate an authoritarian regime or a one-party system.
Indeed, Putinism is demonstrating how to manipulate the rules of parliamentary democracy – by which all of Europe’s political parties have been forced to play since WWII’s end – to serve authoritarian objectives.
Putin’s public image as a strong and virile adventurer, captured in photos depicting him fishing and hunting shirtless, reinforces his appeal as a powerful, charismatic leader.
(Similarly, Mussolini was filmed bare-chested, harvesting corn.)
And a clear parallel exists between Putin’s close relationship with the conservative, ultra-nationalist Russian Orthodox Church and the National Front’s connection to integrist Catholic circles.
Furthermore, Western Europe’s extreme right can learn from Putin’s management of his youth organization, Nashi.
Unlike the Soviet Union’s Komsomol, which had all but ceased to serve as an ideological tool for the Communist Party by the time the USSR collapsed, Nashi has been accused of harassing diplomats and the regime’s opponents – suggesting a closer resemblance to the Hitler Youth or even Mussolini’s Blackshirts.
Indeed, while Nashi seems more like a collection of roguish hooligans, its members do receive paramilitary training to complement their ultra-nationalist ideological indoctrination.
Putinism presents a clever and effective model of a right-wing authoritarian regime that can function within modern Europe’s sociopolitical constraints – one that Western Europe’s extreme right seems keen to emulate.
Let us hope that these forces do not make common cause with Europe’s more unscrupulous mainstream political leaders.
Putin Made Simple
MOSCOW – Three weeks before Russian President Vladimir Putin’s first election victory, in March 2000, his campaign released a book, First Person: Conversations with Vladimir Putin, based on 24 hours of interviews with three journalists.
With quotes like “Life is such a simple thing, really,” the book revealed a key belief that would underlie Putin’s leadership style: Simplicity can and must be imposed on a complex world.
This worldview, which today pervades the Russian establishment, was not developed by Putin himself; it was introduced by a think tank established in December 1999 and headed by German Gref, who would later become Economic Development and Trade Minister under Putin.
In anticipation of Putin’s victory, Gref’s Center for Strategic Research invited experts to develop two programs – one focused on the economy and the other on public administration reform – based on one fundamental directive: Don’t complicate things.
Fifteen years later, Putin’s ideology, policies, and activities all reflect this obsession with simplification of systems and structures.
The separation of powers in government is too inefficient, so the presidency must dominate all other branches.
The large number of political parties, each with its own platform, is too complicated, so it must be replaced by a short list of a few accepted parties, with one main (and permanent) representation of power.
Freedom of expression facilitates an unproductive cacophony of outrage, so the media must receive clear directives to guide their reporting.
There were also, according to Putin’s regime, too many public institutions performing too many activities with insufficient oversight, so they were made smaller and given specific tasks from a short centralized list of priorities.
Multiple higher courts were too difficult to maintain, so a single court replaced them.
Like systems and institutions, problem-solving was also simplified.
Instead of developing a nuanced solution to a multifaceted problem – an approach that would involve careful thought, not to mention mistakes and adjustments – every issue, from official corruption to business management, was viewed as one-dimensional.
The Putin regime’s aversion to complexity has intensified over time, moving from the relatively innocuous belief that simplicity translates into clarity, manageability, predictability, and safety, to the dangerous conclusion that complexity itself – inherently unpredictable and often impenetrable – is a threat.
Complex or convoluted ideas and institutions, viewed as a product of forceful punditry, deliberately produced by the enemy to baffle and hurt Russia, are to be quashed at all costs.
This black-and-white perspective may seem like a continuation of the Soviet-era worldview.
But, in the 1990s, Russia had made significant progress toward modernization – and not just because it began to adopt Western-style state institutions.
In fact, the main driver of Russia’s modernization was the formation of a new social order based on freedom, diversity, and a recognition that the modern world was rich in opportunities for self-actualization, whether in the arts, business, science, or politics.
But, before a modern open society was fully established or the associated mindset entrenched, it was overtaken by Putin’s “simple is better” approach. The view that individual opportunity and heterodoxy should be subordinated to overall predictability empowered the political elite to claim omniscience and cite outside interference as the main threat to Russia’s future.
Driven by these beliefs, a union of “liberals” attempted to bring about a kind of bureaucratic modernization, having convinced themselves that liberal political outcomes could somehow be orchestrated by corrupt bureaucracy through limited democratic institutions.
Not surprisingly, they failed.
Within just a few years, it became clear not only that, in an inescapably complex world, “simple” solutions do not yield results, but also that restrictions on democracy, together with top-down bureaucratic control, create ideal conditions for personal enrichment.
The destruction of democratic institutions was now being driven both by the desire for simplicity and by pure greed.
The Russian proverb “Simplicity is worse than theft” proved oddly prescient.
The latest victim in the Putin regime’s quest for simplicity is science.
While science was not initially deemed a threat, within today’s tightly restricted social and political order, it has emerged as a symbol of autonomy and diversity.
That is why, after being elected for his third (illegal) term as president, Putin asserted full control over the Russian Academy of Sciences.
More recently, the Ministry of Justice added the Dynasty Foundation, established in 2002 by the well-known scientist and telecommunications mogul Dmitry Zimin, to its list of “foreign agents,” most likely with the goal of stifling the organization’s efforts to build a modern scientific community.
(The “foreign funding” that the foundation receives – the reason it was flagged – comes, according to Zimin, from his own bank accounts.)
This repression has had a serious impact on the scientific community, with Russia’s top scientific minds – unwilling to remain in an environment where greed and corruption stifle creativity and exploration – joining investors and capital in fleeing the country.
From 1990 to 2010, around 70% of Russia’s leading mathematicians and half of its theoretical physicists left the country for good. Biologists, chemists, engineers, and other experts have also been emigrating in search of better opportunities.
These trends will only accelerate as Putin’s regime intensifies its assault on the field.
The oppressive atmosphere of gray, government-imposed simplicity has finally insinuated itself into every sphere of Russian life.
One hopes that when Putin’s reign ends – as it inevitably will, perhaps even soon – Russians will understand that the path toward an open, modern society is never a simple one.
Putin of all the Russias
VIENNA &#45;&#45; For those who still wondered who Vladimir Putin is, the mystery is over.
His actions this week show that he is Russia’s new autocrat.
He is a Czar pure and simple.
The seven years since Putin assumed power in the Kremlin have been a time of conflicting signals.
On one hand, he appears to be an educated and dynamic leader committed to modernizing Russia.
On the other hand, with the help of the military-industrial KGB complex – the “ siloviki ” – he has systematically weakened or destroyed every check on his personal power, while strengthening the state’s ability to violate citizens’ constitutional rights.
This week, Putin told the United Russia party that he will place his name at the top of its ballot for the parliamentary election scheduled for December 2, which could enable him to become Russia’s new prime minister after the presidential election due in March 2008.
Of course, as he put it, Russia will have to elect as president a “decent, competent, effective, modern person with whom it would be possible to work in tandem.”
But what that really means is that Russia will have to choose a man Putin has hand-picked to do his bidding.
If this scenario comes true, it will be a sad day for Russia, but not because Putin will be retaining power – something everyone in Russia knew that he would.
True, Putin has concentrated in his own hands more decision-making authority than at any time in Russia’s post-Soviet history.
But most Russians think he is a great leader, crediting him with taking the country from the bankruptcy and despair of the Yeltsin era to wealth and prosperity in just seven years.
Poll after poll puts his approval ratings at more than 70%.
Putin, quite genuinely, holds contradictory views.
He simultaneously advocates multiparty democracy and centralized power.
He favors a free economy, but wants the state to control how wealth is allocated and who benefits from it.
Like their president, most Russians see no contradiction between improving their personal lives and the country’s international status since the 1990’s and the erosion of democratic institutions.
Of course, Russia’s formal institutions of democracy remain in place; but, in the absence of a free press, an independent judiciary and free elections in the regions – where Kremlin cronies, like Ramzan Kadyrov in Chechnya, now hold sway – they have been hollowed out.
Russians would rather have a “father of the nation,” no matter the title – czar, general secretary, president, or prime minister – than follow laws and rules.
Putin’s political genius is to have recognized this.
Even if Putin has found a way to retain power without amending the constitution – a possibility that was endlessly speculated about by Russia’s dwindling band of democrats – the undemocratic nature of his strategy is glaringly obvious.
Moving from one high office in the Kremlin to another in the White House (the seat of the Russian Parliament) is merely a technicality.
Putin will be czar no matter what office is formally his own.
What will make this work is that, like any good KGB man, Putin is a master of facades.
It has been said that presidential democracy only strengthens Russian political culture’s tendency to favor rulers with a “strong hand,” whereas a parliamentary system would allow for a more “horizontal” distribution of power.
So any future Prime Minister Putin will be able to say— hey , I rule under the ultra-democratic Italian parliamentary model.
What could be more democratic?
But if Putin, who has spent seven years “verticalizing” power in order to restore the stability and pride lost during Yeltsin’s “democratization” of Russia, really wanted to secure the good of his country, he would follow in Yeltsin’s footsteps and exit the scene.
For the lesson of the years of communist misrule is this: no one man or party can know enough to manage a modern economy.
Only democratic systems and free markets provide the essential signals that a government needs in order to act efficiently.
After all, the good of democratic structures is their predictability.
Only the Russians, with their devotion to the rule of a strongman, still insist on the importance of the role of personality in history.
By contrast, successful democracies believe that nobody is irreplaceable.
After September 11, 2001, many New Yorkers wanted the city’s then Mayor Rudy Giuliani to remain in office.
But democracy required an election, and many now argue that the current mayor, Michael Bloomberg, has performed even better than Giuliani might have done in reviving the city.
So, if Putin is concerned about Russia, he should abandon his czarist notions of power and leave high office, if not politics altogether.
Like other democratic leaders, he might consider working in the private-sector, like Gerhard Schröder, or, better yet, write books and help Tsunami victims, like Bill Clinton or become an environmentalist, like Mikhail Gorbachev.
But this seems to be too much to ask of ex-KGB man Putin, for whom there can be no distinction between losing power and leaving it gracefully.
Putin of Arabia
BEIRUT – Almost undetected, Russia is regaining much of the influence that it lost in the Middle East after the Soviet Union collapsed.
Ever since Russia invaded Georgia in August, Arab satellite television and Web sites have been rife with talk about the region’s role in an emerging “new Cold War.”
Is the Arab world’s Cold War patron really back, and, if so, what will it mean for peace in the region?
With the USSR’s demise, communist ideology, which Muslims believe contradicts their faith, ended too.
Communism never stopped Arab regimes opposed by the United States from accepting arms supplies from the Soviet-era Russians, but it did prevent Russia from securing the kind of intimate influence that America had secured with its regional allies.
Now, even Islamists are welcoming Russia back as a regional player in order to strengthen their struggle against American hegemony, conveniently forgetting Russia’s brutal suppression of Chechen Muslims during the 1990’s.
This is a complete reversal of the pattern that prevailed in the 1950’s.
Back then, the US encouraged Islam as a bulwark against communism.
Its allies in the Middle East, especially Saudi Arabia, justified US influence on the grounds that Americans were Christian and thus part of the Ahl el-Kitab (the people of the Book).
The Soviets were regularly attacked as dangerous enemies of God.
Today, US power in the Middle East is at its historical nadir, and Russia is seeking to fill the vacuum.
Even America’s closest allies – Saudi Arabia, Egypt, and Israel – are vulnerable as they face the aggressive expansion of “radical forces” represented by Iran, Hamas, Hezbollah, Syria, and the Iraqi resistance.
In the prevailing atmosphere of turmoil and confusion, the radical Islamists attack the Americans as barbarous Crusaders who have replaced the communists as the enemies of Islam.
Indeed, for the conservative majority in the region, the US, with is pop culture and liberal democracy, is seen as a far more problematic ally than the autocratic and wealth-loving Russians.
Russia’s inroads in the region began with former President Vladimir Putin’s state visit to Iran in October 2007 – the first visit by a Russian leader since Stalin’s trip to Teheran in 1943.
Russia, of course, helped Iran kick off its nuclear program, and has often defended the Iranian regime from stiffer United Nations sanctions.
Russia views its relations with Iran as a means to leverage its diplomatic influence in the wider Middle East, where the US has sought (successfully) to marginalize the Kremlin since the Cold War’s end.
Russia’s other aim has been to exempt from UN sanctions the Bushehr nuclear reactor that it has been building for Iran.
A full UN-sponsored financial squeeze on Iran would jeopardize Russia’s profits from providing nuclear fuel for the reactor, which is due to be commissioned soon.
Indeed, for the first time in Russia’s history in the Middle East, it can depend on genuinely powerful local allies.
The Soviet Union lost Egypt in 1972, and its naval bases in Syria were abandoned in 1989.
Now, Russia has signed strategic agreements with Iran and is reconstructing military bases in Syria in response to an appeal by President Bashar Al-Assad (who visited Moscow in a brazen bid for Kremlin support just after the Georgian war ended).
Iran’s regime is eager to publicize its partnerships with Russia, and to make concessions to it in order to face the American and Israeli threat and to gain more time to pursue its nuclear program. Hamas, too, is proud of its Russian connections, so much so that it was one of only three regimes in the world to recognize the independence of Abkhazia and South Ossetia, the regions that Russia has helped break away from Georgia.
In response to America’s failed policies in the Middle East, whether in Iraq, Iran, Syria, Lebanon, or Palestine, Russia appears to be using its oil-fired wealth to knit together a new bloc to counter the US presence.
Even in Iraq, Russia is making headway.
It has written off some $12 billion in debt dating from Saddam and is pushing to create an Iraq-Syria oil pipeline, which will further its bid to control much of the transport of oil and gas.
Russia is also ready and willing to provide more developed weapons to Syria and Iran.
In the short term Russia armed with high oil prices has nothing to lose but in the long term, Russia’s policy in the Middle East appears to be doubly misguided.
A nuclear-armed Iran on its doorstep is certainly not in Russia’s national interest, particularly given the increasing radicalization of Russia’s own 20 million Muslim citizens – the only part of its population that is actually growing.
Indeed, Iran was a keen backer of the Chechen separatists that Russia spent almost a decade fighting to put down.
With Muslims becoming a bigger factor in Russian domestic politics in the decades ahead, it may be wise for Russia to take an interest in Middle East affairs.
But strengthening the hands of the region’s most radical elements will only empower them to turn their attention one day to the “oppressed” Muslims of Russia.
Putinomics
WASHINGTON, D.C. &#45;&#45; President Vladimir Putin turned Russia’ parliamentary election into a referendum on himself – and won by a landslide.
But, while he refuses to spell out his plans for remaining in power once his second term expires next spring, his economic policy is clear.
The strangest thing about the Duma election was that Putin lost his nerve.
He over-exposed himself in public appearances that were as aggressive as they were vague in substance.
He ran against the West and the “chaos” of the 1990’s, just as he raged against Chechen terrorists in 1999 and against oligarchs in 2003.
The Kremlin abandoned democratic procedures, controlling which parties were allowed to run and their candidates, while Putin’s United Russia monopolized media coverage.
Opposition activists were blocked from most campaigning, and often arrested, while Kremlin-controlled courts denied their complaints.
People were intimidated into voting for United Russia on a mass scale.
Independent election monitors were barred.
As a consequence, the new State Duma has not been elected so much as appointed.
It lacks legitimacy and its members are unknown.
But Putin’s legitimacy has also been tainted by the pervasive fraud.
His only “mass” meeting in Moscow drew no more than 5,000 people.
The main questions are how authoritarian he will become, or whether this pathetic campaign will weaken him.
Putin’s policy is easy to understand if one realizes that he usually does the opposite of what he says.
In his first term, Putin appeared to be an authoritarian reformer, undertaking substantial market reforms, such as introducing a 13% flat income tax.
But in his second term, Putin was simply authoritarian, undertaking no economic or social reforms worth mentioning.
The expropriation of the oil company Yukos, valued at $100 billion, was the signal event, and was followed by rising corruption.
Putin has established a purely personal dictatorship.
He rules through the presidential administration and competing secret police forces without ideology or party.
United Russia is little more than a bunch of state officials.
He has sapped most power from other state institutions.
Personal authoritarianism rarely survives its founder.
Since Putin has created an over-centralized regime that cannot survive without him, he has to stay as president.
Law is of minimal relevance, as he can always order the Constitutional Court to approve his third term.
Putin’s regime may be described as a group of clans, consisting of state-dominated corporations, such as Gazprom, Rosneft, Vneshtorgbank, Rosoboronexport, and the Russian Railways, together with the security agencies.
Putin’s KGB cronies, usually from St. Petersburg, control these institutions, and tap them for huge kickbacks.
At the same time, Putin has made sure that they all hate one another, so that they need him as arbitrator or godfather.
In a sensational interview before the election in the Russian newspaper Kommersant , one of these previously unknown KGB managers explained how they use state extortion against private enterprises to accomplish their “velvet re-privatization” through state corporate raiding.
According to the European Bank for Reconstruction and Development, the share of GDP originating in the private sector has declined from 70% to 65% under Putin.
Re-nationalization through extortion is likely to accelerate.
This re-nationalization has not been justified ideologically, but rather cynically: the purpose is simply to generate corrupt revenues for top Kremlin officials.
Although corruption has been declining in most of the former Soviet Union, it has surged in Russia since 2004, becoming more rationalized and concentrated.
None of Putin’s KGB kingpins has been arrested or even demoted.
As re-nationalization gained momentum, the public economic rhetoric changed and become statist.
Putin now favors protectionism, state intervention, and subsidies.
In this climate, no progressive structural reforms are likely.
Until recently, Russia has pursued an admirably conservative macroeconomic policy, running up huge budget and current account surpluses.
It has paid off its foreign debt and built up foreign currency reserves of $450 billion.
Before the Duma election, however, Putin jeopardized this last vestige of responsible economic policy.
Currently, Russia’s greatest economic concern is growing inflationary pressure, driven especially by food prices.
Rising food prices are an international phenomenon, and Russia’s inflation is driven by the large current account surpluses and capital inflows.
But Russia’s government is no longer trying to mitigate these factors, instead pursuing an inflationary policy.
Monetary policy has been loose for the last year, and before the Duma election the government started pouring huge sums into pensions and other social welfare transfers.
Not surprisingly, inflation has shot up from 7% last spring to 11% currently, and may reach 15% in the spring.
Naturally, monetary and fiscal policy should be tightened, but that is difficult when Putin is trying to placate the population.
He could liberalize the exchange rate and let it float upwards, but he is not even doing that.
Instead, using an old Soviet tactic, Putin has imposed informal price controls, which cannot hold for long in a privatized economy.
Russia’s economic growth is still driven by the sound market reforms undertaken in the 1990’s and Putin’s first term, together with high oil and gas prices.
But, while growth is not likely to stop any time soon, Russia’s economic success increasingly hinges not only on high but rising oil and gas prices.
The main question about economic policy in Putin’s third term, then, is how fast it will deteriorate.
Why Did Putin Turn?
PRINCETON – Russian President Vladimir Putin’s policy toward his country’s “near abroad” and the West has been badly misunderstood.
Instead of focusing on broader geopolitical patterns – in particular, the effect of the 2007-2008 financial crisis on global politics – commentators have been turning Kremlin policy into a psychodrama that can be understood only through a deep exploration of the Russian soul.
The result has been rampant misconceptions about what drove Putin’s shift from what seemed to be a modernizing, conciliatory, and even pro-Western stance to aggressive revisionism.
Two such flawed explanations for Russia’s current foreign policy have been offered.
The first, proposed by Germany’s self-described Putin-Versteher (“Putin sympathizers”), is that Russian policy is a logical response to the West’s strategy of encirclement.
The eastward expansion of NATO and the European Union, they contend, was an unnecessary provocation.
In fact, none other than George Kennan, the originator of America’s Cold War containment strategy, opposed NATO enlargement in the 1990s on precisely these grounds.
There are obvious limits to this theory.
For starters, it is based on the claim that, at the time of the Berlin Wall’s collapse and the Soviet Union’s disintegration, the West promised that there would be no NATO expansion.
Even Mikhail Gorbachev, on the 25th anniversary of the Wall’s demise, accused the West of not keeping the promises it made in 1989, instead taking “advantage of Russia’s weakening” in the 1990s to claim “monopoly leadership and domination of the world,” including through NATO enlargement.
But, in reality, the West never promised not to expand NATO.
In fact, in the spring of 1990, the United States presented a powerful case that a reunifying Germany could not be part of two different security systems.
A more fundamental point is that Russia in the 1990s evinced little concern about the expansion of European economic and security structures into the Soviet Union’s former satellites in Central and Eastern Europe, or even into newly independent former Soviet republics.
If it had, it probably would not have taken the Kremlin nearly two decades to strike back.
The second popular explanation of Putin’s shift is that he is irrational, and that Russia’s foreign policy is merely an extension of the fantasies of a man who stages stunts like leading Siberian white cranes along their migration route in a motorized hang glider.
But that raises an obvious question: How did a person who once looked like Russia’s most modern and dependable ruler since Czar Alexander II – a man whom US President George W. Bush called “very straightforward and trustworthy” in 2001 – suddenly become crazier than Rasputin?
A better explanation can be found by tracing the chronology of Russia’s foreign-policy shift, which began with the 2008 Georgia crisis.
When Georgia, which had been flirting with NATO membership, mounted a military response to attacks by secessionists in South Ossetia, an ethnic enclave whose government had been backed by the Kremlin for more than a decade, Russia launched a full-scale invasion to protect the region.
Russia also bolstered its presence in Abkhazia, another breakaway province.
The crisis, which was preceded by the large-scale issuance of Russian passports to Georgians, foreshadowed the deployment of Russian forces in Crimea under the pretense of protecting Russian citizens.
Rhetorically, the shift was apparent even earlier.
At the 2007 Munich Security Conference, Putin presented a new face, emphasizing the potential of the major emerging economies – Brazil, India, China, and Russia – to provide an alternative to what he viewed as an arbitrary unipolar world order.
Many observers were shocked by his statements, and took the speech as evidence of his insecurity or irrationality.
The next year, the financial crisis struck, convincing Putin that his assessment had been prophetic.
The crisis, in his view, was proof that the days of American global dominance were over.
In fact, before the crisis, Russia had acquiesced to the logic of global capitalism, recognizing the need to cooperate with multinational corporations to modernize and diversify an economy based on raw materials and energy production.
After the crisis, however, there was no longer as much to be gained from global markets – at least not in terms of power.
Instead, Russia’s best option was to cooperate with other countries that had adopted a similar model of state-centered capitalism, especially China.
Putin’s interpretation of the crisis was underpinned by political developments in America and Europe.
The US elected a president who appeared intent on scaling back America’s global commitments.
When the Arab Spring revolutions erupted, the US response was weak and muddled, oscillating between pro-democracy rhetoric and support for anti-Islamist autocrats.
This enabled Putin to project himself, particularly in Syria, as a credible proponent of geopolitical pragmatism.
Europe’s debt crisis – and its leaders’ apparent inability to take coordinated action – gave the Kremlin additional ammunition.
Given that Europe’s overall debts and deficits are much lower than those of the US or Japan, the logic went, it should have been able to avoid polarization and paralysis.
More broadly, Putin’s belief that the economic crisis was causing the West to disintegrate aligns with traditional Soviet geopolitical thinking.
As Stephen Kotkin shows in his new biography of Stalin, Soviet policy was strictly rational.
The Great Depression convinced Stalin that the different factions of capitalism would go to war; in 1938-1939, Nazi aggression seemed to vindicate his analysis.
But Stalin’s predictions fell apart after Hitler’s defeat, when conflicting interests did not lead to a clash between the US and the United Kingdom.
While Western politicians and economic policymakers were trying to avert Great Depression II, Putin was already working on the assumption that it had arrived.
For the West, managing the resulting geopolitical imbroglio will be even more challenging than repairing its damaged economies.
Putin’s Crooked Road to Damascus
MOSCOW – When Russian President Vladimir Putin addressed the United Nations General Assembly on September 28, he knew he would grab the world’s attention and upstage US President Barack Obama with his call for a united front in the battle against the Islamic State.
But Putin was addressing Russians, too, knowing full well the need to distract them from their country’s increasingly obvious economic woes.
Last year, the distraction was the annexation of Crimea, followed by the encouragement of pro-Russia separatists in eastern Ukraine.
The recent dispatch of Russian aircraft, missiles, and a few thousand troops to Syria is a flag-waving substitute for that failed “Novorossiya” project.
Putin’s critics rightly see his Syrian adventure as yet another appeal to Russian nostalgia for the Soviet past: the USSR was mighty – and Putin claims that Russia can and does have the same power.
But to what end?
Wrong-footing the United States and the West may be good tactics in the short term, but there seems to be no long-term vision of the purposes that Russian power is supposed to serve, other than to preserve the power of Russia’s elites.
As a result, the regime mimics the forms of democracy while using its propaganda to foment an aggressive form of nationalism.
In the early years of this century the combination of high oil prices and economic growth dulled the elites’ appetite for strategic thinking and allowed them to ignore the subsequent rollback of health-care, education, and social-welfare reforms.
The regime and the public now see the current situation as more or less normal – a “non-crisis crisis.”
Because perception shapes reality, everything is normal, nothing has to be done, and Putin – having supposedly restored Russia’s dignity – can enjoy his approval ratings of more than 80%.
To Putin, restoring Russia’s dignity is the same as resurrecting its “great-power status” following the collapse of the Soviet Union and its humiliating “defeat” by the West in the Cold War.
Exercising power externally apparently compensates for the fact that dignity within the country is far from restored: Today’s Russian citizen remains defenseless before his bosses, the utility companies, the courts, and the police – and yet, whatever his hardships, he remains proud of his nation and its leader.
There is, of course, another explanation of why Putin’s popularity is still growing in the face of a worsening economy: those unable to fend for themselves naturally look to the state for help – and are hardly likely to bite the hand feeds them.
What Westerners decry as human-rights abuses ordinary Russians are likely to praise as policies to rid the country of “alien” practices and protect the majority from the “subversive” minority.
The regime’s hostility toward gays and lesbians may offend the West, but it strikes a sympathetic chord with most Russians.
Because those same Russians regard the war in Ukraine as defensive and just, war becomes justified; history’s dark pages are rewritten; and hostile language becomes the norm.
Not long ago, ordinary Russians spoke openly about the number of deaths and casualties suffered in their country’s military operations; now, following Putin’s presidential decree on “secret losses,” they keep quiet.
Even though the decree may well conflict with the Russian Constitution and the Law on State Secrets, the list of classified information now includes Russian military losses during peacetime operations.
The consequence is a country divided between loyal and disloyal, patriotic and unpatriotic – that is, between those who toe the party line and those who refuse.
If the polls are accurate, the loyal and obedient are a clear majority – at least so far.
This explains support for the separatists in eastern Ukraine’s Donbas region and for Putin’s intervention in Syria.
If the US cannot accept this, it merely proves that America insists on hegemony, whether in Europe, through NATO, or in the Middle East.
Such logic is bolstered by Putin’s self-interested reinterpretation of history, which justifies the 1939 Winter War against Finland, the Molotov-Ribbentrop Pact of 1939, and the 1979 Soviet invasion in Afghanistan.
The Attorney General’s Office has even been occupying itself with a ludicrous retrospective analysis of the decision in 1954 to transfer Crimea from the jurisdiction of the Russian Soviet Federative Socialist Republic to that of the Ukrainian Soviet Socialist Republic.
Worryingly, the same analysis is being carried out on the legality of the independence of the Baltic states after the collapse of the Soviet Union.
Where will all this lead?
Just as in the Soviet era, today’s rulers equate themselves with the state.
The state is then reduced to the leader’s inner circle and the top echelon of the financial and political elites, secure in their power because ordinary citizens have been duped into an uncritical and extreme form of nationalism.
Putin’s embattled opponents can safely predict a long period of political, economic, and intellectual stagnation – certainly until the parliamentary election next year and the presidential election two years later.
The stagnation will probably last into the following political cycle, too.
But it cannot last forever: at some point, the regime’s survival will require offering the public something other than nationalism and nostalgia.
The question is whether Putin, now deepening Russia’s involvement in yet another foreign military adventure, understands this.
Putin’s Ark
Recently I visited Moscow after five years away.
The city, which looked different and strange, impressed me by its ability to change.
My days back in Russia were divided between official meetings, hours wasted in traffic jams, and nights spent with old friends who tried to show me the best of Moscow nightlife.
On my first free evening, I was invited to a place called “Shinok.”
The restaurant had many of the traits found in ethnic restaurants everywhere.
Different bits of kitsch, this time Ukrainian, were richly represented.
But the interior decoration had one unique element – an artificial wall with windows separating a part of the restaurant hall.
Behind the wall was a stage set of a village yard.
A real cow, as well as chickens and geese populated that ersatz farmyard.
At times an old woman in traditional dress appeared to feed the animals. Visitors enjoying borscht and pirogi observed her efforts with satisfaction.
“She works for the restaurant,” my acquaintance explained. “She feeds animals and sits in the yard to create the rustic ambiance.”
Shinok was just an introduction to today’s new wave of Moscow restaurant culture.
A few days later, I visited “The White Sun of the Desert,” another ethnic hangout.
The White Sun existed in Soviet times.
Back then, it was called “Uzbekistan” and was nothing more than an obligatory culinary demonstration of the supposedly unbreakable union of the USSR’s fifteen fraternal republics.
Although the restaurant interior had completely changed since then, its decorative themes remained the same.
Nowadays, however, the establishment is named after a popular Soviet borscht-western (or “eastern”) filmed in 1969 and set in Central Asia during the 1919 Civil War.
The restaurant is decorated not only with oriental carpets, but with life-size figures of the movie’s heroes firing machine guns or sitting on crates of dynamite.
This Soviet “orientalism” is reinforced by pretty waitresses dressed in sexy outfits more inspired by the Arabian Nights than by any Central Asian reality – then or now.
But the Soviet past, not ethnic motifs, are the biggest element in contemporary Muscovite restaurant design.
The club-restaurant “Major Pronin:” is conveniently located in the vicinity of the KGB-FSB headquarters.
It is named after the hero of bad Soviet-era spy novels, a figure who was also the butt of many underground jokes.
The restaurant’s interior is decorated with various pieces of espionage equipment.
But the main attraction is a shooting gallery where patrons can test their skills between courses.
Targets depicting serial killers and drug dealers have mottos like “Save a woman” or “Save a boy” on them. In the middle of the wall is a target representing New York’s World Trade Center being approached by an aircraft, with the inscription “Save America.”
A new club called “Zone” – Russian slang for a concentration camp – is designed to reproduce the feeling of gulag life.
Barking Alsatian dogs, stern guards, and waiters dressed in inmate uniforms work hard to recreate the gulag’s sinister atmosphere.
Russian literature is not forgotten.
If the restaurant “Pushkin” on Tverskoy Boulevard not far from the monument to the great Russian poet is designed to recreate the “aristocratic atmosphere” of the early nineteenth century, the combined bar and diner called “Gogol” on Stoleshnikov Lane is an attempt to recreate a vanished Soviet institution called “rumochnaia.”
A “rumka” is a vodka glass from which exhausted proletarians could revive themselves.
Of course “rumochnaia” had nothing in common with Nikolai Gogol, but the establishment named after the famous writer does have a skating rink that is used once a day by a man dressed up as Gogol.
After my return to Washington, I had a dinner with an American politician who had just visited Saint Petersburg.
As a special honor, his Russian hosts organized an excursion to Strelna, the “Russian Versailles,” which was recently restored from ruin to become the Petersburg residence of President Vladimir Putin.
The palace didn’t impress the American.
The amount of marble used for renovation seemed excessive, and the understanding of what constitutes luxury appeared to correspond to the standards of a Holiday Inn.
The American’s excited Russian hosts asked him constantly for his opinion of the palace. Throughout the tour, the American answered with polite exclamations like “exquisite” or “striking.”
Finally, they reached the attic.
At last, the American was excited.
The attic of the presidential residence was designed as a belly of the seventeenth-century ship. “The last time I saw something like this was in a Hamburg beer hall in the 1960’s,” the politician told me.
How perfect, I thought, as I imagined Russia’s president climbing the stairs to the attic of his palace to play the role of Peter the Great.
Like the customers in that Ukrainian-style village restaurant, perhaps Putin found his attic ark reassuring in some unconscious way.
A historical wave beyond his control had lifted the former KGB lieutenant colonel from out of the shadows to the pinnacle of power.
But fate might also just as suddenly wash him away.
What could be better than to have an ark at hand if one day the political tides turn?
Please visit this link for full size photos:
http://www.project-syndicate.org/akinsha/photos.html
Putin’s Bad-Neighbor Policy
WASHINGTON, DC – Russia has shown itself to be an international spoiler with its ardent support for Syrian President Bashar al-Assad.
The contrast with its benign policy toward Libya in 2011 reflects how Russian foreign policy changed with the return of Vladimir Putin to the Kremlin.
On foreign policy, at least, Russia’s former president, Dmitri Medvedev, mattered more than is commonly understood.
Russia has resumed its aggressive anti-American policy of 2007-2008, which culminated in war with Georgia in August 2008.
Ironically, this bellicosity harms Russia the most, because it alienates all but international pariahs, such as Syria, Venezuela, and Belarus.
Even in the former Soviet Union, almost all countries are seeking trade and security with anyone but Russia, because Putin is using all sticks and no carrots.
His three main policy instruments toward the post-Soviet states are the customs union implied by his proposed “Eurasian Union,” Gazprom, and the Collective Security Treaty Organization (CSTO).
Each intimidates Russia’s neighbors, while none benefits them, leaving them with few reasons to cooperate with Russia.
Currently, Putin’s top priority is to persuade as many countries as possible to join the customs union, but so far only Belarus and Kazakhstan have done so.
Belarus set a high price, demanding a bailout of no less than $20 billion last year, while geography condemns Kazakhstan to get along with Russia.
But the other post-Soviet countries resist, because a customs union with Russia would force them to raise their import tariffs, hindering their trade with other countries.
If Russia were serious about economic integration, it would promote free-trade agreements to facilitate trade in all directions.
In fact, in October 2011, Russia initiated such a new multilateral free-trade agreement in the post-Soviet space; but, owing to the Kremlin’s single-minded pursuit of the customs union, only Belarus and Ukraine have ratified it, leaving its relevance in doubt.
The Central Asian countries’ opposition to a customs union with Russia reflects their growing trade with China.
In Europe, Moldova, Ukraine, and the Caucasian countries prefer free-trade agreements with the European Union, which the customs union would preempt. Moreover, the customs union makes it almost impossible for Russia to conclude any free-trade agreement with the EU.
Meanwhile, Gazprom, one of Russia’s key foreign-policy instruments, is probably the world’s most mismanaged corporation.
Last year, investment bankers assessed its losses through waste and corruption at no less than $40 billion – a level of misconduct that has driven its stock price to rock bottom.
Gazprom’s policy is to threaten client countries with high prices and stop deliveries until it gains full control over a country’s gas-pipeline system.
Putin has ruled the company with a firm hand as both President and Prime Minister.
The mismanagement is not merely financial.
In early 2009, when Gazprom could not sell all of its gas to Europe because of the Great Recession, it sought to cut its supplies from Central Asia.
It did so suddenly and without warning, causing the pipeline from Turkmenistan to explode.
After the Turkmen repaired the pipeline, Gazprom reneged on the old price.
Today, Turkmenistan refuses to cooperate with Russia.
It delivers most of its gas through a new pipeline to China, as do Kazakhstan and Uzbekistan.
As a result, Russia has lost its access to cheap Central Asian gas, as well as to the Chinese market.
Gazprom has pursued its most public fight with Ukraine, insisting on prices that are 50% higher than what its EU customers pay.
In addition, Gazprom is increasingly diverting gas transported through Ukraine to Europe to its new Nord Stream pipeline, with plans to circumvent the country further when the proposed South Stream is completed in 2015.
The current Ukrainian government would happily hand over half of its pipeline system to Gazprom in exchange for a lower gas price, but Putin demands that Ukraine also join the customs union.
In July, Putin went to Ukraine to discuss these issues with President Viktor Yanukovych.
On his way to the Crimea, however, Putin encountered a notorious Russian nationalist motorcycle gang, whose members demand that the Crimea be transferred to Russia.
Putin spent so much time with the bikers that he arrived four hours late to his meeting with Yanukovych, which was then cut to 20 minutes.
Putin added insult to injury by talking to his associates rather than to Yanukovych.
Under these circumstances, not even Yanukovych, who governs in a Putinesque manner, can be pro-Russian.
Since Putin offers Ukraine nothing, Ukraine has minimized its purchases of gas from Russia and downgraded all other bilateral relations.
Moldova is in a similar predicament.
Although it surrendered control of its gas pipelines to Gazprom, it is still charged a usurious price in the face of Russian demands that it, too, join the customs union.
Little surprise that Moldova, one of the most democratic post-Soviet states, wants a free-trade agreement with the EU to escape the vagaries of Putin’s policy.
Since 1992, Russia has tried to build its other main foreign-policy tool, the CSTO, as an alternative to NATO, but for years it had only six members – Russia and its closest allies, Belarus and Kazakhstan, plus three poor and insecure states (Armenia, Kyrgyzstan, and Tajikistan).
In 2006, the Kremlin persuaded Uzbekistan to join, but, after Putin visited Tashkent in early June, President Islam Karimov suspended his country’s membership.
The CSTO remains a paper alliance without military significance.
The happiest former Soviet countries are Estonia, Latvia, and Lithuania, all of which minimized their contacts with Russia in 1992 and joined both the EU and NATO in 2004.
After its war with Russia in 2008, Georgia decided to leave the Russian-dominated Commonwealth of Independent States.
Azerbaijan, Turkmenistan, and Uzbekistan regularly boycott the CIS’s meaningless annual summits.
For how long will they bother to remain members?
Kremlin policy in the post-Soviet space makes little sense, because Russia gains nothing.
Presumably, Putin hopes to whip up nationalist sentiment to strengthen his weakened hold on power at home.
The problem for him is that, increasingly, Russians are not fooled.
Putin’s Balkan Mischief
Russia is again on a tear.
This time, the Kremlin has stuck its finger in the West’s eye over the long and painful effort to bring Kosovo to formal independence.
Unlike the fracas over an American missile shield in Europe, this conflict shows no signs of blowing over, and threatens to damage further the rocky relationship between Russia and the West.
At every turn, Russia has challenged Western efforts to facilitate Kosovo’s independence. After a year of negotiations between Serbia and Kosovo, President Vladimir Putin’s Kremlin rejected the UN mediator’s report recommending supervised independence, prevented the Security Council from accepting that report, and insisted on three additional months of negotiations between Serbia and Kosovo – even after compromise became impossible.
Three weeks ago in the UN Security Council, Russia again insisted that any agreement required the approval of both Serbia and Kosovo, and that further negotiations were necessary.
Russia knows that such negotiations will be fruitless, but believes that another seemingly innocent appeal for more talks would strain EU unity, which appears to be a vital goal for Putin.
Further delay might also generate violence in Kosovo and undermine international support for independence.
Putin’s hatred of the Yeltsin era’s “subservient” relations with the West fuels his opposition.
But the West’s delay in resolving Kosovo’s status permitted that opposition to gain traction.
Indeed, the West has consistently misread Russia’s intentions on Kosovo.
Many claimed that the Kremlin was delaying the inevitable but ultimately would not block independence.
Now, at the eleventh hour, Russia is sticking to its obstructionist position, and its presidential election in March will likely reinforce anti-Western postures.
So what will Putin do when the United States and most European Union members recognize an independent Kosovo in the coming months without a UN blessing, as they now plan?
It is unlikely that the Kremlin would attempt another military intervention in Kosovo (their effort in 1999 to land troops at Pristina airport was a fiasco), but it has a range of options that must give the West pause.
Kremlin support has made Serbia’s nationalist intransigence over Kosovo effective.
Russia has said that it will not give Serbia a blank check, but it will likely support the Serbian government’s efforts to isolate and destabilize an independent Kosovo.
While Serbia has resisted partition of Kosovo, Russia would also support a Serbian proposal to partition the Serb-populated north, an effort that would open up a Pandora’s box of possible partition of Serbia, Bosnia, and Macedonia.
Such a proposal could get some support in Europe and elsewhere as a seemingly appropriate compromise, even if it would destabilize the Balkans once more.
Russia will certainly continue its diplomatic efforts to persuade the world that negotiations are the only way to solve the problem, and that it cannot be solved outside the UN.
That will attract support among many UN members, including those that have major dissatisfied ethnic minorities.
Russia could also react beyond the Balkans, most obviously in the Caucasus, with its breakaway regions, particularly in Georgia.
A declaration of independence by Kosovo will likely bring a similar declaration from Georgia’s breakaway Abkhazia region, which Russia could well recognize.
If Georgia takes military steps to prevent that, Russia’s military would likely react with force, creating a situation that could get out of control.
While the US and the EU do not want to worsen relations with Russia, they cannot retreat in the face of Russian obduracy; security in Europe is at stake.
But they must also continue to try to preempt confrontation with Russia on all fronts.
The West should make clear to Serbia that it will react vigorously against any efforts to promote violence or partition Kosovo.
Dispatching additional NATO troops, in addition to the planned EU mission, to supervise Kosovo independence would be helpful.
Putin’s Russia, which pays little attention to the rule of law, cloaks its diplomatic effort in the guise of adherence to international law, in particular UN Security Council resolution 1244, which ended the 1999 Kosovo war.
A long overdue diplomatic offensive needs to be launched to undercut Russian arguments as well as remind the world of what happened in Kosovo.
Resolution 1244 does not state that Kosovo must remain under Serb sovereignty, as Russia and Serbia insist, nor does it preclude independence.
Indeed, any reasonable reading of the resolution – especially in the context of the conflict-ridden Balkans over the past two decades – would acknowledge that independence would satisfy the resolution’s intent and the purpose of sustaining UN supervision of the province for the past eight years.
In the case of Abkhazia, the West should reiterate the sui generis nature of Kosovo and highlight the tremendous efforts it has undertaken there since 1999.
The world must make clear that Russian military involvement in Abkhazia is unacceptable, while also restraining Georgia’s government from reacting militarily to any provocation.
How Russia reacts to Western support of Kosovo’s coming declaration of independence will test how far we have progressed since the Cold War.
Through careful management of Kosovo’s independence process, and attentiveness to opportunities to improve relations with Russia, the West might mitigate the worst consequences of this confrontation.
Regardless, a new Cold War might just get a little colder.
Putin’s Brezhnev Syndrome
PARIS – The winner of Sunday’s legislative election in Russia was a foregone conclusion: United Russia, organized by Vladimir Putin.
Likewise, there is no doubt that Putin himself will win the presidential election due in March 2012.
But the public enthusiasm that ratified Putin’s rule for a decade has vanished, something demonstrated by the poor performance of his party, United Russia, in the just concluded elections to the Duma.
Unlike Europe, beset by a sovereign-debt crisis, and the United States, whose leaders are wrangling over how to stem the deficit, Russia may look like an oasis of stability and continuity.
But that continuity is more reminiscent of the zastoi, or stagnation, of the Brezhnev era.
Eight years of 7% average annual GDP growth during Putin’s previous presidency (2000-2008) allowed Russia to repay its debts, accumulate almost $600 billion in foreign-currency reserves, and join the leading emerging economies.
A decade after the 1998 crisis brought Russia to its knees, its leaders boasted that the country could weather the 2008 financial crisis.
Given Russia’s economic fundamentals, Putin’s diminished popularity might appear surprising.
The International Monetary Fund’s forecast of 4% growth in 2011 and subsequent years puts Russia well behind China and India, but far ahead of average growth rates in the rich G-7 countries.
Moreover, Russia’s budget will be balanced as long as oil prices remain above $110 per barrel.
Longer-term trends have also improved.
Rapid demographic decline has been brought to a halt since the turn of the century (a time when coffins outnumbered cribs by seven to four), as generous government subsidies for a third child have boosted the fertility rate from its 1999 low of 1.16 children per woman to 1.58 in 2010.
That is still far below the replacement rate of 2.1, but higher fertility, together with successful measures to reduce male mortality, has slowed the pace of population shrinkage.
But Russia remains essentially a “rentier state” – that is, a state whose primary source of revenue is rent – in this case, oil and gas – rather than taxation, which thus keeps demands for political representation at bay.
Instead, the state is the target of political entrepreneurs who strive to capture it in order to capture the rents that it controls.
Russia has most of the usual features of rentier states: autocracy, weak political and judicial institutions, arbitrary governance, lack of the rule of law, little transparency, restraints on freedom of expression, widespread corruption, cronyism, and nepotism.
Also common to rentier states are short investment horizons, vulnerability to commodity-price volatility – euphoria when they surge, crisis when they collapse – and an underdeveloped and uncompetitive manufacturing sector.
Today’s Russia is a gigantic reservoir of raw materials, and its economy relies heavily on commodities – mining and drilling.
Russia is the world’s largest oil and gas exporter, sitting on more than 25% of total proven gas reserves.
Those commodities account for over two thirds of the country’s export earnings, and are the primary source of state revenue.
The impact on governance is all too predictable.
In 2011, Transparency International’s “corruption perception” index ranked Russia 143rd out 182 countries, on a par with Nigeria, and 182nd out of 210 for “control of corruption,” one of the World Bank’s worldwide governance indicators. &nbsp;Regarding the rule of law, there has been only minimal improvement, with Russia ranked 156th.
In the meantime, infrastructure is crumbling even within the vital extractive industry, while manufacturing is internationally uncompetitive.
The Russian armaments industry has lost its strong position with India and China, once its two main customers.
Despite the hype about nanotechnology and a “Russian Silicon Valley” at Skolkovo, spending on Rampamp;D is a mere one-fifteenth of the US level, and one-quarter of China’s.
As a proportion of GDP, it has been halved since the early 1990’s, and is now just 1% of GDP.
Scientists and researchers, once the pride of the Soviet Union, have vanished, often lured by more rewarding opportunities, at home or abroad.
Indeed, Russian universities are almost absent from global rankings: only two appear in the Shanghai University Top-500 list and, at the very bottom, among the 400 rated by The Times Higher Education Supplement.
Russia also fares poorly – 63rd – in the Global Competitiveness Index released by the World Economic Forum, well behind all developed countries and even many developing countries.
The same holds for innovation capacity and technology.
Yet there are hints of hope.
Russia no longer lags behind the developed world in Internet use, which has provided space for unregulated speech, allowing users to circumvent the official – and overwhelmingly pro-Putin – news media.
Moreover, after lengthy negotiations, Russia recently reached an agreement with the World Trade Organization to join, implying the need to comply with all relevant obligations regarding transparency and trading rules.
But comprehensive transformation of Russia’s economy remains doubtful.
One of Russia’s leading independent economists, Sergei Guriev, the rector of the New Economic School in Moscow, soberly noted in 2010 that
“meaningful reforms look highly unlikely – for the simple reason that they would harm the interests of Russia’s ruling elites.
In any resource-rich and undemocratic country, the political class and the business interests that surround it have little or no incentive to support stronger property rights, the rule of law, and competition.
Indeed, such structural changes would weaken the elite’s grip on political and economic power.
The status quo – opaque rules, arbitrary decision-making, and lack of accountability – allows insiders to enrich themselves, especially by obtaining a share of commodity-export revenues.”
When Russia marks the twentieth anniversary of the collapse of the Soviet Union this Christmas, it will have much to celebrate.
Unfortunately, what hasn’t changed will give it much to rue.
Putin’s Scare Tactics
COSTA SMERALDA, SARDINIA – “Every nation gets the government it deserves,” observed Joseph de Maistre, the Sardinian kingdom’s diplomatic envoy to the Russian empire, some 200 years ago.
He was commenting on Russians’ deep-seated political apathy – a trait that persists to this day.
Of course, Russia is no longer an absolute monarchy as it was in Maistre’s time.
Nor is it a communist dictatorship, with the likes of Joseph Stalin using the threat of the Gulag to discourage political expression.
But President Vladimir Putin has learned much from the autocratic tactics of his predecessors, whereas the Russian people seem to have learned nothing.
In an opinion poll at the end of 2014, 68% of respondents said that Putin should be “Man of the Year.”
His seizure of Crimea from Ukraine in March, together with his refusal to bow to the Western powers that disputed the move, made him a hero among ordinary Russians.
In fact, Putin’s efforts to recapture Russia’s former territory have overshadowed his stifling of non-governmental organizations, repression of independent media, and silencing of opposition voices.
Even as Russia’s economy collapses – with the ruble having lost more than half of its value against the dollar since June, interest rates rising to 17%, and inflation reaching double digits – Putin retains an 85% approval rating.
Russians should be demanding a solution to their country’s economic troubles, not praising the leader who caused them.
But Putin, an ex-KGB officer, possesses a dictator’s shrewdness.
He knows that centuries of tight government control have made Russians obedient.
They may fear the government; but they fear being left to fend for themselves even more.
In mid-December Putin held his annual dinner with the oligarchs – a feast in a time of plague, so to speak.
Forty industrial and financial leaders (most of whom manage Kremlin-affiliated firms) attended the event to gain – and give – reassurance that, together, they and the government would weather the crisis.
At the dinner, Putin reiterated his promise to protect the oligarchs’ fortunes from American and European sanctions.
Specifically, he pledged to apply the so-called Rotenberg Law, named after Arkady Rotenberg, a financier who was forced in September to surrender $40 million in assets to Italy’s government. The law obliges the Kremlin to compensate oligarchs for any foreign assets that they lose as a result of Western sanctions.
These statements built upon a promise Putin made in an interview earlier last month.
If Russian businesspeople repatriate their offshore accounts, their financial indiscretions will be forgiven and forgotten.
Relying upon such promises would be financial suicide.
Just a few months ago, Putin assured everyone that Russia’s economy would weather the European and American sanctions easily.
Likewise, during the 1998 financial meltdown, Russian oligarchs lost big – and most never recovered.
Clearly, Russia’s government cannot be trusted to safeguard anyone’s wealth, with the possible exception of that of its own members.
Yet refusing the Kremlin’s embrace is equally destructive.
After all, in Putin’s Russia, political dissent brings financial ruin.
In 2003, Russia’s wealthiest oligarch Mikhail Khodorkovsky – a vocal advocate of democratization and tireless critic of Putin – was imprisoned on trumped-up charges of fraud and tax evasion, and his Yukos Oil Company was driven to bankruptcy, broken up, and sold off to Kremlin cronies.
Ten years later, the message remains the same: If you obey your government, your follies (no business in Russia is free of kickbacks and bribes) will be forgiven.
Failure to fall in line will be your downfall – regardless of how wealthy or well known you are.
Of course, it is not the tycoons who will bear the brunt of the economic crisis.
After all, Putin needs their support – as short-lived or ephemeral as it may be – to retain his grip on power.
Ordinary Russians have far less leverage – and will suffer far more.
But maybe they deserve to suffer.
Harsh austerity measures – cuts to pensions, salaries, and social services (including a recent decision to close hundreds of hospitals and lay off thousands of medical personnel) – have inspired barely any criticism.
At the end of December, a few thousand people staged a demonstration in Moscow’s central Manezh Square, partly to show support for Alexei Navalny – an anti-corruption lawyer, well-known blogger, and leader of a dwindling opposition movement – and his younger brother, Oleg.
The Navalny brothers had just been sentenced to three and a half years in prison for defrauding a cosmetics company.
Alexei, an opponent of Putin on par with Khodorkovsky, received a suspended sentence;
Oleg, an apolitical postal executive, will have to serve his full term in prison.
This tactic – to “forgive” one’s enemies, while punishing them via their relatives – was a favorite of Stalin’s.
The “enemy” would quickly come to his or her senses, and the public, unfamiliar with those imprisoned, would quickly lose interest.
They still do.
Today’s Russians hope that Putin, who blindsided his opponents with his annexation of Crimea, might have another daring trick up his sleeve – one that will stabilize financial markets and revive the oil prices on which Russia’s economy depends.
Of course, Russians know enough to worry that Putin has run out of ideas.
But that fear does not compare to their dread of what might happen if they rock the boat.
And Putin, for his part, understands this well enough to know that he needs no gulags – only the canny use of fear and forgiveness – to retain his grip on power.
Putin’s Choice
BRUSSELS – Vladimir Putin’s return to the Kremlin as Russia’s president was always a foregone conclusion.
But, when he is sworn in on May 7, he will retake formal charge of a country whose politics – even Putin’s own political future – has turned unpredictable.
Putin’s return to the presidency, following a period of de facto control as prime minister, was supposed to signify a reassuring continuation of “business as usual” – a strong, orderly state devoid of the potentially destabilizing effects of multiparty democracy and bickering politicians.
Instead, the Russian people have now challenged the status quo.
Their reaction to Putin’s plan – from the announcement last September that President Dmitri Medvedev would stand aside for his mentor, to the deeply flawed parliamentary and presidential elections – and their accumulated resentment of Kremlin cronies’ massive enrichment, has placed pressure on Putin and the top-down system of government that he created.
How Putin, an astute politician, responds to that pressure will determine his political legacy.
And the West’s response to Putin’s return to the presidency could have a marked effect on whether he presses for liberalizing reforms and survives, or follows his KGB-honed authoritarian instincts and stokes further protest.
Nothing illustrates Russia’s malaise under Putin better than the case of Sergei Magnitsky, a lawyer working for a British investment fund.
He uncovered a massive tax fraud and alleged widespread collusion by the authorities.
His reward for exposing this crime was to be imprisoned and mistreated until he died in mysterious circumstances.
The Russian authorities are bizarrely continuing to prosecute him posthumously, as well as continuing to carry out the tax scams that he exposed.
The United States Congress is currently debating a law that would impose asset freezes and visa bans on the 60 people identified as having had some responsibility for Magnitsky's detention and death.
Many of the law’s supporters want it to replace the so-called Jackson-Vanik amendment, a Cold War-era law that restricts US trade with Russia – and that the Obama administration is pushing to repeal.
Such a change would be doubly beneficial: it would both enhance trade and hold to account people responsible for egregious human-rights abuses.
Meanwhile, in the United Kingdom, the House of Commons recently passed a resolution along the same lines as the proposed US legislation.
London is a favorite destination for wealthy Russians, and the British government is now considering whether to support such an initiative, although there are indications that it will maintain an unofficial and unpublished list of the banned individuals in order to forestall legal challenges.
In Ottawa, the Canadian parliament has called for similar measures, including asset freezes against those responsible for Magnitsky's death, as has the European Parliament, which has called for the European Union’s member states to take collective action.
Introducing such targeted sanctions would be an indisputable sign that the West will not compromise on its fundamental values – values that Putin’s Russia claims to share.
It would also set a precedent that could be extended to all of those in Russia and other countries who regularly violate human rights, and not just those rights concerning physical inviolability.
For example, such measures could be extended to cover all of those who abuse the fundamental right of legal due process, such as the right to a fair trial.
Doing so would highlight the famous case of former oil magnate Mikhail Khodorkovsky, whose political ambitions alone landed him in prison, and who has been declared, after a second trial, a prisoner of conscience by Amnesty International.
Such measures could also include the abuse of prisoners’ rights, such as the case of Khodorkovsky’s former legal counsel Vasily Alexanyan, who was denied treatment for HIV in jail, and was released only after the intervention of the European Court of Human Rights.
Medvedev’s announcement one day after Putin’s election on March 5 that the Khodorkovsky case will be reviewed is a hopeful start.
Imposing travel sanctions on suspected human-rights abusers is a sensible and practical way forward.
It would show that the West does not seek to punish Russia or Russians generally, but only those individuals about whose role in human-rights violations the West has good evidence.
And it would remind Russia of its international legal obligations, specifically as a member of both the OSCE and the Council of Europe, which has 47 member states, including Russia and others who flout some its conventions.
In the past, Putin successfully marketed himself as a strongman, the epitome of stability, a guarantor against chaos.
But now Putin’s style of government is Russia’s primary source of instability, as the country’s middle class takes to the streets in protest against the corruption and inefficiency of his rule.
The West has an opportunity – and an obligation – to convince Putin that protecting his own interests requires profound and permanent democratic reform in Russia, starting with an unambiguous commitment to the rule of law.
And Putin has a rare opportunity, as he begins his third term as President, to restore his deeply tarnished reputation.
Putin’s Deadly “Great Game”
President Vladimir Putin will visit Ukraine, the scene of his biggest foreign policy blunder, this weekend.
Given his myopic actions at home, where he seems increasingly incapable of dealing with any institution that has any degree of autonomy, this seems unlikely.
For example, Putin recently abolished elections in Russia’s provinces.
From now on, presidential appointees will rule a country that is as complex and multi-national as the EU or the US.
That’s not a recipe for sophisticated thinking.
Indeed, elected officials in Russia have become an endangered species.
The Kremlin black art of manipulating elections by deception and other means – called “political technology” by locals – will now be used only in other countries’ elections in, as these are the only real elections the Kremlin has to worry about, so neutered have Russia’s own votes become.
The justification for canceling elections in Russia is the need to fight terrorism – the end that now justifies all means.
How did it happen that every contemporary problem, particularly in Russia, seems to have been reduced to terrorist attacks and counter-terrorist operations?
Poverty, racism, and ideological legacies are just as visible now as they were three or thirteen years ago.
Terrorism has not exacerbated them.
Security forces have not helped resolved them.
On the contrary, the “double terror” induced by terrorism and counter-terrorism distracts public attention from those problems that, as some of us still remember, produced terrorism.
Palestine and Chechnya, two sites of pain and terrorist infection, have not healed.
Their national independence is now more elusive than it was before the terrorist era began.
The past was, of course, far from perfect, but governments and peoples everywhere appeared more capable of tolerating failure.
When battles were lost, talks began.
These talks eventually resulted in the formation of respected countries, from Italy in the nineteenth century, to India in the middle of the twentieth century, to Eritrea near that century’s end.
Try to imagine Putin as Russia’s leader in 1920, when Poland gained its independence from Russia, or in 1991, when Georgia did.
Would he ever have engaged in peace talks?
Nowadays, Rudyard Kipling’s imperialist Great Game is decomposing into a vicious circle.
Security forces respond to the growth of terrorism. The growth of terrorism responds to the strengthening of security forces.
The heavier the hand, it seems, the stronger the resistance; the stronger the resistance, the heavier the hand.
Real issues are buried beneath the crimes of the terrorists and the mistakes of the security forces.
With every turn of the circle, both parties, terrorists and security forces, grow closer to each other.
Their common interest is continuation of the game.
Opposing parties use the same weapons, develop comparable tactics, and preach increasingly similar ideals.
So it goes, until the rules of the game change.
But why would they?
In Russian history, there is an analogous situation.
At the beginning of the twentieth century, socialist revolutionaries led by Evno Asef embarked on a series of terrorist attacks against state officials.
Somewhere along the line, Asef became a double agent.
Sometimes he killed an official who was not on good terms with the police.
At other times, the police simply did not want to betray their precious agent.
Manipulating each other, the terrorists and the security guys became indistinguishable.
Call this the “Asef” effect.
Once such an alliance was shaped, nothing but revolution could stop it – in this case, the Bolshevik revolution.
So the game must be stopped, if only for the survival of innocent bystanders – the rest of us.
If you do not see humanity in your counterpart, you will not talk to him.
You will either use him or kill him.
So the “other” is elevated to the very center of high politics.
This is the Asef effect in action.
The Bolsheviks did it to the bourgeoisie.
The Nazis did it to the Jews.
But classical empires learned not to do it to colonized people.
Over time, they invented fascinating ways to control their subjects, combining education, bribery, and force.
Learning the great art of Orientalism, the classical empires knew how to keep talking while keeping their distance.
Abolishing democracy in Russia’s provinces, including Muslim-populated regions such as Tatarstan and Dagestan, is a deadly act.
Civil peace in these areas was one of the few accomplishments of which contemporary Russia could be proud.
So is Putin suicidal?
Unfortunately not.
He owes his career to Chechnya, as Bush may owe his presidency to Iraq.
But Chechnya, obliging as it is, is small, poor, and idiosyncratic.
Converting vast areas of Russia into new Chechnyas, Putin and his clique calculate that – sooner rather than later – they will play out their games of terror and security with millions of Muslims in the oil-rich plains of Eurasia.
Putin\u0027s Dictatorship of Law Begins Lawlessly
BOSTON: Wide agreement exists among Russian intellectuals as well as foreign observers that one of the most important – if not the most important task – facing post-Soviet Russia is establishment of the rule of law, the foundation of democracy and a free market economy.
Yet doubts persist whether President Putin and his associates realize this fact.
Some of their actions and pronouncements suggest that in their pursuit of a "strong state," they may be willing to sacrifice law to political expediency.
During nearly all her history, Russia was a stranger to law as a principle binding ruler and ruled.
Until the beginning of the twentieth century, tsars knew no legal constraints, such as impeded the absolutism of West European sovereigns. They did not have to respect private property in land because until 1785 they owned all the land.
Nor did they have to honor the rights of the nobility, inasmuch as until the middle of the eighteenth century all nobles were their servants.
The peasants, who made up nine-tenths of the population, consisted overwhelmingly of serfs of the Crown or the gentry and as such enjoyed no legal rights whatsoever.
The first Russian legal codes were compiled in the 1830's and the first effective courts appeared in the 1860's.
Law, of course, did exist but it did not serve to protect people from the arbitrary authority of government: instead, it was an instrument of administration.
Suffice it to say that tsarist officials could not be sued without the permission of their superiors.
And as for private persons standing up to the government in court, the idea was utterly inconceivable.
The traditions of law were, therefore, very shallow in Russia when the Bolsheviks seized power.
The seven decades of their dictatorship blighted the little bits of a law-based society that had taken root root.
Lenin defined his "dictatorship of the proletariat" as "power that is limited by nothing, by no laws, that is restrained by absolutely no rules, that rests directly on coercion."
Such, indeed, it was.
President Putin has asserted that in contemporary Russia law will be a "dictator".
But some evidence suggests that he conceives law in the traditional Russian sense, that is, not as a principle binding equally the state and its citizens, but as device by means of which the state promotes its own interests.
One illustration of this attitude is the recent raid on the headquarters of the Media-Most conglomerate whose television and radio stations, as well as newspapers, have been critical of the Chechnya campaign.
The raid – by heavily armed and masked men! – was allegedly carried out to investigate unlawful actions by the company's personnel.
But it was a highly unlawful procedure in itself, for which no apologies have been offered as of yet.
Another instance has to do with Putin's effort to rein in the governors in charge of Russia's 89 provinces.
During the past decade these elected officials have acquired the powers of feudal barons and in some cases act in clear violation of the constitution.
To bring them to heel, Putin has appointed seven officials (mostly ex-generals and KGB men) resembling tsarist Governors-General who will serve as his agents.
In announcing this move, Putin added, ominously, that he would "dismiss" governors who were found to act have acted unlawfully.
This statement itself was unlawful because, according to Russia's constitution, dismissals of duly elected officials should occur only by virtue of court orders.
Perhaps this was a slip of the presidential tongue.
But a faux pas of this kind, if that is what it was, reflects a mentality that places power over law.
A third illustration concerns Moscow's recent defiance of the United Nations war crimes tribunal by hosting a visit of Yugoslav Defence Minister, Dragoljub Ojdanic.
Mr Ojdanic was indicted a year ago by the Hague-based tribunal, a court established with Moscow's assent, for crimes against humanity in Kosovo.
As a member of the UN Security Council, Russia was duty-bound to arrest him.
Yet it treated him as an official guest, granting him meetings with the Defense Minister and chief of staff of the armed forces.
The trouble is that Vladimir Putin, although a graduate of Saint Petersburg University Law School, served many years in the KGB and surrounds himself with veterans of the KGB, an institution whose main domestic function was repressing dissent.
The mind-set of these people is geared to achieving their objectives without regard to legal niceties.
Such a background is difficult to overcome, especially if the new mission is the establishment of a "strong state."
It bodes ill for Russia which has yet to learn that political strength derives not from riding roughshod over the civil rights of the citizenry but from creating, through strict observance of the law, a sense of shared interest between government and people.
Putin’s Final Act
MOSCOW – Vladimir Putin’s new presidential term is just beginning, but it increasingly looks like the beginning of the end.
Whenever Russia’s people pour into the streets en masse, as they currently are doing, from that point on things never work out well for the authorities.
In 1917, Russian Emperor Nicholas II had to abdicate in the wake of mass street protests, clearing the way for the Bolshevik Revolution.
In 1991, the Soviet Union –&nbsp;then seemingly an unbreakable monolith – collapsed in just a few months.
Hundreds of thousands went into the streets to confront the hardline coup against Mikhail Gorbachev’s perestroika.
Now it is Putin’s turn.
Moscow boasts Occupy Abai, modeled on the Occupy Wall Street movement in the United States (and located on a boulevard next to a statue of Kazakh poet Abai Kunanbaev, whose work has gone from regional obscurity to one of the top Russian Internet downloads in a month).
Other cities are witnessing protests as well, all echoing the same call: Putin must go.
Russians are famously patient and slow to rebel.
And who would blame them?
If protests have turned out badly for Russian governments over the centuries, they have ended even more disastrously for the protesters.
In 1917, liberation from absolute monarchy ushered in an even more despotic form of absolutism.
After 1991, Boris Yeltsin’s unruly privatization reduced millions of people to penury, and elevated a corrupt oligarchy into virtual rulership.
But, despite being well aware of their history, once Russians turn on the man at the top, they don’t stop until he is out.
History debunks Putin’s myth that the majority of the country supports him because they want “stability,” and that the protests, headed by “Western stooges,” are about to subside.
They won’t abate.
And the appointment of Igor Kholmanskikh, a tank factory foreman who had offered to come to Moscow with a burly cohort of his fellow assembly-line workers to defend Putin’s regime, to rule the vast Ural region will not scare them.
Soft power has the upper hand today, and tanks can’t shut down the Internet.
In nominating his new cabinet (which he deemed so important that he could not attend the G-8 summit), Putin’s Soviet origins could not be more obvious.
Leonid Brezhnev used to have his culture and agriculture ministers swap places, as if – bound by the word culture – they were one and the same field of expertise.
Putin’s new cabinet is a similar reshuffling of the incompetent with the unqualified.
This debunks another myth – that Putin, now back in charge, will abandon his vulgar anti-Western rhetoric and become a reformer, understanding that only a democratic Russia can maintain its territorial integrity and sovereignty.
And the reason that he won’t embrace reform is that he can’t, because that old truism – absolute power corrupts absolutely – has proven itself once more.
After more than a decade in power, Russia’s leaders are no longer capable of pursuing better polices.
Their personal interests, and riches, are too dependent on maintaining the status quo.
Of course, Russia has seen this pattern before as well.
I will never forget what my great-grandmother Nina used to say about the corrupting nature of power in our own family.
“Regrettably, the Khrushchev of 1962 wasn’t the Khrushchev of 1956.”
My great-grandfather denounced Stalin’s cult of personality, only to be worshipped – for example, in the over-the-top documentary Our Nikita Sergeevich (1961) – for his “super vision” of how to diminish imperialism and “catch up with West.”
Khrushchev’s self-eulogizing flatly contradicted his earlier de-Stalinization campaign, the point of which was that Stalin betrayed communism by doing all that he could to resemble the royals of the past.
Everything officially said about him was superior and superlative: “best friend of Soviet athletes,” “father of all children on earth,” etc.
Later, Yeltsin, upon assuming office as Russia’s leader in 1990, denounced all Nomenklatura privileges as his first order of business.
In his book A Confession, he wrote, “As long as [Russians] are so poor and dismal, I can’t eat sturgeon and caviar, I can’t race cars, ignoring traffic lights, I can’t take imported super-pills, knowing that a neighbor has no aspirin for a child.
Because I am ashamed.”
When he left the Kremlin in 2000, his secret fortune, from real estate, yachts, horses, and other properties, was estimated to be worth at least $15 million.
In January 2000, the novice President Putin gave a slew of persuasive interviews to Russian TV networks, praising the rule of law and promising not to remain in office a day beyond his two constitutional terms, or if he lost popular support.
These are the “rules of the game, of democracy,” he said.
After two presidential terms, followed by a stint as Prime Minister and now a third presidency, Putin is entering his 13th year in power with 40% of the population desperately wanting him out.
Putin\u0027s Gold-Medal War
LONDON – What does the “Olympics War,” otherwise known as Russia’s invasion of Georgia, really mean?
The war itself was, of course, predicable and predicted.
Its results are equally clear.
First, Prime Minister Vladimir Putin remains in unambiguous charge in Moscow.
He may play a “good cop-bad cop” routine with President Dmitri Medvedev. But the bad cop, Putin, is the real boss.
Second, Putin cannot stand Georgian President Mikheil Saakashvili, who admittedly is not an easy man to like.
The Russian thought the Georgian had become too big for his boots.
He waited for Saakashvili to go a step too far, and then came down on him and his poor country like a ton of bricks.
Third, Russia has been stirring up trouble in South Ossetia and Abkhazia for years.
Moscow wants to keep Georgia weak.
It plays the same game in Transdniestria to undermine Moldova.
If an outsider had tried similar tactics in Chechnya, the Russians would rightly have howled with rage.
Fourth, today’s Russian leaders, like nineteenth-century Czars, want a sphere of influence around their borders.
So far as they are concerned, the countries that were once part of the Russian empire in the Soviet Union should enjoy only limited sovereignty.
The message being transmitted from Georgia to Ukraine and the Central Asian Republics is heard very loudly.
Russia has in particular opposed its neighbors joining NATO.
What is NATO against, the Russians ask?
Where is NATO’s front line?
Are we Russians really the enemy?
If so how should we react?
Russia’s actions have had the reverse effect to what was presumably intended; the invasion of Georgia has made a powerful case for further NATO enlargement.
Fifth, Georgia itself provides an important link to Caspian energy for all those Europeans who do not want to be totally dependent on pipelines controlled by Russia.
Indeed, Georgia is Russia’s choke point in its policy of using oil and gas as strategic foreign policy weapons, which it has done repeatedly.
The Swedish Defense Research Agency has reported that out of 55 deliberate gas supply interruptions, explicit threats, or coercive price actions by Russia since 1991, only 11 had nothing to do with politics.
America has reacted strongly – at least verbally – to Russia’s attack on its neighbor, in which the Russian army moved in first and made things safe for the Russian-backed unofficial South Ossetian militias to burn and pillage Georgian property.
But America is not in a strong position to go any further.
Its moral authority has been compromised in the Bush years, it cannot put more troops on the ground to defend Georgian sovereignty, and, even if it could, doing so would escalate the crisis.
America’s position is further weakened in the absence of a strong and united European response.
But you can forget about seeing that.
Russia knows that when it comes to conducting a serious foreign and security policy, Europe is all mouth.
Russia has pushed Europe around for years on energy issues, cutting bilateral deals with the bigger countries and opposing efforts to create a common European energy policy.
Europe certainly needs Russian gas. But Russia needs European consumers, and sooner rather than later it will seek more European investment in energy exploration and extraction.
No sensible person in Europe wants to revive the Cold War.
But it is not the European Union that is being provocative.
It is not Germany, France, and Italy that are invading their neighbors.
We Europeans seem to have forgotten our history.
There were other times when we have stood by while a militaristic European power insisted that it had the right to intervene wherever it wanted to advance the interests of those who claimed shared ethnicity from the Baltics to the Caucasus.
French President Nicolas Sarkozy claims to have brought peace to Georgia.
Yet it looks suspiciously as though the deal that ended the fighting will leave Russian troops in that truncated country for years.
So what, exactly, will Europe do?
Perhaps initially Europeans should be cautious.
But I doubt whether anything tougher than strongly worded communiqués will ever be employed.
Will we stop talking about our allegedly shared values with Russia?
Will we press the pause button on further discussion of how to integrate Russia fully into the international community?
Will we cut off some of our contacts with Russia, reconsider its membership of the G8, or delay its entry to the WTO and OECD?
Will we put to the side for the time being negotiations on a partnership and cooperation agreement between the EU and Russia?
I suspect that the answer to each of these questions is a resounding “no.”
It will be business pretty much as usual as Europeans prepare cheerfully in the years ahead for the Winter Olympics in Sochi, just up the road from the Russian missiles and tanks on Georgian soil.
Meanwhile, Europeans will continue to talk about their crucial role in world affairs.
It is enough to make even the cynical shake their heads in disbelief.
You could not make it up.
Europe's approach is weak and will cause bigger problems in the future.
So Putin wins the gold medal in his favorite event - bullying his smaller neighbors.
Putin’s History Lessons
CAMBRIDGE – Soviet ideology was always about the future.
By contrast, today’s official Russian ideology seems to be focused squarely on the past.
Prime Minister Vladimir Putin’s recent article for the Polish newspaper Gazeta Wyborcza – written to commemorate the 60th anniversary of the Nazi invasion of Poland – expresses his determination to make twentieth-century European history a major part of the Russian government’s business.
That article reflects the deep, unresolved problems of Putin’s era: the inability to distinguish between the Soviet past and the Russian present; an unscrupulous mix of political conservatism and historical revisionism; and indifference, bordering on incomprehension, with regard to the key values of democracy.
In his article, Putin did not mourn the collapse of the USSR, though he previously called it “the greatest catastrophe of the twentieth century.”
Indeed, he even praised the democratic movements that buried the Soviet Union and its sphere of influence, and he expressed no sympathy for the twentieth century’s revolutions, which he called “deep wounds” that humanity inflicted on itself.
What really worries Putin and his historical advisers is the memory of World War II.
They regard the Soviet victory over Nazi Germany as the highest achievement of the state and nation that they inherited from the USSR.
They also see this victory as the main counter-weight to the memory of the USSR as a reign of brutal, unjustified violence.
Not that Putin’s version of history denies this memory altogether.
This summer, he publicly instructed his education minister to include passages from Aleksandr Solzhenitsyn’s The Gulag Archipelago in the high school curriculum.
Rather, what concerns Putin is the balancing of WWII and Stalinism in Soviet history.
Calling for a “contextual” and “causal” view of history, he acknowledges the Stalinist terror but interprets it as a response to the extraordinary need to defeat Nazism.
Putin summarizes his understanding of the scale of the war by recalling the loss of “27 million lives of my compatriots.”
That number has grown over the years, as Soviet officials broadened the definition of wartime deaths to mean total “population loss,” rather than direct military casualties.
Official estimates of Soviet deaths in WWII thus rose from seven million (the figure put forth under Stalin) to 20 million (Khrushchev) to 26.6 million (Gorbachev), with civilian deaths accounting for at least two-thirds of Putin’s estimate.
Unfortunately, Putin does not explain whom he counts as his compatriots.
If he meant those who lived within Russia’s contemporary borders, the number would have been much lower.
Instead, he includes all citizens of the USSR who died during the war, including millions of Ukrainians, Belarusians, and others.
And, when the USSR annexed the Baltic countries, Königsberg, parts of Poland, Finland, Moldova, and Japan, their citizens, too, became Soviet compatriots.
Moreover, because Putin’s “contextual” history subordinates Soviet-era suffering to the purpose of fighting the Great Patriotic War, his number mixes those who died in battle fighting for the USSR with those whom the Soviets killed through mass murder, deportation, and forced labor.
By this logic, one could also reclassify the victims of the terror, collectivization, and famine of the 1930’s in order to boost the number of Hitler’s casualties in the USSR.
Putin connects two events that triggered WWII, the Munich Agreement of 1938 and the Molotov–Ribbentrop Pact of 1939, in one causal construction.
Both acts of collusion with Nazi Germany were immoral mistakes, writes Putin, but the latter was merely a response to the former.
To be sure, Britain’s Neville Chamberlain and France’s Edouard Daladier signed a shameful treaty with Hitler and Mussolini in Munich.
But when Hitler breached the treaty, both Chamberlain and Daladier lost popular support, and, by the start of WWII, neither was still in office.
The dictators remained, however, Molotov and Stalin among them.
Moreover, while the Munich Agreement cynically blessed Hitler’s dismemberment of Czechoslovakia, it was a public document that meant what it said.
But the truly important part of the Molotov-Ribbentrop Pact was its Secret Protocols, which divided Europe into two imperial domains, Stalin’s and Hitler’s, without the consent – or even the knowledge – of the nations consigned to them.
Molotov, who remained in power throughout the war and until 1956, denied the existence of the Secret Protocols until his death 30 years later.
Democracies make shameful mistakes, but they eventually correct them, or at least apologize for them.
And they dethrone those who got them into trouble.
It is wrong, and even immoral, to equate democratic and dictatorial practices.
But this is the new Russian equation.
Putin’s Imperial Dreams
To divide a people in order to conquer them is an immoral strategy that has endured throughout recorded history.
From Alexander the Great to Stalin the Cruel, variants of that strategy have been used to keep nations in thrall to the will of an emperor.
We are now seeing this strategy at work again as President Vladimir Putin stealthily seeks to restore Kremlin supremacy over the lands treated as “lost” when the USSR imploded in 1991.
In so overplaying his hand in Ukraine’s recent election, however, Putin clearly revealed to the world his neo-imperialist designs.
In the wake of the euphoric mass protests in Kyiv, Russia’s president has since said that he can work with whatever government Ukraine’s people choose.
These are mere words, for in mind and action Putin does not want anyone to rule Ukraine that he has not put in place.
No price is too high to achieve that end, so traditional threats about dividing Ukraine have been used.
I speak as someone who has been on the receiving end of Russian imperialist designs.
When Lithuania and then the other Baltic States – Estonia and Latvia – which were occupied by Stalin early in WWII, seized their opportunity for freedom in 1990-91, the Kremlin did not sit on its hands.
It knew that the rest of Russia’s colonies – the so-called “Soviet republics” – would want to follow the ungrateful Baltic countries into freedom.
Although Russia’s rulers were by then communists in name only, they didn’t hesitate to reach for the old Leninist recipes.
They began to foster and incite splits and confrontations.
They stoked supposed resentments among different national or ethnic communities based on Lenin’s idea that even small groups of villages could demand territorial autonomy.
Note the word “territory.”
The demands were never about normal cultural autonomy as a means of continued identity and supposed self-protection.
Only territorial autonomy, it seems, would do.
This way, minorities become easily manipulated majorities.
Divide enough, stoke enough resentment, and a nation becomes nothing more than a ruined society within a national territory.
Arm some of these manufactured minority structures so that they can demand autonomy at the barrel of a gun, and you get the kind of chaos the Kremlin can use to reassert its control.
Fortunately, Lithuanians – as well as Estonians and Latvians – understood this game.
It failed also in Crimea when Russia sought to deploy its old strategy of divide and rule there in 1991.
But these defeats did not inspire the Kremlin to abandon the basic strategy.
On the contrary, Russia’s imperial ambitions persisted, and persistence has paid off.
Around the Black Sea, Russia has called into being a series of artificial statelets.
Georgia and Moldova have both been partitioned through the creation of criminal mini-states nurtured by the Kremlin and which remain under its military umbrella.
Indeed, in the very week that Putin was meddling in Ukraine’s presidential election, he was threatening to blockade one of those statelets, Georgia’s Abkhazia region, after it had the temerity to vote for a president the Kremlin did not like.
Moldova has been particularly helpless in the face of the Kremlin’s imperial designs.
A huge Russian garrison remains deployed in Transdneister, where it rules in collaboration with local gangs.
Proximity to this lawless territory has helped make Moldova the poorest land in Europe.
To the east, Armenia and Azerbaijan were pushed into such bloody confrontation at the Kremlin’s instigation that the only way for them to end their ethnic wars was to call in the Russians – as in Transdneister – for a kind of “Pax Ruthena.”
Now Ukraine’s people may face a similar test after supporters of Viktor Yanukovych threatened to seek autonomy should the rightful winner of the country’s presidential vote, Viktor Yushchenko, actually become president.
Who can doubt that the hand of Russia is behind this?
Would Moscow’s mayor Yuri Luzkhov, a loyal creature of Putin, have dared to attend the rally where autonomy was demanded without the sanction of the Kremlin’s elected monarch?
Indeed, Putin openly claims this part of Ukraine as a Russian “internal matter.”
It is to be hoped that Ukraine’s Russian-speaking citizens, having witnessed the economic despair – and sometimes the bloodshed – caused by the Kremlin’s manufactured pro-autonomy movements, will realize that they are being turned into Putin’s pawns.
The test for Viktor Yushchenko and his Orange revolutionaries, as it was for Lithuania’s democrats in 1990-91, is to show that democracy does not mean that the majority suppresses any minority.
Lithuania passed that test;
I am confident that Viktor Yushchenko and his team will do so as well.
But Europe and the world are also being tested.
Russia is passing from being the Russian Federation of Boris Yeltsin to a unitary authoritarian regime under Vladimir Putin and his former KGB colleagues.
Europe, America, and the wider world must see Putin’s so-called “managed democracy” in its true light, and must stand united against his neo-imperialist dreams.
The first step is to make Russia honor its binding commitment to the Organization for Security and Cooperation in Europe, as well as to the Council of Europe, to remove its troops from Moldova and Georgia.
Any plans to “defend” Yanukovych and the eastern part of Ukraine by military force must be confronted.
Putin’s Ironic Potential
MOSCOW – Vladimir Putin’s recapture of the Russian presidency has been met with widespread derision, both at home and abroad.
But the autocrat’s return to the Kremlin could be Russia’s best hope to escape stagnation.
With his open contempt for Russian society – exemplified in his mocking response to widespread demonstrations – as well as his arrogance, readiness to stifle dissent, and fear of competition, Putin has singlehandedly quashed the long-held myth that he himself propagated: personalized power can modernize the country while preserving stability.
To be sure, Putin’s Kremlin – and his corrupt cohorts – still calls the shots.
And, while his decision to return to the presidency has vexed the most dynamic elements of Russia’s urban population, the rest of the country’s citizens remain unhappy but quiescent.
Likewise, Russia’s demoralized intellectuals and political class, on whom the population relies to advocate change, neglect to act.
The global rise in oil prices, endemic fear of change, lack of a viable alternative, and reliance on state hand-outs are keeping Russia in a state of inertia.
Moreover, Putin’s Kremlin has used the West –&nbsp;eager for engagement and a policy “reset” with Russia – to legitimize its authoritarian rule and to provide opportunities for its venal cronies’ integration into Western society.
Indeed, by using the West to launder their dirty money, Putin and his cohorts have, in a way, avenged the Soviet Union’s collapse by undermining the West’s principles and discrediting liberal democracy in the eyes of the Russian population.
But cracks are forming in Russian society, threatening the status quo.
And it is not the opposition or a popular rebellion that are beginning to destabilize Putin’s regime, but the very forces that have helped to keep it afloat.
After waiting 12 years for change from the top, Russians finally understand that their political system can be transformed only from the bottom – through popular revolution.
In the absence of institutional channels for expression of their grievances over the corrupt concessions that have preserved the ruling elite’s power, they must take to the streets.
But the question remains: Will Russia this time escape its traditional final act, in which the new regime turns out to be more predatory than the previous one?
Or will Russians find a way to pursue peaceful revolution?
Today, the Kremlin is contributing to its own violent demise, intentionally demoralizing Russian society.
It discredits liberalism by employing liberal rhetoric and appointing liberal leaders to administer its authoritarian rule, leaving political opposition to leftist parties and nationalists.
And Putin’s return to the Stalinist practice of sending police to search opponents’ homes, combined with his attempts to ignite hostility between social groups – for example, between provincial Russia and the urban middle class – is deepening antagonism and distrust among citizens.
In this way, Putin’s regime intensifies political dissenters’ longing for retaliation – thereby hindering peaceful change.
Already, longstanding tensions have begun to boil over; tens of thousands of people have taken to the streets since Putin’s 2011 announcement that he would reclaim the presidency.
His return to the Kremlin has incited some of the largest protests that Moscow has seen since the 1990’s.
And, while popular demonstrations have diminished – largely as a result of draconian new anti-protest laws – the more conflict accumulates beneath the surface, the more devastating the eventual explosion will be.
By censoring the media, discrediting moderate opposition, and provoking popular discontent, Putin is playing with fire.
It is impossible to predict when Russia will detonate, but the system’s fissures are undeniable – and growing.
The Kremlin, far from being able to control the situation, does not fully grasp what is happening.
Russia is moving toward precipice.
Massive capital flight and efforts by Kremlin cronies to engineer a safe landing for themselves in the West show that, even in the eyes of Putin’s cohorts, the end of his époque is approaching.
Yet Putin’s Kremlin continues to work tirelessly to prevent the formation of a strong opposition – increasing the risk that the regime will collapse without a viable alternative.
The longer Putin remains in power, the more devastating his regime’s final act will be.
Both Russia and the West must begin to plan ahead.
Regrettably, Russia’s awakening corresponds with the beginning of the West’s seeming decline.
Still, rather than remaining complicit in Putin’s corrupt regime, the West must help the Russian people to seek their new destiny.
And Russia’s citizens must not give up hope.
Putin’s return to the Kremlin, although painful, could end up curtailing their agony by triggering the regime’s destruction.
When the choice is between an outdated system’s implosion and its slow degradation, a swift, clean break typically offers better prospects for a new start.
Putin’s Kulturkampf
MOSCOW – August is often an unlucky month in Russia, particularly President Vladimir Putin’s Russia.
Submarines have sunk, neighbors have been invaded, and forests have burned out of control.
But, this August, the crisis was purely man-made –&nbsp;indeed, made by one man.
The conviction of three members of the agitprop punk-rock group Pussy Riot for “hooliganism motivated by religious hatred” has turned the three young women into an international cause célèbre.
On February 21, 2012, five members of the group tried to stage a performance, later described as a “punk prayer” in Moscow’s Cathedral of Christ the Savior.
The “prayer” lasted for no more than 40 seconds, at which point security personnel expelled the performers.
But their visit to Russia’s largest church was not in vain – footage of five women, dressed in glowing dresses and balaclavas while jumping in front of the altar, circulated widely on the Internet.
Their song accused Kirill, Patriarch of the Russian Orthodox Church, of kowtowing to the government and advised him to believe in God, not Putin.
The song’s refrain – “Mother of God, drive Putin away!” – incited the wrath of both church and state.
So retribution was certain.
The word “blasphemy” was used more and more frequently.
On March 3, the day before the presidential election, two members of the group, Nadezhda Tolokonnikova and Maria Alekhina, were arrested.
A third, Yekaterina Samutsevich, followed them to prison 12 days later.
Initially, Pussy Riot’s troubles attracted little attention, but the hate campaign orchestrated by Orthodox activists and the threat of a seven-year prison sentence for the women turned the tide.
Moscow liberals, initially treating the performance as silly, saw the threat of prison as inappropriate and the proceedings of the court as Kafkaesque and demented.
The case also attracted attention in the West.
Dozens of pop stars, from Pete Townshend and Paul McCartney to Madonna, rallied in support of the women.
Of course, Pussy Riot could hardly be classified as musicians.
They were more interested in creating visual images.
Both the feminist chants and the primitive chords were secondary to the spectacle.
In a sense, Pussy Riot created a simulacrum of a punk-rock group, a piece of performance art about anonymous protest musicians being mistaken for real musicians by real musicians.
Some of the punk-feminists’ militant accusers saw in their choice of Christ the Savior a diabolical plot against not only Orthodoxy, but also Russia itself.
They repeated ad nauseam that the cathedral was constructed as a monument to the victory over Napoleon, the 200th anniversary of which is being commemorated this year.
But they neglected to mention that it was destroyed, on Stalin’s order, in 1931 to make way for a gigantic Palace of Soviets, which was never constructed.
In 1960, the long neglected pit for the palace’s foundation was transformed into an open-air swimming pool.
In 1994, three years after the Soviet Union’s collapse, reconstruction of the cathedral began. President Boris Yeltsin’s main ideological project, completed in 2000, aimed to undo symbolically the years of communist rule and return Russia to its past.
But the new-old church could not turn back time.
If it became a symbol, it was of Putin’s new Russia, with its mix of jingoistic nationalism and state religion; so any attack on a monument embodying the unity of church and state under Putin could not go unpunished.
The Pussy Riot trial was, of course, a travesty of justice, with the prosecution quoting the canons of the Quinisext Council, which took place in Constantinople in 692, under Byzantine Emperor Justinian II.
The supposed victims of the Pussy Riot “prayer” – mainly the security guards – testified that they could not sleep after witnessing the performance.
Larisa Pavlova, the supposed victims’ lawyer, averred that, “Feminism is a deadly sin.”
The political character of the performance was studiously ignored, and the verdict of the judge, who sentenced the trio to two years in prison, proved to be the show trial’s scandalous dénouement.
According to Russia’s Presidential Council of Human Rights, Tolokonnikova, Alekhina, and Samutsevich were punished for a crime that does not exist – and therefore is not punishable – under Russian legislation.
The Council quoted St. Paul: “I had not known sin, but by the law: for I had not known lust, except the law had said.”
What we have witnessed since August is the latest battle in a Kulturkampf between Russia’s liberal intelligentsia and conservative, often fundamentalist, believers in the unity of the Orthodox Church and the Kremlin.
By punishing Pussy Riot, Putin has staked his presidency on an eventual conservative victory.
The History of Russia’s Future
MOSCOW – Strategic vision has never been a Russian attribute, and it certainly was absent in 2012.
Russia’s vast territory continually seems to obscure for its leaders the need to plan for the future, while its seemingly infinite supply of natural resources convinces them that the country can handle any contingency.
As a result, Russia is perpetually unprepared for the future.
Indeed, just as its leaders failed to prepare for the fall of communism, the softening of the Russian economy shows that they are poorly equipped for the coming decades, which will be characterized by depleted resources, a declining population, and shrinking territory.
Vladimir Putin’s return to the presidency this year marked a new low for Russian strategic vision.
After all, the past is the only future that Putin has ever wanted for the country.
When the Soviet Union collapsed, the Kremlin lost not only control of vast portions of territory, but also half of the USSR’s nearly 300 million people.
Since then, the population has fallen by millions more, owing to Russia’s high mortality rate, especially among men.
Over the same period, the population of the United States has grown from 248 million to more than 300 million.
Despite calls by the Russian public for reform – from modernization of the military and decrepit and corrupt legal institutions to diversification of the economy beyond natural-resource extraction and the military-industrial complex – Putin has stuck to his autocratic guns.
When Defense Minister Anatoly Serdyukov tried to reform Russia’s armed forces – by expanding the military’s training in modern defense techniques, cutting costs, and boosting efficiency – he was replaced by Sergei Shoigu, Moscow’s former governor and a die-hard Putin loyalist, who restored the outdated system.
Even the army’s new uniforms, which border on the comic with their eighteenth-century epaulets and World War II jackets, invoke the past, rather than provide the comfort and efficiency needed in modern warfare.
More ominously, in a move reminiscent of Stalin, Putin has initiated a new anti-extremism law, according to which anyone can be accused of terrorism, espionage, being a foreign agent, or disseminating hatred.
The law has proven to be a powerful tool in stifling dissent, which can include mass protests against election fraud, journalists working to expose corruption, or a librarian in Siberia fulfilling a patron’s request for a banned book.
Likewise, Putin’s foreign policy remains mired in old Russian obsessions, beginning with restoring the empire in whatever form possible.
In his effort to prove that losing its imperial status has not diminished Russia’s global role, Putin has meddled relentlessly in international decisions, opposing sanctions against Iran and supporting Syrian President Bashar al-Assad’s regime, even as it slaughters its own citizens.
Furthermore, while Russia has finally joined the World Trade Organization, doubts about the country’s human-rights record persist.
In 2009, for example, Sergei Magnitsky, a lawyer, was accused of embezzlement after uncovering a fraudulent tax-refund scheme run by Russian officials.
He died in prison after he was badly beaten and denied medical treatment.
In response, the US Congress has just enacted the Sergei Magnitsky Rule of Law Accountability Act, which prohibits anyone implicated in Magnitsky’s detention or death – or others suspected of gross human-rights abuses – from entering the US or using its banking system.
Similar laws have been adopted in Canada and across Western Europe.
But, instead of admitting the crime and working to bring the perpetrators to justice, Russia’s leaders have fought back, declaring that certain Europeans and Americans will, in turn, be barred from visiting Russia.
Putin’s unwillingness to heed popular discontent, and his failure to develop relations with the West during his 12 years in power, has backed him into a corner – and he is running out of ideas.
In his most recent attempt to restore Russia’s empire, he announced the creation of the Eurasian Economic Union with Belarus and Kazakhstan.
(Putin is courting the other ex-Soviet Central Asian countries, as well as Ukraine and Georgia).
But, even here, the President is bullying the very leaders he seeks to woo.
Given that Ukraine’s participation would significantly enhance the union’s legitimacy, Russia is using all available tactics – from lower gas prices to trade sanctions – to persuade its leaders to join.
But Ukraine’s President Viktor Yanukovych, who nurtures his own thuggish reputation, wants no part of it.
Putin’s effort to unify the ex-Soviet states is hardly the only initiative that exemplifies his flawed vision.
In order to appeal to the leaders of East Asia’s fast-growing economies – which Putin has called the most important factor for Russia’s long-term success – the government spent billions of dollars this year to modernize the dilapidated port of Vladivostok.
But, given that Asian leaders view Russia as little more than a natural-resource milk cow, it is far from clear that the investment will pay off, particularly given the absence of a comprehensive economic-development plan for the region.
Putin hopes that harsh policies, at home and abroad, will allow him to maintain a stranglehold on Russia.
But they have merely ensured the country’s decline.
As 2013 begins, Russia is back on the hamster wheel of history, treating the past as prologue – and thus wasting its resources and blighting its people’s lives.
Putin’s Last Stand
WASHINGTON – On April 2-4, NATO will hold its biggest summit ever in Bucharest, the capital of its new member, Romania.
Incredibly, NATO has invited its fiercest critic, Russian President Vladimir Putin, to attend.
For the first time since 2002, he will.
His presence is an embarrassment to NATO, but an even greater disgrace for Russia.
The two biggest issues in Bucharest will be whether to invite Albania, Croatia, and Macedonia to join NATO, and whether to offer applications to Ukraine and Georgia to start so-called “membership action plans.”
These questions should be decided by NATO’s members, not outsiders.
In February 2007, Putin, in an anti-Western tirade delivered in Munich, declared: “I think it is obvious that NATO expansion does not have any relation with the modernization of the Alliance itself or with ensuring security in Europe.
On the contrary, it represents a serious provocation that reduces the level of mutual trust.”
So Putin’s views about NATO are clear.
He will scandalize the summit by seeking to intimidate the former Soviet clients in the room.
Such an aggressive attitude benefits a country’s foreign policy only up to a point – one that Putin passed long ago.
Initially, he acted as an able diplomat and accommodator, but since his Munich speech, Putin has begun uniting the West against Russia.
In his speech on May 9, 2007, commemorating Russia’s victory in World War II, Putin compared the United States with Nazi Germany: “We have a duty to remember that the causes of any war lie above all in the mistakes and miscalculations of peacetime, and that these causes have their roots in an ideology of confrontation and extremism.
It is all the more important that we remember this today, because these threats are not becoming fewer, but are only transforming and changing their appearance.
These new threats, just as under the Third Reich, show the same contempt for human life and the same aspiration to establish an exclusive dictate over the world.”
Serious politicians do not speak like that.
These are the rants of Putin’s few remaining friends – Venezuela’s Hugo Chavez, Iran’s Mahmoud Ahmadinejad, and Belarus’s Alyaksandr Lukashenka.
At home, awareness is rising that Putin is damaging Russia’s interests by insulting and intimidating everybody.
He is isolating his country among the world’s pariahs; worse yet, he has achieved little.
When Putin became president in 2000, he named accession to the World Trade Organization as his foreign policy priority.
He failed, because he gave in to petty protectionist interests, imposing a timber embargo against Finland and Sweden, a fish embargo against Norway, and various agricultural embargos against Lithuania, Ukraine, Moldova, Georgia, and others.
Russia’s foreign policy is focused on the interests of its state-dominated corporations, notably Gazprom, which has concluded agreements with many foreign countries and companies for monopolistic deliveries.
But a Gazprom pipeline typically costs three times as much per kilometer as a similar Western pipeline, because of “leakage” (kickbacks and waste).
The primary purpose of Russia’s foreign policy seems to be to tap Russia’s state companies for the benefit of Kremlin officials.
But customers do not trust suppliers who cut deliveries, raise prices unpredictably, expropriate competitors, and let production decrease in the way Gazprom and Russia’s other state companies have done.
As a result, Russia’s gas exports to Europe have started declining.
Putin’s foreign policy also is evidently intended to whip up populist chauvinism.
Beating up on foreigners may boost his authoritarian rule, but this, too, has a price.
Not only the US and Europe, but all former Soviet republics feel alienated by Putin’s aggressive tactics.
Many are seeking to shield themselves from Russia’s capricious embargos – for example, by seeking alternative energy supplies.
Arguably, Russia has improved its relations with China under Putin, but at the cost of acceding to China’s demands for two big disputed islands over which the two countries fought in 1969.
Putin’s apparent aim was to secure financing for Rosneft’s purchase of the Yugansk oil field, which was part of the Yukos confiscation.
Yet China, too, is wary of Putin, and has been sending warm signals to leaders of former Soviet republics, such as Ukraine’s Yuliya Tymoshenko.
Russia’s nationalists are also outraged by Putin’s foreign policy, because it has alienated former Soviet republics and weakened Russia’s military.
The nationalist Council for National Strategy published a devastating report on the decay of Russia’s military under Putin.
Russian military procurement, it claims, has plummeted.
For example, only three new military aircraft have been purchased since 2000.
True, armaments costs have risen sharply, but only because Putin’s KGB friends, who monopolize weapons production, have stolen inordinate amounts.
Yet, despite this spending shortfall, Putin seems obsessed with making pointless and provocative gestures, such as resuming long-range nuclear bomber flights off the American coast.
In the early 1990’s, many westerners and Russians wanted Russia to become a full-fledged member of both the European Union and NATO, on the condition that Russia became a full-fledged democracy.
Unfortunately, the West never made that offer, and Russian democracy went astray.
Russia should be given a new chance, but only after Putin has departed.
Russia is no enemy of the West;
Vladimir Putin is.
Putin\u0027s Neo-Imperial Ambitions
As Vladimir Putin's re-election approaches on March 14, it is time to take stock of his presidency.
The biggest thing to happen on his watch is that Russia stabilized itself.
With stability, the face of 21st century Russia was revealed.
What much of the world sees in Putin's Russia is a neo-authoritarian regime based on a state-directed capitalism interlinked with the ruling bureaucracy and flanked by an immature civil society.
In terms of raw power, Russia is clearly inferior to the former Soviet Union.
This Russia is neither capable, nor desirous of, full integration with the West.
But weakened, as it no doubt is, Putin's Russia still regards itself as a great power.
The ruling elite rejects transforming Russia into a junior partner of the US or an unimportant member of the West.
As far as Russia's elite is concerned, Realpolitik in the 21st century is a fusion of geopolitics and geo-economics, with military might thrown in.
Ideology and values play little role.
Thus, Putin does not view closer relations with the West as an ideological imperative, but as a resource for Russia's economic modernization.
In relations with the US and EU, Putin wants to boost Russia's status.
This is what his modernization policy aims to achieve.
Russian leaders no longer expect real assistance from the West.
Self-help has replaced the discredited notion that foreign countries will come to Russia's rescue.
Foreign investment is still viewed as desirable, but no one attaches primary importance to attracting it anymore.
Russia, it is widely believed, can rely on domestic capital.
The same sort of thinking holds true in military/strategic affairs.
Because America only respects strong partners, Russia will modernize the components of its national power that make it comparable to the US, in particular its nuclear arsenal.
Overly close contacts with NATO (let alone membership) would deprive Russia of strategic independence.
Of course, confrontation with America must be avoided.
But, because an alliance of equals is impossible, a flexible combination of limited partnership and local rivalry seems the most likely course.
Russia's leaders clearly recognize the country's true current condition, so they accept the need to concentrate on vital interests.
They remain convinced that Russia is a great power, but one that for now must act primarily as a regional one.
The major objective of this strategy in the near future will come down to restoring Russian influence in the states of the former Soviet Union.
Call this strategy "Operation CIS."
The objective is not to revive the Soviet Union.
All CIS countries - with the possible exception of Belarus - will retain their sovereignty.
When President Alexander Lukashenko departs, Belarus may fold into Russia as East Germany was absorbed by West Germany in the early 1990's.
Russia's transformation into an economic magnet for the CIS will be the major force of renewed Russian strategic influence.
In exchange for economic support, the Kremlin will demand political loyalty.
The criteria for that loyalty will be fairly simple - participating in the security framework headed by Russia and eliminating the "excessive" influence of third parties (the US, EU, China, or Turkey) within CIS nations.
Agreements with the CIS ruling elites will become the main instrument for implementing "Operation CIS."
This will require painstaking efforts to promote pro-Russian groups and gradually weaken and neutralize pro-Western circles.
This task will be lengthy, but the similarities between the CIS political and economic systems with what exists in Russia will make it easier.
Besides, in most cases, Western integration is impossible for these CIS states.
Many elites in these countries, because they seized power and became rich rapidly, feel insecure.
Russia's support on promising terms may attract them, particularly because the matter of forfeiting sovereignty will not be raised.
But Russia will encounter problems in pursuing this strategy.
Putin's attempt in 2003 to have President Bush recognize Russia's "special interests" in the former Soviet Union failed, just as Yeltsin's bid to gain that recognition failed a decade earlier.
Unlike Yeltsin, however, Putin won't give up and expects that he can take advantage of the fact that America will be too busy fighting terrorism and WMD proliferation, rearranging the Middle East, and containing China to object too strongly.
Russian activism in the CIS will also bring it into direct rivalry with the EU.
If the Kremlin uses force to establish its regional hegemony, Europe may again see Russia as a security threat, which would bring about a renewal of the Cold War/NATO policy of containment.
Likewise, China might oppose "Operation CIS."
Until recently, China feared that Russia's withdrawal from the region would create a vacuum that the US would fill.
Viewing the region as its strategic backyard and a source of energy, China is now expanding its influence.
Consolidation of Russian strategic power would limit the scope of China's sway.
But if Russia acts as a reliable rear guard and provider of energy and military hardware, China is unlikely to seriously object to expanding Russian influence.
In pursuing these goals, Russia must remember that imperialism is expensive and will incite confrontation with the West.
It must also remember that for the CIS countries, sovereignty primarily means independence from Russia.
So the Kremlin should strive for voluntary recognition of its leadership based on economic and social achievements.
True leaders, after all, lead by example.
Putin’s Rules of Attraction
CAMBRIDGE – Russian President Vladimir Putin’s covert aggression in Ukraine continues – and so do Western sanctions against his country.
But the economy is not all that is under threat;
Russia’s soft power is dwindling, with potentially devastating results.
A country can compel others to advance its interests in three main ways: through coercion, payment, or attraction.
Putin has tried coercion – and been met with increasingly tough sanctions.
German Chancellor Angela Merkel, Putin’s main European interlocutor, has been expressing her frustration with Russian policy toward Ukraine in increasingly harsh terms.
Whatever short-term gains Putin’s actions in Ukraine provide will be more than offset in the long term, as Russia loses access to the Western technology it needs to modernize its industry and extend energy exploration into frontier Arctic regions.
With Russia’s economy faltering, Putin is finding it increasingly difficult to employ the second tool of power: payment.
Not even oil and gas, Russia’s most valuable resources, can save the economy, as Putin’s recent agreement to supply gas to China for 30 years at knockdown prices demonstrates.
This leaves attraction – a more potent source of power than one might expect.
China, for example, has been attempting to use soft power to cultivate a less threatening image – one that it hopes will undermine, and even discourage, the coalitions that have been emerging to counterbalance its rising economic and military might.
A country’s soft power rests on three main resources: an appealing culture, political values that it reliably upholds, and foreign policy that is imbued with moral authority.
The challenge lies in combining these resources with hard-power assets like economic and military power so that they reinforce one another.
The United States failed to strike this balance with respect to its 2003 invasion of Iraq.
While America’s military power was sufficient to defeat Saddam Hussein’s forces quickly, it did so at the expense of its attractiveness in many countries. Likewise, though establishing a Confucius Institute in Manila to teach Filipino people about Chinese culture may help to cultivate China’s soft power, its impact will be severely constrained if China is simultaneously using its hard power to bully the Philippines in the territorial dispute over the Scarborough Shoal.
The problem for Russia is that it already has very little soft power with which to work.
Indeed, as the political analyst Sergei Karaganov noted in 2009, Russia’s lack of soft power is precisely what is driving it to behave aggressively – such as in its war with Georgia the previous year.
To be sure, Russia has historically enjoyed considerable soft power, with its culture having made major contributions to art, music, and literature.
Moreover, in the immediate aftermath of World War II, the Soviet Union was attractive to many Western Europeans, owing largely to its leadership in the fight against fascism.
But the Soviets squandered these soft-power gains by invading Hungary in 1956 and Czechoslovakia in 1968.
By 1989, they had little soft power left.
The Berlin Wall did not collapse under a barrage of NATO artillery, but under the impact of hammers and bulldozers wielded by people who had changed their minds about Soviet ideology.
Putin is now making the same mistake as his Soviet forebears.
Despite his 2013 declaration that Russia should be focusing on the “literate use” of soft power, he failed to capitalize on the soft-power boost afforded to Russia by hosting the 2014 Winter Olympic Games in Sochi.
Instead, even as the Games were proceeding, Putin launched a semi-covert military intervention in Ukraine, which, together with his talk of Russian nationalism, has induced severe anxiety, particularly among ex-Soviet countries.
This has undermined Putin’s own stated objective of establishing a Russia-led Eurasian Union to compete with the European Union.
With few foreigners watching Russian films, and only one Russian university ranked in the global top 100, Russia has few options for regaining its appeal.
So Putin has turned to propaganda.
Last year, Putin reorganized the RIA Novosti news agency, firing 40% of its staff, including its relatively independent management.
The agency’s new leader, Dmitry Kiselyov, announced in November the creation of “Sputnik,” a government-funded network of news hubs in 34 countries, with 1,000 staff members producing radio, social media, and news-wire content in local languages.
But one of the paradoxes of soft power is that propaganda is often counterproductive, owing to its lack of credibility.
During the Cold War, open cultural exchanges – such as the Salzburg Seminar, which enabled young people to engage with one another – demonstrated that contact among populations is far more meaningful.
Today, much of America’s soft power is produced not by the government, but by civil society – including universities, foundations, and pop culture. Indeed, America’s uncensored civil society, and its willingness to criticize its political leaders, enables the country to preserve soft power even when other countries disagree with its government’s actions.
Similarly, in the United Kingdom, the BBC retains its credibility because it can bite the government hand that feeds it.
Yet Putin remains bent on curtailing the role of non-governmental organizations and civil society.
Putin may understand that hard and soft power reinforce each other, but he remains seemingly incapable of applying that understanding to policy.
As a result, Russia’s capacity to attract others, if not to coerce and pay them, will continue to decline.
Putin\u0027s Puppies and Russian Democracy
When overseeing military exercises from aboard a nuclear submarine near Scandinavia, Vladimir Putin announced that Russia had developed a new missile system, the finest in the world.
It was not his most convincing moment.
Three older missiles, launched in his presence, failed to reach their targets on Kamchatka.
The submarine that Putin was on resembled the Kursk, which exploded during a similar military exercise in 2000, killing 118 sailors.
After the Kursk catastrophe, Putin was asked what really happened. "It sank," he replied, with a somewhat macabre smile.
In a recent joke, an interviewer asks Putin what happened to his favorite dog's puppies, whose birth he proudly announced during last December's parliamentary elections. "They sank," he answers.
Russian democracy is almost as young and blind as Putin's puppies - but much poorer.
Low-income countries can develop democracy, but they have a tough time maintaining it.
India, which is both poor and democratic, is a happy exception to this rule.
Will Russia, whose political legacy is not British but Soviet, be another?
Countries with per capita incomes close to the current Russian level sustain democracy for 15-20 years on average.
Russian democracy, born in 1991, may be nearing its expiration date.
Putin's first term in office proved to be an economic success and a political failure.
High oil prices kept Russia's economy - and common people's income ­- growing rapidly.
(Europeans need not be envious: growth is quicker when it begins low; think again about puppies.)
Russia is a rich country with a poor population, and redistribution schemes work well in such conditions.
But they will not work for long.
Putin promises to double Russia's GDP by 2010 - an ambitious aim, and success would improve democracy's prospects.
But few of Putin's promises have been fulfilled.
The Chechen war drags on, bringing new victims every month.
Foreign students are killed because of growing racism.
The population is declining, but immigration is blocked for ideological reasons.
Military reform has yet to begin.
Independent media are practically extinct.
Russia's international position is worse than ever.
Turkey and Ukraine aspire to join the European Union;
Russia does not.
Putin counts on economic growth as the basis for his personal popularity.
But this is a bad bet.
Private companies, not the state, generate Russian growth.
Practically everything that a Russian citizen can find in a supermarket, including the supermarket itself, is produced or imported by private firms.
Oil, the main engine of growth, is privately controlled.
In the late 1980's, Mikhail Gorbachev announced that Russian oil was practically exhausted.
Now Putin claims credit for making Russia the world's leading producer, ahead of Saudi Arabia.
This is indeed a success.
The hydrocarbons sector secures Russian growth, undermines the power of Arab producers and OPEC, and thus promises a decrease in oil prices.
The problem for Putin is that this success was achieved not by the Russian state, but by private enterprises.
By creating independent courts, securing property rights, and collecting fair taxes, the state is crucial for making the environment favorable for business.
But to attribute the performance of Russian business to the efforts of the state is the same as attributing a writer's work to his editor, or even to his censor.
Many Russian industrialists, such as the founders of Yukos Oil, oversaw their businesses' stunning growth.
Now some of them are in jail, in exile, or frightened out of the industry.
In the meantime, economic growth, which is vital for an impoverished but ambitious population, was the central issue of the presidential campaign.
You cannot deceive people about growth; they feel the weight of their pockets better than anyone else.
But you can manipulate their understanding of it: who are the authors of growth, the Khodorkovskys or the Putins?
Growth, it seems, is attributed here not to those who produce it, but to those who punish it.
The business of Putin and his coterie is politics.
Trained as lawyers or even as philologists, but with their formative experience in the security services, these people introduced a concept they call "political technology."
These "technologies" range from producing decoy political parties and legally persecuting opponents to publishing fake polls and falsifying elections.
Of course, electorates have been cheated, bribed, and blackmailed for as long as there have been elections.
What is fairly new, at least for Russians, is that these "technologies" are efficiently coordinated from the top of the presidential administration.
The most successful recent example was the invention of the political party "Motherland," which took protest votes away from the liberal parties as well as from the Communists.
Created by the presidential administration two months before the December parliamentary elections, "Motherland" split and practically collapsed two months after its amazing victory.
Russian political experts, pollsters, and consultants ascribe every success or failure in Russian politics to "political technologies."
Their profession has become so important in recent years that there is now a special "Day of the Political Consultant" in Russia every February 25.
This year's day saw Putin sack the then Prime Minister, Mikhail Kasyanov - an architect of Russia's pro-business reforms - as if to celebrate the overriding power of "political technology."
This manner of governance bodes well neither for economic growth nor democracy in the long term.
For when you drown puppies, they sink.
Putin\u0027s Soft Authoritarianism
A joke making rounds in Moscow nowadays goes like this: Americans didn't know who their President was two months after their last presidential election, but we Russians knew who was going to occupy the Kremlin two years before our recent election.
Russia's political class has ample grounds to be slyly and cynically proud of the system they invented - it guarantees the result it wants.
Despite its lack of drama, intrigue, and competitiveness, the election was important not because Russia's political class renounced all the key elements of authentic democratic electoral procedures, but because it closed the chapter on Russia's liberal democratic experiment, legitimizing Putin's new Russian political system.
What is the nature of the new system?
Is it democracy with adjectives, such as "managed" democracy, "illiberal" democracy, or "electoral" democracy?
Only a few pundits stubbornly adhere to this approach.
Or is the system simply that of a conniving authoritarian?
This view is already conventional wisdom, not only in America, but in Europe as well.
In reality, however, Putin's regime is a strange and complicated mix, which relies upon two important elements: the personal power of Vladimir Putin himself and the growing role of Russia's consolidating democratic institutions.
The tension between these two forces will drive Russia's political dynamics for the next four years.
Complicating the picture further is the fact that Putin represents the most pro-Western force in Russia, while the state apparatus remains conservative, traditional, and archaic.
So Russia's liberals and democrats face a harsh choice: do they support Putin's personal authoritarianism or seek to weaken and delegitimize him and thus restore the role of an ascendant bureaucracy?
How do the siloviki , the now notorious representatives of Russia's security and power structures, fit in this picture?
Everybody likes this myth of the siloviki , because it's so easy to explain Russian developments by ascribing events to a "KGBization" of power.
But this is unpersuasive: the siloviki have not coalesced into a coherent group and consolidated their authority - at least so far.
They lack a leader, have no agenda, and failed to seize power during Putin's first term.
I think they will fail again during Putin's second term.
Indeed, in coming years, other forces have much greater potential to consolidate power, with the siloviki used only as their praetorian guards.
So who is responsible for the fact that liberal democracy has ended in Russia?
Well, Putin, of course, and Yeltsin before him.
Moreover, ordinary Russians are becoming allergic to liberal democracy, because liberal technocrats have consistently served as window dressing for an illiberal Kremlin regime.
Having tied themselves to Russia's existing power structures, liberals are now in no position to become convincing critics.
Indeed, Putin's soft authoritarianism is now probably the greatest threat to greater democratization in Russia.
Paradoxically, because Putin's "strong" leadership incorporates liberals and even democrats so as to preserve a pro-Western façade, a truly liberal opposition cannot emerge.
By contrast, a genuinely repressive iron hand would be far likelier to spur a more potent democratic resistance.
Of course, Putin has concentrated so much authority and control over the levers of power in his own hands that he appears capable of anything.
But appearances can deceive, for the legacy of Putin's first term is that he is losing his fight with the state apparatus that he inherited.
He's not yet a hostage of the bureaucracy, but he regularly loses major battles.
So what will happen when Russia's political class and the President himself discover that "bureaucratic authoritarianism" is not the recipe for modernization à la South Korea that they hoped for?
What will they do when they realize that it has failed to secure sustainable economic growth and political stability?
Under the current soft authoritarian regime, I can see only one rather negative scenario for the future: authentic, full-fledged dictatorship.
The question is whether it will be a Pinochet-style dictatorship bent on economic modernization, or a dictatorship with a revived totalitarian ideology?
By winning so decisively, Putin has legitimately made himself responsible for everything.
There is no government below him to take the blame for failure, and failure is the easiest way to lose legitimacy.
Failure, moreover, will likely bring with it a split in the political class, making it very difficult to find a single candidate to become Putin's successor.
Not one political force in Russia knows how to answer the challenges that "soft authoritarianism" has brought.
Russia has never made a successful transformation of any kind in a time of peace.
Change comes through war and domestic conflict.
For those who seek a democratic and liberal Russia, the quandary is awful, because to delegitimize Putin only risks bringing darker and more archaic powers to the surface.
Putin’s Undercover Liberalism
When Vladimir Putin was elected Russia's president little more than a ago, people expected the smack of firm government -- something most Russians wanted and most outsiders feared.
In politics, they have gotten just that.
In economics, however, President Putin has been a stealthy reformer yearning for consensus.
His caution may be working better than anyone expected.
When President Putin made German Gref (a reformer from Saint Petersburg, the president's home city) minister in charge of economic development, he ordered him to draw up a longterm strategy for economic reform.
Given Gref's reputation, the president knew that any program designed by him would adhere to liberal principles.
When the program was ready six months later, however, the government approved only an eighteen-month version of it, not the longterm strategy.
All measures touching on reform of the state were removed.
Presidential support for Gref appeared on the wane.
As grumbling against his program grew louder, the President asked the governor of Khabarovsk, Viktor Ishayev, to devise an alternative strategy.
Ishayev’s plan turned out to be significantly more conservative, and Gref was ordered to incorporate its positive aspects into his program.
What happened next was surprising.
Gref's program was diluted only slightly but gained wide support and the President's backing.
The general public approved of this seeming compromise.
By implicating Ishayev (a representative of the old and the cautious) into the process, Putin created the appearance of consensus, but in reality demonstrated that there is no valid economic alternative to a liberal course.
This process is emblematic of Putin’s hidden-hand style of government.
He does not charge ahead; before making a decision, he listens to different opinions and lets emotions cool.
Gref's program, too, is emblematic of the President's style: modernization from above -- ie, that initiated by government and under its pressure -- is matched by modernization from below, based on private initiative.
Undeniably liberal ideas dominate the program: strengthening and protecting property rights, deregulation, and encouraging competition.
In addition, Gref's program seeks to create effective private land ownership.
Deregulation ("debureaucratization," really) will make life easier for new businesses by reducing the number of inspections imposed by bureaucrats and by decreasing the number of demands for licenses and other forms of red tape (which were also big sources of bribery).
Enhancing competition will mean putting emphasis on antitrust policy and reducing state subsidies.
But Putin has not become a disciple of Milton Friedman or Margaret Thatcher.
He clearly believes that the state has a powerful role to play in promoting growth, revitalizing core industries, and reforming and regulating natural monopolies.
Still, Thatcherite ideas about lower and more transparent tax structures and central control of budgetary expenditures are definitely key parts of his agenda.
One important aspect of this is the movement of federally mandated expenses (ie, expenditures ordered by federal legislation but paid for by the regions) onto the federal budget.
This will no doubt cause the share of total government expenditures paid by Moscow to rise, but if federal funds cannot pay for something, the costs will no longer be shifted onto the backs of the regions.
Shifted to the regions, however, is responsibility for many social issues, including the problem of low wages.
Enormous subsidies, mainly from local budgets, are allocated for housing.
The federal budget will subsidize this spending through lower tariffs on energy, heat, gas, and rail transport.
These subsidies are also intended to be used to raise wages (first of all, for public employees) and pensions.
If Gref's plan is adhered to, by 2005 the poorest 40% of the population will receive 85% of social transfers, as opposed to the paltry 36.2% they received in 1999 .
This social investment will, it is hoped, be matched by business investment.
At minimum, average GDP growth of 5% is expected for the next decade (a figure now met for over 18 months).
Over this time, government savings are expected to total 30% of GDP.
This is an ambitious goal.
But as capital flight decreases because of the emergence of a more transparent tax regime and legal system, sufficient sources of domestic investment should become available.
This should allow Russia to start closing the gap with other countries.
Important changes in the balance of payments are also expected.
Imports are expected to double and the trade surplus to drop to $35 billion in 2004 as a result of equipment and technology imports -- precisely the pattern a country growing strongly should have.
The current account balance is to drop to $15 billion in 2004 and $5 billion in 2010.
Some of this should be paid for by growth in the export of services and, more importantly, by capital inflows.
What makes Gref's program unique among Russian state budgets since 1991 is its realism: the measures it puts forward are not only necessary but feasible.
Of course, many doubt whether it will be possible in the time allotted to reduce risk and increase trust so that capital flight is slowed and then reversed.
Much depends on this happening, however, as both Gref and the President know.
Still, that task is ambitious, not impossible.
The important thing is that the methods chosen are the right ones, which means that from President Putin on down legality must not only be respected, but shown to be respected.
Putin’s Unwilling Executioner?
MOSCOW – The question that has dominated Russian politics, and world discussion of Russian politics – “Will he (Vladimir Putin) or won’t he stay in power?” – has now been settled.
He will and he won’t.
The election of Putin’s longtime acolyte and handpicked successor, Dmitri Medvedev, as Russia’s president means that Putin is formally surrendering all the pomp and circumstance of Kremlin power.
But now it looks like 21-gun salutes and first place in protocol lines are the only things that Putin is giving up – if that.
In opting to become President Medvedev’s prime minister, Putin sees himself as coming closer to the machine of power, because he will obtain minute-by-minute control of the government.
This bizarre transfer of office but not power – perhaps a slight improvement on state governors in the American south who used to hand their offices to their wives when their term-limits expired – is Putin’s scenario.
But what if it is not Medvedev’s?
What if Medvedev, after a few years, becomes as independent of his patron as Putin became of Boris Yeltsin, the man who put him on the Kremlin throne?
Should that turn out to be the case, it will be useful to know what, if anything, Medvedev stands for.
One thing immediately stands out about Medvedev: he has only indirect ties to the siloviki , the ex-KGB and military men who have dominated the Putin era.
As a trained lawyer, he should in principle understand the importance of the rule of law.
And, as deputy prime minister since 2005, he oversaw the Russian National Priority Projects (a set of policies to develop social welfare), which has given him a clearer insight into Russia’s deep flaws than any of the siloviks , with their focus on getting and maintaining personal power, could ever have.
Medvedev’s promises to modernize the feudal conditions of Russia’s army also set him apart, given the absolute failure of military reform during the Putin era.
Moreover, he appears to believe that confrontations between the state and civil society are counterproductive.
Indeed, he insists that the government’s job is to strengthen civil society based on the rule of law.
All of this sounds good.
The problem is that we have heard it all before from Putin – another trained lawyer – at the start of his presidency, when he promised a “dictatorship of law,” military reform, land reform, and, consequently, a return of Russia’s agriculture dream, ruined by the post-1917 planned economy.
Instead, he and his ex-KGB comrades-in-arms placed themselves above the law, abandoned meaningful social and economic reform, and coasted on high world oil prices.
There is hope, however slight, that, unlike Putin, Medvedev may mean what he says.
His non-KGB, non-military background suggests that his conception of the rule of law may not be entirely shaped by a cynical love of power.
But Medvedev’s track record is not encouraging.
As Russia’s deputy prime minister since 2005, he has not gone beyond consoling rhetoric.
For eight years, he carried out silovik orders, combining the role of Kremlin gray cardinal with treasurer of the main source of silovik power, the chairmanship of state-owned energy giant Gazprom.
Medvedev also coordinated Russia’s interference in the 2004 Ukrainian election, which led to that country’s “Orange Revolution.”
More broadly, as the head of Putin’s presidential administration, Medvedev directly oversaw the construction of today’s authoritarian system of Russian governance.
So it was only appropriate that he should become deputy prime minister for social affairs in 2005, because he had already succeeded in largely bringing these affairs to a halt.
Russia is supposed to be a mystery, but it rarely surprises the world in living down to expectations: most analysts were certain that Putin would find a way to stay in power even without amending the constitution.
And so he did.
Indeed, Russia’s liberal promises have been shattered time after time.
Nikita Khrushchev’s de-Stalinization reforms ended with Leonid Brezhnev’s stagnation;
Boris Yeltsin’s democratization resulted in Putin’s authoritarianism.
In the sadly immortal words of Victor Chernomyrdin, Russia’s prime minister during the Yeltsin era, “We wanted for the better, but it turned out to be like always.”
But, as predictable as Russia’s undemocratic system of governance usually is, the country does defy expectations once in a while.
Khrushchev denounced his mentor, Stalin.
Mikhail Gorbachev was originally installed in power to press on with Yuri Andropov’s KGB-inspired vision of communism, but instead diverted the Soviet Union’s course into glasnost and perestroika , and accidentally into freedom.
What if Putin is wrong in his choice of successor, and Medvedev refuses to be his clone, but instead follows in the footsteps of Khrushchev, Gorbachev, and Yeltsin?
What if the supposed puppet starts to pull the strings?
Putin’s Year of Living Dangerously
MOSCOW – In the spring of 2008, Russian President Vladimir Putin was on top of the world.
Oil and gas prices were sky high, with export revenues flooding the Kremlin’s coffers.
The country’s once powerful military, which collapsed with the demise of communism in 1991, was being rebuilt.
And Putin’s handpicked successor, Dmitri Medvedev, had been eased into power, while Putin downshifted into the premiership.
The United States, moreover, remained a perfect foil for a leader with pretensions to global leadership.
The Bush administration’s incoherent foreign policy included a plan to build a missile defense shield in Poland and the Czech Republic, which allowed Putin to revive the Old Europe/New Europe divisions that began with the Iraq war, with this split appearing to enhance Russian influence on the continent.
Russia’s seeming military revival also played a part in boosting the domestic economy.
Arms sales, worth close to $8 billion, were again competing globally with Great Britain and the US, going to nearly 80 countries, including Venezuela, China, India, Algeria, Iran, Malaysia, and Serbia.
And those arms sales were often closely tied to Putin’s foreign assertiveness, with the Russian army training and holding exercises in many places for the first time, including Venezuela, as if in preparation for another Cuban Missile Crisis, with Hugo Chávez assuming the role of Fidel Castro.
So good did things seem that Russia suddenly discovered that, perhaps for the first time since the early days of the Soviet era, the country actually had some “soft power.”
This first became apparent when the International Olympic Committee awarded the 2014 Winter Games to the Black Sea resort of Sochi.
In 2007, Putin addressed the Olympic Committee (in English), and persuasively argued that the Games will “play a major role in Russia’s future.
They will help Russia’s transition as a young democracy.”
In May 2008, Russia won the world hockey championship, beating Canada.
In June, it almost won the Euro 2008 football championship, losing in the semi-finals to Spain.
Next came the Eurovision Song Contest, an annual competition of pop (rarely first class) European singers, at which Russia’s Dima Bilan gained first prize for his musical clip “Believe.”
That, too, helped rekindle a sense of national pride, extending from the Kremlin to the streets.
Russians habitually respond with black humor to events both good and bad, and the events of 2008 were no exception.
One joke nicely encapsulates the hubris that Putin and his Kremlin allies felt: Putin and Medvedev discuss their newly found invincibility.
“Indeed, time to initiate World War III,” enthuses Putin.
But, as usual, pride precedes a fall.
The fall began with an event that Putin perceived as a mighty triumph – his blitzkrieg in August against Georgia.
Yes, the Kremlin was able to smack down the uppity Mikheil Saakashvili’s hope of reuniting his country by force.
But the world saw in Russia’s onslaught against so puny an antagonist a thuggish state determined to recapture its lost empire.
All the post-Cold War certainties in Europe melted away, and with them went Putin’s reputation as a reliable manager of Russia’s economy.
Capital began to flee the country, which may not have mattered had the world economy not tanked in September.
But tank it did, taking Russia’s economy with it.
The reserves that Russia accumulated during the oil boom years are steadily being drained away. With oil prices collapsing, this pool of resources won’t be refilled quickly.
That could prove to be devastating, because all of Russia’s fiscal assumptions were based upon high oil prices continuing for years to come.
Nevertheless, Putin is trying to spend his way out of the crisis.
But such efforts are unlikely to be enough, because the heavy-handed state-dominated economy – with ex-KGB agents now embedded at the top of most state companies – lacks both the nimbleness and the diversification to recover speedily.
Moreover, with animosity between East and West at their highest since the Cold War’s end, Russia’s trading partners are anxiously looking for other options, which may mean that Putin has damaged Russia’s long-term prospects for an export-led recovery as well.
Indeed, the Georgian war antagonized not only the west, but also China, which has a vital strategic interest in maintaining the post-Cold War geo-strategic settlement.
China, after all, has no desire to see a “Soviet Reunion” on its border.
Besides antagonizing China, the Georgian war also exposed the hollowness of Russia’s military re-armament.
Yes, the Russian army could smash Georgia and most of its ex-Soviet neighbors, but its performance in Georgia shows that it remains the same lumbering, badly motivated outfit that it was in the 1990’s.
Now that America is no longer saddled with a president loathed around the world, Putin has lost one of the key tools that had helped him boost Russia’s international standing.
Poking Bush in the eye was a fine thing to do in the eyes of many people, particularly in Europe.
But to greet the elegant and popular President-elect Barack Obama with threats to station missiles on Europe’s borders, as Medvedev did the day after America’s presidential election, exposed before the world the Kremlin’s ham-handed ways once again.
Putin the Pleaser
MOSCOW: Russia’s election campaign was a bore.
I wish I could explain that it was tedious because we are now a normal democratic country, a place where politics is mundane, not a matter of life and death.
But Russia is still another type of country.
So a Russian election that seems Soviet in its utter predictability is not to be welcomed.
Fundamental issues remain unsettled; hard choices must be made.
Informed, consent is needed, and our democratic election did not provide it.
Voters were so bored that there was real doubt that the minimum 51% of all eligible voters would cast their ballots and thus make the election results valid.
Abstention on such a scale would at least have made the election interesting.
Outside Russia, of course, the world has been preoccupied by our so-called campaign, probably only because Russia’s democracy still seem such a novelty.
As expected for months, Vladimir Putin won by a wide margin.
No longer is he "acting" president.
Instead, Putin rules in his own right.
But what is his mandate?
No one knows for certain.
Hints as to the general tenor of his presidency can, perhaps, be found in discovering why Putin’s star rose so meteorically.
Putin stands for change, inchoate change, but change nonetheless. For Russians tired of Boris Yeltsin long ago.
From a crowd favourite, an idol of women and intellectuals, Yeltsin turned into a feeble old man who aroused pity.
People were sick of his "unpredictability", of his inability to control his temper or knock sense-- if not integrity--into the Kremlin’s corrupt gang.
People held Yeltsin responsible for making Russia a global laughing stock, and were sick of his broken promises.
All of this makes Yeltsin a tragic figure.
He assumed responsibilities beyond his strength.
He undoubtedly saved the freedoms Gorbachev brought--freedom of choice, speech, the press, freedom of conscience.
But he did not succeed in delivering real, sustainable freedom--the freedom to live in a responsible, safe, and stable state.
Under these circumstances, any presidential candidate chosen from Yeltsin's entourage seemed doomed.
But Putin, because of his non-Moscow and non-Kremlin background, was able to overcome his patron.
He was not perceived as a man from the Kremlin’s ragged--through so many government reshuffles--pack of political cards.
He was not deemed a creature of the "family" (Yeltsin's trusted advisers, supporters and aids).
Putin's youth, his energy, his ability to talk in a language crowds understand, are the visible signs of the change he seems to promise.
More importantly, he is all things to all people.
Our intelligentsia loves him because he regularly attends theatre, opera, and ballet.
Economists cheer because he understands the free market.
Lawyers are happy; he promised to establish the "dictatorship of law."
Politicians from across the political spectrum endorse him because his political program runs the gamut from communism to liberalism.
Last but not the least, he is a man of the military and KGB.
Chechnya also announced his promise of change.
Although many view the second Chechen war as a conspiracy launched with the presidential election in mind, it was the Chechens who handed Putin, through their invasion of Dagestan in August 1999, a unifying cause and campaign theme.
Ever the opportunist, Putin caught the country’s mood and staked his future.
He chose the "unity of Russia," and the "threat of Russia's disintegration" as the foundation of his politics and so "took on the noble task to crack down on all separatists."
Like the northern states that rallied to Abraham Lincoln during America’s Civil War, most Russians genuinely supported Putin, for he did not hesitate to fight for "Russia's wholeness."
That decision also played well with Russia’s wounded national pride, as it offered proof that Russia could act in its own interest, making tough decisions regardless of what the Western said.
Although re-conquering Chechnya focussed Putin’s energy, the real prize was Russia and he kept his eyes on it.
The promise to strengthen the state, imposing discipline and order, as encapsulated in the Chechen War seemed to make Putin's presidential aspirations clear.
The "dictatorship of law," the only kind of dictatorship Russia has never experienced in its history, is at the heart of his program and is the real source of his strength and popularity.
Russians like strong leaders, and everyone (especially the West) insists that Russia needs the rule of law.
Putin may be one of the few leaders ever to base his popularity on a promise to get tough.
Yet, despite his image as a hard man of the KGB, Putin is deft at pleasing people.
Indeed, his most astonishing attribute is intellectual flexibility, to say what everyone wants to hear.
Here Putin resembles a magic mirror.
Everyone who looks in it sees himself.
In a campaign, this is a useful quality, for it brings Putin close to everyone, to those who look forward and those who look back, to liberal democrats and ill-liberal conservatives, to nationalists, patriots, communists and independents, to federalists and confederalists.
Putin wears these many hats well.
But being all things to all people only works well only in a campaign.
Pursued in government, it can weaken.
Putin’s rule must amount to more than popularity if he is to be successful.
So what will Putin provide Russia?
This is the mystery Russia faces, for after our boring campaign we left with only a guessing game.
This is just the opposite of what democracy should be.
Campaigns should excite and point the way; governing is about the dull slog of detailed policies, and the effort to build enough support for necessary actions to enhance prosperity and freedom to take place.
Success here means opposing as much as pleasing.
To achieve results, Putin will have to stop pleasing everyone and start really governing.
Putin the Poker Player
Perhaps it takes an ex-KGB spy for a Kremlin ruler to play diplomatic poker with skill.
Indeed, President Vladimir Putin shows as much mastery at international diplomacy as he does in handling Russian domestic affairs.
Not since Gustav Stresemann, Weimar Germany's foreign minister, played the Soviet Union and the West off against each other, has a leader with so weak a hand played his cards so effectively.
Putin's latest moves in North Korea, and his careful tap-dance over Iraq, are just the latest examples.
Diplomacy, in its traditional form, was never Russia's strong suit.
Under the Tsars, Russia was often isolated.
Even when part of alliances--the Triple Alliance with Bismarck's Germany and the Habsburg Empire, or the Entente with France before the First World War--Russia was kept at a distance.
Russian leaders typically dealt with their fear of isolation--and encirclement--by going out of their way to appear threatening.
In the Soviet era, the distances between Russia and its neighbors became unbridgeable chasms, with the USSR ringed either by hostile states or weak, servile ones.
Stalin wasted no time in antagonizing Communist China after Mao's revolution of 1949.
Not until Boris Yeltsin did Russia make its first steps to bridge these divides.
But Yeltsin could never get over Russia's lost superpower status; his periodic growls to assert Russia's wounded pride ultimately made him seem unreliable.
True, his democratic Russia was permitted some role in global diplomacy.
In Yugoslavia, former Premier Victor Chernomyrdin joined Finnish President Matti Ahtissari in resolving the Kosovo crisis of 1999.
But this hardly amounted to recognition of Russia's indispensability; after all, NATO troops entered Kosovo without Russian consent.
A realist in his bones, Putin recognizes Russia's changed status.
But this recognition is not a confession of weakness; instead, it reflects his clear-sighted analysis of Russia's current predicament, and of the country's need to create, recreate, and sustain friendly relations among all of its neighbors if lost influence is to be regained.
Since Putin took the reigns of power in 2000 he has become almost everybody's best friend--Belarus's lunatic strongman Aleksander Lukashenko, US President George W. Bush, Germany's Gerhard Schroeder, Japan's Junichiro Koizumi, and China's Jiang Zemin.
Even North Korea's erratic leader, the hermit Kim Jong Il, who never travels outside his country, has visited Putin twice in recent years.
In fact, North Korea provides a textbook example of Putin's diplomatic method.
Putin cultivated Kim when other leaders neglected him.
In the summer of 2002, the North Korean leader visited Russia to learn about "non-intrusive"--that is, not entirely Western--capitalism, while riding in an armored train on the Trans-Siberian railway.
Kim seemed to reason that, while Russia was no longer Soviet, it retained enough socialist overtones to work with his country.
The benefit of this "educational experiment" was that Putin became one of the few people to whom Kim Jong Il listens.
But Putin's method is to maintain warm relations with everyone.
Even as he hosted Kim in Moscow, Russian diplomats in Pyongyang were helping to protect an American spy in North Korea.
Previously spurned by America in its attempts to use its longstanding contacts in Asia, this assistance appears to have convinced America that Russia can be of real help in its diplomacy with North Korea.
Final negotiations over North Korea's nuclear ambitions will undoubtedly need to take place between the US and Kim Jong Il.
What Putin may be able to provide is the diplomatic cover the US president needs to maintain his pose of not negotiating directly with the North Koreans.
This will allow President Bush to avoid seeming to surrender to the threat of nuclear blackmail.
As a diplomatic practitioner, Putin has learned history's lessons and is determined not to see his country ringed by enmity.
Instead of Russia's borders draining his country's economy, he envisions Russia as a transit point between east and west, and also as an engine of growth for countries in search of the heavy industrial equipment Russia makes.
A rail link between South Korea and Siberia, to carry Korean and Japanese goods west and Russian resource exports east, may be but one positive result of any successful deal he may broker on the Korean peninsula.
Of course, some of the old suspicions about Russian motives linger in the West, most particularly over Iraq (where Lukoil, Russia's biggest oil company, recently signed a new deal to develop Iraqi oil fields).
But Putin's interventions in the UN Security Council over Iraq have been far more moderate than, say, those of France and Germany, two of America's historic allies.
This is so even though Russia has vital national interests to protect in Iraq, including real fears about regional instability spreading into Russia's south, with its millions of Muslim citizens.
For too long Russia practiced either the diplomacy of the thug or that of the Byzantine.
The first made potential partners recoil in fear, the second made them shrink in confusion.
But a spy's stock-in-trade is recruiting and nurturing collaborators.
Those skills are now being put on display by Russia's spymaster president.
No one is complaining.
Putin: Tsar or Doge?
Two practical questions can be asked of any political system: First, what distinguishes the political parties?
Second, who is in charge?
For a while in postcommunist Russia, the answers were blindingly clear: parties were divided between those nostalgic for Soviet times and those who wanted reform.
Who was in charge?
The president.
After twelve years of transition, the answer to the first question has blurred.
With the Communist Party in terminal decline, ideologies are vanishing.
Indeed, anybody hoping for an obvious clash of left and right during the recent presidential election campaign was bound to be disappointed, because the answer to the second question is even more emphatic today: President Putin's re-election was never in doubt.
This president is very much in charge.
Putin's all-encompassing popularity, which is genuine, and his blurring of all political dividing lines has given him an unassailable position.
Many bemoan this state of affairs, but his ascendancy might be less malign than it seems.
Russia's size, the poverty of its infrastructure, and the disarray of its bureaucracy limit Putin's power.
Within those limits, he uses his power relentlessly.
Sufficient unto themselves behind the Kremlin's walls, Putin and his officials rule in ways more arbitrary and opaque than would be tolerated in a true democracy.
The impression Putin's presidency creates is of autocracy punctuated by elections.
Autocracy, not dictatorship.
After four years of a presidency supposedly devoted to forging a "dictatorship of law," the rule of law in Russia remains weak and property rights ill defined.
A solid middle class has yet to emerge, nor a resilient civil society.
Privatisation of state assets has done much for the economy, but has also been used for patronage and empire building.
The army does not appear to be reliably under civilian control, and the brutal war in Chechnya festers.
So Putin's authoritarianism creeps along, but by Russian standards it is far from being hideously creepy.
In some things, indeed, he deserves the thanks of all Russians.
He has consigned the Communists to Trotsky's dustbin of history.
Now splintering, some seem willing to stop pandering to Bolshevik ghosts.
That is good for Russia.
Welcome to the republic.
Putin has also not turned the clock back on economic reform.
Indeed, the economy has mostly boomed under his stewardship - another reason ordinary Russians like him.
Where Putin has failed is in fostering democratic governance.
The question is not just whether he and his ex-KGB cronies muzzle the media and jail their opponents.
No, the real flaw in Putin's rule is that his power is personal, not based on the support of a political party.
The central issue in Russian politics is not the battle for votes.
More significant by far is the competition for power that takes place in the bowels of the presidency.
Barely discernible most of the time, only brief flashes illuminate the battle, as when Mikhail Khodorkovsky was arrested.
But whether Putin is master of this system or its prisoner - a tsar or a doge - is something even he may not know.
The emergence of viable political parties requires a strong parliament.
But, because Russia's presidency is so powerful, the Duma is largely a squabbling-shop and a fixer's paradise.
At best, it is a safety valve for democracy rather than an engine of it.
Of course, there is a big pro-presidential majority party in the Duma.
But that is its flaw: it stands only for the president.
What he wants, it votes for.
But what Russia needs is political parties that stand for something other than their boss's will.
Because Putin cannot stomach opposition, he stifles the growth of parties.
Here he gets a helping hand from party politicians, because the reformist parties inspire little confidence.
A pessimist surveying last December's Duma election, with its futile party politics, bitterness, and invective, might compare Russia to Weimar Germany.
The reformist "Union of Right Forces," led by Boris Nemtsov and Anatoly Chubais, destroyed itself last December, failing to gain a seat in the Duma.
The URF leaders ran an electoral campaign that seemed to revel in their distance from ordinary Russians.
Instead of visiting Russians struggling to manage their difficult lives, Nemtsov and Chubais touted themselves as modern men flying about in private jets and fiddling with laptops.
Tin political ears deserve defeat.
Compounding the problem of party formation is personal rivalry.
Grigory Yavlinsky seems to think he is Charles de Gaulle, waiting at his dacha version of de Gaulle's home in Colombey for a summons to power.
His ego alone kept his Yabloko Party from cooperating with the Union of Right Forces.
Putin understands instinctively that Russia needs elements of democracy, if only to distinguish the new Russia from the old, and to let the odd gust of healthy fresh air in.
Unchallenged in his second and last term, will he retain even that slight democratic instinct?
The talk today in Russia is of "Putinism," which professes democracy without as yet obliging the state to accept the disciplines of a truly democratic system.
But the French have an older word for Putinism: étatisme , which holds that the state commands society rather than serves it.
This does not imply that a government must rule by fear, as past Russian governments did: in this respect, Putin's government is as good as any Russia has ever had.
But a "Putinist" government won't have much time for openness, debate, or accountability.
Putting Lebanon Together
Today’s crisis in Lebanon is a crisis of the Lebanese state.
It is this structural crisis that must be addressed if the violence is to stop.
When Israel withdrew its forces from southern Lebanon in 2000, the international understanding was that the Lebanese government would re-assert its authority in the evacuated area.
Hezbollah, which led the armed struggle against Israeli occupation, was to disarm and re-invent itself as a political force, representing the Shiite community that was historically marginalized by Lebanon’s ruling Maronite, Sunni, and Druze elites.
None of this happened.
Instead of deploying its forces in southern Lebanon, the weak government in Beirut acquiesced in Hezbollah’s determination to turn the area into a staging ground for attacks against Israel.
Over the last six years, Hezbollah established a virtual state-within-a-state: its militia became the only military force in southern Lebanon, setting up outposts along the frontier with Israel, sometimes only a few meters away from the border.
Occasionally, Hezbollah shelled Israel, and its leader, Hassan Nassrallah, continued his blood-curdling invective, not only against Israel and Zionism, but against all Jews.
UN Security Council resolution 1559, which explicitly called for the disarming of all militias and the reassertion of Lebanese government authority in the south, went unheeded.
After the much-heralded “Cedar Revolution” of 2005, Hezbollah even joined the Lebanese government, while at the same time maintaining its armed militia and control of the south.
Israel, for its part, still reeling from the trauma of its ill-begotten war in Lebanon in 1982, chose not to respond to Hezbollah’s attacks and hoped that the attacks would not escalate.
Yet such absurd situations tend to explode, as occurred with Hezbollah’s abduction of two Israeli soldiers within Israeli territory.
The continued existence of Hezbollah’s illegitimate state-within-a-state can no longer be tolerated.
Yet Lebanon itself is too weak to assert its sovereignty.
On the other hand, Israel will not allow Hezbollah to re-establish itself along its border, or to maintain its missile capability.
To achieve any reassertion of effective Lebanese sovereignty in southern Lebanon, a robust international effort is needed, beyond the current hand wringing and rhetoric.
The main elements of such an international solution are the following:
Hezbollah is to free immediately, and without conditions, the two Israeli solders;
Israel is to stop its military activities in Lebanon;
Lebanon’s government is to ask for international assistance in implementing resolution 1559;
For this purpose, a robust and adequately armed international implementation force is to be established.
To succeed, this force must act very differently from the UN’s previous failed efforts in Lebanon.
The existing UN force in southern Lebanon, UNIFIL, is a sad joke.
Like the UN presence in Srebrenica during the Bosnian war, UNIFIL has given the UN a bad name: it never stopped terrorists from attacking Israel, nor did it stop the Israeli invasion of Lebanon in 1982.
What is needed is a military delegation that has a clear mandate to use force.
It should be international, with the UN’s blessing, but it should not be a UN force.
It could be based on NATO capabilities, with a strong European ingredient.
To add legitimacy for its delicate mission within an Arab country, soldiers from Morocco, Saudi Arabia, and perhaps Pakistan, should be added.
The mission of such a force should be to help deploy – by force, if necessary – the Lebanese Army in southern Lebanon, to participate in disarming Hezbollah, and to patrol the Israeli-Lebanese border, ensuring that no incursions take place from either side.
Last but not least: it is not widely known that one anomaly of Lebanon’s status until this very day is that Syria has not fully recognized its existence as a sovereign nation (in Syrian school textbooks, Lebanon figures as part of Greater Syria).
Consequently, there are no normal diplomatic relations between the two countries – no Syrian embassy in Beirut and no Lebanese embassy in Damascus.
This is absurd and dangerous, and the hapless Arab League has never truly addressed it.
To bolster Lebanese independence and security, and in line with UN resolution 1559, which brought about the withdrawal of Syrian forces from Lebanon, Syria should be pushed to recognize Lebanon’s sovereignty and independence.
Hezbollah’s existence as a mini-state in southern Lebanon is a flagrant violation of Lebanese sovereignty.
That vacuum of legitimate authority created the present crisis, and it must be extirpated.
Lebanon itself cannot establish its sovereignty in the country’s south, and Israeli military force is incapable of doing it.
Empty words from St. Petersburg, Brussels, or UN headquarters will not suffice, nor will a mere ceasefire, as that would simply return the area to square one.
Instead, fundamental change is needed.
Only an effective military force, with international legitimacy, can supply it.
Otherwise, we are all condemned to the continuation of the present cycles of violence.
Putting Public Health at the Center of the Struggle against Poverty
CAMBRIDGE: One great challenge facing humanity is reducing the huge gaps in income and wealth between the world’s haves and have nots.
Globalization by itself is not doing the job.
Now, Dr. Gro Bruntland, the head of the World Health Organization, has taken up the challenge.
She points to the desperate health conditions of the world’s poor as one of the greatest barriers to economic development, and is mobilizing the world community to do something about it.
In mid-January, Dr. Bruntland appointed a new global Commission on Macroeconomics and Health (CMH), and honored me by appointing me as its Chairman.
The Commission’s task is enormous, but easily described: to help put global public health at the center of a new strategy of global economic development.
The Commission will meet in various parts of the world – Asia, Africa, Latin America, Europe – in the coming two years, and will issue its report and recommendations at the end of 2001.
Market reforms by themselves cannot lift a population from poverty if people are simultaneously struggling with epidemics of AIDS, or malaria, or tuberculosis, or chronic malnutrition, or other crippling health problems.
Populations battling with disease lack the energy, productivity, or means to invest in their own future.
Studies show that when life expectancy is low, so too are many kinds of investments in the future, such as school attendance, personal saving by households, and foreign investments.
Throughout modern history, improvements in public health have speeded economic development.
It was Britain’s rising agricultural productivity in the 18th century, for example, which helped to raise nutrition levels and reduce the burden of infectious diseases, that helped to initiate the Industrial Revolution.
It was U.S. investment in eradicating hookworms from its Southern states in the early 20th century that improved health conditions in the American South, and which helped to bring about a boom in investments in that previously impoverished region.
Similarly, eradication of malaria in Spain, Italy, and Greece in the late 1940s (using household spraying of pesticides among other factors) helped bring a boom in tourism and foreign investment to these countries in the 1950s and 1960s.
That boom enabled Southern Europe to begin to narrow the large gap in income with the richer countries of Northern Europe.
Health conditions in many of the poorest countries in the world are shockingly bad, and in some cases getting worse.
Approximately one-third of children in the poorest countries are malnourished, and thereby at risk of much greater incidence of infectious disease, learning disorders, and other maladies.
Life expectancy is little more than 50 years (compared with around 77 years in the rich countries).
Millions of poor people every year die of infectious diseases, such as malaria, tuberculosis, pneumonia, and measles.
Ironically, many deaths would be preventable by existing vaccines (such as for measles), but the populations are often too poor to have access to even basic public health.
Even in many middle-income and higher-income countries, there have been surges of new and re-emerging infectious diseases, as a result of increased global travel, the opening of new regions to settlement, and the overuse of antibiotics with a resulting spread of disease-resistant parasites.
The Commission will address these desperate conditions by:
 mobilizing evidence showing how poor health contributes directly to failed economic development;
 working with professionals at the World Health Organization, UNICEF, the World Bank, the Gates Foundation, and other organizations, to identify public health interventions, such as greater vaccine coverage, that have a very high economic rate of return as well as a high health benefit;
 working with the pharmaceutical sector and non-governmental organizations to find creative new ways to get essential medicines to the poorest peoples;
 helping to devise new ways to re-direct global research and development efforts to unsolved problems, such as an effective vaccine for AIDS, malaria, tuberculosis, and dysentery;
 exploring ways to increase overall public spending on vital health needs, by mobilizing more international aid, by expanding the depth of debt relief for highly indebted poor countries, and by finding ways that poor countries can increase their own financial efforts.
The Commission will look for inputs from concerned citizens, public health experts, governments, and non-governmental groups from all parts of the world.
One of the crucial purposes of the Commission is to help give voice to the health needs of the poorest of the poor.
Therefore, the Commission will be seeking inputs in advice and research from all parts of the world, and will provide a record of its evidence gathering and deliberations on the internet.
At a time when global science is more dynamic than ever; when the richest countries are experiencing a boom in wealth unrivaled in history (including around $8 trillion in stock market gains in the United States in the past four years!), the world yearns for more effective approaches to the struggle against poverty.
The World Health Organization is taking its place at the center of that effort.
Qatar’s Jihad
ABU DHABI – Qatar may be tiny, but it is having a major impact across the Arab world.
By propping up violent jihadists in the Middle East, North Africa, and beyond, while supporting the United States in its fight against them, this gas-rich speck of a country – the world’s wealthiest in per capita terms – has transformed itself from a regional gadfly into an international rogue elephant.
Using its vast resources, and driven by unbridled ambition, Qatar has emerged as a hub for radical Islamist movements.
The massive, chandeliered Grand Mosque in Doha – Qatar’s opulent capital – is a rallying point for militants heading to wage jihad in places as diverse as Yemen, Tunisia, and Syria.
As a result, Qatar now rivals Saudi Arabia – another Wahhabi state with enormous resource wealth – in exporting Islamist extremism.
But there are important differences between Qatar and Saudi Arabia.
Qatar’s Wahhabism is less severe than Saudi Arabia’s; for example, Qatari women are allowed to drive and to travel alone.
In Qatar, there is no religious police enforcing morality, even if Qatari clerics openly raise funds for militant causes overseas.
Given this, it is perhaps unsurprising that, whereas Saudi Arabia’s sclerotic leadership pursues reactionary policies rooted in a puritanical understanding of Islam, Qatar’s younger royals have adopted a forward-thinking approach.
Qatar is the home of the Al Jazeera satellite television channel and Education City, a district outside of Doha that accommodates schools, universities, and research centers.
Similar inconsistencies are reflected in Qatar’s foreign policy.
Indeed, the country’s relationship with the United States directly contradicts its links with radical Islamist movements.
Qatar hosts Al Udeid air base – with its 8,000 American military personnel and 120 aircraft, including supertankers for in-flight refueling – from which the US directs its current airstrikes in Syria and Iraq.
Camp As-Sayliyah – another facility for which Qatar charges no rent – serves as the US Central Command’s forward headquarters.
In July, Qatar agreed to purchase $11 billion worth of US arms.
Moreover, Qatar has used its leverage over the Islamists that it funds to help secure the release of Western hostages.
And it hosted secret talks between the US and the Pakistan-backed Afghan Taliban.
To facilitate the negotiations, Qatar provided a home, with US support, to the Taliban’s de facto diplomatic mission – and to the five Afghan Taliban leaders released earlier this year from US detention at Guantánamo Bay.
In other words, Qatar is an important US ally, a supplier of weapons and funds to Islamists, and a peace broker all at the same time.
Add to that its position as the world’s largest supplier of liquefied natural gas and the holder of one of its largest sovereign-wealth funds, and it becomes clear that Qatar has plenty of room to maneuver – as well as considerable international clout.
Germany’s government found that out when it was forced to retract its development minister’s statement that Qatar played a central role in arming and financing the Islamic State.
Qatar’s growing influence has important implications for the balance of power in the Arab World, especially with regard to the country’s rivalry with Saudi Arabia.
This competitive dynamic, which surfaced only recently, represents a shift from a long history of working in tandem to export Islamist extremism.
Both Qatar and Saudi Arabia generously supplied weapons and funds to Sunni extremists in Syria, opening the door for the emergence of the Islamic State.
Both have bolstered the Afghan Taliban.
And both contributed to Libya’s transformation into a failed state by aiding Islamist militias.
During the 2011 NATO campaign to overthrow Colonel Muammar el-Qaddafi, Qatar even deployed ground troops covertly inside Libya.
Today, however, Qatar and Saudi Arabia are on opposite sides.
Qatar, along with Turkey, backs grassroots Islamist movements like the Muslim Brotherhood and its offshoots in Gaza, Libya, Egypt, Tunisia, Iraq, and the Levant.
That pits it against Saudi Arabia and countries like the United Arab Emirates, Egypt, and Jordan, whose rulers view such movements as an existential threat, with some, including the House of Saud, investing in propping up autocratic regimes like their own.
In this sense, Qatar’s tack has produced a rare schism within the Gulf Cooperation Council, whose members collectively possess nearly half of the world’s oil reserves.
The proxy competition among rival monarchies, which led some of them to withdraw their ambassadors from Qatar in March, is intensifying violence and instability throughout the region.
For example, the UAE, with Egyptian assistance, secretly carried out airstrikes in August to stop Qatari-aided Islamist militias from gaining control of the Libyan capital, Tripoli.
Qatar’s leaders are willing to challenge their neighbors for a simple reason: They believe that the grassroots Islamist movements they support – which, in their view, represent majority political aspirations – eventually will win.
Anticipating that such groups will increasingly shape Arab politics, displacing strongman regimes, Qatar has set out to empower them.
In doing so, Qatar is destabilizing several countries and threatening the security of secular democracies far beyond the region.
For the sake of regional and international security, this elephant must be tamed.
Qatar’s Source of Arab Springs
CAMBRIDGE – There’s a joke making the rounds in the Middle East these days: three of Egypt’s former presidents, Gamal Abdel Nasser, Anwar el-Sadat, and Hosni Mubarak, meet in hell and ask each other how they fell.
Sadat says “assassination”; and Mubarak answers “Al Jazeera.”
During the 15 years that it has broadcast from Qatar, Al Jazeera has served as far more than a traditional television station.
With its fearless involvement in Arab politics, it has created a new venue for political freedom, which has culminated in its unreserved support for Arab revolutions.
Al Jazeera has pushed the boundaries of information by providing live coverage of major developments in the Arab world and elsewhere.
It is a platform for political and religious opposition groups in the Arab countries.
It hosts Israeli spokespersons and embraces state-of-the-art broadcasting techniques.
In short, it has become a global brand and a role model for other Arab media.
Success breeds confidence, but it also attracts envy.
Al Jazeera has no shortage of enemies, from the most radical Islamic fundamentalists to American and Israeli intelligence gatherers.
And, between these two extremes, there is fierce debate over whether Al Jazeera is friend or foe.
Liberals who welcome it as a beacon of freedom and progress in the Arab world confront those who accuse it of Islamism and religious radicalization.
Islamists who praise it as a platform for their own views must deal with the fact that it also offers a voice to Israelis.
Al Jazeera journalists are household names; they also suffer more harassment, imprisonment, and fatalities than their colleagues at other major news organizations.
Al Jazeera is not a tool of the CIA, Israel, or Al Qaeda.
Rather, it is the sophisticated mouthpiece of the state of Qatar and its ambitious Emir, Hamad Al Thani.
Simply put, the Al Jazeera success story would not have been possible without Qatar’s backing.
For Al Thani, Al Jazeera is integral to the national “branding” of Qatar and its foreign-policy aspirations.
The motivation for these aspirations is unclear, but a number of ideas are worth pondering.
After deposing his father in a palace coup in 1995, Al Thani was suddenly confronted with a hostile Saudi Arabia and Egypt, whose elites despised the ambitious young ruler and preferred his more timid father.
Qatar was perceived as increasingly rebellious, routinely defecting from the collective and mundane line of Gulf countries’ politics – inviting further pressures from the “big brothers.”
In response, under the young Emir’s firm hand, Al Jazeera delivered a more assertive line of criticism against governments, such as those of Egypt and Saudi Arabia, that other Arab mainstream media would do their best to avoid alienating.
Having received carte blanche from Qatar’s political leadership to support the Arab revolutions, Al Jazeera became fully engaged in live coverage of events in Tunisia, and then in Egypt, by relying on social-media networks away from the eyes of local security officials.
Its coverage was filled with Arab masses declaring their demands to the world.
Banned from local media and mostly on the run, revolutionaries used Al Jazeera to reach – and mobilize – their own people.
The channel canceled its regular programs, and was transformed into a round-the-clock workshop of live news and interviews, switching from one revolution to another.
So, while the Arab Spring has been a genuine popular uprising against decades of corrupt and oppressive authoritarian regimes, its rapid spread, which caught almost everyone by surprise, was due in part to the influence of Al Jazeera, which became the voice of the voiceless throughout the Middle East.
As for Qatar itself, Al Thani provided various forms of support to all of the Arab revolutions, except in Bahrain, where the Saudis and, more pointedly, the Americans, drew a very sharp red line.
Al Thani’s political audacity stems partly from Qatar’s enormous gas resources, which have allowed him to develop vigorous policies in all areas, especially in foreign affairs.
Protecting himself and Qatar by hosting the largest American military base outside the United States, his strategy has been to wrest control from regional third parties who might otherwise dominate the smaller Gulf states.
At the same time, Qatar has created strong links with both Israel and many Islamist movements, including Hamas and Hezbollah.
It has been an aggressive and risky foreign policy, but Al Thani clearly believes that he can fill a regional leadership vacuum.
His support, via Al Jazeera, of the Arab Spring’s revolutions – and of the new generation of leaders that they have spawned – has only strengthened Qatar’s position.
The falling regimes consistently maintained that Al Jazeera wasn’t neutral.
They were right.
The QE Placebo
BRUSSELS – It has now been nearly half a year since the European Central Bank declared its intention to buy some €1.1 trillion ($1.3 trillion) worth of eurozone bonds.
When it first announced the so-called “extended asset-purchase program” in January, the ECB emphasized that it was only expanding an existing program, under which it had been buying modest quantities of private-sector bonds, to cover government paper.
But this pretense of continuity was just that: a pretense.
In reality, by purchasing large volumes of government bonds, the ECB was crossing the Rubicon; after all, it is explicitly prohibited from financing governments.
The ECB’s defense was that that the program was the only way to move inflation closer to its target of approximately 2%.
Moreover, it pointed out, it was merely following the example of other major central banks, including the Bank of England, the Bank of Japan, and especially the US Federal Reserve, whose program of quantitative easing (QE) entailed the purchase of more than $2 trillion worth of long-term securities from 2008 to 2012.
Legal uncertainty aside, whether the ECB’s decision to pursue QE can be justified ultimately depends on its impact.
But, after six months, that impact remains difficult to assess.
One reason for this is that long-term interest rates are affected not just by the actual bond purchases, but also by financial markets’ expectations about future monetary policy.
Indeed, just one day after the ECB made its announcement – and weeks before the purchases began – interest rates fell by a fraction of a percentage point throughout the eurozone.
When the purchases began, rates did continue to fall for a few weeks, so much so that many were concerned that there would not be enough German bonds to meet the ECB’s country-debt quota (determined according to eurozone member states’ GDP and population).
But rates have since risen again, and have now returned, in real terms, to pre-QE levels.
In this sense, the ECB’s bond-buying program has been a failure.
Other indicators, however, paint a different picture.
Notably, price growth turned positive last month, suggesting that the threat of deflation has been eliminated.
This has prompted a modest uptick in expected inflation – the ECB’s favorite measure of price stability – not for the immediate future, but in five years, and then for five years.
In concrete terms, the ECB is measuring its policy’s success today according to the expected inflation rate in 2020-2025.
This figure, calculated from the prices of different types of indexed and non-indexed five- and ten-year bonds, is based on the somewhat heroic assumption that all of the markets for these bonds work efficiently.
This presents a fundamental contradiction.
QE is supposed to work via “portfolio balance effects,” which implies that markets are not fully efficient: purchases of longer-term bonds affect financial conditions by changing the types and quantity of financial assets the public holds.
How can one use market prices as an indicator of inflation far into the future and simultaneously justify QE by claiming that most investors stick to certain asset classes and thus do not follow market signals efficiently?
Another problem with using the five-year, five-year-forward rate of expected inflation to gauge QE’s effectiveness is that the rate is correlated with oil prices.
Indeed, when oil prices fell last year, so did inflation expectations (measured however imperfectly).
And the ECB’s QE announcement coincided with the beginning of the oil-price recovery, which could be expected to increase inflation expectations somewhat.
With such coincidences and contradictions arising in nearly every aspect of the QE debate, it seems that evaluating the policy’s effectiveness is more of an art than a science.
Unfortunately, this leaves plenty of room for distortion and bias.
Most glaring is QE supporters’ tendency to ascribe any decline in interest rates before the policy was announced to market participants’ expectations that QE would be coming.
Yet they do not apply the same reasoning to the decline in inflation expectations that occurred during the same period.
They have followed the same logic since the purchases began, ignoring recent increases in interest rates, while lauding the small rise in inflation expectations as proof of QE’s effectiveness.
In reality, of course, QE – whether the expectation or execution of it – would affect both interest rates, and the inflation expectations that are derived from them.
So, if ECB President Mario Draghi wants to highlight the fact that nominal interest rates are lower today than last August, he must also acknowledge that, given low inflation expectations, real interest rates have moved little.
But such pragmatic thinking has been sorely missing from discussions about QE.
Instead, each side has caricatured the other: supporters emphasize that QE has nowhere led to runaway inflation, while opponents point out that nowhere has QE alone reignited robust growth.
In fact, there has been neither inflation nor growth: central banks can seemingly pour hundreds of billions of dollars, euros, or yen into the market with little discernible effect.
So QE basically consists of an exchange of two low-yielding assets – long-terms bonds and central-bank deposits.
In broad and efficient markets, that exchange does not mean much.
Monetary Mystification
NEW YORK – Central banks on both sides of the Atlantic took extraordinary monetary-policy measures in September: the long awaited “QE3” (the third dose of quantitative easing by the United States Federal Reserve), and the European Central Bank’s announcement that it will purchase unlimited volumes of troubled eurozone members’ government bonds.
Markets responded euphorically, with stock prices in the US, for example, reaching post-recession highs.
Others, especially on the political right, worried that the latest monetary measures would fuel future inflation and encourage unbridled government spending.
In fact, both the critics’ fears and the optimists’ euphoria are unwarranted.
With so much underutilized productive capacity today, and with immediate economic prospects so dismal, the risk of serious inflation is minimal.
Nonetheless, the Fed and ECB actions sent three messages that should have given the markets pause.
First, they were saying that previous actions have not worked; indeed, the major central banks deserve much of the blame for the crisis.
But their ability to undo their mistakes is limited.
Second, the Fed’s announcement that it will keep interest rates at extraordinarily low levels through mid-2015 implied that it does not expect recovery anytime soon.
That should be a warning for Europe, whose economy is now far weaker than America’s.
Finally, the Fed and the ECB were saying that markets will not quickly restore full employment on their own. A stimulus is needed.
That should serve as a rejoinder to those in Europe and America who are calling for just the opposite – further austerity.
But the stimulus that is needed – on both sides of the Atlantic – is a fiscal stimulus.
Monetary policy has proven ineffective, and more of it is unlikely to return the economy to sustainable growth.
In traditional economic models, increased liquidity results in more lending, mostly to investors and sometimes to consumers, thereby increasing demand and employment.
But consider a case like Spain, where so much money has fled the banking system –&#160;and continues to flee as Europe fiddles over the implementation of a common banking system.
Just adding liquidity, while continuing current austerity policies, will not reignite the Spanish economy.
So, too, in the US, the smaller banks that largely finance small and medium-size enterprises have been all but neglected.
The federal government – under both President George W. Bush and Barack Obama – allocated hundreds of billions of dollars to prop up the mega-banks, while allowing hundreds of these crucially important smaller lenders to fail.
But lending would be inhibited even if the banks were healthier.
After all, small enterprises rely on collateral-based lending, and the value of real estate – the main form of collateral – is still down one-third from its pre-crisis level.
Moreover, given the magnitude of excess capacity in real estate, lower interest rates will do little to revive real-estate prices, much less inflate another consumption bubble.
Of course, marginal effects cannot be ruled out: small changes in long-term interest rates from QE3 may lead to a little more investment; some of the rich will take advantage of temporarily higher stock prices to consume more; and a few homeowners will be able to refinance their mortgages, with lower payments allowing them to boost consumption as well.
But most of the wealthy know that temporary measures result only in a fleeting blip in stock prices – hardly enough to support a consumption splurge.
Moreover, reports suggest that few of the benefits of lower long-term interest rates are filtering through to homeowners; the major beneficiaries, it seems, are the banks.
Many who want to refinance their mortgages still cannot, because they are “underwater” (owing more on their mortgages than the underlying property is worth).
In other circumstances, the US would benefit from the exchange-rate weakening that follows from lower interest rates –&#160;a kind of beggar-thy-neighbor competitive devaluation that would come at the expense of America’s trading partners.
But, given lower interest rates in Europe and the global slowdown, the gains are likely to be small even here.
Some worry that the fresh liquidity will lead to worse outcomes – for example, a commodity boom, which would act much like a tax on American and European consumers.
Older people, who were prudent and held their money in government bonds, will see lower returns – further curtailing their consumption.
And low interest rates will encourage firms that do invest to spend on fixed capital like highly automated machines, thereby ensuring that, when recovery comes, it will be relatively jobless.
In short, the benefits are at best small.
In Europe, monetary intervention has greater potential to help –&#160;but with a similar risk of making matters worse.
To allay anxiety about government profligacy, the ECB built conditionality into its bond-purchase program.
But if the conditions operate like austerity measures – imposed without significant accompanying growth measures –&#160;they will be more akin to bloodletting: the patient must risk death before receiving genuine medicine.
Fear of losing economic sovereignty will make governments reluctant to ask for ECB help, and only if they ask will there be any real effect.
There is a further risk for Europe: If the ECB focuses too much on inflation, while the Fed tries to stimulate the US economy, interest-rate differentials will lead to a stronger euro (at least relative to what it otherwise would be), undermining Europe’s competitiveness and growth prospects.
For both Europe and America, the danger now is that politicians and markets believe that monetary policy can revive the economy.
Unfortunately, its main impact at this point is to distract attention from measures that would truly stimulate growth, including an expansionary fiscal policy and financial-sector reforms that boost lending.
The current downturn, already a half-decade long, will not end any time soon.
That, in a nutshell, is what the Fed and the ECB are saying.
Quantitative Easing and the Renminbi
CAMBRIDGE – The United States Federal Reserve’s policy of “quantitative easing” is reducing the value of the dollar relative to other currencies that have floating exchange rates.
But what does the new Fed policy mean for one of the most important exchange rates of all – that of the renminbi relative to the dollar and to other currencies?
The effect of quantitative easing on exchange rates between the dollar and the floating-rate currencies is a predictable result of the Fed’s plan to increase the supply of dollars.
The rise in the volume of dollars is causing the value of each dollar to fall relative to these currencies, whose volume has remained constant or risen more slowly.
The Fed’s goal may be to stimulate domestic activity in the US and to reduce the risk of deflation.
But, intended or not, the increased supply of dollars also affects the international value of the dollar.
American investors who sell bonds to the Fed will want to diversify the dollars that they receive from it.
One form of that diversification is to buy foreign bonds and stocks, driving up the value of those currencies.
The Fed’s policy of increasing the supply of dollars also increases investors’ concern about the future rate of inflation in the US.
That provides a further reason for American investors to shift part of their portfolios from dollars to other currencies that are not likely to experience rising inflation.
In particular, since the European Central Bank has clearly rejected quantitative easing, investors will want to buy euro bonds issued by Germany and other European countries that are not in danger of default.
Likewise, outside the eurozone, Sweden’s clear inflation target makes its currency attractive.
South Korea, Brazil, and other emerging-market countries are also attractive diversification investments, causing their currencies to appreciate.
But the market forces that cause those currencies to appreciate do not work on the renminbi, because China has only very limited capital-account convertibility.
Investors in the US and other countries cannot buy either renminbi or renminbi-denominated bonds in the way that they can buy other currencies.
The Chinese government, acting through the People’s Bank of China, determines the renminbi’s exchange rate.
So the relevant question is how the Chinese government will choose to respond to the Fed’s quantitative easing and the impact of the Fed’s policy on other currencies.
Between 2008 and June of this year, the Chinese held the renminbi at a fixed rate of 6.8 to the dollar.
In June of this year, the Chinese authorities decided to allow the renminbi to appreciate at a moderate pace, as it had done between 2006 and 2008.
Indeed, in the five months since that announcement, the Chinese government has allowed the renminbi to appreciate by 3.1% – not much less than the average rate of appreciation that it allowed between 2006 and 2008.
It is significant that this policy was adopted before Fed Chairman Ben Bernanke’s speech in August, in which he announced his tentative plans for quantitative easing.
While the renminbi has appreciated slightly relative to the dollar since June, the greater fall of the dollar relative to many other currencies means that the renminbi has generally also fallen relative to those currencies.
The overall trade-weighted value of the renminbi has thus declined significantly, particularly relative to the currencies of the emerging-market countries with which Chinese producers compete.
Chinese Prime Minister Wen Jiabao has stressed that China does not want more rapid appreciation of the renminbi, because of the potential adverse impact on Chinese exporters.
Rising Chinese exports between 2006 and 2008, despite renminbi appreciation, suggests that this worry is misplaced or at least exaggerated.
But it is clear that the fall of the renminbi against other currencies that has resulted from the Fed’s policy of quantitative easing now gives the Chinese scope for more rapid appreciation of the renminbi relative to the dollar.
Greater scope for renminbi appreciation comes at a good time for China.
A stronger renminbi would help to reduce rising inflationary pressure in China by reducing the cost of imports, which would also increase Chinese households’ real incomes – a key goal of China’s new five-year plan.
Even those Chinese households that do not buy imported goods would benefit, because the lower cost of imported raw materials would reduce the cost of goods produced in China.
In short, the Fed’s policy of quantitative easing is likely to accelerate the rise of the renminbi – an outcome that is in China’s interest no less than it is in America’s.
But don’t expect US officials to proclaim that goal openly, or Chinese officials to express their gratitude.
China’s Inscrutable Contraction
CAMBRIDGE – While virtually every country in the world is trying to boost growth, China’s government is trying to slow it down to a sustainable level.
As China shifts to a more domestic-demand driven, services-oriented economy, a transition to slower trend growth is both inevitable and desirable.
But the challenges are immense, and no one should take a soft landing for granted.
As China’s economy grows relative to the economies of its trading partners, the efficacy of its export-led growth model must inevitably fade.
As a corollary, the returns on massive infrastructure investment, much of which is directed toward supporting export growth, must also fade.
Consumption and quality of life need to rise, even as China’s air pollution and water shortages become more acute in many areas.
But, in an economy where debt has exploded to more than 200% of GDP, it is not easy to rein in growth gradually without triggering widespread failure of ambitious investment projects.
Even in China, where the government has deep pockets to cushion the fall, one Lehman Brothers-size bankruptcy could lead to a major panic.
Think of how hard it is to engineer a soft landing in market-based economies.
Many a recession has been catalyzed or amplified by monetary-tightening cycles; former US Federal Reserve Chairman Alan Greenspan was christened the “maestro” in the 1990s, because he managed to slow inflation and maintain strong growth simultaneously.
The idea that controlled tightening is easier in a more centrally planned economy, where policymakers must rely on far noisier market signals, is highly questionable.
If one were to judge by official and market growth forecasts, one would think that the risks were modest. China’s official target growth rate is 7.5%.
Anyone forecasting 7% is considered a “China bear,” and predicting a downshift to 6.5% makes one a downright fanatic.
For most countries, such small differences would be splitting hairs.
In the United States, quarterly GDP growth has fluctuated between -2.1% and 4.6% in the first half of 2014.
Of course, Chinese growth almost surely fluctuates far more than the official numbers reveal, in part because local officials have incentives to smooth the data that they report to the central authorities.
So where is China’s economy now?
Most evidence suggests that the economy has slowed significantly.
One striking fact is that annual growth in electricity demand has fallen sharply, to below 4% for the first eight months of 2014, a level recorded previously only in the depths of the global financial crisis that erupted in 2008.
For most of China’s modernization drive, electricity consumption has grown faster than output, not slower.
Weakening electricity demand has tipped China’s coal industry into severe distress, with many mines effectively bankrupt.
Falling house prices are another classic indicator of a vulnerable economy, though the exact pace of decline is difficult to assess.
The main house-price indices measure only asking prices and not actual sales prices.
(Data in many other countries – for example, Spain – suffer from the same deficiency.)
Of course, exports have also slowed, given sluggish growth in the rest of the world.
Commodity exporters such as Australia, Indonesia, and Brazil have already felt the effects of slowing Chinese growth, as have countries, such as Germany and Switzerland, that depend on satisfying China’s voracious demand for capital-intensive goods.
Unfortunately, China’s data are not nearly as reliable as those measuring a developed economy, which makes it difficult for anyone to be sure of what is happening.
Electricity usage is typically one of the most reliable measures of growth; but, with the economy shifting toward services, and with many energy-intensive industries such as cement and steel production slowing down, it is perfectly possible that slow electricity growth is simply a symptom of rebalancing.
Likewise, the softening of housing prices follows a short period in which prices more than doubled, which makes it difficult to tell whether China is facing a modest and healthy correction or outright collapse.
And if continental Europe eventually recovers, as the US and the United Kingdom are, export growth could pick up again.
What seems clear is that China’s leadership is intent on pursuing many of the market-oriented reforms approved by the Third Plenary in 2013.
President Xi Jinping’s aggressive anti-corruption campaign might be seen as preparation for political resistance to further economic liberalization.
On the other hand, one can argue that, until now, Chinese corruption was more of a tax than a paralyzing force, and that dramatically changing the rules of the game could by itself catalyze a sharp drop in output.
Can China’s government engineer a soft landing while weeding out corruption, reducing pollution, and liberalizing markets to ensure long-term growth?
The stakes are high.
If Chinese growth collapses, the global fallout could be far worse than that caused by a normal US recession.
China’s growth rate remains perched at a very high level, so there is a great deal of room to fall.
The potential vulnerability of Western exports and equity prices is massive.
Of the two major instances of policy tightening occurring in the world today, the US Fed’s may be the easier one to understand, but it is not necessarily more consequential for the world than what is happening in China.
Questions for Robert Zoellick
Paul Wolfowitz’s resignation from the World Bank solved one problem, but brought another to light.
When Wolfowitz’s name was first mentioned as a candidate to lead the world’s premier development bank, the idea that the architect of America’s failure in Iraq would be so rewarded was met by incredulity.
But President George W. Bush had, from the beginning of his administration, sought to undermine multilateral institutions and agreements.
Wolfowitz’s nomination seemed to be part of that effort.
Should Bush, a lame duck president with little support at home and less abroad, now be allowed to appoint the next World Bank president?
Bush has already demonstrated his lack of judgment.
Why give him another chance?
The arguments against the “old boy” system – by which the United States appoints the head of the World Bank and Europe the head of the IMF – are especially compelling today How effective can the Bank be in promoting good governance and fighting corruption if its president is chosen in a process that demonstrates flaws in its own governance?
How credible will an anti-corruption message be when delivered by an appointee of what is considered one of the most corrupt and incompetent administrations in US history?
Interestingly, as several heads of US Congressional committees have pointed out, it is in America’s interest for the Bank to be led by the most qualified person, selected in an open and transparent process, regardless of nationality, gender, or race.
This requires a change in how its president is chosen, and, at Congressional hearings on the World Bank – the first in 13 years – I, like everyone who testified, called for this key reform.
Presidential appointments to senior posts in America’s government are subject to open hearings.
Regardless of whether the old boy system is preserved – but especially if it is – the Bank’s Board should likewise conduct open hearings on Bush’s nominee to succeed Wolfowitz.
Here are some of the questions – with some hints at right and wrong answers – that it should ask any proposed candidate for the Bank’s presidency, including Bush’s nominee, Robert Zoellick:
Do you believe that the president of the World Bank should put the interests of developing countries first?
Will you press for Europe and America to eliminate their agricultural subsidies?
Will you advocate a development round that emphasizes liberalization of labor markets more than capital markets, elimination of non-tariff barriers that keep developing countries’ goods out of advanced industrial countries, and abolition of so-called “escalating tariffs,” which impede development?
Will you be open to research even when that research shows that policies of the advanced industrial countries may, at least in some circumstances, not be in the interests of developing countries?
During James Wolfensohn’s presidency of the Bank, there was a change in philosophy.
We encouraged research-based policies, even when that research was critical of policies being pushed by certain advanced industrial countries and by some in the Bank.
When our research showed that certain policies (like agricultural subsidies) were hurting developing countries, we publicized the findings, helping to redefine the debate.
Will you support the initiative of developing countries to have a development-oriented intellectual property regime?
What separates developing countries from developed countries is not only the gap in resources, but also a gap in knowledge.
The Bank should be viewed, in part, as a Knowledge Bank, and it should advocate reforms that enhance developing countries’ access to knowledge.
Access to generic medicines is essential if developing countries, with their limited budgets, are to improve the health of the poor.
TRIPs, the intellectual property provisions of the Uruguay round, were designed to reduce access to generic medicines – and they succeeded.
But as bad as TRIPs are, the bilateral trade agreements that Bush has been pushing are worse.
Any candidate claiming to represent the interests of developing countries must distance himself from these policies.
Will you work to redefine the criteria by which countries get access to funds?
Today, money goes to countries that are neither most in need nor can most effectively use it.
Complying with current orthodoxies – for example, on privatization and liberalization – can earn you points on “good governance,” and thus increase aid allocations—even when they reduce true aid effectiveness.
Do you think countries that are corrupt should be cut off from funding?
If so, will do you so in a consistent way?
If not, how should the Bank respond?
Will you support a comprehensive anti-corruption agenda, including closing down secret bank accounts?
One of the flaws of Wolfowitz’s anti-corruption agenda that expansion or continuation of aid for countries favored by the Bush administration, like Iraq or Pakistan, was pushed, regardless of how corrupt they were, while there was little tolerance elsewhere.
Problems with Uzbekistan were overlooked – until it fell out of favor with the US.
Likewise, the Bush administration opposed the OECD initiative to restrict bank secrecy – until it realized that secret bank accounts help finance terrorists.
Since then, it has shown that it can close secret bank accounts, but has chosen to do so only for terrorists.
Do you think the World Bank should do more to encourage countries to adopt core labor standards?
Not only has the Bank not been active in promoting these globally agreed standards, there is a concern that the Bank discourages collective bargaining and protections for workers when it talks about “flexible labor markets” and conditions that are conducive to private investment.
The old boy system of choosing the head of the World Bank must go.
It has done enough damage.
But if the advanced industrial countries that control the Bank refuse to stand by their principles, at least they should give a nod to greater transparency.
The world should know what it is getting.
Open hearings would be a step in the right direction.
Race and Republicanism
Race has always been a provocative subject when the needs of science and statistics intersect with politics.
Now that debate is once again heating up in France, as the planned introduction of “ethnic statistics” has caused a fierce dispute that touches the very heart of French republicanism.
According to a law that dates back to the French Revolution, and reconfirmed in 1978, French government officials are forbidden to collect information about a citizen’s ethnic or racial origins, whether real or alleged, when conducting a census or other efforts to gathering statistical information on the population.
There are two main reasons for this.
The first is the republican principle, enshrined in the Constitution, that recognizes only citizens and does not accept any distinction among them due to origin, race, or religion.
The second reason is historic: the painful and still vivid memories of the Vichy regime of WWII, when citizens’ “racial” and religious origin was stamped on national identification documents and was used as a key tool in rounding up French Jews for delivery to the death camps.
Today, the issue has returned to the forefront because of a new fight against racial discrimination, which appears to require more accurate measures of social inequality.
Existing public statistics, it is believed, do not provide enough relevant information to analyze the possibility of discrimination in employment or housing.
After all, without appropriate statistics, it is difficult to prove discrimination.
Indeed, many argue that by refusing to take into account distinctions linked to ethnic and religious origin, these distinctions are legitimized.
One British social critic, quoted by the sociologist Dominique Schnapper, compares the behavior of the French, unwilling to mention ethnic discrimination, with English people of the Victorian era, who refused to talk about sex.
Supporters of gathering statistics on race and religion also look to the experiences of the United States, Britain, or the Netherlands, where census takers are free to inquire about ethnic origins and a citizen’s sense of belonging.
Since 1990, the US has collected data on ethnic origins.
Although the First Amendment of the US Constitution bans any religious test for citizenship or political office, ruling out questions on religious beliefs, it is possible to gather information on ethnicity, even in certain cases of multiple ethnic origins, such as “White,” “Black,” “Asian,” and “native American.”
In Britain, the concern about social promotion of minorities led to the introduction in 1991 of statistics that indicate ethnic status.
As for the Netherlands, companies were obliged to report the ethnic composition of their workforces until the law was repealed in 2003.
But today’s French legislation is less rigorous than it seems.
It distinguishes between anonymous files from random samples and established for scientific purposes, which may contain data about a person’s origins, and files that are not anonymous, which have direct consequences for the people concerned – and for which it is strictly forbidden to register any information about ethnic origins.
The 1978 law allows government statisticians to ask “delicate” questions only if these questions are relevant for the survey and with the consent of the person polled.
But government statisticians have long been studying the national origins of immigrants, and are permitted to indicate the previous nationality of people who have acquired French citizenship.
Thus, there is a distinction between mentioning the original nationality, which is allowed, and mentioning ethnic and racial origins, which is not.
Is it necessary to go further just because the indicators linked to national origin are not enough to identify discrimination – especially indirect discrimination – based on ethnic grounds?
Some surveys show that the groups involved are doubtful about this.
Statistics are not only a reflection of reality: they help to shape it.
Statistical categories often tend to become social categories.
Not only are racial indications (White, Black, Arabic, Asian) very inaccurate in a world where racial mixing is now common, but, as François Héran, the head of France’s National Institute of Demographic Studies, argues, it is also necessary to prove that difference means inequality and that inequality necessarily means discrimination.
Indeed, ethnic counting could merely reinforce the logic of community separation.
Given the desire to penalize ethnic discrimination, the push for government to gain this knowledge is understandable.
But the state has other means to encourage equality on the basis of national, social, or economic criteria.
In view of the risk of inciting fresh antagonism, gathering racial, religious, and ethnic statistics may not be worth it.
The ban against ethnic and racial data is a taboo that should not be overthrown easily, and not without carefully weighing the risk to social peace.
Race and the US Presidential Race
BUENOS AIRES – Three-quarters of Americans now disapprove of President George W. Bush’s performance.
Given this, and the fact that the policies and values of John McCain and his vice-presidential nominee, Sarah Palin, are almost identical to those of Bush, you would expect Obama to be leading in the polls by a wider margin than he is.
The reason that he is not, I suspect, is racism.
When polled, most older white voters overwhelming reject Obama, even if many of them are unhappy with Bush.
Indeed, one-third of Democrats have at various times told pollsters that they will not vote for a black candidate.
And a recent Associated Press/Yahoo News poll suggested that his race is costing Obama six percentage points in the polls.
Most of the time, this racism is covert, only hinted at through code words.
The media, particularly the increasingly popular conservative media and talk radio, are particularly important here.
Obama is consistently criticized for his “otherness” and his “arrogance,” terms that call to mind the image of the “uppity nigger” from the days of segregation, which are actually not so far in America’s past.
In a recent interview, Bill O’Reilly, the most popular TV talk show host at Fox News, America’s most watched news station, talked down to Obama in so condescending a manner that some viewers were reminded of the image of a slave owner in an old Hollywood movie putting a young black upstart in his place.
Sean Hannity, another star host at the Rupert Murdoch-owned Fox News, demanded repeatedly on air from one interviewee, Fareed Zakaria, a well-known columnist at Newsweek with a CNN talk show of his own, whether he thought America to be the greatest nation on earth.
The dark-skinned Zakaria, a naturalized American from India with a Ph.D. from Harvard, felt compelled to affirm his loyalty for America twice.
It is hard to imagine Hannity demanding such a public affirmation of loyalty from anyone with white skin.
So how much is race costing Obama?
The problem is that pollsters cannot effectively measure the problem.
They call it the “Bradley effect,” first noted during the 1982 governor’s race in California, when Tom Bradley, the then African-American mayor of Los Angeles, lost the race to his white opponent despite leading in pre-election polls throughout the campaign.
The idea behind the “Bradley effect” is that white voters won’t reveal their prejudices to pollsters.
Instead, they lie and say that they will vote for the black candidate when, in fact, they have no intention of doing so.
Of course, many people now say that Obama has proven that the “Bradley effect” is a thing of the past.
But his continuing difficulties with white working-class voters, who in the primaries went with Hillary Clinton, suggest that, perhaps, the “Bradley effect” is still alive and well.
Younger Americans accept inter-racial relationships as part of the normal social and sexual landscape.
Yet, the very speed with which American society has progressed has threatened half of the country, older and mostly white, unable and unwilling to live in the present.
The moderate Republican Party of Dwight D. Eisenhower and the Rockefellers has been taken over by a radical crowd, with even Eisenhower’s granddaughter now openly backing Obama.
So it boggles many non-Americans’ minds that so many in that great nation still do not wake up to the reality that four more years of Republican rule will further degrade and bankrupt the country.
In any civilized society, ignorance is not illegal and being moralistic is anybody’s inherent privilege.
But what is alarming is how private religious beliefs and morals have increasingly shaped the secular agenda of America, whose Founding Fathers had specifically designed the Constitution to separate state and church.
Today’s radical Republican Party represents a large segment of the population that believes that abortions and same-sex marriage are immoral, God sent America to Iraq, and that bailing out Wall Street is “socialism.”
At the Republican Convention in August, the ear-splitting chants of “USA!
USA!” and “Drill, baby, drill” sounded like cries of desperation, as well as of defiance against an enemy who threatens American’s divine right to remain supreme.
Palin has since identified the enemy, proclaiming of Obama: “This is not a man who sees America like you and I see America.”
Racial Medicine\u0027s Revival
It wasn't supposed to be this way.
In the spring of 2000, Francis Collins and Craig Venter announced at a White House news conference the completion of "the first draft" of the mapping and sequencing of the human DNA.
With President Bill Clinton and Prime Minister Tony Blair nodding their approval, Collins and Venter agreed that racial classifications make no sense at the molecular level; we humans are 99.9% alike in our DNA.
News media around the world picked up the story, intrigued by science's definitive refutation of racial thinking.
Not so fast.
While we may all be 99.9% alike, there are three billion base pairs of human DNA, which leaves at least three million points of difference (single nucleotide polymorphisms, or SNP's) between any two people.
Armed with the promise of powerful new computer-driven technology, scientific attention is becoming riveted to that remaining 0.1% of genetic difference.
Why has science turned - after only a few years - from repudiating the existence of racial differences between human beings to generating a near obsession with them?
Around the same time that the first draft of the human genome was being completed, IBM announced the development of a new Super Computer capable of performing 7.3 trillion calculations per second on human DNA.
The original idea was that greater computing capacity would enable particularized therapies, because we could now turn our attention to individual differences in everything from gene therapy to the delivery of pharmaceuticals.
But gene therapy has run up against a brick wall.
An experiment at the University of Pennsylvania resulted in the death of the patient, Jesse Gelsinger, in late 1999.
Then another gene therapy experiment in France generated leukemia in several patients - and the protocols were stopped immediately.
So the blind alley of gene therapy has sent biotechnology heading full throttle down the road of drug development, based on the new genomics.
Here, researchers are keen to exploit national, ethnic, and racial bio-databanks.
A breakthrough came in December 1998, when Iceland's parliament approved a bill giving a private biotechnology company legal access to a comprehensive genetic database - the first of its kind - for the country's entire population of 270,000.
Iceland has kept medical data on its population for more than a century, including records of the deceased.
By combining both stored and newly collected blood and tissue samples, and supplementing these with detailed genealogical charts and records, the biotechnology company believes that it has gained a head start in searching for genes that are implicated in human disease.
What is worrisome, however, is the putative "ethnic purity" of the database.
According to the magazine Science , Iceland's "isolated position" and catastrophes that "wiped out large parts of [its] population" have left it with "a remarkably homogenic gene pool."
This makes it "relatively easy to track down disease-causing mutations that might form the basis for new tests and therapies."
Here was the foot in the door, the first step toward conceptualizing strategies of research and then delivery of drugs to populations that are defined by ethnicity and race.
The next step was not long in coming.
In March 2001, the United States Food and Drug Administration (FDA) allowed the biotech firm NitroMed to proceed with a full-scale clinical trial of what has been touted as "the first ethnic drug."
The trial itself was the first ever "conducted exclusively in black men and women suffering from heart failure."
The drug, BiDil, is designed to treat or prevent congestive heart failure by raising low or depleted levels of nitric oxide in the blood.
It was originally designed for a wide population base, and race was irrelevant.
But early clinical studies revealed no compelling results, and an FDA advisory panel voted 9 to 3 against the drug's approval.
However, BiDil was suddenly born again as a racialized remedy.
This is all the more remarkable because, by concentrating only on blacks, the clinical trials now under way can have little or nothing compelling to say about comparative results according to supposed racial differences between humans.
Moreover, the underlying epidemiological mistake of such "racial medicine" is obvious. As Michael Klag and his colleagues showed a decade ago, in general, the darker one's skin color, the higher the rate of hypertension for American blacks, even within the African American community.
The differences were not biological or genetic in origin , but biological in effect due to stress-related outcomes of darker skin color: reduced access to valued social goods such as employment, promotion, housing, etc.
Unfortunately, while the new mantra of biotechnology is to claim that someday soon pharmaceuticals will be marketed to individuals based on their DNA, the fundamental truth is that selling drugs is still a mass-market business.
Target markets consist of groups and population aggregates, not individuals.
So, for the pharmaceutical industry, racial categorizations make economic sense.
It has always been difficult to use the market to battle racial discrimination, and many governments nowadays behave as though they would prefer to give up the fight.
But racialized drugs?
They may be coming soon, accompanied by the retrograde racial thinking - with its full range of dangerous assumptions and historical associations - that molecular biology was supposed to have dispelled.
Radical Islam\u0027s Challenge to Indonesia
With the Taliban on the run, sighs of relief can be heard as far away as Indonesia.
Protests against the US-led coalition's bombing campaign had roiled Indonesia for weeks, increasing the country's already perilous instability.
Now that the war in Afghanistan may wind down soon, there is a fear that President Megawati Sukarnoputri will do little to change her do-nothing ways.
These protests came as Mrs Megawati's first 100 days in office ended.
They were but another sign of the scant political honeymoon she enjoyed.
Grumbling about her ``slow motion'' style of government can be heard everywhere; applause for her few accomplishments - such as weathering the Islamic storm - is slight.
Public expectations about Mrs Megawati were modest from the start.
In her report to the annual session of the People's Consultative Assembly, delivered on November 1, Megawati admitted that her government had achieved little.
The Assembly sought to fill this policy vacuum by outlining steps that her government must take to jump-start the economy.
Although the Assembly remains dubious about her, Mrs Megawati was heartened when Assembly Chairman Amien Rais foreswore any challenge to her presidency for the remainder of her term, which expires in 2004.
So Megawati need not worry about being ejected from office as her predecessor Abdurrahman Wahid was, just a few months ago.
But Amien Rais' statement is as much self-serving as it is in the interest of political stability.
He is the only viable rival candidate for President Megawati's job, and would be the man to step into the presidential palace should she be removed.
No politician with any common sense (which Mr Rais has in abundance) would seek to unseat Megawati at this moment, for the challenges she faces are daunting and the chances of success small.
Many people suspect that Megawati's inactivity results from her recognition of the almost intransigent nature of the challenges facing Indonesia.
Hers is a kind of ``self-healing'' administration in which events are left to run their course in the hope that they won't get out of hand.
So Amien Rais' assurance that Megawati will remain president until 2004 will not have injected a greater urgency into her presidency.
Her sense of security (and hence her indolence) is also increased because her political opponents are in complete disarray.
But government by sleepwalking is risky in a country's whose territorial integrity seems to be coming apart at the seams.
The unified Indonesia of the past 40 years or so is finished.
A new regional autonomy law will provide greater freedoms for regions and local communities to express themselves.
Right now, this decentralization process is manageable.
It may not remain so without a firm policy hand at the center.
If the central government refrains from re-imposing its power in the regions, either administratively or militarily, they are more likely to remain within the Republic.
Granting special autonomy to the two most strife-ridden provinces - Aceh and Papua (Irian Jaya) - may also reduce tension between national and local military commanders.
However, the deep wounds of the past few years of violence will not heal unless serious efforts are made by the government in Jakarta to bring human rights abusers to justice.
Megawati promised to pursue human rights violators, but few actions have been taken to enforce this promise.
Such inaction cannot last if national unity is to be maintained.
A credible system to manage Indonesia's new decentralized system is needed.
Regions must be prevented from promulgating regulations that violate national laws or impose negative effects on other regions, as has happened with the creation by some regions of internal trade barriers.
Because of the government's inactivity, such barriers are rising across the Indonesian archipelago.
Regional autonomy, moreover, has not pacified ethnic tensions.
Violent conflicts among Indonesia's myriad ethnic and religious groups continue.
Radical Muslim groups have declared holy war, ``jihad,'' which has complicated and aggravated conflicts in the Moluccan islands.
Fundamentalist Islamic groups, indeed, raised the most consistent challenge to Megawati's ``secular'' government even before the attacks on America.
They are not yet a serious threat to Megawati, only because they are not backed by Indonesia's powerful Islamic political parties.
Mrs Megawati's challenge is to keep these Islamic parties firmly within Indonesia's conventional political framework.
In the first month of the war on terrorism, some Islamic political parties were drawn into anti-American protests and even Vice President Hamzah Haz (chairman of one of Indonesia's strongest Islamic parties) was tempted to ride this tiger for a time.
During Megawati's trip to America to support President Bush's policy, indeed, the government in Jakarta was almost incapacitated by these small, noisy and radical Islamic groups.
On her return, Megawati restored her credibility by ordering the security services to act against these groups.
This restored order.
Credit for the absence of a truly serious Islamic challenge, however, should perhaps be given to Indonesia's moderate and mainstream Muslim leaders and groups, such as Nahdatul Ulama and Muhammadyah, who avoided incendiary words and deeds.
Their responsible behavior demonstrates the growing importance of Indonesia's civil society.
Because Indonesia's government will likely be weak for years to come, Mrs Megawati should forge alliances with the many civil society groups that are emerging in Indonesia and which support a democratic regime.
Such activity by the President will do more to root Indonesia's democracy than any other action Megawati might take.
The War with Radical Islam
NEW YORK – French Prime Minister Manuel Valls was not speaking metaphorically when he said that France is at war with radical Islam.
There is, indeed, a full-fledged war underway, and the heinous terrorist attacks in Paris were part of it.
Yet, like most wars, this one is about more than religion, fanaticism, and ideology.
It is also about geopolitics, and its ultimate solution lies in geopolitics as well.
Crimes like those in Paris, New York, London, and Madrid – attacks on countless cafes, malls, buses, trains, and nightclubs – affront our most basic human values, because they involve the deliberate murder of innocents and seek to spread fear throughout society.
We are wont to declare them the work of lunatics and sociopaths, and we feel repulsed by the very idea that they may have an explanation beyond the insanity of their perpetrators.
Yet, in most cases, terrorism is not rooted in insanity.
It is more often an act of war, albeit war by the weak rather than by organized states and their armies.
Islamist terrorism is a reflection, indeed an extension, of today’s wars in the Middle East.
And with the meddling of outside powers, those wars are becoming a single regional war – one that is continually morphing, expanding, and becoming increasingly violent.
From the jihadist perspective – the one that American or French Muslims, for example, may pick up in training camps in Afghanistan, Syria, and Yemen – daily life is ultra-violent.
Death is pervasive, coming as often as not from the bombs, drones, and troops of the United States, France, and other Western powers.
And the victims are often the innocent “collateral damage” of Western strikes that hit homes, weddings, funerals, and community meetings.
We in the West hate to acknowledge – and most refuse to believe – that our leaders have been flagrantly wasteful of Muslim lives for a century now, in countless wars and military encounters instigated by overwhelming Western power.
What is the message to Muslims of the US-led invasion of Iraq in 2003?
More than 100,000 Iraqi civilians – a very conservative estimate – died in a war that was based on utterly false pretenses.
The US has never apologized, much less even recognized the civilian slaughter.
Or consider Syria, where an estimated 200,000 Syrians have recently died, 3.7 million have fled the country, and 7.6 million have been internally displaced in a civil war that was stoked in no small part by the US, Saudi Arabia, and other allied powers.
Since 2011, the CIA and US allies have poured in weapons, finance, and training in an attempt to topple President Bashar al-Assad.
For the US and its allies, the war is little more than a proxy battle to weaken Assad’s patrons, Iran and Russia.
Yet Syrian civilians are the cannon fodder.
Long before there was Islamist terrorism in the West, the United Kingdom, France, and the US relied on diplomatic chicanery and launched coups, wars, and covert operations in the Middle East to assert and maintain Western political control over the region.
Historians know this sordid story, but most Westerners do not (in no small part because many of the interventions have been covert).
Since the fall of the Ottoman Empire a century ago, Western powers have sought to control the Middle East for a variety of reasons, including claims on oil, access to international sea routes, Israel’s security, and geopolitical competition with Russia in Egypt, Syria, Iraq, and Iran.
The US now has more than 20 military bases in six countries in the region (Afghanistan, Bahrain, Djibouti, the United Arab Emirates, Oman, and Turkey) and large-scale military deployments in many others, including Egypt, Kuwait, Qatar, and Saudi Arabia.
It has funded violence for decades, arming and training the mujahedeen (in effect building the precursor of Al Qaeda) in Afghanistan to fight the Soviets; stoking the Iraq-Iran War in the 1980s; invading Iraq in 2003; trying to topple Assad since 2011; and waging relentless drone attacks in recent years.
The fact that jihadist terrorist attacks in the West are relatively new, occurring only in the last generation or so, indicates that they are a blowback – or at least an extension – of the Middle East wars.
With very few exceptions, the countries that have been attacked are those that have been engaged in the post-1990 Western-led military operations in Afghanistan, Iraq, Libya, and Syria.
The terrorists themselves cast their actions in political terms, even though we rarely listen; indeed, the terrorists’ words are typically reported only briefly, if at all.
But the fact is that almost every terrorist attack in the West or against Western embassies and personnel has been accompanied by the message that it is in retaliation for Western meddling in the Middle East.
The Paris terrorists pointed to France’s operations in Syria.
To be clear, Western actions do not provide Islamist terrorism with a scintilla of justification.
The reason to point out these actions is to make clear what Islamist terrorism in the West represents to the terrorists: Middle East violence on an expanded front.
The West has done much to create that front, arming favored actors, launching proxy wars, and taking the lives of civilians in unconscionable numbers.
Ending the terror of radical Islam will require ending the West’s wars for control in the Middle East.
Fortunately, the Age of Oil is gradually coming to an end.
We should make that end come faster: climate safety will require that we leave most fossil-fuel resources in the ground.
Nor do the other ancient motives for Western interference apply any longer.
The UK no longer needs to protect its trade routes to colonial India, and the US no longer needs a ring of military bases to contain the Soviet Union.
It is time for the West to allow the Arab world to govern itself and to choose its path without Western military interference.
And there are heartening reasons to believe that a self-governing Arab Middle East would wisely choose to become a peaceful global crossroads and a partner in science, culture, and development.
The Arab world has played that beneficent role in the past, and it can do so again.
The region is filled with talented people, and the overwhelming majority in the region want to get on with their lives in peace, educate and raise their children in health and safety, and participate in global society.
सतत विकास के लिए क्रांतिकारी लक्ष्य
बर्लिन – आइए हम एक पल के लिए कल्पना करें कि हम दुनिया को अपनी इच्छा के अनुसार बदल सकते हैं। भारी आर्थिक असमानता का स्थान सामाजिक और राजनीतिक समावेशन ले लेता है। वैश्विक मानव अधिकार वास्तविकता बन जाते हैं। हम वनों की कटाई और कृषि योग्य भूमि के विनाश को समाप्त कर देते हैं। मछलियों के भंडारों में वृद्धि होने लगती है। दो अरब लोग गरीबी, भूख, और हिंसा से रहित जीवन की आशा करने लगते हैं। जलवायु परिवर्तन और संसाधन की कमी का ढोंग करने के बजाय, हम अपने भूमंडल और उसके वातावरण की सीमाओं का सम्मान और समर्थन करना शुरू कर देते हैं।
2001 में जब संयुक्त राष्ट्र ने मिलेनियम डेवलपमेंट गोल्स (एमडीजी) को अपनाया था तब यही उद्देश्य था। अगले साल जब एमडीजी की समय-सीमा समाप्त हो जाएगी और संयुक्त राष्ट्र पर्यावरण और विकास की नीति के लिए अनुवर्ती ढाँचे को अपनाएगा तब यही उद्देश्य होगा। आनेवाले सतत विकास के लक्ष्यों (एसडीजी) का उद्देश्य, पारिस्थितिक तंत्र की रक्षा करना, संसाधनों का संरक्षण करना, और एमडीजी की ही तरह लाखों लोगों को गरीबी से बाहर निकालना होगा।
पर्यावरण और विकास संबंधी ढाँचों को परस्पर मिलाना एक अच्छा विचार है - यह जलवायु की रक्षा, जैव-विविधता के संरक्षण, मानव अधिकारों को बनाए रखने, और गरीबी को कम करने के लिए संयुक्त राष्ट्र के तत्वावधान में तैयार किए गए कानूनी तौर पर बाध्यकारी अनेक अंतर्राष्ट्रीय सम्मेलनों और समझौतों की सफलता पर आधारित होता है। हालाँकि वे संभवतः परिपूर्ण नहीं होते हैं - और, दुर्भाग्यवश, जो देश उनकी पुष्टि करते हैं वे हमेशा लक्ष्य हासिल नहीं करते है - उनसे ऐसी संस्थागत प्रक्रियाओं के निर्माण का मार्ग प्रशस्त हुआ है जिनसे देश अपने वादों को पूरा करने के लिए प्रोत्साहित होते हैं और नागरिक सरकारों को जवाबदेह ठहराने के लिए प्रोत्साहित होते हैं।
लेकिन, हालाँकि इस प्रकार एसडीजी को ठोस कानूनी आधार मिलेगा, परंतु उस आधार को आगे विकसित किया जाना चाहिए। शुरूआत करनेवालों के लिए, वैश्विक समझौते और लक्ष्य अभी तक प्रमुख पर्यावरणीय चुनौतियों के लिए निर्धारित नहीं किए गए हैं, इनमें उपजाऊ ऊपरी मिट्टी का विनाश और वैश्विक प्लास्टिक उत्पादन शामिल हैं। इस तरह के समझौतों का होना इसलिए आवश्यक होगा ताकि एसडीजी मानव अधिकारों, पर्यावरण और विकास पर समग्र रूप से विचार कर सके।
शोधकर्ता और नागरिक-समाज संगठन 2020 तक मिट्टी के क्षरण की स्थिति को पलटने के लिए आह्वान कर रहे हैं, और वैश्विक खाद्य सुरक्षा के इस मूलभूत पहलू पर विचार करने के लिए संयुक्त राष्ट्र में विशेषज्ञों के कम-से-कम एक अंतर्राष्ट्रीय पैनल के उपस्थित होने के लिए दबाव डाल रहे हैं। हर साल, 12 मिलियन हेक्टेयर भूमि - जो आकार में ऑस्ट्रिया और स्विट्जरलैंड के क्षेत्र के बराबर है - अति उपयोग और उर्वरकों का अत्यधिक उपयोग करने के कारण नष्ट हो जाती है। बड़े पैमाने पर खेती किेए जाने के कारण इसका पर्यावरणीय प्रभाव कई गुना अधिक बढ़ जाता है। इसके सामाजिक परिणाम, बेदखली, आजीविकाएँ समाप्त होना, और हिंसक संघर्ष भी बहुत अधिक गंभीर हो सकते हैं।
प्लास्टिक के उपयोग पर भी अंकुश लगाया जाना चा��िए। 1950 के दशक से दुनिया भर में इसका उत्पादन सौ गुना बढ़ गया है। हर साल, 280 लाख टन से अधिक प्लास्टिक का उत्पादन होता है, यह भारी मात्रा में भूजल, नदियों, और महासागरों में समा जाता है, और यह क्रम इसी तरह आगे चलता रहता है। हालाँकि प्लास्टिक जैवविघटनीय नहीं है, परंतु किसी भी देश ने इसे हमारे वातावरण में प्रवेश करने से रोकने का वादा नहीं किया है।
एक अन्य अत्यधिक अपुष्ट संभावना यह होगी कि पर्यावरण की दृष्टि से हानिकारक और सामाजिक दृष्टि से अहितकर सब्सिडियों को चरणबद्ध रूप से समाप्त करने के लिए लक्ष्य निर्धारित किए जाएँ। वैश्विक स्तर पर, यूरोपीय संघ की सामान्य कृषि नीति के ज़रिए दी जानेवाली सब्सिडियों जैसी इन सब्सिडियों की राशि अरबों डॉलरों में होती है, जिनसे बजट खाली हो जाते हैं और अक्सर गरीबों के लिए कुछ नहीं हो पाता है। इनमें कटौती करने से न केवल अलाभकारी प्रोत्साहनों को समाप्त किया जा सकेगा; बल्कि इससे ग्रामीण क्षेत्रों में शिक्षा, सार्वभौमिक स्वास्थ्य देखभाल, और बुनियादी सुविधाओं के लिए धन उपलब्ध हो सकेगा जहाँ पर आय के अवसर पैदा करने के लिए इसकी ज़रूरत है।
दुर्भाग्यवश, हमें हमारी इच्छाओं की दुनिया मिलने की संभावना नहीं है। एसडीजी समझौते यह दर्शाते हैं कि बहुपक्षीय ढाँचे में वर्तमान में क्या संभव है: अपेक्षाकृत कुछ नहीं। कोई भी सरकार असमानता और भूख के कारणों से निपटने के लिए सही मायनों में तैयार नहीं है, जिसके लिए उचित कराधान और व्यापक कल्याण को सर्वोच्च प्राथमिकता देने की आवश्यकता होगी। इस तरह के सुधार किसी भी विकास सहायता की तुलना में अधिक प्रभावी होंगे, लेकिन फिलहाल वे निषिद्ध हैं।
वैश्विक अर्थव्यवस्था के नियम भी पहुँच के बाहर बने हुए हैं, जिससे यह लगभग असंभव है कि वित्तीय और व्यापार नीतियों का पुनर्गठन यह सुनिश्चित करने के लिए किया जा सके कि उनके कारण अधिक गरीबी, अनियंत्रित जलवायु परिवर्तन, और अपरिवर्तनीय संसाधन विनाश नहीं होते हैं।
अब तक की सहमति की भाषा यह भरोसा नहीं दिलाती है। हर कीमत पर आर्थिक विकास के लिए घिसी-पिटी प्रतिबद्धता से इस प्रश्न का कोई उत्तर नहीं मिलता कि हमारे भूमंडल की सीमाओं और इस तथ्य को देखते हुए कि अरबों लोग गरीबी में रहते हैं, विकास को कैसे संतुलित किया जा सकता है। सीमित दुनिया में, असीमित विकास असंभव है, और यदि विकास के लाभों का उचित रूप से वितरण नहीं किया जाता है तो उत्पादन के बढ़ने से हर किसी को भोजन उपलब्ध नहीं हो जाएगा।
विकास का साहसिक एजेंडा तैयार करने में केवल उन्नत देश ही रुकावट नहीं डाल रहे हैं। उभरते और विकासशील देशों में से संपन्न देश एसडीजी समझौतों का उपयोग मुख्य रूप से अंतर्राष्ट्रीय सहायता के हस्तांतरणों के लिए माँग करने के एक मंच के रूप में कर रहे हैं।
संयुक्त राष्ट्र की स्थिति अपने सदस्यों जैसी ही है। वे कितने अच्छे हैं इसका पता हमें इस बात से चल पाएगा कि वे एसडीजी को इक्कीसवीं सदी में पर्यावरण और विकास नीति के लिए सही मायने में नई प्राथमिकताओं और सही मायने में सार्वभौमिक लक्ष्यों को स्थापित करने के लिए किस सीमा तक एक अवसर के रूप देखते हैं।
प्रतिस्पर्धात्मक मौद्रिक सहजता को रोकना
मुंबई - जब विश्व वैश्विक आर्थिक संकट से उबरने के लिए जूझ रहा है, तो लगता है कि कई उन्नत देशों ने इसके परिप्रेक्ष्य में जो अपरंपरागत मौद्रिक नीतियाँ अपनाईं, उन्हें व्यापक स्वीकृति मिली है। परंतु जिन अर्थव्यवस्थाओं में ऋण का भार बहुत अधिक है, नीति अनिश्चित है, या ढाँचागत सुधार की आवश्यकता के कारण घरेलू माँग में बाधा उत्पन्न होती है, उनके मामले में यह प्रश्न उचित है कि क्या इन नीतियों के घरेलू लाभ अन्य अर्थव्यवस्थाओं को हुए हानिकारक अतिप्रवाह से ज़्यादा हैं।
इससे भी बड़ी समस्या यह है कि इन अतिप्रवाहों की अवहेलना करने से वैश्विक अर्थव्यवस्था जैसे को तैसा वाली अपरंपरागत मौद्रिक नीति की ख़तरनाक राह पर जा सकती है। स्थिर और धारणीय आर्थिक विकास सुनिश्चित करने के लिए, विश्व के नेताओं को मौद्रिक खेल के अंतर्राष्ट्रीय नियमों की पुनः जाँच करनी चाहिए, जिसमें उन्नत और उभरती हुई अर्थव्यवस्थाओं को समान रूप से अधिक लाभदायक मौद्रिक नीतियाँ अपनानी चाहिए।
वास्तव में, परिमाणात्मक सहजता (QE) जैसी अपरंपरागत नीतियों की भूमिका होती है; जब बाज़ार टूट चुके हों या बुरी तरह निष्क्रिय हो चुके हों, तब केंद्रीय बैंकरों के लिए ज़रूरी होता है कि नवोन्मेषी रूप से सोचें। निश्चित रूप से, 2008 में अमेरिकी निवेश बैंक लेहमैन ब्रदर्स के दिवालिया होने के तुरंत बाद जो कार्रवाई की गई वह बिल्कुल सही थी, हालाँकि केंद्रीय बैंकरों के पास कोई मार्गदर्शिका नहीं थी।
लेकिन समस्याएं तब आती हैं जब इन नीतियों को बाज़ारों को ठीक करने से भी आगे लागू किया जाता है; जब अर्थव्यवस्थाएँ बुरी तरह से क्षतिग्रस्त होती हैं या उनमें गंभीर सुधार की आवश्यकता होती है तो घरेलू लाभ बेहद अस्पष्ट होते हैं, जबकि घरेलू अर्थव्यवस्था और उभरते देशों दोनों में ही इन नीतियों के फलस्वरूप होने वाले अतिप्रवाहों से मुद्रा और परिसंपत्ति-मूल्यों में अस्थिरता को बढ़ावा मिलता है।
केंद्रीय बैंकों के बीच अधिक समन्वय होने से यह सुनिश्चित करने में भारी मदद मिलेगी कि मौद्रिक नीति अन्यत्र अत्यधिक प्रतिकूल प्रभाव डाले बिना घरेलू मोर्चे पर कारगर होगी। बेशक, इसका अर्थ यह नहीं है कि केंद्रीय बैंकर सामूहिक नीतियों पर चर्चा करने के लिए बैठकों या कॉन्फ़्रेंस कॉलों का आयोजन करें। बल्कि, व्यवस्था की दृष्टि से प्रभावशील केंद्रीय बैंकों के निदेशों का विस्तार किया जाना चाहिए ताकि उनमें अतिप्रवाहों का लेखा-जोखा किया जा सके, नीति-निर्माताओं को अन्य अर्थव्यवस्थाओं पर पर्याप्त प्रतिकूल प्रभाव डालने वाले अपरंपरागत उपायों से दूर रहने के लिए मजबूर किया जा सके, विशेष रूप से यदि घरेलू लाभों के बारे में संदेह हों।
काफी समय से, अर्थशास्त्री इस बारे में एकमत थे कि यदि केंद्रीय बैंक अपनी घरेलू स्थिति के लिए नीतियों का अधिकतम उपयोग करते हैं, तो समन्वय से मामूली लाभ ही मिल सकता है। लेकिन आज केंद्रीय बैंक आवश्यक रूप से सर्वोत्कृष्ट नीतियों का पालन नहीं कर रहे हैं - निष्क्रिय घरेलू राजनीति सहित विभिन्न प्रकार की घरेलू बाध्यताएँ, वास्तव में अपेक्षित या उपयोगी नीतियों की तुलना में अधिक आक्रामक नीतियों के लिए प्रेरित कर सकती हैं।
इसके अतिरिक्त, यह आवश्यक नहीं है कि सीमा-पार पूंजी प्रवाह, जो एक-दूसरे की नीतियों के अर्थव्यवस्थाओं पर पड़ने वाले प्रभावों को पहले की तुलना में कहीं अधिक जोखिम में डालते हैं, प्राप्तकर्ता देशों की आर्थिक स्थितियों से ही निर्देशित हों। केंद्रीय बैंक, पूंजी को दूर रखने और विनिमय दर को कम बनाए रखने के प्रयास के फलस्वरूप विश्व की दुर्लभ विद्यमान माँग में अपने देशों के हिस्से को अधिकतम करने के उद्देश्य से प्रतिस्पर्धात्मक सहजता के चक्र में फँसने का जोखिम उठाते हैं।
कुछ विरल लेकिन प्रशंसनीय अपवादों को छोड़कर, बहु-पक्षीय संस्थाओं के अधिकारियों ने इन अपरंपरागत मौद्रिक नीतियों पर कोई आपत्ति नहीं की, और वे इनके बारे में प्रायः उत्साह दर्शाते रहे हैं। इस दृष्टिकोण में दो आधारभूत जोखिम हैं।
पहल ख़तरा खेल के नियमों के भंग होने का है। अपरंपरागत मौद्रिक नीतियों का निर्विवाद रूप से समर्थन करने का अर्थ यह निकलता है कि यदि विकास को लेकर अन्य घरेलू बाध्यताएँ हों तो परिसंपत्ति मूल्यों की ग़लतबयानी करना स्वीकार्य है।
इसी तर्ज़ पर, देशों के लिए यह जायज़ हो जाएगा कि वे उसे अपनाएँ जिसे वे “परिमाणात्मक बाह्य सहजता” (QEE) कह सकते हैं, जिसमें केंद्रीय बैंक भारी प्रारक्षित निधियों का निर्माण करते हुए, अपनी विनिमय दरों को कम रखने के लिए हस्तक्षेप कर सकते हैं। यदि शुद्ध अतिप्रवाह अंतर्राष्ट्रीय रूप से स्वीकार्य नीति का निर्धारण नहीं करते, तो बहुपक्षीय संस्थाएँ यह दावा नहीं कर सकती हैं कि परिमाणात्मक बाह्य सहजता (QEE) से खेल के नियमों का उल्लंघन होता है, चाहे इससे कितनी भी अस्थिरता का ख़तरा क्यों न होता हो।
वास्तव में, यह मात्र कपोल कल्पना नहीं है। परिमाणात्मक सहजता और इससे मिलते-जुलते उपाय मुख्य रूप से ऐसी परिस्थितियों में लागू किए जाते हैं जिनमें बैंक निर्विवाद रूप से प्रारक्षित निधियाँ भारी मात्रा में रखने के इच्छुक होते हैं – सामान्य रूप से माँग बढ़ाने के लिए जब ऋण के मार्ग अवरुद्ध हों और ब्याज-संवेदनशील माँग के अन्य स्रोत कमज़ोर हों। ऐसी स्थितियों में अगर परिमाणात्मक सहजता (QE) “काम करती है,” तो वह मुख्य रूप से विनिमय दरों में परिवर्तन करके और माँग को देशों के बीच अदल-बदल करके होगा। दूसरे शब्दों में, यह परिमाणात्मक बाह्य सहजता (QEE) से मात्रा में भिन्न है, स्वरूप में नहीं।
दूसरा ख़तरा यह है कि अतिप्रवाहों का लेखा-जोखा रखने में मूल देशों की अनिच्छुकता से प्राप्तकर्ता देशों में अनचाही संपार्श्विक क्षति होती है, जिससे वे अपनी ओर से स्व-हित की कार्रवाई करने के लिए प्रेरित होते हैं। भले ही मूल-देश के केंद्रीय बैंकों ने अथक परिश्रम करके यह संप्रेषित किया हो कि घरेलू परिस्थितियाँ अपरंपरागत नीतियों से बाहर निकलने के उनके मार्ग का किस प्रकार मार्गदर्शन करेंगी, वे इस बारे में मौन रहे हैं कि विदेशी उथल-पुथल का मुकाबला वे किस तरह करेंगे।
निष्कर्ष स्पष्ट है – जिसकी पुष्टि अमेरिका के परिमाणात्मक सहजता (QE) में पाँच वर्ष से अधिक तक रहने के बाद इससे बाहर निकलने के उपरांत वित्तीय-बाज़ार में हाल ही में हुई उथल-पुथल से हुई है – प्राप्तकर्ता देश अपने दम पर हैं। परिणामस्वरूप, उभरती अर्थव्यवस्थाएँ भारी घाटों के प्रति अधिकाधिक चिंतित हैं, और प्रतिस्पर्धात्मक विनिमय दर बनाए रखने और भारी प्रारक्षित निधियाँ एकत्र करने को उच्च प्राथमिकता दे रही हैं जो उथल-पुथल की स्थिति में बीमे के रूप में काम आ सकें। ऐसे समय में जब समग्र माँग में गंभीर कमी दिखाई दे रही है, क्या मूल देश इसी प्रतिक्रिया को उत्तेजित करना चाहते हैं?
केंद्रीय बैंकों के निदेशों में अतिप्रवाहों को सम्मिलित करके उनका विस्तार करने के प्रत्यक्ष लाभों के बावजूद, ऐसे समय पर ऐसे परिवर्तन को लागू करना कठिन होगा जब घरेलू आर्थिक चिंताएँ राजनीतिक दृष्टि से सर्वोपरि हैं। कम-से-कम अभी के लिए, अधिक व्यावहारिक समाधान यह होगा कि मूल-देश के केंद्रीय बैंक प्राप्तकर्ता देशों की निरंतर विनिमय दर हस्तक्षेप जैसी नीति संबंधी प्रतिक्रियाओं के मध्यावधि प्रभावों पर विचार करने के लिए अपने निदेशों की पुनः व्याख्या करें।
इस प्रकार केंद्रीय बैंक अपने विद्यमान निदेशों का अतिक्रमण किए बिना, प्रतिकूल अतिप्रवाहों की स्पष्ट रूप से पहचान करके उन्हें कम कर सकते हैं। कमज़ोर प्रकार के इस “समन्वयन” को वैश्विक सुरक्षा उपायों की पुनः जाँच करके और मज़बूत किया जा सकता है।
वर्तमान प्रणाली-हीनता द्वारा उत्पन्न जोखिम न तो उन्नत-देश संबंधी समस्या हैं और न ही उभरती-अर्थव्यवस्था संबंधी समस्या हैं। प्रतिस्पर्धात्मक मौद्रिक सहजता से उत्पन्न ख़तरा हर किसी के लिए महत्वपूर्ण है। चूँकि विश्व में समग्र माँग कम है, इसलिए देश इसका बड़ा हिस्सा पाने के लिए व्यर्थ की प्रतिस्पर्धा में लगे हुए हैं। इस प्रक्रिया में, वे वित्तीय-क्षेत्र और सीमा-पार के जोखिम पैदा कर रहे हैं जो तब अधिक साफ़ दिखाई देने लगेंगे जब देश अपनी अपरंपरागत नीतियाँ छोड़ देंगे।
सही इलाज बताने का पहला चरण है कि हम बीमारी के कारण को पहचानें। और, जब हम वैश्विक अर्थव्यवस्था की बीमारी के कारणों को ढूँढ़ते हैं, तो पता चलता है कि अत्यधिक मौद्रिक सहजता इसका कारण अधिक है, इलाज कम। हम इस बात को जितना जल्दी समझ लेंगे, वैश्विक आर्थिक सुधार उतना ही अधिक सुदृढ़ और धारणीय होगा।
Raúl Castro Reaches Out
BRASILIA – Raúl Castro has begun a gradual process of changing Cuba’s economy and international relations.
Within Cuba, he hopes to legitimize his government by improving standards of living.
Outside of Cuba, he does not want to be held captive by Cuba’s one international supporter: Venezuelan President Hugo Chávez.
Castro believes in giving farm workers greater incentives.
He has authorized the sale of farm machinery and tools – centralized until now – directly to farmers, as well as handing over idle land to private cooperatives and other organizations that request them.
He also cancelled the debts of some small producers and raised the prices paid by the state for milk and meat.
In another measure intended to improve the lives of ordinary Cubans, he has removed restrictions on acquiring computers, microwave ovens, and other appliances.
Cuban officials stress that the purpose of these changes is to increase efficiency, “not to alter the socialist model.” But, like China and Vietnam, the government will have to embrace the market more openly if it is really to improve living conditions.
Only with foreign investment and economic liberalization – a process that has already begun in some measure – can Cuba hope to offer its 11.2 million people more consumer goods and comfort, improve the social welfare system, and rehabilitate the country’s infrastructure.
This is essential not only in order to build a “better socialism,” as Castro has promised, but, especially, to legitimize the continuity of the regime established by his brother Fidel’s revolution.
For now, Cuba is politically stable.
The evolution of its internal situation leaves no doubt about the consolidation of Raúl Castro’s authority.
There is somewhat greater freedom of expression, with debates and criticism of several aspects of Cuba’s socialist model, such as low salaries and the dual monetary system, which has caused income inequality by favoring those who work in tourism and for foreign companies.
But greater political liberalization is unlikely in the short or medium term.
Cuba’s government argues that America’s financial and political support for the opposition impedes that.
Nevertheless, with Felipe Pérez Roque as Minister of Foreign Affairs, Cuba continues to conduct a pragmatic foreign policy.
Venezuela and China have become Cuba’s main economic and commercial partners, and may continue to be so.
But Raúl Castro wants to avoid dependence on one or two countries alone.
His objective is to diversify Cuba’s foreign relations and prevent problems that any change in these countries could cause his regime – a constant imperative since the collapse of the Soviet Union.
As a result, relations with Latin America’s giants, Brazil and Mexico, are being put on a more normal footing, relations with Spain are being improved.
Moreover, negotiations with the European Union have been resumed, greater understanding with the Vatican is being fostered, and Castro himself has publicly suggested the possibility of dialogue with the United States.
Although Venezuela provides between $1.5 and $2 billion annually to Cuba, Castro regards Chávez as something of a headache, owing to his rhetoric and his confrontational attitude with several countries.
Chávez is simply not the right person to help Cuba normalize its international relations.
Moreover, Venezuela has its own economic problems, despite its enormous dollar reserves.
Shortages of medicines and basic foodstuffs such as milk, sugar, eggs, beef, and chicken abound as a consequence of price controls and mounting inflation.
This reminds Castro of the economic dislocations that led the Soviet Union to slash its aid to Cuba in the years before it collapsed.
Venezuela’s problems make collaboration and support from Brazil – the southern hemisphere’s largest industrial power – even more important.
During President Luís Ignacio da Silva Lula’s visit to Havana in January 2008, Brazil and Cuba signed several economic and commercial agreements.
Indeed, Brazil doubled its loan to Cuba for the purchase of foodstuffs and medicines, to $200 million, and has arranged projects to rehabilitate Cuba’s infrastructure with the participation of Brazilian companies.
Other agreements include a project in which Brazil’s state energy company, Petrobrás, and Cuba’s Cupet will extract oil in the Gulf of Mexico, and another that involves technological aid from the Brazilian Company Pessquisa Agropecuária for the development of soya production in Cuba.
Indeed, as these initiatives suggest, rapprochement with Brazil and Mercosur appears to be Cuba’s best international alternative as Raúl Castro seeks to avoid falling into America’s economic orbit.
Raúl Castro’s China Strategy
MEXICO CITY &#45;&#45;
Fidel Castro’s resignation from two of his three leadership posts, together with the appointment of his younger brother, Raúl, as his successor, marks the end of an era…sort of.
Raúl replaced Fidel as President of the Councils of Ministers and of State, but not as First Secretary of the Cuban Communist Party.
And, in a scene worthy of the glory years of Stalinism, Raúl received the unanimous permission of Cuba’s “parliament” to consult with Fidel on all major issues.
As long as Fidel is around – writing, meeting foreign dignitaries, and weighing in on everything from ethanol to the American presidential campaign – two things will remain clear.
First, Raúl will barely be able to budge even on the modest, strictly economic and regulatory reforms that he hopes, somewhat naïvely, will put food back on Cubans’ table.
Second, while the succession arrangement that the Castros designed years ago has the advantage of stability and predictability, Raúl will be unable to replace the old guard with younger leaders (his successor in the Armed Forces is 72 and his vice-president is 77).
Doing so would give whomever he chooses an edge when Raúl, who is 76, passes on, and he and Fidel do not necessarily agree on who should come next.
Raúl’s strategy is to pursue a Vietnamese or Chinese solution: pro-market economic reforms under continued Communist rule, with no progress on democracy or human rights.
For those in the United States who have rightly concluded that the half-century trade embargo has proved counter-productive, this is an appealing halfway response that provides an alibi for moderation: one day, economic reforms will bring political change.
For Latin American pragmatists, always fearful of Cuban fifth columnists, it offers a way to square the circle: encouraging change in Cuba without going too far.
And, for some European governments, it is a typical hands-off remedy that places the problem squarely in America’s lap.
But the Vietnamese or Chinese roads are unacceptable in Latin America, which has made huge progress in transforming advances in democracy and respect for human rights into a regional legal order that goes beyond national sovereignty or the sacrosanct principle of non-intervention.
After decades of coups, dictatorships, torture, and disappearances, Latin America today, while not devoid of these plagues, has built a number of firewalls to forestall them.
Accepting a Cuban exception would represent an enormous setback.
What will deter the next Central American dictator and murderer if the Cubans are given a free pass?
Invoking pragmatism to justify continued human rights violations in Cuba merely because economic reforms might dissuade a mass exodus to Mexico and Florida is a bad idea.
Mexico has seemed especially tempted to return to its Cuban complicity of the past.
It appears that during an upcoming visit to Havana, the Mexican foreign minister will not meet with local dissidents, breaking with precedents established since 1993.
There are sound reasons to set a timetable for Cuba’s return to the Latin American democratic fold, without imposing elections as a first step or precondition.
Indeed, free and fair elections and full respect for human rights can come at the end of the road – if that end is clearly established.
What would be unacceptable are the two extremes: making an immediate transition to democratic rule a precondition for normalization of relations with the US and re-entering the Latin American community, or exempting Cuba from the obligation to adhere to democratic principles and practices on the grounds that it is somehow different.
In 1953, Fidel Castro, in what is probably the best-known speech in Latin American political history, proclaimed in court that history would absolve him.
In fact, history will judge him, and his nearly 50 years in power, only when the results are in: when the initial achievements in health and education and combating inequality are evaluated according to international standards and with the transparency to which the rest of the region’s countries are subject.
Only then we will know if the trade-off at least made sense, even if for many it was unacceptable: authentic social justice and progress in exchange for authoritarian rule, international ostracism, and a cultural desert.
अफ़्रीका में अदृश्य भुखमरी
दार अस सलाम – यह 20 साल से कुछ अधिक पहले की बात है, जब दक्षिण अफ्रीका के फोटोग्राफर केविन कार्टर ने उस विवादास्पद तस्वीर से दुनिया को अचंभे में डाल दिया जिसमें अकाल के दौरान भूख से बेहाल एक नन्हे सूडानी बच्चे पर गिद्ध अपनी नज़र गढ़ाए बैठा है। आलोचकों ने इस चित्र की आलोचना "आपदा के अश्लील चित्रण" के रूप में की और इसे इस बात के एक और उदाहरण के रूप में पेश किया कि अंतरराष्ट्रीय मीडिया अफ्रीकी समस्याओं को किस तरह सनसनीख़ेज तरीके से पेश करता है।
मुझे जो चीज़ विचलित करती है वह यह चित्र नहीं है। बल्कि वह यह बात है कि चित्र में जो स्थितियाँ दर्शाई गई हैं वे दो शताब्दियों के बाद भी मूलतः वैसी ही बनी हुई हैं। हर साल, दुनिया भर में 3.1 मिलियन बच्चे अभी भी भूख से मरते हैं।
एक अफ़्रीकी डॉक्टर होने के नाते, मैं यह जानता हूँ कि गंभीर कुपोषण और भुखमरी के विनाशकारी परिणाम हमेशा दिखाई नहीं देते हैं। ये हमेशा उतने अधिक साफ दिखाई नहीं देते हैं जितने कि वे भोजन की नलियों से लैस कंकालनुमा बच्चों की बाहर निकलती पसलियों में दिखाई देते हैं, जिन्हें मैं तंज़ानिया के अस्पताल के वार्डों में देखा करता था। दीर्घकालिक कुपोषण, या “अदृश्य भुखमरी” कई अन्य रूपों में दिखाई देती है – लेकिन यह विनाशकारी और घातक हो सकती है। और हालाँकि घोर कुपोषण सहित कई अन्य बीमारियों से होनेवाली मौतों में कमी हुई है, पर अदृश्य भुखमरी फैलती जा रही है।
पिछले दो दशकों में, एचआईवी, तपेदिक और मलेरिया का मुकाबला करने में आश्चर्यजनक सफलता मिली है। अफ़्रीका में कुछ देशों में नए एचआईवी संक्रमणों में 50% जितनी अधिक तक की कमी हुई है, एड्स-संबंधी रोगों के मामले में मौतों की संख्या में 30-48% तक की कमी हुई है; तपेदिक के मामलों में 40% तक की कमी हुई है, और मलेरिया के मामलों में 30% तक की कमी हुई है।
लेकिन कुपोषण के कारण शैशवावस्था में विकास में रुकावट अभी भी उच्च स्तर पर बनी हुई है, इसमें इसी अवधि के दौरान केवल 1% की ही कमी हुई है। अफ़्रीका में, भुखमरी बच्चों की मृत्यु का प्रमुख कारण बना हुआ है, पाँच साल से कम के बच्चों में होनेवाली सभी मौतों में से आधी मौतें इसके कारण होती हैं और एड्स, तपेदिक, और मलेरिया को मिलाकर होनेवाली मौतों की तुलना में इससे होनेवाली मौतें अधिक होती हैं।
वास्तव में, बहुत से वैज्ञानिक अध्ययनों से पता चला है कि कुपोषित बच्चे में संक्रमण के संपर्क में आनेवाली अन्य बीमारियों से पीड़ित होने और उनसे अधिक समय तक पीड़ित रहने की कहीं अधिक संभावना होती है। उदाहरण के लिए, अतिसार बहुत अधिक कम वज़न वाले बच्चों के लिए एक घातक रोग है जिनकी आसानी से उपच���र की जा सकनेवाली किसी बीमारी से उनके मरने की संभावना 12 गुना अधिक होती है। और बहुत अधिक कम वज़न वाले बच्चों में मलेरिया से मरने की संभावना भी 9.5 गुना से अधिक होती है।
वास्तव में, अब इस बात की पुष्टि हो चुकी है कि बाल कुपोषण वैश्विक रोगों का प्रमुख कारण है और विश्व स्वास्थ्य संगठन के अनुसार 2011 में पाँच साल से कम आयु की सभी मौतों में से 45% इसके कारण हुई थीं। युद्ध आक्रांत मध्य अफ़्रीकी गणराज्य से हाल ही में प्राप्त रिपोर्टों से यह पता चलता है कि वहाँ गोलियों के बजाय भूख से अधिक बच्चे मर रहे हैं।
इन आँकड़ों से लगता है कि कुपोषण की समस्या से पार नहीं पाया जा सकता है। लेकिन इसके जग ज़ाहिर उपाय हैं: विटामिन ए, आयोडाइज़्ड नमक और पोषक खाद्य पदार्थ। केवल विटामिन ए की कमी के कारण ही हर साल आधा-मिलियन बच्चे अंधेपन के शिकार होते हैं, और उनमें से आधे अंधे होने के 12 महीनों के भीतर मर जाते हैं। इसी तरह, विकासशील देशों में बच्चे पैदा करने की उम्रवाली सभी महिलाओं में से आधी महिलाएँ लौह तत्व की कमी के कारण होनेवाली खून की कमी के कारण कमज़ोर रोगक्षम प्रणालियों का शिकार होती हैं।
कुपोषण के कारण होनेवाली दीर्घ-कालीन क्षति का डोमिनो प्रभाव होता है, शैक्षिक उपलब्धि बाधित होती है, और अंततः राष्ट्रीय अर्थव्यवस्थाएँ डगमगा जाती हैं। इस सतत संकट से निपटने के लिए धन – अनुमानतः $10 बिलियन प्रति वर्ष – और माताओं और बच्चों को जीवन-रक्षक समाधान उपलब्ध करने के लिए नई और बेहतर रणनीतियों की आवश्यकता होती है जिन्हें इन समाधानों की सबसे अधिक ज़रूरत होती है।
लेकिन यदि भुखमरी की लगात पर विचार किया जाए तो यह लागत उतनी अधिक चुनौतीपूर्ण नहीं लगती है। यूनिसेफ के अनुमान के अनुसार अफ़्रीका के बाल कुपोषण की लागत $25 बिलियन प्रति वर्ष है। और यह पूरी कहानी नहीं है। कुपोषण के कारण उत्पादकता की हानि और स्वास्थ्य देखभाल की उच्च लागतों के फलस्वरूप वैश्विक अर्थव्यवस्था पर अनुमानतः $3.5 ट्रिलियन प्रति वर्ष की लागत आती है।
इस चुनौती का मुकाबला करने, ज़िंदगियों को बचाने, और अर्थव्यवस्थाओं में सुधार लाने के लिए अफ़्रीका को कृषि क्षेत्र में व्यापक रणनीति और अधिक निवेश करने की आवश्यकता है।
अफ़्रीकी संघ ने वर्ष 2014 को कृषि और खाद्य सुरक्षा का वर्ष घोषित किया है, और इससे महाद्वीप के कृषि क्षेत्र का महत्वपूर्ण विकास होने की संभावना है। सिद्धांत रूप से, इसके फलस्वरूप पोषण में समग्र सुधार होना चाहिए; लेकिन कृषि में अधिक निवेश करना कोई रामबाण उपाय नहीं है। हमें पोषण-संवेदी कृषि कार्यक्रमों को तैयार करने की आवश्यकता है जिनमें लघु कृषक, परिवार, और बच्चे सम्मिलित हों।
भूमि के स्वामित्व और खेती संबंधी निर्णय लेने में महिलाओं के नियंत्रण में वृद्धि करने, और साथ ही घरेलू बागबानी तथा पशु और कुक्कुटपालन के ज़रिए घरेलू खाद्य उत्पादन को प्रोत्साहित करने की दृष्टि से दिए जानेवाले कृषि ऋणों और सहायताओं तक पहुँच उपलब्ध करना इस दिशा में एक बड़ा कदम होगा। अध्ययनों से पता चलता है कि पुरुषों की तुलना में महिलाओं में इसकी संभावना अधिक होती है कि वे अतिरिक्त आय को खाद्य और स्वास्थ्य पर खर्च करेंगी। उनकी कृषि आय और निर्णय लेने की क्षमता को बढ़ाने से अंततः बच्चों के स्वास्थ्य और पोषण पर बहुत अधिक प्रभाव पड़ता है।
इसके अतिरिक्त, कृषि संबंधी नीतियों, सहायताओं, और निवेशों से परंपरागत रूप से अनाजवाले कृषकों को लाभ पहुँचता रहा है। लेकिन नीति-निर्माताओं को माँस, फल और सब्ज़ियों जैसे अधिक पोषक खाद्यों तक पहुँच को बढ़ाने पर विचार करने पर ध्यान केंद्रित करना चाहिए जो गरीबों के लिए बहुत महँगे होते हैं।
कुपोषण जीवन के पहले पाँच हज़ार दिनों के दौरान सबसे अधिक क्षति पहुँचाता है जिसके फलस्वरूप शिशुओं के स्वास्थ्य पर गंभीर और अपरिवर्तनीय परिवर्तन होते हैं। अदृश्य भुखमरी के मामले में सचमुच सफलता पाने के लिए अफ़्रीका की सरकारों को वैश्विक विकास के साझेदारों की मदद से शीघ्रतापूर्वक कार्रवाई करनी चाहिए। अफ़्रीका में बाल भुखमरी के जानलेवा होने के लिए उसका उतना अधिक प्रभावशाली होना ज़रूरी नहीं है जितना कि कार्टर के 1993 के चित्र में दर्शाया गया है।
Ransoming Israel’s Chance for Peace
MADRID – The exchange of prisoners between enemies is often a prelude to political reconciliation.
Unfortunately, the recent exchange between Israel and Hamas, in which the Islamist organization gained the lion’s share of more than 1,000 prisoners in exchange for the Israeli soldier Gilad Shalit, does not augur well for the chances of an Israeli-Palestinian peace.
Contrary to appearances, the deal is not a reflection of both sides’ interest in beginning a political rapprochement that might lead to the end of the Gaza siege and other confidence-building measures.
This exchange reveals quite the opposite – that both parties are committed to their core values of resistance and confrontation.
For Israel, recovering Shalit was its way to uphold an ethos of unity in times of war, and to fulfill the army’s promise to its conscripts (and their families) that no soldier, dead or alive, would ever be left behind.
The message was that Israel must remain mobilized and alert in a hostile environment, and that its survival depends on the cohesion of its citizens’ army, as well as on solidarity with those sent into battle.
Controversial and divisive, the Shalit deal triggered a profoundly moral debate in one of the world’s most vibrant civil societies.
The deal is also, in the eyes of Israelis, a badge of honor for their res publica – their Periclean democracy’s claim to the moral high ground in an autocratic neighborhood.
For Hamas, on the other hand, the prisoner exchange embodied the core value of steadfastness.
It was about standing up to the Zionist enemy, the high-tech crusader whose military superiority can be defeated only by stubborn resistance.
Hamas believes that the deal vindicated the teachings of Hezbollah’s leader, Hassan Nassrallah, who has defined Israel as nothing but a “spider’s web” that can be destroyed with the whisper of a sword.
Both Hamas and Hezbollah are bound to conclude from Israel’s emotional collapse at the fate of one young soldier that its helplessness in dealing with psychological and sentimental dilemmas opens the way to its eventual strategic defeat.
Meanwhile, the deal severely compromised the leadership of Mahmoud Abbas, the president of the Palestinian Authority, who has been clamoring for years for the release of prisoners in order to boost his popular standing and enhance his position as Israel’s interlocutor for peace.
Hamas’ resounding success in bringing home the heroes of the Palestinian cause was a major defeat for Abbas – and a significant blow to the peace process.
The Shalit deal clearly gave a boost to the war camp in Palestine and weakened its champions of peace.
The sad irony is that Abbas is still cooperating with Israel in curtailing Hamas in the West Bank, and is still detaining hundreds of Hamas militants, among them some who were arrested for planning abductions of Israeli soldiers and civilians.
The Arab Spring has pushed Israel into a strategic trap from which it can extricate itself only through accommodation with the Palestinians.
In the current political climate, Arab leaders, whether conservative or revolutionary, can no longer afford to be seen as complicit with Israel and the United States in the region.
The Palestinian cause will now resonate louder than ever in the central squares of Cairo, Amman, and Ankara.
By freeing Gilad Shalit, Israeli Prime Minister Benjamin Netanyahu may have finally become a leader who can take difficult decisions.
He will need this quality to make bold moves on the peace process as well.
Admittedly, Hamas is no easy enemy, but neither is it immune to rational political calculations.True, its leader, Khaled Mashaal only recently declared in Tehran that “our aim is liberating all of Palestine from the River to the Sea.”More than once, however, he has also made conciliatory declarations.
But Israel is not required to sign a peace deal with the erratic Mashaal.
Its task is to boost Abbas, instead of weakening him, as it did in the Shalit deal.
It is in Israel’s best interest to reach a settlement with the man who has constantly repudiated his predecessors’ tactics of armed conflict.
Rating the Raters
CAMBRIDGE – In the new financial order being put in place by regulators around the world, reform of credit rating agencies should be a key element.
Credit rating agencies, which play an important role in modern capital markets, completely failed in the years preceding the financial crisis.
What is needed is an effective mechanism for rating the raters.
There is widespread recognition that rating agencies have let down investors.
Many financial products related to real estate lending that Standard &amp;
Poor, Moody’s, and Fitch rated as safe in the boom years turned out to be lethally dangerous.
And the problem isn’t limited to such financial products: with issuers of other debt securities choosing and compensating the firms that rate them, the agencies still have strong incentives to reciprocate with good ratings.
What should be done?
One proposed approach would reduce the significance of the raters’ opinions.
In many cases, the importance of ratings comes partly from legal requirements that oblige or encourage institutional investors and investment vehicles to maintain portfolios of assets that have received sufficiently high grades from the recognized agencies.
Disappointment about the raters’ performance, and skepticism about the effectiveness of regulation, has led to calls to eliminate any regulatory reliance on ratings.
If ratings are not backed by the force of law, so the argument goes, regulators need not worry about rating quality and can leave the monitoring of raters to the market.
Even if ratings were no longer required or encouraged by law, however, demand for ratings – and the need to improve their reliability – would remain.
Many investors are unable to examine the extent to which a bond fund’s high yield is due to risk-taking, and would thus benefit from a rating of the fund’s holdings.
Given past experience, we cannot rely on market reputation to ensure that such ratings will be reliable.
Another approach would be to unleash the liability system.
On this view, if investors were able to take raters to court, raters’ incentives would improve.
But, while such judicial scrutiny may be effective in eliminating some egregious cases, it cannot ensure that raters do the right thing when courts are not expected to be able to tell after the fact what the right thing was.
There is thus no substitute for providing raters with incentives to provide as accurate a rating as they can.
This can be done by making raters’ profits depend not on satisfying the issuers that select them, but on performing well for investors. If raters’ profits depend on such performance – on the accuracy of their ratings – the profit motive would turn from a source of perverse incentives to a provider of beneficial incentives.
The US Senate voted this month to incorporate such a mechanism into the financial reform bill that will now have to be reconciled by the bill passed by the US House of Representatives.
Under the Senate’s approach, regulators would create rules under which an independent regulatory board would choose raters.
The board would be allowed to base its choices on raters’ past performance.
For such a mechanism to work well, it must link the number of assignments won by raters, and thus their compensation, to appropriate measures of their performance.
Such measures should focus on what makes ratings valuable for the investors who use them – their accuracy in forecasting financial health.
Once developed, such a mechanism should not be limited (as, unfortunately, it is in the Senate’s bill) to ratings of structured financial products.
It should apply to all products that rating agencies evaluate.
All ratings of financial products raise the same incentive problems and could benefit from reform.
Predictably, the Senate’s bill encountered stiff resistance from the dominant rating agencies.
Standard &amp;
Poor argued that such a mechanism would provide credit rating agencies with “less incentive to compete with one another, pursue innovation, and improve their models, criteria, and methodologies.”
Well, such a mechanism would indeed reduce raters’ negative incentives to compete with one another to please issuers of securities, and to pursue innovations and improvements that enable raters to serve issuers better.
But it would strengthen raters’ positive incentives to compete with one another to produce accurate ratings, and to pursue innovations and improvements that enable raters to achieve that far more socially beneficial goal.
Rating agencies have been and should remain an important aspect of modern capital markets.
But to make ratings work, the raters need to be rated.
Taking Back Immigration
LONDON – Within hours of US President Barack Obama’s re-election last month, a powerful belief took hold: overwhelming support from Latino voters had helped to secure his victory.
Suddenly, the Republican Party, long identified with a hard line on immigration, started talking about the need for comprehensive reform.
Pundits argued that if the Republicans resisted reform, they would lose the Latino vote for the next generation, relegating their party to near-permanent opposition status.
That might or might not be true. But the American election’s implications for immigration run deeper than electoral expediency – with lessons for governments around the world.
The remarkable speed with which anti-immigration positions buckled indicates that what most Americans want, above all, is a rational approach; they want their political leaders to take responsibility for the issue, rather than running away from it.
When it comes to immigration, politicians usually are driven by fear – a tendency that has become even more acute since the onset of the global financial crisis.
The rise of extreme nationalists in places like Greece and Finland has reinforced the belief that talking about immigration, except to argue against it, is politically fraught.
So politicians either address immigration in the context of border security and cultural identity, or they ignore it.
But they might well be misreading their citizens’ concerns.
Voter reaction is often less about disliking immigrants than it is about a profound sense of frustration that governments have failed to create an immigration system that works.
They want a system that allows for the legal entry of needed workers, while preventing illegal entry; clamps down on exploitative employers; and provides resources to integrate immigrants into communities.
Voters might not like that some migrants enter their country illegally.
But many find it equally or even more unconscionable that migrants are forced to live for decades in the shadows – or that children raised by immigrant parents could be deported to countries that they have never seen.
When migration is undertaken in a legal, orderly way, the public supports it.
A recent transatlantic survey by the German Marshall Fund found that, while majorities in all countries were worried about illegal immigration, anxiety about legal immigration was low – with only 26% of European&#160;respondents expressing concern, and just 18% doing so in the United States.
Ceding the immigration debate to extremists has abetted another extraordinary distortion: people generally believe that the number of immigrants in their countries is far higher than it actually is.
In the same German Marshall Fund survey, British respondents estimated that 31.8% of the United Kingdom’s population was foreign born; the true figure is 11.3%.
Americans estimated that the US foreign-born population stood at 37.8% – triple the actual proportion, 12.5%.
Such false perceptions make it even more difficult to have a reasonable debate about the issues.
Tackling migration-related challenges is necessary regardless of whether one favors more or less immigration.
Today, according to the United Nations, there are 214 million people living outside their country of birth, up from approximately 82 million in 1970.
So, even if not a single new person were to cross a border, the challenges would still be with us.
The reality, of course, is that many countries, especially OECD members, will decide that they need more immigrants as their own populations age and shrink.
This implies that they should figure out how to manage immigration well, rather than outsourcing much of the process to smugglers and extremists.
And, in a world in which nearly half of migrants are now moving from one developing country to another, the problems are no longer confined to the West.
The good news is that there have been important advances during the last decade in managing migration.
For example, policymakers can draw on successful programs to integrate migrant children into educational systems.
They can learn how some countries are successfully matching their businesses’ labor needs with immigrants’ skills.
Developing countries, meanwhile, are getting smarter about how to leverage the $406 billion in remittances that their expatriate citizens will send home this year – by issuing diaspora bonds, for example, or by creating targeted investment opportunities for them.
Many pivotal stakeholders also are advocating for a more rational immigration system.
Labor unions, once known for their skepticism toward immigration, are increasingly in favor of pro-immigration reforms.
In fact, unions were a driving force behind last year’s Domestic Workers Convention, which seeks to protect the rights of the world’s estimated 50-100 million domestic workers.
By supporting smart, progressive reforms, politicians should at least be able to neutralize the issue of immigration on Election Day, if not turn it to their advantage.
More important, electoral politics aside, they would be helping to craft better societies whose politics are shaped by reasonable debate among citizens, not distorted by the community-destroying behavior of smugglers and extremists.
Rationality versus Intelligence
TORONTO – In 2002, the cognitive scientist Daniel Kahneman of Princeton University won the Nobel Prize in Economics for work done with his longtime collaborator Amos Tversky (who died in 1996).
Their work had to do with judgment and decision-making – what makes our thoughts and actions rational or irrational.
They explored how people make choices and assess probabilities, and uncovered basic errors that are typical in decision-making.&#160;
The thinking errors they uncovered are not trivial mistakes in a parlor game.
To be rational means to adopt appropriate goals, take the appropriate action given one’s goals and beliefs, and hold beliefs that are commensurate with available evidence.
It means achieving one’s life goals using the best means possible.
To violate the thinking rules examined by Kahneman and Tversky thus has the practical consequence that we are less satisfied with our lives than we might be.
Research conducted in my own laboratory has indicated that there are systematic individual differences in the judgment and decision-making skills that Kahneman and Tversky studied.
Ironically, the Nobel Prize was awarded for studies of cognitive characteristics that are entirely missing from the most well-known mental assessment device in the behavioral sciences: intelligence tests.
Scientists and laypeople alike tend to agree that “good thinking” encompasses sound judgment and decision-making – the type of thinking that helps us achieve our goals.
Yet assessments of such good (rational) thinking are nowhere to be found on IQ tests.
Intelligence tests measure important things, but they do not assess the extent of rational thought.&#160;
This might not be such a grave omission if intelligence were a strong predictor of rational thinking.
But my research group found just the opposite: it is a mild predictor at best, and some rational thinking skills are totally dissociated from intelligence.
To an important degree, intelligence tests determine the academic and professional careers of millions of people in many countries.
Children are given intelligence tests to determine eligibility for admission to school programs for the gifted.
Corporations and the military depend on assessment and sorting devices that are little more than disguised intelligence tests.
Perhaps some of this attention to intelligence is necessary, but what is not warranted is the tendency to ignore cognitive capacities that are at least equally important: the capacities that sustain rational thought and action.
Critics of intelligence tests have long pointed out that the tests ignore important parts of mental life, mainly non-cognitive domains such as socio-emotional abilities, empathy, and interpersonal skills.
But intelligence tests are also radically incomplete as measures of cognitive functioning, which is evident from the simple fact that many people display a systematic inability to think or behave rationally despite having a more than adequate IQ.
For a variety of reasons, we have come to overvalue the kinds of thinking skills that intelligence tests measure and undervalue other important cognitive skills, such as the ability to think rationally.&#160;
Psychologists have studied the major classes of thinking errors that make people less than rational.
They have studied people’s tendencies to show incoherent probability assessments; to be overconfident in knowledge judgments; to ignore the alternative hypothesis; to evaluate evidence with a “my side” bias; to show inconsistent preferences because of framing effects; to over-weigh short-term rewards at the expense of long-term well-being; to allow decisions to be affected by irrelevant context; and many others.
All of these categories of failure of rational judgment and decision-making are very imperfectly correlated with intelligence – meaning that IQ tests tend not to capture individual differences in rational thought.
Intelligence tests measure mental skills that have been studied for a long time, whereas psychologists have only recently had the tools to measure the tendencies toward rational and irrational thinking.
Nevertheless, recent progress in the cognitive science of rational thought suggests that nothing – save for money – would stop us from constructing an “RQ” test.
Such a test might prove highly useful.
Suboptimal investment decisions have, for example, been linked to overconfidence in knowledge judgments, the tendency to over-explain chance events, and the tendency to substitute affective valence for thought.
Errors in medical and legal decision-making have also been linked to specific irrational thinking tendencies that psychologists have studied.
There are strategies and environmental fixes for the thinking errors that occur in all of these domains.
But it is important to realize that these thinking errors are more related to rationality than intelligence.
They would be reduced if schools, businesses, and government focused on the parts of cognition that intelligence tests miss.&#160;
Instead, these institutions still devote far more attention and resources to intelligence than to teaching people how to think in order to reach their goals.
It is as if intelligence has become totemic in our culture.
But what we should really be pursuing is development of the reasoning strategies that could substantially increase human well-being.
Rattling the Renminbi
BEIJING – From July 2005 until this past December, China’s renminbi (RMB) appreciated steadily.
But then the RMB fell unexpectedly, hitting the bottom of the daily trading band set by the Peoples’ Bank of China (PBoC) for 11 sessions in a row.
Though the RMB has since returned to its previous trajectory of slow appreciation, the episode may have signaled a permanent change in the pattern of the exchange rate’s movement.
As long as China was running a trade surplus and receiving net inflows of foreign direct investment, the RMB remained under upward pressure.
Short-term capital flows had little impact on the direction of the RMB’s exchange rate.
There were two reasons for this.
First, thanks to an effective – albeit porous – capital-control regime in China, short-term “hot money” (capital coming into China aimed at arbitrage, rent-seeking, and speculation) could not enter (and then leave) freely and swiftly.
Second, short-term capital flows usually would strengthen rather than weaken upward pressure on the RMB’s exchange rate, because speculators, persuaded by China’s gradual approach to revaluation, bet on appreciation.
So why, if China was still running a decent current-account surplus and a long-term capital surplus, did the RMB suddenly depreciate, forcing the PBoC to intervene (though not very vigorously) to prevent it from falling further?
Many economists outside of China have argued that the December depreciation resulted from betting by investors that Chinese policymakers, facing the prospect of a hard landing for the economy, would slow or halt currency appreciation.
But if that were true, we would now be seeing significant long-term capital outflows and heavy selling of RMB for dollars in China’s foreign-exchange market.
We see neither reaction.
More importantly, the RMB’s slow appreciation resumed fairly promptly after December’s dip, while investors’ bearish sentiments about China’s economy remain consistent.
In fact, the RMB’s sudden fall in December reflects China’s liberalization of cross-border capital flows.
That process began in April 2009, when China launched the pilot RMB Trade Settlement Scheme (RTSS), which enables enterprises, especially larger ones, to channel their funds between Mainland China and Hong Kong.
As a result, an offshore RMB market, known as the CNH market, was created in Hong Kong alongside the onshore market, now dubbed the CNY market.
But, in contrast to the CNY, the CNH is a free market.
Given expectations of RMB appreciation and a positive interest-rate spread between Mainland China and Hong Kong, the RMB had a higher value in dollar terms on the CNH than on the CNY market.
That difference led to active exchange-rate arbitrage by mainland importers and multinational firms – one form of capital inflows from Hong Kong to the mainland.
Correspondingly, RMB liabilities owed by mainland Chinese and multinationals increased, as did RMB assets held by Hong Kong residents.
Exchange-rate arbitrage by mainland importers and multinationals creates upward pressure on the CNY and downward pressure on the CNH.
In an economy with flexible interest and exchange rates, arbitrage eliminates the exchange-rate spread quickly.
But, because China’s exchange rate and interest rates are inflexible, the CNH-CNY spread persists, and arbitragers are able to reap fat profits at the economy’s expense.
Last September, however, financial conditions changed suddenly in Hong Kong.
The liquidity shortage caused by the European sovereign debt-crisis led developed countries’ banks – especially European banks with exposure in Hong Kong – to withdraw their funds, taking dollars with them.
As a result, the CNH fell against the dollar.
At the same time, the shortage of dollars had not yet affected the CNY, which remained relatively stable.
The CNH therefore became cheaper than the CNY.
Consequently, mainland importers and multinationals stopped buying dollars from the CNH market and returned to the CNY market.&#160;At the same time, mainland exporters stopped selling dollars in the CNY market and turned to the CNH market.
The dollar shortage created depreciation pressures on the CNY, which the PBoC declined to offset.
The CNY was thus bound to fall, which it did last September.
Reverse arbitrage meant capital outflows from the Chinese mainland.
Correspondingly, RMB liabilities owed by mainlanders and multinationals decreased, as did RMB assets held in Hong Kong.
In fact, increases in financing costs and uncertainty about RMB appreciation prompted a partial sell-off of RMB assets by Hong Kong residents.
In short, because the RTSS made cross-border capital movements much easier, short-term flows have become a major factor in determining the RMB’s exchange rate.
External shocks affect the offshore exchange rate first, and then feed through to the onshore exchange rate.
The RMB will continue to appreciate in the near future, owing to strong economic fundamentals, but the inherent instability of short-term capital flows will make its exchange rate more volatile.
This change is bound to pose new challenges for decision makers in the United States and China, particularly as they engage in a fresh round of debate about China’s exchange-rate policy.
Read China’s Lips
NEW HAVEN – The Chinese have long admired America’s economic dynamism.
But they have lost confidence in America’s government and its dysfunctional economic stewardship.
That message came through loud and clear in my recent travels to Beijing, Shanghai, Chongqing, and Hong Kong.
Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw.
Senior Chinese officials are appalled at how the United States allows politics to trump financial stability.
One high-ranking policymaker noted in mid-July, “This is truly shocking… We understand politics, but your government’s continued recklessness is astonishing.”
China is no innocent bystander in America’s race to the abyss.
In the aftermath of the Asian financial crisis of the late 1990’s, China amassed some $3.2 trillion in foreign-exchange reserves in order to insulate its system from external shocks.
Fully two-thirds of that total – around $2 trillion – is invested in dollar-based assets, largely US Treasuries and agency securities (i.e., Fannie Mae and Freddie Mac).
As a result, China surpassed Japan in late 2008 as the largest foreign holder of US financial assets.
Not only did China feel secure in placing such a large bet on the once relatively riskless components of the world’s reserve currency, but its exchange-rate policy left it little choice.
In order to maintain a tight relationship between the renminbi and the dollar, China had to recycle a disproportionate share of its foreign-exchange reserves into dollar-based assets.
Those days are over.
China recognizes that it no longer makes sense to stay with its current growth strategy – one that relies heavily on a combination of exports and a massive buffer of dollar-denominated foreign-exchange reserves.
Three key developments led the Chinese leadership to this conclusion:
First, the crisis and Great Recession of 2008-2009 were a wake-up call.
While Chinese export industries remain highly competitive, there are understandable doubts about the post-crisis state of foreign demand for Chinese products.
From the US to Europe to Japan – crisis-battered developed economies that collectively account for more than 40% of Chinese exports – end-market demand is likely to grow at a slower pace in the years ahead than it did during China’s export boom of the past 30 years.
Long the most powerful driver of Chinese growth, there is now considerable downside to an export-led impetus.
Second, the costs of the insurance premium – the outsize, largely dollar-denominated reservoir of China’s foreign-exchange reserves – have been magnified by political risk.
With US government debt repayment now in play, the very concept of dollar-based riskless assets is in doubt.
In recent years, Chinese Premier Wen Jiabao and President Hu Jintao have repeatedly expressed concerns about US fiscal policy and the safe-haven status of Treasuries.
Like most Americans, China’s leaders believe that the US will ultimately dodge the bullet of an outright default.
But that’s not the point.
There is now great skepticism as to the substance of any “fix” – especially one that relies on smoke and mirrors to postpone meaningful fiscal adjustment.
All of this spells lasting damage to the credibility of Washington’s commitment to the “full faith and credit” of the US government.
And that raises serious questions about the wisdom of China’s massive investments in dollar-denominated assets.
Finally, China’s leadership is mindful of the risks implied by its own macroeconomic imbalances – and of the role that its export-led growth and dollar-based foreign-exchange accumulation plays in perpetuating those imbalances.
Moreover, the Chinese understand the political pressure that a growth-starved developed world is putting on its tight management of the renminbi’s exchange rate relative to the dollar – pressure that is strikingly reminiscent of a similar campaign directed at Japan in the mid-1980’s.
However, unlike Japan, China will not accede to calls for a sharp one-off revaluation of the renminbi.
At the same time, it recognizes the need to address these geopolitical tensions.
But China will do so by providing stimulus to internal demand, thereby weaning itself from relying on dollar-based assets.
With these considerations in mind, China has adopted a very transparent response.
Its new 12th Five-Year Plan says it all – a pro-consumption shift in China’s economic structure that addresses head-on China’s unsustainable imbalances.
By focusing on job creation in services, massive urbanization, and the broadening of its social safety net, there will be a big boost to labor income and consumer purchasing power.
As a result, the consumption share of the Chinese economy could increase by at least five percentage points of GDP by 2015.
A consumer-led rebalancing addresses many of the tensions noted above.
It moves economic growth away from a dangerous over reliance on external demand, while shifting support to untapped internal demand.
In addition, it takes the heat off an undervalued currency as a prop to export growth, giving China considerable leeway to step up the pace of currency reforms.
But, by raising the consumption share of its GDP, China will also absorb much of its surplus saving.
That could bring its current account into balance – or even into slight deficit – by 2015.
That will sharply reduce the pace of foreign-exchange accumulation and cut into China’s open-ended demand for dollar-denominated assets.
So China, the largest foreign buyer of US government paper, will soon say, “enough.”
Yet another vacuous budget deal, in conjunction with weaker-than-expected growth for the US economy for years to come, spells a protracted period of outsize government deficits.
That raises the biggest question of all: lacking in Chinese demand for Treasuries, how will a savings-strapped US economy fund itself without suffering a sharp decline in the dollar and/or a major increase in real long-term interest rates?
The cavalier response heard from Washington insiders is that the Chinese wouldn’t dare spark such an endgame.
After all, where else would they place their asset bets?
Why would they risk losses in their massive portfolio of dollar-based assets?
China’s answers to those questions are clear: it is no longer willing to risk financial and economic stability on the basis of Washington’s hollow promises and tarnished economic stewardship.
The Chinese are finally saying no.
Read their lips.
Read This!
NEW YORK – Forget about innovation and exotic new technology.
People still haven’t learned to use the technology we already have.
I spent many of my spare hours over the last month adjusting to a new e-mail program after abandoning Eudora and my PC for a Mac with AppleMail.
It has been a challenge, but what I really want to talk about is all the messages in my inbox: Why are they still there?
Consider me a proxy for the person you may be trying to reach by email and persuade to act, whether it’s introducing you to a third party, setting a date, investing some money, or just responding to you in some way.
While there are lots of e-mails I respond to promptly, I also have about 400 that are marked as “read” but with no response.
Yes, I should be more diligent…but what is it about those 400 messages that makes them languish in my inbox?
Perhaps you might find the reasons useful as a kind of “don’t” list.
First, they may lack a subject line.
(This one is basic, but a few people still just forget to add one.)
That makes the message easy to miss, or even to dismiss as spam.
Or perhaps the subject line is useless, like “Message from Juan.”
I know that already.
Or at least I do if the sender has a proper return address. And, yes, please, he or she should have a full name, such as Alice Haynes, not just Alice.
Chances are I know several Alices.
Or there’s a subject line: “Message for Esther.”
I know that, too.
She could, perhaps, say “Message for President Obama” if she were sharing an open letter, but otherwise…
The best subject line says what the message is about and signals the desired response: “Invitation to speak in Paris on July 14.”
Unfortunately, I get lots of messages headlined, “Update.”
Unless I know the person’s name, I might not even know what company it’s about. “Update,” to me, translates as “read later.”
But this update message ends with a question: “We’re hoping to have our next meeting in mid-July.
Will you be available?”
I might not get to the end of the mail for quite a while… mid-July, perhaps.
It’s important to say upfront what you want; that way you have some chance of getting it.
There are other e-mail sins.
It’s good to know what you want, but remember that you should really be thinking of how to motivate your reader.
Take the familiar example: Alice asks, “Could you please introduce me Juan Tigar?”
Sure, I’d be happy to, but why?
Even if I know, and I may or may not, Alice should make it easy for me to do her the favor.
You’ve heard of one-click shopping; try one-click introductions. “Dear Esther,
“Could you please pass along this message to Juan Tigar?
I am a big fan of HotNewThing, and I understand they need a new marketing manager.
My own experience as marketing manager for TiredOldThing makes me an ideal candidate for this job.
I positioned TOT’s products as traditional and valuable, and helped sell the company for $20 million. Now I’d like to take on a new challenge and help position HotNewThing as edgy and innovative.
I have several ideas about HNT’s strategy against ZippyNewThing (too edgy) and I’d love to have a chance to discuss them with Juan.
I’d be happy to send a bio and references on request.”
No problem!
All I have to do is click reply, find Juan’s e-mail address, add a brief comment and hit send.
But, more often, the message dumps the work on me.
I must try to remember the stories Alice told me, figure out how her skills are relevant to Juan’s problems and compose a note.
So I decide to handle some other messages first.
Or I reply to Alice asking her to send me a paragraph or two – and lose my enthusiasm for the project.
It’s not that I’m mean or lazy. It’s that I have 400 other messages begging for attention.
Other requests that don’t get my immediate attention include the second question in a two-request message.
Once I have addressed the first one, I tend to forget or defer the second one.
Just send two messages, so that I can get the satisfaction of handling each one.
Nor do I reliably read attachments or follow links, unless the message text is really exciting.
First, I may not be online and may not even be able to open the attachment or follow the link.
Second, in these days of spam and malware, it’s not safe to open attachments you are not expecting.
If I get an e-mail that says “please read” from someone I don’t know, I simply delete it.
Finally, I’m busy!
When I get a batch of, say, 40 messages after a long flight or in the morning, guess what I don’t do?
I don’t click to a Web site invitation or a presentation.
So, I hope my message is clear.
The key thing to think about when sending an email is not the message you send, but the message the recipient receives.
Will it stand out in a sea of messages?
Will it spur the reader to take the action you want?
As I read this, I know I sound like a lazy, distracted person who can’t be bothered to be helpful. But your goal is not to reform me or others like me.
It’s to help us answer your message promptly.
The easier you make things, the more likely you are to get the response you want.
Realism\u0027s Gift to Palestinian Radicals
In support of Ariel Sharon's plan to evacuate unilaterally all Gaza settlements and a few in the West Bank, the Bush administration backed Israel's stance on borders and refugees, two of the most important issues of Palestinian-Israeli final status negotiations.
This position is in clear violation of the text of the "roadmap" to achieve a Palestinian/Israeli peace, which the Bush administration claims it continues to believe in.
That claim does not withstand scrutiny.
President Bush assured the Israelis that, given the "new realities on the ground, including already existing major Israeli population centers," Israel does not have to return all the territories it occupied in 1967.
Moreover, in Bush's view, Israel need not worry about allowing Palestinian refugees to return to their homes inside Israel.
Instead, the vast majority of refugees are expected to settle in a Palestinian state.
Given Palestinian public opinion, the most likely outcome of Sharon's disengagement plan is the empowerment of Hamas and other Palestinian militants.
By presenting the settlements' evacuation as a unilateral step, Sharon allows Palestinian militants to present it as Israel bowing to the "reality" of defeat inflicted by their armed struggle.
Indeed, a survey that I conducted in April 2004 found that two-thirds of Palestinians saw the Israeli plan in just this light.
The same survey showed Hamas with more public support than the nationalist Fatah in the Gaza Strip.
Israel's disengagement plan presents the evacuation of Gaza settlements as an end to 37 years of occupation.
But at the same time, Israel insists that Gaza will not have any attributes of sovereignty and will continue to be governed by existing arrangements covering most aspects of security and civil administration.
This means that the Israeli military will continue to enter Gaza at will and maintain control over border crossings, airspace, and territorial waters.
Nor will the Israeli military be withdrawn from the strip of land along the Palestinian-Egyptian border.
These conditions rule out any possibility of forging a security plan that would receive the support of all factions, including Hamas.
Under such conditions, the option of Hamas agreeing to a cease-fire and some form of power sharing with the Fatah-led Palestinian Authority would no longer be viable.
Sharon's disengagement plan may ultimately render the Gaza Strip little more than a suffocating ghetto isolated from Israel and the rest of the world.
While the new American positions do not represent a revolutionary change in US policy, they do represent a clear procedural and indeed substantive departure from previous American positions, particularly those of the Clinton administration.
The so-called "Clinton Parameters," which were presented just before the end of Clinton's second term, sought to preclude Israeli annexation of parts of the occupied territories by conditioning any border changes on "territorial swaps and other arrangements."
Similarly, while clearly advocating the absorption of refugees in the Palestinian state, the Parameters did not exclude Israel from the list of countries in which refugees could choose to live.
Indeed, the Palestinians themselves have always agreed to absorb refugees in their future state, but this was conditional on granting refugees the right to choose.
In almost all previous final status negotiations, Israel has agreed to accept a certain number of refugees as part of its contribution to help close this historical file.
With his letter, President Bush managed to punish the Palestinians twice: by making significant concessions on their behalf and by excluding them from negotiations.
On the other hand, Israel was rewarded twice: by receiving US assurances of significant Palestinian concessions, and by being relieved from paying a price in return for these concessions.
Aside from forcing Palestinian concessions on borders and refugees, the US also relieved Israel of the need to negotiate with the Palestinians until they change their leadership.
Most discouragingly, the American assurances will likely discredit Palestinian moderates and the positions they have advocated regarding the need for mutual concessions with Israel.
From now on, the Bush statement will strongly affect the framing of the solution to the issues of territory and refugees.
Under normal conditions of give and take, the idea of mutual concessions finds acceptance among the majority of Palestinians.
Now, however, the one-sidedness of the US approach is likely to discredit possible compromises in the eyes of the public.
Radicals will remind Palestinians that these two concessions represent a US-Israeli imposition and an attempt to force the Palestinians to bow to the realities of occupation and dispossession.
So concessions that were deemed legitimate and acceptable may now become illegitimate and unacceptable.
Moderate leaders who advocate these concessions in the context of give-and-take negotiations may become weaker and hardliners stronger.
For the Palestinians, the bottom line in the Sharon plan and the Bush letter is that diplomacy and negotiations no longer have a role: Israeli unilateralism, combined with American prejudgment, makes that clear.
The message is that any peace agreement can only come at the expense of Palestinian rights.
Facts on the ground will be understood as the ultimate arbiters, no matter how illegal and unjust they may be.
For Israel and its US supporters, this strategy has the seeming appeal of hardheaded realism.
But attempting to formalize a fait accompli will most likely lead nowhere in the direction of lasting peace, for under such conditions, Palestinians would have no reason to abandon violence.
Reasoning with Iran
PARIS – Negotiations over Iran’s nuclear program have been stalled for more than three years.
For six years, the voices of reason have largely been drowned out, with passions and delusions claiming primacy.
Countries sitting on their own nuclear arsenals seem to think that they can give Iran orders; it’s a case of “do as I say, not as I do.”
Another favorite delusion in the West is to believe that Iran will surrender if pressure is steadily increased.
Anyone familiar with Iran knows that this provokes only a defiant response.
But Iran, too, harbors illusions, including the notion that it can count on support from non-Western countries, or at least from some sort of Islamic caucus.
Yet, at each stage in the crisis, Iran’s supposed “friends” have let it down.
Iran has also believed that it could split France, and perhaps Germany, away from the United States – as if either country would risk infuriating the Americans for the sake of a leader like Mahmoud Ahmadinejad.
Above all, Iran deludes itself that it can develop an advanced nuclear program by itself.
In fact, continued isolationism would force Iran to reinvent nuclear technologies already invented by others, no doubt with poor results.
Passions abound.
The West feels repugnance over the Iranian regime’s cynical human rights transgressions and hypocritical mixing of religion and politics.
Western public opinion abhors the constant insults directed at Israel, Jews, and the West in general.
There is a profound conviction in the West that an Iranian regime such as this must want nuclear weapons, and that it is acting accordingly.
But Iran has been forecast to develop the bomb for 20 years.
People remain convinced that next year, or maybe the year after, the prediction will come true.
Thus, insidiously, the burden of proof is shifted.
As Angela Merkel said at the United Nations in 2007: “The world does not need to prove to Iran that Iran is building an atomic bomb.
Iran must persuade the world that it does not want the Bomb.” Emotions run high in Iran too, which is happy to return to its familiar role as eternal victim in plots by the Great Powers.
From time to time, Mohammed El Baradei, Director General of the International Atomic Energy Agency (IAEA), has attempted to reintroduce reason and remind everyone that the focus must remain on capabilities, not intentions.
This raises the practical question of what Iran’s current bomb-making capability is.
Would it be possible to detect in advance clandestine activity aimed at producing one, and, if so, what would Iran have to pledge in the matter of inspections and checks, and how might such pledges be obtained?
We know that Iran has made progress with the centrifuge technology essential for producing the enriched uranium needed for nuclear weapons.
It is likely that Iranian teams have been working on the mechanics of a nuclear explosive device, at least at the blueprint stage, and the country is also developing ballistic missiles that would bring many regional capitals within range of a nuclear attack – Israeli cities, of course, being the obvious targets.
That said, Iran must still bring all of these programs together, and that cannot happen undetected.
Iran may be capable of producing sufficient nuclear material to make one or two bombs within the next couple of years, but such activities would inevitably come into the open, because Iran would either have to enrich the uranium under the eyes of IAEA inspectors or expel them, giving the game away.
At this stage, Iran still needs at least a year or longer to assemble one or two crude Hiroshima-type bombs.
The hardest part still lies ahead: the miniaturization needed to fit a nuclear device into a warhead.
Here, too, Iranian testing would also be easily detected.
So, to build a credible nuclear arsenal, Iran would need a decade or longer.
No one can say for sure that Iran’s regime has formally adopted a nuclear weapons program.
Although many Iranian leaders no doubt toy with the idea, others are carefully weighing the costs of such a venture – the risks of preventive strikes from outside, increased isolation, and a regional nuclear arms race.
The West’s options will continue to narrow if it maintains its present course.
It is a great pity that formal negotiations with Iran have been stalled since 2005 amid Western demands that Iran suspend all of its enrichment-related activities.
Three years have been wasted, and we have seen no signs of suspension or willingness to negotiate.
Do negotiations stand any chance of success with Ahmadinejad as president?
The answer is “no” if our objective remains forcing Iran to renounce all activity on centrifugation.
But this objective was also unattainable under President Mohammad Khatami, Ahmadinejad’s reform-minded predecessor.
Acquisition of this technology was, even then, a national priority.
If we alter course, progress may still be possible.
For example, if Iran’s nuclear activities were to be surrounded with enough voluntarily accepted checks and controls, we could be confident of detecting at an early stage any diversion toward military purposes.
Iran could develop its civil nuclear program while remaining a signatory to the Nuclear Non-Proliferation Treaty; the IAEA would be able to fulfill its role as watchdog; and perhaps confidence in Iranian intentions would slowly be restored.
We cannot know whether this course of action is realistic unless we try it.
But we do know that the alternatives – increasing sanctions, military strikes, and perhaps war – would have unforeseeable consequences.
Only rational behavior by the West has any chance of eliciting a rational response from Iran.
Rebalancing Priorities
Rebalancing the Eurozone
WASHINGTON, DC – The eurozone crisis unfolded primarily as a sovereign-debt crisis mostly on its southern periphery, with interest rates on sovereign bonds at times reaching 6-7% for Italy and Spain, and even higher for other countries.
And, because eurozone banks hold a substantial part of their assets in the form of eurozone sovereign bonds, the sovereign-debt crisis became a potential banking crisis, worsened by banks’ other losses, owing, for example, to the collapse of housing prices in Spain.
So a key challenge in resolving the eurozone crisis is to reduce the southern countries’ debt burdens.
The change in a country’s debt burden reflects the size of its primary budget balance (the balance minus interest payments) as a share of GDP, as well as the difference between its borrowing costs and its GDP growth rate.
When the difference between borrowing costs and growth becomes too large, the primary budget surpluses required to stop debt from increasing become impossible to achieve.
Indeed, growth in southern Europe is expected to be close to zero or negative for the next two years, and is not expected to exceed 2-3% even in the longer term.
While not always evident from the headlines, an underlying cause of the eurozone crisis – and now an obstacle for growth in the south – has been the divergence in production costs that developed between the peripheral countries, notably the “south” (specifically, Greece, Spain, Italy, and Portugal) and the “north” (for simplicity, Germany) during the first decade after the introduction of the euro.
Unit labor costs in the four southern countries increased by 36%, 28%, 30%, and 25%, respectively, from 2000 to 2010, compared to less than 5% in Germany, resulting in an end-2010 cumulative divergence above 30% in Greece and more than 20% in Portugal, Italy, and Spain.
Unit labor costs reflect compensation levels and productivity: gains in productivity can offset the effect of wage growth.
Productivity performance did not vary dramatically between northern and southern European countries from 2000 to 2010 – in fact, average annual productivity growth was faster in Greece than in Germany (1% versus 0.7%).
But labor costs increased much faster in the south, resulting in differential cost increases that cannot be addressed by devaluation as long as the monetary union endures.
As long as this internal divergence persists, the euro crisis cannot be fully resolved, because current-account deficits and/or slow growth will continue to stalk the southern European countries, perpetuating worries about sovereign debt and commercial banks.
In this context, productivity growth – whether through technical progress, better allocation of resources, or productive investment – is as important a variable for the southern economies as wage restraint is.
Indeed, excessive wage deflation is likely to have negative effects on productivity.
Skilled labor is likely to emigrate faster, and extreme austerity, falling prices, and high unemployment – and the resulting likelihood of social tension – are not exactly conducive to investment, innovation, or labor mobility.
Likewise, while reducing employment is one way to boost productivity, it implies high macroeconomic costs in terms of lost revenues and higher social spending.
Perhaps even more importantly, economic policy should not break a society’s confidence in itself; what economists call “animal spirits” must be able to reflect hope for the future.
For all of these reasons, excessive austerity and deflation could defeat its own purpose and make the “reforms” to improve the southern European countries’ competitiveness impossible to implement.
The right approach must combine reasonable wage restraint and low (but not negative) inflation with microeconomic policy measures aimed at encouraging productivity increases.
Moreover, it is clear that northern European countries could help to close the competitiveness gap more rapidly by encouraging faster wage growth.
Indeed, Western policy-makers’ strong focus on persuading the Chinese authorities to permit greater appreciation of their currency is puzzling when one considers that Germany’s current-account surplus, as a share of GDP, is now much larger than China’s.
Reversing the large differential in unit labor costs that has emerged in the euro’s first decade thus requires not only wage restraint and productivity-enhancing reforms in the south, but also higher wage gains in the north.
A simulation shows that if German wages grew at 4% annually instead of the 1.5% of the last decade, and if annual productivity growth in Spain accelerated to 2% (it was close to 0.7% in both countries), Spain could reverse the unit-labor-cost differential that emerged with Germany since 2000 in five years, with Spanish wages growing at about 1.7% per annum.
This should not be an impossible scenario.
It would require restraint in Spain, where wages grew at an average annual rate of 3.4% in 2000-2010, as well as a serious effort to accelerate productivity growth.
But it would not require falling wages or significant price deflation: annual wage growth of 1.7% and productivity growth of 2% would be compatible with inflation close to zero.
Productivity growth at the historical rate of 0.7% in Germany, with wage growth of 4%, would be compatible with an inflation rate a little above 3%.
In short, internal adjustment in the eurozone is achievable without serious deflation in the south, provided that productivity growth there accelerates, and that the north does its part by encouraging modestly faster wage gains.
The smaller current-account surplus in northern Europe that might result from this should itself be welcome.
If the north insists on maintaining the low wage growth of the 2000-2010 period, internal adjustment would require significant unemployment and deflation in the south, making it more difficult and perhaps politically impossible to achieve. &nbsp;
Rebalancing the US-China Economic Relationship
CAMBRIDGE – As the global economy stabilizes, there is a growing danger that the United States and China will slip back into their pre-crisis economic patterns, placing themselves and the rest of the world at risk.
Despite Chinese official rhetoric about the need for a new global currency to replace the dollar, and US lawmakers’ flirtation with “Buy American” clauses (which scares everyone, not just the Chinese), no one will want to rock a boat that has almost capsized.
So China continues to run a giant trade surplus, and the US continues to spend and borrow.
Short-run stability certainly seems attractive right now.
But if the US-China trade and debt relationship merely picks up where it left off, what will prevent recurrence of the same unsustainable dynamic that we just witnessed?
After all, huge US foreign borrowing was clearly a key factor in creating the recent financial mess, while China’s excessive reliance on export-driven growth has made it extraordinarily vulnerable to a sudden drop in global demand.
A giant fiscal stimulus in both countries has helped prevent further damage temporarily, but where is the needed change?
Wouldn’t it be better to accept more adjustment now in the form of slower post-crisis growth than to set ourselves up for an even bigger crash?
True, both the US administration and China’s leadership have made some sensible proposals for change. But is their heart in it?
US Treasury Secretary Timothy Geithner has floated a far-reaching overhaul of the financial system, and China’s leaders are starting to take steps towards improving the country’s social safety net.
Both of these measures should help a lot in bringing the US and Chinese trade balances toward more sustainable levels.
Greater financial regulation in the US means consumers will not be able to borrow so easily to rack up huge mortgage and credit card debt.
Chinese consumers, on the other hand, might actually start spending more of their income if they can worry a bit less about saving for health care, their children’s education, and their old-age retirement.
Nevertheless, there is cause for concern.
As the world seems to emerge from its horrific financial crisis, it is human nature for complacency to set it, and the domestic politics of the US-China trade and financial relationship is deeply rooted.
One shudders to think what lessons the US financial sector will draw if, after the multi-trillion dollar bailout, there are only superficial, toothless reforms.
And will China’s coastal export interests again prevail in exchange rate policy decisions, at the expense of poor inland consumers?
Another reason to worry is that the global recovery is still fragile.
US and Chinese leaders have fought the crisis with not only massive fiscal stimulus, but also deep intervention into credit markets.
Such extraordinary fiscal largesse, all at taxpayers’ expense, cannot continue indefinitely.
World Bank President Robert Zoellick has rightly warned that all this massive temporary fiscal stimulus is a “sugar high” that will ultimately pass without deeper reforms.
As I have argued before, the endgame to the financial bailouts and fiscal expansion will almost certainly mean higher interest rates, higher taxes, and, quite possibly, inflation.
For better or for worse, it may not be possible to turn back the clock.
The US consumer, whose gluttony helped fuel growth throughout the world for more than a decade, seems finally set to go on a diet.
In addition to tighter credit, falling home prices and high unemployment will continue to put a crimp on US consumer spending.
Frankly, higher US personal saving rates would not be a bad thing.
It would almost certainly help reduce the risk of an early repeat of the financial crisis.
The obvious candidates to replace them are Chinese and other Asian consumers, whose combined economies are more than equal to that of the US.
But are Asian governments prepared to abandon their mercantilist paradigm?
Outside Japan, Asia policymakers certainly don’t seem amenable to exchange-rate appreciation
Since the beginning of this decade, at least a few economists (including me) have warned that the global trade and current-account imbalances needed to be reined in to reduce the chance of a severe financial crisis.
The US and China are not solely responsible for these imbalances, but their relationship is certainly at the center of it.
Prior to the crisis, there was plenty of talk, including high-level meetings brokered by the International Monetary Fund, but only minimal action.
Now, the risks have spilled out to the entire world.
Let’s hope that this time there is more than talk. If US and Chinese policymakers instead surrender to the temptation of slipping back to the pre-crisis imbalances, the roots of the next crisis will grow like bamboo.  And that would not be good news for the US and China, or anyone else.
Re-Booting DDT
PALO ALTO – Microsoft co-founder Bill Gates is fascinating. So is the 19-page annual letter that describes the work of the Bill and Melinda Gates Foundation, the world’s largest philanthropy.
But for someone as smart as Gates, who can afford to hire experts on any subject under the sun, some of his foundation’s strategies are baffling.
Consider his foundation’s approach to malaria, which focuses on bed nets, a low-tech, only modestly effective intervention, and on the development of a vaccine, a high-tech solution that has eluded intensive efforts for decades.
This approach dismisses an old, cheap, and safe way to control the vector – the Anopheles mosquito – that spreads the disease: the chemical DDT.
Malaria is a scourge, particularly for inhabitants of poor tropical countries.
Forty-one percent of the world's population live in areas where malaria is transmitted, with 350-500 million cases each year.
The disease imposes substantial costs on individuals, families, and governments.
Costs to individuals and their families include drugs, travel to and treatment at clinics, lost time at work and school, and expenses for preventive measures.
Costs to governments include maintenance of health facilities, purchases of drugs and supplies, public-health interventions such as spraying insecticide or distributing insecticide-treated bed nets, and lost revenue from taxes and tourism.
Such costs are a huge economic burden on malaria-prone countries and impede their development.
It has been estimated that annual economic growth in countries with a high incidence of malaria is 1.3 percentage points lower than that of other countries.
Drugs called artemisinins are safe and exhibit potent, rapid anti-malarial activity.
In combination with other anti-malarials, they have been used effectively for several years to treat multiple-drug-resistant malaria.
But resistance has arisen and will surely increase, so that in the absence of a vaccine, elimination of the mosquitoes that spread the disease is the key to preventing epidemics.
Unfortunately, flawed public policy limits the available options.
In 1972, on the basis of data on toxicity to fish and migrating birds (but not to humans), the United States Environmental Protection Agency banned virtually all uses of DDT, an inexpensive and effective pesticide once widely deployed to kill disease-carrying insects.
DDT was subsequently banned for agricultural use worldwide under the 2001 Stockholm Convention on Persistent Organic Pollutants, which stigmatized the chemical and effectively constituted a prohibition.
A basic principle of toxicology is that the dose makes the poison.
Although DDT is a (modestly) toxic substance, there is a world of difference between applying large amounts of it in the environment – as farmers did before it was banned – and using it carefully and sparingly to fight mosquitoes and other disease-carrying insects.
(When it is used at all now, it is now sprayed indoors in small amounts to prevent mosquitoes from nesting.)
The regulators who banned DDT also failed to take into consideration the inadequacy of alternatives.
Because it persists after spraying, DDT works far better than many pesticides now in use, some of which are toxic to fish and other aquatic organisms.
With DDT unavailable, many mosquito-control authorities are depleting their budgets by repeated spraying with short-acting, marginally effective insecticides.
Moreover, even if mosquitoes become resistant to the killing effects of DDT, they are still repelled by it.
An occasional dusting of window frames and doorframes is extremely effective.
Bill Gates’s experts seem not to know that; the foundation’s annual letter contains the following single mention of DDT: “The world hoped in the 1950s and 1960s that [malaria] could be eliminated by killing mosquitoes with DDT, but that tactic failed when the mosquitoes evolved to be resistant to the chemical.”
Since DDT was banned, insect-borne diseases such as malaria and dengue have been on the rise.
In fact, the huge toll of diseases spread by mosquitoes has led some public-health officials to rethink DDT’s use.
In 2006, after roughly 50 million preventable deaths, the United Nations’ World Health Organization reversed course and endorsed the use of DDT to kill and repel Anopheles mosquitoes.
Arata Kochi, the WHO official in charge of malaria said, “We must take a position based on the science and the data.
One of the best tools we have against malaria is indoor residual spraying.
Of the dozen or so insecticides WHO has approved as safe for house spraying, the most effective is DDT.”
But policies based on science and data have a short half-life at the UN.
With a notable absence of fanfare, in May 2009 the WHO, together with the UN Environment Program, reverted to endorsing less effective methods for preventing malaria, announcing that their goal is “to achieve a 30% cut in the application of DDT worldwide by 2014 and its total phase-out by the early 2020s, if not sooner.”
In the absence of effective vaccines or new anti-malarial drugs – and the funding and infrastructure to deliver them – this decision is tantamount to mass murder, a triumph of radical environmental politics over public health.
How can we drain the public-policy swamp?
First, governments should re-evaluate the voluminous data on DDT that have been compiled since the 1970’s, and they should make DDT available immediately for mosquito control indoors.
Second, governments should oppose international restrictions on DDT and withhold all funding from UN agencies that oppose the use of the “best available technology” (including DDT) to control mosquito-borne diseases.
Third, public-health officials should embark on a campaign to educate local authorities and citizens about the DDT.
People now hear only the reflexively anti-pesticide drumbeat of the environmental movement, the lamentable legacy of the benighted Rachel Carson and her acolytes.
And oh, yes, it would be helpful if the world’s greatest philanthropist were to throw his weight behind removing the stigma on DDT.
Re-Booting Emerging Europe
LONDON – After the 1997-1998 financial crisis, policymakers in Asia’s major emerging markets – South Korea, Thailand, Malaysia, and even Indonesia – vowed “never again” to be humiliated by international capital markets.
They set out to address the structural weaknesses that had brought their systems down.
Many countries in emerging Europe had similar near-death experiences in the recent global crisis.
Thanks to international and national policy interventions, their currencies and banking systems were saved from collapse, but many of them saw massive output drops and soaring unemployment.
Unfortunately, they have not to the same extent embraced their Asian counterparts’ determination to address the vulnerabilities.
Following the Asian crisis, the region’s economies underwent intense internal and external scrutiny.
It was clear that they had become more vulnerable due to loss of competitiveness, weak governance, and lack of transparency.
Badly regulated banking sectors, feeble market structures, and weak competition, as well as trade and current-account restrictions, were also among the shortcomings identified.
Not all Asian countries walked the line to the same extent, and some opportunities for reform were undoubtedly lost, but important lessons were learned and institutions improved.
Similarly, emerging economies in Latin America changed their economic-policy course after devastating crises – in some cases a series of them – and moved toward strengthening monetary frameworks to reduce dollarization and build local capital markets, liberalize markets, and improve governance.
These measures contributed to the improved economic fundamentals that helped limit the impact of the global financial crisis.
The countries of emerging Europe must go through a similar bout of introspection, but the fact that they were saved from worst-case scenarios seems to make it more difficult to launch this process.
The region needs to find its way back not only to rapid growth, but also to safer, more sustainable growth.
In the decade leading up to the crisis, the emerging European economies were remarkably successful.
Many of them grew at rates that compared favorably to other emerging markets, if not to China.
In terms of exports, they did almost as well as, and in some respects even surpassed, the Chinese.
But it was clear even before the crisis that emerging Europe was losing many of the strengths that explained its success.
Labor costs grew much faster than for most competitors.
In Latvia, for example, unit labor costs grew ten times faster than in the United States from 2001-2008.
Similarly, the potential gains from improved trade arrangements were being exhausted as they joined the European Union.
Looking ahead, the region’s main export markets, primarily in advanced Europe, are not expected to grow as fast as in the past.
Moreover, the region had relied excessively on foreign savings to support growth, with many countries running large long-term current-account deficits.
A significant part was financed by non-debt-creating inflows of foreign direct investment, but external borrowing, particularly by the private sector, also grew very rapidly.
Foreign financing fueled foreign-currency credit growth, even for borrowers without foreign-currency income.
As a result, the exchange-rate risk was passed on to those least able to manage it: households.
And banks were saddled with large exposures.
As wages grew faster than productivity in the run-up to the crisis, competitiveness also suffered, and domestic demand became the main engine of growth.
Easy access to cheap funding and high commodity prices alleviated the need to press ahead with difficult reforms of infrastructure, utilities, education, and health care, to name a few areas.
Diversification of production took a back seat in policy decisions as commodity prices continued to fuel rapid growth.
Emerging Europe needs new sources of competitiveness.
There are still important gains to be had from further improvements in the broader business environment.
A large-scale survey of business managers, reported in this year’s EBRD Transition Report, reveals grave concerns with the availability of skilled labor, the predictability and transparency of taxation, and corruption.
There are no shortcuts to progress on addressing these problems, but lessons from the region should inspire emulation.
Some countries, like Hungary, have managed to sustain the quality of education, critical for long-term competitiveness.
Estonia has shown the way towards a simplified tax administration, modeled on the Scandinavian experience.
Georgia has managed to reduce low-level corruption radically, through deep staff cuts, improved compensation to remaining government employees, and stiffer penalties for bribery.
Emerging Europe’s fundamental growth model is sound.
If these economies introduce the necessary reforms, they will improve their potential growth.
Equally important, they will create the buffers needed to offset external shocks and, as in emerging Asia and Latin America, to implement countercyclical policies that contain the extent and costs of future systemic crises.
Re-Booting NATO-Russia Relations
MOSCOW – The crisis in Georgia last August tested Europe’s security system, and the system failed to fulfill its core task of ensuring common security for the continent as a whole.
As a result, Europe must re-examine its current security arrangements, analyze what happened, and take this analysis into account in reforming those arrangements.
Even before the Georgia crisis, Russia already saw a need to revisit the mechanisms of European security, including its international and regional institutions and their functions.
We suggested a new, legally binding treaty system of mutual security guarantees to ensure equal security throughout Europe.
The European Union believes that the Russian initiative is well grounded and has shown interest in launching such a project.
There are leaders in the Organization for Security and Cooperation in Europe (OSCE) who are also willing to take part.
NATO, however, has stood aside.
I was supposed to put forward Russian proposals on the new security concept to the NATO-Russia Council (NRC) last September.
But the Alliance refused to hold the scheduled meeting following the Georgia crisis.
When the NRC was created in 2002, it was devised as a mechanism for dialogue, cooperation, and joint decision-making on issues of mutual interest, including non-proliferation and arms control, the fight against terrorism, civil emergency planning, and military-to-military cooperation.
The NRC also was supposed to act as a forum for “holding prompt consultations” in crisis situations and to prevent such crises by “early identification of emerging problems.”
Unfortunately, the Georgian crisis demonstrated that Russia’s dialogue with NATO was less substantial than it should have been.
Yet NATO-Russia cooperation is of the outmost importance to global security.
We need NATO and NATO needs us in order to face common threats and challenges.
On the other hand, Russia will not go cap in hand to NATO.
We are not interested in the illusion of partnership.
Indeed, Russia’s foremost foreign-policy goal is a real, strategic partnership with the West in which we work together to solve the multitude of modern security problems.
I don’t have a crystal ball, but I’m certain that several years from now we should be able to look back at the Georgian crisis as a turning point.
Already we can name three “growth factors” that will help the new security system to mature – the development of the European Security and Defense Policy, the transformation of NATO, and Russia’s return to its rightful position on the world stage.
Russia is not becoming assertive, aggressive, or imperial, as many observers claim.
We are only claiming what is rightfully ours – a place in the front row of international relations.
The world will have to get used to the fact that Russia is no longer a feeble country.
Is it so incomprehensible that we have strategic interests and national security concerns?
Russia has tried for years to get away from Cold War thinking and to persuade our partners to drop their stereotypes.
After the terror attacks of September 11, 2001, Russia quickly extended a helping hand to the Americans.
But the West did not appreciate this gesture.
Military bases have been impetuously established along Russia’s perimeter.
The United States plans to establish part of its global missile defense system in the Czech Republic and Poland.
The Warsaw Pact ceased to exist 20 years ago, but NATO still proceeds eastward, adding new member states for reasons other than enhancing security and democracy.
Russia is not interested in confrontation; we want to focus on our own development, prosperity, and stability.
But successful development is possible only in the context of transparent and equal international relations, together with stability and security in our neighborhood.
Thus, we are interested in a strong and independent Europe.
And the development of EU military capacities and EU security policy is an important factor in European and global security.
It is time for Europe to stop acting like an occupied continent and start displaying its own political will.
The action taken by the EU in the course of the Georgian crisis proved that Europeans have such an aspiration and are willing to fulfill their role as a global player, which will become increasingly apparent in the coming years.
As for NATO, we in Russia think it should adapt and transform itself to suit the new environment.
During this transformation, NATO must keep in mind that the primary responsibility for global peace and security lies with the United Nations.
For the moment, though, NATO and its leaders have no clear answer to the question: where do we go from here?
The Alliance’s strategic concept is outdated, yet it cannot even agree on when to start preparing a new one.
Its forces are overstretched in Afghanistan, and its members are using it to advance their own goals.
A real, working NATO-Russia relationship could provide the Alliance with solutions to problems that it cannot tackle on its own.
It would also give new impetus to the European security system.
This is what we want to see in the future – and it is a future that is not possible without Russia.
To see why, simply compare the importance of combating international terrorism with the value of nurturing Georgian President Mikheil Saakashvili’s personal ambitions; things soon fall into place.
Europe needs an integrated, solid, and indivisible system of comprehensive security.
We are not calling for abolishing everything and starting from scratch.
On the contrary, we must build on existing institutions.
In short, we need to retain the hardware, but update the software.
Russia’s initiative for a pan-European security treaty should be the new operating system.
Rebuilding Euro Governance
COPENHAGEN – Europe’s sovereign-debt problems have prompted a search for more effective approaches to economic governance in the European Union, particularly in the euro area.
Having mounted exceptional efforts, first to provide financing for Greece’s adjustment program, and then to create a safety net for other distressed countries, the European Council established a task force, chaired by President Herman van Rompuy and composed largely of EU finance ministers, to make proposals for reform.
The van Rompuy Task Force will submit its final report in October, but we can anticipate its conclusions in the light of the current system’s major shortcomings.
At the euro’s planning stage, most observers fell into two camps.
Some believed that the absence of political union – reflected in the euro’s lopsided design, which centralized monetary authority but left budgetary and other economic policies (largely) in national hands – would ensure the common currency’s failure.
Others believed that the euro itself would trigger political unification.
Neither view has come close to reality so far – and it remains unclear whether the current proposals will settle the issue, in particular by clarifying what elements of political union are essential for the euro’s survival.
In retrospect, then, the euro appears to have been a hazardous experiment.
But the decision to move towards monetary union reflected what seemed most urgent and politically possible at the time: elimination of intra-EU exchange-rate instability, which had dominated the policy agenda for decades.
There was no support for centralizing any significant elements of fiscal policy – nor is there today.
But such a transfer of authority was not seen back then as necessary for monetary union to work.
Instead, the euro’s founders believed that exposure to deeply integrated markets for goods and services and a tough competition regime would keep national price and cost trends broadly in line, and that common and simple fiscal rules would prevent individual countries’ budgetary behavior from deviating strongly.
The fiscal rules, later elaborated into the Stability and Growth Pact, are in themselves elements of a political union.
The original vision was that this set-up would help to assure a growth-friendly policy mix, with fiscal prudence keeping interest rates low on average.
This approach was chosen not only because of political expediency; “indirect coordination” was seen as economically superior to the more direct coordination implied by “economic governance.”
This model of monetary union left only a small role for financial markets in disciplining national budget behavior.
Indeed, the adoption of fiscal rules was seen as a necessary substitute for the harsh discipline that financial markets had previously exercised over EU countries.
It was recognized that, once a country adopted the euro, financial-market discipline would be constrained to credit spreads on sovereign debt – which turned out to be even smaller than foreseen, as interest rates converged to a remarkable degree until 2007-8.
Governments and EU institutions were unwilling to draw the attention of financial markets to the weakness of the single currency’s two underpinnings: the fiscal rules were ignored, and national price and cost trends diverged, partly explaining the emergence of growing country imbalances within the euro area.
Increasingly, the small spreads between sovereign bonds relied on the implicit assumption that no euro area member would be allowed to get into major difficulties, despite the constraints imposed on intergovernmental rescue operations.
Fiscal discipline came back with a vengeance last year, when the state of public finances in a number of countries had deteriorated massively, owing to the recession and financial-rescue packages.
In line with past experience in emerging economies, excessive market tolerance was rapidly replaced by very pessimistic assessments of debtor prospects.
Once contagion effects within the euro area became ominous, governments reacted by overseeing the Greek adjustment program and by creating the European Financial Stabilization Facility (EFSF), a temporary safety net for other major debtor countries.
Both initiatives were coordinated with the International Monetary Fund, ensuring strict conditionality on the external finance obtained.
Having gained time, EU governments, the European Commission, and the European Central Bank have now turned their attention to improving future governance.
Understandably, the initial efforts of the van Rompuy Task Force were directed at more effective crisis prevention: intensified budgetary surveillance and monitoring of movements in real exchange rates and external imbalances.
A number of useful initiatives are under way in both areas.
However, in normal times, the policy recommendations arising from intensified monitoring – as well as the ultimate imposition of sanctions – will have to continue to rely on the persuasive power of discretionary decisions taken by the EU’s Economic and Financial Affairs Council (ECOFIN).
A country in trouble retains primary responsibility for correcting policy.
Improved surveillance – and the scary experience of having confronted the potential costs of being deprived of access to international financial markets – offers hope that the decentralized model for the euro area’s non-monetary policy components will work better than in the past.
The future role of financial markets in disciplining budgetary policies under such a reformed regime depends to a major extent on the ability of the van Rompuy Task Force to define a crisis-management mechanism to replace the EFSF.
Neither this new mechanism, nor potential ECB purchases of bonds issued by the weakest euro area sovereigns, should be allowed to undermine the critical role that financial markets can play in supplementing the closer mutual monitoring of policies.
A future crisis-management mechanism – if, indeed, governments can agree on one at all – should retain some ambiguity as to how the insurance provided to member states will operate, focusing instead on procedures, in particular regarding creditors’ participation in sharing losses, and on the principle of IMF involvement in shaping loan conditionality.
Leaving scope in this way for financial markets to impose discipline offers the best hope for maintaining individual countries’ primary responsibility for their non-monetary policies, which was central to the original vision for the euro.
Rebuilding Haiti From Davos
ROME – When the captains of business and industry meet in Davos for the World Economic Forum this month, the devastation caused by the recent earthquake in Haiti will be near the top of their agenda.
It should be, for there is much they can do to help.
Haiti was in dire straits even before the earthquake struck.
Rapid population growth, coupled with political and social turmoil , helped make Haiti the poorest nation in the Western hemisphere.
Right now, the international relief efforts in Haiti are rightly focused on the country’s urban areas, which suffered most in the earthquake.
But when rebuilding starts, rural areas must not be overlooked.
In fact, many of those who have lost their homes and jobs in Port-au-Prince and other Haitian cities will likely return to rural communities where they have family.
This will put pressure on the rural economy and place more strain on areas already grappling with meagre resources.
Agriculture plays a vital role in Haiti’s economy, yet the country does not produce enough food to feed its people.
Some 60% of the food Haitians need, and as much as 80% of the rice they eat, is imported.
Sustainable agricultural development is essential to improving the country’s prospects for long-term economic and food security.
The International Fund for Agricultural Development (IFAD) has seen first-hand how investing in agriculture can help people recover from natural disasters.
Our experience in developing countries tells us that investments in agriculture can be twice as effective in reducing poverty as similar investments in other sectors.
Less than two years ago, Haiti was devastated by a hurricane that caused about $220 million in damage to food crops – at a time when the population was also struggling to feed itself because of high world food prices. IFAD funded a program to kick-start food production.
The 2008 winter planting yielded $5 million in bean crops, helping to improve food security and the incomes of poor farmers.
While the crisis in Haiti is a major setback in achieving increased food production, it should not be a stop sign on the path to long-term development.
The challenge is to ensure that earlier efforts are not lost, and that recovery includes a push toward sustainable agricultural production systems for Haiti.
One group now rising from the rubble is Fonkoze, a microfinance organization operating predominantly in rural Haiti.
With assistance from IFAD’s multi-donor Financing Facility for Remittances, Fonkoze purchased satellite phones and diesel generators in 2007, and began delivering remittance services in rural areas where basic infrastructure is often weak or lacking.
Only today is the true value of that investment coming to light.
Fonkoze was back in operation only days after the earthquake.
Remittances transferred through Fonkoze are free, giving recipient families in Haiti vital resources to meet short-term needs while also encouraging long-term development.
More than $1.9 billion was sent to Haiti in 2008 through remittances, more than official development assistance and foreign direct investment combined, with more than half of these funds going directly into the hands of families in rural areas.
When I am in Davos, I will highlight for the CEOs and business leaders the mutual benefits of forming partnerships with small producers.
Much-needed capital investment can enable smallholder farmers to provide the private sector with a sustainable supply of high-quality agricultural produce.
Indeed, smallholder farmers are often extremely efficient producers per hectare, and can contribute to a country’s economic growth and food security.
For example, Vietnam transformed itself from a food-deficit country to the second-largest rice exporter in the world by developing its smallholder farming sector.
As a result, poverty fell from 58% in 1979 to below 15% today.
In Haiti, and in developing countries around the world, smallholder farmers can contribute to food security and economic growth just as they did in Vietnam.
But they cannot do so without secure access to land and water – as well as to rural financial services to pay for seed, tools, and fertilizer.
They also need roads and transportation to get their products to market, and technology to receive and share the latest market information on prices.
Above all, they need a long-term commitment to agriculture from their own governments, the international community, and the private sector, backed up by greater investment.
The productive capacity of Haiti’s small farmers will be crucial in helping the country to overcome this crisis and avert severe food shortages.
That is why Haiti needs the private sector now more than ever – to help rebuild both the country and the livelihoods of poor rural people.
Indeed, the private sector has a pivotal role to play in rural development, not just in Haiti but throughout the developing world.
But public- private partnerships must be backed up with the right policies and support for rural communities, so that poor rural people can increase food production, improve their lives, and contribute to greater food security for all.
Organizations like IFAD can help link the private sector and smallholder farmers.
We can support investments that expand the productive potential of the smallholder sector in the developing world by helping investors reduce their risks, and by assisting smallholder farmers in accessing new financing and markets through private-sector partnerships.
Klaus Schwab, the founder and chairman of the World Economic Forum, has said that this year’s Davos meeting should be used to “solicit commitments in practical help for relief of the continued pain of Haiti’s people, and particularly for the reconstruction of Haiti.”
In Davos, I will work to ensure that the interests of the world’s smallholder farmers – in Haiti and in developing countries around the world – are represented.
Rebuilding Libya
BENGHAZI – Six months after Libyan rebels took up arms against the country’s leader, Col. Muammar el-Qaddafi, they have finally toppled him. But, while victorious on the battlefield, they have not been triumphant in political and economic terms. If the rebels are to ensure their revolution’s long-term success, they will have to overcome the weaknesses that plague them.
In the days following the start of the uprising in February 17, the rebels formed a political body known as the National Transitional Council (NTC) and a cabinet known as the Executive Committee. Though drawn from across Libyan society and staffed by people with technical skills, the groups have been hamstrung by several problems.
Critics have derided the NTC’s lack of transparency and complained about its opaque decision-making. They have also questioned the criteria used to select its members.
Libyans say the Council’s chairman, Mustafa Abdel-Jalil, favors dissidents who spent time in Qaddafi’s prisons over those with the training and skills needed to rebuild the country. If the NTC does not address these concerns, it is difficult to see how it will manage the complex challenges ahead.
It is not only the NTC’s policies that could imperil the success of the Libyan uprising. Though admired in parts of eastern Libya under rebel control, Abdel-Jalil is a dour figure who lacks the charisma characteristic of revolutionary leaders. Indeed, he is a provincial player who so far has been unable to communicate a compelling vision of a new Libya.
A shortage of politically savvy leaders plagues the rebel-controlled East. Shortly after assuming the chairmanship of the NTC in March, Abdel-Jalil announced that its members would not run for office in future elections. But there has since been very little activity on the political front. Because activists were reluctant to begin campaigning while rebels were still fighting, they held back on forming political parties. As a result, only two parties have been created in a country that has no experience with pluralist democracy. At this point, there are very few voices consistently advocating the changes needed to secure the transition from an authoritarian to a democratic regime.
Other problems loom for the NTC. In July, their military chief of staff, Abdul Fattah Younis, was killed in murky circumstances after the Council issued an arrest warrant for him. His tribe has demanded answers that the NTC does not have. People close to the case say that senior NTC officials were implicated in Younis’s death.
Although the investigation into the murder of Younis has been muted by the rebels’ recent military successes, his tribe is demanding justice and is prepared to seek retribution if the NTC cannot resolve the matter. Such an outcome could split the rebels’ ranks and risks plunging Libya into renewed violence at the very moment that hostilities should have ended.
The danger of civil bloodshed imperils a post-Qaddafi Libya more generally. Already, Libyan rebels in the east have exacted revenge on Qaddafi loyalists, many of whom worked for his feared revolutionary committees. In western Libya, human-rights workers have reported that the Qaddafi’s supporters have been shot in the hand to mark their treachery. With the NTC unable to impose discipline on its soldiers, such violence is likely to increase as army soldiers and militias evacuate Qaddafi strongholds.
The NTC faces a number of economic dilemmas as well. Before the revolution, Libya produced nearly 1.6 million barrels of oil per day, accounting for 96% of the country’s export earnings. But, since February, the taps have run dry, owing to disruption and damage to the oil infrastructure. In the interim, the NTC has largely survived on international aid and from the unfreezing of Libyan assets by foreign governments.
But these funds have been unable to fuel the economy of rebel-controlled territories. Libyans complain that they have not been paid their monthly salaries. Nightly power outages have left many in the dark in cities like Tobruk, and even the rebel capital of Benghazi has experienced sporadic electricity cuts.
The war’s costs extend far beyond repairing oil installations and turning on the electricity. Cities such as Misurata have been ravaged by the fighting and will have to be rebuilt. But Libya lacks the technical capacity to tackle these problems. Short on skilled experts, a post-Qaddafi Libya risks becoming dependent on foreign assistance, much like the Palestinians, who live largely from international aid rather than from their own economic activity.
The fall of Qaddafi and his authoritarian regime holds great promise for a people bereft of freedom for 42 years. But, with the NTC having stumbled so far, it will have to redouble its efforts to ensure that it wins the peace that it fought so hard to secure.
Barak Barfi is a research fellow at the New America Foundation.
Rebuilding the Asylum System
NEW YORK – The European Union needs to accept responsibility for the lack of a common asylum policy, which has transformed this year’s growing influx of refugees from a manageable problem into yet another political crisis.
Each member state has selfishly focused on its own interests, often acting against the interests of others.
This precipitated panic among asylum seekers, the general public, and the authorities responsible for law and order.
Asylum seekers have been the main victims.
The EU needs a comprehensive plan to respond to the crisis, one that reasserts effective governance over the flows of asylum-seekers so that they take place in a safe, orderly way, and at a pace that reflects Europe’s capacity to absorb them.
To be comprehensive, the plan has to extend beyond the borders of Europe.
It is less disruptive and much less expensive to maintain potential asylum-seekers in or close to their present location.
As the origin of the current crisis is Syria, the fate of the Syrian population has to be the first priority.
But other asylum seekers and migrants must not be forgotten.
Similarly, a European plan must be accompanied by a global response, under the authority of the United Nations and involving its member states.
This would distribute the burden of the Syrian crisis over a larger number of states, while also establishing global standards for dealing with the problems of forced migration more generally.
Here are the six components of a comprehensive plan.
First, the EU has to accept at least a million asylum-seekers annually for the foreseeable future.
And, to do that, it must share the burden fairly – a principle that a qualified majority finally established at last Wednesday’s summit.
Adequate financing is critical.
The EU should provide €15,000 ($16,800) per asylum-seeker for each of the first two years to help cover housing, health care, and education costs – and to make accepting refugees more appealing to member states.
It can raise these funds by issuing long-term bonds using its largely untapped AAA borrowing capacity, which will have the added benefit of providing a justified fiscal stimulus to the European economy.
It is equally important to allow both states and asylum-seekers to express their preferences, using the least possible coercion.
Placing refugees where they want to go – and where they are wanted – is a sine qua non of success.
Second, the EU must lead the global effort to provide adequate funding to Lebanon, Jordan, and Turkey to support the four million refugees currently living in those countries.
Thus far, only a fraction of the funding needed for even basic care has been raised.
If education, training, and other essential needs are included, the annual costs are at least €5,000 per refugee, or €20 billion.
EU aid today to Turkey, though doubled last week, still amounts to just €1 billion.
In addition, the EU also should help create special economic zones with preferred trade status in the region, including in Tunisia and Morocco, to attract investment and generate jobs for both locals and refugees.
The EU would need to make an annual commitment to frontline countries of at least €8-10 billion, with the balance coming from the United States and the rest of the world.
This could be added to the amount of long-term bonds issued to support asylum-seekers in Europe.
Third, the EU must immediately start building a single EU Asylum and Migration Agency and eventually a single EU Border Guard.
The current patchwork of 28 separate asylum systems does not work: it is expensive, inefficient, and produces wildly inconsistent results in determining who qualifies for asylum.
The new agency would gradually streamline procedures; establish common rules for employment and entrepreneurship, as well as consistent benefits; and develop an effective, rights-respecting return policy for migrants who do not qualify for asylum.
Fourth, safe channels must be established for asylum-seekers, starting with getting them from Greece and Italy to their destination countries.
This is very urgent in order to calm the panic.
The next logical step is to extend safe avenues to the frontline region, thereby reducing the number of migrants who make the dangerous Mediterranean crossing.
If asylum-seekers have a reasonable chance of ultimately reaching Europe, they are far more likely to stay where they are.
This will require negotiating with frontline countries, in cooperation with the UN Refugee Agency, to establish processing centers there – with Turkey as the priority.
The operational and financial arrangements developed by the EU should be used to establish global standards for the treatment of asylum-seekers and migrants.
This is the fifth piece of the comprehensive plan.
Finally, to absorb and integrate more than a million asylum seekers and migrants a year, the EU needs to mobilize the private sector – NGOs, church groups, and businesses – to act as sponsors.
This will require not only sufficient funding, but also the human and IT capacity to match migrants and sponsors.
The exodus from war-torn Syria should never have become a crisis.
It was long in the making, easy to foresee, and eminently manageable by Europe and the international community.
Hungarian Prime Minister Viktor Orbán has now also produced a six-point plan to address the crisis.
But his plan, which subordinates the human rights of asylum-seekers and migrants to the security of borders, threatens to divide and destroy the EU by renouncing the values on which it was built and violating the laws that are supposed to govern it.
The EU must respond with a genuinely European asylum policy that will put an end to the panic and the unnecessary human suffering.
Rebuilding the Brain
For many years, it was thought that all of our brain cells (neurons) are produced before birth, or exceptionally, up to one or two years after birth, but then the process supposedly stopped.
From then on, most brain scientists believed, brain circuits could only be modified by altering the synapses, or contacts between existing cells.
In this view, the total complement of cells, anatomically organized by function and forming major pathways, constituted the brain’s “hardware.”
The detailed nature of the relation between cells, the modifiable synapses, was the software.
Starting in the 1960s, evidence suggested that new neurons might be added beyond this early period and even in adulthood.
This evidence became compelling in the 1980s, based on observations made while studying parts of the songbird brain involved in the acquisition and production of learned song.
The original observations were met with skepticism, but the birdsong data proved compelling.
How does one prove that a neuron was born at a particular time?
Each cell in the body contains DNA, which is responsible for producing the proteins that are necessary for a cell’s functioning.
Though all cells in the body have the same DNA, only a subset of the genes encoded by the DNA is expressed in each cell type, thus accounting for the difference between, say, a skin cell, a liver cell, and a brain cell.
When a cell is about to divide, as happens when tissue grows, the DNA in the mother cell has to be doubled, that is, new DNA is synthesized.
It is possible to supply the cell with one of the building blocks of the new DNA, and to put a little radioactive tag on that building block.
Later, scanning through the brain, every time we find a tagged cell we know that it was born at the time we furnished the DNA.
When we gave adult canaries the tagged DNA building block and then looked for tagged neurons that would have been born one or two days earlier, we found none.
But if we waited longer – for example, 1-3 weeks, depending on part of brain – we found quite a few tagged neurons.
This told us that the new neurons were not born by division of existing neurons, but were born elsewhere in the brain and went through a migratory stage during which they were not recognized as neurons.
It took at least a week for the first new neurons to reach their destination and acquire the looks of an adult neuron.
We then learned how to identify the future neurons during their migratory journey.
They were, at that stage, much smaller and had an elongated shape that allowed them to slip between other cells.
It came as a great surprise when we discovered that the cells giving birth to the new neurons were a type called radial glia, which were thought not to occur in adulthood and were not known to give birth to neurons.
One of the paradoxes of this process is that in adult birds and mammals the total number of brain cells remains remarkably constant.
The new neurons replace older ones of the same kind that die – a process of natural rejuvenation.
There are no hospitals in nature.
The sudden loss of many brain cells as a result of strokes or injuries must have serious effects on an animal’s survival.
It seems likely that the replacement of neurons in the adult brain did not evolve to make up losses due to illness or lesion, but as a process of constant renewal, a few cells being replaced every day.
This idea is so novel that it needs further elaboration.
In the adult songbird brain, we can find at any moment many little migrating neurons ready to replace cells that have died.
Only one of every three job seekers finds a job, but the overproduction is probably worthwhile, for it ensures that as a replaceable neuron dies, there will already be, in its vicinity, a younger one ready to take its place.
As far as known, only a small fraction of all brain cells fall into the replaceable class; when other kinds of neurons die, they are not replaced.
We now know that the brain has the potential to grow new brain cells to replace others that have died.
This potential could be used to repair damaged circuits.
Laboratories around the world are trying to develop ways to bring this knowledge to clinical situations.
The trick will be to induce the brain to produce and deliver to the correct destination any kind of neuron that might be needed, so that regardless of cell class, new cells of the required kind can replace others of the same type that have died.
This goal is not near.
Rebuilding the Ruins of Qaddafi
TRIPOLI – With the creation of a new government, Libya’s leaders should finally be able to focus on organizing the transition from the authoritarian state that they inherited to the more pluralistic one they envisage.
But are they really able and willing to achieve that goal?
In the United States, the debate on Libya has focused on what steps its government should take next.
Senator Robert Menendez argues it “must move quickly to embrace democratic reform,” while international development specialists, such as Manal Omar of the US Institute for Peace, believe that success lies in the cultivation of a vibrant civil society.
These views, however, overlook Libya’s unique history, and treat Libya as though it were just another Third World country in need of generic solutions.
In fact, remedying the country’s ills requires building strong state institutions.
Since Libya achieved independence in 1951, it has been a fractured state.
Rulers relied on loyal tribes and narrow cliques to prop up their regimes.
Under a monarchy that led the country from 1951-1969, King Idris’s relatives and inner circle ran roughshod over fledgling state institutions.
More interested in reigning than in governing, state institutions withered under Idris’s neglect.&nbsp;
These trends were exacerbated after Muammar el-Qaddafi overthrew the king in 1969.
Frustrated with a bureaucracy reluctant to implement his political vision, Qaddafi bypassed traditional institutions and claimed a direct dialogue with the country’s population.
The new Libyan leader created an intricate hierarchy of political organizations that were advertised as empowering citizens, but which in reality only reinforced their subservience to his autocratic regime.
As Libyans tired of Qaddafi’s revolutionary rhetoric, he decided that a new organization was needed to stir popular support.
In 1977, he established committees that he dubbed the “watchdogs of the revolution.”
The committees formed their own courts, assumed sweeping arrest powers, took over the media, and purged officials who resisted Qaddafi’s will.
This led to a split between the state’s official institutions and Qaddafi’s shadow revolutionary apparatus.
Qaddafi clearly preferred the latter.
In 1979, he resigned from his official posts to assume the vague role of “Commander of the Revolution,” explaining that “the revolution must be separated from the authority of the state.”
This led to what the scholar Moncef Djaziri described as a division of formal and informal authority.
Qaddafi’s strategy stunted the growth of state institutions, because, like Mao Zedong’s Cultural Revolution in China, it implied subordinating their development to the needs of an all-embracing vision of transformation.
Economic planning reflected his populist policies and foreign adventures, rather than any focus on stability and sustainable growth.
Instead of relying on state structures to govern, he leaned on a small coterie of minions and members of his tribe.
As a result, state institutions decayed.
Beginning in 1986, the Libyan Central Bank ceased publishing the annual statistical reports that economists and specialists need to formulate coherent policies.
Frustrated by his population’s political apathy, Qaddafi frequently announced his intention to dissolve all government ministries and transfer their responsibilities to municipalities.
Today, Libya’s state institutions exist merely to extract the country’s vast oil wealth and distribute it via subsidies.
In a state that embodied the whim of its leader for 42 years, the rule of law does not exist.
Explaining why he helped spearhead a 1993 military coup attempt, Air Force officer Muhammad Bashir Salah said, “We have neither a state, nor laws, nor a constitution.”
Indeed, even the military, which in many Third World countries is the strongest state institution, was marginalized under Qaddafi.
The revolutionary committees’ attacked it for being “a traditional fascist institution.”
Qaddafi declared his desire to disband the army on several occasions, and its role was so insignificant that it played almost no part in defending the regime during the eight months of fighting that overthrew him.
American diplomatic cables released by WikiLeaks noted that Libya has “few formal decision-making structures,” and called it an “opaque regime in which lines of authority are deliberately blurred to obscure power structures and mitigate accountability.”
Today, Qaddafi’s successors on the National Transitional Council (NTC) are perpetuating the dualistic authority that he created.
Politically inexperienced and lacking strong leadership, they have proved unable to impose discipline on the myriad militias that sprang up during the revolution.
These rogue units have exacted vengeance on Qaddafi supporters and alienated significant segments of society.
If the NTC cannot assert its authority, the council risks the emergence of a movement nostalgic for Qaddafi and the security that his regime provided.
Unlike their neighbors in Egypt, Libyans are not clamoring for the elections deemed by many Westerners to be of paramount importance.
Instead, they have drawn on a patience rooted in their traditional political apathy.
Few political parties have emerged, and there is little popular demand for them.
Activists have instead focused on drafting a new constitution that would empower state institutions.&nbsp;
Libyans understand that the NTC needs time to build a new country on the ruins of the one that Qaddafi destroyed.
That daunting task begins by developing the state institutions required to respond to Libyans’ needs.
Re-Capturing the Friedmans
BERKELEY – On my desk right now are reporter Timothy Noah’s new book The Great Divergence: America’s Growing Inequality Crisis and What We Can Do about It and Milton and Rose Director Friedman’s classic Free to Choose: A Personal Statement.
Considering them together, my overwhelming thought is that the Friedmans would find their task of justifying and advocating small-government libertarianism much harder today than they did in 1979.
Back then, the Friedmans made three powerful factual claims about how the world works – claims that seemed true or maybe true or at least arguably true at the time, but that now seem to be pretty clearly false.
Their case for small-government libertarianism rested largely on those claims, and has now largely crumbled, because the world, it turned out, disagreed with them about how it works.
The first claim was that macroeconomic distress is caused by the government, not by the unstable private market, or, rather, that the form of macroeconomic regulation required to produce economic stability is straightforward and easily achieved.
The Friedmans almost always made the claim in its first form: they said that the government had “caused” the Great Depression.
But when you dug into their argument, it turned out that what they really meant was the second: whenever private-market instability threatened to cause a depression, the government could avert it or produce a rapid recovery simply by purchasing enough bonds for cash to flood the economy with liquidity.
In other words, the strategic government intervention needed to ensure macroeconomic stability was not only straightforward, but also minimal: the authorities need only manage a steady rate of money-supply growth.
The aggressive and comprehensive intervention that Keynesians claimed was needed to manage aggregate demand, and that Minskyites claimed was needed to manage financial risk, was entirely unwarranted.
Real libertarians never bought the Friedmans’ claim that they were as advocating a free-market, “neutral” monetary regime: Ludwig von Mises famously called Milton Friedman and his monetarist followers a bunch of socialists.
But, whatever its packaging, the belief that macroeconomic stability requires only minimal government intervention is simply wrong.
In the United States, Federal Reserve Chairman Ben Bernanke has executed the Friedmanite playbook flawlessly in the current downturn, and it has not been enough to preserve or rapidly restore full employment.
The second claim was that externalities were relatively small, or at least that they were better dealt with via contract and tort law than through government regulation, because the disadvantages of government regulation outweighed the harm done by those externalities that the legal system could not properly address.
Here, too, reality does not seem to have endorsed Free to Choose.
In the US, this is most apparent in changing attitudes toward medical-malpractice lawsuits, with libertarians no longer viewing the court system as the preferred arena to deal with medical risk and error.
The third, and most important, claim is the subject of Noah’s The Great Divergence.
In 1979, the Friedmans could confidently claim that, in the absence of government-mandated discrimination (for example, the South’s segregationist Jim Crow laws), the market economy would produce a sufficiently egalitarian distribution of income.
After all, it had appeared to do so – at least for those who did not suffer from legal discrimination or its legacies – for the entire post-WWII era.
So the Friedmans argued that a minimal safety net for those whom bad luck or a lack of prudence had rendered destitute, and elimination of all legal barriers to equality of opportunity, would lead to the most equitable outcomes possible.
Profit-seeking employers, using and promoting human talents, would bring us as close to a free society of associated producers as is attainable in this fallen sublunary sphere.
Here, too, the Friedmans’ hopes have been disappointed.
The end of American preeminence in education, the collapse of private-sector unions, the emergence of a winner-take-all information-age economy, and the return of Gilded Age-style high finance have produced an extraordinarily unequal pre-tax distribution of income, which will burden the next generation and make a mockery of equality of opportunity.
It would have been nice if the political program laid out a generation ago in Free to Choose had lived up to the Friedmans’ billing.
It would have been nice if a relatively equal and prosperous society with full employment and equal opportunity had followed from a government that stood back from the economy and provided nothing but a minimal safety net, courts, and a constantly growing money supply.
Alas, that did not happen.
Recession Insurance
NEW HAVEN – The Chief Economist of the International Monetary Fund, Olivier Blanchard, and several IMF economists have proposed in a recent paper that governments should offer what they call “recession insurance.”
Companies and/or individuals would buy insurance policies, pay a regular premium for them, and receive a benefit if some measure of the economy, such as GDP growth, dropped below a specified level.
Such insurance, they argue, would help firms and people deal with the “extreme uncertainty” of the current economic environment.
Recession insurance might, indeed, help alleviate the economic crisis by reducing uncertainty.
After all, the real problem that we are currently facing is one of paralysis: uncertainty has placed many spending decisions – by businesses (on higher output) and by consumers (on the items that businesses produce) – on hold.
Reducing uncertainty might augment, or even be superior to, fiscal stimulus programs, for it would address the root cause of the unwillingness to spend.
Moreover, recession insurance might, in contrast to fiscal policy, impose no costs on the government, for if it stimulates confidence, then the risk being insured against is prevented.
The government’s ability to offer such insurance on a scale sufficient to make it costless is one reason to favor a public scheme over private insurers.
Blanchard and his colleagues point out that banks might condition loans to firms on their purchase of recession insurance, which might help credit markets function better, addressing a serious problem underlying the current crisis.
Tantalizingly, they say that doing this would create “a market-based view of future output and the likelihood of severe shocks,” although they do not explain how this market would be structured.
Indeed, there is no market for other kinds of recession-related insurance provided by the government, such as unemployment insurance, old age insurance, or disability insurance.
Instead, the government merely sets an insurance premium and forces everyone to pay it.
The IMF authors are not saying that governments should do this with recession insurance, so perhaps they mean that governments would auction off the policies, which would create a market price.
But the market price would depend especially on how much insurance a government decided to auction off, because the supply would influence the price both directly and through the insurance’s effect on the underlying recession risks.
Governments are in a good position to create new risk-management policies, and they can then set an example for private insurers to follow.
But, as an alternative to the IMF proposal, there could be purely private recession insurance.
Such insurance already exists on a small scale in the form of credit insurance against unemployment.
A New York-based firm, the Assura Group, has been working for four years on a plan to launch privately issued supplemental unemployment insurance to anyone.
Their policies would piggyback on US state unemployment insurance programs, allowing Assura to avoid getting into the monitoring business.
One problem with market-based policies is strategic adoption and cancellation.
GDP risk is a long-term risk.
The price of the insurance would have to be adjusted regularly to adjust for varying public knowledge of the likelihood of a recession, and people could not be allowed to cancel their policies, and stop making payments, whenever the economic outlook became rosier.
The Assura Group had to get permission from the New York State Department of Insurance to have a dynamic rate filing, meaning that they will set prices by a formula, rather than using a fixed rate, so that their prices vary in rapid response to changing economic conditions.
In a recent paper, Mark Kamstra and I proposed that governments issue shares in their GDP, with each share amounting to a trillionth of GDP.
These “trills” would help individual countries manage their GDP risks.
We thought that the issuers of such securities would have, in effect, a form of recession insurance.
Another way to create a market price for recession risk is to offer the MacroShares that my firm MacroMarkets pioneered.
Our first MacroShares have been for oil price risk, but plans for GDP risk are on the drawing board.
These securities are offered in pairs –one long and one short – and, unlike in a government-run scheme, in whatever quantity the market demands.
Once we have a market price for recession insurance or similar products, the question then arises: will it be so high that few people want to buy?
We know that we are probably in a recession right now, and may be for some time, so the expected losses currently are enormous.
As a result, people may balk at the price and not want to buy the insurance.
The only insurance that people might think they can afford could carry a large deductible, and if the deductible is very large, people might not feel so reassured by this insurance.
There are uncertainties with any really new proposal.
But the proposal from the IMF is an important step, because it deals with the essential problem that we are confronting right now: fears about the future of the economy become a self-fulfilling prophesy.
We should not look askance at such a policy because of its potential shortfalls.
The current global economic crisis is an opportunity for some new experimentation that might not only lead to its resolution, but might also set in place institutions that help to prevent future crises.
Recession insurance is one such idea.
Reconciliation’s New Frontier
In France, May 10 is a day to commemorate the abolition of slavery.
January 27 is the day we remember the Holocaust, through the commemoration of the liberation of Auschwitz.
In a few days, there will be ceremonies to celebrate the 100th anniversary of the revision of Captain Alfred Dreyfus’s conviction on charges of espionage in a trial that tore the country apart.
France in particular, but also Europe in general, seems to be in a mood for remembering and repenting.
It all looks as if the need to integrate communities within nations, to reconcile them with their past in order to unite them around a common identity and therefore a common project for the future, has replaced Europe’s now-completed mission of reconciling old enemies like Germany and France.
For decades, “reconciliation” and its most remarkable achievement – the Franco-German rapprochement – was the trademark of the project to create an ever closer union in Europe.
Reconciliation may seem far off for, say, the peoples of Japan, China, and South Korea, but it is taken for granted by today’s Europeans.
Except for the Balkans, most European nations are at peace with each other.
The genes of war now express themselves on the soccer field; competition for land has been replaced by competition for medals and titles.
The first Franco-German history book was released recently, and, according to its team of writers, it was not the past and the Nazi years that constitute a source of contention between French and German historians, but the present and in particular relations with the United States.
So, if the mission of reconciliation has any life left, its focus has shifted.
If European nation-states are reconciled with each other, they are not yet fully reconciled with themselves, with their dark or grey spots, and in particular their treatment of minorities.
Historians of Europe will probably one day conclude that it is the Holocaust and Europe’s relations with its Jews that paved the way for the opening of this process of repentance.
In the words of the Polish historian and statesman Bronislaw Geremek, the liberation of Auschwitz on January 27, 1945, has to be seen as one of the founding moments of today’s Europe.
The silence that surrounded Holocaust survivors during the immediate postwar reconstruction of Europe has been replaced by gestures of contrition and reparation.
Responsibility for passivity as well as active crimes has been recognized.
Pious lies have been uncovered. In France half a century ago, as the Cold War loomed, Charles de Gaulle easily convinced the French that they were heroic during World War II because he was heroic.
Francois Mitterrand, by contrast, managed to assure the French only that they were not so bad, because he, Mitterrand, had served in the collaborationist Vichy regime of Marshal Pétain before joining the resistance.
In the eyes of historians, President Jacques Chirac’s redeeming value will most probably remain his courageous attempt to reconcile France’s wounded minorities with their past and the French nation through a national process of repentance.
It started with the Jews and acknowledgement that the Vichy regime did indeed incarnate the French state.
Thus “France” itself was an accomplice to the crimes of the Nazi regime.
Today, France’s black minority is trying to organize itself along the lines of the Jewish minority.
It has created a central authority serving as an umbrella for diverse organizations.
And it has concluded that centuries of slavery amount to the equivalent of the Holocaust.
European recognition of crimes against the Jews, they argue, must be followed by an admission of guilt towards the Continent’s black minorities.
It is likely that the violence that erupted in the fall of 2005 in many French cities and suburbs, in which young and unemployed black people played a large part, has accelerated the willingness of French officials to come to terms with this historical legacy.
To face the challenge of integration, France must face its past.
But it must also behave in a modern, rather than a neo-colonial, way in many places in its former African empire.
If reconciliation with the past is vital to building a harmonious future, France has much to do concerning another minority for whom history seems to remain largely frozen.
It is with the French of Algerian descent, not to mention Algeria itself, that reconciliation seems most difficult to achieve.
It will take more than a few role models, such as Zinedine Zidane, France’s greatest soccer star, to appease the frustrations and to curb the resentments.
But is acknowledging past guilt only a way to facilitate the integration of minorities?
Or is it also part of a process of closing the doors of our European “paradise” to all those who still want to join us?
Reconciliation between nations is probably easier than reconciliation within nations.
This is the challenge facing much of the democratic world today, not only in France and Europe at large, but also in the US.
Reconciling Hamas and Fatah
GAZA/JERUSALEM – As representatives of Hamas and Fatah meet for the fourth round of national unity talks in Cairo, not only Palestinians but also Americans and Europeans will be watching closely.
The top-level talks, hosted by Egyptian intelligence chief Omar Suleiman, will be crucial to ending nearly two years of bloody confrontation between Hamas-ruled Gaza and the Fatah-ruled West Bank, governed by Western-backed Mahmoud Abbas.
Given previous failures, this round of talks might prove to be the final chance to re-establish Palestinian unity.
The continuing internal schism between the more moderate and secular Fatah and the Islamist Hamas has not only left the Palestinian leadership in disarray, but has also made meaningful peace negotiations with Israel next to impossible.
Moreover, continued internal disunity continues to thwart reconstruction efforts in Gaza, which are urgently needed in the aftermath of Israel’s military offensive earlier this year.
Thus, the outcome of the negotiations in Cairo will have repercussions for Palestinians and Israelis – and, indeed, for anyone with a stake in the Middle East peace process.
In previous rounds, the different factions agreed in principle on forming a united government for the West Bank and Gaza, and on holding legislative and presidential elections in the Palestinian Territories by January 2010.
But Fatah and Hamas still differ fundamentally on how to form a government tasked to prepare elections.
Discussions also center on the control of the security services – a field in which neither Fatah nor Hamas have much room to maneuver.
Moreover, disagreement prevails on the type of electoral system to be used.
Whereas Fatah favors a clear majority voting system, Hamas calls for a more personalized approach.
Furthermore, the question of including Hamas in the Palestine Liberation Organization is crucial.
Contrary to common perception, the PLO has always been the only official negotiating partner with Israel and does not include Hamas.
In a rather obscure linguistic debate, Hamas has in previous negotiation rounds refused to “commit’ itself to past PLO agreements with Israel, but has instead offered to “respect” them.
Negotiators in Cairo will thus have to discuss if such an indirect recognition of Israel’s right to exist will be acceptable.
Underneath this clear-cut quid pro quo of political bargaining, the representatives from Fatah and Hamas are charged with finding the means to reconcile Hamas’s tremendously popular political ideology with Fatah’s traditional secular aspirations.
This is not merely an internal Palestinian affair, for it reflects a conflict raging across the entire Middle East.
Until now, no Arab society has managed to harmonize these opposing trends.
Instead, most governments have opted for a more or less confrontational approach of suppression and exclusion, banning Islamists from participating in elections or bullying them into semi-legality.
The case of the Palestinian Territories, however, is different.
In the absence of a strong central authority, the predominant divide between secular nationalism and politicized religion has led to the actual geographic disintegration of the Palestinian Territories into two distinct parts.
Given the difficulties that even major players in the region face when dealing with the challenge of political Islam, it becomes clear that for the Abbas-led Palestinian Authority, only compromise and dialogue is a feasible way to heal the rift.
Unsurprisingly, the fate of the Cairo talks is anything but certain.
Failure to come up with a unified Palestinian position would undoubtedly play into the hands of the newly elected Israeli government of Benjamin Netanyahu.
After all, the Israeli Prime Minister has made it clear that he favors continued conflict management in terms of “economic peace” over far-reaching political processes based on mutual respect and cooperation.
Faced with continued internal division, pressing for a meaningful peace process is very difficult for the Palestinians.
As a consequence, Israel’s willy-nilly expansion of West Bank settlements might finally bury comprehensive peace efforts for good.
But success in Cairo might prove even more challenging.
If the negotiations lead to the establishment of a Palestinian government supported by both Fatah and Hamas, there will be a tough choice to make – not primarily for Palestinians, but first and foremost for Western decision makers.
Will the West continue its policy of boycotting Hamas politically and financially, or will it adopt an alternative approach?
Given Hamas’s belligerent ideology, any change in the West’s approach towards Hamas in the aftermath of successful Palestinian dialogue in Cairo would be difficult.
But a modified and more pragmatic stance that focuses on Hamas’s behavior on the ground, rather than on abstract conditions, would not only be demanding for Western decision makers; it would pose a major political challenge for Hamas as well.
Reconciling Minority Rights and State Sovereignty
When the East/West conflict ended ten years ago, many hoped that the democratic changes in Eastern Europe would inspire peaceful resolution between the claims of human rights and those of state sovereignty throughout the world.
Instead, ethnic conflicts have multiplied, shaking many East European and Asian countries.
Minority and ethnic rights, it appears, are only demanded at the barrel of a gun, as in Chechnya and East Timor.
Why is this so?
The call for ``human rights,'' which have been made repeatedly since 1989, accents the rights of individuals in their struggles against overweening state institutions.
Freedom of thought, freedom of the press, freedom of assembly: these were the rights that have been stressed most often, probably because they reflected the long struggle to restore the individual liberties smothered under communism.
But human rights confined to the context of freedom for individuals are insufficient to resolving ethnic conflicts, because ethnic communities and groups cannot use the mechanisms of human rights laws and agreements to secure an effective hearing for their claims.
States, after all, are usually the forces suppressing their demands.
Minority and ethnic violence arises out of the sense of frustration that results.
In order for the international community to use the concept of human rights to resolve and settle ethnic conflicts, a concept of community must be incorporated within the framework of our understanding of human rights.
Only if groups are offered corresponding instruments to assert their own collective human rights will there arise a chance that ethnic minorities will not resort to violence in order to achieve their ends, but will seek satisfaction in a civic forum.
A court, a place that furnishes binding jurisdiction for both oppressed minorities and for the countries riven by ethnic disputes is now required.
We need an International Court for Minorities that would act in similar ways to the International Court of Justice to make decisions concerning the legitimacy of claims in this area.
Today, the most virulent examples of such minority and ethnic assertions of their group rights are to be found in Afghanistan.
Ever since the former Soviet Union withdrew its invading army from that country, a political vacuum has existed.
Civil war, motivated by ethnic and religious divisions, followed.
The disintegration of what little remained of the central Afghan administration contributed decisively to the establishment of what can only be called sub-state terrorist structures.
Terrorists rule where the Afghan state once did.
Why did this happen, and why has this experience been repeated time and again?
Why does it appear to be impossible to resolve national and ethnic conflicts by civil, political, and non-violent means?
One reason for this failure, I believe, is that the notion of human rights, despite everything that has been done in its name over the past half-century, remains undefined in a critical way.
After 1989, human rights were understood as a universal code to tame state despotism.
It is my belief, however, that human rights cannot be used as a universal idea for resolving ethnic conflicts unless the concept obtains a clear-cut and expanded definition, which includes ethnic and minority rights.
An International Court for Minorities would provide a forum to define these collective rights.
What would be its work?
First, it would be a place for minorities who consider their legitimate rights within a state as being violated to seek redress.
Charges could be filed and justice sought.
The Court would not only allow minority groups to stake their claims, but the accused national state would also have a chance to be heard in order to protect itself, perhaps, against undeserved propaganda.
Should the Court conclude that the rights of the minority in question were gravely violated it could issue a binding decision demanding that the national state concerned change its laws and practices.
Should that state fail to do so the International Court for Minorities could demand that the UN Security Council provide protection to the endangered minority.
This court would be a place for civic and civilized settlement between ethnic minorities and state sovereignty.
It would thus re-balance the UN charter, which now stipulates that discrimination against individuals is prohibited but says nothing about discrimination of ethnic groups.
The Court would be a mediator issuing binding decisions and setting standards that would regulate the legitimate rights of minorities, and would so become an global authority against not only state despotism but the license of ethnic groups.
For in order to appeal to the Court, minority groups must refrain from using violence.
Of course, no conflict can be resolved in a one-sided manner, benefiting either the state or an ethnic group but not the other.
Just as states would no longer be able to stress their sovereignty as a trump card over minority claims, ethnic groups could no longer insist that their right to self-determination justified any action.
No state may exercise its sovereignty without restriction; not every ethnic group has a right to its own national state.
The Court's objective must be discuss the claims made by both parties and seek a just and peaceful resolution.
The International Court for Minorities that I propose would be both therapeutic and preventative.
It may moderate and, optimally, settle existing conflicts - say, the Middle East conflict, for example - but it might also identify potential conflicts and hinder them from becoming violent.
Here, I am particularly concerned about multinational countries such as China, Brazil, Indonesia and India.
Ethnic conflicts, and in extreme cases ethnic terrorism now pose a clear and present danger to world peace.
They will continue to pose that threat unless the world acts.
Creating an International Court of Justice for Minorities offers a means to head-off such violence and secure global peace.
Reconstructing Haiti
NEW YORK – The horrors of Haiti’s earthquake continue to unfold.
The quake itself killed perhaps 100,000 people.
The inability to organize rapid relief is killing tens of thousands more.
More than one million people are exposed to hunger and disease and, with the rain and hurricane seasons approaching, are vulnerable to further hazards.
Even an economy as impoverished as Haiti’s is a complex system dependent on trade between rural and urban areas, transport, electricity, port services, and government functions.
Haiti’s economy worked badly in the past, and was still reeling from four hurricanes in 2008 when the earthquake struck.
The fact that the quake hit the capital, and demolished every center of social activity, destroyed the systems upon which daily urban life depends.
Millions of people are now without livelihoods and the means for survival.
The first stage in an effective response, the first three or four weeks, must focus on rescuing survivors and stabilizing supplies of food, water, medical services, and shelter for the population.
Neither Haiti nor the world was properly equipped for this, and tens of thousands will die needlessly.
The world’s emergency-response systems – especially for impoverished countries in zones that are vulnerable to earthquakes, volcanoes, droughts, hurricanes, and floods – needs upgrading.
After just a month or so, the emergency phase will give way to a decades-long struggle for recovery and long-term development.
Haiti must avoid a prolonged period of tent cities in which people are mere refugees.
But where should displaced people – numbering hundreds of thousands, and perhaps more than a million – live?
How should they be provided with food, water, health care, and shelter?
And how can they begin to contribute to the revival of basic economic life?
The economy will have a simple structure in the coming years, with most economic activities focused in five sectors: smallholder, or peasant, agriculture; reconstruction; port services and light manufacturing; local small-scale trade; and public services, including health care and education.
The key challenge is to support these five sectors in order to combine short-term relief with long-term reconstruction and development.
First, special efforts should be made to boost peasant agriculture and rural communities.
This will enable hundreds of thousands of displaced people to return to their village communities and live from farming.
With fertilizer, improved seeds, small-scale irrigation, rapid training and extension services, and low-cost storage silos, Haiti’s food production could double or triple in the next few years, sustaining the country and building a new rural economy.
Reconstruction – of roads, buildings, and water and sanitation systems – will employ tens of thousands, perhaps hundreds of thousands, of Haitian construction workers, and boost the regeneration of towns.
The World Food Program can help peasant farmers to produce more food in the countryside and then purchase the food to use in food-for-work programs oriented to construction projects.
Haiti ’s infrastructure was meager before the earthquake (hence the shocking mortality rate), and most of that is now rubble.
Large-scale capital investment will also be needed to re-equip the ports and to re-establish a power grid.
Recovery will also require re-establishing at least a small-scale manufacturing sector.
Haiti, like its next-door neighbor, the Dominican Republic, once created jobs in port facilities, including production of clothing, baseballs, and other light-manufacturing items.
Those jobs disappeared in the 1990’s, when the US imposed a trade embargo on Haiti as part of an effort to re-establish democracy.
Democracy returned, but the economy was destroyed.
Other countries have risen from the rubble of natural disaster and war, and Haiti can do the same over the next five to ten years. For the next decade, however, and especially for the next five years, there will be no escape from the need to rely on international financing, and mainly grant assistance, to finance the rebuilding effort.
The world has spent heavily in Haiti before, but very ineffectively.
This time, it must be done right.
A clear strategy is needed to bolster the key sectors discussed above.
Each sector requires a five-year recovery strategy with a clear budget and clear lines of partnership and responsibility linking the Haitian government, non-governmental organizations, and institutional donors, especially governments and international agencies.
The second key to successful reconstruction is to harmonize the international response.
There are probably 40 or more official organizations from abroad, if not more, already engaged in the recovery effort.
In addition, there are hundreds, if not thousands, of native Haitian NGOs.
The Haitian government itself has been reduced to paralysis by death and destruction.
There should be one overarching framework.
There should be one major multi-donor bank account to finance the heavy outlays required for Haiti’s recovery.
There should be a highly professional executive team coordinating the international support efforts.
And all of this should be put in place very soon, while there is international interest.
The world will move on to the next crisis very soon, well before Haiti has even started to recover.
I have watched the problems of international cooperation for a quarter-century.
Each agency has its role, but they also tend to squabble over turf rather than cooperate.
International financial promises are made for headlines and photo opportunities, but end up undelivered.
We therefore need money in the bank, and clear leadership.
My nominee to guide the process is the Inter-American Development Bank.
The IDB’s deep, long-term commitments in Haiti and professional expertise in agriculture, health, education, and infrastructure qualify it to coordinate the multitude of agencies that will be involved.
It should work closely with a professional executive team made up of native and diaspora Haitian professionals with relevant expertise.
Rebuilding Haiti will cost perhaps $10-$20 billion, and will take much of the coming decade.
Getting started now will save countless lives and prevent a further tragic downward spiral of a society that stands on the brink of survival.
Recount Kenyans’ Votes
Kenya is aflame after a presidential election on December 27 widely believed to have been rigged to secure the re-election of Mwai Kibaki.
Kibaki’s opponents took to the streets, the government issued shoot-to-kill orders, and hundreds have died at the hands of the police as well as from gang rampages and inter-ethnic violence.
The United States has led the international diplomatic response, but its approach has been deeply flawed.
Kenyans voted in vast numbers, waiting in the hot sun for several hours at crowded polling booths around the country.
The first results to be counted were for Kenya’s parliament, with Kibaki’s government ministers roundly defeated in their local constituencies.
The main opposition alliance, led by Raila Odinga, won about 100 seats, compared to roughly 30 for Kibaki.
It appeared overwhelmingly likely that the presidential vote count would similarly show Odinga beating Kibaki by a wide margin.
That, indeed, is how the early count transpired.
As the tallies from polling stations from around the country came into Nairobi, Odinga built up a lead of several hundred thousand votes.
Then the trouble began.
Vote tallies from Kibaki’s homeland in central Kenya were delayed.
Independent observers from the European Union and elsewhere began to report serious irregularities in the Kibaki strongholds, where opposition party representatives were denied access to polling sites.
Matters became even more dubious as the vote tallies were collected and recorded at the Electoral Commission of Kenya (ECK).
According to detailed evidence submitted by the opposition, the tallies from the countryside, allegedly already padded for Kibaki, were again manipulated, with additional votes awarded to him.
As a result, many more votes were recorded by the ECK for the presidential race than for the parliamentary race, even though voters were clearly instructed – indeed required – to cast a vote in both races.
When the opposition tried to challenge these inconsistencies, the ECK abruptly declared Kibaki the winner.
Days later, the ECK’s head publicly acknowledged that Kibaki supporters had pressured him to announce the “results” immediately, despite the clear evidence of vote rigging.
Shockingly, he declared that he did not know who really won.
The EU observers also announced that the election tally had not met basic international standards.
The election is a disaster for Kenya, but the response of the international community, led by the US, is no less distressing.
American foreign policy in Africa is in the hands of Assistant Secretary of State Jendayi Frazer, a former student of Secretary of State Condeleezza Rice.
From the start of the post-election crisis, Frazer took three flawed positions.
First, she declared that the vote could not be re-assessed by an independent tally.
In fact, most observers on the scene believed that there was a long paper trail, from the polling sites all the way to Nairobi, which could be re-assessed in detail.
Second, she claimed that there had been vote rigging “on both sides,” and suggested that the true election results were very close and that perhaps Kibaki had won.
Given the vast amount of direct and circumstantial evidence that the rigging was on behalf of Kibaki, Frazer’s assignment of equal blame to each side was met with astonishment and dismay by the opposition.
She also failed to acknowledge an exit poll carried out by a US foundation, which showed a clear Odinga victory.
Finally, Frazer argued that the two sides needed to compromise and share power.
Instead, Kibaki disdainfully appointed 18 key cabinet members even as “mediation” from abroad was about to begin.
The opposition, of course, was perplexed by the US call for compromise without any serious call to review the vote itself.
In the end, only Kenya will decide its own fate.
The US or other outside powers will not save Kenyan democracy.
Threats, sanctions, or aid cutoffs would only cause further damage to an economy already in free fall, tragically punishing Kenya’s poor while fomenting further violence.
Still, the international community can play a more constructive role than it has until now by pressing both sides to accept an independent recount.
By standing up for democratic principles, the world would truly stand on the side of the Kenyan people.
In dismissing such a recount, Frazer told Kenyans that they shouldn’t expect their vote to be tallied accurately, and that power can be seized or perhaps even negotiated in a backroom.
She also sent an unmistakable signal to those who would steal votes: at worst, they might have to share a few cabinet positions with the opposition.
Perhaps a recount would show that the election was too close to call.
Perhaps, as the opposition insists, it would demonstrate a clear victory for Odinga.
Either way, Kenyans and their votes would be taken seriously, and tempers could well subside.
Only if both sides accept that there was no clear winner is it reasonable to call for power-sharing (or a new election).
There is still time to get this right.
The international community should stop pushing for a backroom “compromise” that ignores the popular will.
Let the world stand with neither Kibaki nor the opposition, nor for an arbitrary compromise, but with Kenya’s voters.
If Kibaki rejects an independent recount, his refusal will reverberate around Kenya and the world.
Those who ignore voters should quickly learn that they have no place to hide.
Recovering America’s “Smart Power”
The United States needs to rediscover how to be a “smart power.”
That was the conclusion of a bipartisan commission that I recently co-chaired with Richard Armitage, the former deputy secretary of state in the Bush administration.
The Smart Power Commission, convened by the Center for Strategic and International Studies in Washington, comprised Republican and Democratic members of Congress, former ambassadors, retired military officers, and heads of non-profit organizations.
We concluded that America’s image and influence had declined in recent years, and that the US must move from exporting fear to inspiring optimism and hope.
We are not alone.
Recently, Defense Secretary Robert Gates called for the US government to commit more money and effort to “soft power,” including diplomacy, economic assistance, and communications, because the military alone cannot defend America’s interests around the world.
Gates pointed out that military spending totals nearly a half-trillion dollars annually, compared to the State Department’s budget of $36 billion.
He acknowledged that for the head of the Pentagon to plead for more resources for the State Department was odd, but these are not normal times.
Smart power is the ability to combine the hard power of coercion or payment with the soft power of attraction into a successful strategy.
By and large, the US managed such a combination during the Cold War; more recently, however, US foreign policy has tended to over-rely on hard power, because it is the most direct and visible source of American strength.
But, while the Pentagon is the best-trained and best-resourced arm of the government, there are limits to what hard power can achieve on its own.
Democracy, human rights, and the development of civil society do not come from the barrel of a gun.
True, the American military has impressive operational capacity, but turning to the Pentagon because it can get things done creates an image of an over-militarized foreign policy.
Diplomacy and foreign assistance are often under-funded and neglected, in part because it is difficult to demonstrate their short-term impact on critical challenges.
In addition, wielding soft power is difficult because many of America’s soft power resources lie outside of government in the private sector and civil society, in its bilateral alliances, multilateral institutions, and transnational contacts.
Moreover, American foreign policy institutions and personnel are fractured and compartmentalized, and there is no adequate inter-agency process for developing and funding a smart power strategy.
The effects of the September 11, 2001, terrorist attacks have also thrown us off course.
Since the shock of those attacks, the US has been exporting fear and anger rather than the country’s more traditional values of hope and optimism.
Guantánamo Bay has become a more powerful global icon than the Statue of Liberty.
The CSIS Smart Power Commission acknowledged that terrorism is a real threat and likely to be with us for decades, but pointed out that over-responding to extremists’ provocations does more damage to the US than terrorists ever could.
Success in the struggle against terrorism means finding a new central premise for American foreign policy to replace the current theme of a “war on terror.”
That premise should be a commitment to invest in the provision of public goods that people and governments worldwide want but cannot attain without American leadership.
By doing so, the US could rebuild the framework that it needs to address tough global challenges.
Specifically, the Smart Power Commission recommended that American foreign policy focus on five critical areas:
Restoring alliances, partnerships, and multilateral institutions, many of which have fallen into disarray in recent years, owing to unilateral approaches.
Elevating the role of economic development to help align US interests with those of people around the world, starting with a major initiative on global public health.
Investment in a public diplomacy that focuses less on broadcasting and more on face-to-face contacts, education, and exchanges that involve civil society and target young people.
Resisting protectionism and promoting continued engagement in the global economy, which is necessary for growth and prosperity at home and abroad, while seeking inclusion for those left behind by changes that an open international economy implies.
Shaping a global consensus and developing innovative technologies to meet the increasingly important global challenges of energy security and climate change.
Implementing such a smart power strategy will require a strategic reassessment of how the US government is organized, coordinated, and budgeted.
The next president should consider a number of creative solutions to maximize the administration’s ability to organize for success, including the appointment of senior personnel who could reach across agencies to better align resources.
This will require innovation, but the US has been a smart power in the past, and it can become so again.
Recovering from Kosovo
LONDON – Kosovo’s recent unilateral declaration of independence brought back memories.
I publicly opposed NATO’s attack on Serbia – carried out in the name of protecting the Kosovars from Serb atrocities – in March 1999. At that time, I was a member of the Opposition Front Bench – or Shadow Government – in Britain’s House of Lords.
The then Conservative leader, William Hague, immediately expelled me to the “back benches.”
Thus ended my (minor) political career.
Ever since, I have wondered whether I was right or wrong.
I opposed military intervention for two reasons.
First, I argued that while it might do local good, it would damage the rules of international relations as they were then understood.
The UN charter was designed to prevent the use of force across national lines except for self-defense and enforcement measures ordered by the Security Council.
Human rights, democracy, and self-determination are not acceptable legal grounds for waging war.
Secondly, I argued that while there might be occasions when, regardless of international law, human rights abuses are so severe that one is morally obliged to act, Kosovo was not such a case.
I considered the “imminent humanitarian disaster” that the intervention was ostensibly aimed at preventing, to be largely an invention.
I further argued that non-military means to resolve the humanitarian issue in Kosovo were far from being exhausted, and that the failed Rambouillet negotiation with Serbia in February-March 1999 was, in Henry Kissinger’s words, “merely an excuse to start the bombing.”
This view was vindicated by the Organization for Security and Cooperation in Europe’s Report on Human Rights Violations in Kosovo , published in December 1999.
The report showed that the level of violence fell markedly when OSCE monitors were placed in Kosovo following the Holbrooke-Milosevic agreement of September 23, 1998; and that it was only after the monitors were withdrawn on March 20, 1999, in preparation for the bombing that general and systematic violation of human rights began.
Between March and June 1999 – the period of NATO bombing – the number of deaths and expulsions in Kosovo shot up.
The “humanitarian disaster” was in fact precipitated by the war itself.
Despite this, the term “genocide,” freely bandied about by Western interventionists, was grotesquely inappropriate at any time.
Without doubt, NATO air strikes and the subsequent administration of Kosovo as a protectorate improved the political situation for Albanian Kosovars.
Without NATO intervention, they probably would have remained second-class citizens within Serbia.
Against this must be set large-scale deterioration in the economic situation of all Kosovars, Albanian and Serbian (44% unemployment), widespread criminalization, and the fact that under NATO rule, Kosovo was ethnically cleansed of half its Serb minority.
Kosovo remains in political limbo to this day.
Two thousand European Union officials run the country, and 16,000 NATO troops guard its security.
Its “independence” is rejected by Serbia, unrecognized by the Security Council, and opposed by Russia, China, and most multi-national states in Europe and Asia, which fear setting a precedent for their own dismemberment.
Indeed, Russian Foreign Minister Sergei Lavrov was quick to blame the disturbances in Tibet on Kosovo’s declaration of independence.
A Serbian insurgency and de facto partition of Kosovo remain possible, and we have yet to face the destabilizing effects of Kosovo’s claim to independence on other divided Balkan states such as Bosnia and Macedonia But the balance sheet is even worse in terms of international relations.
Kosovo was a stalking horse for Iraq, as the doctrine of humanitarian intervention morphed into President George W. Bush’s doctrine of “pre-emptive war,” by which the US claimed the right to attack any state that it deemed a threat to its national security.
As then-UN Secretary General Kofi Annan rightly argued, this opened the door to the proliferation of unilateral, lawless use of force.
Not the least damaging consequence of the Bush doctrine is that it dispenses with the need for public proof of aggressive intent.
The Iraq invasion was justified by the same use of fraudulent evidence as was displayed in Kosovo.
On balance, I believe that I was right to oppose the Kosovo war.
It was a regressive answer to a genuine international problem: how to hold together multi-ethnic/religious states in a reasonably civilized way.
Since 1999, Kosovars have rejected Serbian offers of autonomy, because they were confident of American support for independence.
Western countries must consider more seriously how far they should press their human rights agenda on states with both the power and the will to defend their territorial integrity.
Under American leadership, it is the West that has emerged as the restless, disturbing force in international affairs.
China should certainly grant Tibet more autonomy; but is pumping up the Dalai Lama into a world leader or threatening to boycott the Beijing Olympics the best way to secure a better deal for Tibetans, or to obtain Chinese cooperation on matters that are far more important than Tibet’s status?
Activists, impassioned by the justice of their cause, will not consider these questions.
But world leaders should take them seriously.
Recovery before Reform
LONDON – The financial crisis that started in 2007 shrunk the world economy by 6% in two years, doubling unemployment.
Its proximate cause was predatory bank lending, so people are naturally angry and want heads and bonuses to roll – a sentiment captured by the current worldwide protests against “Wall Street.”
The banks, however, are not just part of the problem, but an essential part of the solution.
The same institutions that caused the crisis must help to solve it, by starting to lend again.
With global demand flagging, the priority has to be recovery, without abandoning the goal of reform – a difficult line to tread politically.
The common ground of reform is the need to re-regulate the financial services industry.
In the run-up to the crisis, experts loudly claimed that “efficient” financial markets could be safely left to regulate themselves.
Reflecting the freebooting financial zeitgeist that prevailed at the time, the International Monetary Fund declared in 2006 that “the dispersion of credit risk by banks to a broader and more diverse group of investors…has helped make the banking and overall financial system more resilient…” As a result, “the commercial banks may be less vulnerable to…shocks.”
It is impossible not to hear in such nonsense the cocksure drumbeat of the Money Power, which has never failed to identify the public interest with its own.
For 50 years after the Great Depression of the 1930’s, the Money Power was held to account by the countervailing power of government.
At the heart of the political check was America’s Glass-Steagall Act of 1933.
Glass-Steagall aimed to prevent commercial banks from gambling with their depositors’ money by mandating the institutional separation of retail and investment banking.
The result was 65 years of relative financial stability.
In what economists later called the “repressed” financial system, retail banks fulfilled the necessary function of financial intermediation without taking on suicidal risks, while the government kept aggregate demand high enough to maintain a full-employment level of investment.
Then the Money Power struck back, aided and abetted by its apologist cohort of economists.
The Big Bang of 1986 in London ended the separation of banking functions in the United Kingdom.
After prolonged lobbying by the financial-services industry, US President Bill Clinton repealed Glass-Steagall in 1999.
From that point on, commercial and investment banks could merge, and the composite entities were authorized to provide a full range of banking services, including underwriting and other trading activities.
This was part of a wave of deregulation that swept away Franklin Roosevelt’s promise to “chase the money changers from the temple.”
Clinton also refused to regulate credit-default swaps, and the US Securities and Exchange Commission allowed banks to triple their leverage.
These three decisions led directly to the sub-prime extravaganza that brought down the US banking system in 2007-2008.
Since that crash, efforts have been made to reconstruct the dismantled system of financial regulation in order to prevent the “over-lending” that led to the collapse.
The new doctrine is called “macro-prudential regulation.”
Under an international agreement known as Basel III, banks are to be required to hold a higher ratio of equity capital against “risk-weighted assets,” and leverage is to be limited to a smaller percentage of such assets.
National regulators are exploring ways to vary ratio requirements over the business cycle, and have started subjecting banks to regular “stress tests.”
In the UK, a Financial Policy Committee within the Bank of England is to monitor the “systemic risk” of financial failure, with a Prudential Regulatory Authority supervising systemically important institutions.
According to monetary economist Charles Goodhart, a significantly faster-than-normal growth rate for bank credit, house prices, and leverage will give the authorities sufficient warning of impending crisis.
The new orthodoxy places its faith in regulators’ ability to improve on banks’ measurement of risk, while leaving the structure of the banking system unchanged.
But, when it comes to upping equity requirements against “risk-weighted assets,” who is to do the weighting, and according to what methodology?
Goodhart concedes that banks’ “risk weightings” in the pre-recession period were subject to political pressure and “financial-industry capture and manipulation.”
This is inevitable, because, as John Maynard Keynes pointed out, the “riskiness” of many investments, being subject to inherent uncertainty, is immeasurable.
In short, the new regulatory philosophy replaces the illusion that banks can safely be left to manage their risks with the illusion that regulators will do it for them.
Meanwhile, initial enthusiasm for restoring Glass-Steagall – breaking up banking functions into separate institutions – has fallen by the wayside.
It is only logical that banks with state-guaranteed deposits should be safe and boring, with other necessary, but risky activities hived off to separate companies.
But little progress has been made in (re)implementing this idea.
The “Volcker rule,” whereby commercial banks would be barred from trading on their own account, and from owning hedge funds and private-equity firms, languishes in Congress.
In the UK, an Independent Commission on Banking, headed by Sir John Vickers, rejected separation of retail from investment banking, recommending instead “ring-fencing” deposits from the investment arms of universal banks.
Trust-busters argue that such “Chinese walls” always break down under pressure, owing to huge shareholder demand for universal banks to boost profits at the expense of a sound commercial banking core.
And senior executives will still have a legal obligation to maximize profits.
The Vickers commission’s proposals also depend on sophisticated regulation, which assumes, against history, that regulators will always be one step ahead of bankers.
The Money Power never surrenders easily.
Whether relying on regulation, or gesturing towards institutional separation, most proposals for banking reform remain at the drawing-board stage, and are sure to be emasculated by financial lobbies.
Moreover, whatever their intrinsic merits, none of these proposals addresses the global economy’s most immediate problem: undersupply, not oversupply, of credit.
In other words, the challenge is to revive lending growth in full awareness that we must begin devising ways to rein it in.
Redeeming the United Nations
For a United Nations official to discuss reform of the international system is rather like an Englishman talking about the weather: it is a staple of daily conversation, but it always seems that real change remains just over the horizon.
On Wednesday, 166 heads of state and government will gather in New York for a summit that we hope will take the reform process a major step forward.
Ambassadors in New York are now working day and night to hammer out the details of the current reform proposals.
But whatever they manage to agree upon, as a long-time UN official I am conscious of how much the UN has already changed since I joined 27 years ago.
If I had suggested to my superiors at that time that the UN would one day observe and even run elections in sovereign states, conduct intrusive inspections for weapons of mass destruction, impose comprehensive sanctions on the entire import-export trade of a member state, or set up international criminal tribunals and coerce governments into handing over their citizens to be tried by foreigners under international law, they would have told me that I did not understand what the UN was all about.
Yet the UN has done all of these things, and more, during the last two decades.
It has administered territory, conducted huge multi-dimensional peace-keeping operations with nearly 80,000 soldiers in the field, and deployed human rights monitors to report on the behavior of sovereign governments.
In short, the UN has been a highly adaptable institution, one that has evolved in response to changing times.
Today’s reform imperatives can be traced to international divisions over the Iraq war.
In the summer of 2003, a poll conducted by the Pew Organization in 20 countries revealed that the UN’s standing had declined in all of them.
The UN’s reputation suffered in the US because it did not support the Bush administration on the war – and in the 19 other countries because it was unable to prevent the war.
We got hit from both sides of the debate and disappointed both sets of expectations.
Some famous and rather powerful voices began to speak of the UN’s irrelevance.
It was at the peak of this unprecedentedly intense scrutiny that Secretary-General Kofi Annan seized the moment.
In an historic speech to the General Assembly, he said that we could either continue with business as usual, potentially leading to disaster, or we could review the entire post-1945 architecture of the international system and construct a more effective structure of global governance.
Annan named a high-level panel of eminent persons to look into issues of peace and security, while a parallel group of economists, led by Jeffrey Sachs, studied what was needed to fulfill the development commitments made by world leaders at the Millennium Summit in 2000.
In March, Annan synthesized their key recommendations in a report entitled In Larger Freedom.
The title comes from the preamble to the UN charter, which speaks of striving “to promote social progress and better standards of life in larger freedom.”
By that magnificent phrase, the UN’s founders meant that human rights, development, and security are mutually interdependent.
Of course, the UN often falls short of its noble aspirations, since it reflects the realities of world politics, even while seeking to transcend them.
At its best and at its worst, the UN is a mirror of our world: it reflects our differences and our convergences, our hopes and aspirations, and our limitations and failures.
But the cause of political freedom has been making headway.
When I joined the UN, it was almost unthinkable for the organization to take sides between democracy and dictatorship, or to seek to intervene in members’ internal affairs.
Even on the meaning of human rights there was no universal agreement, with some states regarding them as a tool of Western neo-imperialism.Today, by contrast, the UN does more than any other single organization to promote and strengthen democratic institutions and practices around the world.
In the past year alone, it has organized or assisted in elections in over 20 countries – often at decisive moments in their history – including Afghanistan, Palestine, Iraq, and Burundi.
The UN is setting up a Democracy Fund to increase assistance for building democracy, and we have proposed establishing a Peace-Building Commission to help countries move from war to durable peace.
Annan is also pressing for a more effective and credible international machinery for defending human rights.
As we face the new challenges of our time, let us not forget the old ones, especially the persistent horror of underdevelopment.
The combination of poverty, drought, famine, and HIV/AIDS in sub-Saharan Africa threatens more human lives than terrorism or tsunamis ever did.
This summit must reaffirm the Millennium Development Goals and recommit the world to achieving these targets by 2015.
There is no longer any excuse for leaving well over a billion people in abject misery.
As Mahatma Gandhi put it, “You must be the change you wish to see in the world.” The UN is no exception.
To change the world, we must change too.
The UN can be a much more effective instrument if its member states in the General Assembly and the Security Council are better organized and give clearer directives to us in the Secretariat – along with the flexibility to carry them out – and then hold us clearly accountable.
This week’s summit will be the largest single gathering of world leaders in human history.
If world leaders rise to their responsibilities, the rebirth and renewal of the UN will be at hand.
With its renewal, we will also renew our hope for a fairer and safer world.
Redefining Sustainable Development
MELBOURNE – Albert Einstein once said that if he had just one hour to find a solution on which his life depended, he would spend the first 55 minutes defining the problem.
Once he knew the right question to ask, he could solve the problem in less than five minutes.
Today, humanity faces such a life-threatening problem: How are we to provide adequate nutrition and a decent quality of life to a global population that is set to surpass nine billion by 2050, without irreparably damaging our planetary life-support system?
To find a solution, we must start by clarifying the problem.
Humans have fundamentally altered Earth’s ecosystems.
By interfering with the carbon, nitrogen, water, and phosphorus cycles, human activity changes the atmosphere, oceans, waterways, forests, and ice sheets, and diminishes biodiversity.
Indeed, the effects of human behavior on the planet’s ecosystems have become so significant in the last few centuries that many scientists now believe that the planet has entered a new geological epoch, dubbed the Anthropocene.
As the environmental consequences of human activity become increasingly apparent, so does humanity’s responsibility to mitigate them.
Last year, at the United Nations Earth Summit in Rio de Janeiro, world leaders agreed to create a set of universal Sustainable Development Goals, which would change the playing field for future economic policy to safeguard our life-support system.
That’s easy to say.
But where does one start?
For almost three decades, sustainable development has been defined as development that meets the needs of the present, without compromising future generations’ ability to meet their needs.
Related policies have reflected the view that sustainable development rests on three equal pillars: the economy, society, and the environment.
But this view is no longer tenable.
As the United States Global Change Research Program’s recently released draft report on climate change points out, some kinds of weather events have become more common, and more intense, in recent years.
In 2012 alone, Arctic sea-ice dipped to a new low, as an area larger than the US melted; unprecedented heat waves struck Australia, and other areas; record floods hit China and Japan; and the United Kingdom had its wettest year on record.
But global responses remain inadequate.
A new approach is needed.
Rather than separate pillars of sustainable development, the economy must be seen as servicing society, which in turn thrives within a secure natural environment.
Viewed this way, sustainable development should be redefined as “development that meets the needs of the present while safeguarding the Earth’s life-support system, on which the welfare of current and future generations depends.”
After all, a healthy, thriving planet is a prerequisite for healthy, prosperous lives.
The process of identifying the Sustainable Development Goals, which are intended to enter into force in 2015, has begun in earnest.
Last week, representatives from 69 countries met at the UN in New York, and an expert group meets this week.
The goals must have measurable, achievable objectives that extend beyond national policy; they must inspire regional and local administrations, businesses, civil society, and individuals everywhere to change their behavior.
They should create goals for humanity that are grounded in shared values – and in relevant science.
This week, my colleagues and I published a report called Sustainable Development Goals for People and Planet, which outlines what is required.
We identified six universal goals for sustainable development: lives and livelihoods, food security, water sustainability, clean energy, healthy ecosystems, and good governance.
The next step is to define measurable targets, such as better lives for slum dwellers or reduced deforestation.
Genuine progress in any of the six target areas will require a comprehensive approach, with policies that span the economic, social, and environmental domains.
For example, eradicating poverty entails the provision of food, water, energy, and access to gainful employment.
But providing energy to all will require governments to discontinue subsidies for fossil fuels and unsustainable agriculture.
And achieving food security is impossible without agricultural systems and practices that not only support farmers and produce enough food to meet people’s nutritional needs, but that also preserve natural resources by, for example, preventing soil erosion and relying on more efficient nitrogen and phosphorus fertilizers.
The Millennium Development Goals, due to expire in 2015, succeeded because they marshaled international resources and funding to address a focused set of poverty-related issues.
The Sustainable Development Goals must go a step further.
The Next Social Contract
PARIS – Around the world nowadays, persistent unemployment, skill mismatches, and retirement frameworks have become central to fiscal policy – and to the often-fierce political debates that surround it.
The advanced countries are facing an immediate “aging” problem, but most of the emerging economies are also in the midst of a demographic transition that will result in an age structure similar to that of the advanced economies – that is, an inverted pyramid – in just two or three decades.
Indeed, China will get there much sooner.
Multiple problems affect employment.
Weak demand in the aftermath of the global financial crisis that began in 2008 remains a key factor in Europe, the United States, and Japan.
But longer-term structural issues are weighing down labor markets as well.
Most important, globalization results in a continuous shift of comparative advantage, creating serious adjustment problems as employment created in new activities does not necessarily compensate for the loss of jobs in old ones.
In any case, most new jobs require different skills, implying that workers losing their jobs in dying industries have little hope of finding another one.
Moreover, technological progress is becoming ever more “labor-saving,” with computers and robots replacing human workers in settings ranging from supermarkets to automobile assembly lines.
Given the volatile macroeconomic outlook, many firms are reluctant to hire new workers, leading to high youth unemployment throughout the world.
At the same time, aging – and the associated cost of health care for the elderly – constitutes the main fiscal challenge in maturing societies.
By the middle of this century, life expectancy at age 60 will have risen by about ten years relative to the post-World War II period, when current retirement ages were fixed.
Marginal changes to existing arrangements are unlikely to be sufficient to respond to technological forces, reduce social tensions and young people’s fears, or address growing fiscal burdens.
A radical reassessment of work, skill formation, retirement, and leisure is needed, with several principles forming the core of any comprehensive reform.
For starters, skill formation and development must become a life-long process, starting with formal schooling, but continuing through on-the-job training and intervals of full-time education at different points in life.
Special youth insertion programs should become a normal part of public support for employment and career formation, with exemption from social-security contributions for the first one or two years of employment.
A second principle is that retirement should be a gradual process.
People could work an average of 1,800-2,000 hours per year until they reach their 50’s, taper off to 1,300-1,500 hours in their early 60’s, and move toward the 500-1,000 range as they approach 70.
A hospital nurse, an airplane crew member, or a secondary-school teacher, for example, could work five days a week until her late fifties, four days a week until age 62, three days until age 65, and perhaps two days until age 70.
Employers and workers should negotiate such flexibility, but they should do so with incentives and financial support from government – for example, variable social-security and income taxes.
Paid holidays can be 3-4 weeks until age 45, gradually increasing to 7-8 weeks in one’s late 60’s.
Maternity and paternity leave should be increased where it is low, such as in the United States.
Public policies should also encourage greater scope for individual choice.
For example, every ten years, a worker should be able to engage in a year of formal learning, with one-third of the cost paid by the employer, one-third by public funds, and one-third by personal savings (these proportions could vary by income bracket).
The overall objective should be a society in which, health permitting, citizens work and pay taxes until close to the age of 70, but less intensively with advancing age and in a flexible manner that reflects individual circumstances.
In fact, gradual and flexible retirement would in many cases benefit not only employers and governments, but also workers themselves, because continued occupational engagement is often a source of personal satisfaction and emotionally enriching social interaction.
Using the Gallup World Poll, my colleagues at the Brookings Institution in Washington, DC, Carol Graham and Milena Nikolova, have found that the happiest cohorts are those who work part-time voluntarily.
In exchange for longer work lives, citizens would have more time for both leisure and skill formation throughout their lives, with positive effects on productivity and life satisfaction.
The new social contract for the first half of the twenty-first century must be one that combines fiscal realism, significant room for individual preferences, and strong social solidarity and protection against shocks stemming from personal circumstances or a volatile economy.
Many countries are taking steps in this direction.
They are too timid.
We need a comprehensive and revolutionary reframing of education, work, retirement, and leisure time.
Redesigning Capitalism
PARIS – When the heads of state of the world’s 20 largest economies come together on short notice, as they just did in Washington, D.C., it is clear how serious the current global crisis is.
They did not decide much, except to call for improved monitoring and regulation of financial flows.
More importantly, they committed themselves to launching a lasting process to reform the world’s financial system.
Of course, those who dreamed of a Bretton Woods&nbsp;II were disappointed.
But the original Bretton Woods framework was not built in a day; indeed, the 1944 conference was preceded by two and a half years of preparatory negotiations, which is probably the minimum needed to decide such weighty issues.
The recent G-20 summit occurred with virtually no real preliminary work.
Three tasks must now be addressed.
First, a floor must be put under the international financial system in order to stop its collapse.
Second, new regulations are needed once the system revives, because if it remains the same way, it will only produce new crises.
Finding the right mix will not be easy.
For 25 years, the world has experienced a huge financial crisis every five years, each seemingly with its own cause.
The third task is to focus on real economic activity, end the recession, sustain growth, and, above all, reform the capitalist system to make it be less dependent on finance.
Long-term investments, not short-term profits, and productive work, rather than paper gains, need to be supported.
The first task is already being tackled.
But, although the United States and some European countries have gone a long way toward restoring the lending capacity of banks, that may not be enough.
After all, if the economy is to grow again, banks need borrowers, but the recession has led entrepreneurs to cut their investments.
The second task remains open.
Disagreements about how to re-regulate the financial markets are deep, owing to countless taboos and the huge interests at stake.
Moreover, there can be no comprehensive agreement that does not take into account the relationship between finance and the real economy.
The essential problem in addressing the third task is to find out precisely what is going on in the real economy.
Some states (Iceland and Hungary) are clearly bankrupt.
Some merely face a hazardous financial situation (Denmark, Spain, and others).
Their financial crisis is the main reason for their weakness.
All of these problems are so difficult to resolve because they have been festering for so long.
It is now increasingly evident that today’s crisis has its roots in February 1971, when US President Richard Nixon decided to break the link between the dollar and gold.
Until that point, America’s pledge to maintain the gold standard was the basis for the global fixed-exchange-rate system, which was the heart of the Bretton Woods framework.
During the 27 years that it lasted, huge growth in international trade, supported by non-volatile pricing, was the norm, and large financial crises were absent. &nbsp;
Since then, the international financial system has been highly volatile.
The era of floating exchange rates that followed the end of the gold standard required the development of products that could protect international trade from price volatility.
This opened the way to options, selling and buying on credit, and derivatives of all kinds.
These innovations were considered technical successes.
Prices were (mostly) stabilized, but with a slow, if continuous, rising trend.
The market for these financial products grew over 30 years to the point that they delivered huge opportunities for immediate gain, which provided a strong incentive for market participants to play with them more and more.
During this time, capitalism – smooth and successful between 1945-1975 (sustained high growth, low unemployment, and no financial crises)&nbsp;– weakened.
Through pension funds, investment funds, and arbitrage (or hedge) funds, shareholders became well organized and seized power in developed countries’ firms.
Under their pressure, more and more processes were “outsourced.”
In real terms, wages no longer rose (indeed, the average real wage has been stagnant for 25 years in the US), and a growing share of manpower (currently around 15%) was without steady employment.
Everywhere, the share of wages and incomes began to fall as a proportion of GDP.
As a result, consumption weakened, unsteady employment grew, and unemployment stopped declining.
Under such circumstances, the upper middle classes in developed countries increasingly came to look for capital gains instead of improving their living standards through productive work.
This promoted inequality, and led to the under-regulated financial system’s seizure of power over the entire economy, destabilizing the real economy by fatally weakening its capacity to react to external shocks.
Today’s crisis marks the end of economic growth fueled only by credit.
But untying the knot that an overweening financial sector has drawn around the economy will take time.
Indeed, there is still no consensus that this needs to be done.&nbsp;Yet the G-20 has opened the way to discussion of these fundamental issues.
Today’s recession will be a long one, but it will compel everybody to consider its root causes.
Rediscovering the West
Transatlantic disputes are multiplying at the very moment that Europe's Constitutional Convention begins to debate a joint EU foreign policy.
Ralf Dahrendorf thinks that both sides of the Atlantic need to look beyond the trivial and rediscover the common interests and values of the West.
Hardly a week goes by without some addition to the already long list of European-American gripes and irritants.
One week it is the UN Security Council vote about a continued US presence in the Bosnia peacekeeping mission. Before that the setting up of the International Criminal Court without American participation set both sides on edge, and the question of whether the Palestinians should be told whom not to elect as their leader.
Israel and the Palestinians remain a subject of profound Europe-US disagreements, as are issues surrounding the environment and the idea of sustainable development.
Add to these US trade sanctions, America's latest Farm Bill, and of course the whole question of alleged or real US unilateralism.
Fortunately, such spats are not the whole truth.
American unilateralism is in fact a form of "multilateralism à la carte".
Where it suits American interests, international institutions are happily used, and they usually serve European interests.
Also one must never forget that we are talking about democracies.
In the US, as in Europe, there are many different views about Bosnia, about Arafat, even about protecting farmers.
After all, not every American voted for President Bush, nor is every European a Eurofederalist.
Still, when representatives of the US and the EU meet for formal consultations, they arrive at the table with different perceptions. US participants represent a country at war in which energies are concentrated on defeating the enemy, "terrorism," whether of the Al Queda or Iraqi variety.
EU participants on the other hand represent ... well, what exactly?
If the issue is trade, then the answer is clear. In so far as the European Union is a "single market," it is represented by the Trade Commissioner, Pascal Lamy.
If the issue is competition, Commissioner Mario Monti represents Europe, stridently so, as Americans have learned to their surprise.
But as soon as we move to wider issues of foreign and defense policy, Xavier Solana, the High Representative of the EU Council of Ministers, may be at the telephone number that Henry Kissinger famously could never find in Brussels when he wanted to "speak to Europe" in his day, but Solana is hardly in a position to speak for "Europe" in important matters today.
European attitudes demonstrate the consequences.
Americans are right to point out that Europeans spend an undue amount of time consulting among themselves, and then come up with very little. Most of the time, they agree only to try to put the brakes on firm action.
They are reluctant.
"Don't go too fast in welcoming Russia to NATO!"
"Don't go too far in supporting Israel and neglecting the Palestinians!"
"Don't extend the fight against terrorism to the producers of weapons of mass destruction!"
What should be done instead? "Political solutions" should be found, which really means that the European method of consensus building without firm action should be applied to the world at large.
Sometimes the two methods - consultation without action in Europe, actions without consultation in the US - can be turned to mutual advantage.
If Europeans do not want to go to war, and Americans do not want to get involved in protracted processes of institution building in distant places, an obvious potential for an international division of labor emerges.
To some extent it is practiced already both in Afghanistan and in the Balkans.
At other times, a dangerous potential for division arises between Europeans and the US. Quite a few in Europe define the EU as an instrument for holding their own against the United States.
They see even the Euro as a weapon against the dollar and rejoice when the Euro is "strong" and the dollar is "weak".
The US has found a new "empire of evil" in "terrorist" states and organizations;
Europe has found a new adversary who helps it integrate in the United States.
This is a dangerous state of affairs for those on either side of the Atlantic who believe in the values of the enlightenment and in the constitution of liberty.
In terms of basic values, there is such a thing as the West.
After September 11 th , it has become more important than ever.
Defending the values of the West against anti-enlightenment forces both within and without may well be the most important task ahead for all who believe in liberty.
It is unfortunate that some in America, and many in Europe, seem to have forgotten, at least temporarily, that this is what our efforts are all about.
Europeans do not want to fight, not even for their basic values, and Americans think they are fighting only as patriots of their great country.
Neither vision is good enough.
Rediscovering the West and the institutions that go with it, and defending them with whatever it takes, is the primary issue on the agenda of liberty today.
Re-envisioning Europe
Many citizens of France’s 24 partners in the European Union, or of states that aspire to enter the EU soon, are angry – indeed, indignant – at France’s rejection of the European Union’s constitutional treaty.
After the Dutch “no,” there is fear that distrust of the European project will spread.
The French vote mainly expressed a rejection of our ruling class and deep anxiety about our economic prospects.
It was a vote of misery and desertion, an impulse moved by panic as well as anger.
But the size of the “no” vote also reflected the persistent lack of a clear explanation by our politicians of what the EU brings to Europeans in terms of wealth, competitiveness, social welfare and, of course, peace.
Too often, our politicians disparage Europe and impute to it evils (like unemployment) that are really the result of domestic insufficiencies.
Like many in France, I do not believe that this thunderbolt means the end of Europe.
We can and must react positively, and we can do so by returning to basics and offering to Europe’s nations, including the French and the Dutch, new challenges and a new spirit.
First, let us express the undeniable facts about Europe’s Union.
Above all, Europe means peace.
Peace was at the heart of the ambition of Europe’s founding fathers.
It returned as an animating and unifying force with the collapse of communism and the Balkan wars of a decade ago.
Peace is also a living issue today, given global terrorism and Europe’s unbreakable alliance with the United States.
It is wrong to pretend that the risk of war is behind us.
If Europe’s vigilance breaks down, violent conflict will become a possibility once again.
A united Europe can respond to these dangers in ways that no single state can.
Moreover, no single state can weigh in on international negotiations and offer solutions to economic rivalries or trade issues that threaten to degenerate into political clashes.
Europe also incarnates democratic values.
The Union helped countries in southern Europe overthrow authoritarian regimes in the 1980’s, and helped countries in Europe's East become democracies in the 1990’s.
Enlargement of the EU is not only an economic duty to be borne by the richest nations; it is also the recognition of a common history and a shared culture.
We in the wealthy West do not have the right to abandon this task, and we must welcome in the same community of destiny all democratic countries east to Russia if they fulfill the EU’s criteria.
Europe also means prosperity and, for the countries that joined the EU recently or will join shortly, the promise of prosperity.
All countries face, to different degrees, economic problems.
But there is a model, simultaneously economic and social, that only Europe embodies.
The European framework is exacting but necessary.
It is as far from being a controlled economy as it is from resembling the libertarian anarchism that many French opponents of the constitutional treaty fear.
It is a framework that is based on a discipline and solidarity within and between member states from which no one can be exempt.
To be sure, behind the Union’s great schemes lurks another EU, one that is excessively bureaucratic.
But it also must be recognized that the EU built its success on its meticulous processes and ability to regulate economic life for the benefit of all.
It was in this way that it radically transformed economies and societies for the better.
Nor can we overlook the banal bargaining of European leaders, the quarrels over budgets, and the rise of national egoisms whenever elections loom.
True, such political infighting makes the EU appear as if it is no longer motivated by great and noble ambitions.
Even the constitutional treaty, which should have been a clarion call for all Europeans, was allowed to become bogged down in minutia.
Indeed, today no European political figure of global stature offers an ambition that resonates.
So our task is to offer Europe a new foundation and a new impulse.
We need founding fathers – or mothers – and nations moved by a clear understanding of their interests and a popular enthusiasm for European integration.
The road will be long.
But we are compelled to be confident that we can move domestic politics to higher considerations.
Europe’s academics, senior civil servants, business executives, and trade unionists must work together to build a project that expresses a new frontier for Europe.
If we are unable to build a new idea of and for Europe, all that Europe has achieved in the last 50 years will be put at risk.
Referendum Farce in Burma
PRAGUE – The enormous suffering of the Burmese people caused by the recent cyclone, which has caused tens of thousands of deaths, deserves the sympathy of the entire world.
But more than sympathy is needed, because the Burmese military junta’s incompetence and brutal oppression are further aggravating the tragic consequences of this natural disaster.
In the midst of the cyclone’s devastation, Burma’s ruling generals went ahead and held a referendum on a new constitution.
But, according to Burma’s Constitutional Referendum Act, members of religious organizations, those subject to criminal prosecution, and members of ethnic groups that have not agreed to a ceasefire with the government were barred from voting.
Thus, all current and former political prisoners, about 500,000 Buddhist monks, and more than twice as many members of ethnic minority groups living close to the borders were banned from the vote.
Moreover, according to the new constitution that was supposedly “approved” by the “referendum,” Daw Aung San Suu Kyi, who has never been prosecuted and still remains under house arrest, is barred from standing in the 2010 general elections under the pretext that her deceased husband was British.
Is the world really willing to accept such an absurdity?
We strongly support the Burmese opposition’s campaign calling on the country’s citizens to reject the constitution, which does not promote human rights, but only confirms the military’s political role.
Many democracy activists have been arrested throughout the country.
The regime’s draconian “law” (5/96) prohibits participants from criticizing the draft constitution; those who dare to challenge the regime face a 20-year prison sentence.
Given the violent suppression of last September’s mass demonstrations (the “Saffron Revolution”) led by Burma’s Buddhist monks, and the constant repression in the country, it is not surprising that the military junta tries to shroud its despotic tendencies in pseudo-democratic measures such as the sham electoral process of the referendum.
Sadly, the international community did not respond to last autumn’s mass arrests of human rights defenders.
The 88 Generation leaders, including Min Ko Naing, Ko Ko Gyi, women activists like Su Su Nway, and others bravely expressed their grievances time and again in letters, statements, and public demonstrations prior to the Saffron Revolution.
Their courageous calls fell on deaf ears; they now remain imprisoned.
It is time to strongly condemn the exclusion of a considerable number of people from voting and to insist on the release of Burma’s political prisoners.
The United Nations and the European Union should be ready to reject conclusively the result of the referendum and strengthen sanctions against the regime.
Burma’s neighbors in ASEAN should stop looking the other way as Burma’s rulers trample on Burma’s citizens.
The UN Security Council should consider introducing a universal arms embargo, and the EU should adopt banking sanctions that target the regime and its cronies.
Moreover, the UN should not only condemn, but without further delay put a stop to today’s greatest atrocity: the regime’s obstruction of foreign assistance to victims of the cyclone.
Their deaths are the sole responsibility of the military junta, which deliberately and with knowledge of the likely consequences has closed the door to humanitarian aid and workers from all over the world.
Their actions represent an appalling crime against humanity.
The military-run referendum will not bring democracy to Burma, nor will it help the Burmese people, who now are suffering not only from the authoritarian regime and poverty, but also from a grave natural disaster and its totally inept handling by the cynical generals.
Burma’s rulers have failed in their duty to protect the Burmese people, but active and decisive political action by the international community towards the regime may yet do so.
Reform and Renewal at the IMF
CAMBRIDGE – Every time the International Monetary Fund awaits a new managing director, critics complain that it is past time for the appointee to come from an emerging-market country.
But whining won’t change the unjust 60-year-old tradition by which a European heads the IMF and an American leads the World Bank.
Only if emerging-market countries unite behind a single candidate will they have a shot at securing the post.
Unfortunately, that is unlikely this time around, too, so the job will probably go to a European yet again.
After all, the oft-repeated principle that the IMF’s managing director should be chosen on the basis of merit rather than nationality need not mean a departure from past practice.
French Finance Minister Christine Lagarde (Europe’s choice) is impressive and capable.
But the proposition that the ongoing sovereign-debt crisis on Europe’s periphery is a reason to appoint a European is wrong.
(Lagarde herself seems to acknowledge this.)
Europe has lost its implicit claim to be the best source of serious people with the experience needed to run the international monetary system.
At one time, there may have been a kernel of truth to this.
In the 1980’s, for example, the IMF was run by highly capable managing directors from France, during a period when huge budget deficits and even hyperinflation ran wild in the developing world.
But that time is past.
There are three respects in which Europe can no longer claim to be a special seat of wisdom and responsibility.
First, many large emerging-market countries have done a better job than Europe at managing their economies over the last decade.
These countries do not have the excessive budget deficits that many European countries ran up during the last expansion – and that are culminating in today’s mismanaged sovereign-debt crisis.
Second, the Europeans have now chosen three managing directors in a row who resigned before the end of their term.
True, neither of Dominique Strauss-Kahn’s two predecessors left amidst scandal as he did. Then again, both of those resignations suggested that the men in question had not taken the job seriously enough.
Finally, many of the best candidates this time around are from emerging economies.
So the merit criterion happens to coincide well with the much-recognized but never-honored need to give emerging-market countries more weight in the IMF’s governance, in line with their new weight in the global economy.
Indeed, the number of excellent emerging-market candidates is remarkable.
Of course, not everyone being put forward by his or her government is a good candidate.
When Turkey’s leaders say they have at least ten good candidates, they show that politicians often don’t know what the job requires.
(No country has ten good candidates.)
I count nine emerging-market candidates who are unusually well qualified to lead the IMF.
Six seem to be live candidates, and they come from all parts of the world:
·Agustín Carstens, the governor of Mexico’s central bank, has been described as the leading prospect among the group.
But even Latin America is not unifying behind him (Brazil has not been supportive), let alone other developing countries;
·Arminio Fraga, the former governor of Brazil’s central bank, is another good candidate with extensive experience.
But it is not clear that Latin America’s other governments are prepared to unify behind someone from the region’s largest country.
Indeed, it seems that any candidate linked to a large regional power is more likely to provoke jealousy than solidarity from others;
·Tharman Shanmugaratnam, who has excelled as Singapore’s finance minister and was just promoted to Deputy Prime Minister, is my favorite.
(Full disclosure: he was my student at Harvard in 1988-1989.)
In March, he was chosen to head the International Monetary and Financial Committee, the panel of ministers that advises the IMF on strategy twice a year.
He has strong political skills, and, coming from a non-threatening country, might be the sort of candidate behind whom emerging markets could unite;
·Sri Mulyani Indrawati is another highly qualified candidate from Southeast Asia.
She became one of the World Bank’s three managing directors last year, after apparently being forced out as Indonesia’s finance minister for doing too good a job.
Incidentally, she is young and could be an excellent candidate next time around too (as could the first three);
·Leszek Balcerowicz, Poland’s former finance minister and central bank governor, is also a credible candidate.
Poland would be a compromise with respect to nationality, because it is both a European Union member and an emerging-market country;
·Trevor Manuel was a great success as South Africa’s finance minister.
It would be good to make better use of him than the current government is doing.
I can think of at least three other candidates who would perform well, but are apparently not actively in contention:
·Kemal Dervis, Turkey’s former minister of economic affairs, would have been excellent, but he took himself out of the running early.
·Stanley Fischer, whom I thought should have been picked in 2000 (he was Deputy Managing Director at the time).
Doing so would have been a first step toward accommodating developing countries’ legitimate desire to break the monopoly of European and US officials on the top jobs in the IMF and World Bank (Fischer was born in Zambia).
·Montek Ahluwalia is Deputy Chairman of India’s Planning Commission, a position far more important than it sounds.
But there is a presumption that the candidate cannot be over 65, which would exclude him (and Fischer).
June 10 is the deadline for nominations.
Any of the nine would do a good job.
Personally, I would urge emerging-market countries to support Shanmugaratnam.
But it is far more likely that they will remain divided.
In that case, it will go to Lagarde.
Reforming Bank Reform
LONDON – Over the last three years, oceans of ink (or bytes) have been expended on articulating schemes to solve the conundrum of “too big to fail” banks.
Many academics and pundits have castigated regulators and central bankers for their inability to understand the obvious attractions of so-called “narrow banking,” a restoration of Glass-Steagall-era separation of commercial and investment/merchant banking, or dramatically higher capital requirements.
If only one of these remedies were adopted, the world would be a safer and happier place, and taxpayers would no longer be at risk of bailing out feckless financiers.
In response, bankers have tended to argue that any interference in their business would be an unconscionable assault on their inalienable human right to lose shareholders’ and depositors’ money in whatever way they please.
Moreover, they argue that the cost of any increase in required equity capital would simply be passed on to borrowers in the form of higher interest rates, bringing economic growth to a grinding halt.
One might characterize this as a dialogue of the deaf, except that most deaf people manage to communicate with each other quite well, through sign language and other means.
Onto this fiercely contested terrain marches the United Kingdom’s Independent banking Commission, set up last year by Chancellor of the Exchequer George Osborne, with a brief to examine possible structural reforms to the banking system aimed at safeguarding financial stability and competition.
The Commission is chaired by Sir John Vickers, the Warden of All Souls College, Oxford, which in British academia is about as good as it gets.
At his side sits Martin Wolf of The Financial Times, so a good reception in the pink pages can be expected.
The Commission’s interim report, published on April 11, is both lucid and penetrating.
It also persuasively demonstrates that all the proposed remedies come with significant costs.
The reader is obliged to conclude that regulators might not have been so dim after all.
One obvious point is that it is hard to identify a clear relationship between the financial industry’s structure and success or failure in the crisis.
Some universal banks did well, others badly.
Some investment banks prospered (in Goldman Sachs’ case, perhaps too much), others collapsed.
Some retail banks went belly-up, like Northern Rock, while others stayed afloat (Santander’s UK subsidiary, for example).
Vickers gives short shrift to some of the more beguiling options.
Narrow banking, which entails retail deposits being kept in distinct entities, backed only by safe and liquid assets like government bonds, does not fare well under the All Souls microscope. “The social costs would be significant,” he warns, as the synergies between deposit-taking and lending would be lost.
And governments would almost certainly have to back some lending banks, too, so the claimed benefits in terms of insulating the public purse would not be realized.
Vickers is no more enamored of so-called “limited purpose banking,” in which all debt is effectively securitized. “There would be a decrease in economic value added from intermediation,” and loans to small and medium-size enterprises would be badly affected.
Straightforward size limits on banks also find no favor.
The Volcker rule? “It is unlikely that the impact would be significant in the UK,” or, by implication, elsewhere outside the US.
Glass-Steagall detains the Commission for rather longer, but also comes up short: “the costs of full separation could be higher than is necessary to address the problems,” owing in part to potential “economies of scope between retail and wholesale/investment banking services.” Moreover, “full separation would remove all intra-bank diversification benefits and so eliminate the possibility that one part of the group could save another part.”
By this point in the report, readers in the boardrooms of British banks were looking forward to a three-set walkover.
The knighted Professor was heading for the Freedom of the City of London (an obscure but valued honor that entitles the holder to drive a flock of sheep across London Bridge).
But there is a sting in the tail.
One reform that does find favor is what the Commission describes as a “retail ring-fence.”
The impact would be to require a bank carrying out retail activities in the UK to put them in a separately capitalized subsidiary.
The capital requirements attached to that subsidiary would be more burdensome, with minimum Tier One capital set at 10%, compared to the new Basel 3 standard of 7%.
Such a requirement would impose costs on universal banks by constraining their ability to transfer capital within the group.
The scale of these costs is unknown, but the share prices of the banks that could be affected (Barclays and Royal Bank of Scotland in particular) rose when the report was published, suggesting that they are not as high as had been feared.
The major advantage of the scheme is that it dovetails with other reforms under development in Basel.
A retail ring-fence makes most sense if coupled with new a new resolution regime, which would allow a retail subsidiary to be wound up without contagion across the group.
If efforts to produce a parallel bail-in arrangement, which allows bondholders to share the pain, are also successful, we might be within sight of a sensible and not-too-costly reform with which the market can make peace – and which regulators would have a realistic chance of managing.
Those who want the banks “cut down to size,” even if it is a case of cutting off one’s nose to spite one’s face, are not happy with Vickers.
But, by providing an honest, rigorous assessment of the major reform proposals, the Independent Banking Commission has performed an invaluable service, and deserves recognition for a job elegantly done.
Reforming Economic Reform
Economists have been more influential over the last 15 years than at probably any other time in history.
The policies of central planning, dirigisme , and import substitution, which many newly independent countries adopted in the 1950's and 1960's, could be labeled as the ideas of communists, Fabian socialists, and nationalists, not trained economists.
The policies of deregulation, privatization, and trade liberalization (the so-called Washington Consensus) that countries adopted in the 1980's, supposedly marked the victory of professional economists over populist politicians.
The paradox is that this was no victory for economics.
Indeed, the last two decades have proved dismal for the practice of the "dismal science."
With few exceptions, countries in which the US-educated economic technocracy gained the upper hand performed worse than they did prior to the 1980's.
Latin America's stalled and stagnant economies, which embraced the Washington Consensus more than most, stand out as exhibit "A."
The biggest development successes in recent years have been in places like China and Vietnam, where Western economic ideas, to the extent that they were considered at all, lost out to more practically oriented policymakers.
The puzzle is not "why did economics fail us?" but "why were economists so overconfident?"
After all, much of the Washington Consensus cannot be deduced from proper economic analysis.
Any graduate student in economics knows that deregulation, privatization, and trade liberalization cannot be expected to produce economic benefits without a long list of unlikely conditions being satisfied.
Moreover, there is nothing in economic theory that should have made economic technocrats think that Anglo-American institutions of corporate governance or "flexible labor markets," to pick just two examples, produce unambiguously superior economic performance when compared to German-style insider control or institutionalized labor markets.
On closer scrutiny, what passed as state-of-the-art thinking on economic policy turns out to have been based on some crude rules of thumb.
More often than not, the advocacy of simple panaceas was based on one or more of the following pathologies:
· Flimsy empiricism .
South Korea has done better than North Korea, and Burma's path is hardly one that leads to prosperity.
Therefore we know that markets do better than central planning, and that foreign trade is better than autarky.
But it takes a huge leap of faith to conclude from this that one can't go wrong by deregulating, privatizing, and opening domestic markets as much as possible.
Even in areas where the empirical record appears clear, closer analysis reveals major flaws.
Analysts who focused only on those elements of China's or South Korea's experience that fit their beliefs missed the larger story that these countries were undergoing massively heterodox experiments.
· Implicit political theorizing .
Economists who become policy advisors are great fans of simplicity, uniformity, and arm's-length relations between government and the private sector, not because of economic theory or empirical evidence, but because of unexamined and untested assumptions.
Governments, they believe, are run by crooks, so tie their hands; bureaucrats are beholden to rent-seeking private agents, so ensure non-discretion and apply uniform taxes and incentives; domestic political systems cannot be trusted, so import laws and institutions from abroad; external influences are always more benign than domestic ones, so ensure maximum openness to international trade and investment; reformers have a limited "honeymoon period," so implement reforms fast.
Economists ended up practicing public administration without license.
· Lack of institutional imagination .
No Western-trained economist could have envisioned China's household responsibility system or township and village enterprises--institutional innovations that lie at the core of the Chinese miracle.
Any economist from Washington (or Harvard) would have pushed a recipe of privatization and across-the-board liberalization if asked in 1978 to advise the Chinese government.
Only with hindsight can we see that China's innovations were truly demanding reforms.
Of course, economic principles do not work differently in different places.
Property rights and the rule of law are always important so that investors--both current and prospective--can expect to retain the money they make.
Private incentives always need to be aligned with social costs and benefits if productive efficiency is to be achieved.
Macroeconomic and financial stability require debt sustainability, prudential regulation, and sound money.
Any economist can mouth these platitudes to his/her hosts immediately upon arrival in a foreign land, without fear of going astray.
The trouble is that these universal principles are not self-executing: they do not automatically translate into clear-cut institutional arrangements or policy prescriptions.
For example, the principle that property rights should be protected implies very little about the best way to achieve this under a society's existing institutional preconditions.
It certainly does not imply that a system of private property rights and Anglo-American corporate governance is the right approach for all countries at all times.
Consider the vast investment and entrepreneurial activity that China has elicited through a hybrid system of property rights and a legal regime that is as far as imaginable from the Anglo-American system.
Similarly, the principle that private incentives should be aligned with social costs and benefits hardly results in unconditional support for policies of trade liberalization, deregulation, and privatization.
Neither does it preclude the use of activist trade and industrial policies in pursuit of economic restructuring.
Finally, debt sustainability, fiscal prudence, and sound money are also obviously compatible with diverse institutional arrangements.
For economists, the challenge is to work out the operational implications of these universal principles in specific economies.
We must take full account of predicates, conditionals, and contingencies in order to specify more completely which countries should adopt what policies.
Failing that, it is time for economists to stop pretending that we have all the answers.
Reforming Employment Protection
There may be no labor market institution more controversial than employment protection regulation--the complex set of laws and procedures that govern how firms hire and fire workers.
Firms complain not only about the direct cost, but also about the complexity and the uncertainty introduced by such regulation.
They argue that regulatory constraints make it difficult for them to adjust to changes in technology and product demand, and that this in turn lowers their efficiency, raises their costs and, as a result, deters job creation.
Workers, on the other hand, focus on the pain of unemployment, and argue that such pain should be taken into account by firms when they consider closing a plant or laying off a worker.
Under pressure from firms to decrease protection, and from workers to maintain it, European governments have navigated carefully, looking for politically acceptable reforms.
In most countries, reforms have included extending the scope for temporary contracts.
This would seem like a smart solution, both politically and economically.
Politically, it maintains high protection for those workers who are already protected.
Economically, easier recourse to temporary contracts gives firms more flexibility in adjusting to changing market conditions.
But the evidence on the effects of these reforms is mixed.
The existence of two classes of workers--those on permanent versus temporary contracts--has led to an increasingly dual and unequal labor market.
Firms are typically reluctant to keep workers on when their temporary contracts end, as this would imply giving them high employment protection.
So new entrants to the labor market go through a long period of dead-end jobs and stretches of unemployment before they eventually get a stable job--not the best way to start their working life.
From a political point of view, the fact that the majority of workers remains highly protected, and that firms have more flexibility than before, decreases the pressure for coherent, across-the-board reform.
Ignore political feasibility for the moment, and ask what "good employment protection" should look like.
The answer is actually simple.
When deciding whether to lay off a worker, a firm should take into account the social costs of doing so.
This means taking into account the benefits that the unemployment insurance fund will have to pay the worker.
At least for workers with seniority in a firm, it also means taking into account the psychological costs associated with losing a long-held job.
How can such "social accounting" be done? Again, simplicity rules.
If a firm lays off a worker, it should pay a layoff tax that is equal, at least on average, to the unemployment benefits that will be paid to the laid-off worker; to compensate for psychological costs, it should pay severance payments that increase in line with workers' seniority.
If, under these conditions, a firm decides to layoff a worker, it should be free to do so.
Simply put, if firms find it more profitable to close a job or a plant even after paying the social costs of their decision, then it does not make sense to keep that job or plant open.
How does this answer compare to the way employment protection is currently designed?
The answer varies from country to country, but the case of France is representative.
In France, unemployment contributions are collected through a payroll tax, not a layoff tax.
This means that firms that lay off more workers do not pay more.
But firms that lay off more workers should pay more.
At the same time, the judicial process is such that judges have a substantial say in deciding whether a layoff decision is justified.
This is also wrong: not only does it lead to a long, uncertain process, but there is no reason for judges to be involved in the first place.
So employment protection reform should involve a shift from a payroll tax to a layoff tax, accompanied by a reduction in the role of judges.
Judges should make sure that rules are followed, but if a firm is willing to satisfy administrative requirements, pay the layoff tax, and make severance payments, they should not be able to second guess the firm's decision.
How complicated would it be to shift from a payroll tax to a layoff tax?
Ironically, the answer comes from America, where the financing of unemployment insurance is indeed done through layoff taxes.
The generosity of the US system--and hence the burden of layoff taxes--is limited.
Benefits and taxes would be higher in Europe, but America's system indicates that it can be done.
This forces us to return to the question of whether such a reform is politically feasible.
I believe it is.
Higher layoff taxes, which force firms to think twice before laying off, would be welcomed by workers, while lighter and more predictable regulation of employment relations would surely be welcomed by firms.
The political road is narrow, but it may exist, and the economic and social rewards of finding it would be very high.
Reforming Germany\u0027s Army
MUNICH: What are the military threats European countries now face?
What forces are required to meet them?
How much are governments willing to pay?
The debate over these issues has now reached West Europe's biggest army, Germany's Bundeswehr.
Its outcome concerns not only Germans but their partners in Nato and the EU as well.
It is a belated debate here.
The Cold War ended a decade ago, and most of Germany's allies conducted their debate years ago.
If Germany has lagged, it is for two reasons: Germany's security environment has undergone the most dramatic change, and Germans remain deeply attached to military conscription.
Revolutions happen quickly but it takes time to adjust to the changes they bring.
For half-a-century, Germany was the point where the Cold War was most likely to turn hot.
Then, beginning in the spring of 1990, Germany united, the Warsaw Pact and USSR disintegrated, and countries to Germany's east, which had been the staging post for Soviet tank armies, suddenly became friends, then partners.
In 1994 the last Russian soldier left German soil.
That would have been the moment to take stock of Germany's new strategic situation.
But Helmut Kohl's government feared that any examination would unravel the central feature of the army created in the mid-1950s and a major condition for its wide acceptance in the country: military conscription.
The military embraces conscription because it assures the armed forces of high-quality recruits and a close link to civil society; politicians like it because it helps make the armed forces transparent; agencies of the welfare state appreciate it because, without conscription, there would be no conscientious objectors to be usefully (and cheaply) employed in all sorts of social tasks.
So the armed forces found themselves in a double bind: the Cold War's end prompted calls for a peace dividend and for unification to be funded.
Germany's defense budget slid to lower levels even faster than did those of her allies.
But to maintain conscription implied a large and costly military structure which bloated personal expenditure at the price of squeezing the budget share of military investment.
The result is an army neither manned nor equipped for dealing with likely security threats, nor for cooperating with the armed forces of Germany's allies.
So reform became inevitable.
Because the conservatives of Helmut Kohl did not address it, Gerhard Schroeder's left coalition had to.
A year ago, it set up an independent "Commission on Common Security and the Future of the Armed Forces" under the chairmanship of Richard von Weizsaecker, the respected former President of the Republic.
Earlier this week, the Commission's report was published.
A debate long in coming is finally beginning.
The 179 page document does not mince words.
The Bundeswehr has no future in its current structure.
Germany is no longer threatened by invading armies; she is surrounded by allies in Nato and partners in the EU.
This strategic condition is here to stay.
Instead of the capability for repulsing a massive attack on its borders, the armed forces need to be able to intervene in and manage crises B whether within or beyond Nato B in joint operations with their closest allies.
Hence what counts is the number and equipment of forces deployable for crisis operations.
At the moment, barely sixty thousand soldiers qualify; the Weizsaecker Commission calls for an increase to 140,000 of different stages of readiness, sufficient to intervene in two simultaneous crises.
At the same time, it proposes a drastic reduction in the overall size of the Bundeswehr: from the current 320,000 to no more than 240,000 men and women (yes, women: they will be eligible for practically all military functions).
The number of conscripts, with a military service of 10 months, should be 30,000 a year, down from the present 130,000.
In other words: the number of soldiers needed for the new tasks goes up, while the total of the armed forces goes down.
The resulting savings are proposed to modernize military hardware and equip the forces for future tasks.
Just as soldiers and their means should be geared to these, so the chain of command needs to be streamlined to assure rapid deployment of combined forces, in close coordination with allies, and with political oversight guaranteed.
It will take up to six years, the Commission estimates, to manage the transition from the present to the future Bundeswehr, and Weizs„cker suggests a program budget to make sure the reform stays on course.
But if it does, Germany will be fully capable of honoring commitments she has undertaken in Nato and the EU.
Indeed, the reform will give a boost to much closer European defence cooperation by increasing interoperability with major European allies and encouraging joint procurement, joint production and joint management of military investment.
Now politicians are taking over.
In the ensuing public debate, two items have already emerged as central: money and conscription B one politically demanding, the other politically convenient.
These reforms will not come cheap.
Although the new Bundeswehr will be more cost-efficient, it will need money to manage the changeover, more than currently planned by a government set on a laudable course of fiscal consolidation.
Will Chancellor Schroeder be willing to commit himself to reforms which will bring fruit only after the next elections?
Conscription is another matter.
While one third of the Commission members favored a volunteer army, the majority supported conscription, albeit with a smaller number of call-ups than today.
Their reasoning: Since the future is uncertain, it makes sense to retain the flexibility conscription permits, to respond both to unforeseen changes in the security environment and to shortfalls in the recruitment of volunteers; here the difficulties that allied armies are encountering which have jettisoned conscription have been a warning.
But the number of young men to be called up depends on the requirements of the forces; hence the Commission insists on no less than ten months' service.
This explains the much reduced figure of only 30.000 a year.
It is this part of the proposal which is encountering most criticism.
Most political parties reject it, preferring instead to draft a much higher number.
The Commission's selective draft, they argue is unconstitutional because it allows the large majority of eligible young men to escape conscription.
This may not be the last word in the debate.
For to argue that the draft is only just if everyone is called up regardless of military requirements is unconvincing, provided those that are drafted are compensated for their service.
Moreover, to draft more than one needs is a costly luxury.
That recognition is gradually sinking in, at least in the government.
Defense Minister Scharping who is currently preparing his own proposals for the future Bundeswehr, also envisages a major reduction in the number of conscripts though not as drastic as the Commission wants.
Less money and more conscripts will slow down, and possibly derail, the Weizsaecker reforms.
But then commissions propose, politicians dispose.
They are under greater constraints than independent advisers, they get the credit for success but also bear the risk of failure.
It would be naive, therefore, to demand that they should not deviate from the script that Weizsaecker wrote.
It would be wrong, as some are doing, to dismiss the Report as an inconsequential wishlist.
In one year of hard work, Weizsaecker's group has done what no other body in government or parliament can do: define the benchmark for needed reforms.
Politicians will deviate, but they will have to account for it if and when they do.
That is why it is safe to say: reform of the Bundeswehr is finally under way.
Reforming Japan’s Constitution
“Reform with no sacred cows” was Junichiro Koizumi’s slogan when he became prime minister five years ago, and no cow here is more sacred than our “peace” constitution.
So it should be no surprise that, as Koizumi moves toward the end of his second and final term in office, his efforts to reform the constitution to allow Japan more effectively to defend world peace are gathering pace.
In mid-April, the Constitution Review committee of Japan’s House of Representatives issued a final report on the fundamental problems facing Japan’s Constitution and submitted it to the Chair of House of the Diet.
Soon the House of Councillors will submit its final report.
Moreover, concrete discussions on constitutional reform are underway within both the ruling Liberal Democratic Party (with Koizumi himself in charge) and the opposition Democratic Party.
The private sector and media outlets like the influential Yomiuri Shimbun newspaper have also joined in.
The Liberal Democrats aim to have their draft constitutional amendments ready for the 50th anniversary of the party’s founding this November.
Although almost everyone concedes that some amendments to the constitution are necessary, agreement on what needs to be done has been difficult to reach.
Indeed, the Liberal Democrats are as divided as everyone else.
In addition to these divisions, there are problems concerning how to amend the constitution.
New legislation will be needed to enable amendments to the constitution, and this will take time and even more debate.
Yet the pressure for fundamental change – particularly of Article 9, which putatively pledges that Japan will never maintain armed forces – is such that there is a real chance that these obstacles can and will be overcome.
Fundamental change, indeed, is needed as soon as possible, because current interpretations of the constitution have consistently distorted Japan’s security and defense policies.
Across Japan, there is a growing view that some of these policies cannot wait for constitutional amendment.
Up to now, issues related to national defense have been regulated by the administrative judgments of the time or by Diet resolutions based on the prevailing interpretation of Article 9.
But this ad-hoc approach has been, and remains, a recipe for paralysis.
The myriad rulings that have resulted from this process have left the exercise of national defense without any clear position under the Constitution and impede Japan from exercising its “collective self-defense” rights and treaty obligations with its allies (principally the United States).
Tortured reasoning about phrases like “use of force” or “exclusively defense-oriented policy” amounts to an open invitation to confusion, both in the military and to countries in the region.
And the so-called “three principles on arms exports” have placed absurd limits on what may be sold or supplied abroad, as even flying boats used for sea rescue have been viewed as banned from export.
Given the current regional security environment– international terrorism tied to local, Asian-based terrorists, various challenges to the security of vital sea lanes, North Korea’s search for nuclear weapons and ballistic missiles, and China’s rapid enhancement of its naval power–, Asia today is far less stable and more complex than it was when Japan's constitution was written.
By revising the country’s National Defense Program Guideline (conventionally called an Outline) last December, Koizumi’s government began the process of clarifying some of these debilitating ambiguities.
The Guideline lifted some of the more foolish limits on arms exports by ending the “all-out prohibition policy” maintained since the Miki Administration of 1976.
For example, it clearly determined that the ongoing Japanese-US joint technical research to develop and produce the SM-3 sea-based ballistic missile defense system is an exception.
More generally, the government may now review requests for weaponry from friendly governments on a case-by-case basis, according to whether the sale risks instigating or fueling international conflicts.
As a result, the sale or supply of used or new surface combat vessels by the Japan Coast Guard or even Japan Maritime Self-Defense Force (JMSDF) to ASEAN countries, say, Malaysia, Indonesia or Singapore, to help them fight maritime terrorism and piracy more effectively will now likely be permitted.
Supplying European countries as well ASEAN countries with JMSDF flying boats for sea rescue, patrol, and fire fighting will also now likely be approved.
These favorable and appropriate actions will allow Japan, for the first time in its postwar history, to meet the international community’s requests in a timely way.
Yet, without fundamental constitutional reform, Japan’s position in Asia and the world will remain anomalous.
It should be remembered that, after the US, Japan is the largest contributor to the United Nations, and to its peacekeeping budget.
Yet its constitution severely constrains its ability to send combat units for the Security Council’s peacekeeping operations.
Japan needs to be able to back up the Security Council with men, and hence share the political risk, as well as the cost, of the UN’s efforts to maintain world peace.
President Xi’s Singapore Lessons
NEW YORK – China is at a crucial point today, as it was in 1978, when the market reforms launched by Deng Xiaoping opened its economy to the world – and as it was again in the early 1990’s, when Deng’s famous “southern tour” reaffirmed the country’s development path.
Throughout this time, examples and lessons from other countries have been important.
Deng was reportedly substantially influenced by an early visit to Singapore, where accelerated growth and prosperity had come decades earlier.
Understanding other developing countries’ successes and shortcomings has been – and remains – an important part of China’s approach to formulating its growth strategy.
Like Singapore, Japan, South Korea, and Taiwan in their first few decades of modern growth, China has been ruled by a single party.
Singapore’s People’s Action Party (PAP) remains dominant, though that appears to be changing.
The others evolved into multi-party democracies during the middle-income transition.
China, too, has now reached this critical last leg of the long march to advanced-country status in terms of economic structure and income levels.
Singapore should continue to be a role model for China, despite its smaller size.
The success of both countries reflects many contributing factors, including a skilled and educated group of policymakers supplied by a meritocratic selection system, and a pragmatic, disciplined, experimental, and forward-looking approach to policy.
The other key lesson from Singapore is that single-party rule has retained popular legitimacy by delivering inclusive growth and equality of opportunity in a multi-ethnic society, and by eliminating corruption of all kinds, including cronyism and excessive influence for vested interests.
What Singapore’s founder, Lee Kwan Yew, and his colleagues and successors understood is that the combination of single-party rule and corruption is toxic.
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Coherence, long time horizons, appropriate incentives, strong “navigational” skills, and decisiveness are desirable aspects of continuity in governance, especially in a meritocratic system managing complex structural shifts.
To protect that and maintain public support for the investments and policies that sustain growth, Singapore needed to prevent corruption from gaining a foothold, and to establish consistency in the application of rules.
Lee did that, with the PAP supplying what a full formal system of public accountability would have provided.
China, too, most likely wants to retain, at least for a while, the benefits of single-party rule, and delay the transition to “messier” governance influenced by multiple voices.
In fact, a pluralistic system is already evolving under the umbrella of the Chinese Communist Party – a process that may eventually lead to citizens gaining an institutionalized voice in public policy.
For now, however, those representative elements that have been added incrementally are not powerful enough to overcome the growing corruption and excessive influence of vested interests.
To maintain single-party legitimacy – and thus the ability to govern – those narrower interests must be overridden in favor of the general interest.
That is the challenge that China’s new leadership faces.
If China’s leaders succeed, they can then have a sensible and nuanced debate about the evolving role of the state in their economy, a debate on the merits.
Many insiders and external advisers believe that the state’s role must change (not necessarily decline) to create the dynamic innovative economy that is key to navigating the middle-income transition successfully.
But there remain many areas in which further debate and choice are needed.
Lee Kwan Yew in Singapore and Mao Zedong and Deng in China gained their peoples’ trust as founders and initial reformers.
But that trust dissipates; succeeding generations of leaders do not inherit it completely, and must earn it.
That is all the more reason for them to heed the lessons of history.
China’s new leaders should first reassert the Party’s role as defender of the general interest by creating an environment in which narrow interests, seeking to protect their growing influence and wealth, do not taint complex policy choices.
They must demonstrate that the Party’s power, legitimacy, and substantial assets are held in trust for the benefit of all Chinese, above all by fostering a pattern of inclusive growth and a system of equal opportunity with a meritocratic foundation.
And then they should return to the task of governing in a complex domestic and global environment.
There are times when muddling through – or, in the Chinese version, crossing the river by feeling the stones – is the right governing strategy, and there are times when a bold resetting of values and direction is required.
Successful leaders know what time it is.
Feeling the stones may seem like the safest option for China’s next president, Xi Jinping, and China’s other new leaders; in fact, it is the most dangerous.
The only safe option is a radical realignment of the Party with the general interest.
The issue, then, is whether the reformers who carry the real spirit of the 1949 revolution will win the battle for equitable and inclusive growth.
The optimistic (and I believe realistic) view is that the Chinese people, through a variety of channels, including social media, will weigh in, empowering reformers to push through a progressive agenda.
Time will tell.
But it is hard to overstate the outcome’s importance to the rest of the world.
Virtually all developing countries – and, increasingly, the advanced countries as well – will be affected one way or another as they, too, struggle to achieve stable and sustainable growth and employment patterns.
Reforming Russia’s Military Industrial Complex
Under President Vladimir Putin, Russia has launched a comprehensive program to restructure its defense industry, which has shrunk dramatically since the Soviet era.
This process has achieved some progress, but fundamental structural problems persist that lead Russia to export large quantities of advanced weapons to conflict-prone regions, placing the Kremlin at odds with Europe, the United States, and other countries.
Over the last six years, the Putin administration has encouraged the nationalization and consolidation of private-sector defense firms into large, vertically integrated, state-controlled holdings.
In November 2000, Putin approved the creation of a single government-supervised arms exporting agency, Rosoboronexport, to end the self-destructive competition that had developed between the country’s major weapons-exporting enterprises. Earlier this year, the agency gained the exclusive right to sell Russian weapons to foreign countries.
At present, the government is promoting the creation of a similar institution in the aviation sector, the new United Aircraft Building Corporation (UABC), which includes major state and private manufacturers of fixed-wing aircraft.
Proponents of the merger believe it will improve the efficiency of the Russian aircraft industry and, by lowering costs, make Russian planes more attractive to foreign buyers.
Under Putin, Russian military spending has also rebounded.
This year, the Russian government will provide the Ministry of Defense almost 5 trillion rubles ($189 billion) under the 2007-2015 State Armaments Program.
The percentage of the defense budget allocated to purchasing military equipment will rise from 44% in 2006 to 50% by 2011.
The primary purpose of this increased spending is to push new weapons systems from the research and development stage to actual procurement for Russia’s armed forces.
Over the course of 2007-2015, Russia’s army and navy will replace almost half (45%) of their military equipment.
In the past, poor government and industry practices frustrated similar plans to supply large numbers of advanced conventional weapons to Russia’s armed forces.
The country’s military-industrial sector suffers from limited domestic orders and extensive overcapacity.
Purchases for the Russian army and navy have been increasing, but still only sustain about one-fourth of Russia’s existing military production capacity.
The Russian government now spends more on new Russian-made conventional weapons than do foreign purchasers.
Yet, persistent inefficiencies in the Russian defense procurement system result in foreign buyers receiving more new systems than the Russian military.
As a result, Russia’s leading defense firms remain heavily dependent on foreign sales.
Although Russia’s arms exports have decreased considerably since the Soviet period, its revenue per transaction is now greater because Russian firms have yielded much of the lower-end market to less expensive suppliers like China, India, and other former Soviet bloc allies.
Moreover, where the USSR transferred much weaponry under easy commercial terms or without charge (e.g., under long-term loans not expected to be repaid), Russia now discounts arms only for its closest allies.
On March 27, 2007, the Defense Ministry announced that Russia’s annual arms exports increased by 50%, from $4 billion to $6.5 billion, from 2001 to 2006.
In an effort to both maximize foreign revenue and strengthen Russia’s own military potential, former Russian Defense Minister Sergei Ivanov, who now oversees Russia’s military-industrial complex and is one of the two leading candidates to succeed Putin as president, stressed the need for “the national defense industry to find a balance between a commitment to arm the Russian military and an opportunity to export arms to countries not subject to UN sanctions.”
Besides helping to sustain the health of Russia’s military industrial complex, many Russian officials think that arms sales will promote Russia’s diplomatic interests by strengthening ties with recipient states.
These transactions, however, have complicated Moscow’s relations with foreign governments, particularly the United States.
American officials complain that Russia’s self-imposed restrictions on arms sales are much weaker than those of Western countries, especially with regard to authoritarian governments accused of committing human rights violations or states seeking weapons of mass destruction.
Washington has protested against Russian military sales to Belarus, China, Iran, Syria, Uzbekistan, and Venezuela.
In early January 2007, the US government imposed economic sanctions on three Russian companies, including Rosoboronexport, for selling missiles and other prohibited military technologies to Iran and Syria.
Russian officials insist that their military exports conform to all applicable international laws and involve primarily defensive weaponry that will not disrupt regional power balances.
They add that the US and its allies also transfer large volumes of weapons to areas of conflict, including South Asia and the Middle East.
Russian officials also contend that US and other foreign objections often reflect a desire to eliminate unwelcome Russian competition or curtail the Kremlin’s influence in important regions, such as Eastern Europe, Asia, and the Middle East.
In 2005, the head of Rosoboronexport, Sergei Chemezov, said: “Let’s have no illusions: if we stop sending arms to export, then someone else will do it.”
Russia seems prepared to negotiate on some security issues, including such sensitive questions as Iran and Kosovo.
Achieving limitations on Russian arms sales, however, will prove much harder.
Given the condition of Russia’s military-industrial complex, considerations of national pride, geopolitical influence, and entrepreneurial profits will likely sustain Russian interest in selling weapons to almost any client no matter how distasteful to Western governments.
Reforming the UN
The UN is in the midst of a serious, long-term crisis.
That crisis will not go away unless its sources are understood and the organization reformed.
But a new form of political correctness is making reform difficult.
One major cause of the UN crisis is the change in the international situation after the demise of the Soviet Union and the proliferation of what I call ``incompetent states.''
Many countries that achieved independence as a result of the national liberation movements of the 1940's-1990's have proved themselves incapable of creating the conditions of normal life within their territories.
In the age of globalization, they are also hopelessly and increasingly lagging behind developed states.
Moreover, many of these regimes are simply ineffectual and will collapse or dramatically change in the foreseeable future.
This will inevitably prove to be the source of long-term political and military instability in large parts of Africa, the Middle East, Central and South Asia, as well as a number of former Soviet republics.
The rise of incompetent states brings about huge challenges: proliferation of weapons of mass destruction, terrorism, religious and ethnic strife, rivalry for natural resources, waves of migration, drug trafficking, and deterioration of the environment.
Such states call into question our traditional attitude towards national sovereignty.
Tolerating them, as was done until recently, is increasingly dangerous.
The politically correct policy of affirming each nation's right to self-determination, including the establishment of an independent state, leads to the emergence of more incompetent regimes.
Indeed, incompetent states now comprise almost a majority in the UN, which undermines that body's moral legitimacy in the eyes of many in the developed world.
It also impairs the UN's ability to deal with the most important problems of today's international environment.
The second cause at the root of the UN crisis is the fact that the US is no longer interested in observing the old rules of international relations.
Indeed, America's superpower status makes it increasingly disadvantageous for its leaders to play by rules that, while repeatedly violated in the past, are now viewed as preventing the US from assuming a new role in international affairs.
The new role the US envisages is closely tied to the profound destabilization brought about by the proliferation of incompetent states.
In fact, America has been eager for some time to ``establish order'' in the world and modernize particularly troublesome regimes in highly strategic regions of the world.
In the Middle East and Central Asia, this policy seems at times to have assumed predominance comparable to that of the former doctrine of deterrence deployed against the Soviet Union and its Communist allies.
It was the desire to counter this destabilization and to consolidate its superpower status that was the primary reason for America's actions in Iraq.
The world might not support the US in its unilateral attempts to become the world's policeman, especially because they may well bring more instability.
Nevertheless, it is important to realize why the US is undertaking them and that they respond to a core problem of today's international order.
If Russia and the other countries that opposed America's Iraq policy in the Security Council really wanted to convince the US not to attack Iraq and to defend international law, it was a naive policy doomed to failure.
If we sought to preserve the UN Security Council and the position of the present permanent members, then those actions were more likely to produce the opposite effect.
Similarly, rearguard efforts to prove that those who opposed war in Iraq were right and that the Americans and the Britons wrong, together with demands for ``proof'' that Iraq possessed weapons of mass destruction, are unconstructive and only cause mutual irritation.
The UN cannot be preserved and reformed without cooperation from the US, however distressful this may be to some.
By making the UN an instrument of struggle against America, the UN will only be weakened or written off altogether.
What is needed is a reform that responds to today's international order and updates the increasingly obsolete and ignored body of international law to today's new economic and political realities.
Restructuring must start with the UN Security Council, whose 1945 mandate is no longer viable.
The most obvious solution is to increase the number of permanent members from five to eight or nine (including Germany, Japan, India and possibly Brazil) and to change the voting rules, so that two or three permanent members--rather than just one--are needed to block an action.
But the UN is not likely to reform itself from within.
Institutionalizing the G-8 and providing it with executive functions could best provide the external impetus that is needed.
If, as is likely, increasing the number of permanent Security Council members lacks sufficient support, developed countries should revert to the idea, circulating in foreign policy circles for several years, of establishing a new G-8-based organization (but including China and India) to counter new threats to global security.
Such proposals might spur further reform of the UN itself.
In any case, one thing seems certain: in the absence of a sweeping overhaul, the UN may quickly follow in the footsteps of other institutional relics of the Cold War, such as the Organization for Security and Cooperation in Europe and NATO.
The New Frontiers of Loyalty
LONDON – This is a tricky time to be a state, and an even trickier time to be a citizen.
The nation-state, the classic provider of security and basic wellbeing in exchange for citizens’ loyalty, is under threat – both at home and as the fundamental unit of international affairs.
New types of loyalty and association are challenging the state’s traditional role.
Some are geographic. In Europe alone, there at least 40 would-be Scotlands seeking separation of some kind from the countries in which they now find themselves.
Other loyalties are based on other kindred identities – not just religious or ethnic, but based on shared commercial, political, or other interests.
Today, many more of us are supporters of NGOs than are members of political parties.
In short, our allegiances, particularly in the West, have rarely seemed more divided than they do now.
Amartya Sen, the Nobel laureate economist, has argued that we can learn to live with these multiple identities and even thrive with the diversity of citizenship and loyalties that they allow us.
But this diversity is not entirely benign.
Many of us work for or hold stock in commercial organizations that seem to pay scant regard to national tax or regulatory authorities.
And, in much of the West, states adhere to models of welfare provision that increasingly disappoint their citizens and are often unaffordable.
A global reordering of economic growth is punishing the developed countries’ high-cost, high-tax, high-benefits governance model.
The Western state’s shortcomings are strikingly apparent when compared with robust survivors and adapters in other parts of the world.
China represents what might be called the Economic Security State: seeking to channel domestic savings into household consumption to sustain GDP growth and popular support, while using its investment power abroad to secure the commodities and energy that underpin its industrialization.
Under Prime Minister Narendra Modi’s leadership, India may prove to be a semi-admiring imitator of China.
Russia, by contrast, is a more classic National Security State, now playing Western anxieties like a fiddle to consolidate its tightening grip on Ukraine and suppress domestic opposition with a tide of official nationalism.
So we live in a world of evolutionary state disorder.
While some in the West may yearn for the return of the strong, unifying state, most of us recognize that it is not coming back.
Indeed, some argue that the inventiveness and internationalism of a world networked by interests and shared causes is likely to be more resilient than one crammed into the artificial – and increasingly constraining – box of the national state.
In that sense, economic success in China or India may be those states’ undoing, as middle-class political aspirations render current arrangements dysfunctional.
Conversely, we may find ourselves in a world whose eastern half is organized into strong authoritarian state structures, with the West embracing post-state models of association.
The question for international governance is how to provide a framework of institutions and rules in a world of competing organizational structures.
The politicians’ answer is depressingly predictable: in the face of a resurgent Russia and China, this is no time to abandon our own states and diplomacy to their fate.
Yet the old systems no longer offer useful answers, as Russia has demonstrated by brushing aside the United Nations Security Council – the high altar of the state-based international system – over Ukraine and stalemating it over Syria.
And, away from the din of their ranting politicians, what Russians, as much as Americans or Chinese, probably want most is a peaceful, predictable international order that allows them to provide for their families and enjoy the benefits of a golden age of global commerce and technology.
A world, in which states’ hard power is contending with the soft power of transnational ideas, invention, and finance, needs rules.
We will all pay dearly – in defense budgets and, more important, in lost global opportunities – if we do not summon the courage to design a global order in which non-state actors have a formal role.
Otherwise, we would be inviting states to continue pursuing a might-makes-right approach and to shirk the coordinated action on, say, financial regulation and the environment that the world now requires.
Of course, states do not have a monopoly on bad behavior.
Transnational economic activity has been an opportunity not only for business, but also for organized crime and others to liberate themselves from effective regulation.
At the moment, the United States has stepped into the breach, relying on often-Draconian extraterritorial use of its justice system and control of the international banking system to impose a crude frontier justice.
That is not good enough.
What is needed is a legitimate system of rules, norms, and institutions, devised by private as well as government stakeholders, that reflects the emerging global nature of economic, political, and social activity as the old state loses its dominance and must coexist with a patchwork of non-state structures of association.
Reform or Revolution in Iran?
Reform the UN Security Council
Human progress can be measured by the fact that we are living in a century where unilateral military operations based on power alone are intolerable.
But the spread of the ideology of peace does not mean that threats to security have disappeared.
At times, preventive action may be necessary.
Many lives would have been saved in Africa, for example, if the international community could have acted decisively and quickly.
The events in Iraq also have demonstrated that the key issue for world security is really the relationship of the big powers to the UN Security Council.
The need for an effective UN Security Council reflects the central strategic certainty of the post-Cold War period: security threats are no longer likely to take the form of war between states, but will instead consist in acts of terror, civil wars, and massacres of civilian populations.
These threats are often related to economic chaos and basic failures in national governance, and international military action will often be needed to meet them head on.
But the legitimacy of any international military action that goes beyond immediate self-defense requires broad international approval - and action without legitimacy is bound to fail.
The international community must therefore accept the need for a fundamental link between such military action and the UN.
Peacekeeping and crisis prevention are accepted functions of the UN.
But broad international support will not be forthcoming if military operations are perceived as some form of Western neo-imperialism.
This last point has been at the heart of the problems in Iraq.
Augmenting US and British troops with other "Western" forces would not, particularly at this late stage, change the fundamental perception of that intervention, both in the Arab world and beyond it.
Only the explicit, up-front approval of a reformed UN Security Council can provide the legitimacy and international support that military action - with the exception of clear self-defense - requires.
This is true for actions contemplated by individual nations, temporary alliances, or more permanent alliances such as NATO.
For the Security Council to be effective in providing global governance in the domain of security, it must be reformed to reflect the realities of the twenty-first century.
A system of
The new system must, of course, reflect not only the size of populations but also the differing economic and military capabilities of nations.
The degree of "internal legitimacy" of governments in terms of human rights and democracy could become another factor determining voting weights or voting rights.
Countries such as India and Japan must gain a strong voice.
Latin America, Africa, and the Arab world also must see an increase in their influence.
There should be permanent global participation in the Security Council through regional constituencies, although the number of seats at any one time should remain in the neighborhood of 15 in order to permit constructive debate and a degree of cohesion.
It is only within this kind of renewed UN that NATO or other military alliances can obtain
The High Level Panel on Security Reform appointed by Secretary General Kofi Annan is looking at the various options.
A far-reaching reform will be difficult, and some may regard it as beyond our reach.
But it is time to think big, to escape from the constraints of the past, and to try to tackle the problems of our age if we truly want to prevent catastrophic events and achieve genuine and long-lasting global peace and security.
Housing versus Habitat
CAMBRIDGE – Peter Drucker, the influential management guru, famously said, “What does not get measured, does not get done.” He might have added that what gets measured poorly gets done poorly.
Consider low-income housing.
Most developing countries, and many rich ones, define their housing deficit according to the number of families living in units deemed socially unacceptable.
But what is meant by unacceptable varies greatly from country to country.
Piped water, sewerage, and electricity are seen as essential in the Americas, but not in India.
The problem is that people do not demand houses; they demand habitats.
A house is an object; a habitat is a node in a multiplicity of overlapping networks – physical (power, water and sanitation, roads), economic (urban transport, labor markets, distribution and retail, entertainment) and social (education, health, security, family, friends).
The ability to connect to all of these networks makes a habitat valuable.
Cities, for example, can be highly productive spaces, because they allow people to combine their different skills to make things that none of them could make individually.
People can exchange their knowhow, learn from each other, and trade.
Jane Jacobs’s insights on this, published more that 40 years ago, have been confirmed by more recent studies summarized in books by Edward Glaeser and Enrico Moretti.
So, if the deficit being measured is one of houses rather than one of habitats, the solutions often do not solve the real problem.
A housing minister who is told to build a certain number of houses will likely fail to build an equivalent number of well-connected habitat nodes.
After all, much of what makes a house a habitat lies outside of his department’s purview.
Moreover, if the housing deficit is diagnosed as a dearth of adequate housing, then the solution is to build more houses for those who lack it – that is, the poor.
But this is like assuming that new cars should be built for those without them – that is, for people who could buy second-hand cars from those seeking to upgrade.
It confuses the construction industry, which builds new homes, with the much larger housing market, which includes all homes.
It gets worse.
Because the poor cannot buy adequate housing on their own, public resources must be used.
In order to target these subsidies to low-income households, governments typically treat families of different income levels differently: the rich must fend for themselves, middle-class families are provided with assistance to secure mortgage loans, and the poor are offered public housing.
To maximize the number of units built, housing ministries make sure that projects meet minimum specifications below a certain per-unit cost threshold.
As a result, developers look for the cheapest land, which is obviously the least connected to the networks that would make it more valuable.
This approach has ended up exacerbating the segregation of the poor.
It artificially creates – as in France – socially homogenous poor neighborhoods where the unskilled live among themselves, disconnected from others, making it harder for them to benefit from the agglomeration economies that would boost their productivity.
Indeed, because many of these developments are so remote, residents often face a long, uncomfortable, and costly daily commute to reach good jobs.
No wonder so many prefer to stay home and work on their own, which may explain why so many developing countries are becoming more urbanized but not more productive.
Confusing the construction of new homes with the housing market is most absurd when dealing with displaced families.
For example, the Venezuelan and Colombian governments were confronted with the need to relocate tens of thousands of families displaced by floods in 2010.
Although the two governments are far apart politically, both promised the displaced families new houses in new urban developments.
In the meantime, people were left for years waiting in shelters.
And, once again, these new urban developments have few of the networks that would make them a habitat.
The burden of creating integrated communities has been placed on a randomly assembled group comprising some of the least connected members of society.
Instead, displaced families should quickly be given vouchers so that they can obtain an appropriate home without delay.
They are bound to choose older homes in established neighborhoods that have already been connected to the many networks that make them a habitat.
Large new housing developments should naturally attract those who already have ample social connections, making it easier to kick-start more integrated communities.
In order to separate the problem of the overall housing deficit from the problem of families with inadequate housing, policymakers need to address both supply and demand.
On the supply side, urban land – with all its physical and social infrastructure – must expand quickly enough.
On the demand side, subsidies should focus on helping families choose from the entire housing market.
This approach would promote socially diverse and productive neighborhoods, rather than segregation and pockets of economic stagnation.
But this goal cannot be achieved unless the construction industry is prevented from dictating low-income-housing policy.
Emergency Education Now
DAVOS – In an ideal world, whenever children needed help, they would get it.
When girls and boys were forced from their homes or classrooms because of war, natural disaster, or other crises, the international community would, within days, formulate a plan to ensure their immediate wellbeing.
And such plans would include not only life-saving interventions, but also havens of psychological support and learning that protect opportunity and hope.
Such places exist. They are called schools.
Unfortunately, ours is far from an ideal world.
When children need help, days turn into weeks and months.
Hundreds of desperate children become thousands and eventually millions.
Hope gives way to prolonged misery – not for a few months or even a year, but on average for more than a decade.
They are shut out of schools, locked out of opportunity, and condemned to live in unbearable conditions – subject to child labor or forced begging, sold into marriage, trafficked, conscripted into gangs, or recruited by extremists.
What has happened in recent years in South Sudan, northern Nigeria, and Iraq – and in Jordan, and Lebanon, where hundreds of thousands of Syrian refugee children are being denied the chance to return to school – makes an overwhelming case for a new humanitarian fund for education in emergencies.
What has happened during the Ebola crisis in Liberia, Guinea, and Sierra Leone – where schools serving five million children remain closed or have not reopened quickly enough – makes this case, too.
Yemen and Chad are likely to be next.
In all of these countries and situations, children’s future depends on whether we, the international community, act.
The Millennium Development Goals commit the international community to achieve the target of universal primary education by the end of 2015.
But the official out-of-school figure currently stands at 58 million. And, once out of school for a year or more, children are unlikely to return.
There is a huge gap in our array of solutions.
In 2014, education received just 1% of humanitarian funds – leaving millions of children and young people on the streets or idle in camps.
And there is no mechanism to pay for the education of refugee children or those affected by disaster.
To be sure, there are organizations – the United Nations High Commission for Refugees (UNHCR), UNICEF, and many other groups – that, working together, perform heroically.
And organizations like the Global Partnership for Education, Sheikha Mozah’s Educate a Child foundation, and the Global Business Coalition for Education also contribute in times of emergency.
But that woefully small 1% figure means that the world simply does not have enough to ensure that more than a fraction of affected children get help.
The solution must be based on a simple humane principle: No child should be denied opportunity simply because adults are unable to work together.
That means establishing an emergency education system that enables adequate funding to be released to UN agencies and operational NGOs at the onset of a crisis – not years later.
What has been happening in Lebanon over the past two years is a case in point.
Today, there are 465,000 Syrian child refugees.
The Lebanese government has volunteered to accept refugee children into the country’s schools by introducing a second afternoon session and enlisting teachers and school directors to take on the extra workload.
Complicating the situation, officials have had to persuade a divided country, already worried about the influx of refugees (which has added 20% to the country’s population).
But few refugee children have enrolled.
UNICEF and the UNHCR have devised a plan with the Lebanese government to implement this program, but the international community has failed to help.
Only $100 million has been pledged, but $163 million is still needed.
Though the Global Partnership for Education and other organizations want to do more, their mandate does not permit them to provide assistance to middle-income countries like Lebanon.
Something is very wrong with this picture.
Lebanon’s government has a plan that requires no new schools or infrastructure, making it one of the most cost-effective solutions to a refugee crisis imaginable.
But, still, the money is lacking.
The same thing is happening in South Sudan.
And in northern Nigeria, countless attacks by the terrorist group Boko Haram have underscored the need for a full safe-schools program; but the money to deliver it simply is not there.
Similarly, in Pakistan, the Peshawar massacre last month has revealed how much more must be done to protect schools and children’s future.
Given such crises, the world can no longer afford to do without a humanitarian fund for education during emergencies.
In April, at the World Bank’s annual meeting, I will call for action by the assembled government ministers, and I hope to announce the establishment of such a fund at the Oslo Summit on Education for Development on July 6-7.
Education, it is said, cannot wait.
Passing the hat when a crisis erupts is not the solution.
In 2015, we must do more.
Life After Schengen
LONDON – Throughout Europe’s refugee crisis, which has been building for well over two years, warnings about the threat to the European Union’s precious Schengen Area of border-free travel have proliferated.
Indeed, the warning was heard again recently, as EU ministers thrashed out a late-night agreement on border policing and the relocation of refugees.
But, at a time of diminished confidence in the EU, would eliminating border-free travel be such a bad thing?
In short, no.
Of course, the idea of abolishing borders within Europe holds great symbolic importance and appeal.
But sometimes even sacred cows need to be slaughtered.
With the refugee crisis turning Schengen into a threat to the credibility of the EU as a collective entity and of its national governments’ ability to maintain order and the rule of law, that time is now.
When it was first created in 1985, the Schengen Area included just five countries (Belgium, France, Luxembourg, the Netherlands, and West Germany).
Membership has since ballooned to include 22 of the EU’s 28 member countries – with four of those left out (Bulgaria, Croatia, Cyprus, and Romania) due to join in the future – plus four non-EU members (Norway, Iceland, Switzerland, and Liechtenstein).
All have abolished controls at their shared borders and have adopted a common visa policy for citizens of non-member states.
It is certainly handy to be able to treat a flight from Zurich to Oslo as a domestic journey, with no passport controls to contend with upon departure and arrival.
And it is undoubtedly convenient to be able to drive from Berlin to Barcelona without having to wait in line at each border one crosses.
Indeed, that convenience is probably why only two EU countries (Ireland and the United Kingdom) have opted out of the Schengen Agreement.
But the refugee crisis has exposed the flipside of the Schengen Agreement – namely, the difficulty of monitoring national and EU territory without border controls.
And though non-Schengen countries have, in some cases, been able to avoid direct obligations to participate in a common policy – the UK, for example, has remained outside the EU’s scheme for the relocation of refugees – they have not been insulated from the challenges of the migration crisis.
They, like the Schengen countries, cannot credibly say how many migrants are in their country, who these people are, or when they arrived.
This loss of control matters, for two main reasons.
First, if statistics about migration are open to doubt, even before taking into account illegal immigration, nationalist anti-immigration political parties can more easily exaggerate the figures to stoke public fears.
Second, if refugees who have been granted asylum can move easily to any Schengen country they choose, burden-sharing agreements lose their credibility and accepting refugees loses its practical appeal.
A country would not want to cover the up-front costs of settling a particular number of refugees, only to miss out on the eventual economic benefits that those refugees could provide when they join the workforce.
To avoid this outcome, it would make sense to implement a transition period – like the seven-year transition periods faced by citizens of new member states – during which successful asylum-seekers are barred from moving to other countries for work.
But Schengen makes this very difficult to enforce – a reality that plays further into the hands of the nationalists, who are keen to portray the EU as a burdensome obligation, rather than as a source of solutions or opportunities.
To be sure, the Schengen Agreement and the EU’s principle of free movement of people seem naturally to reinforce each other.
But the issues they raise are not the same.
It is the free movement of people, not border-free travel, that forms an essential component of the EU.
And, under the current circumstances, Schengen is placing that fundamental right and benefit at risk.
Of course, resolving the refugee crisis will take far more than just reintroducing glass booths and uniformed immigration officials at borders.
But suspending or abolishing the Schengen Agreement would boost the credibility of governments’ efforts to maintain order at home, and thus make ordinary citizens far more amenable to aiding more refugees.
At the same time, reversing a once-cherished policy would prove that the EU, far from being trapped by some utopian ideology, can adapt to changing circumstances in a thoughtful and pragmatic manner.
Reculer pour mieux sauter – backing up in order to jump better – is, after all, a time-honored and very European principle.
Refugees and Reform in Europe
LAGUNA BEACH – There is a simple truth beneath the growing human tragedy of Europe’s refugee crisis, and the European Union cannot address the massive influx of exhausted, desperate people in a manner compatible with its values unless governments and citizens acknowledge it.
Simply put, the historic challenge confronting Europe also offers historic opportunities.
The question is whether Europe’s politicians – who have failed to deliver on far less complicated issues over which they had a lot more control – can seize the moment.
The scale of the challenge is immense, with the flow of refugees extremely difficult to monitor and channel, let alone limit.
Fleeing war and oppression, tens of thousands of people are risking life and limb to find refuge in Europe – a phenomenon that will continue as long as chaos persists in countries of origin, such as Syria, and countries facilitating transit, such as Iraq and Libya.
In the meantime, Europe’s transport networks are under stress, as are shelters, border crossings, and registration centers.
Common asylum policies – including, for example, the basic rule that asylum-seekers should be registered at their point of entry into the EU – are not functioning or are being bypassed.
And the cherished concept of effortless travel within the border-free Schengen Area is under threat.
These problems are aggravated by coordination failures.
Attitudes toward refugees vary widely across countries, with Germany taking a particularly enlightened approach that contrasts sharply with Hungary’s notably heartless one.
Some countries, such as the Czech Republic, have blocked deals to share the burden fairly among European Union members, including through mandatory quotas.
Add to that the preferences of the refugees – who, after risking everything to get to Europe, have strong feelings about where they would like to settle – and the policy challenges are enormous, particularly in the short run.
European politicians have yet to catch up with the reality on the ground, let alone get ahead of it.
And their failure is exacerbating the risks to the EU’s political cohesion that emerged over the Greek crisis.
Politicians have a powerful incentive to get Europe’s response to the refugee crisis right.
Beyond the need to alleviate the human misery that fills television screens and front pages of newspapers lies the imperative not to miss the significant medium-term opportunities that migration provides.
Although there are pockets of high unemployment in Europe today, the ratio of workers to elderly people will decline considerably in the longer term.
And, already, labor-market flexibility has been undermined by structural inertia, including difficulties in retooling and retraining workers, particularly the long-term unemployed.
As the German government and some corporate leaders, including the CEO of Daimler-Benz, have already recognized, an open-minded approach to refugee absorption and integration can help to mitigate some of Europe’s protracted structural problems.
After all, a significant proportion of the incoming refugee population is said to be educated, motivated, and committed to building a better future in their new homes.
Capitalizing on this, European decision-makers can turn a severe short-term challenge into a powerful long-term advantage.
An enlightened policy response to the refugee crisis could help Europe in other ways as well.
Already, it is unlocking additional fiscal outlays in countries like Germany – which, despite having the means, did not previously have the will to spend – thereby helping to alleviate an aggregate-demand imbalance that, together with structural impediments to growth and excessive indebtedness in some countries, has held back the region’s recovery.
The current situation could also provide the catalyst needed to make decisive progress on the EU’s incomplete political, institutional, and financial architecture.
And it could compel Europe to overcome the political obstacles blocking solutions to longstanding problems, such as providing the cover needed for certain European creditors to grant deeper debt relief for Greece, whose already-massive fiscal and employment problems are being exacerbated by the influx of refugees.
It can even drive Europe to modernize its governance framework, which allows a few small countries to derail decisions supported by the vast majority of EU members.
Pessimists would immediately point out that Europe has struggled to come together even on far less complex and more controllable issues, such as the protracted economic and financial crisis in Greece.
Yet history also suggests that shocks of the scale and scope of the current refugee crisis have the potential to spur remarkable policy responses.
Europe has the opportunity to turn today’s refugee crisis into a catalyst for renewal and progress.
Let us hope that its politicians stop bickering and start working together to take advantage of this opening.
If they fail, the momentum behind regional integration – which has brought peace, prosperity, and hope to hundreds of millions of people – will weaken considerably, to the detriment of all.
The Agony and the Exodus
BRUSSELS – The tragic exodus of people from war-torn Syria and surrounding countries challenges the world’s reason and sympathy.
Since 2011, some four million people have fled Syria, with millions more internally displaced.
Syria’s neighbors – Jordan, Lebanon, and Turkey – currently house the vast majority of the externally displaced.
But, as the crisis has progressed, hundreds of thousands of refugees have headed toward Europe, with most taking the extremely dangerous marine route.
The nature and scale of this exodus have rendered all previous legal and political assumptions about migration obsolete.
In the past, the chief motive for migration was economic.
The debate to which economic migration gave rise was between liberals, who upheld the principle of the free movement of labor, and those who wanted restrictions on movement among countries in order to protect jobs, culture, and/or political cohesion.
As the world filled up with nation-states, and empty spaces filled up with people, restriction triumphed over free movement.
Controls on immigration became widespread after World War I. All countries developed population policies.
But there has always been another, much smaller, group of asylum-seekers – those individuals forced to flee their home countries by persecution, often on religious or ethnic grounds.
The 1951 United Nations Convention on Refugees recognized a right of asylum for those unable to return to their country of origin owing to a “well founded” fear of persecution.
In practice, however, it has never been simple to distinguish between economic and political migrants, because political persecution usually includes economic restrictions.
The Jews fleeing pogroms in Eastern Europe at the end of the nineteenth century, or Hitler’s Germany in the 1930s, were both economic and political migrants.
So were the East African Asians forced out of Uganda in the 1960s.
But the number of those identified as political refugees with a right of asylum was much smaller than those whose chief motive was to improve their economic lot. This reflected the relatively settled political conditions of the world of the 1950s.
Back then, the countries from which refugees are now escaping were under colonial or quasi-colonial rule, while homegrown dictatorships then emerged to preserve order in the old empires’ successor states.
It was the collapse of these brutal systems in the wake of the United States-led invasion of Iraq in 2003 and the Arab Spring of 2011 that created the current refugee crisis.
The refugees’ flight from Syria and other war-ravaged countries comes up against legal regimes that are poorly adapted to cope with it.
The European Union severely restricts labor from non-member countries, but allows free movement of labor within its single market.
This is justified by the fiction that the citizens of EU countries are members of a single polity.
The right of Greeks to work in Germany is no different from that of Parisians to work in Marseilles.
But the EU is an incomplete state – one that may never be completed.
An obvious indicator of this is that it lacks a fiscal-transfer mechanism to reduce the pressure of emigration from poor to rich areas.
In the absence of this, it is assumed that free economic migration within the EU will produce little net movement of populations.
The implicit model is that of the “guest worker” who comes and goes; in practice, a sizeable share of economic migrants from poorer parts of Europe stay in their country of destination, fueling an increase in support for anti-immigrant parties.
The asylum system is totally unprepared to deal with the new generation of refugees, who are ineligible under the existing framework, because they are fleeing not from specific acts of persecution, but from the disintegration of their states.
They can be provided “humanitarian protection” or be granted “discretionary leave to remain” for a short period; but then they can be deported as illegal immigrants.
So what is to be done?
Temporary residence status, in Europe or outside, would be reasonable if a rapid return to normalcy in the refugees’ countries of origin was a realistic prospect.
In Syria, for example, it is not: Although politicians and commentators talk about stemming the flood at the source, no peace plan is in sight.
The US and Russia back different sides.
The West cannot accept the possibility that the Assad dictatorship, however brutal, may be the least bad option on offer.
So the civil war will continue, the number of refugees in transit camps will increase, and more of them will risk their lives to enter leaky Fortress Europe.
Jean-Claude Juncker, the president of the European Commission, has proposed distributing 160,000 of the refugees currently in Europe across the EU’s 28 member states.
Germany is prepared to take far more.
Indeed, Chancellor Angela Merkel has bravely asserted “the fundamental right to asylum for the politically persecuted with no upper limit; and that goes for refugees who come to us from the hell of civil war.”
But other European leaders, faced with the rise of extremist, anti-immigrant parties, have not endorsed Merkel’s view; and the refugees still have to get to Germany through countries like Hungary, which are erecting walls and other border defenses to keep them out.
The truth is that the West cannot or will not absorb refugees in the numbers needed; and it has no solution to the problem of failed states.
This means that, apart from doling out humanitarian aid to those in refugee camps, it has no policy.
Unless and until that changes, the tragedy can only deepen.
Regime Change in the Arab World
Four years into a disastrous military adventure in Iraq and with the global war on terror against ill-defined forces of darkness still inconclusive, the collapse of America’s grand strategy has exposed how ill-conceived was its simplistic recipe for democratic change in the Arab world.
The paradox is that America might be winning the war for Arab democracy, even if by default, but cannot reap the benefits, simply because the emerging pattern of Islamic pluralistic politics does not coincide with the West’s brand of secular liberal democracy.
The shift of the Arab world’s mainstream fundamentalist movements to democratic politics is tantamount to a repudiation of the jihadist project and of al-Qaeda’s apocalyptic strategies.
The failure of jihadism is paving the way for a potentially promising restructuring of Islamic politics, but the West either doesn’t recognize the changes or is hostile to them.
The rise of Islamists throughout the region as the sole power capable of exploiting the opportunities of free elections – Hamas’ victory in Palestine and the Muslim Brotherhood’s spectacular gains in the 2005 Egyptian elections are but the most noteworthy – the ascendancy to regional hegemony of Shiite Iran, and the sense among Arab rulers that the embattled Bush administration is running out of steam have all combined to stall the promising drive to political reform in the region.
The US retreated from its democratic designs once it realized that Arab democracy is not being identified with the liberal secular opposition, a political force that practically does not exist in the Arab world, but with Islamic radicals that are seek to repudiate America’s policies and the cause of reconciliation with Israel.
That this should be so has of course much to do with America’s traditional policy of sustaining the Arab world’s pro-Western dictators.
But the notion that the genii of democratization can now be squeezed back into the bottle is a self-serving fantasy.
The move of mainstream Islamists, like the Muslim Brotherhood in Egypt, the Islamic Action Front in Jordan, Hamas in Palestine, the Renaissance Party in Tunisia, or the Party of Justice and Development in Morocco, away from jihadism to political participation started well before America’s democracy promotion campaign, and is not an attempt to please the West.
It is a genuine response to the needs and demands of their supporters.
Extinguishing Arab democracy, as President Mubarak of Egypt is now trying to do through his recent ban on political parties that are based on religion, will bring neither stability nor peace to the Middle East.
It will only exacerbate the rage of the masses at the West’s hypocrisy, now expressed in a form of democratic charlatanry.
The stability of those Arab regimes that are not sustained by a democratic consensus is bound to be fragile and misleading.
Just as Islamic democracy is the natural reaction to Arab secular autocracy and to the West’s collaboration with it, so will the destruction of political Islam usher in even more extreme options with movements like Hamas going back to social work and terror, and with al-Qaeda making inroads into Islamic societies.
Both the West and the Arab rulers need to realize that the tense equation between the incumbent regimes and political Islam is not necessarily a zero-sum game.
This has been learned the hard way by Algerian President Bouteflika who, through his Charter for Peace and National Reconciliation of February 2006, brought an end to a long and bloody civil war, the origins of which lay in the violent cancellation by the military of the Islamist Front’s (FIS) electoral victory in 1991.
It is in this context that the historic compromise between the religious (Hamas) and the secular (Fatah) to form a national unity government for Palestine might have established a new paradigm for the future of regime change in the Arab world.
The concept of national unity governments might, indeed, be the formula that makes it possible to hold together the political families in the Arab world.
King Muhammad VI of Morocco has already indicated that the Crown would consider a “historic compromise” with the Islamists should they, as predicted, win the elections in June 2007.
Such compromises may be the only way to stem the slide to civil war, and possibly also co-opt the Islamists into a settlement with Israel and a rapprochement to the West.
Engaging political Islam will need to be the central part of any successful strategy for the Middle East.
Instead of sticking to doomsday prophecies or to categorical perspectives that prevent an understanding of the complex fabric of Islamic movements, the West needs to keep the pressure on the incumbent regimes to stop circumventing political reform.
As Algeria in the 1990’s showed, exclusion of the Islamists is a recipe for disaster, while inclusion can breed moderation.
The practical necessities of politics are bound to dilute ideological purity.
The Mecca agreement that brought forth the unity government in Palestine will inevitably temper Hamas’ radicalism, just as the regime’s avoidance in Jordan of an “Egyptian solution” to the Islamist challenge allowed the Islamic Action Front to contain within the movement many who would have been otherwise drawn into the jihadist orbit.
The challenge is not how to destroy Islamic movements, but how to turn them away from revolutionary to reformist politics by granting them legitimate political space.
Regulation Revisited
NEW YORK – We are in the midst of the worst financial crisis since the 1930’s.ampnbsp;ampnbsp;
The salient feature of the crisis is that it was not caused by some external shock like OPEC raising the price of oil.ampnbsp;
It was generated by the financial system itself.
This fact – a defect inherent in the system – contradicts the generally accepted theory that financial markets tend towards equilibrium and deviations from the equilibrium occur either in a random manner or are caused by some sudden external event to which markets have difficulty in adjusting.ampnbsp;
The current approach to market regulation has been based on this theory but the severity and amplitude of the crisis proves convincingly that there is something fundamentally wrong with it.
I have developed an alternative theory which holds that financial markets do not reflect the underlying conditions accurately.ampnbsp;
They provide a picture that is always biased or distorted in some way or another.ampnbsp;
More importantly, the distorted views held by market participants and expressed in market prices can, under certain circumstances, affect the so-called fundamentals that market prices are supposed to reflect.ampnbsp;
I call this two-way circular connection between market prices and the underlying reality ‘reflexivity’.ampnbsp;
I contend that financial markets are always reflexive and on occasion they can veer quite far away from the so-called equilibrium.ampnbsp;
In other words, financial markets are prone to produce bubbles.ampnbsp;
The current crisis originated in the subprime mortgage market.ampnbsp;
The bursting of the US housing bubble acted as a detonator that exploded a much larger super-bubble that started developing in the 1980’s when market fundamentalism became the dominant creed.ampnbsp;
That creed led to deregulation, globalization, and financial innovations based on the false assumption that markets tend towards equilibrium.ampnbsp;
The house of cards has now collapsed.ampnbsp;
With the bankruptcy of Lehman Brothers in September, 2008 the inconceivable happened: the financial system went into cardiac arrest.ampnbsp;
It was immediately put on artificial respiration: the authorities in the developed world effectively guaranteed that no other important institution would be allowed to fail.ampnbsp;
But countries at the periphery of the global financial system could not provide equally credible guarantees.ampnbsp;
This precipitated capital flight from countries in Eastern Europe, Asia, and Latin America.
All currencies fell against the dollar and the yen.
Commodity prices dropped like a stone, and interest rates in emerging markets soared.
The race to save the international financial system is still in progress.
Even if it is successful, consumers, investors, and businesses are undergoing a traumatic experience whose full impact is yet to be felt.
A deep recession is inevitable and the possibility of a depression cannot be ruled out.
So what is to be done?
Because financial markets are prone to create asset bubbles, regulators must accept responsibility for preventing them from growing too big.
Until now, financial authorities have explicitly rejected that responsibility.
Of course, it is impossible to prevent bubbles from forming, but it should be possible to keep them within tolerable bounds.
This cannot be done simply by controlling the money supply.
Regulators must also take into account credit conditions, because money and credit do not move in lockstep.ampnbsp;
Markets have moods and biases, which need to be counterbalanced.ampnbsp;
To control credit as distinct from money, additional tools must be employed – or, more accurately, reactivated, since they were used in the 1950’s and 1960’s. I refer to varying margin requirements and the minimal capital requirements of banks.
Today’s sophisticated financial engineering can render the calculation of margin and capital requirements extremely difficult, if not impossible.
Therefore new financial products must be registered and approved by the appropriate authorities before being sold.
Counterbalancing the mood of the market requires judgment, and because regulators are human, they are bound to get it wrong.
They have the advantage, however, of getting feedback from the market, which should enable them to correct their mistakes.ampnbsp;
If a tightening of margin and minimum capital requirements does not deflate a bubble, regulators can tighten some more.
But the process is not foolproof, because markets can also be wrong.
The search for the optimum equilibrium is a never-ending process of trial and error.
This cat-and-mouse game between regulators and market participants is already ongoing, but its true nature has not yet been acknowledged.
Alan Greenspan, the former US Federal Reserve chairman, was a master of manipulation with his Delphic utterances, but instead of acknowledging what he was doing, he pretended that he was merely a passive observer. That is why asset bubbles could grow so large during his tenure.
Because financial markets are global, regulations must also be international in scope.ampnbsp;
In the current situation, the International Monetary Fund (IMF) has a new mission in life: to protect the periphery countries against the effects of storms that originate at the center, namely the US.ampnbsp;
The US consumer can no longer serve as the motor of the world economy.ampnbsp;
To avoid a global depression other countries must also stimulate their domestic economies.ampnbsp;
But periphery countries without large export surpluses are not in a position to employ countercyclical policies.ampnbsp;
It is up to the IMF to find ways to finance countercyclical fiscal deficits.ampnbsp;
This could be done partly by enlisting sovereign wealth funds and partly by issuing Special Drawing Rights so that rich countries that can finance their own fiscal deficits could cede to poorer countries that cannot.
While international regulation must be strengthened for the global financial system to survive we must also beware of going too far. ampnbsp;Markets are imperfect but regulations are even more so.ampnbsp;
Regulators are not only human; they are also bureaucratic and subject to political influences.ampnbsp;
Regulations should be kept to the minimum necessary to maintain stability.
Europe’s Irrelevant Austerity Debate
BRUSSELS – The most visible symptom of the crisis in the eurozone has been the high and variable risk premiums that its peripheral countries now must pay on their public debt.
Moreover, an influential paper by the American economists Carmen Reinhart and Kenneth Rogoff suggests that economic growth falls sharply when a country’s public debt rises above 90% of GDP.
So the policy prescription for solving the crisis seems simple: austerity.
Fiscal deficits must be cut to reduce debt levels.
But the debate about austerity and the cost of high public-debt levels misses a key point: Public debt owed to foreigners is different from debt owed to residents.
Foreigners cannot vote for the higher taxes or lower expenditure needed to service the debt.
Moreover, in the case of domestic debt, a higher interest rate or risk premium merely leads to more redistribution within the country (from taxpayers to bondholders).
By contrast, in the case of debt owed to foreigners, higher interest rates lead to a welfare loss for the country as a whole, because the government must transfer resources abroad, which usually requires a combination of exchange-rate depreciation and a reduction in domestic expenditure.
This distinction between foreign and domestic debt is particularly important in the context of the euro crisis, because eurozone countries cannot devalue to increase exports if this is required to service foreign debt.
And the evidence confirms that the euro crisis is not really about sovereign debt, but about foreign debt.
Indeed, only those countries that were running large current-account deficits before the crisis were affected by it.
The case of Belgium is particularly instructive, because the risk premium on Belgian sovereign debt has remained modest throughout most of the euro crisis, although the country’s debt/GDP ratio is above the eurozone average, at around 100%, and it went without a government for more than a year.
An even starker example of the crucial difference between foreign and domestic debt is provided by Japan, which has by far the highest debt/GDP ratio among OECD countries.
So far, the country has not experienced a debt crisis, and interest rates remain exceptionally low, at around 1%.
The reason is obvious: Japan has run sizeable current-account surpluses for decades, giving it more than sufficient domestic savings to absorb all of its public debt at home.
What does this imply for Europe’s austerity debate?
If foreign debt matters more than public debt, the key variable requiring adjustment is the external deficit, not the fiscal deficit.
A country that has a balanced current account does not need any additional foreign capital.
That is why risk premiums are continuing to fall in the eurozone, despite high political uncertainty in Italy and continuing large fiscal deficits elsewhere.
The peripheral countries’ external deficits are falling rapidly, thus diminishing the need for foreign financing.
The debate about austerity and the high cost of public debt is thus misleading on two accounts.
First, it has often been pointed out that austerity can be self-defeating, because a reduction in the fiscal deficit can lead in the short run to an increase in the debt/GDP ratio if both the debt level and the multiplier are large.
But austerity can never be self-defeating for the external adjustment.
On the contrary, the larger the fall in domestic demand in response to a cut in government expenditure, the more imports will fall and the stronger the improvement in the current account – and thus ultimately the reduction in the risk premium – will be.
Italy’s experience is enlightening: the large tax increases implemented by former Prime Minister Mario Monti’s technocratic government in 2012 had a higher-than-expected impact on demand.
The economy is contracting so much that the debt/GDP ratio is actually increasing, and the actual deficit is improving only marginally, because government revenues are falling along with GDP.
But a side effect of the fall in GDP is a strong decline in imports – and thus a strong improvement in the current account, which is why the risk premium continues to fall, despite the political turmoil unleashed by the country’s inconclusive recent election.
Second, if foreign debt is the real problem, the escalating debate about the Reinhart/Rogoff results is irrelevant for the euro crisis. Countries that have their own currency, like the United Kingdom – and especially the United States, which can borrow from foreigners in dollars – do not face a direct financing constraint.
For these countries, it matters whether history suggests that there is a strong threshold effect once public debt exceeds 90% of GDP.
But the eurozone’s peripheral countries simply did not have a choice: they had to reduce their deficits, because the foreign capital on which their economies were so dependent was no longer available.
But the reverse is also true: as soon as the current account swings to surplus, the pressure from financial markets abates.
This is likely to happen soon.
At this point, peripheral countries will regain their fiscal sovereignty – and will be able to ignore Reinhart and Rogoff’s warning at their own risk.
Reining in Europe’s Debtor Nations
MUNICH – The eurozone countries have now agreed to provide some €80 billion in cheap loans to Greece over the next three years, and hope that the International Monetary Fund will provide another €15 billion at the least.
But the interest rate that Greece must pay buyers of its government bonds has shot up to a record-high level of nearly 9% – 5.9 percentage points above the benchmark rate paid by Germany.
That translates into an additional €16billion per year in interest payments on Greece’s current debt of €273 billion.
Obviously, markets still believe that Greece will default on its debt.
Greece, moreover, has another huge problem: its current-account deficit is currently a whopping 13% of net national income, which means that €27 billion have to be financed annually by borrowing or selling Greek assets.
With international investors no longer willing to finance this deficit, and even shying away from refinancing existing Greek debt, only three possibilities remain.
The first is that the European Union provides the necessary funds on a permanent basis, creating a “European Transfer Union” to the benefit of the deficit countries, including Portugal, Spain, Ireland and Italy.
The second option is for Greece to go through a depression, reducing its wages and prices.
Finally, Greece could leave the euro and devalue its currency.
All three of these options are painful, albeit for different reasons.
The first is unbearable for the more stable EU countries, because it would deprive them of their wealth and suck them into a dangerous fiscal maelstrom.
The second would lead to even more riots in the streets of Greece, with unforeseeable political consequences.
And the third would destabilize the euro, possibly resulting in a run on some other EU countries.
As all the possible options are bad, the situation qualifies as a veritable Greek tragedy such as those hitherto seen only on stage.
Politicians believe that imposing more budget discipline on Greece is a fourth possibility.
But this is not true. Budget discipline will work only insofar as it drives the country into a depression and induces a real devaluation through a reduction in wages and prices, which is option two.
While that would stimulate inward tourism and real-estate sales, what sounds easy and manageable to the layman would in fact be the most problematic solution for Greece, because it would add fuel to internal protests to a point that could destabilize the eastern Mediterranean.
The tragedy could have been avoided if Greece had shown unyielding, timely debt discipline.
The country would then have been unable to price itself out of the market through an artificial debt-financed boom.
There would have been no high, but also no hangover.
The lesson to be learned from the crisis is that a currency union needs ironclad budget discipline to avert a boom-and-bust cycle in the first place.
Again, there are three possibilities worth considering:
· The American system.
In the United States, there is no bailout mechanism and no intergovernmental loans.
Profligate states go bankrupt if necessary.
Markets encourage the required debt discipline in a timelier manner by charging higher interest rates on government debt.
This system has worked quite well since the nineteenth century, even though (or because) it involved a substantial number of state bankruptcies.
Given the perilous state of California’s finances, it may well be tested soon.
· The German system.
In Germany, a “stability council” must approve state budgets.
According to the German Constitution, the German states (or Länder) will not be permitted any budget deficit after 2020, and must already pursue fiscal consolidation in order to meet that goal.
In exceptional cases, a state may run a deficit, but its cumulative volume must not exceed 1.5% of GDP.
If it exceeds 1% of GDP, the excess is subtracted from the budget allowed for the following year, provided that the economy is in an upswing with a shrinking output gap.
· A new EU system, following the logic of the bailout strategy that the EU is currently applying, should be extended to include automatic fines for “debt sinners.”
Loans would be provided by other EU countries if necessary, taking the form of covered state bonds collateralized with privatizable state assets. Their accumulated sum would be limited to 10% of GDP.
Should a country default despite these loans, it would have to leave the euro and devalue.
Automatic fines would punish any country whose debt-to-GDP ratio exceeds the Maastricht Treaty’s 60% cap or whose budget deficit exceeds the 3%-of-GDP limit.
The fines could be as high as the interest premium would be in the absence of help, thereby ensuring that the benefit of enhanced stability under the euro accrues to all eurozone countries, rather than to the profligate members themselves.
In order to prevent sinners from getting caught in a debt trap, the fines could take the form of covered bonds collateralized with privatizable state assets.
All of this is unpleasant, and it may not appeal to politicians who believe in dreams.
But the European debt crisis will not disappear into thin air by virtue of wishful thinking.
It is time for Europe to face its true options in order to maintain the euro’s stability – and that of the EU itself.
Reinventing Economics
NEW HAVEN – The widespread failure of economists to forecast the financial crisis that erupted in 2008 has much to do with faulty models.
This lack of sound models meant that economic policymakers and central bankers received no warning of what was to come.
As George Akerlof and I argue in our recent book Animal Spirits , the current financial crisis was driven by speculative bubbles in the housing market, the stock market, and energy and other commodities markets.
Bubbles are caused by feedback loops: rising speculative prices encourage optimism, which encourages more buying, and hence further speculative price increases – until the crash comes.
But you won’t find the word “bubble” in most economics treatises or textbooks.
Likewise, a search of working papers produced by central banks and economics departments in recent years yields few instances of “bubbles” even being mentioned.
Indeed, the idea that bubbles exist has become so disreputable in much of the economics and finance profession that bringing them up in an economics seminar is like bringing up astrology to a group of astronomers.
The fundamental problem is that a generation of mainstream macroeconomic theorists has come to accept a theory that has an error at its very core: the axiom that people are fully rational.
And as the statistician Leonard “Jimmie” Savage showed in 1954, if people follow certain axioms of rationality, they must behave as if they knew all the probabilities and did all the appropriate calculations.
So economists assume that people do indeed use all publicly available information and know, or behave as if they knew, the probabilities of all conceivable future events.
They are not influenced by anything but the facts, and probabilities are taken as facts.
They update these probabilities as soon as new information becomes available, and so any change in their behavior must be attributable to their rational response to genuinely new information.
And if economic actors are always rational, then no bubbles – irrational market responses – are allowed.
But abundant psychological evidence has now shown that people do not satisfy Savage’s axioms of rationality.
This is the core element of the behavioral economics revolution that has begun to sweep economics over the last decade or so.
In fact, people almost never know the probabilities of future economic events.
They live in a world where economic decisions are fundamentally ambiguous, because the future doesn’t seem to be a mere repetition of a quantifiable past.
For many people, it always seems that “this time is different.”
The work of Duke neuroscientists Scott Huettel and Michael Platt has shown, through functional magnetic resonance imaging experiments, that “decision making under ambiguity does not represent a special, more complex case of risky decision making; instead, these two forms of uncertainty are supported by distinct mechanisms.” In other words, different parts of the brain and emotional pathways are involved when ambiguity is present.
Mathematical economist Donald J. Brown and psychologist Laurie R. Santos, both of Yale, are running experiments with human subjects to try to understand how human tolerance for ambiguity in economic decision-making varies over time.
They theorize that “bull markets are characterized by ambiguity-seeking behavior and bear markets by ambiguity-avoiding behavior.”
These behaviors are aspects of changing confidence, which we are only just beginning to understand.
To be sure, the purely rational theory remains useful for many things.
It can be applied with care in areas where the consequences of violating Savage’s axiom are not too severe.
Economists have also been right to apply his theory to a range of microeconomic issues, such as why monopolists set higher prices.
But the theory has been overextended.
For example, the “Dynamic Stochastic General Equilibrium Model of the Euro Area,” developed by Frank Smets of the European Central Bank and Raf Wouters of the National Bank of Belgium, is very good at giving a precise list of external shocks that are presumed to drive the economy.
But nowhere are bubbles modeled: the economy is assumed to do nothing more than respond in a completely rational way to these external shocks.
Milton Friedman (Savage’s mentor and co-author) and Anna J. Schwartz, in their 1963 book A Monetary History of the United States , showed that monetary-policy anomalies – a prime example of an external shock – were a significant factor in the Great Depression of the 1930’s.
Economists such as Barry Eichengreen, Jeffrey Sachs, and Ben Bernanke have helped us to understand that these anomalies were the result of individual central banks’ effort to stay on the gold standard, causing them to keep interest rates relatively high despite economic weakness.
To some, this revelation represented a culminating event for economic theory.
The worst economic crisis of the twentieth century was explained – and a way to correct it suggested – with a theory that does not rely on bubbles.
Yet events like the Great Depression, as well as the recent crisis, will never be fully understood without understanding bubbles.
The fact that monetary-policy mistakes were an important cause of the Great Depression does not mean that we completely understand that crisis, or that other crises (including the current one) fit that mold.
In fact, the failure of economists’ models to forecast the current crisis will mark the beginning of their overhaul.
This will happen as economists’ redirect their research efforts by listening to scientists with different expertise.
Only then will monetary authorities gain a better understanding of when and how bubbles can derail an economy, and what can be done to prevent that outcome.
Reinventing Energy
NEW YORK ­– The world economy is being battered by sharply higher energy prices.
While a few energy-exporting countries in the Middle East and elsewhere reap huge profits, the rest of the world is suffering as the price of oil has topped $110 per barrel and that of coal has doubled.
Without plentiful and low-cost energy, every aspect of the global economy is threatened.
For example, food prices are increasing alongside soaring oil prices, partly because of increased production costs, but also because farmland in the United States and elsewhere is being converted from food production to bio-fuel production.
No quick fix exists for oil prices.
Higher prices reflect basic conditions of supply and demand. The world economy – especially China, India, and elsewhere in Asia – has been growing rapidly, leading to a steep increase in global demand for energy, notably for electricity and transport.
Yet global supplies of oil, natural gas, and coal cannot easily keep up, even with new discoveries.
And, in many places, oil supplies are declining as old oil fields are depleted.
Coal is in somewhat larger supply, and can be turned into liquid fuels for transport.
Yet coal is an inadequate substitute, partly because of limited supplies, and partly because coal emits large amounts of carbon dioxide per unit of energy, and therefore is a dangerous source of man-made climate change.
For developing countries to continue to enjoy rapid economic growth, and for rich countries to avoid a slump caused, it will be necessary to develop new energy technologies.
Three objectives should be targeted: low-cost alternatives to fossil fuels, greater energy efficiency, and reduction of carbon-dioxide emissions.
The most promising technology in the long term is solar power.
The total solar radiation hitting the planet is about 1,000 times the world’s commercial energy use.
This means that even a small part of the earth’s land surface, notably in desert regions, which receive massive solar radiation, can supply large amounts of the electricity for much of the rest of the world.
For example, solar power plants in America’s Mohave Desert could supply more than half of the country’s electricity needs.
Solar power plants in Northern Africa could supply power to Western Europe. And solar power plants in the Sahel of Africa, just south of the vast Sahara, could supply power to much of West, East, and Central Africa.
Perhaps the single most promising development in terms of energy efficiency is “plug-in hybrid technology” for automobiles, which may be able to triple the fuel efficiency of new automobiles within the next decade.
The idea is that automobiles would run mainly on batteries recharged each night on the electricity grid, with a gasoline-hybrid engine as a backup to the battery.
General Motors might have an early version by 2010.
The most important technology for the safe environmental use of coal is the capture and geological storage of carbon dioxide from coal-fired power plants.
Such “carbon capture and sequestration,” or CCS, is urgently needed in the major coal-consuming countries, especially China, India, Australia, and the US.
The key CCS technologies have already been developed; it is time to move from engineering blueprints to real demonstration power plants.
For all of these promising technologies, governments should be investing in the science and high costs of early-stage testing.
Without at least partial public financing, the uptake of these new technologies will be slow and uneven.
Indeed, most major technologies that we now take for granted – airplanes, computers, the Internet, and new medicines, to name but a few – received crucial public financing in the early stages of development and deployment.
It is shocking, and worrisome, that public financing remains slight, because these technologies’ success could translate into literally trillions of dollars of economic output.
For example, according to the most recent data from the International Energy Agency, in 2006 the US government invested a meager $3 billion per year in energy research and development.
In inflation-adjusted dollars, this represented a decline of roughly 40% since the early 1980’s, and now equals what the US spends on its military in just 1.5 days.
The situation is even more discouraging when we look at the particulars.
US government funding for renewable energy technologies (solar, wind, geothermal, ocean, and bio-energy) totaled a meager $239 million, or just three hours of defense spending.
Spending on carbon capture and sequestration was just $67 million, while spending for energy efficiency of all types (buildings, transport, and industry) was $352 million.
Of course, developing new energy technologies is not America’s responsibility alone.
Global cooperation on energy technologies is needed both to increase supplies and to ensure that energy use is environmentally safe, especially to head off man-made climate change from the use of fossil fuels.
This would not only be good economics, but also good politics, since it could unite the world in our common interest, rather than dividing the world in a bitter struggle over diminishing oil, gas, and coal reserves.
Reinventing Europe’s Financial Markets
FRANKFURT – Despite great progress in integrating the European Union’s financial markets, barriers remain in key areas: retail services, bank mergers and acquisitions, and tax harmonization, to name but a few.
Completing a single financial market would boost economic growth and prosperity in every member state.
It would also broaden consumer choice, open a host of new investment opportunities, strengthen the EU banking sector, and make Europe a center for financial innovation.
What will the single European financial market of the future look like?
First, there needs to be a level playing field within the EU.
Second, consolidation of Europe’s banking sector must be extended, with all protectionist barriers or other obstacles to mergers and acquisitions eliminated.
Third, the European market place should be fully integrated into the global network of financial centers, particularly those in the United States and Asia.
The EU’s Financial Services Action Plan, launched in 1999 and implemented in stages, focused mainly on securities markets.
It boosted competition and innovation for professional traders and encouraged institutional market players, in particular, to trade across EU borders.
As a result, considerable progress was made in the “wholesale” securities sector.
Retail customers, however, were largely ignored.
But the aim of creating a “European home market” should not be reserved for wholesale market players.
Retail customers deserve the chance to buy products and services from all member countries, and it would be in banks’ own interest for them to be able to do so.
For example, according to surveys by the European Commission, more than 10% of European banking and insurance customers would like to use foreign products and services.
But only 5% of customers currently have an account with a foreign bank.
The figures for credit cards are even lower – only around 3% of Europeans have a card from a non-domestic provider.
Just 3% make any private provision for retirement with a foreign bank, and only 1% of retail customers take out a mortgage in another EU country.
The reasons for this are clear.
There are undoubtedly “natural” barriers, such as language and national mentalities, which cannot be overcome swiftly.
But there are also big “man-made” barriers, particularly those created by different national legislation in the fields of investor and consumer protection.
These regulations differ widely.
What information requirements must banks comply with?
What formalities must customers complete if they want to open an account in another EU country?
Nor will consumers find any uniform standards for loans or other financial guarantee agreements in the EU.
This lack of uniformity is preventing both banks and consumers from doing more cross-border business, and it is where policymakers must act; only harmonized rules and EU-wide standards will eliminate costly and time-consuming compliance with different national regimes.
Another missing piece in the EU financial market mosaic is the harmonization of tax law.
The question is not one of aligning tax rates, which can and should be determined by competition.
Rather, the aim of harmonization is to make cross-border trade easier for business.
For example, if there is no standard way to determine taxable income, or offset losses, it is hard for firms – including banks – to sell their products in other member states or to optimize their cross-border corporate structures.
Despite such headaches, significant progress toward a single financial market is being made.
The technical conditions required for the Single Euro Payments Area (SEPA) have been met.
Customers can, for the first time, make all their euro payments as safely, efficiently, and conveniently as they do at home.
The payment products they use are based on uniform pan-European procedures.
An efficient European financial market also needs centralization of supervisory competences.
Convergence of national regulations should be accelerated, and closer cooperation between national authorities should become a priority.
Otherwise, national authorities will be unable to respond properly to cross-border developments.
Ultimately, the aim should be to create a single institution responsible for supervising large banks that operate across the EU, with national regulators responsible only for domestic banks.
Here, the European System of Central Banks could serve as a model.
Centralized financial supervision would avoid the need for banks to duplicate reports to different authorities, allow financial rules and supervisory practices to be harmonized, and eliminate distortions to competition.
The remaining barriers to cross-border mergers and acquisitions also need to be removed so that EU banks can grow big enough to compete globally.
Although direct legal obstacles have been eliminated in Europe, indirect obstacles such as taxation – which can make a merger unprofitable – persist.
Some national governments have their part to play, too.
Germany illustrates the problems that are created when a country’s banking sector is largely bypassed by the global trend toward consolidation.
When measured against the size of its national economy, most German banks remain too small, trailing their international rivals in terms of both market capitalization and total assets.
Germany needs three or four big banks to take their place among Europe’s market leaders and be at the forefront of the consolidation process.
In other countries, policymakers set the course for banking modernization years ago and have reinforced competition since then – to the benefit of customers and banks alike.
The “three pillar” structure of the German banking system is a drag on growth.
While public banks can – and do – buy private banks, the reverse is blocked by law, which distorts competition.
An integrated single market in financial services would be a platform for innovation and increased competitiveness.
It would also boost Europe’s global role and allow EU banks to compete in the worldwide marketplace.
While much has already been accomplished, it is time to finish the job.
Reinventing Science Education
VANCOUVER – Despite the growing importance of science in the modern world, science education remains a remote and minor issue for most people.
This is both short-sighted and hazardous.
After all, science and technology are not only the primary drivers of growth in the modern economy; they are also increasingly central to many major public policy issues, most notably those surrounding climate change and health care.
To be sure, the need for more and better science education has not been entirely ignored.
But little of this attention has been aimed at post-secondary science education, the only level for which there is data showing how to make substantial improvements without enormous costs.
Moreover, it is doubtful that great progress can be made at the primary and secondary levels until a higher standard of science learning is set at the post-secondary level.
The conventional view is that there is little problem with post-secondary science education.
Scientists and engineers are being produced at rates comparable or higher than in the past, and, while few non-science students find their required science courses enjoyable or useful, that is considered to be inherent to the subject.
However, the past 20 years or so have witnessed the emergence of research on science education at the university level carried out by scientists in their respective disciplines.
The results of this research, and the dramatically improved gains in learning and interest achieved in associated teaching experiments, show that there are tremendous opportunities to improve university science education.
Realizing these opportunities, however, will require a different pedagogical approach, one that treats science education as a science, with rigorous standards for teaching effectiveness.
It also requires abandoning the longstanding and widespread assumption that understanding science means simply learning a requisite body of facts and problem-solving recipes, and that mastery of those facts is the sole qualification needed to be a science teacher.
Science education research clearly shows that a true understanding of science, as demonstrated by how it is practiced, is not merely about learning information.
Rather, it is about developing a way of thinking about a discipline that reflects a particular perception of how “knowledge” is established, its extent and limitations, how it describes nature, and how it can be usefully applied in a variety of contexts.
Developing such a way of thinking is a profoundly different experience from learning a set of facts, and requires very different teaching skills.
In many respects, science education today is similar to medicine during the mid-1800’s, when a new level of scientific rigor confronted long-held beliefs and well-respected traditional medical practices.
For example, bloodletting had been in use for thousands of years, with detailed theories explaining its effectiveness.
And there
Over the course of several decades, however, an enormous intellectual shift occurred in how people came to think about the practice of medicine.
Rigorous scientific standards were adopted, a better understanding of the complexities of the human body was developed, and a higher standard of evidence for the efficacy of treatments was established.
The fact that some patients survived bloodletting was no longer good enough.
While this shift led to far more effective medical treatments, it did not come quickly or naturally to people.
Even today, a large number of people are willing to reject medical science in favor of home remedies supported only by an anecdote offered by a neighbor or relative.
There is little reason to think that the adoption of a more scientific approach to science education will be much easier.
Yet it has begun, and completing it offers the hope of moving from the educational equivalent of bloodletting to vaccines and antibiotics.
With continued research and effective implementation of new findings about science education, it will be possible to achieve far more meaningful science learning for all university students.
Giving students a deeper understanding of the world around them is inherently enriching.
It will also enable them to make wiser decisions on critically important matters of public policy, and to be far more creative and effective members of the work force.
Reinventing the European Dream
PRINCETON – The euro crisis and Queen Elizabeth’s recent Jubilee seem to have nothing in common.
In fact, together they impart an important lesson: the power of a positive narrative – and the impossibility of winning without one.
Commenting on the Jubilee’s river pageant and horse parade, historian Simon Schama talked to the BBC about “little boats and big ideas.”
The biggest idea was that Britain’s monarchy serves to connect the country’s past to its future in ways that transcend the pettiness and ugliness of quotidian politics.
The heritage of kings and queens stretching back across more than a millennium – the enduring symbolism of crowns and coaches, and the literal embodiment of the English and now the British state – binds Britons together in a common journey.
Cynics might call this the old bread-and-circuses routine.
But the point is to fix eyes and hearts on a narrative of hope and purpose – to uplift, rather than distract, the public.
Are Greeks, Spaniards, Portuguese, and other Europeans really supposed to embrace an austerity program imposed on them because prevailing wisdom in Germany and other northern countries considers them profligate and lazy?
Those are fighting words, creating resentment and division just when unity and burden-sharing are most needed.
Greece, in particular, now needs a way to connect its past with its future, but no monarch is forthcoming.
And, as the cradle of the world’s first democracy, Greece needs other symbols of national renewal than scepters and robes.
It is through Homer that virtually all Western readers first encounter the Mediterranean world: its islands and shores and peoples knit together by diplomacy, trade, marriage, oil, wine, and long ships.
Greece could once again be a pillar of such a world, using its current crisis to craft a new future.
That vision is more plausible than one might think.
Natural-gas fields in the Eastern Mediterranean are estimated to hold up to 122 trillion cubic feet, enough to supply the entire world for a year.
More gas and large oil fields lie off the Greek coast in the Aegean and Ionian Seas, enough to transform the finances of Greece and the entire region. Israel and Cyprus are planning joint exploration;
Israel and Greece are discussing a pipeline; Turkey and Lebanon are prospecting; and Egypt is planning to license exploration.
But politics, as always, intervenes.
All countries involved have maritime disputes and political disagreements.
The Turks are working with Northern Cyprus, whose independence only they recognize, and regularly make threatening noises about Israel’s drilling with the Greek Cypriot government of the Republic of Cyprus.
The Greek Cypriots regularly hold the EU hostage over any dealings with Turkey, as has Greece.
The Turks will not let Cypriot ships into their harbors and have not been on speaking terms with the Israelis since nine Turkish citizens were killed on a ship that sought to breach Israel’s blockade of Gaza.
Lebanon and Israel do not have diplomatic relations.
In short, the riches, jobs, and development that would flow to all countries in the region from responsible energy exploitation may well be blocked by the insistence of each on getting what it regards as its fair share and denying access to its enemies.
The vision of a Mediterranean Energy Community thus seems destined to remain a pipedream.
Yet July will bring the 60th anniversary of the ratification of the Treaty of Paris, which established the European Coal and Steel Community (ECSC) among France, Germany, Italy, Belgium, the Netherlands, and Luxembourg only six years after the end of World War II.
During the previous 70 years, Germany and France had fought each other in three devastating wars, the last two of which ruined Europe’s economies and decimated its population.
These countries’ mutual hatred and suspicion was no less bitter and deep-seated than that afflicting the Eastern Mediterranean.
Yet French Foreign Minister Robert Schuman, with the assistance of his counselor Jean Monnet, announced a plan for the ECSC in 1950, only five years after German troops had left Paris, with the aim of making “war not only unthinkable but materially impossible.”
Schuman proposed putting Franco-German coal and steel production under a common High Authority, thereby preventing the two sides from using the raw materials of war against each other, and powering a common industrial economy.
The ECSC became the core of today’s European Union.
The EU today is on the ropes, but only a few concrete steps by European leaders might open the door to similarly bold diplomacy that could restore EU and Mediterranean economies and transform the energy politics of Europe and Asia.
If the European Parliament and the European Council were to take steps to make direct EU trade with northern Cyprus subject to qualified majority voting rather than consensus (and hence veto by Cyprus), the EU would be able to begin trading with northern Cyprus, and Turkey could begin trading with Cyprus as a whole.
These steps could lead in turn to a Turkish, Cypriot, and Greek energy partnership that would provide positive incentives for Turkish-Israeli reconciliation.
The Schuman Plan took two years to crystalize and a decade to implement.
But it gave war-torn and desperately poor Europeans a positive vision of a new future, something that Greece and Cyprus, not to mention Middle Eastern and North African countries, desperately need.
Europe’s leaders will not surmount this crisis by pounding their citizens with bleak demands for austerity.
They must take concrete steps, with Greece as a full and equal partner, to create a vision of real rewards from a rejuvenated EU.
The EU does not have a Queen Elizabeth.
What it needs is another Schuman and Monnet.
Преобразование МВФ
Для всех финансовых кризисов, имевших место на протяжении последних 20 лет, будь то кризис внешнего долга 1982 года, мексиканский кризис 1994 года, кризис на финансовых рынках стран с развивающейся экономикой 1997-99 годов или же кризис, переживаемый сегодня Турцией и Аргентиной, характерна одна отличительная особенность, – все они охватывали страны, находящиеся на периферии мировой экономики.
Это послужило причиной значительного несоответствия в экономических и финансовых показателях.
В то время как на периферии один кризис сменялся другим, центральная часть поражала своей стабильностью и процветанием.
Как объяснить такое явление и что можно сделать в подобной ситуации?
Исторически сложилось так, что финансовые кризисы приводили к большему регулированию, включая усиление роли центральных банков и других контрольных органов.
В странах, составляющих ядро мировой экономики, такие образования уже достигли уровня развития, позволяющего им отвращать финансовые неурядицы вроде проблем 1930-х годов.
Однако процесс развития международных основ регулирования отстал от глобализации финансовых рынков.
И действительно, кризис 1997-99 годов может быть хотя бы частично отнесен на счет преждевременного открытия доступа к рынкам капитала развивающихся стран, до того как их финансовые институты оказались способными справиться с этой задачей.
Со времен кризиса 1997-99 годов особое значение придавалось необходимости усиления регулирующих механизмов в странах с развивающейся рыночной экономикой, тем временем, однако, ослабился международный регулирующий механизм.
Существует широко распространенное мнение о том, что «спасательные пакеты» МВФ фактически способствовали возникновению кризисов, создавая то, что экономисты называют «моральным риском», т.е. уверенностью со стороны участников свободного рынка, что МВФ непременно придет на выручку находящимся в затруднении странам, тем самым помогая найти выход из положения инвесторам, предоставившим им кредиты.
Спасательные пакеты МВФ, согласно этому мнению, ослабили рыночную дисциплину, стимулируя бум на неразумное, необоснованное предоставление займов.
В этом аргументе есть доля истины.
Однако рыночные фундаменталисты ошибаются, полагая, что устранение морального риска – это все, что требуется для создания прочной основы для международной финансовой системы.
Система существенно накренена в сторону центра (главным образом Соединенных Штатов), занимающегося регулированием кредитно-денежной политики.
Устранение морального риска просто позволит отразить уже само по себе невыгодное положение нахождения на периферии в стоимости и наличии капитала, что сейчас и происходит, хотя пока этого никто не признает.
В ходе кризиса 1997-99 года и последовавших за ним событий МВФ резко изменил свою политику по отношению к частному сектору, начав отказывать в финансовой помощи вместо того, чтобы предоставлять ее.
Стоимость распределения бремени расходов была включена в рыночные цены.
В результате премия за риск при предоставлении финансирования странам с развивающейся экономикой значительно возросла, в то время как при подсчетах отношения риска к получаемой компенсации обнаружилось смещение в сторону невыгодности инвестирования в страны с развивающейся экономикой.
Изменение политики МВФ принесет успех в предотвращении повторения бума на рынки стран с развивающейся экономикой, однако, оно уже создало проблему, работающую в противоположном направлении: высокая стоимость и отсутствие капитала само по себе является новой формой финансового заболевания.
Оно проявляется не только в нехватке иностранных портфельных инвестиций, но и в утечке внутреннего капитала, а также ставит отечественные компании в периферийных странах в заведомо невыгодное положение относительно многонациональных корпораций.
Собрав вместе ссуды на жилищное строительство, портфельные инвестиции и частные кредитные потоки, можно сделать вывод о существовании чистой утечки капитала из стран с развивающейся экономикой начиная с 1997 года, превратившейся из положительной размером в 81.7 миллиардов долларов в 1996 году в отрицательную размером в 104.7 миллиардов долларов в 2000 году, компенсируемой лишь слегка увеличившимися притоками прямых иностранных инвестиций и государственным финансированием.
Ошеломляющий показатель - 64% всего мирового чистого экспорта капитала в 2000 году было направлено в Соединенные Штаты в поисках лучших инвестиционных возможностей; для сравнения можно привести средний показатель 1997-99 годов равный 35%.
Ясно, что просто устранения морального риска в глобальной финансовой системе недостаточно, необходимы новые стимулы для создания более «ровного игрового поля» и поощрения направления потока капитала в страны, находящиеся на периферии.
Такие стимулы должны принять форму кредитных поручительств и других усовершенствований в области кредитной политики, которые усилили бы могущество и влияние МВФ в деле предотвращения кризисов в будущем.
Общие принципы очевидны: должен быть лучший баланс между предотвращением кризиса и вмешательством со стороны третьего лица, а также лучший баланс между предложением странам стимулов для ведения разумной политики и наказанием тех, кто этого не делает. ��десь пересекаются две основные цели: только посредством предложения определенных стимулов МВФ сможет оказывать более сильное влияние на экономическую политику отдельных стран до того, как эта страна обратится к МВФ за помощью в кризисной ситуации.
Для воплощения этих принципов в жизнь я предлагаю следующие меры: • МВФ должен ввести рейтинг стран.
Наивысшие оценки будут означать автоматический доступ страны к Чрезвычайным Кредитным Линиям, а держатели облигаций получат гарантии, что в случае развертывания программы МВФ их требования будут полностью удовлетворены.
Это послужит серьезным повышением доверия к стране.
И наоборот, странам, получившим низкие оценки, МВФ заранее даст понять, что не собирается вступать в программу без распределения бремени расходов между государственным и частным сектором.
Caveat emptor: пусть покупатель будет бдителен .
Могут также быть введены одна или две промежуточные оценки, когда МВФ сможет настаивать на различной степени распределения бремени расходов; • На основе Базельского Соглашения, которое устанавливает признанные во всем мире требования к уровню собственных средств для коммерческих банков, рейтинг МВФ мог бы быть преобразован в показатель изменения потребности в капитале. • Федеральный Резерв, Европейский Центральный Банк, «Бэнк оф Ингланд» (Bank of England) и "Бэнк оф Джапан" (Bank of Japan) могли бы принимать у своих дисконтных окон определенные казначейские векселя, выпущенные тщательно отобранными странами.
Эта привилегия может сохраняться для конкретных стран или же использоваться в особо опасных ситуациях.
Для того чтобы сделать эти изменения эффективными необходимо решить несколько правовых вопросов.
Например, в настоящее время МВФ не имеет права настаивать на распределении бремени расходов, а также предлагать защиту, сходную с защитой во время банкротства, против судебных исков кредиторов в процессе реорганизации долга (министр финансов Соединенных Штатов О’Нил недавно выразил поддержку такому механизму).
Такие реформы предоставят МВФ и всем его участникам более эффективные средства для предотвращения международных финансовых кризисов и уменьшения экономических несоответствий между странами, находящимися в центре глобальной экономической системы и на ее периферии.
Для их осуществления нам, прежде всего, необходимо преодолеть возражения рыночных фундаменталистов, которые хотят ликвидировать или уменьшить роль МВФ.
Reinventing the Maghreb
At a time when the European Union and the United States are anxious to promote political and economic reform in the Arab world, they should not overlook the Maghreb.
The EU cannot ignore the political, social, and security challenges that confront this huge swathe of northern Africa, and the US cannot afford to neglect this region in its global fight against terrorism.
New and bold – yet pragmatic – initiatives are therefore needed that combine the efforts of local actors and external actors.
The overall situation in the region is far from satisfactory.
Algeria’s economy is massively dependent on oil and gas exports, Morocco’s is largely based on agricultural production (on which the weather has a huge impact) and remittances from expatriates, while Tunisia depends on European consumer demand and tourism.
Education and labor policies in all Maghreb countries are under constant pressure from increasingly youthful populations.
In addition, the controversy over who should rule Western Sahara remains an obstacle to full normalisation of Algerian-Moroccan relations.
The EU is the region’s most important partner, accounting for over two-thirds of its external trade.
Intense bilateral exchanges between states north and south of the Western Mediterranean have accompanied the “Barcelona process,” which created a comprehensive dialogue between the Union and its Mediterranean neighbors, including association agreements.
Finally, a political forum for debate called the 5 + 5 Group periodically brings together representatives from Algeria, France, Italy, Libya, Malta, Mauritania, Morocco, Portugal, Spain, and Tunisia.
For its part, the US has sponsored a number of specific actions to promote democracy and good governance in the region.
Yet, despite these international initiatives and efforts by Maghreb governments, the situation is fragile; stability and security cannot be taken for granted.
The UN Human Development Report, for instance, consistently puts the Maghreb countries below the global average.
One key explanation for the Maghreb’s malaise is its lack of integration.
In Europe and elsewhere, regional integration is gradually changing the political environment, increasing self-confidence in societies and bringing international trust.
Indeed, some of the conditions necessary to launch a regional integration process are present in the Maghreb, but a new approach is needed.
The only way to jump-start integration is by creating a new regional body.
The Arab Maghreb Union could be revived.
But its top-down design hampers its effectiveness.
The European neighborhood policy recently reinforced the bilateral dimension of the Barcelona process.
But while the EU is emphasizing its bilateral relations with Maghreb countries, not enough attention – or funding – is being given to the sub-regional dimension.
To establish a new institutional dynamic in the Maghreb, three elements are needed: active engagement of the Maghreb states, who should be the initiative’s protagonists; determined EU support, which could be obtained only with the mediation of the Union’s Mediterranean members; and political backing from the US.
Creation of a new institution, a “Maghreb Common Market,” would be in everyone’s interest.
The Algerian, Moroccan, and Tunisian governments would show their engagement with their peoples’ future, and Europeans would demonstrate that they are ready to implement the principles they proclaim.
It seems obvious that the US would be supportive of such an initiative, as it is in line with its global policy of promoting liberty, good governance, and free trade.
Resolution of political disputes – both internal and international – in the Maghreb can be dealt with either directly, through thorny negotiations, or indirectly, starting with cooperation on issues, however modest, that could attract consensus.
In Europe after World War II, the “small steps” policy, also called the “Monnet method,” enabled former enemies to put the past behind them and unite.
Adapting this method to their needs, the Maghreb countries should open internal frontiers, facilitate exchanges, and embark on ambitious public works and infrastructure projects (such as highways, communications, and dams), all of which could ensure real progress via small steps.
Finally, new regional arrangements, as well as specific projects, will require diversified funding sources.
Neither the fiscal budgets in the Maghreb nor existing levels of debt currently allows the necessary public investments to be made.
Although EU assistance from the Barcelona process is significant, it does not have a decisive impact on Maghreb economies.
Therefore, an ad hoc funding mechanism must be defined, in the form, say, of a donor conference.
In such a mechanism, Europeans should allocate funds not only from within the Barcelona process and the European Investment Bank, but also from the states most concerned – France, Italy, and Spain.
In addition, international contributions from the World Bank could be supplemented with those from the US, which is keen to stabilize the region, and other donor countries, such as Canada, Japan, Norway, Switzerland, and some Arab countries.
Boosting regional integration in the Maghreb promises much and would cost relatively little.
But outside help is essential.
Reinventing the World Bank, Again
MADRID – With three nominees now in the running to become the World Bank’s next president – Nigerian Finance Minister Ngozi Okonjo-Iweala, former Colombian Finance Minister José Antonio Ocampo, and the United States’ nominee, Dartmouth College President Jim Yong Kim – this is the moment to step back and assess the Bank’s trajectory.
Unless the Bank’s next president has a clear vision of the way ahead, and the gravitas to withstand the institution’s internal pressures, he or she will be swallowed up by its complex machinery and unwieldy processes.
Global attention has been focused on weighing the three candidates’ strengths and qualifications, particularly their economic and financial credentials.
But the real challenge lies in providing direction for the World Bank that reflects the world as it is, and re-calibrating the Bank’s tools accordingly.
Inevitably, the new course hinges in part on recognizing that economics and finance, while integral elements of all areas of the Bank’s activities, are no longer the institution’s main drivers.
The World Bank’s traditional instruments have been (and still are) low-interest loans, interest-free credits, and grants.
But the Bank’s core philosophy has rested on lending, with interest, to middle-income countries and channeling the ensuing funds to the poorest countries eligible for assistance.
Today, owing to the conditionality of its loans, the Bank is losing competitiveness vis-à-vis the plethora of actors, both public and private, that crowd the development scene.
Meanwhile, the Bank is emerging as a vital – indeed, indispensable – source of expertise and technical assistance, as well as a provider of global public goods.
Building on these strengths, the Bank must be willing to understand its client countries’ realities, rather than pontificate, and to balance its country-based work with its global roles.
While lending is progressively thinned out and retained only for the poorest countries, the Bank must adopt the lean hub-and-spoke structure of a strategic consultancy or a “knowledge bank.”
The organization must reformulate its mission, moving away from the idea of being the “West’s Bank,” the “BRICS’ Bank,” or, for that matter, a bank at all.
What is unambiguous today is a growing intolerance for bad governance and corruption – a collective rejection evident in countries as diverse as Burma, Congo, Russia, and Bolivia, not to mention Arab countries from Syria to Morocco.
At the same time, the biggest threat to the international order comes from failing, failed, post-conflict, and conflict-ridden states.
For the past two decades, as part of the soul-searching triggered by the collapse of communism, the World Bank has been seeking to make governance and anti-corruption efforts integral to its work on economic growth and poverty reduction in the developing world.
But, beyond eloquent rhetoric, these changes have been incremental, and have been superimposed on the Bank’s operations, rather than becoming part of its organizational DNA.
The Bank has been too focused on itself and its reputation, and not enough on the countries that it advises and in which it operates, while institution-building has been considered to be embedded in the growth agenda.
As a consequence, law, which constitutes the foundation of institution-building, has been regarded as no more than a toolbox.
Property rights, contract enforcement, entrepreneurial conditions, and free and competitive product and labor markets were proclaimed to be part of the economic framework – a misconception recently restated by the former World Bank economist and current development pundit William Easterly.
Moreover, the traditional interpretation of the Bank’s Articles of Agreement imposed a proclaimed “neutrality” that translated into a readiness to overlook the nature of its client countries’ regimes and their lack of popular accountability.
Ironically, the same World Bank whose former president, Robert McNamara, transformed it almost five decades ago, at the height of decolonization, into a key instrument in the fight against communism, today views the so-called “Beijing Consensus,” by which the Chinese Communist Party maintains an iron grip on the country, as a viable development model.
In this context, a “knowledge bank” needs to address three challenges.
It must enhance support for the private sector and prioritize infrastructure, in a broad sense, in accordance with its importance for individual initiative.
It also must strengthen its know-how in capacity-building, particularly administrative capacity-building, with an emphasis on its legal-institutional aspects.
Finally, it must place anti-corruption and good-governance programs at the core of its mission.
The international community cannot afford a World Bank that, anchored in the world of the past, loses its relevance.
No other institution can fulfill the Bank’s formidable potential as a center of knowledge and a coordinator of development policies.
The mandate of the Bank’s next president will be crucial in making or breaking an institution that the world desperately needs in the century ahead.
Reinvigorate the Rich to Help the Poor
WASHINGTON, DC – For the third time in five years, the world’s poorest countries are at risk of being hit by a crisis not of their making – a prospective downturn brought on by financial turmoil in the world’s most advanced economies.
Having gone through the food and fuel shock of 2007-2008 and the global financial crisis that followed, low-income countries may now face even larger disruptions in 2012.
And, given the interdependence of today’s globalized world, poor countries’ distress will invariably have unwelcome consequences for everyone, rich and poor alike.
At the height of the global crisis in 2009, many low-income countries experienced a slowdown in growth marked by falling exports, lower remittances from expatriate workers, and subdued foreign investment.
The social consequences were severe: the World Bank estimates that an additional 64&nbsp;million people were left in extreme poverty by the end of 2010.
Yet it could have been much worse.
Thanks to greatly improved policy performance over the previous decade, low-income countries entered the crisis far better positioned to withstand shocks than in the past.
They had smaller fiscal and current-account deficits, lower inflation, larger international reserves, and – thanks in part to debt relief – lower debt burdens.
As a result, most countries were able to maintain or even increase spending, despite lower revenues, and allow fiscal deficits to widen.
This propped up economic growth, while also boosting outlays for critical investments and social programs needed to lessen the hardships faced by the poorest people.
The downturn was also relatively short-lived, partly as a result of the greater openness to world trade that lower-income countries have embraced over the past decade.
But these countries are still highly vulnerable.
Many have not had sufficient time to rebuild the policy buffers that served them so well.
There is less ammunition left in the fiscal arsenal, current-account deficits have widened, reserves have declined, and debt levels have risen significantly in some countries.
Moreover, with the advanced economies facing budgetary pressures, foreign aid may be severely constrained for some time to come.
Under these circumstances, it is by no means certain that low-income countries will have access to additional concessional financing.
As a result, a new global downturn would hit low-income countries hard.
Simulations by the International Monetary Fund suggest that a decline in global growth of 1.5 percentage points could, owing to its impact on trade and financial flows, generate a $27 billion gap in additional external financing in 2012 alone.
That would also push 23 million more people – most of them in Sub-Saharan Africa and Asia – into poverty.
What can countries do to help themselves?
The scope for fiscal stimulus is more limited than in 2009, but countries with sufficient fiscal room and available financing should maintain spending levels and preserve critical social and infrastructure programs.
Countries with moderate inflation could be more assertive with monetary and exchange-rate policy.
A key priority for 2012 and subsequent years must be to build increased resilience against shocks.
Low-income countries should boost their revenue bases to reduce reliance on external financing, while improving the efficiency of spending.
In particular, improving the scope and targeting of social safety nets would go a long way toward protecting the poorest in the event of a further global downturn.
Several countries, including Armenia, Burkina Faso, Sierra Leone, Ghana, and Kenya, have already made successful strides in this direction, using means-tested food-voucher programs, maternal and family benefits, school-based social services, and conditional cash-transfer schemes targeting the most vulnerable groups, such as orphans.
Over the longer term, low-income countries would benefit from diversifying their economies and avoiding over-dependence on a few products and trading partners.
More diversified economies are also likely to deliver more inclusive growth – growth that creates jobs for more people, and that distributes its benefits more widely.
In order to boost long-term growth prospects and productivity, low-income countries will also need to meet huge infrastructure needs, especially in the area of electricity generation and transportation.
What can we do to help?
The IMF is ready to assist with policy advice, financial support, and technical assistance.
We have boosted our concessional lending capacity to $17&nbsp;billion through 2014, and doubled the amounts countries can draw.
We have also cut interest rates on all concessional lending to zero through 2012.
We have made our lending instruments more flexible, so that financial support can reach our members quickly, leaving sufficient room for high-priority spending to support growth and protect the most vulnerable.
Ultimately, the best way that the international community can help the low-income countries is for the advanced economies to get their houses in order and restore strong and sustainable global growth.
That will help to ensure that low-income countries remain on track to consolidate and extend the impressive achievements of the last decade.
Religious Pluralism for a Pluralist Age
The election of Pope Benedict XVI and the global war on terror have brought unprecedented attention to the role of religion in our world.
There has been particular interest (most specifically in the case of Islam) as to whether specific religious traditions are compatible with the institutions and values of liberal democracy.
But focusing exclusively on what is believed and practiced overlooks a potentially far more important question: how religious precepts are believed and practiced.
Despite massive evidence to the contrary, many people – not least theologians – fear that we live in a secular age.
But, far from being characterized by secularization, our age has witnessed vast eruptions of religious passion.
The modern age is as religious as any previous historical period, and in some places more so.
One exception is geographical: Western and Central Europe have indeed experienced a significant decline of religion, which has become an important ingredient of European cultural identity.
The other exception is sociological, comprising a relatively thin but influential international intelligentsia, for whom secularization has become not only a fact, but, at least for some of its members, an ideological commitment.
These are exceptions.
What modernity more or less inevitably brings about is not secularization but pluralism – the peaceful co-existence of different racial, ethnic, or religious groups in the same society.
Modernity undermines communities’ traditional homogeneity, because insiders and outsiders constantly rub up against each other, either physically (through urbanization and travel) or “virtually” (through mass literacy and mass communication).
Pluralism – accelerated, expanded, and intensified by globalization – has become a pervasive fact of social life and individuals’ consciousness.
On the institutional level, pluralism means that established religions can no longer take for granted that a particular population will supinely submit to its authority.
If freedom of religion is guaranteed – the typical situation in liberal democracies – religious institutions cannot rely on the state to fill their pews.
Instead, people must be persuaded to accept such authority, giving rise to something like a religious market.
Even if one religious tradition still claims a majority of a population as its nominal adherents, individuals can still choose to disaffiliate from the institution representing that tradition (as in the Catholic majority countries of Europe).
At the level of individual consciousness, this means that religious certainty is now harder to come by.
A religious decision can be a matter of passionate commitment (as in Kierkegaard’s “leap of faith”), or, more commonly, an emotionally low-intensity consumer option (expressed in the telling American phrase “religious preference”).
In either case, the individual is thrown back on himself to reflect upon and come to terms with his native religious tradition.
Even if an individual decides to affirm a very conservative version of a tradition, this decision may, at least in principle, be revoked at some future time.
As a result, pluralism pressures churches to become denominations.
A denomination has the characteristics of a church, into which one is born, but individuals adhere to it voluntarily and it accepts other denominations’ right to exist.
From the standpoint of their compatibility with modern liberal democracy, acceptance of pluralism, more than adherence to particular beliefs and practices, may be what most clearly distinguishes religions.
Within Christianity, for well-known historical reasons, Protestantism has had a comparative advantage in adapting to pluralism.
The Roman Catholic Church, after a long period of fierce resistance, also has adapted successfully to pluralist competition, legitimating it theologically in the declarations on religious liberty that began with the Second Vatican Council.
Acceptance of the market economy has been slower, but that, too, has begun since the encyclical Centesimus Annus of John Paul II.
Eastern Christian Orthodoxy is, however, a different matter.
The relation of divine and secular fuels passionate debate throughout the Islamic world and in Israel, but the Orthodox idea of sinfonia – the harmonious unity between society, state, and church – constitutes a distinctive challenge to the acceptance of liberal democracy.
And comparable Orthodox ideas about communal solidarity (Russian sobornost ) make it difficult to accept capitalism, because competition and individual entrepreneurship are seen as a morally repulsive expression of ruthlessness and greed.
Responses to the challenge of global pluralism will take different forms in different parts of the Orthodox world.
There may be efforts to re-establish something like the traditional sinfonia , as in Russia; embrace of “Eurosecularity,” as in Greece, Cyprus, and other countries entering the EU’s orbit (Romania and Bulgaria sooner, Armenia and Georgia later); or moves toward voluntary association, as in the US.
But the challenge facing Orthodoxy underscores the three options that all contemporary religious communities now face: to resist pluralism, to withdraw from it, or to engage with it.
None is without difficulties and risks, but only engagement is compatible with liberal democracy.
Engagement means that the tradition is carried into the open discourse of the culture, and that those who represent the tradition make unapologetic truth claims.
This will inevitably lead to charges of “proselytizing,” a term that has come to carry a pejorative meaning.
But proselytizing means only that one tries to convince others of the truths to which one is committed.
A self-confident community will usually do just that.
To put it bluntly: instead of worrying that Roman Catholics will “steal” Orthodox souls, the Orthodox should try to steal Catholic souls.
Barring that, in an age when religions must persuade , they must still “proselytize” within the community – pointing out the truth, the values, and the beauty of the tradition – even if they refrain from doing so outside it.
Otherwise, they will lose their children.
Remaking the Middle East
President Bush, Palestinian Premier Mazen, and Israel's Prime Minister Sharon are poised to meet.
Is America serious about bringing peace to Palestine and Israel?
Where does this meeting fit in the overall US Middle East strategy?
Richard Haass, Director of Policy Planning in the US State Department, offers his road map to the entire Middle East region.
What was accomplished in Iraq--and, more importantly, what the Iraqi people will now accomplish with American help--will determine the future of one of the Middle East's key countries.
An open, market_oriented, and peaceful Iraq could also advance reform and growth across the entire region.
But far-reaching change both in Iraq and the Middle East is certain to take time.
The post-Saddam challenge in Iraq has four components: humanitarian, security-related, economic, and political.
The humanitarian challenge has been less burdensome than anticipated, thanks to advance planning by the US and the world community and to the rapid, focused, and discriminate way in which coalition forces fought the war.
Some pockets of humanitarian need remain, but the massive crisis that was anticipated thankfully never materialized.
Refugees and internally displaced persons are relatively few; supplies of food, water and medicine are mostly adequate or at least improving.
The US government has provided some $600 million through UN agencies and non-governmental organizations to meet immediate humanitarian demands.
We also need to restore basic order in Iraq.
Security is the absolute precondition for sustainable recovery from conflict; without it, people cannot rebuild their country or return to school or work.
Saddam's removal sparked a wave of looting, lawlessness, and score settling.
The immediate priority is to put an end to this violence.
Beyond this, international forces must secure and eliminate all weapons of mass destruction; prevent ethnic and religious tensions from erupting into violence; ensure that none of Iraq's neighbors exacerbates an already volatile situation.
Over the longer term, we must help Iraqis rebuild their police and military forces so that they can provide their own safety and security without threatening anyone.
Economic reconstruction is more accurately thought of as economic renewal .
Physical capital is in a better state than expected, and modern Iraq benefits from a deep reservoir of human capital.
Unlike many recent post_conflict situations, there is much raw material to work with.
The US is making available more than $2 billion to support early reconstruction efforts.
Oil output is coming back on line in meaningful quantities.
Longer-run challenges include increasing oil production and tackling Iraq's huge outstanding debt.
The UN Security Council's decision to remove all sanctions is a welcome step forward.
Assisting Iraq's political regeneration may be the most difficult task, given the many religious, ethnic, geographic and political divisions that characterize Iraqi society.
Still, the cynics and skeptics are wrong.
America's goal--an Iraq that is intact, possesses a representative government, and respects the rule of law--is no pipe dream, particularly in view of the country's educated population and sizable middle class.
The international community can realize this goal if it is prepared to stay the course and work with Iraqis until the fundamentals of a democratic society take hold.
Responsible Iraqi leaders must be helped to channel today's tremendous political ferment in constructive directions.
What happens in Iraq will obviously have an impact on the wider region. But it won't determine the Middle East's fate.
It is difficult to think of a foreign policy issue that preoccupies and polarizes world opinion as much as the Palestinian question.
Nearly one year ago, President George W. Bush declared his goal of bringing about a democratic Palestinian state, one prepared to live in peace beside Israel.
Working with Russia, the EU, and the UN, the US developed a roadmap designed to take us in stages toward this goal.
The emergence of a new Palestinian Prime Minister and government constitutes an important opening.
The task now is to persuade Palestinians and Israelis to begin the process, to start taking steps to improve the situation on the ground so that they can tackle more far_reaching matters at the negotiating table.
Terrorists cannot be allowed to forever frustrate the search for peace.
But nor will resolving the Palestine question fix all the Middle East's problems.
The challenges posed by Iran are clear_cut: it is developing weapons of mass destruction and has a history of supporting terror.
Such behavior flouts the norms and rules of the international community and isolates Iran and its people.
Continuation of these actions will have consequences.
But if Iran turns away from terror and its pursuit of catastrophic weapons, it will find a US prepared to recast the relationship.
The US is similarly prepared to respond if Syria demonstrates far_reaching changes in behavior.
A more general issue is the relative lack of openness in the region's political systems and economies.
For too long, America tolerated a "democratic exception" in the Muslim Middle East.
As long as governments were friendly and backed regional stability, there was no need for outsiders to encourage representative government.
We have learned the hard way that closed political systems breed resentment and extremism aimed against the interests of America, the West, and, indeed, the entire world.
That is why we support democracy and political reform through the Middle East Partnership Initiative launched by Secretary of State Colin Powell in December 2002.
Closed economic systems also pose a danger.
As last year's "Arab Human Development Report" made clear, the Arab Middle East lags far behind other regions in key measures, including individual freedom, women's empowerment, and economic and social development.
For too long, these countries watched economic prosperity pass them by.
President Bush is determined to help Arabs share the benefits of economic liberty.
Realizing his recent proposal to establish a US_Middle East free trade area within a decade would lay a strong foundation.
Remembering and Forgetting Zhao Ziyang
So, at last former Chinese Premier and Communist Party General Secretary Zhao Ziyang has died.
But the political agenda that he espoused while in office passed away long ago, on May 19, 1989, when he appeared in Tiananmen Square just before dawn to beg tearfully for the forgiveness of protesters. “I am very sorry,” he said to startled onlookers.
“I have come too late.” After that, he existed more as an historical chimera than as a real person.
When his bizarre and unscheduled appearance in the square was broadcast on Central Chinese Television the next morning – during one of the last days of uncensored media coverage – people across China were stunned by this fleeting moment of all-too-human, official anguish.
After all, Party leaders rarely evince their personal feelings in public, much less transgress the Party line as brazenly as Zhao did.
Such individualism fit neither Leninist nor traditional Chinese proscriptions for behavior by a high official.
As the crackdown following those heady weeks of free expression and assembly came to its apocalyptic end on the night of June 3-4, Zhao vanished, sucked down the Party’s memory hole into which so many other leaders have vanished since China’s “socialist liberation.”
To the discredit of the democratic world, hardly any head of state remonstrated on Zhao’s behalf, minimally demanding that some accounting be made for his illegal and immoral incarceration.
Instead, Zhao was allowed to remain in suspended animation, under house arrest, conveniently forgotten like some cryogenically frozen celebrity with no hope of resurrection.
Zhao was not killed, but allowed to live in an old Beijing courtyard house with his family.
He was let out from time to time, but under guard like a zoo animal, to go to some spa or to play solitary holes of golf, one of the many manifestations of “bourgeois liberalization” that his reform efforts allowed to leak through China’s once hermetic seal.
Chinese have long since used the deaths of defrocked leaders as occasions to let out sentiments that can find no expression through the normal political process.
During the winter of 1976, when Premier Zhou Enlai (viewed as a relative liberal in the Maoist hierarchy) died, tens of thousands of people spontaneously flooded Tiananmen Square, giving the Party a tremendous fright.
It was, of course, the death of former Party chief Hu Yaobang, a liberal like Zhao, which set off the protests in 1989.
Whether Zhao’s supporters will express themselves in a similar fashion is uncertain.
The events of 1989 remain so sensitive, and Tiananmen Square so securely guarded, that it is hard to imagine a protest happening there soon.
At the same time, China seems so drugged on business nowadays that it is hard to imagine many people marching for a cause that would do nothing for their bottom line.
It’s almost as if the Communist Party had turned Marx on his head, replacing religion with profit as the new “opium of the masses.”
Few outside of the lumpen classes of unemployed workers and dispossessed peasants seem to have any gusto for political protest.
By contrast, Zhao embodied a chapter in Chinese history when to be a reformer meant to take on not only the economy, but every aspect of life.
Before becoming Premier and Party chief, he experimented with everything from the de-collectivization of agriculture and separation of the Party from business to laws guaranteeing the rights of journalists and greater openness toward the outside world for ordinary people.
He was even the first Chinese leader to wear a suit and tie rather than a Mao habit when traveling abroad, as well as the first to hold an open press conference.
Although Zhao was no visionary, no Vaclav Havel or Lech Walesa, and not even anti-communist, his agenda in the mid-1980’s embraced the economy, politics, culture, media, and society, and it led to one of the most open and intellectually rich periods of Chinese history.
It was a tragic paradox that the political movement that so peacefully swept China in 1989 ended up arresting the process of broad-based, evolutionary reform to which Zhao consecrated his life.
So chastened by the trauma of June 4 was the Party leadership that, for several years afterwards, it was unclear if any reform would survive.
Then, in 1992, Deng Xiaoping set in motion one of the most rapid and total marketizations of a society in history, catalyzing China’s spectacular rise as an economic superpower.
Zhao Ziyang’s death reminds us not only of how unjustly he was treated, but of how lopsided China’s reforms have been.
For China’s “miracle” to truly become miraculous, Party leaders could do worse than study the record of a man whose legacy they now seem eager to push into oblivion.
Remembering Gaza
LONDON – Government is all about statistics, but life is about people.
That disjunction explains a lot about the cynicism and disaffection with politics that characterizes much of the world nowadays.
And, while domestic problems may seem intractable, distance increases the confusion and fatigue induced by seemingly intractable international problems.
As usual, the people who suffer are those who most need the world’s attention.
This is notably true of the 1.5 million people crowded into the Gaza strip, locked between Israel, Egypt, and the Mediterranean Sea.
The West has already isolated Gaza’s Hamas-controlled government.
This week, the US Congress will discuss cutting off aid to the West Bank-based Palestinian Authority.
But this is a time for more international engagement with the Palestinian people, not less.
The statistics say that 80% of Gaza’s population is dependent on UN food aid.
The youth unemployment rate is 65%.
The Web site of the United Nations Office for the Coordination of Humanitarian Affairs has a comprehensive database that shows how many trucks, containing different kinds of supplies, have been allowed in by the Israeli authorities.
The situation of the people – or rather the fight about their situation – is periodically in the news, most recently when violence broke the otherwise reasonably effective ceasefire in August.
But Gaza has become the land that time – and the wider international community – forgot.
It is for this reason that I took up the offer from Save the Children to visit the Gaza Strip last week.
I had not been able to visit while serving in government for security reasons.
Now I wanted to get a sense of life, not statistics.
The purpose of the visit was not to meet politicians or decision makers, but to get a glimpse, albeit brief, of how people there live.
And there is real life.
Boys in Western football shirts – mainly Lionel Messi of Barcelona.&#160;
Restaurants overlooking the Mediterranean.
Schoolgirls in white headscarves wherever you look.
Barbers, clothes shops, fruit stalls.
And a good deal of traffic – with new cars smuggled in through tunnels beneath the “Philadelphi Route” that runs along the Egyptian border.
But real life is also traumatic and limited.
We saw buildings – not just the former Hamas headquarters – still in rubble.
Houses are riddled with bullet holes.
There is no electricity for up to eight hours a day.
Shortages of schools and teachers have pushed class sizes to 50 or 60, and the school day is restricted to a few hours to allow for two or even three shifts.
The consequences of war are encountered everywhere, nowhere more so than for those caught in the crossfire.
We met the niece and son of a farmer caught in the “buffer zone” between the Israeli border and Gaza.
She had lost an eye and he a hand to Israeli shells in the war of 2008-2009.
Save the Children, obviously, is most concerned about the 53% of Gaza population that is under 18.
The statistics say 10% of children are “stunted” – so undernourished before the age of two that they never grow to their full potential.
We saw what Save the Children is trying to do about it, at a nutrition center serving mothers and children in Gaza City.
The needs are basic: promoting breastfeeding, food supplies for young children, and medical attention for mothers.
But not all those who need help are coming to get it, so Save the Children funds outreach workers to encourage families to use the services.
There is remarkable work being done to create opportunities, as well as to prevent catastrophe.
The Qattan Center for the Child is a privately funded library – and drama, computer, and youth center – that would grace any British community.
The director told me it is dedicated to the credo of “building people not buildings.”
The center is a true oasis.
The situation surrounding such oases represents the ultimate failure of politics.
After the war ended in January 2009, the international community was preoccupied with opening up Gaza.
Nearly three years later, there is only stalemate – to match the wider stalemate in the search for a Palestinian state that can live alongside Israel.
The responsibility lies, first and foremost, with Israel.
The UN’s Gaza peace resolution (which Britain authored) calls on the Israeli government to open up the supply lines, but this has been heeded only in small part.
That is why the tunnels do such a roaring trade, which Hamas taxes to fund its activities.
The Israeli government would retort that the parallel call in the resolution for a halt to the flow of arms into Gaza also has not been heeded.
That is true, too.
Yet the international pressure is muted.
The focus has shifted.
But Gaza’s people and their needs remain in what British Prime Minister David Cameron last year called an “open prison.”
Surely there is room across divides of party and nation to address these pressing humanitarian needs, which otherwise would only fuel future political trouble.
What makes the situation in Gaza even more infuriating is that the status quo is actually irrational.
It is not in anyone’s political interest.
Israel doesn’t become safer, nor do Hamas or Fatah become more popular.
One young mother at the nutrition center told me that she was just completing her accountancy degree – but there was no work.
Yusuf, age nine, working on a computer at the Qattan Center, told me that he wanted to be a pilot.
These people are not a threat to peace in the Middle East.
They are actually its hope.
What they need is a chance to shape their own futures.
Remembering the First \
In June, NATO's leaders commemorated the 60th anniversary of D-Day, the allied invasion of Nazi-occupied France.
This August, they passed up the opportunity to mark the 90th anniversary of the start of World War I, which led to calamities that echoed until the twentieth century's end.
But the lessons of the Great War are no less important today, particularly for the United States.
The causes of World War I have long baffled the public and historians.
Europe was at the peak of its economic power relative to the rest of the world.
Peace among the major European countries had reigned more or less continuously for decades.
A technology boom was revolutionizing, indeed globalizing, the world economy.
For increasingly rich Europeans, the summer of 1914 seemed a peaceful, lazy time.
It turned out to be their last real peace for decades.
That July, terrorists in Bosnia assassinated Archduke Franz Ferdinand of the Habsburg Empire.
Austria responded by invading Serbia, Bosnia's neighbor and an "upstart" Slavic power.
Russia mobilized to support Serbia, while Germany launched a "pre-emptive" war against France and Russia, invading France via Belgium.
Great Britain came to the defense of Belgium and France.
By September's end, a general conflagration was underway.
But why did the pieces of the puzzle fall into place as they did?
Was it bad luck, miscalculation, or bureaucratic error?
It turns out that the German Army Chief of Staff Helmuth von Moltke was eager for war in the summer of 1914.
As historian David Fromkin shows in his recent book Europe's Last Summer , von Moltke feared that Russia was gaining too much industrial strength, and that in a few years Russia could withstand a war with Germany.
Moltke wanted to invade and defeat Russia before it was "too late" for Germany to triumph.
The Archduke's assassination provided a perfect pretext. The Germans encouraged their ally Austria to respond by invading Serbia, under the clear expectation that this would trigger war, but in a way that Germany would not be blamed.
Fromkin shows that the assassination of Ferdinand merely provided Germany an excuse to fight a European War while it still had, according to its calculations, a chance of winning.
Every calculation proved to be disastrously wrong.
Imperial Germany was not threatened by Russian industrial dominance in the way von Moltke feared, and its military calculations also failed. Germany did not knock out France and then conquer Russia.
Instead, the war ground to a bloody stalemate. Eventually, Czarist Russia collapsed, opening the way to the Bolshevik Revolution.
Germany's launch of WWI ninety years ago this month had a more devastating effect on the world economy than any single event in human history.
The war bled Europe of a generation of youth, and set the stage for a second war a generation later. It opened the way for 75 years of Soviet communism, and set in motion the financial instability that led to the Great Depression as well as the collapse of the international trading system.
All of this matters now because last year America launched a war in which a terrorist attack was also an excuse, not the real cause.
The Bush administration wanted to fight Saddam Hussein well before the terrorist attacks on the US of September 11, 2001, but it could not have gained public support.
Just as Fromkin shows with regard to Germany in 1914, the Bush administration manipulated US public opinion to support the Iraq War as a war on terror, even though Iraq had nothing to do with any terrorist attack against the US.
The world was never fooled by the Bush administration's case, but most Americans were fooled, at least for a while.
We know from a long trail of documents, memoirs, and interviews that the terrorist attacks of September 11, 2001 were a pretext.
Richard Cheney, Donald Rumsfeld, and Paul Wolfowitz wanted war with Saddam all through the 1990's, and urged "regime change" as a policy for President Clinton, who wisely rejected such irresponsible advice.
Their eagerness for war had several causes. They wanted to seize control of Iraq's oil.
They wanted a new "home base" in the Middle East if Saudi Arabia soured.
They wanted to protect Israel from Saddam.
They also had exaggerated fears about American weaknesses, just as von Moltke had exaggerated fears about German weaknesses vis-à-vis Russia.
As we know from WWI, wars founded on lies are likely to produce a series of disastrous unforeseen consequences.
The ricochet effects of the Iraq War have combined to yield a mounting threat to stability and security.
Perhaps the aggressive actions of the US and a resulting backlash in the Islamic world will contribute to nuclear proliferation in Iran, or to nuclear Pakistan someday falling into the hands of extremists.
World leaders should still gather to commemorate WWI, in the hope that they might learn enough to avoid repeating its disaster in our time.
The Iraq War is not WWI.
We still have time to avoid further devastating mistakes, but only if we are honest about motives, means, and ends - and only if we are honest in the pursuit of peace.
Remembering the Gulag
"There is nothing more inconspicuous than a monument," said the Austrian writer Robert Musil a hundred years ago.
From the ruins of another empire, Russia's, I would add: There is nothing more conspicuous than an absent monument.
Monuments compose the body of a nation on display.
By looking at monuments, we feel how a nation-state affirms its continuity.
When revolutions disrupt this continuity, they wreak violence against monuments.
As the example of Saddam Hussein teaches us anew, to overturn a monument is easier than to try a dictator.
Post-revolutionary periods, however, allow for more variety.
Sometimes, new monuments are erected. Sometimes, old monuments return to their original spots.
Sometimes, monuments are in absentia, like professors on sabbatical.
While Holocaust deniers have been purged from German universities, Russian universities employ a number of professors of Russian history who conspicuously maintain the Gulag's absence from their lectures.
Though terror in Nazi Germany and Communist Russia created many millions of victims, the memories of these events are vastly different.
The most arresting but unrecognized of all post-Soviet monuments to the Gulag is the 500 ruble banknote, issued in the late 1990's and widely used today.
Seemingly a testament to the nation's proud history, this banknote carries a hidden message.
It depicts the Solovki monastery, a historical complex on an island in the White Sea, which also served as the earliest and one of the most important camps in the Gulag.
Local historians at Solovki believe that the atypical cupolas illustrated on the note date the picture to the end of the 1920's, the time of the camp's peak development.
The design raises some challenging questions.
Is this one of those monuments that has been erected not by artists but by critics, who produce meaning not through creation but through interpretation?
Were officials of the Ministry of Finance being deliberately subversive?
Or is the choice of picture on the banknote a symptom of psychological trauma, an unconscious but realistic manifestation of the work of mourning?
The work of mourning, to use Freud's formula, is continuous.
But symmetrical evil does not mean symmetrical memorialization.
There are plenty of memorials on the sites of German concentration camps, and new ones are continually added.
In Russia, only two Gulag sites, in Solovki and in Perm, have small museums that show conditions in the camps, the techniques of torture and murder, the documents, and the portraits.
In some cases, monuments are erected not on the former murder sites, as in Germany, but near them.
This pattern represents not the old regime's eradication, but its coexistence with the new one.
Even such proximate memory is far from being the rule in Russia.
There is not a single plaque commemorating the Leningrad KGB's victims near the site of their suffering.
Such a monument is also notably absent from the vicinity of the Kremlin.
The museum on Solovki Island fills just a few rooms inside the functioning monastery.
Although about one million people were incarcerated there, there is only one heartbreaking plaque on a shed, which reads, "The children's barrack of the Solovki Camp."
Some local museums display fascinating objects.
In the Kargopol museum, for example, stands a clay pitcher, presented to the museum by the descendants of a guard who appropriated a prisoner's parcel - a pitcher full of honey.
In such exhibits, however, it is impossible to find answers to the most obvious questions: How many prisoners passed through this camp?
How many died here, and when?
Who were the administrators, guards, and executioners?
Close to the Belomorkanal, one of the Gulag's major construction sites, a large mass grave was uncovered at Sandarmokh.
The site is a pine forest near an old highway, distinguished by the small, regular depressions in the earth that are characteristic of such graves.
The Memorial Society meticulously compared their archeological findings with the "shooting protocols" kept in the KGB's archives.
The protocols never mention names, but they give the number of those who were shot on a specific date, classified by gender, e.g. 20 men, seven women.
By matching the number of skeletons and their gender, every "shooting protocol" was identified with a certain grave.
About 9,000 people were shot at Sandarmokh between 1937-1938.
Today, a wooden pole marks each mass grave.
Designed as a local symbol of mourning, these poles, with their sharply angled roofs, remind viewers either of a peasant cross or a human figure with hands raised in prayer.
Sandarmokh is the most important, and best developed, Russian site of memory.
Unfortunately, it is unknown even to neighbors as close as the Scandinavians.
Two better-known memorials in Moscow and St. Petersburg consist of granite stones taken from Solovki.
In St. Petersburg, the stone is complemented with inscriptions, such as "To the victims of Communism."
(This plaque has been vandalized many times, the last with a graffito in red oil paint, "Too few were shot.")
Here we have memory converted to drama.
But Russian memory is also subject to Western-style postmodernist mockery.
A recent fashion in St. Petersburg are restaurants with names such as "Lenin's Mating Call," "USSR," and "Russian Kitsch," which has frescos showing collective farmers socializing with American Indians while Leonid Brezhnev, resembling Frank Sinatra, gives a speech to a stone-age tribe.
Far more than Nazism, Communism belongs to our common European heritage.
The memory of its victims is not only a national, but also a European responsibility.
As generations pass, monuments evolve from a medium of mourning to instruments of education.
The work of memory is hard, expensive, and fragile.
Monuments move back and forth.
Capitals may be renamed.
Banknotes expire.
Everything may be mocked and change meaning.
Even mummies are mobile.
In 1961, the mummy of Stalin was observed striding out of the Mausoleum in Red Square.
Lenin's corpse remains there, but his departure is expected.
This should be a European event.
Remembering the Importance of Forgetting
SINGAPORE – “Be careful what you post on Facebook,” US President Barack Obama warned American high school students this past September. “Whatever you do, it will be pulled up again later somewhere in your life.”
In fact, we all are coming to learn that lesson the hard way: digital information almost never goes away, even if we wish that it would.
The result is the permanency of the past in the present.
This fact is one of the biggest challenges that society will face as computers and the Internet become more a part of everyday life.
For millennia, remembering information was costly and time-consuming, and to forget was a natural part of being human.
In the digital age, the opposite is true: cheap computer storage, powerful processors, and ubiquitous Internet access have made remembering the norm.
Consider this: we tend to retain our rough drafts, years of e-mail traffic, and thousands of ghastly digital snapshots on our hard drives, not because we have decided that they are worth remembering, but because keeping them is now the default way of doing things.
By contrast, deciding what to delete is costly.
It actually requires much more time and effort to shed data than to keep it.
So we click “save” just in case.
But it is worth remembering that there is a lot of value in forgetting.
Forgetting permits us to transcend details and generalize, to see the forest and not just the trees.
As some information lapses over time, the world becomes more comprehensible because we become free to focus on what is important.
Forgetting also enables us to forgive others. Fading memories of past experiences allow new memories to bloom, much as decaying leaves allow for new growth.
Forgetting thus affords us a second chance, individually and as a society, to rise above our past mistakes and misdeeds, to accept that humans change over time.
But, with digital memory, that natural process is halted.
Instead, the past is always present, ready to be called up with a few clicks on a keyboard or mobile phone.
Indeed, we are increasingly confronted with outdated information taken out of context, from anachronistic news stories to emotional e-mails and compromising pictures that we had long ago forgotten.
For example, more and more employers are researching job applicants through Google and social-networking Web sites.
There are already many cases of people being denied jobs or promotions because of what is unearthed.
But these are reflections of a person’s past; they rarely provide accurate information about the present.
Obama’s admonishment reminds us to be more discriminating about what information we share online.
His advice is essentially to practice a form of digital abstinence.
It is an understandable, pragmatic suggestion – but not necessarily a good one.
We have much to gain individually and as a society from sharing information with each other.
Too much self-censoring of what we do online would deny us the benefits of the Internet.
A better approach would be to ensure that digital information, like its offline variants of yesteryear, can disappear over time.
First, we could give digital files “expiration dates,” so that our digital systems would delete the file when the appropriate time comes.
Second, we could opt to expose our information to a form of digital “rusting,” so that it slowly erodes (and we would need to take proactive steps should we ever wish to recover some of it).
Third, we could separate past information, so that it takes a special effort or additional time to retrieve it, thereby reducing the chances that we accidentally stumble upon it.
The more we steam headlong into the future, the more we amalgamate the data and detritus of the past and place it irrevocably into the present.
Yet it is not just how information is stored and retrieved that needs to change, but how we think about information as well.
The onus is on us as much as it is on the computer.
Remembering Zhao Ziyang
The conditions under which Zhao Ziyang lived at the time of his death, in utter isolation from Chinese society due to an illegally imposed 16-year house arrest, shames both Chinese justice and the Chinese Communist Party (CCP).
Zhao’s persecution was the persecution of a leader who dedicated himself for over a decade to groundbreaking efforts that became the foundations of China’s economic reform.
In the late 1970’s, Chinese peasants had long since lost their rights to own their land, owing to collectivization and the establishment of the People’s Commune.
It is a right they have never regained.
Zhao, however, was the first to advocate giving autonomy back to the peasants and so initiated the first pilot tests to abolish the People’s Commune.
Chinese industry had been transformed into subsidiaries of government through nationalization and central planning.
Zhao was the first to propose “expanded autonomy for Chinese enterprises” and “restoration of a healthy relationship between government and industry.”
Expanded autonomy for enterprises and the peasantry were critical first steps whose success led eventually to full-blown economic reform.
These were among the many incremental victories Zhao won to help China’s people break out of the suffocating stagnation of Maoist socialism.
As China’s Premier, Zhao implemented ten years of economic reforms that brought steady progress in which the people, especially the peasantry, enjoyed tangible improvements.
But Zhao was also the only CCP leader to propose a political reform package to tackle China’s system of one-party rule.
The Party’s unchallenged monopoly on political power systematically ensured that every mistake it made – such as the dreadful decade of the Cultural Revolution – turned into a prolonged nationwide crisis.
For genuine and long-term stability, Zhao proposed reforms that ultimately aimed at the legalization and systemization of democracy.
He wished to establish the kind of democratic politics that could support and nurture a healthy market economy.
Although the short-term practical objectives of Zhao’s political reforms were limited by the circumstances in which they were proposed, the measures all aimed at containing Communist Party power and represented a concrete step toward returning, peacefully, power to China’s people.
Zhao’s package – a sharp break with Mao’s totalitarianism – was approved by the 13th Party Congress, officially the highest authority within the CCP.
During his twenty months as CCP General Secretary, Zhao created a culture in which the Politburo refrained from interfering in the courts, and he stopped its attempts to control literature and the arts.
Zhao abolished the policy of enterprises being run by Party organizations and the system by which fa ren (“legal representatives”) were the core of enterprises.
Unfortunately, Zhao’s political reforms were terminated upon his fall from power.
The dreadful result was the indiscriminate denial of civil rights and the principles of democracy, and the rise of what today’s leaders call “socialism with Chinese characteristics” – a bitter euphemism for unchecked Party and government power entwined with commercial interests.
Zhao’s fate is also a chilling reminder of other injustices that are on the consciences of those now in power.
The only reason for Zhao’s continued ill treatment was his opposition to the violent repression of the Tiananmen Square protest in 1989.
It should have been his decision to make as General Secretary, but things were not as they should have been.
It should be remembered that former General Secretary Hu Yaobang, who had been forced to step down two years earlier by Deng Xiaoping because of his liberal stance, died in April 1989, triggering spontaneous and peaceful student demonstrations in Beijing, which spread across the country.
Half a million college students in Beijing alone were involved in this movement.
It lasted 50 days and was heartily supported by Beijing residents and people all around the country, from all walks of life.
Zhao pointed out to the Politburo that the sentiments expressed by the students and residents in their commemoration of Hu, in their protests against corruption, and their desire for democracy were really the same sentiments that they themselves held.
He believed that it should be possible to resolve the student protests and respect the principles of democracy and the rule of law.
Under Zhao’s direction, the Politburo and its Standing Committee called for dialogue with the students.
This hopeful direction changed completely, however, when Deng Xiaoping revealed his desire for a violent crackdown.
In the end, it came down to a fight among five members of the Politburo Standing Committee: Li Peng and Yao Yiling sought to deploy the military.
Zhao opposed this.
Qiao Shi and Hu Qili initially sided with Zhao, but then withdrew their support and, instead, asked Deng Xiaoping to make the final decision.
With deep divisions evident, Deng chose to bypass all existing institutions, the Party’s Politburo, the Central Committee, and the National People’s Congress and its Standing Committee.
Without further discussion, Deng mobilized 500,000 troops to enter Beijing to crack down on the unarmed students and civilians.
The Tiananmen Square Massacre of 1989 was a tragedy for China, and another tragedy for the twentieth century.
Sixteen years have passed, but the pain remains, buried in the hearts and minds of the people.
In the years that have passed, China’s leaders were responsible not only for Zhao’s unlawful house arrest but also for a systematic effort to erase his name from history.
But their attempts to conceal the truth about the past only reveal their weakness and their shamelessness.
For one thing they cannot change: Zhao Ziyang remains with us, in the Chinese people’s ongoing struggle for rights and democracy.
Harnessing the Remittance Boom
ROME – For more than a decade, Asia’s economies have been on the move – and so have its people.
The scale of migration from rural to urban areas and across international borders is historically unprecedented, and twenty-first-century Asia is its focal point.
In Asia’s developing countries, the power and potential of remittances – the money that migrant workers send home to their families (many of whom live in poor and remote areas) – is immense.
Currently, over 60 million migrant workers from the Asia/Pacific region account for more than half of all remittance flows to developing countries, sending home about $260 billion in 2012.
China, India, and the Philippines are the three largest recipients of remittances, while Bangladesh, Indonesia, Pakistan, and Vietnam are also in the top ten.
The money is often a lifeline: it is estimated that 10% of Asian families depend on payments from abroad to obtain their food, clothing, and shelter.
But, while remittances to developing countries are five times higher than official development assistance, the enormous potential returns for society have not been realized – and can be secured only if the flow of money can be channeled into effective rural and agricultural development, particularly in fragile states and post-conflict countries.
Doing so would contribute significantly to creating jobs, enhancing food security, and fostering stability in countries emerging from strife.
In order to establish such channels, we must scale up key initiatives, identify new opportunities, and map out the road ahead.
The fourth Global Forum on Remittances, which runs May 20-23 in Bangkok, will do just that.
Convened by the International Fund for Agricultural Development (IFAD) and the World Bank, the forum will bring together policymakers, private-sector players, and civil-society leaders to chart a course for leveraging the development impact of remittances sent home each year in Asia and around the world.
At IFAD, our starting point is always the three billion people who live in the rural areas of developing countries.
We work to create conditions in which poor rural women and men can grow and sell more food, increase their incomes, and determine the direction of their own lives.
We believe that diasporas and the global donor community can leverage the flow of migrant investment if they form partnerships with national governments for long-term development of the rural communities that are so often the beginning of the migration chain.
More than 215 million people around the world live outside of the countries they call home.
But most families that rely on remittances operate outside of the world’s financial system as well.
Despite the global prevalence of electronic money transfers, most migrant workers are excluded from the convenience of modern banking services, dependent on costly cash transfers that often require rural recipients to travel significant distances.
As a result, migrant workers are forced to initiate more than one billion separate transactions worldwide each year.
That means more than one billion trips for rural women and men to collect their money.
Adding up the cost of the transfer, travel, and time, remittances are far too expensive for people living in poverty.
IFAD has been working in more than 40 countries to ensure that rural families can have easy access to remittances, and are better able to use them as savings or investments that go back into their communities.
The amount of money at stake is staggering: It is estimated that over the next five years, more than $2.5 trillion will be sent in remittances to developing countries, with almost 40% – coming in the form of payments of $50, $100, or $500 at a time – destined for rural areas.
While the majority of family remittances will always be used to meet immediate needs, IFAD’s experience shows that rural families would seize opportunities to save and invest, even small amounts, if they had better options.
While remittances should and can be leveraged to bring about impressive results in poverty reduction, let us not forget that there is an underlying issue that needs to be addressed.
Young people, the leaders and farmers of tomorrow, are leaving their rural communities behind in search of better opportunities.
We need to turn rural areas into vibrant and economically stable communities that provide opportunities for young people to earn a living, build their capacities, and start a family.
We should not ignore the enormous development potential of remittances to rural areas.
Let us empower families to use their hard-earned money in ways that will help to make migration a matter of choice, not a necessity for the generations to come.
The Clean-Energy Moonshot
NEW YORK – In May 1961, President John F. Kennedy stirred America and the world with these words: “I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the Earth.”
Just eight years later, NASA did just that – with astounding benefits for science, technology, and the world economy. Now, a group of leading scientists, innovators, and economists has identified our era’s moonshot: to replace fossil fuels with clean-energy technologies within this generation.
Since a group of policy leaders from the United Kingdom initiated the Global Apollo Programme to Combat Climate Change earlier this year, I and many others have enthusiastically signed on. The program, named after the NASA moon mission, is built on the idea of “directed technological change.”
In other words, through a conscious effort, backed by public funds, we can steer the development of the advanced technologies needed to ensure humanity’s safety and wellbeing.
At the top of the list is clean energy, which will enable us to head off the global warming caused by the combustion of massive amounts of coal, oil, and gas worldwide.
The Deep Decarbonization Pathways Project (DDPP) has demonstrated that a low-carbon future is within reach, with huge benefits at a very modest cost.
In the United States, for example, cutting emissions by 80% by 2050 is not only feasible; it would require added outlays of only around 1% of GDP per year.
And the benefits – including a safer climate, smarter infrastructure, better vehicles, and cleaner air – would be massive.
Pathways to a low-carbon future focus on three main actions: improving energy efficiency, producing electricity from low-carbon energy sources (such as solar and wind energy), and switching from petroleum to low-carbon energy for powering vehicles (such as electric or fuel-cell vehicles) and heating buildings.
These are clear and achievable goals, and the public sector should play a major role in advancing them.
Politicians need to end subsidies for coal, oil, and gas, and start taxing emissions from their use.
Moreover, they must meet the need for new power lines to carry low-carbon solar, wind, geothermal, and hydroelectric power from remote areas (and offshore platforms) to population centers.
But meeting these requirements presupposes advances in technologies that will enable low-carbon energy systems to compete with the alternatives.
That is where the Apollo Programme comes in, with its bold goal of reducing the cost of renewable energy to below that of coal, oil, and gas.
Of course, renewable energy is sometimes already cheaper than fossil fuels – when the sun is shining bright or the wind is blowing strong and consistently.
The main challenge with renewables is energy storage, in two senses.
First, we need to store renewable energy for use in vehicles in a low-cost and efficient way.
While we already have high-quality electric vehicles, they require improvements in range and cost to be able to outcompete conventional vehicles.
The highest technological priority is to develop batteries for transport that are cheaper, longer-lasting, faster-charging, and lighter.
Second, we need to store intermittent energy for times when the wind is not blowing, the sun is not shining, and rivers are not flowing strongly enough to turn hydroelectric turbines.
Many energy-storage technologies are already in use or in development.
One example is pumped hydropower, in which excess wind and solar energy is used to pump water uphill into reservoirs that can later produce hydroelectric power.
Another is the conversion of renewable energy into hydrogen (by splitting water molecules) or a synthetic liquid fuel made with carbon dioxide from the air.
Others include compressed air and large-scale battery storage.
Low-carbon technologies can be improved markedly in many other areas as well.
Power grids running on renewables need more sophisticated systems for balancing energy supply and demand.
Improvements in carbon capture and storage technologies would enable some fossil fuels to be used safely.
And nuclear power plant designs can be made safer with passive (automatic) safety systems and fuel cycles that leave behind less radioactive waste and fissile material that could be turned into weapons.
Given the trillions of dollars of potential losses from human-induced climate change, and the trillions of dollars invested annually in global energy systems, the world’s governments would be wise to invest tens of billions of dollars each year in the research and development needed to achieve a low-carbon energy future.
With this in mind, more than one politician should have already followed in JFK’s footsteps, stepping forward to announce this generation’s critical moonshot, and to offer the public finances needed to make it happen.
So far, none has.
In the US, for example, the government allocates around $31 billion per year to biomedical research (with great returns to health), and roughly $65 billion per year for military R&D, but only about $7 billion per year for non-defense energy, and, of that, less than $2 billion per year for renewable-energy R&D. This is a shocking lapse on two counts: first, the US and the world are losing time on decarbonization; and, second, the US is squandering the chance to develop its own future high-tech industries.
Together, the Apollo Programme and the DDPP point the world’s governments toward the agreement they should reach at the United Nations Climate Change Conference in Paris this December.
First, governments should pledge to decarbonize their economies in order to keep global warming below the extreme danger zone of two degrees Celsius.
Second, they should promise to unveil, in the next couple of years, national “pathways” to deep decarbonization by 2050.
And, third, they should join together to fund the new global moonshot for clean energy.
The pooled financing should start with a minimum of $15 billion per year, and rise sharply thereafter, as key, high-return technology breakthroughs come into view.
As JFK showed, great progress begins with a great goal, one that is bold yet feasible.
The goal today, backed by the Apollo Programme, is deep decarbonization.
It is time for world leaders to commit to the planet-saving clean-energy moonshot.
Renewed Hope for Renewable Energy
VIENNA – A decade ago, renewable energy was viewed as an unwelcome offspring of fossil fuels, but the recent establishment of the International Renewable Energy Agency (IRENA) indicates that governments worldwide are taking “renewables” seriously.
With mounting concerns about climate change and volatility in oil and other fossil-fuel prices, renewables are finally becoming a viable proposition.
IRENA will be headquartered in the United Arab Emirates, in Masdar City, the world’s first carbon-neutral city, which will be constructed in the desert by 2011.
The agency will also maintain two vital arms in Europe: an innovation and technology center in Bonn; and an office in Vienna for strategic alliances with other agencies, particularly the United Nations.
Close to $155 billion was invested in 2008 in renewable energy companies and projects worldwide, not including large-scale hydroelectric projects, according to a recent UN Environment Program report.
On a global scale, the renewable energy sector created 2.3 million jobs in the past few years.
In Germany alone, the sector’s growth has generated 250,000 new green jobs in less than ten years.
Big business is spending billions of dollars to explore the opportunities that renewables can bring.
There are serious plans to turn the Sahara desert’s heat and sunlight into Europe’s major power source, supplying energy to half a billion people.
Some estimates suggest it could cost up to $60 billion to start sending Sahara power to Europe a decade from now.
With public support, progress could be much faster.
The price tags are huge, but the current economic and financial crisis has taught us not to be afraid of ten-digit numbers.
Renewable energy costs will eventually go down, in step with technological innovation and mass production.
The European Parliament recently enacted a law to support investors who help the Continent reach its goal of sourcing 20% of its power from renewable energy by 2020.
As a new global platform for renewables, IRENA will provide policy advice and assist in capacity building and technology transfer.
This will contribute to giving the poorest nations affordable access to clean energy, a key step towards lifting millions out of poverty.
Yet skeptics might say: must we really add yet another set of letters to the alphabet soup of global bureaucracy?
My answer is yes.
This new agency already has immense potential.
First, IRENA will hit the ground running in developing policy and spreading technology, partly because the countries instrumental in its birth – Denmark, Germany, and Spain – have impeccable “green” policy credentials.
Denmark is a pioneer in commercial wind power and produces half of the world’s wind turbines.
It may soon set the stage for the post-Kyoto world.
Germany leads in the clean technology sector, focusing on solar power.
By 2020, it plans to get 47% of its electricity from renewables.
Spain was among the first countries to introduce a national energy plan aimed at promoting renewable energy sources and reducing greenhouse-gas emissions.
I would also add here Austria, a proven international energy hub and a leader in renewable energy production and technologies.
Second, the new agency’s wide membership – 136 States – is keen to benefit from the opportunities that renewable energy will create for growth, jobs, and helping to meet the UN’s Millennium Development Goals.
These countries recognize the potential for renewable energy, especially new off-grid solutions in rural areas.
Third, IRENA will be based in a developing country, a vote of confidence in the quality, institutional expertise, and dynamism that exists in the developing world.
Moreover, a headquarters in Abu Dhabi sends an unequivocal message that promoting renewable energy is not “anti-oil.”
Fossil fuels will be with us for some time to come, and we should continuously seek out cleaner ways to use them.
At the same time, we must face the facts: fossil fuels will not last forever, and some supplies may dwindle soon.
So let’s plan for the inevitable, and develop the relevant policies, technologies, and institutional infrastructure as soon as possible.
IRENA may not be a component of the UN system, but it should be regarded as part of the family from the outset.
A lesson we have learned from both the climate change debate on the way to the December summit in Copenhagen and from the economic crisis is that only by working together can we achieve genuine change.
In a sense, that change has now arrived.
IRENA is solid proof that our world has the will to turn away from the carbon-clogged past and to fuel a clean, prosperous future that both developed and developing countries can enjoy.
Renewing Europe’s Security Dialogue
ATHENS – The year 2009 has been one of great change, taking place amidst even greater uncertainty.
Twenty years after the fall of the Berlin Wall, the resilience of the post-Cold War security system in Europe is being tested.
Longstanding conflicts remain unresolved and complex new challenges are emerging.
Energy security, organized crime, terrorism, absolutism and fundamentalism, climate change, and cybercrime are acute concerns for every country.
The economic crisis has left many people far less prosperous, and perhaps less inclined to be ambitious in our efforts to address Europe’s security challenges.
But we must also keep in mind that crisis brings with it opportunities for change.
This year has also seen a number of positive developments, including a “reset” in relations between two key players in the European security dialogue: Russia and the United States.
The European Union has recently taken important steps towards greater cohesion and unity with the appointment of a President and High Representative for Foreign Affairs.
We should celebrate these achievements even as we recognize that serious problems remain to be resolved.
There are different perspectives on how Europe’s security architecture should be designed, but we all agree on the urgent need to tackle this critical challenge through constructive dialogue.
It is in this spirit of cooperation and bridge-building that 56 foreign ministers – representing the US, Canada, and European countries, including the Russian Federation and the rest of the former Soviet Union – will meet in Athens on December 1-2 on my invitation to discuss the future of European security.
The talks mark the continuation of the “Corfu Process,” anchored in the Organization for Security and Cooperation in Europe, which began with an informal ministerial meeting on Corfu in June.
An attempt to address Europe’s unfinished business, the Corfu Process is an opportunity for us to come together to assess the gaps in our common security, to craft more effective responses to existing challenges, and – most importantly – to generate new political will for joint action.
This includes action to preserve arms-control regimes, including the Treaty on Conventional Armed Forces in Europe; to accelerate the resolution of protracted conflicts; to promote human rights and fundamental freedoms; and to assess and address traditional and new threats.
We cannot afford to leave the region’s protracted conflicts such as the ones in Nagorno-Karabakh and Transnistria on the back burner, as last year’s war in Georgia made abundantly clear.
People living in these areas need peace and stability, not a fragile
Security challenges in neighboring regions also require a joint response.
Afghanistan is a case in point.
And threats like terrorism, trafficking of arms, drugs, and people, and climate change are borderless and complex.
Only a joint response can be effective.
The fall of the Berlin Wall marked the end of an era of mistrust and division, and opened the way for cooperation aimed at a peaceful and stable Europe.
Europe has come a long way from those years of division, but we have not yet fully reaped the benefits promised by the wave of change of 1989.
The OSCE meeting in Athens comes at a critical time, when Europeans must move into the twenty-first century more united than ever before.
We must take this opportunity to restore the full capacity of the OSCE and make a fresh commitment to an indivisible European security system.
Renewing the News
NEW YORK – Last week, rumors from the world of print media were rife: a hundred reporters from The New York Times news desk to be bought out – or to lose their jobs if they refuse; steep cutbacks at British newspapers; staffs slashed at Condé Nast – eight respected editors axed at Glamour magazine.
In the United States and elsewhere, there is a sense that the long-foreseen implosion of news publishing is accelerating, having reached a kind of critical mass.
The head of a famous journalism school, echoing sentiments common among her peers, told me recently, “We are preparing students to enter a profession that won’t exist as we know it by the time they graduate.”
There is no way to disguise the reality: newspaper readers, in the West at least, are getting older; younger readers prefer to get their information online, where readers spend far less time actually reading news than print readers do; and, most agonizingly of all for the industry, people who were willing to pay for newspapers are unwilling to pay for the same content on a screen.
But does this mean the death of news, or its evolution?
I think we are witnessing something new being born.
There is a great deal to mourn about the passing of the older news model.
I had the honor of attending the premiere of The Most Dangerous Man in America , the new documentary about Daniel Ellsberg and his daring release of the Pentagon Papers – against the will of the US government – to The New York Times back in 1971.
At that time, newspapers held the public’s focus and could be a powerful gadfly.
If you were President Richard Nixon, there was no ignoring what appeared on the front page of The New York Times .
The blessings of the Internet are many, but one casualty of our segmentation into online subcultures is the loss of a common focal point.
It is easy for a president or prime minister to ignore a thousand Web sites; the multiplicity of outlets and voices online, paradoxically, has weakened the media’s power to force accountability from leaders.
But the passing of the old news model has also had a salutary effect.
People’s relationship to authority figures – doctors, politicians, religious leaders, or, indeed, journalists – is no longer slavishly deferential.
But this means that newspapers, in order to survive, will have to abandon their top-down tone, their “we decide what's important” sense of hierarchy, and create more collaborative kinds of documentation and feedback with citizens.
This does not mean merely permitting comments on an article that is published online; it means creating more opportunities for citizens to document, record, curate, and edit news from their own communities.
A new form could evolve from this changed power relationship between editors and citizens, potentially becoming as powerful as traditional journalism, if not more so.
First, online news outlets will have to link not just to sources, but to live footage, ideally shot by citizens.
I have created op-eds in partnership with a citizens’ video news collective, The Glass Bead collective.
There is a potent immediacy to documents that have hyperlinks to footage of veterans being trodden underfoot by mounted police at a demonstration at the US presidential debates, or students being gassed in their rooms during the recent G-20 summit.
As more citizens become documentarians, online newspapers will have to curate their work to reflect reality on a level of visual urgency that new readers take for granted.
Second, news outlets will have to be interactive: they should regularly teach citizens op-ed writing, for example, so that editors can receive a truly diverse set of submissions – well sourced, well written, and well argued – from people from all walks of life.
Finally, citizens should be able to continue to curate a news story.
On Facebook, of all places, I experienced the amazing potential of posting an item and then inviting my “community” to continue the research as well as the debate.
To be sure, I have been exposed to flimsy sources, and newspapers of the future should help readers learn what a good source is, and what good citizen journalism requires.
But I have also had many eye-opening experiences as people from around the world and from every background deepen my understanding and sourcing about issues as far-ranging as military law, religious practices, and swine flu.
With every shift in medium, there is a period of mourning for the old one.
I don’t pretend to possess journalism’s Holy Grail: a sustainable business plan for the newspaper of the future.
But I do know that that goal is far more likely to be achieved if newspapers take their readers seriously and train them as documentarians of their own communities and of their own moments.
If newspaper publishers continue merely to rearrange the deck chairs, their elegant, elitist – and currently sinking – ship will deserve its fate.
America’s Pacific Rebalance
WASHINGTON, DC – The United States military has entered a period of historic change after more than a decade of war following the terrorist attacks of September 11, 2001.
We ended the war in Iraq; we are implementing an effective transition and drawdown in Afghanistan; and we have seriously weakened Al Qaeda’s leadership in the fight against terrorism.
As a result of these efforts and the reality of budget constraints, the US has developed a new defense strategy for the twenty-first century, one that emphasizes agility, technology, and force projection.
We have begun to focus on the challenges and opportunities of the future, and it is clear that many of them lie in Asia.
After all, the global center of gravity is steadily shifting toward the Asia-Pacific, tying America’s future prosperity and security ever more closely to this fast-growing region.
At the same time, increasing military spending, challenges to maritime security, non-traditional threats ranging from piracy to terrorism, and the destruction wrought by natural disasters are making the region’s security environment more complex.
For these reasons, the US Department of Defense is implementing a “rebalance” of America’s strategic focus and posture to the Asia-Pacific.
The vast majority of America’s rebalance comes in non-military areas like trade and development.
This is part of a broad effort directed by President Barack Obama to deepen our diplomatic, development, economic, security, and cultural engagement across the region.
For the Department of Defense, the rebalance is about helping to ensure that the US and all countries in the region continue to benefit from a secure and prosperous Asia-Pacific – as we have for nearly 70 years.
This effort rests on four pillars.The first is America’s longstanding commitment to a set of principles that helped to advance peace and security in the region in the twentieth century.
As a Pacific power, the US has an abiding national interest in a just international order that emphasizes states’ rights and responsibilities and their fidelity to the rule of law; open access for all to the global commons of sea, air, space, and cyberspace; unimpeded economic development and commerce; and resolving conflict without the use of force.
These principles can and should underpin strong economic, diplomatic, and military relationships throughout the region today.
The second pillar is a special priority of mine: modernizing and strengthening America’s alliances and partnerships in the region, and developing new ones.
That mission has led me to travel to Asia four times since becoming Secretary of Defense in July 2011.
It has led us to devote more resources and effort to building our partners’ capabilities and improving interoperability between the US military and forces in the region.
We are also working to identify opportunities to deepen our cooperation in information security, intelligence, surveillance, and reconnaissance, and other high-tech frontiers – from cyberspace to outer space.
For example, we are developing a new bilateral plan for the US-Japanese alliance’s future roles, missions, and capabilities, and reached an agreement to position an additional missile-defense radar to protect against the North Korean threat.
On my recent visit to Australia, we signed an agreement to relocate a space surveillance radar to Western Australia.
And, in South Korea, our Strategic Alliance 2015 agreement charts a course for the future across a range of fronts, including cooperation in space and cyberspace, intelligence and information sharing, and command arrangements.
Moreover, America is focused like never before on working with our allies and partners in South and Southeast Asia.
With India, we have developed an unprecedented bilateral initiative that will streamline our export processes and deepen our defense trade and co-production.
We are also pursuing new areas of cooperation in defense exercises, such as submarine salvage and rescue, reflecting this key partnership’s growing dynamism.
In Southeast Asia, we are expanding our engagement with the Association of Southeast Asia Nations (ASEAN), increasing bilateral engagement with traditional allies and partners like Thailand, the Philippines, and Singapore, and developing our cooperative partnerships with Vietnam, Malaysia, and Indonesia.
One of the most important ways to enhance alliances and partnerships is through joint training and exercises.
During 2012, the US increased both the size and the number of bilateral and multilateral exercises across the Asia-Pacific region.
For example, the Rim of the Pacific (RIMPAC) exercise was the largest ever, including more than 42 ships and 25,000 personnel from 22 countries, while the US and China staged their first-ever maritime counter-piracy exercise near the Horn of Africa.
In 2013, we will engage for the first time in multilateral military exercises led by ASEAN, while China has been invited to send ships to RIMPAC 2014. &#160;
In support of this increased engagement – aimed not at establishing new permanent bases, but rather at building stronger allies and partners through a greater rotational presence – the third pillar of America’s rebalancing is to enhance our presence across the Pacific and Indian Oceans.&#160;
In Northeast Asia, where the US military has traditionally maintained a strong presence, we are modernizing our posture.
This year, we deployed F-22s and MV-22 Ospreys to Japan and reached an important agreement to relocate our forces on Okinawa.
We continue to develop Guam as a strategic hub, and plan to establish fully capable Marine Air-Ground Task Forces in Japan, Guam, and Hawaii.
Meanwhile, we are retaining and upgrading US Army capabilities in Korea.
The US military is also rebalancing within the Asia-Pacific region to place more emphasis on new partnerships in Southeast Asia and the Indian Ocean.
Last spring, 200 US Marines arrived in Darwin, Australia, for the first six-month rotation to serve and train alongside Australian troops and operate with regional partners.
We also increased the number and frequency of US Air Force aircraft rotating through Northern Australia.
Finally, we agreed with Singapore to deploy up to four Littoral Combat Ships there on a rotational basis to join it and other countries in the region for exercises, training, and responses to challenges.
The final pillar of the US rebalance is force projection.
We plan to have 60% of our naval fleet based in the Pacific by 2020, and America’s defense budget has preserved, and even boosted, investment in new and more capable assets needed in the Pacific theater.
Our spending plan prioritizes the development and fielding of the newest, most capable technology, including Virginia-class submarines, fifth-generation F-22 and F-35 fighters, P-8 maritime patrol aircraft, new electronic warfare and communications capabilities, and improved precision weapons and cruise missiles.
These are some of the capabilities that will maintain our forces’ ability to project power should our access and freedom of action be challenged.
These four pillars reflect the Department of Defense’s comprehensive approach to contributing to a peaceful and prosperous Asia-Pacific region in the twenty-first century.
This rebalance is a long-term strategy, and in 2012 we laid a foundation for its long-term success.&#160;
Nevertheless, questions and misperceptions remain.
Some have concluded that the rebalance is directed at China.
It is not.
A key component of the rebalance is a healthy, stable, and continuous military-to-military relationship with China, based on sustained and substantive dialogue that enhances our ability to work together and to avoid any kind of miscalculation.
I had a successful visit to China in September, and I am clear-eyed but optimistic about the future of this important military-to-military relationship.
As the US seeks stronger defense ties with China and countries throughout the region, we expect and welcome other countries’ efforts to build ties with China and the US alike.
Some argue that instability and turmoil in the Middle East will prevent us from implementing the rebalance.
Our new defense strategy and budget makes clear that it will not. The US military is a global force that can walk and chew gum at the same time.
Even as we rebalance toward the Asia-Pacific region, we will retain a significant presence in the Middle East to deter aggression and promote stability.
Finally, some question whether, given America’s fiscal constraints, the US military can make the investments necessary to implement the rebalance.
To be sure, the US is facing a new fiscal reality, and the defense budget must be reduced by $487 billion over the next decade.
But budgets are about priorities, and we have clearly made the Asia-Pacific region a priority.
We have a detailed plan for the rebalance in our budget, and we have made decisions that will make our military more cost-effective, efficient, and productive.
America is and always will be a Pacific nation.
The US has fought and spilled precious blood to give the nations in the Asia-Pacific the opportunity to achieve prosperity and security.
We remain committed to improving the lives of all of those who are part of the Pacific family of nations.
Renminbi and Reality
BEIJING – The exchange rate of the renminbi has once again become a target of the United States Congress.
China-bashing, it seems, is back in fashion in America.
But this round of China-bashing appears stranger than the last one.
When Congress pressed China for a large currency revaluation in 2004-2005, China’s current-account surplus was rising at an accelerating pace.
This time, China’s current-account surplus has been shrinking significantly, owing to the global recession caused by the collapse of the US financial bubble.
China’s total annual surplus (excluding Hong Kong) now stands at $200 billion, down by roughly one-third from 2008.
In GDP terms, it fell even more, because GDP grew by 8.7% in 2008.
Back then, pegging the renminbi to the dollar pushed down China’s real effective exchange rate, because the dollar was losing value against other currencies, such as the euro, sterling, and yen.
But this time, with the dollar appreciating against other major currencies in recent months, the relatively fixed rate between the dollar and the renminbi has caused China’s currency to strengthen in terms of its real effective rate.
Of course, there are other sources of friction now that did not seem as pressing five years ago.
America’s internal and external deficits remain large, and its unemployment rate is both high and rising.
Someone needs to take responsibility, and, as US politicians don’t want to blame themselves, the best available scapegoat is China’s exchange rate, which has not appreciated against the US dollar in the past 18 months.
But would a revaluation of the renminbi solve America’s problems?
Recent evidence suggests that it would not.
Between July 2005 and September 2008 (before Lehmann Brothers’ bankruptcy), the renminbi appreciated 22% against the dollar.
Yet the quarterly US current-account deficit actually increased – from $195 billion to $205 billion.
Most economists agree that the renminbi is probably undervalued.
But the extent of misalignment remains an open question.
The economist Menzie Chinn, using purchasing power parity (PPP) exchange rates, reckoned the renminbi’s undervaluation to be 40%.
But, after the World Bank revised China’s GDP in PPP terms downward by 40%, that undervaluation disappeared.
Nick Lardy and Morris Goldstein suggest that the renminbi was probably undervalued only by 12-16% at the end of 2008.
And Yang Yao of Beijing University has put the misalignment at less than 10%.
But assume that China does revalue its currency sharply, by, say, 40%.
If the adjustment came abruptly, Chinese companies would suffer a sudden loss of competitiveness and no longer be able to export.
The market vacuum caused by the exit of Chinese products would probably be filled quickly by other low-cost countries like Vietnam and India.
American companies cannot compete with these countries either.
So no new jobs would be added in the US, but the inflation rate would increase.
Now assume that the renminbi appreciates only moderately, so that China continues to export to the US at higher prices but lower profits.
This would push up inflation rates significantly, forcing the US Federal Reserve to tighten monetary policy, thereby quite possibly undermining America’s recovery, which remains unsteady.
New difficulties in the US and China, the world’s two largest economies, would have a negative impact on global investor confidence, hurting US employment even more.
In both scenarios, US employment would not increase and the trade deficit would not diminish.
So then what?
The historical evidence from the 1970’s and 1980’s, when the US consistently pressed Japan to revalue the yen, suggests that US politicians would most likely demand that the renminbi appreciate even more.
The exchange rate measures the relationship between at least two currencies, whose values are based on the productivity and domestic balance of their respective national economies.
Causes for misalignment may be found on both sides.
If the US dollar needs to devalue because of fundamental disequilibrium in the US economy, the problems cannot be fixed by lowering the dollar’s value alone.
Of course, there are problems with China’s external imbalance with the US, such as excessive national savings (which account for 51% of China’s GDP) and distortions in the prices of energy and other resources.
All those problems contribute to the imbalance, and China should fix them.
But we should realize that there are fundamental causes for the imbalance on the US side as well, such as over-consumption financed by excessive leverage and high budget deficits.
Only when both sides make serious efforts to fix their domestic fundamentals will the imbalances be reduced in a serious and sustained way.
Short-run exchange-rate adjustments simply cannot fix negative long-term trends.
China may resume a “managed float” of its exchange rate, particularly if the uncertainty of the overall post-crisis economic situation diminishes.
In choosing whether or not to do so, its policymakers may weigh factors ranging from China’s international responsibilities to the potential damage of foreign protectionism or even a “trade war.”
What is certain, however, is that China’s politicians have a domestic agenda just like the Americans.
The key element of that agenda is to maintain employment growth.
One-third of China’s labor force remains in agriculture, earning only about half what migrant workers in China’s booming cities earn.
(Per-capita earnings for China’s farmers may rise to $770 if the renminbi appreciates by 10%, but of course that is only a US dollar-term revision, with Chinese farmers feeling no increase at all).
Getting more farmers into better-paid manufacturing and service-industry jobs will mean not only a reduction in poverty, but lower income disparity.
By any moral standard, that goal is at least as important as anything on America’s agenda.
Steady on the Renminbi
NEW HAVEN – Currency wars are raging worldwide, and China is bearing the brunt of them.
The renminbi has appreciated sharply over the past several years, exports are sagging, and the risk of deflation is growing.
Under these circumstances, many suggest that a reversal in Chinese currency policy to weaken the renminbi is the most logical course.
That would be a serious mistake.
In fact, as China pursues structural reforms aimed at ensuring its continued development, forced depreciation is about the last thing it needs.
It would also be highly problematic for the global economy.
On the surface, the situation certainly appears worrisome – especially when viewed through the currency lens, which captures shifts in Chinese prices relative to those in the rest of the world.
According to the Bank for International Settlements (BIS), China's real effective exchange rate – an inflation-adjusted trade-weighted average of the renminbi's value relative to the currencies of a cross-section of China's trading partners – has increased by 26% over the last four years.
China's currency has appreciated more than any of the other 60 countries that the BIS covers (apart from dysfunctional Venezuela, where the figures are distorted by multiple foreign-exchange regimes).
By comparison, the allegedly strong US dollar is up just 12% in real terms over the same period.
Meanwhile, China's emerging-market counterparts have experienced sharp currency depreciations, with the Brazilian real falling by 16%, the Russia ruble by 32%, and the Indian rupee by 12%.
This currency shift is, of course, the functional equivalent of a large hike in the price of Chinese exports.
Add to that continued sluggishness in global demand, and the once-powerful Chinese export machine is suffering, with total exports down by 3% year on year in January.
For an economy in which exports account for about 25% of GDP, that is not a trivial development.
At the same time, a stronger renminbi has made imports less expensive, putting downward pressure on China's price structure.
Unsurprisingly, this has exacerbated the fear of deflation, with the consumer price index (CPI) rising by just 0.8% year on year in January, and the annual decline in producer prices steepening, to 4.3%.
While these trends are undoubtedly being amplified by plummeting world oil prices, China's core CPI inflation rate (which excludes volatile food and energy prices) was near 1% in January.
Against this background, it is easy to see why many anticipate a tactical adjustment in China's currency policy, from appreciation to depreciation.
Such a move would certainly seem appealing as a way to provide temporary relief from downward pressure on growth and prices.
But there are three reasons why such a move could backfire.
First and foremost, a shift in currency policy would undermine – indeed, undo – the progress that China has made on the road to reform and rebalancing.
In fact, a stronger renminbi is consistent with China's key objective of shifting from export-intensive growth to consumer-led development.
The generally steady appreciation of the renminbi – which has risen by 32.6% against the US dollar since mid-2005 – is consistent with this objective and should not be reversed.
It strengthens Chinese consumers' purchasing power and reduces any currency-related subsidy to exports.
During the recent financial crisis, the authorities temporarily suspended China's renminbi-appreciation policy, and the exchange rate was held steady from mid-2008 through early 2010.
Given that current circumstances are far less threatening than those in the depths of the Great Crisis, the need for another tactical adjustment in currency policy is far less acute.
Second, a shift to currency depreciation could inflame anti-China sentiment among the country's major trading partners – especially the United States, where Congress has flirted for years with the prospect of imposing trade sanctions on Chinese exporters.
A bipartisan coalition in the House of Representatives recently introduced the so-called Currency Reform for Fair Trade Act, which would treat currency undervaluation as a subsidy, allowing US companies to seek higher countervailing duties on imports.
Similarly, President Barack Obama's administration has just brought yet another action against China in the World Trade Organization – this time focusing on illegal subsidies that China provided to exporters through so-called “common service platforms" and “demonstration bases."
If China intervenes to push its currency lower, US political support for anti-China trade actions will undoubtedly intensify, pushing the world's two largest economies closer to the slippery slope of protectionism.
Finally, a renminbi-depreciation policy would lead to a sharp escalation in the global currency war.
In an era of unprecedented quantitative easing, competitive currency devaluation has become the norm for the world's major exporters – first the US, then Japan, and now Europe.
If China joined this race to the bottom, others would be tempted to escalate their actions and world financial markets would be subject to yet another source of serious instability.
Just as China resisted the temptation of renminbi depreciation during the Asian financial crisis of 1997-98 – a decision that may have played a pivotal role in arresting regional contagion – it must stay the course today.
That is all the more important in a disorderly climate of QE, where China's role as a currency anchor may take on even greater importance than it did in the late 1990s.
Strategy is China's greatest strength.
Time and again, Chinese officials have successfully coped with unexpected developments, without losing sight of their long-term strategic objectives.
They should work to uphold that record, using the strong renminbi as an incentive to redouble efforts at reform and rebalancing, rather than as an excuse to backtrack.
Re-Orienting America
NEW YORK – Some 40 years ago, when I entered Oxford University as a graduate student, I declared my interest in the Middle East.
I was told that this part of the world came under the rubric of “Oriental Studies,” and that I would be assigned an appropriate professor.
But when I arrived for my first meeting at the professor’s office, his bookshelves were lined with volumes bearing Chinese characters.
He was a specialist in what was, at least for me at the time, the wrong Orient.
Something akin to this mistake has befallen American foreign policy.
The United States has become preoccupied with the Middle East – in certain ways, the wrong Orient – and has not paid adequate attention to East Asia and the Pacific, where much of the twenty-first century’s history will be written.
The good news is that this focus is shifting.
Indeed, a quiet transformation is taking place in American foreign policy, one that is as significant as it is overdue.
The US has rediscovered Asia.
“Rediscovered” is the operative word here.
Asia was one of the two principal theaters of World War II, and again shared centrality with Europe during the Cold War.
Indeed, the period’s two greatest conflicts – the wars in Korea and Vietnam – were fought on the Asian mainland.
But, with the end of the Cold War and the demise of the Soviet Union, Asia receded from American interest.
In the first decade of the post-Cold War era, the US trained much of its attention on Europe.
American policymakers focused primarily on enlarging NATO to encompass many of the former Warsaw Pact countries, and on contending with the post-Yugoslav wars.
The second phase of the post-Cold War era began with the 9/11 terror attacks.
What followed was a decade of US focus on terrorism and the large-scale commitment of American military forces to Iraq and Afghanistan.
The two conflicts have claimed more than 6,000 American lives, cost more than $1 trillion, and consumed countless hours for two presidents and their senior staff.
But now this phase of American foreign policy is ending.
President Barack Obama has announced that US armed forces will be out of Iraq by the end of 2011.
In Afghanistan, US force levels have peaked and are declining; the only questions concern the pace of withdrawal and the size and role of any residual US military presence after 2014.
This is not to argue that the Middle East is irrelevant or that the US should ignore it.
On the contrary, it is still home to massive oil and gas reserves.
It is a part of the world where terrorists are active and conflicts have been common.
Iran is moving ever closer to developing nuclear weapons; if it does, others may well follow suit.
And it is a region now experiencing what could prove to be historic domestic political upheavals.
There is also the unique American tie to Israel.
Nevertheless, there are grounds for the US doing less in the greater Middle East than it has in recent years: the weakening of al-Qaeda; the poor prospects for peacemaking efforts; and, above all, the mounting evidence that, by any measure, massive nation-building initiatives are not yielding returns commensurate with the investments.
At the same time, there are strong arguments for greater US involvement in the Asia-Pacific region.
With its large populations and fast-growing economies, it is difficult to exaggerate the region’s economic importance.
American companies export more than $300 billion in goods and services to countries in the region each year.
Meanwhile, Asian countries are a critical source of investment for the US economy.
Maintaining regional stability is thus critical for US (and global) economic success.
The US has multiple alliance obligations – with Japan, South Korea, Australia, the Philippines, and Thailand –&#160;which are needed, in part, to deter North Korean aggression.
Moreover, US policy must create an environment in which a rising China is never tempted to use its growing power coercively – within or outside the region.
For this reason, recent US efforts to strengthen ties with India and several Southeast Asian countries make good sense.
The US is right to shift its focus from the Middle East to the Far East.
The good news is that this conclusion seems to be shared across the US political spectrum.
Mitt Romney, the likely Republican nominee for president, pledges to increase the rate of shipbuilding – a commitment linked to an increased US presence in the Pacific.
And US Secretary of State Hillary Clinton speaks of America pivoting away from the greater Middle East: “The world’s strategic and economic center of gravity is shifting east, and we are focusing more on the Asia-Pacific region.”
Regardless of whether the twenty-first century will be another “American century,” it is certain that it will be an Asian and Pacific century.
It is both natural and sensible that the US be central to whatever evolves from that fact.
Repairing the Global Plumbing
NEWPORT BEACH – More than three years after the global financial crisis, the world still has a nasty plumbing problem.
Credit pipes remain clogged, and only central banks are working to clear them.
But their ability to do so is waning, posing yet another set of risks for Western economies blocked by too little growth, too much unemployment, deepening inequality, and debt in all the wrong places.
Fortunately, it is not too late to build broader pipes that compliment and replace the damaged infrastructure.
The current situation embodies two narratives that seem contradictory, but are not.
One speaks to the reality that most large companies with access to capital markets have no problem securing new funding.
In fact, they have been remarkably successful in lengthening their debt maturities, accumulating cash, and lowering their future interest payments.
In sum, they now have “fortress” balance sheets.
The other narrative speaks to an opposing, but equally valid reality.
Too many small companies and households still find it difficult to borrow at reasonable terms.
This includes those reliant on bank credit, as well as many mortgage holders with very high legacy interest rates and balances that exceed their homes’ market value.
From every angle, the extremity of this state of affairs – in which those with access to credit do not need it, and those who do cannot get it – is highly problematic.
If left unattended, it leads to a gradual, and then accelerated, renewed deleveraging of the economic system, with the highest first-round costs – a longer unemployment and growth crisis – borne disproportionately by those least able to suffer them.
In the next round, as the system slowly implodes, even those with healthy balance sheets would be impacted, accelerating their disengagement from a deleveraging world economy.
All of this slows social mobility, tears already-stretched safety nets, worsens inequality, and accentuates genuine concerns about the functioning and sustainability of today’s global economic system.
This is not just about socio-economic issues.
There is also a political angle.
With two competing, yet simultaneously valid narratives, ideological extremes harden.
The result is even greater dysfunction in both process and content, ruling out any sustained policy attempt to make things better.
The problem has become acute in Europe, whose crisis has been belatedly recognized as reflecting something more than turmoil in the eurozone’s weakest countries.
It also reflects broad-based contamination, resulting, most recently, in France’s loss of its vaunted AAA sovereign credit rating.
In the process, the efficacy of pan-European rescue mechanisms is being undermined.
And, as fragilities increase – and as a financial wedge is driven into the eurozone’s core (Germany and France) – growth and employment prospects dim.
Central banks have recognized all of this for some time, prompting them to take enormous reputational and operational risks to slow the process.
They have implemented a host of “unconventional policies” that previously would have been deemed unthinkable, even outrageous – and that can be seen in the enormous growth in their balance sheets.
In the last four years, the United States Federal Reserve’s balance sheet has more than tripled, from under $1 trillion to a mammoth $3 trillion.
The growth relative to the size of the economy is even more stunning – from slightly more than 5% of GDP to 20%.
The Bank of England’s balance sheet is also at 20% of GDP.
And both seem to be itching to do even more.
The European Central Bank is often viewed as a laggard.
No longer.
Its balance sheet has now doubled, to a whopping 30% of GDP –&nbsp;and it, too, appears set to do even more.
Mario Draghi, the ECB’s new president, recently said that he expects heavy take-up on the next three-year long-term refinancing operation, a powerful tool to pump cheap liquidity into the banks.
Unfortunately, the economic outcomes have come nowhere close to matching the intensity of these efforts.
Effectively, the central banks have been unconventional bridges to nowhere, owing mainly to their imperfect tools and other government agencies’ inability or unwillingness to act.
At some point – and we are nearing it – bridges to nowhere become a standalone risk: they can topple over.
Rather than just pumping liquidity into clogged pipes, countries can and should do more to build a more effective network of compensating conduits.
In doing so, their main objective (indeed, the test for effectiveness) would be the extent to which new private-sector investment is “crowded in.”
It is high time to move on five fronts, simultaneously:
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Countries such as Spain and the US need to be more forceful in unblocking the housing sector by making overdue decisions on burden sharing, refinancing, and conversion of idle and foreclosed housing stock.
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Countries with excessive debt, such as Greece and Portugal, need to impose sizeable “haircuts” on creditorsin order to have a reasonable chance to restore medium-term debt sustainability and growth.
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In several Western countries, public-private partnerships should be formed to finance urgently needed infrastructure investment.
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Regulators should stop bickering about the future configuration of key financial institutions, and instead set a clearer multi-year vision that is also consistent across borders.
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Finally, governments should inform their electorates explicitly and comprehensively that a few contracts written during the inadvisable “great age” of leverage, debt, and credit entitlements cannot be met, and must be rewritten in a transparent way that strikes a balance between generations, labor and capital, and recipients and taxpayers.
Such policies would allow healthy balance sheets around the world, both public and private, to engage in a pro-growth and pro-jobs process.
They require leadership, focus, and education.
Absent that, plumbing problems will become more acute, and the repairs more complex and threatening to virtually everyone – including both the “one percenters” and those who worrisomely are struggling at the margins of society.
Libya’s Anti-Military Militias
NEW YORK – As the United States struggles to understand last September’s attack on its diplomatic mission in Benghazi, which took the lives of four Americans, including US Ambassador J. Christopher Stevens, a formal investigation has not even been opened in Libya – and likely never will be.
The country’s leaders face myriad challenges – from a vocal federalist movement in the East, aimed at usurping the central government’s prerogatives, to a wave of assassinations targeting security officials – which leaves them few resources to allocate to a case that poses no immediate threat to their domestic standing.
Instead, they are focusing on rebuilding the state that former leader Muammar el-Qaddafi destroyed.
They have been grappling with the need to create effective administrative institutions and foster an independent judiciary.
While the National Transitional Council (NTC), the interim governing body that replaced Muammar el-Qaddafi’s regime, failed to lay the groundwork for a modern state, it is too soon to pass judgment on the elected leadership that took power in November 2012.
The litmus test will be progress on security.
The Benghazi attack, and the lack of a credible Libyan response, demonstrated that the country is neither governed by the rule of law nor in a position to impose it.
The new government must change this situation by disbanding militias and integrating their members into official Libyan security forces.
For starters, the government must stop coddling the militias, and focus on building the national army – something that the NTC neglected.
To be sure, persuading the militias to transfer their loyalties to the state will not be easy, especially given the fighters’ strong, often ideological connections to their individual units.
But it is a crucial step toward establishing order and enhancing the newly elected government’s legitimacy.
Brigades in eastern Libya, or Cyrenaica, for example, are strongly rooted in traditional Islamist ideology.
Fighters in the region have been organized into powerful units, such as the February 17 Martyrs Brigade, the large government-allied force that was hired to protect the US mission in Benghazi, and the Libya Shield Force, the widely deployed coalition of militias that assisted the US mission on the night of the attack.
By contrast, militias in western Libya, or Tripolitania, tend to emerge in individual cities, with the most powerful brigades based in Misrata and Zintan.
These groups want to join the security services as units, rather than as individual fighters, in order to retain their communal bonds and, in turn, to prevent their full integration into a national army.
For its part, the government has treated the creation of national armed forces as an afterthought.
During the revolution, NTC leaders funneled resources and funding to the Islamist brigades with which they shared a common ideology, rather than to the fledgling Libyan National Army (LNA).
After Islamist fighters killed the commander-in-chief of the rebel forces, Abdul Fattah Younes, in July 2011, the military was sidelined.
Indeed, the NTC willingly facilitated the military’s demise.
When tribal clashes erupted in the remote desert town of Kufra early last year, the council dispatched the Libya Shield Force, not LNA units, to quell the unrest.
Moreover, the military receives inadequate financing, with officers forced to use their personal funds to purchase gas for military vehicles.
Meanwhile, the governments of the wealthy Gulf States provide funding directly to militias, allowing them to purchase new vehicles and cutting-edge communications equipment.
Libyans complain that the new government has continued the NTC’s policy of favoring revolutionary brigades over institutionalized security services.
After the September 11 attack in Benghazi, frustrated Libyans poured into the streets shouting anti-militia slogans. Ten days later, protesters overran the base of Ansar al-Sharia, the Islamist militia suspected of masterminding the attack, as part of a sweep of raids on militia compounds throughout the city.
Only a few hours after the demonstrations began, government authorities sent a mass text message that urged the protesters to return to their homes, adding that “the Rafallah al-Sahati Brigade, the February 17 Brigade, and the Libya Shield Force are legal, and are subject to the authority of the [military] general staff.” President Mohamed Magariaf later confirmed this view.
In response, a former NTC member lamented that the government had “lost a chance to finish off all of the militias,” stating that the groups responsible are backed by Qatar, and that the government did not want to interfere with their agenda.
Such patronage extends to the military establishment itself.
Chief of Staff Yousef al-Manqous is said to favor Cyrenaican militias over the military units under his command, while government officials complain about the lack of an effective chain of command.
For example, in June, Defense Minister Osama al-Juwali attacked the NTC for failing to consult with the appropriate officials on its decisions, stating that his role had been reduced to “signing the plans of the chief of staff.”
With ample foreign funding and preferential treatment from the government, the militias have no incentive to disband.
Furthermore, they are wary of turning over control of their brigades to military commanders whom they claim supported Qaddafi or, at least, failed to oppose him.
While there is no shortage of challenges facing Libya’s new government, disbanding the militias must be at the top of its agenda.
Otherwise, the aspirations that drove the anti-Qaddafi revolution – an end to corruption, stability, and shared prosperity – will never be fulfilled.
Rescuing Annapolis
TOLEDO, SPAIN – The Israeli-Palestinian peace talks that began three months ago at Annapolis do not suffer from a lack of ideas about how to address the conflict’s core issues.
After years of frustrated attempts to reach a settlement, and with dozens of official and back-channel peace plans at the negotiators’ disposal, there remains little room for creativity in producing an agreement.
But the deeper problem lies elsewhere, in the poverty of the leadership, and in the fragmentation of Palestinian politics.
Indeed, the only man who could have made a peace agreement based on a two-state solution legitimate in Palestinians’ eyes, Yasser Arafat, took this legitimacy with him to the grave.
President Mahmoud Abbas was never an inspiring figure for Palestinians.
With the loss of Gaza to Hamas, his political clout has been diminished even further.
In fact, Abbas does not even control the militias of his own party, Fatah, which have been even more active than Hamas in staging terrorist attacks against Israel.
The Palestinian Authority’s rule over the West Bank would have collapsed long ago if it were not for the Israelis’ daily incursions against Hamas and Fatah in areas under Abbas’ control.
Throughout history, nationalist movements, almost invariably consisting of radical and pragmatic wings, had to split in order to reach the Promised Land.
Consensus is the negation of leadership and frequently a recipe for political paralysis.
Zionism is a case in point.
If Menachem Begin’s ultra-nationalist Irgun had joined a coalition with Ben-Gurion’s pragmatic Mapai in 1947, Zionists would have rejected the partition of Palestine, and Ben-Gurion would not have been allowed to declare the Jewish state in May 1948.
Of course, this lesson should not be elevated to a dogma.
In the Palestinian case, with the lack of the kind of leadership that Arafat provided, the radical wing, Hamas, cannot be discarded from the process leading to Palestinian statehood.
Moreover, unlike in the case of Israel, the radical wing in Palestine represents the democratic majority, as it emerged victorious from the elections two years ago.
As a result, the question that dominates Israeli discourse nowadays is whether or not to invade Hamas-controlled Gaza.
Locked in a self-imposed conceptual paralysis that does not allow for a non-military solution, Israel refuses to see that Hamas’s rocket attacks on Israeli territory are not intended to draw Israel into an invasion.
Instead, they are an attempt to establish a new deterrent against Israel that would force it to agree to a cease-fire ( Tahdiye) .
It is self-deceiving to assume that those on the Palestinian side involved throughout the discredited Oslo process can still muster the necessary popular legitimacy to win support for a compromise with Israel that would require painful concessions on issues central to the Palestinian national ethos.
Nor is it at all clear that a major invasion of Gaza could bring end the attacks on Israel.
Hamas, with the help of Iran, has been undergoing a process of Hezbollahization.
Its units are no longer simple terrorist cells; they are highly trained and well-equipped combat units, and its rockets, like those in southern Lebanon, are launched with timers from crude underground silos.
The traumatic experience of the Lebanon war in 2006 has made Israel’s leadership wary of yet another asymmetric war where a clear-cut victory can never be claimed, and where the arithmetic of blood is always bound to turn the casualties of the superior force, Israel, into a domestic crisis.
Israel must change its strategic objective in Gaza from toppling Hamas to rescuing the Annapolis process, and with it the last chance for a two-state solution.
This requires not only a cease-fire with Hamas, but also a return to a Palestinian national unity government that alone can offer the peace process the vital legitimacy that it lacks today.
Without the resurrection of the Mecca agreement, which put Hamas and the PLO in a coalition government, Hamas cannot expect to secure its control of Gaza and the PLO cannot deliver a peace settlement with Israel.
The notion, dear to the architects of the Annapolis process, that peace can be achieved only when a wedge is driven between Palestinian “moderates” and “extremists” is a misconception.
A Palestinian national unity government would not impede a settlement for the simple reason that the moderates now negotiating with Israel must in any case strive for an agreement that the extremists could not label as a treacherous sell-out.
Hence, the difference between the Palestinian positions in the current negotiations and those they may hold when a unity government is restored would only be very minor.
Rescuing Nuclear Non-Proliferation
As a declared non-nuclear weapon state, Indonesia has always striven for nuclear non-proliferation - indeed, for a world free of nuclear weapons.
But the cause of nuclear non-proliferation is now in deep trouble, as countries are once again tempted to acquire the means of oblivion.
For over three decades, the nuclear Non-Proliferation Treaty (NPT) has been the cornerstone of the world's non-proliferation regime, a position that derives from growing acknowledgement of the legal and normative standards that it established.
Adherence to the NPT has increased steadily, reaching a stage of near universal acceptance.
But there is a general feeling that implementation has fallen short of expectations, particularly with regard to nuclear disarmament.
Moreover, there is increasing concern over non-compliance and the associated risks of proliferation - to worrisome states, particularly in Asia, and, even more ominously, into the hands of private individuals and terrorist organizations.
In the face of these threats, what can be done to strengthen the non-proliferation regime?
The NPT regime stands on three pillars: non-proliferation, nuclear disarmament, and peaceful uses of nuclear energy.
The Treaty envisages the construction of each pillar through a matching series of steps taken by both nuclear weapon states and non-nuclear weapon states.
Strengthening the non-proliferation regime in order to confront today's challenges would require no more than following this strategy.
Unfortunately, this has not been the case since 1995, when the NPT Review and Extension Conference made the duration of the NPT's validity indefinite.
The Conference, which included the original five nuclear weapon states (the United States, Russia, China, France, and Great Britain) as well as a great number of other UN members, did not reach consensus on a "Final Declaration."
But it did adopt three other decisions, entitled Strengthening the Review Process for the Treaty , Principles and Objectives for Nuclear Non-Proliferation and Disarmament , and Resolution on the Middle East .
These constituted a unified package that was meant to be implemented in its entirety.
Five years later, the 2000 Review Conference finally adopted a Final Document , which contained concrete measures, including "13 practical steps" for systematic and progressive efforts to achieve nuclear disarmament.
The evolution of the NPT - its adaptation to new environments and problems that were not anticipated at the time of its adoption - appeared to ensure the Treaty's continuing effective implementation.
But actions speak louder than words, and challenges to the NPT regime have continued to undermine its basic principles, causing considerable backsliding.
Today, the challenges posed by proliferation are more complex than ever:
· proliferation of nuclear weapons technologies by one de facto nuclear-capable state;
· one stated withdrawal from the NPT;
· one case of non-compliance;
· increasing assertion of the role of nuclear weapons in military doctrines;
· improvements in nuclear weapons by some nuclear weapon states.
The possibility that non-state actors could acquire nuclear weapons and other weapons of mass destruction poses an especially grave new threat.
Confronting it effectively will require the support of all NPT signatories.
But a continuing imbalance and selectivity in the emphasis placed by different states on the Treaty's three pillars damages the unity that the NPT regime needs.
In particular, imbalances in implementing the NPT obligations by the nuclear haves and have-nots are sharpening.
For example, some countries want to develop smaller and "usable" nuclear weapons designed for pre-emptive or preventive military action.
Many non-nuclear weapon states, particularly those from the developing world, remain frustrated with the fact that peaceful nuclear cooperation is yet to be fully realized.
These challenges to the non-proliferation regime not only jeopardize the credibility, efficacy, and viability of the Treaty; they have also cast a long shadow of doubt on the future of nuclear disarmament itself.
Deliberations and negotiations both within the NPT regime and in other areas of disarmament have reached a difficult stage, if not a stalemate.
To jump-start progress, all NPT signatories should re-affirm that the Treaty's provisions are mutually reinforcing and must be pursued jointly and faithfully.
The most dangerous force eroding the Treaty's credibility is the inclination of some nuclear-weapon states to reinterpret at will the package of agreements reached in the past.
Despite the NPT's shortcomings, the overwhelming majority of non-nuclear states fully comply with their Treaty obligations.
This constrains the number of nuclear weapon states, thus fulfilling one of the NPT's most important goals.
One of the best ways to strengthen the non-proliferation regime now would be to implement fully the agreements that have already been reached.
Selectivity and narrow reinterpretation can only weaken the Treaty.
Developing a new set of non-proliferation mechanisms would be a waste time that we cannot afford, because any new protocol would have a dubious legal basis and encourage further imbalances in implementation.
If we are serious about saving the non-proliferation regime, the time to act is now.
Rescuing the Amazon Forests
Developing countries are blessed with some of the world’s most precious natural resources.
But that blessing can also be a curse – and not just for oil-rich countries, with their distorted economies and politics.
Latin American countries in the Amazon region, for example, are home to what can rightly be considered the world’s storehouse of biodiversity.
Yet, when it comes to protecting this global treasure, these countries are expected to shoulder the burden by themselves.
Even with good intentions, these countries on their own are unlikely to ensure that the benefits of conserving the Amazon are realized, because private interests in deforestation – both legal and illegal – remain very strong.
The prospect of quick gains from occupying publicly owned forestland induces private individuals to grab and clear as much of these areas as quickly as possible, without regard for the environmental and social impact of their behavior.
The need to supply fuel and open land during rapid economic development had a devastating effect on European and American forests.
Brazil, too, has in recent decades depleted much of its forestland, only at faster rates.
Five hundred years ago, the Atlantic rainforest stretched nearly the entirety of Brazil’s 8,500-kilometer coastline; today, less than 7% remains.
More than 15% of the Brazilian Amazon has been deforested, most of it in the last 50 years.
In 2003, the Brazilian Amazon lost 23,750 square kilometers of forest – an area nearly the size of Belgium.
The tragedy is that much of this deforestation has been entirely unnecessary from the standpoint of economic development.
For example, since 1990 Brazil has increased grain production by 125%, with an increase of only 24% in cultivated area.
But, at the same time, more than 16 million hectares of pastures and degraded land – an area half the size of Germany – have been abandoned in the Amazon alone, owing to poor agricultural practices and land use.
With their rehabilitation, Brazil could expand agricultural production without further harm to the rainforest.
In this and other ways, the rainforest could be harnessed to finance development and generate growth in a socially inclusive and sustainable way.
But to achieve this, the countries and the international community need to act.
Developing countries need to ensure reliable property rights and policy enforcement in order to generate the incentives needed to protect nature in the future.
To its credit, the Brazilian government has revoked policies that had previously encouraged land clearing in the Amazon, and has mandated that 80% of privately owned forestland be used only for sustainable management of forest resources.
Brazil has also developed a sophisticated system to track and record deforestation – though monitoring an area the size of Europe with scarce resources is by itself unlikely to lead to much compliance.
As a result, there needs to be far greater support from the international community for promising initiatives.
Consider these examples:
· The partnership between the Brazilian Government, the World Wide Fund for Nature, the World Bank, and the international community has been the basis for the Amazon Region Protected Areas Program, which seeks to set aside 12% of the Amazon for conservation.
· The Pilot Program to Conserve the Brazilian Rainforests, funded by the Brazilian government and the G7 countries, has provided $420 million in the past decade for alternatives to deforestation.
Where these programs have been implemented, little deforestation has occurred.
· The World Bank, through a recently approved $505 million loan, is supporting the inclusion of environmental issues and concerns across Brazil’s government ministries.
· The Kyoto Protocol’s Clean Development Mechanism allows for the trade of carbon credits for reforestation.
This mechanism could help establish a system to pay for the maintenance of standing forests and support policies that comprehend the Amazon’s global value.
Rescuing Yemen
LONDON – Yemen has suddenly joined Afghanistan and Pakistan as a risk to global security.
Indeed, it is increasingly seen as a nascent failed state and potential replacement host for Al Qaeda.
The attempted bombing of a Detroit-bound airliner on Christmas Day by a young Nigerian man trained by Al Qaeda in Yemen appeared to open the West’s eyes to the country’s problems.
Following that failed attack, US President Barack Obama and British Prime Minister Gordon Brown jointly pushed a conference in London to propose solutions for the previously overlooked crises in Yemen.
But if the conference focuses too narrowly on Al Qaeda’s presence in Yemen, it will do more harm than good.
Instead, the conference must aim to address broader issues of political and social stability within Yemen.
Al Qaeda is not the primary danger to Yemen’s security and stability, but Yemen’s geography and political problems are well suited to its activities.
A particularly attractive feature is the prevalence of the severe Wahhabi religious dogma, which was exported to Yemen by Saudi Arabia but now provides fertile ground for recruiting disaffected young Yemeni men for assaults on Saudi Arabia.
Yemen ’s central problems are two: the ongoing civil war that the government is waging against the Houthi tribe in the country’s north, and the suppression of a secessionist movement in the south.
It is the Yemeni government’s inability to find a political solution to these problems that has led Yemen to the brink of fragmentation.
So far, Obama and Brown seem unable to fully grasp the fact that Yemen’s problems go well beyond Al Qaeda’s presence in the country. As a result, they appear to be playing into Yemeni President Ali Abdullah Saleh’s hands.
Saleh wants to use the London conference as a means to leverage Western backing, particularly military aid, to pursue his wars against the Houthis and the southern secessionists.
Saleh has regularly employed the danger of Al Qaeda to obtain additional financial and security support from both the West and Saudi Arabia.
For him, the attempted Christmas Day bombing was a gift from heaven.
Saleh’s dilemma is that Western aid may now come with increased interference in Yemen’s internal affairs at a time when he wants the world to turn a blind eye to his conduct of the country’s civil wars.
The West and Saleh do not have the same enemy.
Al Qaeda is the West’s enemy, while Saleh’s true enemies are the Houthis and the separatists of the south.
But if the West is to curtail Al Qaeda’s activities in Yemen, it will need to push Saleh into reaching accommodations with both the Houthis and the southerners, and this will undoubtedly mean sharing power with them.
Saleh will undoubtedly resist such an effort.
Last December, Saleh called for national dialogue, but on his own terms: the Houthis and the southern leaders are to be excluded from the discussions unless they support the Yemeni constitution that has kept Saleh in power for decades.
But Saleh’s hardline approach is failing.
More than half of Yemen’s territory is falling out of government control.
The US should not be surprised by any of these developments because American involvement in Yemen is not new.
Al Qaeda in Yemen has been targeted since the USS Cole was bombed while in the port of Aden in 2000.
Missile strikes by US drones last December in Abein and Shabwa killed a number of Al Qaeda members, as well as civilians.
Fighting Al Qaeda in Yemen through such means may temporarily reduce terrorism, but it will not end it.
The real question is whether the West will address Yemen’s failed political and military strategies, which are the root cause of Al Qaeda’s mushrooming presence in the country.
Only if Western intervention aims to rescue the Yemeni state from itself will there be any possibility to contain Al Qaeda.
And it is not just the Yemeni state that is at fault. Yemen’s neighbors have also played a role.
Saudi Arabia exported both its Wahhabism and Al Qaeda to Yemen by funding thousands of madrassas where fanaticism is taught.
Moreover, since the 1991 Gulf War, Saudi Arabia and Kuwait have been expelling Yemeni workers.
Last month alone, 54,000 Yemeni workers were expelled from Saudi Arabia.
Although Yemen is geographically part of the Arabian Peninsula, it was excluded from the Gulf Cooperation Council, primarily because its size – it is the most populous state on the peninsula – would have given it great influence.
In fact, the Yemeni population exceeds the population of all six GCC members combined.
Saleh received a strong endorsement from the GCC last December for his domestic wars, and Saudi Arabia has been in direct military confrontation with the Houthis, its army having crossed Yemen’s border.
But the GCC members’ failure to open their economies – which are always in need of guest workers – to Yemen’s young men is short-sighted.
The US and Britain, both patrons of the GCC, must encourage its members to include Yemen if they want to solve its problems.
Yemenis are known as skilled labourers.
So, instead of exporting religious radicalism to Yemen, importing its manpower could neutralize Yemen’s problems.
The forthcoming London conference could prove to be either a trap for the West or the beginning of a true effort at the kind of domestic reform that can prevent Yemen from becoming another Afghanistan.
If the West buys into Saleh’s depiction of a war against Al Qaeda, it will be trapped into supporting him and his failed policies.
But if it looks beyond terrorism to the root causes of the problem, and presses Saleh to begin to share power, Yemen need not become another safe haven for terrorists.
Reserve Reform
NEW YORK – Both China and the United Nations Commission on Reforms of the International Monetary and Financial System have called for a new global reserve system.
That issue should be at the top of the agenda when the IMF’s International Monetary and Financial Committee next meet.
The essential idea is quite simple: in the long run, an international monetary system cannot be built on a national currency – a point made a half-century ago by the Belgian-American economist Robert Triffin.
Recognition of this fundamental problem was the reason why the IMF’s Special Drawing Rights (SDRs) were created in the 1960’s.
The dollar standard with which the world has lived since the early 1970’s has three fundamental flaws.
First, as with all systems that preceded it, it puts the burden of adjustment on deficit countries, not on surplus countries.
The main exception is the United States, which, thanks to its reserve currency status, has so far been able to finance its deficit by issuing dollar liabilities that are held by the rest of the world.
Second, the system is unstable, because it makes the major reserve currency’s value dependent on US macroeconomic policy and the vagaries of the US balance of payments and associated domestic deficits.
Since the abandonment of gold-dollar parity in 1971, the world has experienced increasingly intense cycles in the value of the dollar and the US current account.
The dollar has lost what any reserve asset should have: a stable value.
The governor of China’s central bank recently emphasized this basic point.
Third, the current system is inequitable, because it forces a transfer of resources from developing countries to the industrial nations that provide reserve currencies.
This transfer has dramatically increased over the past two decades.
Developing countries’ main defense against world financial instability has been to accumulate international reserves.
At the end of 2007, developing countries, excluding China, held reserves equivalent to 20.6% of their GDP, compared to just 3.7% in 1990.
This generated a huge asymmetry in the world economy, as industrial countries, excluding Japan, hold only 2.6% of GDP in reserves.
One basic reason is that the only “collective insurance” available is limited and highly conditional IMF lending.
It must be emphasized that a system based on competing reserve currencies would not solve the instability and inequities of the current system.
In fact, it would add another one: the instability of the exchange rates among major reserve currencies.
Indeed, this problem is already present in the current system.
The deficiencies of current arrangements are why the world monetary system should be based on a truly global reserve currency: a fiduciary currency backed by the world’s central banks.
This is what was hoped for when SDRs were created in the 1960’s, and this process must be completed by transforming the SDRs into such a global currency.
A major advantage of an SDR-based system is that it would provide a mechanism for the IMF to provide finance with its own resources in an agile way during crises, thus operating in the same way as central banks have been doing on a massive scale in recent months.
It would also be a much better mechanism with which to finance the IMF during crises than the credit lines to the IMF from a few countries (“arrangements to borrow”) that the G-20 is again advocating, as it is truly multilateral financing that does not depend on any individual country.
For such a program to work, it is essential that developing countries recognize that IMF financing is good “collective insurance,” so that their demand for foreign-exchange reserves would decline.
This means that the IMF would have to lend rapidly during balance-of-payments crises, and do so without the overburdening conditionality of the past, particularly when crises stem from rapid reversal of capital flows or a sharp deterioration in terms of trade.
The IMF took steps in this direction in March, particularly by creating the Flexible Credit Line for crisis-prevention purposes, as well as expanding other credit lines and overhauling conditionality (relying more on ex-ante conditionality and eliminating structural performance criteria).
The major problem with the new credit line is that it runs the risk of unduly dividing developing countries into two categories, with significant additional risks for the latter.
A better alternative would be to go back to John Maynard Keynes’s proposal of an overdraft (or, in IMF terminology, drawing) facility for all member countries, with countries that continue to use it eventually having to apply to a formal lending program.
The overdraft facility could again be financed with counter-cyclical issues of SDRs.
The reform should also allow for a mechanism for countries to exchange their current dollar (and euro, yen, and pound) assets for SDRs, thus avoiding the disruptions that could be generated by the transition to the new system.
As Fred Bergsten has reminded us, the mechanism is already available in the form of the “substitution account” that was negotiated in the IMF in 1980.
It is time to broaden the agenda of global financial reform, which so far has focused on an essential but still limited set of issues, particularly financial regulation.
Reform of the global reserve system must be part of that broader agenda.
Re-Setting the NATO-Russia Relationship
WARSAW – Earlier this year, a group led by former US Secretary of State Madeleine Albright (which included me) issued a report on a new strategic concept called “NATO 2020.”
The report recommended that NATO open its door to new members while seeking a more constructive relationship with Russia.
We outlined a dual strategy of reassuring the NATO allies that their interests would be defended while engaging with the Kremlin in a manner consistent with the 1997 NATO-Russia Founding Act and the 2002 Rome Declaration on the NATO-Russia relationship.
Reassuring alliance governments does not require only that “any constructive engagement would have to be based on military reassurances within NATO,” as prominent experts like Wolfgang Ischinger and Ulrich Weisser have said.
Security assurances should also comprise confidence-building measures, along with conventional and nuclear arms control and disarmament.
The Albright report outlined a strategy of “re-engagement and reassurance.”
The “reset” of relations with Russia can succeed only if it is reciprocal.
Russia, therefore, should apply two fundamental principles that it has already accepted in several declarations.
First, as the Helsinki Final Act put it, every sovereign nation has an inherent right “to belong or not to belong to international organizations, to be or not to be a party to bilateral or multilateral treaties, including the right to be or not to be a party to treaties of alliance; they also have the right to neutrality.” Second, the sovereign equality of states includes respect for all the rights inherent in sovereignty.
NATO needs Russia, and Russia needs NATO, and the US shift away from unilateralism has restored the importance of multilateral security institutions while giving NATO the chance to establish new partnerships with the EU and Russia.
Back in February, US Secretary of State Hillary Clinton told the alliance’s Strategic Concept seminar in Washington that, “while Russia faces challenges to its security, NATO is not among them.
We want a cooperative NATO-Russia relationship that produces concrete results and draws NATO and Russia closer together.”
Visiting Moscow that month, our NATO expert group sought to promote a re-thinking of mutual perceptions.
The main problem in the NATO-Russia relationship is not a lack of institutions, documents, or procedures, but a lack of transparency, confidence, and mutual trust.
American security analyst Charles Kupchan raised a pertinent question when he asked whether Russia should eventually join the Atlantic alliance, pointing out that the settlements concluded after the Napoleonic wars and World War II show that alliances between former adversaries can be critical to the consolidation of great-power peace.
In other words, NATO’s strategy towards Russia must be guided by a spirit of inclusiveness.
But such a strategy requires that Russia clearly demonstrate its political will to cooperate with NATO.
Russia must make a choice.
In weighing that choice, Russia must not cling to Cold War rhetoric.
The military doctrine that it unveiled in February this year lists both internal and external threats, but its primary emphasis was on portraying the US and NATO as a danger.
Whether the doctrine’s authors really believe that NATO poses a threat to Russia is not clear, as the country has not had such peaceable neighbors on its Western borders for more than 300 years.
Russia and NATO must jointly develop a new security agenda and a more cooperative methodology based on common working groups and joint papers.
The old way of negotiating – via proposals and counterproposals, with Russia and NATO perceiving each other as adversaries – should be abandoned.
The kind of approach that we need is exemplified by the work of the Euro-Atlantic Security Initiative, co-chaired by Sam Nunn of the US, Igor Ivanov of Russia, and Germany’s Ischinger.
German Chancellor Angela Merkel recently urged that all parties involved focus more on practical steps.
That means that we must think about how to broaden the application of our commitments to reciprocal transparency to all military forces in Europe – including conventional and nuclear forces and missile-defense installations.
The time is ripe to explore again limitations on conventional forces, and to adjust them to current rather than past needs.
We must also redefine common threats, while strengthening the Organization for Security and Cooperation in Europe’s mechanisms for preventing, managing, and resolving conflicts.
And the common security agenda of confidence-building and transparency must be based on the indivisibility of security in Europe and the transatlantic area as a whole, including respect for sovereignty and territorial integrity – not just for alliance members, but for all countries that belong to the broader transatlantic security community.
The interdependence of all states – large or small, weak or powerful, democratic or authoritarian – has become the organizing principle of today’s international security system.
But interdependence does not in itself ensure control of the way relations develop between states, much less developments within them.
The tasks confronting NATO require redefining the essence of transatlantic relations in order to answer some fundamental questions.
What role should the alliance play in the future?
Should it undergo further simultaneous transformation and enlargement?
What kind of relations should NATO have with its partners?
The Albright report tries to address these questions in a balanced way.
It endorses policies that capture accurately the relationship between “out of area operations” and members’ commitment to their mutual self-defense under Article 5 of the North Atlantic Treaty.
It further rightly suggests that NATO’s strategic political and military objectives could be achieved jointly with Russia through greater stability, mutual transparency, predictability, and arms reduction verified by non-proliferation and arms control agreements.
The revived importance of multilateral security institutions is creating a new climate and new prospects for a security system that can meet the needs of the twenty-first century.
The coming NATO and OSCE summits in Lisbon and Astana offer a unique opportunity to move the Euro-Atlantic alliance and Russia towards an inclusive, cooperative, and effective security community.
Reset Turkey/EU Relations
MADRID – Just five months ago, Osama bin Laden was alive, Hosni Mubarak was firmly in control in Egypt, and Zine el-Abidine Ben Ali ruled Tunisia with an iron hand.
Today, popular rebellion and political change have spread throughout the region.
We have witnessed brutal repression of protests in Syria and Yemen, Saudi troops crossing into Bahrain, and an ongoing battle for Libya.
For Europe, the “Arab Spring” should refocus attention on an issue largely ignored in recent months: the benefits of Turkey’s full membership in the European Union.
Given the tremendous opportunities present in the current circumstances, the advantages for Europe of Turkey’s accession should be obvious.
With Recep Tayyip Erdoğan now elected to another term as Turkey’s prime minister, and with Poland, a country well acquainted with the importance of Europe’s strategic position in the world, assuming the EU presidency at the end of the month, now is a time for the Union and Turkey to “reset” their negotiations over Turkish membership.
The good that Turkey can bring to Europe was visible even before the “Arab Spring.”
Europe is, by definition, culturally diverse, so diversity is the EU’s destiny.
And, if Europe is to become an active global player, rather than a museum, it needs the fresh perspective and energy of the people of Turkey.
Europe today is both larger and different compared to the Europe of 1999, when Turkey was invited to begin the accession process.
It is also experiencing a profound economic crisis, which erupted around the same time that the Lisbon Treaty – aimed at accommodating EU enlargement – was finally approved.
Had the treaty been approved in 2005 as intended, it would have been in place for six years, and the strain placed by the crisis on EU economic governance – so visible in the eurozone’s recent problems – would have been much more manageable.
But the EU always faces problems, resolves them, and moves on.
Today, we don’t have a treasury, but we are about to have something similar.
Similarly, the European Central Bank has capacities today that no one imagined in, say, 1997.
A major challenge that Europe must still face is migration, which will only become a bigger problem over time.
Between now and 2050, Europe’s workforce will decrease by 70 million.
Maintaining our economy requires migration and open EU borders – and facing down the populist movements in Europe that would shun “outsiders.”
Today’s Turkey has also changed dramatically since 1999, both politically and economically, and this has much to do with the EU accession process.
Indeed, without the attraction of the EU – its “soft” power – such changes would not have occurred.
Economically, Turkey is now in the G-20 – and playing an effective role there.
And, politically, Turkey has emerged as a regional leader, a role that it takes extremely seriously.
With just-concluded parliamentary elections, and a new constitution to be approved, Turkey is approaching an epochal moment.
I was a member of the Spanish Constitutional Commission that wrote the Spanish constitution in 1975 and 1976, following the death of Franco, so I know what it is to move from dictatorship to democracy – and how important it is that a constitution be framed by consensus.
The EU-Turkey relationship began with an association agreement signed in 1963.
Now the accession negotiations have started, and 35 “chapters” – covering everything from agriculture to energy, competition, environment, employment, social policy, and beyond – must be opened.
We have already opened 19 chapters – fewer than we would like.
But the real problem is that we have closed only one, and, worse, the pace of negotiations has slowed.
In fact, in the second half of 2010, nothing happened.
I hope that meaningful progress comes in 2011.
Turkey and the EU need each other.
The EU now accounts for 75% of foreign investment in Turkey and roughly half its exports and inward tourism.
Likewise, Europe’s energy security depends on cooperation with Turkey on transit of oil and natural gas from Central Asia and the Middle East.
We need each other politically as well.
Turkey’s neighborhood is our neighborhood; its problems are our problems.
The security benefits and strategic advantages for the EU with Turkey as a member would be many, starting with the relationship between the EU and NATO, of which Turkey has long been a member.
Likewise, the EU’s involvement in today’s problems in the Mediterranean region would be much easier in concert with Turkey.
In Bosnia-Herzegovina, EU-Turkey cooperation is fundamental to achieving a durable solution.
In 1999, Turkey did not want to become an accession candidate, because its leaders thought that the conditions would be too tough.
I was there; I talked to Prime Minister Bülent Ecevit at midnight, then to President Süleyman Demirel.
And, two days later, Ecevit was in Helsinki to declare formally Turkey’s wish to become an EU member.
And we said: Turkey will be an EU member.
I supported the signature of that document; I would do the same today.
In these times, difficult and unpredictable but full of hope, the world needs Turkey and the EU to work together.
That does not mean meeting every now and then to decide how to handle a certain problem.
It means something much deeper and well defined. It means Turkey’s admission to the EU.
That is my dream, and I will continue to fight to make it a reality.
Resilient Brazil
SÃO PAULO – Less than a decade ago, Brazil’s economy faltered at the first sign of instability in international financial markets.
Today, by contrast, the country seems immune from global market turbulence – or so Brazilian officials believe.
“We are growing free of imbalances and, in fact, gradually reducing our dependence on inflows of foreign exchange – that’s key.” Indeed, the government has emphasized that Brazil will be even more insulated as efforts to cut spending reduce dependence on external capital flows.
But Brazil’s ability to escape the effects of a recession in the United States depends on the scale of the crisis.
Brazilian officials do have some reasons to boast that Latin America’s largest economy may be stronger than ever: macroeconomic indicators are healthier, solvency ratios have improved, and a mix of exports, investment, and domestic demand has been stimulating economic activity.
During the recent years of abundant global liquidity, the real grew stronger and the central bank was able to pile up foreign reserves, creating a cushion that totaled roughly $185 billion in late January, an amount sufficient to cover the entire foreign debt for the first time in history.
With foreign direct investment still flowing in, Brazil’s lower external vulnerability leaves the country in a much better position than ever before to weather the global storm – at least for now.
Nevertheless, government officials admit, off the record, that the impact of an expected US recession will not be insignificant, because Brazil is not fully protected from external events.
Beyond the sub-prime crisis, concerns about the US financial system’s stability carry serious implications for the global economy.
Moreover, a recession or a slowdown in the US and Europe would hit Brazilian exports, narrowing Brazil’s trade surplus considerably. In fact, although America’s trade significance has diminished, accounting for only 16% of Brazilian exports last year, Brazilian trade and growth typically go hand in hand with the US and Europe; historically they have never decoupled.
At the same time, an extended US slowdown could reduce foreign demand from other markets.
The scenario could worsen if there is a breakdown in commodity prices – one of the most serious threats to Brazil from a global economic slump. Deceleration in India and China would lead to further cuts in prices for raw materials, weakening markets whose strength has underpinned Brazil’s powerful trade performance in recent years.
In any case, the central bank has already projected that Brazil’s trade surplus will disappear this year, with a small deficit expected.
Fortunately, Brazil’s stock exchange has suffered less than other emerging-market bourses from the financial turbulence in the US and elsewhere.
Recently, the exchange has become the prime source of financing for Brazilian companies, ahead of the state-owned National Development Bank, which grants loans at below-market rates.
But Brazil’s financial markets are much more sensitive than trade to international disturbances, and monetary flows could decrease in the long term.
Indeed, should the global economy deteriorate further, outward portfolio investment could accelerate, reducing the financing available to Brazilian corporations and eventually affecting their ability to invest.
So far, business confidence is still high in the industrial sector, according to internal surveys conducted by the São Paulo Association of Industries, and inward FDI hit a record-high US$34.6bn last year.
Optimistically, Brazilian officials believe that the government’s Growth Acceleration Program will serve as a vaccine against global turbulence and help reduce bottlenecks in the economy.
The positive growth outlook, following an estimated 5.1% GDP gain in 2007, is presented as a reliable defense against external contagion.
Nevertheless, the devil is in the details.
Global turmoil could derail Brazil’s expansion.
New obstacles for the Brazilian economy could lead to softening domestic growth and the internalization of inflation, bringing the crisis home.
Consequently, although the current crisis is expected to have a relatively minor effect compared to past upheavals, the possibility of contagion from turbulence in the US cannot be disregarded.
It is therefore essential that Brazil’s private and public sectors do their utmost to sustain long-term growth by making the economic environment more business-friendly.
Beyond that, one can only hope that current external economic disturbances do not lead to a global disaster.
Resilient China
BEIJING – Today’s financial crisis and looming global recession are challenging China’s export-driven economic model as never before in the 30 years since Deng Xiaoping opened the economy.
Indeed, in recent weeks, “the factory of the world” has become plagued by the closure of thousands of manufacturing plants and the threat of widespread labor unrest.
I believe that China’s innovative model for development is likely to help it weather both the gathering economic crisis and any resulting social and political unrest.
Moreover, should China safely navigate this storm, its status as a rising economic and political power will be strengthened.
The essence of the Chinese economic model is a careful sequencing of reforms, with priority given to economic reform over political reform, which means retaining the existing constitutional system and the ruling status of the Communist Party of China (CPC).
This model has involved substantial liberalization in terms of official ideology, the economy, and society, while maintaining public ownership of the major banks and largest state-owned enterprises (SOEs) as “anchors of economic stability.”
Similarly, whereas much autonomy has been extended to local governments in economic and social development, the central government has kept its grip on the direction of policy by maintaining the power to appoint local party and government officials.
In short, the Chinese model reflects a combination of pragmatism, liberalism, and market competition, but with a strong dose of state intervention.
What is astonishing about this “model” is that it has enabled China to maintain rapid growth within a relatively stable political environment for 30 years.
Although China is not the only country to enjoy such long-term growth (post-WWII Japan and South Korea are other cases), it is something of a miracle that a once-poor country with one-fifth of the world’s population could achieve such sustained development.
Of course, there are problems.
Environmental deterioration is severe, the “Gini index” (the gap between rich and poor) is widening, and official corruption has not been curbed.
Nor has domestic consumption been sufficiently expanded, leaving economic growth overly dependent on exports and foreign investment.
Moreover, the global economic crisis has proven to be a far more serious threat than China’s leaders initially recognized.
The worst difficulties stem from China’s dependence on international markets, especially the United States.
A rapid decline in exports has caused the closure of thousands of factories in the Pearl River and Yangtze River deltas, and tens of millions of unemployed migrant workers are now returning to their hinterland provinces.
These newly laid-off workers are joining more than six million new college graduates looking for work.
If the economy cannot maintain high growth rates, mounting unemployment could combine with an accumulation of unresolved political and social issues to create a risk of major social unrest.
But the “China model” has given the authorities the tools to avoid such an outcome.
First, while the US had to wait for its new president to take office, China’s government was able to intervene swiftly with a rescue package.
Judging from events in the last two months, its $560 billion stabilization plan has served its purpose, despite some public criticism that it was too hastily formulated.
Second, China’s fiscal surplus, growing foreign-exchange reserves, and high savings rate have ensured the financial resources needed to maintain adequate investment and sufficiently rapid growth.
Third, the new stimulus package is mainly aimed at infrastructure, equipment renovation, and industrial upgrading, which have suffered serious under-investment in the past, especially in China’s central and western regions.
Fourth, increased investment in the country’s social safety net includes not only universal health and social insurance, but also expanded housing subsidies.
This should help to solve the problem of insufficient demand for real estate, which could have led to the collapse of China’s economy.
Fifth, increased investment in rural areas, provided for in the government’s rescue plan, will help narrow the gap between urban rich and rural poor.
To promote the sale of household electrical appliances in rural areas, the government has begun providing a 13% price subsidy, not only benefiting rural consumption, but also boosting the growth of major industrial enterprises.
Finally, the authorities have subtly used the media to maintain consumer confidence by managing public criticism and thereby helping maintain popular trust in the government and the economy.
Most forecasts suggest that, with a huge effort, China can maintain 8% growth in 2009.
But the history of economic crises shows that non-economic factors play an equally important role in any solution.
Currently, ordinary Chinese still believe that their country’s economic growth remains high, and China’s leaders continue to enjoy high approval ratings because of widespread belief in their abilities and dedication.
Such psychological factors will need continual nurturing.
The coincidence of economic crisis with the 30th anniversary of China’s reforms has provided a timely reminder of the pain of the Cultural Revolution, memories of which make most Chinese opposed to returning in any way to the pre-reform years.
Most Chinese now firmly believe that a more open and free China, one increasingly integrated into the world economy, is the only way forward.
Resilient India
NEW DELHI – With the world’s most developed economies reeling under the incubus of what is already being called the Great Recession, India at the beginning of the year took stock and issued a revised estimate for GDP growth in the 2008-2009 fiscal year.
Its projection came out at a healthy 7.1%.
It is striking that even amid all the doom and gloom assailing world markets, there is no fear of a recession in India.
Even the pessimists are speaking only of lower positive growth.
This is quite a turnabout for an economy that for years had crept along at what was derisively called the “Hindu rate of growth” – around 3% – while much of the rest of Asia shot ahead. For more than four decades after Independence in 1947, India suffered from the economics of nationalism, which equated political independence with economic self-sufficiency and so relegated the country to bureaucratic protectionism and stagnation.
But, since 1991, India has liberalized its economy and profited from globalization.
Its tech-savvy information-technology pioneers, software engineers, and call-center operators have made the country an economic success story.
India has multiplied its per capita income levels many times over since 1950, and has done so far faster in recent years than Britain or the United States did during and after the industrial revolution.
In the last 15 years, India has pulled more people out of poverty than in the previous 45 – 10 million people a year on average in the last decade.
The country has visibly prospered, and, despite population growth, per capita income has grown faster than ever before.
The current financial crisis is unlikely to change the basic success story.
India’s financial system suffers from few of the creative and risky derivative instruments that caused such problems in the West.
A tradition of conservative banking regulation and a tough-minded Governor of the Reserve Bank (India’s central bank) ensured that Indian banks did not acquire the toxic debts flowing from sub-prime loans, credit-default swaps, and over-inflated housing prices that assailed Western banks.
The negative effect of the US financial setbacks on Indian stock markets, therefore, made little sense, since they bore no relation to the real value of Indian companies.
Instead, the decline in Indian stocks reflected foreign investors’ liquidity problems: they withdrew from holdings in India because they needed their money back home, not because it wasn’t growing for them.
Of course, economies that depend on foreign investment are bound to be hurt nowadays, because those investors have less capital to invest.
But there are two reasons to be confident that India will weather the storm.
First, India has considerable resources of its own to put towards growth, and has proven itself skilled at the art of channelling domestic savings into productive investments.
Second, once things have begun to stabilize in the West, investors looking for a place to put their money will look anew at India, owing to the opportunities for growth and the sheer size of the market.
That said, India has relied much less on foreign direct investment than China, and has even exported FDI to OECD countries.
Despite being seen as a poster child for the benefits of globalization, India is not unduly dependent on global flows of trade and capital.
India relies on external trade for less than 20% of its GDP; its large and robust internal market accounts for the rest.
India’s private sector is efficient and entrepreneurial, and its capital and management skills have proven able to control and manage assets in the sophisticated financial markets of the developed West.
India clearly has the basic systems it needs to operate a twenty-first-century economy in an open and globalizing world.
Obviously, the terrorist attacks of late November complicate this story.
The terrorists attacked India’s financial nerve-center and commercial capital, a city emblematic of the country’s energetic thrust into the twenty-first century.
They struck at symbols of the prosperity that have made the Indian model so attractive to the globalizing world, a magnet for investors and tourists alike.
Indeed, by striking hotels favored by foreign businessmen and visitors, they undermined the confidence of those whom India needs to sustain its success story.
Terror may add to the time India will need to recover from the economic crisis.
But India is already bouncing back.
The hotels assaulted and burned in November reopened their doors a month later.
Investors are returning, and FDI inflows this fiscal year are set to exceed the $25 billion received in 2007-08.
At the end of February, Indian Prime Minister Manmohan Singh assured Parliament that “India would emerge the least affected among the countries of the world from the current economic crisis.”
So, for those looking for signs of recovery from the global economic downturn, India remains the place to watch.
According to the World Bank’s annual assessment of Global Economic Prospects, India’s economy could even triple in size in the next 15 to 20 years.
A few more slumdogs may become millionaires by then.
Hugging a Burning Tree
PRAGUE – We are all brought up to recycle paper to save trees.
We get countless e-mail admonitions: “Please consider the environment before printing.”
But now, in the name of saving the planet from climate change, environmentalists are proposing an immense global campaign to cut down and burn trees and scrubs in order to reduce fossil-fuel use.
The initiative could be dismissed as a weird irony, if it weren’t for its phenomenal costs, which include likely destruction of biodiversity, increased water use, and reduced global food production.
And it may end up increasing global CO2 emissions to boot.
When most people think of renewable energy sources, they imagine solar panels and wind turbines.
Globally, however, solar and wind are only a small part of total renewables – less than 7% in 2010.
Hydropower is a much bigger player, at 17%.
But the most important by far is biomass – humanity’s oldest fuel makes up 76% of today’s renewable energy and 10% of all energy.
About 60% of this is wood, twigs, and dung, used by almost three billion people who lack access to modern fuels – and resulting in terrible air pollution and millions of deaths.
But the West uses the other 40% of biomass to produce heat, and it will increasingly use it to generate electricity.
This makes sense, because solar and wind power are inherently unreliable – we still need electricity on cloudy days or when the wind dies down.
Biomass (along with hydropower) can be used to smooth the fluctuations inherent to wind and solar.
Biomass is experiencing a revival, because it is considered CO2-neutral.
The conventional wisdom is that burning wood only releases the carbon sucked up while the tree was growing, and hence the net climate effect is zero.
But a growing number of voices challenge this view.
The European Environment Agency’s Scientific Committee has called it a “mistaken assumption” based on “a serious accounting error,” because if a forest is cut down to burn wood, it will take a long time for new growth to absorb the CO2 emissions.
The climate effect could be a net increase in emissions if forests are cleared to create energy-crop plantations.
According to the Committee’s members, “the potential consequences of this bioenergy accounting error are immense.”
Environmentalists’ plan to obtain 20-50% of all energy from biomass could mean a tripling of current biomass consumption, placing its production in direct competition with that of food for a growing global population, while depleting water supplies, cutting down forests, and reducing biodiversity.
An academic paper published last year makes the point clear in its title: “Large-scale bioenergy from additional harvest of forest biomass is neither sustainable nor greenhouse gas neutral.”
This is one of the major reasons that forests in Europe and the United States have recovered – and it is why many forests in developing countries are threatened.
The developed world’s re-enchantment with biomass could take it down a similar road.
But the biggest problem is that biomass production simply pushes other agricultural production elsewhere.
Studies are just beginning to estimate the impact.
In Denmark, a group of researchers estimated by how much various energy crops would reduce CO2 emissions.
For example, burning a hectare of harvested willow on a field previously used for barley (the typical marginal crop in Denmark) prevents 30 tons of CO2 annually when replacing coal.
This is the amount that proud green-energy producers will showcase when switching to biomass.
But burning the willow releases 22 tons of CO2.
Of course, all of that CO2 was soaked up from the atmosphere the year before; but, had we just left the barley where it was, it, too, would have soaked up quite a bit, lowering the reduction relative to coal to 20 tons.
And, in a market system, almost all of the barley production simply moves to a previously unfarmed area.
Clearing the existing biomass there emits an extra 16 tons of CO2 per year on average (and this is likely an underestimate).
So, instead of saving 30 tons, we save four tons at most.
And this is the best-case scenario. Of the 12 production modes analyzed, two would reduce annual CO2 emissions by only two tons, while the other ten actually increase total emissions – up to 14 tons per year.
At the same time, we are paying a king’s ransom for biomass.
Germany alone spends more than $3 billion annually, or $167 per ton of avoided CO2 emissions, which is more than 37 times the cost of carbon reductions in the European Union Emissions Trading System.
And the estimate of avoided emissions ignores indirect land-use changes, making the likely real cost at least eight times higher.
Ten years ago, the EU and the US embraced biofuels as a way to combat global warming.
Today, the US turns 40% of its maize output into ethanol to be burned in cars.
This has driven up food prices and caused tens of millions of people to starve, while costing more than $17 billion each year in subsidies and causing agricultural deforestation elsewhere in the world, with more total CO2 emissions than the entire savings from the ethanol.
Biofuels have become an almost unstoppable and unmitigated disaster.
We need to confront the next – and potentially much bigger – biomass boondoggle.
Yes, we should turn waste into energy and be smart about agricultural leftovers.
But we are about to diminish biodiversity, over-extract water, make food more expensive, and waste hundreds of billions of dollars – all while cutting down trees to burn them and potentially increasing CO2 emissions.
Restart the Talks on Cyprus
LONDON &#45;&#45; Ever since Greek Cypriots rejected the United Nations plan to reunite Cyprus in 2004, antagonism has grown between the Greek majority and the Turks in the north of the island.
Turkish Cypriots have withdrawn into Turkey’s embrace and have attempted to gain greater international recognition.
Greek Cypriots are using their European Union membership as a weapon to frustrate Turkey’s EU ambitions and to block attempts to increase trade between the EU and the island’s north.
The EU cannot let Cyprus stew in its own juice, not least because as a member state the island is proving an uncomfortable bedfellow.
The whole of Cyprus joined the EU in May 2004, but the acquis communautaire – the body of EU law – applies only to areas under direct government control, so it is suspended in those parts administered by Turkish Cypriots.
The Turkish government, unwisely, became embroiled with the EU over its plan to extend the customs union to include all new member states, including Cyprus.
Meanwhile, the EU has failed to deliver fully on aid and trade pledges to Turkish Cypriots.
Perhaps most worrying of all, if the stalemate over Cyprus continues, it could end Turkey’s chances of joining the EU, as Greek Cypriot intransigence has given succor to other member states that want to keep Turkey out.
It might also prevent rapprochement between Greece and Turkey, despite the hopes raised by Greek Prime Minister Kostas Karamanlis’s recent visit to Turkey – the first in almost a half-century.
There are plenty of obstacles in the way of a negotiated solution to the Cyprus problem.
Just over a year ago, the Finnish EU presidency failed to break the gridlock over the Cyprus trade issue, illustrating again the limited value of trying to agree partial solutions and “confidence-building” measures.
The UN’s latest initiative to get low-key, exploratory talks moving is going nowhere.
Cypriot presidential elections this month may give a second term to Tasos Papadopoulos, the Greek Cypriot leader who led the “No” campaign in the 2004 reunification referendum.
On the other hand, Turkey’s recent elections returned the same pro-EU government that made a serious attempt to settle the Cyprus problem in 2004.
So it’s not all gloom and doom.
Some argue that it would be better to leave Cyprus alone and revisit the problem only in the closing stages of Turkey’s EU accession.
These voices are likely to become louder if Papadopoulos is re-elected.
In my view, such a delay would be a mistake.
Turkey would then have to conduct dual negotiations – over Cyprus and over its own EU accession.
This would risk overlaps and trade-offs between the two, or a cumulative burden of compromises that might become too great for Turks to accept, potentially wrecking both negotiations at one stroke.
For Greek Cypriots, the failure of Turkey’s accession talks in this way would also end any chance of resolving the Cyprus problem.
Both Greek and Turkish Cypriots must take proper responsibility for any solutions that are negotiated and stand behind their decisions during any subsequent referendum campaign.
All too often, Cypriots present themselves as helpless pawns in a wider game played by Greece, Turkey, or the “great powers.”
There may have been some truth to this in the past, although never to the extent that many Cypriots believe.
This time around, only genuine negotiations by both parties − and a mutually accepted settlement − are likely to stand the test of time.
Given the island’s complexity, and Cypriot sensitivity, it would be foolish for an outsider to try to sketch any future settlement.
It would, however, seem safe to summarize certain elements at the outset.
For example, it would be impractical to drop the basic framework of a bi-communal, bi-zonal federation, which was agreed by both sides as long ago as 1977.
Moreover, there seems little doubt that the final, rejected version of the UN’s 2003-04 reunification plan will have to be changed, although earlier versions might contain ideas worth re-visiting.
It may also be constructive to take advantage of transitional provisions linked to Turkey’s EU accession.
One earlier UN suggestion was that Turkey complete the withdrawal of its troops from Cyprus when it joined the EU.
At the same time, there are concerns raised by one side that could be settled without any difficulty for the other side.
Greek Cypriots were worried, for instance, about the tax bill for the last proposed settlement; an agreement by the EU and other international players to subsidize the plan would cut the potential cost without affecting the Turkish community at all.
The UN, the EU, Greece, Turkey, and UN Security Council members must be united in their support for any renewed effort to reach a settlement.
Ever since UN peacekeepers were deployed in 1964, the UN has been the only party acceptable to all sides as a “midwife of compromise.”
While the EU must be present, it cannot be a neutral mediator, since Greece and Cyprus are both members.
The Security Council must also give support to the UN’s negotiators and guarantee the provisions of any settlement.
This will help to avoid the kind of fears that surfaced in 2004 about implementation of the previous UN plan.
Cyprus suffers from being a second-order problem, one that occasionally flares up, only to be damped down again with short-term palliatives.
Many international diplomats are weary of the constant squabbles, endless setbacks, and stubbornness shown in previous negotiations.
But neglect of Cyprus could have serious consequences, especially if its continued division keeps Turkey outside the EU.
The future then would be fraught with tension in a part of the world where the EU needs to encourage peace and stability.
Europe’s Green Recovery
BRUSSELS – The need for clean energy has returned to the top of the global economic agenda.
China’s new leadership now seems to recognize that the thick, hazardous smog that has come to define Beijing and other cities is more than a pollution problem; it is a result of an excessive emphasis on short-term economic planning.
Likewise, in his second inaugural address, US President Barack Obama discussed climate change more than any other issue, saying, “We cannot cede to other nations the technology that will power new jobs and new industries.” At the World Economic Forum in Davos, International Monetary Fund Managing Director Christine Lagarde and World Bank President Jim Yong Kim surprised business and government leaders with their warnings that genuine economic recovery would be impossible without serious action on climate change.
And, at the most recent EU summit, leaders agreed to commit at least 20% of their entire common budget to climate-related spending.
These developments suggest that global leaders are finally beginning to understand that, beyond the global economic crisis, the world is experiencing a social and employment crisis, as well as a climate and resource crisis.
And none can be resolved without addressing the others.
Moreover, Europe’s main commercial competitors have begun to recognize that pursuing short-term development policies, while ignoring long-term threats to the global economy, is both irresponsible and a strategic mistake for those who aspire to global leadership in the twenty-first century.
Although Europeans have known this for decades, in the wake of the recent economic crisis, immediate goals took priority over –&#160;and often at the expense of – long-term objectives.
With the European Union’s economy growing more slowly than those of its major competitors, its leaders must take a more far-sighted approach to restoring – and preserving – its members’ growth potential.
They must begin by identifying not only what is undermining Europe’s competitiveness today, but also those factors that are putting its long-term prospects at risk.
Analysts often point to Europe’s costly social-welfare systems, high labor costs, and increasing tax rates as a drag on competitiveness.
But other, less widely discussed factors must be considered –&#160;particularly the costs of delayed action on climate change.
For example, Unilever CEO Paul Polman reported that extreme weather cost his company $250-300 million in 2012.
Once considered an issue for the future, action on climate change has become increasingly urgent, as the outlays required to mitigate its negative effects have grown.
Furthermore, with record-high unemployment rates, Europe needs jobs in dynamic, competitive industries that cannot easily be outsourced.
The European Commission has identified the green economy as one of the areas with the highest job-creation potential.
At the same time, Europe’s growing dependence on imported fossil fuels is a further hindrance to competitiveness.&#160;In 2011, the EU’s combined trade deficit was €150 billion ($200 billion).
But the combined oil-import bill was more than double that – €315 billion –and the official figure for 2012 is expected to exceed €335 billion.
If Europe does not address these challenges, it risks being left behind.
But Europe cannot build an industrial strategy on cheap energy.
Unlike the United States and China, which the International Energy Agency estimates possess the world’s largest shale-gas deposits, Europe cannot rely on its limited energy reserves to lower prices – especially given that its greater population density makes extraction more difficult, and thus prohibitively expensive.
As a result, Europe will remain a net energy importer.
And, given rising global demand for oil, particularly in developing countries, energy-import prices will remain high.
Meanwhile, China – the world’s leading investor in renewable-energy projects – is undergoing a transformation from the world’s low-cost factory to a global leader in green innovation and a major exporter of clean technologies.
In the contest for this global market, Europe cannot compete on price alone.
But Europe does have options.
EU leaders can build an economy that is less dependent on imported energy through increased efficiency and greater reliance on domestically produced clean energy.
At the same time, they should tackle other major threats to Europe’s long-term competitiveness, including low productivity, an incomplete internal market, and insufficient innovation.
But Europe must not heed short-sighted calls to relax its environmental standards, which some claim harm its competitiveness vis-à-vis countries with looser rules.
Given their global reputation as guarantors of quality, Europe’s high environmental standards are crucial to its future competitiveness, and should therefore be actively promoted, particularly in trade agreements.
While trade deals have often come at the expense of stronger domestic climate action, the EU’s new trade agreement with Singapore aims to boost trade and investment in clean-energy technologies and promote green public tendering.
This should serve as an environmental benchmark for future agreements – including with the US, despite some American constituencies’ expectations that EU standards could be relaxed in a bilateral trade deal.
By maintaining high environmental standards, and promoting such standards among its trade partners, Europe can bolster the global market for clean-energy technologies.
As a major player in the green-technology market – set to triple in value by 2020 – Europe could regain competitiveness and secure its role in the future global economy.
To be successful, Europe must play to its strengths.
The EU’s most competitive economies are the most innovative and energy-efficient, with the most highly educated workforces.
Indeed, for Europe, cheap is not the answer; quality and innovation are.
Europe’s major competitors are turning climate change into an opportunity to encourage growth and create high-quality jobs in rapidly innovating economic sectors.
If EU leaders hesitate to take action on climate change, they will be sabotaging their own economy’s prospects for sustainable recovery.
Restrain the Northern Alliance
Anti-Poverty 2.0
ROME – Global leaders have touted the apparent success of achieving in 2010 – well ahead of the 2015 target – the Millennium Development Goal of halving the share of people who were living below the poverty line in 1990.
But, amid enduring poverty, rising inequality, and lackluster growth in many developing countries, the success of past anti-poverty policies and programs appears dubious.
In fact, outside of East Asia, progress has been modest, with the situation worsening in some countries and regions – despite several economic-growth spurts, sustained expansion in some large developing countries, and public commitments by the international community to the 2000 Millennium Declaration, which led to the MDGs.
This mixed record calls into question the efficacy of conventional poverty-reduction policies, often identified with the Washington Consensus, which transformed the discourse on poverty in the 1980’s.
Washington Consensus reforms – including macroeconomic stabilization (defined as low-single-digit inflation) and market liberalization – were supposed to reduce poverty by accelerating economic growth.
But little attention was paid to poverty’s structural causes, such as inequality of assets and opportunities, or the unequal distributional consequences of growth.
And, because unskilled workers tend to lose their jobs first in economic downturns, while employment generally lags behind output recovery, reduced public investment in health, education, and other social programs ultimately increased the vulnerability of the poor.
Not surprisingly, therefore, the fallout from the global economic crisis that erupted in 2008 – the worst since the Great Depression of the 1930’s – has prompted experts, policymakers, and the international financial institutions to rethink poverty.
Many are rejecting once-dominant perspectives on poverty and deprivation, warning that they lead to ineffective policy prescriptions.
For example, the United Nations’ Report on the World Social Situation: Rethinking Poverty,and its companion book Poor Poverty: The Impoverishment of Analysis, Measurement, and Policies, havesought to advance the debate on poverty by examining the conventional policy framework and assessing popular poverty-reduction programs.
They affirm the need for a shift away from the fundamentalist free-market thinking that has dominated poverty-reduction strategies in recent decades toward context-sensitive measures to promote sustainable development and equality.
Indeed, these reports challenge the prevailing approach, which has left more than one billion people living below the poverty line (defined as the purchasing-power-parity equivalent of $1.25 per day in 2005), and has failed to prevent economic growth from stalling in most countries.
Meanwhile, inequality has increased worldwide – even in countries that have experienced rapid economic expansion, notably China and India.
While growth is usually needed for poverty reduction, it does not necessarily translate into job creation, as many countries’ recent record of jobless or job-poor growth demonstrates.
The UN encourages governments to assume a more proactive development role, which would entail an integrated policymaking approach aimed at promoting structural change while reducing inequality, vulnerability, and economic insecurity.
Growth must become more stable, with a consistently counter-cyclical macroeconomic policy stance, prudent capital-account management, and greater resilience to external shocks.
Generally, economies that have succeeded in terms of both economic growth and poverty reduction over the last three decades have done so by adopting pragmatic, heterodox policies.
Often invoking investor- and market-friendly language, they have generally encouraged private investment, especially in desired economic activities, such as those that create more job opportunities or offer increasing returns to scale.
But aid conditionality and treaty commitments have significantly constrained policymaking in most developing countries, especially the poorest.
In particular, slow growth and revenue losses, owing to economic liberalization programs, have reduced the scope for fiscal policy, with serious consequences for poverty and destitution.
This trend must be reversed.
Moreover, while the programs that most donors like – such as micro-credit, formalization of land titles, and governance reforms – have sometimes helped to ameliorate the conditions facing the poor, they have not reduced poverty significantly.
Leaders must consider, design, and implement pragmatic and innovative alternatives, rather than continue to rely on ineffective policies and programs.
In recent decades, social policies have increasingly involved some form of means testing of eligible beneficiaries, ostensibly to enhance cost effectiveness.
But, in general, universal social policies have been much more effective and politically sustainable, while policies targeting the poor, or the “poorest of the poor,” have often been costly and neglectful of many of those in need.
The right to social security enshrined in the Universal Declaration of Human Rights requires universal social protection to ensure the well-being of all, including people living in poverty and those at risk of poverty.
Social policy, provisioning, and protection must therefore be integral to development and poverty-reduction strategies.
In most countries, a basic social-protection floor – which can help countries to mitigate the negative effects of shocks and prevent people from falling deeper into poverty – is affordable.
However, low-income and least-developed countries need assistance in raising the floor to more acceptable levels.
In order to address global poverty effectively, world leaders must pursue poverty-reduction policies that support inclusive, sustainable economic growth and development – in turn increasing the fiscal resources that are available for social spending.
Only when all citizens benefit from economic development can leaders devoted to poverty reduction claim genuine success.
Re-Thinking Homegrown Terrorism
BERLIN – Homegrown terrorism stands high on the security agenda almost everywhere in Europe.
Its links to international extremist Islamic groups require that governments review and re-think how they respond to it.
International security cooperation, border controls, and transport sector monitoring are all important, but they don’t go far enough.
Governments must also identify radical tendencies within Europe’s Muslim communities and devise strategies to counteract them.
The narrow aim should be to nip terrorism in the bud, and the broader aim should be to open a dialogue with the Muslim community.
This agenda emphasizes intercultural communication as the best way to break down prejudices and negative clichés on both sides.
From the point of view of security policy, intercultural communication is intended to immunize those sections of the Muslim community that are deemed to be potentially receptive to extremist propaganda, with the clear aim being to prevent their radicalization and recruitment to jihad .
For immunization of this sort to be successful, it is important to first clarify what can turn someone into a jihadi .
There appears to be no single answer.
But one common pattern that does emerge is that the jihadi message, because it promises meaning and identity, seems to appeal particularly to people who are unsure about who they are and where they are heading.
Last year, a study of German Muslims analyzed social integration (including obstacles), religion, attitudes to democracy, the rule of law, and politically-inspired violence.
The vast majority of respondents were from a migrant background, and a quarter were Muslims whose families had been in Germany for a generation or more.
In terms of ethnic origin and religious practice, they were a representative sample of Germany’s Muslim community.
The study provided valuable insights into homegrown terrorism, for it revealed a consistently close link between radicalization and “vicarious” experiences of marginalization and discrimination.
A critical factor was the powerful emotions generated by United States-led military interventions in Muslim countries, and by the situation of the Palestinians.
The blanket suspicion that was widely seen as falling on all Muslims after every terrorist attack was also strongly resented.
But the study revealed no automatic correlation between Islamist sympathies and condoning the use of violence.
And, while individuals who had Islamist sympathies and condoned violence were more likely than others to become involved in homegrown terrorism, a mere 1.1% of Germany’s Muslims fell into this category.
The authors also noted that the mechanisms that turn Muslims into potential terrorists are the same as those that make German teenagers susceptible to xenophobic propaganda and right-wing extremism.
The study’s conclusions applied only to Germany, but its main findings were largely corroborated by a Gallup global survey.
According to Gallup, only 7% of Muslims are politically radical and condone the use of violence, and their motives are not so much religious as inspired by the demeaning political and social treatment that Muslims are perceived to suffer.
This is in marked contrast to the conventional view in the West that the prime motive for Islamist terrorism is religious.
Many Muslims see that erroneous assumption as evidence of the West’s contempt for Islam, reinforcing their view that Muslims as a whole are victims of discrimination and creating a vicious cycle that may generate further radicalization on both sides.
Indeed, certain aspects of the host-country environment may contribute to radicalization.
While external factors also play a major role, Muslim attitudes toward their host country are strongly influenced by the perception that Muslims are subjected to humiliation and oppression.
This is liable to be reinforced by any negative experiences that Muslims may suffer themselves.
Finally, there is the quantitative question.
The number of potential terrorist recruits can only be estimated, but it corresponds more or less to the percentage of the population in any Western society that is likely to be involved in violent crime.
In no sense do these people amount to a mass movement.
But, as protagonists in the complex web of interaction between the Muslim and the Western worlds, they view militant terrorism as their preferred option.
There are, of course, other forms of interaction, and this brings us back to the question of how to respond to homegrown terrorism.
A distinction is often made between “hard” tools for combating terrorism – i.e. executive, including military measures – and “soft” tools such as programs promoting the integration of Muslim immigrants, efforts to stabilize and develop problem countries, and strategies for intercultural dialogue.
The slogan “war for Muslim hearts and minds” is a grotesque yet revealing attempt to link both sets of tools.
Even when such interaction is to communicate a political message, an image of war is used.
If we adopt the parlance employed by al-Qaeda while at the same time proclaiming our intention to communicate with the whole Muslim world, we run the risk of reinforcing al-Qaeda’s message. The “competition of ideas” appears to be confined to al-Qaeda’s jihadi agenda.
Such a response is hardly likely to alter the mindset of potential recruits.
Today’s tendency to view Muslim grievances in one-dimensional terms reduces political discourse to a very simplistic level.
Our interactions with Muslims may be unconsciously influenced by this defensive reflex, and that may encourage equally defensive attitudes on their part.
भूख पर पुनर्विचार
रोम – संसार के सामने पोषण की विकट समस्या है. हालांकि सहस्‍त्राब्दि विकास लक्ष्य की दिशा में बड़े कदम उठाए गए हैं जिसके तहत विकासशील देशों में अल्पपोषित लोगों के अनुपात को आधा करना है. लेकिन पोषण की समस्या अपने सर्वव्यापी और जटिल रूप में बनी हुई है. आखिरकार यह मसला महज अधिक भोजन उपलब्‍ध कराने से कहीं आगे जाता है. अल्पपोषण को कम करने के प्रयासों को यह सुनिश्‍चित करना चाहिए कि लोगों की सही प्रकार के पर्याप्‍त भोजन तक पहुंच हो – ऐसा भोजन जो उन्हें पोषण दे जो स्वस्‍थ, उत्पादकीय जीने के लिए जरूरी है.
सन् 1945 से खाद्य उत्पादन तीन गुना बढ़ा है. प्रति व्यक्‍ति खाद्य उपलब्‍धता भी औसतन 40% बढ़ी है. केवल पिछले एक दशक में एशिया-प्रशांत क्षेत्र में सब्जियों का उत्पादन एक-चौथाई बढ़ा है. इस क्षेत्र में दुनिया की तीन-चौथाई सब्जियां उगाई जाती हैं.
परंतु इन सब लाभों के बावजूद आज भी कम से कम 80.5 करोड़ लोग रोजाना भूखे पेट रह जाते हैं. इनमें से करीब 79.1 करोड़ लोग विकासशील देशों में रहते हैं. इससे कहीं अधिक लोग मौसमी रूप से या परिस्थितिवश भूखे रह जाते हैं. और दो अरब से ज्यादा लोग “छिपी हुई भूख” से पीड़ित हैं – यानी एक या अधिक सूक्ष्म पोषक तत्त्वों की कमी से.
भूख और अल्पपोषण वयस्कों के स्वास्‍थ्य और उत्पादकता को नष्‍ट करता है तथा उनके सीखने व काम करने की क्षमता को कम करता है. इसके अलावा इससे बच्चों का शारीरिक तथा मानसिक विकास अवरुद्ध हो जाता है तथा वे बीमारी और अकाल मृत्यु के शिकार होने लगते हैं. पांच साल से कम उम्र के चार में से एक बच्चे की वृद्धि कुपोषण के कारण रुक जाती है.
जीवन के प्रथम 1000 दिनों (गर्भधारण से लेकर बच्चे की दूसरी वर्षगांठ तक) पर्याप्‍त पोषण अत्यंत जरूरी है. लेकिन उसके बाद भी भूख और अल्पपोषण बच्चों के वयस्क उम्र तक बढ़ने की संभावनाओं को कम करता है. अगर वे वयस्क हो भी जाएं तो भी वे अपनी पूरी क्षमता को प्राप्‍त नहीं कर पाते हैं.
विडंबना है कि दुनिया के अनेक भागों में व्यापक भूख मोटापे के लगातार बढ़ते स्तरों के साथ-साथ मौजूद है.
1.5 अरब से अधिक लोग सामान्य से ज्यादा वजन के हैं और उनमें से एक-तिहाई घोषित तौर पर मोटे हैं. ये लोग खासतौर पर असंचारी रोगों, यथा हृदय रोग, हृदयाघात और मधुमेह के ज्यादा शिकार होते हैं.
लोकप्रिय धारणा के विपरीत, मोटापा का जुड़ाव भोजन की बहुतायत से कम और किफायती, विविध तथा संतुलित आहारों तक अपर्याप्‍त पहुंच से ज्यादा है. इस प्रकार अंतर्राष्‍ट्रीय समुदाय के सामने जो चुनौती है वह है सही किस्मों के भोजन के पर्याप्‍त सेवन को सुनि‌‌श्‍चित करना.
इसका अर्थ है ऐसी भोजन प्रणालियां विकसित करना जो लोगों की जरूरतों के सापेक्ष ज्यादा अनुकूल हो, विशेषकर उन लोगों की जरूरतों के जो समाज से कटे हुए हैं और आर्थिक रूप से हाशिये पर हों. माताएं, छोटे बच्चे, वृद्ध तथा विकलांग जनों के अल्पपोषण के मकड़जाल में फंसने की ज्यादा आशंका रहती है. खाद्य असुरक्षा और अल्पपोषण के खातमे के प्रयासों में इन समूहों पर विशेष ध्यान दिया जाना चाहिए.
यह सुनि‌श्‍चित करने के लिए कि आज के प्रयासों से भावी पीढ़ियां भी लाभांवित हों वैश्‍विक खाद्य प्रणालियों को सुधारने वाली नीतियों ��ें पर्यावरणीय निर्वहनीयता पर जोर दिया जाना चाहिए. विश्‍व नेतृत्वों को खासतौर पर प्रचलित खाद्य उत्पादन प्रक्रियाओं का पुर्नमूल्यांकन करना चाहिए, जो प्राकृतिक संसाधनों पर अनावश्यक दबाव डालती हैं, ताजे पानी के स्त्रोतों को खत्म करती हैं, जंगलों का अतिक्रमण करती हैं, मिट्टी की उर्वरता नष्‍ट करती हैं, प्राकृतिक मत्‍स्य भंडारों को नष्‍ट करती हैं और जैव-विविधता को कम करती हैं. इससे भी बुरी बात यह है कि भोजन के भंडारण और उपभोक्‍ताओं तक उसे पहुंचाने के पर्याप्‍त ढांचागत संरचना के अभाव में भोजन का भारी पैमाने पर नुकसान हो जाता है.
अवश्य ही पर्याप्‍त मात्रा में पोषण से भरपूर भोजन उत्पादन और पर्यावरण संरक्षण के बीच सही संतुलन कायम करना अनिवार्य है. पशुधन उत्पादन पर विचार करें जो अनेक प्रकार के भोजनों का स्त्रोत है यथा दूध, अंडे और मांस. इससे विकासशील देशों में पोषण से भरपूर आहार मिलने लगा है और लाखों लोगों को आजीविका मिली है. लेकिन अनिर्वहनीय उत्पादन प्रणालियों तथा दुनिया के कई भागों में अनाप-शनाप व अत्यधिक उपभोग से जलवायु परिवर्तन, रोगों के प्रसार और पोषण असंतुलन जैसे गंभीर नतीजे भी मिले हैं.
लेकिन सशक्‍त राजनैतिक प्रतिबद्धता के साथ वैश्‍विक खाद्य-उत्पादन प्रणालियों को बदला जा सकता है. इस दिशा में एक स्‍पष्‍ट कदम यह हो सकता है कि यह सुनिश्‍चित किया जाए कि सभी खाद्य-संबंधी कार्यक्रम, नीतियां और पहल पोषण और निर्वहनीयता तय करने वाली हों. इसी तरह भोजन-संबंधी शोध व विकास पोषण से भरपूर भोजन के उत्पादन और कृषि प्रणालियों के विविधीकरण को सुगम बनाने पर केंद्रित हों. पानी, जमीन, खाद तथा श्रम के और अधिक कुशल उपयोग के तरीके खोजना भी अनिवार्य है जिससे पर्यावरण पर कम से कम विपरीत प्रभाव पड़े और पारिस्‍थितिकीय निर्वहनीयता सुनिश्‍चित हो सके.
ऐसे उपाय खोजना भी उतना ही महत्वपूर्ण जो स्‍थानीय समुदायों को अपने आहार सुधारने में सक्षम बनाते हों. इसके लिए व्यापक जन-स्वास्‍थ्य एवं शिक्षा अभियान चलाना जरूरी है और सुनम्यता बढ़ाने के लिए सामाजिक संरक्षण तथा रोजगार व आमदनी सृजन के कदम भी जरूरी हैं.
अंत में, उत्पादकों व वितरकों को समर्थन और प्रोत्साहन दिए जाने चाहिए ताकि वे अपनी विद्यमान प्रणालियों में बदलाव ला सकें. आखिरकार, निर्वहनीयता की ओर कोई भी बदलाव किसानों की आजीविका की कीमत पर नहीं आ सकता है.
बेहतर पोषण की आर्थिक मंशा भी है. अपने सभी स्वरूपों में कुपोषण कम उत्पादन व अतिरिक्‍त खर्चों के कारण हर साल वैश्‍विक आर्थिक कल्याण में लगभग 5% की कमी लाता है. अनुमान है कि सूक्ष्मपोषण कमियों को दूर करने से मिले आर्थिक लाभों से लागत/लाभ अनुपात लगभग 1:13 तक बढ़ जाता है. यानी लागत से 13 गुना ज्यादा लाभ मिलता है.
रोम में आयोजित होने वाली पोषण पर द्वितीय अंतर्राष्‍ट्रीय कॉन्फेरेंस एक ऐतिहासिक अवसर प्रदान करेगी जिससे बेहतर नीतियों और अंतर्राष्‍ट्रीय एकजुटता के माध्यम से सभी के लिए पोषण बढ़ाने हेतु राजनीतिक प्रतिबद्धता को बल मिलेगा. भोजन तक पहुंच, पोषण और निर्वहनीयता में जरूरी निवेश करने में विफलता का नैतिक – और आर्थिक रूप से – कोई औचित्य नहीं है.
Rethinking Inflation Targeting
ZURICH – Over the last two decades, inflation targeting has become the predominant monetary-policy framework.
It has been essentially (though not explicitly) adopted by major central banks, including the US Federal Reserve, the European Central Bank, and the Swiss National Bank.
But the 2008 global economic crisis, from which the world has yet to recover fully, has cast serious doubt on this approach.
The Bank for International Settlements has long argued that pure inflation targeting is not compatible with financial stability.
It does not take into account the financial cycle, and thus produces excessively expansionary and asymmetric monetary policy.
Moreover, a major argument in favor of inflation targeting – that it has contributed to a decline in inflation since the early 1990s – is questionable, at best.
Disinflation actually began in the early 1980s – well before inflation targeting was invented – thanks to the concerted efforts of then-US Federal Reserve Board Chair Paul Volcker.
And, from the 1990s on, globalization – in particular, China’s integration into the world economy – has probably been the main reason for the decline in global inflationary pressure.
A more recent indication that inflation targeting has not caused the disinflation seen since the 1990s is the unsuccessful effort by a growing number of central banks to reflate their economies. If central banks are unable to increase inflation, it stands to reason that they may not have been instrumental in reducing it.
The fact is that the original objective of central banks was not consumer-price stability; consumer-price indices did not even exist when most of them were founded.
Central banks were established to provide war financing to governments.
Later, their mission was expanded to include the role of lender of last resort.
It was not until the excessive inflation of the 1970s that central banks discovered – or, in a sense, rediscovered – the desirability of keeping the value of money stable.
But how to measure the value of money?
One approach centers on prices, with the consumer price index appearing to be the most obvious indicator.
The problem is that the relationship between the money supply (which ultimately determines the value of money) and prices is an unstable one.
For starters, the lag time between changes in the money supply and price movements is long, variable, and unpredictable.
Given this, targeting consumer prices in the next 2-3 years will not guarantee that the value of money remains stable in the long term.
Moreover, different methods of collecting consumer prices yield different results, depending on how housing costs are treated and the hedonic adjustment applied.
In short, monetary policy has been shaped by an imprecise, small, and shrinking subset of prices that exhibits long and variable lags vis-à-vis changes in the money supply.
Unfortunately, monetary policymakers’ effort to operationalize the objective of ensuring that the value of money remains stable has taken on a life of its own.
Today’s economics textbooks assume that a primary objective of central banks is to stabilize consumer prices, rather than the value of money.
Furthermore, economists now understand inflation as a rise in consumer prices, not as a decline in the value of money resulting from an excessive increase in the money supply. Making matters worse, central banks routinely deny responsibility for any prices other than consumer prices, ignoring that the value of money is reflected in all prices, including commodities, real estate, stocks, bonds, and, perhaps most important, exchange rates.
In short, while price stabilization through inflation targeting is a commendable objective, central banks’ narrow focus on consumer prices – within a relatively short time frame, no less – is inadequate to achieve it.
This was highlighted by the surge in many countries’ housing prices in the run-up to the 2008 financial crisis, the steep decline in asset and commodity prices immediately after Lehman Brothers collapsed, the return to asset-price inflation since then, and recent large currency fluctuations.
All are inconsistent with a stable value of money.
Central banks’ exclusive focus on consumer prices may even be counterproductive.
By undermining the efficient allocation of capital and fostering mal-investment, CPI-focused monetary policy is distorting economic structures, blocking growth-enhancing creative destruction, creating moral hazard, and sowing the seeds for future instability in the value of money.
Within a complex and constantly evolving economy, a simplistic inflation-targeting framework will not stabilize the value of money.
Only an equally complex and highly adaptable monetary-policy approach – one that emphasizes risk management and reliance on policymakers’ judgment, rather than a clear-cut formula – can do that.
Such an approach would be less predictable and eliminate forward guidance, thereby discouraging excessive risk-taking and reducing moral hazard.
History hints at what a stability-oriented framework could look like.
In the last quarter of the twentieth century, many central banks used intermediate targets, including monetary aggregates.
Such targets could potentially be applied to credit, interest rates, exchange rates, asset and commodity prices, risk premiums, and/or intermediate-goods prices.
Short-term consumer-price stability does not guarantee economic, financial, or monetary stability.
It is time for central banks to accept this fact and adopt a comprehensive, long-term monetary-policy approach – even if it means that, in the short term, consumer-price inflation deviates from what is currently understood as “price stability.”
Temporary fluctuations in a narrow and imprecisely measured CPI are a small price to pay to secure the long-term stability of money.
Rethinking Poverty Reduction
NEW YORK – Last year, the United Nations Food and Agriculture Organization announced that the number of hungry people in the world increased over the last decade. In 2008, the World Bank announced a significant decline in the number of poor people up to the year 2005.
But if poverty is defined principally in terms of the money income needed to avoid hunger, how can announcements such as these be reconciled?
According to the World Bank’s much cited “dollar-a-day” international poverty line, which was revised in 2008 to $1.25 a day in 2005 prices, there are still 1.4 billion people living in poverty, down from 1.9 billion in 1981.
However, as China has accounted for most of this decline, there were at least 100 million more people living in poverty outside China in 2005 than in 1981.
In Sub-Saharan Africa and parts of Asia, poverty and hunger remain stubbornly high.
International agencies estimate that more than 100 million people fell into poverty as a result of higher food prices during 2007-2008, and that the global financial and economic crisis of 2008-2009 accounted for an increase of another 200 million.
Delayed job recovery from the global downturn remains a major challenge for poverty reduction in the coming years.
Meanwhile, measurement controversies continue to cast doubt on actual progress.
With the 1995 Social Summit adopting a wider definition of poverty that includes deprivation, social exclusion, and lack of participation, the situation today may be even worse than suggested by a money-income poverty line.
Inequality appears to have been on the rise in recent decades at the international level and in most countries.
More than 80% of the world’s population live in countries where income differentials are widening.
The poorest 40% of the world’s population account for only 5% of world income, while the richest 20% account for 75%.
The mixed record of poverty reduction calls into question the efficacy of conventional approaches.
Countries were advised to abandon their national development strategies in favor of globalization, market liberalization, and privatization.
Instead of producing sustained rapid growth and economic stability, such policies made countries more vulnerable to the power of the rich and the vagaries of international finance and global instability, which has become more frequent and severe due to deregulation.
The most important lesson is the need for sustained rapid growth and structural economic transformation.
Governments need to play a developmental role, with implementation of integrated policies designed to support inclusive output and employment growth, as well as to reduce inequality and promote social justice.
Such an approach needs to be complemented by appropriate industrial investment and technology policies, and by inclusive financial facilities designed to support them.
In addition, new and potentially viable production capacities need to be fostered through complementary developmental policies.
By contrast, the insistence on minimal government and reliance on the market led to precipitous declines in public infrastructure investment, particularly in agriculture.
This not only impaired long-term growth, but also increased food insecurity.
Advocates of economic liberalization policies cited the success of the rapidly industrializing East Asian economies.
But none of these economies had pursued wholesale economic liberalization.
Instead, governments played a developmental role by supporting industrialization, higher value-added agriculture and services, and improvement of technological and human capabilities.
Structural transformations should promote full and productive employment as well as decent work, while governments should have enough policy and fiscal space to enable them to play a proactive role and to provide adequate universal social protection.
The last three decades also saw the divorce of social policies from overall development strategies as a consequence of the drive for smaller government.
National economic development strategies were replaced with donor-favored poverty-reduction programs, such as land-titling, micro-credit, and “bottom of the pyramid” marketing to the poor.
Such fads have not succeeded in significantly reducing poverty. This is not to deny some positive consequences.
For example, micro-credit has empowered millions of women, while important lessons have been learned from such schemes’ design and implementation.
Meanwhile, universal social programs have improved human welfare much more than targeted and conditional programs.
However, conditional cash-transfer programs have been quite successful in improving various human-development indicators.
Unfortunately, poverty remains endemic, with more than a billion people going hungry every day.
Urgent action is needed, as the recent financial and economic crisis, following hard on the heels of the food-price crisis, is believed to have set back progress on poverty reduction even further.
There are also growing fears that climate change will more adversely threaten the lives of the poor.
The United Nations’ biennial Report on the World Social Situation (RWSS 2010), entitled Rethinking Poverty , makes a compelling case for rethinking poverty-measurement and poverty-reduction efforts. For the world’s poor, “business as usual” has never been an acceptable option.
Nor have the popular trends of recent decades proven to be much better.
There will be no real poverty eradication without equitable and sustainable economic development, which deregulated markets have proved unable to deliver on their own.
Rethinking the Fight against HIV
COPENHAGEN – Thirty years ago, the world got its first inkling of impending catastrophe when five young gay men in Los Angeles were struck down by the illness that became known as HIV/AIDS.
Today, the disease has a truly global impact, claiming 1.8 million lives annually – the equivalent of wiping out the population of Washington, DC, three times every year.
Of course, there have been remarkable scientific breakthroughs since 1981.
Scientists established that a previously unknown retrovirus was the cause of AIDS, and determined that the virus was primarily transmitted through sexual contact.
They created tests that can establish a person’s HIV status or gauge the disease’s progression.
They designed antiretroviral drugs that have made it possible for HIV infection to be a survivable chronic condition.
Alongside these advances, policymakers, human-rights advocates, and people living with HIV/AIDS have fought hard to reduce stigma and discrimination.
And an unprecedented amount of funds has been invested in HIV treatment and prevention.
By 2008, total resources for HIV programs in low- and middle-income countries were an incredible 50 times higher than they were just 12 years earlier.
But, despite this significant progress, the toll of HIV/AIDS remains excruciating.
There are 2.4 million new infections annually and 34 million people living with HIV/AIDS who require treatment to stay alive.
There is a widespread misperception in the developed world that we have already won the battle against HIV/AIDS.
In reality, the crisis has merely become less visible.
Sub-Saharan Africa has 10% of the world’s population, but is home to 70% of those living with HIV/AIDS.
Across Africa, the disease is estimated to have reduced average national growth rates by 2-4 percentage points a year.
Researchers led by Bernhard Schwartländer, the director of evidence, strategy, and results at UNAIDS, calculated that annual spending of at least $22 billion will be needed by 2015 to achieve universal access to HIV prevention, treatment, care, and support.
UNAIDS and the Kaiser Family Foundation estimate that in 2010 donors gave $6.9 billion for HIV prevention, care, treatment, and support – down 10% from 2009.
As a result of the global financial crisis and donor fatigue, Denmark, Germany, the Netherlands, Norway, Spain, Sweden, the United States, and the European Commission have all reduced their spending.
The lamentable reality is that securing $22 billion in annual funding by 2015 will be practically impossible.
So, it is worth asking another question: what could we achieve with just a small increase in the current funding?
That is what the Copenhagen Consensus Center and the Rush Foundation are doing in a new project, RethinkHIV.
There are as many opinions about what should be the top priority for funders as there are options.
We spoke with people living with HIV across Africa who have starkly different perspectives.
In Kawangware, Kenya, 38-year-old Esther argued passionately for more social-policy reform. She told us, “I believe HIV isn’t the only killer.
It’s also the stigma and the stress that kills faster.”
In Mungushi, Tanzania, on the other hand, 28-year-old Rehema told us that economic assistance would make the biggest difference. “It is very hard to take the antiretroviral drugs without having any food in the stomach and when I am worrying about where I am going to live,” she said.
In RethinkHIV, we engage some of the world’s top HIV economists, epidemiologists, and demographers in this vital discussion about priorities.
Their new research will be essential input.
Teams of researchers have written 18 papers identifying the most effective ways to tackle the epidemic, looking at what has been proven to work, and at what could be scaled up or replicated elsewhere in Africa.
All of them calculate the costs and benefits of their proposed solutions, and will compete to convince a panel of five world-class economists, including three Nobel laureates, that they have the very best solutions. The Nobel Laureates’ findings will point to the most effective avenues for additional funding.
This approach, the “Copenhagen Consensus” process, is the same one that has been applied every four years to global challenges, and will next take place in 2012.
The premise is simple: no dollar can be spent twice.
A billion dollars spent on one set of approaches can’t be spent elsewhere.
So where is it best to spend more first?
Often, this simple question is not asked, because doing so means choosing between many popular strategies, each with its own base of enthusiastic supporters.
By highlighting the effectiveness of some options – or pointing to policy choices that require further research – the new research and Nobel laureate findings can assist donors and catalyze optimal choices about where funding should go.
Thirty years after the discovery of HIV/AIDS, we have seen impressive scientific and policy advances.
But HIV/AIDS remains a daily threat to millions, stunts development, and destroys far too many lives.
With attention and money flagging, it is vital that we step up our fight against this disease by adding lessons from cost-benefit analysis to our arsenal.
Rethinking the Growth Imperative
CAMBRIDGE – Modern macroeconomics often seems to treat rapid and stable economic growth as the be-all and end-all of policy.
That message is echoed in political debates, central-bank boardrooms, and front-page headlines.
But does it really make sense to take growth as the main social objective in perpetuity, as economics textbooks implicitly assume?
Certainly, many critiques of standard economic statistics have argued for broader measures of national welfare, such as life expectancy at birth, literacy, etc. Such appraisals include the United Nations Human Development Report, and, more recently, the French-sponsored Commission on the Measurement of Economic Performance and Social Progress, led by the economists Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi.
But there might be a problem even deeper than statistical narrowness: the failure of modern growth theory to emphasize adequately that people are fundamentally social creatures.
They evaluate their welfare based on what they see around them, not just on some absolute standard.
The economist Richard Easterlin famously observed that surveys of “happiness” show surprisingly little evolution in the decades after World War II, despite significant trend income growth.
Needless to say, Easterlin’s result seems less plausible for very poor countries, where rapidly rising incomes often allow societies to enjoy large life improvements, which presumably strongly correlate with any reasonable measure of overall well-being.
In advanced economies, however, benchmarking behavior is almost surely an important factor in how people assess their own well-being.
If so, generalized income growth might well raise such assessments at a much slower pace than one might expect from looking at how a rise in an individual’s income relative to others affects her welfare.
And, on a related note, benchmarking behavior may well imply a different calculus of the tradeoffs between growth and other economic challenges, such as environmental degradation, than conventional growth models suggest.
To be fair, a small but significant literature recognizes that individuals draw heavily on historical or social benchmarks in their economic choices and thinking.
Unfortunately, these models tend to be difficult to manipulate, estimate, or interpret.
As a result, they tend to be employed mainly in very specialized contexts, such as efforts to explain the so-called “equity premium puzzle” (the empirical observation that over long periods, equities yield a higher return than bonds).
There is a certain absurdity to the obsession with maximizing long-term average income growth in perpetuity, to the neglect of other risks and considerations.
Consider a simple thought experiment. Imagine that per capita national income (or some broader measure of welfare) is set to rise by 1% per year over the next couple of centuries.
This is roughly the trend per capita growth rate in the advanced world in recent years.
With annual income growth of 1%, a generation born 70 years from now will enjoy roughly double today’s average income.
Over two centuries, income will grow eight-fold.
Now suppose that we lived in a much faster-growing economy, with per capita income rising at 2% annually.
In that case, per capita income would double after only 35 years, and an eight-fold increase would take only a century.
Finally, ask yourself how much you really care if it takes 100, 200, or even 1,000 years for welfare to increase eight-fold.
Wouldn’t it make more sense to worry about the long-term sustainability and durability of global growth?
Wouldn’t it make more sense to worry whether conflict or global warming might produce a catastrophe that derails society for centuries or more?
Even if one thinks narrowly about one’s own descendants, presumably one hopes that they will be thriving in, and making a positive contribution to, their future society.
Assuming that they are significantly better off than one’s own generation, how important is their absolute level of income?
Perhaps a deeper rationale underlying the growth imperative in many countries stems from concerns about national prestige and national security.
In his influential 1989 book The Rise and Fall of the Great Powers, the historian Paul Kennedy concluded that, over the long run, a country’s wealth and productive power, relative to that of its contemporaries, is the essential determinant of its global status.
Kennedy focused particularly on military power, but, in today’s world, successful economies enjoy status along many dimensions, and policymakers everywhere are legitimately concerned about national economic ranking.
An economic race for global power is certainly an understandable rationale for focusing on long-term growth, but if such competition is really a central justification for this focus, then we need to re-examine standard macroeconomic models, which ignore this issue entirely.
Of course, in the real world, countries rightly consider long-term growth to be integral to their national security and global status.
Highly indebted countries, a group that nowadays includes most of the advanced economies, need growth to help them to dig themselves out.
But, as a long-term proposition, the case for focusing on trend growth is not as encompassing as many policymakers and economic theorists would have one believe.
In a period of great economic uncertainty, it may seem inappropriate to question the growth imperative.
But, then again, perhaps a crisis is exactly the occasion to rethink the longer-term goals of global economic policy.
Re-Thinking the Iranian Nuclear Threat
Would it be a great disaster if Iran had nuclear weapons?
As a habitual contrarian, I pose the question because almost everyone seems to believe that it would, and that it must be prevented at all costs.
But is that true?
John Bolton, the former United States Ambassador to the United Nations, said in April that “if the choice is [Iran] continuing [towards a nuclear bomb] or the use of force, I think you’re at a Hitler marching into the Rhineland point.” Bush, too, has compared Iranian President Mahmoud Ahmadinejad to Hitler.
But these so-called statesmen never consider what might have happened had Germany and Britain both had nuclear weapons in 1939.
Would Hitler, wicked as he was, have gone to war had he faced an assured threat of total destruction?
Have we forgotten all about the theory of deterrence?
Of course, the world would be safer if Iran did not have nuclear weapons, not because it is a “rogue” state, but because any spread of nuclear weapons is likely to make the world more dangerous.
That is why it is worth continuing to make every effort to dissuade Iran from “going nuclear.”
Suppose, though, that it becomes clear that Iran is playing the West along, simply buying time to build a bomb and develop a delivery system to hit Israel.
Would that justify a pre-emptive military strike, as certain circles in Israel and the US advocate?
Military intervention in Iran could go either way.
Iran might lie down peacefully like Libya did when America bombed it, or turn into another Iraq.
My own instinct is that it would unleash a train of uncontrollable events.
It would ignite an already incendiary part of the world, with the added risk of global economic collapse if the Strait of Hormuz, through which one-fifth to one-third of the world’s oil passes, is blocked.
On this view, if America is determined to use force to prevent Iran from becoming a nuclear weapons state, it would have to establish a quasi-permanent empire in the Middle East.
It is to avoid this imperialist logic that sensible Americans like Henry Kissinger and George Shultz have revived the dream of a nuclear-free world.
First proposed in the Baruch Plan of 1945, versions of it have surfaced ever since as the number of nuclear weapons states increased.
The main idea of the Kissinger initiative is large reductions in US and Russian nuclear stockpiles, backed by improved security arrangements for fissile materials, a more intrusive inspection regime for the nuclear powers, and assistance for civilian nuclear programs.
A better arms control system would undoubtedly make it more difficult for non-nuclear weapons states to acquire nuclear capability; but it is hard to see why reductions alone, however dramatic, in the huge number of American and Russian warheads should induce aspiring nuclear powers to give up their nuclear ambitions. Even if America and Russia agreed to reduce their stockpiles of nuclear warheads from 5,000-6,000 each to 1,000 each, why should that stop Iran from wanting to build 50-100 nuclear warheads and short-range delivery systems if it perceives this to be in its national interest?
The risk is that if Iran is allowed its bomb, uncontrollable nuclear proliferation would follow.
However, since the Non-Nuclear Proliferation Treaty (NPT) came into force in 1970, only three new nuclear states have emerged – India, Pakistan, and Israel.
There are two reasons for this.
First, the control system established by the NPT made it very hard for non-nuclear states to acquire nuclear weapons capability.
Second, most non-nuclear states were happy enough to live under the security umbrella provided by the superpower nuclear duopoly.
Given the huge obstacles – technological, economic, and political – to acquiring nuclear weapons, states must have quite specific reasons for wanting to go nuclear, such as the need for security against a regional threat or a perception that a superpower itself threatens the state’s political independence.
Large barriers to nuclear proliferation thus exist independent of the NPT.
There is no reason to believe that they would fall if Iran built its own weapon.
It seems that fear of the US rather than Israel has been the main reason for Iran’s nuclear ambition.
That is why the attractive idea of a nuclear-free Middle East, in which Iran would renounce nuclear weapons in exchange for a similar move by Israel, appears unrealistic.
It is the US, not Israel, that Iranian hardliners want to deter, using Israel as a hostage.
They see going nuclear as a way of limiting US military and geopolitical involvement in the Middle East.
They bank on eventual American acquiescence, as happened with India.
Where do we go from here?
While voluntary Iranian renunciation of nuclear weapons would be the best outcome for the West, there is no reason to believe that a nuclear-armed Iran would be a danger to the world.
The floodgates to nuclear proliferation would not open; a more likely outcome would be a “balance of terror” between Israel and Iran, as exists between India and Pakistan.
However, if Iran were allowed to become a nuclear weapons state, it should be done by agreement with the five “legal” nuclear powers (the US, Russia, Britain, France, and China) – that is, by an officially sanctioned enlargement of the nuclear club, which would include India, Pakistan, and Israel.
This would be the best way to bind Iran to acceptable rules of behavior.
At the very least, we should be clear that military intervention is the third-best (that is, worst) option.
We might be driven to it if the other two fail, but it would be utterly wrong to contemplate it now.
Rethinking the Peace Process
WASHINGTON, D.C.: Many stories coming out of Sharm el-Sheikh convey the idea that the hastily convened Middle East summit was a success.
The reality, however, is both more complicated and more sobering.
Yes, Israelis and Palestinians agreed to issue public statements calling for an end to the violence.
And yes, the two sides also agreed to take steps so that they are less likely to come into open conflict with one another.
Yet the reality is less reassuring.
President Clinton announced the accord;
Israeli Prime Minister Ehud Barak and PLO Chairman Yasir Arafat signed nothing.
Moreover, we have seen assurances like this before only to see renewed violence.
The same could all too easily happen again.
Even more important, President Clinton had little to say about the future path of Middle East diplomacy other than to note the United States would consult with parties on how to more forward.
But moving forward promises to be easier called for than carried out.
The Middle East peace process, as it has evolved over three decades, may well be over.
Ironically, this development comes only months after the one attempt to actually solve the Israeli-Palestinian conflict.
How has the situation reached such a point?
Some point a finger at Ariel Sharon, citing his provocative visit to the Temple Mount area of Jerusalem.
A much stronger case can be made that the lion’s share of the responsibility falls upon Yasir Arafat, who at Camp David rejected a generous Israeli offer.
He then added insult to injury both by failing to do all that he could to curb the violence, which followed the Sharon visit and by releasing more than one hundred accused terrorists from Palestinian prisons.
But the Clinton administration must also share some criticism, by pushing for a comprehensive peace when it was clear that the necessary spade-work had not been done.
Diplomacy must be tailored to fit the opportunity; at Camp David, President Clinton pushed for more than Arafat was going to endorse.
It would have been far wiser to resist the entreaties coming from both the Israeli and Palestinian sides to solve the conflict and stick with the more modest step-by-step approach that had been shown to work.
Others will have their own analysis of how we reached the current imbroglio; no matter.
What does matter is that there is no going back to where we were just weeks ago.
The images C of the lynching of Israeli soldiers, the shooting of that Palestinian boy C have had their effect.
Doves and moderates on either side of the divide are in retreat.
The result is that no “Camp David 3” can hope to accomplish what July’s summit failed to do.
Yasir Arafat will not be more inclined than he was to compromise or to promise an end to the decades-old conflict.
Ehud Barak, Israel’s embattled Prime Minister, is unlikely to be as forthcoming as he was even if he wanted to be.
A second approach would return the focus of peacemaking to where it was just a few months ago, namely, on taking modest steps as called for by the Oslo agreement.
The problem with resurrecting this gradual diplomacy now is that neither side is prepared to embrace it.
Israelis are in no mood to give up more tangible territory for intangible promises of Palestinian good behavior; the Palestinians will resist signing on to any process that does not deliver to them all that they want.
There may be, however, an alternative path for diplomacy: what I call Aconcerted unilateralism.”
This could be the case in today’s Middle East.
In this case, the two sides would still have to script events.
At the core would be the declaration of a Palestinian state and Israeli annexation of land including the bulk of the settlers.
Israel would give up some territory containing settlements that could not be easily defended.
Palestinians living outside the area would be able to move to the new Palestinian state but not to Israel.
In short, the two sides would coordinate the implementation of the less controversial aspects of what had been negotiated at Camp David C and put off trying to solve the most difficult issues, including Jerusalem.
The result would not be peace or an end to the conflict or a signing ceremony on the South Lawn of the White House.
Rather, it would be a de facto separation of the two sides reflecting a tacit arrangement to stabilize the situation.
It would still require cooperation between Israeli and Palestinian officials, but it would not require either side’s leadership to explain to its citizens why it forfeited certain powerful symbols or jettisoned deeply-held goals.
Such an approach is not ideal, but it is potentially doable and is far preferable to what is going on or could develop.
This approach does, however, require that we let go for now of the idea of solving the Middle East problem and return to the more modest but still demanding task of managing the situation.
It is time to rethink the peace process.
Re-Thinking Trade Sanctions
The US Congress has voted almost unanimously (418 to 2 in the House of Representatives and 94 to 1 in the Senate) to tighten trade and financial sanctions against Myanmar, whose despotic regime harasses and repeatedly imprisons the country's rightful leader, Aung San Suu Kyi.
She won the presidential election in 1990 but the military prevented her from taking power.
But sanctions are the wrong approach, for international marginalization hurts ordinary citizens far more than it hurts dictatorial regimes.
It's time to curtail the use of economic sanctions and to make them better targeted at despots.
The most famous sanctions in recent history were those imposed on South Africa during the apartheid era.
Much of the world community stopped trading with South Africa, and stopped making investments in South African-based enterprises.
Those sanctions did, it seems, help speed the demise of that barbaric system.
But one great success does not negate the many failures.
Moreover, it is quite possible that the world community could have supported the overthrow of apartheid in other ways.
Of course, sanctions can be effective in hurting the economy of the target country.
Economic development in today's global economy depends on each country being integrated into the worldwide network of production, trade, and investment.
A national economy that is excluded by sanctions is likely to stagnate or even collapse.
Thus, the South African economy experienced an absolute decline in per capita output during the years of widespread sanctions.
But sanctions were not the only reason for decline.
Political unrest also devastated the economy, as did a fall in world gold prices that coincided with the anti-apartheid movement in the final years.
Still, South Africa was hurt badly by sanctions, and the same has been true for many other countries.
Cuba bears a heavy economic burden today not only as a result of its own internal economic mistakes but also because of the barriers to trade and investment imposed by the US since the 1960's.
Haiti went into an economic tailspin when America imposed sanctions in the 1990's, ostensibly to re-establish democracy.
Even today, the US blocks aid for Haiti because some right-wing US Congressmen are intent on toppling President Aristide, whom they abhor.
Iraq and North Korea have likewise been battered by sanctions.
In Iraq during the 1990's, millions of children suffered repeated illnesses and vast numbers died because international sanctions contributed to ruining the country's economy.
North Korea's economy utterly collapsed in the 1990's, leading to widespread famine.
Once again, this results from a combination of North Korea's political despotism, atrocious economic policy, and international sanctions.
Myanmar has already paid an extremely high price for its isolation.
International organizations have cut back or eliminated their work in the country, and much bilateral foreign aid has been eliminated, too.
One result is that HIV/AIDS has run rampant, and the country has received almost no help in getting the epidemic under control.
Myanmar's HIV/AIDS crisis is now by far Southeast Asia's worst.
Although sanctions clearly create suffering in many places, how often have they achieved the desired goal?
In Myanmar, Iraq, North Korea, and Cuba, despotic regimes not only survived the imposition of sanctions, but became more despotic.
These regimes were able to blame foreigners for domestic hardships, even when it was their own policy mistakes and human rights abuses that caused the crises.
Indeed, sanctions weaken an economy and public health, but do not necessarily make it more likely that a despotic regime will collapse.
Sanctions purportedly undermine the regime by causing widespread unrest and by reducing the government's power base and tax collections.
But sanctions also weaken the ability of the private sector to finance an opposition, tend to cut off the domestic opposition from international sources of support, and reduce, rather than increase, international awareness of the abuses taking place.
Some additional effects are even more pernicious.
When legal means of business are outlawed, illegal means become more attractive.
Many countries under sanction, such as Myanmar, become sources of global illegal trafficking in drugs, arms, money laundering, and forced labor.
Drug trafficking or other illegal activities can overtake the whole government, turning it from despotism to international organized crime.
Does this mean that the world should do nothing about despotic regimes?
There is no easy answer, but to the extent that it is possible to weaken a government without weakening an economy, such steps should be taken.
For example, so-called ``smart sanctions'' focus more narrowly on the political leadership.
Smart sanctions include denial of international travel privileges to despots and their families, and subjecting those despots to the risk of international prosecution.
Leaders can thus be made prisoners in their own countries.
Smart sanctions can also specifically target the trade in military goods, cutting off despotic regimes' armed forces.
Moreover, foreign aid can be shifted away from government towards non-governmental organizations, strengthening the civil societies in such countries.
It is easy to vote against Mynamar's government, but it is harder to foster political change.
Starving Myanmar's economy is unlikely to help, but it is certain to deepen the suffering of its people.
Of course, countries that embrace the use of sanctions do not intend this, but that does not lessen their responsibility for the outcome.
Retiring Mugabe
At least for purposes of public consumption, southern Africa’s political leaders continue to stand by Zimbabwe’s President Robert Mugabe, despite his country’s ever-deepening economic crisis, which is directly attributable to his tyrannical rule.
Indeed, years of economic mismanagement have produced an unemployment rate of 80%, with annual inflation nearing 5,000%.
Though Zimbabwe was once known as “the breadbasket of Africa,” many of its citizens now go hungry and depend on international food donations for survival.
About 3,000 people flee the country every day, often risking their lives when crossing the crocodile-infested Limpopo River – celebrated in Kipling’s tale of “How the Elephant Got Its Trunk” – and scaling a border fence to enter South Africa.
By now, emigration is more than three million, about a quarter of the population.
Yet when Mugabe was introduced at the most recent meeting of the Southern African Development Community (SADC) in Zambia’s capital, Lusaka, his fellow heads of state heartily applauded him.
There are reports that, behind the scenes, things are different.
South African President Thabo Mbeki is said to be trying to negotiate a way for Mugabe to leave the scene.
Yet there have been similar rumors before, and it is difficult to know whether Mbeki and the other southern African leaders are finally willing to tell Mugabe that he must go.
Up to now, paying their respects to him as a revolutionary leader, and catering to his megalomania, has been more important to them than alleviating the suffering of Zimbabwe’s people.
The obvious way for Mugabe to leave at age 83 would be to announce that he has changed his mind about running again in the presidential election now scheduled for March 2008.
Of course, should Mugabe stand down, a fair election next March probably would not be possible.
The political opposition would have little capacity to organize an effective campaign in an environment in which Mugabe has shut down independent media, rewritten electoral rules, and used the police to pummel – literally – his adversaries.
So a period of transition would be required for a proper election to be organized under the auspices of the SADC, with support from the African Union, Europe, and the United States, in order to get a fair result and launch a recovery process.
Yet, given the brief period that remains until the scheduled election, an announcement is required soon if a fair result is to be achieved and a recovery process launched to halt the country’s slide into chaos.
A big factor in any timetable for Zimbabwe’s rescue is Thabo Mbeki’s tenure.
He has just over a year-and-a-half to go to complete his second and final five-year term as South Africa’s president.
In certain respects, he has been a success.
Under his leadership, South African’s multiracial democracy has been consolidated, and, in dramatic contrast to neighboring Zimbabwe, its economy is flourishing.
Yet Mbeki’s achievement is severely marred by two failures.
Domestically, his poor performance in addressing South Africa’s HIV/AIDS epidemic will ensure that he is judged harshly.
Internationally, his record is stained by his lack of leadership up to now in dealing with Zimbabwe.
Nevertheless, even at this late date, Mbeki has a chance to salvage a good part of his reputation by taking the lead in organizing a transition in Zimbabwe.
But, given the amount of time a transition will take, he must act now.
Even when a transition does take place in Zimbabwe, the crisis will not be over.
The country has been so devastated by the Mugabe regime that substantial international engagement will be required to put it back on its feet.
For now, however, the SADC should, at long last, tell Mugabe that he must step aside, and it should take responsibility for managing an electoral process whose result Zimbabweans will recognize as fair, thereby providing the legitimacy needed for recovery to begin.
Retuning Europe’s Franco-German Engine
BERLIN – Whether or not the French presidency of the EU, which begins next month, is successful will depend in large part on whether Franco-German cooperation can be revived.
In that seemingly long-gone era, common initiatives for Europe were the rule, and a Franco-German proposal usually constituted an acceptable compromise for Europe as a whole.
The Maastricht Treaty of 1992 was probably the last masterpiece of Franco-German creativity.
But the two countries subsequently grew increasingly estranged from one another.
France never engaged enthusiastically in the enlargement process, while the creation of the euro led to serious Franco-German tensions between1993 and 1999.
France’s decision to abandon military conscription in 1996 while pressing ahead on nuclear testing did little to improve the relationship.
The final years of Jacques Chirac’s presidency produced mostly deadlock, crowned in May 2005 by the French “No” vote to the EU’s draft constitutional treaty.
Of course, the Franco-German engine cannot function as before.
The two countries’ haughty behavior – for example, criticizing tax regimes in Eastern Europe while themselves failing to comply with the European Union’s Stability and Growth Pact – appalled other EU countries, especially the newest members.
So did their arrogant claim that they alone understood “political Europe,” and would therefore sew up deals – like that on agriculture in October 2002 – bilaterally.
Even so, the EU remains dependent on France and Germany as a driving force.
They may have lost authority, but without them nothing much happens in the EU.
So what can be done to generate a new sense of leadership around the Franco-German axis?
The election a year ago of French President Nicolas Sarkozy might have promised a new era of cooperation.
But Sarkozy’s view that the European Central Bank should be subject to political engineering upset Germany, his visit to Moscow, because Germany felt that it was being circumvented.
Moreover, Sarkozy’s discussions with British Prime Minister Gordon Brown during his two-day state visit to London in March prominently featured a deal to use France’s considerable nuclear expertise to build a new generation of nuclear power stations in Britain – another source of discord with Germany.
Whereas Sarkozy views nuclear power as a promising source of “renewable” energy, Germany remains adamantly opposed to it – a policy that Chancellor Angela Merkel placed at the top of her agenda during Germany’s EU presidency in 2007.
Sarkozy’s visit to London also produced a Franco-British commitment to promote the European Security and Defense Policy (ESDP), and in France’s case to send more troops to Afghanistan.
But Germany too, needs to be engaged over the ESDP and Afghanistan.
If Sarkozy’s presidency has any relevance to Franco-German relations, it may be to reinforce the view that the EU needs new leadership, and that it must still be based on the founding partners.
Indeed, closer Franco-British cooperation should be viewed as a positive development, for it pulls the United Kingdom once more towards Europe.
And German-British relations are also improving.
Further progress will become increasingly important as European responsibilities are placed on more shoulders: Iran, climate change, and the ESDP are all examples of shared decision-making.
But the larger geo-strategic questions, such as the EU’s relations with Russia and its links to NATO, require the attention of a larger leadership team, including Eastern European countries.
Poland has that leadership potential, even if Germany will remain the glue between East and West.
Sarkozy has said that he wants to focus the French EU presidency on promoting measures to deal with climate change, reviewing European migration policy, and re-energizing the ESDP, in line with France’s decision to return to NATO.
Moreover, the Lisbon Treaty will probably start being implemented during the French presidency, with nominations for the future EU leadership, including a permanent president, and steps to shape the future European External Action Service, essentially an EU foreign ministry.
It is an ambitious program, and France will need Germany’s support if it is to succeed.
Fortunately, Franco-German disputes, while often seemingly fierce, do not last long, and can even serve to refocus people’s attention on the importance of the relationship.
For a time, tensions between the two countries rose to the point that France announced the postponement of the “Blaesheim talks,” a regular exchange of views by French and German leaders on European issues that began in 2001.
In the end, though, the two countries’ institutional mechanisms of communication have held firm.
France and Germany, along with the other EU states, must bear in mind that the Lisbon Treaty is, in effect, a European constitution, framed to lead the Union into the twenty-first century, and that its success requires broader leadership.
France must show during its presidency that it truly cares for Europe and its role in the world, and that the EU is more than a French tool.
Building a new leadership team for the EU will be Sarkozy’s main task.
Return to the Abyss
NEW YORK – One interpretation of financial crises is that they are, in Nassim Taleb’s phrase, “black swan” events – unplanned and unpredictable occurrences that change the course of history.
But, in my new book on financial crises, Crisis Economics – which covers not only the recent crisis, but also dozens of others throughout history and across both advanced economies and emerging markets – I show that financial crises are, instead, predictable “white swan” events.
What is happening now – the second stage of the global financial crisis – was no less predictable.
Crises are the inevitable result of a build-up of macroeconomic, financial, and policy risks and vulnerabilities: assets bubbles, excessive risk-taking and leverage, credit booms, loose money, lack of proper supervision and regulation of the financial system, greed, and risky investments by banks and other financial institutions.
History also suggests that financial crises tend to morph over time.
Crises like those we have recently endured were initially driven by excessive debt and leverage among private-sector agents – households, banks and financial institutions, corporate firms.
This eventually led to a re-leveraging of the public sector as fiscal stimulus and socialization of private losses – bail-out programs – caused a dangerous rise in budget deficits and the stock of public debt.
While such fiscal stimulus and bailouts may have been necessary to prevent the Great Recession from turning into Great Depression II, piling public debt on top of private debt carries a high cost.
Eventually those large deficits and debts need to be reduced through higher taxes and lower spending, and such austerity – necessary to avoid a fiscal crisis – tends to slow economic recovery in the short run.
If fiscal imbalances are not addressed through spending cuts and revenue increases, only two options remain: inflation for countries that borrow in their own currency and can monetize their deficits; or default for countries that borrow in a foreign currency or can’t print their own.
Thus, the recent events in Greece, Portugal, Ireland, Italy, and Spain are but the second stage of the recent global financial crisis.
The socialization of private losses and fiscal laxity aimed at stimulating economies in a slump have led to a dangerous build-up of public budget deficits and debt.
So the recent global financial crisis is not over; it has, instead, reached a new and more dangerous stage.
Indeed, a practical definition of a financial crisis is an event that forces policy officials to spend a long weekend trying desperately to announce a new bailout package in order to avoid national and global panic before the markets open on Monday.
In the past years, such weekend all-nighters dealt with the needed bailouts of private firms – Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, AIG, bank rescues, etc.
And, of course, such weekend dramas are still with us, as EU and eurozone policymakers recently spent a desperate weekend developing a rescue package not only for Greece, but also for other weak eurozone members.
The progression is clear: first came rescue of private firms, and now comes the rescue of the rescuers – i.e., governments.
The scale of these bailouts is mushrooming.
During the Asian financial crisis of 1997-1998, South Korea – a relatively large emerging-market economy – received what was then considered a very large IMF rescue package – $10 billion.
But, after the rescues of Bear Sterns ($40 billion), Fannie Mae and Freddie Mac ($200 billion), AIG (up to $250 billion), the Troubled Asset Relief Program for banks ($700 billion), we now have the mother of all bailouts: the $1 trillion European Union-International Monetary Fund rescue of troubled eurozone members.
A billion dollars used to be a lot of money; now one trillion is the “new normal” or – to paraphrase the novel and film The Devil Wears Prada – a trillion is the new ten billion!
Governments that bailed out private firms now are in need of bailouts themselves.
But what happens when the political willingness of Germany and other disciplined creditors – many now in emerging markets – to fund such bailouts fizzles?
Who will then bail out governments that bailed out private banks and financial institutions?
Our global debt mechanics are looking increasingly like a Ponzi scheme.
While the right medicine needed to avoid fiscal train wrecks is well known, the main constraint to fiscal consolidation and discipline is that weak governments around the world lack the political power and willingness to implement austerity.
Political gridlock in Washington and in the United States Congress demonstrates the absence of the bipartisanship needed to address America’s fiscal issues.
In the United Kingdom, a “hung” parliament has resulted in a coalition government that will have a hard time implementing fiscal discipline.
In Germany, Chancellor Angela Merkel lost a key state election after the rescue of Greece, and Japan has a weak and ineffectual government that seems in denial of the scale of the problem that it faces.
In Greece itself, there are riots in the streets and strikes in the factories; in the rest of the PIIGS (Portugal, Ireland, Italy, and Spain), fiscal discipline will be politically and socially painful.
So political constraints may prevent fiscal austerity and structural reforms from being implemented.
As a result, “crisis economics” is likely to be with us for a long time.
Indeed, the recent financial crisis is not over, and, worse, the medicine used to treat may have been partly toxic.
It seems to have made the patient weaker and more addicted to dangerous drugs, as well as more susceptible to new strains of the virus that may, in some cases, eventually prove fatal.
Reversing Europe’s Renationalization
NEW YORK – Far from abating, the euro crisis has taken a turn for the worse in recent months.
The European Central Bank managed to relieve an incipient credit crunch through its long-term refinancing operation (LTRO), which lent over a trillion euros to eurozone banks at one percent.
This brought considerable relief to financial markets, and the resulting rally obscured underlying deterioration; but that is unlikely to last much longer.
The fundamental problems have not been resolved; indeed, the gap between creditor and debtor countries continues to widen.
The crisis has entered what may be a less volatile but potentially more lethal phase.
At the onset of the crisis, the eurozone’s breakup was inconceivable: the assets and liabilities denominated in the common currency were so intermingled that a breakup would cause an uncontrollable meltdown.
But, as the crisis has progressed, the eurozone financial system has been progressively reoriented along national lines.
This trend has gathered momentum in recent months.
The LTRO enabled Spanish and Italian banks to engage in very profitable and low-risk arbitrage in their own countries’ bonds.
And the preferential treatment received by the ECB on its Greek bonds will discourage other investors from holding sovereign debt.
If this continues for a few more years, a eurozone breakup would become possible without a meltdown – the omelet could be unscrambled – but it would leave the creditor countries’ central banks holding large, difficult-to-enforce claims against the debtor countries’ central banks.
The Bundesbank has become aware of the danger.
It is now engaged in a campaign against the indefinite expansion of the money supply, and it has started taking measures to limit the losses that it would sustain in case of a breakup.
This is creating a self-fulfilling prophecy: once the Bundesbank starts guarding against a breakup, everybody will have to do the same.
Markets are beginning to reflect this.
The Bundesbank is also tightening credit at home.
This would be the right policy if Germany was a freestanding country, but the eurozone’s heavily indebted member countries badly need stronger demand from Germany to avoid recession.
Without it, the eurozone’s “fiscal compact,” agreed last December, cannot possibly work.
The heavily indebted countries will either fail to implement the necessary measures, or, if they do, they will fail to meet their targets, as collapsing growth drives down budget revenues.
Either way, debt ratios will rise, and the competitiveness gap with Germany will widen.
Whether or not the euro endures, Europe faces a long period of economic stagnation or worse.
Other countries have gone through similar experiences.
Latin American countries suffered a lost decade after 1982, and Japan has been stagnating for a quarter-century; both have survived.
But the European Union is not a country, and it is unlikely to survive.
The deflationary debt trap is threatening to destroy a still-incomplete political union.
The only way to escape the trap is to recognize that current policies are counterproductive and change course.
I cannot propose a cut-and-dried plan, but three observations stand out.
First, the rules governing the eurozone have failed and need to be radically revised.
Defending a status quo that is unworkable only makes matters worse.
Second, the current situation is highly anomalous, and some exceptional measures are needed to restore normalcy.
Finally, the new rules must allow for financial markets’ inherent instability.
To be realistic, the current fiscal compact governing the eurozone must be taken as the starting point.
Of course, some already-visible defects will need to be modified.
Notably, the compact should count commercial as well as financial debts, and government budgets should distinguish between investments that pay and current spending.
In order to avoid cheating, what qualifies as investment should be subject to approval by a European authority.
An enlarged European Investment Bank could then co-finance investments.
Most importantly, some extraordinary measures need to be invented to bring conditions back to normal.
The EU’s fiscal charter compels member states annually to reduce their public debt by one-twentieth of the amount by which it exceeds 60% of GDP.
I propose that member states jointly reward good behavior by taking over that obligation.
The member states have transferred their seignorage rights to the ECB, and the ECB is currently earning about €25 billion ($32.7 billion) annually.
The seignorage rights have been estimated by Willem Buiter of Citibank and Huw Pill of Goldman Sachs, working independently, to be worth between €2-3 trillion, because they will yield more as the economy grows and interest rates return to normal.
A Special Purpose Vehicle (SPV) owning the rights could use the ECB to finance the cost of acquiring the bonds without violating Article 123 of the Lisbon Treaty.
Should a country violate the fiscal compact, it would wholly or partly forfeit its reward and be obliged to pay interest on the debt owned by the SPV.
That would impose tough fiscal discipline, indeed.
By rewarding good behavior, the fiscal compact would no longer constitute a deflationary debt trap, and the outlook would radically improve.
In addition, to narrow the competitiveness gap, all members should be able to refinance their existing debt at the same interest rate.
But that would require greater fiscal integration, so it would have to be phased in gradually.
The Bundesbank will never accept these proposals, but the European authorities ought to take them seriously.
The future of Europe is a political issue, and thus is beyond the Bundesbank’s competence to decide.
Reviving Europe’s Universities
COPENHAGEN &#45;&#45;
Writing at home sometime ago, with Wimbledon on TV in the background, it occurred to me that just as Britain hosts the world’s top tennis tournament but never wins it, so we Europeans are in a similar situation with education.
The world’s first university was Plato’s Academy in Athens, venerable old universities are scattered across Europe from Coimbra to Cambridge to Copenhagen, and the modern university, uniting research and education, was pioneered by Wilhelm von Humboldt in Berlin.
Yet today, universities in the United States easily outperform their European counterparts.
Less than 2% of the European Union’s GDP is devoted to research, compared to 2.5% in the US and 3% in Japan.
Spending per student on tertiary education is just over $9,000 in France, slightly under $11,000 in Germany, and almost $12,000 in the UK.
Some EU countries, such as Denmark, do better, but still lag far behind the US, which spends more than $25,000.
Measuring the quality of output is difficult, although The Times Higher Education Supplement attempts to do so every year.
Only three European universities – Oxford, Cambridge, and Imperial College in London – made it into the top ten in the most recent list; all the rest were American.
Only ten universities from the entire EU have ever made it into the top 50.
Germany’s top university, Heidelberg, ranks 58th.
As a result, roughly 400,000 European scholars currently reside in the US, and almost 60% of European citizens who received doctorates in US from 1998 to 2001 chose to remain there.
There are twice as many Europeans studying in the US as there are Americans studying in Europe.
Europe’s “education gap” doesn’t stop at the Atlantic.
China and India represent more than mushrooming factories and low-cost semi-skilled labor.
Just as in Europe, the industrial revolution in “Chindia” is also creating an ambitious new middle class that is willing and able to send its children to university.
But in today’s world, students and researchers choose a university much as consumers shop in the international marketplace.
Europe has made some modest efforts to regain university competitiveness.
In March 2000, EU leaders meeting in Lisbon set the goal of making Europe the world’s most competitive and dynamic knowledge-based economy by 2010, and two years later they agreed that investment in R&amp;D must reach 3% of GDP by 2010.
Such ambitious goals, however unrealistic, can have a disciplining effect, leading some EU countries to increase their spending, while the EU itself has launched a number of promising schemes.
The seventh Framework Program, worth some €50 billion – a 40% increase over the sixth program – is perhaps the most prominent funding source tool through which the EU supports R&amp;D activities.
But the EU and European governments must do more.
Overall spending is still dwarfed by US federal research and development spending, which will total $137 billion in the 2007 fiscal year.
European leaders must therefore substantially increase research funding when the EU budget is next due for revision in 2008 and 2009.
Although the core financial burden will be on the member states, the EU level can make an important contribution.
Moreover, although the European Commission clearly has a duty to prevent mismanagement and fraud, every application for EU funding requires extremely onerous procedures.
Eliminating bureaucratic red tape, as the Commission has now pledged to do, would be a substantial boon to European researchers.
Finally, Europe must place more emphasis on basic research.
Of course, our scientists should respond to current problems in society.
But if basic research is neglected, attempts to produce quick innovations through applied research will be futile.
Basic research is the primary organism in the food chain of scientific endeavor.
The European Research Council, which is to award research grants on the basis of peer-reviewed excellence, will therefore be an important step forward, and the EU should further increase its funding.
But just throwing money at universities isn’t enough.
As the former Financial Times editor Richard Lambert, together with Nick Butler, commented in a report published by London’s Centre for European Reform entitled The future of European universities: Renaissance or decay? , EU governments are stuck in a vicious circle: “The universities will get no more money unless they reform, and they cannot reform without more money”.
The Danish government has sought to break free from this vicious circle by introducing reforms before pledging to increase budgets.
In 2003, Denmark’s universities were turned into self-governing institutions run by governing boards dominated by external representatives.
Last year, the government merged 12 universities into eight in order to achieve substantial economies of scale, and the Danish parliament approved a nearly 50% increase in government spending on research by 2010.
The Danish case highlights the pivotal role of governance reform if Europe is ever to meet its Lisbon goals.
The University of Copenhagen’s mergers with the Royal Veterinary and Agricultural University and the Danish University of Pharmaceutical Sciences have made it the largest university in Scandinavia.
We now aspire to becoming the most significant health and life science research center in Europe, owing to a remarkable cluster of knowledge based 5,000 researchers, an excellent medical school, 11 university hospitals, and a thriving biotech business environment that already includes market leaders in diabetes and neuroscience.
Until we embarked on governance reform, this would probably have been impossible.
Our experience so far has taught us that university managers should not accommodate rising student populations by inflating their core business.
However fierce the global competition, they should concentrate on safeguarding quality and achieving excellence in research and education.
Reviving Georgia’s Western Dream
Georgia’s recent instability has dealt a blow to its international reputation as a new democracy, and poses a challenge to the European Union as well.
Faced with street protests in November, President Mikheil Saakashvili claimed that Russian-Georgian tycoon Badri Patarkatsishvili was conspiring to bring down the government.
So he closed the opposition-leaning private Imedi TV station (owned by Patarkatsishvili) and introduced a state of emergency for nine days, before calling an early presidential election for January 5.
Ever since Saakashvili’s inauguration in January 2004, following the 2003 “Rose Revolution,” Georgia’s government has displayed EU flags on official occasions.
Georgians share that enthusiasm.
A poll conducted by the International Republican Institute in September 2007 indicated that 81% of Georgians support joining the EU.
But, regardless of the election’s outcome, the recent crisis exposes a lack of commitment by the EU to security and democracy in Georgia.
Despite Georgia’s strategic location on the Black Sea, bordering Russia, Azerbaijan, and Turkey – and on a key trade route linking the EU, Iran, Russia, and Central Asia – Europe has dragged its feet on the country’s most enduring political problems.
On the Georgian side, It is well understood – at least by the political elite – that EU membership is a distant prospect at best.
This weakens the political importance of the European Neighborhood Policy (ENP), an initiative developed in 2004 to avoid the emergence of new dividing lines between the enlarged EU and its neighbors.
An EU-Georgia ENP Action Plan was signed in November 2006, but it is unlikely to meet expectations.
Indeed, the ENP comes second to co-operation with NATO as a priority for Georgia, in part because Georgians, feeling threatened by Russia, crave security above all.
Moreover, while the recent state of emergency was a serious setback, NATO membership, unlike EU accession, is still within reach.
This makes all the difference.
The security interests of Georgia and the EU coincide least when it comes to the so-called “frozen conflicts” in the Kremlin-backed breakaway regions of Abkhazia and South Ossetia – it is no accident that “Promoting Peaceful Resolution of Internal Conflicts” ranks only sixth among the ENP Action Plan’s priorities.
Georgia wants a reluctant EU to be more engaged, but each side understands engagement differently.
The EU supports politically uncontroversial confidence-building measures that can reap results only in the long term, if ever.
The Georgian government views the Abkhazian and Ossetian conflicts as the country’s principal security threat and impediment to development.
It expects bolder moves from the EU, such as explicit endorsement of the Georgian-Ossetian working group, which includes the alternative, pro-autonomy South Ossetian government of Dmitri Sanakoyev, but is boycotted by the pro-Russian separatist government in Tskhinvali.
The EU has avoided any such gesture, seeking to avoid further tension with Russia.
On the other hand, there are better prospects for strengthening the EU’s role in democracy development.
“Strengthening the Rule of Law, Building State Institutions, Protecting Human Rights and Fundamental Freedoms” occupies first place in the ENP Action Plan.
Though judicial independence and protection of human rights remain conspicuously weak, Saakashvili’s government has increased the civil service’s efficiency, improved public infrastructure, fought corruption, reduced crime, and created an attractive investment environment.
However, the opposition’s shortcomings pose a further obstacle to democratic development.
The government’s opponents can mobilize public protests, as they did in November, but they are much less capable of formulating alternative policy agendas and attracting support for them.
With no internal system of checks and balances in Georgia – the only way to sustain democratic institutions – the international community becomes a compensating actor, with the EU well placed to take the lead.
In fact, while the Saakashvili government’s clampdown showed the structural weaknesses of Georgia’s democracy, the aftermath has also shown that Georgia’s Western ambition remains intact, because the government understands that it cannot afford any long-term deviation from democratic norms.
The EU’s special representative in the South Caucasus, Swedish diplomat Peter Semneby, played a crucial role in bringing back Imedi TV in time to restore media balance ahead of the presidential election – possibly the first time that the EU took a leading role in seminal political events in Georgia.
This was not part of any prefigured Action Plan, but it shows that, given the political will, the EU can play an active role in promoting democracy and stability.
Reviving Muslim Democracy
DAKKA – As fears about the Islamization of politics in the Muslim world grow, Bangladesh, with the world’s fourth-largest Muslim population (126 million), has moved dramatically in the opposite direction.
Bangladesh is usually heard about only when cyclones and tsunamis ravage its low coastline, but the country’s relatively anonymous international stature belies its strategic importance.
Its secular politicians’ ability to defeat the country’s Islamists decisively in the recent parliamentary election may, indeed, have revived the viability of “Muslim democracy” around the world.
The recent landslide victory (with a huge turnout) for the Awami League in Bangladesh’s first election in seven years, after two years of a military-backed caretaker government, has moved the country to the forefront of the battle between secular democrats and Islamists that is now underway across South Asia.
The election was a credit to the country's democratic yearnings – and I say that as the chairman of the European Parliament's short-term election observation mission to Bangladesh.
The new electoral register was more robust than in many Western countries, with a photo ID picture alongside each elector.
The violence that had been widespread in previous Bangladeshi elections was entirely absent, with the security services’ professionalism in policing the elections – and the army’s willingness to return voluntarily to its barracks – playing a key role.
In Prime Minister Sheikh Hasina, Bangladesh now has a charismatic leader whose massive electoral mandate augurs well for creating the type of strong, secular government that the country needs.
She returned to Bangladesh from exile, which the army had imposed on her. After her return she still had to endure imprisonment and trumped-up murder charges.
Hasina’s enormous popularity as a former prime minister, and her status as one of only two surviving daughters of Bangladesh’s founder, Sheikh Mujib Rahman, always ensured that she would be a leading contender in the election.
Her overwhelming triumph has vindicated her belief that ordinary Bangladeshis want a secular and stable future for their country – one that, in contrast to Pakistan, is characterized by warm relations with their giant neighbor, India.
The comprehensive defeat of the Islamist parties that sought to take Bangladesh away from its democratic and secular roots, and which had sought in 1971 to impose Urdu as a national language and suppress Bengali language and culture, is the real story of the election.
The vote demonstrated that Bangladesh’s 153 million people have little appetite for bringing Islamism into politics.
Bangladesh needs only to look west to India and Pakistan to see the threat posed by Islamist terrorism.
But if Hasina is to succeed in continuing to blunt Islamism, she must address the fundamental problems that have destabilized Bangladeshi society for decades.
Chief among these is the poverty endured by the majority of her country’s population.
To some extent, it is surprising that the Islamist parties did not do better, considering their success elsewhere in mobilizing the most marginalized and vulnerable in society.
If the Awami League is unable to address the country’s systematic poverty and social inequality, Islamism may well yet succeed in rallying the impoverished to its banner.
The Jamaat-e-Islami Party, indeed, told me during my stay that they had a 30-year agenda to introduce Sharia law into Bangladesh.
The example of Hamas and Hezbollah provide a salutary reminder of the challenges faced by the new government in Bangladesh.
Although these terrorist groups are better known internationally for atrocities against Israel, they have established strong political support by providing organized social services such as schools and clinics for poor people.
Hamas and Hezbollah prospered in this way because the governing authorities were either unable or unwilling to address grassroots poverty.
In the case of Hamas, this displacement was due largely to the massive corruption of the Palestinian Authority under Yassir Arafat, whose cronies pocketed billions of dollars intended to alleviate poverty and suffering in the Gaza Strip.
Given that endemic corruption in Bangladesh is perhaps the primary obstacle to providing essential services for poor people, it is essential that Hasina adopt a tough approach to corruption from the outset.
Corruption is also a potential trigger for intervention by the military, a recurring feature of Bangladesh’s history that has consistently impeded the country’s development.
Beyond fighting corruption, Hasina must also ban all foreign donations to political parties, in particular the “Wahhabi gold” that Saudi Arabia and the Gulf states use to fund Islamist parties.
The challenges facing the Awami League are many and varied, but it is not without resources.
Bangladesh is in a better position to weather the global financial storm than most Asian countries, because its banks are not over-exposed and its garment industry focuses on the lower end of the market, which, so far, appears to be holding up.
But chief among Bangladesh’s opportunities is the chance to show the world that a Muslim-majority country can freely embrace liberal democracy and make it work by confining religion to the private sphere.
With its constitutional majority, the government should ensure this outcome by restoring the 1972 Constitution, which established Bangladesh as a secular democratic state.
Bangladesh is a country rich with human potential, but that potential can only be realized by making poor people’s needs – which Islamists around the world have previously made their own political territory – the new government’s top priority.
Reviving the Animal Spirits
NEW HAVEN – The world’s fundamental economic problem today is a staggering loss of business confidence.
Commercial banks, investment banks, and hedge funds all owe their ongoing trouble to its decline, which in turn is jeopardizing the plans of companies and entrepreneurs to launch enterprises and make investments, and of households to consume.
Our “animal spirits,” to borrow a phrase made famous by John Maynard Keynes, are weakening.
George Akerlof and I have just written a book by the same name, but by the time Animal Spirits appears later this winter, the world economy may be even worse than it is now.
Nations everywhere are starting to implement aggressive stimulus and bailout packages.
Yet the economic outlook still looks grim.
The International Monetary Fund’s latest forecast predicts that the world’s advanced economies will contract 0.3% in 2009 – the first such shrinkage since the end of World War II.
Part of the difficulty of contending with a crisis of confidence is that it is hard to quantify confidence in the first place.
The Conference Board Consumer Confidence Index in the United States, begun in 1967, fell in October to its lowest value ever.
The latest Nielsen Global Consumer Confidence Index, which covers 52 countries, fell to 84, from 137 when it was launched in 2005.
But these surveys, which tabulate quick answers to simple questions, do not tell us how deeply held these opinions are, how new circumstances might change confidence, or what people will really do when they make important decisions in coming months or years.
This decline in confidence is fundamentally related to the chaos in the financial markets that started in 2007 and accelerated this September.
The specter of collapsing financial institutions around the world, and desperate government bailouts to try to save them, has created a general sense of alarm.
Then there is the effect of memory on today’s animal spirits.
People know enough about the Great Depression to understand that there are parallels with today.
Many know that interest rates on three-month US Treasury bills became slightly negative in September 2008 – for the first time since 1941.
People are also aware that the stock market has not been this volatile since the Great Depression (with the single exception of October 1987).
Beyond that, national leaders are defending extraordinary bailout measures by not-so-veiled comparisons to the Great Depression.
Animal spirits are not always shattered by extraordinary economic events.
But then, not all economic convulsions are alike.
For example, the October 19, 1987, stock market crash was the biggest one-day drop ever.
The Standard &amp;
Poor’s Composite fell by 20.5%, the FTSE 100 by 12.2%, and the Nikkei 225 by 14.9% the next day.
The crisis spread around the world, but there was no recession.
Instead, world stock markets recovered, creating a colossal bubble that peaked 13 years later, in 2000.
In a survey that I conducted immediately after the 1987 crash, I found that the biggest concern expressed by individual and institutional investors in the US was essentially that the stock market had been overpriced.
After the crash corrected that problem, many people apparently did not feel there was much more to worry about.
The only parallel to the Great Depression was the stock market drop itself.
Moreover, many financial experts blamed the 1987 crash on a kind of programmed trading called “portfolio insurance,” which most thought would stop.
But recent events do not carry such a rosy interpretation.
The stunning magnitude of recent declines cannot be dismissed as a one-day anomaly caused by a technical trading glitch.
The week of October 3-10 was the worst stock market week in the US since the Great Depression, while Japan’s stock market performed worse than it did in the worst week of the Asian financial crisis ten years ago.
Similarly, Mexico’s stock market performed about as badly as it did during the worst week of the Mexican financial crisis in 1995, and Argentina’s stock market roughly matched the worst weekly drop during the country’s financial crisis of 1997-2002.
Extraordinary stock market volatility, both up and down, has continued since.
The current stimulus and bailout plans were hatched in reaction to that dreadful week.
The G-7 countries announced a coordinated plan to fix the world economy on October 10, and that weekend the G-20 countries endorsed the plan.
But stock markets were barely higher in early November.
In China and India, they were lower.
The erosion of animal spirits feeds on itself.
Immense market volatility serves only to reinforce people’s sense that something is really wrong.
A volatility feedback loop begins: the more volatility, the more people feel they must pay attention to the market, and hence the more erratic their trades.
Perhaps the saving grace in this situation is that animal spirits can and sometimes do change direction.
Confidence is a psychological phenomenon, and can make seemingly capricious jumps up as well as down.
The most promising prospect for a return of business confidence now would be some kind of public inspiration.
In the US, President-elect Barack Obama seems to have the charisma to create this, and his status as the first minority president marks a major historical transition that might have great positive psychological impact in the US and around the world.
Whatever the near future holds the multitude of plans now being discussed to deal with this global crisis need to be judged with attention to the elusive and inexplicable effects they might have on confidence.
The “animal spirits” that Keynes identified generations ago remain with us today.
Reviving the Quartet
Following the formation of a Palestinian unity government between Fatah and Hamas, and the Arab League summit which revived King Abdullah’s peace plan of 2002, it is time for the so-called Middle East Quartet, consisting of the European Union, Russia, the United Nations, and the United States, to get into action.
The Quartet has been dormant since 2000, because any peace process requires negotiations between the parties in conflict.
Instead, the region has witnessed a policy of unilateral steps.
Some measures – Israel’s unilateral withdrawal from Lebanon in 2000 and from the Gaza Strip in 2005, or Hamas’ year-long ceasefire – might be seen as constructive.
But, however positive their aims, these steps were taken without consulting the opposite side, thereby entrenching the perception that no partner existed.
By the summer of 2006, with the Lebanon war and Israel’s reoccupation of the Gaza strip, the failure of unilateralism was clear.
Today, we know that only a political process that takes each party’s legitimate national interests into account can reduce the risk of renewed violent conflict in the Middle East.
Four steps are needed to restart such a process.
The first step, revival of the Quartet, has already been taken.
The Quartet remains the most appropriate format, as it combines European ideas and service with UN legitimacy and US leadership.
It binds Russia and includes few enough participants to take quick decisions when necessary.
But, aside from its revival, the Quartet should also widen its mandate to deal not only with the Israeli-Palestinian problem, but also with the Israeli-Syrian and Israeli-Lebanese conflicts.
This does not preclude individual initiatives on the part of the US administration in the Israeli-Palestinian arena.
Currently, the US refusal to negotiate directly with Syria, or to encourage Israel to talk with Syria, prevents such a widening of the Quartet’s mandate.
Syria, however, cannot be ignored, since it is capable of undermining attempts at reaching an Israeli-Palestinian track or stabilizing Lebanon.
Syria’s behavior is closely related to its prospects for recovering its own occupied territory – the Golan Heights – and is clearly interested in a new peace process with Israel to achieve this national goal.
Second, a “goal map” should replace the Quartet’s largely outdated “road map,” and should state the basic legitimate interests of the parties to the conflict.
These interests are not mutually exclusive and can be summarized as follows: Israel’s security, Palestinian statehood, Lebanon’s sovereignty and Syria’s territorial integrity.
The Quartet should consult with the individual parties and to specify them further.
What does Israel’s security mean and require?
How can Palestinian statehood be preserved?
Which guarantees are needed to safeguard Lebanon’s sovereignty?
Third, dialogue must be re‑established.
This may be the most difficult task, and it is mainly a responsibility for the Europeans.
Again, the relationship between Syria and Israel is crucial here.
The Israeli government needs to be convinced that resuming peace talks could lead to more constructive Syrian behavior vis-à-vis Lebanon and the Israeli-Palestinian conflict.
The Syrian government itself has realized that it must demonstrate its willingness for dialogue by offering Israel unconditional negotiations, receiving the Iraqi and Palestinian presidents for talks in Damascus, and supporting intra-Palestinian talks.
But it has yet to send convincing and reassuring signals towards Lebanon.
In Lebanon itself, serious internal dialogue about the county’s future remains stalled.
External actors like the EU or individual EU states could offer their support and facilitate talks on political and constitutional reforms.
They should also make clear that no regional deal can be made at the expense of Lebanon’s sovereignty.
With regard to the Palestinians, dialogue capacity of a different kind is needed.
Since the Palestinian parliamentary election in January 2006, the international community has been communicating with President Mahmoud Abbas while boycotting the Hamas-led government.
But isolating the Palestinian government significantly heightened the chaos in the West Bank and the Gaza Strip and has effectively contributed to a deconstruction of statehood.
If the EU wants to continue its state-building efforts in Palestine and contribute to a peaceful settlement, it must find ways to talk to and work with the elected government.
The formation of a Palestinian national unity government enables the EU and its partners to resume cooperation with the Palestinian authorities without losing face.
Based on the Saudi-sponsored agreement between Fatah and Hamas, the unity government meets the EU Council’s demand that a legitimate Palestinian government “adopts a platform reflecting the Quartet principles.”
According to its program, the government will respect all agreements signed by the PLO.
Implicitly, this includes recognition of Israel and the obligation to refrain from and fight acts of terrorism.
Avoiding contact with individual Palestinian ministers who violate these commitments may be necessary, but ostracizing the entire Palestinian administration must end.
A fourth step, albeit for the future, is an international conference at which all relevant parties would adopt the “goal map” and commence parallel bilateral negotiations on this basis, which would enhance the actors’ interest in seeing the entire process through to a successful conclusion.
Meticulous preparation of such a conference is more important than convening it quickly, as initiatives by individual states could undermine the EU’s and Quartet’s effort.
Naturally, the US, as the most important Quartet member, must participate actively.
The current EU presidency was able to convince the US administration that reviving the Quartet could be useful.
However, the Bush administration’s priority in the region clearly remains Iraq, not the Israeli-Palestinian conflict.
In these circumstances, the Europeans and the other Quartet partners could help Bush secure a more flattering legacy with regard to the Middle East.
The EU must not, however, let US or Israeli lack of support thwart its efforts to devise a goal map that would be acceptable to all regional parties, or to push Syria onto a more constructive course by engaging it.
A Europe of Solidarity, Not Only Discipline
BERLIN – Originally, the European Union was what psychologists call a “fantastic object,” a desirable goal that inspires people’s imaginations.
I saw it as the embodiment of an open society – an association of nation-states that gave up part of their sovereignty for the common good and formed a union dominated by no one nation or nationality.
The euro crisis, however, has turned the EU into something radically different.
Member countries are now divided into two classes – creditors and debtors – with the creditors in charge.
As the largest and most creditworthy country, Germany occupies a dominant position. Debtor countries pay substantial risk premiums to finance their debt, which is reflected in their high economy-wide borrowing costs.
This has pushed them into a deflationary tailspin and put them at a substantial – and potentially permanent – competitive disadvantage vis-à-vis creditor countries.
This outcome does not reflect a deliberate plan, but rather a series of policy mistakes.
Germany did not seek to occupy a dominant position in Europe, and it is reluctant to accept the obligations and liabilities that such a position entails.
Call this the tragedy of the European Union.
Recent developments seem to offer grounds for optimism.
The authorities are taking steps to correct their mistakes, especially with the decision to form a banking union and the outright monetary transactions program, which would allow unlimited intervention by the European Central Bank in the sovereign-bond market.
Financial markets have been reassured that the euro is here to stay.
That could be a turning point, provided it is adequately reinforced with additional steps toward greater integration.
Unfortunately, the EU’s unfolding tragedy characteristically feeds on such glimmers of hope.
Germany remains willing to do the minimum – and nothing more – to hold the euro together, and the EU’s recent steps have merely reinforced German resistance to further concessions. This will perpetuate the division between creditor and debtor countries.
A widening gap in economic performance and political dominance is such a dismal prospect for the EU that it must not be allowed to become permanent.
There must be a way to prevent it – after all, history is not predetermined.
The EU, originally conceived as an instrument of solidarity, is today held together by grim necessity.
That is not conducive to a harmonious partnership.
The only way to reverse the trend is to recapture the spirit of solidarity that animated the European project from the start.
To that end, I recently established an Open Society Initiative for Europe (OSIFE).
In doing so, I recognized that the best place to start would be where current policies have created the greatest human suffering: Greece.
The people who are suffering are not those who abused the system and caused the crisis.
The fate of the many migrant and asylum seekers caught in Greece is particularly heart-rending.
But their plight cannot be separated from that of the Greeks themselves.
An initiative confined to migrants would merely reinforce the growing xenophobia and extremism in Greece.
I could not figure out how to approach this seemingly intractable problem until I recently visited Stockholm to commemorate the centenary of Raoul Wallenberg’s birth.
This reawakened my memories of World War II – the calamity that eventually gave birth to the EU.
Wallenberg was a hero who saved the lives of many Jews in my home city of Budapest by establishing Swedish safe houses.
During the German occupation, my father was also a heroic figure.
He helped to save his family and friends and many others.
He taught me to confront harsh reality rather than to submit to it passively.
That is what gave me the idea.
We could set up solidarity houses in Greece, which would serve as community centers for the local population and also provide food and shelter to migrants.
There are already many soup kitchens and civil-society efforts to help the migrants, but these initiatives cannot cope with the scale of the problem.
What I have in mind is to reinforce these efforts.
The EU’s asylum policy has broken down.
Refugees must register in the member country where they enter, but the Greek government cannot process the cases.
Some 60,000 refugees who sought to register have been put into detention facilities where conditions are inhumane.
Migrants who do not register and live on the street are attacked by the hooligans of the neo-fascist Golden Dawn party.
Sweden has made migration and asylum policy a high priority, while Norway is concerned about the fate of migrants in Greece. So both countries would be prime candidates to support solidarity houses.
And other better-off countries could join them.
OSIFE is ready to provide support for this initiative, and I hope other foundations will be eager to do the same.
But this has to be a European project –&nbsp;one that eventually must find its way into the European budget.
Currently, Golden Dawn is making political headway by providing social services to Greeks while attacking migrants. The initiative that I propose would offer a positive alternative, based on solidarity – the solidarity of Europeans with Greeks and of Greeks with migrants.
It would provide a practical demonstration of the spirit that ought to infuse the entire EU.
As soon as possible, I will dispatch an OSIFE needs-assessment team to Greece to contact the authorities – and the people and organizations already helping the needy – to work out a plan for which we can generate public support.
My goal is to revive the idea of the EU as an instrument of solidarity, not only of discipline.
Revolts of the Righteous
It has become fashionable in certain smart circles to regard atheism as a sign of superior education, of a more highly evolved civilization, of enlightenment.
Recent bestsellers suggest that religious faith is really a sign of backwardness, the mark of primitives stuck in the dark ages who are yet to catch up with scientific reason.
Religion, we are told, is responsible for violence, oppression, poverty, and many other ills.
It is not difficult to find examples to back up such assertions.
But can religion also be a force for good?
Indeed, are there cases where religious faith comes to the rescue even of those who don’t have it?
Since I have never had either the benefits or misfortunes of adhering to any religion, it might smack of hypocrisy for me to defend those who have.
But watching the Burmese monks on television defy the security forces of one of the world’s most oppressive regimes, it is hard not to see some merit in religious belief.
Burma is a deeply religious country, where most men spend some time as Buddhist monks.
Even the most thuggish Burmese dictator must hesitate before unleashing lethal force on men dressed in the maroon and saffron robes of their faith.
The Burmese monks, together with nuns in pink robes, were soon joined by students, actors, and others who want to be rid of the military junta.
But it was the monks and nuns who took the first step; they dared to protest when others had mostly given up.
And they did so with the moral authority of their Buddhist faith.
Romantics might say that Buddhism is unlike other religions – indeed, more a philosophy than a faith.
But Buddhism has been a religion in different parts of Asia for many centuries, and, like any other belief, it can be used to justify violent acts.
One need only look at Sri Lanka, where Buddhism is lashed to ethnic chauvinism in the slow-burning civil war between Buddhist Singhalese and Hindu Tamils.
Just as the Buddhists risked their lives to stand up for democracy in Burma, Christians have done so in other countries.
The Marcos regime in the Philippines was doomed in the mid-1980’s from the moment the Catholic Church turned against it.
Thousands of ordinary citizens defied the tanks when Marcos threatened to crush “People Power” with force, but the presence of priests and nuns gave the rebellion its moral authority.
Many political dissidents in South Korea were inspired by their Christian beliefs, and the same is true in China.
And no one can deny the religious authority of Pope John Paul II as a spur to Poland’s rebellion against Communist dictatorship in the 1980’s.
True believers would no doubt see the hand of God in these stirring events.
Ferdinand Marcos’s main opponent, Cory Aquino, actually boasted of having a direct pipeline to the Lord.
As a non-believer, I am bound to treat such claims with skepticism.
But the moral power of religious faith does not need a supernatural explanation.
Its strength is belief itself – belief in a moral order that defies secular, or, indeed, religious dictators.
Active resisters to the Nazis during World War II were often devout Christians.
Some sheltered Jews &#45;&#45; despite their own prejudices &#45;&#45; simply because they saw it as their religious duty to do so.
Nor does faith have to be in a supernatural being.
Men and women who found strength in their belief in Communism resisted the Nazis with equal tenacity.
Despite the horrific violence of Islamist fanatics, it should not be forgotten that the mosque can also be a legitimate basis for resistance against the mostly secular dictatorships in the Middle East today.
In a world of political oppression and moral corruption, religious values offer an alternative moral universe.
This alternative is not necessarily more democratic, but it can be.
Nevertheless, the danger of all dogmas, religious or secular, is that they lead to different forms of oppression.
The revolt against Soviet domination in Afghanistan was led by holy warriors who then imposed their own form of misrule.
Moreover, charismatic leadership can be problematic even when it takes a benign form.
The Madonna-like status of Cory Aquino in the Philippines was inspiring in the heady days of People Power, but did little to bolster the institutions of a secular democracy.
In Poland, once the battle against Communism was won, the Solidarity movement was soon sundered by conflicts between secular democrats and believers who looked to the Church for guidance.
Faith has an especially important role to play in politics in circumstances where secular liberals are rendered impotent, as in the case of Nazi occupation, Communist rule, or military dictatorship.
Liberals are most needed when compromises have to be made, but not nearly as useful when faced with brute force.
That is when visionaries, romantics, and true believers are driven by their beliefs to take risks that most of us would regard as foolhardy.
It is, on the whole, not beneficial to be ruled by such heroes, but it is good to have heroes around when they are needed.
Revolutionary Shadows
VIENNA – What happens after the euphoria of revolution fades?
Today’s Eastern Europe, some two decades after the revolutions of 1989, may offer a salutary warning for today’s defiant and jubilant Arab youth that they must remain vigilant.
Ever since I left Romania for exile in 1986, my returns have been rare and tense.
Although the schedule for my most recent trip was overwhelming, and offered little real contact with ordinary people, I could still grasp – from daily newspapers, TV programs, and conversations with friends – the profound economic, political, and moral crisis engulfing the country.
Mistrust and anger toward a corrupt and inefficient political class, coupled with skepticism about democracy – even nostalgia for communism – is to be found nowadays not only in Romania, but also in some other parts of Eastern Europe.
Some 70% of Romanians reportedly now claim to regret the death of Comrade Nicolae Ceauşescu, whose summary execution in 1989 elicited general enthusiasm.
Of course, the source of such an astonishing finding is difficult to trust, like everything else in Romanian politics, but the vulgar and radical coarsening of public discourse – now peppered with old-new xenophobic elements – is clear enough.
I was offered a taste of this as a guest on a well-respected TV cultural program.
I was amused that the debate focused not on my books, but on issues like the “Jewish cultural mafia” and the “exaggerated” anti-Semitism of past and present Romania.
My interviewer was kinetic, taking over the dialogue with insinuations and personal interventions.
I assumed that I was supposed to be provoked into unguarded comments, a method that fashionable TV journalists everywhere use nowadays.
But I faced a new surprise the following week, when, on the same TV program, the hostess was rather passive towards her guest, a militant journalist turned mercenary journalist, as he confessed his admiration for Corneliu Zelea Codreanu, the “Captain” of the Iron Guard, the far-right Orthodox terrorist organization of the pre-war years.
The journalist considered Codreanu a “Romantic hero.”
A group of Romanian intellectuals, including me, protested in an Open Letter against this effort to rehabilitate a murderer and propagandist of hate and xenophobia.
Romanian TV answered promptly that it understood that victims of anti-Semitic crimes might feel hurt by such a program, but that the program had not promoted this kind of propaganda, offering the bizarre interview with me the previous week as proof of the channel’s good faith.
But the debate didn’t end there.
Soon after, the national committee for the media condemned the program.
And soon after that, some leading intellectuals condemned the national committee’s condemnation as an affront to freedom of speech.No one mentioned the danger of inciting an already radicalized audience.
In fact, the responses from members of the public to these controversies were mostly of a vulgar nationalistic and anti-Semitic tone.
Romania is not alone, of course, in reliving this dark comedy.
Revitalization of the extreme right in Hungary and the rise of “National Bolshevism” in Russia, where Tolstoy is now re-condemned by the Orthodox Church as a proto-communist, suggest a deeper and more pervasive atavistic longing.
I was reminded of my last class at Bard College before my trip to Romania.
We were discussing Thomas Mann’s Death in Venice.
Commenting on the moment when “Asiatic cholera” kills the great and troubled writer Gustav von Aschenbach, a brilliant Asian student pointed out that Mann related the disease to the “pestilence” of the Ganges delta, which traversed China and Afghanistan, Persia and Astrakhan, and “even Moscow,” before reaching Europe through the “city of the lagoon.”
She noted with gravity today’s migrations from poor to prosperous countries, the globalization of evil, the contradictions and conflicts of modernity, the angry terrorist response to it, and the contrast between a rational, pragmatic West and a more idealistic and superstitious East, prone to religious fanaticism and political extremism.
It was a relief to listen to my student’s well-articulated opinions and to see in her the hope of a new, cosmopolitan generation.
But her example was also an unavoidable reminder of the great dangers of our time.
I needed that hope, for what I saw in Eastern Europe had depressed me as much as what I was seeing in the United States, my adopted homeland.
For someone who lived through two totalitarian systems, it is almost unbearable to contemplate America’s decline.
Although we refugees, immigrants, exiles, and outcasts do not boast ad infinitum that “we are the best,” as many Americans do, we still believe that the US remains a powerful guarantor of freedom and democracy, and we consider its incoherence part of its liberty.
For far different reasons, the US, and the entire world, seems condemned to simplification of thought, action, and feeling in the service of immediate, quotidian efficiency.
Of course, art and culture can offer a respite from the oversimplifications of our age – a respite that we need more than ever if we are to reckon with the destiny behind and before us.
But we also need modesty about ourselves and our societies.
Some years ago, I proposed that every country should add to its monuments to heroism some monuments to its national shame.
After all, guilt is as significant as courage in any human enterprise.
To remember and reflect on how we have wronged other people and nations may benefit a country’s citizens as much as celebrating great deeds.
Monuments to shame would not resolve the insoluble problems of humanity’s fate on Earth, but they might slow the advance of its dark side – in Eastern Europe, the Arab world, and everywhere else.
Revolutionizing Arab Economies
ISTANBUL – The ongoing showdown in Egypt between the country’s Islamists and its military rulers is a clear reminder of how difficult democratic transitions in the Arab world are likely to be.
Obviously, failure to reach a power-sharing agreement will prolong political instability. But the resulting economic inaction would be just as damaging to the consolidation of democratic rule.
Emerging Arab leaders, from Islamists to re-invented former regime officials, are keenly aware of the need to improve their countries’ economic prospects. They know full well that their popularity can be sustained only if they are able to deliver growth, employment, and higher living standards.
This would be a difficult challenge under any circumstances – and is all the more daunting against the backdrop of the Arab Spring’s destabilization of the economic systems across the Middle East and North Africa.
Even in countries like Tunisia and Egypt, where the transition to democracy is more advanced, political uncertainty has tended to plague economic achievements.
For the first time since 1986, Tunisia’s economy shrank in 2011, by 1.8%.
Unemployment reached 18% last year, up from 13% in 2010.
Meanwhile, the Egyptian economy contracted by 0.8%, and one million Egyptians lost their jobs.
Egypt’s foreign-investment inflows have also dried up, falling from $6.4 billion in 2010 to a mere $500 million in 2011.
The combination of these negative trends is affecting these countries’ fiscal as well as external balances.
Egypt’s budget deficit reached 10% of GDP, while its foreign-exchange reserves have fallen to $15 billion – barely enough to cover the country’s import bill for the next three months.
In Tunisia, too, the budget deficit has widened sharply in the wake of the revolution, rising from 2.6% of GDP in 2010 to 6% in 2011.
This rapid economic deterioration, combined with the high expectations raised by the onset of political transition, is creating a sense of urgency.
Emerging political actors feel compelled to develop more detailed economic programs and to address their populations’ growing material grievances.
For example, whereas the Islamists had essentially focused on political themes, highlighting participation, inclusiveness, and democratic reforms, the recent election campaigns witnessed a rhetorical shift to economic aspirations.
Overall, the emerging political players – particularly the Islamist parties – have adopted a rather conciliatory tone regarding engagement with international actors.
These parties’ economic programs are by and large pro-market, emphasizing the private sector’s role in driving growth and the need to attract foreign capital.
The state is seen as a vehicle for ensuring social justice, and there are scant references to sharia principles.
Both in Tunisia and Egypt, for example, Islamist politicians have given assurances that the economically critical tourism sector will not be hindered by restrictions related to Islamic law.
The Islamists’ economic programs also foresee a role for international institutions in helping their countries to overcome the challenges that they face.
Indeed, whereas resistance to foreign intervention and assistance has been strong with respect to democratic reforms, new Arab leaders seem more receptive to a partnership with the West on economic objectives.
Economic weakness thus provides an unprecedented opportunity for international engagement with the new Arab leadership, which should incorporate short-, medium-, and long-term goals.
Short-term goals must have priority, because many Islamist parties are being pressed to produce positive results within a single electoral cycle.
The new governments will face the immediate challenge of creating jobs, for which the only available recipe is investment in large-scale public-works projects.
This type of government spending can create labor-intensive jobs that will help to stem rising unemployment.
The international community can help the Arab governments to launch and sustain such initiatives in several ways.
First, it can increase the amount of promised financial assistance.
It can also provide technical expertise to Arab policymakers on debt management.
Without first-rate expertise in debt management, an economy implementing large-scale public outlays risks crowding out private investment through overreliance on domestic savings.
Finally, the international community can help Arab governments to establish a secure and predictable legal and regulatory framework for public-private partnerships for large-scale infrastructure projects.
International actors, jointly with Arab governments, can then help to market these opportunities, allowing Arab economies to benefit from infrastructure-focused long-term international financing.
Only a combination of these options would allow Arab economies to create jobs in the short term, while avoiding the risks of destabilizing fiscal imbalances or a lack of financing for private-sector investment.
The West, for its part, stands to gain in myriad ways from a solid partnership with the Arab world to improve its societies’ economic future.
Even in the midst of a protracted currency crisis, European governments can surely sign on to an agenda that prioritizes transfers of know-how over cash infusions.
Rewriting Russia\u0027s Recent Economic History
Ten years ago this month, Russia's parliament, the Duma, was seeking to impeach then President Boris Yeltsin, initiating a time of stalemate and struggle that ended seven months later when Yeltsin ordered tanks to fire on the Duma's headquarters.
Yeltsin's victory settled who ruled Russia and who would determine economic policy.
But were Yeltsin's economic policy choices the right ones for Russia?
The move from communism to capitalism in Russia after 1991 was supposed to bring unprecedented prosperity.
It did not.
By the time of the ruble crisis of August 1998, output had fallen by almost half and poverty had increased from 2% of the population to over 40%.
Russia's performance since then has been impressive, yet its GDP remains almost 30% below what it was in 1990.
At 4% growth per annum, it will take Russia's economy another decade to get back to where it was when communism collapsed.
A transition that lasts two decades, during which poverty and inequality increase enormously as a few become wealthy, cannot be called a victory for capitalism or democracy.
Moreover, the longer-run prospects are far from rosy: with investment a mere 10% of what it was in 1990, even if that investment is better allocated, how can growth be sustained?
IMF-style neo-liberals are now trotting out an interpretation that amounts to a belated declaration of victory.
The pre-1998 period of economic decline, on their view, reflected a stalled transition process, whereas the ruble crisis finally jolted the authorities into action, with recovery following implementation of far-reaching reforms.
But the real explanation lies elsewhere--and is much simpler.
Until 1998, the ruble was overvalued, making it impossible for domestic producers to compete with imports.
The IMF did not want Russia to devalue, and it provided billions of dollars to prop up the exchange rate.
The IMF and the US Treasury worried that any change would restart inflation, because there was little or no excess productive capacity.
This was a remarkable confession: these officials evidently believed that their policies had wrecked nearly half of Russia's economic capacity in the space of just a few years--a level of destruction not even Hitler's Nazi armies had achieved.
They shunted aside micro-level data that showed that there was in fact excess capacity, just as they ignored a World Bank analysis showing that fresh IMF loans would not restore economic growth, but would only leave the country deeper in debt.
The results were predictable: the 1998 bailout did not work, but devaluation did.
It turned out that there was enormous excess capacity, and import substitution soon began, even in the midst of financial turmoil.
Imports plummeted by nearly 50% in the year after devaluation, as consumers were forced to buy Russian-made food, clothes, and other goods.
Later, higher world oil prices provided a further boost to the economy, generating funds for investment and expansion.
Profits generated provided funds for expansion.
Capital controls--another neo-liberal bugbear--were imposed, and domestic investors looked for opportunities at home instead of in New York or Cyprus or the Cote d'Azur.
Yes, the market economy can provide incentives for wealth creation.
Unfortunately, under the preceding years of IMF programs, the market economy with high interest rates, illegitimate privatization, poor corporate governance, and capital-market liberalization provided only incentives for asset stripping.
Growth was caused by the change in the economic environment, a change that Russia made for itself.
The reformist parliament elected in December 1999 in tandem with President Vladimir Putin's reformist administration lowered tax rates, overhauled the judicial system, legislated private ownership of land, and adopted new banking laws.
These are positive reforms, but they do not explain the burst of post-crisis growth, which began before any of them were passed, let alone put in place.
Indeed, even with the turmoil of default and devaluation, and despite the usual 12-18-month lag in the impact of devaluation, Russia was growing at 5.4% annually by the end of 1999.
In the long run, we should be concerned not just with the pace of economic growth but with the type of society that is created.
To Russia's so-called reformers, the enormous concentration of ownership in Russia that emerged in the 1990's is of no concern, so long as it generates growth.
But there is another vision of a market economy, one based on greater equality, and which uses the power of markets to bring prosperity not just to the few but to all of society.
That Russia's transition did not achieve this is no a surprise.
That goal was not a part of the reformers' vision.
The great paradox is that their view of economics was so stilted, so ideologically driven, that they failed even in their narrower objective of bringing about economic growth.
What they achieved was undiluted decline.
No rewriting of history will change this.
संपन्नता का असली कच्चा माल
तिराना. गरीब देश कच्चे माल यथा कोको, लौह अयस्क और कच्चे हीरों का निर्यात करते हैं. अमीर देश अकसर उन्हीं गरीब देशों को अधिक जटिल उत्पादों जैसे कि चॉकलेट, कार और आभूषणों का निर्यात करते हैं. यदि गरीब देशों को अमीर बनना है तो उन्हें अपने संसाधनों का कच्चे माल के रूप में निर्यात रोकना होगा और उनके मूल्य संवर्द्घन पर ध्यान केंद्रित करना होगा. अन्यथा अमीर देश मूल्य और सभी अच्छी नौकरियों के बड़े भाग को यूं ही हड़पते रहेंगे.
गरीब देश इस बाबत दक्षिण अफ्रीका और बोत्सवाना का अनुसरण कर सकते हैं तथा अपनी प्राकृतिक संपदा का कच्ची अवस्था में निर्यात को सीमित कर उसका अपने यहां औद्योगिकीकरण को बढ़ावा देने में इस्तेमाल कर सकते हैं. इस नीति को स्थानीय स्तर पर ‘‘लाभीकरण’’ के नाम से जाना जाता है. पर क्या वे ऐसा कर पाएंगे?
कुछ विचार गलत होने से ज्यादा बुरे होते हैंः वे वंध्याकारी होते हैं क्योंकि वे दुनिया को उस नजरिये से देखते हैं जिसमें कम अहम मसलों पर जोर होता हैं - बोलें तो कच्चे माल की उपलब्धता - और समाज को उन संभावित अवसरों की चकाचौंध में अंधा कर देते हैं जो दरअसल कहीं और मौजूद हैं.
फिनलैंड की बात करते हैं. इस नॉर्डिक देश की आबादी बहुत कम है लेकिन वहां पेड़ बहुत अधिक हैं. कोई भी किताबी अर्थशास्त्री कहेगा कि इस बात के मद्देनजर फिनलैंड को लकड़ी का निर्यात करना चाहिए. फिनलैंड ने ऐसा किया भी है. इसके विपरीत पारंपरिक विकास का पक्षधर अर्थशास्त्री कहेगा कि इसे लकड़ी का निर्यात नहीं करना चाहिए. इसकी बजाए उसे लकड़ी का मूल्य संवर्द्धन कर इसे कागज व फर्नीचर में बदल देना चाहिए. फिनलैंड ने ऐसा भी किया है, लेकिन फिनलैंड के निर्यात में काष्ठ-उत्पादों का मात्र 20% हिस्सा है.
इसका कारण है कि लकड़ी ने विकास के एकदम अलग और कहीं अधिक समृद्ध मार्ग को खोल दिया है. जब फिनलैंड के लोग लकड़ी काटते थे तो उनकी कुल्हाडि़यां और आरियां टूट जाती थीं और उन्हें बार-बार बदलना पड़ता था तथा सुधारना पड़ता था. इससे उन्हें लकड़ी काटने व छीलने वाली मशीनें बनाने में महारत हासिल करनी पड़ी.
जल्द ही फिनलैंड के व्यापारियों ने महसूस किया कि वे अन्य सामग्रियों को काटने वाली मशीनें भी बना सकते हैं क्योंकि काटने वाली हर चीज लकड़ी की नहीं बनी होती. उसके बाद उन्होंने अपनी मशीनों को स्वचालित बनाया क्योंकि सभी चीजों को हाथ से काटना उबाऊ कम हो सकता है. उसके बाद उन्होंने अन्य स्वाचालित मशीनें बनानी शुरू कर दी क्योंकि जीवन में केवल काटने से भी अधिक बहुत कुछ है. और स्वचालित मशीनों से अंततः अब वे नोकिया तक आ गए हैं. आज विभिन्न प्रकार की मशीनों का फिनलैंड से निर्यात होने वाली वस्तुओं में 40% से भी ज्यादा हिस्सा है.
इस उदाहरण का सबक यह है कि कच्चे माल का मूल्य संवर्द्धन विविधीकरण का एक मार्ग है, पर जरूरी नहीं कि यह लंबा हो या हमेशा फलदायी रहे. देश अपने यहां उपलब्ध कच्चे माल तक ही सीमित नहीं है. आखिर स्विट्जरलैंड के पास कोको नहीं है और चीन उन्नत मेमोरी चिप नहीं बनाता है. लेकिन इससे इन देशों को क्रमशः चाकलेट और कंप्यूटर के बाजार में अपना दबदबा कायम करने में कोई बाधा नहीं उत्पन्न हुई.
अपने आसपास कच्चा माल उपलब्ध होना केवल एक लाभ है बशर्ते कि यह इतना कीमती हो कि इसका अच्छे दाम पर निर्यात किया जा सके. यह बात हीरों और लौह अयस्क से ज्यादा लकड़ी पर लागू होती है. अपनी अलग-थलग अवस्थिति के बावजूद ऑस्ट्रेलिया लौह अयस्क का बड़ा निर्यातक है ना कि स्टील का. जबकि दक्षिण कोरिया जिसे लौह अयस्क आयात करना पड़ता है, स्टील का प्रमुख निर्यातक है.
फिनलैंड का उदाहरण बताता है कि विकास के और अधिक संभावना भरे मार्ग केवल अपने कच्चे माल के मूल्य संवर्द्धन तक ही सीमित नहीं है - बल्कि इसका क्षमताओं में और क्षमताएं जोड़ने से नाता है. अर्थात् नई क्षमताएं जोड़ कर (मसलन स्वाचालीकरण) आप अपनी वर्तमान क्षमता (काटने वाली मशीनों) को पूरी तरह नए बाजारों में उतार सकते हैं. इसके विपरित कच्चा माल प्राप्त करने के लिए आपके केवल नजदीकी बंदरगाह तक ही जाना होता है.
इस तरह एक कच्चे माल के परिवहन-लागत लाभ के आधार पर भविष्य के बारे में सोचने से देश उन्हीं उत्पादों तक सीमित हो जाते हैं जिनमें केवल स्थानीय स्तर पर उपलब्ध कच्चे माल का इस्तेमाल होता है. यह प्रवृत्ति अत्यंत सीमितकारी साबित होती है. किस विशेष कच्चे माल की निकटता किसी देश को कार, प्रिंटर, एंटिबायोटिक या फिल्मों के उत्पादन में प्रतियोगी बनाती है? इनमें से ज्यादातर उत्पादों में एक से अधिक प्रकार के कच्चे माल की जरूरत होती है और ज्यादातर मामलों में केवल एक कच्चे से कोई बहुत अधिक फर्क पड़ने वाला नहीं है.
लाभ कमाने की प्रवृति कच्चे माल खीचनें वाले उद्योगों को स्थानीय बाजार में अपना सामान अपने निर्यात मूल्य से कम दाम पर बेचने के लिए मजबूर करती है. इस प्रकार वे अव्यक्त कर के रूप में कार्य करते हैं जिससे उनके नीचे के कार्यों को सबसिडी मिलती है. सिद्धांत रूप से ऐसे उद्योगों के कुशल कराधान से समाजों को प्रकृति की उदारता का भरपूर लाभ लेने में सक्षम बनाना चाहिए. लेकिन कराधान क्षमता का निचले पायदान के उद्योगों का लाभ पहुंचाने में इस्तेमाल करने का कोई कारण नहीं है. जैसा मेरे सहयोगियों और मैंने दर्शाया है कि ये गतिविधियां ना तो क्षमताओं की परिभाषा के निकट हैं और ना ही भावी विकास के सोपान के रूप में मूल्यवान हैं.
अवश्य ही सत्रहवीं सदी के उत्तरार्द्ध में ब्रिटेन के कोयला उद्योग का जो सबसे बड़ा आर्थिक असर था वह था भाप के इंजिन का विकास जो कोयला खादनों से पानी बाहर निकालते थे. लेकिन बात यहीं नहीं थम गई. भाप इंजन का निर्माण व परिवहन के क्षेत्र में इस्तेमाल होने लगा जिससे क्रांतिकारी परिवर्तन आए, दुनिया का इतिहास बदल गया और ब्रिटेन की हैसियत बढ़ गई. कोयले के भंडार होने से सारी दुनिया में ब्रिटेन की उपयोगिता सर्वोपरी हो गई.
इसके विपरीत पेट्रोकेमिकल या इस्पात संयंत्रों का विकास अथवा कम वेतन वाले हीरा-काटने के कार्यों को भारत या विएतनाम से बोत्सवाना - एक ऐसा देश जो चार गुना से ज्यादा अमीर है - ले जाना जितना अकल्पनाशील है उतना ही सीमितकारी भी है. यूएई में कहीं अधिक रचनाशीलता पाई जा सकती है जिसने तेल से होने वाली आमदनी का अब संरचना तथा सुविधाओं में निवेश किया है. इसके परिणामस्वरूप दुबई आज सफल पर्यटन व व्यापारिक केंद्र में तब्दील हो चुका है.
यहां पर अमेरिका के लिए सबक है जिसने 1973 के तेल संकट (अवरोध) के बाद से बड़ी लाभकरण नीति को अपना लिया है. उस वक्त अमेरिका ने कच्चे तेल और प्राकृतिक गैस के निर्यात पर नियंत्रण लगा दिया था. जैसे-जैसे अमेरिका अधिकाधिक ऊर्जा आयातक बनता गया, इसके नेताओं को इस नीति का परित्याग करने का कोई कारण कभी नहीं मिला. लेकिन हाल ही में घटित शेल ऊर्जा क्रांति ने पिछले पांच साल में तेल और गैस का उत्पादन नाटकीय रूप से बढ़ा दिया है. नतीजतन, प्राकृतिक गैस के घरेलु दाम इसके निर्यात मूल्य से कहीं नीचे हैं.
यह उन उद्योगों के लिए छिपी हुई सबसिडी है जो सघन रूप से तेल व गैस का इस्तेमाल करते हैं और इससे अंतरवाही विदेशी निवेश आकर्षित हो सकता है. लेकिन क्या यह सरकार की कराधान अथवा व्यापार को नियंत्रित करने की क्षमता का सबसे अच्छा उपयोग है? क्या आज अमेरिका बेहतर स्थिति में नहीं होता यदि वह प्राकृतिक गैस पर कर लगाने की क्षमता का क्रांतिकारी इंजन के समतुल्य समीचीन तकनीकी के विकास को बढ़ाने में उपयोग करता?
Turning Good Economic Luck into Bad
CAMBRIDGE, MA – It is often difficult to understand how countries that are dealt a pretty good economic hand can end up making a major mess of things.
It is as if they were trying to commit suicide by jumping from the basement.
Two of the most extreme cases (but not the only ones) are Argentina and Venezuela, countries that have benefited from high prices for their exports but have managed to miss the highway to prosperity by turning onto a dead-end street.
They will eventually have to make a U-turn and backtrack over the terrain of fictitious progress.
The puzzling thing is that this is not the first time either country has veered into an economic cul-de-sac.
It has been said that only barbers learn on other people’s heads, but some countries seem unable to learn even from their own experience.
The ultimate reason for such self-destructiveness may be impossible to identify.
But it is certainly possible to describe how the road to hell is paved, whatever the intentions.
It all starts when some imbalance causes overall inflation or some key price – typically the exchange rate, but also power, water, and gasoline – to come under upward pressure.
The government then uses its coercive power to keep a lid on price growth.
For example, Brazil has wreaked havoc on the financial health of its national oil company, Petrobras, in order to keep gasoline prices low.
Argentina destroyed its natural-gas sector with price controls.
Many countries have kept power and water prices too low and have ended up with shortages.
But things become really nasty when the government opts for foreign-exchange controls.
The usual story, nicely summarized by the late Rüdiger Dornbusch and Sebastian Edwards, is that lax fiscal and monetary policies cause a flood of freshly printed currency to chase more dollars than the central bank can provide at the going exchange rate.
Rather than let the currency depreciate, or tighten its policies, the government opts for foreign-exchange controls, limiting access to dollars to those who “really” need it and thus preventing “speculators” from hurting “the people.”
Foreign-exchange controls, typically accompanied by price controls, give the government the sense that it can have its cake (lax policies) and eat low inflation.
But controls lead to a parallel exchange rate, which can be either legal, as in Argentina, or illegal and even unpublishable, as in Venezuela.
But having two prices for an identical dollar creates enormous arbitrage opportunities.
A dollar purchased at the official rate can be sold for almost twice as much in the “blue” market in Argentina and a whopping ten times more in Venezuela.
Repeat that game a few times and you will be able to afford a corporate jet.
Nothing becomes more profitable than over-invoicing imports and under-invoicing exports.
In Venezuela, importing spoiled food and letting it rot is more profitable than any investment anywhere else in the world (disregarding, of course, the bribes needed to make it happen).
The dual-exchange-rate system ends up distorting production incentives and causing the effective supply of imported goods to decline, leading to a combination of inflation and shortages.
But here things turn interesting.
Public spending tends to rise with inflation more than government revenues do, because revenues depend on the tax on exports, which is calculated at the pegged official exchange rate.
So, over time, fiscal accounts worsen automatically, creating a vicious circle: monetized fiscal deficits lead to inflation and a widening gap in the parallel exchange-rate market which worsens the fiscal deficit.
Eventually, a major adjustment of the official rate becomes inevitable.
For example, when Hugo Chávez was first elected President in 1998, the Venezuelan bolívar could be exchanged for 2,610 Colombian pesos.
Today, despite a raft of foreign-exchange controls, a bolívar is worth barely 300 pesos at the official exchange rate (which is soon to be readjusted); one would be lucky to get 30 pesos at the black-market rate.
Not surprisingly, prices in Venezuela rise in one month more than they do in two years in neighboring Colombia.
Why do countries opt for such a strategy?
Any system creates winners and losers.
In Argentina and Venezuela, the winners are those who have preferential access to foreign exchange, those who benefit from the government’s profligacy, those who can borrow at the negative real interest rates that lax policies create, and those who do not mind waiting in long lines to buy rationed items.
Such a system can generate a self-reinforcing set of popular beliefs, which may explain why countries like Argentina and Venezuela repeatedly drive down dead-end streets.
Because so many businesses make money from the rents created by the rationing of foreign exchange, rather than by creating value, it is easy to believe that markets do not work, that entrepreneurs are speculators, and that governments need to control them and impose “fair” prices.
All too often, this allows governments to blame the car, and even the passengers, for getting lost.
पिकेटी का नदारद तकनीकी ज्ञान
कैम्ब्रिज – सैद्धांतिक ढाँचे बहुत शानदार होते हैं क्योंकि उनकी मदद से हम जटिल दुनिया के बुनियादी पहलुओं को बहुत आसानी से समझ पाते हैं, ठीक वैसे ही जैसे नक़्शों के मामले में होता है। लेकिन, नक़्शों की तरह ही, वे केवल एक सीमा तक ही उपयोगी होते हैं। उदाहरण के लिए, सड़क के नक़्शे आपको यातायात की मौजूदा स्थिति नहीं बताते या राजमार्ग पर मरम्मत के बारे में अद्यतन जानकारी नहीं देते।
विश्व की अर्थव्यवस्था को समझने का एक उपयोगी तरीका वह सुरुचिपूर्ण ढाँचा है जो थॉमस पिकेटी ने अपनी प्रख्यात पुस्तक कैपिटल इन द ट्वेंटी-फ़र्स्ट सेंचुरी में पेश किया है। पिकेटी ने दुनिया को दो मूलभूत तत्वों में विभाजित किया है – पूँजी और श्रम। दोनों का उत्पादन में इस्तेमाल होता है और वे आय साझा करते हैं।
दोनों के बीच मुख्य अंतर यह है कि पूँजी ऐसी चीज़़ है जिसे आप ख़रीद सकते हैं, स्वामित्व में ले सकते हैं, बेच सकते हैं, और, सिद्धांत रूप में, असीम रूप से संचित कर सकते हैं, जैसा कि अति-समृद्ध लोगों ने किया है। श्रम में व्यक्तिगत क्षमता का उपयोग होता है जिसका मानदेय दिया जा सकता है, पर उसे दूसरे लोग स्वामित्व में नहीं ले सकते, क्योंकि ग़ुलामी समाप्त हो चुकी है।
पूँजी की दो रोचक विशेषताएँ है। पहली, इसकी कीमत इसके द्वारा निर्धारित होती है कि यह भविष्य में कितनी आय लेकर आएगी। अगर भूमि का एक टुकड़ा गेहूँ के ढेर या वाणिज्यिक किराये के रूप में दुगुनी आउटपुट देता है, तो यह स्वाभाविक रूप से दुगुने के योग्य होना चाहिए। अन्यथा, एक ढेर का स्वामी दूसरा ढेर ख़रीदने के लिए इसे बेच देगा। इस कोई-अंतरपणन-नहीं की स्थिति का तात्पर्य यह है कि, संतुलन के रूप में, सभी पूँजी समान जोखिम-समायोजित प्रतिलाभ देती हैं, जिसके बारे में पिकेटी का ऐतिहासिक रूप में अनुमान हर साल 4-5% का है।
पूँजी की दूसरी रोचक विशेषता यह है कि यह बचतों के ज़रिए जमा होती है। कोई व्यक्ति या देश जो आय की 100 इकाई बचाता है, उसे शाश्वत रूप से लगभग 4-5 इकाई वार्षिक आय प्राप्त करने में स��्षम होना चाहिए। यहाँ से, यह देखना आसान है कि अगर पूँजी का पूरी तरह पुनः निवेश किया जाता है और अर्थव्यवस्था में 4-5% से कम की वृद्धि होती है, तो पूँजी और इसका आय का अंश अर्थव्यवस्था में तुलनात्मक रूप से बड़ा हो जाएगा।
पिकेटी का तर्क है कि क्योंकि दुनिया के अमीर देश 4-5% से कम दर पर बढ़ रहे हैं, इसलिए वे अधिक असमान बन रहे हैं। इसे डेटा में देखा जा सकता है, हालाँकि संयुक्त राज्य अमेरिका में असमानता में वृद्धि का बड़ा हिस्सा इस तर्क के कारण नहीं है बल्कि उन लोगों के उदय के कारण है जिसे पिकेटी "सुपर-प्रबंधक" कहते हैं जो बहुत उच्च वेतन अर्जित करते हैं (हालाँकि पिकेटी ने इसका कारण नहीं बताया है)।
इसलिए आइए हम यह देखने के लिए दुनिया पर यह सिद्धांत लागू करें कि यह कितनी अच्छी तरह से उपयुक्त बैठता है। 1983 से 2013 तक के 30 सालों में, यूएस ने शेष दुनिया से निवल रूप से $13.3 ट्रिलियन, या एक साल के सकल घरेलू उत्पाद का लगभग 80% उधार लिया। 1982 में वापस लौटें तो इस अवधि के शुरू होने से पहले, यह शेष दुनिया से शुद्ध वित्तीय आय में लगभग $36 बिलियन अर्जित कर रहा था, जो उस पूँजी का गुणन फल है जिसका इसने पहले विदेशों में निवेश किया था।
अगर हम मान लें कि इस पूँजी पर प्रतिलाभ 4% था, तो यह विदेशी पूँजी में $900 बिलियन का स्वामी होने के बराबर होगा। तो, अगर हम हिसाब-किताब करें, तो यूएस आज शेष दुनिया का लगभग $12.4 ट्रिलियन (13.3 घटा 0.9) का कर्ज़दार है। 4% की दर पर, यह $480 बिलियन के वार्षिक भुगतान का प्रतिनिधित्व करेगा। ठीक?
ग़लत – और यह बहुत जोखिम भरा है। यूएस निवल रूप में अपने ऋण के लिए शेष दुनिया को कुछ भुगतान नहीं करता। इसके बजाय, इसने 2013 में लगभग $230 बिलियन अर्जित किए। 4% की आय का अनुमान करते हुए, यह विदेशी पूँजी में $5.7 ट्रिलियन के स्वामित्व के बराबर होगा। वास्तव में, अगर पिकेटी की गणना सही है तो यूएस को जो भुगतान करना चाहिए उसके बीच अंतर वार्षिक आय में लगभग $710 बिलियन, या पूँजी में $17.7 ट्रिलियन है - जो इसके वार्षिक सकल घरेलू उत्पाद के बराबर है।
इस ग़लत गणना में यूएस एकमात्र अपवाद नहीं है, और अंतराल व्यवस्थित और बड़े हैं, जैसा कि फ़ेडरिको स्टुर्ज़ेनेगर और मैंने दिखाया है।
इसके विपरीत चरम स्थिति पर चिली और चीन जैसे देश हैं। चिली ने पिछले 30 सालों में निवल रूप से बहुत कम उधार लिया है, लेकिन शेष दुनिया को इस तरह भुगतान करता है कि मानो इसने अपने सकल घरेलू उत्पाद का 100% उधार लिया था। चीन ने, पिछले दशक के दौरान, शेष दुनिया को निवल रूप में अपने वार्षिक सकल घरेलू उत्पाद का लगभग 30% उधार दिया है, लेकिन उसे इसके लिए लगभग कुछ नहीं मिलता। धन की दृष्टि से, यह ऐसा है कि मानो वे बचतें मौजूद ही नहीं थीं।
यह क्या चल रहा है? आसान सा जवाब यह है कि चीज़़ें सिर्फ़ पूँजी और श्रम से नहीं बनाई जातीं, जैसा कि पिकेटी का तर्क है। उनमें तकनीकी ज्ञान भी शामिल होता है।
इस चूक का प्रभाव देखने के लिए, इस पर विचार करें कि अमेरिका का $13 ट्रिलियन का निवल उधार नाटकीय रूप से सकल उधार की मात्रा को कम करके बताया गया है, जो सकल रूप में लगभग $25 ट्रिलियन था। यूएस ने अपने घाटे को पूरा करने के लिए $13 ट्रिलियन का इस्तेमाल किया और शेष का इस्तेमाल विदेशों में निवेश करने के लिए किया।
यह पैसा प्रत्यक्ष विदेशी निवेश के रूप में तकनीकी ज्ञान के साथ मिश्रित किया गया है, और दोनों का प्रतिलाभ ऋणदाताओं को भुगतान किए गए 4% या उससे कम की तुलना में लगभग 9% है। वास्तव में, $12 ट्रिलियन पर 9% की प्राप्ति $25 ट्रिलियन पर 4% से ज़्यादा है, और इस तरह प्रकट रूप से इस पहेली का हल मिल जाता है।
चिली और चीन ने अपनी बचतें विदेशों में उन्हें तकनीकी ज्ञान के साथ मिश्रित किए बिना लगा दीं - उन्होंने स्टॉक और बांड ख़रीदे - और परिणामस्वरूप वे लगभग सिर्फ़ 4-5% या कम प्राप्त करते हैं जैसा कि पिकेटी का मानना है। इसके विपरीत, चिली और चीन में विदेशी निवेशक मूल्यवान तकनीकी ज्ञान लेकर आते हैं; इसलिए प्रवाहित होने वाली सकल पूँजी विदेशों में सकल बचत से ज़्यादा आय प्रदान करती है। प्रतिलाभ में इस अंतर का अंतरपणन नहीं किया जा सकता, क्योंकि उच्चतर प्रतिलाभ प्राप्त करने के लिए हमें तकनीकी ज्ञान की ज़रूरत होती है।
मुद्दा यह है कि तकनीकी ज्ञान का सृजन और नियोजन धन के सृजन का महत्वपूर्ण स्रोत होता है। आखिरकार, Apple, Google, और Facebook का मूल्य संयुक्त रूप से $1 ट्रिलियन से ज़्यादा है, हालाँकि उनमें शुरू में निवेश की गई पूँजी उसका मामूली-सा अंश ही है।
यह अंतर किसकी जेब में जाएगा, यह लेने वाले की कला पर निर्भर है। तकनीकी ज्ञान सुसंगत टीम में निहित रहता है, व्यक्तियों में नहीं। टीम में हर कोई महत्वपूर्ण होता है, लेकिन टीम के बाहर हर व्यक्ति का मूल्य बहुत कम होता है। शेयरधारक अंतर को मुनाफ़े के रूप में लेना चाह सकते हैं, लेकिन वे टीम के बिना ऐसा नहीं कर सकते।
यहीं सुपर-प्रबंधकों की भूमिका होती है: वे टीम द्वारा सृजित मूल्य का एक हिस्सा अपने पास रखने का प्रयास करते हैं। धन और असमानता में वृद्धि के पीछे केवल पूँजी ही नहीं है, बल्कि तकनीकी ज्ञान भी है।
Venezuela’s Bad Angels
CARACAS – Fish do not know they are in water.
They take it for granted.
They would need to get out of water to understand how different things could be.
Similarly, one way for people to see the uniqueness of what they consider normal is to contrast it with the past – or with an outlier, an example that bucks the current trend.
A case in point is the dramatically low levels of violence that characterize the present, a fact uncovered by Steven Pinker in his 2011 book The Better Angels of Our Nature.
The facts are imposing and incontrovertible.
As Pinker convincingly shows, violence of all kinds has declined over the millennia, in recent centuries, and during the past decades.
Humans, according to Pinker, have both good and bad angels (or passions), and the good ones have become more dominant.
Why?
For starters, Leviathan – that is, the state’s monopoly on the legitimate use of force – has reduced conflict and increased personal security.
Second, the state’s administration of justice adopted and encouraged non-violent ways of resolving grievances, thus allowing cooperation and the expansion of commerce.
This trend accelerated with the spread of Enlightenment humanist ideals based on fundamental human equality and the application of rationality to human affairs.
In this respect, Venezuela is the proverbial fish out of water.
During the 15 years of the “Bolivarian Revolution” initiated by the late Hugo Chávez, the country’s homicide rate has quadrupled, from a high base of 19 per 100,000 in 1998 to 79 in 2013, roughly 17 times the average in the United States, 26 times that in Chile, and more than 30 times the combined average of OECD countries.
In a sample of 145 countries assembled by the World Bank, Venezuela’s homicide numbers since 1995 have been exceeded only by Honduras and El Salvador, countries with less than one-third of Venezuela’s per capita income.
And Venezuela’s murder boom came despite an 8-fold increase in oil prices in the intervening period, which massively increased the country’s exports and fiscal revenues.
Adopting Pinker’s perspective, one key element underpinning the rise in violence in Venezuela is the voluntary weakening of Leviathan.
While there are no armed opposition groups, the government has sponsored the creation of armed paramilitary groups, known locally as colectivos, charged with defending the “revolution.”
Thus, they bear a striking similarity to the Nazi brown shirts, the Fascist black shirts, and the various “people’s militias” that were established under communist regimes.
Just recently, the colectivos made international headlines when, on February 18, acting on the orders of a state governor, they attacked a peaceful demonstration, killing Genesis Carmona, a beauty queen.
They openly control parts of Caracas and other cities.
On February 24, President Nicolás Maduro invited them to ride their motorcycles to the presidential palace.
One reason why a ruling party or political movement might create armed support groups is to deter the regular armed forces from attempting a coup.
In Venezuela, for example, the situation would become very messy, because the colectivos would wreak havoc.
Such groups may also reflect an effort to impose social order through fear.
But there is something else underlying their establishment: an anti-Enlightenment ideology of violence.
While chavismo arrived in power via the ballot box, its leaders wished it had done so with bullets, like their hero Che Guevara.
That is why the colectivos erected a bust of Tirofijo, the deceased leader of Colombia’s FARC guerrilla group, and why they photograph their children with assault rifles, covered faces, and military garb.
The ideology of violence is underpinned by the Marxian idea that the road to progress is class struggle.
The way forward involves inculcating hatred among “the people” of their class enemies.
Under this paradigm, a government that talks to the enemy is either weak or a traitor to its class.
In this framework, there is no collective sense of a communal “we” that has agreed to live together under rules that apply equally to all.
Institutions designed for liberal democracies – such as an independent judiciary, a comptroller-general, and a free press – become assets to be seized and used in the class struggle.
As a consequence, the law is used only against political opponents, the budgetary division between party and state disappears, and those delivering bad news are treated harshly, as many local media have long known, and as global news outlets like CNN have recently discovered.
For many years, Venezuela’s dismal dynamics generated little open revolt.
But, since February 12, things have changed radically.
Previously, skyrocketing insecurity, massive shortages, high inflation, and police brutality were simply facts of life with which Venezuelans had to cope on their own.
Now, however, they have fueled a collective sense of outrage that demands civil disobedience as the only possible moral stance.
The fish know they are out of water.
Venezuela will not be able to join the global trend of declining violence unless its government reestablishes Leviathan, which implies disarming the colectivos.
The country will be unable to avoid tyranny unless it is willing to respect the minimal democratic guarantees provided by the constitution, such as a supreme court, an attorney general, a comptroller, and an electoral council appointed with two-thirds of the National Assembly’s support.
All of these institutions require political forces to negotiate with, rather than persecute, their opponents.
Most important, Venezuela will also have to abandon the ideology of class warfare.
Pinker aptly quotes Voltaire: “Those who can make you believe absurdities can make you commit atrocities.”
The Tacit-Knowledge Economy
CAMBRIDGE – Almost all rich countries are rich because they exploit technological progress.
They have moved the bulk of their labor force out of agriculture and into cities, where knowhow can be shared more easily.
Their families have fewer children and educate them more intensively, thereby facilitating further technological progress.
Poor countries need to go through a similar change in order to become rich: reduce farm employment, become more urban, have fewer children, and keep those children that they have in school longer.
If they do, the doors to prosperity will open.
And isn’t that already happening?
Let us compare, for example, Brazil in 2010 with the United Kingdom in 1960.
Brazil in 2010 was 84.3% urban; its fertility rate was 1.8 births per woman; its labor force had an average of 7.2 years of schooling; and its university graduates accounted for 5.2% of potential workers.
These are better social indicators than the United Kingdom had in 1960.
At that time, the UK was 78.4% urban; its fertility rate was 2.7; its labor force had six years of schooling on average, and its university graduates accounted for less than 2% of potential workers.
Brazil is not a unique case: Colombia, Tunisia, Turkey, and Indonesia in 2010 compare favorably to Japan, France, the Netherlands, and Italy, respectively, in 1960.
Not only did these countries achieve better social indicators in these dimensions; they also could benefit from the technological innovations of the past half-century: computers, cellphones, the Internet, Teflon, and so on.
So today’s emerging-market economies should be richer than today’s advanced economies were back then, right?
Wrong – and by a substantial margin.
Per capita GDP at constant prices was 140% higher in Britain in 1960 than in Brazil in 2010.
It was 80% higher in Japan back then than in Colombia today, 42% higher in old France than in current Tunisia, 250% higher in the old Netherlands than in current Turkey, and 470% higher in old Italy than in current Indonesia.
Why is it that today’s smaller and more educated urbanized families in emerging-market economies are so much less productive than their counterparts were a half-century ago in today’s rich countries?
Why can’t today’s emerging markets replicate levels of productivity that were achieved in countries with worse social indicators and much older technologies?
The key to this puzzle is tacit knowledge.
To make stuff, you need to know how to make it, and this knowledge is, to a large extent, latent – not available in books, but stored in the brains of those who need to use it.
Getting it there is really tough.
Tacit knowledge is acquired mostly through learning by doing.
That is how we train musicians, barbers, doctors, and scientists.
Consider how long it takes an adult to learn to speak a language or a musician to master the violin.
Moreover, tacit knowledge is vast and growing, so that only a miniscule fraction of it fits in anybody’s head.
But most products require much more knowledge than fits in anybody’s head, so that making them requires teams of people with different pieces of knowledge, not unlike a symphonic orchestra.
Getting more tacit knowledge is easier said than done, because economies can offer experience only on the basis of current jobs.
How do people learn to do jobs that do not yet exist?
How do they create and mobilize coherent teams of people in new economic activities if the requisite tacit knowledge is missing?
Recent research at Harvard University’s Center for International Development (CID) suggests that tacit knowledge flows through amazingly slow and narrow channels.
The productivity of Nuevo León, Mexico, is higher than in South Korea, but that of Guerrero, another Mexican state, resembles levels in Honduras.
Moving knowledge across Mexican states has been difficult and slow.
It is easier to move brains than it is to move tacit knowledge into brains, and not only in Mexico.
For example, as the CID’s Frank Neffke has shown, when new industries are launched in German and Swedish cities, it is mostly because entrepreneurs and firms from other cities move in, bringing with them skilled workers with relevant industry experience.
They seldom hire locals.
The recently deceased economist Steven Klepper argued that industries tend to cluster in particular cities simply because new firms are formed mainly by workers who leave other successful firms, taking the relevant tacit knowledge with them.
Indeed, a large literature on knowledge spillovers points to their remarkably narrow geographic range.
The exceptions often confirm the rule.
The US would not have been able to build the first atomic bomb in just four years had Hitler not encouraged so many key scientists to leave Europe.
The bottom line is that urbanization, schooling, and Internet access are woefully insufficient to transmit effectively the tacit knowledge required to be productive.
That is why today’s emerging markets are so much less productive than rich countries were in 1960, even though the latter were less urban, had higher birth rates and less formal schooling, and used much older technologies.
The policy implications are clear.
Knowhow resides in brains, and emerging and developing countries should focus on attracting them, instead of erecting barriers to skilled immigration.
They should tap into their diasporas, attract foreign direct investment in new areas, and acquire foreign firms if possible.
A Brain’s View of Economics
CAMBRIDGE – In his pathbreaking 2005 book On Intelligence, Jeff Hawkins proposed an alternative paradigm of how the human brain works.
In his view, the brain is not a Turing machine that manipulates symbols according to a table of rules, which is the model on which computers and artificial intelligence have been based.
Instead, the brain is a giant hierarchical memory that is constantly recording what it perceives and predicting what will come next.
The brain makes predictions by finding similarities between patterns in recent sensory inputs and previous experiences stored in its vast memory.
It matches current fragmentary sounds in a sea of noise with a known song, or the face of a person in disguise with that of your child.
The idea is similar to the auto-complete function in, say, the Google search box – constantly guessing what you will enter next based on what you have already typed in.
To see the hierarchy in this mechanism, consider that by perceiving just a few letters, you can predict the word; by looking at a few words, you can predict what the sentence means, or even the paragraph.
In fact, right now you must be guessing where it is that I am going with this entire commentary.
The hierarchy allows you to understand meaning, whether the input got to your brain by reading or listening.
The brain is thus an inductive machine that predicts the future based on finding similarities, at many different levels, between the present and the past.
Hawkins’ alternative model of how the brain works has important implications for many fields, including the one that I spend most of my time thinking about: economic-development strategy.
By definition, development is not just more of the same, just as an adult is not just a big baby.
The process involves adding and combining new and existing capabilities to support more diverse and complex activities.
But finding new things that can be done successfully is tricky, because it requires knowing what you will need and whether you will be able to procure it.
This is why Jeffrey Sachs’s Millennium Villages project has faltered, as the journalist Nina Munk’s recent book shows.
In trying to move farmers from subsistence to commercial agriculture, Munk argues, there are just too many missing pieces.
Traditional thinking in economic development has followed a Turing-like approach, trying to specify a general model of the world – based on first principles – and then use that model to think about a country’s predicament or a policy’s potential impact.
But the world is often too complex and nuanced for such an approach.
Would it not be a great improvement if, when looking at a particular place, we could have in mind all of the world’s previous experiences and automatically identify the most relevant ones, in order to infer what to do next?
Would it not be useful to see the development possibilities just as our brain, according to Hawkins, sees the world?
An alternative, Hawkins-like approach to economic development would take massive amounts of data about the world and ask what is likely to succeed next in a country or a city at a given point in time, given what is already present and in light of the experience there and everywhere else.
It would be like Amazon’s recommendation system, proposing books you may like based on your and everybody else’s experience.
In a recent paper, my colleagues and I showed that such an approach to economic development actually works.
In a particular city or country, you can predict, even a decade in advance, which industries will appear or disappear or grow or wane just by knowing the history of what has been there and everywhere else.
Countries tend to move into industries that are related to the ones they already have or that are present in locations that are similar to them.
We have made the approach user-friendly for countries in our recent Atlas of Economic Complexity.
The idea of looking at previous experiences to inform future action is as old as civilization.
Following this intuition, Justin Yifu Lin, the former chief economist of the World Bank, has suggested that when countries choose what to do next, they should look at a successful country that was similar to them two decades ago.
But we should be able to do much better than that by looking at many more experiences in much more detail, using a much bigger memory that can find many more patterns across much more of the relevant human experience.
Imagine that Sachs’s Millennium Villages project had known the sequence of all previous successful moves out of subsistence agriculture, rather than relying only on guesswork or deduction.
Would it not be useful to understand the paths to industrial development – and the dead ends – that are most relevant to a particular country today?
This alternative approach can empower many more people to seek successful routes to prosperity by lowering the perils and risks involved in the search – in the same way that maps empower people to get to where they want to go with much more information than they would otherwise have.
Just as augmented-reality technologies make our experience of the world richer (imagine a sports match today without instant replay), putting the development experience of the world at the fingertips of those engaged in promoting development is now perfectly feasible.
The Visual Politics of Terror
NEW YORK – The British artist Damien Hirst once referred to the 2001 attack on New York’s World Trade Center as “kind of an artwork in its own right.
It was wicked, but it was devised in this way for this kind of impact.
It was devised visually.” Now, 13 years later, Western governments, while able to describe in strategic terms the threat of the Islamic State to the Middle East, are still struggling to come to terms with its visual assault in the global media.
Like Osama bin Laden and Al Qaeda, the Islamic State appears to understand the impact that lurid images of violence can have on the public imagination.
The irony, of course, is that the Islamic State’s exploitation of images of “pornographic” violence is at odds with the Islamists’ own condemnations of visual stimulation in other areas of life.
Indeed, their videos take sensory titillation to its limit.
Like an algorithm designed to access an adversary’s digital network, the Islamic State’s carefully staged videos, featuring the beheadings of American and British journalists and aid workers, have penetrated the Western psyche.
That psyche has long been primed to receive shocking imagery.
Now, the electronic media’s weakness for graphic violence has become the Islamic State’s strength.
The visual politics of terror may seem primitive, but its practice can be as sophisticated as its effects are profound.
Like ancient conquerors, who erected new temples on the sites where the vanquished had their own, the destroyers of New York’s Twin Towers used visual terror to strike at the heart of their enemy’s value system. That is what terror aims to do: destabilize the foe’s normative reality.
Once the security of the familiar world is challenged, and its inner sanctums have been invaded and shaken, a space may be cleared for occupation.
Consider, for example, how Indonesia’s Suharto regime, from 1966 to 1998, depicted alleged Communist insurgent savagery, and compelled citizens to watch it on television and in theaters.
The horrifying images were intended to foment terror.
In the face of a grotesquely violent enemy, an even more terrifying state apparatus of organized violence emerged.
In effect, Suharto’s visual politics of atrocity and terror created a new reality from the violence and terror associated with the demise of the old.
The same perverse logic is at work in the Islamic State’s viral spectacles.
Though the need to confront evil remains as pressing as ever, Western societies’ motivation for doing so may lose clarity.
After all, it is one thing to deliberate on the pros and cons of confronting external forces of irrational violence; it is something else to lash out against the producers of brutal, politically charged, and upsetting imagery.
We must therefore ask ourselves what exactly is driving our response to the threats that the Islamic State presents.
Distinguishing between information about real national-security concerns and images strategically designed to shock and titillate us will not be easy.
But given the stakes, it is undoubtedly worthwhile.
The visual politics of atrocity and terror is only as strong as we imagine it.
That is why exorcising its demons will require more than military might.
It also will require us to think deeply about the strategic use of violent images in the digital age.
Free Trade Forever
NEWTON, MASSACHUSETTS – On December 7, representatives from the World Trade Organization’s 159 member countries reached agreement on the first multilateral trade deal in the WTO’s 19-year history.
Although the Trade Facilitation Agreement – dubbed the “Bali package,” after the Indonesian island where the meeting took place – did not address the most pressing North-South trade issues, it remains an important economic and political milestone.
The Bali package commits WTO members to moving toward lowering non-tariff trade barriers – for example, by establishing more transparent customs regulations and reducing trade-related paperwork.
These changes might seem like bureaucratic minutiae, but the agreement’s impact – adding $1 trillion to global output and creating 21 million jobs worldwide – will be substantial.
The agreement has been criticized for failing to meet the goals set out in the WTO’s 2001 Doha Development Agenda.
But these objectives – including improvement of market access in agriculture, manufacturing, and services; clarification of international trade rules; and progress on addressing relevant environmental issues – were overly ambitious.
Even the modest Bali package was touch and go, requiring an extra day of negotiations to reach agreement on contentious issues like Indian farm subsidies and the US embargo of Cuba.
Nonetheless, it is clear that trade liberalization is gaining momentum.
Consider the impressive scale and scope of other multilateral trade agreements – such as the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership, and the Trade-in-Services Agreement – that are currently being negotiated.
Current progress toward trade liberalization underscores how trade policy – especially that of the United States – has improved over the last hundred years.
The early nineteenth century was characterized by high tariff rates in both the US and Europe.
But, during the last few decades of the century, European tariff rates fell substantially, largely in response to the United Kingdom’s unilateral repeal of the Corn Laws, which had imposed substantial tariffs on imported grain.
The US, however, continued to charge much higher tariffs.
Unlike in Europe, partisan politics shaped US trade policy before World War II, with the Republicans raising tariffs and the Democrats reducing them.
One of the most notable hikes occurred in 1922, when the Republican-controlled government passed the Fordney-McCumber Tariff, which raised the average import tariff rate by 64%.
This triggered vehement protests – and strong retaliation – from America’s trading partners.
From 1925 to 1929, 33 tariff revisions were made in 26 European countries, and 17 were made in Latin America.
International conferences in Brussels in 1920, Portorose in 1921, and Genoa in 1922 – as well as the League of Nations’ World Economic Conference in Geneva in 1927 – endorsed a tariff truce, but to no avail.
In 1930, US President Herbert Hoover and a Republican Congress, enacted the Smoot-Hawley Tariff Act, sending the tariff war into high gear.
Though the Smoot-Hawley tariff increases were modest compared to those under Fordney-McCumber, their timing turned the act into a virtual synonym for bad trade policy.
According to the League of Nations, Smoot-Hawley triggered “an outburst of tariff-making activities in other countries, at least partly by way of reprisals,” with substantial duty hikes made almost immediately by Canada, Cuba, France, Italy, Mexico, and Spain.
Thus, though Smoot-Hawley was not a direct cause of the Great Depression, as many have claimed, it did contribute to a breakdown of international trade precisely when the world could least afford it.
The two-thirds decline in aggregate imports from 1929 to 1933 was only partly a result of falling incomes, and hence import demand; retaliatory trade and exchange-rate policies also played a major role in bringing about the global trade collapse.
Even when world trade finally began to revive after the depression ended, it remained fragmented, developing primarily within trading blocs and regions.
It was only after World War II – when the General Agreement on Tariffs and Trade (succeeded in 1995 by the WTO) began the process of multilateral trade liberalization – that Smoot-Hawley’s destructive legacy was finally overcome.
Of course, protectionist pressures have occasionally arisen since then.
For example, during the 1992 US presidential campaign, Ross Perot argued that ratifying the North American Free Trade Agreement would lead to a “giant sucking sound,” as US jobs migrated to Mexico and American workers’ wages fell.
And many countries have introduced minor – and not so minor – impediments to trade since WWII.
Nonetheless, the overall trend has been toward increased openness.
In fact, the post-war era has been the longest sustained period of trade liberalization in history – a particularly impressive feat, given that the world has just suffered the worst economic downturn since the Great Depression.
Indeed, policymakers nowadays seem genuinely disinclined to resort to tariff increases.
There is no denying that Bali was not a complete success, and much of the WTO’s Doha agenda remains unfulfilled.
But the fact that countries have continued to pursue trade liberalization, however gradually, at a time of weak economic growth, suggests that free trade is here to stay.
The Monetary Cosmopolitans
NEWTON, MASSACHUSETTS – Can you imagine a French citizen being elected President of the United States?
Or a Japanese prime minister of the United Kingdom?
Or a Mexican chancellor of Germany?
Probably not.
Indeed, even if there were no legal obstacles, it would be difficult to imagine voters in a democracy installing a foreigner in their government’s top job.
But, during the last few years, countries have increasingly turned to foreigners and people with considerable foreign experience to assume what is generally viewed as a country’s second most important position: head of the central bank.
What has driven this shift, and should it be welcomed or discouraged?
For example, Stanley Fischer, nominated in January by US President Barack Obama to succeed Janet Yellen as Vice Chair of the Federal Reserve, is an American immigrant from southern Africa who served as Governor of the Bank of Israel from 2005 until last year.
And, in July 2013, Mark Carney, a Canadian who had served as central-bank governor in his home country, became the first foreigner to lead the Bank of England in its nearly 320-year history.
Similarly, the widely respected governor of Ireland’s central bank, Patrick Honohan, spent nearly a decade at the World Bank in Washington, DC.
One of Honohan’s deputies is a Swede with experience at the Hong Kong Monetary Authority; the other is a Frenchman.
This represents a major departure from the tradition of filling central banks’ top leadership positions with people who have spent most of their careers there – a tradition that, over time, allowed central banks to be taken over by “groupthink.”
With the entrenchment of a particular ideology or mode of thinking, monetary policymakers increasingly missed – by choice or inertia – opportunities to change, reinvigorate, and improve the running of these vital institutions.
As central banks’ key role in the recovery from the post-2008 global economic crisis demonstrated, monetary policy must be flexible and innovative.
That is where the different perspectives that foreigners bring can help.
The Fed’s experience – shaped by a historically decentralized power structure – highlights the benefits of a policymaking process characterized by diverse views.
When the Fed was established a century ago, monetary authority was distributed across 12 regional reserve banks, each of which had considerable autonomy.
The fact that the heads of each of the regional Fed banks were called “governor” – the same title given to heads of the long-established European central banks – was indicative of their authority.
But, in the aftermath of the Great Depression of the 1930’s, it became clear that such decentralization had prevented the Fed from formulating and implementing a coherent monetary policy.
The heads of the regional banks were “downgraded” from governors to “presidents” – the first and only time in US history when the transition from governor to president was a demotion – and power was centralized in the Board of Governors based in Washington, DC.
Nonetheless, an important legacy of the earlier system has remained: each of the regional banks maintains its own research department, and brings a different approach to the monetary-policy debate.
In other words, the Fed’s structure continues to foster a robust and diverse mix of views – something that is severely lacking in many other central banks.
Consider the Bank of Canada.
Years ago, an employee at one of the regional Fed banks – who was also my graduate-school classmate – contrasted the responses to his research presentations in the United States and Canada.
Whereas staff economists from the Federal Reserve System brought differing perspectives to the monetary-policy debate, their Canadian counterparts seemed to subscribe to a single “Bank of Canada view.”
Two independent reviews of the Bank of England published in the wake of the global financial crisis found a similar lack of intellectual diversity and robust debate.
One observed that Bank of England staff members tended to “filter” their advice to make it more palatable to their superiors.
The other concluded that the crisis highlighted just how wrong the consensus view had been, and recommended a new approach that considered divergent views.
This desire for change may have contributed to Carney’s appointment as the new governor, and his recent decision to bring more outside expertise into the Bank’s leadership.
Avoiding groupthink is essential to developing innovative, effective policies capable of responding to new monetary-policy challenges – and that demands a flexible, dynamic policymaking process.
The good news is that central banks have options for enriching their policy debates, even without the benefit of the Fed’s size, structure, and geographic spread.
For starters, they can establish committees of outside experts or commission regular external reviews of policy and the policymaking process.
Such reviews typically take place only after a crisis – when it is already too late.
Another solution is to appoint a governor from outside the central bank, preferably one who has enough external experience to avoid being captured by groupthink.
Or, perhaps better yet, they can hire a foreigner.
Rich Europe, Poor Europe
From its earliest days, the European Union has aimed for balanced economic development across its many regions.
The Maastricht Treaty contains the striking phrase “overall harmonious development.”
But, however admirable this sentiment may be, there is no “scientific truth” about the “right” level of disparities and the correct speed of convergence.
Nevertheless, it is useful to compare economic disparities in the EU with those in the United States to assess regional convergence in Europe – bearing in mind, of course, that the US has been a nation-state for more than two centuries, while the EU is best seen as a confederation of 27 states under a supra-national structure.
Let us first take a historical look at the western part of the EU.
In 1960, disparities in what later came to be known as the EU-15 were about twice as large as those between US states.
Today, they are comparable with American income disparities.
Income disparities have halved both in nominal terms when expressed in euros and in real terms when taking into account differences in purchasing power.
Western Europe first saw a period in which real incomes converged, followed by a period of converging prices.
In the 1960’s and early 1970’s, disparities in purchasing power declined by about 40%, then stalled, while nominal income disparities fell by a similar margin from the mid-1970’s to 1990.
With the introduction of the euro, and with falling inflation, nominal convergence and real convergence have grown similar, both making gradual progress since the mid-1990’s.
The average population of the EU-15 is about 25 million, many more than the six million in the average US state, which more closely resembles the average population of EU regions, such as Bavaria, Wallonia, Île-de-France and the Canary Islands.
So perhaps it is more useful to compare the 50 US states with the EU’s 72 regions.
The convergence trend in the EU at the country level is reflected in the regions.
But income disparities in the regions are still substantial in western Europe when compared with American states.
It is true that poorer EU countries tend to outgrow richer ones, but poor regions do not necessarily outgrow rich regions or even the country average.
So regional disparities may persist or even grow, posing a challenge for policymakers concerned with stimulating economic growth and regional cohesion.
And what about wealth disparities in today’s EU of 27 members?
With the accession of 10 new states in 2004 and another two at the beginning of 2007, the Union’s membership now spans central and eastern Europe.
In the 1990’s, these ex-communist countries had to face temporary income slumps as most of their industrial production became virtually made obsolete overnight.
New production capacity has now been created and new markets conquered, but the catching-up process is still far from complete.
Unsurprisingly, then, regional disparities in income are much greater across the enlarged EU’s countries than across the US states.
In 2005, average income disparities were twice as high within the then-EU-25 as within the American states.
But they have come down by nearly one-third over the past 12 years.
As with the EU-15, income convergence for the regions again turns out to be slower than convergence between countries.
Recent empirical evidence suggests that the central and eastern European regions benefiting most from EU membership are those around the country’s capital city or sharing a border with one of the 15 countries.
But as long as poorer member states grow faster than their richer counterparts, one should not be overly concerned about temporary increases in intra-national disparities.
In fact, a temporary increase in intra-national disparities may be a good thing.
Globalization and technological change are reshaping production throughout Europe, leading to the decline of traditional industries and rapid growth of high-technology manufacturing, banking and finance, scientific research, and business services.
The fact that companies in these sectors benefit from operating close to one another may boost economic development at the expense of peripheral regions.
In the US, successful convergence in economic conditions across regions relies strongly on labor mobility.
Internal migration is the main driver of income convergence, helped by a common language and all the other factors that foster mobility in America, such as comparatively easy access to housing and education.
By contrast, labor in the EU is largely immobile.
Despite populist speeches about the threat posed by “Polish plumbers,” net migration flows between regions are generally insensitive to differences in unemployment rates among regions.
Of course, Europe’s labor immobility is partly caused by linguistic and cultural differences – barriers that cannot easily be removed.
But other barriers can be overcome by reforming housing policies, reducing the cost of moving, and revising social-welfare policies in order to end fears of losing long-term benefits.
Reducing the labor supply in economically depressed areas of Europe and increasing it in booming regions would do much to reduce differences in wages and unemployment rates.
It’s time to start thinking seriously about how to make Europeans move.
Rift and Mastery
PARIS – Like brothers in arms united in combat but divided in peace, Europe and the United States, which had fought depression jointly in 2009, started voicing disagreements in 2010 and begin 2011 with divergent positions on macroeconomic policy.
The price of divergence could be steep: though the worst is over, effective coordination of policy is still needed at a time when rebalancing the global economy, as the G-20 has called for, is far from being accomplished.
The transatlantic divide is evident with respect to monetary policy.
In November of last year, the US Federal Reserve’s decision to launch a new cycle of “quantitative easing” (buying up government bonds through monetary creation) triggered fierce criticism in Europe.
While the European Central Bank has also been buying government bonds since last spring, the amount is relatively small (€70 billion, compared to the Fed’s $600 billion program), and is meant only to support troubled eurozone members, with particular care taken to avoid any impact on money supply.
A similar divergence, though less acute, has appeared with respect to fiscal policy.
In December, as Europeans shifted towards fiscal rigor, the US Congress extended for two years the tax cuts initiated by George W. Bush – which almost everyone interpreted as yet another effort to boost the US economy.
True, fiscal retrenchment in Germany is more cautious than official rhetoric suggests. But, overall, the eurozone and Great Britain have clearly shifted towards austerity, which the US is still very reluctant to consider.
In Europe, this divergence is often attributed to what French President Charles de Gaulle used to refer to as America’s “exorbitant privilege”: the power to print the principal international reserve currency.
But this explanation is only partly satisfying.
Yes, China does pile up reserves in dollars. But no one forces it to do so, and the US would much prefer a stronger renminbi.
Emerging-market countries could also invest in euros, if only they were offered such liquid assets as US Treasury bonds – therein lies the current debate over the proposed creation of “eurobonds.”
And, while countries like Greece and Spain suffer from market constraints, such is not the case for Northern Europe.
A second interpretation of the transatlantic divide is that the two sides’ policies reflect the differences in their situations.
This is clearly the case with labor markets and unemployment: American companies have reacted to recession with massive layoffs, whereas European companies – with the exception of Spanish firms, but not of British companies – have been doing their best to hoard labor.
As a result, productivity has stagnated in Europe since 2007, whereas it has improved by more than six percentage points in the US.
Of course, another consequence is that the US unemployment rate is close to post-war peaks and will remain high much longer.
And unemployed workers in the US lose their benefits after 99 weeks, making the political imperative for macroeconomic action much stronger than in Europe, where unemployment rose more slowly and benefits are more generous.
As the economist Joseph Stiglitz puts it, America’s welfare state is, first and foremost, the Fed’s monetary policy.
But there is also a third, subtler reading of the EU-US split, which has to do with beliefs.
In the view of most Europeans, none of the ground that has been lost – or only very little of it – can be recovered.
So, because supply has shrunk, it would be dangerous for the central bank or the budget to over-stimulate demand.
And, because tax revenues, too, will not recover, the gap will have to be bridged by fiscal austerity.
Americans, on the other hand, are convinced that whatever was lost during the recent recession will eventually be regained.
The Obama administration says so, as does the Fed (albeit more prudently), and both act accordingly.
In other words, Europeans are pessimistic about the future and thus are reluctant to stimulate growth, whereas Americans remain optimistic and prepared to give any policy instrument a chance.
Thus, divergence over macroeconomic policy will continue – at least as long as investors remain willing to buy US public debt.
Several consequences follow from this divergence: difficulties in policy coordination, given no agreement on the diagnosis; a very probable return to large US external deficits while Europe remains in balance; and a weaker dollar, which will become evident if the crisis in the eurozone subsides.
All this could greatly complicate managing the G-20, and risks obscuring the question that all should be addressing: how to manage a global economy in which the balance between advanced and emerging countries is shifting at great speed.
Righting the EU Constitution
The prospect of multiple referenda on the European Union Constitution has dramatically altered the betting on ratification.
Both europhiles and eurocrats shudder at the prospect that rejection in several member states, particularly in a large one, might kill the project, leaving the Union to muddle through with the Nice Treaty.
On the other hand, if the protagonists are patient, the winds of democracy could lead to a stronger constitution, free of the risks of economic and judicial nightmare that some aspects of the present draft entail.
The EU urgently needs to democratize its procedures and reorganize its institutions to ensure that this year's enlargement does not lead to bureaucratic deadlock.
The draft Constitution provides acceptable answers to many questions of governance.
But the elevation of the Social Chapter, previously a list of good intentions, to the status of fundamental constitutional rights, threatens to encumber workers and businesses in the member states with burdensome judicial proceedings and expensive social entitlements written by judges in Luxembourg whose last word is beyond appeal.
The inclusion in Part II of the draft on "social rights" - such as the right not to be unjustly dismissed, or the right to receive old-age pensions, unemployment compensation, and health benefits (regardless of cost) - is in no way necessary to the functioning of the whole.
These social protections are laudable, but all have a cost.
The very term "social right" is a misnomer.
If something is a "right," then cost is not an issue.
For instance, no economic cost is too great for the defense of freedom of speech.
The desirability of generous public pensions, on the other hand, cannot be dissociated from their cost to taxpayers.
Social protections should be framed in laws enacted by democratically elected legislators, who are well placed to weigh the costs and benefits for their constituents.
The most ardent advocate of expanded health care rights should agree that the forum for that advocacy is the Parliament, not the European Court of Justice.
These protections have no place in a constitution, particularly one that cannot be easily amended.
The fact that certain "social rights" have made their way into some national constitutions on the Continent is no reason to impose them, as the present draft does, on the entire Union.
It is noteworthy that in the Scandinavian countries, which enjoy some of the most progressive social protections in Europe, these benefits are provided by statutory laws enacted by legislatures rather than by courts enacting constitutional "rights."
They are the social dividend, allocated by national parliaments, of real economic growth.
Supporters of the European Constitution in France, on both the left and the right, shrug and say that including the Social Chapter in the draft is a compromise.
The "social rights" in Part II are seen as compensating voters on the left for, say, enshrining "competition" as a fundamental objective of the Union in Part I. But neither provision belongs in the Constitution.
Natural monopolies are sometimes economically desirable, and it is legislators, not judges, who should decide whether and when they are to be permitted.
For a decade, Britain stood almost alone against expanding the Social Chapter.
In the constitutional convention, the Blair government accepted the inclusion of its provisions in the body of the text, but insisted on language limiting their reach.
The trouble is that the British safeguards do not work.
Article II-52 states that the Fundamental Rights in the Constitution (including its 12 "social rights") apply only to the actions of the Union, and of member states when they are implementing Union decisions . But as Europe integrates, these decisions will become pervasive.
If EU environmental directives, for instance, call for the closure of a heavily polluting plant in Britain, the Constitution would give labor unions the right to judicial appeals against the resulting redundancies.
Fortunately, this fault line in the British safeguards can be corrected without jeopardizing the document.
The simplest solution is to remove the Fundamental Rights of Part II from the body of the text, and give them the status the Social Chapter had in the Treaty of Amsterdam: a declaration of intentions appended to the Treaty.
All traditional individual rights are already covered in the Declaration of Human Rights, which will continue to be enforced by the court in Strasbourg.
"Social rights" should not become mandates for judges; they should remain a guide to legislators.
If a political compromise is needed, "competition" should be removed as a fundamental Union objective.
Free movement of goods, services, labor, and capital certainly suffices.
If this preferred solution proves unacceptable, an alternative would be to strengthen Article II-52, to state clearly that the twelve "social rights" of Part II apply to the Union, but not to the member states, even when these are implementing Union directives. If the Union decides, as it could, that all member states must provide public health care for all unemployed persons, it would be up to national parliaments, not 25 judges in Luxembourg, to determine how to address that objective.
This would take some of the teeth out of the Union's social directives, and would give real substance to the principle of subsidiarity.
By excising from the draft Constitution the prospect of a welfare state run by judges, its framers will increase the chances that Britain and other doubters will, in the end, ratify the final product.
Righting the Wrongs of Leprosy
TOKYO – At its 15th session, which ended at the beginning of October, the United Nations Human Rights Council adopted a resolution encouraging governments to eliminate discrimination against people affected by leprosy – and their family members.
As the World Health Organization’s Goodwill Ambassador for Leprosy Elimination, I have long campaigned for this outcome.
Leprosy is one of the world’s oldest diseases.
It has a physical dimension, but also social and psychological components.
For much of its long history, there was no known cure.
It was only in the latter part of the twentieth century that a truly effective chemotherapy became available.
Since the introduction of multidrug therapy in the early 1980’s, roughly 16 million people around the world have been cured.
In virtually every country in the world, leprosy is no longer regarded as a public-health problem.
Caught early and addressed promptly, leprosy need leave no trace.
Only when the disease goes untreated does the damage caused to the peripheral nerves lead to loss of sensation and invite ulceration and wounds. Unchecked, leprosy disfigures and can result in permanent disability.
Down the ages, the appearance of those with the disease, and the absence of a known cure, contributed to the fear that it caused – and thus to the stigmatization of its sufferers.
Even today, many mistaken notions about leprosy persist.
The stigma surrounding the disease remains hard to dispel, and results in discriminatory attitudes and practices that continue to blight the lives of millions of people.
But the facts about leprosy are hardly so odious.
The disease is caused by a bacillus called Myobacterium leprae, first identified in 1873 by G.H. Armauer Hansen.
Leprosy is thus an infectious disease; it is not hereditary, let alone a divine punishment.
Transmission is believed to be airborne, through close and frequent contact with an infected, untreated person.
But leprosy is very hard to develop; most people have a built-in immunity to it and have nothing to fear.
It is important to emphasize, too, that leprosy can be cured at any time.
The first dose of MDT kills 99.9% of the bacteria that cause leprosy, rendering the person no longer infectious.
But if treatment has been delayed, the patient may be left with recurring ulcers and permanent damage.
Last year, there were under 250,000 new cases of leprosy reported in the world, over half of them in India.
Brazil and Indonesia also contribute a significant number of new cases.
Compared to the numbers who fall ill with diseases such as HIV/AIDS, malaria, and tuberculosis, however, leprosy almost pales into insignificance.
But what is not acceptable is the way that people with leprosy, those cured of it, and even their family members continue to be discriminated against on the basis of fears, myths, and outdated notions about a disease that is today completely curable.
The Principles and Guidelines that were unanimously adopted by the Human Rights Council convey the nature and scale of the problem.
In affirming the rights to which people affected by leprosy and their family members are entitled, the Principles and Guidelines reveal the extent of discrimination and the forms that it has taken.
For example, the Principles and Guidelines note that people affected by leprosy, including sufferers’ family members, are entitled to the same rights as everyone else with respect to marriage, family, and parenthood.
So leprosy should not be grounds for denying anyone the right to marry, or for divorce; nor should it constitute grounds for separating a child from his or her parents.
People who have been infected with leprosy also are entitled to the same rights as everyone else with respect to full citizenship and obtaining identify documents.
They have the right to serve the public, on an equal basis with others, including the right to stand for elections and to hold office at all levels of government.
Likewise, they have the right to work and be treated on an equal basis with others vis-à-vis recruitment, hiring, promotion, and salary.
They are not to be denied admission to or expelled from schools or training programs on the grounds of leprosy.
In other words, people should not be discriminated against on the grounds of having or having had leprosy – or, indeed, any disease.
The landmark resolution adopted by the UN Human Rights Council encourages governments to give due consideration to the Principles and Guidelines in formulating policies.
I hope that governments will do more than that. I hope that they will take them to heart and address once and for all the long-standing injustices that for too long have pushed too many people with leprosy to the margins of society.
Rio’s Unsustainable Nonsense
NEW YORK – If George Orwell were alive today, he would be irritated, and then shocked, by the cynical way in which every lobby with an axe to grind and money to burn has hitched its wagon to the alluring phrase “sustainable development.”
In fact, the United Nations’ Rio+20 Conference on Sustainable Development is about pet projects of all and sundry – many of them tangential to the major environmental issues, such as climate change, that were the principal legacy of the original Rio Earth Summit.
Thus, the International Labor Organization and trade-union lobbies have managed to insert “Decent Jobs” into the seven priority areas at the Rio conference.
I would love for everyone, everywhere, to have a decent job.
But what does that have to do with either the environment or “sustainability?”
No one should pretend that we can magically offer decent jobs to the huge numbers of impoverished but aspiring workers in the informal sector.
Such jobs can only be created by adopting appropriate economic policies.
Indeed, the really pressing task facing many developing economies is to pursue policies that promote economic opportunities by accelerating growth.
The flavor of the week in Rio is “sustainability indexing” for corporations, by way of corporate social responsibility (CSR).
Such indexing is being compared to accounting standards.
But the latter are “technical” and gain from standardization; the former are not and must reflect variety instead.
Corporations can, of course, be asked to conform to a “don’t” list – don’t dump mercury into rivers, don’t employ children for hazardous tasks, etc. But what they practice as “do’s” by way of altruism is surely a matter of what they consider virtuous to spend their money on.
The notion that a self-appointed set of activists, in conjunction with some governments and international agencies, can determine what a corporation should do by way of CSR contradicts the liberal notion that we should ask for virtue to be pursued, but not in a particular way.
At a time when the world is emphasizing the importance of diversity and tolerance, it is effrontery to suggest that corporations should standardize their notion of how they wish to promote good in the world.
Even when the Rio+20 agenda includes something more properly “environmental” – say, the supply of water – platitudes predominate.
Thus, the availability of safe drinking water is now to be enshrined as a “right.”
We have traditionally distinguished in human-rights conventions between (mandatory) civil and political rights, such as the right to habeas corpus, from (aspirational) economic rights, because the latter require resources.
Blurring that distinction – thereby disregarding the problem of scarcity – is no solution.
After all, “availability” can be interpreted according to many criteria and thus in myriad ways: How much water?
At what distance from different households (or by pipe into each house)?
At what cost?
These decisions have different implications for the availability of water, and they must compete, in any event, against other “rights” and resource uses.
In the end, therefore, water availability cannot properly be called a “right.”
Rather, it is a “priority,” and countries will inevitably differ in the sequence with which they pursue it relative to others.
While these are “sins of commission,” the “sins of omission” at Rio+20 are even more glaring.
For a conference that is supposedly addressing “sustainability,” it is worth lamenting the absence of a heroic effort to agree on a successor treaty to the Kyoto Accord.
If the cataclysmic scenarios implied by neglect of climate change are valid – and extreme estimates, it must be said, could backfire politically by looking implausible or, worse, by producing a “Nero effect” (if Rome is burning, let’s party) – Rio+20’s lack of action should be regarded as an historic failure.
But a matching omission is that prompted by our societies’ increasing political unsustainability, not because of the immediate financial problems like those afflicting Europe and threatening the world, but because the modern media have made visible to all the disparities in the fortunes of the rich and the poor.
The rich should be urged not to flaunt their wealth: extravagance amid much poverty arouses wrath.
The poor, meanwhile, need a fair shot at raising their incomes.
That can only come through access to education and economic opportunity, both in poor and rich countries.
“Less Excess and More Access”: only a policy mix based on this credo will guarantee that our societies remain viable and achieve genuine “sustainability.”
The Dangerous Rise of Buddhist Chauvinism
TOKYO – The Buddha, Siddhartha Gautama, composed no sutta to religious hatred or racial animus.
And yet Buddhist chauvinism now threatens the democratic process in both Myanmar (Burma) and Sri Lanka.
Some of the same Buddhist monks who braved Myanmar’s military junta in the “Saffron Revolution” of 2007 today incite violence against members of the country’s Muslim Rohingya minority.
In Sri Lanka, the ethnic chauvinism of the Buddhist Sinhalese, stirred by a former president determined to reclaim power, mocks the supposed goal of reconciliation with the vanquished Hindu Tamils.
In Myanmar, Buddhist racism is at the root of a virtual civil war in the state of Rakhine and is fueling a humanitarian crisis in which hundreds of thousands of Muslim Rohingya have fled their country by land and sea.
Most ominous for Myanmar’s future, given that all genocides are linked to official action, this racial and religious antagonism is in no way spontaneous.
The Rohingya have already been stripped of their Myanmar citizenship, and a raft of new and proposed legislation that would further marginalize Islam seems certain to provoke further violence.
A new marriage law, for example, requires interfaith couples to register their intent to marry with local authorities, who will display a public notice of the engagement; only if no citizen objects to the union – highly unlikely in the present tense climate – is the couple permitted to wed.
Another bill in the pipeline would forbid anyone under the age of 18 from converting to another religion, and would require even an adult seeking to convert to gain the permission – subject to repeated interrogation – of local officials.
Perhaps most disturbing, a third recent bill would allow for the imposition of Chinese-style population control on any group with a growth rate that is higher than the national average.
Women could be ordered to wait, say, three years after the birth of a child before having another.
Here, too, local governments, which are the most susceptible to popular prejudices, will be empowered to implement a law that seems specifically targeted at the Rohingyas, with their large families.
These laws do not yet amount to an updated version of the Nuremberg laws (the anti-Jewish legislation enacted by the Nazis in 1935).
But they do reflect the agenda of those seeking to fan Buddhist resentment in order to thwart Myanmar’s democratic transition.
That dark ambition has gained urgency, because the country is due to hold its first democratic presidential election since the transition began in 2011.
The Rohingyas are, of course, the main target of this strategy.
But there is another target as well: Aung San Suu Kyi, the Nobel Peace Prize laureate and opposition leader.
For now, Suu Kyi is precluded from running for President by a cynical constitutional provision that excludes anyone whose spouse or child has a foreign passport (Suu Kyi’s two sons by her late English husband hold British passports).
Nonetheless, the regime, still fearing her popularity, is playing the race and religion card in order to discredit her and her party, the National League for Democracy, which won all but one of the parliamentary seats contested in the recent general election (and swept the annulled 1990 election).
By stoking Buddhist violence against the Rohingya, the regime aims to damage Suu Kyi and the NLD’s chances of victory in two ways.
If she speaks out for the Rohingya, her appeal among Buddhists, the vast majority of Myanmar’s citizens, may be dented enough to preserve the army’s grip on power.
If she does not defend the Rohingya, her aura of moral leadership may be dimmed among her own supporters, both at home and abroad.
So far, Suu Kyi has circumvented this booby trap with the verbal evasiveness that one would expect of an ordinary politician, rather than someone of her courage and standing.
But, as the violence grows and the election nears, her room for maneuver will undoubtedly narrow.
Instead of highlighting the country’s real needs – serious land reform, an anti-corruption drive, and freeing the economy from oligarchic control – she may instead be drawn into defending an unpopular minority.
A similar political imperative is at the heart of the Sinhalese chauvinism that has made a sudden return to public life in Sri Lanka.
The religious and ethnic passions of the Sinhalese were encouraged during the final, bloody push that ended Sri Lanka’s quarter-century of civil war with the Tamil Tigers in 2009.
But instead of seeking reconciliation with the Tamils following their defeat, then-President Mahinda Rajapaksa continued to play on ethnic hatred as he subverted Sri Lanka’s democracy.
Rajapaksa’s unexpected defeat by a coalition of Sri Lanka’s democrats and Tamil political parties in last January’s presidential election – a result that he then sought to annul – should have ended both his career and the politics of race-baiting.
But the former president is now mounting a furious comeback bid and might well win the parliamentary election scheduled for August 17.
One reason for Rajapaksa’s potential victory is his deep pockets; another is that he can probably count on support from China, having allowed the construction of ports and other facilities for the People’s Liberation Army during his presidency.
But the key to his fortunes has been his effort to stoke the fears of the majority Sinhalese.
Rajapaksa is thus placing Prime Minister Ranil Wickremesinghe in the same difficult position faced in Myanmar by Suu Kyi.
So far, Wickremesinghe has succeeded in suggesting that the Sinhalese have more to fear from the return of Rajapaksa than they do from the country’s ethnic minorities.
But no one should ever underestimate the power of hatred to undermine a democracy from within.
Rise Up and Walk
In July 2005, millions of people filled stadiums for the Live 8 concerts in support of Africa’s people.
It was also for ordinary citizens that African leaders traveled to Scotland to meet the G-8 heads of state that summer.
It was for these same people that the Jubilee 2000 campaign for debt relief was carried out by many individuals and organizations all over the world.
And in St. Petersberg in July 2006, the G-8 leaders reaffirmed their commitment to the ambitious goals they had set the year before, although they did not go further.
Nearly a year and a half on, there are signs of progress toward fulfilling the commitments to Africa’s development made by world leaders and committed campaigners.
But it is fair to ask when a sustainable solution to Africa’s dehumanizing poverty will be found, not only by the G8 and the organizers of Live 8, but also by Africa’s leaders and people.
Africa is a paradox.
It is one of the richest continents on the planet, endowed with oil, precious stones, forests, water, wildlife, soil, land, agricultural products, and millions of women and men.
Yet most of Africa’s people remain impoverished.
I continue to ask myself, “Why?”
One reason is that many Africans lack the knowledge, skills, tools, and the political will to create wealth from their resources.
They are unable to add value to raw materials in order to sell processed goods in local and international markets and negotiate better prices and favorable trade rules.
Another reason is that ordinary citizens suffer when debts are not cancelled, when financial assistance is not forthcoming, or when trade barriers are raised.
I have also seen the need for ordinary Africans to embrace a set of values, like service for the common good, and commitment, persistence, and patience until a goal is realized.
We also need Africans who love Africa so much that they want to protect their countries – their land – from environmentally destructive processes.
The transformation of grasslands into deserts due to deforestation, encroachment into forests for subsistence farming, overgrazing, and loss of biodiversity and soil threaten the entire continent.
Another value Africans must adopt is love and concern for young people.
One of the most devastating experiences is to see youth wasting away because they are unemployed, even after they have completed secondary and tertiary education, or because their health has deteriorated.
African governments should give priority to investments in technical education and HIV/AIDS prevention, treatment, care, and support programs.
Without skills, people find themselves locked out of productive, rewarding economic activities, leaving them unable to meet their needs for housing, healthcare and nutrition.
They get trapped in a vicious cycle of poverty and, sometimes, crime.
Africa needs to prepare for the opportunities and challenges to come by deliberately working for peace and security.
Much of Africa’s poverty is fueled by conflicts.
In the course of my work over the past 30 years, I have observed that whether it is at the national or regional level, most conflicts are over resources.
Who will control and utilize them?
Who will be included or excluded?
When resources are scarce, or so degraded that they can no longer sustain livelihoods, or inequitably distributed, conflict invariably ensues.
In Africa, we need to manage our resources sustainably, accountably, and responsibly.
And we need to share those resources equitably.
Otherwise, we will continue to invest in wars and conflicts, or in fighting crime and domestic instability, rather than in promoting development and thereby eliminating poverty.
African leaders should govern and serve for the benefit of the people, not themselves.
But perhaps the most unrecognized problem in Africa, especially at the grassroots level, is the disempowerment of ordinary people.
This is one of the main reasons why so many people are unable to take advantage of the many opportunities available in Africa.
Africa’s people must be allowed to gain confidence, dignity, and a sense of self-worth.
They must also be empowered with knowledge, skills, and tools to take action.
This is why debt relief is so important.
It provides governments additional resources to invest in initiatives that can empower their people.
Despite the many challenges that remain, there has been much recent progress in Africa.
There are indications of good governance in many countries.
In many others, civil society continues to grow, supported by national governments, the African Union, and the international community.
Many countries are resolving their conflicts and working for peace and stability.
We must appreciate and encourage those who are making bold decisions.
But much must still be accomplished, by Africans and with Africa’s many friends around the world.
As in the Bible story, when Peter and John said to a beggar, “rise up and walk,” Africans are called upon to walk away from ignorance, inertia, apathy, and fatalism. To walk towards economic and political freedom.
Rising Uncertainties in the U.S. Economy
CAMBRIDGE: America’s economy is entering a risky phase.
The conditions that underpinned its long boom are weakening.
It is a fool’s game to try to predict changes in public sentiments. Nonetheless, good economic reasoning can help us to anticipate the economic turbulence ahead.
The US boom has been a mix of reality and wishful thinking.
The reality is that technological advancement, combined with flexible and dynamic labor and capital markets, led to a rapid rise in productivity growth and the spread of new technologies.
Lives in the US changed remarkably for the better recently, with improvements in the service economy, new medical technologies, access to information, and the like.
Wishful thinking transformed economic gains into visions of easy wealth.
The New Economy – which is real – became the “invincible” economy where risks are discounted, stocks always rise, world economic conditions are always beneficial, and budget surpluses continue forever.
Optimism manifested itself in two ways. First, American stock markets rose giddily – adding $8 trillion in paper wealth to owners of US equities in a five-year period.
Second, American consumers increased spending as a result of their paper wealth, reducing or eliminating their savings from income because their stock market wealth would protect them in the future.
The combination of large business investments in new technologies, combined with high levels of consumer spending, fueled a spending boom.
For every dollar of income produced in America, spending by consumers, businesses, and the government now equals one dollar and four cents.
The extra four cents per dollar is paid for, in essence, by borrowing from abroad.
Foreigners have been keen on buying US stocks and bonds, while American businesses and households used that capital to support their investment and spending.
All of this will work out fine if the rosy scenarios continue.
The problem is that many contrary economic signals are now appearing.
Suddenly, doubts have arisen, and the cumulative effect of them could to turn a boom into slowdown, or even into recession.
The first doubt is about the stock market.
Euphoric investors acted as if profits would continue to grow at unprecedented rates.
Recently, profits have not cooperated.
As forecasts of profitability drooped, the stock market declined.
The easy wealth of recent years has become less easy.
Nobody is panicking yet, but nobody can rule out more declines.
The second doubt concerns the world economy.
Soaring oil prices will cut corporate profits and household purchasing power.
Interest rates in the US might be raised to head off the inflationary effects of higher oil prices.
Violence in the Middle East makes matters worse.
The third doubt is about US economic management.
While nobody can predict the outcome of the presidential election, we can be certain that a new, untested Administration will take over in January.
George W. Bush’s proposals for a massive tax cut are risky – gambling on large future budget surpluses that might never appear, and gambling that a sharp tax cut won’t trigger a jump in interest rates.
A Gore Administration would have more continuity with present policies, but first-year Administrations always create uncertainties and anxieties, and many of Gore’s spending proposals will create uncertainties about future budget prospects.
The great economist John Maynard Keynes taught that changes in market sentiments – which he called “animal spirits” – have a life of their own; that swings in sentiment could swing an economy.
Optimism turns to euphoria turns to pessimism turns to panic.
America has had its share of euphoria; pessimism is now setting in.
Panic is by no means assured, but cannot be ruled out.
What would happen if more shocks undermine the confidence that fueled America’s boom?
Suppose oil prices remain high, profit forecasts continue to fall, and the new Administration unsettles the markets.
Stock prices would fall; interest rates would rise; budget surplus projections would be cut.
Trillions of dollars of paper wealth already factored into spending decisions by households, firms, and government would disappear.
Households would cut spending, and investors would reduce their American holdings, driving the dollar down against the Euro and other currencies.
American politics would dramatically heat up, with a fierce debate over priorities.
This would incite even more economic uncertainties.
Depending on how rapidly and deeply such a swing occurs, America could merely slow down (the so-called “soft landing”), or fall into recession (the increasingly feared “hard landing”).
Normally, a cutback in optimism reduces interest rates, helping sustain investment and consumer spending.
But here, who knows?
The Federal Reserve might keep interest rates high to fight the inflationary consequences of high oil prices.
Or interest rates might remain high because of increased uncertainties about the size of future budget surpluses, or the risks of large tax cuts.
For the rest of the world, economic maneuvering would be tricky.
For many economies, exports to America would slow, and growth would depend either on finding new markets (say, increased sales in Europe and Japan if those economies picked up), or on being able to increase domestic consumption and investment within those economies.
If investors take money out of the US and park it in other markets, those economies would enjoy a boost of wealth and spending.
No doubt, then, that the world could compensate for slower growth in US by faster growth abroad, but there is also no doubt that such transitions are hard to manage.
This is especially true because financial systems in many countries have still not recovered from their own recent crises.
I am no pessimist, even less a doomsayer.
Events in the world economy are notoriously hard to predict.
America’s economy could continue to charge ahead.
More realistically, the combination of optimism and productivity growth that powered America’s boom looks likely to be less robust in the coming year.
A Year on the Brink
NEW YORK – The year 2012 turned out to be as bad as I thought.
The recession in Europe was the predictable (and predicted) consequence of its austerity policies and a euro framework that was doomed to fail.
America’s anemic recovery – with growth barely sufficient to create jobs for new entrants into the labor force – was the predictable (and predicted) consequence of political gridlock, which prevented the enactment of President Barack Obama’s jobs bill and sent the economy toward a “fiscal cliff.”
The two main surprises were the slowdown in emerging markets, which was slightly sharper and more widespread than anticipated, and Europe’s embrace of some truly remarkable reforms – though still far short of what is needed.
Looking to 2013, the biggest risks are in the US and Europe.
By contrast, China has the instruments, resources, incentives, and knowledge to avoid an economic hard landing – and, unlike Western countries, lacks any significant constituency wedded to lethal ideas like “expansionary austerity.”
The Chinese rightly understand that they must focus more on the “quality” of growth –rebalancing their economy away from exports and toward domestic consumption – than on sheer output.
But, even with China’s change in focus, and despite adverse global economic conditions, growth of around 7% should sustain commodity prices, thereby benefiting exports from Africa and Latin America.
A third round of quantitative easing by the US Federal Reserve could help commodity exporters as well, even if it does little to promote US domestic growth.
The US, with Obama re-elected, is likely to muddle on, much as it has for the past four years.&#160;
Inklings of recovery in the real-estate market will be enough to discourage dramatic policy measures, like a write-down of principal on “underwater” mortgages (where the outstanding loan exceeds the market value of the house).
But, with real (inflation-adjusted) house prices still 40% below the previous peak, a strong recovery for real estate (and the closely related construction industry) seems unlikely.
Meanwhile, even if Obama’s Republican opponents do not push the country over the fiscal cliff of automatic tax increases and spending cuts on January 1, they will ensure that America’s own form of mild austerity will continue.
Public-sector employment is now roughly 600,000 below its pre-crisis level, while normal expansion would have meant 1.2 million additional jobs, implying a public-sector jobs deficit of almost two million.
But the real risk for the global economy is in Europe.
Spain and Greece are in depression, with no hope of recovery in sight.
The eurozone’s “fiscal compact” is no solution, and the European Central Bank’s purchases of sovereign debt are at most a temporary palliative.
If the ECB imposes further austerity conditions (as it seems to be demanding of Greece and Spain) in exchange for financing, the cure will only worsen the patient’s condition.
Likewise, common European banking supervision will not suffice to prevent the continuing exodus of funds from the afflicted countries.
That requires an adequate common deposit-insurance scheme, which the northern European countries have said is not in the cards anytime soon.
While European leaders have repeatedly done what previously seemed unthinkable, their responses have been out of synch with markets.
They have consistently underestimated their austerity programs’ adverse effects and overestimated the benefits of their institutional adjustments.
The impact of the ECB’s €1 trillion ($1.3 trillion) long-term refinancing operation (LTRO), which loaned money to commercial banks to buy sovereign bonds (a bootstrap operation that seemed as peculiar as the ECB’s financing of sovereigns to shore up the banks), was impressively short-lived.
Europe’s leaders have recognized that the debt crisis in the periphery will only worsen in the absence of growth, and they have even (sometimes) recognized that austerity will not help on that front; nonetheless, they have failed to deliver an effective growth package.
The depression that European authorities have imposed on Spain and Greece already is having political consequences.
In Spain, independence movements, especially in Catalonia, have revived, while neo-Nazism is on the march in Greece.
The euro, created for the avowed purpose of fostering the integration of a democratic Europe, is having precisely the opposite effect.
The lesson is that politics and economics are inseparable.
Markets on their own may be neither efficient nor stable, but the politics of deregulation gave scope to unprecedented excesses that led to asset bubbles and the rolling crisis that has followed their collapse.
And the politics of crisis has led to responses that are far from adequate.
Banks have been saved, but the underlying problems were left to fester – no surprise there, given that, in both Europe and America, the task of fixing them was assigned to the policymakers who had caused them.
In Europe, it was politics, not economics, that drove the creation of the euro; and it was politics that led to a fundamentally flawed structure that created ample room for bubbles, but little scope for dealing with the aftermath.
To forecast 2013 is to predict how divided government in the US and a divided Europe respond to their respective crises.
Economists’ crystal balls are always cloudy, but those of political scientists are even cloudier.
That said, the US will probably muddle through another year, neither pushed over the cliff nor put on the road to robust recovery.
But, on both sides of the Atlantic, the polarized politics of bravado and brinkmanship will be much in evidence.
The problem with brinkmanship is that, sometimes, one does go over the brink.
Risky Risk Management
LONDON – Mainstream economics subscribes to the theory that markets “clear” continuously.
The theory’s big idea is that if wages and prices are completely flexible, resources will be fully employed, so that any shock to the system will result in instantaneous adjustment of wages and prices to the new situation.
This system-wide responsiveness depends on economic agents having perfect information about the future, which is manifestly absurd.
Nevertheless, mainstream economists believe that economic actors possess enough information to lend their theorizing a sufficient dose of reality.
The aspect of the theory that applies particularly to financial markets is called the “efficient market theory,” which should have blown sky-high by last autumn’s financial breakdown.
But I doubt that it has.
Seventy years ago, John Maynard Keynes pointed out its fallacy.
When shocks to the system occur, agents do not know what will happen next.
In the face of this uncertainty, they do not readjust their spending; instead, they refrain from spending until the mists clear, sending the economy into a tailspin.
It is the shock, not the adjustments to it, that spreads throughout the system.
The inescapable information deficit obstructs all those smoothly working adjustment mechanisms – i.e., flexible wages and flexible interest rates – posited by mainstream economic theory.
An economy hit by a shock does not maintain its buoyancy; rather, it becomes a leaky balloon.
Hence Keynes gave governments two tasks: to pump up the economy with air when it starts to deflate, and to minimize the chances of serious shocks happening in the first place.
Today, that first lesson appears to have been learned: various bailout and stimulus packages have stimulated depressed economies sufficiently for us to have a reasonable expectation that the worst of the slump is over.
But, judging from recent proposals in the United States, the United Kingdom, and the European Union to reform the financial system, it is far from clear that the second lesson has been learned.
Admittedly, there are some good things in these proposals.
For example, the US Treasury suggests that originators of mortgages should retain a “material” financial interest in the loans they make, in contrast to the recent practice of securitizing them.
This would, among other things, reduce the role of credit rating agencies.
But there is no indication as to how much of the loan they would be required to hold, or for how long.
Nor do these official responses to the crisis envisage limiting the amount of loans to some multiple of the borrowers’ income or some proportion of the value of the property being bought.
This, it is feared, might slow recovery.
It would have been better for both recovery and reform to promise to introduce such limitations in (say) two years time.
Most disappointing to reformers has been the official rejection of the “Glass-Steagall” approach to banking reform.
This would have restored the separation between retail and investment banking, which was swept away by the de-regulating wave of the 1980’s and 1990’s.
The logic behind the separation was absolutely clear: banks whose deposits were insured by the taxpayers should not be allowed to speculate with their depositors’ money.
Instead, the reform proposals have opted for a mixture of higher capital requirements for leading banks and pre-funding of deposit insurance by a special levy on banks.
There seems to be little appetite for proposals to vary capital adequacy requirements counter-cyclically.
This would enable capital buffers to be created in good years, which could then be drawn down in bad years.
Admittedly, there are difficulties with all proposals to restrict the scope of “risky” banking, especially in the context of a global economy with free capital mobility.
As is frequently pointed out, unless banking regulations are identical across frontiers, there will be plenty of scope for “regulatory arbitrage.”
Similarly, banks would have incentives to “game” capital-adequacy requirements by manipulating how capital and assets are defined.
Indeed, investment banks like Goldman Sachs and Barclays Capital are already inventing new types of securities to reduce the capital cost of holding risky assets.
The underlying problem, though, is that both regulators and bankers continue to rely on mathematical models that promise more than they can deliver for managing financial risks.
Although regulators now place their faith in “macro-prudential” models to manage “systemic” risk, rather than leaving financial institutions to manage their own risks, both sides lumber on in the untenable belief that all risk is measurable (and therefore controllable), ignoring Keynes’s crucial distinction between “risk” and “uncertainty.”
Salvation does not lie in better “risk management” by either regulators or banks, but, as Keynes believed, in taking adequate precautions against uncertainty.
As long as policies and institutions to do this were in place, Keynes argued, risk could be let to look after itself.
Treasury reformers have shirked the challenge of working out the implications of this crucial insight.
Will Americans Become Poorer?
CAMBRIDGE – Robert Gordon of Northwestern University has launched a lively and important debate about the future rate of economic growth in the United States.
Although his book The Rise and Fall of American Growth will not be published until January 2016, his thesis has already garnered coverage in the Economist and Foreign Affairs.
Clearly, Gordon’s gloomy assessment of America’s growth prospects deserves to be taken seriously.
But is it right?
Gordon argues that the major technological changes that raised the standard of living in the past are much more important than anything that can happen in the future.
He points to examples such as indoor plumbing, automobiles, electricity, telephones, and central heating, and argues that all of them were much more important for living standards than recent innovations like the internet and mobile phones.
I agree with Gordon that I would rather give up my mobile phone and even the Internet than go without indoor plumbing and electricity.
But that just means that we are lucky to be living now rather than a century ago (and even luckier to be living now than two centuries ago or in the middle ages).
The fact that these major innovations happened in the past is not a reason to be pessimistic about the future.
Gordon also points to the recent slowdown in real (inflation-adjusted) GDP growth.
According to official US statistics, real GDP per worker grew at an average annual rate of 2.3% from 1891 to 1972, but by only 1.5% since then.
But the official statistics on GDP growth fail to capture most of the gains in our standard of living that come from new and improved goods and services.
That means that the official growth rate does not reflect the rise in real incomes that came with air conditioning, anti-cancer drugs, new surgical procedures, and the many more mundane innovations.
Moreover, because the US government does not count anything in GDP unless it is sold in the market, the vast expansion of television entertainment and the introduction of services like Google and Facebook have been completely excluded from the national account.
This means that the true rise in real incomes was actually faster than the official statistics imply – possibly much faster.
That is true of the data for the first half of the twentieth century, and it continues to be true today.
It is not clear whether the measurement problem was bigger in the more distant past than it has been recently; but it is irrelevant when we think about the future.
Whether growth in per capita income that is officially estimated at 1.5% is in reality more like 3%, we are enjoying the higher level of real incomes inherited from the past.
So will future generations.
Indeed, there is simply no reason for the view, often expressed in surveys and appearing in Gordon’s book, that the children of today’s generation will not enjoy a standard of living as high as their parents’.
That may be true for some people, especially those with relatively high incomes, but it is definitely not true for most people.
Think about a 30-year-old new parent at the middle of the income distribution.
Thirty years from now, the child will be as old as her median-income parent is now.
If real incomes grow at just 1.5% a year, the median income 30 years from now will be nearly 60% higher than the income of today’s median-income individual.
Even if the child earns 30% less than the median at that time, her income would still be higher than today’s median income.
And if product innovations and improvements imply that per capita real incomes grow at 3% a year, the median income of someone 30 years from now would be more than twice today’s median income.
So Americans are lucky that they have inherited the innovations of the past, and that real incomes will continue to grow in the future.
But that is not a reason for complacency.
The US can increase its future growth rate by improving its education system, raising its rates of saving and investment to where they were in the past, and fixing the features of its tax and transfer systems that reduce employment and earnings.
Gordon focuses on the effect of technological innovation on Americans’ real incomes.
But an important limitation of his argument is that it gives short shrift to policy innovation.
America’s economy – and those of many other countries – could grow faster in the future if policymakers adopt the appropriate reforms.
The Financial Fire Next Time
NEW HAVEN – If we have learned anything since the global financial crisis peaked in 2008, it is that preventing another one is a tougher job than most people anticipated.
Not only does effective crisis prevention require overhauling our financial institutions through creative application of the principles of good finance; it also requires that politicians and their constituents have a shared understanding of these principles.
Today, unfortunately, such an understanding is missing.
The solutions are too technical for most news reporting aimed at the general public. And, while people love to hear about “reining in” or “punishing” financial leaders, they are far less enthusiastic about asking these people to expand or improve financial-risk management.
But, because special-interest groups have developed around existing institutions and practices, we are basically stuck with them, subject to minor tweaking.
The financial crisis, which is still ongoing, resulted largely from the boom and bust in home prices that preceded it for several years (home prices peaked in the United States in 2006).
During the pre-crisis boom, homebuyers were encouraged to borrow heavily to finance undiversified investments in a single home, while governments provided guarantees to mortgage investors.
In the US, this occurred through implicit guarantees of assets held by the Federal Housing Administration (FHA) and the mortgage agencies Fannie Mae and Freddie Mac.
At a session that I chaired at the American Economic Association’s recent meeting in Philadelphia, the participants discussed the difficulty of getting any sensible reform out of governments around the world.
In a paper presented at the session, Andrew Caplin of New York University spoke of the public’s lack of interest or comprehension of the rising risks associated with the FHA, which has been guaranteeing privately-issued mortgages since its creation during the housing crisis of the 1930’s.
Caplin’s discussant, Joseph Gyourko of the Wharton School, concurred.
Gyourko’s own 2013 study concludes that the FHA, now effectively leveraged 30 to one on guarantees of home mortgages that are themselves leveraged 30 to one, is underwater to the tune of tens of billions of dollars.
He wants the FHA shut down and replaced with a subsidized saving program that does not attempt to compete with the private sector in evaluating mortgage risk.
Similarly, Caplin testified in 2010 before the US House Committee on Financial Services that the FHA was at serious risk, a year after FHA Commissioner David Stevens told the same committee that “We will not need a bailout.”
Caplin’s research evidently did not sit well with FHA officials, who were hostile to Caplin and refused to give him the data he wanted.
The FHA has underestimated its losses every year since, while proclaiming itself in good health.
Finally, in September, it was forced to seek a government bailout.
At the session, I asked Caplin about his effort, starting with his co-authored 1997 book Housing Partnerships, which proposed allowing homebuyers to buy only a fraction of a house, thereby reducing their risk exposure without putting taxpayers at risk.
If implemented, his innovative idea would reduce homeowners’ leverage.
But, while it was a highly leveraged mortgage market that fueled the financial crisis 11 years later, the idea, he said, has not made headway anywhere in the world.
Why not, I asked?
Why can’t creative people with their lawyers simply create such partnerships for themselves?
The answer, he replied, is complicated; but, at least in the US, one serious problem looms large: the US Internal Revenue Service’s refusal to issue an advance ruling on how such risk-managing arrangements would be taxed.
Given the resulting uncertainty, no one is in a mood to be creative.
Meanwhile, there is strong public demand – angry and urgent – for a government response aimed at preventing another crisis and ending the problem of “too big to fail” financial institutions. But the political reality is that government officials lack sufficient knowledge and incentive to impose reforms that are effective but highly technical.
For example, one reform adopted in the US to help prevent the “too big to fail” problem is the risk retention rule stipulated by the 2010 Dodd Frank Act.
In order to ensure that mortgage securitizers have some “skin in the game,” they are required to retain an interest in 5% of the mortgage securities that they create (unless they qualify for an exemption).
But, in another paper presented at our session, Paul Willen of the Federal Reserve Bank of Boston argued that creating such a restriction is hardly the best way for a government to improve the functioning of financial markets.
Investors already know that people have a stronger incentive to manage risks better if they retain some interest in the risk.
But investors also know that other factors may offset the advantages of risk retention in specific cases.
In trying to balance such considerations, the government is in over its head.
The most fundamental reform of housing markets remains something that reduces homeowners’ overleverage and lack of diversification.
In my own paper for the session, I returned to the idea of the government encouraging privately-issued mortgages with preplanned workouts, thereby insuring them against the calamity of ending up underwater after home prices fall.
Like housing partnerships, this would be a fundamental reform, for it would address the core problem that underlay the financial crisis.
But there is no impetus for such a reform from existing interest groups or the news media.
One of our discussants, Joseph Tracy of the Federal Reserve Bank of New York (and co-author of Housing Partnerships), put the problem succinctly: “Firefighting is more glamorous than fire prevention.”
That is not a recipe for a happy ending.
The Global Economy’s Tale Risks
TOKYO – Fluctuations in the world’s economies are largely due to the stories we hear and tell about them.
These popular, emotionally relevant narratives sometimes inspire us to go out and spend, start businesses, build new factories and office buildings, and hire employees; at other times, they put fear in our hearts and impel us to sit tight, save our resources, curtail spending, and reduce risk.
They either stimulate our “animal spirits” or muffle them.
Visiting Japan on a speaking tour, I am struck by the positive impact of the economy-related stories on people’s thinking and behavior, and also by how fragile that change is.
Since Prime Minister Shinzo Abe assumed office in December 2012 and launched his program of monetary and fiscal stimulus and structural reform, the impact on Japanese confidence has been profound.
According to the International Monetary Fund, the output gap – the difference between actual and potential GDP – narrowed from -3.6% in 2011 to -0.9% in 2013.
Most of the rest of the world lacks a comprehensive, easily understood narrative of positive change similar to Japan’s “Abenomics.”
The output gap for the world’s major advanced economies, as calculated by the IMF, remains disappointing, at -3.2% in 2013, which is less than half-way back to normal from 2009, the worst year of the global financial crisis, when the gap was -5.3%.
We seem to be at the mercy of our narratives.
Ever since 2009, most of us have just been waiting for some story to turn our hearts aglow with hope and confidence – and to reinvigorate our economies.
Think of the story of the real-estate boom in the United States and other countries in the first half of the 2000’s.
This was a story not of a “bubble”; rather, the boom was a triumph of capitalist enterprise in a new millennium.
These stories were so powerful because a huge number of people were psychologically – and financially – invested in them.
Most families owned a house, so they were automatically participating in the boom.
And many homeowners, eager to participate even more in the boom and feel like savvy capitalists, bought more expensive houses than they normally would.
With the abrupt end of the boom in 2006, that ego-boosting story also ended. We were not all investing geniuses after all.
It was just a bubble, we learned.
Our confidence in ourselves, and hence in our futures, took a hit, discouraging economic risk-taking.
Then the financial crisis erupted, scaring the entire world.
A story of opportunity and riches turned into one of corrupt mortgage lenders, overleveraged financial institutions, dimwitted experts, and captured regulators.
The economy was careening like a rudderless ship, and the sharp operators who had duped us into getting on board – call them the 1% – were slipping away in the only lifeboats.
By early 2009, the plunge in stock markets around the world reached its nadir, and fear of a deep depression, according to the University of Michigan Consumer Sentiment Survey, was at its highest level since the second oil crisis in the early 1980’s.
Stories of the Great Depression of the 1930’s were recalled from our dimmest memories – or from our parents’ and grandparents’ memories – and retold.
To understand why economic recovery (if not that of the stock market) has remained so weak since 2009, we need to identify which stories have been affecting popular psychology.
One example is the rapid advance in smartphones and tablet computers.
Apple’s iPhone was launched in 2007, and Google’s Android phones in 2008, just as the crisis was beginning, but most of their growth has been since then.
Apple’s iPad was launched in 2010.
Since then, these products have entered almost everyone’s consciousness; we see people using them everywhere – on the street and in hotel lobbies, restaurants, and airports.
This ought to be a confidence-boosting story: amazing technologies are emerging, sales are booming, and entrepreneurship is alive and very well.
But the confidence-boosting effect of the earlier real-estate boom was far more powerful, because it resonated directly with many more people.
This time, in fact, the smartphone/tablet story is associated with a sense of foreboding, for the wealth that these devices generate seems to be concentrated among a tiny number of tech entrepreneurs who probably live in a faraway country.
These stories awaken our fears of being overtaken by others on the economic ladder.
And now that our phones talk to us (Apple launched Siri, the artificial voice that answers your spoken questions, on its iPhones in 2010), they fuel dread that they can replace us, just as earlier waves of automation rendered much human capital obsolete.
I had the pleasure of meeting with Abe on this trip.
He sticks to the script, telling a story of taking aggressive and definitive action against an economic malaise that has plagued Japan for decades.
He inspires confidence; I felt it immediately.
Abe is also described as reviving national patriotism, even nationalism.
Though I heard none of this from him in my meeting, I think it may be a central part of his story, too.
Nationalism, after all, is intrinsically bound up with individual identity.
It creates a story for each member of the nation, a story about what he or she can do as part of a successful country.
Some of Abe’s most controversial steps, such as visiting the Yasukuni Shrine despite Chinese and Korean objections, only increase the story’s impact.
Still, it is not easy for national leaders, even those with Abe’s talents, to manage such stories, just as it is hard for film producers to make a blockbuster every time.
No leader can consistently shape the narratives that affect the economy.
Booming Until It Hurts?
NEW HAVEN – In recent months, concern has intensified among the world’s financial experts and news media that overheated asset markets – real estate, equities, and long-term bonds – could lead to a major correction and another economic crisis.
The general public seems unbothered: Google Trends shows some pickup in the search term “stock market bubble,” but it is not at its peak 2007 levels, and “housing bubble” searches are relatively infrequent.
But the experts’ concern is notable and healthy, because the belief that markets are always efficient can survive only when some people do not completely believe it and think that they can profit by timing the markets.
At the same time, this heightened concern carries dangers, too, because we do not know whether it will lead to a public overreaction on the downside.
International agencies recently issued warnings about speculative excesses in asset markets, suggesting that we should be worried about a possible crisis.
In a speech in June, International Monetary Fund Deputy Managing Director Min Zhu argued that housing markets in several countries, including in Europe, Asia, and the Americas, “show signs of overheating.” The same month, the Bank for International Settlements said in its Annual Report that such “signs are worrying.”
Newspapers are sounding alarms as well.
On July 8, the New York Times led its front page with a somewhat hyperbolic headline: “From Stocks to Farmland, All’s Booming, or Bubbling: Prices for Nearly All Assets around World Are High, Bringing Economic Risks.”
The words “nearly all” are too strong, though the headline evinces the newfound concern.
It is not entirely clear why the alarms are sounding just now, after five years of general expansion in markets since they hit bottom in early 2009.
Why aren’t people blithely expecting more years of expansion?
It seems that this thinking is heavily influenced by recent record highs in stock markets, even if these levels are practically meaningless, given inflation.
Notably, just a month ago the Morgan Stanley Capital International All Country World Index broke the record that it reached on October 31, 2007.
The International Monetary Fund announced in June a new Global Housing Watch website that tracks global home prices and ratios.
The site shows a global index for house prices that is rising, on a GDP-weighted basis, as fast as during the boom that preceded the 2008 crisis, though not yet reaching the 2006 record level.
There is also the US Federal Reserve’s announcement that, if the economy progresses as expected, the last bond purchase from the round of quantitative easing that it began in September 2012 will be in the month after the Federal Open Market Committee’s October 2014 meeting.
That kind of news story seems also to affect observers’ thinking, though it is not really much in the way of news, given that everyone has known that the Fed would end the program before long.
The problem is that there is no certain way to explain how people will react to such a policy change, to any signs of price overheating or decline, or to other news stories that might be spun as somehow important.
We simply do not have much well-documented history of big financial crises to examine, leaving econometricians vulnerable to serious error, despite studying time series that are typically no more than a few decades long.
Until the recent crisis, economists were talking up the “great moderation”: economic fluctuations were supposedly becoming milder, and many concluded that economic stabilization policy had reached new heights of effectiveness.
As of 2005, just before the onset of the financial crisis, the Harvard econometricians James Stock (now a member of President Barack Obama’s Council of Economic Advisers) and Mark Watson concluded that the advanced economies had become both less volatile and less correlated with each other over the course of the preceding 40 years.
That conclusion would have to be significantly modified in light of the data recorded since the financial crisis.
The economic slowdown in 2009, the worst year of the crisis, was nothing short of catastrophic.
In fact, we have had only three salient global crises in the last century: 1929-33, 1980-82, and 2007-9.
These events appear to be more than just larger versions of the more frequent small fluctuations that we often see, and that Stock and Watson analyzed.
But, with only three observations, it is hard to understand these events.
All seemed to have something to do with speculative price movements that surprised most observers and were never really explained, even years after the fact.
They also had something to do with government policymakers’ mistakes.
For example, the 1980-82 crisis was triggered by an oil price spike caused by the Iran-Iraq war.
But all of them were related to asset-price bubbles that burst, leading to financial collapse.
Those who warn of grave dangers if speculative price increases are allowed to continue unimpeded are right to do so, even if they cannot prove that there is any cause for concern.
The warnings might help prevent the booms that we are now seeing from continuing much longer and becoming more dangerous.
Is Economics a Science?
NEW HAVEN – I am one of the winners of this year’s Nobel Memorial Prize in Economic Sciences, which makes me acutely aware of criticism of the prize by those who claim that economics – unlike chemistry, physics, or medicine, for which Nobel Prizes are also awarded – is not a science.
Are they right?
One problem with economics is that it is necessarily focused on policy, rather than discovery of fundamentals.
Nobody really cares much about economic data except as a guide to policy: economic phenomena do not have the same intrinsic fascination for us as the internal resonances of the atom or the functioning of the vesicles and other organelles of a living cell.
We judge economics by what it can produce.
As such, economics is rather more like engineering than physics, more practical than spiritual.
There is no Nobel Prize for engineering, though there should be.
True, the chemistry prize this year looks a bit like an engineering prize, because it was given to three researchers – Martin Karplus, Michael Levitt, and Arieh Warshel – “for the development of multiscale models of complex chemical systems” that underlie the computer programs that make nuclear magnetic resonance hardware work.
But the Nobel Foundation is forced to look at much more such practical, applied material when it considers the economics prize.
The problem is that once we focus on economic policy, much that is not science comes into play. Politics becomes involved, and political posturing is amply rewarded by public attention.
The Nobel Prize is designed to reward those who do not play tricks for attention, and who, in their sincere pursuit of the truth, might otherwise be slighted.
Why is it called a prize in “economic sciences,” rather than just “economics”?
The other prizes are not awarded in the “chemical sciences” or the “physical sciences.”
Fields of endeavor that use “science” in their titles tend to be those that get masses of people emotionally involved and in which crackpots seem to have some purchase on public opinion.
These fields have “science” in their names to distinguish them from their disreputable cousins.
The term political science first became popular in the late eighteenth century to distinguish it from all the partisan tracts whose purpose was to gain votes and influence rather than pursue the truth. Astronomical science was a common term in the late nineteenth century, to distinguish it from astrology and the study of ancient myths about the constellations.
There was a need for such terms back then, because their crackpot counterparts held much greater sway in general discourse.
Scientists had to announce themselves as scientists.
In fact, even the term chemical science enjoyed some popularity in the nineteenth century – a time when the field sought to distinguish itself from alchemy and the promotion of quack nostrums.
But the need to use that term to distinguish true science from the practice of imposters was already fading by the time the Nobel Prizes were launched in 1901.
Similarly, the terms astronomical science and hypnotic science mostly died out as the twentieth century progressed, perhaps because belief in the occult waned in respectable society.
Yes, horoscopes still persist in popular newspapers, but they are there only for the severely scientifically challenged, or for entertainment; the idea that the stars determine our fate has lost all intellectual currency.
Hence there is no longer any need for the term “astronomical science.”
Critics of “economic sciences” sometimes refer to the development of a “pseudoscience” of economics, arguing that it uses the trappings of science, like dense mathematics, but only for show.
For example, in his 2004 book Fooled by Randomness, Nassim Nicholas Taleb said of economic sciences: “You can disguise charlatanism under the weight of equations, and nobody can catch you since there is no such thing as a controlled experiment.”
But physics is not without such critics, too.
In his 2004 book The Trouble with Physics: The Rise of String Theory, The Fall of a Science, and What Comes Next, Lee Smolin reproached the physics profession for being seduced by beautiful and elegant theories (notably string theory) rather than those that can be tested by experimentation.
Similarly, in his 2007 book Not Even Wrong: The Failure of String Theory and the Search for Unity in Physical Law, Peter Woit accused physicists of much the same sin as mathematical economists are said to commit.
My belief is that economics is somewhat more vulnerable than the physical sciences to models whose validity will never be clear, because the necessity for approximation is much stronger than in the physical sciences, especially given that the models describe people rather than magnetic resonances or fundamental particles.
People can just change their minds and behave completely differently.
They even have neuroses and identity problems, complex phenomena that the field of behavioral economics is finding relevant to understanding economic outcomes.
But all the mathematics in economics is not, as Taleb suggests, charlatanism.
Economics has an important quantitative side, which cannot be escaped.
The challenge has been to combine its mathematical insights with the kinds of adjustments that are needed to make its models fit the economy’s irreducibly human element.
The advance of behavioral economics is not fundamentally in conflict with mathematical economics, as some seem to think, though it may well be in conflict with some currently fashionable mathematical economic models.
And, while economics presents its own methodological problems, the basic challenges facing researchers are not fundamentally different from those faced by researchers in other fields.
As economics develops, it will broaden its repertory of methods and sources of evidence, the science will become stronger, and the charlatans will be exposed.
Parallels to 1937
NEW HAVEN – The depression that followed the stock-market crash of 1929 took a turn for the worse eight years later, and recovery came only with the enormous economic stimulus provided by World War II, a conflict that cost more than 60 million lives.
By the time recovery finally arrived, much of Europe and Asia lay in ruins.
The current world situation is not nearly so dire, but there are parallels, particularly to 1937.
Now, as then, people have been disappointed for a long time, and many are despairing.
They are becoming more fearful for their long-term economic future.
And such fears can have severe consequences.
For example, the impact of the 2008 financial crisis on the Ukrainian and Russian economies might ultimately be behind the recent war there.
According to the International Monetary Fund, both Ukraine and Russia experienced spectacular growth from 2002 to 2007: over those five years, real per capita GDP rose 52% in Ukraine and 46% in Russia.
That is history now: real per capita GDP growth was only 0.2% last year in Ukraine, and only 1.3% in Russia.
The discontent generated by such disappointment may help to explain Ukrainian separatists’ anger, Russians’ discontent, and Russian President Vladimir Putin’s decision to annex Crimea and to support the separatists.
There is a name for the despair that has been driving discontent – and not only in Russia and Ukraine – since the financial crisis. That name is the “new normal,” referring to long-term diminished prospects for economic growth, a term popularized by Bill Gross, a founder of bond giant PIMCO.
The despair felt after 1937 led to the emergence of similar new terms then, too.
“Secular stagnation,” referring to long-term economic malaise, is one example.
The word secular comes from the Latin saeculum, meaning a generation or a century.
The word stagnation suggests a swamp, implying a breeding ground for virulent dangers.
In the late 1930s, people were also worrying about discontent in Europe, which had already powered the rise of Adolph Hitler and Benito Mussolini.
The other term that suddenly became prominent around 1937 was “underconsumptionism” – the theory that fearful people may want to save too much for difficult times ahead. Moreover, the amount of saving that people desire exceeds the available investment opportunities.
As a result, the desire to save will not add to aggregate saving to start new businesses, construct and sell new buildings, and so forth. Though investors may bid up prices of existing capital assets, their attempts to save only slow down the economy.
“Secular stagnation” and “underconsumptionism” are terms that betray an underlying pessimism, which, by discouraging spending, not only reinforces a weak economy, but also generates anger, intolerance, and a potential for violence.
In his magnum opus&nbsp;The Moral Consequences of Economic Growth, Benjamin M. Friedman showed many examples of declining economic growth giving rise – with variable and sometimes long lags – to intolerance, aggressive nationalism, and war.
He concluded that, “The value of a rising standard of living lies not just in the concrete improvements it brings to how individuals live but in how it shapes the social, political, and ultimately the moral character of a people.”
Some will doubt the importance of economic growth.
Maybe, many say, we are too ambitious and ought to enjoy a higher quality of life with more leisure.
Maybe they are right.
But the real issue is self-esteem and the social-comparison processes that psychologist Leon Festinger observed as a universal human trait.
Though many will deny it, we are always comparing ourselves with others, and hoping to climb the social ladder.
People will never be happy with newfound opportunities for leisure if it seems to signal their failure relative to others.
The hope that economic growth promotes peace and tolerance is based on people’s tendency to compare themselves not just to others in the present, but also to what they remember of people – including themselves – in the past.
According to Friedman, “Obviously nothing can enable the majority of the population to be better off than everyone else.
But not only is it possible for most people to be better off than they used to be, that is precisely what economic growth means.”
The downside of the sanctions imposed against Russia for its behavior in eastern Ukraine is that they may produce a recession throughout Europe and beyond.
That will leave the world with unhappy Russians, unhappy Ukrainians, and unhappy Europeans whose sense of confidence and support for peaceful democratic institutions will weaken.
While some kinds of sanctions against international aggression appear to be necessary, we must remain mindful of the risks associated with extreme or punishing measures.
It would be highly desirable to come to an agreement to end the sanctions; to integrate Russia (and Ukraine) more fully into the world economy; and to couple these steps with expansionary economic policies.
A satisfactory resolution of the current conflict requires nothing less.
Robert Rubin Revisited
Economists and historians will long debate the contrast between the economic policies of the presidencies of Bill Clinton and George W. Bush.
The Clinton administration took office with remarkably few cards, and the cards it held were dreadful: a long-term legacy of extremely slow economic growth, huge federal budget deficits created by the Ronald Reagan/George H. W. Bush administrations of 1980-1992, a relatively high "natural" rate of unemployment, and growing inflationary pressure.
By contrast, George W. Bush's administration took office with stunningly good cards: a budget in substantial surplus, a trend of rapid productivity growth as the information-technology revolution reached critical mass, and a very low "natural" rate of unemployment.
Despite its handicaps, nearly everything that the Clinton economic policy team touched turned to gold.
Led by Robert Rubin, first as an Assistant to the President and later as Secretary of the Treasury, it turned the gargantuan Reagan/Bush deficits into huge surpluses; it successfully enhanced America's high-investment/high productivity growth recovery; it pursued initiatives to reduce trade barriers.
The Clinton team could also take credit for the largely successful handling of the 1994 Mexican and 1997-1998 Asian financial crises.
By contrast, nearly everything that George W. Bush's economic policy team has touched has turned to, well, if not lead, at least to a state that inspires observers, both inside and outside the administration, to shake their heads and mutter about a horribly wasted opportunity.
On trade, on fiscal policy, on reform of social entitlements, on almost every issue you can name, the Bush team has worsened conditions substantially.
Reading Rubin's recently published memoir In an Uncertain World , we can begin to understand this striking difference better.
Begin by noting that the title page of In an Uncertain World states that its authors are Robert Rubin and Jacob Weisberg.
How often does the person who crafts the prose for a memoir of a public figure get his or her name on the cover?
Weisberg is not given a mere "with," but the full credit of a co-author that the word "and" delivers.
This is a key facet of Robert Rubin's strength: he is a classy guy, one who believes that credit is to be shared.
What Rubin sees as most important in developing policy is the habit of "probabilistic thinking."
This means a willingness to ask, "What else might happen?," "What if we're wrong?," "What could happen next?," and to look at the full range of potential outcomes--at their costs as well as their benefits--rather than assuming that results will match some fashionable ideology or favorite administration model.
All forecasts, after all, turn out to be wrong in at least one vital dimension.
Pounding a table and shouting does not make unwanted facts disappear.
Rubin's recognition that the world is a complicated, poorly-understood place, where lots of unexpected and surprising things happen--and where we cannot merely consult some map drawn by John Maynard Keynes or Milton Friedman or some neo-conservative pundit--seems to have been the most powerful of his secret weapons.
But in reading In an Uncertain World , you soon see that "probabilistic thinking" was not Rubin's only weapon.
He also worked for a president who cared deeply about policy as well as politics--and who was willing to be convinced, at least most of the time, that good policy would turn out in the long run to be good politics.
Rubin also used the remarkable management skills that he had honed as chairman of the investment bank Goldman Sachs to great effect.
I recall sitting in the back of the White House's Roosevelt Room and watching, amazed, as he guided meetings of the National Economic Council to the consensus he wanted by little more than raising his eyebrows and calling on people in the appropriate order.
All of these policymaking skills, however, would have been of little use had they not been pointed in the right direction.
I think that the principal reason for Rubin's (and Clinton's) extraordinary economic policy success--all the more so in view of the weak cards the administration was dealt--was the ability to hew to the true object of government: to always keep the big picture in mind.
In his memoir, Rubin recalls a moment when he held firm on world trade: "Protecting industries is usually appealing, because the negative consequences of free trade are so visible....
In a discussion with President Clinton...I mentioned that one sector where we needed to push for reduced trade barriers was fish.
Clinton remembered... seeing some poor fisherman casting their lines....
He wasn't going to do anything to hurt those vulnerable people. `But Mr. President,' I said, `to help those poor fishermen, you're going to prevent the vastly greater benefit that would come to the poor...from being able to buy cheap fish.'"
We, too, need to keep our eye on the big picture.
That means that we must make it more likely in the future that people as capable and wise as Robert Rubin will find it attractive to enter public service, and that once there, they will have the power to make a difference.
The Road to Full Investment
LONDON – A specter is haunting the treasuries and central banks of the West – the specter of secular stagnation.
What if there is no sustainable recovery from the economic slump of 2008-2013?
What if the sources of economic growth have dried up – not temporarily, but permanently?
The new pessimism comes not from Marxists, who have always looked for telltale signs of capitalism’s collapse, but from the heart of the policymaking establishment: Larry Summers, former US President Bill Clinton’s Secretary of the Treasury, and chief economist of almost everything at one time or another.
Summers’s argument, in a nutshell, is that if the expected profitability of investment is falling, interest rates need to fall to the same extent. But interest rates cannot fall below zero (in fact, they may be stuck above zero if there is a strong desire to build up cash balances).
This could result in profit expectations falling below the cost of borrowing.
Most people agree that this could happen at the depth of a slump.
It was to avert this possibility that central banks began pumping money into the economy after 2008.
The novelty of Summers’s argument is the claim that “secular stagnation” began 15-20 years before the crash.
True enough, interest rates were falling, though not as fast as the fall in expected profit on new investment.
So, even in the so-called boom years, most Western economies were kept afloat not by new investment, but by asset bubbles based on increasingly unsustainable leverage.
The generalized version of this proposition is that secular stagnation – the persistent underuse of potential resources – is the fate of all economies that rely on private investment to fill the gap between income and consumption.
As capital becomes more abundant, the expected return on new investment, allowing for risk, falls toward zero.
But this does not mean that all investment should come to an end.
If the risk can be eliminated, the investment engine can be kept going, at least temporarily.
This is where public investment comes in.
Certain classes of investment may not earn the risk-adjusted returns that private investors demand.
But, provided that the returns are positive, such investments are still worth making.
Given near-zero interest rates and idle workers, it is time for the state to undertake the rebuilding of infrastructure.
Those who know their history will recognize that Summers is reviving an argument advanced by the American economist Alvin Hansen in 1938.
Owing to a slowdown in population growth, and thus lower “demand for capital,” the world, Hansen claimed, faced a problem of “secular, or structural, unemployment…in the decades before us.”
The prolonged boom that followed World War II falsified Hansen’s projection.
But his argument was not foolish; it was the assumptions underlying it that turned out to be wrong. Hansen did not anticipate the war’s huge capital-consuming effect, and that of many smaller wars, plus the long Cold War, in keeping capital scarce.
In the United States, military spending averaged 10% of GDP in the 1950’s and 1960’s.
Population growth was boosted by a war-induced baby boom and mass immigration into the US and Western Europe.
New export markets and private investment opportunities opened up in developing countries.
Most Western governments pursued large-scale civilian investment programs: think of the US interstate highway system built under President Dwight D. Eisenhower in the 1950’s.
This mixture of stimulating events and policies enabled Western economies to maintain high investment ratios in the post-WWII years.
But it is possible to argue that all of this merely postponed the day when the expected rate of return to capital would fall below the minimum rate of interest acceptable to savers, which would happen as capital became more abundant relative to population.
Hansen thought that new inventions would require less capital than in the past.
This has now come to pass in what the MIT economists Erik Brynjolfsson and Andrew McAfee call The Second Machine Age.
A company like Kodak needed and built vastly more infrastructure than its digital successors Instagram and Facebook – and (of course) employed many more workers. The inventions of the future may well consume even less capital (and labor).
What follows from this?
The human race has proved very successful in the past at keeping capital scarce – mainly by engaging in destructive wars.
One cannot exclude recourse to this solution in the future. Apart from this, it is surely premature to believe that the West has run out of investment opportunities.
Some new inventions, like self-driving car systems, will require heavy capital investment in new kinds of roads.
And one can think of many others.
It is probable, though, that most of the new investment will have to be carried out with state subsidies.
But beyond this, one should view secular stagnation as an opportunity rather than a threat.
The classical economists of the nineteenth century looked forward to what they called a “stationary state,” when, in the words of John Stuart Mill, the life of “struggling to get on…trampling, crushing, elbowing, and treading on each other’s heels” would no longer be needed.
If a point of true “full investment” – that is, a situation when the supply of capital increased to the point at which it would yield no net return above its replacement cost – were ever reached, it would signify that the human race had solved its economic problem.
The challenge then would be to convert capital abundance into more leisure and balanced consumption.
Should that happen, we would be at the threshold of a new world – some would say a heaven on earth.
We can be tolerably certain of one thing: our leaders will do their best to make sure we never get there.
Endgame for Putin in Ukraine?
LONDON – Vladimir Putin may (or may not) enjoy 80% public support in Russia for his Ukraine policy; but it has become increasingly clear that he has bitten off more than he can chew.
The question is: At what point will his position as President become untenable?
Leave to one side the moral and geopolitical background of the Ukraine imbroglio.
Russians are justified, I believe, in their view that the West took advantage of Russia’s post-communist weakness to encroach on their country’s historic space.
The Monroe Doctrine may be incompatible with contemporary international law; but all powers strong enough to enforce a strategic sphere of interest do so.
There is merit, I also believe, in Putin’s contention that a multipolar world is better than a unipolar world for advancing the cause of human flourishing.
No single power or coalition is wise or disinterested enough to claim universal sovereignty.
So it should be no surprise that Russia and other countries have started to build an institutional structure for multi-polarity.
The Shanghai Cooperation Organization, which includes Russia, China, and four ex-Soviet Central Asian states, was established in 2001.
Last month, the five BRICS countries – Brazil, Russia, India, China, and South Africa – established the New Development Bank and a contingent reserve fund to diversify sources of official lending to developing countries.
The BRICS’ “no strings” policy explicitly challenges the conditionality imposed on borrowers by the World Bank and the International Monetary Fund, though the policy remains untested.
Indeed, it is impossible to imagine China’s leaders approving a loan to a country that, say, recognizes Taiwan or accepts Tibetan claims to independence.
But the fact remains that Russia is too weak to challenge the West further, at least in the way that it did in Ukraine.
Russia’s GDP is around $2 trillion, and its population of 143 million is falling fast.
The United States and the European Union have a combined GDP of about $34 trillion and a population of 822 million, with the US population growing rapidly.
This means that the West can inflict much more damage on Russia than Russia can inflict on the West.
Even in its heyday, the Soviet Union was a one-track superpower.
With an economy about a quarter of the size of America’s, it was able to maintain rough military parity by spending four times as much of its national income on defense as the US did – to the detriment of the living standards of ordinary citizens.
Today the balance of power is even more unfavorable.
Russia’s economy is weaker, and its armaments are rusty.
It retains a formidable nuclear capacity, but it is inconceivable that Russia would use it to secure its aims in Ukraine.
So we are left with a looming endgame in which Putin can neither retain his spoils – Crimea and control of Russian-speaking parts of eastern Ukraine – nor back down.
Russia will be required to disgorge these acquisitions as a condition of normalizing its relations with the West.
But Putin will most likely try to prop up eastern Ukraine’s separatists as long as he can – perhaps with military assistance disguised as humanitarian aid – and will absolutely refuse to give up Crimea.
This will lead to a further escalation of Western sanctions: restrictions on gas exports, general export restrictions, suspension from the World Trade Organization, withdrawal of the FIFA 2018 World Cup soccer tournament, and so on.
This, in conjunction with the tightening of current sanctions, including the exclusion of Russian banks from Western capital markets, is bound to cause serious shortages, declining living standards, and major problems for Russia’s ownership class.
The Russian public’s natural reaction will be to rally to their leader.
But support for Putin, though broad, may not be deep.
It is support before, not after, the debate about the costs of Putin’s policy has taken place.
And that debate is being silenced by state control of the media and the suppression of opposition.
It is natural and right to think of possible compromises: Ukraine’s guaranteed neutrality, greater regional autonomy within a federal Ukraine, an interim international administration in Crimea to supervise a referendum on its future, and the like.
The question is not how much of this kind of package Putin would accept, but whether any of it will be offered to him.
The West no longer believes anything he says.
US President Barack Obama has publicly accused him of lying.
German Chancellor Angela Merkel, formerly Putin’s strongest backer in Europe, is reported to have described him as delusional.
(The last straw for her apparently was his attempt to blame the downing of Malaysia Airlines Flight 17 on the Ukrainian government.)
All leaders lie and dissemble to some extent; but the scale of disinformation coming from the Kremlin has been epic.
So the question must be asked: Will the West be prepared to make peace with Putin?
Leaders whose foreign-policy adventures end in defeat do not usually survive long in office.
Either formal mechanisms are used to dethrone them – as occurred, for example, in the Soviet Union, when the Central Committee forced Nikita Khrushchev out of power in 1964 – or informal mechanisms come into play.
Putin’s power elite will start fracturing – indeed, that process may have begun already.
Pressure will grow for him to step aside.
There is no need, it will be said, for his country to go down with him.
Such a scenario, unimaginable a few months ago, may already be shaping up as the Ukraine drama moves to its endgame.
Post-Crash Economics
LONDON – In last month’s European Parliament election, euroskeptic and extremist parties won 25% of the popular vote, with the biggest gains chalked up in France, the United Kingdom, and Greece.
These results were widely, and correctly, interpreted as showing the degree of disconnect between an arrogant European elite and ordinary citizens.
Less noticed, because less obviously political, are today’s intellectual rumblings, of which French economist Thomas Piketty’s Capital in the Twenty-First Century, a withering indictment of growing inequality, is the latest manifestation.
We may be witnessing the beginning of the end of the neoliberal capitalist consensus that has prevailed throughout the West since the 1980s – and that many claim led to the economic disaster of 2008-2009.
Particularly important is the growing discontent of economics students with the university curriculum.
Undergraduates’ discontent matters, because economics has long been the West’s political lodestar.
This discontent was born in the “post-autistic economics movement,” which started in Paris in 2000, and spread to the United States, Australia, and New Zealand. Its adherents’ main complaint was that the mainstream economics taught to students had become a branch of mathematics, disconnected from reality.
The revolt made little progress in the years of the “Great Moderation” of the 2000s, but was revived following the 2008 crisis.
Two important links with the earlier network are US economist James Galbraith, the son of John Kenneth Galbraith, and British economist Ha-Joon Chang, author of the best-selling 23 Things They Don’t Tell You about Capitalism.
In a manifesto published in April, economics students at the University of Manchester advocated an approach “that begins with economic phenomena and then gives students a toolkit to evaluate how well different perspectives can explain it,” rather than with mathematical models based on unreal assumptions.
Significantly, Andrew Haldane, Executive Director for Financial Stability at the Bank of England, wrote the introduction.
The Manchester students argue that “the mainstream within the discipline (neoclassical theory) has excluded all dissenting opinion, and the crisis is arguably the ultimate price of this exclusion.
Alternative approaches such as Post-Keynesian, Marxist, and Austrian economics (as well as many others) have been marginalized.
The same can be said of the history of the discipline.” As a result, students have little awareness of neoclassical theory’s limits, much less alternatives to it.
The aim, according to the students, should be to “bridge disciplines within and outside of economics.”
Economics should not be divorced from psychology, politics, history, philosophy, and so on.
Students are especially keen to study issues like inequality, the role of ethics and fairness in economics (as opposed to the prevailing focus on profit maximization), and the economic consequences of climate change.
The idea is that such intellectual cross-fertilization would help students understand recent economic phenomena better and improve economic theory.
From this point of view, everyone stands to benefit from curriculum reform.
The deeper message is that mainstream economics is in fact an ideology – the ideology of the free market.
Its tools and assumptions define its topics.
If we assume perfect rationality and complete markets, we are debarred from exploring the causes of large-scale economic failures.
Unfortunately, such assumptions have a profound influence on policy.
The efficient-market hypothesis – the belief that financial markets price risks correctly on average – provided the intellectual argument for extensive deregulation of banking in the 1980s and 1990s.
Similarly, the austerity policies that Europe used to fight the recession from 2010 on were based on the belief that there was no recession to fight.
These ideas were tailored to the views of the financial oligarchy.
But the tools of economics, as currently taught, provide little scope for investigating the links between economists’ ideas and the structures of power.
Today’s “post-crash” students are right.
So what is keeping the mainstream’s intellectual apparatus going?
For starters, economics teaching and research is deeply embedded in an institutional structure that, as with any ideological movement, rewards orthodoxy and penalizes heresy.
The great classics of economics, from Smith to Ricardo to Veblen, go untaught.
Research funding is allocated on the basis of publication in academic journals that espouse the neoclassical perspective.
Publication in such journals is also the basis of promotion.
Moreover, it has become an article of faith that any move toward a more open or “pluralist” approach to economics portends regression to “pre-scientific” modes of thought, just as the results of the European Parliament election threaten to revive a more primitive mode of politics.
Yet institutions and ideologies cannot survive by mere incantation or reminders of past horrors.
They have to address and account for the contemporary world of lived experience.
For now, the best that curriculum reform can do is to remind students that economics is not a science like physics, and that it has a much richer history than is to be found in the standard textbooks.
In his book Economics of Good and Evil, the Czech economist Tomáš Sedláček shows that what we call “economics” is only a formalized fragment of a much wider range of thinking about economic life, stretching from the Sumerian epic of Gilgamesh to the meta-mathematics of today.
Indeed, mainstream economics is a pitifully thin distillation of historical wisdom on the topics that it addresses.
It should be applied to whatever practical problems it can solve; but its tools and assumptions should always be in creative tension with other beliefs concerning human wellbeing and flourishing.
Shale Gas to the Rescue?
LONDON – The developed world is slowly emerging from the Great Recession, but a question lingers: How fast and how far will the recovery go?
One big source of pessimism has been the idea that we are running out of investment opportunities – and have been since before the 2008 crash.
But is that true?
The last big surge of innovation was the Internet revolution, whose products came onstream in the 1990’s.
Following the dot-com collapse of the early 2000’s, speculation in real estate and financial assets – enabled by cheap money – kept Western economies going.
The post-2008 slump merely exposed the unsoundness of the preceding boom; the mediocrity of the recovery reflects the mediocrity of previous prospects, coolly considered.
The risk now is that a debt-fueled asset spike merely perpetuates the boom-bust cycle.
The economist Larry Summers has reintroduced the term “secular stagnation” to describe what awaits us.
By the mid-2000’s, Summers argued at a recent International Monetary Fund conference, the average prospective return on new investment in the United States had fallen below any feasible reduction in the Federal Reserve’s benchmark interest rate.
That remains true today.
We may be in a permanent liquidity trap, in which nominal interest rates cannot fall below zero, but the expected rate of return to investment remains negative.
Unconventional monetary policies like quantitative easing may inflate a new generation of asset bubbles, but the underlying problem – negative returns to new investment – will not have been solved by the time the next crash comes.
So the problem is poor investment prospects.
Why?
In the 1930’s, the economist Alvin Hansen argued that opportunities for new investment in already-rich countries were drying up.
Investment growth had depended on population growth, technological innovation, and westward expansion.
With the closing of the frontier and static populations, growth would depend on innovation; but future innovation would require smaller inputs of capital and labor than in the past.
In other words, the returns to capital were bound to fall as it became more abundant relative to population.
In this situation, full employment could be maintained only by running continuous fiscal deficits.
John Maynard Keynes held a different view.
In 1945, he wrote to T.S. Eliot: “[T]he full employment policy by means of investment is only one particular application of an intellectual theorem.
Personally, I regard the investment policy as first aid.…Less work is the ultimate solution.”
Developed countries’ strong postwar investment performance dispelled fear of secular stagnation. But this occurred after a world war that had created huge pent-up demand for new equipment, transport infrastructure, and household appliances, together with a military-industrial complex that armed the West during the Cold War.
The real rate of return to capital may have started to decline by the early 1970’s; productivity growth certainly has slowed since then.
Some crucial changes in the political economy of Western capitalism in the 1980’s can also be viewed in this light: the rise of neoliberal ideology, the growing inequality of wealth and incomes, the increase in structural unemployment, the growth of financial services, globalization, the invention of post-Cold War threats to sustain military spending, and so on.
The question today is whether a new upsurge of investment will come to our rescue.
Optimists point to the shale-energy revolution in the US.
The McKinsey Global Institute has identified shale energy as a “game changer” for the world economy, estimatingthat it could boost America’s GDP by as much as 4% ($690 billion) per year and add 1.7 million permanent jobs to the labor market by 2020.
From 2007 to 2012, North American shale-gas production grew at an average annual rate of more than 50%.
As a result, the share of shale gas in America’s overall gas production rose from just 5% in 2007 to 36% in 2012.
With the share of imports in US natural-gas consumption dropping from 16.5% in 2007 to 11% in 2010, America is on the path to energy self-sufficiency.
Likewise, a September 2013 report by IHS concludes that midstream industries like transportation and downstream industries like manufacturing and chemicals are also receiving a massive stimulus.
As a result of the shale-energy boom, “over $216 billion in total will be invested in the midstream and downstream oil and gas industries” from 2012 to 2025.
Nearly 380,000 of the 2.1 million jobs that shale-related industries generated in the US in 2012 , were created in these areas.
Beyond this, the most dramatic impact of shale oil and gas on the economy has been the fall in energy prices.
In the US, the price of natural gas has fallen to $4 per MMBtu, from $13 in 2008, boosting household purchasing power. IHS estimates that in 2012, developments in the shale-energy industry increased households’ real disposable income by more than $1,200.
Thus the shale revolution represents a huge stimulus for America, in terms of investment, exports, and a reduction in energy costs.
I am not in a position either to judge the quantitative impact of shale energy on the US economy and, via growth there, on the rest of the world, or to comment on its geopolitical consequences or net effect on carbon emissions.
But it does seem to me that contemporary apostles of secular stagnation like Summers and Paul Krugman at least ought to be taking the shale-energy revolution into account.
Death to Machines?
LONDON – At the start of the Industrial Revolution, textile workers in the Midlands and the North of England, mainly weavers, staged a spontaneous revolt, smashing machinery and burning factories. Their complaint was that the newfangled machines were robbing them of their wages and jobs.
The rebels took their name, and inspiration, from the apocryphal Ned Ludd, supposedly an apprentice weaver who smashed two knitting frames in 1779 in a “fit of passion.”
Robert Calvert wrote a ballad about him in 1985: “They said Ned Ludd was an idiot boy/ That all he could do was wreck and destroy,” the song begins.
And then: “He turned to his workmates and said: ‘Death to Machines’/They tread on our future and stamp on our dreams.”
The Luddites’ rampage was at its height in 1811-12.
An alarmed government sent in more troops to garrison the disturbed areas than were then available to Wellington in the Peninsular War against Napoleon. More than a hundred Luddites were hanged or transported to Australia.
These measures restored peace.
The machines won: the Luddites are a footnote in the history of the Industrial Revolution.
Historians tell us that the Luddites were victims of a temporary conjuncture of rising prices and falling wages that threatened them with starvation in a society with minimal welfare provision.
The Luddites, however, blamed their misfortune on the machines themselves.
The new knitting frames and power looms could weave yarn into cloth much faster than the most skilled artisan weaver working in his own cottage. Caught between fixed costs (the hire and upkeep of their domestic appliances) and falling prices for their products, tens of thousands of families were doomed to become paupers.
Their plight evoked some sympathy (Lord Byron made a brilliant speech in their defense in the House of Lords); their arguments, however, did not.
There could be no rejecting progress: the future lay with machine production, not with old-fashioned handicrafts.
Thomas Paine spoke for middle-class radicalism when he said, “We know that every machine for the abridgment of labor is a blessing to the great family of which we are part.”
There would, of course, be some temporary unemployment in the technologically advancing sectors; but, in the long run, machine-assisted production, by increasing the real wealth of the community, would enable full employment at higher wages.
That was the initial view of David Ricardo, the most influential economist of the nineteenth century.
But in the third edition of his Principles of Political Economy (1817), he inserted a chapter on machinery that changed tack.
He was now “convinced that the substitution of machines for human labor is often very injurious to the class of laborers,” that the “same cause which may increase the net revenue of the country, may at the same time render the population redundant.” As a result, “the opinion entertained by the laboring class, that the employment of machinery is frequently detrimental to their interests, is not founded on prejudice and error, but is conformable to the correct principles of political economy.”
Just consider: machinery “may render the population redundant”!
Ricardo’s orthodox followers took no notice of it, assuming it to be a rare lapse by the Master.
But was it?
The pessimistic argument is as follows: If machines costing $5 an hour can produce the same amount as workers costing $10 an hour, employers have an incentive to substitute machines for labor up to the point that the costs are equal – that is, when the wages of the workers have fallen to $5 an hour.
As machines become ever more productive, so wages tend to fall even more, toward zero, and the population becomes redundant.
Now, it did not work out like that.
Labor’s share of GDP remained constant throughout the Industrial Age.
The pessimistic argument ignored the fact that by lowering the cost of goods, machines increased workers’ real wages – enabling them to buy more – and that the rise in labor productivity enabled employers (often under pressure from trade unions) to pay more per worker.
It also assumed that machines and workers were close substitutes, whereas more often than not workers could still do things that machines could not.
However, over the last 30 years, the share of wages in national income has been falling, owing to what MIT professors Erik Brynjolfsson and Andrew McAfee call the “second machine age.”
Computerized technology has penetrated deeply into the service sector, taking over jobs for which the human factor and “cognitive functions” were hitherto deemed indispensable.
In retail, for example, Walmart and Amazon are prime examples of new technology driving down workers’ wages. Because computer programs and humans are close substitutes for such jobs, and given the predictable improvement in computing power, there seems to be no technical obstacle to the redundancy of workers across much of the service economy.
Yes, there will still be activities that require human skills, and these skills can be improved.
But it is broadly true that the more computers can do, the less humans need to do.
The prospect of the “abridgment of labor” should fill us with hope rather than foreboding.
But, in our kind of society, there are no mechanisms for converting redundancy into leisure.
That brings me back to the Luddites.
They claimed that because machines were cheaper than labor, their introduction would depress wages.
They argued the case for skill against cheapness.
The most thoughtful of them understood that consumption depends on real income, and that depressing real income destroys businesses.
Above all, they understood that the solution to the problems created by machines would not be found in laissez-faire nostrums.
The Luddites were wrong on many points; but perhaps they deserve more than a footnote.
Vanguard Scotland?
LONDON – Since I believe that the Scots are sensible, I think that they will vote “no” this week to independence.
But, whichever way the vote goes, the spectacular rise of nationalism, in Scotland and elsewhere in Europe, is a symptom of a diseased political mainstream.
Many are now convinced that the current way of organizing our affairs does not deserve such unquestioning allegiance; that the political system has closed down serious debate on economic and social alternatives; that banks and oligarchs rule; and that democracy is a sham.
Nationalism promises an escape from the discipline of “sensible” alternatives that turn out to offer no alternative.
Nationalists can be divided into two main groups: those who genuinely believe that independence provides an exit from a blocked political system, and those who use the threat of it to force concessions from the political establishment.
Either way, nationalist politicians enjoy the huge advantage of not requiring a practical program: all good things will flow from sovereignty.
Though nationalist politics was long suppressed after World War II by economic prosperity and memories of pre-war horrors, Europe offers fertile ground for its revival.
This is not just because of Europe’s prolonged economic malaise. It is because practically all of Europe’s existing nation-states contain geographically concentrated ethnic, religious, or linguistic minorities.
Moreover, these states’ incorporation into the European Union – a kind of voluntary empire – challenges their citizens’ allegiance.
Thus, nationalists can look either to Europe to protect them against their own states or to their states to protect them against the European empire.
That is why Britain has spawned two nationalisms simultaneously.
The United Kingdom Independence Party (UKIP), led by populist Nigel Farage, looks to London to protect British independence against the EU bureaucracy.
The Scottish National Party (SNP), led by the astute Alex Salmond, looks to Brussels to protect Scotland against the “imperial” parliament in Westminster.
Given the right conditions, nationalism will always discover an “other” against which to define itself.
Scottish nationalism was not created by the recent economic crisis, but the Scottish referendum was.
Scotland convened its first devolved parliament in 1999, giving the SNP a political platform in Edinburgh from which to campaign for independence.
The removal of the Labour government in London in 2010 was the voters’ way of punishing the Labour Party for the economic collapse of 2008-2009.
But, while Labour’s punishment delivered a Conservative government in London, it produced a majority victory for the SNP in Edinburgh in 2011.
To maintain governability in Scotland, British Prime Minister David Cameron was forced to permit a referendum on independence.
An independent Scottish government would face huge economic costs.
It would inherit its share of UK public-sector debt and future liabilities without the benefit of the substantial subsidy that it currently receives from the British Treasury.
The SNP claims that additional revenues from North Sea oil would offset the subsidy.
But these revenues are naturally time-limited, and the SNP has failed to mention the large decommissioning costs that will be incurred when the oil runs out.
So, almost certainly, Scottish taxes would have to be higher than UK taxes.
In addition, leading Scottish-based banks and many large businesses have said they would relocate some of their operations to London.
Scotland would also be threatened with the loss of British defense contracts.
According to the SNP, an independent Scotland would not cause fragmentation of the UK internal market, because it would maintain a currency union with Britain. But the three main British political parties, and the Bank of England, have rejected this.
If the Scots want sovereignty, they will need their own currency – and their own central bank: no British lender of last resort would be available to Scotland’s banks.
Scotland might try to keep its currency at par with sterling, but this would require larger reserves than a Scottish central bank could command, at least at the outset.
And a Scottish currency that floats against the British pound would mean large transaction costs and reduced trade between the two countries.
Nor is there any easy escape, at least in the short run, by joining the EU, which may well require an independent Scotland to apply for membership.
In short, the SNP’s dream of social democracy in one country would fall afoul of the larger interdependencies that bind together the components of the UK, and that tie the UK to the EU and the EU to the rest of the globalized world. None of this fazes the Scottish nationalists.
In nationalism’s forward march in post-crash Europe, its standard-bearers often use immigration to exploit pre-crash resentment against globalization, notably the erosion of cultures and identities, declining sense of community, wage stagnation, rising inequality, uncontrolled banks, and high unemployment.
They question whether people can enjoy the benefits of globalization while being sheltered from its costs – and what alternatives there are to the “market fundamentalism” that has defined capitalism since the late twentieth century.
In this mood, people are more willing to discount nationalism’s costs, because they have come to doubt the benefits of its liberal capitalist rival.
Ordinary Russians, for example, refuse to face the costs of their government’s Ukraine policy, not just because they underestimate them, but because they somehow seem unimportant relative to the huge psychological boost the policy brings.
Nationalism today is not nearly as virulent as it was in the 1930s, because economic distress is much less pronounced. But its revival is a portent of what happens when a form of politics claims to satisfy every human need except the coziness of communal belonging – and then lets the people down.
Free Trade and Costly Love
LONDON – The World Trade Organization’s ministerial conference in Bali in December produced a modest package of encouragements to global trade.
More broadly, the WTO’s multilateral approach has shown its worth by preventing a massive increase in trade barriers, unlike in 1929-1930, when protectionism helped deepen and broaden the Great Depression.
But the main question – whether globalization is a good thing, and for whom – remains unanswered.
The essence of globalization – free trade – rests on the theory of comparative advantage, which views international trade as profitable even for a country that can produce every commodity more cheaply (in terms of labor or all resources) than any other country.
The textbook example given by the Nobel laureate Paul Samuelson is that of a town’s best lawyer who is also its best typist.
Provided that he is better at law than at typing, he should specialize in law and leave his secretary to do the typing.
That way, both of their earnings will be higher.
The same logic applies to countries.
Each country should specialize in producing those things that it produces most efficiently, rather than producing a bit of everything, because that way its income will be higher.
Economists regard understanding the theory of comparative advantage as a test of professional competence.
But are the incompetents – say, the average person who believes that buying cheap imports from China destroys Western jobs – always wrong?
Samuelson, who called the theory of comparative advantage the most beautiful thing in economics, changed his tune a bit at the end of his life.
Free trade, he said, works fine with unchanging technology.
But if countries like China can combine Western technology with low wages, then trade with China will lower Western wages.
True, the West will be able to get its goods more cheaply; but, as Samuelson put it, “being able to purchase groceries 20% cheaper at Wal-Mart does not necessarily make up for the wage losses.”
Nor, he might have added, would being able to buy goods more cheaply compensate for many other good things in life that are sacrificed to efficiency.
The argument for free trade is an argument for welfare, but welfare defined exclusively in terms of money.
Time is money: the more money you can squeeze out of an hour’s work, the better off you are.
But what about all of the things that you enjoy doing, or that you think of as valuable, that do not maximize your earnings?
The economist responds that the more efficient you are at your work, the more time you will have for those other things.
The trouble is that the more you start to think of your welfare in terms of money, the more likely you are to regard spending time with your friends or making love as an “opportunity cost” – the loss of money you would have made by working instead – rather than a benefit.
The goal of squeezing as much money as possible out of time makes a great deal of sense in poor countries, where inefficient use of time can lead to starvation.
The whole point of economic development is, surely, to reduce the cost of inefficiency.
Yet economists, not noticing that their logic is less applicable to rich countries, continue trying to extend it to more and more areas of life.
A newly luxuriant research area is “life outsourcing.”
Paying someone else to fold your socks is a way to maximize your own earnings and those of the sock folder.
Even as penniless graduate students, the economists Jon Steinsson and Emi Nakamura borrowed money to pay people to do their household chores, calculating that “spending an extra hour working on a paper was better for their lifetime expected earnings than spending that same hour vacuuming.”
Likewise, the economists Betsey Stevenson and Justin Wolfers, pioneers of “lovenomics,” cite the tax code as a reason for not marrying.
They also conducted a cost/benefit analysis before having a child.
As Wolfers explains,
“The principle of comparative advantage tells us that gains from trade are largest when your trading partner has skills and endowments that are quite different from yours.
I’m an impractical bookish Harvard-trained empirical labor economist, while Betsey is an impractical and bookish Harvard-trained empirical labor economist.
When your skills are so similar, the gains from trade aren’t so large.
Except when it comes to bringing up our baby.
There, Betsey has a pair of, um, endowments that mean that she’s better at inputs.
And that means that I’m left to deal with outputs.”
As Stevenson helpfully clarifies, “it turns out that fathers can be pretty good at dealing with diapers.”
At this point, those untutored in economics are likely to start gnashing their teeth.
“I enjoy doing lots of things that do not maximize my earning power,” they might protest. But as soon as we accept the premise that to be rational is to seek to maximize one’s utility – defined in terms of consumption, with money the way to maximize it – the economist’s logic wins.
At that point, we must admit that it is irrational to spend time on long conversations with friends if it is time stolen from inventing, say, new software (unless the conversation helps the invention).
For Wolfers, it is a coincidence that what earns him the most money, economics, is also what he most enjoys doing.
Such reasoning crystallizes opposing views of the world, one in which time is a cost, and the other in which it is a benefit.
The first sees time spent on enjoyment as a missed opportunity; the second as part of the good life.
We should be clear about what is at stake in the choice between the two.
Rockets into Ploughshares
MOSCOW: The first law of scientific research - that it costs big money - is as immutable as the laws of gravity.
So no surprise that Russian science fell into a black hole due to economic upheaval in the decade following communism's collapse.
Economic freedoms that transformed Russia for good and ill brought despair to laboratories and research institutes as budgets were slashed and bright young scientists fled abroad while others (most famously the mathematician turned oligarch Boris Berezovsky) moved into banking and other businesses.
This internal and external brain drain will impact Russia's economy for decades to come.
It is also an unintentional gift from Russia to the West.
The scale of this transfer of intellect may be unsurpassed in human history, and is greater than the flight of scientists from Nazi Germany in the 1930s.
Take the institution which I headed for thirty-five years, the physics department of the Moscow Institute of Physics and Techniques (MIPT), comparable to America's acclaimed Massachusetts Institute of Technology.
During the last ten years 1500 graduates from our Institute left for the US.
According to a common means of assessment, educating a scientific specialist at a high level costs approximately $1million dollars.
Thus, one Russian institute alone subsidized America with scientists with a nominal value of $1.5billion!
Of course, the seeds of the collapse of Russian science were sown in the Soviet era, when three-quarters of scientific research was financed by the military.
Without that Cold War imperative, science became an easy target for Kremlin budget cutters.
But more than the bloated branches of military science were slashed.
Over the past decade expenditures on total scientific research were reduced to less than 5% of their former value.
Oceanographic and geological research, traditionally strong in Russia, have virtually ceased to exist.
Harsh reforms have followed this starvation diet.
Before 1991 there were 4,500 research and development (R&D) institutes in Russia. About five hundred belonged to the prestigious Academy of Sciences and worked mainly in basic science.
The remaining "branch institutes" - industrial research facilities, design bureaus, field stations and so on - belonged to one or another ministry. These carried out applied R&D that, in capitalist systems, is mostly done by the private sector.
Government privatized some 1,100 branch institutes, making their finances somebody else's problem.
But privatization is brutal, because most of these bodies are ill-prepared to survive in a free market.
For no system exists in Russia to translate research into marketable products and technologies. No system of venture capital - ie, one where investors support promising new scientific developments - exists.
There is neither financial nor tax support for it. Russian banks would not know where to begin.
Moreover, there are no technology parks of the type often connected with universities in the West and which facilitate the translation of achievements in modern science into useful applications.
Without these support systems, Russia will continue to lose not only good people, but hope for its future.
Yet, all is not lost.
Compared to R&D activities, fundamental research is cheap and it is here that, although damaged, a solid Russian tradition remains that can be built upon.
Asia's tiger economies have a strong high-tech base but are not noted for their scientists.
Once our economy adopts - if it does - we will have a base of knowledge to feed off of.
Adaptation is underway.
Old structures are crumbling and being replaced.
The Russian Academy of Science, the most powerful body in Russian science, has opened itself to new blood, increasing the number of specialists by 20% in recent years.
Outside influences also matter.
Financial and moral support from George Soros's International Science Foundation, for example, buoyed a peer review system established in 1992 within the Russian Foundation for Basic Research. Peer review is vitally important to the coming generation of scientists.
With a viable peer review system in place, the chances of getting money is directly related to performance.
The RFBR's main drawback is that it hands out only 6% of the national science budget.
By comparison, 90% of civilian research in America is peer reviewed.
Yet, despite continuing bias toward state control, the system is opening up.
The Internet also assists this opening as it favours transmission of information and connections to and from Russia and the world.
Russians, because of their high level of education, are very receptive to the Internet and use it with great familiarity.
But it is not nearly enough.
Despite open borders, scientific contacts, participation in conferences, even the exchange of publications, remain problematic.
Isolation, indeed, is unbridgeable for some.
A generation of scientists and R&D workers - those too old and entrenched to uproot their lives and adapt, but too young to retire - have no where to go.
Many are in formerly powerful research centers now wasting away, some form entire populations in once closed research cities and one institute towns that were wholly dependent on a single defence institute or project.
Their fate is like that experienced by the generation of Russian serfs liberated in the mid-19th century. After a lifetime under the yoke, feudal or communist, freedom is not an easy thing to get used to.
Those who do adapt provide a model for all Russia.
Modern science is democratic and meritocratic.
Open to talent, and only talent, people who discover something new are recognized and rewarded.
In science, a dictatorship of reason is combined with the freedom of ideas.
That fusion is what all Russia needs, a reconciliation of the cold-minded calculations of the market with the search for truth.
In that reconciliation lies the future of Russian science and of Russia itself.
The Rights of Digital Man
ABU DHABI – We have created an online world whose vastness exceeds our comprehension.
As a measure of its magnitude, consider this: In 2012, the new Internet address system, IPv6, created more than 340 trillion trillion trillion (3.4 x 1038) addresses – that is, around 4.8 x 1028 addresses for every person on earth.
That should be sufficient to service the five billion devices that currently connect to the internet, and the 22 billion devices forecast to be in use by 2020.
The hard part of the connectivity explosion is not building capacity, but how it should be managed.
We must answer profound questions about the way we live.
Should everyone be permanently connected to everything?
Who owns which data, and how should information be made public?
Can and should data use be regulated, and, if so, how?
And what role should government, business, and ordinary Internet users play in addressing these issues?
Such questions can no longer be ignored.
As the virtual world expands, so, too, do breaches of trust and misuse of personal data.
Surveillance has increased public unease – and even paranoia – about state agencies.
Private companies that trade in personal data have incited the launch of a “reclaim privacy” movement.
As one delegate at a recent World Economic Forum debate, noted: “The more connected we have become, the more privacy we have given up.”
But we can shape our future cyber-world in a way that keeps our data safe, reestablishes trust online, and welcomes in billions of new participants.
Ensuring security will require that the Internet’s many stakeholders establish some kind of governance system.
Organizations such as the Internet Corporation for Assigned Names and Numbers (ICANN) will need to become much more global in scope.
At the same time, we must guard against over-regulation or government control.
This might require us to phase out the Internet Assigned Numbers Authority to prevent it from falling under the control of an inter-governmental body, as some states have demanded.
Governments certainly have an important part to play.
But too much control would almost certainly stifle innovation, increase costs, and probably exclude important anti-establishment voices.
A better approach, and one that would enhance public trust in the system, would be to establish diversified stewardship with multiple stakeholders.
One such stakeholder group is business.
Now that our personal data have become such a valuable asset, companies are coming under increasing pressure to develop online business models that protect rather than exploit users’ private information.
In particular, Internet users want to stop companies befuddling their customers with convoluted and legalistic service agreements in order to extract and sell their data.
This type of abuse could be limited by creating legal and social contracts to govern the authorization of data use.
One idea, proposed by the information scientist Marc Davis, is to draw up a standard, readable seven-point “Terms of Service” agreement that empowers people’s control of the uses of their personal data.
Another is to allow users themselves to decide from a preset menu how much personal information they are prepared to share.
But the trust issue goes beyond just regulation.
Companies must find ways to introduce new technologies and do business that are popular with their customers and retain their trust.
(Indeed, in a world of human-robot interfaces, 3D printing, nanotechnology, and shale-gas extraction, any innovative company must ask itself this basic question.)
Finally, we must consider the human dimension of our virtual world.
Hyper-connectivity not only creates new commercial opportunities; it also changes the way ordinary people think about their lives.
The so-called FoMo (fear of missing out) syndrome reflects the anxieties of a younger generation whose members feel compelled to capture instantly everything they do and see.
Ironically, this hyper-connectivity has increased our insularity, as we increasingly live through our electronic devices.
Neuroscientists believe that this may even have altered how we now relate to one another in the real world.
At the heart of this debate is the need to ensure that in a world where many, if not all, of the important details of our lives – including our relationships – exist in cyber-perpetuity, people retain, or reclaim, some level of control over their online selves.
While the world of forgetting may have vanished, we can reshape the new one in a way that benefits rather than overwhelms us.
Our overriding task is to construct a digital way of life that reinforces our existing sense of ethics and values, with security, trust, and fairness at its heart.
बीमार पर कर लगाना बंद करें
वाशिंगटन, डीसी – उभरते और विकासशील देशों में किफ़ायती दवाओं तक पहुँच के बारे में होनेवाली चर्चा में अक्सर एक महत्वपूर्ण मुद्दे को अनदेखा कर दिया जाता है: इन देशों में सरकारें नेमी तौर पर जीवन के लिए महत्वपूर्ण दवाओं पर शुल्क और अन्य कर थोप देती हैं। हालाँकि इन उपायों से सामान्य राजस्व की प्राप्ति तो होती है, परंतु इनसे प्रभावित दवाएँ अधिक महँगी हो जाती हैं, जिससे ये दवाएँ उन बहुत-से लोगों के लिए पहुँच के बाहर हो जाती हैं जिन्हें उनकी सबसे ज्यादा जरूरत होती है।
विकसित देशों की तरह, उभरते और विकासशील देश अपनी कुछ दवाएँ - अगर सभी नहीं तो - आयात करते हैं, जिनकी लागत मुख्य रूप से मरीजों द्वारा स्वयं वहन की जाती है क्योंकि इन देशों में स्वास्थ्य बीमा का अभाव है। उदाहरण के लिए, भारतीय अपने स्वास्थ्य देखभाल के व्ययों का 70% भुगतान अपनी जेब से करते हैं। कुछ क्षेत्रों में शुल्कों और अन्य करों के कारण दवाओं की लागतों में दो तिहाई जितनी अधिक की वृद्धि हो जाती है जिससे सर्वाधिक बुनियादी जेनेरिक दवाएँ भी सबसे गरीब लोगों के लिए उनकी सामर्थ्य से बाहर हो जाती हैं। दिल्ली के दवा बाजार पर एक शोध रिपोर्ट ने यह निष्कर्ष निकाला है कि ऐसी लेवी अनिवार्य रूप से "बीमार पर कर" के रूप में होती हैं जिन्हें सरकार आसानी से हटा सकती है।
बहुत-से उभरते बाजारों में यह कहानी इसी तरह की है। विश्व व्यापार संगठन द्वारा किए गए 2012 के अध्ययन के अनुसार अर्जेंटीना, ब्राज़ील, भारत, और रूस, आयातित दवाओं पर 10% के आसपास का शुल्क लगाते हैं, जबकि उदाहरण के लिए, अल्जीरिया और रवांडा ने 15% की दर बनाए रखी है। जिबूती में शुल्क 26% है। जैसा कि रिपोर्ट में उल्लेख किया गया है, यह समझना मुश्किल है कि छोटे देशों में स्वास्थ्य उत्पादों पर उच्च शुल्क क्यों रखे जाते हैं जबकि इस उपाय से केवल घरेलू कीमतों में वृद्धि होती है।
लेकिन शुल्क समस्या का एक हिस्सा मात्र हैं। कई देश भारी बिक्री कर भी लगाते हैं। ब्राज़ील पर्चे की दवाओं पर 28% की दर पर कर लगाता है, जबकि भारत में दवाओं पर 5% से लेकर 16% तक के राज्य कर लगाए जाते हैं और उन पर 5% का मूल्य वर्धित कर और 3% का शिक्षा कर भी लगाया जाता है।
विकासशील देश इन करों का औचित्य इस आधार पर सिद्ध करते हैं कि वे सामाजिक व्ययों के लिए निधि प्रदान करते हैं। लेकिन, 2011 में, भारत ने सरकार द्वारा जनता के लिए दवाओं पर खर्च की गई राशि की तुलना में दवाओं पर करों के रूप में अधिक राशि जुटाई। यदि सरकार लोगों की ज़रूरत वाली दवाओं की कीमतें कृत्रिम रूप से बढ़ाना बंद कर दे तो भारत के स्वास्थ्य देखभाल संकट को कम किया जा सकता है।
इसके अतिरिक्त, राजकोषीय दबावों के बावजूद, यह भले ही प्रतिकूल न लगे, पर अत्यधिक प्रतिगामी लगता है कि सबसे अधिक वित्तीय बोझ उन पर डाला जाए जिनका स्वास्थ्य सबसे ख़राब है (और जो संभवतः इस तरह के सामाजिक कार्यक्रमों का लक्ष्य हैं)। यह आर्थिक दृष्टि से भी अनुत्पादक है। दवाओं की कीमतें बढ़ाने से उनका उपयोग कम होता है, जिससे बीमारी अधिक होती है, उत्पादकता कम होती है, और जीडीपी विकास दर धीमी होती है।
इससे बेहतर एक और तरीका है। कोलम्बिया, इथियोपिया, मलेशिया, निकारागुआ, पाकिस्तान, तंज़ानिया और युगांडा समेत कई देशों ने दवाओं पर शुल्कों और करों को काफी हद तक कम कर दिया है या हटा दिया है। इसके परिणाम आश्चर्यजनक रहे हैं। उदाहरण के लिए, केन्या द्वारा मलेरिया रोधी उत्पादों पर शुल्क और करों को हटा देने के बाद, उसने सूचित किया कि 2002 और 2009 के बीच शिशु मृत्यु दर और बीमारी में 44% की कमी हुई।
भारत और चीन, स्वयं प्रमुख दवा निर्यातक हैं और इस कारण उनकी साफ़ तौर पर यह देखने में रुचि है कि दुनिया भर में दवाओं के शुल्क कम हों। भारत, जिसे "विकासशील देशों की फ़ार्मेसी" के रूप में जाना जाता है, तैयार दवाओं के सबसे बड़े निर्यातकों में से एक है, जबकि चीन इन दवाओं की सक्रिय सामग्रियों के 70-80% का उत्पादन करता है।
दवाओं पर शुल्कों को खत्म करके विकसित देशों के उस उदाहरण का अनुसरण किया जा सकेगा जो उनके द्वारा दो दशक पहले विश्व व्यापार संगठन बनाए जाने के अवसर पर प्रस्तुत किया गया था। विश्व स्वास्थ्य संगठन ने यह घोषणा की थी: "सरकारों को उन चीज़ों पर कर लगाना चाहिए जो लोगों को बीमार करती हैं, न कि उन चीज़ों पर जो लोगों को अच्छा करती हैं।"
यह तो निश्चित है कि करों में कटौती करने से उभरते और विकासशील देशों में अस्पतालों, क्लीनिकों, डॉक्टरों, तथा सार्वजनिक और निजी बीमा की कमी जैसी स्वास्थ्य देखभाल तक पहुँच से संबंधित अनेक चुनौतियों में से सभी का समाधान नहीं होगा। लेकिन शुल्क हटाना एक ऐसी चीज़ है जिसे जल्दी से लागू किया जा सकता है और इससे सबसे अधिक ज़रूरतमंद लोगों को तुरंत लाभ होगा।
प्रमुख दवा निर्माताओं - और इन करों से सबसे अधिक प्रभावित कई लोगों - के लिए प्रमुख स्थान होने के कारण - भारत और चीन को एक अंतर्राष्ट्रीय उदारीकरण के प्रयास का नेतृत्व करना चाहिए। फ़ोर्टालेज़ा, ब्राज़ील में 15-17 जुलाई को आयोजित होने वाला ब्रिक्स (BRICS) शिखर सम्मेलन इसे शुरू करने के लिए एक अच्छी जगह हो सकती है।
इन देशों ने निश्चित रूप से एक साथ मिलकर कार्य करने की क्षमता प्रदर्शित की है। इस वर्ष इससे पहले, चीन पर्यावरण की वस्तुओं से शुल्क हटाए जाने के लिए माँग करनेवाले विश्व व्यापार संगठन के 13 अन्य सदस्यों में शामिल हो गया। चीन, भारत, और अन्य ब्रिक्स देशों को दवाओं पर शुल्कों के उन्मूलन की माँग करने के लिए इसी तरह का एक गठबंधन बनाना चाहिए जिससे विश्व के सभी विकासशील देशों में स्वास्थ्य देखभाल तक पहुँच को व्यापक बनाया जा सके। दुनिया के बीमार और कमज़ोर लोगों को बेवजह कष्ट नहीं सहना चाहिए।
Rogozin for President
I have good news and bad news, but since I don't know which is which, I will convey them in their logical order.
First, the name of Russia's next president is now known.
Second, his name is Dmitriy Rogozin, the Motherland Party's most famous politician.
Naturally, everything can change in the future, including Russia's constitutional norms.
But for now, Dmitriy Rogozin is the only Russian politician who has both genuine prospects of winning and the corresponding, albeit not publicly stated, ambition to do so.
There were many more candidates in 1997, three years before the 2000 presidential election, a veritable parade of names representing different sections of the nomenklatura and political spectrum: Chernomyrdin, Yavlinskiy, Lebed, Luzhkov, Nemtsov, Zhirinovskiy.
Not all of them had realistic chances, but every one of them had the backing of a specific political force.
And now?
None of these former candidates remains a serious political contender, although some are still quite young.
Nor is a presidential candidate likely to be found among the regional governors, or among the leaders of the "old" or "new" parties.
Except Dmitriy Rogozin.
Why?
Russian voters tend to vote according to three main sentiments: anti-liberal, anti-oligarchic, and anti-Western (more precisely, anti-American).
It is Rogozin who articulates all three in the most spectacular, persistent, and public manner.
In addition, Rogozin is a pro-Putin politician, which is also very important to the bulk of voters, and he has managed to confirm this not only verbally, but also bureaucratically, by his work as the president's special representative for Kaliningrad Oblast affairs.
Prior to Motherland's sensational victory in the 2003 general election, Rogozin wanted the post of minister of foreign affairs.
But now he is playing for higher stakes.
He will most likely nominate himself during the 2008 presidential election campaign, even if the Kremlin nominates another successor, although naturally he will try to ensure that he is anointed.
So far, things are going extremely well for Dmitriy Rogozin.
He is young, vigorous, charismatic, and educated, a patriot advocating a strong state.
His electoral platform will remain the most promising in the immediate future, particularly since United Russia lacks the courage and flexibility to embrace contemporary Russian conservatism.
At this point Rogozin is the most freethinking and freedom-loving politician in Russia.
For example, Russia's most urgent foreign policy problems are its relations with the United States and the conflict over South Ossetia with neighboring Georgia.
Rogozin very clearly articulates his positions on these issues, which are in variance with official policy - at least the one presented to the public.
He reacts to Russia's domestic problems - widespread poverty, the situation in Chechnya, the fight against oligarchs - just as clearly, promptly, and explicitly, while most other politicians either keep silent or mumble incoherently.
The so-called liberals are entirely invisible, and nobody cares about their opinion anyway.
The Communists attract attention only by their internal squabbles.
The nationalist warhorse Zhirinovskiy looks old and lifeless compared to Rogozin.
The United Russia leaders are maneuvering between the president's contradictory remarks.
The problem for United Russia is that Rogozin is already a master at their game.
He remains a firm Putin supporter, skillfully combining criticism of virtually all aspects of Russia's foreign and domestic policy with a loyal - but not glorifying - attitude toward the president himself.
In essence, Dmitriy Rogozin is currently the only real political orator in Russia - a highly advantageous position, particularly in an era of mediocrity.
People have recently compared him to Georgia's President Mikhail Saakashvili - whether as an insult or as a compliment.
Either intuitively or rationally, people feel that Rogozin, like Saakashvili, wants to assume the main post, is prepared to do so, and would start solving the state's territorial problems immediately.
Parallels between Rogozin and Saakashvili appear even more logical in view of the current situation in the Caucasus.
It is increasingly likely that Saakashvili's policy is aimed at instigating bloodshed in South Ossetia or Abkhazia and putting all the blame on Russia - a strategy that appears designed to bring the Americans to the region eventually.
Against the backdrop of Russia's completely ambiguous policy in the Caucasus, this will give Rogozin an opportunity to remain at the top of public-opinion polls.
If the next presidential election in Russia were held this year, and if no decision were made to banish him from Russians' TV screens, there can be little doubt that Dmitriy Rogozin would win.
Details will change by 2008, but not trends, and Rogozin has mastered these trends better than anyone else.
In fact, he is the only person who has mastered them so far.
It can be dangerous to start one's electoral campaign before other candidates, but sometimes, if one starts much earlier than everyone else, serious rivals never appear.
Rogue Diplomacy
NEW DELHI – “Such very fine brains” filled with “such bad ideas.”
That was how the late Daniel Patrick Moynihan, a former United States senator and perhaps the keenest mind to enter US politics since World War II, once described India, where he was US ambassador in the 1970’s.
That snappy description of my country is also a very good way to describe the current – and seemingly unending – contretemps between the leaders of Iran and the US.
As a new round of negotiations with Iran begins – with European Union High Representative Catherine Ashton the first into the breach – finding a way to move Iran-US relations beyond their freighted past is an urgent matter.
In both countries, deep and mutually paralyzing suspicion has poisoned relations for three decades.
Negotiations in such an atmosphere are almost fated to failure.
America’s acceptance of Iran’s current regime is grudging.
Iranian leaders demonize the US as if the millions killed in the 1980’s in the Iran-Iraq War (in which the US backed Saddam Hussein’s invading army) died only yesterday.
So long as these dark shadows are allowed to linger, “resetting” relations between the two countries, in the manner of US-Russia relations, will be impossible.
The list of disputes between the two countries is almost endless, but Iran’s plan to enrich uranium now stands above everything else.
The Iranians insist that they need nuclear power to generate electricity.
Their secretiveness, maintains the US, betrays the regime’s drive to develop nuclear weapons.
Not surprisingly, given the Americans’ deeply ingrained suspicion, the agreement reached earlier this year between Iran and Turkey and Brazil to allow for the export of low-enriched uranium from Iran in return for fuel rods was “not acceptable” to the US.
Indeed, after years of sanctions, threats, negotiations, and then more sanctions and threats, the US remains unclear about what specific nuclear program it might accept.
So what does the US want? “Crippling sanctions,” Secretary of State Hillary Clinton once said, though she quickly retracted that impromptu remark.
But no such caution restrains US senators like South Carolina’s Lindsey Graham, who says that the “evil (of) a nuclear … Iran” will affect the US “far more than (any) conflict.”
Following the hopeful early months of the Obama administration, this “stop Iran” policy has become America’s focus.
Iran, of course, repeatedly asserts its commitment to the Nuclear Non-Proliferation Treaty (NPT), but its past relations with Dr. A. Q. Khan – the self-proclaimed “godfather” of Pakistan’s nuclear-weapons program, and the world’s most notorious nuclear proliferator – invites skepticism.
Indeed, the US holds the “Khan network” responsible for helping Iran start its own nuclear program.
Mistrust is compounded by Iranian President Mahmoud Ahmadinejad’s incendiary pronouncements, particularly about Israel.
Although the origins of Iran’s nuclear program are to be found in the “enlightened” presidency of Mohammad Khatami (1997-2005) – it was just before Ahmadinejad’s inauguration that Iran ended its self-imposed moratorium on uranium enrichment – Ahmadinejad’s bombast has made matters worse.
And not just with the US.
In September 2005, the International Atomic Energy Agency deemed Iran “non-compliant” with the NPT. Between 2006 and 2008, Iran was subjected to three United Nations Security Council resolutions, each imposing yet more sanctions.
Yet, despite increasing economic costs, Iran’s response only hardened.
Iran’s insecurity goes back at least to 1953, when US and British officials plotted the military coup that removed from office Mohammed Mossadegh, Iran’s first elected prime minister and an ardent nationalist, and installed General Fazlollah Zahedi.
Mossadegh’s sin was his plan to nationalize Iran’s oil industry.
But, in the process of laying claim to Iran’s oil, subverting its democracy, and jeopardizing its national security, the US and Britain committed a much graver sin: the wounding of Iranians’ national pride.
Then there is the Shah’s ouster, Ayatollah Ruhollah Khomeini’s Islamic Revolution, the absurd abduction of US diplomats, President Jimmy Carter’s disastrous attempt to free them militarily, and the “Iran-Contra” scandal, when Reagan administration officials sought to sell weapons to Iran through third parties and channel the proceeds to anti-Sandinista guerrillas in Nicaragua.
Iran sits at the heart of an extremely volatile region.
The country’s Shia footprint stretches from the Mediterranean to the Hindu Kush.
It has a vital role in Afghanistan; indeed, it was passively supportive of the removal of the Taliban from power in 2001.
With such a country, “non-engagement” means having no policy at all.
America’s failure to talk to Iran is as foolhardy as its decades-long failure to talk with Mao’s China.
And the ongoing failure to talk to North Korea does not appear to be working either, as the recent shelling of South Korea demonstrates.
Even if Iranian nuclear weapons are not acceptable to the US, President Barack Obama needs to start talking more openly about what is.
His Nobel Peace Prize demands it.
And talking should not be impossible.
As India’s foreign minister, I engaged in successful talks with Iran frequently.
Iran may be a self-proclaimed theocracy, but it has conducted foreign relations since the 1979 revolution in a rational, if not always emollient, way.
Ahmadinejad may bluster, but there is usually considerable ambiguity and calculation behind his outbursts.
Iran is obstinate, prideful, ambitious, and, yes, sometimes paranoid.
But it also sees itself as vulnerable.
A young population with no memory of the Islamic Revolution is desperate for the jobs that its leaders have failed to provide.
In these circumstances, if Iran is offered a diplomatic ladder that it can climb down with its dignity intact – above all, a credible promise of an historic reconciliation with the US that includes specific economic benefits, not Obama’s current vague offers – a tired revolution’s troubled leadership might take it.
That, not Western bluster and sanctions, is the way ahead.
Rolling the Dice in Cyprus
PRINCETON – The task was never going to be an easy one: impose losses worth about €5.8 billion ($7.5 billion) on lenders to the Cypriot government and depositors with the country’s banks.
And now that effort has led Europe to its latest impasse.
In marathon negotiations, the Cypriot government, under the supervision of the troika (the European Commission, the European Central Bank, and the International Monetary Fund), agreed to a one-time “tax” on bank deposits.
But, despite an amendment to exempt accounts containing less than €20,000, the Cypriot parliament overwhelmingly rejected the plan, leaving Cyprus – and Europe – in limbo.
In fact, large depositors are not unlike senior bondholders, and the proposed haircut was a small but welcome step forward.
But, because it did not go far enough, a hole remained.
There were other options.
Lee Buchheit, the veteran sovereign-debt attorney who should have been in the negotiating room, and Mitu Gulati of Duke University have proposed an elegant “reprofiling” of Cyprus’s €15 billion sovereign debt that would instantly reduce the financing pressure on the country.
But such considerations were off the table well before the deliberations began.
Instead, the initial decision was to confiscate just under €3 billion from accounts containing less than €100,000 –&#160;the cutoff for deposit insurance.
Make no mistake: this would have been the greatest policy error since the start of the financial crisis five years ago.
Indeed, the proposal amounted to a rupture with the near-universal agreement that small depositors should be considered sacrosanct.
After all, televised news footage of panicked depositors in long lines outside banks and at ATMs can cause immeasurable financial damage far beyond a country’s borders.
Historians will argue whether forcing Lehman Brothers into bankruptcy in September 2008 precipitated the subsequent global financial crisis.
Vincent Reinhart, formerly of the US Federal Reserve and now at Morgan Stanley, has argued that the Lehman decision was correct (the error came earlier, with the bailout of Bear Stearns, which created an expectation that all banks would be bailed out).
Private risks must be privately borne.
By contrast, the proposal to impose losses on small Cypriot depositors had no redeeming justification whatsoever.
As in Ireland, the most vulnerable were being asked to take the hit, while large depositors were let off lightly and other lenders were to be spared.
But it gets worse.
There has never been an official explanation of why lenders to a sovereign should not share the pain, despite the “no bailout” principle on which the eurozone was founded.
Most observers cite the authorities’ concern that if any sovereign does not honor its debts, all sovereign borrowers will be penalized.
But such contagion risk is trivial compared to the wildfire that could be ignited by imposing losses on small depositors.
In mid-2007, Cyprus qualified for eurozone membership by meeting the stringent Maastricht criteria, intended to ensure that new entrants would behave responsibly and flourish in the secure environment provided by the currency union.
In the months leading up to the decision, the IMF urged Cyprus to take all necessary steps to ensure a favorable outcome.
The benefits of Cyprus’s adoption of the euro may never be clear.
By 2009, the IMF’s Article IV Staff Report was already ringing the alarm bells.
Public debt was still low, but growing rapidly; the current-account deficit was ballooning (reaching 15% of GDP in 2008); and the banks had gone Icelandic, with assets worth more than three times Cyprus’s GDP.
As the report noted, the huge and highly concentrated banking sector’s problems could “quickly escalate to systemic proportions with serious economic repercussions.”
And so they have.
This is a remarkable outcome, given that the risks have been so well known and understood.
Indeed, the Cypriot authorities have been engaged in ongoing discussions with the troika for the past year.
And yet, despite all of the preparation, a night of closed-door negotiations led to a stunningly elementary error.
Compounding that error was the absence of any substantive decision concerning how to extricate Cyprus from its downward spiral.
Cypriot debt, we are told, will rise to 140% of GDP, but will fall to about 100% of GDP in less than a decade.
This appears to be another replay of the Greek scenario, with targets for reducing the debt burden repeatedly missed, until more drastic steps become inevitable.
Most important, no restructuring of Cypriot banks appears imminent; on the contrary, the intent seems to be to keep large depositors from fleeing and preserve the highly risky system.
The Central Bank of Cyprus has provided large loans to Cypriot banks under the Emergency Liquidity Assistance arrangement, implying that the collateral offered did not meet the standards of the ECB.
More train wrecks are in the making.
The problems in Cyprus now threaten international financial stability.
If the idea of a European banking union is serious, now is the moment to advance it.
That means reaffirming the commitment to deposit insurance, closing unviable banks, and recapitalizing the rest with European (not Cypriot) funds.
The troika’s decision on Cyprus was akin to policymaking by rolling the dice.
The coming days will reveal the extent of the immediate damage that it has caused.
But, with another display of reactive and ad hoc decision-making, we are no wiser about how Europe intends to resolve its dilemmas.
Romania\u0027s Hysteria
BUCHAREST: Across Eastern Europe throughout this year, people have celebrated their peaceful, victorious revolutions against communism.
In Romania, however, there was nothing “velvet” about communism's end.
Ten years ago this December the center of Bucharest was ravaged by tank and sniper fire, leaving many people dead, as the part of the Romanian army that sided with those who wanted liberation fought street by street with loyalists of Ceausescu's Securitate.
Today, our so-called revolution is still viewed differently than those that took place in other former communist countries.
Elsewhere, people know that a real revolution took place; they have been building truly new societies.
Our revolution of 1989 now seems more like a coup, with one part of the communist elite simply replacing that part which had become utterly discredited.
As a member of the “Group for Social Dialogue” that sought to give direction to the forces of change during the fighting that December, I can say that we were never certain as to what forces were fighting with us and against us, nor for what reasons.
The National Salvation Front that ruled Romania's first half-decade of transition, headed by Ion Iliescu, simply emerged triumphant from the bloodshed of 1989 as a fait accompli. It never really declared communism over, merely that the Ceausescu dictatorship was finished.
Indeed, the only thing that I know for certain about those days is a strange curiosity: that Ceausescu endured his kangaroo court trial and execution with far more dignity than I would ever have imagined.
Uncertainty about our “revolution” still has debilitating effects today.
As then, people remain passive and uncommitted.
Market-oriented reforms, long postponed by the Iliescu government, appear to have failed to raise living standards.
As in Russia, they failed to bring about a legal free-market economy.
On the contrary, the share of the black market economy has been increasing by such a speed that, according to some economists, the real economy (composed of both the "white" and the "black" economy) actually grew over the last two years, notwithstanding an official decline in GDP.
Nevertheless, people complain that they are far worse off now than ten years ago.
In November, several unions organized rallies where demonstrators cursed the ruling centre-right government and invoked the Ceausescu era as one relatively good and secure.
Yet, as workers and unions step up their protests against privatization, market reforms, inflation, corruption or unemployment they seem to forget the taxes they withhold daily from state or local councils.
They ask their government to provide viable jobs for them, to control crime and inflation, and to care for their health, while at the same time they do all they can to evade the taxes needed to pay for these things.
In Romania, the gap between what people say and what people do remains a chasm.
Private hypocrisy breeds public hypocrisy and crime.
The less money the state has, the lower the salaries of civil servants and the value of pensions.
So, in order to feed their families, many teachers, judges or policemen will quite naturally accept bribes.
Because of lousy salaries in the state administration, many young and gifted people avoid government service, preferring to look for better-paid jobs in the private sector, or to emigrate.
Those in business try to shrink their declared income to the smallest amount possible, or not declare any income at all.
Thus the black market grows ever bigger and the state's ability to carry out its most basic services continues to diminish.
As the state plunges into chronic weakness, a growing number of people yearn for it to be made stronger, even if our new liberties need to be sacrificed here and there.
They want the state to provide for their welfare, to tackle crime, unemployment and inflation and to fight corruption, all of which the state is less and less capable of doing.
Because most people confuse strength with efficiency, they believe that the state must again acquire sufficient power to enforce its will.
The result of this vicious circle is obvious: an ever growing dissatisfaction with the democratic (even if imperfect) state founded in the aftermath of Ceausescu's fall.
What Romania (and some other East-European countries, like Ukraine, Russia, Albania) is experiencing is not merely an economic or a political crisis; rather, it is a crisis of alienation.
The gap between the rulers and the ruled widens everyday.
Not only does each mistrust the other, but each tries to deceive each other as much as they can.
Ten years ago our revolution was mere sleight of hand; now our politics is simply deception, too.
This week, President Constantinescu sacked the prime minister, who in turn refused to leave office.
Chaos, once again, seems at hand.
Romania, indeed, seems almost ripe for any bold demagogue to offer to replace this so-called "weak and rotten state" with a "strong and sound" dictatorship.
The only thing that seems to be holding us back from the brink is that dictatorships are out of fashion nowadays in Europe.
But in deceiving ourselves into thinking that it is a moral imperative that the state impose order, we are joining the fashionable madmen, which is when the thin whine of hysteria can be heard.
When that happens, a country is in trouble, and I think Romania already is there.
Roman Polanski’s American Dream
NEW YORK – What purpose is Switzerland serving by jailing the renowned Franco-Polish film director Roman Polanski on a 30-year-old warrant?
Arrested in 1977 for allegedly raping a 13-year-old girl in Los Angeles, Polanski pleaded guilty to the lesser offense of having unlawful sex with a minor.
In the belief that his judge, the late Laurence J. Rittenband, would renege on his promise to let Polanski go free after serving 42 days in a California prison, the director fled the United States in 1978 before his final sentence was announced.
Since then, the victim of Polanski’s sex crime, Samantha Geimer, publicly forgave him, and expressed her wish for the charges to be withdrawn.
So the reason to pursue the case now can have nothing to do with the rights or feelings of the victim.
Nor is Polanski, a married father of two children with no other criminal record, likely to repeat his offenses.
So the good of society is not served by forcing him to return to LA for a trial.
Common sense would seem to leave no other conclusion than that his arrest – in a country that is obliged by treaty to extradite fugitives from US justice – serves no purpose at all.
Yet the reactions to his sad plight, especially in France, have been oddly shrill. The French foreign minister, Bernard Kouchner, called Polanski’s arrest “sinister.”
Fréderic Mitterand, the culture minister, spoke of “a scary America that has just shown its face.”
The former culture minister, Jack Lang, said the “American system of justice had run amok.” He added that it was like “an infernal machine” that advances “blindly.”
Infernal or not, one might argue that justice is
Polanski is a French citizen, and France is probably more indulgent towards its great artists than is the US.
In 1943, after a life of petty crime, the writer Jean Genet faced another prison sentence for theft, when Jean Cocteau declared that Genet was a literary genius.
A French court, afraid of being too hard on a master of letters, reduced his sentence.
Allowing recognized artists to get away with behavior that would not be tolerated in lesser men is a tribute France pays to superior talent.
(Think of Oscar Wilde, who, like Polanski, found refuge in Paris.)
Perhaps this shows that France is more civilized than the US.
The Americans, and to an extent the British, sometimes pay a different kind of tribute to famous artists.
If they are caught misbehaving, they are often treated with particular harshness by courts and the popular media alike.
This is a form of populism: it shows that even the most famous people are no better than us – and it sells newspapers (or, nowadays, generates Web traffic).
A particularly nasty example was the case of “Fatty” Arbuckle, a great comedy actor in Hollywood’s silent-movie era.
When a girl claimed to have been raped at one of his parties in 1921, and then died a few days later, Arbuckle was pilloried in the press, and sentenced for rape and murder twice.
It was not established until his third trial that he was innocent.
The girl was a known blackmailer, and she died of causes that had nothing to do with her sex life.
But Arbuckle’s career was ruined, the victim of an ambitious prosecutor and a popular press that made money out of scandals.
Polanski was not innocent, but he, too, may have fallen victim to the same combination of a judge’s desire to bring down a famous man and a sensation-starved media.
Perhaps the US is not as civilized as France, but it is more democratic.
And, while equal treatment under the law obviously is one of democracy’s more commendable features, the zeal of elected officials and mass media that pander to popular opinion in their treatment of talented artists is the ugly face of democracy.
The great French observer of American democracy, Alexis de Tocqueville, saw this face of American democracy in the 1830’s, noting that “Americans are so enamored of equality that they would rather be equal in slavery than unequal in freedom.” The price for American-style democracy, he wrote, was artistic mediocrity and public conformity.
This, too, was an exaggeration, but Tocqueville had a point.
If too much deference to great artists is the mark of a society that has never quite escaped from its aristocratic roots, too little regard for them is a sign of narrow philistinism.
So what should Polanski do?
In an ideal world, he would agree to return to Los Angeles, face his judges, and hope that his case will be dismissed.
This is not an unlikely outcome.
Americans can be generous.
And he would then be free to go wherever he likes in the remaining years of his life.
Alas, the world is not ideal, and Polanski might find the risk of incarceration in a US prison too high.
If he decides to resist being tried in a court of law, like any other offender, this would be understandable.
Whether it is admirable is another question.
Romney versus Obama
CAMBRIDGE – While the presidential primary elections in the United States are not over, Mitt Romney is now almost certain to be the party’s nominee to face Democratic President Barack Obama in November.
As Governor of Massachusetts, Romney built a record as a competent and moderate conservative, a political profile that suited him to the state’s electorate.
But the Republican Party’s far right wing dominates the primaries, so Romney has worked hard to escape the “moderate” label by staking out very conservative positions.
Now, as the party’s presumptive nominee, he must move back toward the political center, where the majority of voters are to be found.
So which is the real Mitt Romney?
And how can voters judge the two candidates?
Obama has a proven track record, albeit one that has disappointed many who voted for him in 2008.
Of course, his supporters argue that he had to adapt to two ongoing wars and the worst recession since the 1930’s.
Moreover, after the 2010 mid-term elections, a hostile Republican-controlled House of Representatives blocked his initiatives.
Romney, for his part, will hold up Obama’s early, still-unmet promises, while Obama will call Romney a “flip-flopper” who changes his positions to suit the moment (and the audience).
In fact, the difficulty of predicting the eventual winner’s performance in office is not new.
In his 2000 presidential bid, George W. Bush famously promised “compassionate conservatism” and a humble foreign policy, but governed very differently, as when he decided to invade Iraq.
Likewise, Woodrow Wilson and Lyndon Johnson campaigned on promises of peace, but each took America to war shortly after being elected.
Do such post-election changes in direction make a mockery of democracy?
How can voters make intelligent judgments when campaigns are so carefully scripted and slickly promoted?
Leadership theorists suggest that we should pay less attention to leaders’ policy promises than to their emotional intelligence – their self-mastery and ability to reach out to others.
Contrary to the view that emotions interfere with clear thinking, the ability to understand and regulate emotions can result in more effective thinking.
As Supreme Court Justice Oliver Wendell Holmes reputedly quipped after meeting Franklin D. Roosevelt: “Second-class intellect, but first-class temperament.”
The energy and optimism that he unleashed in his administration’s first hundred days did not reflect concrete policy proposals in his campaign.
Psychologists have wrestled with the concept of intelligence, and how to assess it, for more than a century.
General IQ tests measure dimensions of intelligence such as verbal and spatial dexterity, but IQ scores generally predict only about 10-20% of success in life.
And, while experts disagree about how much of the other 80% is attributable to emotional intelligence, they generally agree that it is an important and learnable skill that increases with age and experience, and that individuals possess it to varying degrees.
Leaders work hard to manage their public images, which requires some of the same emotional discipline and skill that successful actors possess.
Ronald Reagan’s experience in Hollywood served him well in this regard, and Roosevelt was a master at image management.
Despite his pain and difficulty in moving on legs crippled by polio, he maintained a cheery exterior and avoided being photographed in a wheelchair.
Whether they realize it or not, leaders always convey signals.
Emotional intelligence involves the awareness and control of such signals, and the self-discipline that prevents personal psychological needs from distorting policy.
If emotional intelligence is inauthentic, others will likely find out in the long run.
Richard Nixon, for example, was strong on cognitive skills, but weak on emotional intelligence.
He was able to strategize effectively on foreign policy, but was less able to control the personal insecurities that eventually led to his downfall – a shortcoming that emerged only over time.
Indeed, it was not until well into his presidency that the public learned of his infamous “enemies list.”
Bush showed emotional intelligence in midlife by mastering his problems with alcohol, and in displaying the courage to persevere with unpopular policies.
But, at some point, perseverance becomes emotional stubbornness.
Like Wilson, Bush had an obstinate commitment to his vision that inhibited learning and adjustment.
Perhaps the flexibility that Obama and Romney have shown is not such a bad quality for a president after all.
The rigors of the prolonged campaign provide voters with some clues about stamina and self-discipline.
Each of the Republican candidates took a turn as front-runner in this race, and the rigors of the primary season exposed the flaws in some, like Texas Governor Rick Perry, who were initially attractive.
Now, in the general election, how Romney, in particular, relates to his party’s platform will tell us something about the strength of his independence and future cabinet appointments.
But the most important variable for voters to examine is the candidate’s biography.
I do not mean the slick books and television advertisements that are produced for their campaigns.
While image consultants and acting ability can mask a candidate’s character, an integrated life over time is the best basis to judge the authenticity of the next president’s temperament and how he will govern.
Above all, sophisticated voters will themselves be emotionally intelligent enough to be prepared for surprises.
When their candidate disappoints them – as he inevitably will, regardless of the election’s outcome – they will bear in mind that democracy is the worst system, except for all of the others.
Ronald Reagan Putin
On May 22, two free-market liberals will meet in the Kremlin: one an ex-oilman who is the son of a US president, the other an ex-KGB agent who is the son of a Saint Petersburg maintenance man.
Despite their very different backgrounds, Presidents George W. Bush and Vladimir Putin are forging a remarkably close partnership.
Indeed, cooperation in the international war on terrorism, the recent agreement to reduce stockpiles of nuclear weapons, and Russia's rapprochement with NATO appear to be only the beginning of a process that is deepening by the day Russia's integration with the West.
But it is in economics, surprisingly, that the two men seem to share the most common ground.
President Bush may be tempted to believe that Russia's current economic success is purely the result of high world oil prices.
Prices aside, the difference between how Russian oil companies were managed in the early 1990s and how they are managed now is too dramatic to ignore.
So, too, are management improvements in the food industry which have boosted output and quality.
Throughout the economy, resources are finally flowing into the ever more efficient and well-organized market sector, rather than into the poorly managed Soviet industrial dinosaurs.
For those who know Russia, this is a staggering turn of events.
Four years ago, big Russian companies were interested in state subsidies, not structural reforms.
Now, business leaders believe that the stock-market capitalization of their companies depends on the investment climate.
The value of their assets matters to them.
They want to know how much they can borrow from abroad, or at what price shares in their companies may be sold in New York or London.
Putin does not deserve all the credit for this sea change, but what he has achieved over the last two years is far more than anyone had the right to expect: a simplified tax code, progress toward WTO membership, legal reform, greater transparency.
Still, if oil prices fall sharply, he will face a huge political problem: bold structural reforms usually require years, not months, to show results.
Russia's recent strong growth partly reflects the reforms of the early 1990s, and the reform achievements of 2000 and 2001 will feed through to measurable economic performance only in, say, 2005.
But Putin has a true politician's sense of how to handle adversity.
Here, he resembles former US President Reagan, whose popularity was rooted in an ability to feel the pulse of the public more accurately than his opponents.
What distinguishes such leaders, whatever the political context, is that they understand what the public wants.
Russia's pundits predict that if growth falls, so too will public support for reform.
The public wants everything to be fine, in a simple, commonsense way. It wants economic growth and it wants it now.
So Putin recently addressed the time-lag problem in a disarmingly simple way: in his state of the nation address in April, he demanded 8% growth this year, not the tepid 3-4% rate his government's ministers were targeting.
In doing this, he seemed to be following the credo of Stanislav Strumilin, a mastermind of the Soviet "War Economy" in the late 1920s, who said: "I'd rather stand for high rates of growth than sit [in jail] for low ones."
But by proclaiming his adherence to this goal, Putin is not exhorting workers to become Stakhonovites and "exceed production norms."
Central planning is not about to stage a comeback.
Instead, Putin is stoking public support for reform by lighting a fire under the state bureaucracy.
For Russia's public knows deep in its bones that Russia's bloated yet ineffective state is the greatest threat to its economy.
It knows that the bureaucratic apparatus remains outrageously large, and that civil servants retain numerous expensive perks - cars, dachas, medical services, and more - while most ordinary Russians scrape by on meager wages and vegetable gardens.
The public also knows that bureaucrats will use any tactic to ensure inertia, and hence their own survival. For example, the Soviet system of public-finance management remains virtually intact.
State spending left over from the previous year is routinely included in the federal budget, regardless of whether the renewed authorization serves a specific and necessary purpose.
Military reforms have stalled, as if Russia had all the time in the world to rationalize and modernize its defenses. In short, bureaucrats do everything they can to force the government to sit on its hands.
So the Russia that George W. Bush will visit is one of post-revolutionary economic stabilization, accompanied by a reactionary struggle against central authority - a struggle waged not by Russia's regions, but by the state's own bureaucrats. Some might argue that it is Putin's revitalization of central power that is reactionary.
Round-Trip Freedom
NEW YORK – Western media describe my friend and colleague Chen Guangcheng as a blind activist who made a flight to freedom when China allowed him to journey from Beijing to the United States.
What is essential about Chen is neither his blindness nor his family’s visit to the US, but the fact that he upholds a vision of universal human rights, a vision that can be fully realized only when, and if, China honors its promise to allow him one day to return home.
China has a history of forcing scholars and dissidents like us into exile.
When the Chinese student movement broke out in 1989, I was pursuing a Ph.D. in mathematics at the University of California-Berkeley.
I traveled to Beijing to participate as an activist in Tiananmen Square, where I narrowly escaped the massacre and was able to make my way back to the US.
Due to my activism, however, China refused to renew my passport.
So, when I returned to China in 2002 to help the movement for workers’ rights, I used a friend’s passport.
China incarcerated me as a political prisoner for five years, until 2007.
For a year and a half of that period, I was held in solitary confinement, without access to visitors, reading materials, or even paper and pen.
Upon my release, China renewed my passport on the condition that I return to the US.
I have tried three times to return to my homeland, only to see China block each attempt at the Hong Kong airport.
So Chen’s case serves as a reminder that those who want to support Chinese activists’ struggle for human rights must support our right to enter and leave China freely.
It also confirms that China’s top leaders can be moved when the international community, led by the US, puts specific cases like his on the table. China’s leaders directed negotiators to resolve the issue before the arrival of US Secretary of State Hillary Clinton, because she could be counted on to raise the issue in full view of the world’s media.
This naming and shaming approach can be more effective than most observers think.
Human rights need not take a back seat to doing business with China.
As a case in point, many Western observers thought that Norway’s trade relations with China would be undermined when dissident Liu Xiaobo was invited to receive the Nobel Peace Prize in Oslo in December 2010.
China complained loudly, refused to allow Liu to collect the prize, and even threatened Norway with financial repercussions.
The same month, however, one of China’s largest oil companies concluded a drilling contract with Norway’s Statoil, clearly signaling that diplomatic tensions would not stop business.
So Western diplomats who negotiate with China should call lower-level officials’ bluff, and focus on the signal-to-noise ratio, bearing in mind that, ultimately, decisions are taken quietly at a higher level by pragmatic leaders who are indeed susceptible to pressure.
After all, economic growth remains China’s best hope to keep the regime afloat, and it is the main criterion for officials’ promotion through the ranks.
So the last thing that officials at any level want to do is jeopardize international trade.
The strong commitment of US President Barack Obama’s administration in supporting Chen made a difference, and it will make a difference in other cases, too.
So we voices for human rights in China have reason to express gratitude to Clinton, Ambassador Gary Locke, House Speaker John Boehner, US Representatives Chris Smith, Frank Wolf, Nancy Pelosi, Jim McGovern, and Ileana Ros-Lehtinen, and many citizens who spoke out for Chen.
Chen had been sentenced to four years and three months in jail because he alienated corrupt local officials.
After he served his term, the same officials funneled government funds to hire 200 thugs to punish him further by keeping him confined to his house.
The resolution of Chen’s dilemma shows that standing up for human rights will gain the grudging respect of China’s leadership and citizenry.
In addition, promoting democracy and human rights in authoritarian countries such as China will improve their social equality, economic productivity, and political stability in the long run, making them better trading partners.
The right of return and freedom of speech were uppermost in Chen’s mind as he engineered his family’s departure for the US. I know because I spoke with him while he was in a hospital, negotiating his release.
Exile is not freedom.
For Chen, as for myself, the true flight to freedom will be made with a return ticket home.
Running From the Ruble
PARIS – In recent weeks, the fall in the Russian ruble and Russian stock markets closely tracked the declines in global oil prices.
But everything changed on December 15.
The oil price remained stable, but the ruble and the stock-price indices lost 30% in the subsequent 24 hours.
An unprecedented effort by the Central Bank of Russia (CBR) in the wee hours of December 16 to stabilize the ruble, by hiking the interest rate from 10.5% to 17%, proved useless.
The cause of Russia’s “Black Monday” was readily apparent: the government bailout of state-owned Rosneft, the country’s largest oil company.
Usually, bailouts calm markets; but this one recalled early post-Soviet experiments, when the CBR issued direct loans to enterprises – invariably fueling higher inflation.
The CBR’s governor at the time, Viktor Gerashchenko, was once dubbed the world’s worst central banker.
In 2014, the CBR is more constrained than it was in Gerashchenko’s era: it cannot lend directly to firms.
Yet it has also become more sophisticated at achieving the same ends that Gerashchenko sought.
In October, Rosneft issued $11 billion worth of ruble-denominated bonds (an unparalleled amount for the Russian market, equivalent to 70% of the total value of corporate bonds issued in Russia this year).
The coupon on these bonds was actually 1.5 percentage points below sovereign bonds of similar maturity, which is also unusual, especially given that Rosneft currently is subject to Western sanctions.
Then, unnamed investors (allegedly the largest Russian state banks) benefited from the CBR’s decision on December 12 to allow these bonds to be used as collateral for three-year CBR ruble loans at the policy rate.
Moreover, the CBR scheduled a special auction for such loans on December 15 – with the total amount of the loans similar to that of Rosneft’s bond issue.
Thus, the CBR would be able to provide a massive pile of rubles to Rosneft at below-market rates.
So why did the deal trigger a panic?
At first glance, this deal was intended to meet contemporary Russia’s most important economic challenge.
Sanctions have cut off Russian banks and companies from Western financial markets.
Russian companies have to repay or refinance about $300 billion of debt over the coming two years.
Some of this debt is owed to Russian companies’ offshore owners, who will certainly be happy to roll it over.
But in most cases, firms’ liabilities comprise real debt owed to major international banks.
The best example is Rosneft, which borrowed about $40 billion in 2013 to buy its competitor, TNK-BP.
About $10 billion of this debt has to be repaid in the fourth quarter of 2014, including a $7 billion payment on December 21 ($20 billion more will have to be repaid in 2015).
Financial-market investors have been waiting patiently for the government to announce a strategy for addressing the issue of external corporate debt.
The CBR did introduce a 12-month dollar facility for up to $50 billion, but this will barely last until the end of 2015.
Given that the price of oil is likely to remain low, Asian financiers – even the Chinese – do not seem eager to refinance Russian companies, and sanctions are unlikely to be lifted, investors clearly wanted a bigger and bolder solution.
Rosneft had repeatedly asked for $40 billion from Russia’s sovereign wealth fund.
But, with that money already committed to other purposes, the government opted for a non-transparent and non-market-based solution that would have made Gerashchenko proud.
Unfortunately, this solution poses several immediate problems.
For starters, the risk of Rosneft defaulting – as well as the cost of providing subsidized loans – rests with the bondholders.
If the bondholders are indeed the largest state-owned banks, the deal actually hurts the banking system: it increases the concentration of risk and implies additional losses from buying bonds with below-market interest rates.
Second, because Rosneft must repay its external debt, it is likely to use its bailout cash to buy dollars, which can only result in further downward pressure on the ruble.
Rosneft has denied this publicly, but the markets nonetheless seem to expect that the newly printed rubles will flood the currency markets.
Third, the non-transparent structure of the deal undermines trust in the CBR’s integrity and independence.
The day after Black Monday, Minister of Economy Alexey Ulyukaev said that the CBR should have increased interest rates sooner.
This immediately raised suspicion that the CBR delayed the interest-rate hike in order to complete the deal at the lower rate.
Finally, this bailout fails to answer the question it was supposed to address.
Investors do not know whether the Rosneft bailout is a one-off deal and, if it is not, which companies can hope to receive similar treatment from the CBR.
Thus, they do not understand how (and whether) Russian corporate debt will be repaid or refinanced – or how much trust they can place in the ruble.
RUDI DORNBUSCH
Rudi Dornbusch's death on July 25, at age 60, took a great economist and exceptional human being from us.
Rudi was born and grew up in Krefeld, Germany.
He was an undergraduate at the University of Geneva and completed his Ph.D. at the University of Chicago in 1971.
He taught at the University of Rochester from 1972 to 1974, before returning to the University of Chicago as Associate Professor in the Graduate School of Business in 1974-75.
In 1975 he accepted an offer from the MIT Department of Economics, where he taught until his death.
Both the subject and style of Rudi's early work reflected the influence of his thesis adviser, Robert Mundell.
The topic was exchange rates, output, and interest rates; the style was elegant and deceptively simple, with complex models reduced to the interaction of two curves.
For some time, indeed, such diagrams were known as "Dornbusch diagrams".
Many of these early articles are collected in his classic book Open Economy Macroeconomics , published in 1980.
In 1976, soon after coming to MIT, Rudi wrote his most famous and influential article, "Expectations and Exchange Rate Dynamics", on the overshooting of exchange rates.
The exchange rate fluctuations that came about following the shift to flexible exchange rates in 1973 were surprisingly large - far greater than fluctuations in domestic prices - and the question was why.
Rudi provided a simple explanation.
Price level and the level of output are "sticky", that is, they change only slowly.
When a shock hits the economy, it is initially absorbed by interest rates and the exchange rate.
Gradually the impact of the shock is transferred to output and domestic prices, and the exchange rate moves towards a new equilibrium.
The "Dornbusch result" is that, in this process, the exchange rate typically overshoots its long run value.
Because it overshoots, the exchange rate fluctuates more than the price level.
As Ken Rogoff, the current IMF chief economist who studied under Rudi, commented on the 25 th anniversary of the article's publication: "The `overshooting' paper ... marks the birth of modern international macroeconomics."
Even as he continued to produce outstanding theoretical articles, Rudi became interested in policy issues.
He became one of the outstanding policy economists of our time, displaying the same rare talent demonstrated in his theoretical work: the ability to extract the essence of a complicated problem and explain it in terms that made it appear simple.
He worked on a range of problems, typically the major international and national economic issues of the day, drawing on his knowledge of economic history to illuminate the present.
For example, he applied the lessons of the dissolution of the Austro-Hungarian empire to the break-up of the Soviet bloc.
Among his policy papers, the most famous is a 1994 paper that predicted Mexico's peso crisis, one of many papers on Latin America's economic problems.
Another that warrants rereading is his 1990 paper "Macroeconomic Populism", which accurately depicts a temptation to which policymakers in Latin America and other countries often used to succumb.
As his policy interests grew, Rudi's fame spread.
He was an indefatigable traveller, speaker, and writer, and a frequent columnist.
In his more popular articles, in his columns, and on the podium, his wit and the speed of his mind made him a formidable presence.
He was one of the finest debaters and polemicists in the profession.
He did not shy away from stating his views, often reflecting the advice of Keynes: "Words ought to be a little wild for they are the assault of thoughts on the unthinking".
At various times he was persona non grata to the authorities in a number of countries after characterizing either their policies or their behaviour in ways they did not appreciate.
It did not help that he was more often right than not.
Despite his public persona, Rudi was an excellent confidential policy adviser.
When I was in the IMF, I often called him to discuss a difficult situation.
He would talk as long as necessary, and his advice was always thoughtful and nuanced, providing insights no one else had seen.
For a short time, Rudi thought about joining the Clinton administration.
Fortunately he did not, because he had little patience for bureaucracy, long meetings, and the need to toe an official line.
His comparative advantage was on the outside, where he was free to develop his insights and express his views.
Rudi was also a spectacularly successful teacher.
As a thesis adviser, Rudi had few peers.
Every outstanding American international macroeconomist who went to MIT, among them Jeffrey Frankel, Paul Krugman, Maurice Obstfeld and Ken Rogoff, was Rudi's student.
Outstanding students of Rudi can be found all over the globe, many as policymakers.
In their devotion to their teacher and friend lies the greatest compliment to his teaching and his mentoring.
I had the good fortune to collaborate with Rudi in writing two textbooks and several articles.
One textbook, Macroeconomics , sold well over a million copies worldwide and gave me as much satisfaction as anything I have done in my professional life.
Rudi felt the same way.
Rudi lit up any group in which he participated.
He was among the most talented of men, and the warmest, generous with his time and himself, available for students and friends whenever they needed him.
He fought his terminal cancer for over 18 months, never complaining, always expressing optimism that the latest experimental treatment would work.
When he was finally forced to take to his bed, he said that he hoped his friends would remember him as he had been, not as he was at the end.
That they will.
Rules for a Frugal Superpower
WASHINGTON, DC – American foreign policy stands on the brink of substantial belt-tightening.
The mounting expenses of servicing the growing national debt, combined with the skyrocketing costs of Social Security and Medicare as the 78-million-strong baby-boom generation retires, will leave less money for American initiatives abroad.
As I argue in my new book The Frugal Superpower: America’s Global Leadership in a Cash-Strapped Era, the burden that these obligations will impose on Americans – in the form of higher taxes and fewer benefits – will weaken public support for the expansive international role that the United States has played since World War II.
This will change the world, and not for the better.
American foreign policy, for all its shortcomings, has underpinned political stability around the world.
How, then, should the US adapt what it does abroad to minimize the damage to global security caused by its straitened circumstances?
Here are three rules for a frugal superpower.
Rule I: No More Nation-building
During the first two post-Cold War presidencies, the US conducted military interventions in Somalia, Haiti, Bosnia, Kosovo, Afghanistan, and Iraq.
The motives for these interventions varied, but all led to American efforts to establish working governments – nation-building – that proved protracted and frustrating.
The relevant institutions cannot be built quickly and cannot be imported, ready-made, from abroad.
For this reason, among others, the enterprise has not found favor with the American public.
To its difficulty and unpopularity another drawback to nation-building must now be added: its expense.
The US government will no longer be able to afford to invest hundreds of billions of dollars (the cost in Iraq alone will run into the trillions) trying to supply other people with decent government.
Moreover, such projects make a far smaller contribution to US and global security and well-being than do other American foreign policies – policies that the US should make every effort to continue.
Rule II: Concentrate on the Elephants
“Don’t chase the rabbits,” an old saying has it, “because if you chase the rabbits, the elephants will kill you.” Somalia, Haiti, Bosnia, Kosovo, Afghanistan, and even Iraq qualify as rabbits – distractions from what should be the focus of US foreign policy.
The functional equivalents of elephants are Europe, East Asia, and the Middle East.
These are three of the most important parts of the world, and in each the American military presence plays a constructive role.
In the first two, the US reassures each of these region’s countries that there will be no sudden change in the balance of power that will threaten them.
In Europe, Germany can be confident that the US would help to contain an aggressive Russia, while Russia knows that Germany will remain tied to, and thus restrained by, the US.
In East Asia, American air and naval forces provide a check on China, but also serve one of China’s strategic interests by keeping Japan from conducting an independent military policy.
To keep the peace in both regions, a continuing US military presence of some kind will be needed.
Complete American withdrawal could lead to suspicion, arms races, and, in the worst case, wars among the countries of Europe and Asia.
In the Middle East, the US confronts Iran, which seeks to expand its power by any means it can, to oust neighboring countries’ governments in favor of ideologically sympathetic forces, and ultimately to evict America from the region.
Nuclear weapons would make the threat posed by the Iranian regime all the more severe.
Indeed, containing Iran while thwarting its nuclear ambitions is the single most urgent priority for today’s cash-strapped American superpower.
Rule III: Raise the Gasoline Tax
Iran’s quest to dominate the Middle East threatens the world because the region accounts for so much of the oil on which the global economy depends.
If the world used less oil, Iran would become less threatening, because its radical rulers rely on oil revenues to purchase domestic support and pursue their regional goals.
Reducing oil revenues by using less oil would also weaken other international troublemakers, actual and potential – Hugo Chávez of Venezuela, for example, and Vladimir Putin of Russia.
Moreover, some of the money that the world pays for Saudi Arabia’s oil finds its way into the coffers of terrorist organizations.
No single measure would do more to make the world a less dangerous place than a substantial reduction in its consumption of oil.
And no single measure would do more to reduce global oil consumption than a sharp increase in the tax on gasoline in the country that consumes more of it than any other: the US.
If Americans had to pay more for gasoline, they would use less of it. With a high gasoline price, alternative sources of energy such as ethanol and alternative forms of transportation such as electrically powered automobiles would become commercially viable.
None of this would happen immediately.
In the short term, Americans would have to make modest economic sacrifices in the form of higher fuel prices.
Such sacrifices, however, would be well worthwhile.
They would help to ensure that, even in an era of retrenchment in American foreign policy, the world would continue to enjoy the most important benefits of the expansive foreign policy that the US can no longer afford.
Rules for Calamity and Crisis
NEW YORK &#45;&#45; Several years ago, my daughter lay in a coma after a serious fall.
Two nurses came into her hospital room to prepare for a transfusion.
One clutched a pouch of blood and the other held my daughter’s medical dossier.
The first read aloud from the bag, “Type A blood,” and the other read aloud from the file, “Alexa Holmes, Type A blood.”
They then proceeded, following a script, to switch props and roles, the first nurse reading from the file, “Alexa Holmes, Type A blood,” and the second reading from the bag, “Type A blood.”
Why do well-trained professionals, when struggling with a rapidly unfolding emergency, adhere to rules laid down in advance?
The principal reason is that in times of crisis people fall into predictable but avoidable errors, largely because of panic.
Over time, detailed protocols have evolved for such confusing situations to encourage cool-headedness and minimize the risk of avoidable error.
The value of improvisation in the face of novel threats does not imply that existing rules should be peremptorily discarded.
This point is almost trite, but it remains virtually unnoticed by last-ditch defenders of the Bush administration’s foreign policy.
Even today, the leading Republican presidential candidates suggest that the rule of law is an unaffordable luxury in the battle with al-Qaeda.
They claim that constitutionalism and due process, if meticulously followed, reduce the government’s “flexibility” in devising ways to prevent terrorist attacks.
It is easy to imagine situations in which flexibility can be increased by curtailing individual rights and abandoning pre-established decision-making rules.
But generalizing from these exceptions is unwise.
An administration that has consistently boasted of its willingness to bend (and sometimes break) the law to meet an unprecedented threat has become notorious not for its flexibility, but for its rigidity.
Might there be a causal relation between the Bush administration’s cavalier, if not hostile, attitude toward law and its dazzling inability to acknowledge mistakes and manage midstream readjustments?
Could it be that a willingness to flout the law and circumvent the Constitution tends to produce not nimbleness, but obduracy and intransigence?
Just as adherence to rules can improve the performance of emergency-room personnel, so due process and constitutionalism can improve the performance, especially in a crisis, of law-enforcement officers and national-security policymakers.
Requiring the government to test the factual basis of its decision to use force is not a shackle to be thrown off, but an incentive for forethought and a psychologically stabilizing support.
A government that routinely makes fundamental national-security decisions based on undisclosed information, which no one outside a tiny circle of partisan loyalists ever has a chance to assess, is unlikely to make wise choices.
The idea that executive officials will fight terrorism more effectively when they know that no one is watching is farfetched.
A presidency that, having dismantled traditional checks and balances, is never compelled to provide coherent reasons for its policies, is soon likely to have few coherent reasons for its policies.
The self-defeating proclivities of such laxly monitored executive power are now visible for all to see.
Consider the decision radically to loosen evidentiary standards when deciding to incarcerate terrorist suspects in Guantánamo Bay or elsewhere.
The result has been to encourage liars to clog the system with disinformation and false leads while discouraging honest people from reporting what they observe, lest an innocent neighbor be incarcerated on the basis of misperceptions.
Secrecy is, of course, necessary in national-security affairs.
But excessive secrecy leads to scarce resources being diverted into wild-goose chases.
And, to hide from scrutiny, the executive branch inevitably ends up hiding from itself – for example, by preventing well-informed experts in the State Department from independently appraising decisions made in the Pentagon.
Obligatory consultation with independent and informed people may be annoying, but it can avert misunderstandings and accelerate the painful process of correcting blunders.
Having invaded an oil-rich Arab country that played no role in the terrorist attack of September 11, 2001, the United States has imprudently allowed itself to be sucked into its attackers’ primitive logic of collective punishment and group revenge.
It thereby abandoned the most essential pillar of the rule of law, namely the individualization of culpability.
Restricting criminal liability to actual perpetrators, carefully excluding clansmen and kin, is a fragile historical innovation aimed at interrupting spirals of bloody inter-communal violence.
The administration arguably devoted most of its counterterrorism efforts not to law enforcement operations, but into “war” in Muslim lands because it failed to keep a cool head in the immediate aftermath of the attacks on New York and Washington.
It thereby inadvertently confirmed the jihadists’ vilest propaganda, suggesting that Muslims worldwide can, for no apparent reason, become targets of America’s lethal fury.
The surest way to rouse violent resistance is to communicate to people that there is nothing they can personally do to avoid being attacked.
That is yet another reason why flouting inherited rules and protocols, in the name of national security, has made, and will continue to make, the terrorist threat catastrophically worse.
Rumors of War
War is widely thought to be linked to economic good times.
World War II is often said to have brought the world out of the Great Depression, and war has since enhanced its reputation as a spur to economic growth.
Some even suggest that capitalism needs wars, that without them, recession would always lurk on the horizon.
Today, we know that these propositions are nonsense.
The 1990s boom showed that peace is economically far better than war.
The Gulf War of 1991 demonstrated that wars can actually be bad for an economy.
That conflict contributed mightily to the onset of the recession of 1991 (which, it should be remembered, was probably the key factor in denying the first President Bush re-election in 1992).
The current situation is far more akin to the Gulf War than to wars that may have contributed to economic growth.
Indeed, the economic effects of a second war against Iraq would probably be far more adverse.
WWII called for total mobilization, and it was that total mobilization, requiring a country's total resources, that wiped out unemployment.
Total war means total employment.
By contrast, the direct costs of a military attack on Saddam Hussein's regime will be minuscule in terms of total US government spending.
Most analysts put the total costs of the war at less than 0.1% of GDP, the highest at 0.2% of GDP.
Much of that, moreover, includes the usage of munitions that already exist, implying that little or no stimulus will be provided to today's economy.
The Bush administration's (admittedly wavering) commitment to fiscal prudence means that much, perhaps most, of the war costs will be offset by expenditure cuts elsewhere.
Investments in education, health, research, and the environment will almost inevitably be crowded out.
Accordingly, war will be unambiguously bad in terms of what really counts: the standard of living of ordinary people.
America will thus be poorer, both now and the future.
Obviously, if this military adventure were in fact necessary to maintain security or to preserve freedom, as its advocates and promoters proclaim--and if it were to prove as successful as its boosters hope--then the cost might still be worth it.
But that is another matter.
I want to debunk the idea that it is possible both to achieve the war's ends and benefit the economy.
There is also the uncertainty factor.
Of course, resolving uncertainty is no reason to invade Iraq prematurely, for the costs of any war are high, and are not to be measured only, or primarily, in economic terms.
Innocent lives will be lost--possibly far more than were lost on September 11, 2001.
But the wait for war adds to uncertainties that already weigh on the American, and the global, economy:
uncertainties arising from America's looming fiscal deficit, due to macroeconomic mismanagement and a tax cut that the country cannot afford;
uncertainties arising from the unfinished "war on terrorism";
uncertainties associated with the massive corporate accounting and banking scandals, and the Bush Administration's half-hearted efforts at reform, as a result of which no one knows what America's corporations are worth;
uncertainties connected to America's massive trade deficit, which has reached all- time records.
Will foreigners be willing to continue to lend to the US, with all of its problems, at a rate in excess of a billion dollars a day?
Uncertainties associated with Europe's stability pact.
Will it survive, and will it be good for Europe if it does?
Finally, the uncertainties associated with Japan: will it at long last fix its banking system, and if it does, how negative will be the short-term impact?
Some suggest that the US may be going to war to maintain steady oil supplies, or to advance its oil interests.
Few can doubt the influence that oil interests have on President Bush--witness the administration's energy policy, with its emphasis on expanding oil production rather than conservation.
But even from the perspective of oil interests, war against Iraq is a risky venture: not only is the impact on price, and therefore on oil company prices, highly uncertain, but other oil producers, including Russian and European interests, will not easily be ignored.
Indeed, should the US go to war, no one can predict the effect on oil supplies.
A peaceful, democratic Iraqi regime could be established.
Desperate for funds for reconstruction, that new regime could sell large amounts of oil, lowering global oil prices.
Domestic US oil producers, as well as those in allied countries, such as Mexico and Russia, would be devastated, though users of oil around the world would benefit enormously.
Or the turmoil throughout the Muslim world could lead to disruptions of oil supplies, with high prices the result.
This will please oil producers in other parts of the world, but will have enormously adverse consequences for the global economy, akin to those resulting from the oil price hikes in 1973.
Whichever way one looks at it, the economic effects of war with Iraq will not be good.
Markets loathe uncertainty and volatility.
War, and anticipation of war, bring both.
We should be prepared for them.
Running from Musharraf
How times change the man.
Pakistan’s embattled president, Pervez Musharraf, once declared, “I am not at all a politician.
I don’t think I’m cut out for politics.” Eight years after seizing power and exiling his main civilian opponents, the general is moving heaven and earth to hold on to political office.
Though he took power in a bloodless coup, there was little doubt about his popularity at the time.
The public had tired of a civilian regime marked by corruption and economic chaos.
Musharraf’s personal frankness and integrity appealed to the street and earned him de facto legitimacy.
The general, who offered the father of modern Turkey, Kemal Atatürk, as his model, also seemed to represent a vision for his country that combined economic growth with support for secularizing impulses.
But, given his unwillingness to seek support for his regime and his policies from the ballot box, Musharraf succeeded in undermining both.
Over the years, he rigged referendums, browbeat the judiciary, and asked Islamic parties for support to shore up his government.
A president’s modernizing vision degenerated into a dictator’s power-driven myopia.
Musharraf admitted on television this year, “Yes, my popularity has been reduced.” Yet he clearly failed to comprehend that this was not just about approval ratings.
The political core of his regime had become hollow.
In March, he sacked the chief justice of the Supreme Court, Iftikhar Muhammad Chaudhry, probably because Chaudhry objected to Musharraf’s seeking a constitutionally questionable third term as president.
It proved to be the tipping point, triggering waves of protests by lawyers and other groups in Pakistan’s main cities.
Unable to vote the general out of office, the public took to the streets.
Polls show Musharraf’s support has fallen to a third of the population, and that two-thirds oppose his seeking another presidential term.
Simultaneously, there has been considerable erosion of support from Musharraf’s strongest external backer, the United States.
After he seized power, America welcomed Musharraf’s willingness to fight al-Qaeda and the Taliban on his territory in exchange for large infusions of military aid.
The general fought less out of conviction than pragmatism, but the end result was the same.
Or so the US believed.
Given the long-standing relationship between Pakistan’s Islamic militants and the military, it became clear there were limits to how far Musharraf was prepared to go in the “war on terrorism.”
Musharraf is now desperate to beg, steal, or borrow any political legitimacy he can get – including from the two civilian political leaders he exiled.
His most ambitious strategy has been to try to form a partnership with Benazir Bhutto, the head of one of the two largest democratic parties.
Bhutto initially saw this as an opportunity to end her exile and ease herself into the prime ministership with a politically wounded partner.
Her primary demand was that Musharraf surrender his uniform.
The other civilian leader, Nawaz Sharif, responded by defying his exile, returning to Pakistan, and promptly being re-expelled.
But Sharif succeeded in undermining the Bhutto-Musharraf plan, positioning himself as Pakistan’s genuine champion of democracy.
In one move, he reversed the Pakistani political dynamic: being farthest from the dictator became more valuable than being closest to him.
Unsurprisingly, Bhutto is now having second thoughts about an alliance with Musharraf, who has been reduced to chasing after her in an effort to salvage the deal.
Musharraf, according to his lawyer’s depositions before the Supreme Court, plans to give up his uniform after the indirect presidential elections he scheduled for October 6.
In preparation, he has replaced senior generals in the Pakistani army with officers considered more beholden to him, evidently hoping that this will ensure the military’s loyalty even after he removes himself from the chain of command.
However, his options are shrinking rapidly.
The US, concerned with ensuring stability in case of a transition to a new government, is keeping silent about its preference for Musharraf to remain head of both the government and the army.
The Bush administration is slowly recognizing that for a Pakistani leader to be an effective counterterrorism ally, he or she must have a modicum of legitimacy.
The two civilian leaders may soon begin vying with each other to see who can claim to be more anti-Musharraf.
Even Osama bin Laden, sensing an opportunity to stir up trouble and win popular support, has issued a video calling for a jihad against Musharraf.
Nor can Musharraf count on the military, despite his recent appointments.
The generals have always placed the institution of the military above all else, including rulers from their own ranks.
If they come to believe that Musharraf is sinking, they can be counted on to cut him loose, especially if he becomes a civilian.
Running in Place on Trade
NEW YORK – Meetings of G-20 leaders regularly affirm the importance of maintaining and strengthening openness in trade.
June’s G-20 summit in Toronto, although not very effusive on trade, did not back away from it.
Yet talk is cheap, and the open-mouth policy of (generally pro-trade) pronouncements has not been matched by action.
The paradox is that this has been good for holding the line on protectionism.
After all, actions are also necessary to “roll back” open trade.
So we have largely stood still, in trade jargon.
But lack of trade activism has also meant that we are not moving forward with trade liberalization.
The long-standing Doha Round of multilateral trade negotiations seems to have been put on indefinite hold.
That governments did not break out into protectionism after the global financial crisis hit surprised many.
In retrospect, it is easy to see why.
Policy is driven by three “I’s”: ideas, institutions, and interests (i.e., lobbies).
On all three dimensions, protectionist policy was hemmed in.
Progress in economic thought after 1929 initially led to the argument that, in a depression, tariffs are justified because they would divert insufficient aggregate world demand to one’s goods at the expense of others.
But all could play this game, saddling the world economy with tariffs that would likely hurt all while failing to revive growth.
The solution was obviously to forgo protectionism and increase aggregate demand instead.
This lesson has been well learned.
Institutions have also helped.
Following the passage of America’s Smoot-Hawley Tariff in 1930, countries raised trade barriers in a tit-for-tat frenzy, with no rules to constrain their behavior.
The architects of the postwar global order therefore established the General Agreement on Tariffs and Trade (GATT) in 1947, which embodied such rules – as does the World Trade Organization, which absorbed and expanded the GATT in 1995.
Indeed, no country has defied WTO rules in the current crisis.
Of course, we might still have yielded to pressure for protectionist measures, especially as WTO rules leave open the possibility of such a response.
Thus, for instance, bound tariffs (i.e., agreed ceilings) allow countries to raise actual tariffs, which are often lower, without restraint.
What has prevented the eruption of WTO-compliant trade wars has been the changed structure of the world economy, which has created strong anti-protectionist interests.
Thus, when the United States Congress enacted “Buy America” provisions for public procurement, many US firms, such as Boeing, Caterpillar, and General Electric – all fearing retaliation in their foreign markets – lobbied successfully to moderate the legislation.
The Doha Round ought to profit from some of these fundamental forces that favor open trade and impede protectionism.
Indeed, conventional wisdom holds that, during a depression, citizens become risk-averse and will not support liberalization.
But, with many people now aware that their jobs depend on trade in a closely integrated world economy, polls in the US and elsewhere show continued majority support for free trade.
While the Doha negotiators have settled many important issues, the final negotiations first stalled last year, owing to America’s refusal to cut its agricultural subsidies further and India’s insistence on special safeguards to prevent exposing its millions of subsistence farmers to unfairly subsidized US competition.
Today, domestic politics in the US and India has left America as the only stumbling block to progress.
The last election freed India’s Congress Party of its coalition with the Communists, who opposed trade, and thus increased the flexibility of pro-trade Prime Minister Manmohan Singh.
But the last election in the US ushered in a Democratic congressional majority that is indebted to trade-fearing unions, thus constraining the pro-trade President Barack Obama.
Obama also faces falling support from business lobbies in manufacturing and services – sectors that are demanding more concessions from other nations.
Were he to opt to close the Doha Round as it has been negotiated to date, he could become a general without any troops.
His silence on Doha at the recent G-20 summit was deafening.
So, how do we move forward on trade?
One solution, favored by some Washington think tanks, is to go along and ask for more.
But that would mean several years of re-negotiation.
The Doha Round would then be de facto dead.
The other option is to close the Round by resolving the US-India discord on agriculture.
Mutual concessions can be crafted that ensure negligible political fallout for both leaders.
This would also require marginal improvements in concessions by the major developing countries, and by the US and the European Union on services.
The problem is that lobbyists in Washington would reject this modest solution if the Doha Round were the end game.
So, part of the solution would have to be declaration of another Round to negotiate new aspirations and demands.
We could even call this the Obama Round.
After all, Obama should have to live up to his Nobel Prize as a multilateralist!
Rushdie a la Russe
June will be a cruel month in Russia's courts.
On June 16th, the rebellious oligarch Mikhail Khodorkovsky and his comrade-in-arms Platon Lebedev finally began to face the judges of the Meshchansky district court.
No doubt, this case will attract the Russian and international press.
Hearings began just the day before Khodorkovsky's trial opened in another case that is no less significant.
But this case is not about oligarchs trying to interfere in politics; it is about a group of artists and curators whose professional activities have unexpectedly turned into a political hot potato.
In January 2003, a gang of Russian Orthodox activists destroyed an exhibition in the Sakharov Museum and Public Center called "Caution!
Religion."
The organizers of the exhibition stated that they wanted to attract attention to the new role of religious institutions in Russian life.
But the Orthodox fundamentalists found the art blasphemous and offensive, and some trashed the exhibition.
Last December, prosecutors charged two Sakharov Museum officials and three of the exhibition's organizers with inciting religious hatred.
They now face prison terms of up to five years.
The vandals, meanwhile, were hailed by church officials as heroes.
All charges against them were dismissed.
The vandals had influential protectors.
All of them were members of the congregation of St. Nicholas in Pyzhi, whose archpriest, Alexander Shargunov, is a well-known radical fundamentalist.
In 1997, he established a movement called the Social Committee For the Moral Revival of the Fatherland.
In 2001, the committee's Web site carried instructions on how to vandalize "immoral" billboards by splashing paint on them.
Followers promptly destroyed 150 billboards in Moscow.
A group of well-known nationalist intellectuals, including film director Nikita Mikhalkov, artist Ilya Glazunov, and writers Valentin Rasputin and Vasily Belov, weighed in with a petition calling the exhibition a "new stage of conscious Satanism."
They wrote that Russia's enemies were bent on humiliating the powerless "Russian people, their objects of worship, and their historic values."
Who, precisely, were these powerful enemies?
The intellectuals didn't identify them, but the fascist political party Pamyat (Memory) did not hesitate.
The appeal posted on its Web site called on Orthodox Christians to protect "our Lord Jesus Christ" from "Yid-degenerates," using the most derogatory Russian term for Jews.
These alarming events in the art world have taken place against a background of rising nationalism and Orthodox assertiveness in Russia.
The Orthodox Church has acquired enormous political clout in recent years, and few politicians risk offending it.
The Sakharov Museum exhibition was subjected to a vituperative media campaign, and the matter was almost immediately taken up in the Duma, where nationalist deputies vied with each other to denounce the artists and laud the vandals.
In February 2003, the Duma passed a decree stating that the Sakharov museum exhibition's purpose was to incite religious hatred and to insult believers and the Orthodox Church.
The state prosecutor was ordered to take action against the organizers, with 265 of 267 deputies approving the measure.
In April 2003, the Duma voted to toughen the law against inciting religious hatred by adding prison terms of up to five years for offenders.
In December 2003, Sakharov Museum director Yuri Samodurov was charged with actions "leading to the provocation of hatred and enmity."
If found guilty, he could be sentenced to up to five years in prison.
Church officials are not calling for that harsh a penalty.
In March 2004, the Moscow Patriarchy's External Relations Department issued a statement that surprised everyone.
It asserted, in effect, that the Sakharov Museum exhibition organizers had committed an administrative rather than a criminal offense.
The difference is that administrative offenses are punished with fines, at most, not prison terms.
Such a softening of the church's position was probably the result of the public outcry in Russia's liberal press.
Yet the pogrom at the Sakharov museum provoked a chain reaction of similar attacks on contemporary art by Orthodox fundamentalists whom the church has been unable to control.
Anna Alchuk, an artist who participated in the exhibition in the Sakaharov Center and was later charged, said she had read all 14 volumes of evidence collected by the prosecutor, and that 11 volumes consisted entirely of letters from "working people" expressing outrage at the show and demanding that the artists be punished.
Almost none of the writers had seen the exhibition - most had signed form letters. "The events around the exhibition discredit the Russian Orthodox Church, just as the fatwah condemning Salman Rushdie to death discredited Islam," said Elena Bonner, Andrei Sakharov's widow.
The outcome of the court hearings is difficult to predict, but it will answer the question of whether Russians have lost the freedom artistic self-expression that they gained after communism's fall.
Disillusion with "democracy Boris Yeltsin-style" has pushed President Vladimir Putin to search for an ideology based on nationalism and the glorification of the state.
Putin calls it "managed pluralism."
As we can now see, the Social Committee For the Moral Revival of the Fatherland wants to be among the managers.
Russia and the Kosovo Card
TBILISI – Look before you leap is as sound a principle in foreign policy as it is in life.
Yet, once again, the Bush administration is preparing to leap into the unknown.
Even though lack of foresight is universally viewed as a leading cause of its Iraq debacle, the United States (with British backing probable) is now preparing to recognize Kosovo’s independence unilaterally – irrespective of the consequences for Europe and the world.
Kosovo has been administered since 1999 by a United Nations mission guarded by NATO troops, although it remains formally a part of Serbia.
But, with Kosovo’s ethnic Albanian majority demanding its own state, and with Russia refusing to recognize UN mediator Martti Ahtisaari’s plan for conditional independence, the US is preparing to go it alone.
Instead of thinking what Ahtisaari deemed unthinkable, a partition of Kosovo with a small part of the north going to Serbia and the rest linked to the Kosovars ethnic brethren in Albania or a separate state, the US plans to act without the UN’s blessing, arguing that only an independent Kosovo will bring stability to the Western Balkans.
That argument is debatable – and the record of the Kosovar government suggests that it is wrong.
But the US position is unambiguously misguided in not foreseeing that the “Kosovo precedent” will incite instability and potentially even violence elsewhere.
Why the rush to give Kosovo independence?
Many serious disputes have gone unresolved for decades.
The Kashmir question has lingered since 1947, the Turkish occupation of Northern Cyprus since 1974, and Israel’s occupation of the West Bank from 1967.
Yet no one is suggesting that unilateral solutions be imposed in these potential flashpoints.
Nevertheless, the US – and most European Union members – argue that Kosovo’s situation is sui generis and will set no legally binding international precedent.
But Russia sees things very differently.
Indeed, it may seek to use this precedent to re-establish its authority over the nations and territories that were once part of the Soviet Union.
Spain and Cyprus with their worries over secessionist-minded regions, are worried by any possible precedent.
Romania fears the fallout from Kosovo’s unilaterally gaining independence on neighboring Moldova.
The worry is that Russia will unilaterally recognize the breakaway Moldovan territory of Transdnistria, which Russian troops and criminal gangs have been propping up for 16 years.
Ukraine – the great prize in Russia’s bid to recapture its former sphere of influence – is also deeply anxious.
It fears that Russia will encourage separatist tendencies in Crimea, where the ethnic Russian population forms a majority.
(Crimea was ceded to Ukraine by Nikita Khrushchev only in 1954).
Russia may decide to abuse the Kosovo precedent further to divide Ukraine’s population between Russian speakers and Ukrainian speakers.
But the biggest risks posed by unilateral recognition of Kosovo’s independence are in the South Caucasus, a region that abuts the tinderbox of today’s Middle East.
Here, there is a real danger that Russia may recognize breakaway regions in the South Caucasus, – and back them more strongly than it does now.
Even before Vladimir Putin became Russia’s president, the Kremlin was making mischief in Georgia, issuing Russian passports to citizens of Abkhazia (the largest breakaway region) and pouring money into its economy.
Russia’s supposed “peacekeeping troops” in Abkhazia and South Ossetia, Georgia’s other secession-minded region, have in fact protected their rebel governments.
Russia has also been enforcing a complete trade embargo on Georgia in the hope of weakening the resolve of its pro-Western president, Mikhail Saakashvili.
Should Russia recognize Abkhazia’s independence, Saakashvili might be tempted to respond militarily to prevent his country from unraveling.
Renewed conflict in Abkhazia would not only bring the risk of open warfare with Russia, but strain relations with Armenia, as there are near to 50,000 Armenians in Abkhazia who support the breakaway government.
Another risk in the South Caucasus is that Russia (with Armenian support) will recognize Nagorno-Karabakh’s self-proclaimed independence from Azerbaijan.
Nagorno-Karabakh, historically Armenian, endured a bloody secessionist war between1988 and 1994, with 30,000 killed and 14% of Azerbaijan’s territory occupied by Russian-backed Armenian forces.
Since then, oil has fuelled an Azeri military buildup.
So the government in Baku is far more prepared to respond to renewed warfare than it was in the 1990’s.
Moreover, it has neighboring Turkey on its side.
Turkey is already enforcing a punitive economic embargo on Armenia, including closure of its border.
Military projections by the US have repeatedly suggested that Azerbaijan would lose such a battle, even with newly purchased equipment and Turkish military support.
Armenian forces are well dug in and have received a significant boost from Russia’s diversion of heavy weaponry to Armenia from some recently closed Georgian military bases.
Iran also must be factored into this equation, as it is becoming a strategic investor by building an oil refinery just across its border in Armenia, partly as a security measure in case of a US attack and partly to relieve its petrol shortages.
Moreover, Iran remains eager to contain Azerbaijani revanchist claims over the large Azeri minority in northern Iran.
The conflicts in Transdnistria and the South Caucasus are usually called “frozen conflicts,” because not much has happened since they began in the early 1990’s.
Any unilateral move to give Kosovo its independence is likely to unfreeze them – fast and bloodily.
And such potential bloodshed on Russia’s border may give Vladimir Putin the pretext he may desire to extend his rule beyond its constitutionally mandated end next March.
Russia and the West After Iraq
The US-led invasion of Iraq called into question the efficacy of today's international system.
While the US will probably not achieve all of its goals in Iraq, the war has clearly confirmed and strengthened its global supremacy.
How should Russia respond?
Where do its interests lie, and what kinds of policy should its leaders pursue?
In particular, how should Russia position itself vis-à-vis the incipient rivalry between Europe and the United States?
The Iraqi crisis revealed deep differences between the US and Western Europe in matters of political culture, ethics, approaches to international politics, and the role of military force.
These differences will hardly break the basic trans-Atlantic alliance built on the foundation of common values and interests. But they will necessarily heighten elements of competition, including competition for Russia.
The war in Iraq has also revealed the critical state of the European Union's foreign and defense policies.
Attempts to have Europe speak with one voice obviously failed.
In light of even greater differences resulting from the enlargement, they are not likely to succeed in the near future.
Moreover, as confrontation with the US intensifies, Washington will probably act to forestall any trend toward the unification of EU foreign and defense policy.
In the absence of such common policy, the EU and its leading members will remain in the second league of world-class players for the foreseeable future.
In this context, it was a mistake for Russia to side so strongly with France and Germany against the US.
It was not as bad as during Soviet times, when we used to side with the Third World against both America and Europe, but it was still not in Russia's long-term interest.
France was pursuing its own Gaullist goal of strengthening French national prestige by inflicting damage or even humiliation upon the US.
Germany's chancellor was not motivated by European goals, either, but took an anti-war stand on Iraq to deal with his own domestic problems: the weakness of his government and pacifist sentiments among the majority of Germans.
A struggle for preserving the vestiges of greatness may be a worthy goal; perhaps France, a country richer than Russia, can afford these objectives.
But do Russians really want to tickle their vanity at the expense of the long-term interests of our economically devastated country?
Nor does Russia need to cater to pacifism for domestic political considerations, as a pacifist movement is non-existent in my country.
One goal of European foreign policy has always been to prevent excessive rapprochement between Russia and the US.
Good US-Russian relations, however, could strengthen both countries, and especially Russia.
Some people in Russia--traditional leftists and corrupt bureaucrats afraid of a more open system--indulge in anti-American rhetoric.
But anti-Americanism is simply irrational for Russia, which only stands to gain from an alliance with the world's economic and political leader.
Of course, good relations with Europe are a priority for Russia, especially economic links, human contacts, and social interactions.
Russia will also benefit from an active foreign-policy engagement with the EU's leading members.
But a strategic alliance with the EU in foreign and security policies remains unrealistic and inefficient.
Europe will most likely continue to grow weaker, rather than stronger, in this field.
That is why Europe will inevitably be a minor priority if Russia manages to restore and maintain special relations with the US.
Russia could also play the role of a "transatlantic integrator," mediating the various conflicts and differences in the traditional Atlantic community.
Obviously, we are more suited for this role than, say Poland, which is also trying to play it.
A similar bridging role could perhaps be played by Russia with respect to China and India, with which we should establish maximally close relations.
But close relations with the US do not mean that Russia must neglect its own interests, both political and economic.
In the context of Iraq, for example, Russia should constructively support the rebuilding effort, even if, as of now, its participation has not been sought.
But while supporting the new Iraqi government, Russia should not break off contacts, if they still exist, with moderate members of the Baath party, many of whom may come back to power.
After all, Iraq has few other elites to rely upon, much as Russia had no non-Communist elite after 1991.
Should such a possibility arise, Russia should take part in peacemaking and reconstruction operations in Iraq, rather than trying to put a spoke in Washington's wheel.
Indeed, unlike Kosovo, where we have no serious interests and should withdraw from the peacekeeping efforts, Russia stands both to gain and lose a lot in Iraq.
We have our interests to protect, the most important of which are economic: recovery of Iraqi debts owed to Russia, the contractually agreed-upon development of oil fields, restoration of public infrastructure.
More generally, Russia must play the oil card, which still gives the country a powerful trump in international relations, especially in light of long-term destabilization of the Middle East.
Russia will both derive large revenues from oil for many decades and can also play the role of an "energy stabilizer" that will be important for maintaining world peace.
Wise use of oil resources will not only provide a long-term foundation for Russia's modernization, but will also enhance Russia's geopolitical influence.
A New Cold War Order?
MOSCOW – As 2014 comes to a close, it is clear that the European and international political structures that have been in place since 1989 have failed the test of time.
Indeed, the world has not witnessed such a tense and fraught environment since the Cold War’s end, with bloodshed in Europe and the Middle East coming against the backdrop of a breakdown in dialogue between major powers.
The world, it appears, is on the brink of Cold War II.
Some even say that it has already begun.
Meanwhile, the world’s key international body – the United Nations Security Council – is scarcely playing a role or taking concrete action to stop the fires and the killing.
Why has it not acted with determination to evaluate the situation and develop a program of joint action?
One primary reason, I believe, is that the trust created by hard work and mutual effort in ending the Cold War has collapsed.
Without such trust, peaceful international relations in today’s globalized world are inconceivable.
But this trust was not undermined only yesterday; it happened long before.
The roots of the current situation lie in the events of the 1990s.
The Cold War’s end was supposed to mark the beginning of a path toward a new Europe and a safer world order.
But, instead of building new European security institutions and pursuing the demilitarization of Europe – as promised in NATO’s London Declaration of 1990 – the West, particularly the United States, declared victory.
Euphoria and triumphalism went to Western leaders’ heads.
Taking advantage of Russia’s weaknesses and the lack of a counterweight, they refused to heed warnings against claiming a monopoly on global leadership.
The events of the past few months are the consequences of shortsightedly seeking to impose one’s will while ignoring the interests of one’s partners.
A shortlist of such faits accomplis would include NATO enlargement, the war in Yugoslavia (particularly Kosovo), missile-defense plans, Iraq, Libya, and Syria.
As a result, what was a blister has now turned into a festering wound.
And it is Europe that suffers the most.
Instead of leading change in a globalizing world, the continent has turned into an arena of political upheaval, competition for spheres of influence, and military conflict.
The consequence, inevitably, is that Europe is weakening at a time when other centers of power and influence are strengthening.
If this continues, Europe will lose its influence in world affairs and gradually become irrelevant.
Fortunately, the experience of the 1980s suggests a way forward.
The international situation at the time was no less dangerous than it is today.
Yet we succeeded in ameliorating it – not just normalizing relations but ending the Cold War confrontation itself.
This was achieved primarily through dialogue.
But the key to dialogue is political will and setting the right priorities.
Today, the foremost priority should be dialogue itself: a renewal of the ability to interact, listen to, and hear one another.
Promising signs are now emerging, though initial efforts have yielded only modest and fragile results: the Minsk agreement on a ceasefire and military disengagement in Ukraine; the trilateral gas agreement concluded by Russia, Ukraine, and the European Union; and a halt to the escalation of mutual sanctions.
We must continue to move from polemics and mutual accusations to a search for points of convergence and a gradual lifting of sanctions, which are damaging to both sides.
As a first step, the so-called personal sanctions that affect political figures and parliamentarians should be lifted, so that they can rejoin the process of seeking mutually acceptable solutions.
One area for interaction could be to help Ukraine overcome the consequences of fratricidal war and rebuild the affected regions.
The same is true of global challenges and pan-European security.
Today’s key global problems – terrorism and extremism, poverty and inequality, climate change, migration, and epidemics – are worsening daily.
And, as different as they are, they share one key feature: none has a military solution.
Yet political mechanisms to solve these problems are lacking or dysfunctional, even as the continuing global crisis should persuade us to seek – without delay – a new model that can ensure political, economic, and environmental sustainability.
As for Europe’s security, only a pan-European solution is viable.
Indeed, attempts to address the problem by enlarging NATO or through an EU defense policy are counterproductive.
We need more inclusive institutions and mechanisms that provide assurances and guarantees to all.
Here the Organization for Security and Cooperation in Europe, to which a lot of hope was attached, has so far not been up to the task.
That does not mean that the OSCE should be replaced with something new – especially since it has now assumed important control functions in Ukraine.
But the OSCE is, I would say, an edifice that requires major repairs and some new construction.
Years ago, former German Foreign Minister Hans Dietrich Genscher, former US National Security Adviser Brent Scowcroft, and other policymakers proposed creating a Security Council, or Directorate, for Europe.
I agreed with their approach.
Along the same lines, during Russian Prime Minister Dmitri Medvedev’s presidency, he called for the creation of a mechanism for European preventive diplomacy and mandatory consultations in the event of a threat to any state’s security.
Had such a mechanism been established, the worst events in Ukraine could have been averted.
Political leaders are, of course, to blame for filing away these and other “European ideas” in the archives.
But the blame must also be shared with the entire European political class, civil-society institutions, and the media.
Though I am, by nature, an optimist, I have to admit that it is very difficult not to be pessimistic as 2014 comes to a close.
Nonetheless, we must not submit to panic and despair, or allow ourselves to be drawn into a vortex of negative inertia.
The bitter experience of the past few months must be transformed into the will to reengage in dialogue and cooperation.
This is my appeal to our leaders, and to all of us, for 2015: Let us think, propose, and act together.
The Kremlin’s Tragic Miscalculation
COPENHAGEN – Russia’s aggression against Ukraine is one of the great tragedies of our time, not only because of the tremendous human cost, but also because it is utterly pointless.
Indeed, Russia’s leaders fundamentally misjudged the West’s intentions and created an entirely unnecessary confrontation that undermines both sides’ interests.
Russia and the West – with their closely interlinked economies and many overlapping political objectives in Europe and beyond – have much to gain from peaceful cooperation.
But instead of working with Western powers to enhance shared prosperity, the Kremlin turned on its partners abroad.
The reason was simple: Russia viewed the gradual enlargement of the European Union and NATO – achieved through their “neighborhood” and “open door” policies, respectively – as carefully orchestrated attempts to encircle and threaten it.
According to Kremlin rhetoric, by welcoming former Soviet countries, the EU and NATO were explicitly attempting to weaken Russia.
This interpretation ultimately drove Russia to respond to Ukraine’s plans to sign an association agreement with the EU by annexing Crimea and attempting to create a “frozen conflict” in eastern Ukraine.
But Russia’s interpretation was patently wrong – and I can say so with full authority.
As Prime Minister of Denmark, I chaired the 2002 EU summit in Copenhagen, where European leaders agreed on the bloc’s most expansive enlargement ever.
And as Secretary General of NATO, I spent five years chairing the NATO-Russia Council to build cooperation with our largest neighbor.
The truth is that the young democracies of Central and Eastern Europe sought to join the EU and NATO – and worked hard to gain membership – because they longed for peace, progress, and prosperity.
It was those countries’ ambitions, not some vendetta against Russia, that drove EU and NATO enlargement.
Russia should not bemoan its neighbors’ decision to engage with the EU and NATO, which, after all, paved the way for economic progress and security improvements.
The EU and NATO supported the construction of strong democratic institutions based on the rule of law and respect for minorities, the emergence of viable and dynamic economies, and the peaceful resolution of border disputes.
A secure and prosperous Central and Eastern Europe benefits everyone – especially Russia.
Today, the EU is Russia’s largest foreign market, with a major share of its exports going to the member states that joined in 2004.
And Russia’s border with the EU, far from posing a threat, is the most stable and secure of all its frontiers.
In fact, no NATO ally would attack Russia, as such a move would defy a key tenet of international law: respect for other countries’ sovereignty.
In the case of border disputes, NATO members are committed to finding nonviolent solutions.
In short, thanks to the EU and NATO, the stability on its Western borders that Russia has sought for centuries has now been achieved.
Russia should be celebrating – and it should be seizing the opportunity to deepen its ties with the West.
When I became Secretary General of NATO in 2009, I identified a strengthened relationship with Russia as a top priority.
By the end of the next year, it seemed like we were making major progress toward closer cooperation.
At the third summit of the NATO-Russia Council, Russia’s then-president, Dmitri Medvedev, and his counterparts from the other 28 participating states issued a joint statement in which they pledged to develop a “true strategic partnership.”
But five years later, Russia is far from our strategic partner; it is our strategic problem.
In fact, the current Russian military doctrine names NATO as one of the main external threats to Russian security.
It is time to redefine Russia’s relationship with the West.
The first step would be for the EU, the United States, and other NATO members to demonstrate clearly that cooperation pays – and that confrontation has costs.
This means continued economic sanctions against Russia, alongside economic aid for Ukraine.
From a security point of view, NATO should enhance its territorial defense, while NATO allies help Ukraine improve its defense capabilities.
The EU and the US must remain firm and united in their policy toward Russia.
This approach offers the best chance of bringing an end to the current confrontation, and compelling Russia to engage constructively with the West.
Of course, if cooperation is to work, Russia must earn back the trust that it has broken, demonstrating its commitment to abide by the treaties and international norms of behavior to which it has agreed.
When it comes to Russia today, appeasement will not lead to peace; on the contrary, a conciliatory approach will only prolong the conflict.
The sooner the West convinces Russia’s leaders that it will not back down, the sooner the conflict will be over.
Only then will Russia return to the path of constructive cooperation with the EU, NATO, and the US – and a more prosperous future.
Russia Between Old Europe and New America
by Dmitri Trenin
Throughout the UN debate on Iraq, President Putin tried to let France lead the charge against America's supposed "unilateralism".
He also refrained from joining German Chancellor Schroeder's opposition to any military action against Baghdad.
In the end, Russia's president came down against backing the US, yet he has - so far - attracted none of the angry gibes that the French and German leaders have received from America.
The subtlety and maturity of his diplomacy over Iraq are but another sign that Russia is emerging from its long post-communist funk to find its voice in an American-led world.
From the start of the crisis, Russia's president shrewdly saw the difference in the way Americans perceive France and Germany, on the one hand, and Russia, on the other.
The lingering empathy for France and Germany born of the Cold War alliance stands in stark contrast to the American foreign policy community's wariness toward post-Soviet Russia.
Had President Putin joined the Franco-German chorus of doubters at the beginning of the UN debate, he would have squandered the goodwill and reputation for reliability he had painstakingly accumulated since coming to power three years ago.
The difference between Paris/Berlin and Moscow, however, reaches deeper.
France is not merely interested in Iraqi oil, nor is Germany's Chancellor simply taking notice of opinion polls (on his own government's performance, not just Iraq).
For both France and Germany, the Iraq issue is a crucible for forging an autonomous foreign/security policy for the European Union.
That is a serious goal, but also a challenge to America, and President Putin knows it.
Washington identifies it as such, and welcomed the "new Europe" (which includes large chunks of the "old" communist Eastern Europe) helping to tilt the balance on the continent back in America's favor.
At this remarkable point in Europe's history, some in Russia have been tempted to revive the old policy of fuelling transatlantic divisions.
Defunct and, frankly, bankrupt, that policy is nevertheless remembered fondly by many in Russia's foreign policy elite.
Others saw, in siding with France and Germany, a means for Russia to "join Europe" on more equal terms than those that now seem to be on offer.
Both views are delusions.
In today's world, Russia's business is Russia.
Its paramount interest is to modernize the country, its economy, political system, and society.
To achieve that goal, Russia requires not just the absence of confrontation with the US, but a genuinely strong and deep relationship with the world's sole superpower.
Until Russia becomes a magnet for US investment and a proper economic foundation is built to support this relationship, it will have to rest on two principal pillars: security cooperation and energy partnership.
It is in Russia's direct national interest to craft a special relationship with America, both to underpin its modernization strategy and to deal with the countless security problems facing Eurasia.
These include proliferation of weapons of mass destruction around Russia's borders; international terrorism and drug trafficking which benefit from social and economic dislocations, especially across the Greater Middle East; and the challenge of Islamic militancy.
As in Afghanistan and Central Asia, America and Russia could be valuable partners in pursuit of common objectives.
President Putin has said, rightly, that there are matters in the world more important than Iraq, among them the role and authority of the UN Security Council.
This is correct.
Traditionally, Moscow regarded the Council through the prism of it holding one of the five veto-wielding permanent chairs.
This served as a guarantee of "international political immunity" for Russia.
Great Power status on the Security Council remains a valuable hedge, but in a world where there is only one superpower, the informal rules of the game have changed.
To raise the effectiveness of the Council now, one needs to learn to work with (not against) the newly-dominant US through UN mechanisms.
Here, there is much (besides the special relationship) that Russians can learn from Britain.
In addition to the new Europe now coming into being, a new West is taking form, one spanning the Atlantic to the Pacific.
Russia is of Europe, but its situation and some of its interests are markedly different from those of the EU core (as West Europeans regularly point out).
Economic integration with the EU plus security partnership with the US is a winning formula for Russian modernization.
On Iraq, Russia's national interest is to preserve some of its influence, and the only way to do that is to find some agreement with the US about Iraq's post-Saddam future.
A New Sino-Russian Alliance?
CAMBRIDGE – Some analysts believe that 2014 ushered in a new era of Cold War-style geopolitics.
Russian President Vladimir Putin’s invasion of Ukraine and annexation of Crimea was met with heavy economic sanctions from Europe and the United States, weakening Russia’s ties with the West and leaving the Kremlin eager to strengthen ties with China.
The question is whether Russia will manage to build a real alliance with the People’s Republic.
At first glance, it seems plausible.
Indeed, traditional balance-of-power theory suggests that US primacy in power resources should be offset by a Sino-Russian partnership.
Perhaps more convincing, there seems to be historical precedent for such a partnership.
In the 1950s, China and the Soviet Union were allied against the US.
After US President Richard Nixon’s opening to China in l972, the balance shifted, with the US and China cooperating to limit what they viewed as a dangerous rise in the Soviet Union’s power.
With the collapse of the Soviet Union, that de facto US-China alliance ended, and a China-Russia rapprochement began.
In 1992, the two countries declared that they were pursuing a “constructive partnership”; in 1996, they progressed toward a “strategic partnership”; and in 2001, they signed a treaty of “friendship and cooperation.”
In recent years, China and Russia have cooperated closely in the UN Security Council and taken similar positions on Internet regulation.
They have used diplomatic frameworks – such as the BRICS group of major emerging countries (along with Brazil, India, and South Africa) and the Shanghai Cooperation Organization (along with Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan) – to coordinate positions.
And Putin has struck up a good working relationship with Chinese President Xi Jinping, based on their shared domestic illiberalism and desire to counter American ideology and influence.
Their economic relationship, too, seems to be progressing.
Last May, shortly after the annexation of Crimea, Russia announced a $400 billion deal to supply 38 billion cubic meters (bcm) of gas to China annually for 30 years, beginning in 2019.
The contract, between Russia’s state-owned energy giant Gazprom and the China National Petroleum Corporation, entails the construction of a 2,500-mile gas pipeline to China’s Heilongjiang province (where, incidentally, the two countries nearly went to war a few decades ago).
Though the exact price remains secret, it appears that Russia offered major concessions, after nearly a decade of negotiations, to ensure the deal’s success.
Moreover, in November, Gazprom announced a framework agreement to deliver an additional 30 bcm of gas to China’s Xingjiang Province from western Siberia for 30 years via another new pipeline.
If the “eastern” and “western” pipelines are completed as planned, the 68 bcm they deliver to China annually would dwarf the 40 bcm that Russia exports to its current largest customer, Germany.
This may seem to portend an ever-deepening bilateral relationship.
But there is a hitch: the gas deals amplify a significant bilateral trade imbalance, with Russia supplying raw materials to China and importing Chinese manufactures.
And the gas deals do not make up for Russia’s lost access to the Western technology that it needs to develop frontier Arctic fields and become an energy superpower, not just China’s gas station.
In fact, the problems with a Sino-Russian alliance run even deeper.
With its economic, military, and demographic heft – China generates considerable unease in Russia.
Consider the demographic situation in eastern Siberia, where six million Russians live across the border from up to 120 million Chinese.
Furthermore, Russia’s economic and military power has been in decline, whereas China’s has exploded.
Anxiety over China’s conventional military superiority probably motivated, at least partly, Russia’s 2009 announcement of a new military doctrine explicitly reserving the right to first use of nuclear weapons – a stance that resembles America’s Cold War force posture, aimed at deterring superior conventional Soviet forces in Europe.
These imbalances suggest that Russia would resist a tight military alliance with China, even as the two countries pursue mutually beneficial tactical diplomatic coordination.
China’s willingness to cooperate with Russia also has its limits.
After all, China’s development strategy depends on its continued integration into the world economy – and, specifically, reliable access to American markets and technology.
The Chinese Communist Party’s legitimacy depends on strong economic growth, and it will not risk this strategy for some “authoritarian alliance” with Russia.
Even within multilateral forums, the relationship between Russia and China is far from balanced.
Given that China’s economy is larger than the other four BRICS economies combined, the group’s initiatives – including its new development bank – are likely to reflect a disproportionate Chinese influence.
And though the Shanghai Cooperation Organization has facilitated some diplomatic coordination, China and Russia remain locked in a struggle for influence in Central Asia.
The Sino-Russian alliance in the twentieth century was a product of China’s weakness following World War II and at the beginning of the Cold War – and, even then, it lasted little more than a decade.
Today’s China is strong, and unlikely to get too close to a Russia whose decline has been accelerated by its leader’s poor judgment.
In short, when it comes to a Sino-Russian alliance challenging the West, history is not likely to repeat itself.
Contrary to Putin’s hopes, 2014 will not be remembered as a year of successful Russian foreign policy.
Russia Debates Its Future
YAROSLAVL – Russia is said by many to lack a “civil society.”
But it partly makes up for this by having a rather interesting public sphere, in which serious topics do get debated, and where glimpses of the great are not entirely confined to televised snippets.
The first fortnight in September saw successive meetings of two major Russian political groups, the Valdai Discussion Club and the Global Policy Forum.
The first was on a boat and ended with dinner with Prime Minister Vladimir Putin at Sochi on the Black Sea.
The second, in Yaroslavl, culminated in a symposium with President Dmitri Medvedev.
Scholars, think-tankers, and journalists (both Russian and foreign) joined political and business leaders to discuss Russia’s future.
Three things made these events unusual in a typically Russian way.
The first was the intense media interest.
Indeed, even the most camera-shy academic can suddenly find himself a TV star in Russia.
Second was the willingness of both Putin and Medvedev to engage publicly with experts on the experts’ own intellectual turf.
The only recent Western political leader I can think of who had the confidence to do this was Bill Clinton.
Finally, the two events saw the emergence of two rival political courts, each exuding the faint but unmistakable odor of a looming conflict.
For those with eyes to see, the two conferences presented a fascinating glimpse of a crumbling diarchy.
The main theme of the Valdai conference concerned whether Russia’s history and geography doomed it to authoritarian rule.
If democracy was the wave of the future, was Russia destined to miss out?
The pessimists – mainly Russian historians – claimed that Russia would find it difficult, if not impossible, to overcome its legacy of autocracy.
One of them argued that, in Russia, autocracy rises constantly from the ashes, like a Phoenix, sustained by Russians’ passivity and endurance.
The Bolsheviks inherited the autocracy of the Czars;
Putin rediscovered the old monarchical principle of anointing his successor, bypassing democratic competition for the presidency.
Some radicals in Russia have rejected this historical determinism, arguing that we should not legitimize authoritarianism by reference to history.
Protests were growing.
It was Putin’s yoke, not history’s, which lay heavily on Russia.
Much of this discussion lacked clarity, as such discussions tend to do.
Most participants failed to distinguish between history as a constraint and history as a determinant.
No country, or civilization, can entirely transcend its history: but each history offers many different possibilities.
Countries are not genetically programmed like animals.
The discussion about autocracy was inevitably bound up with others.
Autocracy has been defended in Russia as necessary for empire.
But this leads to another question: is empire necessary for Russia?
Can Russia renounce its imperial past and accept ordinary relations with newly independent neighbors like Ukraine and Georgia?
Can it, in fact, be an “ordinary” or “normal” player on the world stage?
At the Yaroslavl meeting with Medvedev, attention shifted to the connection between democracy and modernization.
Everyone agreed that Russia must diversify its economy away from reliance on energy.
As Medvedev pointed out, a raw materials-based economy is always vulnerable to volatile commodity prices.
But there were two broad views about the relationship between political and economic modernization.
Putin’s view is that democracy results from a modern economy, a kind of reward for hard work.
If the state pushes modernization from the top, democracy will grow naturally, if slowly, as a result of rising prosperity and a growing middle class.
The Kremlin’s chief ideologist, Vladislav Surkov, has suggested that full democracy presupposes “democracy in the head,” implying that this desirable mental condition was still a long way off in Russia.
The alternative view, championed by people such as Igor Yurgens, head of Medvedev’s favorite think tank, The Institute of Contemporary Development, is that democracy is the precondition for economic modernization.
Their argument is that the Russian state, as now constituted, lacks any real incentive to reform its own – or Russians’ – bad economic habits.
The record bears this out.
Russia has staged a modest recovery from the recession.
But there is almost no innovation, the elites are happy to live comfortably off energy rents, and corruption continues unchecked.
Putin is the strong leader of a weak state, which, lacking a mobilizing or feedback mechanism, is incapable of carrying out a modernizing project.
There is a clear rift between Putin and Medvedev.
Medvedev is far from being Putin’s puppet.
They both believe that democracy must come sooner or later, but Putin’s emphasis is very much on later, whereas Medvedev has added a liberalizing voice to Russia’s public discourse.
Cynics say that this is simply a deceptive “good cop-bad cop” routine.
But words matter, and new rhetoric is a political force in its own right.
Moreover, Medvedev’s main strategic goal must be to secure a second term as president.
He cannot openly challenge Putin’s legacy, but he has to position himself as reaching beyond Putin.
It is a difficult balancing act, because Putin can always reclaim the presidency if he believes that his erstwhile protégé wants to dismantle the authoritarian state he has created.
Nineteen years after the fall of Communism, Russia’s direction remains as unclear as ever.
This matters chiefly to Russians, but, because Russia straddles the vast Eurasian land mass, lack of clarity about its future imposes a permanent fearfulness on the rest of us.
Is Russia part of the West?
Does its history and geography give it a distinctive Eurasian outlook capable of mediating a potential clash between Western and Eastern civilizations, or between Christianity and Islam?
Russia does not fit neatly into geopolitical categories, but remains too important to be ignored.
The Challenge of Russia’s Decline
CAMBRIDGE – As Europe debates whether to maintain its sanctions regime against Russia, the Kremlin’s policy of aggression toward Ukraine continues unabated.
Russia is in long-term decline, but it still poses a very real threat to the international order in Europe and beyond.
Indeed, Russia’s decline may make it even more dangerous.
Make no mistake: what is happening in Ukraine is Russian aggression.
President Vladimir Putin’s pretense that Russian troops were not participating in the fighting was all but shattered recently, when a Russian fighter in Donetsk confirmed to the BBC Russian service that they are playing a decisive role in rebel advances.
Russian officers, he reported, directly command large military operations in eastern Ukraine, including the siege and capture of the important transport center of Debaltseve in February.
But the threat posed by Russia extends far beyond Ukraine.
After all, Russia is the one country with enough missiles and nuclear warheads to destroy the US.
As its economic and geopolitical influence has waned, so has its willingness to consider renouncing its nuclear status.
Indeed, not only has it revived the Cold War-era tactic of sending military aircraft unannounced into airspace over the Baltic countries and the North Sea; it has also made veiled nuclear threats against countries like Denmark.
Weapons are not Russia’s only strength.
The country also benefits from its enormous size, vast natural resources, and educated population, including a multitude of skilled scientists and engineers.
But Russia faces serious challenges.
It remains a “one-crop economy,” with energy accounting for two-thirds of its exports.
And its population is shrinking – not least because the average man in Russia dies at age 65, a full decade earlier than in other developed countries.
Though liberalizing reforms could cure Russia’s ailments, such an agenda is unlikely to be embraced in a corruption-plagued country with an emphatically illiberal leadership.
Putin, after all, has sought to promote a neo-Slavophile identity defined above all by suspicion of Western cultural and intellectual influence.
Instead of developing a strategy for Russia’s long-term recovery, Putin has adopted a reactive and opportunistic approach – one that can sometimes succeed, but only in the short term – to cope with domestic insecurity, perceived external threats, and the weakness of neighbors.
He has waged unconventional war in the West, while pursuing closer ties with the East, raising the likelihood that Russia will end up acting as China’s junior partner, without access to the Western capital, technology, and contacts that it needs to reverse its decline.
But Russia’s problem is not just Putin.
Though Putin has cultivated nationalism in Russia – according to Harvard University’s Timothy Colton, at a recent meeting of the Valdai Discussion Club, Putin called himself the country’s “biggest nationalist” – he found fertile ground to plow.
Given that other high-level figures – for example, Dmitry Rogozin, who last October endorsed a book calling for the return of Alaska – are also highly nationalistic, a successor to Putin would probably not be liberal.
The recent assassination of former Deputy Prime Minister and opposition leader Boris Nemtsov reinforces this assumption.
So Russia seems doomed to continue its decline – an outcome that should be no cause for celebration in the West.
States in decline – think of the Austro-Hungarian Empire in 1914 – tend to become less risk-averse and thus much more dangerous.
In any case, a thriving Russia has more to offer the international community in the long run.
In the meantime, the US and Europe face a policy dilemma.
On one hand, it is important to resist Putin’s challenge to the fundamental principle that states should not use force to violate one another’s territorial integrity.
Though sanctions are unlikely to change Crimea’s status or lead to withdrawal of Russian soldiers from Ukraine, they have upheld that principle, by showing that it cannot be violated with impunity.
On the other hand, it is important not to isolate Russia completely, given shared interests with the US and Europe relating to nuclear security and non-proliferation, terrorism, space, the Artic, and Iran and Afghanistan.
No one will benefit from a new Cold War.
Reconciling these objectives will not be easy, especially given Ukraine’s continuing crisis.
At February’s Munich Security Conference, many US senators advocated arming Ukraine – an approach that could exacerbate the situation, given Putin’s conventional military dominance there.
With German leaders, including Chancellor Angela Merkel, opposed to this approach, pursuing it would also split the West, strengthening Putin’s hand further.
Others at the conference argued that the West should change the game by expelling Russia from SWIFT, the international framework for clearing bank payments.
But critics point out that this would damage SWIFT and the West, whose banks would lose the hundreds of billions of dollars that Russia currently owes them.
For their part, the Russians have warned informally that this would be “the real nuclear option.”
Designing and implementing a strategy that constrains Putin’s revisionist behavior, while ensuring Russia’s long-term international engagement, is one of the most important challenges facing the US and its allies today.
For now, the policy consensus seems to be to maintain sanctions, help bolster Ukraine’s economy, and continue to strengthen NATO (an outcome that Putin undoubtedly did not intend).
Putin’s Winning Streak
CHENGDU – Since Russia invaded Crimea last summer, the West has relied on a strategy of economic sanctions and international isolation to compel the Kremlin to withdraw its support for the rebels in eastern Ukraine.
But Russian President Vladimir Putin’s recent series of diplomatic successes – in particular, with Iran, North Korea, and Pakistan – has all but negated the effectiveness of this strategy.
To be sure, Putin was shunned at last month’s G-20 summit in Brisbane, with the Australian hosts and Western leaders berating him in bilateral meetings for violating Ukraine’s sovereignty and creating a rift with its Western economic partners.
Putin left early, proclaiming that Western sanctions were harming European economies more than Russia anyway.
But Putin was not deterred, proceeding to launch major initiatives with countries of vital security concern to the West, boosting Russia’s diplomatic leverage and enhancing its value to its most important, albeit still coy, partner: China.
As Putin declared in a recent interview, his government is committed to ensuring that Russia does not become internationally isolated behind a new Iron Curtain.
With Iran, the Kremlin has launched a joint bank that will enable Russian companies to expand bilateral trade without using Western currencies or worrying about Western financial sanctions.
The deal builds on this summer’s “oil-for-goods” agreement, whereby Russia will exchange its own goods for as many as 500,000 barrels of Iranian oil daily.
Bilateral security cooperation also progressed, with the Russian Navy holding a three-day maritime exercise with Iran’s Caspian fleet.
So far, efforts to weaken Russia’s relationship with Iran – not to mention its other major Middle Eastern ally, Syria – have repeatedly failed.
In October, Russia’s United Nations ambassador, Vitaly Churkin, faulted the US-led initiative against the Islamic State for its failure to involve Iran and Syria, which he called “logical allies in the fight against terrorism in the region.”
Moreover, Russia has signed an agreement that will ensure that its own firms remain the dominant foreign players in Iran’s civil nuclear-energy sector, even if a nuclear deal leads Western powers to ease sanctions on Iran.
Under the terms of the deal, Russia will help Iran construct at least two more nuclear reactors – and as many as eight.
The new plants, like Iran’s first Russian-built reactor at Bushehr, would be subject to International Atomic Energy Agency monitoring and use only Russian-made nuclear fuel, which would be returned to Russia for storage to prevent Iran from developing dangerous nuclear technologies.
Still, Russia has agreed to train more Iranian nuclear experts, and may allow Iran to manufacture some of the components of the uranium fuel rods itself.
In North Korea, Russian diplomacy has made even more progress.
Last summer, Putin forgave 90% of North Korea’s $11 billion Soviet-era debt, and announced that the remaining $1 billion could be used as part of a “debt-for-aid” program, funding health, energy, and educational projects in the country.
This opened the way for new development projects and increased bilateral and regional investment.
For example, Russian firms are planning to help rebuild North Korea’s railway network in exchange for access to the country’s undeveloped mineral resources.
Russia has hosted more senior North Korean leaders than any other country this year, including the reclusive leader Kim Jong-un’s special envoy, Choe Ryong-hae, a senior official in the ruling Workers’ Party, who spent an entire week meeting with Russian political and economic leaders.
In fact, Russian officials have indicated that Putin is prepared to become the first head of state to meet with Kim, who is eager to deepen ties with Russia to compensate for his faltering relationship with China.
November was also a good month for Russian diplomacy in Pakistan, with Sergei Shoigu becoming the first Russian defense minister to visit the country since 1969.
During his stay in Islamabad, Shoigu and Pakistani Prime Minister Nawaz Sharif signed an unprecedented agreement that could establish a framework for joint military exercises, reciprocal port visits, and a wide-ranging dialogue on regional security issues.
Moreover, the Kremlin has relaxed its opposition to Pakistan’s full membership in the Shanghai Cooperation Organization, along with China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan.
And the Russian government has agreed to sell Pakistan as many as 20 Mil Mi-35 “Hind E” heavy attack helicopters to aid in the fight against terrorism and drug trafficking.
Until now, Russia has refrained from selling advanced military equipment to Pakistan, in order to avoid damaging its relationship with India.
But, as Russia’s strategic relationship with India has strengthened, including through a joint mechanism to purchase and deliver Russian weapons to the Afghan government, Putin has gained the confidence to bolster cooperation with Pakistan.
The announcement of several more bilateral deals during Putin’s recent visit to India suggests that his confidence was merited.
All of this could augment Russia’s leverage with China, which has an interest in increasing its influence over Iran, North Korea, and Pakistan, but has subtly sought to exploit Russia’s isolation.
Russia’s vast natural-gas wealth also appeals to China, which drove a hard bargain in the two countries’ recently concluded 30-year, $400 billion gas-supply deal.
By giving key regional actors alternatives to bowing to US pressure on issues like nuclear non-proliferation and the fight against terrorism, Russia’s recent maneuvers have complicated American diplomatic efforts considerably.
Though Putin has not broken from the international consensus on these issues, he could block progress in order to compel the US to change its policies toward Ukraine, Syria, and other countries.
As a result, a dangerous global security situation could become even more so.
Why Russia’s Economy Will Not Collapse
GENEVA – The rapid depreciation of the ruble, despite a dramatic – and seemingly desperate – late-night interest-rate hike by the Central Bank of Russia (CBR) last month, has raised the specter of Russia’s economic meltdown in 1998.
Indeed, the West has sought to animate that specter in its ongoing confrontation with Russian President Vladimir Putin.
But, though Russia’s economy is undoubtedly in trouble, a full-blown collapse is unlikely.
Oil and gas account for more than 60% of Russia’s exports; other primary commodities make up much of the rest.
Given this, the recent sharp decline in world oil prices obviously represents a major shock – large enough, when combined with the effect of increasingly strict Western sanctions – to provoke a sizeable recession.
To make matters worse, commodity prices are expected to remain low for some time. In that case, the income loss would become much more than a temporary setback.
But Russia is no economic basket-case-in-waiting – at least not yet.
The situation today is very different from that in 1998, when Russia was running twin fiscal and current-account deficits.
Russia needed to borrow, and it was borrowing heavily in foreign currency.
This meant that as the ruble depreciated, Russia’s debts rose.
Eventually, default became inevitable.
By contrast, in recent years, Russia has enjoyed a sizeable budget surplus, and public debt is below 20% of GDP.
It is true that income from oil and gas, which represents the bulk of government revenues, has been halved when measured in dollars.
But the Russian currency has fallen by about the same percentage, meaning that the government’s income in rubles remains approximately unchanged.
Similarly, Russia’s current-account balance has been mostly in surplus in recent years.
Gross public and private external debt is below 40% of GDP, and much of it is denominated in rubles.
The sharp fall in export income is rapidly changing the situation, but Russia is starting from a comfortable position.
To panic would be premature.
The ruble’s free fall has been driven mainly by capital outflows.
Russia’s famous oligarchs have already stashed most of their wealth abroad, but they retain significant savings at home.
As the economic and political situation deteriorates, they are most likely pulling more money out.
Small savers have every reason to switch into foreign currency as well.
This has put the CBR in a challenging position.
The ruble’s depreciation is bound to fuel inflation, already around 11% and far above the CBR’s 5% target.
In that context, raising the interest rate sharply makes sense, and officials may be hoping that the hike will stem capital outflows – despite the risk that the decision, if interpreted as being aimed at defending the currency, could have the opposite effect.
The trouble is that the higher interest rates are bound to deepen Russia’s economic downturn, making the CBR an easy scapegoat.
Never mind that the central bank is not responsible for Russia’s troubles – the run on the ruble, the recession, and the flare-up of inflation – and that using interest rates to prevent capital outflows always fails.
Embattled politicians can be counted on to point the finger.
The threat to Putin is clear.
He risks the fate of his predecessor, Boris Yeltsin, who presided during a period of unusually low oil prices.
Until now, Putin has been lucky, coming to power just as oil prices started to rise.
Most Russian citizens credit him with two decades of rising living standards, following decades of decline.
Putin’s decision not to implement the unpopular reforms that would have created a strong non-oil export sector may have been bad for the economy’s long-term health, but it has allowed him to maintain widespread public support.
His economic good fortune, combined with his readiness to stand up to the West, has created a misguided impression in Russia that the country is, once again, a world power.
Many in the United States and Europe believe that ratcheting up economic pressure on Russia will help drive Putin out.
This is an enormously dangerous gamble.
As Russian living standards decline, Putin’s only viable strategy to remain in power will be an aggressive international posture.
Foreign military adventures, after all, are most appealing when the domestic front is on fire.
None of this means that the West should bow and forsake its principles.
But it does mean that the time has come for a diplomatic approach that does not depend on the prospect of Russia’s economic collapse.
Getting to Yes with Putin
PARIS – In the showdown with Russia over Ukraine, the weaknesses and divisions in European policy have been as encouraging for Russian President Vladimir Putin as America’s hesitant approach to Syria was.
If Europe is to act responsibly, three key concepts should define its policy toward Russia: firmness, clarity, and a willingness to find an acceptable compromise.
Without firmness, nothing is possible.
To be sure, Europe and the US made mistakes in the aftermath of the Soviet Union’s collapse.
The US, in particular, can be accused of acting arrogantly and unnecessarily humiliating Russia.
But the Soviet Union’s demise was the result of a long string of missteps, beginning with pre-Soviet Russia’s inability to come to terms with modernity.
Post-Soviet Russian leaders have yet to confront those failures.
By adopting an aggressive, revisionist stance, Putin has made a historic and strategic mistake.
Putin’s model should have been Peter the Great.
His ambition should have been to tie Russia’s future to that of Europe.
Instead, Putin turned for inspiration to Nicholas I, the most reactionary of Russia’s nineteenth-century czars.
The failure of Putin’s policy can be seen by comparing Russia with China.
The gap between the two – in terms of each country’s behavior and achievements – has never been greater.
At the G-20 Summit in Brisbane this month, China played its hand masterfully, highlighting its goodwill, particularly on the issue of climate change.
Russia, meanwhile, appeared self-isolated – pathetically so, given the impact of its seclusion on its economy.
Russia’s stock exchange is collapsing.
Its currency has lost 30% of its value.
The price of oil and gas – the mainstay of the Kremlin’s budget – has fallen by more than 25%.
In contrast to China, Russia’s economy depends heavily on its energy resources, leaving it vulnerable when global energy markets head south.
Putin’s only strength lies in Europe’s weakness and irresolution.
So Europe’s goal must be to set clear limits on Putin’s ambitions.
Whether he is seeking to weaken Ukraine or to enlarge Russia’s territory, Europe’s response must be firm.
Putin must be convinced that he cannot do either without paying a cost that Russians will not willingly bear.
Given the Kremlin’s ambiguous behavior – if not its deliberate policy of deceit – it seems obvious that France should not deliver a Mistral-class assault warship, which it previously agreed to sell to Russia.
It is far better for France to be perceived as an unreliable arms dealer than as an irresponsible strategic actor, caring only about its mercantile interests.
Firmness must be accompanied by clarity.
Putin is no longer the leader he was when he came to power in 2000, nor even the leader he was in 2008, when he grabbed pieces of Georgia by force.
Under his increasingly centralized and authoritarian rule, he has combined ultra-religious nationalism with Soviet-era tactics and practices.
It is a dangerous and volatile mix, relying on principles and methods that led Russia’s empires – Czarist and Soviet – to failure and ruin.
Firmness and clarity are indispensable.
But they are not sufficient to formulate a coherent European policy.
The goal cannot be simply to contain Russia.
A compromise must be reached.
True, Russia lacks the means to achieve Putin’s aims.
But the rest of the world nonetheless needs the Kremlin’s cooperation and goodwill as it pursues efforts such as the containment of Iran’s nuclear ambitions and the fight against the Islamic State.
As long as Russia remains intent on achieving unacceptable outcomes, accompanied by hints of nuclear saber rattling, reaching a compromise will be difficult.
Putin is far from an ideal partner with whom to attempt to reconcile the two key principles of international law: the right of a people to self-determination and the sanctity of national borders.
But doing so is not impossible.
Any compromise will have to address the future of Crimea, now under Russian domination, and maintain Ukraine’s independence.
Putin must be convinced that by gaining Crimea, he has lost Ukraine.
For their part, Ukrainian leaders will have to make a commitment not to join NATO, in exchange for Russia’s acceptance of Ukraine’s right to enter the European Union.
The progressive removal of sanctions would follow, allowing all parties to concentrate their energies on other priorities, be they economic or strategic.
In its negotiations with Russia, Europe holds the stronger cards.
But as long as they are poorly played, as they have been up to now, Putin will continue to win every hand.
A War of Values With Russia
COPENHAGEN – Russian authorities recently threatened to aim nuclear missiles at Danish warships if Denmark joins NATO’s missile-defense system.
This was obviously an outrageous threat against a country that has no intention of attacking Russia.
But it also reflects a more fundamental factor in the Kremlin’s foreign policy: desperation to maintain Russia’s strategic influence at a time of unprecedented challenges to its authority.
Of course, Russia’s leaders know very well that NATO’s missile defense is not directed at their country.
When I served as NATO Secretary General from 2009 to 2014, we repeatedly emphasized that the purpose was to defend Alliance members from threats originating outside the Euro-Atlantic area.
Anyone with even a rudimentary knowledge of physics and engineering – two subjects at which Russians excel – can see that the system is designed to do precisely that.
Russia’s nuclear threats, against Denmark and others, are the hallmark of a weak country in economic, demographic and political decline.
NATO has not aggressively victimized Russia, as Kremlin propaganda claims.
The current conflict between Russia and the West – centered on the crisis in Ukraine – is, at its core, a clash of values.
Recall how the Ukrainian conflict began: Tens of thousands of Ukrainian citizens from all parts of society demanded, in overwhelmingly peaceful demonstrations, an association agreement with the European Union.
No one was calling for a pogrom against Ukraine’s Russian-speakers, despite the Kremlin’s claims to the contrary.
And NATO membership was not part of the deal.
Yet Russia reacted swiftly and harshly.
Long before violence engulfed the protests, Russian officials began accusing the demonstrators of being neo-Nazis, radicals, and provocateurs.
As soon as Ukraine’s then-President Viktor Yanukovych fled Kyiv, Russian President Vladimir Putin began engineering the annexation of Crimea.
This was not only a gross violation of international law; it also directly contravened Russia’s oft-stated insistence that no country has the right to ensure its security at the expense of another.
The Ukrainian demonstrators marched against their government, not Russia’s.
Indeed, the notion that Ukraine could pose a military threat to Russia is nothing short of absurd.
Even if Ukraine were a NATO member, a war of aggression against Russia would be an absurd scenario, as it would not serve any of the allies’ interests.
For Russia, the threat posed by the Ukrainian protesters was existential.
In demanding change, freedom, and democracy – right on Russia’s doorstep, no less – the protesters challenged Putin’s model of “sovereign democracy,” in which the president eliminates all opposition, restricts media freedom, and then tells citizens that they can choose their leaders.
The Kremlin feared that if the Ukrainians got what they wanted, Russians might be inspired to follow their example.
That is why Russia’s leaders have been so keen to label Ukraine’s leaders as Russophobes and fascists.
It is why they have portrayed the Baltic States for years as dysfunctional oppressors of their Russian citizens.
And it is why they are now portraying the EU as decadent, immoral, and corrupt.
The Kremlin is trying desperately to convince Russians that liberal democracy is bad, and that life under Putin is good.
That requires not only spreading damaging lies at home, but also sowing violence and instability among its neighbors.
In the face of a massive Russian propaganda assault, the West must continue to stand up for Ukraine, as well as for Georgia and NATO members like Estonia, Latvia, and Lithuania.
Despite whatever pain we incur, we must maintain – and, if necessary, deepen – sanctions against Russia and reinforce NATO’s front line.
And we must face up to the reality that, at long last, we may have to pay for our defense.
The West’s greatest strength is democracy; it is what has enabled us to secure peace for two generations and bring an end to communist rule in Europe almost without a shot being fired.
Though liberal democracy is far from perfect, it remains the best defense against extremism and intolerance – and the most powerful facilitator of human progress.
If the West allows Russia to attack its neighbors simply because they might inspire Russians to seek reform, it will send the message that democratic values are not worth defending.
It will undermine the West’s role as a model of prosperity and freedom that societies worldwide hope to emulate.
And it will eliminate not only the West’s remaining moral authority, but also the sense of purpose that animates NATO.
Such an approach would expose the West to attacks by Putin and similar aggressors.
And it would be a slap in the face to all of the courageous men and women worldwide who risk their lives every day in the pursuit of freedom and democracy.
No one should be fooled by the Kremlin’s spin doctors.
The conflict in Ukraine is not about Ukraine.
Nor is it about Russia, or even about NATO.
It is about democracy.
Putin in Denial
WASHINGTON, DC – As 2014 came to a close, an enormous financial crisis erupted in Russia.
World oil prices had fallen by almost half since mid-June, and the ruble plummeted in December, finishing the year down by a similar margin.
Russia’s international reserves have fallen by $135 billion, and inflation has reached double digits.
Things are only going to get worse.
The current oil price will force Russia to cut its imports by half – a move that, together with the continuing rise in inflation, will diminish Russians’ living standards considerably.
Add to that ever-worsening corruption and a severe liquidity freeze, and a financial meltdown, accompanied by an 8-10% decline in output, appears likely.
Russia’s ability to negotiate its current predicament hinges on its powerful president, Vladimir Putin.
But Putin remains unprepared to act; in fact, so far, he has pretended that there is no crisis at all.
In both of his major public appearances in December, Putin referred simply to the “current situation.”
In his New Year greeting, he boasted about the annexation of Crimea and the successful Winter Olympics in Sochi, carefully avoiding any reference to the economy.
But, with the economy in free fall, Putin cannot pretend forever.
And when he finally does acknowledge reality, he will have little room for maneuver.
Of course, Putin could withdraw his troops from eastern Ukraine, thereby spurring the United States and Europe to lift economic sanctions against Russia.
But this would amount to admitting defeat – something that Putin is not prone to do.
Likewise, short of initiating a major war, Putin has few options for driving up oil prices.
Moreover, even before the oil-price collapse, crony capitalism had brought growth to a halt – and any serious effort to change the system would destabilize his power base.
In fact, Putin’s leadership approach seems fundamentally incompatible with any solution to Russia’s current economic woes.
Though accurate and timely statistics on Russia’s economy – needed to guide effective measures to counter the crisis – are readily available to the public online, Putin claims not to use the Internet.
Instead, the journalist Ben Judah reports, Putin receives daily updates on Kremlin politics, domestic affairs, and foreign relations from his three key intelligence agencies.
His actions suggest that he considers economic data to be far less important than security information – perhaps the natural attitude of a kleptocrat.
To be clear, there is no dearth of economic expertise among Russian policymakers.
On the contrary, Russia’s key economic institutions boast competent managers.
The problem is that policymaking is concentrated in the Kremlin, where economic expertise is lacking.
Indeed, the last of the economic heavyweights – all of them holdovers from the 1990s – in Putin’s personal circle was Alexei Kudrin, who resigned as Finance Minister in 2011.
Unlike in the US, none of Russia’s top economic managers sits on the National Security Council.
Putin has usurped authority not just from his more knowledgeable colleagues, but also from the prime minister, who has traditionally served as Russia’s chief economic policymaker.
Indeed, since Putin returned to the presidency in 2012, Prime Minister Dmitri Medvedev has been all but irrelevant.
In short, Putin – who is no economic expert – makes all major economic policy decisions in Russia, delivering orders to top managers of state-owned enterprises and individual ministers in ad hoc, one-on-one meetings.
As a result, Russian economic policymaking is fragmented and dysfunctional.
Nowhere is this lack of coordination more obvious than in the sensitive currency market.
In Russia, unlike in most other countries, the central bank does not retain the exclusive right to intervene.
When the ruble tumbled in December, the finance ministry – which holds almost half of Russia’s foreign reserves, $169 billion, in two sovereign-wealth funds – deemed the central bank’s intervention to be insufficient.
So it announced that it would sell $7 billion from its reserves to boost the ruble – a move that caused the exchange rate to overshoot on the upside.
When the exchange rate plummeted again, the Kremlin urged the five largest state-owned exporting companies to exchange a portion of their assets into rubles, leading to another overshoot, followed by yet another sharp decline.
Clearly, such uncoordinated interventions are exacerbating currency-market turmoil, with the ruble’s value fluctuating by 5% – and as much as 10% – in a single day.
Russia’s fiscal situation, determined by Putin’s arbitrary budget management, is hardly better.
Putin’s priorities are clear: first come the military, the security apparatus, and the state administration; second are the major infrastructure projects from which he and his cronies make their fortunes; social expenditures (primarily pensions), needed to maintain popular support, come last.
Suddenly, oil revenues are no longer sufficient to cover all three.
As hard as the finance ministry may try to balance expenditures and revenues, it lacks the needed political weight.
Last year, the central government delegated more education and health-care expenditures to regional bodies, without allocating more resources – and there was nothing anyone could do about it.
If Putin wants to save Russia’s economy from disaster, he must shift his priorities.
For starters, he must shelve some of the large, long-term infrastructure projects that he has promoted energetically in the last two years.
Though the decision in December to abandon the South Stream gas pipeline is a step in the right direction, it is far from adequate.
Likewise, Putin should follow Finance Minister Anton Siluanov’s sensible recommendation to cut public expenditure, including on social programs and the military, by 10% this year.
But experience suggests that Putin is unlikely to do so.
Russia faces serious – and intensifying – financial problems.
But its biggest problem remains its leader, who continues to deny reality while pursuing policies and projects that will only make the situation worse.
Russia Hits the Reset Button
MOSCOW – NATO soldiers marching in Red Square on V-E Day;
Moscow agreeing on a compromise resolution of the 40-year-old sea-boundary dispute with Norway; the sight of Prime Minister Vladimir Putin kneeling at the memorial to the Polish officers murdered by Stalin at Katyn: these are a few glimpses of what a European newspaper described as a kinder, gentler Russia.
But three questions immediately arise: Is this real?
Why the change?
And how to respond to Russia’s new foreign policy?
In this case, what you see is what you get.
Russia’s tone, especially toward the United States, began to change last year, but the Kremlin’s support for a fourth United Nations Security Council sanctions resolution on Iran demonstrates that, today, there is real substance.
Moreover, surrendering territorial claims in the Arctic – the stakes in the dispute with Norway – is no small matter.
Putin’s joint visit to Katyn with Polish Prime Minister Donald Tusk in April was, of course, symbolic.
But serious conversations between the two men started last September, during Putin’s visit to Gdansk to mark the 70th anniversary of WWII’s start.
The kneeling act was also followed, just three days later, by Russian officials going out of their way to help investigate the air crash in Russia that killed Polish President Lech Kaczynski and scores of Polish dignitaries, and to pay respects to the victims.
In May, an apparently genuine internal Foreign Ministry document made it clear that the Kremlin now prioritizes relations with America and Europe.
All of this is a far cry from using the Red Square platform to compare George W. Bush’s policies to those of the Third Reich, resuming air patrols along the Norwegian coast and into the North Atlantic and the Caribbean, or threatening Poland with deployment of Iskander missiles in Kaliningrad.
Four factors have contributed most to this positive reversal: the Georgia war, the global economic crisis, the Obama factor, and China’s relentless rise.
The Georgia war demonstrated how quickly relations with the US could deteriorate, almost to the point of reviving the Cold War, leaving Russia isolated and in a generally weak position.
The economic crisis destroyed illusions of sustained energy-fueled growth through at least 2020, and the hubris that went with it.
Moreover, the Obama administration, by having reset US foreign policy, removed the principal irritants in Russia-Western relations, such as the prospect of NATO enlargement to Ukraine and Georgia; close relations with Georgian President Mikheil Saakashvili, and plans for the deployment of US defensive missiles in Central Europe.
Barack Obama also showed genuine respect and openness to Russia.
Finally, as China has become more confident and assertive, its shadow over Russia has grown longer and thicker.
Faced with this situation, the Russian leadership sees both new dangers and new opportunities, which are often intimately interlinked.
The country’s backwardness vis-à-vis not only the West, but also some of the emerging powers drives home the need to modernize Russia’s technological base.
But where is the money for that?
Russia’s worsening credit rating and the tougher borrowing terms in the international market are forcing Russia to compete harder for capital.
Obama’s openness and pragmatism have turned the US into a partner, but it is uncertain how long he will stay in the White House and how strong will he will be in the future.
China is both a market and a partner, but this partnership looks increasingly tilted in China’s favor.
So Russia needed to adjust its foreign policy.
Passionate defense of a diminished status makes less sense than practical efforts to arrest decline and enhance Russia’s real power.
Multipolarity exists, but Russia is not much of a pole.
Summits of the BRIC (Brazil, Russia, India, and China) leaders are still held, but the real focus of Russia’s policy is the OECD countries, which have technology and money.
Russian foreign policy’s new central task is to channel those resources to Russia’s modernization drive, for which improved relations with the US are essential.
Still, there are important caveats.
The Russian government’s concept of modernization is too narrow to succeed.
Unless the basic conditions for doing business in Russia improve substantially, and until the Russian state starts to modernize itself, technology transfers will have little effect.
Putin himself has furnished proof of that.
Speaking recently at the Russian Academy of Science, he said that the Soviet economy was structurally incapable of using most of the technological secrets procured through KGB industrial espionage.
Without an independent judiciary, secure property rights, and a check on corruption, Putin’s modernization will mimic Brezhnev’s.
The danger is not of the Kremlin losing interest in technology transfers from the West, but rather its inability to create the right legal, business, and political environment in Russia to capitalize on them.
The West has broadly welcomed Russia’s new line.
Obama has sent a nuclear energy cooperation agreement with Russia to Congress, while the European Union has offered a “partnership for modernization.”
Both want Russia to complete its accession to the World Trade Organization.
This is crucial.
There can be no better foundation for modernization than WTO membership.
When this is achieved, the next steps are a permanent normal trade status for Russia in the US, and practical moves toward a pan-European free-trade area between the EU, Russia, Ukraine, and other countries.
Europe’s potentially most effective instrument to help Russian modernization is gradual abolition of the visa regime with Russia.
The time to act is now.
Within a few years, when it becomes clear to the Russian leadership that modernization conceived as technological innovation is too narrow to succeed, important choices will have to be made. Either the scope of modernization will be broadened, or modernization will be aborted in favor of regime preservation.
Forward-looking elements in Russia will require compelling arguments if their case is to prevail.
The Battle for Russia
PARIS – When I heard the news about the assassination of the Russian politician Boris Nemtsov in Moscow, I was reminded of a conversation I once had with a Soviet dignitary before the fall of the Berlin Wall.
We were walking alone in the park at Versailles, talking in general terms about the twentieth century and its tragedies when my Soviet guest suddenly uttered something that has stayed with me ever since. “Russians have suffered more in this century than any other people,” he said.
“During the First and Second World Wars, no other country suffered as many deaths as we did. But it was Soviet power, through a combination of purges and forced famines, that killed more of its children than all the enemies of Russia combined.”
The tragedy of Russia is that it poses as great a threat to itself as it does to its neighbors.
As Europe faces off with Russian President Vladimir Putin over Ukraine, a larger and ultimately more important battle is taking place within Russia itself, one that pits the country’s rich culture against the cruel mendacity of its politics.
Given the nature of Putin’s regime, we will likely never know the truth behind Nemtsov’s murder.
But it is impossible to contemplate the case without thinking that somehow, directly or indirectly, the path to assassination started near the Kremlin’s door.
Putin has expertly used an endless and highly professional barrage of propaganda to widen the gulf between the beliefs of most Russians and those of most Westerners.
Indeed, official propaganda – playing off deep strains of nationalism – is the key that allows the Kremlin to foment a climate of jingoism and intolerance.
The power of Putin’s propaganda can be seen in the way it resonates far beyond Russia’s borders.
During Soviet times, it was easy to understand how the communist ideal could seduce those of generous spirit, even if its promise of a just and free society ultimately turned out to be a lie.
What is harder to explain – beyond the crass financial and commercial interests of some – is why so many in Western Europe demonstrate such an affinity for Russia today.
For some, it may be the allure of anti-Americanism, mixed with the defense of conservative values and the rejection of liberal “decadence” (for which Exhibit A is the West’s growing social acceptance of same-sex marriage).
Others may be searching for an ally in the face of a greater threat.
Just as some in the West advocated cooperation with Nazi Germany against what they saw as the far more menacing Soviet threat, so today some support Putin as a partner against the danger of fundamentalist Islam.
Russia’s Western allies do not necessarily like the regime – just as many of Germany’s supporters abhorred the Nazis – but there seems to be no alternative.
In tough times, according to this view, one cannot choose one’s allies.
The result can be seen in the perfectly logical alliance between Europe’s populist parties – for many of which the greater threat seems to be the European Union – and Putin’s kitschy imperialism.
For now, in the struggle for the Russian soul, its venal politics seems to have the upper hand.
But, although the country remains mired in violence and fear, there are signs of light in the darkness.
In the immediate aftermath of the fall of the Soviet Union, I was lucky enough to meet young idealistic Russians like Nemtsov.
They believed in democracy and the rule of law and did not consider these values to be incompatible with Russian history and culture.
In their enthusiasm and audacity, they reminded me of the young generals of the French Revolution.
But the battlefields these young Russians were fighting on were in the realm of ideas, and their struggle was for freedom, not territory.
These young idealists may have lost many battles, but the war is far from finished.
Their banners rose again, shortly after Nemtsov’s assassination, when tens of thousands of Russians took to the streets in protest.
The forest of Russian flags provided a powerful symbol, a promise that another Russia was possible – and may yet still be.
Putin’s Syrian Roulette
LONDON – Two recent tragedies – the downing of a Russian civilian airliner over the Sinai Peninsula and the terrorist massacre in Paris two weeks later – seemed to give Russia and the West something to agree upon: the Islamic State (ISIS) must go.
But a closer look at Russia’s military operations in Syria – not to mention Turkey’s downing of a Russian warplane – suggests that it would be premature to conclude that Russian and Western objectives can be brought into alignment.
Of course, Russia claims that its Syrian intervention is aimed at defeating the Islamic State and “other terrorists.”
But, according to the US State Department, more than 90% of Russian airstrikes so far have been directed not at ISIS or the Al Qaeda-affiliated Jabhat al-Nusra, but at the armed groups that are fighting both ISIS and Russia’s ally, Syrian President Bashar al-Assad.
In fact, ISIS has made advances in Aleppo since the airstrikes began.
This is not to say that annihilating ISIS is not on Russian President Vladimir Putin’s agenda.
It almost certainly is.
But he also has other objectives: to protect Assad’s regime, to expand Russia’s military presence and political influence in the eastern Mediterranean and the Middle East, and perhaps even to push up the price of oil.
So far, Russian airstrikes have been concentrated in Latakia, Hama, and Idlib, where they have enabled Assad’s regime to make several advances.
Putin seems to be trying to help Assad secure his coastal strongholds, toward which armed rebels made significant advances in August and September.
These areas are part of the so-called “useful Syria,” which also includes the Lebanese border, Damascus, parts of Aleppo, and major cities in western, southern, and central Syria.
Assad must maintain control over these areas to fortify his position in any political negotiations and eventual settlement, including a potential partition.
Moreover, Russia’s installation of sophisticated air-defense capabilities in Syria has nothing to do with ISIS, which has no air force.
Instead, it sets the stage for a no-fly zone, which would protect Assad’s regime and serve as a strategic counterweight to America’s presence at Turkey’s Incirlik Air Base.
In fact, Turkey’s downing of the Russian warplane – which, incidentally, was targeting Syrian rebel groups – is prompting Russia to step up these efforts.
Russian Defense Minister Sergei Shoigu has now announced that a cutting-edge S-400 SAM system will be deployed to Russia’s air base in Latakia.
But there are serious problems with Putin’s strategy.
For starters, the tactical airstrikes on which Russia is relying have not proved particularly effective in the past.
Russia’s air force lacks the breadth of precision weapons and targeting systems fielded by the West – a reality that produced horrific consequences during the Georgian war in 2008 and the first and second Chechen wars in 1994-1996 and 1999-2009.
Tolerance for “collateral damage” is much higher in Russia than in the West – and the reality of it plays into the hands of terrorist recruiters.
The Kremlin has also been attempting to stoke ethnic tensions – a tactic used since the Czarist era – with Foreign Minister Sergey Lavrov claiming that Russia intervened in Syria to “protect minorities.” Putin made the same claim when he sent troops to invade two ethnic enclaves in Georgia, Abkhazia and South Ossetia, and recognized them as independent republics.
Likewise, he justified Russia’s annexation of Crimea and invasion of parts of eastern Ukraine by emphasizing their substantial “ethnic Russian” populations.
In the Middle East, however, the outcome could be reminiscent of what followed the Soviet invasion of Afghanistan 36 years ago.
Regional players like Turkey and Saudi Arabia adamantly oppose leaving Assad in power, as that would advance the interests of their rivals, Iran and Hezbollah.
Fifty-five Saudi clerics have released a statement urging “jihad” against the Russian invaders.
Syria’s Muslim Brotherhood, whose leaders are based in Turkey and northern Syria, have echoed that sentiment, declaring that jihad against the “Russian invasion” is the “religious duty” of “every able-bodied Muslim.”
If domestic resistance succeeds in driving Russia out of Syria, as happened to the Soviet Union in Afghanistan and to Russia in the first Chechen war, Putin could face trouble at home.
Military defeat, combined with worsening economic conditions, would likely turn much of the public – and more than a few of his cronies – against him.
But other outcomes are also possible.
A partial Russian victory, like that in Georgia or Ukraine, would mean carving out pieces of western Syria under Russo-Iranian protection, and ultimately the de facto partition of the country.
An outcome like that of the second Chechen war – less likely, given the major differences between the two theaters – would entail the installation of a loyalist regime, whether led by Assad or someone else, and the persistence of instability and a rural insurgency.
The least likely scenario is one in which Russia leads a negotiating process that produces long-term peace and stability.
A Russian-led “mediation” in Tajikistan ended the civil war of 1992-1997, and led opposition movements to hand over their weapons or to integrate into the regular army under Russian guarantees.
But a few years later, many of these movements were banned, and their leaders and members were in jail, in exile, or in graves.
None of these scenarios correspond with the slogans of Syria’s 2011 revolution, or with Western interests in stabilizing the country, stemming refugee outflows, and, eventually, promoting democratization.
Unfortunately, this is not surprising: as has been true so many times in the past, the West currently has no credible strategy for containing Putin, even when he has no clear exit strategy or endgame in mind.
All that is certain now is that, whatever happens in Syria, it will not happen without Russia.
Russia’s Indefensible Military Budget
PARIS – On May 9, Russia held its largest military parade since the Soviet era.
In the tradition of that era, Red Square was filled with the army’s latest equipment, including the new T-14 “Armata” tank.
And, also in the tradition of that era, ordinary people were quick to joke when the tank stalled during the parade rehearsal: “The Armata truly has unprecedented destructive power; a battalion can destroy the entire Russian budget!”
The joke, though an exaggeration (each tank costs about $8 million), highlighted another throwback to Soviet life: overspending on the military.
There is now no question that the Kremlin’s military spending is threatening Russia’s fiscal position, which has already been undermined by low world oil prices and the West’s economic sanctions.
And this spending spree shows no sign of slowing.
In recent months, growth in military expenditure has accelerated rapidly, exceeding the authorities’ already ambitious plans.
The 2015 budget that Russia developed last summer was based on the assumption that oil prices would remain at $100 per barrel, with annual GDP growth and inflation at about 2% and 5%, respectively.
Then oil prices plummeted, the economy contracted, and inflation reached double digits.
Russia’s government was slow to accept reality, with President Vladimir Putin signing a revised budget only last month.
The good news is that the new budget is much more realistic, as it cuts spending by about 2% in nominal terms.
Given annual inflation of at least 11%, this amounts to roughly an 8% real reduction in planned spending.
Nonetheless, as lower oil prices and economic contraction undermine budget revenues, the deficit will increase from 0.5% to 3.7% of GDP.
This is a major problem, given that Russia, despite its miniscule sovereign debt of only 13% of GDP, cannot borrow on global financial markets, owing to Western sanctions.
As a result, the Russian government’s only option for financing its deficit is to tap its reserve fund, which is meant to cushion the economy against shocks.
With the fund amounting to only about 6% of GDP, Russia can maintain a 3.7% deficit for less than two years before it either has to withdraw from Ukraine to gain relief from Western sanctions, or undertake a major – and, for Putin, politically dangerous – fiscal adjustment.
But even this scenario may be too optimistic.
According to just-published budget data, during the first three months of 2015, non-defense spending amounted to 16.5% of quarterly GDP, as planned; but military expenditure exceeded 9% of quarterly GDP – more than double the budgeted amount.
In other words, Russia has already spent more than half of its total military budget for 2015.
At this rate, its reserve fund will be emptied before the end of the year.
The fact that the reserve fund is now being consumed in this way represents a decisive step in a protracted debate over Russia’s military spending.
That debate began in 2011, when then-President Dmitri Medvedev proposed raising military spending by $600 billion, taking it from under 3% to above 4% of GDP, over ten years.
When then-Finance Minister Alexei Kudrin – who had presided over budget surpluses, helped to build up the reserve fund and cut state debt considerably – argued that Russia could not afford such an increase, he was fired.
The plan was adopted soon after.
But sacking Kudrin did not change the facts.
The Kremlin’s goal was extremely ambitious, both by Russian and global standards.
Most European countries now spend less than 2% of GDP on defense;
China spends slightly more than 2%; and the US spends about 3.5%.
According to the World Bank, only nine countries in the world, including Saudi Arabia, the United Arab Emirates, and Israel, spend more than 4% of GDP on their militaries.
Russia simply cannot sustain the allocation of such a large share of its budget to defense spending.
Moreover, its defense industry lacks the capacity to produce modern equipment as quickly as the plan anticipated.
Since the plan’s adoption, scandals involving overpricing and corruption have multiplied, with many defense executives losing their jobs.
And still, until this year, actual defense spending remained at about 3% of GDP.
Against this background, Russia’s recent military spending binge is all the more notable, for it suggests that the government, desperate to retain popular support amid declining economic performance, is less interested in investing in the most modern equipment than in showing its support for the rebels in eastern Ukraine, even at the price of further economic hardship.
The Kremlin might even be preparing a major offensive for the coming months.
Alternatively, it may have no strategy, with unusually high military spending simply reflecting the higher-than-expected costs of the conflict.
In any case, Kudrin’s economic and financial logic is even more valid today than it was at his dismissal from office.
If Russia could not afford a 4%-of-GDP defense budget in good times, it cannot possibly manage such a high rate of military spending now, when it confronts rock-bottom oil prices, Western sanctions, and economic recession.
Of course, the government could be betting on an oil-price resurgence; after all, prices have historically bounced back when Russia was in need.
The Cold War and the Cold Shoulder
TBILISI – The Ukraine crisis has shattered key Western assumptions about Russia, and many analysts and policymakers have fallen back on the belief that Russian President Vladimir Putin must be acting irrationally.
But it is Western assumptions that need to be questioned.
In particular, what has made Russia so keen to undermine the current international order, first in Georgia in 2008 and in Ukraine now?
On the surface, these campaigns seem like post-imperial territorial conflicts.
Russia, according to this view, recognizes that it cannot get its old empire back, so it is chipping away at neighboring territories instead, justifying its actions by a nebulous concept of ethnic and historical justice.
And, like Serbia’s former President Slobodan Milošević, Putin dresses up foreign aggression as national salvation in order to bolster his domestic popularity and marginalize his opponents.
Putin’s approach closely resembles the vision set out by Russian Nobel laureate Alexander Solzhenitsyn in his 1990 essay “Rebuilding Russia.”
Referring to the former Soviet satellite states, he suggested letting those “ungrateful peoples” go, but keeping Russia’s rightful territories, such as eastern and southern Ukraine, northern Kazakhstan, and eastern Estonia, with their ethnic Russian populations, and Georgia’s Abkhazia and South Ossetia, which are cultural extensions of Russia’s North Caucasus.
But it would be misleading to portray Putin as merely another out-of-control national romantic.
He singled out Georgia and Ukraine not to redeem Russians’ emotional commitment to South Ossetia or Crimea, but to punish those countries for their dangerous liaisons with the West – in particular Georgia’s ambition to join NATO and Ukraine’s desire to sign an association agreement with the European Union.
Indeed, Russia’s reaction is consistent with its recurrent discourse about being “squeezed out” of its own neighborhood and “encircled” by hostile Western powers.
Western politicians’ vain attempts to convince Putin that the eastward expansion of NATO and the EU would benefit Russia by creating a zone of peace and prosperity along its borders were naive and insulting.
It is not for Americans or Europeans, however reasonable they may sound, to tell Russia what is or is not in its interests.
From the current Russian regime’s perspective, declarations that EU and NATO expansion is about spreading values, accountable institutions, and good governance, not military or economic competition, is beyond hypocritical.
The spread of Western values and institutions is precisely what Putin fears most.
Supporting democracy on Russia’s borders can have a dangerous “demonstration” effect, by encouraging ordinary Russians to demand the same for themselves.
Indeed, Putin believes that the past decade’s democratic uprisings in Georgia and Ukraine were Western conspiracies against Russia.
That may sound paranoid, but his anxiety is rational: European-style democracy on Russia’s borders would make it much harder to maintain authoritarian rule at home.
But the insult represented by attempted EU and NATO expansion runs deeper.
Russia’s Cold War defeat and the loss of its empire transformed the country from a global superpower into a second-rate regional actor within just a couple of years, with a decade of economic upheaval and decline to follow.
This geopolitical collapse occurred in part because Russians (not to mention their “captive nations” in Central and Eastern Europe) were seduced into believing that Western-style democracy and free markets worked better.
This implied that the West was morally superior, too – a difficult notion for the country of Pushkin and Dostoyevsky to swallow.
Given this mindset, Putin and his supporters at home and abroad view democracy and free markets not as the path to peace and prosperity, but as part of a wicked conspiracy to destroy Russia.
It does not help that when many Russians recall the country’s experiment with democracy in the 1990s, they remember nothing but misery and humiliation.
Western leaders are deceiving themselves if they think that cajoling and reasoning with Putin, or offering token signs of respect, can break that mindset.
But turning a blind eye to Russian aggression, as the West did when Russia attacked Georgia in 2008 – portraying the conflict as a clash between two hotheaded leaders – is not an option, either.
In short, while it is perfectly rational for the West to want Russia as a partner, Russia considers the US and the EU enemies.
The West can offer no conceivable partnership terms that Putin would accept.
Either the West jettisons its fundamental values, or Russia must change.
History suggests that Russia changes only when it experiences an unambiguous geopolitical defeat.
Its loss in the Crimean War of 1853-1856 led to the abolition of serfdom and other liberal reforms.
Its defeat by Japan in 1905 brought about Russia’s first parliament and the reforms of Pyotr Stolypin.
The Afghanistan debacle of the 1980s created the environment that led to Mikhail Gorbachev’s perestroika.
Ultimately, the Russian people will decide for themselves what constitutes a defeat.
If Putin is able to portray his attack on Ukraine as a success, Russia will continue to bully and posture on the international stage.
But if Russians come to believe that Ukraine was a misadventure, a very different country could emerge.
Russian Realities
At first glance, Russia bears many of the hallmarks of a great power.
It possesses a large arsenal of nuclear weapons, a permanent seat on the United Nations Security Council, enormous reserves of oil and other minerals, a recent record of robust economic growth, and more territory than any other country despite being only three-fourths the size of the former Soviet Union.
Closer inspection, however, reveals a different Russia.
Much of its wealth reflects the increased value of energy, not productive economic activity.
Russia’s armed forces are able to project little in the way of usable military might.
The country’s population now numbers less than Pakistan’s and is declining by 500,000 people per year, leaving large portions of its vast landmass mostly uninhabited.
Male life expectancy is now less than 60 years, owing to alcoholism, crime, drugs, disease, and a dreadful public health system.
All this adds up to a Russia that, if not quite a Potemkin state, is anything but great.
There are limits to what Russia can accomplish in the world in any positive sense, although its capacity to be a spoiler or create problems is considerable.
Decisions made in Moscow can affect world energy prices, the future of the Iranian and North Korean nuclear programs, and the success of terrorists.
For better and for worse, Russia still matters.
But how much will it matter?
One question concerns political stability.
In order to remain intact and functional, the country needs a political system and a society that persuade talented young people to stay in Russia – and that provides them with the education to develop their talent.
There also must be limits on the power of the central government and the presidency, a degree of regions autonomy, and rule of law – in short, the rudiments of a modern state and democracy.
Alas, Russia is moving more in the opposite direction; political power is becoming more, not less, concentrated.
The economic picture is similarly uncertain.
High energy prices are a boon to Russia’s economy, but, as is often the case in the Middle East and other oil- and gas-rich regions, they can be a burden as well, feeding corruption and discouraging real economic activity.
The challenge for Russia’s leaders is to use its oil wealth to educate Russia’s people and rebuild Russia’s infrastructure, thereby ensuring global competitiveness and employment growth.
Russia also needs a national security strategy to complement its political and economic renewal.
All stick and little carrot has failed to quell Chechen nationalism, and President Vladimir Putin’s similarly heavy-handed attempts to control Russia’s so-called “near abroad” – as in Ukraine during the Orange Revolution – have proven no more successful.
Nor will any posture succeed that seeks to put Russia forward as a geopolitical counterweight to the United States.
Such a strategy might be politically satisfying to some, but Russia lacks the resources to compete with the US and needs good bilateral relations in order to proceed with its own internal transformation.
At the same time, the best way to help bring about a more liberal Russia – one that promises to be more stable at home and more responsible abroad – is by working with it. The outside world can and should support the strengthening of civil society, independent media, and a true transfer of political power in 2008.
Isolating Russia makes no sense.
Russian membership in the World Trade Organization has the potential to strengthen the rule of law, combat corruption, and give Russia a stake in better relations with the outside world. Closer ties between Russia and the European Union make sense for similar reasons.
There should also be some understanding for what Russia and the Russian people have gone through over the past two decades.
Losing a country and a special place in the world is the sort of trauma that could lead to the emergence of extreme and potentially violent nationalism.
Russia should be treated as a major power, which means consultations on important global issues.
Its voice should be heard on matters ranging from terrorism and weapons proliferation to global climate change and energy policy.
Next year’s G-8 meeting in Russia provides an opportunity to do all of this and more.
Amid all the attention being devoted to China and the potential for competition or even conflict with the US, it should not be forgotten that Russia’s future hangs in the balance, for history suggests that declining powers can pose as great a challenge to world order as rising ones.
One need only consider Austria-Hungary and Ottoman Turkey at the start of the twentieth century or the former Yugoslavia at its end.
So far, the decline of what was the Soviet Union has proceeded relatively well;
Russia, the principal successor state, has avoided all-out civil war and war with its neighbors.
But the challenge of integrating Russia remains.
At best, Russia is a potential partner in the effort to manage globalization’s challenges; at worst, it is a potential problem.
What is certain is that how Russia develops will be a key factor determining the character of this century, no less than the last.
The Russian Threat Runs Out of Fuel
BRUSSELS – For Europe, the defining event of 2014 was Russia’s annexation of Crimea and military intervention in eastern Ukraine’s Donbas region.
The Kremlin’s actions directly challenged key principles that have guided Europe for more than six decades, particularly the renunciation of the use of force to alter national borders.
But Russia is in no position to sustain its aggressive foreign policy.
It has often been argued that Russia was reacting to the perceived encroachment on its “near abroad” by the European Union and NATO.
But history suggests a simpler explanation: A decade of steadily rising oil prices had emboldened Russia, leaving it ready to seize any opportunity to deploy its military power.
Indeed, the Soviet Union had a similar experience 40 years ago, when a protracted period of rising oil revenues fueled an increasingly assertive foreign policy, which culminated in the 1979 invasion of Afghanistan.
Oil prices quadrupled following the first oil embargo in 1973, and the discovery of large reserves in the 1970s underpinned a massive increase in Soviet output.
As a result, from 1965 to 1980, the value of Soviet oil production soared by a factor of almost 20.
Burgeoning oil wealth bolstered the regime’s credibility – not least by enabling a significant increase in military spending – and rising economic and military strength gave the Soviet Union’s geriatric leadership a rejuvenated sense of invulnerability.
The invasion of Afghanistan was not merely an improvised response to a local development (a putsch in Kabul); it was also a direct result of this trend.
Putin’s reaction to the Euromaidan demonstrations in Ukraine followed a similar pattern.
In both cases, a seemingly low-cost opportunity was viewed as yielding a large strategic gain – at least in the short run.
Indeed, while the devastating consequences of the Soviet Union’s Afghan adventure are now well known, at the time the invasion was viewed as a major defeat for the West.
The Soviet army’s retreat in 1988 is usually ascribed to the Afghan insurgency, led by Pakistan-trained mujahedeen with support from the United States.
But the decline in oil prices during the 1980s, which cut the value of Soviet output to one-third of its peak level, undoubtedly played a role.
Indeed, it led to a period of extreme economic weakness – a key factor in the Soviet Union’s dissolution just three years after its withdrawal from Afghanistan.
During the 1990s, Russia was too preoccupied with its own post-Soviet political turmoil to object to EU or NATO enlargement to the east.
Nor did it have the wherewithal, as its own production and oil prices continued to decline, hitting a trough of $10 per barrel in 1999-2000.
Russia’s stance changed gradually during the early 2000s, as world oil prices – and Russian output – recovered, reinvigorating the country’s economic base at a time when its leadership was becoming increasingly autocratic.
Only then did Russia start to claim that the US and its European allies had offered some implicit pledge not to expand NATO eastward.
With oil prices steadily rising, the value of Russian oil production reached a new peak, roughly ten times the 1999 level, in 2008; Russia invaded Georgia the same year.
Though prices collapsed during the Great Recession of 2009, they quickly recovered, with the value of Russian output reaching another peak in 2012-2013 – precisely when Russia’s position on the EU-Ukraine association agreement hardened.
Given that the EU and Ukraine had already been negotiating the deal for more than two years, without much reaction from Russia, the EU was blindsided by the Kremlin’s sudden sharp objections.
Clearly, Russia’s attitude toward its near abroad is not quite as erratic as it may seem.
When oil prices rise, Russia expresses its latent resentments more aggressively, often employing its military.
Moreover, at higher prices, the oil industry crowds out other export sectors that support open markets and a less aggressive foreign policy.
The Soviet war in Afghanistan was followed by a long-term decline in oil prices.
The recent price slide – to $50-60 per barrel, halving the value of Russia’s oil production – suggests that history is about to repeat itself.
And oil prices are not Russia’s only problem.
Western sanctions, which seemed to constitute only a pinprick a few months ago, appear to have inflicted serious damage, with the ruble having lost nearly half its value against the US dollar last year.
Though financial markets will calm down when the ruble’s exchange rate settles into its new equilibrium, Russia’s economy will remain weak, forcing the country’s leaders to make tough choices.
Against this background, a stalemate in the Donbas seems more likely than an outright offensive aimed at occupying the remainder of the region and establishing a land corridor to Crimea – the outcome that many in the West initially feared.
President Vladimir Putin’s new Novorossya project simply cannot progress with oil prices at their current level.
To be sure, Russia will continue to challenge Europe.
But no amount of posturing can offset the disintegration of the economy’s material base caused by the new equilibrium in the oil market.
In this sense, the US has come to Europe’s rescue in a different way: Its production of shale oil and gas is likely to play a greater role in keeping Russia at bay than NATO troops on Europe’s eastern borders.
Putin’s New Prudence
WASHINGTON, DC – This year, the Russian economy is the G-20’s worst performer, contracting by 3.8%, according to the International Monetary Fund’s latest forecast.
And things could easily have been worse.
President Vladimir Putin claims that his economic policies remain consistent; in fact, he has wisely changed course, limiting the damage that could have been done had he not.
At the end of 2014, Russia was seized by financial panic.
The Central Bank of Russia (CBR) responded to collapsing oil prices by floating the ruble, which immediately lost half its value.
Desperate Russians rushed to buy whatever they could before their money became worthless.
Inflation shot up to 16%.
Putin’s prescription – given at his annual televised press conference last December – was not reassuring: “We intend to use the measures we applied, and rather successfully, back in 2008.”
The result: GDP fell by 7.8%, the largest drop in the G-20.
In short, Putin was proposing to repeat a failed policy.
Fortunately for Russia, Putin did not carry out his promise.
In 2008-2009, the CBR pursued a policy of gradual devaluation, bailing out all big state-owned and private corporations, regardless of their performance.
This time, Russia has maintained a floating exchange rate, conserving its reserves.
The CBR stabilized the market by shock-hiking its interest rate, and has since reduced it gradually, as any sound central bank would.
Russia did adopt an anti-crisis stimulus package; but, at 3.5% of GDP, it was just one-third the size of the 2008 package.
And while the Russian government singled out some enterprises as “strategic,” it actually gave them very little money.
Many big companies, most notably in the construction and aviation sectors, were forced into bankruptcy.
Creative destruction, which in the late 1990s provided Russia with a decade of stratospheric growth, has been revived somewhat.
Life is a little less secure for Russia’s rich.
Since the expropriation of Yukos Oil Company in 2004, Putin’s policy had been highly benevolent to large state-owned firms.
The state financed their purchases and investment projects with seemingly inexhaustible oil revenues.
But now, with oil prices down sharply, Russia’s export revenue has plummeted by 30% this year, and state funds have become very scarce.
Something had to give, and, to Putin’s credit, it was not fiscal conservatism.
This year, Russia’s budget deficit is expected to be just 2% of GDP, rising to 3.5% in 2016 – a remarkably strong performance given that the country has had to weather a trade shock and international financial sanctions.
Next year, the government is set to use $40-45 billion of its reserve fund for budget financing.
But Russia can afford that: its total international reserves currently amount to $364 billion, and its public debt is barely 14% of GDP.
Accomplishing this has required Putin to abandon some of his regime’s taboos.
For the first 15 years of Putin’s rule, Russians’ standard of living rose steadily; but it has fallen sharply since November 2014.
Real wages are set to plummet by 10% this year.
Real pensions are also declining, and spending on health care and education is set to fall by 8% next year.
State-owned firms have been affected as well.
Gazprom, Rosneft (which absorbed Yukos), and Russian Railways have been publicly begging for government money.
Last December, Putin accepted a complex financing scheme for Rosneft.
But by August, it was clear that all three corporate giants would receive only a small share of what they wanted.
The powerful head of Russian Railways, Vladimir Yakunin, an alleged former KGB officer and friend of Putin’s, was fired.
Given Western financial sanctions, Putin’s effort to conserve state funds is entirely sensible.
Still, the significance of these changes should not be exaggerated.
Their macroeconomic impact is substantial, but no systemic reforms are on the agenda.
Unlike China, Russia has made no attempt to rein in rampant corruption at the top.
Nor has anything been done to strengthen the rule of law.
Tens of thousands of presumably innocent Russian businessmen sit in pretrial detention because security officials want to seize their companies.
Protectionism proliferates as Russia imposes ever more trade sanctions.
The big question is how Russians will respond when they realize that the decline in their standard of living is not temporary, as it was in 1998.
In 2014, Russia’s GDP was $2.1 trillion (at the current exchange rate).
It has plunged to $1.1 trillion.
These numbers do not reflect purchasing power, but the Russian middle class measure their salaries in dollars.
So far, public reaction has been muted, but a two-week protest by Russia’s truck drivers over a new highway toll suggests that popular quiescence may not last.
At his press conference last December, Putin laid out his expectations: “In a worst-case scenario, I believe [the crisis] would take a couple of years....After that, growth is inevitable, due to a changing foreign economic situation among other things.
A growing world economy will require additional energy resources.” This December, Putin stated: “The current situation is complicated but…not critical.”
That is no longer believable.
Russia’s economy was stagnating even before the bottom fell out of global oil prices, and most experts expect energy prices to remain low for years.
This confronts Putin with a challenge he has never faced: leading Russia at a time when there is no light visible at the end of the tunnel.
Putin in the Dock
STANFORD – To read the international press, one would think that the last two years have been good ones for Russian President Vladimir Putin.
His campaign in Ukraine has largely achieved its main goals; Russia has wrested control of Crimea and destabilized large portions of the rest of the country.
Plunging oil prices may have wreaked havoc on Russia’s finances, but so far Putin’s popularity seems unaffected.
But a long stream of little-remarked-upon legal defeats could have a dramatic impact on Putin’s fortunes.
In 2014, for example, the European Court of Human Rights (ECHR) delivered 129 judgments against Russia, and in January, the Council of Europe deprived Russia of its voting rights for its violations of international law.
As the rulings pile up, they are starting to pose a threat to Russia’s international standing, its financial health, and Putin himself.
The rulings have not been merely symbolic.
In July 2014, the Permanent Court for Arbitration in The Hague ordered Russia to pay $50 billion to former shareholders of the oil company Yukos for having illegally bankrupted the firm and distributed its assets to Rosneft, a state-owned producer.
At its peak in 2003, Yukos was valued at $30 billion.
The judgment is the largest ever awarded by the arbitration court, and it cannot be appealed.
France and Belgium have begun seizing Russian assets to enforce the judgment.
In a separate case, in June 2014 the ECHR ordered Russia to pay Yukos’s shareholders more than $2 billion “in respect of pecuniary damage.”
This judgment was also the largest in that court’s history.
Russia, which is in the midst of a liquidity crisis, will struggle to raise such huge sums; failure to comply, however, would jeopardize future foreign investments.
The Yukos case could be a sign of things to come.
In April, the European Commission issued a Statement of Objections to Russian gas giant Gazprom, charging it with violating Europe’s antitrust laws by partitioning Central and Eastern European gas markets, forbidding cross-border resale, and closing its pipelines to third parties.
Gazprom faces a fine of 10% of its revenues, which totaled $177 billion in its last fiscal year.
Already struggling with low gas prices, increased competition, and now falling production Gazprom will be hard pressed to come up with the necessary funds without sacrificing urgent infrastructure projects.
Russia is also coming under increased pressure regarding alleged criminal conduct.
Indeed, it recently vetoed a Security Council resolution, sought by Malaysia, Ukraine, the Netherlands, Australia, and Belgium, to establish a criminal tribunal to prosecute those responsible for the downing of Malaysia Airlines Flight 17 in July 2014 over rebel-occupied territory in eastern Ukraine.
Evidence gathered by the five countries points to a missile fired from a Russian BUK system operated by a Russian crew.
Were Russian guilt for the downing of Malaysia Airlines Flight 17 to be established, Putin’s depiction of his country as a bystander in the Ukrainian conflict would be exposed as a lie.
In any case, Russia’s veto in the Security Council is a tacit admission of guilt, opening the door for the Netherlands – which lost the most citizens in the attack – to push for additional sanctions.
Meanwhile, in July 2014, the United Kingdom reinstated a legal inquiry into the November 2006 polonium poisoning of Alexander Litvinenko, a former Russian state security officer who had become a UK citizen.
Public hearings were held in London to identify “where responsibility for the death lies.”
The inquiry devoted particular attention to a Russian law passed in March 2006 allowing the state to kill those, such as Litvinenko, deemed to jeopardize national security.
A ruling by a British court that the Russian government ordered or abetted the murder of Litvinenko would have far-reaching consequences.
The verdict would lend credibility to other charges of criminality, such as the bombing of four Russian apartment blocks in 1999 and the murders of several investigative journalists.
It would also strengthen the European Parliament’s call for an independent international investigation of the murder of the Russian opposition political leader, former deputy prime minister Boris Nemtsov, and bolster his family’s petition for an international investigation.
Finally, while Russia has established de facto control of Crimea, it is likely to find itself increasingly embroiled in legal challenges to its presence there.
No credible government or international organization accepts Russia’s description of the annexation as a legal democratic act by the Crimean people.
The United Nations, the G-7, the European Union, and the United States all characterize it as an illegal act.
In May, German Chancellor Angela Merkel described it – in Putin’s presence – as “criminal and illegal under international law.”
In June, Ukraine presented Russia with a 17-volume calculation of its losses from the annexation of Crimea, totaling nearly $90 billion.
Additional losses could be billed for the Russian-supported war in southeast Ukraine, which has led to 6,000 deaths and large-scale damage to infrastructure.
Russia is certain to find itself mired in years of legal battles in venues like the ECHR and the International Center for the Settlement of Investment Disputes.
These endless legal challenges will scare off investment in Crimea, requiring Russia to subsidize its occupation for years to come.
Putin has overplayed his hand.
In addition to its exposure to liability for damage caused during the conflict in Ukraine, Russia faces legal penalties totaling roughly 4% of its GDP – roughly what it spends on education.
Putin may have been able to bring his country’s legal system under his control, but he remains vulnerable to international rulings.
With Russia too enmeshed in the international legal and financial system to cut ties and become a rogue state, its president is increasingly likely to face the consequences of his actions.
Russia\u0027s Ambivalent Muslim Heritage
On his recent visit to Brussels, Russian President Vladimir Putin stunned European leaders and journalists alike with his comments about the Islamic desire to establish a global Caliphate.
Sensational in his rhetoric, Putin presents Russia's brutal war against the Chechens as his country's contribution to the international war against Islamist terrorism.
But is it really?
Russia's attempts to subdue the Chechen insurrection are but another bloody chapter in a two hundred year colonial policy that began with Russia's subjugation of Caucasian mountain peoples in a cruel war that lasted for thirty years.
This war lingered and flared well into the early Soviet era and, in 1944, the entire Chechen population was forcibly deported to Central Asia.
Fifty years later, President Yeltsin resumed the war when Chechens made a new bid for independence.
So, from a historic perspective, it is more appropriate to compare today's Chechen war with the other great wars of the era of de-colonialization, particularly the bloody French war in Algeria, than it is to view it as a "Clash of Civilizations" or a war on terror.
All the while, the fighting and ruined cities of Chechnya cast a shadow on the otherwise much more complex encounter of Russia with the Islamic world.
Indeed, the Chechens are only a fraction of the 13 million Muslims who live in Russia - 9% of the total population.
But simultaneous with its attempts to crush the Chechen rebellion, Russia has pursued a very different path in its relations with the Volga Tatars and Bashkirs, who live in their own republics in the Volga-Ural area.
In the early 1990s, Yeltsin concluded bilateral agreements with those republics, conceding extensive autonomy to Tatarstan and Bashkortostan.
Although restoration of centralized political power in the Kremlin has marked Putin's presidency, Moscow and the two Muslim-dominated Russian republics still adhere to the Yeltsin-era bargain.
The ambivalent relationship between Russia and its Muslims is deeply rooted in history.
Russia conquered Muslim territories in the Volga-Ural area, Caucasus and Central Asia, and brutally suppressed any resistance.
However, after loyalty was secured, the government adopted a more pragmatic policy.
Until the mid 19th century, sedentary Muslim elites were co-opted into the imperial aristocracy, just as, in the 20th century, national communist elites were absorbed into the Soviet nomenclatura .
Indeed, Russia's contacts with the Muslim world go back thousands of years and were rooted in a tradition of tolerance.
With a few short-lived exceptions, Russia's imperial government did not support Orthodox evangelism.
Forced conversion was unknown and Russia's policy with regard to Muslims was guided primarily by the political and economic interests of the state.
After the Revolution, Soviet policy preserved the most important aspects of the old imperial approach.
To be sure, the Communists tried to repress Islam as a religion - as they tried to repress all religions.
But the Soviets encouraged the development of nations based on ethnic identity - Stalin, it is to be recalled, fancied himself a theorist of nationalities - and the ethnic identity of Soviet Muslims derived largely from their Islamic culture.
In this sense, the Soviets helped keep Islam alive.
What few people realize is that, overall, the history of Russian-Muslim relations stand in sharp contrast with the policy pursued by most West European governments over the centuries - policies have been rooted in anti-Islamic stereotypes since the Middle Ages.
In Spain and Sicily, Muslims were discriminated against, forcibly baptized, and expelled since the 15th century.
Five hundred years of warfare against the Ottomans also helped to fuel anti-Islamic prejudices and intolerance.
Indeed, whenever Russia (as in the first half of the 18th century) or the Soviet Union (in the late 1920s and 1930s) combated Islam, its rulers pointed to the Western example.
The policy toward the Muslims pursued by the Russian Empire, by contrast, largely preserved ethnic and religious communities.
This pragmatism has mostly been preserved to this day.
Reverting to the imperial Russian tradition, Boris Yeltsin, as the first president of an independent Russian nation-state, sought realistic solutions for the Muslim republics that desired autonomy or, as Chechnya, independence.
This tolerant posture gave way to war in Chechnya in 1994, but the armistice of 1996, which de facto recognized Chechnya's independence, gave rise to new hopes of a better future.
In 1999 Yeltsin and Putin, his then prime minister, resumed combat.
The Chechen war was exploited in Putin's presidential election campaign and, after September 11, 2001, Putin has tried to legitimize his intransigence by presenting the war in Chechnya as Russia's contribution to its emerging partnership with the US in the war against terrorism.
With the Soviet Union's disintegration, Russia and the West lost the enemy each had seen in the other.
Both deem Islam the new enemy, one held in common.
What they fail to see is that Islam is not a homogenous entity and that today's conflicts do not have religious or civilizing causes, but are rooted in political, social and economic reasons.
Indeed, many Islamic movements are largely a reaction to former or still existing colonial dependence.
The Putin government's focus on violence demonstrates that Russia hasn't learned from its long history of engagement with Islam.
The Chechen War is not part of some Clash of Civilizations, but a retreat to a colonial policy that failed.
Why Sanctions on Russia Don’t Work
MOSCOW – The Western approach to Russia is predicated on the supposition that continued pressure on the country will cause President Vladimir Putin’s regime to make concessions or even crumble.
Nothing could be further from the truth.
The assumption underlying the efficacy of Western sanctions is that the sharp economic deterioration that results from them will turn the Russian public, particularly the financial and political elite, against the Kremlin.
Putin will not be able to withstand mounting dissent from affluent urban areas and the country’s burgeoning middle class.
Meanwhile, the thinking goes, military pressure – in the form of potential lethal aid to Ukraine – will similarly mobilize ordinary Russians against Putin.
Unwilling to see their boys die for the Donbas, they will form an anti-war movement that will force him to rein in his territorial ambitions.
Pressed at once from above and from below, the Kremlin will be have to change its policies, and perhaps even begin to democratize.
What Western policymakers fail to understand is that such an approach is less likely to undermine the regime than to cause Russians to close ranks behind it.
Opinion polls show that Russians perceive Western pressure and sanctions to be aimed not at Putin and his cronies, but at Russia and its citizens.
In January, 69% of Russians supported the Kremlin’s policy in Ukraine, according to a poll by the independent Levada Center.
To be sure, Putin’s support is not rock-solid; indeed, there is widespread suspicion about corruption in his government.
But Russians have a long tradition of defending their compatriots from outsiders.
And in this case, the compatriots under attack are Putin and his government.
Russian propaganda taps a deep well of nationalism, artfully playing off sentiments and imagery from World War II.
Known in the country as the Great Patriotic War, the effort to defend the country from German invasion remains sacred to many Russians.
That is why the Kremlin has repackaged derogatory historical terms like “Nazis” to refer to Ukraine’s current political elites.
Russian society has been militarized for decades, if not centuries.
Military preparedness was one of the most important shared values in the Soviet Union – a sentiment captured in the slogan emblazoned on the badges issued to children who excelled in athletics: “Ready for Work and Defense.”
It is in this context that Putin has been able to use Western pressure as a tool to regain the support of many Russians, who only a few years ago would have felt detached from, if not alienated by, his government.
Presented with a real or imagined threat to the fatherland, the average Russian supports the country’s leaders.
Nor is the Russian middle class, which makes up some 20-30% of the population, likely to pose much of a threat to Putin.
With many of its members owing their recent wealth to high oil prices and the economic recovery of the 2000s, loyalty to the Putin regime is one of the Russian middle class’s abiding characteristics.
Russian opinion polling and sociological research tends to show that the higher one’s position in society, the more likely one is to vote for the incumbents. The motives behind such voting patterns may vary – some voters made a fortune during the economic recovery, while others are simply satisfied with the status quo.
But the bottom line is that such voters demonstrate a fundamental loyalty to the state and the regime.
Indeed, only a small portion of the middle class attended the protests that gathered force in late 2011 and early 2012, most of them concentrated in Moscow.
And, in any case, Putin’s clampdown on dissent was predictably ruthless.
He tightened legislation aimed at throttling civil society, pursued lawsuits against protesters, and blocked the activity of Alexei Navalny, a promising opposition politician.
These efforts have had a lasting effect on the groups that were at the heart of the protest movement.
Russians of all walks of life have shown that they prefer passive adaptation over protest.
In the face of growing economic pressures, Russia’s middle class is steering clear of political involvement.
The working class is no different.
The more the West increases its pressure, the less likely it becomes that this will change.
Russia’s Bo-Toxic President Returns
MOSCOW – When a tsar is treated with mockery, rather than regarded with awe, it is time for him to consider retirement, or to prepare for a palace coup.
Russian Prime Minister Vladimir Putin, who intends to stage a glorious return to the Kremlin as President in the election scheduled for March next year, should reflect on that choice.
This year began with a vigorous (by Russian standards) Internet petition urging Putin to take the first option.
Then the whole country laughed when, during his customary visit to a patriotic summer camp run by Nashi (a pro-Putin youth movement), he demonstrated his physical prowess by scaling a rock-climbing wall, only to find that he couldn’t climb down.
Now Russians wonder what has happened to their leader’s face.
His new smooth-faced appearance has sparked rumors of Botox, or even plastic surgery.
Vampire jokes abound.
Recently, during a dive in the waters at Krasnodar, in southern Russia, Putin miraculously salvaged two ancient Greek urns.
Russians’ laughter turned Homeric when Putin’s spokesman, Dmitry Peskov, inexplicably announced that the urns had been placed there to give Putin a sense of importance.
If I didn’t take the incompetence of the Russian state at face value, I might suspect a conspiracy to discredit Putin.
For, make no mistake: Putin has been discredited.
After a recent martial-arts match between an American and a Russian, Putin, a judo enthusiast, stepped into the ring to congratulate the Russian victor, a member of his United Russia party.
The audience screamed wildly, “Putin, go home!” until he did.
Politics, the crowd seemed to say, should be taken out of sports – and Putin out of politics.
Putin thinks that his stunts are essential to governance.
He has kissed dolphins and babies, saved tigers and journalists, and posed bare-chested on horseback and on foot in the Siberian wilderness.
But Putin the performer cannot abide a bad review.
Embarrassed by the judo fiasco, he canceled all of his subsequent unscripted public appearances.
In fact, since that incident, Putin has attended just one event – the Congress of United Russia – where 600 delegates voted unanimously for his nomination as the party’s presidential candidate in 2012.
But the parliamentary elections held on December 4, which gave barely 50% to United Russia (Putin used to be able to guarantee about 70%), had to be fiercely controlled, with an overwhelming police presence.
Observers were harassed and obstructed, and monitoring Web sites were shut down or hacked by the government.
An elections-observing mission of the Organization for Security and Cooperation in Europe noted that “most parties have expressed a lack of trust in the fairness of the electoral process.”
Putin’s extravagant vanity has severely undermined the strongman image that he has spent the last 12 years building.
After all, narcissistic publicity stunts and facelifts – which worked well for his friend Silvio Berlusconi in Italy (until they didn’t) – don’t inspire fear, or even respect, among Russians, where an iron-fisted ruler is always the preferred choice.
So now Putin’s image as the hard man of politics has been lost forever.
It is difficult to assume a despotic countenance when you can’t move your eyebrows.
Indeed, Russians heckle Putin not because he has turned Russia into an industrial banana republic, where exports of oil and other commodities sustain a quasi-authoritarian state, but because he no longer inhabits his role convincingly.
All the same, the origin of discontent with Putin is irrelevant; the desire for freedom has to start somewhere.
So long as Russians feel empowered to confront the regime, even if only with contempt and laughter, there is hope for change.
And now, with the election results inciting the largest protests since the collapse of the Soviet Union, that hope is growing.
When a tsar loses his image of omnipotence, he eventually loses his grip on authority.
After Putin’s long-running melodrama, the Kremlin’s options for a sequel are quite limited.
Everyone expects that the current president, the puppet Dmitry Medvedev, to switch roles with Putin after the March elections.
But waiting in the wings is former Finance Minister Alexei Kudrin, who could replace Medvedev should Russia need a factotum of sincerity about economic reform.
Kudrin’s reputation for placid competence might just buy Putin some extra time.
But, in Putin’s eyes, this is an unlikely scenario.
The once and future president argues that he has already made Russia stronger, and that, as financial uncertainty grips much of the developed world in 2012, the country has become an island of stability envied by many.
Perhaps, but it is difficult to be a heroic leader and the butt of popular jokes simultaneously.
Putin is often compared to Joseph Stalin, but nowadays, as the 20th anniversary of the Soviet Union’s collapse at the end of 1991 approaches, he looks increasingly like Leonid Brezhnev – the symbol of a political system that is well past its expiry date.
All that is missing are the jowls.
Russia\u0027s Coming Financial Crash
WASHINGTON, DC – Today, the whole world is being hit by a tremendous financial crisis, but Russia is facing a perfect storm.
The Russian stock market is in free fall, plummeting by 60% since May 19, a loss of $900 billion.
And the plunge is accelerating.
As a result, Russia’s economic growth is likely to fall sharply and suddenly.
One problem is that, after a long period of fiscal prudence, Russia’s government has shown extraordinary ineptitude.
Russia has enjoyed average annual economic growth of 7% since 1999.
With huge current-account and budget surpluses, it had accumulated international reserves of $600 billion by July.
Its public debt was almost eliminated.
But the open economy that has bred Russia’s economic success requires the maintenance of sensible policies to succeed.
The initial American financial crisis barely touched Russia, but the global economic slowdown brought about a decline in oil and other commodity prices by more than one-third since July, which was a big blow.
All the other hits, however, have been self-inflicted.
The Russian financial crisis is high drama, best described as a tragedy in five acts.
On July 24, Prime Minister Vladimir Putin initiated the first act by fiercely attacking, without evidence, the timid owner of the giant coal and steel company Mechel for price-gouging and tax evasion.
In three days, Mechel’s shares lost half their value, triggering the Russian stock market’s decline.
Then, on August 8, Putin launched the second act of this Russian tragedy, his long-planned attack on Georgia.
Shockingly, Russia argued that it had the right to attack a country that harbored people to whom it had just issued passports, scaring all countries with Russian minorities.
By recognizing the “independence” of the two occupied territories, Abkhazia and South Ossetia, Russia turned the whole world against it.
Russia’s leaders have earned a reputation for being unreliable, quixotic, and unpredictable, but markets like trustworthiness, stability, and predictability.
Not surprisingly, foreign investors no longer favor Putin’s Russia.
Within a week of its attack on Georgia, Russia recorded a capital outflow of $16 billion, which has since increased to $30 billion.
This is a small sum relative to Russia’s currency reserves, but plenty for the underdeveloped banking system, which experienced a severe credit squeeze.
Putin continues to deny that Russia’s financial problems were caused by his war in Georgia, and it took the Central Bank more than a month to provide substantial liquidity injections.
But it was already too late, as the liquidity problem had become a matter of solidity.
Overtly, Russian stock valuations look attractive, but by heaping abuse on foreigners, Putin has scared them away, while Russian investors have no money at hand.
With every statement, Putin erodes Russia’s political risk profile.
As is customary, many Russian businessmen pledged their shares to borrow money for stock purchases.
As the stock market dives, they receive margin calls and are being forced to sell their shares at ever-lower prices, causing the stock market’s downward spiral to accelerate.
In Soviet fashion, the Moscow stock exchanges closed for four days in a row in the week of September 15, because stocks plunged too fast.
By denying the problem, the authorities have aggravated the lack of confidence.
On international financial markets, the war in Georgia has rendered Russian debt and bonds toxic.
Interest rates on Russia’s bonds have risen by 2-3 percentage points, and many Russian creditors no longer have access to international capital markets.
Russia is just about to enter the third act of this tragedy, a banking crisis.
Numerous medium-sized banks, and some large ones, are set to go under in the stock-market turmoil.
Too many big investors can no longer meet their margin calls, while borrowing costs have risen sharply.
The recent appreciation of the dollar adds to their hardship.
In the fourth act, the real estate bubble will burst.
A reasonable guess would be that Moscow’s astronomic real-estate prices will fall by at least two-thirds. That will exacerbate the banking crisis.
In the fifth act, investment will seize up.
Why continue building when you can neither finance your investment nor sell real estate?
Russian consumers are already scared and will cut their consumption, causing aggregate demand to contract.
In the end, real economic growth will come to a screeching halt, perhaps as early as next year.
Other factors are likely to aggravate the situation.
High-level corruption is so rampant that Russia appears unable to build major public infrastructure projects.
Oil and other commodity prices are likely to fall further, and oil and gas production have already stagnated.
Putin has turned his back on the World Trade Organization and is promoting protectionism, which will also harm growth.
Strangely, the most solid parts of the Russian financial system are the state budget and the currency reserves, but it is too late for them to prevent this tragedy. Neither arbitrary state intervention nor brutality will restore investor confidence.
The villain in this drama is Vladimir Putin, who has thrived on eight years of rapid growth generated by the market reforms of his predecessor, Boris Yeltsin.
Russia had a good chance to escape this international financial crisis, but, through his ruthlessness and ineptitude, Putin has rendered his poor country a prime victim.
How long Russia can afford such an expensive prime minister?
Russia\u0027s Culture of Contempt
Once again, everyone wants to know, where is Russia heading?
The trial of Mikhail Khodorkovsky and the possible bankruptcy of his company Yukos, Russia's biggest company, have incited cries that President Putin is returning the country to the bad old days of dictatorship.
But in assessing where Russia is heading, political and economic analysis are of little help.
It is Russia's social culture that is determining the country's fate.
Russia's political system, indeed, is not what prevents the country from moving forward, and it never has been.
Whether Russians live under monarchy, communism, Yeltsin's cowboy market economy or Putin's supposed dictatorship of law, the result is always the same - the system despises its citizens, eliciting an equal and opposite reaction of derision and distrust.
Russian capitalism hates the consumer as much as Russian communism did.
Russia's people, whether they are waiters or waiting for service, are convinced that they will be ripped off and treated rudely, and so steel themselves with indifference.
Neither the system nor the people are to blame for this state of affairs.
It arises partly from the fact that Russia is an "imitation" culture.
Russia's first rulers were Nordic princes in the 860's, men invited to bring order to the country - even then, or so it seems, Russians didn't trust themselves to rule themselves effectively.
Sometimes, Russian imitation produces works of genius.
After all, Pushkin and Gogol originally grew out of German and French models, although their sheer originality left the mimicry far behind.
But Russia is simply not as good at copying practical things like laws and economic models as it is at transforming cultural impulses into works of art with a Russian soul.
Its practical borrowings are invariably stillborn, mostly because of the country's ingrained culture of contempt.
Consider Moscow, a highly seasoned imitator (though nowhere in the league of St. Petersburg, that baroque Italianate city on the Neva, as an urban mimic).
Moscow nowadays has all the trappings of high-end capitalism: Prada, Fouchon, Rolls Royce.
Its Café des Artistes is as wonderful a French bistro as you will find.
But something is missing in the usual Russian way - proper utensils.
Ask a waiter for a steak knife and you will draw a look that suggests you've asked for a sword.
Some restaurants greet their customers with a guard who brusquely asks what they want, as if they came to buy stamps, not to have dinner.
Of course, the guards know that their job is to ensure that everyone is safe and comfortable, but the Gulag-type notion of what a guard does is too embedded to be removed.
Their real job is to be "against" - and this time, it is the customers they are to be against.
The very existence of other people breeds suspicion in Russian guards, and who is to say that they are completely wrong?
After all, contract killings and random shootings in restaurants are common affairs, and the idea of excessive protection from everyone goes back to Soviet days, when social contempt was cloaked in the guise of public safety.
Small wonder, then, that Russians always cut corners, jump over fences, and never follow a path designated for walking - these paths were built not to make life easier for people, but to control them.
Indeed, fences and barriers in Russia are usually built where there should be a footpath.
But perhaps the authorities are right to want to keep us in line.
Anyone who has ever flown into Russia will know this scene: the moment the captain requests the passengers to remain seated until the plane comes to a complete stop, all the Russians on board will respond by immediately standing up and piling into the aisles as if it's their last chance to get out.
They know in their bones that the system is out to get them, even if the system is represented by a commercial airliner from a foreign country.
The simplest things are complicated, and then destroyed, by this culture of suspicion and contempt.
I once went for lunch to a Swedish-style buffet in Moscow.
The choice of food was great, a sort of post-modern typical Russian kasha: sushi, salad, borsht, meat, and cabbage.
But customers received only a small saucer for this feast, and the principle of the smorgasbord - all you can eat - was jettisoned. You were allowed to use the buffet only once.
Customers - who know what a smorgasbord is - understandably try to stuff as much food as they can onto the tiny saucer, sushi on top of roast beef.
If you dare to ask for a bigger plate or an extra helping, the waitress gives you that withering Soviet look - you want too much.
Soviet socialism thought its citizens unworthy of any form of service altogether; Russian capitalism doubts that you can control your appetites, so it wants to control them for you.
In the end, there is very little difference.
And so Russia goes on, undertaking revolutionary changes and not changing at all.
Incurable suspicion, mutual fear, ubiquitous contempt - confirmed everyday in large and small ways - are our immutable social condition.
Russia’s Eternal Inflation
In eternal Russia, nothing changes when it comes to monetary management.
Year after year, the Russian Central Bank (RCB) blames the weather, the poor harvest, or other non-monetary factors for its feeble performance in lowering the inflation rate.
Unlike many emerging-market and transition economies in the 1990’s, Russia did not abandon a fixed-exchange rate anchor in favor of an inflation-targeting regime as its guide to monetary-policy.
As a result, the period since the financial crisis of 1998 has generated serious problems for monetary and exchange-rate policies.
Faced with a balance-of-payments surplus – largely thanks to high oil prices – the RCB’s 2005 Monetary Program fudges: reducing inflation is a priority, but so is exchange-rate targeting in order to support growth.
This “just-do-it” approach works fine in the United States, for example, where the Federal Reserve has established its anti-inflationary credibility.
But the RCB’s track record since 1992 has done little to stabilize inflation expectations and to persuade businessmen, investors, government officials and ordinary Russians that it is genuinely focused on reining in price growth.
During the early transition years, the lack of an effective monetary-policy framework reflected the challenge of establishing new institutions and regulations, as well as the difficulty of overcoming the legacy of central planning, under which budget and credit financing were indistinguishable.
Sometimes the RCB acted as the government’s banker, providing liquidity without considering the financial markets; at other times, it focused on the financial markets, providing liquidity to banks.
In both cases, there is no link between inflation and interest rates.
To be sure, the muted impact of inflation on interest rates is not surprising in transition economies, where the mechanisms of monetary-policy transmission and financial intermediation took long periods to put in place and still need reform and regulation.
It is inevitably a long road from a starting point where credits are channeled to state-owned enterprises through state-owned banks to an economic environment in which interest rates are a proper indicator of monetary policy.
Moreover, Russia’s default and devaluation in 1998 undermined the progress that was accomplished – starting in 1996 – in the banking sector and the capital markets in general.
But that excuse has worn thin.
In recent years, slowing the pace of real exchange-rate appreciation to shelter domestic producers and employment from import competition seems to have gained clear precedence over disinflation.
At the beginning of June, the RCB’s governor, Sergei Ignatyev, admitted not only that this year’s inflation target would be missed, but also that the RCB is not prepared to pursue inflation targets at the expense of a competitive exchange rate.
This helps explain why the inflation rate, as measured by growth in the annual consumer price index, has remained stubbornly high.
Indeed, for the first time since 1998, the annual inflation rate has been rising this year, rendering the official targets – 7.5%-8.5% in 2005, 6%-7.5% in 2006 and 5%-6.5% in 2007 – little more than lip service.
Of course, many central banks around the world pursue both price stability and growth.
But in Russia, there is no trade-off between the two, at least not using the exchange rate.
As the IMF’s latest annual report on Russia’s economy points out, if the RCB continues to restrain the ruble’s appreciation for the sake of growth, the result will merely be higher inflation, which implies that the ruble would still strengthen in real terms, thereby damaging growth.
Russian macroeconomic performance has greatly improved since the 1998 financial crisis, and this success can be attributed in part to improved monetary policy.
But the RCB’s lack of resolve in adopting a framework where low inflation is clearly stated as the priority now threatens to undermine what has been achieved.
As a starting point, the RCB should be charged with projecting inflation, formulate policies to stabilize prices, and either implement those polices or explain why it cannot and who could do so.
The correct answer to the latter question – as the IMF suggests – may be the Ministry of Finance: the only sure way for Russia to reduce inflation and sustain growth is to maintain a sound fiscal policy.
The reality is the opposite.
Rather than using the oil windfall to pay for long-overdue reforms in health care, education, and utilities – and thus helping to ensure the macroeconomic stability needed to sustain rapid long-term growth – President Vladimir Putin has chosen large spending increases for public wages and pensions.
As a result, Putin’s Russia appears headed for the Latin American model of self-inflicted stagflation.
Russia\u0027s European Occupation
When Gazprom, Russia’s natural gas monopoly, cut off supplies to Ukraine and Georgia in January 2006, the move was widely seen as a clear warning of the Kremlin’s willingness to use its energy resources to exert political influence over Europe.
Twelve months later, Russia drummed home the significance of that act by shutting off oil supplies to Belarus for three days, causing a ripple effect on shipments to Western Europe.
Despite these supply-side threats, there have been few signs of an effective European Union-wide policy that would reduce dependence on Russian energy.
The European Commission’s energy proposals, issued in January, are a step in the right direction.
But they will have little direct effect on Russia’s energy relations with Europe, because they do not oblige Russia to adopt more competitive and transparent energy transport and investment policies.
On the contrary, European countries continue to forge bilateral deals with Russia, with little consideration for common EU interests.
The West European EU members have shown scant concern over Russian pressure tactics against the new members in Central and Eastern Europe, calling into question the extent of EU solidarity regarding energy supplies.
Since the Kremlin interrupted energy supplies to the Baltic states in 1990 in a futile attempt to stifle their independence movements, it has continued to use pipeline politics against countries such as Poland, Latvia, and Lithuania – all new EU members.
For them, and for new democracies like Ukraine, Georgia, and Moldova, Russian energy dominance and its political consequences remain a serious threat.
Russia has profited from Europe’s disarray by moving to cement greater long-term European dependence on its energy, particularly natural gas by continuing its divide-and-rule tactics toward European governments.
Since January 2006, Moscow has negotiated separate deals with energy companies from Germany, France, Italy, Hungary, Serbia, Slovakia, and Denmark that could undercut Europe’s efforts to build additional pipelines aimed at bypassing Russia’s near monopoly of supplies from Central Asia.
It initially appeared that Germany under Chancellor Angela Merkel would be more sensitive to the energy security of Central and Eastern Europe.
However, Merkel approved the expensive Northern Europe Gas Pipeline (NEGP) beneath the Baltic Sea, negotiated between her predecessor Gerhard Schroeder and President Vladimir Putin, and strongly opposed by fellow EU member Poland, which the pipeline will bypass.
The NEGP will cost at least eight times as much as the alternative Yamal II pipeline, which would have gone overland through Poland.
Despite the European Commission’s good intentions, the EU’s larger members continue to resist submitting to a common EU energy policy.
In mid-November, EU foreign ministers failed to agree on a common approach to Russian energy – just as reports resurfaced that Russia may seek to establish a natural gas cartel similar to OPEC.
The EU’s political will to counter its increasing dependence on Russia in the immediate future is thus open to serious doubt.
Indeed, for the next five to ten years, Russia will be able to fulfill its gas contracts in Europe only by monopolizing exports of gas to Europe from Kazakhstan, Turkmenistan, and Uzbekistan.
But the EU so far has chosen to ignore that Gazprom’s monopoly is a clear violation of the anti-trust and competition policies of the revised Rome Treaty and WTO obligations.
Russia clearly believes that the current tight world energy market and high prices give it enough leverage over the West to maintain its current approach.
Russia consistently refuses to allow Western companies the same access to Russian facilities that Russian state energy companies already enjoy in Europe and the United States.
That is likely to remain true as long as the West fails to adopt an energy strategy that causes the Kremlin to change course.
Putin denies that Russia is using its energy resources to coerce European governments, arguing that the decrease in gas supplies to Western Europe during the cut-off of gas to Ukraine in January 2006 was the result of Ukrainian “theft.”
In its dispute with Belarus in January 2007, Russia leveled a similar accusation of theft from the oil pipeline that crosses the country.
It also claims to have been subsidizing the price of energy to the Commonwealth of Independent States, when in reality it is the Central Asians who have been subsidizing Russia to an even greater extent.
Although the EU Commission appears to be committed to building a more open, competitive energy market in Europe, action against Russia’s noncompetitive practices within the EU has taken a back seat to internal differences over takeover battles for national energy “champions” involving companies from other member states.
Russia must be convinced that its resources will be far more valuable if they are opened to international investment, managed transparently, and operated according to the legal and commercial rules of the international trading system.
But that is unlikely in the absence of strong and unified European action.
Russia’s Fascist Temptation
Today’s Kremlin thinks that democracy was being built too quickly in Russia.
The government does not say that it is against democracy, only that it is untimely and needs to be delayed – a logic that manifests itself in most official decisions.
Thus, at the beginning of the current decade, the democratic system of political checks and balances that had been created in the 1990’s began to be dismantled.
Before 2000, there was an influential, independent press and a parliament loyal to the president, but still independent.
The Federation Council (the upper chamber of the Duma), too, was generally loyal to the president, as were regional governors, while remaining independent.
There were also influential entrepreneurs and business organizations that were actively involved in the decision-making process.
As a result of the disappearance of these checks and balances, the quality of the government’s decisions has fallen sharply.
The notorious law on monetization of social benefits, which transforms in-kind benefits into cash, is a typical example.
Despite the fundamental soundness of the step, it was poorly prepared and implemented, and the government seriously miscalculated its effects on the national budget.
Moreover, it generated mass social protests, which the government evidently had not envisaged.
Never would the law in its current form have passed through the old State Duma.
MP’s would have read and analyzed it attentively, asked ministers many questions, and, if necessary, insisted on re-writing various tables presented in the draft.
They would have understood that the calculations provided were at complete odds with reality, and they would have considered what to do about it.
If there is no independent press able to caution against mistakes and a parliament that can do the same, then the mistakes will eventually manifest themselves on the streets.
Democracy was not invented by fools.
Experience tells us that if you don’t let the steam out of a pot, the pot will explode.
But when we stifle, step by step, all that remains of a free press, when even small television channels that provide uncensored information seem dangerous, we are keeping the lid firmly on the pot.
I would say that this is worse than a crime.
It’s a mistake.
As someone with some background in politics, I understand the strategy of today’s government: create an extreme threat, first and foremost through shadowy associations with fascist organizations, and then say to citizens, “You can’t deal with this threat on your own, so you should trust us to figure out what to do with it.”
I understand the reality of the fascist threat, but I also understand what the government wants us to take from it.
I firmly believe that we should not allow ourselves to participate in these games, nor that we should believe that Russia’s fascist organizations don’t have anything to do with the government.
I think that when the authorities conceive such strategies, they assume that the outcome will be manageable.
In reality, this is not always the case.
When you open a Pandora’s box, nobody can predict what will happen.
It is very risky to create a dangerous situation for political ends, because, more often than not, it is likely that the situation will become uncontrollable.
Indeed, the threat of fascism is real.
But the more people who don’t accept the fascist alternative are mobilized politically, the smaller the threat will be.
The most important question of the day is not the government’s perspective, that is, its desire to instill fear and eliminate checks and balances on its power.
What matters are the actions of those who don’t want fascism in Russia and instead simply want Russia to be free.
There are many such people, tens of millions, but they are not always politically engaged and united.
The good news, then, is that there are far fewer people who seriously want to see a fascist regime in Russia than the government claims.
We should not lose heart, but we do need to be politically active and united.
After all, the Soviet Union was a totalitarian state that could rely on a powerful and ubiquitous secret police.
And look how it ended up.
Russia’s Fragile Power
Russia sent an impressive delegation to the World Economic Forum at Davos this year.
After strong representation under Boris Yeltsin, the level of Russia’s participants had slipped since Vladimir Putin became president.
This year, however, the Russians sent their “A” team, and a well-attended session focused on “Russia’s More Muscular Foreign Policy.”
With higher energy prices, many Russian officials are enjoying their renewed power.
I was asked to comment on United States-Russian relations at a dinner with top officials from the government and Gazprom, the giant energy company.
I said that America and Europe had too many illusions about democracy in Russia in the 1990’s, and were now going through a stage of disillusionment.
There is concern about Russia’s future, how it will use its newfound power, and how the West should respond.
One view is that Russian politics is like a pendulum.
It had swung too far in the direction of chaos under Yeltsin, and has now swung too far in the direction of order and state control under Putin.
It has not swung back to Stalinism; Czarism might be a better historical metaphor.
Observers debate whether it will eventually reach a new equilibrium.
The optimistic view is that property rights are becoming more deeply anchored than they were in the past, and that Russia’s future will depend on how fast a middle class with a stake in law-based government can be created.
But others are not so sure.
Sometimes pendulums continue to oscillate wildly unless there is some friction to slow them down, and sometimes they get stuck.
Pessimistic observers foresee a continual decline of freedom rather than a liberal equilibrium.
Faced with this uncertainty about the future of liberal democracy in Russia, how should western countries respond?
This question is particularly difficult for the Bush administration, which is torn between the president’s early endorsement of Putin and his pro-democracy agenda.
Secretary of State Condoleezza Rice declared in 2005 that “the fundamental character of regimes matters more today than the international distribution of power,” and Senator John McCain, a US presidential candidate, has urged removing Russia from the Group of Eight advanced countries.
Yet, in addition to its democracy agenda, the West has a realist agenda based on very tangible interests.
The West needs Russian cooperation in dealing with issues like nuclear proliferation in Iran and North Korea, the control of nuclear materials and weapons, combating the current wave of radical Islamist terrorism, and energy production and security.
Moreover, Russia possesses talented people, technology, and resources that can help to meet new challenges like climate change or the spread of pandemic diseases.
There may not be as much conflict between these two agendas as first appears.
If the West were to turn its back on Russia, such isolation would reinforce the xenophobic and statist tendencies present in Russian political culture and make the liberal cause more difficult.
A better approach would be to look to the long run, use the soft power of attraction, expand exchanges and contacts with Russia’s new generation, support its participation in the World Trade Organization and other market-oriented institutions, and address deficiencies with specific criticisms rather than general harangues or isolation.
In any case, the sources of political change in Russia will remain largely rooted in Russia, and Western influence will inevitably be limited.
But advocating engagement over isolation should not prevent friendly criticism, and in Davos I offered four reasons why Russia will not remain a major power in 2020 unless it changes its current behavior and policies.
First, Russia is failing to diversify its economy rapidly enough.
Oil is a mixed blessing.
Riding on record-high energy prices and raw material exports, in January 2007 Russia became the world’s tenth-largest economy.
But energy exports finance about 30% of a government budget that is based on forecasts that oil remains at $61 per barrel.
Russian industrial exports primarily consist of armaments, with advanced aircraft accounting for more than half of sales.
That leaves Russia vulnerable.
A related problem is that Russia lacks a rule of law that protects and encourages entrepreneurs.
These are precisely the people needed to help foster a vibrant middle class – the bedrock of a stable democratic market economy.
Instead, corruption is rampant.
Moreover, Russia’s demographic crisis continues, sustained by poor public health and inadequate investment in a social safety net.
Most demographers expect Russia’s population to shrink significantly over the coming decades.
Adult male mortality is much higher than in the rest of Europe, and it has not been improving.
Finally, while one can understand a former superpower’s temptation to seize its opportunity to return to a muscular foreign policy, Russia’s bullying in the energy area is destroying trust and undercutting Russia’s soft power in other countries.
Both Russia’s neighbors and Western Europe have become more wary of depending upon Russia.
Most Russian participants at the Davos dinner seemed to ignore these criticisms, but it was interesting to hear one important official admit that reform might progress faster if oil prices dropped somewhat, and another accept the point that criticism should be welcomed as long as it is offered in a friendly spirit.
The mere fact that high-level Russians reappeared in Davos to defend themselves may be a small but healthy sign.
Russia\u0027s Future is Now
MOSCOW: Russia's politics are not those of the steppe.
Russian voters cannot stroll to the left in one election, to the right in the next, unworried about falling over the edge.
We live psychologically on one or the other side of a great divide.
Now the question is whether or not, in elections to the Duma to be held on December 19th, and in presidential elections due next summer, the country will continue its transition or backtrack across that great divide.
When today's Duma was elected, many cast a nostalgic vote for the good-old Soviet times when wages were paid, the future was unchanging, and you did not need to work too hard.
An opinion poll of last September shows such sentiments remain: 48% wanted Leonid Brezhnev back as Russia's president.
Those voices matter, but less every day. For an epoch in Russia's history is ending.
It lasted only 9 years but its impact equals the age of Peter the Great and the October Revolution.
It has been a fantastic, dizzying era when vast fortunes were made and lost, but also one when millions learned how to live on their own, without a faceless big brother watching over them.
It is fashionable to mock the reform process as a failure.
But cynicism is wrong.
Some policies could have been handled differently, but despite nostalgia for the security of an all-powerful state, we have moved so far that communism has been consigned to the dustbin of Russia's history.
The impossibility of communism's restoration is perhaps the great achievement of Yeltsin's presidency.
Let me give an example close to me – the financial crisis of August, 1998.
My government fell because of it, but the plans we initiated were enacted by the Primakov and Stepashin governments that replaced mine.
Despite talk about how everything we did was wrong and that we needed new state planning, there was simply no alternative.
It took almost a year before the proposed measures began to work, and precious time was lost – but not altogether wasted.
That year was a valuable learning experience for everyone.
The need to live within the country's means became so obvious that, for two consecutive years, the Duma passed austerity budgets of which my government could only have dreamed.
The key task now is not so much to bury communism's remnants as to overcome the corrupt and inept bureaucratic/oligarchic state in which bureaucrats are simultaneously entrepreneurs and politicians, and in which obeying the law is not mandatory but somehow negotiable.
Most Russians know that such a state is dangerous and cannot succeed.
Somehow they tolerate it because it is so familiar, so Russian.
Bureaucratic corruption and incompetence, however, is not just a legacy of communism.
In pre-revolutionary Russia, as reported by the police at the time, only 3 out of 33 governors did not take bribes.
Soviet regional party bosses simply carried on this tradition of greed and grab.
In another sense, too, our current conditions resemble those that existed before Lenin's revolution.
Read the memoirs of the tsarist prime-minister Sergei Witte and you understand that, paradoxically, a liberally-minded progressive bureaucrat was back then, just as some in the small circle of officials around Yeltsin are today, the lone pillar of reform.
With luck, several steps forward can be made.
Without luck, a reactionary backlash ensues.
The problems Witte dealt with were the same we confronted over the past decade: corruption, the pseudo-patriots who oppose everything foreign (including capital), and an elite and court system dominated by interest groups, rather than defending the state against them.
What Russia needs is both an economy and state civilized by law.
During the first four years of Yeltsin's presidency, a functioning state did not exist; in a free-for-all that passed for market reform, force determined everything.
In 1997 government attempts to tame the power of the oligarchs redounded against the state as the cabinet was dissolved.
The state, however, regained some strength recently; how it uses it is a matter of great importance.
If it limits itself to setting clear rules and applies them equally, society will benefit.
But if the state follows the old Russian tradition and attempts to manage everything, the consequences will be as grave as those of the absence of state power in the first four years of the Yeltsin era.
In this sense, it is difficult to overestimate the significance of the coming elections, because they will largely determine the future of the Russian state.
A limited state will emerge only if the part of society that values freedom, property and security becomes politically active.
More than 60% of Russians believe they can provide for themselves, and do not want state patronage.
This vital part of new Russia, while active in the economic sphere, could not care less about politics.
Voters under 30 account for 29% of the total population, but only 3-5% of them vote.
The higher the education, it seems, the lower the voter participation: among those who never vote, the percent of people with higher education is twice as high as that of people without higher education.
Alienated for so long, the country's brightest people have washed their hands of politics.
This is a sort of political depression.
Depression can be cured, but only by giving the patient a positive vision of the future.
The right-centrist parties – the Union of the Right forces and Yabloko – do have such a vision and people know it.
When asked in polls "which is the party of our future, the party of our children?" people never mention the communists or the nationalist, but they list the Union of Right forces and Yabloko as number one.
Those who support reform must begin to convince Russia that the future is now.
Russia\u0027s \
As America's debate over toppling Saddam Hussein's regime intensifies, Russia is moving to center stage.
This week Russia signed a $40 billion trade and economic cooperation treaty with Iraq while meeting Iranian leaders to discuss nuclear non-proliferation.
Christopher Granville, a former British diplomat and now chief strategist for United Financial Group, a Russian investment bank, analyzes Russia's long-term interests and likely actions.
While no country seems able to trouble the Bush administration's military calculations concerning Iraq, Russia does combine serious interests in the region with marginally significant military capabilities.
But Russia's real importance in any looming US-Iraq war lies not so much in its residual military power, as in the light its position sheds not only on the Iraqi problem but on that other member of the "axis of evil": Iran.
So far, the most striking feature of the Putin administration's handling of the US-Iraq situation has been its silence.
If forced to state a view, Russian diplomats stick to a standard line about implementing UN Security Council resolutions and the need for Security Council endorsement of any new actions against Iraq.
Unlike other leading West European countries, President Putin and his government prefer to keep their heads down, reflecting their wish to nurture Russia's new and still-fragile rapprochement with the US.
But this explanation does not fit Russian policy on Iran, where, despite US pressure, the Putin government is quite literally sticking to its guns by selling weapons and civil nuclear technology to Teheran.
The nuclear issue came to the fore during the recent visit to Moscow by US Energy Secretary Spencer Abraham.
American arguments against Russian cooperation center on Iran's motives for developing nuclear power.
Given the country's massive hydrocarbon reserves, the Iranian regime has no obvious need for such a program besides its suspected ambition to develop nuclear weapons.
Transfer of atomic energy know-how from Russia is seen as a first step towards achieving that goal.
Russian officials reply that there can be no serious objection to such civil nuclear cooperation programs so long as the recipient country accepts the safeguards and inspection regime of the International Atomic Energy Agency (IAEA).
This is the case with Iran.
Russian officials like to point out that the US and other Western countries once planned similar cooperation program with countries, including North Korea, which do not accept the rigorous IAEA safeguards to which Iran has agreed.
Russia's government argues in a similar vein that its conventional arms sales to Iran concerns supplies of equipment that have no bearing on concerns about the proliferation of weapons of mass destruction.
It challenges the US and others to prove the contrary.
In response, the US has made a partial, but not fully convincing, case--at least publicly.
After talks with Mr Abraham, Russia indicated that implementation of nuclear projects in Iran beyond the existing one at Bushehr would be subject to a review of domestic political developments.
But that seems more like a tactical move aimed at appeasing the US, rather than a reflection of genuine second thoughts on nuclear cooperation with Iran in principle.
All of this suggests that the Putin administration has other goals besides proving Russia's new-found friendship with the US.
Deeper interests underlie Russia's attitude toward Iran and its tacit accommodation of US war plans against Iraq.
One need look no further than the country's external financial position.
Russia inherited all of the Soviet Union's foreign financial claims and liabilities.
It now spends up to $10 billion a year servicing Soviet-era debts.
Soviet-era claims, on the other hand, are almost all beyond recovery.
Oil-rich Iraq's debts, with a face value amounting to many billions of dollars (deriving mainly from export credits for arms sales), are a rare exception.
Russia's main interest in Iraq is to get these loans repaid, and then resume arms sales, while simultaneously becoming a major, perhaps the dominant, foreign player in Iraq's oil and gas sector.
Ever since the Gulf War, Russia has pursued these goals by promoting rehabilitation of Saddam's Iraq via the implementation of Security Council resolutions and the lifting of sanctions.
That route now looks hopeless.
So the US goal of regime change in Baghdad does not look too bad, even if it cannot be publicly supported.
For President Putin it makes sense to stay on the sidelines over Iraq, at least for now, and to be repaid later for his helpful silence in the form of US influence on the successor Iraqi regime concerning repayment of the country's Russian debts.
If the US war in Iraq fails, the situation will hardly be worse than it is now from the narrow point of view of Russian interests, while the resulting mess will be a problem for the US and its traditional allies rather than for Russia.
The contrast between Russia's handling of Iraq and Iran underlines not only Mr Putin's famous pragmatism, but the sophistication and adroitness of his policy.
This contrast also reflects the fundamental difference between Iran, an historical nation state, and the artificial creation that is Iraq.
Russia's long-term interests in Iran require permanent engagement.
Iran's Islamic revolution will inevitably run its course and mutate into a new form of nationalism, to some extent mirroring Russia's own transition out of the Soviet system.
With Iraq, the opposite is true, because not only the regime but the country itself might cease to exist, or at least be radically transformed, should Hussein fall.
Putin's goal is to put Russia in a position to exploit such transformations.
Russia’s Illiberal “Liberal Empire”
Across the West, many people are questioning whether Russia will continue using natural gas as a means of putting economic and political pressure on Ukraine, Georgia, and other countries in what the Kremlin regards as its “near abroad.”
Using the “energy weapon,” however, is not just a tactic: it is at the heart of the prevailing doctrine guiding Russian foreign policy.
Russia’s policy toward the post-Soviet countries is based on the doctrine of a “liberal empire,” according to which Russia’s major government-owned and private companies should assume control of key economic entities across the territories of the former Soviet republics by acquiring their assets.
In this context, the word “liberal” should be understood to suggest that the empire of the “new Russian dream” should be built by purely economic means, excluding all forcible action against other nations.
Naturally, the key role in this model is given to the supply of energy to the post-Soviet countries.
In particular, the Russian utility giant Gazprom uses increases in gas prices as a means to punish “disobedient” neighbors.
Ukraine was punished in this way for its eagerness to integrate with the West following the Orange Revolution.
However, after the return of the pro-Russian Victor Yanukovych to the position of Ukrainian prime minister, the country’s pro-Western orientation has been significantly weakened.
So it should be no surprise that Ukraine under Yanukovych has faced no further problems with the supply of Russian gas.
But Georgia remains a major Kremlin-Gazprom target.
Russia’s attempt to drag Georgia into its imperial net started in the summer of 2003, when the Russian power monopoly United Energy System took control of 75% of Georgia’s electricity network.
After the Rose Revolution of November 2003, Russian companies turned out to be the most avid purchasers of Georgian enterprises and their assets.
The first significant obstacle in the way of Russia’s designs on Georgia was intervention by the US, which demanded that the Georgian government drop negotiations with Gazprom and banned Georgia from selling the gas pipeline that connects Russia and Armenia through Georgian territory.
Russia punished Georgia almost immediately, banning the import of Georgian wines and mineral waters – both of which are key export goods.
As Georgia’s prospects of joining NATO seemed to increase, Russian actions became more illiberal.
Ethnic Georgians living in Russia, including those who are Russian citizens, became targets of persecution.
Russia’s actions are aimed at fomenting an anti-government backlash in Georgia, thereby paving the way for pro-Russian political forces to come to power.
But the illiberalism inherent in Russian imperialism is not limited to recent behavior, and, more disturbingly, it extends to the question of Georgia’s territorial integrity, as Russian troops continue to prop up secessionist regions.
By provoking ethnic conflicts in the territories of former Soviet republics, Moscow hopes to keep them under its control and influence.
Ironically, the Russian troops deployed in the renegade Georgian regions of Abkhazia and South Ossetia have been accorded the status of “peacekeepers.”
But they are really illegal occupiers, as Russia’s decision to give Russian passports to these regions’ residents attests.
Now Russia is threatening to recognize the independence of Abkhazia and South Ossetia if the West recognizes the Serbian province of Kosovo as an independent nation.
To the extent that most of the residents of Abkhazia and South Ossetia have already been given Russian citizenship, the recognition of those two regions’ sovereignty would be entirely fictitious and, in fact, an interim measure on the way to their full annexation by Russia.
To strengthen Russia’s political influence over Georgia’s separatist regions, Gazprom, without taking the trouble to ask for permission from Georgia’s democratically elected leaders, has begun constructing a gas pipeline connecting Russia and South Ossetia directly.
Although there was no interruption of gas supply from Tbilisi to South Ossetia, this step is necessary for the Kremlin to ensure even greater integration of this Georgian region into Russia’s economic system.
With Gazprom having already doubled gas tariffs for Georgia, the energy noose is tightening.
But, thanks to gas supplies from neighboring Azerbaijan, Georgia has not yet been strangled.
A revived Russian empire, whether it is constructed by force or through economic coercion, is not in anyone’s interests.
Reigning in Russia’s illiberal “liberal empire” is the central question of European security today.
Russia\u0027s Incompetent War on Terror
In response to the recent wave of terrorist attacks, Vladimir Putin has demanded that even more power be vested in him.
As leading Russian military expert Alexander Golts argues, the problem in Russia is not a lack of central power, but of power exercised incompetently and without individual initiative.
The slaughter by terrorists of hundreds of Russian children in Beslan was final proof - if more was needed - of the utter incompetence of Russia's military and security services.
In Beslan, camouflaged men representing four ministries fussed uselessly, with no clear leader or goals, losing precious minutes when the violence erupted.
Meanwhile, Nikolai Patrushev, the director of the Federal Security Service (FSB, the former KGB) and Rashid Nurgaliev, the head of the Ministry of Internal Affairs (MVD), both sent to Beslan by President Vladimir Putin, were invisible as the tragedy unfolded.
So once again Russians must face how ineffective their military is.
Indeed, none of Russia's power structures, including the military, the FSB, and the MVD, are capable of performing effective anti-terrorist operations.
Most Russians reached this conclusion long before the Beslan attack.
In 2002, after terrorists took 800 theatergoers hostage, Putin ordered that an anti-terrorist component be added to Russia's military strategic plan.
Some military analysts saw this as the beginning, at long last, of serious reforms, as the army was capable only of executing military operations in Russia's traditional way, i.e., using overwhelming force, as in WWII.
Russia's traditional army cannot fight terrorists effectively because it disdains the ability of soldiers to work in small groups, and does not encourage individual initiative on the part of officers.
All are simply expected to execute orders scrupulously.
But it is individual training and the ability to make split-second decisions in a fluid situation that are required in anti-terrorist operations.
Incidentally, when one such anti-terrorist operation was suggested in the Pankisi Gorge in Georgia, Putin decided against it, understanding that instead of eliminating terrorists it would likely turn into a full blown traditional war.
From the outset, the Defense Ministry was skeptical of Putin's order to include anti-terrorism on the military agenda.
It suggested, instead, that the army should play a secondary role in anti-terrorist operations.
The Army's hostility to reform is deeply ingrained.
Today, Russia's army has no professional institution for training non-commissioned officers.
The Defense Ministry simply names sergeants from senior conscripts, which means that sergeants are not very different from their subordinates in either age or training.
The internal conditions of the "power" ministries - the FSB and the MVD, which bear the main responsibility for antiterrorist operations - are equally grim.
Now the Kremlin wants to merge the FSB and MVD into one Ministry of State Security, thereby creating a single anti-terrorist center.
Putin has already decided to create an operational center of 13 groups in the Northern Caucasus region to coordinate the actions of the Defense and Emergencies Ministries.
But there is little reason to believe that this proposed bureaucratic monster will provide better security than the existing FSB and MVD forces.
The only positive result that may emerge from such a structural change could be that the number of anti-terrorist formations will grow.
Yet even that is uncertain: before Beslan, the response to terrorist attacks in Ingushetia and Chechnya consisted of efforts to form additional traditional military divisions.
It is now obvious that overwhelming numbers don't provide an advantage in fighting terrorism, because it is the terrorists who have the initiative.
They plan when and where to strike.
Confronting them effectively will require root-and-branch change in order to inspire Russian security officials to take the initiative.
For example, Russian security structures have no information about the underground work of the terrorist organizations, which are spread across the entire Russian Federation.
There is no credible intelligence penetration of these organizations.
This must change if Russia is to prevent future Beslans.
But fighting terrorists requires an entirely different kind of spying from "uncovering" traditional "spies," or neutralizing unpopular oligarchs such as Mikhail Khodorkovsky.
To meet today's threats, troops must be able to take individual responsibility and initiative, and need to be trained to react resourcefully and at a moment's notice.
These qualities simply don't exist in Russia's Sovietized military organizations, with their rigid hierarchies and culture of blind conformity.
The entire military philosophy in Russia must be changed.
But neither Russia's president nor its power ministries seem ready for this.
Instead of confronting today's new and very real enemy, they would rather confront the old, traditional one - the West.
After the Beslan tragedy, Putin offered an exotic explanation of terrorism: the terrorists, he claimed, are instruments in the hands of those who still fear Russia as a nuclear power.
This is nonsense on stilts, though it obviously sounds pleasing to generals in the power ministries, because the only war they know how to wage is with "world imperialism."
They are useless at fighting today's new terrorist enemy.
Without major reform of all security and military forces - reforms that provide incentives for individual officers to show initiative and take responsibility - Russia's war on terror will remain one-sided: the terrorists will be doing all the attacking.
Russia\u0027s Language is in the Soup
Three hundred years ago Peter the Great cut a window into Europe.
Foreign languages flooded into Russia: English, Dutch, French, and Italian.
Today, new words and cultural concepts are also arriving in Russia at breathtaking speed.
Sometimes they add to, sometimes they replace, Russian analogues.
For example, Russia has had "shti" (cabbage soup), "ukha" (fish soup), "pokhlebka" (everything soup), "selyanka" (peasant soup), "botviniya" (cold beet soup), "okroshka" (spring vegetable soup).
Now bullion, consommé, and even simply "soup" have arrived.
There was less, now we have more.
Isn't this good?
But somebody thinks that all the old words should be deleted from our memories, that only one word -- soup -- should remain.
Soup; soup in general, with no variations.
Everything we eat with a spoon is soup; everything we eat with a fork is not soup.
In all our menus we have soup - just that.
Forget what you've known, never remember, never try to find out what words like gazpacho or bouillabaisse might mean.
Don't ask what ingredients are used in making those dishes.
You don't need to know all this.
In fact, why be concerned about the foreign gazpacho?
Forget even a simple difference between the "shchi" (cabbage soup) and the "borshch" (beet soup).
There is none.
"Ukha" (fish soup), what is "ukha?"
With all sorts of fish available, let's eliminate the word for it.
Why use a name when we have a product?
Let all of those concepts disappear, evaporate; let only "soup" remain -- eat it, that's it.
Clothes, too, are now generic in today's Russia, as in China under Mao--a blue fatigue.
Let's live in "khroushchobas" (five-story uniform buildings built in the 1950-1960s during Khrushchev's leadership).
Let all men be Sashas and all women Natashas.
If we need to address them, we can simply say, "Eh!"
Under free market capitalism we can, at long last, live up to the communist ideal, "The whole Soviet nation like one man!"
Excellent synonyms like "good, beautiful, valuable, positive, lovely, exceptional, super, enchanted, magic, adorable, remarkable, sweet, perfect, spectacular, fantastic, great, grandiose, irresistible, intriguing, entertaining, luring, incomparable, attractive, striking, divine," are disappearing.
What do we have nowadays?
Only "krutoi" (cool), or "klevyi" (hot).
It is really "cool", for example, to express oneself with just one-syllable words, selectively adopted from all the treasures of the English language.
At this very moment your author is staring with disgust at a cardboard box on which some American has written: "Parm Plus!
New Improved Taste."
What he really wanted to say, of course, was that "This box contains Parmesan Cheese, which because of the newly added ingredients is infinitely better than other cheeses produced by our vicious competitors."
This surgery resulted in the amputation of a perfectly healthy part of the word "parmesan," adding the empty but pompous suffix "plus."
Think of this action as akin to a surgery that replaces a healthy leg with an artificial limb.
Some inexplicable and unsurpassable force makes our journalists (especially young television and radio types), cut out whole bunches of Russian suffixes and throw them into the trash.
"Blef-klub" (Bluff Club) for example is shown on "Kultura" TV.
Its hosts and producers seem deaf to the nauseating connotations - vomit, nausea, and illness - that the word "blef" (blev) has in Russian.
We must remember that despite the IMF, the World Banks, and all the market economic phenomena we have experienced in the last decade, Russian bread cannot grow in a foreign style.
Economy of sounds and words does not work for the Russian language.
Using English-speaking models we no longer get the slow, sequential flow of the Russian linguistic stream but a competition for asthmatics.
The new generation, it seems, prefers new models of verbal exchange, not as enchanting as in the past, but perfectly suited to the simple communications required in today's simplified world.
Everywhere people gripe about how teenagers grunt and do not speak.
Here in Russia, grunting is all we now seem to do.
This is what it a typical modern Russian conversation sounds like.
A restaurant scene (words used in both Russian and English version are italicized):
Client: I want soup .
Waiter: Here is soup .
C: Is soup hot ?
W: Hot plus .
C: (eating) Eh ?!?!
W: Mhhh ?
C: Soup is not hot .
W: No?
Not hot ?
Then it's cool .
C: Not cool.
Soup --out.
W: Well, it's one buck .
C: Go to hell!
Here is ruble plus .
W: Eh!
Ruble is shit.
Give me a buck .
C: No!
W: I'll give you a black eye plus .
Give me a buck .
C: Here (punches a waiter in the eye)
W: Mhhh!
C: I saved a buck (runs away).
This language can be used not only by male silent types, but also by lovely chirping ladies.
Here is a beauty parlor scene (based on a true story).
A lady enters with a fashion magazine.
Hairdresser: So?
Lady: Cut.
H: How?
L: Like here.
Boxer -cut.
H: (approvingly) Boxer is cool .
L: So...
H: So how was Cypru s?
L: (perking up) O, Cyprus was cool .
Beach, bar --all plus, juice, gin, drink .
At night--husband into the douche , daughter--out, here is Greek Max -- knock, knock , then sex , cake, bucks, kreks, feks, peks .
So here.
At this point your author runs away, in despair, in search of the few remaining Russians who still converse in their native language.
Russia’s Lawless Legality
MOSCOW – Colonel Yuri Budanov is a convicted rapist and murderer.
After serving half his prison sentence for the rape and murder of an 18-year-old Chechen, Elsa Kungayeva, he was released last December.
Svetlana Bakhmina was a lawyer at Yukos, the oil company formerly run by Mikhail Khodorkovsky.
In 2004, she was arrested and, in 2006, sentenced to six and a half years on embezzlement and tax fraud charges.
Like Budanov, she applied for early release from prison in 2008.
Her request was refused, as was her earlier plea in 2006 to suspend her sentence until her two small sons reached the age of 14 – a request she was entitled to make under Russian law.
Vasily Aleksanyan was Executive Vice President of Yukos, and, as a lawyer, defended Khodorkovsky and his partner, Platon Lebedev, after their arrest in 2003.
He was subsequently disbarred and was himself arrested in April 2006.
By that time, Aleksanyan was critically ill with AIDS, for which treatment was withheld. In December 2008, the Moscow City Court approved his release on bail of 50 million rubles (around $1,775,000 at the time).
Finally, consider Khodorkovsky and Lebedev themselves.
Arrested in 2003, they were sentenced in 2005 to eight years in prison on charges of tax fraud.
They are serving their sentence in Chita on the Chinese border, although Russian law prescribes that, for the crimes with which they were charged, they were entitled to be imprisoned near their place of domicile, i.e., in Moscow.
When Dmitry Medvedev was elected as Russia’s president a little more than a year ago, he promised to do away with the “legal nihilism” in Russia.
Although he was a close confidante of Vladimir Putin and probably was able to assume presidential office exclusively for that reason, many dared to hope that he would stop the vendetta against Khodorkovsky and all those who had been close to him.
Disillusion fully set in only one year after Medvedev’s election, when a new case against Khodorkovsky and Lebedev was brought, this time for embezzlement of billions and money laundering.
A cynical observer remarked at the preliminary hearing that by the looks of it the Russian authorities couldn’t make up their mind: either the former Yukos bosses didn’t pay taxes or they embezzled money.
But since when does one pay taxes on embezzled funds?
The courtroom where the new trial against Khodorkovsky and Lebedev is taking place is slightly larger than a spacious classroom.
And it is full of heavily armed guards.
Despite this, the two defendants are forced to sit inside a narrow cage whose glass front has only two small holes through which their lawyers can communicate with them.
Every day, they are brought into the courtroom handcuffed like dangerous felons.
One cannot help but contrast this with Budanov, the rapist and murderer who is now free to move about Russia at will.
The judge refused without comment requests by the defense to remove the cage and to replace one of the prosecutors, who had already been a prosecuting counsel during the first trial. So the authorities’ aim seems clear: put Khodorkovsky and Lebedev away for a much longer time – more than 20 years if they are convicted.
Still, this new trial of course is also a test case for Medvedev’s presidency. So far, he has done nothing to counteract the legal nihilism against which he himself has spoken.
But maybe he will in the course of this trial, which resembles a personal vendetta even more than the first one did.
To be sure, Khodorkovsky is no saint.
Like many others in Russia who are allowed to enjoy their wealth in peace today (or maybe are lamenting its loss due to the financial crisis), he made his money in thoroughly obscure ways during the early post-Soviet years.
But, instead of buying villas, yachts, or soccer clubs abroad, he invested his fortune in Russia.
Of course, he did mainly fill his own pockets – and his social and political activities certainly were not entirely altruistic, either.
But what made him public enemy number one for Putin was his desire to move Russia in a political direction that he viewed as positive and desirable.
It was his ambition to subject the country to truly far-reaching social and political reforms that sealed his downfall and also brought about this new trial, which appears intended to silence him for good.
Medvedev’s presidency will inevitably be measured by this case.
Will he tolerate and endorse his prime minister’s personal aversions, or is he willing to put an end to the infamous spectacle of a judicial process that has been manipulated and abused from beginning to end?
Little speaks for the latter scenario, but Russia has always been a country where hope dies last.
Russia’s Lost Opportunity with Japan
TOKYO – President Dmitri A. Medvedev visit to the south Kuril Islands, which the Soviet Red Army seized from Japan in the closing days of World War II, has demonstrated in unmistakable terms that Russia has no intention of returning the mineral-rich islands.
This visit is not only a lost opportunity, given Russia’s need to modernize its economy and the help Japan could provide, but a grave strategic error in view of Russia’s increasing worries about China’s ambitions in Asia, which includes Russia’s lightly populated Siberian provinces.
Russia, however, is only now beginning to realize that it must be much more pro-active in protecting its national-security interests in the Pacific region.
The problem is that Russia’s focus is wrong-headed.
For coinciding with China’s recent naval exercises in the Yellow Sea, the Russian Armed Forces carried out part of its “Vostok 2010” drills (involving 1,500 troops) on Etorofu, the largest island among the Russian-occupied Northern Territories of Japan.
The entire Vostok 2010 exercise involved more than 20,000 troops.
Russia’s illegal occupation of the south Kuril Islands began on August 18, 1945, three days after Japan accepted the Potsdam Declaration (or the Proclamation Defining Terms for Japanese Surrender), which ended the Pacific War.
Stalin’s Red Army nonetheless invaded the Chishima Islands, and has occupied them, Southern Karafuto (or Southern Sakhalin), and the islands of Etorofu, Kunashiri, Shikotan, and Habomai – which had never been part of the Russian Empire or the Soviet Union at any point in history – ever since.
Indeed, the lower house of Russia's Duma passed a resolution earlier this year designating September 2 as the anniversary of the “real” end of World War II, effectively making it a day to commemorate the Soviet Union's victory over Japan – and thus an attempt to undermine Japan’s claim that the occupation of the islands came after WWII’s end.
On a trip to Russia’s Asian port of Vladivostok, Russian President Dmitri Medvedev declared that the social and economic development of Russia’s Far East is a national priority.
By continuing to maintain its illegal occupation of Japanese territory, however, Russia precludes expansive Japanese involvement in this effort, effectively leaving the Chinese to dominate the region’s development.
Russia’s persistence in its self-defeating occupation is surprising.
Indeed, when Boris Yeltsin was Russia’s president, the country came close to recognizing the need to return the Northern Territories to Japan.
But a nationalist backlash doomed Yeltsin’s efforts.
Even Japan’s strategically myopic current government seems to understand that Russia needs to play some role in achieving a new balance of power in Asia.
There are rumors that Prime Minister Naoto Kan’s administration is planning to break the logjam in the Japan-Russia relationship by appointing Yukio Hatoyama, his predecessor as prime minister, ambassador to Russia.
Hatoyama is the grandson of Prime Minister Ichiro Hatoyama, who signed the Japanese-Soviet Joint Declaration on October 19, 1956, which formally restored diplomatic relations between two countries and also enabled Japan’s entry into the United Nations.
That treaty, however, did not settle the territorial dispute, resolution of which was put off until the conclusion of a permanent peace treaty between Japan and the Soviet Union (now Russia).
In the 1956 declaration, the two countries agreed to negotiate such a treaty, and the Soviet Union was to hand over Shikotan and Habomai islands to Japan once it was concluded.
In the meantime, the status of the larger Etorofu and Kunashiri islands would remain unresolved and subject to negotiation.
Japanese public opinion has remained adamant for decades that all four islands belong to Japan, and that no real peace can exist until they are returned.
So sending Hatoyama as ambassador may elicit harsh criticism, as his grandfather once agreed to a peace process that returned only two islands, and many Japanese fear that his grandson may also be prepared to cut another unequal deal.
Ambassadorial appointments should never be used as political stunts.
This is particularly true for the appointment of an ambassador to a country that is critical to Asia’s balance of power.
But it is not surprising coming from a government that lacks any coherent concept of Japan’s national security.
Fortunately, Japanese voters sense their government’s irresolute nature, delivering it a sharp rebuke in the recent elections to the upper house of Japan’s Diet.
But it is not only Japan that needs a government that takes regional security issues seriously.
Russia should recognize that it has neglected its position in Asia for too long, and that only when it returns Japan’s Northern Territories can Japanese expertise be brought seriously to bear in developing Russia’s Far East.
Only normal bilateral relations will allow the two countries to work together to forge a lasting Asian balance of power.
Given his record, Vladimir Putin would not face the type of nationalist backlash Yeltsin confronted if he sought to reach an agreement that restored Japan’s sovereignty over its Northern Territories.
Will he have the strategic vision to do so?
Russia\u0027s Manipulative Media
MOSCOW: Today, there are no political parties in Russia, only mass media.
This is the little noticed result of the last parliamentary and presidential elections.
To be sure, the press is powerful in most democracies and often influences the ways in which political messages are read by the public.
But in more developed systems, political programs and ideas are ultimately the work of political parties and politicians – what people ultimately vote for or against.
In Russia, the media don't "mediate"; they are the very source of Russia's political ideas.
Russian voters vote don't vote a party line, they vote the mass media line.
Last summer there was little doubt that the coming parliamentary elections would make the Luzhkov/Primakov Fatherland-All Russia party (OVR) the biggest fraction in the Duma.
After the vote on December 19, OVR was not even runner up: it came third, with 13% of the vote and 46 out of 450 seats in the Duma.
Similarly, no one doubted last July that the next President would be either ex-prime minister Primakov or Moscow's mayor Luzhkov.
All that was left to guessing was which of the two would agree to be prime-minister in the other's presidential administration.
When the presidential election occurred, however, neither man was anywhere to be seen.
What happened to OVR, supposedly the new party of power?
What happened to Primakov and Luzhkov?
Did they change their political positions?
Did OVR commit some huge political blunder that finished them off?
They were destroyed, not by themselves or their unpopularity with voters, but by the mass media.
That same mass media also created a new idol who has now swept all before him.
A new inter-regional movement, Unity, founded only in September ‘99, dominated the parliamentary elections last December on a platform that could be summarized in two words: Vladimir Putin.
From then on the presidential election was a yawn: the only (not very exciting) question was whether Putin would need one or two rounds to switch from being the "acting" to the "elected" holder of the highest office.
In the wake of Putin's personal juggernaut, Unity also lapsed into desuetude.
To understand what happened, we need to look beyond politics and into the psychological makeup of Russian voters.
Only two groups of Russians today show some resistance to the all-powerful sway of the media.
The first – around 30% of the voting population – is made up of political extremes, mostly hard core communist supporters for whom "party discipline"and unqualified hatred of everything since the Soviet Union's collapse trumps all other considerations.
Included in this 30% is a also sprinkling of right-wing nationalists who look at post-1991 history as a vast anti-Russian conspiracy.
The other group less subject to informational hypnosis are young people.
By and large, the new generation, grown to adulthood after 1991, has its own mind and does not look at every published word as if it was revealed truth.
But in what is perhaps the most damning failure of democracy in Russia, the young are politically apathetic and refuse to vote or actively participate in politics.
The rest of the Russian public is held in thrall by TV and the press.
How?
After all, the Russian media do not seem more trustworthy, better informed, or more professionally run than in most countries; quite to the contrary, they are owned by a few oligarchs, and their bias and manipulation are both transparent and crude.
The answer lies in the most insidious Soviet heritage.
More than 62 million Russians who are over 40 today were formed by the Soviet system.
Although many do not have much sympathy for the old regime, most have been conditioned to view any published word, or anything they see on TV, as a type of gospel truth not subject critical assessment.
Such atrophy of critical thinking and unprecedented information naivete make it possible for a politically and financially motivated press to manipulate a good half of the voters.
The abnormal power of the media also means that they are not run as normal businesses.
Since owning the media allows powerful interests to achieve their coveted political or economic objectives, political influence, not profit, drives media behavior.
Just look at who stands behind the most important newspapers and TV stations in Russia.
The largest players are the state and business empires for which the media is not a significant profit center.
The list of major owners, in addition to the federal government and the usually mentioned moguls, such as Berezovsky and Gusinsky, includes the oil giant Lukoil, the gas empire Gazprom, the financial group Oneksimbank, the Moscow government, and others.
Of these, only the Gusinsky group derives its profits primarily from the media.
Another peculiarity of Russia's media market, stemming from the absence of the profit motive, is a chronic overproduction of titles.
New players are forever trying to gain a foothold of political influence.
17 daily newspapers are published in Moscow, 10 of which call themselves "national."
Some 5,000 newspapers appear in Russia.
Their total combined circulation is of similar size to total newspaper circulation in Germany, but there fewer than 500 titles do the job.
All the while, the total volume of advertisements during the best of times (before the 1998 crisis) did not exceed $2.5billion, as compared with more than $20 billion in Germany and more than $117 billion in America.
The power to think critically develops only slowly.
So Russia must wait before Russian politics asserts its independence and the media learns to report, rather than create.
The hope that this may one day happen lies in the fact that, despite its corruption, the media is free – one of the great legacies of Yeltsin's presidency.
Russia’s Moving Presidential Target
Recently, a small event caused a major stir in Russian politics.
An aide to President Vladimir Putin, Igor Shuvalov, said that it was realistic to expect the appearance of a new person whom Putin would consider his potential successor.
The statement hit like a bombshell, producing an explosion of comments.
There is nothing strange in this.
Russia’s somewhat archaic political culture overly personifies power.
Perceptions and assessments of the country’s future often depend heavily on the personality of its leader, his resoluteness, and his intellectual and moral qualities.
Furthermore, Putin himself is interested in preserving uncertainty with regard to his successor for as long as possible.
By doing so, he avoids the damage to his authority that would be caused by becoming a “lame duck,” particularly given Russia’s servile bureaucracy and its lack of reliable institutions and respected traditions to carry out a smooth transfer of power.
Finally, different clans around the president have long been trying to promote their own candidates for succession.
Statements similar to Shuvalov’s have already been made, and more can be expected.
This ongoing discussion of the various candidates’ merits and drawbacks recalls how airplanes protect themselves from missile attacks by launching a false target.
Public interest is the missile, and the target is the “ruling power,” which protects itself by providing a decoy in the form of aimless talk.
But a more fundamental question is why Russia’s politicians, journalists, and analysts (and even some in the West) happily engage in this ruse.
At the moment, who will succeed Putin is not important; what counts is the process that will result in the choice of Russia’s third president.
The real historical significance of the choice that Russia will face in 2008 will be determined not by the next president’s personal qualities, but by his loyalties – that is, to whom he owes his job.
Putin’s successor (whoever that will be) will come to power as a result of a deal within a narrow elite circle.
This means that he will be accountable to and dependent on those who raised him to power, not in a symbolic sense, but in the quite real sense of fulfilling promises and facing sanctions if he does not.
This narrow circle comprises not only very rich and resourceful people, but also members of informal but very effective organizations (which are often, perhaps not entirely correctly, called “mafia”).
Thus, the implementation of Operation Successor (which may include the extension of the current president’s term) has imitated the way Putin himself came to power, and leaves Russia on the same path that Yeltsin set in the last years of his presidency – a path that will either ruin the country or bring it to a dead end.
Politicians who come to power by winning a free and fair election are accountable primarily to voters.
This does not necessarily lead them to work solely for the public good.
Even winners of competitive elections have commitments to their campaign teams and sponsors.
However, the existence of real political opposition creates a different atmosphere, which spreads beyond elections.
Free elections do not determine politicians’ behavior, and do not necessarily ensure that moral, energetic, and intelligent people fill high offices.
But freedom and democracy do restrict arbitrariness and theft, and encourage politicians, regardless of their moral qualities, to take public interests into account.
If the next president comes to power by means of a free and fair election, Russia will have a real chance at a decent future.
However, if Putin’s successor – or Putin himself – is imposed on the country in an uncompetitive way, Russia will remain on its current path to nowhere.
This is a critical moment for Russia.
Unfortunately, what is most important to comprehend in this moment is barely recognized, much less discussed.
Russia\u0027s Naked Public Space
Those who lived in Moscow in the late 1990's frequently encountered odd - and mostly incomprehensible - billboards.
The first such billboard showed a young woman's face, but no bar of soap or bottle of perfume. No brand name, either.
A short line said simply "I love you."
Who loved this woman and why did he want everyone to know of his passion?
Rumors had it that one of Russia's richest men wanted to impress his sweetheart.
Next came a billboard showing a man's face, with foreign coins flowing down upon it.
The line read, "Roma takes care of the Family, the Family takes care of Roma.
Congratulations!
Roma found a classy place for himself."
There was never any public explanation for this message, either, just rumors - that "Roma" was Roman Abramovich (this was long before the tycoon bought the Chelsea football team, becoming a world celebrity), and that he had close ties with then President Boris Yeltsin's inner circle, known as "the Family."
Even the few who claimed knowledge about Roma were unsure about who commissioned the billboard.
It was simply taken for granted that what is supposed to be public space - the streets of Moscow - was appropriated for a vaguely menacing private message.
Such "private" billboards kept appearing for about a year with varying themes.
The implications of this game, however, run deeper than the actual messages sent and received.
The billboards with their private messages were able to occupy public space so easily because in Russia public space is virtually empty: there's very little, if any, communication between state and society, and barely any public debate.
Under Communism, public debate was confined to private kitchens.
Everything beyond private space was state territory.
Those who encroached upon it were punished.
Perestroika turned the country into one big public space.
Streets and squares, newspapers and literary journals became the ground for free public expression.
Newspapers published in gigantic numbers.
Russia's people wanted to make a difference and amazingly they did: their energy and cohesion put an end to Communist rule.
Of course, what Russia had in the late 1980's and early 1990's wasn't institutionalized democracy, but revolutionary excitement.
It was expected that out of this sea of democratic emotion new political institutions would emerge.
Instead, political life here has been reduced to mere formality.
Although there's nothing like Soviet oppression, the alienation between state and society resembles that of Soviet days.
Unlike the Communist regime, the new Russian state doesn't treat its citizens like a flock of sheep.
On the contrary, the state generally ignores its citizens - it is in no way accountable to the public, nor does it bother to explain what actually goes on inside the Kremlin.
With political parties driven into irrelevance, parliament turned into a rubber stamp agency, and national television networks taken under government control, public discourse has all but disappeared.
Ideas may be voiced, but there's barely any audience, and these utterances don't resonate; they die away with no implications or consequences.
Russian society is atomized, with no sense of cohesion, solidarity, or collective drive in any interest group, professional or social, big or small.
Big business won't stand up for the oil tycoon Mikhail Khodorkovsky, singled out by the Kremlin as a political enemy and imprisoned since last year.
Instead, each businessman makes his own deals with the Kremlin to gain relative security.
The same lack of cohesion is found among journalists.
No professional solidarity was shown back in 2001, when Russia's private national television network NTV was taken over by the government.
A considerable degree of freedom remains, but a submissive society freely gives ground to the state.
Seven or eight liberal dailies publish critical opinion or even incriminating evidence against government officials.
But their print runs range between 20 and 100 thousand copies, and their circulation is mostly limited to Moscow.
With such small audiences, they are all but irrelevant.
Worse, the broad public isn't anxious to get a better idea of how important government decisions are made.
The old Soviet mindset persists: they up there will take their own decisions regardless of us down below.
In this atmosphere of public silence, the virtually vacant public space is filled with odd voices that are not intended for public consumption.
The billboards were "them" communicating in our common space, exchanging messages, as it were, over our heads .
In March, a high-quality Moscow business daily, Vedomosti, published a letter from Mikhail Khodorkovsky.
It was a mystery how the letter was smuggled out of jail.
Did Khodorkovsky write the letter, or had he merely signed it?
If he was the author, was it his political manifesto or an act of repentance?
In the murky atmosphere surrounding Khodorkovsky's case, it is impossible to discover which theory is true.
But the more relevant question is whom Khodorkovsky's letter aimed to address.
Vedomosti readers may sympathize with Khodorkovsky's plight, but they account for only 60 thousand people.
The public at large was basically unaware of Khodorkovsky's letter, because the state television networks did not report it.
His missive was more likely an element in behind-the-scenes negotiations between Khodorkovsky and various Kremlin factions.
Khodorkovsky's letter may have appeared in the public space, but it was not intended for public consumption.
Rather, it was like the "I love you" billboard.
For the time being, Khodorkovsky's love remains unrequited.
Russia\u0027s Neurotic Invasion
PARIS – At the very moment China was getting a “gold medal” in diplomacy for the success of the opening ceremony in Beijing, Russia earned a “red card” for the extreme and disproportionate violence of its military intervention in Georgia.
Whereas China intends to seduce and impress the world by the number of its Olympic medals, Russia wants to impress the world by demonstrating its military superiority. China’s soft power versus Russia’s hard power: the two countries’ choices reflect their very different levels of self-confidence.
China may play the victim versus the West, but its leaders know that their country is back on the world scene at a level that they deem appropriate and legitimate.
Of course, domestically, China’s leaders lack confidence and behave accordingly towards their citizens.
Yet, as China takes minuscule steps forward, Russia takes giant steps backward.
For many years now, Georgia and Russia have been playing with fire, and war in the Caucasus looked preordained.
Each side was waiting for a false move by the other to play its hand.
It is more than likely that the young and impulsive Georgian President Mikheil Saakashvili fell into the trap that he had helped to create.
He wanted to demonstrate to his Western partners that Georgia needed NATO protection from Russia, and that accession was therefore urgent.
Regardless of whether some in the United States encouraged Saakashvili, he did not expect – but he should have – the “hyper-charged” reaction from Russia. For it is clearer than ever that Vladimir Putin is still in charge.
The opportunity that Saakashvili presented to him to signal to the world Russia could no longer be humiliated was simply too tempting.
Well aware of Russia’s emergence as a growing energy super-power, of the relative weakening of US clout and determination, of Europe’s deep divisions between pro-Russians, such as Germany and even more so Italy, and anti-Russians (mostly from the EU’s newest members in eastern Europe), and of the United Nations’ paralysis owing to Russia’s veto power, the Kremlin is sending a strong message to the world: “the time for concessions is over.”
Yet Russia, like Saakashvili, is playing with fire: its strategy of encouraging separatist forces in the two Georgian provinces may inflame separatist tendencies in other parts of the Russian Federation (remember Chechnya?).
Moreover, Russia is unnecessarily isolating itself from the world.
Above all, this crisis confirms the new hierarchy of powers that now exists in the world. In this new world, China and Russia are back and America, though still on top, is declining.
As for Europe, while the European Union mediates, in doing so it is also demonstrating the limits of its influence.
The EU is truly “convincing” only when it can use the seductive power of a membership card.
But Russia is not interested in joining, at least not on Europe’s terms.
Russians are well aware that Americans want their help in the Middle East; on other issues, they listen to Europe and America with a stance oscillating between indifference and brutality.
In the Caucasus, everyone is losing, though some more than others – foremost the civilians who have lost their lives or homes.
Then comes the Georgian government, which has demonstrated its immaturity, if not irresponsibility.
A lamb, after all, does not provoke a bear.
But Russia, too, has unnecessarily damaged its international image.
The Kremlin did not need such a display of unrestrained force and brutality to prove its case.
China, in comparison, now looks like a respectable partner.
As for the West, it is confronted with a dilemma.
Can it reward Georgians for the leaders’ irresponsibility by rushing the country into NATO?
On the other hand, can it afford to grant Russia the de facto right to control, directly or indirectly, countries like Georgia today and Ukraine tomorrow?
The current crisis in the Caucasus does not mark the return of the Cold War, nor is it likely to mark the start of open warfare between Russia and the West; it is, more simply, the return of the traditional imperialism practiced by the Russian Empire more than a century ago.
China is, with the exception of Tibet, a satisfied and confident status-quo empire.
Russia by contrast is a revisionist imperialist power, whose lack of self-confidence is returning to haunt the world.
Russia\u0027s New Anti-Oligarch War
Moscow's sleepy political summer has been stirred by a Kremlin attack, initiated by President Vladimir Putin's closest aides, on Russia's leading oligarch and the country's richest man--Michael Khodorkovsky, the principal shareholder of the oil company Yukos.
Of course, there is nothing new in such battles.
Elements within Russia's political power structure have periodically waged war on the country's business elite--either to rein in the political ambitions of the oligarchs or to grab a bit of wealth for themselves--ever since the Soviet collapse.
What is different now is that this war--a defining feature of the Yeltsin era--was supposedly settled by President Putin early on in his administration, when he offered the oligarchs a deal: keep your wealth, we won't investigate how you got it, but stay out of politics.
Why has that deal apparently collapsed?
Equally unclear is why Khodorkovsky, the oligarch who has gone the farthest in making his business modern and transparent, the target of attack?
During Putin's first term, the Kremlin ``power structures'' (now dominated by former KGB cronies of Putin from Saint Petersburg) failed to gain control over the country's key financial and economic institutions.
None of the real wealth of Russia has come their way.
But this does not explain why they attacked Khodorkovsky rather than some other businessman with a shady past.
One clue as to why they attacked Russia's richest man is the fact that Khodorkovsky is the first oligarch to help the country's liberal parties as opposed to the ruling party of power, to support independent mass media, and to provide money to lawyers and legal assistants.
Moreover, they also feared that Khodorkovsky was preparing to enter politics.
He was beginning to support the idea of Russia becoming a parliamentary, not a presidential, republic and was gaining influence ahead of this year's Duma elections.
Such activity crossed the line drawn by Putin.
The logic of Russia's presidential regime dictates that only the leader is permitted to control political institutions.
All other attempts to shape the political atmosphere and influence events, especially by a powerful oligarch, violate this logic.
Putin feared that the return of oligarchic political influence would bring back the chaos of Yeltsin's rule.
So Khodorkovsky was targeted.
No doubt, Putin is now likely to behave like a peacemaker.
He is not interested in reinforcing the power of his Kremlin aides.
He also realizes that big business is crucially important for Russia's modernization.
He simply wants the oligarchs to stick to their sphere of activity and to leave politics to him.
But the problem won't go away.
Today's anti-oligarch war has exposed Putin's failure to deliver the ``dictatorship of law'' he promised when he took office.
The attack on Khodorkovsky clearly demonstrates that prosecutors and courts can readily be manipulated by the politically powerful.
That revelation has undermined much of the good Putin has achieved in office, for it has made foreign investors wary once again of doing business in Russia.
Foreign investors aren't alone in worrying.
Frightened by the attack on Khodorkovsky, Russian businessmen worry that success will bring harrassment from the Kremlin.
Some are removing their assets from Russia.
Roman Abromovictch, for example, just acquired London's Chelsea football club--a witty way to join English society, no doubt, but an investment unlikely to offer the kind of financial returns he could make in Russia if his confidence in the country were undented.
This ``anti-oligarch'' war has not damaged Putin's popular standing because most Russians perceive the oligarchs as alien and corrupt.
They object to vast differences in wealth and think large accumulations of it must be the product of theft, not work and risk.
The current generation of big business in Russia will be considered illegitimate for a long time.
The oligarchs would help their own cause by becoming more socially active and spending their money on philanthropical pursuits. In fact, most oligarchs have started charities and foundations.
But their activities are insignificant, primarily because Russia's megarich tend to be more concerned with their reputations in the West than at home.
Worse still, Russia's bureaucracy would likely perceive such activity as a threat, and so spare no effort to hinder Russia's businessmen from civilizing themselves.
Sooner or later Putin will have to choose between the bureaucracy and business.
He will hardly want to depend on his siloviki (those in the Kremlin power structures).
He understands the worldview of the ex-KGB men in the Kremlin very well and is unlikely to approve of revisiting how property and wealth are divided in Russia.
After all, a new division of wealth could occur only in the wake of a revolution that would disturb his hold on power.
Yet Putin knows that he must curtail the political ambitions of the oligarchs if Russian business is to be modernized.
Otherwise, they will continue to use the state to generate huge rents for themselves at the cost of distorting the rest of the economy.
But neither the Kremlin's power elite, the bureaucracy, nor the oligarchs seem capable of reforming themselves.
Each wants to shape the state to serve its interests alone.
So the summer attack on the Russian oligarchs may turn out to be a litmus test that reveals not only Putin's ability to control the oligarchs, but also the retrograde interests of his closest aides.
Sadly, in this clash of titans, postcommunist Russia's main values--liberty and private property--hardly get a mention.
Russia’s No-Participation Pact
MOSCOW – The Russian government, with its solid hold on power, has invariably gotten away with poor performance, inefficiency, corruption, and widespread violation of political rights and civil liberties.
Polls consistently demonstrate that the Russian people are not deluded: they routinely respond in surveys that government officials are corrupt and self-serving.
More than 80% of Russians, according to a poll conducted last summer, believe that “many civil servants practically defy the law.”
And yet Prime Minister Vladimir Putin, who still remains Russia’s most powerful person despite his not holding the presidency, has enjoyed high and steady approval ratings for years.
A mild drop in early 2011 probably reflected frustration over social injustice and a growing sense of insecurity and uncertainty about the future.
Even so, roughly 70% of respondents in a February poll said that they approved of Putin’s performance.
President Dmitri Medvedev’s approval ratings are only slightly lower.
Russian leaders’ high ratings do not, however, indicate a rational preference for the incumbents over potential contenders; with political competition in Russia eviscerated, comparison and choice are not part of the political left.
Rather, these poll numbers are a “vote” for the status quo; they convey a broadly shared sense that political change is not desired, notwithstanding terrorist attacks, technological catastrophes, lawless police, or rigged elections.
During the years of Putin’s leadership, the Kremlin has steadily pushed citizens farther and farther from decision-making by virtually dismantling representative institutions.
Gubernatorial elections were abolished six years ago, and even elected city mayors have been progressively replaced by appointed officials.
Polls routinely indicate that more than 80% of Russians believe that they can make no difference in national or even regional affairs.
This system of political alienation is accepted by an overwhelming majority of Russians.
The “masses” and the “best and the brightest” alike show no interest in political participation.
Political opposition groups do not attract public support, which makes it easy for the government to suppress them.
Indeed, in the absence of political participation, the government enjoys easy dominance over society.
The perennial Russian order – the dominant state and a powerless, fragmented society – remains largely in place.
Twice in the twentieth century, the omnipotent Russian state was dramatically weakened: at the beginning, when the Russian Empire collapsed, and at the end, when the USSR ceased to exist.
Both times, however, the traditional pattern of state dominance was quickly reestablished.
Although state-society relations in Russia hue to a traditional pattern, different leaderships have shaped them in different ways.
Stalin’s regime could be compared to a cruel, sadistic father who keeps his children in a state of fear and submission.
Brezhnev’s model resembled a bad marriage, exhausted of love or respect, in which the spouses constantly cheat, take advantage of each other, and grab each other’s property, though the powerful husband occasionally reminds his wife that he is boss and demands at least a formal pledge of loyalty – or else.
Compared to these two models, Putin’s model of state-society relations looks like a divorce, or at least a separation: each side minds its own business and doesn’t interfere with the other’s sphere.
It is a model best described as ano-participation pact.The Kremlin may have monopolized decision-making, but it is largely non-intrusive and enables citizens to live their own lives and pursue their own interests – as long as they do not encroach on the government realm.
Unlike in the USSR, which massively infringed on citizens’ private space, today’s Russians enjoy virtually unlimited individual freedoms.
The non-intrusive nature of the government is appreciated: people eagerly engage in their private affairs – with little regard for the political realm, which they have willingly abandoned.
Nevertheless, the last 20 years of broad individual freedom and limited civil liberties have generated shifts in Russian society – if not across the board, then certainly among certain groups.
In particular, Russians have acquired some organizational and community-building skills.
The use of online social networks, for example, has grown faster than in any other country in Europe, and has helped create some semblance of a public sphere, with the Russian blogosphere often a venue for angry public expression about social injustice, undeserved privileges, lawlessness, and police impunity.
Socioeconomic protests have also become a feature of Russian life, especially during the economic crisis.
Unlike political groups, which attract very limited public support, socioeconomic demands have repeatedly brought together thousands of people in various parts of the country.
In big cities, moreover, anew urban class is emerging – advanced and modernized Russians with good professional skills who feel at ease in the globalized world.
It is mostly due to this group that private charity has developed in recent years.
But, despite opportunities for self-expression, community building and activism remain marginal and do not alter or weaken the state’s dominance over society.
Despite the recent rise in negative public sentiment, protest activity remains fragmented and invariably local in scope and demands.
For now, at least, provincial Russians and the new urban class alike have accepted Putin’s no-participation pact.
In fact, should events turn out badly, critically-minded and well-informed urban achievers would be most likely to embrace the ultimate form of non-participation: emigration.
In the current political climate, the more enlightened Russians would rather use their skills and talents for self-fulfillment abroad than be the driving force of Russia’s modernization.
Russia\u0027s Nostalgic Generals
Generals everywhere are mocked for wanting to fight new wars the same way they fought the last one.
Russia's military leaders--indeed, much of its foreign policy elite--is stuck in a similar rut.
Both generals and diplomats are finding it hard to move beyond Cold War thinking, and their retrograde posture is hindering President Putin's efforts to push the country in a new direction.
Around the world, Vladimir Putin is viewed as a strong man whose word is sacred.
But this is hardly the case.
In the Iraq crisis, both the Foreign Affairs and Defense Ministries voiced opinions starkly at odds with Putin.
Such divisions occur regularly.
Kremlin watchers, also stuck with Cold War mindsets, prefer to believe that President Putin and his ministers are playing a game of ``good cop/bad cop,'' in which, where the West is concerned, Mr Putin is good and everyone else is bad.
If so, it's a strange game with perverse effects.
For any foreign policy needs clear goals.
But what happened during the Iraq war demonstrated that no real practical goal--such as securing repayment of Iraq's debts or preserving Russian interests in Iraqi oil--guided Russia's foreign policy.
Instead, the Kremlin placed at risk its hard-won warm relations with the US for no clear reason.
It is no secret that Russia's diplomats and military leaders were unhappy with Putin's decisive tilt toward the West after the war on terror began.
Both the Foreign and Defense Ministries wanted a drawn-out fight over America's withdrawal from the ABM Treaty and NATO enlargement.
They were mightily disappointed when Putin stated that he did not want any ``hysteria'' over these issues.
But without the support of these two ministries, Putin cannot institutionalize his new foreign policy course.
In other words, his efforts to reorient Russia's military to confront the most likely threats of the 21st century are being frustrated at the highest level.
Defense Minister Sergei Ivanov does not even bother to hide his skepticism about the necessity of such a reorientation. ``In my view,'' he proclaims, ``it is still premature to speak of the specific content of changes to Russia's defense priorities and to the functions and tasks of its armed forces in connection with the threat of international terrorism.''
Underscoring his real agenda, he adds that, ``No radical revision of the fundamental principles governing the operation of the armed forces is required.''
Yet it is facile to say that antagonism to Putin's new course derives simply from adherence to Cold War stereotypes.
Of course, Russia's generals readily believe the most paranoid explanations of American motives (particularly now, when American foreign policy seems so arrogant).
But stereotypes can survive so long and be so influential only insofar as they serve the real interests of real people and institutions.
The interest that Russia's military and diplomatic elite is defending is something I call the ``confrontation paradigm,'' within which the role--and budgets!--of the Foreign and Defense Ministries receive priority in public spending.
Today, however, President Putin recognizes that economics will determine Russia's future, and so the ``power'' ministries must take a back seat to Russia's modernization and development.
To promote their position, Russia's generals and diplomats adhere to the perception that the country remains besieged by enemies, the US and NATO most prominently.
High-ranking diplomats understand that their way of thinking requires one sort of diplomacy, and that a foreign policy focused on realizing Russia's economic potential requires quite another.
So confrontation with the West (even if only rhetorical) is a form of job protection by other means.
The military brass act as they do for essentially the same reason.
They maintain that Russia needs a big standing army in order to defend the country in any potential war with the US.
Indeed, this year's annual session of the Academy of Military Sciences saw army commanders and military theorists try to prove that a future source of conflict will be America's desire to control the world's oil-rich regions.
Lt. Gen. Alexander Rukshin, chief of the General Staff's main operative directorate, spoke of the need for modernization of command and control systems in preparation for such a war.
He complained that the existing system has limited capabilities against America's precision weapons.
Admiral Victor Kravchenko, the chief of the Navy staff, argued that the main threat to Russia is the US Navy.
Indeed, only the continuance of a vast global threat can justify the existence of Russia's armed forces at their current size of 1.2 million personnel, as well as the current conscription system--deeply resented by oridinary Russians--and a reserve of many millions.
Russian generals insist that conscription must be maintained so that, if necessary, a large-scale war can be waged.
Like post-Soviet Bourbons, Russia's generals and diplomats have learned nothing and forgotten nothing.
They continue to think as they have always done, because it is in their direct self-interest to do all they can to preserve the militarized state of a decadent era.
Russia’s “Oil-for-Knowledge” Scheme
Whenever you fill up your European compact car’s gas tank, or that of your American SUV, you pay as much as a Russian schoolteacher earns in a month.
And every time you pay, you subsidize a regime that relies on energy, not information, as its main product.
You finance the pre-modern and the inefficient, and perhaps worse: every time you pay, you may be collaborating with political evil.
Russia began 2006, the year of its chairmanship of the G-8, by launching a gas war with Ukraine.
Having a virtual monopoly on supply, Russia decided that it could dictate prices.
But Ukraine has a virtual monopoly on delivery, so Russia blinked in this standoff as soon as gas supplies to Western Europe dropped.
Modern economies rely not on monopolies, but on competition.
Contemporary Russians consume competitive products: Nestle cereals, Mercedes cars, Hollywood movies.
The problem is that they do not make them.
Russians pay for this consumption from the profits of gas and oil.
State-owned and private multinational companies drill fuel in Russia and sell it to Europe and North America.
The government partially redistributes profits by collecting taxes and paying salaries.
Gas prices are growing, and so are Russian salaries.
This causes inflation, because, other than fuel, Russians do not produce much else.
To avoid inflation, the government deposits a large part of its profits into a Stabilization Fund.
But, because the Kremlin does not trust its own stocks and bonds, the Stabilization Fund invests in Western securities.
Thus, the government loses its chance to modernize Russian cities, roads, hospitals, and universities.
But inflation still grows, as do real estate prices.
Mortgages are available at outrageously high interest rates.
No civil servant, military officer, or professor is able to buy even a modest apartment, unless they have an additional – often illegal – source of income.
Most don’t.
Russia exposes an ugly truth of our era: illiberal societies can grow just as fast – even faster – than open ones.
Oil-rich states need global networks to sell their oil, to export their capital, and to import technologies and technologists.
Among current United Nations members, countries with large natural resource endowments are also more likely to have a non-democratic regime.
In the 1980’s, Mikhail Gorbachev warned that Soviet oil resources were exhausted.
Of course, due to the Western engineering and management that became available after Gorbachev launched his perestroika reforms, the country was soon producing more oil than ever – indeed, more than was ever believed possible – and oil men like Mikhail Khodorkovsky arose out of the blue.
But, while machines work everywhere, managers must abide by local traditions and belong to indigenous social networks.
If the cultural component is important, why share the profits with Western-minded people like Khodorkovsky?
So no surprise that other managers, with better relations with those in power, now run Khodorkovsky’s Yukos Oil, as well as another major firm, Sibneft.
Foreign managers don’t seem to mind.
On the contrary, some of these managers, such as former German Chancellor Gerhard Schroeder, who now chairs a Gazprom subsidiary building a pipeline under the Baltic sea, are helping to expand Russia’s oil-based imperial designs over Europe.
In the strange new world of today, the modern and the pre-modern depend on each other.
Thus, Russians trade oil for the products of knowledge.
Imported technologies are cheap if you convert their prices into barrels of oil, so the country produces a shortage of its own geologists and chemists, not to mention economists and lawyers.
It needs only one gang of politicians.
In fact, for such a country, local experts are not just redundant, but dangerous.
In their moments of sincerity, Russian policymakers admit that Russia is, from their point of view, overeducated.
They recently discovered what their Arab colleagues have known for a long time: that for an oil-rich regime, it is cheaper and safer to buy knowledge than to produce it.
So hidebound conservatives run Russian universities.
Scientists go on trial for technical espionage, while ex-KGB spies sign multi-billion dollar contracts.
Non-governmental organizations are met with suspicion and harassment, with new legislation seemingly designed to vanquish them.
Political parties are created or banned by anonymous Kremlin clerks.
Elections are either canceled or faked.
Oil-poor neighbors like Ukraine are blackmailed.
An illiberal society can produce growth, but it cannot enjoy it.
Redistribution schemes benefit the population if, and only if, they are controlled by democratic feedback.
The Russian Stabilization Fund embodies an unstable combination of anxiety and greed that is typical for an undemocratic regime.
Dependent on gas, oil, and multinationals, the G-8 countries accept quite a lot of guff from their current chair, Vladimir Putin.
Still, the arrogance of Russia’s rulers may have breached the West’s tolerance.
Alternative sources to Russian energy are not the only means to decrease prices.
Global civil society has developed instruments to halt consumption that produces harm.
Elegant ladies, for example, no longer buy fur coats. Many Westerners eagerly pay more for “Fair Trade” coffee.
Would a similar approach work for the gas in your oven?
A century ago, the idea of decolonization sounded just as absurd.
Public awareness is as crucial now as it was decisive then.
Russia’s Pipeline to Empire
Gerhard Schroeder, who less than a month ago was Germany’s Chancellor, has agreed to become chairman of the company that is building a gas pipeline from Russia, across the Baltic Sea to Germany, and on through Western Europe.
In many countries, Schroeder would now be charged with the crime of conflict of interest.
His apparent ethical lapse is magnified by the fact that, at this very moment, Russia is threatening to cut off Ukraine’s gas supplies if that country does not give in to the pricing demands of Kremlin’s state-owned gas behemoth, Gazprom.
Russia’s strategic task is obvious: cutting off Ukraine’s gas currently means cutting off much of Europe’s gas as well, because some of its biggest gas pipelines pass through Ukraine.
By circumventing Ukraine, Poland, and of course, the Baltic countries, the new pipeline promises greater leverage to the Kremlin as it seeks to reassert itself regionally.
President Vladimir Putin and his administration of ex-KGB clones will no longer have to worry about Western Europe when deciding how hard to squeeze Russia’s postcommunist neighbors.
Should Europe really be providing Putin with this new imperial weapon?
Worse, might Russia turn this weapon on an energy-addicted EU?
That a German ex-chancellor is going to lead the company that could provide Russia with a means to manipulate the EU economy is testimony to Europe’s dangerous complacency in the face of Putin’s neo-imperialist ambitions.
Certainly Russia’s media are aware of Europe’s growing dependence on Russian energy.
Indeed, they revel in it: after we integrate and increase our common gas business, Russian editorialists write, Europe will keep silent about human rights.
Putin expresses this stance in a more oblique way with his commitment to pursuing what he calls an “independent policy.”
What he means by that is that Russia is to be “independent” of the moral and human rights concerns of the Western democracies.
Perhaps some European leaders really do believe that maintaining the Union’s cozy prosperity justifies silencing ourselves on human rights and other issues that annoy the Kremlin.
Of course, we may speak up, briefly, about “commercial” matters like the expropriation of Yukos, but if the Kremlin puts a price on our values or criticism of Russian wrongdoing – as in, say, bloodstained Chechnya – Europeans seem willing to shut up rather than face the possibility of higher energy prices, or even a blockade like that now facing Ukraine.
As Putin shuffles his court, subordinating the Duma to his will, the EU’s hopes for a growing “Europeanization” of Russia should be abandoned.
The Russia that Putin is building has mutated from the post-Soviet hopes of freedom into an oil and gas bulwark for his new model ex-KGB elite.
Indeed, Matthias Warnig, the chief executive of the pipeline consortium that Schroeder will chair, is a longtime Putin friend.
The Wall Street Journal reported earlier this year that Warnig, who heads Dresdner Bank’s Russian arm, was an officer in the Stasi, the East German secret police, and met Putin in the late 1980’s when the Russian president was based in East Germany as a KGB spy.
That Russians tolerate a government of ex-KGB men, for whom lack of compassion and intolerance of dissent are the norm, reflects their exhaustion from the tumult of the last 20 years.
Now the Kremlin seems to think that what is good for ordinary Russians is good for independent nations as well: small and weak countries will be shown no mercy once Russia is given the tools to intimidate, isolate, and threaten them with the prospect of an energy blockade.
As a former Head of State of newly independent Lithuania, I frequently endured such threats.
The EU has signed numerous agreements with Russia including one for a “common space” for freedom and justice.
The Kremlin is very good at feigning such idealism.
Its control of Eastern Europe was always enforced on the basis of “friendship treaties,” and the Soviet invasions of Hungary in 1956 and Czechoslovakia in 1968 were “fraternal” missions.
But look how Putin abuses that “common” space: barbaric treatment of Chechens, the businessmen Mikhail Khodorkovsky imprisoned, foreign NGO’s hounded, a co-leader of last year’s Orange Revolution, Yuliya Tymoshenko, indicted by Russian military prosecutors on trumped-up charges.
If Europeans are serious about their common space for human rights and freedoms, they must recognize that those values are not shared by the calculating placemen of Putin’s Kremlin.
The same is true of viewing Russia as an ally in the fight against terrorism.
Is it really conceivable that the homeland of the “Red Terror” with countless unpunished crimes from the Soviet era, and which bears traces of blood from Lithuania to the Caucasus, will provide reliable help in stopping Iran and North Korea from threatening the world?
It seems more likely that the Kremlin’s cold minds will merely exploit each crisis as an opportunity to increase their destructive power and influence.
For decades, my region of Europe was left to the mercy of evil.
So I cannot sit back in silence as Europe stumbles blindly into a new appeasement.
We, the new democracies of Eastern Europe, have been taught by our legacy that behind Russia’s every diplomatic act lurks imperial ambition.
Western Europeans, who have been spared this legacy, should heed our warnings.
Dependence on Russia – even if its face is now that of the allegedly “charismatic” Gerhard Schroeder – will only lead to an abyss.
Russia’s Population Implosion
Years ago, Alexander Solzhenitsyn coined the phrase “preservation of the people,” by which he meant Russia’s cultural survival.
Today, it applies to Russia in a far more literal way.
Although I am a physicist, I began to study demography about15 years ago, in the belief that the key global problem was not so much the threat of nuclear annihilation as the dynamics of population growth.
It was a grim recognition that Russia faces the opposite problem: a rapid decline in population that threatens every aspect of Russian life.
Indeed, just in the last ten years, Russia’s population has dropped by 9.5 million, despite the many thousands of Russians returning from former Soviet republics.
The birthrate has increased somewhat beginning since 2000, and now stands near 1.5 million a year, but this is 700,000-800,000 below the replacement rate.
Many observers argue that Russians are not having enough children because life is so harsh.
But the problem is not so simple.
The United States, Europe, Japan, Australia, and Canada have all seen declining birth rates as well.
In Spain, the birthrate of 1.07 per woman is even lower than in Russia.
Russia’s uniqueness stems instead from the high rate of early death among males, which is directly attributable to poor diet and high consumption of alcohol and tobacco, and, indirectly, to the stresses caused by the wrenching economic and political changes that began with Gorbachev’s
Here is where the revised meaning of Solzhenitsyn’s “preservation of the people” comes in.
Solzhenitsyn himself recently suggested that Russia’s national idea should be based on Ivan Petrovich Shuvalov’s proposal to Empress Elizabeth 250 years ago. “Every move, every law should be assessed in terms of whether it helps to preserve the people,” according to Solzhenitsyn.
Solzhenitsyn’s suggestion is crude, but right in a fundamental sense.
Our public thought is fragmented, and the country’s intelligentsia, who are partly responsible for tending to society’s values and goals, are behaving in often-destructive ways.
The live-for-the-moment mentality of hedonism and greed that they have encouraged is embodied in Moscow’s casinos, of which there are more than in the rest of Europe – or, for that matter, Las Vegas.
These values – reflected in the way people dress, how they behave in public, and the language they speak – are not the values of human life.
A crime subculture is spreading in Russia, and it is attaining the status of official culture.
Where the intelligentsia is not directly complicit, its members have, simply by remaining silent, refused to accept the responsibility that accompanies freedom.
By contrast, Solzhenitsyn, Tolstoy, and other writers in Russia’s great literary tradition fully understood this responsibility.
The current Russian interpretation of freedom is instead characterized by a narrow, individualistic permissiveness that is incompatible with collective tasks.
In other words, Russia’s population crisis is one manifestation of a crisis of ideas.
This, of course, raises the broader question of whether declining birthrates, in Russia and elsewhere, imply a crisis of the liberal idea of freedom, with its focus on individual rights?
Clearly, liberalism may be a contributing factor, if and where it is primitively understood to entail for the individual no countervailing obligations before society.
Clearly, the belief that liberalism is at fault for declining birth rates and dysfunctional families has gained currency in the West, which now produces popular books like Pat Buchanan’s
But I think the crisis is deeper, reflecting a lack of awareness of the paths and goals of human development – an ignorance that cannot be reduced to Western-style democracy or liberal ideas.
For Russia, the issue is simple because the crisis – which has led to more homeless children than after either the Civil War or World War II – is so stark.
“Preservation of the people” requires nothing less than that our men take care of themselves so that they can take proper care of our children.
Russia’s Renegade Puppet
MOSCOW – Ramzan Kadyrov, the president of Chechnya, recently proposed to Ahmed Zakaev, a leader of the nationalistic and comparatively moderate Chechen opposition, that he return to Chechnya.
Kadyrov promised Zakaev amnesty and various positions ranging from director of the local theater to Minister of Culture.
Zakaev looked ready to accept the proposal.
His position in the nationalist opposition was weak.
There seem to be few, if any, fighters in Chechnya who recognize him as commander; his recent attempt to send an emissary to create a fighting unit directly under his command was not successful.
At the same time, Zakaev maintained rather friendly relations with Kadyrov, whose achievements – making Chechnya practically independent – he implicitly acknowledged.
The Kremlin supposedly would not have opposed the deal.
But, although Zakaev was one of the most moderate members of the Chechen resistance, an amnesty for him needed the Kremlin’s approval, and he does not seem to have received it, which is probably why he refused Kadyrov’s offer.
But the reason the Kremlin balked at offering Zakaev an amnesty is unlikely to be related him personally, but rather to Kadyrov.
The return to Chechnya of an amnestied Zakaev would greatly increase Kadyrov’s prestige.
But the Kremlin wants to avoid this, owing to Kadyrov’s growing power and its general unease with a Russian Muslim elite that, while formally acknowledging Russian suzerainty, increasingly demands a redistribution of power within the Russian Federation.
For most of the past two decades, jihadists in the Caucasus and Central Asia were a major source of concern for the Kremlin.
Fear of “Talibanization” of the Caucasus prompted the Kremlin’s recent announcement that Russian Muslims should be protected from extremist propaganda from abroad, and that Russian Muslim education and spiritual life should be controlled in order to direct them away from extremism.
It was fear of extremism, as well as a more general increase violence, that led to the rise of the Kadyrov clan in 2004, when the Kremlin decided to engage in a “Chechenization” of the conflict.
The plan implied that the Kremlin would provide the Kadyrovs – first Akhmad Kadyrov, and then, after his death, his son, Ramzan – broad autonomy (independence in all but name) and huge sums of money.
The Kremlin closed its eyes to Kadryov’s amnesty of former guerrillas and their inclusion in his paramilitary units.
In exchange, Kadyrov was to wage war against the remaining Islamist resistance and thus relieve Moscow of the burden of shedding Russian blood, or at least minimize the cost in Russian casualties.
The plan initially worked.
Kadyrov was able to create a strong force that could fight the guerrillas, basically on its own.
Kadyrov’s efforts can also be credited with ending major terrorist attacks in Russia’s heartland, such as those that occurred in Moscow in 2002 and in Beslan in 2004.
Kadyrov seemed an effective antidote to the jihadists.
Still, the logical conclusion of the Kremlin’s Kadyrov policy appears to be precisely what it sought to prevent – Chechen independence – when it engaged in the first Chechen war almost a generation ago.
Receiving from the Kremlin virtual carte blanche to do what he wants in Chechnya, Kadyrov made genuine efforts to transform himself into a popular leader.
It is clear that he has not brought down the unemployment rate and has no intention of ending corruption.
Still, he can be credited for some tangible results in bringing Chechnya a modicum of normality.
The restoration of the capital, Grozny, was one of his clear achievements.
Grozny was totally destroyed during the first Chechen war; both Russian and foreign observers compared it with WWII Stalingrad and assumed that it would be impossible to restore the city.
It was suggested that a new Chechen capital be built.
Yet, having enjoyed a huge subsidy from Moscow, Kadyrov has rebuilt Grozny and provided it with some security.
Kadyrov also catered to the spiritual aspirations of the Chechen majority.
He rejected Wahhabism – the ideological framework of the jihadists. But he maintained that Islam is an essential part of the Chechen tradition and presented himself as a leader who fully understood this.
So he encouraged an Islamic dress code and built a huge mosque – one of the biggest, if not the biggest, in Europe.
All of this brought Kadyrov wide support among the Chechen population.
Even those who dislike him sometimes conclude that he is the best all the possible options, and he has improved his position by persistently weeding out Chechen military forces that are not directly under his command.
His most recent effort was the liquidation of the “Vostok” battalion, despite its being an integral part of the Russian army.
It was probably inevitable that Kadyrov’s increasing power would worry the Kremlin, especially after the Kremlin itself created a precedent for secession by recognizing the independence of Abkhazia and South Ossetia of the war with Georgia of 2008.
Allowing Zakaev’s return would have worsened matters by increasing Kadyrov’s prestige at home, as well as his international visibility and legitimacy.
That would have pushed Kadyrov even further away from Russian control at a time when the Kremlin has become increasingly unable, and possibly reluctant, to purchase his loyalty.
Russia’s Road to Isolation
Next week, Presidents Putin and Bush will meet in Slovakia.
Mounting authoritarianism in Russia and Ukraine’s Orange Revolution seem to have ended the honeymoon the two men had enjoyed.
Sergei Karaganov, Chairman of Russia’s Council on Foreign and Defense Policy, assesses Russia’s deepening foreign policy problems.
Two years ago, Russians could look at the world with satisfaction.
We appeared stronger in the diplomatic arena than our economic and military power might warrant.
Not anymore.
There were some successes last year, the most important being that our foreign debt, which restricts our economic sovereignty, is close to being paid off.
Otherwise, although Russia’s objective strengths remain unchanged, our influence in international affairs has declined.
From the Middle East to the war on terror and efforts to curtail the proliferation of weapons of mass destruction, Russia should be a valuable partner.
Yet no clear Russian “footprint” on these issues can be discerned.
Indeed, even the growing split between Europe and America has not stemmed Russia’s loss of standing.
This turn of events is confusing.
President Vladimir Putin remains a fairly effective international communicator.
Yet Russia suffered several obvious defeats in 2004 that tarnished its image and undermined its standing in the world.
In our immediate neighborhood, Belarus’s President Alexander Lukashenko ignored warnings from Russia and went ahead with a referendum that enables him to remain president for life.
Russia then focused almost all of its foreign policy attention on Ukraine, only to lose there, too.
In the Far East, paying for past broken promises appears to have forced Russia to accept China’s terms for resolving a border dispute.
Of course, settling this long-festering dispute is to be welcomed, but the cost is that ceding territory has become a precedent.
Moreover, Russia's dialogue with the European Union reached a dead end in 2004.
One reason is that the supposed resolution of the “Kaliningrad problem” – the Russian enclave cut off from Russia when Lithuania and Poland joined the EU – turned out to be no solution at all.
This is not entirely Russia’s fault; but now the dialogue will have to be restarted, practically from scratch.
Indeed, a chill is settling over Russia’s relations with the West more broadly.
So far, this is not disastrous, though it is difficult to read what the Western media have to say about Russia and its leadership.
Almost all of the coverage is negative, and they have even started mocking us.
Events in Belarus and Ukraine have made the Euro-Asian Economic Community project appear increasingly unrealistic.
Our partners in the Commonwealth of Independent States have inevitably drawn conclusions from Russia’s demonstration of weakness and incompetence.
I could add more to this list, but that would merely be to rub salt into our wounds, which are my own as well.
Russians should not lose heart; but unless we understand the reasons for these failures, and make drastic corrections to our foreign policy, we are doomed to continue suffering defeats and losing status and influence, if not worse.
The major cause of what has happened is the systematic intellectual weakness of Russia's foreign policy.
Our knowledge and understanding of the rest of the world continues to deteriorate; on many counts, we lack any system of foreign policy planning and forecasting.
For example, the Ukraine debacle could have been avoided had we evaluated the political situation in a timely manner and backed the candidate who was practically certain to win.
But we placed amateurs in charge of dealing with Ukraine – amateurs with far-reaching commercial interests.
When Putin was dragged in to cover up the mess, an ordinary failure turned into a total fiasco.
In fact, Russia’s foreign policy is Putin personified: the president decides and executes almost everything.
The Foreign Ministry, home to the state’s best personnel, has been largely cut off from diplomatic planning.
The Security Council is practically invisible.
As a result, even good decisions are incompletely planned.
So the risk of error is rising.
Moreover, responsibility for foreign affairs is often given to whichever “commissioner” happens to turn up.
This approach accounts for the failure of Dmitri Kozak’s plan for resolving the situation in Moldova’s breakaway Trans-Dniester region, as well as for the ludicrous state of affairs that has arisen in Georgia’s separatist Abkhazia region.
The fundamental weakness of Russia’s emerging political system, with its excessive centralization, its reliance on individual personnel rather than institutions, and the declining quality of its management, is starting to show.
Russia’s ruling elite is increasingly failing to measure up to Russia’s capabilities and needs.
As our failures mount, we snarl and blame others, or construct imaginary plans for countering the great powers.
Thus far, we have been half-forgiven for doing so.
Russia is tactically necessary.
But the outside world’s assessment of Russia’s policies and prospects are visibly changing for the worse.
This is not due solely to our foreign policy, or even to dubious economic policies.
Few believe it is possible to strengthen Russia by creating an almost Soviet-style political system, but without that system’s main state-forming component – the Communist Party and its ideology.
As a result, the past 12-18 months have seen a shift in perceptions of Russia: from a strengthening partner and potential ally to a weakening rival.
Russia needs a serious discussion, within the elite and among the public, about national strategy, just as it needs to create an effective planning and coordination mechanism for foreign policy.
Substantial corrections will be required to the entire political agenda, which, multiplied by the astonishing ideology of building national capitalism in one country, is currently too reminiscent of the policies that led to the Soviet Union’s disintegration.
As it is, Russia is moving towards becoming a bigger version of Venezuela or Nigeria – oil-rich and dysfunctional – rather than towards becoming a great European or Eurasian power of the future.
Russia’s Self-Defeating “But”
MOSCOW – Prime Minister Vladimir Putin insists that “Without normal democratic development Russia will have no future.”
We Russians are pleased to hear these enlightened words, yet Putin adds a “but” to his argument, which weakens it considerably.
In fact, Putin’s “but” renders his points senseless.
We have hated this “but,” this coordinating conjunction, ever since the dawn of the Soviet era.
Then we were told that freedom is good, but that one can’t live in an individualist society without common concern for the communist state.
Democracy is great, but only in the interests of the working class.
Now Russia’s prime minister tells us that democracy is indeed great, but that public protests cannot take place in public places, say, around hospitals and the like.
Never mind that the Russian constitution does not list hospitals among places forbidden for public assembly, or that sick people need democracy, too.
Russian President Dmitri Medvedev does understand – with no “buts” – that “freedom is better than not freedom,” that “legal nihilism” is bad and democracy is good.
He understands that Stalin was a criminal, that his order to murder Polish officers in Katyn was an act of depravity that has no excuse or explanation.
The president understands this; unfortunately, we don’t understand the role our president plays in our society.
He says all the right things, yet they don’t seem to be reflected in reality.
The Dissenters Marches, which take place on the 31st of every month (article 31 of the Russian constitution guarantees freedom of assembly), could be (and are) easily dismissed as a marginal protest of a few hundred people with no common goals or ideas.
Putin’s and Medvedev’s poll numbers are so high, many argue, that they don’t need to care about a few dissenters.
Besides, most Russians support the government with no dissent at all, they say.
This doesn't say much, however, because the Russian majority always supports the government, regardless of the policies it implements.
Today’s dissenters are indeed a minority and of course can be disregarded, but only up to a point.
After all, this minority is one of thinkers – musicians, artists, and writers, and those who move forward Russian science, technology, and economic innovation.
Such people cannot be dismissed as useless, since we need the innovation that they deliver, even if we think Russia doesn’t need democracy.
True, not all members of the thinking minority attend the dissenters’ marches, yet many more of them silently oppose the regime.
Our leaders talk obsessively of Russia’s industrial modernization, of their support for innovations such as nanotechnology, so that Russia can catch up with the developed counties.
In line with Soviet traditions, a nanotechnology project was given a piece of land, with plans to set up various scientific facilities.
The best brains in Russia –engineers, scientists, and inventors – will gather in one place, and from there begin moving the country forward.
The hope is that not only those living in Russia but also emigrants will be overcome with patriotic feelings.
They will come back to Russia (also drawn by high salaries) to make themselves famous and their motherland proud.
A wonderful plan.
But I fear that it won’t work.
For example, imagine a genius who left Russia years back.
He has achieved prominence in a foreign country, inventing something outstanding.
Now he is asked to come home: your motherland is waiting for you, it values your contribution, it forgives your betrayal, and it will pay you more than what you are getting elsewhere.
But this brilliant scientist is still a human being.
He is of course nostalgic for the birch trees, his old friends, ex-wife, and children from the first marriage.
He wants to come back, to revisit all that he has left behind, in the meantime helping his nation to become economically strong, technically advanced, and prosperous.
Yet, before making the final decision, he turns on the radio, watches a bit of TV, browses the Internet, and finds out what Russia is like.
Journalists are killed, scientists are accused of espionage, and Mikhail Khodorkovsky remains unjustly imprisoned.
Various blogs tell him that Russia’s parliament is just a place for rubber-stamping decisions already taken at the top.
He reads the confused and confusing speeches our leaders: freedom is good, but…
This brilliant scientist learns that Vasily Aleksanyan, the terminally ill Yukos lawyer, was held in prison in inhuman conditions.
Another lawyer, Sergei Magnitsky, died in prison after being refused medical treatment.
And yet another one, Stanislav Markelov, was gunned down on a Moscow street.
Then this scientist will be surprised (or not) to discover that the Russian majority views Joseph Stalin as the third most popular person in a contest to be known as the “Face of Russia.”
In the meantime, his junior colleague in Russia, who still has his whole future in front of him, does not attend the Dissenters’ March, but simply emigrates, which is also a form of protest.
In Soviet times, communist leaders tried to lure people into the kolkhozes (collective farms) with promises of great crops and spectacular meat production.
Nothing worked, because the kolkhoz system was incompatible with high achievement in the long run.
Similarly, in a country where the concepts of democracy and freedom are balanced by “but,” achievements in science, technology, and economy are not possible.
The thinking minority needs a system of laws and institutions, real presidential elections, a working parliament, and justice that is independent, rather than merely following orders from above.
Russia’s Skeptical G8 Partners
Poor oil-rich Russia.
It is trying so hard to have its turn as chair of the elite Group of Eight countries taken seriously.
President Vladimir Putin, perhaps hoping to elevate the presidential summit talks in St. Petersburg in July, has laid out an ambitious agenda.
He plans to lead his colleagues in erudite conversations about education, infectious diseases, and – to make sure that no one dozes off – “energy security.”
And what has Putin gotten for his efforts?
Not much.
The Bush administration, led by Vice President Dick Cheney (but with his boss’s explicit approval), recently accused Russia of backsliding into its old “evil empire” ways.
Putin shot back, portraying the United States as “Comrade Wolf,” ready to pounce on any nation that leaves itself vulnerable.
Suspense seems to be building around how Bush and Putin will greet each other when they meet in St. Petersburg.
Europeans, for their part, are still hysterical about getting caught up in the Russia-Ukraine gas dispute that left their pipelines dry for a few days at the beginning of this year.
They see discussing “energy security” with Russia as akin to chatting about water safety with Comrade Crocodile.
Of course, people who really want to be unkind will point out the absurdity of Russia’s membership in a club that includes the giant economies of US, Germany, Japan, England, France, Italy, and (less so) Canada.
Why wasn’t Chinese president Hu Jintao, whose country’s economy is the world’s second largest (when measured at world prices), given a seat at the table instead of Putin?
After all, even with all its energy resources, and even with today’s sky-high oil and gas prices, Russia’s national income is only about the size of Greater Los Angeles.
Perhaps what Putin needs to do is stop suffering all the criticisms and go on the offensive.
He could start by pointing out to his smugly democratic counterparts that he is probably more popular in Russia today than any of them are in their own countries.
He might actually win a fair election tomorrow (not that he would ever risk finding out).
Few of the others could make the same claim with a straight face.
Of course, Putin’s success over the past few years in killing off any semblance of a free press – and when an ex-KGB man “kills off” a free press, it is not just a figure of speech – has helped mute open opposition.
Even so, Putin does seem genuinely popular among a public longing for a leader who can anchor their country without sinking it.
Putin might also argue that Russia’s fiscal position is far stronger that of the other G8 members.
Yes, it helps that Siberia turned out to be a giant oil well, with the government sucking up much of the money.
Venezuelan President Hugo Chavez is balancing his country’s books, too, for now.
But, to be fair, oil is not the whole story.
Most economists advocate rich countries’ replacing their complex and antiquated tax codes with a simple low flat tax, and they bemoan the fact that so few countries have tried it.
Putin, however, implemented such a policy a few years ago, and the results have been nothing short of miraculous.
Of course, the other G8 leaders might be less enamored of some of Russia’s other approaches to addressing budget problems.
Most G8 countries seem incapable of achieving the political consensus required to take necessary steps such as raising the retirement age or significantly cutting the indexation of benefits to inflation.
Russia, by contrast, has essentially abandoned its pensioners by inflating away the value of their incomes.
Indeed, many of the elderly in rural Russia are forced to sustain themselves by growing potatoes on the tiny plots of land that the government allows them to till.
That is, assuming they survive at all: since the fall of the Berlin Wall, Russian male life expectancy has plummeted from 65 years to around 60 years.
There is growing evidence that the stress of transition is the leading cause of death, even above big killers in postcommunist Russia such as alcohol, murder, and AIDS.
Should Putin tell his colleagues that they, too, could balance their countries’ intergenerational accounts by starving the elderly?
So perhaps Putin had better not try to push his country’s accomplishments too far.
Maybe the best plan is simply to let the vodka flow and hope for a round of smiles in the photo ops.
In any case, when Putin tells his guests how they can pay Russia more to improve their own “energy security,” he may finally get the respect that he craves.
Russia Stays Home
MADRID – Just three days before his return to the Kremlin as Russia’s president, Vladimir Putin met behind closed doors at his residence in Novo-Ogaryovo, outside Moscow, with US National Security Adviser Tom Donilon, who was there to transmit President Barack Obama’s renewed determination to strengthen cooperation with Russia.
But Donilon returned home empty-handed: Putin will attend neither the G-8 summit on May 18-19 at Camp David, nor the NATO summit in Chicago on May 20-21, despite Obama’s effort to accommodate Russia by moving the G-8 summit from Chicago.
As a result, what would have been the first meeting between Obama and Putin after his return to the Russian presidency has been postponed until the G-20 summit in Los Cabos, Mexico, set for June 18-19.
This delay has provoked much speculation.
Some point as a cause of Putin’s absence to recent tensions between Russia and the United States arising from Putin’s increasingly harsh response to the protests by his opponents at home.
Others suggest that Putin’s aloofness stems from Kremlin infighting.
Whatever may be driving Putin’s behavior, this month’s two summits will affect relations between the two countries considerably, given the global security issues to be discussed by the G-8 and the need to arrange for Russia’s participation in NATO’s anti-missile shield.
Two matters – besides the shaky global economy – are especially important for the G-8 summit.
First, Iran’s nuclear program is now on the diplomatic front burner.
After more than a year of deadlock, negotiations resumed in April.
Russia, as a permanent member of the United Nations Security Council, participates in these talks, and its cooperation is essential to resolving one of today’s most vexing international problems.
Much the same can be said of Russia’s role in resolving the crisis in Syria, owing to the strategic relationship that the two countries have maintained since the Cold War.
Indeed, with the growing possibility that former UN Secretary-General Kofi Annan’s peace plan for Syria might fail, and that civil war might erupt, Russia could be the international community’s only effective interlocutor left.
In addition, it is essential to align the positions of Russia and the West on the anti-missile shield system now being developed by NATO, which will be a subject for discussion in Chicago.
The principal aim of the system is to protect Europe and the US from possible attacks by short- and medium-range ballistic missiles from Iran and North Korea.
But Russian leaders are skeptical about the true objectives of a shield, believing that it would undermine Russia’s security by curtailing the retaliatory (and thus deterrent) capacity of its nuclear missiles.
In 2009, the “approach by stages of adaptation” launched by Obama seemed to ease bilateral tensions and prepared the way for the 2010 New START arms-reduction treaty, in which Russia and the US took a strategic leap to cut the number of nuclear-missile launchers by half.
Following on this progress, at the end of 2010, the Russians agreed to study the possibility of cooperating with NATO on anti-missile defense.
But the US was unable to offer legal – not just political – guarantees that an anti-missile system based in Europe would not obstruct Russia’s strategic potential.
As a result, Russia is now so mistrustful that its military chief of staff, General Nikolai Makarov, recently declared that his country would not rule out pre-emptive attacks to destroy any part of the anti-missile shield that it views as a threat to its own security.
One of the main arguments for this posture was Russia’s uncertainty about whether later steps in the “approach by stages of adaptation” might be a threat to its strategic ballistic missiles.
Moreover, Russia opposes the deployment of military facilities in countries – like Romania – that joined NATO after 1999, a point made recently by former US ambassador to Ukraine Steven Pifer of the Brookings Institution.
In view of the seriousness of the questions under consideration at the two summits, Putin’s presence would have been helpful.
In addition to the inherent value of improving the personal chemistry between leaders, reducing tensions in the relationship between Russia and the West has become indispensable, given that negotiations over the missile shield, Iran, Syria, and other issues are bound to be long – and that the solutions are linked.
Indeed, acceptable solutions today would open the way for an unprecedented nuclear-arms agreement in 2013.
This is a matter of major importance, for which a good understanding between Russia and the US is essential.
We must do everything within our power to realize Donilon’s proposal to Putin to, in essence, “reset the reset” and bridge the gap between the two countries concerning the future disposition of their nuclear arsenals.
For Obama, success would vindicate the Nobel Peace Prize that he was awarded in 2009.
Russia\u0027s Tuberculosis Catastrophe
TOMSK, SIBERIA: Europe ignores Russia’s public health problems at its peril.
So do the other industrialized countries who cheered the Soviet Union’s fall but have failed to respond to the collapse of Russia’s health and social-service infrastructure.
For out of a confused swirl of economic ideology and sometimes insensitive advice has emerged a new form of drug-resistant tuberculosis that is proving hard to contain.
Much has been made of Russia’s plummeting life expectancies – its "mortality crisis."
Although that grim trend appears to be being slowly reversed, another problem is spiraling out of control: tuberculosis.
In several regions of Russia, young men fall ill and die from tuberculosis at rates well in excess of ten times those documented a mere decade ago; in some non-Russian areas of the former USSR, the story is even worse.
A confluence of events is to blame, including the collapse of Russia’s social safety net at the very moment when petty crime, and thus imprisonment, was reaching new heights.
Russia and the United States have long been world leaders in rates of imprisonment.
In the context of wars and economic disruption, Russia has pulled ahead.
Tuberculosis is now epidemic within Russia’s prisons and jails.
One in ten prisoners is sick with the disease.
Victims of tuberculosis, especially drug-resistant tuberculosis, are likely to have served time in prison or to have a close relative who has gone through the Russian justice system.
Like other airborne plagues, drug-resistant tuberculosis cannot be stopped by either prison walls or national boundaries.
In the state of Massachusetts, where I practice medicine, close to 70% of all tuberculosis cases are diagnosed in people born abroad.
The proportion is much the same throughout Western Europe.
The epidemics of recent years are fundamentally “transnational” in character, as befits the global era.
As infecting organisms easily cross frontiers, solidarity and generosity usually get tied up in customs.
So far, Russian health specialists have received much haughty advice but little practical assistance from their colleagues abroad.
Of course Russia must update its approach to tuberculosis control, as physicians in other nations are doing.
Chiding Russian doctors for their failure to contain tuberculosis, however, makes little sense when they are not responsible for slashing the health budgets under which they operate.
And, of course our colleagues in Russia need to set clear goals and must seek to avoid waste, just as we do in the West.
But to decrease health expenditures on grounds of “cost-effectiveness” makes little sense in the midst of an epidemic.
When your house is on fire, do you suddenly decide to conserve water?
Russian politicians need to support penal reform and seek alternatives to incarceration, just as we do here.
But to amnesty sick prisoners while making no provisions for their care after release is a favor to no one; it only invites a more rapid spread of drug-resistant tuberculosis.
After a long silence, we are at last beginning to hear arguments in Europe and America to support Russian health care.
Some of these arguments are self-serving.
We read that it is in our “enlightened self-interest” to assist the former Soviet Union with this epidemic.
Some political leaders now cast tuberculosis as a key national security issue.
That, however, is an approach which puts physicians and public-health personnel in the position of border guards.
Only a brave few speak of solidarity and mutual support.
Regardless of justification, it is essential that the countries of North America, the European Community, Scandinavia, Japan, Australia – indeed all those who care about stopping a senseless, avoidable and devastating epidemic – come together to lend real support to those seeking to control tuberculosis in Russia and elsewhere in the former Soviet Union.
The global community needs to follow a number of principles if this initiative is to prove effective.
First, let’s stop advising Russia’s government to decrease health expenditures.
We should, indeed, regard with deep suspicion arguments for reducing outlays for tuberculosis control.
Such budget cuts make no more sense in Moscow or Sverdlovsk than they would have made in New York, where a comparatively trivial prison-based outbreak of tuberculosis a decade ago led to a massive influx of resources.
All now agree that the hundreds of millions of dollars used to treat and control tuberculosis in New York was money well spent.
Second, encourage Russia to adopt standards of care seen elsewhere in Europe and other industrialized countries.
Russia has the professional and technical capacity to put in place a modern tuberculosis-control system.
Third, let's link our advice to generous financial support for medications, appropriate diagnostic tools, and infection control.
Here we should avoid loans whenever possible in favor of outright grants.
For what’s wrong with the idea of putting resources where they are needed most?
The willingness of affluent societies to take on this new tuberculosis will be the test of our commitment to a new internationalism that is sorely needed if we are to stop this and other emerging plagues.
And we need to act swiftly, before the spread of HIV in Russia makes this an even more daunting task.
Time is short.
Russia’s Ukrainian Path to the Future
MOSCOW – Russia and the West are losing each other yet again.
The magnetic attraction and repulsion between the two has been going on for centuries.
Indeed, historians have counted as many as 25 such cycles since the reign of Tsar Ivan III.
In the past, however, Russia’s sharp anti-Western turns were reversed – usually out of simple necessity – after relations reached rock bottom.
Not this time.
On the contrary, the deterioration of the relationship nowadays has developed a momentum of its own.
There are four reasons for this.
First, the “loss” of the Cold War, and with it imperial and superpower status, has created a deep and so far unresolved crisis in the collective mentality of Russia’s political class.
Russian leaders continue to perceive the West as a phantom enemy in opposition to which all the traditional mythologies of Russian foreign policy are being resurrected.
Second, by the end of Vladimir Putin’s second presidential term, Russia’s modernizing dreams had been shattered.
Modernization, indeed, simply turned out to be yet another redistribution of property to those on top, particularly those who came out of the St. Petersburg mayoral office and the Federal Security Bureau (FSB).
The image of the West as an enemy has become the only ideological excuse for Putin’s model of the corporate state.
Third, the soaring price of oil has made the Kremlin’s inhabitants believe that they are all-powerful.
Today’s Russia, which thinks of itself as a “great energy state,” laughs at its previous meager desire to catch up with little Portugal in terms of living standards.
Finally, a series of Western mistakes and misfortunes, a crisis in transatlantic relations, lack of leadership, and the growing threat of Islamic fundamentalism (in both the Middle East and Europe) have led Russian leaders to believe that the West is a sinking ship, to be abandoned as soon as possible.
While this belief unfortunately does have some validity, it requires one very important caveat: Russia is part of that ship.
Russia can make advances to Hamas, Hezbollah, and Iran, and it can remind the Arab world that the Soviet Union helped it develop and offered it protection in the United Nations Security Council.
But in the eyes of Islamic extremists, Russia is part of the “Satanic” West – indeed, its most vulnerable part.
Thus, it is Russia, with a soaring birth rate among its Muslim citizens that is the most attractive for expansion and take-over.
But Russia’s self-destructive confrontation with the West can be halted, and its centuries-old debate between Westernizers and the Slavophiles put to rest once and for all.
This, however, will depend on Ukraine’s success on the path of European development it chose in the Orange Revolution of 2004-2005.
Ukraine does, indeed, present a threat, but not to Russia’s security, as Kremlin propagandists claim.
The real threat is to the Putin model of a corporate, authoritarian state, unfriendly to the West.
For the Kremlin’s occupants, it is a matter of life and death that countries that were once part of the Soviet Union but chose a different model of development – Ukraine being the chief example – should never become attractive to ordinary Russians.
The example posed by the Baltic nations does not threaten the Kremlin much, because they are perceived as foreign to the Russian psyche.
Indeed, in Soviet films, Baltic actors were usually cast in the roles of Nazi generals and American spies.
Ukrainians, on the other hand, are close to us in their culture and mentality.
If they made a different choice, why can’t we do the same?
Ukraine’s success will mark the political death of Putinism, that squalid philosophy of “KGB Capitalists.”
If Ukraine succeeds in its European choice, if it is able to make it work, it can settle the question that has bedeviled Russian culture for centuries – Russia or the West?
So the best way to help Russia today is to support Ukraine’s claim that it belongs to Europe and its institutions.
This will influence Russia's political mentality more than anything else.
For if Russia’s anti-Western paranoia continues and the Kremlin’s Eurasian fantasy of allying with China lasts another 10-15 years, Russia will end up seeing China swallowing its Far East and Siberia.
Indeed, the weakened Russia that will be Putin’s legacy will then also lose the Northern Caucasus and the Volga region to their growing Muslim populations.
The remaining Russian lands would then have no other choice but to attach themselves to Ukraine, which should by then have become a successful member of the European Union.
After 1,000 years, Russia will have come full circle, returning to Kievan Rus after wandering on the roads of the Mongol hordes, empire, communism, and farcical Putinism.
So Russia now has a choice: Ukrainian plan A or Ukrainian plan B.
The Rain on Russia’s Parade
WASHINGTON, DC – When Russian President Vladimir Putin presides over the military parade commemorating Victory in Europe Day on May 9, he will not attract the crowd he could have expected a couple of years ago.
Neither US President Barack Obama nor any leader from the European Union will be present to watch as tanks roll and military bands march through Red Square.
Aside from the president of Serbia, the only leaders expected to be in attendance are from countries, such as China and Vietnam, that were not part of the European theater in World War II.
Following Russia’s annexation of Crimea, and given Putin’s continued support for secessionists in eastern Ukraine, relations between Russia and the West are as bad as they have been since the Soviet Union disintegrated almost a quarter-century ago.
Obama recently listed Russian aggression in Europe alongside Ebola and the Islamic State as one of the three main threats to US national security.
Putin responded with claims that the US created the Islamic State and supports “neo-Nazis” in Ukraine and around the world.
The diplomatic tension is ironic, because the parade in Moscow is meant to commemorate a victory made possible seven decades ago by the alliance of the United States, Great Britain, and the Soviet Union against Nazi Germany.
Today, the former allies are unable to work together, even when facing a common enemy like the Islamic State.
Previous commemorations – which were attended by US Presidents Bill Clinton and George W. Bush – emphasized the common endeavor.
This year, Russian media have ceaselessly downplayed American and British contributions to the defeat of the Axis powers.
The Nazi-Soviet pact, which carved up Poland and Romania between the Soviet Union and Germany, has been swept under the rug.
Obama’s first term in office began with an attempt to “reset” relations with Russia.
The surviving fruit of those efforts – the New Start arms-control treaty and cooperation on Iran and Afghanistan – are vestiges of the warmer ties that existed when Dimitri Medvedev was president of Russia.
Bilateral relations began to deteriorate when Putin blamed the US – and then Secretary of State Hillary Clinton in particular – for supporting the thousands of Russians who protested his return to the presidency in December 2011.
The Obama administration made several unsuccessful attempts in 2012 and 2013 to restart a dialogue with the Kremlin, but changed course in the summer of 2013, when Russia granted political asylum to former US intelligence contractor Edward Snowden.
The war in Ukraine then took relations to their current depths.
One year after the “little green men” – Russian soldiers without military insignias – began to appear, first in Crimea and then in the Donbas region, the situation in eastern Ukraine remains both stalemated and volatile.
A fragile ceasefire remains in place in most parts of the contested region, but fighting continues to break out in some areas, and many worry that a new Russian-backed offensive could soon be launched around the strategic port of Mariupol.
Worse, the war in Ukraine appears to be on its way to becoming a “frozen conflict,” with the Donbas maintained as a pseudo-state run by Russian-backed insurgents and mafias.
Ukraine has lost control over both the region and its border with Russia, and it faces the constant possibility that the conflict could heat up once again, as Georgia’s did in 2008, when Russia sent in troops to support the breakaway regions of South Ossetia and Abkhazia.
Meanwhile, Ukraine’s neighbors are left feeling vulnerable, worried that Russia’s efforts to destabilize the region may cross yet another border.
The Kremlin shows no signs that it is interested in a solution to the crisis that would enable the government in Kyiv to regain full sovereignty over its territory.
Even if the fighting does not spread, the US and its allies must re-evaluate their relations with Russia.
The turning point was the annexation of Crimea, which effectively ended US and European hopes for integrating a modern post-Soviet Russia into the West.
Putin has explicitly rejected a global order that he believes was imposed by the US in the 1990s, when Russia was weak – an order that, in his view, has run roughshod over his country’s interests.
The ability of the next US president to work with Russia on issues of global order and Euro-Atlantic security will depend largely on the choices that Putin makes in Ukraine and elsewhere.
His Victory Day celebration – with its display of advanced weaponry, underpinned by increased military spending – will serve as a demonstration of Russian nationalism and intransigence.
As long as the US and Russia view each other as antagonists, creating a viable working relationship, let alone an alliance, will be impossible.
Their inability to unite even in celebrating their shared triumph in World War II is a clear sign of the geopolitical challenges that lie ahead.
Russia’s War on Ukraine’s Economy
WASHINGTON, DC – Ukraine’s economy may no longer be in free fall, but it remains in dire straits.
The country’s GDP contracted by 6.8% last year, and is forecast to shrink by another 9% this year – a total loss of roughly 16% over two years.
While things seem, to some extent, to be stabilizing – depreciation of the hryvnia has eliminated the country’s current-account deficit, and a massive fiscal adjustment brought Ukraine’s budget into cash balance in the second quarter of this year – the situation remains precarious.
Ukraine’s primary economic challenges are not homegrown; they are the result of Russian aggression.
The country’s belligerent eastern neighbor has annexed Crimea, sponsored rebels in eastern Ukraine, pursued a trade war, intermittently cut off its supply of natural gas, and is threatening financial attack.
So far, Ukraine has miraculously managed to withstand these assaults with little international support – but it is in desperate need of assistance.
Russia’s annexation of Crimea in March 2014 seized 4% of Ukraine’s GDP.
Since then, Russian-supported armed forces have occupied territories in eastern Ukraine that accounted for 10% of the country’s GDP in 2013.
With the Donbas region’s production having plummeted by 70% in the months since, this has cost Ukraine some 7% of its 2013 GDP.
Since 2013, Russian trade sanctions have slashed Ukraine’s exports to the country by 70% – accounting for a drop of 18% in Ukraine’s total exports.
Last year alone, Ukraine’s exports to Russia – which included machinery, steel, agricultural goods, and chemicals – fell by half.
Logistical issues, the lack of commercial links, and the specialization of some products meant that the goods could not be redirected in the short term.
I estimate that the loss is likely to correspond to a 6% decline in Ukraine’s GDP.
Businessmen everywhere are aware of Russia’s assault on Ukraine, and, unsurprisingly, few want to invest in a war zone.
As a consequence, Ukraine’s net foreign-direct investment, which was slightly over 3% of GDP before the start of hostilities, has evaporated.
This amounts to a corresponding reduction of 3% of GDP.
In addition to this, Ukraine has faced an intermittent gas war.
A financial assault may be yet to come.
Leaving Crimea aside, we can attempt conservatively to sum up Ukraine’s economic losses from Russia’s aggression.
Roughly 7% from lost production in occupied eastern Ukraine, 6% losses from trade sanctions, plus 3% from lost foreign direct investment amounts to 16% of GDP – that is, the total amount Ukraine is estimated to have lost from the beginning of 2014 to the end of this year.
Russia’s apparent but undeclared aim is to make sure that democratic Ukraine fails, without looking entirely guilty of having caused that failure.
This leads to an important conclusion: Ukraine is not the culprit but the victim, and it should be treated accordingly.
One does not counter military aggression only with stabilization credits, but also with military support.
European countries should note that, given the Kremlin’s saber-rattling in the Baltic and the Balkans, there is little reason to believe that the Russian threat is limited to Ukraine.
Delivering arms to Ukraine before Russia attacks, openly or covertly, should be a priority.
On July 1, Russia opened a new front in the economic war on Ukraine when the energy giant Gazprom, which is majority-owned by the Russian state and slavishly pursues Russian foreign-policy objectives, decided unilaterally to cut off the country’s gas supply.
Given the global gas surplus, Europe is in a position to tell Russia in no uncertain terms that its corrupt practices are no longer acceptable.
In particular, the European Commission should insist that Ukraine be able to continue to import gas from Gazprom in order to augment European supplies.
Furthermore, the economic war is making it almost impossible for Ukraine to deal with the humanitarian emergency that Russian aggression has caused: more than 6,000 citizens killed, tens of thousands injured, and 1.3 million people internally displaced.
The international community, again with the EU in the lead, must provide substantial humanitarian assistance.
Ukraine’s stabilization program with the International Monetary Fund is sound but underfunded.
An additional credit of roughly $10 billion is needed to raise Ukraine’s international reserves and stabilize its currency so that controls can be lifted.
This money should come from the EU and the United States.
Meanwhile, the EU should make Russia’s trade war with Ukraine the focal point of any trade negotiations with the Kremlin.
And it should abolish its remaining strict import quotas for Ukrainian goods.
Finally, every legal avenue to holding Russia to account must be pursued.
Sanctions against Russian President Vladimir Putin’s cronies should not only be continued, but also deepened.
And the US should follow on its success in tackling FIFA by exposing criminals in former Ukrainian President Viktor Yanukovych’s regime and Putin’s entourage.
Given that many of them have international bank accounts in US dollars, they are liable to American prosecution.
Sadat’s Journey, 30 Years After
TOLEDO &#45;&#45; If “one man of courage makes a majority,” as Andrew Jackson said, then 30 years ago, in November 1977, Egyptian President Anwar Sadat was such a man.
His peace overture to Israel stunned the Middle East.
He had, as he put it, gone “to the end of the earth” (the Knesset in Jerusalem), and in doing so transformed the region’s politics beyond recognition.
From that moment, the question for the Arabs was no longer how to destroy Israel, but how to reach an accomodation with it.
In his dramatic leap into the future, Sadat taught Arab leaders the realities of a changing world.
For Sadat’s peace overture was born out of a sober strategic analysis of the regional balance of power.
It was clear to him that Israel was a nuclear power that, in October 1973, had once again proven itself to be unbeatable in a conventional war – a war Sadat himself had never expected to win when he launched it.
Understanding Clausewitz’s dictum that war is a continuation of politics by other means, Sadat had sent the Egyptian Army across the Suez Canal in order to unleash a peace process.
He was defeated militarily, but his decision to go to Jerusalem meant that he would succeed politically.
During all of their abortive attempts to destroy Israel, the Arabs had relied on the military backing of the Soviet Union.
But a strategy of peace with Israel, Sadat knew, required an alliance with the United States.
This alliance was so vital an objective for Sadat that one may rightly wonder what came first in his strategy.
Perhaps Sadat might have opted to secure the American alliance without making peace with Israel if he had been able to do so.
But he could not, and he knew it.
Indeed, in 1974, when General Gamasy, the architect of the 1973 war, questioned Sadat’s flexibility in the disengagement talks with Israel, Egypt’s president calmed him down by saying, “Don’t forget, General, we are talking here about peace with the Americans!”
Another shift implicit in Sadat’s strategy was to keep Egypt at a distance from pan-Arabism.
Weary of inter-Arab politics, and tired of the high price Egypt had paid for the Palestinian cause, Sadat wanted to move away from Nasser’s pan-Arab ambitions and an excessive focus on the question of Palestine toward an emphasis on Egypt’s role as a power lying at the strategic crossroads between Asia and Africa.
Sadat would, of course, continue to champion the Palestinian cause as the heart of an Arab consensus and sometimes as a fig leaf for his own Egypt-focused foreign policy.
But, for all practical purposes, Sadat had embarked on a path leading to a separate peace with Israel.
One lesson of Sadat’s initiative is that in protracted conflicts where deep emotions and historical hatreds are involved, when almost every conceivable diplomatic formula has been tried and failed, the shock of a visionary, generous, and imaginative step can open new paths.
The major problem in the Arab-Isreli conflict, as in many other intricate disputes, has always been the incapacity or unwillingness of leaders to conduct a peace policy that is not supported by their societies’ prevailing, and frequently paralyzing, consensus.
Leaders, more often than not, are hostage to the socio-political environment that produces them, rather than its shapers.
Sadat gained a privileged place in history and achieved immortality the moment he fled from the comfortable prison of inertia, and from the pantomime solidarity and hollow rhetorical cohesion of Arab summits.
The test of statesmanship did not end there.
Sadat’s spectacular leap into the future needed to be met by Israel’s prime minister, Menachem Begin, at almost every juncture down a tortuous road to peace.
Arguably, only a political “hawk” like Begin, a man with a keen sense of the dramatic and a political romantic with a beady eye to the judgment of history, could have responded in such a way to Sadat’s initiative.
That Begin was able to rise to the occasion had much to do with the psychological impact of Sadat’s astonishing initiative.
Through his visit to Jerusalem, Sadat made more ordinary the nature of the Arab-Israeli conflict.
Sadat’s initiative transformed the conflict from a fight about Israel’s right to exist into a negotiation of interests between legitimate sovereign states.
Here, indeed, is the central point: the need to move away from mythological, mutually exclusive rights of existence, conflicting historical narratives, and religious claims of ownership.
Sadly, this is where the Palestinian-Israeli tragedy remains stuck to this very day, thus making the conflict practically insoluble.
Through his visit to Jerusalem, Sadat shook away Israel’s siege mentality and gave psychological living space to an otherwise claustrophobic nation in the midst of a hostile Arab world.
Peace is never a zero-sum game.
In its peace with Israel, Egypt reached its strategic objective of an alliance with the US.
But Israel was wrong to believe that Egypt could be a gateway into the Arab world.
The gate to Israeli-Arab reconciliation remains where it was always been – in the hands of the Palestinians.
Saddam and the Arabs
With the end of Saddam Hussein's regime, the scope of his brutalization of the Iraqi people is becoming clear.
Mass graves are unearthed, torture chambers opened.
Countless Iraqis now openly recount horrifying stories of the murder and disappearance of loved ones.
In the other Arab states, the political leadership and the media have not dwelled much on these aspects of Saddam's rule.
They have good reason for avoiding such close scrutiny.
Many of them benefited directly from Saddam's rule.
Examining what he did in Iraq means examining their own role in supporting more than three decades of brutality.
The heyday of Saddams's relations with the Arab world came during the Iran-Iraq war during the 1980s.
Saddam's attack on Iran allayed the fears of Arab regimes that Ayatollah Khomeini's Iran would export its Islamic revolution.
The late Jordanian monarch King Hussein would join Saddam in inspecting the frontlines.
The Gulf states, especially Saudi Arabia and Kuwait, offered Saddam massive financial and media support.
Egypt's centers of power, such as its army, businessmen, journalists, and ideological parties, played a prominent role in supporting Saddam's war against Iran.
Syria was the sole exception to this chorus of Arab approval for Saddam, because its late leader, President Hafez al Assad, had aligned himself with Iran.
Saddam's brutality within Iraq also served his neighbors' purposes.
He repressed the Shiites, the traditional opponents of Sunni-dominated regimes in the region.
He suppressed the Kurds, reassuring both Turkey and Syria, countries with sizeable--and restive--minority populations of their own.
Indeed, by stifling any hint of democracy or political opposition in Iraq, Saddam's police state eliminated all risk of possible contagion of neighboring states.
Outside Iraq, Saddam understood the uses of wealth and influence as a means of gaining friends.
He put his oil reserves to good use, providing Jordan and Syria--each a failing economy--with deeply discounted supplies, assuring their goodwill.
Saddam also focussed his attention on the media in the Arab world, understanding their power in controlling and regimenting an audience.
Saddam spent unreservedly, buying off politicians, journalists, writers, and artists in Iraq, the Arab world, and beyond.
Through a large and interlocking network of security and media organizations, Saddam financed scores of newspapers and magazines, lavishing on their hack writers sums of money that were unimaginable to ordinary Arab journalists.
A political-intelligence-media network was constantly at work.
Arab writers and artists invited to Saddam-sponsored cultural events would invariably find a pleasant surprise when opening brief cases distributed as presents--wads of dollars would be stuffed inside.
For favored supporters, the rewards could be much greater: mansions, luxurious apartments, the latest cars.
Dozens of Arab intellectuals engaged in this kind of business with Saddam.
In the Arab world many of these people are literary celebrities, film idols, and media stars.
Recently discovered documents reveal that hundreds of them received money and gifts from Saddam or his henchmen.
At the center of this network were the cultural organizations that Saddam established in Arab and other capitals.
Iraqi embassies acted as media centers, along with their despicable role in hunting dissidents of all political stripes.
The sole concern of these lavishly-funded front organizations was to sell Saddam Hussein abroad and discredit his opponents.
I experienced directly the difficulty of trying to offer an alternative view of Iraq and its cultural life.
With a group of colleagues, I established a modest cultural group, with no external support whatsoever.
We had a terrible time trying to publish our writings or getting coverage of the society's activities.
I remember how much we agonized before we could print our first literary review, Al-Badeel (The Alternative), early years in our forced exile more than twenty years ago, starting in Lebanon.
In the Arab region, Saddam manipulated people's sentiments by feeding them an ever-changing diet of secular, Islamist, and nationalist slogans.
He crowned these with his call to liberate Palestine "from the river to the sea," that is, the destruction of Israel, outdoing the Palestinian leaders themselves.
Indeed, it was Saddam who added the words "God is great" in his own handwriting to the Iraqi flag.
Saddam also assigned his deputy Izzat Ibrahim to lead a so-called "faith drive."
The campaign was designed to serve several purposes, including the suppression of any free, secular thinking.
On a wider scale, it was meant to influence and win over Arab and Muslim minds by hollow but bombastic rhetoric.
Unfortunately, many Arabs, rulers and ruled alike, fell for it.
With the end of Saddam's regime, Iraq faces a reckoning for decades of physical brutality and cultural intimidation.
Iraqis will have to revisit concepts--like nationalism, sovereignty, and Islamic community--that have never come under critical examination.
How the Arab world reacts to Iraq's reckoning, and whether other Arabs will face their own complicity in Saddam's legacy, will tell us a great deal about what sort of Arab societies the future will bring.
Saddam Hussein Before the Law
What is at stake in the trial of Saddam Hussein, which is set to begin on October 19?
Coming just four days after the referendum on Iraq’s constitution and touted as a “constitutional moment” akin to the trials of Kings Charles X and Louis XVI, the proceedings are supposed to help advance Iraq’s transition from tyranny to democracy.
Will they?
So far, all signs suggest that the trial is unlikely to meet its ambitious aims.
From the outset in postwar Iraq, criminal justice resembled deracinated constitutionalism: atomistic trials, radical purges, and compromised elections.
Most egregious was the post-invasion rush to “de-Ba’athification,” which eviscerated many of the country’s existing institutions.
The mix of individual and collective responsibility associated with repressive regimes often creates a dilemma concerning how to deal with the old institutions.
But, in Iraq, flushing out the military and the police merely left the country in a domestic security vacuum.
By the time that mistake was recognized, the damage was done, needlessly sacrificing security.
Moreover, potential sources of legitimacy in Iraq’s ongoing constitutional reform, such as parliament, were also destroyed.
The lack of legitimate institutions needed to rebuild the rule of law is evident in the debate over what authority and whose judgment ought to be exercised over Saddam Hussein.
Should the tribunal be national or international?
This question highlights the problematic relationship of international humanitarian law to the use of force.
In the Balkans, the indictment of Slobodan Milosevic by the United Nations’ International Criminal Tribunal for the former Yugoslavia (ICTY) provided a boost to political change in the region.
Regime delegitimation has become a leading function of the new permanent International Criminal Court.
But Iraq was different.
Instead of recurring to an international forum, a devastating war was declared that went beyond deposing Saddam, wreaking damage on tens of thousands of civilians, and thus confounding the message of condemnation.
The origins of successor justice in the war means that the debate over its legitimacy overlaps with the broader schism over the intervention itself.
So far, the UN, the European Union, and most human rights groups have not cooperated with the Iraqi Special Tribunal (IST), owing to their opposition to the original military intervention, as well as the IST statute’s authorization of the death penalty.
Ultimately, the debate over international versus national jurisdiction reflects a dichotomy that is no longer apt in contemporary political conditions, for it obscures the fact that international law is increasingly embedded within domestic law.
Despite being putatively “national,” the Iraq tribunal couches the relevant offenses in terms of “crimes against humanity.”
But it is only now, after the war, that successor justice is being aimed at refining and consolidating the message of delegitimation and regime change.
Despite its close links to the invasion, Saddam’s trial is expected somehow to represent an independent Iraqi judgment, thereby constituting local accountability without exacerbating tensions and destabilizing the country further.
Can it succeed?
From the start, the IST must constitute a robust symbol of Iraqi sovereignty.
But its close association with the United States-led invasion leaves it vulnerable to the charge of “victor’s justice.”
Although officially adopted in December 2003 by the Iraqi Governing Council, the IST’s statute was framed under contract to the US government and approved by L. Paul Bremer, the Coalition Provisional Authority’s Administrator.
The US remains the driving force behind the IST, supplying the needed expertise.
For many Iraqis, it is hard to view the IST as anything other than an expression of the occupiers’ will.
Indeed, the IST’s close association with the US-backed establishment of a successor regime is fraught with political pitfalls.
Transitional criminal justice must be broad enough to reconcile a divided Iraq, and, therefore, include Shi’a and Kurdish crimes against humanity, while it apparently must also avoid embarrassing the US or its allies, particularly regarding their extensive dealings with Saddam’s regime.
But the appearance of selective or controlled justice will defeat the tribunal’s purpose.
So will the specter of illiberal trial procedures – another reason for the lack of international support for the IST.
The original selection of judges by what was widely viewed as a wing of the occupation exposes the tribunal to allegations of bias and partiality, as have issues regarding access and transparency for defendants and others.
Moreover, the IST statute says nothing about the standard of proof, which means that guilt does not clearly have to be established beyond a reasonable doubt.
While the first set of charges concerns the well-documented killings in Dujail and elsewhere in the 1980’s, Milosevic’s trial by the ICTY shows that it is far more difficult to establish “superior authority,” linking the killings to the leader.
According to Iraqi President Jalal Talabani, this problem has ostensibly been “solved” by means of extracted confessions.
Of course, if the IST’s aim is to evoke the possibility of show trials rather than bolstering the rule of law, Talabani is quite right: problem solved.
Criminal proceedings may then be downsized to a confession of a single massacre, as subsequent trials are shelved to open the way for punishment – unlike, say, the Milosevic trial, which is now dragging into its fourth year.
But rapid punishment – most likely execution – threatens to bury the full record of decades of tyranny under the apparently overriding purpose of fighting the insurgency by other means.
Saddam’s trial will thus demonstrate the limits of the law in jumpstarting regime transition.
An intractable dilemma of transitional justice is that societies ravaged by brutal human rights legacies often appeal to the law to shore up the legitimacy of the successor regime, only to see these salutary aims subverted by the challenges and compromises that are inherent to the transition itself.
Safeguarding Asia’s Growth
SEOUL – Emerging Asian countries should be proud of their economic resilience. Despite a global economy plagued by weak growth, persistently high unemployment, and heavy debt loads, the region’s emerging and developing economies grew at an average annual rate of 6.8% from 2000-2010, propping up global output and buttressing recovery efforts.
The region’s success has been underpinned by dynamic growth in China and India, which account for almost 60% of the continent’s total GDP in purchasing power parity terms.
Furthermore, economic-policy changes and structural reforms that were enacted in the wake of the 1997-1998 Asian financial crisis significantly reduced the region’s vulnerability to financial shocks over the past decade.
But Asia cannot be complacent: financial systems remain fragile; economies are burdened with high fiscal and current-account deficits; and Asia remains too heavily dependent on North American and European export markets, increasing its vulnerability to external shocks.
Moreover, if conditions in the eurozone continue to deteriorate, Asia could be more severely affected.
Already, spillover effects from trade and financial transmission channels are beginning to take their toll: China’s GDP growth rate in the second quarter of 2012 averaged 7.6%, reflecting a significant slowdown, and India’s growth rate is expected to decline to roughly 6% this year.
China’s potentially strong domestic-demand base and ample room for policy maneuvers can help it to avoid a hard landing.
It has already aggressively loosened monetary policy, and it can employ further fiscal stimulus.
But policy mismanagement and structural weaknesses in the financial sector and local governments could undermine efforts to safeguard growth.
Meanwhile, India, constrained by a high fiscal deficit and persistent inflationary pressure, has less scope for expansionary policies and faces significant challenges in pursuing credible structural reform.
This has serious implications for the rest of Asia.
Over the last three decades, increased economic and trade integration has bolstered the region’s growth.
For example, segmented production for global supply chains has stimulated trade in intermediate goods and promoted foreign direct investment.
Now, however, closer economic integration means that sluggish growth in China and India will reduce job opportunities and slow the rate of poverty reduction throughout the region.
Faced with weak demand in advanced countries, Asian economies are working to rebalance their sources of growth by shifting toward domestic and regional markets.
As a result, growth in intra-regional trade has outpaced overall trade growth, with intra-Asian trade now accounting for more than half of the continent’s total trade turnover.
But China’s established role as the assembly hub for the region’s production-sharing networks means that it is becoming a source of autonomous shocks – with a large and persistent impact on business-cycle fluctuations.
So, what policies must emerging Asian economies pursue to reduce their vulnerability to regional and global volatility?
The most immediate challenge is to safeguard the financial system’s stability against external shocks.
Policy reform should aim to promote market transparency, improve risk management, and strengthen effective supervision and regulations.
Second, emerging countries must develop more effective macroeconomic frameworks, including better macro-prudential regulation and a broader monetary-policy framework that takes into account asset prices and financial-market stability.
A wide range of official measures could be employed to support domestic demand while protecting medium-term fiscal sustainability.
And, to address volatile capital flows, countries should increase exchange-rate flexibility, maintain adequate international reserves, and implement carefully designed capital controls.
Third, emerging economies must further rebalance their sources of growth.
Reducing dependence on external demand – for example, by promoting private-sector investment and encouraging household expenditure – is crucial.
Supply-side policies that promote small and medium-size enterprises and service industries accommodating domestic demand are also critical to ensuring more inclusive and sustainable growth.
Finally, enhanced regional and global financial cooperation – including closer policy coordination at the G-20 and International Monetary Fund – would help countries to respond more effectively to shocks and crises.
A key regional initiative is the $240 billion multilateral reserve pool of the ASEAN+3 (the Association of Southeast Asian Nations plus China, Japan, and South Korea), which can provide short-term liquidity to members when needed.
Institutional arrangements in regional liquidity provision and economic surveillance must be enhanced.
Asians need not be pessimistic; the perfect storm of a hard landing in China, a double-dip recession in the United States, and a collapse of the eurozone is unlikely.
But they cannot rule out the downside risk of a synchronized global downturn.
Only with preemptive policies designed to manage risk better can emerging Asian countries protect economic growth from the threat of current and future crises.
Can Rouhani Deliver?
NEW YORK – As world powers meet in Geneva to begin nuclear talks with Iran, the world awaits the follow-up to the phone call between Iranian President Hassan Rouhani and US President Barack Obama after Rouhani’s visit to the United Nations General Assembly last month.
That brief conversation – the first between the two countries’ presidents since 1979 – recalls the last attempt to revive bilateral diplomacy, undertaken 12 years ago by Iran’s then-President Mohammad Khatami.
In both episodes, a missing handshake symbolized the countries’ persistent rift.
Back then, Khatami and Foreign Minister Kamal Kharrazi “went shopping,” rather than attend a cultural event at the Asia Society and risk crossing paths – and shaking hands – with US Secretary of State Madeleine Albright.
This time, despite Iran’s avoidance of a presidential handshake at the UN, Rouhani delivered a major address at the Asia Society asserting that his government would pursue policies of “moderation and common sense” and would be willing to work with the West on resolving questions about its nuclear program.
Moreover, handshakes were exchanged by the two countries’ foreign ministers, when John Kerry and Javad Zarif, joined by the European Union’s top diplomat, Catherine Ashton, held a formal meeting to organize the upcoming nuclear negotiations in Geneva.
Kerry and Zarif shook hands again when the two met separately.
So what changed?
Back then, Iran’s supreme leader, Ayatollah Ali Khamenei, had forbidden Khatami to speak with the Americans.
Rouhani, by contrast, proceeded with Khamenei’s blessing.
Khamenei, concerned with repairing the damage caused by his acceptance of the fraudulent reelection in 2009 of former President Mahmoud Ahmadinejad, was willing to accept the victory in June of Rouhani, a conservative reformist whom he trusted.
He must have calculated that the new president would have to ameliorate the consequences of Ahmadinejad’s foreign-policy freelancing and economic mismanagement, which has had as much to do with the collapse of the Iranian economy as US-led international sanctions.
There had been earlier attempts to improve relations with the Americans.
Akbar Hashemi Rafsanjani, who became Iran’s president after Ayatollah Ruhollah Khomeini’s death in 1989, sought such an outcome.
In 1995, he sent clear signals of a desire to restore diplomatic relations.
President Bill Clinton’s administration ignored the overtures and allowed the US Congress to take the initiative.
Congress responded by unanimously adopting the Iran and Libya Sanctions Act of 1996.
Rafsanjani was in a much stronger position vis-à-vis Khamenei, who had just been selected to succeed Khomeini as Supreme Leader, than any of Iran’s subsequent presidents.
His trouble was with powerful opponents in Iran’s security apparatus, who sabotaged his pragmatic foreign-policy initiatives by staging terrorist attacks in France, Germany, and Argentina.
Khatami’s proposal for a “dialogue among civilizations” in 2000 was an attempt to open a crack in what he described as the wall of mistrust that continued to separate Iran and the US.
It was only in the last year of his second term that Clinton made a serious effort to respond to Khatami.
But Khatami lacked the support of Khamenei, who firmly opposed his reforms.
The aggressive rhetoric of Clinton’s successor, George W. Bush, who called Iran part of an “axis of evil” prior to the US-led invasion of Iraq, made Khamenei apprehensive, and he endorsed an initiative for a dialogue with the Americans in 2003.
The Bush administration, in thrall to the idea of regime change, ignored this initiative and rejected the “Big Deal” on nuclear energy negotiated with the EU-3 in Paris in November 2004 by Rouhani, who was then Khamenei’s representative and Chairman of Iran’s National Security Council.
The formal rejection of the Iran-EU nuclear agreement in February 2005 was an unintended gift to Iran’s hardliners, led by Ahmadinejad.
The return of hardliners after the ascendancy of moderates is a little-understood but fairly typical feature of twentieth-century revolutions.
Ahmadinejad’s election in 2005 was a throwback to the populism of Khomeini’s Islamic Revolution and his cult of revolutionary martyrs.
It went hand in hand with an aggressive foreign policy and a determined nuclear strategy of uranium enrichment that repeatedly frustrated EU negotiators and forced world leaders to fall into line behind America’s crippling sanctions regime.
There can be no doubt that before coming to the US, Iran’s new president studied Obama’s letter to Khamenei, who promised “heroic flexibility” in negotiations.
With Khamenei’s support, Rouhani will be able to rein in recalcitrant forces in Iran’s power structure in a way that his pragmatic predecessors, Rafsanjani and Khatami, could not.
More than any Iranian president since 1979, Rouhani can deliver his part of the bargain – that is, if and when a bargain is struck.
Remaking Iran
TEHRAN – Iranian President Hassan Rouhani recently marked the end of his first year in office not only with smiles, but also with further evidence of his efforts at domestic reform and geostrategic reorientation.
In Iran’s case, these two imperatives have long gone hand in hand.
Rouhani now says that Iran would be willing to work with the United States in Iraq.
The dire threat to both Iranian and US interests posed by the Islamic State (formerly the Islamic State in Iraq and Syria) has, evidently, brought the two countries closer together.
In the days since the anniversary of Rouhani’s election, Iran’s foreign minister, Mohammad Javad Zarif, overcame his earlier reservations and expressed optimism about reaching an international deal on his country’s nuclear program by the original deadline of July 20.
If rapprochement with the West can be achieved, the removal of the international sanctions stemming from the nuclear program would give a tremendous boost to Rouhani’s economic policy.
And it is here that Rouhani has invested much of his energy and political capital.
Coming into office, Rouhani had a clear priority: fix an economy devastated by eight years of former President Mahmoud Ahmadinejad’s demagogic mismanagement.
He replaced Ahmadinejad’s incompetent thugs with a reasonably qualified cabinet and capable administrators, and has embarked on an ambitious program of economic development, expanded health care, and environmental protection.
Though Rouhani has made little headway combating rampant inflation, small business and the entrepreneurial middle class seem to be thriving.
In early June, I found a recently opened complex of expensive restaurants opposite the new luxury Grand Hotel in Shiraz packed with affluent customers.
Rouhani is vigorously cultivating economic ties with Gulf states, including Kuwait, whose ruler he entertained in Tehran in early June before leaving on an official visit to Turkey, where he signed ten deals aimed at doubling bilateral trade, to $30 billion, in 2015.
On the environmental front, Rouhani is also busy undoing his predecessor’s damage.
Tehran’s air pollution, widely blamed by those with respiratory illness on low-octane “Ahmadinejad gasoline,” has visibly declined with the introduction of high-octane fuel and other restrictions.
Last but not least, Rouhani has launched his national health-insurance program, and ordered state hospitals, which dominate the health sector, to limit patients’ copayments for all medical expenses to 10%.
Rouhani has made it clear that he wants to pay for the new health care by phasing out the monthly state stipends paid to more than seventy-four million registered citizens, which Ahmadinejad offered when he eliminated a wide range of subsidies.
The strongest factor working in Rouhani’s favor is the support of Ayatollah Ali Khamenei, the country’s Supreme Leader, for the president’s domestic policies – just as he has fully backed the nuclear negotiations.
Unlike Ahmadinejad’s reformist predecessor, Mohammad Khatami, who acted more like the leader of the loyal opposition than head of the executive, Rouhani has worked closely with Khamenei.
In his speech to commemorate the 25th anniversary of Ayatollah Ruhollah Khomeini’s death on June 4, Khamenei fully appropriated the discourse of the dissident clerics aligned with Khatami.
Thus, he described the regime instituted by Khomeini as a religious democracy in which all high state offices, including his own, derive their legitimacy from the will of the people as expressed in elections.
But Rouhani needs more than Khamenei’s backing.
Khamenei is 74 and has health problems.
With Mohammad Reza Mahdavi Kani, the 83-year-old chairman of the Council of Experts (the body of clerics that elects the supreme leader) gravely ill, Ghorbanali Dorri-Najafabadi, an influential member and former intelligence and security minister, has suggested that the Council should proceed to elect Khamenei’s successor now.
Clearly, the clerical elite is concerned about the future of its leadership after Khamenei.
Should a succession process begin soon, it would significantly constrain Rouhani’s room for maneuver.
Rouhani’s relations with the Iranian Revolutionary Guard Corps (IRGC) and other security forces are of more immediate concern.
Last month’s unceremonious killing of a billionaire businessman detained by security forces on corruption charges seemed to reflect the tacit division of power between the president and Iran’s security apparatus.
Nonetheless, tension is simmering beneath the surface.
Rouhani seems to have halted the expansion of the IRGC’s economic empire.
The IRGC’s commander, General Mohammad Ali Jafari, has publicly expressed his hostility to Rouhani’s administration, while General Hassan Firouzabadi, Chief of Staff of the Armed Forces, has countered by expressing his support for the president.
It is in Iraq, however, that Iran faces its most complicated mix of challenge and opportunity.
Determined to prevent the disintegration of the country, Iran has provided military and political support to Prime Minister Nouri al-Maliki’s government.
This appears to align Iranian and American policies, with both determined to counter the gains of radical Islamist forces in Iraq and Syria.
Rouhani’s circle is fully prepared to address this crisis by talking to the US.
After a year in power, Rouhani’s program of economic development, environmental cleanup, and improved health care is proceeding smoothly and quietly.
But, given the uncertainty of the domestic and international political context, there are no guarantees of success.
Much depends on whether a nuclear deal with the international community is achieved, and the likelihood of that outcome has unexpectedly increased, owing to the common interest of Iran and the US in coping with the collapse of Iraq.
Saif Qaddafi and Me
CAMBRIDGE – Not long ago, a Harvard colleague wrote to me that Saif al-Islam el-Qaddafi, a son of Libya’s dictator, would be in town and wanted to meet me.
He is an interesting fellow, my colleague said, with a doctorate from the London School of Economics and Political Science (LSE); I would enjoy talking to him, and I might be able to help his thinking on economic matters.
The meeting, as it turned out, was a letdown.
I was first briefed by a former Monitor Company employee, who gently intimated that I should not to expect too much.
Saif himself held photocopies of pages from one of my books on which he had scribbled notes.
He asked me several questions – about the role of international NGOs, as I recall – that seemed fairly distant from my areas of expertise.
I don’t imagine he was much impressed by me; nor was I much taken by him.
As the meeting ended, Saif invited me to Libya and I said – more out of politeness than anything else – that I would be happy to come.
Saif never followed up; nor did I. But if a real invitation had come, would I have traveled to Libya, spent time with him, and possibly met his father and his cronies?
Would I have been tempted by arguments such as: “We are trying to develop our economy, and you can really help us with your knowledge?”
In other words, would I have followed in the footsteps of several of my Harvard colleagues who traveled to Libya to exchange views with and advise its dictator – and were paid for their services?
These scholars have been pilloried in the media in recent weeks for supposedly having cozied up to Qaddafi.
Sir Howard Davies chose to resign as Director of the LSE, which awarded Saif his doctorate (which some allege was plagiarized) and took money for the school from the Libyan regime.
There is a strong sentiment that academics and institutions that collaborated with such an odious regime – often with the encouragement of their governments, no doubt – suffered a grave lapse of judgment.
Muammar el-Qaddafi’s murderous stance during the uprising has revealed his true colors, regardless of his more moderate posture in recent years.
And Saif al-Islam’s recent support for his father suggests that he is not the liberal reformer many took him to be.
But it is much easier to reach such judgments with hindsight.
Were the moral overtones of dealing with the Qaddafis so obvious before the Arab revolutions spread to Libya?
Or to pose the question more broadly, is it so clear that advisers should always steer clear of dictatorial regimes?
Universities all over the world are falling over each other trying to deepen their engagement with China.
Most academics would jump at the chance to have a meeting with China’s President Hu Jintao.
I haven’t heard much criticism of such contacts, which tend to be viewed as normal and unproblematic.
And yet few would deny that China’s is a repressive regime that deals with its opponents harshly.
Memories of Tiananmen are still fresh.
Who is to say how the Chinese leadership would respond to a future pro-democracy uprising that threatened to undermine the regime?
Or what about a country like Ethiopia?
I have had intensive economic-policy discussions with Prime Minister Meles Zenawi in Addis Ababa.
I must confess to having enjoyed these talks more than most meetings I have in Washington, DC and other democratic capitals.
I have no illusions about Meles’ commitment to democracy – or lack thereof.
But I also believe that he is trying to develop his economy, and I offer policy advice because I believe it may benefit ordinary Ethiopians.
The conundrum that advisers to authoritarian regimes face is akin to a long-standing problem in moral philosophy known as the dilemma of “dirty hands.”
A terrorist is holding several people hostage, and he asks you to deliver water and food to them.
You may choose the moral high ground and say, “I will never deal with a terrorist.” But you will have passed up an opportunity to assist the hostages.
Most moral philosophers would say that helping the hostages is the right thing to do in this instance, even if doing so also helps the terrorist.
But choosing an action for the greater good does not absolve us from moral culpability.
Our hands do become dirty when we help a terrorist or a dictator.
The philosopher Michael Walzer puts it well: “It is easy to get one’s hands dirty in politics.”
In the end, an adviser to authoritarian leaders cannot escape the dilemma.
Often, leaders seek the engagement only to legitimize their rule, in which case the foreign adviser should simply stay away.
But when the adviser believes his work will benefit those whom the leader effectively holds hostage, he has a duty not to withhold advice.
Even then, he should be aware that there is a degree of moral complicity involved.
If the adviser does not come out of the interaction feeling somewhat tainted and a bit guilty, he has probably not reflected enough about the nature of the relationship.
Saigon\u0027s Fall, Saigon\u0027s Rebirth: 25 Years Later
Vietnam's long war ended 25 years ago, on April 30, 1975.
Like a passerby staring at the wreckage of a road accident, I watched the fall of Saigon on television in Connecticut with my new family.
Like millions of Americans, I was mesmerized by the collapse of a country where half-a-million American soldiers fought and 50,000 died.
I was lucky.
Barely twelve, I left Saigon a month before its fall with an American officer whom I had befriended in an army hospital, where my mother and I volunteered.
That was 1968, the year of the Tet Offensive.
We brought him rice porridge, chocolate eclairs, tamarind candy.
He spoke French with me.
As he lay bandaged, I told stories that made him laugh.
Seven years later, as North Vietnamese tanks crossed the DMZ, he returned and adopted me, taking me out several months before my parents made their own escape.
From the safety of our living room we watched as crowds of Vietnamese forced their way into the guarded US compounds.
Helicopters skittered on the Embassy's rooftop.
This was ‘Operation Frequent Wind,' code-name for America's evacuation from Saigon.
There was an exodus by air, towards the Seventh Fleet patrolling the South China Sea; an exodus by sea saw waves of barges, fishing boats and other makeshift vessels.
More than 100,000 Vietnamese fled in April and May of 1975 alone, a number swelling to 2 million in the years after.
Wars are often incomprehensible to those who live through them.
The beginning; the end; the beginning of the end: these are historians' questions.
Those who survived the war in Vietnam and fled because we were suddenly on history's losing side, grappled with questions of forgetting, of how to live an unremembered life – unremembered until an anniversary like this one.
April 30: the Day of Liberation as it is known in Communist Vietnam; the Day of National Loss, as Vietnam's exiles call it.
Reinvented by Hollywood for American self-examination, recrimination, and regret, Vietnam became an allegorical black hole.
In films like Apocalypse Now and Platoon, shadowy enemies lurk in an hallucinatory darkness of fetid swamps and jungles.
Symbols of disillusion abound in Born on the Fourth of July, where a flag-waving patriot is transfigured into an antiwar demonstrator.
The Deer Hunter conceives of Vietnam as a metaphor for insanity, the arbitrary click of a gun in a game of Russian roulette signaling the difference between life and death for American GIs addicted to the madness of war and hell in a very small place.
Years after the war, Vietnam remained a buzzword for something else, never for itself; a short-hand for disaster.
But for us Vietnamese who made America our new country, Vietnam remains home, a place of controlled forgetting and even more controlled remembering.
In that grey space between remembering and forgetting, most of us invented new lives.
So, for many Vietnamese, April 30 is a day of re-invention and rebirth.
Twenty five years after Saigon's fall, most of us have inched away from the margins of American life.
We learned English, managed America's raucous sounds, even as we preserved our multiple versions of the old.
Across America, in Orange County in California, in Houston and Dallas, Arlington and Falls Church, Virginia, Saigon has been resurrected.
In these "Little Saigons," mini- malls are filled with American-style Vietnamese supermarkets, restaurants, bakeries, nail and hair salons, medical and law offices, travel agencies, and every type of service business.
Ice cream parlors are called "Givrard" and "Brodard", and restaurants "Pasteur," after those once frequented in Saigon.
South Vietnam's flag of yellow with three red horizontal stripes often flies side-by-side with the Star-Spangled banner.
Vietnam remembered remains the stuff of dreams, a voluptuous mix of reproduced scent and sound.
For the generation raised as hyphenated Americans, Vietnam hovers in the recesses of their lives, through stories told by parents and, increasingly, in this technological age, with a click to such websites as ‘Viet.story', ‘Viet.travel', etc.
VC nowadays means not Vietcong, but venture capitalist.
Twenty five years after the exodus from Vietnam, a reverse exodus is taking place.
The Viet Kieu, as the Vietnamese diaspora is called, are returning by the thousands, bringing to Vietnam the precious American dollar.
There, we find ice cream parlors called "Baskin-Robbins," restaurants owned by locals called "Café California," and bars with names like "Apocalypse Now."
For those left behind, it is America that is the stuff of dreams, the American passport that is admired.
In Ho Chi Minh City, a name not even Communist officials use, Saigon remains its old brash, energetic, and audacious self.
In the city that bears his name, Ho Chi Minh is more or less ignored, although his portraits loom alongside Sony and Coca Cola signs.
Before 1986, it was a crime to own a private business.
As a result of economic reforms, the private economy, especially in Saigon, surpasses the official state economy.
In the city's markets, on sidewalks and in alleyways, everyone peddles something.
After twenty five years of collapsed expectations, you feel a raw energy in the roar of motorbikes that weave through improvisational waves of traffic, in the spirit of a city revived.
Four years ago, I gave a series of lectures at the invitation of the Ministry of Education and squeezed in a visit with my uncle, a Vietcong who stayed behind after the Communist victory.
What he wanted to learn was how his Mekong Delta province could attract some of the foreign investment going mostly to Saigon.
Hanoi's officials, too, resent that investors fly to their city to get approval for deals, only to do business in the South.
April 30 is indeed called the Day of Liberation in Vietnam: 1.5 million Vietnamese died during that war; 3 million were wounded.
But as my uncle suggests, perhaps it was the South that ultimately liberated the North.
Syria’s Kurdish Hope
QAMISHLI, SYRIA – The civil war now engulfing Syria emerged from its people’s desire for political change.
But the war is not universal: since the outbreak of protests in 2011 against President Bashar al-Assad’s regime – and long before – one group of Syrians, the Kurdish community, has consistently sought peaceful change and respect for the rights of all.
For Syria’s Kurds, the struggle against more than four decades of the Assad family’s Ba’athist dictatorship became particularly harsh after 2004, when security forces killed dozens of unarmed protesters in the northeastern town of Qamishli.
This ignited the spark for democratic reform, and we were spurred on by the knowledge that our kinsmen had won political autonomy in northern Iraq and were creating a vibrant democracy.
When protests erupted across Syria in 2011, Kurds were at the forefront.
Unfortunately, foreign fighters across the Arab and wider Muslim world soon joined the fray, some supporting the regime, and others backing the rebels.
For the Kurds, the widening conflict meant that, in addition to fighting a brutal dictatorship, we were now confronted by Al Qaeda militants seeking to establish an Islamic emirate in the Middle East.
The Kurds have never sought to achieve democratic goals through violence.
We wanted no part of a revolution that massacred children, drove families from their homes, and left millions destitute.
We took up arms only to protect ourselves and our property from an immediate extreme Islamist threat that tolerated no dissent.
Radical Islamists targeted us because our people generally hold secular views of politics and society, with women, for example, playing a prominent role in public and professional life.
Islamists also abhor us because we demand self-determination, whereas they seek an amorphous emirate that lumps all Muslims together without regard for cultural and historical differences. Indeed, they aim to suppress, and even eliminate, any such difference.
While defending ourselves, we have also established our own government in Syria’s Kurdish regions, the only areas that enjoy both order and democracy.
The streets of Qamishli, Amuda, and Malikiyya are calm and safe.
The armed gangs that move freely through rebel-controlled cities such as Aleppo are absent in Kurdish areas.
When people go to the markets they do not fear being kidnapped or killed.
This is the case for people of all ethnic or religious communities in the Kurdish regions.
Kurds have long been proud of their tolerance.
Christians who have fled rebel-controlled areas live peacefully and with equal rights in Kurdish areas. Indeed, these areas have become safe havens for all religious and ethnic groups escaping the war.
We also know that violence will not solve this conflict.
That is why Syrian Kurds’ political representatives advocate a negotiated settlement, and are willing to sit down with anyone – regime or rebels – to achieve a peace agreement.
Other rebel factions demand Assad’s resignation; we insist on no such preconditions.
We do not even seek the creation of an independent Kurdish state – just a guarantee of Kurdish rights in a unified Syria.
Centralized power has suppressed the country’s diversity and led to appalling abuses.
Our chief goal is to end the persecution and discrimination, including the ban on the Kurdish language and our exclusion from certain professions, and we believe that this can best be achieved through a decentralized political system that devolves power to the provinces.
Yet, despite consistently demonstrating a commitment to democracy, the international community has been deaf to our appeals.
The United States, Europe, and other Western governments refuse to negotiate with us, even though neighboring Iraq and Turkey have done so willingly.
The region’s new geopolitical realities demand new political arrangements.
Syria’s Kurds are ready to build a more democratic country.
But we need Western support and expertise to consolidate the free society to which everyone aspires.
By ignoring us, Western governments are disregarding the secular, democratic values that they claim to uphold.
Worse, our fragile democracy risks falling victim to extremists who pose a mortal danger not just to Syria, but to the wider Middle East and the world.
Gays and the New Public Philosophy
LONDON – With humanity’s millennia-old focus on collective survival no longer a primary concern, a few fortunate societies in the West have become preoccupied with matters of human, or individual, rights.
In recent decades, we have experienced a second flowering of the individualism associated with such nineteenth-century thinkers as John Stuart Mill.
The rights of the individual were submerged by the horrors of the first half of the twentieth century.
But since the 1960’s, the passions expended until then on righting collective wrongs have been increasingly channeled into securing the rights of humans as individuals.
Indeed, if the West can be said to have a public philosophy nowadays, it is a philosophy of human rights.
A small but significant example of this is the United Kingdom’s recent debate in Parliament of a bill recognizing the right to same-sex marriage, which follows a decision taken in France this spring to legalize same-sex marriage.
Indeed, the UK is something of a latecomer: thirteen countries already allow gay marriage, and the usually conservative current US Supreme Court recently struck down the “Defense of Marriage Act,” adopted in 1996 explicitly to ban gay marriages, and a law prohibiting gay marriage in California.
Only in 2004 were British gays allowed to form “civil partnerships” – relationships with the same legal status as marriage, but denied the title.
This did not settle the matter; the passion for human rights simply moved to the next level.
Denial of gay couples’ legal right to call themselves married is – has become – intolerably discriminatory.
But allowing them to marry has proved a harder legislative nut to crack than allowing them civil partnerships.
The parliamentary debate that has preceded the likely passage of this legislation revealed a classic case of an institution (marriage) coming into conflict with a cause (human rights).
Both opponents and supporters of the bill concede that marriage has changed in various ways over time.
They also agree that a central core has remained constant.
But they disagree about what that core is.
The chief argument of those opposed to the bill is that marriage has always meant a lifelong union aimed at procreation and child-rearing.
This is its “normative” meaning – the best that the human race has come up with to secure its survival.
As such, marriage is inescapably to a member of the opposite sex.
Against this, supporters of same-sex marriage argue that the one constant that defines the married state is a loving couple’s commitment to “share their journey.”
Love and commitment are the only relevant criteria.
It is simply unfair to withhold the status of marriage from those who want to make this public vow.
Many and ingenious have been the attempts to split the difference.
In the House of Lords, Lord Mackay of Clashfern, a former Lord Chancellor, moved an amendment requiring the bill to distinguish between marriage (same sex) and marriage (opposite sex).
The common word marriage, he argued, would remove any discrimination, but the brackets would recognize that the two states were different.
Supporters of the bill allowing same-sex marriage pooh-poohed “marriage in brackets.”
With the defeat of the Clashfern amendment by 314 votes to 119, much of the bill’s original form remains intact.
Churches would not be required to consecrate same-sex unions, or teachers to promote them (against their conscience); but, as far as the state is concerned, marriage would be gender-blind.
The arguments on both sides have been of high quality, especially in the House of Lords.
But, as I have sat and listened to the debate, I cannot help wondering what a break it is in human history for so much intellect and feeling to be focused on such a small matter as the state’s withholding of a word, marriage, but not its substance.
On the lexicographic point, opponents of same-sex marriage are surely right.
Historically, marriage has not been, as one peer described it, an “elongated envelope,” into which any expression of love and commitment can be packed.
It is not so regarded in contemporary Britain; and even less so in the non-Western world, where unions of men and women are considered the norm.
But there is a glaring weakness in the arguments of the bill’s opponents: while they hint darkly at the “unintended consequences” of legalizing same-sex marriage, they cannot spell out exactly what these consequences would be.
It is not obvious that “normal” marriage, procreation, or child-rearing would be threatened by this “add on.”
In fact, opponents of the bill fail to mention that traditional marriage is in a fairly advanced state of decay in Western societies.
Fewer and fewer people are bothering to get married, and marriage is regarded less and less as a lifelong union.
Families are having fewer and fewer children, and more and more children are born out of wedlock.
So one of the “unintended consequences” of the bill might be to add welcome recruits to the ranks of the married, even if these recruits are of a historically unusual kind.
After much soul-searching, I voted for the bill, though without any acute sense that I was striking a blow for freedom.
There is a clear status benefit to the minority; no obvious harm is being done to the majority; and the long-term consequences are unfathomable.
In the end, it seemed a no-brainer.
Yet it left me uncomfortable.
Every institution, Mill wrote in On Liberty, had to justify its keep; if it could not, it deserved to be swept away.
But what counts as justification?
The very institution in which I sit, the House of Lords, has no rational justification in terms of its composition or powers, as reformers have been quick to point out.
But the very longevity of an institution like marriage is some mark of its worth.
Russia’s European Home
MOSCOW – Last spring, after Russia annexed Crimea and began intervening in eastern Ukraine, the United States and the European Union introduced sanctions against Russian individuals and businesses.
But if sanctions are to be an effective tool in countering Vladimir Putin’s ambitions – a topic of ongoing debate in the West – they must combine a firm hand toward Russia’s president with an open one toward its people.
To understand the role that sanctions can play in managing the Kremlin, one need only consider the importance of money to its occupant.
From the beginning of the century until very recently, Russia was flooded with petrodollars; as the flow of money increased, so did Putin’s audacity and aggression.
In 1999, oil and gas revenues contributed $40.5 billion to Russia’s GDP.
As prices rose and production increased, this contribution increased substantially, averaging $73.5 billion annually from 2001 to 2004.
Russia’s growing wealth emboldened Putin, a change exemplified in his decision to arrest and imprison Mikhail Khodorkovsky, the owner of oil giant Yukos, in 2003.
And the trend continued.
From 2005-2008, annual hydrocarbon revenues were $223.6 billion higher than in 1999; at the end of this period, Russia invaded Georgia.
In 2011-2013, Russia’s annual oil and gas income peaked at $394 billion above 1999 levels, setting the stage for the Kremlin’s interventions in Ukraine.
In all of these cases, Putin acted on the conviction that Russia’s oil wealth meant that rules – even international laws – did not apply to him.
But with the introduction of sanctions, financial markets are closed, for the most part, to Russian businesses.
Oil prices are plummeting; Russia’s finance minister estimates that the country’s losses since last spring have surpassed $140 billion.
Russia’s strategic currency reserves are being pulled apart by Putin’s friends and may be exhausted by the end of the year.
Moreover, the ruble has lost close to 50% of its value over the last six months.
But, though the sanctions clearly are starting to bite, it will be some time before the bulk of the Russian public actually feels their impact.
So the West needs to wait.
There is little point in engaging in a search for diplomatic solutions.
They simply do not exist.
Putin has chosen to act without regard for territorial integrity.
He has declared himself a defender not only of Russian citizens, but of all ethnic Russians, Russophones, and even Orthodox Christians.
He believes that he possesses the right to intervene in his neighbors’ affairs, because, as he put it, “the Soviet Union was the same Russia, just called by another name.”
In other words, Ukraine is merely a breakaway region of historical Russia.
The Russian people, however, are modern enough to question these policies.
The “Putin consensus” was built on the promise of rising prosperity – a promise that is quickly evaporating under the heat of sanctions.
Most Russian elites think and act like businesspeople, not like romantic nationalists: As the economy sinks into prolonged recession, scrutiny and criticism of Putin’s policies will increase.
The goal of Western sanctions should be to detach Russia’s pre-modern rulers from its modern population.
This strategy may be of little use in tightly controlled societies like Iran or North Korea; but Russia is essentially European.
Instead of wasting time trying to negotiate, the West should focus on elaborating and publicizing a post-Putin agenda.
For starters, the West should explicitly deny any Russian claim to a right to interfere in the affairs of the EU and NATO.
Ukraine should be embraced – even if Crimea and Donbas are lost.
A “new Marshall plan” should be rolled out, one that can transform Ukraine into a free, prosperous country that can join the EU and NATO, should it so desire.
Even more important, the West should make it clear that it extends its definition of Europe not just to Russia’s borders, but across them.
Russia should be acknowledged as an integral and natural part of Europe – a country that might eventually join the EU.
The grand strategy for the coming decades should be centered on a simple idea: Though Russia can never be allowed to influence Europe from outside, it will be welcome to gain a place of influence from within, if it accepts Europe’s rules and norms.
Russians should be made to understand that they can choose one of two paths.
They can follow Putin into isolation, probably ending up under Chinese influence (indeed, from China’s perspective, its claim to Siberia all the way to Lake Baikal is even stronger than Russia’s claim to Crimea).
Or they can decide to move toward Europe, perhaps in the distant future joining the EU as its largest – and perhaps most influential – member.
The West’s biggest mistake regarding Russia and Ukraine was to choose the path of indifference after the end of the Cold War.
That led to the creation of the Commonwealth of Independent States in 1991 and the Budapest Memorandum on Security Assurances in 1994.
If, instead, Russia and Ukraine had been encouraged to work toward joining the European Economic Community and were invited to join NATO, the arc of history would have been bent in a much more peaceful direction.
History rarely offers a second chance.
But this time it has.
The mistakes of the 1990s should be remedied, and the starting point should be to offer those who want to join the West the opportunity to work toward doing so.
If Ukraine is brought into the European fold, the Russian people will want to follow – much sooner than anyone can now imagine.
India’s East Asian Dream
SINGAPORE – On August 15, Narendra Modi delivered his first Independence Day speech as Prime Minister.
Though he continued the tradition of addressing the country from the ramparts of Delhi’s historic Red Fort, the speech broke with convention.
Shunning a written text, Modi extemporized for an hour, mapping out an explicit vision for India, including an economic model that constitutes a clean break from India’s past.
Since 1991, India has been slowly changing its policy framework away from the socialist vision of its first prime minister, Jawaharlal Nehru.
However, for political reasons, the changes were always justified in an almost apologetic way.
Indeed, many Nehru-era institutions continue to exist – and even thrive.
In one fell swoop, Modi announced the abolition of one of the most important of these institutions: the powerful Planning Commission, which had continued to churn out Soviet-style “Five-Year Plans” and remained at the heart of a centralized resource-allocation process.
Its successor, the National Development and Reform Commission, will probably function more as a think tank – providing ideas and ensuring policy coherence, but with no power to allocate.
Modi also argued for a new economic-growth model based on export-oriented manufacturing.
This means encouraging domestic entrepreneurs to manufacture goods for export and inviting the world’s top companies to relocate production to India.
This effort is important, because India’s economy and exports are dominated by services, which have grown steadily relative to overall output, now accounting for almost 60% of GDP.
By contrast, the industrial sector’s share of GDP has remain unchanged, at around 26%, for the last three decades (the manufacturing segment is even smaller, at 14.9% of GDP).
When Modi’s emphasis on export-led manufacturing is viewed in the context of his government’s focus on heavy infrastructure projects – ranging from power generation to railways – it becomes clear that his growth model, with its mass deployment of labor and capital in industry, looks similar to East Asian countries’ strategy.
It is also consistent with his frequent references to the need to create new cities, because urbanization is the spatial manifestation of industrialization.
The shift to an “East Asian” growth model should not be surprising, given India’s demographic pipeline.
India needs to create jobs for the ten million people per year who join the working-age population.
It also needs to accommodate the millions who wish to shift away from agriculture, which still employs half of the workforce.
Although the service sector was able to generate growth in the past, it has proved to be a poor job creator and only employs 27% of workers, far lower than its share of the economy.
By contrast, construction and manufacturing are rightly seen to be more promising outlets for the mass deployment of semi-skilled workers.
There are, of course, many obstacles in Modi’s path.
India’s tax and regulatory regime is widely regarded as unfriendly to business; but Modi’s track record in government suggests that he is sensitive to this problem and will be able to make significant improvements.
The greater challenge for Modi will be financing his growth model.
The success of the East Asian model was predicated on a sharp increase in the investment rate.
Beginning with Japan, every rapidly growing East Asian economy sustained investment rates in the range of 38-40% of GDP over its rapid-growth phase.
China is currently investing almost half of its GDP.
India’s fixed-investment ratio, by contrast, has declined in recent years to around 30% of GDP.
Foreign capital can play a role in supporting rapid growth, but international experience shows that domestic savings is key to sustaining high investment rates.
Mobilizing these savings will require careful thinking about how the domestic financial system can be expanded by an order of magnitude without risking a future crisis.
Another major problem will be the migration of tens of millions of people as they are sucked into the expanding industrial economy.
India does not have China’s sociopolitical controls, such as the hukou residential-permit system, to manage such a large-scale movement of people.
Japan and South Korea are perhaps too small to serve as useful precedents.
Modi may be hoping to preempt the problem through his project to create 100 “smart cities,” though how the program will be implemented remains unknown.
Despite all of the obstacles and risks, Modi has articulated an explicit economic vision for the first time since Nehru.
Unlike the apologetic reforms of the past two decades, Indians have been promised a confident new beginning.
Who Will Run the World’s Deficits?
SINGAPORE – These days everyone seems to want to run a current-account surplus.
China has long run large surpluses.
The eurozone is now running even larger ones, with swings in southern Europe augmenting Germany’s longstanding surpluses.
Indeed, countries from Singapore to Russia are running large surpluses.
Meanwhile, America’s external deficit – which for decades has helped to sustain surpluses elsewhere – is now smaller than it was before 2008, with many economists arguing that it should never revert to its previous levels (they argue that the shale-gas boom makes this unlikely, anyway).
Financial markets have also made clear that the ability of other major deficit countries, like Brazil and India, to absorb capital flows is reaching its limit.
Since the world is a closed system, this raises the question: Who will run the world’s deficits?
Mainstream economists believe that the global economy should function as a balanced mechanical arrangement in which external surpluses and deficits are smoothed out over time.
But periods of global economic expansion have virtually always been characterized by symbiotic imbalances.
One part of the world runs large deficits for a prolonged period, creating demand; another part of the world runs surpluses, financing its counterparts’ deficits.
This was true of Roman-Indian trade in the first and second centuries, and of the age of European exploration in the sixteenth century.
It was also true of the two Bretton Woods arrangements, in which the US ran the necessary deficits.
Admittedly, imbalanced systems create distortions.
The Romans had to debase their coins, owing to the continuous loss of gold to India.
The Spanish empire flooded the world with silver coins as it paid for its many wars.
Bretton Woods I collapsed in 1971, when the dollar’s peg to gold became untenable, and Bretton Woods II ended in 2008, owing to the misallocation of capital.
But these distortions did not prevent unbalanced systems from enduring for long periods.
The only significant period of “balanced” economic expansion was in the early nineteenth century.
The British East India Company deliberately imposed a triangular trade arrangement whereby Britain sold manufactured goods to India in order to buy opium, which it subsequently sold in China to finance the purchase of tea and other products.
In other words, balanced global economic growth required war, colonization, and large-scale drug trafficking.
So, what symbiotic imbalance will underpin the next round of global economic growth?
Given that the current account is the difference between a country’s saving and investment rates, both of which are heavily influenced by demographics, we need to consider rapid changes in population dynamics.
China currently saves and invests half of its GDP, but, as its workforce shrinks in the coming years, its investment rate is likely to fall sharply.
However, aging will keep the saving rate from falling at the same pace.
This differential will generate large external surpluses that will transform China from the “world’s factory” into the “world’s investor.”
It would be convenient if global demographics were distributed in such a way that aging countries could run surpluses just when younger countries needed the capital.
In reality, many major economies will be trying to save for retirement at the same time.
Moreover, the younger countries are typically emerging markets, which have neither the scale nor the capacity to absorb the world’s excess savings efficiently.
The US is the main exception: it has both the required scale and the youngest population of any major developed country.
Given this, it will once again fall to the US to run the world’s largest external deficit, in what could be dubbed Bretton Woods III.
It may seem appalling to expect such a highly indebted country to continue to run deficits; but the world is willing to finance the US at negative real interest rates.
Indeed, the main international concern has been US policymakers’ reluctance to raise the government’s debt ceiling!
If the US is unable or unwilling to run the required deficits, the global economy will flounder in a savings glut of low demand and cheap capital until another alternative emerges.
Or perhaps the low cost of international capital will entice the US to absorb some of the world’s excess savings, triggering a new period of global expansion.
While a Bretton Woods III arrangement would inevitably generate its own distortions, it could last for years if the capital is invested sensibly.
The prospect of its eventual demise is not a good reason to wait for some theoretical ideal of global balance to materialize.
If history is any indication, we will be waiting for a long time.
Santa Claus Speaks German
Santa Claus was a Turkish Dervish who in the middle ages traveled through Central and Northern Europe, giving gifts to children and claiming to be the re-incarnation of Greek St. Nicholas, who preached in the fourth century.
Together with the Christmas tree, Sankt Niklaus, as the Germans called the benefactor, became a central figure in German Christmas habits.
In the seventeenth and eighteenth centuries, German immigrants, the so-called Pennsylvania Dutch, carried them to the United States, from where they later spread to the rest of the world, if only as marketing icons for Coca Cola.
In 2006, Santa Claus again came from Germany with a sack full of good news about the business cycle.
The Ifo business climate indicator, which had been rising since the second half of 2005, reached its highest level since Germany’s unification boom.
After years of stagnant growth, the German economy has been growing at an annual rate of about 2.5% in 2006.
While the value-added tax will rise by three percentage points in 2007, economic growth will remain healthy, at nearly 2%.
The Ifo business climate indicator is generated every month by asking 7,000 firms, primarily from German manufacturing industry, about their current business situation and their expectations for the next six months.
It has been produced for half a century, and, according to a poll conducted by Reuters, it is Europe’s most prominent business indicator, outperforming even official EU indicators.
In early 2006, when the Ifo indicator foresaw an economic upturn while the German Federal Statistical Office reported meager quarterly GDP growth figures, some commentators scoffed.
But when the Office later revised its data upward, it became clear that the Ifo indicator was right.
This is good news not only for Germany, but also for Europe as a whole, as the business climate for German manufacturers reflects that in the rest of Europe – their main export market.
In 2006, the euro-zone economies may have grown by 2.7% on average, and should grow by 2.2% in 2007.
However, there are substantial differences among these economies.
Some are doing very well, indeed.
In 2006, Ireland’s GDP may grow by 5.2%, Finland’s by 5.8% and Spain’s by 3.7%.
By contrast, Portugal and Italy are currently Europe’s laggards, with growth rates of just 1.5% and 1.7%, respectively, in 2006.
Somewhat surprisingly, France also seems to be having a hard time keeping up, with a below-average growth rate of 2.1%.
More importantly, despite the promising news coming from Germany these days, it would be an overstatement to call the German economy a growth engine for Europe, given that it, too, is growing more slowly than the euro zone as a whole.
Nevertheless, given that, aside from Italy, Germany recorded the EU’s lowest growth rate from 1995 to 2005, the improving performance of Europe’s largest economy is a source of relief.
While the US economy begins to stagnate, across the Atlantic the business cycle seems to have turned upward at last.
As the world’s second largest exporter, the German boom was initially driven by foreign sales. Indeed, German exports grew by 6.9% in 2005 and 11.2% in 2006.
But, given increasing capacity utilization in the export industries, as well as higher investment requirements owing to the normal capital replacement cycle, domestic investment demand is now also rising.
Annual investment in equipment increased by 7.7% in 2006, while overall investment, including construction, was up by 5%.
Although Germany’s net investment as a share of GNP remains one of the lowest in the developed world, the additional investment implies more jobs in the construction and machine tool industries, followed by rising employment wherever the investment is placed.
Unfortunately, however, the upturn in the business cycle cannot be taken as a sign of structural improvement in the German economy.
Since 1970, Germany’s business cycles have been surprisingly regular: a downswing in the first half of each decade, followed by an upswing in the second half.
Unemployment has always reached its lowest point at the end of the decade or a year later, driven by cyclical movements in equipment investment that followed the textbook multiplier-accelerator model.
However, unemployment has increased from one boom to the next, with the lowest rate in each business cycle following a linear upward trend.
It is too early to speculate whether Germany will be able to break this pattern and reverse that trend.
Despite the boom, and despite various programs that stimulated part-time employment, unemployment in absolute terms was about 4.5 million in 2006 and will be 4.1 million in 2007, compared to the last low point of 3.9 million in 2000.
Germany’s economic development will have to be observed well into the next full decade in order to judge the potential for a structural trend reversal.
Nevertheless, there is every reason to expect the German economy’s upswing to continue for the time being.
With some luck, good times for Germany, and for Europe as a whole, could last until the end of the decade.
Sarko v Sego At Last
The surprise in the first round of the French presidential election was that there was no surprise, except for the huge level of voter turnout.
The two leaders of the Right and of the Left, the favorites in all the polls for a long time, came first and second.
Four winners and one clear loser emerged from the first round.
The first winner is democracy.
For the first time in my lifetime, as I went to vote on Sunday with my children - in a peaceful celebration of that secular religion that is democracy when it works well - I had to wait in line patiently for a relatively long time.
For 85% of the electorate went to vote in what has been the highest level of participation in presidential elections in France since Charles de Gaulle last ran for president in1965.
The lesson of the first ballot of 2002, which saw a high level of abstention and the surprise elimination of the Socialist Lionel Jospin, partly explains that mobilization.
Also, with the emergence of a new generation of political leaders, the French &#45;&#45; who were thought cynical towards politics &#45;&#45; seem to have regained their unique passion for it.
The second winner is undeniably and by far Nicolas Sarkozy.
With 31% of the vote he will come to the second ballot in a very favorable position.
His strategy to attract the electorates of Jean Marie Le Pen’s extreme right, proved to be a winning one.
A majority of French who voted for him, did it, according to reliable exit poll studies, above all because of his personality.
They wanted a strong charismatic man to reawaken France economically and to reassure them in security terms.
The third winner, though she is mathematically in a much less favorable position, is Segolène Royal.
Her making it to the second round is a huge relief for the Socialist party after the Jospin debacle of 2002 - and with more than 25% of the votes, she did nearly as well as François Mitterrand in 1981.
In order to have a serious chance to win, she has to transform the second ballot into a referendum against Nicolas Sarkozy.
In a classical Left-Right contest she can only lose.
The working class is disappearing in modern France and what’s left of it tends to go more to the extreme-right than to the extreme-left.
Segolène. Royal has done well, but probably not well enough, unless in a face to face debate with Nicolas Sarkozy she can rally a majority of viewers to the radical modernity of electing a woman to the highest French position.
It is not what she says but what she is, or even more so the fear of her opponent that constitute her best chance.
The fourth winner, though his absence from the second ballot is a disappointment for him, is François Bayrou.
With more than18% of the votes he tripled his score of 2002. He has turned the Center into a force.
In the second ballot of France’s presidential elections, he will prove to be a Queen or more like a King maker.
His votes are needed by both remaining candidates and it is likely they will tend to split equally between Left and Right, for he cannot commit himself to clearly support one candidate over the other.
The clear loser in the first round is the leader of the extreme-right Jean-Marie Le Pen.
With less than 11% of the votes in what will be the last campaign of his career, he turned into an “ageing detail of History”.
In a campaign centered on the emergence of a new generation of political leaders, he lost his appeal.
He did not mellow, but was swallowed by history’s zeitgeist.
Now a second campaign begins.
The key strategic move for the two remaining candidates will be to attract the votes of the Center without losing their core Leftist or Rightist constituencies.
That means emphasizing in a reassuring way, economic credibility for Segolene Royal, and social compassion for Nicolas Sarkozy.
The world and Europe in particular will be watching even more intensely this second round.
One can nearly detect a kind of “North-South divide,” with south Europe (pre dominantly Spain and Italy standing behind Segolène Royal, and northern Europe, predominantly Germany and Britain (the US as well) aligning themselves behind Nicolas Sarkozy.
For the European Union, new man or woman in the Elysee Palace may be a necessary condition for reinvigorating the European project, but it is not a sufficient condition.
The French “No” to the referendum on Europe’s constitutional treaty in May 2005 revealed the depth of Europe’s crisis, it did not create it.
Watching the celebration of patriotism behind the raising of the French flag and the singing of the national anthem during the first round of the campaign, one can easily believe that the British vision of a Europe of independent nation states has won already, if only by default.
On May 6, the date of the second ballot, French citizens will choose between two risks.
The first one, which is potential, given Sarkozy’s domineering personality is to have Sarkozy as president.
The second risk may prove to be even a bigger one, and can be described as follows. At this particular juncture in time and given the condition of their economy can the French reject the candidate that incarnates by far the best hope for change and “Renaissance.”
To succeed, Nicolas Sarkozy will have to turn his campaign slogan “Together everything becomes possible” into reality.
That implies successfully integrating French immigrants into the wider community with a combination of economic growth, restoration of the authority of the State, but also and above all a far greater sense of solidarity and fraternity.
Sarkozy Agonistes
“Why do they hate us?” asked the Americans of the Islamic fundamentalists after 9/11. “Why do they not like me?” could be the question asked by Nicolas Sarkozy to the French after more than one year in power.
Sarkozy is omnipresent both domestically and internationally.
On July 13, the leaders of more than 40 countries attended the first gathering of the “Union for the Mediterranean” in Paris.
France is back in the world and in Europe.
Domestically, an ambitious and difficult program of long-awaited reforms, which a majority of French citizens recognize are inevitable, has begun, with some early results in the field of labor law and education.
Sarkozy’s energy, willpower, and activism are nothing short of spectacular.
And yet he is the least popular of the Fifth Republic’s presidents, the one whose “fall from grace” with the French has been the most spectacular, rapid, and durable, to the point where political experts, and his friends and foes alike, wonder whether he can rebound.
What went wrong?
“I don’t want a good General, I want a lucky one” the French Emperor Napoleon I used to quip. By that standard, he would not have wanted Sarkozy.
Having campaigned on a promise to restore and improve the French people’s purchasing power, Sarkozy came to power, in May 2007, just a few weeks before the sub-prime mortgage crisis erupted, and a few months before commodity prices exploded.
He then assumed the European Union presidency just days after the resounding Irish “No” to the Lisbon Treaty reduced his role to an exercise in damage control at best.
And, to make matters worse, the French soccer team, whose World Cup victory in 1998 gave his predecessor Jacques Chirac a short respite and a passing popularity boom, was humiliated in June’s Euro championship.
Yet the international context, with its unforeseen events, does not suffice to explain Sarkozy’s unpopularity with the French.
His problem stems from the combination of his essence and style, which adds up to a brutal lack of coherence.
As economic crisis engulfs France and most of the world, the French are not reassured by their young and energetic president.
Of course, there is an element of deeply unfair subjectivity in this perception.
But this is what politics is all about.
The president’s physical appearance and his body language – if he was a Shakespeare character, he would probably be the traitor Iago in Othello – are part of the problem.
His nervousness, his impulsiveness verging on vulgarity, is disconcerting even for the majority of French who voted for him.
At home for example, the badly needed reform of the army has been accompanied by unnecessary malignity, as if a former interior minister imbued with a “police culture” was utterly incapable of understanding the “army culture” and its sense of honor.
And his undeniable success in implementing his labor laws, exemplified by sparse street demonstrations, has been undermined by his irrepressible will to provocation, reflected in his gratuitous remark that “today when there is a strike in France, no one notices it!”
In his foreign policy, too, Sarkozy seems to combine the right intuitions with the wrong tactics – that is, when his entire strategy is not marred by the pursuit of contradictory objectives.
France’s policy toward China and the issue of the French and EU president’s attendance at the opening ceremony of the Beijing Olympics has represented a spectacular illustration of this lack of consistency.
Sarkozy misjudged the balance of power between France and China, and France came out of that diplomatic episode badly bruised, with its president swallowing his human rights claims and bending to the diktat of realpolitik.
In the same vein, there is a mismatch in Sarkozy’s approach to Europe between the message and the messenger, between careful diplomacy needed to create a new consensus within the European Commission and with countries like Ireland, and president’s rather authoritarian style.
While Sarkozy’s popularity remains low, a majority of the French want him to succeed, for he has four more years to go, and there is no alternative around the corner.
The left remains in disarray, caught between its internal feuds and the rise of anti-capitalist extremism at its margins.
For a president bent on implementing reforms, “less can be more” – less aggressiveness and less ego.
But can a man act against his deepest nature?
The answer is probably no.
Sarkozy and the Euro’s Perfect Storm
The more French president Nicolas Sarkozy attacks the European Central Bank and the strong euro, the more he is criticized in the European media, by European finance ministers, European Union officials and the ECB itself.
The critics are right.
The fundamental reason behind France’s current economic weakness is its lack of competitiveness even in other euro-zone economies where the euro is not a factor.
But Sarkozy has a point.
A perfect storm is forming in the foreign exchange markets that threatens to catapult the euro to levels that will make even the euro-zone’s most efficient exporter—Germany—unable to compete in world markets.
If German exporters can’t compete at 1.50 euros to the dollar, what chances do French exporters have?
The euro is gaining ground for several reasons.
A precipitating factor is that the Federal Reserve has had a dramatic change of heart about the strength of the US economy.
Fed chairman Ben Bernanke is now extremely concerned that the economy’s housing market and mortgage problems will cause a recession unless interest rates are aggressively cut even if this means taking some risks with inflation.
This new “no recession” Fed policy has started the US dollar down the path to new lows.
The decline will likely be sustained by the substantial US current account deficit, which found in Bernanke’s cuts the spark it needed to make its impact fully felt in foreign exchange markets.
Of course, if interest rates also were being cut in the euro-zone, the fall in the dollar against the euro would be moderated.
This is Sarkozy’s major point.
But the ECB has made it clear not only that interest rate cuts are not on the table—it is merely postponing, not abandoning, the interest rate increase originally planned for September.
The perfect storm is forming because both Europe and America, for different reasons, are following monetary policies that encourage the euro to rocket to dangerous levels.
The anti-inflation hawks in Frankfurt are not at all happy with Bernanke’s aggressive 50 basis point cut and the promise of more to come.
It gives comfort to ECB critics like Sarkozy, and otherwise puts pressure on them to drop the central bank’s inflationary bias because of its effect on the euro.
Some are recalcitrant and are more than willing to see the euro rise because, with rate hikes off the table, the strong euro may be the only way left for fighting the incipient inflation they fear.
But this policy is unsustainable.
The ECB should drop its inflationary bias because the European economy is weakening, and the weaker economy will contain whatever inflationary pressures now exist.
The anti-inflationary bias, which made sense until recently, now is seriously out of whack with current economic realities.
But European officials—and not only the ECB&#45;&#45; seem very reluctant to admit that their economy is faltering, fearing that it will further weaken confidence and add to the slowdown pressures.
Every soft number — and there have plenty lately — is given a positive spin (“euro-zone economic fundamentals remain strong” or “the economy remains robust”) &#45;&#45; and the media goes along with the deception.
The Ifo business confidence indicator in Germany has been down four months in a row but, according to Ifo, “the ECB does not have to change policy.” The European Commission’s economic index is plummeting, purchasing managers indices are down and so are German retail sales.
Ordinary Europeans will pay a high price for their leaders self -deception and mistaken policies.
The longer the ECB maintains its inflationary bias, the steeper the consequent economic decline as the economy crumbles under the weight of the skyrocketing euro and interest rates that are too high for current economic realities (though lower than where the ECB hawks had planned to go before the current financial crisis hit).
Ironically, the ECB will have to cut interest rates sooner, and by greater amounts, because its inflationary bias is sending the euro to dangerous levels for the current state of its economy.
It will not do ECB credibility any good if takes an economic collapse to convince it that the coast is clear on the inflation front.
The ECB is not the old Bundesbank, which had such public support and trust in Germany that it could get away with almost anything.
The ECB’s margin for error is much narrower—the support of its constituents less deep.
A major policy mistake and the same public officials now criticizing Sarkozy for attacking the ECB will be joining him.
Maastricht treaty or no Maastricht treaty, loss of public support for the ECB will diminish its independence.
Sarkozy at Dusk
PARIS – And the next French President will be…the Socialist Party’s candidate François Hollande.
A month ago, any prediction uttered with such certainty would have sounded imprudent, if not foolish.
Uncertainty prevailed.
Four candidates dominated the competition, and no one would have dared to predict which two will make it to the second-round run-off.
Indeed, the race looked more open than ever in recent memory.
Suddenly, something happened – not an event in itself (though it started with Hollande’s first great public rally in mid-January), but rather something that may resemble an irresistible process that can be summarized as follows: a majority of the French want to punish a president who has fallen from their graces.
They might not have dared to do so had they not found a reasonably credible alternative.
Hollande, by appearing more sound and determined than most French voters thought he was, has given a voice (and a face) to a widespread desire to reject the incumbent, Nicolas Sarkozy.
That is not to say that Hollande is charismatic.
On the contrary, there remain lingering doubts about his gravitas, not to mention serious concerns about the realism or the wisdom of his program.
But, unlike his former companion, Ségolène Royal, who challenged Sarkozy for the presidency in 2007, he looks and sounds “real.”
From now on, the campaign appears set to be transformed into a classic left-right struggle, but with a major difference between the two main candidates’ strategies.
Hollande wants to turn the presidential election into a referendum on Sarkozy, who, given his unpopularity, is seeking to frame the battle in terms of values and experience.
Indeed, the essence of Sarkozy’s campaign message has become: “You might not like me personally (you would be wrong, by the way, because I am not as you see me, and my experience in power has transformed me deeply), but you support my conservative values, because they represent what you really think.
In a world that is changing so rapidly and brutally, you need stability and reassurance.
I can give you that.”
By emphasizing the ideological divide between him and Hollande, Sarkozy is also being led to court, more openly than ever, the extreme-right electorate of Marine Le Pen’s National Front, as if he sensed that she might not find enough signatures to qualify for a place on the ballot.
This strategy may make sense in the first round, but, by attracting extreme-right voters in the first round, Sarkozy could lose the support of centrist voters in the run-off.
They might be willing to vote for “experience,” but not for a “Christian conservative” who strays from humanistic values.
In any case, one could argue that the French are being unfair toward their president.
Sarkozy has had to confront exceptionally difficult circumstances, and his record is far from poor.
At the beginning of his term, France was at the helm of the European Union, and he proved to be a skillful leader.
Understanding the gravity of the economic crisis that erupted in 2008, he reacted swiftly and with considerable energy.
He has also launched a major and long-overdue reform of the pension system and higher education.
He made the right choices in intervening in Côte d’Ivoire and Libya.
One could easily add more such examples.
In brief, Sarkozy has sincerely tried to reform a deeply paralyzed country.
And he cannot be held responsible for high unemployment, given the depth of the world crisis.
Yet, barring a last-minute miracle – a major mistake by Hollande that wrecks his credibility, or a fresh bout of crisis that stokes voters’ desire for reassuring continuity at the top – Sarkozy appears condemned to be the second one-term president in the history of the Fifth Republic, following Valéry Giscard d’Estaing.
In 1981, Giscard was defeated largely as a result of the “betrayal” of his former prime minister, Jacques Chirac, who ran against him.
In 2012, no one in Sarkozy’s camp is betraying the president (those who are trying, such as former Prime Minister Dominique de Villepin, have received no support).
It is Sarkozy himself who has betrayed the hopes of his supporters and consolidated the hostility of his opponents.
Sarkozy did so mostly at the very beginning of his presidency, and he is likely to be punished for it in 2012.
He has changed for the better, but only up to a point, and clearly not enough for a majority of the French, who, according to recent public-opinion polls, simply cannot stand the idea of having him on their television screens for another five years.
Of course, as former British Prime Minister Harold Wilson used to say, “a week is a long time in politics,” and Sarkozy will officially become a candidate only this week.
Yet it will be extremely difficult, if not impossible, for him to prevent the upcoming election from becoming an emotional and negative referendum on his persona.
Sarkozy, Carpe Diem!
Nicolas Sarkozy’s presidential election triumph in May, and now the victory of his party, the UMP, in the parliamentary election, has created the most favorable opportunity in decades for deep structural reform in France.
Not only did Sarkozy win the presidency with 53% of the vote, but his approval rating has since soared, to 62%, after he formed an inclusive government with high-ranking recruits from the opposition.
In the first round of the parliamentary election, the UMP won a record-high 40% of the vote.
While voters denied the UMP a landslide victory in the second round, its overall win meant that the governing party retained its legislative majority for the first time in 29 years.
In the days following his election, Sarkozy brought France “back to Europe,” reinvigorating the Franco-German partnership and giving decisive support to German Chancellor Angela Merkel’s campaign to revive the European Union’s draft constitutional treaty.
He demonstrated pragmatism by not vetoing ongoing EU accession negotiations with Turkey, thus avoiding unnecessary confrontation with Great Britain and Spain, despite maintaining his long-term opposition to full membership for Turkey.
Likewise, his government’s discreet silence in the wake of the European Central Bank’s latest interest rate increase constitutes eloquent recognition of the ECB’s independence.
But how will Sarkozy and his government respond to France’s internal challenges?
With anemic growth, unemployment stuck between 9% and 10% for more than 20 years, and immigrant ghettos that vacillate between lawlessness and despair, France is indeed one of the sick men of Europe.
Where adaptation to ruthless international competition and rapid technological change calls for flexibility and individual responsibility, the dominant culture in France continues to be one of assistance and entitlement.
It is now clear that the French government will follow Sarkozy’s presidential program to the letter.
The program’s flagship measure is the wholesale exemption of overtime hours from social security and income taxes.
Many economists and some foreign observers are puzzled by the emphasis Sarkozy has placed on this expensive provision.
Indeed, it might appear disproportionate to give higher priority to encouraging overtime than to stimulating employment.
But France is not a normal country.
For ten years, it has struggled with the costs of a mandatory 35-hour week – a ceiling that is now so embedded in the legislation regulating working hours that simple abrogation would lead to chaos.
The alternative, a targeted tax holiday, constitutes a welcome break with the culture of “time off,” and an encouragement to those who, as Sarkozy’s campaign slogan put it, want to “work more in order to earn more.”
The program’s other measures are a series of tax cuts for the middle class, entrepreneurs, and the wealthy, which, though expensive, constitute a similarly welcome break with France’s tradition of punitive taxation.
However, none of these measures goes to the heart of France’s structural problems.
The Gordian knot paralyzing initiative and blocking employment consists in the maze of regulations that stifle the labor market.
French companies live under the constant threat of a surprise visit from the labor inspector to determine compliance with a thick book of arcane measures.
Worse yet, the knowledge that some law or regulation covers every aspect of employment poisons the workplace and discourages attempts to resolve problems pragmatically.
When both parties to a dispute know that they are likely to end in a labor court, neither has an incentive to compromise.
The law’s most onerous provisions are those regulating the terms of employment contracts, for they condemn employers who decide to close a plant to a marathon of legal proceedings of uncertain duration and unpredictable outcome.
This not only hampers restructuring, but also makes firms hesitant to hire and inhibits innovation.
A stop-gap measure that permits firms to hire workers for temporary assignments, on condition that they not be renewed, condemns the least skilled to a demoralizing cycle of short-term jobs and repeated spells of unemployment.
These marginal workers are predominantly immigrants and the children and grandchildren of former immigrants, whose social and economic integration is thus blocked, trapping them in increasingly violent suburban ghettoes.
There is a simple, if radical, solution: abrogate the legal provisions that regulate the duration of employment contracts, and return the treatment of tenure and seniority to collective bargaining, as is the case elsewhere.
The logical complement of such freedom would be to make employers pay for the social costs of plant closings, by levying a tax on layoffs, which would increase with seniority.
The proceeds of the tax could be used in part to fund the much needed expansion of France’s underdeveloped public job placement services.
Unfortunately, Sarkozy’s program in this critical area is vague.
Job protection benefits the employed at the expense of the unemployed, and some unions, notably the most militant, are strongly opposed to greater flexibility, and have already threatened to block liberalizing measures in the streets.
The pragmatic course, therefore, was to set general objectives during the campaign, and, after the elections, to encourage the unions to make the first proposals.
Prime Minister François Fillon has called for tripartite negotiations on tenure and seniority this summer and fall.
Will the government settle for marginal changes to the existing labor code, or will it seize its unique opportunity to break with a generation of stifling regulations?
The future of the French economy, the stability of French society, and the influence of France in the world hangs on the outcome.
Sarkozy Chooses Dishonor
PARIS – “Britain and France had to choose between war and dishonor.
They chose dishonor. They will have war.”
Winston Churchill’s famous denunciation of the delaying tactics of the British and French on the eve of World War II should be a warning to French President Nicolas Sarkozy.
In fanning vicious anti-immigrant passions for short-term political gain, he will have dishonor first and then defeat.
For, although a majority of French today may be inclined to sympathize with Sarkozy’s immigrant-bashing rhetoric, there is no guarantee that they will re-elect him in 2012.
It is not so much Sarkozy’s performance as president that most Frenchmen reject; it is his essence. At a time of rising unemployment, with France dominated by fears about the future, the French need a reassuring father or mother figure, not a jittery and manipulative leaderready to compromise ethics and France’s proud tradition that every citizen is entitled to equal treatment under the law.
Former Prime Minister Michel Rocard did not mince words about Sarkozy’s recent proposals to strip foreign-born French nationals of their citizenship if convicted of threatening the life of a police officer, practicing polygamy, or female “circumcision.” “One has not seen such measures since the Vichy regime or since the Nazis,” Rocard declared.
Equating Sarkozy with Marshal Pétain’s collaborationist Vichy regime is, of course, an exaggeration, but Rocard’s concerns are shared by many French – and not only intellectuals and pundits.
Even among traditional conservatives, there is a whiff of ethical disgust at Sarkozy.
Can the French really violate their values to such an extent?
Will re-introduction of the death penalty be the next step on this populist downward spiral?
Two years, of course, is a long time in politics, and any predictions today about the presidential vote in 2012 would be imprudent.
Yet few analysts today would bet on Sarkozy’s re-election.
He proved to be a great candidate in 2007, but he was also running against a particularly weak Socialist contender, Ségolène Royal.
In 2012 it is unlikely that a Socialist Party “starved for power” will commit electoral suicide once again by nominating an unelectable figure.
Could France today be like the France of 1980 on the eve of the Left’s first victory since the establishment of the Fifth Republic?
Will Dominique de Villepin, the flamboyant former prime minister under Jacques Chirac, be to Sarkozy what Chirac was to Valéry Giscard d’Estaing in 1981?
Chirac, it should be recalled, guaranteed the defeat of Giscard d’Estaing by dividing the Right so bitterly that it proved impossible to reunite behind Giscard in his final-round confrontation with François Mitterrand.
Behind such speculation are important questions about the state of French society and governmental institutions.
France, perhaps more than most European countries, is faced with serious internal security problems and violence linked to the failures of previous immigration policies, which have turned the dreams of the 1960’s into the nightmares of the present.
The undeniable escalation of violence in too many big-city suburbs, and the emergence of local “Scarfaces” who live totally without rules in a fantasy-like world of brutality, reflect a state that has gone astray.
But a pure “law and order” response to these problems will not magically repair the damage inflicted by years of bad policy and neglect.
Too much state is not the answer to a locally failed state. Successful education and integration policies take time to work and thus will not bring clear-cut results in time for the next election.
To stigmatize immigrants, Muslims in particular, or to destroy the camps in which Roma live, is a much easier task, even if it reveals the truly opportunistic and amoral nature of both Sarkozy and those who surround him.
For nearly 60 years, universal suffrage has made successive French presidents the modern equivalents of elected monarchs, men who have concentrated in their hands more power than their counterparts in any other democratic country.
Chirac’s shortening of the presidential term from seven to five years has, paradoxically, resulted in an even greater concentration of presidential power.
The problem with this omnipotent presidency is that the qualities needed in order to be elected are not necessarily those required to master the art of government, with its mixture of distance, patience, serenity, and modesty, in addition to energy and activism.
The French presidency combines both the symbols and the realities of power – the equivalent of both the Queen of England and the British prime minister.
But an office designed bespoke for a giant like Charles de Gaulle may simply be too much for any single man or woman.
Indeed, it could very well be that the failures of recent French presidents point to a structural problem at the heart of the French constitution, and not just to the shortcomings of its various incumbents.
Sarkozy Goes to War
PARIS – In 2003, France, under President Jacques Chirac, took the lead in opposing America’s planned invasion of Saddam Hussein’s Iraq.
French Foreign Minister Dominique de Villepin’s flamboyant speech at the United Nations encapsulated the “spirit of resistance” against what proved to be a dangerous adventure.
In 2011, under President Nicolas Sarkozy, France has again taken a highly visible stand on a question of war and peace, except that now the French, together with the British, are leading the fight to protect Libya’s people from their erratic, brutal leader, Col. Muammar el-Qaddafi.
Why does France seem to crave such prominence?
In the eyes of the French, France’s international status remains a key ingredient in forming their own national identity.
The way we French are perceived by others affects how we perceive ourselves, and nothing is more troubling for us than to be perceived with indifference or, worse, not to be noticed at all.
Suddenly, with the Libya issue, we can tell ourselves that we are catching up with Germany, whose pusillanimity is striking; we are showing the way to the United States; and the French (and British) flags are deployed in the streets of “liberated” Libya, together with that country’s own new flag.
And, just as suddenly, the French, according to early polls, are proud again to be French.
France’s seemingly natural propensity to intervene is reinforced in this case by three key factors: Sarkozy, Qaddafi, and the context of a wider Arab revolution.
The Sarkozy factor is fundamental.
The French president loves crises, with their concomitant surge of adrenaline.
For him, this is what power is about: taking hard decisions under unfavorable circumstances.
Of course, domestic considerations are not absent from Sarkozy’s thinking.
In 2007, when he played a key role in the liberation of Bulgarian nurses imprisoned by Qaddafi, Libya’s leader was rewarded with what looked like a legitimacy prize: an official visit to Paris.
He was no longer a pariah, but an eccentric partner.
Today, by contrast, it all looks as if intervention may re-legitimate Sarkozy in the eyes of French citizens, whose votes he will need in next year’s presidential election.
An energetic and daring gambler, Sarkozy is taking a high but legitimate risk that he can retake the moral (and political) high ground.
Beyond Sarkozy is Qaddafi, the ideal villain.
A caricature of a despot, he personifies the type of odious adversary whom all democrats want to see defeated.
His behavior has been abominable for decades – and not only towards his people.
The terrorist attacks on Western targets that he ordered include not only the Pan Am tragedy in Lockerbie, Scotland, but also a French UTA plane blown up over Africa.
And not only is Qaddafi truly bad, but Libya is comparatively small, and his forces appear relatively weak (this remains to be proven on the ground).
Aside from these personality factors, there is the regional context.
Preventing Qaddafi from rebuilding the wall of fear that fell in Tunisia and Egypt is essential if the “Arab spring” is not to be succeeded by a new winter of discontent.
What is now done in the sky over Libya – sanctioned by international law and, unlike in Iraq in 2003, with the ambivalent political support of the Arab League – is fundamental if the Arab revolutionaries are to take a positive view of the West.
The West is not trying, as it did during the Crusades or the Imperialist conquests of the nineteenth and early twentieth centuries, to impose its religion or values on the Arabs.
Instead, the West is defending common values, such as freedom, respect for human life, and the rule of law.
We have a duty to protect Arab lives and values, as Arabs themselves have requested.
France has a common history and geography with the countries on the southern Mediterranean shore.
The duty to intervene – and the cost of indifference – is probably higher for France than for any other Western country.
Indeed, France has a very large immigrant population that originated in the Maghreb, and for which the “Arab spring” is vitally important and a source of fascination and pride.
And today, with France taking the lead in an international effort to protect the Libyan people from their leader, they can feel simultaneously proud of being French and of their Arab roots.
These positive identities constitute the best protection against the sirens of fundamentalist Islam.
Of course, an ideal scenario implies that the intervention “goes well,” and that it does not incite confusion or chaos in Libya or the wider region.
France, together with Great Britain, and with the more distant support of the US, is undeniably risking much, for it is easier to start a war than it is to end one.
But it is a worthwhile risk.
The cost of non-intervention, of allowing Qaddafi to crush his own people, and of thus signaling to the world’s despots that a campaign of domestic terror is acceptable, is far more menacing.
Sarkozy has chosen the right course.
In fact, he has chosen the only possible way forward.
Sarkozy’s Moment
LONDON – A little more than three years ago, just as the financial crisis was getting into full swing, I published a guide to the international system of financial regulation, Global Financial Regulation: The Essential Guide.
It described an elaborate spider’s web of committees, councils, and agencies with overlapping responsibilities, unrepresentative memberships, and inadequate enforcement powers – a system built up incrementally over decades, with no guiding architectural hand or central authority to promote coherent global regulatory standards.
After all that has happened in the intervening years to demonstrate the dangers inherent in these flaws, and a plethora of summits and conferences, a 2008 guide to financial regulation ought now to be hopelessly out of date.
Unfortunately, it is not.
True, some things have changed for the better.
At the apex of the pyramid, the G-7 was obliged to give way to the broader G-20, bringing countries like China and India into the decision-making nexus as full partners.
G-20 summits are more cumbersome as a result, but that simply reflects the reality of the ongoing shift in economic power from West to East.
There is no point in pretending that this shift is not happening, or that standards set in New York and London will be slavishly followed in Mumbai and Beijing if China and India are not involved in the process.
So the increased importance of the G-20 should be welcomed.
There has been one other important change, too.
The Financial Stability Forum, created after the Asian financial crisis as an informal coordinating body – the United States resisted anything stronger – was renamed the Financial Stability Board.
A “board” sounds more impressive, authoritative, and permanent than a mere “forum.”
In the arcane world of international financial diplomacy, these subtle shifts in terminology matter.
But the change in name should not blind us to the fact that the FSB has no more power than the FSF had.
Successive G-20 summits have asked its chairman, Mario Draghi (now a favorite to succeed Jean-Claude Trichet as President of the European Central Bank), for updates on progress in reforming regulation, but the FSB has no authority over the Basel Committee on Banking Supervision, or any of the other standard setters.
It cannot instruct them to change their rules.
Nor can it achieve consistency between different standard setters’ approaches, or, indeed, consistency of implementation by different national regulators.
Yet consistent implementation is crucial to avoiding another regulatory “race to the bottom.”
There are already dangerous signs that global firms are moving activities into more congenial jurisdictions in order to avoid tighter regulation in the major financial centers.
The G-20 should fill that gap urgently.
President Nicolas Sarkozy of France, which chairs the G-20 this year, has asked for a review of the governance of the financial system.
In response, the existing bodies are vigorously defending their autonomy, resisting any attempts to impose on them a modicum of coordination and discipline.
The International Monetary Fund, for example, has always resented the FSB, arguing that the Fund itself should be the monitor of systemic risk – and thus serve as the de facto global financial regulator.
But the IMF’s arguments have been weakened by a recently published report by its own evaluation office, highlighting the Fund’s failure to identify emerging risks in the run-up to the crisis.
The IMF is too political a body to act as the systemic-risk watchdog.
The next G-20 summit should implement a fundamental reform of the FSB.
It should give the FSB a legal personality, enshrined in an international treaty.
Currently, the Board has no formal status and only a small, though high-quality, permanent staff, hosted by the Bank for International Settlements in Basel.
Draghi’s successor as chairman should be a full-time appointee, and the FSB should be given powers to direct the other standard setters, review the implementation of standards by individual countries, and publish the results.
It would be unrealistic to think that the FSB could direct countries to strengthen their regulation, but it should have some form of arbitration power analogous to that held by the World Trade Organization.
So, if a country is thought to be operating a lax regime to attract mobile international business, the FSB could expose that behavior and publish its conclusions.
The anomaly that countries have decided to endow an international body with powers to regulate disputes in trading goods, but not in financial transactions, should be corrected.
There is a strong argument for going further, and subsuming the standard setters – the Basel Committee, the International Organization of Securities Commissions, the International Association of Insurance Supervisors, etc. – in a single body.
They could be co-located in a regulatory Tower of Babel in Basel.
That might happen one day, as the borderlines between different sub-sectors of the financial system become more blurred.
But, for now, however logical such an objective may be, it is probably too much to hope for.
Even so, as the saying goes, it is important not to waste a good crisis.
Sarkozy has a golden opportunity to put his mark on the global financial system.
Surely a French president, eager for global success with a domestic election looming, will not pass up his chance?
Indeed, Sarkozy has an additional incentive, given that he would be scoring a point against the IMF, led by Dominique Strauss-Kahn, his likely Socialist opponent in the next presidential election.
So, for once, logic and personal political motivation are pushing in the same direction.
That ought to be a winning combination.
Sarkozy’s Secret Rupture
PARIS – A year ago, when Nicolas Sarkozy was campaigning for the French presidency, he promised a “rupture” with the past.
So far, few French people can see the sort of rupture that Sarkozy promised.
But they are wrong to think that nothing has changed in the first year of his presidency.
Sarkozy has, in fact, brought about a rupture, albeit in an unexpected area: the foreign policy consensus that has prevailed since the days of Charles de Gaulle.
Of course, it is impossible at this early stage to evaluate with any degree of precision the long-term strategic repercussions of Sarkozy’s apparent decision to return France to NATO’s integrated military command and strengthen the French military commitment to NATO’s out-of-theater engagement – its first ever – in Afghanistan.
But the implication of these decisions is clear: France under Sarkozy is now back at the heart of the Atlantic Alliance.
Although this may seem mundane outside France, Sarkozy’s foreign policy revolution has incited fierce opposition at home.
Indeed, all left-wing parties denounce Sarkozy’s rupture with the Fifth Republic’s military/diplomatic heritage.
Of course, the left’s real quarrel with Sarkozy’s policy has at its roots in his conception of France’s relationship with the United States.
Wariness of America was, to be sure, not just a leftist pose; many Gaullists over the decades have been tinged with anti-Americanism, too.
But, although Sarkozy may not have sold his party on the merits of George Bush’s America, he has softened its once habitual suspicions about the US.
As a result, a left-right divide has opened in this central area of French diplomacy – a division that has not been seen in France for four decades.
The French left, not surprisingly, rejects Sarkozy’s Atlanticist impulses and frequently charge him with betraying General de Gaulle’s legacy.
The majority of French people, however, appear to favor improving ties with the US.
There is more than a little irony here. In the year that the Socialists are celebrating the fortieth anniversary of the May 1968 demonstrations against de Gaulle, they are also trying to steal his diplomatic clothes by proclaiming themselves the defenders of the independent French foreign policy that he championed.
In the 1960’s, both Socialists and Centrists denounced de Gaulle’s “anti-Americanism.”
On NATO, France’s Middle East policy, or the constitution, Francois Mitterrand (the Socialist leader in the 1960’s) and the opposition sharply criticized de Gaulle’s go-it-alone ways for shattering the Alliance consensus.
Indeed, the Socialists opposed de Gaulle’s decision to withdraw France from NATO’s unified military command, opposed the creation of an independent French nuclear arsenal (they preferred the American nuclear guarantee), and were hostile to de Gaulle’s rupture with Israel after the Six Day War.
But the Socialists began to change their stripes in the late 1970’s, rallying around the concept of nuclear dissuasion as a guarantee of national independence and beginning to distance themselves from America.
Although Mitterrand did stand firm with the US on the stationing of Pershing missiles in Europe in the early 1980’s, which won him respect from President Ronald Reagan, by this point the Gaullist consensus on the fundamentals of French foreign policy had spread across all political groups.
Even the Communist Party could be said to have basically embraced its tenets.
Sarkozy has now broken with this so-called “Gaullist- Mitterrandist” orientation, which was based on the persistence of a belief in French “exceptionalism” in the field of foreign affairs. This does not mean that Sarkozy’s France will toe the American line on all international issues.
Far from it.
But it does mean that France will no longer oppose America just for the sake of opposing America.
Sarkozy’s Société Générale Myopia
SAN FRANCISCO &#45;&#45; The French government should be honoring Bank of France Governor Christian Noyer for saving Société Générale from certain bankruptcy in the current rogue trader scandal, not criticizing him, as some high government officials have done.
“Loose lips sink ships” is received wisdom in central banking circles. But if President Nicolas Sarkozy’s team in the Élysée Palace had had its way, Noyer would have immediately informed the government of Société Générale’s troubles.
Had that happened, there would have been an unacceptable risk that the news would leak to speculators before Société Générale had a chance to liquidate the extraordinary large stock positions that Jérôme Kerviel had amassed, presumably without the bank’s knowledge.
The loss for Société Générale could have been far higher than the €5 billion it is reported to have incurred.
Speculators could have “front run” the bank in the markets, selling short, driving equity prices down, and forcing the French financial institution to sell into a bottomless pit.
Is a forced bankruptcy in extremely fragile global financial markets what the French government wanted for Société Générale?
How can President Sarkozy, who has repeatedly attacked financial speculators, question the judgment of the very man who, by knowing how to keep his mouth shut in a crisis, thwarted them?
Of course, independent central bankers are not Sarkozy’s favorite people.
According to Laurent Dubois, a political science professor at the Sorbonne in Paris, Noyer may pay for Sarkozy’s battles with the European Central Bank.
Sarkozy has “a problem with central banks’ independence,” and Noyer may become a “scapegoat.”
Not likely – at least in the current political environment.
Sarkozy’s recent poll numbers have been dropping like a stone.
According to the TNS Sofres poll for Le Figaro Magazine, Sarkozy’s popularity tumbled a whopping eight percentage points in January, to just 41%, the lowest level since he took office last May and down from a high of 65% in July.
Sarkozy, who during his electoral campaign vowed to be the “president who delivers on purchasing power,” now faces an angry French public whose primary complaint is that purchasing power is being eroded by inflation.
In this changed political environment, Sarkozy is not likely to go after someone like Noyer who, as Bank of France Governor and a member of the ECB’s Governing Council, is widely viewed as a stalwart against inflation and a defender of French purchasing power.
Why risk a “soft on inflation” label?
Sarkozy might even tone down his attacks on the ECB, whose single-minded, inflation-fighting policies have made it one of his favorite targets.
That would be a good thing.
With Sarkozy off his back, ECB President Jean-Claude Trichet might feel freer to cut interest rates to counter the impending economic slowdown in Europe.
Meanwhile, though Société Générale has been saved by Noyer’s professionalism and political courage, it has been badly wounded and will most likely be taken over by another bank.
“Société Générale will remain a great French bank,” Prime Minister Francois Fillon has said. “The government will not allow it to be the target of hostile raids by other banks.”
The problem is that the French government is barred from doing this under an EU directive that it signed last year, which was specifically introduced to improve transparency in banking mergers.
After Italy’s former central bank governor, Antonio Fazio, flagrantly abused his position to block a takeover of an Italian bank by ABN Amro, member countries agreed that future mergers would be assessed on five objective criteria, the idea being to prevent governments from blocking foreign bids purely for protectionist reasons.
Noyer’s diplomatic skill certainly will be put to the test if he has to navigate the treacherous waters between the Scylla of French protectionism and the Charybdis of the EU’s five criteria for bank mergers.
Foreign bank mergers have proved poisonous for euro-zone central bankers.
So far, the only serious candidates to emerge for a Société Générale takeover are two French banks, Credit Agricole and BNP Paribas.
But should a credible foreign offer for Société Générale appear in the coming weeks ­– and it well might – another disruptive conflict between the Bank of France and the government may be in the offing.
The Société Générale rogue trader scandal has caused more problems than any of the main players possibly could have imagined.
Sarkozy’s Three-Way NATO Bet
PARIS – France’s return to NATO’s integrated military structure after a 43-year absence last year brought to an end one of the exceptions françaises.
It also helped frame the growing debate over whether to develop European defense more effectively or to seriously reform the Atlantic alliance.
At first glance, it may seem that France chose NATO at the expense of the ten-year-old European Security and Defense Policy (ESDP).
But that interpretation takes too pessimistic a view of ESDP’s achievements over the past decade, and is based on a flawed understanding of the relationships between NATO and the European Union.
Indeed, France’s return to NATO is far from a U-turn that reflects disenchantment with ESDP.
Rather, it is the product of a 15-year process of rapprochement with NATO – and of the real progress being achieved in European defense.
France ’s re-integration into NATO is, in fact, the final stage in a process that has seen the French military play an increasingly important role in the alliance’s operations.
France has been aligning itself with the military structures of a NATO that has progressively abandoned the practices that were at the root of General Charles de Gaulle’s decision to quit, most notably the placement of all NATO forces under a single command, even in times of peace.
Sarkozy’s NATO policy is thus more of a follow-up on decisions and developments in the 1990’s than a radical U-turn from the policies of his predecessors.
Where Sarkozy does distinguish himself is in adopting a more openly pro-Atlantic stance.
Beyond the often partisan and quintessentially French polemics about Sarkozy’s NATO decision, it is possible to discern what might best be termed a three-way wager by the French president.
The first concerns building European defense in harmony with NATO, rather than in opposition to it.
Ending the exception française in NATO has removed the suspicion that French support for developing European defense was really aimed at competing with the alliance or weakening it.
Whether this suspicion had any truth or not, the message for many allies is clear: the developments the French want for ESDP are compatible with its full and complete membership of NATO.
American support for the European Union’s efforts to play a greater role in defense and security – a stance apparent since 2007 and confirmed by the arrival of the Obama administration – consolidates this approach.
The second part of Sarkozy’s wager concerns reforming and renewing the alliance.
France’s full engagement will increase the pace of reform in NATO and make the alliance a tool better adapted to twenty-first-century crises by paring down its cumbersome bureaucracy.
France could not become an active player in this debate without being part of the alliance.
Following the appointment of French officers to a number of key NATO posts, France can, along with the United Kingdom, the Netherlands, and a few other NATO allies, begin to implement much-needed reforms.
The last and perhaps most difficult part of the wager is “Europeanizing” the alliance.
France can help to give NATO more balance by spreading political and military responsibilities more evenly among Europeans and Americans.
Now that the right political conditions exist in the United States, it is up to Europeans to make the political decisions on budgets and resources that will enable them to strengthen their role in NATO.
There is no guarantee, of course, that the three parts of this wager will pay off.
The forces of inertia are always strong, and when it comes to resources the current economic crisis favors neither ambitious reforms of the alliance nor serious intensification of ESDP.
It will be a few years yet before we can determine whether these ambitions have borne fruit.
The most serious criticism of France’s return to the alliance has been that it places the European defense project at risk, or at least endangers the ambitious vision of the EU as a leading strategic player.
If that were the case, Sarkozy’s decision, regardless of the advantages to NATO or France, would clearly be open to question.
If France had returned fully to NATO’s military structures 10 or 15 years ago, before ESDP existed, this would indeed be a serious and well-founded objection.
But the fact that the EU has become a politico-military player since 1998 has radically changed the stakes.
In just a few years, the Union built a framework for managing civilian and military crises, however imperfect or incomplete these tools may still be.
The EU has since 2003 begun to assert itself operationally as well, carrying out 23 ESDP missions, six of which have been significant military operations.
It has engaged in the Balkans, Africa, the Middle East, and Afghanistan, as well as South-East Asia with its Aceh peacekeeping mission, and more recently in the Caucasus and in the Indian Ocean.
These operations have varied widely in scale, ranging from a few dozen observers, police officers, or civilian advisors to several thousand soldiers.
Although they have mostly been on land, operation “Atlanta” off the coast of Somalia saw the EU’s first naval operation.
All were launched autonomously, relying either on national command arrangements or on making the most of command arrangements with NATO known as Berlin-plus.
In these circumstances, France’s full involvement in NATO, far from burying the European project, looks like a vital tool for furthering it.
Sarkozy's decision has put France in a position to gain influence in the alliance and increase the pace of NATO’s reform, while at the same time strengthening the ESDP.
Living the Saudi Dream
IRVING, TEXAS – Saudi Arabia wants it all: to salvage OPEC, achieve income diversification and industrialization, and preserve its market share in crude oil, petroleum products, petrochemicals, and natural gas liquids (NGLs).
Whether the Saudis succeed will be determined largely by the shale-energy industry in the United States.
The US shale revolution divided OPEC according to the quality of its members' crude oil.
Exporters of light sweet crude – such as Algeria, Angola, and Nigeria – lost nearly all of their market share in the US, while exporters of sour or heavier crude, including Saudi Arabia and Kuwait, have lost little.
Because almost all crude oil produced by the Gulf States is sour, and most of the global surplus is sweet, any production cut by Saudi Arabia and its neighbors would not drive prices back up and rebalance the oil market.
The only way to do that – and prevent an OPEC breakup – would be to reduce the production of light sweet crude, including by US producers, which would thus lose market share.
If this occurred, oil prices could be expected to rise again relatively quickly.
If, however, Saudi Arabia remains more committed to its strategic development objectives, low oil prices could persist.
Since the 1970s, several OPEC members, led by Saudi Arabia, have worked to diversify their industrial base by promoting sectors with a comparative advantage, such as petrochemicals, and building mega-refineries to enable the export of value-added products.
At the same time, to boost revenues, they expanded exports of NGLs, which are not counted in OPEC quotas.
But just when these countries were beginning to achieve success, the US shale revolution emerged, threatening all three of their main strategic objectives.
The key to the competitiveness of Saudi Arabia's petrochemical industry was its use of natural gas and ethane, which was far less expensive than the oil product naphtha on which its global competitors depended.
Now that the US is producing massive amounts of low-price natural gas and ethane, Saudi Arabia's competitive advantage – and market share – is beginning to deteriorate.
The same goes for refining.
Since the US does not allow exports of crude oil, the shale revolution pushed down the US benchmark price, the West Texas Intermediate, relative to international crude prices, sometimes with differentials as wide as $20.
US refiners took advantage of lower prices to increase their exports of petroleum products – so much so, that they are now threatening the market share of Saudi refineries in Asia and elsewhere.
Likewise, US companies have increased NGL production considerably, enabling the country to slash its liquefied petroleum gas (LPG) imports and expand its NGL exports significantly.
As a result, Saudi Arabia has lost market share to US producers in Central and South America.
But the recent collapse in oil prices could change this dynamic.
In refusing to cut its own production, Saudi Arabia seems to be hoping that low oil prices will drive down investment in US shale energy, undermining production growth there.
Low prices may already have contributed to delays in America's decision to begin exporting crude oil, as well as to the political viability of US President Barack Obama's veto of the Keystone XL pipeline, intended to transport oil from the Canadian tar sands to the Gulf of Mexico for export.
Add to that the delay in the opening of the Mexican energy sector, and it seems that low oil prices could amount to a net gain for the Kingdom.
Though Saudi Arabia's motivation in not cutting production was probably almost entirely economic, low oil prices could also offer distinct political advantages.
Most notably, the decline in prices is creating serious challenges for Iran, the Kingdom's main rival in the region, as well as for the unstable, oil-dependent economies of Russia and Venezuela.
None of these countries has adequate savings to cushion the blow of reduced revenues.
Under these circumstances, it seems likely that Saudi Arabia will continue to refuse to cut oil production, leaving prices low until market forces trigger a rebound.
And even then, the price increase could be limited.
After all, game theory dictates that, once the surplus is eliminated, the dominant producer must prevent oil prices from rising high enough to cause it to lose market share again.
That means that Saudi Arabia will try to compel non-OPEC countries, mainly in North America, to keep oil-production increases commensurate with growth in global demand.
In short, it is in Saudi Arabia's interest for oil prices to rise high enough to sustain its own economy, but not so high that they can sustain significant increases in non-OPEC supply.
In order to keep prices in this ideal range, Saudi Arabia may even increase production again.
This strategy is not without risk.
In the short run, excessively low prices could trigger political instability in some oil-producing countries, driving up prices.
Similarly, delays in upstream investment, especially megaprojects, could push prices above the ideal level in the medium and long term.
But perhaps the biggest risk lies with the US shale-oil industry.
Over the next few years, US producers are likely to retrench, focus on sweet spots, improve technology, reduce costs, and increase production once again.
At that point, Saudi Arabia's current strategy may no longer be adequate to sustain its market dominance.
Saudi Arabia’s Iraq Dilemma
Saudi Arabia broke ranks with the Arab world’s opposition to military action against Iraq when Foreign Minister Saud al-Faisal announced that the kingdom would allow the use of its military bases if the UN sanctions an attack on Iraq.
The official Saudi press explains the new stance as reflecting the government’s desire to abide by Security Council resolutions.
But it also underscores the Saudi regime’s growing feelings of internal fragility and external vulnerability.
Domestic pressure on the Saudi royal family, the al-Sauds, arises from widespread opposition to any war against Iraq, as well as to America’s military presence.
Dissent comes not only from the street, but also from the Wahhabi religious establishment, the al-Sauds’ longstanding ally and source of their legitimacy.
External pressure arises specifically from the US, Saudi Arabia’s primary strategic protector.
The al-Sauds have no easy option.
They fear that cooperation with the Americans may not guarantee long-term stability, and worry that concessions on so fundamental an “Arab” cause as Iraq will further undermine their domestic legitimacy.
How much erosion of legitimacy occurs will depend not only on whether war with Iraq takes place, but on what happens during the build-up and preparations for war: the media and propaganda struggles, and the political alliances that are forged.
Should an attack on Iraq take place, the Saudi regime does not want to be marginalized as America embarks on its policy of “regime change”; it also does not want to be America’s next target.
So, among a bad set of options, the least bad appears to be cooperation with the US.
Yet cooperation with the US may not gain the al-Sauds much, because Saudi relations with America are strained to the breaking point.
Ever since the terrorist attacks on New York and Washington last year, the regime—once central to American strategic interests in the region, has been made to feel dispensable by the US, which drops strong hints that there are alternatives to Saudi military bases, even to Saudi oil.
Although the Saudis were not included in President Bush’s “axis of evil,” some American policymakers now view the country as a “kernel of evil.”
Al-Qaeda’s terrorist network is seen as arising directly from fundamentalist Wahhabi teachings, which constitute an integral part of the Saudi regime.
Problems with America run parallel with the regime’s rising domestic problems.
War against Iraq will invariably be divisive and weaken the kingdom’s already delicate unity.
Shi’as in the oil-rich east, who feel ambivalent about their “Saudi-ness” and are labeled as heretics by the Wahhabi authorities, will likely welcome regime change in Iraq if it enhances their ties with Iraqi co-religionists, which would bolster their political confidence.
The population of Asir, the tribal area bordering Yemen from which most al-Qaeda recruits originate, is also alienated.
Saudi Arabian participation in a war on Iraq could strengthen the appeal of al-Qaeda’s message there, invigorating calls for jihad against America’s military presence and the al-Sauds.
Meanwhile, the Hejazis, who originate in the holy cities of Mecca and Medina, are alienated not only from the political process, but also from the religious establishment because they are not Wahhabi.
They might welcome a return of their old Hashemite rulers to the Iraqi throne, an option discussed for any “regime change” that follows Saddam Hussein’s ouster.
However, if war reinforces the Arab sense of defeat, Hejazi adherence to bin Laden’s message may grow.
In the face of this domestic antagonism, the al-Sauds have few tools.
The advent of Arab satellite television and the Internet limits the government’s ability to control public opinion.
A declining economy has made the rising generation rebellious.
War on Iraq could also reduce the importance of Saudi oil in world markets because increased Iraqi production is likely when sanctions are lifted.
As al-Saud political and economic control declines, and in the absence of democratic reforms, the regime’s policy seems certain to shift from patronage to repression.
Making matters worse, the al-Sauds realize that American demands will persist after any war on Iraq is concluded.
America wants to restrict the influence of the Wahhabi religious establishment, reform the educational system, and bring about moves towards democracy.
To appease the Americans, discussions are taking place about shifting state religious oversight to marginal tasks such as operating schools for memorization of the Koran and regulating tourism.
The Wahhabi establishment’s role would begin to be limited purely to the social sphere.
Such an attempt to secularize the state might backfire, however, as the regime could become even more vulnerable to accusations that it is an American lackey.
For there is nothing at hand to replace the legitimizing sanction provided by the Wahhabis.
To survive, the Saudi regime needs not only American guarantees, but also the support of the rising middle class.
To attract that support, some steps towards freedom of the press have been taken, but censorship remains strict.
Some educated people, however, emboldened by the satellite network al-Jazeera and its likes, seem poised to step beyond the current limits of toleration.
So the Saudi dilemma has been heightened, not lessened, by its changed stance on Iraq.
Ties with America may have been strengthened, but at the cost of upsetting the Saudi people.
As war talk builds in the months ahead, the regime’s room for maneuver will narrow even more.
Saudi Arabia’s Old Regime Grows Older
LONDON – The contrast between the deaths, within two days of each other, of Libya’s Col. Muammar el-Qaddafi and Saudi Crown Prince Sultan bin Abdel Aziz is one of terminal buffoonery versus decadent gerontocracy.
And their demise is likely to lead to very different outcomes: liberation for the Libyans and stagnation for the Saudis.
But the death of Sultan, at 86, marks the beginning of a critical period of domestic and foreign uncertainty for the Kingdom.
After all, Sultan’s half-brother, King Abdullah, 87, is still hospitalized in Riyadh, following a major operation last month.
The regime is aging and ailing, and is perceived by the population as being on life support.
Meanwhile, the succession is still being argued.
Sultan’s death is the first time that the burial of a Saudi royal has been delayed to give the ruling family time to decide on the next in line – a sign of internal discord (and concord on the continuation of dynastic rule).
The Saudi regime’s stability now depends on its ability to maintain unity and establish clarity in its system of succession.
With the Crown Prince’s death, schisms are particularly threatening to the Kingdom’s stability (and that of oil exports), because the ruling Al Saud have swelled to 22,000 members, which has given rise to factional clashes among increasingly numerous claimants to power.
Sultan had already been dead – politically, that is – for the last three years; indeed, since June 2011, when he left for New York for medical treatment, young Saudis speculated on numerous Web sites that this was also literally the case.
Abdullah’s octogenarian line of successors recalls the final years of the Soviet Union, when one infirm leader after another succeeded to power for a brief period of inert rule.
Many Saudi subjects feel the same pattern of continuous uncertainty and torpor.
Making matters worse, the rule of succession is ambiguous.
After Abdullah succeeded his brother Fahd, who ruled for 23 years until his death in 2005, he created an Allegiance Council, an ambiguous and mysterious family body that resembled the Vatican’s College of Cardinals.
But here, restrictions are not based entirely on age, but on family bloodlines.
The Council included the surviving royal princes of the 43 sons of Ibn Saud, the Kingdom’s founder, and the sons of their deceased brothers – for example, the late King Faisal’s brood.
But, as Sultan’s health deteriorated, Abdullah bypassed his own creation and appointed Prince Naif, the interior minister, as a second deputy.
In other words, Naif will be anointed Crown Prince.
But, befitting this increasingly exsanguinous imperium, Naif, 82, is known to suffer from leukemia.
Sultan’s fortune is estimated at $270 billion, which he distributed between his sons prior to his death in order to shore up their political position in the competitive princely arena.
The reality is that every senior prince has placed his favorite sons in important positions in the Kingdom.
Sultan secured the defense ministry for his son Khaled, and brought back Khaled’s notorious brother, Bandar to head the Intelligence Security Council.
Abdullah guaranteed his son Mitaeb’s position as head of the National Guard.
The new Crown Prince-in-waiting, Naif, has established his son Mohammed as the next interior minister.
In short, despite Abdullah’s innovations in the succession process, it is an open secret that nothing guarantees a transition to a younger generation of leaders – or that an effective ruler will emerge.
The story of the Al Saud’s succession struggle is no longer whispered behind closed doors.
The Internet has opened a window on all of the royal family’s plots, ambitions, and double-dealings.
The Al Saud resembles a family business, established in 1932.
Ibn Saud managed to conquer and unite the vast territory of the Arabian Peninsula, give it his family name, and alienate, divide, and control his cousins and brothers in order to establish a clear and undisputed line of succession through his sons.
After Ibn Saud’s death, his sons, though never entirely united, maintained enough coherence to keep the store running.
That is no longer true of the thousands of princes that they produced.
As the older generation dies off, the new generation has fallen to fighting in front of the customers.
Indeed, with the ratio of royals to commoners now at one to a thousand (compared to one to five million in the United Kingdom), the challenge of managing princely privileges, salaries, and demand for jobs has never been more intense.
Royal perks include lifetime sinecures and domination of the civil service, which enable the princes to award contracts and receive commissions on top of their salaries.
So the Saudi regime is divided, its legitimacy is questioned, and sectarian tensions are growing.
Moreover, while oil-export revenue is booming, the neighborhood is in revolutionary flames.
In the short term, the iron-fisted Naif, as Crown Prince, will push the Kingdom into greater repression, in part by strengthening the hardline Wahhabi clerics’ place in the country’s power nexus.
Magnificent sums of money, backed by Wahhabi dogma, will be deployed to ensure popular submission and silence.
Whereas Abdullah at least talked about reform (though with no real consequences), Naif can barely bring himself to utter the word.
Denial remains the Saudi rulers’ dominant mindset.
The royals believe that custodianship of Islam’s holy places gives them a special status in the Arab world, and that no revolution can touch them.
And, if anyone tries, they will follow Naif’s counsel: “What we took by the sword we will hold by the sword.”
Throughout the region, newly mobilized (and thus empowered) Arab youth are trying to move their countries towards reform and liberalization.
Saudi Arabia, unfortunately, is moving in the opposite direction.
Saudi Arabia’s Shia Stand Up
BEIRUT – On February 24, violent confrontations between Shia pilgrims and the Saudi religious police and security forces occurred at the entrance to the Prophet Mohamed’s Mosque in Medina.
The timing and location of the clashes may have serious repercussions for domestic security, if not for the regime itself.
Some 2,000 Shia pilgrims gathered near the mosque that houses the Prophet’s tomb for the commemoration of Mohamed’s death, an act of worship that the ruling Saudi Wahhabi sect considers heretical and idolatrous.
Thus, the Mutawa’ah, the religious police of the Committee for the Preservation of Virtue and the Prohibition of Vice, armed with sticks and backed by police firing into the air, tried to disperse the pilgrims.
The pilgrims resisted.
Three pilgrims died and hundreds were injured in the ensuing stampede.
A large number of pilgrims remain in detention, among them 15 teenage boys.
Soon after, representatives of Saudi Arabia’s Shia community sought a meeting with King Abdullah in an effort to free the detainees.
Dialogue seemed like a promising strategy: just ten days earlier, Abdullah had announced a promising reform agenda for the country.
But the King refused to meet the Shia delegation.
The violence outside the Medina mosque has led to unprecedented demonstrations in front of Saudi embassies in London, Berlin, and The Hague, with protesters demanding independence from the Saudi state.
Such demonstrations are, of course, illegal in Saudi Arabia.
But domestic suppression has only served to export and expand the problem.
And now, the regime’s policies of repression, discrimination, and antagonism directed at the Shia and other politically marginalized groups increasingly threaten the Saudi state with disintegration.
The Shia are a special case, constituting 75% of the population in the Eastern Province, the Kingdom’s main oil-producing region, and identifying far more strongly with Shia across the border in Iraq than with the Saudi state.
Indeed, the empowerment of Iraq’s long-suppressed Shia has raised expectations among Saudi Arabia’s Shia that they, too, can gain first-class status.
From the regime’s point of view, however, Shia Iran is now the most serious security threat. The Saudi authorities perceived the Shia demonstrations as an assertion of Iranian policy, as they coincided precisely with Iran’s celebration of the 30th anniversary of its Islamic Revolution.
Suppression of the Shia is thus a part of the Kingdom’s strategy to counter Iran’s bid for regional hegemony.
But this thinking is tremendously shortsighted.
Only by transforming Saudi Arabia’s currently monolithic Saudi/Wahhabi national identity into a more inclusive one will the Kingdom become a model that is attractive to its minorities.
Today, the disempowered Shia are forced to seek political connections and backing from the region’s wider Shia political movements to compensate for the discrimination they face at home.
So the choice for the Saudi rulers is stark: empower the Shia within the system, or watch as they increase their power through external alliances.
The threat that this would represent is not abstract: the Kingdom’s borders are very porous.
So far, King Abdullah has shown no sign of opting for a policy of inclusion – not even a token gesture, such as a Shia minister.
Moreover, Abdullah is unable even to stop Wahhabi satellite TV stations from denouncing the Shia “heretics,” or the hundreds of Wahhabi Web sites that call for the outright elimination of the Shia.
But non-Wahhabi Saudis, mainly the Shia, continue to resist state dogma.
Until the beginning of this year, they have not formed significant or open opposition movements, owing to a historically well-entrenched fear of repression.
Shia unrest dates back to the Kingdom’s establishment in 1932, and violent confrontations with the Saudi state began with the Shia revolution in neighbouring Iran.
The Iranian revolution prompted a Shia uprising in the Eastern Province in November 1979.
Saudi Arabia’s Shia, an economically and politically marginalized community, staged an unprecedented intifada in the towns of Qatif, Saihat, Safwa, and Awamiyya.
Tens of thousands of men and women demanded an end to the politics of discrimination against the Shia.
Although, the Saudi security forces, the National Guard, and the marines crushed the rebellion, the domestic tensions that fueled it remain.
And Ayatollah Khomeini challenged the Al Saud’s ideological monopoly and control of Mecca and Medina. Khomeini challenged the very concept of monarchy in Islam by declaring that “those with authority” are not Kings but religious scholars.
The Saudi religious establishment has long been on alert to this rival and threatening entity.
Sefr al Hawali, a prominent Saudi Wahhabi cleric, warned of the dangers of the “Shia arc” following the Shia intifada in Iraq in 1991.
But, since the war in Iraq in 2003 and the empowerment of Shia across the region, the Saudi regime faces sizeable, restless, and politically ambitious Shia populations in neighboring Gulf countries, especially Kuwait and Bahrain, as well as in Lebanon.
The demonstrations at Medina show that Saudi Shia are now themselves emboldened. Indeed, they have formed an opposition movement called Khalas (Salvation), aimed at mobilizing the new generation of Shia in the Eastern Province.
In light of widened regional and political cleavages, confrontations such as occurred in the holy mosque of the Prophet could increase in frequency, size, and violence.
Saudi Arabia vs. the Arab Spring
PRINCETON – Saudi Arabia is widely perceived as leading the counter-revolution against the Arab Spring uprisings.
In reality, the Kingdom’s response is centered, as its foreign and domestic policy has long been, on “stability.”
The Saudis don’t want anti-Saudi forces, including such enemies as Iran and Al Qaeda, to increase their influence in the Middle East.
Some of the older Saudi leaders have seen this movie before.
The nationalist revolutions of the 1950’s and 1960’s, inspired and galvanized by Gamel Nasser’s Egypt, nearly toppled the House of Saud.
Nonetheless, today’s Saudi princes appear to recognize that something has genuinely changed in the Middle East: The younger generation of Arabs is no longer prepared to accept unaccountable, corrupt, and brutal governments.
Saudi Arabia, a self-proclaimed bulwark of Islamic conservatism, where popular democracy has never been considered a legitimate form of rule, has been more aggressive in some arenas than in others.
Domestically, the royal family struck quickly, adopting a ban on public demonstrations and acts of civil disobedience.
The Kingdom’s traditional interpretation of Islam construes political legitimacy in terms of a ruler’s proper application of Islamic law.
In return, his subjects owe him obedience within the constraints of Sharia religious law.
Dissent, should it arise, must always take the form of well-intentioned advice given to the ruler in a private setting.
Public demonstrations of dissent are regarded as contrary to Islam, because they foster divisiveness and lead to civil strife.
The highest council of Saudi religious scholars recently declared demonstrations to be categorically un-Islamic.
Confronted with the possibility of mass demonstrations on March 11 – the so-called Day of Rage on a Facebook page – the Saudi rulers enforced that ruling by deploying massive numbers of security forces in the streets.
They also played the Shia card, an effective trump in Sunni-majority Saudi Arabia.
The rulers argued that public protests throughout the region were being orchestrated by Shia Iran, and were anti-Sunni and sectarian.
The threat of chaos, evident now in Libya, Syria, and Yemen, also weighed in the royal family’s favor.
The House of Saud has a long historical claim on rule in Arabia, and its promise of stability remains key to its durability.
A massive government subsidy package also accounted for domestic calm.
Abruptly, some $130 billion was added to spending projections over the next five years.
Salaries for all public servants, a majority of the national work force, were raised, as was the total number of public-sector jobs.
King Abdullah pledged large numbers of new housing units, an important gesture in a country where young people, especially young married couples, cannot easily access the housing market.
In neighboring Bahrain, the Saudis also moved quickly to bolster the Sunni-minority regime against a rising tide of protest led by the island kingdom’s Shia majority.
Saudi troops marched into Bahrain under the banner of the Gulf Cooperation Council (GCC), and the Saudi rulers issued clear instructions to adopt an iron-fisted policy with the demonstrators, again arguing that Iran’s nefarious hand was at play in subverting the country.
No doubt, the Saudis believe that a Shia-led Bahrain would lead to Iranian dominance at their very doorstep.
Here, too, the Kingdom employed its policy of largesse through the GCC, promising Bahrain $10 billion over the next decade.
Other large-scale financial commitments were made to Oman and Jordan, both Saudi allies that have managed to silence early whispers of mass protest.
Farther away, in Libya and Syria, the Saudis have said little, perhaps to avoid picking the losing side in uncertain circumstances.
The Kingdom has no love for Libyan leader Muammar el-Qaddafi, who tried to assassinate King Abdullah and has waged a concerted anti-Saudi propaganda campaign for at least a decade.
The Saudis would surely like to see Qaddafi deposed, but they have no real stake in the Libyan uprising’s outcome.
Closer to home, the Kingdom despises Syrian President Bashar al-Assad for his alliance with Iran and duplicity in Lebanon.
But his fall would present the Saudis with the risk of a country led by the Muslim Brotherhood.
Even worse is the prospect of Syria falling into chaos, dragging Lebanon – and maybe the broader region – with it.
The Assad regime’s use of excessive force, especially the deliberate killing of thousands of mainly Sunni civilians, has nonetheless recently spurred a tougher stance.
King Abdullah has called the killings unacceptable, and has withdrawn his ambassador from Damascus.
The actual policy implications, however, remain to be determined.
Neighboring Yemen is a much more immediate threat.
The opposition is hopelessly divided, and the tribal and military leadership is utterly compromised.
Ominously, the south is being taken over by hardcore Islamists, some allied with Al Qaeda.
Throwing money around won’t work in Yemen, which is too large and complex to be pacified.
In fact, the country is on the verge of total collapse.
Today, the Saudis see 24 million Yemenis – hungry, heavily armed, and envious of Saudi wealth – looking across the border.
If civil war erupts, the Saudis will not be able to stop the waves of refugees.
But the Kingdom remains paralyzed, still wavering on whether to allow President Ali Abdullah Saleh, who is convalescing in Riyadh from injuries sustained in a bomb attack, to return to Sana to resume his rule.
For all of their wealth and planning, the Saudis remain vulnerable to the turmoil surrounding them.
At home, the legacy of Saudi family rule, fear of chaos, increased public spending, and abundant security forces have produced calm.
But a modest political opening and economic diversification away from state-owned industry have been sacrificed.
In Bahrain, things are quiet now as well, but the chances of further radicalization of the country’s Shia majority have increased, possibly benefiting Iran in the long run.
Great change is coming to the Middle East.
It is far from clear that a Saudi policy of stability at all costs will strengthen the regime.
Savable Africa
The G-8 Summit in Scotland in early July will bring together the political leaders of the richest countries to consider the plight of the poorest countries.
So far, President George W. Bush has resisted Prime Minister Tony Blair’s call for a doubling of aid to Africa by 2010.
This is a tragic mistake, one that results from a misunderstanding of the challenges facing Africa and of America’s responsibilities.
American policy is based overwhelmingly on the idea that Africa can lift itself out of extreme poverty through its own efforts, that aid is largely misused because of corruption, and that the United States already gives generous amounts.
This is wrong on all counts: Africa is trapped in poverty, many countries are well poised to use aid effectively, and America’s contribution is tiny relative to Africa’s needs, America’s promises, and America’s wealth.
Africa suffers simultaneously from three challenges that trap it in poverty.
First, Africa does not grow enough food.
Unlike Asia, Africa did not have a Green Revolution in food production.
In 1965, India averaged 854 kilograms of grain per hectare in use, while Sub-Saharan Africa averaged almost the same, 773 kilograms per hectare.
But, by 2000, India was producing 2,293 kilograms per hectare, while Africa was producing only 1,118.
Second, Africa suffers from disease unlike any other part of the world.
Africa’s AIDS pandemic is well known; its malaria pandemic, which will claim three million lives and a billion illnesses this year, is not.
India controlled malaria after the 1960’s, while Africa did not, one reason being that Africa’s malaria-bearing mosquitoes are particularly adept at transmitting the disease.
Third, Africa is economically isolated, owing to very poor infrastructure, large over-land distances, and many landlocked countries.
These geographical barriers keep much of Africa, especially rural Africa, out of the mainstream of international trade.
Without the benefits of trade, much of rural Africa struggles at subsistence levels.
Bush might think that America is doing a lot to help overcome these problems, but the truth is that US aid is minimal.
Blair’s Africa Commission, as well as the UN Millennium Project, found that Africa needs about $50 billion per year in aid by 2010.
America’s fair share of the total is about $15 billion per year.
Yet official US aid to Africa is only $3 billion per year, and much of that covers salaries for American consultants rather than investments in Africa’s needs.
This tragically small sum amounts to just three cents for every $100 of US gross national product, which is less than two days of US military spending.
Not only is US aid a tiny fraction of what it should be, but American explanations for the lack of aid are wrong.
Bush and others imply that Africa wastes the aid through corruption.
But impoverished and slow-growing African countries like Ghana, Senegal, Mali, Benin, and Malawi are ranked as having less corruption than fast-growing Asian countries like Vietnam, Bangladesh, and Indonesia.
Indeed, America’s own Millennium Challenge Account has already recognized such African countries for their strong governance.
Good governance surely will help in Africa and elsewhere, but corruption should not be used as an excuse not to help Africa.
On hunger, the key is to help Africa achieve its own Green Revolution.
Rich countries should help African farmers use improved seed varieties, more fertilizer, and better water management, such as small-scale irrigation.
The techniques are known, but Africa’s farmers are too poor to get started.
With increased help to African farmers to grow more food (as opposed to shipping food aid from the US), it would be possible to double or even triple crop yields.
On disease, malaria could be controlled by 2008 using proven, low-cost methods.
But, again, Africa cannot afford them.
The first goal should be to distribute long-lasting insecticide-treated bed nets to all of Africa’s rural poor within four years.
The best estimates show that Africa needs about 300 million bed nets, and that the cost per net (including shipping) is around $10, for a sum of $3 billion.
This cost would be spread over several years.
In addition, Africa needs help with anti-malaria medicines, diagnostic equipment, and training of community health workers.
On economic isolation, Africa needs help with the basics – roads and ports – but there is also an opportunity to “leapfrog” technology.
Cell phones and Internet connectivity could reach all of Africa at low cost, ending the economic isolation of hundreds of millions of people.
Some reasonable estimates put the cost at around $1 billion for an Africa-wide fiber-optic network that could bring Internet connectivity and telephone service across the continent’s villages and cities.
Africa is ready to break out of poverty if the US and other rich countries help.
Europe appears poised to do more, while the US appears to be the main obstacle.
The G-8 Summit provides an opportunity for the US, which will spend $500 billion on its military this year, to make a lasting – and certainly more cost-effective – contribution to global security by saving millions of lives in Africa and helping its people escape extreme poverty.
Saved by Taxes
What do we owe to our great-great-great-grandchildren?
What actions are we obligated to take now in order to diminish the risks to our descendants and our planet from the increasing likelihood of global warming and climate change?
Almost everyone – except the likes of ExxonMobil, US Vice President Dick Cheney, and their paid servants and deluded acolytes – understands that when humans burn hydrocarbons, carbon dioxide goes into the atmosphere, where it acts like a giant blanket, absorbing infrared radiation coming up from below and warming the earth.
Likewise, almost everyone understands that while global warming might be a much smaller or larger problem than existing models suggest, this uncertainty is no excuse for inaction.
In fact, uncertainty about global climate change should lead us to do more to guard against it than if we knew it would proceed exactly according to the central-case projections.
Finally, almost everyone agrees that governments, non-profit institutions, and energy companies should be spending far more to develop technologies that generate non-carbon-emitting power, that remove it from the atmosphere to forests or oceans, and that cool the earth by reflecting more of the sunlight that lands on it.
Clearly, the world’s rich countries should carry the burden of dealing with climate change over the next generations.
After all, they could take an easy, emissions-intensive path to industrialization and wealth.
Today, China, India, and other developing countries cannot, and it would be unfair to penalize them for that.
So now is the time to build, not disrupt or impede, the international institutions that will manage our response to global climate change in the years ahead.
But should we be doing anything else now and in the next decade?
Economists like to think of things in terms of prices.
And when economists see behavior that has destructive side effects, we like to tax it.
Taxation makes individuals feel in their wallets the destruction they are causing.
Imposing a tax on those who, say, drive low-mileage SUV’s is a way of harnessing humanity’s collective intelligence to decide when bad side effects are a reason to alter behavior.
But it has to be the right tax.
An SUV going ten miles in the city and burning a gallon of gasoline pumps about three kilograms of carbon into the atmosphere.
Should the extra “global warming” tax be $0.05 a gallon, $0.50 a gallon, or $1.50 a gallon?
Our views will change as we learn more, but at the moment the size of the tax hinges on a question of moral philosophy: how much do we believe we owe our distant descendents?
The Australian economist John Quiggin has an illuminating discussion on his website ( http://johnquiggin.com ) that comes down on the side of a $0.50/gallon tax, because he projects that spending today to reduce carbon emissions is a good investment for the future.
Assuming that annual per capita income grows at about 2% per year worldwide, a marginal expenditure of roughly $70 today to cut carbon emissions would be worth it if, accounting for damage from global warming and adjustment costs, the world of 2100 would be $500 richer in year-2006 purchasing power.
On the other hand, critics point out that the world today is poor: average annual GDP per capita at purchasing power parity is roughly $7,000.
We expect improved technology and its spread to make the world of 2100, at a 2% annual growth rate, much richer: $50,000 per capita of year-2006 purchasing power.
So the critics argue that we need the marginal $70 per capita today much more than the richer people of 2100 will need the $500 that they would gain from being spared the effects of global climate change.
But what the critics often don’t say is that the same logic applies to the world today.
Average annual per capita incomes in the US, Japan, and Western Europe are currently around $40,000, and less than $6,000 for the poorer half of the world’s population.
The same logic that says we need our $70 more than the people of 2100 need an extra $500 dictates that we should tax the world’s rich more, as long as each extra $500 in first-world taxes generates as little as an extra $70 in poor countries per capita incomes.
In short, if the world’s rich are stingy today toward our much richer descendants, and if we want to leave our environmental mess to them to deal with, we should be lavish toward the world’s poor.
Likewise, if we are stingy today toward the world’s poor, we should be lavish toward our descendents.
At least, that is what we should do, if our actions are based on some moral principle, rather than that of Leonid Brezhnev: what we have, we hold.
Selamatkan Tanah kita
BERLIN – Perserikatan Bangsa-Bangsa (PBB) telah mendeklarasikan 2015 sebagai Tahun Tanah Internasional dan tanggal 19-23 April menandai pelaksanaan Pekan Global untuk Tanah tahun 2015 ini.
Peringatan tersebut, meskipun tidak terlihat megah, tidak mendapatkan perhatian yang sepatutnya diterima.
Tanah tidak terganggu (intact soils) merupakan sumber daya yang sangat berharga dan tidak dapat digantikan, salah satu jenis tanah yang memiliki banyak sekali fungsi untuk mewujudkan tujuan-tujuan pembangunan utama dan lingkungan hidup bagi komunitas internasional.
Kini kebutuhan melindungi tanah tersebut bersifat mendesak.
Tanah yang sehat (healthy soils) sangat penting bagi nutrisi manusia dan upaya melawan kelaparan.
Manusia bergantung pada tanah tidak hanya untuk produksi pangan namun juga perolehan sumber air minum baru.
Tanah membantu pengaturan iklim Bumi, menyimpan lebih banyak karbon dibanding jumlah seluruh hutan dunia (hanya samudera saja yang merupakan carbon sink lebih besar), dan sangat diperlukan untuk menjaga keanekaragaman hayati: segenggam tanah subur mengandung lebih banyak mikroorganisme dibandingkan jumlah manusia di bumi.
Dua pertiga spesies makhluk hidup di bumi hidup di bawah permukaan tanah.
Namun erosi dan kontaminasi menjadikan tanah berada dalam kondisi stres yang buruk.
Secara global, 24 juta ton tanah subur hilang setiap tahunnya, sebagian diakibatkan oleh pertumbuhan perkotaan dan infrastruktur.
Di Jerman saja, proyek-proyek konstruksi menggunakan rata-rata lebih dari 75 hektar tanah per hari.
Praktik pertanian yang tidak layak juga patut dipersalahkan: misalnya penggunaan pupuk sintesis secara sewenang-wenang, akan merusak organisme yang hidup di tanah dan mengubah struktur tanah.
Diperlukan waktu seribu tahun untuk pembentukan topsoil yang subur; di berbagai tempat, hanya dibutuhkan hujan deras untuk menghilangkan semuanya.
Di saat yang sama, kebutuhan global akan pangan, pakan hewan dan biomass sebagai bahan bakar terus meningkat, sehingga turut menaikkan nilai tanah secara signifikan – hal ini merupakan fakta yang masih menjadi perhatian investor asing.
Menurut estimasi Bank Dunia, 10%-30% tanah siap garap di seluruh dunia – tanah yang sejogjanya dapat digunakan oleh jutaan petani kecil, peternak, dan masyarakat adat – terkena dampak investasi skala besar.
Perjuangan untuk menjamin hak-tanah atas tanah bagi individu dan masyarakat menjadi persoalan ketahanan hidup di banyak negara.
Akses terhadap tanah menjadi salah satu faktor penentu utama terjadinya kelaparan dan penyebarannya jauh lebih tidak merata dibandingkan distribusi pendapatan.
Sekitar 20% rumah tangga yang terkena dampak kelaparan adalah mereka yang tidak memiliki lahan, dan 50% rumah tangga dengan keterbatasan pangan adalah keluarga petani kecil.
Di Eropa, sejak lama kami sudah menghabiskan lahan pertanian domestik, sehingga kini kami “mengimpornya” secara besar-besaran dari negara-negara di belahan bumi bagian selatan.
Bahkan untuk memproduksi pakan ternak yang diperlukan untuk memenuhi konsumsi daging di Uni Eropa saja akan membutuhkan lahan pertanian di Brasil seluas wilayah Kerajaan Bersatu Britania Raya dan Irlandia Utara (UK).
Jika setiap orang mengkonsumsi daging dalam jumlah yang sama dengan rata-rata penduduk Uni Eropa, maka diperlukan 80% tanah siap garap di dunia untuk produksinya, dibandingkan persentase sekarang yang hanya 33%.
Agar lebih jelas: mengingat 100 kalori pakan ternak hanya akan menghasilkan maksimal 30 kalori daging, maka penggunaan tanah subur untuk tujuan ini merupakan pemborosan.
Kecenderungan ini akan diperparah sampai pada tingkat dimana “pertumbuhan hijau” ketika banyak pemerintah kini menjanjikan penggunaan biofuel sebagai pengganti bahan bakar fosil seperti minyak dan batubara.
Manfaat biofuel bagi iklim sangat sedikit bila dibandingkan dengan sistem tenaga surya atau angin, sebab biofuel hanya menghasilkan sepersepuluh energi per satu meter persegi.
Sebagai akibatnya, kebutuhan biofuel yang termuat dalam Kerangka Kerja Iklim dan Energi Uni Eropa tahun 2030 (2030 Framework for Climate and Energy) akan memerlukan tambahan 70 juta hektar tanah – luas wilayah yang lebih besar dari Perancis.
Perlindungan terhadap tanah tidak berarti mengurangi kemakmuran.
Justru sebaliknya, upaya-upaya perlindungan tanah secara berkelanjutan dapat menaikkan hasil pertanian – khususnya bagi petani kecil.
Diversifikasi panen, daur ulang, dan tanah penutup dapat berkontribusi pada tanah yang subur dan produktif yang mampu mengoptimalkan pengelolaan air.
Satu pendekatan yang disebut agro-ecology berdasarkan pada pengetahuan tradisional dan pengalaman petani kecil, menjadikan pendekatan ini mampu disesuaikan dengan kondisi lokal.
Suatu studi mengenai praktik pertanian agro-ecological yang dilakukan oleh Jules Pretty di tahun 2006 mempelajari 286 proyek pertanian berkelanjutan di 57 negara dan menyimpulkan bahwa rata-rata hasil panen meningkat sebesar 79%.
Meskipun keberhasilan metode ini belum terbukti, penggunaan pupuk sintetis telah bertambah lima kali lipat selama lebih dari 50 tahun terakhir dan sebagian besar negara-negara di Afrika mengeluarkan hampir 60% anggaran pertaniannya untuk subsidi pupuk tersebut.
Khususnya di lingkungan tropis, produk ini mengakibatkan kerusakan pada topsoil dan hilangnya keanekaragaman hayati (kelebihannya pun akan dibuang ke laut, sehingga merusak ekosistem laut).
Walaupun komponen utamanya, yaitu nitrogen, dapat diproduksi secara biologis dan berkelanjutan, tapi itu akan bertentangan dengan kepentingan sejumlah produsen dan distributor pupuk yang berkuasa.
Pembuat kebijakan harus menjawab pertanyaan berikut: Bagaimana cara agar penduduk miskin akan mampu menghasilkan pangan yang cukup supaya terhindar dari kelaparan dan kemiskinan melalui cara-cara yang tetap melindungi tanah, mengurangi perubahan iklim, dan menjaga keanekaragaman hayati?
Meskipun persoalan ini mendesak, pendekatan-pendekatan seperti produk agro-ecological di mana pun juga belum dikembangkan secara serius.
Perayaan atau kegiatan seperti Tahun Tanah Internasional dan Pekan Global untuk Tanah menawarkan peluang perubahan sejak awal dan secara menyeluruh.
Save the Emerging Markets
CAMBRIDGE – If the world were fair, most emerging markets would be watching the financial crisis engulfing the world’s advanced economies from the sidelines – if not entirely unaffected, not overly concerned either.
For once, what has set financial markets ablaze are not their excesses, but those of Wall Street.
Emerging markets’ external and fiscal positions have been stronger than ever, thanks to the hard lessons learned from their own crisis-prone history.
We might even have allowed these countries a certain measure of schadenfreude in the troubles of the United States and other rich countries, just as we might expect kids to take perverse delight from their parents’ getting into the kinds of trouble they so adamantly warn their children against.
Instead, emerging markets are suffering financial convulsions of possibly historic proportions.
The fear is no longer that they will be unable to insulate themselves. It is that their economies could be dragged into much deeper crises than those that will be experienced at the epicenter of the sub-prime debacle.
Some of these countries should have known better and might have protected themselves sooner.
There is little excuse for Iceland, which essentially turned itself into a highly leveraged hedge fund.
Several other countries in Central and Eastern Europe, such as Hungary, Ukraine, and the Baltic states, were also living dangerously, with large current-account deficits and firms and households running up huge debts in foreign currency.
Argentina, the international financial system’s enfant terrible , could always be relied on to produce a gimmick to spook investors – in this case a nationalization of its private pension funds.
But financial markets have made little distinction between these countries and others like Mexico, Brazil, South Korea, or Indonesia, which until just a few weeks ago appeared to be models of financial health.
Consider what has happened to South Korea and Brazil.
Both economies have experienced currency crises within recent memory – South Korea in 1997-1998 and Brazil in 1999 – and both subsequently took steps to increase their financial resilience.
They reduced inflation, floated their currencies, ran external surpluses or small deficits, and, most importantly, accumulated mountains of foreign reserves (which now comfortably exceed their short-term external debts).
Brazil’s financial good behavior was rewarded as recently as April of this year when Standard &amp;
Poor’s raised its credit rating to investment-grade.
(South Korea has been investment-grade for years.)
But both are nonetheless getting hammered in financial markets.
In the last two months, their currencies have lost around a quarter of their value against the US dollar.
Their stock markets have declined by even more (40% in Brazil and one-third in South Korea).
None of this can be explained by economic fundamentals.
Both countries have experienced strong growth recently.
Brazil is a commodity exporter, while South Korea is not.
South Korea is hugely dependent on exports to advanced countries, Brazil much less so.
They and other emerging-market countries are victims of a rational flight to safety, exacerbated by an irrational panic.
The public guarantees that rich countries’ governments have extended to their financial sectors have exposed more clearly the critical line of demarcation between “safe” and “risky” assets, with emerging markets clearly in the latter category.
Economic fundamentals have fallen by the wayside.
To make matters even worse, emerging markets are deprived of the one tool that the advanced countries have employed in order to stem their own financial panics: domestic fiscal resources or domestic liquidity.
Emerging markets need foreign currency and, therefore, external support.
What needs to be done is clear.
The International Monetary Fund and the G7 countries’ central banks must act as global lenders of last resort and provide ample liquidity – quickly and with few strings attached – to support emerging markets’ currencies.
The scale of the lending that is required will likely run into hundreds of billions of US dollars, and exceed anything that the IMF has done to date.
But there is no shortage of resources.
If necessary, the IMF can issue special drawing rights (SDRs) to generate the global liquidity needed.
Moreover, China, which holds nearly $2 trillion in foreign reserves, must be part of this rescue mission.
The Chinese economy’s dynamism is highly dependent on exports, which would suffer greatly from a collapse of emerging markets.
In fact, China, with its need for high growth to pay for social peace, may be the country most at risk from a severe global downturn.
Naked self-interest should persuade the advanced countries as well.
Collapsing emerging-market currencies, and the resulting trade pressures, will make it all the more difficult for them to prevent their unemployment levels from rising significantly.
In the absence of a backstop for emerging-country finances, the doomsday scenario of a protectionist vicious cycle reminiscent of the 1930’s could no longer be ruled out.
The United States Federal Reserve and the International Monetary Fund have both taken some positive steps. The Fed has created a swap facility for four countries (South Korea, Brazil, Mexico and Singapore) of $30 billion each.  The IMF has announced a new quick-dispersing short-term facility for a limited number of countries with good policies.  The questions are whether these will be enough and what happens to those countries that will not be able to avail themselves of these programs.
So when the G-20 countries meet in Washington on November 15 for their crisis summit, this is the agenda item that should dominate their discussion.
There will be plenty of time to debate a new Bretton Woods and the construction of a global regulatory apparatus.
The priority for now is to save the emerging markets from the consequences of Wall Street’s financial follies.
Saving a World that Doesn\u0027t Save
Around the world, social security and health care are today's hottest economic issues due to the rising dependency ratio : the proportion of elderly people relative to younger, economically active, workers.
According to the Population Resource Center, this ratio will double in the world's more developed regions and triple in less developed regions by 2050.
With so many more old people in coming decades, governments will be hard pressed to raise enough money to pay for their needs by taxing the young.
None of this is news.
But that is the point: despite the vast attention currently paid to the looming old-age crisis, household saving rates have been falling in most of the world's rich countries.
Why aren't people saving more for their future retirement?
Why are they actually doing the opposite by saving less ?
According to a recent study by the Organization for Economic Cooperation and Development (OECD), household saving rates declined between 1984 and 2001 in Australia, Austria, Belgium, Canada, Finland, Italy, Japan, Korea, New Zealand, Portugal, Spain, the United Kingdom, and the United States.
In some countries, the decline has been dramatic: in the US during this period, the annual household saving rate - expressed as the share of disposable income - fell from 10.6% to 1.6%.
One might think that, with declining birthrates in rich countries in recent decades, it should be easy to save more.
Fewer children mean fewer expenses, and adults can work longer to earn extra income beyond their immediate needs.
So why have so many different countries experienced a decline in savings?
The answer must be that people do not decide whether to increase their savings on the basis of careful calculations about their future needs.
The decision to stop spending and save stems from more immediate concerns, and we have to look at the economic factors - common to many countries of the world - that play on those concerns.
A study in 2000 of saving rates in 150 countries, headed by Norman Loayza at the World Bank, found that some basic economic factors explained much of the variation in national saving rates, without any reference to cultural differences.
Surprisingly, the study found that saving rates tend to be high when inflation is high, and to decline when inflation declines.
Since inflation has been declining in most countries of the world over the last 20 years or so, this could help explain the global decline in saving rates.
Loayza and his colleagues thought that inflation encourages saving because it creates an atmosphere of uncertainty.
When people see high inflation, they conclude that the economy is precarious, so perhaps they should tighten their belts.
Thus, inflation serves as a visceral reminder to save, while old age seems too far away for most people to think about.
There is another reason why the high inflation of the past encouraged saving: the high interest rates that tend to accompany rapid price growth.
Borrowers may be forced to "save" more by paying higher mortgage rates.
Consider the US in 1980, when the personal saving rate was 11%.
The inflation rate was 12% and 30-year fixed-rate home mortgages were over 15%.
The real interest rate was not really high - just 3% - but one still had to pay that 15% interest out of current income.
Imagine buying a house valued at three years' income and paying 45% of your income just to make mortgage payments.
In America in 1980, this effectively forced some households to reduce their consumption expenditures drastically, contributing to the high saving rate of the time.
When inflation fell, people eventually refinanced their mortgages at lower rates, breathed a sigh of relief, and started spending more.
That example also underscores the strong improvement seen in mortgage institutions around the world during the past 20 years - another force tending to reduce saving.
The easier it is to get a home mortgage, and the lower the down payment that lenders demand, the less young people need to save to buy their first house.
The increase in credit cards and consumer credit has had the same general effect.
Finally, declining saving rates around the world reflect strong growth in asset markets - namely, stocks and real estate - over the last twenty years.
The explanation for this growth is subject to dispute, but it seems to reflect an optimistic attitude towards the future, as we enter a modern world in which technological advances are supposed to make corporations extremely valuable and our economies perform well.
We value our assets more because we imagine that they will be in great demand in the future.
Rising asset prices follow from this psychology.
For most people, the troubles caused by the old-age crisis seem remote, while booming share or housing prices look concrete in brokerage statements or on the business pages of newspapers.
People feel richer and save less.
The problem is that these increases in value create the impression that our lack of saving for the last decade has had no serious consequences.
We think we're still getting richer even though we save less.
But since speculative prices are ultimately determined by psychology, they can also suddenly be deflated by psychology.
Unless we come to terms with the lethal combination of declining saving rates and falling birthrates, many more people may retire poor than we ever imagined.
Saving Europe’s Lost Generation of Workers
MILAN – More and more European young people are beginning to think just like Paul Nizan’s character Antoine Bloyé, who said, “When I was twenty, I would not call that the best time in my life.”
The global financial crisis has hit them hard.
The slow recovery from the recession may be even worse.
Young people who entered the labor market through the backdoor of temporary contracts are now the first to be forced out as their contracts expire.
For more than a decade, temporary employment has been the engine of job creation in Europe.
Now, unsurprisingly, these temporary workers form the major pool where jobs are being destroyed.
Since the beginning of the recession, in the third quarter of 2008, the European Union has lost five million jobs among those under 40 years old.
Almost 90 per cent of total job losses have been concentrated in this age bracket.
Those who are now leaving school and entering the job market run the risk of becoming a lost generation, like their Japanese cohorts who began their working lives at the beginning of Japan’s downturn in the 1990’s.
Due to high economic uncertainty, firms are offering only fixed-term contracts.
That is exactly what happened in Sweden during its financial crisis in the 1990’s, when the share of temporary workers in total employment increased from 10% to 16%, despite massive layoffs from fixed-term contracts.
Such contracts involve less investment in on-the-job training, as temporary workers offer a sort of buffer to employers.
Temporary workers also do not have access to bank loans and mortgages in many countries.
Thus, the credit crunch is becoming a “youth crunch,” as highlighted by a recent survey carried out by the British Council in several European countries.
On top of all this, rapidly growing public debt implies that new entrants to the labor market will sooner or later face a mountain of taxes.
In countries like Germany, Italy, and the Netherlands, the rise in unemployment has been contained so far by massive use of short-time working schemes, which freeze workers with permanent contracts into their current jobs.
This strategy will pay off only if a sustained economic recovery does not require a significant reallocation of labor.
Recessions are typically times of reallocation, where the true comparative advantages of a country unfold.
What is certain is that freezing workers in their current jobs under today’s conditions makes entering the labor market even more difficult for youngsters.
Aging countries seeking to recover the ground lost in the current recession quickly cannot afford to lose entire generations.
They need to define as soon as possible a labor-market entry strategy that encourages employers not only to hire young workers, but also to train them.
That requires contracts that do not come with a fixed expiry date.
Short-term contracts become a self-fulfilling prophecy, insofar as training is not provided on the job, and hence such workers are less productive and more vulnerable to shocks.
Investment in the human capital of new cohorts (which is largely accumulated on the job) would benefit employers by increasing productivity.
An entry strategy for young workers based on completing the reforms of employment protection carried out in most OECD countries in the last 20 years could offer them a clear “tenure track.”
Currently, there are no long-term prospects after the expiration of a temporary contract.
Governments could promote entry into the permanent labor market in stages by introducing graded employment protection and so avoiding the formation of a long-term dual market.
Under this scheme, job-security provisions, mainly in the form of mandated severance payments, should increase steadily as workers acquire seniority.
This would not discourage new hires under open-ended contracts, as employers would continue to benefit from substantial flexibility at the start of a worker’s employment, when the quality of new hires is being assessed.
Cohorts entering the labor market during recessions typically ask for far more protection and state intervention during their entire working life than cohorts that enter the labor market in normal times.
Neglecting the problem of entry into the labor market could backfire by increasing pressure for more public expenditure just when governments should start reducing the huge public debts accumulated during the recession.
A reform offering a “tenure track” imposes no burden on public finances, and could avoid further distortions and highly costly measures later on.
Far too many post-mortems of the economic crisis are now being written.
They are misleading and dangerous, not only because the crisis in the labor market is not yet over, but also because they contribute to complacency, thereby reducing pressure for reform.
The current recession will be truly over only when new cohorts of workers are able to enter the labor market quickly and through the main door.
Saving Face and Peace in the Gulf
PRINCETON – The West and Iran are playing a dangerous game.
In the past ten days, Iran threatened to close the Strait of Hormuz and warned the United States against sending an aircraft carrier back into the Persian Gulf.
The US predictably responded that its aircraft carriers could and would patrol wherever necessary to promote freedom of navigation.
Iran then announced that it would conduct naval exercises in the Strait.
In the game of “chicken,” two cars drive straight at each other at top speed; either one driver “chickens out” and swerves, or they collide in a fireball.
Governments around the world cannot stand by and watch that game play out across the world’s energy lifeline.
It is time for third parties to step in and facilitate solutions that allow Iran to save face while significantly and credibly reducing its supply of enriched uranium.
Iran may or may not be planning to go all the way to production of a nuclear weapon.
Nonetheless, it is in clear violation of its obligations under the Nuclear Non-Proliferation Treaty, as determined by the International Atomic Energy Agency, which is charged with monitoring the treaty.
Its continuing non-compliance is destabilizing the entire Middle East, with serious repercussions for global security.
Although the Iranian government could most likely be deterred from using a nuclear weapon, the price of a nuclear Iran could well be a regional arms race – a nuclear Saudi Arabia, possibly followed by Turkey and Egypt.
Nuclear weapons, components, and materials in a region that is already volatile and violent, and that determines the world’s oil prices, is an appalling scenario.
The market has already taken the measure of the past week’s tensions, driving up the price of some oil contracts to their highest levels in eight months.
Trying to force Iran to back down with steadily mounting sanctions has not produced results.
Despite the tightening economic noose – the US imposed sanctions on all companies that do business with Iran’s central bank, and the European Union plans to impose sanctions on Iranian oil exports by the end of January – many nuclear experts now estimate that Iran is very close to enriching enough uranium to build a bomb.
But how else can the US, the EU, and the United Nations make clear that the “international community” means what it says?
To go soft now is to lose all credibility with respect not only to Iran, but also to any other country thinking about pursuing a nuclear path.
The logic is compelling enough, except that the current course leaves Iran’s government no alternative between publicly backing down, which it will not do, and escalating its provocations.
After all, what government wants to be seen as “chickening out”?
And, in this case, decision-makers on both sides face domestic opponents who are only too ready to pounce at the least sign of weakness.
In the US, the Republican Party’s leading presidential candidate in this year’s election, Mitt Romney, declared at a recent debate, “If you elect me as President, Iran will not have a nuclear weapon.” His principal challenger, Rick Santorum, told NBC News that he would “order air strikes” if it “became clear that [Iran] was going to get nuclear weapons.”
Iranian politics is much harder to read.
In the ongoing power struggle between President Mahmoud Ahmadinejad and Supreme Leader Ali Khamenei, each is more likely to out-tough the other than to propose concessions to the West.
Moreover, many Iranian analysts point out that Khamenei and his inner circle are convinced that the US is ultimately bent on regime change – and is willing to use force to achieve it.
Hence Iranian missile tests, threats to close the Strait of Hormuz, and announcements of nuclear progress should be read as efforts to deter more than provoke.
The more publicly the West threatens Iran, the more easily Iranian leaders can portray America as the Great Satan to parts of the Iranian population that have recently been inclined to see the US as their friend.
The net effect is to keep Iran speeding down the road toward a crash.
It is time for cooler heads to prevail with a strategy that helps Iran step back.
The key players here are Brazil and Turkey, whose governments negotiated an ill-timed deal with Iran in May 2011, whereby Iran would transfer 1,200 kilograms of low-enriched uranium to Turkey in exchange for 1,200 kilograms of medium-enriched uranium for medical research at a Tehran reactor.
That deal quickly fell apart, but it could be time to try again.
The stage is already set in Turkey, which agreed on January 6 to host a new round of nuclear talks between Iran and the 5+1 group (the five permanent members of the UN Security Council + Germany).
A new deal would probably have to go beyond the swap proposed in May 2011, but there are other possibilities.
For example, add Egypt and Qatar to the equation and bring in the UN to provide an umbrella for a proposed regional nuclear-fuel bank, to which Iran would make the first contribution.
Bring in South Korea (a major customer for Iranian oil) and Russia and begin exploring options for a global fuel bank.
And ensure that all countries in the region reaffirm the basic rules of freedom of navigation in a way that allows them to claim vindication.
Where the political will exists to allow the other side sufficient margin to reach an agreement, creative solutions can be found.
Still, diplomats know that war can be preferable to humiliation, which is why saving face is just as important as threatening force – and why other countries should step in and provide the room that both sides need to avoid a head-on collision.
Saving Global Order
GENEVA – As 2015 begins, the values enshrined in the Charter of the United Nations and the Universal Declaration of Human Rights are under threat.
Around the world, personal liberty, human rights, and democracy are at risk – even in countries that have embraced democratic ideals.
The international community is deeply divided, blocking progress on a host of global challenges, ranging from the crises in Syria, Iraq, and Ukraine to climate change and international trade.
Three factors – all likely to persist this year – are driving these unsettling trends.
First, globalization may have delivered many benefits, but it has also eroded the capacity of societies to determine their own destinies.
Many modern challenges – including tax avoidance, organized crime, cyber insecurity, terrorism, climate change, international migration, and financial flows, both licit and illicit – have one thing in common: the traditional instruments of a sovereign state have become inadequate to manage them.
Second, failed military solutions in Afghanistan and Iraq have played a large role in undermining the international community’s unity, and eroding confidence in intervention in general, even as established powers cut budgets and emerging powers shy away from taking on new responsibilities.
In 2014, leaders in my native Africa and elsewhere challenged the objectivity and effectiveness of the International Criminal Court, the creation of which was a major milestone in the struggle to end impunity for national leaders.
Finally, we have failed to modernize the international system’s institutional architecture.
The most important institutions – the United Nations Security Council, the World Bank, and the International Monetary Fund – remain dominated by the European and American victors of World War II, countries that represent an increasingly small minority of the world’s population and a shrinking share of its economic output.
The failure to reflect the changing balance of global power brought about by the rise of China, Brazil, South Africa, and other emerging countries undermines both the effectiveness and the legitimacy of today’s international system, particularly in the eyes of those who feel denied of proper recognition.
And yet, whatever the shortcomings of the international system, it is important to remember that never before in human history have so few people (as a proportion of world population) died from armed conflict.
It may not make headlines, but the international system, with its rules and institutions, allows states to settle most of their disputes peacefully, most of the time.
For better or worse, fighting epidemics like Ebola or preventing the most harmful consequences of climate change requires solidarity and cooperation.
Retreating into unilateralism, ultra-nationalism, or the politics of identity will produce nothing but a bitter, fragmented, parochial, and dangerous world.
The world desperately needs brave leaders who can take the long view.
In a world where power ebbs and flows, it is in everyone’s interest to adhere to a fair system of rules that respect both national sovereignty and individual rights.
The heads of the world’s historical powers need to recognize that it is in their interest, too, to follow the rules, and to allow rising states to help write these rules.
As I have often argued, the Security Council must be enlarged, and developing countries should be given greater voting rights in the Bretton Woods institutions: the IMF and the World Bank.
In exchange, the world’s newest powers must begin to take on a greater share of responsibility for the global order upon which their success depends.
They can no longer stand on the sidelines, denouncing the injustices of the past.
Instead, they must join their peers in building the future.
We often hear talk about the shortcomings of the UN, which stands at the heart of the international system.
Too seldom do we note its achievements and successes, of which there have been many.
Rather than retreat from a system that has yielded exceptional results, we must use the international community’s current crisis as a historic opportunity to reshape the existing order to better meet our modern challenges.
Bombing for Morality
NEW YORK – A gift for words was always US President Barack Obama’s strongest asset.
Now it looks as if his words have trapped him.
Having stated in March that the United States would “not tolerate the use of chemical weapons against the Syrian people,” and having spoken last year about a “red line” that could not be crossed, he will lose face if he fails to react forcefully to the murder, allegedly by the Syrian regime, of more than 1,000 civilians by sarin gas.
Of course, the risk of losing face is not a good reason for attacking another country.
But why did Obama fence himself in with such rhetoric in the first place?
Why this particular red line?
Secretary of State John Kerry was right to call the use of gas “a moral obscenity.”
But so is torturing children, which is how the civil war in Syria actually began more than two years ago.
And is killing civilians with chemical agents morally more obscene than shelling, shooting, or starving them to death?
At least since the use of mustard gas in World War I, it has been a common assumption that certain weapons are more immoral than others.
Weapons of mass destruction, nuclear bombs in particular, certainly cause more damage faster than conventional armaments do.
But is there really a clear moral distinction between killing roughly 100,000 people in Hiroshima with one atom bomb and killing even more people in Tokyo in a single night of incendiary bombing?
Was it more immoral to gas Jews than to machine-gun them into open pits?
There is an argument, made by Nicholas Kristof in the New York Times, that a swift punishment might persuade Syrian President Bashar Al-Assad to stop using chemical weapons and use “more banal ways to slaughter his people.” This does not make sense to me.
The problem is surely the slaughter, not the methods used.
In any case, moral outrage, however justified, is not a sufficient reason for going to war.
Mao Zedong was responsible for the deaths of more than 40 million Chinese in the 1950’s and 1960’s.
No one in his right mind suggested that military intervention in China would be a good idea.
In the 1980’s, Saddam Hussein gassed hundreds of thousands of Iranians and Kurds.
The US supported him.
So is it a legal issue?
Using chemical weapons is indeed a breach of international conventions, including the Chemical Weapons Convention, which Syria has never signed, and the Geneva Protocol, to which it is a party.
So there are good reasons to treat Assad as a war criminal, in which case he should be indicted at the International Criminal Court (ICC) – established, incidentally, by a treaty that the US has never ratified.
But bypassing the United Nations and unleashing an illegal war to punish an illegal act is not an easy policy to defend.
Still, one might say, surely the “international community,” or the West, or the US as the major Western power, must draw the line somewhere.
How can responsible governments simply look away when innocent people are being killed in large numbers?
Tolerating genocide is intolerable.
But where exactly do we draw that line?
How many murders constitute genocide?
Thousands?
Hundreds of thousands?
Millions?
Or is it not a question of numbers?
Genocide, after all, is a matter of intent, of killing or persecuting people on the grounds of their race, ethnicity, or creed.
Technically, killing ten people for such reasons – or even two – could be a form of genocide.
There is another way of considering the matter.
The question to ponder before intervening with force in another country is whether doing so is likely to improve matters, save lives, and make the world more secure.
Yes, violence against citizens, whether by sarin gas or helicopter gunships, is a moral obscenity.
The issue is how to respond: What will work?
Justice and morality have little to do with this.
Like the ICC, “humanitarian intervention” has more chance of working in the case of a weak country (say, Serbia, Mali, or Sierra Leone) than where a big power is involved.
No one is going to shoot missiles into China or Russia for the sake of upholding human rights or international standards of warfare.
Syria, as many people have pointed out, is not Libya or Mali.
Nor is it a great power.
But its civil war has already spread beyond its borders, implicating greater powers like Iran, Turkey, and Russia in the process.
One thing worse than the moral obscenities of a civil war would be a regional conflagration.
It is by no means certain that US intervention would do anything to reduce the risk of a wider war.
In fact, certain advocates of US intervention – both neo-cons and “liberal hawks” – seem to desire the opposite outcome; they want a war against Iran.
And there is probably a clear link in Obama’s mind between the red line in Syria and the one he has drawn for Iran, perhaps equally unwisely, to prevent it from developing nuclear weapons.
So what is to be achieved by a US strike on Syrian targets, which Obama has already assured the world is not meant to change the Syrian regime?
It will not stop the civil war.
But even one missile would turn the US into a direct participant, provoking yet more violence.
Saving Obama’s honor hardly seems worth that risk.
This is the view of many people in Syria, even among the rebels.
It is the view of most people in Europe.
It is also the view of most people in the US.
Perhaps it is even the view of Obama himself, which is why he is playing for time, desperately turning over approval of an attack on Syria to the US Congress.
His relations with Congress have been far from smooth.
But now he needs it more than ever – in order, as they say in America, to cover his ass.
Saving Public Sarkozy
Ever since key public figures signed a manifesto in a French magazine denouncing the dangers of a monarchical drift – without ever mentioning the president’s name – the political atmosphere in France has been electric.
Nicolas Sarkozy’s rapid fall from grace is unprecedented in the history of the Fifth Republic.
His popularity ratings are plummeting, and his party, the conservative UMP, is predicted to fare badly in the municipal elections in mid-March.
What is behind the collapse in Sarkozy’s popularity?
Can he recover?
These questions are crucial not only for France, because we are five months away from a French presidency of the European Union that should have been an important step in Europe’s own rebound.
The attacks on Sarkozy are very personal, and focus as much on his “essence” as on his performance.
Can he incarnate France with dignity and legitimacy?
Can he transform intuitions and speeches into concrete actions?
Has he already lost touch with reality, surrounded as he is by a court of media courtesans?
In the eyes of a majority of French citizens, for whom presidents are “elected monarchs,” Sarkozy has “de-sacralized” the presidency.
Unlike constitutional monarchies, France does not distinguish between the symbol and the reality of power.
Sarkozy may want to be a combination of Margaret Thatcher and Tony Blair, but in symbolic terms he is also the Queen.
And, in his quest for modernity and transparency, he has de-legitimized the symbolic dimension of his function by mixing his private and public lives.
On the one hand, Sarkozy’s fascination with rich people has helped isolate him from the average Frenchman.
Yet, on the other hand, his flashy style is considered vulgar by traditional French elites, who are keen to dissociate themselves from someone whose educational background and instinctive reactions clearly marks him as not one of them.
His love life is not seen as a human, romantic affair and a sign of youthful energy, but as a possibly fatal distraction, the ultimate proof of his “immaturity.”
Of course, if the international economic environment had been more favourable, and if there were not so much legitimate concern about declining purchasing power, the French might have shown greater indulgence towards their young president.
But it looks as if Sarkozy, once obsessed with gaining power, has progressively lost touch with reality since achieving his goal.
You cannot proclaim your impotence in the face of empty state coffers after pushing through useless and costly tax breaks for the richest.
And you cannot adopt a Churchill-like call to sacrifice when you indulge in a series of highly publicized luxury weekends with your latest fiancée.
Moreover, if Sarkozy has eroded, perhaps fatally, the “sacred” symbolic nature of the presidency, his governance has failed to provide any compensating reassurance.
Multiplying initiatives, being everywhere at once, accelerating the pace of reforms at the risk of confusing quality and quantity, breaking taboos, and blurring the lines between secularism and religion, Sarkozy has reinforced lingering doubts about a brilliant politician’s ability to become a statesman or at least an effective ruler.
The influence of his court has been seen as excessive and dangerous, marginalizing and frustrating the government, parliament, and his own party.
But it is much too early to bury Sarkozy.
While he has seemingly lost touch with the French people, he is deeply aware of and wounded by his declining popularity, and no one should underestimate his ability to reinvent himself with a new government after the municipal elections and greater distance from his immediate entourage.
In any case, France is not Russia.
Despite some troubling similarities between Sarkozy and Vladimir Putin, French democracy is not in danger.
What is at stake is the dignity of the presidential office and, beyond that, France’s ability to modernize.
Indeed, the most serious casualty of the current political climate in France is Sarkozy’s reform agenda.
It is as if his personality had become the biggest obstacle to his determination to break with the past.
Perhaps too much uncontrolled rupture in style can ultimately lead to paralysis in substance.
Saving Resources to Save Growth
NEW YORK – Reconciling global economic growth, especially in developing countries, with the intensifying constraints on global supplies of energy, food, land, and water is the great question of our time.
Commodity prices are soaring worldwide, not only for headline items like food and energy, but for metals, arable land, fresh water, and other crucial inputs to growth, because increased demand is pushing up against limited global supplies.
Worldwide economic growth is already slowing under the pressures of $135-per-barrel oil and grain prices that have more than doubled in the past year.
A new global growth strategy is needed to maintain global economic progress.
The basic issue is that the world economy is now so large that it is hitting against limits never before experienced. There are 6.7 billion people, and the population continues to rise by around 75 million per year, notably in the world’s poorest countries.
Annual output per person, adjusted for price levels in different parts of the world, averages around $10,000, implying total output of around $67 trillion.
There is, of course, an enormous gap between rich countries, at roughly $40,000 per person, and the poorest, at $1,000 per person or less.
But many poor countries, most famously China and India, have achieved extraordinary economic growth in recent years by harnessing cutting-edge technologies.
As a result, the world economy has been growing at around 5% per year in recent years.
At that rate, the world economy would double in size in 14 years.
This is possible, however, only if the key growth inputs remain in ample supply, and if human-made climate change is counteracted.
If the supply of vital inputs is constrained or the climate destabilized, prices will rise sharply, industrial production and consumer spending will fall, and world economic growth will slow, perhaps sharply.
Many free-market ideologues ridicule the idea that natural resource constraints will now cause a significant slowdown in global growth.
They say that fears of “running out of resources,” notably food and energy, have been with us for 200 years, and we never succumbed.
Indeed, output has continued to rise much faster than population.
This view has some truth.
Better technologies have allowed the world economy to continue to grow despite tough resource constraints in the past.
But simplistic free-market optimism is misplaced for at least four reasons.
First, history has already shown how resource constraints can hinder global economic growth.
After the upward jump in energy prices in 1973, annual global growth fell from roughly 5% between 1960 and 1973 to around 3% between 1973 and 1989.
Second, the world economy is vastly larger than in the past, so that demand for key commodities and energy inputs is also vastly larger.
Third, we have already used up many of the low-cost options that were once available.
Low-cost oil is rapidly being depleted.
The same is true for ground water.
Land is also increasingly scarce.
Finally, our past technological triumphs did not actually conserve natural resources, but instead enabled humanity to mine and use these resources at a lower overall cost, thereby hastening their depletion.
Looking ahead, the world economy will need to introduce alternative technologies that conserve energy, water, and land, or that enable us to use new forms of renewable energy (such as solar and wind power) at much lower cost than today.
Many such technologies exist, and even better technologies can be developed.
One key problem is that the alternative technologies are often more expensive than the resource-depleting technologies now in use.
For example, farmers around the world could reduce their water use dramatically by switching from conventional irrigation to drip irrigation, which uses a series of tubes to deliver water directly to each plant while preserving or raising crop yields.
Yet the investment in drip irrigation is generally more expensive than less-efficient irrigation methods.
Poor farmers may lack the capital to invest in it, or may lack the incentive to do so if water is taken directly from publicly available sources or if the government is subsidizing its use.
Similar examples abound.
With greater investments, it will be possible to raise farm yields, lower energy use to heat and cool buildings, achieve greater fuel efficiency for cars, and more.
With new investments in research and development, still further improvements in technologies can be achieved.
Yet investments in new resource-saving technologies are not being made at a sufficient scale, because market signals don’t give the right incentives, and because governments are not yet cooperating adequately to develop and spread their use.
If we continue on our current course – leaving fate to the markets, and leaving governments to compete with each other over scarce oil and food – global growth will slow under the pressures of resource constraints.
But if the world cooperates on the research, development, demonstration, and diffusion of resource-saving technologies and renewable energy sources, we will be able to continue to achieve rapid economic progress.
A good place to start would be the climate-change negotiations, now underway.
The rich world should commit to financing a massive program of technology development – renewable energy, fuel-efficient cars, and green buildings – and to a program of technology transfer to developing countries.
Such a commitment would also give crucial confidence to poor countries that climate-change control will not become a barrier to long-term economic development.
Saving the Egyptian Revolution
TEL AVIV – Revolutions throughout history have proven to devour their children.
Their final outcomes are seldom congruent with their prime movers’ intentions.
Too frequently, revolutions are hijacked by a second wave, either more conservative or more radical than what was first contemplated by the initiators of change.
What started in France in 1789 as an uprising of the middle classes in alliance with the sans culottes ended up with the return of the monarchy in the form of Napoleon’s dictatorship.
More recently, the first wave of the Iranian revolution, under the presidency of Abolhassan Bani-Sadr, was by no means exclusively Islamist; the second wave, led by Ayatollah Ruhollah Khomeini, was.
The question for Egypt is whether the agenda of a truly pluralistic democracy – proclaimed by the avant-garde young protesters at Tahrir Square, the admirably self-empowered Facebook and Twitter generation – can prevail against the resilient forces of the past.
Indeed, according to a Pew Research Center poll, only 5.5% of people have access to Facebook, while 95% want Islam to play a major role in politics, 80% believe that adulterers should be stoned, 45% are practically illiterate, and 40% live on less than $2 a day.
Ideally, the new democratic order should be based on a common platform adopted by the forces of change, both secular and Islamic, and on a transition pact between these forces and those representing the old system, first and foremost the army.
Indeed, one of the Egyptian revolution’s odd features is that it now operates under the exclusive trusteeship of a conservative army.
True revolutions occur only when the old repressive system is thoroughly dismantled and purged.
But Egypt’s revolution is one whose initial stage ended with power fully in the hands of the old regime’s repressive apparatus.
The risk is that the fraternal ties between the army – not exactly innocent of the Mubarak regime’s repressive practices – and the protesters might prove short-lived.
So far, the army has acceded to only one of the protesters’ central demands – getting rid of Mubarak.
It has not endorsed the wide array of liberal demands voiced by the revolutionaries of Tahrir Square.
Arguably, the military concurred with the protesters’ demand for Mubarak’s removal as the best way to circumvent a move towards a dynastic republic under Mubarak’s son, Gamal.
The masses called for a revolution, while the army conducted its own coup d’etat in the hope of saving what is essential in the system while sacrificing the man who embodied it.
The army’s temptation to limit change reflects the conservative profile of its hierarchy, the extraordinary privileges it enjoys, and the economic interests with which it has been tied.
Egypt was ruled as a police state, and, with a gigantic and all-pervasive security apparatus, the army might be tempted to assume the role of guardian of order and stability if democracy proves too messy.
Fortunately, there are limits to the Egyptian military’s capacity to impede change.
A Western-leaning army, funded and trained by the United States, it cannot allow itself the liberty of shooting peaceful protesters.
Indeed, limiting the army’s political role will certainly be a fundamental condition for maintaining Egypt’s warm relations with the West.
A free-trade agreement with the US and improved access to EU markets might be powerful incentives that the West can offer to Egypt’s young democracy.
So, no matter how conditioned the Egyptian army may be by its worldview and vested interests, it has no option but to facilitate the democratization process.
It should have to accept, however, that no Arab democracy worthy of the name could refuse to open the electoral gates to political Islam.
Indeed, Egypt’s formidably historic task now is to refute the old paradigm according to which the Arab world’s only choice is between secular and repressive autocracy or obscurantist and repressive theocracy.
But the regime that emerges is bound to be more attuned to local conditions, and thus to religion’s vital role in the social fabric.
A democracy that excludes religion from public life entirely, à la France, cannot work in Egypt.
After all, such a democracy does not work in Israel, or even in the US, a country that G. K. Chesterton described as having “the soul of a church.”
Building a modern secular state for a devout people is Egypt’s main challenge.
That said, a scenario in which the Muslim Brotherhood usurps the revolution does not seem plausible, if only because this might lead another strongman on horseback to take over.
Although still inspired by staunchly anti-Western conservatives who believe that the “banner of Jihad” should not be abandoned, the Brotherhood today is not the unconditionally jihadist organization that Mubarak regime’s portrayed to the West.
It has long disavowed its violent past and has shown an interest inpeaceful political participation.
The tense relationship between the incumbent Arab regimes and political Islam is not necessarily a zero-sum game.
It is in this context that the abortive Palestinian “Mecca Agreement” between the religious (Hamas) and the secular (Fatah) to form a national-unity government for Palestine might have established a new paradigm for the future of regime change in the Arab world.
Such compromises may be the only way to stem the slide to civil war, and possibly co-opt Islamists into a settlement with Israel and rapprochement with the West.
Saving the World\u0027s Fish
It is difficult not to be a pessimist about the future of the world's fish population.
Global marine catches, which had increased rapidly since WWII, stalled in the late 1980's and have been declining ever since.
That decline will be difficult to halt.
The rapid depletion of fish stocks is the inevitable outcome of sophisticated industrial technology being thrown at dwindling marine populations as demand rises, fueled by growth in human population and incomes.
The decline has so far been masked in the developed world by seafood products that were not previously available, such as farmed salmon, and by massive fish imports from developing countries.
But over-fishing has become a severe problem in the developing world as well.
So fisheries worldwide are due for wrenching changes in the near future.
A clear indication of the problem is "fishing down the marine food web"-- the increasing tendency to land fish and shellfish from the bottom of marine food chains, often the prey of the larger fish that were previously targeted.
This trend provides low-quality substitutes for the high-quality fish that we were once accustomed to, and will inexorably lead us toward catching plankton, especially jellyfish.
Yes, jellyfish, which were once a specialty consumed around East Asia, are now a product caught in the Atlantic as well, and exported across continents.
The fishing industry is, on its own, incapable of reversing the "fishing down" trend, notwithstanding arguments by commentators who should know better.
In his recent book The Skeptical Environmentalist , for example, the Danish public-policy analyst Bjørn Lomborg cited data reported by the UN Food and Agriculture Organization (FAO) that showed increasing figures for global fish catches.
Lomborg used the figures to argue that if catches are up, then the underlying ecosystems must be in good shape, despite all the warnings from experts.
But Lomborg is wrong, and the experts are right.
We now know that the apparent increases in global fish catches in the 1990's were due to massive over-reporting to the FAO by China.
We also know that fish catches can remain high (and in fact usually do) even as stocks collapse, as illustrated by cod off Eastern Canada, which yielded good catches until the fishery had to be closed because there were literally no fish left.
But excessive catches are not even the whole story.
Many fishing techniques now in use--bottom trawls foremost among them--literally tear up the habitat upon which fish depend.
As a result, some fish stocks exploited in this manner do not seem to recover, regardless of quotas or other regulations on catches.
Aquaculture, the farming of fish and other aquatic organisms, could in principle ameliorate the coming shortfall.
However, aquaculture refers to two fundamentally different kinds of operations.
One type of aquaculture is devoted to the farming of bivalves such as oysters and mussels, or to freshwater fish such as carp and tilapia.
It relies on plants (plankton sometimes supplemented by agricultural by-products in the case of freshwater fish) to generate a net addition to the fish food supply available to consumers.
Moreover, because this type of aquaculture is based predominantly in developing countries (mainly in China, but also in countries such as the Philippines and Bangladesh), it supplies cheap animal protein right where it is needed.
The second type of aquaculture entails the farming of carnivorous fish such as salmon or seabass, and increasingly, the fattening of wild tuna in captivity.
Salmon, seabass, or tuna eat flesh; in ecological terms, they are the wolves and lions of the sea.
When fed only vegetable matter, such as soy meal, salmon do not grow well, and end up looking and tasting like tofu.
There is no point even trying to feed tuna anything but fish.
The more of this aquaculture there is, the less cheap fish, such as sardines, herring, mackerel, and anchovies, there will be for humans to buy and eat.
Farming carnivorous fish increases rather than reduces pressure on wild stocks.
It has led to massive imports by developed countries--where this type of aquaculture predominates--of fishmeal from fish caught and ground up in developing countries.
One reason why acquaculture's practitioners can get away with this is that the public assumes that all of these operations are similar, and that they all add to the global fish supply.
This is simply not the case.
There is still time to save our fisheries, but only if they are reinvented not as the source of an endlessly growing supply of fish for an endlessly growing human population, but as a provider of a healthy complement to grain-based diets.
Moreover, such reinvented fisheries will be smaller, and they will rely on fish that move out of marine reserves, the protected ocean areas that we must establish to enable marine ecosystems and the species within them to rebuild some of their past abundance, and to share it with us again.
Saying No to Medical Technology
As is recommended for all patients, DeBakey had an advance directive: he had stated, while in good health, what approach to medical care he would want if he became ill and unable to speak for himself.
He specifically indicated that he would not want to undergo major surgery.
A cardinal principle of contemporary medical ethics is that patients have the right to make this type of decision, and that physicians are obligated to follow their wishes.
To disregard a patient’s preferences once he loses the ability to make decisions – as occurred when DeBakey’s wife reportedly stormed into a late-night hospital ethics committee meeting and demanded that the surgery take place – violates the hard-won respect for patients’ autonomy gained over the past 20 years.
Much of the commentary about the case has centered on whether a patient’s wishes can be overridden, even by loving family members.
What has largely been left out of the discussion is whether it is ever appropriate to perform invasive, dangerous, and expensive surgery on 97-year-olds – even if they want it.
The operation performed on DeBakey involved putting him on cardiac bypass and opening the aorta, the artery that carries blood from the heart to most of the major organs of the body.
The damaged part of the aorta was then replaced with a synthetic graft.
The risks were high: in a group of elderly patients who had the procedure, the oldest of whom was 77, 18% died while hospitalized.
Moreover, surviving the surgery does not mean returning to one’s usual state of health in a matter of a few weeks.
It typically means, as DeBakey experienced and as his physicians anticipated, an extended hospitalization marked by reliance on machines, multiple complications, and considerable suffering.
DeBakey spent three months in the hospital, much of the time unable to speak or eat, let alone leave his bed, read, or interact with others.
He was attached to respirator and to another machine to clear wastes from his body, and was fed through a stomach tube.
The cost of his hospital stay is estimated to have exceeded $1 million.
While DeBakey is glad to be alive, how many people should we subject to the grueling treatment that he endured for the chance of a few more weeks or months of life?
Is it reasonable for 99 or perhaps 999 people to suffer for days or months, only to die from complications of surgery, because one person might live?
The number of potentially life-prolonging technologies offered by contemporary medicine is proliferating.
An implantable cardioverter defibrillator can jolt the heart back to normal if an irregular, life-threatening rhythm develops in patients who have had a heart attack.
The left ventricular assistance device is a partial artificial heart used in patients dying of heart failure.
Sophisticated biopharmaceuticals – drugs typically used in patients with extremely advanced cancers – are also multiplying.
Some of these therapies can provide additional months or even years of life to people in their prime.
But does their use make sense for the oldest old, especially when they are invasive and costly?
When the baby boomers begin turning 65 in the 2010, they will account for 13% of the population in the United States; by 2050, 21% will be over 65, and 5% will be over 85.
Medicare expenditure – the money spent by the government insurance program for the elderly – is projected to soar from 2.6% of GDP currently to 9.2% in 2050, with technology accounting for over 50% of the cost increase.
If we are to have the resources for public goods other than health care – say, education, national parks, and highways, not to mention medical care for children and the poor – we must put the brakes on technology.
In rich countries, this does not mean rationing care based on age alone.
But surely the place to start is to limit treatment that is burdensome and expensive, that has a miniscule chance of success, and that is proposed for people at the very end of life.
We need to accept human mortality and, as a matter of both practice and policy, concentrate on improving older people’s quality of life.
This means assuring compassionate nursing home care, coordinated management of chronic diseases, and competent palliative care as death approaches, rather than using ever more technology to try to eke out a little more life.
It also means systematically considering cost and life expectancy in decisions about reimbursing high-technology medical care.
Scarcity in an Age of Plenty
NEW YORK – Around the world, protests against soaring food and fuel prices are mounting.
The poor – and even the middle classes – are seeing their incomes squeezed as the global economy enters a slowdown.
Politicians want to respond to their constituents’ legitimate concerns, but do not know what to do.
In the United States, both Hillary Clinton and John McCain took the easy way out, and supported a suspension of the gasoline tax, at least for the summer.
Only Barack Obama stood his ground and rejected the proposal, which would have merely increased demand for gasoline – and thereby offset the effect of the tax cut.
But if Clinton and McCain were wrong, what should be done?
One cannot simply ignore the pleas of those who are suffering.
In the US, real middle-class incomes have not yet recovered to the levels attained before the last recession in 1991.
When George Bush was elected, he claimed that tax cuts for the rich would cure all the economy’s ailments.
The benefits of tax-cut-fueled growth would trickle down to all – policies that have become fashionable in Europe and elsewhere, but that have failed.
Tax cuts were supposed to stimulate savings, but household savings in the US have plummeted to zero.
They were supposed to stimulate employment, but labor force participation is lower than in the 1990’s. What growth did occur benefited only the few at the top.
Productivity grew, for a while, but it wasn’t because of Wall Street financial innovations.
The financial products being created didn’t manage risk; they enhanced risk.
They were so non-transparent and complex that neither Wall Street nor the ratings agencies could properly assess them.
Meanwhile, the financial sector failed to create products that would help ordinary people manage the risks they faced, including the risks of home ownership.
Millions of Americans will likely lose their homes and, with them, their life savings.
At the core of America’s success is technology, symbolized by Silicon Valley.
The irony is that the scientists making the advances that enable technology-based growth, and the venture capital firms that finance it were not the ones reaping the biggest rewards in the heyday of the real estate bubble.
These real investments are overshadowed by the games that have been absorbing most participants in financial markets.
The world needs to rethink the sources of growth.
If the foundations of economic growth lie in advances in science and technology, not in speculation in real estate or financial markets, then tax systems must be realigned.
Why should those who make their income by gambling in Wall Street’s casinos be taxed at a lower rate than those who earn their money in other ways.
Capital gains should be taxed at least at as high a rate as ordinary income.
(Such returns will, in any case, get a substantial benefit because the tax is not imposed until the gain is realized.)
In addition, there should be a windfall profits tax on oil and gas companies.
Given the huge increase in inequality in most countries, higher taxes for those who have done well – to help those who have lost ground from globalization and technological change – are in order, and could also ameliorate the strains imposed by soaring food and energy prices.
Countries, like the US, with food stamp programs clearly need to increase the value of these subsidies in order to ensure that nutrition standards do not deteriorate.
Those countries without such programs might think about instituting them.
Two factors set off today’s crisis: the Iraq war contributed to the run-up in oil prices, including through increased instability in the Middle East, the low cost provider of oil, while bio-fuels have meant that food and energy markets are increasingly integrated.
Although the focus on renewable energy sources is welcome, policies that distort food supply are not. America’s subsidies for corn-based ethanol contribute more to the coffers of ethanol producers than they do to curtailing global warming.
Huge agriculture subsidies in the US and the European Union have weakened agriculture in the developing world, where too little international assistance was directed at improving agriculture productivity.
Development aid for agriculture has fallen from a high of 17% of total aid to just 3% today, with some international donors demanding that fertilizer subsidies be eliminated, making it even more difficult for cash-strapped farmers to compete.
Rich countries must reduce, if not eliminate, distortional agriculture and energy policies, and help those in the poorest countries improve their capacity to produce food.
But this is just a start: we have treated our most precious resources – clean water and air – as if they were free.
Only new patterns of consumption and production – a new economic model – can address that most fundamental resource problem.
Scenes from the Drug War
The war on drugs takes many forms.
Colombia presents the militarized version, with specially trained battalions of soldiers skimming over jungles and mountainsides, spraying defoliants from helicopter gun-ships.
This “poisoned earth” policy kills coca plants, not peasant farmers.
So many of these cross into Ecuador to cultivate coca there.
Or you can take a poppy field and dig a large pond, fill it with fish, plant trees around it, buy some ducks and have your children watch them.
This will, supposedly, eradicate a field of poppies, provide local people with protein from fish and fowl, help reforestation and also bring employment to local children.
That, at least, was the idea behind a United States Agency for International Development (USAID)-funded poppy eradication program in Afghanistan.
As in Colombia, however, the results were fleeting.
Poppy, like coca, is an ideal cash crop for farmers with small areas of land and few resources.
It needs little care and brings a secure income.
Fighting poppy and/or coca production, on the other hand, is an ideal political stance for politicians.
It is easier to vote to spend millions of dollars to eradicate poppy/coca production in poor countries than confront addiction at home.
To see the folly of these endeavors, let me dissect a number of anti-poppy schemes undertaken in Afghanistan with which I was connected.
The promise of funds to fight poppy production galvanized the American Embassy in Islamabad into action.
The wife of the then American Ambassador personally threw her weight behind the program.
Impatient, she flew to Quetta to discuss with Mullah Nasim Aukhundzada a poppy substitution program.
Mullah Aukhundzada was the Amir of a big area of Helmand in Southwest Afghanistan, a major poppy producing area.
He promised to slash poppy production in return for tractors, seed, and other goodies.
Soon after, USAID funded its own big eradication program.
Although it attracted some experienced advisers, political pressure for fast results left little time to prepare the groundwork.
Instead of researching the focus area’s agricultural base, social structures, and local cultures the plan’s officers launched a program based on hearsay and feeble contacts. Wily and resourceful, Afghans were quick to take advantage of the ignorance, goodwill and craving for instant results of the program’s officers.
As well as happily receiving requests from individual social, political or military representatives within the target areas, the USAID-sponsored program invited NGOs to submit their own proposals.
These NGOs, who flourished during the fight against the Soviet occupation of Afghanistan, had seen their funding dry up after Russia’s withdrawal, so funds for fighting poppy seemed a gift from heaven.
Although they lacked experience in narcotics eradication, many NGOs based in Peshawar and Pakistan’s North West Frontier jumped at the opportunity to secure USAID money, proposing ill-considered programs.
Injections of American money promised to help pay office administration costs and keep NGO jobs alive.
One self�serving program was “Afghanaid,” a British organization that provided an area in Nangahar with several teams of bullocks.
After ploughing the land in preparation for winter wheat, however, the farmers slaughtered the cattle because they could not keep them fed throughout the winter, because no fodder was provided.
This program was quickly dubbed the “Kebabs for Poppy” scheme.
There are, of course, other amusing anecdotes.
What is not amusing is the end result: the poppy eradication program achieved the opposite to what was intended.
In a number of cases the program failed to deliver what it promised.
Mullah Aukhundzada became so angry and humiliated when the promised goodies failed to materialize, that he ordered all the former poppy producing areas, as well as surrounding areas, to double poppy production the following year.
In another instance a dashing young Afghan, who convinced the program’s administrators that his uncle (in reality a nonentity) represented many growers whom he could persuade to stop cultivating poppy, walked away with one hundred thousand dollars worth of aid.
Another bitter irony was that, in areas that received assistance, neighboring farmers who cultivated food crops soon switched to cultivating poppy because then, too, could then qualify for aid.
It is, of course, easier to mock the attempts of organizations such as USAID to tackle poppy production than provide a viable solution.
So long as political masters yearn for quick fixes and high profile results, however, such programs are likely to yield only short�term successes.
Indeed, helicopter gun-ships and expensive crop replacement programs may provide TV-friendly images that politicians love, but do nothing to lessen the demand for drugs.
Peasant farmers may, for a time, be bribed or intimidated (the Taliban executes Afghan poppy growers) into cultivating crops other than poppy or coca.
They may even be persuaded to dig a fishpond and to try and eek out a living from that.
But when the pond dries up or the substitute crop or job fails, so long as there are rich drug users in the West, they will return to cultivating poppy or coca if it provides a livelihood for their families.
Schadenfreude Capitalism
PRINCETON – The protracted financial and economic crisis discredited first the American model of capitalism, and then the European version.
Now it looks as if the Asian approach may take some knocks, too.
Coming after the failure of state socialism, does this mean that there is no correct way of organizing an economy?
In the aftermath of the subprime crisis and the collapse of Lehman Brothers, fingers were pointed at the United States as an example of how badly things could go wrong.
The American model had supposedly failed, its reputation weakened first by the Iraq invasion, and then by the financial crisis.
Anyone who dreamed of the American way of life now looked stupid.
Immediately after Lehman Brothers’ collapse, German Finance Minister Peer Steinbrück put this diagnosis as a challenge not only to the US, but also to other countries – notably the United Kingdom – that had “Americanized” their financial system.
The problem, Steinbrück argued, lay in over-reliance on highly complex financial instruments, propagated by globalized American institutions: “The financial crisis is above all an American problem.
The other G-7 financial ministers in continental Europe share this opinion.”
Criticism of America did not stop there.
Steinbrück’s successor, Wolfgang Schäuble, persisted in the same tone, attacking “clueless” American monetary policy, which was supposedly designed only to feed the American financial monster.
But such criticism ignores the problems faced by banks that did not use or deal in complex financial products.
Bank regulators had long insisted that the safest possible financial instrument was a bond issued by a rich industrial country.
Then came the eurozone’s sovereign-debt crisis, with its roots in lax government finance in some (mostly southern European) countries.
Critics now had a new focus.
Naturally, many conservative Americans were delighted by the imminent failure of what they saw as Europe’s tax-and-spend model, with its addiction to a costly and inefficient welfare state.
They were not the only critics.
The chairman of China Investment Corporation, Jin Liquin, commented skeptically on a proposed Chinese bailout of Europe, which he called “a worn-out welfare society” with “outdated” welfare laws that induce dependence and sloth.
Criticism of large European transfer payments may have some justification, say, insofar as French, Greek, and Italian civil servants could indeed retire young.
And restrictive labor laws have indeed discouraged many firms from hiring new workers.
But such criticism captures only one small part of Europe’s difficulties.
The fiscal problems of Greece and Spain were also the result of spending a great deal on high-technology and high-prestige projects: facilities for the Olympic Games, new airport buildings, high-speed train links.
And Spain and Ireland before the crisis did not have a fiscal problem, owing to the rapid economic growth produced by a real-estate boom that seemed to promise a new era of economic miracles.
One of the most widely used Chinese terms of recent years is 幸灾乐祸 (xìng zāi lè huò), best translated as “schadenfreude”: somebody else – some other society – tripped on an enormous political banana peel.
Asian critics looking at America and Europe could easily convince themselves that the Western model of democratic capitalism was collapsing.
But haven’t similar capital investments and soaring property prices also been an increasingly important part of China’s transformation since the 1990’s?
Chinese citizens are now not only frustrated with the high-speed trains’ increasingly obvious imperfections and inadequacies, but are also wondering whether their government has set the right priorities.
Schadenfreude comes in several flavors.
Russia’s Prime Minister Vladimir Putin and Argentina’s President Christina Kirchner liked to think that their versions of a controlled economy and society built in the aftermath of default on foreign debt offered a more viable alternative to cosmopolitan international capitalism.
Both now face major problems with disillusioned populations.
In short, the world’s major economies share many more vulnerabilities than is commonly supposed.
A response to global challenges based simply on schadenfreude may promote a short-term sense of well-being, as people often like to think how lucky they are to have escaped a mess that originated elsewhere.
But soon they encounter their own banana peel; indeed, today’s global economy is a riot of slipping economic models.
And tomorrow the cacophony will be even louder.
So, is there any absolutely sure way of organizing economic life?
If the quest is for a way of securing perpetual security or dominance, then the answer is “no.”
Underpinning comparisons of different models is the wish to find an absolutely secure way of generating wealth and prosperity.
In a market economy, however, competition rapidly leads to emulation, and high profits associated with an original innovation turn out to be transitory.
From a longer-term perspective, there are only temporary surges of relative wealth, just as there are only temporary surges of apparent success in a particular way of doing business.
During the Industrial Revolution in Western Europe in the late eighteenth and early nineteenth centuries, the pioneers and innovators in textiles, steel, and railroads were not, on the whole, rewarded with immense riches: their profits were competed away.
The late nineteenth and the twentieth century produced a different sort of growth, because public policies and resources could be used to protect accumulated wealth from the otherwise inevitable erosion stemming from competitive pressure.
Behind the idea of a particular model of growth was the belief that a sensibly ordered state could somehow capture and eternalize the fruits of economic success.
Like it or not, states cannot organize themselves in that way any more than individuals can.
Schengen and European Security
BRUSSELS – Another key European project is under threat.
Some two decades after border controls were first abolished under the Schengen Agreement – which now includes 26 countries, including four non-members of the European Union – Germany has reinstated controls at its border with Austria, and France at its border with Belgium.
The controls are meant to be temporary, and the vast majority of other borders remain open.
But more openness does not seem to be the direction in which Europe is headed – and that is a serious problem.
The shift away from a “Europe without borders,” instigated by images of refugees walking across internal frontiers, was fortified by the news that most of those who carried out last month’s Paris attacks came from Belgium, and that some may have entered the EU via the Balkans, posing as refugees.
The underlying assumption – reinforced by many European politicians, especially interior ministers – is that there is a tradeoff between security and openness.
This is far from accurate.
In fact, the reinstatement of border controls seems to be an example of “security theater” – a policy intended to make the public feel like something is being done.
But, far from making Europeans safer, rolling back Schengen would actually hinder the fight against terrorism, because countries would be forced to devote valuable resources – thousands of police officers, if the agreement were to be abolished altogether – to checking documents at borders.
Those resources would no longer contribute directly to investigations into terrorist activities.
And those investigations need all the help they can get.
After all, the objective – to identify a few terrorists hiding among millions of law-abiding citizens, before they commit a violent act – is the equivalent of finding a needle in a haystack.
The recognition of the flawed logic behind reinstating border controls is probably why police officials have remained guarded in discussing the issue.
It should be remembered that when five countries – Belgium, France, Germany, Luxembourg, and the Netherlands – agreed in 1985 (in the village of Schengen, Luxembourg) to abolish border controls, they did not do so on a whim or because some politicians had a lofty vision.
However symbolic the agreement may have been, symbolism wasn’t the point.
Participating countries’ security establishments had recognized that stopping people at the internal borders did not help them counter major threats, such as organized crime and drug smuggling.
Truck drivers, who protested against long waits at customs stations, helped spur the effort.
But it took another decade of hard-nosed, detailed negotiations, entailing efforts to strengthen the EU’s external borders, to reach the point, in 1995, where internal border controls could actually be lifted.
The subsequent decision by non-EU countries like Switzerland to join the Schengen Area highlights the massive benefits, including for security, of maintaining open borders.
Rather than attempt to control the masses of tourists and business travelers entering the country from all sides – essentially an exercise in futility in Switzerland – the country decided to focus police resources specifically on security threats.
By joining Schengen, the Swiss police also gained access to the Schengen Information System and other important European databases on criminal suspects, stolen cars, and more.
Of course, there are flaws in the Schengen system.
Like the eurozone, the area began with only a small group of member countries, all of which had a similar outlook and capacity to implement common rules, but soon welcomed many others, some of which, it later became apparent, could not uphold agreed standards.
In the eurozone, imbalances in competitiveness and fiscal positions – which were not noted during the perfunctory check, based on formal criteria, that was conducted before approving new members – led to a protracted economic crisis.
In the Schengen Area, some countries’ inability to protect external borders adequately – owing to a lack of administrative capacity (especially true in Greece, but also, to some extent, Italy), together with geographic challenges like long and fractured coast lines – have undermined confidence in the face of the refugee crisis.
The eurozone survived its crisis for two key reasons. First, a common institution, the European Central Bank, had the power to act.
Second, member states relinquished some control over their banks, in order to boost the system’s overall stability.
If the Schengen Area is to endure, it needs to evolve in a similar direction, establishing a common institution responsible for securing external borders, while reinforcing the framework for internal security.
As it stands, defense of Schengen’s external borders is up to individual member states, including one, Greece, that is already facing a devastating economic crisis.
The only EU-wide operation aimed at helping police the external border, called Frontex, is severely limited in scope.
What the Schengen Area needs is a true European coast guard, with its own budget, ships, and personnel.
The Mediterranean can be expected to remain the main security challenge for some time, owing both to illegal immigration and its proximity to terrorist training grounds.
It thus makes sense for the new coast guard, backed by EU funds, to start there.
Even a small fraction of the EU budget would far exceed the available resources of any individual country.
Moreover, a European coast guard would provide a flexible tool with which to allocate resources as effectively as possible at any given moment.
After all, even if security threats remain concentrated in the same broad area, the most urgent challenges can shift considerably over time.
Last year, the problem was Southern Italy.
Today, it is the Aegean.
Tomorrow it might be somewhere else.
Europe needs to prepare for any eventuality.
It is not only possible to have both openness and security; the former can actually bolster the latter.
The Schengen Area’s members need to recognize that the security rationale for abolishing internal borders remains as compelling today as it was when they joined.
A Generation Held Hostage?
LONDON – On April 14, 2014, the Islamist terrorist group Boko Haram kidnapped 276 schoolgirls from the government secondary school in Nigeria’s northern town of Chibok.
Many escaped, but 219 remain in captivity, their whereabouts still unknown.
So deep is the despair and desolation felt by the girls’ parents that they are now considering whether to declare their daughters “presumed dead.”
According to local custom, funerals are held after loved ones have gone missing for four months, so that a period of mourning can give families some closure.
The girls have now been held captive for over five months.
No one can overstate the families’ unspeakable anguish from not knowing if their daughters have been raped, beaten, or trafficked out of Nigeria – or even if they are still alive.
The rest of the world may have moved on, but the girls’ parents wake each morning to a day of uncertainty and resignation.
Hope is fast evaporating.
It is difficult to see how the girls could be returned safely.
Launching a military rescue operation would be highly risky.
It is believed that the girls have been split into separate groups, so that any attempt to rescue one group would imperil the others. Despite talk of the government negotiating a deal with the captors, this option, too, would be fraught with danger.
Even if all of the girls eventually do come home, nothing will ever be the same again for them or their families.
For some, it is already too late.
Seven parents, despite being relatively young, have died of heart attacks or strokes, to which the intolerable strains of their situation may have contributed.
But amid the gloom, there is, perhaps, a glimmer of hope.
While we cannot know the future for the girls still in captivity, 15 of the 57 girls who escaped their kidnappers are now back at school, braving Boko Haram’s threats to return and abduct more students.
Hundreds of thousands of other girls in northern Nigeria are now too afraid to go to school, but these girls refuse to be cowed.
They are determined to make up for lost time.
This display of astonishing courage and determination to get an education should be an inspiration for us all in the fight against discrimination.
To support and encourage more girls to attend school in the face of abduction threats, the Nigerian Safe Schools Initiative has been launched to fund fortifications, telecommunications, and security measures aimed at allaying children’s fears about going to what should be a safe haven.
Sadly, the world’s response to pleas for donations has been slow and miserly.
This indifference mirrors similar reactions to other recent global appeals, such as for schooling for Syrian refugees in Lebanon.
The lack of concern seems particularly callous when one considers that the cost of educating a refugee child is no more than $8 a week.
There is simply not enough outrage – except from young people themselves.
They are more assertive in standing up for their right to education than the adults who are supposed to uphold that right.
It was particularly encouraging to see hundreds of global youth ambassadors from 100 countries descend on New York recently to demand the right to education and to support the Bring Back Our Girls campaign in Nigeria.
Bring Back Our Girls is the highest-profile campaign highlighting discrimination against girls.
But it is only part of a growing global movement by young people for civil rights.
The American civil-rights struggle that reached its height in the 1960s fought racial prejudice and discrimination at home and opposed colonialism abroad.
But there is a war of liberation that remains to be won worldwide – against child labor, child marriage, child trafficking, and discrimination against girls.
None of these evils will end until basic education is made compulsory for all – just as was done in the West more than a century ago.
The campaign for the 219 Nigerian girls – kidnapped simply because they wanted to go to school – is an iconic battle of this freedom struggle.
That struggle will be won some day.
No injustice can last forever.
Closing America’s Jobs Deficit
BERKELEY – The latest data on employment in the United States confirm that the American economy continues to recover from the Great Recession of 2008-2009, despite the slowdown engulfing the other G-20 nations.
Indeed, the pace of private-sector job growth has actually been much stronger during this recovery than during the recovery from the 2001 recession, and is comparable to the recovery from the 1990-1991 recession.
During the last 31 months, private-sector employment has increased by 5.2 million and the unemployment rate has now fallen below 8% for the first time in nearly four years.
But the unemployment rate is still more than two percentage points above the long-run value that most economists view as normal when the economy is operating near its potential.
Moreover, the number of long-term unemployed (27 weeks or longer) is about 40% of the total – thelowest share since 2009, but still far higher than in the previous recessions since the Great Depression, and about double what it would be in a normal labor market.
So the US labor market, while healing, is still far from where it should be.
That is partly because the job losses during the Great Recessionwere so large – twice as large as those of previous recessions since the Great Depression.
In terms of US economic history, what is abnormal is not the pace of private-sector job growth since the 2008-2009 recession ended, but rather the length and depth of the recession itself.
The downturn was a distinctive balance-sheet recession that caused sizeable declines in household wealth and necessitated painful deleveraging.
Consistent with recoveries from such recessions, demand has grown slowly, despite unprecedented fiscal and monetary stimulus, and that explains why the unemployment rate remains high.
Indeed, businesses cite uncertainty about the strength of demand, not uncertainty about regulation or taxation, as the main factor holding back job creation.
Public-sector demand has also contracted, owing to state and local governments’ deteriorating budgets.
As a result, public employment, which usually rises during recoveries, has been a major contributor to high unemployment during the last three years.
Despite a modest uptick in the last three months, government employment is 569,000 below its June 2009 level – a 30-year low as a share of the adult civilian population.
According to Hamilton Project calculations, if this share were at its 1980-2012 average of about 9.6% (it was actually higher between 2001 and 2007), there would be about 1.4 million more public-sector jobs and the unemployment rate would be around 6.9%.
Recent reports suggest that there are more than three million unfilled job openings, and about 49% of employers say that they have difficulty filling positions, especially in information technology, engineering, and skilled trades.
This has fanned speculation that a “mismatch” between workers’ skills and employers’ needs is a significant factor behind the elevatedunemployment rate.
But there is scant evidence to support this view.
The relationship between the unemployment rate and the job vacancy rate is consistent with patterns in previous recoveries.
Nor is there anything unusual about the size of mismatches between job openings and worker availability by industry.
Such industrial mismatches become larger during recessions, reflecting greater churn in the labor market as workers move between shrinking and expanding sectors; but they decline as the economy recovers.
This pattern also characterizes the current recovery, and recent data suggest that mismatches between the demand and supply of labor by industry are back to pre-recession levels.
But, as the US economy recovers, technological change is accelerating, fueling demand for more skills at a time when the workforce’s educational-attainment levels have plateaued.
This is the real skills gap that existed before the Great Recession, and it is getting worse over time.
The gap manifests itself in much higher unemployment rates for high-school educated workers than for college-educated workers at every stage of the business cycle.
The gap also shows up in significant – andrising – inequality between the earnings of high-school educated workers and those with a college degree or higher.
Earnings gains have been especially strong for those with tertiary degrees, while the real wages of high-school educated workers, especially men, have fallen sharply.
It is becoming increasingly difficult for workers with low levels of educational attainment to find high-paying jobs in any sector, even when the economy is operating near full capacity.
The US was the world leader in high school and college graduation rates for much of the twentieth century.
Today it ranks in the middle of the OECD countries.
A major factor behind that relative decline has been the US school system’s failure to ensure high-quality education for disadvantaged Americans, particularly children from poor, minority, and immigrant households.
According to the most recent census, about one-quarter of children under the age of six live in poverty.
They are less likely to have access to early-childhood programs that prepare them for school, and are more likely to attend schools that have high student/teacher ratios and that cannot attract and retain skilled teachers.
As a result of these and other problems, the average American secondary-school student receives inadequate preparation in core subjects such as writing, mathematics, and analytical reasoning, which in turn reduces college enrollment and completion rates.
The US experience is consistent with OECD evidence that students from countries with greater income inequality score lower on academic achievement tests.
And a recent study by McKinsey suggests that the gaps in educational opportunity and attainment by income impose the equivalent of a permanent recession of 3-5% of GDP on the US economy.
To address the skills gap, the US must boost the educational attainment of current and future workers.
That means investing more in education at all levels –&#160;in early-childhood education programs, elementary and secondary schools, community colleges, trade-school programs for specific jobs in specific sectors, and financial aid for higher education.
Above all, it means addressing the income disparities in educational opportunity and attainment.
Science and Africa\u0027s Salvation
Africa is a rich continent -- rich in bio-diversity, rich in mineral resources, rich in precious stones.
It is also rich in traditional knowledge, especially knowledge associated with indigenous and medicinal plants.
But Africa is also a poor continent.
With roughly 13% of the world's population, it enjoys only 1% of the world's wealth.
An estimated 50% of Africa's population lives in poverty and 40% suffer from malnutrition and hunger.
Two-thirds of Africa's land is degraded and more than half of its population lives without safe drinking water.
Malaria threatens many regions and HIV/AIDS has devastated the youth of many African nations, including Botswana, South Africa, Zimbabwe, where an estimated 25% of adults are afflicted with this deadly disease.
Stark disparities exist not only between Africa and the rest of the world, but between Africa and the rest of the developing world.
What accounts for this?
There are many political, socioeconomic and environmental factors.
Centuries of foreign colonialism followed by decades of homegrown authoritarian governments.
A chronic lack of transparency in economic transactions often accompanied by corruption.
Unsustainable use of natural resources. Marginal participation in the global economy.
But another, less visible or dramatic factor, is also at work: Africa's woeful shortcomings in science and technology.
By almost any measure, African science and technology is in a dismal state: in terms of the miniscule numbers and inadequate skills of its research and technical personnel; the poor and neglected quality of the infrastructure; the low level of instruction in primary and secondary schools; the miserly investments in universities and research institutes.
What should African nations do to advance their scientific and technological capabilities?
I suggest a five-step program:
First, develop, sustain, and utilize local capacities and leadership .
Developing scientific and technical capacity is less difficult than sustaining it, and sustaining it is less difficult than utilizing it.
Yet, the ultimate impact of science and technology depends on all three factors.
So African nations must invest in scientific and technological education and training.
Each nation must also develop strategies that offer scientists and technologists local employment opportunities.
To assure such sustainability, a vibrant educational system and an enduring, yet flexible, job base are needed.
Second, mobilize the best and most relevant science and technology in Africa and elsewhere to address critical social and economic problems .
The food, health and environmental issues faced by people in the least developed countries are of a different dimension (often of a different kind) to issues faced by people in rich countries.
Such differences help to explain why science and technology initiatives in developed countries rarely target Africa's most critical problems.
If Africa is to use science and technology to tackle its most pressing problems, it must develop its scientific and technical capacities.
Otherwise, it will be forever beholden to "second-hand" science that likely will never quite fit the continent's circumstances.
Of course, African nations should not turn their backs on research from beyond their borders.
Indeed, efforts should be made to strengthen poorly funded, yet relevant, programs within UN organizations, and African nations should continue to pursue cooperative projects with constituencies with special ties to the continent.
For example, sub-Saharan African scientists should seek to tap distant yet potentially strong ties with expatriate scientists of African origin working in rich countries.
Third, build the case for supporting indigenous science and technology .
This is a critical challenge for African scientists given competing demands on the continent's limited financial resources.
African scientists not only have an obligation but a self-serving interest to convince governments of the value of science and the need to support such endeavors.
Such efforts must include a willingness to engage the public in discussions on science-based issues, a desire to lobby the government for support, and, perhaps most importantly, a commitment to pursue research that focuses on critical social and economic problems -- that is, agendas that allow scientists to help their nations build stronger and more sustainable societies.
Fourth, share innovative and successful experiences in the development and application of science and technology .
Africa's successful experiences in the application of science and technology for development are all-too-often drowned out by dismal news across the continent.
Identification of genetic molecular markers for improved tea harvests in Kenya, ongoing efforts to examine alternative treatments for river blindness in Uganda, research on sickle-cell anemia in Ghana, and detailed assessments in Madagascar of the effectiveness of medicinal plants treating diabetes are examples of science-based initiatives that deserve recognition within the larger scientific community and among the public.
Fifth, strengthen and build African centers of excellence .
Despite the dismal condition of most scientific and technological institutions in Africa, pockets of strength exist. For example: the Immunology Laboratories in Cameroon, the African Centre for Meteorological Applications in Niger, and the African Centre for Technology in Senegal could be transformed into international centers of excellence.
Such a transformation would not only boost African science but could serve as models for developing of other institutions across the continent.
To address its problems and avoid being marginalized even more, Africa must devise long-term strategies that enable it to sustain economic growth and compete in a world where development is increasingly dominated by scientific knowledge and technical skills.
Science and technology cannot save Africa by themselves, but Africa without science and technology cannot be saved.
Science and the Meaning of Life
Most religions embrace and promote certain notions about the meaning of life, offering the faithful reasons why we and all other organisms exist.
Indeed, perhaps the fundamental definition of religious faith is the believe that life serves a (divine) purpose.
Science, however, has always given a resounding "no" to the question "Does life have a higher meaning?"
At least until now.
In a series of lectures and in a forthcoming book, science writers Eric Schneider and Dorion Sagan argue that even from a scientific perspective, life does serve a purpose, and thus does have a meaning that transcends the self.
They arrived at this conclusion when trying to reconcile a contradiction that has long puzzled those who study both biology and physics.
Living organisms obviously embody arrangements of matter into complex structures.
They transform chemicals and, in an orderly fashion, transport and store them in purposeful ways.
Above the level of individual organisms, they form societies and ecosystems.
All of us are familiar with these fundamental biological notions, and we are all part of these processes.
Order seems to be the name of the biological game, and evolution leads to more complex organisms and more organized structures.
This is, of course, at odds with one of the fundamental principles of physics: the second law of thermodynamics, which holds that entropy - the degradation of all matter and energy in the universe to an ultimate state of inert uniformity - increases as a result of each and every process.
The more the world develops the more disorder there will be.
Physics even accepts the idea that entropy defines the direction of time.
In the end everything will be broken down and randomly distributed.
How do Schneider and Sagan reconcile the contradiction between what appears true of life - that it organizes matter into increasingly complex creatures and structures - and the notion that disorder should increase and order should be lost?
Equally important, how can science see any meaning of life in the reconciliation of that apparent contradiction?
The bottom line is that the second law of thermodynamics rules and that the existence of life helps increase entropy.
In other words, life promotes disorder.
Some might think that this could be true only if the logical end of evolution and intelligent life were to be a nuclear explosion that pulverized Earth.
But that is not what Schneider and Sagan mean.
Instead, they make a distinction between matter and energy and say that matter organized in structures disseminates energy gradients faster than randomly distributed matter.
As one example, they consider a phenomenon of which beer drinkers have long been aware.
If you want to empty a bottle of water (or beer) and turn it upside down, the water will come out in uneven glugs.
If you spin the bottle and create an eddy inside it, the water will flow out much faster and more smoothly.
The eddy in the bottle is a structure in the water.
Water running down is matter losing its potential energy.
The structure speeds up the dissemination of the energy gradient.
Similarly, on a hot day, the air in a forest is cooler than over adjacent bare lands, thanks to evaporation and transpiration in the trees.
The energy gradient, in this case that of heat, is disseminated more effectively by the structure of the forest and the life within it.
The more complex the structure the more effective is the energy dissemination.
Populations are better in this respect than single individuals; ecosystems even more so, and most effective of all - so far - are human high-tech societies.
Thus, goes the argument, the second law of thermodynamics is not contrary to the existence of life; rather, it is the cause of life.
That law drives evolution to higher levels of complexity and to more sophisticated societies and technologies for the sole purpose of disseminating energy gradients.
So life, at long last, has a higher meaning in the eyes of science - even if serving the second law of thermodynamics is not exactly what the religiously faithful had in mind.
Science under Siege
Three centuries after the Enlightenment first linked human freedom with the progress of science and technology, both are under growing attack--despite their spectacular triumphs.
Fundamental discoveries about nature expanded our creative power over the structure and transformations of the inanimate and living world.
Breakthroughs in physics and chemistry enabled the extraordinary development of electronics and materials that dramatically shortened time and distance, ushering in an information age of fast, secure communication and transport.
Advances in biological sciences and technologies, meanwhile, are increasing our ability to control disease and aging, boost food production, and manage pollution.
In short, scientific research--and its implementation through new technologies--made possible new freedoms, new ways of life, and new means of practical human action.
But more and more we hear that our ability and willingness to manipulate natural processes is itself unnatural --an indictment that reflects our ambivalent relationship with nature.
We are, as the French writer Jean Bruller-Vercors put it, animaux dénaturés , or "denatured animals," living in nature but simultaneously able to observe, investigate, and question it from a distance, conscious of our separateness.
This ambivalence gives rise to a diffuse anxiety: there are certain things that should not be touched, basic mysteries in nature that we tamper with at the risk of unleashing uncontrollable forces.
The birth of electricity and automotive power was accompanied by this apprehension, and it has grown stronger the further science has penetrated the natural world, unlocking the secrets of the atom and of our own genetic makeup.
Indeed, fear of our own awesome power explains the appeal of environmentalism, with its vision--particularly in its fundamentalist, quasi-religious variant, so-called "deep ecology"--of an intrinsically "pure" Nature whose harmony is supposedly disrupted by man.
But nature is entirely indifferent to man; it has no moral standing and it contains no moral code.
Nature just is .
My own field, chemistry, plays a primordial role in our ability to act upon natural phenomena, to modify them, and to invent new expressions of them.
A natural substance, however, has no reason to be less toxic than a synthetic one.
In fact, synthetic compounds may be safer than natural ones.
For example, genetic engineering has eliminated the prion which causes Creutzfeld-Jakob disease, from naturally occurring human growth hormone, and has enabled blood transfusion without risk of HIV infection.
Let us be clear: science is the result of evolution, which has led to a being--man--that has progressively become able to take charge of itself and its surroundings.
We humans will inevitably end up controlling our own evolution, and, because our power is emergent from nature we will make use of this acquired capacity sooner or later, for better or worse.
Man modifying man (and man's environment) is contained in man.
What of the "sanctity" of life?
We humans embrace the axiom that life is sacred in order to preserve what allowed that axiom to be formulated in the first place: consciousness and thought.
No natural law commands that life respect itself--and, indeed, it does not; living species feed on each other.
The basic value that life is sacred rests only on our ability to transcend and question our own making, even if this foundation is necessarily a product of life.
It is thus our fate to continue the quest for knowledge.
It is also our obligation.
We do not have the right to decide that we have reached a sufficient level of scientific progress, because we cannot consult future generations--and we are fortunate that our predecessors could not consult us.
Science and technology, after all, are not responsible for the careless and wasteful behavior that environmentalists rightly condemn.
On the contrary, the scientific spirit offers our only hope of developing new processes and products that minimize the risks attendant on human progress, while technology transfers promise to minimize poor countries' reliance on natural resource-intensive industries.
Providing a "development shortcut" that leads directly to photovoltaic or nuclear electricity generators, not coal-fired power stations, high-performance materials, not steel mills, and cellular telephone networks, not expensive fixed-line systems, would clearly benefit us all.
Zero risk does not exist.
Risk appears with life.
Zero risk is a dead world.
So risk is inherent in every decision we make.
Attempting to eliminate risk by ruling certain areas of research off limits would stifle human freedom as well.
We must distinguish between the dangerous and the merely disagreeable.
A glass that is half-full to some people, is half-empty to others; but from the half-full half, you can drink, whereas with the empty half you cannot do much (except try to fill it)!
Unfortunately, it is not always possible to assess risks accurately, and science alone cannot provide all the answers.
Decisions concerning the uses of scientific discoveries are typically based on criteria that have nothing in common with science.
A factory may function without emitting disagreeable fumes that are not dangerous, but only if we are prepared to pay for it.
Of course, technological choices entail more than economic criteria.
Installing a solar-powered water pump in a developing country may destroy a traditional social structure based on control of the water supply.
Similarly, sexual cohabitation before fertilization may, according to recent research, generate an immunological response in women that markedly decreases health risks linked to pregnancy, such as hypertension and convulsive eclampsia.
Such findings--like the development of safe, effective contraceptive methods--clearly threaten long-held religious proscriptions.
The scientist's first responsibility is to the pursuit of new knowledge, not to any narrow vision of society.
Ethics and rules of justice change and have to adapt, as they have since the Enlightenment's ideals began breaking down the barriers of superstition, obscurantism, and demagogy that limited the realm of human freedom.
History cannot be rewritten, and we must resist the irrational urge--whether it originates from the abyss of our ignorance or from the specter of our crises--to stop it in its tracks.
We must walk the path to the tree of knowledge if we are to control our destiny.
Science Under Threat
PARIS: A century ago, pondering what the future might bring, Anatole France said that “my dream is to read the books of schoolboys as they shall be in the year 2000.”
As the millennium passes into history, perhaps we should ask if our schoolchildren are being inspired in the way Anatole France once hoped.
The 20th century saw great technical revolutions, such as television, air transport, and rocketry.
At a deeper level, two conceptual revolutions also occurred.
From atoms to stars, we now have a precise, operative picture of nearly all physical phenomena.
The only major gap in our knowledge involves the origins of the universe.
The second conceptual revolution was started by molecular biology.
Here too we now have a precise, operative picture of all life processes, from bacteria to humanity.
Again, the only major gap concerns origins: the notion of a "primordial soup" in the oceans in which nucleotides and peptides somehow organized themselves into living organisms is not fully convincing.
Today’s schoolbooks recount these achievements with pride.
But something important for scientific advance is missing in our children’s lives.
A sense of wonder about future scientific progress is lacking; a growing cultural disinterest in science is taking hold.
Moreover, increasing legal roadblocks to scientific progress are stifling inventiveness everywhere.
Anatole France lived in an age of great inventors like Gustave Eiffel and Thomas Edison.
He could discern the looming industrial explosion of the 20th century, when a few major companies drove technical innovation and made electricity, chemistry, transport, communications, and computers key parts of everyday life.
But these same companies, which shaped much of the 20th century, are now under myopic pressure from their shareholders to abandon long-term research in favor of short-term profits.
Look at the oil companies: although the world faces growing uncertainty about new sources of energy, these companies, which have both the intellectual and material means to prepare for the next century, have more or less abandoned their role as providers of a new vision.
While the spirit of waning interest in basic science, which characterizes today’s large industrial groups, dominates in Europe, a brilliant American countermeasure has been the rise of small “high tech” companies that engage in basic research and long-term reflection.
As a result, America offers better conditions for scientists than Europe, and the cost of this to Europe is high.
In the last five years, France alone lost some of its best computer scientists to the United States.
But not all is well in America either.
Indifference – indeed, sometimes outright hostility – to scientific progress exists there as well.
One institution that blunts the dynamism of Silicon Valley and the high tech companies is the legal system.
We had a taste of the American courts at my small place at the Ecole de Physique et Chimie in Paris, when one of our teams invented a clever system to monitor the heartbeat of a new-born baby.
A special bed sheet monitored the vital signs, without any instrument attached to the body.
The device was of potentially great benefit to babies born in families with a history of sudden infant death.
Manufacture in the US, however, was blocked because of the threat of liability.
If just one child died on this sheet, no matter the cause, the company producing the sheet would likely be held liable.
So the sheet was not produced, and thousands of families are forced to continue using old, painful monitoring systems.
Legal roadblocks are spreading to other countries, but they are not alone in inhibiting science.
Another American invention – one increasingly exported to Europe – is the advocacy of so- called “political correctness” which views much of science as “a rape of Nature.”
Often reduced to anti-scientific propaganda, these ideas are diffused from non-scientific university departments to students, high school teachers, and ultimately to young children.
Everywhere you look, the excitement about scientific advance that gripped Anatole France is being replaced by ignorant fear and incipient censorship of scientific thinking.
The young are particularly vulnerable to this.
In the popular mind, science is blamed for deadly weapons and environmental pollution, even if the decisions to produce weapons are political, not scientific in nature, and the main reason for pollution is the profit motive, not scientific progress.
Indeed, politically correct critics forget that most progress in the fight against pollution comes from scientists, and that science created the means to monitor arms control agreements.
It is no wonder, therefore, that locally trained young people in America, and to a large extent in Europe, tend to avoid university science departments, with new students largely recruited from among recent immigrants.
In the face of legal impediments, contempt, and indifference, what will science do in the 21st century?
My hope is that the coming years will witness, among other things, an explosion in bio-engineering, with new forms of drug delivery, artificial organs, and so on.
None of these advances will occur, however, without a change in attitude.
In place of today’s indifference and sometimes outright hostility, we must create conditions that will nurture scientific research and restore the central position of science in the culture of Western societies.
Cutting down legal impediments and changing attitudes won’t happen overnight.
Primo Levi, the Italian chemist who escaped death in the Nazi camps to become a writer, wrote movingly about his life as a chemist and about “the strong and bitter flavor of our trade, which is nothing more than one special case, a more bold version, of the trade of life.”
If the spirit of scientific exploration and creativity is to be renewed in our time, we must create educational systems and schoolbooks informed by the spirit of Primo Levi.
Scientific Capitalism
PRINCETON – To understand how we got ourselves into our current economic mess, complicated explanations about derivatives, regulatory failure, and so on are beside the point.
The best answer is both ancient and simple: hubris.
In modern mathematical economics, many people in the rich world decided that we had finally devised a set of scientific tools that could really predict human behavior.
These tools were supposed to be as reliable as those used in engineering. Having ushered scientific socialism into its grave at the Cold War’s end, we quickly found ourselves embracing another Science of Man.
Our new beliefs did not stem from some new experiment or unexpected observation, the way a real scientific paradigm shift does.
Economists do not typically conduct experiments with real money.
When they do, as when the Nobel laureate Myron Scholes ran the hedge fund Long Term Capital Management (LTCM), the dangers often outweigh the benefits (a lesson we still don’t seem to have learned.)
And, since almost every observation that economists make turns out in a way that wasn’t predicted, no unexpected observation could ever actually change an economic paradigm.
What really produced the change in economics that led to disaster was the simple fact that you could now get away with saying certain kinds of things in public.
Some of us honestly thought that history was over.
And after all, you can’t have a final, utopian society without having a final, scientific theory of human behavior, together with some mad scientists or philosophes to preside over the whole thing.
The problem is that, no matter how “scientifically” these new beliefs were formulated, they are still false.
Capitalism is, among other things, a struggle between individual people over the control of scarce resources.
Like boxing and poker, it is a soft, restrained, private form of warfare.
Military strategists have known for centuries that there is, and can be, no final science of war.
In a real struggle over things that actually matter, we must assume that we are up against thinking opponents, who may understand some things about us that we don’t know about ourselves.
For example, if profit can be made by understanding the model behind a policy, as is surely the case with the models used by the United States Federal Reserve, sooner or later so much capital will seek that profit that the tail will begin to wag the dog, as has been happening lately.
The truth is that such models are most useful when they are little known or not universally believed.
They progressively lose their predictive value as we all accept and begin to bet on them.
But there can be no real predictive science for a system that may change its behavior if we publish a model of it.
Markets might once have been fairly efficient, before we had the theory of efficient markets.
If investing is simply a matter of allocating money to an index, however, liquidity becomes the sole determinant of prices, and valuations go haywire.
When a substantial fraction of market participants are simply buying the index, the market’s role in ensuring good corporate governance also disappears.
The formation of large bubbles in recent decades was partly a consequence of the commonness and incorrigibility of the belief that no such thing could ever happen.
Our collective belief that markets are efficient helped make them wildly inefficient.
Despite this, over the course of the last 20 years, economists began to act as if we thought we could genuinely predict the economic future.
If the universe didn’t oblige, it wasn’t because our models were wrong; “market failure” was to blame.
It is not clear how we could know that markets were failing whenever they fell significantly, but believed that we had no business second-guessing them when they climbed.
Nor is it clear how we all knew that LTCM’s failure or the post-September 11 malaise posed grave risks to the system, but could seriously doubt that the dot-com craze was a bubble.
We repeatedly rescued bubbles, and never deliberately burst them.
As a result, our financial markets became a pyramid scheme. Moral hazard, we thought, could safely be ignored, because it is “moral,” which, as every true scientist knows, just means “imaginary.”
But a market is not a rocket, economists are not rocket scientists, and moral hazard is, in human affairs, the risk that matters most.
The false belief that we can collectively see the future using science has led us all to make various binding promises about things in that future that no human being can possibly guarantee.
A promise of something that we should know cannot be guaranteed is also known as a lie.
That vast tissue of lies is now tearing itself apart.
Governments think we can stop this process by throwing money at it, but there are many reasons to believe that this won’t work.
The banking system is probably already past saving – many institutions simply aren’t banks anymore, but vast experiments that didn’t work out as predicted.
We could easily be “stimulating” and “rescuing” the economy for a rather long time, in ways that only delay the needed adjustment, before we are finally forced to allow the required creative destruction to occur.
But that is not the real problem.
The real problem is the pseudoscientific ideology behind today’s crisis.
A final science of man has no room for the unplanned and unpredictable recovery that is the only kind a capitalist economy can have after a crisis of this size.
If we cleave to the false security of a supposed science that isn’t working, and forget about the philosophy behind it, ideas like personal responsibility and the right to fail, our leaders will very scientifically give us no recovery at all.
Building a Caring Economy
DAVOS – Today’s mainstream economic models are based on two fundamental assumptions: first, humans are essentially selfish actors who act rationally to advance their own utility – so-called homo economicus; but, second, as Adam Smith’s metaphor of an “invisible hand” was intended to suggest, self-regarding behavior can inadvertently advance the common good.
Both assumptions are patently false.
In order to address pressing global problems like climate change and inequality, the predominant economic models must be rethought, incorporating other motivational systems that can induce different human behaviors.
Such realistic models, based on empirical research in psychology and the neurosciences, would allow societies to cultivate their sense of compassion and build a new kind of “caring economics” that reflects more fully what it is to be human.
Neuroscientific studies have shown that humans can be motivated by care and systems of affiliation just as easily as they can be by power and achievement or consumption and desire.
After all, we have evolved to be able to form stable relationships, build trust, and care for children, all of which requires a capacity for compassion and empathy.
Once we recognize that these caring motivational systems are common to all humans – indeed, most are shared with other animals – the world begins to look very different.
It is important, however, to distinguish between basic empathic responses and a more universal capacity for compassion.
Empathy alone does not necessarily prompt pro-social behavior; empathizing with the suffering of another may not drive you to help that person.
In fact, empathy can result in distress, which may even lead to withdrawal or burnout.
Compassion, by contrast, is concern for another person that is linked to a strong motivation to alleviate their suffering.
If, say, a mother sees her child crying after a fall, she may first empathize with the child, feeling its pain and sadness.
But, rather than succumbing to feelings of distress, she will take the child in her arms to soothe and comfort it.
Both empathy and compassion seem to come naturally to humans.
But both responses are fragile, and can be quelled or reversed by a large number of factors – including the degree to which we identify with the person who is suffering.
Humans tend to find it easy to empathize with and care about members of their “in-group” – people with whom they share features, whether real or socially constructed, like race, gender, age, or religious affiliation.
Empathy and care toward out-group members does not come quite as easily.
Such universal or global compassion – caring about people who are very different from us – probably requires the involvement of higher cognitive functions, and thus may be unique to humans.
It may also require some training.
After all, living in a world that assumes we are homo economicus can encourage selfish habits.
Fortunately, research suggests that such habits can be broken.
The largest such study is the recently completed ReSource project, in which my colleagues and I subjected almost 300 people, over 11 months, to an intense mental-training program, developed by a team of experienced mediation teachers, scientists, and psychotherapists.
The goal was to cultivate a broad range of mental capacities and social skills, including attention, mindfulness, self-awareness, perspective-taking on others, empathy, compassion, and the ability to cope with difficult emotions like anger or stress.
Progress was assessed by measuring changes in participants’ brains, hormones, health, behavior, and subjective sense of wellbeing.
The project’s preliminary results reinforce a key finding of previous, smaller studies: just as we can strengthen and transform a muscle through physical exercise, we can develop our brain and behavioral capacities – from attention and emotional regulation to trust and donation behavior – through regular mental training.
Of course, mental exercises must be honed to develop particular skills and behaviors; mindfulness practice alone is not adequate to improve, say, socio-cognitive skills.
And lasting changes occur only after a prolonged period of regular training.
But, with the right approach, it may well be possible to foster the kind of altruistic and pro-social behaviors that are needed to improve global cooperation.
On the basis of these findings and those from other psychological, neuroscientific, and economic studies, my colleagues and I are now working with the president of the Kiel Institute for the World Economy, Dennis Snower, to formulate new motivation-based computational models of economic decision-making.
These models will enable us to make clear, testable predictions about expected monetary-exchange behavior in an economic context, including in addressing common-good problems.
In fact, several of these experiments are already underway.
The secular, ethical mental-training exercises used in the ReSource project could be applied in businesses, political institutions, schools (for both teachers and students), and health-care settings – in short, in all areas where people experience high levels of stress and related phenomena.
Young children, in particular, could benefit considerably from such training programs, which could enable them to use mental skills and compassion to regulate stress and emotions.
Policymakers should take the lead in promoting this science-based approach to learning and working, such as by redesigning institutions to emphasize collaboration.
Several governments – including that of the United Kingdom – have developed so-called “nudge units,” which seek to encourage people to make better choices for themselves and society by providing subtle hints, cues, and other suggestions.
A lack of compassion is arguably the cause of many of humankind’s most devastating failures.
Our success in tackling the enormous challenges we face will depend not only on our willingness to work actively and cooperatively to advance the common good, but also on our ability to foster the attributes needed to do so.
Crowdfunding or Crowdphishing?
NEW HAVEN – If one were seeking a perfect example of why it’s so hard to make financial markets work well, one would not have to look further than the difficulties and controversies surrounding crowdfunding in the United States.
After deliberating for more than three years, the US Securities and Exchange Commission (SEC) last month issued a final rule that will allow true crowdfunding; and yet the new regulatory framework still falls far short of what’s needed to boost crowdfunding worldwide.
True crowdfunding, or equity crowdfunding, refers to the activities of online platforms that sell shares of startup companies directly to large numbers of small investors, bypassing traditional venture capital or investment banking.
The concept is analogous to that of online auctions.
But, unlike allowing individuals to offer their furniture to the whole world, crowdfunding is supposed to raise money fast, from those in the know, for businesses that bankers might not understand.
It certainly sounds exciting.
Regulators outside the US have often been more accommodating, and some crowdfunding platforms are already operating.
For example, Symbid in the Netherlands and Crowdcube in the United Kingdom were both founded in 2011.
But crowdfunding is still not a major factor in world markets.
And that will not change without adequate – and innovative – financial regulation.
There is a conceptual barrier to understanding the problems that officials might face in regulating crowdfunding, owing to the failure of prevailing economic models to account for the manipulative and devious aspects of human behavior.
Economists typically describe people’s rational, honest side, but ignore their duplicity.
As a result, they underestimate the downside risks of crowdsourcing.
The risks consist not so much in outright fraud – big lies that would be jailable offenses – as in more subtle forms of deception.
It may well be open deception, with promoters steering gullible amateurs around a business plan’s fatal flaw, or disclosing it only grudgingly or in the fine print.
It is not that people are completely dishonest.
On the contrary, they typically pride themselves on integrity.
It’s just that their integrity suffers little lapses here and there – and not always so little in aggregate.
In my new book with George Akerlof, Phishing for Phools: The Economics of Manipulation and Deception, we argue that unscrupulous behavior has to be factored into economic theory in a fundamental way.
The economic equilibrium we live should be regarded, above all, as a phishing equilibrium, in which small-time individual dishonesty can morph into something more systemically important when it is carried on by business organizations under intense competitive pressure.
Yes, competition rewards the sharp and hardworking.
But it also often compels them to keep the frontiers of subtle deception in view.
The SEC’s new rules for crowdfunding are complex, because they address a complicated problem.
The concept underlying crowdfunding is the dispersal of information across millions of people.
Most people, even the cleverest, cannot grasp the next breakthrough business opportunity.
Those who can are dispersed.
The economist Friedrich Hayek put it well in 1945:
“[T]here is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of particular circumstances and place.
It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.”
The problem is that the promise of genuine “unique information” comes with the reality of vulnerability to deception.
That’s why channeling dispersed knowledge into new businesses requires a regulatory framework that favors the genuinely enlightened and honest.
Unfortunately, the SEC’s new crowdsourcing rules don’t go as far as they should.
The 2012 US legislation that tasked the SEC with rulemaking for crowdfunding platforms specified that no startup can use them to raise more than $1 million a year.
This is practically worthless in terms of limiting the scope for deception.
In fact, including this provision was a serious mistake, and needs to be corrected with new legislation.
A million dollars is not enough, and the cap will tend to limit crowdfunding to small ideas.
Some of the SEC rules do work against deception.
Notably, crowdfunding platforms must provide communication channels “through which investors can communicate with one another and with representatives of the issuer about offerings made available.”
That is a good rule, fundamental to the entire idea of crowdfunding.
But the SEC could do more than just avow its belief in “uncensored and transparent crowd discussions.”
It should require that the intermediary sponsoring a platform install a surveillance system to guard against interference and shills offering phony comments.
The SEC and other regulators could go even further.
They could nudge intermediaries to create a platform that summarizes commenters’ record and reputation.
Indeed, why not pay commenters who accumulate “likes” or whose comments on issuers turn out to be valuable in light of evidence of those enterprises’ subsequent success?
For the financial system as a whole, success ultimately depends on trust and confidence, both of which, like suspicion and fear, are highly contagious.
That’s why, if crowdfunding is to reach its global potential, crowdphishing must be prevented from the outset.
Regulators need to get the rules right (and it would help if they hurried up about it).
Iraqi Hope Dies Last
BAGHDAD – Ten years have passed since Saddam Hussein was removed from power, following more than three decades of tyrannical rule.
The dream of Iraqis after Saddam’s fall was to build a new, prosperous, and democratic Iraq.
A country at peace with itself and its neighbors, with a constitution upholding basic human rights and the rule of law, was the desire of almost everyone.
But the United States and its allies, lacking a coherent vision of Iraq’s future, much less a sound policy for the post-Saddam era, declared Iraq an occupied country, with a US-appointed administrator to run the country, who soon decided to dismantle all existing security, military, and media institutions.
He also introduced a de-Baathification law, which evicted members of the Baath Party from official positions without legal recourse, paving the way for sectarianism and, ultimately, communal violence and unrest.
These unfortunate – and ultimately disastrous – events established an unstable foundation in a strategic country at the core of a highly troubled yet vital region of the world.
As Iraq moved through progressive phases of mismanagement over the subsequent ten agonizing years, the country fractured, shattering the dreams of Iraqis who saw their beloved homeland once again sliding toward authoritarianism, with almost daily violations of the constitution.
The world watched, seemingly helpless to do anything.
Iraq’s last general election, in 2010, brought hope of recovery in the form of a power-sharing agreement among Sunni, Shia, and Kurds, which was supposed to ensure that the country did not revert to dictatorship.
Iraqiya, which I lead, was the largest electoral bloc to emerge from that vote.
But, despite our status, we agreed to give up the leadership position afforded by the Constitution in the belief that power-sharing and respect for the rights of all Iraqis is the only formula for governing the country democratically.
These hopes, however, soon vanished, as Iraq’s two-term prime minister, Nouri al-Maliki, subsequently reneged on the agreement.
Today, the very human rights that were guaranteed by the constitution are being violated, with a politicized judiciary routinely abused and manipulated in order to justify the prime minister’s actions.
Instead of keeping the Maliki government in check, the courts facilitate its quest for ever-greater power.
Making matters worse for ordinary Iraqis, public services have deteriorated to a dismal level, and unemployment is rising sharply, despite public expenditure in excess of $500 billion over the seven years of Maliki’s rule.
Sectarianism and racism have become a regular feature of the political landscape.
Corruption is rampant, and Baghdad is now considered one of the world’s worst places to live.
If Iraq continues along its current disastrous path, mayhem and civil war will be the inevitable outcome, with dire consequences for the entire region.
Yet Iraqis continue to hope for a better future.
The advent of a new electoral cycle, which begins with local elections in April, may provide another opportunity to put Iraq on the right path.
But that can happen only if the voting is free and the counting is fair.
The current government, however, is unable to supervise free and fair elections.
Significant measures must be taken, including the active involvement of neutral international agencies and observers to keep the government in check and ensure that voters can have their say.
We are hopeful that Iraqis, who have had their fill of sectarian political parties, will be allowed freely to choose candidates who embrace a non-sectarian and non-racist agenda.
Given a new law limiting senior officials to two terms in office, we also hope to see new and accountable leaders in positions of power.
I am certain that power-sharing, reconciliation, and accountability are the only way forward for Iraq.
Let us hope that this spring – ten years after the US invasion and Saddam’s downfall – brings Iraq a new and constructive beginning.
Securing a More Secure World
Committee reports are usually deadly dull, and UN committee reports are among the dullest.
But the recent report of the UN Secretary General’s High Level Panel on Threats, Challenges, and Change broke that rule.
Sixteen political leaders and former diplomats combined principle with political realism to produce the most comprehensive proposals for change since the UN was created in 1945.
Secretary General Kofi Annan is to present the report in March.
Then it will be up to governments to act.
Many early comments focus on the Panel’s recommendations for enlarging the UN Security Council from 15 to 24 members.
The report proposes two alternatives.
One would add six new permanent members – such as India, Brazil, Egypt, South Africa, Japan, and Germany – as well as three two-year members.
The other alternative would create eight semi-permanent members with renewable four-year terms and one additional member chosen for a two-year term.
Either proposal would entail amending the UN Charter, which requires marshaling the support of a two-thirds majority of the 191 member states, including the five veto-wielding members of the current Security Council.
Skeptics doubt that this is feasible.
But focusing on enlargement of the Security Council risks diverting attention from the rest of the Panel’s analyses and 101 recommendations for reform, many of which do not require amending the Charter.
According to the report, the General Assembly has lost vitality, the Security Council must be more proactive, the Commission on Human Rights suffers from a legitimacy deficit, the Secretariat should be more professional and better organized, and major institutional gaps hinder responses to economic and social threats to international security.
The report is critical of the organization’s performance on genocide in Bosnia, Rwanda, and Darfur, as well as the late response to HIV/AIDS.
In the panel’s words, the UN was created above all “to save succeeding generations from the scourge of war,” but today the biggest security threats we face “go far beyond states waging aggressive war.
The preoccupation of the UN founders was with state security.
When they spoke of creating a new system of collective security they meant it in the traditional military sense.”
Today the threats are from non-state actors as well as states, and they jeopardize human security as well as that of states.
Collective security nowadays means a broader sharing of responsibility for each other’s security.
The Panel deals forthrightly with the new transnational threats posed by terrorists and the spread of weapons of mass destruction.
Its members agreed that there could be “nightmare scenarios” that combine the two and might require the preventive use of force.
They urge strengthening the non-proliferation regime through more intrusive inspections, and negotiation of arrangements for internationally guaranteed access to nuclear enrichment and reprocessing services, rather than allowing countries to construct them for themselves.
They back President George W. Bush’s Proliferation Security Initiative aimed at stopping traffic in weapons of mass destruction.
On terrorism, they break the long UN impasse over finding a definition, condemning all attacks against civilians, and propose a number of measures that member states should take.
Regarding preventive use of force, traditional interpretations of Article 51 of the UN Charter (which provides a right of self-defense) allow a threatened state to take pre-emptive action in the face of imminent attack, but not to use force preventively against longer term threats.
The Panel would broaden that interpretation to allow the preventive use of force in some instances, but only if approved by the Security Council.
The Security Council would judge the legitimacy of such action by whether it met the age-old criteria of just war: the seriousness of the threat, the purpose of the response, whether force is a last resort, whether it is used in a proportionate way, and whether there is a reasonable balance of good and bad consequences.
In that sense, President Bush won half his argument: preventive force can be justified, but not unilaterally.
Afghanistan would fit; Iraq would not.
Critics complain that this approach places too much trust in a Security Council that can be paralyzed by politics and the veto.
Enlarging the Council could make maters worse.
A state threatened by terrorist attacks originating in another state might feel less patient than a majority of the Council about what is the “last resort.”
In Rwanda and Kosovo, the Security Council failed to act in time to save thousands of lives.
Is there an alternative to waiting for the Security Council and acting unilaterally?
Kosovo and Iraq provide instructive examples.
In the former, the prospect of a Security Council veto prevented action, and a regional organization (NATO) acted without UN authorization.
Although this called the legality of the action into question, the intervention benefited from a widespread sense of political legitimacy that limited its negative effects on international order.
In the case of the Iraq War, President Bush never established a broad consensus that might have provided legitimacy in the face of a veto.
Countries such as France and Germany that opposed action in Iraq were willing to use force in Kosovo despite the absence of Security Council authorization.
If states feel compelled to act in the case of Council stalemate, they should know that they would do less damage to their reputations if they act within the Panel’s guidelines for legitimacy, even if they fail to satisfy its criterion for legality.
No single report can create a more secure world, but those who support that goal must hope that governments and their publics will consider seriously the Panel’s recommendations.
Securing Europe’s Energy Future
Most Europeans agree that reliable, affordable, and sustainable energy is crucial to Europe’s security and prosperity; that energy can be used as a political weapon, as when Russia shut off gas to Ukraine in January 2006; and that Europe is far too dependent on energy supplies from undemocratic and unstable countries or regions.
Yet, despite wide agreement on these matters, there is little consensus about how to address them.
Both boldness and consensus are urgently needed, and those who doubt that Europe is capable of either can take heart from two recent European Commission decisions: a politically ambitious proposal to force the complete separation of networks of pipelines and wires from the companies that supply gas and electricity; and a proposal that Gazprom and other non-EU businesses can control Union energy assets only if they meet tough new conditions, including reciprocal access to, say, Russia’s market for EU energy companies.
But the fundamental problem remains Europe’s vulnerability over energy: an emerging divide and rule strategy over the supply of gas that must be confronted head on.
Today’s preference by individual EU members to act unilaterally on energy must be replaced by a common energy policy based on solidarity among member states and unity in defending EU interests vis-à-vis external partners.
After all, such solidarity is what allowed Europe to prosper and integrate over the past 50 years.
So why not stick to a winning formula where energy is concerned?
Specifically, the EU must develop a diplomatic strategy aimed at strengthening cooperation with all major energy producing, transit, and consumer countries, while creating within the Union a mutually beneficial, open, transparent, and stable energy sector based on reciprocity.
Until now, the geopolitical dimension of European energy security has been so neglected as to endanger the Union’s future.
With China seeking to secure exclusive access to energy resources in Africa and the Russian energy giant Gazprom seeking de facto control of Western companies by investing billions of euros in them, Europe can no longer afford to take a wait-and-see approach.
The EU must become more active, more determined and united in securing its energy interests and those of its member states.
Indeed, the internal and external aspects of energy policy are interrelated.
Europe cannot build an efficient external policy without achieving a minimum of harmonization of member state policies regarding energy flows, interconnections, infrastructure, investment, and greater progress toward a single energy market.
Concrete provisions must be included in the new treaty to reform the EU’s institutions in order to ensure the capacity to negotiate an energy security framework with third countries.
For example, all the Union’s future energy agreements should include an “energy security clause” that explicitly outlines a code of conduct and measures to be taken in the event of a supply disruption.
We should replace today’s energy unilateralism by member states with a new common energy policy based on solidarity.
A fundamental part of this must be serious consultation among member states on strategic decisions that may affect an EU partner.
This principle of solidarity was missing when the decision to build a Baltic Sea pipeline to directly link Russia and Germany was taken.
The possible negative environmental consequences of that pipeline are of serious concern to all the citizens of the Baltic region and should be given due attention.
Of course, a common EU security strategy is not meant to undermine the rights of individual member states to choose their internal energy policies.
But collective energy security requires increasing the EU’s ability to face – and face down – external energy challenges.
To achieve this, viable instruments are needed.
I suggest the creation of a new institutional post of Special Representative on foreign energy policy, which would facilitate the coordination of all policies related to the external aspects of energy security.
Working under the authority of the High Representative on Foreign Policy, who under the terms of the new reform treaty will also become a Vice-President of the European Commission, this post would reinforce synergies within the EU.
I also propose that a precise “road map” toward a common foreign policy on energy be created, which would indicate short-, medium-, and long-term objectives, together with a specific timeframe for their implementation.
The existing Energy Charter Treaty – including the Transit Protocol – must remain a cornerstone of Europe’s energy security policy.
The EU must continue to insist that Russia ratify it, stipulating that Russia is already bound by its terms.
The EU should also negotiate a framework document in the context of the next Partnership and Cooperation Agreement negotiations in order to clarify the obligations contained in the Treaty, in particular its Transit Protocol.
Common threats to Europe’s energy security demand a common response.
In building the means to secure Europe’s energy future, we will also renew the spirit of European integration and give new strength to the EU as a global actor.
The energy challenge that confronts Europe calls for an ambitious and courageous approach.
Today’s EU was built on concrete achievements, combining vision and the instruments needed to implement it.
In the interests of our common security, we must not forsake that legacy.
Securing Synthetic Securities
NEW YORK – Goldman Sachs, we can be sure, will vigorously contest the civil suit brought against it by the United States Security and Exchange Commission (SEC).
But, regardless of the eventual outcome, the case has far-reaching implications for the financial reform legislation that the US Congress is now considering.
Whether or not Goldman is guilty, the transaction in question clearly had no social benefit.
It involved a complex synthetic security that was derived from existing mortgage-backed securities by cloning them into imaginary units that mimicked the originals.
This synthetic collateralized debt obligation (CDO) did not finance the ownership of any additional homes or allocate capital more efficiently; it merely swelled the volume of mortgage-backed securities that lost value when the housing bubble burst.
The primary purpose of the transaction was to generate fees and commissions.
This is a clear demonstration of how derivatives and synthetic securities were used to create imaginary value out of thin air.
Indeed, more triple-A CDOs were created than there were underlying triple-A assets.
This was done on a large scale, despite the fact that all of the parties involved were sophisticated investors.
The process continued for years, culminating in a crash that caused wealth destruction amounting to trillions of dollars.
Such activity cannot be allowed to continue.
The use of derivatives and other synthetic instruments must be regulated, even if all the parties are sophisticated investors.
Ordinary securities must be registered with the SEC before they can be traded.
Synthetic securities need to be similarly regulated, although the task could be assigned to a different authority, such as the Commodity Futures Trading Commission.
Derivatives can serve many useful purposes, but they also contain hidden dangers.
For instance, they can pile up hidden imbalances in supply or demand, which may suddenly be revealed when a threshold is breached.
This is true of so-called “knockout options,” used in currency hedging.
It was also true of the portfolio insurance programs that caused the New York Stock Exchange’s Black Monday of October 1987.
The subsequent introduction of circuit-breakers tacitly acknowledged that derivatives can cause disruptions, but the proper conclusions were not drawn.
Credit default swaps (CDS) are particularly suspicious instruments.
They are supposed to provide insurance against default to bondholders.
But, because they are freely tradable, they can be used to mount bear raids – a type of stock market strategy by which a trader (or group of traders) attempts to force down the price of a stock to cover a short position.
In addition to insurance, they also provide a license to kill.
Their use ought to be confined to those who have an insurable interest in the bonds of a country or company.
It will be the task of regulators to understand derivatives and synthetic securities, and to refuse to allow their creation if they cannot fully evaluate the systemic risks.
That task cannot be left to investors, contrary to the diktats of the market fundamentalist dogma that prevailed until recently.
Derivatives traded on exchanges should be registered as a class.
Tailor-made derivatives would have to be registered individually, with regulators obliged to understand the risks involved.
Registration is laborious and time-consuming, and would discourage the use of over-the-counter derivatives.
Tailor-made products could be put together from exchange-traded instruments.
This would prevent a recurrence of the abuses that contributed to the 2008 financial crisis.
Requiring derivatives and synthetic securities to be registered would be a simple and effective measure; yet the legislation currently under consideration in the US contains no such requirement.
The Senate Agriculture Committee proposes blocking deposit-taking banks from making markets in swaps.
This is an excellent proposal that would go a long way in reducing the interconnectedness of markets, thereby preventing financial contagion, but it would not regulate derivatives.
Moreover, the five big banks that serve as market makers and account for more than 95% of over-the-counter transactions in the US are likely to oppose the proposal, because it would hit their profits.
It is more puzzling that some multinational corporations are also opposed.
The only plausible explanation is that tailor-made derivatives can facilitate tax avoidance and manipulation of earnings.
Of course, these considerations ought not to influence the legislation.
Securing the Future at the Evian Summit
The paradox of our time is the great power of the world's richest countries to do good, but their seeming compulsion to miss every opportunity to do so.
The US stands as the supreme example of this: a country that devotes $450 billion per year to military spending allocates only $12 billion per year to development assistance for poor countries.
It can bomb Somalia, Afghanistan, and Iraq, but seems ill-equipped to help these places develop.
Europe is little better, paralyzed as it is by internal divisions and budget deficits.
Next week's G-8 summit in Evian, France is a chance to make a fresh start.
For the one billion people represented at the G-8 Summit, life is extremely good in comparison with the rest of the planet, with average incomes at $25,000 per person or more and life expectancy around 80 years.
For about three billion people in the world today, including China, much of India, and most of East Asia, economic development is proceeding reasonably well, even if it displays a lot of ups and downs (most recently, the shock of the SARS epidemic).
Positive trends are also seen in Brazil and Mexico.
But for the world's remaining two billion people, life remains desperate.
For roughly one billion people, bare survival is nothing short of precarious.
Millions die each year because they lack access to medicines, food, safe drinking water, and basic sanitation.
Their life expectancy is often less than 50 years, and is falling in many places.
The G-8 could end the suffering of the world's poorest billion people if it adopted realistic measures to solve their problems.
They fail to do so not only because they are greedy, but also because they are scared.
They think that global poverty is inevitable and too expensive to solve.
But they can solve the problems of the world's poorest--with relatively little effort and with no noticeable negative impact on their own standard of living.
The biggest problem areas are concentrated in sub-Saharan Africa, the Andean region, and Central Asia.
Other pockets of extreme poverty, in China and India, are on the path of amelioration due to these two giants' rapid economic growth.
But the problems in sub-Saharan Africa, the Andes, and Central Asia are not solving themselves.
These regions are trapped in poverty.
The worst situation, by far, is in Africa.
The US government believes that these countries have only themselves to blame for their poverty.
But this is the ignorant boasting of a rich country that fails to comprehend the situation on the ground.
Africa is trapped in poverty for deep-seated reasons.
It suffers from endemic malaria, which is like a SARS pandemic that lasts for centuries, not for a few months.
It suffers from a climate prone to massive droughts and from soils depleted of nutrients.
It suffers from the fact that most of its population lives in the rural interior, without paved roads to reach ports and facilitate access to international trade.
Aside from a few countries in West Africa, it suffers from a serious shortage of energy resources, whether coal or oil or hydroelectric power.
The US never had to grapple with any one of these problems in the severity that they grip Africa.
The ultimate irony is that all of these deep problems are amenable to solutions, albeit solutions that require money.
That is where the G-8 should come in.
All that is required is for the G-8 leaders to commit, at Evian, to follow through on their previous promises, which for years have remained unfulfilled.
During the past three years, the world's leaders have promised concrete action to cut global poverty by one half by the year 2015, in a series of commitments known as the Millennium Development Goals.
But only baby steps have followed.
The US increased foreign aid by perhaps $4 billion a year at the same time that it increased military spending by $150 billion annually and cut taxes by trillions of dollars.
Clearly, the US has the means to do vastly more to help the world's poor, if only it had the foresight.
Specifically, the G-8 leaders should commit to providing adequate financing for the Global Fund to Fight AIDS, Tuberculosis, and Malaria; to raise food productivity in Africa through a new Green Revolution; to ensure that all poor children have the opportunity to go to school; and to ensure that poor people everywhere have access to clean drinking water and sanitation.
The total cost of this agenda, remarkably, would be much less than 1% of the annual income of rich countries.
For the first time in history, the rich are so rich, and the poor so poor, that a tiny effort by the rich could end massive suffering.
The Evian Summit will clarify whether greed, ignorance, and the bombast of war have closed the eyes of the US entirely, and whether Europe and Japan will look inward rather than outward.
Securing the Future of Energy
PALO ALTO – Today’s huge global energy problems in no small measure reflect the essentially nineteenth-century business plans that three of the world’s largest industries are still pursuing.
Electric utilities still largely burn fossil fuels and sell the power to homes and businesses.
Oil companies still drill for and refine petroleum, and principally sell gasoline and diesel fuel.
Automobile manufacturers still bend steel into vehicles that generally must be powered by petroleum-based fuels.
Until recently, each of these giant industries was comfortable continuing on its familiar and comfortable nineteenth-century path into the twenty-first century.
Each had also succeeded in getting government to insulate it against any need to make fundamental changes.
But recent developments are beginning to create increasingly heavy seas for these industries.
Indeed, many observers detect approaching storms of epic proportions.
What has happened?
First, evidence of climate change has begun to convince almost all climatologists and many other informed observers that our current approach to producing and using energy is very dangerous to the biosphere.
Because changes in carbon dioxide emissions, unlike pollutants such as sulfur dioxide and nitrogen dioxide, cannot be easily detected, and because of the multi-century persistence of CO2 in the atmosphere, the problem of reducing its level in the atmosphere is much harder to solve than are other environmental problems.
Nor are we accustomed to dealing with potential exponential climate change, as phenomena such as warming lead to the release of carbon from the tundra, thereby accelerating warming.
Public debate is also confused by an “all-or-nothing” mind-set, with skeptics contending that if any portion of climate change is naturally caused (say, by the earth’s axis tilting over a period of millennia) then none of it can be anthropogenic.
Yet there is every reason for us to try to mitigate at least the anthropogenic portion of the climate change caused by CO 2 emissions and other dangerous practices, such as deforestation.
Moreover, there is deepening concern about two types of energy-related security problems: the increasing risk of violence stemming from the nature of our energy use, and the high cost of that energy.
The main risk of violence created by the nature of the electricity system itself is the danger of serious power outages due to physical or cyber-attacks on the increasingly fragile transmission and distribution grid.
Regarding oil, which dominates transportation, the high concentration of deposits in the Middle East, especially those that can be most cheaply exploited, makes oil-importing countries hostage both to terrorist attacks on the oil infrastructure and to monopoly-determined prices.
OPEC uses output cuts whenever possible to keep prices at levels that are at least an order of magnitude above the cost of production plus a reasonable return.
As Paul Collier of Oxford University has pointed out, the preponderance of dictatorships and autocratic kingdoms in the ranks of the largest oil exporters indicates that where these huge economic rents exist, pressures are created against economic diversification and democratization.
Most terrorism, ultimately, is oil-funded.
What Collier calls the “Bottom Billion,” the poorest one-sixth of the world, suffers the most from high oil prices.
Heavy national debt and expensive power are problems for relatively wealthy countries, but they are disasters for sub-Saharan Africa and the rest of the world’s poor.
So what may be the solutions?
First, as the energy campaigner Anne Korin puts it, we need to do to oil what was done to salt just over a century ago.
Salt had been a strategic commodity for millennia – countries fought wars over salt mines – because it was the only way to preserve meat.
But the advent of electricity, refrigeration, and freezing ended salt’s monopoly relatively quickly.
It is still a useful commodity, but no one regards salt mines any more as instruments of national power and influence.
Oil urgently needs to suffer a similar fate.
Oil’s monopoly over transportation can in part be destroyed by electrification (via plug-in hybrid electric vehicles, for example), and also by second-generation biofuels, such as butanol from cellulosic feedstocks, and by algae- and waste-based biofuels.
Studies show clearly that, with time-of-day pricing, electrification of vehicles creates little need for new electricity-generating plants, and also that even with today’s coal-heavy electric grids, electrified vehicles emit less CO2 than gasoline- and diesel-powered vehicles.
And, as the grid’s CO2 emissions are cleaned up, the vehicles’ role as a source of emissions will decline.
It is crucial to improve the efficiency of electricity use, especially in lighting, which accounts for a very large share of demand.
LED’s are beginning to lead the way.
Many nations can also learn a great deal from Denmark’s creative use of waste heat for cogeneration.
Solar power is beginning to gain substantially greater prominence, especially for smaller factories and rooftops.
Germany, with its feed-in tariff, has led the way in encouraging such solar deployments, and this approach is beginning to be adopted at the state level in America.
Reductions in the cost of solar power, efficiency improvements, and sharply improved batteries and other means of electricity storage are helping to make possible a world of increasingly distributed energy generation, based on renewable sources.
That, in turn, promises increasing freedom from the dangers created by our vulnerable electric grids and our reliance on oil.
Limiting the Security Council Veto
PARIS – Back in 2001, France floated a proposal that the five permanent members of the United Nations Security Council (P5) should voluntarily refrain from using their veto power when dealing with mass-atrocity crimes.
And now, in the lead-up to the commemoration of this year’s 70th anniversary of the UN, French President François Hollande’s government is actively pursuing the idea again.
Could such an arrangement really work?
The predictable initial response is to dismiss the possibility out of hand.
As Australia’s wartime prime minister, Ben Chifley, once famously remarked, “The trouble with gentleman’s agreements is that there aren’t enough bloody gentlemen.”
It is indeed hard to believe that Russia and China, in particular, would be accommodating.
Russia, for example, has exercised vetoes more than 100 times since 1946, most recently – and unhappily – four times since 2011 to block resolutions intended to halt the carnage in Syria.
Nor has the United States, which has used its veto some 80 times (most frequently, in recent years, on Israel-related issues), shown much enthusiasm, notwithstanding its generally strong stand on genocide and related cases.
Only the United Kingdom (which, like France itself, last resorted to the veto in 1989) has given any hint of support for the French initiative.
The right to veto was the price demanded by China, France, Great Britain, Russia, and the US for joining the UN.
No one believes that a formal Charter amendment to abolish or limit this right is remotely likely.
But international pressure on the P5 has been mounting for the last 15 years – and especially since the General Assembly’s unanimous embrace in 2005 of the “responsibility to protect” (R2P) principle.
Advocates of the French position want these countries to forswear their veto when a clear majority supports proposed action to mitigate the risk of a mass-atrocity crime.
Distaste for the blocking of the Syrian resolutions has been particularly intense, and, at last count, 68 countries had given explicit support to the French proposal in various UN forums.
The moral argument that the veto should not be used in cases of mass-atrocity crimes is overwhelming.
The P5 have obligations under the UN Charter, as well as international humanitarian and human rights law, not to undermine the effectiveness of the UN or that body of law.
And the political argument against using the veto in these situations – that it jeopardizes the credibility and legitimacy of the Security Council, whose structure is already seen as not reflecting the geopolitical realities of the twenty-first century – should also weigh heavily on the P5.
But is it possible to craft a veto-restraint proposal to which all of the P5 can agree?
In January, at a conference I attended in Paris that brought together French policymakers and international experts, it became clear that a draft agreement could meet most, if not all, objections.
But it would need to have at least three key elements.
First, the agreement would have to define the relevant cases clearly – neither too widely nor too narrowly – and build on well-established R2P language.
The definition might be something like “situations where populations are suffering, or at imminent risk of, genocide, other crimes against humanity, or major war crimes.”
Second, an agreement would need to include a mechanism to determine when such cases had actually arisen.
This would need to be speedy, provide some assurance of objective assessment, and ideally generate strong concern across a wide cross-section of the international community.
One way to meet these needs would be to have a double trigger.
The first requirement would be a certification, communicated to the Security Council by the UN Secretary-General and his Office of Special Advisers on the Prevention of Genocide and R2P (which has the necessary resources, expertise, and credibility) that the case meets the agreed definition.
The other would be a request for veto-restraint by at least 50 member states, including at least five members from each of the recognized geographical groupings.
A third key element, unattractive ethically but probably necessary politically to win the support of the US and others, would be a provision allowing any P5 member to veto when it claimed a “vital national interest” to be at stake.
The consolation is that trying to rely on such an escape clause in most atrocity cases would not pass the laugh test.
Could Russia and China really have used it to veto Security Council resolutions on Myanmar and Zimbabwe in, respectively, 2007 and 2008?
Even given the intensity of Russia’s political and military relationship with Bashar al-Assad’s regime in Syria, could it really claim that a resolution would place its own vital interests at risk?
Many kinds of pushback can be expected, not least the argument that the veto exists not to protect the P5’s interests, but to ensure unanimity of the major players (conspicuously missing in the UN’s ill-fated predecessor, the League of Nations) in any action undertaken, in order to maintain international peace and security.
We will be told that it is unconscionable to ask a P5 member to forgo a veto when it genuinely believes that a proposed resolution will cause more harm than good.
One response is that it is almost impossible to find any such genuinely high-minded rationale for any veto ever cast in a mass-atrocity situation.
Another is that any UN Security Council resolution requires at least nine affirmative votes (in a Council of 15).
If there are genuine concerns on the merits, that requirement will prove a very high bar.
The point of the veto restraint is, at minimum, to raise the political cost for those who would block action designed to ensure that there are no more Cambodias, Rwandas, Srebrenicas, or Syrias.
The French proposal, though still evolving, has already struck a responsive chord internationally.
Security in a Time of Hatred
In the wake of the Palestinian suicide bombers and the mass murder and collective suicide that took place last September 11th the world is still trying to redefine what it means by security.
We know about mass suicides of religious sects and about individual suicides in military operations.
Never before, however, were the two combined on so devastating a scale.
Never before have we witnessed a military operation whose participants accept their own death not as a mere possibility, but as an inevitable and, indeed, desired outcome.
Suicidal mass murder results from organized hatred-the unconditional craving to harm an enemy not for what it has (as with envy) or for what it does (as with anger), but for what it is.
What a person or group has or does can be changed by redistribution or sanctions, but what it is can only be eliminated.
As an expressive act of religious mania, organized hatred is rooted in a collective revelation of divine order and the duties arising from it, along with the promise of eternal reward for those who are unconditionally committed to fulfilling God's plan.
Envy, anger, and sadness hurt. But hatred may be accompanied by the self-pleasures of an heroic mission.
There have been countless attempts to pin the hatred of the September 11th attackers on something else: surely, America's global economic power and political hegemony at least nurtured the conditions in which such hatred could develop.
Hasn't the US administration implied as much, speaking of its "vision of a Palestinian state" and sometimes criticizing Israeli policy with hitherto unseen severity?
But while shifts in US rhetoric may be "collateral benefits" of the current military campaign, the Israel-related explanation of organized hatred falls short.
There were no Palestinians among the September 11th terrorists, and the Islamic world's solidarity with the Palestinian cause is in any case largely rhetorical and tactical.
Similarly, few in the Islamic world seriously regard Iraq's defeat in the Gulf War as a humiliation inflicted by the US on all Muslims.
Islamist terrorism differs fundamentally from Third World revolutionary and national liberation movements, with their comparatively rational anti-imperialist stance.
What America and the West do or did in the past is irrelevant; to radical Islamics, what matters are the West's heretical liberalism, individualism, and secularism.
So what is to be done to re-establish security?
President Bush once told America's Congress that "Al Qaeda is to terror what the Mafia is to crime."
It may be comforting to believe that beheading the hierarchy of some conspiratorial organization will prevent further attacks.
But the analogy doesn't hold up sociologically.
In contrast to fear (the Mafia's stock in trade), hatred cannot be generated and conditioned systematically.
An unconditional will to destruction and self-sacrifice can neither be taught nor learned.
Al Qaeda bundles together rather than produces the hatred of autonomous perpetrators.
But it is impossible to behead networks, much less networks of unconditional haters.
Nor can security now be based solely on deterrence, as Israel may be discovering.
Unlike the Cold War, whose logic of mutually assured nuclear destruction assumed that everybody prefers survival to death, the "war" against terrorism is much less immune to escalation.
Indeed, because Islamist terrorism relies on the logic of diffuse, unconditional hatred, the preventive effects of even the most precise military attack may be less than zero, and may, instead, merely provoke demonstrative acts of retaliation.
On the other hand, the deep and morally justified indignation and shared anxiety (felt well beyond America) made it politically impossible to not respond militarily.
The Bush Administration seems aware of the pitfalls, emphasizing at home and abroad how different the conduct of the ongoing anti-terrorism war will be, that it requires military, diplomatic, law enforcement, and humanitarian measures, and that victory will be hard to prove.
But victory will be even harder to prove if this new type of international conflict continues to be used to justify goals that risk multiplying anti-Western grievances.
China breezes into the WTO.
President Bush seeks to win congressional approval for his "fast-track" authority to approve free-trade deals.
Putin gets a pass on Chechnya.
The US withdraws from the Anti-Ballistic Missile treaty.
Efforts to open the southern border of the US and the eastern border of the EU are put on the back burner.
None of these developments-or the massive subsidies doled out to US and European business interests since September 11th-move us any closer to understanding the origins of hatred and ensuring security.
On the contrary, they risk redefining a conflict between supporters of minimal standards of civilized human coexistence and a despicable gang of religious fanatics as a struggle against the arrogant, predatory, and corrupt agents of Western rationality.
Ensuring victory against organized hatred requires a very different approach, one that attracts the support of those whose material and spiritual conditions leave them most susceptible to religious extremism.
This clearly calls for far more than military mobilization and discretionary allocations for debt relief and humanitarian assistance.
Fighting organized hatred means that we must pay more systematic attention to "soft" issues in international politics, such as human rights, mutual recognition and confidence-building among civilizations and religions, supranational guarantees of stability and peace, and strategies for economic development that are reliable and fair.
In short, genuine security in the wake of a plague of suicidal terrorists demands that we, too, display a willingness for self-sacrifice in the interest of undercutting support for those who hate the community to be secured.
Seeing Double at Central Banks
OXFORD – Central banks are now targeting liquidity, not just inflation.
The credit boom of the past decade highlighted the inadequacy of focusing only on prices, and underscored the need for the monetary authority of a country (or group of countries in the case of the European Central Bank and the eurozone) to monitor the financial sector.
Macroprudential regulation is the new term of art among central bankers, supplementing their well-established inflation-targeting regimes.
This shift in focus could radically change monetary policy, but for better or worse?
The Bank of England may be blazing the way in this transition, but the ECB and the United States Federal Reserve Board are taking on more financial regulation as well.
Indeed, the ECB’s European Systemic Risk Board serves a function that is similar to the United Kingdom’s new Financial Policy Committee (FPC).
At the end of a recent discussion with Andy Haldane, the Bank of England’s Executive Director for Financial Stability and a member of the FPC, I asked: What happens if inflation is high and lending is low?
Under this scenario, the Bank of England’s Monetary Policy Committee (MPC) would favor an increase in interest rates, while the FPC would want to loosen monetary conditions.
I am still pondering the question that I posed to Haldane, because the potential for such contradictory policy imperatives appears unavoidable – never more so than now.
The last decade – until the collapse of Lehman Brothers in September 2008 – was known as the Great Moderation, a period of low inflation and strong growth that reflected major new developments, such as global integration of emerging markets and major central banks’ adoption of inflation-targeting regimes during the 1990’s.
In the United Kingdom, the Bank of England was made independent in 1997, and given a target of 2% annual inflation.
Price stability during the 2000’s explained the low interest rates that supported strong growth.
But, it also meant that a credit boom with international dimensions was not monitored, resulting in the most spectacular bust of modern times, including the near collapse of the banking system.
Amid the UK’s institutional changes in 1997, financial regulation was put in the hands of the Financial Services Authority (FSA).
But the FSA is soon to be replaced by the FPC, resulting in a system that aims to avoid an “underlap” of authority that leaves no one in charge.
The FPC is now part of the Bank of England, which is meant somehow to ensure that monetary policy takes into account the financial sector.
The change reflects central bankers’ argument that to target credit or liquidity requires another tool.
Interest rates are too blunt an instrument, and risk damaging the wider economy when used to prick a housing bubble, as recent research by BOE Deputy Governor Charlie Bean has shown.
So the FPC would wield instruments such as capital ratios or loan-to-value ratios to manage liquidity, and placing two instruments for two targets – liquidity and inflation – within the BOE would ensure coordination.
But what if the two targets are in conflict?
During the pre-crisis Great Moderation, restraining lending through regulatory tools probably would have worked, because it was unlikely to push the economy into deflation, as hiking interest rates would have done.
But that is not the problem now.
The current issue is that the monetary aggregate (M4) measure of lending to the private sector is at its lowest level in a decade, while inflation is more than double the BOE’s target.
If the FPC lowers capital requirements to encourage lending, but the MPC raises rates to cope with inflation, banks would face competing pressures.
Looser lending rules would conflict with the higher cost of money.
Because both the FPC and the MPC rely on a monetary-transmission mechanism that operates through banks, it isn’t clear that inflation-targeting and liquidity maintenance can be so neatly separated.
There is also the added complexity of global regulation.
The idea is that countries would coordinate counter-cyclical regulatory measures, thereby preventing capital from skirting them by moving across borders.
But, what if – and this is very likely – business cycles are not coordinated?
After all, China is tightening credit while the UK is encouraging more of it.
Closer to Britain, the ECB is potentially embarking on a tightening cycle and withdrawing hundreds of billions of euros in liquidity provided during the crisis, owing to concerns about “addicted” banks.
Will it really loosen capital requirements in order to align itself with the BOE?
Again, such policies would have worked a decade ago, in an environment of low inflation and rapid lending growth.
But times have changed, and monetary policy will, of course, shift accordingly.
The problem is that if bodies like the FPC become as important to central banks as monetary policy committees, we may be left wondering which target takes precedence when they clash.
Seeing REDD on Climate Change
CANCÚN – The official communiqué from the Cancún climate-change conference cannot disguise the fact that there will be no successor to the Kyoto Protocol when it expires at the end of 2012.
Japan, among others, has withdrawn its support for efforts simply to extend the Kyoto treaty.
This sounds like bad news, because it means that there will be no international price on carbon, and, without a market price, it is difficult to see how the reduction of carbon emissions can be efficiently organized.
But appearances can be deceiving.
Even as the top-down approach to tackling climate change is breaking down, a new bottom-up approach is emerging.
It holds out better prospects for success than the cumbersome United Nations negotiations.
Instead of a single price for carbon, this bottom-up approach is likely to produce a multiplicity of prices for carbon emissions.
This is more appropriate to the task of reducing carbon emissions than a single price, because there is a multiplicity of sectors and methods, each of which produces a different cost curve.
The market price of anything is always equal to the marginal cost.
When there is a single price, all the various cost curves are merged into one and low-cost projects enjoy large rents.
This makes the cost of reducing carbon emissions much larger than it needs to be.
This was amply demonstrated by the working of the Kyoto Protocol in practice.
The carbon-trading scheme that it established gave rise to many abuses.
For example, formerly communist countries earned emission credits at zero cost on the heavy industries that they had to shut down and reaped windfall profits by selling them.
So the demise of the Kyoto Protocol will be no great loss.
The same applies to the protracted negotiations between developed and developing nations.
The developed nations promised to pay reparations for their past sins at the Rio de Janeiro summit in 1992 but kept deferring their obligations by negotiating.
Meanwhile, conditions changed with the passage of time: China, following decades of booming growth, replaced the United States as the largest emitter.
The negotiations have taken on an increasingly unreal air.
Currently, the dispute revolves around how governments will deliver $100 billion annually by 2020 to help developing countries confront climate change, given that even the $10 billion Fast Track Fund cannot be cobbled together without using smoke and mirrors.
By failing to make any progress beyond keeping the talks alive, the Cancún summit has given the impression that nothing is happening, and that the situation is hopeless.
That is not the case.
Individual countries like Germany are making binding unilateral commitments that are not conditional on what other countries do, and “coalitions of the willing” are being formed to tackle particular sectors.
The REDD+ partnership (Reducing Emissions from Deforestation and Forest Degradation), an effort to create financial value for the carbon stored in forests, is the prime example here.
Indeed, the greatest progress is now being made where the problem is the most urgent: it is much easier to preserve forests than to restore them.
The case of Indonesia deserves special attention.
Indonesia has become the third largest polluter in the world, after China and the US, because much of its forest grows on peatlands.
When the trees are cut and peatlands drained, the carbon accumulated over millennia is exposed and oxidized – often in the form of fires that envelope neighboring Singapore and Malaysia in smoke.
Today, half of Indonesia’s peatlands remain intact; if they were exposed, emissions would double.
President Susilo Bambang Yudhoyono is determined to prevent this, and he has received financial support for his efforts from Norway.
Their partnership has already been joined by Australia, and others will soon follow.
The partnership is path-breaking in several ways.
Yudhoyono is introducing a moratorium on the exploitation of peatlands and virgin forests.
A REDD+ agency will be charged with treating rain forests as a natural resource that is to be preserved and restored rather than exploited and destroyed.
This will also transform governance and the delivery of official development assistance (ODA).
The REDD+ agency will have a domestic governing board that will coordinate the activities of all the governmental units concerned with rain forests, and an international board that will authorize and monitor the spending of ODA funds.
This means that ODA will support home-grown institutions instead of administering projects introduced from the outside.
These efforts can serve as a prototype for assisting other countries such as Guyana, where the current forest-preservation scheme does not work so well.
Eventually, it should lead to the establishment of a global fund for rain forests and agricultural adaptation because the benefits of carbon abatement accrue to mankind as a whole, not to individual countries.
The global fund would introduce two prices: one for carbon saving by restoring forests and one for avoiding carbon emissions by preserving them.
This in turn sets an example for other sectors.
In this way, carbon pricing will be introduced and international cooperation established from the bottom up, on a sectoral basis rooted in demonstrated results.
Thus, despite the widespread impression that the climate-change agenda has stalled, there are grounds for hope.
But realizing that hope requires keeping pace with global warming, and that means speeding up the process of putting a price – or prices – on carbon emissions.
Seeing Through Cultural Bias in Science
Most people now accept that fields like politics and journalism reflect and perpetuate cultural bias.
Yet we imagine science as free of unexamined cultural assumptions.
This is more or less true for some fields - say, chemistry or physics.
My own corner of science, ethology, or the study of animal behavior, is certainly not pristine.
How we look at animals reflects how we view ourselves.
The founder of Japanese primatology, Kinji Imanishi, could attest to this.
Imanishi argued that nature is inherently harmonious rather than competitive, with species forming an ecological whole.
This rather un-Darwinian perspective so upset a British paleontologist, the late Beverly Halstead, that in 1984 he traveled to Kyoto to confront Imanishi.
Unconstrained by first-hand knowledge of Imanishi's works, which were never translated, Halstead told him that his theory was "Japanese in its unreality."
What compelled Halstead to be so rude?
Why did he later write an article criticizing not just Imanishi's views, but his country?
Why did " Nature, " one of the most prestigious journals in science, publish it, in 1985, beneath the patronizing assertion that the "popularity of Kinji Imanishi's writings in Japan gives an interesting insight into Japanese society"?
Could not the same be said of Darwin's theory of unremitting competition, which grew out of a society giving birth to free-market capitalism?
Even if Imanishi's ecological and evolutionary ideas were problematic, he and his followers were right about quite a lot.
In fact, well before Halstead's contemptuous pilgrimage, Western ethologists began adopting Eastern concepts and approaches--although without being aware of their sources.
To understand how this could occur is to appreciate the role of different cultural assumptions about the relations between humans and animals and how linguistic hegemony affects science.
Eastern philosophy has no counterpart to Plato's "great chain of being," which places humans above all other animals.
In most Eastern belief systems, the human soul can reincarnate in many shapes and forms.
A man can become a fish and a fish can become God.
There are no grounds in Eastern thought for resisting the central idea of evolutionary theory: that all animals are historically linked.
Unlike in the West, this acceptance of evolution was never tainted by hubris or an aversion to acknowledging human-like characteristics in animals.
Japanese primate researchers assumed that each individual animal had a distinct personality, and they did not hesitate to give their subjects names.
They plotted kinship relationships over multiple generations, believing that primates must have a complex family life, just like us.
They did all of this well before any Western scientist thought of it.
In 1958, when Imanishi and his students toured the US to report their findings, they were ridiculed for humanizing their subjects and for believing that they could distinguish between all those monkeys.
The Western view of apes regarded them as akin to Rousseau's "noble savage" - autonomous individuals, devoid of social ties and obligations, driven by instinct to swing haphazardly from one fruit tree to the next.
But while Jane Goodall was describing female chimpanzees and their dependent offspring as the only socially bonded units in the primate world, a Japanese team, working only 130 kilometers away, eventually proved that chimpanzees live in large communities with stable memberships. We now know that chimpanzee society is male-bonded, and there is ample evidence of territorial warfare between communities.
The initial discovery arose from the assumption that chimpanzees, so close in evolution to humans, could not be as "individualistic" as Western science supposed.
The same initial assumption led Imanishi in 1952 to suggest that animals might have culture, which he reduced to its lowest common denominator: the social rather than genetic transmission of behavior.
If individuals learn from one another, over time their behavior may diverge from that of other groups, thus constituting a distinct culture.
We now know that cultural learning among animals is widespread, including birdsong, the use of tools by chimpanzees, and the hunting techniques of whales.
Yet only a few decades ago, some Western professors forbade their students even to make reference to papers by Japanese colleagues!
How could a cultural outlook that the West treated with such raw condescension - even in 1985 - simultaneously shape Western science so profoundly?
The answer lies in language.
A single language for scientific papers and conferences is clearly desirable, and the language of international science is English.
Good scientific ideas formulated in bad English either die or get repackaged.
Like a Hollywood interpretation of a French novel, their origins become erased.
Eastern thinking could creep into ethology unnoticed partly because it filtered into the literature through awkward formulations and translations that native English speakers found it easy to improve on.
The problem is not the English language per se , but the attitude and behavior of many native speakers.
Naturally, you speak and write your own language faster and more eloquently than any other, and this can place scientists whose English is poor at a severe disadvantage.
Imanishi's influence is now pervasive - all primate scientists have adopted the technique of following individuals over time, and animal culture is the hottest topic in our field.
But Imanishi's writings are rarely, if ever, cited.
We should not wonder at the difficulties that other cultural and linguistic groups must experience in gaining a voice and proper acknowledgment in science.
Seeking Sovereignty in Europe and Iraq
Two very different efforts at "nation building" are galvanizing world attention: America's struggle to construct a viable polity in Iraq and the EU's ambitious project of making Europe into a true "Union."
While many issues involved are distinct, a "democratic deficit" looms large in both undertakings.
Why and what will it take to overcome it?
Sovereign regimes require a political identity.
To understand this, lets reflect on a few considerations with a Rousseauian flavour.
Jean-Jacques Rousseau was the conflicted genius who first articulated many basic themes of modernity, from democracy through authenticity, with all their contradictory demands.
He is a great thinker, whose advice is always disastrous to follow.
The first modern, democratic revolutions transferred power from monarchs to the "nation" or the "people."
But this required inventing a new kind of collective agency that could decide and act together, to which one could attribute - a la Rousseau -- a "will."
This new entity requires strong cohesion, because popular sovereignty means more than simply the will of the majority.
After all, many sorts of bodies, even the loosest aggregations, can adopt majority decision-making.
Suppose that during a public lecture, some people feel hot and ask that the windows be opened; others disagree.
One might decide the matter by a show of hands, with the minority accepting the outcome favored by the majority as legitimate.
Yet the audience might be comprised of individuals unknown to one another, without mutual concern, brought together only by the lecture.
Democratic societies, by contrast, need to be bonded more powerfully than some chance grouping.
Popular sovereignty entails certain types of decision procedures--grounded ultimately on the will of the majority (restricted by respect for liberty and individual rights)--and offers a particular justification for collective decision-making.
Under a regime of popular sovereignty, we are free in a way that we are not under an absolute monarch or an entrenched aristocracy.
To see why, consider such a regime from an individual's standpoint.
Say that I am outvoted on some important issue.
I must abide by an outcome I oppose.
My will is thwarted, so why should I consider myself free?
Why does it matter that it is the majority of my fellow citizens, rather than the decisions of a monarch, that is overriding my will?
Indeed, we can even imagine that a potential monarch, waiting to return to power in a coup, agrees with me on the issue in question.
Wouldn't I be freer after a counter-revolution, when my will--at least on this matter--would then be put into effect?
This question is not merely theoretical.
It is rarely put on behalf of individuals, but it regularly arises for sub-groups, such as national minorities, who see themselves as oppressed by majorities.
Perhaps no answer can satisfy them.
Whatever one says or does, they may be unable to see themselves as part of a larger sovereign people.
They therefore see its rule over them as illegitimate, which is precisely the point: the logic of popular sovereignty requires an idea of collective agency based on a sense of individual belonging that is much stronger than in our lecture audience.
Of course, some extreme philosophical individualists believe that appealing to a greater collective is pure humbug, concocted to get voters to accept voluntary servitude.
But without deciding this philosophical issue, we can ask: what feature of our "imagined communities" persuades people to accept that they are free under a democratic regime, even when their will is overridden on important issues?
The answer that we as individuals accept is that we are free because we rule ourselves in common, rather than being ruled by some agency that need not take account of us.
Our freedom consists in having a guaranteed voice in the sovereign, in being heard and participating in making decisions.
We enjoy this freedom because of a law that enfranchises all of us, so that we enjoy this freedom together.
Our freedom is realized and defended by this law, whether or not we win or lose any particular decision.
This law also defines the community whose freedom it realizes and defends-a collective agency, a people, whose acting together by the law preserves their freedom.
Such is the answer, valid or not, that people accept in democratic societies.
Insofar as this freedom is crucial to their identity, they identify strongly with this ongoing collective agency--the "nation" or the "people"--and hence feel a bond with their co-participants in it.
Only an appeal to this kind of membership can rebut the challenge of those considering support for a monarch's or general's or provisional government's coup in the name of their freedom.
The crucial point is that regardless of who is right philosophically, it is only insofar as people accept some such appeal that the legitimacy principle underlying popular sovereignty can work to secure their consent.
If identification with the community is rejected, the government will be illegitimate in the eyes of the rejecters.
In short, there can be no democracy without a shared identity as participants in a common agency.
This notion--which boils down to citizenship --underscores the central challenge now posed by both the Iraqi and European projects.
Simply put, are Iraqis too divided, too long oppressed, to develop anything like the sense of common identity and collective agency that popular sovereignty requires?
In some ways, much less is at stake in building a new democratic community out of the already free and prosperous European countries.
But whether the "democratic deficit" on the European level be remedied also depends on whether a shared European identity can be forged out of the 25 nations that will soon make up the European Union.
Both projects are audacious.
Neither is guaranteed success.
Financial Regulators’ Global Variety Show
PARIS – In the early phases of the financial crisis, it was fashionable to argue that the United States’ system of regulation needed a fundamental structural overhaul.
Differences of opinion between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) had obstructed effective oversight of investment banks and derivatives trading (only the US believes that it makes sense to regulate securities and derivatives separately).
Indeed, the plethora of separate banking regulators had created opportunities for banks to arbitrage the system in search of a more indulgent approach to capital.
Likewise, the lack of a federal insurance regulator had left AIG regulated by the Office of Thrift Supervision (OTS) and the New York State Insurance Department, which proved to be a wholly inadequate arrangement.
Little has come of these arguments.
The Dodd-Frank Act did succeed in putting the OTS out of its misery, but jealous congressional oversight committees have prevented a merger of the SEC and CFTC, and nothing has been done to rationalize banking supervision.
So the American system looks remarkably similar to the one that turned a collective blind eye to the rise of fatal tensions in the early 2000’s.
One factor that contributed to institutional stasis was the absence of a persuasive alternative.
In the decade or so leading up to the meltdown of 2007-2008, the global trend was toward regulatory integration.
Almost 40 countries had introduced single regulators, merging all types of oversight into a single all-powerful entity.
The movement began in Scandinavia in the early 1990’s, but the most dramatic change came in 1997, when the United Kingdom introduced its Financial Services Authority (I was its first chairman).
Other countries adopted slightly different models.
A fashionable approach was known as “twin peaks,” whereby one regulator handled prudential regulation – setting capital requirements – while another oversaw adherence to business rules.
But twin peaks itself was further subdivided.
The Dutch model brigaded the prudential regulators inside the central bank, while the Australian version was built on a separate institution.
These integrated structures seemed to offer many advantages.
There were economies of scale and scope, and financial firms typically like the idea of a one-stop (or, at worst, a two-stop) shop.
A single regulator might also be expected to develop a more coherent view of trends in the financial sector as a whole.
Unfortunately, these benefits did not materialize, or at least not everywhere.
It is hard to argue that the British system performed any more effectively than the American, so the single-regulator movement has suffered reputational damage.
And the continuing travails of the Dutch banking system – another bank was nationalized last month – suggest that it is easy to fall into the gap between twin peaks.
The truth is that it is hard to identify any correlation between regulatory structure and success in heading off or responding to the financial crisis.
Among the single-regulator countries, Singapore and the Scandinavians were successful in dodging most of the fatal bullets, while the UK evidently was not.
Among the twin peak exponents, the Dutch system performed very poorly indeed, while Australian financial regulation may be considered a success.
Does it matter whether the central bank is directly involved?
Many central bankers maintain that the central bank is uniquely placed to deal with systemic risks, and that it is essential to carry out monetary and financial policies in the same institution.
Again, it is hard to find strong empirical support for that argument.
The Dutch and American central banks, with direct oversight of their banking systems, were no more effective in identifying potentially dangerous systemic issues than were non-central bank regulators elsewhere.
Canada is often cited as a country that steered its banks away from trouble, even though they sit uncomfortably close to US markets.
But the Bank of Canada is not now, and has never been, a hands-on institutional supervisor.
So perhaps the US Congress has been right to conclude that changing the structure of regulatory bodies is less important than getting the content of regulation right.
Elsewhere, though, a lot of structural change is under way.
In the UK, every financial disturbance leads to calls to revamp the system.
There were major overhauls in 1986, and again in 1997, when the Bank of England lost its banking supervision responsibilities as a delayed response to the collapse of Barings.
Next month, it gets them back – and more.
For the first time, the Bank of England will supervise insurance companies as well.
A similar change has been introduced in France, where a new Prudential Control Authority has been created.
The British and French rarely agree on anything; one is tempted to say that when they do, they are highly likely to be wrong.
It is difficult now to discern a coherent pattern.
Certainly, the trend toward full-service single regulators outside the central bank has slowed to a crawl (though Indonesia is consolidating regulators at present).
There is no consensus on the role of the central bank: in around a third of countries, it is the dominant player, in another third it has responsibilities for banks only, while in the remaining third it is a system overseer only.
We could see this as a controlled experiment to try to identify a preferred model.
After all, financial systems are not so different from one another, particularly in OECD countries.
But there is no sign of a considered assessment being prepared, which might at least help countries to make better-informed choices, even if it did not conclude that one model was unambiguously best.
The G-20, under its current Russian presidency, is now in search of a role.
Seeming Green
COPENHAGEN – When Denmark’s new government ministers presented themselves to Queen Margrethe II last month, the incoming development minister established his green credentials by rolling up to the palace in a tiny, three-wheeled, electric-powered vehicle.
The photo opportunity made a powerful statement about the minister’s commitment to the environment – but probably not the one he intended.
Christian Friis Bach’s electric-powered vehicle was incapable of covering the 30 kilometers from his house to the palace without running out of power.
So he put the electric mini-car inside a horse trailer and dragged it behind his petrol-powered Citroën for three-quarters of the trip, switching back to the mini-car when he neared the television cameras.
The stunt produced more carbon emissions than if he had ditched the electric car and horse trailer and driven a regular car the entire distance.
Unfortunately, the story is not unique.
Under the United Kingdom’s Labour government in 2006, Conservative party leader David Cameron attracted attention for trying to “green” his credentials by cycling to work; the tactic went awry when it emerged that a car trailed him carrying his briefcase.
But environmental hypocrisy in current politics runs deeper than photo opportunities.
In Denmark, as across the developed world, politicians are promising to fix the globe’s financial mess by overseeing a transition to a greener economy.
In the United States, President Barack Obama touts “green jobs.”
Australian Prime Minister Julia Gillard has introduced a carbon tax to “enable economic growth without increases in carbon pollution.”
And David Cameron was elected Prime Minister on a promise to lead the UK’s “greenest government ever.”
Denmark serves as a useful test of whether these leaders’ preferred policies yield the environmental and economic benefits that they promise.
In tune with international enthusiasm for green energy investment, the Danish government intends to expand wind power dramatically by 2020.
That is a significant gesture, but, since the country is part of the European Union’s emissions-trading scheme, it will mean absolutely nothing for global CO2 emissions.
It will simply make coal power cheaper in other EU countries.
Indeed, costly emission cuts in Denmark and elsewhere are likely to lead to a partial relocation of CO2 emissions to more lenient countries, such as China (where production is less climate-efficient), and thus to an overall increase in global CO2 emissions.
The EU has reduced its emissions since 1990, but, at the same time, it has increased imports from China, which alone has produced enough emissions to offset those reductions.
Some will argue that we must implement a comprehensive Kyoto-style agreement to cut emissions globally.
But, as we saw at the farcical Copenhagen climate summit in 2009, such an agreement is impossible.
Nobody expects a deal to emerge from next month’s summit in Durban, South Africa, and with good reason: even with Democrats in the White House and controlling Congress, the US could not implement an agreement on climate change, while emerging economies, led by China and India, are unwilling to implement measures that would impede growth.
Danish politicians – like politicians elsewhere – claim that a green economy will cost nothing, or may even be a source of new growth.
Unfortunately, this is not true.
Globally, there is a clear correlation between higher growth rates and higher CO2 emissions.
Furthermore, nearly every green energy source is still more expensive than fossil fuels, even when calculating pollution costs.
We do not burn fossil fuels simply to annoy environmentalists.
We burn them because fossil fuels have facilitated virtually all of the material advances that civilization has achieved over the last few hundred years.
Politicians in Denmark and elsewhere argue as if this were no longer true: a transition to a green economy will create millions of new “green jobs.”
But, while green-energy subsidies generate more jobs in green-energy sectors, they also displace similar numbers of jobs elsewhere.
This is not surprising: either customers or taxpayers must finance subsidies.
Electricity prices will increase, implying a drag on private-sector job creation.
If the goal is to create jobs, public investment in other areas – such as the health care – generates stronger, faster employment growth.
To bring the point home, for years Danish politicians have insisted on subsidizing the world’s largest, Danish-based, wind-turbine producer, Vestas, arguing that Denmark wins when other countries spend subsidies on Danish wind-farm technology.
But when the Danish Economic Council examined the situation in 2004, it concluded that the country had lost money overall from expenditures on subsidies.
More seriously, in today’s tough financial times, the solar and wind industries are downsizing production in expensive countries and shifting employment to cheaper economies.
Last year, Vestas dismissed 3,000 employees in Denmark and Sweden.
Many politicians are drawn to photo opportunities and lofty rhetoric about “building a green economy.”
Unfortunately, the green-energy policies currently being pursued are not helping the environment or the economy.
More likely, they will lead to greater emissions in China, more outsourcing to India, and lower growth rates for the well-intentioned “green” countries.
Selecting Our Children
MELBOURNE – In April, Germany’s parliament placed limits on the use of genetic diagnosis.
Is the new German law a model for other countries to follow as we grapple with the ethical issues posed by our growing knowledge of human genetics?
Some provisions of the German law draw on the widely shared ethical principles of respect for individual autonomy and privacy.
No one can be tested without his or her consent.
Neither employers, nor insurance companies, may require genetic testing.
Individuals are granted both the right to know – to be informed of the results of any genetic test about themselves – and the right to choose to live in ignorance of what a genetic test may predict about their future.
To discriminate against or stigmatize anyone on account of their genetic characteristics is prohibited.
Desirable as these provisions seem, they could impose a heavy cost on German companies. If insurance companies outside Germany are permitted to require genetic tests while German companies are prohibited from doing so, then people who know they have life-shortening genetic diagnoses will get their life insurance from German insurance companies.
These companies will then find themselves making more payments for premature deaths relative to their competitors.
To cover the increased costs, they will have to raise premiums, making themselves uncompetitive.
In an attempt to mitigate this problem, the law specifies that anyone taking out an insurance policy valued at more than €300,000 may be required to disclose the results of prior genetic tests.
But if people lie about whether they have previously been tested, that provision will be moot.
As genetic testing becomes increasingly able to predict not only health, but also some cognitive and personality traits, the prohibition on employer testing may also put German employers at a disadvantage in the international marketplace.
They will invest resources in training employees whom their competitors will exclude from the initial pool of recruits.
This may be a humane thing to do, for it gives every individual a chance, irrespective of the genetic odds against their paying their way for the company.
But, in the long term, if we are serious about prohibiting such tests, we need an international agreement – on both insurance and employment – to ensure a level playing field for all countries.
That will not be easy to achieve in a globally competitive economy in which some nations have demonstrably less respect for individual human rights than others.
The German law’s most controversial feature is a prohibition on prenatal genetic testing for diseases that will manifest themselves only in adulthood.
Consider, for example, a woman who knows that her partner has the gene for Huntington’s disease.
Any child of his has a 50% chance of inheriting the condition.
If the child does inherit it, he or she will, at around 40, begin to suffer uncontrollable movements, personality changes, and a slow deterioration of cognitive capacities.
People with Huntington’s disease usually die about 15 years after the onset of the symptoms.
There is no cure.
No parents could want this future for their children.
Prenatal testing of fetuses (or of in vitro embryos before transfer to the uterus) is now well established throughout the developed world.
If the test is positive, the pregnancy can be terminated, or, in the case of pre-implantation diagnosis, the embryo will be discarded.
The new German law makes such tests a crime.
The same is true of tests for the genes that strongly predispose women to breast cancer.
As genetics advances, more such late-onset conditions will become detectable prenatally.
What could be the thinking behind such a law?
One might take the view that 40 years of life before the onset of Huntington’s disease or breast cancer is better than no life at all.
But if we take that into account, should we not also take into consideration the life of the child who the parents would have had, if they had been able to use prenatal diagnosis and be sure of having a child who does not carry the gene for the disease?
Surely that child has better life prospects.
When we have a choice between lives with such different prospects – and can make the choice before the embryo or fetus has any awareness at all – shouldn’t we be able to choose the child with the better prospects?
It is not surprising that questions about genetic tests should receive special attention in Germany, given the national imperative of avoiding any repetition of the crimes of the Nazi era.
But, in their laudable desire to distance themselves as much as possible from those atrocities, Germany’s legislators have enacted a law that makes it a crime to use modern science to avoid undoubted human tragedies.
That is an absurd outcome.
The pendulum has swung too far.
Selling America
A year ago, then United States National Security Adviser Condoleezza Rice announced that, “We are engaged primarily in a war of ideas, not of armies.”
She was right, but it is a war that the US is losing, because it is regularly out-flanked by Al-Qaeda.
Rising anti-Americanism around the world threatens to deprive the US of the soft or attractive power that it needs to succeed in the struggle against terrorism.
As Iraq has shown, hard military power alone cannot provide a solution.
Poll after poll confirms that America’s soft power has declined, particularly in the Islamic world.
Even in supposedly friendly countries like Jordan and Pakistan, more people say they trust Osama Bin Laden than George Bush.
Information is power, and today a much larger part of the world’s population has access to it.
Long gone are the days when US Foreign Service officers drove Jeeps to remote regions of the Third World to show reel-to-reel movies to isolated villagers.
Technological advances have led to an information explosion, and publics have become more sensitized to propaganda.
The world is awash in information, some of it accurate, some misleading.
As a result, politics has become a contest about credibility.
Whereas the world of traditional power politics is typically defined by whose military or economy wins, politics in an information age is about whose story wins.
Governments compete with each other and with other organizations to enhance their own credibility and weaken that of their opponents.
Unfortunately, the US government has not kept up.
Even the Pentagon’s Defense Science Board admits this, reporting that America’s strategic communication “lacks Presidential direction, effective interagency coordination, optimal private sector partnerships, and adequate resources.”
In the final years of the Clinton administration, Congress mistakenly abolished the US Information Agency and gave its tasks to a new Undersecretary for Public Diplomacy in the State Department.
This office has subsequently been left vacant or, for two of the past four years, filled on only an interim basis.
The entire budget for public diplomacy (broadcasting, information, and exchange programs) is $1.2 billion, about the same as France, or what McDonald’s spends on advertising.
The US government spends 450 times more on hard military power than on soft power.
In 1963, Edward R. Murrow, the famous journalist who directed the US Information Agency in the Kennedy Administration, defined public diplomacy as interactions not only with foreign governments, but primarily with non-governmental individuals and organizations, often presenting a variety of private views in addition to government views.
Skeptics who treat “public diplomacy” as a euphemism for broadcasting government propaganda miss the point.
Simple propaganda lacks credibility and thus is counterproductive.
Public diplomacy, by contrast, involves building long-term relationships.
Most important in the current situation will be the development of a long-term strategy of cultural and educational exchanges aimed at developing a richer and more open civil society in Middle Eastern countries.
Given low official credibility, America’s most effective spokesmen will often be non-governmental.
Indeed, some analysts have even suggested that the US create a non-partisan corporation for public diplomacy that would receive government and private funds, but would stimulate independent cross-border communications.
Corporations, foundations, universities, and other non-profit organizations can promote much of the work of developing an open civil society.
Companies and foundations can offer technology to help modernize Arab educational systems and take them beyond rote learning.
American universities can establish more exchange programs for students and faculty.
Foundations can support the development of institutions of American studies in Muslim countries, or programs that enhance journalistic professionalism.
They can support the teaching of English and finance student exchanges.
In short, there are many strands to an effective long-term strategy for creating soft power resources and promoting conditions for the development of democracy.
The response to the recent tsunami disaster in Asia is a case in point.
President George W. Bush pledged – albeit belatedly – $350 million in relief to the victims, and sent high-level emissaries to the region.
There has also been an impressive outpouring of private support by American charities and non-profit organizations.
The images of US soldiers battling in Iraq have been supplemented by images of America’s military delivering relief to disaster victims.
But effective follow-up is essential.
Bush’s prior announcements of increased development assistance and stronger efforts to combat HIV/AIDS in Africa were not only moral imperatives, but also important investments in American soft power.
Unfortunately, the funds needed to implement these initiatives have not flowed as rapidly as the rhetoric.
Equally important, none of these efforts at relief or public diplomacy will be effective unless the style and substance of US policies are consistent with a larger democratic message.
That means that Condoleezza Rice’s chief task as Secretary of State will be to make American foreign policy more consultative in style as she seeks a political solution in Iraq and progress on Middle East peace.
Only then will she be able to begin the job of repairing America’s tattered reputation by shoring up its neglected public diplomacy.
Mine Your Digital Business
BOSTON – Nearly everyone has a digital footprint – the trail of so-called “passive data” that is produced when you engage in any online interaction, such as with branded content on social media, or perform any digital transaction, like purchasing something with a credit card.
A few seconds ago, you may have generated passive data by clicking on a link to read this article.
Passive data, as the name suggests, are not generated consciously; they are by-products of our everyday technological existence.
As a result, this information – and its intrinsic monetary value – often goes unnoticed by Internet users.
But the potential of passive data is not lost on companies.
They recognize that such information, like a raw material, can be mined and used in many different ways.
For example, by analyzing users’ browser history, firms can predict what kinds of advertisements they might respond to or what kinds of products they are likely to purchase.
Even health-care organizations are getting in on the action, using a community’s purchasing patterns to predict, say, an influenza outbreak.
Indeed, an entire industry of businesses – which operate rather euphemistically as “data-management platforms” – now captures individual users’ passive data and extracts hundreds of billions of dollars from it.
According to the Data-Driven Marketing Institute, the data-mining industry generated $156 billion in revenue in 2012 – roughly $60 for each of the world’s 2.5 billion Internet users.
As impressive as this figure sounds, it is just the first step for the data economy.
By 2020, the global Internet population will reach five billion; ten billion new machine-to-machine connections will be created; and mobile data traffic will rise 11-fold.
Given the dramatic growth in the amount of data being generated, together with ever-expanding applications across industries, it is reasonable to expect that individual data will soon be worth more than $100 per Internet user.
Within ten years, the data-capture industry can be expected to generate more than $500 billion annually.
Based on these projections, one might wonder what kind of compensation the creators of this multibillion-dollar data can expect.
As it stands, the answer is none at all.
Individual users are at the bottom of a broken economy.
The value that their data generate is being collected by third parties, and sold to whatever cash-rich organization is willing to purchase it.
This does not have to be the case.
The first step toward reclaiming some of the value of our own data is to view this information as an asset, rather than as a by-product.
At that point, Internet users can find ways to take control of their own creation.
Already, Facebook users can export all of their personal data as a zip file simply by clicking a link on their profiles.
Presumably, they could sell that information directly to the organizations that want it, instead of allowing Facebook to do so.
Of course, the data market does not yet exist on this scale.
But, as Facebook’s data-export facility demonstrates, a new model that turns data into an asset and consumers into producers is not a distant prospect.
Such a model would empower billions of Internet users by making them beneficiaries of a transactional exchange – one that adds value in every direction.
Beyond enabling individual Internet users to monetize their data, this model would benefit data buyers by connecting them more closely to consumers – not least by diminishing the mistrust that can arise when users are not complicit in the sharing and use of their data.
Indeed, firms that acknowledge that personal data are personal property will be in a better position to build relationships with individual consumers, thereby gaining deeper insights into their specific needs and desires.
If passive data are worth hundreds of billions of dollars when sold by third parties, the data that individuals choose to share – reliable, honest insights into their motivations as consumers – should be worth much more.
By recognizing the individuals behind the data, companies can access and share in that value, within a fully inclusive data economy.
Personal data is exactly that – personal.
People should choose whether to share it, and they should be able to share it on their own terms.
Semi-Rational Exuberance
In 1996, Yale economist Robert Shiller looked around, considered the historical record, and concluded that the American stock market was overvalued.
In the past, whenever price-earnings ratios were high, future long-run stock returns were low.
But now prices on the broad index of the S&P 500 stood at 29 times the average of the past decade's earnings.
On the basis of econometric regression analyses carried out by Shiller and Harvard’s John Campbell, Shiller predicted in 1996 that the S&P 500 would be a bad investment over the next decade.
In the decade up to January 2006, he argued, the real value of the S&P 500 would fall.
Even including dividends, his estimate of the likely inflation-adjusted returns to investors holding the S&P 500 was zero – far below the roughly 6% annual real return that we have come to think of as typical for the American stock market.
Shiller’s arguments were compelling.
They persuaded Alan Greenspan to give his famous “irrational exuberance” speech at the American Enterprise Institute in December 1996.
They certainly convinced me, too.
But Shiller was wrong.
Unless the American stock market collapses before the end of January, the past decade will have seen it offer returns that are slightly higher than the historical averages – and much, much greater than zero.
Those who invested and reinvested their money in America’s stock market over the past decade have nearly doubled it, even after taking account of inflation.
Why was Shiller wrong?
We can point to three factors, each of which can take roughly one-third of the credit for annual real returns of 6%, rather than zero, over the past decade:
· The high-tech revolutions behind the very real “new economy,” which have accelerated American companies’ productivity growth.
· Shifts in the distribution of income away from labor and toward capital, which have boosted corporate profits as a share of production.
· Increasing risk tolerance on the part of stock market investors, which appears to have raised long-run price-earnings ratios by around 20%.
None of these three factors was obvious in 1996 (although there were signs of the first and inklings of the third for those smart or lucky enough to read them).
In 1996, betting on Shiller’s regression analyses was a reasonable and perhaps intelligent thing to do.
But it was also an overwhelmingly risky thing to do, as anyone who followed the portfolio strategy implicit in Shiller’s analysis learned.
This takes nothing away from the importance of the question that Shiller addressed.
Just why is it that stock markets around the world are subject to fits of “irrational exuberance” and “excessive pessimism”? Why don’t rational and informed investors take more steps to bet heavily on fundamentals and against the enthusiasms of the uninformed crowd?
The past decade offers us two reasons.
First – if we grant that Shiller’s regression analyses correctly identified long-run fundamentals a decade ago – betting on fundamentals for the long term is overwhelmingly risky.
Lots of good news can happen over a decade, enough to bankrupt an even slightly leveraged bear when stock prices look high; and lots of bad news can happen, enough to bankrupt an even slightly leveraged bull when stock prices look low.
Thus, even in extreme situations – like the peak of the dot-com bubble in late 1999 and early 2000 – it is very difficult even for those who believe that they know what fundamental values are to make large long-run bets on them.
It is even more difficult for those who claim to know this and who want to make large long-run contrarian bets to convince others to trust them with their money.
If it were easy to pierce the veils of time and ignorance and to assess long-run fundamental values with a high degree of confidence, it would be simple and safe to make large contrarian long-run bets on fundamentals.
In that case, the smart money would smooth out the enthusiasms – positive and negative – of the uninformed crowd.
But, of course, we cannot overcome long-run uncertainty.
As J.P. Morgan put it when asked to predict what stock prices would do, “They will fluctuate.”
Send in the Clowns
New York &#45;&#45; Beppo Grillo is one of Italy’s most famous comics.
He is also one of Italy’s most influential political commentators.
His blog attracts 160,000 hits daily, and if he could run for prime minister (he can’t, because of a criminal record), more than half of Italy’s voters, according to a poll last year, would have considered voting for him.
Grillo is yet another reminder of a modern phenomenon: the important role of comedians in contemporary politics.
Until a few years ago, the one TV program most Mexicans turned to for political information was called The Morning Quickie, broadcast from 6-10 a.m.
The host, interviewer, and main commentator was Victor Trujillo, better known as Brozo the Clown, adorned with a green wig and a red rubber nose.
It was Brozo the Clown who exposed a major corruption scandal in the office of a former Mexico City mayor.
While staid TV pundits ask the usually vapid questions during presidential debates in the United States, candidates know that the really important thing is to get laughs on the comedy shows of David Letterman or Jay Leno.
And, for several years, American liberals have looked to Jon Stewart, another comic talent, for critical political commentary.
Of course, comic entertainment in politics is not just a modern phenomenon.
Nero was a murderer who understood that he had to amuse the masses to gain popular support.
Then there is the long tradition of the court jester with license to criticize the despot by sweetening his barbs with jokes.
The annual Gridiron Club Dinner in Washington, where the president is lampooned by the press, is a relic of this custom.
In the US, especially, the borderlines between showbiz and politics (or indeed religion) have always been porous.
The similarities between the variety show, the evangelical meeting, and the party convention are striking.
Europeans like to sneer at American political jamborees as being hopelessly vulgar.
In fact, democracy demands a degree of showmanship and pizzazz; politicians need to appeal to the mass of voters, and not just to an elite, which can afford to ignore hoi polloi.
To be utterly boring, holding forth for hours on end, regardless of entertainment value, is the privilege of autocrats.
Only communist rulers could force millions of people to buy their complete works, filled with wooden ideas written in turgid prose.
The problem with many democratic politicians today is that they have become almost as dull as the old communist autocrats.
Most, especially in Europe, are professional politicians with no experience apart from working the levers of party machines.
Gone, for the most part, are the colorful rogues and public-spirited idealists who used to liven up parliamentary politics.
Like bureaucrats, professional politicians have mastered the art of saying nothing interesting in public.
They are managed by equally professional press handlers, masters of spin and the television sound bite.
In these dying days of serious newspaper journalism, slick television shows, packaged by highly-paid anchormen – who never utter an original thought themselves, and would never expect a politician to do so – are the only venues where professional politicians feel secure enough to “face” the public.
As a result, the public is turned off.
Not since the 1930’s has popular disgust with politicians in Europe, the US, as well as Japan, run so high.
This is dangerous, because such sentiments can end in disgust with liberal democracy itself.
Does the future belong, then, to the clowns, the anarchic blogosphere, the anti-politicians, and the populist showmen who entertain the masses with jokes, slurs, and indiscretions on TV channels, which some of them actually own?
If the success of a TV pundit with a red rubber nose is a rebuke to the dull and fawning anchormen, the political success in recent years of entertainers, demagogues, and public figures who make a virtue of their indiscretion is a slap in the face of the professional political class which they profess to despise.
The recent re-election of the great showman Silvio Berlusconi illustrates this perfectly.
Although none of the aspiring candidates for the US presidency can match him in terms of zaniness, similar trends are plain to see.
John McCain managed to defeat his more conventional Republican rivals by seeming to be totally different from them: a maverick who says what he damned well wants, a tough guy with the knowing wink of the old ladies’ man.
Barack Obama, at least when he began his campaign, had all the charisma of the holy roller, turning on the crowds with the rhetorical spark of a great evangelist.
That is why he barged his way past Hillary Clinton, the consummate operator of the party machine.
In some ways, Obama’s candidacy illustrates the problems facing our democracies today.
People don’t trust the professionals.
But electing a clown is not the answer either.
Obama happily combines showmanship and seriousness in a way that could inject new life into the democratic system.
But he has been maneuvered into a peculiar dilemma.
Attacked for being shallow, indiscreet, and flashy by the Hillary camp, he has toned down his revivalist rhetoric, and adopted a more sober, more cautious, more professional air.
Yet, by doing so, he may have made himself less popular, and is being accused of elitism to boot.
Here is one case where a bit more vulgar showbiz may be exactly what democracy requires.
Senegal’s Democracy Put to the Test
Senegal, a country whose population is 90% Muslim, is one of the Islamic world’s most peaceful and democratic countries.
This tranquility has been helped by the elaborate “rituals of respect” that have developed between the secular state and the Sufi orders, and the excellent relations between the country’s Muslim majority and the Catholic minority at all levels of society.
The secular state and religious groups have cooperated on AIDS prevention – to the extent AIDS affects only about 1% of the population, compared to more than 20% in some African countries.
The secular state, supported by feminist groups and some transnational non-governmental organizations, banned female genital mutilation in 1999, without triggering massive Muslim protests.
Mistakenly viewed by some as an example of French laicité, which might be characterized as “freedom of the state from religion,” Senegal, although once a French colony, has crafted a very different model of “equal respect and equal support for all religions.”
In fact, secularism in Senegal resembles that in India more than anywhere else.
In Senegal, fundamentalist schools, as well as Iranian and Saudi Arabian aid in the education sector, find little space or demand.
The Senegalese government spends about 40% of the state budget on education and provides free public schooling to almost 85% of all primary school age children.
By contrast, Pakistan, spends just 8% and six million primary age children have no public schooling.
Furthermore, since 2003 state schools offer religious instruction (using authorized textbooks that are never Wahhabi in spirit), with the informal approval of secular and Sufi teachers alike.
Parents are increasingly sending their sons, and now their daughters, to these tolerant, accredited, and democracy-compatible schools.
Some parents still elect to send their children to private, often Franco-Arabic, schools.
However, the Senegalese pattern of state-religious relations allows the government to provide partial funding to such private religious schools.
In return, the state inspects such schools regularly.
The only schools the state does not supervise are Koran-based schools, which some parents use as a complement – but seldom a full substitute – for state education.
But most of the traditional religious teachers in such schools practice Senegalese rituals of respect, and, in any case, view Saudi Arabian-style schools as alien competitors.
Yet, despite all these positive developments, Senegal’s unusual democracy is imperiled.
The reasons have nothing to do with the rise of political Islam, but everything to with poor electoral practices by elected incumbents and international indifference.
The current president, Abdoulaye Wade, who is over 80 years old, is running for re-election on February 25.
Wade has substantial international prestige, because he led the final phase of the country’s long democratic transition in 2000.
But Wade postponed legislative elections, originally scheduled for June 2006, first to February 2007, and later, by presidential decree, to June 2007.
Two weeks ago there were almost daily discussions about the possibility of the presidential elections being postponed indefinitely .
It now appears that there will be a presidential election, but will it be fair?
A month before the election, only 64% of citizens who had registered had received their voting cards.
On January 28, a peaceful but “unauthorized” demonstration by opposition parties was brutally repressed by the police and three presidential candidates were arrested for the day.
None of this was shown on television.
In a country with little tradition of political violence, too many mysterious things are happening.
An early strong critic of Wade, Talla Sylla, had his face beaten with a hammer.
Abdou Latif Coulibaly, the author of two books critical of Wade, received a death threat, as did Alioune Tine, the leader of a main human rights organization, Raddho.
So Senegal’s “rituals of respect” may not be holding.
The Bush administration, in bad need of a democratic Muslim ally, wants Wade to fill that bill, and seems to have decided, in the words of one high, but disappointed, US official, to give Wade a “pass.”
Whereas the US is willing to spend $147 billion next year in the name of an implausible democracy in Iraq, it refuses to spend any imagination or money to shore up one of the most creative models of peace and democracy in the Islamic world.
That is terrible for Senegal and Africa, as well as for America’s credibility.
The European Union says that it has been caught unawares by the situation and has not budgeted any funds for election observers to go to Senegal.
France, the former colonial ruler – and still a influential force in the country – has been silent.
But Senegal’s democracy hangs in the balance.
In the coming weeks, attention by the international press, by international election observers, and by supporters of tolerance around the world could make a critical difference.
East Asia’s Patriots and Populists
TOKYO – When faced with domestic worries, politicians often resort to foreign diversions – a simple axiom that is highly useful in assessing the increasingly tense sovereignty disputes in the East and South China Seas.
Although China is involved in the most wide-ranging and intense disputes, the most tragic is that between South Korea and Japan, given that both countries are democracies with almost identical strategic interests.
On August 10, South Korean President Lee Myung-bak visited the island of Takeshima (called Dokdo in Korean), which has been the subject of a territorial dispute between Japan and South Korea for 60 years.
During a lecture at the Korea National University of Education four days later, he stoked tensions further, saying of the Emperor of Japan’s proposed visit: “If he wants to come, he should apologize first for the past.”
Despite his numerous achievements as president, Lee is trumpeting his nationalist/anti-Japanese credentials in the waning days of his term, which ends in February 2013.
Indeed, so strident has he become that he refused to accept a message from Japan’s prime minister about his island visit.
Lee’s hyper-patriotism is new.
Less than two months ago, he reached an agreement to share military intelligence with Japan – a deal that was subsequently abandoned, owing to fears that the opposition would attack his party’s presidential candidate as subservient to Japan.
Lee’s recent behavior may also reflect his fear that he could suffer a fate similar to that of past South Korean presidents.
Some have been assassinated, one committed suicide, and others were arrested and condemned to death after stepping down.
Lee may have interpreted his brother’s arrest in July for accepting bribes as a prelude to such a fate.
Attempting to mitigate future domestic political damage by undermining the dynamics of the relationship between South Korea and Japan – and both countries’ relationship with the United States – is unwise.
Given North Korea’s continued potential for military mischief and the fluid state of security in Asia in the wake of China’s rise, such tactics could have serious, if unintended, consequences.
The origins of the dispute over Takeshima lie in the period immediately before the Treaty of San Francisco was signed in 1951, formally ending World War II in the Pacific.
The treaty demarcated territory, including Takeshima.
But South Korea’s then-president, Syngman Rhee, in violation of the treaty and international law, instituted the “Syngman Rhee Line” to demarcate an expansive area, including Takeshima, within which South Korea unilaterally claimed fishery jurisdiction.
Since then, South Korea has used the issue as a means of boosting national prestige – and, aware that its sovereignty claims are legally dubious, has refused to allow the International Court of Justice to adjudicate.
More ominous, however, is the sovereignty dispute between Japan and China.
Here, history has a story to tell as well.
Japan’s government officially incorporated the Senkaku Islands into Japanese national territory in 1895.
Since then, the islands have consistently been held to be Japanese.
Indeed, at one point there was a dried bonito factory in operation, and more than 200 residents on Uotsuri, the largest of the islands (roughly the size of New York City’s Central Park).
At WWII’s end, in accordance with Article 3 of the Treaty of San Francisco, the islands were placed under United States control, but reverted to Japan in 1972, as part of the agreement that returned to it administration of Okinawa.
Until this point, neither China nor Taiwan expressed objections.
In the Chinese World Atlas published under Mao Zedong in 1960, the Senkaku Islands were treated as part of Okinawa.
And, although circumstances changed in 1968, when a survey by the United Nations Economic and Social Commission for Asia and Pacific revealed the seas around the islands to contain an abundance of resources, the periodic tensions that arose were manageable.
That dynamic was altered when the Democratic Party of Japan came to power three years ago.
The DPJ’s feckless dithering over whether to renew the US Marines’ lease on a base on Okinawa signaled to the world – and to China, in particular – that the party did not value the US alliance and America’s security guarantee as highly as previous governments did.
As a result, China has since been testing Japan’s resolve and America’s assurances, though US Secretary of State Hillary Clinton’s recent and resolute affirmation of her country’s commitment to Japan’s security should put an end to any suspicion in that regard.
Meanwhile, domestic tension in China – particularly the scandal surrounding the purge of former Chongqing Communist Party boss Bo Xilai and the country’s economic slowdown – has probably prompted the government to play the nationalist card more forcefully than usual.
The Party’s upcoming Congress to anoint the country’s new leadership for the next decade adds to its desire to manipulate public emotion.
But the nationalist genie, once released, is not easily controlled.
Some anti-Japanese demonstrations – which featured rioting, looting, and the destruction of Japanese businesses – mutated into anti-government protests.
By allowing social tensions to mount to such a degree, the Chinese government may also be partly responsible for the recent rampage among thousands of workers at the Foxconn plant (where components for Apple iPods and iPads are made) in Taiyuan.
This December, South Korea will elect a new president. Japan is likely to hold fresh elections soon as well.
The governments that emerge should use their popular mandates to forge a new form of cooperation that can transcend an embittered past.
What France and Germany achieved in the 1950’s can serve as an example.
By forging shared sovereignty over issues vital to national security – namely, coal and steel – visionary leaders in both countries laid the foundation for European peace and security, while overcoming a long history of antagonism.
In the face of China’s rise and maritime ambitions, East Asia’s two great democracies must seek to do no less.
If they succeed, South Korea and Japan would establish a precedent that offers the best path to resolving the great sovereignty questions that are now destabilizing Asia.
Sense and Nonsense about Disproportionate Force
As the war in Lebanon continues, the term “disproportionate force” is being bandied about as if some crystal clear principle of international law lay behind it, telling us when force is disproportionate and why it is illegal.
But civilian deaths as a result of military combat are not enough to say that “disproportionate force” has been used.
Nor has that standard, whatever it is, been met if more children die on one side than the other.
So what, then, does “disproportionate force” mean, and what is its place in the law of war?
Let’s go back to basics.
In the domestic law of self‑defense, the use of force must always be both necessary and proportionate to the interest being protected.
A good example is whether a storeowner may shoot looters who are escaping with his goods.
If there is no other way to stop the thieves, the use of force is necessary.
But is it proportional?
That depends on whether the cost to the looters of being shot so clearly outweighs the value of the stolen goods that the storeowner should do nothing, at least at the moment.
He always has recourse to the police and the possibility that they might recover the goods.
In other words, force becomes disproportionate when the costs of using it are too high.
However, this does not mean that force becomes “disproportionate” simply when the costs outweigh the benefits.
After all, a woman may use deadly force to avoid being raped, even though the life of the aggressor, one would think, is worth more than the sexual integrity of the potential victim.
Anytime physical harm is threatened, it seems that the use of all necessary force is permissible.
Suppose a terrorist is pulling out his victim’s teeth one by one, and that the only way to stop him is to kill him.
Most people would say that doing so is permissible, even though the harm to the aggressor is much greater than the value of the victim’s teeth.
How, then, do we know when force is disproportionate?
This is a matter of constant debate.
Many legal systems now take the position that, with regard to property offenses at least, the victim must be willing to surrender his property when the only available option is to kill the thief.
Let us try to apply these principles to international conflict.
Two distinct realms of self‑defense exist within the law of war.
One is the justification for going to war in the first place; the second is the use of force in combat in the course of war, such as killing civilians who are attacking soldiers.
In the justification of armed conflict, everyone agrees that the defending state may use all necessary force to repel an aggressor.
When Argentina invaded and occupied the Falkland Islands, the United Kingdom could take whatever measures were necessary to remove them.
But let us suppose that the British bombed Buenos Aires.
For the use of force to be necessary, it must yield a direct military advantage that contributes to thwarting the aggression.
It would not be acceptable to argue that to bomb a city on the mainland was necessary in order to compel the Argentine population to put pressure on the military junta to withdraw from the islands.
So bombing Buenos Aires in that context would have been unnecessary and therefore could not possibly qualify as proportionate.
International lawyers commonly confuse the concepts of necessity and proportionality, claiming that both apply in wars of self‑defense.
But this is not as clear as it is in domestic criminal law.
I know of no case in the international version of shooting escaping looters where a court has affirmed that the use of force was necessary but not proportionate.
There are two reasons why international law is tolerant of the use of all, or nearly all, necessary force.
First, in international conflicts, the defending army must always protect the lives of its citizens, not just property interests.
Second, with rare exceptions, there is no international police force that can assist a defending nation.
The problem of disproportionate force has different contours on the battlefield, when soldiers are already at war.
Among all the dozens of war crimes in international law, none mentions the element of disproportionate force.
The closest adjective used in the Rome Statute is “clearly excessive” force.
Intentional targeting of civilians is prohibited, as is an attack on military targets in the knowledge that there will be “clearly excessive” harm relative to the value of the military target.
As one would expect, there is no criterion, not even a theory, for determining when the use of force carries an excessive cost to civilian bystanders.
The specific problem in Lebanon, particularly Israel’s bombing of southern Beirut, is deciding when the targets are protected civilians or part of a militant terrorist organization and thus subject to legitimate attack.
We have too little information about many of these attacks to know one way or the other.
This is an area where the concepts are clear but the facts remain murky.
Journalists on the ground would do well to inquire about the relevant military objectives rather than pass judgment on the basis of the numbers of civilians killed, which may have minimal relevance to legal analysis.
Sense and Nonsense about Self-Defense
If patriotism is, as Samuel Johnson suggested, the last refuge of a scoundrel, then self-defense is the last refuge of an aggressor.
The justification of self-defense comes readily to the lips of both paranoids and those who reasonably wish to defend themselves against imminent attack.
The argument for America's putative invasion of Iraq is, of course, self-defense, that is, the need to shield itself and its allies against Saddam Hussein's possible use of weapons of mass destruction.
But claims of "self-defense" also find less reputable invocations.
Timothy McVeigh, the Oklahoma City bomber who murdered 168 people in 1995, thought he was defending the US Constitution against a predatory federal government.
Yigal Amir thought he was defending Israel against a Prime Minister willing to surrender sacred land to the enemy when he assassinated Yitzak Rabin later in the same year.
Perpetrators of violent acts rarely concede that they are aggression pure and simple, rather than actions in defense of life, liberty, or some other important value.
Is there a sensible boundary between sense and nonsense in claiming self-defense?
Lawyers must seek this distinction, for if we surrender to the rhetorical claims of statesmen and paranoids, the line between aggression and self-defense will disappear.
The UN has tried to delimit the scope of self-defense, but it goes too far by permitting states to resort to force only if "an armed attack occurs."
This makes little sense, because states must retain the right to defend themselves against impending attacks as well.
Imagine, say, the Japanese warplanes zeroing in on Pearl Harbor on December 7 th , 1941.
The United States Navy surely had the right to defend itself--if it could--before the bombs fell.
Or consider Nasser's massing of Egyptian troops on Israel's border in 1967, threatening to wipe it off the map.
Is this not akin to a mugger pointing a gun at your head and threatening to shoot?
If self-defense is not permissible in cases of manifest, imminent attack, then the doctrine can hardly appeal to ordinary moral intuitions.
But these clear examples quickly fade into an ambiguous and disputed range of cases, such as Israel's fear of Iraq's Osirak nuclear reactor in 1981.
Building a nuclear reactor is a far cry from launching a nuclear missile.
Israel's bombing of the Osirak reactor must, therefore, be regarded as a "preemptive" or a "preventive" strike--words meant to capture the shadow land of self-defense.
There is little point in struggling with the meaning of these elusive words, because both miss the point.
Some say that the real point is the risk of attack and the destruction that might occur if weapons of mass destruction are deployed.
They employ something like a cost/benefit analysis based on a subjective sense of danger.
But there is no way of making an objective assessment of fear, and even if it were possible, using cost/benefit analysis to invade the territory of another country would wreak havoc with the global system of national sovereignty and international law.
The better way to make sense of self-defense is to invoke two principles that underlie legal claims of justification in both domestic and international law.
The first principle is reciprocity, which implies that if Israel had the right to attack the Osirak reactor, then Iraq had the right to bomb the Israeli nuclear facility at Dimona.
If America now has the right to attack Baghdad, then Iraq--which has made no public statements of aggressive intent toward the US--has the reciprocal right to attack Washington.
What is good for the goose must be good for the gander.
There is no way for a state to claim as a matter of law: You are a "rogue" state and we are good guys, and therefore we operate under different rules.
Admittedly, prior actions and intentions matter in making a judgment about whether to fear an attack.
In the relationship between Israel and Iraq, Saddam Hussein's lobbing of scud missiles at Tel Aviv in 1991 has relevance in judging the dictator's current intentions toward Israel.
But there is no comparable evidence of Iraqi aggressive behavior against US territory.
This brings into focus the second requirement of self-defense.
Evidence of aggressive design must be public and visible to all.
Publicity is a critical element in a legal culture.
Impending aggression cannot be documented in secret dossiers but only by events that can be filmed by CNN.
The aggressor must do something that all can see as a dangerous threat by, for example, aiming a guided missile at a country and threatening to use it.
If we look back at irrational claims of individual self-defense--McVeigh, Amir, and others--we see that their fears were based on private evidence not shared by more than a small circle of friends and co-conspirators, at most.
Insisting on public evidence provides some guarantee against paranoid self-defense by individuals and political manipulation by national leaders.
If the requirements of reciprocity and publicity are applied to the current plans to invade Iraq, the implications are clear.
If they are not, President George W. Bush risks engaging in unlawful aggression against a foreign country.
Sentries
The notion that people have inalienable rights – the right to free speech and association, or the right not to be tortured – simply by virtue of their existence as human beings: that notion is, of course, a fiction.
Actually people are merely sacks of meat on sticks.
Such, it seems, is the ironclad certainty that grounds most tyrannies all over the world – anything their subjects are or have, they sustain or retain at the whim of the regime.
Indeed, the notion of absolute rights inhering in human beings by virtue of their humanity initially arises as a wild assertion in the face of eons of stark evidence to the contrary.
But it is a magical assertion.
"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain inalienable rights, that among these are Life, Liberty and the Pursuit of Happiness...."
The truly revolutionary realization in that passage from America’s Declaration of Independence is contained not so much in the words "truths" or "self-evident" or "created equal" or any of the rest: rather, it's in the calm self-certainty of those first two words: "We hold...."
Note how the text doesn’t launch out with "It is manifestly self-evident that...," or any similar construction, as logic might dictate.
In fact, the self-evidence of the assertion remains fugitive, immanent until some people insist upon it, mutually pledging their Lives, Fortunes, and Sacred Honor, in the process.
It is holding such truths to be self-evident that first makes them so – and more specifically, doing so in concert, alongside others.
Over fifty years ago, the UN’s General Assembly proclaimed a "Universal Declaration of Human Rights."
Most UN member states, however, instantly dismissed the document’s assertions as so much dead letter.
It was left to individual citizens, often through public stances of preposterous courage, to realize that document’s basic premises.
Theirs is a labor, of course, that remains far short of completion.
But fundamental to that work has been the simple, endlessly repeated act of bearing witness, of compiling accurate, reliable information about the victims of renegade regimes.
Such monitoring has usually takes place on the ground, in the midst of depredations, and it can be very dangerous.
Take the case of Maria Victoria Fallon, a lawyer in Medellin, capital of Colombia’s most violent state.
Her group monitors and documents the often murderous collusion of right-wing paramilitaries and Colombia’s army.
Since its formation in 1987, five of her group’s presidents have been gunned down.
In the last three years over thirty Colombian rights monitors have been assassinated or disappeared.
A couple of months ago, Vicky (as she is known to friends) received her own first death threat.
The voice on the end of the line was calm, educated, even polite.
Unless she left Medellin within 24 hours, it told her, she too would be killed.
"Please pay attention," the voice continued.
"This is no joke."
Maria Victoria left Medellin the next day, though for only a few weeks.
She is now back in Medellin, at work, despite increasing threats.
In Tunisia, the regime polishes a reputation for moderation.
In fact, its human rights record is shockingly retrograde.
Torture, grossly unfair trials and denial of basic rights are commonplace. Anyone attempting to draw attention to such facts is routinely suppressed.
Several weeks ago, Dr. Moncef Marzouki, a professor of community medicine at the University of Sousse and veteran of an earlier prison term for helping to found the Tunisian League for Human Rights in 1994 as the Arab World’s first independent human rights organization, was once again tried on trumped-up charges.
Once again, he was sentenced to prison, this time for yet a year’s term, though the conviction is under appeal (the prosecutors are seeking a longer sentence).
Jeanine Mukanirwa, deputy director of PAIF (Promotion and Support for Women’s Initiatives), the leading women’s organization in her native Goma, Eastern Congo, recently ran afoul of insurgent rebels, in part owing to her group’s work documenting violence aimed at women by all the region’s warring parties.
Fleeing west to the country’s capital, Kinshasa, early in 2000, she joined a group coordinating the peace efforts of a variety of civil organizations, apparently offending the country’s rulers.
She was arrested last December and remains detained under frightening conditions.
Bearing witness in such a manner ought not to work.
How can it?
How can mere vigilance, insistence on the rule of law in the face of armored, entrenched tyrannies, ever make a difference?
We hold these truths...these truths and nothing else: aside from them we are naked before power.
But holding such truths is magical.
It's smoke and mirrors, of course: nothing is there except the bold insistence that something is there: this ineffable yet essential thing called human rights.
But if enough people insist upon those rights insistently enough, over time a light begins to shine.
Not only does it shine, it illumines; it actually begins to melt tyrannies.
It's uncanny. But let’s be clear about the nature of that light.
The old proverb notwithstanding, “Truth” alone never set anyone free.
It's always been people telling the truth that accomplishes that miracle.
Separatism and Russia\u0027s Future
MOSCOW: “Self-determination” dominated international politics for two centuries.
In the postwar era, Marxists were the strongest advocates of this theory, insisting on including it in the UN charter.
That grant of legitimacy to the national aspirations of subordinated peoples helped eliminate colonialism.
Should the principle of “self-determination”, however, continue to be embraced in today’s world?
Imagine the chaos that may ensue if separatist energies are allowed to continue in an unfettered way in a world where over two thousand ethnic groups live in over 150 distinct states.
Nowadays, indeed, separatism is not a problem confined to individual states and societies; it is one for the entire global community.
Of course, if all parts of a nation accept separation, creation of a new national state need not be resisted by the world community.
But when a party disagrees about dividing a nation, separatism becomes illegitimate.
So the world community must resist unilateral efforts at separation because separatism today is much more dangerous than during the post-colonial era due to the twin evils of international terrorism and religious extremism.
When I suggest that religious extremism is a danger, I do not equate it with religious fundamentalism.
Muslims in the old Soviet Union were attracted to fundamentalism because they were oppressed.
They could not build mosques; they could not perform their faith in public.
A fundamentalist adherence to Islam was a perfectly natural response to this.
Islamic extremism differs from religious fundamentalism because, beyond promoting strict adherence to Islam, it preaches the spread of Islamic models of power and society.
Married to terrorist tactics, religious extremists, with their unlimited goals, present a real danger to the world.
Perhaps nowhere is this threat as serious as in Russia.
Throughout the North Caucasus many nationalities and ethnic groups have lived in close proximity for centuries.
Some groups – prominently Muslim Chechens – are now separatist-minded.
Others groups want to remain part of Russia.
In the face of such rival desires, how can Russia deal democratically with separatist claims made at gunpoint?
Rather than encourage more of the fragmentation that pursuit of self-determination has caused, I strongly support bringing together and uniting the nationalities that live on Russian territory into a stronger state.
I disagree with those who argue that such a policy will hinder Russia economically and politically.
Indeed, there are clear instances when Russia’s unity with the other independent states that were once part of the Soviet Union will prove to be beneficial to everyone involved.
Take the case of Byelorussia.
During Soviet times, Byelorussia was an “assembling room” of Soviet industrial production.
It remains a republic with solid intellectual potential and hardworking manpower.
Byelorussia may not posses as many natural resources as Russia, but it is self-sufficient, so it may not be the long-term drain on Russia’s economy that many see Byelorussia as being.
Most importantly, Byelorussia and Russia share historical origins.
These bind us together.
Why should we live in two distinct states if most people, not small groups on either side, want unity?
In uniting with Byelorussia we need not act precipitously.
Byelorussia’s President Aleksander Lukashenka seeks closer ties to Russia.
We agree with him.
After all, much of Western Europe adheres to a common currency and its member countries have not come to a bad end.
These processes are complicated but the point is to move in this direction; then, perhaps, Ukraine will begin to come closer to Russia.
What applies to Byelorussia in terms of ending an unwanted separatism applies even more to the Caucasus.
In the US, many ethnic groups live at peace within America’s states.
Russia must resolve its ethnic, national, and separatist problems by providing cultural autonomy and national self-expression within the context of a community remaining part of the Russian Federation.
Assisting national self-expression by some, however, does not mean that others, say Chechnya’s neighbors in Tatarstan or Bashkortostan, should suffer.
National support for one group should not mean oppression of others, or come at their expense.
In seeking peaceful solutions to ethnic and separatist friction, Russia faces unique problems.
Nationalities expelled by Stalin to internal exile in Siberia and elsewhere may want to return to areas that were theirs “by origin.”
Crimean Tartars, for example, want to return home to their “Crimea.”
Individuals should be able to return to their homelands, but as individuals.
For even if we admit (and we do admit) that historic injustices – historic crimes, really – did take place, we must recognize that land which one people lost through expulsion has been repopulated by others.
To evict them would be unfair and would repeat the original historic crime.
When all of Russia’s people realize that they must live together they will begin to adjust to each other.
To insure that this realization takes place, the separatist option must be closed.
Only in this way will it be possible to restore the peaceful relations which existed before; only then will our many ethnic and national groups find a means to drain the violence from their antagonisms.
Separatism, Italian-Style
ROME – Many separatist movements in Europe have resorted to various violent terrorist acts since the second half of the twentieth century.
From the 1960’s onwards, bombs and death were the order of the day in regions like Northern Ireland, Corsica (France), South Tyrol (Italy), and the Basque country (Spain).
Indeed, the specter of violent separatism has reared its head again in Spain.
The Basque terrorist organization ETA has ended its truce with the Spanish government, and, on the occasion of the 50th anniversary of its founding, placed bombs in the town of Burgos and on the island of Majorca.
Fortunately, elsewhere in Europe, reason seems to prevail nowadays and the resort to violence has been curtailed.
But that does not mean the end of separatism.
Italy, for example, is under constant threat of cultural and economic separatism, albeit in a peaceful way.
Silvio Berlusconi's ally in government, the Lega Nord (Northern League), is continuously conjuring up schemes to embarrass the national government with threats to the concept of national unity.
The Lega Nord, led by the charismatic Umberto Bossi, holds the decisive votes in Parliament to keep the Berlusconi government afloat.
It uses this power to blackmail the government into introducing measures which discriminate between citizens of Italy’s north and south.
Exponents of the Northern League, such as MEP Mario Borghezio, MP Roberto Cota, and Senator Federico Bricolo, are well known for their xenophobic statements in Parliament, particularly against those from non-EU countries.
But their chauvinism does not stop there: they constantly propose measures to discriminate between northern Italian citizens from Veneto or Lombardy and southerners from Naples, Calabria, or Sicily.
During this summer of “separatist” folly, the first proposal concerned the appointment of headmasters of schools in the Veneto region: the local councilors in the province of Vicenza approved a measure to reserve all headmaster posts in the province for northern Italian teachers.
At the end of July, another Lega Nord MP, Paola Goisis, proposed in Parliament that teachers from Italy’s south should not be allowed to teach in northern schools unless they are well versed in the history, traditions, and dialects of the area where the school is located.
The Italian Minister for Education, Mariastella Gelmini, agreed to discuss the proposal.
The third attack on Italian unity launched at the beginning of August by the President of the Lega Nord group in the Senate, Federico Bricolo, who proposed adding a proviso to Article 12 of the Italian Constitution whereby the flags and anthems of the different regions would be officially recognized on an equal footing with the national anthem and flag.
The Lega Nord’s latest provocation is its proposal that state employees receive different salaries for the same job, depending on whether they live in the north or the south.
Agriculture Minister Luca Zaia has gone so far as to argue that relating salaries to the cost of living in different regions will force the south to be self-sufficient and stop relying on help from the north.
This proposal seems to have found a certain degree of support from Berlusconi, though he would likely be the only one in the country to agree with it.
The trade unions, employers’ associations, all opposition political parties, and even many of Berlusconi’s own MPs have united against what they consider to be an aberration.
Zaia’s vivid imagination does not stop there: he has now proposed that popular Italian TV series be dubbed or subtitled in the local dialect!
And Berlusconi, consumed as he is with defending his difficult position as the main protagonist in a seemingly endless soap opera of sex scandals, is not capable of reining in such blatant provocations on the part of the Lega Nord.
The result is that Berlusconi’s supposed allies such as former Minister Gianfranco Micciche and current Governor of Sicily Raffaele Lombardo, are seriously thinking of setting up a “Party of the South” to ensure that Italy’s southern regions have enough clout to withstand the Lega Nord’s onslaught.
Whether such plans materialize remains to be seen.
What seems certain is that, unlike in Spain, Italy’s separatist movements are gaining ground through a bloodless revolution.
Mao was wrong: political blackmail seems to be a more effective tool than the barrel of a gun.
September 11, 2002
In the year since the terrorist attacks of last September 11th, many of us have repeatedly looked in the mirror to ask: What has changed?
Shock and sadness remain with us, but there is also a determined sense that we face challenges - as individuals and as a civilization - that were unknown a year ago.
Even more unsettling, we recognize that America or another country may well be attacked by surprise once again, and are left wondering if such an event will match or exceed the horror of last year.
We have all been hurt and are convinced that there are people who, having honed their malignant audacity to a sharp point, are now planning to hurt us again.
In memory, then, the Twin Towers still stand tall, still cast a shadow into our lives.
What happened to them was unimaginable until, through deliberate action, it became real.
Against all expectation, and contrary to our wishes, this violence has put us in front of choices we had not seen before.
In many ways, this is the story of the 20th century.
Violence and brutality that were once beyond the realm of possibility now seem commonplace.
Adapting to the latest horror, we conclude - repeatedly, and despite all evidence to the contrary - that we have at last seen all that there is to see.
But then we are shocked into recognizing that our imagination failed us - there was worse to come.
The philosopher Berel Lang brilliantly analyzed how cataclysmic violence reshapes our conception of the world.
In "The Future of the Holocaust," he wrote that those generations born before the genocide of European Jewry "at least began life in a different world, one from which genocide was absent, in which that occurrence was quite inconceivable."
For those born afterward "that absence was dismissed before they were born.
They do not remember the world without it."
There is no comparison to be made between the Holocaust and the events of September 11th, yet Lang's insight underscores a larger point about the transforming power of new forms of mass violence.
Thinking about ourselves, and the world we now live in, his phrase is worth repeating: "They do not remember the world without it."
September 11, 2001 emerges then as the starting point of something new: a world in which the events of September 11th have become real.
From that bright September morning onward, those events have been and will be a reference point for anyone who would use them.
A year ago, the idea that some number of young men would come to the US to train as pilots, hijack four fully loaded passenger jets, and then turn them into missiles to be exploded into some of the most important symbols of Western civilization - was inconceivable.
Today, it is a contingency that must be accounted for in every trip to the airport.
This is not only a matter of heightened security.
Our understanding of the world, of our freedom to act in the world, and the possibilities of violence aimed at us because of who we are - these have all changed.
Here lies the difference between September 11, 2001 and September 11, 2002.
Until then, we shared a certain sense of what was and was not possible.
Since then, we struggle with the shock that something so large could have happened - could have taken so much from us - without our having anticipated any of it.
This first anniversary of the attack will be the first and sharpest of many annual reminders that once again history has turned the unimaginable into the real.
This is the realization that lies underneath our all-encompassing focus on security.
We will not wait for another version of this lesson.
It has now become the central principle of our interaction with the world, and it will be for the foreseeable future.
Beyond the vast questions of geopolitics and security, we might also hope for another realization to come out of September 11th.
The international dimension of the attacks also includes an encounter with the after-effects of violence, and the longer-term problems of understanding what happened and how it changed us.
In this, Americans are finding out that they now have more in common with many members of the international community than they had ever imagined possible.
Americans, too, are now recovering from a brutal act of violent dislocation, a phenomenon the United States has long been spared, but one familiar in many places around the world.
The events of September 11th hit America because of who Americans are, and those events transformed the moral horizon of the world community.
Yet, even so, Americans are not alone in living in the aftermath of violence.
September 11, 2002 commands an authority that was unimaginable a year ago.
The calendar has now fully cycled, setting the attack itself apart from our memories of what happened.
In commemorating the passage of a year, we mark the passage from "before" to "after."
Looking back a year, we see how the future has changed.
रक्तपिपासु को पछाड़ना
न्यू हेवन – मानव अफ़्रीकी ट्रिपैनोसोमियासिस (HAT) – जिसे निद्रा रोग भी कहते हैं – से ग्रामीण उप-सहारा अफ़्रीकी आबादी लंबे समय से त्रस्त है। इस परजीवी संक्रामक रोग का अगर इलाज न किया जाए तो यह अक्सर जानलेवा होता है। और इसका इलाज करना जटिल होता है, जिसमें अत्यधिक कुशलता वाले चिकित्सीय स्टाफ़ की ज़रूरत होती है जो प्रभावित इलाकों में बहुत मुश्किल से मिलता है। इस संक्रामक रोग को फैलानेवाले परजीवी – मध्यवर्ती और पश्चिमी अफ़्रीका में ट्रिपैनोसोमा ब्रूसी गैम्बिएन्स और पूर्वी अफ़्रीका में टी.बी. रहोड्सिएन्स – संक्रमित सीसी मक्खी (ग्लोसिना मॉर्सिटन्स मॉर्सिटन) के काटने से संचारित होते हैं।
बीसवीं सदी के आरंभ में HAT महामारी के प्रकोप से अफ्रीका के कई हिस्सों में आबादियाँ तबाह हो गई थीं। हालाँकि लाखों लोगों की व्यवस्थित जाँच और इलाज करने से 1930 के दशक में रोग के संक्रमण में प्रभावशाली रूप से कमी हुई थी, परंतु इन प्रयासों में ढिलाई बरतने के कारण 1950 और 1960 के दशकों में HAT को दुबारा उभरने का मौका मिल गया जिसके फलस्वरूप 1990 के दशक के आरंभ में इसने महामारी का रूप ले लिया। विश्व स्वास्थ्य संगठन के एक अभियान से आख़िरकार 2008 तक इस रोग पर नियंत्रण पा लिया गया और प्रति वर्ष इससे प्रभावित होनेवाले लोगों की संख्या घटकर मात्र लगभग 10,000 हो गई। लेकिन लाखों लोगों के लिए जोखिम बना हुआ है।
साफ तौर पर, सीसी मक्खियाँ उन इलाकों में गंभीर ख़तरा पैदा करती है जहाँ इसका इलाज करवाना उनकी बर्दाश्त या पहुँच के बाहर होता है। और यह ख़तरा मनुष्यों तक सीमित नहीं है। अफ़्रीकी पशु ट्रिपैनोसोमियासिस रोग, या नगाना, परजीवियों ट्रिपैनोसोमा कॉन्गोलेन्स, टी. विवाक्स और टी. ब्रूसी के कारण होता है – और ये सभी सीसी मक्खी द्वारा संक्रमित किए जाते हैं।
अगर इलाज न किया जाए तो नगाना भी जानलेवा होता है, और इससे पशुओं की भारी हानि होती है। अकेले पशु उत्पादन में, आर्थिक हानियों की राशि अनुमानतः 1-1.2 बिलियन डॉलर वार्षिक थी, जिससे कुल कृषि संबंधी हानियों की राशि लगभग 4.75 बिलियन डॉलर हो गई। इसके अतिरिक्त, नगाना के कारण पशुपालन को अफ़्रीका के दस मिलियन वर्ग किलोमीटर क्षेत्र तक सीमित रखना पड़ता है।
असरदार टीकों और आसानी से उपलब्ध सस्ती दवाओं की कमी को देखते हुए, इस तरह के रोगों को नियंत्रित करने के लिए सीसी मक्खियों की संख्या को कम करना सबसे कारगर तरीका है। यह काम ट्रैप और टार्गेट यंत्रों (कीटनाशक-सिक्त स्क्रीनों) की मदद से किया जा सकता है जो मक्खियों को ऐसे डिवाइस की ओर आकर्षित करते हैं जो उन्हें एकत्र करता है और/या मारता है।
लेकिन इन डिवाइसों में सुधार करके या विभिन्न पारिस्थितिक सेटिंग में नियंत्रण कार्यक्रमों को लागू करके इन विधियों की कारगरता को बढ़ाने के लिए बहुत कुछ किया जा सकता है। दोनों ही मामलों में, सीसी के जैविक स्वरूप की बेहतर जानकारी होना बहुत उपयोगी होता है।
हाल ही में पूरी की गई ग्लोसिना मोर्सिटन्स मोर्सिटन की जीनोम अनुक्रमणिका से ऐसी कई बातों का पता चलता है जिनसे सीसी मक्खी अनुसंधान और रोग नियंत्रण के व्यवहारों में परिवर्तन हो सकता है। सर्वप्रथम, अनुसंधानकर्ताओं ने यह पता लगाने की कोशिश की कि एकमात्र कशेरुकी के खून पर पलनेवाली सीसी मक्खी अपने शिकार की पहचान कैसे करती है।
इस उद्देश्य से, अनुसंधानकर्ताओं ने घ्राण (गंध), स्वाद, और दृष्टि जैसी विभिन्न महत्वपूर्ण प्रक्रियाओं को समझने के लिए जीन्स का 12,300 से अधिक प्रोटीनों के लिए विश्लेषण किया। उन्होंने पता लगाया कि सीसी मक्खियों में गंध और स्वाद का पता लगाने के लिए जीन्स बहुत कम होते हैं और शिकार ढूँढ़ने में मदद करने के लिए प्रमुख चीज़ कार्बन डाइऑक्साइड के लिए बहुत अधिक जीन्स होते हैं।
अनुसंधानकर्ताओं ने रंगों का बोध करानेवाले जीन्स को गहराई से समझने की भी कोशिश की ताकि यह निर्धारित करने में मदद मिल सके कि जिस नीले रंग के बारे में काफी पहले से पता है कि वह सीसी मक्खियों को आकर्षित करता है, उसका कौन-सा शेड उन्हें फँसाने के लिए सबसे अधिक कारगर होगा। गंध और दृष्टि के आणविक पहलुओं के बारे में भावी अनुसंधान से इस बारे में मार्गदर्शन मिल सकता है कि मक्खियों को ट्रैप में फँसाने के लिए ललचाने वाली कौन-सी अधिक कारगर युक्तियों का विकास किया जाए या पशुओं की सीसी मक्खियों के काटने से रक्षा करने के लिए कौन-से विकर्षकों का लेप किया जाए।
इसी तरह, सहजीवों और सीसी मक्खियों के प्रजनन संबंधी ज्ञान का उपयोग सीसी मक्खियों की संख्या को नियंत्रित करने की नई विधियाँ विकसित करने के लिए किया जा सकता है। तथापि, सीसी मक्खियाँ अनिवार्य भोजन तत्वों का समन्वय नहीं कर सकतीं, उदाहरण के लिए, वे विभिन्न प्रकार के सहजीवी बैक्टीरिया पेश करती हैं जो उनके लिए काम कर जाते हैं।
विशेष रूप से रोचक चीज़ है सीसी मक्खी की असामान्य प्रजनन विधि: यह अपनी संतान का प्रजनन सजीव रूप में करती है। मादा केवल एक ही भ्रूण का विकास करती है जो लार्वा बन जाता है, अपनी माँ के गर्भाशय में विकसित यह लार्वा विशेष ग्रंथियों द्वारा स्रावित दूध से पोषित होता है। मादा एक पूर्ण विकसित लार्वा को जन्म देती है, यह प्यूपा बनता है और वयस्क होने तक भूमिगत होकर निष्क्रिय बना रहता है।
जीनोम अध्ययन से इस विशेषता के आण्विक आधार – दूध ग्रंथि में उत्पादित नए प्रोटीनों – का पता चला है। जीन-अभिव्यक्ति अध्ययनों से पता चला है कि मादा के गर्भवती होने पर उसकी दूध ग्रंथि में जीन कार्यकलाप में 40% की जो वृद्धि होती है वह गर्भावस्था के दौरान कुल जीन कार्यकलाप की लगभग आधी होती है। दूसरे शब्दों में, सीसी मक्खी के जीवित रहने के लिए दुग्ध स्रवण महत्वपूर्ण है।
अनुसंधानकर्ताओं को यह भी पता चला है कि एकमात्र आनुवांशिक जानकारी स्थानांतरण (ट्रांस्क्रिपशन) कारक, सोनपंखी (गुबरैला की तरह का पतंगा - लेडीबर्ड लेट) सभी दुग्ध प्रोटीनों के संश्लेषण को विनियमित करता है; इसके बिना मक्खियाँ अपनी उर्वरता खो देती हैं। यह सुझाव दिया गया है कि इस कारक के लिए रासायनिक निरोधकों से मक्खी के लिए जन्म देना असंभव हो जाएगा, जिससे सीसी मक्खियों की संख्या कम हो जाएगी।
परंतु यह सीसी मक्खी की एकमात्र अनोखी विशेषता नहीं है। अन्य बहुत-से जानवरों के विपरीत, मादा सीसी मक्खियाँ अपने पूरे जीवनकाल में जननक्षम रहती हैं। अनुसंधानकर्ताओं को गर्भधारण चक्रों के बीच तीव्र एंटीऑक्सीडेंट प्रतिक्रिया उत्पन्न होने का पता चला है, जिनसे मादा को ऑक्सीडेटिव तनाव से होने वाली क्षति से बचने में मदद मिलती है। इस एंटीऑक्सीडेंट प्रतिक्रिया को रोकने का कोई रास्ता ढूँढ़ लेने से मादाओं की प्रजनन प्रणालियों के समाधान में मदद मिल सकती है।
सीसी मक्खी का आनुवंशिक खाका होना सीसी मक्खियों की संख्या को कम करने के लिए तंत्र विकसित करने की दिशा में एक महत्वपूर्ण पहला कदम है। ग्रामीण अफ़्रीका के लोगों के लिए, ऐसे विकास बहुत जल्दी नहीं हो सकते।
Serbia’s Advantages in Coming Late
Serbia\u0027s Choice
On January 20, Serbs go to the polls for the first round of a presidential election that may decide the country’s future for decades to come.
As Kosovo’s new government moves toward a unilateral declaration of independence, Serbs face a stark choice: retain Kosovo and effectively sever ties with the European Union, or accept the painful reality of Kosovar independence and embrace a new future within the EU.
Serbia’s liberal pro-European president, Boris Tadic, remains the favourite to win, but opinion polls suggest that his lead over Tomislav Nikolic of the ultra-nationalist Serbian Radical Party has narrowed to within the margin of error.
Nikolic, whose party’s leader, Vojislav Seselj, is currently being tried for war crimes in The Hague, has campaigned on an anti-Western, Euro-skeptic, and openly chauvinist platform, exploiting the Kosovo issue at every turn and putting Tadic and other pro-Europeans on the defensive.
His argument that Kosovo should remain an integral part of Serbia, and that Russia is a more natural (Slavic) ally for the Serbs than perfidious Europe, resonates strongly in a country traumatized by its recent past.
Tadic’s real problem, however, lies not with his enemies but with his friends.
His coalition partner, Prime Minister Vojislav Kostunica, increasingly espouses hardline nationalist rhetoric that is indistinguishable from that of Nikolic and the Radicals.
In addition to rehabilitating many Milosevic-era figures and refusing to arrest indicted war criminal General Ratko Maldic, Kostunica often speaks contemptuously about the EU and insists that if the EU recognizes Kosovo’s independence, Serbia will turn away from Europe and seek closer relations with Russia.
Under pressure from all sides, Tadic has thus had to maintain the fiction of defending a maximalist position on Kosovo (“no surrender”) while striving to maintain and enhance Serbia’s relationship with the EU, which he sees as crucial to reversing the terrible legacy of two decades of war and isolation.
Unlike the peaceful secession of Montenegro in 2006, the loss of Kosovo represents a damaging blow to Serbia, given its place in the national consciousness.
Kosovo serves as the source of the foundation myth of Serbian statehood and the repository of its cultural and historical lore.
It is the spiritual essence of “celestial Serbia,” the site of its most important Orthodox churches, and therefore far from being just a piece of territory.
The EU, in this narrative, is merely the latest in a long line of predatory and unscrupulous foreign powers that have assaulted Serbian identity and pride.
From the perspective of the European Union (and many liberal Serbs), this narrative has the familiar ring of jingoism, obsessive self-regard, and an enduring attachment to victimhood.
Serbia remains stuck in a nineteenth-century world of nationalism and refuses to recognize the new global realities of economic interdependence, inter-state reciprocity, and collectivism &#45;&#45; all of which characterize today’s EU.
EU officials emphasize that an independent Kosovo will be subject to an unprecedented level of oversight.
The EU will effectively “manage” Kosovo’s independence through the deployment of a large police force and civilian administration.
Moreover, Kosovo’s ambition to join the EU in the next decade means that its treatment of the Serb minority will attract very close and intensive scrutiny.
Tadic and other outward-looking Serbs understand the nature of the EU accession process, and, in particular, how it acts as a mechanism of conflict resolution and encourages foreign direct investment, enhanced trade, accelerated economic growth, and more effective public administration.
The EU’s eastern enlargement provides conclusive evidence to support this view, and demonstrates how the EU’s evolution has also encouraged a fundamental re-conceptualization of sovereignty as something de-territorialized and diffuse rather than static and unchanging.
Thus, although Serbia’s loss of sovereignty over Kosovo will undoubtedly be painful in the short term, the long-term gains for the entire Western Balkans region from eventual EU accession are vastly more significant.
As a natural regional leader, Serbia can expect to reap the benefits as all states advance toward membership.
The difficulty for Tadic lies in convincing Serbian voters that drawing closer to the EU is infinitely preferable to remaining attached to an outmoded concept of statehood that can only lead to isolation and backwardness.
Putin’s Dilemma
PARIS – Many critics argue that the sanctions imposed on Russia for its actions in Ukraine are ineffective, because they are too limited in scale and scope.
Moreover, sanctions are seen as allowing President Vladimir Putin to blame the West for Russia’s internal problems.
Indeed, some of Putin’s supporters within Russia welcome the sanctions as a means to compel Russian autarky – and thus strategic independence from the West.
These arguments are wrong.
Though the sanctions are not backed by China, they are already having a powerful effect, and the expectation that they will be tightened further is a huge concern for investors and the Russian government.
Full autarky, meanwhile, would imply a dramatic decline in Russian living standards – the foundation of Putin’s domestic support.
The latest sanctions are unprecedented.
The European Union went even further than the United States. Exposure to Russian markets varies widely among EU countries – and between the EU and the US.
But, after the downing of Malaysia Airlines Flight 17, Russia can no longer pursue a divide-and-rule strategy that leverages these differences.
Both the EU and the US have now sanctioned Russia’s highest officials and leading companies and banks.
The EU list includes all of the main state-owned banks (the country’s largest).
Most important, the EU added Sberbank, a cornerstone of Russia’s financial system, with assets totaling almost 30% of Russian GDP and about half of Russian retail deposits.
Currently, the sanctions only limit Sberbank’s access to European capital markets.
In the immediate future, Sberbank – and other sanctioned banks – will be able to replace European funds with liquidity provided by the Central Bank of Russia (CBR) or Asian sources.
But the fact that Sberbank is on the list has created enormous anxiety for all foreign investors in Russia.
They are right to be worried;
Russia’s financial system is highly vulnerable.
The banking sector’s total external debt is $214 billion, of which $107 billion is due within a year (and $129 billion within two years). Non-financial firms’ external debt totals $432 billion, with $128 billion due within a year (and $175 billion within two years).
These are large numbers even for Russia, with its currency reserves of $480 billion.
Likewise, though the ban on exports to Russia of technology for the oil and gas sector holds no immediate implications for the Russian economy, over the course of the next few years, Russia will have to use Western technology to develop new oil fields. Otherwise, its oil output will stagnate or even fall, hitting the ruble and living standards hard.
Financial markets and Russia’s government understand the gravity of the medium-term risks.
To avoid ruble depreciation and inflationary pressure, the CBR raised its benchmark interest rate to 8% (from 5.5% before the Crimea crisis).
But this may not be enough, given that Russia’s recently introduced “counter-sanctions” – an embargo of food imports from the EU and the US – will contribute significantly to price growth.
Since January, Russian stocks have lost 16% of their value on the MSCI index, after already trading at a 50% discount in 2013, while Brazilian and Turkish equities are up by 13% and 27%, respectively.
With MSCI now set to offer investors emerging-markets indices that exclude Russia, a massive sell-off of Russian stocks by index funds will drive down prices further.
Indeed, the net capital outflow is expected to grow from $60 billion in 2013 to at least $100 billion dollars this year, with some estimates as high as $200 billion.
One consequence of all of this is that the government can no longer balance its books and has started to discuss spending cuts and new taxes, in particular a sales tax. Over the last ten years, the question has been whether to keep the existing 18% value-added tax or replace it with a sales tax.
Now the debate is whether to introduce a sales tax on top of the VAT or to raise the VAT rate.
In addition, Finance Minister Anton Siluanov has said that the government must use this year’s pension contributions for projects in Crimea, while some highway construction has been postponed indefinitely.
The government now says that it will expropriate next year’s pension contributions as well (Deputy Minister of Economic Development Sergei Belyakov was fired after publicly apologizing for the move).
In a leaked letter, Deputy Prime Minister Arkady Dvorkovich explicitly acknowledged to Prime Minister Dmitri Medvedev the impossibility of fulfilling Putin’s spending promises, and proposed a radical revision of current fiscal plans.
Apparently, fear of even more serious economic troubles – for example, further capital flight when taxes are raised – has precluded an open invasion of eastern Ukraine.
Russian leaders seem to understand that, despite rising support for “self-sufficiency,” autarky has never worked for Russia.
Even in the Stalin era – when the economy was much more closed than in Czarist times – industrialization required the import of Western capital and knowhow.
More important, Putin’s popularity rests on historically high living standards.
Annual household consumption is now double the level achieved in the Soviet Union’s dying days.
Consumption growth has been driven largely by Russia’s integration into the global economy – and cannot be sustained without it.
The last generation of Soviet leaders well understood the importance of maintaining living standards, which is why they used revenues from oil and gas exports to import consumer goods.
When oil prices collapsed in the mid-1980s, household consumption collapsed; soon after, so did the Soviet Union.
Today, though oil prices remain high, Russia’s budget and financial system face severe problems over the next 2-3 years.
If the West introduces full-blown sanctions against the largest Russian banks – as the US has already done against relatively small banks – those problems may become insurmountable.
How will Russia’s government respond?
Putin cannot afford to return to the pre-Crimean status quo, which would be viewed domestically as a major political defeat. This implies that sanctions will remain in place.
But, having already deployed political repression, censorship, and propaganda, Putin’s tools for maintaining control as Russians’ living standards decline will be limited.
The nature of that dilemma makes it impossible to predict what he will do next.
Serious Harm By Research
The media, legislators, and other organizations often raise concerns about human-rights violations and ethical breaches in clinical research.
Such cases are legion.
Human subjects are allowed to be bitten by 100 mosquitoes that could carry malaria in a study in Brazil.
A French doctor performs a face transplant without the benefit of the usual research that would accompany such a high-risk procedure.
An 18-year-old subject in a gene therapy trial dies, with numerous lapses in the clinical trial noted after his death.
Just months ago, a clinical trial in London that saw the first use of a drug in humans resulted in six healthy subjects becoming violently ill.
Two of the volunteers nearly died.
The volunteers were paid several thousands of dollars to participate in the trial.
The general public is aware of clinical research trials, but there is little awareness that the number of subjects enrolled in research is much larger than the numbers enrolled in clinical trials alone.
While some research-related deaths reach the popular media, the actual number of deaths in research is higher.
Even regulators and industry experts are not aware of the true numbers of deaths and adverse events, due to the lack of proper reporting.
The large numbers of human subjects in research are an outgrowth of the legitimate need for more and better health care throughout our ever-lengthening lifespans.
No single entity keeps track of the real extent of the abuse of all human subjects engaged in research either in the United States or worldwide.
I estimate that in the US alone, there are more than twenty million subjects, half of whom represent drug trials.
Worldwide, this number could exceed fifty million, with about half that number in drug studies.
These staggering numbers present an awesome responsibility for our citizens and our governments alike.
The immediate ethical issue facing us is the real harm inflicted on unsuspecting subjects through a vast array of indignities, adverse events, injuries, and death.
Many of those who are harmed are poor, uneducated, and politically powerless.
Some are impaired in their ability to give informed consent due to mental or cognitive disabilities, or are exposed to coercion, improper monitoring, and pervasive conflicts of interest.
Moreover, the justice of the distribution of risks and benefits is questionable when research subjects are concentrated on a vulnerable segment of our society.
Bloomberg Market magazine recently published an extensive article on the unethical practices of the largest contract research organization conducting some clinical trials in Florida.
Trial subjects drawn from illegal Latin American immigrants were threatened with reporting of their illegal status to the US Department of Homeland Security if they complained about the risks of the drug that they received.
That is only one example.
The system of protections for human subjects worldwide is either non-existent or broken.
In Europe since May 2004, all clinical trials in the 25 nations of the EU must conform to the European Directive (ED) issued in 2001 at the behest of pharmaceutical industry.
Each country’s regulatory body will have to issue their own regulations that are within the bound the Directive.
The Directive brings the protections for human subjects in European clinical trials in line with those in the US.
But in both the US and Europe, the system has serious shortcomings and gaps.
For example, there are highly de-centralized ethics committees with varied qualities to protect human subjects.
The EU directive does not regulate social and behavioral research while the US. does not regulate research that is privately funded and not related to drug licensing.
Further down the chain of supervision, research institutions are designated to “manage” their own conflicts of interests as well as those of their investigators.
Yet many institutions and investigators have a financial stake in the clinical trials they conduct.
Most investigators have little or no training in ethics and regulatory compliance, for which there is no mandatory education.
Advocates in the US, such as the ten-year-old human rights organization, Citizens for Responsible Care and Research (www.circare.org), which I co-founded, have proposed a universal National Human Subjects Protection Act.
However, there is no likelihood of passage anytime soon.
Opposition to serious reforms to protect human subjects in research comes from two groups: the pharmaceutical industry and universities.
The objections of industry rest on the narrow issue of added financial cost.
The objections coming from universities are more puzzling, as it is in their long-term interest to conduct research ethically.
In both cases, the effective protection of human subjects should receive much higher priority, thereby justifying the modest added expense, which probably would amount to no more than 1-2% of the overall cost of clinical studies.
If such research is truly to serve the public good, the safety, health, and dignity of human subjects should not be compromised.
Serious Negotiations or Hot Confrontation with Iran?
Berlin – For two weeks, it looked like the regime in Iran had finally gotten the message that, if it continues to pursue its nuclear program, serious military confrontation is likely to result.
Indeed, there were interesting – and previously unheard of – statements and signals from Teheran that suggested an increased willingness to start negotiating about Iran’s nuclear program and regional security issues.
And America’s decision to send Undersecretary of State William Burns to a meeting with Iran’s top nuclear negotiator suggests that those signals are being taken seriously.
But the recent military muscle-flexing with rocket tests and the rejection of a compromise by Iranian President Mahmoud Ahmedinejad and his foreign minister show that the country’s leadership is seriously divided over the strategic line that Iran should pursue.
Iran’s leadership still harbors the misconception that Israeli threats against its nuclear facilities are an expression of the domestic difficulties of Prime Minister Ehud Olmert’s government.
This is plainly wrong. Olmert’s government has serious problems, but they are not the reason that the situation between Israel and Iran is coming to a head.
On the contrary, a cross-party consensus exists in Israel concerning Iran’s possible nuclear armament and regional hegemony.
All sides agree that, unless there is a diplomatic solution, Iran’s possession of nuclear weapons must be prevented in good time and by any means necessary.
Moreover, Saudi Arabia and some other Arab countries share this view, albeit behind closed doors.
If Iran adopts a more realistic approach, there is real hope for a diplomatic solution. The most recent offer of the 5+1 group (the United Nations Security Council’s five permanent members and Germany) was well received in Teheran.
In addition to far-reaching political and economic cooperation, the offer promises cooperation on nuclear matters, including the construction and supply of the newest light-water reactors in Iran, as well as Iranian access to nuclear research and development – provided that there is a negotiated settlement.
But what was really new is that Iran also responded positively to the procedure proposed by the 5+1 group. In the pre-negotiation phase, this means that Iran would agree not to install any new centrifuges, necessary for increasing the volume of uranium being enriched, while the 5+1 group would refrain from calling for new sanctions in the Security Council.
Once negotiations start, Iran would, under the supervision of the International Atomic Energy Agency, suspend its uranium enrichment and all related activities for six months – something that the Iranian government refused even to discuss in the last four years. For its part, the Security Council would suspend all its deliberations related to the Iranian nuclear program.
The aim of these negotiations is a comprehensive agreement between Iran and the 5+1 group that would resolve both the nuclear conflict and address regional security issues (Iraq, the Israeli-Palestinian conflict, Lebanon, Persian Gulf, Afghanistan) while opening up extensive international and regional cooperation.
There were also signals emanating from Iran that, having , having mastered uranium enrichment technology, the authorities could envisage continuing enrichment in a third country in a joint consortium with the West.
A similar proposal made by Russia was unceremoniously dismissed only a short time ago.
Moreover, while there is no willingness to accept Israeli hegemony, the tone vis-à-vis Israel is beginning to change. Ahmadinejad’s vile anti-Semitism has of late been indirectly, but fairly openly, criticized by one of the closest confidants of Iran’s supreme religious leader, former Foreign Minister Ali Akbar Velayati.
Iranian spokesmen also indicate that there is an official awareness of Israel’s importance for a comprehensive regional solution, and that doing business with Israel is no longer inconceivable.
One hasn’t heard this sort of language in all the years since Ahmadinejad came to power. But is Iran really serious?
Or are these simply the old stonewalling tactics?
Does the government just want to buy time once more, now to make it through the America’s presidential elections?
Given the public contradictions in the Iranian leadership’s behavior, is there a reliable Iranian position, and, if so, who represents it?
These crucial questions can only be answered by the practical test of negotiations, this time with direct American participation.
If Iran is serious, the result may be nothing less than the long awaited “Grand Bargain” – a regional reconciliation of interests between Iran, on one side, and America, Europe, and the region’s US allies on the other.
But if Iran is playing for time, its behavior is shortsighted and foolish.
The conflict, and thus the danger of a military confrontation, will not disappear under a new US administration.
On the contrary, should the negotiations fail, the confrontation will resurface in short order, and be far more dangerous.
Neither John McCain nor Barack Obama will take a softer stance than the current American administration on the question of Iran’s regional hegemony and its nuclear program.
Indeed, if a diplomatic solution fails, they are more likely to react more forcefully.
It is therefore imperative that diplomacy, which looks possible at the moment, be given a chance.
If the top leadership in Teheran has realized that it makes a great deal more sense, and is more in keeping with Iran’s interests, to consolidate the successes of its foreign policy in the last few years, and to strengthen the regime, rather than risk everything in a military showdown with unforeseeable consequences, then there is a real chance for a diplomatic solution. If not, the region will be plunged into a hot confrontation.
There’s wisdom, which Iran’s leaders should heed, in the old adage that a bird in the hand is worth two in the bush.
Services without Tears
NEW YORK – A famous claim in economics is that the cost of services (such as health care and education) tends to increase relative to the cost of goods (such as food, oil, and machinery).
This seems right: people around the world can barely afford the rising health-care and school-tuition costs they currently face – costs that seem to increase each year faster than overall inflation.
But a sharp decline in the costs of health care, education, and other services is now possible, thanks to the ongoing information and communications technology (ICT) revolution.
The cost of services compared to the cost of goods depends on productivity.
If farmers become much better at growing food while teachers become little better at teaching kids, the cost of food will tend to fall relative to the cost of education.
Moreover, the proportion of the population engaged in farming will tend to fall, since fewer farmers are needed to feed the entire country.
This is the long-term pattern that we’ve seen: the share of the workforce in goods production has declined over time, while the cost of goods has fallen relative to that of services.
In the United States, around 4% of the population in 1950 was employed in agriculture, 38% in industry (including mining, construction, and manufacturing), and 58% in services.
By 2010, the proportions were roughly 2%, 17%, and 81%, respectively.
In the meantime, health-care and tuition costs have soared, along with the costs of many other services.
But a productivity revolution in service-sector delivery is now possible.
As a professor, I feel it in my own classroom.
Ever since I began teaching 30 years ago, it had seemed that the technology was rather fixed.
I would stand before a class and give a one-hour lecture.
Sure, the blackboard gave way to an overhead projector, and then to PowerPoint; but, otherwise, the basic classroom “production system” seemed to change little.
In the past two years, everything has changed – for the better.
At eight on Tuesday mornings, we turn on a computer at Columbia University and join in a “global classroom” with 20 other campuses around the world.
A professor or a development expert somewhere gives a talk, and many hundreds of students listen in through videoconferencing.
Information technology is revolutionizing the classroom and driving down the costs of producing first-rate educational materials.
Many universities are putting their classes online for free, so that anyone in the world can learn physics, math, or economics from world-class faculty.
At Stanford University this fall, two computer-science professors put their courses online for students anywhere in the world; now they have an enrollment of 58,000.
The same breakthroughs now possible in education can occur in health care.
The US health-care system is notoriously expensive, partly because many of the key costs are controlled by the American Medical Association and private-sector health-insurance companies, which act like monopolists, driving up costs.
Such monopoly pricing should be ended.
Yet there are other reasons for high health-care costs.
Many people suffer from chronic ailments, such as heart disease, diabetes, obesity, and depression and other mental disorders.
These diseases can be expensive to address if they are poorly managed and treated.
Far too many people end up in the emergency room and the hospital because they lacked the advice and help to keep their conditions under control without institutional care, or even to prevent their disorders entirely.
Now information technology is coming to the rescue.
Innovative companies like CareMore in California are using ICT to keep their clientele healthy and out of the hospital.
For example, when CareMore’s patients step on the scale at home each day, their weight is automatically transmitted to the health-care unit.
If there is a dangerous weight swing, which could be caused by congestive heart failure, the clinic brings the patient in for a quick examination, thereby heading off a potentially devastating crisis.
These innovative companies’ approaches combine three ideas. The first is to use ICT to help individuals monitor their health conditions, and to connect individuals with expert advice.
The second is to empower outreach workers (sometimes called “community health workers”) to provide home-based care in order to prevent more serious illnesses and to cut down on the high costs of doctors and hospitals.
The third idea is to recognize that many illnesses arise or become worse because of individuals’ social circumstances.
Perhaps the patient is isolated, lonely, suffering from depression, out of work, or facing some other personal or family calamity.
If these social conditions go unaddressed, they may give rise to an expensive, even deadly, medical condition.
Smart healthcare is therefore holistic, helping people not only as patients arriving in the emergency room, but also as individuals and family members in their own homes and communities.
Holistic health care is more humane, effective, and cost-efficient.
The ICT revolution provides the means to achieve holistic health care in new and powerful ways.
In economic terms, information and communications technologies are “disruptive,” meaning that they will outcompete the existing, more expensive ways of doing things.
Implementing disruptive technologies is never easy.
Existing high-cost producers, especially entrenched monopolists, resist. National budgets may continue to favor the old ways.
Nevertheless, the promise of great cost savings and major advances in service delivery is at hand.
The world’s economies, rich and poor alike, have much to gain from accelerated innovation in the information age.
Serving Two Masters
Talk about corruption in developing countries -- and in some developed ones -- is running rampant.
In the past, corruption was usually said to be located within the ranks of public servants, and this was used as a partial justification for privatization, especially in developing countries.
Cheerleaders of the private sector, however, failed to reckon with the ability of company bosses to indulge in corrupt practices on an almost unfathomable scale, something American corporate capitalism has demonstrated amply of late.
Corrupt bosses put to shame petty government bureaucrats who steal a measly few thousand dollars -- even a few million.
The scale of theft achieved by those who ransacked Enron, Worldcom, and other corporations is in the billions of dollars, greater than the GDP of many countries.
My research over the past thirty years focused on the economics of information.
With perfect information -- an assumption made by traditional economics, though one not fully appreciated by free market advocates -- these problems would never have occurred.
Shareholders would instantly realize that the books were cooked, and roundly punish the offending company's share price.
But information is never perfect.
Because of tax advantages and inappropriate accounting practices firms richly rewarded executives with stock options.
With these in hand, company bosses could ensure that they were well paid without doing anything to benefit their company's bottom line.
All they needed to do was boost the stock price, then cash in their option.
It was a system almost too good to be true: while executives received millions in compensation, no one seemed to be bearing the cost.
Of course, this was a mirage: by issuing such options shareholder value was diluted.
Moreover, this was worse than dishonest: stock options provided managers with strong incentives to get the value of their stocks up fast.
What mattered was not a company's long-term strength but its short-term appearance.
Corporate officers respond to incentives and opportunities.
Over the last decade-and-a-half, executive compensation in America soared.
So, too, did the fraction of that compensation that is tied to a company's stock price, to the point where the fraction related to long-term performance is quite small.
It was as if managers were actively discouraged from looking at fundamentals.
The proponents of markets are right that incentives matter, but inappropriate incentives do not create real wealth in the economy, only a massive misallocation of resources of the sort we see now in such industries as telecoms.
Overinflated prices lead firms to overinvest.
As research over the past three decades demonstrates, when information is imperfect -- as it always is! -- Adam Smith's invisible hand, by which the price system is supposed to guide the economy to efficient outcomes, is invisible in part because it is absent.
With the wrong incentives, with the kinds of incentives that were in place in corporate America, a drive for the creation of the appearance of wealth took hold, at the cost of actual wealth.
By the same token, auditing firms that make more money from consulting than from providing auditing services have a conflict of interest: they have (at least in the short run) an incentive to go easy on their clients, or even, as consultants, to help their clients think of ways - "within the rules," of course -- that improve the appearance of profits.
Or analysts at investment banks that earn large fees from stock offerings may -- as we have seen not so long ago -- tout stocks even when they are dubious about them.
If these banks also have a commercial bank division, they may have an incentive to maintain credit lines beyond a prudent level, because to cut such lines would put at risk high potential future revenues from mergers and acquisitions and stock and bond issues.
Moreover, a distortion of private incentives affects public incentives as well, and the two become intertwined.
As "money talks" in politics, private incentives distort public policy and prevent it from correcting market failures in ways that, in turn, further distort private incentives.
America's Securities and Exchange Commission's head recognized the problems posed by conflicts of interests in accounting, but his efforts to put in place rules to address the problem met with overwhelming resistance from the industry--until the scandals made change irresistible.
Similarly, the accounting problems with executive stock options were recognized by the Financial Accounting Standards Board, but again early efforts at reform met with resistance, from the obvious sources.
Here, political pressure, including from the US Treasury, was put on the supposedly independent Board not to make the change.
These problems arise at both the national and international levels.
Some countries try to fight against this vicious circle.
For example, because we rightly suspect government officials who move too quickly into private sector jobs related to their public roles, many democracies have rules against such "revolving doors."
To be sure, there are costs in imposing such restrictions -- they may, for example, deter qualified individuals from accepting public employment -- and the restrictions seldom eliminate conflicts of interest altogether.
But restrictions of this kind - affecting both private and public sectors -- are often necessary because of imperfect information: we cannot really be sure what motivates an individual, even if the individual seems of the highest integrity.
The loss of public confidence that may result from not acting may be even higher than the cost of governmental regulation -- indeed, this loss recently resulted in billions of dollars of reductions in the value of shares.
Conflicts of interest will never be eliminated, either in the public or private sector.
But by making ourselves more sensitive to their presence and becoming aware of the distorted incentives to which they give rise, as well as by imposing regulations that limit their scope and increasing the amount of required disclosure, we can mitigate their consequences, both in the public and the private sector.
Learning from Rwanda
GENEVA – How is it that Rwanda, among the world’s poorest countries – and still recovering from a brutal civil war – is able to protect its teenage girls against cancer more effectively than the G-8 countries?
After just one year, Rwanda reported vaccinating more than 93% of its adolescent girls against the human papillomavirus (HPV) – by far the largest cause of cervical cancer.
Vaccine coverage in the world’s richest countries varies, but in some places it is less than 30%.
In fact, poor coverage in the world’s richest countries should come as no great surprise, especially when one considers the demographics of those missing out.
Where available, evidence suggests that they are mainly girls at the lower end of the socioeconomic spectrum – often members of ethnic minorities with no health-care coverage.
This implies that those who are at greatest risk are not being protected.
It is a familiar story, one that is consistent with the global pattern of this terrible disease, which claims a life every two minutes: those most in need of protection have the least access to it.
Of the 275,000 women and girls who die of cervical cancer every year, 88% live in developing countries, where mortality rates can be more than 20 times higher than in France, Italy, and the United States.
That is not just because vaccines are not readily available; it is also because women in these countries have limited access to screening and treatment.
Without prevention, they have no options if they get sick.
Alarmingly, in some of the wealthy countries, where both screening and treatment should be readily available, vaccine coverage now appears to be declining, raising a real danger that socioeconomically disadvantaged girls there will face a similar fate.
If it turns out that girls at risk of not receiving all three doses of the HPV vaccine are also those with an elevated risk of being infected and missing cervical screenings as adults, they may be slipping through not one but two nets.
It is still not clear why this is happening.
What we do know is that HPV is a highly infectious sexually transmitted virus, which is responsible for almost all forms of cervical cancer.
HPV vaccines can prevent 70% of these cases by targeting the two most common types of the virus, but only if girls have not yet been exposed to the virus, which means vaccinating them before they become sexually active.
Yet efforts to communicate this to the public have been met with skepticism from some critics, who argue that the vaccine gives young girls tacit consent to engage in sexual activity, ultimately leading to an increase in promiscuity.
However, quite apart from the evidence to the contrary, intuitively this makes no sense.
To suggest that giving girls aged 9-13 three injections over six months gives them a green light to engage in sex and sets them on a path to promiscuity is utter nonsense.
It is like saying that people are more likely to drive dangerously if they wear a seat belt; in fact, the opposite is more often the case.
Whether such attitudes and misinformation account for poor vaccine coverage in places like France and the US is still not known.
It may simply be that some parents or girls mistakenly believe that one shot of the HPV vaccine is enough to provide protection, or that some socially disadvantaged girls lack sufficient access to in-school vaccination services.
Or perhaps the cost of the vaccine is a barrier in some of these countries.
Whatever the reason, unless coverage for all three doses increases, cervical cancer and pre-cancer rates will increase.
In countries like Rwanda, people know this only too well, which is why they have been so eager to tighten the net on HPV.
They have seen the horrors of cervical cancer, with women in the prime of their lives presenting with late-stage disease and suffering slow and painful deaths.
Without changes in prevention and control, deaths from cervical cancer worldwide are projected to rise almost two-fold by 2030, to more than 430,000 per year.
And now, with help from my organization, the GAVI Alliance, a public-private partnership created to improve access to new vaccines for the world’s poorest children, other low-income countries are following Rwanda’s lead.
As of this year, Ghana, Kenya, Laos, Madagascar, Malawi, Mozambique, Niger, Sierra Leone, Tanzania, and Zimbabwe have all taken steps to introduce HPV vaccines, with more countries expected to follow.
G-8 countries’ generous contributions to organizations like mine show that they understand the importance of childhood immunization.
But, while HPV infection rates may be falling in some of these countries, are they falling fast enough?
In the US, for example, the G-8 country for which we currently have the most data, infection rates have halved in the six years since the vaccine was first introduced.
Yet failure to reach the 80% coverage mark means that 50,000 American girls alive today will develop cervical cancer, as will another 4,400 girls with each year of delay.
So it is worth remembering that even in wealthy countries, there is an urgent need to overcome challenges in protecting the hardest-to-reach girls, who often are at high risk of HPV infection.
Overcoming these challenges is essential to reducing cervical cancer and pre-cancer rates in the coming years.
Rwanda’s success should be the norm, not the exception.
Set the IMF Free
BRUSSELS – The International Monetary Fund is back in business.
During the bubble years, neither its advice nor its money seemed to be needed.
But now more and more countries need balance-of-payments support, and there is general agreement that the global monetary system needs a body to oversee its overall stability.
The IMF is the only candidate for this task, but experience has shown that the Fund can fulfill this role only if its governance is reformed.
Granting balance-of-payments support has important fiscal implications, and it is natural that there should be continuing close oversight by those who ultimately provide the capital – the IMF’s member states.
But looking after the stability of the global financial system, including the assessment of exchange-rate policies and global payment imbalances, is a different responsibility.
For these analytical functions, there is no need for close oversight.
On the contrary, independence and professional expertise should be decisive.
Thus, a key change should be to distinguish between the IMF’s financial measures and its analytical functions, especially the surveillance of exchange rates and other sources of global financial risk.
The IMF’s Executive Board, which consists exclusively of representatives of member countries, currently runs the Fund’s daily business.
The Board thus does not perform oversight functions, but rather serves essentially as an extended Management Board, which delegates the execution of its decisions to the Managing Director and the staff.
This modus operandi needs to be changed in order to give the IMF the independence it needs if it is to become a credible, impartial judge of balance-of-payments disequilibria and sources of risk to global financial markets.
This requisite independence of the IMF staff can be achieved by stipulating that the Board oversees only the work of the Fund’s analytical functions and, more importantly, that its composition and decision-making mode are overhauled in the following ways:
- The Executive Board should be enlarged by the addition of several (possibly 3-5) independent members (as in the private sector), and the voting principle should be one person, one vote.
The independent board members would constitute only a small minority, but their presence and professional expertise would give them disproportionate weight.
- Management would be free to take a position on all issues not involving the use of Fund resources, unless it is was explicitly overruled by the expanded board.
This would give management considerable de facto independence, since under the one person, one vote principle the larger member countries could no longer block issues just because they are politically inconvenient.
For all decisions involving the resources of the Fund (lending to member countries or the size of quotas, etc.), the existing decision-making procedure could remain unchanged.
All financial decisions would thus continue to be taken by the existing Executive Board, with weighted voting reflecting the financial contributions of member countries.
The European Central Bank provides an interesting analogy, because it has two voting procedures, depending on the issue at hand.
The ECB’s Governing Council comprises the six members of the Executive Board plus the governors/presidents of the 16 national central banks of the eurozone countries.
The Governing Council takes the really important decisions on monetary policy based on one person, one vote.
When the Maastricht Treaty was negotiated, the Germans considered this provision an important concession.
But it is indispensable if the ECB is really to be independent, and if one expects that all members of the Governing Board, particularly the governors of national central banks, base their decisions only on the interests of the entire euro area (and not of their home country).
However, on financial matters (in particular the distribution of profits and losses), the voting rules are different: the Executive Board does not participate and the votes of the national central bank presidents in the Governing Council are weighted by their respective capital shares.
When the G-20 leaders meet in London, they should consider giving the IMF the independence it needs to become an effective guardian of global financial stability. Putting independent experts on this Board will be a key step in that direction.
Set the Universities Free
After pensions and healthcare, higher education is the third great public service in serious trouble in many countries, notably in Europe.
Proud Germany, the inventor of the modern university system as most of the world currently knows it, now sees its students ranked at the bottom in tests of knowledge and competence.
The nature of the trouble in higher education is similar to that affecting all the public services: a massive growth in demand that can no longer be met from the public purse.
This means, above all, that the much-vaunted middle classes are being asked--or soon will be asked--to contribute more toward the costs of these services, either by higher taxes or through privatisation of the financial burdens.
Additional private pensions in Germany, rising charges for healthcare everywhere, and "top-up fees" for university students in the United Kingdom have become hot political issues bedevilling governments almost everywhere. For the most part, the quick fixes they have imposed so far have not been very successful.
In the case of higher education, there is of course an alternative.
In the absence of sufficient funds, one can simply let the universities deteriorate.
On the European Continent this has been happening since the 1970s.
Overcrowded classes in often inadequate physical surroundings without necessary equipment have led to ever longer periods of study, a deterioration in the quality of degrees, and much unhappiness among both students and professors.
In the United Kingdom, where this did not happen in the 1970s and 1980s, every university place could have been filled with a Continental European trying to escape declining institutions at home.
Now, however, the miseries of expanding the number of university students without adequate public finance have invaded Britain as well.
Even Britain's Secretary of State for Education admits that higher education would need 18 billion additional euros in the budget merely to return standards of education to where they were ten years ago in terms of staff-student ratios and the condition of buildings and equipment.
Within a decade the funds available per student have declined by 40%.
Where can the needed funds come from?
Not much, it is clear, can be gained from increased taxation.
While some still believe that the taxpaying public might be persuaded to spend an additional "penny in the pound" (i.e., 1% of tax) of income tax to keep higher education going, most know that this path can be ruled out for general economic as well as political reasons.
Thus, alternatives will have to be found despite the fact that they all hit groups whose votes governments need for electoral survival.
One alternative is to let universities shrink again to a manageable size.
To some extent this has happened in Europe.
In Britain, however, the opposite is taking place.
The government has set a target according to which 50% of each generation should enter higher education by 2010.
However absurd this target may be, mass higher education is here to stay.
This is why the subject is no longer one for a small privileged elite, but rather one for general political debate.
A second alternative is to charge the beneficiaries of higher education for what they get.
This can be done in several ways: by means tests that impose duties on many parents; by loans to be repaid under favourable conditions; by a special tax on graduates; or by mixtures of such approaches involving a generous system of bursaries as well as charges on well-to-do parents.
All these methods have their problems.
They require massive transitional expenditure as they are introduced.
They may deter some of those who are qualified from seeking higher education.
They impose burdens on politically sensitive groups.
They may not be sufficient to save universities from bankruptcy.
But what is the alternative?
Continental European students who used to come to Britain now join their British colleagues in casting their eyes across the Atlantic.
More than ever, the American system is regarded as a model.
In a mysterious way it seems to combine equal access with excellence.
The mystery is of course easily resolved; its name is differentiation.
The American university system is not a "two-tier" or "two-class" system but one of almost infinite variety.
This is true for its financial parameters too.
Public and private contributions are combined in many ways.
To be sure, there is the additional feature that many higher education institutions have an endowment, which they can use to balance inequities.
It will take some time to build up such endowments in Europe and elsewhere.
Even so, the principle is surely right: universities must be set free.
They must be free to admit students of their choice and to charge them what is needed.
The role of the state, here as elsewhere, is one of correcting inequities rather than running the whole show.
Such thoughts may seem heretical now, but without heresy there will be no reform.
For the problem of the next generation remains to combine public and private contributions to services that simply cannot remain wholly financed by taxpayers and wholly run by public bureaucracies.
Seven More Years of Hard Times?
NEW HAVEN – Much of the talk emerging from the August 2010 Jackson Hole Economic Symposium, attended by many of the world’s central bankers and economists, has been about a paper presented there that gave a dire long-runassessment of the future of the world’s economies.
The paper, “After the Fall,” was written by economists Carmen Reinhart and Vincent Reinhart.
Their work draws upon a recent book that Carmen Reinhart co-authored with Kenneth Rogoff, entitled This Time Is Different: Eight Centuries of Financial Folly.
According to the Reinharts’ paper, when compared to the decade that precedes financial crises like the one that started three years ago, “GDP growth and housing prices are significantly lower and unemployment higher” in the subsequent “ten-year window.”
Thus, one might infer that we face another seven years or so of bad times.
Economic theory is not sufficiently developed to predict major turning points based on first principles or mathematical models.
So we have to be historically oriented in our method.
History may be a “soft” social science, but we have to look at it, even distant history, if we are to grasp other examples of major crises.
Moreover, we have to look at the entire world.
Most economists study the recent history of their own country, which is easiest to do, and their results sound superficially important to most of their countrymen.
But major financial crises are rare by the standards of any one country, and we have to range widely through history to get enough information about how such crises play out.
The research by the Reinharts and Rogoff is an expansion and generalization of many people’s informal economic thinking, which often compares the present with stories of major past episodes.
Ever since the current crisis began in 2007, many people have been wondering if the Great Depression that followed the 1929 stock-market crash and the banking crises of the early 1930’s is relevant to our experience today.
The troubling fact about the Great Depression is that it was severe, global, and lasted over a decade – and that it followed the collapse of an equity and real-estate boom, roughly as happened before the current crisis.
Likewise, many people have been wondering if the weakness that followed the equity and real-estate crash in Japan at the beginning of the 1990’s is relevant to our experience today.
They used to refer to Japan’s “lost decade.”
Now it is more appropriate to describe that experience as the “lost decades.”
Are these examples models for our future?
They certainly make one stop and think.
But they do not stand as convincing evidence about what will happen – after all, two observations are hardly enough to prove the point.
But now the Reinharts and Rogoff have systematically studied many more examples in modern financial history.
There is also the world financial crisis that attended the oil shocks of 1973 and 1979, and there are the country-specific financial crises in Spain in 1977, Chile in 1981, Norway in 1987, Finland and Sweden in 1991, Mexico in 1994, Indonesia, Korea, Malaysia, the Philippines, and Thailand in 1997, Colombia in 1998, and Argentina and Turkey in 2001.
So, there are many more than just two modern cases (though they are not all entirely independent, because they are somewhat bunched in time).
From them, the Reinharts and Rogoff found, for example, that median annual growth rates of real per capita GDP for advanced countries were one percentage point lower in the decade following a crisis, while median unemployment rates were five percentage points higher.
How did this happen?
They note that, in general, debt levels and leverage rose during the decade preceding these crises, propelling increases in asset prices for a long time.
Reinhart and Rogoff describe a “this time is different syndrome” during the pre-crisis boom, whereby these bubbles are allowed to continue for far too long, because people think that past episodes are irrelevant.
There seems to be the germ of a new economic theory in the work of the Reinharts and Rogoff, but it remains ill defined.
It seems to have a behavioral-economics component, since the “this time is different syndrome” seems psychological rather than rational.
But it is still not so sharp a theory that we can really rely on it for making confident forecasts.
Moreover, there are reasons to suggest that this time really might be different.
I hate to say so, not wanting to commit the sin defined by their “syndrome,” but this time might be different because all of the modern examples of past crises came during a time when many economists worldwide were extolling the virtues of the “rational expectations” model of the economy.
This model suggested that a market economy should be left alone as much as possible, so that is what governments tended to do.
According to “rational expectations,” bubbles simply did not exist –&nbsp;which meant that actual bubbles were allowed to grow.
But that mindset is waning, and government and business leaders now routinely warn of bubbles and adopt policies to counter them.
So, this time really is at least a little different.
In that case perhaps all of those crisis-induced bad decades are no longer relevant.
But any such hopes that the aftermath of the current crisis will turn out better are still in the category of thoughts, theories, and dreams, not science.&nbsp;
It is not true that if you break a mirror, you will have seven years’ bad luck.
That is a superstition.
But if you allow a financial market to spin wildly until it breaks down, it really does seem that you run the risk of years of economic malaise.
That is a historical pattern.
Our Debt to Stalingrad
BERKELEY – We are not newly created, innocent, rational, and reasonable beings.
We are not created fresh in an unmarked Eden under a new sun.
We are, instead, the products of hundreds of millions of years of myopic evolution, and thousands of years of unwritten and then recorded history.
Our past has built up layer upon layer of instincts, propensities, habits of thought, patterns of interaction, and material resources.
On top of this historical foundation, we build our civilization.
Were it not for our history, our labor would not just be in vain; it would be impossible.
And there are the crimes of human history.
The horrible crimes.
The unbelievable crimes.
Our history grips us like a nightmare, for the crimes of the past scar the present and induce yet more crimes in the future.
And there are also the efforts to stop and undo the effects of past crimes.
So it is appropriate this month to write not about economics, but about something else.
Seventy-nine years ago, Germany went mad.
There was delinquency.
There was also history and bad luck.
The criminals are almost all dead now.
Their descendants and successors in Germany have done – and are doing – better than anyone could have expected at grappling with and mastering the nation’s unmasterable past.
Seventy years ago, 200,000 Soviet soldiers –&nbsp;overwhelmingly male and predominantly Russian – crossed the Volga River to the city of Stalingrad.
As members of Vasily Chuikov’s 62nd Army, they grabbed hold of the nose of the Nazi army and did not let go.
For five months, they fought.
And perhaps 80% of them died in the ruins of the city.
On October 15 –&nbsp;a typical day – Chuikov’s battle diary records that a radio message was received from the 416th Regiment at 12:20 PM: “Have been encircled, ammunition and water available, death before surrender!”
At 4:35 PM, Lieutenant Colonel Ustinov called down the artillery on his own encircled command post.
But they held on.
And so, 70 years ago this November –&nbsp;on November 19 to be precise –&nbsp;the million-soldier reserve of the Red Army was transferred to General Nikolai Vatutin’s Southwestern Front, Marshal Konstantin Rokossovsky’s Don Front, and Marshal Andrei Yeremenko’s Stalingrad Front.
They went on to spring the trap of Operation Uranus, the code name for the planned encirclement and annihilation of the German Sixth Army and Fourth Panzer Army.
They would fight, die, win, and thus destroy the Nazi hope of dominating Eurasia for even one more year – let alone of establishing Hitler’s 1,000-year Reich.
Together, these 1.2 million Red Army soldiers, the workers who armed them, and the peasants who fed them turned the Battle of Stalingrad into the fight that, of any battle in human history, has made the greatest positive difference for humanity.
The Allies probably would have eventually won World War II even had the Nazis conquered Stalingrad, redistributed their spearhead forces as mobile reserves, repelled the Red Army’s subsequent winter 1942 offensive, and seized the Caucasus oil fields, thus depriving the Red Army of 90% of its motor fuel.
But any Allied victory would have required the large-scale use of nuclear weapons, and a death toll in Europe that would most likely have been twice the actual World War II death toll of perhaps 40 million.
May there never be another such battle.
May we never need another one.
The soldiers of the Red Army, and the workers and peasants of the Soviet Union who armed and fed them, allowed their dictatorial masters to commit crimes –&nbsp;and committed crimes themselves.
But these crimes fall short by an order of magnitude of the great service to humanity –&nbsp;and especially to western European humanity –&nbsp;that they gave in the rubble along the Volga River 70 years ago this fall.
We are the heirs to their accomplishments.
We are their debtors.
And we cannot repay what we owe to them.
We can only remember it.
But how many NATO leaders or European Union presidents and prime ministers have ever taken the time to visit the battle site, and perhaps lay a wreath to those whose sacrifice saved their civilization?
Seven Years in Afghanistan
KABUL –We began a journey in Afghanistan seven years ago with the war that ousted the Taliban from power.
Much has been accomplished along the way, for Afghanistan and for the world.
In less than 45 days in 2001, we Afghans were freed from the menace of terrorism and the Taliban.
Back then, Afghanistan’s people held great hopes for an immediately wonderful future.
Some of those hopes were fulfilled.
Our children are back in school.
Roughly 85% of Afghans now have access to some health care, up from 9% before 2001.
Child mortality – among the worst in the world in 2001 – has dropped by 25%.
Democracy, a free press, economic gains, and better livelihoods – all of that is there.
But, sadly, we are still fighting the Taliban and Al Qaeda.
What is it that we have not done right that makes us – and the rest of the world – less secure?
After the liberation in 2001, the international community concentrated on Afghanistan alone as the place to fight extremism and terrorism, while we Afghans argued that our country is not the right place to fight.
The war on terrorism cannot be fought in Afghan villages.
Instead, a regional approach was and is needed.
It must be concentrated on the sanctuaries of those who train, equip, and motivate the extremists and send them out to hurt us all.
But we were not heard.
Regardless of whether that was the result of a lack of knowledge or a lack of will, events have proven us right.
Unfortunately, for the past two years, Pakistan has been suffering as much or perhaps more than Afghanistan has suffered.
Almost the entire tribal belt along the Pakistan/Afghanistan border is suffering.
Just as schools were burned in Afghanistan from 2004 onwards, for the past year schools – especially for girls – have been burned there, leaving 80,000 children without facilities.
Bridges have been blown up, soldiers and police killed.
Bombs have exploded from Karachi to Lahore to Islamabad.
The violence has spread to India as well, with bombings in Gujarat, Bangalore, and Delhi.
So the problem is regional, and it concerns institutional support for extremism that incites terrorism.
Unless we collectively address the roots of the problem by ending that support, as well as financial support for radicalism in all forms, we will not defeat terrorism.
This has not been properly understood in the West, which has been fighting the symptoms of terrorism, but has failed to attack its underlying causes.
Fortunately, today I see signs of recognition of this malaise.
And democratic change in Pakistan is good news for Afghans, Pakistani people, and, by extension, many others around the world.
Pakistan’s new president, Asif Ali Zardari, has suffered from terrorism as we have suffered.
His wife, Benazir Bhutto, was killed by terrorists.
I visited Pakistan for President Zardari’s inauguration, and for the first time I saw a dim ray of hope.
If we can all work together – Afghanistan, Pakistan, India, the United States, and our allies – I see a possibility of moving beyond the days when a government thinks it needs extremism as an instrument of policy.
When all governments in the region reject extremism, there will be no place for extremists, and terrorism will wither away.
But this also requires helping those people who out of desperation have fallen prey to extremist forces.
Last year, I pardoned a 14-year-old boy from the Pakistan tribal area in Waziristan who had come to Afghanistan to blow himself up as a suicide bomber.
Only utter hopelessness can drive so young a man to such an act.
We must rescue these people by giving them a better future, which only more education and new opportunities can bring.
Desperation and poverty are the tools used by evil forces to raise their terrorist cadres.
But that environment will not change if political will is lacking, and if there is no action by the US and the governments of the region to get our economies to create jobs that offer hope.
Moreover, in order to deny terrorists institutional support, we must bring institutional strength to Afghanistan.
We must enable Afghans to look after themselves and defend their country, to have a future in Afghanistan, to have hope of raising their children in Afghanistan.
Recently, I spoke to an Afghan man very close to me.
He has a son who works in the Afghan Foreign Office.
That young man was born in the US but returned to Afghanistan four years ago.
The father asked, “Do you think I should take my son back to the US?” I said, “Why?
Let him live here, let him work here, let him be an Afghan.” He said, “Yes, but will he have a future?”
A viable future means security as well as bread.
We have started to bring hope by educating young Afghans, but we have not yet succeeded in bringing them a secure life, free from the danger of bombs and aerial bombardment.
Only when that happens will Afghanistan be secure.
And if the two other conditions are fulfilled – removal of political backing for radicalism and help for the desperate – we will have a safer life not only in Afghanistan, but in Pakistan, India, and the rest of the world.
Sex and Surveillance
NEW YORK – It is impossible to hear about sexual or sex-crime scandals nowadays – whether that involving Dominique Strauss-Kahn or those of former New York Governor Eliot Spitzer, Italian Prime Minister Silvio Berlusconi, or the half-dozen United States congressmen whose careers have ended in the past couple of years – without considering how they were exposed.
What does it mean to live in a society in which surveillance is omnipresent?
Like the heat beneath the proverbial boiling frogs, the level of surveillance in Western democracies has been ratcheted up slowly – but far faster than citizens can respond.
In the US, for example, President George W. Bush’s Patriot Act is being extended, following a series of backroom deals.
Americans do not want it, and they were not consulted when it was enacted by their representatives under the pressure of a government that demanded more power in the wake of the terrorist attacks of September 11, 2001.
That does not seem to matter.
A concerted effort is underway in the US – and in the United Kingdom – to “brand” surveillance as positive.
New York City subway passengers are now advised that they might experience random searches of their bags.
Activists in America are now accustomed to assuming that their emails are being read and their phone calls monitored.
Indeed, the telecom companies Verizon and AT&amp;T have established areas on their premises for eavesdropping activity by the National Security Agency.
The spate of sex scandals is a sign of more serious corruption and degradation than most commentators seem to realize.
Yes, sex criminals must be punished; but political career after political career, especially in America, is ending because of consensual affairs.
Consensual sex between adults is no one else’s business.
But now that public figures – especially those deemed to be “of interest” to intelligence agencies – are susceptible to being watched three-dimensionally, the chances of being compromised are far higher than they were in the days of the UK’s Profumo affair, which brought down a British defense secretary in the early 1960’s.
And there is no end to this crash-and-burn surveillance strategy, owing to the nature of the information that is caught in the net.
After all, the human sex drive, especially if it compels risky or self-destructive behavior, has held appeal for dramatists since the ancient Greeks, who originated the story of Achilles and his vulnerability.
And, because sex scandals are always interesting to read about – certainly compared to yet another undeclared war, or a bailout that created jobs costing an estimated $850,000 each – they will always be useful diversions.
Citizens’ attention can be channeled away from, say, major corporate theft and government malfeasance toward narratives involving two hapless individuals (and their wives and children, who are usually suffering quite enough without the media’s heavy breathing).
Another reason to mourn the normalization of a surveillance society lies in the link between sexual privacy and other kinds of psychological liberation.
That is why closed societies monitor their citizens’ sexual lives.
The combination of sexuality and privacy has an anarchic, subversive effect on citizens.
Connecting with another person in an unscrutinized, uncivilized, unmediated, unobserved way inevitably reminds people that there are aspects of the human soul that cannot and must not be subjected to official control.
For this reason, closed and closing societies have always feared sexual liberationists, and have sought to link political dissidence with sexual anarchy.
In the 1950’s, communism and the homosexual “threat” became wedded in the American public imagination.
In Britain’s decadent 1890’s, feminists, socialists, and Utopians were portrayed as free-love menaces to family life – even if they had no sexually transformational agenda at all.
Everyone has secrets – that is what people realize too late when a surveillance society falls softly into place.
Think about your own privacy and secrets.
If you or your spouse strayed, would you want to discuss it in private, or have the world discuss it with you – or have a government official tell you that he will discuss it with your spouse, unless you do as requested?
You might even choose not to address it at all.
Most people take for granted that they would have that choice, because they do not realize that living in a surveillance society means that eventually everyone must face the same anxieties about exposure as public figures do.
Of course, the issue is broader: If you are a recovering alcoholic, make a pass at someone of the same gender, have a gambling problem, suffer from bipolar illness, or have had a conversation with your accountant about your taxes that skirted what was proper, are you ready to be “outed”?
Official surveillance has been marketed as a national-security imperative.
In fact, it gives the state the power to blackmail anyone it wishes.
Consider the official US diplomatic cables released by WikiLeaks that revealed that State Department employees were asked to obtain “biometrics” on public officials at the United Nations.
Are we entering an era of geopolitics by blackmail?
Perhaps we should defuse the threats posed by a surveillance society by having an annual day of amnesty.
On Amnesty Day – not a state holiday, to be sure – we would reveal to our loved ones, constituents, or employers the secrets that we think put us at risk.
Or we could work to eliminate the threat of exposure of private behavior.
For example, as consumers of media, we have power: the next time you are peddled a sex scandal, refuse to buy it.
Sexual impropriety – of whatever flavor – is not among the most important things in the world; the loss of freedom is.
Sex, Berlusconi, and Putin’s Bed
ROME – Italian Prime Minister Silvio Berlusconi’s political and sexual exploits make headlines around the world, and not just in the tabloid press.
These stories would be no more than funny – which they are certainly are – if they were not so damaging to Italy and revelatory of the country’s immobile politics.
For, despite the rampant scandals, “national Silvio” (“Il Silvio Nazionale”) remains by far Italy’s most popular and successful politician (though his approval ratings have now dipped below the 50% mark in opinion polls for the first time since his second return to the premiership in 2008).
Part of the reason for Berlusconi’s longevity despite his many stumbles is cultural.
As in other Latin or Mediterranean countries with a strong Catholic tradition, Italian society long ago learned to accept serenely a life of duplicity: on the one hand, a strong attachment to church and family values, and on the other a second life – often lived in plain sight – composed of mistresses and other “dubious” connections.
Today’s Italian Catholic political leaders often embrace such a lifestyle.
In recent years, aside from Berlusconi himself, other divorcés like Centrist Catholic Party Leader Pier Ferdinando Casini and Parliament Speaker Gianfranco Fini could easily deliver passionate speeches in the morning on the importance of the traditional family unit and the sacredness of marriage, attend a touching audience with the Pope in the afternoon, and then rush off in the evening to their unmarried partners and mothers of their latest offspring.
Italian society’s tacit acceptance of such behavior has become more openly acknowledged in recent years, thanks perhaps to Berlusconi and his vast media holdings.
In the 1970’s, the average Italian working-class family’s major ambition for its children was for them to study, go to university, and become a doctor or a lawyer.
Since the late 1970’s, and especially during the 1980’s and 1990’s, Berlusconi's three private TV channels have portrayed a false and illusory model of quick success, as seen in American soap operas such as “Dallas.”
Since the 1990’s, his channels broadcast “Big Brother” and Italian variety shows dominated by male comedians, musclemen, and scantily clad young girls, popularly known as “veline.”
In the space of just 30 years, Berlusconi's TV stations managed to impose this illusory portrait of success on Italian society.
And today, the ambition of many working-class Italian mothers is to see their daughters become a successful scantily clad “velina” who, in turn, manages to hit the gossip columns by flirting with the latest muscleman-turned-TV heartthrob or some budding young football player.
Graduating as a doctor or a lawyer is no longer a mark of success.
Despite his lack of muscles and hair, Berlusconi is the embodiment of this form of success.
The former cabaret singer who became one of the richest businessman in the world, has also managed to become Italy’s most powerful politician – and one of the world’s most colorful.
Until a few weeks ago, the average Italian viewed him as a role model, someone who had succeeded in many spheres of life.
That has now changed.
People have become less admiring of Berlusconi, because the hypocrisy has gone too far.
It may be trendy for an Italian politician to flaunt his Mediterranean macho image, but that image becomes hard to stomach when the prime minister launches a campaign to eradicate street prostitution, with possible jail sentences for clients, while sleeping with paid escorts.
Nor are Italians reassured to learn that Berlusconi fielded a number of candidates during the recent European Parliament elections whose only discernible qualification was that they were pretty young girls who had possibly spent some time in the prime minister’s company at his Sardinian Villa or Roman Palazzo.
Today, it seems all but certain that Berlusconi will never be elected President of Italy, the post to which he has always aspired.
Moreover, rumors are rife that he is now being attacked for his behavior by members of his own party.
Indeed, some maintain that Berlusconi will be forced to resign as prime minister by the end of the year.
Such rumors may well turn out to be true, for the heart of the scandal now concerns the taped conversations between a paid escort and Berlusconi during their romps in his Sardinian villa on the big bed given to him by his Russian counterpart, Vladimir Putin.
A downfall plotted to happen on a Kremlin-supplied bed would be a denouement that not even one of Berlusconi’s TV channels could dream up.
Sexy Culture
Why is there culture?
What motivates people to write poems, paint, or sing?
Most people engaged in these activities would respond with answers like, “because I like to” or, “because it fulfills me,” if not, “I feel obliged not to waste my talent.” They tend to believe that culture reflects the existence of a soul type, or that it's an expression of humans’ intelligence and creativity.
Natural science – as so often – has a more mundane answer, one that has to do with natural selection.
In his seminal work on evolution, On the Origin of Species by Means of Natural Selection, or the Preservation of Favored Races in the Struggle for Life, Charles Darwin used the much-cited expression “survival of the fittest.” Most people find it easy to understand that being especially strong or fast, or able to withstand hunger, heat, or cold, can increase the chances of survival.
Intelligence also falls into that category.
But to squeeze cultural excellence into the group of characteristics defining “the fittest” is not so easy and requires some leap of faith.
In his later work, Darwin introduced another selection criteria that may be just as important, but which has received much less attention: mating preference, or sexual selection.
His reason for doing so was to explain male peacocks’ obviously hindering tail feathers and male lions’ apparently useless manes.
These characteristics would reduce rather than enhance the bearer’s chances of survival, but obviously they prevailed in generation after generation.
Thus, Darwin argued, they must increase the probability of more offspring by making the males more attractive to female mates.
As Darwin did not believe that pure aesthetics would guide female peacocks and lions in their choice of mating partners, he had to find a rational reason for females’ preference for males with hindering characteristics.
The very fact, he reasoned, that these features make life harder signals to prospective partners that individuals who can do reasonably well with them have an especially good genetic set-up and are thus likely to produce strong offspring.
They should therefore be preferred mates.
Evolutionary biologists have since taken the concept further.
If someone can do difficult things, not only carrying peacock tail feathers or a long dark lion mane, but also things that require much practice without contributing to physical fitness and survival, and yet stay alive, that individual must have especially good genes.
They are therefore sexually attractive.
Culture – at least the culture we are proud of and don’t sneer at – is highly elitist.
We admire the best, and only the best, according to some cultural and time-dependent standard.
It does not help much to sing pop songs or opera arias in the bathroom. You must be able to draw a listening and cheering crowd to qualify for the elite.
Likewise, the amateur painter does not increase her or his attractiveness much compared to a van Gogh or a Picasso.
The same goes for writers.
A vanity press autobiography does not bring you to the top.
For that, you have to be a Nobel laureate or at least the author of a couple of well regarded books.
The bottom line is that while many are called, few are chosen.
Reaching the top requires not only talent and luck, but also a lot of practices – that is, time wasted from the point of view of survival.
Sport is in this respect also a form of culture, albeit one that is often sneered at by those engaged in pursuits like classical music or serious literature.
Most sports certainly contribute to physical fitness – as do some other expressions of culture, such as ballet – but what we admire in a player who can do extraordinary things with a ball is a technique that is utterly useless outside the playing field and has taken thousands of hours of practice to bring to perfection.
Here, of course, it’s only the best that become local or national heroes.
To be a devoted football or basketball player in the lowest series brings ridicule rather than fame.
It must be hard and require enormous effort to acquire the unique skills that mark the superstar and earn societies’ respect and admiration.
Following this reasoning, what makes the poet, the painter, and the singer attractive is uselessness combined with the difficulty of their activity.
The harder and more futile the activity, the better and more sexually attractive is the performer.
Naturally, self-awareness of this underlying wish to be sexually attractive is not required.
The mechanism works all the same.
The poet, painter, and singer may think they do what they do for more high-minded reasons, but scientists know otherwise.
Hey, science is hard, too!
But, in line with the logic of natural selection, to become sexually attractive, the scientist only has make sure that the results of his or her work are useless.
Shades of Gray
It takes a very close look at the results of the recent elections in the German state of North-Rhine-Westphalia to find among the list of “Others” the tally for “The Greys”: they got 0.1% of the vote.
In other words, one in a thousand voted for them, although they claimed to speak for that state’s retired and elderly people – over 30% of the population.
“Generation consciousness,” unlike the “class consciousness” of old, is obviously not a defining factor in people’s political preferences.
Many more “Greys” voted for the Greens than for their “own” party.
This is an important fact.
Most Europeans – and many in other parts of the world – live in rapidly aging societies.
Nurseries and schools are closed while retirement homes and hospices spring up everywhere.
Rising life expectancy coupled with low birth rates shape the demography of almost all prosperous countries.
By the middle of the century – unless there is a dramatic turnaround – about half the population will be economically inactive for reasons of age.
This trend will have many consequences, most obviously for the welfare state, notably pensions and healthcare.
While expenditure for both is rising rapidly, the offsetting revenues are coming from ever fewer people in employment.
As a result, the “generational contract” looks less and less viable, because we can no longer rely on today’s workers to pay for today’s pensioners.
Insurance-based systems of entitlements created by personal contributions are increasingly taking the place of national health and pension services.
This is a profound change that creates much friction in the transitional phase.
For example, the transitional phase is a period in which public debt inevitably increases.
Governments must continue to pay benefits to today’s pensioners, and they can do so only by borrowing money to replace the revenues that tomorrow’s pensioners are now diverting to personal insurance schemes.
Debt, however, is a burden imposed by current citizens on future generations.
Understandably, there are signs that younger politicians of all parties are resisting this development.
Indeed, a party of the young might well have better prospects than the “Greys.”
Shifting political interests are, however, but one part of the changes in an aging society.
More visible are changes in lifestyle.
People who live longer while not being in employment want to enjoy their lives.
A plethora of magazines tell pensioners what they can do.
Advice ranges from sex in old age to tourism.
Tourism, in particular – cruises as well as more adventurous trips – has become a favorite pastime for the elderly.
At the same time, images of life in our own societies are shifting.
No one is surprised to see grey-haired people dancing and singing and petting.
For many of them, life seems to become an almost permanent holiday.
To be sure, the impression is deceptive.
Old people who have families are often found in a new role as educators of the young.
While their sons and daughters go to work, they become the real parents of the next generation.
Today’s young children often see more of their grandmother than of their mother.
One may well wonder what this means in terms of social values.
The impression of a generation on permanent holiday is deceptive in another respect.
Much public debate is devoted to child poverty and how to relieve it.
However, there is at least as much old-age poverty.
The point is that it is less visible.
Occasionally, newspapers report that an old person has been found dead after days, having suffered a lonely demise from illness or even starvation.
For the most part, old-age poverty is hidden, often by the victims themselves, who are too proud to talk about their condition.
This is in part the explanation for the failure of the “Greys,” that is, of political groups catering to the interests of the elderly.
While such interests do exist, they do not lead older people to close ranks and organize themselves.
If they are poor or otherwise disadvantaged, they are most likely to regard this as their personal, almost private destiny.
Like the unemployed, they do not want a political party devoted to their plight.
Beyond that, the key feature of an aging society is the independence of the elderly.
Their vote is precisely not an expression of group interest.
They make up their own minds and contribute to the unpredictability of modern elections.
In that sense, too, an aging society adds to the responsibilities of the young.
पाकिस्तान का गृह युद्ध
सिंगापुर – पाकिस्तान की सेना ने कई सालों के अनिर्णय के बाद, पिछले महीने उत्तरी वज़ीरिस्तान कबायली एजेंसी में पूरे स्तर पर सैन्य अभियान शुरू किया जिसका लक्ष्य आतंकी अड्डों को नष्ट करना और इस क्षेत्र की अराजकता को समाप्त करना है। सेना ख़ास तौर से विदेशी लड़ाकों को खदेड़ना चाहती है जो इस क्षेत्र का इस्तेमाल मुस्लिम दुनिया में विभिन्न जिहादों के लिए अड्डे के रूप में कर रहे हैं। लेकिन, इस बात का जोखिम है कि यह अभियान एक और शरणार्थी संकट पैदा करके आतंकी ख़तरे को पाकिस्तान के दूसरे भागों में फैला देगा, जिनमें उसका सबसे बड़ा शहर और वाणिज्यिक केंद्र, कराची शामिल है।
आदिवासी एजेंसी में स्थापित अभयारण्यों से संचालन करके विभिन्न आतंकवादी गुटों ने देश में दूसरे स्थानों पर स्थित संगठनों के सहयोग से पहले से ही पाकिस्तान के चार पड़ोसियों - अफ़गानिस्तान, चीन, भारत, और ईरान - पर हमले कर दिए हैं। क्षेत्र के विदेशी लड़ाकों में से, उज़्बेकिस्तान इस्लामिक आंदोलन से संबंधित उज़्बेकी हाल ही में सबसे ज़्यादा स्पष्ट ख़तरा बन गए हैं, जिन्होंने कराची के जिन्ना अंतर्राष्ट्रीय हवाई अड्डे पर 8-9 जून के हमले की ज़िम्मेदारी ली है, जिसमें सभी दस उग्रवादियों सहित 30 लोग मारे गए थे।
उत्तरी वज़ीरिस्तान अभियान को शुरू करते हुए, पाकिस्तान के नए सेना प्रमुख, जनरल राहील शरीफ़ ने कहा है कि उनकी सेना तथाकथित रूप से "अच्छे" और "बुरे" तालिबानियों के बीच कोई भेद नहीं करेगी। इनमें से पहले को, जिनमें हक्कानी शामिल हैं - जिनका नाम जलालुद्दीन हक्कानी के नाम पर रखा गया है और जिन्होंने अफ़गानिस्तान में सोवियत सेनाओं के खिलाफ़ इस्लामी प्रतिरोध का नेतृत्व किया था - पाकिस्तान की मुख्य सुरक्षा एजेंसी इंटर सर्विसेज इंटेलिजेंस (आईएसआई) ने प्रशिक्षण दिया और हथियारों से लैस किया।
2001 में संयुक्त राज्य अमेरिका द्वारा अफ़गानिस्तान पर आक्रमण के बाद, हक्कानियों ने उत्तरी वज़ीरिस्तान कबायली एजेंसी में अभयारण्य बनाया था। आईएसआई ने यह कार्य इस उम्मीद से किया था कि 2014 के अंत में अमेरिकी लड़ाकू सैनिकों के चले जाने के बाद पश्तून समूह अफ़गानिस्तान में पाकिस्तान के लिए परदे के पीछे से काम करेगा। लेकिन ऐसा प्रतीत होता है कि हक्कानियों ने ऐसे किसी सौदे का सम्मान नहीं किया, और उत्तरी वज़ीरिस्तान में अपने उज़्बेकी मेहमानों को कराची हवाई अड्डे पर हमला करने की अनुमति दे दी।
तथापि, इस संघर्ष को रोकना या इसका प्रबंध करना आसान नहीं होगा। अफ़गानिस्तान-पाकिस्तान सीमा के दोनों तरफ मुख्य जातीय समूह, पश्तून, अपने उन राजनीतिक और आर्थिक अधिकारों पर ज़ोर देने के लिए दोनों देशों में कठोर संघर्ष में लगे हुए हैं जिन्हें वे न्यायसंगत मानते हैं। दक्षिण में सैकड़ों मील दूर कराची, उत्तरी वज़ीरिस्तान की सामरिक गतिविधि के नतीजों से अछूता नहीं रहेगा।
सेना ने निवासियों को पहले से क्षेत्र छोड़ने के निर्देश दिए हैं, और उसकी योजना हवाई हमलों से मुख्य आतंकी ठिकाने साफ़ करने, और फिर थल सेना भेजने की है। लगभग 3,50,000 लोग पहले ही भाग गए हैं, जिससे उस स्तर का मानवीय संकट पैदा गया है जो 2009 में तब हुआ था जब सेना ने स्वाट घाटी पर तालिबान की पकड़ ख़त्म की थी।
इतने सारे लोगों की आवाजाही का पाकिस्तान पर गहरा प्रभाव पड़ने की संभावना है। हमले के सिर्फ़ पाँच दिन बाद जारी की गई संयुक्त राष्ट्र शरणार्थी उच्चायुक्त की रिपोर्ट के अनुसार, 2013 के अंत में, दुनिया में 51.2 मिलियन जबरन विस्थापित लोग थे, यह संख्या पिछले साल की तुलना में छह मिलियन ज़्यादा है, और द्वितीय विश्व युद्ध के बाद से सबसे बड़ी संख्या है।
किसी अन्य देश की तुलना में पाकिस्तान ज़्यादा शरणार्थियों की मेज़बानी करता है, जहाँ देश में 1.5 मिलियन पंजीकृत शरणार्थी हैं, यह संख्या आंतरिक रूप से विस्थापित 3.5 मिलियन लोगों के अलावा हैं।
जैसा कि पिछले अवसरों पर हुआ है, इस बात की संभावना नहीं है कि उत्तरी वज़ीरिस्तान से आंतरिक रूप से विस्थापित लोग उनके लिए आसपास के ज़िलों में स्थापित किए गए शिविरों में बने रहेंगे। इनमें से कई पाकिस्तान के बड़े शहरों, ख़ास तौर से कराची की ओर जाएँगे। शहर की 20 मिलियन की आबादी में पहले ही लगभग छह मिलियन पश्तून शामिल हैं, यह संख्या काबुल और पेशावर की संयुक्त जनसंख्या से ज़्यादा है।
वास्तव में, कराची को "त्वरित शहर" कहा जाता है, जो 1947 में पाकिस्तान द्वारा आज़ादी हासिल करने के बाद से लोगों के प्रवास की कई लहरों के परिणामस्वरूप 50 गुना बड़ा हो गया है। लगभग दो मिलियन लोगों की पहली लहर कराची में तब आई थी जब आठ मिलियन मुसलमान भारत छोड़कर पाकिस्तान चले आए थे। दूसरी लहर में पश्तून निर्माण श्रमिक शामिल थे जिन्होंने नई वाणिज्यिक राजधानी का निर्माण करने में मदद की थी। तीसरी लहर में सोवियत कब्ज़े के खिलाफ़ अफ़गानिस्तान के युद्ध के दौरान विस्थापित शरणार्थी शामिल थे। और चौथी लहर 2000 के बाद के दशक के शुरू में अफ़गानिस्तान पर अमेरिकी आक्रमण के बाद शुरू हुई, जिसने सीमा के दोनों तरफ पश्तून प्रतिरोध को जन्म दिया, और कबायली इलाकों में इस्लामी अतिवाद पनपने में भी योगदान किया।
इसलिए, उत्तरी वज़ीरिस्तान से मौजूदा विस्थापन को इस चौथी लहर के हिस्से के रूप में देखा जा सकता है। चाहे सेना आतंकियों को खदेड़ने में सफल भी हो जाती है, आंतरिक रूप से विस्थापित लोगों में से कुछ लोग, लड़ाई के दंश लिए कराची तक पहुँच जाएँगे। अगर नगर निगम के अधिकारी ऐसे समावेशी राजनीतिक संस्थान विकसित करने में विफल रहते हैं जो अल्पसंख्यक जातीय समूहों को निष्पक्ष राजनीतिक आवाज़ दे सकें तो इन लोगों का हथियार डालने का कोई इरादा नहीं लगता। ऐसी स्थिति में, सेना के उत्तरी वज़ीरिस्तान में अभियान के दीर्घकालिक परिणाम ज़्यादा हिंसक हो सकते हैं जिससे बहुत ज़्यादा नुक़सान हो सकता है।
Shaky Social Contracts
LONDON – “Enrich yourselves,” China’s Deng Xiaoping told his fellow countrymen when he started dismantling Mao Zedong’s failed socialist model.
In fact, elites everywhere have always lived by this injunction, and ordinary people have not minded very much, provided that the elites fulfill their part of the bargain: protect the country against its enemies and improve living conditions.
It is this implied social contract that is now endangered by economic collapse.
Of course, the terms of the contract vary with place and time.
In nineteenth-century Europe, the rich were expected to be frugal.
Conspicuous consumption was eschewed.
The rich were supposed to save much of their income, as saving was both a fund for investment and a moral virtue.
And, in the days before the welfare state, the rich were also expected to be philanthropists.
In the opportunity culture of the United States, by contrast, conspicuous consumption was more tolerated.
High spending was a mark of success: what Americans demanded of their rich was conspicuous enterprise.
Societies have also differed in how wealthy they allow their elites to become, and in their tolerance of the means by which wealth is acquired and used.
One dividing line is between societies that tolerate self-enrichment through politics, and those that demand that the two spheres be kept separate.
In Western countries, politicians and civil servants are expected to be relatively poor.
In most of the rest of the world, a political career is regarded as a quasi-legitimate road to wealth.
But the broad conclusion remains: wealth is conditional on services.
When the services fail, the position of the wealthy is threatened.
In the current crisis, popular anger is – no surprise – directed against bankers.
Their speculative frenzies ruined shareholders, customers, and the economy.
Anger has come to focus on banking executives’ huge compensation packages, composed largely of bonuses.
Rewarding success is acceptable; rewarding failure is not.
Governments face a dilemma.
Big banks cannot be allowed to fail; but the public expects bankers to be punished.
Few will be ruined or imprisoned.
But the banking system is sure to be re-regulated, as it was after the Great Crash of 1929-1932, when President Franklin Roosevelt promised to drive the money changers from the temple.
The global economy’s downturn increases countries’ political risk to varying degrees, depending on the severity of the shock and the nature of the implied social contract.
Political systems in which power is least controlled, and the abuse of wealth greatest, are most at risk.
The more corrupt the system of capitalism, the more vulnerable it is to attack.
The general problem is that all of today’s versions of capitalism are more or less corrupt. “Enrich yourselves” is the clarion call of our era; and in that moral blind spot lies a great danger.
Despite efforts to give it precision, estimating political risk is not an exact science.
It requires political theory, not econometrics.
Forecasting models, based on “normal distributions” of risk over short slices of recent time, are notoriously incapable of capturing the real amount of risk in a political system.
One of the “safest” political systems of recent times was President Suharto’s regime in Indonesia.
Suharto came to power in 1966, establishing a quasi-military dictatorship and encouraging Indonesians to “enrich themselves.” Despite the depredations of his family, enough Indonesians did so over the next 30 years to make his rule seem exceptionally stable – until the East Asian financial crisis of 1997-1998 sent the Indonesian economy into a tailspin, triggering violent riots that forced Suharto out.
Similarly, few regimes seemed more stable than that of the Shah of Iran, another long-term ruler, who, having bankrupted his country, was forced to flee the fury of a mob in 1979.
The lesson is clear.
Autocracies, which are much praised for their decisiveness, and for guaranteeing “law and order,” are paper tigers.
They appear immovable until the moment they are evicted by popular anger.
In face of economic failure or military defeat, their emperors turn out to be naked.
In such situations, the great advantage of democracies is that they allow a change of rulers without a change of regime.
Failure discredits only the party or coalition in power, not the entire political system.
Popular anger is channeled to the ballot box.
In such countries, there may be “New Deals,” but no revolutions.
In estimating political risk today, analysts must pay particular attention to the character of the political system.
Does it allow for an orderly transition?
Is it competitive enough to prevent discredited leaders from clinging to power?
Analysts also must pay attention to the nature of the implied social contract.
Broadly speaking, the weakest contracts are those that allow wealth and power to be concentrated in the same few hands, while the strongest are built on significant dispersal of both.
Deepening economic recession is bound to catalyze political change.
The Western democracies will survive with only modest changes.
But strongmen who rely on the secret police and a controlled media to maintain their rule will be quaking in their shoes.
Even Venezuela’s Hugo Chávez, who built his power on populist anti-Americanism, must be praying for the success of US President Barack Obama’s stimulus package to lift his falling oil revenues.
The big countries with the highest political risk are Russia and China.
The legitimacy of their autocratic systems is almost entirely dependent on their success in delivering rapid economic growth.
When growth falters, or goes into reverse, there is no one to blame but “the system.”
Igor Yurgens, one of Russia’s most creative political analysts, has been quick to draw the moral: “the social contract consisted of limiting civil rights in exchange for economic well-being.
At the current moment, economic well-being is shrinking.
Correspondingly, civil rights should expand.
It’s just simple logic.” The rulers in Moscow and Beijing would do well to heed this warning.
Shards of Europe
PRINCETON – As European leaders struggle after another failed summit, they should think hard about what their continent – and the world – might look like if they continue to produce unsatisfactory solutions to Europe’s financial and economic problems.
What would follow the disintegration of the eurozone and – almost certainly with it – that of the European Union?
The best place to consider that question would not be Brussels, but Tiraspol, the capital of the entity that calls itself the Pridnestrovian Moldavian Republic, or Trans-Dniestr.
This territorial sliver with a population of a half-million emerged in the early 1990’s, after the dissolution of the Soviet Union (population almost 300 million), when it broke away from the Republic of Moldova (population four million), which had separated in the 1940’s from Ukraine (population 50 million).
Trans-Dniestr has its own government and parliament, army, constitution, flag, and a rousing Soviet-style national anthem; of course, its nationhood would be incomplete without its own currency.
This political entity is a precise counterpart in the political world to a well-known physical phenomenon of splintering or fissuring. When stressed, a big surface bifurcates in big chunks, but then the disintegration continues into smaller and smaller fragments.
Of the six larger EU states, only France has a really well-defined centralized political system.&nbsp;
Poland’s centralism comes close, but strong regional differences persist – a legacy of the three large and quite different imperial systems that encompassed today’s Poland in the nineteenth century.
Italy and Germany were nineteenth-century amalgamations of a colorful variety of small and medium-size political units.
The United Kingdom looks older and more stable, but Scotland today is controlled by a political party that wants to repeal the 1707 Act of Union, with the future to be determined by a Scottish referendum in 2014.
Spain after the Franco dictatorship stabilized itself by granting autonomy to its regions, which in many ways now behave like independent units.
In these fragmented political areas, the logic of integration in the past depended on areas that were dissatisfied with political outcomes appealing to new allies in larger units.
Franconians in southern Germany disliked the fact that the Napoleonic Wars subjected them to Bavarian rule; they saw German nationalism as a way to use Prussia and Berlin as a counterweight to Munich’s hegemony.
But, once Germany was united, Bavarians did not like the outcome, and then thought of a united Europe as a counterweight to the German state.
Indeed, Bavaria became adept at using European Community resources to bolster its own political system.
Integration had its own historical momentum; if and when it goes into reverse, that process will have a counter-momentum.
The argument against European structures depends on hostility to a transfer union that might lead to some redistribution of resources. Why should our money be taken away and given to people in a very different area?
What sort of claim do those people have?
Germans thinking about the likelihood of transfers to southern Europe doubtless recall their country’s reunification after the collapse of communist East Germany in 1989-1990.
There were massive transfers, and national resources were devoted to gigantic infrastructure projects.
That was not enough to halt the hollowing out of the eastern Länder, as many of the ablest and most entrepreneurial people left – an experience that put enormous strain on national solidarity.
Problems of transfers in a large political unit are at the heart of federalism.
The United States’ early history was dominated by a passionate debate about the issue of solidarity.
In 1790, when Alexander Hamilton argued that the new federal government should assume the states’ debts from the War of Independence, he encountered fierce hostility.
The only way to sustain such a new political order, James Madison argued in The Federalist Papers, was to ensure that federal powers were few and limited.
Europe is confronting a similar moment of destiny.
It is now mired in an existential crisis more profound than at any point since 1945.
And, while muddling through is a characteristic response of complex political systems, it is deeply destructive.
If Europe’s political center is widely perceived to be arbitrary and overweening, its authority will be rejected and resisted.
While adopting a new treaty may look like an unwieldy process, ill-suited to managing a fast-moving modern financial crisis, it is the only way to generate legitimacy for the institutions that are needed to address that crisis – in particular to provide reassurance that transfers will not be indefinite and unlimited.
If European integration shifts into reverse, the outcome will not be a series of happy and prosperous nation-states, living in a sort of replica of the 1950’s or 1960’s.
Southern Germans would wonder whether they were not transferring too much to the north’s old industrial rustbelt; northern Italians who support the anti-EU Lega Nord in the self-styled unit of “Padania” would want to escape from the rule of Rome and the south.
Setting the clock back would thus not simply return Europe to the mid-twentieth century.
The small states of the mid-nineteenth century, with no fiscal transfers out of a relatively limited area, might be recreated.
But the dynamic might go further: the German territories had around 350 independent political entities in the mid-eighteenth century, and more than 3,000 before the middle of the seventeenth century.
Sharing Globalization’s Benefits
Sharing the Burden of Hard Times
PRINCETON – The economic gloom that shrouded the world in 2008 has led many to ask whether the apparent prosperity that preceded it was real.
We know that in countries as diverse as China, India, Russia, and the United States, the number of billionaires soared.
More generally, the top 1% of the population prospered.
But the gap between the rich and poor widened, and at least in the US, the incomes of the poor and the middle class stagnated.ampnbsp;
No wonder that many are now skeptical about taxpayer-funded schemes to bail out banks, insurance companies, and even automakers.
Is this just another case of politicians making sure that, even in hard times, the wealthy elite that supports them will once again do better than everyone else?
But, in assessing the benefits achieved by economic growth, it is a mistake to focus on whether the income gap between rich and poor widened or narrowed.
If a person’s annual income increased from $300 to $500 that may be enough to lift him out of extreme poverty, and will make a huge difference to his welfare and that of his family.
If, at the same time, the income of a person earning a million dollars increased by $100,000, the income gap will have widened.
But since $100,000 doesn’t make that much difference to the welfare of a person earning a million dollars, the gap in welfare will have narrowed.
I believe that we shouldn’t really be focusing on inequality anyway.
We should give priority to reducing unnecessary suffering.
So the right question to ask is this: did the economic growth of recent years make the poor better off?
If we take a worldwide perspective, it clearly did.
In 1981, about four in every ten people on the planet was living in the degrading condition that the World Bank terms extreme poverty.
Now, it is less than one in four.
Even in absolute terms, despite population growth, the number of extremely poor people fell during that period, from 1.9 billion to 1.4 billion.
There have been especially dramatic reductions in poverty in countries like China and India.
Does it matter so much that a few Chinese and Indians have become billionaires, if in the process hundreds of millions escaped extreme poverty?
But the prospects for a continuing reduction in world poverty in 2009 are not good.
If the recession cuts deep in the developed nations, many workers will lose their jobs.
Families that can no longer keep up with their mortgage payments will lose their homes.
All of this causes real suffering.
People become accustomed to a level of comfort, and hope to move up to something even better.
When those expectations are disappointed, it is hard to accept having less than one had in the past.
There may be a sense of shame, and a loss of self-esteem, at being poor, even in hard times.
Nevertheless, the poor in industrialized nations will remain, in most cases, poor only by comparison with those who are better off.
In the US, 97% of those classified by the Census Bureau as poor own a color TV and a car.
When Americans lose their jobs, even if they have no assets, they still have some access to health care and food stamps.ampnbsp;
The situation of the 1.4 billion people living in extreme poverty is different.
They are poor by an absolute standard based on the most basic human needs.
If the recession reduces demand for imports from developing nations, many people living in those countries will lose their jobs.
They will have no social security to fall back on.
They will struggle to feed their families.
When a poor family’s income drops, one of the few expenses on which it can cut back is the cost of sending the children to school.
The most basic health care services will usually be beyond their means.
This will be where the recession hits hardest.
Some will see globalization as the cause of this hardship, for if the poor were not linked to the rich through trade, they would not be affected by the recession.
True, but they would also have missed out on the growth that helped so many of them to escape poverty.
It’s difficult to see self-sufficiency providing an adequate standard of living for the world’s growing population.
In this dire situation, what will the rich countries do?
They have, on several occasions, pledged to increase their aid to the poor, and some European countries have started to meet their higher targets.
But they will be tempted to use the current hard times as a reason for backtracking.
US President-elect Barack Obama said, prior to his election, that he would double America’s foreign aid, and make it more effective in helping the poor.
But, as the recession hit, and the cost of the bailout became apparent, he indicated that he might have to postpone implementing this commitment.
It is understandable why, in the midst of an election campaign, a candidate would say that, for, even in the best of times, increasing foreign aid wins few votes in America.
Doubling US foreign aid would, however, still leave it below $50 billion a year – a modest sum compared to the $685 billion that the US spent on defense in 2008.
I doubt that any $50 billion in the Pentagon’s budget could do more to make the world safer than doubling aid to the world’s poorest people.
It is not a step that should await the return of prosperity.
Sharm el-Sheikh Redux
Driven by a common fear of Islamic fundamentalism, and by a false assumption that it is an illegitimate political force, the Middle East’s so-called “moderates” have once again gathered at the Egyptian seaside resort of Sharm el-Sheikh, the traditional venue for emergency regional summits, to rally “moderates” against “extremists.”
In the spring of 1996, the so-called “moderates” – Egyptian President Hosni Mubarak, Jordan’s King Hussein, Yasser Arafat, and even some representatives of the Gulf dynasties – convened in Sharm el-Shekh with President Bill Clinton and United Nations Secretary-General Kofi Annan in a desperate bid to block radical Islam’s emergence.
They were also expected to give an electoral boost to Prime Minister Shimon Peres of Israel who, severely undermined by Hamas’s devastating campaign of suicide terrorism, was on the verge of electoral defeat at the hands of Benjamin Netanyahu.
But Islamic fundamentalism remained unimpressed.
Both its jihadist and political identity have, indeed, only gained momentum ever since.
In October 2000, Sharm el-Sheikh was the scene of another summit, with most of the same actors.
This time, the call went out for an end to the Palestinian Intifada and for Israelis and Palestinians to reach a final peace agreement.
Both objectives were endorsed by all the participants; neither was implemented.
As one of the players at that summit, I understand the reason for the gap between what was agreed by the “moderates” and the harsh realities that have driven the “extremists” forward.
The only way Arafat could stop the Intifada and stem the advance of Hamas was through an especially generous peace deal from Israel.
But such a deal became impossible precisely because the Intifada had raised Palestinian expectations to such heights that it became impossible for Israel to meet them.
Notwithstanding Israeli Prime Minister Ehud Olmert’s commendable gestures at Sharm el-Sheikh in 2007, the summit’s achievements are bound to be short-lived.
It is unrealistic to believe that transferring to the Palestinians tax revenues that are owed to them, removing a limited number of checkpoints in the occupied West Bank, and even releasing 250 Fatah prisoners “with no blood on their hands” will calm the Palestinian volcano, and thus enhance Palestinian President Mahmoud Abbas’s leadership and Fatah’s edge over Hamas.
Indeed, all indications are that Hamas might soon boost its popularity by exchanging Israeli corporal Gilad Shalit for even more prisoners, including some “with blood on their hands.”
This alliance of Middle East moderates comes with a price that neither Israel nor the Bush administration seems ready to pay.
The Israeli-American strategy of driving a wedge between Gaza and the West Bank while shunning negotiations on a peace settlement that could give Abbas the ultimate tool to undermine Hamas is a policy at war with itself.
Moreover, no matter how critical the moderate Arabs may be of the Hamas coup in Gaza, the Arab leaders cannot afford the domestic fallout of shunning Hamas.
Indeed, Mubarak has already called for a resumption of inter-Palestinian dialogue, which might lead to yet another attempt at a national unity government, the same kind of government with which both Israel and the US refused to do business.
Abbas is being asked to play for high stakes – defeating Hamas and with it the cause of Islamic fundamentalism in the region – with inadequate resources.
And, by mortgaging his entire Middle East policy to the concept of an “ideological confrontation” against the forces of evil, Bush is putting his entire strategy on the weary shoulders of a defeated Palestinian president without really providing him with the necessary tools.
Worse still, by ladling money and arms to Abbas without offering him a political horizon that would deepen his support among ordinary Palestinians, while at the same time imprisoning all Hamas leaders in the West Bank, Israel and the United States are condemning Abbas to seeming a collaborator in the eyes of his people.
Of course the Arabs are not free of blame either.
No Israeli government will risk making a far-reaching peace offer to a Palestinian Authority whose rule is characterized by abdication and anarchy.
Hamas’s emergence as a formidable military force also reflects the Egyptians’ inept performance in preventing the smuggling of weapons into Gaza.
Taming Hamas is in Egypt’s interest, but it refuses to pay the price of a direct confrontation because that might lead Egyptian forces to be perceived as Israel’s protectors.
Indeed, Mubarak’s strategic vision is desperately narrow.
His role as a broker of sorts is mostly aimed at endearing himself to the US, where Congress is highly critical of his human rights record.
On his home front, he needs to cultivate, at the lowest possible price, an image as a champion of the Palestinian cause.
The latest Sharm el-Sheikh summit is also a message to the Saudis: Cairo, not Mecca, is the center of Middle East politics.
Calling for Israeli concessions is perfectly legitimate, even necessary.
But the credibility of such demands is undermined by the Arabs’ inability to alleviate Palestinian misery and, no less importantly, by their failure to help the Palestinians face the hard choices they will need to make if an orderly Palestinian state is ever to emerge.
Sharon’s Triumph
Israeli Prime Minister Ariel Sharon’s disabling stroke has thrown Israeli politics into turmoil yet again.
Or so it seems.
Sharon was considered a certain victor in the planned March elections, for which he had organized his own Kadima (Forward) party, attracting leading figures from the Labor party on the left and the Likud party on the right.
But will his departure from public life really be as destabilizing as many observers suggest?
To be sure, it was Sharon’s personal appeal that made Kadima so popular.
His conservative and nationalist credentials sustained his popularity on the right, while his new security strategy – including full withdrawal from the Gaza Strip – attracted supporters from the left.
In short, Sharon was the ideal center candidate: a leader who reconciled a dovish approach with a hawkish outlook.
Yet Sharon’s untimely departure has by no means reversed the fundamental political and strategic shifts that he initiated.
In the short term, while Kadima will get fewer votes without Sharon at the helm, some voters will be swayed by sympathy for the stricken leader.
Indeed, polls show that the party could still finish first.
Moreover, Kadima still has an impressive triumvirate at the top of its list.
Acting Prime Minister Ehud Olmert, a veteran political maverick and former mayor of Jerusalem, inspired several of Sharon’s initiatives.
Shimon Peres, a former prime minister and Labor party leader, appeals to many voters from the left.
Former chief of staff and defense minister Shaul Mufaz provides the security expertise.
Their differences will be harder to patch up without Sharon, but they have closed ranks and could well lead Kadima to victory.
At the same time, the main alternative candidates on the left and right have positioned themselves too far toward the extremes to recapture the center easily.
On the left is Amir Peretz of the Labor party, a populist and trade-union federation leader with little national leadership experience and even less familiarity with security matters.
Many Israelis distrust his ability to lead the country.
It had generally been expected that Labor would come in second in the election and form a coalition government with Kadima.
Without Sharon, Peretz might have more leverage in the partnership, particularly since Olmert has been more willing than Sharon to embrace policy changes perceived as dovish.
A Kadima-Labor coalition would have its problems, but it would still form the basis of a solid government.
On the right is Bibi Netanyahu, a former prime minister and leader of Sharon’s old Likud party.
A year ago, Netanyahu seemed certain to succeed Sharon.
But his opposition to the Gaza Strip withdrawal, coupled with his strong criticism of Sharon, cost him his position as heir apparent.
To gain control of the rump Likud, Netanyahu had to move sharply to the right.
In the longer term, Netanyahu may again rise to the top in a post-Sharon era, if he is able to regain the center.
But in the upcoming elections, he is likely to be left out in the cold.
More importantly, continuity on the political front is likely to extend to strategy and policy.
Sharon embodied a new national consensus, accepted by at least two-thirds of the population, that reflects deep-seated changes in the country and its situation.
From the left comes the idea that, in return for full peace, Israel is ready to withdraw from most of the territory captured in 1967 and accept a Palestinian state.
From the right, the consensus acknowledges that currently there is no Palestinian partner for real peace.
The left’s advocacy of territorial withdrawal gained currency as a result of a general recognition that holding onto land, especially Palestinian-populated areas, is not in the national interest.
Israel does not intend to claim this land in the future, never derived any economic benefit from it, and now regards staying there as a security problem rather than an asset.
With the Cold War over, the USSR gone, and the Arab world weakened, a conventional war with the armies of Arab states is no longer likely, rendering obsolete the strategic considerations underlying Israel’s occupation of this territory.
At the same time, though, there is no hesitation about waging a tough defensive war against Palestinian terrorism.
Israel will complete its defensive security fence and strike back against terrorists and those who fire missiles at Israeli civilian targets.
No one believes that Palestinian leader Abu Mazin can or will do anything to stop such attacks.
Indeed, it is understood on both the left and the right that he and his colleagues will not live up to any commitment they make.
The Palestinian movement is falling apart, the radicals are gaining control, and nobody is going to make peace.
The bad news, then, is that the conflict will go on for decades, owing to intransigence and growing chaos on the Palestinian side.
The good news is that Israel can defend itself with relatively low casualties, its economy is improving, and tourism is recovering.
As Palestinian extremism and anarchy become clearer, Israel’s stance may gain greater international sympathy, strengthening prospects for better relations with the Arab world and the West.
It was Sharon who sensed a sea change in Israeli sentiment and acted upon it.
But Sharon was the messenger, not the message.
The era of Israeli pragmatism that he opened will not end with his departure.
Shell\u0027s Corrupt Shell Game in Nigeria
Under fire from shareholders, and facing investigations in the United States, the United Kingdom, and the Netherlands for misrepresenting its oil reserves, Royal Dutch/Shell is trying to shift the blame to Nigeria.
Confidential company documents made available in late March suggest that Shell withheld vital information on the extent of the downward revaluation of its Nigerian reserves - by 1.5 billion barrels (60% of the country's total reserves) - because it wanted to strengthen Nigeria's hand in negotiating with OPEC to increase the country's production quota.
Nigeria presently produces two million barrels per day.
OPEC calculates member countries' quotas based on proven reserves.
Nigeria, grappling with a worsening economic crisis, wants to double daily production to four million barrels, to reflect new discoveries that the Nigerian National Petroleum Corporation (NNPC) claimed in December 2003 had increased reserves to 34 billion barrels.
Officials also argue that Nigeria's large population relative to other OPEC members, and the urgent need to earn foreign exchange to invest in infrastructure and social services, necessitates preferential treatment.
Shell claimed it did not want to jeopardize these negotiations by making public the true state of its Nigerian reserves.
This image of Shell as a sensitive, caring company mocks the evidence.
At the heart of Shell's oil reserves scandal is the desire for profit and the elaborate mechanisms that it nurtured in collaboration with corrupt military dictators over the years to ensure that its operations yield enormous dividends at the expense of ordinary Nigerians.
Shortly after General Ibrahim Babangida seized power in a coup in 1985, the military government signed a "Memorandum of Understanding" with Shell and other oil companies.
The Memorandum, revised in 1991, entitled Shell to a guaranteed profit of between $2 and $2.50 per barrel produced as long as oil prices remain in the range of $12.50 to $23.50, and provided that it invests a minimum of $1.50 on every barrel it produces.
As a further sweetener, Shell was entitled to a bonus of ten to fifty cents per barrel for every operating year in which it discovers new oil fields with reserves greater than the volume of the oil it extracts.
Shell has been laughing all the way to the bank ever since.
On average, world oil prices have not fallen below the stipulated $12.50 baseline since 1986.
Moreover, Shell also operates a joint venture partnership between the NNPC, the French oil company Elf, and Agip of Italy.
The Joint Operating Agreement guiding the venture, in which the Nigerian government has 55% equity, stipulates that while all parties share in the cost of operations, Shell prepares the annual work programs and budget.
Control over operating costs is the key to understanding of Shell's big profits in Nigeria.
The NNPC's executives admit that proper monitoring of the company's operating costs consistently eludes them and that what keeps Shell and the other western oil companies in business is not the theoretical margin, but the returns they build into their costs.
Because the operational budget is set by Shell, and because the NNPC is plagued by corruption and lacks the expertise to verify production claims, the operating company has a powerful incentive to inflate costs.
Similarly, new reserves "discovered" by Shell to enable it to press a claim for the Reserves Addition Bonus was a key source of company profits until 1999, when a new government reviewed the Memorandum of Understanding.
Production costs have been a subject of bitter dispute between Shell and Nigeria's government since the early 1990's.
Alarmed that the production costs put forward by Shell were always increasing, in 1996 Nigeria's petroleum minister promised to establish a monitoring unit to scrutinize all of Shell's invoices and claims.
Nothing came of this.
Last February, the newly elected Senate attempted to block $1.6 billion from going to Shell and two other companies for production expenses until they provided adequate documents to support their claims.
This effort was brushed aside by President Olusegun Obasanjo and NNPC officials.
The latest scandal is unlikely to elicit vigorous responses from Nigeria's government, even though it has been paying millions of dollars for new oil finds that exist only in Shell's imagination.
Nigerian officials are anxious to swat away charges that Shell padded its figures for reserves in Nigeria to take advantage of lax oversight and regulatory mechanisms and reap millions of dollars in bonus payments.
Indeed, Shell insists that Nigeria owes it $385 million more.
Shell has powerful friends in Nigeria's government.
In the mid 1990's, the company worked closely with the late dictator, General Sani Abacha, to suppress the Movement for the Survival of Ogoni People, a grassroots environmental and minority rights organization led by Ken Saro-Wiwa, who was later executed by the regime.
Human Rights Watch investigators linked Shell officials to gross human rights violations committed by government troops at the time.
This slick alliance of corrupt state officials and self-serving company executives, anxious to keep the petrodollars flowing, is still in place.
Facing the sharp end of the stick are the seven million Niger delta peasants, who bear the brunt of the violence, environmental devastation, and social anarchy that Big Oil produces wherever it sets up its drilling rigs.
Shevardnadze’s Last Stand?
Shifting the Afghan “Great Game”
Tel Aviv – So President Barack Obama has decided to “stay the course.”
The obstinate battle cry of the Bush administration in Iraq has now won out in Obama’s planned surge of an additional 30,000 troops in Afghanistan.
A Taliban victory there, the advocates of the surge had warned, would radicalize the entire region and create a domino effect, with Islamic insurgencies unleashed across Central Asia.
Al Qaeda, inextricably entwined with the Taliban, would also claim victory if America had signaled a retreat.
But victory for the forces of jihad is not the only possible scenario.
Al Qaeda, for example, has now become a franchised global concern whose capabilities no longer depend on its Afghan base.
In fact, disconnected from the heroin trade, which has turned the Taliban into a colossal economic concern, Al Qaeda is in clear financial decline.
Nor is it clear that NATO’s withdrawal would inevitably usher in a Taliban takeover.
A fragmentation of the country along ethnic lines is a more probable scenario.
In reality, the question of what to do in Afghanistan concerns the old vocation of the “white man’s burden,” which never seems to die, however costly and duplicitous it might be.
For, even if the calamities predicted by the prophets of doom are the most likely scenario, why are they a greater threat to the West than they are to regional powers like India, China, Russia, and Iran (for which the Sunni Taliban are a dangerous ideological challenge).
None of these countries is considering a military solution to the Afghan crisis.
Pakistan’s macabre association with the Taliban stems mostly from its constant effort to pressure its mortal enemy, India.
A stable and secular Afghanistan is therefore a vital strategic necessity for India.
Indeed, India was alone in the non-aligned movement in supporting the Soviet invasion of Afghanistan in the 1980’s, and it also desperately supported the secular Northern Alliance after the Taliban victory of the 1990’s.
Nor can China’s interest in the stability of both Afghanistan and Pakistan be underestimated.
Afghanistan, along with Pakistan and Iran, is part of a vital western security zone for China.
It is a corridor through which it can secure its interests in Pakistan, a traditional ally, and ensure its access to vital natural resources in the region.
Moreover, China’s Muslim-majority province of Xinjiang, bordering on Afghanistan, can be dangerously affected by a Taliban takeover in Kabul or by the dismemberment of the country.
Russia, of course, has no appetite to repeat the Soviet Union’s calamitous military adventure in Afghanistan.
But this does not mean that a Taliban victory or an Afghan crisis that spirals out of control is no threat to the Kremlin’s standing in Central Asia, a region it considers its strategic backyard.
The Russians are especially concerned by the regularly involvement of jihadis from Chechnya, Dagestan, and Central Asia with Taliban fighters.
So, while the US gets to play the “Ugly American” once again, the regional powers promote their interests in that war-torn country with a smiling face and away from the battlefield.
America’s difficulties in Afghanistan – and the serious problems it faces in harnessing Pakistan’s government to a more robust fight against the Taliban both at home and in Afghanistan – provide an opportunity for these powers to attempt to shift the dynamics of the “Great Game” to their benefit.
Soft power is their means.
Afghanistan is the recipient of the largest assistance program that India has for any country in the world.
That program focuses on the Afghanization of the development process, as well as on allowing the security forces to operate autonomously.
As in Africa, where it is consistently replacing Western influence with its massive financial firepower, China’s strategy in Afghanistan is mostly focused on business development – with a stabilizing effect on the country that should not be underestimated.
China’s development of the Ainak Copper Mine is the largest single foreign direct investment in Afghanistan’s history.
China is also engaged in constructing a $500 million electric plant and railway link between Tajikistan and Pakistan.
Russia’s economic influence in Afghanistan is far less robust, but it is growing.
While the West is busy fighting the Taliban, the Russians, like the other regional powers, are building roads and electricity stations, and conceiving regional diplomatic solutions to what has become a Vietnam-like quagmire for the West.
If both war and diplomacy fail, these regional powers believe they will be better positioned than the West to shift the Afghan Great Game in their favor.
China’s diplomatic recipe for Afghanistan and Pakistan is the right one, and the US should focus on it.
A settlement over Kashmir is the key to stability in Afghanistan, which would then no longer be a strategic playground for India and Pakistan.
Instead of persisting in a counterproductive war effort, the US should use its leverage on India and Pakistan to bring them back to peace negotiations.
Beyond the additional troops, President Obama must strive for an inclusive settlement in Afghanistan.
This means engaging Afghanistan’s neighboring states to promote a settlement of national reconciliation that includes all the major stakeholders &#45;&#45; the government, the Taliban and the warlords &#45;&#45; in the country.
The Promise of Abenomics
TOKYO – Japanese Prime Minister Shinzo Abe’s program for his country’s economic recovery has led to a surge in domestic confidence.
But to what extent can “Abenomics” claim credit?
Interestingly, a closer look at Japan’s performance over the past decade suggests little reason for persistent bearish sentiment.
Indeed, in terms of growth of output per employed worker, Japan has done quite well since the turn of the century.
With a shrinking labor force, the standard estimate for Japan in 2012 –&#160;that is, before Abenomics – had output per employed worker growing by 3.08% year on year.
That is considerably more robust than in the United States, where output per worker grew by just 0.37% last year, and much stronger than in Germany, where it shrank by 0.25%.
Nonetheless, as many Japanese rightly sense, Abenomics can only help the country’s recovery.
Abe is doing what many economists (including me) have been calling for in the US and Europe: a comprehensive program entailing monetary, fiscal, and structural policies.
Abe likens this approach to holding three arrows –&#160;taken alone, each can be bent; taken together, none can.
The new governor of the Bank of Japan, Haruhiko Kuroda, comes with a wealth of experience gained in the finance ministry, and then as President of the Asian Development Bank.
During the East Asia crisis of the late 1990’s, he saw firsthand the failure of the conventional wisdom pushed by the US Treasury and the International Monetary Fund.
Not wedded to central bankers’ obsolete doctrines, he has made a commitment to reverse Japan’s chronic deflation, setting an inflation target of 2%.
Deflation increases the real (inflation-adjusted) debt burden, as well as the real interest rate.
Though there is little evidence of the importance of small changes in real interest rates, the effect of even mild deflation on real debt, year after year, can be significant.
Kuroda’s stance has already weakened the yen’s exchange rate, making Japanese goods more competitive.
This simply reflects the reality of monetary-policy interdependence: if the US Federal Reserve’s policy of so-called quantitative easing weakens the dollar, others have to respond to prevent undue appreciation of their currencies.
Someday, we might achieve closer global monetary-policy coordination; for now, however, it made sense for Japan to respond, albeit belatedly, to developments elsewhere.
Monetary policy would have been more effective in the US had more attention been devoted to credit blockages –&#160;for example, many homeowners’ refinancing problems, even at lower interest rates, or small and medium-size enterprises’ lack of access to financing.
Japan’s monetary policy, one hopes, will focus on such critical issues.
But Abe has two more arrows in his policy quiver.
Critics who argue that fiscal stimulus in Japan failed in the past – leading only to squandered investment in useless infrastructure – make two mistakes.
First, there is the counterfactual case: How would Japan’s economy have performed in the absence of fiscal stimulus?
Given the magnitude of the contraction in credit supply following the financial crisis of the late 1990’s, it is no surprise that government spending failed to restore growth.
Matters would have been much worse without the spending; as it was, unemployment never surpassed 5.8%, and, in throes of the global financial crisis, it peaked at 5.5%.
Second, anyone visiting Japan recognizes the benefits of its infrastructure investments (America could learn a valuable lesson here).
The real challenge will be in designing the third arrow, what Abe refers to as “growth.”
This includes policies aimed at restructuring the economy, improving productivity, and increasing labor-force participation, especially by women.
Some talk about “deregulation” – a word that has rightly fallen into disrepute following the global financial crisis.
In fact, it would be a mistake for Japan to roll back its environmental regulations, or its health and safety regulations.
What is needed is the right regulation.
In some areas, more active government involvement will be needed to ensure more effective competition.
But many areas in which reform is needed, such as hiring practices, require change in private-sector conventions, not government regulations.
Abe can only set the tone, not dictate outcomes.
For example, he has asked firms to increase their workers’ wages, and many firms are planning to provide a larger bonus than usual at the end of the fiscal year in March.
Government efforts to increase productivity in the service sector probably will be particularly important.
For example, Japan is in a good position to exploit synergies between an improved health-care sector and its world-class manufacturing capabilities, in the development of medical instrumentation.
Family policies, together with changes in corporate labor practices, can reinforce changing mores, leading to greater (and more effective) female labor-force participation.
While Japanese students rank high in international comparisons, a widespread lack of command of English, the lingua franca of international commerce and science, puts Japan at a disadvantage in the global marketplace.
Further investments in research and education are likely to pay high dividends.
There is every reason to believe that Japan’s strategy for rejuvenating its economy will succeed:&#160; the country benefits from strong institutions, has a well-educated labor force with superb technical skills and design sensibilities, and is located in the world’s most (only?) dynamic region.
It suffers from less inequality than many advanced industrial countries (though more than Canada and the northern European countries), and it has had a longer-standing commitment to environment preservation.
If the comprehensive agenda that Abe has laid out is executed well, today’s growing confidence will be vindicated.
Indeed, Japan could become one of the few rays of light in an otherwise gloomy advanced-country landscape.
समुद्र में क़ानून-व्यवस्था हासिल करना
टोक्यो – एशिया और दुनिया में शांति सुनिश्चित करने में जापान बड़ी और ज़्यादा सक्रिय भूमिका निभाने के लिए आज पहले से कहीं बेहतर स्थिति में है। हमें अपने सहयोगी दलों और अन्य अनुकूल देशों का स्पष्ट और उत्साहपूर्ण समर्थन प्राप्त है, जिनमें हर आसियान सदस्य देश और संयुक्त राज्य अमेरिका, ऑस्ट्रेलिया, भारत, यूनाइटेड किंगडम, और फ़्रांस, और अन्य शामिल हैं। उन सभी को पता है कि जापान - एशिया और सभी लोगों के लिए - क़ानून-व्यवस्था का समर्थक है।
हम अकेले नहीं हैं। ज़्यादातर एशिया-प्रशांत देशों में, आर्थिक विकास ने विचार और धर्म की आज़ादी, और साथ ही और ज़्यादा जवाबदेह और संवेदनशील राजनीतिक प्रणाली का पोषण किया है। हालाँकि ऐसे बदलावों की गति हर देश में अलग-अलग है, लेकिन क़ानून-व्यवस्था के विचार ने जड़ पकड़ ली है। और इसका मतलब है कि क्षेत्र के राजनीतिक नेताओं को अंतर्राष्ट्रीय क़ानून के प्रति सम्मान सुनिश्चित करना होगा।
यह ज़रूरत अंतर्राष्ट्रीय समुद्री क़ानून के क्षेत्र में जितनी स्पष्ट है, उतनी दूसरे क्षेत्रों में नहीं है। एशिया-प्रशांत क्षेत्र में एक ही पीढ़ी के अंतराल में ज़बरदस्त विकास हुआ है। अफसोस की बात है कि उस विकास के फल का बड़ा और सापेक्षिक रूप से अनुपयुक्त हिस्सा सेना के विस्तार में लगाया जा रहा है। अस्थिरता के स्रोतों में न केवल सामूहिक विनाश के हथियारों का ख़तरा शामिल है, बल्कि साथ ही - और ज़्यादा तात्कालिक रूप से – इसमें बल या अतिचार के माध्यम से क्षेत्र-संबंधी यथास्थिति को बदलने के प्रयास भी शामिल हैं। और ये प्रयास प्रमुख रूप से समुद्र में हो रहे हैं।
हाल ही में, अमेरिकी राष्ट्रपति बराक ओबामा और मैंने पारस्परिक रूप से क्षेत्रीय शांति और सुरक्षा की आधारशिला के रूप में हमारे देशों के सहयोग की पुष्टि की है। इसके अलावा, संयुक्त राज्य अमेरिका और जापान क्षेत्रीय और वैश्विक शांति और आर्थिक समृद्धि को बढ़ावा देने के लिए समान विचारधारा वाले भागीदारों के साथ त्रिपक्षीय सहयोग को मज़बू��� कर रहे हैं। पहले ही, ऑस्ट्रेलियाई प्रधानमंत्री टोनी एबट और मैं सहमत हो चुके हैं कि हमें ठीक ऐसा ही करना चाहिए।
अंतर्राष्ट्रीय समुद्री क़ानून का इतिहास लंबा है, जो प्राचीन ग्रीस तक पीछे जाता है। रोमन समय तक, समुद्र सभी के लिए खुले थे और निजी अधिकार और विभाजन करना निषिद्ध था। अन्वेषण के युग की शुरुआत से, बड़ी संख्या में लोगों ने असंख्य कारणों से समुद्रों को पार किया है, और समुद्र-आधारित वाणिज्य ने दुनिया के क्षेत्रों को एक-दूसरे से जोड़ा है। गहरे समुद्र पर आज़ादी मानव समृद्धि के लिए मूलभूत सिद्धांत बन गया है।
किसी विशेष देश या समूह ने ऐसा अंतर्राष्ट्रीय समुद्री क़ानून नहीं बनाया जैसा यह अब मौजूद है। यह मानव जाति की सामूहिक मेधा का उत्पाद है, जो सबकी भलाई के लिए अनेक सालों से ज़्यादा समय में तैयार किया गया है। आज, मानवता के लिए बहुत से लाभ इस बात पर निर्भर करते हैं कि प्रशांत से लेकर हिंद महासागर तक समुद्र पूरी तरह खुले रहें।
लेकिन इसका, वास्तव में, क्या मतलब है? अगर हम उस चेतना का सार करें जो हमने अंतर्राष्ट्रीय क़ानून में सदियों से समाहित की है और इसकी तीन सिद्धांतों के रूप में पुनः रचना करें, तो समुद्र में क़ानून-व्यवस्था सामान्य ज्ञान की बात हो जाती है।
सबसे पहले, देशों को अंतर्राष्ट्रीय क़ानून के आधार पर अपने दावे पेश और स्पष्ट करने चाहिए। दूसरे, देशों को अपने दावे साकार करने की कोशिश में बल या अतिचार का इस्तेमाल नहीं करना चाहिए। और, तीसरे, देशों को विवाद शांतिपूर्ण ढंग से निपटाने चाहिए। इन तीनों अत्यंत सरल - जो लगभग स्वयं स्पष्ट हैं - सिद्धांतों पर ज़ोर दिया जाना चाहिए, क्योंकि एशिया और प्रशांत में सभी सरकारों को इन्हें कड़ाई से बनाए रखने चाहिए।
इंडोनेशिया और फिलीपींस पर विचार करें, ये वे देश हैं जिनके नेता अपने अनन्य आर्थिक क्षेत्रों की अतिव्याप्ति के परिसीमन के लिए शांतिपूर्ण समझौते पर पहुँच गए हैं। इसी तरह, मेरी सरकार दृढ़ता से फिलीपींस के दक्षिण चीन सागर में क्षेत्र-संबंधी विवाद के समाधान के लिए आह्वान का पूरा समर्थन करती है जो सही मायने में अंतर्राष्ट्रीय समुद्री क़ानून के तीन सिद्धांतों के साथ सुसंगत है, ठीक वैसे ही जैसे हम वियतनाम के क्षेत्र-संबंधी विरोधी दावों के समाधान के लिए बातचीत के माध्यम से प्रयासों का समर्थन करते हैं।
एक निष्पन्न कार्य को दूसरे पर जमा करके यथास्थिति में बदलावों को म़जबूत करने के प्रयासों के बजाय, इस क्षेत्र की सरकारों को 2002 के दक्षिण चीन समुद्र में पक्षों के व्यवहार पर समझौते की चेतना और प्रावधानों पर लौटने के लिए दृढ़ प्रतिज्ञा करनी चाहिए, जिन पर पहले सभी संबंधित पक्षों ने सहमति व्यक्त की थी। आज की दुनिया में, देशों को इस बात का डर नहीं होना चाहिए कि अतिचार और धमकियाँ नियमों और क़ानूनों की जगह ले लेंगी। मैं दृढ़ता से आशा करता हूँ कि आसियान सदस्य देश और चीन दक्षिण चीन सागर के लिए शीघ्रता से सही मायने में प्रभावी आचार संहिता स्थापित कर लेंगे।
जापान और चीन के बीच एक समझौता है जिसे तत्कालीन प्रधानमंत्री वेन जियाबाओ और मैंने, प्रधानमंत्री के रूप में अपने पहले कार्यकाल के दौरान 2007 में संपन्न किया था। हमने अपने देशों के बीच अप्रत्याशित घटनाओं को तनाव और ग़लत गणना करने से रोकने के लिए समुद्री और हवाई संचार तंत्र तैयार करने के लिए प्रतिबद्धता की थी। दुर्भाग्य से, यह प्रतिबद्धता ऐसे तंत्र के क्रियान्वयन में तब्दील नहीं हुई है।
हम लड़ाकू विमानों और समुद्र में जहाजों द्वारा ख़तरनाक मुठभेड़ों का स्वागत नहीं करते। जापान और चीन को जिस चीज़ का आदान-प्रदान करना चाहिए, वे शब्द हैं। क्या हमें वार्ता की मेज़ पर नहीं मिलना चाहिए, एक दूसरे से मुस्कराकर हाथ नहीं मिलाने चाहिए, और आपस में बात नहीं करनी चाहिए?
मेरा मानना कि 2007 के समझौते के माध्यम से अनुसरण करने से पूरे क्षेत्र में शांति और स्थिरता को बढ़ावा मिलेगा। लेकिन मैं यह भी जानता हूँ कि दीर्घकालिक सुरक्षा सुनिश्चित करने के लिए और अनेक समझौतों की ज़रूरत होगी, जिनमें से प्रत्येक क्षेत्र आज़ादी और समृद्धि के क्षेत्र-व्यापी जाल का एक महत्वपूर्ण तंतु बनेगा।
Military Transparency and Asian Security
TOKYO – We have all heard the saying, “Sunshine is the best disinfectant.”
That is particularly true where Asian security is concerned.
Indeed, I believe that a framework under which Asian governments publicly disclose their military budgets needs to be established if we are to build trust and avoid a regional arms race.
More broadly, keeping military expansion in check, enlarging the number of countries that conclude the Arms Trade Treaty, and improving mutual understanding among national defense authorities are now the paramount issues facing Asia.
They should be the focus of the East Asia Summit, which in turn should become the premier forum for taking up regional security issues and ensuring that stability is maintained.
Military expansion is inherently incompatible with Asia’s move toward the center of the global economy.
The fruits of prosperity should be reinvested in improving people’s lives, not in weapons that can take them.
And yet safeguarding the rule of law counts most.
For example, Japan will offer its utmost support for efforts by ASEAN member countries to ensure the security and free navigation of the seas and skies.
But let me be transparent about what Japan will actually support, and how.
We have already provided three new patrol vessels to Indonesia through grant aid cooperation and have decided to provide ten more to the Philippine Coast Guard.
Moreover, we are moving forward with the necessary survey to enable us to provide such vessels to Vietnam.
No less important, when Japan sends hardware, experts and training follow, and we convey our sense of pride in committing ourselves to our duties.
By cultivating a high degree of morale and proficiency, we strengthen the bonds between the peoples of Japan and recipient countries.
In the Philippines, Indonesia, and Malaysia alone, Japan has trained more than 250 coast guard personnel.
In 2012, when we invited senior officials responsible for enforcing maritime law in each of the five major ASEAN countries to a month-long training program, three members of the Japan Coast Guard were assigned to each trainee, with all of them living, eating, and sleeping together under the same roof.
Recently, Japan formulated a new framework for transfers of defense equipment and technology to other countries.
On the basis of appropriate controls and strict inspections, we can now offer rescue, transport, surveillance, and minesweeping equipment.
To support ASEAN countries in safeguarding the seas, Japan will combine various options, including official development assistance, capacity building by the Japan Self-Defense Forces (JSDF), and provision of defense equipment and technology.
No country can secure its own peace alone anymore.
That is why it is incumbent upon us in Japan to reconstruct the legal basis for collective self-defense and international cooperation, including participation in United Nations peacekeeping operations – a reform that my administration has begun.
The importance of this reform can hardly be overstated.
The JSDF is now working to foster peace in South Sudan, under the flag of the UN mission there, alongside units from Cambodia, Mongolia, Bangladesh, India, Nepal, the Republic of Korea, and China, as well as many civilian UN staffers and NGO personnel from various countries.
All are partners with us in assisting South Sudan’s nation-building process.
But imagine now that civilian workers there, powerless to defend themselves, came under sudden attack by armed elements.
Under the approach that Japanese governments have taken up to now, the JSDF would be unable to rescue the civilians.
Is this really an appropriate response?
My government is thinking hard about this dilemma, and close consultation is underway within the ruling coalition.
It is precisely because Japan depends so heavily on the international community for the stability of its external environment that we wish to work even more proactively for world peace.
Many generations of Japanese have walked a single path – that of freedom, human rights, and the rule of law – and we will continue to walk this path for generations to come.
But, as we revitalize Japan’s economy, we need “new” Japanese who shoulder global responsibilities commensurate with their country’s size and economic resources.
These new Japanese will lose none of their good qualities.
They will still loathe poverty, embrace universal values, and find joy in hard work.
If anything has changed, it is that women are much more visible among these new Japanese.
For example, all three of the Japanese judges and public prosecutors who helped draft Cambodia’s civil code were young women.
The new Japanese will actively serve the cause of Asian peace.
In August 2011, President Benigno Aquino III of the Philippines and Chairman Murad Ebrahim of the Moro Islamic Liberation Front met in Narita, Japan.
Three months ago, in March, the two sides finally reached a comprehensive peace agreement.
When the new Bangsamoro local government assumes power two years from now, Japanese assistance teams will be there from the start.
Japan is already focusing on giving women in the region the skills they need to earn a living.
In Mindanao, where Japan built a vocational training center for women, the sounds of gunshots and angry cries have been replaced by the whir of sewing machines.
All of this is nothing other than an expression of Japan’s determination to spare no effort for the sake of peace, security, and wider prosperity in the Asia-Pacific region.
By working with our regional allies and partners, including the United States and ASEAN, we will translate that determination into a rock-solid zone of stability.
Japan in Action
TOKYO – Japan’s prolonged political anni horribiles – spanning more than half a decade – has ended.
The Liberal Democratic Party (LDP) won a decisive victory in elections to the upper house of parliament held on July 21, bringing to an end the indecisive politics caused by the lack of an effective majority.
During the previous six years, there were six prime ministers, ten defense ministers, and 14 justice ministers (ten of whom came and went during the 39 months of rule by the Democratic Party of Japan).
These figures indicate just how unstable the country’s political situation had become.
But anxiety about the immature DPJ government, prolonged deflation, and unprecedented challenges posed by neighboring countries created a widespread sense of crisis among Japanese voters.
It was this that motivated them to return the LDP to power, though many voters seemed fed up with the party just a few short years ago.
In the recent election campaign, the LDP continued to criticize the previous DPJ government’s immaturity, but avoided attacks on other parties.
Instead, the LDP highlighted the beneficial effects of Prime Minister Shinzo Abe’s reforms (colloquially known as “Abenomics”), such as increased share prices, faster GDP growth, and higher employment, all of which have created hope for a turnaround in Japan’s prospects.
Since Abe returned last December for a second stint as Prime Minister, Japanese voters have entrusted him with maintaining political stability and ensuring economic revitalization.
But, following monetary easing and fiscal expansion, it is Abenomics’ third “arrow” that will prove most important – and most politically challenging. The Abe government must implement deregulation and other structural reforms while convincing powerful interest groups to adjust to a new national and global environment in which Japan’s old economic model no longer works.
Fortunately, Abe will not need to worry about elections for the next three years.
With strong majorities in both houses, he should be able to secure whatever reform legislation he needs – that is, provided that he can maintain the LDP’s internal discipline (his enormous popularity will help him).
Abe’s agenda includes reform of social security in response to demographic trends, as well as gaining the agriculture sector’s acceptance of the Trans-Pacific Partnership, the bold regional trade agreement that will unite the United States, Japan, Australia, New Zealand, and much of the rest of Asia, with the exception of China.
The rigors of the TPP are bound to force significant agricultural reforms, and pushing it through will, indeed, test party discipline.
But Abe is also pressing for change in medical research and the technology sector by embracing long-shunned innovations such as iPS cells (artificial stem cells).
He is also emphasizing the development of renewable energy and power-saving innovations, which became an urgent policy objective following the accident at the Fukushima Daiichi nuclear power plant two years ago.
Abe is resolved to make steady progress on each of these key issues.
But Abenomics has a strategic corollary as well.
Japanese diplomacy lost its footing in the unstable – and often naive – politics of the DPJ years.
Thus, Abe has been traveling abroad every month since last December in an effort to demonstrate that Japan has returned as a global player, and is particularly keen to play a prominent role in recasting Asia’s security structures in the wake of China’s rise.
Indeed, Abe has visited 13 countries in the last six months alone (a schedule that has helped him to cast aside any lingering memories of his previous tenure as Prime Minister, when ill health forced him from office after barely a year).
Abe has placed particular emphasis on strengthening Japan’s alliance with the Unites States, which had atrophied as a result of the DPJ government’s feckless behavior (relations with China deteriorated as well).
More broadly, Abe envisages Japan’s future as that of a trading country that has assumed its rightful role in ensuring a free and open maritime order.
Abe’s diplomatic whirlwind is aimed at strengthening ties with countries that share this commitment, as well as Japan’s other values, including human rights and democracy.
Of course, given Asia’s size and dynamism, there are many other issues that will need to be addressed in the years ahead, including improvement of the security environment in a currently unstable East Asia and amending the country’s constitution, which the LDP has considered doing for many years.
But the first priority for Abe’s second government is to revive the Japanese economy.
That task has already begun, and the LDP’s recent election victory will strengthen Abe’s ability to complete it.
The Fate of Abe’s Japan
TOKYO – As Shinzo Abe sits down this week in Seoul with South Korean President Park Geun-hye and Chinese Premier Li Keqiang, he does so as the leader of a country that many people around the world now seriously underestimate.
That dynamic certainly will be felt during the three Northeast Asian powers’ first summit since 2012.
Three decades ago, many erred in the opposite direction in their assessments of Japan.
Many Americans feared being overtaken after Japanese per capita income surpassed that of the United States;
Japanese manufacturing set the international standard; and some books even predicted an eventual war with a Japanese nuclear superpower.
Such views extrapolated from Japan’s impressive postwar economic growth; today, after more than two decades of malaise, they simply remind us of the danger of linear projections.
That danger remains with us.
In response to China’s rapid rise and the assertiveness of its Communist Party leadership, the current conventional wisdom portrays Japan as a country of secondary importance – which is equally mistaken.
Despite its economic slowdown, Japan retains impressive power resources.
It is a democracy that has been at peace for 70 years, with a stable society and a high standard of living.
Its per capita income is five times that of China, and Beijing residents can only envy Tokyo’s air quality and product safety standards.
Its economy remains the world’s third largest overall, sustained by highly sophisticated industry.
While China has nuclear weapons and more soldiers, Japan’s military is better equipped in some areas (and obviously has the technological capacity to develop nuclear weapons very quickly).
Moreover, Japan’s culture (both traditional and popular), overseas development assistance, and support of international institutions are impressive sources of soft power.
Yes, Japan faces severe demographic problems, with the population projected to shrink from 127 million to below 100 million by 2050.
The current birth rate is 1.4 (well below the replacement rate of 2.1), and the Japanese are resistant to accepting large numbers of immigrants.
When Abe became Prime Minister almost three years ago, he vowed to restore Japan’s standing as a “first-tier country” by implementing an economic stimulus package, dubbed “Abenomics,” and reinterpreting Japan’s constitution to stiffen the country’s defense posture.
But, whereas Abenomics was enacted quickly, the Diet enacted the defense legislation only recently – and after more than a year of effort.
Many in Abe’s Liberal Democratic Party would have preferred fundamental reform of Japan’s defense doctrine, by removing the constitution’s limits on the country’s armed forces.
But public opinion and Abe’s coalition partner, Komeito, did not allow it.
Nonetheless, Japan’s interlocutors at the Seoul summit, China and South Korea, which suffered enormously from Japanese aggression in the last century, have protested loudly.
Both are suspicious of Abe, who exacerbated tensions with nationalist rhetoric and a visit to the controversial Yasukuni Shrine early in his current administration.
Indeed, Chinese President Xi Jinping has resisted meeting with Abe, as has Park, who will do so for the first time at the Seoul summit.
On the other hand, Abe has repaired the strained relations with the US that Japan had under his predecessors, and President Barack Obama reiterated the strength of the bilateral alliance during Abe’s state visit to the White House last April.
Under the new defense guidelines, US and Japanese forces are able to plan and exercise more effectively, and the alliance is in its best condition in decades.
Abe has thus been relatively successful in terms of foreign and defense policy.
But the situation on the economic front is more mixed.
Inflation and unemployment are low, but growth is largely flat, and few experts I spoke with in Tokyo recently expect it to accelerate significantly.
The first two components (or “arrows”) of Abenomics – loose monetary and fiscal policies – helped to restore demand.
But the third arrow of structural reform has remained in the quiver.
Since his success in the Diet election last year, Abe has talked about liberalizing electricity markets, improving corporate governance, and undertaking tax reform.
In addition, he hopes to use the recently concluded Trans-Pacific Partnership trade agreement to force reform of the inefficient agriculture sector.
One important constraint is labor supply.
Abe has proposed relaxing visa conditions for expatriate workers; but immigration on a scale that would make a major economic difference is unlikely, given the homogeneity and insularity of Japan’s traditional culture.
The difficulty of loosening limits on immigration will require Japan to mobilize its underused female human resources.
But that effort, too, must overcome formidable cultural obstacles.
Abe has spoken frequently (including at the United Nations) about opportunities for women, and has called for women to make up 30% of Japan’s managers.
But today they account for less than 10% of managers and about 1% of senior executives.
The World Economic Forum’s index of gender inequality gives Japan a low rating.
Government measures like family leave and more nurseries for working mothers can help, but traditional attitudes change slowly.
Unless it is addressed, the labor constraint implies that Japan will not reach its full potential economically – and thus in regional and global affairs as well.
Japan is a successful, comfortable society, which has much to contribute to the world.
The danger is that it is so comfortable that it will look inward and prove the conventional wisdom right.
Shinzo Abe’s Grand Arrival
Japan’s new prime minister, Shinzo Abe, has wasted little time in making his mark, particularly in foreign policy.
His official visits to China and South Korea – two key countries with which relations suffered under the administration of Junichiro Koizumi – came within a week of his taking office and at a moment of crisis, with North Korea setting off an underground nuclear blast.
That Prime Minister Abe and Chinese President Hu Jintao agreed that a North Korean nuclear test “cannot be tolerated” suggests that this new activism may help to stabilize Asian security.
As Abe made clear when he delivered the prime minister’s general policy speech late last month, his focus on foreign policy is set to intensify.
But, while Abe’s commitment to what he describes as “future-oriented” relations with China and South Korea represents a welcome departure from the Koizumi government’s record, his policy agenda in fact implies considerable continuity with Japan’s heightened focus on diplomacy and security issues.
In particular, emphasizing a “shift to more assertive diplomacy,” Abe’s policy speech cited Japan’s initiative in proposing sanctions against North Korea to the United Nations Security Council, and its success in overseeing – through close coordination with the United States and other countries – the resolution’s unanimous adoption.
At the same time, he indicated his intention to advance diplomacy aimed at strengthening the solidarity among Asian nations, founded on “the Japan-US alliance for the world and for Asia.”
Abe also stressed his intention to boost ties with Russia, promote cooperation with the ASEAN countries, and develop a strategic dialogue with Australia and India.
Likewise, under Abe, Japan will develop its official development assistance, seek to secure stable energy supplies, and pursue permanent membership of the UN Security Council.
Toward North Korea, on the other hand, continuity will prevail, with Abe re-emphasizing the principle that normalization of relations requires resolution of abduction cases – some dating to the 1970’s – involving Japanese citizens who were seized from coastal towns.
At the same time, Japan will remain committed to the six-party talks on North Korea’s nuclear program.
Abe recognizes the new challenges posed by proliferation of weapons of mass destruction and terrorism, and has acknowledged the rising expectation, at home and abroad, that Japan’s contribution to international security must grow.
Most importantly, he has proposed exercising the right collective self-defense on a case-by-case basis - thus far barred by the article 9 of Japan’s constitution – in order to maintain peace and promote effective functioning of the Japan-US alliance.
Abe says that he would “expect” the early adoption of the referendum law needed to amend the constitution.
Abe’s choice of personnel clearly reflects his focus on diplomatic and security issues.
Yasuhisa Shiozaki, who occupies the key position of cabinet secretary, is a long-time ally, while the foreign minister, Taro Aso, though a rival within the Liberal Democratic Party (LDP), shares Abe’s policy priorities.
Akio Kyuma, the Director-General of the Defense Agency, which is expected to be transformed into the Ministry of Defense, was instrumental in preventing Aso’s ally, Fukushiro Nukaga, from running for LDP president.
Furthermore, Abe will seek to reorganize the prime minister’s office to reinforce its ability to function as a political headquarters that can make quick decisions on national strategy concerning diplomatic and security issues.
Thus, the prime minister’s office will more closely resemble the US White House, which he hopes will enable both countries to communicate their intentions continuously and reliably.
Based on his previous experience as cabinet secretary, Abe wants to create and operate a Japanese version of America’s National Security Council.
For this, he has appointed Yuriko Koike, a former cabinet member, as one of his five assistants, while one of the other four, Kyoko Nakayama, is responsible solely for the abduction issue.
Moreover, although the current assistants’ authority is limited, Abe plans to submit legislation aimed at strengthening the prime minister’s office, including an amendment of the cabinet law.
This would enable the prime minister’s assistants to “command and instruct” the relevant ministries and agencies.
Abe’s government may also review to increase the number of staff to which the assistants are entitled.
All of this has given rise to depictions of the Abe administration as a “cabinet of hawks” or “the buddy club” Nevertheless, its popular support is the third highest since the end of World War II (63% according to Asahi Shimbun , and 70% according to Yomiuri Shimbun ).
This implies that Abe enjoys a strong mandate to implement his government’s policies.
But high expectations, both domestically and internationally, can lead to huge disappointments.
If Abe is to create the “beautiful country” that he promised in his policy speech, he must not lose momentum in exercising strong leadership.
Abe’s Safe Bet
TOKYO – Japanese Prime Minister Shinzo Abe has thrown out the political playbook.
With two years remaining in his term, and with his Liberal Democratic Party enjoying comfortable majorities in the Diet’s upper and lower houses, Abe has called a snap general election for December.
Political leaders and pundits worldwide are scratching their heads at Abe’s decision to risk his extensive reform agenda with a throw of the electoral dice.
But while Abe may be known for his boldness, he is no reckless gambler.
On the contrary, he would have been reckless to launch the third “arrow” of his so-called Abenomics strategy for reviving Japan’s economy – supply-side structural reforms – without a clear mandate for reform.
Fortunately, Abe is almost certain to receive that mandate – not least because he lacks credible opponents.
The main opposition party, the Democratic Party of Japan (DPJ), essentially imploded following its previous turn in government, which was characterized by economic malaise and foreign-policy blunders.
And Japan’s other political parties have done nothing to convince voters that they deserve to emerge from the political wilderness.
In a sense, Abe is not running against his parliamentary opponents, but against himself.
After the first two arrows of Abenomics – expansionary monetary and fiscal policies – raised expectations that Japan’s economy would finally escape stagnation, the country began slipping back into recession in the second quarter of this year.
As any democratic politician will attest, disappointed expectations may well be the toughest electoral opponent of all.
Just ask former French President Nicolas Sarkozy.
Of course, Abe did not face the kind of sky-high expectations that Sarkozy and, for that matter, US President Barack Obama did.
It is not that Abe’s 2012 campaign lacked ambition; he set out a bold economic-reform agenda and promised to boost Japan’s global influence.
But, after two decades of leaders who – with the exception of Junichiro Koizumi – promised little and achieved less, Japanese voters had little reason to expect that Abe would follow through on his pledges.
Moreover, Japan’s powerful bureaucracy – which has a long history of impeding reform (and has taken too little of the blame for the country’s “lost decades” of stagnation) – was probably not convinced that the election had authorized Abe to push for sweeping change.
Expecting Abe to show the same inertia as the DPJ premiers who preceded him, they behaved in the way they always had – advancing their own interests, instead of faithfully enacting the policies of the elected government.
But Abe was not deterred.
In his first weeks in office, he announced a ¥10.3 trillion ($116 billion) stimulus bill and appointed Haruhiko Kuroda, a determined, dynamic, and bold thinker, to head the Bank of Japan. Kuroda wasted little time in initiating expansionary monetary policies – following in the footsteps of the US Federal Reserve and the Bank of England – to help reflate the economy.
The first two arrows of Abenomics began to take effect almost immediately.
Japan experienced sustained inflation for the first time since the early 1990s.
The stock market boomed.
The yen fell to a more realistic level against other currencies.
Consumer confidence rose marginally.
But Abe knows that all of this will be for naught unless and until the third arrow is launched.
Beyond his economic strategy, Abe has also delivered in terms of foreign policy.
He has visited almost all of Japan’s Asian neighbors, reinvigorating relationships that the DPJ neglected.
In particular, his personal rapport with Indian Prime Minister Narendra Modi has galvanized their countries’ emerging partnership, creating a new strategic center of gravity in Asia.
Moreover, Abe has settled a nettlesome dispute with the United States over its military bases on the island of Okinawa, thereby fortifying Japan’s relationship with its main ally.
And, by reinterpreting Article 9 of the constitution to allow Japan to exercise “collective self-defense” and provide aid to an ally under attack, Abe has made Japan a far more reliable partner for the US and its Asian allies.
Most important, Abe has initiated a realistic and coherent relationship with Chinese President Xi Jinping.
In recent years, rising tensions with China have stripped Japan of the illusion of friendship and goodwill that led it to inject many hundreds of billions of dollars into the country.
With a more pragmatic approach, however, Asia’s two largest economies can find a way to support domestic and regional stability, giving them the space to pursue economic reform at home.
Allowing secondary issues to jeopardize peace and progress would simply be irresponsible.
Unlike in the last election, Japanese voters now know exactly the kind of government Abe intends to lead.
They know that he intends to follow through on his plan to include Japan in the Trans-Pacific Partnership, the US-backed mega-regional free-trade deal currently being negotiated – a move that will require some sacrifices at home.
Abe has proved that reinvigorating the economy is his top priority.
In this sense, his decision to postpone the second round of the consumer-tax hike planned for next year is not fiscally irresponsible; on the contrary, it reflects his recognition that Japan’s economy is not yet strong enough to withstand a sharp tax increase.
Finally, Japan’s voters know that Abe is committed to building a durable and consensual regional peace, without which the rest of his plans could not succeed.
There is no doubt about Abe’s intentions or policy commitments.
If the Japanese public returns him to office, he will have the mandate he needs to complete his ambitious, pragmatic, and forward-thinking agenda.
It is now up to the Japanese people to give him that mandate, effectively choosing to end two decades of economic malaise and geopolitical irrelevance.
जापान की दूसरी पारी
टोक्यो – अमेरिकी राष्ट्रपति बराक ओबामा मेरे देश के इतिहास में एक ऐसे अनूठे समय पर टोक्यो का दौरा कर रहे हैं जब जापान की अर्थव्यवस्था ऐसे सुदृढ़ विकास के मार्ग पर चल रही है जिसमें इसकी भौगोलिक स्थिति का पूरा लाभ उठाया जाएगा। जापान अब अपने आपको “सुदूर” पूर्व नहीं मानता है; बल्कि हम प्रशांत परिधि के बिल्कुल केंद्र में हैं, और दक्षिणपूर्व एशिया से लेकर भारत तक फैले विश्व के विकास केंद्र के पड़ोस में हैं।
इस बारे में लेशमात्र भी संदेह नहीं है कि यह विकास केंद्र निकट भविष्य में जापान की अर्थव्यवस्था को आगे बढ़ाना जारी रखेगा। उदाहरण के लिए, वियतनाम और भारत में जापान के प्रत्यक्ष निवेश में वृद्धि हो रही है जिससे जापानी मशीन-उपकरणों और पूंजीगत वस्तुओं की मांग को बढ़ावा मिलेगा।
लेकिन अपने अवसरों को अधिकतम करने के लिए जापान को अपनी अर्थव्यवस्था को और अधिक मुक्त करना चाहिए और एक ऐसा देश बनना चाहिए जो विदेशों से पूंजी, मानव संसाधन, और ज्ञान को सक्रिय रूप से समाविष्ट करनेवाला हो। जापान को एक ऐसा देश होना चाहिए जो विकसित हो रहे एशिया की प्राणशक्ति को दिशा देकर विकास करने में समर्थ हो।
इस उद्देश्य से, हमने विश्व भर के विभिन्न भागीदारों के साथ आर्थिक भागीदारी अनुबंधों, या ईपीए, के संबंध में बातचीत की गति को बहुत अधिक तेज़ किया है। इससे पहले इस महीने, ऑस्ट्रेलियाई प्रधानमंत्री टोनी एबट और मैं जापान-ऑस्ट्रेलिया ईपीए पर सिद्धांत रूप से सहमत हुए। इसके बाद बारी आती है प्रशांत-पार भागीदारी (टीपीपी) की, जो विश्व के सबसे बड़े व्यापारिक क्षेत्र के 12 देशों को संगठित करेगी।
जापान और अमेरिका दोनों ही नियमों को बहुत अधिक महत्व देते हैं, स्वतंत्रता और लोकतंत्र के सिद्धांतों का समर्थन करते हैं, और उनके पास सर्वाधिक उन्नत प्रौद्योगिकियाँ और उद्योग हैं। हमारा इरादा है कि हम अपने मतभेदों को दूर करके और मिलजुल कर टीपीपी के रूप में एशिया और प्रशांत के लिए इक्कीसवीं सदी की एक ऐसी आर्थिक व्यवस्था स्थापित करें जो विकास के लिए सुदृढ़ नींव के रूप में कार्य करेगी।
मेरी सरकार यूरोपीय संघ के साथ ईपीए करने के लिए भी भरपूर प्रयास कर रही है। यह देखते हुए कि अमेरिका और यूरोपीय संघ के बीच पहले से ही व्यापारिक बातचीत ��ल रही है, जापान और यूरोपीय संघ के बीच ईपीए, और साथ ही टीपीपी, वास्तव में एक विशाल बाजार को जन्म देगा – जो विकास का एक ऐसा भारी साधन होगा जिससे पूरी वैश्विक अर्थव्यवस्था को फायदा होगा।
लेकिन जापान की आर्थिक सरहदें एशिया और प्रशांत से कहीं आगे, लैटिन अमेरिका और अफ़्रीका तक फैली हुई हैं - इस कारण यह अधिक उचित होगा कि हम अपने पुराने चले आ रहे अंतर्मुखी दृष्टिकोण को त्याग दें। अत्यधिक प्रेरित और महत्वाकांक्षी युवा लोग अध्ययन और कार्य के लिए बहुत बड़ी संख्या में पहले से ही दुनिया भर से, विशेष रूप से पड़ोस के एशियाई देशों से, जापान में आ चुके हैं। जापान को उनकी उम्मीदों पर खरा उतरना चाहिए। हमें उनके साथ अशिष्टता नहीं करनी चाहिए, और हमेशा खुले दिल से उनका स्वागत करना चाहिए। मेरा विश्वास है कि जापान ऐसा ही देश है।
निकट भविष्य में, हम छह राष्ट्रीय महत्वपूर्ण आर्थिक विकास क्षेत्रों – टोक्यो, कनसाई, ओकिनावा प्रांत, और नीगाटा, याबू, और फुकुओका के शहरों – को नामित करेंगे ताकि वे शेष देश के लिए मॉडल के रूप में कार्य कर सकें। स्वास्थ्य देखभाल, शिक्षा, कृषि, और रोज़गार प्रथाओं में, हम उन नीतियों और प्रथाओं की पहचान कर रहे हैं जो आज की आवश्यकताओं के हिसाब से अनुकूल नहीं रह गई हैं, और हम उनमें सुधार लाने के लिए शीघ्र कार्रवाई करेंगे। राष्ट्रीय महत्वपूर्ण आर्थिक विकास क्षेत्र सुधार की जाँच को अपनी विनियामक प्रणाली में शामिल करेंगे जो इसके मूल में दृढ़ हो चुकी है।
एक और आदत जो जापानियों को अवश्य बदल लेनी चाहिए वह है हमारी व्यापक पुरुष केंद्रित सोच। हमने पहले से ही यह सुनिश्चित करने का संकल्प लिया है कि राष्ट्रीय सरकार द्वारा नियुक्त किए जानेवाले कार्मिकों में से कम-से-कम 30% महिलाएँ हों। अब मैं सार्वजनिक रूप से कारोबार करनेवाली कंपनियों से भी अनुरोध कर रहा हूँ कि वे कम-से-कम एक महिला को बोर्ड सदस्य के रूप में शामिल करें। जिस समय हम उस मुकाम पर पहुँच जाएँगे जब किसी महिला या किसी गैर-जापानी का सीईओ के रूप में कार्य करना ख़बर नहीं रह जाएगा, तो जापान का हुलिया बदल चुका होगा और उसने जोखिम लेने और नवाचार की अपनी सच्ची भावना को वापस पा लिया होगा।
“महिलाशास्त्र” हमें बताता है कि जिस समाज में महिलाएँ सक्रिय रूप से कार्यरत होंगी उसमें जन्म दर भी अधिक होगी। मेरी सरकार का इरादा शिशु-देखभाल केंद्र सुविधाओं और समाज के लिए संस्था के निर्माण जैसी अन्य बुनियादी सुविधाओं के विस्तार पर तुरंत ध्यान देने का है जिसे उसके सभी सदस्यों के कौशलों और प्रतिभाओं का लाभ मिले।
हम परिवर्तन के लिए पूरी तरह से सक्षम हैं; वास्तव में हमें यह पसंद है, जैसा कि आनेवाले महीनों और वर्षों में दुनिया देखेगी। परंतु जापान के बारे में में कुछ चीज़ें ऐसी हैं जिन्हें बदला नहीं जा सकता, और कुछ चीज़ों को बदला नहीं जाना चाहिए।
इनमें से एक है हमारा ट्रैक रिकॉर्ड, जो "शांति के लिए सक्रिय योगदानकर्ता" होने की हमारी महत्वाकांक्षाओं का समर्थन करता है। जापान ने संयुक्त राष्ट्र और उसके संगठनों को वित्तीय योगदान अपने उचित हिस्से से कहीं अधिक किया है, ऐतिहासिक और वर्तमान दोनों दृष्टियों से। और हमारा वैश्विक उत्तरदायित्वों का विस्तार जापान की आत्म-रक्षा सेनाओं तक व्याप्त है। आत्म-रक्षा सेनाओं के सदस्यों ने 2011 में पूर्व जापान में आए भारी भूकंप के समय, अमेरिका और ऑस्ट्रेलिया की सशस्त्र सेनाओं के साथ अनुकरणीय सहयोग प्रदर्शित किया, और उन्हें हैती, इंडोनेशिया, और हाल ही में फ़िलीपीन्स में, जहाँ कहीं भी तैनात किया गया उन्होंने भारी प्रशंसा और सम्मान अर्जित किया है।
शांति के लिए सक्रिय रूप से योगदान करने का अर्थ है कि उस सुरक्षा को सुनिश्चित करने के लिए जापान को स्वयं अपना हिस्से के उत्तरदायित्व का जिम्मा लेना होगा जो वैश्विक समृद्धि और स्थिरता का समर्थन करती है। जिन देशों के साथ हम साझे मूल्यों और हितों को साझा करते हैं, उनके साथ काम करके हम अंतर्राष्ट्रीय सार्वजनिक वस्तुओं, अंतरिक्ष और साइबर स्पेस से लेकर आकाश और समुद्र तक की रक्षा और विकास करेंगे।
जैसा कि ओबामा के दौरे के दौरान दुनिया देखेगी, जापान ने वापसी की है और फलफूल रहा है। और वैश्विक स्थिरता और समृद्धि के लिए इसकी वापसी अपरिहार्य है।
The Middle East Crack-Up
JERUSALEM – The horror stories emerging from northern Iraq, as well as the continuing slaughter in Syria’s civil war, point to a tectonic shift in the Middle East.
Almost 100 years after World War I, the regional state system established after the dissolution of the Ottoman Empire is unraveling.
The contemporary map of the Middle East was drawn by the victorious Western imperial powers, Great Britain and France, during and after WWI. While the war was still raging, they signed an agreement drafted by the diplomats Sir Mark Sykes and François George-Picot, which delineated their respective spheres of influence across the Levant – an agreement that entirely disregarded the region’s history, ethnic and religious traditions and affiliations, and the will of local populations.
The modern states of Iraq, Syria, and Lebanon thus arose as separate, independent entities.
Their borders were arbitrary and artificial, and none had ever existed in such form.
(The case of Palestine was even more complicated, owing to Britain’s conflicting promises to Arabs and Jews.)
Eventually, Iraq, Syria, and Lebanon became independent countries, modeled on the Westphalian idea of the modern nation-state.
Their leaders maintained this system – and its borders – as the best available. None of these rulers, especially the authoritarian ones who emerged after independence, had an interest in rocking the boat.
That Western-imposed system is now unraveling.
Nation-states cannot be sustained when they do not reflect the wishes of their populations.
The United States-led invasion of Iraq put an end not only to Saddam Hussein’s rule, but also to Sunni-minority control, established by the British generations ago.
The Shia majority, once unleashed, viewed US-backed democratic elections as a vehicle for imposing hegemonic control over the country.
Iraq today is not the unitary Arab nation-state that it was, and it is doubtful whether that state can be restored.
The Kurdish Regional Government in the north is a de facto state, with its own army, border authorities, and control (up to a point) of the natural resources located on its territory.
Foreign consulates in the KRG’s capital, Erbil, effectively function as embassies.
In Syria, what started as peaceful pro-democracy demonstrations deteriorated quickly into an armed insurrection of the Sunni majority against the hegemony of the Alawite sect, led by the Assad family.
As with Iraq, it is difficult to see how Syria can be reconstituted as a unitary Arab nation-state.
The de facto dismemberment of both countries’ central state authorities gave rise to a totally new player – the Islamic State, which has announced the establishment of a caliphate straddling Iraq and Syria, totally disregarding the old Sykes-Picot arrangement.
The Islamic State, an offshoot of Al Qaeda, probably will not succeed in creating a viable, cross-border entity, but its brutal effort and Islamist ideology certainly suggest that the old borders, and the states delineated by them, are on their way out.
Indeed, the group’s recent incursions into Lebanon may also undermine the fragile inter-communal balance there.
The unraveling of the Western-imposed state system is taking place elsewhere in the greater Middle East.
Sudan – a vast, multiethnic, and multi-confessional country, established as a political entity by the British in the 1890s – is continuing to fray.
The emergence, after a prolonged and bloody civil war, of an independent South Sudan in 2011, freed the local Christian and animist population from the Arab/Muslim yoke.
But Darfur is still bleeding, and South Sudan is far from being a stable polity.
Libya, too, is disintegrating.
The two provinces of Tripolitania and Cyrenaica, which Italy wrested from the Ottomans just before WWI, were forced together into an entity called “Libya,” despite their profound historical and cultural differences.
Since Muammar el-Qaddafi’s demise in 2011, Libyans have failed to establish a coherent state structure of any sort, cycling through six prime ministers.
Pious Western sermons about the need to form a unified, democratically elected government sound utterly irrelevant, given the extent of social and political fragmentation.
There is one exception to this regional development: Egypt.
For all of its internal tribulations, there is no doubt that Egypt is a coherent entity, deeply anchored in history and in the consciousness of its population. For all of the problems confronting the Coptic Christian community, no one doubts that they are as Egyptian as the Muslim majority.
But Egypt, too, has followed a defining regional pattern.
Whereas secularism in the West arose with the emergence of liberal and democratic forces inspired by the Enlightenment, in the Muslim Middle East it has always been imposed by authoritarian rulers: the Shah in Iran, Atatürk in Turkey, Saddam in Iraq, Assad in Syria, and Nasser and Mubarak in Egypt.
This explains why Syria’s Christian and Druze minorities now support Assad, and why the Copts in Egypt support military rule: democratic majoritarian rule means Muslim hegemony.
Europe endured centuries of violent religious and national struggle, culminating in the horrors of the two world wars, before achieving its current stable state system.
The Middle East probably will pay less in terms of time and violence; but the idea that what emerges will necessarily be European-style nation-states may turn out to be a Western conceit.
The late literary theorist and public intellectual Edward Said might even have called it an example of paternalistic Orientalism.
The Great American Losing Streak
JERUSALEM – The interim agreement reached in Geneva between the five permanent members of the United Nations Security Council plus Germany (the P5+1) and Iran is probably the best deal to curtail Iran’s nuclear program that could be reached, given current circumstances.
The United States and its Western allies were unwilling to risk a military option, and not concluding a deal would have allowed Iran to proceed unimpeded toward acquiring nuclear weapons.
In an ideal world, Iran should have been forced to scrap its nuclear program altogether and hand over all of its enriched uranium to an outside power; but, realistically, that was unattainable.
So the outcome of the Geneva talks is that Iran has secured some international legitimation as a nuclear-threshold power, which deeply worries its regional neighbors, from Saudi Arabia and Israel to Turkey, Egypt, and the small and vulnerable Gulf states.
Western statesmen are right to congratulate themselves on averting an immediate major crisis.
But they are wrong to believe that they have resolved the Iranian nuclear threat.
Indeed, it is naïve to imagine that a final agreement with Iran will be achieved in the coming six months: Iran’s seasoned diplomats will make sure that that does not happen.
So, while the interim agreement may not be a replay of the Munich Agreement in 1938, as many critics contend, it may have set the stage for an even more combustible future.
US President Barack Obama may not be in office when the fire ignites, but if things do go terribly wrong, he may be remembered as another statesman who, like Neville Chamberlain, was blind to the consequences of his peaceful intentions.
The main reason for pessimism stems from the interim agreement’s wider geopolitical context, which has been ignored in favor of the regional dimension.
In fact, the agreement, which alleviates much of the economic pressure on the Iranian regime, is a result of Russia’s success in delaying international sanctions against Iran and its stubborn refusal to tighten them further.
For the Kremlin, Iran’s nuclear program is only one chapter in a campaign to reassert Russia’s role as a great power.
Indeed, the interim agreement should be viewed as another in a string of recent Russian diplomatic victories over the US.
The current US administration lacks the type of grand strategy that animates Russian President Vladimir Putin.
Instead, it considers every issue separately, unsure about how to balance its role as a global power with its commitment to liberal values, and led by a president who apparently believes that soaring rhetoric is a substitute for strategic thinking.
There should be no illusion: The interim agreement with Iran is a resounding triumph for Putin, not for Obama and US Secretary of State John Kerry.
That victory was quickly followed by another – Ukraine’s decision to reject an association agreement with the European Union, opting instead to join Putin’s pet project, a Eurasian customs union designed to reconstitute much of the Soviet Union as a single economic zone.
Meanwhile, the Syrian crisis also is going the Kremlin’s way, with President Bashar al-Assad remaining in power, despite Obama’s insistence that he leave.
Obama’s threat last summer to use limited force in Syria was empty rhetoric.
It might have convinced Assad to give up his chemical weapons, but Russia’s threat to veto any muscular Security Council resolution against Syria guaranteed that his murderous regime would retain control.
Even if a Geneva II meeting on Syria is convened in January, Russia will ensure that Assad remains on the throne.
America’s strategic vacuum can also be seen in Egypt in the wake of the military’s overthrow of President Mohamed Morsi’s Muslim Brotherhood government.
Obama’s uncertainty about how to deal with the coup has created an absurd situation in which most Western-oriented groups in Egypt – the military and secular elites who underpinned Mubarak’s alliance with the US – have now turned, in desperation, to Russia as a source of future military supplies.
Decades of American strategic thinking and diplomacy, initiated by Henry Kissinger in the 1970’s, aimed at weaning Egypt from its Russian alliance, now appear in danger of going down the drain because of Obama’s inability to make up his mind about Morsi’s overthrow.
Of course, it is not easy to support a military coup against a democratically elected president (even one who, like Morsi, undermines the democratic values and institutions that brought him to power).
But one wonders how Obama would have reacted in 1933 had the German military toppled Hitler (who, after all, was appointed Chancellor after winning an election).
One does not have to demonize Russia – or Putin – to be worried by these developments.
Russia is entitled to its place as a leading power.
And the US should shun a domineering policy.
But, confronted with a resolute Russian policy of imperial re-assertion, now also visible in the Caucasus, the US seems unable to see how global developments are linked.
Is anyone in Washington asking how the Geneva agreements on Syria and Iran are connected to Ukraine’s refusal to move closer to the EU, much less developing a strategic response?
The choice facing the US is not former President George W. Bush’s megalomaniacal swashbuckling or global withdrawal.
Russia’s resurgence calls for a reasoned American response, combining its preponderant power and recognition of the inherent limits on the use of that power.
The current US administration seems incapable of this, and Tea Party isolationism certainly is not the answer.
A rudderless US foreign policy is no response to a resurgent and neo-authoritarian Russia flexing its geopolitical muscle.
Nostalgia for a Metternich, or a Kissinger, may not be out of order.
Why Israel?
TEL AVIV – Israel’s latest war in Gaza has echoed through Europe’s capitals in a powerful and destructive way.
In Berlin, London, Paris, Rome, and elsewhere, Israel is being denounced as a “terrorist state.”
Angry demonstrators burned synagogues in France and, of all places, Germany, with some even chanting “Jews to the gas!”
The grotesque coupling of legitimate solidarity with Palestine and anti-Jewish invective seems to have forged a politically correct form of anti-Semitism – one that, 70 years after the Holocaust, is raising the specter of Kristallnacht over Europe’s Jewish communities.
Israelis are struggling to comprehend why five million refugees and 200,000 deaths in Syria mean so much less to the Western conscience than the 2,000 Palestinians killed in Gaza. They cannot quite grasp how European demonstrators can denounce Israel’s wars as “genocide” – a term that has never been applied to the Syrian hecatomb, the obliteration of Grozny by Russia, the 500,000 casualties in Iraq since the United States-led invasion in 2003, or US airstrikes in Afghanistan and Pakistan.
In fact, the answer is simple: Defining Israel’s sins in terms borrowed from the Holocaust is Europe’s righteous way to rid itself of its Jewish complex.
Or, as the psychiatrist Zvi Rex famously quipped, “Germans will never forgive the Jews for Auschwitz.”
There is no denying that Gaza’s agony is a humanitarian disaster.
But it does not even approach other humanitarian crises of recent decades, including those in the Democratic Republic of the Congo (DRC), Sudan, Iraq, and Afghanistan.
In fact, since 1882, the entire Arab-Jewish/Israeli conflict has produced barely half the number of casualties that Syria has in just three years.
Since 1950, the Arab-Israeli conflict ranks 49th in terms of fatalities.
This does not square with the global vilification of Israel that is drowning out legitimate criticism.
When other countries falter, their policies are questioned; when Israel’s behavior is controversial or problematic, its right to exist comes under fire.
There are more United Nations resolutions devoted to human rights abuses committed by Israel than to abuses by all other countries combined.
Stories about Israel focus almost exclusively on the Palestinian conflict.
Joyce Karam, the Washington bureau chief of the Pan-Arab newspaper Al-Hayat, believes that this is because “Muslim killing Muslim or Arab killing Arab seems more acceptable than Israel killing Arabs.” Syrian, Libyan, and Yemenite victims are faceless; the lionization of the incomparably fewer Gazan casualties makes them unique.
This is not to say that Israel should be consoled by the macabre arithmetic of bloodshed.
The hypocrisy of some of Israel’s critics in no way vindicates its colonial encroachment on Palestinian space, which makes it the last developed, “Western” country occupying and manhandling a non-Western people. Most of today’s conflicts – in Colombia, Somalia, the DRC, Sudan, and now even Iraq and Afghanistan – are internal.
Israel’s clash with Palestine represents a particularly compelling drama for the West.
The story of Israel extends far beyond the current conflict, to recount an extraordinary symbiosis between Jewish heritage and European civilization that ended in calamity.
From its birth, Israel has borne the scars of the greatest crime ever committed on Europe’s soil.
The plight of the Palestinians – the victims of Zionism’s triumph – touches another neuralgic point in the European mind.
Nonetheless, the Israel-Palestine tragedy is unique.
It is an absorbing odyssey of two nations with mutually exclusive claims on sacred lands and religious shrines that are central in the lives of millions of people worldwide.
It is also a war of conflicting images, in which both parties claim a monopoly on justice and martyrdom.
Jewish persecution, and the way that Zionism has employed it, has become a model for Palestinian nationalism.
Catchwords like “exile,” “diaspora,” “Holocaust,” “return,” and “genocide” are now an inextricable component of the Palestinian national ethos.
It is important to note that the Holocaust does not give Israel immunity from criticism, nor can every attack on Israel’s policies be dismissed as anti-Semitism.
Prime Minister Binyamin Netanyahu’s Israel is rightly perceived as a status quo state that aspires to have it all: continued control over and settlement of the Palestinian territories and “quiet for quiet” from the Palestinians.
But Hamas’s control within Gaza is equally problematic.
In order to end its fatal flirtation with jihadism and bolster stability, Gaza must pursue an economic and political deal with Israel that represses the temptation of war.
Just as the rehabilitation of the Egyptian towns along the Suez Canal in the wake of the 1973 Yom Kippur war paved the way for an Israeli-Egyptian peace, a prosperous Gaza would serve the interests of all parties involved – beginning with Israel.
Shock and Panic
CARDIFF – No medical therapy is treated more differently by countries, regions, hospitals, and doctors than electroconvulsive therapy (ECT).
This is surprising in an era when treatments that work should supposedly be used with some uniformity.
In fact, despite a consensus that ECT is the most effective treatment for severe depressive disorder, it comes at the bottom of the list in most treatment regimens for mood disorders.
Some of the unease about ECT stems from psychiatry’s dark past, when patients in many countries had fewer legal rights than prisoners.
Not so long ago, physical treatments such as lobotomy and ECT could be inflicted on patients without their consent, and sometimes for punitive purposes.
But there is no comparable protest against the use of antipsychotic drugs, which have similarly been forced on people – and even used to torture prisoners.
And, whereas few people now get ECT involuntarily, and in all cases consent is sought, a large and growing number get antipsychotic drugs under false pretences, including children, vulnerable adults, patients with Alzheimer’s, and a host of others whose lives are shortened by treatment, with no effort undertaken to seek their consent.
Although ECT’s opponents believe that it causes brain damage, this is difficult to prove.
Like antipsychotic drugs, antidepressants, and tranquilizers, ECT has an immediate organic effect.
But, while ECT rarely, if ever, causes clear clinical evidence of brain damage and has not been shown to do so in animal studies, antipsychotic drugs regularly do, in the form of tardive dyskinesia and other syndromes.
The same is true of antidepressants.
There is no dispute that ECT can cause short-term memory loss.
But critics have found it difficult to demonstrate memory or other cognitive problems that endure beyond three months.
Nor can enduring autobiographical memory disturbances and inability to remember lists be readily attributed to ECT, because ECT is rarely given on its own.
Indeed, very few of those who receive ECT do not also receive benzodiazepines, which do cause significant autobiographical memory problems when given alone, and antipsychotic drugs, which cause difficulties with lists of names or telephone numbers, and other comparable problems.
Yet these drugs are rarely, if ever, blamed for cognitive disturbances following psychiatric treatment.
The failure of ECT’s critics to demonstrate what to them seems obvious indicates an active conspiracy to minimize treatment-induced problems and to block those who have been injured by treatment from seeking redress.
In fact, at recent guideline meetings in the United Kingdom on the issue of ECT, there have been no representatives from psychiatry, but many from patient groups.
Organized psychiatry appears to have little interest in ECT, or is scared of harassment from patient advocates.
As a result, even evidence that a person’s mood and clinical state has been significantly improved after ECT can be transformed into evidence of brain damage. When patients come forward to say they were helped by ECT, or a patient’s medical record points to clinical improvement with treatment, the apparent improvements are read as indicating the disinhibition and vacuousness that accompanies brain damage.
There are better targets in mental health than ECT.
Where is the concern about the millions who are becoming physically dependent on antidepressants?
Where are the protests about the one-year-olds being treated with antipsychotic drugs?
How is it possible that, because no company with currently patented drugs is campaigning to help medical and nursing staff recognize the catatonic features displayed by one in ten patients going through a psychiatric unit – features that could be treated rapidly with benzodiazepines or ECT – these features are missed completely?
Why is it all but impossible to find anything but vilification of ECT on the Internet, and anything but glowing testimonies about drug treatments?
ECT’s critics seem to think that if they do not protest against its use at every opportunity, its advocates will inflict it on people who do not need it.
But, in contrast to psychotropic drugs, there are no marketing departments geared to maximizing ECT.
This visceral focus on ECT has almost certainly led to ever more people ending up on drugs, and ever more brain damage and memory problems as a consequence.
It sometimes seems that the critics are behaving according to the romantic illusion that if they can just abolish ECT, mental illness will disappear with it.
Sigmund Freud would have been fascinated.
Shorting Fiscal Consolidation
NEW HAVEN – Real long-term interest rates – that is, interest rates on inflation-protected bonds – have fallen to historic lows in much of the world.
This is an economic fact of fundamental significance, for the real long-term interest rate is a direct measure of the cost of borrowing to conduct business, launch new enterprises, or expand existing ones – and its levels now fly in the face of all the talk about the need to slash government deficits.
Nominal interest rates – quoted in terms of dollars, euros, renminbi, etc. – are difficult to interpret, since the real cost of borrowing at these rates depends on the future course of inflation, which is always unknown.
If I borrow euros at 4% for ten years, I know that I will have to pay back 4% of the principal owed as interest in euros every year, but I don’t know what this amounts to.
If inflation is also 4% per year, I can borrow for free – and for less than nothing if annual inflation turns out to be higher.
But, if there is no inflation over the next ten years, I will pay a hefty real price for borrowing.
One just doesn’t know.
Economists like to subtract the nominal government bond yield from the inflation-indexed bond yield of the same maturity to get a market estimate of the inflation rate from now to that maturity date.
But such forecasts of “implied inflation” can be wild, if not absurd.
During the heat of the 2008 financial crisis, for example, the inflation-indexed yield in the US rose so high for a brief period that implied annual inflation for the next seven years suddenly dropped to -1.5%.
(A subsequent study by PIMCO bond traders Gang Hu and Mihir Worah concluded that this was linked to technical and institutional factors concerning the Lehman Brothers bankruptcy.)
The real reason inflation-indexed bond yields are an interesting economic variable is that they report on a market in which both investors and borrowers know exactly what is coming, in real terms.
Notably, the issuer, that is the borrower, can rationally plan such borrowing to make real investments.
The supposed threat posed by government debt levels hasn’t hurt these markets, at least in the relatively few countries that have inflation-indexed bonds.
Long-term inflation-indexed bond yields have fallen to around 1% a year, or less, in the United States, Canada, the United Kingdom, and the eurozone.
Elsewhere, yields have been a little higher – around 2% in Mexico, Australia, and New Zealand – but still very low by historical standards.
All these countries have shown roughly the same downward trend in real interest rates for many years, and notably since 2000.
If one were to extrapolate this trend, ten-year interest rates would move into negative territory in a few years or so for most of them.
In the US and the UK, yields on intermediate-term (5-year) inflation-indexed bonds are already actually negative this year.
One may ask: how can an interest rate be negative?
Why would anyone lend (buy a bond) for less than nothing?
One can never have negative nominal interest rates (except through some oddity of taxes or regulations), since lenders would rather hold their cash than effectively pay borrowers.
But there is nothing to stop negative real interest rates, since routine investors may have no alternative risk-free instrument that offers a positive real return.
The low level of real interest rates does not appear to be due to the 2007-2009 financial crisis.
In fact, there was a temporary upward spike in real long-term interest rates during the financial crisis in countries with indexed bonds.
The rate has come down to low levels only during the period of recovery from the immediate crisis.
Instead, low long-term real interest rates appear to reflect a general failure by governments over the years to use the borrowing opportunities that the inflation-indexed markets present to them.
This implies an arbitrage opportunity for governments: borrow massively at these low (or even negative) real interest rates, and invest the proceeds in positive-returning projects, such as infrastructure or education.
Opportunities for governments to do this exceed those of the private sector, which in many cases continue to be constrained by slow economic growth.
Moreover, unlike private firms, governments can count as profits on their investments the benefits of positive externalities (benefits that accrue to everyone).
Surely, governments’ levels of long-term investment in infrastructure, education, and research should be much higher now than they were five or ten years ago, when long-term real interest rates were roughly twice as high.
The payoffs of such investments are, if anything, higher than they were then, given that many countries still have relatively weak economies that need stimulating.
It is strange that so many governments are now emphasizing fiscal consolidation, when they should be increasing their borrowing to take advantage of rock-bottom real interest rates.
This would be an opportune time for governments to issue more inflation-indexed debt, to begin issuing it, or to issue nominal GDP-linked debt, which is analogous to it.
Should Africa Follow the EU Model?
The African Union, which replaced the Organization for African Unity (OAU) in 2002, is trying to reproduce the European Union's institutions and ways of acting.
But copying the EU blueprint means that nothing has been learned from the past and that nothing is being done to avoid the pitfalls Europe has endured.
The biggest flaw in the EU model has been its reliance on a bureaucratic road to unity.
In Africa, such an approach is particularly noxious because there is no real commitment on the part of African rulers to unity, which offers the prospect of creating a bureaucracy with no mission but to waste Africa's scarce resources.
It will invariably recycle retired and failed politicians and be a way station for vast patronage.
Of course, Africa needs unity.
The go-it-alone strategy practiced by most African countries has left them vulnerable to the whims of former colonial powers determined to perpetuate an international division of labor that assigns to Africa the role of supplier of basic products and raw materials, rather than skilled, well-paid labor.
So unity is needed to rebuild Africa.
But that unity must be built step by step, with the primary focus on increasing regional trade within Africa.
This should be followed by a determined strategy to end Africa's position as the "ghetto continent," one used by the industrialised countries--in collusion with most African rulers--as a dumping ground for obsolete products.
Africa must cease being a region to be ransacked, burdened with ill-considered debts by the IMF and World Bank, and so left with institutionalised famine, lawlessness, and horrendus corruption.
If true African unity is to emerge, Africa's rulers must be committed to it, not just in words, but by deeds.
They could begin that long process by taking the following steps:
hire staff based solely on merit;
involve both elites and masses (professional associations, trade unions, NGOs, indeed all of civil society) in formulating policies.
Unlike the EU, African unity cannot be built on the will of the elites alone;
educate people now on the costs and benefits of cooperation and integration, which requires partial surrender of national sovereignty to regional authorities.
The EU may well have avoided significant constitutional tensions had its member states' governments initiated such programs much sooner;
restructuring of existing regional and continental groupings in order to give priority to increasing the volume of intra-Regional trade.
This involves consolidating institutions such as regional Organisations for Economic Cooperation, African Payments Unions, regional clearing houses, and compensatory mechanisms;
The AU must secure an AAA bond rating in order to tap international capital markets on the most favorable terms, which includes issuing bonds on African exchanges.
Such a scenario will be possible only with the involvement of the UN Security Council, which might consider running a scheme based on the Iraqi oil-for-food program.
This time, the UN would earmark part of the export revenues of any given AU member for specific and defined programs and budget contributions.
A zero tolerance policy must be applied for arrears on contributions.
The AU will also have to keep an eye on the abuse of state funds by African rulers and local elites.
An entirely new financial culture needs to be implemented to eliminate corruption, and this will require that Africans monitor other Africans.
But clean finance will only be possible with clean politics.
So the AU should set criteria and create a surveillance system for democratic elections across Africa.
Suitable control systems should be put in place to stop and correct any failure to meet the established rules by any means necessary, including suspension of membership or exclusion of culprit countries.
Here the AU should look to Europe, which began its process of unification with a mere six highly committed members.
The quality, not quantity, of member states is what matters.
The role of the AU should extend to cultivating ways to involve the private sector in restructuring both Africa's economy and its politics.
Here the international community will have to help, for just as Southeast Asia's economies needed some protection for their infant industries, so Africa's may also need a brief respite from the whip of the global market during the first stage of building the AU.
This is not a call for total protectionism; the AU's members should compete fiercely between themselves during this stage.
Speculation on Africa's basic products and raw materials, which has driven down prices for most commodities over the last four decades, might be addressed by creating a mechanism that ties, for an agreed time, the prices of these items to those of industrial goods and services.
A program for African renewal along the lines outlined above offers the best hope for creating stability, new jobs, and establishing democracy in a continent that desperately needs all three.
Africa's unity must become more than a slogan if Africa is to renew itself and prosper.
Should Bondholders be Bailed Out?
CAMBRIDGE – A year after the United States government allowed the investment bank Lehman Brothers to fail but then bailed out AIG, and after governments around the world bailed out many other banks, key question remains: when and how should authorities rescue financial institutions?
It is now widely expected that, when a financial institution is deemed “too big to fail,” governments will intervene if it gets into trouble.
But how far should such interventions go?
In contrast to the recent rash of bailouts, future government bailouts should protect only some creditors of a bailed-out institution.
In particular, the government’s safety net should never be extended to include the bondholders of such institutions.
In the past, government bailouts have typically protected all contributors of capital of a rescued bank other than shareholders.
Shareholders were often required to suffer losses or were even wiped out, but bondholders were generally saved by the government’s infusion of cash.
For example, bondholders were fully covered in the bailouts of AIG, Bank of America, Citigroup, and Fannie Mae, while these firms’ shareholders had to bear large losses.
The same was true in government bailouts in the United Kingdom, Continental Europe, and elsewhere.
Bondholders were saved because governments generally chose to infuse cash in exchange for common or preferred shares – which are subordinate to bondholders’ claims – or to improve balance sheets by buying or guaranteeing the value of assets.
A government may wish to bail out a financial institution and provide protection to its creditors for two reasons.
First, with respect to depositors or other creditors that are free to withdraw their capital on short notice, a protective government umbrella might be necessary to prevent inefficient “runs” on the institution’s assets that could trigger similar runs at other institutions.
Second, most small creditors are “non-adjusting,” in the sense that they are unable to monitor and study the financial institution’s situation when agreeing to do business with it.
To enable small creditors to use the financial system, it might be efficient for the government to guarantee (explicitly or implicitly) their claims.
But, while these considerations provide a basis for providing full protection to depositors and other depositor-like creditors when a financial institution is bailed out, they do not justify extending such protection to bondholders.
Unlike depositors, bondholders generally are not free to withdraw their capital on short notice.
They are paid at a contractually specified time, which may be years away.
Thus, if a financial firm appears to have difficulties, its bondholders cannot stage a run on its assets and how these bondholders fare cannot be expected to trigger runs by bondholders in other companies.
Moreover, when providing their capital to a financial firm, bondholders can generally be expected to obtain contractual terms that reflect the risks they face.
Indeed, the need to compensate bondholders for risks could provide market discipline: when financial firms operate in ways that can be expected to produce increased risks down the road, they should expect to “pay” with, say, higher interest rates or tighter conditions.
But this source of market discipline would cease to work if the government’s protective umbrella were perceived to extend to bondholders.
If bondholders knew that the government would protect them, they would not insist on getting stricter contractual terms when they face greater risks.
The problem of “moral hazard” – which posits that actors will take excessive risks if they do not expect to bear fully the consequences of their actions – is commonly cited as a reason not to protect shareholders of bailed-out firms.
But it also counsels against protecting firms’ bondholders.
Thus, when a large financial firm runs into problems that require a government bailout, the government should be prepared to provide a safety net to depositors and depositor-like creditors, but not to bondholders.
In particular, if the firm’s equity capital erodes, the government should not provide funds (directly or indirectly) to increase the cushion available to bondholders.
Rather, bonds should be at least partly converted into equity capital, and any infusion of new capital by the government should be in exchange for securities that are senior to those of existing bondholders.
Governments should not only avoid protecting bondholders after the fact, when the details of a bailout are worked out; but should also make their commitment to this approach clear in advance.
Some of the benefits of a government policy that induces bondholders to insist on stricter terms when financial firms take larger risks would not be fully realized if bondholders believed that the government might protect their interests in the event of a bailout.
In other words, governments should establish bailout policies before the need to intervene arises, rather than make ad hoc decisions when financial firms get into trouble.
The best policy should categorically exclude bondholders from the set of potential beneficiaries of government bailouts.
This would not only eliminate some of the unnecessary costs of government bailouts, but would also reduce their incidence.
Should Children Take Antidepressants?
The last 12 months have witnessed radical changes and considerable controversy regarding how childhood and teenage depression is treated.
Although few antidepressant drugs have been licensed for pediatric use, rates of prescribing in the under-18 age group have risen by around 60% over the past decade, with over a million children and adolescents receiving what are called selective serotonin reuptake inhibitors (SSRI’s).
Now, however, concerns over these drugs’ safety and side effects in children and adolescents – including elevated suicide rates – have awakened regulators in many countries.
After reviewing all relevant pediatric trials, the UK’s Medinces and Heathcare products Regulatory Agency (MHRA) advised that the risks outweighed the benefits for all SSRI’s (except fluoxetine), and that these products should not be prescribed as new therapy for patients under 18 years of age with depressive illness.
For the first time, the MHRA made public a summary of the review that this decision was based on, including both efficacy and safety data for all of the trials, regardless of whether they had previously been published or not.
This was important because about half of the trials had not been published in peer-reviewed journals.
The pediatric trial data released by the MHRA presented a unique opportunity to examine whether the unpublished data supported the findings from published studies of SSRI’s.
My colleagues and I addressed this question in a review published in The Lancet in April 2004.
The review showed that while the published data generally indicated minimal risk, the unpublished trial data were far less sanguine, and even suggested an increased risk of serious adverse events, including suicide-related behavior.
The MHRA was not alone in being concerned about pediatric trials.
A review in the British Medical Journal (BMJ) in April 2004, claimed that most papers on SSRI trials overstated the evidence for efficacy and understated the risk of harm.
An article by the Center for Science in the Public Interest classified all available published placebo-controlled trials of SSRI’s in children and adolescents as industry-funded or non-industry funded.
The results showed that 90% of industry-funded trials in the published literature were reported as positive, while only 55.6% of non-industry-funded trials were positive.
More recently, the US Food and Drug Administration (FDA) applied a ”black box” warning to all antidepressant drugs labelling, but fell short of restricting the use of any individual drug.
This was done after an FDA commissioned re-analysis of safety data from all trials of the newer antidepressants demonstrated increased risk of suicidality (definitive suicidal behaviour/ ideation) and increased risk of treatment-emergent hostility or agitation in those treated with the active drug compared to placebo.
Taken together, it is not hard to see why some commentators argue that there has been little attempt by the pharmaceutical industry to properly assess the risks and benefits of their products in under 18’s.
Often, where trials have been conducted, only favorable results have been published.
The problem is widespread and not restricted to drug companies.
Both regulators and clinicians who run trials have been criticized.
Adding further fuel to the fire, New York State Attorney General Eliot Spitzer recently filed a civil lawsuit against GlaxoSmithKline for potentially misleading doctors by publicizing a favorable study of paroxetine for pediatric depression while downplaying other unfavorable trials.
In response, GlaxoSmithKline made full-trial reports of all studies involving paroxetine in patients under 18 available on their website.
The case points to several changes in the way data are collected and released that are urgently needed to determine definitively whether SSRI’s are safe and effective for treating pediatric depression.
Tighter regulation of all clinical trials is needed, as is a public worldwide database that contains trial protocols and regularly updated information about trial status and publications.
Moreover, both benefits and harms of all trials must be published within a reasonable timeframe, and properly designed, non-industry-funded trials are needed to confirm both safety and efficacy.
Finally, product labels must reflect negative or equivocal results, not just those that are positive.
Such changes may well lead to a dramatic reduction in the use of SSRI’s in treating depressed children and adolescents.
But whatever the outcome, it is urgent that doubts about the safety of these drugs are resolved.
Should China be “Contained”?
CAMBRIDGE – This month marks the 40th anniversary of Henry Kissinger’s secret trip to Beijing, which launched the process of mending a 20-year breach in diplomatic relations between the United States and China.
That trip, and President Richard Nixon’s subsequent visit, represented a major Cold War realignment.
The US and China put aside their intense hostility in a joint and successful effort to contain an expansionist Soviet Union.
Today, the Soviet Union has vanished, and Chinese power is growing.
Some Americans argue that China’s rise cannot be peaceful, and that the US, therefore, should now adopt a policy of containing the People’s Republic.
Indeed, many Chinese officials perceive that to be the current American strategy.
They are wrong.
After all, Cold War containment of the USSR meant virtually no trade and little social contact.
Today, by contrast, the US not only has massive trade with China, but also extensive social contact, including 125,000 Chinese students attending American universities.
With the end of the Cold War, the containment of the Soviet Union ushered in by Kissinger’s visit could no longer serve as the basis for US-China relations.
Moreover, relations with China cooled after the Tiananmen Square shootings in 1989, and the Clinton administration had to devise a new approach.
When I was supervising the Pentagon’s East Asia Strategy Review in 1994, we rejected the idea of containment of China for two reasons. If we treated China as an enemy, we were guaranteeing an enemy in the future.
If we treated China as a friend, we could not guarantee friendship, but we could at least keep open the possibility of more benign outcomes.
In addition, it would have been difficult to persuade other countries to join a coalition to contain China unless China resorted to bullying tactics, as the Soviets did after World War II.
Only China, by its behavior, could organize the containment of China by others.
Instead of containment, the strategy that the Clinton administration devised could be termed “integrate but hedge” – something like Ronald Reagan’s “trust but verify” approach to strategic agreements with the Soviets.
On one hand, the US supported China’s membership in the World Trade Organization and accepted Chinese goods and visitors.
On the other hand, the Clinton-Hashimoto Declaration of April 1996 affirmed that the US-Japan security treaty, rather than being a Cold War relic, would provide the basis for a stable and prosperous East Asia.
Clinton also began to improve relations with India, a strategy that has enjoyed bipartisan support in the US.
The Bush administration continued to improve bilateral relations, while deepening and formalizing the economic dialogue with China.
Then Deputy Secretary of State Robert Zoellick made clear that the US would accept the rise of China as a “responsible stakeholder.”
That policy continues to guide the Obama administration, which has broadened the annual economic consultations with China to include security issues.
As I argue in my new book The Future of Power, one of the major power shifts of the twenty-first century is Asia revival.
In 1800, Asia represented half the world’s population and half the world’s economy.
By 1900, the industrial revolution in Europe and North America drove down Asia’s share of global output to 20%.
By the middle of this century, Asia should again represent half the world’s population and GDP.
This is a natural and welcome evolution, as it enables hundreds of millions of people to escape from poverty.
At the same time, however, it has given rise to fears that China will become a threat to the US.
Such fears appear exaggerated, particularly when one considers that Asia is not one entity.
It has its own internal balance of power.
Japan, India, Vietnam, and other countries do not want to be dominated by China, and thus welcome a US presence in the region.
Unless China develops its “soft power,” the rise in its military and economic power is likely to frighten its neighbors into seeking coalitions to balance its rise.
It is as if Mexico and Canada sought an alliance with China to balance US power in North America.
After the 2008-2009 financial crisis, as China recovered rapidly and resumed 10% annual economic growth, some Chinese officials and commentators urged a more assertive foreign policy to reflect China’s new strength.
Many mistakenly believed that the US was in decline, and that the crisis presented new strategic opportunities for China.
For example, China began pressing territorial claims in the South China Sea, as well as escalating a longstanding border dispute with India.
The net result is that over the past two years, China has worsened its relations with Japan, India, South Korea, Vietnam, and others – quite a remarkable record that confirms the US strategic premise that “only China can contain China.”
But it would be a mistake to focus only on the hedging part of American strategy.
The US and China (as well as other countries) have much to gain from collaborating on transnational issues.
One cannot devise and implement solutions to global financial stability, climate change, cyber terrorism, or pandemics without such cooperation.
If power is the ability to obtain the outcomes one wants, it is important to remember that sometimes our power is greater when we act with others rather than merely over others.
This important dimension of a “smart power” strategy for the twenty-first century is not captured by the concept of containment.
When Kissinger landed in Beijing four decades ago, he ushered in not only a Cold War transformation, but also a new era of US-Chinese engagement.
Should Europe Regulate Sovereign Wealth Funds?
WIESBADEN – State-controlled investments from overseas – so-called sovereign wealth funds (SWFs) – are now the subject of intense debate.
The United States and France have made their fears known.
In Germany, too, the debate centers on SWFs’ political and economic significance for the country’s future.
The problem has been exacerbated by the growing wealth of a number of countries, some of them formerly run by socialist or communist regimes.
China, Russia, India, and the Gulf States have integrated their wealth into the global economy, to the immense benefit of world trade.
The openness of Germany’s markets makes them especially attractive to global trade.
This openness will not change, yet there are some who now call for new safety fences – in other words, for protection.
For example, Russian investors are interested in taking a massive share in the German-French aerospace company EADS, which is already 5%-owned by a Russian bank.
For many, this proposal has underscored a change in investors’ behavior.
But what, exactly, has changed?
SWFs have been around for years.
Among the first countries to invest their considerable state-owned funds were Kuwait, the United Arab Emirates, Norway, and Singapore.
They invested, and still invest, their budgetary surpluses worldwide in government bonds and state-owned enterprises.
Industrialized countries like the US and Japan also have so-called “reserve funds.”
Some of these funds are huge.
In the UAE, the Abu Dhabi Investment Authority has estimated capital assets of $875 billion, making it probably the world’s largest state-owned investment company.
In July 2007, another rich UAE fund, Dubai International Capital, bought 3% of EADS, after taking a stake of almost 2% in the automotive manufacturer Daimler in January 2006.
The Kuwait Investment Authority, also a state-owned fund, holds 7% of Daimler.
Singapore possesses two SWFs – Temasek-Holdings, with capital assets of roughly $100 billion, and the Government of Singapore Investment Corporation, with approximately $330 billion.
Both funds are invested worldwide, including with the port operator PSA.
Some funds are subject to considerable restrictions.
Japan limits its state investments overseas to bonds, mostly those issued by the US.
Until recently, China, which holds foreign currency reserves of more than $1.2 trillion (the world’s largest), followed this policy, too.
But a $3 billion investment by the Chinese SWF in the US investment firm Blackstone suggests a more worryingly strategic investment policy, one that appears aimed at advancing its own industrial interests in certain markets.
Russia, where the line between state-controlled and privately controlled companies is often blurry, has demonstrated this strategy in Europe.
Indeed, Russian investments in aerospace, telecommunications, and, most of all, in the energy sector, are the main source of concern for Germany.
Are state-controlled investors now aiming primarily for strategic rather than purely financial returns?
Because SWFs’ resources are so substantial, it is advisable to take precautions to avoid becoming a target of politically motivated market manipulation, or becoming economically and psychologically dependent on foreign governments’ decisions.
Most Western countries already have instruments to deter foreigners from making unwanted investments, not only in defense industries, but also in other sectors.
But, while Germany’s Foreign Trade and Payments Act protects against takeovers in the defense industry (though the law needs strengthening) elsewhere Germany has no system for examining investments by SWFs that may be strategically motivated.
The International Monetary Fund now encourages more transparency by foreign investors, and has plans for a code of conduct.
The EU Commission also favors voluntary agreements aimed at strengthening transparency.
Some SWFs now seem willing to engage in constructive dialogue.
But assessing potential threats is not easy.
Most investments are seen to benefit a country’s economy, if not its security.
We in Germany need to distinguish one from the other.
Bills have been drafted that amount to amendments to the Foreign Trade and Payments Act and related regulations.
While strengthening the act, they seek to avoid affecting the openness of the German economy.
Under proposed new legislation, if a foreign investment in a German company amounts to more than 25%, an assessment can be made of whether public order or safety might be threatened.
In my view, this would address the concerns about SWFs, while not generally impeding investment because it would apply only in a very few cases.
Germany has also drawn up a plan to protect its industries that is modeled on US regulation.
Since 1988, the US president can prohibit foreign direct investment if it is seen as a threat to national security.
An additional control was introduced last year, so now all direct investments in which a foreign government is involved are scrutinized by the Committee on Foreign Direct Investment.
The principle of reciprocity should clearly apply to transnational investments.
Germany is open to foreign investors, but in return we Germans demand the same market access abroad.
Much remains to be done in this area even in Europe, as Germany’s own experiences with France and Spain demonstrate.
In China and almost all Middle Eastern countries, foreigners are restricted to minority shareholdings and must contend with high import duties and numerous non-tariff barriers.
Protective measures must remain the exception rather than the rule.
We Europeans must accept the challenges of global competition, and transnational investments are the basis of thriving economic development at home and abroad.
Nevertheless, we must not allow ourselves to become the passive economic playthings of other nations, or of big state-owned enterprises.
We must play an active part in shaping globalization, and that means crafting appropriate rules.
Should Iran Be Attacked?
President George W. Bush has said that Iran’s development of nuclear weapons is unacceptable, and recent press accounts suggest that his administration is exploring preventive military options.
In Iran, President Mahmoud Ahmadinejad has defied the diplomatic efforts of the European Union and others, using the nuclear issue to stir rally domestic support.
Is it too late to prevent a showdown?
Iran claims that its nuclear program is aimed solely at peaceful uses, and that it has the right to develop uranium enrichment and other technologies as a signatory of the Nuclear Non-Proliferation Treaty (NPT).
But it spent 18 years deceiving inspectors from the watchdog International Atomic Energy Agency, leading some countries to argue that Iran destroyed its credibility and forfeited its rights to enrichment on its own soil.
Russia has offered to provide nuclear enrichment and reprocessing services for the civilian reactor it is building in Iran.
If Iran were interested solely in peaceful uses, the Russian offer or some other plan (such as placing stocks of low enriched uranium in Iran) could meet their needs.
Iran’s insistence on enrichment inside the country is widely attributed to its desire to produce highly enriched uranium for a bomb.
Would an Iranian bomb really be so bad?
Some argue that it could become the basis of stable nuclear deterrence in the region, analogous to the nuclear standoff between the United States and the Soviet Union during the Cold War.
But statements by Iranian leaders denying the Holocaust and urging the destruction of Israel have not only cost Iran support in Europe, but are unlikely to make Israel willing to gamble its existence on the prospect of stable deterrence.
Nor is it likely that Saudi Arabia, Egypt, and others will sit passively while the Persian Shia gain the bomb.
They will likely follow suit, and the more weapons proliferate in the volatile Middle East, the more likely it is that accidents and miscalculations could lead to their use.
Moreover, there are genuine fears that rogue elements in a divided Iranian government might leak weapons technology to terrorist groups.
These are the dangers that lead some to contemplate air strikes to destroy Iran’s nuclear facilities before they can make weapons.
At first glance, a “surgical” strike may look tempting.
But military options are less attractive when carefully analyzed. Iran’s nuclear facilities are dispersed; some are underground.
If one adds suppression of air defenses, such a strike might involve roughly 600 targets – far from surgical.
Moreover, while an air strike might set back Iran’s program by a few years, it would solidify nationalist support for the government and the nuclear program, particularly because one attack would not be enough.
The process of protracted strikes could thwart positive political changes among the younger generation, thus reducing the chances of a more democratic and benign Iran emerging in the future.
At the same time, Iran has effective means of retaliation.
It might not be able to close the Strait of Hormuz, but threats to refineries, storage facilities, and tankers would send oil prices even higher.
Moreover, Iran’s support of terrorist organizations, such as Hezbollah, could bring violence to other countries.
With the outcome of Bush’s ill-advised war in Iraq uncertain and his legacy depending heavily upon finding a political solution, Iran’s support for Iraqi Shiite radicals could give it considerable leverage.
When Bush administration officials say that “all options are on the table,” they are warning the Iranians that the use of force is possible.
But one is tempted to believe them when they add that they are now focused on diplomacy.
As Theodore Roosevelt once said, negotiations may go better when you talk softly but carry a big stick.
At the same time, however, Iran knows how costly it would be for the Americans (and perhaps the Israelis) to use force, which reduces the effect of the threat.
At present, a diplomatic solution does not look promising.
Iran has threatened to leave the NPT if sanctions are imposed, and Russia and China worry that even modest targeted sanctions could escalate and ultimately legitimize an American use of force that they wish to avoid.
China wants to preserve its access to Iranian oil, and Russia seeks to preserve a valuable commercial market.
But both realize that a failure to resolve the issue in the context of the UN (in which they are major stakeholders as permanent members of the Security Council) could severely damage the future of that institution.
Today, the diplomatic package consists mostly of penalties, albeit the small ones of targeted sanctions.
Their main effect will be psychological if widespread support for them creates a sense in Iran that it has isolated itself.
Unlike North Korea, Iran is more likely to care about its international standing.
The diplomatic package could be made more attractive if the US would add more positive incentives.
Through a credible intermediary, the US could offer to consider security guarantees and relief from existing sanctions if Iran agrees to forego domestic enrichment and accept the Russian offer, perhaps garbed as an IAEA-backed international consortium in which Iran could participate.
This would mean abandoning the temptations of coercive regime change that hamstrung American diplomacy in Bush’s first term.
By increasing economic and cultural ties, diplomacy might unleash the soft power that could contribute to more gradual regime transformation over the longer term.
Meanwhile, such an approach might avoid the costly use of force and buy time for a more benign outcome than what lies at the end of the current path of events.
Should Shareholders Be Kings?
The story takes place in France, in Belgium, and in Luxemburg.
But it is really a pan-European story, and in economic terms it encompasses the entire world.
Mittal, the biggest steelmaker in the world, has successfully gained control of Arcelor, the second biggest, through what initially was a hostile takeover bid.
This is no mere corporate takeover; it is a conflict between business and social models.
Arcelor, originally French and Luxemburguese but now predominantly Belgian, has a strong base in Brazil and operates throughout much of the world.
It specializes in high-quality, special steel products designed for the most complicated uses.
These high-quality products are purchased on middle- and long-term contracts, mainly by long-time customers.
Arcelor, one of the oldest steel manufacturers in the world, depends very little on the highly speculative world market for raw steel, and its workforce is (on average) highly qualified and stable.
Mittal, by contrast, is a conglomerate that has come out of nowhere to become the world’s leading steel company in a mere two decades.
It did so by brilliantly consolidating and rationalizing steel plants throughout the world.
Its president is Indian, but it has no factory in India.
Mittal is mainly based in Eastern Europe, but also has a strong presence in Asia (South Korea) and Latin America.
Mittal is a strong but fragile company, for it is highly subject to the speculative waves of the global market for raw steel.
It tightens costs, and outsources work as much as possible, so its workforce is paid less than Arcelor’s employees and is less stable.
Moreover, Arcelor represented a perfect takeover target: most of its capital belongs to diverse shareholders.
The opposite is true of Mittal, where the Lakshmi Mittal and his family own more than 60% of the shares.
This explains why Mittal’s shares are traded in Amsterdam, one of the few stock markets in the world that allows for the listing of companies with so little free-floating capital.
Thus, there is no reciprocity: Mittal could bid for Arcelor, but Arcelor could not bid for Mittal.
The stakes are much clearer than they usually are in these types of battles.
Mittal has an obvious interest in gaining control of Arcelor in order to improve its global geographic balance, boost its market share in high-end steel products, and reduce its vulnerability to the speculative jolts that occur in the raw steel market.
Conversely, Arcelor has absolutely no interest in the success of this takeover.
If it is led into a more adventurous strategy, its sustained policy of research and heavy investment in up-market steel products may be weakened.
Its workforce stands to suffer, slowly but surely, from erosion of its relative advantages in terms of wages and job security.
This explains why the management, most of the workers, and the Unions of Arcelor refused Mittals offer.
But the shareholders of Arcelor have made their choice.
The immediate profit offered by Mittal was enough.
Mittal won.
So the shareholders chose to cash in on a temporary bonus, taking a risk on the progressive erosion of the firm, and perhaps the end of its policy of focusing on high quality while treating its workers with respect.
There are very few fixed-term contracts or part-time contracts in Arcelor.
This choice directly concerns more than 150,000 employees.
Indirectly, it concerns all of us, for the choice made by Arcelor’s shareholders is far from being an exception; on the contrary, it reveals the deep economic and social significance of corporate takeovers of this type.
Where are our societies headed if company owners consider that quality is too expensive and that workers must be made insecure in order to make them less demanding?
A system governed by such rules is prone to give rise to various social conflicts, and perhaps to violence.
Above all, such a system is neither viable nor sustainable in the long run.
For this reason, it is dangerous to maintain the outdated legal concept according to which a company belongs only to its owners or shareholders.
Indeed, in reality, the company is a community of men and women who draw their incomes from the same economic and technical venture.
It would be prudent to adapt the law to this state of facts, and to give employees, too, a say in their destiny.
In the wake of Mittal’s takeover of Arcelor, governments must address this gap in the law, as no society can afford to permit the economic system to continue its march toward indifference to the welfare and security of workers.
Blaming the Fed
FRANKFURT – Critics of the US Federal Reserve are having a field day with embarrassing revelations of its risk assessments on the eve of the financial crisis.
By law, the Fed is required to publish the transcripts of its Federal Open Market Committee (FOMC) meetings with a five-year lag.
While the full-blown crisis did not erupt until the collapse of Lehman Brothers in September 2008, it was clear by the summer of 2007 that something was very wrong in credit markets, which were starting to behave in all sorts of strange ways.
Yet many Fed officials clearly failed to recognize the significance of what was unfolding.
One governor opined that the Fed should regard it as a good thing that markets were starting to worry about subprime mortgages. Another argued that the summertime market stress would most likely be a hiccup.
Various critics are seizing on such statements as evidence that the Fed is incompetent, and that its independence should be curtailed, or worse.
This is nonsense.
Yes, things could and should have been done better; but to single out Fed governors for missing the coming catastrophe is ludicrous.
The Fed was hardly alone.
In August 2007, few market participants, even those with access to mountains of information and a broad range of expert opinions, had a real clue as to what was going on.
Certainly the US Congress was clueless; its members were still busy lobbying for the government-backed housing-mortgage agencies Fannie Mae and Freddie Mac, thereby digging the hole deeper.
Nor did the International Monetary Fund have a shining moment.
In April 2007, the IMF released its famous “Valentine’s Day” World Economic Outlook, in which it declared that all of the problems in the United States and other advanced economies that it had been worrying about were overblown.
Moreover, it is misleading to single out the most misguided comments by individual governors in the context of an active intellectual debate over policy.
It is legitimate to criticize individual policymakers who exercised poor judgment, and they should have a mark on their record.
But that does not impugn the whole FOMC, much less the entire institution.
Central banks’ state-of-the-art macroeconomic models also failed miserably – to a degree that the economics profession has only now begun to acknowledge fully.
Although the Fed assesses many approaches and indicators in making its decisions, there is no doubt that it was heavily influenced by mainstream academic thinking – including the so-called real business cycle models and New Keynesian models – which assumed that financial markets operate flawlessly.
Indeed, the economics profession and the world’s major central banks advertised the idea of the “great moderation” – the muting of macroeconomic volatility, owing partly to monetary authorities’ supposedly more scientific, model-based approach to policymaking.
We now know that canonical macroeconomic models do not adequately allow for financial-market fragilities, and that fixing the models while retaining their tractability is a formidable task.
Frankly, had the models at least allowed for the possibility of credit-market imperfections, the Fed might have paid more attention to credit-market indicators as a reflection of overall financial-market conditions, as central banks in emerging-market countries do.
Last but not least, even if the Fed had better understood the risks, it would not have been easy for it to avert the crisis on its own. The effectiveness of interest-rate policy is limited, and many of the deepest problems were on the regulatory side.
And calibrating a response was not easy.
By late 2007, for example, the Fed and the US Treasury had most likely already seen at least one report arguing that only massive intervention to support subprime loans could forestall a catastrophe.
The idea was to save the financial system from having to deal with safely dismantling the impossibly complex contractual edifices – which did not allow for the possibility of systemic collapse – that it had constructed.
Such a bailout would have cost an estimated $500 billion or more, and the main beneficiaries would have included big financial firms.
Was there any realistic chance that such a measure would have passed Congress before there was blood in the streets?
Indeed, it was precisely this logic that me led to give a very dark forecast in a widely covered speech in Singapore on August 19, 2008, a month before Lehman Brothers failed.
I argued that things would not get better until they got much worse, and that the collapse of one of the world’s largest financial firms was imminent.
My argument rested on my view that the global economy was entering a major recession, and I had the benefit of my quantitative work, with Carmen Reinhart, on the history of financial crises.
I was not trying to be sensational in Singapore.
I thought that what I was saying was completely obvious.
Nevertheless, my prediction gained bold front-page headlines in many major newspapers throughout the world.
It gained headlines, evidently, because it was still far from a consensus view, although concerns were mounting.
Were concerns mounting at the Fed as well in the summer of 2008?
We will have to wait until next year to find out.
Should the Troops Come Home Now?
Last weekend’s announcement that Iraqi lawmakers have finally formed a unity government is welcome news, both for Iraq and for George W. Bush and Tony Blair.
The American and British governments, increasingly unpopular at home, desperately needed some tangible evidence of progress to assuage their domestic critics and to begin to speak openly of an exit strategy.
But Iraq’s greatest challenges lie ahead.
If Bush and Blair declare victory before the real battles have begun, they will undermine the very process to which both have committed so much at such great cost.
Bush waited weeks for a positive development that would allow him to suggest he can reduce troop levels in Iraq from 133,000 to 100,000 by the end of 2006.
Blair, still stung by his Labour Party’s defeat in local elections in early May, also welcomed the good news from Iraq.
During a triumphal surprise visit to Baghdad on May 22, he said he expected Iraqi forces to take responsibility for “territorial security” in much of the country by the end of the year. “It is the violence that keeps us here,” he said.
The optimism is premature.
The formation of a unity government is only the first of many hurdles Iraq’s new government must clear if it is to build a durable peace.
Its first task will be to remove those provisions of Iraq’s constitution that pit Iraq’s Sunni, Shia, and Kurds against one another.
Under current Iraqi law, the parliamentary committee charged with making these constitutional changes has four months to complete its task.
The four-month clock began ticking on May 3, following the first meeting of Iraq’s new parliament.
The changes are badly needed.
The committee must enact a new hydrocarbon law that guarantees each of Iraq’s factions a fair share of the country’s oil wealth, which accounts for 97% of total export revenue.
Under the current constitution, local governments have the right to exploit (and profit directly from) oil extracted from new sites beneath their territory, while only a share of the income from existing sites must go to Iraq’s central government.
On May 15, two small independent energy companies (Turkey’s Genel Enerji and Canada’s Addax Petroleum) became the latest foreign firms to begin drilling in Kurdish-controlled territory under an agreement with the regional government.
Kurdish politicians within the new parliament have good reason to protect these lucrative deals as debate begins over constitutional changes.
But the central government will need a large share of that income if it is to finance the construction of new institutions of governance, invest in critical infrastructure, undertake onerous reforms aimed at economic liberalization, and provide the resource-poor (and already restive) Sunnis of central Iraq with a greater share of the country’s wealth.
The constitution must also be amended to reverse the worst effects of a de-Baathification process that aimed to dismantle the vestiges of Saddam Hussein’s regime.
In practice, de-Baathification has excluded thousands of Iraqis – most of them Sunnis who joined the party during the Saddam era only to secure good jobs – from the country’s political and economic life.
Finally, the Iraqi government must begin dismantling the militia groups that still outgun the fledgling Iraqi army, and it must defeat the largely Sunni-led insurgency.
Each of these tasks is formidable.
If Bush and Blair prematurely withdraw large numbers of the troops that support Iraqi stability, the country’s new government would have little chance of success.
There is some reason for optimism that efforts to stem the tide of violence can succeed.
Media reports of Iraqi bloodshed focus overwhelmingly on Baghdad – where the large majority of foreign journalists are based – creating the impression that the desperate security situation there is representative of the country as a whole.
But in the Kurdish-controlled areas of the north and Shiite-dominated provinces in the south, levels of crime and deadly violence compare favorably with those in many cities in the United States.
But attacks in Iraq’s “Sunni triangle” (and Baghdad in particular) occur at a rate rivaling those in Chechnya and the Niger Delta.
Since Sunni militants destroyed the Shiite Askariya mosque in February, hundreds of Iraqis have been killed in a series of tit-for-tat sectarian attacks.
Tens of thousands have fled from mixed Sunni-Shiite cities to safer havens in ethnically homogenous enclaves that are effectively controlled by Sunni and Shiite militias.
Only the presence of foreign troops slows the further balkanization of the country’s already fractious politics.
That’s why the temptation for Bush and Blair to limit further political damage at home by prematurely declaring victory in Iraq is so dangerous.
If they use the good news to begin withdrawing significant numbers of the foreign troops who bolster Iraq’s stability at a crucial and vulnerable moment, they will have undermined the project to which both have devoted so much political capital.
And they will leave the new Iraqi government at the mercy of forces that would eventually pull the country apart.
Hands Off Syria?
WASHINGTON, DC – More than any of the previous events in the Arab Spring, Syria’s turmoil has presented serious difficulties for Western policymakers.
Just as Syria comprises a more complex society than the other Arab countries currently in the throes of political transition, so, too, are its external relations more complex.
As a result, any attempt at decisive military intervention would be not only difficult, but also extremely risky.
Syria’s leading role in Lebanon, even after withdrawing its occupying forces there, is only one complication.
Another is Alawite-minority rule in a Sunni-majority country, which makes Syria a proxy for Shia Iran in the Sunni Arab world.
Still other Syrian minority groups – non-Alawite Shia, Orthodox and Catholic Christians, and Druze – are linked to neighboring countries and regional players, inviting intense external interest and even active support.
Turkey, Saudi Arabia, and Russia all have strategic interests and factional connections to Syria.
The United States and its NATO allies would, of course, prefer a democratic, Western-oriented regime to emerge in Syria.
But, given the country’s complex society and external ties, the West should happily settle for a stable government not dominated by Russia or Iran, and not in military conflict with its neighbors, including Israel.
So what is the best US and Western policy?
A negotiated end to the current warfare could leave President Bashar al-Assad’s regime in power, albeit with a different face in charge.
Such an outcome would be a triumph for the cause of hardline dictatorship, suppression of human rights, and Iran and Russia.
But it also becomes less feasible as the violence mounts.
That leaves supporting the rebels, but which ones, and how?
Yet another factor militating against intervention is that the distribution of power resulting from the Arab Spring is leaving the US with limited influence and little intelligence.
But the US and the West cannot leave the matter entirely to others or confine their efforts to the United Nations, where Russia and China prevent any effective action.
So, what should be done?
In my view, the US could work with Turkey, Saudi Arabia (taking care not to support Islamic extremists), and its NATO allies, especially France and Britain, to create a prospective successor government for Syria, and to arm its military element.
Such a government would have to be representative and coherent.
And Western powers would need to be sure that their weapons would not fall into potentially unfriendly hands.
The fact that Iran is arming the Assad regime calls for countervailing action.
Some have suggested a more active military role for the US, beginning with a no-fly zone.
It may come to that.
But the French and British, who urged that course in Libya, have made no such proposal for Syria.
One reason is that Syria has a substantial air-defense system, which would have to be suppressed by a bombing campaign – causing significant civilian casualties and risking the loss of aircraft and crews.
Before starting down that road, the US should be convinced that military action would not require US ground forces in Syria.
It should also be confident (which is impossible now) about the nature of a successor government.
To meet these criteria would require convening interested countries in order to gain greater insight into both internal Syrian and regional implications of military action.
The attention devoted to the Syrian issue during the “non-aligned” countries’ recent Tehran summit was a parody of such an exercise.
Holding such a conference is easier said than done.
Merely finalizing the guest list would be a major diplomatic feat. Surely, Turkey, Egypt, Saudi Arabia, and Iraq must be invited.
Russia, the US, and perhaps France and Britain should be present as well.
But to omit a neighbor like Israel, a Syrian client like Lebanon, or a patron like Iran would be peculiar – and inviting all of them would be a formula for chaos.
The uprising in Syria, the most violent of the Arab Spring rebellions, is playing out slowly and lethally.
The estimated 10,000 deaths over the last 18 months equal the number killed in just a few days in 1982 in the city of Hama by Assad’s father, Hafez al-Assad, whose scorched-earth policy strengthened his hold on power and incurred only rhetorical condemnation from the international community.
The repercussions are likely to be all the more disruptive when, sooner or later, the regime falls.
The Assads, like other authoritarian Arab leaders, kept a lid on internal violence and their own citizens’ aspirations.
But the sheer complexity of conditions in Syria means that the regime’s endgame could trigger a transition unlike any other in the Arab Spring, different in both its domestic course and in its effects on the region.
Diplomats make careers of finding procedural solutions to insoluble dilemmas; surely, they hope, there is a conference table with a shape that matches a given strategic configuration.
So far, the US has handled the various forms of political transition in the Arab Spring without severely damaging missteps.
Should We Affirm Affirmative Action?
Equal rights for all citizens are fundamental to a liberal order.
Such rights offer opportunities for political participation, to form associations, and to speak one's mind.
But they also open doors to economic participation, and doors to participation in social institutions like education.
Constitutional guarantees of these rights are the great achievement of the long battle for citizenship that marked the last two centuries.
However, such legal guarantees of rights are often insufficient.
Even the right to vote means little for someone who is totally dependent on other people or institutions.
Equality before the law remains an empty promise for those who cannot afford to make use of it or simply do not know how to do so.
The civil right to an education according to talent requires encouragement of many kinds. Thus, one great theme of social progress in the last century was to imbue the abstract concept of equal rights with social substance.
This meant active encouragement by information, by political education, for example.
As far as education was concerned, it often meant committing resources to financial assistance for students, such as subsidized loans or scholarships.
Yet when all this was done, certain stubborn obstacles to equal participation remained.
Major groups remained underrepresented among societies' most successful citizens.
This was notably the case for women and for some cultural minorities, especially if these were defined by unchosen "ascriptive" characteristics, such as skin color.
Few people from these groups were found among senior managers, government ministers, professors, doctors, and lawyers, so that the suspicion grew that there are largely invisible barriers blocking access to such positions.
Perhaps entrenched institutional cultures militated against women or black people.
Wanting real citizenship for all meant that more had to be done than offering legal guarantees, information, or even financial support.
It was a courageous step, first taken in the United States, to decide that at least for a while a new kind of policy was needed to remedy long-term injustices.
Affirmative action , as it was called, consisted of rules that set aside a certain percentage of representation among candidates for office, students and teachers, police and the military, and in other walks of life to members of hitherto disadvantaged groups.
The US Supreme Court became the guardian of affirmative action.
Wherever it was seriously tried, affirmative action undoubtedly had some success.
This is notably the case in countries that were once homogeneous but now have to deal with citizens who are black or Muslim or are otherwise in an identifiable and neglected minority position.
But at the very moment that other countries were looking to America for a policy model, affirmative action began to raise questions, of which three are particularly important.
First, is there not a risk of a kind of inverted injustice by which the traditionally privileged become the new underprivileged?
The US Supreme Court confronted this question when it first dealt with the case of a white student who was not admitted to medical school despite having better academic qualifications than other applicants.
In Britain, children in private schools must now fear to be at a disadvantage because of the pressure on universities to admit more students from state schools.
This takes us back to the old and vexing question: can we be equal and excellent too?
Second, is equal representation at all levels really what all groups want or need?
After all, the "feminization" of the teaching profession in many countries has not done any harm.
Many countries have benefited from the entrepreneurialism of their Chinese or Jewish minorities.
Are we perhaps pursuing too mechanical an ideal which confuses the absence of privilege and disadvantage with the absence of diversity?
Third, is affirmative action in some cases producing a new kind of rigid segmentation that destroys the very civil society it was intended to create?
Are women, for example, always the best defenders of women's interests?
The same question can be raised for members of religious groups and ethnic minorities, or even of certain social classes.
One shudders to think of parliaments in which the main criterion of membership is to belong to a group in need of affirmative action.
Indeed, in some countries, democracy fails to deliver imaginative and effective governance because the main objective seems to be to have all major groups on board.
To repeat the earlier point: affirmative action was and is a courageous final step in the fight for universal citizenship rights - not just on paper, but in reality.
But affirmative action must not become an enduring principle of a liberal order.
If any set of rules needs a "sunset clause" to enforce review after a specific and limited period, it is affirmative action.
The flexibility of the US Supreme Court in this regard is admirable.
Elsewhere it is probably best to include in the laws of countries and the statutes of organizations a clause that makes affirmative action lapse after five years, or at most ten.
Such a clause could be renewed, but there is nothing so effective as a firm deadline to force a thorough review and concentrate minds.
Should We Talk About Race and Intelligence?
PRINCETON, NJ - The intersection of genetics and intelligence is an intellectual minefield.
Harvard’s former president Larry Summers touched off one explosion in 2005 when he tentatively suggested a genetic explanation for the difficulty his university had in recruiting female professors in math and physics.
(He did not suggest that men are on average more gifted in these fields than women, but that there is some reason for believing that men are more likely than women to be found at both the upper and lower ends of the spectrum of abilities in these fields – and Harvard, of course, only appoints people at the extreme upper end.)
Now one of the most eminent scientists of our time has blundered much more clumsily into the same minefield, with predictable results.
In October, James Watson, who shared the 1962 Nobel Prize for his description of the structure of DNA, was in London to promote his memoir, Avoid Boring People and Other Lessons From a Life in Science .
In an interview in the London Sunday Times , he was quoted as saying that he was gloomy about Africa’s prospects, because “All our social policies are based on the fact that their intelligence is the same as ours – whereas all the testing says not really.” He added that he hoped everyone was equal, but that “people who have to deal with black employees find this is not true.”
Watson tried to clarify his remarks in a subsequent interview in The Independent, saying:
The overwhelming desire of society today is to assume that equal powers of reason are a universal heritage of humanity.
It may well be.
But simply wanting this to be the case is not enough.
This is not science.
To question this is not to give in to racism.
Watson is right that questioning this assumption is not, in itself, racist.
A racist has a negative attitude to people of a particular race.
There is nothing racist about trying to learn what the facts are.
What does raise the suspicion of racism, however, is propagating a negative view of the facts when that view lacks a solid scientific foundation.
That is precisely what Watson has now admitted he did.
Returning to New York, he apologized to those who had drawn from his remarks the implication that Africa is somehow “genetically inferior.”
This was not, he claimed, what he meant, and more importantly, “there is no scientific basis for such a belief.”
The retraction came too late.
The Science Museum cancelled a lecture Watson was to give about his book and his career.
Under pressure from the board, Watson resigned his position as chancellor of Cold Spring Harbor Laboratory, an institution that under his leadership has become one of the world’s leading research and educational institutions in the biological sciences.
Rockefeller University also cancelled a lecture that Watson had been scheduled to give.
Putting aside the specific claims that Watson made in his Sunday Times interview, a genuinely difficult question remains: should scientists investigate the possibility of a link between race and intelligence?
Is the question too sensitive for science to explore?
Is the danger of misuse of the results of such research too great?
The dangers are obvious enough.
Racist stereotyping harms the prospects of many non-whites, especially those of African descent.
The concepts of intelligence and of race are less clear-cut than we often assume them to be.
Scientists need to handle them carefully if they are to pose meaningful questions about the point at which these two concepts intersect.
Some say that the tools we use to measure intelligence – IQ tests – are themselves culturally biased.
The late Stephen J. Gould, author of The Mismeasure of Man, dismissed cross-cultural research using IQ tests as an attempt by white men to show their superiority.
But if that was so, the attempt has backfired, because East Asians tend to score better than people of European descent.
On the other hand, it clearly is possible that differences in IQ scores between people living in impoverished countries and people living in affluent countries are affected by factors like education and nutrition in early childhood.
Controlling for these variables is difficult.
Yet to say that we should not carry out research in this area is equivalent to saying that we should reject open-minded investigation of the causes of inequalities in income, education, and health between people of different racial or ethnic groups.
When faced with such major social problems, a preference for ignorance over knowledge is difficult to defend.
In explaining why it was canceling Watson’s lecture, the Science Museum said that his remarks had gone “beyond the point of acceptable debate.”
It then struck a reasonable balance by inviting people who want to learn more about “the science behind genetics and race” to attend other upcoming events at the museum.
The speakers at these events will presumably have better credentials than Watson to discuss topics like race and intelligence.
If so, one can only hope that watching how Watson blew himself up will not discourage them from venturing into the minefield.
Finally, no matter what the facts on race and intelligence turn out to be, they will not justify racial hatred, nor disrespect for people of a different race.
Whether some are of higher or lower intelligence has nothing to do with that.
Should We Trust Our Moral Intuitions?
When we condemn the behavior of a politician, celebrity, or friend, we often end up appealing to our moral intuitions.
“It just feels wrong!” we say. But where do these intuitive judgments come from?
Are they reliable moral guides?
Recently, some unusual research has raised new questions about the role of intuitive responses in ethical reasoning.
Joshua Greene, a philosophy graduate now working in psychology who has recently moved from Princeton University to Harvard, studied how people respond to a set of imaginary dilemmas.
In one dilemma, you are standing by a railroad track when you notice that a trolley, with no one aboard, is heading for a group of five people.
They will all be killed if the trolley continues on its current track.
The only thing you can do to prevent these five deaths is to throw a switch that will divert the trolley onto a side track, where it will kill only one person.
When asked what you should do in these circumstances, most people say that you should divert the trolley onto the side track, thus saving a net four lives.
In another dilemma, the trolley, as before, is about to kill five people.
This time, however, you are not standing near the track, but on a footbridge above the track.
You cannot divert the trolley.
You consider jumping off the bridge, in front of the trolley, thus sacrificing yourself to save the five people in danger, but you realize that you are far too light to stop the trolley.
Standing next to you, however, is a very large stranger.
The only way you can prevent the trolley from killing five people is by pushing this large stranger off the footbridge, in front of the trolley.
If you push the stranger off, he will be killed, but you will save the other five.
When asked what you should do in these circumstances, most people say that it would be wrong to push the stranger.
This judgment is not limited to particular cultures.
Marc Hauser, at Harvard University, has put similar dilemmas on the web in what he calls a “Moral Sense Test,” available in English, Spanish, and Chinese ( http://moral.wjh.harvard.edu ).
After receiving tens of thousands of responses, he finds remarkable consistency despite differences in nationality, ethnicity, religion, age, and sex.
Philosophers have puzzled about how to justify our intuitions in these situations, given that in both cases, the choice seems to be between saving five lives at the cost of taking one life.
Greene, however, was more concerned to understand why we have the intuitions, so he used functional Magnetic Resonance Imaging, or fMRI, to examine what happens in people’s brains when they make these moral judgments.
Greene found that people asked to make a moral judgment about “personal” violations, like pushing the stranger off the footbridge, showed increased activity in areas of the brain associated with the emotions.
This was not the case with people asked to make judgments about relatively “impersonal” violations like throwing a switch.
Moreover, the minority of subjects who did consider that it would be right to push the stranger off the footbridge took longer to reach this judgment than those who said that doing so would be wrong.
Why would our judgments, and our emotions, vary in this way?
For most of our evolutionary history, human beings – and our primate ancestors – have lived in small groups, in which violence could be inflicted only in an up-close and personal way, by hitting, pushing, strangling, or using a stick or stone as a club.
To deal with such situations, we developed immediate, emotionally based intuitive responses to the infliction of personal violence on others.
The thought of pushing the stranger off the footbridge elicits these responses.
On the other hand, it is only in the last couple of centuries – not long enough to have any evolutionary significance – that we have been able to harm anyone by throwing a switch that diverts a train.
Hence the thought of doing it does not elicit the same emotional response as pushing someone off a bridge.
Greene’s work helps us understand where our moral intuitions come from.
But the fact that our moral intuitions are universal and part of our human nature does not mean that they are right.
On the contrary, these findings should make us more skeptical about relying on our intuitions.
There is, after all, no ethical significance in the fact that one method of harming others has existed for most of our evolutionary history, and the other is relatively new.
Blowing up people with bombs is no better than clubbing them to death.
And surely the death of one person is a lesser tragedy than the death of five, no matter how that death is brought about.
So we should think for ourselves, not just listen to our intuitions.
Showdown in Bali
BALI – This month’s international meeting in Bali will set a framework that will attempt to prevent the impending disaster of global warming/climate change.
There is now little doubt that greenhouse gases, such as carbon dioxide, are leading to significant changes in climate.
Nor is there doubt that these changes will impose huge costs.
The question is no longer whether we can afford to do something, but rather how to control emissions in an equitable and effective way.
The Kyoto Protocol was a major achievement, yet it left out 75% of the sources of emissions: the US, the largest polluter, refused to sign.
(With Australia’s new government now having signed the Protocol, America is now the sole holdout among the advanced industrial countries.)
No requirements were put on developing countries, yet within the not-too-distant future, they will contribute half or more of emissions.
And nothing was done about deforestation, which is contributing almost as much to increases in greenhouse gas concentrations as the US.
The US and China are in a race to be the world’s worst polluter;
America has long won the contest, but in the next few years, China will claim that dubious honor.
But Indonesia is number three, owing to its rapid deforestation.
One concrete action that should be taken at Bali is support for the initiative of the Rainforest Coalition, a group of developing countries that want help to maintain their forests.
These countries are providing environmental services for which they have not been compensated.
They need the resources, and the incentives, to maintain their forests.
The global benefits of supporting them far outweigh the costs.
The timing of the conference is not propitious.
George W. Bush, long a skeptic about global warming, and long committed to undermining multilateralism, remains America’s president.
His close connections with the oil industry make him loathe to force it to pay for its pollution.
Still, the Bali meeting’s participants can agree on a few principles to guide future negotiations.
These include, first, that solutions to global warming require the participation of all countries.
Second, there can be no free riders, so trade sanctions – the only effective sanctions that the international community currently has – can and should be imposed on those not going along.
Third, the problem of global warming is so vast that every instrument must be employed.
Better incentives must be part of the solution.
But there is a raging controversy over whether the Kyoto protocol’s cap-and-trade system or taxes work better.
The problem with the Kyoto system is assigning caps that will be acceptable to developed and developing countries.
Giving emission allowances is like giving away money – potentially hundreds of billions of dollars.
Kyoto’s underlying principle – that countries that emitted more in 1990 are allowed to emit more in the future – is unacceptable to developing countries, as is granting greater emission rights to countries with a higher GDP.
The only principle that has some ethical basis is equal emission rights per capita (with some adjustments – for instance, the US has already used up its share of the global atmosphere, so it should have fewer emission allowances).
But adopting this principle would entail such huge payments from developed countries to developing countries, that, regrettably, the former are unlikely to accept it.
Economic efficiency requires that those who generate emissions pay the cost, and the simplest way of forcing them to do so is through a carbon tax.
There could be an international agreement that every country would impose a carbon tax at an agreed rate (reflecting the global social cost).
Indeed, it makes far more sense to tax bad things, like pollution, than to tax good things like work and savings.
Such a tax would increase global efficiency.
Of course, polluting industries like the cap-and-trade system.
While it provides them an incentive not to pollute, emission allowances offset much of what they would have to pay under a tax system.
Some firms can even make money off the deal.
Moreover, Europe has grown used to the concept of cap-and-trade, and many are loathe to try an alternative.
Yet, no one has proposed an acceptable set of principles for assigning emission rights.
For some, this is not a concern.
With developing countries standing to lose even more than developed countries if nothing is done about global warming, many believe they can be cajoled, threatened, or induced to be part of a global agreement.
Developed countries need only figure out the minimum price they have to pay developing countries to go along.
But developing countries worry that a new global agreement on emissions, like so many other international agreements, will leave them in a disadvantageous position.
In the end, Realpolitik may rule.
But the world today is different from the world of 25 years ago, or even 10 years ago.
Flourishing democracies in many developing countries mean that their citizens demand fair treatment.
Principles do matter.
The Bali meeting’s participants should bear this in mind: global warming is too important to be held hostage to another attempt at squeezing the poor.
Hope Amid the Middle East’s Turmoil
LONDON – Syria is a living nightmare.
Egypt hovers on the brink.
But, as the opening of peace talks between Israel and the Palestinian Authority shows, there are signs of hope.
And, though it may seem counter-intuitive, the region’s turmoil is finally bringing to the surface its fundamental problems in a way that allows them to be confronted and overcome.
Now is a time not for despair, but for active engagement.
No one put the chances of reviving the Israel-Palestine peace process at more than minimal.
Yet it has happened.
And these are not talks about talks, but a full-blown revival of final-status negotiations, with an undertaking by both parties to remain in the process for at least nine months.
To those of us who have toiled, often fruitlessly, on this issue in the past, it is a huge achievement brought about by US Secretary of State John Kerry’s sheer dogged determination and the willingness of Israel’s Prime Minister Binyamin Netanyahu and Palestinian Authority President Mahmoud Abbas to take political risks with their domestic public opinion.
Much less noted was the visit of Yemen’s president, Abd Rabbuh Mansur Hadi, to Washington, DC.
Against all the odds, Yemen is undergoing a process of political transformation, with 500 delegates from all parts of society working on plans for democracy, justice, and equality.
In Iraq, after years of declining sectarian violence, the casualty figures are up again, in part owing to the war in neighboring Syria.
Yet, even in Iraq, Grand Ayatollah Ali al-Sistani, the country’s most influential Shia cleric, recently issued a seminal statement proclaiming the need for a civil, not religious state, with equal freedom for all to participate.
Sistani also expressed disagreement with those close to Iran who want Shia to go to Syria to fight for Bashar al-Assad’s regime alongside Hezbollah.
Similarly, at the start of Ramadan, King Abdullah of Saudi Arabia, who is also the custodian of the two holy mosques, made a powerful statement reclaiming the faith of Islam from those who would pervert it in the name of politics.
Libya and Tunisia are far from settled, as the recent assassination of Tunisia’s leading opposition politician and the presence of unrestrained militia in Libyan towns show.
But the democrats are not giving up.
Across the northern part of Sub-Saharan Africa, there are now huge challenges from well-armed and well-financed terrorist groups that have imported toxic Islamist ideology from the Middle East.
Countries such as Nigeria, for example, have suffered horribly from terrorism based on a brand of religious extremism that is alien to their society.
But, again, despite it all, the country is experiencing rapid economic growth and has just implemented a major reform – widely considered impossible until recently – of the power sector.
Meanwhile, with a genuinely inclusive and objectively administered constitution, Egypt could pivot back toward democracy.
Elections by early 2014 have been promised, and all parties, including the Muslim Brotherhood, could take part.
Or Egypt could become paralyzed and unable to rectify its dire economic situation and restore order, without which no progress is possible.
But Egypt’s internal divisions reveal a deeper awakening in the region that has its own significance.
Lessons about government, governance, and democracy that took the West centuries to learn are being taken in at extraordinary speed.
It is now clear that the status quo in the region will not hold.
The idea of “strong man” government – a regime that maintains order, and that the rest of the world likes to deal with because it is predictable – has gone.
It doesn’t matter whether the “strong man” is a psychopath, like Saddam Hussein, or a moderate, like Hosni Mubarak, who kept peace in the region. This is the twenty-first century, and ordinary people want to shape their country’s politics.
The choice is between evolution and revolution.
Evolution, if attainable, is clearly preferable.
Frankly, Syria would have been better for it.
People have had a taste of politics conducted by firestorm.
Across the region, there is fatigue with the wildness and disorder that politics conducted by firestorm brings.
There is growing recognition that change is best accompanied by stability, and that democracy works only if debate is conducted in an atmosphere in which arguments can be bold, even harsh, but not inflammatory.
There is also a burgeoning acceptance that religious freedom is a necessary part of free and open societies.
The discussion about religion’s role in government and society is now out in the open.
This is enormously important and healthy.
For the first time, there is lively and intelligent debate around this issue, which is at the core of the Middle East’s problems.
Open societies are incompatible with closed economies.
A functioning private sector that creates adequate jobs, and schools that educate the large young population for today’s inter-connected world, are prerequisites of progress.
The Israeli-Palestinian issue is crucial for all the obvious reasons.
But it is also a test of the region’s capacity to forge a different and better future.
If these two peoples can find common ground to create two states, both democratic and free, after decades of bitterness and bloodshed, the region would have an enormously powerful model of hope.
But the opening of the peace talks in Washington, DC, would not have happened without the full engagement of the US and other international partners.
This is the lesson that we should bear in mind as Syria disintegrates before our eyes.
However much we may wish to look away, the consequences of allowing the bloodbath in Syria to take its own course may well be disastrous for the region and for the West’s security.
Surely we can begin to see certain common threads running through the terror attacks of September 11, 2001, Afghanistan, Iraq, the Arab revolutions, Iran, Syria, Egypt, and the spread of terror based on religious extremism.
One concerns how states emerge from years of repression to build institutions capable of responding to the needs of the modern world.
Another – plainly linked – is Muslim-majority countries’ efforts to define the relationship between religion and politics.
The entire world has a massive interest in where these threads lead.
Silent Burmese Days
PRAGUE &#45;&#45; In the coming days – perhaps even hours – the destiny of Burma (also known as Myanmar), and the fates of over fifty million Burmese, will be decided.
Today’s crisis has been brewing for many years.
But nobody knew with any precision just when open revolt against Burma’s military dictatorship would erupt.
I fear that, with only a few exceptions, most countries have been surprised and caught off guard – once again – by the rapid course that events have taken in Burma.
So they seem to be completely unprepared for the crisis and thus at a loss as to what to do.
How many times and in how many places has this now happened?
Worse, however, is the number of countries that find it convenient to avert their eyes and ears from the deathly silence with which this Asian country chooses to present itself to the outside world.
In Burma, the power of educated Buddhist monks – people who are unarmed and peace loving by their very nature – has risen up against the military regime.
That monks are leading the protests is no great surprise to those who have taken a long-term interest in the situation in Burma.
An overwhelming number of Burma’s Buddhist monks have found it difficult to bear the central and regional governments’ efforts to corrupt their monastic orders, and to misuse the example of the monks’ self-restraint to increase the pressure on other believers.
Of course, without universal and coordinated international political, economic, and media support for these brave monks, all development in Burma may quickly be put back nearly 20 years.
On a daily basis, at a great many international and scholarly conferences all over the world, we can hear learned debates about human rights and emotional proclamations in their defense.
So how is it possible that the international community remains incapable of responding effectively to dissuade Burma’s military rulers from escalating the force that they have begun to unleash in Rangoon and its Buddhist temples?
For dozens of years, the international community has been arguing over how it should reform the United Nations so that it can better secure civic and human dignity in the face of conflicts such as those now taking place in Burma or Darfur, Sudan.
It is not the innocent victims of repression who are losing their dignity, but rather the international community, whose failure to act means watching helplessly as the victims are consigned to their fate.
The world’s dictators, of course, know exactly what to make of the international community’s failure of will and inability to coordinate effective measures.
How else can they explain it than as a complete confirmation of the status quo and of their own ability to act with impunity?
Socrates in Silicon Valley
LONDON – If Socrates’s gadfly was in Silicon Valley, it would have a lot of lazy horses to sting.
The citizens of the techno-polis appear oblivious to how the outside world’s perception of them has changed, and radically so.
Once universally revered as a hotbed of innovation, the world’s premier technology hub is increasingly viewed with suspicion and resentment.
Yes, Silicon Valley is still admired as a source of invention and creative destruction; but it is also widely viewed as having lost its ethical compass.
With proliferating reports of lax attitudes toward data privacy, wanton disregard for the dignity of the less fortunate, and a growing sense that technology companies are pushing their preferred policy agenda on the rest of the world, discontent and disillusion are rising.
Viewed from outside, the world sees companies that exude a sense of entitlement – for example, by flouting local regulations as they expand into cities around the world, from Berlin to Rio de Janeiro.
Supremely confident in the power of their knowledge and skills, they are convinced that they will guide the world onto the Path of Truth.
This overweening certitude is not new – the United States, after all, was founded on missionary zeal – but the ethical arrogance is.
Of course, not all technology companies should be tarred with the same brush as the main offenders.
But the recent spate of high-profile cases harms the reputation of the sector as a whole.
As the world looks to Silicon Valley and sees an echo chamber of self-righteous conceit, mature and law-abiding technology companies are assumed to be inside it, too.
The cases are becoming legion.
Uber, the data-abusing car-sharing app that spikes prices during peak demand and threatens journalists who write negatively about it, has been banned in Spain, the Netherlands, Thailand, and two Indian cities so far, including New Delhi (after a driver allegedly raped a passenger).
These reports follow the revelation that pictures shared on Snapchat may not be deleted, as promised.
In August, Brazilian authorities banned the social-networking app Secret after the company failed to respond to cyberbullying concerns, with Israel considering a similar move.
The list goes on.
Silicon Valley is risking a backlash that will not do anyone any good.
Its leaders are increasingly out of step with the public’s expectation of ethical and conscientious behavior.
If they fail to generate new ideas and devise novel approaches, their problems will only multiply further.
One thing that would help is fresh blood.
Much of Silicon Valley’s success stems from its tight networks – people who have been successful and support one another.
But history shows that the same structures can also choke off innovation.
Organizations, like species, become inbred and weak, and eventually perish, when they fail to embrace diversity.
Indeed, one of the most revealing facts to come to light about Silicon Valley in recent months is the extreme ethnic and gender imbalance at large technology companies, including Apple, Google, Facebook, and Twitter.
No one is shocked, but clearly something needs to change.
Somehow a place that prides itself on innovation and doing things differently should be doing this differently as well.
Above all, there is value in questioning and challenging the status quo.
Independence in thought and deed is vital for any company to function and to build things that last and contribute to economic growth and prosperity.
In Plato’s Apology, Socrates advocates for the examined life – the habit of rigorous self-reflection and posing hard, heterodox, and possibly upsetting questions.
The tech sector needs to embrace that credo.
Ironically, questioning prevailing wisdom – and thereby inventing radically new solutions – has been Silicon Valley’s modus operandi from the outset.
But it has followed this approach on a macro level and for problems elsewhere in the economy, without examining itself.
Silicon Valley’s citizens must start applying their skill at innovation – and their pride in “breaking things” – to themselves.
The only way to evolve is by adapting to new environmental pressures, and now Silicon Valley – owing in large part to its own behavior – is facing plenty of them.
Unless it changes, it will be overtaken.
The good news is that if any place has proved that it can innovate, it is Silicon Valley.
Now, however, its citizens must recognize that they do not have all the answers; unfortunately, so far at least, there seems to be no awareness among them that there is even a problem.
Like the “skilled craftsmen” described by Socrates, “on the strength of their technical proficiency, they claimed a perfect understanding of every other subject, however important.”
As Plato’s teacher knew – and as every fresh report of the tech sector’s abusive behavior should remind us – a little knowledge can be a dangerous thing.
Depression’s Psychedelic Solution?
ZURICH – According to the World Health Organization, depression affects an estimated 350 million people worldwide, making it one of the most prevalent psychiatric conditions.
But only about half of those who try antidepressant drugs respond to them, and those who do may have to wait several weeks or even months before experiencing relief – a critical failing for people at immediate risk of suicide.
Fast-acting antidepressants are thus urgently needed.
Ketamine – a drug primarily used as an anesthetic in veterinary medicine and as a short-term anesthetic and analgesic in hospitals during surgery or other painful procedures – is currently the rising star of depression research.
It appears to ease depression’s most severe symptoms within minutes or hours, even in patients who have a dismal track record with other treatments.
In the first controlled study, researchers reported a 50% decline in symptoms of depression within two hours of a ketamine infusion, and one-third of patients were virtually symptom-free within a day.
Moreover, patients reported diminished thoughts of suicide a mere 40 minutes after receiving an intravenous infusion of the drug.
In some patients, the effects of a single dose can last more than a week.
Clinicians are not alone in studying ketamine’s potential.
Neuroscientists have hailed it as the first breakthrough in depression-drug research in 50 years.
Unlike conventional antidepressants – which are used to elevate concentrations of the neurotransmitters serotonin, dopamine, or noradrenaline – ketamine influences the glutamate system.
Glutamate, the major excitatory neurotransmitter, plays a central role in mediating nearly all forms of brain function, including learning, memory, cognition, and emotion.
By blocking glutamate from binding to the NMDA receptor, ketamine leads to an augmented glutamate release, which activates other types of glutamate receptors and enhances the function and density of synapses (the junctions between neurons) in areas of the brain where stress or depression has caused cells to atrophy.
Increased synaptic plasticity – the ability of synapses to adjust their strength, which is essential to healthy brain function – could be the neurobiological reason for the apparent therapeutic effect in patients.
But, though ketamine’s promise has stirred excitement among clinicians and neuroscientists, it has also sparked controversy, owing to the drug’s potentially harmful side effects.
Depending on the dose, a patient may experience altered physical, spatial, and temporal states; larger quantities may induce hallucinations and dissolution of the self.
Intriguingly, ketamine’s psychoactive properties may be responsible for its mood-enhancing effect.
Psychedelic and psycholytic treatments – popular in the 1960’s and 1970’s, before research was severely restricted and interest in the clinical use of psychedelics faded – were based on the notion that the drug-induced psychological experience was essential to facilitating the psychotherapeutic process.
According to this view, the altered state of consciousness produced by ketamine – particularly the dissolution of the self’s boundaries and the experience of union with the world – might constitute a profound and meaningful experience for a patient.
Integrating this experience into the psychotherapeutic process might facilitate subsequent behavioral changes.
In other words, drugs like ketamine that quickly increase neuroplasticity might be particularly clinically efficient in combination with psychotherapeutic interventions.
Unfortunately, research on ketamine addicts and those who take it in large doses as a party drug has revealed that its use may lead to learning and perception problems, as well as memory disorders.
Another concern is that ketamine’s benefits may be relatively fleeting.
As a result, ketamine may never develop into an accepted treatment for depression in its current form.
In fact, ketamine’s future as a therapy for depression would be uncertain even if its efficacy were more strongly established.
Because ketamine has been available for decades, there is no patent for it, so pharmaceutical companies have little financial incentive to carry out research on the drug and seek approval for its use as an antidepressant.
Nonetheless, research on ketamine’s chemistry might help to identify mechanisms for addressing treatment-resistant depression that are based on glutamate-driven neuroplasticity.
Indeed, pharmaceutical companies have already begun to investigate other NMDA-receptor antagonists, together with drugs that act on a different part of the glutamate system, as possible treatments for depression.
This research could eventually lead to an entirely new class of antidepressant – and relief for millions of people worldwide.
Financial Regulators’ Fine Mess
WASHINGTON, DC – When an athlete breaks the rules, it is easy to figure out whether the relevant disciplinary body really wants to discourage repeat offenses.
Suspending a player from the sport – as happens in soccer in the case of dangerous fouls – is a real punishment, not only for the individual but also for the team.
Consider the case of Michael Clarke, the captain of the Australian cricket team, who recently threatened bodily harm to an opposing player.
Despite public hand-wringing, Cricket Australia (the governing body) imposed only a small fine (that is, small relative to Clarke’s annual salary).
Whether or not this was appropriate, Cricket Australia was making it clear that such behavior merited only a symbolic punishment.
The recent $13 billion settlement between the US Department of Justice and JPMorgan Chase (JPM), one of the world’s largest international banks, should be viewed the same way.
To the uninitiated, the fine appears significant (which explains all the attention-grabbing headlines), and it certainly has made America’s financial regulators look busy and serious.
But, just like Cricket Australia, the message is clear: There will be no change to business as usual.
JPM was accused of a wide range of illegal activities, including misrepresenting securities to investors and much more.
Better Markets, a pro-financial-reform group, points out that what we know about the settlement suggests that it is largely meaningless.
As Dennis Kelleher, head of Better Markets, put it,
“Rather than throwing the book at [JPM] and its executives, the Department of Justice called off a press conference and stopped a lawsuit because the bank’s high profile, politically-connected CEO, Jamie Dimon, personally called the Attorney General and asked him to do so.”
The way in which the settlement was worked out should also give us pause – with Dimon having direct access to US Attorney General Eric Holder, America’s top law-enforcement official. “Few if any Americans have the ability to even get the AG on the phone,” Kelleher reminds us, “much less the power to get him to stop him from filing a lawsuit that would have revealed to the public the details of JPMorgan’s alleged illegal conduct.”
As a result, we will not learn exactly what was alleged in the case against JPM, including the evidence used.
The level of public scrutiny and concern will subside.
But at least JPM must pay a high price to make the entire matter disappear, right?
Well, no.
A $13 billion “fine” for a company the size of JPM is about as painful as Clarke’s fine is for him – not painful at all.
Clarke earns about $6 million (Australian dollars) per year; in addition to an annual retainer, he receives a $14,000 match fee for every international test match, along with other tour fees and bonuses.
He was fined 20% of the international match fee ($2,800), or about 0.05% of his annual salary.
For anyone with an annual income of $50,000 (which is close to the median for US households), this would be equivalent to a fine of $25.
JPM has a total balance sheet of around $4 trillion, measured using international accounting standards.
As management told shareholders after the settlement was announced, “the Firm is appropriately reserved for all of these matters,” meaning that there would be no material impact on earnings.
And, predictably, “the Firm did not admit any violations of law.”
In fact, while Clark’s paltry fine presumably at least comes out of his own pocket, the penalty levied on JPM is to be paid largely by its shareholders.
And, because there is no market for corporate control over megabanks (because protections provided by regulators prevent hostile takeovers or effective shareholder activism), frustration on the part of JPM’s investors cannot result in a change of management.
But, again, JPM’s shareholders have little cause for concern.
Marianne Lake, JP Morgan’s chief financial officer, has suggested that about $7 billion of the fine is likely to be tax deductible, that is, treated as a form of necessary and usual business expense.
The bank was taxed at an effective rate of 31.3% in the first nine months of 2013, according to the Wall Street Journal, implying a tax break worth around $2.2 billion (which could end up higher).
While JPM is now off the hook, holding individual employees personally accountable for their behavior is still an option.
But no one should hold their breath.
The chances that anyone will be suspended from the industry are minimal, and the impact on management is likely to be nil.
Kelleher sent a forceful letter to Holder, urging full disclosure of all relevant details in the case – and there are many.
Americans owe it to themselves to read it and recommend it to their elected representatives.
Kelleher concludes, “Equal justice for all without fear or favor is the bedrock of our democracy and, indeed, our country.” Unfortunately, the Department of Justice still seems to believe that very large companies deserve special access and special treatment.
The Temptation of the Central Bankers
WASHINGTON, DC – The banking system has become most central bankers’ Achilles’ heel.
This may seem paradoxical – after all, the word “bank” is in their job description.
But most people currently at the top of our central banks built their careers during the 1980’s and 1990’s, when the threat of inflation was still very real, so this – rather than bank regulation and supervision – remains a major focus of their intellectual and practical concerns.
Moreover, a formative experience for many central bankers over the past half-decade has been the need to prevent a potential collapse of output, including by preventing prices from falling.
They have achieved this goal largely by propping up credit, regardless of what that may do to the banking sector’s structure or incentives.
It is not surprising that today’s central bankers continue to be deferential to those who run large private-sector banks.
Central banks have a great deal of control over an economy’s money supply, and they can affect interest rates across a wide range of loans and securities.
But private-sector banks do the lending, while also bearing responsibility for important dimensions of how financial markets operate.
Thus, keeping global megabanks in business and highly profitable has become a key objective for policymakers in the United States, Europe, and many other countries.
All too often, however, this means that central bankers defer to these firms’ executives.
José De Gregorio, the governor of the Central Bank of Chile from 2007 to 2011, is an important exception.
In How Latin America Weathered the Global Financial Crisis, he combines recent history and personal insight to offer a fascinating account of how to apply a more balanced policy approach – both in emerging markets and more broadly.
(De Gregorio’s book is published by the Peterson Institute for International Economics, where I am a senior fellow, though I was not involved in commissioning or editing his work.)
There is plenty of conventional macroeconomics in De Gregorio’s story, including the value of careful fiscal policy and the advantage of maintaining a flexible exchange rate guided largely by supply and demand in the market. When countries seem committed to a fixed exchange rate (say, relative to the US dollar), firms and individuals feel encouraged to borrow in foreign currency (like the dollar) in order to lock in what are typically lower interest rates.
But such a perception can easily become a trap.
When capital flows out of the country – as is happening now in some emerging markets – it may be helpful if the central bank allows the currency to depreciate in an effort to boost exports and reduce imports.
But if the country’s borrowers have a lot of dollar-denominated debt, depreciation can be ruinous.
De Gregorio covers all of these issues very well – and also discusses the importance of luck.
Chinese growth remained relatively strong in 2009 and after, which kept the price of commodities high.
This benefited Chile – a major copper producer – and much of Latin America.
But De Gregorio’s analysis of banking is what really stands out.
Here the key issue is leverage, or how much banks are allowed to borrow relative to their equity, and the temptation that policymakers face to allow banks to borrow more, particularly when times are good and asset prices are rising.
Big banks’ executives often want to increase their institutions’ leverage, typically because they have various forms of guarantee – in particular, deposit insurance and access to central-bank financing on advantageous terms.
In addition, the executives’ pay is typically based on return on equity, unadjusted for risk.
The danger for central banks stems from the fact that the implicit subsidies provided to major financial institutions are not measured in any budget.
Moreover, the build-up of risk in the financial system that accompanies higher leverage is both hard to measure and likely to materialize only after a few years (for example, after a governor’s term of office has expired).
De Gregorio’s views differ from those of many of his colleagues in other countries, because he sees clearly the risks in allowing banks to become bigger and apply what he calls “clever” strategies that require a great deal of leverage.
Higher leverage creates macroeconomic risk – not least for fiscal balances when implicit guarantees must be honored.
By keeping banks and other private-sector firms at lower levels of debt, vulnerability to shocks is reduced.
In a boom, this may seem irrelevant; but, as De Gregorio knows, pressure on emerging markets – and richer countries – arises all too often, and frequently at unexpected moments.
Growth based on high leverage typically proves to be illusory.
And yet the illusion continues to entice policymakers.
That is why De Gregorio’s book should be required reading for all central bankers.
The Fed in Denial
WASHINGTON, DC – The United States Federal Reserve System is one of the most powerful governmental organizations in the history of the world.
America’s central bank has control over the supply of dollars, and currently exerts great influence over interest rates, both for short-term and long-term borrowing.
And, though the Fed was partly responsible for the regulatory failures that led to the global economy’s near-meltdown in 2008-2009, post-crisis reform has left it with even greater authority and more responsibility for overseeing the financial system.
That is a worrying outcome, because senior Fed officials seem to have slipped back into their pre-2008 ways, ignoring concerns about dangerous financial-sector behavior – even when those concerns are expressed by members of the US Senate Banking Committee.
This is not only unfortunate; it is also dangerous, because the Fed’s political position is much more precarious than its leadership seems to realize.
In many countries, people on the right of the political spectrum provide a bastion of support for the central bank.
In northern Europe, for example, the European Central Bank’s independence is seen as essential for price stability – and politicians on the right typically attach a higher priority to this goal.
The situation is quite different in the US.
Here, the right, represented by the Republican Party, has long been suspicious of the Fed, reflecting its opposition to a powerful federal government, as well as nostalgia for the days of the gold standard (particularly the version that operated before the Fed was created in 1913).
The Fed as it currently operates is being protected by the left (the Democratic Party).
For example, I recently testified at a hearing of the House Financial Services Committee on Republican-proposed legislation that would impose on the Fed greater limitations on both monetary policy and regulation.
House Democrats oppose the bill and invited me to the hearing, where I explained that the proposed constraints would, in my view, greatly hamper the Fed’s effectiveness – including its ability to help the economy return to full employment and to prevent the financial system from spinning out of control again.
Under current circumstances, the Democrats are strong enough – with control of the Senate and of the presidency – to fend off these assaults.
Consequently, senior Fed and White House officials seem rather confident that nothing dramatic will happen that would undermine the Fed’s independence.
I would not be so sure.
The main problem is that the Fed has not moved with alacrity to implement fully key provisions of the Dodd-Frank financial reforms, which were passed in 2010.
For example, the Dodd-Frank legislation specifies that all large financial institutions should draw up meaningful “living wills” – specifying how they could be allowed to fail, unencumbered by any kind of bailout, if they again became insolvent.
Creating such living wills is not an option; it is a requirement of the law.
Yet, in a recent speech that reviewed the landscape of financial reform, Fed Vice Chairman Stanley Fischer skipped over the requirement almost completely.
Fischer appears to prefer to rely on the resolution powers of the Federal Deposit Insurance Corporation, which is empowered to takeover failing financial institutions, with the expectation that it will impose losses on creditors in such a way that will not cause global panic.
(I am on the FDIC’s systemic resolution advisory committee, but I am not responsible for the agency’s plans or potential actions.)
Unfortunately, as currently constructed, these resolution powers are unlikely to work.
They do not apply across borders, there is not enough loss-absorbing capital in large complex financial institutions, and the funding structure of big bank holding companies remains precarious.
Senior Fed officials emphasize that big banks fund themselves with more equity now than they did in the past.
But the Global Capital Index constructed by Thomas Hoenig, the FDIC’s vice chairman, indicates that the largest US banks are still 95% debt-financed.
With that much leverage, it does not take a lot to create fear of insolvency.
Yet, despite repeated and responsible expressions of concern – including from Senate Democrats – the Fed continues to ignore these profound problems.
If anything, in his most recent speech, Fischer seemed to brush aside any such fears – assuring his audience that there is great social value in continuing to have extremely large financial firms that operate with so very little equity capital (and therefore a great deal of leverage).
This is more than disappointing.
It is profoundly dangerous to the economy.
And it imperils the Fed’s future ability to take action as needed.
In recent interviews, including with The New Yorker, Fed Chair Janet Yellen has indicated at least general concerns about financial-sector behavior and the vulnerability of big banks.
But unless the Fed acts on such concerns – including by implementing the requirement that large financial institutions adopt meaningful living wills – its independence will come under even greater pressure.
Are China’s Banks Next?
WASHINGTON, DC – America’s recent bout of dysfunctional politics and the eurozone’s on-again, off-again crisis should, on the face of it, present a golden opportunity to China.
To be sure, the malaise in the United States and Europe is likely to hurt Chinese exports; but, over the long term, China wants to reorient its economy toward domestic consumption.
With the Tea Party wing of America’s Republican Party scaring investors out of the dollar, interest in the Chinese renminbi’s potential as an international reserve currency can only increase.
This will help China to attract more investors seeking to diversify their portfolios.
Chinese government debt will become an important global benchmark asset, which should help its private sector to attract funding on reasonable terms, while the predominance of the US Federal Reserve in determining worldwide monetary conditions would presumably diminish. The decades-old shift to a multipolar world for manufacturing could thus lead to a more multipolar currency world, with the renminbi as an important player.
But, despite its unique history and current advantages, China harbors a weakness that is quite similar to what has caused so much trouble in the US and Europe: big banks that have an incentive not to be careful.
China’s latest moves suggest that while it may now enjoy some years of greater prominence, its encouragement of its financial institutions to go global is likely to lead to serious trouble.
Ironically, the British government, while no doubt just trying to be hospitable to foreign investors by laying out a red carpet, is helping to set a trap for Chinese financial institutions – and the broader Chinese economy.
By encouraging China to build global financial institutions with light regulation, the United Kingdom is not just inviting irresponsible behavior; it could help to pull an entire economy toward ultimately unproductive and even self-destructive activities.
China has long kept tight control over its main banks.
Credit policies have helped to juice the economy from time to time, but the authorities have also retained the ability to slow things down when warranted.
Banking has become an instrument of economic policy to ensure GDP growth and employment creation, while keeping inflation at an acceptable level.
But the Chinese policy elite are also very taken with the idea that a first-rank country needs a prominent banking system that is active internationally.
There is nothing wrong with this ambition, as long as it is handled with great caution. Unfortunately, it is now becoming clear that the hard lessons of recent financial crises have been lost on China.
Bankers never like tight regulation – and they particularly do not appreciate being required to fund their operations with more equity relative to debt.
In both good times and bad, their refrain is, “We need lower capital requirements,” meaning they should be allowed to borrow more.
Iceland, Switzerland, and the UK have all learned the hard way that allowing banks to become big relative to their economies brings with it great risks. Bailouts become more expensive and – as in the case of Iceland – may actually be unaffordable.
Even when, as in the UK, the cost of losses is not completely ruinous, the direct damage to domestic credit and to broader confidence can be enough to hold back the economy for a half-decade or more.
Mervyn King, the former governor of the Bank of England (BoE), is reported to have said, “Banks live globally and die locally.”
In other words, when everything is going well, you may be willing to believe that it does not matter where a particular international bank gets its equity funding and in which jurisdiction its debts are issued.
But when bad things happen and there is pressure on financial markets, with fear of insolvency in the air, it matters a great deal if you have a claim on an insured bank in the United States or on an essentially unregulated offshore subsidiary.
China wants to build up its banks’ international operations.
And the British are welcoming an expansion of these activities in London – offering to treat Chinese banks operating there as branches (subject to Chinese regulation) rather than as subsidiaries (subject to British regulation).
Mark Carney, King’s successor at the BoE, said, “We are open for business,” in terms of providing liquidity loans to backstop big banks.
But UK banks’ assets amounted to eight times the country’s GDP before the crisis and will presumably approach that level again with Carney’s encouragement. Can the BoE – and the UK Treasury – really provide downside insurance for this full amount, or are the UK authorities set on the path to becoming another Iceland (where the value of bank assets peaked at more than 11 times the country’s GDP)?
The Chinese authorities should take another look at their policies.
China is like Cinderella – finally allowed to attend the ball and given a chance to become a prominent player.
But midnight could come very quickly, and financial crises do not have fairytale endings.
The Future of the Captured State
WASHINGTON, DC – Concerns about state capture are nothing new.
Special interests hold undue sway over official decision-makers in many countries, and regulators are always prone to see the world through the eyes of the people whose activities they are supposed to oversee.
But the rise of finance in industrialized countries has cast these issues in a new, much harsher light.
Before 1939, wages and profits in the financial sector in the United States amounted to less than 1% of GDP; now they stand at 7-8% of GDP.
In recent decades, financial assets have expanded dramatically relative to any measure of economic activity, as life expectancy increased and the post-WWII baby boomers began to think about saving for retirement.
Compared to the size of the US economy, individual banks are now much bigger than they were in the early 1990’s.
(The precise numbers are different in other industrialized countries, but the rise of finance is a general phenomenon.)
The global financial crisis of 2007-2008 and the deep recession that resulted made it plain to see that the financial sector in the US and elsewhere had become too powerful.
Since the 1980’s, a form of “cognitive capture” had occurred, with policymakers becoming convinced that innovation and deregulation could only improve the functioning of both financial intermediation and the broader economy.
The crisis proved this view completely wrong, imposing massive costs – measured in terms of jobs lost, lives disrupted, and increased hardship – on millions of people.
Financial regulation entered a new, much more contested phase in 2010 – at least in the US.
Most officials now concede the existence of systemic risk as a form of “pollution,” meaning that banks and other financial firms do not necessarily internalize the full costs of their structures and activities.
And these costs can be huge – potentially large enough, despite recent reform attempts, to cause Great Depression II (or worse).
Operating big financial firms with small amounts of equity capital and a lot of debt may be in the interest of their managers, but it is definitely not in the interest of the rest of society.
Moreover, providing large implicit subsidies to firms that are too big to fail should not be an attractive policy, because it encourages such firms to take on excessive risk (and to become even bigger).
And yet debate about these issues has remained wide open.
The question is no longer so much one of beliefs.
Now it is simply about money – particularly campaign contributions, but also the revolving door between Washington and Wall Street, as well as the vast pro-megabank interests that pour millions of dollars into think tanks and other, more shadowy organizations.
The Oscar-winning documentary Inside Job raised some sensitivities and led to increased disclosures by some people, including academics, concerning their involvement with the financial industry.
But there remain profound monetary ties between big banks and people who purport to be independent analysts providing expert opinions.
Some officials remain highly captured.
But there is also good news: Other officials are now much more resistant and inclined to push back against the industry.
Well-informed nonpartisan outsiders are increasingly well organized and influential, particularly when they can work closely with pro-reform officials.
The latest indications from the Board of Governors of the US Federal Reserve – a crucial piece of this puzzle – are encouraging.
For example, new rules for foreign banks operating in the US essentially require them to fund themselves with as much equity as US banks.
But, on the eve of a new presidential campaign, the struggle over this important precinct of the American state remains far from over.
With the exception of the United Kingdom, the extreme free-market view gained less traction in Europe in recent decades than it did in the US; nonetheless, the challenge of implementing financial reforms in the eurozone is actually more difficult.
Governments regard domestic banks as important buyers of sovereign debt.
The banks argue that more effective regulation would limit credit and slow the pace of economic recovery.
As a result, the authorities in Germany and France (as well as Japan) have consistently resisted increasing capital requirements, despite widespread agreement that doing so is an essential part of effective re-regulation.
Their opposition has undermined international efforts to build a more resilient system – and it will likely hamper efforts to put the European economy on a sounder footing.
In other words, key European states remain just as captured by financial interests as the American state ever was.
And the big American banks now want to use the slow pace of change in Europe as a brake on US policy (for example, through the ongoing free-trade negotiations between the European Union and the US).
If the US is to escape the consequences of government capture by big Wall Street banks, it cannot wait for Europe to catch up on regulation, including capital requirements.
Taking Systemic Risk Seriously
WASHINGTON, DC – There are two leading views about the world’s financial system.
The first, heard mostly from executives at leading global banks and their allies, is that the system is safer than it has ever been.
According to this view, the events that led up to the global financial crisis that erupted in 2008 cannot happen again; the reform process has succeeded.
By contrast, a growing group of current and former officials continues to express concern about current and potential future risks in the United States, Europe, and globally.
US Treasury Secretary Jack Lew made such an argument in a recent congressional testimony, in the context of explaining why the Financial Stability Oversight Council (FSOC) should be allowed to consider whether any kind of firm or activity could pose a risk to the broader system.
And a striking new voice has joined the fray – Kara Stein, a commissioner at the Securities and Exchange Commission (SEC).
Stein delivered a far-reaching speech in June, in which she argued that systemic risk must become a more central responsibility for financial-market regulators.
Systemic risk refers to problems that spill across different kinds of firms and markets, often in unexpected ways and sometimes very quickly.
Perhaps the most prominent example from 2008 is the way that the failure of the investment bank Lehman Brothers risked brining about the imminent collapse of the insurer AIG, while also leading to intense pressure on money-market mutual funds.
Jeremy Stein (no relation to Kara Stein), until recently a governor of the US Federal Reserve System, has suggested that forced “fire sales” of assets are one important way that risks are transmitted.
When asset prices fall as a result of such selling, the solvency of other firms can be affected – even if the creditworthiness of the underlying asset has not really changed.
Bank regulators are starting to take these issues more seriously – an encouraging change from the 1990s and early 2000s, when the Fed was among the cheerleaders for unfettered financial innovation, without adequate consideration for systemic risk.
But securities regulators also need to start thinking along the same lines – and this is where Kara Stein wants them to go.
For example, the SEC has traditionally thought about adequate equity capital in a regulated business, primarily as the amount needed to help compensate customers in the event that individual firms fail.
But it would be much better, as Stein suggests, to think about equity capital from a systemic perspective – that is, how much loss-absorption is needed to prevent some form of a cascading confidence crisis.
Similarly, regulators should start to think about how and when the structure of particular financial transactions creates a potential systemic risk.
For example, short-term funding markets involve the supposedly safe business of borrowing against the collateral of tradable securities, which is a mainstay of how broker-dealers finance themselves.
Unfortunately, as we discovered during the financial crisis, such markets can become less liquid or even dry up completely when lenders start to fear unforeseen problems, either with borrowers or with the assets that they pledge as collateral.
The systemic risks in this case do not necessarily lie with an individual firm; rather, the issue is the way in which a particular market has come to operate.
Stein has some detailed and credible ideas about how to make such operations less risky for the system as a whole.
More broadly, however, her point is that we need the FSOC to be able to do its job – to look for and assess all kinds of potential systemic risks.
This needs to be done as a technical matter, not as part of the political process.
Not everyone at the SEC is as sensible as Stein.
There is also some friction among the various regulators in the US, and we surely need more coordination across national borders – including with Europe.
But the real danger is that powerful lobbies, working through members of Congress, are pushing back hard against the FSOC and its mandate.
No one likes scrutiny, of course.
And everyone in the asset-management industry seems to fear being put under the Fed’s microscope, which is what happens if the FSOC determines that a business is systemically important.
The nature of externalities means that financial firms do not care about the costs that they may create for others.
Big and small firms can create a wide variety of externalities, and these have to be examined carefully and dispassionately – exactly as Stein is recommending.
And yet, though assessing systemic risk is a technical matter, there is ultimately and inevitably a political question.
The FSOC can figure out where the risks are lurking, but will it be allowed to do its job?
If not, when the next crisis comes, those who opposed the FSOC’s proper functioning will bear the lion’s share of the responsibility.
Two Views of Finance
WASHINGTON, DC – The International Monetary Fund’s annual meetings will be held on October 10-12 in Washington DC, and the world’s financial sector is a central item on the agenda.
That will make for an interesting meeting, because two diametrically opposed views of the global financial system will face off against each other.
The first view is that “we have done a lot” since the global financial crisis erupted in 2008.
According to this view, which is put forward on a regular basis by some US Treasury officials and their European counterparts, there may be a bit more to do in terms of implementing reforms, but our banks and other financial firms have already become much safer.
The crisis of 2008 cannot soon be repeated.
The second view is that we are a long way from completing the far-reaching changes that we need.
Even worse, on at least one key point, the very language used among policymakers and leading journalists to describe finance is badly broken.
The issues are complex and nuances abound, but much of what divides the two sides in this debate comes down to this: Is it acceptable to say that banks “hold” capital?
This is an expression used with great regularity among top finance reporters (though not, for example, by Bloomberg/BusinessWeek, which has long been much more careful on this point). “Banks will need to hold more capital” is a common refrain, describing efforts by regulators – and, in the United States, some legislators – to require that financial institutions fund themselves with relatively more equity and less debt.
Using “hold” in this way is both completely conventional and deeply misleading. In any other common English language usage, “hold” is an active verb or a noun with a similar connotation.
You hold a baby in your arms. Please hold on tight to this rope.
He had a strong hold over his colleagues.
This matters, because “holding” capital has become a disguised or implicit metaphor.
The implication is that banks are being asked to sequester part of the asset side of their balance sheets – and this naturally leads to the perception that somehow “less is available” to lend, for example, to the real (non-financial) economy.
I encounter this view frequently, even in sophisticated circles – for example, on Capitol Hill.
But this interpretation is a complete – and sometimes deliberate – misunderstanding of bank capital and the policies being pursued.
(Anat Admati and Martin Hellwig have pointed out that there are many misperceptions in this area; but, of these, misconstruing capital is surely the most fundamental.)
Capital, in this context, is simply a synonym for equity, which is on the liability side of a bank’s (or anyone’s) balance sheet.
It refers to how a bank (or other firm) finances its activities, not to how it uses the funds that it has available.
Higher capital requirements mean, in essence, more equity funding and – by implication, under any sensible definition – relatively less debt for a given balance-sheet size.
This is an attractive and sensible policy, because today’s global banks have relatively small slivers of equity underpinning their operations.
The best comparable measures of bank capital are those found in the Global Capital Index produced by Thomas Hoenig, Vice Chairman of the Federal Deposit Insurance Corporation.
Hoenig looks at how much equity banks have in the simplest and most transparent measure (also known as leverage).
Six years after the world’s largest financial crisis, our megabanks have equity amounting to no more than 5% of their balance sheets.
(In fact, some banks have not much more than 3% equity.)
That means that 95% of their operations are financed by debt – and thus that only a small negative shock would be needed to push them toward insolvency.
Many measures are still needed to address this vulnerability, including the formalization of international cooperation to handle failing financial firms.
We need these firms to be able to fail without causing a global panic.
They should prepare meaningful “living wills,” to show how this will be possible; in fact, such plans are a requirement – still unimplemented – of the 2010 Dodd-Frank financial reforms in the US.
But there is a much simpler step that would make a big difference: A senior policymaker, such as a member of the Federal Reserve’s Board of Governors or the president of the New York Fed, should make a speech that explains clearly what bank capital is (and what it is not).
Journalists who ignore the guidance on terminology in this speech should be called – in private – by the Fed.
The Fed devotes considerable effort to ensuring that the public understands its monetary policy; officials should devote similar effort to communicating regulatory policy precisely.
And Hoenig’s index should be picked up and publicized by a major organization, such as the IMF.
We need not only more precise use of language, but also timely and accurate measurement of banks’ capital levels.
Washington Recaptured
WASHINGTON, DC – Two hundred years ago, Washington DC was captured by the British – who then proceeded to set fire to official buildings, including the White House, Treasury Department, and Congress.
Today, it is a domestic interest group – very large banks – that has captured Washington.
The costs are likely to be far higher than they were in 1814.
America’s largest bank holding companies receive an implicit government subsidy, because they are perceived to be “too big to fail.”
The authorities will not allow the biggest banks to default on their debts, through bankruptcy or in any other fashion, owing to the need to prevent the financial system from collapsing.
This doctrine became starkly apparent in late 2008 and early 2009; it remains in force today.
This effective exemption from the risk of bankruptcy means that anyone who lends to the largest half-dozen banks receives a government guarantee – free insurance against the risk of a catastrophe.
This allows these banks to obtain more debt financing on better terms (from their perspective).
In particular, their executives operate highly opaque firms, with risks effectively masked from outsiders and very little in the way of loss-absorbing shareholder equity.
Simply put, without their government backstop, these murky empires could not exist.
Democratic Senator Sherrod Brown of Ohio and Republican Senator David Vitter of Louisiana, along with some important colleagues, have long sought to phase out this implicit subsidy.
And independent analysts, such as Anat Admati of Stanford University, have explained all of the relevant details of how – and why – this should be done.
Those details – for example, in Admati’s recent testimony to the Senate subcommittee chaired by Brown – are not in doubt.
Thanks to Admati and her colleagues, we have a clear rendering of them in straightforward, non-technical language.
Unfortunately, the leading federal government officials remain in denial.
The most spectacular recent example of this is a report issued this summer by the Government Accountability Office.
The GAO had a simple task: At the request of Brown and Vitter, it was charged with assessing the scale and impact of the implicit guarantees provided by the government to large bank holding companies.
The GAO responded by producing a deeply muddled report that followed the financial industry’s suggestion of focusing almost exclusively on the difference in bond spreads (interest rates on various forms of financing) between the largest banks and some of their competitors.
Such spreads are only a small component of the funding advantage for big banks, and they are also highly cyclical – meaning that the advantage for the biggest banks manifests itself the most when markets are under pressure, as they were in the fall of 2008.
The GAO concluded that these spreads had indeed been high in 2008, and that now they have fallen.
But, as Admati pointed out in her testimony, if the authors had included 2006 and earlier years in their analysis, they would have seen low spreads using their own methodology – despite the obvious fact that massive implicit subsidies were already in place.
All that the GAO established is that the macroeconomy was previously in bad shape and it is now doing somewhat better – hardly a profound finding.
The GAO report also refers to the Dodd-Frank financial reforms of 2010, including the requirement that large bank holding companies create “living wills.”
The industry contends that the existence of these living wills – showing how a big bank’s collapse could be handled without causing global financial panic – means that “too big to fail” is over.
Sadly for the GAO, shortly after their report appeared, the Federal Reserve and the Federal Deposit Insurance Corporation rejected the most recent living wills as completely inadequate – meaning that there is still no road map for handling the failure of a very large bank.
Either such a firm would be allowed to fail, with dire consequences for global finance, or there would be some sort of backdoor bailout.
The GAO’s failure to see and state this problem clearly is a major disappointment.
As FDIC Vice Chairman Tom Hoenig put it, “Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support.”
To be fair, the GAO is not the only part of official Washington seemingly beguiled by large banks.
While the Fed now recognizes that living wills are inadequate, it has taken an extraordinarily long time to reach this rather obvious conclusion – and the Fed’s Board of Governors is still dragging its feet on forcing the banks to simplify their operations.
American forces performed disastrously at the Battle of Bladensburg in August 1814, allowing the British to capture and burn the capital.
Two hundred years later, we may well be witnessing that battle’s intellectual and policymaking analogue.
How to Become an Oligarch
WASHINGTON, DC – Let’s say that you would like to become one of the richest people on the planet, someone with enormous wealth and access to the top rung of political power.
This is not an unreasonable aspiration for any fresh college graduate in today’s winner-take-all economies.
But how realistic is it?
You could have a good idea for a new technology with potentially widespread demand.
With the right credentials and some luck, you could attract investment from a venture-capital fund.
Many such ventures do not pan out; but – particularly in the United States – such equity-financed rapid-growth companies are strongly encouraged.
Or you could issue a lot of debt.
This might seem like a strange idea in the immediate aftermath of a major debt-fueled financial crisis, and with many homeowners still underwater on their mortgages (they owe more than the house is worth, even if they can still afford the monthly payments).
In any case, to the extent that any recent American graduate thinks about debt, it is in the context of paying student loans.
But a new book, Private Equity at Work, by Eileen Appelbaum and Rosemary Batt, explains exactly how a few people have become immensely rich through the shrewd strategic use of debt.
The authors present a broad, detailed, and fair assessment of private equity – the business of investing in established companies through debt-financed purchases of controlling stakes.
(By contrast, venture capitalists support start-ups almost entirely through equity.)
And Appelbaum and Batt are careful to point out that many private-equity firms bring better management or other efficiency improvements to their portfolio companies.
But some of the largest funds – in fact, most of the brand names in the industry – use the clever trick of securing the debt they issue with collateral owned by the company they buy.
This is a little bit like buying a house.
A bank or mortgage originator lends you a large amount of money, which is secured by the house as collateral.
In other words, if you fail to make your payments on time, the lender can foreclose on the loan and take possession of the property – as millions of homeowners have experienced in the last decade.
And yet there is a major difference between how private equity operates and how a family buys a home.
Only a small part of the equity ownership acquired by any private equity fund comes from money provided by the partners who found and operate the fund.
Most of it is raised from outside investors.
(This would be like a family financing its down payment not from its own savings but from distant relatives about whom the family cares little.)
The fee structure in this overall arrangement is such that the people running the private-equity fund want to have as much debt as possible; this will increase the way upside returns are calculated, which in turn is the main driver of the compensation that the controlling “general” partners can receive.
More debt, of course, also means more risk; but this is not a sector focused primarily on risk-adjusted returns.
If the company cannot make its interest payments, its assets will need to be sold or its activities otherwise scaled back.
But, in contrast to the case of the struggling homeowner, not much of those downside costs typically fall on the general partner.
In addition, there are various other fees – charged to portfolio companies and to investors – that further encourage high levels of debt.
The US tax code allows interest payments to be deducted as a business expense; there is no equivalent allowance for payments to equity investors.
Appelbaum and Batt document in impressive detail the way in which top-tier private-equity funds have been able to earn high returns and ultimately enormous wealth for their founders, while not necessarily helping the companies in which they invest.
Interestingly, when returns are measured properly, the outside “limited” partners in private equity – including pension funds, insurance companies, and university endowments – also do not necessarily do so well.
However, before graduates flock to private equity, they should know that only the very big funds can use debt to skew returns for insiders in this way, primarily because only they can raise the capital needed to buy well-established companies that are rich in fixed assets, and thus in potential collateral.
Smaller private-equity funds typically buy into younger, smaller companies without such fixed assets, and the leverage in those deals is commensurately less.
Regulators have recently woken up to the incentives for excessive leverage in this sector – and to the risks that such leverage poses to lenders and the broader economy.
Not surprisingly, big private-equity firms seem determined to ignore or otherwise circumvent new restrictions.
As the policy debate on this issue heats up, one hopes that all participants will become better informed by reading Private Equity At Work.
If the new graduate in your life has the connections to join a very large brand-name private-equity fund, the path to immense wealth, political influence, or even power becomes much clearer.
Without such initial connections, however, it is very unlikely that he or she will become an oligarch.
Big Banks’ Shadow Dance
WASHINGTON, DC – One of the great myths propagated by very large financial institutions is that, if they were to become effectively regulated again, many investors and financial transactions would flee to “shadow banks.”
That sounds bad.
Anything that lurks in shadows must have nasty intent, potentially dangerous consequences, or both.
And its very shadowiness implies that nothing can be done about it – whatever is there must be beyond the reach of regulation or effective supervision.
So perhaps financial-system risk would increase, not decrease, if we regulated very large non-shadow banks properly.
So much for scary fairytales.
In reality, there are three kinds of “shadow” activities, all of which are obvious, operate in plain sight, and could be controlled in a straightforward and responsible fashion.
Whether we have the political will to implement effective controls is, as always, another question – in large part because the big banks are very powerful and they would like the shadows to remain as shadowy as they are now.
The first set of shadow activities includes those conducted by the banks themselves, for example, as a way to reduce the amount of equity funding that they need.
The people who run big banks like leverage: More borrowed money (and less of their own) means that they get more upside, in the sense of a higher return on capital, unadjusted for risk.
When things go against them, it also means more losses.
But that is why it is good to be big – you can get more downside protection from the Federal Reserve or other official sources.
For example, Citigroup created so-called “special-purpose vehicles” to invest in mortgage-related securities prior to 2007.
They funded this activity with a lot of short-term debt and a wafer-thin cushion of equity.
When the market boomed, such schemes’ authors were heralded as geniuses.
But when house prices fell and mortgage-backed securities (and derivatives based on them) became illiquid, Citigroup took the liabilities back onto its balance sheet – and then needed to be rescued through massive, repeated bailouts.
These shadow activities were the work of Citigroup and other large complex financial institutions that are subject to regulation.
Their boom-and-bust character reflected nothing more than the relevant regulators’ failure – or refusal – to understand the risks involved.
The regulators were “captured” – meaning that they identified so closely with the intellectual perspective and worldview of large complex financial institutions that they were persuaded to allow something that was actually very dangerous.
Unfortunately, despite all we have been through in the past five years, these big banks’ shadows survive in various forms today – and regulators do not seem sufficiently inclined to turn on the lights.
The second set of shadow activities involves banking-type activities that really are conducted outside banks.
The most prominent example is money-market mutual funds.
These entities take money from investors and buy various kinds of assets, some of which may be risky – like short-maturity corporate debt.
The problem is that these funds create the impression that anything invested with them is just as safe as a deposit at an insured bank.
You can write checks on a money-market account, and your monthly statement shows it to have a stable value – just like your bank account.
In fact, the value of assets held by such funds fluctuates, and it is only an accounting convention – permitted by regulators – that allows them to report a stable value.
As a result, when the possibility arises that a money-market fund will be unable to pay investors in full – as happened after the collapse of Lehman Brothers in September 2008 – all hell breaks loose.
There were similar fears recently when it became known that US-based money-market funds had lent heavily to European banks.
And some leading US banks also rely on money-market funding; here, too, the “shadows” and the banks have aligned interests.
There is a simple fix to this problem – require money-market funds to show the actual floating value of their assets, so that everyone understands that it is not a fixed number.
Some US regulators are pushing in this direction.
Unfortunately, the money-market funds – and their friends in the big banks – are pushing back hard.
The third set of shadow activities includes those that may yet emerge.
We should not underestimate the creativity of financiers seeking to escape capital requirements and leverage up.
A brilliant book by Anat Admati and Martin Hellwig, The Bankers’ New Clothes, demonstrates the pervasiveness of this problem and highlights its potentially devastating consequences for the economy.
The right approach is to search for and prevent excessive systemic risk wherever it manifests itself.
The US authorities now have a legal mandate to do this.
But will they be able to stand up to the powerful lobby of big banks and their shadowy allies?
The Importance of Being Boring
WASHINGTON, DC – The International Monetary Fund is an immensely useful organization, able to deliver substantial amounts of financial and technical assistance at short notice to almost any place in the world.
It also has the great advantage of almost always being perceived as incredibly boring.
Unfortunately for the IMF, it now needs a slightly higher public profile to convince the US Congress to agree to some important reforms.
The Ukrainian crisis may prove helpful, though that appears less likely now – which may be a good thing to the extent that one unintended consequence could be a loan to Ukraine that is larger than it really needs.
In the realm of international economics, being perceived as boring confers power to the extent that it allows major decisions to be made without a great deal of external scrutiny.
From 1918 to 1939, international economic cooperation was hard to come by – in large part because all of the attempted deals were put together at high-profile international conferences.
Following the creation of the IMF in 1944, many of the same decisions became routine, a lot less interesting, and much easier to implement.
The IMF rarely makes front-page headlines in the United States or other big countries, except when there is a racy personal dimension.
The last time that many read a news story about the Fund may have been when then-Managing Director Dominique Strauss Kahn was forced out in May 2011, following accusations that he sexually assaulted an employee in a New York hotel.
Since then, his successor, Christine Lagarde, has helped to restore the Fund’s reputation – and to return coverage of its programs and activities to newspapers’ dry and unemotional business sections.
(When I worked at the IMF in the 2000’s, page-three coverage of our events by leading newspapers was typically viewed as preferable to top billing.)
Of course, in countries receiving assistance – such as Greece in the last few years – the IMF excites great passion.
But in the halls of the US Congress, few people pay any attention.
In the highly charged partisan atmosphere of Washington, DC, this is without question almost always an advantage.
Imagine if the disbursement of all assistance to countries in trouble required Congressional approval, let alone spending from the US budget.
Nothing good would ever happen – and certainly not for the US.
The IMF is founded on the premise that it represents cooperation between all of the countries of the world.
The reality is that it stands for and operationalizes US power, in cooperation with America’s closest allies.
Anyone who doubts that should review a recent letter orchestrated by the Bretton Woods Committee, addressed to Congressional leaders on behalf of an impressive array of former Republican and Democratic cabinet secretaries.
The first paragraph reads, “The IMF has always been a valuable tool for advancing US national interests globally.”
The US does not dictate what happens at the IMF, but it does have a disproportionate influence.
Given the Fund’s origins in helping to rebuild Europe after World War II, European countries are also very well represented on its executive board and in terms of ownership shares (and thus voting weight on important decisions).
One major goal in recent decades has been to shift representation at the IMF somewhat away from Europe and toward the world’s emerging markets.
These countries’ global economic and financial significance has grown rapidly, yet they have relatively little representation at the Fund.
A package of reforms has been agreed.
Like most products of international negotiations, the agreement is not perfect; but it does move the ball forward.
(For the technical details, I recommend a recent paper by Edwin M. Truman, my colleague at the Peterson Institute for International Economics.)
These reforms need to be agreed, in legislative form, by the US Congress before they can take effect.
For whatever reason, President Barack Obama’s administration did not push this item hard in 2013 and early 2014 – and the agenda of encouraging further IMF reform has therefore languished.
The Obama administration proposed to tie IMF reform to the presumably imminent approval by Congress of funding for Ukraine.
This is sensible legislative tactics but not appealing as an economic strategy.
In effect, the administration tried to make the IMF more interesting, particularly to encourage Republicans in the House of Representatives to support the reforms.
The latest indications are that the Republicans will not be so enticed.
But the bigger problem is that Ukraine does not really need a massive loan from the IMF.
What Ukraine needs is a sharp reduction in corruption, as well as real legitimacy (through the ballot box) for people who want to rein in the influence of oligarchs – a group that has sapped the economy through plunder and incompetence over the past two decades.
IMF reform is sensible and should be supported.
The Europeans do not need their current level of representation, and the positions and voices of middle- and lower-income countries should be strengthened.
The Obama administration needs to make this case more directly and forcefully to Congress.
Sinai’s Second-String Security
SHARM EL-SHEIKH – In the wake of an attack that killed 16 security officers in the Sinai Peninsula in August, the Egyptian military has ratcheted up the pressure against jihadis there.
Generals have promised an extended campaign to extinguish the terrorist threat, bringing in heavy armor and firing missiles at training camps to back up their pledge.
But, if past performance is indicative of future returns, the offensive is likely to be a fleeting affair.
The armed forces have never shown much interest in stabilizing Sinai, and previous operations to clear out jihadis have not prevented them from returning.
Egyptians blame the strictures of the 1979 Egyptian-Israeli peace treaty for their military’s inability to police Sinai.
The bilateral accord stipulates that Egypt can station only 22,000 troops in the western part of the peninsula, known as Zone A. In the eastern section bordering Israel, known as Zone C, the Egyptian presence is restricted to Central Security Forces personnel.
Composed of poorly trained cadets, the CSF is limited to carrying out “normal police functions,” according to the agreement’s security annex.
Jihadis have exploited the security void created by last year’s revolution to reinforce their presence in Sinai.
As the threat has mounted, Israel has allowed Egypt to increase troop levels in the peninsula beyond those stipulated in the peace accords.
But Egypt has not taken advantage of the offer.
Last August, the Israelis permitted an additional seven battalions and 20 tanks in Zone C. But the Egyptian armed forces never brought in the full number of additional troops, and did not even bother to transport the tanks across the Suez Canal.
Egypt’s approach toward Sinai troop deployments reflects its traditional neglect of the peninsula.
Historically, it has deployed only 70-80% of the 22,000 soldiers that the treaty allows in Zone A. And the military has never established a regional command in Sinai, preferring to allow units temporarily stationed there to report to their superiors scattered around Cairo and its environs.
Egypt’s new Islamist leaders may want to restore “full sovereignty” over the peninsula, as President Mohamed Morsi’s legal adviser, Mohamed Fouad Gadalla, recently noted.
Such saber-rattling comments vis-à-vis Israel are currently popular in the country.
But the generals, who have the final say on military matters, are likely to preserve the status quo.
Egypt’s indifference toward Sinai stems from its view of Israel.
When the guns fell silent following the two countries’ 1973 war, Egypt stopped viewing Israel as a threat.
In the cease-fire talks that followed, the two sides made so much progress that US Secretary of State Henry Kissinger, fearing that he would have nothing to negotiate when he arrived in the region weeks later, asked the Israelis to halt them.
Since then, Egypt has fought a war with Libya and sporadically clashed with Sudan.
But not a shot has been fired across Sinai.
Employing CSF troops in the sensitive border region where jihadis have established their strongholds is similarly indicative of Sinai’s insignificance in Egyptian military thought.
Created to absorb army rejects who must still complete their mandatory national service, the CSF is a lower-rung security organization in a country whose armed forces are subpar to begin with.
Its members are uneducated rural men, some of whom are illiterate.
Their most crucial tasks include guarding banks and hotels.
These forces are poorly trained and badly equipped to take on fighters with experience in international jihadist campaigns.
And the CSF’s track record is dismal at best.
When it was deployed as part of the battle against the Islamist uprising of the 1990’s, insurgents penetrated a number of units.
The government’s counter-terrorism policies also work against an enhanced military role in quashing the Sinai jihadis.
Historically, Egypt has used its intelligence services, supplemented by the police and the CSF, to fight Islamist militants.
As a result, the army has neither the training nor the experience to grapple with Sinai insurgents.
The military’s recent offensive reflects this, relying on air strikes that imperiled civilians rather than a ground offensive that would have been more precise in achieving its objectives.
And dropping bombs instead of arresting jihadis prevented the military from gaining valuable intelligence about future attacks and transnational ties to other organizations and networks.
But, beyond such theoretical objectives, lay the operation’s practical realities.
Sinai residents claim that there were no funerals following the missile strikes.
The lack of evidence of casualties has left many Egyptian analysts believing that the military’s aim was not to target jihadis, but rather to silence its domestic and international critics.
If so, it is a tactic that can work only until the next attack.
And that will only lead to more civilian and military casualties in Egypt’s neglected war.
Turkey’s Iran Strategy
ISTANBUL – Following Iranian Foreign Minister Javad Zarif’s recent visit to the Gulf states, the Islamic Republic’s charm offensive is set to continue with President Hassan Rouhani’s trip to Turkey early next month.
Unlike the majority of Iran’s Arab neighbors, Turkey unequivocally welcomed the interim nuclear deal concluded last month between Iran and the P5+1 (the United Nations Security Council’s five permanent members and Germany).
But Turkish policymakers are keenly aware that the agreement may upend the Middle East’s fragile balance of power.
From Turkey’s perspective, the nuclear deal, if successfully implemented and made permanent after six months, is set to eliminate a major security concern.
Prime Minister Recep Tayyip Erdoğan’s government does not want to be faced with a nuclear Iran, fearing the emergence of an asymmetric power relationship with the Islamic Republic after centuries of balanced ties.
But Turkey also did not want a military intervention in Iran, led by the United States.
It was believed that a military strike would create even more problems in terms of regional stability and security.
That is why Turkish policymakers have consistently championed a diplomatic solution to the Iranian conundrum, which is what they got with the latest deal.
There are other reasons why Turkish officials have welcomed the interim agreement so warmly.
First, they interpret the deal as vindication of their ill-fated effort in May 2010 (together with Brazil) to reach an agreement with Iran on the disposition of Iran’s nuclear fuel.
Turkish authorities continue to highlight that earlier tripartite agreement with Iran.
The foreign ministry, for example, released a statement noting that, “The agreement…constitutes the first concrete positive development concerning Iran’s nuclear program since the Tehran Declaration of 2010.”
Turkey is also satisfied that the deal does not weaken its position on sovereign rights under the Nuclear Non-Proliferation Treaty.
Turkey has consistently defended the interpretation that states have the right to establish domestic uranium-enrichment programs under the NPT, provided that they comply with their treaty commitments.
Even at the peak of diplomatic tensions with Iran, Turkey refrained from adopting America’s more maximalist position, which challenged the validity of Iran’s right to enrich uranium.
So the tacit and conditional acceptance of this right is a satisfactory outcome for Turkey.
Though Turkey currently has no plans to develop a fuel cycle of its own, its ambitious agenda for developing nuclear power has made policymakers intent on safeguarding the rights recognized by the NPT, including the right to enrich uranium.
There are also significant economic considerations for Turkey, which relies on Iran for a substantial share of its energy imports.
Equally important, as a neighboring country, Iran has been a traditional trading partner – a relationship worth more than $15 billion per year.
As a result, Turkey’s export potential has been negatively affected by the rising stringency of the sanctions regime against Iran, with trade losses estimated at $6 billion for the first nine months of 2013.
The gradual easing of the sanctions is expected to benefit Turkey’s export industries, which hope to satisfy pent-up Iranian demand for consumer and investment goods.
Finally, in contrast to Arab states like Saudi Arabia, Turkey is generally comfortable with the deal’s geopolitical ramifications.
The improvement of Iran’s relationship with the West and the easing of diplomatic pressure on the Islamic Republic is not a major concern.
But, for the Gulf states – and also possibly for Israel – this scenario is viewed as opening the door to stronger Iranian influence throughout the region.
These countries believe that, following the interim agreement, the US will fail to demonstrate sufficiently strong resolve to deter Iran from seeking regional hegemony.
In that case, tensions between Saudi Arabia and Iran will become more acute in the years ahead, emerging as the main destabilizing factor in the region.
It is in this context that Turkey’s role as a secular power, one capable of transcending the sectarian divide, will become more important than ever.
Turkish policymakers would be well advised to seize this opportunity to consolidate the country’s effectiveness as a regional actor, one that is uniquely positioned to stem the danger of a widening – and potentially extremely dangerous – rift.
Erdoğan’s Pyrrhic Victory
ISTANBUL – Turkey’s beleaguered Prime Minister Recep Tayyip Erdoğan and his Justice and Development Party (AKP) have emerged victorious from this week’s local elections.
Still, the AKP’s triumph is unlikely to ameliorate the country’s internal conflicts, much less revive its tarnished international standing.
The local elections were widely seen as a referendum on Erdoğan.
The AKP received 44% of the national vote and now controls 49 of Turkey’s 81 metropolitan municipalities, including Istanbul and the capital, Ankara.
The main opposition force, the center-left Republican People’s Party (CHP), received 26% and won only 13 municipalities.
The outcome can be seen as a vindication of Erdoğan’s strategy of using political polarization to consolidate his support and counter the challenge to his rule posed by followers of his former ally, the US-based Islamic preacher Fethullah Gülen.
With the AKP’s initial support, the Gülen movement gradually infiltrated state institutions, particularly the judiciary and law enforcement, until the alliance eventually ended in an acrimonious split over the distribution of power within Turkey.
The end result was a dirty war of graft allegations spread through social media, apparently by Gülen’s followers primarily.
In response, the government has branded its opponents as enemies, and sought to promulgate new laws undermining the independence of the judiciary and restricting freedom of expression – including shutdowns of Twitter and YouTube.
Erdoğan’s strategy sought to complement this exercise in damage limitation with a demonstration of its popular legitimacy.
With the AKP’s overwhelming triumph in the local elections, Erdoğan can now justifiably claim that the Turkish electorate backs his approach, including his government’s suspension of the rule of law in order to obstruct corruption investigations that it views as a judicial coup attempted by Gülen’s followers.
Yet the AKP’s electoral victory heralds two specific dangers for the future of Turkey’s democracy.
The first is the persistence of intense political polarization in the run-up to the presidential election in August and the parliamentary election in the first half of 2015.
In Turkey, polarization does not have the same political costs as it does elsewhere: Given a weak system of checks and balances, the Turkish executive still has ample room to manage the state’s affairs.
And Erdoğan’s recent victory will embolden him to continue his polarizing politics as the basis of a presidential run.
The other danger is that of growing alienation from the West.
With a renewed popular mandate, the government is likely to begin prosecuting Gülenists for alleged criminal behavior.
But the creation of a wider siege mentality to boost domestic support also requires the invention of external co-conspirators – global financial markets, the international media, or even Turkey’s NATO allies.
Such allegations have been a part of the government’s conspiratorial rhetoric since last summer’s protests, and the authorities dismissed the recent corruption accusations against Erdoğan in the same way.
Turkey’s international standing has thus suffered enormously from Erdoğan’s strategy of internal polarization.
Long gone are the days when the prospect of accession to the European Union sustained a powerful dynamic of democratic reform.
With hope of EU membership fading, reform momentum has been lost, and the European Commission is expected to issue a sharply critical progress report in October.
The bilateral relationship with the United States is also under strain.
President Barack Obama and Erdoğan rarely speak with one another anymore, whereas Obama once considered Erdoğan among his favorite world leaders.
Turkey has also lost several regional allies, particularly some of the Gulf monarchies, which are angry at the Erdoğan government’s unconditional support for the Muslim Brotherhood in Egypt.
Turkey’s much-vaunted soft-power diplomacy and neighborhood policy now lie in tatters.
Yet Turkey remains a large and important regional power.
With his popularity reaffirmed, Erdoğan could still move in a different direction.
Aware of the dangers of extreme polarization and reassured by the level of support obtained by the AKP in the local elections, Erdoğan may opt to lower the political temperature at home in the hope of repairing Turkey’s frayed relations abroad.
How Erdoğan behaves will not only determine the intensity of domestic political conflict; it will also greatly affect Turkey’s potential to regain the regional clout that it once enjoyed.
If Erdoğan believes that a higher level of antagonism is necessary to retain power, he may remain oblivious to the harm done to Turkey’s international standing.
Singapore: The Myth of the Miracle
Single Financial Regulators Are the Future
Why have some countries chosen to create a single national financial services regulator? Four reasons predominate:
First, market developments - say, the increasing number of financial conglomerates and the blurring of boundaries between financial products - make sector-based regulation increasingly less viable.
Most countries see cross-sector mergers and acquisitions in the financial services industry; and financial services firms expand through internal growth into new business sectors.
Indeed, groups that include some combination of banking, insurance, securities and fund management activities are increasingly common.
Moreover, complex products that enable firms to unbundle, repackage and trade risks in ways that blur the boundaries between formerly distinct sectors are introduced consistently.
The UK was not the first country to favor a single regulator capable of regulating these conglomerates as groups, and understanding the cross-sector nature of their business.
Norway, Denmark and Sweden led the way here, but many others soon followed, or announced an intention to do so.
Second, economies of scale and scope are available to an integrated regulator.
The UK's Financial Services Authority (rather the many regulated firms who meet its costs) benefits from the economies of scale that arise from the move to a single set of central support services; unified management; and a unified approach to standard_setting, authorization, supervision, enforcement, consumer education and tackling financial crime.
This is reflected in the FSA costing less, in real terms, than the sum of its individual predecessor regulatory bodies.
Economies of scope arise because a single regulator can tackle cross_sector issues more efficiently and effectively than a multiplicity of regulators.
Consistent and coherent standards can be set for regulated firms, differentiating between sectors only when it is appropriate to do so, and so reducing incentives for regulatory arbitrage.
Prudence and conduct of business regulation can be brought together, because both depend on the quality of a firm's senior management and high-level systems and controls.
A risk-based approach supervising individual firms can be adopted by a single regulator, with resources allocated not only across firms but also across sectors on the basis of the likelihood of problems arising and of the impact on consumers and on market confidence if problems emerge.
A single regulator can assess the real and potential impact, on all sectors, of industry and market-wide issues such as turbulence in markets and economies, the development of e-commerce, the shift to low inflation, the implications of demographic changes, and risk transfers between banks and insurance firms.
Third, there are benefits in setting single, clear and consistent objectives and responsibilities, and to resolving trade_offs among these within a single agency.
The FSA's four statutory objectives are to maintain confidence in the financial system; to promote public understanding of the financial system; to secure the appropriate degree of protection for consumers; and to reduce as far as possible the chances of a financial services firm being used for criminal purposes.
In pursuing these objectives, the FSA pays keen attention to seven ``principles of good regulation:''
· the efficient, economic use of its resources;
· the responsibilities of those who manage the affairs of authorized persons;
· the principle that a burden or restriction imposed on a regulated firm should be proportionate to the benefits;
· the desirability of facilitation of innovation in connection with regulated activities;
· the international character of financial services and markets and the desirability of maintaining the UK's competitive position;
· the need to minimize adverse effects on competition from the FSA's discharge of its general functions;
· the desirability of facilitating competition between firms regulated by the FSA.
Fourth, there are advantages for the regulatory regime, for the costs of regulation, and in preventing regulatory failures in making a single regulator clearly accountable against its statutory objectives.
The buck cannot be passed from one regulator to another if a regulatory failure occurs.
Although independent of government, the FSA can be called to account by government and parliament, and recognises the interests of all of its stakeholders.
It must publish an annual report describing how it has met its statutory objectives and carried out its functions.
It must also consult publicly - including a cost benefit analysis - on proposed rules and regulatory guidance before issuing them; and must take account of the views of both a consumer panel and a practitioner panel established on a statutory basis.
What does the approach of a single regulator imply for innovation and new ideas?
The experience here suggests that the outcome is positive.
Internally, bringing together different regulatory agencies to create a new integrated approach enhances innovation, because rather than simply follow the old practices of any predecessor agency, the best ideas are chosen.
As new issues arise the need and the ability to adopt a cross-sector perspective generates novel regulatory responses.
Meanwhile, constant and considerable innovation in the firms and markets the FSA regulates; the obligation on the FSA to be an open, transparent and consultative regulator, and to pay careful attention to the impact of its actions on competition and innovation; and participation in international discussions and negotiations all contribute to the FSA's development of a new, efficient, risk-based and innovative regulatory regime.
The importance of giving clear incentives, so that regulators are innovative and facilitate innovation in financial services, must not be underestimated.
Regulators must be held to account for doing so.
Sinking the Sunshine Policy
Last week's naval battle between North and South Korean warships sank more than a South Korean frigate.
It also probably sank the "Sunshine Policy" of rapprochement with North Korea that once appeared to be the crowning achievement of Kim Dae Jung's presidency in South Korea.
Two years have passed since Kim Dae Jung and North Korea's Chairman Kim Jong Il met in Pyongyang, the North's impoverished capital.
Since then, Kim Jong Il has failed to make his promised return visit to Seoul.
That failure suggests that North Korea's fundamental hostility to the South remains unabated.
Why?
We can only speculate that North Korea's military is resisting any real change because the regime's survival depends on its "military first" politics.
So long as North Korea's military remains the guardian of the regime by advocating this doctrine, it will be impossible for Kim Jong Il to change his country's ruling domestic and foreign policies.
Many explanations for the North's aggressive behavior are in contention in the South.
Perhaps North Korea wanted to disrupt the World Cup tournament that South Korea was co-hosting with Japan and in which South Korea's national team had achieved stunning success.
More plausible is the idea that the North wanted to deliver a message: it does not want to be ignored by the South, the US, China, or any other concerned party.
Whatever its motivations, one thing is clear: North Korea is not going to help President Kim sustain the "Sunshine Policy" as the primary legacy of his government after he leaves office in February 2003.
North Korea's relations with America are also at a new low water mark.
Just before the naval skirmish broke out, the Bush administration sent Assistant Secretary of State James Kelly to Pyongyang to probe North Korea on missile and nuclear weapon proliferation and conventional forces.
Nothing came of that visit.
So the trend is worrying.
In February, President Bush declared the North a member of the "axis of evil" and in March the Pentagon singled North Korea as a possible target for a preemptive nuclear strike should it invade South Korea.
In April the Bush administration refused to certify that North Korea is abiding by the 1994 agreement to freeze its nuclear weapons program.
Now America is asking that North Korea accept International Atomic Energy Agency inspection on its nuclear sites.
The US wants to find out whether the North is hiding nuclear weapon materials before South Korean workers begin to create the foundations for the two light water nuclear reactors promised in that 1994 agreement.
North Korea must also soon declare whether or not it will continue its declared moratorium on testing ballistic missile in early 2003.
Unlike the Clinton administration, which saw engagement with North Korea as a goal in itself, the Bush administration is focused on preventing North Korean missiles sales to "rogue" regimes like Iran, ensuring verified compliance with international obligation on nuclear safeguards, and reducing conventional military forces along the border with South Korea.
So America is committed to what can only be called "conditional engagement" with the North as part of its global campaign against international terrorism and weapons of mass destruction.
The "Sunshine Policy" is on the defensive in South Korean domestic politics, too.
The unilateral and persistent way in which President Kim and his associates pursued their opening to the North caused enormous divisiveness on an issue over which the country was usually very united.
Opponents of Mr. Kim's policy point out that the South keeps making concessions without gaining anything from the North in return.
During last month's local government campaign, indeed, Mr. Lee Hoi-Chang, the opposition Grand National Party Candidate for president, repeatedly emphasized the principle of reciprocity and vowed to abrogate the "Kim/Kim" summit agreement if Kim Jong Il's government continued to insist that the South accept the North's terms for the constitutional construction of a reunified Korea.
President Kim Dae Jung's opponents romped to victory in a landslide that suggests the unpopularity of his policies.
There is little doubt that the naval confrontation in which four South Korean sailors were killed further damaged President Kim's credibility on policy toward the North.
President Kim himself demanded an apology, but the North only accused South Korea of initiating an armed provocation against it.
Unless the North reverses this position, President Kim's efforts to stick to the "Sunshine Policy" will look increasingly weak in the eyes of South Korea's public.
Such a perception will make it hard for his successor - whoever he is - to revitalize the "Sunshine Policy" even if he wants to do so.
Despite its seeming slow death, the "Sunshine Policy" did deliver benefits.
Primarily, it opened North Korea to South Korea and the world.
As a result, North Korea has begun to enter the international system and its dependence on South Korea, the US, China and other donors has deepened.
But it is also true that this opening failed to change North Korea's behavior in any fundamental way.
Sink or Swim in the Philippines
MANILA – The tragedy of the sinking of the Princess of the Stars ferry in the waters off Romblon in the Philippines – with hundreds of corpses still believed trapped inside – is proof that the country is prone not only to natural calamities, but to manmade ones as well.
The decision to allow the vessel to sail directly into the path of Typhoon Frank resulted from plain and simple incompetence.
Worse still, the same shipping line has been involved in at least three other tragedies at sea in the past 11 years, including the “Dona Paz” disaster in 1987, which killed more than 4,000 people and was described as the world’s worst maritime disaster in peace time.
That record adds even more ignominy to the sense of loss suffered by the loved ones of those who died or remain missing.
If only Philippine authorities could learn the lessons of past tragedies, this latest one might well have been averted.
Philippine law, like that of most jurisdictions worldwide, classifies the business of transportation as a public convenience.
It is undertaken not as an ordinary business under traditional conditions of laissez-faire, but as one vested with the public interest.
Of prime concern is the fact that sea travel has been and will always be perilous.
For a thousand years, states have regulated maritime transportation for the purpose of promoting safety at sea.
In theory, the Philippine authorities should have exercised their regulatory oversight with far more diligence.
Instead, Manila port officials and the Philippine coast guard permitted the Princess of the Stars to set sail, despite clear warnings by the weather bureau that the ship was headed for the eye of the typhoon.
So the problem is not one of regulation, but of the will to enforce it.
Moreover, it is more than strange that a company with so dismal a safety record has continued to operate.
Surely, the fact that the Philippines is notorious for being one of the world’s most corrupt countries explains why non-seaworthy vessels with incompetent crews continue to ply their routes.
Quite simply, it is a root failure of the rule of law in the Philippines that is to blame for the plight of the victims.
Part of the problem lies in the fact that Philippine law places a very low value on human life.
Indeed, in Philippine courts, the cost of indemnity for a human life is valued at only $2,500.
In the country’s statute books, the value is even lower – just $100.
This valuation may not constitute the full amount of damages that the heirs of those who have died as a result of a crime or a breach of contract may eventually recover.
Nevertheless, the refusal of Philippine courts to award damages beyond actual damages and nominal moral damages has made loss of life affordable to those who intend to be derelict in their contractual obligations.
Of course, exemplary and punitive damages in order to discourage conduct inimical to society do exist in the statute books.
But Philippine courts have refused to resort to the use of such damage awards as a tool for controlling behavior, particularly of businessmen.
Recent attempts by Filipino lawyers to prosecute civil claims for environmental tort and human rights abuses before American courts demonstrate just how desperate Filipino claimants are to seek redress against those who have acted negligently or with impunity.
All of this explains why Sulpicio Lines, the owner of the Princess of the Stars, has remained in commercial operations despite its many lapses.
Simply put, the Philippine courts have not made it sufficiently costly for it to maintain non-seaworthy vessels.
Worse, litigation in the Philippines takes at least five years on average to be concluded.
Even those Filipinos who can afford to litigate have to wait; a claimant in the Dona Paz tragedy, for example, waited 19 years before recovering $250,000 in damages.
As a general rule, though, Filipino ferry and ship passengers are poor and cannot afford the services of lawyers or the high filing fees demanded by the courts.
As a consequence, they settle for the crumbs that are eventually offered by the ship owners after a disaster.
This lawless legality is all too common in a country where 85% of people live in abject poverty.
To many of them, sea travel remains the only viable means of transportation.
Non-seaworthy vessels notwithstanding, their only alternative would be to swim – or, like those on board the Princess of the Stars, to sink.
The Sino-American Codependency Trap
NEW HAVEN – Increasingly reliant on each other for sustainable economic growth, the United States and China have fallen into a classic codependency trap, bristling at changes in the rules of engagement.
The symptoms of this insidious pathology were on clear display during Chinese President Xi Jinping’s recent visit to America.
Little was accomplished, and the path ahead remains treacherous.
Codependency between America and China was born in the late 1970s, when the US was in the grips of wrenching stagflation, and the Chinese economy was in shambles following the Cultural Revolution.
Both countries needed new recipes for revival and growth, and turned to each other in a marriage of convenience.
China provided cheap goods that enabled income-constrained American consumers to make ends meet, and the US provided the external demand that underpinned Deng Xiaoping’s export-led growth strategy.
Over the years, this arrangement morphed into a deeper relationship.
Lacking in saving and wanting to grow, the US relied increasingly on China’s vast reservoir of surplus saving to make ends meet.
Anchoring its currency to the dollar, the Chinese built up a huge stake in US Treasuries, which helped America fund record budget deficits.
America provided China with both stability and growth anchors.
China enabled the US to sidestep the mounting perils of subpar saving, reckless fiscal policy, and weak household income growth.
But economic codependency is as unstable as human codependency.
One partner eventually changes, while the other is left hanging, feeling scorned.
China is now changing, and America doesn’t like it.
Not only is China rebalancing its economic model from exports to consumption; it is also redefining its national character.
It has adapted a more muscular foreign policy in the South China Sea, embraced the nationalistic longing of rejuvenation, framed by what Xi calls the “China Dream.”
And it has started to reshape the international financial architecture with new institutions such as the Asian Infrastructure Investment Bank, the New Development Bank, and the Silk Road Fund.
The US response has put China on edge, particularly America’s so-called “Asian pivot,” or “strategic rebalancing,” with its subtext of containing China.
The US recognizes the need to increase China’s role in the existing Bretton Woods institutions (the International Monetary Fund and the World Bank); but when it fails to deliver, it chafes at Chinese institution building.
And while the US has long urged China to tilt its growth model toward private consumption, it is uncomfortable with many of the implications of this shift.
In large part, America’s unease reflects a failure to address its core economic problems – mainly a lack of domestic saving.
The net national saving rate (businesses, households, and the government combined) stood at just 2.9% of national income in mid-2015, less than half the 6.3% average over the final three decades of the twentieth century.
As China shifts from surplus saving to saving absorption – using its surpluses to build a safety net for the Chinese people rather than subsidize the savings of Americans – a saving-short US will find it tough to fill the void.
America’s monetary policy reveals another layer of codependency.
By citing international concerns – especially China’s slowing growth – as a major reason for deferring its long-awaited interest-rate hike in September, the Federal Reserve has left little doubt concerning the key role that China plays in sustaining a still-fragile US recovery.
And with good reason: US exports, which accounted for a record 13.7% of GDP in the fourth quarter of 2013, up from 10.6% in the first quarter of 2009, slipped back to 12.7% of GDP in mid-2015.
With domestic demand still weak – real consumption has grown at an anemic 1.4% pace over the past 7.5 years – the US needs export growth more than ever.
So the outlook for China, America’s third-largest and most rapidly growing major export market, is crucial for a Fed that has failed to gain much traction from its unconventional post-crisis monetary policies.
This aspect of codependency is global in scope.
Over the past decade, China has accounted for an average of 1.6 percentage points of world GDP growth per year – more than double the combined 0.7-percentage-point contribution of the so-called advanced economies.
Even if its GDP growth slows to 6.8% this year, China would account for slightly more growth than is likely from the advanced world.
Little wonder that China’s growth prospects are such a big deal for policymakers worldwide.
Speaking in Seattle on September 22, Xi stressed the need for both the US and China to deepen their “mutual understanding of strategic intentions” as a key objective for the bilateral relationship.
And yet his deliberations with US President Barack Obama were lacking in precisely that respect.
The agenda was shaped more by disconnected issues – cyber security, climate change, and market access – rather than by an appreciation of the strategic challenges that both countries face alone and together.
Moreover, there was little sign of meaningful progress even on the issues that Xi and Obama discussed.
Both sides hailed a newfound commitment to high-level exchanges on cyber crime; but the US is about to impose sanctions on Chinese companies that have benefited from egregious hacking.
Likewise, they stressed yet again the need for a “high standard” bilateral investment treaty; but there was little indication of serious movement on the industries that would be shielded from such an agreement (the “negative list.”).
To its credit, China did announce an important shift in environmental policy – a nationwide cap-and-trade system for greenhouse-gas emissions, to go into effect in 2017.
But, without similar actions by the US, China’s move hardly tempers the perils of global climate change.
Trapped in a web of codependency, the US-China relationship has become fraught with friction and finger pointing.
In human behavior, the endgame of this pathology is usually a painful breakup.
The just-concluded summit between Obama and Xi did little to dispel this possibility.
Sixty Years of the Palestinian “Catastrophe”
As the state of Israel celebrates its 60th birthday, Palestinians remember the Nakbeh, or “catastrophe” – their story of dispossession, occupation, and statelessness.
But, for both sides, as well as external powers, the events of 1948 and what has followed – the occupation since 1967 of the remaining lands of historic Palestine – represents a tragic failure.
Israel is most at fault for this failure, owing to its continued military occupation and illegal settlements.
Despite giving lip service to peace, the Israeli army’s refusal to leave the occupied territories continues to be in direct contravention to what the preamble to United Nations Security Council resolution 242 termed the “inadmissible taking of land by force.”
But the international community, Palestinians, and Arabs all bear responsibility as well, albeit at different levels.
Indeed, the list of disappointments pre-dates Israeli statehood and the Nakbeh itself: the King-Crane Commission of 1919, the 1937 Peel Report, the British White Paper of 1939, the Anglo-American Committee of Inquiry of 1945, and the UN Partition Plan of 1947.
Since then, we have had UN resolutions 194, 242, and 338, the Rogers Plan, the Mitchell Plan, the Tenet Plan, Camp David, Taba, the Saudi plan, the “road map,” the Geneva Initiative, the People’s Choice, and the Arab Peace Initiative.
To be sure, Palestinians and Arabs are also to blame for their inability to empathize, recognize, and understand the plight of the Jewish people.
Although Palestinians had nothing to do with European anti-Semitism and the Nazi Holocaust, they should not have turned a blind eye to the Jews’ tragedy.
Palestinians were so locked in their opposition to Zionism that they were unable to appreciate the Jews’ existential needs, just as they failed to appreciate the effects of indiscriminate acts of violence against Israeli civilians.
Consumed with legitimate anger, Palestinians and Arabs failed to come up with a serious approach to reach out to Israelis and failed to devise a workable political strategy that would address Palestinian daily needs and national aspirations.
Cross-border attacks, hijackings, Arab and international diplomacy, secret talks, non-violent resistance, suicide bombings, rockets, regional Arab initiatives, international peace envoys: nothing has succeeded in ending the occupation.
With each approach, Palestinian leaders, believing Arab states’ hollow proclamations of solidarity with their cause, have failed to measure accurately their own powers vis-à-vis the Israelis.
Indeed, the Arab states have come nowhere close to matching the level of US and European aid to the Palestinians, much less the even higher level of Western support – political and military, as well as financial – that has been the key to Israel’s ability to withstand Palestinian demands for freedom.
While European public and private support to Israel, especially in its founding years, is believed to be very extensive, the US has created a firewall of vetoes and political protection for Israel, in addition to providing massive financial support.
Writing in the Washington Report on Middle East Affairs , Shirl McArthur, a retired US Foreign Service officer, estimates that direct US aid to Israel between 1949 and 2006 totaled $108 billion.
After the US, Germany is the principal donor of both economic and military aid to Israel.
By far the largest component of German aid has been in the form of restitution payments for Nazi atrocities.
Total German assistance to the Israeli government, Israeli individuals, and Israeli private institutions has been roughly $31 billion, or $5,345 per capita, bringing combined US and German assistance to almost $20,000 per Israeli.
In the face of Israel’s strength, the Palestinian national movement’s failure has now played into the hands of Islamists.
The Islamic Resistance Movement (known by its Arabic acronym, Hamas), which emerged during the first Intifada in 1987, grew more powerful in the 1990’s, after the return of the PLO’s Yasser Arafat and the creation, as a result of the Oslo Accords, of the Palestinian Authority.
Hamas’s rejection of the Oslo Accords bore political fruit as it became increasingly clear to Palestinians that the handshakes on the White House lawn would not produce the coveted end to the Israeli occupation, or even of Israel’s illegal settlement activities.
Yet, despite history’s long train of failures, Hamas’s June 2007 seizure of control of Gaza, and its pariah status in the West, we are repeatedly told by the US that 2008 will be the year of a peace agreement.
Meanwhile, the Arab peace proposal, which calls for a Palestinian state on the 1967 borders and a fair solution to the refugee problem in exchange for normalization of Arab states’ relations with Israel, appears doomed.
After 60 years of failures, and as the generation that lived through the Nakbeh passes from the scene, a political settlement that can provide Palestinians with freedom in an independent state alongside a secure Israel and a fair solution of the refugee problem is more necessary – but also appears less possible – than ever.
Slamming the Euro Door
LONDON – Last week, central bankers from around the world assembled in Frankfurt to bask in the glory of the euro’s first ten years.
But for those coming from euro candidate countries, the event was a cold shower.
Just as the global financial crisis has made euro membership seem more urgent and necessary than ever, euro incumbents have started floating proposals that would raise the bar for entry.
Under the proposal that was openly discussed in Frankfurt, in addition to the macroeconomic Maastricht criteria that have been in place since the euro’s launch, the quality of a country’s banking system would be used as an additional criterion for euro entry.
Leaving aside the hypocrisy of Western governments pontificating on this topic while they are bailing out banks after massive regulatory failures, the proposal is seriously flawed.
To fully appreciate the proposal’s absurdity, consider the extraordinarily successful East European growth model of the past two decades.
The model advocated by Western Europe and embraced by Eastern Europe has been based on the idea that capital should flow from capital-rich to capital-poor countries.
Economists have to go back to the nineteenth-century United States to find a similar textbook example of successful growth, with large current-account deficits financed mainly through foreign direct investment.
Financial flows have been accompanied by unprecedented financial integration, with most East European banks now controlled by Western parents.
This model has worked remarkably well not just in generating growth, but also, as documented in the European Bank for Reconstruction and Development’s 2008 Transition Report , in improving the institutions that support markets and democracy in Eastern Europe.
But it has also left these countries vulnerable to the twists and turns of global financial markets.
Over the last year and a half, they withstood these pressures remarkably well; but, as the global crisis hits them with full force, they are now seeking help from the International Monetary Fund.
The main vulnerability in the current crisis has been massive exposure to foreign exchange movements.
Actors in all parts of the economy, households and companies alike, have bet that their local currencies would continue to appreciate.
Mortgages in Swiss francs and car loans in Japanese yen have been common throughout the region.
But it was probably in Hungary, the first country to seek an IMF package, that these practices were most widespread.
Yet this vulnerability was largely created, or at least accommodated, by Western banks.
The funding from the parent banks that in the earlier phase of the crisis helped provide liquidity to the East European banking systems now appears more as a liability and possible source of contagion.
It was also the West European financial regulators and supervisors who, under “home rule,” were supposed to discourage these excesses.
The penetration of foreign banks has also effectively deprived countries in Central and Eastern Europe of monetary policy tools, leaving them with little control over extremely rapid credit growth.
Add to this the impact of the current West European bank rescue packages on the banking systems of Eastern Europe.
On one hand, these programs help promote stability by supporting the parent banks active in the region.
On the other hand, the interventions have also undermined the East European financial systems.&#160;
Governments in Eastern Europe cannot credibly match the broad deposit guarantees issued by their Western neighbors, and the generous recapitalizations have brought down Western banks’ relative funding costs, further weakening local institutions’ competitiveness.
Finally, many governments explicitly or implicitly restrict parent banks’ ability to use government funds to back up their East European subsidiaries, many of them critical to the stability of the local financial systems.
To make the quality of the banking system a new criterion for euro membership is not only hypocritical; it is also counterproductive.
Relatively high levels of inflation have been the main reason why euro membership was perceived as increasingly remote in most countries, and why the prospect of euro entry has had a diminishing impact on domestic reform efforts.
A small consolation in the current crisis is that inflation rates are now coming down.
More importantly, the crisis has demonstrated the value for these small economies of being part of a larger currency area.
Instead of exploiting the current opportunity of unprecedented leverage over euro candidates to push them to meet the Maastricht criteria, euro incumbents are contemplating a new and exceedingly vague criterion based on the quality of banking systems.
And whose banks are these?
Who are we kidding?
Sleepwalking through America’s Unemployment Crisis
NEWPORT BEACH – It was relegated to the Q&amp;A session, rather than featured prominently in the opening statement, at last week’s first-ever press conference of US Federal Reserve Board Chairman Ben Bernanke.
It is an issue that too many in Washington, DC are willing to dismiss as “transitory,” despite visible evidence to the contrary.
It is extremely vulnerable to high oil and food prices.
And it undermines the operational assumptions that underpin the long-standing characterization of the US economy as vibrant and responsive.
The issue is the scope and composition of unemployment in America – a problem that is yet to be sufficiently recognized for its increasingly detrimental impact on the country’s social fabric, its economic potential, and its already-fragile fiscal position and debt dynamics.
Let us start with the facts:
· At 8.8% almost three years after the onset of the global financial crisis, America’s unemployment rate remains stubbornly (and unusually) high;
· Rather than reflecting job creation, much of the improvement in recent months (from 9.8% in November last year) is due to workers exiting the labor force, thus driving workforce participation to a multi-year low of 64.2%;
· If part-time workers eager to work full time are included, almost one in six workers in America are either under- or unemployed;
· More than six million workers have been unemployed for more than six months, and four million for over a year;
· Unemployment among 16-19 year olds is at a staggering 24%;
· With virtually no earned income and dwindling savings, the unemployed are least able to manage the current surge in gasoline and food prices, they are effectively shut off from credit, and many have mortgage debt that exceed the value of their homes.
These and many other facts speak to an unpleasant and unusual reality for the United States.
The country now has an unemployment problem that is large in magnitude and increasingly structural in nature.
The consequences are multifaceted, involving immediate personal anguish, rising social and political tensions, economic losses, and budgetary pressures.
This is much more than a problem for the here and now.
High and intractable unemployment has serious negative long-term consequences that threaten to become exponentially worse.
This is a crisis.
Substantial international research shows that the longer one is unemployed, the harder it is to get a job.
This erodes an economy’s skills base and saps its long-term productive capacities.
And, if unemployment is particularly acute among the young, as is the case today, too many of the unemployed risk becoming unemployable.
Undoubtedly, the Great Recession triggered by the global financial crisis has contributed to this worrisome situation.
Unfortunately, the problem is much deeper, as it was long in the making.
At its root, America’s jobs crisis is the result of many years of under-investment in human resources and the social sectors.
The education system has lagged the progress made in other countries.
Job retraining initiatives have been woefully inadequate.
Labor mobility has been declining.
And insufficient attention has been devoted to maintaining an adequate social safety net.
These realities were masked by the craziness that characterized America’s pre-2008 “Golden Age” of leverage, credit, and debt entitlement, which fueled a gigantic but unsustainable boom in construction, housing, leisure, and retail.
The resulting job creation, though temporary, lulled policymakers into complacency about what was really going on in the labor market.
As the boom turned into a prolonged bust, the longer-term inadequacies of the job situation have become visible to all who care to look; and they are alarming.
Left to its own devices, America’s unemployment problem will deepen. This will widen the already-large gap between the country’s haves and have-nots.
It will undermine labor’s skills and productivity.
It will accentuate the burden imposed on the gradually declining number of people who remain in the labor force and have jobs.
And it will make it even harder to find a medium-term solution to America’s worsening public-debt and deficit dynamics.
The US government has little time to waste if it is to avoid an even more protracted and entrenched unemployment problem.
It must move now to address the problem’s sources through multi-year programs that range from educational restructuring and worker retraining to productivity enhancement and housing-sector reform.
And it must do so while better protecting the long-term unemployed, many of whom bear little responsibility for their current, once unthinkable, and unfortunately long-lasting predicament.
It is past time for the US to wake up and confront in a holistic fashion its unemployment crisis.
As everyone who has ever had an unpalatable job knows, shutting off the alarm and pulling the blanket over one’s head is not a solution.
Slouching Toward Fanaticism in Pakistan
President Bush's comparison of the capture of Khalid Shaikh Mohammed (reputed to have planned the attacks on the World Trade Center and the Pentagon) to the liberation of Paris in 1944 was certainly hyperbolic, but the arrest was a political blessing for the US President all the same.
For Pakistan's General Pervez Musharaf, Mohammed's apprehension is a mixed bag: it gained a pat on the back from Mr. Bush but simultaneously revealed the falsity of General Musharaf's claims that Pakistan is largely Al-Qaida free.
Indeed, it is now starkly apparent that much of Al-Qaida and its top leadership prefer refuge in Pakistan to any other place.
The reason would be obvious to anyone who witnessed the recent "million man march" in Karachi organized by Pakistan's newly formed coalition of religious parties, known as the MMA.
Called to protest America's impending attack on Iraq, marchers set effigies of George Bush and Tony Blair on fire as smiling portraits of Osama bin Laden, draped with fresh flowers, looked on.
Speaker after speaker accused General Musharaf's government of treachery and denounced its cooperation with the FBI in nabbing Al-Qaida members.
Before the terrorist attacks on America and the ouster of the Taliban in next-door Afghanistan, Pakistan's religious parties had few seats in either the federal or provincial assemblies.
Resentment against the US after the bombing of Afghanistan rocketed the religious alliance's popularity sky-high.
The religious alliance has now formed governments in two of Pakistan's four provinces, the Frontier and Baluchistan, and openly declares its intent to shatter Pakistan's pro-American policy.
The rise of the MMA is sure to make a fundamental change upon not only Pakistani foreign policy but also upon the country's society and culture.
Almost immediately after assuming office, the new governments ordered an end to music in public transport, required public buses to stand still for the five daily prayers, and closed down video shops and cinema houses.
Folk singers have been threatened, abducted, and forbidden to sing in public.
Cable television operators see their premises ransacked.
More of this awaits.
New laws, expected to be passed by the Frontier Assembly soon, follow the lead of Afghanistan's former Taliban government.
For example, women without "hijab" and a chaperone may not leave their homes; shops shall not advertise the sale of sanitary pads or undergarments; hair-removing creams and lotions may not be sold; use of perfume and makeup will be banned; women will not be allowed to use male tailors; male doctors may not treat women patients; women guests at hotels will not be allowed in the swimming pool; coeducation has been identified as a cause of fornication and is to be phased out; family planning shall be declared un-Islamic, and the sale of contraceptives banned.
Driven by its compulsion to make war on Iraq at all costs, Washington has shown little inclination to consider the war's long-term impact on countries lying at the periphery of the war zone.
In a special trip to Islamabad, US Assistant Secretary of State Christina Rocca sought to reassure a visibly nervous Pakistani government that the war would be "quick and short."
Even if Rocca is right, the anger flowing in Pakistan's streets will drastically weaken moderate opinion while further radicalizing Islamic groups.
However, if the war drags on, if Baghdad comes under siege with heavy civilian casualties - or if weapons of mass destruction are actually used - all bets could be off.
Mounting anger within the Pakistan Army, whose soldiers exchanged fire with American troops two months ago, would make Musharaf's isolation total, perhaps forcing him to abandon the American-led coalition.
To appease radical opinion, Islamic militant leaders who were jailed a year ago are now operating freely again.
A taped speech by the released head of the Lashkar-i-Tayyaba, Hafiz Saeed, was played on Kashmir Day at mosques in Rawalpindi.
Lashing out at India and America, the firebrand cleric rhetorically asked, "Allah has told us to make atom bombs.
America is telling us not to.
O Muslims, to whom shall we listen, Allah or America?"
Meanwhile, across the border in Afghanistan, US forces are experiencing frequent ambushes and rocket attacks upon their bases.
This has led to aggressive US Army sweeps, backed in some cases by heavy bombers.
The heightened activity, much of it concentrated along the Pakistani border, suggests that some of Pakistan's army intelligence officers have resumed their support of the Taliban and its friends.
Waiting for spring to come is ex-mujahideen commander Gulbuddin Hekmatyar - a former favorite of the CIA and Pakistan's ISI during the Soviet occupation of Afghanistan. He is massing his forces and weapons for a determined strike against American forces.
Hekmatyar and Al-Qaida expect their task to be easier since the enemy is likely to have its attention focused on Iraq.
Fighting terror backed by radical Islam requires a sophisticated understanding of its political and economic roots.
America's plan to liberate Iraq with cruise missiles betrays not only crude ignorance, but also a lack of will to try and deal with the causes of terrorism.
America's strategic myopia may well provide bin Laden and his kind with a fresh flood of recruits and make Pakistan, the Islamic world's only nuclear-armed state, ungovernable.
Slouching Toward Sanity
BERKELEY – In America today – and in the rest of the world – economic-policy centrists are being squeezed.
The Economic Policy Institute reports a poll showing that Americans overwhelmingly believe that the economic policies of the past year have greatly enriched the bankers of Midtown Manhattan and London’s Canary Wharf (they really aren’t concentrated along Wall Street or in the City of London anymore).
In America, the Republican congressional caucus is just saying no: no to short-term deficit spending to put people to work, no to supporting the banking system, and no to increased government oversight or ownership of financial entities.
And the banks themselves are back to business-as-usual: anxious to block any financial-sector reform and trusting congressmen eager for campaign contributions to delay and disrupt the legislative process.
I do not claim that policy in recent years has been ideal.
If I had been running things 13 months ago, the United States Treasury and Federal Reserve would have let Lehman and AIG fail – but I would have discounted their debt for cash at face value, provided that the debt also came with sufficient equity warrants.
That would have preserved the functioning of the system while severely punishing the banking and shadow-banking systems’ equity holders, and today nobody would be claiming that their risk management practices were adequate and did not need reform.
If I had been running things 19 months ago, I would have nationalized Fannie Mae and Freddie Mac and for the duration of the crisis shifted monetary and financial policy from targeting the Federal Funds rate to targeting the price of mortgages.
Ever since 1825, the purpose of monetary policy in a crisis has been to support asset prices to prevent the financial markets from sending to the real economy the price signal that it is time for mass unemployment.
Nationalizing Fannie and Freddie, and using them to peg the price of mortgages, would have been the cleanest and easiest way to accomplish that.
Nevertheless, policy over the past two and a half years has been good.
A fundamental shock bigger than the one in 1929-1930 hit a financial system that was much more vulnerable to shocks than was the case back then.
Despite this, unemployment will peak at around 10%, rather than at 24%, as it did in the US during the Great Depression, while nonfarm unemployment will peak at 10.5%, rather than at 30%.
Nor will we have a lost decade of economic stagnation, as Japan did in the 1990’s.
Admittedly, the bar is low when making this comparison. But our policymakers did clear it.
It is worth stepping back and asking: What would the world economy look like today if policymakers had acceded to the populist demand of no support to the bankers?
What would the world economy look like today if Congressional Republican opposition to the Troubled Asset Relief Program (TARP) program and additional deficit spending to stimulate recovery had won the day?
The only natural historical analogy is the Great Depression itself.
That is the only time when (a) a financial crisis caused a widespread, lengthy, and prolonged reinforcing chain of bank failures, and (b) the government neither intervened nor passed the baton to a consortium of private banks to support the system as a whole.
It is now 19 months after Bear Stearns failed and was taken over by JP MorganChase with the assistance of up to $30 billion of Federal Reserve money on March 16, 2008, and industrial production stands 14% below its peak in 2007.
By contrast, 19 months after the Bank of the United States, with 450,000 depositors, failed on December 11, 1930 – the first major bank collapse in New York since the Knickerbocker Trust failure during the panic and depression of 1907 – industrial production, according to the Federal Reserve index, was 54% below its 1929 peak.
Opponents of recent economic policy rebel against the hypothesis that an absence of government intervention and support could produce an economic decline of that magnitude today.
After all, modern economies are stable and stubborn things.
Market systems are resilient webs that offer the best possible incentives to people to make deals and use resources productively.
A 54% fall in industrial production between its 2007 peak and today is inconceivable – isn’t it?
If so, then the unavoidable conclusion must be that things would not have been so bad if the government had refused to implement an expansionary fiscal policy, recapitalize banks, nationalize troubled institutions, and buy financial assets in non-standard ways.
The problem, though, is that all the theoretical reasons to think that depressions as deep as the Great Depression simply do not happen to market economies applied just as well to the 1930’s as they do to today.
But it did happen.
And it could have happened again.
Slouching Towards Europe
When communism in Eastern Europe collapsed, the region's new democratic leaders agreed that joining the European Union--fast--must be their priority. ``Back to Europe!'' became the slogan, one enthusiastically backed by a majority of their populations.
Yet eight months before that dream formally comes true, doubts in Eastern Europe about the benefits of EU membership are mounting.
What has gone wrong?
For the new democracies in Europe's east, EU membership has five basic dimensions: historical symbolism, security, economic prosperity, political stability, and a guarantee of the rule of law.
Each dimension has dominated at different times over the last fourteen years; attached to each are different expectations in Eastern and Western Europe.
The historical symbolism of the EU has always been more strongly felt in the East than in Western Europe.
While Eastern Europe's peoples perceived membership as confirmation of their historical affiliation with the West and as another step away from Soviet rule, the EU seemed in no hurry to meet those expectations.
Instead, the EU emphasized the technical criteria of membership.
West Europeans did not seem concerned that early enlargement eastward might speed the consolidation of the region's democratic revolutions.
Reduced to a highly technical and bureaucratic process, enlargement became almost totally devoid of any moral and political ethos.
Meanwhile, the security dimension of EU membership diminished in importance when the US opted for rapid NATO enlargement.
The fact that the Americans were quicker on their feet than the EU also helped to solidify a sense of loyalty that many people in the new democracies feel toward the US.
Here, indeed, the EU missed a big opportunity to tie enlargement to a daring internal reform that would transform it into a superpower.
Instead, enlargement was turned into a dull exercise, in which the ultimate benefits of EU membership became blurred in the minds of ordinary people by the complex process of adopting the acquis communautaire (the body of EU law).
Inevitably, for many the EU appeared to be a bureaucratic monster.
In the end, Eastern Europe's pro-EU elites were left with only one means of stirring enthusiasm for EU membership: general pronouncements about how the EU delivered peace and stability to a notoriously war-prone continent, as well as the promises of economic prosperity.
Going ``back to Europe'' was gone; East Europeans were brought back to Europe by the US.
Now, unfortunately, even the economic benefits of EU membership seem unclear.
Throughout the accession process, the EU made it clear that it could not and would not offer the same level of economic solidarity as it offered previous newcomers to the Union.
The new members could, of course, benefit from investment pouring in from current EU countries.
After all, for many West European companies the existence of a common economic area--and, eventually, an enlarged monetary union--will make it easy to relocate their operations to those parts of Europe with lower costs but identical legal standards.
But even these benefits may be curtailed by the continuing economic downturn in much of Western Europe.
A significant change in Europe's economic fortunes cannot be expected unless deep structural changes are introduced.
But only tentative reforms have appeared so far.
Slower growth in the new member states could also delay the planned introduction of the Euro, which in turn could deter many Western companies from investing in the region.
There seems to be a Catch-22 at work here: introducing the common currency may prompt foreign investment, although this will depend on the ability of the new members to lower their public finance deficits.
But fiscal consolidation requires strong economic performance, which depends on foreign investment.
With the economic benefits of EU membership now seeming much less than expected, the intensity of pro-EU sentiments in the candidate countries has significantly declined.
Although overwhelming majorities voted in favor of membership in virtually all candidate countries where membership referendums have taken place, many people did not turn out to vote.
The best word to describe the referendums that have taken place so far is apathy.
Eastern Europe's post-revolutionary enthusiasm for Europe has evaporated.
To make matters even more complicated, East European countries will join the EU at a time when it has initiated a major internal reform embodied by a new European Constitution.
Given their experiences with the drawn-out enlargement process, most candidate countries are leery about the motives of some large EU countries.
If those countries have been egoistic in the past fourteen years, why should candidates believe they would not misuse new decision-making mechanisms to the detriment of small countries--hence the opposition of some candidate countries to creating the post of a European president.
Such fears have also been strengthened by schizophrenic behavior, particularly French President Jacques Chirac's chastising candidate countries for voicing support for the US regarding Iraq.
So on May 1, 2004, when the dream of expansion is fulfilled, there will likely be little jubilation on either side of Europe.
Instead, apprehension and the desultory hope that it will all somehow work out in the end will dominate.
Then again, given Europe's experience with revolution--in both the East and the West--perhaps that apathy should be welcomed.
Five Reasons for Slow Growth
MILAN – A remarkable pattern has emerged since the 2008 global financial crisis: Governments, central banks, and international financial institutions have consistently had to revise their growth forecasts downward.
With very few exceptions, this has been true of projections for the global economy and individual countries alike.
It is a pattern that has caused real damage, because overoptimistic forecasts delay measures that are needed to boost growth, and thus impede full economic recovery.
Forecasters need to come to terms with what has gone wrong; fortunately, as the post-crisis experience lengthens, some of the missing pieces are coming into clear focus.
I have identified five.
First, the capacity for fiscal intervention – at least among developed economies – has been underutilized.
As former United States Deputy Secretary of the Treasury Frank Newman argued in a recent book, Freedom from National Debt, a country’s capacity for fiscal intervention is better assessed by examining its aggregate balance sheet than by the traditional method of comparing its debt (a liability) to its GDP (a flow).
Reliance on the traditional method has resulted in missed opportunities, particularly given that productive public-sector investment can more than pay for itself.
Investments in infrastructure, education, and technology help drive long-term growth.
They increase competitiveness, facilitate innovation, and boost private-sector returns, generating growth and employment.
It does not take a lot of growth to offset even substantial investment – especially given current low borrowing costs.
Research by the International Monetary Fund has indicated that these fiscal multipliers – the second factor overlooked by forecasters – vary with underlying economic conditions.
In economies with excess capacity (including human capital) and a high degree of structural flexibility, the multipliers are greater than once thought.
In the US, for instance, structural flexibility contributed to economic recovery and helped the country adapt to long-term technological changes and global market forces.
In Europe, by contrast, structural change faces resistance.
Fiscal stimulus in Europe may still be justified, but structural rigidity will lower its impact on long-term growth.
Europe’s fiscal interventions would be easier to justify if they were accompanied by microeconomic reforms targeted at increasing flexibility.
A third piece of the forecast puzzle is the disparity between the behavior of financial markets and that of the real economy.
Judged only by asset prices, one would have to conclude that growth is booming.
Obviously, it is not.
A major contributor to this divergence has been ultra-loose monetary policy, which, by flooding financial markets with liquidity, was supposed to boost growth.
But it remains unclear whether elevated asset prices are supporting aggregate demand or mainly shifting the distribution of wealth.
It is equally unclear what will happen to asset prices when monetary assistance is withdrawn.
A fourth factor is the quality of government.
In recent years, there has been no shortage of examples of governments abusing their powers to favor the ruling elite, their supporters, and a variety of special interests, with detrimental effects on regulation, public investment, the delivery of services, and growth.
It is critically important that public services, public investment, and public policy are well managed.
Countries that attract and motivate skilled public managers outperform their peers.
Finally, and most important, the magnitude and duration of the drop in aggregate demand has been greater than expected, partly because employment and median incomes have been lagging behind growth.
This phenomenon preceded the crisis, and high levels of household debt have exacerbated its impact in the aftermath.
The stagnation of incomes in the bottom 75% of the distribution presents an especially large challenge, because it depresses consumption, undermines social cohesion (and thus political stability and effectiveness), and decreases intergenerational mobility – especially where public education is poor.
Sometimes change occurs at a pace that outstrips the capacity of individuals and systems to respond.
This appears to be one of those times. Labor markets have been knocked out of equilibrium as new technology and shifting global supply chains have caused demand in the labor market to change faster than supply can adjust.
This is not a permanent condition, but the transition will be long and complex.
The same forces that are dramatically increasing the world economy’s productive potential are largely responsible for the adverse trends in income distribution.
Digital technology and capital have eliminated middle-income jobs or moved them offshore, generating an excess supply of labor that has contributed to income stagnation precisely in that range.
A more muscular response will require an awareness of the nature of the challenge and a willingness to meet it by investing heavily in key areas – particularly education, health care, and infrastructure.
It must be recognized that this is a difficult moment and countries must mobilize their resources to help their people with the transition.
That will mean redistributing income and ensuring access to essential basic services.
If countering inequality and promoting intergenerational opportunity introduces some marginal inefficiencies and blunts some incentives, it is more than worth the price.
Public provision of critical basic services like education or health care may never be as efficient as private-sector alternatives; but where efficiency entails exclusion and inequality of opportunity, public provision is not a mistake.
One hopes that a growing awareness of the significance of these and other factors will have a positive effect on policy agendas in the coming year.
Slumdog Oscar
NEW DELHI – Indians haven’t often had much to root for at the Oscars, Hollywood’s annual celebration of cinematic success.
Only two Indian movies have been nominated in the Best Foreign Language Film category in the last 50 years, and neither won.
So Indians take vicarious pleasure in the triumphs of “mainstream” pictures with an Indian connection – the seven Oscars won by Richard Attenborough’s Gandhi in 1983, for instance, or the success of The Sixth Sense, written and directed by a Philadelphian of Indian descent, Manoj Night Shyamalan.
This year, the country’s attention has been riveted by the surprise Oscar winning best picture, Slumdog Millionaire – set in India, with Indian characters, Indian actors and Indian themes – which was nominated in ten categories.
Indeed, for the first time, Indian citizens won for best song and for A. R. Rahman’s musical score.
Movies made by Westerners about India have rarely been worth writing home about, ranging as they’ve done from the ignorant racism of Steven Spielberg’s Indiana Jones and the Temple of Doom to David Lean’s well-intentioned but cringe-inducing Passage to India , with Alec Guinness warbling away in brown-face.
But most Indians regard Slumdog Millionaire as an exception.
Directed by Scotland’s Danny Boyle ( Trainspotting ), and based on the page-turning novel Q and A by Indian diplomat Vikas Swarup, the film has captured the hearts of audiences and critics around the world with its tale of a child from the slums, a tea-boy in a call-center, who wins a TV quiz show modeled on Who Wants to be a Millionaire .
Exuberant, exciting, gaudy, and gritty in a way that can only be called Dickensian, Slumdog Millionaire brings contemporary Mumbai to life from the seamy side up, and it does so with brio, compassion, and all-round cinematic excellence.
This being India, the film – which is just beginning its cinematic release in the country, months after it hit Western screens – has also provoked dissent.
Protests have been mounted by slum-dwellers against the movie’s title: the term “slumdog,” coined by the screenwriter, has given great offense, with demonstrators holding up postcards declaiming, “We are not dogs.”
(To the dismay of Indian liberals, a judge has admitted a petition against the filmmakers, but it is difficult to believe the case will go far.)
Others have, more predictably, decried the film’s searingly authentic depiction of India’s poverty and slum life.
Slumdog Millionaire was filmed in large part with small hand-held digital cameras on location in Dharavi, Mumbai’s (and Asia’s) biggest slum, and does not skip the mounds of garbage, cesspits, and overflowing drains.
There is even a scene involving human excrement that is both revolting and hilarious.
But this is not an exercise in the pornography of poverty.
Slum life is depicted with integrity and dignity, and with a joie de vivre that transcends its setting.
It is easy to see why this movie would appeal to international filmgoers in a way that a bleaker film like City of Joy , which was set in the slums of Calcutta, could not.
Others have protested that the film shows Indians as conniving, unprincipled, and ruthless, and that the only compassionate people in the film are a pair of white tourists who give the protagonist some money.
This may reveal something of Boyle’s view of human nature, but most Indian viewers know they live in a land largely devoid of larger-than-life heroes.
We Indians have learned to take human beings as they are, which is to say, as grossly imperfect.
And the film’s hero, played by the teenage British-Indian actor Dev Patel with a look that combines intensity and expressiveness, and yet seems utterly genuine, is as sincere a protagonist as you could hope to find.
So, Slumdog Millionaire following its four Golden Globes and Screen Actors’ Guild awards, seven BAFTA awards (the British Oscars), and eight Academy Awards, is a cause to celebrate in India.
And, if some of the film’s larger-than-expected profits are directed toward the slums where the movie was made, the protestors are quite likely to fade away.
What they want, after all, is a share of the glory.
Slumdog Millionaire is the work of an artist at the peak of his powers.
India is Boyle’s palette, and Mumbai – that teeming “maximum city,” with 19 million strivers on the make, jostling, scheming, struggling, and killing for success – is his brush.
The portrait that emerges has been executed with bold strokes, vivid colors, and striking images.
It would have stayed in the mind’s eye a long time, whether or not it swept the Oscars.
Small Economies, Big Problems, and Global Interdependence
WASHINGTON, DC – Greece’s GDP, at about $300 billion, represents approximately 0.5% of world output.
Its $470 billion public debt is very large relative to the Greek economy’s size, but less than 1% of global debt – and less than half is held by private banks (mainly Greek).
Barclays Capital estimates that only a few globally significant foreign banks hold close to 10% of their Tier 1 capital in Greek government bonds, with the majority holding much less.
So, at least on paper, Greece should not be a systemically important economy.
Yet there are several reasons why the Greek crisis is having substantial spillover effects.
Moreover, Greece is not alone in this respect.
First, in the Greek case, there is the fear of contagion to other distressed European economies, such as Portugal and Ireland, or even Spain and Italy.
There are also substantial investments by American money-market funds in instruments issued by some of the exposed banks.
Then there are various derivatives, such as credit-default swaps, through which banks holding Greek debt have insured themselves against non-payment.
If CDSs are concentrated in particular financial institutions, these institutions could be at risk – more so than the primary purchasers of Greek debt themselves.
But no one knows who is holding how much of these derivatives, or whether they reduce or magnify the risk, because CDSs are not transparently traded on open exchanges.
Finally, Greece’s difficulties imply problems for managing the euro, as well as possible disorderly behavior in foreign-exchange markets, which threaten to augment uncertainty and negatively influence the already-weakening global recovery.
Clearly, the world economy has a large stake in Greece’s recovery.
In the same vein, consider a completely different case, that of Yemen.
Greece and Yemen have no relevant similarities, except the contrast between their size and possible spillover effects.
Yemen’s GDP is only 10% the size of Greece’s, representing 0.05% of global output, and its economy is not significantly linked to the international financial system.
But Yemen’s population is close to that of Saudi Arabia, and its border is very hard to control.
Chaos in Yemen, coupled with the growing strength of extremists, could seriously destabilize Saudi Arabia and threaten oil production.
In that case, the price of oil could shoot up to $150 a barrel or more, dealing a heavy blow to the global economy.
One can find other examples of this kind.
Recall that the 1997 Asian crisis started in Thailand – again, not a large economy.
The strong trade, financial, and natural-resource-related interconnections that have developed in the world economy turn many otherwise small countries, or problems, into global systemic risks.
The implications for global economic governance need to be understood and addressed.
At the Seoul G-20 summit in November 2010, the assembled leaders encouraged the International Monetary Fund to work with the Financial Stability Forum to develop an early-warning system for global financial risks, and to analyze spillover effects on “large economies” (China, the United States, the United Kingdom, Japan, and the eurozone).
The spillover reports are currently being discussed by the IMF’s board.
A synthetic report by the Fund’s Managing Director is to be presented to the International Monetary and Financial Committee when officials from the IMF’s member states meet in September.
This step, if pursued seriously, would enable a deeper analysis of interdependence in the world economy.
It could also increase the IMF’s legitimacy as an institution that is global not only in its membership, but also in its treatment of different types of members.
So long as the IMF’s macroeconomic surveillance was in fact applied only to developing countries, with the G-7 and other rich countries evading a serious monitoring process, the Fund could not be perceived as fair and impartial.
As these examples indicate, however, systemic importance is not just a question of size.
What matters is the interconnections that link a particular country, institution, or group of institutions (for example, Lehman Brothers and AIG) to the wider world economy.
Surveillance of systemic risk must proactively test and analyze these interconnections, and try to imagine the “hard to imagine.”
After all, as we now know only too well, systemic risk can emerge in unexpected places.
Interdependence has become much more complex than it was even a decade ago.
The IMF needs to be empowered to analyze the macroeconomic and macro-financial risks that have emerged, establish an early-warning system, and propose possible preemptive policy measures.
The Fund’s almost universal membership and its staff’s technical expertise should enable it to carry out effective multilateral surveillance, provided that it accelerates its own governance reforms, so that surveillance is perceived as being in everyone’s interest.
Small Stock Markets in a Globalized World
Globalization means the unavoidable transformation of nations, businesses, and individuals--in Africa no less than anywhere else in the world.
All must adapt, and stock exchanges are no exception.
As technological advances in information technology combine with de-regulation and globalization to fuel growing competition, the world's securities markets are being forced to update, consolidate, and expand their activities, and to rationalize their governance structures in order to become more cost efficient, transparent, and accountable.
Emerging markets, like those on the African continent, including the two leaders South Africa and Egypt, have no choice but to follow the lead of the global securities industry, because globalization has changed stock exchanges' traditional role.
The internet and computer-based trading have shattered geographic boundaries and revolutionized investment, not only by opening up new avenues for trading, but by democratizing access to information that was once the exclusive preserve of professional investors.
However large or small, whether in a Cairo internet café or a New York office, today's investors demand, and increasingly get, instant information and immediate execution of trades.
Navigating these changes is essential for emerging-market stock exchanges if they are to be competitive on a global level.
In particular, they must prepare themselves to deal with falling prices for financial services.
The global investor of tomorrow will be able to execute transactions more efficiently and less expensively than ever before, as better technology and heightened competition essentially push trading costs to zero.
Thus, in order to maintain cash flow, stock exchanges must enhance their services to deliver higher added value.
For example, stock exchanges have already begun extending trading hours into the evening, earlier in the morning or both, deepening liquidity and benefiting investors, issuers, and brokers alike.
In light of these innovations, the next generation of stock markets must invest substantially in technology to enable instant worldwide price discovery and trade execution in a fair, orderly, low-cost, and well-regulated environment without time-zone limitations.
This may require broader "demutualization," a step currently under consideration by the Bombay, Kuala Lumpur, New Zealand, and Sao Paulo stock exchanges following its successful implementation by exchanges in Australia, Sweden, Hong Kong, Singapore, and London.
African exchanges should consider it, too.
Demutualization means transforming a stock exchange into a for-profit organization, with shares that can be owned by members, financial institutions, and the public.
Under this scheme, the long-term profitability and survival of an exchange depends on the value of its traded shares, just like any other listed company.
The main advantage of demutualization for stock exchanges is that it puts an end to the ownership monopoly of member firms, who are often reluctant to take decisions that benefit the market and issuers but that conflict with their own vested interests.
In particular, demutualization will allow stock markets greater leeway to merge, acquire each other, or form partnerships, creating a few truly global giants.
This will help expose foreign investors to listed companies at home and local investors to companies abroad.
The efficiencies created by these economies of scale can then be passed on to investors and issuers alike.
Serious challenges remain, of course, including differences in securities legislation, listing and trading rules, information disclosure requirements, and clearing, settlement, and payment systems.
Thus, the world is not likely to move to a single consolidated securities market anytime soon, but rather to a collection of diverse markets that include some domestic players and others with a more global reach.
Stock exchanges in emerging markets will increasingly be forced to contemplate regional or global integration or alliances, lest they remain solely domestic in nature.
As the internationalization of securities markets progresses, however, there will be less to contemplate.
Listing and trading rules will be harmonized, and standards of information disclosure will become uniform across exchanges.
Global regulatory initiatives, particularly those aimed at standardizing accounting and other disclosure requirements, will be enforced vigorously.
These changes will further empower investors, giving them greater control over trading via access to company information that is formatted to a global standard.
For the Cairo and Alexandria Stock Exchange, where I work, and the Johannesburg Stock Exchange--Africa's two largest--the agenda is clear.
They must adopt listing rules that emphasize timely disclosure for both domestic and international investors, implement international accounting standards, and prohibit insider trading in order to encourage listings by local and regional blue-chip issuers and attract international investors.
Indeed, as the recent collapse of corporate giants such as Enron and World.com clearly demonstrates, the ability to protect investors adequately and retain their confidence will be crucial for securities markets to compete effectively as globalization proceeds.
This is even truer in emerging-market exchanges, where one bad apple can ruin the reputation of an entire country's business.
More than ever before, an attractive market will be one that provides the highest value of all: fair and effective regulation.
In short, stock exchanges in Africa and in emerging markets elsewhere will not survive the globalization of the securities industry unless they focus on improving their transparency, integrity, and efficiency.
Ensuring sound corporate governance and protection of minority shareholders' rights must come first.
Smart Development Targets
ABUJA, NIGERIA – Over the next 15 years, the international community will spend $2.5 trillion on development, with national budgets contributing countless trillions more.
In September, the world’s 193 governments will meet at the United Nations in New York to agree on a set of global targets that will direct these resources.
With so much at stake, it is vital that we make the smartest choices.
Because it is only natural for politicians to promise to do everything, the UN is currently poised to consider an impossibly inclusive 169 targets.
The proposed targets range from the ambitious (“end the epidemics of AIDS, tuberculosis, and malaria”) to the peripheral (“promote sustainable tourism”) to the impossible (“by 2030 achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities”).
But promising everything to everyone provides no direction. In truth, having 169 priorities is like having none at all.
That is why my think tank, the Copenhagen Consensus, asked 82 of the world’s top economists, 44 sector experts, and UN organizations and NGOs to evaluate which targets would do the most good for every dollar, euro, or peso spent.
A team of eminent economists, including several Nobel laureates, then prioritized these targets in value-for-money terms.
It turns out that not all targets are equal.
Some generate amazing economic, social, and environmental benefits per dollar spent.
Many others generate only slightly more than a dollar per dollar spent.
Some even generate a net loss, doing less than a dollar of good per dollar spent.
If the world were to spend money equally across all 169 UN targets, it would do about $7 of social good for each dollar spent.
That is respectable, but we could do much better.
The panel of eminent economists has produced a much shorter list of just 19 targets that will do the most good for the world.
Every dollar spent on these targets will likely produce $32 of social good – more than four times more effective than spending on all 169.
Being smart about development spending could be better than quadrupling the global aid budget.
The short list covers a lot of ground; what connects the targets is the amount of good they will do for people, the planet, and prosperity.
Consider a few targets that would do so much to help people.
Tuberculosis is a “hidden” disease, but a much bigger problem than headline-grabbing Ebola.
More than two billion people carry the TB bacterium, and at some point about 10% of them will develop the disease, which kills some 1.5 million victims per year (compared to 20,000 dead in the recent Ebola outbreak).
Yet treatment is inexpensive and, in most cases, highly effective.
Spending a dollar on diagnosis and treatment pays back $43 by giving people many more years of productive life.
Another outstanding use of resources is to reduce childhood malnutrition.
Good nutrition is especially critical for young children, because it allows their brains and bodies to develop better, producing life-long benefits.
Well-nourished children stay in school longer, learn more, and end up being much more productive members of society.
The available evidence suggests that providing better nutrition for 68 million children each year would produce $45 in long-term social benefits for every dollar spent.
Some targets that benefit the planet also provide excellent value.
Cutting fossil-fuel subsidies, which amount to nearly $550 billion a year – would reduce pollution and CO2 emissions while freeing up resources for investment in health, education, and infrastructure.
In total, each dollar not spent on fossil-fuel subsidies would provide more than $15 of planetary benefits.
Focusing on coral reefs turns out to be a surprisingly efficient target.
It preserves biodiversity, with healthy reefs producing more fish and attracting more tourists.
Each dollar spent protecting them can provide benefits worth $24.
Perhaps the most important, cross-cutting problem is poverty, which afflicts billions of people and underlies most other development problems.
When you are poor, your children will more likely suffer malnutrition and succumb to TB.
When you are poor, you are more likely to slash and burn rain forest or fish atop coral reefs with dynamite.
Better nutrition and greater access to education will help.
But so will targets for prosperity, allowing hundreds of millions to lift themselves out of poverty.
As we have seen repeatedly – in China, South Korea, Chile, India, and elsewhere – fewer trade restrictions can lift incomes and reduce poverty.
Economic models show that a successful reduction of trade barriers like that foreseen in the ongoing Doha Round of multilateral trade talks could add $11 trillion to global GDP by 2030.
This would mean $1,000 more for each person in the developing world every year, and would lift a staggering 160 million people out of poverty.
This list of smart targets will not solve all of the world’s problems; no realistic list, however ambitious, can.
But the 19 targets identified by the Copenhagen Consensus can help the world’s governments to concentrate on key priorities.
These targets will do more than four times as much good per dollar spent as spending across all 169 targets would do.
Governments should stop promising everything to everyone and start focusing on delivering the most possible.
For more information about the project and all 19 targets, visit www.post2015consensus.com
Smarter Thinking on Climate Change
COPENHAGEN – Politicians and commentators are understandably pessimistic about the chances of an international deal on carbon cuts emerging from the United Nations summit in Mexico this December.
Nothing has been resolved since the Copenhagen climate talks fell apart last year.
Fortunately, recent research points to a smarter way to tackle climate change.
There is no longer any mainstream disagreement about the reality of global warming.
The crucial questions concern the economics of our response.
But this debate can be just as heated.
Ever since I published The Skeptical Environmentalist in 2001, I have always acknowledged that man-made global warming is real.
Yet activists have repeatedly labeled me a “climate-change denier.”
This is not because I have ever suggested that the basic science of global warming is wrong.
Rather, it reflects anger and frustration over my insistence on pointing out that drastic carbon cuts make no sense.
The Copenhagen Consensus Center – a think tank where I serve as director – recently asked a large group of top climate economists to explore the costs and benefits of different responses to global warming.
At the same time, we convened a second, equally stellar group of economists, including three Nobel laureates, to examine all of the research and rank the proposals in order of desirability.
Cambridge University Press is publishing their research and findings this month, under the title Smart Solutions to Climate Change.
The book includes a chapter by prominent climate economist Richard Tol, who has been a contributing, lead, principal, and convening author for the United Nations’ Intergovernmental Panel on Climate Change.
In his chapter, Tol shows why grand promises of drastic, immediate carbon cuts are such a flawed strategy.
Tol found that trying to keep temperature increases under 2°C, as the G-8 industrialized nations have promised to do, would require emissions reductions of about 80% by mid-century.
Based on conventional estimates, this would avoid total climate damages of about $1.1 trillion across the century.
However, it would cut economic growth by around $40 trillion a year.
In other words, we would effectively be spending $40 trillion every year by the end of the century to do just over $1 trillion worth of total good.
In fact, this estimate is wildly optimistic.
The calculation assumes that over 100 years, politicians everywhere in the world will consistently enact the most efficient, effective laws imaginable to reduce carbon emissions.
Dump that far-fetched assumption and the cost could jump by a factor of ten or even 100.
To put it starkly, such drastic carbon cuts are likely to do a lot more damage than climate change to our quality of life (especially for those in the developing world).
The reason is simple.
Despite all of the optimistic talk about wind, solar, geothermal, and other sustainable, non-carbon-emitting energy sources, no alternative is remotely ready to shoulder the energy burden currently borne by fossil fuels.
This is why I have long urged policymakers to increase significantly the amount of money invested in research and development of green-energy alternatives.
Now there is research that shows exactly how we can put this approach into action.
In Smart Solutions to Climate Change, Chris Green of McGill University and Isabel Galiana look at current rates of progress and conclude that by 2050 alternative energy sources will produce less than half the power needed to be able to stabilize carbon emissions.
By 2100, the gap would be even wider.
The challenge is enormous.
Galiana and Green find that devoting just 0.2% of global GDP – roughly $100 billion a year – to green energy R&amp;D would produce the kind of game-changing breakthroughs needed to fuel a carbon-free future.
Not only would this be a much less expensive fix than trying to cut carbon emissions, but it would also reduce global warming far more quickly.
And, unlike carbon cuts, this is a solution that developing countries would be likely to embrace.
Even with a major R&amp;D effort, green energy won’t become affordable overnight.
To ensure that we have enough time to conduct the necessary R&amp;D, we should step up our commitment to research into climate-engineering technology.
In Smart Solutions to Climate Change, Eric Bickel and Lee Lane of the University of Texas offer compelling evidence that a tiny investment in climate engineering could result in bigger and faster reductions in global warming than would a vastly more expensive program of carbon cuts.
The publication of Smart Solutions to Climate Change has generated considerable interest, including some from activists who believe that my enthusiastic support of its proposals represents a major shift in my thinking.
In fact, I have advocated R&amp;D spending for years.
What is new – and exciting – is that with the publication of this research, we may finally be starting a constructive discussion about how we really can respond intelligently to this challenge.
Surveillance and American Liberty
CAMBRIDGE – Ever since Edward J. Snowden disclosed the National Security Agency’s ongoing collection of massive amounts of electronic-communications data generated by United States citizens and non-citizens alike, attention has been lavished on his personal status.
But the more important issue, even before Russia granted him temporary asylum, is the status of American civil liberties.
Is the US guilty of hypocrisy, as Russia, China, and others have charged?
To answer that question, it is important to distinguish between two issues that have become conflated in public debate: electronic espionage against foreign entities and domestic surveillance of a government’s own citizens.
Before Snowden’s disclosures, cyber espionage had become a major point of contention in US-China relations.
It was discussed at the June “shirt-sleeves summit” between Presidents Barack Obama and Xi Jinping, and the two governments agreed to create a special working group on the issue.
The US accuses China of using cyber espionage to steal intellectual property on an unprecedented scale.
Among other public sources, it could point to a study by the cyber-security firm Mandiant, which traced many such attacks to a People’s Liberation Army facility in Shanghai.
China counters that it is also the victim of innumerable cyber intrusions, many originating in the US.
Both countries have a point.
If a proverbial Martian were watching the flow of electrons between East Asia and North America, he would probably notice robust two-way traffic.
But if he looked inside the data packets, he would see very different content.
American policy is not to steal intellectual property, while China’s policy appears to be the opposite.
At the same time, both governments constantly hack into each other’s computers to steal traditional political and military secrets.
Spying is not a violation of international law (though it often violates various domestic laws), but the US argues that theft of intellectual property violates both the spirit and letter of international trade agreements.
China is not the only country that steals intellectual property.
Some of America’s allies, now professing outrage at disclosures of US spying, have been known to do the same thing to the US.
According to the US, when it inspects a non-American’s e-mail, it is searching for terrorist connections, and has often shared the findings with its allies.
In that sense, security surveillance can benefit both the US and other countries.
After all, part of the plot that culminated in the terrorist attacks of September 11, 2001, was hatched by an Egyptian living in Hamburg.
But the Americans are not without sin.
As Snowden’s information revealed, the US was monitoring the communications of European Union representatives as they were preparing for trade negotiations.
This did not produce a joint benefit; it was a bad decision, and one that Obama should renounce.
It is tactically useful for Russia, China, and others to conflate espionage issues with civil liberties and accuse the US of hypocrisy.
But those charges seem odd coming from countries with weak rule of law and heavy Internet censorship.
Snowden revealed two major surveillance programs inside the US.
In terms of civil liberties, examining the content of a message from a suspect non-American source is less controversial.
The more hotly debated program is one in which the NSA maps the origin and destination of US citizens’ telephone traffic and stores it for possible later inspection (presumably with a court order).
This application of technological capacity to store what is called “big data” raises a new set of issues about intrusion into citizens’ privacy.
Defenders of the program point out that it is consistent with current law and with America’s constitutional philosophy of checks and balances, because both the legislative and judicial branches approved it.
Opponents argue that the court created in 1978 under the Foreign Intelligence Surveillance Act (FISA) was designed for an era before the advent of big data, and that current practice stretches the provisions of the Patriot Act, passed after the September 11 attacks.
The opponents call for new laws.
Last month, the current legal framework survived a close vote (217 to 205) in the House of Representatives.
Most interesting was the split in both parties.
The opposition consisted of a coalition of conservative Tea Party Republicans and liberal Democrats.
The issue is bound to arise again, with several pending bills proposing revisions of the FISA court.
Rather than demonstrating hypocrisy and acceptance of the erosion of civil liberties, the Snowden disclosures have provoked a debate that suggests the US is living up to its democratic principles in its traditionally untidy ways.
America faces a trade-off between security and liberty, but the relationship is more complex than it appears at first glance.
The worst threats to liberties come when insecurity is greatest, so modest trade-offs can sometimes prevent greater losses.
Even such a great defender of freedom as Abraham Lincoln suspended habeas corpus under the extreme conditions of the American Civil War.
And such decisions may not be recognized as mistaken or unjust until later – consider Franklin Roosevelt’s internment of Japanese-American citizens early in World War II.
In the decade after September 11, 2001, the pendulum of public sentiment swung too far to the security pole; but it has begun to swing back in the absence of major new terrorist attacks.
A recent ABC News-Washington Post poll showed that 39% of Americans now say that protecting privacy is more important than investigating terrorist threats, up from only 18% in 2002.
Ironically, the programs that Snowden revealed seem to have helped prevent massive new terrorism events, such as a bomb attack on the New York subways.
If so, they may have prevented the implementation of more draconian anti-terrorist measures – thus enabling the current debate.
Social Democracy Lives in Latin America
MONTEVIDEO, URUGUAY – Amongst the different leftist governments in Latin America, there are new and rather strident populist regimes (Venezuela, Bolivia, Ecuador), which seem to grab all the attention. But there is also a social-democratic strain to Latin American politics – a historical novelty in the region – that is gaining strength.
In Brazil, Chile and Uruguay, social democracy is proving that it can work.
What distinguishes these social democratic governments from their populist counterparts is that they are composed of a left that is integrated into competitive, multi-party democracies.
These social democrats were once part of a socialist, revolutionary, or reformist left, tightly allied with labor unions. But they ultimately accepted the market economy, and came to lean toward ideological moderation and to compete for votes in the political center.  At the same time, motivated by their political competition and their own leftist ideology, these social democratic governments emphasize both economic growth and social inclusion.
These governments’ potential to innovate depends on the political resources and power at their disposal. The first government of the left in Uruguayan history has comparative advantages in this respect, for, unlike in Brazil and Chile, Uruguay’s social democrats have ruled as a one-party majority government.
The Frente Amplio (FA) brings together nearly all the country’s left-wing groups and has the loyal support of labor unions.
Moreover, Uruguay’s president, Tabaré Vázquez won his office five years ago in the first round and, by uniting the posts of head of state and party leader, was able to forge a strong presidential leadership and popularity. As a result, during the cycle of economic prosperity that lasted until 2008, with rising commodity prices and internal dynamism, the Vázquez government insured macroeconomic stability, fiscal balance, and an open market, encouraging competitiveness as well as domestic and foreign private investment.
Despite this economic orthodoxy, Vázquez’s government also pursued important policy innovations: protection of human rights was improved; tax reform, including introduction of a general, progressive income tax was undertaken and a more inclusive health system was created.
In addition, the government forged policies for the poor with non-contributory income transfers and family allowances, which benefited minors and female who are heads of household. Public education was boosted by bigger expenditure and a “one laptop per child” program.
A labor policy favorable to workers and unions revived Wage Councils for setting pay.
Vázquez’s term ends in March 2010. He cannot run again and the looming presidential election promises to be close.
Indeed, despite the government’s successes, there could be a change, as the Partido Nacional of the center-right bloc is now running neck-and-neck with the FA.
In the FA primaries, José Mujica won the presidential nomination by defying Vázquez and placing himself farther to the left than his rival, Danilo Astori, who represented a continuation of the present administration. Mujica has a populist profile, based on charisma, anti-establishment stances and an appeal to the poor, which was strengthened by his personal traits and his lineage as a member of the 1960’s Tupamaros guerrilla movement, as well as his affinity for the ruling Kirchners of Argentina and the “Bolivarian” left.
Given all this, it might seem that Uruguay’s carefully constructed social-democratic alternative could unravel.
But the party system and the FA’s internal balance of power do not favor any turn abrupt toward radical left or populism. Indeed, because populist tactics are likely to prove self-defeating in the presidential campaign, Mujica started supporting Vázquez’s administration’s record and made Astori his candidate to be Vice President, entitled to take the lead on economic policy and participate in the executive.  To stress their social democratic credentials both candidates, Mujica and Astori, have gone on pilgrimages to the United States, Brazil, and Chile.
Moreover, Uruguay’s political structures will invariably have a moderating effect on any government that might be elected.
Regardless of the president’s political slant, if the FA remains in office, the social-democratic reforms of recent years are likely to continue, although with different emphases and considerable variations imposed by the economic cycle and the government’s political resources.
If the FA does not win the first round, it will not secure the absolute majority that Vázquez has enjoyed, limiting the government’s capacity for innovation. Furthermore, while Mujica has majority support within the FA, he is not the sole chief of the party but just the head of one of its competing factions.
His leadership will be sorely tested in the electoral campaign, and also in his presidency should he triumph.
A second term for the Frente Amplio would pose new problems, since the balance of power and political competition will be stronger, both between parties and within the left itself. These challenges may eventually tug Uruguay’s social democrats even closer to the experiences of Brazil and Chile.  Like their European brethren, Latin America’s social democratic governments should eventually prosper through pluralist democracies and the even more demanding politics of compromise.
Socialism or Global Division?
For the first time in history, we have the knowledge, the technology, and the wealth to design a different world.
We have the resources to “make poverty history.”
But, though we have the power to change the world, we are not taking the steps needed to do so.
In 2000, the world’s governments adopted the United Nations Millennium Development Goals, which aim to halve global poverty by 2015.
Yet the international community has lacked the political will needed to meet these basic responsibilities to humanity, causing people to lose faith in politics.
Unless we take action, our citizens will lose hope in the power of democracy – or find hope in extremism, fundamentalism, and violence.
To restore people’s trust not only in politics, but also in their own potential, our policies must guarantee responsible governance and institutions that work for and with responsible citizens.
As the largest political organization in the world, the Socialist International can unite the world’s citizens around a new global agenda to achieve these goals.
Our first challenge is to democratize globalization.
We must reconfigure globalization from the bottom-up, bringing in the two-thirds of the human race that is currently excluded from the process, on terms that reflect the socialist principles of inclusion, cultural diversity, and sustainable development.
How can citizens have a democratic say in world economic development when the IMF and World Bank work on the principle of “one dollar, one vote”?
There can be no real democracy when we have a massive concentration of capital and power in the hands of the few; when multinational corporations challenge the power of democratically elected representatives; when organized criminals can buy off police officers, judges, and politicians; when monopolization of the media erodes fundamental freedoms.
Democratizing globalization will take time.
But we can accelerate the process by strengthening regional cooperation and integration.
This calls for new channels of cooperation with progressive forces in other parts of the world – in China, the United States, India, and the Arab world.
To tackle global problems, we need to strengthen and democratize international institutions like the United Nations.
But we need to look beyond reform of the Security Council and start creating a democratic global architecture that puts globalization at the service of citizens, not markets.
Today, the top priority for socialists is to re-establish a balance between economic productivity and social justice.
While we have some successful precedents, such as the Nordic model, it is difficult for nations to achieve this balance.
As capitalist markets give way to vast commercial networks, and as market economies become market societies, governments and unions are increasingly restricted in scope.
This has disempowered and divided our citizens.
Citizens of developed countries increasingly feel like mere objects of consumerism, while citizens of developing countries struggle for daily survival.
In both cases, but in different ways, people feel impoverished.
To be sure, we have very diverse societies, but we also face new forms of inequality.
Lack of labor standards in one part of the world undermines the social welfare of workers in other parts of the world.
Mass migration from poor countries has created fear and xenophobia in richer countries, especially among the working class.
Similarly, free trade has turned farmers and service workers in the developing and developed world against each other.
Environmental concerns have become a “blame game.”
The developed world fears the depletion of vital resources by the developing world, which in turn blames the developed world for destroying the environment in pursuit of profit.
To bridge these divides, we must rethink the nature of employment in an increasingly automated, borderless, and mobile global economy.
As capital is globalized, so basic labor standards should be global.
Forced labor, child labor, and discrimination in the workplace must be eliminated.
We must also make our own politics more democratic.
We must fight exclusion from our political parties, just as we fight exclusion in our societies.
This means welcoming migrants and minorities, creating more opportunities for women and the disabled, and empowering citizens through education and participation.
Empowering citizens means giving them both the power to decide and the knowledge to decide well.
In PASOK, the Greek Socialist party that I lead, we are undertaking far-reaching reforms in this direction.
Likewise, the goal of the Socialist International is a world governed not by free markets, but by free people.
A Future-Oriented US Fiscal Policy
NEW YORK – At last, Republican candidates in the US presidential campaign have begun focusing on the economy.
At a time of rising anxiety among middle-income voters about wealth inequality, and growing awareness of the unsustainability of Social Security and Medicare, this conversation could not be more important.
Unfortunately, not enough attention is being paid to the link between these two key issues.
In fact, tackling the problems with Social Security and Medicare is the key to addressing what ails the middle class.
But fiscal-policy progressives, in particular, remain fixated on using higher tax rates on the wealthy to fund higher incomes for everyone else.
Income redistribution may be an attractive idea for some – including, to a lesser extent, the Republicans who support a watered-down version, in which relatively high marginal tax rates support expanded family assistance – but it is fool’s gold.
As a recent Brookings Institution paper shows, higher marginal tax rates would do little to diminish income inequality in the US.
Likewise, higher taxes cannot resolve the problem posed by the mounting unfunded liabilities of Social Security and Medicare.
Maintaining these programs in their current form would require growth-destroying tax increases on middle-income Americans, as well as continuing cuts in government funding for defense, education, and research.
There is only one way to ensure broadly shared prosperity in the US: a future-oriented fiscal policy aimed at boosting employment and productivity, maintaining low marginal tax rates, strengthening support for workers, and investing in education, innovation, and infrastructure.
The alternative – allowing the past, in the form of interest payments on the national debt and entitlement spending, to continue dictating fiscal policy – would block prosperity among middle-income households, by requiring continuous tax increases and reduced public investment.
To fund this future-oriented policy, US leaders must implement reforms that enhance the long-run viability of the social safety net.
As it stands, Social Security and Medicare are unsustainable, with the long-term gap between projected income and promised benefits reaching tens of trillions of dollars – well in excess of the official debt the federal government has accumulated over its history.
Closing the gap with tax hikes – the burden of which would be borne largely by middle-income households – would threaten both economic growth and living standards.
And offsetting spending cuts provides no safety valve.
Health care and Social Security already consume half of the US federal budget, up from one-sixth in 1965, and these outlays relative to GDP are projected to more than double by 2040.
With no change in course, the programs’ “trust fund” balances will be depleted by the 2030s.
Avoiding that outcome will require US political leaders to constrain the growth of entitlement spending and bolster support for middle-income individuals.
While Social Security and Medicare remain important to ensure wellbeing in retirement, their role must be updated to suit today’s needs.
For example, to ensure that no one who has worked for 30 or more years will live in poverty in old age, Social Security needs a higher minimum benefit for lower-income workers, with more affluent seniors seeing less growth in benefits over time.
Adopting the chained consumer-price index for federal benefit calculations would ensure that benefits more accurately represent inflation, while slowing the rate of benefit growth for individuals.
Beyond stabilizing Social Security’s finances, US leaders should implement policies that place a higher value on work.
Seniors working past the retirement age of 67 should not be subject to the payroll tax, and the retirement earnings test should be eliminated, so that seniors can work full-time without losing out on Social Security benefits.
Finally, incentives for private retirement saving should be expanded.
A similarly honest and modern approach can also secure Medicare, without large tax increases on middle-income Americans.
For starters, bipartisan proposals for premium support, with seniors receiving subsidies to purchase private health insurance, should be implemented.
To enable individuals to prepare to cover the associated deductibles and copayments, health savings accounts – funds which are not subject to income tax at the time of deposit, and can be used tax-free at any time to cover qualified medical expenses – should be expanded and strengthened.
Premium support can significantly reduce Medicare spending, as it establishes a framework for more efficient spending on benefits, driven by competition and innovation in care and coverage.
So far, the only US presidential candidate who has recognized the need for such a future-oriented approach is former Florida Governor Jeb Bush, who has proposed modernizing reforms of Social Security and Medicare that avoid imposing high costs on middle-income Americans and a heavier debt burden on future generations.
Two other Republican candidates, Ohio Governor John Kasich and Florida Senator Marco Rubio, have also raised constructive reform ideas.
By contrast, former Secretary of State and Democratic candidate Hillary Clinton and a leading Republican contender, Donald Trump, have opposed reform of Social Security and Medicare.
Senator Bernie Sanders, Clinton’s Democratic rival, actually proposes to expand the programs’ unfunded liabilities.
With so few presidential candidates recognizing the link between reforming Social Security and Medicare and ensuring broadly shared prosperity, the US faces serious risks.
The progressive redistributive agenda could continue to advance, or the conservative entitlement-reform agenda could fail.
Either way, the US would face growth-limiting tax increases and limits on the contributions that public investment can make to the country’s future.
There is a fiscal path to enhancing prosperity for middle-income Americans.
It requires support for growth, rewards for work, investment in opportunity, and, unavoidably, reforms to Social Security and Medicare.
One hopes that, as the campaign progresses, honest and forward-looking fiscal-policy debates recognizing this fundamental truth gain traction.
The Authoritarian Temptation
NEW YORK – Twenty-four years ago this month, Soviet hardliners, desperate to stop the country’s nascent democratic transition, arrested Mikhail Gorbachev and declared martial law.
In response, millions of protesters poured into the streets of Moscow and towns across the Soviet Union.
Key elements of the army refused to accept the coup, and it soon collapsed – with the Soviet Union soon to follow.
Even though economic conditions were dire in the USSR’s final months, people could see the freedoms that were coming and, unlike today, were willing to stand up for them.
Indeed, in the early years of the democratic transition that followed, most post-communist voters did not succumb to the temptation to elect extremists who promised to end the hard times they were enduring.
Instead, they usually chose the most sensible candidate available.
Russians, for example, rejected Vladimir Zhirinovsky, a clownish Donald Trump-like nationalist and anti-Semite, in favor of Boris Yeltsin, who had stared down tanks during the failed 1991 coup and recognized that his country’s future lay with democracy and the West.
In Romania, the extremist poet Corneliu Vadim Tudor lost to a succession of corrupt pragmatists, beginning with Ion Iliescu, who had led the ouster of the country’s last communist leader, Nicolae Ceaușescu.
Since then, the world has been turned upside down.
As life has gotten easier, with people’s material expectations largely met, voters have increasingly favored neo-autocrats who promise to “protect” the people from this or that threat.
Russian President Vladimir Putin, of course, leads this group, but there are also Hungarian Prime Minister Viktor Orbán and Czech President Miloš Zeman.
And the trend extends beyond the former communist countries to include, for example, Turkish President Recep Tayyip Erdoğan.
The French philosopher Jean-François Revel saw the rise of violent dictatorships in the twentieth century as driven by a “totalitarian temptation.”
What we are witnessing today is something a bit less sinister – call it an “authoritarian temptation.”
But it is a growing threat not only to democracy, but also to global stability.
After all, the one thing today’s autocrats have in common with their totalitarian predecessors is contempt for the rule of law, both domestically and internationally.
One cause for this shift toward authoritarianism is that many countries no longer view the United States as a beacon of democracy and a model of stability and prosperity to be emulated.
Putin’s claim that democratization is actually an American plot “to gain unilateral advantages” resonates with many societies following the disastrous invasion of Iraq and revelations about the National Security Agency’s spying on citizens and leaders worldwide.
But even before these developments, the Cold War’s winners – and especially the US – were showing a boastfulness that probably alienated many.
When even allies are treated with disrespect – recall George W. Bush’s infamous shout of “Yo, Blair,” as if then-British Prime Minister Tony Blair were some cowhand – people naturally wonder whether their country, too, is deemed subservient.
Rising “soft” dictators – what the journalist Bobby Ghosh calls authoritarian democrats – have used these feelings of unease and alienation to attract votes.
Their supporters do not want to be oppressed, but they do want stability and national sovereignty – desires that their leaders fulfill partly by limiting opposition.
Given the reach of today’s mass media and social networks, only a few people must be targeted to cow the rest of society into conforming to the leader’s vision.
So, instead of building gulags, neo-authoritarians launch criminal cases.
The defendants range from political opponents and critics in Russia – such as the oil oligarch Mikhail Khodorkovsky and the anti-corruption lawyer Alexei Navalny – to independent journalists in Erdoğan’s Turkey.
Citizens seem convinced.
At least 70% of Russians agree with Putin that this kind of “managed democracy” is superior to the chaotic version practiced in the West.
Almost half of Hungary’s citizens find membership in the European Union, whose liberal values Orbán mocks, unnecessary.
And more than 70% of Turks have a negative view of the US, which Erdoğan blames for the rise of social media (the “worst menace” facing Turkey today – trumping, it seems, even the Islamic State’s deadly attacks in Turkish cities).
When the Berlin Wall fell in 1989, people did not understand the link between capitalism and democracy.
Many wanted a Western lifestyle, with access to the kinds of jobs and goods available in the US, but seemed not to recognize that access to that lifestyle requires increased economic and personal freedom – precisely the kind of freedom that underpins democratic societies.
If, in the current environment, Western powers attempted to point this out to the people of Russia, Hungary, or Turkey, they would likely stoke even greater resentment.
The better option would be to work on the countries’ leaders.
If the Putins, Erdoğans, and Orbáns of the world want to continue to benefit economically from the open international system, they cannot simply make up their own rules.
The power of such an approach can be seen in Russia, where Western sanctions, imposed following Putin’s annexation of Crimea, are the main factor limiting the pro-Russian rebels’ incursion in eastern Ukraine.
Putin’s efforts to reclaim “great power” status for Russia may find support among his people; but that support will probably dwindle if Russians face the prospect of losing all of the comforts derived from the relatively open economy that their country has had for more than two decades.
At a time when more and more Russians are being denied passports to travel outside the country, those tempted by authoritarianism would do well to recall the elementary point made by John F. Kennedy in his Berlin speech in 1963. “Freedom has many difficulties, and democracy is not perfect,” Kennedy said.
The Erosion of Law
MADRID – In assessments of global events and trends in 2014, words like chaos, disorder, and fragmentation are likely to feature prominently.
But the word “soft” should also appear.
Indeed, 2014 was characterized by the continued rise of “soft” instruments to address global challenges: pledges, decrees, self-regulation, joint plans of action, and handshake deals.
Are the days of organizing international relations according to traditional, formal law over?
To be sure, this shift toward “soft” law is also occurring in domestic contexts.
In the United States, President Barack Obama used his executive power to sidestep Congress on immigration reform.
At the supranational level, the new European Commission is pursuing its goal of “better regulation” using as little formal lawmaking as possible, focusing instead on recommendations, codes of conduct, and guidelines.
But the erosion of traditional law remains most pronounced in the international arena.
The G-20’s decisions have become increasingly informal, while rule-making authority has been outsourced to private regulatory bodies, such as the Basel Committee and the International Accounting Standards Board.
Moreover, a growing number of arrangements are being introduced with little or no built-in enforcement.
November’s much-celebrated climate agreement between Obama and Chinese President Xi Jinping, and the interim “joint plan of action” between Iran and its international interlocutors on the country’s nuclear program (essentially two unilateral statements linked by a press release), are but two recent examples.
Such agreements may be positive developments, but they are no substitute for official, enforceable international rules of conduct.
And states, despite their reticence to be formally bound by preset terms, recognize this.
From trade regulations and nuclear non-proliferation to climate action and maritime boundaries, there is a yearning for the clarity and certainty that only “hard” law can provide.
So what is preventing the international community from making firm rules?
The protracted travails of the Doha Round of World Trade talks offer some clues.
One key problem is the rapid rise in the number of actors.
It is simply more difficult for 193 states to reach agreement than it was for the original 51 signatories of the post-World War II conventions that established the contemporary international order.
This challenge is rooted in two developments: the post-colonial and post-Soviet proliferation of states, and the disaggregation and erosion of state sovereignty.
Crafting agreements is no longer the job of only foreign ministers or heads of state; it now must involve civil society, experts, international organizations, and the private sector – each of which has its own agenda.
This may enrich negotiations; but it also complicates and prolongs the process considerably.
In this context, ensuring that formal rule-making remains a viable option internationally will require some adjustments.
One potential solution would be for regional representatives to be empowered to negotiate on behalf of groups of states.
Another would be to work from treaties involving fewer actors to build broader agreements.
In international trade, for example, mega-regional deals like the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership could serve as de facto standard setters, helping to facilitate a global agreement.
Likewise, a binding and enforceable deal on Iran’s nuclear program could encourage progress at this spring’s Non-Proliferation Treaty Review Conference toward instituting firm commitments to implement the action items agreed upon at the 2010 round – in particular, establishing a nuclear-weapons-free zone in the Middle East.
Unless non-proliferation deals are infused with traditional legality, they will remain inadequate to achieve their goal of making the world a safer place.
This year will offer one more critical opportunity to reestablish hard legality in international negotiations: the United Nations Climate Change Conference in Paris in December.
It is widely believed that the conference may well represent the world’s last chance to limit the global temperature increase to 2º Celsius over pre-industrial levels – the threshold beyond which the risks of climate change become particularly daunting.
To succeed, the Paris conference can look nothing like the disastrous meeting held in Copenhagen six years ago.
And the negotiating parties must move beyond the soft “intended nationally determined contributions,” agreed to last month in Lima, to establish legally binding commitments.
Such a result would be a boon not just for efforts to limit climate change, but also for addressing other global challenges.
A firm, enforceable climate-change deal would show that, as difficult as it is to reach a hard-law agreement nowadays, it is possible.
Indeed, world leaders should not settle for less.
More flexible approaches to international negotiations may have facilitated “landmark” deals in 2014.
But without strong compliance mechanisms, such agreements could amount to little.
Finding ways to adapt formal legal processes to today’s complex global environment is a key challenge for 2015.
World leaders need a success story to get them motivated.
Soft Power and Hard Batons
LONDON – We all remember one phrase from the first presidential campaign by a Clinton.
When Bill Clinton was running for the job in the early 1990’s, one of his staff explained what the central issue in the election was. “It’s the economy, stupid.” he said.
Economics explains all – jobs, prices, savings, houses.
It determines the public mood and sets the political agenda.
The point is reinforced by a curious glossy magazine advertisement that you might have seen recently.
It is for expensive luggage.
Mikhail Gorbachev sits in the back of a limousine.
He is being driven past the Berlin Wall.
On the seat next to him is the luxury brand, a leather attaché case.
The message?
Who cares about the Wall; forget politics; money rules.
Maybe that’s really how it is.
Today the world wrestles with the consequences of America’s addiction to borrowing and with the greed and stupidity of many global banks.
Drivers grumble at the cost of filling their cars’ gas tanks.
Housewives in poor countries – and in better-off countries, too – despair at the rising cost of feeding their families.
In Asia, Africa, the Middle East, and Latin America, their husbands and sons riot over food prices.
So the economy is the big story.
But two others jostle for our attention.
They tell us a lot about the politics of the world in a new century.
It’s not only the economy that matters, after all.
First, there is Tibet, where apparently the local economy has been growing fast.
This does not seem to have impressed the Tibetans.
Last year, it was Burma’s Buddhist monks who were shot and beaten with batons.
This year it is monks in Tibet.
The history is complicated.
But I have no problem in accepting that Tibet is part of China.
Many Chinese dissidents take the same view. It seems to be the Dalai Lama’s opinion as well.
But can that position be sustained only through state violence?
The Dalai Lama is not a devious terrorist.
China does itself no favors by remaining time-warped in the Maoist 1960’s when discussing this issue.
The Chinese have been so smart in so many areas.
They devised the “one country, two systems” formula for Hong Kong.
Is it really beyond the capacity of their political system to work out a formula for Tibet that recognizes its cultural and religious autonomy within the Chinese state?
I hope that this issue does not derail the Chinese effort to use the Olympics as an opportunity to show the world that their country has emerged again as one of the world’s leaders.
It would make no sense at all to boycott the Games.
A boycott would merely provoke nationalist hostility in China.
But those who attend the Games should not be placed under any constraints about giving their views – if they have any – politely but firmly about human rights.
What has happened in China economically in the last 25 years is momentous.
China has become the workshop of the world.
Its success is not a threat to the rest of us.
It is good news for everyone.
Momentous, sure – but China is not yet a superpower.
It is not a mark of a superpower’s quiet, self-confident authority to beat up Buddhist monks and attack their spiritual leader.
The other big global political story is the American presidential election.
This is super-charged American soft power.
A tight contest between the two Democrats, Barack Obama and Hillary Clinton, has yet to be resolved.
Waiting to take on the winner is a tough genuine war hero, John McCain.
The contest between Obama and Clinton, though it has produced some lamentable protectionist sentiments, has captured the world’s attention.
Obama himself represents two qualities that enthuse many people, not just the young.
Obama’s success demonstrates that the United States is still the land of opportunity.
If he were to win the election, imagine the impact on the world of his first speech from the podium to the United Nations General Assembly.
He would be there as president of the most globalized country in the world; in a sense he would be everyone’s president.
Second, he does democratic politics a service.
Like an earlier son of Illinois, Adlai Stevenson, he believes that the average man and woman are a great deal better than average.
Faced with the embarrassment of his pastor’s views on race and on America, Obama did not go into a huddle with spin-doctors to fathom how he should deal with the problem. Instead, he delivered a thoughtful, eloquent, and moving speech about race.
He treated the issue head-on, and intelligently.
Confronted with an awkward problem, he responded with reason.
Whatever else happens in the presidential race, that speech marked a special moment.
So why is all of this – Tibet on the one hand and American soft power on the other – so significant?
It’s simple.
The century ahead will not be a struggle between China and the US for global leadership.
This is not a balance-of-power gladiatorial contest.
There will, however, be a battle of ideas.
Does the world want and need Leninism with its shopping malls?
Do governments have to lock up dissidents in order to deliver prosperity?
Or does the world want the sort of freedom that embraces politics as well as economics?
That is what my children would call a “no brainer.”
Soft Power and the Struggle Against Terrorism
Last year, at the World Economic Forum in Davos, Switzerland, George Carey, the former Archbishop of Canterbury, asked Secretary of State Colin Powell why the United States seemed to focus only on its hard power rather than its soft power.
Secretary Powell replied that the US had used hard power to win World War II, but he continued: "What followed immediately after hard power?
Did the US ask for dominion over a single nation in Europe?
No.
Soft power came in the Marshall Plan¼.We did the same thing in Japan."
After the war in Iraq ended, I spoke about soft power (a concept I developed) to a conference co-sponsored by the US Army in Washington.
One speaker was Secretary of Defense Donald Rumsfeld.
According to a press account, "the top military brass listened sympathetically," but when someone asked Rumsfeld for his opinion on soft power, he replied, "I don't know what it means."
One of Rumsfeld's "rules" is that "weakness is provocative."
He is correct, up to a point.
As Osama bin Laden observed, people like a strong horse.
But power, defined as the ability to influence others, comes in many guises, and soft power is not weakness.
On the contrary, it is the failure to use soft power effectively that weakens America in the struggle against terrorism.
Soft power is the ability to get what one wants by attracting others rather than threatening or paying them.
It is based on culture, political ideals, and policies.
When you persuade others to want what you want, you do not have to spend as much on sticks and carrots to move them in your direction.
Hard power, which relies on coercion, grows out of military and economic might.
It remains crucial in a world populated by threatening states and terrorist organizations.
But soft power will become increasingly important in preventing terrorists from recruiting new supporters, and for obtaining the international cooperation necessary for countering terrorism.
The US is more powerful than any country since the Roman Empire, but like Rome, America is neither invincible nor invulnerable.
Rome did not succumb to the rise of another empire, but to the onslaught of waves of barbarians.
Modern high-tech terrorists are the new barbarians.
The US cannot alone hunt down every suspected Al Qaeda leader.
Nor can it launch a war whenever it wishes without alienating other countries.
The four-week war in Iraq was a dazzling display of America's hard military power that removed a vicious tyrant.
But it did not remove America's vulnerability to terrorism.
It was also costly in terms of our soft power to attract others.
In the aftermath of the war, polls showed a dramatic decline in the popularity of the US even in countries like Britain, Spain, and Italy, whose governments supported the war.
America's standing plummeted in Islamic countries, whose support is needed to help track the flow of terrorists, tainted money, and dangerous weapons.
The war on terrorism is not a clash of civilizations - Islam versus the West - but a civil war within Islamic civilization between extremists who use violence to enforce their vision and a moderate majority who want things like jobs, education, health care, and dignity as they pursue their faith.
America will not win unless the moderates win.
American soft power will never attract Osama bin Laden and the extremists.
Only hard power can deal with them.
But soft power will play a crucial role in attracting moderates and denying the extremists new recruits.
During the Cold War, the West's strategy of containment combined the hard power of military deterrence with the soft power of attracting people behind the Iron Curtain.
Behind the wall of military containment, the West ate away Soviet self-confidence with broadcasts, student and cultural exchanges, and the success of capitalist economics.
As a former KGB official later testified, "Exchanges were a Trojan horse for the Soviet Union.
They played a tremendous role in the erosion of the Soviet system."
In retirement, President Dwight Eisenhower said that he should have taken money out of the defense budget to strengthen the US Information Agency.
With the Cold War's end, Americans became more interested in budget savings than in investing in soft power.
In 2003, a bipartisan advisory group reported that the US was spending only $150 million on public diplomacy in Muslim countries, an amount it called grossly inadequate.
Indeed, the combined cost for the State Department's public diplomacy programs and all of America's international broadcasting is just over $1 billion, about the same amount spent by Britain or France, countries that are one-fifth America's size and whose military budgets are only 25% as large.
No one would suggest that America spend as much to launch ideas as to launch bombs, but it does seem odd that the US spends 400 times as much on hard power as on soft power.
If the US spent just 1% of the military budget on soft power, it would quadruple its current spending on this key component of the war on terrorism.
If America is to win that war, its leaders are going to have to do better at combining soft and hard power into "smart power."
Revolusi Tarif Tenaga Surya
POTSDAM – Revolusi sunyi sedang berjalan.
Pada bulan November, Dubai mengumumkan pembangunan solar energy park yang akan menghasilkan listrik dengan tarif kurang dari $0.06 per kilowat-jam– jauh mengalahkan biaya pilihan investasi alternatif, pembangkit listrik tenaga gas atau batubara.
Pembangkit ini – diharapkan beroperasi pada tahun 2017 – lagi-lagi menjadi pelopor masa depan dimana energi terbarukan mampu menyaingi bahan bakar fosil yang konvensional.
Bahkan jarang sekali satu minggu berlalu tanpa pemberitaan tentang kesepakatan besar untuk membangun pembangkit listrik tenaga surya.
Pada bulan Februari saja terdapat pengumuman proyek-proyek baru pembangkit listrik tenaga surya di Nigeria (1,000 megawat), Australia (2,000 MW), dan India (10,000 MW).
Tidak diragukan lagi perkembangan ini bagus untuk perjuangan melawan perubahan iklim.
Namun pertimbangan utama yang menggerakkannya adalah keuntungan, bukan lingkungan hidup, sebab adanya peningkatan efisiensi dalam distribusi negara, dan apabila diperlukan, dalam penyimpanan, akan mengurangi biaya produksi energi terbarukan.
Seiring dengan manfaat lain yang timbul dari upaya-upaya memperbaiki pengelolaan listrik dari sumber tenaga yang berfluktuasi, biaya tenaga surya akan terus menurun.
Dalam waktu sepuluh tahun, tenaga surya akan dapat diproduksi di banyak negara di seluruh dunia dengan tarif 4-6 sen per kilowat-jam, menurut studi terkini oleh Fraunhofer Institute for Solar Energy Systems (dirumuskan oleh satu think tank, Agora Energiewende).
Pada tahun 2050, biaya produksi akan menurun hingga 2-4 sen per kilowat-jam.
Sebagaimana disampaikan oleh Patrick Graichen, direktur eksekutif Agora, sebagian besar perkiraan tentang pasokan energi dunia di masa depan tidak memperhitungkan lonjakan keberhasilan yang mampu dicapai tenaga surya dibandingkan pesaingnya yang merupakan bahan bakar fosil.
Dengan memperbarui perkiraan-perkiraan tersebut, kita akan mampu mendapatkan gambaran yang lebih realistis tentang biaya dan dampak produksi dan konsumsi energi terhadap iklim dunia, mengungkapkan pentingnya energi terbarukan terhadap pembangunan ekonomi, dan memungkinkan perencanaan infrastruktur energi yang lebih baik.
Kita tidak boleh meremehkan potensi besar yang dimiliki tenaga surya dan angin dalam meningkatkan kesejahteraan global dan memberantas kemiskinan.
Ketika tenaga surya menjadi semakin hemat biaya, negara-negara yang berada di sun-belt dapat mengembangkan model bisnis baru seiring dengan adanya energi murah dan bersih yang memungkinkan mereka untuk memproses bahan baku secara lokal, menambah nilai – dan keuntungan – sebelum mengekspornya.
Berbeda dengan pembangkit tenaga listrik konvensional berskala besar lainnya, instalasi pembangkit tenaga surya dapat dibangun dalam hitungan bulan; selain hemat biaya, instalasi ini memberikan metode cepat untuk memenuhi kenaikan permintaan global.
Selain itu, karena pembangkit listrik tenaga surya umumnya dapat dioperasikan secara terpisah dari jaringan listrik interregional yang kompleks, maka mereka menciptakan cara bagi negara yang kurang berkembang untuk menghasilkan listrik tanpa membangun infrastruktur baru yang mahal.
Pembangkit listrik tenaga surya dapat memainkan peran yang sama di bidang energi sebagaimana dilakukan telepon genggam dalam bidang telekomunikasi: menjangkau komunitas secara luas dan cepat, komunitas yang tidak mendapat layanan memadai di wilayah yang jarang penduduknya, tanpa perlu mengeluarkan dana untuk pembangunan kabel dan infrastruktur penunjang yang dulu diperlukan.
Di Afrika, 66% dari populasinya sudah mendapatkan akses kepada teknologi komunikasi sejak tahun 2000.
Tidak ada alasan mengapa tenaga surya tidak bisa melakukan hal yang sama mengenai pemenuhan akses kepada listrik.
Sekarang tiba waktunya untuk berinvestasi pada produksi tenaga surya berskala besar.
Sebagai awalnya, biaya konstruksi pembangkit listrik tenaga surya akhirnya cukup rendah sehingga dapat menghasilkan listrik dengan tarif yang kompetitif dan stabil selama 25 tahun.
Memang saat ini harga minyak merosot tajam, namun akan kembali naik.
Pembangkit listrik tenaga listrik memberikan jaminan dibandingkan ketidakjelasan harga yang inheren pada bahan bakar fosil.
Menjadi lebih penting juga sebab biaya modal saat ini di sejumlah negara sangat rendah.
Hal ini merupakan faktor penentu bagi kelayakan ekonomi pembangkit listrik tenaga surya, sebab pembangkit listrik jenis ini membutuhkan hanya sedikit perawatan walaupun perlu investasi di muka yang relatif tinggi.
Studi yang dilakukan Fraunhofer Institute menunjukkan bahwa selisih dalam pengeluaran modal (capex) sama pentingnya bagi biaya per kilowat-jam dengan selisih pada cahaya matahari.
Tenaga surya saat ini lebih murah di Jerman yang cuacanya berawan dibandingkan dengan wilayah dengan cuaca cerah, dimana biaya pinjaman lebih besar.
Tentu mustahil bagi kita untuk mengubah jumlah paparan cahaya matahari yang menyinari suatu negara, namun negara dapat mengendalikan biaya modal.
Dengan membuat kerangka hukum yang stabil, memberikan jaminan kredit dalam konteks perjanjian internasional, dan melibatkan bank sentral dalam investasi skala besar, pemerintah dapat membantu menjadikan tenaga surya lebih mudah diakses.
Faktor-faktor semacam ini menggambarkan alasan mengapa kebijakan-kebijakan iklim internasional semakin berfokus tidak hanya kepada tenaga surya, tapi juga bentuk energi terbarukan lainnya.
Terobosan teknologi telah meningkatkan persaingan sumber-sumber energi ini dibandingkan bahan bakar fosil.
Sebagai akibatnya, semua perangkat yang tersedia untuk membuat penggunaan sumber energi ini lebih terjangkau sudah menjadi salah satu senjata terpenting yang kita miliki dalam perjuangan melawan perubahan iklim.
Solidarity Fatigue
Democracy tarnishes its heroes as surely as revolutions devour their children.
For 25 years, the leaders of Solidarity personified the qualities needed to win Poland’s struggle for democracy: unbending courage in the face of the communist Leviathan and magnanimity and clear-sighted determination during the transfer of power.
All of these were great and noble qualities, and all of them now seem utterly superfluous to most Poles.
That is the sad lesson of Poland’s parliamentary election two weeks ago, and of Sunday’s indecisive presidential election (which will be decided by a run off between Donald Tusk and Lech Kaczynski on October 23rd.)
To be sure, the communists-cum-postcommunists who have dominated Polish politics since 1989 were utterly repudiated – the left got scarcely 11% of the vote in the parliamentary poll.
But Solidarity’s old guard has also been cast aside.
Poland yearns for something new.
Poland’s recent elections were the first in which the postcommunist left was irrelevant. The postcommunists know that they can no longer live off their legacy of organization and discipline, so they have chosen a clever and attractive 34-year-old leader.
He has nothing to do with the communist era and has sacked all former Party members from important positions, even barring former Prime Minister Leszek Miller from standing for parliament.
This is undoubtedly all to the good.
But the overall health of Polish democracy is another matter.
Turnout for the parliamentary election was 40%, which puts Poland near the bottom in voter participation among the democratic nations of the world, and about 25-30% below the European average.
Political apathy reflects many factors, but two stand out.
A few days before the parliamentary election, people were asked if they hoped for a better life.
An astounding 60% said that they do not.
Hopeless people do not vote.
Second, one of the necessary conditions of a functioning democracy are clear and sufficiently distinct party political programs.
That is not the case in Poland.
Parties’ programs changed with the public opinion polls, and their economic proposals were either too complicated or too muddled for voters to grasp. So the 40% who voted did so for emotional reasons, not as a clear political choice.
Among the leading politicians of the parties that overwhelmingly won the parliamentary elections – the neo-liberal Civic Platform and the conservative-populist Law and Justice – almost every face has been around since 1989.
So the members of the new government, although not physically old, are politically geriatric.
The Solidarity/postcommunist divide seems to have pickled Polish politics, leaving it without a new generation of leaders and thus without enthusiasm.
Unsurprisingly, the young are the most estranged.
When I asked my students at Warsaw University how many intended to vote, only two raised their hands.
Perhaps others were ashamed to say they care about politics and did, in fact, vote, but they can’t have been many. An entire generation has grown up to be apolitical, even anti-political, which bodes ill for the future.
The most difficult problems in Poland are unemployment, which hovers around 20% – the highest rate in the EU – and the growing divide between rich and poor.
Indeed, only in Russia (and perhaps in Ukraine) is the income gap wider.
Yet neither of these issues was raised decisively in the campaign. The main issues that both victorious parties highlighted were the communist past and public corruption.
Both are important issues, but they are secondary to the problems of joblessness and poverty.
Indeed, it is estimated that 30% of Polish children do not get enough to eat.
This is Europe, so they do not die of hunger. But that a third of all children in a member country of the European Union live on one meal a day is a source of shame – and thus should also be a primary political issue.
This is all the more peculiar given that the victorious parties that emerged out of Solidarity are keen to promote its values, particularly “solidarity” with a small “s.”
But their purpose is purely instrumental, for to call somebody a “liberal” nowadays in Poland is more pejorative than calling him a “son of a bitch.”
Indeed, “liberal” in both its meanings – economic and moral – is disdained.
Liberals are viewed as vampires, seeking only to make money for themselves and their cronies.
So it is understandable that both leading presidential candidates, Donald Tusk and Lech Kaczynski, ran as fast as they could from “liberal” ideas.
But what does small-s solidarity mean in practical terms?
Nobody knows, and neither Tusk nor Kaczynski was saying.
They suggested only some vague notions of state intervention on behalf of the poor and needy.
The death of postcommunism in Poland has thus been greeted not with a bang but with a whimper.
There is nothing devastating in this, of course, but Poland’s political malaise may one day prove dangerous, and so should be scrutinized in other democracies, old and new.
For the problems of anomie, apathy, and political charade are not Polish problems, but maladies that increasingly afflict democracies everywhere, and that urgently call for a restoring of faith in parties and politics.
Solidarity in a Pluralist Age
VIENNA – Solidarity is essential to democratic societies; otherwise, they fall apart.
They cannot function beyond a certain level of mutual distrust or a sense on the part of some members that other members have abandoned them.
Many view the development of an individualistic outlook as the greatest threat to solidarity nowadays.
But this is closely linked to a diminishing sense of common identity.
It is no accident, for example, that Europe’s most successful welfare states were created in ethnically homogeneous Scandinavia.
People in those countries had the sense that they could understand their neighbors and fellow citizens, and that they shared a close link with them.
The challenge nowadays is to maintain that sense of intense solidarity amid diversifying populations.
There are two ways to do this.
One is to hark back to older modes of solidarity.
French identity, for example, is based on the country’s unique brand of republican secularism, known as laïcité.
But France’s efforts to shore up solidarity by insisting on laïcité and erecting a dam against Muslim immigrants are both ineffective and counter-productive, because they exclude from a sense of fully belonging to the nation many people who are actually in France already.
The other way to preserve solidarity is to redefine identity.
All democratic societies today are faced with the challenge of redefining their identity in dialogue with some elements that are external, and some that are internal.
Consider the influence of feminist movements throughout the West.
These are not people who came from outside their countries.
They are people who in some ways lacked full citizenship, who demanded it, and who redefined the political order by obtaining it.
Today the great task is to calm the fears that our traditions are being undermined; to reach out to people who are coming into our lands from other countries; and to find a way of recreating our political ethic around the kernel of human rights, equality, non-discrimination, and democracy.
If we succeed, we can create a sense that we belong together, even though our reasons for believing so may be different.
But increasing individualism – a focus on one’s own ambitions and economic prosperity – in many countries poses a stubborn obstacle to realizing this vision.
Indeed, the utter lack of a sense of solidarity among so many people – horrifyingly evident in the US health-care debate – is now undermining the very basis of what a modern democratic society is.
A society’s sense of solidarity can be sustained only if all of its different spiritual groups recreate their sense of dedication to it: if Christians see it as central to their Christianity, if Muslims see it as central to their Islam, and if the various kinds of lay philosophies see it as central to their philosophies.
Religion provides a profound and powerful base of solidarity, and to marginalize it would be a big mistake, just as marginalizing atheistic philosophies would be a mistake.
Democratic societies, in their tremendous diversity, are powered by many different engines of commitment to a common ethic.
They cannot afford to switch off any of these engines and hope to maintain a political community.
Historically, the political ethic of confessional societies has been grounded in a single, basic foundation.
In Europe, various kinds of laïque societies have tried to invent themselves out of the ruins of the Christian foundation, but they have made the same mistake in another way, with a kind of Jacobin insistence on the civil religionof the Enlightenment.
Well, we can no longer have a civil religion – not one based on God, nor on laïcité and the rights of man, nor, indeed, on any particular view.
We live, today, in uncharted territory.
We face a challenge that is unprecedented in human history: creation of a powerful political ethic of solidarity self-consciously grounded on the presence and acceptance of very different views.
This can succeed only if we engage in vigorous exchange with each other in order to create a kind of mutual respect for these different views.
The advancing force of Islamophobia in Europe and the US, with its attempt to reduce Islam’s complex and varied history to a few demagogic slogans, is the kind of utterly ignorant stupidity – there’s no better description of it – on which democratic societies founder.
But that is true of any kind of dismissive view of the “other.”
Our societies will hold together only if we talk to each other with openness and frankness, and, in doing so, recreate a certain sense of solidarity from all our different roots.
The Population Challenge
BRISBANE – When people think of the world’s “population problem,” they often focus on rapid demographic growth in parts of the developing world.
But, globally, the population-growth rate is actually falling, and population is expected to plateau later this century.
Though we cannot afford to ignore the fact that, according to United Nations estimates, there will be 2.4 billion more mouths to feed worldwide by mid-century, another population problem also merits serious attention: large pockets of demographic decline.
In developed countries, not only is the share of elderly people rising; birth rates are too low to maintain the size of the total population.
While the life expectancy gains that are driving this shift should be celebrated, their problematic consequences – forcing a declining number of working-age people to support an increasing number of retired people – must be addressed.
Meanwhile, in developing countries, the opposite is happening, with too many young people lacking employment – or, at least, high-quality, full-time employment.
To be sure, it will not be very long before these countries begin to confront the problems of aging and shrinking populations, as well.
But, for now, they have plenty of working-age citizens – and they need jobs.
In fact, these contrasting trends present an ideal opportunity for global demographic rebalancing.
By easing restrictions on migration, developed countries could bolster their dwindling workforces with young people from developing countries.
These migrant workers’ taxes would help developed countries fund services for the elderly, and their remittances would help their home countries.
This approach has enormous potential benefits.
Indeed, a modest 3% increase in the developed-country workforce would provide a larger economic boost than removing all remaining trade barriers.
Moreover, every dollar invested in this initiative would produce nearly $50 in returns, making it an exceptionally effective use of limited resources.
These impressive figures emerged from a comprehensive analysis conducted by a team of top economists tasked by my think tank, the Copenhagen Consensus Center, with assessing possible population-related targets, in order to identify the best global investments.
(Additional teams considered issues in 18 other areas.)
Such objective, empirically-based analysis should guide ongoing efforts – involving the UN, national governments, NGOs, and other actors – to establish the next global development agenda, which will be launched next year.
Indeed, it is the only way to ensure that the poorest people get the best deal, and that governments get the biggest bang for their buck.
While the current agenda – centered on the so-called Millennium Development Goals – has produced significant successes, its failure to emphasize such cost-benefit analyses has prevented practitioners from fully optimizing limited resources.
Another advantage to this kind of analysis is that it can highlight future risks associated with longer-term trends like global population growth.
This is important, as a rising population may be an even bigger problem than was previously thought.
A new study argues that there is now a 70% chance that the world population will not peak this century, and an 80% chance that it will reach 9.6-12.3 billion people by 2100.
Sub-Saharan Africa – persistently the poorest region – will be the main engine of demographic growth.
Fortunately, there is a cost-effective way to slow down this engine: improve women’s access to modern contraception.
Providing contraception for the 215 million women worldwide – a large share of them in Africa – who would like to avoid pregnancy would cost about $3.6 billion annually.
This is a pittance, when one considers the massive payoff.
Each year, there would be an estimated 640,000 fewer newborn deaths, 150,000 fewer maternal deaths, and 600,000 fewer children losing their mothers – yielding economic benefits of roughly $145 billion.
And there is more good news. Better access to contraception would enable mothers to spend more time raising – and educating – the children that they do have.
Fewer kids also means that a larger share of the population would be working, boosting the economy by an estimated $288 billion annually for a generation.
Altogether, each dollar spent on family-planning programs yields a whopping $120 in benefits.
Of course, simply distributing contraception would not be enough.
People in poor countries – especially in high-fertility African countries, which have only 18% of the world’s population but produce 38% of its newborns – would also benefit considerably from educational initiatives centered on health and family planning.
There is no silver bullet for sustainable development. Improving the lot of the world’s poorest people as much as possible means navigating powerful forces, entrenched habits, and, most important, severe financial, temporal, and human-capital constraints.
For that reason, objective, data-driven analysis is the best guide.
Perompak Somalia yang Baru
MOGADISHU – Somalia diberkati dengan garis pantai terluas di benua Afrika.
Perairan laut kami yang kaya termasuk salah satu yang paling produktif di dunia, penuh dengan ikan tuna sirip biru, marlin biru, mahi-mahi, dan sarden.
Akan tetapi selama lebih dari 30 tahun, lingkungan laut yang berlimpah ini juga menjadi sumber dan lokasi konflik, seiring dengan kapal-kapal asing memasuki wilayah perairan dan melakukan penangkapan ikan yang tidak sah, tidak dilaporkan, dan tidak sesuai aturan (illegal, unreported, and unregulated (IUU) fishing) dan menjual hasil tangkapan mereka di pelabuhan-pelabuhan di luar Somalia.
Hanya beberapa tahun yang lalu, pelanggaran yang dilakukan oleh kapal-kapal ikan ilegal memicu aksi bajak laut di Somalia yang menimbulkan kerugian pada industri pelayaran maritim internasional hingga miliaran dolar.
Ketika kapal-kapal penangkap ikan asing ilegal melarikan diri dari perairan kita, bajak laut Somalia dengan cepatnya mengalihkan fokus mereka ke kapal-kapal yang lebih menguntungkan, seperti kapal kargo dan tanker minyak.
Kini saat aksi bajak laut hampir seluruhnya diberantas, terdapat cukup banyak bukti bahwa kapal-kapal asing telah kembali untuk lagi-lagi merampas perairan kita.
Laporan baru yang dikeluarkan oleh kelompok Secure Fisheries yang disebut Securing Somali Fisheries mengungkap data satelit baru yang menunjukkan bahwa kapal-kapal asing ilegal kini melakukan penangkapan ikan yang tiga kali lebih banyak dibandingkan kapal-kapal dari Somalia.
Mereka menargetkan penangkapan beberapa ikan dengan harga tertinggi di perairan kita, sehingga warga Somalia terpaksa bersaing untuk mendapatkan ikan-ikan dengan harga/nilai lebih rendah.
Laporan tersebut menunjukkan bahwa kapal-kapal asing ini berkontribusi pada penangkapan ikan yang berlebihan (overfishing) terhadap populasi ikan todak, kakap, marlin, dan hiu.
Kapal-kapal asing yang menggunakan pukat dasar (bottom trawl) melakukan penangkapan ikan yang tidak bertanggung jawab dan bertindak berdasarkan impunitas, menyeret jaring-jaring berukuran besar, menghancurkan dasar laut dan merusak habitat laut yang vital seluas 120.000 kilometer persegi (46.000 mil persegi).
Kerusakan ini sangat buruk sehingga walaupun penggunaan pukat ini dihentikan sekarang, pemulihan di kawasan ini akan membutuhkan waktu bertahun-tahun.
Penjarahan terhadap ekosistem laut kita terus berlangsung bahkan ketika Somalia telah menerapkan perbaikan selama 18 bulan terakhir tentang pengelolaan wilayah perairan yang lebih baik.
Pada bulan Juni 2014, pemerintah di bawah kepemimpinan saya membuat klaim atas zona ekonomi eksklusif (ZEE) Somalia seluas 200 mil laut, sejalan dengan Konvensi PBB tentang Hukum Laut.
Pada bulan Desember lalu, kami juga mengundangkan UU Perikanan Somalia yang secara jelas mengkriminalisasi penggunaan pukat dasar.
Peraturan yang mendobrak ini menyerukan penguatan monitoring atas penyimpanan ikan pasca tangkap, suatu pendekatan berbasis ekosistem dalam pengelolaan perikanan dimana kawasan tersebut akan dikelola secara menyeluruh, serta perlindungan spesies ikan yang terancam punah atau langka.
Meskipun terdapat sejumlah kemajuan dalam penguatan pengelolaan perikanan domestik, kami memiliki kelemahan dalam mengamankan dan mengawasi wilayah perairan yang luas.
Komunitas internasional dapat membuat perbedaan yang signifikan di bidang ini, dengan membantu pemerintah kami melakukan mengawasi dan mengendalikan ZEE Somalia, serta menyempurnakan pertukaran intelijen kritis yang diperoleh dari patroli angkatan laut internasional.
Menurut laporan yang diterbitkan Secure Fisheries, pemberantasan IUU fishing akan memungkinkan Somalia untuk memulai sistem perizinan dan menjual tuna yang bernilai komersial secara berkelanjutan dan menghasilkan dana hingga $17 juta per tahun.
Dana tersebut kemudian dapat diinvestasikan kembali untuk membangun infrastruktur yang lebih baik – seperti pembangunan pelabuhan, perbaikan ruang penyimpanan dingin, dan fasilitas pengolahan modern – untuk memfasilitasi kapal-kapal milik nelayan tradisional dan industri perikanan.
Pemberantasan IUU fishing juga akan memungkinkan cadangan ikan yang mengalami overfishing untuk pulih dan membantu pengembangan perikanan domestik Somalia yang sejahtera, seiring dengan bertambahnya dukungan pemerintah dan anggaran untuk pengumpulan data dan pengelolaan sumber daya.
Laporan tersebut menunjukkan bahwa jumlah cadangan ikan (fish stocks) yang wajar akan memberikan jumlah sumber daya yang jauh lebih besar dibandingkan sekarang.
Bahkan, hampir setengah dari perikanan yang kita kelola saat ini tengah dieksploitasi pada tingkatan yang berkelanjutan.
Tetapi kita memerlukan investasi lebih besar untuk perbaikan infrastruktur untuk mewujudkan potensi industri secara maksimal.
Praktik penangkapan ikan di perairan Somalia tidak boleh dibiarkan terbuka/bebas untuk semua (free-for-all), sehingga menyebabkan kapal-kapal asing mengeksploitasi ekosistem dengan cara yang tidak berkelanjutan.
Saya menyerukan kepada komunitas internasional untuk bekerja sama dengan pemerintah yang saya pimpin untuk memastikan bahwa IUU fishing di perairan Somalia dihentikan selamanya.
Tindakan ini akan meningkatkan keamanan maritim dan memajukan industri perikanan domestik yang kuat dan memberikan manfaat serta menunjang penghidupan seluruh warga Somalia.
Industri perikanan yang berkelanjutan dan dinamis akan membantu kita membangun Somalia yang lebih stabil dan sejahtera.
Mengingat potensi besar yang negara kita miliki serta lokasi strategis, hal ini merupakan hasil yang selayaknya didukung semua orang.
Somalia’s Endless Hell
MOGADISHU &#45;&#45; Somalia’s internal conflict is propelled by a combustible mix of religion, politics, and clan rivalry.
Civilians are killed daily in Mogadishu, there are roadside bombs and mortar attacks, and politicians and journalists are targeted.
Making matters worse, the country has suffered this year from both floods and drought.
This combination of insecurity and natural disasters has displaced huge numbers of people and caused suffering on a scale painful to behold.
According to the most recent United Nations figures, 400,000 people, or roughly one-third of Mogadishu’s population, have fled the city.
Yet Somalia still rarely gets into the headlines.
This partly reflects the near impossibility of gathering news.
Few foreign journalists venture in – it is too difficult and too dangerous for them to work inside the country – and local reporters are harassed by the authorities.
And, even when there is news, the world’s capacity to absorb bad and sad stories from yet another hellish place is limited.
Since last December, Somalia has been in a de facto state of civil war.
The secular government, supported by the UN, the European Union, and the United States, with military reinforcements from Ethiopia, has been fighting insurgents from the Union of Islamic Courts, a group accused of harboring al-Qaeda terrorists whose leaders are supported by Eritrea.
The lawlessness and absence of security makes finding a political solution almost impossible.
When local elders and delegates wanted to assemble in Mogadishu for a reconciliation conference, security conditions forced them to postpone the conference for several months (though when they did meet, in big numbers and for a long time, they achieved no breakthrough).
A plane with the UN envoy for human rights was denied landing rights in Baidoa (seat of the Somali parliament) not long ago, and pilots sometimes refuse to fly foreigners to Mogadishu, because it is too dangerous.
The same lack of security applies to delivering aid: on a recent visit to North Somalia to assess humanitarian needs, a team from the International Rescue Committee of which I was a part spent more time, effort, and funds on security issues than on inspecting wells and evaluating the need for latrines, although the lack of water and sanitation is acute.
On a 25 mile stretch of road between the southern cities of Kismayo and Jilib, there are at least 35 checkpoints manned by armed men who take $50 to $200 from passing travelers.
Offshore, piracy seriously disrupts aid being brought in by ships.
One incident in southern Somalia vividly demonstrated how insecurity can hamper humanitarian work.
While our assessment team was in the town of Marare, a banal scene of two friends in their twenties having breakfast turned into a major drama when one of the boys mishandled his Kalashnikov and accidentally killed his friend.
The boys were from the same clan, but, alas, from different sub-clans.
The customary procedure is that the victim’s family gets to kill someone from the perpetrator’s sub-clan.
The elders of the two sub-clans spent four days negotiating a less bloody solution, and the agreed price of 100 camels – worth $7,000 – was paid as compensation.
But during those four days, work at the local hospital (run by an international non-governmental organization) was impeded, as all staff from the perpetrator’s sub-clan stayed away from their jobs, lest they be targeted for a revenge killing.
The dilemma that the accident presented is not easy for a foreigner to understand.
But the way the elders steered clear of a violent resolution is an admirable example of good governance.
If only such practices were used to tackle the vast majority of the problems that overwhelm Somalia.
In this quintessential “failed state,” this sort of elders’ wisdom may be the only option to start dealing with the quagmire created by the lawlessness that has gripped the country since the departure of the dictator Said Barre in 1991.
Ignoring the situation in Somalia and not trying to reestablish law and order is not an option.
The two main factions fighting in Mogadishu are backed, respectively, by Ethiopia and Eritrea.
Because those nations - among the poorest in Africa - have an unresolved border dispute that led to a 1998-2000 war in which tens of thousand died on both sides and hostilities in the area continue, their involvement, by proxy, in the Somali civil war may have grave implications for the entire Horn of Africa.
Sons of the Mau Mau
WASHINGTON – At the beginning of last year, Kenya seemed to be descending into madness.
Those scenes return as if from a nightmare: children massacred inside burning churches, mobs using machetes at will in city slums, a country on the brink of breakdown.
By the time the dust settled, more than 1,500 people had been killed and over 400,000 displaced, following an election that observers dismissed as rigged.
Kenya was saved from the abyss by a shotgun marriage between the country’s ethnic Kikuyu president, Mwai Kibaki, and his Luo challenger, Raila Odinga, who was given the post of prime minister.
The power-sharing government, fostered by former United Nations Secretary-General Kofi Annan and the Western powers, stabilized the country and gave Kenyans hope in a tough year that has seen food and fuel prices skyrocket and drought plague the north.
But if the government is to succeed and prevent further violence, Kenya must tackle the roots of its election chaos.
These include poverty, tribalism, and the failure of the country to live up to the vision of its first president, Jomo Kenyatta.
Speaking in 1952 – prior to independence – Kenyatta said: “It has never been known in history that a country prospers without equality.
As long as people are held down, corruption is sure to rise, and the only answer to this is a policy of equality.
If we work together as one, we must succeed.”
Today’s Kenya bears little resemblance to this vision – 48% of Kenyans live in poverty and 75% of young people are unemployed.
Urban slums like Nairobi’s Kibera – home to over one million people – remain largely untouched by government services.
Into this vacuum have stepped tribal gangs including the ethnic Kalenjin Sabaot Land Defence Force and the Luo Taliban, which was named, according to one member, in honor of its Afghan heroes’ “defense of their people and way of life.”
These groups frequently challenge law and order through intimidation, extortion, and violence.
But no group has provoked government ire like the Kikuyu Mungiki.
The organization—which claims one million members—is guilty of horrific acts of violence that continue unabated, including the recent beheading of the son of one of Kibaki’s key allies.
Mungiki’s origins can be traced in part to the sons and daughters of Mau Mau fighters, the dispossessed Kikuyu who fought the Kikuyu elite and British colonists in the 1950s.
Today, they have vowed to fight government elites, Christianity, and foreign influences like the IMF and World Bank, which they accuse of re-colonizing Kenya.
Western culture is shunned and traditional Kikuyu beliefs like female circumcision promoted.
Kibaki has responded harshly to Mungiki, waging a “war on terror”-style campaign to defeat it, which has lead to thousands of deaths, according to Kenyan human rights groups.
Kibaki was aided by the Bush administration, which was concerned that Kenyan instability would harm Western business interests and jeopardize American anti-terror operations in Somalia.
Yet, at the same time Kenya’s president was trying to suppress Mungiki, some of his Kikuyu allies in government allegedly activated Mungiki as attack dogs following attacks on the Kikuyu by the Luo and other tribes in the post-election chaos.
Many Kenyans suspect that these politicians’ names are on a “secret list” of guilty officials from all sides contained in a recent report by Kenyan Justice Philip Waki.
The discrepancy in Mungiki’s treatment by the government is a good indication of what is going wrong in Kenya.
The state fails to provide for its citizens; poverty, political marginalization, and land disputes then fester, fueling ethnic militias that function as a kind of tribal shadow government, often providing social services.
The state then brutally crushes the militias, making matters worse, and politicians manipulate the actors for their own purposes.
To break this cycle, Kenya needs a new approach to government – a return to Kenyatta’s original vision of justice and equality, and a way for the poor to benefit from economic growth and globalization.
This does not mean using state power to crush groups that have arisen in part due to the state’s own failures, but rather to uphold law and order by prosecuting only the guilty and understanding why such groups are gaining recruits in the first place.
Odinga’s pledge last year to begin a dialogue with Mungiki is a good step, but it must be followed with action.
Kenyans should be proud of what they have accomplished in a year that has also seen the election of a man they claim as their own, Barack Obama, as America’s president.
But if the old pattern continues, and massive poverty-stricken populations are left out of the political process, the country could explode in another orgy of violence.
For all the parties involved, including the coalition government and its Western allies, the stakes are much too high for a return to “business as usual.”
Sorry States
PARIS – National repentance is in the news again, as it has been with remarkable frequency in recent years.
In 2008, Australia’s then-Prime Minister Kevin Rudd apologized to his country’s Aborigines, while Queen Elizabeth II offered a moving gesture of contrition in Ireland a few months ago.
And now, French President Nicolas Sarkozy, on a recent visit to the Caucasus, reiterated his advice to the Turks to “repent” for the massacres of Armenians committed by the decaying Ottoman regime in 1915.
Of course, Sarkozy would be surprised to be told that the same logic should lead to a declaration of repentance by the French state to Algeria, not to mention to the Algerian soldiers who fought under the French banner, the so-called “Harkis,” many of whom were abandoned to a terrible fate when France left the country in a hurry.
As for those who managed to survive and cross the Mediterranean, France dumped them in segregated, under-served ghettos.
For many political leaders and analysts, repentance is a misplaced and excessive form of sensitivity.
History is tough, they say.
Besides, where does one begin apologizing – or, rather, end?
Should one apologize for the Crusades, for the destruction of German cities by the armies of King Louis the XIV in the seventeenth century, not to mention the armies of Napoleon?
Wouldn’t the result simply be to turn history into a perpetual cycle of contrition?
Yet, in a globalized age, which demands transparency and posits interdependence, repentance can be considered an instrument of good governance.
A country that has lifted the carpet of myth and indifference under which the negative aspects of its past were swept is better able to manage itself and accommodate others.
Japan has never learned to interact with its Asian neighbors the way that Germany after World War II learned to cooperate with its future European partners, partly because its apologies have appeared formalistic and half-hearted, when they have taken place at all.
The European Union exists (whatever its current difficulties) because Germany asked for forgiveness.
And Germany today is able to distance itself – though clearly at the margin – from Israel’s current government because Germans fully confronted their past in ways that many of their neighbors have not.
To ask for forgiveness enables one to speak to the “Other” without ambiguity, with the freedom of speech needed to express truth.
Indeed, former French President Jacques Chirac won a place in French history by proclaiming France’s responsibility for the crimes committed by the collaborationist Vichy government against its Jewish citizens during the Nazi occupation.
The fiction, popularized by General Charles de Gaulle and pursued by François Mitterrand, that “Vichy was not France” had finally been interred.
Who will be the French president courageous enough to apologize to Algeria and the Harkis?
Of course, French crimes during Algeria’s war of independence resemble those of Nazi Germany in neither scale nor motivation.
It can be argued that during the colonial era, France willed the happiness of Algerians, not only the greatness of France.
But it was the French who defined “happiness,” without consultation with the Algerians, much less their consent.
Today, as France engages the progressive forces of the “Arab Spring” – politically, if not militarily, as in Libya – can it continue to maintain a hypocritical stance towards Algeria, paying a high price in credibility for continuing its silence about the past?
In terms of forgiveness, it is the strongest party that must apologize first.
And democracy is an essential component of that strength, for it constitutes the most favorable ground for a responsible pedagogy of historical honesty.
Of course, one should not entertain too many illusions.
The current Algerian government is quite comfortable denouncing France, and might continue to do so regardless of anything that the former colonial power does or says.
But that should not serve as an alibi for doing nothing.
In July 2012, France and Algeria will commemorate the 50th anniversary of the birth of the Algerian Republic.
Coming immediately after the upcoming French presidential election, the event offers an ideal opportunity for Sarkozy or his successor to engage in a symbolic act of repentance.
Such a gesture would strengthen France both externally and in terms of the sentiments of its citizens of Algerian descent, whose difficulty in reconciling their dual identity has led some to turn to fundamentalist Islam.
Repentance is not a sign of weakness.
On the contrary, it is a demonstration of tranquil and conscientious strength – and a precondition of good and realistic governance.
Sorting out the Debate on Globalization
CAMBRIDGE: Confusion reigns supreme in the heated debate on globalization.
For others, globalization is a curse under which poor countries are bound to fall further and further behind.
There is little doubt that after twenty years of IMF and World Bank programs in Africa, those countries are still mired in poverty, with little benefit to show from all of those Washington-inspired programs.
So who’s right in this debate which has spilled into the streets of Seattle, Washington, and now Prague, during the cycle of international economics meetings in the past year?
The answer, of course, is that life is more complicated than the contrasting positions of globalization as panacea or curse.
Different parts of the world face different kinds of challenges.
For some, globalization is a pretty reliable ticket to success; for others, it will have little effect by itself, since the most pressing social and economic crises hitting those countries can’t be solved by free trade or market reforms alone.
First, some countries are heavily burdened by their physical geography.
Some places in the world are very remote from international trade – think of the Andean highlands, the mountainous regions of Iran, Iraq, and Afghanistan; the landlocked countries of Africa, such as Rwanda, Burundi, Burkina Faso, or the landlocked regions of Central Asia.
These countries are not much helped by globalization.
They are, in general, stuck in poverty and economic isolation.
For them, globalization is not a curse, but it is hardly a solution.
Globalization also does little to eliminate the high incidence of disease linked to tropical climate.
In parts of Nigeria, a person can expect to be bitten by an infective mosquito carrying malaria up to 300 times in a year, while I am pretty much assured that no mosquito will give me malaria in Boston.
Africans suffer about 500 million cases of malaria per year, causing around 2 million deaths.
Malaria can destroy economic growth and hinder foreign investment just as much as war or economic mismanagement.
Second, national development strategies matter a lot.
Countries that deliberately avoided world markets through heavy protectionism lost out in the past twenty years.
Countries that chose socialism all went bankrupt.
Export-led growth has proved to be necessary for economic development for the simple reason that countries need to purchase technology from world markets (much of it in the form of high-tech machinery), and they can afford to do so only if they are generating sufficient export earnings.
But free trade is not enough.
In today’s knowledge economy, the countries that are the biggest success stories are basing their development not only on export growth but also on major investments in science and technology, and higher education.
A full development strategy therefore requires a combination of globalization with sufficient public investment.
Many of the protesters at the IMF, World Bank, and WTO meetings have been ill informed about the potential benefits of world markets, but they have been absolutely right about the politics of globalization.
Many countries are clearly not benefiting from globalization, and are falling further and further behind into extreme poverty.
The protesters have also understood that, despite repeated promises of financial help, debt cancellation, and support for disease control, the rich countries – and the IMF and World Bank, which the rich countries control – have done very little to help.
We therefore need a new strategy for globalization that ensures that much more of the world will benefit from the expansion of world markets.
The rich countries should help the poor countries to overcome the burdens of their geography by helping to fund a major fight against as AIDS, malaria, and other tropical infectious diseases.
The rich countries can do vastly more to assist the poor countries in becoming a part of the information-technology revolution.
They should also help support scientists and universities in the poor countries that will be the key to finding technological solutions to the deepest challenges of disease, low agricultural productivity, and environmental degradation facing the poorest peoples of the world.
Just tens of dollars per person per year would generate tens of billions of dollars of increased foreign assistance and make a profound difference in the quality of life, and in the benefits of globalization, for the world’s poorest people.
Soulless Bodies
The world’s leading scholar in artificial intelligence once described people as machines made of meat.
This nicely captures the consensus in the fields of psychology and neuroscience, which tell us that our mental lives are the products of our physical brains, and that these brains are shaped not by a divine creator, but by the blind process of natural selection.
But, with the exception of a small minority of philosophers and scientists, nobody takes this view seriously.
It is offensive.
It violates the tenets of every religion, and it conflicts with common sense.
We do not feel, after all, that we are just material bodies, mere flesh.
Instead, we occupy our bodies.
We own them.
We are spontaneously drawn to the view defended by René Descartes: We are natural-born dualists, so we see bodies and souls as separate.
This dualism has significant consequences for how we think, act, and feel.
The philosopher Peter Singer discusses the notion of a moral circle – the circle of things that matter to us, that have moral significance.
This circle can be very small, including just your kin and those with whom you interact on a daily basis, or it can be extremely broad, including all humans, but also fetuses, animals, plants, and even the earth itself.
For most of us, the circle is mid-sized, and working out its precise boundaries – does it include stem cells, for instance? – can be a source of anguish and conflict.
The nature of these boundaries is related to our common-sense view that some objects have souls and others do not.
If one attributes a soul to something, then it has value; if one sees something as a mere body, it does not.
This is often explicit; historically, debates about abortion, for example, are often framed in terms of the question: When does the soul enter the body?
This reasoning can apply as well to how we regard adults.
Normally, when we interact with others we see them as both body and soul.
We appreciate that they have beliefs, desires, and consciousness, and we recognize that they are solid physical things that take up space and are subject to gravity.
Both stances coexist well enough in the normal course of things.&#160;But when we emphasize one perspective over another, there are moral consequences.
Social&#160;psychologists have shown that simply getting an experimental subject to take another person’s perspective will make the subject care more about the person and be more likely to help.
Focusing on the soul, then, leads to moral concern, and can expand the moral circle.
The opposite can occur when someone is viewed solely as a body, and one emotion that supports this outcome is disgust.
The psychologist Paul Rozin has shown how disgust, as Charles Darwin first noted, is an evolutionary adaptation that deters us from bad meat, so it is naturally triggered by animals and animal waste products.
But disgust can readily extend to people.
People, after all, are made of meat.
Hence, every movement designed to stigmatize or malign some group – Jews, blacks, gays, the poor, women, and so on – has used disgust.
Once a group of people is viewed as disgusting, attention shifts away from them as moral individuals.
They become soulless bodies, and the moral circle closes in to exclude them.
Our reaction to soulless bodies is well illustrated in a story told about Descartes after he died.
It was known that Descartes had an illegitimate daughter, Francine, who died when she was five years old.
According to the story, Descartes was so struck with grief that he created an automaton, a mechanical doll, built to appear identical to his dead daughter.
The two were inseparable.
When Descartes crossed the Holland Sea, he kept the doll in a small trunk in his cabin.
Curious about the contents of the trunk, the captain of the ship crept down to Descartes’ cabin one night and opened it.
To his horror, the robot Francine arose.
The captain, struck with revulsion, grabbed her, dragged her up to the deck of the ship, and&#160;threw her overboard.
This story captures how disturbing – in some cases, revolting – we find a body without a soul, and it embodies the emotional pull that our common-sense dualism often has.
But it also raises a serious problem.
Science tells us that common-sense dualism is wrong.
There is no consensus as to precisely how mental life emerges from a physical brain, but there is no doubt that this is its source.
Thus, if a “soul” means something immaterial and immortal, then it does not&#160;exist.
All of us are soulless bodies, no less than the robot Francine.
This is perhaps the main reason why the scientific rejection of dualism may be so hard to swallow: it seems to diminish the moral status of people.
If we are to accept scientific facts, we need to construct morality on a new foundation, one without souls.
South Asia at War
CAMBRIDGE – Last month’s terrorist assault in Mumbai targeted not only India’s economy and sense of security.
Its broader goal was to smash the India-Pakistan détente that has been taking shape since 2004.
The attackers did not hide their faces or blow themselves up with suicide jackets.
Anonymity was not their goal.
They wanted to be identified as defenders of a cause.
Unless this cause is fully understood, and its roots revealed across the region, this attack may prove to be the beginning of the unmaking of South Asia.
Regional conflict, involving all of the region’s states and increasing numbers of non-state actors, has produced large numbers of trained fighters, waiting for the call to glory.
Within both India and Pakistan, economic disparities and a sense of social injustice have created fertile ground for conflict.
The use and abuse of religious fervor, whether “jihadi” or “Hindu fundamentalist,” are striking at the roots of communal harmony across South Asia.
Much of the current trouble can be traced to Afghanistan, whose tragedy could never have remained confined within its designated borders.
The dynamics of the region changed when the Afghan freedom fighters of 1980’s were converted into “mujahidin” through a criminal enterprise in which both the West and the Muslim world happily participated.
Pakistan, always insecure about India, became the hub of this transformation.
The West thought it had moved on after the fall of the Soviet empire, but the region – and increasingly the global community – continues to pay a heavy price for this unholy project.
The ills of two decades in South Asia can be attributed to the Afghan jihad years: the rise of the Taliban, the dominance of Pakistani-sponsored religious fanatics within the Kashmir freedom movement, and the eventual spread of sectarian conflict within Pakistan.
Moreover, they wanted payback for India’s role in supporting the revolt in the 1960’s and 1970’s that led to Bangladesh’s independence from Pakistan.
India is not blameless here.
It was pursuing a two-pronged strategy – making the argument that all was well in Kashmir (a blatant lie) and supporting ethnic confrontation in Pakistan.
Violent intelligence wars between Pakistan’s Inter-Services Intelligence (ISI) and India’s Research and Analysis Wing (RAW) have become a brutal reality in South Asia.
Lashkar-e-Taiba (LET, Army of the Pure), a Pakistan-based militant outfit supporting insurgency on the Indian side of Kashmir, was a product of these years.
According to Indian investigators, this group is implicated in the Mumbai attacks.
Pakistan’s clampdown on its offices throughout the country essentially confirms this conclusion, though Pakistan is publicly demanding more evidence.
LET was the armed wing of an Ahle-Hadith organization, a South Asian version of Saudi-style fundamentalism, whose purpose was to hit Indian forces in Kashmir.
Though the group was banned by former Pakistani President Pervez Musharraf after the terrorist attacks on the United States of September 11, 2001, some of its operators went underground and others joined Jamaat-ud-Dawa (JuD, Party of Proselytizing) – an organization that runs religious educational centers and charities.
Given its established linkages with Pakistan’s intelligence outfits, the group was never targeted strongly.
In fact, it was even involved in rescue operations on the Pakistani side of Kashmir after the devastating 2005 earthquake there.
What Pakistan’s military strategists failed to realize was that groups like LET and JuD had local agendas as well – converting Pakistan into a theocracy.
Hafiz Saeed, the founder of LET and currently the head of JuD, once proudly argued that: “We believe in the Clash of Civilizations, and our Jihad will continue until Islam becomes the dominant religion.”
JuD, along with many other like-minded groups, radicalized thousands of young Pakistanis. Through its web and print publications, it also routinely challenged the teachings of the Sufi mystics who originally brought Islam to South Asia by promoting pluralism and love for humanity.
Even while demanding strong action against JuD, India must recognize that Pakistan is itself a victim of terror.
Any military confrontation with Pakistan will only empower Pakistani radicals.
India also needs to look inward, as anti-Muslim violence in Gujarat and the activities of Hindu fundamentalist groups have potentially created recruitment opportunities for Muslim extremists within India. An amicable resolution of the Kashmir conflict will only help improve peace prospects in South Asia.
For Pakistan, a concerted and sustained effort against all extremist groups operating in the country is necessary.
Militants of all stripes must be decommissioned completely and transparently.
Equally important for Pakistan is to expand and reform its public education system and improve basic services so that radical groups cannot lure young people into their educational and welfare networks.
Otherwise, the status quo can gravely threaten Pakistan’s – and South Asia’s – future.
Avoiding Conflict in the South China Sea
OXFORD – When a US Navy P8-A surveillance aircraft recently flew near Fiery Cross Reef in the Spratly Islands in the South China Sea, it was warned eight times by the Chinese Navy to leave the area. Chinese Foreign Minister Wang Yi said that, “China’s determination to safeguard its sovereignty and territorial integrity is as firm as a rock.”
US Defense Secretary Ashton Carter replied that, “[T]here should be no mistake about this: the United States will fly, sail, and operate wherever international law allows us, as we do all around the world.”
In 1995, when I was serving in the Pentagon, China began building structures on Mischief Reef, which is claimed by the Philippines and lies much closer to its shores than to China’s.
The US issued a statement that we took no position on the competing claims by five states over the 750 or so rocks, atolls, islets, cays, and reefs that comprise the Spratlys, which cover a vast area – 425,000 square kilometers (164,000 square miles) – of the South China Sea.
We urged that the parties involved settle the disputes peacefully.
But the US took a strong stand that the South China Sea, which includes important sea lanes for oil shipments from the Middle East and container ships from Europe, and over which military and commercial aircraft routinely fly, was subject to the United Nations Law of the Sea Treaty (UNCLOS).
To back up its territorial claim, China relies on a map inherited from the Nationalist period – the so-called “nine-dashed line,” which extends nearly a thousand miles south of mainland China and sometimes as close as 40 or 50 miles from the coastline of states like Vietnam, Malaysia, Brunei and the Philippines.
All of these states claim the 200-mile exclusive economic zones granted under UNCLOS.
When the dispute over Mischief Reef erupted, Chinese officials failed to clarify the meaning of the nine-dashed line, but, when pressed, they agreed that the dashes demarcated areas where China had sovereign claims.
At the same time, they agreed that the South China Sea was not a Chinese lake, and that it was governed by the UN treaty.
On this basis, the US and China avoided conflict over the issue for nearly two decades.
But China did not avoid conflicts with its maritime neighbors.
Although it pledged to adhere to a code of conduct negotiated by the Association of Southeast Asian Nations in 2002, it used its superior military might in disputes with the Philippines and Vietnam.
In 2012, Chinese patrol vessels chased Philippine fishing boats away from Scarborough Shoal off the Philippine coast, and the Philippine government has taken the dispute to the International Tribunal for the Law of the Sea (ITLOS), which China claims has no jurisdiction.
In 2014, after China stationed an oil rig in waters claimed by Vietnam, ships from the two countries engaged in ramming and water-cannon battles at sea; anti-Chinese riots in Vietnam followed.
The region’s smaller states sought American support. But the US remained careful not to be drawn into the competing claims over sovereignty, some of which are tenuous, while on others China sometimes has a stronger legal position.
Moreover, the US had to focus on larger issues in its relationship with China.
This began to change when China initiated an active policy of dredging sand to fill in reefs and build islands in at least five locations.
Earlier this year, analysts released images of what is expected to be a 10,000-foot (3,000-meter) runway on Fiery Cross Reef.
The US argues that UNCLOS grants foreign ships and planes free access beyond a 12-mile territorial limit, while China claims that military flights cannot cross its 200-mile economic zone without its permission.
If China claimed such a zone for each of the sites it occupies, it could close off most of the South China Sea.
As one US official put it, China seems to be trying to “create facts on the ground” – what Admiral Harry Harris, the US commander in the Pacific, calls a new “great wall of sand.”
China correctly declared that it was within its sovereign rights to dredge, and that it was merely following the lead of its neighbors, whose governments had also been creating structures to bolster their claims.
But American suspicions were heightened by the fact that in 2013, in a separate dispute between China and Japan over the Senkaku/Daiyou Islands in the East China Sea, the Chinese government unilaterally declared an Air Defense Identification Zone without prior warning.
The US response was to fly two B-52 bombers through the unrecognized zone.
This set a precedent for the recent naval reconnaissance flight (which had a team of CNN reporters on board).
The US response was designed to prevent China from creating a fait accompli that could close off large parts of the South China Sea.
Nevertheless, the original policy of not becoming embroiled in the sovereignty dispute continues to make sense.
The irony is that the US Senate’s failure to ratify UNCLOS means that the US cannot take China to ITLOS over its efforts to convert reefs into islands and claim exclusion zones that could interfere with the right of free passage – a major US interest.
But, because China has ratified UNCLOS and the US respects it as customary international law, there is a basis for serious direct negotiation over clarification of the ambiguous nine-dashed line and the preservation of freedom of the seas.
With properly managed diplomacy, a US-China conflict in the South China Sea can and should be avoided.
Southeast Asia’s Pakistan Problem
MANILA &#45;&#45; Pakistan’s near political chaos, the result of President Pervez Musharraf’s declaration of martial law last year and the assassination of former Prime Minister Benazir Bhutto, has had a tsunami-like impact across Southeast Asia.
Should Musharraf’s government backslide even more on its commitments to restore parliamentary democracy, Pakistan’s crisis would not only be exacerbated, but it might begin to infect the wider region.
At direct stake today is Pakistan’s future, but its future may determine the political fates of neighboring countries that are also struggling with violent Islamic fundamentalism.
Will Pakistan be dragged along the path of Islamic extremism and emergency rule, or finally achieve modernity as a secular nation under civilian leadership?
That choice matters as an example across Asia, because Pakistan has long been the traditional sanctuary of Al Qaeda and its Taliban cohorts, who hide in the inhospitable Pakistani-Afghani border region.
These Islamic terrorists, with their global reach, could well tilt the balance from one extreme to the other in a number of countries.
The fallout from Bhutto’s assassination was bound to reach beyond Pakistan’s borders.
The country’s mushrooming instability has triggered a bitter debate in the United States about the long-term viability of Musharraf’s military-backed government and whether US financial support for Pakistan should continue.
Now, however, is not the time to freeze out Pakistan, despite the seeming chaos.
Last September, Osama bin Laden’s deputy, Al-Zawahiri, released videotapes calling for jihad in Pakistan and around the world. Bin Laden’s most recent threats have been equally universal.
Indeed, given extremist violence in Sri Lanka (Tamil Tigers), West Bengal (Naxalites), Bangladesh (Islamic fundamentalists), Southern Thailand (Islamic separatists), Java (Jemaah Islamiyah), and Basilan (Abu Sayyaf), the possibility that Al Qaeda and its satellites are plotting attacks elsewhere, especially against soft targets, poses a real danger to the region.
Regional leaders understand this.
A year ago at their Cebu (Philippines) summit, the leaders of ASEAN adopted the “ASEAN Convention Against Terrorism.”
The Convention aims to prevent the commission of terrorist acts by implementing early warning systems; the use of ASEAN members’ respective territories by those who finance, plan, facilitate, or commit terrorist acts; and movement of terrorists and terrorist groups by means of effective border control and identity/travel documentation.
But cooperation against terror is easier said than done, given the region’s diversity of governance, culture, language, and religion, as well as ASEAN’s central policy of keeping out of non-interference in its members’ internal affairs.
This policy has enabled the group to remain united over the years, despite severe disagreements.
Where anti-terrorist planning is concerned, however, non-interference has become ASEAN’s biggest handicap.
Yet to be forewarned of a weakness is to be forearmed.
The first and crucial preventive step that any government can take in the face of a renewed Al Qaeda offensive in southeast Asia is fully to respect the creativity, mobility, technical expertise, and financial capabilities of suicidal groups.
Recall a letter from the convicted terrorist Ramzi Yousef, which was found in his Islamabad safe house after he was arrested in February 1995.
Yousef seethed with resentment about the discovery of his “Bojinka” (explosives) cell in Manila the month before and vowed:
We will take the harshest of measures in order that all Filipino interests inside and outside the Philippines will be subject to destruction....Our measures will include assassinating prominent figures, foremost among them the Filipino President (RAMOS)....We also have the ability to use chemicals and poisonous gas against vital institutions, residential populations, and drinking water sources...
At the height of the Soviet-Afghanistan war in the 1980’s, Pakistan was the covert conduit for Filipino Muslim militants passing to and from Afghanistan and back to the island of Mindanao, which has long been a stronghold of Muslim rebels.
Their experience in guerrilla warfare produced leaders such as the brothers Abdurajak and Khadaffy Janjalani who founded the terrorist Abu Sayyaf Group, which is now wrecking havoc in the Philippines.
Indeed, just last November, a member of the Philippines’ Congress, Wahab Akbar, a Muslim representing Basilan, was killed with five others in front of the House of Representatives by an improvised explosive device of the type used in Pakistan, Afghanistan, and Iraq.
His death should serve as a warning to all Southeast Asian governments: we must fight Al Qaeda together, or we shall lose to them separately.
Southeast Asia’s Widening Arms Race
Southeast Asia’s return to prosperity since the financial crisis of 1997 has brought a region-wide splurge on new weapons.
Most Southeast Asian countries are, indeed, now busily modernizing their armed forces.
So far, most have done so without compromising their autonomy in security matters.
But, with China’s military build-up causing nervousness everywhere, many governments in the region are starting to work with outside powers.
Indonesia’s President Susilo Bambang Yudhoyono has perhaps been the most assertive.
In addition to becoming more active in world diplomacy, Yudhoyono will meet Russian President Vladimir Putin in Moscow this month to discuss buying Russia’s newest fighter jets.
Indonesia is seeking to form an air-defense squadron of 12 jets, with eight Russian fighters to complement the two Russian Su-27SK’s and Su-30MKM’s that it has already bought.
Elsewhere in the region, Singapore has apparently opted to purchase 12 new F-15SG fighter aircraft from the United States.
Thailand’s Prime Minister, Thaksin Shinawatra, met Putin late last year and tentatively agreed to purchase 12 Su-30MKM’s.
Malaysia has agreed to buy 18 Su-30MKM’s over the next two years, while Vietnam has purchased 36 SU-27SK’s, 12 of which are already in service.
With the exception of Singapore, it seems that Russian fighter-attack aircraft are the region’s weapon of choice at the moment.
Russia’s growing slice of the local arms market worries the US, the world’s biggest weapons supplier and still Asia’s greatest military power.
Thus, for example, last November, the US lifted its six-year embargo on military sales to Indonesia, imposed in 1999 in response to human rights abuses in East Timor.
Indonesia immediately expressed its intention to purchase C-130 transport aircraft, as well as fast patrol boats to conduct “anti-terrorism and anti-piracy measures.”
Yet Indonesia is also trying to align itself with Asia’s rising power, China, by seeking greater defense and security cooperation.
As a result of these improved relations, Indonesia has received Chinese short-range missile technology.
The possibility that Southeast Asia’s governments might begin to play America and China off against each other is one of the concerns that most animates the latest US quadrennial defense review, which is intended to “focus on the Pacific Ocean” in awareness of China’s growing naval power.
Undoubtedly, the US will try to build closer ties with Indonesia through greater military cooperation, because Indonesia borders the region’s key sea lines of communications.
In particular, Indonesia will inevitably become involved in the tug of war between the US and China for influence over the vitally important Malacca Strait.
Because China must import vast quantities of oil through the Malacca Strait, that sea lane has become a central element in the country’s security strategy.
For this reason, China is attempting to use economic and military aid as leverage to improve relations even with countries with which it has had military confrontations with in the past, most prominently Vietnam and the Philippines.
India, too, is now joining the military build-up.
It has actively led regional multilateral joint exercises, such as the naval joint exercise that India’s navy hosted in the Andaman Sea, in the eastern Indian Ocean, earlier this year.
Nine Asian-Pacific countries took part, including Indonesia, Malaysia, Singapore, and Thailand.
Both India and China are each seeking greater influence over the strategically important country of Myanmar.
For example, after Myanmar signed an agreement with China in 2005 to supply natural gas, India responded by cutting its own gas deal with Myanmar.
South Korea, too, has joined the scramble.
President Roh Moo-hyun visited Malaysia and agreed to expand mutual economic cooperation mainly in information technology, bio-technology, and resources and energy.
Roh reportedly also discussed exporting defense materials worth $2.3 billion, including training aircraft, destroyers, and armed vehicles.
Moreover, in January 2006, Korean Defense Minister Yoon agreed with the Philippines to deliver two used patrol boats.
In this crowded power play, only Japan is left out, choosing for the most part to remain aloof and cultivate its relations with the US.
But, despite deep historical animosity over World War II, there are increasing calls in the region for Japan to expand its influence to counterbalance China.
In reality, Japan is not ready for this, because it still strongly adheres to “self-imposed restraints” against “influence over other countries in security and defense,” including weapons exports.
In the 1960’s, as its economic takeoff was proceeding, Japan initiated a serious dialogue with regional players, aiming to build stronger relations with countries that it had once conquered and occupied.
It is no overstatement to say that those efforts, which boosted trade and investment in the region, formed the foundation of Japan’s national power today.
But now Japan’s political and economic influence in South East Asia is gradually declining, owing in part to its failure to exert influence over security and defense matters.
For those Asian countries that recall Japan’s moderate and sensible advancement of regional policies since the 1960’s, there is a growing expectation that Japan should re-think its stance.
At a time of regional uncertainty about Chinese policies – including the looming prospect of China’s first aircraft carrier – Japan’s participation in the evolving Asian security framework is fundamental to stability.
The time when Japan could remain on the sidelines is over.
South Korea in the G-20 Spotlight
CAMBRIDGE – South Korea has an historic opportunity when it chairs the G-20 meeting in Seoul on November 11-12, for this will be the first time that a non-G-7 country has hosted the G-20 since the larger body supplanted the G-7 as the steering committee of the world economy.
But there is a danger that the G-20 will now prove too unwieldy.
South Korea justifiably views its role as host as another opportunity to mark its arrival on the world stage.
But it should make more of its opportunity than this, and instead exercise substantive leadership.
Otherwise, its turn at the G-20’s helm risks resembling the chaotic Czech presidency of the European Union in 2009, which confirmed some larger EU members’ belief that it is a mistake to let smaller countries do the driving.
The challenge for South Korea stems from the inevitable tradeoff between legitimacy and workability.
The G-7 was small enough to be workable, but too small to claim legitimacy.
The United Nations is big enough to claim legitimacy, but too big to be workable.
The G-20 has enough legitimacy for its purpose – which is more limited than the purposes of formal institutions such as the UN, the International Monetary Fund, and the World Trade Organization – by virtue of the fact that it accounts for 85% of the world’s GDP, for example.
But it is too big to be workable as a steering group.
A principle of multilateral talk-shops is that conversation is not possible with more than 10 delegations in the room.
With 20 delegations, each reads prepared statements; there is no give-and-take, and the communiqué is a watered down least-common-denominator press release.
The G-20 needs a smaller informal steering group, a G-6 or G-9, which could meet on the eve of the main G-20 meeting and discuss how to organize the discussion in the larger group.
It would be unwise to be too specific at this point about who should be in the smaller group.
Nevertheless, the United States, Japan, and Europe (represented perhaps by the EU Commission), must be there on the rich-country side; China, India, and Brazil must be there on the developing-country side.
Of course the pressure to expand is always irresistible.
Europe could be represented by both the United Kingdom and the eurozone.
In Seoul, South Korea must be there as the host.
The ninth country could be any of the rest.
The G-20 will discuss whatever the bigger countries consider it most useful to discuss.
Five possible topics include:
• More seats on the IMF executive board for emerging market countries, made possible by consolidation of some European seats;
• More financial regulatory reform, such as coordination of any taxes or penalties that members want to apply to risk-taking banks;
• An attempt to address global current-account imbalances and ¨currency wars."  There could be a statement agreeing that excessive imbalances are a problem, that exchange rates and budget deficits both bear some responsibility, and that neither should bear the burden of adjustment alone;
• Macroeconomic exit strategies.
I would favor articulation of the principle that the necessary concrete steps toward long-term fiscal consolidation in advanced countries – such as raising the retirement age or taking other steps today to reform public pensions – need not require premature withdrawal of current fiscal stimulus;
• Re-launching discussion of a new agreement on climate change to replace the Kyoto Protocol after 2012.
South Korea is in a good position to lead as the first post-Kyoto country to accept emission targets.
Don’t judge the outcome of the Seoul G-20 meeting by what appears in the media.
Press reviews usually pronounce any summit meeting a let-down.
But occasionally such meetings are important, in ways that are often not clear until later.
Consider the London G-20 meeting in 2009.
It was not obvious at the time that it had been a success in terms of substantive policies.
Observers even compared it to the infamous failed London Economic Summit of 1933, which was a way of saying that the world had not learned the lessons of the Great Depression.
But the 2009 meeting appears far better in hindsight.
Fiscal stimulus turned out to be more widespread in 2009 than one might have guessed.
Similarly, global monetary policy was easy, avoiding another big mistake of the 1930’s.
And the G-20 unexpectedly agreed to triple the IMF’s resources and bring its reserve currency, special drawing rights (SDRs), back from the dead.
Even in the area of trade policy, despite fears of protectionism, the outcome was not bad by the standards of past recessions, let alone compared to America’s infamous Smoot-Hawley tariffs, enacted in 1930.
Overall, the immediate response of policymakers to the global recession in 2009 did not repeat the mistakes of the early 1930’s.
Currently, however, the advanced countries are in danger of repeating the mistake that US President Franklin Roosevelt made in 1937, when he cut spending prematurely and sent the American economy back into recession.
Perhaps the G-20 will be a venue in which the big emerging-market countries remind the US and the UK of the lesson they once knew but have now forgotten – what it means to run a countercyclical fiscal policy.
South Korea’s Budding Femocracy
TOKYO – This is a year of presidential elections worldwide, and the last to take place – on December 19 – will be in South Korea.
That ballot, however, is already having an international impact, in part because South Korea’s failure to ratify an important new intelligence-sharing treaty with Japan is widely seen as a result of campaign politics.
But the election may well have a more positive impact on the region as a whole.
On July 10, the frontrunner, Park Geun-hye of the ruling Saenuri (New Frontier) Party, became the first to announce her candidacy.
In addition to other opposition candidates, much attention has focused on Ahn Cheol-soo, Dean of the Graduate School of Convergence Science and Technology at Seoul National University, who is a successful entrepreneur and a charismatic figure for South Korea’s young and independent voters.
But it is Park who has so far stimulated the greatest interest.
There is great anticipation among conservative voters, in particular, concerning her policy toward North Korea, a country that continues to be as unpredictable as ever.
(Witness Kim Jong-un’s sudden dismissal of senior military officer Ri Yong-ho, anointment of himself as a marshal, and revelation that he had married a woman first glimpsed when she accompanied him to a concert featuring appearances by Disney’s Mickey and Minnie Mouse.)
So far, Park, sensing that the electorate trusts her foreign-policy instincts, has kept her North Korea cards close to her chest.
For many South Koreans, Park is a tragic heroine.
Both her mother and her father, President Park Chung-hee, were assassinated, in 1974 and 1979, respectively.
Indeed, her father was murdered by his own intelligence chief, KCIA Director Kim Jaegyu.
Park avoided active politics for many years after her parents’ death, but later won a parliamentary seat.
She has also served as a leader of the Saenuri Party (formerly known as the Grand National Party).
In 2006, an assailant slashed her face as she was campaigning on behalf of the GNP’s candidate in Seoul’s mayoral election.
But now the real battle begins.
If elected, Park will become South Korea’s first female president.
Like Japan and other Asian countries, Korean society, which is underpinned by Confucian thought, has experienced little political participation by women, though that appears to be changing rapidly.
In 2000, only 5.9% of the National Assembly’s 299 members were women.
In 2004, however, women more than doubled their share, to 13%, when 39 were elected from single-seat constituencies and through party-list proportional representation.
According to the Inter-Parliamentary Union (IPU), that election pushed South Korea from 101st to 62nd place worldwide in terms of the proportion of female MPs , well ahead of 121st-ranked Japan.
The increase in women MPs led not only to an increase in female cabinet members, but also to a variety of policies and institutional improvements aimed specifically at women.
And, although South Korea has slipped to 80th place in the IPU’s most recent rankings, the fall reflects subsequent growth in the proportion of female legislators in other countries.
The main reason for the increase in the number of women MPs was the introduction of a quota system, according to which South Korea’s political parties should ensure that 30% of their candidates are women.
The campaign-finance law was revised to provide additional government funding to parties that meet the quota, and to reduce the amount for parties that do not.
As a result, more than half of the 56 members elected through proportional representation in 2004 were women.
Moreover, 10% of government funding to political parties is now used for the advancement of women in politics, with each party establishing institutions for training women MPs and candidates.
Although the quota system is still a matter of constitutional debate in South Korea, years of effort by women’s groups have made a significant contribution to boosting women’s role in policymaking.
The triumph of a female president would be an important symbolic and practical victory for all who have sought to establish a political environment that is hospitable to women.
And it would provide a powerful example to other Asian countries – including my own – in which women have struggled to gain an electoral foothold.
South Korea\u0027s Dangerous New Dawn
North Korea's decision to expel UN atomic energy inspectors is but another reason to view Roh Moo Hyun's election as South Korea's president two weeks ago as an historical watershed.
The beginning of his term not only coincides with one of the most dangerous episodes on the Korean peninsula in decades, but his presidency will also test South Korea's relations with the US to a degree that has not been seen for many years.
Roh's victory over Lee Hoi Chang signifies a generational shift in Korean politics, with the young determined to gain a freer hand in Korea's relations with the US.
Indeed, generational differences were the deciding factor in the race, replacing the regional sentiments that dominated every presidential race before this one.
According to one report, over 60% of people in their twenties and thirties voted for Roh to produce a margin of 2.3% in this first two-man, head-to-head presidential race in 31 years.
Roh's populist and nationalist stance will be swiftly and sorely tested by reality when he assumes power in February.
But couple the generational changeover thaty put him in office with a strong popular desire for continued engagement with North Korea--notwithstanding North Korea's growing nuclear brinkmanship--and the recipe is complete for disputes with the US.
Roh, a self-made man who passed a bar examination without going to college and law school, succeeded in convincing voters that he would usher in a new brand of politics reflecting South Korea's growing wealth and middle class sentiments, thereby sweeping away insider-dominated politics, regional bickering, and factional struggles.
His style and rhetoric projected the fresh (for Korea!) image of a common man committed to eliminating the ossified networks of cronyism and corruption.
For the first time in modern Korean history, the presidential campaign actually debated the central issues facing the country, rather than focussing on parties and personalities.
Candidate Roh called for a new relationship between South Korea and the US, one based on the principle of independence and equality.
For example, he said that he would not kow-tow to the US or visit Washington just for the sake of a photo opportunity He also promised to continue President Kim Dae Jung's "Sunshine policy" of engagement with the North.
Remarkably, Roh won the election despite North Korea's decision to reactivate nuclear reactors that had been frozen since 1994.
A few years ago this would have doomed Roh's candidacy.
That he overcame this obstacle without changing his stance on engaging North Korea means that times have radically changed.
A popular yearning for change, not the security situation, is now the overriding concern of ordinary Koreans.
Roh's campaign also took advantage of a rising tide of anti-Americanism.
The acquittal by a US military court of two American soldiers who accidentally killed two Korean schoolgirls with their armored car last June triggered street demonstrations across the country.
Although President George W. Bush apologized twice for the deaths of the girls, demands continue to escalate for changing the Status of Force Agreement (SOFA) that governs the legal treatment of American troops stationed in South Korea.
Ordinary Koreans insist that US soldiers who commit crimes should be tried in Korean courts.
This expression of wounded national pride was enabled by South Korea's tremendous performance in the World Cup football tournament last summer, which helped convince ordinary Koreans that their country was fully grown up--and thus might be able to stand on its own without the presence of 37,000 US troops.
Indeed, many ordinary people now view the US presence, and not North Korea's communist regime, as the biggest obstacle to unification.
According to a recent poll, only 54.8% of Koreans now support the stationing of American troops in the country, while 31.7% oppose it.
These sentiments will form part of the diplomatic test shaping Roh's presidency from the start, for he must re-engineer relations with America at the same time that the Bush administration is fretting about North Korea's nuclear ambitions and its role in spreading weapons of mass destruction to rogue states.
For now, Korean voters--apparently impervious to the threat that North Korea's nuclear weapons poses--support Roh's policy of maintaining dialogue and economic exchange with the North.
Under President Roh, South Korea's domestic politics and relations with the US and North Korea will require an almost total overhaul.
Can he walk the tightrope of maintaining security on the peninsula, keeping America engaged, and retaining the support of the voters who elected him?
Reconciling those goals would test even the most experienced and cynical of politicians, so it is anyone's guess as to whether President Roh can succeed.
Failure, however, offers such a horrific prospect that no one can possibly hope for it.
South Korea’s Growing Soft Power
CAMBRIDGE – When the Association of Southeast Asian Nations met in Thailand last month, South Korea was an important presence.
Quietly, South Korea has moved away from being defined by its problematic North Korean neighbor, and is becoming an important middle-ranking power in global affairs.
A South Korean is Secretary-General of the United Nations; Seoul will host next year’s G-20 summit; and the country has just reached a free-trade agreement with the European Union.
This was not always so.
If geography is destiny, South Korea was dealt a weak hand.
Wedged into an area where three giants – China, Japan, and Russia – confront each other, Korea has had a difficult history of developing sufficient “hard” military power to defend itself.
Indeed, at the beginning of the twentieth century, such efforts failed and Korea became a colony of Japan.
After World War II, the peninsula was divided along the lines of Cold War bipolarity, and American and UN intervention was necessary to prevent South Korea’s subjugation in the Korean War.
More recently, despite its impressive hard-power resources, South Korea has found that an alliance with a distant power like the United States continues to provide a useful insurance policy for life in a difficult neighborhood.
In a recent survey of G-20 nations published in the newspaper Chosun Ilbo , the Hansun Foundation ranked South Korea 13th in the world in terms of national power.
South Korea ranked 9th in hard power resources but performed more poorly in terms of soft power.
In the newspaper’s words, “state of the art factories, high-tech weapons, advanced information communications infrastructure are the key components that a country must have for stronger international competitiveness.” But for these “hard power” ingredients to become true engines of the country’s growth and prosperity, they must be backed by more sophisticated and highly efficient “soft power.”
South Korea has impressive soft-power potential.
Sometimes, Koreans compare their country of 50 million to a neighbor like China or a superpower like the US and believe that they cannot compete with such giants.
That may be true in the domain of hard military power, but it is not true of soft-power resources.
Many countries that are smaller than South Korea do well with soft power.
The political clout of countries such as Canada, the Netherlands, and the Scandinavian states is greater than their military and economic weight, owing to the incorporation of attractive causes such as economic aid or peacemaking in their definitions of their national interest.
For example, in the past two decades, Norway, a country of only five million people, has taken a lead in peace talks.
Similarly, Canada and the Netherlands have enhanced their soft power not only by their policies in the UN, but also by overseas development assistance.
Such legitimizing policies are readily available to South Korea.
Moreover, in terms of attractive values, South Korea has a compelling story to tell.
In 1960, it had approximately the same level of economic wealth as Ghana, one of the more prosperous of the newly independent countries in Africa.
Today, the two countries are vastly different.
Over the next half-century, South Korea became the world’s 11th largest economy, with per capita income reaching more than $15,000.
It joined the OECD and is an important member of the G-20.
It has become the home of world-famous brands and a leader in the adoption of the Internet and information technology.
Even more important, South Korea also developed a democratic political system, with free elections and peaceful transfer of power between different political parties.
Human rights are well protected, as is freedom of speech.
South Koreans often complain about the disorderliness of their political system, and the Hansun Foundation Report rated South Korea 16th among the G-20 in the efficiency of legislative activities, and 17th in political stability and efficiency.
According to the survey, “The low standings are not surprising, given habitually violent clashes between governing and opposition parties over sensitive bills and unending bribery scandals involving politicians.”
Nevertheless, while improvement in these areas would certainly enhance South Korea’s soft power, the very fact of having an open society that is able to produce and discuss such criticisms makes South Korea attractive.
Finally, there is the attractiveness of South Korean culture.
The traditions of Korean art, crafts, and cuisine have already spread around the world.
Korean popular culture has also crossed borders, particularly among younger people in neighboring Asian countries, while the impressive success of the Korean diaspora in the US has further enhanced the attractiveness of the culture and country from which they came.
Indeed, the late 1990’s saw the rise of “Hallyu,” or “the Korean wave” – the growing popularity of all things Korean, from fashion and film to music and cuisine.
In short, South Korea has the resources to produce soft power, and its soft power is not prisoner to the geographical limitations that have constrained its hard power throughout its history.
As a result, South Korea is beginning to design a foreign policy that will allow it to play a larger role in the international institutions and networks that will be essential to global governance.
Sovereignty Bound
PRAGUE - Glorification of the nation state as the climax to the history of every national community, as the only thing in whose name it is permissible to kill or for whom it is worth dying for, is passing.
Generations of democrats, and the horrors of two World Wars, have brought humanity to the realization that a human being is more important than the state.
In the coming century, most states will begin to transform from cult-like objects charged with emotional contents into simpler civil administrative units that are part of a complex planetary organization.
This change should do away with the idea of non-intervention, with the concept that what happens in another state is none of our business.
As for the practical responsibilities and the jurisdictions of the State, these can go into two directions: downwards or upwards.
Downwards applies to the various organs and structures of civil society to which the State should gradually transfer many of its tasks.
Upwards applies to various regional, transnational or global communities or organizations.
This transfer of functions has already begun.
The Twenty-First Century – provided that humanity withstands all the dangers that it is preparing for itself – will be a world of ever closer cooperation.
In order that the world can be like this, individual entities, cultures or spheres of civilization must clearly recognize their own identities, understand what makes them different from others and accept the fact that such “otherness” is no handicap, but a contribution to the global wealth of the human race.
Of course, the same must be recognized also by those who, on the contrary, have the inclination to regard their “otherness” as a reason for feeling superior.
I am not against the institution of the State as such.
Instead, I am talking about the fact that there is a value which ranks higher than the State.
This value is humanity.
The State serves the people, not the other way round.
If a person serves his or her state such service should go only as far as is necessary for the state to do a good service to all its citizens.
Human rights rank above the rights of states.
Human liberties constitute a higher value than State sovereignty.
In terms of international law, the provisions that protect the unique human being should take precedence over the provisions that protect the State.
Thus, the foreign policies of individual states should gradually sever the category that has, until now, most often constituted their axis, that is, the category of “our national interests,” tends to divide rather than bring us together.
Each of us has some specific interests.
This is entirely natural and there is no reason why we should abandon our legitimate concerns.
But there is something that ranks higher than our interests: it is the principles that we espouse.
Principles unite rather than divide; they are the yardsticks for measuring the legitimacy of our interests.
I do not think it is valid when various state doctrines say that it is in the interest of the state to uphold such and such a principle.
Principles must be respected and upheld for their own sake; interests should be derived from them.
For example: It would not be right if I said that it is in the interest of the Czech Republic that there is an equitable peace in the world.
I have to say something else: There must be an equitable peace in the world and the interests of the Czech Republic must be subordinated to that.
The Alliance of which nations as diverse as Canada and the Czech Republic are members waged a struggle against the genocidal regime of Slobodan Milosevic.
That struggle was neither easy nor popular.
But no person of sound judgement can deny one thing: that this was probably the first war ever fought that is not waged in the name of interests, but in the name of principles and values.
If it is possible to say about a war that it is ethical, or that it is fought for ethical reasons, it was true of this war. Kosovo has no oil fields whose output might perhaps attract somebody’s interest; no member country of the Alliance had any territorial claims there.
The Alliance fought in the name of human interest for the fate of other human beings.
It fought because decent people cannot sit and watch systematic, state-directed massacres of other people.
Decent people simply cannot tolerate this, and cannot fail to come to the rescue if rescue is within their power.
So human rights now must take precedence over the rights of states.
States and collections of states like the European Union must act out of respect for the law – for a law that ranks higher than the protection of the sovereignty of states; they must act out of respect for the rights of humanity, as they are articulated by our conscience as well as by other instruments of international law.
I see this as an important precedent for the future.
It has now been clearly stated that it is not permissible to slaughter people, to evict them from their homes, to maltreat them and to deprive them of their property.
It has been demonstrated that human rights are indivisible and that if injustice is done to some, it is done to all.
Many times in the past, I pondered on the questions of why humanity has the prerogative to any rights at all.
Inevitably, I concluded that human rights, human liberties and human dignity have their deepest roots outside of this earthly world.
They become what they are only because, under certain circumstances, they can mean to humanity a value that people place – without being forced to – higher than even their own lives.
Thus, these notions have meaning only against the background of the infinite and of eternity.
It is my profound conviction that the true worth of all our actions – whether or not they are in harmony with our conscience, the ambassador of eternity in our soul – is finally tested somewhere beyond our sight.
If we did not sense this, or subconsciously surmise it, certain things could never be achieved.
For while the State is a human creation, humanity is a creation of God.
Spain Can Still Rise
MADRID – July will enter Spanish history as having started on a tremendous high, spurred by Spain’s recent triumph in the 2012 Euro Soccer Championship.
But all signs indicate that the month will end in doubt and pessimism.
The image of joyful crowds and Spanish flags draped from cars and windows has given way to that of throngs of demonstrators holding banners protesting the government’s latest austerity measures.
With one in four Spaniards unemployed and Spain’s sovereign bonds rated just above junk status, Spain seems to be on the edge of falling into the abyss.
But very few analyses delve beneath the surface of immediate figures and assess the core of Spain’s strengths and weaknesses.
Observers today tend to forget that, until the early 1980’s, Spain qualified as a developing country, according to World Bank standards.
Indeed, together with Singapore and Ireland, Spain represents the biggest economic success story of the last quarter of the twentieth century.
And it should not be forgotten that, together with an astounding leap in GDP per capita (from $7,284 in 1980 to over $30,000 in 2010), Spain, under King Juan Carlos’s invaluable leadership, carried out a successful transition to democracy and joined the European Union.
Such feats always entail important asymmetries and political pacts; though fundamental to the post-Franco transition, when Spaniards were still fearful of reviving the deep divisions of the civil war, they plague the country to this day.
Furthermore, Spain’s success, coupled with lax credit policy in the eurozone, resulted in a financial bubble whose collapse exposed structural challenges.
As a result, Spain now requires a concerted effort from its citizens, one rooted in confidence in their achievements of the last 30 years.
One area in grave need of reform is the labor market.
The foundations of Spain’s current labor laws date to 1938, when the civil war was tearing the country apart.
The system created by Generalissimo Francisco Franco following his victory offered workers job security and strong collective-bargaining rights, which helped to maintain social stability in the absence of democracy.
Paradoxically, the bulk of this platform has survived as a banner of the left.
Changing it is, therefore, not only vital for regaining competitiveness; it is also a critical test of the maturity of Spain’s democracy.
The current system underpins Spain’s soaring unemployment rate.
Since the second half of the 1980’s, when net emigration abruptly reversed, Spain has experienced high levels of structural unemployment, even when annual growth was above 4%, in part owing to the high quality and generous provisions of Spain’s social-welfare system, which was also consolidated in the post-Franco period.
As of 2011, an estimated 5.7 million residents (12% of the population) were immigrants – over a million more than in the significantly larger United Kingdom (with a population of 62 million).
International observers often also target the need to reduce public employment.
Here, too, the problem is a direct consequence of the political agreements reached at the beginning of the transition to democracy.
The public sector underwent rapid and radical decentralization as part of the transition, owing to the creation of the country’s quasi-federal governmental structure, which created significant overlap and duplication, both in terms of effort and resources.
Meanwhile, it distorts reality to view Spain’s entire banking sector through the prism of the cajas, the savings banks that are the soft underbelly of the Spanish financial system.
Indeed, Santander and BBVA rank among today’s most successful international banks.
Nevertheless, it was the cajas that concentrated the risk associated with the housing bubble, and whose governance presented the worst face of public ownership.
The cajas had neither the corporate governance structures nor the management skills to withstand the crisis.
Moreover, Spanish schools trail behind in the international ranking system; the relatively effective Franco-era vocational training system became collateral damage in the transition; and the low number of patent applications reveals severe shortcomings in research and development.
This hindrance to competitiveness is also linked to an underperforming, state-regulated higher-education system, with no Spanish public university among the top 150 ranked in the 2012 Academic Ranking of World Universities, whereas three private institutions (IE, IESE, and ESADE) are all ranked among the top business schools worldwide.
Today, Spain has some of Europe’s best infrastructure, including high-speed trains, high-tech airports, fast highways, and top-notch green-energy networks.
Its entrepreneurial class has pioneered business ventures, such as Inditex and Mercadona, whose models are case studies in the best business schools.
Spain counts a fair number of successful, cutting-edge multinationals, from Ferrovial and FCC in public works to Iberdrola and Abengoa in the energy sector.
It is also important to emphasize the political stability – and public maturity – that allowed aparty whose program called for rationalization of spending to win an absolute majority in the parliamentary election held six months ago.
Spain’s soccer victory was not a fluke but the culmination of a long evolution to emerge as a winning machine from its Francoist furia española past.
After Spain’s victories at Euro 2008 and the 2010 World Cup, the national team demonstrated once again how diversity can coalesce into a winning formula through identification with a common goal. &nbsp;
Spaniards in general, and particularly their political leaders, must rediscover what it takes to succeed.
Dealt a difficult hand, Spain can overcome its critical situation only through collective hard work, responsibility, respect, and loyalty, thereby ensuring its standing in Europe and beyond.
Spain’s New Conquistadors
BARCELONA: Espańa va bien (Spain is doing well).
That phrase is on everyone’s tongue nowadays.
So it should be.
Spain has not boomed nor felt as self-confident since its Age of Discovery.
Instead of sending out swashbuckling conquistadors, however, Spanish companies are exploring the world in search of new opportunities.
From BSCH and BBVA in banking, Repsol-YPF, Endesa, Iberdrola in energy, and Telefónica in telecoms, Spanish companies have boldly displaced US firms as prime investors in Latin America.
All this activity has put Madrid back on the map, not only as a force in the global marketplace but in diplomacy too.
Liberalization, accompanied by economic growth, is the engine for this overseas expansion.
Spain’s economy has grown at over 3% for the past four years, and is now growing at 4%.
In that time, the budget deficit was reduced 5 fold, and is now only about 1% of GDP, with unemployment dropping from 23% to 15%.
Not surprisingly, strong growth rekindled inflation, now bumping up against the European Central Bank’s tolerance level.
Nonetheless, Spaniards recognize that they have not had it so good for a long time, and recently returned Prime Minister José Maria Aznar to office with both a parliamentary majority no longer dependent on coalition partners and a mandate to modernize Spain even more.
Spain’s path to liberalization looks to the liberal British model, not, as is traditional in Spain, to the way things are done in France.
During Prime Minister Aznar’s first term his Popular Party privatized most public sector firms and deregulated many service sectors.
His new government vows to continue eliminating the public deficit and lowering unemployment.
It also promises to cut income taxes, put the country’s Social Security system on firmer footing and reduce costs of shedding labor.
Introducing real competition in energy and telecoms, lacking in the privatization process until now, is also pledged.
Aznar’s program is sensible yet ambitious.
The question is whether his government, which has gone to great lengths to forge a consensus behind its reforms, will carry through on additional measures, the need for which have been hidden by a favorable economy and wage moderation by unions.
As in Thatcher’s Britain, one big problem is of the government’s making.
Aznar’s privatizations maintained and reinforced, at least at first, the old oligopolistic market structure.
This retarded competition.
The government has learned the hard lesson that big privatized companies, when unchecked by truly competitive markets, concentrate too much power.
In a liberalization package just released, the government partially redresses its early mistakes in privatization by clawing back power from the incumbent near monopolies in oil, gas, electricity, and telecoms.
Local access in telecoms, for example, will be open to competition beginning in January 2001.
Cross-shareholdings that reinforce monopoly power will be strictly limited in these sectors as well.
Encouraging robust competition is essential because Spain must grow faster than Europe and so cannot be content with mimicking dozy Continental methods.
In order to catch up with the rest of the Continent in wealth, Spain must remain daring in four big ways:
- Regulators and competition authorities must be made formally and materially independent of government control.
Such a modern regulatory structure will foster Spain’s international role by keeping Spanish multinationals on their toes.
For only vigorous internal rivalry will make Spain’s companies nimble enough to prosper in risk-filled emerging economies.
- Because political interference with regulation and competition policy (once old hat in Spain) makes companies uncompetitive, government must refrain from using regulation to control inflation as well as corporate activity.
No one gains from the government’s ugly struggle with Telefónica that climaxed with the resignation of Telefónica’s boss, Juan Villalonga.
That spat not only prevented a merger, apparently welcomed by the market, with the Dutch firm KPN, it put the Spanish Security and Exchange Commission (CNMV) in a difficult spot as broker between government and a powerful company boss.
- Spain must decide whether to let other countries innovate or to contribute to and catch up with, today’s fast paced global technological innovation.
Without improved research and development (R&D), the gap between Spain and the world leaders will grow.
Even meeting government promises to raise R&D spending from today’s 1% of GDP to 2% by 2004 may not be enough.
The issue is not only increased investment, but also of a change in the organization of research to reward creativity and excellence as measured by international standards.
- To sustain growth, Spain’s welfare state -- basically pensions and health care -- must be overhauled to increase efficiency and promote fairness.
Aznar’s current plans are too timid: they tackle only public health expenditures, not the underlying welfare state structure.
Moreover, labor market liberalization must run parallel to welfare state reform.
Without improvement here the benefits of increased commercial competition cannot be fully reaped.
Public administration, too, must be overhauled to promote efficiency by rewarding hard work and quality of service, not seniority and over-manning.
Even if Prime Minister Aznar follows through on these bold reforms, his program might unravel if unmatched by domestic political daring.
Imaginative solutions are needed to make Spain’s restless regions, particularly Catalonia and the Basque Country, fit comfortably within Spain.
Without initiative here the prospect of both regions drifting away is real.
Participation of Catalonia in Spain’s modernization project would probably be guaranteed if Barcelona were to become, effectively, the second capital of Spain.
Spanish Leadership for Europe’s Roma
NEW YORK – Continued discrimination against Roma in Europe not only violates human dignity, but is a major social problem crippling the development of Eastern European countries with large Roma populations.
Spain, which has been more successful in dealing with its Roma problem than other countries, can take the lead this month as it assumes the European Union presidency.
Up to 12 million Roma live in Europe today, primarily in the East.
Despite the region’s overall economic growth over the past two decades, life for many Roma is worse now than ever.
During the communist era, Roma received jobs and housing.
But the heavy industries in which many were employed have now closed, and unemployment is widespread.
Many Roma live in deplorable conditions unworthy of modern Europe.
These economic hardships are deepened by social tension.
The majority population is very hostile towards Roma, and discrimination against them occurs at every level.
For example, Roma children are often automatically put into classes for the mentally disabled, simply because they are Roma.
Despite court rulings ordering reform, Roma are regularly denied equal access to housing, education, and healthcare, creating a vicious cycle of poverty and marginalization.
Reality and stereotype reinforce each other in a reflexive fashion.
The EU is slowly realizing that it has a major social problem on its hands. Denied opportunities in the East, many Roma have moved to Western Europe, fueling a new wave of hostility.
In Italy, the Berlusconi government’s treatment of Roma settlements – destroying homes and fingerprinting Roma based solely on their ethnicity – blatantly violated human rights.
This prompted the EU to create the new position of Fundamental Rights Commissioner, with confirmation hearings set to begin in January;
In the meantime, violations continue.
On a positive note, the Decade of Roma Inclusion, established in 2005, is receiving strong support from the structural funds administered by the European Commission and is making some inroads.
Yet this is not enough to reverse a rising tide of violence and discrimination, compounded by the recent economic recession.
What is needed now is a comprehensive European strategy to address Roma issues across borders.
This strategy must address both intolerable living conditions for Roma and the hostile stereotypes that prevail within majority populations, because they mutually reinforce each other.
This is not only a human rights issue, but also an economic one. Following current demographic trends, by 2040, Roma will comprise roughly 40% of Hungary’s working-age population.
Statistics are similar for neighboring countries.
Unless the Roma are well educated and socially integrated – in stark contrast to today’s reality – these countries’ economic future is bleak.
The key to success is the education of a new generation of Roma who do not seek to assimilate into the general population, but deliberately retain their identity as Roma. Educated, successful Roma will shatter the prevailing negative stereotypes by their very existence.
I speak with some authority on this subject.
My foundation network has made the education of Roma a priority since its inception in Hungary in 1984, and across the rest of Eastern Europe since 1989. These efforts have produced a small, well-educated Roma elite who are now making an important contribution to the emancipation of Roma.
These leaders have blazed a trail for future advocates, but there are far too few of them.
In conjunction with the launch of the Decade of Roma Inclusion in 2005, my foundation network formed an alliance with the World Bank and transferred its Roma educational programs to a newly established Roma Education Fund.
Last year, the Fund directly assisted 30,000 Roma children and 800 university students.
It also provided invaluable support to member countries’ public education systems to strengthen Roma inclusion.
The Fund plans to double its activities in the next five years, but, again, this is not enough.
Given the need, it ought to grow ten-fold.
The scale of this challenge demands a comprehensive, institutional response from the EU that goes well beyond the Decade and the capacity of my foundations.
While the European Roma Platform launched in 2009 paid lip service to Roma issues, it did not go far enough.
Europe must develop a long-term strategy tied to programs and monitoring mechanisms that will deliver real change on the ground.
Spain can be justly proud of the way it has dealt with its own Roma minority.
I hope that the Spanish EU Presidency will build on this experience to champion the launch of a comprehensive European Roma strategy.
If Spain leads the way, all of Europe will ultimately reap the benefits.
A Speech of Hope for Greece
ATHENS – On September 6, 1946 US Secretary of State James F. Byrnes traveled to Stuttgart to deliver his historic “Speech of Hope.”
Byrnes’ address marked America’s post-war change of heart vis-à-vis Germany and gave a fallen nation a chance to imagine recovery, growth, and a return to normalcy.
Seven decades later, it is my country, Greece, that needs such a chance.
Until Byrnes’ “Speech of Hope,” the Allies were committed to converting “…Germany into a country primarily agricultural and pastoral in character.”
That was the express intention of the Morgenthau Plan, devised by US Treasury Secretary Henry Morgenthau Jr. and co-signed by the United States and Britain two years earlier, in September 1944.
Indeed, when the US, the Soviet Union, and the United Kingdom signed the Potsdam Agreement in August 1945, they agreed on the “reduction or destruction of all civilian heavy-industry with war potential” and on “restructuring the German economy toward agriculture and light industry.”
By 1946, the Allies had reduced Germany’s steel output to 75% of its pre-war level.
Car production plummeted to around 10% of pre-war output.
By the end of the decade, 706 industrial plants were destroyed.
Byrnes’ speech signaled to the German people a reversal of that punitive de-industrialization drive.
Of course, Germany owes its post-war recovery and wealth to its people and their hard work, innovation, and devotion to a united, democratic Europe.
But Germans could not have staged their magnificent post-war renaissance without the support signified by the “Speech of Hope.”
Prior to Byrnes’ speech, and for a while afterwards, America’s allies were not keen to restore hope to the defeated Germans.
But once President Harry Truman’s administration decided to rehabilitate Germany, there was no turning back.
Its rebirth was underway, facilitated by the Marshall Plan, the US-sponsored 1953 debt write-down, and by the infusion of migrant labor from Italy, Yugoslavia, and Greece.
Europe could not have united in peace and democracy without that sea change.
Someone had to put aside moralistic objections and look dispassionately at a country locked in a set of circumstances that would only reproduce discord and fragmentation across the continent.
The US, having emerged from the war as the only creditor country, did precisely that.
Today, it is my country that is locked in such circumstances and in need of hope.
Moralistic objections to helping Greece abound, denying its people a shot at achieving their own renaissance.
Greater austerity is being demanded from an economy that is on its knees, owing to the heftiest dose of austerity any country has ever had to endure in peacetime.
No offer of debt relief.
No plan for boosting investment.
And certainly, as of yet, no “Speech of Hope” for this fallen people.
It is the mark of ancient societies, like those of Germany and of Greece, that contemporary tribulations revive old fears and foment new discord.
So we must be careful.
Teenagers should never be told that, due to some “prodigal sin,” they deserve to be educated in cash-strapped schools and weighed down by mass unemployment, whether the scene is Germany in the late 1940s or Greece today.
As I write these lines, the Greek government is presenting the European Union with a set of proposals for deep reforms, debt management, and an investment plan to kick-start the economy.
Greece is indeed ready and willing to enter into a compact with Europe that will eliminate the deformities that caused it to be the first domino to fall in 2010.
But, if Greece is to implement these reforms successfully, its citizens need a missing ingredient: Hope.
A “Speech of Hope” for Greece would make all the difference now – not only for us, but also for our creditors, as our renaissance would terminate the default risk.
What should such a declaration include?
Just as Byrnes’ address was short on detail but long on symbolism, a “Speech of Hope” for Greece does not have to be technical.
It should simply mark a sea change, a break with the past five years of adding new loans on top of already unsustainable debt, conditional on further doses of punitive austerity.
Who should deliver it?
In my mind, the speaker should be German Chancellor Angela Merkel, addressing an audience in Athens or Thessaloniki or any Greek city of her choice.
She could use the opportunity to hint at a new approach to European integration, one that starts in the country that has suffered the most, a victim both of the eurozone’s faulty monetary design and of its society’s own failings.
Hope was a force for good in post-war Europe, and it can be a force for positive transformation now.
A speech by Germany’s leader in a Greek city could go a long way toward delivering it.
Spend in haste, repent at leisure: America’s latest bailout plan
Cambridge – With minds concentrated by fears of another 1930’s-style Great Depression, America’s politicians have adopted, virtually overnight, a $700 billon bailout plan to resuscitate the country’s rapidly deflating financial sector.
The final deal is an elaborate piece of financial and political engineering whose ultimate effect is almost impossible to predict.
There are good reasons, however, to be skeptical that this will be the panacea that credit markets are (literally) banking on.
The plan’s central conceit is that government ingenuity can disentangle the trillion-dollar “sub-prime” mortgage loan market, even though Wall Street’s own rocket scientists have utterly failed to do so.
To boot, we are told that government is so clever that it might even make money on the whole affair.
Perhaps, but let’s not forget that a lot of very smart people in the financial industry thought the same thing until quite recently.
Just a year ago, the United States had five major freestanding investment banks that stood atop its mighty financial sector.
Collectively, their employees shared more than $36 billion dollars in bonuses last year, thanks to the huge profits these institutions “earned” on their risky and aggressive business strategies.
These strategies typically involve far more risk – and sophistication – than the activities of traditional commercial banks.
In mid-August, I had the temerity to predict that risks had come home to roost, and that a large US investment bank might soon fail or be forced into a highly distressed merger.
Little did I imagine that today, there would be no freestanding investment bank left on Wall Street.
Indeed, after years of attracting many of the world’s best and brightest into ultra-high paying jobs, collapsing investment banks are now throwing them out left and right.
One such victim, a former student, called me the other day and asked, “What am I supposed to do now, get a real job?”
This brings us back to the US Treasury’s plan to spend hundreds of billions of dollars to unclog the sub-prime mortgage market.
The idea is that the US government will serve as buyer of last resort for the junk debt that the private sector has not been able to price.
Who, exactly, does the Treasury plan to employ to figure all this out?
Why, unemployed investment bankers, of course!
Let’s ponder this.
Investment bankers have been losing their cushy jobs because they could not figure out any convincing way to price distressed mortgage debt.
Otherwise, their firms would have been able to tap the trillions of dollars now sitting on the sidelines, held by sovereign wealth funds, private equity groups, hedge funds, and others.
Now, working for the taxpayer, these same investment bankers will suddenly come up with the magic pricing formula that has eluded them until now.
Little wonder that academics across the political spectrum have expressed considerable skepticism.
True, the Treasury will take equity stakes in some firms, so there is some upside potential.
But the main concern centers around the Treasury’s apparent intention to pay more than double the current market price (20-30 cents on the dollar) on the premise that Treasury’s success in untangling the mortgage market will make any discount seem like a bargain.
Does such nitpicking fail to recognize the urgency of fixing the financial system?
Isn’t any plan better than none?
I, for one, am not convinced.
Efficient financial systems are supposed to promote growth in the real economy, not impose a huge tax burden.
And the US financial sector, in greasing the wheels of the real economy, has been soaking up an astounding 30% of corporate profits and 10% of wages.
Thus, unlike in the 1930’s, the US faces a hypertrophied financial system.
Isn’t it possible, then, that rather than causing a Great Depression, significant shrinkage of the financial sector, particularly if facilitated by an improved regulatory structure, might actually enhance efficiency and growth?
I am not suggesting that the government should sit on its hands.
It needs to provide an expanded form of deposit insurance during this time of turmoil, so that there are no more Northern Rock-style bank runs.
That was a big lesson of the 1930’s.
The government may also need to consider injecting funds more directly into the mortgage sector while the private sector reconstitutes itself.
Certainly, the government must also find better ways to help homeowners and their lenders work out efficient bankruptcy proceedings.
It makes no sense for banks to foreclose on homes when there are workout options whereby people could stay in their homes and banks could recover far more money.
Eventually, after further twists, turns, and huge expenditures, the US will emerge from its epic financial crisis.
But there is a significant risk that this latest step, however grand, might end up doing more for profits and bonuses in the financial sector than for the rest of the economy.
Europe’s Procrustean Nightmare
MANNHEIM – The European Union’s policy of saving the euro at all costs is enough to guarantee the euro’s survival.
But is preserving the “one-size-fits-all” euro really worth sacrificing the eurozone’s competitiveness and, ultimately, European solidarity?
It was the single market’s establishment in 1992 – not the euro’s introduction seven years later – that brought free trade, increased competitiveness, and new wealth to Europe.
In fact, the monetary union has become a political and economic nightmare, plagued by recession, record-high unemployment, social unrest, and rising distrust among member states.
But, even as politicians and economists run out of arguments in favor of the euro, few dare to challenge its fundamental structure, let alone propose alternatives.
To escape the crisis, EU leaders must recognize the shortcomings of the eurozone’s one-dimensional framework, and develop a system better suited to managing a multi-faceted monetary union.
Excessive centralization and harmonization are decimating the subsidiarity and competition needed to drive Europe’s economies, as the socialization of debt undermines weaker economies’ accountability.
Furthermore, closing competitiveness gaps – essential to saving the euro – would not only require weaker economies to become more productive; strong economies, like Germany, would face pressure to become less efficient, diminishing Europe’s overall competitiveness vis-à-vis the rest of the world.
At the same time, the euro crisis is inciting suspicion, antagonism, and new divisions in the eurozone.
German-French relations, once the cornerstone of European integration, are at their lowest point in decades.
And unemployed young people in Greece, Portugal, and Spain routinely protest against “German dictates.”
Likewise, the rift between the eurozone’s 17 members and the other ten EU countries is widening.
Most notably, the United Kingdom is seeking to renegotiate the terms of its EU membership, with a referendum on the outcome that will determine whether it leaves the EU altogether.
Historical precedents indicate that forcing disparate nations and states to unite under a single idea – whether communism in the Soviet Union, socialism in Yugoslavia, or a shared currency in the eurozone – generates centrifugal forces that can trigger the union’s collapse.
A one-size-fits-all approach to integration is simply unsustainable.
But the eurozone is not only replicating other unions’ mistakes; it is repeating its own.
While 25 of the EU’s 27 governments agreed to the “fiscal compact,” aimed at imposing fiscal discipline on member states, there is no guarantee that governments will not violate the rules, just as they violated those established by the Maastricht Treaty.
Similarly, although the one-size-fits-all monetary policy contributed to Greece’s excessive indebtedness, and to Spain’s real-estate bubble, eurozone leaders have consistently sought to re-align interest rates, for example, by compelling holders of Greek debt to accept “haircuts” (write-downs on principal).
But the impact is severely limited without external devaluation, which is impossible within a monetary union.
While Greece’s eurozone partners may be able to carry it for decades this way, and even to bail out Spain, the system would surely collapse under the weight of a larger economy.
And such an economy – France – is in serious jeopardy.
In 2011, France’s ratio of new debt to GDP was three times higher than Germany’s, with the public sector accounting for more than 56% of national income.
Currently, 9% of French citizens are employed by the government, compared to 5% in Germany.
And unemployment hovers above 10%, with youth unemployment far higher, at roughly 25%.
While some of France’s largest companies – like Michelin, LVMH, and Air Liquide – remain successful, they cannot offset the economy’s lack of a solid base of small and medium-size enterprises.
As a result, France’s competitiveness is deteriorating.
Indeed, its ranking on the World Economic Forum’s Global Competitiveness Index fell from 18th last year to 21st this year (Germany ranked sixth both years).
Recent actions taken by President François Hollande’s government – including raising the minimum wage, increasing taxes on business, and lowering the retirement age for some workers – threaten to exacerbate the situation.
Given this, it is no surprise that Moody’s downgraded France’s credit rating last year.
But, like the struggling countries of southern Europe, France has few options.
Austerity programs have been largely counterproductive, generating vicious cycles of slow or no growth, business closures, skyrocketing unemployment, and tax-base erosion.
As a result, the eurozone’s fiscally sound countries are being asked repeatedly to compromise their prudent policies in order to finance endless bailouts.
This situation is untenable.
Europe’s leaders must pursue a controlled segmentation of the eurozone, in which the most competitive countries – Austria, Finland, Germany, and the Netherlands – adopt a new currency, the “northern euro.”
This new monetary union would be managed according to the original Maastricht Treaty, with a truly independent central bank responsible for regulating the northern euro’s exchange rate against the euro, which less competitive countries would retain.
The rump euro’s weakened exchange rate would lead to renewed economic growth, job creation, and a stronger tax base in southern European countries.
Initially, to facilitate debt reduction, bondholders would face another haircut.
Countries departing for the northern euro should make a one-time contribution to these debt-reduction efforts.
A flexible membership system would enable countries to join the northern euro when their economic and fiscal conditions became strong enough.
Europe’s leaders must stop treating the eurozone as a homogeneous entity, imposing one-size-fits-all policies on vastly different countries.
The euro’s framework should be adjusted to suit current fiscal and economic realities – not the other way around.
Spying on Eros
A Sydney-based Muslim cleric, Sheik Hilaly, recently made headlines in Australia when he publicly reflected that immodest women invite rape because they are like “uncovered meat.”
More unfortunate still was his implication that this was the cause of a series of gang rapes in Sydney in 2000, in which the attackers’ legal defense was that they thought the women were sexually available because they wore Western clothes.
Although local Muslim leaders have since criticized Hilaly’s attitude, the incident again raises the question of attitudes regarding sex in “orthodox” communities, and how they can be reconciled with prevailing norms in the West.
Meanwhile, in the United States, the controversy over government spying on its citizens seems to have died down, mostly because people are now convinced that their government will only look at the really bad guys.
What do these two issues have in common?
Gathering sophisticated intelligence is largely a matter of understanding trends.
It is less important, for instance, to steal a copy of North Korea’s bomb designs than to know the morale and capability of its scientists.
It is important to know how much deprivation in a country would swing public opinion.
Like most social science, measurement of these dynamics is conducted indirectly.
Intelligence analysts operate like scientists, in the sense that they develop theories, then measure and test them.
Like scientists, they prefer to work with huge amounts of data, which is why the US government wants a record of every call and financial transaction made by every inhabitant of the country.
Tracking the movement of individuals by the locator in their cell phones is possible, and it is surely under consideration.
That is because intelligence agents look for indicators, correlations, and causes. Causes are the hardest to understand.
For example, the civil services in Iraq have recently crossed a threshold beyond which they are now probably impossible to administer.
A significant reason is believed to be the steady flight of intellectuals from Iraq, which seems obvious, but is difficult to measure.
Indicators and correlations are easier to demonstrate.
If a lot of people are leaving their seats during a sporting event, you might consider it an indication that the event is not exciting.
During the Cold War, Western intelligence agencies developed an immense catalogue of indicators and correlations.
If train traffic on certain routes increased, it suggested that army food supplies were being delivered, thus hinting at impending military action.
Likewise, shipments of toilet paper are amazingly accurate indicators of military activity.
Once the Soviets realized this, they began to send bogus shipments around the country on random schedules, creating shortages for the baffled civilian population.
As it turns out, another extremely useful view into a society is the type of pornography it consumes, together with how that pornography is manufactured and delivered.
Yes, it is true.
Spies are interested in prurient behavior everywhere.
One reason is that pornography in orthodox societies is illicit, so the distribution channels opened by sexual materials are usually used for other goods as well.
In the Muslim world, there is a significant, important flow of pornography.
According to one story, possibly apocryphal, in the 1970’s, the Islamic insurgency in Iran was initially planned using material delivered through porn-related channels because the mosques were so tightly controlled.
But there are other trends indicated by pornographic content that are useful to spies.
Movies produced for the sexual gratification of consumers reveal cultural norms of restriction, transgression, and otherness.
In fact, porn is so specifically tuned to the tastes of consumers that shifts can indicate changes in a society almost immediately.
Interestingly, many purveyors of pornography initially thought that better quality video would make their product more desirable.
However, it seems that high production values were actually less popular.
So a “casual” production style was adopted, similar to the design of worn and ripped jeans.
Part of the raw appeal of pornography, it seems, is that the product itself be raw, and conspicuously illicit.
But local tastes nonetheless vary widely.
Japanese porn features schoolgirls, often bound.
Egyptian porn before Nasser featured local beauties and voyeurism, but now focuses on fair-haired and pale-skinned women, sometimes with forced sex as a theme.
Egyptian-born Sheik Hilaly, in Sydney, may have been verbalizing a latent sense of otherness and mistaking it for insight.
This means that tinkering with the content of porn could be in the national interest, under certain circumstances.
Anyone privy to details of such activities cannot comment on them, but one story circulating in the research community involved attempts to introduce condoms into African porn as part of an anti-AIDS effort.
Then, of course, there is the biggest market of all: the US, where it is estimated that annual revenue for pornography in 2004 exceeded the combined revenue of the ABC, CBS, and NBC television networks by many billions of dollars.
We should not be surprised if someone eventually tries to tweak the content of pornography to exploit Americans’ cultural proclivities on behalf of other products, causes, or even political candidates.
Squaring Asia’s Nuclear Triangle
TOKYO – Just before the fourth trilateral summit between Japan, China, and South Korea began on May 21, Chinese Premier Wen Jiabao, South Korean President Lee Myung-bak, and Japanese Prime Minister Naoto Kan jointly visited the areas affected by the Great East Japan Earthquake, offering encouragement to the disaster’s victims living in evacuation centers.
Since the accident at Fukushima Daiichi Nuclear Power Plant in March, Kan has aimed at lifting the bans that many countries have imposed on imports of Japanese agricultural products, and so offered the two heads of state cherries from Fukushima in a bid to highlight their safety.
At the summit, the three countries issued a joint statement outlining cooperation on a wide range of issues, including nuclear safety, disaster prevention, economic growth, and the environment.
The lessons learned from Japan’s earthquake and nuclear accident would be shared with China, South Korea, and the wider international community, and, in an addendum, the Japanese authorities promised to “continue to provide information…with the greatest transparency possible.”
In fact, the Kan administration – which loathes the involvement of bureaucrats, who are professionals, in managing public affairs – delayed notifying neighboring countries when it was forced to order the release of water containing low concentrations of radioactive material.
For Kan, the real priority was his government’s effort to maintain its grip on power, not reassuring Japan’s neighbors of the actions it was taking to contain a potential threat to their citizens.
The codicil to the summit communiqué was created to address these concerns.
It emphasized the importance of sharing information about nuclear safety, and incorporated specific measures, including the creation of a framework for rapid notification in the event of an emergency and exchanges of experts to assist in managing future nuclear crises and ensuring that regional concerns are taken into account.
Ever since the Fukushima accident, opposition to nuclear power has been growing in China and South Korea, both of which had been planning a massive expansion of their nuclear generating capacity – and both of which face a change of political leadership next year.
China’s succession, though set, will nonetheless bring a period of uncertainty, while South Korea will undoubtedly face its usual no-holds-barred democratic battle in its coming presidential election.
Given these political realities, keeping ordinary citizens content about civilian nuclear power has become a greater priority than usual in both countries.
This confluence of political need has created an opportunity for all three countries to cooperate more closely in the management of civilian nuclear power, and this opportunity should not be missed.
Sensing this, China and South Korea have provided humanitarian and economic aid to areas affected by the earthquake, and both countries were quick to send specialized teams to Japan to search for the missing.
The first country to send a rescue team to Japan, however, was Taiwan (which also was the largest single provider of donations, amounting to ¥20 billion).
But, owing to what Kan’s government called “confusion on the ground,” Taiwan’s rescue team was kept waiting for days.
And, while the people of Japan were grateful for Taiwan’s unexpected generosity, the Japanese government failed to offer any thanks, despite running advertisements in major newspapers expressing gratitude for the relief sent from other countries.
(Eventually, a public campaign raised the money to run an advertisement in a Taiwanese newspaper.)
Taiwanese President Ma Ying-jeou was as surprised as the Japanese by the size of the contributions made by his people.
Ma had been tilting his government’s policies increasingly toward China, concluding a bilateral framework agreement on economic cooperation.
But, in the wake of Taiwanese society’s outpouring of sympathy for Japan, he has adjusted his stance.
The Ma government has also been kept on its toes by the opposition Democratic Progressive Party’s call for the phase-out of nuclear power in Taiwan by 2025.
Taiwan has three nuclear power plants, and, like the plant at Fukushima, they directly face the ocean.
Two are located within 20 kilometers of the capital, Taipei, and it is generally agreed that there would be no escape for the vast majority of the capital’s citizens should a major nuclear accident occur.
Construction of a fourth nuclear power plant, which began in 1999, was suspended by DPP President Chen Shui-bian the following year.
Although Chen’s government, under pressure from the opposition Kuomintang, later restarted work on the plant, design revisions have repeatedly delayed its completion.
Opposition from local residents remains stiff.
At their recent trilateral summit, Japan, China, and South Korea skillfully evaded direct mention of the delicately poised security issues that they face.
And, while they did bring nuclear safety to the fore and agreed to cooperate and share information with each other, efforts to meet this region-wide challenge cannot succeed without bringing Taiwan into the discussions.
Taiwan should also be allowed to participate in the International Atomic Energy Agency in the area of nuclear safety, just as it became an observer at the World Health Organization during the SARS and avian flu pandemics of the 1990’s.
Where nuclear safety is concerned, China must rethink its policy of isolating Taiwan from international bodies.
Stagflation Cometh
New York – The world economy has had several good years.
Global growth has been strong, and the divide between the developing and developed world has narrowed, with India and China leading the way, experiencing GDP growth of 11.1% and 9.7% in 2006 and 11.5% and 8.9% in 2007, respectively. Even Africa has been doing well, with growth in excess of 5% in 2006 and 2007.
But the good times may be ending.
There have been worries for years about the global imbalances caused by America’s huge overseas borrowing.
America, in turn, said that the world should be thankful: by living beyond its means, it helped keep the global economy going, especially given high savings rates in Asia, which accumulated hundreds of billions of dollars in reserves.
But it was always recognized that America’s growth under President George W. Bush was not sustainable.
Now the day of reckoning looms.
America’s ill-conceived war in Iraq helped fuel a quadrupling of oil prices since 2003.
In the 1970’s, oil shocks led to inflation in some countries, and to recession elsewhere, as governments raised interest rates to combat rising prices.
And some economies faced the worst of both worlds: stagflation.
Until now, three critical factors helped the world weather soaring oil prices.
First, China, with its enormous productivity increases – based on resting on high levels of investment, including investments in education and technology ­– exported its deflation.
Second, the United States took advantage of this by lowering interest rates to unprecedented levels, inducing a housing bubble, with mortgages available to anyone not on a life-support system.
Finally, workers all over the world took it on the chin, accepting lower real wages and a smaller share of GDP.
That game is up.
China is now facing inflationary pressures.
What’s more, if the US convinces China to let its currency appreciate, the cost of living in the US and elsewhere will rise.
And, with the rise of biofuels, the food and energy markets have become integrated.
Combined with increasing demand from those with higher incomes and lower supplies due to weather-related problems associated with climate change, this means high food prices – a lethal threat to developing countries.
Prospects for America’s consumption binge continuing are also bleak.
Even if the US Federal Reserve continues to lower interest rates, lenders will not rush to make more bad mortgages.
With house prices declining, fewer Americans will be willing and able to continue their profligacy.
The Bush administration is hoping, somehow, to forestall a wave of foreclosures – thereby passing the economy’s problems on to the next president, just as it is doing with the Iraq quagmire.
Its chances of succeeding are slim.
For America today, the real question is only whether there will be a short, sharp downturn, or a more prolonged, but shallower, slowdown.
Moreover, America has been exporting its problems abroad, not just by selling toxic mortgages and bad financial practices, but through the ever-weakening dollar, in part a result of flawed macro- and micro-policies.
Europe, for instance, will find it increasingly difficult to export.
And, in a world economy that had rested on the foundations of a “strong dollar,” the consequent financial market instability will be costly for all.
At the same time, there has been a massive global redistribution of income from oil importers to oil exporters – a disproportionate number of which are undemocratic states – and from workers everywhere to the very rich.
It is not clear whether workers will continue to accept declines in their living standards in the name of an unbalanced globalization whose promises seem ever more elusive.
In America, one can feel the backlash mounting.
For those who think that a well-managed globalization has the potential to benefit both developed and developing countries, and who believe in global social justice and the importance of democracy (and the vibrant middle class that supports it), all of this is bad news.
Economic adjustments of this magnitude are always painful, but the economic pain is greater today because the winners are less prone to spend.
Indeed, the flip side of “a world awash with liquidity” is a world facing depressed aggregate demand.
For the past seven years, America’s unbridled spending filled the gap.
Now both US household and government spending is likely to be curbed, as both parties’ presidential candidates promise a return to fiscal responsibility.
After seven years in which America has seen its national debt rise from $5.6 trillion to $9 trillion, this should be welcome news – but the timing couldn’t be worse.
There is one positive note in this dismal picture: the sources of global growth today are more diverse than they were a decade ago.
The real engines of global growth in recent years have been developing countries.
Nevertheless, slower growth – or possibly a recession – in the world’s largest economy inevitably has global consequences.
There will be a global slowdown.
If monetary authorities respond appropriately to growing inflationary pressure – recognizing that much of it is imported, and not a result of excess domestic demand – we may be able to manage our way through it.
But if they raise interest rates relentlessly to meet inflation targets, we should prepare for the worst: another episode of stagflation.
If central banks go down this path, they will no doubt eventually succeed in wringing inflation out of the system.
But the cost – in lost jobs, lost wages, and lost homes – will be enormous.
Stagnant and Paralyzed
MILAN – The recent dramatic declines in equity markets worldwide are a response to the interaction of two factors: economic fundamentals and policy responses – or, rather, the lack of policy responses.
First, the fundamentals.
Economic growth rates in the United States and Europe are low – and well below even recent expectations.
Slow growth has hit equity valuations hard,&nbsp;and both economies are at risk of a major downturn.
A slowdown in one is bound to produce a slowdown in the other – and in the major emerging economies, which, until now, could sustain high growth in the face of sluggish performance in the advanced economies.
Emerging countries’ resilience will not extend to double-dip recessions in America and Europe: they cannot offset sharp falls in advanced-country demand by themselves, notwithstanding their healthy public-sector balance sheets.
America’s domestic-demand shortfall reflects rising savings, balance-sheet damage in the household sector, unemployment, and fiscal distress.
As a result, the large non-tradable sector and the domestic-demand portion of the tradable sector cannot serve as engines of growth and employment.
That leaves exports – goods and services sold to the global economy’s growth regions (mostly the emerging economies) – to carry the load.
And strengthening the US export sector requires overcoming some significant structural and competitive barriers.
What the world is witnessing is a correlated growth slowdown across the advanced countries (with a few exceptions), and across all of the systemically important parts of the global economy, possibly including the emerging economies.
And equity values’ decline toward a more realistic reflection of economic fundamentals will further weaken aggregate demand and growth.
Hence the rising risk of a major downturn – and additional fiscal distress.
Combined, these factors should produce a correction in asset prices that brings them into line with revised expectations of the global economy’s medium-term prospects.
But the situation is more foreboding than a major correction.
Even as expectations adjust, there is a growing loss of confidence among investors in the adequacy of official policy responses in Europe and the US (and to a lesser extent in emerging economies).
It now seems clear that the structural and balance-sheet impediments to growth have been persistently underestimated, but it is far less clear whether officials have the capacity to identify the critical issues and the political will to address them.
In Europe, risks spreads are rising on Italian and Spanish sovereign debt.
Yields are in the 6-7% range (generally viewed as a danger zone) for both countries.
Combined with their low and declining GDP growth prospects, their debt burdens are becoming sufficiently onerous to raise questions about whether they can stabilize the situation and restore growth on their own.
Italy and Spain expose the full extent of Europe’s vulnerability.
Like Greece, Ireland, and Portugal, membership in the euro denies Italy and Spain devaluation and inflation as policy tools.
But the declining value of their sovereign debt – and the size of that debt relative to that of Europe’s smaller distressed countries – implies much greater erosion of banks’ capital base, raising the additional risk of liquidity problems and further economic damage.
The domestic policy focus in Europe has been to cut deficits, with scant attention to reforms or investments aimed at boosting medium-term growth.
At the EU level, there is not yet a complementary policy response designed to halt the vicious cycle of rising yields and growth impairment now faced by Italy and Spain.
Credible domestic and EU-wide policies are needed to stabilize the situation.
Neither is forthcoming.
Recent market volatility has been partly a response to the apparent rise in the downside risk of policy paralysis or denial.
In the US side, the integrity of sovereign debt was kept in question for too long.
During those months of political dithering, US treasuries became a riskier asset.
Then, with the immediate default risk removed, money stormed out of risky assets into Treasuries to wait out the economic bad news – mainly feeble and declining growth, employment stagnation, and falling equity prices.
Little in America’s domestic policy debates hints at a viable growth and employment-oriented strategy.
In fairness, some believe that cutting the budget is a sufficient growth strategy.
But that is neither the majority view, nor the view reflected by the markets.
Structural and competitive impediments to growth have been largely ignored.
There is little recognition that domestic aggregate demand cannot be restored to its pre-crisis levels except through growth.
In fact, the household savings rate continues to rise.
The details may elude voters and some investors, but the focus of policy is not on restoring medium- and long-term growth and employment.
Indeed, there is profound uncertainty about whether and when these imperatives will move to the center of the agenda.
In the emerging economies, by contrast, inflation is a challenge, but the main risk to growth stems from the advanced countries’ problems.
In addition, reforms and major structural changes are needed to sustain growth, and these could be postponed, or run into delays, in a decelerating global economy.
The resetting of asset values in line with realistic growth prospects is probably not a bad outcome, though it will add to the demand shortfall in the short run.
But uncertainty, lack of confidence, and policy paralysis or gridlock could easily cause value destruction to overshoot, inflicting extensive damage on all parts of the global economy.
This somewhat bleak picture could change, though probably not in the short run.
Stability can return, but not until domestic policy in the advanced countries, together with international policy coordination, credibly shifts to restoring a pattern of inclusive growth, with fiscal stabilization carried out in a way that supports growth and employment.
In short, we confront two interacting problems: a global economy losing the struggle to restore growth and the absence of any credible policy response.
Too many countries seem to be focused more on political outcomes than on economic performance.
Markets are simply holding up a mirror to these flaws and risks.
Stalin Lives
The legacy of dead dictators from vanquished totalitarian regimes should no longer be ambivalent.
Only Germany’s lunatic fringe dares to commemorate Hitler. Not even the pathetic remnant of the Khmer Rouge celebrates Pol Pot’s memory.
Yet, as Russia approaches the 60th anniversary of its victory over Nazi Germany, marking Stalin’s role in that victory is proving to be damnably awkward.
Indeed, earlier this year, Moscow was roiled by debates about whether or not to build a statue to the dead dictator.
In large bookstores across Russia, a huge number of political biographies and histories portray Stalin and his era.
Some of these, based on newly opened archival material, are critical.
But the majority of these books and authors portray Stalin in a positive light.
Indeed, when Russians are asked to list the most important people of the twentieth century, Stalin is still tied for first place – with Lenin.
Some see the hand of what remains of the Communist Party behind this.
The Party has moved far from its old Leninist ideals, as it seeks support nowadays through a witch’s brew of Russian nationalism, hyper-orthodox Christianity, and “state Stalinism.”
Of course, towns and cities are no longer named for Stalin.
In the late 1950’s, countless Stalin monuments were demolished.
Yet many symbols of Stalin’s rule have been carefully preserved, including the national anthem he personally approved in 1944.
There are seven high-rises in Moscow that Russians still call “Stalin’s vysotki.”
Next to Lenin’s tomb is Stalin’s grave and monument, where heaps of fresh flowers are always to be seen on the anniversaries of his birth, his death, and the victory over Hitler.
To be sure, Khrushchev’s uncovering of Stalin’s crimes and cult of personality in 1956 made a huge impression both in the Soviet Union and abroad.
But many people in the political elite and military circles were enraged by Khrushchev’s revelations.
This incited many attempts to rehabilitate Stalin, especially during the 20 years of Leonid Brezhnev’s rule, which we now call the period of “stagnation.”
Mikhail Gorbachev continued to uncover the crimes of Stalinism, shedding light on dark pages that Khrushchev lacked the courage to open to public view.
During Boris Yeltsin’s presidency, this criticism became even stronger.
But demolishing the ideological, political and economic structures of the past is not enough to renew society.
Yeltsin understood this.
Eight years ago the remains of the Romanov family were publicly buried in the Peter-Paul castle in Saint Petersburg.
Nicolas II gained the status of saintly martyr.
The reburial of the Romanovs, however, didn’t touch the public’s emotions for long.
Over 50% of Russia’s population, including teachers, scientists, doctors, and military personnel, have seen their quality of life fall since communism’s demise.
No surprise, then, that they are nostalgic for the past, including Stalin.
People of the older generation do, of course, remember the hardships of the 1930’s and 1940’s.
But most Russians do not view the entire Soviet period as some sort of black hole. They see a time of hardship, yes, but also of great achievements – in economic development, science, culture, education, and defense of the motherland during the war.
Today, Russians listen to old Soviet songs and watch Soviet-era movies.
May 1 (Labor Day), and November 7 (the anniversary of the Bolshevik Revolution) remain much more meaningful than newly installed postcommunist holidays, such as June 12 (Independence Day).
In fact, for many Russians, the declaration of Russia’s independence in 1990 represents a low point in the country’s history, a year of anarchy and disarray.
What can Russians be proud of in the 15 years of postcommunism?
Shock therapy that ruined the economy and gave away the country’s wealth to private but rarely clean hands?
Neither democracy nor markets are seen by most Russians as absolute values, because they have failed to deliver either prosperity or security.
What victories has Russia’s army achieved in these years?
It could not even subdue Chechnya, a small republic within the Russian federation.
The Russian federation remains a collection of multinational states in need of some unifying idea of statehood and nationality to keep them together.
The easiest and the most understandable idea for Russians to cling to is patriotism.
Only two events have the power to mobilize and energize this sense of patriotism: the October revolution of 1917 and the Great Patriotic War of 1941-1945, which turned the USSR and Russia into a great world power.
The victory over fascism, because so many of its participants remain active, is a living event in our memory.
Victory Day this year will likely be the last “round” anniversary of 1945 that Russia can commemorate while many thousands of veterans are alive and able to participate.
So the Kremlin is preparing to mark the event on a scale that Russia has never seen before.
Needless to say, Stalin’s name will be mentioned countless times during these celebrations.
But it would be a mistake to see this public recognition of Stalin as a real yearning for every aspect of the system he created.
Instead, acknowledging Stalin is a way for Russians to recall a time of great deeds and perhaps even greater sacrifices.
Patriotism everywhere is always based on such notions.
Stalin, Our Contemporary
NEW HAVEN – Eighty years ago, in the autumn of 1930, Joseph Stalin enforced a policy that changed the course of history, and led to tens of millions of deaths across the decades and around the world.
In a violent and massive campaign of “collectivization,” he brought Soviet agriculture under state control.
Stalin pursued collectivization despite the massive resistance that had followed when Soviet authorities first tried to introduce the policy the previous spring.
The Soviet leadership had relied then upon shootings and deportations to the Gulag to preempt opposition.
Yet Soviet citizens resisted in large numbers;
Kazakh nomads fled to China, Ukrainian farmers to Poland.
In the autumn, the shootings and deportations resumed, complemented by economic coercion.
Individual farmers were taxed until they entered the collective, and collective farms were allowed to seize individual farmers’ seed grain, used to plant the next year's harvest.
Once the agricultural sector of the USSR was collectivized, the hunger began.
By depriving peasants of their land and making them de facto state employees, collective farming allowed Moscow to control people as well as their produce.
Yet control is not creation.
It proved impossible to make Central Asian nomads into productive farmers in a single growing season.
Beginning in 1930, some 1.3 million people starved in Kazakhstan as their meager crops were requisitioned according to central directives.
In Ukraine, the harvest failed in 1931.
The reasons were many: poor weather, pests, shortages of animal power after peasants slaughtered livestock rather than losing it to the collective, shortages of tractors, the shooting and deportation of the best farmers, and the disruption of sowing and reaping caused by collectivization itself.
“How can we be expected to build the socialist economy,” asked a Ukrainian peasant, “when we are all doomed to hunger?” We now know, after 20 years of discussion of Soviet documents, that in 1932 Stalin knowingly transformed the collectivization famine in Ukraine into a deliberate campaign of politically motivated starvation.
Stalin presented the crop failure as a sign of Ukrainian national resistance, requiring firmness rather than concessions.
As famine spread that summer, Stalin refined his explanation: hunger was sabotage, local Communist activists were the saboteurs, protected by higher authorities, and all were paid by foreign spies.
In the autumn of 1932, the Kremlin issued a series of decrees that guaranteed mass death.
One of them cut off all supplies to communities that failed to make their grain quotas.
Meanwhile, the Communists took whatever food they could find, as one peasant remembered, “down to the last little grain,” and in early 1933 the borders of Soviet Ukraine were sealed so that the starving could not seek help.
Dying peasants harvested the spring crops under watchtowers.
More than five million people starved to death or died of hunger-related disease in the USSR in the early 1930’s, 3.3 million of them in Ukraine, of which about three million would have survived had Stalin simply ceased requisitions and exports for a few months and granted people access to grain stores.
These events remain at the center of East European politics to this day.
Each November, Ukrainians commemorate the victims of 1933.
But Viktor Yanukovych, the current Ukrainian president, denies the special suffering of the Ukrainian people – a nod to Russia’s official historical narrative, which seeks to blur the particular evils of collectivization into a tragedy so vague that it has no clear perpetrators or victims.
Rafal Lemkin, the Polish-Jewish lawyer who established the concept of “genocide” and invented the term, would have disagreed: he called the Ukrainian famine a classic case of Soviet genocide.
As Lemkin knew, terror followed famine: peasants who survived hunger and the Gulag became Stalin’s next victims.
The Great Terror of 1937-1938 began with a shooting campaign – directed chiefly against peasants – that claimed 386,798 lives across the Soviet Union, a disproportionate number of them in Ukraine.
Collectivization casts a long shadow.
When Nazi Germany invaded the western Soviet Union, the Germans kept the collective farms intact, rightly seeing them as the instrument that would allow them to divert Ukrainian food for their own purposes, and starve whom they wished.
After Mao made his revolution in 1948, Chinese communists followed the Stalinist model of development.
This meant that some 30 million Chinese starved to death in 1958-1961, in a famine very similar to that in the Soviet Union.
Maoist collectivization, too, was followed by mass shooting campaigns.
Even today, collective agriculture is the basis for tyrannical power in North Korea, where hundreds of thousands of people starved in the 1990’s.
And in Belarus, Europe’s last dictatorship, collective farming was never undone, and a former collective farm director, Aleksandr Lukashenko, runs the country.
Lukashenko is running for a fourth consecutive presidential term in December.
Controlling the land, he also controls the vote.
Eighty years after the collectivization campaign, Stalin’s world remains with us.
Standards for Non-Standard Monetary Policy
PARIS – The widespread introduction of unconventional monetary-policy measures by major central banks has been a defining characteristic of the global financial crisis.
We have seen enhanced credit support, credit easing, quantitative easing, interventions in currency and securities markets, and the provision of liquidity in foreign currency – to name but a few of the measures taken.
Some view these measures as a continuation of standard policy by other means.
Once nominal interest rates cannot be lowered further, central banks use other tools to determine the monetary-policy stance.
They have reached the end of the road, so they shift into four-wheel drive: they expand their balance sheets and inject liquidity to influence the structure of yields and returns and thereby stimulate aggregate demand.
But when central banks return to the road – that is, exit from the non-standard measures – they must retrace their path, first unwinding unconventional policy, and only then raising interest rates.
Let me suggest a different view.
Say that key interest rates are to be set at levels considered appropriate to maintain price stability, drawing on regular, comprehensive assessment of economic and monetary conditions.
Following standard practice, interest rates can be more or less significantly positive, very close to zero, or at zero.
But, whatever the level of nominal interest rates, the monetary-policy stance established in this way has often been poorly transmitted to the economy, particularly in times of acute crisis.
During the financial crisis, market functioning was impaired, at times very profoundly.
Non-standard measures helped to clear standard measures’ transmission path.
By this logic, if the transmission of standard measures is impeded in a significant way, non-standard measures can offer support. And, as for the exit, standard and non-standard measures can be determined largely independently.
Policymakers are not obliged to unwind non-standard measures before considering interest-rate increases, or to push interest rates to the zero lower bound before considering unconventional measures. Standard measures depend on the medium- and long-term outlook for price stability, whereas non-standard measures depend on the degree of dysfunction of the monetary-policy transmission mechanism.
This second view has characterized the European Central Bank’s approach to monetary policy since the start of the financial crisis. The ECB’s first non-standard measure – unlimited supply of liquidity at fixed rates against appropriate collateral – was introduced in August 2007, when the minimum bid rate of its main refinancing operation was 4.25% – nowhere near the zero bound.
Non-standard measures were required to ensure that the monetary-policy stance would be more effectively transmitted to the broader economy, notwithstanding the dislocations observed in some financial markets.
Obvious, unconventional measures, if not carefully monitored, might have the unintended consequence of creating an abnormally benign financial environment for markets, commercial banks, and sovereigns.
This, in turn, could delay needed improvements in financial regulation, balance-sheet repair by banks, structural economic reform, and fiscal adjustment. As a result, non-standard measures must satisfy five conditions.
First, they must be as commensurate as possible with the degree of market dislocation and disruption of market that they aim to counter, which is always a matter of judgment. In most cases, the measures must be tailored to avoid the total disruption of markets.
The ECB has never hesitated to increase or decrease the scope of its non-standard tools – in particular, the duration of the non-standard supply of liquidity – depending on the abnormality in the functioning of the financial system.
Second, the measures must be accompanied by forceful messages to commercial banks to address their medium-term recapitalization and balance-sheet-repair issues.
To the extent that banks are, by far, the ECB’s main instrument for “non-standard” refinancing, this message is particularly important in Europe.
Third, the measures must be accompanied by equally forceful messages, when and where needed, to the governments concerned.
When non-standard measures are required because of loss of confidence in sovereign debt, such messages must seek to avoid the measures’ failure by highlighting the risk of major additional difficulties in the future.
Fourth, in the case of Europe, the European Union institutions, as well as the member states, must be urged to strengthen economic governance, including through close monitoring of individual countries’ economic and budgetary policies.
The ECB’s governing council has been highly vocal on this issue since the start of the crisis.
Finally, to the extent that the combined non-standard measures of the advanced economies’ central banks are creating a very substantial structural change in the global economy’s monetary and financial environment, it seems necessary to call for the appropriate reinforcement of global governance.
As long as these central banks consider non-standard measures necessary, they are entitled to be vocal advocates of the necessary reforms of global finance; the necessary adjustment of global imbalances within the framework of the G-20; and the decisive contribution of multilateral lenders.
The ECB’s decision in December 2011 to launch its long-term refinancing operation, which supplies low-cost three-year financing to commercial banks, meets these five conditions. The LTRO’s duration, in particular, is appropriate, given the growing threat of major dysfunction in the European banking sector in October, November, and at the beginning of December last year.
Moreover, ECB President Mario Draghi, my successor, made loud and clear the importance of reinforcing banks’ balance sheets, adjusting individual countries’ strategies, and improving governance in the eurozone and the EU as a whole.
In all of these domains, as well as at the global level, where reform is equally urgent, there is no longer any room for complacency.
Photograph of Jean-Claude Trichet: (c) European Central Bank/Andreas Böttcher
Starving for Capital in Sub-Saharan Africa
Sub-Saharan Africa's appalling poverty and living conditions have been exposed repeatedly through television and the Internet.
But these agonizing pictures represent only the symptoms of an underlying - and largely unreported - malady: capital flight.
Capital flight stems from myriad causes: debt servicing, the awarding to foreign firms of almost all contracts financed by multilateral lenders (and exemptions from taxes and duties on these goods and services), unfavorable terms of trade, speculation, free transfer of benefits, foreign exchange reserves held in foreign accounts, and domestic private capital funneled abroad.
According to the UN Industrial Development Organization (UNIDO), every dollar that flows into the region generates an outflow of $1.06.
Most of this hemorrhage is debt-fueled: approximately 80 cents on every dollar that flows into the region from foreign loans flows out again in the same year.
This implies active complicity between creditors (the OECD countries and their financial institutions, especially the IMF and the World Bank) and borrowers (African governments).
Capital flight provides creditors with the resources they need to finance additional loans to the countries from which these resources originated in the first place - a scheme known as "round-tipping" or "back-to-back" loans.
Borrowers, in turn, use these foreign loans to increase their accumulation of private assets held abroad, even as strict budget discipline and free capital movement - implemented in line with IMF and World Bank structural adjustment programs - have led to skyrocketing interest rates.
The lethal combination of these factors thwarts any prospect of economic growth while leading to an unsustainable level of debt.
The pool of fleeing capital includes assets acquired legally at home and legally transferred abroad; capital acquired legally at home and illegally transferred abroad; and illegally acquired capital that is funneled abroad illegally.
Using the latter two types to impose "odious debts" on Africans undermines western lenders' credibility concerning money laundering, good governance, transparency, fiscal discipline, and macroeconomic policies conducive to economic growth.
Repudiating unwarranted and unjustified debts would be consistent with economic logic and international law.
Well-functioning credit markets require that lenders face the consequences of irresponsible or politically motivated lending.
But two obstacles must be overcome.
First, African leaders, who should repudiate these debts, are the ones who contracted them in the first place, with the obvious aim of enriching themselves.
Second, creditors may retaliate by withdrawing subsequent lending.
These obstacles are neither insurmountable nor unique to sub-Saharan Africa.
Capital flight is most likely to be sparked by uncertainty regarding good governance, political stability, civil liberties, accountability, property rights, and corruption.
Sound economic policies, sustainable economic growth, and adequate rates of return on investment tend to reverse capital flight.
According to figures released by the American investment bank Salomon Brothers, the return of flight capital was estimated at around $40 billion for Latin America in 1991, led by Mexico, Venezuela, Brazil, Argentina, and Chile.
China recovered $56 billion between 1989 and 1991.
Equally revealing, several Middle East economies are booming.
The United Arab Emirates and Saudi Arabia are flooded with capital as a result of billions of dollars poured back into the region in the past two years by domestic investors.
The Saudi stock market index is up by 78% since the start of the year, hugely out-performing the main US and European indices - and this in a region plagued by conflict, nuclear tensions, terrorism, and acute political challenges.
As for sub-Saharan Africa, the "Washington Consensus" - economic liberalization, deregulation of capital movements, suppression of subsidies, and privatization - runs against the very policies needed to promote political improvements, a stable macroeconomic environment, enlarged financial markets, and lower debt overhang.
Private firms that have acquired public assets should be induced, through legislation, to recapitalize these companies.
New shares should be earmarked for residents to encourage the repatriation of private capital.
Capital controls and fiscal incentives will keep legitimate private capital at home and promote domestic investment.
These are the essential conditions for launching sustainable economic growth in the region.
Common sense points to the need for the OECD countries, the IMF, and the World Bank to sever their dubious complicity with sub-Saharan African leaders and support policies that are in the long-term interest of the West and the world.
Ignoring the negative investment climate would be unwise.
According to the New York Times , quoting US military personnel, the Sahara Desert is becoming a "new Afghanistan."
This threat, together with terrorist attacks in Kenya, Tanzania, Tunisia, and Morocco, has prompted the Bush administration to install military bases in the region.
But only policies that privilege social justice and economic development can win the fight against terrorism definitively.
Tony Blair is America's closest ally in their "war on terror."
He also believes that conditions in Africa are "a scar on the conscience of the world," and has established a Commission for Africa that will report to the G8.
But, in addition to the trade distortions that Blair has promised to address, he and other Western leaders should put an end to scandalous "round-tipping" or "back-to-back" loans and return the funds embezzled by African leaders and their Western friends.
State Aggression and Judicial Passivity
WASHINGTON, DC – When the member states of the International Criminal Court gather later this month in Kampala, Uganda, for a conference to review the ICC’s work, one issue on the agenda will be whether to amend the Court’s statute to allow it to exercise jurisdiction over the crime of aggression.
That issue was deferred when the ICC Statute was adopted in 1998.
Based on my experience as an international prosecutor, and speaking as a strong supporter of the ICC, I believe that it would be a serious mistake to add the crime of aggression to the Court’s docket now.
The issue should be deferred again.
By any measure, the ICC has gotten off to a strong start in generating global support and demonstrating its potential to address the problem of official impunity for serious international crimes.
But it also has encountered charges of politicization, and it is still learning, as an institution, how to exercise effectively its jurisdiction over genocide, crimes against humanity, and war crimes.
The experience of the International Criminal Tribunal for the former Yugoslavia (ICTY), which also addressed genocide, crimes against humanity, and war crimes, should sound a cautionary note for ICC members as they debate whether to add the crime of aggression to their jurisdiction.
One of the greatest challenges I faced as the ICTY prosecutor was convincing the Serbian public that the court was not a politically motivated conspiracy against Serbia.
This challenge would have been immensely greater – perhaps impossible – if the Tribunal’s jurisdiction had included the crime of aggression.
Indeed, including aggression would have required me to investigate and potentially prosecute the decision to go to war – inherently a profoundly political decision.
Prosecuting that decision would have inflamed suspicions of an anti-Serbian plot; choosing not to prosecute would have incited countervailing charges that the Tribunal was not fulfilling its mandate.
Such a debate would have diverted attention and energy from the imperative of fairly and effectively providing justice and accountability for the grave crimes then being committed against civilians in the former Yugoslavia.
Now is not the time for the ICC to risk embroiling itself in similar controversy.
The issues that would arise from dealing with allegations of aggression would give ammunition to the ICC’s critics who claim that it is a highly politicized institution.
Moreover, as a young institution, the Court still has much work to do in effectively investigating and prosecuting the crimes over which it already exercises jurisdiction.
Cooperation from member states and the relationship between peace and justice are just two vital issues that require sustained attention at Kampala and beyond.
Grappling with the crime of aggression also threatens to open rifts among members of the Court and other Court supporters.
Despite years of complex negotiations, deep disagreements persist over key issues related to amending the statute on aggression, such as state consent and how cases would be initiated.
It is unrealistic to expect consensus to be reached on these issues in the days remaining before the Kampala meeting.
And attempting to force a decision in the absence of consensus would vitiate one of the strongest assets the Court has had – the solidarity of its members in the face of efforts to undermine the project of an effective and independent international mechanism for justice and accountability.
The ICC review conference in Kampala will not be the last opportunity to amend the statute.
The Court’s members can choose to do so at any time in the future.
They should wait at least until the Court is more established institutionally and a broader consensus emerges on the relevant issues.
State of the Art, or Art of the State?
September is traditionally the time when opera companies and orchestras return to their home cities from Aix, Salzburg, Tanglewood, and countless other summer festivals.
This rentrée is also marked (on both sides of the Atlantic) by the return of worries about how classical music is financed.
American symphonic life is Euro-centric in almost every respect except for its funding.
Whereas Americans depend upon tax-deductible private donations and box office receipts to finance live classical music, Europeans prefer direct government support for the arts.
Ironically, while arts advocates in the United States have long argued for adoption of the “European model” – which has produced a rich and varied artistic life for Europeans –Europe is being forced to change its system of support to one that depends more on private money and the box office.
Unfortunately, Europe’s system of direct government financial support is falling victim to Europe’s slow economic growth and budget deficits.
Particularly for those countries that have adopted the euro, government spending on the arts will be constrained for some time by the requirement that fiscal deficits be kept to 3% of GDP.
The resulting pressure on Europe’s performing arts institutions is causing concern at various different levels.
Traditionally, Europe’s social democracies have preferred allocating scarce goods and services like concerts and operas by queues (financed by huge subsidies to keep prices low) rather than by willingness to pay.
Now, this will change.
Performing arts advocates in Europe point to the US where, among other things, music directors of even major orchestras are now expected to fully participate in fundraising activities and be active in the local community on the orchestras behalf.
The same thing, they fear, will happen in Europe.
Some conductors, not wanting to carry a tin cup as they wave their batons, have rejected important posts in the US for this reason, feeling that it would interfere with their art.
Daniel Barenboim is rumored to have left the Chicago Symphony Orchestra in part because he objected to the fundraising demands that were being made of him.
But US experience shows that getting artistic leaders like orchestra music directors to participate in fundraising need not be bad for the artistic side of the job.
Michael Tilson Thomas in San Francisco, for example, has combined effective fundraising and artistic leadership to propel the San Francisco Symphony to the top rank of US orchestras.
It also should be reassuring to Europeans who are concerned that greater reliance on private money necessarily means conservative programming that the San Francisco Symphony has one of the most adventuresome repertoires in the US.
If the audience has progressive tastes, private money and innovative programming are entirely compatible.
A corollary is that public money makes it possible for adventuresome programming even if audience tastes run to the conservative side.
This is one reason performing artists in Europe like public money – it liberates them from a diet of only Beethoven and Mozart.
Moreover, the audience may come to appreciate an adventuresome repertoire the more it becomes exposed to it.
Of course, with reduced public spending on the performing arts, not only will there be greater reliance on private money, but ticket prices will have to rise as well.
Some argue that this is a bad thing, because they prefer queuing to the price system and fear that higher prices will compromise future audiences by excluding young people.
But cheap prices for the performing arts do not solve the thorny problem of access for youth.
First, youth may not take advantage of cheap tickets to the extent that they are not interested in going to hear live classical music at any price.
Second, even if they do want to go, they may not be able to get seats, which often are not available because subscriptions stay in the same hands year after year.
What good are cheap prices, which serve mainly to subsidize the same subscription holders, if there are no seats?
If a taste for classical music is to be subsidized, some more targeted subsidies should be preferred to cheap prices.
The best way to bring youth to the performing arts is through education.
Because American orchestras can’t count on schools or government to provide the basic music education necessary to ensure a continuing audience for classical music, some orchestras are doing it themselves with private money.
In San Francisco, for example, the Symphony runs a $23 million privately funded project – called Keeping Score – that includes a national public television series, radio shows, interactive music learning, and school music programs.
This type of innovative program is relevant for European as well as American orchestras.
The problem of youth and access to the performing arts exists on both sides of the Atlantic.
So does poor music education in state schools.
If orchestras don’t look after their own futures, they may well not have one to look after.
States of Risk
LONDON – The Great Recession of 2008-2009 was triggered by excessive debt accumulation and leverage on the part of households, financial institutions, and even the corporate sector in many advanced economies.
While there is much talk about de-leveraging as the crisis wanes, the reality is that private-sector debt ratios have stabilized at very high levels.
By contrast, as a consequence of fiscal stimulus and socialization of part of the private sector’s losses, there is now a massive re-leveraging of the public sector.
Deficits in excess of 10% of GDP can be found in many advanced economies, and debt-to-GDP ratios are expected to rise sharply – in some cases doubling in the next few years.
As Carmen Reinhart and Ken Rogoff’s new book This Time is Different demonstrates, such balance-sheet crises have historically led to economic recoveries that are slow, anemic, and below-trend for many years.
Sovereign-debt problems are another strong possibility, given the massive re-leveraging of the public sector.
In countries that cannot issue debt in their own currency (traditionally emerging-market economies), or that issue debt in their own currency but cannot independently print money (as in the euro zone), unsustainable fiscal deficits often lead to a credit crisis, a sovereign default, or other coercive form of public-debt restructuring.
In countries that borrow in their own currency and can monetize the public debt, a sovereign debt crisis is unlikely, but monetization of fiscal deficits can eventually lead to high inflation.
And inflation is – like default – a capital levy on holders of public debt, as it reduces the real value of nominal liabilities at fixed interest rates.
Thus, the recent problems faced by Greece are only the tip of a sovereign-debt iceberg in many advanced economies (and a smaller number of emerging markets).
Bond-market vigilantes already have taken aim at Greece, Spain, Portugal, the United Kingdom, Ireland, and Iceland, pushing government bond yields higher.
Eventually they may take aim at other countries – even Japan and the United States – where fiscal policy is on an unsustainable path.
In most advanced economies, aging populations – a serious problem in Europe and Japan –exacerbate the problem of fiscal sustainability, as falling population levels increase the burden of unfunded public-sector liabilities, particularly social-security and health-care systems.
Low or negative population growth also implies lower potential economic growth and therefore worse debt-to-GDP dynamics and increasingly grave doubts about the sustainability of public-sector debt.
The dilemma is that, whereas fiscal consolidation is necessary to prevent an unsustainable increase in the spread on sovereign bonds, the short-run effects of raising taxes and cutting government spending tend to be contractionary.
This, too, complicates the public-debt dynamics and impedes the restoration of public-debt sustainability.
Indeed, this was the trap faced by Argentina in 1998-2001, when needed fiscal contraction exacerbated recession and eventually led to default.
In countries like the euro-zone members, a loss of external competitiveness, caused by tight monetary policy and a strong currency, erosion of long-term comparative advantage relative to emerging markets, and wage growth in excess of productivity growth, impose further constraints on the resumption of growth.
If growth does not recover, the fiscal problems will worsen while making it more politically difficult to enact the painful reforms needed to restore competitiveness.
A vicious circle of public-finance deficits, current-account gaps, worsening external-debt dynamics, and stagnating growth can then set in.
Eventually, this can lead to default on euro-zone members’ public and foreign debt, as well as exit from the monetary union by fragile economies unable to adjust and reform fast enough.
Provision of liquidity by an international lender of last resort – the European Central Bank, the International Monetary Fund, or even a new European Monetary Fund – could prevent an illiquidity problem from turning into an insolvency problem.
But if a country is effectively insolvent rather than just illiquid, such “bailouts” cannot prevent eventual default and devaluation (or exit from a monetary union) because the international lender of last resort eventually will stop financing an unsustainable debt dynamic, as occurred Argentina (and in Russia in 1998).
Cleaning up high private-sector debt and lowering public-debt ratios by growth alone is particularly hard if a balance-sheet crisis leads to an anemic recovery.
And reducing debt ratios by saving more leads to the paradox of thrift: too fast an increase in savings deepens the recession and makes debt ratios even worse.
At the end of the day, resolving private-sector leverage problems by fully socializing private losses and re-leveraging the public sector is risky.
At best, taxes will eventually be raised and spending cut, with a negative effect on growth; at worst, the outcome may be direct capital levies (default) or indirect ones (inflation).
Unsustainable private-debt problems must be resolved by defaults, debt reductions, and conversion of debt into equity.
If, instead, private debts are excessively socialized, the advanced economies will face a grim future: serious sustainability problems with their public, private, and foreign debt, together with crippled prospects for economic growth.
Stay the Course in North Korea
NEW YORK – Barack Obama’s election was historic on many levels.
Between now and his inauguration on January 20, he will need to hone his policies.
Much of the early focus of the Obama administration will undoubtedly be on the economy and the war in Iraq.
But it is critically important that the new administration pay serious attention to other foreign-policy issues right from the start.
American relations with North Korea, and the ongoing six-party talks, certainly belong at the top of the list.
Here, the United States must not only stay the course, but also build on the efforts of the last few years.
The risks of changing course cannot be overstated.
Not long after President George W. Bush came into office, his administration took a hard-line stance against the North Korean regime, calling for a review of the Clinton administration’s policy, and eventually tagging North Korea as a member of the “axis of evil.”
While North Korea had done much over the preceding years to warrant a more critical eye, in retrospect these policies set back prospects for peace and stability in the region.
After all, North Korea’s reaction to the Bush administration’s policies was to drop out of the Nuclear Nonproliferation Treaty, restart its nuclear program, and further develop its weapons production.
Indeed, it is believed that North Korea during this time increased its stockpile of nuclear weapons.
Moreover, while there is plenty of blame to go around on all sides, America’s change of policy stalled for years the potential for progress in relations between the six parties.
It is only more recently, under the watch of US Assistant Secretary of State Christopher Hill, that the Bush administration’s policy toward North Korea has become more pragmatic.
After North Korea threatened to restart its nuclear facility at Yongbyon, the Bush administration in early October removed the country from its terrorism blacklist.
In exchange, North Korea promised to allow access to its facilities for inspections, while also dropping its opposition to Japanese and South Korean participation in inspections.
At this point, the road forward is fraught with peril and uncertainty.
As a presidential candidate, Obama spoke of the need for “sustained, direct, and aggressive diplomacy” to deal with North Korea.
This formulation seems to suggest an understanding of the often-lengthy process of dealing with its regime, but it remains unclear how far Obama might be willing to go to secure America’s interests.
At the same time, Obama’s advocacy of direct diplomacy caused concern during the campaign, with some questioning whether this meant that he would meet a leader such as Kim Jong-il without preconditions.
While it is difficult to predict how far he might move in this direction, it would be politically difficult for Obama to meet the North Korean leader in such a manner, something that he is likely to learn early in his presidency.
The on-again, off-again talks on North Korea can fluster even the most experienced of negotiators.
That being the case, Obama needs to build a strong team of experienced Korea hands to push the agenda forward.
While trying to build on the limited progress of recent years, they will have to confront a number of additional obstacles in building a cohesive and sustainable peace on the Korean Peninsula.
North Korea’s leader, Kim Jong-il, is reportedly ill.
What this means for continuing the negotiations remains to be seen.
Relations between North and South Korea have taken a turn for the worse this year, following the election of South Korean President Lee Myung-bak, who has taken a more hard-line approach toward the North.
And then there is Japan, a member of the six-party talks and a steadfast US ally, which was angered by the recent delisting of North Korea, because the North has yet to satisfy fully Japanese inquiries into the abduction of its citizens by North Korean agents decades ago.
These are just a few of the issues that will complicate US relations with North Korea and the denuclearization of the Korean Peninsula.
But America must stay the course.
As Obama’s new administration takes over, the choice is between making some progress, as has occurred in recent years, and facing a nuclear North Korea.
The choice is now Obama’s.
The future of peace and stability in Northeast Asia hangs in the balance.
The Return of the Renminbi Rant
NEW HAVEN – China’s currency, the renminbi, has been weakening in recent months, resurrecting familiar charges of manipulation, competitive devaluation, and beggar-thy-neighbor mercantilism.
In mid-April, the US Treasury expressed “particularly serious concerns” over this development, underscoring what has long been one of the most contentious economic-policy issues between the United States and China.
This is a timeworn debate – politically inspired and grounded in bad economics – that does a serious disservice to both sides by diverting attention from far more important issues affecting the US-China economic relationship.
Taken to its extreme, America’s accusations risk pushing the world’s two largest economies down the slippery slope of trade frictions, protectionism, or something even worse.
First, the facts: Since hitting its high watermark on January 14, 2014, the renminbi has depreciated by 3.4% relative to the US dollar through April 25.
This follows a cumulative appreciation of 37% since July 21, 2005, when China dropped its dollar peg and shifted its currency regime to a so-called “managed float.”
Relative to where it started nearly nine years ago, the renminbi is still up 32.5%.
Over the same period, there has been a dramatic adjustment of China’s international balance-of-payments position.
The current-account surplus – the most telling symptom of an undervalued currency – has narrowed from a record 10.1% of GDP in 2007 to just 2.1% in 2013.
The International Monetary Fund’s latest forecast suggests that the surplus will hold at around 2% of GDP in 2014.
Seen against this background, US officials’ handwringing over the recent modest reversal in the renminbi’s exchange rate appears absurd.
With China’s external position much closer to balance, there is good reason to argue that the renminbi, having appreciated by nearly one-third since mid-2005, is now within a reasonable proximity of “fair value.”
The IMF conceded as much in its latest in-depth review of the Chinese economy, which calls the renminbi “moderately undervalued” by 5-10%.
This stands in contrast to its earlier assessments of “substantial” undervaluation.
America’s fixation on the renminbi is a classic case of political denial.
With US workers remaining under intense pressure in terms of both job security and real wages, politicians have understandably been put on the spot.
In response, they have fixated on the Chinese component of a long-gaping trade deficit, charging that currency manipulation is the culprit to the long festering woes of the American middle class.
This argument is politically expedient – but wrong.
The US trade deficit is a multilateral imbalance with many countries – 102 in all – not a bilateral problem with China.
It arises not from the alleged manipulation of the renminbi, but from the simple fact that America does not save.
Lacking in domestic savings and wanting to grow, the US must import surplus savings from abroad, and run massive current-account deficits to attract the foreign capital.
And that leads to America’s multilateral trade imbalance.
Yes, trade with China is the largest component of this imbalance, but that largely reflects the complexity of multinational supply chains and the benefits of offshore efficiency solutions.
That brings us to the uncomfortable truth about America’s politically inspired China bashing: It will backfire.
If America fails to solve its saving problem – a reasonable scenario in light of fiscal gridlock and persistently subpar personal saving – the current-account deficit will persist.
That means that any reductions in China’s share of America’s external imbalance would simply be shifted to other foreign producers.
Significantly, this alternative sourcing will most likely have a higher cost base than Chinese production, thereby imposing the functional equivalent of a tax hike on already-beleaguered middle-class Americans.
As China rebalances toward a growth model that draws greater support from domestic demand, Washington should stop ranting about the renminbi and start focusing on the opportunities that this bonanza will create.
That means emphasizing US companies’ access to China’s domestic goods and services markets.
Pushing for a bilateral investment treaty that relaxes caps on foreign ownership in both countries would be an important step in that direction.
Similarly, the US needs to give China credit for having taken meaningful steps on the road to further currency reform.
The mid-March widening of the daily renminbi-dollar trading bands to plus or minus 2% (from the earlier 1% band) is an important step in relaxing control over the so-called managed float.
That, coupled with the 3% depreciation in the past few months, should send a strong signal to speculators that one-way renminbi bets are hazardous – a signal that could help dampen inflows of hot money, which have complicated liquidity management and fueled asset-market volatility in China.
There are two views of the future of the US-China economic relationship: one that sees only risk, and another that sees opportunity.
Fixating on the renminbi falls into the former category: It misses the rebalancing and reforms already under way in China and deflects America’s focus from addressing its most serious long-term macroeconomic problem – a lack of saving.
By contrast, viewing China as an opportunity underscores the need for America to undertake its own rebalancing – rebuilding US competitiveness and pushing for a meaningful share of China’s coming boom in domestic demand.
Unfortunately, the revival in US saving that this will require is being drowned out by the renminbi rant.
The Fed Trap
NEW HAVEN – As the US Federal Reserve attempts to exit from its unconventional monetary policy, it is grappling with the disparity between the policy’s success in preventing economic disaster and its failure to foster a robust recovery.
To the extent that this disconnect has led to mounting financial-market excesses, the exit will be all the more problematic for markets – and for America’s market-fixated monetary authority.
The Fed’s current quandary is rooted in a radical change in the art and practice of central banking.
Conventional monetary policies, designed to fulfill the Fed’s dual mandate of price stability and full employment, are ill-equipped to cope with the systemic risks of asset and credit bubbles, to say nothing of the balance-sheet recessions that ensue after such bubbles burst.
This became painfully apparent in recent years, as central banks, confronted by the global financial crisis of 2008-2009, turned to unconventional policies – in particular, massive liquidity injections through quantitative easing (QE).
The theory behind this move – as espoused by Ben Bernanke, first as an academic, then as a Fed governor, and eventually as Fed Chairman – is that operating on the quantity dimension of the credit cycle is the functional equivalent of acting on the price side of the equation.
That supposition liberated the Fed from fear of the dreaded “zero bound” that it was approaching in 2003-2004, when, in response to the collapse of the equity bubble, it lowered its benchmark policy rate to 1%.
If the Fed ran out of basis points, the argument went, it would still have plenty of tools at its disposal for supporting and guiding the real economy.
But this argument’s intellectual foundations – first laid out in a 2002 paper by 13 members of the Fed’s Washington, DC, research staff – are shaky, at best.
The paper’s seemingly innocuous title, “Preventing Deflation: Lessons from Japan’s Experience in the 1990s,” makes the fundamental assertion that Japan’s struggles were rooted in a serious policy blunder: the Bank of Japan’s failure to recognize soon enough and act strongly enough on the peril of incipient deflation.
(Not coincidentally, this view coincided with a similar conclusion professed by Bernanke in a scathing attack on the BOJ in the late 1990s.)
The implication was clear: substantial monetary and fiscal stimulus is critical for economies that risk approaching the zero bound.
Any doubt as to what form that “substantial stimulus” might take were dispelled a few months later, when then-Fed Governor Bernanke delivered a speech stressing the need for a central bank to deploy unconventional measures to mitigate deflationary risks in an economy that was approaching the zero bound.
Such measures could include buying up public debt, providing subsidized credit to banks, targeting longer-term interest rates, or even intervening to reduce the dollar’s value in foreign-exchange markets.
A few years later, the global financial crisis erupted, and these statements, once idle conjecture, became the basis for an urgent action plan.
But one vital caveat was lost in the commotion: What works during a crisis will not necessarily provide sufficient traction for the post-crisis recovery – especially if the crisis has left the real economy mired in a balance-sheet recession.
Indeed, given that such recessions clog the monetary-policy transmission mechanism, neither conventional interest-rate adjustments nor unconventional liquidity injections have much impact in the wake of a crisis, when deleveraging and balance-sheet repair are urgent.
That is certainly the case in the US today.
QE may have been a resounding success in some ways – namely, arresting the riskiest phase of the crisis.
But it did little to revive household consumption, which accounts for about 70% of the US economy.
In fact, since early 2008, annualized growth in real consumer expenditure has averaged a mere 1.3% – the most anemic period of consumption growth on record.
This is corroborated by a glaring shortfall in the “GDP dividend” from Fed liquidity injections.
Though $3.6 trillion of incremental liquidity has been added to the Fed’s balance sheet since late 2008, nominal GDP was up by just $2.5 trillion from the third quarter of 2008 to the second quarter of this year.
As John Maynard Keynes famously pointed out after the Great Depression, when an economy is locked in a “liquidity trap,” with low interest rates unable to induce investment or consumption, attempting to use monetary policy to spur demand is like pushing on a string.
This approach also has serious financial-market consequences.
Having more than doubled since its crisis-induced trough, the US equity market – not to mention its amply rewarded upper-income shareholders – has been the principal beneficiary of the Fed’s unconventional policy gambit.
The same is true for a variety of once-risky fixed-income instruments – from high-yield corporate “junk” bonds to sovereign debt in crisis-torn Europe.
The operative view in central-banking circles has been that the so-called “wealth effect” – when asset appreciation spurs real economic activity – would square the circle for a lagging post-crisis recovery.
The persistently anemic recovery and its attendant headwinds in the US labor market belie this assumption.
Nonetheless, the Fed remains fixated on financial-market feedback – and thus ensnared in a potentially deadly trap.
Fearful of market disruptions, the Fed has embraced a slow-motion exit from QE.
By splitting hairs over the meaning of the words “considerable time” in describing the expected timeline for policy normalization, Fed Chair Janet Yellen is falling into the same trap.
Such a fruitless debate borrows a page from the Bernanke-Greenspan incremental normalization script of 2004-2006.
The Sino-American Trust Deficit
NEW HAVEN – The recently concluded Strategic and Economic Dialogue (S&ED) between the United States and China was a major disappointment.
It lacked strategy at a time when both countries face formidable challenges on many fronts.
And what passed for dialogue was a series of speeches and tightly scripted talking points.
Most significant, it failed to address an increasingly corrosive trust deficit that poses the most serious threat to Sino-American relations in 25 years.
Conditions were tough heading into the talks.
The US Treasury was complaining yet again about the Chinese currency, which had depreciated by 2.4% against the dollar in the first half of 2014, after having appreciated by 37% over the previous eight and a half years.
The US State Department and China’s Ministry of Foreign Affairs were engaged in a war of words over mounting territorial and sea-lane disputes in the East and South China Seas.
But the darkest clouds were on the cyber front.
Two months before the S&ED, the US Department of Justice indicted five officers of the People’s Liberation Army (PLA) on 31 counts of charges ranging from computer fraud and hacking to identity theft and economic espionage.
In response, China suspended its participation in bilateral military exchanges on cyber threats.
Meanwhile, revelations of the pervasive scope of US cyber-espionage activities reverberated from Capitol Hill to Berlin, giving rise to legislation aimed at controlling America’s largely unchecked National Security Agency and casting a pall over the all-important US-German relationship.
Charges and countercharges on the cyber issue have focused primarily on motives.
The US has been quick to distinguish between commercial and military espionage.
But for China, this distinction rings hollow.
Chinese officials see little difference between the cyber threat posed by the NSA and that posed by the PLA, especially given that America’s cyber intrusions have also been aimed at foreign companies, trade negotiators, and international leaders – all of whom are directly or indirectly engaged in commercial activity.
In the end, moral hair-splitting is less important than the blame game itself – a visible manifestation of the deepening bilateral distrust wrought by a destructive phase of Sino-American codependency.
Against this backdrop, it was hardly surprising that the S&ED produced so little.
Cyber exchanges between the two militaries were not restarted, and negotiations over a bilateral investment treaty – a mutually beneficial rules-based framework that would go a long way in opening up both countries’ markets to increasingly globalized US and Chinese companies – were particularly disappointing.
A year ago, there was an encouraging breakthrough on the investment treaty; this year, there was a setback, as the launch of explicit negotiations over which industries would be exempt – the always contentious “negative list” – was deferred until 2015.
The problem with “kicking the can down the road” is that the road is leading directly toward the upcoming US presidential election cycle – a time when the debate over China always intensifies.
Add to that a polarized and dysfunctional Congress, and the timeframe for concluding a US-China investment treaty is beginning to appear eerily reminiscent of the decade-long process that was required for Chinese accession to the World Trade Organization in 2001.
That would be bad for both countries, as each now faces urgent economic challenges.
I was in China during the week following the S&ED, and official circles were abuzz about the new growth opportunities of services-led rebalancing.
There was also clear recognition of meaningful progress on this front, with China’s tertiary sector (services) growing more rapidly than its secondary sector (manufacturing and construction) for the third year in a row – sufficient to make services the Chinese economy’s largest sector for the first time.
And there is plenty more to come.
At around 47% of GDP, China’s embryonic services sector remains well short of the 60-65% share that a middle-income economy typically possesses.
At the same time, Chinese officials understand that further progress toward a services-led economic rebalancing will stall without the talent, systems, experience, and scale of global multinational services providers.
And who better to provide what is needed than the US – the world’s largest and most competitive services economy.
Given that the US has experienced yet another year of weak performance, one might have thought that this growth opportunity would have resonated on the American side of the S&ED table.
The failure of both US and Chinese leaders to recognize the mutual benefits of an investment treaty is disturbing.
Going slow on such an obvious “win-win” reform suggests either that each country attaches little importance to its growth imperative or that they are unwilling to address that urgency by coming to grips with the increasingly insidious trust deficit that divides them.
I suspect that it is the latter.
Leaders on both sides understand their countries’ growth challenges.
But neither seems willing to address the intensification of distrust that has arisen during the past year from the cyber issue.
Here is where the blame game belies the obvious: Both countries hack, and both have lost control over their hackers.
Moreover, cyber-hacking itself is growing at an exponential rate in today’s interconnected world.
In other words, the cyber blame game is pointless.
Acceptance of shared responsibilities in coming to grips with cyber tensions is essential if the US and China are to re-engage on the other geostrategic and economic challenges that they both face.
The failure of July’s S&ED was a red flag, yet another indication that the bilateral relationship is headed in the wrong direction.
China’s Wake-Up Call from Washington
NEW HAVEN – Yes, the United States dodged another bullet with a last-minute deal on the debt ceiling.
But, with 90 days left to bridge the ideological and partisan divide before another crisis erupts, the fuse on America’s debt bomb is getting shorter and shorter.
As a dysfunctional US government peers into the abyss, China – America’s largest foreign creditor – has much at stake.
It began so innocently.
As recently as 2000, China owned only about $60 billion in US Treasuries, or roughly 2% of the outstanding US debt of $3.3 trillion held by the public.
But then both countries upped the ante on America’s fiscal profligacy.
US debt exploded to nearly $12 trillion ($16.7 trillion if intragovernmental holdings are included).
And China’s share of America’s publicly-held debt overhang increased more than five-fold, to nearly 11% ($1.3 trillion) by July 2013.
Along with roughly $700 billion in Chinese holdings of US agency debt (Fannie Mae and Freddie Mac), China’s total $2 trillion exposure to US government and quasi-government securities is massive by any standard.
China’s seemingly open-ended purchases of US government debt are at the heart of a web of codependency that binds the two economies.
China does not buy Treasuries out of benevolence, or because it looks to America as a shining example of wealth and prosperity.
It certainly is not attracted by the return and seemingly riskless security of US government paper – both of which are much in play in an era of zero interest rates and mounting concerns about default.
Nor is sympathy at work;
China does not buy Treasuries because it wants to temper the pain of America’s fiscal brinkmanship.
China buys Treasuries because they suit its currency policy and the export-led growth that it has relied on over the past 33 years.
As a surplus saver, China has run large current-account surpluses since 1994, accumulating a massive portfolio of foreign-exchange reserves that now stands at almost $3.7 trillion.
China has recycled about 60% of these reserves back into dollar-denominated US government securities, because it wants to limit any appreciation of the renminbi against the world’s benchmark currency.
If China bought fewer dollars, the renminbi’s exchange rate – up 35% against the dollar since mid-2005 – would strengthen more sharply than it already has, jeopardizing competiveness and export-led growth.
This arrangement fits America’s needs like a glove.
Given its extraordinary shortfall of domestic saving, the US runs chronic current-account deficits and relies on foreign investors to fill the funding void.
US politicians take this for granted as a special privilege bestowed by the dollar’s position as the world’s major reserve currency.
When queried about America’s dependence on foreign lenders, they often smugly retort, “Where else would they go?” I have heard that line many times when I have testified before the US Congress.
Of course, America benefits from China’s outward-facing growth model in many other ways, as well.
China’s purchases of Treasuries help hold down US interest rates – possibly by as much as one percentage point – which provides broad support to other asset markets, such as equities and real estate, whose valuation depends to some extent on Chinese-subsidized US interest rates.
And, of course, hard-pressed middle-class American consumers benefit hugely from low-cost Chinese imports – the Walmart effect – that enable them to stretch their budgets in an era of unrelenting pressure on jobs and real incomes.
For more than 20 years, this mutually beneficial codependency has served both countries well in compensating for their inherent saving imbalances while satisfying their respective growth agendas.
But here the past should not be viewed as prologue.
A seismic shift is at hand, and America’s recent fiscal follies may well be the tipping point.
China has made a conscious strategic decision to alter its growth strategy.
Its 12th Five-Year Plan, enacted in March 2011, lays out a broad framework for a more balanced growth model that relies increasingly on domestic private consumption.
These plans are about to be put into action.&nbsp;
An important meeting in November – the Third Plenum of the Central Committee of the 18th Chinese Communist Party Congress – will provide a major test of the new leadership team’s commitment to a detailed agenda of reforms and policies that will be required to achieve this shift.
The debt-ceiling debacle has sent a clear message to China – and comes in conjunction with other warning signs.
Post-crisis sluggishness in US aggregate demand – especially consumer demand – is likely to persist, denying Chinese exporters the support they need from their largest foreign market.
US-led China bashing – a bipartisan blame game that reached new heights in the 2012 political cycle – remains a real threat.
And now the safety and security of US debt are at risk. Economic alarms rarely ring so loudly.
The time has come for China to respond with equal clarity.
Rebalancing is China’s only option.
Several internal factors – excess resource consumption, environmental degradation, and mounting income inequalities – are calling the old model into question, while a broad constellation of US-centric external forces also attests to the urgent need for realignment.
With rebalancing will come a decline in China’s surplus saving, much slower accumulation of foreign-exchange reserves, and a concomitant reduction in its seemingly voracious demand for dollar-denominated assets.
Curtailing purchases of US Treasuries is a perfectly logical outgrowth of this process.
Long dependent on China to finesse its fiscal problems, America may now have to pay a much steeper price to secure external capital.
Recently, Chinese commentators have provocatively referred to the inevitability of a “de-Americanized world.”
For China, this is not a power race.
It should be seen as more of a conscious strategy to do what is right for China as it confronts its own daunting growth and development imperatives in the coming years.
The US will find it equally urgent to come to grips with a very different China.
Codependency was never a sustainable strategy for either side.
China just happens to have understood this first.
The days of its open-ended buying of Treasuries will soon come to an end.
Bringing the Chinese Consumer to Life
BEIJING – History will be the ultimate judge, but there is good reason to believe that China’s recently completed Third Plenum will come to be regarded as a pivotal moment in the country’s development.
At long last, China’s senior leadership has endorsed a raft of reforms that could impel the economy’s shift from reliance on exports to consumption-led growth.
Until now, this transformation was framed in terms of broad goals and aspirations.
For example, the 12th Five-Year Plan, adopted in March 2011, promised the emergence of a consumer-led economy, resting on the building blocks of urbanization and the development of an embryonic services sector.
Notwithstanding the importance of these commitments in setting out opportunities for China’s middle class, they lacked a critical component: incentives for Chinese families to convert their newfound income into discretionary consumption.
On the contrary, financial and economic insecurity has gripped Chinese households since the “iron rice bowl” – the cradle-to-grave support that the socialist state offered workers and their families – was discarded in the late 1990’s.
Fearing for the future, households have hoarded incremental income, rather than spending it on consumer goods.
Economists call that precautionary saving.
China’s leaders called it frustrating.
The reforms endorsed by the Third Plenum focus on this wedge between income and consumption, offering specific proposals aimed at altering the behavior of fear-driven Chinese families.
Especially important is the proposal to channel 30% of the profits of state-owned enterprises (SOEs) – currently running at close to $400 billion – into the country’s woefully under-funded social safety net.
China’s national health-insurance plan, for example, boasts nearly universal coverage, but the benefits it provides are negligible.
The same is true of China’s retirement system: the workforce’s enrollment rate is around 50%, but only $600 of assets per worker (in national, local government, and private pension schemes, combined) are available to cover lifetime retirement benefits.
Little wonder that Chinese families, fearful of such an uncertain future, save to excess.
An adequately funded safety net could go a long way in tempering the expectations underlying this behavior.
Several other measures proposed at the Third Plenum seek to shift Chinese families’ behavioral norms.
A major reconsideration of the one-child policy is especially important, given the need to relieve pressures arising from the inevitable decline in China’s working-age population.
Reform of the hukou (residency permit) system to allow citizens to transfer their welfare benefits from one city to another is vital for an increasingly flexible labor force that now includes almost 200 million migrant workers.
China’s consumers should also draw comfort from the likely move to market-based deposit rates on their savings accounts, which will reinforce incremental growth in wage income.
This long overdue policy shift is an important component of the Third Plenum’s official elevation of market-based pricing as the “decisive” mode of resource allocation in China.
The word “decisive” holds important implications for key resources – including fuels, financial capital, and, of course, the currency – that historically have been subject to state-administered pricing.
Rhetorical flourishes have always been an important signaling mechanism for major policy changes – think of Deng Xiaoping’s “reforms and opening up” of the late 1970’s.
The Third Plenum’s use of “decisive” to anchor a market-based approach is a similar gambit.
All of this casts modern China’s development strategy in a new light.
Beginning with Deng in the late 1970’s, scientists and engineers – technocrats with the determination to convert a dysfunctional centrally planned economy into an investment- and export-led colossus – framed and implemented a producer-oriented development model.
Today, the task at hand is very different: to transform the technocratic framework of the producer model into the aspirational vision of a flourishing consumer society.
The need to navigate this shift raises the toughest question of all: Is the new “fifth-generation” Chinese leadership, headed by President Xi Jinping, up to the challenge?
There are three reasons to believe that it is.
First, the role of technocrats in China’s senior leadership is on the wane.
Research by Cheng Li of the Brookings Institution reveals that only about 15% of the current 25 Politburo members are engineers and scientists, down from 40% in 2007 and 72% in 2002.
Li’s analysis points to the related ascendance of senior officials trained in law and the social sciences – providing a skill set that is more closely aligned with the vision of a consumer society.
Second, the Third Plenum established a new high-level organization – the so-called Central Leading Group on Reforms.
This small group, likely to be headed by Xi, will play the key role in drafting specific guidelines for implementing the Plenum’s proposed reforms – thus threatening to marginalize the long-dominant technocrats of the National Development and Reform Commission, the heir to the old State Planning Commission.
Finally, Xi’s power base is far broader than that of his two predecessors, Jiang Zemin and Hu Jintao, both of whom had shaky transitions in the first years of their leadership.
Unlike Jiang and Hu, Xi assumed quick command of the Chinese Communist Party, the government, and the military, and very effectively shepherded the Third Plenum’s historic reforms.
As always, proof will come only with implementation.
But with China’s leaders now focusing squarely on aligning the vast population’s behavioral norms with the next phase of transformation, the case for a consumer-led China has become more compelling than ever.
The End of Chinese Central Planning
BEIJING – “Isn’t it now time for China to abandon the concept of a growth target?”
That was the question I asked Chinese Finance Minister Lou Jiwei this week at the 15th annual China Development Forum, which brings together top Chinese officials and an international delegation of academics, leaders of multilateral organizations, and business executives.
Having attended the CDF since former Premier Zhu Rongji initiated it in 2000, I can attest to its role as one of China’s most important platforms for debate.
Zhu welcomed the exchange of views at the Forum as a true intellectual test for China’s reformers.
It was in that spirit that I posed my question to Lou, whom I have known since the late 1990’s.
In that period, he has been Deputy Minister of Finance, founding Chairman of China’s sovereign wealth fund, China Investment Corporation, and now Minister of Finance.
I have always found him to be direct, intellectually curious, a first-rate analytical thinker, and a forward-looking advocate of market-based reforms.
He is cut from the same cloth as his mentor, Zhu.
My question was set in the context of the new thrust of Chinese reforms announced at last November’s Third Plenum of the 18th Central Committee of the Chinese Communist Party, which emphasized the “decisive role” of market forces in shaping the next phase of China’s economic development.
I prefaced my question by underscoring the inherent contradiction between a target and a forecast in framing China’s major economic objectives.
I argued that the former embodied the obsolete straitjacket of central planning, while the latter was far more consistent with market-based outcomes.
A target perpetuates the image of the all-powerful state-directed Chinese growth machine – a government that will essentially stop at nothing to hit a predetermined number.
While it may seem like splitting hairs, continuing to frame the economic goal as a target sends a message of determined and explicit guidance that now seems at odds with the government’s market-oriented intentions.
Wouldn’t dropping the concept send a far more powerful message?
Isn’t it time for China to let go of the last vestiges of its centrally planned past?
Lou’s response: “Good question.”
China, he went on, is in fact moving away from its once single-minded emphasis on growth targeting.
The government now stresses three macroeconomic goals – job creation, price stability, and GDP growth.
And, as evidenced by the annual “work report” that the premier recently submitted to China’s National People’s Congress, the current emphasis is in that order, with GDP growth at the bottom of the list.
This gives China and its policymakers considerable room for maneuver in coping with the current growth slowdown.
Unlike most Western observers, who are fixated on the slightest deviation from the official growth target, Chinese officials are actually far more open-minded.
They care less about GDP growth per se and more about the labor content of the gains in output.
This is particularly relevant in light of the important threshold that has now been reached by the structural transformation of the Chinese economy – the long-awaited shift to a services-led growth dynamic.
Services, which now account for the largest share of the economy, require close to 30% more jobs per unit of output than the manufacturing and construction sectors combined.
In an increasingly services-led, labor-intensive economy, China’s economic managers can afford to be more relaxed about a GDP slowdown.
Last year was a case in point.
At the start of 2013, the government announced that it was targeting ten million new urban jobs.
In fact, the economy added 13.1 million workers – even though GDP expanded by “only” 7.7%.
In other words, if China can hit its employment goal with 7.5% GDP growth, there is no reason for its policymakers to panic and roll out the heavy counter-cyclical artillery.
That, in fact, was pretty much the message conveyed by a broad cross-section of senior officials at this year’s CDF: Slowdown, yes; major policy response, no.
Zhou Xiaochuan, the head of the People’s Bank of China, was just as emphatic on this point.
The PBOC, he argued, does not pursue a single target.
Instead, it frames monetary policy in accordance with what he called a “multi-objective function” comprised of goals for price stability, employment, GDP growth, and the external balance-of-payments – the latter factor added to recognize the PBOC’s authority over currency policy.
The trick, Zhou stressed, is to assign weights to each of the four goals in the multi-objective policy function.
He conceded that the weighting problem has now been seriously complicated by the new need to pay greater attention to financial stability.
All of this paints China with a very different brush than was used during the first 30 years of its growth miracle.
Since Deng Xiaoping’s reforms of the early 1980’s, less and less attention has been paid to the numerical targets of central planning.
The State Planning Commission evolved into the National Development and Reform Commission (NDRC) – though it is still housed in the same building on Yuetan Street in Beijing.
And, over time, economic managers succeeded in drastically curtailing sector-by-sector Soviet-style planning.
But there was still a plan and an aggregate growth target – and an all-powerful NDRC hanging on to the levers of control.
Those days are now over.
A new “leading committee” on reforms is marginalizing the NDRC, and China’s most senior fiscal and monetary policymakers – Lou Jiwei and Zhou Xiaochuan – are close to taking the final step in the long journey to a market-based economy.
Their shared interpretation of flexible growth targeting puts them basically in the same camp as policymakers in most of the developed world.
The plan is now a goal-setting exercise.
From now on, fluctuations in the Chinese economy, and the policy responses that those fluctuations imply, need to be considered in that vein.
America’s False Dawn
NEW HAVEN – Financial markets and the so-called Davos consensus are in broad agreement that something close to a classic cyclical revival may finally be at hand for the US.
But is it?
At first blush, the celebration seems warranted.
Growth in real GDP appears to have averaged close to 4% in the second half of 2013, nearly double the 2.2% pace of the preceding four years.
The unemployment rate has finally fallen below the 7% threshold.
And the Federal Reserve has validated this seemingly uplifting scenario by starting to taper its purchases of long-term assets.
But my advice is to keep the champagne on ice.
Two quarters of strengthening GDP growth hardly indicates a breakout from an anemic recovery.
The same thing has happened twice since the end of the Great Recession in mid-2009 – a 3.4% average annualized gain in the second and third quarters of 2010 and a 4.3% average increase in the fourth quarter of 2011 and the first quarter of 2012.
In both cases, the uptick proved to be short-lived.
A similar outcome this time would not be surprising.
Indeed, much of the acceleration in GDP growth has been bloated by an unsustainable surge of restocking.
Over the first three quarters of 2013, rising inventory investment accounted for fully 38% of the 2.6% increase in total GDP.
Excluding this inventory swing, annualized growth in “final sales” to consumers, businesses, and the government averaged a tepid 1.6%.
With inventory investment unlikely to keep accelerating at anything close to its recent rate, overall GDP growth can be expected to converge on this more subdued pace of final demand.
That gets to the toughest issue of all – the ongoing balance-sheet recession that continues to stifle the American consumer.
Accounting for 69% of the economy, consumer demand holds the key to America’s post-crisis malaise.
In the 17 quarters since “recovery” began, annualized growth in real personal consumption expenditures has averaged just 2.2%, compared to a pre-crisis trend of 3.6% from 1996 to 2007.
To be sure, there were indications of a temporary pick-up in annual consumption growth to nearly 4% in the fourth quarter of 2013.
Yet that is reminiscent of a comparable 4.3% spurt in the fourth quarter of 2010, an upturn that quickly faded.
The lackluster trend in consumption is all the more pronounced when judged against the unprecedented decline that occurred in the depths of the Great Recession.
From the first quarter of 2008 through the second quarter of 2009, real consumer spending plunged at a 1.8% average annual rate.
In the past, when discretionary spending on items such as motor vehicles, furniture, appliances, and travel was deferred, a surge of “pent-up demand” quickly followed.
Not this time.
The record plunge in consumer demand during the Great Recession has been followed by persistently subpar consumption growth.
This should not be surprising.
The American consumer was, in effect, ground zero in this horrific crisis.
Far too many US households made enormous bets on the property bubble, believing that their paper gains were permanent substitutes for stagnant labor income.
They then used these gains to support a record consumption binge.
Compounding the problem, they drew freely on a monstrous credit bubble to finance the gap between spending and income-based saving.
When both bubbles burst – first housing, and then credit – asset-dependent US consumers were exposed to the American strain of the Japanese disease first diagnosed by Nomura economist Richard Koo.
Koo has stressed the lingering perils of a balance-sheet recession centered on the corporate sector of the Japanese economy; but the analysis is equally applicable to bubble-dependent US consumers.
When the collateral that underpins excess leverage comes under severe pressure – as was the case for Japanese businesses in the early 1990’s and American consumers in the mid 2000’s – what Koo calls the “debt rejection” motive of deleveraging takes precedence over discretionary spending.
The Japanese parallels do not stop there.
As research by the economists Richard Caballero, Takeo Hoshi, and Anil Kashyap has shown, Japan’s corporate “zombies” – rendered essentially lifeless by their balance-sheet problems – ended up damaging the healthier parts of the economy.
Until balance sheets are repaired, such “zombie congestion” restrains aggregate demand.
Japan’s lost decades are an outgrowth of this phenomenon; the US is now halfway through the first lost decade of its own.
Indicators of US balance-sheet repair hardly signal the onset of the more vigorous cyclical revival that many believe is at hand.
The debt/income ratio for American households is now down to 109% – well below the peak of 135% reached in late 2007, but still 35 percentage points above the average over the final three decades of the twentieth century.
Similarly, the personal saving rate stood at 4.9% in late 2013, up sharply from the low of 2.3% in the third quarter of 2005; but it remains 4.4 percentage points below the average recorded from 1970 to 1999.
By these measures, American consumers’ balance-sheet repair is, at best, only about half-finished.
Optimists see it differently.
Encouraged by sharp reductions in households’ debt-service costs and a surprisingly steep fall in unemployment, they argue that the long nightmare has finally ended.
That may be wishful thinking.
Plunging debt service is largely an outgrowth of the Fed’s unprecedented zero-interest-rate policy.
As long as the stock of debt remains excessive, consumers will dismiss the reduction in interest expenses as nothing more than a temporary subsidy from the Fed.
Moreover, the decline in unemployment largely reflects persistently grim labor-market conditions, which have discouraged many workers from remaining in the labor force.
If the labor-force participation rate was 66%, as it was in early 2008, rather than 62.8%, as it was in December 2013, the unemployment rate would be just over 11%, not 6.7%.
Yes, there has been some progress on the road to recovery.
But, as Carmen Reinhart and Ken Rogoff have long documented, post-crisis healing is typically slow and painful.
Notwithstanding the Fed’s claims that its unconventional policies have been the elixir of economic renewal in the US, the healing process still has years to go.
Rethinking the Sino-American Relationship
NEW HAVEN – In early July, senior US and Chinese officials will gather in Beijing for the sixth Strategic and Economic Dialogue.
With bilateral frictions mounting on a number of fronts – including cyber security, territorial disputes in the East and South China Seas, and currency policy – the summit offers an opportunity for a serious reconsideration of the relationship between the world’s two most powerful countries.
The United States and China are locked in an uncomfortable embrace – the economic counterpart of what psychologists call “codependency.”
The flirtation started in the late 1970s, when China was teetering in the aftermath of the Cultural Revolution and the US was mired in a wrenching stagflation.
Desperate for economic growth, two needy countries entered into a marriage of convenience.
China was quick to benefit from an export-led economic model that was critically dependent on America as its largest source of demand.
The US gained by turning to China for low-cost goods that helped income-constrained consumers make ends meet; it also imported surplus savings from China to fill the void of an unprecedented shortfall of domestic saving, with the deficit-prone US drawing freely on China’s voracious appetite for Treasury securities.
Over time, this marriage of convenience morphed into a full-blown and inherently unhealthy codependency.
Both partners took the relationship for granted and pushed unbalanced growth models too far – the US with its asset and credit bubbles that underpinned a record consumption binge, and China with an export-led resurgence that was ultimately dependent on America’s consumption bubble.
The imbalances only worsened.
China’s three decades of 10% annual hyper-growth led to unsustainable strains – outsize resource and energy needs, environmental degradation and pollution, and mounting income inequality.
Huge Chinese current-account surpluses resulted from too much saving and too little consumption.
Mounting imbalances in the US were the mirror image of those in China – a massive shortfall of domestic saving, unprecedented current-account deficits, excess debt, and an asset-dependent economy that was ultimately built on speculative quicksand.
Predictably, in keeping with the pathology of codependence, the lines distinguishing the two countries became blurred.
Over the past decade, Chinese subsidiaries of Western multinationals accounted for more than 60% of the cumulative rise in China’s exports.
In other words, the export miracle was sparked not by state-sponsored Chinese companies but by offshore efficiency solutions crafted in the West.
This led to the economic equivalent of a personal identity crisis: Who is China – them or us?
In personal relationships, denial tends to mask imbalances – but only for so long.
Ultimately, the denial cracks and imbalances give rise to frictions and blame – holding a codependent partner responsible for problems of one’s own making.
Such is the case with the US and China.
America blames China for its trade deficits and the pressures they inflict on workers, citing a massive accumulation of foreign-exchange reserves as evidence of an unconscionable currency manipulation.
China counters by underscoring America’s saving shortfall – a gap that must be plugged by surplus saving from abroad, a current-account deficit, and a multilateral trade imbalance with more than 100 countries.
China blames the US for fixating on a bilateral imbalance as the source of America’s multilateral problem.
The same blame game of codependency is apparent in the cyber-security controversy.
The US contends that China steals intellectual property for competitive reasons, inflicting grave damage on companies and workers.
China, for its part, claims that the US is guilty of equally egregious violations – widespread cyber spying on international leaders, trade negotiators, and foreign firms.
Equally worrisome are the security disputes that have flared up in the East and South China Seas, which, via treaty obligations, directly involve the US.
America’s strategic “pivot” to Asia adds more tension.
The longer these frictions fester, the greater the risk of an accident or miscalculation leading to a military response – culminating in the ultimate break-up nightmare.
The US and China could escape the potentially destructive endgame of a codependent relationship by recasting their ties as a more constructive and sustainable interdependency.
An interdependent relationship fosters healthy interaction between partners, who satisfy their own needs rather than relying on others to do so, and maintain their own identities while appreciating the relationship’s mutual benefits.
The upcoming Strategic and Economic Dialogue provides the US and China a platform of engagement to seize their collective opportunities.
Both countries should press ahead with a bilateral investment treaty, which would enhance rules-based market access and eventually foster greater trade liberalization.
That would allow the US, the world’s preeminent services economy, to seize the opportunity that is about to be provided by the emergence in China of a services-led consumer society.
And it would enable China to draw on America’s expertise and experience to help master its daunting economic rebalancing act.
At the same time, the upcoming dialogue should aim to restart the military-to-military exchanges on cyber-security issues that were launched a year ago.
These efforts were recently suspended in the aftermath of the US Justice Department’s decision to file criminal charges against five members of the People’s Liberation Army.
Here as well, the goal should be a rules-based system of engagement – especially vital for all modern economies in an era of IT-enabled globalization.
Progress on these fronts will not be possible if the US and China remain stuck in the quagmire of codependency.
Only by embracing the opportunities of interdependency can the hegemon and the rising power reduce tensions and focus on the benefits of mutually sustainable prosperity.
The Stall-Speed Syndrome
NEW HAVEN – Relapse is the rule in the post-crisis global economy.
In the United States, Japan, and Europe, GDP growth faltered again in the first half of 2014.
These setbacks are hardly a coincidence.
Persistent sluggish growth throughout the developed world has left major economies unusually vulnerable to the inevitable bumps in the road.
Sure, there are excuses – there always are.
A contraction in the US economy in the first quarter of the year was dismissed as weather-related.
Japan’s plunge in the second quarter was blamed on a sales-tax hike.
Europe’s stagnant growth in the second quarter has been explained away as an aberration reflecting the confluence of weather effects and sanctions imposed on Russia.
As tempting as it may be to attribute these developments to idiosyncratic factors, the latest slowdown in developed countries is not so easily dismissed.
Lacking cyclical vigor in the aftermath of severe recessions, today’s economies are finding it especially difficult to shrug off the impact of shocks and break out of anemic growth trajectories.
Consider the US.
Though annual GDP growth is estimated to have rebounded to 4% in the second quarter of 2014, following the 2.1% first-quarter contraction, that still leaves average growth in the first half of the year at a measly 1%.
The problem is even worse in Japan, where consumers brought forward expenditures in anticipation of the sales-tax hike.
The 6.1% first-quarter growth surge to which this gave rise was more than offset by a 6.8% second-quarter contraction.
The net result in the first half of this year – an average decline of 0.3% – is broadly in line with the 0.2% contraction now estimated for the fourth quarter of 2013.
With the trajectory of real (inflation-adjusted) growth having moved into negative territory, on average, for three consecutive quarters, Japan may once again be reverting to recessionary form.
Europe’s fragile economy has similarly failed to recover strongly enough to ward off periodic growth setbacks.
During the acute phase of the euro crisis, recession was concentrated in peripheral economies such as Greece, Portugal, and Spain.
Now, however, the malaise has spread to the core economies of Germany and Italy, both of which contracted in the second quarter, and to France, which recorded zero growth.
As a result, annual growth in the 18-country eurozone slipped to just 0.4% in the first half of 2014.
This poor performance can only exacerbate the European Central Bank’s deflationary concerns.
Collectively, the annual growth rate in the major developed economies averaged a little less than 0.7% in the first half of 2014.
America’s paltry 1% growth led the way, while Japan and Europe, whose combined GDP is roughly equal to that of the US in purchasing-power-parity terms, recorded no better than a 0.3% increase.
On balance, that is easily 1-1.5 percentage points below the developed world’s longer-term, or potential, growth trend – a worrisome outcome, to say the least, for employment, deflation risk, global trade, and export-dependent developing economies, such as China, which remain heavily reliant on external demand in developed countries.
But there is another problem with persistently subpar growth: It provides no cushion to shield economies from unexpected blows.
That is especially true when growth falls below 1%, leaving a thin margin between expansion and contraction.
Such sluggish performance is the economic equivalent of “stall speed” – the heightened vulnerability that aircrafts can encounter at low velocity.
Under such circumstances, it does not take much to lead to an aborted takeoff, or worse.
The analogy is all too apt today.
Shocks, whether traceable to weather, geopolitical disturbances, strikes, or natural disasters, are the rule, not the exception.
When hit by them, vigorously growing economies have cushions to withstand the blows and the resilience to shrug them off. Economies limping along near stall speed do not.
The odds of a recessionary relapse in an environment of unusually weak growth – very much the problem today – should not be minimized.
The big question is what should be done about it.
The current approach, centered on unconventional monetary policy, is not the answer.
Though monetary policy provided a powerful antidote to frozen credit markets in the depth of the global financial crisis, it has failed to spark classic cyclical recoveries.
That should be no surprise.
The world’s major developed economies are not suffering from cyclical deficiencies in aggregate demand that are amenable to a monetary cure.
As the Bank for International Settlements correctly points out, they are still struggling in the aftermath of wrenching balance-sheet recessions.
In the US, a lingering overhang of household debt implies that deleveraging and the rebuilding of savings continues to take precedence over discretionary consumption.
In Japan, long-standing structural problems, such as aging, labor-market rigidities, and a generalized productivity malaise, can be addressed only through the so-called “third arrow” of Prime Minister Shinzo Abe’s reform agenda, which remains woefully incomplete.
And Europe faces a desperate need to build pan-European institutions to ensure banking and fiscal union, and to address serious competitiveness problems in France and Italy.
Unfortunately, the more that central banks give the impression that that they are on the case, and the more that markets cheer them on, the less pressure there is on politically gridlocked governments to deploy fiscal policy and push through structural reforms.
Moreover, the fixation on monetary accommodation leaves slow-growth, balance-sheet-constrained economies stuck at stall speed, increasing the risk of yet another global growth relapse.&nbsp;
Myopic authorities need to take less guidance from frothy financial markets and focus more on the structural repair of a post-crisis world.
Step in, Prodi!
COPENHAGEN: The "joint reaction" of 14 European Union governments against their partner – Austria – threatens to weaken the Union at the moment when it faces its greatest challenge: opening its membership to the new democracies of Central and Eastern Europe.
For the political boycott implemented by the 14 against Austria undermines the Treaty on European Union, and raises serious doubts about the functioning of EU-institutions.
If the present deadlock is not broken soon, serious damage will be done to European integration.
The intentions of the 14 were the noblest imaginable: that the Union should be safeguarded against the xenophobia manifested in the rhetoric of the leader of the Austrian Freedom Party, Mr. Jörg Haider.
When Austrian conservatives in January started negotiations with Haider’s party on a new coalition to take power after many years of complacent conservative/socialist governments, alarm bells rang across Europe.
Suddenly, 14 members of the European Council of state and government leaders found themselves able to take a quick decision.
Too quick, alas.
They decided to establish political boycotts against Austria, should the new coalition become a reality.
When Austria’s new coalition government was sworn in, the boycotts ensued.
The problem is that the Treaty on European Union sets out clear rules for how member governments shall treat each other if the fundamental principles common to them are endangered:
* Article Six of the Treaty describes these common values: "…principles of liberty, democracy, respect for human rights and fundamental freedoms, and the rule of law…"
* Article Seven states that the European Council "may determine the existence of a serious and persistent breach by a Member State of …(these) principles after inviting the government of the Member State in question to submit its observations.
Where such a determination has been made, the Council, acting by a qualified majority, may decide to suspend certain of the rights deriving from the application of this Treaty to the Member State in question, including the voting rights of the representatives of that Member State in the Council."
So far, so clear.
Now 14 heads of state and government deem it appropriate to invent their own new rules.
They tried to camouflage their joint action as something that had nothing to do with the EU.
They talked about a "joint reaction" by 14 governments, as if they accidentally happened to put their heads together, as such Orwellian ‘newspeak’ would fool anybody.
I am definitely no admirer of Mr. Haider and his so-called "Freedom" Party.
His attitudes toward opening Europe to the new postcommunist democracies are worrying; his lack of sensitivity in regards to the shadier sides of Europe’s history is disgusting.
These are just two reasons why we kicked him and his party out of the European Liberal and Democrat Party (ELDR) some years ago.
But a democratically elected government should be judged on its politics, not on the rhetoric of a populist politician, however vulgar and repulsive.
The action against Austria causes anxiety all over Europe, not least among the new democracies applying for membership.
The new Austrian government was judged by its European partners without being able to "submit its observations" as stated in the Treaty.
Everybody is confused: which set of common values have been broken by the Austrians?
Why act, for example, against the Austrian Freedom Party when no action was taken in other European countries (like Italy) when parties from the extreme right took part in government?
Does Europe have one set of rules for small countries and another for big ones?
What if communists suddenly appear in government coalitions?
Will that also lead to political boycotts from other EU-governments?
If not, is that because 11 out of the 14 governments today are socialist/social-democrats, and jumped to help out when fellow Austrian socialists were poised to lose power?
Do we have one set of rules for the extreme right and one for the extreme left?
These nagging questions threaten to undermine the authority of the European Council.
This institution has grown in influence over the last 10-15 years.
Heads of state and government meet more frequently than before and are increasingly active in EU decision making.
They have developed what sometimes looks like an old-boys-network.
They have often given a welcome boost to European integration, when snap decisions needed to be taken and red tape cut.
But when they act as in this case – without consultations with their diplomats and the Commission ("guardian of the Treaty") – it begins to look like the sort of arrogance of power that makes European integration seem so frightening to a lot of people.
The 14 government leaders have painted themselves into a corner.
Nowadays it is not a pretty sight to watch the proceedings of the Councils of Ministers: some ministers behave like small children in a kindergarten.
I don’t want to sit beside you;
I won’t listen when you talk…. This is not a dignified way to act.
The big question is: can this situation be reversed?
In their wisdom the 14 forgot to tell the Austrians what to do in order to be accepted again as playmates by their colleagues.
Perhaps the president of the European Commission should try to cut this Gordian knot.
After all, it is his responsibility, and of those of his colleagues in the Commission, to safeguard the Treaty.
He cannot remain a passive spectator when one member state is being mugged by the others in clear conflict with the Treaty’s rules.
Step in, Signor Prodi! Save what is left of everyone’s faces.
Diet and Growth
KIGALI – There is no greater hindrance to a country’s long-term economic development than childhood undernourishment.
When a growing body does not get enough essential vitamins and nutrients, the harmful effects last long into adulthood.
In low-income countries, diets consist primarily of starches, such as rice, and legumes, like peas, that contain very little protein.
So even a child with a full belly does not necessarily get the right balance of nutritious food and vitamins required for healthy physical development.
This takes an enormous toll.
Undernourished children are more susceptible to illness.
According to UNICEF, children who suffer from severe under-nutrition are 9.5 times more likely to die from diarrhea and 6.4 times more likely to die from pneumonia.
Fully one in three preventable deaths among young children worldwide – up to 2.5 million each year – are the result of inadequate nutrition.
Worldwide, one in four children under the age of five is stunted, meaning that chronic under-nutrition has caused serious and often irreversible physical and cognitive damage.
There were 165 million stunted children in 2001, equivalent to half the population of the United States.
Stunted children often struggle to reach their potential in school and ultimately the workplace, diminishing economic productivity and development.
A World Bank study found that under-nutrition can cost an individual up to 10% of his or her potential lifetime earnings, and as much as 3% of a country’s GDP.
To combat this problem, we need a multi-pronged approach that marshals all available resources to ensure good nutrition among children.
That starts with strong leadership in countries where the challenge is acute.
While my country, Rwanda, has reduced child mortality by 70% over the past decade, the rate of stunting remains high, with 44% of children under the age of five chronically malnourished.
Rwandan President Paul Kagame has initiated a national emergency plan to address the fundamental causes of malnutrition.
This means not only increasing available food sources for children, but also educating families about the importance of nutritious diets.
Between 2006 and 2011, for example, we doubled the agriculture budget, distributed more than 2,000 cows to low-income families, and expanded milk delivery and fruit and vegetable gardens across the country.
Community health workers in each of Rwanda’s 15,000 villages, as well as nurses at health centers across the country, periodically measure the weight and height of each child under the age of five, referring for help those identified as malnourished or at risk.
At the same time, ensuring that these efforts translate into better health outcomes requires a revolution in the way families prepare their children’s food.
Our government has started a massive educational campaign to broaden understanding of the importance of nutritious diets.
Pamphlets have been distributed across the country detailing the kinds of foods that children need, how to cook them, and the need for proper hygiene and exclusive breastfeeding for children under the age of six months.
In each village, a woman skilled in communication will teach families how to prepare balanced meals and ensure adequate nutrition for children.
Providing proper nutrition in a child’s first thousand days is particularly important.
The British medical journal The Lancet has described a package of effective interventions to accomplish this.
Recommended measures include providing essential vitamins and minerals through enriched foods and supplements; promoting breastfeeding and nutritious complementary feeding for weaning babies; and treating severely malnourished children with therapeutic foods such as specially fortified peanut butter.
There is an emerging consensus on the need to address under-nutrition worldwide.
Last year, the Copenhagen Consensus – an esteemed panel of economists including several Nobel Laureates – ranked child nutrition as the top priority on its list of cost-effective investments that would improve global welfare.
In many low-income countries, making these investments will require forging partnerships with foreign governments – and we welcome the vital role that donor programs, aid agencies, and volunteer organizations can play by working within the framework of national plans.
Regional collaboration will also be key to fulfilling our commitment to succeed in fighting malnutrition.
For us, this means working closely with our neighbors in the East African Community.
On June 8, just ahead of the G-8 Summit, the United Kingdom will convene a summit on Nutrition for Growth.
Leaders from rich and poor countries, foundations, non-governmental organizations, and private industry will gather to make specific commitments to invest in nutrition.
I hope that they will increase their efforts – and that they think hard about how to ensure that all sectors of recipient countries’ economies benefit through local procurement.
Simply flooding markets with cheap high-calorie, low-nutrient grains will never solve chronic malnutrition.
A change of mindset among development partners is required, along with long-term commitments to building sustainable, diversified, and equitably distributed systems of food production and distribution.
The investments needed to make this happen represent a fraction of most donor assistance to low- and middle-income countries, but would have a massive global impact on human development in the long term.
All of these efforts – production of affordable and nutritious food, ensuring its availability everywhere, and education about how to prepare it – will be essential if Rwanda and other countries are to succeed in ensuring that children receive the nourishment they need to live healthy and productive lives.
Our job will not be finished until every child is assured a healthy and balanced diet and the opportunity to reach his or her full potential.
युद्ध और शांति के लिए एक अर्थशास्त्री का मार्गदर्शन
न्यू यॉर्क – आज की सुर्खियाँ संघर्ष के समाचारों से भरी होती हैं: चाहे यह सीरिया का गृहयुद्ध हो, यूक्रेन में सड़क पर लड़ाइयाँ हों, नाइजीरिया में आतंकवाद हो, ब्राज़ील में पुलिस की कार्रवाइयाँ हो, हिंसा की भीषण तात्कालिकता बहुत साफ़ नज़र आती है। लेकिन, हालाँकि टिप्पणीकार भू-रणनीतिक सावधानियों, निवारण, जातीय संघर्ष, और इनमें फँसने वाले आम लोगों की दुर्दशा पर चर्चा करते हैं, लेकिन संघर्ष के एक अन्य महत्वपूर्ण पहलू अर्थात इसकी आर्थिक लागत पर निष्पक्ष चर्चा शायद ही कभी होती है।
हिंसा की मोटी क़ीमत होती है। 2012 में हिंसा पर काबू पाने या उसके परिणामों से निपटने की वैश्विक लागत चौंका देने वाले स्तर $9.5 खरब पर पहुँच गई थी (जो वैश्विक सकल घरेलू उत्पाद का 11% है)। यह वैश्विक कृषि क्षेत्र की लागत के दुगुने से ज़्यादा है और विदेशी सहायता पर कुल ख़र्च इसकी तुलना में बहुत ही कम है।
इन भारी राशियों को देखते हुए, नीति निर्धारकों के लिए यह अनिवार्य है कि वे इसका विश्लेषण करें कि इस पैसे का ख़र्च कहाँ और कैसे किया जाता है, और इसकी कुल राशि को कम करने के तरीकों पर विचार करें। दुर्भाग्य से, इन सवालों पर शायद ही कभी गंभीरता से विचार किया गया हो। काफ़ी हद तक, इसका कारण यह है कि सैन्य अभियान आम तौर से भू-रणनीतिक सरोकारों से अभिप्रेरित होते हैं, वित्तीय तर्कों से नहीं। यद्यपि इराक युद्ध के विरोधी संयुक्त राज्य अमेरिका पर आरोप लगा सकते हैं कि उसकी नज़र देश के तेल-क्षेत्रों पर थी, पर इतना तो कहा ही जा सकता है कि यह अभियान ख़र्चीला था। वियतनाम युद्ध और अन्य संघर्ष भी वित्तीय विनाश ही थे।
इसी तरह के संदेह शांतिकाल के दौरान हथियारों पर किए जानेवाले ख़र्च पर किए जा सकते हैं। उदाहरण के लिए, हम शायद ऑस्ट्रेलिया द्वारा समस्या-ग्रस्त संयुक्त स्ट्राइक लड़ाकू विमानों की ख़रीद पर $24 अरब ख़र्च करने के हाल के फ़ैसले के वित्तीय तर्क पर सवाल उठा सकते हैं जबकि वह इसी के साथ देश को दशकों के सबसे कठोर बजट के लिए तैयार कर रहा था।
व्यर्थ, हिंसा से संबंधित ख़र्च सिर्फ़ युद्ध या निवारण की बात ही नहीं है। उदाहरण के लिए, क़ानून-और-व्यवस्था के कठोर और महँगे अभियान चाहे मतदाताओं को लुभाते हैं, लेकिन उनका असर अंतर्निहित अपराध दरों पर आम तौर से बहुत कम होता है। यह चाहे विश्व युद्ध हो या स्थानीय पुलिस का काम, संघर्ष में हमेशा सरकार के ख़र्च में भारी बढ़ोतरी होती है; सवाल यह है कि क्या इन पर इतना ख़र्च किया जाना उचित है।
जाहिर है, हिंसा रोकने के लिए पैसा ख़र्च करना हमेशा ख़राब बात नहीं होती। सेना, पुलिस, या व्यक्तिगत सुरक्षा व्यवस्था अकसर स्वागत योग्य और ज़रूरी चीज़ें होती हैं, और, अगर उन्हें उचित रूप से नियोजित किया जाए, तो उनसे दीर्घावधि में करदाताओं का पैसा भी बचता है। प्रासंगिक मुद्दा यह है कि क्या प्रत्येक स्थिति में ख़र्च की गई राशि उपयुक्त है।
निश्चित रूप से, कुछ देशों ने अपेक्षाकृत कम परिव्यय से हिंसा पर कार्रवाई करके उचित संतुलन बनाया है; जिसका मतलब यह है कि अनावश्यक ख़र्च को कम करने के तरीके मौजूद हैं। संभावित या लगातार चल रहे संघर्ष के लिए प्रभावी बजट सबसे अच्छे ढंग से तभी हासिल किया जा सकता है जब रोकथाम पर बल दिया जाए। हम जानते हैं कि शांतिपूर्ण समाज के मूल में क्या होता है: आय का समान वितरण, अल्पसंख्यकों के अधिकारों के प्रति सम्मान, शिक्षा के उच्च मानक, भ्रष्टाचार के न्यून स्तर, और व्यवसाय के लिए आकर्षक परिवेश।
इसके अलावा, जब सरकारें हिंसा को रोकने के लिए ज़्यादा ख़र्च करती हैं, तो वे वह पैसा बर्बाद करती हैं जिसका अन्यथा ज़्यादा उत्पादक क्षेत्रों में निवेश किया जा सकता है, जैसे बुनियादी सुविधाएँ, व्यवसाय का विकास, या शिक्षा। इसके परिणामस्वरूप होने वाली उच्च उत्पादकता से, जैसे, जेल के बजाय स्कूल के निर्माण से, नागरिकों की खुशहाली में सुधार होगा, जिससे हिंसा की रोकथाम में निवेश करने की ज़रूरत कम होगी। मैं इसे "शांति का पुण्य चक्र" कहता हूँ।
उदाहरण के लिए, 2012 में हिंसा की रोकथाम के लिए दुनिया भर में ख़र्च किए लगभग $10 खरब की तुलना हाल ही में वैश्विक वित्तीय संकट की वैश्विक लागत से करें। स्टैंडर्ड एंड पूअर के पूर्व मुख्य क्रेडिट अधिकारी मार्क एडलसन का अनुमान है कि संकट के कारण कुल वैश्विक हानियों की राशि 2007-2011 में $15 खरब जितनी अधिक थी, जो इसी अवधि के दौरान हिंसा पर ख़र्च की गई राशि की सिर्फ़ आधी है। अगर नीति निर्माताओं ने उतना ही समय और धन संघर्ष की रोकथाम करने और उसे रोकने में लगाया होता, तो हिंसा कम होने और आर्थिक विकास तेज़ होने की दृष्टि से, इससे मिलनेवाले लाभ बहुत अधिक हो सकते थे।
सरकारें शायद अपने सहायता ख़र्च का फिर से मूल्यांकन करके शुरुआत कर सकती हैं। वैश्विक स्तर पर, देश पहले ही अपनी कुल संयुक्त विदेश विकास सहायता की तुलना में हिंसा की रोकथाम पर 75 गुना ज़्यादा ख़र्च करते हैं। और यह भी कोई संयोग नहीं है कि सकल घरेलू उत्पाद के प्रतिशत के रूप में हिंसा पर उच्चतम ख़र्च करने वाले देश दुनिया में सबसे ग़रीब देश हैं – जिनमें से कुछ हैं, उत्तर कोरिया, सीरिया, लाइबेरिया, अफ़गानिस्तान, और लीबिया। शायद इस पैसे को उन निवेशों में लगाना बेहतर होगा जो संघर्ष को कम करें या रोकें?
शांति में निवेश के लिए स्पष्ट मानवीय कारणों के अलावा, ख़ास तौर से जब इसे अंतर्राष्ट्रीय विकास के स्थापित ढाँचे के भीतर किया जाता है, ऐसा निवेश अर्थव्यवस्था के विकास और बजट संतुलन के लिए भी सबसे किफ़ायती तरीकों में से एक होता है। यह सचमुच एक चर्चा योग्य विषय है।
A World of Pain
BALTIMORE – Pain is ubiquitous in life.
Inextricably bound to consciousness, it is an experience that all living creatures with advanced nervous systems share.
For our ancestors, whose lives were fraught with danger, pain conferred an evolutionary advantage, signaling the need to separate oneself from its immediate source.
But evolution has failed to keep pace with biomedical and technological advances, allowing chronic pain (pain that persists beyond an acute injury or condition) to become a disease in itself.
It is difficult to overestimate chronic pain’s societal impact.
According to the US Institute of Medicine, one in three people suffer from chronic pain – more than from heart disease, cancer, and diabetes combined.
Pain is the leading cause of disability, especially back pain among people under 45 years of age and joint pain in older individuals.
In the United States alone, chronic pain is estimated to cost more than $600 billion annually.
Pain can be classified according to a variety of factors, such as duration or location.
But the most useful categorization is based on mechanism.
Nociceptive pain, which arises from damage to non-nervous tissue, occurs when, say, a person twists an ankle.
An example of chronic nociceptive pain is arthritis.
Neuropathic pain, by contrast, arises after a lesion or disease affects the nervous system.
Nerve damage resulting from diabetes (diabetic neuropathy) and persistent pain after shingles (postherpetic neuralgia) are among the most common causes.
Chronic pain is difficult to treat; even the most effective medications provide only modest relief to a minority of patients.
This can be explained partly by pain’s subjective nature, and partly by the fact that its source can be difficult to pinpoint.
Although neuroscientists are adept at studying pain, animal models fail to account for its “affective-motivational” component – that is, pain’s emotional, cognitive, and contextual features.
Indeed, physiological indicators have less of an impact on a patient’s prognosis after a painful injury than psychological and social factors such as depression or poor coping skills.
The problem is that subjective measures are much more difficult to study – not least because they are associated with high placebo response rates.
Unrealistic expectations exacerbate these psychological impediments to progress.
In an era of instant access, people often expect immediate relief from symptoms, which is difficult to achieve when it comes to chronic pain.
For example, the best way to relieve back and neck pain is often to exercise, while treating underlying contributing factors like obesity.
But few people are willing to devote the time and effort that such a therapeutic plan demands; they would prefer an injection, operation, or medication.
When there is no instant fix available, they can become discouraged, hampering their recovery further.
Making matters worse, people are being inundated with information – and often misinformation – through television, the Internet, and other direct-marketing channels.
This fuels misconceptions and, in many cases, gives people false hope about the kind of relief they can expect from a particular drug or treatment.
Not even physicians are immune to these influences; indeed, in some cases, they actually create the bias.
For example, studies of epidural steroid injections for back pain have been shown to be almost three times more likely to yield positive results when conducted by doctors who routinely administer them.
Financial incentives have compounded the problem, leading to some alarming trends.
Procedures, operations, and prescription opioid use aimed at curbing chronic pain have increased dramatically over the last decade, driving up health-care costs, while failing to stem the increase in the prevalence of pain or the number of disability claims.
This is particularly problematic in countries where health-care delivery is based on a fee-for-service model.
The rate of spine surgery in the United States, for example, is more than twice as high as in Europe.
And, despite having less than 5% of the world’s population, the US accounts for more than three-quarters of global opioid consumption – leading to a surge in addiction rates and overdoses.
What can be done to improve management and treatment of chronic pain?
For starters, health-care providers and individuals should view chronic pain more as a “syndrome” than a symptom – one that may not be “curable.”
For patients who have not responded to conventional treatment, restoring function should replace eradicating pain as the primary objective.
Similarly, patients must recognize that there are no “silver bullets” for pain treatment.
Indiscriminate use of procedures that may benefit only a select few patients merely drives up health-care costs.
Likewise, for chronic non-cancer pain, there is virtually no evidence to support the long-term use of high doses of opioids, which often do more harm than good.
The long-term pain treatment with the strongest empirical support involves lifestyle modifications such as exercise, stress reduction, and weight loss – all of which require significant time and effort.
Finally, researchers should compare the long-term cost-effectiveness of different treatments in typical chronic-pain patients.
Such an approach would be more relevant and generalizable than industry-sponsored short-term studies that compare new treatments to placebos in a fastidiously chosen population that does not reflect real-world conditions.
A thorough and realistic understanding of the nature of chronic pain is crucial to devising effective treatments.
Indeed, without better evidence, efforts to help patients may well end up creating more problems than they solve.
Stick to the Resolution
MELBOURNE – The international military intervention in Libya is not about bombing for democracy or for Col. Muammar el-Qaddafi’s head – let alone keeping oil prices down or profits up. Legally, morally, politically, and militarily, it has only one justification: protecting Libyans from the kind of murderous harm that Qaddafi inflicted on unarmed protestors four weeks ago; has continued to inflict on those who oppose him in the areas that his forces control; and has promised to inflict on his opponents in Benghazi and other rebel-held territory.
When that job is done, the military’s job will be done.
Regime change is for the Libyan people themselves to achieve.
It should not be necessary to rearticulate and reargue these basic points.
But it is.
Despite the best efforts of US President Barack Obama, UN Secretary-General Ban Ki-moon, and others who have stayed admirably focused and consistent, other voices – from the right, the left, and the simply muddled – are now capturing media attention, and are beginning to drown, or at least confuse, the basic message.
US Senators John McCain and Joseph Lieberman, for example, have said that the aim must be not only to protect civilians, but also to drive Qaddafi from power.
British Defense Minister Liam Fox has suggested that Qaddafi could be targeted.
And from the other side, many commentators – anxiously or cynically, according to taste – have drawn parallels with Iraq and other past misuses of Western military power.
Many others talk of being drawn inexorably into an Afghanistan-style quagmire.
To clarify the issues, the best place to start is with the two UN Security Council resolutions.
The first, Resolution 1970, adopted on February 26, invoked “the Libyan authorities’ responsibility to protect its population,” condemned its violence against civilians, demanded that this violence stop, and sought to concentrate Qaddafi’s mind by applying targeted sanctions, an arms embargo, and the threat of prosecution for crimes against humanity.
The follow-up Resolution 1973, adopted on March 17, deplored the failure to comply with Resolution 1970, reasserted a determination to ensure the protection of civilians, and called for an immediate ceasefire and a complete end to violent attacks against and abuses of civilians.
Then, for the first time ever, the Council explicitly authorized military intervention by member states to achieve these objectives.
Coercive military action was allowed to take two forms: “all necessary measures” to enforce a no-fly zone, and “all necessary measures… to protect civilians and civilian populated areas under threat of attack.”
Boots on the ground – “a foreign occupation force” – were expressly excluded.
The language of these resolutions could hardly be clearer in prescribing the scope and limits of what should be done.
In the case of enforcing the no-fly zone, Resolution 1973 allows the destruction, by aircraft or missile, of any loyalist jet or helicopter that takes off, any pro-Qaddafi forces’ anti-aircraft batteries or missile-launch sites, and the disabling of any airstrip.
And, as for the wider mandate to protect civilians, the resolution allows airborne attacks to knock out tanks or troop columns advancing on Benghazi or other rebel-held towns, and – should they exist – concentrations of forces within those areas that pose a direct and immediate threat to Qaddafi’s opponents.
In both cases, some questions do arise at the margin.
Is it within the scope of the no-fly zone to take out command and control centers that might direct aircraft?
Can it possibly be legitimate to kill regime forces actually fleeing from a protected area, or in some other way posing no obvious or imminent threat to civilians?
Should a line be drawn against any otherwise legitimate action against Qaddafi’s forces that would be likely to put innocent civilians at risk?
Beyond these questions, there is nothing to debate.
Military action expressly designed to kill Qaddafi or force him into exile, to ensure a rebel victory in a civil war, or to achieve a more open and responsive system of government in Libya is not permissible under the explicit terms of Resolution 1973.
Nor is it permissible under the moral first principles of the “responsibility to protect” doctrine unanimously endorsed by the UN General Assembly in 2005 in an effort to end mass atrocities once and for all.
True, one or more of these results might, conceivably, be the effect of permissible military action, but they cannot be its objective.
It also follows from these legal and moral first principles that once there are reasonable grounds for confidence that the threat to civilian populations has been removed or neutralized (as seems now to be largely the case, at least in the east), military action should cease.
Of course, a close watch should be maintained, so that enforcement action under Resolution 1973 can be very quickly reinstated.
But offshore-based airborne action, with a sharply defined and limited objective, is much less susceptible to the kind of mission-creep and quagmire problems that often beset intervening ground forces, especially those with an inherently confused mandate, as in Afghanistan.
As the situation in Libya and the wider Middle East unfolds, policymakers are bound to face further acute dilemmas, not least in responding to continuing repression in Tripoli, or the similarly ugly and fragile situations in Bahrain and Yemen.
Mustering the cross-cultural political will to give the responsibility to protect real – and consistent – teeth will always be difficult.
But, at least in the case of Libya, a vital precedent has been set.
The Security Council has written the right script; we must now make sure that we follow it.
Stimulate or Die
NEW YORK – As the green shoots of economic recovery that many people spied this spring have turned brown, questions are being raised as to whether the policy of jump-starting the economy through a massive fiscal stimulus has failed.
Has Keynesian economics been proven wrong now that it has been put to the test?
That question, however, would make sense only if Keynesian economics had really been tried.
Indeed, what is needed now is another dose of fiscal stimulus.
If that does not happen, we can look forward to an even longer period in which the economy operates below capacity, with high unemployment.
The Obama administration seems surprised and disappointed with high and rising joblessness.
It should not be.
All of this was predictable.
The true measure of the success of the stimulus is not the actual level of unemployment, but what unemployment would have been without the stimulus.
The Obama administration was always clear that it would create some three million jobs more than what would otherwise be the case.
The problem is that the shock to the economy from the financial crisis was so bad that even Obama’s seemingly huge fiscal stimulus has not been enough.
But there is another problem: In the United States, only about a quarter of the almost $800 billion stimulus was designed to be spent this year, and getting it spent even on “shovel ready” projects has been slow going.
Meanwhile, US states have been faced with massive revenue shortfalls, exceeding $200 billion.
Most face constitutional requirements to run balanced budgets, which means that such states are now either raising taxes or cutting expenditures –a negative stimulus that offsets at least some of the Federal government’s positive stimulus.&nbsp;
At the same time, almost one-third of the stimulus was devoted to tax cuts, which Keynesian economics correctly predicted would be relatively ineffective.
Households, burdened with debt while their retirement savings wither and job prospects remain dim, have spent only a fraction of the tax cuts.
In the US and elsewhere, much attention was focused on fixing the banking system.
This may be necessary to restore robust growth, but it is not sufficient.
Banks will not lend if the economy is in the doldrums, and American households will be particularly reluctant to borrow – at least in the profligate ways they borrowed prior to the crisis.
The almighty American consumer was the engine of global growth, but it will most likely continue to sputter even after the banks are repaired.
In the interim, some form of government stimulus will be required.
Some worry about America’s increasing national debt.
But if a new stimulus is well designed, with much of the money spent on assets, the fiscal position and future growth can actually be made stronger.
It is a mistake to look only at a country’s liabilities, and ignore its assets.
Of course, that is an argument against badly designed bank bailouts, like the one in America, which has cost US taxpayer hundreds of billions of dollars, much of it never to be recovered.
The national debt has increased, with no offsetting asset placed on the government’s balance sheet.
But one should not confuse corporate welfare with a Keynesian stimulus.&nbsp;
A few (not many) worry that this bout of government spending will result in inflation.
But the more immediate problem remains deflation, given high unemployment and excess capacity.
If the economy recovers more robustly than I anticipate, spending can be canceled.
Better yet, if much of the next round of stimulus is devoted to automatic stabilizers – such as compensating for the shortfall in state revenues – then if the economy does recover, the spending will not occur.
There is little downside risk.
Nevertheless, there is some concern that growing inflationary expectations might result in rising long-term interest rates, offsetting the benefits of the stimulus.
Here, monetary authorities must be vigilant, and continue their “non-standard” interventions – managing both short-term and long-term interest rates.
All policies entail risk.
Not preparing for a second stimulus now risks a weaker economy – and the money not being there when it is needed.
Stimulating an economy takes time, as the Obama administration’s difficulties in spending what it has allocated show; the full effect of these efforts may take a half-year or more to be felt.
A weaker economy means more bankruptcies and home foreclosures and higher unemployment.
Even putting aside the human suffering, this means, in turn, more problems for the financial system.
And, as we have seen, a weaker financial system means a weaker economy, and possibly the need for more emergency money to save it from another catastrophe.
If we try to save money now, we risk spending much more later.
The Obama administration erred in asking for too small a stimulus, especially after making political compromises that caused it to be less effective than it could have been.&nbsp;
It made another mistake in designing a bank bailout that gave too much money with too few restrictions on too favorable terms to those who caused the economic mess in the first place – a policy that has dampened taxpayers’ appetite for more spending.
But that is politics.
The economics is clear: the world needs all the advanced industrial countries to commit to another big round of real stimulus spending.
This should be one of the central themes of the next G-20 meeting in Pittsburgh.
Stimulating Equality
NEW YORK – With unemployment climbing in the United States and other OECD countries, job creation is a key objective for policymakers.
In the US, President Barack Obama recently proposed to increase public spending by about $600 billion over the next two years to create an additional four million jobs.
But Obama is also concerned with reversing a sharp rise in income inequality (which is now at an 80-year high).
Is it possible for leaders to do both at the same time?
The answer is unequivocally yes, but only if they focus on government spending rather than reforming their tax systems.
That lesson is even more powerful for other advanced countries like Germany and France, which spend a far higher percentage of GDP on public programs (35% and 43%, respectively, in 2005) than the US (only 25%).
America’s tax system has surprisingly little redistributional punch.
Using a measure of “comprehensive income” – money income, total capital gains on wealth, imputed rent on owner-occupied housing, non-cash government benefits, and public consumption – income taxes are generally progressive.
Federal income taxes as a proportion of income increase steadily from 2% at the 10th percentile (that is, a family ranked tenth from the bottom out of 100) to 14% at the 90th percentile, but then falls off slightly to 13% at the very top, reflecting the favorable treatment of capital gains and investment income under the Bush administration’s income-tax laws.
On the other hand, social security taxes – the biggest tax for more than two-thirds of families – are mildly regressive.
Social security taxes as a proportion of income rise gradually from 5% at the 10th percentile to 9% at the 80th percentile, stay there at the 90th percentile, but then fall off sharply to 5% at the top.
This decline reflects the wage cap on social security taxes (currently at $102,000).
The total tax burden on families also includes sales taxes, which are steeply regressive, and property taxes, which are progressive.
Total personal taxes are mildly progressive, increasing steadily as a share of income from 14% at the 10th percentile to 28% at the 90th percentile, but then falling off sharply to 22% at the top, owing to the favorable treatment of capital gains and investment income, the wage cap on social security taxes, and the sharp regressivity of sales taxes.
On the other hand, total transfers have a much bigger equalizing effect on incomes.
Cash transfers, like social security and unemployment insurance, are highly equalizing.
When the value of non-cash government benefits, like Medicaid, Medicare, and Food Stamps, are also included, total transfers become extremely progressive.
As a proportion of income, they fall almost continuously, from 50% at the 10th percentile to 2.5% at the very top.
But government spending on goods and services, like education, highways, police, and sanitation, has distributional consequences, too, and can be allocated to actual beneficiaries in much the same way as government transfers.
Educational expenditures are allocated on the basis of the number of schoolchildren in the family.
Highway spending is allocated in proportion to the number of cars owned by the family and estimated miles driven.
Collective goods like fire and police protection are allocated on a per capita basis.
Public consumption is just as progressive as transfer payments.
As a proportion of income, it declines almost continuously, from 34% at the 10th percentile to 3% at the very top.
The main beneficiaries of public spending are the poor and the middle class.
When you add together government transfers and public consumption and subtract taxes paid, you get a figure for net government expenditures.
This is extremely progressive.
As a share of income, it declines sharply from 70% at the 10th percentile to -16% at the top (in other words, the top bracket pays more in taxes than it receives in government benefits).
In fact, the crossover point between positive and negative net government expenditures is at the 66th percentile.
The extremely progressive nature of net government expenditures comes about equally from government transfers and public spending; very little is contributed by taxes.
It is not just the poor who benefit from net governmental expenditures.
The middle class is also a big beneficiary.
Between 1959 and 2005, about half of the growth of the middle class’s income came from increased net government expenditures.
Indeed, from 2000 to 2004, the increase in net government expenditures accounted for 150% of income growth, as other sources of income shriveled up.
Net government spending also helped to reduce overall inequality over those years.
As Obama and other leaders around the world implement stimulus packages in the months ahead, they should recognize that the question of who benefits goes beyond the number of jobs created.
Government spending, no less than government transfers, has actual beneficiaries.
If these packages target education (very redistributive) or sanitation, fire, police, and highways (mildly redistributive), they can create jobs and reduce inequality.
Are Equities Overvalued?
MILAN – Since the global economic crisis, sharp divergences in economic performance have contributed to considerable stock-market volatility.
Now, equity prices are reaching relatively high levels by conventional measures – and investors are starting to get nervous.
The question is whether stock valuations are excessive relative to future earnings potential.
The answer depends on two key variables: the discount rate and future earnings growth.
A lower discount rate and/or a higher rate of expected earnings growth would justify higher equity valuations.
The S&amp;P’s price-to-earnings (P/E) ratio for the trailing 12 months is close to 20, compared to a long-run mean of 15.53 and a median of 14.57. The Shiller P/E ratio – based on average real (inflation-adjusted) earnings from the last ten years – is at 27.08, with a mean and median of 16.59 and 15.96, respectively.
And, in February, the forward 12-month earnings P/E ratio, which uses managers’ future earnings guidance, reached an 11-year high of 17.1, with the five- and ten-year averages standing at about 14 and the 15-year average at 16.
The stock market’s recent performance often is attributed to the unconventional monetary policies that many central banks have been pursuing.
These policies, by design, lowered the return on sovereign bonds, forcing investors to seek yield in markets for higher-risk assets like equities, lower-rated bonds, and foreign securities.
According to the standard formulation, stock prices tend to revert toward the present value of estimated future earnings (including growth in those earnings), discounted at the so-called “risk-free rate,” augmented by an equity risk premium.
More precisely, the forward earnings yield – that is, the inverse of the P/E ratio – is equal to the risk-free rate plus the equity premium, minus the growth rate of earnings.
(Of course, markets take detours along the way, driven by, say, irrational exuberance, temporary declines in the impact of value investors, or mistimed contrarian trades.)
Monetary policy may have bolstered stock prices in two ways, either lowering the discount rate by compressing the equity risk premium, or simply reducing risk-free rates for long enough to raise the present value of stocks.
In either case, equity prices should level off at some point, allowing earnings to catch up, or even correct downward.
But the monetary-policy story, while plausible, is not ironclad.
Indeed, other factors may explain – or at least contribute to – current stock-market trends.
A key factor is earnings growth.
In the long run, it is reasonable to expect that revenue growth would be broadly consistent with economic growth – and, as it stands, there is little acceleration on this front.
Earnings can grow faster than revenues for a prolonged (though not indefinite) period, if companies cut costs or reduce investment – a trend that would, over time, lower depreciation charges.
In theory, corporate-tax cuts could have the same effect.
Furthermore, the economy’s equilibrium conditions could change, so that aggregate earnings would capture a larger share of national income.
There is some evidence that this is now occurring in advanced economies, with the proliferation of labor-saving digital technologies and the globalization of supply chains suppressing income growth.
That said, some trends may be having the opposite effect on expectations for earnings growth.
More than two-fifths of the S&amp;P 500’s earnings come from external markets, some of which, like Europe and Japan, are barely growing, while others, like China, are slowing.
The appreciation of the dollar exacerbates the situation for US markets, because it creates headwinds for exporters and causes companies’ foreign earnings, reported in dollars, to decline.
And a slowdown in productivity growth, together with excessive leverage and persistent public-sector underinvestment, may be undermining medium-term potential economic growth.
While expectations of faster earnings growth may well be contributing to elevated P/E levels, the current situation is complicated, to say the least.
What is certain is that expectations of high earnings growth would have a more durable positive effect on P/E levels than the suppression of the equity risk premium.
The other important factor affecting P/E is the risk-free rate.
As monetary policy normalizes – a process that has already begun in the United States – the risk-free rate is expected to rise to a level that is consistent with stable 2% inflation, which, in turn, corresponds with a level of unemployment.
What precisely that rate is, however, remains uncertain – and extremely difficult to determine, given that it is affected by virtually every aspect of the unfolding growth patterns.
Nonetheless, several features of current growth patterns stand out: excess productive capacity, persistent high leverage, declining labor content in goods-and-services production, and an increasingly unequal distribution of income both between labor and capital, and across labor-income segments, with their differential savings rates.
Together, these patterns could lead to an extended period in which aggregate demand limits growth.
With growth not constrained on the supply side, there would be little inflationary pressure, and the neutral interest rate that is consistent with non-inflationary full employment could simply be lower than it used to be for an extended period.
Where does this leave us?
In my view, it is difficult to make a strong case for a significant sustained increase in earnings growth in this environment, meaning that growth alone would not justify current equity valuations.
But the lower-discount-rate argument is more persuasive, and is consistent with underlying economic conditions and central banks’ mandates.
That said, in such a complex environment, investors can be expected to reach widely disparate conclusions, which will sustain – if not increase – market volatility.
Stock Markets’ Fear of Falling
NEW HAVEN &#45;&#45; The sharp drop in the world’s stock markets on August 9, after BNP Paribas announced that it would freeze three of its funds, is just one more example of the markets’ recent downward instability or asymmetry.
That is, the markets have been more vulnerable to sudden large drops than they have been to sudden large increases.
Daily stock price changes for the 100-business-day period ending August 3 were unusually negatively skewed in Argentina, Australia, Brazil, Canada, China, France, Germany, India, Japan, Korea, Mexico, the United States and the United Kingdom.
In the US, for example, the Standard and Poor’s 500 index in July recorded six days of declines and only three days of increases amounting to more than 1%.
In June, the index dropped more than 1% on four days, and gained more than 1% on two days.
Going back further, there was a gigantic one-day drop on February 27, 2007, of 3.5%, and no sharp rebound.
The February 27 decline began with an 8.8% one-day drop in the Shanghai Composite, following news that the Chinese government might tax capital gains more aggressively.
This news should have been relevant only to China, but the drop there fueled declines worldwide.
For example, the Bovespa in Brazil fell 6.6% on February 27, and the BSE 30 in India fell 4% the next day.
The subsequent recovery was slow and incremental.
In the US, the skew has been so negative only three other times since 1960: at the time of the 6.7% drop on May 28, 1962, the record-shattering 20.5% plummet on October 19, 1987, and the 6.1% decline on October 13, 1989.
Stock markets’ unusually negative skew is not inconsistent with booming price growth in recent years.
The markets have broken all-time records, come close to doing so, or at least done very well since 2003 ( the case in Japan) by making up for the big drops incrementally, in a succession of smaller increases.
Nor is the negative skew inconsistent with the fact that world stock markets have been relatively quiet for most of this year.
With the conspicuous exception of China and the less conspicuous exception of Australia, all have had low standard deviations of daily returns for the 100-business-day period ending August 3 when compared with the norm for the country.
The February 27 drop in US stock prices was only the 31st biggest one-day drop since 1950.
But all of the other 30 drops occurred at times when stock prices were much more volatile.
Thus, the February 27th drop really stands out, as do other recent one-day drops.
Indeed, one of the big puzzles of the US stock market recently has been low price volatility since around 2004, amid the most volatile earnings growth ever seen.
Five-year real earnings growth on the S&amp;P 500 set an all-time record in the period ending in the first quarter of 2007, at 192%.
Before that, between the third quarter of 2000 and the first quarter of 2002, real S&amp;P 500 earnings fell 55% – the biggest-ever decline since the index was created in 1957.
One would think that market prices should be volatile as investors try to absorb what this earnings volatility means.
But we have learned time and again that stock markets are driven more by psychology than by reasoning about fundamentals.
Is psychology somehow behind the pervasive negative skew in recent months?
Maybe we should ask why the skew is so negative.
Should we regard it as just chance, or, when combined with record-high prices, as a symptom of some instability?
The adage in the bull market of the 1920’s was “one step down, two steps up, again and again.”
The updated adage for the recent bull market is “one big step down, then three little steps up, again and again,” so far at least.
No one is looking for a sudden surge, and volatility is reduced by the absence of sharp up-movements.
But big negative returns have an unfortunate psychological impact on markets.
People still talk about October 28, 1929, or October 19, 1987.
Big drops get their attention, and this primes some people to be attentive for them in the future, and to be ready to sell if another one comes.
In fact, willingness to support the market after a sudden drop may be declining.
The “buy-on-dips stock market confidence index” that we compile at the Yale School of Management has been falling gradually since 2001, and has fallen especially far lately.
The index is the share of people who answered “increase” to the question, “If the Dow dropped 3% tomorrow, I would guess that the day after tomorrow the Dow would: Increase?
Stay the Same?” In 2001, 72% of institutional investors and 74% of individual investors chose “increase.”
By May 2007, only 48% of institutional investors and 59% of individual investors chose “increase.”
Perhaps the buy-on-dips confidence index has slipped lately because of negative news concerning credit markets, notably the US sub-prime mortgage market, which has increased anxiety about the fundamental soundness of the economy.
But something more may be at work.
Everyone knows that markets have been booming, and everyone knows that other people know that a correction is always a possibility.
So there may be an underlying sensitivity to price drops, which could fuel a succession of downward price changes, amplifying public concerns about problems in the economy and heralding a profound change in investor sentiment.
Stocks and the Long Run
BERKELEY – After the second 40% decline in America’s Standard &amp;
Poor’s composite index of common stocks in a decade, global investors are shell-shocked.
Funds invested, and reinvested, in the S&amp;P composite from 1998-2008 have yielded a real return of zero: the dividends earned on the portfolio have been just enough to offset inflation.
Not since 1982 has a decade passed at the end of which investors would have been better off had they placed their money in corporate or United States Treasury bonds rather than in a diversified portfolio of stocks.
So investors are wondering: will future decades be like the past decade?
If so, shouldn't investments in equities be shunned?
The answer is almost surely no.
At a time horizon of a decade or two, the past performance of stocks and bonds is neither a reliable guarantee nor a good guide to future results.
Periods like 1998-2008, in which stocks do relatively badly, are preceded by periods – like 1978-1988 and 1988-1998 – in which they do relatively well, and are in all likelihood followed by similar periods.
Do the math.
At the moment, the yield-to-maturity of the ten-year US Treasury bond is 3.76%.
Subtract 2.5% for inflation, and you get a benchmark expected real return of 1.26%.
Meanwhile, the earnings yield on the stocks that make up the S&amp;P composite is fluctuating around 6%: that is how much money the corporations that underpin the stocks are making for their shareholders.
Some of that money will be paid out in dividends.
Some will be used to buy back stock – thus concentrating the equity and raising the value of the stock that is not bought back.
Some will be reinvested and used to boost the company’s capital stock.
You can argue that the corporate executives have expertise and knowledge that allows them to commit the funds they control to higher-return projects than are available in the stock market.
Or you can argue that they are corrupt empire-builders who dissipate a portion of the shareholders’ money that they control.
The sensible guess is that these two factors cancel each other out.
Thus, the expected fundamental real return on diversified US stock portfolios right now is in the range of 6% to 7%.
The expected market return is that amount plus or minus expected changes in valuation ratios: will stocks return more as price-earnings ratios rise, or return less as price-earnings ratios fall?
Once again, the sensible guess is that these two factors more or less cancel each other out.
Compare the 6% to 7% real return on stocks to a 1.25% real return on bonds.
But aren’t stocks risky?
Couldn’t earnings collapse?
Couldn’t the market undergo another 40% decline in the near future?
Aren’t bonds safer?
The answers to these questions are yes, yes, yes, and yes.
Remember: we already had another 40% decline in 2000-2003, and are in another one right now.
We also had the long slide from 1977-1982 that followed a 40% collapse from 1973-1975.
Before that, we had declines in 1946-1949, 1937-1942, and the biggest of them all in 1929-1933.
But stock market declines that are not accompanied by steep and persistent collapses in earnings are by their nature temporary: they are provoked by steep rises in perceived risk, and if those risks turn out to be overblown, stocks rebound when the perception of risk falls.
And how about stock market declines that are accompanied by a steep and persistent collapse in earnings – by depressions?
In the pre-World War II era, when governments held fast to the gold standard, depressions were times of deflation.
But in the post-World War II era, in which social democratic governments maintain welfare spending and Keynesian economic advisers seek to use fiscal policy to boost output, an earnings depression is much more likely to be accompanied by inflation.
True, a steep and persistent collapse in earnings will erode wealth invested in stocks.
But the inflation that accompanies it will produce a steeper and larger erosion of real wealth invested in nominal bonds.
As Edgar L. Smith wrote in The Atlantic Monthly back in 1924, when the principal risks are macroeconomic, bonds are no safer than diversified portfolios of stocks – in fact, they are riskier.
All these arguments apply only to long-term investors who can afford to wait out another 40% decline in values and keep their money invested until perceived risk drops.
(And if perceived risk never drops than you have worse things to worry about than the performance of your portfolio.)
For retirees and other people who need to spend soon, the year-to-year variability of the stock market commands caution.
But for those who do not need to spend soon, the recent decline in equity values is more an opportunity than a catastrophe.
We liked the stocks in our portfolio a year ago for their long-term prospects.
Today’s short-term crisis does not materially alter their long-term prospects.
And now we have an opportunity to buy more, and cheaply.
Stop Coddling Belarus
Lenin once said that capitalists were so cynical that they would sell the Soviets the rope with which they would hang them.
Lenin and communism have passed away, but that cynical indifference to suffering when profits are involved remains.
Belarus provides a glaring example.
The European Parliament has consistently denounced Belarus as Europe’s last dictatorship, yet EU member governments continue business as usual with Aleksander Lukashenka, the country’s wayward and near lunatic despot.
This is especially true when there is a chance to save or make money.
For example, for more than a decade, Germany’s police forces, customs service, and even the Bundeswehr have been ordering uniforms from a state-owned factory in the city of Dzherzinsky, named after the father of the Red Terror and founder of the Soviet KGB, Feliks Dzherzinsky.
Similar examples of such indifferent cynicism abound.
By treating Lukashenka as a favored business partner at the same time that the EU is trying to isolate him as an international pariah, European hypocrisy stands naked.
Instead of indirectly propping up Lukashenka’s regime through such cozy deals, Europe’s governments must begin to act in accordance with what Europe’s parliament has long understood: underwriting Lukashenka economically only prolongs his misrule.
So it is now more important than ever that European parliamentarians unite and make their position clear.
The European Parliament has, indeed, taken the lead.
Since last year it has been enlisting people with historic knowledge and understanding of totalitarian regimes to help guide its response to events in Belarus.
This advice helped shape the parliament’s strong stance against maintaining unnecessary economic engagement with Lukashenka and his henchmen.
But there are two radically different attitudes regarding Belarus’s participation in European activities.
On one hand, the Parliamentary Assembly of the Council of Europe has denied Belarusian politicians even informal access to meetings in Strasbourg.
The Assembly condemned Lukashenka’s usurpation of power when he twisted the constitution to grant himself a virtual lifetime presidency, and it has denounced the disappearance of those Belarussians who have dared to think differently from the regime.
The Organization for Security and Cooperation in Europe (OSCE) has also taken a strong stand against the Belarusian dictator.
As the Final Report of its 2004 mission to observe the Belarusian parliamentary elections clearly stated, the vote “fell significantly short of OSCE commitments.”
Similarly, the 2004 referendum to eliminate term limits on the presidency “took place with unrestrained Government bias in favor of the referendum,” and without “the conditions, particularly freedom of expression and freedom of the media, to ensure that the will of the people serves as the basis of government authority.”
But at the same time the OSCE is condemning these anti-democratic practices, its own Parliamentary Assembly maintains full-fledged cooperation with the Belarusian parliament.
Indeed, the OSCE treats the Lukashenka-controlled parliament in the same way it does any EU parliament.
So real parliaments and sham parliaments are treated as equals.
The idea would be laughable if it were not so tragic.
This absurd situation must change.
It is the duty of all members of EU national parliaments to reject this affront to their democratic dignity.
Only democratic parliaments should sit as equals in Europe’s democratic forums.
The goal is not to ensure Europe’s democratic purity, but to change the nature of Belarus’s government.
For that to happen, Europe’s democratic voice must be heard within Belarus.
That won’t be easy.
Of the 1,500 different media outlets in Belarus today, only a dozen or so retain any form of independence.
Even that small number is likely to diminish, as Lukashenka keeps up political, financial, and legal pressure on them.
Indeed, Belarus’s last independent daily newspaper recently went out of business.
The European Commission has allocated two million euros to establish an independent radio station for Belarus, which must operate outside of the country because of Lukashenka.
Working with the Belarusian association of journalists, this independent media outlet will broadcast from Latvia, Lithuania, Poland, and perhaps Ukraine.
This meager effort, however, is an insufficient response by Europe’s democracies to the full panoply of Lukashenka’s dictatorship: his docile courts, brutal jails, and corrupt police.
Are a few hours of radio broadcasting really all Europe and the democratic west can muster?
If so, Lukashenka must be laughing aloud.
Parliamentarians across Europe and the West must join their voice together in a well-defined, united and ringing declaration that forces Western leaders to apply real pressure to Europe’s last dictator.
Such pressure brought results a year ago, with the success of the Orange Revolution in Ukraine.
Nothing less than a united position against the despot of Belarus is necessary if Lukashenka – and his Russian backers – are to be forced to change their ways.
Stopping Latin America’s Budding Arms Race
In recent weeks, many observers of the Latin American military situation have detected what could be the beginning of a new arms race in the region.
Brazilian President Luis Inacio “Lula” da Silva was photographed boarding the Tikuna, his country’s first conventional, domestically built submarine.
He used the opportunity to highlight his support for the Brazilian military.
Similarly, Venezuela’s President Hugo Chávez has broadcast his intention to purchase Russian Mig fighter jets and Brazilian low-flying surveillance aircraft, and to expand military expenditures.
He is doing so, perhaps, because of recent problems with Colombia.
Even Chile, after a lengthy process of weighing its options, is still pondering whether to acquire a dozen American-built jet fighters or a joint Swedish-Brazilian alternative.
Is there a new arms race underway in Latin America?
If so, is there any conceivable way it could help address the hemisphere’s economic and social dilemmas?
Regional wars and border conflicts have existed since time immemorial in Latin America.
There was the Chaco war and the Chilean-Bolivian conflagration in the nineteenth century, the so called “Soccer War” between Honduras and El Salvador in the 1960’s, the clash between Ecuador and Peru in the 1980’s, and Antarctic border disputes between Chile and Argentina that were finally settled in the early 1990’s.
But the main reason for heavy military spending in Latin America has always been chiefly domestic.
Either the military ran various countries, and gorged itself with hardware and troop increases, or weak civilian governments, terrified of military coups or blackmail, placated their armed forces with all sorts of unnecessary martial goodies. By international standards, arms spending in Latina America is low relative to GDP; but it is nonetheless excessive relative to the region’s needs.
Today the situation is more complex.
In Venezuela, keeping his former comrades in arms happy is obviously a concern for Chávez.
But festering conflicts with his Colombian neighbors are also a factor, particularly in view of the constant accusations and suspicions that Chávez comforts and supports the FARC guerrillas in Colombia.
High oil prices allow Venezuela to go on this military spending spree, and there seems little that anybody can do about it.
In Brazil, matters are somewhat different.
Lula has been able to neatly dovetail his socialist roots with traditional Brazilian nationalism, which has always been strong in the country’s armed forces. “ O Brasil, país grande ” is a universal slogan in South America’s giant – a country that has borders with nine neighbors and fears that its distant jungle frontiers cannot easily be patrolled.
Similar sentiments are apparent elsewhere in the region.
But the question everywhere in Latin America is whether it would not be a better idea to implement former – and perhaps future – Costa Rican President Oscar Arias’s idea of Latin American disarmament, to turn “spending on swords” into investments in ploughshares.
Arias, the 1987 Nobel peace prize recipient, has a good reason for pushing this idea: his country has no standing army.
Still, it is a bold initiative that should be revived in view of Latin America’s incipient arms race.
Indeed, it could be the cornerstone of a new program for the next Secretary General of the Organization of American States, who is to be elected in the coming weeks.
Obviously, I am rooting for the Mexican candidate, Foreign Minister Luis Ernesto Derbez.
But whoever wins will need new ideas and initiatives to reinvigorate a dormant institution.
Stopping Latin America’s budding arms race is about as good an idea as there can be.
Stop the Band-Aid Treatment
The Middle East is a tinderbox, with some key players on all sides waiting for every opportunity to destroy their enemies with bullets, bombs and missiles.
One of the special vulnerabilities of Israel, and a repetitive cause of violence, is the holding of prisoners.
Militant Palestinians and Lebanese know that a captured Israeli soldier or civilian is either a cause of conflict or a valuable bargaining chip for prisoner exchange.
This assumption is based on a number of such trades, including 1,150 Arabs, mostly Palestinians, for three Israelis in 1985; 123 Lebanese for the remains of two Israeli soldiers in 1996; and 433 Palestinians and others for an Israeli businessman and the bodies of three soldiers in 2004.
This stratagem precipitated the renewed violence that erupted in June when Palestinians dug a tunnel under the barrier that surrounds Gaza and assaulted some Israeli soldiers, killing two and capturing one.
They offered to exchange the soldier for the release of 95 women and 313 children who are among almost 10,000 Arabs in Israeli prisons, but this time Israel rejected a swap and attacked Gaza in an attempt to free the soldier and stop rocket fire into Israel.
The resulting destruction brought reconciliation between warring Palestinian factions and support for them throughout the Arab world.
Hezbollah militants in south Lebanon then killed three Israeli soldiers and captured two others, and insisted on Israel’s withdrawal from disputed territory and an exchange for some of the several thousand incarcerated Lebanese.
With American backing, Israeli bombs and missiles rained down on Lebanon.
Soon, Hezbollah rockets supplied by Syria and Iran were striking northern Israel.
It is inarguable that Israel has a right to defend itself against attacks on its citizens, but it is inhumane and counterproductive to punish civilian populations in the illogical hope that somehow they will blame Hamas and Hezbollah for provoking the devastating response.
The result instead has been that broad Arab and worldwide support has been rallied for these groups, while condemnation of both Israel and the United States has intensified.
Israel belatedly announced, but did not carry out, a two-day cessation in bombing Lebanon, responding to the global condemnation of an air attack on the Lebanese village of Qana, where 57 civilians were killed and where 106 died from the same cause 10 years ago.
As before there were expressions of “deep regret,” a promise of “immediate investigation” and the explanation that dropped leaflets had warned families in the region to leave their homes.
The urgent need in Lebanon is that Israeli attacks stop, that Lebanon’s regular military forces control the southern region of the country, that Hezbollah cease as a separate fighting force, and future attacks against Israel be prevented.
Israel should withdraw from all Lebanese territory, including Shebaa Farms, and release the Lebanese prisoners.
Yet Prime Minister Ehud Olmert has rejected such a cease-fire.
These are ambitious hopes, but even if the UN Security Council adopts and implements a resolution that would lead to such an eventual solution, it will provide just another band-aid and temporary relief.
Tragically, the current conflict is part of the inevitably repetitive cycle of violence that results from the absence of a comprehensive settlement in the Middle East, exacerbated by the almost unprecedented six-year absence of any real effort to achieve such a goal.
Leaders on both sides ignore strong majorities that crave peace, allowing extremist-led violence to preempt all opportunities for building a political consensus.
Traumatized Israelis cling to the false hope that their lives will be made safer by incremental unilateral withdrawals from occupied areas, while Palestinians see their remnant territories reduced to little more than human dumping grounds surrounded by a provocative “security barrier” that embarrasses Israel’s friends and fails to bring safety or stability.
The general parameters of a long-term, two-state agreement are well known.
There will be no substantive and permanent peace for any peoples in this troubled region as long as Israel is violating key UN resolutions, official American policy and the international “road map” for peace by occupying Arab lands and oppressing the Palestinians.
Except for mutually agreeable negotiated modifications, Israel’s official pre-1967 borders must be honored.
As were all previous administrations since the founding of Israel, US government leaders must be in the forefront of achieving this long-delayed goal.
A major impediment to progress is the US administration’s strange policy that dialogue on controversial issues will be extended only as a reward for subservient behavior and will be withheld from those who reject US assertions.
Direct engagement with the Palestine Liberation Organization or the Palestinian Authority and the government in Damascus will be necessary if secure negotiated settlements are to be achieved.
Failure to address the issues and leaders involved risks the creation of an arc of even greater instability running from Jerusalem through Beirut, Damascus, Baghdad and Tehran.
The people of the Middle East deserve peace and justice, and we in the international community owe them our strong leadership and support.
Storm Clouds over the Euro
The creation of the European Monetary Union (EMU) was an unprecedented achievement, promising deeper and larger markets.
The stimulus to trade and investment is manifest.
But will the Euro last?
Two current developments will shape the answer.
The first is the outcome of battles raging in France, Germany, and elsewhere over social security reform. The second is the debate over the inclusion of ``social rights'' in the EU's draft Constitution.
Welfare state entitlements are vastly different from country to country in Europe. These differences portend intense conflicts within EMU.
France, Germany, and Italy must scale back their social commitments, raise taxes, or borrow.
But in the Eurozone's increasingly competitive environment, raising taxes would drive away business, while cutting benefits may be tantamount to political suicide.
So the temptation to borrow is high.
The Stability and Growth Pact is designed to block that temptation by keeping budget deficits below 3% of GDP.
But the Pact is already straining, and today's serial violations may appear mild when the baby boom generation begins to retire and public pension and health liabilities become cash demands.
Some national deficits may rise to twice the Pact's limit.
If that happens, the affected countries can expect no help from the European Central Bank, which is prohibited from bailing out member states.
Italy and Belgium, heavily indebted when the Euro was launched, could become the classic victims of a vicious circle, in which high deficits trigger rising interest rates, higher borrowing costs, even higher deficits, and eventually default.
If an EMU country defaults, it will come under intense pressure to leave the Euro in order to regain control of its currency and pay at least its domestic liabilities in devalued national paper.
If that country is large, the shock waves could push other members over the edge with it.
Recent events in Argentina provide a warning as to how such a crisis can unfold.
Ballooning provincial deficits, which Argentina's central government could not control--but was obliged to finance--pushed the country into default, forcing it to abandon a monetary pact (the currency's one-to-one peg to the dollar) to which the population was attached.
The Euro faces a second basic challenge.
The governments that launched EMU anticipated that their workers and businesses would eventually be sufficiently mobile and flexible to adjust to economic changes affecting them differentially.
At present, workers throughout the EU resist moving to change jobs, and social regulations hamper the mobility and adaptability of businesses.
Legislatures are under pressure to relax these constraints.
But little noticed social provisions in the EU draft Constitution, which Europe's leaders are expected to sign in less than a year, could compromise the liberalizing process.
In Part II of the draft Constitution, a list of ``social rights'' is incorporated as ``constitutional rights,'' enforced by the European Court of Justice.
These include protection against ``unjustified dismissal,'' the right to ``working conditions that respect the worker's health, safety and dignity,'' and ``entitlement to social security benefits [apparently regardless of cost] ... in cases such as illness, old age, and loss of employment.''
Faced with these new statutes, the Court might well change its basic approach.
Since its inception, the Court's thrust has been to enforce the economic freedoms mandated by successive agreements since the Treaty of Rome.
A Bill of Social Rights will require the Court to balance this liberalizing mission with attention to the new protections.
In this new legal environment, national efforts to dismantle business restrictions could grind to a halt.
The consequences for the Euro would be grave.
Without further liberalization, EMU will remain subject to potentially fatal strains arising from shocks that affect some countries more than others.
Imagine that the economic boom that Greece is experiencing in the run-up to the 2004 Olympics turns to bust after the games end.
Because the drachma does not exist anymore, it cannot be devalued.
If the ECB considers a large reduction of interest rates, contrary to its inflation objectives, the bank won't be able to help by cutting interest rates to benefit Greece.
So the appropriate response for Greece would be an energetic restructuring program, involving closing some businesses, requiring changes in working conditions, and perhaps even cutting wages.
But if regulations block Greek firms from laying off workers, and if militant Greek unions refuse any changes in working conditions, the result could be a wave of bankruptcies and a surge in unemployment.
The Greek government, already burdened by social security obligations, would have to increase unemployment payments, at a time when its revenues would be collapsing.
Radical proposals to leave the Euro, and restart the Greek economy with a program of devaluation and budgetary expansion, could become compelling.
In truth, many of the rigidities underlying this hypothetical crisis are not attributable to provisions in the draft Constitution.
Greece has not liberalized sufficiently to insure its economy against idiosyncratic shocks, despite impressive reforms to date.
A new Bill of Social Rights would not create destructive rigidities, but it could slow down the liberalizing process that countries like Greece need to withstand the vicissitudes of a common currency.
A Euro crisis can be avoided.
But to do so the nations of Europe must lift the twin clouds of pension debt and regulatory protections.
France and Germany are pursuing modest but nonetheless courageous reforms. If their liberalizing efforts, and those of others, are not to stall, their leaders should see to it that the draft Bill of Social Rights is not frozen in its present form in the EU Constitution.
Instead, these rights should be left in the hands of national legislatures, which have the flexibility to change their minds.
Story Time for the World Economy
NEW HAVEN - Since hitting bottom in early March, the world’s major stock markets have all risen dramatically.
Some, notably in China and Brazil, reached lows last fall and again in March, before rebounding sharply, with Brazil’s Bovespa up 75% in May compared to late October 2008, and the Shanghai Composite up 54% in roughly the same period.
But the stock market news just about everywhere has been very good since March.
Does this suggest that the world economic crisis is coming to an end? Could it be that everyone becomes optimistic again at the same time, bringing a quick end to all our problems?
Speculative booms are driven by psychological feedback.
Rising stock prices generate stories of smart investors getting rich.
People become envious of others’ successes, and begin to wonder if rising prices don’t portend further increases.
A temptation arises to get into the market, even among people who are fundamentally doubtful that the boom will continue.
So rising prices feed back into more rising prices, and the cycle repeats again and again – for a while.
During a boom, people considering getting into asset markets weigh the fear of regret if they don’t against the pain of possible loss if they do.
There is no authoritative answer about what the “right” decision is, and no consensus among experts about the proper level of exposure to these markets.
Should it be 30% in stocks and 70% in housing?
Or the reverse?
Who knows?
So the ultimate human decision must be based on the relative salience of these discordant emotional factors.
In a boom environment, the emotional factors are biased toward getting into the market.
But one must ask what would sustain such a movement now.
There seems to be no dramatic fundamental news since March other than the price increases themselves.
The human tendency to react to price increases is always there waiting to generate booms and bubbles.
The feedback is only an amplification mechanism for other factors that predispose people to want to get into the markets.
The whole world can’t recover all of the enthusiasm of a few years ago from feedback alone, for there is a giant coordination problem: we are not all attentive to price increases at the same time, so we make decisions to buy at very different times.
As a result, things happen slowly, and, meanwhile, more bad news may be revealed.
The only way world confidence can return dramatically is if our thinking coordinates around some inspiring story beyond that of the price increases themselves.
In my 2009 book with George Akerlof, Animal Spirits , we describe the ups and downs of a macroeconomy as being substantially driven by stories .
Such narratives, especially those fueled by accessible human-interest stories, are the thought viruses whose contagion drives the economy.
The contagion rate of stories depends on their relation to feedback, but plausible stories have to be there in the first place.
The narratives have substantial persistence in that they affect our views.
The story that drove the worldwide stock-market bubble that peaked in 2000 was complex, but, put crudely, it was that bright, aggressive people were leading the way to a new era of capitalist glory in a rapidly globalizing economy.
Such people became new entrepreneurs and world travelers on the way to prosperity.
This narrative seemed plausible to casual observers, because it was tied to millions of little human-interest stories about the obvious successes of those – friends, neighbors, and family members – who had the vision to participate enthusiastically in the new environment.
But it is hard today to re-create such a narrative, given so many stories of trouble.
The stock markets’ rebound since March seems not to be built around any inspirational story, but rather the mere absence of more really bad news and the knowledge that all previous recessions have come to an end.
At a time when the newspapers are filled with pictures of foreclosure sales – and even of surplus homes being demolished – it is hard to see any cause for the markets’ rebound other than this “all recessions come to an end sooner or later” story.
Indeed, the “capitalists triumphant” story is tarnished, as is our faith in international trade.
So, here is the problem: there isn’t a plausible driver of a dramatic recovery.
Starting an economic recovery is like launching a new movie: nobody knows how people will react to it until people actually get to see it and talk about it among themselves.
The new movie Star Trek , based on yet another remake of a television show from more than 40 years ago, surprised everyone by raking in $76.5 million on its first weekend.
That old story just got some excitement back with this new movie. Similarly, we have to hope that some of the same old stories that propelled us in the past – the rise of capitalism and its internationalization throughout the world economy – can somehow be dusted off and revived yet again to invigorate the animal spirits that drive economic recovery.
Our efforts to stimulate the economy should be focused on improving the script for those stories, making these stories believable again.
This means making capitalism work better, and making it clear that there is no threat of protectionism.
But the rationale must be to get the world economy out of its current risky situation, not to propel us into yet another speculative bubble.
Strangers in the Land?
Migration is the side of globalization that, to borrow Oscar Wilde's phrase, dare not speak its name.
Advocates of globalization dance around the topic because they fear it will incite nativist backlash.
Respectable opponents of globalization avoid it in fear that they will be called racists or insensitive to the plight of the world's poorest.
This silence is not only disingenuous; it is certainly dangerous.
In theory, global economic integration implies a world where the markets for goods, services, capital, and labor are perfectly integrated.
Although many markets are nowadays increasingly open--even if others, notably agriculture, remain distorted by protectionism--integrating global labor markets has largely been left out of the globalization process.
This is hardly surprising.
Over the centuries, governments have always been concerned to protect "their" local poor and unskilled from immigrant competition.
Of course, such concerns are quickly discarded when countries become rich and local workers no longer want to perform menial jobs.
The history of much of the great migrations to the US in the 19 th and 20 th centuries fits this model.
So do the Indo-Pakistani and Afro-Caribbean migrations to Britain that followed the UK's post-war imperial retreat, and the migrations of Algerians to France and Turks to Germany during the "economic wonder" of the 1960s.
But political leaders and citizens in the developed world are wrong to think that economic migration can be turned on and off like a spigot.
Despite massive government efforts in Europe and the developed world to restrain immigration after the oil price shocks of the 1970s, labor inflows into the rich countries started to increase in the 1980s to an annual average of about 1.4 million in Europe and 2.3 million in the US.
The number of foreign-born workers increased throughout the OECD area (Japan being the sole exception).
Foreign workers now account for 25% of Australia's labor force, 10.3% in the US, and 5.3% in Europe.
These flows reflect the growing shortage of skilled workers and declining populations (particularly in Europe) that are beginning to bedevil the developed world.
So Germany, if not warmly welcoming, finds itself soliciting Indian computer programmers, while Canada and other countries entice China's middle classes with a safe haven in which to invest just in case things go wrong at home.
But this tolerance is confined to the skilled and the wealthy.
No one wants to open the door to large-scale immigration by the poorest of the poor.
Underlying this discrimination, especially in Europe, is cultural aversion to immigrants from regions with alien cultures, which may account for the absence of widespread protests against the EU's eastward enlargement.
Indeed, the economic justification--that skilled immigrants tend to be net economic contributors while low-skilled workers impose a fiscal burden and threaten low-skilled natives--is weak.
Immediate welfare costs, for example, can be passed on to the next generation, which will encompass these immigrants' children.
More importantly, immigration's overall benefits outstrip the costs.
In Britain, for example, the net annual contribution to GDP from immigrants is £2.5 billion, according to a recent Home Office report.
Facts, however, rarely pose an effective obstacle to hardened nativists, which is why governments worried about immigrants prefer to see some jobs go to people in poor countries rather than see poor people come to jobs in rich countries.
Open international trading relations (especially allowing farmers in developing countries greater access to rich countries' markets) is, of course, the best way to achieve this.
Indeed, liberalization of agriculture would provide a viable substitute for migration in many cases.
Farm politics in Europe and America, however, make this virtually impossibile.
Recent academic studies by Sergei Guriev of Moscow's New Economic School and Guido Freibel of the University of Toulouse expose a link between strict immigration rules and illicit trafficking in human beings, confirming the need for reform.
If such criminal activity is to be stopped, the despair found in poor countries must be reduced.
Politicians in rich countries will be forced to strike a better balance between more liberal immigration policies and less trade protectionism.
History offers bitter lessons concerning the failure to meet this challenge.
The economic historian Harold James notes that the countries that turned toward aggressive militarism in the 1930s had previously been large suppliers of emigrants.
Japan, Germany, and Russia all saw large outflows of their populations before the First World War, but these flows slowed to a trickle as countries like the US closed their doors to immigrants in the wake of the Great Depression that began in 1929.
In today's world, Africa and Asia are the world's biggest suppliers of migrants.
If more jobs do not appear in these places, and doors to immigration remain shut, it should be no surprise that events born of frustration and hopelessness will occur with ever-greater frequency.
Liberal immigration policies and the economic growth promised by globalization are the keys to preventing dire conditions in poor countries from being translated into violence at home and abroad.
Euro Lessons for East Asia
SEOUL – East Asia could learn two valuable lessons from the eurozone crisis.
First, do not rush the process of financial and monetary integration; and, second, develop adequate institutional frameworks before proceeding.
In fact, East Asian countries are unlikely to move toward a regional fixed exchange-rate system or a monetary union with a single currency in the immediate future, owing to the region’s great diversity in terms of economic and political conditions.
Perhaps, in a few decades, the region’s countries will develop institutions to promote financial integration, such as a single bank supervisory agency of the type that the European Union is now creating.
Nevertheless, Asian policymakers should improve cooperation mechanisms designed to prevent and manage crises.
Most promising is the Chiang Mai Initiative Multilateralization (CMIM) of the ASEAN+3 – the 10 members of the Association of Southeast Asian Nations plus China, Japan, and South Korea.
This $120 billion regional reserve pool was launched in 2010 to provide short-term liquidity to members in an emergency.
The ASEAN+3 is now strengthening the CMIM by doubling the total fund size to $240 billion.
The group also agreed to enhance the CMIM’s flexibility by reducing the minimum portion of crisis lending to be tied to the International Monetary Fund’s lending program from 80% to 70%.
The CMIM has yet to be tested in a crisis.
In its infancy, it might not be able to provide adequate emergency support in a timely and flexible manner.
The $240 billion fund is small, amounting to only about 1.5% of the region’s GDP.
European experience suggests that large-scale systemic shocks call for greater financial support.
Unlike the IMF or the European Stability Mechanism, CMIM contributions are self-managed by the respective country’s authorities.
And countries may choose not to contribute to a swap request.
This suggests that the CMIM could be especially constrained amid a systemic shock or political disputes among member countries.
Moreover, an “IMF stigma” remains among those countries in the region that were discontented with the Fund’s role during the 1997-1998 Asian financial crisis.
IMF conditionality for the activation of the majority of their borrowing could make countries reluctant to turn to the CMIM for support.
Another challenge is the CMIM’s limited capacity for economic surveillance and monitoring.
Last year, ASEAN+3 established a regional surveillance unit, the ASEAN+3 Macroeconomic Research Office (AMRO), to monitor regional economies, detect emerging vulnerabilities, and support effective decision-making by the CMIM.
But it is unclear whether AMRO has sufficient capacity and expertise to monitor 13 countries effectively.
Indeed, East Asian countries may find it difficult to conduct candid surveillance of one another’s policies and enforce firm policy conditionality.
The example of Greece before and during the eurozone crisis shows that it is often hard for countries to be tough on their neighbors.
The ASEAN+3 must continue to increase its resources, enhance its independence and improve its operational procedures.
A fully capable regional financial safety net could contain the contagion of financial shocks emanating from individual economies and prevent disruptions to the region’s key growth drivers – intra-regional trade and investment.
The CMIM could help East Asian countries to reduce their reliance on accumulating, as a form of self-insurance, costly reserves that fuel global imbalances.
With greater resources and an improved governance structure, AMRO could play a more effective role in regional economic surveillance and monitoring, without which moral-hazard risks associated with financial safety nets would rise.
Enhanced regional control would contribute to better information-sharing and decision-making as well, implying that the IMF-linked portion of CMIM crisis lending could be reduced in step with the strengthening of AMRO’s capacity and performance.
The ASEAN+3 should aim to develop the CMIM into a full-capacity regional financial safety net supported by AMRO as a capable and credible secretariat – a de facto Asian Monetary Fund, possibly with broader membership.
But, until the CMIM and AMRO are fully developed, their close cooperation with the IMF is desirable.
Indeed, at the Cannes G-20 Summit in November 2011, leaders agreed on principles for cooperation between the IMF and regional financing arrangements, including open information-sharing and joint missions.
In particular, the IMF and ASEAN+3 financing arrangement should establish a regular channel of dialogue to facilitate information exchange and prepare concrete guidelines for cooperation and an appropriate division of tasks.
Establishing constructive and effective guidelines could help to prevent the sort of conflicts and confusion over lending conditions during crises that we have seen among the IMF, EU, and the European Central Bank in the eurozone.
Given the “IMF stigma” in Asia, a co-financing facility that provides precautionary credit lines without policy conditionality to qualified member countries would be useful.
Asian countries have learned from their region’s own crisis in the 1990’s, as well as from the eurozone’s ongoing crisis, that effective management of cross-border capital flows requires well-constructed national, regional, and global responses.
To respond effectively to crises, East Asian countries must continue to improve the regional financial safety net and surveillance mechanism, while strengthening their cooperation with the IMF.
Strengthening IMF Surveillance
In today’s globalized economy, one country’s economic and financial policies can reverberate far beyond its borders.
Be it the spread of inflation or the impact of currency devaluation half a world away, global economic forces can have a direct impact on every person’s livelihood.
Under such circumstances, international cooperation is essential to ensure stability and growth and prevent disruptive crises.
But for such cooperation to be effective, the international community needs the right tools.
The International Monetary Fund provides one of the most important tools.
For many years, the IMF has engaged its member countries in a process known as “surveillance,” in which it monitors, analyzes, and consults on each country’s economic policies – both exchange rate policies and relevant domestic policies.
These regular checkups help to identify potential vulnerabilities and maintain economic stability.
However, the increasingly complex policy challenges of the globalized economy demand a fresh look at this process.
This June, the IMF’s Executive Board did just that, reaching a broad consensus on updating surveillance to make it more focused and effective.
This is one of the most important reforms to the Fund’s work in the 30 years since the surveillance process was designed.
Indeed, it is part of a much broader reform effort aimed at strengthening the IMF and will have implications extending well beyond the Fund’s boardroom.
The new reform brings three critical changes.
First, it affirms that surveillance should focus on what matters for stability, and gives detailed guidance in this area.
IMF advice should not be spread too thin.
Second, there is now clear advice to the Fund’s member countries on how they should run their exchange rate policies, and on what is acceptable to the international community.
Finally, the reform sets out clearly for the first time what is expected of surveillance, and so should promote candor and evenhanded treatment of every country.
In other words, the Fund must ensure that it deals with every country the same way, including delivering clear and sometimes difficult policy messages and sharing its views with the international community.
The new approach to exchange rate policies represents one of the most significant advances.
Under the IMF Articles of Agreement, members are required to collaborate to promote a stable system of exchange rates and to avoid manipulation with a view to gaining an unfair trade advantage.
Past guidance in this area was limited, focusing entirely on manipulation and on avoidance of short-term volatility.
This guidance remains, but what we meant by manipulation is now clearer.
We have also addressed those policies that have caused the most harm to the system in recent years, including overvalued or undervalued exchange rate pegs maintained for domestic reasons.
This change comes at a crucial time for the world economy.
Countries are experiencing strong growth, inflation is low, and the threat of crisis has receded considerably.
Few countries need to borrow from the IMF – a highly positive trend.
But improved surveillance is essential to ensure that the global economy remains on an even keel.
By clarifying what surveillance entails, the new decision should help the IMF and its members see eye to eye on the Fund’s role, help those involved in surveillance do their job properly, and make the Fund more accountable for delivering on this key responsibility.
This reform represents a victory for multilateralism that demonstrates ownership of how Fund surveillance will be strengthened and members’ willingness to live up to their responsibilities in the process.
Of course, it is critically important that it received very broad support from industrial countries, emerging economies, and developing countries.
The international community needs a setting where it can debate the most sensitive economic issues, including – but certainly not limited to – exchange rate issues.
The IMF offers that venue.
At the same time, it can provide the nonpartisan technical expertise that enables governments to define policies that will ensure continued economic stability.
The goal is to support policies that are good for each member country – but also for other countries – through dialogue and persuasion.
This is the very essence of international cooperation.
Securing Nuclear Material
VIENNA – World leaders have devoted increasing attention in recent years to the risk of terrorists obtaining nuclear or other radioactive material.
That’s the good news.
But all of us need to act with greater urgency in translating good intentions into concrete action.
The risk of nuclear or other radioactive material falling into the wrong hands is all too real.
There have been embarrassing security lapses at nuclear facilities, and sensitive material is often inadequately secured.
Indeed, the International Atomic Energy Agency (IAEA) records numerous cases of theft and other unauthorized activities involving nuclear and radioactive material every year.
Most of these incidents are fairly minor, but some are more serious.
Some material goes missing and is never found.
An incident in Moldova two years ago involving highly enriched uranium – which can be used in a nuclear weapon – illustrates both the scale of the threat and the possibility of effective counter-measures if countries take the problem seriously.
Police seized a quantity of the substance from an individual who was attempting to sell it.
The smugglers had tried to evade detection by building a shielded container – a worrisome level of sophistication on their part.
Fortunately, the Moldovan authorities had been working hard to improve their detection capabilities.
They had also shared information with their counterparts in other countries.
The uranium was seized in a sting operation.
Arrests were made and several people received prison sentences.
Most cases of attempted trafficking do not involve nuclear material; rather, they involve radioactive substances of the type held in hospitals, factories, and other locations all over the world.
These locations are generally not as well protected as nuclear facilities.
Even a relatively small amount of material such as cobalt-60 – used in radiotherapy – could cause serious harm if combined with conventional explosives in a so-called dirty bomb (or otherwise deliberately used to expose the public to dangerous radiation).
Foreign and energy ministers will have an opportunity to strengthen the global nuclear security framework when they meet at the International Conference on Nuclear Security: Enhancing Global Efforts in Vienna on July 1-5.
This will be the first such event that is open to all countries.
At the top of the agenda should be ratification of improvements to a crucial nuclear security instrument – theConvention on the Physical Protection of Nuclear Material.
The proposed amendment would oblige countries to protect nuclear material when it is being used or stored, not just when it is being transported internationally, as is the case now.
It would also require countries to protect nuclear facilities against acts of sabotage, which could have consequences similar to those of nuclear accidents.
The proposed amendment was agreed in 2005, but it still has not entered into force, because not enough countries have ratified it.
That needs to change if major vulnerabilities are to be addressed successfully.
Nuclear security is a matter of global concern, and global action is required.
Efforts by just a handful of major players will not be sufficient to keep the world safe.
We cannot afford to have weak links in our chain of defense.
All countries must play their part.
Even countries that do not possess nuclear or other radioactive material need to act.
There is evidence that criminal and terrorist gangs have attempted to traffic material through countries perceived to have lax security.
It is imperative that they do not succeed.
One simple measure would make a big difference: All countries should allow peer reviews of their nuclear-security arrangements by international experts.
Peer reviews have been shown to work – for example, in improving safety at nuclear power plants.
Everyone benefits.
Bringing experts in nuclear security together to share their experience is a no-brainer.
More countries need to do it.
Following Moldova’s example, all countries should also ensure that law-enforcement officers are properly trained to respond to the menace of nuclear terrorism.
Countries must invest in equipment and infrastructure and share information across borders.
The fact that there has been no major nuclear terrorist attack should not lull us into a fall sense of security.
The threat remains.
We must seize the opportunity to ensure that our worst nightmare never becomes our waking reality.
Strengthening the Stabilizers
PARIS – The G-20 summit in Cannes in early November is a major opportunity to address the mandate, governance, and institutional capacity of the Financial Stability Board, the international body that monitors, and makes recommendations about enhancing, the international financial system.
The meeting is particularly timely, because the FSB will soon be under new leadership, as its current chairman, Mario Draghi, takes over in November as President of the European Central Bank.
In the midst of the financial meltdown in 2008-2009, the G-20 established the FSB, building on its predecessor, the Financial Stability Forum, and charged it with coordinating urgent international regulatory-reform efforts to ensure greater financial stability and global consistency of rules.
Even as the G-20 wrestles with the challenges of the global economic slowdown and the euro crisis, the mandate to the FSB remains central to a substantial financial-reform agenda – and to avoiding national and regional divergence in areas critical to the global financial system’s stability.
The FSB has been criticized for lacking enforcement capability.
But, in today’s world of sovereign states, treaties creating new international institutions with supranational powers are not realistic alternatives.
Moreover, the FSB’s achievements are significant.
Its agenda is rapidly expanding, and it is becoming an influential and permanent component of the international economic and financial architecture, even as challenging questions surround its future.
Pragmatic steps to clarify the FSB’s mandate and enhance its operational effectiveness can and should be taken.
Today, the FSB is without legal standing (it is only the product of a political statement).
Institutionally, it is simply an extension of the Bank for International Settlements in Basel. It is funded through the BIS, which also seconds its small staff.
Its internal governance processes are underdeveloped and lack transparency.
As the only entity that integrates central banks, supervisors, treasuries of major economies, and international standard-setting bodies, the FSB is uniquely positioned to set priorities on financial regulation, provide regulatory coherence across the financial sector, oversee consistent implementation, and, in conjunction with the International Monetary Fund, to assess systemic vulnerabilities.
But, while it should identify regulatory gaps and encourage more proactive work by the various standard-setting bodies, it should not take on daily operational responsibilities.
It should, however, foster a culture of consultation with industry as a necessary dimension of legitimacy, which implies more transparent approaches to considering the market impact of proposed standards.
Effective execution of such an ambitious mandate is particularly important in view of two emerging G-20 priorities for the FSB: regulatory initiatives with respect to the functioning of markets, including so-called “shadow banking” (the less regulated forms of private financing), and new mechanisms to foster consistent implementation of standards.
Expectations of a greater FSB focus on shadow banking stem not only from non-bank financial institutions’ role in fueling the 2008-2009 crisis, but also from the concern that stiffer capital and liquidity requirements for banks might shift risk away from the financial sector’s regulated core.
This will require carefully balancing the need to mitigate risks in the unregulated sector with the benefits that its efficiency and innovation provide to the financial system.
The FSB, along with the Basel Committee on Banking Supervision, has been quietly considering new mechanisms for monitoring implementation of standards, particularly in the context of Basel III rules.
FSB membership should imply accountability in implementation of standards.
In the absence of formal enforcement powers, the pragmatic alternative is to develop mechanisms for monitoring implementation of standards on an ongoing basis, and to incorporate systematic, impartial peer reviews.
The Cannes Summit should articulate a renewed commitment to consistent implementation of agreed regulatory reforms, and to minimizing divergence in national regulation that could create systemic risks or significant competitive advantage.
The G-20 should provide the political support to develop a framework that relies on monitoring, consultation, mutual oversight, reporting, and publication.
It is in the financial industry’s interest to support the development of these mechanisms as a means to address the competitive implications of divergent national regulation.
Finally, the G-20 should provide the FSB with adequate institutional capacity to address its tasks, but without creating a bureaucracy.
The first order of business is to endorse a capable and dedicated new FSB chairman.
Beyond that, the FSB should be given legal capacity through proper incorporation – an institutionally intermediate point between its purely political status now and the extreme of a treaty organization.
This would enable to FSB to hire the best possible talent, receive funding from governments, and enter into more formal arrangements with other international bodies in order to carry out its responsibilities more effectively.
Striking Euro Gold (and Silver)
PRINCETON – The alternatives for Europe’s currency, the euro, seem increasingly limited to a desperate muddling through or a chaotic collapse.
But there is a bolder and more productive approach that relies on past experience with multiple currencies.
The threat posed by Europe’s current policy impasse can hardly be overestimated.
In the early 1930’s, monetary-policy incoherence paralyzed US policy, with the Federal Reserve Bank of New York locked in insurmountable conflict with the Chicago Fed over monetary easing (at that time through open-market securities purchases).
Today’s chronic policy disputes between Germany and France are producing a level of uncertainty that is potentially even more destructive.
Every few months, European governments launch a new and ever more ingenious initiative to resolve the eurozone’s debt crisis.
For a day (and sometimes only for a few hours), financial markets rally euphorically. But soon doubt sweeps back in.
There is no sense of a realistic endgame.
And there is no longer-term vision of how the fiscal integration needed for the effective operation of a monetary union could be achieved in a practical timeframe.
Europeans should look to the past, when previous crises produced innovative solutions.
The extended crisis of the European Monetary System (EMS) between September 1992 and July 1993 looked as if it would derail European integration.
What was initially seen as a problem in one country (Italy) toppled other currency regimes like dominos: Britain, Spain, and Portugal – and, by July 1993, even France was vulnerable.
Then, as now, Europe’s future was at stake.
The solution adopted in frantic late-night negotiations in Brussels initially looked counterproductive.
The massive widening of the EMS bands to 15% on either side of a central parity initially made a single currency appear more remote.
But it also took away the one-way-bet character of speculative attacks on vulnerable currencies, and thus removed the fundamental driver of instability.
The modern equivalent of the band widening of 1993 would be to maintain the euro for all members of the eurozone, but also allow some of them (in principle, all of them) to issue – if necessary – national currencies.
The countries that did would probably find that their new currencies immediately traded at a heavy discount.
California recently adopted a similar approach, issuing IOUs when faced with the impossibility of access to funding.
The success of stabilization efforts could then be assessed according to the price of the new currency.
If the objectives were met – fiscal stabilization and renewed growth – the discount would disappear.
In the same way, after 1993, the French franc initially diverged from its old level, but, in a good policy setting, it then returned within the exchange-rate band.
This approach has an important advantage: it would not require the redenomination of bank assets or liabilities.
As a result, it would not be subject to the multiple legal challenges that a more radical alternative would run into.
Of course, there would also be the possibility that no convergence would occur, and that the two parallel currencies would coexist for a much longer period.
This is not a novel thought.
One of the possibilities raised in the discussions on monetary union in the early 1990’s was that a common currency might not mean a single currency.
That possibility is not just a theoretical construct in fringe debates two decades ago; it is a real historical alternative.
In fact, there is a rather surprising parallel for stable coexistence of two currencies over a long period of time.
Before the victory of the gold standard in the 1870’s, Europe had operated with a bimetallic standard for centuries, using silver as well as gold.
Each metal had its different coinage.
This regime was so successful in part because the coins were used for different purposes.
High-value gold coins were used as a reference for large-value transactions and international business.
Low-value silver coins were used for small day-to-day transactions, including payment of modest wages and rents.
Silver was what Shakespeare termed the “pale and common drudge ‘tween man and man.”
A depreciation of silver relative to gold in this system would bring down real wages and improve competitiveness.
Early modern Italian textile workers would find their pay in silver reduced, while their products still commanded a gold price on the international market for luxuries.
This is one of the reasons why theorists such as Milton Friedman considered a bimetallic standard inherently more stable than a monometallic (gold-based) regime.
Nowadays, the equivalent of the adjustment mechanism in the early modern world of bimetallism would be a fall in, say, Greek wage costs paid in the national currency, as long as it was traded at a discount.
These would be the silver currencies.
Meanwhile, the euro would be the equivalent of the gold standard.
It would be kept stable by the institutions that already exist today, the European Central Bank and those national central banks that have no new alternative.
In this sense, the core countries would be the equivalent of eighteenth- and early nineteenth-century Britain, which had only a gold-standard regime.
Maintaining a choice of currencies in a national as well as an international setting seems odd and counterintuitive.
But it can – and has – been done, and it can be remarkably successful at satisfying peak demand for stability.
अफ़्रीका के भविष्य के खेत
हरारे - व्यवसाय शुरू करना मुश्किल काम हो सकता है, ख़ास तौर से अफ़्रीका में, जहाँ कमज़ोर शासन प्रणालियाँ और महत्वपूर्ण संसाधनों तक अपर्याप्त पहुँच सफलता में बाधा बन सकती है। अफ़्रीका के किसानों के लिए, चुनौतियाँ विशेष रूप से स्पष्ट हैं। गतिशील और आधुनिक कृषि क्षेत्र के व्यापक आर्थिक और सामाजिक लाभों को देखते हुए, किसानों को ऐसे प्रोत्साहन, निवेश, और विनियम उपलब्ध करना सर्वोच्च प्राथमिकता होनी चाहिए जिनकी उन्हें सफल होने के लिए ज़रूरत है।
अफ़्रीका के दूरसंचार क्षेत्र में हाल में आई तेज़ी - जिसने न केवल लोगों की जीवन-शैलियों में बल्कि सभी उद्योगों में क्रांति ला दी है - से यह पता चलता है कि इस तरह का दृष्टिकोण कितना असरदार हो सकता है। आज इस महाद्वीप पर आधे अरब से ज़्यादा मोबाइल कनेक्शन हैं; वास्तव में, कई मामलों में, अफ़्रीका मोबाइल विकास और नवाचार में दुनिया में अग्रणी है।
अफ़्रीका इस विकास को कृषि क्षेत्र में लागू करने में असमर्थ क्यों रहा है? भरपूर फसलों के बावजूद, अफ़्रीका का वार्षिक खाद्य आयात बिल $35 अरब क्यों है? अफ़्रीका प्रगति पैनल की नवीनतम वार्षिक रिपोर्ट, अनाज, मछली, पैसा - अफ़्रीका की हरित और नीली क्रांतियों का वित्त-पोषण (Grain, Fish, Money – Financing Africa’s Green and Blue Revolutions), के अनुसार समस्या बिल्कुल साफ है: अफ़्रीका के किसानों के सामने बाधाओं का अंबार लगा है।
यह ख़ास तौर से छोटे किसानों के मामले में सच है, जिनमें से अधिकांश महिलाएँ हैं। लगभग एक या दो फ़ुटबॉल मैदानों के आकार के भूखंडों पर खेती करनेवाले इन किसानों के पास आम तौर से विश्वसनीय सिंचाई प्रणालियों और गुणवत्ता वाली निविष्टियों की कमी होती है, जैसे बीज और मिट्टी के अनुपूरक। इसके अलावा, वे शायद ही कभी इतना कमा पाते हैं कि ज़रूरत की मशीनरी में निवेश कर सकें, और वे ऋण तक पहुँच प्राप्त नहीं कर पाते।
और मानो इतना ही काफ़ी न हो, इन किसानों को अधिकाधिक रूप से अस्थिर जलवायु स्थितियों का सामना करना पड़ता है जिससे उनकी फसलें ख़राब हो जाने की संभावना बढ़ जाती है। उदाहरण के लिए, इक्कीसवीं सदी में मक्का की पैदावार में एक-चौथाई तक गिरावट आना निश्चित है। और, जब फसलें तैयार हो जाती हैं तो किसानों को उन्हें बाज़ार तक ले जाने में भारी बाधाओं का सामना करना पड़ता है - जिनमें अपर्याप्त ग्रामीण सड़क प्रणालियाँ और कोल्ड स्टोरेज सुविधाओं की कमी शामिल हैं।
इन जोखिमों के बावजूद, जो टेलीकॉम उद्योग द्वारा सामना किए गए जोखिमों के मुकाबले बहुत कम हैं, अफ़्रीका के छोटे किसान अपने से ��ड़े किसानों की तुलना में उनके बराबर ही कुशल बने रहते हैं - जो उनकी दृढ़ता और लचीलेपन का प्रमाण है। फिर भी, किसानों का समर्थन करने के बजाय, अफ़्रीकी सरकारों ने उनके विकास में और अधिक बाधाएँ खड़ी कर दी हैं, जिनमें अत्यधिक कराधान, अपर्याप्त निवेश और निरोधक नीतियाँ शामिल हैं।
अफ़्रीका के किसानों को उन्हें सक्षम बनाने वाले परिवेश की ज़रूरत है जो उन्हें उनके सामने आने वाली चुनौतियों का सामना कर सकने में सक्षम बना सके। ऐसी स्थिति में, महाद्वीप के कृषि क्षेत्र में वैसी वैसी जबर्दस्त क्रांति आ सकती है जैसी संचार उद्योग में आई थी।
अच्छी ख़बर यह है कि निजी और सार्वजनिक दोनों क्षेत्र इस बदलाव को लाने के लिए तैयार लग रहे हैं – जो खाद्य की अत्यधिक माँग, ख़ास तौर से अफ़्रीका के तेजी से बढ़ते शहरों में, और बढ़ती वैश्विक खाद्य क़ीमतों से प्रेरित हैं। निजी फ़र्मों ने अफ़्रीका के कृषि क्षेत्र में निवेश करना शुरू कर दिया है, जिसमें ग्रो अफ़्रीका (जिसका मैं सह-अध्यक्ष हूँ) जैसी पहलों के फलस्वरूप किए गए निवेश शामिल हैं जो कृषि विकास के लिए लक्ष्यों को प्राप्त करने के लिए राष्ट्रीय सरकारों और सौ से अधिक स्थानीय, क्षेत्रीय और अंतर्राष्ट्रीय कंपनियों के बीच सहयोग में मदद करती है। पिछले दो वर्षों से, इन फ़र्मों ने कृषि निवेश में $7.2 अरब से अधिक की वचनबद्धता की है।
अफ़्रीकी सरकारों और विकास साझेदारों ने अपनी ओर से, अपनी आर्थिक विकास कार्यसूची में कृषि द्वारा जिस केंद्रीय भूमिका का निर्वाह किया जा सकता है, उसे पहचानकर, कृषि में सार्वजनिक निवेश में तीन-दशक से चली आ रही गिरावट की स्थिति को पलटना शुरू कर दिया है। वास्तव में, किसी अन्य क्षेत्र की तुलना में कृषि क्षेत्र में ग़रीबी को दुगुनी गति से कम करने की क्षमता है।
महाद्वीप के कई भागों में इस तरह के प्रयासों का प्रभाव स्पष्ट दिखाई देने लगा है। घाना से रवांडा तक, कृषि निवेश के उच्च स्तरों के कारण ग्रामीण क्षेत्रों में प्रभावशाली आर्थिक विकास होने लग गया है, जिससे रोज़गार सृजन को बढ़ावा मिल रहा है और ग़रीबी और भूख में कमी हो रही है।
लेकिन इन लाभों में अस्थिरता बनी हुई है। उन्हें स्थायी बनाने के लिए अफ़्रीकी सरकारों को अफ़्रीकी संघ के कृषि और खाद्य सुरक्षा पर मापुटो घोषणा के प्रति पुनः प्रतिबद्ध होना होगा, जिसमें उनके बजट के कम-से-कम 10% को कृषि निवेश में लगाने की वचनबद्धता शामिल है। और, उन्हें किसानों को बुनियादी सुविधाएँ, ऊर्जा आपूर्ति, और आवश्यक सहायक नीतियाँ उपलब्ध करानी होंगी जिनकी उन्हें अपने उत्पाद बाज़ार में ले जाने के लिए ज़रूरत होती है।
संचार क्षेत्र को भी इसमें महत्वपूर्ण भूमिका निभानी होगी। किसानों को बहुमूल्य जानकारी प्रदान करके मोबाइल प्रौद्योगिकी ने पहले ही अफ़्रीका के कृषि उद्योग को बदलना शुरू कर दिया है, जैसे बाज़ार की क़ीमतें, ई-वाउचरों के माध्यम से निविष्टि संबंधी सहायता, और यहाँ तक कि ऋण तक पहुँच। इन अभिनव सेवाओं में से अनेक सेवाएँ अमेरिकी या यूरोपीय किसानों की तुलना में अफ़्रीका के छोटे किसानों के लिए ज़्यादा सुलभ हैं।
अंत में, कृषि विकास को आगे बढ़ाने के लिए निजी क्षेत्र के संचालकों, कृषक संगठनों और नागरिक- समाज के समूहों का सहयोग करना ज़रूरी है। उदाहरण के लिए, अफ़्रीका में हरित क्रांति के लिए एलायंस (Alliance for a Green Revolution in Africa), समूचे महाद्वीप में लाखों छोटे किसानों को उच्च गुणवत्ता के बीजों की आपूर्ति करती है जिनमें से अनेक सूखा-प्रतिरोधी होते हैं।
अफ़्रीकी संघ ने 2014 को अफ़्रीका में कृषि और खाद्य सुरक्षा का वर्ष घोषित किया है। नीति, निवेश, और प्रौद्योगिकी के क्षेत्र में व्यापक कार्रवाई के साथ, अफ़्रीका के किसान पाँच वर्षों के भीतर अपनी उत्पादकता दुगुनी कर सकते हैं। अब कृषि क्षेत्र को वह सुअवसर देने का समय आ गया है जिसकी साझा समृद्धि के युग में जाने के लिए सभीअफ़्रीकियों को ज़रूरत है।
Structural Booms
Why are there economic booms and busts, those long swings between expansion and slowdown?
Traditional explanations focus on bad monetary policy.
My research argues that they are usually structural, the result of powerful shifts in expectations about future productivity and profitability.
In the Interwar period, big swings were marked by hyper-inflations and deep deflations.
Small wonder that for the Austrian, Keynesian and Monetarist schools it was always “cherchez la monnaie”.
After World War II, however, long swings in economic activity continued, while only moderate price and inflation patterns emerged.
In the 1960s, unemployment nearly disappeared in several European countries, but without rising inflation.
In the 1990s, employment soared in several industrial countries, again with little or no inflation.
I see these powerful upswings as investment booms as having structural causes and effects.
Entrepreneurs foresaw new opportunities for profitable use of capital in the medium-term future.
So they stepped up investment in new facilities, new customers and new employees.
Most business investing leads through non-monetary channels to higher employment – without inflationary over-heating.
The turn-of-the-century German school, led by Arthur Spiethoff and Gustav Cassel, viewed the pre-WWI booms in the same non-monetary way.
They didn’t deny that “excesses” of speculation may arise. But they held that structural booms may die of natural causes – with no necessity for the over-building, purge and catharsis depicted by the later Austrian school.
In recent research I conducted with Gylfi Zoega, we hypothesised that such shifts in expectations, and thus in future economic expansion, can be detected in advance from tell-tale shifts in the stock markets.
Share prices may serve as a kind of proxy for the expectations and attitudes of businessmen.
It turns out there that is extensive evidence that a sustained shift in share prices is followed by a gradual change in unemployment.
Since 1900 at least, there has been a pronounced long-term relationship between share prices and employment in the US and the UK, and over a somewhat later period in France, too.
Since 1960, when figures for more OECD countries are available, there is the same statistical link in all of those countries except Sweden: the higher the share prices, the lower the unemployment rate.
The strength of this relationship depends on a country’s economic institutions.
Some OECD economies have long been relatively capitalist – the US, the UK, the Netherlands, Canada and Australia.
Within them, new businesses have relatively easy access to finance (domestic and foreign) and can enter or exit a wide range of industries without big hurdles.
Other countries have long been more nearly corporatist – Italy, Germany, Austria and Japan.
They have a rather closed system of big corporations and big labour unions loosely directed by an interventionist government with the collaboration of big banks.
Statistical evidence shows that the same given change in share prices is followed by a greater change in employment in the more capitalist economies than in the more corporatist ones.
To what particular labour and capital-market institutions might responsiveness to share prices be strongly linked?
We argued that more responsive economies have fewer employment protections to scare entrepreneurs away from starting new firms, and have less industry-wide or economy-wide wage bargaining, which may also deter entrepreneurs.
Evidence confirms that the most responsive OECD economies scored well on these counts.
We also hypothesised that more responsive economies would be less encumbered by bureaucratic “red tape” that raise the costs of starting and developing firms.
Further, they would have a well-developed stock market, since stock options help motivate entrepreneurs to start new businesses and venture capitalists will want an exchange in which to sell the shares in the start-ups they acquire.
Finally, they would show large numbers with a university education.
Countries that scored poorly in responsiveness to share prices tend also to score badly on the OECD’s index of “red tape” and on university education.
We measured the progress of each country’s stock-market by the level of stock-market capitalisation as a ratio to GDP in 1988, a decade before the late 1990s investment booms began.
We found that the greater the level of capitalisation, the more responsive employment was to share prices.
With these capitalisation figures alone you could have predicted which OECD economies would boom in the late 1990s.
If my thesis is right – the root cause of big booms in capitalist economies over recent decades (as well as during the pre-WWI decades) is a structural shift in expected future profitability – what does it mean for the choice of an economic system and for economic stabilisation?
Many Western nations react to perceived flaws by drawing back somewhat from capitalism through increased public sector employment, public expenditure, and social control over the private sector.
Countries that, in the past, pursued some such policies include Norway, Austria, Italy, Germany, Sweden, and France.
It is plausible – though not a certainty – that an economy dominated by large public expenditure and public employment is capable of greater stability.
Yet countries that continued with these policies in the 1990s were deprived of the once-in-a-generation investment boom enjoyed in the more capitalist countries.
Now a cultural shift appears underway in several of those economies, with more possibly to come.
“Shareholder value” has gained force; access to an organised stock exchange has widened.
If so, these countries will be exposed to wider swings.
What then?
It is doubtful that there is a positive benefit – net of future cost – from jiggling tax rates to stabilise employment.
Yet governments can attack speculative excesses and thus reduce job instability by doing for capital markets what they have long done for product and labour markets: set up systems to monitor markets for the safety of investors, ensure transparency, and promote good corporate governance.
The job instability that remains would be a small price to pay for the stimulus, excitement and progress that a well-designed capitalism brings.
Stumbling in the Dark
SAO PAULO – As well-intentioned gestures go, Earth Hour is hard to beat.
At the stroke of 8:30 p.m. on Saturday, March 27, nearly a billion people in more than 120 countries demonstrated their desire to do something about global warming by switching off their lights for an hour.
In a show of official solidarity, the lights also went out at many of the planet’s most iconic landmarks, from the Opera House in Sydney to the Great Pyramid at Giza, not to mention Beijing’s Forbidden City, New York’s Empire State Building, London’s Big Ben, Paris’s Eiffel Tower, and the skylines of both Hong Kong and Las Vegas.
What ever else it may be, Earth Hour is surely one of the most successful publicity stunts ever dreamed up.
First organized in Sydney, Australia, in 2007 by the local chapter of the World Wildlife Fund, its popularity and the level of participation (both individual and official) that generates has exploded in recent years – to the point that there is barely a corner of the earth that the campaign hasn’t touched.
As Greg Bourne, CEO of World Wildlife Fund in Australia, put it: “We have everyone from Casablanca to the safari camps of Namibia and Tanzania taking part.”
But has Earth Hour actually done anything to halt – or even slow – global warming?
Not so much.
The event’s popularity is not hard to fathom.
Who but the most die-hard global-warming denier could resist the notion, as Earth Hour’s American website phrased it this year, that merely “by flipping off your lights on March 27 at 8:30 p.m. local time you will be making the switch to a cleaner, more secure nation”?
Needless to say, this was not quite the case.
The main thing that anyone accomplished by turning off the lights at nighttime for an hour was to make it harder to see.
The environmental impact was negligible.
Indeed, even if everyone in the world had participated the requisite hour, the result would have been the equivalent of turning off China’s carbon emissions for roughly 45 seconds.
Of course, this wildly optimistic calculation assumes that nobody used more power afterwards.
Recent research by two Canadian psychologists found that people who spent money on green products were, immediately afterwards, less likely to be generous and more likely to steal than those who bought non-green stuff.
Apparently doing something virtuous – like turning off the lights– makes us feel entitled to act badly afterwards.
The Earth Hour organizers acknowledged the symbolic nature of the exercise.
Turning off the lights is just a “call to action,” they noted.
As WWF Director-General James Leape explained, it provides “a global platform for millions of people to voice their concern about the devastating effects of climate change.” Added another WWF official, “It’s saying to our politicians, you can’t give up on climate change.”
All well and good. But according to Andy Ridley, Earth Hour actually has a more specific agenda than that.
In addition to being the guy who first came up with the idea for the event over drinks with friends in a Sydney pub several years ago, Ridley is also the executive director of Earth Hour Global, so he presumably speaks with some authority on the subject. “What we’re still looking for in this coming year,” he told the Associated Press last week, “is a global deal that encourages all countries to lower their emissions.”
Therein lies the big problem with Earth Hour.
As much as we would like to believe otherwise, the fact is that carbon emissions won’t be lowered by a deal.
If that were politically possible, it would have been done a long time ago – if not at the 1992 “Earth Summit” in Rio de Janeiro, then in Kyoto 12 years later; and if not in Kyoto, then in Copenhagen last December.
But it wasn’t.
Indeed, after nearly two decades of trying, the best climate deal that countries have been able to agree on is one that imposes no real obligations, sets no binding emissions targets, and requires no specific actions by anyone. Surely, there is a lesson here.
Alas, the organizers of Earth Hour prefer to ignore this inconvenient reality.
But there is no getting around it.
If we are serious about wanting to solve global warming, we need to take action that actually does good – as opposed to wasting valuable resources on empty agreements and moral posturing that merely make us feel good.
Switching off our lights and promising to cut carbon emissions may make us feel momentarily virtuous, but that’s all it does.
A meaningful solution to global warming needs to focus on clean-energy research and development, instead of fixating on empty promises of reductions in carbon emissions.
For just 0.2% of global GDP, or $100 billion a year, we could bring about the game-changing technological breakthroughs that will be required to make green energy cheap enough to fuel a carbon-free future.
So let’s stop stumbling around in the dark and do something meaningful for a brighter future.
Sub-Saharan Africa’s Leadership to Nowhere
Why are the countries of sub-Saharan Africa the poorest in the world?
One reason is the set of ill-designed development strategies that the IMF and the World Bank have implemented in the region for nearly half a century.
But the centuries-old culture of leadership that is ingrained in many African societies has played an equally disastrous role.
Indeed, the overwhelming majority of African rulers regard their countries as their personal possessions, to be used as they see fit.
This conception of power led in past centuries to kings handing over their subjects to slave traders. Nowadays, leaders squander their countries’ resources and revenues, leaving the majority of their populations mired in poverty, disease, hunger, war, and hopelessness.
The current oil rush in West Africa is a perfect illustration of the problem.
Instead of being an asset, oil has become a liability that generates poverty, corruption, ethnic conflict, and ecological disaster.
It need not be this way.
Venezuela’s President Hugo Chávez, for example, is using his country’s oil revenues to provide free literacy training and health care, to help alleviate the debts of his Argentinean and Ecuadorian neighbors, to forge energy alliances in Latin America and the Caribbean, and to propose a strategic rapprochement with the Andean countries.
He has revived pan-Americanism, and Venezuela has become a member of Mercosur, the regional grouping whose other members include Argentina, Brazil, Chile, Uruguay, and Paraguay.
But, if a dysfunctional culture of leadership has put a similar agenda of unity and social progress out of reach for sub-Saharan Africa, so have the IMF and the World Bank.
When sub-Saharan African countries gained independence in the late 1950’s and early 1960’s, their leaders inherited bankrupt states with no access to international capital markets.
As a result, newly established African leaders had no alternative but to sub-contract economic development to the IMF and World Bank and the Western countries that control them.
Economic liberalization, deregulation of capital movements, suppression of subsidies, privatization of valuable public assets (liquidation would be a more appropriate word), fiscal austerity, high interest rates, and repressed demand became the order of the day.
Structural adjustment programs demanded by the IMF and the World Bank ended up transforming these countries into dumping grounds for over-subsidized Western agricultural surpluses and over-priced and obsolete manufactured goods.
It was obvious from the outset that the IMF/World Bank strategy was doomed to fail.
Their loans were designed to perpetuate Africa’s role as a supplier of raw materials, while entangling the continent in an inextricable web of debts and dependency on the “aid industry.”
The IMF can cut off not only its own credit, but also most loans from the larger World Bank, other multilateral lenders, rich country governments, and even much of the private sector.
But consider Argentina, which suffered a deep four-year depression, beginning in 1998.
Rejecting IMF demands for higher interest rates, utility price increases, budget tightening, and maintenance of the peso’s unsustainable link to the US dollar, Nestor Kirchner’s government was able to chart its own economic course.
Despite repeated threats from the IMF, Argentina took a hard line with foreign creditors, who were owed $100 billion. In September 2003, Argentina did the unthinkable: a temporary default to the IMF itself.
The Fund eventually backed down, leading to a rapid and robust economic recovery.
Similarly, sub-Saharan Africa’s development cannot not be delegated to others.
Fortunately, there is hope that the region can resist the West’s destructive neo-liberal agenda.
According to the US Energy Department, America’s annual oil imports from Africa will soon reach 770 millions barrels, bringing an estimated $200 billion to the continent over the next decade.
If oil prices remain high – likely in the foreseeable future, given strong demand from the US, Japan, China, and India – oil revenues could reach $400-600 billion.
To reap the benefits, sub-Saharan Africa must form an oil-based confederation under the tutelage of thoroughly reformed regional groupings aimed at encouraging economic integration and political union.
This would provide the region with the muscle to pursue a development strategy similar to that adopted in the past by the US, the European Union’s member states, and the East Asian countries.
All of these countries imposed capital controls and regulated inward foreign investment in the early stages of their economic development.
Sub-Saharan Africa is no different.
The focus must be put on diversifying the economy and enhancing the productive capacity of domestic suppliers.
This will mean designing foreign partnerships with a view to ensuring that local businesses benefit from technology transfer and training, thereby generating higher value-added in domestic production and exports.
It also implies subsidizing and protecting domestic production, just as all developed nations once did – and still do whenever it suits them.
The first step towards implementing such policies, however, must be to re-invent and reinvigorate a pan-African identity.
Europe, Asia, and, increasingly, Latin America, are showing that regional integration provides the healthiest path to development.
In Africa, this will not be possible until a new breed of genuinely public-spirited leaders emerges.
Reducing sub-Saharan Africa’s dependence on the IMF and the World Bank might bring that day closer.
Subsidies that Save
Was France’s recent wave of protests against an amendment that would have increased employers’ freedom to fire young workers a blessing in disguise?
To defuse the protests, President Jacques Chirac was forced to withdraw the provision, and instead has proposed hiring subsidies as a way to reduce youth joblessness.
A related proposal for targeted wage subsidies is being floated in Germany.
Advocates of greater labor-market flexibility insist that paying employers to hire young people is the wrong approach.
Allow employers to fire workers more easily, they argue, and employers will hire them more readily.
The limitation of this approach, however, is that a free market for labor will neither eradicate unemployment nor transform marginal, low-end workers into high-productivity, high-wage employees.
If the proposed subsidies in France and Germany have a defect, it is not that they are unnecessary, but that they do not go far enough.
In the advanced economies of the West, many people in all age groups are effectively left out of formal employment.
In the United States, the pay of less qualified workers is so meager that, if their situation is not dire, they find it emotionally difficult to keep a job for long, or they become too demoralized or distracted to be adequate employees, or minimum-wage laws make them unaffordable to law-abiding employers.
In Europe, they are excluded from employment by labor agreements and in some cases by minimum-wage laws.
In both cases, these workers lose the opportunity for engagement and personal development that most legitimate jobs provide.
This deprivation in turn generates high social costs, including crime, violence, and dependency.
The latter pathologies then become a weapon in the populist attack on free enterprise, which Western countries require for economic dynamism – and thus prosperity.
So those who are included and benefit by free enterprise, yet are burdened by the social costs of exclusion, should all be willing to pay something to remedy these conditions.
The best remedy is a subsidy for low-wage employment, paid to employers for every full-time low-wage worker they hire and calibrated to the employee’s wage cost to the firm.
The higher the wage cost, the lower the subsidy, until it has tapered off to zero.
With such wage subsidies, competitive forces would cause employers to hire more workers, and the resulting fall in unemployment would cause most of the subsidy to be paid out as direct or indirect labor compensation.
People could benefit from the subsidy only by engaging in productive work – that is, a job that employers deem worth paying something for.
Ideally, the subsidies will go for employing workers of all ages.
However, it is understandable that plans under current discussion envision focusing first on the youngest and oldest workers.
Some people still think of wage subsidies as a welfare hand-out.
But these subsidies are very different from social assistance and social insurance programs.
Although such programs have been substantial in Europe and the US, the working poor remain as marginalized as ever.
Indeed, social spending has worsened the problem, because it reduces work incentives and thus creates a culture of dependency and alienation from the commercial economy, undermining labor force participation, employability, and employee loyalty.
What is needed is higher employment and pay through higher demand for the least productive workers.
Some would count on the free market to solve the problem with time.
But market forces alone are unlikely to solve the unprecedented levels of labor-market exclusion that developed from the mid-1970’s to the early 1990’s.
The prevailing belief in a reliable tendency to return to some normal degree of inclusion has little ground to stand on.
True, most recessions are reversed, just as most booms end. Nevertheless, what is “normal” is itself shifting all the time.
Many argue that subsidies of any kind should never be countenanced, in part because they are extremely difficult, if not impossible, to abolish, even if they are no longer needed.
According to this view, the total payment to a factor of production should not exceed its marginal productivity, so desirable outcomes should be promoted through tax incentives.
But, as early twentieth-century theorists pointed out, collaboration and exchange within a nation’s diverse labor force increase everyone’s productivity.
There is a mutual gain from economic cooperation in addition to what each type of talent could produce independently – an insight later built on by the philosopher John Rawls.
A society can let the free market distribute this gain, or it can intervene to direct it to the least advantaged, so that some get more than their marginal product, others less.
Since the least skilled workers face morale problems that lower their wages and erode their employability, it makes sense to deliver the mutual gain that is redistributed to them through subsidies that encourage greater self-support and employment.
And, unlike tax incentives, wage subsidies target only employment of low-wage workers.
Both Europe and the US must do more to promote low-wage workers’ inclusion.
A good economy not only sustains growing output and national income; it also ensures its participants’ capacity for self-sufficiency and ability to realize their potential.
A substantial low-wage employment subsidy is a fair and efficient way to achieve this important goal.
Success in Afghanistan Needs China and Russia
NEW YORK – Preoccupation with Afghanistan’s disputed presidential election is understandable.
Ending the country’s violence will require a government with both the legitimacy and capacity to tackle the underlying sources of the Taliban insurgency.
But achieving success in Afghanistan – defined as achieving a sustainable democratic regime able to contain political violence, prevent the reconstruction of a terrorist base with global reach, and dampen a narcotics-funded insurgency that threatens neighboring countries – requires greater policy harmonization among the world powers that have a stake in the outcome.
Much recent attention has focused on how NATO, Afghan, and Pakistani security forces can collaborate to defeat the insurgency and prevent the country from becoming a terrorist haven again.
But the past few years have underscored NATO’s inability to achieve sustained political, economic, and security improvements in Afghanistan without more effective international collaboration, particularly with China and Russia.
For several years, representatives of the Shanghai Cooperation Organization (SCO), whose dominant members are China and Russia, have identified narcotics trafficking from Afghanistan as a major regional insecurity.
NATO should use these concerns to explore potential collaboration on Afghan security issues.
Securing additional assistance from China and Russia – to supplement the support already provided by the SCO’s Central Asian members as well as SCO observers Pakistan and India – is imperative.
Afghanistan is an area of vital interest to the SCO.
Its members are eager to assist the Afghan government to counter regional narcotics trafficking and terrorism.
President Hamid Karzai has been a regular guest at SCO summits since 2004, and has called on the SCO to make combating narcotics trafficking a priority.
The members have established an SCO-Afghan Working Group to provide a coordinating mechanism for the large number of SCO initiatives that concern Afghanistan.
The convening of a special conference under SCO auspices in March 2009 further confirmed the unique status Afghanistan has obtained.
The SCO and Afghan governments adopted a joint statement that expressed support for the efforts of the NATO-led International Security Assistance Force (ISAF) to counter regional narcotics trafficking.
SCO members showed no interest in contributing troops to the ISAF, but the declaration did encourage “other countries…to participate in the collective efforts” to combat regional terrorism and to “consider taking part in transiting non-military cargoes needed by ISAF.”
Several SCO members are already assisting NATO countries to deliver supplies into Afghanistan, while Russia is allowing the United States to ferry military items across its border into Central Asia and onward to Afghanistan.
This collaboration should be expanded, because China and Russia, perhaps more than any other countries, share common interests with the West in Afghanistan.
A major drug route passes from Afghanistan through Central Asia and into Russia and Europe.
The lax regimes on Russia’s borders with the former Soviet republics of Central Asia facilitate the smuggling of narcotics and other contraband.
The Taliban, and especially al-Qaeda, have also used their positions in Afghanistan to support other Eurasian terrorist movements, especially the Islamic Movement of Uzbekistan and its various offshoots.
Although China is not situated along the “Northern Route” through which Afghan narcotics traditionally enter Central Asia and Europe, new trafficking networks have developed since 2005 that transport illicit drugs from Afghanistan through Pakistan and Central Asia into China.
In addition, Chinese officials remain concerned about the Taliban’s ties with Islamic extremist groups advocating independence for China’s restive Xinjiang region.
Moreover, China has become a major economic stakeholder in Afghanistan.
According to Chinese government figures, as of last year, 33 projects in Afghanistan involved Chinese companies.
In May 2008, China obtained a major economic stake in Afghanistan when Chinese firms won a $3.5 billion contract to develop Afghanistan’s huge Aynak copper field.
The contract also involves the construction of a power plant and a railroad connecting the mines to China through Pakistan.
It represents the largest foreign direct investment project in Afghanistan’s history and creates hundreds of jobs.
Yet Chinese entrepreneurs are reluctant to invest in Afghanistan due to the widespread violence there.
Insurgent attacks have killed 11 Chinese workers since 2004.
Chinese investors would presumably eagerly acquire additional natural resources in Afghanistan if the security situation improved.
For example, northern Afghanistan has unexplored reserves of oil and natural gas that could help meet China’s energy needs.
Since SCO members have stated that they are not prepared to provide combat troops to the NATO-led ISAF, closer collaboration should first concentrate on revitalizing the Afghan economy and providing alternative livelihoods to those involved in narcotics.
Afghanistan’s long-term economic viability depends on the development of improved transportation, communication, and other networks to better integrate the country into the regional economy.
China and Russia could provide economic assistance and investment to Afghanistan, creating more projects that provide Afghanistan with badly needed jobs and revenue.
In turn, NATO and Afghan forces could assign troops to protect these projects from further attacks, ideally with some kind of Chinese and Russian financial assistance to blunt objections that Western soldiers are dying to enrich foreign companies.
China’s close ties to Pakistan could also prove useful in assisting European and American efforts to keep the Pakistani military and intelligence services allied against the Taliban.
Meanwhile, all these international actors could help fund and train the Afghan army and national police.
In the end, Afghans themselves will need to sustain the economic and security progress that foreign allies can only help to jumpstart.
Sudan and Africa’s Future
JOHANNESBURG – It has been said, correctly, that Sudan is a microcosm of Africa.
For this reason, the entire continent will follow events in Sudan over the next few months with the greatest interest.
On January 9, 2011, the people of South Sudan will vote in a referendum to decide whether they will remain part of a united Sudan or form a new independent state.
If they choose the latter option, the new state will come into being on July 9, 2011.
During the same period, even as Sudan is addressing the issue of its North-South relations, it will also have to arrive at a comprehensive agreement to end the conflict in Darfur.
During its nearly 55 years of independence, Sudan has experienced a succession of violent conflicts, in the South, the West (Darfur), and the East.
It is commonly accepted that what lay at the root of these conflicts was the failure of independent Sudan – one of Africa’s most racially, ethnically, religiously, and culturally diverse countries – to construct a polity informed by the principle and practice of unity in diversity.
This challenge faces almost all African countries as they seek to construct stable and peaceful societies.
Virtually all civil wars and other violent conflicts in post-colonial Africa have occurred because of the failure to manage properly the diversity that characterizes these countries.
These conflicts have taught Africa that, in order to contain the centrifugal pressures that encourage fragmentation within our relatively new states, a conscious effort must be made to nurture and entrench national unity, which must include democratic practices.
Conflict has also communicated the unequivocal message that unity cannot be secured and maintained by force alone.
Rather, it is only by respecting our diversity – ensuring that each social group enjoys a shared sense of belonging, rather than feeling marginalized and excluded – that the state’s unity and peace can be guaranteed.
Sudan has learned these lessons through harsh practical experience, including war.
As long ago as 1975, Gafaar al-Nimeiry, Sudan’s military head of state, stated with great prescience what Sudan and Africa needed to do to achieve peace and stability. “Unity based on diversity has become the essence and the raison d’être of the political and national entity of many an emerging African country today.
We take pride in that the Sudan of the Revolution has become the exemplary essence of this new hope.
The Sudan is the biggest country in Africa.
It lies in its heart and at its crossroads.
Its extensive territory borders (nine) African countries.
Common frontiers mean common ethnic origins, common cultures, and shared ways of life and environmental conditions.
Trouble in the Sudan would, by necessity, spill over its frontiers, and vice versa.
A turbulent and unstable Sudan would not therefore be a catalyst of peace and stability in Africa, and vice versa.”
Unfortunately, failure to implement policies based on genuine respect for this perspective plunged Sudan into its second costly North-South war, fueled the violent conflicts in Western and Eastern Sudan, and created the possibility of the South’s secession.
Given this history, it is clear that the governments of Sudan and South Sudan, as well as the overwhelming majority of the Sudanese people, have had enough of war and passionately desire peace.
The processes in which the Sudanese parties are currently engaged – the preparations for the South Sudan referendum, negotiations on post-referendum arrangements, and the search for a negotiated settlement in Darfur – are all informed by this desire for peace.
For this reason, Africa is following Sudan’s evolution with intense interest – and is eager to see this country “at the heart and crossroads of Africa” give substance to al-Nimeiry’s vision.
But, regardless of the outcome of the South Sudan referendum, the impending developments in Sudan will result in important changes to the structure of the Sudanese state.
In this context, the Sudanese parties – North and South – have accepted the important principle of establishing “two viable states” if the South secedes.
As happens during periods of major and rapid change, the country will experience social tension, uncertainty, and unease.
Africa is keen that the Sudanese leadership cooperate effectively to manage this delicate situation, in the interest of the continent as a whole.
This requires that Sudan’s various leadership collectives have sufficient strength and cohesion to bring their constituencies into the settlement, and therefore that no one, from near or afar, does anything to weaken any of these collectives.
It is in Africa’s interest to see Sudan’s people living together in peace and cooperating with one another for their mutual benefit – fully respecting one another’s diverse but not mutually exclusive interests, whether they live in one country or two.
A Sudan that truly embodied “the exemplary essence” of respect for diversity of which al-Nimeiry spoke would serve as a catalyst for peace and stability on our continent.
It is to be hoped that the sustained and enormous international focus on Sudan has as its objective providing the necessary support to the Sudanese people to help them achieve this goal, including building two viable states, as may be necessary.
The Problem With Secular Stagnation
DELHI – In a recent exchange between former US Federal Reserve Chairman Ben Bernanke and former US Treasury Secretary Larry Summers on the plausibility of secular stagnation, one point of agreement was the need for a global perspective.
But from that perspective, the hypothesis of secular stagnation in the period leading up to the 2008 global financial crisis is at odds with a central fact: global growth averaged more than 4% – the highest rate on record.
The same problem haunts Bernanke’s hypothesis that slow growth reflected a “global savings glut.”
From a Keynesian perspective, an increase in savings cannot explain the surge in activity that the world witnessed in the early 2000s.
Supporters of the secular-stagnation hypothesis, it seems, have identified the wrong problem.
From a truly secular and global perspective, the difficulty lies in explaining the pre-crisis boom.
More precisely, it lies in explaining the conjunction of three major global developments: a surge in growth (not stagnation), a decline in inflation, and a reduction in real (inflation-adjusted) interest rates.
Any persuasive explanation of these three developments must de-emphasize a pure aggregate-demand framework and focus on the rise of emerging markets, especially China.
Essentially, the world witnessed a large positive productivity shock emanating from the emerging markets, which accelerated world growth while reinforcing disinflationary pressures that had already been set in motion by the so-called Great Moderation in business-cycle volatility.
This key development helps to reconcile two of the three major global developments: faster growth and lower inflation.
The real puzzle, then, is to square rising global productivity growth with declining real interest rates.
Bernanke correctly emphasized that long-term real interest rates are determined by real growth.
So the positive productivity shock should have raised the return to capital and, hence, equilibrium real interest rates.
Moreover, this tendency should have been accentuated by the fact that the productivity shock reflected a decline in the global capital-to-labor ratio implied by the integration of Chinese and Indian workers into the global economy.
But this did not happen: instead, global real interest rates declined.
Central to understanding this puzzle are two distinctive features of the emerging-market productivity shock: it was resource-intensive and mercantilist in origin and consequence.
Both features increased global savings.
For starters, because relatively poor but large countries – India and especially China – were the engines of global growth, and were resource-hungry, world oil prices soared.
This redistributed global income toward countries with a higher propensity to save: the oil-exporting countries.
Even more important were mercantilist policies.
China and other emerging-market countries pursued an economic strategy that defied the standard tenets of growth and development theory.
Mercantilist growth was based on – and to some extent required – pushing capital out rather than attracting it.
By limiting foreign inflows and keeping domestic interest rates low, China was able to maintain a relatively weaker currency, which served to sustain its export-led growth model.
This led to massive current-account surpluses (more than 10% of GDP at one point), which sent capital flowing to the rest of the world.
Recognizing the significance of this strategy exposes a common fallacy whereby the global savings glut is attributed to emerging-market countries’ desire to insure themselves against financial turmoil by acquiring dollar reserves.
That may have been true in the immediate aftermath of the Asian financial crisis of the late 1990s, but it was quickly overtaken by the growth imperative.
In other words, the self-insurance motive might explain China’s first trillion dollars of reserve holdings, but it has nothing to do with the subsequent three trillion.
Further contributing to the savings glut was growth itself.
As incomes rose, already-prudent Asians became even more prudent, and profitable companies became even more profitable.
This endogenous response to rapid productivity growth was a key factor contributing to the savings glut.
Old development verities that savings drive growth had to be re-assessed, because, to some extent, emerging-market growth drove savings.
Here lies the explanation of the interest-rate puzzle.
As savings (and hence the global supply of loanable funds) increased, real rates came under downward pressure.
Low rates, in turn, provided the lubrication needed to finance the asset bubble in the US and elsewhere.
According to Summers, high savings caused weak growth; under the alternative explanation offered here, it was primarily rapid growth – and its distinctive features – that drove high savings.
Today, as world growth decelerates, secular stagnation seems plausible once again.
But secular stagnation is an ailment of countries at the economic frontier.
For the rest of the developing world, the real worry is not a shortfall of demand; it is the need to sustain high rates of productivity growth so that they can catch up with the advanced economies.
As policymakers gather in Washington for their ritual conversations this week, they should not lose sight of that key distinction.
Summertime Blues
FLORENCE – Summer is a time for beaches and relaxation – and, historically, for all sorts of destructive crises.
Time and again, it has proven dangerous for the world to be on holiday.
August is an especially bad month for financial markets.
On August 15, 1971, President Richard M. Nixon ended the commitment of the United States to a fixed gold price, and since then the world has lived with currency volatility and instability.
On August 13, 1982 (a Friday), Mexican Finance Minister Silva Herzog went to Washington to tell the International Monetary Fund and the US government that Mexico would be unable to make its scheduled debt payment the following Monday.
On August 17, 1998, Russian Prime Minister Sergei Kiriyenko announced that his country would simultaneously default and devalue.
And in the first week of August 2007, IKB Deutsche Industriebank disintegrated, as the US subprime crisis spread.
The roots of this seasonal periodicity of crises predate World War I, in the era of the classic gold standard.
The explanation at that time was usually found in the predictable timing of the international payments mechanism.
In the late summer, farmers in the Western Hemisphere brought their crops to traders for export, and demanded cash payment, which the traders needed to raise from their banks.
The consequence was a demand for gold in the US and mounting exchange-rate pressure on Britain and other European importers.
The same pattern of selling pressure on the pound sterling was repeated in the interwar era.
Finally, in September 1931, Britain departed from the restored gold standard, which led to the collapse of the system as a whole.
Europe’s central bankers had been nervous, even superstitious, about the late summer long before 1931.
Montagu Norman, the longest-serving Governor of the Bank of England and a romantic and temperamental man, regularly left his office for several weeks at this time of year, owing to nervous exhaustion.
Indeed, he was literally at sea crossing the Atlantic when the gold standard broke down; the Bank of England staff advised him with a cryptic cabled message, “Old lady goes off.”
It is difficult to think of the harvest-driven seasonal cyclicality of payments producing crises today, but somehow the problem persists.
One explanation could be that trading is often thinner during the holiday season, so any disturbance inevitably has a bigger impact.
But the technical side of crises masks a much more dramatic story.
How summers and crises go together was obvious in the event that triggered the first big collapse of the gold standard, the outbreak of WWI in 1914.
Indeed, this was the Urkrise – the event that made the twentieth century so terrible.
Crises are in part about gamesmanship, about taking the other side by surprise.
A country poised to embark on some radical and uncharted course of action often believes that vacations produce additional scope for delaying or frustrating the other side’s counter-move.
The logic of a summer provocation was abundantly clear in 1914.
Austrian Archduke Franz Ferdinand was assassinated in Sarajevo on June 28, but the subsequent diplomatic discussions dragged out for weeks.
Germany’s top officials ostensibly went on vacation in order to create the impression that the tensions could easily be resolved.
Meanwhile, the Germans waited for the French prime minister and president, who had both been visiting Russia (France’s ally), to leave St. Petersburg, at which point they rapidly pressed Austria to deliver an ultimatum that they knew the Russians could not accept.
The news would arrive while the French leaders were at sea, and would thus find it more difficult to produce an effective and coordinated response.
Vacation logic was also used to maximize bargaining power in recent cases of default or threatened default.
Mexico’s action in August 1982 took officials elsewhere completely by surprise.
In the US, Treasury Secretary Donald Regan was playing golf with President Ronald Reagan, while vacationing European central bankers were hard to reach in an era before mobile telephones.
A predictable funding problem was left unresolved until the moment when creditors would be least likely to present a united front, and most likely to give in to pressure to undertake crisis-management measures.
In August 1998, Russia had only just concluded a gigantic IMF program that appeared to stabilize the country.
That arrangement provided enough funds for insiders to exchange their rubles for foreign assets.
Once the insiders had saved their own positions, they no longer saw any need to maintain the exchange rate.
The IMF was in summer mode, and all of the consultations required complicated conference calls from remote locations.
When a compromise package has been agreed that makes the summer look calm, when the negotiators think that they have earned a good rest – this is the moment for the brilliant surprise.
A debtor’s negotiating strategy is to make creditors believe that a collapse would produce some much bigger catastrophe, which can be avoided only by more concessions and more support.
That sense is always more likely when the debtor’s action comes without warning – the financial equivalent of a pre-dawn attack.
The eurozone leaders’ summit on June 28-29 in Brussels now looks like the most far-reaching and satisfactory recent attempt at European diplomacy.
The Sunni Arc of Instability
ABU DHABI – While international observers fixate on the Sunni-Shia rivalry’s role in shaping geopolitics in the Islamic world, deep fissures within the Sunni arc that stretches from the Maghreb-Sahel region of North Africa to the Afghanistan-Pakistan belt are increasingly apparent.
Moreover, it is Sunni communities that produce the transnational jihadists who have become a potent threat to secular, democratic states near and far.
What is driving this fragmentation and radicalization within the ranks of Sunni Islam, and how can it be managed?
The importance of addressing that question cannot be overstated.
The largest acts of international terror, including the September 11, 2001, attacks on New York and Washington, DC, and the 2008 Mumbai attack, were carried out by brutal transnational Sunni organizations (Al Qaeda and Lashkar-e-Taiba, respectively).
The Sunni militant group Boko Haram, known internationally for abducting 276 schoolgirls in April and forcing them to marry its members, has been wreaking havoc in Nigeria for years.
And the Sunni extremists of the Islamic State, whose dramatic rise has entailed untold horrors to Iraq and Syria, are seeking to establish a caliphate, by whatever means necessary.
The influence of these organizations is far-reaching.
Just last month, individuals inspired by these groups’ activities carried out two separate attacks, one in the Canadian parliament and another on police officers in New York.
Political and tribal sectarianism in the Sunni Middle East and North Africa is both a reflection and a driver of the region’s weakening political institutions, with a series of failed or failing states becoming hubs of transnational terrorism.
A lawless Libya, for example, is now exporting jihad and guns across the Sahel and undermining the security of fellow Maghreb countries and Egypt.
Several largely Sunni countries – including Syria, Iraq, Yemen, Libya, Somalia, and Afghanistan – have become de facto partitioned, with little prospect of reunification in the near future.
Jordan and Lebanon could be the next states to succumb to Sunni extremist violence.
The Sunni tumult has underscored the fragility of almost all Arab countries, while diluting the centrality of the Israel-Palestine conflict.
The post-Ottoman order – created by the British, with some help from the French, after World War I – is disintegrating, with no viable alternative in sight.
The sectarianism plaguing the Sunni belt is affecting even the relatively stable oil sheikdoms of the Gulf, where a schism within the Gulf Cooperation Council is spurring new tensions and proxy competition among its members.
Saudi Arabia and the United Arab Emirates view Qatar’s efforts to aid Islamists like the Muslim Brotherhood as an existential threat, even as their own wealth has fueled the spread of Salafi jihadism and Al Qaeda ideology.
Both countries, along with Bahrain, have recalled their ambassadors from Qatar.
This rupture is compounded by a rift between the Middle East’s two main Sunni powers, Egypt and Turkey, whose relationship soured last year, after the Egyptian military ousted the Muslim Brotherhood government, backed by pro-Islamist Turkish President Recep Tayyip Erdoğan.
Egypt recalled its ambassador from Ankara and expelled the Turkish ambassador from Cairo.
In September, the Egyptian foreign ministry accused Erdoğan of seeking to “provoke chaos” and “incite divisions in the Middle East region through his support for groups and terrorist organizations.”
A similar divide exists between Afghanistan and Pakistan over the latter’s provision of aid and sanctuary to Afghan militants – a divide that will only deepen when the United States-led NATO coalition ends its combat operations in Afghanistan this year.
Pakistan’s support has spawned two incarnations of the Taliban: the Afghan Taliban, sponsored by the Pakistani military, and the Pakistani Taliban, the Pakistani military’s nemesis.
Successive Afghan governments have refused to recognize the frontier with Pakistan known as the Durand line, a British-colonial invention that split the large ethnic Pashtun population.
Such conflicts are spurring the militarization of Sunni states.
The UAE and Qatar have already instituted compulsory military service for adult males.
And Kuwait is considering following in Jordan’s footsteps by reintroducing conscription, which is already in place in most Sunni states (and Iran).
Against this background, efforts to tame the deep-seated Sunni-Shia rivalry (by, for example, improving relations between Saudi Arabia and Iran), though undoubtedly important, should not take priority over a strategy to address the sectarianism plaguing the Sunni belt.
That strategy must center on federalism.
Had federalism been introduced in Somalia, for example, when the north-south rift emerged, it probably would not have ended up as a failed state.
Today, federalism can allow for the orderly management of key Sunni countries, where a unitary state simply is not practical.
The problem is that federalism has become a dirty word in most Sunni countries.
And the emergence of new threats has made some governments, most notably Saudi Arabia’s, staunchly opposed to change.
What these countries do not seem to recognize is that it is the petrodollar-funded export of Wahhabism –&nbsp;the source of modern Sunni jihad – that has gradually extinguished more liberal Islamic traditions elsewhere and fueled the international terrorism that now threatens to devour its sponsors.
Stagnation is not stability.
On the contrary, in the Sunni arc today, it means a vicious cycle of expanding extremism, rapid population growth, rising unemployment, worsening water shortages, and popular discontent.
Political fissures and tribal and ethnic sectarianism add fuel to this lethal mix of volatility and violence.
It is time for the Sunni world to recognize the need for a federalist approach to manage the instability and conflict that plagues it.
Even the US must reconsider its regional policy, which has long depended on alliances with despotic Sunni rulers.
In a region ravaged by conflict, business as usual is no longer an option.
Super-Sizing the IMF is Wrong
CAMBRIDGE – As the global financial crisis radiates out from the developed economies into emerging markets, it is ravaging not only governance-challenged economies such as Venezuela, Russia, and Argentina.
The crisis is also striking countries like Brazil, Korea, and South Africa, which appeared to have made substantial and lasting progress towards macroeconomic stability.
For this reason, the future shape of the International Monetary Fund is rapidly moving to the top of the agenda for world leaders as they prepare to meet in Washington in mid-November to discuss the future of the global financial system.
Just a short time ago, the IMF seemed relegated to a sustained period of irrelevance as it failed to modernize either its euro-centric political representation or its arcane government-to-government lending facilities.
Suddenly, the Fund has moved to center stage as the only agency seemingly capable of stemming the vicious downward spiral that is currently seizing emerging-market stocks and bonds.
World leaders should be happy that the IMF stands ready to take the lead in the next phase of the global financial crisis, even if its lending resources of approximately $250 billion are inadequate to stem the current run on emerging markets.
Emerging-market companies alone have hundreds of billions coming due in the next twelve months, far more than their governments’ reserves can cover if credit markets do not normalize.
Unlike United States Federal Reserve chairman Ben Bernanke, most emerging-market central bankers are in no position to extend blank checks across their economies without a boomerang effect on interest rates and exchange rates.
(We will see how investors judge the dollar once the smoke clears and the huge expansion of US money and debt becomes evident.)
But it would be a terrible mistake simply to super-size the IMF in its current guise by greatly scaling up its lending facilities, as many propose.
Rather, the Fund’s role, even in the current crisis, should be sharpened as an interlocutor between lenders and developing country borrowers, rather than simply as a replacement for all other loan sources.
The key reforms for the IMF remain (1) improving governance by reducing European representation while increasing that of Asia, and (2) focusing the Fund’s mission on monitoring and surveillance rather than as a direct provider of bailout loans.
Contrary to popular opinion, now is exactly the right time to make these changes.
Rich country governments, led by central banks, should provide the large scale funding needed to stem the run on developing country finances.
The Fund’s main role should be in monitoring.
Without its own currency, the IMF is poorly positioned to intervene with the overwhelming force needed for lender-of-last-resort operations.
In principle, the IMF could be allowed to print money (it already has its own accounting unit, the so-called Special Drawing Rights).
But this is not realistic, given the lack of an adequate system for global governance.
Even the euro area, which is far more cohesive than the world as a whole, has not quite figured out how to use its central bank as lender of last resort.
The IMF’s lending resources have shrunk dramatically relative to world trade and income compared over the past 50 years.
But increasing its resources to a trillion dollars or more is not a realistic option, either.
The IMF does not have an adequate framework for handling the massive defaults that could easily attend a huge surge in lending, much less the political will to distinguish between countries that are facing genuine short-term liquidity problems and countries that are actually facing insolvency problems.
So what should world leaders do with the IMF? In the short run, the IMF could help coordinate additional loans from countries such as the US, Japan, and China, to help maintain economic and political stability in the developing world.
Without directly acknowledging America’s central role in causing the financial crisis, the US Federal Reserve has already offered to exchange up to $30 billion each with the central banks of Korea, Brazil, Mexico and Singapore.
The IMF can also play a useful role in helping surplus countries manage their foreign exchange reserves, much as the Bank for International Settlements already does. World leaders can allow the IMF to sell some of its gold stock to endow the agency with enough cash to fund its monitoring and surveillance functions.  Then in the future, it will not need to make crisis loans just to keep the lights on in the building.
As tempting as it may be to ramp up IMF lending on a long-term basis, this would be a strategic mistake for both the world and the Fund.
The rich countries, together with China and the Middle East oil exporters do indeed need to take bold steps to help out emerging markets, and the Fund has a useful role to play.
But super-sizing the Fund, without sufficient governance improvements and lending constraints, would give the world too much of a good thing.
Supporting Human Embryonic Stem Cell Research
Most of the cells in our bodies have a short life span and a specific job to do.
Stem cells, found in many organs from skin to bone marrow, are different.
The “ancestors” of ordinary cells, they can replenish themselves indefinitely.
Given the right biochemical signals, these cells can divide and transform themselves into a range of different cell types as and when the need arises.
Such versatility means that stem cells have the potential to regenerate damaged organ tissues and provide amazing new treatments for a range of now devastating diseases.
Indeed, stem cells may perhaps make it possible for humans to “grow new organs” to replace diseased ones, thereby providing for the possibility of new forms of cell-based therapies.
On the basis of research with comparable cells from mice, scientists envision that stem cells could be used to replace bone marrow in patients suffering from cancer, produce pancreatic cells for alleviating diabetes, or neuronal cells for treating Parkinson's disease, Alzheimer's disease, and various brain and spinal cord disorders.
Stem cells used in this research are best derived from very early stage embryos created by in vitro fertilization, but this leads to ethical dilemmas.
The idea that human embryos could be created with the express purpose of “harvesting” them for medical purposes incites fear of a “brave new world” revisited.
Even if that extreme is unlikely, the possibility of abuse of any sort generates strong opposition.
Most of those who oppose stem cell research do not question its scientific and medical value, but object to the use of human embryos.
These critics, especially in Germany, where stem cell research evokes nightmares of Nazi era eugenics, argue that research with stem cells derived from embryos is unnecessary because multi-potential stem cells occur naturally in adult tissues as well.
While guardedly encouraged by recent reports of the remarkable plasticity of stem cells obtained from adult tissues, scientists know little about their potential for prolonged maintenance outside the body, their capacity for differentiation, and whether they can be obtained in the quantities needed to explore their utility for clinical use.
If embryonic stem cell research were to be halted based on that hope, it is possible that years may pass before scientists could determine if adult-derived stem cells are equivalent to embryonic stem cells in their potential to treat disease.
We cannot afford the luxury of proceeding with these promising technologies sequentially.
We owe it to those who are in need to explore all possible avenues that could lead to medical cures.
While research on adult-derived stem cells should be pursued aggressively, it should not be at the expense of an aggressive program to explore the full potential of stem cells for use in human therapies.
Another restriction has been recently adopted in the United States, where the issue was explored by the National Biomedical Ethics Advisory Commission in extensive hearings and discussions with ethicists, religious leaders, scientists and physicians.
They concluded that it is ethically permissible to prepare stem cell lines from frozen embryos, but only from those obtained in the course of in vitro fertilization procedures and deemed by donors and their physician to be in excess of clinical requirements.
(More eggs are usually fertilized than are actually implanted in women who want to become pregnant.)
Following these discussions, the US National Institute of Health (NIH) promulgated guidelines that allow the use of government funds for stem-cell research but, in their present form, prohibit federally-funded investigators from creating new stem cell lines.
That restriction requires that stem cell lines must be obtained only from privately-funded or commercial sources that follow the protocols mandated by the guidelines.
I believe that restricting the use of government funds for the creation of stem cells, although politically prudent, imposes substantial scientific handicaps.
We know that a variety of poorly understood factors cause embryonic stem cells to lose their capacity to differentiate into all possible cell types.
This loss of capacity to differentiate may be caused by the particular mode in which the stem cells are derived, the conditions surrounding their growth, and other variables of handling.
Enabling individual government-funded investigators to derive stem cell lines using a variety of conditions in their own laboratories, as permitted recently in Britain and France, is the best route to determining what conditions are critical for generating cells for specific therapeutic purposes.
Embryonic stem cells prepared in a scientist’s own laboratory are most likely to have been derived, stored and maintained in ways that maximize their potency for particular uses.
Cells obtained from commercial sources are likely to be of unknown genetic background and history and therefore be less useful for some important studies.
While various remote contingencies are sometimes invoked, the fundamental ethical choice posed by stem cell research is more circumscribed: whether human embryos, which will ultimately be legally discarded, should be used to create potentially life-saving therapies for those in need.
Those who oppose abortion irrespective of its purpose argue that sacrificing a human embryo to obtain stem cells is akin to abortion and therefore immoral.
But harvesting stem cells from very early stage embryos that will in the end be discarded is, in my view, ethically distinct from abortion.
For we must also consider the moral consequences of failing to pursue this line of research if it has the potential to save and improve human lives.
What greater morality exists than doing all we can do to help individuals whose lives are blighted by disease and disability?
The Global Economy on the Fly
ISTANBUL – In the last four weeks, I have traveled to Sofia, Kuala Lumpur, Dubai, London, Milan, Frankfurt, Berlin, Paris, Beijing, Tokyo, Istanbul, and throughout the United States.
As a result, the myriad challenges facing the global economy were never far away.
In Europe, the tail risk of a eurozone break-up and a loss of market access by Spain and Italy were reduced by last summer’s decision by the European Central Bank to backstop sovereign debt.
But the monetary union’s fundamental problems – low potential growth, ongoing recession, loss of competitiveness, and large stocks of private and public debt – have not been resolved.
Moreover, the grand bargain between the eurozone core, the ECB, and the periphery – painful austerity and reforms in exchange for large-scale financial support – is now breaking down, as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands.
Austerity fatigue in the periphery is clearly evident from the success of anti-establishment forces in Italy’s recent election; large street demonstrations in Spain, Portugal, and elsewhere; and now the botched bailout of Cypriot banks, which has fueled massive public anger.
Throughout the periphery, populist parties of the left and right are gaining ground.
Meanwhile, Germany’s insistence on imposing losses on bank creditors in Cyprus is the latest symptom of bailout fatigue in the core.
Other core eurozone members, eager to limit the risks to their taxpayers, have similarly signaled that creditor “bail-ins” are the way of the future.
Outside the eurozone, even the United Kingdom is struggling to restore growth, owing to the damage caused by front-loaded fiscal-consolidation efforts, while anti-austerity sentiment is also mounting in Bulgaria, Romania, and Hungary.
In China, the leadership transition has occurred smoothly.
But the country’s economic model remains, as former Premier Wen Jiabao famously put it, “unstable, unbalanced, uncoordinated, and unsustainable.”
China’s problems are many: regional imbalances between its coastal regions and the interior, and between urban and rural areas; too much savings and fixed investment, and too little private consumption; growing income and wealth inequality; and massive environmental degradation, with air, water, and soil pollution jeopardizing public health and food safety.
The country’s new leaders speak earnestly of deepening reforms and rebalancing the economy, but they remain cautious, gradualist, and conservative by inclination.
Moreover, the power of vested interests that oppose reform – state-owned enterprises, provincial governments, and the military, for example – has yet to be broken.
As a result, the reforms needed to rebalance the economy may not occur fast enough to prevent a hard landing when, by next year, an investment bust materializes.
In China – and in Russia (and partly in Brazil and India) – state capitalism has become more entrenched, which does not bode well for growth.
Overall, these four countries (the BRICs) have been over-hyped, and other emerging economies may do better in the next decade: Malaysia, the Philippines, and Indonesia in Asia;
Farther East, Japan is trying a new economic experiment to stop deflation, boost economic growth, and restore business and consumer confidence. “Abenomics” has several components: aggressive monetary stimulus by the Bank of Japan; a fiscal stimulus this year to jump start demand, followed by fiscal austerity in 2014 to rein in deficits and debt; a push to increase nominal wages to boost domestic demand; structural reforms to deregulate the economy; and new free-trade agreements – starting with the Trans-Pacific Partnership – to boost trade and productivity.
But the challenges are daunting.
It is not clear if deflation can be beaten with monetary policy; excessive fiscal stimulus and deferred austerity may make the debt unsustainable; and the structural-reform components of Abenomics are vague.
Moreover, tensions with China over territorial claims in the East China Sea may adversely affect trade and foreign direct investment.
Then there is the Middle East, which remains an arc of instability from the Maghreb to Pakistan.
Turkey – with a young population, high potential growth, and a dynamic private sector – seeks to become a major regional power. But Turkey faces many challenges of its own.
Its bid to join the European Union is currently stalled, while the eurozone recession dampens its growth.
Its current-account deficit remains large, and monetary policy has been confusing, as the objective of boosting competitiveness and growth clashes with the need to control inflation and avoid excessive credit expansion.
Moreover, while rapprochement with Israel has become more likely, Turkey faces severe tensions with Syria and Iran, and its Islamist ruling party must still prove that it can coexist with the country’s secular political tradition.
In this fragile global environment, has America become a beacon of hope?
The US is experiencing several positive economic trends: housing is recovering; shale gas and oil will reduce energy costs and boost competitiveness; job creation is improving; rising labor costs in Asia and the advent of robotics and automation are underpinning a manufacturing resurgence; and aggressive quantitative easing is helping both the real economy and financial markets.
But risks remain.
Unemployment and household debt remain stubbornly high.
The fiscal drag from rising taxes and spending cuts will hit growth, and the political system is dysfunctional, with partisan polarization impeding compromise on the fiscal deficit, immigration, energy policy, and other key issues that influence potential growth.
In sum, among advanced economies, the US is in the best relative shape, followed by Japan, where Abenomics is boosting confidence.
The eurozone and the UK remain mired in recessions made worse by tight monetary and fiscal policies.
Among emerging economies, China could face a hard landing by late 2014 if critical structural reforms are postponed, and the other BRICs need to turn away from state capitalism.
While other emerging markets in Asia and Latin America are showing more dynamism than the BRICs, their strength will not be enough to turn the global tide.
Survival of the Weakest
Surviving Motherhood
Mothers’ Day is upon us in many countries around the world.
Children of all ages will give flowers, make breakfast, call home.
This is as it should be.
On my travels around the world, particularly to its poorest and most troubled places, I have learned that it is mothers who keep families together — indeed, who keep entire societies intact.
Mothers are society’s weavers. They make the world go round.
Yet too often, the world is letting mothers down.
Becoming a mother – the rite of passage that Mothers’ Day celebrates – can carry a terrible burden of fear, anxiety, and loss for many women and their families.
Women such as Leonora Pocaterrazas, 21, who died in childbirth not long ago in the mountain village of Columpapa Grande, Bolivia, leaving her husband to raise three other children on his own.
Or Sarah Omega, just 20, who spent 18 hours in labor at a hospital in Kenya.
Her baby died, but she survived, despite terrible injuries, determined to speak out so that others would not have to endure the same ordeal. “Life lost its meaning,” she told American lawmakers in 2008.
Her testimony helped persuade Congress to commit more development aid to maternal health.
These are just two of the very personal stories behind the shocking statistics reported by the United Nations’ Population Fund.
The figures show the chasm that exists between rich and poor countries where motherhood is concerned. It is a divide that the UN is determined to bridge.
In the rich world, when a mother dies giving birth, we assume that something went wrong.
For women in the developing world, by contrast, dying in childbirth is simply a fact of life.
In some countries, one woman in eight will die giving birth.
Complications from pregnancy and childbirth are the leading cause of death among girls aged 15 to 19 worldwide.
In poor countries, pregnant women often must fend for themselves; they have no healthcare and nowhere to turn.
They may struggle to find proper nutrition and work long hours in factories and fields until the day they go into labor.
They give birth at home, perhaps with the help of a midwife who most likely has no medical training.
I myself was born at home, in a small village in the Korean countryside.
One of my childhood memories is asking my mother about a curious custom. Women who were about to give birth would gaze at their simple rubber shoes, which were kept by the back door.
My mother explained that they were wondering if they would ever step into those shoes again. Giving birth was so risky that they feared for their lives.
In the United States, just 100 years ago, women were roughly 100 times more likely to die in childbirth than they are today.
We know how to save mothers’ lives.
Simple blood tests, a doctor’s consultation, and someone qualified to help with the birth can make a huge difference.
Add some basic antibiotics, blood transfusions, and a safe operating room, and the risk of death can almost be eliminated.
Recent figures show that we are making progress in helping women throughout the world.
Yet we still have very far to go.
Every year, hundreds of thousands of women die in childbirth, 99% of them in developing countries.
That is why, as Secretary-General, I have spoken out for the needs of mothers and pregnant women at every opportunity.
Last month, the UN launched a joint action plan with governments, businesses, foundations, and civil-society organizations to advance this vital cause.
I am counting on people around the world to back us in ending this silent scandal.
No woman should have to pay with her life for giving life.
On Mothers’ Day, let us honor mothers around the world by pledging to do everything we can to make motherhood safer for all.
Sustainability Equals Prosperity
Trinidad – Sustainability has become the foundation for almost all economic thinking nowadays.
It is essential not only to economic recovery today, but to ensuring peace and security tomorrow.
Factoring sustainability into all our thinking is necessary because, as a global society, we are living on the edge.
The last two years have brought a series of crises: energy, food, climate change, and global recession.
I fear that worse may be in store.
Indeed, today’s global economic crisis, if not handled properly, could evolve into a full-scale political crisis – one defined by social unrest, weakened governments, and angry publics who have lost faith in their leaders and their future.
In addition, we are entering a new age of austerity.
We are facing more problems with fewer resources.
National budgets have shrunk.
Aid programs are being squeezed.
Voluntary contributions are drying up.
Yet there is a third reality, which provides cause for optimism: the challenges that we face are interrelated, so, if we are smart about it, if we spot and utilize the inter-connections among these problems, solutions to each problem can be solutions to all.
We can get more bang for our collective buck, peso, and real, and find effective, efficient, enduring paths to a more sustainable, inclusive, and prosperous future.
At the recent G-20 summit in London, world leaders explicitly recognized these linkages.
They agreed on a genuine global stimulus that advanced the interests of all countries, not just a few.
They stood against protectionism, and they recognized the United Nations’ Millennium Development Goals as an engine for development, growth, and creation of quality jobs worldwide.
They took a major step toward a “Green New Deal” and vowed to reach agreement at the UN climate change conference in Copenhagen in December.
This last development is vital.
I have seen shrinking glaciers in Antarctica and the Andes.
I have seen the effects of deforestation in the Brazilian Amazon and the loss of biodiversity.
The very existence of some Caribbean countries, including portions of Trinidad and Tobago, could be threatened if sea levels rise.
But bold, visionary leadership will be needed to seal a successor deal to the Kyoto Protocol in Copenhagen later this year.
The agreement reached there must be ambitious, effective, and fair, offering rich countries a way to cut greenhouse-gas emissions while supporting poorer countries as they adapt to the adverse impact of climate change.
We need to protect vulnerable populations, including indigenous peoples, and we need financial incentives to preserve forests and the livelihoods of those who depend on them.
By tackling climate change, we also deal with the economic crisis — green jobs for green growth.
All of us see the links between economic growth and political stability, democracy, and human rights.
For me, as UN Secretary-General, collective social and economic security is a basic principle of justice – global social justice.
But to achieve this goal, we must think about and work to advance the sustainability agenda for what it really is: a prosperity agenda.
Opportunities to do so will be coming up at the July G-8 meeting in Italy and the climate change summit at the UN in September.
For my part, I pledge to bring the UN together in coordinated, decisive, and innovative ways to realize this agenda.
We will create a new mechanism for coordinating additional financing for food security to help vulnerable nations weather the storm.
We will support a Global Jobs Pact – a recovery strategy to meet peoples’ basic need for decent work.
And we will launch a UN Global Vulnerability Alert, collecting real-time information on the social effects of the economic crisis worldwide.
Ultimately, solidarity and common cause must be our greatest strength.
For today we have before us an opportunity to re-invent how we as countries work together to deliver collective solutions to our collective problems.
Indeed, the times require a new multilateralism as the foundation of a new and sustainable prosperity for all.
Sustainable Cities
NEW YORK – To most people, big, densely-populated cities look like ecological nightmares, wastelands of concrete and garbage and diesel fumes and traffic jams.
But, compared to other inhabited places, cities are models of environmental responsibility.
By the most significant measures, the greenest community in the United States is New York City, the only American city that approaches environmental standards set elsewhere in the world.
The average New Yorker generates 7.1 metric tons of greenhouse gases annually; that is more than the average Swede, who generates 5.6 metric tons, but it is less than 30% of the US average of 24.5 metric tons. Residents of Manhattan, the most densely populated of the city’s five boroughs, generate even less.
The key to New York’s relative environmental benignity is its extreme compactness.
Manhattan’s density is approximately 67,000 people per square mile, or more than 800 times that of the US as a whole and roughly 30 times that of Los Angeles.
Moving people closer together reduces the distances between their daily destinations and limits their opportunities for reckless consumption, as well as forcing the majority to live in some of the most inherently energy-efficient residential structures in the world: apartment buildings.
New Yorkers, individually, use less water, burn less fossil fuel, and produce less solid waste.
Their households also use much less electricity: 4,696 kilowatt hours per year, compared with 16,116 kilowatt hours in Dallas, Texas.
Most important, New York’s highly concentrated population and comprehensive public transit system enable the majority of residents to live without owning automobiles, an unthinkable deprivation almost anywhere else in the US.
Some 82% of employed Manhattanites travel to work by public transit, bicycle, or on foot.
That’s 10 times the rate for Americans in general, eight times the rate for workers in Los Angeles County, and 16 times the rate for residents of metropolitan Atlanta.
At an environmental presentation in 2008, I sat next to an investment banker who was initially skeptical when I explained that New Yorkers have a significantly lower environmental impact than other Americans. “But that’s just because they’re all crammed together,” he said.
Well, yes.
He then disparaged New Yorkers’ energy efficiency as “unconscious,” as though intention were more important than results.
In fact, unconscious efficiencies are the most desirable ones, because they require neither enforcement nor a personal commitment to cutting back.
I spoke with one energy expert, who, when I asked him to explain why per-capita energy consumption was so much lower in Europe than in the US, said, “It’s not a secret, and it’s not the result of some miraculous technological breakthrough.
It’s because Europeans are more likely to live in dense cities and less likely to own cars.” In European cities, as in Manhattan, the most important efficiencies are built-in.
And for the same reasons.
China and many other non-Western countries are rapidly urbanizing.
That is, their populations are undergoing a general migration from rural areas to cities.
This trend, which has been under way worldwide for decades, is often decried by American environmentalists, who generally prefer people to move in the opposite direction, toward “the land.”
But urbanization is usually a good thing, both for those moving to cities and for civilization in general.
Urban families live more compactly, do less damage to fragile ecosystems, burn less fuel, enjoy stronger social ties to larger numbers of people, and, most significantly, produce fewer children, since large families have less economic utility in densely settled areas than they do in marginal agricultural areas.
The world’s population is expected to reach nine billion by 2042.
That’s an increase of seven times the current population of the US, or of the combined current population of India and China.
If we are to sustain a world of that size, growth must occur almost entirely in cities.
Unfortunately, many global trends are pushing in the opposite direction.
Dependence on automobiles is growing in parts of the world that formerly got by without them.
China’s pool of licensed drivers is growing exponentially, and India is a decade into one of the largest road-building projects in history, a 3,600-mile superhighway known as the Golden Quadrilateral, which links the country’s four largest cities, plus an extensive network of feeder roads.
All those new highways, in combination with India’s brand-new “People’s Car,” the $2,500 Tata Nano, represent an environmental, economic, and cultural disaster in the making.
If America’s long history of energy-and-emissions gluttony proves anything, it’s that an automobile-dependent society is vastly easier to create than to un-create.
Moving from walking, bicycling, and public transit to driving is relatively simple, because it requires only wealth, a desire for independence and status, and an inability or unwillingness to look very far into the future.
Moving from driving back to transit, bicycling, and walking is far harder, because the cars themselves are only part of the problem.
Much more critical is the inherent inefficiency of the way of life that cars both enable and make necessary, and of the sprawling web of wasteful infrastructure that high levels of individual mechanized mobility lead affluent societies to create.
Sooner or later, whatever else happens, the world will run out of inexpensive oil.
Countries with expanding economies would be better off using their new wealth to create ways of life that can be sustained beyond that inescapable point, rather than recklessly investing in a future that has no future.
Not jumping off a cliff is easier than turning around in mid-fall.
The Year of Sustainable Development
NEW YORK – The year 2015 will be our generation’s greatest opportunity to move the world toward sustainable development.
Three high-level negotiations between July and December can reshape the global development agenda, and give an important push to vital changes in the workings of the global economy.
With United Nations Secretary-General Ban Ki-moon’s call to action in his report “The Road to Dignity,” the Year of Sustainable Development has begun.
In July 2015, world leaders will meet in Addis Ababa, Ethiopia, to chart reforms of the global financial system.
In September 2015, they will meet again to approve Sustainable Development Goals (SDGs) to guide national and global policies to 2030.
And in December 2015, leaders will assemble in Paris to adopt a global agreement to head off the growing dangers of human-induced climate change.
The fundamental goal of these summits is to put the world on a course toward sustainable development, or inclusive and sustainable growth.
This means growth that raises average living standards; benefits society across the income distribution, rather than just the rich; and protects, rather than wrecks, the natural environment.
The world economy is reasonably good at achieving economic growth, but it fails to ensure that prosperity is equitably shared and environmentally sustainable.
The reason is simple: The world’s largest companies relentlessly – and rather successfully – pursue their own profits, all too often at the expense of economic fairness and the environment.
Profit maximization does not guarantee a reasonable distribution of income or a safe planet.
On the contrary, the global economy is leaving vast numbers of people behind, including in the richest countries, while planet Earth itself is under unprecedented threat, owing to human-caused climate change, pollution, water depletion, and the extinction of countless species.
The SDGs are premised on the need for rapid far-reaching change.
As John F. Kennedy put it a half-century ago: “By defining our goal more clearly, by making it seem more manageable and less remote, we can help all people to see it, to draw hope from it, and to move irresistibly toward it.”
The main objectives of the SDGs have already been agreed.
A committee of the UN General Assembly identified 17 target areas, including the eradication of extreme poverty, ensuring education and health for all, and fighting human-induced climate change.
The General Assembly as a whole has spoken in favor of these priorities.
The key remaining step is to turn them into a workable set of goals.
When the SDGs were first proposed in 2012, the UN’s member said that they “should be action-oriented,” “easy to communicate,” and “limited in number,” with many governments favoring a total of perhaps 10-12 goals encompassing the 17 priority areas.
Achieving the SDGs will require deep reform of the global financial system, the key purpose of July’s Conference on Financing for Development.
Resources need to be channeled away from armed conflict, tax loopholes for the rich, and wasteful outlays on new oil, gas, and coal development toward priorities such as health, education, and low-carbon energy, as well as stronger efforts to combat corruption and capital flight.
The July summit will seek to elicit from the world’s governments a commitment to allocate more funds to social needs.
It will also identify better ways to ensure that development aid reaches the poor, taking lessons from successful programs such as the Global Fund to Fight AIDS, Tuberculosis, and Malaria.
One such innovation should be a new Global Fund for Education, to ensure that children everywhere can afford to attend school at least through the secondary level.
We also need better ways to channel private money toward sustainable infrastructure, such as wind and solar power.
These goals are within reach.
Indeed, they are the only way for us to stop wasting trillions of dollars on financial bubbles, useless wars, and environmentally destructive forms of energy.
Success in July and September will give momentum to the decisive climate-change negotiations in Paris next December.
Debate over human-induced global warming has been seemingly endless.
In the 22 years since the world signed the UN Framework Convention on Climate Change at the Rio Earth Summit, there has been far too little progress toward real action.
As a result, 2014 is now likely to be the warmest year in recorded history, a year that has also brought devastating droughts, floods, high-impact storms, and heat waves.
Back in 2009 and 2010, the world’s governments agreed to keep the rise in global temperature to below 2° Celsius relative to the pre-industrial era.
Yet warming is currently on course to reach 4-6 degrees by the end of the century – high enough to devastate global food production and dramatically increase the frequency of extreme weather events.
To stay below the two-degree limit, the world’s governments must embrace a core concept: “deep decarbonization” of the world’s energy system.
That means a decisive shift from carbon-emitting energy sources like coal, oil, and gas, toward wind, solar, nuclear, and hydroelectric power, as well as the adoption of carbon capture and storage technologies when fossil fuels continue to be used.
Dirty high-carbon energy must give way to clean low- and zero-carbon energy, and all energy must be used much more efficiently.
A successful climate agreement next December should reaffirm the two-degree cap on warming; include national “decarbonization” commitments up to 2030 and deep-decarbonization “pathways” (or plans) up to 2050; launch a massive global effort by both governments and businesses to improve the operating performance of low-carbon energy technologies; and provide large-scale and reliable financial help to poorer countries as they face climate challenges.
The United States, China, the European Union’s members, and other countries are already signaling their intention to move in the right direction.
The SDGs can create a path toward economic development that is technologically advanced, socially fair, and environmentally sustainable.
Agreements at next year’s three summits will not guarantee the success of sustainable development, but they can certainly orient the global economy in the right direction.
The chance will not come along again in our generation.
Next-Generation Development
PRAGUE – Over the next 15 years, some two billion children will be born, 90% in the poorest parts of the world.
Providing these kids with a better start would be one of the greatest achievements that humanity could make.
Doing so also would be one of the most efficient uses of the resources that the world dedicates to development.
Next month, world leaders will gather at the United Nations in New York to agree on the Sustainable Development Goals: the targets that will succeed the 18 set in the year 2000 by the Millennium Development Goals.
The list of potential targets is impossibly long: 169 in all, toward which trillions of dollars will be spent.
How they are prioritized will be profoundly important to the lives of billions of people.
The Copenhagen Consensus, a research organization that I head, asked 82 eminent economists from around the world to carry out a cost-benefit analysis of the proposed targets, in order to establish which are likely to do the most good for people, the planet, and global prosperity over the next 15 years.
It turns out that one of the best ways to help is by focusing on improving the lives of children.
Our analysis identified 19 targets that would do the most good for every dollar spent.
In fact, each dollar spent on these 19 targets would do four times as much good as spending the same money on all 169.
It is not surprising that the top 19 include interventions improving the fortunes of the young; after all, they will grow up to become the workers and leaders of tomorrow.
Opportunities start at birth – or not.
Although the child mortality rate has been reduced by two-thirds since 1970, a horrifying number of children still die in their first years of life.
In 2013, 6.3 million children died before their fifth birthday.
Nearly one-third were newborn babies who lost their lives because they were born prematurely or because of complications during birth.
We know from experience that it is perfectly feasible to target a 70% reduction in child mortality, but that doing so will be expensive, requiring the construction of effective health services to deliver high-quality care before, during, and after birth.
And yet our research shows that it would be money well spent.
Taking into account a variety of far-reaching positive effects, we find that every dollar spent on neonatal care generates about $9 in benefits.
Among the additional positive effects would be more capable health services, providing better care to people of all ages.
Keeping kids healthy and well fed are two other highly cost-effective targets.
Since 1970, the international community has managed to vaccinate most of the world’s children against measles, tetanus, whooping cough, diphtheria, and polio.
These interventions likely save three million lives a year – a phenomenal achievement.
There is an opportunity to do much more.
For about $1 billion a year, vaccination programs could be expanded to prevent childhood pneumonia and diarrhea, saving another million lives annually.
In economic terms, each dollar spent would deliver $60 worth of welfare for the world’s youngest people.
Tackling malnutrition would be another effective use of development dollars.
Kids who do not get enough to eat during their vital early years do not develop properly and remain disadvantaged throughout their lives.
Even those who get enough overall calories can suffer ill effects, if they are deprived of essential vitamins, minerals, and protein.
A target to lower chronic malnutrition by 40%, by ensuring better access to micronutrients and sufficient food, would have a remarkable impact.
It would help children’s brains develop normally, allowing them to stay in school longer, learn more, and be more productive later in life.
Every dollar spent on better nutrition for the young produces $45 of social benefits.
Improving the quality of education is another worthy goal, as even the healthiest, best-fed children will struggle to learn when their schools are substandard.
To be sure, improving the quality of education is not easy; even rich countries struggle to do so.
But it turns out to be exceptionally valuable to focus on very early education.
The best education target would be to triple the number of children attending pre-school in sub-Saharan Africa, the world’s most deprived region.
Not only would this be relatively cheap; it would also provide children with a life-long yearning for learning, boosting their life chances and delivering benefits worth $33 for every dollar invested.
It is morally right that every child should be given the best chance to survive, eat well, stay healthy, and receive an education.
Now we also know that it is among the best investments we can make.
Healthy, well-educated kids grow into productive adults, capable of providing a better future for their own children, creating a virtuous circle that can help build a better, more prosperous world.
विकास के लिए डेटा
न्यूयॉर्क – डेटा क्रांति समाज के हर हिस्से में तेजी से बदलाव ला रही है। चुनावों का प्रबंध बायोमीट्रिक्स से किया जा रहा है, वनों की निगरानी उपग्रह इमेजरी से की जा रही है, बैंकिंग शाखा कार्यालयों से हटकर अब स्मार्टफोन्स में आ गई है, और चिकित्सीय एक्स-रे की जाँच का काम दुनिया भर में आधा रह गया है। संयुक्त राष्ट्र सतत विकास समाधान नेटवर्क (एसडीएसएन) द्वारा तैयार की गई विकास के लिए डेटा पर एक नई रिपोर्ट में यह बताया गया है कि थोड़े-से निवेश, और दूरदर्शिता से डेटा क्रांति सतत विकास की क्रांति ला सकती है, और गरीबी को समाप्त करने, सामाजिक समावेशन को बढ़ावा देने, और पर्यावरण की रक्षा करने की दिशा में प्रगति को तेज़ कर सकती है।
दुनिया की सरकारें 25 सितंबर को संयुक्त राष्ट्र के विशेष शिखर सम्मेलन में नए सतत विकास लक्ष्यों (एसडीजी) को अपनाएँगी। यह अवसर संभवतः इतिहास में दुनिया के नेताओं का सबसे बड़ा जमावड़ा होगा जिसमें देशों और सरकारों के लगभग 170 अध्यक्ष उन साझा लक्ष्यों को अपनाएँगे जो 2030 तक वैश्विक विकास के प्रयासों का मार्गदर्शन करेंगे। सच तो यह है कि लक्ष्यों को अपनाना जितना आसान है उन्हें प्राप्त करना उतना आसान नहीं है। इसलिए हमें नई डेटा प्रणालियों सहित नए साधनों की आवश्यकता होगी जिससे 2030 तक सतत विकास लक्ष्यों को हकीकत में बदला जा सके। इन नई डेटा प्रणालियों को विकसित करने के लिए, सरकारों, व्यवसायों, और नागरिक समाज के समूहों को चार स्पष्ट उद्देश्यों को बढ़ावा देना चाहिए।
पहला और सबसे महत्वपूर्ण है, सेवा प्रदान करने के लिए डेटा। डेटा क्रांति सरकारों और व्यवसायों को सेवाएँ प्रदान करने, भ्रष्टाचार को दूर करने, लालफीताशाही को कम करने, और अब तक के पहुँच के बाहर के स्थानों तक पहुँच की गारंटी देने के लिए नए और अत्यधिक बेहतर तरीके उपलब्ध करती है। सूचना प्रौद्योगिकी स्वास्थ्य देखभाल, शिक्षा, प्रशासन, बुनियादी ढाँचे (उदाहरण के लिए, प्रीपेड बिजली), बैंकिंग, आपातकालीन प्रतिक्रिया की सुविधाएँ प्रदान करने, और अन्य कई क्षेत्रों में पहले से ही क्रांति ला रही है।
दूसरा उद्देश्य है सार्वजनिक प्रबंधन के लिए डेटा। अधिकारी अब सरकारी सुविधाओं, परिवहन नेटवर्कों, आपात राहत कार्यों, सार्वजनिक स्वास्थ्य निगरानी, हिंसक अपराधों, और अन्य कई चीज़ों के बारे में उन्हें वर्तमान स्थिति के बारे में सूचित किए जाने के लिए रीयल-टाइम डैशबोर्ड रख सकते हैं। नागरिक प्रतिक्रिया से भी कामकाज में सुधार किए जा सकते हैं, जैसे चालकों से यातायात की जानकारी को क्राउडसोर्स करके। भौगोलिक सूचना प्रणालियों (जीआईएस) से स्थानीय सरकारों और दूर-दराज के क्षेत्रों में स्थित जिलों में रीयल-टाइम निगरानी की जा सकती है।
तीसरा उद्देश्य है सरकारों और व्यवसायों की जवाबदेही के लिए डेटा। यह एक सामान्य सत्य है कि सरकारी अधिकारी गलत तरीके अपनाते हैं, सेवा प्रदान करने में कमियों को छिपाते हैं, निष्पादन को बढ़ा-चढ़ाकर दर्शाते हैं, या सबसे खराब मामलों में, जब उनका बस चलता है तो वे चोरी करने से भी बाज़ नहीं आते हैं। अधिकतर व्यवसा���ों की हालत भी इससे कुछ बेहतर नहीं हैं। डेटा क्रांति यह सुनिश्चित करने में मदद कर सकती है कि जाँचयोग्य डेटा तक आम जनता और सार्वजनिक और निजी सेवाओं के इच्छित प्राप्तकर्ताओं को पहुँच मिलती है। जब सेवाएँ समय पर नहीं पहुँचती हैं (उदाहरण के लिए, निर्माण में किसी व्यवधान या आपूर्ति श्रृंखला में भ्रष्टाचार के कारण), तो जनता डेटा प्रणाली के माध्यम से समस्याओं के बारे में ठीक से पता लगा सकती है और सरकारों और व्यवसायों को जिम्मेदार ठहरा सकती है।
अंत में, डेटा क्रांति की मदद से जनता यह जानने में सक्षम हो सकेगी कि कोई वैश्विक लक्ष्य या उद्देश्य वास्तव में हासिल किया गया है या नहीं। वर्ष 2000 में निर्धारित किए गए सहस्राब्दी विकास लक्ष्यों में, वर्ष 2015 के लिए मात्रात्मक लक्ष्य निर्धारित किए गए थे। लेकिन, हालाँकि अब हम सहस्राब्दी विकास लक्ष्यों के अंतिम वर्ष में हैं, उच्च गुणवत्ता वाले, समयोचित आंकड़ों के अभाव में, हमें अभी तक इस बारे में ठीक-ठीक जानकारी नहीं है कि सहस्राब्दी विकास लक्ष्यों के कतिपय लक्ष्यों को हासिल किया गया है या नहीं। कुछ अत्यंत महत्वपूर्ण सहस्राब्दी विकास लक्ष्यों के बारे में सूचनाएँ कई वर्षों के अंतराल से दी जाती हैं। उदाहरण के लिए, विश्व बैंक ने विस्तृत गरीबी डेटा 2010 के बाद से प्रकाशित नहीं किया है।
डेटा क्रांति से भारी विलंबों को दूर किया जा सकता है और डेटा की गुणवत्ता में भारी सुधार किए जा सकते हैं। उदाहरण के लिए, मृत्यु दर की गणना करने के लिए हर कुछ वर्षों के बाद किए जानेवाले परिवार सर्वेक्षणों पर निर्भर करने के बजाय, नागरिक पंजीकरण और महत्वपूर्ण आँकड़ों की प्रणालियाँ रीयल-टाइम में मृत्यु दर के आँकड़े एकत्र कर सकती हैं, जिसमें मृत्यु के कारण के बारे में अतिरिक्त जानकारी का लाभ भी मिल सकता है।
इसी तरह, कागज आधारित सर्वेक्षणों के स्थान पर स्मार्ट फोनों का उपयोग करके, गरीबी के आँकड़ों को अपेक्षाकृत कम लागत पर और आज की तुलना में बहुत अधिक बारंबारता के साथ एकत्र किया जा सकता है। कुछ विश्लेषकों ने सुझाव दिया है कि मोबाइल फोन के इस्तेमाल से कुछ पूर्वी अफ्रीकी देशों में सर्वेक्षणों की लागत में दस साल की अवधि में 60% तक की कमी की जा सकती है। गैलप इंटरनेशनल जैसी निजी कंपनियाँ, डेटा संग्रह में तेजी लाने के लिए अधिक परंपरागत सार्वजनिक क्षेत्र के सांख्यिकीय कार्यालयों के साथ मिलकर काम कर सकती हैं।
डेटा क्रांति प्रौद्योगिकियों के गहन पारिस्थितिकी तंत्र की बदौलत सेवा वितरण, प्रबंधन, जवाबदेही, और जाँच के लिए सफल अवसर प्रदान करती है, जिसमें कई विविध तरीकों से जानकारी एकत्र की जाती है: रिमोट सेंसिंग और उपग्रह इमेजरी, बायोमीट्रिक डेटा, जीआईएस ट्रैकिंग, सुविधाओं-आधारित डेटा, परिवार सर्वेक्षण, सामाजिक मीडिया, क्राउड सोर्सिंग, और अन्य माध्यमों से।
सतत विकास लक्ष्यों का समर्थन करने के लिए, इस तरह का डेटा सार्वजनिक रूप से अधिक बारंबारता से सभी देशों के लिए उपलब्ध होना चाहिए - प्रमुख लक्ष्यों के लिए कम-से-कम एक वर्ष के भीतर, और उन क्षेत्रों में रीयल-टाइम में उपलब्ध होना चाहिए जिनमें सेवा प्रदान करना महत्वपूर्ण होता है (स्वास्थ्य, शिक्षा, और ऐसे अन्य क्षेत्र)। टेलीकॉम, सामाजिक विपणन कंपनियों, सिस्टम डिजाइनरों, सर्वेक्षण कंपनियों, और अन्य सूचना प्रदाताओं सहित सभी निजी कंपनियों को डेटा "पारिस्थितिकी तंत्र" में एकीकृत किया जाना चाहिए।
नई रिपोर्ट को तैयार करने में, एसडीएसएन ने सतत विकास लक्ष्यों के लिए डेटा क्रांति को कैसे शुरू किया जाए के लिए "आवश्यकता मूल्यांकन" तैयार करने के लिए कई भागीदार एजेंसियों के साथ सहयोग किया। इस रिपोर्ट में एक कार्य योजना प्रस्तुत की गई है जिसे राष्ट्रीय सांख्यिकी प्रणालियों और निजी सूचना फर्मों और अन्य गैर-सरकारी डेटा प्रदाताओं के साथ मिलकर तैयार किया गया है। जैसा कि इस रिपोर्ट में जोर दिया गया है, निम्न आय और निम्न-मध्यम आय वाले देशों को इन नई डेटा प्रणालियों को तैयार करने के लिए वित्तीय मदद की आवश्यकता होगी।
हालाँकि लागत संबंधी अनुमान बिल्कुल अनंतिम हैं, विशेष रूप से विघटनकारी प्रौद्योगिकीय परिवर्तन के इस युग में, नए अध्ययन में यह सुझाव दिया गया है कि सतत विकास लक्ष्यों के लिए उचित डेटा प्रणालियों के लिए निम्न आय वाले सभी 77 देशों को शामिल करने के लिए प्रति वर्ष कम-से-कम $1 बिलियन की आवश्यकता होगी। इस राशि में से लगभग आधी राशि को आधिकारिक विकास सहायता के माध्यम से वित्तपोषित किया जाना चाहिए, जिसका अर्थ यह है कि वर्तमान दाता प्रवाहों की तुलना में प्रति वर्ष कम-से-कम $200 मिलियन की वृद्धि की जानी चाहिए।
अब धन की ऐसी वृद्धि की प्रतिबद्धता के लिए सही समय है। जुलाई में, विश्व के प्रतिनिधि विकास के लिए अंतर्राष्ट्रीय वित्त सम्मेलन के लिए अदीस अबाबा में मिलेंगे,और फिर उसके कुछ ही हफ्तों के बाद सतत विकास लक्ष्यों को अपनाने के लिए, सितंबर के अंत में संयुक्त राष्ट्र मुख्यालय में मिलेंगे। इन दोनों शिखर बैठकों से पहले त्वरित कार्रवाई करके, विश्व उन डेटा प्रणालियों के साथ सतत विकास लक्ष्यों को आरंभ करने के लिए तैयार हो जाएगा जिनकी उसे सफल होने के लिए जरूरत है।
Harnessing Disruption for Sustainability
GENEVA – After decades of reluctance on the part of world leaders, a rapid, smooth, and purposeful transition toward sustainable development seems unlikely.
Indeed, throughout human history, such major changes have more often been forced upon the world by circumstances, with leaders focusing on shorter-term concerns like political turmoil or economic stagnation until serious disruptions to their economies and societies arise.
But this need not be the case.
Policymakers can develop solutions that leverage immediate challenges to guide the shift toward a more sustainable, inclusive future.
This year, which has been dubbed “the year of sustainable development,” provides an ideal opportunity in this regard.
At high-level meetings in Sendai, Japan, in March and in Addis Ababa, Ethiopia, in July, world leaders will pursue closer collaboration on disaster-risk reduction and on mobilizing finance for development, respectively.
In September, the United Nations will launch its Sustainable Development Goals, to serve as the framework for global development efforts until 2030.
Moreover, global climate negotiations will reach a critical point in December, when world leaders meet for the United Nations Climate Change Conference in Paris.
And the agendas of the forthcoming G-7 and G-20 summits will both feature measures to combat climate change.
Such multilateral frameworks catalyze progress.
Indeed, agreements like last year’s deal between China and the United States to reduce carbon-dioxide emissions – not to mention initiatives to mobilize business, such as We Mean Business – are unlikely to happen without them.
Nonetheless, as Mancur Olson famously observed, it is the individual interests of the parties that drive collective success.
For example, China’s recent embrace of sustainable development, which will serve the planet’s long-term interests, is driven by the domestic challenges posed by air, water, and land pollution.
Rather than agonize over growing disruptions, China’s government has decided to hasten the shift toward a dynamic green economy, even if it means stranding assets and allowing businesses that do not suit China’s shifting needs to fail – an approach that will deliver a long-term competitive advantage.
The rest of the world should recognize the benefits of allowing short-term disruptions to drive, not distract from, the sustainability agenda.
One area where such an opportunity is already apparent is financial reform.
Today’s historically low interest rates should encourage long-term investment, as they lower the current cost of capital.
But new financial regulatory frameworks – such as Basel III, which aims to reduce risk in the banking sector, and Solvency II, the European Union’s equivalent for insurance companies – are inadvertently discouraging such investment.
This undermines both short-term efforts to boost employment and the long-term objective of sustainable growth.
It does not have to be this way.
As the UN Environment Programme emphasized in a briefing at the World Economic Forum in Davos, saving the financial sector from itself can accelerate the transition to sustainable development.
For example, effective risk management and longer-term policy objectives would be better aligned if regulators reduced capital requirements for banks that extend loans for climate-resilient and environmentally friendly investments.
Similarly, central banks’ inflated balance sheets – the result of short-term crisis-response measures – could, through refinancing arrangements, be used to boost green investment.
Further quantitative easing, such as by the European Central Bank, could be directed toward greener asset-backed securities.
Even perverse signals can be mitigated and leveraged.
Instead of allowing low oil prices to encourage consumption, governments could take the opportunity to impose a small, politically acceptable energy or carbon-equivalent tax – an approach advocated by many economists and development specialists, including Jeffrey Sachs, Lawrence Summers, and Kemal Derviş.
Such a tax would not only sustain the price signals needed to steer societies onto a more sustainable energy path; it would also provide revenues that could be channeled toward employment creation and long-term green investments, thereby leveraging private capital.
Likewise, central banks’ macro-prudential activities, which evolved largely in response to the global financial crisis, could focus on longer-term risks to the financial sector, including the cumulative impact of climate change, environmental policies, and disruptive clean technologies.
Bank of England Governor Mark Carney has taken the lead in initiating a prudential review of the impact of climate change on the United Kingdom’s insurance sector.
Other institutions – including multilateral bodies like the Bank of International Settlements, the Financial Stability Board, and the G-20 – should follow suit.
What the world needs now are leaders who are willing to bridge the gap between daunting short-term demands and desirable long-term outcomes.
Instead of remaining preoccupied with the present, world leaders should view 2015 as an opportunity to ensure that today’s disruptive crises provide the foundation for tomorrow’s sustainable prosperity.
Menggapai Masa Depan Berkelanjutan
BEIJING – Untuk pertama kalinya dalam sejarah, tingginya harapan dan optimisme kini layak dipertimbangkan.
Ekonomi global – meskipun terdapat sejumlah persoalan – akhirnya mampu bergerak keluar dari krisis keuangan.
Terobosan teknologi menempatkan energi terbarukan dalam posisi untuk berkompetisi dengan bahan bakar fosil.
Komunitas internasional pun nampak yakin untuk menempa perjanjian-perjanjian kritis mengenai pembangunan berkelanjutan dan perjuangan melawan perubahan iklim.
Akan tetapi masih ada risiko bahwa kemajuan ini akan terbuang begitu saja, sebab pembuat kebijakan, pemimpin bisnis, dan investor berfokus pada kekhawatiran jangka panjang dan mengabaikan besarnya ancaman terhadap ekonomi global.
Jika kita ingin mempertahankan tingkat kemajuan yang ada sekarang, kita perlu memperbaiki kegagalan dalam sistem keuangan sampai ke akarnya dan memberlakukan standar, peraturan, dan praktik yang menjadikan sistem ini selaras dengan kebutuhan jangka panjang akan perekonomian yang lebih inklusif dan berkelanjutan.
Tahun ini kita memiliki potensi melakukan upaya tersebut.
Transisi menuju ekonomi hijau adalah hal yang pasti, bukan lagi harapan semata, seiring dengan meningkatnya dukungan publik dan kemajuan teknologi sehingga membuat investasi energi bersih semakin mudah dilaksanakan.
Di tahun 2014, investasi global dalam energi terbarukan meningkat 17%, bahkan dengan merosotnya harga minyak dunia, berdasarkan laporan terkini yang dirumuskan oleh United Nations Environment Programme (UNEP).
Trend ini dipicu oleh lonjakan tenaga surya di Tiongkok dan Jepang dan peningkatan investasi negara-negara Eropa untuk pembangkit tenaga angin di laut.
Perdagangan di bursa efek dari Shanghai hingga São Paolo menetapkan persyaratan pelaporan untuk memberitahu investor mengenai cara perusahaan memasukkan isu keberlanjutan ke dalam strategi mereka.
Obligasi hijau (green bonds) mulai diterapkan dengan nilai melebihi $40miliar diterbitkan di tahun 2014 dan jenis obligasi ini dapat menjadi lebih populer seiring dengan penetapan standar dan peraturan yang lebih jelas.
Bahkan bank sentral telah mengalihkan perhatiannya kepada isu lingkungan hidup.
People’s Bank of China telah bergabung dengan UNEP untuk mengidentifikasi langkah-langkah praktis guna menjamin pelaksanaan reformasi pasar keuangan yang “hijau”, dan Bank of England (BoE) telah memulai tinjauan mendalam dengan penuh kehati-hatian mengenai risiko-risiko sistemik sebagai akibat dari perubahan iklim yang berdampak pada sektor asuransi di Kerajaan Bersatu Britania Raya dan Irlandia Utara (UK).
Bulan September ini menandai peluncuran Sustainable Development Goals oleh PBB yang merupakan tujuan pembangunan yang pertama di dunia yang mencakup target-target yang dapat diukur dan bersifat universal mengenai pengentasan kemiskinan dan kelaparan, serta di saat yang sama melindungi lingkungan hidup dan sumber daya alam di bumi.
Nantinya di akhir tahun ini komunitas internasional diharapkan dapat menyepakati sejumlah komitmen yang mengikat mereka dalam upaya menurunkan emisi dan mendanai perjuangan melawan perubahan iklim.
Akan tetapi, walaupun semua pertanda ini mengarah pada jalur yang benar, kita masih jauh dari keberhasilan.
Kemajuan ini bisa pudar jika momentum ini tidak diwujudkan. Tantangan utamanya disini adalah waktu, dan kerusakan yang tidak dapat diubah yang mungkin timbul jika kita terlambat mengatasinya.
Lebih dari 80% dari total 140 negara yang disurvei dalam laporan “Inclusive Wealth” yang diterbitkan oleh UNEP mencatat penurunan jumlah cadangan modal alam.
Kerugian ekonomi akibat degradasi lingkungan hidup diperkirakan mencapai $7 triliun per tahun, sebagian besarnya adalah kerusakan yang tidak dapat diubah.
Semakin lama ditunda, permasalahan yang ada akan memburuk.
Perlu ada upaya internasional yang signifikan untuk menyelaraskan kembali pasar keuangan dan pasar modal melalui cara yang mendukung pembangunan berkelanjutan.
Rancangan sistem keuangan kita yang sekarang tidak menjamin kondisi yang disebut Gubernur Bank of England, Mark Carney, sebagai “tragedy of horizons” – kegagalan pada pasar yang diakibatkan oleh ketidakmampuan investor, perusahaan, dan pemerintah dalam menyelesaikan permasalahan seperti perubahan iklim, sehingga menciptakan konsekuensi yang baru akan dirasakan jauh di masa depan – tidak akan terjadi.
Pembuat kebijakan dan pemimpin bisnis memiliki berbagai alasan mengapa mereka lebih fokus pada kekhawatiran yang bersifat lebih mendesak.
Memang benar bahwa tindakan kebijakan sangat diperlukan untuk mengurangi risiko terjadinya krisis keuangan lain yang memaksa bank dan pengelola aset memberikan pinjaman dan melakukan investasi jangka pendek, sehingga seringkali melewatkan peluang yang lebih menguntungkan, meskipun bersifat kurang likuid dan lebih berjangka panjang.
Tekanan jangka pendek selalu muncul namun dapat dihadapi dengan perangkat yang sesuai: perbaikan pricing pada risiko lingkungan hidup, penetapan credit rating yang ramah iklim, tanggung jawab pemberi pinjaman di bidang lingkungan hidup, dan upaya-upaya mitigasi risiko lingkungan hidup terhadap stabilitas keuangan.
Masa depan berkelanjutan akan berada dalam genggaman kita, namun kondisi ini hanya akan terwujud jika kita menerapkan kebijakan yang tepat.
Tidak Meninggalkan Jejak bagi Anak-anak Kita
STOCKHOLM – Generasi kita memiliki kesempatan unik.
Jika kita bersungguh-sungguh, kita dapat menjadi generasi pertama dalam sejarah yang tidak meninggalkan bekas apapun bagi anak-anak kita: tanpa emisi gas rumah kaca, tanpa kemiskinan, dan tanpa kerusakan pada keanekaragaman hayati.
Hal ini tentu menjadi sasaran yang ditetapkan pemimpin dunia ketika mereka bertemu di markas besar PBB di New York pada 25 September untuk mengadopsi Tujuan Pembangunan Berkelanjutan (Sustainable Development Goals/SDGs).
17 tujuan ini berkisar dari pengentasan kemiskinan dan peningkatan layanan kesehatan hingga perlindungan biosfer planet dan penyediaan energi untuk semua.
Rumusan tujuan ini dihasilkan dari pertemuan terbesar dalam sejarah PBB, konferensi “Rio+20” di tahun 2012, dilanjutkan dengan konsultasi terbesar yang pernah dilakukan PBB.
Berbeda dengan pendahulunya, Tujuan Pembangunan Milenium (Millenium Development Goals/MDGs), yang berfokus semata-mata hanya pada negara-negara berkembang, tujuan global yang baru ini bersifat universal dan berlaku sama bagi semua negara.
Pemberlakuan tujuan baru ini menunjukkan penerimaan secara luas atas fakta bahwa semua negara berbagi tanggung jawab yang sama untuk menjaga stabilitas jangka panjang siklus alami bumi, dimana kemampuan planet untuk mendukung kehidupan kita bergantung padanya.
Memang benar bahwa SDGs adalah kerangka pembangunan pertama yang mengakui perubahan mendasar dalam hal hubungan kita dengan planet.
Untuk pertama kalinya dalam sejarah selama 4,5 miliar tahun usia bumi, faktor utama yang menentukan stabilitas sistem bumi bukan lagi jarak planet dari matahari atau kekuatan atau frekuensi letusan gunung berapi, melainkan ekonomi, politik, dan teknologi.
Dalam 12.000 tahun terakhir, pada sebagian besar waktunya iklim bumi relatif stabil dan biosfer juga memiliki ketahanan dan kekuatan.
Ahli geologi menyebut periode ini Holocene.
Baru-baru ini, kita telah memasuki zaman yang sering disebut Anthropocene, era dimana perubahan iklim yang diakibatkan manusia semakin sulit diperkirakan.
Pergeseran mendasar ini mengharuskan adanya model ekonomi baru.
Kita tidak lagi bisa berasumsi – layaknya pemikiran ekonomi yang berlaku – bahwa ketersediaan sumber daya tidak terbatas.
Kita mungkin dulunya adalah masyarakat kecil di sebuah planet. Sekarang kita adalah masyarakat yang besar pada planet kecil.
Namun, jauh dari berpikiran utopis, SDGs dapat dicapai pada tahun 2030.
Beberapa negara, termasuk Denmark, Finlandia, Norwegia, dan Swedia kini dalam upaya mewujudkan sebagian besar tujuan tersebut dan banyak kemajuan tengah terjadi di banyak negara.
Dalam beberapa dekade terakhir, angka kemiskinan berhasil dikurangi setengahnya.
Walaupun sering menjadi berita utama, konflik kekerasan semakin berkurang.
Penyakit sedang diberantas.
Populasi global akan distabilkan.
Lapisan ozon menunjukkan tanda-tanda pemulihan.
Dan revolusi digital mengacaukan keseluruhan industri yang bisa dianggap sebagai keuntungan bagi planet ini.
Pengentasan kemiskinan yang ekstrim berada dalam jangkauan kita.
Kini sekitar 800 juta orang hidup dengan kurang dari $1,25 per hari.
Menurut laporan Bank Dunia baru-baru ini, sekitar 30% dari penduduk ini tinggal di India, seperti raksasa yang sedang tidur dan menunggu industrialisasi, jika diberikan insentif yang tepat.
Kemiskinan menurun di negara-negara lain, termasuk Nigeria (dimana terdapat 10% dari penduduk termiskin), Tiongkok (8%), dan Bangladesh (6%).
Sumber utama keraguan menyangkut komitmen negara-negara kaya untuk membantu negara-negara berkembang mengurangi emisi gas rumah kaca adalah upaya pengentasan kemiskinan.
Tanpa bantuan yang tepat, negara-negara miskin berisiko menjadi terjebak dalam ketergantungan pada batubara dan minyak untuk setidaknya satu generasi mendatang, menempatkan seluruh planet dalam bahaya perubahan iklim yang di luar kendali.
Para pemimpin dunia harus menyadari bahwa biaya mengubah sistem energi global jauh lebih rendah dibandingkan mengatasi dampak pembakaran bahan bakar fosil yang tersisa di planet ini.
Penelitian yang diterbitkan bulan ini menyimpulkan bahwa menghabiskan seluruh hidrokarbon yang tersisa akan mengakibatkan mencairnya seluruh lapisan es Antartika, yang berpotensi menaikkan permukaan air laut sebanyak 58 meter.
Dan kenaikan permukaan air laut hanya satu potensi ancaman.
Kekeringan dan gagal panen akibat perubahan iklim, misalnya, bisa memicu konflik kekerasan.
Untungnya, ada banyak bukti bahwa negara-negara dan industri dapat berkembang tanpa berkontribusi terhadap perubahan iklim.
Pada tahun 2030 nanti, besar kemungkinan beberapa negara dapat melepaskan diri dari bahan bakar fosil, dimana negara seperti Swedia, Prancis, dan Jerman akan memimpin.
Negara-negara ini akan memiliki lebih sedikit polusi udara, peningkatan kesehatan dan kesejahteraan, dan pertumbuhan ekonomi.
Mereka juga akan menempatkan sedikit tekanan pada biosfer.
Berdasarkan beberapa perkiraan, kehidupan di Bumi tidak pernah sebegitu beragamnya.
Nilai keanekaragaman hayati adalah menjadikan ekosistem kita lebih tangguh, yang merupakan prasyarat terbentuknya masyarakat yang stabil; perusakan yang sewenang-wenang terhadap keanekaragaman hayati sama dengan menyulut api pada sekoci penolong.
Pengentasan kemiskinan dan penurunan tingkat emisi, termasuk pengelolaan hak guna lahan secara efektif dan pemberantasan deforestasi, akan berdampak positif untuk menghentikan tren dan memutarbalikkan kerusakan.
Perusahaan seperti Ikea dan Unilever memimpin dengan upaya-upaya tulus untuk bertanggung jawab atas iklim, sumber daya, dan ekosistem bumi.
Salah satu alasannya adalah bertambahnya kesadaran konsumen menjadikan degradasi ekosistem berdampak buruk bagi bisnis.
Pada saat yang sama, semua industri, dari teknologi informasi hingga pertanian, bergantung pada layanan yang disediakan oleh alam.
Mengelola hutan, sungai, padang rumput, dan terumbu karang secara berkelanjutan membuat mereka lebih tangguh dan meningkatkan kemampuan mereka untuk menyerap gas rumah kaca, yang baik untuk bisnis.
Kita adalah generasi pertama yang dapat membuat informed choice tentang arah pembangunan.
Apakah kita akan meninggalkan keturunan kita dengan anugerah akan terhapuskannya kemiskinan, nihil penggunaan bahan bakar fosil, dan nihil kerusakan pada keanekaragaman hayati, atau kita justru meninggalkan mereka harus membayar tagihan pajak dari Bumi yang bisa memusnahkan mereka.
Development’s Digital Divide
STOCKHOLM – On September 25, world leaders will gather in New York to adopt the new Sustainable Development Goals.
The SDGs, comprising 17 goals and 169 related targets, are the result of extensive political negotiations, and will set the benchmarks over the next 15 years for achieving the international community’s overarching objective: to “end poverty in all its forms everywhere.”
The SDGs are noble and certainly ambitious.
And yet, in a time of profound scientific and technological change, they remain remarkably conventional.
Information technology – this century’s defining social and economic development – receives only a brief mention (in one of the sub-targets).
Nowhere in the document is there even a hint of the revolutionary role that the nascent explosion in connectivity, information, and data could play in ending poverty.
There can be no doubting the impact that information technology will have on economic growth.
Governments, politicians, and international organizations must harness the potential of the Internet to serve global development and individual empowerment.
Issues concerning security and governance have dominated discussions of cyber policy over the past few years.
This is to some extent justifiable: The breadth of topics is staggering, ranging from international norms for state behavior in cyberspace to challenges like cybercrime and growing censorship.
But it is also clear that the countries that will gain the most from the ongoing information revolution are those that manage to keep their eyes on the real prize: using this explosion in technology to strengthen their economies and improve the lives of their citizens.
A 2009 study by the World Bank found that a 10% increase in fixed broadband penetration boosts a developing economy’s GDP by about 1.4%.
These findings likely vastly understate the impact of the technology; after all, much of the developing world is seeing a rapid rollout of mobile broadband, with much higher capacity than what was available at the time of the study.
The phenomenon is most evident in Asia and Africa – which together account for three-quarters of the global growth in smartphone use this year.
As smartphone subscriptions increase from 2.9 billion to 7.7 billion worldwide in the next five years, 80% of the new accounts are expected to be opened by users on these two continents.
The widespread adoption of information technology in the developing world opens up myriad possibilities; we are only at the beginning.
Data analysis has been used to fight Ebola in West Africa, and mobile phone networks have been used to bring modern banking to unserved populations throughout the developing world.
These new technologies empower people – most notably the rapidly growing youth population – and create new avenues for economic and social development.
Indeed, mobile connectivity may turn out to be the most important development tool ever for the billions of people in emerging Africa and Asia.
Of course, there will still be a digital divide.
But, increasingly, it will be generational rather than geographical.
Within a decade, the majority of young people in Africa will likely be as well connected as those in Europe or North America.
This will change the world profoundly.
The big question is whether governments are aware of the potential power of this development.
If the SDGs are any indication, it is likely that they are not.
The goals and targets that the world is about to embrace do not adequately reflect the significance of this epochal change.
The absence of awareness is also reflected in the preparations for a high-level UN meeting on international policy concerning the Internet and development that will take place in December.
The event, a review of the progress made since the 2005 World Summit on the Information Society, is the culmination of a three-year negotiation process.
Unfortunately, political wrangling over issues of Internet governance and cybersecurity have dominated the preparations for the meeting, and there has been little discussion of the revolutionary possibilities that an open, dynamic, and free Internet can provide.
Governments are being left behind as entrepreneurs and innovators race ahead.
But maximizing the potential of the new technology requires the stable and predictable operating environment, as well as the support for basic research, that only governments can provide.
It is time for world leaders to put the potential of the Internet at the top of the development agenda.
Alasan Pentingnya Tujuan Pembangunan Berkelanjutan
ROMA – Menindaklanjuti keberhasilan yang dicapai oleh Millennium Development Goals (Tujuan Pembangunan Milenium) (MDGs), yang mempedomani upaya pembangunan global selama periode 2000-2015, pemerintah negara-negara di dunia sedang merundingkan seperangkat Sustainable Development Goals (Tujuan Pembangunan Berkelanjutan) (SDGs) untuk periode 2016-2030.
MDGs akan meneruskan upaya pengentasan kemiskinan, serta menambahkan tantangan guna memastikan pemerataan pembangunan dan keberlanjutan lingkungan hidup, khususnya sasaran utama untuk meminimalisasi bahaya perubahan iklim yang disebabkan manusia.
Tetapi apakah seperangkat tujuan yang baru akan bermanfaat untuk mendorong pergeseran dari jalur business-as-usual yang berbahaya menuju pembangunan berkelanjutan yang nyata di dunia ini?
Apakah tujuan-tujuan PBB dapat menciptakan perbedaan?
Fakta-fakta yang berasal dari MDGs menunjukkan kekuatan besar dan memberikan semangat.
Pada bulan September 2000, Majelis Umum PBB mengadopsi “Millennium Declaration (Deklarasi Milenium),” yang mencakup MDGs.
Kedelapan tujuan tersebut menjadi inti upaya pembangunan bagi negara-negara miskin di dunia.
Apakah tujuan-tujuan tersebut berhasil membuat perbedaan?
Nampaknya jawabannya adalah ya.
Terdapat sejumlah contoh kemajuan dalam pengentasan kemiskinan, pengendalian penyakit dan peningkatan akses kepada sekolah dan infrastruktur di negara-negara termiskin di dunia, khususnya di Afrika, yang merupakan hasil dari MDGs.
Tujuan global membantu membangkitkan upaya global.
Bagaimana cara mereka mampu berhasil?
Mengapa tujuan itu penting?
Belum pernah ada seorang pun yang mampu menyampaikan argumentasi tentang keberhasilan berdasarkan tujuan sebaik rumusan John F. Kennedy 50 tahun yang lalu.
Dalam salah satu pidato terbaik di sejarah kepresidenan modern Amerika Serikat, disampaikan pada bulan Juni 1963, Kennedy berkata: “Saat kita bisa mendefinisikan tujuan dengan lebih jelas, menjadikannya lebih mudah diatur dan diterapkan, kita akan membuatnya terlihat nyata bagi semua orang sehingga mereka mampu merajut harapan dan melangkah menuju pencapaian tanpa halangan apapun.”
Terdapat sejumlah alasan penting untuk menetapkan tujuan.
Pertama, tujuan penting untuk mobilisasi sosial.
Dunia ini perlu diarahkan menuju satu arah untuk memberantas kemiskinan atau membantu pencapaian pembangunan berkelanjutan, namun akan sangat sulit dilakukan dalam situasi dunia yang rumit, berbeda, terpisah, ramai, padat, mudah dialihkan, dan seringkali membuat kewalahan agar dapat menunjang upaya konsisten untuk mencapai tujuan bersama.
Mengadopsi tujuan global akan membantu individu, lembaga, dan pemerintah di seluruh dunia untuk menyepakati arah tersebut – pada intinya, berfokus pada hal-hal yang betul-betul bermanfaat bagi masa depan kita.
Fungsi kedua dengan adanya tujuan ialah menciptakan tekanan sejawat.
Dengan mengadopsi MDGs, setiap langkah yang diambil pemimpin politik untuk mengentaskan kemiskinan akan senantiasa dipertanyakan, baik di depan umum maupun secara tertutup.
Alasan ketiga yang menunjukkan pentingnya memiliki tujuan ialah memacu komunitas epistemik – jaringan keahlian, pengetahuan, dan praktik – menuju tindakan untuk mengatasi kesulitan pembangunan berkelanjutan.
Ketika tujuan-tujuan yang kokoh sudah ditetapkan, maka sekelompok pengetahuan dan praktik akan bangkit bersama untuk merekomendasikan jalur yang praktis untuk mencapai hasil.
Terakhir, tujuan dapat memobilisasi jaringan pemangku kepentingan.
Pemimpin masyarakat, politisi, kementerian, komunitas ilmiah, lembaga swadaya masyarakat yang terkemuka, kelompok agama, lembaga internasional, lembaga donor, dan yayasan semuanya akan terdorong untuk bergabung ke dalam tujuan bersama.
Proses multi-stakeholder ini sangat penting untuk mengatasi tantanga-tantangan kompleks dalam pembangunan berkelanjutan dan upaya melawan kemiskinan, kelaparan, dan penyakit.
Kennedy sendiri menunjukkan kepemimpinan melalui penetapan tujuan sekitar setengah abad yang lalu dalam percariannya demi mewujudkan perdamaian dengan Uni Soviet pada puncak Perang Dingin.
Dalam serangkaian pidato yang dimulai dengan pidato terkenal beliau ketika wisuda di American University, Washington DC, Kennedy memulai kampanye perdamaian menggunakan gabungan antara visi dan tindakan pragmatis, menekankan pada perjanjian yang mengakhiri uji coba nuklir.
Tujuh minggu setelah pidato perdamaian tersebut, Amerika Serikat dan Uni Soviet menandatangani Traktat Pelarangan Uji Coba Terbatas (Limited Test Ban Treaty), perjanjian yang menjadi tonggak sejarah yang menahan laju arms race selama Perang Dingin, suatu kondisi yang beberapa bulan sebelumnya bahkan tidak terbayangkan bisa terjadi.
Meskipun Traktat Pelarangan Uji Coba Terbatas tidak mengakhiri Perang Dingin, namun traktat tersebut memberikan bukti bahwa perundingan dan perjanjian dapat diwujudkan dan menetapkan landasan bagi kesepakatan di masa depan.
Sebetulnya pencapaian hasil berskala besar tidak terhindarkan lagi apabila kita mampu menetapkan satu atau sejumlah tujuan.
Penetapan tujuan hanya langkah awal untuk menerapkan rencana aksi.
Rumusan kebijakan yang baik, pendanaan yang memadai, dan lembaga-lembaga baru yang mengawasi pelaksanaan tindakan harus mengikuti tujuan yang sudah ditetapkan.
Kemudian hasil-hasil yang timbul harus diukur dan strategi yang ada harus dipikirkan ulang dan diterapkan ke dalam siklus rekomendasi kebijakan yang berkesinambungan dimana semuanya berada di bawah tekanan dan motivasi berdasarkan tujuan dan jangka waktu yang jelas.
Seiring dengan kemajuan luar biasa yang dicapai dunia dengan MDGs, kita bisa menemukan cara untuk mewujudkan SDGs.
Meskipun terdapat sinisme, kebingungan, dan politik menghalangi-halangi yang muncul di tengah upaya memberantas kemiskinan, ketidaksetaraan, dan degradasi lingkungan hidup, masih dimungkinkan timbulnya terobosan baru, Negara-negara berkekuatan besar di dunia mungkin terlihat tidak responsif, namun mereka dapat berubah.
Gagasan memiliki pengaruh.
Gagasan dapat mempengaruhi kebijakan publik jauh lebih besar dan lebih cepat dibandingkan dengan yang diperkirakan para pencela.
Dalam pidato terakhirnya di PBB pada bulan September 1963, Kennedy memaparkan tentang penciptaan perdamaian kontemporer dengan mengutip Archimedes; “konon ketika menjelaskan prinsip kerja tuas (pengungkit), Archimedes berkata kepada rekan-rekannya: ‘Berikan saya satu tempat untuk berpijak dan saya akan mengangkat bumi.’”
Energi Berkelanjutan Mulai Sekarang
WASHINGTON, DC – Dunia ini akhirnya mampu mendekati impian mencapai masa depan energi yang lebih berkelanjutan dan aman.
Energi terbarukan dari tenaga angin dan surya mampu bersaing dengan pembangkit listrik tenaga yang berasal dari bahan bakar fosil serta harga minyak merosot tajam yang belum pernah dialami pada tahun-tahun sebelumnya.
Perkembangan ini menempatkan kita pada jalur transformasi energi global – selama kita mampu menetapkan langkah-langkah berikutnya dengan tepat.
Sejumlah negara sudah memanfaatkan momen ini.
Dengan penurunan harga minyak yang dimulai pada pertengahan tahun 2014, prioritas pertama menjadi jelas: melakukan reformasi subsidi bahan bakar minyak sebelum harga kembali naik.
Subsidi ini melemahkan anggaran pemerintah, menganjurkan penggunaan energi yang berlebihan, dan meningkatkan polusi dan emisi karbon dioksida.
India telah mencabut pengendalian harga solar.
Indonesia telah beralih dari subsidi minyak.
Negara lain pun menerapkan tindakan yang serupa.
Dana yang disimpan dari pencabutan subsidi dapat digunakan untuk menciptakan safety nets (jaring pengaman) yang melindungi penduduk miskin ketika terjadi kenaikan harga energi.
Tetapi penghapusan subsidi bahan bahan minyak secara bertahap meskipun sangat penting, hanya merupakan langkah awal dalam arah yang tepat.
Dengan memanfaatkan teknologi baru yang saat ini tersedia dengan harga yang terjangkau, seluruh negara akhirnya dapat bergerak menuju keamanan energi jangka panjang dan menjauh dari ketidakstabilan pasar minyak yang tidak dapat dipisahkan.
Bagi negara-negara berpendapatan ekonomi rendah, hal ini berarti mengurangi penggunaan minyak impor untuk menghasilkan listrik.
Kenya, sebagai contoh, bergantung pada heavy fuel oil dan solar atas 21% produksi listrik di negaranya; gambaran yang serupa di Senegal mencapai angka yang luar biasa sebesar 85%; dan sejumlah negara kepulauan menggunakan solar yang diimpor untuk seluruh kebutuhan listriknya.
Bagi sejumlah negara, ini menjadi satu-satu pilihan yang layak, namun dalam jangka panjang ketergantungan ini dapat menciptakan biaya energi yang lebih tinggi dan kerentanan terhadap ketidakstabilan harga dan goncangan pada pasokan.
Melalui kebijakan yang tepat dan dukungan internasional, negara-negara ini dapat berinvestasi pada infrastruktur yang dibutuhkan untuk mewujudkan pilihan energi yang lebih beragam.
Bagi banyak negara, langkah berikutnya adalah mempersiapkan jaringan (kabel) listrik untuk menyatukan beragam energi terbarukan pada tingkat tinggi seperti tenaga surya dan angin.
Berkat penurunan harga panel surya dan turbin angin, kedua sumber tenaga ini berkembang dengan laju lebih cepat jauh di luar perkiraan.
Berdasarkan laporan Bank Dunia yang baru, per tahun 2014, terdapat 144 negara yang sudah menetapkan rencana nasional untuk meningkatkan energi terbarukan dan hampir 100 negara telah menetapkan target dan insentif yang spesifik.
Dalam tujuh tahun saja, dari tahun 2006 hingga 2014, kapasitas tenaga angin di dunia yang sudah terpasang meningkat empat kali lipat, sementara itu penggunaan sistem fotovoltaik bertambah hampir 20 kali lipat.
Semua gambaran ini menunjukkan bahwa kecepatan penggunaan meningkat.
Kekhawatiran terdahulu tentang penyatuan tenaga angin dan surya ke dalam sistem ketenagalistrikan tradisional mulai terhapuskan.
Di Meksiko, proyek-proyek energi terbarukan yang ambisius dan umumnya terdapat di pelosok – seperti tenaga air, surya dan angin – akan terhubung dengan jaringan.
Tiongkok, yang memiliki kapasitas instalasi energi terbarukan yang terbesar di dunia, sedang mempelajari kebutuhan dan biaya peningkatan jaringan untuk mewujudkan penyebaran tenaga surya pada tingkatan lebih tinggi.
Sebagaimana dirumuskan dalam laporan Bank Dunia, melalui investasi dan kebijakan yang tepat, banyak negara kini mampu memenuhi sebagian besar kebutuhan listriknya dari beragam energi terbarukan tanpa mengurangi keandalan jaringan atau keterjangkauan listrik.
Investasi ini meliputi penyimpanan energi, perbaikan sistem perkiraan dan smart grids – yang seluruhnya memperoleh manfaat dari terobosan-terobosan teknologi dan penurunan harga.
Barangkali yang terpenting ialah pasar energi harus terbuka untuk pemain-pemain baru.
Bagi wilayah terpencil yang lebih miskin, berarti menciptakan lingkungan yang produktif bagi pengusaha dan produsen tenaga skala kecil untuk mengembangkan mini-grids – umumnya berasal dari tenaga surya, air pada skala kecil, atau gabungan surya-diesel – yang mampu menghasilkan listrik bagi masyarakat, dimana apabila opsi ini tidak tersedia sama sekali maka mereka harus menunggu tahunan untuk memperoleh koneksi jaringan.
Di Tanzania, produsen tenaga skala kecil sekarang ini mampu menjual listrik kepada konsumen tanpa harus melalui proses perizinan yang terlalu panjang.
Di India, menara seluler di pelosok, yang seharusnya bersumber dari generator diesel, bertindak layaknya sebagai “anchor customer” bagi mini-grids baru.
Pembangkit listrik tenaga nasional harus cekatan – bersedia bekerja dengan produsen tenaga yang mandiri dan individual – dan menjadikan smart grids mampu mengelola pasokan dan permintaan lebih baik.
Hal ini merupakan tantangan bahkan bagi negara-negara berpendapatan tinggi seperti Jerman dan Amerika Serikat, dimana beberapa pembangkit listrik mengalami usahanya merosot seiring dengan konsumen menjual kembali tenaga listrik kepada jaringan.
Dalam hal ini, negara-negara berkembang, dengan investasi lebih sedikit pada business model tradisional dan menghadapi kebutuhan mendesak untuk pasokan tenaga listrik, mungkin akan dapat melampaui negara-negara maju, sama halnya dengan kemajuan yang mereka capai pada telepon genggam.
Istilah “energi berkelanjutan” (sustainable energy) dan “energi terbarukan” (renewable energy) seringkali dipersamakan, namun barangkali pengertiannya perlu diperluas.
Energi berkelanjutan yang sebenarnya tidak hanya bersih, sedikit dampaknya pada polusi dan emisi karbon dioksida.
Energi ini harus terjangkau bagi pemerintah dan penduduk; dapat dipercaya, berasal dari sumber-sumber yang dapat diandalkan untuk beberapa dekade mendatang; dan berkontribusi pada kemakmuran bersama, memberikan layanan dan manfaat bagi seluruh masyarakat.
Berkat penurunan harga minyak, inovasi dan skala ekonomis dalam sektor energi terbarukan, kini visi tersebut dapat menjadi kenyataan.
The Future Global Economy
WASHINGTON, DC – As the world enters yet another year in the shadow of continued financial and economic crisis, a broader view of the contours of the future global economy is required.
The longer-term trends are clear. Dynamic emerging markets from Asia to Latin America are rising in prominence.
The United States and Japan remain important drivers of the global economy but face major debt and deficit challenges.
Europe is going through a difficult but historic process of re-engineering and integration.
The Middle East is transforming before our eyes.
Sub-Saharan Africa is breaking through to sustained development – creating a new frontier of growth after decades of stagnation.
These changes are shaping our future in a positive way.
Yet there are still considerable roadblocks to overcome.
The global economic recovery remains too weak.
With more than 200 million unemployed around the world, prospects for job creation are still too dim.
And the gap between rich and poor, exacerbated by the crisis, is still too wide.
There is a tough road ahead if we are to turn optimism into reality.
I see three key milestones.
First, and most obviously, we need to put the crisis behind us, once and for all.
And we know how to do that: accommodative monetary policy; fiscal adjustment in all advanced economies that includes concrete and realistic plans to reduce debt over the medium term, but does not undercut short-term growth; completing the banking-sector cleanup; and reforms to boost productivity and growth potential.
All of this should be complemented by a rebalancing of global demand toward dynamic markets, including emerging economies.
Perhaps the greatest obstacle will be the huge legacy of public debt, which now averages about 110% of GDP in the advanced economies – the highest level since World War&#160;II.
This leaves governments highly exposed to subtle shifts in confidence.
It also ties their hands, especially as they seek to build the physical and institutional infrastructure of the twenty-first century while respecting social promises.
The needs of aging populations will add to these pressures.
History offers two clear lessons: reducing public debt is incredibly difficult without growth, and increasing growth is incredibly difficult with a huge burden of public debt.
So we face a twofold imperative – securing growth while reducing debt.
The key now is not only to move from deliberation to action on the policies that we know are needed, but to move together and on all fronts.
The second milestone is a better global financial system.
We need to move beyond the system that gave us the crisis – a financial sector in which some, as the ancient Greeks might say, toyed with hubris and unleashed nemesis.
Of course, there has been important progress, especially on the Basel III agenda to create more resilient capital and liquidity buffers.
But momentum is flagging, both on implementing the agreed reforms and on progress in areas like derivatives and shadow banking.
As a result, the system as a whole is not yet much safer than it was in September 2008, when Lehman Brothers collapsed.
It is still too complex; activities are still too concentrated in large institutions; and the specter of “too big to fail” remains.
Continuing excesses and repeated scandals show that the culture of finance has not really changed.
Many in the financial-services industry are concerned about the costs of new regulations.
A recent IMF study shows that better regulation would indeed nudge banks’ lending rates up, but by relatively little.
We also found that increasing capital buffers to appropriate levels helps, rather than hurts, economic growth.
Reforming financial-sector taxation would also help to reduce excessive risk-taking and leverage.
The bottom line is that the costs of reform are affordable.
The costs of complacency are not.
The third milestone relates to the quality and inclusiveness of growth.
While growth is essential for the future global economy, it must be a different kind of growth – inclusive and not simply the fallout of unfettered globalization.
The policy implications of such a reorientation are profound.
It requires a fiscal policy that focuses not only on efficiency, but also on equity – particularly on fairness in sharing the burden of adjustment, and on protecting the weak and vulnerable.
It means expanding access to credit and financial services everywhere.
And it means more transparency and better governance.
Achieving these milestones presupposes greater global cooperation.
A world that is bound closely together must be a world that works closely together if it is to prosper together.
There is simply no other choice.
We are multiple players, but we are engaged in a single game – a game that must be cooperative, not simply competitive.
In such a world, multilateral institutions like the International Monetary Fund play a vital role in boosting economic cooperation.
The year 2013 offers the chance to put the economic crisis behind us and to shape the world for the better.
Policymakers must seize this chance.
The IMF will support them in building a fairer and more prosperous future.
Sustainable Humanity
ADDIS ABABA – Sustainable development means achieving economic growth that is widely shared and that protects the earth’s vital resources.
Our current global economy, however, is not sustainable, with more than one billion people left behind by economic progress and the earth’s environment suffering terrible damage from human activity.
Sustainable development requires mobilizing new technologies that are guided by shared social values.
United Nations Secretary-General Ban Ki-moon has rightly declared sustainable development to be at the top of the global agenda.
We have entered a dangerous period in which a huge and growing population, combined with rapid economic growth, now threatens to have a catastrophic impact on the earth’s climate, biodiversity, and fresh-water supplies.
Scientists call this new period the Anthropocene – in which human beings have become the main causes of the earth’s physical and biological changes.&nbsp;
The Secretary-General’s Global Sustainability Panel has issued a new report that outlines a framework for sustainable development.
The GSP rightly notes that sustainable development has three pillars: ending extreme poverty; ensuring that prosperity is shared by all, including women, youth, and minorities; and protecting the natural environment.
These can be termed the economic, social, and environmental pillars of sustainable development, or, more simply, the “triple bottom line” of sustainable development.
The GSP has called for world leaders to adopt a new set of Sustainable Development Goals, or SDGs, that will help to shape global policies and actions after the 2015 target date for achieving the Millennium Development Goals (MDGs).
Whereas the MDGs focus on reducing extreme poverty, the SDGs will focus on all three pillars of sustainable development: ending extreme poverty, sharing the benefits of economic development for all of society, and protecting the Earth.
It is, of course, one thing to set SDGs and quite another to achieve them.
The problem can be seen by looking at one key challenge: climate change.
Today, there are seven billion people on the planet, and each one, on average, is responsible for the release each year of a bit more than four tons of carbon dioxide into the atmosphere. This CO2 is emitted when we burn coal, oil, and gas to produce electricity, drive our cars, or heat our homes.
All told, humans emit roughly 30 billion tons of CO2 per year into the atmosphere, enough to change the climate sharply within a few decades.
By 2050, there will most likely be more than nine billion people.
If these people are richer than people today (and therefore using more energy per person), total emissions worldwide could double or even triple.
This is the great dilemma: we need to emit less CO2, but we are on a global path to emit much more.
We should care about that scenario, because remaining on a path of rising global emissions is almost certain to cause havoc and suffering for billions of people as they are hit by a torrent of droughts, heat waves, hurricanes, and more.
We have already experienced the onset of this misery in recent years, with a spate of devastating famines, floods, and other climate-related disasters.
So, how can the world’s people – especially its poor people – benefit from more electricity and more access to modern transportation, but in a way that saves the planet rather than destroys it?
The truth is that we can’t – unless we improve dramatically the technologies that we use.
We need to use energy far more wisely while shifting from fossil fuels to low-carbon energy sources.
Such decisive improvements are certainly possible and economically realistic.
Consider the energy inefficiency of an automobile, for example.
We currently move around 1,000 to 2,000 kilograms of machinery to transport only one or just a few people, each weighing perhaps 75 kilograms (165 lbs.).
And we do so using an internal combustion engine that utilizes only a small part of the energy released by burning the gasoline.
Most of the energy is lost as waste heat.
We could therefore achieve huge reductions in CO2 emissions by converting to small, lightweight, battery-powered vehicles running on highly efficient electric motors and charged by a low-carbon energy source such as solar power.
Even better, by shifting to electric vehicles, we would be able to use cutting-edge information technology to make them smart – even smart enough to drive themselves using advanced data-processing and positioning systems.
The benefits of information and communications technologies can be found in every area of human activity: better farming using GPS and micro-dosing of fertilizers; precision manufacturing; buildings that know how to economize on energy use; and, of course, the transformative, distance-erasing power of the Internet.
Mobile broadband is already connecting even the most distant villages in rural Africa and India, thereby cutting down significantly on the need for travel.
Banking is now done by phone, and so, too, is a growing range of medical diagnostics.
Electronic books are beamed directly to handheld devices, without the need for bookshops, travel, and the pulp and paper of physical books.
Education is increasingly online as well, and will soon enable students everywhere to receive first-rate instruction at almost a zero “marginal” cost for enrolling another student.
Yet getting from here to sustainable development will not just be a matter of technology. It will also be a matter of market incentives, government regulations, and public support for research and development.
But, even more fundamental than policies and governance will be the challenge of values.
We must understand our shared fate, and embrace sustainable development as a common commitment to decency for all human beings, today and in the future.
Sustainable Medicine
There is hardly a developed country where health care reform has not become a kind of chronic disease of modern medicine: as soon as some reforms are implemented, a call comes for yet another round.
Costs continue to climb, but nothing seems to contain their growth for very long.
Why?
Politics surely plays a role.
But a more fundamental reason is the nature of modern medicine itself.
Most developed countries have a growing number and proportion of elderly.
Since health care costs for those over 65 are approximately four times higher than for those under 65, aging societies place massive claims on medical resources.
This is compounded by the constant introduction of new (and usually more expensive) technologies, together with increased demand for high-quality health care.
We want more, expect more, and complain more loudly if we don't get it.
When we do get it, we quickly raise the bar, wanting still more.
The net result has been an average general system-wide cost increase of 10%-15% annually in the United States for the past several years--and with no end in sight.
European countries are under severe cost pressures as well, undermining their cherished ideal of equitable access.
Unfortunately, greater use of co-payments and deductibles, privatization of health-care infrastructure, and waiting lists for elective surgery and other non-emergency care are unlikely to work much better in the future than they have in the past.
What is needed is a radical change in how we think about medicine and health care, not simply better ways to reorganize existing systems.
We need a "sustainable medicine" that is affordable to national health care systems and provides equitable access in the long term.
The notion of "sustainability" comes from environmentalism, which seeks to protect the earth and its atmosphere in order to sustain indefinitely human life of a good quality.
As with environmentalism, sustainable medicine requires reformulating the idea of progress that drives technology costs and fuels public demand.
The Western idea of progress, translated to medicine, sets no limits on the improvement of health, defined as the reduction of mortality and the relief of all medical miseries.
However much health improves, it will never be sufficient--so further progress is always required.
But unlimited progress cannot be paid for with finite funds.
Long-term affordability and equitable access requires a finite vision of medicine and health care, one that does not try to overcome aging, death, and disease, but tries to help everyone avoid a premature death and to live decent, even if not perfect, lives.
This implies shifting medical resources sharply towards health promotion and disease prevention.
Billions of dollars have been spent on mapping the human genome.
Comparable sums must be spent on understanding and changing health behaviors that are most likely to bring about disease.
Why is obesity increasing almost everywhere?
Why do so many people continue smoking?
Why is it so difficult to persuade contemporary people to exercise?
Sustainable medicine also requires comparing health care expenditure with spending on other socially important goods.
In a balanced society, health care may not always be the top priority.
At the same time, we often overlook the health benefits of spending money in ways that have nothing to do with the direct delivery of medical care: education and health, for example, are strongly correlated: the higher the former the better the latter.
In any case, sustainable medicine acknowledges that rationing is and always will be a part of any health care system.
No system can give everyone everything they need.
Our aspirations will always exceed our resources, particularly since medical progress itself raises public expectations.
But, to be fair, rationing requires the knowledge and general consent of all who are subject to it.
One place to start is to evaluate the economic impact of new technologies, preferably before they are released to the public.
Evidence-based medicine--a popular technique for controlling costs--is ordinarily aimed only at the efficacy of diagnostic or therapeutic procedures.
But if drug companies must test new products for their safety and efficacy, why not also for their economic impact on health care?
New technologies should not be dropped into health care systems uninvited.
Only if a technology does not significantly raise costs, or does so only exceptionally, should governments be willing to pay for it.
Most fundamentally, a finite model of medicine must accept human aging and death as part of the human life cycle, not some kind of preventable condition.
Medicine must shift its focus from length of life to quality of life.
A medicine that keeps people alive too long is not a decent and humane medicine.
We can live to be 85, but we are likely to do so with chronic conditions that leave us sick and in pain.
This is not an argument against progress: I, for one, am glad that people don't die of small pox at 40 anymore.
But aging and death will still win out in the end.
Medical progress is like exploring outer space: no matter how far we go, we can go further.
With space travel, the economic limitations of unlimited exploration soon became obvious: no more moon walks.
Medicine needs an analogous insight.
Slower technological progress may seem a high price to pay for sustainable health care.
But our current systems carry an even higher price, threatening justice and social stability.
At the same time, only about 40% of the rise in health status over the past century is attributable to medical progress, with the rest reflecting improved social and economic conditions.
This trend is likely to continue, so that even if technological progress slows, people are almost certain to live longer lives in the future--and in better health--than they do now.
That outcome should be acceptable to everyone.
Sweden’s Lessons for Managing Financial Crisis
STOCKHOLM – Although Sweden is a small country, its experiences managing its financial crisis of the early 1990’s may provide valuable lessons for others.
The Swedish crisis began in 1991 with the first major insolvency in the financial market.
A number of damaging developments followed:
Most of the banking system fell into deep crisis.
One bank went into liquidation, while the rest of the system required extensive governmental emergency aid.Property values fell by approximately 35% over four years.
Equities fell by 55% over a three-year period.Despite the central bank’s 500% interest rate, it was impossible to defend the Swedish krona, which was pegged to the euro’s forerunner, the European Currency Unit or Ecu.
The krona depreciated by around 25% in the autumn of 1992, a year after the crisis began.The crisis triggered a sharp economic downturn.
GDP fell by 7% over three years, and unemployment rose by 7% over five years.During a three-year period, government debt increased by about 50%, with the public deficit reaching 12% of GDP.
Falling GDP led to declining tax revenues, while rising unemployment led to an automatic increase in public expenditure.Although the crisis that began in the United States in 2007 has since spread worldwide, the outlook for the US economy is clearly crucial to eventual global recovery.
If we assume that the US is experiencing a typical financial crisis, GDP will fall this year as well.
Unemployment can be expected to peak around 12%, and gross public debt will have increased by 50%, which corresponds to around 90% of GDP.
But if the US follows the Swedish pattern, the worst of the financial sector’s problems are now in the past.
In terms of fiscal problems and real economic decline, however, the US would still have most of the crisis ahead of it.
In Sweden, the decline in GDP lasted for three years, and the economy was then lifted by a dramatic increase in exports, owing to the sharp depreciation of the krona, with annual industrial output rising by around 10% on average over two years.
The US is not likely to repeat this experience.
Financial crises and currency crises are often linked, but we have not seen this in the US.
Instead, paradoxically, the dollar has at least until recently been bolstered somewhat by the crisis.
Although the US is the epicenter of the crisis, its government debt instruments continue to be regarded as the safest investments in the world.
Will America’s widening fiscal deficit alter this perception?
One can imagine two scenarios for the dollar over the next five years.
In the first, the dollar retains its position or perhaps even rises slightly.
In the second, the decline in the US economy and growing fiscal problems lead to a sharp fall in the dollar.
Some estimates show that it would take a 40% depreciation of the dollar to bring US foreign payments into balance.
Neither scenario is good for Europe – or for the rest of the world.
In recent decades, the fast-growing Asian economies, as well as European Union economies such as Germany and the Nordic countries, have made export-led growth their primary economic strategy.
As a result, growth in those countries is dependent on US demand, and their industrial sectors have become too large to be compatible with long-term balance.
So both these scenarios seem to preclude export-led growth as a successful strategy.
In any case, rich European countries will suffer a permanent structural decline in manufacturing: much of the decline that we now see in European manufacturing is not the result of temporary economic movements but is part of a long-term adjustment of the industrial sector’s size.
Although the bigger EU countries have embarked on a policy to protect their industries as long as the crisis continues, they will doubtless be unsuccessful, because no country can ultimately halt structural adjustment by offering subsidies.
Moreover, protectionist measures will increase fiscal problems, and this will ultimately deepen the international downturn and delay recovery.
But it is too easy to say what should not be done.
In the absence of any “miracle” cure, the medium-term aim should be to renew and strengthen the framework for international economic and trade cooperation.
A significant cause of the current crisis was the imbalances in international trade and capital flows that built up over many years, without anybody taking responsibility for the consequences.
Remedial action in Europe should include completing the internal market.
Only when Europe has a dynamic internal market can balanced European growth occur.
And achieving that goal is more important than ever, because it will be some time before the US can re-assume the role of locomotive for the world economy.
Sweden’s Other Rape Suspects
NEW YORK – It is difficult for me, as an advocate against rape and other forms of violence against women, to fathom the laziness and willful ignorance that characterize so much of the media coverage of the sexual-assault allegations against WikiLeaks founder Julian Assange.
To report that we are&nbsp;simply witnessing Swedish justice at work, one must be committed to doing no research – not even the bare minimum of picking up a phone.
In fact, we are witnessing a bizarre aberration in the context of&nbsp;Sweden’s treatment of sex crime – a case that exposes the grim reality of indifference, or worse, that victims there and elsewhere face.
If I were raped in Uppsala, where Assange is alleged to have committed his crime, I could not expect top prosecutors to lobby governments to arrest my assailant.
On the contrary, “ordinary” Swedish rapists and abusers of women should assume that the police might not respond when called.
When I tried the rape-crisis hotline at the government-run Crisis Center for Women in Stockholm, no one even picked up – and there was no answering machine.
According to rape-crisis advocates in Sweden, one-third of Swedish women have been sexually assaulted by the time they leave their teens.
Indeed, according to a study published in 2003, and other later studies through 2009, Sweden has the highest sexual-assault rate in Europe, and among the lowest conviction rates.
When I reached the Stockholm branch of Terrafem, a support organization for rape survivors, a volunteer told me that in her many years of experience, Sweden’s police, prosecutors, and magistrates had never mobilized in pursuit of any alleged perpetrator in ways remotely similar to their pursuit of Assange.
The far more common scenario – in fact, the only reliable scenario – was that even cases accompanied by a significant amount of evidence were seldom prosecuted.
This, she explained, was because most rapes in Uppsala, Stockholm, and other cities occur when young women meet young men online and go to an apartment, where, as in the allegations in the Assange case, what began as consensual sex turns nonconsensual.
But she said that this is exactly the scenario that Swedish police typically refuse to prosecute.
Just as everywhere else, Sweden’s male-dominated police, she explained, do not tend to see these victims as “innocent,” and thus do not bother building a case for arrest.
She is right: According to a report by Amnesty International, as of 2008, the number of reported rapes in Sweden had quadrupled in 20 years, but only 20% of cases were ever prosecuted.
And, while the prosecution rate constituted a minimal improvement on previous years, when less than 15% of cases ended up in court, the conviction rate for reported rapes “is markedly lower today than it was in 1965.” As a result, “in practice, many perpetrators enjoy impunity.”
Until 2006, women in Uppsala faced a remarkable hurdle in seeking justice: the city’s chief of police, Göran Lindberg, was himself a serial rapist, convicted in July 2010 of more than a dozen charges, including “serious sexual offenses.”
Lindberg also served as the Police Academy’s spokesman against sexual violence.
The Uppsala police force that is now investigating Assange either failed to or refused to investigate effectively the sadistic rapist with whom they worked every day.
In other words, the purported magical Swedish kingdom of female sexual equality, empowerment, and robust institutional support for rape victims – a land, conjured by Swedish prosecutors, that holds much of the global media in thrall – simply does not exist.
In the Assange case, the Swedish police supported the accusers in legally unprecedented ways – for example, by allowing them to tell their stories together and by allowing testimony from a boyfriend.&nbsp;But other alleged victims of gender-based abuse, sometimes in life-threatening circumstances, typically receive very different treatment.&nbsp;In particular, according to WAVE, a pan-European consortium of service providers for rape and sexual-abuse survivors, when migrants, who comprise 13.8% of Sweden’s population, report rape and abuse, they face high systemic hurdles in even telling their stories to police – including longstanding linguistic barriers in communicating with them at all.
Likewise, Swedish intake centers for victims of male violence are woefully underfunded – like all support services for rape and abuse victims across Europe and North America – leaving many women who face threats to their safety and that of their children waiting for unavailable places in shelters.
When I emailed the Rape Crisis support institute in Uppsala, listed by the global rape-crisis organization RAINN, I received an automatic reply saying that the facility was temporarily closed.
So, for most raped Swedish women, the shelters are full, the hotlines inactive, and the police selectively look the other way – that is, unless they are busy chasing down a globally famous suspect.
We have been here before.
Last year, when my left-wing colleagues were virtually unanimous in believing the New York Police Department’s narrative of a certain victim and a guilty-before-due-process rapist, I made the same call – to the local rape-crisis center.
There, Harriet Lesser, who works every day with victims whose alleged attacker is not the managing director of the International Monetary Fund, confirmed that the official support shown for the victim – in advance of any investigation – was indeed unprecedented.
Let me be clear: I am not saying that Assange, much less Dominique Strauss-Kahn, committed no crime against women.
Rather, Assange’s case, as was true with Strauss-Kahn’s, is being handled so differently from how the authorities handle all other rape cases that a corrupted standard of justice clearly is being applied.
These aberrations add insult to the injury of women, undefended and without justice, who have been raped in the “normal” course of events – by violent nobodies.
Sweden’s Shame
VIENNA – Last month, firecrackers were thrown at the only synagogue in the Swedish city of Malmö, breaking three windows.
The day before, a bomb threat had been left at the building, warning of what was about to happen.
Two weeks previously, another attack was launched against the same synagogue.
For months, local Jews have testified to an increasingly hostile atmosphere, with many saying they are frightened to go out on the streets wearing anything that might identify them as Jews.
Earlier this year, Daniel Schwammenthal, writing in The Wall Street Journal, explained why in the starkest possible terms: “Screaming ‘Sieg Heil’ and ‘Hitler, Hitler,’ a mostly Muslim mob threw bottles and stones at a small group of Jews peacefully demonstrating for Israel at this town’s central square last year.
Worshippers on their way to synagogue and Jewish kids in schools are routinely accosted as ‘Dirty Jews.’”
Malmö police say that, of the 115 hate crimes recorded in the city in 2009, 52 were aimed at Jews or Jewish institutions.
Anti-Semitism is back, and what is taking place in Malmö is merely an extreme manifestation of what is happening across the whole of Sweden.
Let us recall that it was Sweden’s top-selling newspaper, Aftonbladet, that last year published an anti-Semitic blood libel by alleging that Israeli soldiers routinely murdered Palestinian children and harvested their bodily organs for sale on the international black market.
The Swedish government responded with indifference, and worse: when the country’s ambassador to Israel put up a note on the embassy’s Web site distancing Sweden from such appalling calumnies, her enraged superiors in Stockholm ordered her to take it down.
It is not just the media and the government that is fanning the flames of this hatred.
In January 2009, church officials in the town of Luleå cancelled a planned torch-light procession for Holocaust Memorial Day, with a spokesman saying that they were “preoccupied” and “grief-stricken” by Israel’s Operation Cast Lead in Gaza.
Canceling Holocaust Memorial Day?
Spreading blood libels, and acquiescing in them?
Allowing a state of affairs in which Jews are frightened to leave their homes?
This does not sound like the tolerant, fair, and just society for which Sweden would like to be known.
How has such a state of affairs arisen, and what can be done to address it?
The first problem is that Swedish mainstream hostility to the State of Israel has clearly begun to cross the line into outright anti-Semitism. Of course, attempts to draw a distinction between hatred of Jews and hatred of Israel were never particularly convincing.
Israel is a specifically Jewish project, and to join the campaign of de-legitimization against the Jewish state is to join a campaign of de-legitimization against much of world Jewry, the vast majority of which either lives in Israel or regards it as a central component of Jewish identity.
But one particular section of Sweden’s population has never engaged in the pretense that there is a distinction between hatred of Israel and hatred of Jews.
Which brings us to the second major issue at play here: Sweden’s Muslim population.
While all manifestations of intolerance against Muslims must be firmly resisted, it is also vital to recognize the danger that some Muslim immigrants have brought with them from their home cultures: extreme forms of bigotry against Jews and Israel.
When mainstream politicians, newspapers, and churches rail against Israel, many Swedish Muslims inevitably see this is a green light for them to unleash their own hostility toward ordinary Jews.
They feel that their anti-Semitism is acceptable.
A third layer of this problem is the increasingly symbiotic alliance between radical Islamist groups in Sweden and a left that has departed from the honorable social-democratic traditions for which the country is famous around the world.
When the Israeli Davis Cup tennis team came to Malmö in 2009, it was forced to play against its hosts behind closed doors while a crowd of 6,000 far-leftists and Muslims rioted outside.
With anti-Israeli hate serving as the primary unifying factor, this alliance has grown into a new and dangerous force for intolerance within Swedish society.
Ultimately, change will not come unless and until Sweden’s leaders address these problems.
Officials and opinion shapers must understand that this perilous state of affairs will worsen if they fail to take their responsibilities more seriously, tone down their rhetoric, and adopt a balanced approach to Israel.
Above all, Swedish politicians must speak out when minorities become the target of hate crimes.
Even a tolerant country such as Sweden must not tolerate those who preach intolerance.
Sweden in Crisis
STOCKHOLM – After decades of adherence to more or less stable rules and predictable patterns, Swedish politics has entered uncharted territory in recent weeks.
Many are shocked that the government collapsed and had to call a new election only two months after taking office.
After all, Sweden had been a rare beacon of success in Europe in the years since the 2008 global financial crisis.
So what happened?
The immediate cause of the government’s demise was Parliament’s rejection of the center-left coalition’s proposed budget, in favor of the budget presented by the center-right Alliance parties, which formed the previous government.
Having failed to pass its first budget – owing to the abrupt decision by the far-right Swedish Democrats (SD) to support the Alliance alternative – the government could not simply continue as if nothing had happened.
The background to this episode was the September election, which the four-party Alliance lost after eight years in power (during which I served as Foreign Minister).
The Alliance government was widely considered to have been successful; but eight years is a long time in politics.
Fair enough.
But, though the Alliance certainly lost, the main opposition Swedish Social Democratic Party and its allies on the left did not win.
In fact, the three leftist parties in Parliament gained a slightly smaller share of the popular vote than they did in the 2010 election.
The big winner was the populist SD, which doubled its share of the vote, to more than 13%.
And, because no other party was prepared to cooperate with the SD, the only viable alternative was a minority government.
To be sure, the Social Democrat-Green coalition, with the support of only 38% of MPs, was bound to be an uncertain exercise.
But it could have worked, had the government not quickly veered sharply to the left, forging budget and other agreements with the ex-Communist Left party.
That strategy sealed the government’s fate, though the end came sooner and more dramatically than expected.
But Sweden’s current political muddle is also rooted in longer-term changes, which to some extent reflect broader European trends.
One is the structural decline of the once-dominant Social Democrats.
For decades, any election in which the party won less than 45% of the vote was viewed as a disaster.
Now the Social Democrats’ popular support hovers at around 30%, and the last two elections yielded the worst results in a century.
The other trend is the rise of the populist SD.
Until 2010, Sweden seemed immune to the rise of far-right parties like those in Denmark, Norway, and Finland.
Since then, however, the SD has fundamentally changed the country’s political landscape.
Anti-immigrant sentiment is part of the story, though Swedish public opinion has become much more favorable toward immigration since the early 1990s.
For some, immigration has become a symbol of a society gone astray.
For others, the number of immigrants over the last few years has simply been too high.
In fact, the numbers are high – not in comparison with a country like Turkey, but certainly relative to other European Union countries.
Sweden and Germany receive the largest inflows of immigrants by far – and Germany is nearly ten times the size of Sweden.
Our tradition of being open to refugees is not new.
People came from the Baltic countries in the 1940s, Hungary in 1956, Chile after the 1973 coup, and Iran after the 1979 revolution.
For decades, Swedish industry was dependent on immigrant workers.
During the Bosnian War of the 1990s, Sweden opened its doors to some 100,000 people – a challenge at any time, much less during a period of profound economic crisis.
But it still turned out well: The Bosnian immigrants have fared roughly as well as the Swedes who received them, and they have enriched our society.
In the new century, refugees have come increasingly from the Middle East and the Horn of Africa.
One percent of Sweden’s population today is from Iran, and almost 2% are from Iraq.
Indeed, after the Iraq war, the small town of Södertälje took in more Iraqi refugees than the United States did.
Given the numbers, immigration in Sweden has worked much better than expected.
But there are problems.
The Swedish labor market’s sometimes rather strict systems and stable structures have impeded integration relative to many other countries.
And now the number of immigrants is increasing again, reflecting chronic turmoil in the Middle East and elsewhere, as well as Europe’s increasingly turbulent and dangerous neighborhood, largely owing to Russian revisionism and military expansion.
Sweden, already a humanitarian superpower in terms of the aid it provides to conflict regions, certainly will not close its doors.
But other European countries will have to bear more of the burden, and the authorities will have to do more to facilitate integration.
In particular, the pace of job creation achieved in the last few years must be maintained.
For all of its economic success during the past two decades, not least since the 2008 crisis, industry is hollowing out, and structural issues are beginning to be felt.
Our celebrated welfare state will come under strain from an aging population.
Indeed, in this respect, immigration is more a part of the solution than a part of the problem.
There is no guarantee that the election in March will resolve Sweden’s political crisis, particularly if the SD performs well again.
A German-style grand coalition has never been tested in Sweden; and Austria’s experience suggests that it could play into the extremists’ hands.
But a more cooperative atmosphere might well be needed.
In that case, the key question will be whether the Social Democrats can ditch their allies further to the left.
Swine Flu for Grownups
PRINCETON – No one knows how the swine flu (H1N1) pandemic will evolve.
Will it keep spreading, or will it fizzle?
Will it retreat during the northern hemisphere’s summer and return in the fall?
Will it stay mild or turn more severe?
Flu experts just don’t know.
What is certain is that health officials risk mishandling how they explain this new and potentially alarming threat to the public.
Although they know a lot about virology and public health, they often know next to nothing about how to talk (and listen!) to people about risks.
So here’s a primer on the swine flu pandemic risk communication, framed in terms of what health officials shouldn’t do when they’re telling you about this new disease.
1. Don’t feign confidence.
Nobody likes uncertainty; we all wish the experts knew exactly what will happen.
But we cope better with candidly acknowledged uncertainty than with false confidence.
When health officials tell us confidently that X is going to happen, and then Y happens instead, we lose trust in their leadership.
Smart officials are planning for various swine flu pandemic scenarios, and expecting surprises that will force them to change their plans.
They should tell us so.
2. Don’t over-reassure.
So far, this pandemic is mild.
But even a mild influenza virus kills a lot of people, especially those with other medical problems.
And experts worry that the novel H1N1 virus could mutate into a more severe strain.
Yet officials endlessly insist that there is, as a Scottish health official put it, “absolutely no need for the public to be concerned.”
This is false and it could backfire.
Even before a situation deteriorates (if it does), people sense when they are being “calmed” rather than informed.
Not trusting that officials will be candid about alarming information, we rely more on rumors.
Not trusting official over-reassurances, we become even more alarmed.
3. Don’t worry about panic.
Panic is rare in emergencies.
Although people may feel panicky, they almost always behave well.
But “panic panic” – leaders’ fear that they will be unable to stop their people from panicking – is both common and harmful.
In the grip of “panic panic,” officials issue over-reassuring statements, suppress or delay alarming news, and speak contemptuously about how the public is “irrational,” “hysterical,” or “panicking.”
Such disdainful communication further reduces trust.
4. Don’t obsess over accusations of fear-mongering.
Nothing officials say is likely to cause panic, but they may be accused of causing panic no matter what they say.
Even when officials over-reassure, they’re often accused of fear-mongering by critics who can’t bear any signs of public concern.
That particular criticism is inevitable, and officials should shrug it off.
Far more officials have lost their jobs for under-warning the public about risks that turned out to be serious than for over-warning about risks that didn’t.
5. Don’t fight the adjustment reaction.
While panic is rare, it is natural for people to need some time to adjust to a new risk – and this swine flu pandemic is new to us all.
We cannot skip what risk communicators call the “adjustment reaction” phase, during which we may become temporarily overanxious and hypervigilant, and may even take precautions that are technically unnecessary or premature.
Adjustment reactions are brief, but useful – a cognitive, logistical, and emotional rehearsal for possible hard times ahead.
Health officials should guide people through their adjustment reactions, not demand that they skip that step.
6. Don’t oversell what the government is doing.
If I could ban one phrase from official statements, my first choice would be “Everything is under control.”
(“There’s no need to panic” would be a close second.)
Experts agree that pandemics can be slowed, but not “contained.” Officials who promise – or imply – that they can keep this pandemic from their borders, or stop it once it has arrived, are setting themselves up for public outrage later.
7. Don’t oversell what the public can do.
It is good risk communication to offer people things to do.
Action gives us a sense of control, and helps us bear our fear.
And if H1N1 becomes more severe, people (and communities) who have prepared for that possibility will probably fare better than those who have not.
But hygiene recommendations like hand-washing and cough-covering help only a little.
Flu spreads more slowly if we all do our share, but it still spreads. “It’s not much, but it’s all we’ve got” is just as effective a message as “It will prevent the flu” in getting people to adopt these measures – and truth is far more sustainable than exaggeration.
8. Don’t ask the impossible.
Recommending measures that the public cannot implement creates a sense of futility, not a sense of control.
Officials shouldn’t urge people to wash their hands where clean water isn’t available.
They shouldn’t urge urban residents with underlying health conditions to “avoid crowds” without acknowledging empathically that it’s impossible to avoid crowds entirely for the duration of the pandemic.
9. Don’t neglect the teachable moment.
In the developing world, swine flu (so far) is much less serious than many endemic health threats, and the main risk-communication goal should be to help people get through their adjustment reaction, take precautions that are feasible, and refocus on other priorities.
But in the developed world, swine flu has two long-lasting lessons to teach: (1) Flu is a bigger deal than many people imagine.
(2) Eventually, a severe pandemic will strike, whether it’s H1N1 or not, and we should do what we can, now, to prepare.
Health officials in North America mostly missed the teachable moment.
Instead of these lessons, many people “learned” (or mislearned) that pandemics are paper tigers, and that health officials are fear-mongers.
Let us hope that officials elsewhere will do better.
Sympathy for Greenspan
BERKELEY – In the circles in which I travel, there is near-universal consensus that America’s monetary authorities made three serious mistakes that contributed to and exacerbated the financial crisis.
This consensus is almost always qualified by declarations that the United States has been well served by its Federal Reserve chairmen since at least Paul Volcker’s tenure, and that those of us who have not sat in that seat know that we would have made worse mistakes.
Nevertheless, the consensus is that US policymakers erred when:
· the decision was made to eschew principles-based regulation and allow the shadow banking sector to grow with respect to its leverage and its compensation schemes, in the belief that the government’s guarantee of the commercial banking system was enough to keep us out of trouble;
· the Fed and the Treasury decided, once we were in trouble, to nationalize AIG and pay its bills rather than to support its counterparties, which allowed financiers to pretend that their strategies were fundamentally sound;
· the Fed and the Treasury decided to let Lehman Brothers go into uncontrolled bankruptcy in order to try to teach financiers that having an ill-capitalized counterparty was not without risk, and that people should not expect the government to come to their rescue automatically.
There is, however, a lively debate about whether there was a fourth big mistake: Alan Greenspan’s decision in 2001-2004 to push and keep nominal interest rates on US Treasury securities very low in order to try to keep the economy near full employment.
In other words, should Greenspan have kept interest rates higher and triggered a recession in order to avert the growth of a housing bubble?
If we push interest rates up, Greenspan thought, millions of Americans would become unemployed, to no one’s benefit.
If interest rates were allowed to fall, these extra workers would be employed building houses and making things to sell to all the people whose incomes come from the construction sector.
Full employment is better than high unemployment if it can be accomplished without inflation, Greenspan thought.
If a bubble develops, and if the bubble does not deflate but collapses, threatening to cause a depression, the Fed would have the policy tools to short-circuit that chain.
In hindsight, Greenspan was wrong.
But the question is: was the bet that Greenspan made a favorable one?
Whenever in the future the US finds itself in a situation like 2003, should it try to keep the economy near full employment even at some risk of a developing bubble?
I am genuinely unsure as to which side I come down on in this debate.
Central bankers have long recognized that it is imprudent to lower interest rates in pursuit of full employment if the consequence is an inflationary spiral.
Some days I think that, in the future, central bankers must also recognize that it is imprudent to lower interest rates in pursuit of full employment when doing so risks causing an asset price bubble.
Other days, however, I think that, even with the extra information we have learned about the structure of the economy, Greenspan’s decisions in 2001-2004 were prudent and committed us to a favorable and acceptable bet.
What I do know is that the way the issue is usually posed is wrong.
People claim that Greenspan’s Fed “aggressively pushed interest rates below a natural level.”
But what is the natural level?
In the 1920’s, Swedish economist Knut Wicksell defined it as the interest rate at which, economy-wide, desired investment equals desired savings, implying no upward pressure on consumer prices, resource prices, or wages as aggregate demand outruns supply, and no downward pressure on these prices as supply exceeds demand.
On Wicksell’s definition – the best, and, in fact, the only definition I know of – the market interest rate was, if anything, above the natural interest rate in the early 2000’s: the threat was deflation, not accelerating inflation.
The natural interest rate was low because, as the Fed’s current chairman Ben Bernanke explained at the time, the world had a global savings glut (or, rather, a global investment deficiency).
You can argue that Greenspan’s policies in the early 2000’s were wrong.
But you cannot argue that he aggressively pushed the interest rate below its natural level.
Rather, Greenspan's mistake – if it was a mistake – was his failure to overrule the market and aggressively push the interest rate up above its natural rate, which would have deepened and prolonged the recession that started in 2001.
But today is one of those days when I don’t think that Greenspan’s failure to raise interest rates above the natural rate to generate high unemployment and avert the growth of a mortgage-finance bubble was a mistake.
There were plenty of other mistakes that generated the catastrophe that faces us today.
Defusing the Syrian Time Bomb
TEL AVIV – It is remarkable that a stern warning about the scale of the threat posed to the United States by Syria’s civil war has gone practically unnoticed.
Is President Barack Obama’s administration stumbling toward the abyss?
Earlier this month, the Wall Street Journal reported that, according to the CIA’s deputy director, Michael Morell, “Syria’s volatile mix of Al Qaeda extremism and civil war now poses the greatest threat to US national security” – indeed, “probably the most important issue in the world today.” By contrast, Morell described the Iranian regime’s “merging of...nuclear ambitions with its desire to be a hegemonic power in the Middle East” as a mere “cause for concern.”
Just two months ago, in mid-June, when the Syrian crisis was the focus of international attention and the subject of heated policy debate, such a statement by a senior administration official would have drawn strong reactions from several quarters.
But Syria has since moved from the center of attention, displaced by the coup and ongoing crisis in Egypt, the threat of an Al Qaeda terror offensive in Yemen and elsewhere, and the renewal of Israeli-Palestinian negotiations.
The apparent (and deceptive) lull in the fighting in Syria has contributed to this shift.
After the government’s military achievements in Quseir and Homs, there has been some tactical regrouping by the opposition.
Both sides are trading minor blows as they prepare for a major round of fighting in Aleppo, Syria’s largest city, now held by the opposition.
Overall, and despite the regime’s recent victories, the fighting remains at a stalemate.
So this is a convenient time for the international community to look away from a crisis that seems to have no good solutions.
But this does not diminish the gravity of what is happening in Syria, or lessen the seriousness of Morell’s warning.
As Morell put it, the most acute danger is that a regime with a large stockpile of weapons of mass destruction will be supplanted by a regime affiliated with, or dominated by, Al Qaeda.
Pointing to the inflow of jihadis, Morell said that Syria’s “current track is toward the collapse of its central government,” after which it would replace Pakistan as Al Qaeda’s preferred haven.
Morell thus placed himself squarely within one of the two principal schools of thought in the policy debate on Syria (a debate that is articulated almost exclusively in geopolitical terms and ignores humanitarian issues).
One school regards Syria primarily as a theater of battle against Al Qaeda and other extremists.
Its adherents, preoccupied with the prospect of a jihadi takeover in Syria, argue (sometimes implicitly and sometimes explicitly) that the US and its allies must not support or intervene on the side of the rebels and, in fact, should view Bashar al-Assad’s regime as the lesser evil.
Those who fear a jihadi takeover cite recent events in Sinai.
Just a few days ago, Israel closed its airport in Eilat after receiving a warning that jihadis in Sinai planned to attack it with rockets.
This, it is argued, is only a dress rehearsal for what can be expected in a post-Assad Syria.
The other school of thought does not take this scenario lightly.
Nonetheless, it argues that a victory in Syria by a coalition of Russia, Iran, Hezbollah, and Assad’s regime would pose an even greater danger.
Moreover, in the event of the Assad regime’s fall, there would be plenty of ways to deal with the jihadi groups in Syria.
But the most appropriate response to Morell’s statement is that the US does not necessarily have to choose between two sharply defined options.
Yes, Syria’s secular opposition is weak and divided, while the jihadis are more dynamic; but jihadi supremacy in the event of an opposition victory is not inevitable.
The US and its allies should conduct a robust policy, make a more significant investment in the secular opposition, and articulate clear goals.
In June, Obama announced that Assad’s regime had used chemical weapons against its own population and had thus crossed his administration’s “red line.”
But no coherent action or policy followed this powerful statement.
For Obama, Syria’s fate simply does not seem urgent; but when the decisive battle for Aleppo begins, it may be too late.
Morell’s warnings may yet be vindicated – by default, if not by design.
Solving Syria in the Security Council
NEW YORK – The ongoing bloodletting in Syria is not only the world’s greatest humanitarian disaster by far, but also one of its gravest geopolitical risks.
And the United States’ current approach – a two-front war against the Islamic State and President Bashar al-Assad’s regime – has failed miserably.
The solution to the Syrian crisis, including the growing refugee crisis in Europe, must run through the United Nations Security Council.
The roots of US strategy in Syria lie in a strange– and unsuccessful – union of two sources of American foreign policy.
One comprises the US security establishment, including the military, the intelligence agencies, and their staunch supporters in Congress.
The other source emerges from the human-rights community.
Their peculiar merger has been evident in many recent US wars in the Middle East and Africa. Unfortunately, the results have been consistently devastating.
The security establishment is driven by US policymakers’ long-standing reliance on military force and covert operations to topple regimes deemed to be harmful to American interests.
From the 1953 toppling of Mohammad Mossadegh’s democratically elected government in Iran and the “other 9/11” (the US-backed military coup in 1973 against Chile’s democratically elected Salvador Allende) to Afghanistan, Iraq, Libya, and now Syria, regime change has long been the coin of the US security realm.
At the same time, parts of the human-rights community have backed recent US military interventions on the grounds of the “Responsibility to Protect,” or R2P.
This doctrine, adopted unanimously by the UN General Assembly in 2005, holds that the international community is obliged to intervene to protect a civilian population under massive attack by its own government.
In the face of the brutality of Saddam Hussein, Muammar el-Qaddafi, and Assad, some human-rights advocates made common cause with the US security establishment, while China, Russia, and others have argued that R2P has become a pretext for US-led regime change.
The problem, as human-rights advocates should have learned long ago, is that the US security establishment’s regime-change model does not work.
What appears to be a “quick fix” to protect local populations and US interests often devolves into chaos, anarchy, civil war, and burgeoning humanitarian crises, as has happened in Afghanistan, Iraq, Libya, and now Syria.
The risks of failure multiply whenever the UN Security Council as a whole does not back the military part of the intervention.
The US intervention in Syria can also be traced to decisions taken by the security establishment a quarter-century ago to overthrow Soviet-backed regimes in the Middle East.
As then-Under Secretary of Defense Paul Wolfowitz explained to General Wesley Clark in 1991: “We learned that we can intervene militarily in the region with impunity, and the Soviets won’t do a thing to stop us… [We’ve] got about five to ten years to take out these old Soviet ‘surrogate’ regimes – Iraq, Syria, and the rest – before the next superpower [China] comes along to challenge us in the region.”
When al-Qaeda struck the US on September 11, 2001, the attack was used as a pretext by the security establishment to launch its long-desired war to topple Saddam.
When the Arab Spring protests erupted a decade later, the US security establishment viewed the sudden vulnerability of the Qaddafi and Assad regimes as a similar opportunity to install new regimes in Libya and Syria.
Such was the theory, at any rate.
In the case of Syria, America’s regional allies also told President Barack Obama’s administration to move on Assad.
Saudi Arabia wanted Assad gone to weaken a client state of Iran, the kingdom’s main rival for regional primacy.
Israel wanted Assad gone to weaken Iran’s supply lines to Hezbollah in southern Lebanon.
And Turkey wanted Assad gone to extend its strategic reach and stabilize its southern border.
The humanitarian community joined the regime-change chorus when Assad responded to Arab Spring protesters’ demand for political liberalization by unleashing the army and paramilitaries.
From March to August 2011, Assad’s forces killed around 2,000 people.
At that point, Obama declared that Assad must “step aside.”
We don’t know the full extent of US actions in Syria after that.
On the diplomatic level, the US organized the “Friends of Syria,” mainly Western countries and Middle East allies committed to Assad’s overthrow.
The CIA began to work covertly with Turkey to channel arms, financing, and non-lethal support to the so-called “Free Syrian Army” and other insurgent groups operating to topple Assad.
The results have been an unmitigated disaster.
While roughly 500 people per month were killed from March to August 2011, some 100,000 civilians – around 3,200 per month – died between September 2011 and April 2015, with the total number of dead, including combatants, reaching perhaps 310,000, or 10,000 per month.
And, with the Islamic State and other brutal extremist groups capitalizing on the anarchy created by the civil war, the prospect of peace is more distant than ever.
Military intervention led or backed by the US in Afghanistan, Iraq, and Libya has produced similar debacles.
Toppling a regime is one thing; replacing it with a stable and legitimate government is quite another.
If the US wants better results, it should stop going it alone.
The US cannot impose its will unilaterally, and trying to do so has merely arrayed other powerful countries, including China and Russia, against it.
Like the US, Russia has a strong interest in stability in Syria and in defeating the Islamic State; but it has no interest in allowing the US to install its choice of regimes in Syria or elsewhere in the region.
That is why all efforts by the UN Security Council to forge a common position on Syria have so far foundered.
But the UN route can and must be tried again.
The nuclear pact between Iran and the Security Council’s five permanent members (the US, China, France, Russia, and the UK) plus Germany, has just provided a powerful demonstration of the Council’s capacity to lead.
It can lead in Syria as well, if the US will set aside its unilateral demand for regime change and work with the rest of the Council, including China and Russia, on a common approach.
In Syria, only multilateralism can succeed.
The UN remains the world’s best – indeed its only – hope to stop the Syrian bloodbath and halt the flood of refugees to Europe.
Preserving the Ottoman Mosaic
LONDON – The roots of the Middle East’s many conflicts lie in the unraveling of the Ottoman Empire at the beginning of the twentieth century and the failure since then to forge a stable regional order.
As the international community works toward securing a durable peace in the region, its leaders would be wise to remember the lessons of history.
The Ottoman Empire – which once stretched from Bihać in today’s Bosnia to Basra in Iraq – was a rich mosaic of intermingled cultures, traditions, and languages under the ultimate authority of the Sultan in Istanbul.
It was remarkably stable, providing the region with a peaceful foundation for hundreds of years.
But as it started to come apart, it did so violently.
It was in the Balkans that the process of carving out nation-states from the Ottoman mosaic began.
And it was a process that kicked off two decades of devastating wars – the first at the beginning of the twentieth century, the second in the 1990s.
Meanwhile, in Mesopotamia and the Levant, a new crop of countries emerged as outside powers redrew the Ottoman map.
Syria and Iraq were the outcome of negotiations over competing French and British interests.
The Greeks made an ill-fated attempt to conquer western Anatolia – eventually triggering the revolution that led to the creation of modern Turkey.
And the 1917 Balfour Declaration – a British pledge to establish a Jewish state in Palestine – laid the groundwork for the creation of Israel in 1948, followed by decades of conflict and negotiations.
Finding a home for the Ottoman province of Mosul proved to be a particularly tricky part of the game, as it was claimed by the new governments in both Turkey and Iraq.
A commission set up by the League of Nations and headed by a Swedish diplomat crisscrossed the region in search of a fair solution, but ultimately failed to find a neat dividing line.
Eventually, the commission recommended that the province be given to Iraq, but only because Iraq was supposed to remain under a League mandate for decades.
Since then, through successive wars and revolutions, one truth has remained paramount: The Ottoman mosaic provided no clear dividing lines that would permit a smooth reordering of the region into states or entities with homogenous ethnic, national, or religious identities.
Recognizing this truth is highly consequential: The regional order created in the wake of the empire’s post-World War I collapse may well be arbitrary, but any attempt to change it is likely to lead to even more bloodshed.
Dividing Iraq into separate Sunni and Shia states, for example, could easily result in Mesopotamia’s version of the Indian subcontinent’s tragedy in 1947, when millions of people died fleeing to Pakistan or India after the partition.
Indeed, the conflict between Arabs and Kurds that would follow any partition of Iraq would likely be both bloody and long, and would have profound ramifications in Iran, Turkey, and Syria, with their large Kurdish populations.
The battle for control of Baghdad would be similarly severe.
Finding a solution to the conflict in Syria is no easier.
A Russian-protected Alawite state along the coast might be sustainable, but power in Damascus would remain highly contested.
Syria’s Christian minority would also be a victim of such an effort.
The country is host to some of the world’s oldest Christian communities, which, though much smaller than they once were, retain undisputed historic rights to the region.
They are part of the small patch in the Ottoman mosaic that was preserved in modern Syria; but they would perish if it were to disappear.
To be sure, the Ottoman mosaic is badly damaged and in the process of slowly disintegrating.
But while the old multicultural trading cities of Aleppo and Mosul might never truly recover and blossom again, that should not be used as an excuse to carve up the region along new lines, at the cost of rivers of blood.
As the international community strives to end the chaos and conflict wracking the Middle East and establish a regional order than can sustain peace and stability, its leaders should strive to work within the existing framework.
Armchair strategists in faraway countries are deluding themselves if they think attempts to impose neat new borders on these ancient lands would not founder against modern reality.
Syrian Roulette
JERUSALEM: Parliamentary maneuvers in the Knesset and recent fighting in Lebanon put Syrian/Israeli peace talks in cold storage.
Even Israeli’s unilateral pledge to pull its army out of south Lebanon this summer did not instantly rekindle them.
But these ups and downs only indicate the difficulties involved.
They also reflect the nature of the closed Syrian regime, which never underwent anything like a perestroika.
The most important new fact remains unchanged: after fifty years of enmity Syria has signaled its readiness to follow Egypt, Jordan and the PLO in seeking reconciliation with the Jewish state.
So even the Lion of Damascus ("Assad" means lion in Arabic), it appears, is no longer willing to isolate himself from changes in the region.
Three causes push President Hafez al-Assad, ever so glacially, towards accepting the necessity of peace with Israel.
First, disappearance of the Soviet bloc deprived Damascus of its Moscow-based strategic umbrella: if Syria finds itself at war with Israel and loses, as in the past, hundreds of tanks and aircraft, there will be no automatic resupply from Moscow.
In short: Syria has no military option.
Secondly, Syria does not like feeling isolated – neither in the Arab world, nor on the international scene.
With Egypt, Jordan and the Palestinians at peace with Israel, the idea of being in the same category as Baghdad and Tripoli does not appeal to Assad.
Moreover, all Arab regimes that made peace with Israel benefit from improved relations with the United States (i.e.: economic assistance), while Syria remains on the American list of terrorist states.
Here again the disappearance of Soviet power brings our Syria’s vulnerability.
When even Assad’s allies in Teheran talk about a "dialogue of civilizations" with the West, the chill felt in Damascus must be great.
Last and not least: although President Assad has been ailing for years, he has outlived most of his neighbors.
There is no doubt that the Assad era is coming to a close.
He is grooming his son Bishar to succeed him.
Alliance between the three pillars of the regime – the Army, the Ba’ath Party and the Alawite clans – seems capable of guaranteeing a smooth transition.
What better gift can Assad-pére bequeath to his son than a return of the Golan Heights.
These developments have their mirror image in Israel and suggest why the Labour-led governments of Rabin, Peres and now Barak are ready for meaningful compromise on the territorial issue of the Golan.
The strategic importance of the dramatic heights, overlooking most of the northern Israeli region of Galilee, is obvious.
Because Syria, bereft of Soviet support, is less of a threat to Israel, Jerusalem can be more flexible than before, when the Golan was a glacis defending Israel not only against Syria, but against a bloc seemingly stretching all the way to Vladivostok.
So, despite today’s interruptions, a context for negotiations exists, as well as political will on both sides.
The agendas of both parties are, however, different: while Syria focuses on the symbolic meaning of the return of the Golan, Israel wants specific, entrenched guarantees regarding the security of its northeastern border, as well as an end to Syrian-supported Hizbullah incursions from Lebanon – a country that is virtually a Syrian protectorate.
For Israel the quid pro quo for returning the Golan is not a piece of paper with the usual phrases about peace and coexistence.
It needs tangible, institutionalized arrangements that will assure a skeptical Israeli public and make a return of hostilities difficult.
This means normalization of relations: mutual recognition, full diplomatic relations, exchange of ambassadors, open frontiers, free movement of people and goods, possibilities for economic and scientific cooperation –plus an effective early warning system.
It is these steps, which may sound reasonable to outsiders, which create problems for the closed, claustrophobic, regime in Damascus.
Syria does not enjoy open relations with any of its other neighbors: the border with Iraq has been virtually closed for decades, the border with Turkey is contested.
What for Israel appears as "normalization" is totally abnormal for Syria.
A different obstacle appears on the Israeli side, where any territorial concessions must be ratified, according to a law passed in the waning days of the Netanyahu government (and recently toughened), by a referendum.
Israel has no experience with referenda, and having a peace treaty ratified by a referendum is in any case quite unique.
It is reasonable to argue that if agreement is reached with Syria and accepted by the government as well as a majority in the Knesset, it will eventually be ratified.
This is Barak’s argument, and it seems plausible.
Yet, negotiating a complicated and painful agreement with Syria, which may involve uprooting 15,000 Israeli settlers from the Golan, under a Damocles’ sword of a referendum doesn’t make Barak’s task easier.
Recent demonstrations in Tel-Aviv against returning the Golan marked the beginning of a campaign that will shadow the negotiations with ever greater force the more the negotiations seem capable of bearing fruit.
So both sides labor under complex conditions and in political contexts which make negotiations an almost Byzantine game.
Yet the political will on both sides is there, giving hope to a process which otherwise appears like squaring a circle.
Engaging the World in Syria
ABU DHABI – A global security crisis of historic proportions is raging in the Middle East, and spreading by the day, as millions of refugees flee Syria and Iraq.
The crisis is now affecting not just all of Syria’s immediate neighbors, straining their resources and exacerbating social and ethnic tensions; it now directly involves all of the current permanent members of the Security Council except China.
It is time for all would-be permanent members of the United Nations Security Council – namely, Germany, India, Japan, Brazil, and Egypt – to step up.
The desire for a political settlement that could end the Syrian civil war is palpable; but just what that settlement would look like remains open to debate – or to further conflict.
Indeed, Russia and the United States are circling each other like boxers before the contest actually begins, supporting different factions and trying to ensure that their allies in the multi-sided conflict are advancing, or at least holding ground.
The need for broad cooperation – and the support of the entire UN Security Council – is apparent.
That is why US Secretary of State John Kerry is talking to the Russians, the Saudis, and the Turks to build support for a new round of international talks.
And the UN and Arab League’s special envoy to Syria, Staffan de Mistura, has created a set of working groups, chaired by Europeans, to “create a framework for concrete talks between Syria’s government and opposition.”
In enabling a peace deal, a coalition of countries that are not yet directly involved in the crisis could be very helpful.
Such a coalition – involving, say, Germany, India, Japan, Brazil, and Egypt – could increase the pressure on President Bashar al-Assad to negotiate by convincing Russian President Vladimir Putin that the world is watching his deal-making efforts closely and that his prestige is on the line.
Moreover, coalition members could convince other relevant regional players to push for a lasting peace.
Germany, for example, already recognizes that the only long-term solution to Europe’s refugee influx lies in eliminating the need to flee, and has begun to make some moves.
Foreign Minister Frank-Walter Steinmeier traveled to Turkey in September to help broker a deal on keeping refugees in Turkey, in exchange for restarting talks on Turkish accession to the European Union.
A leading German foreign policy expert, Volker Perthes, is chairing one of de Mistura’s working groups.
The other countries have yet to take action.
But they, too, have plenty of motivation – and plenty to offer.
India – as well as Pakistan – has a great deal to gain from strengthening Southwest Asian trade, energy, and investment ties.
Since the signing of the Iran nuclear deal, India has been contemplating renewing the plan for an Iran-Pakistan-India gas pipeline, with the participation of China and Russia.
But that will be impossible without a settlement in Syria and a decision by Iran to stop supporting Hezbollah.
India has a strong relationship with Iran, underpinned by long-standing cultural, social, political, and economic ties, with India now funding an overhaul of the Iranian port of Chabahar, which will give it direct access to Afghanistan.
This places India in a strong position to push Iran to put pressure on Assad.
Likewise, India can leverage its relationship with Russia – it remains a major importer of Russian arms – to help drive progress.
Japan’s potential contribution also involves Iran, with which Japan has lately been pursuing a closer relationship – not least because Japan needs Iranian oil and gas.
Earlier this month in Tehran, the Japanese and Iranian foreign ministers agreed to begin negotiations on a bilateral investment treaty.
Japan also wants to speed up implementation of the Iran nuclear deal, so that it can take advantage of the business opportunities that will result when economic sanctions on the Islamic Republic are lifted.
But if Iran is truly to rejoin the international community, it must play a constructive role in its region.
Japan, which now aspires to enhance its own role on the world stage, must not shy away from making that clear.
A bonus here is that Japanese and Indian interest in the Syrian peace process could spur China to play an active role in reaching, rather than blocking, a solution.
Brazil, despite confronting plenty of domestic problems right now, is also in a position to help.
Not only does it have substantial ties with Russia; it is also linked to Turkey, exemplified by the two countries’ 2010 effort to broker a deal with Iran over its nuclear program.
Moreover, in 2011, Brazil put forward a concept paper at the UN outlining how countries seeking to implement the “responsibility to protect” doctrine should behave.
With the Syrian government – through its murder of tens of thousands of civilians with barrel bombs and poison gas – having more than fulfilled the criteria for triggering the international community’s obligation to intervene, Brazil could suggest what an intervention that reflected the principle of “responsibility while protecting” might look like.
Finally, Egypt – a perennial candidate for a permanent or rotating African seat in a reformed Security Council – has important relationships throughout the region, particularly with Saudi Arabia and other Gulf countries that are directly supporting some Syrian opposition groups.
The government of Egyptian President Abdel Fattah el-Sisi, who has emphasized the need for a comprehensive political settlement, is tacitly supporting Assad, but is also deeply concerned about the Islamic State.
Egyptian diplomats are thus excellent candidates to exert pressure for compromise.
Many of these countries’ governments might say that the Syrian conflict is too far away to affect them directly.
But global leadership does not simply mean enjoying the prestige that accompanies presumed power.
The UN Charter requires countries to use their power to identify “any threat to the peace, breach of the peace, or act of aggression,” and to decide which measures must be taken “to maintain or restore international peace and security.”
The Syrian crisis is a major “threat to the peace,” and the world must address it together.
Syria\u0027s Culture of Fear and Stalemate
It is not surprising that the new, young leader of an Arab country should be tremendously concerned, during his first years in office, with establishing his legitimacy and stature.
In replacing his father, the late President Hafiz al-Assad, Syria's current President, Bashar al-Assad, urgently needed to demonstrate his command of his country's situation even more than other relatively new Arab leaders, such as Jordan's King Abdullah or Morocco's King Muhammad.
For Bashar al-Assad selection as the replacement for his father, within minutes of Assad's death on June 10, 2000, had stunned Syria's entire system, despite the years of preparing public opinion for this succession.
Having failed to put forward a clear and effective program of internal reform, the young President sought to make up for his domestic failure in the realm of foreign affairs.
Here, no surprise, the ongoing Arab-Israeli conflict provided the most visible opportunity to establish his leadership credentials, especially in the aftermath of the democratic election of Ariel Sharon as Israel's new Prime Minister, a man reviled in the Arab world.
During the recent Arab Summit in Beirut, the young President capitalized on the absence of the Egyptian, Libyan and Palestinian leaders (among others) to strike a positive chord with audiences in Syria and across the Arab world.
In a well-rehearsed, self-assured manner reminiscent of his late father, Bashar al-Assad aimed a provocative lecture at his colleagues, supporting the Palestinians' "right of resistance," calling upon Arab countries to sever their relations with Israel, urging an Iraqi-Kuwaiti reconciliation, and endorsing Saudi Crown Prince Abdallah's peace initiative.
With these demands, the young President emerged in many Syrian eyes as the summit's "Man of the Hour," a leader with a deep understanding of the issues at hand.
Through his confident performance, the new President gained in stature.
More importantly, his performance deflected attention from any consideration of economic or political reform within Syria, at least for now.
Initially, President Bashar's accession to power was accompanied by a modest, but noticeable political thaw.
Popular forums and private discussion clubs sprung up across Syria, allowing relatively open debate.
After a few months, these popular forums were brought to an abrupt halt, as security services enforced a stringent set of regulations that effectively closed these open gatherings.
The shortness of this Syrian "spring" came as a hard blow to the expectations of many of the country's intellectuals and professionals, young and old.
This blow was felt all the more sharply as it became obvious that curtailment of these popular forums did not stir a wide public reaction.
Forced to recognize the prospect of being marginalized yet again by the new government, Syrian intellectuals turned their attention to Sharon and the growing conflict between Israelis and Palestinians.
Once again, the Palestinian cause became a substitute for focused attention on Syria's domestic situation, offering Syrian intellectuals and professionals a politically safe way to vent their frustrations.
As for the Syrian "Street," that amorphous mixture of average citizens and popular consensus, not only did it lack any sympathy for the intellectuals, it also failed to show any systematic interest in domestic politics.
The main concerns of the average Syrian, it seems, are definite improvements in living standards and a reduction in the high unemployment rate.
Broader concerns about reform - civil law, women's rights, and the role of religion in society - remain issues that the Syrian Street prefers to avoid.
For better or worse, restrictions in these areas are well-understood constants of Syrian life.
Challenging them in difficult and insecure times is not an appealing prospect.
The passivity of Syrian society is the result of a tacit agreement between people and government.
The government does not dabble too much in social affairs, while the people do not involve themselves too much in internal politics.
Meanwhile, the Arab-Israeli conflict serves as a mutually agreed upon rallying point for Syria's government and governed.
As the pretext for ignoring the repression of basic freedoms, that conflict has come to be described in powerful national and religious rhetoric throughout Syrian society.
What might otherwise be seen as a political conflict has acquired significant socio-cultural dimensions.
It is therefore legitimate to wonder whether Syria's President can act with any real initiative toward the Arab-Israeli conflict.
Despite the dictatorial nature of his regime, President al-Assad still needs to satisfy popular sentiment regarding Israel.
To betray this consensus runs the risk of mobilizing people on behalf of other, more domestically-oriented concerns.
This is the risk of all popular mobilization in the Middle East;
Syria simply exhibits a more potent version of it.
Syria’s Dangerous Liaisons
All eyes turned to Syria following the assassination of former Lebanese Prime Minister Rafik Hariri.
Opposition groups in Lebanon, as well as Hariri supporters, openly accused Syrian President Bashar Assad’s regime of being responsible for the killing.
The Bush administration, while not formally blaming Syria, virtually did so and recalled its ambassador to Damascus.
The US is said to be extremely angry at Syria’s refusal to withdraw its forces from Lebanon in line with a United Nations resolution.
Growing opposition to Syrian hegemony in Lebanon is but one of four related problems Syria faces, all of which it has addressed inadequately.
The other three are Syria’s behavior in Iraq, its relations with the US, and the need for domestic reform.
While corrosive immobility is a trademark of the Syrian regime, these challenges threaten to reinforce each other and marginalize Syria internationally even more so than today.
In Lebanon, the Syrians have repeatedly misread the Bush administration’s intentions.
Last September, the US, together with France, sponsored UN Security Council Resolution 1559 demanding a Syrian pullout and the disarming of militias – mainly Hezbollah.
This came after Assad last September imposed an unconstitutional extension of Lebanese President Emile Lahoud’s mandate, despite French and American warnings.
Yet to this day, Syrian officials privately say that they don’t think the US is serious about a withdrawal.
Syria’s leaders also continue to dismiss demands from within Lebanon for an end to Syria’s 28-year military presence.
Such demands escalated dramatically after Hariri’s death, as tens of thousands of the former prime minister’s partisans, who previously sat on the fence when it came to Syria, shouted “Syria out.”
Indeed, a broad multi-communal opposition front has formed in Beirut to demand Syria’s departure.
Yet rather than address the front’s demands and shape a healthy bilateral relationship between equal countries, Syria has sought to divide the opposition and reassert control.
Hariri’s assassination makes that far more difficult, and Syria must prepare for a strong backlash from the US and France.
In Iraq, since the fall of Baghdad on April 9, 2003, Damascus has shown undue nostalgia for the old system.
Though the Syrian and Iraqi Baath parties were bitter foes, there was consolation in that both were members of a confederacy of despotisms.
For the Syrians, a democratic Iraq friendly to the US was always far worse than Saddam Hussein, the enemy they knew – and later profitably traded with – during the years of international sanctions against Iraq.
Syria’s suspected support for Iraqi Baathist exiles threatens to damage relations with the new Iraq.
Baghdad has repeatedly accused the Assad regime of allowing Iraqi funds to be channeled to insurgents, and recently notified the Syrians that the photograph of a senior Syrian intelligence official taken with an Islamist combatant was found on the latter’s body in Falluja.
As a legitimate Iraqi authority emerges following the elections, the Syrians will have to show foresight in jettisoning their pro-Saddam acquaintances.
The Bush administration’s growing impatience with Syrian involvement in the Iraqi insurgency is a major reason for Syria’s deteriorating relationship with the US.
Indeed, there is palpable disdain for Syria in Washington.
That is why Syria’s denials that it is playing a spoiler role in Iraq are rarely taken seriously, and why Assad has not gained American support for renewed negotiations with Israel over the Golan Heights.
There are signs that the Syrians are unable to gauge American intentions on other issues as well.
For example, Assad apparently still does not realize how much the Bush administration associates his regime with terrorism.
Syrian officials believe that because the Baath Party is secular, the US will invariably support it against an Islamist resurgence.
They fail to see that American officials regard Syria as complicit in the activities of Islamist terrorist groups in the Palestinian territories, Iraq, and Lebanon.
At home, Assad’s regime also finds itself in a bind.
Political and economic reform, when it advances, does so at a glacial pace.
A major item of discussion in Syria is the revival of Islam as an alternative to a political and economic system offering few incentives except to regime grandees.
France’s opposition to Syria’s presence in Lebanon was at least partly a reflection of disenchantment with Assad’s reformist ambitions, and the European Union has expressed similar reservations.
Assad is now in a consolidation phase, leaving little room for reform.
Indeed, his new interior minister, Ghazi Kanaan, an old-school hardliner, spearheaded a crackdown on reformers and Kurds in the past year or so.
The reshuffle last November that brought Kanaan and others into the cabinet was seen to reflect Assad’s preferences.
In the coming month, several rounds of retirements should allow the president to place more of his people in positions of power.
Consolidation, however, is not reform.
Assad must show that his enhanced authority can lead to genuine transformation.
Until now, the president has toed a hard line on Iraq, on Lebanon, and in domestic affairs.
If he’s a reformer, few are convinced.
Syria may pay a heavy price for that ambiguity.
Syria’s Sectarian Stalemate
PRINCETON – What began in Syria as a revolt against an oppressive regime has evolved into a sectarian civil war and, more recently, into a proxy conflict.
In the process, the struggle has become increasingly convoluted, with conflicting agendas among allies, together with deep-seated communal tensions, rendering the situation nearly intractable.
On one side, the United States, the European Union, Turkey, Jordan, Saudi Arabia, and Qatar are backing the opposition – a welter of armed factions with diverse agendas and ideologies that range from Syrian nationalist to global jihadi.
This disunity reflects the fissures in Syrian society, a result of more than four decades of brutal authoritarian rule.
On the other side, Russia and Iran (and its proxy, Lebanon’s Hezbollah), each for its own reasons, are supporting President Bashar al-Assad’s regime.
Russia’s motivations are tied to the legacy of the Cold War.
The Assad regime has consistently adopted an anti-Western stance, aligning itself with the Soviet Union and later with Russia.
Today, Syria represents Russia’s only remaining toehold in the Arab world, while all of Assad’s regional opponents are US allies.
Iran’s involvement reflects a different, much older struggle – that between Sunni and Shia for control of the Middle East.
With Shia-dominated Iran providing weapons, money, troops, and training for Assad’s forces, the conflict’s sectarian dimension has taken on greater significance.
Indeed, government forces have devolved into a sectarian army, motivated by the fear that, if the largely Sunni rebels are victorious, they will annihilate the Shia-affiliated Alawite minority that has ruled Syria for decades.
As it stands, Assad’s regime possesses an overwhelming military advantage, with an air force, tanks, missiles, and chemical and biological weapons.
In order to defeat them, the opposition needs more sophisticated weapons – and its backers are ready to oblige.
Turkey, Saudi Arabia, Jordan, and Qatar – all Sunni-led countries – have sharply increased their military aid to the Syrian rebels in recent months.
Even the United States, which has so far refused to provide lethal aid for fear of arming global jihadis, recently announced that it is working on a plan to deliver weapons to opposition forces.
Sunni-Shia tensions tend to rise sharply during geopolitical power struggles, such as in Iraq in 2006-2008.
Prior to that, the last great Sunni-Shia battle in the Middle East involved near-constant war between the Sunni Ottoman Empire and Iran’s Shia Safavid Empire during the sixteenth and seventeenth centuries.
The Ottomans won by a small margin, ultimately securing control over Iraq.
But the protracted conflict contributed to the decline of both empires and devastated Iraq, leaving behind a deep sectarian cleavage.
This does not bode well for Syria.
Since the 1970’s, the Assads have failed to foster Arab nationalism in order to unite the religiously divided population, resorting instead to divisive sectarian politics to control Syria’s population.
While ensuring that their Alawite allies filled key positions in the military and intelligence services helped the Assads to retain their grip on the country, it was a strategy that widened and reinforced the Sunni-Shia rift among the population.
When the Arab Spring began to unfold, Assad adopted the same approach, hoping that it would rally his Alawite supporters and scare the rest of the public into submission.
This time, however, the plan backfired.
Syria’s Sunni population, inspired by the revolutions in other Arab countries and outraged by the regime’s brutality, simply stopped being afraid –&#160;a potentially game-changing development for Arab authoritarianism.
Now, the consequences of the Assads’ failure to promote a shared national ideology are becoming fully exposed.
Syria’s Sunnis are increasingly invoking theology to justify hatred of the Shia minority, and forms of Sunni exclusivism, similar to Al Qaeda’s ideology and worldview, are becoming the norm.
While Assad has secured the Alawite community’s renewed support, he has done so at the cost of increasing the very real danger that the rebels will punish all Alawites for the regime’s crimes.
As the war grinds on, prospects for a negotiated solution are diminishing.
As Iran throws its weight – and billions of dollars – behind the Alawites, and the Gulf States do likewise in support of the Sunnis, Syria is being torn apart.
Soon, it will be too far gone for either side to be able to claim victory.
Uniting Syria
BERLIN – Syrian opposition activists regularly express disappointment with the level of international support that they receive.
Although the last meeting of the so-called “Friends of Syria” (a group of countries that convenes periodically to discuss Syria’s situation outside of the United Nations Security Council) brought more financial aid, the degree of genuine outside commitment to their cause remains questionable.
The United States, the European Union, Turkey, and most Arab countries agree that Syrian President Bashar al-Assad’s regime is no longer legitimate.
They have intensified sanctions against the government, and have provided different kinds of support to opposition groups.
Some states have delivered automatic weapons, ammunition, and rocket-propelled grenades.
But arms deliveries have dried up, and the rebels’ pleas for anti-aircraft weapons remain unanswered.
Moreover, neither Syria’s neighbors nor Western governments are willing to intervene militarily.
Indeed, despite expressions of solidarity, they have refused to establish a protection zone for Syrian civilians along the border of neighboring states, or to impose a no-fly zone for Syrian military aircraft.
As a result, Syrian opposition groups believe that they have been left to confront Assad’s brutal regime alone.
But Syrian oppositionists must recognize that the lack of decisive international action is not only the result of Russia and China vetoing any meaningful action in the Security Council, or NATO countries’ unwillingness to enter into another war in the region.
In fact, the international community is waiting for Syria’s disorganized opposition to transform itself into a coherent, effective force as much as the opposition is waiting for the international community.
This entails forming a common platform that represents all relevant groups, including the Local Coordination Committees, the Syrian Revolution Coordinators Union, and the Free Syrian Army’s military councils.
To be sure, the rebels have made some progress.
They have created four regional military councils, which have helped to consolidate leadership and solidify their control over significant areas of the country, particularly near the Turkish border.
Yet the Syrian opposition has so far failed to present itself as a unified actor.
This is astonishing, given that highly respected, influential figures and political parties have been speaking for the opposition at international gatherings.
The Syrian National Council (SNC), for example, includes many such figures, and has managed to gain material support from several countries.
But it is not inclusive enough to serve as the Syrian opposition’s sole representative.
Attempts to enlarge the SNC have been unsuccessful, owing to reservations expressed by some important groups, such as the Democratic Forum, about joining an organization that relies on foreign sponsors.
The Syrian opposition needs to establish an umbrella organization accepted by all, including the de facto civilian and military leaders who have emerged locally over the last year and a half.
These groups already share a common goal – to bring down Assad’s regime – and most of them (with a few ultra-militant exceptions) hope to build a peaceful, inclusive, and democratic state.
Influential opposition figures – such as former parliamentarian and political prisoner Riad Seif and the SNC’s former leader, Burhan Ghalioun – have proposed promising strategies for forming such an umbrella organization.
For example, a “group of wise persons” who do not seek political positions could oversee the creation of a provisional council that includes all relevant political groups and coalitions, the military councils, the business community, and religious leaders.
But such plans have not been realized, owing to the absence of a cooperative culture.
Given that Syrians were socialized in a deeply authoritarian system, even those who are fighting for a democratic system are inexperienced in the art of coalition building.
Also, potential politicians have never been able really to measure their popularity in democratic contests.
As a result, not a few of them overestimate their actual influence and tend to compete for leadership rather than cooperate.
Syria’s opposition leaders do not need to sweep their political differences under the rug in order to gain the international community’s support.
They simply need to create a common body that all relevant groups on the ground can accept, as the Libyan opposition did when it set up the National Transitional Council.
After that, they should establish a legitimate authority inside Syria that can administer liberated areas, distribute aid, and provide services to civilians.
Such a transitional authority could call upon the international community for needed support more easily than an exiled rebel group could.
The Syrian revolution is essentially a civilian and political rebellion against dictatorship – one that is gradually unraveling Assad’s regime.
The opposition must begin to lay the groundwork for a new order based on unity and cooperation.
Otherwise, smaller groups of armed militants – supported, or even manipulated, by external actors – will dictate Syria’s future.
Why Syriza Will Blink
LONDON – Once again, Greece seems to have slipped the financial noose.
By drawing on its holdings in an International Monetary Fund reserve account, it was able to repay €750 million ($851 million) – ironically to the IMF itself – just as the payment was falling due.
This brinkmanship is no accident.
Since coming to power in January, the Greek government, led by Prime Minister Alexis Tsipras’s Syriza party, has believed that the threat of default – and thus of a financial crisis that might break up the euro – provides negotiating leverage to offset Greece’s lack of economic and political power.
Months later, Tsipras and his finance minister, Yanis Varoufakis, an academic expert in game theory, still seem committed to this view, despite the lack of any evidence to support it.
But their calculation is based on a false premise.
Tsipras and Varoufakis assume that a default would force Europe to choose between just two alternatives: expel Greece from the eurozone or offer it unconditional debt relief.
But the European authorities have a third option in the event of a Greek default.
Instead of forcing a “Grexit,” the EU could trap Greece inside the eurozone and starve it of money, then simply sit back and watch the Tsipras government’s domestic political support collapse.
Such a siege strategy – waiting for Greece to run out of the money it needs to maintain the normal functions of government – now looks like the EU’s most promising technique to break Greek resistance.
It is likely to work because the Greek government finds it increasingly difficult to scrape together enough money to pay wages and pensions at the end of each month.
To do so, Varoufakis has been resorting to increasingly desperate measures, such as seizing the cash in municipal and hospital bank accounts.
The implication is that tax collections have been so badly hit by the economic chaos since January’s election that government revenues are no longer sufficient to cover day-to-day costs.
If this is true – nobody can say for sure because of the unreliability of Greek financial statistics (another of the EU authorities’ complaints) – the Greek government’s negotiating strategy is doomed.
The Tsipras-Varoufakis strategy assumed that Greece could credibly threaten to default, because the government, if forced to follow through, would still have more than enough money to pay for wages, pensions, and public services.
That was a reasonable assumption back in January.
The government had budgeted for a large primary surplus (which excludes interest payments), which was projected at 4% of GDP.
If Greece had defaulted in January, this primary surplus could (in theory) have been redirected from interest payments to finance the higher wages, pensions, and public spending that Syriza had promised in its election campaign.
Given this possibility, Varoufakis may have believed that he was making other EU finance ministers a generous offer by proposing to cut the primary surplus from 4% to 1% of GDP, rather than all the way to zero.
If the EU refused, his implied threat was simply to stop paying interest and make the entire primary surplus available for extra public spending.
But what if the primary surplus – the Greek government’s trump card in its confrontational negotiating strategy – has now disappeared?
In that case, the threat of default is no longer credible.
With the primary surplus gone, a default would no longer permit Tsipras to fulfill Syriza’s campaign promises; on the contrary, it would imply even bigger cutbacks in wages, pensions, and public spending than the “troika” – the European Commission, the European Central Bank, and the IMF – is now demanding.
For the EU authorities, by contrast, a Greek default would now be much less problematic than previously assumed.
They no longer need to deter a default by threatening Greece with expulsion from the euro.
Instead, the EU can now rely on the Greek government itself to punish its people by failing to pay wages and pensions and honor bank guarantees.
Tsipras and Varoufakis should have seen this coming, because the same thing happened two years ago, when Cyprus, in the throes of a banking crisis, attempted to defy the EU.
The Cyprus experience suggests that, with the credibility of the government’s default threat in tatters, the EU is likely to force Greece to stay in the euro and put it through an American-style municipal bankruptcy, like that of Detroit.
The legal and political mechanisms for treating Greece like a municipal bankruptcy are clear.
The European treaties state unequivocally that euro membership is irreversible unless a country decides to exit not just from the single currency but from the entire EU.
That is also the political message that EU governments want to instill in their own citizens and financial investors.
If Greece defaults, the EU will be legally justified and politically motivated to insist that the euro remains its only legal tender.
Even if the Greek government decides to pay wages and pensions by printing its own IOUs or “new drachmas,” the European Court of Justice will rule that all domestic debts and bank deposits must be repaid in euros.
That, in turn, will force a default against Greek citizens, as well as foreign creditors, because the government will be unable to honor the euro value of insured deposits in Greek banks.
So a Greek default within the euro, far from allowing Syriza to honor its election promises, would inflict even greater austerity on Greek voters than they endured under the troika program.
At that point, the government’s collapse would become inevitable.
Instead of Greece exiting the eurozone, Syriza would exit the Greek government.
As soon as Tsipras realizes that the rules of the game between Greece and Europe have changed, his capitulation will be just a matter of time.
The Greek Austerity Myth
BRUSSELS – Since the anti-austerity Syriza party's victory in Greece's recent general election, the “Greek problem" is again preoccupying markets and policymakers throughout Europe.
Some fear a return to the uncertainty of 2012, when many thought that a Greek default and exit from the eurozone were imminent.
Then as now, many worry that a Greek debt crisis could destabilize – and perhaps even bring down – Europe's monetary union.
But this time really is different.
One critical difference lies in economic fundamentals.
Over the last two years, the eurozone's other peripheral countries have proven their capacity for adjustment, by reducing their fiscal deficits, expanding exports, and moving to current-account surpluses, thereby negating the need for financing.
Indeed, Greece is the only one that has consistently dragged its feet on reforms and sustained abysmal export performance.
Providing an additional shield to the peripheral countries is the European Central Bank's plan to begin purchasing sovereign bonds.
Though the German government does not officially support quantitative easing, it should be grateful to the ECB for calming financial markets.
Now Germany can take a tough stance on the new Greek government's demands for a large-scale debt write-off and an end to austerity, without fearing the kind of financial-market turbulence that in 2012 left the eurozone with little choice but to bail out Greece.
In fact, both of the Greek government's demands are based on a misunderstanding.
For starters, Syriza and others argue that Greece's public debt, at a massive 170% of GDP, is unsustainable and must be cut.
Given that the country's official debt constitutes the bulk of its overall public debt, the government wants it reduced.
In fact, Greece's official creditors have granted it long enough grace periods and low enough interest rates that the burden is bearable.
Greece actually spends less on debt service than Italy or Ireland, both of which have much lower (gross) debt-to-GDP ratios.
With payments on Greece's official foreign debt amounting to only 1.5% of GDP, debt service is not the country's problem.
The relatively low debt-service cost also removes the justification for Syriza's demands for an end to austerity.
The last bailout program from the “troika" (the International Monetary Fund, the ECB, and the European Commission), initiated in 2010, foresees a primary budget surplus (which excludes interest payments) of 4% of GDP this year.
That would be slightly more than is needed to cover interest payments, and would thus allow Greece finally to begin to reduce its debt.
The new Greek government's argument that this is an unreasonable target fails to withstand scrutiny.
After all, when faced with excessively high debt, other European countries – including Belgium (from 1995), Ireland (from 1991), and Norway (from 1999) – maintained similar surpluses for at least ten years each, typically in the aftermath of a financial crisis.
To be sure, one can reasonably argue that austerity in the eurozone has been excessive, and that fiscal deficits should have been much larger to sustain demand.
But only governments with access to market finance can use expansionary fiscal policy to boost demand.
For Greece, higher spending would have to be financed by lending from one or more official institutions.
For the same reason, it is disingenuous to claim that the troika forced Greece into excessive austerity.
Had Greece not received financial support in 2010, it would have had to cut its fiscal deficit from more than 10% of GDP to zero immediately.
By financing continued deficits until 2013, the troika actually enabled Greece to delay austerity.
Of course, Greece is not the first country to request emergency financing to delay budget cuts, and then complain that the cuts are excessive once the worst is over.
This typically happens when the government runs a primary surplus.
When the government can finance its current spending through taxes – and might even be able to increase expenditure, if it does not have to pay interest – the temptation to renege on debt intensifies.
It was widely anticipated that Greece would be tempted to follow this route when the troika program was initiated.
Last year, the new Greek finance minister, Yanis Varoufakis, confirmed the prediction, arguing that a primary surplus would give Greece the upper hand in any negotiations on debt restructuring, because it could just suspend repayments to the troika, without incurring any financing problems.
That approach would be a mistake.
The practical problem for Greece now is not the sustainability of a debt that matures in 20-30 years and carries very low interest rates; the real issue is the few payments to the IMF and the ECB that fall due this year – payments that the new government has promised to make.
But, to follow through on this promise (and hire more employees), Greece will need more financial support from its eurozone partners.
Moreover, the country's financial system will need continuing support from the ECB.
In other words, Greece's new government must now try to convince its European partners that it deserves more financial support, while pushing for a reduction of its existing debt and resisting the austerity policies on which previous lending was conditioned.
For Syriza and its voters, the political honeymoon could be short.
Tabloid Climate Science
NEW DELHI – The scientists whose research has revealed the extent of global climate change are now getting the tabloid treatment.
First came the scandal of leaked (actually hacked) e-mails at the climate institute of Britain’s East Anglia University.
Now comes the supposed news that the Himalayan glaciers are not, in fact, retreating, and will therefore not disappear by 2035.
The first story was timed to appear just before December’s COP15 climate-change summit in Copenhagen.
The second is designed to bury whatever hopes still exist for signing a successor treaty to the Kyoto Protocol.
Coming one after the other, these inflated scandals have, at least for now, dealt a massive blow to the credibility of the evidence that underpins the battle against global warming.
But how justified are these attacks, particularly the attacks on the Intergovernmental Panel on Climate Change, the United Nations body that has set the gold standard for analyzing global climate change?
One tell-tale sign is the climate skeptics’ contempt for the actual data in the Indian government’s study, which is being used to undermine the IPCC report and the impeccable credentials of the scientist Syed Iqbal Hasnain, the source of the IPCC’s alarming quote on the Himalayas.
There is also the unholy glee with which they have set about destroying an icon of the anti-global warming movement, the Nobel Laureate R.K Pachauri, by attributing financial motives to his research.
Hasnain, who is currently conducting a study of the accumulation of black carbon on snow at high altitudes in the Himalayas, is not some egotistical scientist seeking the limelight.
He was Professor of Glaciology at Jawaharlal Nehru University’s School of Environmental Sciences and a fellow of the Indian Institute of Technology and of Delft Technical University in the Netherlands.
Between 1995 and 1999, he chaired a working group on Himalayan Glaciology within the International Commission on Snow and Ice.
He is also the author of Himalayan Glaciers: Hydrology and Hydrochemistry and scores of scientific papers.
Hasnain made his remark to the New Scientist in 1999, only five years after the retreat had reached its peak and only two to three years after the slowdown began – far too soon to say that the trend had changed. The IPCC’s use of his remark may have been rash, but was not misleading because in 2003-2004, the year before it finalized its fourth report, the changed trend would have been barely perceptible
What the 2009 report for the Indian Ministry of Forests and Environment actually says is that the average retreat of glaciers, approximately five meters per year since the 1840’s, when records began to be kept, accelerated sharply between the 1950’s and 1990’s.
But the retreat slowed after the mid-1990’s until, for some of the biggest and best-known glaciers, such as Gangotri and Siachen, it had “practically come to a standstill during the period 2007-2009.”
But, the retreat of a glacier’s “snout” is only one of three measures of how glaciers can change.
The other two are its “mass balance” and the rate at which melt-water is discharged.
The Himalayan glaciers have not stopped losing mass, although they are losing it at a somewhat slower rate than before.
Evidence collected on 466 glaciers by the Indian Space Applications Center from 1962 to 2004 shows a 21% loss of glacier area and a 30.8% of glacier volume.
The same study also shows that smaller glaciers are shrinking much more rapidly than larger ones.
While glaciers that cover more than five square kilometers have lost 12% of their mass, those under one square kilometer have lost 38 percent.
Applying the overall ratio of mass lost to area covered, this means that the smallest (and most numerous) Himalayan glaciers lost up to 57% of their mass between 1960 and 2004.
What could have caused the glacier snouts to have stopped retreating?
One factor could be deposits of dust and black carbon (collectively called aerosols) upon the snow, which, up to an accumulation of 400 grams per square meter sharply raises the rate of melting.
Between 400 and 600 grams, it has no further effect, but when it exceeds 600 grams, it acts as a shield against the sun, and slows down melting.
Much thicker coatings of aerosols at the lower ends of glaciers might explain the tendency in several glaciers, noted in the Indian report, to become narrower in the middle, forming two distinct parts.
The slowdown in the retreat of the snout of glaciers could, therefore, be a consequence of the very rapid rise of human population in the hills and desertification caused by overgrazing – purely local factors that boost aerosol levels.
Only more research focused on the differences between glaciers in heavily populated areas and those in uninhabited ones like Siachen will answer this question definitively.
But relying upon population growth and desertification to prolong their lives would be robbing Peter to pay Paul.
What needs to be explored is not the validity of the secular trend, but the nature of the local influences working against it.
By rushing to apologize for a statement they clearly did not understand, British Secretary for Energy and Climate Change Ed Miliband and others have impugned not only the honesty of scientists like Hasnain, but also the credibility of science itself.
Taiwan and China, At It Again
Why is Taiwan's relationship with China so intractable an issue?
Why, when they share common economic interests - one million Taiwanese live on the Mainland, working in some 50,000 firms in which Taiwanese have invested over $400 billion - does China aim 500 short-range missiles at Taiwan?
The run-up to Taiwan's presidential election on March 20th is one current source of tension.
The incumbent, Chen Shui-bian, has initiated a referendum process that might someday be used to ask Taiwanese if they want to formalize today's de facto independence.
This infuriates China.
After all, as Mao Zedong told Edgar Snow in 1936, "It is the immediate task of China to regain all our lost territories," explicitly including "Formosa."
Since then, China has sought to make good on Mao's pledge.
China's new leadership often evinces a new judiciousness and moderation in its diplomacy.
But Luo Yuan, a senior colonel at the Chinese Academy of Military Sciences, recently declared that if Taiwan's leaders "refuse to come to their senses and continue to use referenda as an excuse to seek independence, they will push [their] compatriots into the abyss of war."
In an age when self-determination is a hallowed principle how is it possible that Taiwan - which has been part of China during only four of the last eleven decades, and has never been under the control of the People's Republic of China - is shunned by every nation when it deigns to wonder aloud why it should not be allowed to go its own way?
The reasons have deep historical roots.
When Mao and the Chinese Communists came to power in 1949, they promised "reunification of the Motherland," which included bringing Xinjiang (the Muslim desert regions of the West), Tibet, Mongolia, Hong Kong, Macao, and Taiwan back under central government control.
It became a matter of national pride for a country that had been guafen , "cut up like a melon," by predatory colonial powers, to end national feelings of humiliation by restoring itself to wholeness.
Communist propaganda relentlessly proselytized for re-unification as a "sacred" duty.
As Tibet, Hong Kong, and Macao returned "to the embrace of the Motherland," Mao's commitment seemed close to realization.
The fact that only Taiwan stands in the way makes reunification all the more non-negotiable.
But, there is another dynamic at work.
Over the last two decades, almost every other plank of the Communist Party's platform (world-wide people's war, proletarian struggle leading to a classless utopia, a triumph over global capitalism, etc.), has been abandoned.
This leaves unification as the last tie to Mao's revolution and justification for one-party rule.
China's leadership plays up this "revolutionary" commitment, for it helps generate nationalist sentiment, one of the few things (besides strong economic performance) that legitimizes the Communist monopoly on power.
China's leaders ought to reflect on the fact that their country is no longer the "sick man of Asia."
It is increasingly powerful, globally pro-active, and economically robust.
So it is a timely moment to reappraise its position and to begin acting from strength, not weakness.
In short, it is time for China's leaders to change the chemistry of their long feud with Taiwan.
After all, China and Taiwan have struggled politically even as their economies become increasingly unified.
In due course, they may well be able to become more unified on the political front - if they do not push their disagreements too aggressively.
For economic convergence, if allowed to ripen, could set Taiwan and the PRC on an evolutionary course toward common sovereignty.
How can such a scenario be realized?
China must declare, loudly and clearly, that greater democracy, not mutant Leninism, is its ultimate political goal, and that as this evolutionary process takes place and the political climate becomes more congenial, they look forward to discussing how to better weave a political, as well as an economic, fabric with Taiwan.
Such a declaration alone would give Taiwanese the ability to imagine that they may one day find it in their interest to be part of China.
For its part, Taiwan needs to calm down.
Its leaders must understand that, even though "independence" may sometimes seem like a logical scenario, Taiwan is a small, vulnerable island, and China an emerging superpower.
Even though Taiwan may have a "right" to independence, its leaders need to remind their people that provocative actions will gain them little.
In 1973, as Sino-US relations were thawing, Mao admitted to Henry Kissinger that, though he did not believe reunification would come peacefully, "We can do without Taiwan for the time being, and let it come after 100 years...
Why is there a need to be in such great haste?"
Mao's advice is not bad.
China must take to heart its newfound dynamism and strength, and write a new scenario for its relations with Taiwan that emphasizes persuasion instead of missiles.
For the first time in fifty years, China and Taiwan share real interests.
What blocks matrimony is China's lack of democracy.
Most Chinese would probably like to see this absence remedied as much as they favor full reunification.
Only democracy in China can bring lasting peace to the Taiwan Straits.
Taiwan\u0027s Democratic Labor Pains
Young democracies can be cruel: their voters are often as unforgiving as political opponents.
The two weeks since Taiwan's disputed presidential election of March 20 - only the third such democratic vote in the country's history - has tested this truism almost to the breaking point.
Taiwan's young democracy must now cope with the balancing act that President Chen Shui-bian's re-election has thrust upon it.
While canvassing for votes in his hometown in southern Taiwan on the eve of the election, President Chen and Vice President Annette Lu were both wounded by an assassin's bullet.
The sympathy this secured gave the President his razor-thin margin of victory - with just 50.1% of the votes - over Lien Chan, the candidate of the Kuomintang Party and People's First Party (KMT-PFP) coalition.
Opposition street protests and shouts that the assassination was stage followed.
A recount was demanded.
None of this is surprising, because Taiwan's society is evenly and deeply polarized.
President Chen's Democratic Progressive Party (DPP) called for "one country on each side of the Taiwan Strait" and for "preventing the return of an alien regime" (meaning the KMT, which came to Taiwan in 1949).
But while Chen's campaign to safeguard Taiwan against threats from mainland China clearly galvanized the party's supporters, it made the uncommitted nervous and the rival KMT angry.
For the KMT-PFP coalition, the campaign was a virtual holy war, conducted not only to revive an ailing economy, but also to keep the country's official name: the "Republic of China."
With so much at stake, both camps mobilized millions of people.
President Chen upped the stakes even more by holding Taiwan's first-ever popular referendum.
It called for beefing up Taiwan's defense in the face of mainland China's missile threats and for building a peaceful framework of relations across the strait that separates Taiwan from the mainland.
Not only did China denounce the referendum as provocative, but so did the US President George W. Bush.
In the weeks since the vote, Taiwan has staggered ahead.
President Chen agreed to a recount.
But the questions on everyone's lips are whether the loser of the recount will accept the result, and whether Taiwan's young democracy can survive this tumult?
For the most important issue facing Taiwan today is not re-unification with China, but consolidating and deepening our democratic institutions.
Traditions of tolerance must replace the turbulence that has so far dominated the building of Taiwan's democracy.
The one benefit to be gained from the referendum is that, for the first time, Taiwan's citizens were asked to debate issues related to national defense and cross-Strait relations.
Any citizen could take part in one of ten nationally televised debates and argue with government officials.
Moreover, the presidential candidates themselves engaged in two rounds of televised debates and gave another two televised speeches - a political openness new to Taiwan and unique in the Chinese political world.
Although China's rulers dismissed the election, Taiwan's open democratic exercises will have vast repercussions for other Chinese political communities in their pursuit of greater political pluralism.
From this perspective, Taiwan's democratic traditions can only grow stronger.
The DPP is a relatively young party, formed only in 1986.
For a long time, indeed, Taiwan was overshadowed by the KMT.
That dominance is now definitively a thing of the past.
The uneven distribution of power between the two parties had many predicting a victory for the KMT-PFP coalition.
Indeed, the DPP had never been able to win more than 40% of the vote previously.
Its victory has now made it a fixture on the political landscape.
Having ruled for four years, the DPP has already redrawn Taiwan's political map.
Its calls for more reforms, its belief in Taiwan, and the urgency of its appeal to defend the island against undue influence from China have now captured the allegiance of a small majority of the population.
Yet this should not be considered an outright victory for Taiwanese nationalism.
Were it not for the shooting incident on the election's eve, the opposition might have eked out a victory, with the soft economy the deciding factor.
The slim majority, and the clear differences between the two political camps, will assure a robust two-party system in the future.
But more than two strong parties have emerged from the campaign.
The law, too, is giving democracy here a boost.
For example, the two parties are now engaged in tense negotiations to amend the Presidential and Vice-Presidential Election and Recall Law to avert any repeat of the current confused circumstances surrounding the current recount.
In the future a compulsory recount will be held should the winning margin be less than 1%.
A "sunshine law" to regulate political donations was enacted before the ballots were cast.
The finances of the president and his/her family will henceforth be more strictly monitored.
Taiwan's democratic experiences are messy, but no messier than the vote that brought President Bush to power four years ago.
Yes, Taiwan's recent vote will leave a divided country behind, but those divisions are democratic divisions, and people are now organizing for the next elections.
Instead of writing off Taiwan's democratic experiment as doomed to instability or worse, the disputed vote will help consolidate and invigorate our democratic order.
Taiwan’s Journey From Troublemaker to Peacemaker
OXFORD – Is the “harmonious society” that Chinese President Hu Jintao constantly proclaims being realized in China’s relations with Taiwan?
Before Ma Ying-jeou became President of Taiwan (officially known as the Republic of China) in May 2008, Taiwan was regularly portrayed in China as a “troublemaker,” and was the main cause of tension between China and the United States.
Now Taiwan has become something of a diplomatic afterthought because it no longer makes trouble.
At the US-China Strategic and Economic Dialogue, indeed, Taiwan was barely mentioned, as North Korea, Iran, and the value of the renminbi claimed the most attention.
It has always been unfair to demonize the Taiwanese merely for wanting what most people around the world take for granted: to uphold their basic human rights and way of life, including the right to decide through a democratic process their own future.
China, however, rejects such sentimentality about self-determination.
And, as a rising power, China is not a force that leaders, even democratic ones, dismiss lightly.
For years, China’s ruling Communist Party has maintained that Taiwan is a “core national interest,” despite the reality that Taiwan has existed and functioned as a virtual state for 60 years.
China has long threatened to use force if the international community should formally recognize Taiwan’s independence.
But the atmosphere gradually changed in recent years, and the “troublemaker” label, applied under Ma’s predecessor, President Chen Shui-bian of the Democratic Progressive Party (DPP), has not been used for two years.
Of course, Taiwan under President Ma still wants the same rights that it desired under Chen.
But Ma has taken a different approach.
He has eased tensions with China by focusing on what both sides can agree upon.
China’s leaders find his language inoffensive.
He seeks to advance Taiwan’s national interests without arousing the People’s Republic’s threat to use force.
And he has sought to forge closer trade and transport links.
Ma’s strategy suits China, whose leaders welcome being able to avoid confrontation with Taiwan, given their current focus on engineering their country’s “peaceful rise.”
Moreover, China does not wish to see the DPP and its aggressively pro-independence leaders return to power.
When Ma’s popularity fell dramatically as Taiwan’s economy suffered from the global financial crisis, China’s leaders worked with Ma to pre-empt just such an outcome.
This has allowed Ma’s administration to claim credit for improving relations with China.
But the fundamental causes underlying the threat of a China-Taiwan war – and conflict between China and the US, which has long been committed to supporting Taiwan should China seek to determine its status unilaterally – have not been removed.
The Chinese Communist Party remains committed to forcing Taiwan to accept the idea of ultimate “reunification,” while the Taiwanese remain determined to decide their own future.
But each side’s interests need not be mutually exclusive.
The right to national self-determination does not imply an assertion of de jure independence.
For example, acknowledgement of Scotland’s right to choose independence has not resulted in Scotland leaving the United Kingdom.
What people in Taiwan want is nothing more and nothing less than acknowledgement that they can decide their own future.
Given China’s deep distrust, it will never believe that a DPP president who insists on the Taiwanese people’s right to determine their future will not secretly push for independence.
But, since China knows that Ma is not advocating independence, they are able to countenance with greater equanimity his commitment to sustain the Republic of China on Taiwan.
If ever there were an opportunity for China and Taiwan to find a way to ensure that future confrontations do not escalate and drag the US into a conflict, it is now.
What Ma must do is forge a clearer consensus within Taiwan that the independence vs. unification issue is a phoney one.
The real issue is whether both sides can acknowledge that Taiwan’s people have the right to determine their future.
China’s leaders need to be persuaded that conceding this point does not imply letting Taiwan move towards de jure independence.
This may require that the Taiwanese abandon their tendency to hold regular referenda to show that they enjoy this right.
And the People’s Republic will need to recognize that the best way to entice Taiwanese to embrace reunification is to make the proposition so attractive that they cannot resist.
There is no need to set a timetable for this.
As a rising superpower, China should feel confident that time is on its side.
The whole world shares an interest in preventing disagreements between Taiwan and China from becoming a cause for military confrontation between the US and China.
Ma has created the necessary conditions for deactivating the trigger.
It is time for the rest of the world to support him in removing it forever, so that Taiwan will continue to fade as a global concern.
Take From the Poor, Give to the Rich
President Bush seems poised to wreck America's budget for years to come.
When Bush came into office, the outlook was for budget surpluses as far as the eye could see.
Today, through a combination of irresponsible Republican-led tax cuts, a slowing economy, the bursting of the stock market bubble, and a massive increase in defense spending, huge deficits dominate the fiscal horizon.
Worse is coming, because the Bush Administration and the Republican-led Congress are preparing to deepen the fiscal mess.
The damage they will do will likely weaken the US and add instability to the world economy.
Traditionally, America's Republican Party stood for balanced budgets.
This changed with the Reagan Administration, when conservative Republicans favored tax cuts even at the cost of large budget deficits.
President Reagan told the American people that they could enjoy tax cuts, a military build-up, and continuation of their favorite spending programs all at the same time.
The result - no surprise - was a series of vast budget deficits that took years to clean up.
Both President George Bush Sr. and Bill Clinton had to raise taxes to clean up the Reagan-era mess.
Those tax increases probably contributed to President Bush Sr's defeat by Bill Clinton in 1992.
Yet Clinton bravely decided to complete the process of restoring fiscal balance, in part to protect the long-term financing of the Social Security retirement program.
When Clinton left office in 2000, the budget situation was the best in decades.
Then along came President George Bush Jr. to replay Reagan: large tax cuts, a big increase in military spending, and continuation or even expansion of popular spending programs.
The result was predictable.
In January 2001, the cumulative budget outcome for the years 2002-2011 was projected to be $5.6 trillion dollars in surplus.
By mid-2002, those projected surpluses had vanished.
In view of these changed economic conditions, and the shadow of war in Iraq, you might expect the Bush Administration and the Republican-led Congress to be cautious in advocating new tax cuts.
But no, their highest priority is to enact more tax cuts that will mainly benefit the rich.
At the same time, the Administration is calling for big increases in military spending.
With the November 2004 presidential election now coming into view, you can be certain that no meaningful cuts in non-military spending programs will be made.
So massive budget deficits seem here to stay.
If domestic spending simply stays constant as a fraction of national income, the cumulative budget outcome for the next ten years will be a combined deficit of $1.5 trillion.
But this figure may be optimistic, because it probably doesn't adequately factor in the costs of a possible war in Iraq, nor another round of tax cuts, nor the risk of higher interest rates in the years ahead.
Why are Republicans so unconcerned about this mess?
Some Republican care more about tax cuts for the rich than they do about almost anything else.
Others believe that deficits will force major cuts in domestic government spending, thus shrinking the state, which is their heart's desire.
The problem with this latter view is that most taxpayers like domestic programs, and will not readily support major spending cuts.
A more intriguing question is why do Americans vote for such policies, when they should know that trouble will probably result.
One answer is that many voters do not see the looming budget troubles.
A better answer is that most Americans did not actually vote for these policies.
Voter turnout in the 2002 election was only around 40%, of which around half went to the Republicans, or around 20% of eligible voters.
Of course, the outlook need not be so bleak.
War in Iraq may be avoided.
Proposed tax cuts may be watered down or abandoned.
But I predict large budget deficits for years to come, and a growing sense of unease within the US and abroad about America's macroeconomic situation.
Foreign investors may decide to cut back financing America's budget and current account deficits on favorable terms.
The dollar may weaken, and fears of inflation may become more pronounced.
All of this will make US policymakers less confident and less flexible in their responses to economic shocks.
The poor, both inside the US and abroad, could suffer the most, as President Bush and the Congress tell the American people and the world that, due to the large budget deficits, there is no money available to address problems of poverty, disease, and education.
Unless ordinary Americans wake up to these fiscal risks, the rich may walk away with another multi-billion-dollar gift as the country and the world bear the harsh consequences for years to come.
Take the Euro and Run
For the eight post-communist countries that the EU promises to admit in 2004, joining its Economic and Monetary Union (EMU) poses an accompanying obligation.
Unlike the United Kingdom or Denmark, the new members cannot opt out of the euro.
They can only control when to adopt it, which in principle could be as early as two years after EU admission.
Obviously, accepting the Maastricht Treaty, with its tough constraints on fiscal, monetary, and wage policies, is far more than an economic decision.
But in the final analysis, the conviction--or lack of it--that joining EMU will bring powerful economic benefits is the force likely to guide decisions about whether to embrace the euro as soon as possible.
EMU is founded on the idea, pioneered by the Nobel laureate Robert Mundell, that the costs and benefits of monetary integration depend on whether or not countries share certain properties.
A group of countries characterized by economic openness, trade and financial market integration, similar economic structures, price and wage flexibility, labor mobility and other factors of production may, according to this view, form an optimum currency area (OCA).
Do the post-communist candidate countries share the OCA properties required for successful EMU membership?
Their degree of economic openness, measured by the share of exports and imports in their GDP, is as high as that of current EMU members.
This is vital, because the more open an economy, the more the prices of internationally traded goods determine domestic inflation, thus making an independent exchange rate policy less necessary for influencing relative prices and competitiveness.
Similarly, trade integration and comparable economic structures tend to synchronize the business cycles of member countries, making common monetary and exchange rate policies more likely to serve the interests of all.
Trade integration can be measured by the EU's share in a country's exports.
For all but three candidate countries, this is more than 60%, and often larger than for current EU members.
Economic structure reflects the contributions of different sectors of the economy to GDP and employment.
The economic structures of the four candidates who are OECD members (the Czech Republic, Hungary, Poland, and Slovakia) are similar to today's EMU members, although industry's share in GDP is higher and that of services lower.
Employment patterns also reflect the legacy of central planning, with industrial employment higher than in the EMU.
Still, all indicators show that the candidate countries are closely integrated financially with the EU, permitting them to run higher current account deficits than they could otherwise.
In Hungary, non-residents hold 20% of government securities and account for 70% of the equity market's capitalization.
Of 31 commercial banks, only five are domestically owned.
Foreign owners--mostly EU-based banks--now control roughly 95% of assets in the Czech and Slovak banking sectors.
The candidate countries also display greater flexibility of nominal prices and wages.
A recent OECD study measuring regulation of product markets and employment protection in member countries indicates that the Czechs, Hungarians, and Poles are more committed to removing price controls, facilitating entrepreneurship, and liberalizing labor markets than many EU members.
This dampens the need for the exchange rate to function as a mechanism of adjustment for potential shocks.
Throughout Europe, cross-country labor mobility is hampered by cultural and language barriers, limited portability of social benefits, and administrative restrictions.
But the importance of labor mobility for a currency union should not be exaggerated.
It would be impractical and socially undesirable to depend on labor mobility to help overcome temporary shocks, and an independent monetary policy can do little to address the permanent shocks that labor mobility can ameliorate.
In the end, mobility of capital compensates for lower labor mobility.
So current EMU members and EU candidate countries clearly share OCA properties.
But a successful currency union requires more than this.
For example, if the transmission mechanism of monetary policy varies among countries, their responses to a common policy may also vary.
Factors affecting the transmission mechanism in the candidate countries--legal frameworks, the degree of financial depth, the maturity of debts, and the availability of non-bank financing--differ markedly from those in the current EMU members.
But such differences exist within the EMU as well, while the effects of short-term interest rate changes on output and prices are nonetheless fairly similar.
Yet the degree of many candidate countries' economic openness has narrowed the scope for independent monetary policy.
Vast amounts of short-term capital, speculating on interest rate convergence or equity market gains, are flowing into the most advanced candidate countries, driving up their currencies and increasing their vulnerability to a sudden capital-flow reversal.
EMU membership will diminish this volatility and eliminate exposure to it.
Even if EMU membership did not promise a more stable and competitive business environment, increased efficiency, and faster growth throughout the enlarged euro area, minimizing exposure to financial contagion is reason enough to join as soon as possible.
Markets can be a brutal and disruptive teacher, as we know from the monetary crises that wracked developing countries in the 1990s.
By eliminating nominal exchange rate uncertainty, a common currency area has the additional benefit of lowering transaction costs and investment risks.
Economists disagree over how much this increases trade.
But the effect on output growth, which is what matters in the end, is bigger the more open an economy is--one more way that the candidate countries could gain considerably from early EMU membership.
Taking Disarmament Seriously
MELBOURNE – People sometimes forget that the boy who cried wolf ended up being eaten.
True, nobody has been killed by a nuclear weapon since the attacks on Hiroshima and Nagasaki, 65 years ago this month.
And, with Cold War tensions long past, it is all too easy for policymakers and publics to resist the doomsayers, be complacent about the threats that these weapons continue to pose, and to regard attempts to eliminate them, or contain their spread, as well-meaning but futile.
But the truth is that it is sheer dumb luck – not statesmanship, good professional management, or anything inherently stable about the world’s nuclear weapon systems – that has let us survive so long without catastrophe.
With 23,000 nuclear weapons (equivalent to 150,000 Hiroshimas) still in existence, more than 7,000 of them actively deployed, and more than 2,000 still on dangerously high launch-on-warning alert, we cannot assume that our luck will hold indefinitely.
We know now – with multiple revelations about human error and system breakdown on both the American and Russian sides during the Cold War years and since – that even the most sophisticated command and control systems are not foolproof.
We know that some of the newer nuclear-armed states start with systems much less sophisticated than these.
And we know that, across the spectrum of sophistication, the risk of destabilizing cyber attack beating cyber defense is getting ever higher.
So it should be obvious that maintaining the status quo is intolerable.
Moreover, there is the real risk of proliferation, especially in the Middle East, multiplying the dangers that nuclear weapons will be used by accident or miscalculation as well as design.
There is also the sometimes exaggerated but unquestionably non-negligible risk of non-state terrorist actors getting their hands on insufficiently secured weapons or fissile material and exploding a bomb in a major population center.
And there is the disconcerting prospect that new civil nuclear-energy players will insist on building uranium-enrichment or plutonium-reprocessing plants of their own, rightly described as “bomb starter kits.”
President Barack Obama came to office alert to all these threats and determined, as no other US president – and almost no other world leader – has been, to eliminate them.
His leadership inspired hope that more than a decade of sleepwalking was behind us, and brought some modest gains over the last 18 months.
They include the conclusion of the US-Russia new START treaty, which would reduce deployed strategic weapons; some modest limitations on the role of nuclear weapons in US nuclear doctrine; a Washington summit that reached useful agreement on the implementation of improved nuclear-security measures; and hard-to-achieve consensus at the recently concluded pentannual Nuclear Non-Proliferation Treaty (NPT) Review Conference on useful steps forward, including a 2012 conference on achieving a nuclear-weapons-free zone in the Middle East.
But START treaty ratification is going nowhere fast in the US Senate and progress on other key issues has been slow or shaky: bringing the Comprehensive Test Ban Treaty into force; starting negotiations on a new treaty to ban the production of fissile material for nuclear weapons; strengthening the non-proliferation regime with effective measures to detect violations and deter treaty walk-outs; reaching agreement on some form of international management of the most sensitive aspects of the fuel cycle; and, above all, starting new rounds of serious disarmament talks, involving not just the two nuclear superpowers, but all eight nuclear-armed states.
Arms control and disarmament is a grinding, unglamorous business that brings few quick returns.
With domestic issues and re-election anxieties now dominating most political agendas, it will be all too easy for commitment to wane.
If that is to be avoided, continued leadership from the top – above all from Obama and Russian President Dmitri Medvedev – will be indispensable.
But there are a number of major contributions that less powerful states and leaders, as well as civil-society organizations, can make.
The most immediately important task is for those with credible voices to take every opportunity to bridge the complacency gap.
The messages must be stark: nuclear weapons are not only the most indiscriminately inhumane weapons ever invented, but the only ones capable of destroying life on this planet as we know it.
Carbon dioxide can also kill us, but not as quickly as bombs.
The second major task is to set a clear global disarmament action agenda – with credible timelines and milestones.
It is probably too difficult right now to set a reliable target date for getting all the way to “global zero”: there are still too many difficult technical problems of verification and enforcement to be worked through, as well as the obvious geopolitical and psychological ones.
But it is not incredible to set a date like 2025 as a target for minimizing the world’s nuclear arsenal to less than 10% of its current size, with very few weapons actually deployed, and their role in all states’ military doctrine dramatically reduced.
Nor is it too early to begin work on crafting a new Nuclear Weapons Convention that provides a workable framework for multilateral negotiations, and on devising an independent high-level monitoring mechanism that would spell out clear benchmarks for progress, track how they are being met, and create real pressure for change.
These are all recommendations of the International Commission on Nuclear Non-Proliferation and Disarmament.
As the world commemorates the 65th anniversary of the bombing of Hiroshima and Nagasaki this August, we should recognize that our luck is running out – and take them seriously.
Taking Drug Safety Seriously
Health hazards – nuclear reactors, guns, and contaminated foods – surround all of us, so governments take an active role in limiting these hazards through regulations, which, in many cases, are very successful.
But the situation is far different concerning the safety of prescription drugs.
Indeed, as far as protecting the public is concerned, drug safety is the regulator’s neglected stepchild.
The magnitude of the problem is huge.
In the United States alone, it is estimated that every year up to 100,000 patients die due to serious adverse drug reactions (ADR’s).
If true, drug-induced death would qualify as the fourth or fifth leading cause of death (depending on which mortality estimates are used).
Moreover, the direct annual hospital costs attributable to ADR’s run into the billions of dollars, and this does not include all the suffering that ADR’s cause that does not lead to hospitalization (or death).
The difficulties in determining cause and effect must be acknowledged.
Whether a patient’s death or hospitalization is due to a particular drug, the underlying illness, or a combination of the two can be hard to determine.
But this makes drug safety all the more important.
Inherent to drug safety is the fact that all drugs, in addition to their benefits, cause harm in certain patients.
Drug approval and use requires a careful weighing of desirable and undesirable effects.
These judgments vary, depending on whether they are made by a drug company, which stands to benefit from sales, or a patient at risk of suffering a serious adverse effect.
Incomplete knowledge complicates this assessment.
The rush to get new drugs to market often leads to inadequate safety documentation.
More than half of all approved drugs produce a serious adverse reaction that is not known at the time of regulatory approval.
For example, when the new class of painkillers called Cox-2 inhibitors was introduced, regulators, physicians, and patients were unaware that these drugs could cause heart attacks and strokes.
Tens of thousands of innocent patients – perhaps more – suffered such ADR’s before the first two drugs of this class were withdrawn.
Proper and complete documentation of harmful drug effects is difficult.
Spontaneous reporting rates to regulatory agencies are low – approximately 1% – and ongoing monitoring is passive in many countries.
There is also a general reluctance to report unfavorable drug effects.
Physicians may feel guilty and fear litigation, drug companies worry about the threat to corporate profits and regulatory agencies must face the question: “Why was the drug approved in the first place?”
It is especially difficult to attribute an adverse reaction to a drug if the medical event is common in the user’s age group or in the condition being treated.
Because the risk of heart attacks is high in older people, many of whom have arthritic pain requiring treatment with painkillers, it took six years to link Cox-2 inhibitors to a two- to three-fold increase in the risk of heart attacks.
A recent Harris Survey in the US concluded that 60% of adults are either not confident at all or not very confident that drug makers will publicly and in a timely manner disclose data on their products’ adverse effects.
Their skepticism is hardly groundless: internal documents obtained in recent lawsuits reveal that drug companies often fail to submit critical safety information to regulatory agencies, as required by law, and fail to communicate such information to physicians and patients.
One problem is that the consequences for neglecting drug safety are non-existing or minimal.
The time has come to get serious:
· Citizens and government must make drug safety a priority and commit adequate resources to fixing the problems;
· Penalties for drug companies’ failure to report and communicate safety information must be increased dramatically if they are to serve as effective deterrents;
· Regulatory agencies need enforcement authority so that stricter rules can be implemented;
· The drug-safety problem must be seen as a systemic failure.
It is unfair to blame clinicians for serious ADR’s, particularly in the absence of complete safety information.
Fixing the problem requires full cooperation from clinicians, but this requires ending their fear of litigation.
This approach works well in the airline industry: pilots reporting near misses are not penalized;
· Patients need to be better informed about the risks of prescription drugs and more involved in detection and reporting.
Package inserts in fine print are useless;
· Monitoring of ADR’s must be more pro-active.
This requires more funding, which should come from the main beneficiary of drug sales – the pharmaceutical industry – just as oversight of aviation safety is funded by the airlines.
Above all, the success of any comprehensive effort to improve drug safety hinges upon establishing an independent office of drug safety to advocate, coordinate, and provide direction to the regulatory agenda.
Such an office exists in the United Kingdom.
Other governments should follow this model in order to fulfill their neglected role as guardian of public health.
Taking Faith Seriously
LONDON – The term “Arab Spring” is already highly disputed.
Do the revolutions across the Arab world presage the glory days of summer, or a passage through a bleak winter?
One thing is certain: the influence of religion and faith in determining the outcome.
Consider the scale of what is now happening.
Across the Middle East and North Africa, Islamist parties are ascendant.
Sunni/Shia divisions are also at the fore.
Terrorism, based on a perversion of religion, is disfiguring politics not only in familiar places, but also in Nigeria, Russia, Kazakhstan, the Philippines and elsewhere.
More than half of today’s conflicts in the world today have a predominantly religious dimension.
Most (though not all) religious faiths today contain extremist groups, all capable of producing discord among previously settled communities.
True, much of this extremism is based on a perversion of Islam; but such perversions of faith are also often directed against Muslims.
In parts of Europe, Islamophobia now rivals anti-Semitism and has potent and dangerous political appeal.
In short, religion matters.
Three and a half years ago, when I started a foundation dedicated to improving interfaith relations, some thought it quixotic, or plain weird: Why would a former prime minister want to do that?
I did it for a very simple reason.
My experience as Prime Minister taught me that none of the problems of the Middle East and beyond – including Iran, Afghanistan, Pakistan, and Somalia – can be understood unless we comprehend the importance of religion.
I don’t mean the politics of religion, but religion as religion.
We cannot treat the influence of religious faith in purely secular terms.
We must address it also as a genuine issue of faith.
In fact, a fundamental foreign-policy weakness, especially in the West, is the assumption that political solutions alone provide a sensible path to the future.
They don’t.
Those who feel that their faith compels them to act in a way destructive of mutual respect must be persuaded that this is a wrong reading of their faith; otherwise, such a faith-based compulsion will always trump secular political arguments.
Consider the Middle East and North Africa today.
Like it or not, the Muslim Brotherhood and other religious parties will possibly dominate.
They are longstanding, well organized, deep rooted in communities, and, above all, highly motivated – a winning combination anywhere.
Arrayed against them are the discredited politics of the old regimes and well-meaning, often numerous, but highly disorganized liberal-minded groups.
The risk we face is easy enough to describe. The challenge for these emerging democracies is to remain democratic through the traumas of comprehensive change.
In particular, their economies need to reform, open up, and grow in order to meet their citizens’ rising expectations.
Indeed, the region has some of the world’s youngest populations, with the average age often below 30.
Egypt’s population was around 30 million in the 1950’s; today it is 90 million.
Young, aspiring populations, whose criticism of the old regime was at least as much economic as political, need their tourist industry back on its feet, their business entrepreneurs feeling confident, and eager foreign investors.
They need fundamental education and welfare reforms.
And the new political masters need to know that if they don’t succeed, it is the right of the people to vote them out.
But democracy is not just about the free elections and the constitutional rule of the majority.
It is about freedom of expression, freedom of religion, and markets that, albeit regulated, also are free and predictable.
In other words, democracy is not just a system of voting, but an open-minded attitude.
That distinction – open versus closed – is as politically salient today as traditional left-right distinctions.
Do we view globalization – with technology, communication, migration, and travel pushing us closer together – as something to be embraced but made to work fairly, or as a threat to our traditional way of life that must be resisted?
I believe that the future belongs to the open-minded.
But the closed-minded have a powerful gut appeal, and religion plays into it.
There are two faces of faith in our world today.
One is seen not just in acts of religious extremism, but also in the desire of religious people to wear their faith as a badge of identity in opposition to those who are different.
The other face is defined by extraordinary acts of sacrifice and compassion – for example, in caring for the sick, disabled or destitute.
One face is about service to others; the other face does not accept them.
One recognizes that equal dignity should be accorded to all human beings, and seeks to build bridges of understanding between faiths.
The other regards those who do not share their faith as unworthy unbelievers, and seeks to build a protective wall around it, or even to be actively hostile to “outsiders.”
All over the world, this battle between the two faces of faith is being played out. What is needed are platforms of understanding, respect, and outreach in support of the open-minded view of faith.
Education has a vital role to play.
How many Christians know that Jesus is revered by Muslims as a prophet, or that it was through Islam that Christian thinkers in the eleventh century relearned the importance of Aristotle and Plato?
And how many Muslims understand fully the Christian Reformation and what it taught believers about philosophy and religion?
How much do either Muslims or Christians really know of their debt to Judaism?
And have we in the West any real appreciation of the true nature of the Hindu or Buddhist faith?
Do we understand how Sikhism developed its extraordinary openness to all faiths, or who the Bahai’s are and what they believe?
The point is that faith is culture; and, in today’s world, people of different cultures are coming into contact as never before.
Whether this produces harmony or discord depends our frame of mind – open or closed.
Can strong religious faith coexist with such pluralism?
This is a key question of our time.
Yet many open-minded people remain curiously passive in the face of religious extremism.
Sometimes we ignore it, hoping we can treat it as something other than religion.
Sometimes we just give up and embrace secularism.
The first ignores the essence of the problem; the second undermines faith, which still has a hugely important role to play in civilizing globalization and infusing it with spirit.
In short, we need religion-friendly democracy and democracy-friendly religion. At this time of Christian celebration, that is an important message, of which Jesus Christ, I believe, would have approved.
Taking Hope in the Long View
BERKELEY – In the United States, we sit in the midst of 10% unemployment.
In some countries, fiscal policy is crippled by legitimate fears that more deficit spending will trigger government-debt crises.
In many other countries, fiscal policy is crippled by confusion between short-term cyclical and long-term structural deficits.
Meanwhile, banking policy is crippled by populist reaction against more bailouts, and monetary policy by a strange mindset among central bankers that fears inflation even as wage growth continues to drop.
As R.G. Hawtrey said of such people’s predecessors in the Great Depression, they are “crying ‘Fire!
Fire!’ in Noah’s flood.”
It is time to calm down.
And the best way to calm down is by taking the long view.
If all goes well in China and India in the next generation – and if nothing goes catastrophically wrong in the rich, post-industrial, North Atlantic core of the global economy – the next generation will reach a real milestone.
For the first time, more than half of the world will have enough food not to be hungry, enough shelter not to be wet, enough clothing not to be cold, and enough medical care not to be worried that they and most of their children will die prematurely of micro-parasites.
The big problems for most of humanity will be to find enough conceptual puzzles and diversions in their work and leisure lives to avoid being bored, and enough relative status not to be green with envy of their fellows.
And, of course, they will have to dispose of thugs who used to have spears but will now have cruise missiles and H-bombs – that is, the macro-parasites that have infected humanity ever since the first farmers realized that having crops took away the option of running away into the forest.
How did this miracle come about?
Some say that it was the disenchantment of the world: the shift from a worldview that relied on prayer and the propitiation of spirits to one that relied on rational manipulation and management of nature and of society.
But the Classical Greeks had natural philosophy, and the Classical Romans believed in figuring out what worked and applying it.
Yet all they produced were some splendid works of architecture and infrastructure and a system of military training that spread their society beyond the Mediterranean.
Some say that the miracle stemmed from an agricultural revolution that freed a large chunk of the labor force to make things rather than grow food.
But eleventh-century China had a bigger and earlier agricultural revolution than eighteenth-century Britain, and China would have to wait another millennium before emerging as a global power.
Some say that the European conquest of the Americas deserves the credit.
But what was shipped back from America across the Atlantic to Europe – and what was paid for in imports from Asia with American products – was never real wealth.
It was merely sterile gold and silver, some empty calories (in the form of sugar), and some psychoactive products –coffee, tea, chocolate, and tobacco.
Some say that it was the commercial revolution and the rise of the middle class that brought us to the brink of victory over scarcity.
But Adam Smith in 1776, and David Ricardo a little later, looked forward to a future Britain that looked a lot like China – a full country with high agricultural productivity and a well-developed division of labor but a very poor peasantry and working class ruled by very rich landlords.
Or maybe it was the industrial revolution of the eighteenth century in Britain – the steam engine, the forge, and the cotton mill – that set the train of progress in motion.
But, as late as 1871, John Stuart Mill was writing that it was doubtful whether all of the industrial revolution’s inventions had lightened the day’s toil of a single worker.
Looking back, it is difficult to avoid the conclusion that it was at the end of the nineteenth century that something really special happened.
That really special thing had three parts.
First, the advent of global communications meant that ideas invented or found or applied in one part of the world could be quickly made known to and adapted in other parts of the world, rather than waiting decades or centuries to percolate across the oceans.
Second, the coming of global transportation meant that any good idea could be put into practice to produce enormous profits as it was leveraged across the entire globe.
Third – and in large part a consequence of the other two – the rise of the professional inventor and the industrial research laboratory created a class of people whose business was not to make and apply a single invention, but to invent the process of continuous and constant invention and innovation itself.
Because all three of these developments occurred at roughly the same time, we had our critical mass and the chain reaction that has brought us here.
Let’s hope that we can keep it in motion, and that we don’t spoil it by losing sight of what was really important in bringing it about.
Taking the Fat Out of Global Warming
LONDON – Mitigating climate change presents unrivaled opportunities for improving human health and well being.
Indeed, policies to reduce greenhouse-gas emissions promise to bring about substantial reductions in heart disease, respiratory illness, cancer, obesity, diabetes, depression, and road deaths and injuries.
These health benefits arise because climate policy necessarily affects two of the most important determinants of human health: nutrition and movement.
Although medical professionals increasingly recognize the health benefits of policies to address climate change, they are not widely appreciated by policymakers themselves.
The existence of these health benefits implies a dramatic reduction in the net cost of taking strong action to mitigate climate change – which means that failure to understand their importance could have serious environmental consequences.
Recent research has documented the multiple health benefits of reducing greenhouse-gas emissions.
Meeting emissions targets in the transport sector would require, alongside reductions in car use, modest increases in walking and cycling.
Based on the epidemiological evidence linking physical activity and health, the resulting increase in physical activity would dramatically reduce rates of chronic disease, with around 10-20% less heart disease and stroke, 12-18% less breast cancer, and 8% less dementia.
Sustainable transport would also improve our mental health, with an estimated 6% less depression.
There would be additional mental-health benefits from more green spaces, less noise pollution, and greater physical fitness.
Reducing livestock production in order to limit cattle-related methane emissions and deforestation – significant factors contributing to climate change – would also improve human health.
Fewer livestock would mean fewer animal products in our diet, which would reduce our consumption of harmful saturated fats, leading to a 30% decline in heart disease.
Reducing meat consumption should reduce rates of colorectal cancer as well – the second most common type in men, after lung cancer.
By improving diet and raising levels of physical activity, policies to mitigate climate change would result in a dramatic cut in rates of diseases that mean premature death and disability for hundreds of millions of people worldwide.
They would also reduce population fatness.
More than a billion adults are overweight and 300 million are obese, including more than one-third of the US population.
And British government scientists predict that the United Kingdom will be “a predominantly obese society” by 2050.
Indeed, if current trends continue, by 2050, nine in ten adults in many developed countries will be overweight or obese.
In middle-income countries, too, average body mass index (BMI) is rising steadily.
This will have a serious impact on health and well being, increasing the risk of diabetes, heart disease, stroke, and cancer.
But developing countries are also at risk.
Mexico, for example, is second only to the US in terms of the prevalence of obesity.
The increase in diabetes as a result of population fattening is causing an epidemic of chronic kidney disease in a country where only one in four can expect to receive treatment.
The experience of Cuba in the 1990’s confirms the health effects of reducing fossil-fuel consumption.
During the Cuban energy crisis that followed the cut-off of subsidized Soviet supplies, the proportion of adults who were physically active more than doubled.
The population’s average BMI fell by 1.5 units, with a halving in the prevalence of obesity, from 14% to 7%.
Deaths from diabetes fell by 51%, from heart disease by 35%, and from stroke by 20%.
Moreover, there would be less hunger in a de-carbonized world.
In April 2008, Evo Morales, the president of poor and increasingly hungry Bolivia, pleaded for “la vida primero, los autos segundos” (life first, cars second), exhorting the wealthy world to stop burning food every time they drive – a reference to Western governments’ policies on bio-fuels.
But car use and food prices were linked long before bio-fuel policies. Car use drives up food prices, because oil is a key agricultural input.
Reducing oil use in the transport sector is essential to preventing starvation in poor countries.
Until agriculture unshackles itself from dependence on oil, gas tanks in rich countries and stomachs in poor countries will be competing to be filled.
Eating fewer animal products would reduce food prices as well, because cattle are fed on grain.
Other policies aimed at mitigating climate change also have positive effects on health.
Insulating homes in high-income countries in order to save energy would prevent cold-related deaths.
Likewise, use of fuel-efficient cooking stoves in poor countries would reduce the number of children –amp#160;currently around one million per year – who die from respiratory infections caused or worsened by the burning of solid fuels.
A de-carbonization program that cuts across all the major areas of energy use, combined with reduced consumption of animal products, would create substantial benefits for human health and welfare.
As negotiators and policymakers debate the costs of mitigating climate change, they cannot afford to overlook these benefits’ immense value.
Beating the Child Killers
GENEVA – Ask most people to name the two biggest causes of death among children, and they will most likely say malaria and HIV.
In fact, it is pneumonia and diarrhea – the “forgotten killers” – that are responsible for the highest death toll, claiming more than two million of the most vulnerable lives every year.
Together, these two diseases account for 29% of all deaths of children under five years old.
That is more than double the total for HIV and malaria combined, and nearly as many as all other infectious diseases, injuries, and other post-neonatal conditions put together.
Yet as shocking as these statistics are, what is perhaps even more surprising is just how preventable pneumonia and diarrhea are – so much so that it would be quite feasible to introduce measures that by 2025 would reduce their death toll to almost zero.
That is precisely what we are now aiming to do.
An ambitious new plan, called the Integrated Global Action Plan for the Prevention and Control of Pneumonia and Diarrhea, launched this month by the World Health Organization and UNICEF, aims to step up existing interventions and pool global efforts, with the goal of reducing the number of deaths from pneumonia to less than three children per 1,000, and of diarrhea-related deaths to below one in 1,000.
This would effectively end the preventable deaths of more than two million children every year.
For any other infectious disease or global health threat, achieving this kind of reduction in incidence rate and mortality would be nothing short of miraculous.
Yet, for pneumonia and diarrhea, we have every reason to believe that we can succeed, because we already know what works.
For example, infants who are not exclusively breastfed for the first six months have a ten-fold increase in the risk of death from diarrhea, and are 15 times more likely to die from pneumonia.
Similarly, basic sanitation, such as improved hand washing and access to clean water, and better nutrition can also produce significant risk reduction, much of which can be achieved through simple education programs.
Immunization is also highly effective.
Vaccinating children against rotavirus, for example, can protect them from a pathogen that is responsible for 37% of all diarrhea deaths in children under five, thus saving 450,000 lives every year.
Similarly, vaccines exist to protect against pneumococcal disease, which accounts for a half-million pneumonia-related deaths annually.
When combined, these interventions significantly reduce both pneumonia and diarrhea; the problem is that, too often, they do not reach the children most at risk, such as those living in extreme poverty or hard-to-reach communities in the world’s poorest countries.
That is why we now need the Integrated Global Action Plan.
The two diseases share so many common causes and risk factors, prevention strategies and interventions, and delivery platforms for care in clinics, communities, and schools that it makes sense to bring them together.
But, if those hard-to-reach children are to benefit, our efforts must be scaled up significantly.
Until recently, this simply would not have been possible, at least not on the immunization front.
The vaccines protecting against rotavirus and pneumococcal disease are both barely more than a decade old.
In the past, such new vaccines would take, on average, 15 years to reach developing countries – and then at prices that would place them beyond the reach of those most in need.
This is one of the reasons why my organization, the GAVI Alliance, was created: to help accelerate the introduction of new vaccines and make them more affordable and accessible in developing countries.
Through our unique public-private business model, we have worked with our partners to help increase supplies of these vaccines while simultaneously bringing down their price.
Indeed, since 2006, the price of rotavirus vaccine has fallen by 67%, to just $2.50 per dose, while the price of a dose of pneumococcal conjugate vaccine has plummeted by 90%, to $3.50.
Such price reductions have and will continue to play a crucial role in saving the lives of millions of children and achieving the Millennium Development Goal of reducing child mortality by two-thirds.
To date, GAVI has helped countries immunize more than 13 million children against pneumococcal disease and five million children against rotavirus, with plans to strengthen its efforts in countries where immunization coverage is below 70%.
None of this means that we will not still face significant obstacles.
But the one thing that we know about immunization is that we can reach everyone.
We did it with smallpox, which has now been eradicated, and we are doing it with polio (with less than 100 cases worldwide this year).
The challenge now is to do the same with all of our life-saving vaccines – particularly those that target the biggest killers of children.
Taking the Long View
NEW YORK – The coming year will be a narrative of tension – a series of difficult choices between the imperatives of the present and those of tomorrow.
How we resolve this tension will be the measure of our vision and our leadership.
As a community of nations, we face three immediate tests in the coming year.
The first has just begun.
Not the global financial crisis, important as it is.
I am speaking, here, about climate change, the one truly existential threat.
We have only 12 short months until a key summit in Copenhagen, where world leaders will gather next December to reach an agreement to curb global warming.
We need a deal that will extend, deepen, and strengthen the Kyoto Protocols.
We need a new treaty for the twenty-first century that is balanced, inclusive, and comprehensive – one that all nations can embrace.
We took an important step in early December in Poznan, Poland, where climate ministers and experts met to hammer out a work plan toward the future.
The negotiations were difficult. They promise to become even more so.
Some argued that, amid our current difficulties, we cannot afford to tackle climate change.
I say we cannot afford not to.
The future of the planet is at stake.
Our second test is economic.
Clearly, we need a global stimulus.
Major economies have responded to the current crisis with ambitious fiscal and monetary rescue plans.
The emergency G-20 summit in Washington in November showed that governments are working together to coordinate policies.
Those efforts were broadened at a more recent meeting in Doha.
All of this is welcome.
But we need to do more.
Above all, we need to think boldly and freshly.
If we are to spend our way out of the financial crisis, we should be smart about it.
And that means that these expenditures must be investments .
They must be sustainable , so that we are not merely throwing money at problems but, instead, are using those funds to lay the foundations of a more stable and prosperous future.
China has shown leadership.
Fully one-third of its recently announced $586 billion economic stimulus program will be channeled into green growth and infrastructure.
The Chinese have seized an opportunity to address several challenges at once – to create jobs, conserve energy, and combat climate change.
The United States under President Barack Obama plans to do the same.
These policymakers know that investment in alternative fuels and eco-friendly technologies will deliver a massive future pay-off in terms of a safer environment, energy independence, and sustainable growth.
But they also know that green investment can produce jobs and spur growth in the here and now.
Other nations should follow suit.
We will never usher in an era of sustainable prosperity in the absence of a big, global push, with all nations moving in the same direction.
If ever there were a time for bold and ambitious vision – a chance to chart a new and better path – it is now.
Our third test is a matter of pragmatic principle.
Climate change and global finance are not our only crises.
Indeed, they compound other threats: food insecurity, volatile energy and commodity markets, and the terrible persistence of poverty.
No nation has been spared.
But it is the poorest nations that feel these blows most sharply.
If not handled correctly, today’s financial crisis will become tomorrow’s human crisis.
Social unrest and political instability will grow, exacerbating all other problems.
The danger, ultimately, is a cascading series of crises, each building on the others, with potentially devastating consequences for all.
During the coming year, therefore, we must act in a spirit of global solidarity.
Measures we take to deal with the financial crisis must be in the interests of all nations – the poorest as well as the rich and powerful. Aid programs for developing nations should be considered a part of any global stimulus and long-term economic recovery plan.
At the very least, that means not using the financial crisis as an excuse to reduce international aid and development assistance.
We must honor our commitments under the Millennium Development Goals as a pragmatic as well as a moral responsibility.
We stand on the threshold of a new multilateralism.
The pendulum of history is swinging back toward the United Nations and collective action.
The challenges we face as a community of nations today are increasingly those of collaboration and cooperation: fighting climate change, rebuilding the global financial system, and promoting sustainable development.
In this interconnected world, the challenge is to see the nexus among these three sets of problems.
With vision, we will find solutions to each that are solutions to all.
But it will take leadership to translate that vision into action, just as it will take leadership to balance our larger long-term interests against the fierce urgencies of now.
Talent versus Capital in the Twenty-First Century
GENEVA – When financial policymakers attempt to promote economic growth, they almost invariably focus on looking for new ways to unleash capital.
But, although this approach may have worked in the past, it risks giving short shrift to the role that talent plays in generating and realizing the ideas that make growth possible.
Indeed, in a future of rapid technological change and widespread automation, the determining factor – or crippling limit – to innovation, competiveness, and growth is less likely to be the availability of capital than the existence of a skilled workforce.
Geopolitical, demographic, and economic forces are relentlessly reshaping labor markets.
Technology, in particular, is changing the nature of work itself, rendering entire sectors and occupations obsolete, while creating completely new industries and job categories.
By some estimates, almost half of today’s professions could be automatable by 2025.
Speculation about what will replace them ranges from predictions of unexpected opportunities to forecasts of large-scale unemployment as machines displace most human labor.
The first signs of this disruption are already visible.
Global unemployment has topped 212 million, according to the International Labor Organization, and another 42 million new jobs will need to be created each year if the world economy is to provide employment to the growing number of new entrants into the labor market.
Meanwhile, last year, 36% of employers worldwide reported facing difficulties in finding talent, the highest percentage in seven years.
Addressing this mismatch in supply and demand will require governments, business leaders, educational institutions, and individuals to overcome incentives to focus on the short term and begin to plan for a future in which change is the only constant.
All must rethink what it means to learn, the nature of work, and the roles and responsibilities of various stakeholders in ensuring that workers around the world are able to fulfill their potential.
Human-resource executives at some of the world’s largest companies anticipate profound disruptions from the increased adoption of mobile Internet and cloud technology, the use of big data, flexible work arrangements, 3-D printing, advanced materials, and new energy supplies, according to early results from a survey by the World Economic Forum.
Their view of the overall impact on employment levels in their industries was for the most part positive – provided that new workforce skills can be developed rapidly in their own sectors and in the labor market more broadly.
As technology increasingly takes over knowledge-based work, the cognitive skills that are central to today’s education systems will remain important; but behavioral and non-cognitive skills necessary for collaboration, innovation, and problem solving will become essential as well.
Today’s schools and universities, which are dominated by approaches to learning that are fundamentally individualistic and competitive in nature, must be redesigned to focus on learning to learn and acquiring the skills needed to collaborate with others.
Uniquely human skills, like being able to work in teams, manage relationships, and understand cultural sensitivities will become vital for businesses across all sectors and must become a core component of future generations’ education.
Moreover, with education increasingly becoming a lifelong pursuit, businesses must rethink their role in providing for a competitive workforce.
Some companies have already grasped this and are investing in their employees’ continuous learning, re-skilling, and up-skilling.
Yet most employers still expect to obtain pre-trained talent from schools, universities, and other companies.
Business will increasingly have to work with educators and governments to help education systems keep up with the needs of the labor market.
Given rapid change in the skill sets required for many occupations, business must redirect investment to on-the-job training and lifelong learning, particularly as millennials enter the workforce, seeking purpose and diversity of experience where their predecessors sought remuneration and stability.
Business cycles naturally entail peaks and troughs in employment, and socially responsible businesses should follow successful examples like Coca-Cola, Alcoa, Saudi Aramco, Africa Rainbow Minerals, and Google in working toward mitigating joblessness and enhancing people’s abilities to earn a livelihood.
Governments, too, have a role to play in creating an environment in which their citizens can reach their potential.
Policymakers must use stronger metrics to assess human capital and reexamine investment in education, curriculum design, hiring and firing practices, women’s integration into the workforce, retirement policies, immigration legislation, and welfare policies.
Regulatory support for entrepreneurship and small and medium-size enterprises remains one of the most underused means of unleashing creativity, enhancing growth, and generating employment.
Protecting workers and consumers is critical, but shielding specific industries from the impact of new business models will not hold off the next wave of transformation.
Rather than seeking to rein in disruptive businesses such as Airbnb and Uber, governments should introduce regulations that enable their sustained growth, while looking for ways to leverage their technologies and entrepreneurial approaches to boost social welfare.
Such policies include online education courses for the unemployed, digital workers’ insurance, virtual unionization, and tax policies geared for the sharing economy.
Unlocking the world’s latent talent, and thus its full capacity for growth, requires us to look beyond business cycles and quarterly reports.
The future is full of potential, but only if we are smart enough – and courageous enough – to grasp it.
Pakistan After the Peshawar Massacre
LAHORE – On December 16, the Taliban attacked an army school in Peshawar and killed 132 children and nine adults.
Eight terrorists dressed in military uniform penetrated the school’s well-guarded perimeter and opened fire on the students and school personnel.
Pakistani army commandos fought the intruders for several hours before killing the last attacker.
The assault on the military school was the single deadliest attack in the Taliban’s history.
The question now is whether it will turn out to be a turning point for Pakistan in its relations with the group.
Pakistan’s military is the country’s most respected and powerful institution.
By attacking the children of military families, the Taliban has dramatically increased the likelihood that Pakistan will move resolutely against it.
This may, of course, take some time.
A Pakistani court’s decision to grant bail to Zaki-ur-Rehman Lakhvi, who is accused of masterminding the 2008 terror attack that killed 166 people in Mumbai, underscores the challenge of getting every Pakistani government institution on board.
Pakistan has had a complicated relationship with the Taliban.
The country’s intelligence services had a hand in the group’s formation and in its rise to power in neighboring Afghanistan.
Many in the international community suspect that some in the Pakistani military and its spy networks continued to support the Taliban even after the country joined what then-US President George W. Bush called “the war on terror” in 2001.
More recently, however, three crucial developments have altered the environment in which Islamic extremists operate in Pakistan.
For starters, in November 2013, Prime Minister Nawaz Sharif appointed General Raheel Sharif as Chief of Staff of the Pakistani army.
Sharif views Islamic extremism as an existential threat that needs to be faced and defeated.
In a conversation I had with the general when he visited Washington, DC last month, he placed Islamic extremism well ahead of Pakistan’s poorly performing economy and immature political system on the list of problems that the country must confront.
Pakistan, he said, has the strength – and now the political will – to move decisively against terrorism.
In June, the Pakistani army launched Operation Zarb-e-Azb, an effort to eliminate terrorist hideouts and safe areas in North Waziristan, one of the tribal areas along the border region with Afghanistan.
For Sharif, the offensive is just the beginning of an all-out effort that will take time to produce the desired result.
“There will be difficulties on the way, and three of them have already occurred,” he told me. Following this summer’s attacks on Karachi’s international airport, a naval base, and a crowd gathered on the India-Pakistan border to witness a popular display of force by each side’s guards, the Peshawar massacre makes it four.
The second key development is the election in Afghanistan of President Ashraf Ghani.
A former senior World Bank official, Ghani is interested not only in finding a durable solution to the problem of Islamic extremism, but also in setting his country on a path of sustainable economic development.
Moreover, Ghani has been persuaded that he needs Pakistan’s help on both fronts.
One of Pakistan’s first actions after the Peshawar school attack was to approach Ghani’s government and ensure that Afghan authorities blocked the escape routes of those involved in planning and executing it.
Indeed, Sharif visited Ghani in Kabul just a few hours after the attack, and, even as the battle was still underway, Pakistan’s military launched airstrikes on terrorist hideouts along the countries’ border, after intelligence officials concluded that the attack had been planned by a group operating in that area.
The third development is the sudden rise of the Islamic State in Iraq and Syria.
The group’s brutality is not so much an expression of religious belief as of tribal traditions that have, over the centuries, shaped a narrow, fanatical interpretation of Islam.
This is the source of much of the trouble in Afghanistan and Pakistan as well.
Bringing the tribal system and its mores into the mainstream and under the rule of law will be an important component in the effort to end the reign of terror in both countries.
The border where Operation Zarb-e-Azb is taking place highlights the importance of all three developments.
To this day, Afghanistan has not recognized the Durand Line – drawn by a British diplomat in 1893 and imposed on Afghanistan by India’s colonial rulers – as the formal border with Pakistan.
Afghanistan was the only state that opposed Pakistan’s entry into the United Nations when it gained independence from British rule in 1947, contributing to nearly 70 years of bilateral tensions.
The Durand Line bisects the territory of several Pashtun tribes, including the Mehsuds and the Haqqanis.
The former have supplied the leadership and foot soldiers to the Pakistani Taliban and the latter has fought, often with devastating effect, against the government in Kabul and American and NATO troops.
Both groups aim to replace their countries’ governments with an Islamic caliphate, based on what they interpret as the tenets of Islam.
Over the decades, the governments in Islamabad and Kabul have done little to remove the sanctuaries established by the two groups, whose members freely cross the poorly patrolled frontier.
Today, the two countries have a chance to mend ties and join forces to rein in Islamic extremists on both sides of the border.
This week’s slaughter of schoolchildren in Peshawar could be the tipping point.
Talking Sense About Global Warming
LONDON – In February, 14 distinguished climate scientists, economists, and policy experts came together to discuss how to tackle global warming.
This week, the London School of Economics and Oxford University are publishing their conclusions.
They are worth considering.
The group was brought together by Gwyn Prins, a well-regarded expert in security policy and international relations who heads LSE’s Mackinder Programme for the Study of Long Wave Events.
Participants included climate scientist Mike Hulme of the University of East Anglia, climate policy expert Roger Pielke Jr. of the University of Colorado, and climate economist Christopher Green of McGill University.
The group’s report, “The Hartwell Paper,” outlines a new direction for climate policy after the collapse of last year’s attempts to negotiate a global climate deal.
The authors note that 18 years of the “Kyoto Protocol approach” to international climate policy have failed to produce any discernable real-world reductions in emissions of greenhouse gases.
What defines the Kyoto approach, of course, is a single-minded focus on cutting carbon-dioxide emissions.
“The Hartwell Paper” argues that the Kyoto approach, based as it is on past experience with relatively simple environmental problems like acid rain, was always doomed to failure.
The group points out that it makes no sense to compare climate change to other environmental challenges that we have faced and solved.
Climate change is much more complicated, involving open, complex, and imperfectly understood systems.
Unlike, say, acid rain or smog, it is not “a conventional environmental ‘problem.’” It is as much “an energy problem, an economic development problem, or a land-use problem.”
Climate economists widely acknowledge that there are only four policy levers that can be used in an attempt to lower carbon emissions and rein in climate change: reducing the world’s population, shrinking the global economy, increasing the efficiency of energy consumption, and decreasing carbon intensity (meaning that we create less carbon for each unit of energy that we produce).
Reducing global population is implausible, and deliberately reducing the size of the global economy would result in increased hardship for billions.
“The Hartwell Paper,” then, sets out to develop a strategy that identifies a number of ways of pulling the levers of energy efficiency and carbon intensity.
The Hartwell group proposes that we adopt three basic climate-related goals: ensuring secure, affordable energy supplies for everyone (which means developing alternatives to fossil fuels); ensuring that economic development doesn’t wreak environmental havoc (which means not just reducing CO2 emissions, but also cutting indoor pollution from burning biomass, reducing ozone, and protecting tropical forests); and making sure that we are prepared to cope with whatever climate changes may occur, man-made or natural (which means recognizing, at last, the importance of adapting to climate change).
Achieving these goals will obviously require heavy lifting.
The Hartwell group correctly notes that in order to be successful, our approach to climate policy should offer obvious advantages (“rapid and demonstrable pay-back”), appeal to a wide variety of people, and produce measurable results.
The Kyoto approach, of course, does none of these things.
Instead of single-mindedly trying to force people to do without carbon-emitting fuels, the Hartwell group suggests that we pursue a number of other worthy goals – for example, adaptation, reforestation, encouraging biodiversity, and improving air quality – each of which is important, and all of which may also reduce carbon emissions.
As the report notes, “the all-inclusive ‘Kyoto’ type of climate policy…needs to be broken up into separate issues again, each addressed on its merits and each in its own ways.”
At the same time, the group adds, we must recognize that we won’t make any real progress in cutting CO2 emissions until we can provide developing economies with affordable alternatives to the fossil fuels on which they currently depend. “In short,” the report notes, “we need to ignite…an energy technology revolution.”
The Hartwell group argues that mass improvements are needed across many technologies, requiring the determined participation of governments.
They suggest partially funding the required research and development with a “slowly rising but initially low carbon tax” that would avoid undermining economic growth.
If any – or all – of this sounds familiar, it may be because I have been arguing much the same points for some time.
If my experience is any guide, the members of the Hartwell group should expect to be attacked as heretics for questioning the Kyoto orthodoxy. But that is a small price to pay.
As the saying goes, “insanity is doing the same thing over and over again and expecting a different result.”
With respect to global warming, it’s time we came to our senses.
Talking to the Taliban
WASHINGTON, DC – The Obama administration has affirmed that, while it will not participate directly, it supports the idea of peace negotiations between the Afghan Taliban and the Afghan government.
This nod from the White House followed the publication of reports that representatives of Afghan President Hamid Karzai had begun preliminary high-level talks regarding a possible coalition government and an agreed timetable for a NATO military withdrawal from Afghanistan.
The issue of negotiating a rapprochement between Afghanistan’s government and the Taliban is undoubtedly controversial.
The hope is that the Taliban leadership is not cohesive – that, whereas some of its members are probably committed to al-Qaeda’s absolutist ideology, others might accept a compromise settlement.
Karzai and Western leaders have repeatedly insisted that their reconciliation offer does not extend to al-Qaeda members, who are seen as alien foreign elements whose extremist convictions and past terrorist activities make them unacceptable negotiating partners.
Although al-Qaeda and the Taliban are united in their desire to expel Western troops from Afghanistan and reestablish a strict Islamic government in which they enjoy a monopoly of political and religious power, some Taliban leaders might accept more moderate goals.
More importantly, the Taliban in government would not necessarily support Islamic insurgencies in other countries or engage in distant terrorist attacks in Western countries, whereas al-Qaeda almost certainly would.
In recent years, Taliban representatives, aware of widespread eagerness to end the country’s decades of fighting, have insisted that their political ambitions are confined to Afghanistan.
Al-Qaeda leaders, by contrast, remain wedded to the goal of establishing radical Islamist regimes throughout the Muslim world and waging war against a long list of governments that they see as hostile to this objective.
The key uncertainty is whether an Afghan government that includes the Taliban would and could prevent al-Qaeda from reestablishing bases in regions under Taliban control.
Some argue that the Taliban, eager to return to power, would want to reconcile with the international community or at least prevent further Western military strikes.
But it is hard to imagine the Taliban using force to prevent their al-Qaeda allies from reestablishing a military presence in Afghanistan and exploiting that presence to organize additional terrorist attacks in other countries.
The Taliban and al-Qaeda fighters in Afghanistan are closely integrated at the operational level, with al-Qaeda members embedded in most important Taliban field operations.
Thus far, the Taliban leadership has publicly rejected Karzai’s reconciliation overtures.
For example, they greeted the inauguration of the June 2010 Peace Jirga with rocket attacks and suicide bombers.
Until now, Taliban representatives have demanded that all Western troops leave Afghanistan before they even consider engaging in direct talks with the Afghan government.
Karzai has sought to finesse the issue by arguing that a peace agreement that ended the insurgency would bring about the withdrawal of all foreign military forces.
Another obstacle is many Taliban leaders’ opposition to Afghanistan’s current constitution, which was adopted after the Taliban lost power.
It includes a number of liberal-democratic principles that many Taliban consider objectionable, if not blasphemous.
For example, the constitutional provision guaranteeing women equal rights is a major source of dispute.
Fearing the loss of guaranteed schooling for girls and other rights, many women’s rights groups, in Afghanistan and elsewhere, oppose negotiating with the Taliban.
The 2001 Bonn Agreement, the 2006 London Compact, and NATO’s April 2008 Bucharest Declaration also list a range of political, economic, and social objectives for Afghanistan that in many cases conflict with Taliban values.
Human rights groups suspect that even if the Afghan government and Taliban representatives profess to respect the constitution in any future peace agreement, they will not enforce some of its provisions in practice.
Even if Taliban leaders affirmed their willingness to talk, it would be hard to trust their intentions.
They could easily imitate the North Vietnamese strategy of professing to accept a compromise peace settlement in order to secure a foreign military withdrawal.
They then could resume offensive operations against the still weak Afghan Security Forces, which have yet to demonstrate much military effectiveness.
The Pakistani Taliban has employed a variant of this strategy in the past, ostentatiously negotiating truces with the military in order to allow their forces to rest and regroup before resuming their attacks shortly thereafter.
Unlike in Pakistan, moreover, the Afghan insurgents could resume fighting with the expectation that their main adversary, the international forces, would be considerably hobbled in their response, because Western publics would prevent their governments from sending their troops back to battle.
One reason why progress in the reconciliation processes has been slower than anticipated is that Western governments have not pressed Karzai to engage in genuine peace negotiations with Taliban leaders until coalition forces have had the opportunity to reverse the deteriorating situation on the battlefield.
US policymakers in particular wanted to take advantage of the ongoing surge in NATO combat forces in Afghanistan – which reached 150,000 in August, of which some two-thirds were American – to shake Taliban commanders’ conviction that they were winning the war.
It would be a mistake to disconnect the situation on the battlefield from the reconciliation process.
If NATO’s forces work sufficiently well, they might weaken the insurgency enough that the Afghan military could prove adequate to overcoming the remaining hard-liners, even after foreign troops reverse their current surge and scale down their presence during the next few years.
Taming Bigotry
MELBOURNE –At a time when the horrific events in Norway remind us how much murderous bigotry there still is in the world, perhaps a story from the other side of it can restore a little optimism that some positive, historically significant, changes in attitude really are occurring.
Last month in Australia, a major-league football player was fined, suspended, and – as a result of intensive negative coverage in the press – experienced profound public humiliation.
What was unusual about the case, and the scale of the response, was his offense.
It was not a thuggish tackle, abuse of the umpire, or match-fixing in collusion with gamblers.
It was just a taunting remark heard only by his opponent.
But his opponent was Nigerian-born, and the remark was a racist insult.
Just a few days earlier, in an incident that also drew significant media attention and condemnation, a spectator hurling racial abuse at a Sudanese-born player was escorted from the ground and banned from attending future matches unless he undertook racism-awareness education.
Not many years ago, in Australia – as in most of the rest of the world – these kinds of incidents would have passed utterly unremarked and without redress.
They were not serious – just part of the game, uttered in the heat of the gladiatorial contest on the field and the passionate partisan cheering in the stands.
A famous player of the 1990’s said at the time, “I’d make a racist comment every week if I thought it would help win the game.”
And spectators were no different: “Of course, I sing out ‘black bastard,’ but I don’t mean it.
It’s just a way of letting out your feelings.”
It seemed not to occur to anyone that the black players who were the subject of this abuse could possibly have rather different feelings about it.
And all of this was happening in a country that seemed, institutionally at least, to have put its racist past behind it.
The notorious “White Australia” immigration policy was abandoned in the late 1960’s, robust anti-discrimination legislation was enacted in the 1970’s, and innumerable efforts were made to remedy through land rights and social-justice programs the injustices experienced over many decades by indigenous Aboriginal and Torres Strait Islander people.
Casual racism – disparaging remarks made about other ethnic and national groups around the workplace, or over the bar or the family dinner table (as I can well remember growing up in the 1950’s) – had become much less prevalent in Australian private life, and certainly wholly absent from public life, by the 1990’s.
But sport was somehow different.
There, it was just letting off steam, no different from cheering or booing; or it was a “legitimate” tactic, no different from needling an opponent by challenging his manhood.
That mood and behavior began to change with the action of a star Aboriginal Australian Rules footballer, Nicky Winmar, one of the very few then playing in the top professional league.
In 1993, he had had enough.
After a man-of-the-match performance, throughout which he had been racially taunted, he turned to the opposing team’s cheer squad, raised his top with one hand and pointed dramatically to his chest with the other.
The declaration was unequivocal: “I’m black, and I’m proud of it.”
The demand for action generated by this incident, and by the highly publicized on-field abuse of another star Aboriginal player, Michael Long, two years later, led the Australian Football League to introduce in 1995 a “Racial and Religious Vilification” code of conduct.
The code combines a robust conciliation process with appropriate punitive measures and a strong educational program.
The code has been overwhelmingly successful in ridding Australian football of the on-field racism that made life miserable for most indigenous players, with the number of indigenous players at the elite level more than doubling over the last decade.
It has since been embraced by every football competition in Australia, and has proved an influential model for other sports in Australia and worldwide.
For example, Australia’s reforms are reflected in the anti-racism policies adopted in the last decade by the international football governing bodies, FIFA and UEFA (though in many cases the translation of policy into effective, enforceable action at the national level has left much to be desired).
For a long time, however, there has been doubt in Australia about how much real across-the-board commitment there was to the underlying message that racial vilification anywhere, anytime, by anyone, in any context, is simply unacceptable.
There was considerable sentimental attachment toward Aboriginal sportsmen and women, and indeed toward Australia’s indigenous people generally – apparent in the outpouring of emotion, remarked worldwide, that accompanied Prime Minister Kevin Rudd’s moving “Apology to the Stolen Generation” in 2008.
But would this sentiment extend to those of African descent and to members of other ethnicities who were gradually becoming a more visible part of Australian life?
The evidence of the last few weeks is that history, at last, really has moved on.
The revelation of the abuse of players of Sudanese and Nigerian origin generated a surge of genuine, visible, and tangible public repugnance – a very real sense that the perpetrators had shamed not only themselves, but also their country.
For an Australian of my generation, that is a very new, and hugely welcome, experience.
And there is every reason to hope, and believe, that our experience is gradually becoming universal.
Taming Finance in an Age of Austerity
NEW YORK – It was not long ago that we could say, “We are all Keynesians now.” The financial sector and its free-market ideology had brought the world to the brink of ruin.
Markets clearly were not self-correcting.
Deregulation had proven to be a dismal failure.
The “innovations” unleashed by modern finance did not lead to higher long-term efficiency, faster growth, or more prosperity for all.
Instead, they were designed to circumvent accounting standards and to evade and avoid taxes that are required to finance the public investments in infrastructure and technology – like the Internet – that underlie real growth, not the phantom growth promoted by the financial sector.
The financial sector pontificated not only about how to create a dynamic economy, but also about what to do in the event of a recession (which, according to their ideology, could be caused only by a failure of government, not of markets).
Whenever an economy enters recession, revenues fall, and expenditures – say, for unemployment benefits – increase.
So deficits grow.
Financial-sector deficit hawks said that governments should focus on eliminating deficits, preferably by cutting back on expenditures.
The reduced deficits would restore confidence, which would restore investment – and thus growth.
But, as plausible as this line of reasoning may sound, the historical evidence repeatedly refutes it.
When US President Herbert Hoover tried that recipe, it helped transform the 1929 stock-market crash into the Great Depression.
When the International Monetary Fund tried the same formula in East Asia in 1997, downturns became recessions, and recessions became depressions.
The reasoning behind such episodes is based on a flawed analogy.
A household that owes more money than it can easily repay needs to cut back on spending.
But when a government does that, output and incomes decline, unemployment increases, and the ability to repay may actually decrease.
What is true for a family is not true for a country.
More sophisticated advocates warn that government spending will drive up interest rates, thus “crowding out” private investment.
When the economy is at full employment, this is a legitimate concern.
But not now: given extraordinarily low long-term interest rates, no serious economist raises the “crowding out” issue nowadays.
In Europe, especially Germany, and in some quarters in the US, as government deficits and debt grow, so, too, do calls for increased austerity.
If heeded, as appears to be the case in many countries, the results will be disastrous, especially given the fragility of the recovery.
Growth will slow, with Europe and/or America possibly even slipping back into recession.
Stimulus spending, the deficit hawks’ favorite bogeyman, did not cause most of the increased deficits and debt, which are the result of “automatic stabilizers” – the tax cuts and spending increases that automatically accompany economic fluctuations.
So, as austerity undermines growth, debt reduction will be marginal at best.
Keynesian economics worked: if not for stimulus measures and automatic stabilizers, the recession would have been far deeper and longer, and unemployment much higher.
This does not mean that we should ignore the level of debt.
But what matters is long-term debt.
There is a simple Keynesian recipe: First, shift spending away from unproductive uses – such as wars in Afghanistan and Iraq, or unconditional bank bailouts that do not revive lending – toward high-return investments.
Second, encourage spending and promote equity and efficiency by raising taxes on corporations that don’t reinvest, for example, and lowering them on those that do, or by raising taxes on speculative capital gains (say, in real estate) and on carbon- and pollution-intensive energy, while cutting taxes for lower-income payers.
There are other measures that might help.
For example, governments should help banks that lend to small- and medium-size enterprises, which are the main source of job creation – or establish new financial institutions that would do so – rather than supporting big banks that make their money from derivatives and abusive credit card practices.
Financial markets have worked hard to create a system that enforces their views: with free and open capital markets, a small country can be flooded with funds one moment, only to be charged high interest rates – or cut off completely – soon thereafter.
In such circumstances, small countries seemingly have no choice: financial markets’ Diktat on austerity, lest they be punished by withdrawal of financing.
But financial markets are a harsh and fickle taskmaster.
The day after Spain announced its austerity package, its bonds were downgraded.
The problem was not a lack of confidence that the Spanish government would fulfill its promises, but too much confidence that it would, and that this would reduce growth and increase unemployment from its already intolerable level of 20%.
In short, having gotten the world into its current economic mess, financial markets are now saying to countries like Greece and Spain: damned if you don’t cut back on spending, but damned if you do as well.
Finance is a means to an end, not an end in itself.
It is supposed to serve the interests of the rest of society, not the other way around.
Taming financial markets will not be easy, but it can and must be done, through a combination of taxation and regulation – and, if necessary, government stepping in to fill some of the breaches (as it already does in the case of lending to small- and medium-size enterprises.)
Unsurprisingly, financial markets do not want to be tamed.
They like the way things have been working, and why shouldn’t they?
In countries with corrupt and imperfect democracies, they have the wherewithal to resist change.
Fortunately, citizens in Europe and America have lost patience.
The process of tempering and taming has begun.
But there is far more yet to do.
Taming Russia\u0027s Presidency
MOSCOW: The good news is that Russia's parliamentary elections took place.
Just three or four months ago it seemed that they would be postponed or cancelled.
Russia's legislature – the Duma – has now gained power and a new legitimacy, even if only theoretically.
Now it is time for curtailing the vast powers of the presidency.
If this can take place without nullification (a big if), legitimately and in time, Russians can hope that today's ineffective, corrupt regime, rejected by almost the entire Russian population, will leave office.
Only then will there will be a chance to construct a more effective government, to start rebuilding the state.
Of the elections, they were conducted (and ended) rather strangely.
Never before either in Russia or in any other state, insofar as I know, was an election campaign so utterly dirty, with countless formal and factual violations of Russian laws and infringements of democratic norms.
Two out of the three most important TV channels (state channels from the formal point of view but are really controlled by the "family" around President Yeltsin, including the family oligarchs like Boris Berezovsky), transmitting across all Russia, almost completely prevented the two main opposition parties -- the Primakov and Luzhkov "Fatherland-All Russia”(OVR) and Yavlinskiy's "Yabloko" from getting their message broadcast.
OVR and its leaders were constantly slandered by these channels.
No one bothered about the truth.
Primakov was attacked for supposedly taking brides from Saddam Hussein as well as for conspiring with America to overthrow Prime Minister Putin's government.
The claims against Luzhkov were even more monstrous .
They followed the rule of the BIG LIE: the more preposterous the lie, the more people will believe it.
With frankness and brute force the Kremlin supported three parties: The “Union of Right Forces" led by Boris Nemtzov, Sergei Kiriyenko, and Anatoly Chubais; the ever obedient to the Kremlin mob of Vladimir Zhirinovsky; and "Edinstvo” (meaning Unity or Bear), specially created for the election by Yeltsin's administration.
The Kremlin did not criticise the Communist Party this time, as it poses no threat today -- though the idea of a communist threat could be held in reserve just in case the presidential elections go wrong next summer.
"Unity" proved a godsend for Yeltsin and his family.
Disoriented by the Kremlin's massive black propaganda, voters, especially the less educated and economically wounded, cast their votes for it, a political bloc without a recognizable face or program.
Government interference in the election process was another characteristic of the elections, though this is something certainly old hat here.
Prime Minister Putin used the popularity he gained through his prosecution of the Chechen war to support Unity and the Union of Right Forces.
Regional governors, ministers and other federal authorities were instructed to support these parties during the election campaigns as well as when counting the votes.
One additional dark feature of this election was the use of anti-western rhetoric by Kremlin supporters who were previously seen as pro-west.
Freedom of speech in Russia was perhaps the most important victim of these elections.
The first hints of the usefulness in politics of such an assault were seen during the presidential elections of 1996, when journalists became closely tied to the presidential family, sometimes for a fee but mostly because they remained afraid of the communists.
Now we are paying for this self-censorship and contempt for professional ethics, as all media abandoned the truth in order to curry favor with the Kremlin.
Formal freedom of the mass media still exists, but only for trivial matters.
Touch something important to the rulers, and press freedom evaporates.
Given the unprincipled nature of the elections, no mandate exists upon which the Duma can act.
Moreover, because the elected deputies from Unity joined the party for no other purpose but election, their discipline is likely to be scant.
It is doubtful that this Duma will be able to pass necessary constitutional reforms aimed at restricting the President's power and making Parliament and the President more accountable.
The majority needed for overcoming a presidential veto will be difficult to find, particularly as President Yeltsin (as well as his likely successor) will fight hard to block any restriction of presidential power.
The current lame duck Duma, despite being dominated by communists, became more effective near the end of its tenure.
The financial panic of two years ago taught even its most unreconstructed communist members some realism.
Now, new and untested men will assemble.
We may be back to square one insofar as the Duma is concerned.
Personally, I was among the figures under attack from the Kremlin during the elections. I worked with OVR, the bloc of Primakov and Luzhkov.
Perhaps that is why my presentation of the results seems so dismal, where others see the reality as much more optimistic.
I wished I could believe in their optimism.
But, sad to say, the only hope that I can see is something vaguely Leninist: in Lenin's terminology, if we made two steps backwards, one step was nevertheless made forward.
Democracy in Russia has taken a beating.
Still, our democracy is alive; it lives on.
Given our history in this century, that is a victory.
Taming “Speculative Capitalism”
Nicolas Sarkozy, the leading contender in the French presidential election, recently lashed out against what he called “speculative capitalism,” and says he wants to “moralize the financial zone” created by the euro.
What does Sarkozy mean by “speculative capitalism?”
Something immoral, apparently, but what?
The term has rarely been used before, and seems to be redundant.
After all, capitalism is practically a synonym for speculation, isn’t it?
Sarkozy is expressing a wave of sentiment that is neither unique to his party nor to France.
At stake with his comments are emerging ideas and attitudes that will inform the twenty-first century economy.
So we should think hard about what “speculative capitalism” means.
Sarkozy has called free trade “a policy of naiveté,” and wants to take a number of steps that would stand in the way of economic globalization.
Although he does want to make the French labor market less rigid, he would block foreign takeover bids of French companies and protect Airbus workers from possible job losses.
Protecting France from speculative capitalism seems to mean interfering with free trade to protect local jobs.
To be sure, Sarkozy is right to note the enormous risks that workers and their communities face in this rapidly globalizing world.
But putting this problem center stage should not mean protecting existing jobs come what may.
Capitalists put their money where they think it can get the highest return; that is what we call speculation.
They buy companies, break them up, recombine them, fire some employees, and hire others.
To do this profitably, they cannot afford to let patriotism or sentiment interfere.
They do business in whatever country is most advantageous.
Rewarding successful ventures is the basic idea of capitalism – a dynamic process that Joseph Schumpeter called “creative destruction.”
Under capitalism, one is immoral if one reneges on a contract or breaks the law, but not if one speculates.
Planned economies were never able to flourish because uncertainty about the future is just too high, something that is best left to the speculators, with the potential of reward if they are right and the disciplining whip of the market if they are wrong.
Concerns about free trade similar to Sarkozy’s are gaining strength around the world.
In an article last year in the US journal Foreign Affairs , Alan Blinder, a former advisor to President Bill Clinton and Vice-Chair of the US Federal Reserve Board, argued that the process of globalization has the potential to cause massive job loss in the future.
Given that electronic communications technology has a powerful potential to replace employees with others who are thousands of miles away, we may now be seeing only the beginning of this process.
Blinder is absolutely right that the problem could get worse.
Deniers of the problem – such as economist Jagdish Baghwati – cannot prove that the worst will not happen.
We ought to prepare for the possibility of massive turmoil in our economies in coming years, even if we cannot prove that it will happen, just as we should take steps against global warming, even if some scientists doubt that it is a problem.
According to Blinder, governments should encourage education for jobs that are harder to outsource overseas.
He wants the government to subsidize “personally-delivered service” jobs, which cannot be delivered over the Internet, to encourage the expansion of such jobs instead of “impersonally-delivered services.”
Subsidies, of course, interfere with free trade.
But Blinder’s solution appears to be a creative new idea, and one may think of legitimate justifications for the government to interfere with free markets this way.
His idea certainly is more focused and theoretically sound than Sarkozy’s plans to protect existing jobs.
In fact, Blinder’s proposal is only one of many possible government policies aimed at dealing with the Internet-age turmoil in the market for jobs and livelihoods.
Capitalist institutions include risk-management schemes that provide insurance, hedging, and diversification.
Government can promote the democratization of such institutions so that they protect people from the very risks that they are worrying most about.
Such possibilities include livelihood insurance, home equity insurance, income-linked loans, and GDP-linked and home-price-linked securities.
Moreover, government can make our social insurance (a government institution that complements private insurance) more incentive-compatible and better at managing risks – and not just the risks of the extreme losers – by, say, launching inequality-indexation of the tax system.
And governments should improve our information infrastructure, so that financial contracts can better capture the outcomes of economic risks.
So Sarkozy shouldn’t be lashing out against “speculative capitalism.”
On the contrary, he should be asking how capitalism can be developed even further, with new institutions in finance and insurance to deal with the very important problem that his campaign has highlighted.
Taming the Private Equity “Locusts”
The full repercussions of the financial crisis triggered by bad mortgages in the United States are still unclear, but the unforeseen effects already include an unstoppable demand for greater transparency in financial markets, and better regulation.
One part of the financial markets not subject to the transparency and disclosure rules that apply to, say, banks and mutual funds, are hedge and private equity funds.
Once relatively small, the five biggest private equity deals now involve more money than the annual budgets of Russia and India.
Assets in private equity and hedge funds stand at $3 trillion today and are expected to reach $10 trillion by the end of 2010.
The funds now rely heavily on investment from pension funds, and on money borrowed from banks and other non-private sources.
Indeed, these private funds account for about two-thirds of all new debt.
So, if there is a debt problem, as in the US mortgage crisis, one must also look at private funds’ role in creating it.
They are, in short, a major challenge to financial stability, and, unless regulated, they are likely to contribute to future crises.
The big private equity funds have proven to be a menace to healthy companies, to workers’ rights, and to the European Union’s Lisbon Agenda (aimed at making Europe the world’s most competitive economy).
Typically, they take over companies with borrowed money – often more than 80% of the price.
These “leveraged buy-outs” leave the company saddled with debt and interest payments, its workers are laid off, and its assets are sold.
A once profitable and healthy company is milked for short-term profits, benefiting neither workers nor the real economy.
In Britain, the Automobile Association was bought by private equity in 2004.
The AA had made a profit of £75 million and was expanding its services with 10,000 staff.
Annual profits have since risen to £190 million, but 6,000 workers have been laid off and both costs and waiting times for AA members needing its vehicle repair and recovery services have increased.
In Denmark, the telecommunications company TDC was taken over by a group of private equity firms in 2005, with 80% of the purchase financed by borrowing.
The company’s debt/asset ratio leapt from 18% to 90% as company reserves for long-term development – essential in the telecoms industry – were used to service the loan.
These funds are largely tax-exempt, often because they are registered offshore, although they operate from the world’s major onshore financial centers.
One fund manager admitted that he pays less tax than his cleaning lady.
In the US, it has been calculated that the funds cost $2-3 billion in lost tax revenues – an amount three times that of the EU’s budget for humanitarian aid.
Trade unions in the United Kingdom, Germany, Canada, and elsewhere have long pointed to the damage caused by leveraged buy-outs.
So have such senior politicians as former German Vice-Chancellor Franz Müntefering, who described private equity funds as “locusts,” and leading Democrats in the US Congress’s House Committee on Financial Services.
The European Parliament’s Socialist Group, the UK’s House of Commons, and the Australian parliament have all investigated these private funds.
Charlie McCreevy, the EU’s internal market commissioner, is staunchly resisting any move towards greater control of private equity and hedge funds.
But the tide is turning against him.
At the EU’s autumn summit, British Prime Minister Gordon Brown, German Chancellor Angela Merkel, and French President Nicolas Sarkozy agreed in a joint statement that more transparency is needed in financial markets.
In a separate move, Brown promised to close any legal loopholes that enable hedge fund managers to exempt themselves from paying taxes.
Both the private equity and hedge fund industries reacted by publishing voluntary codes of conduct.
Paul Marshall, a hedge fund chairman, told the Financial Times that he hoped voluntary action by the industry “will take the pressure off.”
At least that was transparent.
Nobody wants to demonize or unnecessarily restrict private equity and hedge funds, and venture capital’s investment in innovative and high-risk new companies highlights their potentially useful role.
But this accounts for only a minor part (5%) of the private equity industry.
Given that the largest part of the industry (60%) is based on leveraged buy-outs and extreme debt, it seems only reasonable to demand that they honor the transparency and tax rules accepted by everyone else.
Ultimately, private funds should be regulated globally.
We can enact measures in each of our member states and in the EU, but coordinated action by the EU and the US would be a realistic start.
Private funds cannot operate without these two giant markets, and would have to comply with their requirements.
The will to act exists in the EU.
Faced with the leaders of Europe’s three largest economies, McCreevy is not a serious obstacle.
The White House’s current occupant is a more formidable obstacle to reform, but change is coming.
Even so, ensuring transparency and disclosure cannot fully address heavily debt-laden leveraged buy-outs, which would still be objectionable.
There is a need to set a limit on the amount of debt that a company can accumulate, and change acquisition and merger legislation to include leverage.
The latter clearly falls within the EU’s competence.
There is also a need to protect our pension savings, which are now heavily invested in private equity.
In short, we need a proper supervisory system for the financial services sector in Europe.
There is still a lot of talking to do.
Serious discussions are needed to reach EU-wide and inter-governmental agreements, and to encourage the US to move in the same direction.
But, for the sake of our pensions, our savings, our jobs, and our welfare states, the sooner change comes, the better.
Taming the Tigers
BRUSSELS – Three years ago, Sri Lanka elected Mahinda Rajapaksa as president because he pledged to take the offensive against the Liberation Tigers of Tamil Eelam, the guerillas who have been fighting for 25 years to carve out an independent homeland for the country’s Tamil minority.
Many well-meaning people saw Rajapaksa’s promise as warmongering, and, even as Sri Lanka’s army has been pressing toward victory, urged him to negotiate with perhaps the world’s most fanatical terror organization (the Tamil Tigers, it should be recalled, virtually invented the cult of the modern suicide bomber.)
Fortunately, Rajapaksa listened more to his war-ravaged citizens than to outsiders, and today what seemed impossible – military victory over the Tigers, the oldest, largest, and wealthiest guerrilla army in South Asia – appears at hand.
Over the past few months, the Tigers have suffered a series of devastating blows.
Instead of commanding much of northern Sri Lanka, they are now confined to a shrinking pocket, and are reduced to mindless military stunts such as the recent bombing by light aircraft of the tax administration building in the capital, Colombo.
Thousands of Tamil Tiger fighters have deserted. A rebel army has dwindled to a fanatical few.
But fighting the Tigers and seeking a peace deal have never been alternatives.
President Rajapaksa’s predecessors spent years engaged in fruitless talks and ceasefires, during which the guerrillas remained committed to their aim of dividing the country, and making demands for political and socio-economic changes that no democracy could accept, even as they carried on killing and kidnapping.
Weakening the Tigers militarily has thus always been a necessary condition for achieving a political settlement with Sri Lanka’s Tamils.
Now that the guerrillas are boxed in, what can Rajapaksa reasonably offer to them and ordinary Tamils?
The Tigers’ leaders have committed crimes against humanity, and some of them engage in criminal activities.
So they have little incentive to demobilize.
Some Sri Lankans say the best place for the Tiger leaders is jail.
True, but in politics the best justice can be the enemy of the general good.
Though the Tigers can no longer destroy Sri Lanka’s democracy, fighting to the last guerrilla is in nobody's interest.
Ending this conflict will require political adroitness as well as continued military firmness.
Achieving a lasting peace, though difficult, is possible.
On the most basic level, it will almost certainly require security guarantees for the Tigers’ leaders.
But it should not, as some say, include any offer of power-sharing with the guerillas (ordinary Tamils are another matter).
Sri Lanka is a democracy.
In exchange for laying down their arms and ending a pointless and destructive war, Tiger soldiers should be encouraged to take part in politics, but on exactly the same terms as any other Sri Lankan.
Nobody should underestimate the difficulty of rebuilding Sri Lanka’s war-ravaged north and reconciling the Tamils at a time of global recession.
In countries with strong ethnic, tribal, and religious divisions, unless it is made clear from the start that everything possible will be done to foster reconciliation, communal enmity will most likely simmer.
Any “victory” that the Tamils perceive as leading to subjugation of their rights and aspirations for equality with the majority Sinhalese will be short-lived.
So Rajapaksa must offer the Tamil people a political compromise, perhaps including some cabinet positions, as well as the promise of a revived economy.
Indeed, the Rajapaksa government, and the majority Sinhalese, must understand that the political and economic reforms needed to achieve a lasting peace are inextricably intertwined.
One cannot succeed without the other.
On the political front, a power vacuum must be avoided.
Although one of the main goals of reconstruction must be the creation of a democratic system that the Tamils regard as their own, establishing effective governance, and fast, in Sri Lanka’s north matters just as much.
Order must be restored rapidly, with zero tolerance of looting and other crimes.
Nevertheless, victory over the Tigers need not rule out some form of decentralization that guarantees the Tamils some political say, so long as a degree of local autonomy does not destroy Sri Lanka’s unity.
The alternative to such a political compromise may be a return to the tragic and bloody secessionist course that the Tigers sought for so long.
Indeed, no effort should be spared to get skeptical Tamil groups to participate in the forthcoming peacemaking.
Of course, it may take some time for the Tamils and their leaders to learn the mutual tolerance and self-discipline of democratic government.
Handing over any local power before those leaders are ready to use it would be an error, with potentially disastrous consequences.
In the Eastern Province, a good start has been made, with former terrorists now winning through the ballot box and not the bullet.
Economic reform also must begin without delay.
Sri Lanka’s economy must open up –�not an easy thing to achieve at a time when liberal economic reforms appear to be in disrepute.
But such an opening is essential if the country’s Tamils are to have real hopes for their future within the country.
Sri Lanka’s Buddhist traditions and historic links with Burma, Thailand, Cambodia and Laos makes it easy for it to be a future member of ASEAN, which Sri Lanka should try to join as a means of anchoring its economy in the wider region.
Some of what needs to be done, including the sequencing of reconstruction measures, is now better understood – not least due to the different recent experiences in rebuilding Bosnia, Colombia, and other war-torn states.
These efforts demonstrated the need to have an effective legal system and functioning state institutions before embarking on big structural reforms.
In this respect, Sri Lanka’s ability to maintain its democracy throughout decades of war gives reason for hope.
Taming the World\u0027s Mega Cities
It has recently been suggested that a wall be built around Rio de Janeiro's notorious shantytowns.
It would have the same purpose as that infamous wall that once divided Berlin, and the wall that Israel is building to cut itself off from the Palestinian territories: to isolate people.
In Rio, the people who would be isolated are the denizens of the city's vast and crime-infested favelas .
The wall, of course, will never be built.
Even if it was, the problems of mass urbanization in the twenty-first century will not be solved by such crude methods.
What the United Nations calls the "century of urbanization" will require creativity and imagination, innovations and not brute brick walls or even more subtle security frontiers.
Consider São Paulo, the world's fourth largest city and my home.
Our past and present is the future for many others.
Of the world's six billion people, more than 50% live in cities and towns.
Even in a country as big as Brazil, over 80% of the population lives in urban areas.
The pace of urbanization is astonishing.
In 1975, only 38% of the world's population lived in cities; by 1998, the rate had grown to 47%.
By 2015, the number will reach or exceed 55%.
In 1975, only 100 cities topped one million in population; by 2015, 527 cities will exceed that mark.
More critically, while there were only two "mega cities" with populations over 10 million in 1960, and 18 now, some 26 will exist in 2015.
The new geography requires new relationships and planning strategies.
Mega cities put demands on regional economies, peacemaking efforts, and economic and human development.
Those factors are all the more complicated because of the massive global unbalance that characterizes current urbanization.
Twenty-one of the mega cities estimated for year 2015 will be in developing and less developed countries, while 80% of the global cities that play host to decision-making actors are in the northern hemisphere.
This situation will be aggravated by some of the dangers associated with a global economy led by the financial sector.
So far, unemployment has become increasingly concentrated in one hemisphere, while income and capital is concentrated in the other.
The result has been a widening gap between rich and poor, together with a commensurate rise in the type of urban poverty that so bedevils cities like Rio de Janeiro.
Eventually, the southern hemisphere's more dramatic urban problems will spill over into mass migration to northern cities.
Imagine urban geography as an archipelago .
On its islands live the modern consumers globally connected in their consuming behaviors, computers and abilities to earn sufficiently well to maintain their lifestyles and speedy rhythm.
Surrounding these islands, however, are oceans of excluded people.
New York City stands out as a very big island with a small ocean, while in Mumbai, we find a tiny island and a vast ocean.
This image was very much on my mind when the mayor of São Paulo, Marta Suplicy, asked me to set up a new Strategic Master Plan for our 10.4 million people - a number that grows to 17.4 million when the greater metropolitan area is considered.
The ten-year plan was prepared in six months and debated for another six months in more than 200 public meetings before being approved by the city council in 2002.
The main innovations were based on the perception that urban development is a collective task in which local government should orient and induce private investments to achieve more livable cities.
With this in mind, we used a new planning tool that allows building rights to drift.
This means that we can preserve acreage for watersheds, parks, or other environmental or historical sites, but allow property owners to sell and transfer their building rights elsewhere.
That means the city gets more green space and retains more of its history without halting badly needed construction.
We also reduced the free building floor area; but we allowed builders to reach higher up.
In exchange, they have to contribute to a public fund for housing, environmental, and infrastructure improvements.
In other words, they have to purchase virtual land from the city.
Starting this year, this mechanism is expected to produce $40 million annually.
Moreover, higher density buildings will be near subway stations or other public mass transport.
We also envisage detailed neighborhood planning aimed at adding more public space.
Such physical innovations go hand in hand with other initiatives that seek to redistribute the fruits of development.
These include income distribution programs, special schools in poor sectors that integrate education, cultural and sport facilities, and a recycling system for the 13,000 tons of waste produced daily, thereby creating new working opportunities for street collectors.
Most importantly, these and other reforms - such as new transportation systems and a public-health system based on family doctors - must be undertaken with the participation of the people affected.
It is the citizens of urban enclaves who are taking part in establishing budget priorities and counseling government through a decentralized policy of administration.
These changes are meant to eventually benefit income distribution and to improve the quality of life for all of São Paulo's residents.
Many of these innovations, I believe, can be reproduced in other large cities as well.
Taming Traffic
In Paris, New York, and Mexico City, rich and poor alike escape the summer heat in city parks.
But in many places in the developing world, open public spaces are as rare as stable democracies.
That may be no accident.
If it appears frivolous to write about public space in cities like Bogota, Delhi, and Lima, where poverty and squalor run rampant, consider that the government's subsidy of grass and concrete for pedestrians is a measure of its respect for human dignity and the democratic values.
Public spaces are where poor and rich meet as equals.
If governments cannot level the playing field in a global economy, they can at least equalize the enjoyment of a city during leisure time.
In the Third World, this means offering residents clean and plentiful public parks and keeping the sidewalks clear for pedestrians.
While the latter is taken for granted in the developed world, sidewalks in Latin America are often akin to disputed territory.
Pedestrians shouldn't have to compete with cars.
City and government officials should ensure that parks and paved paths become as ubiquitous to a city's landcape as parking spaces.
As Mayor of Bogotá, I was almost impeached for insisting that pedestrians win this war with the automobile and commerce.
Shop-owners and drivers complained that sidewalks should continue to be shared with parked cars, as they had been for years.
We had to explain that although sidewalks live next to roads, they do not belong to the same family. Rather, sidewalks are close relatives of parks and plazas.
Sidewalks are not merely for going from one place to another, they are for talking, playing, kissing, or sitting on a bench.
To suggest that parking bays can be carved out of sidewalks is like saying a park or a plaza can be turned into an open-air parking lot with trees.
People need to walk to be happy.
A bird can survive inside a small cage and even lay eggs and bear descendants.
We, too, could live out our lives in the confines of an apartment.
But just as a bird is happier in a cage the size of an auditorium and even happier when flying free, we walk better on a sidewalk three or ten meters wide.
We are exuberant if offered an esplanade cleared of cars, noise and pollutants.
For thousands of years, city streets were pedestrian, even if shared with horses and carriages.
Paintings up to the end of the 19th century depict cityscapes with people all about the street.
Any eight-year-old child was safe walking about these streets.
All this changed dramatically when automobiles appeared.
Streets became lethally dangerous, particularly for children.
As automobiles drove pedestrians off to the side of streets, cities in the Third World should have developed a parallel network of exclusively pedestrian walkways.
Nothing of the sort happened.
On the recently built road from Delhi to Agra to facilitate the flow of tourists to the Taj Mahal, there must be at least 200 pedestrians and bicyclists for each motor vehicle.
But there are no sidewalks or bicycle paths alongside it.
This regressive design is not exclusive to India; it is typical of the Third World.
Investing in road infrastructure tends to be regressive in societies where only a minority own automobiles.
But upper income people drive and they make the decisions.
Building an infrastructure for an ever-growing number of cars was a daunting task, one that absorbed the attention and resources of many Third World governments over the past three decades.
After clogging every square meter of city street, they cut road space through the most spectacular natural settings.
Practically no urban lakefront, riverbank, coastline, or mountainside has not been threatened.
Quality public pedestrian space, on the other hand, demonstrates official respect for human dignity and for society's most vulnerable members--the handicapped, children and the elderly.
A progressive strategy towards public space deepens democracy, since the pedestrians and bicyclists who benefit most directly are lower-income citizens.
This is especially true in developing countries, where the population of cities will increase by more than two billion inhabitants over the next 30 years.
The new urban areas to be created could be different, more egalitarian, and environmentally more sustainable than those built over the last 100 years.
Public space networks of greenways, parks, plazas, exclusively pedestrian avenues, and streets could be the backbone of the new Third World city.
As for mobility in a pedestrian city, it is possible to structure low-cost bus-based transit systems and to severely restrict car use during peak hours.
Generally, cities in developing countries cannot afford architectural jewels such as Notre Dame; but they can have formidable pedestrian avenues shaded by enormous tropical trees.
Environmental and social sustainability worldwide depends to a large degree on what happens in developing countries' cities over the next few decades.
There is not much reason for optimism now.
But there could be: if the Third World frees its feet, its mind will follow.
Taming Voodoo Economics
Americans have once again finished a presidential campaign season in which the quality of the debate over economic policy was abysmal.
On the Republican side, hacks, spin masters, and many people who ought to have known better suddenly developed an extraordinary appreciation for something called the "CPS Household Survey of Employment" as a supposed guide to month-to-month changes in the labor market.
The CPS survey was never designed to do this, but it offered the most favorable gloss on the Bush administration's dreadful record on employment.
On the Democratic side, the same sorts of hacks and PR men focused like a laser beam on the bad employment news of the George W. Bush years, ignoring the good news about output and productivity.
And, again, Republicans responded tendentiously, by focusing on the unemployment rate rather than on the job numbers - as if it were a good thing that the lousy labor market since 2001 has artificially depressed the number of people looking for work.
Similarly, Republicans glibly touted the Bush tax cuts - the equivalent of which President Bush's father, President George H. W. Bush, two decades ago called "voodoo economics" - as the acme of economic wisdom.
They paid no heed to the large drag that Bush's unbalancing of America's public finances will impose on the US economy over the next several decades.
Democrats, for their part, pretended that the tax cuts had already harmed the economy, when they ought to know that the greatest damage is still to come.
The Republicans magnified their economic quackery by frantically trying to minimize public perceptions of the long-run fiscal problems of America's social-insurance system, largely to deflect attention from the fact that Bush threw away the budget surpluses President Clinton had bequeathed him - and with them what may have been the country's last best chance to fix things in this regard short of some form of disaster.
These same Republicans also argued for government spending restraint while blocking the institutional changes to Congressional procedures needed to make spending restraint possible.
All of this economic legerdemain was magnified by television, print, and Internet journalists.
Aside from a small number of good stories in the business press, it is difficult to argue that anyone who read or listened to English-language media coverage of the campaign could have learned anything interesting or relevant to the question of whose economic policy was likely to be better for America.
The economics profession bears part of the blame for this. Nobel Prize winners such as Edward Prescott have no business talking about the benefits of tax cuts without pointing out that a tax cut accompanied by spending increases is not a tax cut at all, but rather a tax shift onto the future - and a tax shift that raises risk and discourages accumulation.
But much of the problem stems from an under-briefed, undereducated, and uncurious press corps.
Indeed, the tendency towards superficiality in coverage of economic issues may have led campaign managers to believe that the press will so distort their message that they dare not even try to set out what they regard as the true rationales for their economic policies.
At this point, I as a pundit am supposed to come up with my magic plan, my clever scheme for fixing things and putting the world to rights.
I don't have one.
But there is one glimmer of hope. The past two generations have witnessed the rise of independent central banks whose monetary policy, largely insulated from partisan politics, aims for the maximum possible employment and purchasing power consistent with price stability.
Monetary policy in the industrial core has been far from perfect in this age of independent central banks, but it has been much better than what came before, representing a victory for technocracy.
The American political system, at least, appears incapable of setting out the central fiscal policy issues in ways that give voters a chance to make informed judgments and distinguish between candidates-even between candidates whose programs are serious and those whose programs are mathematically impossible jokes.
It may well be time for another technocratic push: a Fiscal Stabilization Board that would take its place beside the Federal Reserve Board.
Just as the Federal Reserve exists to ensure that monetary policy is not inconsistent with price stability, the Fiscal Stabilization Board would guarantee that spending authority remains in line with the legislated level of taxes.
Let the debate begin.
The Saudi Spring?
LONDON – In the early 1970’s, Saudi Arabia’s King Faisal reportedly confided to senior members of the royal family his fear that, just as in a single generation the country had moved from “riding camels to riding Cadillacs….the next generation could be riding camels again.”
His warning seems more apt than ever.
Saudi Arabia, long one of the Arab world’s most rigid societies, now finds itself in a state of flux.
Its relations with the West – and with the United States in particular – have frayed in the turmoil unleashed in the Middle East and North Africa by the Arab Spring.
Meanwhile, a group of women provided the latest sign of domestic restiveness by defying the Kingdom’s prohibition against women drivers.
While Saudi Arabia remains the largest Arab economy, the world’s leading producer and exporter of oil, and the guardian of Sunni Islam, its political influence has diminished significantly in recent years.
From the early 1980’s to the mid-2000’s, Saudi Arabia was the coordinator of pan-Arab politics, with the palaces of Riyadh and Jeddah drawing political leaders from throughout the Arab world.
But the reception rooms have since been noticeably empty.
Qatar – with its seemingly inexhaustible wealth and a comprehensive foreign, investment, and media strategy – has replaced Saudi Arabia as the decisive arbiter in almost every Middle Eastern conflict.
The deterioration of Saudi Arabia’s political influence has contributed to a growing sense of national decline.
King Abdullah’s reform efforts – especially those aimed at curbing the power of the ultra-conservative Wahhabi-Salafi religious establishment – have lost steam, and the deaths of two crown princes have complicated the inter-generational transfer of power.
While Saudi leaders have managed to buy middle-class support by allocating a significant proportion of oil revenues to targeted welfare and credit-support programs, widespread poverty and massive income inequality persist.
Shia Muslims in the oil-rich Eastern Province have repeatedly defied the ban on anti-regime demonstrations.
And Saudi Arabia’s campaign against the Shia Houthis in Yemen has proved longer and costlier than expected.
Against this background, Saudi leaders remain conspicuously wary of popular empowerment and disruption of the Arab order that they have dominated for the last three decades.
For Saudi Wahhabism, in which absolute power is granted to the royal family by religious mandate, innovative forms of political Islam that anchor legitimacy in genuine representation are a strategic threat.
Over the last year, the Saudi family has been focusing on many of these challenges.
King Abdullah has made significant personnel changes within the defense, interior, foreign, and intelligence ministries, granting broad powers to two experienced princes – Bandar bin Sultan, who was Ambassador to the US for more than two decades, and Miteb bin Abdullah, the king’s son and long-time commander of the National Guard.
The government has also sought to attract foreign investment and promote economic diversification.
And some factions of the Saudi family are reaching out – albeit cautiously – to civil-society actors, attempting to engage them in a dialogue about the country’s future.
Moreover, in order to combat Iran’s influence in the eastern Mediterranean, Saudi Arabia has increased support for its allies in Iraq, Jordan, and Lebanon, and has effectively taken responsibility for financing, arming, and directing the Syrian opposition and rebel forces.
It has helped to curb the rise of political Islam across North Africa, including by backing the overthrow of Egyptian President Mohamed Morsi.
And, through a combination of positive and negative incentives, it has checked the threat posed by the Houthis in Yemen.
But none of these policies addresses the fundamental challenge facing the Kingdom – namely, the gradual erosion of its wealth (indeed, Saudi Arabia is expected to become a net energy importer by 2030).
Given many economic sectors’ lack of competitiveness and the inadequacy of the educational system, the Saudi population – 70% of which is under 35 years old – will experience skyrocketing unemployment in the coming years.
Many Saudis sense a wasted opportunity; despite sitting atop one of history’s most liquid fortunes, the country has failed to become an advanced economy.
And Saudi Arabia’s large middle class is likely to respond to diminishing prosperity by calling for a more representative political system.
The problem is that the obvious challenges facing Saudi Arabia require a level of cohesion in the upper echelons of government that remains elusive.
As the journalist Christian Caryl put it, “to say that historical or economic conditions predispose a country to embark on a particular path does not mean that its politicians will necessarily decide to take it.”
The continued absence of resolute action could easily drive Saudi Arabia toward irreversible decay.
In such a scenario, the economy would gradually weaken, hampering the royal family’s ability to continue buying middle-class support, while enabling rebel groups in the east and the south to erode the government’s authority.
This could cause Wahhabi religious and political doctrine to lose ground among young people and fuel regime infighting.
Ultimately, Abdulaziz bin Saud’s unification of the Kingdom in the late 1920’s could even be reversed, making the last eight decades an anomaly in the Arabian Peninsula’s long history of fragmentation.
Such an outcome would effectively make Yemen and the rest of the Gulf states ungovernable, allowing the Sunni-Shia confrontation that is currently unfolding in the Levant to overwhelm the region.
But there is another possibility.
The new generation of Saudi leaders could spearhead a transition to a genuine constitutional monarchy, based on a transparent system of checks and balances.
A more representative governance model, together with strong economic incentives, could unleash the young population’s creativity and dynamism – and secure Saudi Arabia’s future in the process.
That promise was captured in the recent film “Wadjda” – written, produced, and directed by Saudi women – which tells the story of a young girl from a middle-class family who challenges social conventions and pushes boundaries, as she attempts to fulfill her potential.
If she is not Saudi Arabia’s future, the country may not have a future at all.
गैर-संचारी रोगों को लक्ष्य बनाना
इंडियानापोलिस - दुनिया भर में, ज़िंदगियों को तबाह करनेवाला और आर्थिक विकास को अवरुद्ध करनेवाला जो सबसे प्रमुख कारक है उसी के बारे में कार्रवाई करना सबसे मुश्किल कामों में से एक है। दुनिया भर में होनेवाली सभी मौतों में से अब दो-तिहाई मौतें हृदय रोग, मधुमेह और कैंसर जैसे गैर-संचारी रोगों (एनसीडी) के कारण होती हैं। गैर-संचारी रोग लोगों की ज़िंदगियों को समय से पहले खत्म करने के अलावा अपने शिकारों, उनके परिवारों, और उनके समुदायों को भारी आर्थिक नुकसान पहुँचाते हैं, आर्थिक उत्पादकता को कम कर देते हैं और चिकित्सा लागतों को बढ़ा देते हैं। अगले दो दशकों में, गैर-संचारी रोगों होनेवाले कुल आर्थिक नुकसान $30 ट्रिलियन से अधिक हो सकते हैं।
गैर-संचारी रोगों से उत्पन्न जटिल चुनौती के संबंध में कार्रवाई करने के लिए एक समन्वित अंतर्राष्ट्रीय प्रयास की आवश्यकता होगी। सौभाग्य से, इस दिशा में हाल ही में कुछ महत्वपूर्ण कदम उठाए गए हैं। सितंबर में, संयुक्त राष्ट्र ने सतत विकास लक्ष्यों को अपनाया, इसमें निर्धारित किए गए 17 उद्देश्य अगले 15 वर्ष के लिए वैश्विक विकास के एजेंडा का मार्गदर्शन करेंगे। इनमें गरीबी उन्मूलन और पर्यावरण की रक्षा के उपायों जैसे लक्ष्यों के साथ-साथ गैर-संचारी रोगों की वजह से होनेवाली मृत्यु दर को कम करने की प्रतिबद्धता भी है - संयुक्त राष्ट्र के आधिकारिक विकास के एजेंडा में इस समस्या पर पहली बार सीधे लक्ष्य किया गया है।
यह एक स्वागत योग्य मील का पत्थर है, लेकिन यह एक लंबी सड़क के कई मील के पत्थरों में से केवल पहला पत्थर है। गैर-संचारी रोगों से जुड़े भौतिक और आर्थिक बोझ वहाँ सबसे ज्यादा भार डालते हैं जहाँ उन्हें वहन करना सबसे कम आसान होता है: कम और मध्यम आय वाले देश जिनमें गैर-संचारी रोगों से संबंधित 80% मौतें होती हैं। हाल ही में जिन लाखों लोगों ने गरीबी से मुक्ति पाई है, इसके परिणामस्वरूप वे वापस गरीबी में धकेले जा सकते हैं।
सतत विकास लक्ष्यों के फलस्वरूप दिए गए ध्यान और सहयोगियों के दबाव से इसमें प्रगति करने में मदद मिल सकती है। लेकिन लक्ष्यों को प्राप्त करने के लिए निरंतर ध्यान देने, और सरकारों, अंतर्राष्ट्रीय गैर-लाभ संगठनों, और महत्वपूर्ण रूप से निजी क्षेत्र के संसाधनों और विशेषज्ञता का लाभ उठाने की आवश्यकता होगी।
स्वास्थ्य के क्षेत्र में अपने अनुभव के आधार पर मैं इस निष्कर्ष पर पहुँचा हूँ कि गैर-संचारी रोगों से उत्पन्न चुनौतियों के संबंध में कार्रवाई करने में दो महत्वपूर्ण कारक उपयोगी सिद्ध होंगे। पहली और सबसे महत्वपूर्ण बात यह है कि प्रगति ऐसे कारगर और स्थानीय दृष्टिकोणों को तैयार करने पर निर्भर करेगी जिन्हें अपनाया जा सके, दोहराया जा सके, और बढ़ाया जा सके। मधुमेह या हृदय रोग जैसी समस्याओं के लिए सभी के लिए एक ही समाधान जैसी कोई स्थिति नहीं हो सकती। लेकिन यह देखते हुए कि गैर-संचारी रोग दुनिया भर के सभी भागों के समुदायों को प्रभावित करते हैं, ऐसा बहुत अधिक समान धरातल मौजूद है जिसकी लगातार दुबारा खोज करने की आवश्यकता नहीं है।
उदाहरण के लिए, 2013 में कार्लोस स्लिम फाउंडेशन ने मधुमेह की रोकथाम और उसके उपचार की स्थिति को समझने के लिए आठ प्राथमिक देखभाल क्लीनिकों में एक कठोर आधारभूत मूल्यांकन किया था। इस अध्ययन के दौरान एकत्र आंकड़ों के आध���र पर, इस फाउंडेशन ने स्क्रीनिंग, उपचार और रोकथाम में सुधार लाने के लिए कम लागत वाले, उपयोगकर्ता-अनुकूल उपकरणों का उपयोग करके CASALUD नामक मॉडल प्रायोगिक रूप से जारी किया जिससे रक्त शर्करा के स्तरों सहित विभिन्न प्रकार के महत्वपूर्ण लक्षणों को मापा जा सकता है। इसमें भाग लेने वाले क्लीनिकों को दवाओं की माल-सूचियों पर नज़र रखने और कमियों से बचने के लिए एक ऑनलाइन प्रणाली से लैस किया गया है।
यह दृष्टिकोण इतना अधिक प्रभावी था कि मेक्सिको के स्वास्थ्य कार्यालय में मधुमेह और अन्य गैर-संचारी रोगों को बढ़ावा देनेवाले मोटापे को दूर करने के अपने राष्ट्रीय अभियान के लिए आधार के रूप में CASALUD मॉडल का उपयोग किया जा रहा है जो स्थानीय अनुभव के आधार पर कार्य को आगे बढ़ाने का एक बढ़िया उदाहरण है।
गैर-संचारी रोगों के खिलाफ लड़ाई में सफलता के लिए दूसरी प्रमुख बात निजी क्षेत्र के संसाधनों का उपयोग करने की प्रतिबद्धता है। इसमें न केवल निजी निवेश को जुटाना, बल्कि भारी मात्रा में उस तकनीकी, प्रचालनात्मक, और स्थानीय रूप से तैयार की गई विशेषज्ञता को भारी मात्रा में नियोजित करना भी शामिल है जिसे निजी कंपनियों ने दुनिया भर में कारोबार करने के दौरान हासिल किया है। सरकारों और अंतर्राष्ट्रीय और स्थानीय संगठनों के साथ भागीदारियाँ स्थापित करके, कंपनियाँ विनाशकारी और महंगे रोगों के प्रभाव को कम करने में मदद कर सकती हैं।
मैं यह इसलिए जानता हूँ क्योंकि मेरी कंपनी इसी तरह के एक प्रयास, द लिली एनसीडी पार्टनरशिप में शामिल है जिसमें हम गैर-संचारी रोगों से निपटने के लिए अपने भागीदारों और भारत, मेक्सिको, दक्षिण अफ्रीका और ब्राज़ील की सरकारों के साथ सहयोग कर रहे हैं। उदाहरण के लिए, ब्राज़ील में बीमारी की रोकथाम में सुधार लाने के लिए हम रियो ग्रांडे डो सुल के संघीय विश्वविद्यालय, सहित प्रमुख स्थानीय संगठनों के साथ मिलजुल कर काम कर रहे हैं जिनमें उन माताओं की सहायता करने पर ध्यान केंद्रित किया जा रहा है जिनका रोग निदान उनके गर्भवती होने के दौरान गर्भावस्था के मधुमेह के रूप में किया गया था और अब उनमें टाइप 2 मधुमेह होने का जोखिम है।
हमारे जैसे कार्यक्रम यह दर्शाते हैं कि दुनिया भर में मूलभूत, स्थानीय स्तर पर संचालित सार्वजनिक-निजी भागीदारियों के माध्यम से क्या कुछ हासिल किया जा सकता है। सतत विकास लक्ष्यों की सफलता को सुनिश्चित करने के लिए गैर-संचारी रोगों से होनेवाली मौतों में कमी करने सहित, कंपनियों के लिए यह आवश्यक होगा कि वे पारंपरिक परोपकार से आगे बढ़ें और सामाजिक-आर्थिक समस्याओं के लिए रचनात्मक समाधान तैयार करें। यदि हम यह स्वीकार कर लेते हैं कि नवोन्मेष स्थानीय परिस्थितियों को समझने और निजी क्षेत्र के विशाल संसाधनों का अधिकतम उपयोग करने से होता है, तो हम सुदूर भविष्य में बेहतर स्वास्थ्य तथा अधिक तीव्र आर्थिक विकास सुनिश्चित कर सकते हैं।
Targeting the Targeters
LONDON – Speaking in the happier economic times of 2005, Mervyn King – then, as now, Governor of the Bank of England – stressed the importance of entrenching public expectations of stable, low inflation.
He warned that, “if you let inflation expectations drift too far away from the target, you can end up in quite serious difficulty with a costly process to bring them back again.” King must now be a worried man.
The Bank of England’s own commissioned quarterly surveys of public attitudes reveal that the credibility of its Monetary Policy Committee (MPC) has now been impaired.
For the last 15 months, the 2% inflation target, which is set by the government and is supposed to be enforced by the Bank of England, has been exceeded by more than a full percentage point.
For most of this period, the British public expected inflation in the coming year to be lower than in the previous year, thanks to the MPC’s strong track record on price stability.
That confidence has now dissipated: inflation expectations have caught up with the actual inflation rate of 4%.
There is no mystery about what is going on.
The price-stability mandate has been trumped by concerns about growth.
The fear is that tightening monetary policy to bear down on inflation could snuff out the faltering economic recovery.
So not only has the MPC kept interest rates at a rock-bottom 0.5% since 2009, but policy has been loosened further by the Bank of England’s so-called “quantitative easing” – that is, expanding the monetary base by the stroke of a pen in the hope of reinvigorating domestic credit markets.
But the United Kingdom is now faced with the worst outcome: stagflation.
The economy is incurring the inflationary costs of the Bank’s policy while missing out on the intended benefit of growth.
In the US, where the Federal Reserve is running a similarly loose monetary policy, the situation looks rosier – at least at first sight.
The US economy is staging a more convincing recovery than the UK, and, in contrast to the Bank of England and the European Central Bank, the Fed is not explicitly mandated by Congress to achieve a specific inflation target.
Thus, compared to the Bank of England, the all-important credibility of the monetary authority seems less vulnerable in the case of the Fed.
But, even in the US, policy-setting officials, such as Thomas Hoenig, President of the Federal Reserve Bank of Kansas City, express concern that inflation expectations may become unanchored, owing to the massive expansion of government debt and the Fed’s balance sheet since the financial crash in 2008.
All the major Western central banks – including even the traditionally “hawkish” ECB – appear to be sticking their heads in the sand.
But there is something they can do to ensure the benefits of inflation-targeting rules (credibility and well-anchored inflation expectations) while also supporting recovery: raise the stated target.
The case for doing so can best be shown by Britain, where the situation is particularly delicate.
The UK authorities have decided to prioritize fiscal consolidation while running a loose monetary policy to contain risks to the recovery from higher taxes and lower government spending.
The thinking is clear (if rarely spelled out clearly by politicians): whereas a loss of market confidence in the British state’s solvency would most likely trigger a depression, above-target inflation can be rectified at a relatively tolerable cost to living standards (though higher than it should have been).
Granting, for the sake of argument, the force of this logic (and even its critics could hardly deny its coherence), it would be foolish to underestimate the risk of runaway inflation and underplay the economic and social harm it would cause.
To the extent that tolerance of above-target inflation also reflects a desire to erode the real value of public and private debts, market interest rates could soar, leaving indebted governments and households in even greater trouble.
Many commentators believe that governments’ huge budget constraints will force them to rely on inflation.
If so, it is better to do it transparently, unlike the Bank of England.
Simply put, in order to anchor inflation expectations effectively, inflation targets must be realistic.
The current high-stakes conundrum faced by policymakers suggests that they should apply inflation-targeting principles more flexibly in the context of a major economic shock.
This would involve raising the target to a level in line with the actual inflation rate observed in the post-crisis period – a level that the public would perceive as realistic, honest, and credible.
Doing so would reduce the debt and tax burdens on future generations, while crucially limiting the risks of much higher inflation in the nearer term.
Moreover, a higher inflation target – and the restoration of credibility that it would imply – would enable central banks to return to a lower inflation target without creating a recession once debt levels had been reduced and aggregate demand had recovered.
Tax and spend (Please)
Excessive taxation can dull incentives and hinder growth.
But too little taxation can do the same.
Governments with meager tax revenues can't provide basic public goods.
Worse yet, low tax revenues in poor countries often result from defects in tax collection systems (rather than low tax rates) that also promote unproductive enterprise.
India illustrates the importance of a well-designed tax system.
In Bangalore, high-tech companies have built world-class campuses replete with manicured lawns and high-speed data communication networks.
Outside these campuses, however, lie open sewers, uncollected garbage, and roads in acute disrepair.
Whereas technology companies instantaneously transmit terabytes of data to remote continents, local transport proceeds at an almost medieval pace.
As a result, businesses in Bangalore run their own bus services, contract with private suppliers for drinking water, and install generators to protect themselves from interruptions in electricity supply.
The state can't fix the shambles because it is broke.
India's government debt exceeds 70% of GDP, so more than half its tax receipts go to paying interest.
But the debt isn't because of excessive spending in the past.
India's government expenditures amount to about 15% of GDP, compared to an average of around 40% of GDP in the OECD.
Rather, India's financial difficulties stem from a badly designed and administered tax system.
Rates and rules for personal and corporate income taxes appear reasonable by international standards.
Nonetheless, India's government collects income taxes amounting to only about 3.7% of GDP, about half that in South Korea and the other Asian tigers.
Agriculture in India accounts for about a quarter of GDP, but even wealthy farmers don't pay taxes.
Export-oriented companies in the software and other industries enjoy tax holidays on their profits, although their employees do pay taxes on their personal incomes.
Despite reasonable rates, tax evasion is widespread.
Cheating occurs because the government hasn't invested in personnel or in the systems to detect tax evaders, who rarely face jail time and can often bribe their way out of trouble when they do get caught.
More subtly, the evasion of "direct" taxes on incomes and profits reflects the mess in the system of "indirect" taxes levied on production and consumption.
Excise taxes account for over 60% of India's indirect taxes, which in turn represent the same proportion of its total tax receipts.
The basic excise tax has been fixed at 16% of the value of a firm's output.
Then there are a variety of concessions, exemptions, and surcharges.
For instance a "concessionary duty rate" of 8% is levied on categories like food products, matches, cotton yarn, and computers.
An additional "special excise duty" (SED) of 8% is levied on products that include polyester filament, cars, air conditioners and tires.
An "additional excise duty" (AED, not to be confused with the SED) is levied on "goods of special importance."
Exemptions from excise taxes are numerous and complex, including businesses with total annual revenues of less than 10 million rupees and firms located in certain troubled or backward areas.
Overall, the exemptions fall under 70 broad categories, subdivided into 259 entries, 52 conditions, and 7 lists, each containing numerous items.
Exemptions invite abuse.
For a price, low ranking officials, who have considerable discretion in applying the conditions, can be persuaded to reach favorable interpretations.
Goods taxed at high rates (for example, polished granite) are sold as goods taxed at lower rates (for example, as unpolished granite).
Evasion of excise taxes is more contagious than evasion of taxes on profits and incomes.
If one firm evades excise taxes, and the tax rate is high compared to pre-tax profit margins in the industry, its competitors also have to cheat, just in order to survive.
As evasion increases, governments levy "additional" or "special" duties, inciting further evasion.
Collections of direct taxes also suffer.
The bribe paid to the excise tax collector for a favorable classification, the difference between the value of polished and unpolished granite, and the under-reporting of true revenues create "black" funds, which cannot be declared on income-tax returns.
In addition to impairing the state's ability to provide basic public goods, schemes to evade indirect taxes also discourage businesses from adopting more productive technologies, which requires technologies that involve large-scale operation.
But, because indirect taxes are more easily avoided by operating many small units instead of one large unit, economies of scale cannot be realized.
It's worth noting that in the software industry, where all units are exempt from indirect taxes, Indian companies do operate at efficient scale.
Could India emulate China's example, where the rationalization of indirect taxes in 1994 set the stage for a great boom?
Or are coalition governments in a vigorous democracy incapable of such reform?
Last year India's BJP-led government introduced legislation mandating sharp reductions in the budget deficit.
It then appointed a task force to formulate the necessary changes in tax and spending policies.
This July, the task force proposed raising taxes (rather than cutting spending), through, among other things, removing most indirect tax exemptions.
India's new Congress-led government, too, seems to favor these proposals.
If Congress and the opposition parties follow through, they will go a long way to sustaining the country's economic growth and in dispelling the idea that democracies cannot do what's needed to encourage development.
Why Taxation Must Go Global
BERLIN – We are witnessing profound changes in the way that the world economy works.
As a result of the growing pace and intensity of globalization and digitization, more and more economic processes have an international dimension.
As a consequence, an increasing number of businesses are adapting their structures to domestic and foreign legal systems and taxation laws.
Thanks to technical advances in the digital economy, companies can serve markets without having to be physically present in them.
At the same time, sources of income have become more mobile: There is an increasing focus on intangible assets and mobile investment income that can easily be “optimized” from a tax point of view and transferred abroad.
Tax legislation has not kept pace with these developments.
Most of the tax-allocation principles that apply today date back to a time when doing business internationally primarily meant transporting goods across a border to a neighboring country.
But rules that were devised for this in the 1920s and 1930s are no longer suitable for today’s international integration of economic processes and corporate structures.
They need to be adapted to the economic reality of digital services.
In the absence of workable rules, states are losing revenue that they urgently need in order to fulfill their responsibilities.
At the same time, the issue of fair taxation is becoming more and more pressing, because the number of taxpayers who make an adequate contribution to financing public goods and services is decreasing.
The resulting tensions between national fiscal sovereignty and the borderless scope of today’s business activities can be resolved only through international dialogue and uniform global standards.
Within the European Union, permitting groups of states to forge ahead with joint solutions to issues that can be addressed only multilaterally has worked well in the past.
If such measures prove successful, other states follow.
This approach can also serve as a global governance model for resolving international problems.
In today’s world, even large states cannot establish and enforce international frameworks on their own.
Groups of countries still can.
This has been demonstrated in the context of financial-market regulation; it is starting to become clear with regard to the regulatory framework for the digital economy; and it is now being confirmed in the area of taxation.
The Seventh Meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes took place in Berlin this week, bringing together representatives from 122 countries and jurisdictions, as well as the EU.
A joint agreement on the automatic exchange of information on financial accounts was signed on Wednesday.
The joint agreement was originally an initiative by Germany, France, Italy, the United Kingdom, and Spain.
Roughly 50 early-adopter countries and territories decided to take part, while other countries have indicated their willingness to join.
The agreement is based on the Common Reporting Standard, which was developed by the OECD.
Under the CRS, tax authorities receive information from banks and other financial service providers and automatically share it with tax authorities in other countries.
In the future, virtually all of the information connected to a bank account will be reported to the tax authorities of the account holder’s country, including the account holder’s name, balance, interest and dividend income, and capital gains.
Various measures are in place to ensure that banks can identify the beneficial owner and notify the relevant tax authorities accordingly.
The CRS thus expands the scope of global, cross-border cooperation among national tax authorities.
In this way, we can establish a regulatory framework for the age of globalization.
The automatic exchange of information is a pragmatic and effective response to the perceived lack of global governance regarding international tax issues.
By making taxation fairer, governments will have a positive impact on people’s acceptance of their tax regimes.
This great success in the fight against international tax evasion would have been unthinkable only a few years ago.
Now it is important to continue the efforts of the OECD and the G-20 in the area of corporate taxation.
We need to make sure that creative tax planning in the form of profit-shifting and artificial profit reduction is no longer a lucrative business model.
A “beggar-thy-neighbor” taxation policy, by which one country pursues tax policies at the expense of others, is just as dangerous as beggar-thy-neighbor monetary policies based on competitive currency devaluation.
It leads to misallocations – and will ultimately reduce prosperity around the world.
That is why we need to agree on uniform international standards in order to achieve fair international tax competition.
The progress achieved in Berlin on the automatic exchange of tax information shows that, by working together, we can realize this goal.
Penghasil Polusi, Saatnya Membayar
JAKARTA – Pada awal tahun ini di Myanmar, hujan deras menyebabkan tanah longsor yang menghabiskan ratusan rumah dan menyebabkan kerusakan hasil panen berskala besar.
Lebih dari 1,3 juta orang terkena dampaknya, dan lebih dari 100 orang meninggal dunia.
Di Vietnam, banjir besar juga menghasilkan lubang-lubang dengan lumpur beracun dari tambang batubara meluap dan membanjiri desa-desa mencapai Ha Long Bay yang tercatat sebagai salah satu Kekayaan Dunia; jumlah korban jiwa sampai 17 orang.
Melihat semakin banyak dan membahayakannya kejadian-kejadian alam seperti ini, kebutuhan untuk memitigasi dan beradaptasi kepada perubahan iklim menjadi semakin penting.
Dan jangan ragu: Kejadian-kejadian ini, paling tidak sebagian, diakibatkan oleh perubahan iklim.
Sebagaimana diutarakan oleh ilmuwan iklim Kevin Trenberth dari Pusat Penelitian Atmosfer Nasional AS, belakangan ini, “semua kejadian cuaca terkena dampak perubahan iklim, karena lingkungan di mana kejadian-kejadian ini terjadi lebih panas dan lembab dari sebelumnya.”
Para negosiator iklim internasional sedikit banyak memahami hal ini.
Konsekuensi yang dihadapi oleh penduduk Myanmar dan Vietnam dianggap sebagai kerugian yang tidak dapat dihindari akibat kegagalan untuk beradaptasi kepada perubahan iklim, yang dikelompokkan oleh para pejabat sebgai “kerugian dan kerusakan.”
Akan tetapi, istilah-istilah tersebut tidak berhasil menangkap keseluruhan konsekuensi – khusunya dampaknya terhadap jiwa manusia.
Orang-orang yang meninggal di Myanmar dan Vietnam bukan hanya “kerugian yang tidak dapat dihindari”, dan orang-orang tercinta mereka tidak dapat “beradaptasi” begitu saja dengan kehilangan mereka.
Retorika berdarah dingin seperti ini mencerminkan kurangnya respon kepada perubahan iklim yang telah dihasilkan perundingan internasional selama ini.
Bahkan, jika negara-negara industri telah melakukan apa yang diperlukan untuk menghentikan perubahan iklim, sebagaimana dijanjikan pada generasi sebelumnya, kemungkinan besar Myanmar dan Vietnam dapat menghindari “kerugian dan kerusakan” yang terjadi baru-baru ini.
Kegagalan negara-negara ekonomi besar dunia untuk memenuhi komitmen mereka tersebut memiliki implikasi bahwa Myanmar dan Vietnam bukanlah negara-negara berkembang yang paling rapuh saat ini.
Negara-negara pulau kecil Pasifik, contohnya, tidak dapat mendirikan pertahanan yang cukup dari “arus pasang” yang memasuki pulau mereka dan menyebabkan air tawar yang berada di bawah pulau-pulau karang mereka menjadi payau.
Populasi mereka – yang merupakan salah satu orang-orang termiskin di dunia – membayar harga perubahan iklim dengan jiwa dan penghidupan mereka.
Dan tanpa sumber daya untuk beradaptasi, mereka akan terus menderita.
Keadaannya bahkan lebih buruk lagi.
Mereka yang menjadi penyebab masalah ini – para penghasil polusi terbesar di dunia – terus menghasilkan keuntungan miliaran, dan juga menerima subsidi energi yang besar dari pemerintah (diperkirakan mencapai $5,3 triliun di tahun 2015, atau sekitar $10 juta per menit).
Siapa para penghasil polusi ini?
Menurut penelitian pada tahun 2013 oleh ilmuwan Rick Heede, hampir dua per tiga karbon dioksida yang dihasilkan sejak tahun 1750 dapat ditelusuri kepada 90 entitas penghasil bahan bakar fosil- dan semen- terbesar, yang sebagian besar masih beroperasi.
Lima puluh di antaranya merupakan perusahaan yang dimiliki investor, termasuk ChevronTexaco, ExxonMobil, Shell, BP, dan Peabody Energy; 31 diantaranya merupakan BUMN, seperti Saudi Aramco dan Statoil dari Norwegia; dan sembilan merupakan negara seperti Arab Saudi dan Cina.
Memahami ketidakadilan yang mencolok ini – juga kerusakan yang dibuatnya – keadaan ini, suatu inisiatif baru, diluncurkan oleh Carbon Levy Project dan didukung oleh berbagai individu dan organisasi yang jumlahnya semakin besar, telah muncul untuk meminta kompensasi untuk negara-negara berkembang yang rentan terhadap para penghasil polusi besar.
Secara khusus, Carbon Levy Project mengajukan pajak di titik-titik ekstraksi bahan bakar fosil.
Pajak tersebut konsisten dengan hukum internasional, termasuk prinsip “pencemar membayar” (polluters pay principle), dan akan memberikan sumber pembiayaan yang baru dan dapat diprediksi – yang berjumlah miliaran dolar – untuk masyarakat yang paling membutuhkannya, tanpa melepaskan pemerintah dari tanggung jawab untuk memberikan sumber dana umum.
Dan, peningkatan biaya pengambilan bahan bakar fosil akan berkontribusi pada pengikisan suatu sektor yang tidak seharusnya ada di dunia yang aman secara iklim.
Untungnya, dunia tidak perlu menunggu kesadaran moral untuk bertahan.
Perusahaan bahan bakar fosil dan pemerintah saat ini menghadapi tekanan hukum yang semakin berat.
Para korban angin topan di Filipina yang selamat mengirimkan keluhan kepada Komisi Hak Asasi Manusia nasionalnya, meminta dilakukannya investigasi atas tanggung jawab perusahaan-perusahaan bahan bakar fosil dalam menyebabkan perubahan iklim.
Grup Belanda Urgenda dan hampir 900 penggugat berhasil menggugat pemerintah Belanda, memaksanya untuk memberlakukan kebijakan iklim yang lebih ketat.
Seorang petani Peru saat ini bermaksud untuk menggugat perusahaan batubara Jerman RWE untuk menutup biaya yang dikeluarkan untuk melindungi rumahnya, yang berlokasi di jalur banjir sebuah danau glasial.
Di samping itu, para penandatangan Deklarasi Masyarakat Sipil untuk Keadilan Iklim dari negara-negara Kepulauan Pasifik berkomitmen untuk mengajukan perkara terhadap para penghasil polusi besar untuk kegiatan-kegiatan yang menyebabkan kerusakan rumah mereka.
Jika tidak ada tindakan yang dilakukan, gugatan-gugatan seperti itu akan semakin banyak dan semakin sulit untuk dikalahkan.
Big Oil, Big Gas, dan Big Coal perlu mengambil tanggung jawab untuk perubahan iklim dan mulai memberikan kontribusi nyata kepada adaptasi, atau bersiap diri untuk pertarungan bagi kelangsungan mereka sendiri – pertarungan yang, dalam jangka panjang, tidak mungkin bisa mereka menangkan.
Taxing the Israeli Occupation
CAIRO – Arab intellectuals and policymakers have often accused Europe of using financial generosity to cover up its political impotence over the Arab-Israeli conflict.
If Europe is to be taken seriously as a global player, they argue, it must also flex some muscle when it delivers the money.
In Arab eyes, European officials implicitly plead guilty to these charges by pointing to Europe’s complex multilateral politics and the European Union’s bureaucratic nature.
Europe’s Arab interlocutors are unimpressed: they want Europe to stop talking like a Great Power and start acting like one.
But it is precisely the EU’s desire to look more and more like a nation-state that has pushed its position on the Arab-Israeli conflict in the wrong direction.
Europe’s inability to play a political role in the Middle East peace process was wrongly diagnosed as resulting from a European bias against Israel.
Policy advisers argued that gaining Israel’s trust was necessary to win support for a European role in the peace process.
Almost nothing became too dear in this quest: technology transfers, upgraded relations, association agreements, and even, reportedly, the prospect of joining the EU.
European policy thus revolved around simultaneously seducing Israel and bribing the Palestinian Authority.
Financing Israel’s occupation of Gaza and the West Bank served both objectives at the same time, at a cost to European taxpayers of several billion euros.
Yet this policy earned Europe neither recognition nor relevance.
Palestinians continued to trivialize Europe’s contribution, and Israelis to loathe it for “financing Palestinian terror.”
In the end, Europe paid a lot of money only to expose its own weakness.
How much worse can things get before the EU abandons its counter-productive policy?
The idea that Europe can seduce the occupier into giving it a role in ending the occupation seems wrong-headed.
Israel does not want an even-handed mediator but an unconditional supporter.
This is partly why Israel prefers the United States as sole mediator, and it is also why Israel’s acceptance of a monopoly role for the US evaporates as soon as any American president starts developing views different from its own.
When this happens, America’s ability to project power makes all the difference.
In other words, no matter what blandishments are showered on Israel, when push comes to shove it is the ability to use power – not charm – that determines whether or not an outside power has a say in Arab-Israeli peacemaking.
Europe ’s failure to play a role in resolving this conflict does not result from its supposed anti-Israeli views, but from the fact that the EU is not a state.
States are not given roles; they acquire them by the power assets they can deploy.
And Europe cannot deploy the type of power needed to tilt the balance in Arab-Israeli peacemaking.
But Europe can do other things.
To change the Israeli-Palestinian dynamic, external actors now need to influence the political calculus inside Israel and Palestine by lowering the political cost of peace and raising the cost of occupation .
Any meaningful Arab-Israeli peace depends on Israel’s return of Palestinian territories, with certain conditions, but no Israeli government will be willing or even able to do so unless the political calculus inside Israel changes.
Making withdrawal a tolerable political option (or making occupation a more costly one) is needed to trigger a meaningful peace process.
Europe has already tried incentives for withdrawal, but that alone will not suffice; the cost of occupation must also be raised.
In plain English, an “occupation tax” is needed.
This would be different from applying sanctions, which would risk triggering a “ Masada Complex” that might push Israel to further extremes.
Instead, an occupation tax would target the settlers’ economy and the violation of Palestinians’ human rights.
Such a tax should start with turning the EU current exclusion of settlements’ products from preferential customs treatment into a full-scale ban on imports from settlements – and any transactions with them.
Companies and banks should be barred from doing business in or with settlements, especially with construction companies and their suppliers.
Pressure should be exerted on Israel to end its financial assistance to settlements.
The occupation tax should also include action aimed at ending the virtual impunity enjoyed by the Israel Defense Force.
IDF officials argue that some level of human rights violation is inevitable during occupation, and that the IDF’s record is not much worse than any other occupation army.
They are right; an occupation cannot be sustained without the systematic violation of human rights.
That is precisely why these violations must be made costly: to signal to Israeli voters that the cost of occupation is bound to rise.
This can be done if Europe supports investigations of suspected war crimes and other violations of international humanitarian law committed by the IDF, as well as the establishment of international tribunals when such crimes occur.
Only the US can bring Israelis and Palestinians to a new negotiation process, much less draft a blueprint for a political solution.
Europe and others can support such a process, but mainly by affecting the internal political calculus in Israel.
Such a role would better protect Europe’s broader interests in the Middle East, while allowing it to remain faithful to its values.
Taxing Tissue
Today’s biomedical research is a collaborative research enterprise, requiring the contributions of patients, universities and industry.
Today’s laws, however, allow only universities and industry, which supply basic knowledge and technology, to profit from their contributions; patients, who supply tissue, may not be compensated.
Some consider this unfair, as it allows tissue donated by patients to be wholly appropriated by universities and industry.
Others consider this wise, as compensating individual tissue donors could block scientific progress and technological development.
Is there a way to redress the double standard in biomedical research that is both fair and wise?
Ironically, the double standard has both a moral and an economic underpinning.
European law solemnly declares that the human body and its parts shall not give rise to financial gain , for reasons of human dignity. American law denies patients a property right in their tissue for reasons of economic policy.
Recognizing such a right would impose a duty on universities and industry to negotiate fair compensation with every donor of all tissue used in their research.
Moreover, compared with the contributions of universities and industry to the end product, the importance of tissue contributed by patients is minimal.
Finally, why should tissue donors be entitled to compensation, as they or their progeny may benefit in the long run from the technological advances to which they contribute?
Opponents of the double standard draw on principles of fairness, equity, and distributive justice.
They view the double standard as a possible source of public distrust in the biomedical research enterprise.
In fact, patients’ contributions to that enterprise are no longer minimal, as they supply university and industry with crucial compilations of tissue and associated medical data.
Consequently, they have increasingly abandoned altruistic participation and are demanding compensation for their tissue.
However, given current European and American law, these claims require a novel legal underpinning in order to be valid and enforceable.
Various models have been proposed.
Charitable trust model .
Donors would transfer their tissue to a charitable trust, and would collectively appoint a trustee, who would have legal fiduciary duties to use the tissue for the benefit of the public.
The trust agreement could allow the donor group to participate in the governance of the trust and thus have a say in the distribution of any benefits.
But, while the model is fair in a number of ways, it implies that parts of the human body can give rise to financial gain.
Moreover, the model is unwise to the extent that tissue donors could block the development of knowledge and applications.
And, by definition, it would work only if the trust is funded on a public basis.
Contract model. Tissue can be removed only with donors’ prior consent.
Thus, prior to giving their consent, tissue donors can negotiate acceptable compensation.
Patients suffering from rare disorders have adopted this approach.
Prior to supplying their tissue to universities and industry, these patients negotiate ownership rights in any technology that arises from the research.
This model seems fair enough: if people can exploit such natural endowments as their beauty or scientific genius, then why not their tissue?
It may be unwise , though, because the knowledge and applications over which they retain control may have implications for other diseases.
In such circumstances, should they further their own interests by continuing to exploiting their control, or should they further the interests of those other patients by donating their tissue?
Global public good model . In this view, the human genome is a common heritage of humankind and a global public good whose benefits should be shared with all.
Benefit-sharing may be fair in that it includes giving special assistance to research participants, such as access to medical care or to new treatments stemming from the research, but it may be unfair in failing to define the recipients of such benefits.
In addition, the model bears an arbitrary element, as the sharing of benefits is not subject to control by the donors of tissue, much less to democratic control, and may prove self-serving for universities and industry.
The unfair and unwise elements of these models nonetheless suggest a solution that is both fair and wise: a tissue tax.
Instead of allowing donors to claim individual compensation for their tissue, a tax would be imposed every time a tissue-based application actually yields a profit.
This would be fair , as it would ensure collective compensation for the use of tissue in general, rather than for individual tissue donors, and it would be wise in that it would not block scientific and technological progress.
While universities and industry may be wary of taxation, they might prefer a tissue tax over endless negotiations with countless tissue donors over the sharing of uncertain future benefits.
Moreover, unlike direct compensation schemes, a tissue tax does not exert undue influence on individuals or groups to donate tissue.
And, instead of being arbitrary, a tissue tax would be subject to democratic control: no taxation without representation.
In brief, the introduction of a tissue tax would be both a fair and a wise way to redress the double standard that currently governs the collaborative biomedical research enterprise.
Tax the Oligarchs
Around the world, there is concern about the arrest of Russian oil billionaire Mikhail Khodorkovsky.
The worry is that Russia may be backtracking from democracy and the rule of law.
Russia faces numerous problems posed by the legacy of Communism and the way the transition from Communism to a market economy was handled.
One set of problems concerns politics and the difficulties of creating democracy and the rule of law after decades of totalitarianism.
Another relates to economics.
Two grievous economic policy errors were committed during Yeltsin's presidency.
The first, as I argue in my book Globalization and its Discontents , was to create incentives that led to asset stripping rather than wealth creation.
The other was to squander the few positive legacies left from the Communist era.
One such legacy was a high level of human capital, especially in technical and scientific areas, much of which was lost, as many of the country's most talented people emigrated.
Another squandered legacy -- with serious political consequences -- was the relative equality bequeathed by Communism.
Politics and economics are in fact inextricably linked here: the erosion of the middle classes, which accompanied the rise of a few enormously wealthy oligarchs, and the descent of millions into poverty, made creation of a democratic society and the rule of law much more difficult.
The reason is simple.
It is not the Rockefellers and the Gateses of this world that are the strongest advocates of a "level playing field" and respect for law (including the law of competition).
Historically, it is the middle classes that have an inherent stake in fairness and equality, thus playing an instrumental role in instituting the rule of law.
For this reason, coming to terms with the illegitimate privatizations of the 1990's, which are at the root of wealth inequality in Russia, is something that still needs to be done -- and not only as a matter of justice; it is important for the long-term performance of Russia's economy.
Ultimately, security of property rights -- and the growth it enables -- depends primarily on the legitimacy with which those rights are viewed by society.
If those who hold wealth are seen as having obtained it in ways that lack legitimacy, no legal system can make property secure.
If property is not secure -- or even is not perceived as secure -- incentives are distorted.
Those in control of Russian businesses will thus continue to strip assets and convert them into forms of wealth that can be easily taken out of the country.
Worse, if the legacy of illegitimate privatizations is not addressed, the economic oligarchy will likely be transformed into a political one as well.
It is in light of this that Putin's moves against Khodorkovsky should be seen.
For if the oligarchs succeed in keeping their ill-gotten gains, it is not hard to imagine someone like Khodorkovsky -- who was already starting to build a political machine alongside his business empire -- cashing in his Yukos shares, parking his wealth in a safe haven offshore, and using it to manipulate Russian politics.
What is to be done, then, with the tainted property gained during the wild privatizations of the 1990's?
It probably would have been easier for Russia's government to recapture some of the oligarchs' ill-gotten gains earlier, say, after the ruble crisis of 1998, when many of them fell into arrears on their loans.
Although that opportunity has passed, I still think that it will be far easier to address this problem now than, say, in another decade.
Once Khodorkovsky and his ilk sell their stakes to foreign interests and take their money out of Russia, there will be little that can be done.
But wouldn't a reversal of the illegitimate privatizations of the 1990's create new problems and undermine Russia's attempt to establish secure property rights?
I believe some of the inequities of the past can be addressed without any direct attack on "property rights," no matter how dubiously acquired.
Russia could impose an "excess capital gains tax," analogous in spirit to the tax imposed on US oil companies when their profits soared, through no effort of their own, from high oil prices in the 1970's.
A tax could be imposed, say, at the rate of 90%, on the "excess" gains from the acquisition of state assets--e.g., on gains in excess of 10% cumulative returns on original equity investments.
The tax would be payable either when the company is listed on a stock market or when the assets are sold.
Such a tax would leave the oligarchs with plenty, and could even compensate them for their efforts at restructuring enterprises.
To encourage domestic investment, and recognizing that it is difficult to tax assets held abroad, an "exit" tax could also be imposed on capital taken out of the country.
It would be a move somewhat similar to that contemplated in the US by the Clinton administration, which proposed a tax on billionaires who surrendered their citizenship in order to avoid taxation.
The money raised by the new tax could help restore, for instance, Russia's ailing health and educational systems.
To be sure, the tax would not solve all of Russia's problems.
It would not eliminate huge inequalities. It would not create a new middle class.
It would, however, go some way towards rectifying the consequences of the "wealth grabs" of the Yeltsin era.
Most importantly, while it would not ensure the creation of a viable democracy, it would at least reduce the threat to democracy posed by the increasingly poisonous role played by money in Russian politics.
Teaching PIIGS to Fly
NEW YORK – Greece’s fiscal problems are, as I have argued many times, but the tip of a global iceberg.
For the next installment of the recent global financial crisis will be rising sovereign risk, especially in advanced economies that run massive budget deficits and accumulate large stocks of public debt as they socialize private financial losses in order to revive economic growth.
Indeed, history suggests that severe recession and socialization of private losses often lead to an unsustainable build-up of public debt.
Moreover, financial crises triggered by excessive debt and leverage in the private sector are followed after a few years by sovereign defaults and/or high inflation to wipe out the real value of public debts.
Greece is also the canary in the coal mine for the euro zone, where all the PIIGS economies (Portugal, Italy, Ireland, Greece, and Spain) suffer from the twin problems of public-debt sustainability and external-debt sustainability.
Euro accession and bull-market “convergence trades” pushed bond yields in these countries toward the level of German bunds, with the ensuing credit boom supporting excessive consumption growth.
Most of these economies were suffering a loss of their export markets to low-wage Asia.
A decade of wage growth exceeding productivity gains led to real appreciation, loss of competitiveness, and large current-account deficits.
In Spain and Ireland, a housing boom exacerbated external imbalances by reducing national saving, pumping up consumption, and boosting residential investment.
And the euro’s appreciation in recent years – driven in part by the European Central Bank’s excessively tight monetary policy – was the final nail in the competitiveness coffin.
Thus, restoring competitiveness, not just fiscal adjustment, is necessary to revive sustained growth.
There are only three ways to accomplish this.
A decade of deflation would work, but it would be accompanied by economic stagnation, thus becoming – as in Argentina earlier this decade – politically unsustainable, leading to devaluation (exit from the euro) and default. Accelerating structural reforms that increase productivity while keeping the growth of public and private wages in check is the right approach, but it is likewise politically difficult to implement.
Or a weaker euro could be had if the ECB were willing – quite unlikely – to ease monetary policy further to allow real depreciation.
But a weaker euro would not eliminate the need for structural reforms; otherwise, the benefits would go mostly to countries like Germany that undertook painful reforms to restore competitiveness via a reduction in relative unit labor costs.
A shadow or actual International Monetary Fund program would vastly enhance the credibility of a policy of fiscal retrenchment and structural reforms.
Under the former, the European Commission would impose fiscal and structural conditionality on Greece, while the EU and/or ECB would provide financing, which would be absolutely necessary, because announcing even the best conceived reform program would not be sufficient to restore lost policy credibility.
Markets will remain skeptical, especially if implementation leads to street demonstrations, riots, strikes, and parliamentary foot-dragging.
Until credibility is re-established, the risk of a speculative attack on public debt – reflected in the current rise in credit default swap spreads – would linger, given the ongoing budget deficit and the need to roll over maturing debt.
Since the European Union has no history of imposing conditionality, and ECB financing could be perceived as a form of bailout, a formal IMF program would be the better approach.
The most successful programs undertaken in the presence of a risk of a fiscal and/or external debt financing crisis were those – as in Mexico, Turkey, and Brazil – where a large amount of liquidity/financing support by the IMF beefed up an increasingly credible commitment to adjustment and reform.
Loan guarantees from Germany and/or the EU are less desirable than an IMF program, as it is very hard to design and credibly implement conditionality in such guarantees.
IMF support, on the other hand, is paid out in tranches and is conditional on achieving various policy targets over time.
The Greek authorities and the EU had until recently denied the need for financing, owing to concern that it would signal weakness and create a stigma.
That was a grave mistake.
Fiscal adjustment and structural reform without financing is more fragile and liable to fail without a war chest of liquidity to prevent a run on public debt while the appropriate policies are implemented and gradually gain credibility.
At the same time, if Greece does not fully adjust its policies to restore fiscal sustainability and competitiveness, a partial bailout by the EU and the ECB will still be likely in order to avoid the risk of contagion to the rest of the euro zone and the consequent threat to the monetary union’s survival.
A default by Greece, after all, could have the same global systemic effects as the collapse of Lehman Brothers did in 2008.
Sovereign spreads are already pricing the risk of a domino effect from Greece to Spain, Portugal, and other euro-zone members.
The EU and the ECB are worried about the moral hazard of any “bailout.”
But that is precisely why a credible IMF program that ties financial support to the progressive achievement of fiscal and structural reform goals is the right way to teach Greece and the other PIIGS how to fly.
Tea Time in America
NEW YORK – Ever since the first “Tea Party” convention was held last month in Nashville, Tennessee, with Sarah Palin as one of the keynote speakers, America’s political and media establishments have been reacting with a combination of apprehension and disdain.
The Speaker of the US House of Representatives, Nancy Pelosi, has called the Tea Party adherents Nazis, while the mainstream media tend to portray them as ignorant and provincial, a passive rabble with raw emotion but little analytical skill, stirred up and manipulated by demagogues to advance their own agendas.
To be sure, the Tea Party’s brand of aggrieved populism – and its composition of mostly white, angry, middle-class voters – has deep roots in the United States, flaring up during times of change.
But observers who have drawn comparisons to the Know-Nothings, the racist, paranoid, anti-Catholic, and anti-immigrant party that surged in the 1850’s, are reading the movement far too superficially.
Indeed, those who deride and dismiss this movement do so at their peril.
While some Tea Partiers may be racist or focused on eccentric themes – such as the validity of Barack Obama’s birth certificate – far more of them, those who were part of the original grass-roots effort, are focused on issues that have merit.
If you actually listen to them, instead of just reading accounts transmitted through the distorting mirror of the mainstream media, you hear grievances that are profound, as well as some proposals that are actually ahead of their time.
For example, Tea Party activists, using a group called End the Fed, were among the first to focus critical attention on the unelected and unaccountable US Federal Reserve Board.
Now legislation is being put forward to establish greater transparency at the Fed – surely a laudable outcome.
While those attracted to the Tea Party movement are a diverse group, some common themes emerge.
They see a struggle for the soul of the Tea Party between true libertarians, who are worried about individual liberties, and traditional conservatives.
Many who spoke to me directly in my Facebook community believe that Congress is utterly broken and regard faith in either of America’s major parties as naïve.
They view the Democrats and the Republicans alike as obstacles to change, drowning out the voices of the people as they kowtow to special interests.
They are concerned about concentrated Federal control, spiraling debt, and the loss of individual rights.
Are they really wrong?
After all, the movement took shape following the US government’s massive – and bipartisan – bailout of Wall Street banks.
And, at a time when the Chinese government, America’s main creditor, has begun sending clear signals about its preferences for US domestic policy – even as it ignores American criticism of its human rights record – are the Tea Partiers merely being paranoid?
As little as I like Sarah Palin, the fact is that entrenched lobbying and other special interests mean that a “changing of the guard” in Washington is too often only a change in branding.
As Barack Obama submits to the pressures of a US Department of Defense in which private contractors comprise 65% of the staffing budget, proposes preventive detention of Guantánamo detainees, and perpetuates the status quo in myriad other ways, her question – “So how’s that whole hopey-changey thing workin’ out for ya?” – is not the wrong question.
Indeed, for nearly a decade, concentration of executive power has threatened America’s system of checks and balances and given the Federal government the authority to spy on citizens, withhold information, and aggressively arrest and even Taser protesters – or to hire private contractors to do so.
In these circumstances, the Tea Party activists’ focus on supporting states’ autonomy – and even on property rights and the right to bear arms – can seem like a prescient effort to constrain overweening corporate and military power in national government.
That is why the elites in general are so quick to ridicule this movement.
A movement that is genuinely populist in origin poses a threat to their own position in the power structure.
For once, a grassroots movement has arisen that is composed of people – some with Ivy League degrees, but many without – who are taking seriously the Internet-age promise that you don’t have to yield leadership to an established class of politicians and pundits.
This is also why the Republicans are seeking to capture the Tea Party movement’s energy for partisan purposes, overrunning it with well-paid operatives, particularly from former Representative Dick Armey’s fundraising and advocacy organization.
Moreover, Tea Party gatherings have increasingly become a platform for Republican candidates seeking the support of a highly mobilized electoral base.
I hope that the Republican establishment does not succeed in co-opting the Tea Party – and that the Democratic establishment does not, either.
And I hope that the movement captures the imagination of progressives, who are equally disgusted with the corruption of the status quo, and who can agree on many thematic goals, even if their policy proposals might be different.
At its worst, any populist movement can descend to demagoguery.
But the Tea Party movement at its best (or in its origin) is constitutionalist.
That is an awakening – and long overdue – sentiment in America, and one that spans the political divide.
The Tea Party movement’s adherents are angry – and, in many respects, justifiably so – but most of them are not crazy.
That diagnosis better suits those who prefer to ignore them.
Technological Cooperation
In early February, the United States National Academy of Engineering released a report on “Grand Challenges for Engineering in the 21st Century.”
The goal is to focus attention on the potential of technology to help the world address poverty and environmental threats.
The list includes potential breakthroughs such as low-cost solar power, safe disposal of CO2 from power plants, nuclear fusion, new educational technologies, and the control of environmental side effects from nitrogen fertilizers.
The report, like the Gates Foundation’s similar list of “Grand Challenges” in global health, highlights a new global priority: promoting advanced technologies for sustainable development.
We are used to thinking about global cooperation in fields such as monetary policy, disease control, or nuclear weapons proliferation.
We are less accustomed to thinking of global cooperation to promote new technologies, such as clean energy, a malaria vaccine, or drought-resistant crops to help poor African farmers.
By and large, we regard new technologies as something to be developed by businesses for the marketplace, not as opportunities for global problem solving.
Yet, given the enormous global pressures that we face, including vastly unequal incomes and massive environmental damage, we must find new technological solutions to our problems.
There is no way, for example, to continue expanding the global use of energy safely unless we drastically alter how we produce electricity, power automobiles, and heat and cool our buildings.
Current reliance on coal, natural gas, and petroleum, without regard for CO2 emissions, is now simply too dangerous, because it is leading to climate changes that will spread diseases, destroy crops, produce more droughts and floods, and perhaps dramatically raise sea levels, thereby inundating coastal regions.
The National Academy of Engineering identified some possible answers.
We can harness safe nuclear energy, lower the cost of solar power, or capture and safely store the CO2 produced from burning fossil fuels.
Yet the technologies are not yet ready, and we can’t simply wait for the market to deliver them, because they require complex changes in public policy to ensure that they are safe, reliable, and acceptable to the broad public.
Moreover, there are no market incentives in place to induce private businesses to invest adequately in developing them.
Consider carbon capture and sequestration. The idea is that power plants and other large fossil fuel users should capture the CO2 and pump it into permanent underground storage sites, such as old oil fields.
This will cost, say, $30 per ton of CO2 that is stored, so businesses will need an incentive to do it.
Moreover, public policies will have to promote the testing and improvement of this technology, especially when used at a large scale.
New kinds of power plants will have to be built to make carbon capture economical, new pipelines will have to be built to transport the CO2 to storage sites, and new monitoring systems will have to be designed to control leaks.
Likewise, new regulations will be needed to ensure compliance with safety procedures, and to assure public support.
All of this will take time, costly investments, and lots of collaboration between scientists and engineers in universities, government laboratories, and private businesses.
Moreover, this kind of technology will be useful only if it is widely used, notably in China and India.
This raises another challenge of technological innovation: we will need to support the transfer of proven technologies to poorer countries.
If rich countries monopolize new technologies, the goal of worldwide use to solve worldwide problems will be defeated.
Thus, technological developments should involve a collaborative international effort from the start.
All of this will require a new global approach to problem solving.
We will need to embrace global goals and then establish scientific, engineering, and political processes to support their achievement.
We will need to give new budgetary incentives to promote demonstration projects, and to support technology transfer.
And we will have to engage major companies in a new way, giving them ample incentives and market rewards for success, without allowing them to hold a monopoly on successful technologies that should be widely adopted.
I believe that this new kind of global public-private partnership on technology development will be a major objective of international policy making in the coming years. Look for new global cooperative approaches to clean energy systems, medicines and vaccines, improved techniques for fish farming, drought-and-temperature resistant crop varieties, high-mileage automobiles, and low-cost irrigation techniques.
Rich countries should fund these efforts heavily, and they should be carried out in collaboration with poor countries and the private sector.
Successful technological breakthroughs can provide stunning benefits for humanity.
This will be an exciting time to be a scientist or engineer facing the challenges of sustainable development.
The Age of Adaptation
GENEVA – The world needs to stop looking backward.
Since the 2008 financial crisis, we have wasted far too much energy trying to return to the days of rapid economic expansion.
The flawed assumption that the post-crisis world's challenges were only temporary has underpinned policies that have yielded only lackluster recoveries, while failing to address key problems like high unemployment and rising inequality.
The post-crisis era is over, and the “post-post-crisis world" is upon us.
It is time to adopt a new framework of realistic solutions that promote shared prosperity within the global economy of today and tomorrow.
In this new era, economic growth will occur more slowly – but potentially more sustainably – than it did before the crisis.
And technological change will be its driving force.
Indeed, just as the Industrial Revolution transformed the productive potential of societies in the nineteenth and twentieth centuries, a new wave of technological breakthroughs is reshaping economic and even social dynamics today. The difference is that this revolution's impact will be even greater.
One outstanding feature of this revolution is the scope and scale of its disruptiveness.
The Industrial Revolution occurred relatively slowly, like long waves in the ocean; though it began in the 1780s, its impact was not really felt until the 1830s and 1840s.
The current technological revolution, by contrast, hits economies like a tsunami, with little warning and inexorable force.
The pace of change has been accelerated by the interconnected nature of today's world.
Technological progress is occurring within a complex and deeply integrated ecosystem, meaning that it simultaneously affects economic structures, governments, security arrangements, and people's daily lives.
In order to prepare a country to reap the benefits of rapid, far-reaching change, policymakers must account for the entirety of the ecosystem in which it is taking place, ensuring that government, business, and society all adjust to every shift.
In other words, competing in the twenty-first century economy will require relentless adaptation.
Nothing is off limits.
Every practice and standard will have to be rethought.
Every industry will be at risk of being turned on its head.
The car-sharing service Uber, for example, has not only changed how people get around; it also appears to be leading a retail revolution in which goods and services are “Uberized" – customers pay to use them, not own them.
The manufacturing industry, meanwhile, will be similarly transformed by 3D printing technology.
Supply chains will be eliminated or reshaped – an expectation that the CEO of a major aluminum manufacturer recently described.
He knows that, in order to succeed, firms will have to anticipate and respond to such trends.
Gone are the days of big fish eating small fish.
In the post-post-crisis world, fast fish will dominate – and slow fish will die.
But the current technological revolution is not just reshaping what we produce and how we produce it; it is fundamentally reshaping who we are – our habits, interests, and worldviews.
Consider the vast difference between the way young people and older generations interpret privacy in the Internet age.
It is also extending our lifespans, with one in two babies born today in Switzerland expected to live more than 100 years.
On balance, the impact of technological progress will be positive.
But that does not negate the massive challenge it will pose.
For example, job automation will ultimately propel more people toward higher-paying, more productive employment that is better suited to the new era of “talentism," when human imagination and innovation, not capital or natural resources, drive economic growth.
But, if workers fail to acquire the skills to fill these new positions, they will be left behind.
Government, more than any other sector, can shape the impact of technological change, ensuring that challenges are addressed and opportunities are seized.
Indeed, it should be at the forefront of such change, by creating an environment that encourages private-sector innovation and creativity, while ensuring that citizens are equipped to compete.
Of course, governments cannot always be ahead of the curve.
They will also have to react and respond to new needs and demands, such as the expectation that public services meet the same level of high-tech efficiency and convenience that private companies offer.
Change may be frightening, but it is inevitable.
And, in fact, it is an important source of opportunity to improve our systems, our strategies, and ourselves.
The latest wave of technological change is far from cresting.
We should be excited – and filled with hope – by where it could take us.
Technology and Economic Growth
ROME: The story of Elihu Thompson, the inventor of the electric dynamo, and ultimately a founder of one of America's great companies, General Electric, recurs frequently in the speeches of Alan Greenspan.
The chairman of America's Federal Reserve Board is understandably fascinated by the great inventions of the late 19th century which revolutionized industrial production in America and around the globe.
Some may be surprised that a central bank governor is interested in technological innovation, and even more that economists at the Fed are studying the impact of computers on economic growth (their research on this subject, indeed, may be found on the Fed's internet site: www.bog.frb.fed.us).
Such research may also shed light on whether the current extraordinary expansion of the U.S. economy, which has lasted uninterrupted for the past nine years, is simply a prolonged streak of luck or represents the effect of a new technological revolution, similar to the one which occurred at the end of the 19th century and which is best symbolized by the spread of electric power.
The answer to that question not only has important consequences for American monetary policy, but also suggests a few reflections on today's economic conditions in Europe as well as Europe's new single currency.
The reason why the Federal Reserve is studying the electric dynamo is, obviously, not the Fed's interest in history.
The story of the diffusion and utilization of the dynamo offers strong analogies with the opportunities and problems posed by today's new information technologies for the organization of enterprises.
The first industrial applications of the dynamo began in 1890, but one needed to wait some thirty years before seeing the effects of that then “new technology” on the productivity of enterprises.
The most important reason for this delay was the resistance of managers towards adapting the organization of labor in their firms to the new mode of production.
Once this transformation took place, however, rapid growth in productivity followed fast.
The story of the electrical dynamo is extremely timely, and so it is perhaps no accident that Alan Greenspan has been studying it so carefully.
The research conducted so far by Fed economists shows that a long time has also been needed for the impact of computers to be felt in measurable improvements in productivity for the entire American economy.
Indeed, so long was this lag that some economists and business leaders came to have doubts about whether information technology would have any effect on productivity.
The reason for this delayed impact was the same as a hundred years earlier in the case of the electric dynamo: the difficulties that firms encountered in modifying the organization of their labor forces in such a way as to benefit from such technologies as e-mail and the internet.
Recent data on productivity, which grew at a pace of nearly 5% in the third trimester of last year, shows that, for many American companies, much of these difficulties are already things of the past.
After a decade of enterprise restructuring, the United States has ushered in the era of the internet.
In the 1980s, the organization of American firms was revolutionized by a new generation of CEOs who took apart their firms, only to reconfigure them anew.
These restructuring efforts created the ideal conditions for the introduction of new technologies.
While this was happening, the European counterparts of America's managers, with a few exceptions, have either been busy reconciling the demands of their “hard core” shareholders – composite groups of stakeholders, rarely united by common interests – or sought to secure government assistance and protection against international competition.
The case of Mannesmann in its fight to avoid takeover by Vodaphone is only the most recent example; a few months ago the French government openly discouraged any idea of a takeover of Société Générale by non-French investors.
The interests of the Fed in the application of technology to production are so distant from the preoccupations of the European Central Bank that one is tempted to view the two institutions as living on different planets.
The ECB continues to be exclusively preoccupied by inflation and budgets – problems which the United States solved almost ten years ago during the Bush administration and which also in Europe continue to obsess us only by reason of limited intellectual agility.
An economy may perhaps make up ten years of neglect, but during a technological revolution, ten years are as long as a century.
This, more than any other reason, is the cause for why the euro is weak.
Technology and Inequality
CAMBRIDGE – Until now, the relentless march of technology and globalization has played out hugely in favor of high-skilled labor, helping to fuel record-high levels of income and wealth inequality around the world.
Will the endgame be renewed class warfare, with populist governments coming to power, stretching the limits of income redistribution, and asserting greater state control over economic life?
There is no doubt that income inequality is the single biggest threat to social stability around the world, whether it is in the United States, the European periphery, or China.
Yet it is easy to forget that market forces, if allowed to play out, might eventually exert a stabilizing role.
Simply put, the greater the premium for highly skilled workers, the greater the incentive to find ways to economize on employing their talents.
The world of chess, with which I am closely familiar, starkly illustrates the way in which innovation in the coming decades may have a very different effect on relative wages than it did over the past three decades.
During the late eighteenth and early nineteenth centuries, a brilliantly inventive chess-playing “automaton” toured the world’s capitals. “The Turk” won games against the likes of Napoleon and Benjamin Franklin, while challenging many great minds to penetrate its secrets.
Concealing a human player in a shifting compartment amid a maze of impressive-looking gadgetry, it took decades for outsiders to correctly guess how the Turk really worked.
Today, the scam has been turned on its head: chess-playing machines pretend to be chess-playing humans.
Desktop-based chess programs have considerably surpassed the best human players over the past decade, and cheating has become a growing scourge.
The French chess federation recently suspended three of its top players for conspiring to obtain computer assistance.
(Interestingly, one of the main ways to uncover cheating is by using a computer program to detect whether a player’s moves consistently resemble the favored choices of various top computer programs.)
Of course, there are many other examples of activities that were once thought exclusively the domain of intuitive humans, but that computers have come to dominate.
Many teachers and schools now use computer programs to scan essays for plagiarism, an ancient transgression made all too easy by the Internet.
Indeed, computer-grading of essays is a surging science, with some studies showing that computer evaluations are fairer, more consistent, and more informative than those of an average teacher, if not necessarily of an outstanding one.
Expert computer systems are also gaining traction in medicine, law, finance, and even entertainment.
Given these developments, there is every reason to believe that technological innovation will lead ultimately to commoditization of many skills that now seem very precious and unique.
My Harvard colleague Kenneth Froot and I once studied the relative price movements of a number of goods over a 700-year period.
To our surprise, we found that the relative prices of grains, metals, and many other basic goods tended to revert to a central mean tendency over sufficiently long periods.
We conjectured that even though random discoveries, weather events, and technologies might dramatically shift relative values for certain periods, the resulting price differentials would create incentives for innovators to concentrate more attention on goods whose prices had risen dramatically.
Of course, people are not goods, but the same principles apply.
As skilled labor becomes increasingly expensive relative to unskilled labor, firms and businesses have a greater incentive to find ways to “cheat” by using substitutes for high-price inputs.
The shift might take many decades, but it also might come much faster as artificial intelligence fuels the next wave of innovation.
Perhaps skilled workers will try to band together to get governments to pass laws and regulations making it more difficult for firms to make their jobs obsolete.
But if the global trading system remains open to competition, skilled workers’ ability to forestall labor-saving technology indefinitely should prove little more successful than such attempts by unskilled workers in the past.
The next generation of technological advances could also promote greater income equality by leveling the playing field in education.
Currently, educational resources – particularly tertiary educational resources (university) – in many poorer countries are severely limited relative to wealthy countries, and, so far, the Internet and computers have exacerbated the differences.
But it does not have to be that way.
Surely, higher education will eventually be hit by the same kind of sweeping wave of technology that has flattened the automobile and media industries, among others.
If the commoditization of education eventually extends to at least lower-level college courses, the impact on income inequality could be profound.
Many commentators seem to believe that the growing gap between rich and poor is an inevitable byproduct of increasing globalization and technology.
In their view, governments will need to intervene radically in markets to restore social balance.
I disagree.
Yes, we need genuinely progressive tax systems, respect for workers’ rights, and generous aid policies on the part of rich countries.
But the past is not necessarily prologue: given the remarkable flexibility of market forces, it would be foolish, if not dangerous, to infer rising inequality in relative incomes in the coming decades by extrapolating from recent trends.
Where Will All the Workers Go?
NEW YORK – Technology innovators and CEOs seem positively giddy nowadays about what the future will bring.
New manufacturing technologies have generated feverish excitement about what some see as a Third Industrial Revolution.
In the years ahead, technological improvements in robotics and automation will boost productivity and efficiency, implying significant economic gains for companies.
But, unless the proper policies to nurture job growth are put in place, it remains uncertain whether demand for labor will continue to grow as technology marches forward.
Recent technological advances have three biases: They tend to be capital-intensive (thus favoring those who already have financial resources); skill-intensive (thus favoring those who already have a high level of technical proficiency); and labor-saving (thus reducing the total number of unskilled and semi-skilled jobs in the economy).
The risk is that robotics and automation will displace workers in blue-collar manufacturing jobs before the dust of the Third Industrial Revolution settles.
The rapid development of smart software over the last few decades has been perhaps the most important force shaping the coming manufacturing revolution.
Software innovation, together with 3D printing technologies, will open the door to those workers who are educated enough to participate; for everyone else, however, it may feel as though the revolution is happening elsewhere.
Indeed, the factory of the future may be 1,000 robots and one worker manning them.
Even the shop floor can be swept better and cheaper by a Roomba robot than by any worker.
For the developed countries, this may seem like old news.
After all, for the last 30 years, the manufacturing base in Asia’s emerging economies has been displacing that of the old industrial powers of Western Europe and North America.
But there is no guarantee that gains in service-sector employment will continue to offset the resulting job losses in industry.
For starters, technology is making even many service jobs tradable, enabling them to be offshored to Asia and other emerging markets.
And, eventually, technology will replace manufacturing and service jobs in emerging markets as well.
Today, for example, a patient in New York may have his MRI sent digitally to, say, Bangalore, where a highly skilled radiologist reads it for one-quarter of what a New York-based radiologist would cost.
But how long will it be before a computer software can read those images faster, better, and cheaper than the radiologist in Bangalore can?
Likewise, in the next decade, Foxconn, which produces iPhones and other consumer electronics, plans to replace much of its Chinese workforce of more than 1.2 million with robots.
And soon enough voice recognition software will replace the call centers of Bangalore and Manila.
Job-reducing technological innovations will affect education, health care, government, and even transportation.
For example, will we still need so many teachers in the decades to come if the cream of the profession can produce increasingly sophisticated online courses that millions of students can take?
If not, how will all of those former teachers earn a living?
Governments, too, are shedding labor – particularly governments burdened by high deficits and debts.
And, by transforming how services are provided to the public, the e-government trend can offset the employment losses with productivity gains.
Even transportation is being revolutionized by technology.
In a matter of years, driverless cars – courtesy of Google and others – may render millions of jobs obsolete.
And, of course technological innovation that is capital-intensive and labor-saving is one of the factors – together with the related winner-take-all effects – driving the rise in income and wealth inequality.
Rising inequality then becomes a drag on demand and growth (as well as a source of social and political instability), because it distributes income from those who spend more (lower- and middle-income households) to those who save more (high-net-worth individuals and corporate firms).
Obviously, this is not the first time the world has faced such problems, and the past can help to serve as a model for resolving them.
Late nineteenth- and early twentieth-century leaders sought to minimize the worst features of industrialization.
Child labor was abolished throughout the developed world, working hours and conditions became more humane, and a social safety net was put in place to protect vulnerable workers and stabilize the (often fragile) macroeconomy.
As we begin to seek enlightened solutions to the challenges that the Third Industrial Revolution presents, one overall theme looms large: The gains from technology must be channeled to a broader base of the population than has benefited so far.
That requires a major educational component.
In order to create broad-based prosperity, workers need the skills to participate in the brave new world implied by a digital economy.
Even that may not be sufficient, in which case it will become necessary to provide permanent income support to those whose jobs are displaced by software and machines.
Here, too, we should attend carefully to the lessons of the past.
King Ludd is Still Dead
CAMBRIDGE – Since the dawn of the industrial age, a recurrent fear has been that technological change will spawn mass unemployment.
Neoclassical economists predicted that this would not happen, because people would find other jobs, albeit possibly after a long period of painful adjustment.
By and large, that prediction has proven to be correct.
Two hundred years of breathtaking innovation since the dawn of the industrial age have produced rising living standards for ordinary people in much of the world, with no sharply rising trend for unemployment.
Yes, there have been many problems, notably bouts of staggering inequality and increasingly horrific wars.
On balance, however, throughout much of the world, people live longer, work much fewer hours, and lead generally healthier lives.
But there is no denying that technological change nowadays has accelerated, potentially leading to deeper and more profound dislocations.
In a much-cited 1983 article, the great economist Wassily Leontief worried that the pace of modern technological change is so rapid that many workers, unable to adjust, will simply become obsolete, like horses after the rise of the automobile.
Are millions of workers headed for the glue factory?
As Asian wages rise, factory managers are already looking for opportunities to replace employees with robots, even in China.
As the advent of cheap smartphones fuels a boom in Internet access, online purchases will eliminate a vast number of retail jobs.
Back-of-the-envelope calculations suggest that, worldwide, technological change could easily lead to the loss of 5-10 million jobs each year.
Fortunately, until now, market economies have proved stunningly flexible in absorbing the impact of these changes.
A peculiar but perhaps instructive example comes from the world of professional chess.
Back in the 1970’s and 1980’s, many feared that players would become obsolete if and when computers could play chess better than humans.
Finally, in 1997, the IBM computer Deep Blue defeated world chess champion Gary Kasparov in a short match.
Soon, potential chess sponsors began to balk at paying millions of dollars to host championship matches between humans.
Isn’t the computer world champion, they asked?
Today, the top few players still earn a very good living, but less than at the peak.
Meanwhile, in real (inflation-adjusted) terms, second-tier players earn much less money from tournaments and exhibitions than they did in the 1970’s.
Nevertheless, a curious thing has happened: far more people make a living as professional chess players today than ever before.
Thanks partly to the availability of computer programs and online matches, there has been a mini-boom in chess interest among young people in many countries.
Many parents see chess as an attractive alternative to mindless video games.
A few countries, such as Armenia and Moldova, have actually legislated the teaching of chess in schools.
As a result, thousands of players nowadays earn surprisingly good incomes teaching chess to children, whereas in the days before Deep Blue, only a few hundred players could truly make a living as professionals.
In many US cities, for example, good chess teachers earn upwards of $100-$150 per hour.
Yesterday’s unemployed chess bum can bring in a six-figure income if he or she is willing to take on enough work.
In fact, this is one example where technology might actually have contributed to equalizing incomes.
Second-tier chess players who are good teachers often earn as much as top tournament players – or more.
Of course, the factors governing the market for chess incomes are complex, and I have vastly over-simplified the situation.
But the basic point is that the market has a way of transforming jobs and opportunities in ways that no one can predict.
Technological change is not all upside, and transitions can be painful.
An unemployed autoworker in Detroit may be fully capable of retraining to become a hospital technician.
Yet, after years of taking pride in his work, he could be very reluctant to make the switch.
I know a chess grandmaster who, 20 years ago, prided himself on his success at winning money in tournaments. He vowed that he would never end up teaching children “how horsey moves” (the reference is to the knight, also called the horse).
But now he does exactly that, earning more from teaching “how horsey moves” than he ever did as a competitive chess player.
Still, it beats being sent to the knacker.
Of course, this time technological change could be different, and one should be careful in extrapolating the experience of the last two centuries to the next two.
For one thing, mankind will be confronted with more complex economic and moral questions as technology accelerates.
Still, even as technological change accelerates, nothing suggests a massive upward shift in unemployment over the next few decades.
Of course, some increase in unemployment as a result of more rapid technological change is certainly likely, especially in places like Europe, where a plethora of rigidities inhibit smooth adjustment.
For now, however, the high unemployment of the past several years should be mainly attributed to the financial crisis, and should ultimately retreat toward historical benchmark levels.
Ten Reasons Why China is Different
NEW HAVEN – The China doubters are back in force.
They seem to come in waves – every few years, or so.
Yet, year in and year out, China has defied the naysayers and stayed the course, perpetuating the most spectacular development miracle of modern times.
That seems likely to continue.
Today’s feverish hand-wringing reflects a confluence of worries – especially concerns about inflation, excess investment, soaring wages, and bad bank loans.
Prominent academics warn that China could fall victim to the dreaded “middle-income trap,” which has derailed many a developing nation.
There is a kernel of truth to many of the concerns cited above, especially with respect to the current inflation problem.
But they stem largely from misplaced generalizations.
Here are ten reasons why it doesn’t pay to diagnose the Chinese economy by drawing inferences from the experiences of others:
Strategy.
Since 1953, China has framed its macro objectives in the context of five-year plans, with clearly defined targets and policy initiatives designed to hit those targets.
The recently enacted 12th Five-Year Plan could well be a strategic turning point – ushering in a shift from the highly successful producer model of the past 30 years to a flourishing consumer society.
Commitment.
Seared by memories of turmoil, reinforced by the Cultural Revolution of the 1960’s and 1970’s, China’s leadership places the highest priority on stability.
Such a commitment served China extremely well in avoiding collateral damage from the crisis of 2008-2009.
It stands to play an equally important role in driving the fight against inflation, asset bubbles, and deteriorating loan quality.
Wherewithal to deliver.
China’s commitment to stability has teeth.
More than 30 years of reform have unlocked its economic dynamism.
Enterprise and financial-market reforms have been key, and many more reforms are coming.
Moreover, China has shown itself to be a good learner from past crises, and shifts course when necessary.
Saving.
A domestic saving rate in excess of 50% has served China well.
It funded the investment imperatives of economic development and boosted the cushion of foreign-exchange reserves that has shielded China from external shocks.
China now stands ready to absorb some of that surplus saving to promote a shift toward internal demand.
Rural-urban migration.
Over the past 30 years, the urban share of the Chinese population has risen from 20% to 46%.
According to OECD estimates, another 316 million people should move from the countryside to China’s cities over the next 20 years.
Such an unprecedented wave of urbanization provides solid support for infrastructure investment and commercial and residential construction activity.
Fears of excess investment and “ghost cities” fixate on the supply side, without giving due weight to burgeoning demand.
Low-hanging fruit – Consumption.
Private consumption accounts for only about 37% of China’s GDP – the smallest share of any major economy.
By focusing on job creation, wage increases, and the social safety net, the 12th Five-Year Plan could spark a major increase in discretionary consumer purchasing power.
That could lead to as much as a five-percentage-point increase in China’s consumption share by 2015.
Low-hanging fruit – Services.
Services account for just 43% of Chinese GDP – well below global norms.
Services are an important piece of China’s pro-consumption strategy – especially large-scale transactions-based industries such as distribution (wholesale and retail), domestic transportation, supply-chain logistics, and hospitality and leisure.
Over the next five years, the services share of Chinese GDP could rise above the currently targeted four-percentage-point increase.
This is a labor-intensive, resource-efficient, environmentally-friendly growth recipe – precisely what China needs in the next phase of its development.
Foreign direct investment.
Modern China has long been a magnet for global multinational corporations seeking both efficiency and a toehold in the world’s most populous market.
Such investments provide China with access to modern technologies and management systems – a catalyst to economic development.
China’s upcoming pro-consumption rebalancing implies a potential shift in FDI – away from manufacturing toward services – that could propel growth further.
Education.
China has taken enormous strides in building human capital.
The adult literacy rate is now almost 95%, and secondary school enrollment rates are up to 80%.
Shanghai’s 15-year-old students were recently ranked first globally in math and reading as per the standardized PISA metric.
Chinese universities now graduate more than 1.5 million engineers and scientists annually.
The country is well on its way to a knowledge-based economy.
Innovation.
In 2009, about 280,000 domestic patent applications were filed in China, placing it third globally, behind Japan and the United States.
China is fourth and rising in terms of international patent applications.
At the same time, China is targeting a research-and-development share of GDP of 2.2% by 2015 – double the ratio in 2002.
This fits with the 12th Five-Year Plan’s new focus on innovation-based “strategic emerging industries” – energy conservation, new-generation information technology, biotechnology, high-end equipment manufacturing, renewable energy, alternative materials, and autos running on alternative fuels.
Currently, these seven industries account for 3% of Chinese GDP; the government is targeting a 15% share by 2020, a significant move up the value chain.
Yale historian Jonathan Spence has long cautioned that the West tends to view China through the same lens as it sees itself.
Today’s cottage industry of China doubters is a case in point.
Yes, by our standards, China’s imbalances are unstable and unsustainable.&#160;
Chinese Premier Wen Jiabao has, in fact, gone public with a similar critique.
But that’s why China is so different.
It actually takes these concerns seriously.
Unlike the West, where the very concept of strategy has become an oxymoron, China has embraced a transitional framework aimed at resolving its sustainability constraints.
Moreover, unlike the West, which is trapped in a dysfunctional political quagmire, China has both the commitment and the wherewithal to deliver on that strategy.
This is not a time to bet against China.
The Disenchantment of Iraq
LONDON – Twenty-five years ago, on March 16, 1988, Saddam Hussein’s troops spread poison gas through the Kurdish town of Halabja.
The attack, which killed an estimated 5,000 people and injured up to 10,000 more, remains the largest chemical-weapons attack ever to target a civilian population.
In the light of the Halabja atrocity, and the regime’s broader genocidal Anfal campaign against the Kurds, and massive repression throughout the country, the question “Is Iraq better off now than it was under Saddam Hussein?” requires no great deliberation.
Iraqis are rid of a dictator responsible for the deaths of at least one million Iraqis, a man who plunged the country into three wars in 24 years, and whose policies (with the international community’s complicity) kept ordinary Iraqis under the strictest sanctions ever imposed by the United Nations.
Yes, Iraq is better off without this absolute despot.
But, for those of us who participated in the effort to reconstruct Iraq starting in 2003, this answer is far too glib.
We set the bar far higher.
The success of the war must surely be measured by whether its goals – particularly the establishment of a constitutional democracy and the country’s economic reconstruction – have been achieved.
By this standard, the war in Iraq was a monumental failure.
The United States-led Coalition Provisional Authority empowered a new group of political elites who fundamentally distrusted one another and, more important, failed to coalesce around a shared vision for governing the country.
Rather than giving these new politicians time to broker compromises, the Americans imposed a divisive constitutional process that exacerbated existing fissures, leading to the civil war of 2006-2007.
The Kurdish and Arab Shia religious parties sought a very weak central government in Baghdad, the latter because they feared a return to Sunni minority rule.
The Sunni Arab parties initially rejected any notion of a confederated state, but in time they came to believe that the Shia parties would never share power voluntarily.
The ongoing cycle of violence is a legacy of this struggle for control.
Today, many Sunni Iraqis aspire to the same autonomy from Baghdad that the Kurds enjoy in the north of the country.
The Shia parties, having tasted real power in Iraq for the first time, are now attempting to create a much more centralized state than either the Kurds or Sunni Iraqis – or the constitution, for that matter – will tolerate.
Indeed, Prime Minister Nouri al-Maliki has largely succeeded in concentrating power in his own hands.
He has created a network of military and security forces that report directly to him, often outside the legal command structure.
He has intimidated the judiciary into ignoring institutional checks on his power, so that constitutionally independent agencies, such as the electoral commission and the central bank, are now under his direct control.
Moreover, Maliki has used the criminal courts to silence his political opponents.
Iraq’s Sunni vice president is a fugitive in Turkey, with multiple death sentences rendered against him for alleged terrorist activities, though the judgments were based on the confessions of bodyguards who had been tortured (one died during the “investigation”).
An arrest warrant has now been issued against the former finance minister, also a Sunni, on similar charges.
As for the economy, no one expected a replication of Germany’s post-1945 Wirtschaftswunder.
Still, Iraq has vast oil and natural-gas reserves, to which all of the major oil companies wanted access.
Everyone stood to benefit: the companies would profit handsomely, while Iraq would gain new technology and vast sums to rebuild the country’s devastated infrastructure.
The reality has been far different.
After ten years, Iraq’s oil production has finally recovered to its pre-war level.
But Iraq’s government has not completed a single infrastructure project: no new hospitals, schools, roads, or housing whatsoever.
Basic services such as electricity and waste collection have yet to be restored even in major urban centers like Baghdad.
(By contrast, reconstruction in Iraqi Kurdistan is occurring at breakneck speed.)
Iraqis are about to enter their 11th summer, when temperatures routinely exceed 50° C, with no more than sporadic power and running water.
This lack of progress is truly remarkable, given that Iraq’s annual budgets for the last five years have totaled nearly $500 billion.
Incompetence and corruption are rampant: Iraq routinely scores among the bottom ten countries in Transparency International’s list of the most corrupt countries in the world.
Likewise, Iraq’s unemployment and underemployment levels remain among the highest in the Middle East.
And, as Iraq observer Joel Wing has pointed out, public-sector employment doubled from 2005 to 2010, and now accounts for roughly 60% of the full-time labor force.
The brain drain among Iraq’s educated youth has accelerated in the last ten years, because many of them simply see no future in the country.
Amnesty International recently issued a report detailing the continued systematic abuse of fundamental human rights in Iraq. Plus ça change, plus c’est la même chose.
True, Maliki’s nascent dictatorship is lighter than that of Saddam at his worst, and perhaps that is some progress.
But what has been gained may be far outweighed by what has been lost: the hope that if Saddam and his tyranny could just be removed, decency, stability, and normalcy could be restored.
Ten Years after the Mouse Roared
CAMBRIDGE – Al Qaeda’s attack on the United States ten years ago was a profound shock to both American and international public opinion.
What lessons can we learn a decade later?
Anyone who flies or tries to visit a Washington office building gets a reminder of how American security was changed by 9/11.
But, while concern about terrorism is greater, and immigration restrictions are tighter, the hysteria of the early days after 9/11 has abated.
New agencies such as the Department of Homeland Security, the Director of National Intelligence, and an upgraded Counter Terrorism Center have not transformed American government, and, for most Americans, personal freedoms have been little affected.
No more large-scale attacks have occurred inside the US, and everyday life has recovered well.
But this apparent return to normality should not mislead us about the longer-term importance of 9/11.
As I argue in my book The Future of Power, one of the great power shifts of this global information age is the strengthening of non-state actors.
Al Qaeda killed more Americans on 9/11 than the attack by the government of Japan did at Pearl Harbor in 1941.
This might be called the “privatization of war.”
During the Cold War, the US had been even more vulnerable, in technological terms, to a nuclear attack from Russia, but “mutual assured destruction” prevented the worst by keeping vulnerability more or less symmetrical.
Russia controlled great force, but it could not acquire power over the US from its arsenal.
Two asymmetries, however, favored Al Qaeda in September 2001.
First, there was an asymmetry of information.
The terrorists had good information about their targets, while the US before September 11 had poor information about the identity and location of terrorist networks.
Some government reports had anticipated the extent to which non-state actors could hurt large states, but their conclusions were not incorporated into official plans.
Second, there was an asymmetry in attention.
A larger actor’s many interests and objectives often dilute its attention to a smaller actor, which, by contrast, can focus its attention and will more easily.
There was a good deal of information about Al Qaeda in the American intelligence system, but the US was unable to process coherently the information that its various agencies had gathered.
But asymmetries of information and attention do not confer a permanent advantage on the wielders of informal violence.
To be sure, there is no such thing as perfect safety, and, historically, waves of terrorism have often taken a generation to recede.
Even so, the elimination of top Al Qaeda leaders, the strengthening of American intelligence, tighter border controls, and greater cooperation between the FBI and the CIA have all clearly made the US (and its allies) safer.
But there are larger lessons that 9/11 teaches us about the role of narrative and soft power in an information age.
Traditionally, analysts assumed that victory went to the side with the better army or the larger force; in an information age, the outcome is also influenced by who has the better story.
Competing narratives matter, and terrorism is about narrative and political drama.
The smaller actor cannot compete with the larger in terms of military might, but it can use violence to set the world agenda and construct narratives that affect its targets’ soft power.
Osama bin Laden was very adept at narrative.
He was not able to do as much damage to the US as he hoped, but he managed to dominate the world agenda for a decade, and the ineptness of the initial American reaction meant that he could impose larger costs on the US than were necessary.
President George W. Bush made a tactical error in declaring a “global war on terrorism.” He would have done better to frame the response as a reply to Al Qaeda, which had declared war on the US.
The global war on terror was misinterpreted to justify a wide variety of actions, including the misguided and expensive Iraq War, which damaged America’s image.
Moreover, many Muslims misread the term as an attack on Islam, which was not America’s intent, but fit Bin Laden’s efforts to tarnish perceptions of the US in key Muslim countries.
To the extent that the trillion or more dollars of unfunded war costs contributed to the budget deficit that plagues the US today, Bin Laden was able to damage American hard power.
And the real price of 9/11 may be the opportunity costs: for most of the first decade of this century, as the world economy gradually shifted its center of gravity toward Asia, the US was preoccupied with a mistaken war of choice in the Middle East.
A key lesson of 9/11 is that hard military power is essential in countering terrorism by the likes of Bin Laden, but that the soft power of ideas and legitimacy is essential for winning the hearts and minds of the mainstream Muslim populations from whom Al Qaeda would like to recruit.
A “smart power” strategy does not ignore the tools of soft power.
But, at least for America, perhaps the most important lesson of 9/11 is that US foreign policy should follow the counsel of President Dwight Eisenhower a half-century ago: Do not get involved in land wars of occupation, and focus on maintaining the strength of the American economy.
The Sino-American Decade
HONG KONG – The California summit between US President Barack Obama and Chinese President Xi Jinping on June 7-8 comes at a time of heightened tension between the world’s two preeminent powers.
But divisive issues – from computer hacking to America’s “pivot to Asia” – must not claim all of the attention. If Obama and Xi lift their heads above the parapets and begin charting a jointly agreed course through the coming decade, they may find that they have much in common.
The next ten years will be characterized by major structural adjustments and shifts in individual economies, and by a huge reconfiguration of the global economy as a whole.
Above all, much depends on the policies adopted by the two largest economies, China and the United States, and their cooperation and leadership in creating global public goods and maintaining a stable and open economic environment.
Cooperation will be needed in many areas. One is the management of natural resources and the environment.
The growth of China and the developing world will lead to a doubling of global output in 10-15 years, and probably a tripling in the 15 years after that.
The growth model on which both advanced and developing countries relied in the past will not work at two or three times the scale.
Climate, ecology, food, water, energy, and livability will not withstand the pressure.
Global problems are hard to solve.
A productive starting point would be China-US collaboration on energy efficiency and security, greener growth, and climate change.
China’s 12th Five-Year Plan sets ambitious goals in this area.
In the US, progress is somewhat more decentralized, though new national policies have been adopted, including Corporate Average Fuel Economy (CAFE) standards for automobiles.
The US also is set to become energy independent, owing to the rise of shale oil and gas, with diminishing reliance on coal already bringing down per capita carbon emissions.
The complementarity of the Chinese and US economies is changing rapidly, but it is not declining in significance.
In the past, the US brought a large open market, foreign direct investment, and technology, while China supplied low-cost labor-intensive components in key global manufacturing supply chains.
Today, China provides a large and rapidly growing market for a widening array of previously unaffordable goods, and will increasingly produce as well as absorb new technologies.
In the process, it will shed lower-value-added jobs in its export sector as production moves to lower-cost developing countries.
Depending on policies on both sides, China may also become a foreign direct investor in the US economy in a wide range of areas – including infrastructure.
The US will continue to provide a large open market, even as China’s role in serving it will shift upward in value added and in global supply chains.
The US will also provide, share, and absorb technology and human talent, remaining at the top end of the higher-education spectrum and in basic and applied research.
Of course, there is also a healthy element of competition.
The sharp differences in comparative advantage that were apparent two decades ago are diminishing as the gap in income, capital depth (including human capital), and capabilities narrows.
Chinese multinationals with recognized brands will begin to appear, just as they did in Japan and Korea.
They will compete with multinationals from a wide range of countries, and will become architects of global supply chains. Fair, rules-based competition in a rapidly expanding global economy is far from a zero-sum game.
The outlines of the structural changes needed to move toward a healthier, more sustainable growth pattern in the coming decade are relatively clear in China.
The remaining questions concern policy implementation and institutional development – issues that will be clarified in the course of 2013, as China’s new leaders formalize and communicate their reform priorities.
The US economy, meanwhile, retains many elements of dynamism and flexibility.
But, while GDP growth seems to be returning slowly to potential, the slow pace of recovery in employment and the residual secular shifts in income distribution remain causes of concern.
In particular, the shift of income from those who save less to those who save more implies uncertainty about the restoration of aggregate demand.
Political polarization has become another source of uncertainty.
Many centrists agree that an optimal fiscal policy would feature short-term stimulus, a multi-year medium-term deficit reduction plan, and measures to reduce long-term liabilities, especially if retrenchment protected growth-oriented public-sector investments.
But that is difficult to achieve in a context of deleveraging and fixation on debt.
If current trends continue, with the US economy recovering slowly but steadily, the pattern of convergence with China will continue. East Asia as a whole will surpass the US in terms of aggregate GDP by 2015, with China contributing the highest proportion of the total.
China’s GDP is projected to catch up to that of the US and Europe in 10-15 years, at which point (if not sooner) both Chinese and US real GDP will exceed $25 trillion (in 2012 prices), more than three times China’s current GDP.
Each will account for approximately 15% of global output.
And yet this shift will be accompanied by very substantial global economic challenges and uncertainties, underscoring the importance of Sino-US cooperation.
A constructive, cooperative relationship can make a significant contribution to both countries’ efforts to adapt their policies and institutions to achieve sustainable, inclusive growth patterns.
Beyond the bilateral benefits, the rest of the global economy is dependent on Chinese and US leadership – both in terms of growth and in matters concerning global economic governance and coordination.
Trade and economic openness, financial stability and regulation, energy security, climate change, and many other issues confront the world collectively.
Ten years of European Security and Defence Policy
BRUSSELS – 2009 is a landmark year for the European Union's role in the world.
It marks ten years of European Security and Defence Policy (ESDP), during which the EU became a global provider of security, making a real difference to people's lives all over the world.
At the same time, we are on the threshold of a new era when the Lisbon Treaty enters into force and provides fresh impetus for our external action.
In ten years, we have deployed 20 operations on three continents to help prevent violence, restore peace and rebuild after a conflict.
From Kabul to Pristina, from Ramallah to Kinshasa, the EU is monitoring borders, overseeing peace agreements, training police forces, building up criminal justice systems and protecting shipping from pirate attacks.
Thanks to our achievements, we are receiving more and more calls to help in a crisis or after a war.
We have the credibility, the values and the will to do this.
The EU was ahead of its time in 1999.
The comprehensive, multi-faceted nature of our approach was novel.
And the EU remains the only organisation that can call on a full panoply of instruments and resources that complement the traditional foreign policy tools of its member states, both to pre-empt or prevent a crisis and to restore peace and rebuild institutions after a conflict.
This is where the EU's unique added value lies.
We combine humanitarian aid and support for institution-building and good governance with crisis-management capacities, technical and financial assistance, and political dialogue and mediation.
The EU's joint civilian-military approach makes us flexible and able to offer tailor-made solutions to complex problems.
Today's conflicts demonstrate more clearly than ever that a military solution is neither the sole nor the best option, particularly during the stabilization of a crisis — a truth President Barack Obama has also emphasised.
The ESDP first cut its teeth in the Balkans.
When the Yugoslav wars broke out in the 1990's we watched as our neighbourhood burned because we had no means of responding to the crisis.
We learned our lesson and organised ourselves, acquiring a set of capabilities coupled with decision-making procedures and a security doctrine.
In 2003, we prevented a fresh outbreak of hostilities in the former Yugoslav Republic of Macedonia through our diplomatic efforts and then deployed Operation Concordia.
In 2004, Operation Althea took over from the NATO peacekeeping force in Bosnia and Herzegovina.
Today, we are still deeply engaged in the Balkans, fighting organised crime and building up the institutions of law and order.
For example, EULEX Kosovo is the largest EU mission to date, with some 2,000 staff, working in the police and judicial system and in mobile customs teams.
The EU's crisis-management and peace-building activities are not restricted to its backyard.
We have made a real difference in Africa, helping, for example, to provide a secure environment for elections in the Democratic Republic of Congo and protecting refugees and aid workers from the fall-out of the Darfur crisis.
Last year, we mounted EUNAVFOR, our first-ever naval operation, to combat piracy in the waters off Somalia.
Who would have guessed 10 years ago that the EU would one day lead a taskforce of 13 frigates in the Indian Ocean that would cut the success rate of pirate attacks by half?
This year the EU has 12 operations running concurrently — more than ever before.
Since 2003, some 70,000 men and women have been deployed in 23 crisis-management operations.
They come from EU member states and non-EU countries that also take part in our operations, including Norway, Switzerland, Ukraine, Turkey and the United States.
Of these 23 missions, six have been military and the other 17 civilian.
We deploy army or navy personnel when and where they are needed but our business is peace-building not waging war.
The EU is not a military alliance.
The solution to any crisis, emergency or conflict, must always be political and our ESDP actions are always firmly anchored in political strategies, formed by consensus.
Our ESDP missions have taken us as far afield as Aceh, Indonesia, where we monitored the peace agreement reached after the 2004 tsunami, following decades of civil war.
Working closely with the Association of South-Eastern Asian Nations (ASEAN), we mediated between rebels and the government and oversaw the decommissioning of weapons.
As we gain experience and expertise we are mounting increasingly ambitious operations.
Our success with Operation Artemis, in the Democratic Republic of Congo, where the EU intervened in 2003 after violent clashes and a humanitarian crisis in Bunia, helped prepare us to mount our EUFOR operation in Chad and the Central African Republic and EUNAVFOR Somalia, which South Africa has expressed an interest in joining.
Last year, we showed how rapidly we could mobilize when we deployed a monitoring mission to the Caucasus in less than three weeks to help defuse the crisis between Russia and Georgia, following the EU-mediated peace agreement.
As a member of the International Quartet, the EU is deeply engaged at diplomatic level in the Middle East Peace Process and the moment an agreement is reached between the Israelis and Palestinians we will be ready to help implement it on the ground.
We already have a mission in the West Bank helping to build up the Palestinian civil police and criminal justice system.
In Somalia, we are considering security-sector reform measures to complement EUNAVFOR Somalia and the humanitarian aid and political support that we are already providing.
To respond to the growing calls to help tackle regional and global security challenges, the EU must improve the efficiency and coherence of its external action still further.
We currently have a gap between our ambitions and our resources which must be addressed.
Clearer priorities and more sensible budgeting decisions are needed.
And we need to strengthen our civilian and military capabilities and boost their funding in order to back up our political decisions.
The EU's unique, joint civilian-military approach must be further developed to make us yet more flexible.
Our capacity to deploy rapid reaction forces also needs strengthening.
In the second decade of ESDP, the Lisbon Treaty will put all this within the EU's grasp.
The Decline of the West Revisited
LONDON – The terrorist slaughter in Paris has once again brought into sharp relief the storm clouds gathering over the twenty-first century, dimming the bright promise for Europe and the West that the fall of communism opened up.
Given dangers that seemingly grow by the day, it is worth pondering what we may be in for.
Though prophecy is delusive, an agreed point of departure should be falling expectations.
As Ipsos MORI’s Social Research Institute reports: “The assumption of an automatically better future for the next generation is gone in much of the West.”
In 1918, Oswald Spengler published The Decline of the West.
Today the word “decline” is taboo.
Our politicians shun it in favor of “challenges,” while our economists talk of “secular stagnation.”
The language changes, but the belief that Western civilization is living on borrowed time (and money) is the same.
Why should this be?
Conventional wisdom regards it simply as a reaction to stagnant living standards.
But a more compelling reason, which has seeped into the public’s understanding, is the West’s failure, following the fall of the Soviet Union, to establish a secure international environment for the perpetuation of its values and way of life.
The most urgent example of this failure is the eruption of Islamist terrorism.
On its own, terrorism is hardly an existential threat.
What is catastrophic is the collapse of state structures in many of the countries from which the terrorists come.
The Islamic world contains 1.6 billion people, or 23% of the world’s population.
A hundred years ago it was one of the world’s most peaceful regions; today it is the most violent.
This is not the “peripheral” trouble that Francis Fukuyama envisioned in his 1989 manifesto “The End of History.”
Through the massive influx of refugees, the disorder in the Middle East strikes at the heart of Europe.
This movement of peoples has little to do with the “clash of civilizations” foreseen by Samuel Huntington.
The more mundane truth is that there have never been any stable successors to the defunct Ottoman, British, and French empires that used to keep the peace in the Islamic world.
This is largely, though not entirely, the fault of the European colonialists who, in the death throes of their own empires, created artificial states ripening for dissolution.
Their American successors have hardly done better.
I recently watched the film “Charlie Wilson’s War,” which relates how the United States came to arm the Mujahideen fighting the Soviets in Afghanistan.
At the end of the film, as America’s erstwhile clients turn into the Taliban, Wilson, the American politician who got them the money, is quoted as saying “We won a great victory, but fouled up the end game.”
This “fouling up” is a continuous thread running through American military interventions since the Vietnam War.
The US deploys overwhelming firepower, either directly or by arming opposition groups, shatters local governmental structures, and then pulls out, leaving the country in shambles.
It is unlikely that US policymaking reflects the grip of some ideal view of the world, in which getting rid of dictators is the same thing as creating democracies.
Rather, the belief in ideal outcomes is a necessary myth to cover an unwillingness to use force persistently and intelligently enough to achieve a desired result.
However much military hardware a superpower owns, decay of the will to use it is the same thing as a decay of effective power.
After a time, it ceases to overawe.
That’s why Robert Kagan’s 2003 neo-conservative proposition, “Americans are from Mars, Europeans from Venus,” offered such a misleading guide.
True enough, the European Union has gone farther down the pacifist road than the US.
It is the weak nerve center of a flabby semi-state, with almost defenseless frontiers, where humanitarian rhetoric masks spinelessness. But America’s sporadic, erratic, and largely ineffective deployment of power is hardly of Martian quality.
The decline of the West is juxtaposed with the rise of the East, notably China.
(It is hard to tell whether Russia is rising or falling; either way, it is disturbing.)
Fitting a rising power into a decaying international system has rarely occurred peacefully.
Perhaps superior Western and Chinese statesmanship will avert a major war; but this, in historical terms, would be a bonus.
The increasing fragility of the international political order is diminishing the global economy’s prospects.
This is the slowest recovery from a major slump on record.
The reasons for this are complex, but part of the explanation must be the weakness of the rebound in international trade.
In the past, trade expansion has been the world’s main growth engine.
But it now lags behind the recovery of output (which is itself modest), because the kind of global political order hospitable to globalization is disappearing.
One symptom of this has been the failure after 14 years to conclude the Doha Round of trade negotiations.
Trade and monetary agreements are still reached, but they increasingly take the form of regional and bilateral deals, rather than multilateral arrangements, thereby serving broader geopolitical goals.
The US-led Trans-Pacific Partnership, for example, is directed against China; and China’s New Silk Road initiative is a reaction to its exclusion from the 12-country TPP.
Perhaps these regional bargains will prove to be a step toward wider free trade.
But I doubt it.
A world divided into political blocs will become a world of trade blocs, sustained by protectionism and currency manipulation.
And yet, even as trade relations become increasingly politicized, our leaders continue to urge us to gear up to meet the “challenges of globalization,” and few question the benefits of cost-cutting through automation.
In both cases, politicians are trying to force adaptation on reluctant populations who crave security.
This strategy is not only desperate; it is also delusive, for it seems obvious that, if the planet is to remain habitable, competition in economic growth must give way to competition in quality of life.
In short, we are far from having developed a reliable set of precepts and policies to guide us toward a safer future.
Small wonder, then, that Western populations look ahead with foreboding.
Terrorism and Counter-Terrorism Reconsidered
The arrests in London of 21 terrorists who appear to have planned to blow up a number of airplanes over the Atlantic reminds us, if any reminder is needed, of the terrorist attacks on New York and Washington of September 11, 2001.
9/11 remains the date that has come to signify modern terrorism in all of its terrible capacity to cause death and destruction.
Five years may be too short a period for historians to judge the full significance of the event, but it does offer an opportunity to take stock.
At best, it is a mixed record.
Terrorist attacks have occurred subsequently in Indonesia, Madrid, London, Egypt, and most recently Mumbai.
Thousands of innocent men, women and children have been killed.
There is also the steady drumbeat of terrorist violence in Iraq – violence that risks pushing the country into full-scale civil war.
But the terrorists still have not done anything on the scale of 9/11.
The reason for this is worth thinking about.
It may reflect the ouster of the government of Afghanistan and the elimination of al-Qaida’s safe haven there.
Improved and better coordinated intelligence, law enforcement, and homeland security efforts at both the national and international levels have made it more difficult for terrorists to succeed.
And as the recent arrests in London suggest, it is also possible that the desire of some terrorists to accomplish something more dramatic than the 9/11 attacks may have complicated their ability to implement their plans and increased the prospect that they will be detected.
None of this should make anyone sanguine.
Globalization makes it easier for terrorists to acquire the tools of their trade and to move about.
The odds also favor terrorists, in that one success can compensate for multiple failures.
Modern technology, possibly including weapons of mass destruction, increases the possibility that any terrorist success will cause damage of great magnitude.
In addition, Iraq is producing a new generation of experienced terrorists along the lines that Afghanistan did two decades ago.
So what needs doing?
One answer put forward by the Bush administration is to promote democracy.
The thinking is that young men and women will be less likely to become terrorists if they are members of societies that provide them with political and economic opportunities to live meaningful and satisfying lives.
Unfortunately, the evidence does not support this.
Individuals growing up in mature democracies such as the United Kingdom can still become alienated and radicalized.
A more democratic Iraq has become a more violent Iraq.
Similarly, elections in Palestine did not persuade Hamas to turn its back on violence any more than elections in Lebanon dissuaded Hezbollah from initiating the current crisis in the Middle East.
Moreover, even if democracy were the answer, it is extraordinarily difficult to bring about, as Iraq shows.
Building a true democracy (as opposed to simply holding elections) is an enterprise that requires decades or even generations.
In the meantime, however, we require a policy to deal with the terrorism that confronts us.
What is more, democracy is irrelevant to those who are already committed terrorists.
Their goals of re-creating some 7th century caliphate or, in the case of Iraq, restoring Sunni domination are unlikely to be satisfied by free men and women openly choosing their political system and leadership.
So what, then, needs doing?
The first thing to do is to drop the metaphor of a “war on terrorism.”
Wars are mostly fought with arms on battlefields between soldiers of opposing countries.
Wars have beginnings and ends.
None of these characteristics apply here.
Terrorism can now be carried out with boxcutters and airplanes as easily as with explosives.
Office buildings and commuter trains and coffee shops are today’s battlefields.
There are no uniforms, and often those doing the killing are acting in the name of causes or movements.
And there is no end in sight.
To the contrary, terrorism is now part of the fabric of contemporary life.
There is another reason to jettison the martial vocabulary.
Terrorism cannot be defeated by arms alone.
Indeed, other instruments of policy, including intelligence, police work and diplomacy, are likely to play a larger part in any effective policy.
Second, it is essential to distinguish between existing and potential terrorists.
Existing terrorists need to be stopped before they act; failing that, societies need to protect themselves and have ready the means of reducing the consequences of successful attacks.
But much more than that can - and should - be done to persuade young men and women not to become terrorists in the first place.
The aim must be to create an environment in which terrorism is seen as neither acceptable nor necessary.
Terrorism must be stripped of its legitimacy; those carrying it out must be shamed.
No political cause justifies the taking of innocent life.
Arab and Muslim leaders need to make this clear, be it in public pronouncements by politicians, lectures by teachers, or fatwas by leading clerics.
The initial critical reaction on the part of several Arab governments to Hezbollah’s kidnapping of Israeli soldiers is a sign that such criticism is possible, as are selective comments by a number of Muslim religious leaders.
But terrorism also needs to be stripped of its motivation.
This translates into the United States and others spelling out the gains Palestinians can expect in a peace agreement with Israel and what Sunnis and Shia can reasonably expect in Iraq’s new political order.
Bringing about a lasting cease-fire in Lebanon will also help calm the emotions that will lead some to become terrorists and others to tolerate or support them.
The way ahead is clear: vigilance against violence coupled with political possibility.
Such a counter-terrorism policy will not eliminate the scourge of terrorism any more than modern medicine can eliminate disease. But it does hold out the promise of reducing it to a scale that will not threaten the openness, security, or prosperity of modern societies.
Terror Or Reform In The Greater Middle East
Last week's brutal bombing in Madrid is part of a wave of terror that has made victims of Christians as well as Muslims.
Everywhere debate is focused on the best way to combat this form of terrorism and on the importance, in this context, of the Greater Middle East initiative that the United States wants the G8 and NATO to approve in June.
Agreement is uncertain.
Unlike European leaders such as Joschka Fischer, Germany's Foreign Minister, the US excludes the Israeli-Arab conflict from the initiative, and wants to concentrate solely on the social and economic problems that feed extremism and terrorism in the Islamic world.
Concern with the region did not begin with the attacks in the US in September 2001 or with the Madrid bombings.
Already in the 1980's and 1990's, Europe had launched the "Barcelona Process" to promote democracy, security and development in the region.
Then, as now, fears about regional instability, economic stagnation, and social backwardness abounded.
There were anxieties, too, that the increasing loss of legitimacy of Arab nationalist regimes would benefit radical Islamists - fears confirmed by Algeria's bloody civil war of the 1990's.
But if defending the status quo no longer seems possible, regime change incites its own fears.
Many suspect that Islamist radicals will be the big winners in any democratic opening.
This led some to support the Algerian government's military crackdown after Islamists won the first round of 1991 legislative elections.
But the stubborn inertia of authoritarian regimes only encourages radicalization, so there is a clear need for a gradual process of liberalization.
This dilemma underscores the difficulty in crafting a democratization strategy for so vast a region as "the Greater Middle East," which stretches from Mauritania to Pakistan.
After all, any such strategy must, by definition, ignore local specificities and regional realities.
What is needed instead are policies that reflect particular circumstances in different states and regions, together with an awareness that democracy is, above all, a statement about national realities and depends primarily on domestic factors.
If imposing a single strategy is unviable, what should the European option be, and what policy should the G8 and NATO adopt?
Any truly viable policy must get eight things right:
It is not only Middle East governments that should be involved. Civil society and public opinion must also be included.
· Support democratic transition. Incumbent leaders must have the proper incentives to initiate gradual processes of reform.
Each positive initiative, whether it comes from governments or civil societies, should be supported.
The historical parallel here is not, as is often suggested, with the Organization for Security and Cooperation in Europe, but with the Marshall Plan, which provided real incentives, not lofty rhetoric and hortatory appeals, for integration and democratic consolidation.
· Reinforce anti-terrorist cooperation. The fight against terrorism, which requires short-term successes, must be differentiated from the long-term process of reform.
The priority in fighting terrorism should be police and intelligence service cooperation, which produces much faster results and limits the capacity of extremists to mobilize.
· Be coherent and consistent. Human rights cannot be defended if antiterrorism activities fail to respect the rule of law.
Nor can democracy be advanced if authoritarian regimes are supported simultaneously merely because - like Saddam Hussein's Iraq - they are secular and anti-Islamist.
· Sustain long-term commitments. Initiatives such as the Euro-Mediterranean Partnership and the European Neighborhood Policy need sustained political engagement and resources if they are to work.
NATO's attempt to change public perceptions of its objectives and operations is also in effect a long-term effort.
Larger projects, such as the Greater Middle East initiative, are much less sustainable than targeted initiatives and are more susceptible to the exigencies of electoral campaigns.
· Get America's role right. As with postwar European integration, America has a crucial role to play.
It must contribute in its own unique way to resolving conflicts that hinder inclusion and feed radicalism.
The main US focus must be on finding a fair solution to the Israeli-Palestinian question and to the Iraq crisis.
Of course, America's economic support for political reform would be welcome.
· Capitalize on institutional diversity. Because NATO and the EU share complementary priorities, both can develop mechanisms for inclusive security cooperation in peacekeeping operations.
· Address the question of political Islam. None of these tasks can be achieved without serious reflection about political Islam.
Its diversity must be recognized, so that groups that resort to violence can be differentiated from those that do not.
There can be no democratic transition if Islamic currents that reject violence and accept democracy's ground rules are not integrated into the public arena.
A key factor in the success of any EU Middle East initiative will be the millions of European citizens of North African origin, who have a political, cultural, and economic role to play.
That is why the current French debate on the headscarf is so important, for it concerns the rights of Muslim women in European societies and the protection of diversity.
Democracies can deal with political Islam and respect fundamental rights.
They can fight obscurantism and respect diversity.
Indeed, the main lesson of recent years is that their own security requires that they support democratic openings elsewhere.
Terror vs. Liberty
The terrorism that we have come to associate with Al Qaeda is special in many ways.
It is global, technologically sophisticated, but, above all, it is not about an achievable political objective.
It is not aimed at creating a united (Catholic) Ireland, an independent Basque country, or even a Palestinian state, but at a particular worldview and those who represent it.
It is aimed at what used to be called the West, that is, a liberal order of things, a free world.
Because the United States is the most visible and powerful representative of that free world, it is aimed against America and its closest allies in Europe and elsewhere.
This is a critical fact to remember.
What we describe under the heading of Al Qaeda is an essentially negative, destructive movement. It does not offer an alternative view of the modern world other than the implicit claim that modernity is neither necessary nor desirable.
Moreover, that claim, when made by men who appear to be religious leaders, is almost certainly dishonest.
Such leaders are using religion for their own highly modern political purposes; they use it to organize and mobilize their supporters - to commit individual or collective suicide, if need be.
In this they are not entirely dissimilar from the totalitarian leaders of fascist movements, who likewise built on popular frustration to pursue an essentially destructive purpose in the name of anti-modern beliefs and promises.
Violence born from such sources is difficult to fight.
Signs of frustration with modernity are never hard to find.
They are present in highly developed countries, but above all in entire regions of the world that are suspended between a yesterday that no longer exists and a tomorrow that has not yet come into being.
How, then, do free countries deal with terrorist expressions of organized frustration?
Without doubt, the first priority for any free country must be to protect its citizens and assets against acts of terrorist violence.
Given a globalized movement of fury, this is not simple.
It requires measures that do not come easily to citizens, groups, and authorities steeped in a tradition of liberalism and tolerance.
We must accept that there are limits to tolerance.
Opting out of the values and customs of free societies is problematic, but it is ultimately acceptable.
Non-aggressive demonstrations of difference - including Islamic headscarves worn by students or teachers in largely Christian countries - should be bearable.
But violence should never be tolerated.
The monopoly on the use of violence exercised by democratic states must be preserved, which may involve expelling non-citizens who choose violence or advocate its use, and the detention of citizens who have practiced or threatened it.
However, it is of critical importance that the treatment of terrorists and those suspected of terrorist acts remains strictly within the rule of law.
Indefinite detention without trial is as unacceptable as defining people as "illegal combatants," to whom no rules of any kind apply.
The status of the prisoners held at Guantanamo Bay and the recent incidents of possibly systematic humiliation and torture of Iraqi prisoners cast doubt on the very values on which a liberal order is based.
Such incidents make one wonder whether the terrorists have, in the end, achieved their aim of destroying the West and what it stands for.
Terrorism aimed at the destruction of the liberal order is a test of that order.
This is particularly so if one accepts - as I do - intervention in the internal affairs of countries in order to prevent genocide or the murderous suppression of minorities and opposition groups.
But intervention must never borrow methods from those against whom it is undertaken.
This applies also to the intervening powers' objectives.
Terrorism of the Al Qaeda type is basically destructive.
Any response must be basically constructive.
The frustration of many in the economically developed countries is, like the frustration of entire countries in developing regions, a challenge.
This challenge cannot really be met by simply promising unlimited opportunities, as they uniquely exist in America.
It requires a sense of social responsibility that accompanies and cushions the painful process of modernization.
People who are suspended between a lost past and a future not yet gained need help.
Such assistance will not yield immediate results, but awareness of the medium term - which means readiness to face it by delaying immediate gratification - is also a sign of a liberal order.
Thus, fighting Al Qaeda is not a war.
It is partly self-defense, partly an assertion of the rule of law in difficult circumstances, and partly a constructive effort to redress the causes of frustration.
Testing Medicine
Most people are surprised to learn that rigorous application of formal rules of evidence to evaluate medical research and decide on the best treatments is a recent phenomenon.
They might be just as surprised to learn that health policy is not yet subject to the same approach.
So-called “evidence-based medicine” entails a hierarchy of empirical proof that ranks medical studies according to their quality.
Physiological research on animals, or of human responses in laboratory settings, rank low on the hierarchy.
Observational studies that compare outcomes for patients who receive particular treatments and control subject who do not rank higher, but may still be misleading.
Convincing studies of drugs and surgical procedures usually come only from randomized trials, in which patients receive treatment or don’t according to a process analogous to a coin flip.
Well-conducted randomized trials incorporate additional safeguards against bias, including use of placebo medication that allows investigators to blind patients and caregivers to whether patients are, or are not, receiving active treatment.
Doctors have made many errors that they could have avoided had these principles been applied.
For example, for a decade leading doctors advocated hormone replacement therapy to lower cardiovascular risk in post-menopausal women.
These recommendations, based on physiological and observational studies, proved profoundly misleading.
Randomized trials ultimately showed no benefit, and a clear increase in breast cancer and vascular blood clots.
Similarly, cardiologists once prescribed drugs to reduce sudden death in patients after heart attacks.
The drugs suppressed arrhythmias – disturbances of the heartbeat associated with sudden death.
The logic seemed clear: suppress the asymptomatic but nasty-looking arrhythmias, and you will reduce sudden death.
Unfortunately, when investigators undertook randomized trials, they found that treated patients had a higher death rate.
Clinicians stopped using the drugs, but not before causing a large number of unnecessary deaths.
But awareness that principles of evidence-based medicine should also guide health policy has been slower to take root.
Here, although randomized trials are not feasible, it remains possible to follow evidence-based medicine’s primary rule: to base action on systematic summaries of the highest quality evidence available.
Consider the issue of whether countries should fund health care publicly, through taxes, or privately, through health insurance and user fees.
Private health insurance has proved enormously wasteful, with large administrative expenditures on activities that include developing insurance packages, marketing those packages, and assessing claims.
Public funding eliminates these activities, resulting in far lower administrative costs.
Likewise, user fees discourage the poor and elderly from accessing needed health services, whereas public funding largely eliminates inequities in the provision of care while producing health outcomes that are as good as, if not better than, mixed public-private funding models.
Public funding also benefits a country’s economy, because large employers are spared the expense of providing health benefits to their workers.
Thus, the evidence suggests that public funding of all key aspects of medical care – physician and hospital services, drugs, and devices –- offers benefits of equity, efficiency, and industrial advantage.
The medical community has come to accept the need for systematic reviews to guide decisions regarding drugs and surgical therapies, but their use in health policy is only now taking hold.
Systematic reviews have summarized the evidence regarding the provision of hospital services by large for-profit companies versus not-for-profit providers.
The primary studies forming the basis of these reviews come largely from the United States, where for-profit and not-for-profit providers work side by side in the same environment, and where large administrative databases allow accurate detection of death rates.
But, while these observational studies are threatened by bias from patient selection – sicker patients mean higher death rates, for example ­– the available administrative databases document patient characteristics such as age, severity of illness, and co-morbidity, including diabetes and high blood pressure.
This information allows statistical approaches that level the playing field, helping to protect against biases associated with patient selection.
These systematic reviews have shown that for-profit hospital care leads to higher death rates than not-for-profit care, despite higher charges to third-party payers.
Systematic reviews have demonstrated the same phenomenon in outpatient dialysis facilities – lower death rates in not-for-profit facilities – and have also shown higher quality care in not-for-profit nursing homes.
The reason that not-for-profit providers can achieve higher quality care with better health outcomes at lower cost is evident.
While for-profit providers have higher administrative costs and larger executive salaries, their main burden relative to not-for-profit provision is the need to generate returns for their shareholders.
These additional costs mean that approximately 20% of the total income that not-for-profit providers can devote to patient care is unavailable.
The result is cutting corners, deficiencies in care, and poorer outcomes for patients.
Principles of evidence-based medicine have transformed the way we look at clinical interventions and may prevent repetitions of public-health disasters such as the inappropriate promotion of hormone replacement therapy and anti-arrhythmic drugs.
Application of these principles to health policy can lead to wiser decisions about how to run our health systems.
The available evidence provides strong support for public funding of health services delivered by not-for-profit providers.
Testing Putin in Syria
NEW YORK – There has been no shortage of scrutiny of what Russian President Vladimir Putin is up to in Syria and why.
Much of the analysis, though, has been narrowly focused on the short term and may be too negative in assessing his actions’ likely long-term consequences.
What we know is that Putin has decided to come to the aid of Bashar al-Assad’s embattled regime.
Russian bombs and missiles are now raining down on an array of armed groups that have been fighting Syrian government forces, which has given the regime the breathing space that Russia’s intervention was intended to provide.
As bad as the Assad government is, and as much as it has to answer for, this outcome is arguably preferable in the short run to the regime’s collapse.
The painful truth in Syria today is that a government implosion would most likely lead to genocide, millions more displaced people, and the establishment of the Islamic State’s so-called caliphate in Damascus.
Putin’s motives are a matter of speculation, but it would appear that he did not want to see Russia’s long-term ally in the Middle East fall.
Moreover, he never misses an opportunity to remind the world that Russia remains a major power, able and willing to act on behalf of its perceived interests.
It is also possible that he sought to distract domestic attention from a shrinking economy and the rising cost of intervention in Ukraine.
Putin’s high approval ratings suggest he may well be succeeding.
Many fear that Russia’s latest activism will not only prolong Syria’s brutal civil war, but also strengthen the Islamic State.
This could well turn out to be the case, as hatred of the Assad regime is a major recruiting tool.
And, thus far at least, the Islamic State seems to be a low priority for the Russian military, which appears to be attacking mainly other anti-Assad groups.
Indeed, there have been reports of the Islamic State moving into areas that others have abandoned following Russian attacks.
Russia seems to be playing the same cynical game as Assad: framing the war as a binary choice between the Islamic State and a regime that, however flawed, still deserves the world’s support.
Some also fear that this demonstration of Russian assertiveness presages a new wave of such interventions, even a new Cold War.
But this is unlikely, if for no other reason than that Russia lacks the economic and military means to sustain such efforts on multiple fronts.
It is also not clear that the Russian people are prepared to pay a high price for such a foreign policy.
So it all comes down to Putin, who enjoys a degree of autonomy in Kremlin decision-making not seen since the Stalin era.
Putin is widely known to be a martial-arts enthusiast, and his action in Syria is entirely consistent with many of the discipline’s principles, including the importance of the decisive thrust that neutralizes the opponent’s strengths and exploits his weaknesses.
But force has its limits.
Russia’s intervention in Syria cannot succeed if success is defined as enabling the Assad government to regain control over the bulk of the country’s territory.
Putin’s policy can, at most, establish a relatively secure enclave.
Even this modest aim will prove costly, because the Islamic State is also becoming stronger.
And it could prove expensive to Russia itself: it is only a matter of time before suicide bombings (such as the recent attack in Ankara) occur in Moscow.
The real question, then, is whether Putin sees bolstering the Assad government as an end in itself or as a means to an end.
If it is the latter – if Putin is thinking in terms of chess, the preferred game of many Russians, and planning several moves ahead – a diplomatic process, in which Assad is removed at some point, is conceivable.
Russia might support such a process; after all, Putin is not known for his sentimentality.
Indeed, he might embrace a political process that enabled him to demonstrate Russia’s central role in shaping the future of the Middle East.
In the meantime, the United States and others should pursue a two-track policy. One track would channel steps to improve the balance of power on the ground in Syria.
This means doing more to help the Kurds and select Sunni tribes, as well as continuing to attack the Islamic State from the air.
Relatively safe enclaves should emerge from this effort.
A Syria of enclaves or cantons may be the best possible outcome for now and the foreseeable future.
Neither the US nor anyone else has a vital national interest in restoring a Syrian government that controls all of the country’s territory; what is essential is to roll back the Islamic State and similar groups.
The second track is a political process in which the US and other governments remain open to Russian (and even Iranian) participation.
The goal would be to ease Assad out of power and establish a successor government that, at a minimum, enjoyed the support of his Alawite base and, ideally, some Sunnis.
Such a process might well confer prestige on Putin.
That would be a price worth paying if it contributed to a dynamic that over time reduced both the suffering of the Syrian people and the danger posed by the Islamic State.
Thailand on the Precipice
BANGKOK – The two-month siege of downtown Bangkok by the so-called “Red Shirts” has ended in bloodshed.
More than 60 people, including two foreign reporters and a few soldiers, died in the Thai army’s suppression of the urban rebellion.
The Thai government had no choice but to use force after negotiations with the protestors broke down.
Both sides deeply mistrusted the other, even though the government’s five-point “road map” for a peaceful resolution implicitly acknowledged the existence of serious socioeconomic problems and included an early general election this November – a concession to the protestors, who argue that the government lacks legitimacy because it was never elected.
Much of Thailand is now under an all-night curfew, imposed after radical Red Shirts set fire to more than 35 landmark buildings in Bangkok.
The militants’ targets included branches of Bangkok Bank, the country’s largest and a pillar of the establishment; Siam Square, owned by the Palace; and a deluxe shopping mall owned by one of the richest Thai Chinese families.
That anarchic fury reflected the disappointment of radicals at their leaders for prematurely surrendering to the authorities rather than fighting to their last breath. Those who did not surrender wanted to show their defiance.  The fires were also a volcanic outburst of class hatred by the disenfranchised, rural and urban, against the Bangkok-based wealthy ruling class.
That class is an interlocking network of millionaire generals, big-business owners and their marriage-linked clans, and the Palace, an institution protected by lèse majesté laws that carry severe penalties.
The ruling elite, whose public face at present is the attractive, mild-mannered, Oxford-educated prime minister, Abhisit Vejjajiva, is pinning all the troubles on one man, former Prime Minister Thaksin Shinawatra, exiled abroad and a fugitive from Thai justice.
In this narrative, Thaksin masterminded the siege by hiring a small group of rogue army officers, and by paying the poor to go to Bangkok to start a civil war.
It is entirely plausible that Thaksin did help finance the protest.
It is also likely that some radical hot heads wanted to overthrow the government by mob action.
But to insist that protesters, old and young, fathers and mothers, numbering as many as 150,000, were willing to risk their lives sitting under a scorching Tropical sun for two months only for money strains credulity.
That the elite believes this story is one indication of just how condescending and out-of-touch its members are.
Many in the elite have even turned their ire at foreign news media for allegedly distorting the truth by overplaying the protesters’ grievances.
CNN and BBC have been attacked for their alleged bias in showing the “human side” of the protesters and giving insufficient time to the uglier aspects.
Both outlets ran live broadcasts throughout the protest, showing all the drama that the cameras could capture.
While official “spin control” is in full throttle, a growing number of thoughtful analysts are voicing concern that facile caricatures do not serve Thailand’s interests.
After all, the sense of disenfranchisement among voters in the country’s populous north and northeast, as well as among the urban poor, is real.
It is not something manufactured by Thaksin. Nor are the peasants so ignorant to be easily conned by a crafty politician promising much delivering little or none.
This patronizing view conveniently ignores the fact that in the last four elections, Thaksin and his allies won by lopsided margins.
Thaksin’s rural development policies were clearly welcomed by people who, for the first time, felt connected to the leaders they had elected.
So the ruling elite engineered a coup to secure the power they had failed to win at the ballot box.
They then made use of the “Constitutional Court” to ban Thaksin’s party, the largest in the country.
But, even as it made Thaksin’s party illegal, the Constitutional Court failed to unearth any evidence of widespread violations.
Instead, it ruled on a minor side issue that many claim was based on a retrospective law.
Thailand’s Old Boys Club – generals-turned-politicians, political parties backed by tycoons with an eye on fat government contracts, and that unnameable hereditary institution whose only agenda is to maintain its longevity – has misgoverned the country for the past half-century.
Under its stewardship, one of Asia’s more promising economies has instead become a borderline failed state, enervated by 17 coups since World War II.
Few who now hold the reins of power in Bangkok could honestly throw the first stones.
Yet they do.
A peaceful resolution of deep-rooted problems requires wise political leadership, as well as recognition that past injustices cannot be redressed all at once.
The art of politics is about skillful compromises, with no side getting exactly what it considers fair and just.
But the country’s underclasses must see long-overdue and concrete changes in the right direction – that is, furthering what Thaksin tried to do.
In fact, Thaksin may well have to be included in any national reconciliation.
Change is easier promised than accomplished. Unless the ruling elite embrace an honest and earnest effort at national and class reconciliation and soon, Thailand could well descend into a civil war along class lines that would make the turmoil of the past two months in Bangkok seem like a brawl in a bar.
Thailand’s Endless Endgame
BANGKOK – The hospitalization of King Bhumibol Adulyadej has brought Thailand’s most daunting question to the fore. The country’s wrenching political struggle over the past several years has, at bottom, concerned what will happen after the ailing 81-year-old king’s reign, now at 63 years, comes to an end.
Thailand’s endgame is being shaped by several key events: the military coup of September 2006, the current military-supported constitution and election in 2007, street protests and seizures of Government House and Bangkok’s airports in 2008, the army-brokered coalition government of Prime Minister Abhisit Vejjajiva that has ruled since January this year, and the Bangkok riots in April.
At stake is the soul of an emerging Thailand, with far-reaching ramifications for developing democracies elsewhere as well as the broader international community.
Thailand’s color-coated crisis pits largely urban, conservative, and royalist “yellow” shirts against the predominantly rural “red” columns of former Prime Minister Thaksin Shinawatra.
For much of Thailand’s long economic boom of the past two decades, wealth resided mostly in the Bangkok metropolitan area, a boon to the burgeoning urban middle class, but deeply resented by the rural majority.
While the rural population had more than enough to eat, their economic opportunities and upward mobility were limited by a shoddy education system and docile state-run media that fed them soap operas and official messages.
For a nobody to become a somebody, all roads led to Bangkok and its prestigious prep schools and universities.
Thailand’s farms became increasingly alienated from the urban elite.
Thaksin recognized this urban-rural divide and shrewdly exploited it, upending the elite consensus that had long prevailed.
That consensus rested on a nexus of the military, the monarchy, and the bureaucracy.
Military rule and putsches stemming from factional infighting among generals were the norm until the early 1970’s, when university students overthrew a military dictatorship and opened up democratic space.
Parliament, political parties, and politicians then came and went alternately with military coups, which invariably suppressed the maturation of democratic institutions.
The rural-urban divide wedded the grassroots rural population to upcountry patronage networks and vote-buying, while elected politicians reaped their rewards through corruption and graft. In turn, the military stepped in from time to time – once every four years on average since 1932 – ostensibly to suppress corruption, but retarding democratic rule in the process.
All this changed when Thailand promulgated a constitution in 1997 that promoted political transparency and accountability and government stability and effectiveness. Its logical but flawed outcome was the triumph of Thaksin and his once-invincible Thai Rak Thai party, which became the first to complete a full term and be re-elected – by a landslide in 2005.
Thai Rak Thai’s populism featured income redistribution, cheap health care, micro-credit schemes, and a dazzling array of policy innovations that ushered Thailand into twenty-first-century globalization.
The direct connection of Thaksin and his party to the electorate bypassed and threatened the established trinity of institutions that had long called the shots in Thailand.
Thaksin and his cronies handed the establishment an opportunity to strike back by abusing power and profiting personally from it.
A billionaire telecommunications tycoon, Thaksin presided over the trebling of his family’s assets in the stock market.
He also engineered an extrajudicial drug-suppression campaign that claimed 2,275 lives.
Thaksin’s sins are voluminous, and became the basis of the rise of his yellow-shirted opponents, the People’s Alliance for Democracy (PAD), which entered the electoral arena as the New Politics Party.
The PAD spent much of last year demonstrating against the two successive Thaksin-nominated governments that arose from the December 2007 election, reinvigorating Thai Rak Thai’s anti-PAD red-shirted allies, the United Front for Democracy against Dictatorship (UDD).
After more than three years, Thailand’s crisis has become a knotty saga.
Abhisit’s pledges of reform and reconciliation in the wake of April’s riots have made little headway.
The PAD wants to maintain the 2007 charter.
The UDD favors reinstatement of the 1997 constitution.
Enraged by a sense of social injustice, the reds rail against the establishment’s double standards, while the pro-establishment yellows have hunkered down for a battle of attrition.
In the process, what had been a pro- and anti-Thaksin fight has gradually become a pro- and anti-monarchy struggle.
The rigidly hierarchical forces of the establishment are insecure and fearful of what will happen after the king dies.
Lèse majesté cases alleging insults against the immediate royal family are on the rise.
Many thousands of Web sites challenging establishment interests and deploring post-coup machinations have been blocked.
Thaksin’s appeal splits the reds.
Many repudiate his corruption but, in challenging the post-coup status quo , have no recourse except to use him as a rallying symbol.
Likewise, all yellows find Thaksin’s misrule intolerable, but not all are fanatical royalists.
A stalemate has taken hold, with the denouement likely to be reached only after the royal succession.
A new consensus is imperative if Thailand is to regain its footing.
That consensus would have to be based on mutual recognition and accommodation. The reds will need to distance themselves from Thaksin’s abuses of power as much as the yellows will have to accept some of Thaksin’s policy legacy, particularly grassroots opportunities for jobs, education, and upward mobility.
Thailand Turns Banana Republic
BANGKOK – “Thailand’s future is up for grabs,” proclaimed the eminent Thai scholar Thitinan Pongsudhirak just before the country’s Constitutional Court ruled, in effect, that the ruling People Power Party (PPP) and its two smaller coalition partners are “illegal,” and hence must disband due to “election frauds” committed by party executives a year ago.
Party leaders, including Prime Minister Somchai Wongsawat, are barred from politics for five years.
With that one stroke, Thailand’s popularly elected government fell.
Parliament must now reconstitute itself without the three parties loyal to Somchai.
In Thailand’s current crisis, history is repeating itself, for the PPP under Somchai was the same Thai Rak Thai (Thais Love Thais) Party formed by the ousted Prime Minister Thaksin Shinawatra, a figure much-hated by the country’s Bangkok-based elite.
The PPP was created because TRT had been outlawed at the time of Thaksin’s removal.
What is perverse about this is that every recent poll in Thailand shows that Thaksin remains wildly popular with the vast majority of Thais, most of whom live outside Bangkok.
So, despite the ousting of two Thaksin proxies in a row by the court and the elite, Thais are likely to return yet another Thaksin loyalist if they are allowed to vote in an unrigged election.
The current crisis has been brewing for some time, but the breaking point came when anti-government protestors occupied Bangkok’s main airport.
The protestors march under the banner of the “People’s Alliance for Democracy,” but the truth is that they have resorted to undemocratic means to topple a democratically elected government.
This parade of toppled and ousted governments has led Pavin Chchavalpongpun, another eminent Thai scholar, to call his country a “failed state.”
That description may not yet be true, but the shadow of state failure is certainly growing.
Thaksin’s unforgivable sin was his violation of Thailand’s unwritten rules about how the country’s ruling elites are to behave.
The key rule here is that the winner in any power play must not shut out his opponents.
In a land of “smiles” and plenty, the winner must not take all.
But Thaksin, a self-made billionaire, allowed his greed and huge electoral successes to get the better of him.
After his two landslide victories, he thought he could have it all.
The traditional Bangkok elites had always thought of him as an uncouth upstart.
Once in power, he essentially shut them out of the “grabbing” game, preserving it for himself and his cronies.
Thaksin’s supposedly legal “tax planning,” which allowed him to pay zero capital gains tax on the billion dollar sale of his flagship telecom company, Shin Corporation, in 2006, offended the rising urban professional classes.
But Thaksin had by then won over Thailand’s rural population through popular policies including handouts.
Some of these projects were the proverbial bridges to nowhere.
But others did meet real rural needs: cutting medical costs, providing subsidized agricultural loans, and maintaining price supports.
Thaksin’s rural base rewarded him by returning him to power, ignoring his personal corruption.
Thaksin’s detractors call his rural strategy (which his proxy successors have followed) cynical vote buying.
But Thaksin’s rural base wonders why the anti-Thaksin groups and his predecessors in power never tried to do much for them.
Such vote buying to win hearts and minds is, after all, a fair game for any party to indulge in.
The going “wage” for the “Rent-A-Crowds” at the heart of the crisis was 300 Baht a day per person, plus food, transportation, and a clean yellow T-shirt – yellow being the Royal color.
These protests have run, on and off, for nearly 200 days, with crowd sizes ranging from a few hundred to tens of thousands. It is widely known that the anti-Thaksin business elites provided the money to keep people in the street.
Thailand ’s universally loved and respected King has not taken a public stand on the occupation of the airports nor on any other recent public demonstrations.
Some analysts say anti-government leaders have hijacked the Royal Color to pretend that they have his support.
Nevertheless it is widely believed that Thaksin committed “lèse majesté” by attempting to undermine the moral authority of the crown, a cornerstone of the kingdom, perhaps replacing it with a republic that he would control. Lèse majesté is a grave crime in Thailand.
It is true that Thailand’s queen herself recently presided over the funeral of a protestor killed in a clash with the police.
From that point on, policing of the protests became utterly passive.
The queen is rumored to have said she would pay the medical expenses of any injured demonstrators.
The anti-Thaksin factions have failed to produce a knockout in any recent general election.
Street protests to paralyze the government remain their sole weapon. But until and unless the anti-Thaksin civilian elite can convince the rest of the country that they are serious about winning the hearts and minds of the poor, Thailand will remain on a knife edge between banana republic and failed state.
Thaksin and the Lessons of Hong Kong
HONG KONG – Former Thai Prime Minister Thaksin Shinawatra was gracious when he ended his exile in Hong Kong: “Thank you, Hong Kong, for having me here, so warmly.
Hong Kong is a destination where I would always like to come.”
If Thaksin is sincere, he could serve Thailand by bringing back a few of his host city’s more admirable virtues.
Two stand out: a largely uncorrupt, efficient, transparent, and accountable government, and an open and competitive economy.
Hong Kong is, of course, by no means perfect: Mainland China’s politics and habits are slowly infecting the island.
Nevertheless, Transparency International, the world’s premier corruption rating agency, ranked Hong Kong as the 14th cleanest society in 2007.
From 2001 when Thaksin first became prime minister, to 2007 under military rule, Thailand’s corruption ranking plunged from an already low 61 to 84, which puts the country in the same league as Gabon and Swaziland, two countries notorious for violent and corrupt leaders who routinely trample on their citizens’ rights.
Thailand’s public sector is historically plagued by frequent military coups, managed with rare exception by incompetent generals and civilians who rule with condescension towards the people who pay them to serve.
Public accountability, government transparency, and official integrity remain largely slogans.
Thailand was once touted as a future “Asian Tiger.”
None of the four “tiger” economies – Singapore, Hong Kong, Taiwan, and South Korea – were as blessed with natural resources and fertile soil.
And, unlike Thailand, all of them had suffered from war or internal strife.
Yet, even the most cursory analysis reveals the vast gap in economic performance between them and Thailand in the past 50 years.
The cause is obvious: the inferior quality of governance in Thailand.
While a relatively small business, military, and political elite misgoverned Thailand – often cynically, and sometimes incompetently – others in Asia, with more selfless and competent public servants, succeeded in finding their competitive niche in the modern world.
Much of Asia, including China, focused on meeting the challenge of globalization, whereas Thailand’s elite has protected the country’s economy to serve its parochial interests.
Thus, in the Heritage Foundation’s annual rankings of countries by how free and competitive their economies are, Thailand routinely comes up short.
In 2007, Thailand was ranked 54th, compared to first and second place for Hong Kong and Singapore, respectively.
Taiwan was ranked 25th and Korea 41st.
Korea’s relatively low ranking reflects the inclusion of North Korea.
Yet several South Korean companies, such as Samsung and Hyundai, have become global household names competing successfully against far more established brands, such as Sony and Honda.
Indeed, South Korea has shown how a poor country without natural resources can become a world-class economy.
China was at the bottom of the rankings 30 years ago, but at its present rate it will soon overtake Thailand.
In several key sectors such as financial services and retail, China is already more open than Thailand.
The quality of China’s roads and telecommunication puts to shame Thailand’s uneven, badly maintained streets and its slow and expensive Internet service.
Likewise, China has identified three of its universities as candidates to join the world’s top 10 in the near future.
Without quality education, there cannot be a quality work force, and without that, no country can hope to compete in a world where the march of globalization cannot be stopped.
To that end, the government is injecting public capital, while wealthy graduates are pouring in private money in the style of American alumni donors.
By contrast, Thailand’s government and local elite seem content to remain a provincial country shielded from global competition in science and technology.
Foreign employers are appalled by the poor quality of Thailand’s education system, whose graduates have little foreign language proficiency and possess scant analytical skills.
Competition is not a zero-sum game.
The successes of Hong Kong, Singapore, China, and South Korea should serve as a powerful reminder that Thailand has great potential, if only its elites would stop behaving like spoiled children playing a game at which only they are allowed to win.
Thaksin has unique qualifications to serve Thailand well.
He is one of the country’s rare politicians who understands economics, and how to put the government to good public use.
In his new life as a “non-politician,” Thaksin can tell many of his business and political friends to chart a new course for Thailand, one that would help the country become a near “tiger.”
Or he can let history judge him even more harshly.
The choice is his.
Thaksin Returns
Former Thai Prime Minister Thaksin Shinawatra has returned to Bangkok 17 months after being deposed in a military coup.
Thaksin has repeatedly denied that he intends to reenter politics, from which he has been barred for five years.
But how realistic is it to expect so driven and flamboyant a man to stay away from the limelight?
Thaksin already is believed by many to be providing advice to the government of Prime Minister Samak Sundaravej.
Indeed, Samak’s People Power Party (PPP) is widely considered a proxy for Thaksin.
It was, after all, formed from the remains of Thaksin’s Thai Rak Thai party, which was disbanded after the coup.
Of course Thaksin’s political revival can’t get underway unless and until he has been acquitted of corruption charges.
But he is likely to have made all the calculations related to the charges and other allegations before leaving London, and to have concluded that his chances of remaining free are high.
After all, Thaksin is too serious a man to risk freedom for the sake of sentimentality.
Moreover, he remains very popular in Thailand, if not in Bangkok. His presence in the country might well spark a clamor for his “reluctant” return to politics.
Now, add to all this a soccer team.
Thaksin’s ownership of the Manchester City football club might not seem of great importance to observers outside Thailand and Asia.
But Thais are soccer enthusiasts and even bigger fans of the English Premier League.
Thaksin’s ownership is a source of considerable pride, especially outside elite circles in Bangkok. His proprietorship provides Thais with a direct connection to an elite team in the world’s most popular sport.
This, in turn, gives him a substantial popularity dividend to add to his store.
It was not for nothing that he had two Man City players accompany him on his return to Thailand.
The PPP’s victory in the December polls has also been seen as vindication of sorts for Thaksin.
Given the opportunity to vote, voters turned to a party not unlike Thaksin’s pre-coup Thai Rak Thai.
So why not complete the picture?
Obviously, none of this will please Thaksin’s opponents.
So the possibility of demonstrations, stalemate, and a new crisis cannot be discounted.
The situation is all the more uncertain in view of a problem facing the PPP.
Just hours before Thaksin returned to Bangkok, Thailand’s Election Commission convicted the speaker of the parliament’s lower house of fraud after he paid civil servants to campaign on behalf of the party.
The Supreme Court must uphold the ruling, but if it does, the speaker will lose his parliamentary seat.
And more ominously, the case could easily snowball, leading to the dissolution of the PPP and an end to Thaksin’s nascent political recovery.
This would throw the party, government, and country into fresh turmoil.
Thus, under almost any scenario, Thaksin’s return could well mark a return to those fraught days of 2006 just before the last coup.
Thank Bush for Bernanke
The world may not know it, but we all dodged a bullet when George W. Bush nominated Ben Bernanke to succeed the all-powerful US Fed Chairman Alan Greenspan.
There were some positively scary names for potential Fed chairman floating out of the White House, and I, for one, had no confidence in the outcome.
Instead, almost miraculously, we got an absolutely first-rate economist, a safe pair of hands to guide the global economy.
Those of us who know Bernanke view him as someone who has the experience, intellect, and personality to sparkle in the position that he will assume next February.
Why is the job so important?
Alan Greenspan is a great man, but it is a curious set of circumstances that has elevated the job of Fed chairman to Mount Olympus.
Consider, first, that the other two major central banks in the world (the European Central Bank and the Bank of Japan) simply are not fully functional.
While the Fed agilely changes policy interest rates to stabilize inflation and output, neither the BOJ nor the ECB has changed its key policy rates for years now, with the ECB stuck at 2% and the BOJ at 0%.
While failure to adjust interest rates is not prima facie evidence of dysfunction – after all, even a broken clock is right twice a day – frozen interest rates really do give the appearance of paralysis.
Thus, with the world’s other two major central banks missing in action, the Fed has the global economic stage all to itself.
Equally importantly, the Fed Chairman also commands the US economic stage.
Normally, the United States Treasury Secretary or some other leader in the administration would play a counterbalancing role.
But in the Bush administration, these officials simply don’t have the political support to be effective, particularly opposite Greenspan.
President Bush has clearly decided that he himself should be the administration’s main economic spokesperson.
Inevitably, however, Bush comes across as a cheerleader, while the more objective Fed chairman just ran circles around him.
Of course, Greenspan never had to compromise his credibility on economic issues by pontificating on Darwin’s theory of evolution (which many Bush supporters deny), or buzzing on about how wonderfully things are supposedly going for US forces in Iraq.
Against Bush’s vapid boosterism was set Greenspan’s vast knowledge and experience.
Besides, there is just no way that a US president busy with dozens of other pressing problems can compete with a Fed chairman who has the luxury of focusing full time on economic issues.
So we should give Bush credit for being willing to pick someone who can maintain Greenspan’s role as the chief economist of the US, by default.
Mind you, it may be quite awhile before Ben Bernanke’s name becomes the global household word that Greenspan’s has become.
People who could care less about economics and finance often still know the name of the current US Fed chairman.
It has certainly made my life easier in explaining to people that I am a professor of economics.
Of course, some people, such as an accomplished young musician I recently met, have never heard of Alan Greenspan – or of the US Federal Reserve, for that matter (within half an hour he was mesmerized by the idea that there might be someone who could essentially print a billion dollars on a whim).
But, generally, even though most people don’t really understand what a central bank does, they view Alan Greenspan as a vitally important person who has something to do with setting interest rates, and thus influencing their lives.
This brings us back to the ECB and the BOJ, because their real problem is not simply interest-rate paralysis, but rather that each feels enormously constrained in addressing key economic issues outside monetary policy.
As the premier pan-European Union institution, the ECB is uniquely positioned to play a leadership role in Europe’s discussion of fiscal policy, trade policy, and demographic transition.
But, while it quietly makes a number of important technical contributions to various debates, it is hemmed in politically and thus cannot reach forcefully beyond its jurisdiction.
This is an unfortunate limitation of the ECB’s design by a group of nation states that have not yet decided whether they prefer greater unity or greater devolution.
For the BOJ, the fundamental problem is its deep institutional fear of rocking the boat politically, and thus its inability to play the role of chief economist.
As a result, America’s Fed chairman today commands super-normal influence.
Perhaps some day this unbridled power will be reined in by a resurgent ECB and BOJ.
In the meantime, we can only be relieved that by chance or by fate, President Bush has actually appointed a worthy replacement for Greenspan.
It could have been a disaster.
Thatcher and the Big Bang
LONDON – In the United States, for people of a certain age, Margaret Thatcher was a superstar, and Americans have been surprised at the sharply divided views on display in the Britain that she governed for 11 years.
But Britons were not astonished.
Like Tony Blair, Thatcher has long been a British product with more appeal in export markets than at home.
All aspects of her legacy are earnestly disputed.
Was she prescient about the problems of European monetary union, or did she leave Britain isolated on the fringes of the continent?
Did she create a new economic dynamism, or did she leave the United Kingdom bitterly divided, more unequal, and less cohesive than before?
Did she destroy the power of vested interests and create a genuine meritocracy, or did she entrench bankers and financiers as the new elite, with disastrous consequences?
Indeed, one issue that has come under the microscope is Thatcher’s reforms of the City of London in the late 1980’s.
In 1986, her government was instrumental in what is known colloquially as the “Big Bang.”
Technically, the main change was to end “single capacity,” whereby a stock trader could be a principal or an agent, but not both.
Before 1986, there were brokers, acting for clients, and jobbers, making a market, and never the twain could meet.
This system had been abandoned elsewhere, and the reform opened London to new types of institutions, especially the major US investment banks.
The first and most visible consequence was the demise of the long lunch.
Beginning with a gin and tonic just after noon, and ending with a Napoleon brandy at three o’clock, lunch prior to the Big Bang was often the most arduous part of a stockbroker’s day.
That cozy culture ended soon after the thrusting, brash Americans, who worked even over breakfast, hit town.
But some believe that there were downsides, too.
Philip Augar, the author of The Death of Gentlemanly Capitalism, argues that “Good characteristics of the City were thrown out along with the bad,” and that Thatcher’s reforms “put us on a helter-skelter course towards the financial crisis.”
How justified is this charge?
Can we really trace the roots of today’s malaise back to the 1980’s?
Was the Iron Lady an author of the world’s current misfortunes?
Nigel Lawson, Thatcher’s Chancellor of the Exchequer at the time, denies it.
(Full disclosure: I was an adviser to Lawson in the 1980’s).
He points out that the reforms were accompanied by new regulation.
The Financial Services Act of 1986 put an end to the pure self-regulation regime.
Financial interests opposed it vigorously at the time, viewing it as the thin end of a dangerous wedge, though they could not have guessed just how thick that wedge would eventually become.
It is also difficult to trace back to the 1980’s the origins of the credit explosion and the proliferation of exotic and poorly understood financial instruments that lay at the heart of the 2007-2008 crisis.
The most dangerous trends, including the upsurge of global imbalances and the dramatic financialization of the economy, accelerated dangerously from about 2004 onwards.
Thatcher herself was not an enthusiast for credit, once famously saying, “I don’t believe in credit cards.” Indeed, she espoused a rigorous philosophy about borrowing: “The secret of happiness is to live within your income and pay your bills on time.”
But perhaps there is a deeper level on which we can see some connections between Thatcherism and the crisis.
Her mantra, “You can’t buck the market,” did contribute to a mindset that led governments and central banks to be reluctant to question unsustainable market trends.
Thatcher was referring specifically to the dangers of fixed exchange rates, and can certainly not be counted as one of the principal architects of the so-called “efficient markets hypothesis.”
But she was a strong believer in the expansion of private markets, and was instinctively suspicious of government intervention.
As the late economist and European central banker Tommaso Padoa-Schioppa once put it, Thatcher “shifted the line dividing markets from government, enlarging the territory of the former at the expense of the latter.” Padoa-Schioppa regarded this as a factor contributing to the US and UK authorities’ reluctance to step in at the right time before the 2007-2008 crisis.
Thatcher was certainly no friend of central bankers.
She remained, to the end, hostile to central-bank independence, regularly rejecting the advice of her chancellors to allow the Bank of England to control interest rates.
She feared that independent central banks would serve the interests of their banking “clients,” rather than those of the economy as a whole.
She was especially hostile to what she saw as the excessive independence of the European Central Bank.
In her last speech in Parliament as Prime Minister, she attacked the ECB as an institution “accountable to no one,” and drew attention to the political implications of centralizing monetary policy, accurately forecasting the dangers of a “democratic deficit,” which now worries many in Europe, and not just in Cyprus or Portugal.
So, in the financial arena, as elsewhere, there is light and shade in the Thatcher inheritance.
Her Alan Greenspan-like belief in the self-correcting features of financial markets, and her reverence for the integrity of the price mechanism, do not look as well-founded today as they did in the 1980’s.
So, in that sense, she can be seen as an enabler of the market hubris that prevailed until 2007.
On the other hand, it is difficult to imagine that a Thatcher government would have run a loose fiscal policy in the 2000’s.
And it is equally unlikely that, had she had her way, the eurozone would be the camel – a horse designed by committee – that it is today.
That Old Tax Magic
WASHINGTON, DC – Tax time in the United States – the dreaded mid-April deadline for filing annual income-tax forms – has come and gone.
The system, Americans have been reminded, has become painfully complex, with many a loophole through which one might try to squeeze.
The fear of an audit by the Internal Revenue Service lurks in homes across the country.
At such a sensitive time, it is no surprise to hear politicians pitching the idea of “tax reform” – suggesting that they can simplify the system, close loopholes, and use the proceeds to reduce tax rates.
The allure of such appeals is that a crackdown on others’ tax avoidance will mean that you personally will pay less in taxes.
In the policy jargon increasingly heard in today’s political discourse, tax reform will be “revenue neutral” – meaning that it will not worsen the budget deficit or drive up the national debt.
The broader subliminal message is that you can have whatever you currently expect in terms of government services for less than it costs you now.
The problem with this vision of tax reform is that it is magical – an attractive illusion with no basis in reality.
Consider the recent pronouncements of Mitt Romney – now the presumptive Republican candidate to challenge President Barack Obama in November.
Romney wants to cut tax rates, mainly benefiting those at the upper end of the income distribution.
He also wants to close loopholes, but none of the details that he has offered add up to much.
His boldest proposal – eliminating deductions for interest paid on mortgages on second homes – is trivial in terms of generating revenue.
Obama is only slightly better.
While he talks less about “tax reform,” he is currently communicating the message that merely raising taxes on rich people – the infamous 1% – will bring the budget and national debt under control.
That, too, is a pipedream.
Americans – and taxpayers in many other countries – need a more transparent approach to assessing candidates’ budget proposals.
In the US, there are groups that offer their own assessments.
For example, the Committee for a Responsible Federal Budget performed an admirable service in “scoring” the fiscal plans of rival candidates for the Republican nomination.
The problem is that in an election with high stakes and deep polarization, who, exactly, can voters trust?
Everyone has an agenda, perceived or real.
The veracity of any organization that is funded by particular individuals, or through less transparent corporate channels, will be called into question.
What the US and many other countries need is an independent, competent, and experienced body that leans neither right nor left.
Fortunately, the US has the Congressional Budget Office, which scores legislation in terms of its budgetary impact, assesses official budget proposals, and formulates its own economic projections.
(I serve on the CBO’s Panel of Economic Advisers, which comments on the draft forecast twice a year, but does not assess budget proposals or anything else.)
Because the CBO reports to the relevant congressional committees – those dealing with tax and budgets – both Republicans and Democrats watch its every move.
But the CBO, created in the 1970’s precisely to bring greater transparency and accountability to the rather byzantine congressional budget process, really is independent and run by professionals.
The CBO does not, however, score proposals by political candidates, and that is part of the problem.
In the run-up to the pre-election debates between Obama and Romney, both sides should agree to submit detailed budget proposals in the correct format for CBO assessment.
The relevant congressional committees also should agree to this exercise.
If one presidential candidate refuses to cooperate in this manner, that should confer an advantage on the candidate who is willing to disclose more fully the specifics of his plan.
And, to make this pressure to disclose meaningful, part of one debate should focus on budget proposals, with the questions being structured around how the CBO has reacted to specifics.
If either candidate does not want to bring the national debt under control, he should be pressed to explain why.
This is not a matter only for the world’s largest economies.
Candidates to lead their countries should not be allowed to get away with speaking in generalities or engaging in vague rhetorical flourishes.
That Stalling Feeling
NEW YORK – Despite the series of low-probability, high-impact events that have hit the global economy in 2011, financial markets continued to rise happily until a month or so ago.
The year began with rising food, oil, and commodity prices, giving rise to the specter of high inflation.
Then massive turmoil erupted in the Middle East, further ratcheting up oil prices.
Then came Japan’s terrible earthquake, which severely damaged both its economy and global supply chains.
And then Greece, Ireland, and Portugal lost access to credit markets, requiring bailout packages from the International Monetary Fund and the European Union.
But that was not the end of it.
Although Greece was bailed out a year ago, Plan A has now clearly failed.
Greece will require another official bailout – or a bail-in of private creditors, an option that is fueling heated disagreement among European policymakers.
Lately, concerns about America’s unsustainable fiscal deficits have, likewise, resulted in ugly political infighting, almost leading to a government shutdown.
A similar battle is now brewing about America’s “debt ceiling,” which, if unresolved, introduces the risk of a “technical” default on US public debt.
Until recently, markets seemed to discount these shocks; apart from a few days when panic about Japan or the Middle East caused a correction, they continued their upward march.
But, since the end of April, a more persistent correction in global equity markets has set in, driven by worries that economic growth in the United States and worldwide may be slowing sharply.
Data from the US, the United Kingdom, the periphery of the eurozone, Japan, and even emerging-market economies is signaling that part of the global economy – especially advanced economies – may be stalling, if not dropping into a double-dip recession.
Global risk-aversion has also increased, as the option of further “extend and pretend” or “delay and pray” on Greece is becoming less desirable, and the specter of a disorderly workout is becoming more likely.
Optimists argue that the global economy has merely hit a “soft patch.”
Firms and consumers reacted to this year’s shocks by “temporarily” slowing consumption, capital spending, and job creation.
As long as the shocks don’t worsen (and as some become less acute), confidence and growth will recover in the second half of the year, and stock markets will rally again.
But there are good reasons to believe that we are experiencing a more persistent slump.
First, the problems of the eurozone periphery are in some cases problems of actual insolvency, not illiquidity: large and rising public and private deficits and debt; damaged financial systems that need to be cleaned up and recapitalized; massive loss of competitiveness; lack of economic growth; and rising unemployment.
It is no longer possible to deny that public and/or private debts in Greece, Ireland, and Portugal will need to be restructured.
Second, the factors slowing US growth are chronic.
These include slow but persistent private and public-sector deleveraging; rising oil prices; weak job creation; another downturn in the housing market; severe fiscal problems at the state and local level; and an unsustainable deficit and debt burden at the federal level.
Third, economic growth has been flat on average in the UK over the last couple of quarters, with front-loaded fiscal austerity coming at a time when rising inflation is preventing the Bank of England from easing monetary policy.
Indeed, inflation may even force the Bank to raise interest rates by the fall.
And Japan is already slipping back into recession because of the earthquake.
All of these economies were already growing anemically and below trend, as the ongoing process of deleveraging required a slowdown of public and private spending in order to increase saving rates and reduce debts.
And now, in addition to the string of “black swan” events that advanced economies have faced this year, monetary and fiscal stimulus has been removed in most of them, or soon will be.
If what is happening now turns out to be something worse than a temporary soft patch, the market correction will continue further, thus weakening growth as the negative wealth effects of falling equity markets reduce private spending.
And, unlike in 2007-2010, when every negative shock and market downturn was countered by more policy action by governments, this time around policymakers are running out of ammunition, and thus may be unable to trigger more asset reflation and jump-start the real economy.
This lack of policy bullets is reflected in most advanced economies’ embrace of some form of austerity, in order to avoid a fiscal train wreck down the line.
Public debt is already high, and many sovereigns are near distress, so governments’ ability to backstop their banks via more bailouts, guarantees, and ring-fencing of questionable assets is severely constrained.
Another round of so-called “quantitative easing” by monetary authorities may not occur as inflation is rising – albeit slowly – in most advanced economies.
If the latest global economic data reflect something more serious than a hiccup, and markets and economies continue to slow, policymakers could well find themselves empty-handed.
If that happens, the risk of stall speed or an outright double-dip recession would rise sharply in many advanced economies.
The $200 Trillion Question
Perhaps the most remarkable trend in global macroeconomics over the past two decades has been the stunning drop in the volatility of economic growth.
In the United States, for example, quarterly output volatility has fallen by more than half since the mid-1980’s.
Obviously, moderation in output movements did not occur everywhere simultaneously.
Volatility in Asia began to fall only after the financial crisis of the late 1990’s.
In Japan and Latin America, volatility dropped in a meaningful way only in the current decade.
But by now, the decline has become nearly universal, with huge implications for global asset markets.
Indeed, the main question for 2007 is whether macroeconomic volatility will continue to decline, fueling another spectacular year for markets and housing, or start to rise again, perhaps due to growing geopolitical tensions.
I lean slightly toward the optimistic scenario, but investors and policymakers alike need to understand the ramifications of a return to more normal volatility levels.
Investors, especially, need to recognize that even if broader positive trends in globalization and technological progress continue, a rise in macroeconomic volatility could still produce a massive fall in asset prices.
Indeed, the massive equity and housing price increases of the past dozen or so years probably owe as much to greater macroeconomic stability as to any other factor.
As output and consumption become more stable, investors do not demand as large a risk premium.
The lower the price of risk, the higher the price of risky assets.
Consider this.
If you agree with the many pundits who say stock prices have gone too high, and are much more likely to fall than to rise further, you may be right—but not if macroeconomic risk continues to drain from the system.
At the end of 2000, at the height of the Internet stock boom and just before the 2001 crash, the economists James Glassman and Kevin Hassett published Dow 36,000 .
At the time, the Dow Jones industrial average of US stocks was trading at around 11,000, so the book’s premise seemed outrageous.
Certainly the timing was bad: global stock prices began to collapse a few months later, and it took years for them to fully recover.
But Glassman and Hassett did have a point.
Their admittedly crude analysis shows why, if volatility continues to fall in 2007, prices of stocks and other assets can still go a lot higher.
They asked how investors would price stocks if they expected historical average returns to continue, while also deciding that the risk was essentially zero.
That may sound extreme, but some scholars, such as the 2004 Nobel Prize winner Ed Prescott, have shown that, historically, holding a large diversified portfolio of stocks long enough is generally a far better investment than ultra-safe US Treasury bonds.
A back-of-the-envelope calculation shows that with the risk premium removed, stocks prices could easily triple from existing levels, with price/dividend ratios soaring to over 200, compared to historical averages of 40 to 50.
Of course, there is a big hole in the Dow 36,000 logic.
Stocks are risky, depressions can happen, and it is dangerous to extrapolate the past to the future.
If prices rise simply because investors decide that there is no longer any risk, then prices will collapse all the more precipitously if investors collectively change their minds.
This brings us to the $200 trillion question (roughly the value of global money and asset markets, including housing): What could cause macroeconomic volatility to start rising?
Don’t look to central banks; most are likely to manage the near-term risks to inflation and growth reasonably well.
Hedge funds could throw a scare.
The Germans tried to use their leadership in the G8 to achieve greater transparency in hedge funds, but they were beaten back by the US and Great Britain.
To my mind, though, the greatest risk is geopolitical instability.
By and large, China has been a far more constructive counterpart to the US than the former Soviet Union ever was.
But, given huge income disparities.
China’s leaders still face enormous challenges in maintaining domestic stability, and continuing quiescence cannot be taken for granted.
At the same time, there are at least a half-dozen other global hot spots – some might be tempted to include the US Senate – that could trigger a major breakdown in world trade.
In short, if the macroeconomic moderation that dominated 2006 continues into 2007, look for further asset price inflation (but don’t hold your breath for the Dow to hit 36,000).
But if a major flare-up causes investors to lose confidence in low volatility, the bottom could fall out from under equity and housing prices.
In that case, do investors and policymakers have a plan B?
The Globalization of Justice
PARIS – When the International Criminal Tribunal for the former Yugoslavia (ICTY) was established by the United Nations Security Council 20 years ago, on May 25, 1993, many regarded it as a meaningless gesture.
At the time, the war in Bosnia was already more than a year old; the city of Sarajevo was under siege; tens of thousands of civilian noncombatants had already died; and hundreds of thousands had been forcibly displaced.
The Bosnian Serbs – and their supporters in Serbia – seemed to be winning the war, while the UN made no provision for taking into custody those charged with ordering or carrying out atrocities.
Indeed, some saw the creation of the ICTY as a poor substitute for the military intervention that was needed to halt the slaughter.
For a long time, that cynical response seemed to be justified.
The ICTY was slow in getting off the ground.
It took the UN 14 months to appoint a chief prosecutor.
Another year passed before his office issued indictments against high-ranking figures responsible for major crimes.
By then, the massacre of about 8,000 Muslim men and boys at Srebrenica, the largest mass killing in Europe since World War II, had already taken place.
But, though some aspects of the ICTY’s performance merit criticism, its overall performance and achievements over the last two decades have made it a great success.
That success is twofold: the tribunal’s achievements with respect to the former Yugoslavia, and its impact worldwide on ending impunity for war crimes, crimes against humanity, and genocide.
As for the former Yugoslavia, the ICTY eventually obtained custody of all whom it indicted, except those who died in the interim.
It has conducted fair trials and has provided a meaningful appellate process that has led to significant convictions and equally significant acquittals.
Its work has paved the way for the establishment of local courts in Serbia, Croatia, and Bosnia that have supplemented its work.
By now, hundreds of those responsible for atrocities in the former Yugoslavia in the wars of the 1990’s have been held accountable and have served – or are still serving – judicially ordered prison sentences.
The impact of the ICTY worldwide has been multifaceted.
It has fostered the establishment of additional ad hoc international criminal courts with jurisdiction over such countries as Rwanda, Sierra Leone, Cambodia, and Lebanon.
It also provided impetus to the establishment of the International Criminal Court, while encouraging prosecutors in many countries to charge senior officials and guerrilla leaders for war crimes and bring them to trial in national courts.
The recent trial and conviction, in a national court, of former Guatemalan President General Efraín Ríos Montt on charges of genocide and crimes against humanity is only the latest blow against the impunity that previously protected high officials responsible for atrocities.
Though the conviction has since been overturned by Guatemala’s Constitutional Court, Ríos Montt joins dozens of former heads of state and government leaders who have been prosecuted for gross abuses of human rights since the ICTY was established.
But, despite the achievements of the past 20 years, the movement for international justice is still in its infancy.
Inevitably, mistakes have been made.
Even so, the 20th anniversary of the establishment of the ICTY is worth celebrating, because the movement it has led has forced military commanders, guerrilla leaders, and heads of state around the world to take into account the possibility that they will face justice if crimes against humanity are committed on their watch.
To that extent, the ICTY has done more than bring a measure of justice to victims and survivors in the former Yugoslavia.
It has also contributed to the prevention of injustice in contexts far removed from the Balkans.
The 70% Solution
BERKELEY – Via a circuitous Internet chain – Paul Krugman of Princeton University quoting Mark Thoma of the University of Oregon reading the Journal of Economic Perspectives – I got a copy of an article written by Emmanuel Saez, whose office is 50 feet from mine, on the same corridor, and the Nobel laureate economist Peter Diamond.
Saez and Diamond argue that the right marginal tax rate for North Atlantic societies to impose on their richest citizens is 70%.
It is an arresting assertion, given the tax-cut mania that has prevailed in these societies for the past 30 years, but Diamond and Saez’s logic is clear.
The superrich command and control so many resources that they are effectively satiated: increasing or decreasing how much wealth they have has no effect on their happiness.
So, no matter how large a weight we place on their happiness relative to the happiness of others – whether we regard them as praiseworthy captains of industry who merit their high positions, or as parasitic thieves – we simply cannot do anything to affect it by raising or lowering their tax rates.
The unavoidable implication of this argument is that when we calculate what the tax rate for the superrich will be, we should not consider the effect of changing their tax rate on their happiness, for we know that it is zero.
Rather, the key question must be the effect of changing their tax rate on the well-being of the rest of us.
From this simple chain of logic follows the conclusion that we have a moral obligation to tax our superrich at the peak of the Laffer Curve: to tax them so heavily that we raise the most possible money from them – to the point beyond which their diversion of energy and enterprise into tax avoidance and sheltering would mean that any extra taxes would not raise but reduce revenue.
The utilitarian economic logic is clear.
Yet more than half of us are likely to reject the conclusion reached by Diamond and Saez.
We feel that there is something wrong with taxing our superrich until the pips squeak so much that further taxation reduces the number of pips.
And we feel this for two reasons, both of them set out more than two centuries ago by Adam Smith – not in his most famous work, The Wealth of Nations, but in his far less discussed book The Theory of Moral Sentiments.
The first reason applies to the idle rich.
According to Smith,
“A stranger to human nature, who saw the indifference of men about the misery of their inferiors, and the regret and indignation which they feel for the misfortunes and sufferings of those above them, would be apt to imagine, that pain must be more agonizing, and the convulsions of death more terrible to persons of higher rank, than to those of meaner stations...”
We feel this, Smith believes, because we naturally sympathize with others (if he were writing today, he would surely invoke “mirror neurons”).
And the more pleasant our thoughts about individuals or groups are, the more we tend to sympathize with them.
The fact that the lifestyles of the rich and famous “seem almost the abstract idea of a perfect and happy state” leads us to “pity…that anything should spoil and corrupt so agreeable a situation!
We could even wish them immortal...”
The second reason applies to the hard-working rich, the type of person who
“devotes himself forever to the pursuit of wealth and greatness....With the most unrelenting industry he labors night and day....serves those whom he hates, and is obsequious to those whom he despises....[I]n the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments....he begins at last to find that wealth and greatness are mere trinkets of frivolous utility....Power and riches....keep off the summer shower, not the winter storm, but leave him always as much, and sometimes more exposed than before, to anxiety, to fear, and to sorrow; to diseases, to danger, and to death...”
In short, on the one hand, we don’t wish to disrupt the perfect felicity of the lifestyles of the rich and famous; on the other hand, we don’t wish to add to the burdens of those who have spent their most precious possession – their time and energy – pursuing baubles.
These two arguments are not consistent, but that does not matter.
They both have a purchase on our thinking.
Unlike today’s public-finance economists, Smith understood that we are not rational utilitarian calculators.
Indeed, that is why we have collectively done a very bad job so far in dealing with the enormous rise in inequality between the industrial middle class and the plutocratic superrich that we have witnessed in the last generation.
The Abuse of History and the Iranian Bomb
TEL AVIV – Saturated with their often tragic history, Jews tend to pay great reverence to the past.
But the past, especially when not handled with care, can be the enemy of the future and distort our reading of the challenges of the present.
This is certainly the case with the analogy that Israeli leaders insist on drawing between the destruction of European Jewry in the Holocaust and the threat posed to the Jewish state by a nuclear-armed Iran.
Holocaust Remembrance Day in Jerusalem this year again saw Israeli leaders competing with each other in feeding the gloom of the national psyche and public hysteria surrounding Iran’s intentions.
President Shimon Peres, who, unlike Prime Minister Binyamin Netanyahu, is skeptical of the utility of an attack on Iran’s nuclear installations, spoke of the “threat of extermination” facing Israel.
Even Defense Minister Ehud Barak, usually a coolly rational thinker, chose Yad Mordechai, a Kibbutz named after Mordechai Anilewitz, the leader of the Warsaw Ghetto uprising, to alert world opinion against “Holocaust deniers, first and foremost the Iranian president, who calls for the destruction of the Jewish people.”
Netanyahu, not surprisingly, was especially outspoken.
To him, Iranian President Mahmoud Ahmadinejad is another Hitler, and the world is now facing the same challenges that it faced on the eve of Hitler’s rise to power.
Iran’s race to develop nuclear weapons, Netanyahu warned, can be understood only in the context of its leaders’ “repeated vows to wipe the Jewish state off the face of the earth.” Supposedly, now, as then, the world is criminally indifferent.
Netanyahu’s Holocaust analogy would have been a mere intellectual curiosity if he were not the person who would be responsible for taking the decision about whether to attack Iran’s nuclear installations and thus drive the Middle East into an apocalyptic confrontation.
The career of his political mentor, Menachem Begin, demonstrated that distorted analogies between past and present can inspire irresponsible policies.
In his disastrous 1982 invasion of Lebanon, Begin perceived himself as a God-sent vindicator of the legacy of the Holocaust.
He chose to portray what was a cynical alliance of convenience between Israel and the Christian Phalange as a lesson to humanity and a rebuke of that hypocritical Christian Europe which had betrayed the Jews during the Holocaust.
He would show them how the Jewish state, created by Holocaust survivors and now led by one, would come to the rescue of a Christian minority threatened with destruction.
To Begin, Arafat in Beirut was Hitler in his Berlin bunker.
Indeed, Abba Eban ridiculed Begin for behaving “as if Israel were a kind of disarmed Costa Rica and the PLO was Napoleon Bonaparte, Alexander the Great, and Attila the Hun all wrapped into one.”
Begin was the best proof that Israel’s critics needed that the Zionist revolution, although it created a state out of the ashes of the Holocaust, had failed to eradicate the collective self-image of the Jew and the Israeli as victim.
Netanyahu seals the image of Israel as a nation totally incapable of breaking out of the prison of its past.
Israel is not wrong to cast serious doubts on the efficacy of the measures that the United States pretends to take in the hope of curtailing Iran’s nuclear ambitions.
Neither the planned sanctions nor the recently published US Nuclear Posture Review, a far less revolutionary document than expected, will curb Iran’s nuclear appetite.
Instead of believing in its capacity to stop Iran’s nuclear program, the world is preparing to live with a nuclear-armed Iran.
But this would not be Israel’s problem alone.
Such a resounding collapse of the Nuclear Non-Proliferation Treaty would pose a formidable challenge to the world community, particularly to the Middle East.
Iran’s viciously anti-Semitic rhetoric is a transparent attempt to deceive its terrified Arab neighbors by presenting its military might as the spearhead of an all-Muslim confrontation with Israel.
In fact, a nuclear Iran would launch the entire region into nuclear anarchy.
Saudi Arabia, Egypt, and Turkey would all seek their own “Sunni” bomb to counter the threat of a Shia nuclear empire on their doorsteps.
When he did not feel the need to exploit the solemnity of Holocaust remembrance ceremonies, Barak conveyed the right message to the rising Iranian power.
A year ago, knowing full well that Iran was irreversibly on its way to getting the bomb, he soberly challenged Netanuyahu’s dangerous distortion of history.
“We are a strong country to which the whole world attributes nuclear capabilities, and in regional terms we are a superpower.” He then expressed his dislike for comparing the Iranian threat to the Holocaust, “because it cheapens the Holocaust and stretches current challenges beyond their proper place.
There is none that will dare to destroy Israel.”
History has not come full circle.
Israel needs to decide whether it is a regional superpower or a Jewish ghetto waiting for an imminent pogrom to begin.
History in the hands of manipulative politicians and incorrigible ideologues can be either a dangerously inebriating weapon to mobilize the masses, or, as James Joyce put it in Ulysses, “a nightmare” from which it is difficult to wake.
By obsessively filtering their conflict through the nightmare of the Holocaust and the Nakbah, Israelis and Palestinians have doomed the chances of a peaceful settlement of their dispute.
Viewing the current conflict between such formidable military powers as Israel and Iran through a similar lens can only breed untold catastrophe.
A Year of Reckoning for France and Europe
PARIS – France is at a crossroads.
It has numerous valuable assets, but it cannot postpone long-overdue reforms, or else it will become increasingly irrelevant in a fiercely competitive global economy. This is the economic challenge that President François Hollande, Prime Minister Jean-Marc Ayrault, and all of us in the French government must confront.
We face a historic responsibility: we need to modernize the French economy, and introduce in a few months a decade’s worth of reforms to generate stronger, more inclusive growth, create more jobs, and shrink public deficits.
This is precisely what the government has been doing since the election earlier this year; indeed, no French government has ever carried out so many reforms in such a short period of time.
France’s economic performance has been lackluster during the past ten years, particularly with respect to competitiveness, debt sustainability, public spending, and the labor market.
Our responsibility is to ensure that we are doing better in each of these areas by 2017, when the current electoral term expires.
To meet this challenge, we have designed an economic strategy that rests on three pillars: Europe, fiscal consolidation, and competitiveness.
Europe is our number one priority: stabilizing the eurozone and resolving its current crisis are essential to stability and economic recovery in France.
Hollande’s government insists that we will be successful only if three conditions are met.
First, Europe should adopt a balanced approach to fiscal consolidation – a necessary process, but self-defeating when carried out too quickly.
We must then break the perverse feedback loop between banking risk and sovereign risk that is at the heart of the euro crisis.
This requires implementing a fully-fledged banking union – with a pan-European supervisor and a strong regime for banking resolution and deposit insurance – as soon as possible.
Finally, in the medium to long term, we must complete the eurozone integration process and move forward on solidarity and risk-sharing – for example, by establishing a eurozone-specific budget.
In late November, the eurozone finally agreed on a partial rescheduling of Greece’s debt to alleviate the country’s financial burden.
It was a critical step toward stabilization, but more must be done.
In 2013, we will have to turn our gaze to other countries (such as Cyprus and Spain), and ensure that we maintain the momentum needed to build a banking union.
Fiscal consolidation is the second pillar of France’s economic strategy.
France has not adopted a balanced budget in the last 30 years, and its public debt reached an unsustainable €1.7 trillion ($2.2 trillion) in 2011.
Our duty is to rise to the occasion and reverse the tide.
France is fully committed to a fiscal-consolidation effort that returns it to a balanced budget by 2017.
This is not just a political commitment; we have enshrined France’s fiscal path in a law adopted in November.
The coming year will be a milestone on this path: France is targeting a 3%-of-GDP budget deficit in 2013, down from 5.2% in 2011 and 4.5% in 2012, and a lower debt/GDP ratio from 2014 onward.
This is an ambitious commitment, and one that we intend to meet without resorting to an old-fashioned “tax and spend” fiscal policy: over the next five years, spending cuts will be larger than tax increases, reaching €60 billion over five years.
Obviously we will have to modernize France’s administration to achieve this, looking to other countries for best practices.
But the challenge for the coming five years will be to adapt and upgrade our institutions without undermining the quality of public services, which is part and parcel of French competitiveness.
Finally, we have committed ourselves to measures aimed at addressing France’s weakened competitiveness, via a “National Pact for Growth, Competitiveness, and Employment,” which includes a €20 billion cut in labor costs for employers, to be phased in over three years.
A new corporate-tax credit will cut payroll taxes by 6% for all wages below 2.5 times the minimum wage – a step that will benefit more than 80% of all salaried workers.
And, because expectations for France’s competitiveness agenda are high, we will ensure swift implementation of the National Pact so that it can start producing results as soon as 2013.
We have designed the corporate-tax credit to maximize its positive impact on the economy: labor costs will fall immediately without depressing aggregate demand in 2013, because the spending cuts (€10 billion) and household tax increases that will fund the credit will begin only in 2014.
The Pact also improves the business environment and creates mechanisms, such as the extension of a research tax rebate, designed to boost innovation.
Last but not least, we have launched a major labor-market reform that will establish our own version of northern Europe’s “flexicurity” model.
Firms need more flexibility to adjust their payrolls in adverse economic conditions; and workers need more security, provided by better training and active labor-market policies.
We are committed to reforming the French economy.
But we are committed to doing so while remaining true to our political convictions, and without jeopardizing what makes France both strong and special: a highly redistributive social model.
Europe is and will be part of the solution, if we can agree that more solidarity is the next step in our shared journey.
Europe needs more solidarity not only to overcome the crisis and complete the eurozone integration process, but also to bridge the widening divide between Europe and its peoples.
I look forward to 2013 as a year of progress on our national and European agendas alike.
The Accidental Empire
NEW YORK – It is now clear that the main cause of the euro crisis is the member states’ surrender of their right to print money to the European Central Bank.
They did not understand just what that surrender entailed – and neither did the European authorities.
When the euro was introduced, regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital, and the ECB discounted all eurozone government bonds on equal terms.
Commercial banks found it advantageous to accumulate weaker countries’ bonds to earn a few extra basis points, which caused interest rates to converge across the eurozone.
Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive.
Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive.
Then came the crash of 2008.
Governments had to bail out their banks.
Some of them found themselves in the position of a developing country that had become heavily indebted in a currency that it did not control.
Reflecting the divergence in economic performance, Europe became divided into creditor and debtor countries.
When financial markets discovered that supposedly riskless government bonds might be forced into default, they raised risk premiums dramatically.
This rendered potentially insolvent commercial banks, whose balance sheets were loaded with such bonds, giving rise to Europe’s twin sovereign-debt and banking crisis.
The eurozone is now replicating how the global financial system dealt with such crises in 1982 and again in 1997.
In both cases, the international authorities inflicted hardship on the periphery in order to protect the center; now Germany is unknowingly playing the same role.
The details differ, but the idea is the same: creditors are shifting the entire burden of adjustment onto debtors, while the “center” avoids its own responsibility for the imbalances.
Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed.
Yet, in the euro crisis, the center’s responsibility is even greater than it was in 1982 or 1997: it designed a flawed currency system and failed to correct the defects.
In the 1980’s, Latin America suffered a lost decade; a similar fate now awaits Europe.
At the onset of the crisis, a breakup of the euro was inconceivable: the assets and liabilities denominated in a common currency were so intermingled that a breakup would have led to an uncontrollable meltdown.
But, as the crisis has progressed, the financial system has become increasingly reordered along national lines.
This trend has gathered momentum in recent months.
The ECB’s long-term refinancing operation enabled Spanish and Italian banks to buy their own countries’ bonds and earn a large spread.
Simultaneously, banks gave preference to shedding assets outside their national borders, and risk managers try to match assets and liabilities at home, rather than within the eurozone as a whole.
If this continued for a few years, a euro breakup would become possible without a meltdown, but it would leave the creditor countries with large claims against debtor countries, which would be difficult to collect.
In addition to intergovernmental transfers and guarantees, the Bundesbank’s claims against peripheral countries’ central banks within the Target2 clearing system totaled €644 billion ($804 billion) on April 30, and the amount is growing exponentially, owing to capital flight.
So the crisis keeps growing.
Tensions in financial markets have hit new highs.
Most telling is that Britain, which retained control of its currency, enjoys the lowest yields in its history, while the risk premium on Spanish bonds is at a new high.
The real economy of the eurozone is declining, while Germany is booming.
This means that the divergence is widening.
The political and social dynamics are also working toward disintegration.
Public opinion, as expressed in recent election results, is increasingly opposed to austerity, and this trend is likely to continue until the policy is reversed.
Something has to give.
In my judgment, the authorities have a three-month window during which they could still correct their mistakes and reverse current trends.
That would require some extraordinary policy measures to return conditions closer to normal, and they must conform to existing treaties, which could then be revised in a calmer atmosphere to prevent recurrence of imbalances.
It is difficult, but not impossible, to identify some extraordinary measures that would meet these tough requirements.
They would have to tackle the banking and the sovereign-debt problems simultaneously, without neglecting to reduce divergences in competitiveness.
The eurozone needs a banking union: a European deposit-insurance scheme in order to stem capital flight, a European source for financing bank recapitalization, and eurozone-wide supervision and regulation.
The heavily indebted countries need relief on their financing costs. There are various ways to provide it, but they all require Germany’s active support.
That is where the blockage is.
German authorities are working feverishly to come up with a set of proposals in time for the European Union summit at the end of June, but all signs suggest that they will offer only the minimum on which the various parties can agree – implying, once again, only temporary relief.
But we are at an inflection point.
The Greek crisis is liable to come to a climax in the fall, even if the election produces a government that is willing to abide by Greece’s current agreement with its creditors.
By that time, the German economy will also be weakening, so that Chancellor Angela Merkel will find it even more difficult than today to persuade the German public to accept additional European responsibilities.
Barring an accident like the Lehman Brothers bankruptcy, Germany is likely to do enough to hold the euro together, but the EU will become something very different from the open society that once fired people’s imagination.
The division between debtor and creditor countries will become permanent, with Germany dominating and the periphery becoming a depressed hinterland.
This will inevitably arouse suspicion about Germany’s role in Europe – but any comparison with Germany's past is quite inappropriate.
The current situation is due not to a deliberate plan, but to the lack of one.
It is a tragedy of policy errors.
Germany is a well-functioning democracy with an overwhelming majority for an open society.
When the German people become aware of the consequences –&nbsp;one hopes not too late – they will want to correct the defects in the euro's design.
It is clear what is needed: a European fiscal authority that is able and willing to reduce the debt burden of the periphery, as well as a banking union.
Debt relief could take various forms other than Eurobonds, and would be conditional on debtors abiding by the fiscal compact.
Withdrawing all or part of the relief in case of nonperformance would be a powerful protection against moral hazard.
It is up to Germany to live up to the leadership responsibilities thrust upon it by its own success.
The Achievement Myth
NEW YORK – In late September, the American press was filled with data on women’s happiness.
Marcus Buckingham, a business consultant, made the case that the data showed that women have become less happy over the past 40 years.
Blogs, newsmagazines, and daytime talk shows agonized over the notion that feminism – all that freedom, all those choices – was actually making women sadder.
In fact, the women had told the researchers whom Buckingham cited that they were ‘not satisfied’ with many areas of their lives.
If Western women have learned anything in the past 40 years, it is how to be unsatisfied with the status quo – an important insight for the rest of the world, as we seek to export Western-style feminism.
There is truth, for good and for ill, to the idea that Western-style “consciousness-raising” is also about teaching women how to be dissatisfied.
The contemporary Western women’s movement announced itself in 1963, with Betty Friedan’s The Feminine Mystique and that book’s permission to complain – to identify in many ways “the problem that has no name.”
Waves of discourse followed, helping Western women see what was “not enough” in many aspects of their lives, such as the low-paying jobs in which men took credit for their work – and pinched their bottoms.
The movement also raised the bar sexually: Shere Hite let women know in 1973 that if they could not reach orgasm through intercourse alone, they weren’t aberrant – they could ask for more and subtler sexual attention.
Do you want to run your own business?
Go, girl!
Do you dream of equal parenting, or of being a Supreme Court Justice?
Right on, sister!
In every area of their lives, those who articulated Western feminism invited women to demand more.
But the downside of this aspirational language and philosophy can be a perpetual, personal restlessness.
Many men and women in the rest of the world – especially in the developing world – observe this in us and are ambivalent about it.
Indeed, the definition of Western feminism as “always more” has led to a paradox.
Our girls and young women are unable to relax.
New data in the West reveal that we have not necessarily raised a generation of daughters who are exuding self-respect and self-esteem.
We are raising a generation of girls who are extremely hard on themselves – who set their own personal standards incredibly, even punishingly high – and who don’t give themselves a chance to rest and think, “that’s enough.”
What if we in the West, by letting feminism be defined as always doing more, doing it better, and outdoing others, have failed to give our daughters a definition of success that sometimes simply lets them be?
Unfortunately for us in the West, Second Wave feminism was articulated by ambitious, highly educated women who went to elite colleges and viewed professional accomplishment as the apex of overall accomplishment.
Not much space was given to other forms of achievement, such as caring for elderly parents, being a nurturing member of the community, or – how very un-Western! – attaining a certain inner wisdom, insight, or peace.
What if we have externalized the feminist ideal primarily as a set of accomplishments and rigors, rather than embracing it as an expansion of all kinds of freedom – which can also sometimes include freedom from eternal aspiration?
The redefinition of feminism as “always seeking more” fulfills the requirements of consumer capitalism and a post-industrial work ethic.
It is not necessarily a victory for women – or men – that, 40 years on, professional women are just as exhausted as professional men traditionally have been.
When children of working mothers were asked in one recent survey what they wanted to change in their life situation, they did not say that they wanted to spend more time with their mothers.
They said that they wished their mothers could be less exhausted and stressed.
My aunt Anasuya, who is one of my most important role models, delayed conventionally defined achievements in the professional world as she focused on raising a family.
Now, with her children grown, she has gone off to Tibet for months to realize her dream of becoming a practitioner of Tibetan medicine.
Feminism certainly opened the way for her to have a life of choices, and now to reach for this unusual goal.
But I don’t know that feminism made space explicitly to honor what I admire most about her: her open door.
She is continually taking in students who need a home, or refugee single mothers in economic need, or simply making one more place at the table for teenagers whose parents are struggling with issues of their own.
In terms of the way she amplifies the lives of others, hers is one of the most successful “careers” I know – and one pursued while exuding calm, serenity, and peace.
Should Western feminism deepen its definition of a successful woman’s life, so that more than credentials can demonstrate well-made choices?
I believe the time is right to do so.
As markets collapse, unemployment skyrockets, and the foundations of our institutions shift in seismic ways, this could be a moment of great opportunity for women and those for whom they care.
Perhaps seeing how futile it is to rest one’s sense of self on externalized, professionalized achievement is a wake-up call – and a first step to a deeper freedom, and an even deeper sense of feminine destiny.
The Afghan Endgame Mirage
STOCKHOLM – On a recent visit to Afghanistan and Pakistan, I could not fail to notice the increasingly frequent international calls for an “endgame” in Afghanistan.
But an endgame for that country is a dangerous illusion: the game will not end, and neither will history.
The only thing that could come to an end is the world’s attention and engagement in Afghanistan, which could well lead to catastrophic consequences.
Much international focus is now on the year 2014, the target date for completion of the gradual transfer of responsibility for security from international forces to the Afghan government.
This process is not without challenges, but there is no reason to believe that it could not be finalized more or less according to plan and the current timetable.
My belief is that there is another, far more critical challenge facing Afghanistan in 2014: the election of a new president.
In a system where so much power – open and hidden, constitutional and traditional – is centered around the president, the election could well turn into an all-out battle for the country’s future.
The presidential election of 2009 – in which Hamid Karzai gained a second term – was a highly contentious affair, and neither the Afghan political system nor the international community came through it with flying colors.
Together with the battle over the Taliban’s future role in the country, the struggle for power in 2014 could reanimate divisions that take the country back to the brink of a wider civil war, with the liberal technocrats of Kabul crushed between a resurgent Northern Alliance and a wider “Pashtun Pact.”
Such a scenario would, of course, spell disaster for Afghanistan.
But the implications would be far broader.
We must not ignore the grave dangers that it would pose for Pakistan, where a new round of jihadist rhetoric and mobilization could be fatal to hopes of building a stable and more secure country.
We should have learned the lesson of the 1980’s: ignorance is not bliss.
What, then, is the proper policy for the international community?
First, we must focus on what is most important – a transition to a post-Karzai system that is seen as reasonably legitimate by all parts of Afghanistan.
This is primarily a question of making the elections as free and as fair as possible, and here the United Nations’ role will be critical.
But it is also imperative to establish a wide national consensus on the rules of the game.
Karzai can leave no better legacy than an orderly transition, and has no interest in seeing all that he has achieved go up in flames.
Second, we must encourage a true regional dialogue that prevents Afghanistan from becoming a battleground for devastating proxy wars.
Here, the key will be to bridge the gulf between Pakistan’s government and the forces of northern Afghanistan.
Pakistan must do whatever is necessary to convince everyone that it will not play a hidden game with the Taliban – assuming, of course, that it has no such intention.
It is equally important that Pakistan and India engage in an open dialogue that can establish trust and transparency in their respective policies concerning Afghanistan.
Today, this dialogue hardly exists, and their mutual maneuvering, fueled by mistrust, could easily destabilize their weaker neighbor.
Finally, for reasons of history, geography, and culture, Iran’s role in Afghanistan cannot and should not be ignored.
There is no reason why the West’s strategic objectives concerning Afghanistan should change fundamentally in the coming years.
The key now is to get our priorities right.
Securing an orderly political transition and encouraging a deep and broad regional dialogue should now be at the top of the international agenda for Afghanistan.
Not only are these objectives important in themselves; they are also central in creating the right framework for a settlement between the various Afghan parties and the Taliban.
Some now argue that large-scale engagement in Afghanistan was a mistake.
But, in the mirror of history, we can see that the greater mistake has been to abandon the country altogether.
Afghanistan connects Central and South Asia, and a breakdown of order there would pose grave risks in both directions.
Moreover, the world – not just the West, but Russia and China as well – would risk global proliferation of drugs, weapons, and terror.
The task now is not to seek an illusory endgame.
The book is not finished; we are merely entering a new chapter.
What we must do now is create the framework for a more stable Afghanistan, and for sustained international engagement in a region that is crucial for global stability.
The Age of Authoritarian Democracy
MOSCOW – The world is currently being shaken by tectonic changes almost too numerous to count: the ongoing economic crisis is accelerating the degradation of international governance and supranational institutions, and both are occurring alongside a massive shift of economic and political power to Asia.
Less than a quarter-century after Francis Fukuyama declared “the end of history,” we seem to have arrived at the dawn of a new age of social and geopolitical upheaval.
Dramatically, the Arab world has been swept by a revolutionary spring, though one that is rapidly becoming a chilly winter.
Indeed, for the most part, the new regimes are combining the old authoritarianism with Islamism, resulting in further social stagnation, resentment, and instability.
Even more remarkable, however, are the social (and antisocial) grassroots demonstrations that are mushrooming in affluent Western societies.
These protests have two major causes.
First, social inequality has grown unabated in the West over the last quarter-century, owing in part to the disappearance of the Soviet Union and, with it, the threat of expansionist communism.
The specter of revolution had forced Western elites to use the power of the state to redistribute wealth and nurture the growth of loyal middle classes.
But, when communism collapsed in its Eurasian heartland, the West’s rich, believing that they had nothing more to fear, pressed to roll back the welfare state, causing inequality to rise rapidly.
This was tolerable as long as the overall pie was expanding, but the global financial crisis in 2008 ended that.
Second, over the past 15 years, hundreds of millions of jobs shifted to Asia, which offered inexpensive and often highly skilled labor.
The West, euphoric from its victory over communism and its seemingly unstoppable economic growth, failed to implement necessary structural reforms (Germany and Sweden were rare exceptions).
Instead, Western prosperity relied increasingly on debt.
But the economic crisis has made it impossible to maintain a good life on borrowed money.
Americans and Europeans are beginning to understand that neither they, nor their children, can assume that they will become wealthier over time.
Governments now face the difficult task of implementing reforms that will hit the majority of voters hardest.
In the meantime, the minority that has benefited financially over the past two decades is unlikely to give up its advantages without a fight.
All of this cannot fail but to weaken Western democracy’s allure in countries like Russia, where, unlike in the West or to a large extent the Arab world, those who are organizing the massive demonstrations against the government belong to the economic elite.
Theirs is a movement of political reform – demanding more freedom and government accountability – not of social protest, at least not yet.
A few years ago, it was fashionable to worry about the challenge that authoritarian-style capitalism (for example, in China, Singapore, Malaysia, or Russia) presented to Western democratic capitalism.
Today, the problem is not only economic.
Western capitalism’s model of a society based on near-universal affluence and liberal democracy looks increasingly ineffective compared to the competition.
Authoritarian countries’ middle classes may push their leaders toward greater democracy, as in Russia, but Western democracies will also likely become more authoritarian.
Indeed, measured against today’s standards, Charles de Gaulle, Winston Churchill, and Dwight Eisenhower were comparatively authoritarian leaders.
The West will have to re-adopt such an approach, or risk losing out globally as its ultra-right and ultra-left political forces consolidate their positions and its middle classes begin to dissolve.
We must find ways to prevent the political polarization that gave rise to totalitarian systems – communist and fascist – in the twentieth century.
Fortunately, this is possible.
Communism and fascism were born and took root in societies demoralized by war, which is why all steps should be taken now to prevent the outbreak of war.
This is becoming particularly relevant today, as the smell of war hangs over Iran.
Israel, which is facing a surge of hostile sentiment among its neighbors in the wake of their “democratic” upheavals, is not the only interested party.
Many people in the advanced countries, and even some in Russia, look increasingly supportive of a war with Iran, despite – or perhaps owing to – the need to address the ongoing global economic crisis and failure of international governance.
At the same time, huge opportunities beckon in times of far-reaching change.
Billions of people in Asia have extricated themselves from poverty.
New markets and spheres for applying one’s intellect, education, and talents are appearing constantly.
The world’s power centers are beginning to counterbalance each other, undermining hegemonic ambitions and heralding a creative instability based on genuine multipolarity, with people gaining greater freedom to define their fate in the global arena.
Paradoxically, today’s global changes and challenges offer the potential for both peaceful coexistence and violent conflict.
Whether fortunately or not, it is up to us – alone – to determine which future it will be.
The Age of the Judge
Alexander Hamilton, the renowned author of many of the Federalist Papers that set out the rationale for adopting the US Constitution, had no doubt about the relative weight of the three great powers of state.
In Federalist No. 78, he wrote that the executive commands ``the power of the sword,'' thus the instrument of legitimate violence.
The legislature commands the ``power of the purse'' and so makes all the rules.
But the judiciary ``has no influence over either the sword or the purse,'' it has ``neither Force nor Will, but merely judgement,'' making it ``beyond comparison the weakest of the three departments in power.''
Hamilton went on to make the case for the independence of judges in order to strengthen their position, and this case remains unassailable.
Beyond that, however, the observer of contemporary politics will hardly recognize the picture drawn by America's great constitutional theorist.
For the American President, the appointment of Supreme Court justices is of major importance because the Court has the power to determine the course of affairs in important respects, as in matters of racial equality.
In Germany, many controversial political issues are taken to the Constitutional Court by minorities defeated in parliament.
In Italy and also in Spain, judges (in both cases, investigating judges) seem to influence political debate more than the interplay of government and opposition.
Even in Britain, where the sovereignty of parliament was until recently sacrosanct, and the separation of powers underdeveloped, a Supreme Court will now be created to scrutinize political decisions on the basis of the European Convention of Human Rights.
How did it come about that the third power is by no means ``the weakest'' nowadays?
Is this right?
In technical terms, one reason for the change is probably the complexity of overregulated modern societies.
Judges are experts in complexity which cannot be said of parliamentarians nor even of the executive.
Beyond that, however, the power of the judiciary stems precisely from the assumption of independence which Hamilton regarded as crucial for their position.
There is a strong and perhaps growing desire to find ``independent'' views amidst today's always strongly partisan--and often overly polemical--political controversies.
Ordinary people vaguely associate independence with truth, and partisanship with lies or at least with untrustworthiness.
Thus, little protest is heard if a judge is asked to conduct an independent inquiry even into such matters as the motives for the Iraq war.
In democracies, courts are heard, and obeyed, even if their judgements affect the original parliamentary power of the purse, as in recent German cases concerning the pension entitlements of particular groups.
Politicians clearly do not like this shift in power toward the judiciary.
If they are personally affected, like Italian Prime Minister Silvio Berlusconi, they do not actually attack the power of the judiciary, but question judges' independence.
Undeniably, the independence of judges today requires more than lifetime tenure and reasonable emoluments (which were Hamilton's concerns).
In modern societies, influences on apparently independent people are numerous and hard to control.
But the debate about possibly biased Italian or Spanish or Belgian judges in highly sensitive cases detracts from the deeper question of whether the increase in the powers of the judiciary may not have gone too far.
Is there a case for a pendulum swing back to the more political powers, notably the legislature?
I believe that such a swing is necessary.
Politics is by its nature about conflicts, which are sensibly regulated by the rules of democratic constitutions.
Politics is also about trial and error.
Political decisions can--or at any rate, should--never claim to represent the truth.
They are intrinsically time-bound attempts to come to terms with issues, and they should be allowed to run their course if they are based on deliberations by elected majorities of representatives.
It could even be argued that the ``juridification'' of the political process itself has gone too far.
Parliamentary committees advised by legal experts try too hard to get things right forever and forget their original intentions in the process.
So there is a case for going back to political basics.
This is relevant for the current debate about reforms in many democratic countries.
It could be argued that the greater the power of the judiciary is in a country, the slower the pace of reform becomes.
Such slowness is ultimately self-defeating, because it leads into a cul-de-sac from which only dramatic steps provide an escape.
More confident politics and less reliance on Hamilton's third power would add to the flexibility of a society.
It may even serve to strengthen trust in the true independence of judges, who are badly needed as an instance of last resort, when the rights of individuals is at risk--and hence the very rule of law itself.
The Agony and Ecstasy of Synthetic Drugs
NEW YORK – The world is speeding up.
Communications, travel, and productivity are increasing.
For some people, synthetic drugs have become a way to deal with today’s fast and competitive times.
Around the world, in order to enhance performance, people are popping pills and powder known as amphetamine-type stimulants (ATS).
From ravers in all-night discos to assembly-line workers or long-haul truckers, more than 30 million people use amphetamine, methamphetamine (meth), or ecstasy at least once a year – more than the combined number of those who take cocaine and heroin.
The global market for these stimulants is estimated at $65 billion.
Part of the attraction of these synthetic drugs is that they are readily available, affordable, and convenient to use (no need to shoot up, snort, or smoke).
Amphetamines speed up the way the body works: users experience increased confidence, sociability, and energy.
This buzz is considered harmless: “pills do not kill or spread HIV/AIDS,” it is said.
But what goes up must come down.
People who become dependent on “uppers” may suffer paranoia, kidney failure, and internal bleeding, and even serious mental health problems, brain damage, or heart attack.
Meth users often develop rotten teeth and horrible scabs caused by scratching themselves due to a sensation of insects crawling under their skin.
The message about the dangers of ATS seems to be getting through to young people in the developed world, thanks in part to graphic public awareness campaigns.
After substantial increases in the 1990’s – when meth was considered public enemy number one in the United States and Japan – the use of synthetic drugs has stabilized in North America, Europe, Australia, and New Zealand, albeit at high levels. In Australia, for example, 2.3% of the population use meth, and 3.5% use ecstasy at least once a year – one of the highest rates in the world.
Evidence suggests that the problem is shifting to new markets in East and Southeast Asia and the Near and Middle East.
Asia, with its huge population and increasing affluence, is driving demand.
In 2006, almost half of Asian countries reported an increase in meth use.
This year, more than half of China’s provinces had serious ATS-related problems.
The upsurge is not limited to Asia.
Something strange is going on in Saudi Arabia.
Last year, the Kingdom seized almost 14 tons of amphetamine, mostly in the form known as Captagon (probably manufactured in Southeast Europe). That’s one-quarter of all amphetamines seized in the world.
Seven years ago, Saudi Arabia accounted for only 1% of all such seizures.
In South Africa, the number of seized meth laboratories has consistently gone up for the past five years, while domestic consumption has increased.
Part of the shift may be due to changes in demand.
For societies in transition or going through rapid modernization, synthetic drugs seem to be a by-product of hyperactive growth.
The shift is also due to a strong supply push from increasingly aggressive criminal groups with tentacles around the world.
A decade ago, synthetic drugs were a do-it-yourself cottage industry.
The ingredients for meth, for example, are readily available, recipes are easy to obtain, and batches of the drug can be cooked up in a kitchen.
But in the past few years, the production of ATS has become a big global business.
Organized crime is taking over all aspects of this illicit trade, from smuggling precursor chemicals to manufacturing and trafficking the drugs.
With little initial investment, industrial-scale factories can make huge profits by manufacturing millions of tablets.
Increasingly sophisticated labs are being discovered in, for example, Indonesia and Malaysia.
In 2007 alone, 75 ATS laboratories were seized in China.
No doubt there are many other such labs in parts of the world where law enforcement is weak or corrupt, or local officials are complicit.
Myanmar is a notorious example.
Producers and suppliers adapt quickly to the latest trends, and cater to local markets.
When one lab is shut, another opens.
When one type of precursor chemical is unavailable, producers switch to an alternative.
North America still accounts for 84% of all reported ATS laboratories in the world, and Western Europe has traditionally been a production center for synthetic drugs (particularly in the Czech Republic and the Netherlands).
In the past few years, however, decreasing lab seizures in the US and the European Union have been offset by a rise in production in neighboring countries, like Canada and Mexico in North America, and Turkey in Southeast Europe.
Greater regional cooperation is needed to prevent such displacement.
Before it is too late, countries in the developing world need to get their heads out of the sand.
Many are in denial about the problem, and do not even report their situation to the United Nations.
The most vulnerable are ill-equipped to fight the pandemic through information gathering, regulatory frameworks, law enforcement, forensics, or health care.
In general, more information is needed on new types of synthetic drugs (like the hallucinogen ketamine), developments in production techniques, emerging trafficking routes, and new markets.
Stabilization of the problem in the developed world shows that containment is possible.
But unless more attention and resources are devoted to prevention, treatment, and law enforcement in youthful and increasingly affluent societies in the developing world, these countries may soon be facing a similar epidemic of drug abuse.
What America Wants in Egypt
PRINCETON – Both the Muslim Brotherhood and Egypt’s liberal opposition are roundly criticizing the United States.
That is hard on Ambassador Anne Patterson, Secretary of State John Kerry, and Deputy Secretary of State William Burns, who just visited Cairo.
But it is also evidence that the US is trying to pursue the right policy.
The US is doing its best to support not a particular party, but rather a conception of liberal democracy that entails free and fair elections and a mode of governance that respects and includes minority views and upholds individual rights.
To pursue this course, however, will require standing up to Israel and Saudi Arabia.
The young people who led Egypt’s revolution two and a half years ago have been suspicious of the US for the simple reason that it supported former President Hosni Mubarak’s regime for 30 years.
From the US perspective, President Barack Obama pivoted quickly from Mubarak to the people; but it did not look that way on Cairo’s streets.
When the Muslim Brotherhood’s Mohamed Morsi was elected President in 2012, many Egyptians assumed that America must have supported him, because they could not imagine that the US would accept a result that it did not want.
When Patterson tried to work with Morsi’s government in ways that allowed her to pursue US interests, including pushing for more inclusive and rights-respecting policies, the liberal opposition saw her as supporting the Muslim Brotherhood.
But when the US refused to call the Egyptian military’s removal of Morsi a coup (a designation that would have required it to cut off the $1.5 billion in aid provided annually to the Egyptian army), Muslim Brotherhood supporters concluded that America supported the army’s decision.
So what should the US and other governments that support liberal democracy do now?
The answer could affect Egypt’s political future and that of countries throughout the region.
As many commentators have pointed out, from the Islamists’ standpoint, Morsi’s removal looks remarkably like the Algerian military’s overthrow in 1992 (with US support) of an elected Islamist government; the Turkish military’s “soft coup” in 1997, when it forced an elected Islamist government out of power; and the US government’s reversal of its support for “Arab democracy” after Hamas won elections in Gaza in 2006.
If the choice for Islamists is still bullets or ballots, bullets may now look more promising.
More generally, military interference with civilian politics, for any reason, weakens the processes, institutions, and checks on state power that make liberal democracy work.
Yet an estimated 17 million Egyptians marched to protest Morsi’s government, the majority of them citizens who had been mobilized through a petition process to demand a government responsive to their needs.
Morsi and his Freedom and Justice Party (the Muslin Brotherhood’s political wing) gave no sign that they were prepared to accept real compromise, as opposed to tactical delays, in achieving their vision of an Islamic state.
In his final speech, Morsi rallied his troops for the barricades and bloodshed rather than for the compromise that would have kept him in office.
Genuine liberal democracy requires accepting that in a pluralist, divided country, it is possible to govern only through inclusion, not imposition.
Anything else suggests that political Islam is the Marxism of our time, preparing a long-term strategy ultimately aimed at replacing the system rather than reforming it.
The liberal-democratic alternative is to participate in the push and pull over the role of religion in public life within limits set by a super-majoritarian constitution, as more religiously oriented parties do in the US, Europe, and Israel.
Given these competing considerations, the US should start by calling the events that began on June 30 a coup, but not yet a military coup, on the grounds that a true military coup replaces the existing government with a military government.
That has not happened, and it may not happen if genuinely free and fair elections, with the participation of all parties, take place within six months.
The US should therefore declare that it will cut off its aid to Egypt’s military at a specified date unless elections take place.
But that decision involves US-Israeli relations as much as US-Egyptian relations, because US aid has been aimed at securing and preserving Egypt’s peace treaty with Israel.
In the last two weeks, Israel has increased cooperation with Egypt’s generals to pursue Islamist extremists in Sinai.
Equally important, the US and as many other countries as possible should make clear to Egypt’s military that the detention of Muslim Brotherhood leaders must stop unless the military tries them for publicly inciting violence.
While it is legitimate to demand that the Brotherhood become a regular legal organization, rather than a shadowy network fronted by the Freedom and Justice Party, criminalization of political activity has no place in a constitutional democracy.
It is the classic first step toward dictatorship, as is censorship of Muslim Brotherhood media.
Egyptian elections will not be free and fair if they follow a political purge, as in Iran or Russia.
But stopping the military’s campaign against Brotherhood leaders requires engaging Saudi Arabia and the United Arab Emirates.
These two countries authorized a combined $8 billion in aid to Egypt immediately after June 30, and they make no secret of their desire to eradicate the Brotherhood.
But political stability that is bought in this way cannot last for more than a few months.
Over the longer term, an elected government will have to bring enough parts of Egyptian society together to be able to make tough choices about dismantling the military’s corrupt state within a state, cutting subsidies, and rebuilding the economy’s foundations.
Pushing the Muslim Brotherhood back underground is a recipe for further instability.
Revolutions often seesaw between extremes before the forces strong enough to overthrow governments become strong enough and legitimate enough to govern.
All friends of the Egyptian people must support the principles and processes of liberal democracy, regardless of the politicians and parties that we offend.
The Alchemy of Violence
The Al Jazeera Revolution Turns Ten
When it first appeared, the new satellite channel broadcast from Qatar reflected its own name. Al Jazeera – Arabic for “the island” – represented a haven of professional, independent, current affairs programming in a sea of one-sided, government-controlled Arab media.
Until Al Jazeera’s mostly BBC-trained journalists arrived on the scene, the average Arab citizen’s news television diet was nothing more than protocol news, wire service video reflecting the latest in the Palestinian conflict, and dramatic photos of earthquakes or wild fires.
Al Jazeera not only provided live interviews and broadcasts from the field; it introduced live debate to the Arab world.
Its program Al Itijah al Mu’akess (“the opposite direction”) brought the sort of verbal jousts that most of the world takes for granted but Arabs had never seen televised.
The guests that Faisal Qassem brought to the Doha studios (or via satellite) included people from the same Arab country or region but representing completely opposing points of view.
While hard-hitting professional news and programs like Al Itijah al Mu’akess provided viewers with unique television, it took major world conflicts to bring Al Jazeera acclaim.
The Palestinian intifada, the terrorist attacks against New York and Washington in September 2001, and the invasion of Afghanistan and Iraq propelled Al Jazeera to global influence.
In its first years, Al Jazeera was simultaneously hailed as a pioneering media outlet for reform in the Arab world and as an instigator of internal conflict and strife.
Almost every Arab ruler at one time or another attempted to silence the station by closing its local bureau and pressing the Qatari rulers to muzzle its freewheeling journalists.
Neither worked.
In fact, the pressures only added to the station’s popularity among Arab viewers.
The United States initially seemed favorable to Al Jazeera.
The station’s encouragement of democratic reform and coverage of different points of view were compatible with the proclamations of US foreign policy.
But this changed dramatically after 9/11, when it became clear that Iraqi and Afghan civilian victims of US bombs (as well as prisoners of war) would receive more coverage than was being provided by the embedded western media machine (Al Jazeera’s one embedded journalist did not remain so very long).
When Al Jazeera reporters interviewed Osama bin Laden and the station broadcast his videos, America’s gloves came off.
Senior US officials publicly vilified the station.
But the more the US and authoritarian Arab regimes attacked the station, the more the station became a reflector of some of the radical Islamic trends.
In the Danish cartoon case and the recent controversy over the Pope’s statements, the station was clearly seen as making the news rather than just covering it.
Despite its popularity, however, Al Jazeera has not succeeded financially.
The enmity of the Saudis to the station and its Qatari owners resulted in boycotts.
Multi-national advertisers who covet the huge Saudi market were informed in no uncertain terms that they would lose hefty contracts if they advertised on Al Jazeera.
Nevertheless, the station, whose owners have deep pockets, expanded to add a direct satellite broadcast, a children’s station, two sports stations, and soon an international, English-language station.
Although no one has yet caught up to Al Jazeera’s news and current affairs popularity, the Saudi-owned Middle East Broadcasting Center has introduced a successful 24-hour station, Al Arrabiyeh, which is challenging Al Jazeera’s lead.
The Lebanese Broadcasting Corporation and Egypt’s Dream have also won large segments of the general Arab public with entertainment programs.
Al Jazeera has made Qatar famous and the Arab world better informed.
Despite its inadequacies and biases, Al Jazeera has changed the Arab world for the better.
While no state-run TV station had live current affairs programs ten years ago, now even stations from some of the most dictatorial regimes are forced to raise their level and allow live interviews.
As it celebrates its tenth anniversary, Al Jazeera is no longer new, but it remains a trendsetter.
It has broken new ground in politics and culture, but its impact on social and economic life has been minimal.
So, as Al Jazeera moves into media adolescence, it must begin to think about how it can become a social pioneer in the Arab and Islamic world.
God knows, change is still needed on that front.
The Allure of Asia
President Bush is in Asia to attend the Asian Pacific Economic Council in China, but he should pay attention to another Asian summit to which he was not invited.
In December, Malaysia will host an East Asian meeting that deliberately excludes the United States.
According to many close observers, America’s attractiveness is declining in the region where the allure, or “soft power,” of others has increased.
Asian countries have impressive potential resources for soft power.
The arts, fashion, and cuisine of Asia’s ancient cultures have had a strong impact on other parts of the world for centuries, but Asia went through a period of relative decline as it lagged behind the industrial revolution in the West, and this undermined its influence.
In the 1950’s, Asia conjured up images of poverty and starvation.
There was a brief political infatuation among some Westerners in the 1960’s with Nehru jackets and Maoist revolution, but it was brief.
As John Lennon sang in 1968, “if you go carrying pictures of Chairman Mao, you ain’t gonna make it with anyone anyhow.”
Asia’s resurgence began with Japan’s economic success.
By the end of the century, Japan’s remarkable performance not only made the Japanese wealthy, but also enhanced the country’s soft power.
As the first non-Western country that drew even with the West in modernity while showing that it is possible to maintain a unique culture, Japan has more potential soft-power resources than any other Asian country.
Today Japan ranks first in the world in the number of patents, third in expenditure on research and development as a share of GDP, second in book sales and music sales, and highest for life expectancy.
It is home to three of the top twenty-five multinational brand names (Toyota, Honda, and Sony).
The decade-long economic slowdown of the 1990’s tarnished Japan’s reputation, but it did not erase Japan’s soft-power resources.
Japan’s global cultural influence grew in areas ranging from fashion, food, and pop music to consumer electronics, architecture, and art.
Japanese manufacturers rule the roost in home video games.
Pokemon cartoons are broadcast in 65 countries, and Japanese animation is a huge hit with filmmakers and teenagers everywhere.
In short, Japan’s popular culture was still producing potential soft-power resources even after its economy slowed down.
Now, with signs of a reviving economy, Japan’s soft power may increase even more.
But there are limits.
Unlike Germany, which repudiated its past aggression and reconciled with its neighbors in the framework of the European Union, Japan has never come to terms with its record in the 1930’s and 1940’s.
The residual suspicion that lingers in countries like China and Korea sets limits on Japan’s appeal that are reinforced every time the Japanese prime minister visits the Yasukuni Shrine.
Japan also faces serious demographic challenges.
By mid-century, Japan’s population could shrink by 30% unless it attracts 17 million immigrants – a hard task in a country historically resistant to immigration.
Moreover, the Japanese language is not widely spoken, and Japan’s meager English-language skills make it difficult to attract international talent to its universities.
Japan’s culture remains inward-looking.
Looking ahead, China and India are the looming giants of Asia, with their huge populations and rapid economic growth rates.
Not only are their military, or “hard power,” resources growing; there are signs that their soft-power resources are increasing, too.
In 2000, Chinese novelist Gao Xingjian won China’s first Nobel prize for literature, followed a year later by the Indian diaspora writer V.S. Naipaul.
The Chinese film “Crouching Tiger, Hidden Dragon” became the highest grossing non-English film, and Indian movies like “Monsoon Wedding” were global box-office successes.
Indeed, “Bollywood” produces more movies every year than Hollywood.
The list goes on.
Yao Ming, the Chinese star of the National Basketball Association’s Houston Rockets, could become another Michael Jordan, and China is set to host the 2008 Summer Olympics.
Large expatriate communities in the US – 2.4 million Chinese and 1.7 million Indians – have increased interest in their home countries among other Americans.
Moreover, transnational connections in the information industry are close, as Western high-tech companies increasingly employ affiliates in Bangalore and Shanghai to provide real-time services.
But the real promise for China and India lies in the future.
A country’s soft power rests upon the attractiveness of its culture, the appeal of its domestic political and social values, and the style and substance of its foreign policies.
In recent years, both China and India have adopted foreign policies that have increased their attractiveness to others.
But neither country yet ranks high on the various indices of potential soft-power resources that are possessed by the US, Europe, and Japan.
While culture provides some soft power, domestic policies and values set limits, particularly in China, where the Communist Party fears allowing too much intellectual freedom and resists outside influences.
Both countries have a reputation for corruption in government.
India benefits from democratic politics, but suffers from overly bureaucratized government.
In foreign policy as well, both countries’ reputations are burdened with the problems of longstanding disputes over Taiwan and Kashmir.
Moreover, in the US, the attraction of an authoritarian China is limited by the concern that it could become a future threat.
The soft power of Asian countries, then, lags behind that of the US, Europe, and Japan, but it is likely to increase.
Indeed, if the US continues to pursue unattractive policies, it may find that its absence from the summit in Malaysia in December is a harbinger of things to come.
The American Anti-Intellectual Threat
NEW YORK – In recent years, the United States has been more a source of global instability than a source of global problem-solving.
Examples include the war in Iraq, launched by the US on false premises, obstructionism on efforts to curb climate change, meager development assistance, and the violation of international treaties such as the Geneva Conventions.
While many factors contributed to America’s destabilizing actions, a powerful one is anti-intellectualism, exemplified recently by Republican vice-presidential nominee Sarah Palin’s surging popularity.
By anti-intellectualism, I mean especially an aggressively anti-scientific perspective, backed by disdain for those who adhere to science and evidence.
The challenges faced by a major power like the US require rigorous analysis of information according to the best scientific principles.
Climate change, for example, poses dire threats to the planet that must be assessed according to prevailing scientific norms and the evolving capacity of climate science.
The Nobel Prize-winning global scientific process called the Inter-Governmental Panel on Climate Change (IPCC) has set the gold standard for scientific rigor in analyzing the threats of human-induced climate change.
We need scientifically literate politicians adept at evidence-based critical thinking to translate these findings and recommendations into policy and international agreements.
In the US, however, the attitudes of President Bush, leading Republicans, and now Sarah Palin, have been the opposite of scientific.
The White House did all it could for eight years to hide the overwhelming scientific consensus that humans are contributing to climate change.
It tried to prevent government scientists from speaking honestly to the public.
The Wall Street Journal has similarly peddled anti-science and pseudo-science to oppose policies to fight human-induced climate change.
These anti-scientific approaches affected not only climate policy, but also foreign policy.
The US went to war in Iraq on the basis of Bush’s gut instincts and religious convictions, not rigorous evidence.
Likewise, Palin has called the Iraq War “a task from God.”
These are not isolated albeit powerful individuals out of touch with reality.
They reflect the fact that a significant portion of American society, which currently votes mainly Republican, rejects or is simply unaware of basic scientific evidence regarding climate change, biological evolution, human health, and other fields.
These voters generally do not reject the benefits of technologies that result from modern science, but they do reject the evidence and advice of scientists regarding public policies.
Recent survey data by the Pew Foundation found that while 58% of Democrats believe that human beings are causing global warming, only 28% of Republicans do.
Similarly, a 2005 survey found that 59% of self-professed conservative Republicans rejected any theory of evolution, while 67% of liberal Democrats accepted some version of evolutionary theory.
To be sure, some of these deniers are simply scientifically ignorant, having been failed by the poor quality of science education in America.
But others are biblical fundamentalists, who reject modern science because they take the word of the Bible as literally true.
They reject geological evidence of climate change because they reject the science of geology itself.
The issue here is not religion versus science.
All of the great religions have traditions of fruitful interchange with – and, indeed, support for – scientific inquiry.
The Golden Age of Islam a millennium ago was also the age in which Islamic science led the world.
Pope John Paul II declared his support for the basic science of evolution, and Roman Catholic bishops are strongly in favor of limiting human-induced climate change, based on the scientific evidence.
Several leading scientists, including one of the world’s greatest biologists, E.O. Wilson, have reached out to religious communities to support the fight against human-induced climate change and the fight for biological conservation, and those religious communities have reached back in harmony with science.
The problem is an aggressive fundamentalism that denies modern science, and an aggressive anti-intellectualism that views experts and scientists as the enemy.
It is those views that could end up getting us all killed.
After all, that kind of extremism can even lead to war, based on perverted views that a particular war is God’s will rather than a failure of politics and cooperation.
In many statements, Palin seems intent on invoking God in her judgments about war, an ominous sign for the future if she is elected.
She would certainly stoke many enemies who will look to their own brands of fundamentalism to strike back at the US.
Extremists on both sides end up putting at risk the vast majority of humans who are neither extremists nor anti-science fundamentalists.
It is difficult to know for sure what is giving rise to fundamentalism in so many parts of the world.
What is happening in the US, for example, is not happening in Europe, but it is of course characteristic of some parts of the Middle East and Central Asia.
Fundamentalism seems to emerge in times of far-reaching change, when traditional social arrangements come under threat. The surge of modern American fundamentalism in politics dates to the civil rights era of the 1960’s, and at least partly reflects a backlash among whites against the growing political and economic strength of non-white and immigrant minority groups in US society.
Humanity’s only hope is that the vicious circle of extremism can be replaced by a shared global understanding of the massive challenges of climate change, food supplies, sustainable energy, water scarcity, and poverty.
Global scientific processes like the IPCC are critical, because they offer our best hope of forging a consensus based on the scientific evidence.
The US must return to the global consensus based on shared science rather than anti-intellectualism.
That is the urgent challenge at the heart of American society today.
The American Hangover
NEW YORK – As turmoil stalks America’s financial markets and protests fill its streets, Americans’ lifestyle choices are evolving in a telling way: once seen by the rest of the world as an exuberant teenager – the globe’s extrovert, exporter of rock ’n’ roll and flashy Hollywood movies – Americans are now becoming decidedly withdrawn, or at least inward-looking.
Trends in leisure activities reflect that change: frugality and making do are in; gaudy consumerism is out.
This change is due to the fragile economy, of course, but I believe that it is also psychological.
After two wars and a half-dozen undeclared conflicts in the past decade, America has entered a period of unprecedented cultural hibernation.
Gardening, scrapbooking, knitting, and cooking have all become newly, shabbily chic.&#160;In the urban neighborhoods to which the young and hip are moving, city garden plots and heirloom tomatoes grown in window boxes have replaced Lexuses and Priuses.
Other young hipsters have moved farther out into the country in search of an idyllic new narrative fantasy.
The young couple – he with a beard and she in a sundress and rubber boots – are homesteading in the Hudson River Valley with a flock of chickens, or in New Mexico in an ecofriendly straw-bale house.
They have replaced the young couple of five years ago – he with the hedge fund, she with interior decorators – in a McMansion in Westchester County.
The food sections of urban newspapers that, five years ago, would have covered the latest fusion cuisine, now run dreamy profiles of the guy with the Ivy League degree who has stepped off the grid, and done fine for himself by starting a line of homemade pickles.
Farmers’ markets, wood stoves, solar panels, and Agway farm-supply stores are the new focus of aspirational dreams for people who not long ago were high on boundless credit, consuming luxury brands scaled down for the middle class, and fantasizing about the kind of life on display in glossy magazines.
Even Hollywood story lines now echo this desire to escape to a “simpler life,” with its aversion to excessive wealth and indulgence.
In the soon-to-be-released “We Bought a Zoo,” a single father heals his family by moving to the country and homesteading with a menagerie of wild animals – shabby house and spectacular natural vistas guaranteeing a redemptive setting for domestic life.
Other films cast excess as nauseating.
The blockbuster “The Hangover Part II” depicts three young male friends engaged in a night of carousing in Thailand, in which they are free to satisfy every appetite – from transsexual sex workers to drugs and chaos of all kinds. At the end, however, the lead character indulges his longing for marriage, family, and the quiet life of a dentist.
In a parallel plot aimed at women, the movie “Bridesmaids” features a bride-to-be who is about to get “everything” – in the guise of a dull but extremely affluent groom – but flees the excess around her and escapes to her humble apartment.
After bank bailouts, Bernard Madoff-type financial scandals, and a housing bubble that left Americans high and dry, it is as if the collective unconscious is recasting life on yachts and perfectly manicured golf courses as distasteful, and thrifty, often rural simplicity as a virtuously cleansing relief.
Not surprisingly, the last time American culture had such a reversal of iconography was during the Great Depression, when films like “The Grapes of Wrath” cast down-to-earth simplicity – versus the corruption of wealthy elites – as a shining virtue.
(“Whenever there’s a cop beating up a guy, I’ll be there….wherever people are eatin’ the stuff they raise and livin’ in the houses they build, I’ll be there, too,” as Tom Joad said).
Ronald Reagan asserted in 1980 that it was “morning in America,” but in America now, it is the morning after.
This drive toward an off-the-grid, eat-what-you-raise, bike-there-on-your-own, solar-powered collective fantasy is inevitable: Americans were pumped full of hope that more consumption would make them happier, and instead were left with a pile of debt.
They were asked to admire the top of the income pyramid, only to find that they were looking at a pyramid scheme.
It is no wonder therefore, that a kind of survivalist chic has become the updated version of the radical, communal chic of the 1960’s.
Americans have lost their faith in those who, in the boom times, purred, “Trust us.”
The new American dream – a flock of chickens and a jar of pickles – represents the insight that the only people whom Americans can trust in a crisis are themselves.
The American Leader We Need
LONDON – Around the world, America’s presidential election campaign has attracted as much attention as domestic political controversies in each of our own countries.
The interest the world has taken in America’s vote is the best example of America’s soft power, and a lesson in democracy from the world’s only superpower.
If only we could all vote as well as watch and listen, because the outcome is vital for everyone around the world.
What does the world want – and, perhaps more importantly, what does it need – from a new American President?
Much as some may hate to admit it, anti-Americanism is a sentiment that has been fed and nurtured during the Bush years.
Yet the world still needs American leadership.
Yes, we are witnessing the emergence of China, Brazil, and India as important global economic players.
Yes, we have watched the humiliating fall of Wall Street’s masters of the universe.
Yes, American military prowess has drained away into what Winston Churchill called “the thankless deserts of Mesopotamia,” and its moral authority has been weakened by events in places from Guantánamo Bay to Abu Ghraib.
All that is true.
Yet the United States remains the world’s only superpower, the only nation that matters in every part of the globe, the only country capable of mobilizing international action to tackle global problems.
A new president’s first task will be to return America’s economic competitiveness and self-confidence.
It will not be easy to rein in over-spending and over-borrowing, to restore the real family values of saving, thrift, responsibility, and fair reward.
Achieving these goals is bound to involve a greater regard for social equality, after a period in which the very rich have been able to protect a “Roaring Twenties” lifestyle through cleverly exploiting the “culture wars” – i.e., the populist prejudices of their much poorer fellow citizens.
With America turning away from its global role of borrower of last resort, the rest of us will need to sharpen our competitive edge to sell in other markets.
What is imperative is that this should not be impeded by a return to protectionism.
A new American president would do well to remember the disastrous consequences of protectionism in the 1920’s and 1930’s.
President Herbert Hoover’s failures should be a sanguinary lesson.
We all look to the next US president to re-engage with the world community and international organizations, accepting that even a superpower should accept the rules that apply to others.
The United Nations is far from perfect.
It needs reform – as do the bodies that provide global economic governance.
That will take time.
But a necessary if not sufficient condition for change is America’s commitment to and leadership of the process. Forget the distraction of trying to create an alternative to the UN – the so-called “League of Democracies.”
It won’t work.
We want a new president who will aim to make a success of the Nuclear Non-Proliferation Treaty Renewal Conference in 2010 by scrapping more weapons, abandoning research into them, and challenging others to do the same.
That would be the best backdrop to establishing tougher surveillance and monitoring, beginning to engage with Iran, and searching for a way to involve India and Pakistan in a global nuclear agreement.
Ahead of that, a new president should unleash America’s creative potential in boosting energy efficiency and developing clean technologies. It would be a welcome surprise if a comprehensive follow-up to the Kyoto Treaty could be agreed next year.
But at least we should aim to agree on the process that will move world-wide discussions in the right direction and, as part of that, America should aim to engage Europe, China, and India, in particular, on technological developments like clean coal.
America’s relationship with China will be a key to prosperity and security in this new century.
I do not think that a struggle for hegemony is inevitable, or that it would be desirable.
The US should focus more attention on China, without ever pretending that China’s record on human rights can be swept under the carpet.
China cannot sustain its economic development without political changes and environmental improvements.
In the Middle East, Israeli Prime Minister Ehud Olmert offered wise advice to the next US president upon his retirement.
Israel and Palestine have become, he said, the hopeless and bloody prism through which American diplomacy often seems to see the world.
It has long since been time to move on, making a sustained drive for the sort of settlement that was almost achieved in the Clinton years.
There is s paradox in all this.
The world has for years called for a multilateral approach from Washington.
When we get one, will the rest of us – Europe, for example – actually respond with sufficient commitment and drive?
It would at least be a welcome challenge to be required to put our efforts where our mouths have been.
The American Mirror
What will the next year bring for the world economy?
What will happen to production in the developing world, and in the rich industrial core?
Indeed, do we even still dare to maintain that distinction anymore?
After all, most rich countries have entered a post-industrial age, while developing countries now have—or soon will—as great a share of their population working in “industry” as the world’s rich nations.
In the United States, the fears of nine months ago that America’s economy might succumb to deflation have been dispelled.
What remains is a sense of tremendous opportunity wasted.
Ever since George W. Bush took office, America’s annual real GDP growth has averaged 2.3%—a pace that would have been acclaimed as normal and satisfactory when George W. Bush’s father or Ronald Reagan was president, but that after the Clinton boom now seems tawdry and sluggish.
Indeed, it is clear that the American economy could have grown much faster than it has.
The US Bureau of Labor Statistics reports a drop in the employment/population ratio from 64.4% in 2000 to 62.3% today, together with a decline in non-farm payroll employment in this period from 131.8 million to 130.2 million.
Underlying the business cycle, the rapid progress of the information-technology revolution is pushing American productivity growth ahead as fast as—or faster than—ever.
Had the Federal Reserve been more aggressive in pushing interest rates down, or had Bush and Congress passed tax cuts aimed at boosting short-term demand and employment, the US economy would have grown at a pace not seen in a generation and a half.
Will America’s economy grasp its opportunity to grow rapidly over the next year?
Probably.
Unless stagnant employment causes a sudden cutback in household consumption, tax rebates and low interest rates should push the US economy ahead at a 4% growth rate over the next year.
This may or may not be enough to produce lots of payroll jobs and significantly cut the unemployment rate, but it will be enough growth for the US to continue to be the fastest growing component of the world economy’s post-industrial core.
But the post-industrial core’s economy as a whole will continue to be like an airplane with only one working engine. Real GDP growth in Japan and western Europe is unlikely to reach even half the pace seen in the US.
However, the absence of rapid growth in western Europe and Japan is not a great handicap for developing countries, because Europe and Japan were never all that open to imports from developing countries to begin with.
Solid demand growth in the US will provide increased demand for developing-country exports—albeit not at the prices that prevailed when the dollar was stronger.
More importantly, the developing world has little to fear from sudden panic on Wall Street.
American domestic interest rates are so low and the fear of a large further decline in the dollar so great that it is nearly impossible to envision a sudden withdrawal of capital from developing countries to the post-industrial core.
So 2004 is unlikely to see a repeat of the capital flight that hit Mexico in 1995 or East Asia in 1997-98.
If hysteria hits world capital markets, the excitement is much more likely to come in the form of capital flight from the US.
More important than short-run cycles, however, are long-run trends.
Annual Labor productivity growth in the US has acclerated steadily in the past 30 years, from 1.2% in the period from the mid-1970’s to the mid-1990’s, to 2.3% in the late 1990’s, and to 4.2% since 2000.
How much of the second jump in productivity growth will be sustained is uncertain, but it is safe to bet that some of it will.
The more intriguing question is this: when will the rapid IT-driven productivity growth seen in the US spread to the rest of the rich countries?
We do not know, but we do know that it will.
Similarly, we do not know when world trade in information services like form processing, accounting, and customer service will truly boom as a result of the Internet and the fiber-optic cable. But we do know that, like the late 19th-century boom in trade in staple goods fueled by the iron-hulled ocean-going steamship and the submarine telegraph, it will.
The lesson is that governments, firms, investors, workers, and parents worldwide should begin betting on the long-run trends that have become visible over the past decade.
Such bets probably won’t pay off in the next year, or two, or three. But they surely will start to pay off in the next ten.
Karl Marx was not wholly wrong when he wrote that the most industrialized countries are mirrors in which the rest of the world can see its own future.
The mirror that is the US shows that the returns from taking advantage of the economic changes made possible by the IT revolution are very high.
The hard question for other countries is how to do this.
The American Recovery
NEWPORT BEACH – The United States has gone through an arduous period of intervention and rehabilitation since the global financial crisis in 2008 sent it to the economic equivalent of the emergency room.
It moved from the intensive-care unit to the recovery room and, just recently, was discharged from the hospital.
The question now is whether the US economy is ready not just to walk, but also to run and sprint.
The answer will powerfully influence global economic prospects.
It is easy to forget how critical things were back in the fourth quarter of 2008 and the first quarter of 2009.
Having suffered what economists call a “sudden stop,” many parts of the US economy were imploding or had ceased to function – to extend the medical metaphor, even the most vital organs were threatened.
Economic activity collapsed and unemployment surged.
Credit stopped flowing.
Banks were on the verge of bankruptcy and nationalization.
International trade was disrupted.
Income and wealth inequalities worsened.
And a general sense of fear and uncertainty inhibited the few healthy parts of the economy from engaging in meaningful hiring, investment, and expansion.
Parlous conditions required dramatic measures.
And that is what the economy got in the form of unprecedented fiscal stimulus and unthinkable policy activism on the part of the US Federal Reserve.
As they intervened, American policymakers consulted closely with their counterparts around the world, urging them to take supportive steps.
And they did, culminating in one of the most successful periods of global policy coordination in history, involving both advanced and emerging economies.
For many, the global economic summit held in London in April 2009 marks the point when the US economy turned the corner.
The change was so notable that many policymakers fell into the trap of projecting a quick rebound, especially given America’s prior history of economic dynamism and resilience, only to be humbled by what has proven to be a protracted and complex process of recovery.
Even today, that process highlights the scale and scope of the economy’s structural weaknesses.
Having reduced the risk of a relapse into recession, the US economy is able now to move on its own power, though gingerly.
The horrific collapse in the labor market has given way to consistent monthly employment gains, albeit less than what is needed for a full recovery.
Manufacturing activity has picked up, helped by a surge in exports.
The housing sector seems to be finding a tentative bottom (though housing finance remains incoherent).
Consumers have better access to credit.
And, sensing all of this, companies are beginning to deploy the massive precautionary cash balances that they have accumulated.
With the US still by far the largest economy in the world and the anchor of the international monetary system, its well-being has huge implications everywhere.
So, not surprisingly, the US recovery has helped to set a calming and constructive tone – and at a critical juncture, given that Europe is still struggling with a debt crisis on the eurozone periphery, and emerging economies are going through a cyclical slowdown.
Politics is also in play, and in a manner that significantly influences who will lead the world’s superpower after this November’s presidential and congressional elections.
The economic improvements already have helped President Barack Obama’s re-election prospects, as has the continuing drama of a drawn-out, divisive, and expensive Republican primary.
The problem is that the sense of relief now can – and probably will – be taken too far.
Indeed, today’s good news should not obscure some consequential structural limitations that will require prolonged therapy and caution.
After all, the US economy has yet to regain its full strength, is too structurally impaired to sustain any rapid forward movement, and has not yet started to overcome the many distortive side effects of the extreme medicine that it received.
Locking in recovery implies a multi-year program of serious and coordinated reforms that fundamentally improve the way the country educates and trains its citizens, invests in infrastructure and finances other productive outlays and housing, competes in the global economy, and formulates and adheres to a rational budgetary process.
Such a program will also require a recovering America to navigate several key challenges in the next few months.
For starters, the economy is not yet in a position to handle the 4-5%-of-GDP “fiscal cliff” that is approaching as all of the hard political decisions that were postponed come into view at the end of this year.
The prospect of a disorderly fiscal contraction needs to give way to a more rationally designed approach that avoids undermining the fragile recovery.
To accomplish that, the political class must avoid the bickering that almost sent America back into recession in 2011, and that raised major questions about the quality of the country’s economic governance.
Oil prices are not helping.
Having already surged on account of Iran-related geopolitical concerns, they are altering American consumers’ behavior, weakening their confidence, aggravating the country’s payments imbalances, and further reducing policymakers’ flexibility.
And then there is Europe, which is yet to overcome decisively its debt and growth problems.
Like other countries, the US must continue to strengthen internal firewalls to limit its vulnerability to what is still a complex crisis across the Atlantic.
America’s full recovery is not yet guaranteed.
A mix of steadfastness, caution, and good luck is needed for that to happen.
And when it does, the country will be in a better position to repay its massive hospital bill.
The American World Turned Upside Down
PARIS – From Washington, the enthusiasm of the French for intervention in Libya is seen with a mixture of relief and puzzlement.
The Americans do not want the job and are happy that someone else does.
Indeed, President Nicolas Sarkozy’s willingness to intervene (alongside British Prime Minister David Cameron) helped close a dangerous gap between the world of “values,” which would call for direct American intervention against Muammar el-Qaddafi, and the world of “interest,” which impelled President Barack Obama to restraint.
America’s strategy seems to be to squeeze Qaddafi’s regime out of power through a combination of financial, economic, and even “psychological” pressure aimed at isolating the Colonel from his sources of support within his own inner circle.
That is a wise approach, one that may ultimately work.
But it will likely take a lot of time to produce results.
While Americans are relieved by France’s display of determination, they cannot refrain from expressing a sense of bemusement: Do the French really know what they are up against?
What has happened to them?
We know what war means, but they seem to have forgotten!
Indeed, France and the United States seem to have switched roles from just a few years ago.
Listening to Obama’s reflexive and distant speeches on Libya, one can nearly hear French Foreign Minister Dominique de Villepin’s flamboyant intervention at the United Nations on the eve of the invasion of Iraq in 2003.
And, though the circumstances and the “legal” environment are very different – there is a UN resolution for the Libya intervention, and a vague declaration of support by the Arab League – Sarkozy’s stance reminds some of George W. Bush’s enthusiasm for war.
The British, too, seem to be regarding the French with some perplexity.
Even though they are fighting side-by-side in Libya, with their armies expressing a deep confidence in each other, there are distinct nuances in each country’s position on military intervention.
The view from London contains the same element of “distance” – if not slight apprehension – found in the view from Washington.
To explain this difference in perspective, perhaps one should venture further into the past than the Iraq War and consider the divergence that already existed traditionally between the United Kingdom’s pragmatic approach to its imperial role and the French Empire’s missionary zeal.
A duty to accumulate wealth catalyzed the former; a duty to civilize inspired the latter.
The spectacular inversion of the French and US roles on the issue of intervention has different causes.
Some are linked to the personalities of Obama and Sarkozy; others reflect the nature of their political imperatives.
Obama’s priority is not to be dragged into another conflict.
Afghanistan is already such a costly quagmire.
Sarkozy’s goal is to “exist” as much as possible on the global stage.
But, beyond personalities and political calculus, what we are witnessing is a fundamental shift in the international system.
It is a shift that raises a major question: if those who are willing to act prove incapable of doing so “successfully,” what happens to global stability unless those who are capable are also willing to step in?
At the crossroads of this question stands NATO, an organization perceived as American by Europeans and international (i.e., not American) by the average US citizen.
But if NATO is – for better or worse – in command on the ground in Libya, it is the UN that has given the necessary green light to French action there.
It is this specific “marriage of reason” between France and the UN that is essential to understanding the French position on Libya.
Indeed, the same relationship between France and the UN that led to the country’s resistance to intervention in Iraq in 2003 has now pushed France to intervene in Libya in 2011.
Yet it is dangerous to believe that the world has found in this new-model Coalition of the Willing the solution that it was seeking in today’s increasingly chaotic post-American order.
Neither France nor Britain – not to mention the European Union, which is more divided than ever when it comes to military interventions – can be seen as substitutes for the US.
Despite Sarkozy’s exceptional activism, they have neither the means nor, in reality, the will.
Confronted with the world’s increasing complexity and America’s decreasing appetite for international responsibilities, the need for adequate rules – and for a referee to enforce them – is greater than ever.
In the face of growing risks of global anarchy, the courageous but risky activism of France and Britain should not be seen as a substitute for an engaged US.
But does such an engaged America still exist?
The answer is probably no.
The America that Can Say No
NEW YORK –­ Early this month, Kyrgyzstan’s president Kurmanbek Bakiyev went cap in hand to Moscow to ask for financial aid.
To make his request more palatable, Bakiyev announced that he was demanding that the United States close its airbase in Kyrgyzstan, which resupplies NATO troops in neighboring Afghanistan.
Similarly, late last year, Iceland’s government asked Russia to help bail out its banking system, while Pakistani President Asif Ali Zardari visited China in hopes of securing an emergency infusion of cash.
Some observers cite these episodes as evidence of decline in America’s international clout.
But there’s a larger point: so far, except for relatively small sums offered to the Kyrgyz, Russia and China haven’t offered much help.
Amid much talk of a “post-American world,” many observers see a shift from a US-dominated international order toward a multipolar system, in which countries like China, Russia, and several others compete for global leadership on a range of common challenges and risks.
More than five years ago, China’s President Hu Jintao proclaimed that, “the trend toward a multipolar world is irreversible and dominant.” When Vladimir Putin complained during a conference in Munich last year that US unilateralism stoked conflict around the world, an offended Senator John McCain responded that confrontation was unnecessary in “today’s multipolar world.”
When Putin welcomed Venezuelan President Hugo Chávez to Russia last September, he observed that, “Latin America is becoming a noticeable link in the chain of the multipolar world that is forming.” Chávez agreed: “A multipolar world is becoming reality.”
All of them have it wrong.
US dominance is clearly on the wane, but a multipolar order implies that several emerging powers hold competing views about how the world should be run, and that they are prepared to act to advance their global agendas.
That is not the case.
Instead, we are witnessing the birth of a non-polar order, in which America’s chief competitors remain too busy with problems at home and in their immediate neighborhoods to shoulder the heaviest international burdens.
None of the emerging powers has even begun to use its growing political and economic clout to advance truly global ambitions – or to take on responsibilities that Washington can no longer afford.
Start with Russia.
Despite its growing ties with Venezuela and efforts to coordinate energy policy with natural gas-rich countries in North Africa, the Kremlin has no aspirations to rebuild Soviet-scale influence in Latin America, Africa, or Southeast Asia.
Nor does it have Soviet-style ideological appeal.
Instead, Russia’s leaders are busy protecting Russian markets, banks, and companies from the worst effects of the global financial crisis, consolidating state control over domestic economic sectors, and extending their foreign-policy leverage across former Soviet territory.
China’s need to satisfy its hunger for imported oil and other commodities has given it an international presence.
But its influence is more commercial than political. China’s leaders must devote their attention to a staggering array of pressing problems at home: averting an economic slowdown that could push millions out of work and into the streets, the fallout from rural land reform, and efforts to manage enormous environmental and public health problems.
India must hold its own in China’s lengthening shadow.
Facing elections next year, the ruling Congress Party is spending the government’s time and money on subsidies for consumers, wage hikes for state employees, and debt relief for farmers.
Brazil is similarly preoccupied, appearing to have no grander near-term aspirations than to promote stability in Latin America, manage the effects of the global financial crisis, and inspire others in the developing world.
In short, there is a vacuum of global leadership just at the moment when it is badly needed.
President Barack Obama’s attention is now concentrated on stimulating the anemic US economy, crafting tax cuts, reforming energy and health-care policies, and restoring confidence in US financial institutions.
The European Union continues its internal debate over how best to bail out its failing banks and industries, handle the fallout from EU and euro-zone expansion, and manage increasingly rocky relations with Russia.
Who, then, can take the lead on efforts to create a new global financial architecture that reflects the complexities of twenty-first-century commerce?
Who can drive consensus on a multilateral response to climate change?
Who will replace an obsolete nonproliferation regime, provide collective security in emerging international hotspots, and build momentum behind Middle East Peace talks?
The international summit meeting in Washington in November 2008 underlined the problem.
The world’s richest countries (the G7) turned to the emerging powers within the G20 to help coordinate a response to the global financial slowdown.
Difficult as it is for seven countries to agree on anything, imagine the challenge of building consensus among 20.
Consider the competing views within this group on democracy, transparency, the proper economic role of government, new rules of the road for financial markets and trade, and how best to ensure that the United Nations, International Monetary Fund, and the World Bank fairly reflect today’s global balance of power.
For the next several years, when those in crisis turn to the US for help, they are increasingly likely to hear the word no.
And it is not at all clear that anyone else is willing and able to say yes.
The Anatomy of Global Economic Uncertainty
NEWPORT BEACH – The sense of uncertainty prevailing in the West is palpable, and rightly so.
People are worried about their futures, with a record number now fearing that their children may end up worse off than them.
Unfortunately, things will become even more unsettling in the months ahead.
The United States is having difficulties returning its economy to the path of high growth and vigorous job creation.
Thousands of people have taken to the streets of US cities, and thousands of others in Europe, to demand a fairer system.
In the eurozone, financial crises have forced out two governments, replacing elected representative with appointed technocrats charged with restoring order.
Concern about the institutional integrity of the eurozone – key to the architecture of modern Europe – continues to mount.
This uncertainty extends beyond countries and regions.
Those looking around the next corner also worry about the stability of an international economic order in which the difficulties faced by the system’s Western core are gradually eroding global public goods.
It is no coincidence that all of this is happening simultaneously.
Each development, and certainly their occurrence in tandem, points to the historic paradigm changes shaping today’s global economy – and to the anxiety that comes with the loss of once-dependable anchors, be they economic and financial or social and political.
Restoring these anchors will take time.
There is no game plan as of now, and historic precedents are only partly illuminating.
Yet two things seem clear: different countries are opting, either by choice or necessity, for different outcomes; and the global system as a whole faces challenges in reconciling them.
Some changes will be evolutionary, taking many years to manifest themselves; others will be sudden and more disruptive.
Yet, as complex as all of this sounds – and, by definition, paradigm changes are complicated affairs that, fortunately, seldom occur – a simple analytical framework may help shed light on what to look for, what to expect and where, and how best to adapt.
The framework relies on an often-used analytical shortcut: identifying a limited set of explanatory variables in what statisticians call “a reduced-form equation.”
The objective is not to account for everything, but rather to pinpoint a small number of variables than can explain key factors, albeit neither perfectly nor fully.
Using this approach, it is possible to argue that the future of many Western economies, and that of the global economy, will be shaped by their ability to navigate four inter-related financial, economic, social, and political dynamics.
The first relates to balance sheets.
Many Western economies must deal with the nasty legacy of years of excessive borrowing and leveraging; those, like Germany, that do not have this problem are linked to neighbors that do.
Faced with this reality, different countries will opt for different de-leveraging options.
Indeed, differentiation is already evident.
Some, like Greece, face such a parlous situation that it is difficult to imagine any outcome other than a traumatic default and further economic turmoil; and Greece is unlikely to be the only Western economy forced to restructure its debt.
Others, like the United Kingdom, have moved quickly to take firmer control of their destiny, though their austerity drives will inevitably involve considerable sacrifices.
A third group, led by the US, has not yet made an explicit de-leveraging choice.
Having more time, they are using the less visible, and much more gradual, path of “financial repression,” under which interest rates are forced down so that creditors, including those on modest fixed incomes, subsidize debtors.
De-leveraging is closely linked to the second variable – namely, economic growth.
Simply put, the stronger a country’s ability to generate additional national income, the greater its ability to meet debt obligations while maintaining and enhancing citizens’ standards of living.
Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labor markets, pensions, housing, and economic governance.
Some, like the US, can combine structural reforms with short-term demand stimulus.
A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.
But growth, while necessary, is insufficient by itself, given today’s high unemployment and the extent to which income and wealth inequalities have increased.
Hence the third dynamic: the West is being challenged to deliver not just growth, but “inclusive growth,” which, most critically, involves greater “social justice.”
Indeed, there is a deep sense that capitalism in the West has become unfair.
Certain players, led by big banks, extracted huge profits during the boom, and avoided the deep losses that they deserved during the bust.
Citizens no longer accept the argument that this unfortunate outcome reflects the banks’ special economic role.
And why should they, given that record bailouts have not revived growth and employment?
Calls for a fairer system will not go away.
If anything, they will spread and grow louder.
The West has no choice but to strike a better balance – between capital and labor, between current and future generations, and between the financial sector and the real economy.
This leads to the final variable, the role of politicians and policymakers.
It has become fashionable in both America and Europe to point to a debilitating “lack of leadership,” which underscores the extent to which an inherently complex paradigm change is straining traditional mindsets, processes, and governance systems.
Unlike emerging economies, Western countries are not well equipped to deal with structural and secular changes – and understandably so.
After all, their histories – and certainly during what was mislabeled as the “Great Moderation” between 1980 and 2008– have been predominantly cyclical.
The longer they fail to adjust, the greater the risks.
Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety.
Instead, we can use this simple framework to monitor developments, learn from them, and adapt.
Yes, there will still be volatility, unusual strains, and historically odd outcomes.
But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.
North Korea’s Blackmail Missile
TOKYO – The Unha-3 rocket launched from Sohae in North Korea on the morning of December 12 passed through Japanese air space over the island of Okinawa 12 minutes later, and crashed into the Pacific Ocean roughly 300 kilometers east of the Philippines.
The launch could be considered a mild surprise, because South Korean intelligence sources had suggested that it had been canceled.
More surprising was the success of the launch, which makes North Korea the tenth member of the world’s “Space Club” (the ninth member was Iran, which successfully launched its Safir rocket in 2008).
The Unha-3, a three-stage rocket weighing 92 tons, follows the Unha-2, which failed spectacularly in 2009, so the evident progress that North Korea has made in its missile technology in such a short period has shocked governments around the world.
The United Nations Security Council responded by debating a resolution on strengthening sanctions against North Korea.
Only China – no surprise – opposed new sanctions, stressing that “actions that heighten tension on the Korean Peninsula should not be taken.”
China has agreed to Security Council resolutions against Iran on several occasions, but it has backed sanctions against North Korea on only two, both coming after the North conducted nuclear tests (in 2006 and 2009).
China’s leaders oppose stiffer sanctions against North Korea for a simple reason: they fear the frailty of Kim Jong-un’s regime more than they fear the international security consequences of the missile launch.
Above all, China wants to prevent the regime’s collapse, which it fears may result from stricter sanctions.
If the Kim regime timed the missile launch to have a direct impact on elections in nearby Japan and South Korea, it may have succeeded merely in boosting support for defense-oriented conservative parties.
Indeed, although it is difficult to say how large an impact the launch had on the result in Japan, the Liberal Democratic Party (of which I am a member, serving as Deputy Chair of the election campaign) won a landslide victory.
Although Park Geun-hye’s victory in South Korea, where she became the country’s first-ever female president, followed a campaign mainly focused on domestic economic issues, North Korea’s missile-guided brinkmanship probably shifted many undecided voters to the security-minded Park’s camp.
So, given the seemingly negative impact of the launch on neighboring South Korea and Japan, why didn’t the North hold its fire?
Some suggest that North Korean leaders were determined to stage the launch before the first anniversary of Kim Jong-un’s assumption of power on December 17.
Others suggest that the North Koreans prefer conservatives in power in Seoul and Tokyo, because a more robust vision of national defense in Japan and South Korea will antagonize China, which, isolated in East Asia, will then be more likely to maintain its support for the Kim regime.
After all, China’s small list of friends in Asia became even smaller in 2012, given Myanmar’s democratic transition.
So, in Kim’s perverse logic, a new push for UN sanctions, and new security-conscious governments in Japan and South Korea, will strengthen North Korea’s hold on Chinese foreign policy.
Thus, the missile launch can be viewed as an indication of how threatened the Kim dynasty feels: the regime appears to believe that it must blackmail its closest ally in order to maintain its support.
The primary cause of the regime’s fears is growing political uncertainty, which is the direct result of the failing health of Kim Kyong-hui, Kim Jong-un’s aunt and the power behind the throne.
Indeed, keen observers of North Korea suggest that Kim Jong-un ordered the missile launch as a way to strengthen his grip on power while he still has the experienced and ruthless Kim Kyong-hui’s backing.
Without it, the Kim dynasty’s hold on power would almost certainly weaken, given Kim Jong-un’s youth and inexperience, plunging the country into chaos.
One seemingly obscure political move last month – the appointment of Jang Sung-taek (Kim Kyong-hui’s husband) as the chairman of the State Physical Culture and Sports Guidance Commission – suggests that Kim Kyong-hui’s ill health is already having an impact on the regime.
Although no modern state would do so, the Sports Guidance Commission comprises the regime’s most powerful members.
Jang’s move to the post strongly suggests that the internal struggle for power is already heating up.
North Korea’s missile launch, coming amid the internal uncertainty arising from Kim Kyong-hui’s failing health, creates an extremely dangerous situation for the international community.
Only by strengthening UN sanctions to such an extent that North Korea is forced to abandon its missiles and nuclear weapons – and China to reconsider its knee-jerk support – can the regime be dissuaded from further, and more ominous, maneuvering.
But, given China’s continuing opposition to further sanctions, there is scant hope of this happening.
Until China puts its responsibilities as a modern global power ahead of its narrow national interests, the danger from North Korea will grow as the Kim regime becomes ever more unstable.
The Anatomy of Sarkozy
A majority of the French say that they want Finance Minister Nicholas Sarkozy to play an important role in shaping the country's future.
No Frenchman wants that more than the ambitious "Sarko" himself.
So Sarkozy will step down as finance minister next month to take the reigns of the ruling conservative party (UMP), washing his hands of Chirac's muddled government and hoping to use the party machine to bulldoze his way into the Elysée Palace in two years.
But is Sarkozy much different from Chirac?
Will he really try to end France's misguided belief in its own economic "exceptionalism?"
The challenge is massive: a 10% unemployment rate that has lasted for 20 years, with more than 20% of people under 25 unemployed, and five million people - nearly a quarter of the working population - employed by the state.
The salaries and pensions of these fonctionnaires represent about 40% of the national budget.
This "French exception" also includes vested interests like the railways and agriculture, sectors so powerful that any attempt at reform is immediately frozen by street demonstrations.
Indeed, instead of being turned off by such tactics, ordinary Frenchmen and women often turn violent activists like Jose Bové, who destroyed a McDonald's restaurant, into heroes.
Can "Supersarko" (the satirical Canard Enchaîné newspaper's nickname) tackle "la France des privileges?"
Possibly.
Sarkozy does not identify with the privileged elite.
Although born into comfort, he did not pass through the elite training grounds, the Grandes Écoles, but instead went to university like millions of other French.
He cultivates the image of a "regular guy" who doesn't read poetry or philosophy at breakfast.
Hence the sneering elite suspicion - evident, among other places, in the pages of Le Monde - that he is a mere populist.
But these are appearances.
What does Sarkozy's record as finance and economy minister say about his instincts?
As finance minister, Sarkozy presided over improving economic indicators that are due more to luck than skill.
For example, the French statistical agency now expects annual real GDP growth to accelerate to 2.5% this year, compared to the 1.7% on which the budget was based.
This recovery - almost entirely based on domestic demand - gave Sarkozy an extra five billion euros in tax revenues.
Without having to resort to big spending cuts, he could announce that France will reduce its budget deficit in 2005 from 3.6% to 2.9% - below the 3% ceiling for eurozone countries for the first time since 2001.
To keep consumer spending high, Sarkozy has moved forward with tax reform and reduction - including inheritance tax breaks encouraging the drawdown of savings, worker tax credits, and incentives to prevent outsourcing of jobs abroad.
Unsurprisingly, consumer spending rose by 6% year on year in the second quarter of this year, while the household savings rate is set to fall to 14% this year, from 17% in 2002.
Sarkozy is also planning to cut corporate taxation, which, at 35.4%, remains 20% higher than the European average.
At the same time, Sarkozy has shown some inclination towards structural reform.
He recently blamed France's budgetary problems on the country's 35-hour workweek.
Besides the adverse effect such tight restrictions have on companies' flexibility and effectiveness, these rules also cost 16 billion euros per year - more than is spent on higher education.
Sarkozy has also spoken of forcing France's eager healthcare consumers to pay a flat fee covering part of the costs of treatment.
But this economic modernizer has a populist side, leading the charge for standardized tax rates in the EU and "encouraging" retailers to cut the price of brand-name products like Coca Cola and Danone yogurt.
Moreover, Sarkozy displays plenty of the interventionist and nationalist instincts of the establishment that he appears to challenge, including the recent announcement of an "economic growth package" - code for demand-boosting public expenditure.
To be sure, Sarkozy seems free of the most powerful negative impulse of French nationalism, anti-Americanism.
He likes to point out that most French young people want to go to the US, and has even been nicknamed "Sarkozy the American."
But Sarkozy's bailout of Alstom - a company regarded as a "national champion" - had all the hallmarks of the old dirigisme , calling for the government to take a bigger stake while ruling out a strategic partnership with Germany's Siemens.
For good measure, Sarkozy said that France had become too exclusively friendly with Germany.
Corporatist France is hard to govern.
The trap for politicians like Sarkozy lies in adding new layers of state bureaucracy instead of trying to dismantle and deregulate.
On the one hand, the government heavily taxes enterprises, impeding job creation; on the other, France is to spend 12.8 billion euros on "social cohesion" to tackle unemployment, disaffection, and increasing religious extremism.
In other words, the state spends in order to clean up the mess it created.
Can Sarkozy break this vicious circle?
Can he reform a state that undermines output by taxing producers and encourages idleness by increasing unemployment benefits?
Mr Chirac's future is behind him, so he dreads Sarkozy.
The battle that will now take place between them seems certain to paralyze government and any hope of reform in the short run.
But Sarkozy has powerful friends in the press, as well as most of the battalions of the Gaullist UMP behind him.
He has many enemies, but also a reputation for prodigious energy and efficiency.
Sarkozy's maverick ways could save France.
But first he must overcome his own residual tendency to expect too much from an overburdened state.
The Anatomy of Slow Recovery
BERKELEY – Between 1950 and 1990 – the days of old-fashioned inflation-fighting downturns engineered by the United States Federal Reserve – America’s post-recession unemployment rate would fall on average 32.4% over the course of a year from its initial value toward its natural rate.
If the US unemployment rate had started to follow such a path after peaking in the second half of 2009, it would now stand at 8.3%, rather than 8.9%.
Unfortunately, none of the net reduction in the US unemployment rate over the past year came from increases in the employment-to-population ratio; all of it came from declining labor-force participation.
Unemployment has fallen from 10.1% over the course of the past 18 months, but the employment-to-population ratio has remained stuck at 58.4%.
Perhaps it would be better if unemployed people who could have jobs – and who at full employment would have them – were actively looking for work rather than out of the labor force completely.
If you take that view, between 1950 and 1990, the US employment-to-population ratio would rise an extra 0.227% annually on average for each year that the unemployment rate was above its natural rate.
If the US employment-to-population ratio had started to follow such a path after its 2009 peak, the current ratio would be 59.7%, rather than 58.4%.
(In that case, we would be experiencing “morning in America,” rather than the current state of economic malaise.)
This is, I think, the best metric to use to quantify the decidedly sub-par pace of today’s jobless recovery in the US.
It is not out of line with other American yardsticks: since the output trough, real GDP has grown at an average rate of 2.86%/year, barely above the rate of growth of the US economy’s productive potential.
And it is not out of line with the experience of other rich economies, whether Japan or in Europe.
Indeed, today’s US predicament contrasts sharply only with the current experiences of developing Asia.
There, real GDP growth and declining unemployment show a solid, well-entrenched, and rapid recovery – to the point that inflation will soon become a more significant macroeconomic problem than job creation.
The obvious hypothesis to explain why the current US recovery – like the previous two – has proceeded at a sub-par pace is that the speed of any recovery is linked to what caused the downturn.
A pre-1990 recession was triggered by a Fed decision to switch policy from business-as-usual to inflation-fighting.
The Fed would then cause a liquidity squeeze and so distort asset prices as to make much construction, sizable amounts of other investment, and some consumption goods unaffordable (and thus unprofitable to produce).
The resulting excess supply of goods, services, and labor would cause inflation to fall.
As soon as the Fed had achieved its inflation-fighting goal, however, it would end the liquidity squeeze.
Asset prices and incomes would return to normal.
And all the lines of business that had been profitable before the downturn would become profitable once again.
From an entrepreneurial standpoint, therefore, recovery was a straightforward matter: simply pick up where you left off and do what you used to do.
After the most recent US downturn, however (and to a lesser extent after its two predecessors), things have been different.
The downturn was not caused by a liquidity squeeze, so the Fed cannot wave its wand and return asset prices to their pre-recession configuration.
And that means that the entrepreneurial problems of are much more complex, for recovery is not a matter of reviving what used to be profitable to produce, but rather of figuring out what will be profitable to produce in the future.
As the economist Dan Kuehn likes to say, a recession is like somebody knocking your jigsaw puzzle, disturbing the pieces, and turning some of them over.
When the Fed ends a liquidity squeeze, it turns the pieces right side up.
So it is easy to reassemble the puzzle.
Now, however, there is no one to turn the pieces right side up, so things are much harder to correct.
Indeed, I believe that things are even worse: as long as aggregate demand remains low, we cannot even tell which pieces are right side up.
New investments, lines of business, and worker-firm matches that would be highly productive and profitable at normal levels of capacity utilization and unemployment are unprofitable now.
So, what America needs now is not just a recovery in demand, but also structural adjustment.
Unfortunately, the market cannot produce a demand recovery rapidly by itself.
And it cannot produce structural adjustment at all until a demand recovery is well under way.
The Anti-Drug God that Failed
Russians and Ukrainians are once again being made victims of a utopian dream.
Since the end of communism in 1991, these countries (and others) have experienced a dramatic increase in the use of illicit drugs.
They have responded with draconian policies that mirror the simplistic message of a drug-free society espoused by UN drug treaties and the institutions that seek to enforce them.
Today, these policies are contributing to an explosion of HIV infections in much of the developing world.
The UN treaties that guide global drug policy reflect none of the recent findings on drug use and addiction.
Indeed, most UN drug conventions were enacted long before the appearance of HIV/AIDS--a disease fuelled by injection drug use in the former Soviet Union and many parts of Asia.
Consider Russia and Ukraine, which have the world's fastest-growing rate of HIV infection.
The number of people infected with HIV in Russia and Ukraine has increased by more than 18 times over the past five years.
As many as 1.5 million Russians and 400,000 Ukrainians are estimated to have HIV; at least 85% of known infections are attributed to intravenous drug use.
Governments in Russia and Ukraine allocate the bulk of their drug-related resources to law enforcement in a misguided attempt to comply with the UN drug treaties.
Individual users suffer police abuse and are driven away from vital health and treatment services.
Meanwhile, the flow of drugs continues undiminished.
Repressive policies have never succeeded in eliminating demand for drugs.
They do not tackle any of the economic, social, or health factors associated with the use of illicit drugs.
Locking up drug users is not a solution--in Russia, it is easier to score drugs in prison than outside.
Moreover, in a repressive climate, drug users who avoid arrest are more likely to face increased discrimination, reducing their motivation to take measures to protect their own health and the health of those around them.
In such circumstances--without hope for a better future or the opportunity for compassion-based interaction with society--drug use and HIV spread rapidly.
Russia and Ukraine are not alone in facing these twin epidemics.
Pakistan, Iran, China, the Central Asian countries, and other places with rising rates of intravenous drug use are bound for the same public health catastrophe if they pursue similar discredited policies.
Public health intervention to reduce the damage caused by drugs has been proven--by decades of research in dozens of countries--to be vastly more effective at lowering HIV infection rates and healthcare costs.
Using a conservative model, the British medical journal Lancet estimated that the US would have recorded net savings of $500 million if it had implemented a national syringe exchange program between 1987-1995.
Similarly, an international survey found that HIV infection among intravenous drug users decreased by 5.8% per year in cities with syringe exchange programs, and increased by 5.9% per year in cities without such programs.
No major study has shown that syringe exchange programs increase rates of drug use.
Indeed, studies in the US, Australia, and elsewhere show that drug treatment rates tend to remain steady or rise, because syringe exchange participants gain greater access to rehabilitative care.
UN agencies such as the Commission on Narcotic Drugs or the Office on Drugs and Crime are not mandated to prescribe specific drug strategies.
However, their narrowly focused anti-drug stance strongly influences the policies and practices of member nations.
Many individual governments, obsessed with compliance, are unable or unwilling to consider the negative public health effects of harsh anti-drug policies.
International institutions chose to look the other way in the 1990's as HIV/AIDS killed millions in Africa, infecting more than 25% of the population in some countries.
Because of similar ignorance, this terrible epidemic now looms over the former Soviet Union and other regions.
Have we really learned nothing?
It is not too late for international and national policymakers to reconsider their strategies.
In defiance of the UN conventions, some countries have adopted more pragmatic approaches to dealing with drug use and HIV.
By treating drug use first and foremost as a problem of public health, nations can fight the spread of HIV far more effectively.
To achieve this, they should take the following steps:
· Adopt anti-discrimination and equal-protection laws to guarantee the civil liberties and human rights of drug users and people living with HIV;
· Acknowledge drug use as a public health issue, not a law-and-order issue, with government policies reflecting this reality;
· Explicitly legalize needle exchange and the use of methadone and other "substitute" medications for treatment;
· Create national programs that encompass a full range of pragmatic, inclusive, and accessible harm reduction services, from education and drug treatment to substitution therapy and needle exchange;
· Include drug users and their advocates in developing policies on drug use at both international and national levels.
Continuing resistance to calls to restructure anti-drug strategies and goals will only worsen the HIV epidemic and contribute to the deaths of millions of vulnerable people.
The Anti-History Boys
BERKELEY – If you asked a modern economic historian like me why the world is currently in the grips of a financial crisis and a deep economic downturn, I would tell you that this is the latest episode in a long history of similar bubbles, crashes, crises, and recessions that date back at least to the canal-building bubble of the early 1820’s, the 1825-1826 failure of Pole, Thornton ampamp;
Co, and the subsequent first industrial recession in Britain.
We have seen this process at work in many other historical episodes as well – in 1870, 1890, 1929, and 2000.
For some reason, asset prices get way out of whack and rise to unsustainable levels.
Sometimes the culprit is lousy internal controls in financial firms that over-reward subordinates for taking risk.
Sometimes the cause is government guarantees.
And sometimes it is simply a long run of good fortune, which leaves the market dominated by unrealistic optimists.
Then the crash comes.
And when it does, risk tolerance collapses: everybody knows that there are immense unrealized losses in financial assets and nobody is sure that they know where they are.
The crash is followed by a flight to safety, which is followed by a steep fall in the velocity of money as investors hoard cash.
And that fall in monetary velocity brings on a recession.
I will not say that this is the pattern of all recessions; it isn’t.
But I will say that this is the pattern of this recession, and that we have been here before.
But if you ask the same question of a modern macroeconomist – for example, the extremely bright Narayana Kocherlakota of the University of Minnesota – you will find that he says that he does not know, and that macroeconomic models attribute economic downturns to various causes.
Most, he points out, “rely on some form of large quarterly movements in the technological frontier.
Some have collective shocks to the marginal utility of leisure.
Other models have large quarterly shocks to the depreciation rate in the capital stock (in order to generate high asset price volatilities)...”
That is, downturns are either the result of a great forgetting of technological and organizational knowledge, a great vacation as workers suddenly develop a taste for extra leisure, or a great rusting as the speed at which oxygen corrodes accelerates, reducing the value of large things made out of metal.
But modern macroeconomists will also say that all these models strike them as implausible stories that are not to be taken seriously.
Indeed, according to Kocherlakota, nobody really believes them.: “Macroeconomists use them only as convenient short-cuts to generate the requisite levels of volatility” in their mathematical models.
This leads me to ask two questions:
First, is it really true that nobody believes these stories?
Ed Prescott of Arizona State University really does believe that large-scale recessions are caused by economy-wide episodes of forgetting the technological and organizational knowledge that underpin total factor productivity.
One exception is the Great Depression, which Prescott says was caused by real wages far exceeding equilibrium values, owing to President Herbert Hoover’s extraordinary pro-labor, pro-union policies.
Likewise, Casey Mulligan of the University of Chicago really does appear to believe that large falls in the employment-to-population ratio are best seen as “great vacations” – and as the side-effect of destructive government policies like those in place today, which lead workers to quit their jobs so they can get higher government subsidies to refinance their mortgages.
(I know; I find it incredible, too.)
Second, regardless of whether modern macroeconomists attribute our current difficulties to causes that are “patently unrealistic” or simply confess ignorance, why do they have such a different view than we economic historians do?
Regardless of whether they have rejected our interpretations and understandings or simply have built or failed to build their own in ignorance of what we have done, why have they not used our work?
The second question is particularly disturbing.
After all, economic theory should be grappling with economic history.
Theory is crystallized history – it can be nothing more.
Someone observes some instructive case or some anecdotal or empirical regularity, and says, “This is interesting; let’s build a model of this.” After the initial crystallization, theory does, of course, develop according to its own intellectual imperatives and processes, but the seed of history is still there.
What happened to the seed?
This is not to say that the macroeconomic model-building of the past generation has been pointless.
But I do think that modern macroeconomists need to be rounded up, on pain of loss of tenure, and sent to a year-long boot camp with the assembled monetary historians of the world as their drill sergeants.
They need to listen to and learn from Dick Sylla about Alexander Hamilton’s bank rescue of 1825; from Charlie Calomiris about the Overend, Gurney crisis; from Michael Bordo about the first bankruptcy of Baring brothers; and from Barry Eichengreen, Christy Romer, and Ben Bernanke about the Great Depression.
If modern macroeconomists do not reconnect with history – if they do not realize just what their theories are crystallized out of and what the point of the enterprise is – then their profession will wither and die.
The Anti-Hunger Imperative
BRUSSELS – There are plenty of summits to choose from this year, but the World Summit on Food Security deserves not to be lost in the crowd.
This meeting in Rome from November 16-18 provides badly needed political momentum to three linked issues that rank among the most challenging of the current era: food security, biodiversity, and climate change.
Collectively, we are failing in the fight against world hunger. More than one billion people in the world today do not have enough food to meet their basic daily nutritional needs, and the situation in developing countries is getting worse.
This is, first and foremost, a moral outrage.
How can it be that in the twenty-first century, when we have taken men to the Moon and back, we still cannot feed everyone on this planet? Policymakers must recognize, moreover, that food insecurity is linked to the lasting effects of the economic crisis and ongoing climate change, and that it represents no less a threat to our global community.
To be fair, world leaders have responded.
At the recent G-8 summit in L’Aquila, Italy, we made a firm commitment “to act with the scale and urgency needed to achieve global food security,” and we collectively pledged $20 billion over three years.
This is a sizeable commitment, but it may not be enough – more needs to be done to increase agricultural production, to free up the potential of trade to address food insecurity, and to deal with the increasing impact of climate change on agriculture.
The European Commission, too, has responded, with finance for food security coming via a number of instruments.
Our European Union food facility, agreed last year, is mobilizing an additional $1.5 billion for a rapid response to rising food prices.
And we will pump in another $4 billion in the coming three years to fund activities that help countries improve food security and adapt to climate change.
Extra money to address food security problems, among other things, should be one of the key outcomes of the finance package that the EU strongly supports for the next crucial event on the summit calendar: the Copenhagen climate conference in December.
Changing weather patterns and the increasing magnitude and frequency of extreme weather events will require substantial investments if farmers are to adapt successfully.
These changes hit the poorest the hardest, and global trends mask deep regional disparities.
Small farmers, predominantly in developing countries, will bear the brunt of climate change.
If we do not act quickly, the 40 poorest countries, predominantly in sub-Saharan Africa and Latin America, will by 2080 lose from 10% to 20% of their basic grain-growing capacity due to drought.
But answers to this problem are close to hand.
The impact of biodiversity is often insufficiently understood, which means that we have undervalued its contribution to tackling global challenges.
The more diverse the variation of life forms within a given ecosystem, the more resilient it is to change.
So biodiversity can act as a natural “insurance policy” against sudden environmental changes and a buffer against losses caused by them (as well as by pests and diseases).
Biodiversity is essential for reliable and stable long-term food production.
The famines in Ireland in the nineteenth century and in Ethiopia in the late twentieth century provide clear evidence of the vulnerability of undiversified crops to environmental changes, and the dramatic consequences of such vulnerability for the population.
Crop diversity can also deliver important ecosystem benefits.
Varieties that are tolerant to drought and flood can not only increase productivity, but also can prevent soil erosion and desertification.
In southern Ghana, for example, farmers have managed to reduce crop failures arising from rainfall variability and unpredictability by cultivating several drought-tolerant types of the same crop species.
In addition, crop diversification has reduced the need for costly and environmentally damaging pesticides.
So I am convinced that we should raise the profile of biodiversity in tackling climate change and food insecurity, and that we need more high-level attention to this subject.
Next week, when leaders meet in Rome, I hope that we will agree on the key priorities to fight hunger and food insecurity, and in particular to establish an authoritative source of advice on food security to governments and international institutions.
In fact, we need for food security what the United Nations’ Intergovernmental Panel has done for climate change: a science-based red-alert system for the planet.
And at the start of a new five-year term at the European Commission, I will continue to do all I can to promote this important issue.
But even the best and most up-to-date donor policies will remain vain exercises if governments in developed countries fail to translate their commitments into hard cash and improvements in agricultural investment worldwide.
So finally let the World Summit on Food Security provide tangible evidence of a commitment from all governments to a common objective: a world free of hunger.
History will judge us unfavorably if we fail.
The Anti-Terrorist Temptation
The ongoing Middle East crisis is not only directly relevant to that troubled region but more generally to the global "war against terror" conducted under US leadership.
While some important victories have been won in this war, for lack of US leadership one battle has already been lost - the definition of the enemy.
Terror is a shadowy enemy.
What makes it so damnably difficult to confront is the fact that it takes many forms.
True, all terrorists act criminally by taking the lives of innocent people to further some real or imagined objective.
While each has different motives, none of the causes they espouse justify their acts.
In most cases terror is local in cause, action, and motivation: ETA in Spain, the IRA in Northern Ireland, suicide bombers in Palestine, Chechen rebels, the Tamil Tigers.
In contrast, the Al Qaeda terrorists of September 11 th acted on a global scale and with a global motive.
Initially they were rightly defined as a different species: America declared war not on all kinds of terrorists but, to quote President Bush, against those "of global reach."
That was an essential distinction.
The first law in strategy is to be clear about who your enemy is, to focus on him and not be deflected.
Unfortunately, the Bush Administration lost its focus.
The Middle East crisis demonstrates the disturbing consequences of this: lack of a clear US policy towards that escalating conflict has clearly been caused by target confusion.
With the help of powerful groups within the US Administration, the Israeli government succeeded in redefining America's enemy in the "war on terror" to mean not only Osama bin Laden's globally operating Al Qaeda network, but every militant group of Palestinians that resists Israel's occupation.
So American efforts to bring about a cease-fire were stillborn.
True, the intransigence of the two belligerents frustrates the intervention of most outside powers.
But where the Middle East is concerned America always has real clout.
A decisive US effort behind President Bush's initial call for the immediate withdrawal of Israeli troops from the occupied territories could have worked.
But his words, however, had lost authority.
Prime Minister Sharon replied that he was fighting America's war on terrorism.
As William Kristol, a supporter of the Sharon line and a leading conservative US commentator wrote: "You can't have a peace process in which one of the partners is a sponsor of terrorism.
Not if you are engaged in a serious war on terrorism."
Sharon is not alone in hijacking the definition of the terrorist enemy.
Wherever in today's world revolt is quashed by military oppression, the oppressors claim that they are only following America's lead.
Kristol's dogma is eagerly applied by President Putin in Russia's brutal war in Chechnya, by Uzbekistan's authoritarian regime against Islamic groups of all kinds, by India's heavy-handed operations in Kashmir.
That danger was foreseeable; failing to avoid it a costly mistake.
Not only does it tie America's Middle Eastern policy to the intransigence of Sharon and the death wish of Palestinian suicide bombers, it also weakens the international coalition against Al Qaeda.
Even powerful America cannot hunt down everyone everywhere who employs violence as a political weapon.
Nor can it maintain an international coalition of states against Al Qaeda-type terror if its members are asked to subscribe to today's wider, vaguer goal.
Local terrorism affects different states differently and divides instead of unites.
Worst of all, the US is in danger of losing control of the campaign as all those regimes and governments fighting local terrorists in America's name obscure the fight against global terrorism.
True, Al Qaeda's tentacles reach into many conflicts.
Chechen fighters and Kashmiri insurgents apparently receive financial support, weapons and training from sources linked to bin Laden's network.
This argues for targeting such support, not lumping all of these groups together.
If you throw your blanket too wide, you cannot complain about nasty bedfellows.
Instead of leading others in a coalition against your enemy, you risk being led astray by them.
In the long blockade against Napoleonic France, captains in Britain's Royal Navy would on the eve of battle drink the following toast: "Confusion to the French!"
They knew that confusion on the part of the defender offers the best chance for successful attack.
In the "war on terror," it is now the attacker who is confused.
The fight against Al Qaeda continues and must continue.
But it will now take much longer unless today's confusion is replaced by clarity.
The Apocalyptic Mind
LONDON – It was only to be expected that former US Vice President Al Gore would give this month’s Burmese cyclone an apocalyptic twist. “Last year,” he said, “a catastrophic storm hit Bangladesh.
The year before, the strongest cyclone in more than 50 years hit China....We’re seeing the consequences that scientists have long predicted might be associated with continual global warming.”
Surprisingly, Gore did not include the Asian tsunami of 2004, which claimed 225,000 lives.
His not so subliminal message was that these natural catastrophes foreshadow the end of the world.
Apocalyptic beliefs have always been part of the Christian tradition.
They express the yearning for heaven on earth, when evil is destroyed and the good are saved.
In their classical religious form, such beliefs rely on signs and omens, like earthquakes and sunspots, which can be interpreted, by reference to biblical passages, as portending a great cataclysm and cleansing.
Thus, apocalyptic moments are products of a sense of crisis: they can be triggered by wars and natural disasters.
Classical apocalyptic thinking is certainly alive and well, especially in America, where it feeds on Protestant fundamentalism, and is mass marketed with all the resources of modern media.
Circles close to the Bush administration, it is rumored, take current distempers like terrorism as confirmation of biblical prophecies.
In secularized, pseudo-scientific form, apocalyptic thinking has also been at the core of revolutionary politics.
In his latest book, Black Mass , the philosopher John Gray discusses how political doctrines like Marxism colonized the apocalyptic vision in prophesying the destruction of capitalism as the prelude to the socialist utopia.
But political messianism was an offshoot of nineteenth-century optimism.
With the collapse of optimism, contemporary apocalyptic belief lays more stress on catastrophe and less on utopia.
For example, in his book Flat Earth News , the investigative journalist Nick Davies reminds us of the millennium bug panic.
Newspapers everywhere carried stories predicting that computer systems would crash on January 1, 2000, causing much of the world to shut down.
The subtext was familiar: those who live by technology will die by it.
Misreporting of science is now so routine that we hardly notice it.
Much more serious is when science itself becomes infected by the apocalyptic spirit.
Faith-based science seems a contradiction in terms, because the scientific worldview emerged as a challenge to religious superstition.
But important scientific beliefs can now be said to be held religiously, rather than scientifically.
This brings us back to Al Gore and climate change.
There is no doubt that the earth became warmer over the twentieth century (by about 0.7 degrees Celsius), which most climate scientists attribute largely to human carbon dioxide emissions.
If nothing is done to restrict such emissions, global temperature will rise 1.8-4 degrees over the next century.
At some “tipping point,” the world will be subject to floods and pestilence in classic apocalyptic fashion.
This is the second doomsday scenario of recent decades, the first being the Club of Rome’s prediction in 1972 that the world would soon run out of natural resources.
Both are “scientific,” but their structure is the same as that of the Biblical story of the Flood: human wickedness (in today’s case, unbridled materialism) triggers the disastrous sequence, which it may already be too late to avert.
Like Biblical prophecy, scientific doomsday stories seem impervious to refutation, and are constantly repackaged to feed the hunger for catastrophe.
Scientists argue that the media and politicians are responsible for exaggerating their findings as promises of salvation or warnings of retribution.
But scientists themselves are partly responsible, because they have hardened uncertainties into probabilities, treated disputable propositions as matters of fact, and attacked dissent as heresy.
Scientists are notoriously loath to jettison conclusions reached by approved scientific methods, however faulty.
But their intolerance of dissent is hugely magnified when they see themselves as captains in the salvationist army, dedicated to purging the world of evil habits.
Today it is the West that foists an apocalyptic imagination on the rest of the world.
Perhaps we should be looking to China and India for answers about how to address environmental damage, instead of using climate change as a pretext to deprive them of what we already have.
How do the Chinese feel about their newfound materialism?
Do they have an intellectual structure with which to make sense of it?
The best antidote to the doom merchants is skepticism.
We must be willing to take uncertainty seriously.
Climate change is a fact.
But apocalyptic thinking distorts the scientific debate and makes it harder to explain the causes and consequences of this fact, which in turn makes it harder to know how to deal with it.
The danger is that we become so infected with the apocalyptic virus that we end up creating a real catastrophe – the meltdown of our economies and lifestyles – in order to avoid an imaginary one.
In short, while a religious attitude of mind deserves the highest respect, we should resist the re-conquest by religion of matters that should be the concern of science.
The Arab Drama
PRINCETON – The Arab world has entered the most dramatic period in its modern history.
Oppressive regimes are being swept away, as Arab people finally take their fate into their own hands.
The excitement of the moment, however, does not tell us what the future holds.
At best, democracy is still off in the distance: the military still dominates in Egypt and Tunisia, tribal forces are on the rise in Libya and Yemen, and sectarian divides between Sunni and Shia are likely to dominate politics in Bahrain, as they have in Iraq since 2003.
There is no single narrative that makes sense of this all.
Regimes throughout the Middle East, the United States, and European governments, as well as Al Qaeda and other Islamist groups, are all struggling to understand what comes next.
Scholars of the region, like myself, are also recognizing that our understanding of Arab politics did not anticipate this wave of successful protest.
Until the uprising in Tunisia, we thought that political change would be led either by Islamist forces or by a coup by a group of military officers – not by disorganized, youth-led masses.
The Middle East’s demographic youth bulge is well known, but no one predicted that its members would mobilize social media and cell phones to topple long-established dictators.
The technologies of the Internet were thought to fragment societal forces rather than unite them in a common cause.
And the regimes were considered to be too brutal, as we see tragically in Libya, to go down without a fight.
By its own admission, Al Qaeda has been caught off guard, no doubt because the group’s central argument has been that the fall of oppressive Arab governments could come only through violence.
In response to recent events, Ayman al-Zawahiri, Al Qaeda’s second in command, released a tedious Powerpoint-like analysis of Egyptian constitutional law and political history.
Like Egypt’s now-deposed President Hosni Mubarak, al-Zawahiri’s tone was patronizing and condescending.
If anything, the lecture underscored how out of touch Al Qaeda’s senior leaders are with the spirit of the time.
A younger Al Qaeda ideologue is more convincing, however.
In a message dated February 16, 2011, entitled “The People’s Revolution and the Fall of the Corrupt Arab System: A New Beginning and the Shattering of the Idol of ‘Stability,’” a Libyan who goes by the name Atiyat Allah writes, “It is true that this revolution is not the ideal that we had desired….[W]e hope that this is the first step to better times yet.”
Allah goes on to argue that these revolutions did more than just topple regimes like Mubarak’s.
More importantly, they have destroyed the doctrine of “stability” that allowed the regimes and the West to exploit the region and provide security for Israel.
Admitting surprise at the speed of events, Allah advises Al Qaeda groups to engage gently with the rising forces in these countries.
Tactically, he argues, this is the only way for Al Qaeda to achieve its ultimate goal of taking power.
Other Al Qaeda thinkers have expressed admiration for the ability of young men like Wael Ghonim to mobilize thousands of his fellow Egyptians by conveying his sincere desire for change and love of country.
There is certainly a degree of envy for what others have accomplished and a sense of desperation about how Al Qaeda can capitalize on this change.
Unlike the uprisings in Egypt and Tunisia, the current fighting in Libya presents Al Qaeda with an opportunity to confirm its classic narrative about the importance of change through violence.
More troubling still is that Libya’s violence reveals certain features of the Middle East that had been forgotten after the heady success in Tunis and Cairo.
Most clearly, political change will not occur in the same fashion across the diverse countries of the Arab world.
Unlike Tunisia and Egypt, which are largely homogeneous societies, Libya has important tribal cleavages, whereas Bahrain, Yemen, and Syria are riven by sectarianism.
In the absence of strong national institutions, change in these countries risks significant bloodshed.
In addition, the excessive violence in Libya might send the message to other peoples in the region that the cost of change is too high to pay, and that the relatively peaceful transitions seen in Egypt and Tunisia might not be replicable.
Finally, the chaos in Libya has shown how dependent the rest of the world is on the political fate of Middle Eastern societies.
Should chaos of the kind witnessed in Libya occur in the Persian Gulf countries, for example, the world could literally come to a standstill, given the quantity of oil that they supply.
While unlikely anytime soon, this possibility should give everyone pause and spur us to find policies that will help Arabs find the political dignity and good governance they deserve through an ordered, peaceful process.
The alternative is a world in which we remain hostage to the region’s pathologies, which provide ample opportunity for Al Qaeda to reassert its narrative and influence.
The Arabs Look Inward
Across the Arab world, the fall of Baghdad on April 9th is seen as a day of shame, reminiscent of June 5th 1967, when Israel defeated the armies of three Arab countries, conquering the West Bank, Gaza Strip, and East Jerusalem in a mere six days.
Arab intellectuals, and indeed the wider Arab public, are now busy trying to analyze and understand the lessons of the Iraqi earthquake.
Meanwhile, supporters of the former Ba'athist regime in Iraq and others are now busy defending the same old totalitarian mindset.
Their tactic has been to obstruct a clear review of the Iraqi catastrophe by suggesting that any criticism of Saddam's regime is tantamount to supporting the American occupation of Iraq.
For example, Fahd Al-Fanek, a former Ba'ath Party member, is now a columnist for the Jordanian newspaper Al-Ra'i.
In April, he wrote that the end of Saddam's hold on power in Iraq ``provided the opportunity for the enemies of the regime to shed crocodile tears at democracy and to denounce repression and dictatorship as an indirect gesture welcoming the American occupation.''
None of the anti-Saddam sentoment, Al-Fanek argued, was ``intended to serve the cause of democracy, but to support the American position and justify the American occupation.''
Interestingly, such retrospective support for Saddam and his dictatorial regime is now being met with growing indignation in the Arab World, because ordinary Arabs are only now learning of the crimes perpetrated by the Ba'ath Party regime.
Apologists for Saddam's rule are now facing some difficult questions.
There is precedent for such soul-searching in the Arab world.
In the aftermath of Israel's 1967 victory, Sadeq Jalal Al-Azm, a well-know Syrian intellectual and a professor of philosophy, published a book entitled ``Self-criticism after the defeat,'' which sharply criticised many aspects of Arab political culture.
Al-Azm's book became a sensation, stimulating a wave of reviews and polemical exchanges.
Back then, the paramount question was: How did a small state like Israel defeat the armies of three Arab countries and occupy vast areas of Egyptian, Jordanian and Syrian territory in a few days?
This question still echoes through the decades, and the many answers have dwelled not only on military failings, but on broader questions concerning Arab political, economic, cultural, and technological development.
The prevailing response in the 1960's to Israel's triumph was that the Arabs should adapt the guerilla strategies pursued by the Vietnamese, Chinese, and Cubans.
Later on, the Soviet model became popular among nationalist and leftist movements fighting for independence when they seized power in Syria, Iraq, and South Yemen.
Demands for democracy, popular participation, and political pluralism were shelved in favor of pan-Arab national slogans urging Arab unity, the liberation of Palestine and opposition to imperialism.
But looking back on the 1970's and 1980's, the socioeconomic failures of the despotic regimes that embodied this worldview are glaringly obvious.
Their countries sank deeply into debt, with low rates of growth, endemic corruption, and bloated public sectors.
Prisons were overcrowded, and cultural expression was stifled.
Unsurprisingly, these regimes viewed the slightest criticism as treason and subversion.
This was the stagnant context in which Iraq embarked on its military expansionism in 1991, aimed at the occupation of Kuwait.
Although the Iraqi forces were quickly expelled from Kuwait, Saddam's overwhelming defeat did nothing to undermine his stature in the Arab world.
The remnants of Saddam's army were not pursued within Iraq, allowing him to crush the popular insurrection staged in the south, and remain in power.
Despite trying to annex an Arab neighbor, Saddam was able to claim the nationalist mantle against the Americans.
Today, the previously unknown crimes committed by Saddam's regime against numberless thousands of Iraqis are being revealed.
Around the Arab world, people are comparing the nationalist rhetoric of the regime with the scope of its barbarism.
Shame at the price the Iraqi people have paid for the false face of the Baathist regime can be detected everywhere.
It is becoming clear that no achievement, regardless of how great it may be, can justify the human cost that the Iraqi people paid over the last four decades.
In the weeks since the overthrow of Saddam's regime, and despite the American occupation, Iraqis are exercising an increasing degree of control over their daily lives.
They are choosing local councils, publishing newspapers, and organizing various political and social organizations.
The reconstruction of Iraq, which has now begun, will continue.
The echoes of the Iraqi quake are being felt in every Arab capital, including those that put their faith in oil riches to protect them from popular discontent.
Demands for political and economic reform are escalating.
The winds of change will blow once again through the Middle East, which remains threatened by both religious fundamentalism and foreign pressure.
The best alternative to both is a voluntary movement toward democratic openness and political pluralism, enabling citizens across the Arab world to participate in making the future of their countries.
The Arab Spring and Europe’s Turn
NEW HAVEN – Until now, and with few exceptions, the West has nurtured two distinct communities of foreign-policy specialists: the development community and the democratic community.
More often than not, they have had little or no connection with one another: development specialists dealt comfortably with dictatorships and democracies alike, believing that prosperity can best be created by concentrating exclusively on economic issues and institutions.
The consequences of this approach have a special resonance in the Arab world today.
But, as the recent United Nations Security Council debates on the Arab Spring have shown, it is not the major emerging countries that will influence events in the region.
Brazil has barely uttered a word in reaction to the region’s tumult, while Russia and China have little taste for sanctions against Libya in light of their own autocratic governments.
All of this adds up to a unique opportunity for the European Union to support its neighbors’ transition from revolutionary upheaval to democratic government.
At the same time, we need to promote the progress of other regimes in the region toward inclusive democracy.
Indeed, the EU is their natural partner in this endeavor.
Since the launch of the Barcelona Process in 1995, EU Mediterranean policy has been criticized for not linking financial aid to democratic reform, and for giving priority to European concerns like immigration, security, and cooperation on counter-terrorism.
At the same time, EU policy has sidelined clear southern priorities, like opening up Europe’s agriculture and textile markets.
The result is that the vision of the official Euro-Mediterranean Policy (EMP) has lagged far behind its original goals.
Europe should shift its focus on immigration and security back to policies that reflect the original objectives of the Barcelona Declaration.
The EMP’s central goals were to advance a “comprehensive partnership” and political reform, and to create “a common area of peace and stability,” together with a Euro-Mediterranean free-trade area.
Moreover, the associated MEDA funding mechanism crucially and specifically included the European Initiative for Democracy and Human Rights.
This link between security, democracy, and human development has since been broken and needs to be restored through investment in good governance, regional development, and education.
The EMP evolved in 2004 into the European Neighborhood Policy framework, and in 2007, the European Neighborhood Policy Instrument (ENPI) replaced MEDA as the EU’s main financing mechanism for Euro-Mediterranean policy.
This put human rights funding into the National Indicative Program (NIP), which encompasses 17 countries: ten in the south and seven in Eastern Europe.
Although good governance and human rights remained among the ENP’s proclaimed goals, official communications of the European Commission show that it emphasized security and border control.
When the EMP was “re-launched” in 2008 under the newly established Union for the Mediterranean (UfM) to give it greater political emphasis, the result was an exercise in “realism” that further weakened the original EMP.
And, for all its high-flown language, the UfM is an empty shell.
This is partly due to unfortunate timing: the UfM’s launch coincided with the outbreak of the Gaza War and became entangled in the complexities of Arab-Israeli relations.
But the initiative also failed to gain momentum among political leaders.
To implement the far-reaching vision of the Barcelona Process, the ENP will have to revisit the way it distributes its financial support, rebalance the funding that it provides to the EU’s eastern and southern neighborhoods, and place much greater emphasis on democracy, the rule of law, and human rights.
Education remains a key area where the EU should contribute to the development of the southern neighborhood, if only because young people are a growing majority of the Arab population.
Although many Arab states have been opening new schools and universities, and are allowing more private educational institutions to flourish, the quality of education in the region still leaves much to be desired.
Religion remains a compulsory subject throughout university programs, while inquisitiveness, critical thinking, and objective analysis are all widely discouraged.
As the Jordanian intellectual and former foreign minister Marwan al-Muasher has argued, state and religious interpretations of history, science, and political values are hammered into Arab students.
Wilfried Martens, President of the European People’s Party (EPP) in the European Parliament and former Prime Minister of Belgium, recently made a similar point: “The West is not at war with Islam.
Christianity is not at war with Islam.
And neither is democracy.
All three, however, are incompatible with a certain interpretation which claims that the scripture is the basis upon which to build a state.”
Of the Arab countries receiving ENP funds, only Egypt has channeled a high proportion – nearly 50% – toward education.
In any case, Europe’s spending on education in the region is scattered among inter-regional, national, and thematic programs, which makes it difficult to see how these funds’ effectiveness might be measured.
Europe now faces key decisions that concern both its values and its interests in the Arab world, and the reconciliation of its short- and long-term objectives.
Infrastructural investment and economic reform are crucial for the Mediterranean region’s future development, but they cannot transform the region without a parallel emphasis on democracy, the rule of law, human rights, and education.
To advance both objectives, the EU must link its investment and aid programs to concrete progress on democratization, and press for much greater accountability and improvement in reforming educational systems throughout the region.
The Arab Spring’s Backward Leap for Women
CAIRO – This summer, as the dust of the Arab Spring revolutions begins to settle, women – who stood shoulder to shoulder with men in defying tyranny – are finding themselves marginalized and excluded from decision-making.
Despite the new freedoms championed by the revolutionaries, women continue to be regarded as subordinate to men.
In Tunisia, a mass protest called for all women to be veiled, which led to unveiled female religion professors being hounded off campuses.
Mobs shouted at Tunisian women demonstrators to go back to the kitchen “where they belong.”
In Egypt, too, conservative forces are on the rise, demanding policies – particularly reforms of family legislation – that would represent a step backward for women.
Angered and alarmed by these developments, Arab women have been forced to defend their rights.
In April 2011, Tunisian women successfully pressed for an electoral-parity law, thanks to which they won 49 of 217 parliamentary seats in last October’s elections.
In Egypt, though, the prospects for women seem gloomier, because they failed to retain the pre-revolution quota system that had given them 64 parliamentary seats.
That system was replaced by a new electoral law that obliges political parties to include at least one woman on their candidate lists.
But almost all of the parties put female candidates at the end of their lists; as a result, only nine women were elected to the parliament.
The Supreme Council of the Armed Forces (SCAF), the ruling junta, appointed two more women, bringing the share of women MPs to about 2%.
Islamist groups won majorities in both the Tunisian and Egyptian parliaments.
Draft legislation that reflects a restrictive interpretation of sharia (Islamic law), particularly concerning women’s status, is now being submitted for debate in Tunisia.
And there seems to be a clear intention in many Arab countries to allow unrestricted polygamy, for example, even where it was prohibited prior to the Arab Spring.
In Egypt, matters are more complicated.
SCAF, fearing an Islamist takeover ahead of the presidential election, dissolved the parliament in June, following a judicial decision that they (and the court) insist must be upheld.
But the new president, the Muslim Brotherhood’s Mohamed Morsi, has ordered the parliament to reconvene.
Previously, the parliament’s legislative committee received a proposal to lower the age of marriage for girls from 18 years to 12.
Needless to say, this would cut short girls’ education, not to mention other harmful implications.
A powerful feature of the Egyptian revolution was the equality between the very different actors who initiated it.
None tried to seize a leadership role.
The power struggle pitted the forces of Hosni Mubarak’s regime against the people, including women, who were on the streets and in the squares demanding freedom, dignity, and social justice.
But now things are strikingly different.
The once unified opposition to the Mubarak regime has become fragmented, with each faction defending its own interests and advocating its own version of the revolution’s goals.
The two most prominent actors in the new power spectrum – the military, represented by SCAF, and the Islamists, who include the Muslim Brotherhood and the Salafists – are surrounded by lesser political parties, youth coalitions, and others.
Unfortunately, women’s political position is weak.
The National Council for Women has been restructured, there is a new Egyptian Feminist Union, and a number of coalitions made up of feminist NGOs have been created.
But they are far from being sufficiently organized to work together effectively.
There now seem to be two scenarios for women’s future status in Egypt, neither of which is very hopeful.
In the first scenario, SCAF – which, aside from dissolving the parliament, stripped the presidency of most powers in order to weaken its rivals – continues to rule the country under the military system introduced in 1952 when Mohamed Naguib and then Gamel Abdel Nasser seized power.
Militarism and patriarchy are inextricably linked, and both view masculinity as the opposite of femininity.
If soldiers – and, by extension, all “real” men – are strong and daring, then real women should be the antithesis: passive, obedient, and in need of protection as “good” wives, sisters, and mothers.
The second scenario is an Islamist regime: Morsi negotiates with SCAF a transition to civilian rule;
Islamists continue to dominate a restored parliament; and the new constitution establishes a theocratic state.
Most of Egypt’s Islamists, particularly those who returned from exile in Saudi Arabia, adhere to the Wahhabi sect, with its severe restrictions on women, implying that women’s status would be much worse than it was before the revolution.
Among other things, new legislation would make polygamy the rule, rather than the exception, and would deprive women of an equal right to divorce.
The Islamists could also impose the veil and later on the niqab.
An immense effort would be required of women’s-rights activists to be prevent a reign of injustice.
Unfortunately, neither SCAF nor Morsi espouses the type of liberal regime that would provide women with opportunities to take on the leadership roles that have traditionally been denied to them.
Indeed, the only glimmer of hope remaining for women’s equality and dignity in Egypt is the willingness of all who seek such a regime to unite and try yet again to fulfill the democratic promise of Egypt’s revolution.
The Arab Spring’s Balance Sheet
CAIRO – Last year’s events in Egypt and Tunisia drew the curtain on a tottering old order and delivered much of the Arab world into a long-awaited new era.&#160;But what that new era will look like remains very much an open question, given the many challenges that the region’s countries still face.
The old order that has begun to vanish extends beyond the former regimes.
The region’s entire value system – a political culture forged by autocracy – is being transformed.
Arab men and women have shed the sense of humiliation and inferiority that despotism imposed on them – and that fostered desperation, anger, violence, and insularity.
This transformation, though far from complete – indeed, it may well last years – has nonetheless started to bear fruit.
If the 2011 uprisings had not occurred, we would now be witnessing another year of autocracy, with more talk of dynastic successions.
That would mean further humiliation for ordinary people, who bear the brunt of corruption, as government officials and their crony capitalists continued to siphon off public funds.
The Arab media would still be heaping uncritical praise on the region’s presidents and their families, while development programs would be looted by them.
Education would continue to stagnate, and Arab societies, which are divided across sectarian, tribal, and regional lines, would experience rising levels of retribution and violence.
The infamous “death boats,” on which hundreds of young North African men risked their lives every year in search of employment and a better life abroad, would continue to deliver those who survived the journey onto Europe’s unwelcoming shores.&#160;And Arabs’ rage would reach unprecedented levels, causing utter mayhem and destruction.
Arab youth have rescued the Arab world from this fate.
Their conscientiousness and integrity have restored people’s self-confidence.
The old regimes’ opponents have demonstrated bravery without recklessness, and differences of opinion without bigotry.
Indeed, we have seen Islamists, liberals, and leftists standing together in defiance.
We have seen Muslims and Copts protect each other in Cairo.
In Yemen, we have seen local tribesmen follow a woman, Nobel Peace Prize winner Tawakel Karman, in the fight for freedom.
And we have seen the Arab media foster a mature debate about democracy, constitutionalism, and the role of Islam in the modern state, rather than dispensing disinformation and crass propaganda.
But the transformation must not stop here.
The new and old political forces should initiate a dialogue to create a consensus on the rules of political engagement.
As the people become their own masters, those who fail to engage in this process will eventually find themselves without political power.
Other countries in the region, and beyond, should embrace the Arab Spring.
In particular, the members of the Gulf Cooperation Council (GCC) should abandon their hesitance to support the post-revolution governments.
Ultimately, the changes occurring in the Arab world will contribute to the entire region’s economic prosperity and political stability.
Today, Tunisia and Egypt are experiencing severe economic crises.
Before Tunisia’s revolution, for example, 500,000 of its labor force of 3.6 million were unemployed, and that number has since risen to 700,000.
Egypt has lost roughly $9 billion in capital flight in recent months.
But, according to Egypt’s prime minister, Kamal al-Ganzouri, the country’s Arab “brethren” have delivered only $1 billion of the $10.5 billion in aid and loans that they promised.
Moreover, Tunisia and Egypt have so far received none of the $35 billion promised by the G-8 countries.
And, given the current global economic crisis, the funds are not likely to be forthcoming in the near future.
The region’s emerging democracies urgently need an Arab initiative that resembles the Marshall Plan – a program to attract large-scale investment in infrastructure, industry, and agriculture (and in the region’s wealth of untapped technical skills), thereby boosting employment.
The initiative should also encourage free movement of goods and people within the region, by lifting the customs restrictions and complicated procedures that hinder bilateral and multilateral trade.
Creating regional development banks and building a Mediterranean express railway from Alexandria to Rabat would serve this goal.
But long-term investments will not solve the immediate crisis.
Egypt and Tunisia need immediate cash deposits and grants, and their newly elected leaderships should not be forced to resort to begging.
In the past, the Gulf countries have supported Egypt and Tunisia.
It is now in the GCC’s best interests to support them again as they make the transition to freedom.
Meanwhile, the United States and the European Union should recognize the nature and depth of the unfolding changes.
The Arab public is fully aware of the close alliances that existed between the West and the now-defunct despotic regimes, yet they have exhibited no desire for vengeance or retribution towards the West.
It is past time for the West to accept the Arab people’s will and to stop exaggerating the repercussions of change.
The West must support genuine democracy in the Arab world.
If the Arab Spring is aborted, the result will be not dictatorships that are loyal to the West, but rather, a tsunami of rage that will spare no one.
There is nothing more dangerous than aborted dreams, especially when those dreams may be the last chance for change.
The Arab Springtime of Nations?
JERUSALEM – Two things stand out in the Middle East since the Arab Spring began – one that happened, and one that did not.
What happened was that for the first time in modern Arab history, authoritarian regimes and rulers were toppled, or seriously challenged, by popular demonstrations, not – as in the past – through military coups.
But what did not happen might be as important as what did.
While dictators associated with military juntas were challenged overnight, the Arab Spring never came to the region’s conservative monarchies.
The dynastic rulers of Morocco, Jordan, Saudi Arabia, and the Gulf states (with the exception of Bahrain) remain more or less firmly in the saddle, even though Saudi Arabia’s regime, at least, is in many respects far more oppressive than were the former Egyptian and Tunisian regimes.
Of course, oil money helps to sustain autocracy, but this is not a factor in Morocco and Jordan.
It appears that these monarchies enjoy a form of traditional authority that the region’s secular nationalist rulers never had.
Being descendants of the Prophet, as in Morocco and Jordan, or having custodianship of the holy sites of Mecca and Medina, as in Saudi Arabia, bestows a legitimacy on the countries’ rulers that is directly linked to Islam.
The only monarchical regime that was seriously challenged during the Arab Spring was the Sunni ruling family in Shia-majority Bahrain, where precisely this sectarian divide seems to have been the crucial ingredient in the uprising, which was then brutally suppressed with Saudi military help.
Yet, for all of the success epitomized by the protests in Cairo’s Tahrir Square, bringing down a dictatorship is one thing – a drama lasting a few weeks – while the transition to a functioning, consolidated democracy is quite another.
Here, a lengthy process is involved, and its success – exemplified in the post-communist transitions in Eastern Europe – depends on key preconditions.
Where these conditions exist – for example, a vibrant and autonomous civil society, as in Poland, or a strong pre-authoritarian tradition of pluralism, representation, and tolerance, as in the Czech Republic – the transition is relatively smooth.
Where they are lacking or weak, as in Russia or Ukraine, the outcome is much more problematic.
Simply put, a rosy outlook for countries like Egypt cannot be assumed on the basis of exhilarating images on CNN or Al Jazeera, or the fact that masses of young, well-educated, English-speaking men and women are connected through Facebook and Twitter.
The great majority of Egyptians were not in Tahrir Square, and many of them lack not only access to online social networks, but also electricity and safe drinking water.
Democracy and free speech are not at the top of their agenda.
Egypt’s silent majority also identifies with the authenticity represented by various Islamic groups, while principles of democracy and civil rights seem to them to be imported Western abstractions.
So the tremendous victory of the Muslim Brotherhood and the Al-Nour Party in Egypt – as well as that of Ennahda in Tunisia – should come as no surprise.
A similar scenario could unfold in Syria, if and when President Bashar al-Assad falls from power, while both post-Qaddafi Libya and post-Saleh Yemen point to the difficulties that these countries face in constructing a coherent democratic regime.
Looking at Egypt’s prospects realistically, one should not exclude the possibility that the two strongest forces in the country – the military and the Muslim Brotherhood – ultimately will find a way to share power.
The Brotherhood’s vision of democracy is purely majoritarian, not liberal: winning an election, according to its spokespeople, permits the victor to rule according to his views.
Minority rights, institutional checks on government power, human rights – the liberal aspects of democracy – are entirely absent.
Another, more fundamental, dimension to current and future changes in the region may come into view as well.
Most international borders in the Middle East and North Africa were drawn by imperial powers – Britain, France, and Italy – either after World War I and the breakup of the Ottoman Empire (the Sykes-Picot agreements), or, as in Libya and Sudan, earlier.
But in no case did these borders correspond with local popular will, or with ethnic or historical boundaries.
In other words, none of these countries, except Egypt, had ever been a discrete political entity.
Until recently, their rulers had a common interest in keeping this Pandora’s Box of borders tightly sealed.
That has changed, and we see the region’s imperially imposed frontiers being called into question.
In Iraq, the emergence of a de facto Kurdish autonomous region in the north has put an end to Saddam Hussein’s centralized Arab-controlled state.
With South Sudan’s independence,the rest of Arab-dominated Sudan could face further division, with Darfur leaving next.
In Libya, the transitional authorities are finding it extremely challenging to create a coherent political structure that can unite two very different provinces, Cyrenaica and Tripolitania, which were held together only by the Qaddafi regime’s brutality.
In Benghazi, there are already calls for autonomy, if not outright independence.
Similarly, Yemen’s unity is far from assured.
The divisions between its south and north, which had been two different countries – with totally different histories –until Saleh’s dictatorship, are resurfacing again.
In a post-Assad Syria, the ethnic and religious fissures betweenSunnis, Alawites, Druze, Christians, and Kurdsmight equally threaten the country’s unity.
In his brutal way, Assad may be right that only his iron grip keeps the country together.
And developments in Syria will undoubtedly have an impact on neighboring Lebanon.
The end of communist autocracies in the Soviet Union, Yugoslavia, and even Czechoslovakia brought about a dramatic wave of state creation.
Likewise, no one should be surprised if democratization in the Arab world, difficult as it might be, brings in its wake a redrawing of borders.
The Arab World’s Democratic Opening
Roughly 400 million Muslims currently live in non-Arab Muslim majority states – including Turkey, Indonesia, Bangladesh, Senegal, Mali, and Albania – that have held relatively free elections for their highest political offices.
These countries may not yet be full democracies, but, because they hold competitive elections, they have met a necessary condition for being a democracy.
But since Lebanon was torn apart thirty years ago by civil war and violence, exacerbated by PLO, Israeli, Syrian, French, and US military incursions, not a single Muslim has lived in an electorally competitive Arab state.
This is why it is so important for the world to think deeply about the current opportunities for democracy in Palestine and its neighbors.
Modern democracies share at least seven preconditions:
· a functioning state;
· a monopoly over the use of legitimate force;
· borders that have strong national and international recognition;
· agreement on who are its citizens;
· a government that rules from within the national territory;
· an elected government responsible to its citizens;
· a reasonably integrated legal system.
Obviously, when the PLO was headquartered in Jordan, Lebanon, or Tunisia, and there was not yet a Palestinian Authority, Palestine did not meet any of these seven prerequisites.
Indeed, partly owing to Yasir Arafat’s own actions or inactions, at his death Palestine still had none of them.
For example, while Palestine’s state capacities were destroyed by Israel, especially following the second Intifada, Arafat made matters worse by constantly bypassing and eviscerating potential mechanisms of accountability, such as the elected Palestinian Legislative Council.
He failed to do anything about Palestine’s legacy of four different and contradictory legal systems.
Moreover, Arafat contributed to the absence of a legitimate monopoly of force by ignoring the semi-autonomous armed actions of his own Fatah-based militia, as well as the Fatah-based Al–Aqsa Martyrs’ Brigades, not to mention other groups’ armed militias.
But let us imagine what was unimaginable even a few months ago: a world where the present diminution of conflict holds, and where discussions between Israel and Palestine arrive at a mutually acceptable recognition of each state’s sovereignty.
To be sure, this is possible only if the United States pushes Israel much harder than it has so far to give Palestine viable borders.
How might such a world affect prospects for peace and democracy in the Middle East?
Palestinian President Mahmoud Abbas desperately wants to construct a functioning state.
With cessation of Israeli incursions, and large-scale international aid from the European Union, the US, Japan, and some Arab League countries, he could begin to make a plausible go of it.
With an effective state, and an inclusive and functioning electoral system, Abbas could then disarm his own Fatah-based militia.
With peace, and the prospect of doing well in July’s parliamentary election, in which it has agreed to participate, Hamas would have powerful incentives to transform itself from an armed movement outside the system into a political party committed to competing for power at the ballot box.
By disarming any remaining militias, Abbas could claim what Max Weber called the necessary ingredient of any state, namely a “monopoly of the legitimate use of force.”
Palestine has more elements of a vigorous civil society than virtually any other country in the Arab world, including an active human rights movement, which initially focused only on Israeli abuses, but that has increasingly criticized violations by the Palestinian Authority itself.
Palestine also has a powerful women’s movement (Palestine being the first Arab country to give women the vote, in 1946).
Finally, and ironically, because so many Palestinians have worked in Israel, spent time in Israeli prisons, often speak and read Hebrew, and are regularly exposed to the Israeli media and the rough and tumble of Israeli politics, Palestine has more young citizens than any other Arab country who have observed life in a democracy at first hand.
So democracy in an independent Palestinian state is possible.
Lebanon has had regular elections since its civil war ended in 1990.
But a country without sovereignty, or control over its domestic politics, does not have a democratically serviceable state.
Syria, bolstered by the 14,000 troops it stationed in Lebanon, has imposed its choice as Lebanon’s president and otherwise interfered with Lebanese politics.
So Lebanon cannot be considered electorally competitive.
With a just and stable Israeli-Palestinian peace, Syria might be forced not only to withdraw its troops, but also to lessen its interference in Lebanese politics.
Lebanon could return to the democratic track, and Hezbollah might use democratic, not military, politics as its survival strategy in the newly sovereign Lebanon, especially if an international peacekeeping force were consensually allowed to demilitarize the Golan Heights.
The only two Arab countries ever to recognize Israel were Egypt in 1978 and Jordan in 1994.
But this was an asymmetrical peace.
Both countries recognized Israel, but Israel did not recognize Palestine, and Israel’s construction of settlements on occupied land continued.
In Jordan and Egypt, protests against the asymmetrical peace led to growing social fragmentation and processes of regime-led domestic de-liberalization.
A symmetrical peace between Israel and Palestine would, by contrast, incite much less Islamic resistance.
A symmetrical peace agreement might also contribute to a new dynamic in Jordan and Egypt, namely re-liberalization of society.
Palestine and its immediate neighbors have their best opportunity in thirty years to produce democratic states.
They can do so if they seize the current opening, and if the international community intensifies its support for an end to the Arab-Israeli conflict.
The Arab World’s Silent Feminist Revolution
MADRID – Arab societies often appear rigid and resistant to change to outsiders, because what they see is these countries’ ruling regimes, which mostly do resist development and change.
But this image is nearly the opposite of reality in Arab societies, where enormous dynamism is opening doors to many types of change, albeit at different speeds and in complex, contradictory ways – particularly when change from below is held back from above.
Consider Arab women.
The predominant image is of a passive, exotic, and veiled victim-woman who reacts to events instead of actively participating in them.
She is an impersonal object of communal stereotypes that sustain cultural prejudices.
In fact, Arab societies are engaged in a process of immense and irreversible change in which women are playing a crucial role.
During the last half-century, intense urbanization and feminization of the workforce in all Arab countries has propelled women into the public arena on a massive scale.
During this period, differences in schooling levels between boys and girls have lessened everywhere – though at different speeds.
Indeed, in many Arab countries, more girls than boys are now in secondary and higher education, which shows that parents consider their daughters’ education to be just as important as that of their sons.
And all surveys show that young men and women want to study and have a job before they marry.
(Moreover, they increasingly want to choose their own partner.)
At the same time, demographic shifts, along with social and economic factors affecting education and work, are forcing profound change on the traditional model of the Arab family.
Higher ages for marriage and declining fertility – resulting directly from widening use of artificial contraception – are reducing family size to something much closer to the “nuclear families” of the West.
The Maghreb region may lead in this regard, but the phenomenon is observable throughout the Arab world, even in the most rigidly conservative states.
This new family model has gained so much force that it is imposing itself on rural society, too, where the decline of the agrarian economy is accompanied by a strong shift towards smaller families. This change is occurring at slightly different speeds across the Arab world, but often it is occurring simultaneously in town and country.
Not surprisingly, these changes have led to a redistribution of power between old and young – and between men and women.
We are now witnessing a progressive weakening of patriarchy, reinforced by the shift from traditional to more nuclear families.
Of course, these changes do not mark a sharp break with the past.
All change reflects local compromises with tradition and with patriarchal laws, and different rates of adjustment between old and new ways of life.
The changes, however, are notably weaker and more complex in countries like Palestine and Iraq, owing to the grave conflicts they have been undergoing.
The dynamics of change in Arab societies are rarely accompanied by change in the political system.
Most states resist transferring the processes of social transformation into their legal framework.
They fear, with reason, that extending freedoms and developing individual autonomy within the family – and so weakening patriarchal authority – could lead to a questioning in the public arena of the ideological basis of state power.
The result is widespread invocation by governments of religious norms, and to a lesser extent references to tradition, in order to legitimize the continuation of patriarchal rule.
“State feminism” is generally more a demonstration of rhetoric or political symbolism, concerned primarily with projecting a progressive image internationally, than it is a real motor for change.
Undoubtedly, however, the region’s political authorities, no less than families themselves, will be forced to accept the inconsistencies of the traditional model when it comes to the transformation of the condition of women.
This change will affect many others, and it must be analyzed from an Arab perspective, as well as from outside that perspective.
This is particularly necessary because the situation of women is one of the main benchmarks that the outside world, and particularly the West, uses to assess the Arab world.
And, unfortunately, such assessments tend to focus on the supposed immobilism that derives from Islamic norms, which obscures knowledge of the real changes that are taking place.
Indeed, the predominant view of Arab societies often stifles outsiders’ ability to break free of their belief that Islam confines all Arab women in the same way, when in reality they experience very different conditions.
This prevents many from seeing, much less evaluating, the deep changes taking place in Arab societies – and how women are driving those changes forward.
The West thus risks depriving itself of an important key to understanding the Arab world today, and as it will be tomorrow.
The Arab Young and Restless
NEW YORK – Many factors underlay the ongoing upheavals in the Middle East: decades of corrupt and authoritarian rule, increasingly literate and digitally-connected societies, and skyrocketing world food prices.
To top it off, throughout the Middle East (as well as Sub-Saharan Africa and most of South Asia), rapid population growth is fueling enormous demographic pressures.
Egypt’s population, for example, more than doubled over the course of Hosni Mubarak’s rule, from 42 million in 1980 to 85 million in 2010.
This surge is all the more remarkable given that Egypt is a desert country, its inhabitants packed along the Nile.
With no room to spread out, population densities are rising to the breaking point.
Cairo has become a sprawling region of some 20 million people living cheek-by-jowl with inadequate infrastructure.
Rapid population growth means a bulging youth population.
Indeed, half of Egypt’s population is under age 25.
Egypt, like dozens of countries around the world, is facing the extreme – and largely unmet – challenge of ensuring productive and gainful employment for its young people.
Employment growth is simply not keeping up with this population surge, at least not in the sense of decent jobs with decent wages.
The unemployment rate for young people (15-24 years old) in North Africa and the Middle East is 30% or more.
The frustration of unemployed and under-employed youth is now spilling over into the streets.
The problem of high youth unemployment is certainly not confined to the developing world, however.
In the United States, the overall unemployment rate is around 9%, but among 18-25 year olds, it is a staggering 19%.
And this includes only young people actually at work or looking for work.
Many more have simply become discouraged and dropped out of the labor force entirely: not at school, not at work, and not looking for work.
They don’t protest much, but many end up in prison.
The world’s labor markets are now interconnected.
Young people in countries as diverse as Egypt and the US are in effect competing with young Chinese and Indians for jobs.
China’s low-paid, reasonably productive manufacturing workers and high-quality infrastructure (roads, power, ports, and communications) has set the standard for competitiveness globally.
As a result, low-skilled workers in Egypt, the US, and other countries must either raise their productivity enough to compete at a decent wage, or accept extremely low pay or outright unemployment.
So creating decent jobs at decent wages is at the heart of being internationally competitive.
That requires equipping workers with a good education, strong on-the-job training, and supportive infrastructure.
While the private sector must create most of the jobs, the public sector must create the underlying conditions for high productivity.
That is a tall order.
Only one high-income region has done a reasonably good job of preparing its youth, and its overall economy, for tough global competition: Northern Europe, including Germany and Scandinavia (Denmark, Finland, Norway, and Sweden).
In these countries, public education is excellent, and the transition from school to work often involves programs like the apprenticeships for which Germany is especially famous.
In developing countries, the main advances are found in countries that emphasize excellence in education, public investment in infrastructure, and serious on-the-job training.
South Korea is probably the leading success story, with superb educational attainment and strong employment of young people having taken it from developing-country to high-income status within one generation.
And South Korea has accomplished this feat in China’s intensely competitive immediate neighborhood.
The US, by contrast, is a case of failure, except for youth from high-income households.
American children raised in affluence succeed in obtaining an excellent education and have good job prospects after a bachelor’s degree.
But, as the rich have successfully pressed for tax cuts and reductions in government spending, children from poor and working-class households are far less likely to receive a high-quality education, and the US government has failed to provide for training or adequate infrastructure.
The result is a growing youth unemployment crisis among poor and working-class youth.
The countries of North Africa and the Middle East should learn from East Asia and Northern Europe, and take pains to avoid the failures of the US.
If democracy is to take hold and flourish in Egypt, Tunisia, and elsewhere in the Arab world, the new reform-minded governments must make the youth unemployment crisis their highest priority.
Middle Eastern countries should elaborate strategies to improve the quality and increase the length of schooling, invest in job training, establish private-sector apprenticeships, and develop small and medium-sized businesses.
They should identify key infrastructure projects needed to ensure private-sector productivity.
And they must work together to deepen regional trade integration, thereby creating a much larger market.
The deposed authoritarian rulers – Tunisia’s Zine El Abidine Ben Ali, Mubarak, and soon Libya’s Col. Muammar el-Qaddafi – stashed away billions of dollars stolen from the public treasury.
This ill-gotten money should be recovered and put into a special fund for youth employment.
Moreover, with oil prices back above $100 per barrel, the Gulf states are enjoying a bonanza.
They, too, should create a special fund for youth employment in the region through the Islamic Development Bank.
There can be no better way to use the region’s resources than to ensure that its young people’s lives are enriched by education, skills, and high-quality jobs.
The Arafat Succession Scramble
To understand what the Palestinian cause will look like without Yasir Arafat, consider the various titles that he currently holds.
Arafat is Chairman of the PLO executive Committee, President of the Palestinian National Authority, Commander-in-chief of the Palestinian forces, and head of the Fatah movement.
The PLO embodies Palestinian national aspirations for independence and statehood.
It is the highest political body for all Palestinians, both those living in Palestine and the refugees and other Palestinians in the diaspora.
Arafat’s successor will need to juggle between negotiations with Israel, which will require concession on refugees’ “right of return” to Palestine, and the aspirations of more than three million Palestinians who wish to come back to the homes from which they were expelled in the wars of 1948 and 1967.
Arafat’s successor as President of the Palestinian National Authority will be bound by the Oslo Accords, which created an interim government, now headed by Prime Minister Ahmad Qurei, that is responsible for the day-to-day lives of Palestinians in the West Bank and Gaza.
Palestinians will have to decide whether to make the position of PNA president a powerful one or merely symbolic, as it now is.
The latter option would make Qurei an empowered prime minister, which is what many Palestinians and others want.
The position of the commander of the Palestinian forces supposedly puts the various Palestinian military, security, and intelligence units under one leader, who is expected to ensure the rule of law.
But these forces are now in disarray, with most uniformed Palestinian security agencies needing to be reorganized after four years of intensive effort by Israel to crush them.
The key factor in internal security is local paramilitary units.
These units, most of which are not controlled by the PNA’s central leadership, are more loyal to grassroots figures than to uniformed PNA officers.
Local Fatah leaders like Marwan Barghouti have tremendous power over the nationalist armed units that are loosely organized under the title of the Al Aqsa Martyrs’ Brigades.
Barghouti advocated and was trying to implement internal Fatah elections when the Israelis arrested him.
As a street leader who was elected as the head of the Bir Zeit University student council, he gained legitimacy by being chosen by his peers.
When the Oslo process began, he refused to accept any official position within the Palestinian Authority, choosing instead to remain close to the local Fatah cadres.
Whoever fills Arafat’s shoes will need to make sure that these brigades are satisfied that their status, demands, and leaders are respected.
Indeed, the power struggle that will ensue in the post-Arafat era will ultimately center on Al Fatah, the backbone of the PLO.
A worldwide assembly chooses Fatah’s 100-member revolutionary council, which in turn elects a 20-member central committee, where most of the power struggle will take place.
Many young street leaders will insist on an emergency meeting of the revolutionary council, or even holding the sixth general assembly (which would be the first since 1988).
Events in recent months show that the Al Asqa Martyrs’ Brigades have forced even Arafat to take their demands into consideration.
While much of the power struggle will take place within the nationalist camp, one must not overlook the Islamist camp led by Hamas and Islamic Jihad.
Although the Islamists are unlikely to interfere in the post-Arafat power struggle, they will not sit idly by if the new leadership moves in what they consider the wrong direction.
Of course, the new leadership will have to reach some agreement with the Islamists regarding the rules of the game, both domestically and vis-à-vis Israel.
Without such an agreement, and if the new leadership cracks down hard on the Islamists, a violent civil war could erupt.
Most importantly, in order to consolidate his leadership, the next Palestinian leader must make some hard decisions and show some tangible results quickly.
The experience of the first Palestinian prime minister, who resigned largely because of his inability to deliver any improvements to his people – particularly personal and collective security, the rule of law, and an end to chaos in Palestinian areas – remains fresh in the public’s memory.
At the same time, a freeze on settlement activities, release of Palestinian political prisoners – including Marwan Barghouti – and the removal of the hundreds of checkpoints between Palestinian cities would revive a feeling of hope, without which no Palestinian leader can negotiate what the world wants: a peace settlement.
The problem is that no Palestinian leader, no matter who he is, can deliver these changes.
They represent a direct challenge to the Israeli occupiers, neighboring Arab countries, and the international community, led by the United States.
The Arrogance of Chinese Power
NEW DELHI – Success breeds confidence, and rapid success produces arrogance.
That, in a nutshell, is the problem that both Asia and the West face in China, and which has been demonstrated once again at the G20 summit in Canada.
Rising economic and military power is emboldening China’s government to pursue a more muscular foreign policy.
Having earlier preached the gospel of its “peaceful rise,” China is now beginning to take the gloves off, convinced that it has acquired the necessary muscle.
That approach became more marked with the global financial crisis that began in the fall of 2008.
China interpreted that crisis as symbolizing both the decline of the Anglo-American brand of capitalism and the weakening of American economic power.
That, in turn, strengthened its two-fold belief – that its brand of state-steered capitalism offers a credible alternative, and that its global ascendance is inevitable.
Chinese analysts gleefully point out that, after having sung the “liberalize, privatize, and let the markets decide” song for so long, the United States and Britain took the lead in bailing out their financial giants at the first sign of trouble.
By contrast, state-driven capitalism has given China economic stability and rapid growth, allowing it to ride out the global crisis.
Indeed, despite perpetual talk of an overheating economy, China’s exports and retail sales are soaring, and its foreign-exchange reserves now approach $2.5 trillion, even as America’s fiscal and trade deficits remain alarming.
That has helped reinforce the Chinese elite’s faith in the country’s fusion of autocratic politics and state capitalism.
The biggest loser from the global financial crisis, in China’s view, is Uncle Sam.
That the US remains dependent on China to buy billions of dollars worth of Treasury bonds every week to finance its yawning budget deficit is a sign of shifting global financial power – which China is sure to use for political gain in the years ahead.
The current spotlight may be on Europe’s financial woes, but the bigger picture for China is that America’s chronic deficits and indebtedness epitomize its relative decline.
Add to the picture the two wars that the US is waging overseas – one of which is getting hotter and increasingly appears unwinnable – and what comes to mind among China’s leaders is the historian Paul Kennedy’s warning about “imperial overstretch.”
Against that background, China’s growing assertiveness may not surprise many.
Deng Xiaoping’s advice – “Hide your capabilities and bide your time” – no longer seems relevant.
Today, China is not shy about showcasing its military capabilities and asserting itself on multiple fronts.
As a result, new strains are appearing in China’s relationship with the West, and were in full view at last year’s Copenhagen climate-change summit, where China – the world’s largest polluter with the fastest-growing carbon emissions – cleverly deflected pressure by hiding behind developing countries.
Since then, China has added to the strains by continuing to manipulate the value of the renminbi, maintaining an abnormally high trade surplus, and restricting goods manufactured by foreign companies in China from entering the domestic market.
On political and security issues, China has aroused no less concern.
For example, China’s expanding naval role and maritime claims threaten to collide with US interests, including America’s traditional emphasis on freedom of the seas.
Yet the plain truth is that America’s economic and military travails are crimping its foreign-policy options vis-à-vis China.
The US seems more reluctant than ever to exercise the leverage that it still has to press China to correct policies that threaten to distort trade, foster huge trade imbalances, and spark greater competition for scarce raw materials.
By keeping its currency undervalued and flooding world markets with artificially cheap goods, China pursues a predatory trade policy.
This undercuts manufacturing in the developing world more than in the West.
But, by threatening to destabilize the global economy, China threatens Western interests as well.
Furthermore, its efforts to lock up supplies of key resources mean that it will continue to lend support to renegade regimes.
Still, America shies away from exerting any kind of open pressure on China.
US policy today is a study in contrast relative to America’s unabashed exercise of leverage in the 1970’s and 1980’s, when Japan emerged as a global economic powerhouse.
Japan kept the yen undervalued and erected hidden barriers to foreign goods, precipitating strong pressure – and periodic arm-twisting – by the US for Japanese concessions.
Today, the US cannot adopt the same approach with China, largely because China is also a military and political power, and the US depends on Chinese support on a host of international issues – from North Korea and Burma to Iran and Pakistan.
By contrast, Japan has remained a fully pacifist economic power.
It matters greatly that China became a global military player before it became a global economic player.
China’s military power was built by Mao Zedong, enabling Deng to focus single-mindedly on rapidly building the country’s economic power.
Before Deng launched his “four modernizations,” China had acquired global military reach by testing its first intercontinental ballistic missile, the DF-5, with a range of 12,000 kilometers (7,500 miles), and developing a thermonuclear warhead.
Without the military security that Mao created, it might not have been possible for China to build economic power on the scale that it has.
In fact, the 13-fold expansion of its economy over the past three decades generated even greater resources for China to sharpen its military claws.
China’s rise thus is as much Mao’s handiwork as it is Deng’s.
But for Chinese military power, the US would treat China like another Japan.
The Art of Finance
PRINCETON – In the middle of September’s financial meltdown, a remarkable event occurred in London.
While the City of London was shaken by the collapse of Lehman Brothers and the run on HBOS, Sotheby’s staged a record-breaking auction for the works of the artist Damien Hirst, which produced a gross take of around $200 million.
Compared to the values that were being destroyed on Wall Street, this was small change; but it was a remarkable vote of confidence in the work of one artist.
Financial bubbles, like the one that has just definitively burst, are intimately related to the world of art.
Renaissance Florence depended on the patronage of the Medici.
Sixteenth-century Venice turned the wealth of the spice trade into the canvases of Titian and Tintoretto.
The world’s next great commercial center was Amsterdam, where again the successful burghers pushed for a new style of art and produced the age of Rembrandt.
The great nineteenth- and early twentieth-century financiers, men like J.P. Morgan, Henry Frick, and Andrew Mellon, spent a large part of their fortunes on art.
From their viewpoint, collecting art was not simply a matter of benevolence or public spiritedness.
Nor was it simply a very expensive hobby.
Their galleries showed in a visible and very public way the discernment and judgment that their financial business depended on.
Financial judgment, by contrast, is not by its nature open to inspection.
It depends on inside deals, on moving ahead of the market.
It is impossible to tell who is making good bets and who is gambling recklessly.
Consequently, it is helpful to have a proxy activity that enables outsiders to see that the process of discernment and valuation really occurs.
The recent era of global finance – maybe we can already possibly speak of it as being past – differed from the financial surge of a century ago. Its cultural manifestations also appeared to be novel.
To some of its participants, collecting contemporary art showed how finance had become much more of a creative process than it was the world of the older financiers.
Morgan or Mellon collected largely old masters from the cinquecento, whose reputation was clearly and solidly established.
The new art collectors, however, were more like the Medici: they were really stimulating new cultural creation.
As with their investments, the habitués of contemporary art markets relied not purely on their own judgment, but on teams of sophisticated advisers and dealers who could give opinions on what trends best caught the spirit of the age.
Naïve outsiders found the world of contemporary art bewildering.
Why was a cow preserved in formaldehyde a great cultural achievement?
What did the sheets of cloth covered by regularly interspersed colored dots – the products of Hirst’s large and mechanized workshops – have to do with artistic innovation or originality?
But was not the same incomprehension on the part of the broad public characteristic of the increasingly sophisticated financial products that were being traded?
Indeed, the nature of the risks involved was not clear, it seems, even to regulators or the senior management of the firms that were building the business.
Some modern artists and their patrons explicitly point to the parallel between contemporary art and new financial products.
Deutsche Bank, Europe’s most prominent art-collecting bank, published the view of academic experts to the effect that customers, the broad public, were “extremely conservative, boring, lack imagination, and don’t know their own minds.”
After financial implosions, such as the collapse of the dot-com bubble in 2000 or the sub-prime meltdown of 2007-8, such views appear arrogant.
The parallel between bewildering and apparently meaningless art and unintelligible financial products is damning rather than reassuring.
So why was the Hirst auction such a success?
In part, because the art involved was far from being unintelligible.
The most eagerly anticipated item, a bull with golden horns and hooves, was entitled, with obvious intent, “The Golden Calf.”
But there was also another motive driving the bidders.
One hint was that Russian buyers paid the big money, at the very moment that Russia’s banking system was melting down.
At the same time, there was a surge in demand for gold jewelry.
The search for non-financial assets looks like characteristic behavior in any financial crisis – what was known during the great drama of hyperinflation in Weimar Germany as “die Flucht in die Sachwerte,” the flight to material assets.
Art also functions as a store of value.
But in order to be sure of the reliability of this function, the purchaser must be convinced of the long-term valuation of the object of desire.
The bankers of the Italian Renaissance also bought works of art because they reminded them of timeless values that transcended quotidian transactions.
They saw their acquisitions of paintings and sculptures as a connection to eternity.
Who can say the same for the products of Damien Hirst?
The Asian Cockpit
LONDON – With the July terrorist attack on the Indian embassy in Kabul – which left 41 dead and the finger of suspicion pointing at the Pakistani intelligence services – the world was again reminded why the Indian sub-continent has eclipsed the Middle East as the world’s flash-point.
Both American presidential candidates, Barack Obama and John McCain, have made clear that they expect the Pakistani government to take action against militants, and that they would be willing to authorize strikes inside Pakistan.
But a more comprehensive Euro-Atlantic approach will be required to deal with the region’s problems.
The story of Western failure in Afghanistan is now all too familiar, painfully illustrated, almost weekly, by the repatriation of fallen NATO soldiers.
But the story is repeated across the border in Pakistan, with serious consequences for both countries.
The optimism that followed the recent Pakistani elections has turned to concern as the government’s negotiations with militants appear to have made a terrorist safe-haven safer and attacks against NATO forces in Afghanistan more frequent.
Pakistan’s military and intelligence services are sympathetic to an Islamic fundamentalist creed, militant groups affiliated with al Qaeda operate freely on its territory, and government infighting has made it difficult to establish civilian control over the military.
In any case, the ability of the Pakistani military to deal with the current threat, let alone a widespread insurgency, is questionable, as is Western leverage on Pakistan’s security forces.
As a result, loss of control of parts of Pakistan to an increasingly capable alliance of militant groups is a serious near-term threat.
If American policy has failed to deal with this growing problem, European policy has focused on technical assistance, with the European Union providing €125 million in aid between 2002 and 2006.
Moreover, Europe is Pakistan’s largest trading partner, accounting for 27.4% of total exports and 17% of imports.
In 2005 alone, EU imports from Pakistan totaled €3.4 billion.
Yet, despite this, it is hard to escape the conclusion that the EU’s role in Pakistan bears all the hallmarks of the pre-Maastricht polity that it no longer wants to be: technocratic, apolitical, and marginalized by the United States.
This needs to change.
The US, even under a new president, cannot succeed in the region without a united front with Europe.
And Europe cannot hope to achieve its aims with technical programs alone.
To create a framework for US-European cooperation, work needs to begin now.
Several reports that will influence the McCain and Obama campaigns are already being written in Washington.
But none of these will be able to chart a way forward for transatlantic cooperation.
Moreover, they risk repeating the standard pattern of US-European cooperation: the US as the policy developer and Europe as the apolitical and hesitant money-spender.
Genuine transatlantic cooperation will require that solutions be developed jointly, and that European leaders “own” the policy options.
Otherwise, European governments will find it difficult to explain the need to step up efforts in the region, and the European Commission’s technical programs will continue to define the EU’s policy.
To build the necessary unity and a political strategy, a European Baker-Hamilton-style commission is necessary.
Such a commission, with senior European members, could examine the key issues in the region, visit all countries and players and develop a set of recommendations for a new transatlantic approach to begin in early January 2009 when a new U.S president is in place.
And who better to launch this than Nicolas Sarkozy?
The French president has already played a crucial role in bridging the U.S/European divide on the Afghan mission and - after a successful donor's conference - has taken the help of the EU's rotating, six-month presidency.
Ideally, such a commission should be independent, but endorsed by the French, German and British governments and EU foreign policy chief Javier Solana, as well as, however tacitly, Senators McCain and Obama.
Everyone knows of the dangers posed by instability on the Afghan-Pakistan border, in Pakistan and the region.
In July, Pakistani and Indian soldiers waged a 12 hour gun battle across disputed border.
But so far, little has been done to develop the kind of Euro-Atlantic consensus about policy options necessary for a new U.S president and Europe to collaborate.
Worse still, the rejection by Ireland of the Lisbon Treaty threatens to push the issue further back in the queue.
But European leaders must not take their eyes off real-world problems and drafting a new Euro-Atlantic policy on Afghanistan and Pakistan is as real as it gets.
The Asian Crisis Ten Years After
This July marks the tenth anniversary of East Asia’s financial crisis.
In July 1997, the Thai Baht plummeted.
Soon after, financial panic spread to Indonesia and Korea, then to Malaysia.
In a little more than a year, the Asian financial crisis became a global financial crisis, with the crash of Russia’s ruble and Brazil’s real.
In the midst of a crisis, no one knows how far an economy will drop or for how long.
But capitalism, since its beginning, has been marked by crises; each time, the economy recovers, but each crisis carries its own lessons.
So ten years after Asia’s crisis, it is natural to ask: what were the lessons, and has the world learned them?
Could such a crisis recur?
Is another crisis imminent?
Some similarities exist between the situation then and today: before the 1997 crisis, there had been rapid increases in capital flows from developed to developing countries – a six-fold increase in six years.
Afterward, capital flows to developing countries stagnated.
Before the crisis, some thought risk premia for developing countries were irrationally low.
These observers proved right: the crisis was marked by soaring risk premia.
Today, the global surfeit of liquidity has once again resulted in comparably low risk premia and a resurgence of capital flows, despite a broad consensus that the world faces enormous risks (including the risks posed by a return of risk premia to more normal levels.)
In 1997, the IMF and the United States Treasury blamed the crisis on a lack of transparency in financial markets.
But when developing countries pointed their fingers at secret bank accounts and hedge funds, IMF and US enthusiasm for greater transparency diminished.
Since then, hedge funds have grown in importance, and secret bank accounts have flourished.
But there are some big differences between then and now.
Most developing countries have accumulated massive foreign currency reserves.
They learned the hard way what happens to countries otherwise, as the IMF and US Treasury marched in, took away economic sovereignty and demanded policies intended to enhance repayment to Western creditors, which plunged their economies into deep recessions and depressions.
Reserves are costly, for the money could have been spent on development projects that would enhance growth.
Nevertheless, the benefits in reducing the likelihood of another crisis and another loss of economic independence far outweigh the costs.
This growth in reserves, while providing insurance to developing countries, created a new source of global volatility.
Especially as the dollar lost its sacred place as a store of value under the Bush administration, rebalancing these multi-trillion dollar portfolios entails selling off dollar holdings, contributing to the dollar’s weakening.
Developing countries have also increasingly borrowed in their own currencies during the last few years, thus reducing their foreign exchange exposure.
For those developing countries that remain heavily indebted abroad, an increase in risk premia would almost certainly bring economic turmoil, if not crisis.
But the fact that so many countries hold large reserves means that the likelihood of the problem spreading into a global financial crisis is greatly reduced.
In the midst of the 1997 crisis, a consensus developed that there was a need for a change in the global financial architecture: the world needed to do better in preventing crises and dealing with them when they occur.
But the US Treasury and the IMF realized that the likely reforms, as desirable as they were for the world, were not in their interest.
They did what they could to ensure that no meaningful reforms occurred during the crisis, with the knowledge that after the crisis, momentum for reform would dissipate.
They were more right than they knew.
Who, after all, could have anticipated that Bill Clinton would be followed by a US president committed to undermining the multilateral system in all its manifestations?
For example, when the IMF correctly suggested, after Argentina’s crisis, that there needed to be a better way of restructuring debt (an international bankruptcy procedure), the US vetoed the initiative.
When the OECD proposed an agreement to restrict bank secrecy, the Bush administration vetoed that initiative, too.
Indeed, the two most important lessons of the crisis have not been absorbed.
The first is that capital market liberalization – opening up developing countries’ financial markets to surges in short-term “hot” money – is dangerous.
It was not an accident that the only two major developing countries to be spared a crisis were India and China.
Both had resisted capital market liberalization.
Yet today, both are under pressure to liberalize.
The second lesson is that in a highly integrated world, there is a need for a credible international financial institution to design the rules of the road in ways that enhance global stability and promote economic growth in developing countries.
With the IMF so dominated by the US (it is the only country with a veto) and Europe (which, by custom, appoints its head), the Fund was long seen as representing the interests of international creditors.
Its failures in the 1997 crisis further undermined its credibility, and its failure to do anything about the massive global financial imbalances that represent the main threat to global financial stability today, have underscored its limitations.
Reforms are still needed – including an overhaul of the global reserve system.
We may not be facing a repeat of the global financial crisis of 1997, but make no mistake, imperfections in the global financial system can still be costly, both in terms of global prosperity and stability.
The Autism Generation
SAN DIEGO – Not long ago, autism was among the rarest of disorders, afflicting only one child in every 2,000-5,000.
This changed dramatically with the publication in 1994 of DSM IV (the manual of psychiatric diagnosis widely used around the world).
Soon, rates exploded to about 1 per 100.
And a large study in South Korea recently reported a further jump to 1 in 38 – an astounding 3% of the general population was labeled autistic.
What is causing this epidemic and where are we headed?
The natural reaction to any plague is panic.
Parents are now fearful that every delay in speech or socialization presages autism.
Childless couples decide to avoid having kids.
Parents with autistic children are desolate and desperate to determine its cause.
The British physician Andrew Wakefield’s vaccine theory became wildly popular among parents, many of whom began to withhold vaccination (thus subjecting their own and other children to the risk of entirely preventable, and sometimes serious, illnesses).
Vaccination seemed a plausible cause because of the fortuitous correlation between getting shots and the onset of symptoms.
Wakefield’s work has now been thoroughly discredited as incorrect and dishonest science.
But fear of autism is so great, and the reactions to it so irrational, that in some circles Wakefield continues to be revered as a false prophet.
Other factors must be behind the sharp rise in the diagnosis.
Before DSM IV, autism was among the most narrowly and clearly defined of disorders.
Symptoms had to begin before age three and comprised a striking and unmistakable combination of severe language deficits, inability to form social relationships, and a preoccupation with a very narrow set of stereotyped behaviors.
In preparing DSM IV, we decided to add a new category describing a milder (and therefore much more difficult to define and distinguish) form of autism, called Asperger's Disorder.
This seemed necessary because some (still quite rare) children presented with more or less normal language development, but with grave social and behavioral difficulties.
We knew that Asperger’s would likely triple the rate of autistic disorders to about 1 per 500-1,000, but this doesn't explain the new rate of 1 per 38.
A second possible explanation for the explosion in autism is that previously missed cases are now being more accurately diagnosed.
This is probably a factor, but again only a minor one.
Perhaps, then, an environmental toxin is causing an epidemic outbreak of autism.
This has been the most popular theory, but it, too, is a small factor, at best.
There has been no sudden environmental change since 1994 to account for an explosion in rates.
This doesn't entirely disprove an environmental vector, but it does make the odds quite remote – especially since there is a far more plausible explanation.
The most likely cause of the autism epidemic is that autism has become fashionable – a popular fad diagnosis.
Once rare and unmistakable, the term is now used loosely to describe people who do not really satisfy the narrow criteria intended for it by DSM IV.
Autism now casts a wide net, catching much milder problems that previously went undiagnosed altogether or were given other labels.
Autism is no longer seen as an extremely disabling condition, and many creative and normally eccentric people have discovered their inner autistic self.
This dramatic swing from under- to overdiagnosis has been fueled by widespread publicity, Internet support and advocacy groups, and the fact that expensive school services are provided only for those who have received the diagnosis.
The Korean study, for example, was financed by an autism advocacy group, which could barely contain its enthusiasm at the high rates that were reported.
The Korean study paid no attention to the bias that haunts all epidemiological studies, which always overestimate pathology rates by including as disorder even very mild presentations that do not have clinical significance. It is entirely plausible that 3% of the population may have some smidgen of autism, but it is entirely implausible that so many would have symptoms severe enough to qualify as an autistic disorder.
Reported rates should be regarded as an upper limit, not as a true reflection of the rate of actual mental disorder.
Human nature, neurological illness, and psychiatric disorder all change very slowly, if at all.
Environmental toxins do not usually just pop out of nowhere to make a condition 100 times more common than it was less than 20 years before.
A more plausible scenario is that DSM IV gave autism purchase by introducing a milder form that is close to the extremely populous boundary of normality.
Then autism took flight on the wings of definitional diffusion, internet contagion, financial incentive, and naïve interpretation of epidemiological results.
The autism “epidemic” is set to spread further starting in May 2013, when the next revision of the diagnostic manual (DSM 5) will be published.
The DSM 5 definition of an “autistic spectrum” will cast an even wider net, capturing many people now considered to be normal or to have another disorder.
Their symptoms will not have changed – just the label.
The Autumn of the Commandante
The death watch for Fidel Castro is something that only Gabriel Garcia Marquez could get right.
His novel Autumn of the Patriarch captures perfectly the moral squalor, political paralysis, and savage ennui that enshrouds a society awaiting the death of a long-term dictator.
Commandante Fidel’s departure from power, of course, will be solely a matter of biology, and the few pictures of him that have emerged since he took ill last year clearly show biology at work.
When the end comes, change in Cuba could be as vast as any that greeted the end of the last century’s great dictators.
Stalin, Franco, Tito, Mao: all were mostly alike in their means and methods.
How they passed from the scene, however, was often very different, and these differences can shape societies for years and decades to come.
Consider the Soviet Union.
On March 9, 1953, from the Gulf of Finland to the Bering Sea, everything stood still; likewise in Warsaw, Budapest, Prague, and East Berlin.
In Beijing, Mao Zedong himself bowed low before an immense effigy of Joseph Stalin.
Huge mourning crowds, crying, nearly hysterical, could be seen all over the vast empire Stalin had ruled.
Yet, within days, the word Stalinism was being expunged from a new Soviet dictionary, and three years later my grandfather, Nikita Khrushchev, denounced Stalin’s “cult of personality” in his famous “Secret Speech” to the Communist Party’s XXth Congress.
The Khrushchev thaw that followed may have been short-lived, but for the first time in Soviet history the possibility of change was opened – a possibility that Mikhail Gorbachev seized upon in 1985.
The death of Marshal Josip Broz Tito brought forth an outpouring of another sort.
For decades, his personal rule imposed a false unity on Yugoslavia.
Following his death in 1980, that artificial state began to unravel, culminating in the genocidal wars in Bosnia, Croatia, and Kosovo of the 1990’s.
Not all long-term dictatorships, however, end in disintegration and mayhem.
Mao’s death allowed for Deng Xiaoping’s return from disgrace and internal exile.
Deng quickly routed Mao’s “Gang of Four” heirs, and in only a few years opened China’s economy, fueling a capitalist revolution that has transformed China far more completely – and successfully – than Mao’s socialist revolution ever did.
The Communist Party, of course, remains in power, and Mao’s portrait still looms over Tiananmen Square.
But both are mere relics of ideas and ideals that in reality have been consigned to the dustbin of history.
Spain, too, escaped violent dissolution when Generalissimo Francisco Franco’s fascist dictatorship collapsed at his death.
Here the old dictator can take some credit, for by re-establishing the monarchy under King Juan Carlos just before he died, Franco provided Spain with a foundation on which to build anew.
Little did Franco realize that what Juan Carlos would build, with the help of a clever young Franco-era bureaucrat named Adolfo Suarez, was the modern, democratic Spain of today.
It was no accident that communist countries were (and are) usually run by geriatric leaders, and democracies by younger men and women.
That difference matters.
Old leaders can preside successfully over smoothly running countries that need no radical re-examination of their policies and purposes.
There are exceptions to this rule, of course – Churchill, Adenauer, Deng, Reagan – but states cannot count on fortune bringing an exceptional ruler their way.
Younger leaders are more likely to be able to cope with the chop and change of difficult times.
Political competition makes it necessary for all politicians, whatever their age, to stay on their toes, anticipate new problems, and remain open to new ideas aimed at addressing them.
No one can keep himself ensconced in high office subject only to death or his own boredom.
One-party systems, one-man charismatic dictatorships, or a mixture of the two, as in Tito’s Yugoslavia, are a guarantee of sclerotic minds and inert governments.
So what will become of Cuba after Fidel departs?
Many observers portray Raúl Castro, Fidel’s younger brother and designated heir, as a pragmatist – the “practical Castro.”
When Cuba’s lavish Soviet subsidies vanished in the early 1990’s, it was Raúl who recognized that the regime’s survival required economic reforms, pressing to allow private agricultural markets to reopen in order to boost food production and stave off possible starvation.
However, this is the same man who, as the head of Cuba’s internal security apparatus, for many years represented the knuckles of an iron-fisted regime, directly responsible for imprisoning – and often torturing – thousands of dissidents.
So perhaps the best that could be hoped for is a Russian-style experiment with liberalization that is quickly called off by the regime’s nervous Old Guard.
Moreover, with the support of oil-rich allies like Venezuela’s President Hugo Chávez – and with the recent discovery of significant crude reserves off Cuba’s own coast – introducing reforms could well become less urgent.
In that case, Raúl may seek to cling grimly to the fossilized system that he helped build and maintain with such brutality.
But Raúl Castro is an old man himself, so we can hope for the prospect that some Deng or, better yet, a Suarez will ultimately emerge from the wreckage of Fidelism.
But for now, younger communist officials, like Foreign Minister Felipe Perez Roque, remain ideological hardliners whom many Cubans refer to as “los Taliban.”
If they take control and stick to their guns, Cuba could face another long biology lesson.
The Ayatollah and the Witches
WASHINGTON, DC – Mahmoud Ahmadinejad has now made the mistake that all Iranian presidents make: he has challenged the authority of the country’s Supreme Leader, Ayatollah Ali Khamenei.
He is doomed to fail.
The challenge posed by Ahmadinejad is such a predictable part of Iranian politics that it has come to be known as “the president’s symptom.”
It emerges from a president’s confidence that, as a popularly elected leader, he should not be constrained by the Supreme Leader’s oversight.
But the Islamic Republic’s history is littered with its presidents’ failed attempts to consolidate an independent power center.
Ultimately, divine authority trumps political authority.
This dual authority is embedded in the Islamic Republic’s constitution, and inevitably tilts toward the divine, particularly in a president’s second term.
Ahmadinejad is not an exception to this rule.
In fact, because he has pushed harder than his predecessors, his star is falling faster. Moreover, the controversial presidential election of June 2009, and the political crisis that ensued, irreparably damaged Ahmadinejad’s democratic legitimacy.
Khamenei was forced to use his authority to support the president, and has since repeatedly condemned the “Green Movement” that opposed Ahmadinejad’s re-election.
As a result, Ahmadinejad has been the most costly president for Khamenei to date, because he forced the Supreme Leader to deplete his power in the face of a common enemy – a move that called into question his own judgment and tarnished his reputation.
Ahmadinejad himself, however, has generally ignored the post-election crisis in his public statements, and evidently believed that Khamenei’s post-election support meant that the Supreme Leader would remain passive in the face of encroachments on his traditional powers and prerogatives.
Indeed, for the last two years, Ahmadinejad has repeatedly undermined parliament, and abruptly dismissed ministers tied to Khamenei, like Foreign Minister Manouchehr Mottaki and Intelligence Minister Heydar Moslehi.
Since becoming Supreme Leader 22 years ago, Khamenei has been relatively weak, but has adapted by seeking to encourage weakness in the Islamic Republic’s other high offices.
He has supported factionalization in the government, and, when necessary, has weakened factions that he previously supported.
Most importantly, he has ensured that Iran’s presidents remain weak, regardless of their agenda or popularity.
So, now that the threat posed by the Green Movement has diminished – at least in Khamenei’s eyes – the time has come to call Ahmadinejad to account.
Both men are hard at work preparing for the March 2012 parliamentary election, as well as the 2013 presidential election, and Khamenei has taken off the gloves.
He has given official propagandists the green light to attack Ahmadinejad and his cronies explicitly, portraying them as people who do not believe in the principle of the guardianship of the Shia jurist, the key concept bequeathed by the Islamic Republic’s founder, Grand Ayatollah Ruhollah Khomeini.
In the official view, Ahmadinejad and his circle lack rationality and wisdom; indeed, they are said to be in the grip of superstition.
There are even rumors that some of them have resorted to witchcraft to summon spirits from beyond the grave, and that Ahmadinejad has had direct contact with the hidden Imam (the Shia messiah).
Likewise, the judiciary, under Khamenei’s control, has accused the vice president, Mohammad Reza Rahimi, of leading an economic mafia, and many of Ahmadinejad’s allies have been arrested or are under investigation.
It is likely that the Guardian Council, which can veto legislation and bar candidates from standing in elections, will use its power to shift the balance in favor of Ahmadinejad’s conservative critics.
The anti-Ahmadinejad camp’s leaders, the brothers Ali and Sadeq Larijani, who head the parliament and judiciary, respectively, will help Khamenei to push the president from the center of power.
But, since Khamenei cannot accept a single, united political faction, it is extremely unlikely that he will let the Larijani camp (which includes Tehran Mayor Mohammad Baqer Qalibaf and former Foreign Minister Ali Akbar Velayati) become powerful enough to win the next presidential election.
Khamenei will likely create a new faction to compete with traditional conservatives after Ahmadinejad’s decline.
This might force him to pick a new face for the next presidential election, someone with little domestic-policy experience and little influence on ordinary people’s lives.
One possible candidate is Said Jalili, Iran’s current nuclear negotiator, or someone like him.
Only those with a strong background in intelligence or the Revolutionary Guards, and a low profile in domestic politics, need apply.
Having full control over the judiciary, the intelligence apparatus, and the military makes Khamenei seem invincible against all political factions or elected officials.
This will lead the regime down an increasingly autocratic path, applying more aggression at home and defying the West with greater self-confidence.
But the concentration of power in the Supreme Leader’s hands poses risks for the Islamic Republic.
When Khamenei dies, there is no strong and obvious successor.
And, since he has systematically weakened Iran’s political institutions so that the Islamic Republic itself has come to be identified with his person, his absence will create a vacuum.
His strength today foreshadows greater uncertainty in Iran’s future.
The Ayatollah Contemplates Compromise
WASHINGTON, DC – The recent nuclear talks in Istanbul between the five permanent members of the United Nations Security Council, plus Germany, and Iran have shifted the world’s focus to the possible terms of a deal when the sides meet again, probably in Baghdad on May 23.
So, what accounts for the new seeming willingness of Iran’s leaders to reach an agreement?
Economic sanctions and political isolation have, of course, deeply hurt the regime, especially the Revolutionary Guards, whose leaders and industries have been directly targeted by the international community.
But these are not the only factors.
The regime’s propaganda machine is already portraying the Istanbul talks as a triumph for the Islamic Republic and a setback for the West.
Indeed, it is setting the stage for a significant compromise by preparing both the Iranian public and the global community.
Iran, it must be remembered, cares as much about its image as it does about its nuclear achievements.
A successful strategy must allow Iran to come out of talks with a smile on its face, even if it gives up the most sensitive parts of its nuclear program.
Ayatollah Ali Khamenei, Iran’s Supreme Leader, has made an uncompromising nuclear policy central to his domestic authority.
For years, he sabotaged the efforts of Iranian officials who might have cut a deal with the West because he doubted their loyalty to him.
Those whom Khamenei did trust were not skillful enough to craft a policy of compromise that would preserve his ability to portray himself as a tough anti-American leader.
As the talks move ahead, the United States and its allies must stick to a dual-track policy: intensifying political pressure and economic sanctions, while negotiating seriously.
They should insist on transparency in Iran’s nuclear program, while offering a gradual easing of sanctions in exchange for verifiable guarantees that the regime is not pursuing nuclear weapons.
If things break down, the possibility of a pre-emptive military strike, whether by Israel or the US, remains an option.
Regardless of their outcome, the new negotiations have put Khamenei in a perilous position.
As the person in charge of Iran’s nuclear policy, compromising is as dangerous for him as digging in his heels.
This might be the last chance for Iran to change its nuclear policy, prevent military confrontation, and save the economy.
But, for Khamenei, nuclear concessions might also undermine his monopoly over domestic politics.
Khamenei is not a suicidal jihadist.
In 23 years of leadership, he has avoided risky domestic and foreign policies.
But he is not immune to miscalculation.
In 2005, Mahmoud Ahmadinejad relied on Khamenei’s financial and political support to win the presidency.
Today, however, Khamenei is profoundly regretful about that choice.
Ahmadinejad disobeys his orders, tries to discredit him with the public by challenging his authority, and undermines key institutions, including the judiciary and the parliament.
It is an open secret in Iranian political circles that Khamenei also regrets permitting volunteers of the Basij militia to attack the British embassy last November.
The troubling conclusion to be drawn from these episodes is that even if Khamenei is not looking for a military confrontation, he may very well be susceptible to misjudgments about how to avoid one.
Khamenei faces a deeper problem: he is not Ayatollah Ruhollah Khomeini, his predecessor and the Islamic Republic’s founding Supreme Leader, who shaped the system’s identity.
Khomeini was so self-confident, and his authority was so well consolidated, that he was not afraid to make concessions if he thought it necessary for the regime’s well-being.
Khamenei’s political standing is closely associated with the current nuclear policy, and he lacks the charisma and authority necessary to move the political and religious elite toward compromise.
For Khamenei, nuclear capability is not a goal but rather a means to force the West and its regional allies to recognize the regime’s strategic interests.
Moreover, he is convinced that the West is seeking to undermine the Islamic Republic through a “soft” assault of culture and politics, and that compromise on the nuclear program would lead inevitably to concessions on human rights and democracy, and eventually to regime change.
Given this, a guarantee that the West, especially the US, is not seeking the overthrow of Iran’s leaders would have to be a key component of a nuclear compromise.
Indeed, Khamenei might well demand that this guarantee cover Farsi broadcasts, financial and political support to opposition groups, and censorship of the Internet.
The nuclear crisis should be resolved through negotiations, before, in US President Barack Obama’s phrase, the window closes.
The problem for Khamenei – and thus for those negotiating with Iran – is that there is scant benefit for him in success.
The biggest obstacle to a successful outcome is the contradiction of his situation: to compromise, he must save face; but, to save face, he must not compromise.
The Ayatollahs’ Tipping Point
SOUTHAMPTON, ENGLAND – Once the crowds were in the streets in Tehran, one could, if one knew the script, begin the countdown: if today there are mass protests, tomorrow there will be threats of retaliation in the name of “national security.”
By day three, we will see journalists imprisoned and media shut down; day four, bloody reprisals against protesters by secret police; day five, arrests of key opposition figures.
Sure enough, right on schedule, each of those steps was set in motion in Iran, within the space of a week.
These same ten steps occurred in Thailand in 2006 – in ten days, and in seven days in Myanmar a year later.
The script is so well known by now among the world’s would-be dictators that it can take less than a week to lock down a country.
None of this should surprise anyone anymore.
We should understand that this time-tested script for establishing or enforcing a dictatorship exists – but so does a counter-strategy for opening up a closed society.
When a would-be dictator – anywhere, any time, on the right or the left – wants to close an open society or initiate a crackdown against a democracy movement, he follows ten classic steps: invoke a threat, create secret prisons, develop a paramilitary force, establish a surveillance apparatus, arbitrarily detain citizens, infiltrate citizen groups, target key individuals, go after journalists, call criticism “treason,” and subvert the rule of law.
Once these steps are put in place, it is extremely difficult for a pro-democracy movement to survive – but not impossible if counter-pressure is applied correctly.
History shows again and again – throughout the modern era and around the world – that people do indeed have some powerful tools to reestablish an open society if they were willing to use them.
The counter-script for establishing or restoring pro-democratic conditions consists of more mass protest; the appearance and display of resistance symbols; the emergence of enough spokespeople throughout society that all of them cannot be arrested at once; overt civil and covert disobedience, at every level of society, that brings the economy to a halt; withdrawal of support by lawyers and judges for the regime’s decisions; international sanctions tied to human rights and clean elections; the refusal – tricky but not unattainable – of many soldiers and police to fire at unarmed citizens; and, finally, when the rule of law is reestablished, serious prosecutions of the defeated regime’s ringleaders.
When we see footage of nonviolent protesters being brutally beaten by police and militia members, it is painful to deliver the message that, if history is a guide, continued street protest will make the difference between Iran being like Myanmar or, possibly, like Czechoslovakia.
Time and again, when mass street protest has been sustained for more than a week or two, a regime – even one that has begun beating and arresting protesters –eventually finds it practically and psychologically difficult to sustain its hold.
Street protest, if it can sustain itself for more than that crucial first week, has an effect that is both tactical and emotional; mass protest during the French Revolution made it clear to the courtiers that this rebellion would be too profound to quell in the usual manner; street protests in the American colonies, in the face of arrest or worse, made the colonies ungovernable even before George III waged a costly, unpopular war.
In Estonia in the 1980’s, the small, illegal protests that surrounded the public singing of the banned national anthem grew, and Estonians were emboldened as their numbers swelled by the thousands daily.
In the United States, street protests helped bring the Vietnam war to an end, and the mass protests of the civil rights movement showed that, as Martin Luther King, Jr. put it, “business as usual” could no longer continue.
According to King, disruptive mass protest exposes the tension that has been hidden or ignored, so that it can be addressed.
Iran’s citizens – and all people longing to resist a tyrannical government or to protest in an established democracy – should bear that lesson in mind.
Protest that works must disrupt business as usual and, ideally, stop traffic. Iranian citizens have shown great courage, and they would do well to continue pouring into the street and sitting down, lying down, or standing still.
Unless a regime is willing to start machine-gunning its citizens, peaceful, steady, long-term disruption of “business as usual” always works.
What the West can do is apply pressure on Iran – and on other governments in the future – to assure and account for the safety of protesters.
Natan Sharansky said that this tactic – the West tracking and demanding accountability for the treatment of individual internal dissenters – helped break up the Soviet Union.
In this crisis, the US president should form a united front with human rights groups, which can advise him exactly how to follow, sustain, and support those Iranians who have been or may yet be arrested, or worse.
Barack Obama says that America “stands with” those who support free assembly.
That will be welcome news to people living under dictatorial regimes installed and propped up by the US, and to the opposition leaders and journalists languishing in US-supported prisons in those countries for having engaged in just such protest.
But it is a start.
What a real revolution it would be if the Western democracies did indeed begin to frame their foreign policies with human rights and democratic processes as their benchmark.
The Bad Society
LONDON – How much inequality is acceptable?
Judging by pre-recession standards, a great deal of it, especially in the United States and Britain.
New Labour's Peter Mandelson voiced the spirit of the past 30 years when he remarked that he felt intensely “relaxed” about people getting “filthy” rich.
Getting rich was what the “new economy” was all about.
And the newly rich kept an increasing part of what they got, as taxes were slashed to encourage them to get still richer, and efforts to divide up the pie more fairly were abandoned.
The results were predictable.
In 1970, the pre-tax pay of a top American CEO was about 30 times higher than that of the average worker; today it is 263 times higher.
In Britain, the basic pay (without bonuses) of a top CEO was 47 times the average worker’s in 1970; in 2010, it was 81 times more.
Since the late 1970s, the post-tax income of the richest fifth has increased five times as fast as the poorest fifth in the US, and four times as fast in the UK.
Even more important has been the growing gap between average (mean) and median income: that is, the proportion of the population living on half or less of the average income in the US and Britain has been growing.
Although some countries have resisted the trend, inequality has been increasing over the last 30-40 years in the world as a whole.
Inequality within countries has increased, and inequality between countries increased sharply after 1980, before leveling off in the late 1990’s and finally falling back after 2000, as catch-up growth in developing countries accelerated.
The growth of inequality leaves ideological defenders of capitalism unfazed.
In a competitive market system,&#160;people are said to be paid what they are worth: so&#160;top CEOs add 263 times more value to the American economy than the workers they employ.
But the poor, it is claimed, are still better off than they would have been had the gap been artificially narrowed by trade unions or governments.&#160;The only secure way to get “trickle-down” wealth to trickle faster is by cutting marginal tax rates still further, or, alternatively, by improving the “human capital” of the poor, so that they become worth more to their employers.
This is a method of economic reasoning that is calculated to appeal&#160;to those at the top of the income pyramid.
After all, there is no way whatsoever to calculate the marginal products of different&#160;individuals in cooperative productive activities.
Top pay rates are simply fixed by comparing them to other top pay rates in similar jobs.
In the past,&#160;pay differentials were settled by reference to what seemed fair and reasonable.
The greater the knowledge, skill, and responsibility attached to a job, the higher the acceptable and accepted reward for doing it.
But all of this occurred within bounds that maintained some connection between the top and the bottom.
Top business salaries were rarely more than 20 or 30 times higher&#160;than average wages, and for most people differentials were far less.
Thus, the income of doctors and lawyers used to be about five times higher than that of manual workers, not ten times or more, as they are today.
It is the breakdown of non-economistic, common-sense ways of valuing human activities –framing them in larger social contexts –&#160;that has led to today’s spurious methods of calculating pay.
There is a strange, though little-noticed, consequence of the failure to distinguish value from price: the only way offered to most people to boost their incomes is through economic growth.
In poor countries, this is reasonable; there is not enough wealth to spread round.
But, in developed countries, concentration on economic growth is an extraordinarily inefficient way to increase general prosperity, because it means that an economy must grow by, say, 3% to raise the earnings of the majority by, say, 1%.
Nor is it by any means certain that the human capital of the majority can be increased faster than that of the minority, who capture all of the educational advantages flowing from superior wealth, family conditions, and connections.
Redistribution in these circumstances is a more secure way to achieve a broad base of consumption, which is itself a guarantee of economic stability.
The attitude of indifference to income distribution is in fact a recipe for economic growth without end, with the rich, very rich, and super-rich drawing ever further ahead of the rest.
This must be wrong for moral and even practical reasons.
In moral terms, it puts the prospect of the good life perpetually beyond reach for most people.
And, in practical terms, it is bound to destroy the social cohesion on which democracy – or, indeed, any type of peaceful, contented society – ultimately rests.
The Bailout Bias
WARSAW – The seemingly never-ending debate over the eurozone’s fiscal problems has focused excessively on official bailouts, in particular the proposed purchase of government bonds on a massive scale by the European Central Bank.
Indeed, we are warned almost daily – by the International Monetary Fund and others – that if bailout efforts are not greatly expanded, the euro will perish.
For some, this stance reflects the benefits that they would gain from such purchases; for others, it reflects mistaken beliefs.
Creditors obviously support bailing out debtor countries to protect themselves.
Many political leaders also welcome official crisis lending, which can ease market pressure on them.
The media, meanwhile, always thrives on being the bearers of bad news.
Mistaken beliefs, on the other hand, are reflected in metaphors like “contagion” and “domino effect,” which imply that financial markets become blind, virulent, and indiscriminate when they are disturbed.
Such terms provoke fear that, once confidence in any one country is lost, all others are in danger.
According to this logic, it follows that only a formidable countervailing power – such as massive official intervention – can halt the ravenous dynamics of financial markets.
Widespread use of expressions like “aim a bazooka at the eurozone,” and “it’s them or us,” demonstrates a pervasive Manichean view of financial-market behavior vis-à-vis governments.
But financial markets, even when agitated, are not blind.
They are capable of distinguishing, however imperfectly and belatedly, between macroeconomic conditions in various countries. This is why interest-rate spreads within the eurozone have been widening, with Germany and the Nordic countries benefiting from lower borrowing costs and the “problem” countries being punished by a high-risk premium.
Another, related, fallacy is the assumption that reforms can reap benefits only in the long run.
This misconception reduces the short-term solution to affected governments’ sharply higher borrowing costs to bailouts.
In fact, properly structured reforms have both short- and long-term effects.
For example, one does not need to wait for the completion of a pension reform to see reduced yields on government bonds.
Markets react to credible announcements of reforms, as well as to their implementation.
The countries that have been severely affected by the financial crisis illustrate the impact of reform.
One group – Bulgaria, Estonia, Latvia, and Lithuania (BELL) – experienced a surge in yields on their government bonds in 2009, followed by a sharp decline.
Another group – Portugal, Ireland, Italy, Greece, and Spain (PIIGS) – has had more mixed outcomes: yields have soared on Greek and Portuguese bonds, while Ireland’s were falling until recently.
These differences can be explained largely by the variations in the extent and structure of these countries’ reforms.
Proper reforms can produce confidence and growth.
Official crisis lending can buy time to prepare, and it can help to stop a banking-sector crisis, but it cannot substitute for reform.
All bailouts can create moral hazard, because they weaken the incentive to implement reforms that will avoid bad outcomes in the future.
To some extent, official crisis lending replaces the pressure from financial markets with pressure from experts and creditor countries’ politicians.
Among the proposed eurozone bailouts, none has come under the spotlight as much as the idea that the ECB should purchase massive quantities of the problem countries’ bonds.
Advocates of this approach stretch the concept of “lender of last resort” to suggest that providing liquidity to commercial banks is the same as funding governments.
They also present the alternative to a bailout as a “catastrophe.”
Finally, they cite similar policies implemented by the United States Federal Reserve, the Bank of England, and the Bank of Japan – as though merely mentioning past examples is evidence that ECB lending will work.
These rhetorical devices must not overshadow careful analysis of the various options.
There has been surprisingly little comparative analysis of the effects of quantitative easing (QE) in Japan, the US, and Britain.
Yet the evidence indicates that QE is no free lunch.
Although it may offer potential benefits in the short run, costs and risks invariably emerge later.
In Japan, QE may have contributed to delays in economic reform and restructuring, thereby weakening longer-term economic growth and exacerbating fiscal distress.
In the US, it failed to avert the slowdown during 2008-2011, while America’s 2011 inflation figures may turn out to be higher than they were in 2007.
In Britain, economic growth is even slower, while inflation is much higher. And these countries’ QE has also fueled asset bubbles in the world economy.
Massive purchases of government bonds by the ECB would be the worst type of bailout.
The fact that such purchases are potentially unlimited would exacerbate the problem of moral hazard.
It would also increase the risk of inflation, along with other negative economic consequences.
Moreover, such a bailout could undermine the ECB’s trustworthiness as guardian of the euro’s stability, particularly in light of the new political power that it would obtain.
And it would further undermine the rule of law in the EU at a time when confidence in the Union’s governing treaties is already fragile.
The key to resolving the eurozone crisis lies in properly structured reforms in the ailing countries.
Indeed, experience shows that there is no substitute.
The Balkans on Trial
Serbia’s long tragedy looks like it is coming to an end.
The death of Slobodan Milosevic has just been followed by Montenegro’s referendum on independence.
Independence for Kosovo, too, is inching closer.
The wars of the Yugoslav succession have not only been a trial for the peoples of that disintegrated country; they also raised huge questions about the exercise of international justice.
Do international tribunals of the sort Milosevic faced before his death promote or postpone serious self-reflection and reconciliation in damaged societies?
Do they strengthen or undermine the political stability needed to rebuild wrecked communities and shattered economies?
The evidence on these questions is mixed.
Indeed, the record of the International War Crimes Tribunal for Former Yugoslavia (ICTY), based in The Hague, may be instructive in judging the credibility of the strategy of using such trials as part of the effort to end civil and other wars.
In 13 years, the ICTY, with 1,200 employees, spent roughly $1.25 billion to convict only a few dozen war criminals.
Moreover, whereas members of all ethnic groups committed crimes, in its first years, the ICTY indicted and prosecuted far more Serbs than others, fueling a perception, even among opponents of Milosevic’s regime, that the tribunal was political and anti-Serbian.
We may regret that Milosevic’s own trial ended without a conclusion.
But a conviction only of Milosevic, however justified, without parallel penalties for his Croat, Bosniak, and Kosovo-Albanian counterparts would hardly have contributed to serious self-reflection within the post-Yugoslav nations.
To be sure, the arrest of General Ante Gotovina, adored by many Croats as a hero, but responsible for the brutal expulsion of a quarter-million Serbs from Croatia and north-west Bosnia – the biggest ethnic cleansing in Europe since WWII – improves the ICTY’s standing.
But Milosevic’s Croatian and Bosniak counterparts, Franjo Tudjman and Alija Izetbegovic, respectively, remained unindicted when they died.
So, too, the main commanders of the Kosovo Liberation Army (UCK).
Ramush Haradinaj, the prime minister of Kosovo, was accused but later released from detention.
I have always been convinced that Milosevic should have been put on trial in Belgrade.
After all, Milosevic’s critics and political rivals such as the journalist Slavko Curuvija and Milosevic’s former mentor, Ivan Stambolic, were assasinated by Serb police agents, who also tried three times to murder the opposition leader Vuk Draskovic.
There was, moreover, ample evidence of corruption among Milosevic’s inner circle, including members of his immediate family.
Holding the trial in Belgrade might have served better to catalyze a sober examination of the past.
The atmosphere was certainly favorable.
The majority of Serbs hold Milosevic responsible for the decline of their society.
Even before his fall, the opposition controlled most big Serbian cities, and in 2000 he lost the election that he called to shore up his authority.
The relatively small turnout at his funeral confirmed that only a minority of Serbs considers him a national hero.
Meanwhile, with the exception of Slovenia, the democratic transformation in the post-Yugoslav region remains uneasy.
Wars, ethnic cleansing, embargoes, and sanctions created not only psychological traumas, but also black markets, smuggling, large-scale corruption, and de facto rule by mafias.
The bombing of Serbia by NATO in 1999 heavily damaged its economy, with serious consequences for neighboring countries.
The definitive end of what remains of Yugoslavia may – at least today – pose no danger of war, but the Muslim Sandjak region will now be divided by state boundaries, and Albanian extremists, with their dreams of a Greater Albania, believe their influence in a separate Montenegro will be reinforced with a yes vote on independence.
Most Serbs and Croats in Bosnia believe that the best solution to the problems of that sad country would be to join the territories that they inhabit with their “mother” countries.
Then there is the unresolved status of Kosovo, where the Albanian majority demands independence, and extremists threaten to fight for it.
As one Kosovo Liberation Army commander warned, “If we kill one KFOR soldier a day, these cowards will leave.” With independence, the extremists would gain a territorial base from which to undermine Macedonia, southern Montenegro, and southern Serbia, jeopardizing stability in the entire region.
Serbia is offering Kosovo the formula “less than independence, more than autonomy.” It demands security guarantees for the Serbian minority and cultural monuments, as well as control of the borders with Albania and Macedonia to stop traffic in arms, drugs, and women, and to prevent the use of Kosovo by Albanian extremists.
Any resolution of Kosovo’s status is problematic, but the international community should not repeat old mistakes.
In 1991, the principle that only a politically negotiated division of Yugoslavia would be recognized was abandoned.
Now, as then, a change of boundaries without the consent of all concerned parties would not only violate international law, but could also lead to violence.
The international community must not be gulled into thinking that war-crimes trials marginalize, rather than mobilize, extremists and nationalists.
Pressure on Croatia and Serbia to arrest and hand over suspects – a condition of EU accession negotiations – has yielded several extraditions and may result in more.
But further trials alone are unlikely to bring about the long-term settlements that the region’s fragile states need in order to ensure stability and democratic development.
The people of the Balkans should feel that the EU offers them political and economic support.
They deserve it.
The Banality of Abu Ghraib
As more images of debased Iraqi detainees ricochet around the world, many viewers are as bewildered as they are outraged.
How could ordinary American soldiers, whether they were following orders or acting on their own, appear so untroubled, even exhilarated by their brutish conduct?
To be sure, over-eager military-intelligence interrogators, as well as the Bush Administration's high-handed attitude toward international law, helped precipitate the crisis.
But few commentators have focused enough attention on the site of this macabre theatre - not a battlefield, but a prison.
Prison experts are the least surprised by the grotesque reports filtering out of Abu Ghraib.
They recognize that prisons, as uniquely divisive and authoritarian institutions, regularly give rise to behaviors that appear depraved to the wider world but come to seem acceptable - even normal - behind bars.
Indeed, some of the most publicized prison scandals have erupted in the United States, which incarcerates more people in absolute and per capita terms than any other country.
Compared to Saddam Hussein's murderous old regime at Abu Ghraib, of course, American prisons are relatively well managed.
But as mandatory sentencing rules have landed more and more Americans behind bars, incidents that bear a disquieting resemblance to the degenerate cruelties photographed in Iraq have come increasingly to light.
The connection is no accident.
Some of the US scandals tie American prison personnel directly to Abu Ghraib.
In Virginia, for instance, human rights advocates report that inmates at two "supermax" prisons have been hooded and subjected to "excessive and malicious use of force by prison staff," often involving electric shock devices and rubber bullets.
John J. Armstrong, now the assistant director of operations for US prisons in Iraq, resigned from his previous post when he was named in two wrongful death lawsuits at one of those prisons.
Sergeant Ivan Frederick, the man directly in charge of the infamous Abu Ghraib "hard site," previously worked as a Virginia corrections officer.
In Pennsylvania, a 1998 inquiry into a supermax prison notorious for racist guards revealed videotapes of routine beatings and elaborate rituals of humiliation.
Specialist Charles A. Graner, identified as a ringleader in the Abu Ghraib depravity, has worked at that prison since 1996.
Some of the worst abuses have surfaced in Texas, America's death penalty capital and home to more prisoners than Germany, France, Belgium, and the Netherlands combined.
When George W. Bush was governor, a federal judge ruled that the state's entire penal system was pervaded by a "culture of sadistic and malicious violence."
Texas prison guards regularly rely on excessive force, the judge concluded, officials ignore sexual enslavement, and the state's isolation units function as "virtual incubators of psychoses."
Despite this appalling record, the US occupation authorities in Iraq appointed a former director of the Texas prison system, Lane McCotter, to help set up operations at Abu Ghraib in May 2003.
Two months earlier, McCotter's private prison company was cited by the US Justice Department for lax supervision and mistreatment of inmates at a New Mexico jail.
Before that, McCotter led Utah's corrections department, but was forced to resign after the death of a schizophrenic inmate who had been stripped naked and strapped to a restraining chair for 16 hours.
Of course, malicious imprisonment is by no means uniquely American.
Even in Western Europe, which boasts the most rehabilitation-oriented penal systems, ghastly scandals periodically erupt.
In 2000, the chief physician at Paris's crumbling La Santé penitentiary, Veronique Vasseur, wrote a scathing exposé of "virtually medieval" conditions, complete with rat infestations, rotten food, extreme temperature variations, desperate self-mutilations, bullying, drug-dealing guards, and widespread sexual assault, often perpetrated by staff.
According to a 2003 report, conditions have worsened since Dr. Vasseur's report, and France's overcrowded prisons are on a "descent to hell."
Particularly troubling is France's protracted incarceration of pre-trial suspects.
In a country that regards itself as a civilized counterweight to belligerent American hegemony, nearly half of all prisoners have never been convicted of a crime.
Why do prisons the world over concentrate such suffering and misconduct?
Partly by design.
Prisons herd together angry, unruly people against their will.
While the best facilities provide programs to help prisoners reintegrate into society, prisons also subject inmates to strict, often arbitrary discipline and depersonalizing rituals like numbering and strip searches - practices that foster more rage than reformation.
On the other side of the bars, low-paid, often poorly trained corrections officers exercise near-absolute authority over an irascible population.
In time, even the most well meaning come to regard their wards with cold detachment, if not dehumanizing contempt.
Not all prisons succumb to these corrosive and polarizing dynamics. But penologists recognize that certain factors - including overcrowding, insufficient guard training, detached management, shoddy infrastructure, racial tensions, and lack of public accountability - make disaster almost inevitable.
Many of these conditions pervade prisons worldwide.
All of them were present in Iraq - in addition to the strains of combat and officially approved interrogation techniques that senior US officials now admit violated the Geneva Conventions.
Rather than heeding warnings from the Red Cross and others, however, Pentagon officials let dangerous prison dynamics spin out of control.
A flurry of investigations will now try to figure out what went disastrously awry at Abu Ghraib.
But ensuring that "justice is done," as US Secretary of State Colin Powell promised, means that judgment must not stop at the low-ranking soldiers who were foolish enough to pose for demented snapshots.
More importantly, the abuses in Iraq demand careful scrutiny of detention practices not only there, but in our own communities as well.
The Bankers’ Capital War
PARIS – Almost everyone nowadays agrees that banks need more capital.
Christine Lagarde chose to make it her first campaign as Managing Director of the International Monetary Fund.
And conventional analyses of the financial crisis focus on the weak capital base of many banks, which left them with insufficient reserves to absorb the losses they incurred when asset prices fell sharply in 2007-2008.
Taxpayers, notably in the United States and the United Kingdom, were obliged to step in to fill that hole.
The same disaster movie is now playing in the eurozone.
We can only hope that the bankers are eventually rescued from the burning eurotower by Super-Sarkozy and Wonder-Frau Merkel – and that the Basel Committee of Banking Supervisors ensures that there will be no sequel.
The Basel Committee has proposed strengthening considerably both the quantity and the quality of capital in the global banking system.
This would mean much larger core equity capital for all banks and a range of additional reserves – a capital conservation buffer, a countercyclical buffer, and a surcharge for systemically vital institutions – to be added by local regulators as they see fit.
Unfortunately, the final implementation date for these new obligations has been deferred until 2019 – by which point a few banks might still be left standing.
In fact, the view that banks need more capital, while widespread, is not unanimous.
Two notable holdouts are Jamie Dimon and Walter Bagehot.
Dimon, the Chairman and CEO of J.P. Morgan, has been making his contrarian views known to regulators, most recently almost coming to blows, according to eyewitnesses, in a spat with Governor of the Bank of Canada Mark Carney, who chairs a group that is designing parts of the new regime.
Walter Bagehot is in no position to threaten Carney, or any other regulator.
He died in 1877.
But in his great work on finance, Lombard Street, published in 1873, he asserted that, “A well-run bank needs no capital.
No amount of capital will rescue a badly run bank.” I expect that Dimon, who has steered Morgan through the crisis without the need for public support, would say “amen.”
Of course, regulators cannot easily require all banks to be “well-run” in Bagehot’s sense.
So banks require capital as a backstop.
It is not a bad substitute for perfect judgment, and at least it can be defined and measured.
But how much capital is enough?
Even if, at heart, they take the Bagehot view, all bankers recognize that market confidence requires them to demonstrate a more solid capital base to attract wholesale funding, as well as to satisfy the stricter demands of regulators.
But a wide gap has opened up between the financial authorities and the banks on the costs and benefits of the much higher requirements now demanded by Basel.
Basel 3, the Basel Committee’s new global regulatory standard on banks’ capital adequacy and liquidity, will more or less double the equity requirements, and will impose extra costs on banks deemed “too big to fail.”
The Committee’s analysis of the economic consequences found that the impact on growth would be modest, perhaps reducing GDP by 0.33% after five years – easily within the margin of forecast error.
The OECD took a different view, putting the growth impact at about twice that level, and rather higher in Europe, where companies rely far more on bank financing than they do in the US.
In sharp contrast, the Institute of International Finance, the leading trade association for the world’s top banks, believes that the impact of higher capital requirements could be far stronger.
The IIF believes that GDP could be fully 5% lower after five years, with unemployment more than 7% higher.
The IIF’s forecast may seem alarmist, but the competing estimates are based on some intriguing analytical differences.
Regulators take the view that the impact of higher capital requirements on the cost of credit to borrowers will be modest, as the overall cost of funds to banks will not rise much.
They rest their case on the famous Modigliani-Miller theorem, which implies that a company cannot alter its capital cost by changing the balance between equity and debt on its balance sheet.
If there is more equity, then logically debt should be cheaper, as the company (or bank) is better insulated from default.
Bankers accept that, in the long run, the theorem might hold, but argue that it will take time, especially given recent events, to persuade investors that banks are genuinely safer, and that their shares should be thought of as closer to utility stocks, yielding a lower return.
Indeed, Franco Modigliani also argued that investors have a “preferred habitat,” and that coaxing them out of it carries some cost.
That does not bode well for banks, which have been a very poor investment in the last few years.
Moreover, the banks assume that they will need to hold more capital than regulators ostensibly require in order to maintain a margin of safety.
These assessments are unusually divergent.
Though economists are notoriously disputatious, their estimates do not often differ by a factor of ten.
It would be wise, before the rules are set in stone, to refer the issue to the World Institute for the Resolution of Economic Disputes in Baltimore, or “The Wire.”
Unfortunately, there is no such institute, in Baltimore or anywhere else.
There is no one who can offer a timely and, above all, authoritative view on which forecast is the more compelling scenario.
The stakes of not knowing are very high.
The Banking Conundrum
BARCELONA – Central bankers and regulators tend to worry that too much competition in the financial sector increases instability and the risk of systemic failure.
Competition authorities, on the other hand, tend to believe that the more competition, the better.
Both can’t be right.
There is a trade-off between competition and stability.
Indeed, greater competitive pressure may increase the fragility of banks’ balance sheets and make investors more prone to panics.
It may also erode the charter value of institutions.
A bank with thin margins and limited liability does not have much to lose, and will tend to gamble – a tendency that is exacerbated by deposit insurance and too-big-to-fail policies.
The result will be more incentives to assume risk.
Indeed, for banks close to the failure point in liberalized systems, the evidence of perverse risk-taking incentives is overwhelming.
That is why crises began to increase in number and severity after financial systems in the developed world started to liberalize in the 1970’s, beginning in the United States.
This new vulnerability stands in stark contrast to the stability of the over-regulated post-World War II period.
The crises in the US in the 1980’s (caused by the savings-and-loan institutions known as “thrifts”), and in Japan and Scandinavia in the 1990’s, showed that financial liberalization without proper regulation induces instability.
In an ideal world, the competition-stability trade-off could be regulated away with sophisticated risk-based insurance mechanisms, credible liquidation and resolution procedures, contingent convertibles, and capital requirements with charges for systemic institutions.
The problem is that regulation is unlikely to eliminate completely market failures: the competition-stability trade-off can be ameliorated, but not eliminated.
For example, the United Kingdom’s Independent Commission on Banking (ICB) has proposed ring-fencing retail activities from investment-banking activities in separately capitalized divisions of a bank holding company.
This is a compromise aimed at minimizing the incentive to gamble with public insurance while allowing some economies of scale for banking activities.
But the devil is in the details, and, even in the most optimistic scenario, the trade-off between competition and stability will remain.
One shortcoming of the measure consists in the fact that the crisis has hit both universal and specialized banks.
Furthermore, the definition of the boundary between retail and investment-banking activities will leave an important grey area and generate perverse incentives.
And the regulatory boundary problem persists: risky activities may migrate to areas where regulation is lax and reproduce the problems with the shadow banking system that we have witnessed during the crisis.
As a result, investment-banking operations might need to be rescued if they pose a systemic threat.
The massive regulatory failure exposed by the financial crisis that began in 2008 underscores the need to concentrate on reforms that provide the correct incentives to banks.
But, if the past is any guide to the future, we should be aware of the limits of regulation.
The UK’s ICB has rightly stated that there is room to improve both competition and stability, given the current weak regulatory framework, but it would be imprudent to strive for the complete elimination of market power in banking.
The design of optimal regulation has to take into account the intensity of competition in the different banking segments.
For example, capital charges should account for the degree of friction and rivalry in the banking sector, with tighter requirements in more competitive contexts.
It follows, then, that prudential regulation and competition policy in banking should be coordinated.
This is all the more true in crisis situations, in which a protocol of collaboration should be implemented to delineate liquidity help from recapitalization, and to establish the conditions for restructuring in order to avoid competitive distortions.
What implications does this have for market structure?
Concentration in well-defined deposit and loan markets is linked with competitive pressure.
In more concentrated markets, banks tend to offer worse terms to customers.
The crisis has affected both concentrated banking systems (for example, the UK and the Netherlands) and non-concentrated systems (e.g., the US and Germany).
In both cases, it has brought consolidation, leaving fewer players with increased market power and too-big-to-fail status.
Witness the takeover by Lloyds TSB of the troubled HBOS (Halifax/Bank of Scotland) in the UK, or post-crisis consolidation in the US.
All this would not be so problematic if the increased market power of the merged institutions were a temporary reward for past prudent behavior.
In that case, the benefits would wane in importance as new competitors entered the banking fray.
But if banks’ market power increases due to barriers to entry, consumers and investors will suffer.
An active competition policy will be needed.
But the degree to which the authorities will be able to push for more competition in banking will depend crucially on the regulatory framework.
Let us fix and strengthen that framework, while bearing in mind that a simple mandate to maximize competitive pressure in banking is no more possible, or desirable, than one that would aim at eliminating instability completely.
Central Banking’s New Face
LONDON – A changing of the guard is underway at many of the world’s leading central banks.
Haruhiko Kuroda is now installed as the governor of the Bank of Japan (BOJ), faced with the daunting task of ending two decades of stagnation.
Mark Carney, the Bank of Canada’s current governor, who is set to take over as the governor of the Bank of England (BoE) in July, is already making his presence felt in British monetary-policy debates.
And in the United States, the expected conclusion of Ben Bernanke’s term as Chairman of the Federal Reserve Board in January is already inviting speculation about his successor.
The only holdouts among the world’s leading economies are the eurozone and China.
But that does not necessarily imply constancy.
Mario Draghi has been the president of the European Central Bank for barely a year, and the governor of the People’s Bank of China, Zhou Xiaochuan, was almost replaced when he reached retirement age in February.
Twenty years ago, such developments would have interested mostly bankers and businesspeople.
But, since the global financial crisis, the need to revive and sustain economic growth in the US, the United Kingdom, and Japan – and to avoid financial collapse in the eurozone – has prompted major central banks to be more outspoken and pursue more aggressive monetary policies, including unconventional measures like quantitative easing (QE).
As a result, many central bankers have become household names; some even have tabloid nicknames, like “super Mario” Draghi.
This new prominence has also forced some central bankers to reassess their decision-making processes.
In Japan, outsiders recently got a rare glimpse into the BOJ’s activities when minutes of a policy meeting were leaked.
Likewise, the accidental release a day early of the minutes from the Fed’s March rate-setting meeting to more than 100 people, including banking executives, congressional aides, and bank lobbyists, raised questions about how the bank controls the disclosure of privileged information.
In fact, the Fed has been under increasing scrutiny since 2008, when near-zero nominal interest rates drove it to become the first central bank to adopt QE.
In a push to reduce the cost of borrowing, the Fed purchased long-term assets in the market, injecting liquidity into the financial system.
The BoE and the ECB have since adopted similar measures.
In early April, the BOJ announced plans to unleash the most aggressive bond-buying program of all, promising to inject $1.4 trillion into the economy over the next two years in order to meet an inflation target of 2%.
This is monetary policy on steroids, and, to opponents of inflation-inducing money creation, it amounts to playing with fire.
But, for Japan, which has been struggling with deflation for a generation, it is a risk worth taking.
Whether Kuroda’s assault will bolster domestic consumption and investment remains to be seen.
Unconventional measures are part of a broader transformation of monetary policymaking.
In addition to becoming bolder and more expansive, it has become increasingly intertwined with fiscal policy.
This is most explicit in Japan, where monetary policy is a central component of Prime Minister Shinzo Abe’s economic strategy, dubbed “Abenomics,” implying collaboration between the government and the central bank.
Does this undermine central-bank independence by amounting to a de facto subordination of unelected technocrats to elected politicians?
Arguably, Japan is an exceptional case, with the constraint of the zero bound on nominal interest rates demanding, at long last, a deviation from conventional measures.
In Europe, however, Bundesbank President Jens Weidmann has criticized the ECB for overstepping its mandate with its “outright monetary transactions” program, through which Draghi aims to fulfill his pledge to guarantee the euro’s survival.
As a result, questions about the role of monetary policy and the independence and accountability of central banks, once confined to rarefied academic discussions, are fixtures of broad policy debate.
But, rather than try to define a single approach, central bankers should aim to develop individualized approaches within the orthodox monetary-policy framework, which revolves around price stability and independence.
For example, the Fed’s mandate dictates that price stability can be explicitly linked to active support for GDP growth and employment; for the BoE and the ECB, it can be a condition for achieving the broader goal of sustainable growth and employment.
As long as politicians observe the rule of non-interference – at least publicly – central banks will be perceived as unconstrained by political interests.
The BOJ, by demonstrating that aggressive money creation is a legitimate approach to fighting deflation, has broken previously sacrosanct conventions.
At the same time, it has taken the unprecedented step of incorporating monetary policy into a comprehensive economic strategy based on coordination among different policy areas and their associated institutions.
This integrated approach could prove effective in countries where the real economy and the financial sector are closely linked, ensuring the timely, orderly implementation of policies, while preventing adverse spillovers.
Such coordination would infringe on central-bank independence no more than multilateral cooperation undermines the sovereignty of the countries involved.
While the impact of Abenomics on Japan’s economy remains to be seen, its impact on debates about monetary policy and the relationship between central banks and governments is already becoming apparent.
One hopes that Carney will follow this trend of challenging conventional wisdom at the BoE.
A new era of active and varied monetary policy may have begun, with potential benefits for all.
The Bankrupt Theology of Financial Deregulation
GENEVA – Now that the global financial crisis is abating, it is time to take stock of our mistakes and ensure that they are not repeated.
Beyond regulatory improvements, preventing payment incentives from rewarding reckless risk taking, and building Chinese walls between originators of securities and rating agencies, we need to discover what made this crisis so difficult to predict.
The International Monetary Fund is our global watchdog, and many believe that it failed to foresee the crisis because it was distracted or looking in the wrong places.
I disagree.
The problem is that the IMF was unable to interpret the evidence with which it was confronted.
I served on the IMF Board in June 2006 when it discussed its annual review of the United States.
The staff “saw” the relaxation of lending standards in the US mortgage market, but noted that “borrowers at risk of significant mortgage payment increases remained a small minority, concentrated mostly among higher-income households that were aware of the attendant risks.”
A few months later, in September 2006, just ten months before the sub-prime mortgage crisis became apparent to all, the Global Financial Stability Report (GFSR), one of the IMF’s flagship publications, stated that “[m]ajor financial institutions in mature...markets [were]...healthy, having remained profitable and well capitalized.”
Moreover, “the financial sectors in many countries” were supposedly “in a strong position to cope with any cyclical challenges and further market corrections to come.”
The IMF’s radar started blinking only in April 2007, virtually when the problem was already hitting its windshield, but still with little sense of urgency.
Clearly the Fund’s surveillance of the US economy was ineffective, and its multilateral surveillance of financial markets no better.
Admittedly, the IMF was not alone in failing to interpret the underlying facts that triggered the crisis, but that is little consolation.
Before the crisis, the IMF’s best-known function – lending to countries with balance-of-payment problems – was becoming irrelevant.
Many emerging markets preferred to self-insure by accumulating reserves rather than borrow from the Fund.
Ironically, this was leading the IMF to focus on its supervisory role. So, in searching for the causes of the IMF’s failure, we can rule out distraction by more urgent matters.
The Fund normally expects that problems come from the usual suspects – economically volatile developing countries – but this time the crisis was developing a few miles away from its headquarters.
Perhaps this proximity was at the root of the IMF’s failure to interpret the evidence right under its nose.
If so, it is a failure that raises two key questions.
First, is the Fund’s governance structure suited to exercising arms-length surveillance of its main shareholders?
And, second, did ideological blinders prevent the IMF from acknowledging that deregulation could contribute to a disastrous outcome?
It is inconceivable that the Fund, with its qualified and dedicated staff, would have failed so miserably in detecting and calling attention to the vulnerabilities piling up in the US mortgage market had they occurred in a developing country. But power in the IMF currently follows the logic of its lending role.
The more money a country puts into the pool of resources, the more influence it gets.
I, for one, am not happy with the way in which “quotas” to the IMF are calculated, but I have to admit that exchanging money for votes is a perfectly adequate governing structure for a lending institution.
But it is not adequate for an institution that is meant to exercise arms-length surveillance of its members – particularly its most influential member, whose domestic policies have global systemic implications.
That “money-for-influence” governance structure indirectly impairs the Fund’s capacity to criticize its most important members’ economies (let alone police compliance with their obligations).
And, as I have witnessed several times, if the IMF staff ever do become too candid in their criticism of powerful members, the target governments use their leverage to water down the public communiqués issued by the Board.
Let us now consider the second question – whether the Fund suffered from a mindset that blinded it to the causes of what was happening.
As early as August 2005, Raghuram Rajan, the IMF’s Economic Counselor (chief economist) at the time, was warning of weaknesses in the US financial markets.
Rajan saw that something potentially dangerous was happening, warning that competition forces were pushing financial markets “to flirt continuously with the limits of illiquidity” and concealing risks from investors in order to outperform competitors.
Perhaps most revealingly, though, Rajan nonetheless optimistically argued that “[d]eregulation has removed artificial barriers preventing entry of new firms, and has encouraged competition between products, institutions, markets, and jurisdictions.”
In other words, he clearly believed that regulation created “artificial barriers,” and that “competition between jurisdictions” – that is, between regulators – was to be welcomed.
Such beliefs come naturally to those committed to the view that markets perform better without regulation, and Rajan’s statement is a good illustration of the IMF’s creed at the time.
And it was this boundless faith in markets’ self-regulatory capacity that appears to be at the root of the Fund’s failure to find what it was not looking for.
There are now encouraging signs of change at the IMF, but this should not reassure us.
As the political economist Fred Block has noted, “societies invariably draw back from the brink of full-scale experimentation with market self-regulation.”
Unfortunately, this also makes self-regulation a faith that is very difficult to dispel, because its priests can always claim that its failures result not from theological bankruptcy, but from insufficient orthodoxy.
The Battle for Bahrain
MANAMA - The fervor for change that inspired revolutions in Tunisia and Egypt is now rocking Bahrain. But the uprising in Manama differs from the mass protests that turned out longtime rulers in North Africa. Indeed, sectarian fault lines, together with the security forces’ complete fealty to the monarchy, seriously diminish the likelihood of peaceful regime change.
Whereas Tunisia and Egypt are relatively homogeneous countries – Sunni Muslims constitute more than 90% of their inhabitants – Bahrain’s Sunnis, including the royal family and the country’s political and economic elite, comprise only about one-third of the population.
The rest are Shia.
Each of these groups is making different, if not contradictory, demands.
The Shia focus on political reforms that would reflect their majority status. Aggrieved Sunnis, however, want socio-economic changes, such as affordable housing. And, whereas Egyptian protesters of all types found common ground in insisting that President Hosni Mubarak resign, Bahrainis will find it almost impossible to agree on a rallying cry.
The ruling al-Khalifa family will not relinquish its power willingly. To preserve itself, the regime relies on imported security forces that are beholden only to the royal family. Drawn from Jordan, Pakistan, and Yemen, they are not reluctant to beat and kill protesters, for they know that any change at the top would mean defeat not only for the al-Khalifas, but for themselves as well.
Indeed, Bahraini security forces have been ruthless in their attacks against demonstrators, killing six.
Given this alignment of forces, and the bloodshed that has already occurred in Manama’s Pearl Square, the scenes from Cairo of protesters arm-in-arm with soldiers and hugging tank crews are unlikely to be replayed here.
Moreover, whereas in Egypt, historically a stable country, 18 days of chaos were enough to convince the military to restore order by ousting Mubarak, Bahrainis have greater experience with social unrest than Egyptians or Tunisians do.
Political instability is a way of life in Bahrain.
From the turmoil in the 1920’s, following administrative reforms, to labor protests in the 1950’s, the country is accustomed to agitation. As a result, factional strife is unlikely to panic the rulers and is even less likely to persuade them that the king must abdicate to save the country.
The legislature’s role and influence in these three countries also vary. In Tunisia and Egypt, authoritarian regimes allowed no political space for dissenting voices.
When Mubarak felt his power was slipping and reached out to his adversaries, he found disorganized opposition parties with little political experience and no support in society. They could not formulate coherent positions and practical demands.
Instead, they clung to hard-line positions, leaving Mubarak unable to find a solution to the impasse.
But here in Bahrain, the situation is different. Opposition parties have been active for almost a decade, and have significant representation in the legislature.
The leading opposition group, al-Wifaq, has 18 seats in the 40-member parliament. In talks with the opposition, the monarchy will find seasoned politicians ready to bargain over long-held demands. And, with widespread support among its constituents, al-Wifaq can do much to reduce tensions.
King Hamad has a number of other options available to him. Because citizens have so many grievances, he can do much to placate them. He can address Shia claims of discrimination by offering them more jobs in government ministries. He can promise to invest state funds in their run-down communities. He can mollify both Shia and Sunnis by granting them affordable housing. He can appease both factions by ending a naturalization policy that confers citizenship on foreign-born Sunnis, eroding the Shia majority.
And he can dismiss the prime minister, Khalifa bin Salman al-Khalifa, who has exhausted many on both sides of the sectarian divide during his 40 years in power.
In short, Bahrain’s rulers have many cards to play – and the international response to the uprising seems likely to strengthen the regime further. Bahrain is, after all, a key American ally, hosting the United States Navy’s Fifth Fleet, which patrols the Persian Gulf and keeps Iran in check. While the US has urged the Bahraini government to rein in its security forces, it is evidently unwilling to press for regime change.
Keeping its naval bases will be a top US priority – one that will ultimately shape its response to the situation in Bahrain.
Saudi Arabia, too, can be expected to do everything in its power to prevent the al-Khalifas’ fall. Bahrain is the Kingdom’s most loyal ally in the region, and the Saudis fear that sectarian unrest could spread to the country’s eastern region, where a Shia-minority nurses long-held grievances.
For years, the Saudis have propped up the Bahraini regime by providing free oil and funding its budget. When unrest erupted, Saudi Arabia reportedly dispatched military units to bolster Bahrain’s paltry armed forces.
Change may be coming to much of the Middle East.
But, with Bahrain’s social fault lines too wide to bridge, the regime willing to resort to brutal violence to crush any uprising, and the international community prepared to look the other way, the protesters in Manama should be prepared for defeat.
The Battle for Churchill’s Bust
NEW YORK – The election of the United States’ next president is surely the most important contest in the democratic world.
Yet the issues being contested can seem awfully trivial.
Consider, for instance, the question of Winston Churchill’s bust.
A bronze sculpture of the British prime minister had been in the Oval Office of the White House since the 1960’s.
On becoming President, Barack Obama replaced it with a bust of Abraham Lincoln.
Mitt Romney, his Republican opponent in November’s election, has vowed to restore it if he wins.
Then a White House spokesman said that the bust was still on the premises, just in a different room, whereupon the story changed once more: there were apparently two busts of Churchill; one still in the White House, and one that Obama returned to the British embassy.
Why would anyone care about this?
One answer was provided by two of Mitt Romney’s advisers, who stated that their candidate particularly valued the “special relationship” with Britain because of the shared “Anglo-Saxon heritage.”
This heritage, they claimed, was not sufficiently “appreciated” by the current president.
When this bizarre statement, with its racist undertones, threatened to become a scandal, Romney quickly distanced himself from it.
He did not want to be seen as a racist.
But how else is his peculiar nostalgia for Churchill’s bust to be understood?
In fact, the phrase “Anglo-Saxon” is not often heard any more in the US, where the majority of the population has not been of Anglo-Saxon origin for a long time (which is also true of Britain’s largest cities).
When Americans use the term, it is usually to differentiate white Americans from the rest, which is not something that most Americans, least of all presidential candidates, would now choose to do in public.
“Anglo-Saxon” is more often used in a negative sense by the French, as in “Anglo-Saxon bankers” or “Anglo-Saxon conspiracies” (to keep the French down).
Just recently Le Monde had the wonderful headline: “[President] Hollande Defends French Foie Gras against Anglo-Saxon lobbies” (the reference was to California’s ban on foie gras under its animal-cruelty laws).
Even Churchill himself did not speak of Anglo-Saxons much.
He talked about “the British race” or the “English-speaking peoples.”
The so-called “special relationship” between Britain and the US, certainly prized by Churchill, was not so much racial as it was a product of World War II – and a rather complicated one at that.
During the war, Churchill and Roosevelt shared the idea that once Germany and Japan were defeated, British and US military forces should act as global policemen.
They believed that the world would be safe from future Hitlers if it were, at least for some time, under the enlightened leadership of the democratic English-speaking peoples.
By the end of the war, however, Britain was too exhausted to police the world.
The country was bankrupt and His Majesty’s colonial subjects were growing restive.
The future belonged to the US and the Soviet Union, neither of which had sentimental feelings about the British Empire, let alone the “Anglo-Saxons.”
But the British elite, fully aware of their country’s decline, took the “special relationship” with the US very seriously, for it was the only way for Britain to feel like it was still a major power, unlike, say, France.
They still do.
Churchill certainly saw it that way, but so did Tony Blair, who presented President George W. Bush with the second Churchill bust.
Americans, on the whole, have far less interest than the British in the “special relationship.”
But they are often sentimental about Churchill.
He is the man whom many American presidents would like to emulate, not because of any racial affinities, but because of his allure as a wartime leader.
The US is the strongest military power in the world, just as Britain was in Churchill’s youth.
And, like British empire-builders in the past, US elites often claim a moral mission to remake the world in America’s image.
Churchill, in other words, became a symbol of presidential hubris in the US, even as the “special relationship” can be viewed as a symbol of British decline.
People tend to forget that Rudyard Kipling’s famous poem about “the white man’s burden” was not an ode to the British Empire, but to the US colonial enterprise in the Philippines.
Too much power corrupts, as we all know.
Hubristic presidents contemplating Churchill’s bust in their office are prone to believe that they have been called upon to be “war presidents” – that they, like Churchill in 1940, must oppose the next Hitler.
This siren song drew the US into Vietnam, Afghanistan, and Iraq.
So, when Obama decided to remove Churchill’s bust from his office in 2008, this struck me as a very sensible gesture.
A little less hubris would do the US, as well as the world, some good.
But now Romney wants him back.
Whatever else he might be, Romney does not come across as a convincing war leader.
Businessmen rarely are.
Yet he likes to portray himself as a tough patriot, and Obama as an un-American wimp.
Perhaps Romney wants another war, in which he can play Churchill.
Or perhaps his two advisers were speaking the truth.
Maybe Romney really is feeling sentimental about the “Anglo-Saxon heritage,” even as Asian power grows.
If so, nostalgia for Churchill is hardly a sign of American vitality, but more like a romantic rearguard battle, typical of a country in decline.
The Battle for Europe
The European summit in Brussels this weekend was intended to equip the European Union with a constitution that would enable it to handle the challenges posed by the admission of ten new member states next spring.
Instead, the summit's breakdown may be an advance warning that this enlargement could prove to be so disruptive as to lead, not to a benign transformation of the EU, but to its radical dislocation.
On past precedent, the odds ought to be against any dramatic disaster.
The EU has confronted many political crises in the past, some much more severe than this one.
On every previous occasion, member states preferred compromise to rupture.
Chances are they will do so again.
Indeed, downplaying the gravity of the latest crisis is easy: one can argue that the immediate cause of the breakdown, when examined closely, is not really all that serious.
The crux of the problem is that the draft Constitution would give the EU a new and much simpler method of taking majority votes in the Council of Ministers.
Under the method adopted three years ago at the EU's Nice summit, each member state has a certain number of votes, weighted according to population, but small countries are protected by having proportionally more votes than big countries.
This system is known as Qualified Majority Vote.
A majority decision requires 50% of the member states, about 72% of their weighted votes, and 62% of the EU's total population.
The proposed new system would do away with weighted votes.
Member states would each have one vote, and a majority decision would require 50% of the member states and 60% of the population of the EU.
This new system is simpler and more comprehensible; arguably, it is also more democratic.
But in arithmetic terms it is less favourable to the smaller countries, since they lose their weighting advantage.
It is much less favourable to Spain and Poland, since the weighting they received at Nice is almost as great as that of Germany, even though heir population are only half as large.
This was the trigger for Saturday's breakdown: Spain and Poland refused to surrender the voting privileges they received at Nice.
But if this were the real reason for the breakdown, one would expect it to be resolved by detailed haggling over the voting arrangements.
But it seems probable that the argument over majority voting rules is really a stalking horse for deeper differences about the future of the EU.
One (unstated) difference is about money.
The Poles claim--self-righteously--that they are representing not their own national interest, but that of all the smaller member states.
The facts tell a different story.
Two-thirds of the EU budget goes to agriculture and the development of poor regions.
Spain, together with Portugal, Greece, and Ireland, has been an enormous beneficiary of the budget on both counts; and Poland, another poor country, wishes to join the gravy train.
Everyone knows that reform of the farm policy is overdue by several decades; and reform means cutting farm subsidies.
But reform won't happen without the right majority in the Council of Ministers.
So obviously Spain and Poland do not want to give up their voting privileges there.
But the more serious differences are political.
What kind of EU do the member states--present and future--want?
Do they want a politically integrated EU?
In the long run, do they want something approaching a federal Union?
Or do they want a free-trade area based on some form of inter-governmental arrangement?
These questions have become much more acute with the impending mega-enlargement, partly because of the sheer weight of numbers of newcomers, but mainly because the central European accession countries are essentially strangers to the learning process of integration that the existing members have gone through these past 50 years.
Moreover, that learning process has been seriously contaminated.
In 1950, when the EU was born, the political dilemma was comparatively simple. So was its solution: the large member states--France, Germany, and Italy--accepted some common decision-making, because they believed they were still independent nation states.
The three small Benelux member states--Netherlands, Belgium, and Luxemburg--accepted common decision-making, because they believed that this would maximise their national interests.
Over the years, they continued to believe, logically if paradoxically, that the small countries could best safeguard their interests by submitting to the logic of majority voting.
The 10 new EU members do not have the same history as the Netherlands, Belgium, and Luxembourg.
The problem is not just that they are economically less developed, or that their political institutions are inadequate and corrupt.
The real problem for the EU is that there is no sign that the 10 new members have any desire to learn the same lessons, because they do not agree with the old members about the real purpose of the European enterprise.
But do the old members really agree about the real purpose of the European enterprise?
Unfortunately, they do not--not since the British joined 30 years ago.
The British have long resisted European integration.
Tony Blair says he wants Britain to be at the center of Europe.
This is just talk: Tony Blair has not the faintest idea about what the center of Europe means.
The question is: do the new member states want a more politically integrated Europe?
These are the real questions posed by Sunday's breakdown of the constitutional negotiations in Brussels.
The Battle for Hope
PARIS – Since the arrival of President Barack Obama in the White House, there has been an undeniable rapprochement between Europe and the United States.
But on the deeper and more fundamental level of emotions and values, is it possible that the gap between the two sides of the Atlantic has widened?
Today, there is much more collective hope and much more individual fear in America in the wake of the global economic crisis.
But the reverse is true in Europe.
Here one encounters less collective hope and less individual fear.
The reason for this contrast is simple: the US has Obama, and Europe has the welfare state.
So what can be done to promote an “Americanization” of Europe in political terms and a “Europeanization” of America in social terms?
Comforted by a new President who incarnates a return of hope, who inspires and reassures at the same time, Americans are starting to believe that the worst of the economic crisis is behind them.
What was at the beginning of this spring no more than “a glimmer of hope,” to use Obama’s phrase, has become a more serious and positive trend.
Animated collectively by a combination of natural optimism and deep nationalism, Americans have made their president’s campaign slogan, “Yes, we can,” their own.
By contrast, when the personal situations of many individual Americans are examined through European eyes, the extreme individualism that constitutes a key part of American optimism translates into an unacceptable social scandal. “Cities of Tents are Filling with the Victims of the Economic Crisis,” read one headline a month ago on the front page of a mass-circulation American newspaper.
Journalists report tragic stories of middle-class Americans losing their jobs and homes, potentially putting their lives at risk without any social protection.
Who will pay for your costly cancer treatment if you lose the health insurance policy that came with your job?
It is wrong to assume, as some ultra-free marketers do, that the absence of social protection makes you stronger.
The ambition of a country and a society born of the principles of the Enlightenment cannot be to create a people armed to the teeth with guns yet entirely disarmed in the face of illness.
Moreover, in a society that “lives to work,” where one’s job is such a central component of one’s identity, the loss of work is more destabilizing than in a culture where one “works to live,” as in Europe.
Americans’ perspective on retirement is highly revealing: they are afraid of it.
What will they do?
This perspective is not simply rooted in economics, even if today a large proportion of older Americans are rushing back to work as the downturn wrecks their retirement plans.
The geographic separation of families, owing to America’s size and Americans’ mobility, makes the association between retirement and being a grandparent less practicable in the US than it is in Europe.
In Europe, meanwhile, there is undeniably less collective hope and probably a little less individual fear.
Perhaps because they are older and more cynical, European societies seem to bask in a “collective moroseness,” from which they have difficulty emerging.
The record level of abstention in the recent European Parliament elections is further proof of that growing cynicism and alienation.
Of course, it is neither possible nor desirable to “clone” Obama in each of the European Union’s 27 member states.
But what is needed to reduce the deficit of hope that plagues Europe today?
The answer is far from obvious.
Europe suffers from a shortage of leaders who can speak in its name; from a shortage of ambition (what, after all, is the collective ambition of Europeans now that the EU is perceived more as part of the problem than part of the solution).
But, above all, Europe suffers from an identity deficit, for no one seems to know what it means to be a European nowadays.
America, by contrast, seems to have an abundance of all the things Europe lacks.
Formulated in such terms, the European challenge seems even more formidable than the American one.
Nevertheless, it is far from clear that the US will find it easier to reform its health and social security system, and thus alleviate the individual fears of its citizens, than for Europe to inspire its citizens with a sense of collective hope.
In reality, Europe and America should represent a source of mutual inspiration that would reduce the human consequences of inequality in the one, and restore a sense of hope in the other.
Turkey’s Class Struggle
NEW YORK – One interpretation of the anti-government demonstrations now roiling Turkish cities is that they are a massive protest against political Islam.
What began as a rally against official plans to raze a small park in the center of Istanbul to make way for a kitschy shopping mall quickly evolved into a conflict of values.
On the surface, the fight appears to represent two different visions of modern Turkey, secular versus religious, democratic versus authoritarian.
Comparisons have been made with Occupy Wall Street.
Some observers even speak of a “Turkish Spring.”
Clearly, many Turkish citizens, especially in the big cities, are sick of Prime Minister Recep Tayyip Erdoğan’s increasingly authoritarian style, his steely grip on the press, his taste for grandiose new mosques, the restrictions on alcohol, the arrests of political dissidents, and now the violent response to the demonstrations.
People fear that sharia law will replace secular legislation, and that Islamism will spoil the fruits of Kemal Atatürk’s drive to modernize post-Ottoman Turkey.
Then there is the issue of the Alevis, a religious minority linked to Sufism and Shi’ism.
The Alevis, who had been protected by the secular Kemalist state, deeply distrust Erdoğan, who further unsettled them by planning to name a new bridge over the Bosphorus after a sixteenth-century sultan who massacred their forebears.
Religion, then, would seem to be at the heart of the Turkish problem.
Political Islam’s opponents regard it as inherently anti-democratic.
But things are not so simple.
The secular Kemalist state was no less authoritarian than Erdoğan’s populist Islamist regime; if anything, it was more so.
And it is also significant that the first protests in Istanbul’s Taksim Square concerned not a mosque, but a shopping mall.
Fear of sharia law is matched by anger at the rapacious vulgarity of developers and entrepreneurs backed by Erdoğan’s government.
There is a strong leftist bent to the Turkish Spring.
So, rather than dwell on the problems of contemporary political Islam, which are certainly considerable, it might be more fruitful to look at Turkey’s conflicts from another, now distinctly unfashionable, perspective: class.
The protesters, whether they are liberal or leftist, tend to be from the urban elite – Westernized, sophisticated, and secular.
Erdoğan, on the other hand, is still very popular in rural and provincial Turkey, among people who are less educated, poorer, more conservative, and more religious.
Despite Erdoğan’s personal authoritarian tendencies, which are obvious, it would be misleading to regard the current protests purely as a conflict between democracy and autocracy.
After all, the success of Erdoğan’s populist Justice and Development Party, as well as the increasing presence of religious symbols and customs in public life, is a result of more democracy in Turkey, not less.
Customs that the Kemalist secular state suppressed, such as women’s use of headscarves in public places, have reappeared, because rural Turks have more influence.
Young religious women are turning up at urban universities.
The votes of conservative provincial Turks now count.
Likewise, the alliance between businessmen and religious populists is hardly unique to Turkey.
Many of the new entrepreneurs, like the women in headscarves, are from villages in Anatolia.
These newly rich provincials resent the old Istanbul elite as much as businessmen from Texas or Kansas hate the East Coast elites of New York and Washington.
But to say that Turkey has become more democratic is not to say that it has become more liberal.
This is also one of the problems revealed by the Arab Spring.
Giving all people a voice in government is essential to any democracy.
But those voices, especially in revolutionary times, are rarely moderate.
What we see in countries such as Egypt and Turkey – and even in Syria – is what the great British liberal philosopher Isaiah Berlin described as the incompatibility of equal goods.
It is a mistake to believe that all good things always come together.
Sometimes equally good things clash.
So it is in the painful political transitions in the Middle East.
Democracy is good, and so are liberalism and tolerance.
Ideally, of course, they coincide.
But right now, in most parts of the Middle East, they do not.
More democracy can actually mean less liberalism and more intolerance.
It is easy to sympathize with the rebels against Bashar al-Assad’s dictatorship in Syria, for example.
But the upper classes of Damascus, the secular men and women who enjoy Western music and films, some of them members of the Christian and Alawite religious minorities, will have a hard time surviving once Assad is gone.
Baathism was dictatorial and oppressive – often brutally so – but it protected minorities and the secular elites.
But keeping Islamism at bay is not a reason to support dictators.
After all, the violence of political Islam is largely a product of these oppressive regimes.
The longer they stay in power, the more violent the Islamist rebellions will be.
This is no reason to support Erdoğan and his shopping-mall builders against the protesters in Turkey, either.
The demonstrators are right to oppose his haughty disregard of public opinion and his stifling of the press.
But to see the conflict as a righteous struggle against religious expression would be equally mistaken.
Higher visibility for Islam is the inevitable result of more democracy in Muslim-majority countries.
How to stop this from killing liberalism is the most important question facing people in the Middle East.
Turkey is still a democracy.
It is to be hoped that the protests against Erdoğan will make it more liberal, too.
The Battle for Turkey’s Constitution
ISTANBUL – On September 12, Turks will vote on a set of constitutional amendments proposed by the ruling Justice and Development Party (AKP), which has been in power for eight years. &#160;Since the vote falls on the 30th anniversary of the 1980 military coup, Prime Minister Recep Tayyip Erdogan is portraying the referendum as an opportunity to reject the military regime’s legacy.
Turkey’s constitution has been amended repeatedly since the coup.
But its anti-democratic core remains intact – and, unfortunately, the current proposals do not dramatically alter that.&#160;
Most of the previous amendments relied on agreements between governing and opposition parties, and were not put to a popular vote.
This time, the AKP acted on its own and was barely able to garner from its own ranks the requisite majority for a referendum.
Far from being an occasion for popular condemnation of the coup on its anniversary, the referendum is a mark of the AKP’s failure to gain widespread support for its project.
With another general election due next year, civil-society groups preferred that priority be given to lowering the 10% electoral threshold for parties to enter parliament, thus broadening political participation.
The new parliament would then work on constitutional reform.
That, however, was out of the question: the AKP benefited from the rules put in place for the 2002 and 2007 general elections, in both cases converting pluralities of the popular vote into large parliamentary majorities.
In 2007, the AKP government briefly seemed interested in a new constitution, having weathered threats of a military coup just before the elections.
A distinguished group of academics was assigned to produce a draft.
But, before any public debate could occur, the AKP decided to amend only two articles of the constitution, in order to allow female university students to wear headscarves on campus.
The amendment won parliamentary approval, but was subsequently rejected by the Constitutional Court.
Moreover, in a case brought to the Constitutional Court, the AKP’s support for the amendment was used as evidence that the party was violating Turkey’s secular constitution.
In the end, the party was found guilty and subjected to a fine.
From the AKP’s point of view, the Constitutional Court – and the judiciary in general – had replaced the military as the last bastion of Turkey’s secularist establishment.
The AKP then drafted a set of constitutional amendments that would change the composition of the Constitutional Court and of the Supreme Council of Judges and Public Prosecutors, the body that handles the nomination and promotion of judges and prosecutors.
Other proposed changes were added for democratic window-dressing.
Indeed, the AKP insisted on submitting the entire package to a single “yes/no” vote, despite repeated calls from civil-society groups and opposition parties to allow for votes on each amendment separately.
One new “democratic” amendment would create an ombudsman’s office – long demanded by the European Union – but without a guarantee of autonomy.
Likewise, an affirmative-action clause for women is little different from a provision in the current constitution.
State employees would be granted the right to engage in collective bargaining, but would have no right to strike.
The authority of military courts would be curtailed to some extent.
Most important among such amendments is the repeal of Provisional Article 15, which has provided immunity from prosecution to all actors of the military regime established by the 1980 coup.
Whatever symbolic value this may have is overshadowed by the fact that the statute of limitations already precludes any legal action on this issue.
Opposition proposals to sharpen this provision were rejected by AKP leaders.
On the other hand, the key amendments sought by the AKP would increase the number of seats on the Constitutional Court and the Supreme Council, but without changing significantly the way appointments to these bodies are made.
The president – to be directly elected in the future given another AKP-initiated amendment that was approved by a referendum in 2007 – thus maintains the predominant role, which underscores the AKP’s confidence that it will continue to control the presidency in the years ahead.
But Turkish voters care less about these amendments than about jobs, social security, and the continuing loss of lives in the never-ending war with the PKK Kurdish rebels.
The AKP has largely squandered the goodwill that first brought it to power on a wave of voter revulsion at the old political elite’s rampant corruption.
It has now created its own elite and shares the same political culture.
People will base their votes in the referendum not on the substance of the amendments, but on how they feel about the AKP’s eight years in power.
Nationalist right-wing and statist left-of-center groups are campaigning against the amendments, Islamist-leaning groups support them, and Kurdish groups advocate a referendum boycott, wishing to support neither the old establishment nor the current government.
Moreover, the socialist and the liberal left are divided over whether some progress is better than none, with opponents arguing that half-hearted changes to the constitution would preclude eventual real reform.
With the campaign dragging on for months, the referendum has thoroughly polarized Turkish politics.
Win or lose, that is unlikely to change.
The Battle for Ukraine
The old axioms are true: firmness can pay; resolution can see you through.
We who are struggling to maintain our democracy in Ukraine believe this.
Now, more than ever, we must believe this, for Russian troops wearing Ukrainian uniforms have entered our country, because Ukrainian soldiers are refusing to carry out orders to crush those who are demonstrating to defend our democracy.
We will need the solidarity of our neighbors, and of freedom-loving peoples around the world, to assure that our democratic dreams are realized in peace.
The struggle to secure the victory of Viktor Yushchenko, the true winner in last Sunday’s presidential election, as Ukraine’s new president is not one that we sought.
But, that battle for our freedom having been imposed upon us, we will not be found wanting in either courage or resolve.
The days and nights ahead will be difficult, and the secret presence of Russian troops will make them all the more dangerous.
The forces of Prime Minister Viktor Yanukovych foolishly stuffed ballots and intimidated the country’s electoral commission to an absurd degree.
They then tried to force the Ukrainian people to swallow this sham – threatening to ban public gatherings, close our borders to new visa seekers, and silence any word of our protests on television.
More and more members of a governmental machine that thought it could impose a fraudulent election on Ukraine’s people are shying away from imposing that choice by force.
Members of the army, the security services, and government officials are all balking at doing the bidding of the Yanukovych clique.
Such a volatile ruling elite cannot be counted on to be consistent from now on.
The way ahead is a minefield.
We recognize that an unstable government can swing back to uncompromising intransigence.
It will try to erode our support by infiltrating our protests with loyalists who will carry the virus of defeatism, and it will seek to outflank us by appealing to ordinary, hard-working Ukrainians, worried about feeding and clothing their children, that a tottering economy needs stability to be saved.
It will try to divide the country between Russian and Ukrainian speakers.
But it is too late for divide and misrule strategies to work.
Ukrainians know that the choice they make now, that their decision to stand firm with Viktor Yushchenko today, will determine their freedom forever, as well as the health of their nation – its independence as well as its economic strength.
So we will stand firm in the cold and the snow to see that our democratic choices are respected.
To do otherwise is to surrender not only our freedom, but our hopes for better lives.
We defy those who seek to corrupt our democracy, but we stand with the hand of friendship extended to all of our neighbors, including Russia.
It has no reason to intervene.
A vibrant Ukrainian democracy will need the comradeship of Russia and of Europe to build the kind of society that our people desire.
Our boldness is tinged by realism.
By securing our democracy, we help secure Russia’s own.
For we are engaged not in revolution, but in peaceful democratic evolution.
Ukrainians have endured the worst that man can do to his fellow man: Stalin’s orchestrated famines of the 1930’s and the Nazi slaughterhouse of World War II.
So do not doubt our ability to endure and stand firm.
We shall persist, and our democracy shall prevail.
Stand with us.
The Battle of the Bonds
LONDON – Everyone knows that Greece will default on its external debt.
The only question concerns the best way to arrange it so that no one really understands that Greece is actually defaulting.
On this topic, there is no shortage of expert plans – among them bond buy-backs, bond swaps, and the creation of Eurobonds, a European version of the “Brady” bonds issued by Latin American countries that defaulted in the 1980’s.
What all such schemes amount to is piling one lot of bonds on top of another in an attempt to square the circle of Greece’s inability to pay, and to minimize the losses faced by its creditors – mostly European banks.
Every week, a preposterous coterie of European bankers and finance ministers drags itself from one capital to another to discuss which default/restructuring plan to adopt.
Meanwhile, Greece’s agony continues, and the “markets” wait to swoop down on Portugal, Ireland, Italy, and Spain.
No one who is not well versed in financial legerdemain can make much sense of this battle of the bonds.
But behind it lie two moral attitudes, which are much easier to grasp.
The first is traditional disapproval of debt.
The oldest rule in personal finance is to avoid debt – that is, never spend more than you earn.
Economists and moralists have been united in believing that you should actually spend less than you earn – in order to “save” for the proverbial rainy day or for old age.
Getting into debt was long associated with profligacy or fecklessness.
And, if a person became indebted, it was a point of honor to repay the obligation when it fell due, by selling assets, reducing consumption, working harder, or some combination of the three.
Indeed, it was often more than a point of honor: failure to repay debt on time landed the debtor in prison.
The same attitude governed institutional debt.
Banks grew out of a practice by gold smiths and silver smiths, who, for a small price, accepted deposits for safekeeping.
When they became lending institutions, their earliest rule was to keep almost 100% of cash reserves against their loans, so that they would not be caught short if most of their depositors decided to withdraw their money at the same time.
Similarly, before the introduction of limited liability in the nineteenth century, a company’s shareholders or partners were each liable for all of the firm’s debts, which severely restricted businesses’ willingness to borrow to finance trade.
For public finance, too, the orthodox rule was that budgets should always be balanced; except in emergencies, governments should never spend more than they “earned” in taxation.
Again, it was a point of honor for governments to pay back such debts as they were incurred, whatever the sacrifice to the country.
Until recently, the conventional view was that “mature” sovereigns always honored their debts, while only banana republics failed to do so.
These historically embedded norms and practices were only slowly superseded.
But, in the twentieth century, with greater security of conditions and continuous economic growth, it became normal for individuals, companies, and governments to borrow in anticipation of earnings – to spend money they did not have, but that they expected to have.
With fear of bank runs and defaults receding, banks’ reserve ratios became ever smaller, thus increasing their lending facilities.
On this bedrock rose an imposing edifice of bond markets and banks that drove down the cost of finance, and thus sped up the rate of economic growth.
It was this system of financial intermediation whose near-collapse in 2008 seemed for many to justify the ancient warnings of the perils of indebtedness.
In their exhaustive historical review of financial crises, Carmen Reinhart and Kenneth Rogoff write: “Again and again, countries, banks, individuals, and firms take on excessive debt in good times without enough awareness of the risks that will follow when the inevitable recession hits.”
But there is a contrary moral attitude, the essence of which is that, whereas excessive debt is to be deplored, the blame for it lies with the lender, not the borrower. “Neither a borrower nor a lender be,” Polonius admonished in Hamlet.
Lending money at interest was identified with “usury,” or making money from money rather than from goods and services – a distinction that goes back to Aristotle, for whom money was barren.
The moneylender was the most hated figure in medieval Europe.
The last legal restrictions on taking interest on money were lifted only in the nineteenth century, when they succumbed to the economic argument that lending money was a service, for which the lender was entitled to charge whatever the market would bear.
But the theory of usury survived in the view that it was morally wrong to extract some additional amount that was made feasible by the borrower’s weak bargaining position or extreme need.
These two moral attitudes confront each other today in the battle of the bonds.
The demand for debt repayment confronts the philosophy of debt forgiveness.
In the lender’s view, the 17% interest rate that Greece’s government now has to pay for its 10-year bonds accurately reflects the lender’s risk in buying Greek government debt.
It is the price of past profligacy.
But in the borrower’s view it is usurious – taking advantage of the borrower’s desperation.
The sensible middle position would surely be an agreed write-off of a portion of the outstanding Greek debt, combined with a five-year moratorium on interest payments on the remainder.
This would immediately relieve pressure on Greece’s budget and give its government the time and incentive to put the country’s economy in order.
In the long run, however, we will have to answer the broader question that the eurozone’s various debt crises have raised: Is the social value of making finance cheap worth the days of reckoning for stricken debtors?
The Beauty in Ugly Elections
Elections in countries that have been strangers to democracy are never pretty, as Afghanistan's recent vote demonstrated and as any election in Iraq is likely to be.
But electoral flaws are not always the whole picture.
Consider Kazakhstan, where five million people cast ballots in September for their parliament's lower house.
Western media judged the election a failure.
CNN reported it "neither equitable nor free."
The Economist snidely referred to the "results" in quotation marks.
Most quoted the OSCE's finding that the elections were riddled with "serious shortcomings."
Those elections were flawed.
But only a small percent of the breaches were the result of deliberate manipulation.
We were there, and visited eight urban and rural polling places, talked with roughly a hundred voters, election officials and observers, as well as officials from six parties.
The majority of shortcomings resulted from organizational ineptitude.
The worst cases of outright manipulation occurred when local bureaucrats - all appointed from above - pressured voters to support President Nursultan Nazarbayev's Otan Party.
This problem will doubtless persist until more local officials are chosen through elections.
Many, probably most, of the other problems were managerial in nature.
Often, voter lists were incomplete or inaccurate.
The head of the Central Electoral Commission has now proposed that members of the local public join election officials and administrators in compiling the lists.
Electronic voting, used at 10% of polling stations, also caused problems.
Even though voters could choose between electronic and paper ballots, difficulties remained, especially among older voters.
Another problem was the bar code system designed to prevent duplicate voting.
Some qualified voters didn't get their bar codes; others feared that employers might use them to learn how they voted.
Despite the new election law's assurance of equal coverage in the main media, government TV channels devoted more time to the pro-government parties.
Protests by some parties that could not afford the high cost of TV spots and billboards mirror similar complaints in the US.
Far more serious was the lack of transparency in the Central Electoral Commission and the political imbalances on some local commissions.
Some of this may have been deliberate, but incompetence also played a part.
So how bad was the election?
Exit polls suggest that ballot totals fairly closely reflect voter choices.
But how to explain charges of "gross violations" by the Ak Zhol Party, the largest opposition group, or the decision by the Minister of Information, an Ak Zhol candidate, to resign in protest?
Or the 89 charges of violations filed by just one bloc?
The ex-minister's charge is disingenuous.
He himself presided over many violations, a fact noted by the OSCE back in 1999.
He resigned only after winning election to parliament.
Clearly, Ak Zhol used accusations of impropriety as a weapon against the government parties.
Indeed, many opposition groups engaged in dirty tricks.
Nevertheless, the elections represented significant progress.
First, they were competitive.
The official registration of ten parties, including opposition groups, surpassed any previous election, and the OSCE admitted that voters had "a real choice."
Had systematic manipulation occurred, one-third of the races would not have gone to runoffs.
Moreover, there were real surprises.
The Asar Party, founded and led by President Nazarbayev's daughter, was expected to claim second place, assuring her eventual succession.
But, despite ample funding and abundant media access, Asar finished third.
At the same time, 17% of all candidates were women, far more than in earlier elections.
Runoff votes will send more women than ever to Kazakhstan's parliament.
Turnout was relatively high, at 57% of registered, particularly given that the OSCE had intoned that "public interest does not seem to be high"; other experts wrote of "voter fatigue."
Defying such sour predictions, voters clearly felt that elections matter.
For the first time, parties could make their case in seven debates aired on national television.
Many voters changed their choices after watching these.
Another first was that observers from all parties monitored the polling.
Thousands of volunteers took their role seriously, producing the complaints that the Prosecutor is now investigating.
Another 1,029 foreign observers came from as far away as India and Thailand.
The government knew monitors would turn up improprieties, but believes that it has nothing to hide, and much to gain, from honest criticism.
Even the experiment with electronic voting machines was a qualified success.
The decision to use them should have been made earlier to allow more training, but most voters experienced no problems.
Equally important, no newspapers were closed, stories suppressed, or journalists harassed, as occurred in earlier Kazakh elections.
Obviously, the election's flaws cannot be swept under the carpet.
But nor is Kazakhstan seeking to do so.
Public debate about how to improve the system has commenced.
At the same time, the process as a whole further legitimizes elections in the eyes of people accustomed by Soviet rule to dismissing all votes as charades.
Kazakhstan deserved the criticism it received from Western election monitors.
But it also earned kudos that have been withheld.
Kazakhstan's elections mark a big step forward.
Even an ugly election can be beautiful if it advances democracy - an important lesson for countries like Afghanistan and Iraq.
The Beginning of the End for Guantánamo
The “war on terror” has forced democracies to grapple with the extent to which they can afford to protect the civil rights and liberties of both their citizens and foreigners.
The debate has been most intense in the United States, where the refrain that the Constitution is not a “suicide pact” and that national security can justify extraordinary measures is heard repeatedly.
Some measures – unauthorized searches of bank records and wiretapping of telephone calls – compromise the liberty of all.
Others – most notoriously, the confinement of roughly 450 alleged Muslim fighters in Guantánamo Bay – impinge on people thought to be the enemy.
Amid rising allegations of abuse, President George W. Bush’s government realized some time ago that it could not maintain its Guantánamo detention camp forever.
Yet it did not want to repeat the experience of the Zacharias Moussaoui trial, in which, after many propagandistic appeals from the dock, the alleged twentieth September 11, 2001, hijacker was finally convicted and sentenced to life imprisonment.
So the Bush administration proposed a middle way: a military commission under military judges, which would recognize fewer rights for the accused and bar appeals to civilian courts.
In its recent decision in Hamdan v. Rumsfeld , the US Supreme Court said “no”: Bush’s exercise of executive power went too far.
As a result, the decision will have a lasting impact on America’s constitutional structure.
Salim Ahmad Hamdan served as Osama bin Laden’s personal driver.
Other than drive his boss around and attend meetings, he did nothing more to promote the terrorist attacks of September 2001.
Yet his driving and his knowledge of Al Qaeda’s purposes struck the military as sufficient to charge him with entering a conspiracy to kill civilians and engage in terrorists acts.
When his trial began, the prosecution tried to exclude Hamdan from the room during the testimony of a witness against him.
The government wanted to protect its sources.
But this unusual procedure, permitted in the military commissions, runs afoul of accepted canons of federal, Constitutional, and international law.
The defense immediately sought an injunction in federal court to prevent the trial from continuing.
The federal court ruled that under the Geneva Conventions, Hamdan, as a prisoner of war, was entitled to a court hearing that followed the same procedures as one judging soldiers of the detaining power, that is, an American court martial.
The Supreme Court, however, sidestepped the question of whether Hamdan was a prisoner of war, arguing instead that the conflict was governed by common Article III in all the Geneva Conventions, which regulates armed conflict ”not of an international character.”
In such cases, there is a duty to guarantee that all sentences are passed “by a regularly constituted court affording all the judicial guarantees which are recognized as indispensable by civilized peoples.”
Bush’s military commissions were found to fall below this standard.
While the discussion of the Geneva Conventions and procedural rights is important, the more profound portion of Justice John Paul Stevens’ majority opinion addresses the boundaries of the law of war, and specifically whether the conspiracy charge against Hamdan constitutes a violation of this body of customary international law.
Everyone agrees that, under US law, the jurisdiction of military tribunals is limited to violations of the laws of war, so if conspiracy cannot be charged, Hamdan and others like him cannot be tried in any military courts, not just the ad hoc commissions.
In order to resolve the question of whether conspiracy constitutes a crime under the laws of war, Justice Stevens followed the arguments made in the brief that I submitted on behalf of Experts on Conspiracy and the Law of War.
The law of war, the Court reasoned, must reflect the consensus of all legal systems.
But conspiracy, as a stand-alone offense, is particular to Anglo-American common law.
This argument has been well known since the Nuremberg trials, which rejected charges of conspiracy to commit war crimes and crimes against humanity.
Justice Stevens cited Telford Taylor, the chief prosecutor in Nuremberg, who made the same point about the oddity of conspiracy charges in international tribunals.
Moreover, arguments about international law in the post-WWII period have quietly dropped all references to conspiracy charges.
This admittedly has not been an explicit process, but the pattern is undeniable.
As Justice Stevens wrote, “The crime of ‘conspiracy’ . . . does not appear in either the Geneva Conventions or the Hague Conventions – the major treaties on the law of war.”
He could have added the Rome Statute and UN resolutions establishing the ad hoc tribunals for the former Yugoslavia and for Rwanda.
The international community’s rejection of conspiracy charges is correct, I believe, because international criminal proceedings are oriented to post hoc justice – to judging those who are alleged to have already brought about massacres and other major crimes that concern the international community.
Conspiracy, by contrast, is suited to a legal system that emphasizes early police intervention, before criminal plans are carried out.
Early intervention is possible in a domestic legal system, but there is no international police force that could fulfill a similar function.
The Bush administration is now left in an embarrassing position.
It does not want to prosecute the Guantánamo detainees in federal courts, but it is unlikely that it can prosecute them under the law of war as interpreted in the Hamdan decision.
Although Hamdan recognizes the legitimacy of confining enemy combatants until the end of hostilities, doing so is untenable.
The international community will not accept this form of massive preventive detention, with continuing allegations of abuse and torture.
Sooner or later, Bush will have to decide between prosecutions in federal court or closing the camp.
The Benefits of Chinese FDI
BERKELEY – In a rare act of bipartisanship, the United States Congress recently passed legislation to encourage more inward foreign direct investment.
Democrats and Republicans agree that FDI, or “insourcing,” is important to US jobs and competitiveness.
They are right.
But, even as they propose new measures to court foreign investors, many members of Congress in both parties harbor deep concerns about FDI from China, on both national-security and economic grounds.
These concerns are unwarranted, and discriminatory policies to restrict such investment are ill-advised.
The US government already has adequate controls in place to review and block FDI from all countries, including China, that pose anti-competitive and national-security risks.
Investments that clear these controls benefit the US economy in numerous ways and should be welcomed.
Foreign-owned firms in the US account for 5% of private-sector employment, 17% of manufacturing jobs, 21% of exports, 14% of research and development, and 17% of corporate-income taxes.
Recognizing FDI’s significant contributions to the US economy, President Barack Obama’s Council on Jobs and Competitiveness endorsed the administration’s new Select USA program to coordinate government-wide efforts to promote it.
To be sure, the US remains the world’s leading destination for FDI, accounting for 15% of global flows.
But its share is declining, while China, using both carrots (like tax holidays and special enterprise zones) and sticks (like explicit and implicit local-content requirements) to attract foreign companies, has become the second-largest destination.
China has remained a small source of FDI outflows, but that, too, is changing rapidly.
Chinese outward FDI soared from an average of $3 billion per year before 2005 to $60 billion in 2010, catapulting China into the top five sources of FDI on a three-year moving-average basis.
Given the size of China’s economy, its growth rate, and the experience of other developing economies, FDI from China is likely to increase by $1-2 trillion by 2020.
An increase in FDI outflows is a priority in China for two reasons. First, China has an understandable interest in diversifying its substantial holdings of foreign-exchange reserves away from low-yielding US Treasuries to real productive assets with higher returns.
That is why China established its sovereign-wealth fund, China Investment Corporation, and why CIC decision-makers are seeking more FDI opportunities.
Second, China’s businesses have been encouraged to “go global” and invest abroad to find new markets, secure access to energy and raw materials, and enhance their competitiveness by acquiring new technologies, brands, and management skills.
In a recent report, the People’s Bank of China urged Chinese companies to acquire foreign firms as the first stage of a ten-year plan to ease China’s capital-market restrictions – long a goal of US policymakers.
So far, China’s FDI outflows have been concentrated in developing countries and a handful of resource-rich developed countries, including Australia and Canada, and have been aimed at facilitating trade and acquiring access to natural resources.
But the patterns and destinations of China’s outward FDI will change as rising wages, an appreciating real exchange rate, and the entry of new suppliers from other emerging countries erode Chinese companies’ competitiveness, motivating them to invest abroad to upgrade their technology and management capabilities, find new growth opportunities, and move up the value chain.
Currently, the US receives only about 2-3% of FDI flows from China.
But China’s direct investments in the US have increased rapidly, from less than $1 billion annually in 2003-2008 to more than $5 billion per year in 2010-2011.
At least 38 US states now host FDI projects from China, and competition for Chinese investment has intensified as states’ budgets have contracted.
Of course, alongside the potential economic benefits of attracting a much larger share of Chinese FDI, legitimate competitive and national-security concerns do need to be addressed.
First, like all mergers and acquisitions involving both domestic and foreign investors, investments in or acquisitions of US companies by Chinese companies, whether state-owned or private, must be evaluated by the US Justice Department for their impact on market competition.
Investments with significant anti-competitive effects must be modified or blocked.
Second, the Committee on Foreign Investment in the United States (CFIUS) must screen investments in or acquisitions of US companies by foreign companies, including Chinese companies, for national-security risks.
Such screening is a common and justifiable practice around the world.
In recent years, CFIUS has defined national security broadly to encompass not only defense activities and dual-use technologies, but also critical infrastructure, including telecommunications, energy, and transport – areas of particular interest to Chinese companies.
Many Chinese investors view the CFIUS screening process as protectionist and targeted at them, but there is no evidence of this.
The United Kingdom, Canada, France, and Israel accounted for more than half of all CFIUS cases reviewed in 2008-2010, while China accounted for only about 5%.
Only a small fraction of Chinese FDI in the US is subject to CFIUS review, and most of these projects, like most reviewed by CFIUS, are approved, sometimes with mitigation measures.
CFIUS does not review greenfield investments, which account for about 50% of Chinese FDI in the US.
But Chinese FDI, especially in sensitive sectors like energy, does often trigger Congressional hearings, ad hoc resolutions, and calls for tougher CFIUS action.
As a result of high-profile Congressional opposition, China’s state-owned energy company CNOOC withdrew its bid for Unocal, an American energy company, in 2005, before a CFIUS review that most likely would have cleared the deal on national-security grounds.
China still points to this episode as evidence that Chinese FDI is not welcome in the US.
Feeding this perception, some members of Congress are now exhorting CFIUS to block CNOOC’s proposed acquisition of Nexen, a Canadian energy company with holdings in the Gulf of Mexico, until China resolves ongoing disputes with the US over preferential government procurement policies and barriers to FDI by US companies in China.
Heeding these calls would be a costly mistake that would undermine the objective, non-discriminatory CFIUS process and encourage Chinese companies to look elsewhere at a time when Chinese FDI is poised to explode and the US economy sorely needs the jobs, capital, and trade benefits that it would bring.
Why Consolidate?
STANFORD – Around the world, raging debates about whether, when, how, and how much to reduce large budget deficits and high levels of sovereign debt are dividing policymakers and publics.
Diametrically opposed spending, tax, monetary, and regulatory policies and proposals are proliferating.
To consolidate (the budget), or not to consolidate, that is the question.
The political left clamors for more spending, higher taxes on high-income earners, and delayed fiscal consolidation.
For example, the economist and New York Times columnist Paul Krugman proposes waiting 10-15 years.
(Many of the same people argued for analogous reasons against the Federal Reserve’s successful disinflation policies in the early 1980’s.)
The political right calls for more rapid deficit reduction by cutting spending.
In Europe, policymakers, including the European Central Bank, demand consolidation for high-debt countries, but are flexible in negotiations; voters, however, reject it – most recently in Italy.
In the United States, Republicans propose to balance the budget within ten years by reforming entitlement spending and taxes (with fewer exemptions, deductions, and credits providing the revenue needed to reduce personal tax rates and a corporate rate that, at 35%, is the highest in the OECD).
America’s Senate Democrats propose $1.5 trillion in higher taxes over ten years (on top of the $600 billion agreed in early January), $100 billion (twice that, for House Democrats) in new stimulus spending, and modest longer-term expenditure cuts.
Their version of tax reform would mean reducing deductions for the wealthy and corporations, with no rate reductions.
What are the likely costs and benefits of stimulus versus consolidation?
And what is the best combination of spending cuts and tax hikes?
Economists agree that, at full employment, higher government spending crowds out private spending.
Keynesian models claiming a quick boost from higher government spending below full employment show that the effect soon turns negative.
So it needs to be repeated over and over, like a drug, to sustain the economic high.
That strategy saddled Japan with the world’s highest debt/GDP ratio, to little benefit.
To be sure, recent research suggests that increased government spending can be effective in temporarily raising output and employment during deep, long-lasting recessions when the central bank has reduced its short-term policy interest rate to zero.
But the same research suggests that the government spending multiplier is likely to be small or even negative in a variety of circumstances and, in any event, would quickly shrink.
Such circumstances include, first, a high debt/GDP ratio, with rising interest rates impeding growth.
Likewise, during expansions, higher government spending is more likely to crowd out private spending.
Spending on transfer payments and/or nonmilitary purchases – which can become entrenched or be procured more cheaply from abroad (for example, solar panels and wind turbines, respectively, in America’s 2009 fiscal stimulus) – is also likely to yield only a small multiplier.
And, when the economy has flexible exchange rates, if government spending raises interest rates, the currency will strengthen, leading to a decrease in investment and net exports.
Finally, the effects of additional government spending may be offset by people’s expectations of higher taxes once the central bank exits the zero lower bound on interest rates (causing them to spend less now).
These considerations apply to the US and some European countries today.
Together with poor design, they explain why America’s 2009 stimulus cost several hundred thousand dollars per temporary job created.
Recent research also reveals that in OECD countries since World War II, successful fiscal consolidation – defined as stabilizing the budget while avoiding recession – averaged $5-$6 of actual spending cuts per dollar of tax hikes.
Cuts in spending, especially on entitlements and transfers, were far less likely to cause recessions than tax increases were.
Unfortunately, tax hikes have predominated in many recent European consolidations, including last week’s proposed Cyprus bailout.
Of course, caution is appropriate in order to avoid claiming too much for the benefits of short-run consolidation.
After all, the current American and European economies differ in important ways from the other post-war cases – size, simultaneous consolidation in many countries, already-low interest rates, and the dollar’s status as the main global reserve currency.
But, other than in deep recessions, the validity of the Keynesian claim that delaying spending cuts is necessary to avoid undermining the economy is at best unclear, and would leave a long boom as the only time to control spending.
And large deficits and high debt levels decrease the prospects for a long boom.
Moreover, credibly phasing in spending reductions as the economy recovers is no easy task, given the political economy of the budget and the inability of one legislature to bind the next.
Worse yet, the cost of delay and increased deficits and debt is enormous.
For example, without major reform in the US entitlement programs – which are exploding in size as a result of rising real benefits per beneficiary and an aging population – the next generation can expect a 20% reduction in living standards.
The most credible reforms are structural – for example, higher retirement ages and changes to benefit formulas – and difficult to alter once they are implemented.
Merely setting a dollar (or pound or euro) target for budget cuts is far less effective, because the target can easily be revised – and cuts reversed – to avoid political pain.
If there were some short-term stimulus that was timely and likely to raise output and employment at a reasonable long-term cost, I would be all for it.
But the evidence is that highly effective fiscal policy, even at the zero lower bound on interest rates, remains at best a theoretical possibility, subject to severe political constraints.
While consolidation may imply some short-term costs, especially in a recession, the long-term costs of delay are large.
It would be best if a credible consolidation program could be phased in gradually; but consolidation needs to proceed nonetheless – and primarily by controlling spending.
Inflation Is Still the Lesser Evil
CAMBRIDGE – The world’s major central banks continue to express concern about inflationary spillover from their recession-fighting efforts.
That is a mistake.
Weighed against the political, social, and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about.
On the contrary, in most regions, it should be embraced.
Perhaps the case for moderate inflation (say, 4-6% annually) is not so compelling as it was at the outset of the crisis, when I first raised the issue.
Back then, against a backdrop of government reluctance to force debt write-downs, along with massively over-valued real housing prices and excessive real wages in some sectors, moderate inflation would have been extremely helpful.
The consensus at the time, of course, was that a robust “V-shaped” recovery was around the corner, and it was foolish to embrace inflation heterodoxy.
I thought otherwise, based on research underlying my 2009 book with Carmen M. Reinhart, This Time is Different.
Examining previous deep financial crises, there was every reason to be concerned that the employment decline would be catastrophically deep and the recovery extraordinarily slow.
A proper assessment of the medium-term risks would have helped to justify my conclusion in December 2008 that “It will take every tool in the box to fix today’s once-in-a-century financial crisis.”
Five years on, public, private, and external debt are at record levels in many countries.
There is still a need for huge relative wage adjustments between Europe’s periphery and its core.
But the world’s major central banks seem not to have noticed.
In the United States, the Federal Reserve has sent bond markets into a tizzy by signaling that quantitative easing (QE) might be coming to an end.
The proposed exit seems to reflect a truce accord among the Fed’s hawks and doves.
The doves got massive liquidity, but, with the economy now strengthening, the hawks are insisting on bringing QE to an end.
This is a modern-day variant of the classic prescription to start tightening before inflation sets in too deeply, even if employment has not fully recovered.
As William McChesney Martin, who served as Fed Chairman in the 1950’s and 1960’s, once quipped, the central bank’s job is “to take away the punch bowl just as the party gets going.”
The trouble is that this is no ordinary recession, and a lot people have not had any punch yet, let alone too much.
Yes, there are legitimate technical concerns that QE is distorting asset prices, but bursting bubbles simply are not the main risk now. Right now is the US’s best chance yet for a real, sustained recovery from the financial crisis.
And it would be a catastrophe if the recovery were derailed by excessive devotion to anti-inflation shibboleths, much as some central banks were excessively devoted to the gold standard during the 1920’s and 1930’s.
Japan faces a different conundrum.
Haruhiko Kuroda, the Bank of Japan’s new governor, has sent a clear signal to markets that the BOJ is targeting 2% annual inflation, after years of near-zero price growth.
But, with longer-term interest rates now creeping up slightly, the BOJ seems to be pausing.
What did Kuroda and his colleagues expect? If the BOJ were to succeed in raising inflation expectations, long-term interest rates would necessarily have to reflect a correspondingly higher inflation premium.
As long as nominal interest rates are rising because of inflation expectations, the increase is part of the solution, not part of the problem.
The BOJ would be right to worry, of course, if interest rates were rising because of a growing risk premium, rather than because of higher inflation expectations.
The risk premium could rise, for example, if investors became uncertain about whether Kuroda would adhere to his commitment.
The solution, as always with monetary policy, is a clear, consistent, and unambiguous communication strategy.
The European Central Bank is in a different place entirely.
Because the ECB has already been using its balance sheet to help bring down borrowing costs in the eurozone’s periphery, it has been cautious in its approach to monetary easing.
But higher inflation would help to accelerate desperately needed adjustment in Europe’s commercial banks, where many loans remain on the books at far above market value.
It would also provide a backdrop against which wages in Germany could rise without necessarily having to fall in the periphery.
Each of the world’s major central banks can make plausible arguments for caution.
And central bankers are right to insist on structural reforms and credible plans for balancing budgets in the long term.
But, unfortunately, we are nowhere near the point at which policymakers should be getting cold feet about inflation risks.
They should be spiking the punch bowl more, not taking it away.
Cartography’s New Golden Age
MOUNTAIN VIEW, CALIFORNIA – Noé Diakubama, an emigrant from the Democratic Republic of Congo who now lives in Paris, is one of this century’s intrepid pioneers.
Using online mapmaking tools, he created the first map of his village, Mbandaka, which he and his wife have modified more than 100,000 times since 2009.
Noé literally put Mbandaka – and the people who live there – on the map.
Noé is not the only such pioneer. There is a vast and growing community of online mapmakers creating useful, accessible maps of lesser-known areas – and transforming people’s lives in the process.
During the Age of Exploration, which extended from the fifteenth to the seventeenth century, adventurers like Christopher Columbus, Ferdinand Magellan, and James Cook embarked on dangerous journeys to distant lands, from New Zealand to Newfoundland, drawing detailed charts of their voyages.
By advancing geographic knowledge, they broadened people’s worldview, enhanced trade, and helped to usher in the Industrial Revolution.
Today, people like Noé are spearheading a second golden age of cartography, which promises to bring equally significant economic and social benefits.
Indeed, accurate maps break down geographic barriers, empowering individuals to reach their desired destinations, enabling businesses to reach consumers anywhere, and enriching people’s outlooks.
The Internet is transforming the way maps are made, enabling ordinary people – dubbed “citizen cartographers” – to work alongside intrepid adventurers and professional geographers.
These cartographers – whose only common characteristic is Internet access – are embracing the opportunity to depict the places that they know and love, whether to help their neighbors get around or to give faraway people a glimpse of their local environments.
Using online tools like Google Map Maker, they are contributing to the shared goal of building a digital map of the world.
Some even host “mapping parties,” at which communities gather around computers, in schoolyards or church halls, to add layers of detail that extend beyond topography.
By including human elements, such as popular cafés or local walking trails, they create comprehensive, useful tools for others, and enhance their understanding of their own community.
Digital maps can be as dynamic as the communities that they depict.
While paper maps can accurately portray static features like rivers and mountains, they cannot easily be updated when new buildings are constructed, roads are rerouted, or new restaurants open.
By contrast, digital maps can be modified instantly, keeping locals apprised of developments in their area and helping visitors to feel like natives in unfamiliar places.
Similarly, a digital map can be tailored to an individual’s interests or needs.
A keen cyclist might want a map showing bicycle paths, including information about the terrain.
But a tourist might prefer a map that highlights specific attractions or indicates public-transport links.
Such customization leads to many millions of versions of the world – all of them accurate.
Digital mapping technology is having the most profound impact on the world’s most remote and undeveloped regions.
In Africa, for example, road coverage on Google Maps increased from 20% in 2008 to 75% last year, while the number of towns and villages for which detailed maps are available grew by more than 1,000%.
This has not only facilitated trade and transport, but also translates into faster response times for emergency services, saving thousands of lives each year.
In fact, modern tools like maps and satellite navigation contribute to annual savings of up to 3.5 billion liters of gasoline and more than one billion hours of travel time.
As a result, farmers are better able to get their goods to market before they perish, and to build more efficient irrigation systems, which save the global agricultural industry $8-22 billion annually.
The mapping movement’s growing momentum promises to result in the accurate and comprehensive representation of almost every inch of the world, including road data, photos, and business listings.
This will create even more opportunities for economic growth, improve access to health care and other services, contribute to social development, and broaden – both figuratively and literally – people’s worldview.
To advance the world’s geographic knowledge, explorers used to have to head out to sea, enduring inclement weather and debilitating disease, unsure of where they were going – or whether they would ever return home.
While today’s online cartographers do not face the same risks, they, too, are embarking on a journey into the unknown in search of knowledge, excitement, and better lives.
The Benefits of US-China Strategic Economic Dialogue
In recognition of the importance and complexity of the US-China economic relationship, in September 2006 President George W. Bush and President Hu Jintao created the “Strategic Economic Dialogue” between our countries.
Their intent was not to replace the many economic dialogues already taking place, but to create a senior-level forum that was both comprehensive and strategic.
A forum that would also build trust on both sides by demonstrating progress on the immediate issues we face.
The SED has made substantial progress in achieving these goals.
The US and China have built stronger relationships and established constructive channels of communication that didn’t previously exist.
These innovations have helped keep the US-China economic relationship on an even keel, even in times of tension.
Because we have a framework for high-level discussions, we can – and do – pick up the phone and talk.
The SED meeting next week in Beijing will focus on five areas: integrity of trade and product safety; balanced economic development, including financial sector reform; energy efficiency and security; environmental sustainability; and bilateral investment.
The meeting comes at a delicate time, as a new group of leaders moves into China’s senior positions, and as the agenda has been broadened to include food and product safety, energy efficiency and security, and environmental sustainability.
These issues carry deep implications for economic ties.
Consumers need to have confidence in the safety of the products they purchase, whether produced at home or abroad.
China’s management of food and product safety issues will have a long-term impact on trade relations, the sustainability of China’s growth strategy, and its further integration into the global trading system.
US and Chinese government agencies are working together to address these issues.
Likewise, for both our countries, greater energy efficiency and security requires reliance upon market price signals, technology, innovation, and diversified energy sources.
The Global Nuclear Energy Partnership, clean coal development through FutureGen, and industrial efficiency audits represent some of the most productive areas of ongoing cooperation.
We also encourage China’s active participation in the Major Economies Meeting efforts to develop a post-2012 framework for greenhouse-gas reduction.
I was pleased to see that a large Chinese energy company, Shanghai Electric, recently indicated public support for substantial reductions in greenhouse-gas emissions.
One pressing issue – for the US, China, and the global economy – is China’s move to a more flexible exchange-rate policy.
China is reforming its policy, as a part of a move to a more market-determined exchange rate.
In the past year, the RMB has appreciated by 6%, but the pace is not fast enough to reduce China’s global trade surplus, its internal imbalances, or foreign-exchange-market pressures.
A more flexible currency is especially important now, when inflation risks are rising in China.
Increased currency flexibility would allow China’s central bank to use monetary policy to enhance China’s financial and price stability.
As Premier Wen Jiabao recently emphasized, China must now undertake comprehensive measures to control mounting inflation, growing asset bubbles, and an overheating economy.
We share these concerns.
In the US-China relationship, the RMB exchange rate has become a touchstone for broader anxieties about competition from China.
As globalization advances and economies become more tightly integrated, worries about the effects of foreign competition – through trade or through foreign investment – have fueled economic nationalism and protectionist sentiments.
Americans have been through this type of debate before.
Twenty years ago, we were gripped by fear that Japan would overtake our economic leadership – a concern that was unfounded then and, in hindsight, looks profoundly mistaken.
America continues to lead the world in standard of living, productivity, and innovation.
China’s continued economic growth and integration into the global economy gives America even greater opportunities to grow and succeed.
The biggest risk to both US and Chinese prosperity is that China’s growth stalls, or that it pulls back from further global integration and reforms too slowly.
Indeed, economic nationalism is growing in China, too.
Some Chinese are suspicious that the US push for RMB appreciation and financial-market liberalization is really an attempt to gain trade advantages and generate profits for American companies while slowing China’s economic expansion.
They mistakenly believe that yen appreciation during the mid-1980’s caused Japan’s weak economic performance in the 1990’s.
Rather, we now know that Japan’s economic difficulties were caused by the growth, and then collapse, of a huge asset bubble, and the failure to use monetary policy to prevent deflation after the bubble burst.
Financial liberalization is not about foreign firms drilling holes in China’s economy.
Foreign participation in the financial sector brings expertise needed to provide more efficient savings instruments, risk management, and allocation of capital.
But to use that expertise – the most valuable asset a globally competitive financial institution has – investors need to control the operations of firms in which they have a stake.
This is why China’s equity limits for foreign investment in Chinese financial institutions are costly to the Chinese economy, and why raising these limits is important.
There are also those in China who argue that the US focus on food and product safety is part of a strategy to restrict Chinese imports and reduce the bilateral trade deficit. This argument has no basis in fact.
Numerous other countries, notably European Union members, share our concerns.
Finally, after welcoming foreign investment, which contributed greatly to Chinese manufacturing growth and export competitiveness, some in China would now tighten restrictions on foreign investment to protect China’s domestic industries.
The US faces similar pressures, even though we are one of the world’s most open economies.
But neither country can protect its way to prosperity: protectionism harms China’s industrial development and our efforts to build stronger trading relationships.
I am committed to working to maintain economic openness, because it is good for America and for our workers.
But, frankly, it will be easier to do this if the American public and the US Congress see that China is serious about reform and expanding access to its markets.
The SED is one valuable tool in combating protectionist sentiments.
In this and other bilateral dialogues, the US has demonstrated that we welcome and encourage the rise of a prosperous and stable China.
We supported China’s membership in the World Trade Organization, the Inter-American Development Bank and the Financial Action Task Force.
We supported a greater voting share for China, and other rapidly growing emerging markets, in the IMF and the World Bank.
But China’s government must recognize that, while increased participation allows China to advance its interests, it also brings greater responsibilities.
The agreements we have achieved thus far are like signposts showing progress along the road to mutual economic prosperity.
While progress has not been as rapid as we would like, these signposts point the way to further benefits for Americans and Chinese alike.
To turn back would jeopardize the long-term strategic interests of both countries for short-term political expediency.
The Berlusconi Paradox
ROME – One storm has passed in Italy.
Another, perhaps bigger storm, has yet to begin.
Not for the first time, Italian politics are a landscape of paradoxes and oxymora.
Thus, a prime minister who gained massive support from voters only two and a half years ago, won mid-term elections, survived two confidence votes in Parliament, and still enjoys high approval ratings is constantly under pressure.
Sixteen years have passed since Silvio Berlusconi, a blessing and a curse for the Italian people, made his first foray into the political ring.
Berlusconi has been in power for eight of those years, though, as Giuliano Ferrara, the editor of Il Foglio, puts it, the popular perception is that, given his commanding personality, he has ruled the whole time.
The Berlusconi era is approaching its twilight, yet his sun is unwilling to set.
Berlusconi, the head of a diversified media empire (television, radio, press, Internet, movies, advertising, and books), decided to establish a political party at a time when he believed that post-communists could win power otherwise.
Until 2006, Berlusconi relied on three supporters: Northern League federalists, the post-fascists led by Gianfranco Fini, and the Catholic Union of the Center (UDC), under Pier Ferdinando Casini’s leadership.
In 1994, Fini and Casini were around 40 years old and seen as rising stars of Italian politics.
Standing alongside Berlusconi, they did indeed rise, but the tycoon’s star out-shone their own.
They felt like powerless minority shareholders.
In 2008, Casini split from Berlusconi.
The vote of confidence that just took place finalized Berlusconi’s divorce with the leader of the Italian right, Fini.
In both cases, Berlusconi won, but he has paid a heavy price.
His government initially had a margin of more than 100 seats in Parliament; now, with Casini and Fini gone, it is down to three.
Berlusconi himself seems captive to his only remaining partner: the Northern League, which is at its popular zenith (though its charismatic leader, Umberto Bossi, is seriously ill).
Not surprisingly, the League is calling for new elections in the spring, whereas Berlusconi would prefer to widen the government’s majority by bringing back Casini – a path beset with hurdles and hazards.
After all, Berlusconi’s power, while strong, is also strongly contested.
On the international scene, the American diplomatic cables recently released by WikiLeaks highlight American suspicions about Italy, which are not limited to the country’s ties – too close, according to the US State Department – to Vladimir Putin’s Russia, to Libya, and to Iran.
What is probably most striking for the Anglo-Saxon cultural paradigm is Berlusconi’s boldness in his use of power –&#160;not only when dealing with young and attractive women, but, first and foremost, when advancing his companies’ interests against those of their competitors.
The overt government backing provided to Berlusconi’s Mediaset against Rupert Murdoch’s Sky caused a far greater stir internationally than it did in Italy.
Berlusconi regards his “commercial diplomacy” as a formidable defensive weapon, which may help explain why he is not too concerned about how his actions in this area are perceived on the international front.
Nor he is overly worried about the domestic scene, since opponents are deeply divided and thus unable to offer an electoral alternative.
Berlusconi’s worries, instead, have more to do with a possible criminal verdict by the Constitutional Court on corruption charges, and a related ban from public office.
That is why, if fresh elections are to be held, Berlusconi may well turn them into a personal referendum.
These are the machinations of Italian politics.
Finance Minister Giulio Tremonti is a safe pair of hands for the country’s fiscal policy, yet the government has been unable to revive economic growth.
Social unrest, on the other hand, has already erupted, with violent protests by students and radical trade-union factions fueling alarm – as have threats and aggression against officials of both trade unions and employers’ associations.
Matters could get worse in 2011, as rising unemployment cuts household consumption.
And widening interest-rate spreads on government bonds do not bode well, either, as this will quickly lead to pressure for further spending cuts.
Despite these sources of concern, Italy is a robust country that knows how to deal with economic crisis.
But will it be able to deal with a brewing political crisis, too?
The answer is likely to be as paradoxical as Italian politics: temporarily definitive.
The Best and Brightest Fanatics
In Britain and Australia, several Muslim medical doctors and engineers have been arrested following a series of failed car bombings.
The arrest of these well-educated professionals, together with the Egyptian doctor Ayman al-Zawahiri’s role as al-Qaeda’s deputy leader, raises questions that go far beyond disaffection among Muslims and the consequences of America’s misadventures in the Middle East.
Doctors and engineers, after all, are professionals.
They are well-off, well-established members of society, not marginal figures whom we might expect to be drawn to desperate acts of violence.
Moreover, they come from a scientific background, and science is usually not associated with religious zeal or political fanaticism.
Of course, only a minority of zealous Muslims espouses political violence, and only a tiny number of Muslim professionals set off bombs.
Nevertheless, the presence of doctors and engineers in fundamentalist movements stands out.
In fact, fundamentalist leaders often have professional backgrounds.
Doctors who organize groups based on literalist readings of scripture and engineers who lead Islamist political parties are familiar figures throughout the Muslim world.
One reason for this is the difference between the cultures of basic science and applied science.
Throughout the world, physicists and biologists tend to be more skeptical and less religious.
Among engineers and biomedical professionals, however, conservative, even fundamentalist religious leanings are not so unusual.
This phenomenon is not unique to Islam.
In the United States, literalist Christians with engineering backgrounds have long led opposition to Darwin’s theory of evolution.
Compared to biologists, the ranks of medical doctors include a much larger proportion of creationists.
Likewise, in Muslim countries, it is not unusual for engineering professors to denounce Darwin as a fraud, and many well-known doctors argue that modern technological and scientific developments are prefigured in the Koran.
In the Muslim world, applied science has even more religious and political entanglements.
In their effort to overcome centuries of military and commercial backwardness, Muslims have sought to industrialize, rationalize administration, and adopt modern forms of political life.
However, a constant concern has been to adopt these changes without corrupting Muslim culture – to become technologically adept and yet remain devout Muslims.
In this effort, professionals in applied science, as people who would help Muslim countries catch up with the West, have enjoyed enormous prestige.
Engineering programs are in high demand, and engineers enjoy a status comparable to lawyers and doctors in the West.
The best and the brightest young Muslims go into applied science, while basic science languishes.
With their important role in modernization, applied scientists engage in cultural debates as well.
A doctor may choose a secular path, or try to integrate a traditional faith with a modern profession.
Such choices are directly connected to debates over the direction the whole society should take.
To complicate matters further, the Islamic world is in a period of religious experimentation.
Traditional doctrines and supernaturalism remain vigorous, but the structures of religious authority are changing.
Today’s fundamentalism is a modern way of being religious, more suitable to a literate, urban population than a peasantry guided by traditional religious scholars.
Traditionally, Muslim scholars achieved status by mastering socially useful knowledge, which was Islamic law.
Today, however, applied science is also useful knowledge for the modern world.
As a result, in a modernizing environment, doctors and engineers can find themselves in positions of religious authority, leading a Koran study group and interpreting scripture.
The Muslim world is home to many successful movements that combine doctrinal conservatism with a modern outlook that supports capitalism and embraces technology.
Professionals have been integral parts of such movements, because modernization encourages action rather than resignation.
Political ideas are easily translated into religious language, and in extreme circumstances, violent jihadism is used to express political frustrations.
But the possibility of violence should not distract us from noticing that fundamentalist convictions also motivate positive political activism.
Islamists (such as those in Hamas) gain credibility among Muslim populations because of the social services and community support that they help to organize.
Indeed, fundamentalist professionals often excel in such activism.
Their puritanical religious style sets forth an ideal morality with clear-cut rules that are similar to the constraints of an engineering project.
Engineers set out to change the world according to a blueprint, as they were trained to do.
Religiously colored political violence will always attract some professionals.
But, again, it is a tiny number.
The majority of observant Muslims are peaceful, and most Islamists today have adopted more moderate, democratic politics.
Increasingly Islamism is becoming a form of right-wing populism.
But, like right-wing Christians in the US, Islamists can be legitimate parts of a democratic political landscape.
Indeed, one virtue of democracy is its ability to dampen violent tendencies.
If we are to encourage democratic trends in political Islam, we must learn to think of Islamists as political opponents rather than as violent adversaries who may have medical and engineering degrees.
The Best Investments
KOLKATA – On the eastern edge of Kolkata, Dulu Bibi, a 25-year-old mother of four, worries about the cost of treating her two sick boys.
Her husband earns 80-90 rupees ($1.90 or €1.40) a day.
The family’s basic diet is low in the essential micronutrients that children need to thrive.
Dulu’s two sons, aged three and one, are weak and feverish, lack appetite, and cry a lot. “If I have to spend 150-200 rupees on medicine,” she asks, “what will I eat and feed my children with?”
Dulu’s story is heartbreaking – and heartbreakingly common – in the developing world: three billion people survive on diets that lack micronutrients like vitamin A and Zinc, and are at increased risk of illness from common infections like diarrheal disease, which kills nearly two million children annually.
Micronutrient deficiency is known as “hidden hunger.”
This is a fitting description, because it is one of the global challenges that we hear relatively little about in the developed world.
It draws scant media attention or celebrity firepower, which are often crucial to attracting charitable donations to a cause.
But there is a larger point here: billions of dollars are given and spent on aid and development by individuals and companies each year.
Despite this generosity, we simply do not allocate enough resources to solve all of the world’s biggest problems.
In a world fraught with competing claims on human solidarity, we have a moral obligation to direct additional resources to where they can achieve the most good.
And that is as true of our own small-scale charitable donations as it is of governments’ or philanthropists’ aid budgets.
In 2008, the Copenhagen Consensus Center, which I direct, asked a group of the world’s top economists to identify the “investments” that could best help the planet.
The experts – including five Nobel Laureates – compared ways to spend $75 billion on more than 30 interventions aimed at reducing malnutrition, broadening educational opportunity, slowing global warming, cutting air pollution, preventing conflict, fighting disease, improving access to water and sanitation, lowering trade and immigration barriers, thwarting terrorism, and promoting gender equality.
Guided by their consideration of each option’s costs and benefits, and setting aside matters like media attention, the experts identified the best investments – those for which relatively tiny amounts of money could generate significant returns in terms of health, prosperity, and community advantages.
These included increased immunization coverage, initiatives to reduce school dropout rates, community-based nutrition promotion, and micronutrient supplementation.
This last initiative, which could do so much to help Dulu Bibi’s family in Kolkata, is extraordinarily cheap.
Providing Vitamin A for a year costs as little as $1.20 per child, while providing Zinc costs as little as $1.00.
By highlighting the areas in which even small investments can accomplish a great deal, the project influenced philanthropic organizations and governments.
This month, the Copenhagen Consensus Center releases the Guide to Giving (www.copenhagenconsensus.com) so that those of us without a government treasury or charitable foundation at our disposal can also consider how to use the experts’ lessons.
Some reject the need to set priorities.
But it happens whether we like it or not.
A few causes and issues get the most airtime, attention, and money.
The Copenhagen Consensus provides a framework on which we can build informed decisions, based on what can be achieved with similar “investments” in different areas.
Should we contribute to organizations that focus on saving lives today, immediately making the world a better place (with spin-offs lasting longer), or fund education to benefit future generations?
Often we hear catchphrases like “without an education there is no future” or “without water one cannot survive,” as if it is obvious that we should focus first on one or the other.
But many people go without proper education and access to clean drinking water.
The difficult task that the expert panel undertook was to look at the extra good that an additional donation – even as little as $10 – could achieve with respect to many good causes.
The contrast between saving lives today and aiming at tomorrow becomes clear when efforts to tackle global warming are included in the comparison.
How could $10 best be spent?
Should we, say, buy carbon offsets, or donate to a charity providing micronutrient supplements?
By putting all benefits to individuals, communities, and countries in monetary terms, we can compare the two options.
Expert researchers for the Copenhagen Consensus found that carbon offsets are a relatively ineffective way of reining in global warming and reducing its effects – $10 would avoid about $3 of damage from climate change.
By contrast, $10 spent on Vitamin A supplements would achieve more than $170 of benefits in health and long-term prosperity.
One lesson we can draw is that while global warming may exacerbate problems like malnutrition, communities bolstered by adequate nutrition will generally be less vulnerable to climate-based threats.
Overall, we can typically best help through direct interventions, including micronutrient supplements, fortification, biofortification, and nutritional promotion.
There are billions of stories like Dulu Bibi’s and billions of other stories that demand our attention.
By embracing simple lessons from economics, all of us – individuals, governments, and philanthropies – can ensure that our generosity yields the greatest benefit possible.
The Big Bank Fix
LONDON – Two alternative approaches dominate current discussions about banking reform: break-up and regulation.
The debate goes back to the early days of US President Franklin D. Roosevelt’s “New Deal,” which pitted “trust-busters” against regulators.
In banking, the trust-busters won the day with the Glass-Steagall Act of 1933, which divorced commercial banking from investment banking and guaranteed bank deposits.
With the gradual dismantling of Glass-Steagall, and its final repeal in 1999, bankers triumphed over both the busters and the regulators, while maintaining deposit insurance for the commercial banks.
It was this largely unregulated system that came crashing down in 2008, with global repercussions.
At the core of preventing another banking crash is solving the problem of moral hazard – the likelihood that a risk-taker who is insured against loss will take more risks.
In most countries, if a bank in which I place my money goes bust, the government, not the bank, compensates me.
Additionally, the central bank acts as “lender of last resort” to commercial banks considered “too big to fail.”
As a result, banks enjoying deposit insurance and access to central bank funds are free to gamble with their depositors’ money; they are “banks with casinos attached to them” in the words of John Kay.
The danger unleashed by sweeping away the Glass-Steagall barrier to moral hazard became clear after Lehman Brothers was allowed to fail in September 2008.
Bail-out facilities were then extended ad hoc to investment banks, mortgage providers, and big insurers like AIG, protecting managers, creditors, and stock-holders against loss.
(Goldman Sachs became eligible for subsidized Fed loans by turning itself into a holding company).
The main part of the banking system was able to take risks without having to foot the bill for failure.
Public anger apart, such a system is untenable.
Premature rejection of bank nationalization has left us with the same two alternatives as in 1933: break-up or regulation.
Taking his cue from Paul Volcker, a former chairman of the US Federal Reserve, President Barack Obama has proposed a modern form of Glass-Steagall.
Under the Obama-Volcker proposals, commercial banks would be forbidden to engage in proprietary trading – trading on their own account – and from owning hedge funds and private-equity firms.
Moreover, they would be limited in their holding of derivative instruments, and Obama has suggested that no commercial bank should hold more than 10% of national deposits.
The main idea is to reduce the risks that can be taken by any financial institution that is backed by the federal government.
The alternative regulatory approach, promoted by Nobel Laureate Paul Krugman and the chairman of Britain’s Financial Service Authority, Adair Turner, seeks to use regulation to limit risk-taking without changing the structure of the banking system.
A new portfolio of regulations would increase banks’ capital requirements, limit the debt that they could take on, and establish a Consumer Financial Protection Agency to protect naïve borrowers against predatory lending.
This is not an either-or matter.
In testimony to the Senate Banking Committee in early February, MIT’s Simon Johnson endorsed the Volcker approach, but also favored strengthening commercial banks’ capital ratios “dramatically” – from about 7% to 25% – and improving bankruptcy procedures through a “living will,” which would freeze some assets, but not others.
Many details of the Obama package are unlikely to survive (if, indeed, the plan itself does).
But there are powerful arguments against the principles of his approach.
Critics point out that “plain old bad lending” by the commercial banks accounted for 90% of banks’ losses.
The classic case is Britain’s Royal Bank of Scotland, which is not an investment bank.
The commercial banks’ main losses were incurred in the residential and commercial housing market.
The remedy here is not to break up the banks, but to limit bank loans to this sector – say, by forcing them to hold a certain proportion of mortgages on their books, and by increasing the capital that needs to be held against loans for commercial real estate.
Moreover, many countries with integrated banking systems did not have to bail out any of their financial institutions.
Canada’s banks were not too big to fail – just too boring to fail.
There is nothing in Canada to rival the power of Wall Street or the City of London. This enabled the government to swim against the tide of financial innovation and de-regulation.
It is countries like the US and Britain, with politically dominant financial sectors competing to take over financial leadership of the world, that suffered the heaviest losses.
This is the point that the well-intentioned regulators miss.
At root, the battle between the two approaches is a question of power, not of technical financial economics.
As Johnson pointed out in his Congressional testimony, “solutions that depend on smarter, better regulatory supervision and corrective action ignore the political constraint on regulation and the political power of big banks.”
Such proposed solutions assume that regulators will be able to identify excess risks, prevent banks from manipulating the regulations, resist political pressure to leave the banks alone, and impose controversial corrective measures “that will be too complicated to defend in public.”
They also assume that governments will have to the courage to back them as their opponents accuse them of socialism and crimes against freedom, innovation, dynamism, and so on.
In fact, this chorus of abuse has already started, led by Goldman Sachs Chairman Lloyd Blankfein.
There is another interesting parallel with the New Deal.
Roosevelt got the Glass-Steagall Act through Congress within a hundred days of his inauguration.
Obama has waited over a year to suggest his bank reform, and it is unlikely to pass.
This is not just because the banking crisis in 1933 was greater than today’s crisis; it is because much more powerful financial lobbies now stand between pen and policy.
If reformers are to win, they must be prepared to fight the world’s most powerful vested interest.
The Big Blink
CHICAGO – World growth is likely to remain subdued over the next few years, with industrial countries struggling to repair household and government balance sheets, and emerging markets weaning themselves off of industrial-country demand.
As this clean-up from the Great Recession continues, one thing is clear: the source of global demand in the future will be the billions of consumers in Africa, China, and India. But it will take time to activate that demand, for what is now being produced around the world for industrial-country consumers cannot simply be shipped to emerging-market consumers, especially the poorer ones among them.
If we want to talk about billions of new consumers, rather than the tens of millions who have incomes similar to the middle classes in industrial countries, we must recognize that many emerging-market consumers have much lower incomes than industrial-country consumers, and live in vastly different conditions.
Their needs are different, and producers around the world have, until recently, largely ignored them.
But times are changing.
Increasingly, producers are focusing on people who, if not at the bottom of the income pyramid, comprise the vast numbers nearer the base.
For example, an Indian company, Godrej, is making an innovative refrigerator targeted at poor villagers.
Village women typically are forced to cook multiple times during the day because the food that they prepare in the morning spoils in the heat.
They would like to be able to refrigerate uneaten food, which would limit waste as well as time spent cooking.
Unfortunately, with electricity supply intermittent even when available, compressor-based electric refrigerators, which consume a lot of power, have not been an option.
Godrej’s engineers observed that if the objective was only to keep food from spoiling, and not necessarily to make ice, it would be sufficient if the refrigerator cooled to a few degrees above zero centigrade.
This would allow the use of a less power-hungry fan instead of a compressor, and the fan could run on batteries rather than relying on the power grid.
This is the kind of frugally engineered product that can create enormous new consumer demand in emerging markets.
Companies in the industrial world are taking note.
General Electric, for example, is cutting down the functions provided by its medical equipment to only what is strictly useful in order to supply remote rural clinics across the developing world. “Just-enough” functionality makes the equipment affordable without compromising quality.
Over the next decade, growth in this kind of developing-country demand will help offset the slow growth of demand in industrial countries.
But the process cannot be rushed.
Unfortunately, with high levels of unemployment in industrial countries, policymakers want to do something – anything – to increase growth fast.
The aggressive policies that they are following, however, could jeopardize the process of adjustment.
Consider the United States Federal Reserve’s foray into quantitative easing.
Clearly, the Fed’s objective is to increase bond prices, in the hope that lower long-term interest rates will propel corporate investment.
In addition, the Fed hopes that lower long-term interest rates will push up asset prices, giving households more wealth and greater incentive to spend.
Finally, by demonstrating a willingness to print money, the Fed hopes to increase inflationary expectations from their current low levels.
Even though the markets seem to be anticipating substantial levels of quantitative easing, US corporate investment remains subdued.
And US households seem wary of splurging again as they did in the past, no matter how wealthy they feel.
The Fed has, however, succeeded in enhancing expectations of inflation in the US.
With its anticipated bond purchases keeping a lid on interest rates, the net effect is that investors do not see an adequate real return from holding dollar assets, which is perhaps one reason the dollar has been depreciating.
Emerging markets are worried because they believe that the Fed’s ultra-aggressive monetary policy will have little effect in expanding US domestic demand.
Instead, it will shift demand towards US producers, much as direct foreign-exchange intervention would.
In other words, quantitative easing seems to be as effective a method of depreciating the dollar as selling it in currency markets would be.
Because they know that it will take time for domestic demand to pick up, emerging markets are unwilling to risk a collapse in exports to the US by allowing their currencies to strengthen against the dollar too quickly.
They are resisting appreciation through foreign-exchange intervention and capital controls.
As a result, we might not see steady growth of demand in emerging markets.
Instead, excess liquidity and fresh asset bubbles could emerge in the world’s financial and housing markets, impeding, if not torpedoing, growth.
In the ongoing showdown over currencies, who will blink first?
The US (and other industrial countries) could argue that it has high levels of unemployment and should be free to adopt policies that boost growth, even at the expense of growth in emerging markets.
These countries, in turn, could argue that even very poor US households are much better off than the average emerging-market household.
Rather than bickering about who has the stronger case, it would be better if all sides compromised – if everyone blinked simultaneously.
The US should dial back its aggressive monetary policy, focusing on repairing its own economy’s structural problems, while emerging markets should respond by allowing their exchange rates to appreciate steadily, thereby facilitating the growth of domestic demand.
Is it too much to hope that the G-20 can achieve such a commonsensical compromise?
The Big Chill
MOSCOW: Russian-American relations are witnessing a renewed process of deterioration.
Rot first set in during 1998 but stalled in 2000 because of the US presidential election.
The Republicans were then presenting the Democrats as the party who "lost" Russia, so it was not to the Clinton/Gore Administration's advantage to second this by themselves feuding with the Putin administration.
Now, with Republicans in the White House, the problems between the two countries are out in the open and multiplying.
The Bush Administration appears to believe that Russia and America are playing a "zero sum" game: that every diplomatic triumph Russia may have, no matter how minor, comes at American expense.
Thus Russian efforts to treat the diplomatic world as a multi-polar one is viewed in Washington only as a facade for its efforts to diminish America.
Making matters worse, the two countries have, to all intents and purposes, broken off both unofficial and - with scarcely an exception - official dialogue.
Why is this happening?
Much of American foreign policy is now in the hands of people who have been out of international diplomacy for fifteen to twenty years, and so continue to sing from the old Cold War hymn book.
Holding pride of place here is America's Secretary of Defense, Donald Rumsfeld, and a number of people around him.
They appear unable to recognize that the post-Cold War world is not the world they knew when last in power.
Before negotiating with their old adversaries, the Russians, they seem determined to show just how tough they are.
But neither America nor Russia - Russia to an even greater extent - benefit from confrontation.
Confrontation, indeed, will only lead to a situation in which Russia will be driven into a corner and ally itself with states truly hostile to the US, even though Russia is not now hostile towards America.
It is important to recognize that today's international situation and strategic stability are more fragile than during the Cold War years of predictable superpower rivalry.
It is because of the unpredictable nature of today's world that neither side can afford a farcical "Cold War, The Sequel."
The Cold War was a tragedy; a repeat can only be a farce because it is unnecessary.
So it is essential that the Bush and Putin administrations begin wide-ranging dialogues - at both the unofficial and official levels - in order to take their relations out of their semi-nose-dive.
Sources of friction, however, are not solely on America's side.
In Russia, too, a feeling has built up that America can and must be held responsible for the many troubles that Russians have, in fact, brought upon themselves.
Someone, it seems, must be blamed for the pain of the last decade, and it is easier to blame Americans than to blame ourselves.
An element of wishful thinking has also entered some Russian strategic thinking.
One such element is that Europe will interpose itself between America and Russia over the Bush plan for National Missile Defense (NMD).
Europe, however, will not mediate over NMD; indeed, Europe is backpedaling from its earlier opposition to the scheme.
This is why the calculations that some Russian strategists make - ie, that Russia will be able to forge a sort of all-European-coalition against America over NMD - are patently ridiculous.
Over NMD, Europe's vital interests are engaged to such a slight degree that it will never quarrel seriously with the US on this count, even though most European leaders do not like America's policy.
Another, related issue that holds the potential for real danger concerns proposed revision of the Anti-Ballistic Missile (ABM) Treaty.
Formal negotiations here, however, will only lead to a toughening of America's position, boosting the cause of NMD's advocates.
Russia's position is also likely to harden as well.
Here the result can only be that Russia will be forced to cave in disgracefully, because we lack sufficient strength to hold our ground and dare not irresponsibly escalate the matter into a global crisis.
To lose out in this way, however, will only repeat the tragedy of the Russia/NATO Founding Act when, by signing and ratifying that treaty, Russia legitimized NATO's eastward expansion.
As no benefit can be gained by Russia from either surrendering or holding tough on this issue, the best thing for us is to evade negotiations on it altogether and, instead, initiate a wide-ranging dialogue on preserving and strengthening global strategic stability.
This dialogue should go beyond nuclear weapons to include the fight against terrorism, non-proliferation, the global arms trade, and Asia's evolving role in global security.
Under no circumstances, however, should the ABM issue be included, for it will only aggravate Russian/American relations.
As for the expulsion of 50 Russian diplomats from America recently, this, of course, it is too much, although the British used to expel upwards of 100.
Once these tit-for-tat expulsions are over, both governments should seriously assess each other as they really are, not as they wish or fear each other to be.
The Big Easing
BRUSSELS – More than three years after the financial crisis that erupted in 2008, who is doing more to bring about economic recovery, Europe or the United States?
The US Federal Reserve has completed two rounds of so-called “quantitative easing,” whereas the European Central Bank has fired two shots from its big gun, the so-called long-term refinancing operation (LTRO), providing more than €1 trillion ($1.3 trillion) in low-cost financing to eurozone banks for three years.
For some time, it was argued that the Fed had done more to stimulate the economy, because, using 2007 as the benchmark, it had expanded its balance sheet proportionally more than the ECB had done.
But the ECB has now caught up.
Its balance sheet amounts to roughly €2.8 trillion, or close to 30% of eurozone GDP, compared to the Fed’s balance sheet of roughly 20% of US GDP.
But there is a qualitative difference between the two that is more important than balance-sheet size: the Fed buys almost exclusively risk-free assets (like US government bonds), whereas the ECB has bought (much smaller quantities of) risky assets, for which the market was drying up.
Moreover, the Fed lends very little to banks, whereas the ECB has lent massive amounts to weak banks (which could not obtain funding from the market).
In short, quantitative easing is not the same thing as credit easing.
The theory behind quantitative easing is that the central bank can lower long-term interest rates if it buys large amounts of longer-term government bonds with the deposits that it receives from banks.
By contrast, the ECB’s credit easing is motivated by a practical concern: banks from some parts of the eurozone – namely, from the distressed countries on its periphery – have been effectively cut off from the inter-bank market.
A simple way to evaluate the difference between the approaches of the world’s two biggest central banks is to evaluate the risks that they are taking on.
When the Fed buys US government bonds, it does not incur any credit risk, but it is assuming interest-rate risk.
The Fed acts like a typical bank engaging in what is called “maturity transformation”: it uses short-term deposits to finance the acquisition of long-term securities.
With short-term deposit rates close to zero and long-term rates at around 2% the Fed is earning a nice “carry,” equal to about 2% per year on bond purchases totaling roughly $1.5 trillion over the course of its quantitative easing, or about $30 billion.
Any commercial bank contemplating a similar operation would have to take into account the risk that its cost of funds increases above the 2% yield that it earns on its assets.
The Fed can determine its own cost of funds, because it can determine short-term interest rates.
But the fact that it would inflict losses on itself by increasing rates is likely to reduce its room for maneuver.
Its recent announcement that it will keep interests low for an extended period thus might have been motivated by more than concern about a sluggish recovery.
By contrast, the ECB does not assume any maturity risk with its LTRO, because it has explicitly stated that it will charge banks the average of the interest rates that will materialize over the next three years.
It does, however, take on credit risk, because is lending to banks that cannot obtain funding anywhere else.
The large increase in the ECB’s balance sheet has led to concern that its LTRO might be stoking inflation.
But this is not the case: the ECB has not expanded its net lending to the eurozone banking system, because the deposits that it receives from banks (about €1 trillion) are almost as large as the amounts that it lends (€1.15 trillion).
This implies that there is no inflationary danger, because the ECB is not creating any substantial new purchasing power for the banking system as a whole.
The banks that are parking their money at the ECB (receiving only 0.25% interest) are clearly not the same ones that are taking out three-year loans at 1%.
The deposits come largely from northern European banks (mainly German and Dutch), and LTRO loans go largely to banks in southern Europe (mainly Italy and Spain).
In other words, the ECB has become the central counterparty to a banking system that is de facto segmented along national lines.
The real problem for the ECB is that it is not properly insured against the credit risk that it is taking on.
The 0.75% spread between deposit and lending rates (yielding €7.5 billion per year) does not provide much of a cushion against the losses that are looming in Greece, where the ECB has €130 billion at stake.
The ECB had to act when the eurozone’s financial system was close to collapse at the end of last year.
But its room for maneuver is even more restricted than that of the Fed.
Its balance sheet is now saddled with huge credit risks over which it has very little control.
It can only hope that politicians deliver the adjustments in southern Europe that would allow the LTRO’s recipient banks to survive.
The Bigger Issue in Sudan
TEL AVIV – The most immediate result of the arrest warrant issued for Sudanese President Omar Hassan al-Bashir by the International Criminal Court last month was the expulsion of most aid agencies from the country.
But this global focus on Sudan’s Darfur region, though justified, has overshadowed an even more vital issue: sustaining the quest for a broader peace in all of Sudan.
What is most needed now is to build an international consensus on a strategy to implement fully the 2005 Comprehensive Peace Agreement (CPA) for Sudan.
The CPA ended Africa’s longest civil war, which had left behind over two million dead.
That agreement not only contains benchmarks that should lead to self-determination for Sudan’s South; it also spells out a democratization process in Sudan itself.
After all, the oppressive nature of the regime in Khartoum is at the root of the many conflicts that have torn the country apart.
If the government in Khartoum persists in undermining the reform process and derailing the referendum on self-determination promised for the South in January 2011, a return to full-scale civil war, with calamitous consequences for the peoples of Sudan and the entire region, is a real possibility.
The commitment of Sudan’s government to the CPA has always been equivocal.
Indeed, since the civil war’s end in 2005, the Sudan People’s Liberation Army (SPLA) in the South has frequently had to confront militias that operate as government proxies.
Moreover, Sudanese security forces continue to arm Arab tribes straddling the North-South border with the aim of destabilizing the mostly Christian South.
The arrest warrant for al-Bashir should not be allowed to spur further attempts by his government to sabotage the CPA and the fragile process leading to the 2011 referendum.
Nor should the international neglect that has for too long allowed the Darfur genocide to go unpunished recur when it comes to sustaining the quest for peace in Sudan.
The South’s drive for independence has gained momentum because of the North’s failure to make unity attractive through reform and elections, as stipulated by the CPA.
A second factor pushing secession forward is the SPLA’s lack of commitment to the New Sudan ideology of its founder, John Garang, who had negotiated the CPA and died in a plane crash in 2005.
Garang fought for a united, secular, and democratic Sudan, a lofty dream that the Islamist regime in Khartoum admittedly has had no intention of implementing.
Self-determination for the South has thus become the only practical way out of the country’s dilemma, and one fully consistent with the 2005 peace agreement.
Because the North possesses the capacity, but not the political will, to implement the CPA, and the South has the will but not the capacity, continued disengagement by the international community might doom the prospects for peace.
The Government of Southern Sudan suffers from serious financial constraints, owing to unrealistic assumptions about its oil revenues.
As a result, its ability to maintain services – and the military capacity to respond to any maneuver by the Khartoum government aimed against the peace agreement – is seriously compromised.
Only the United States appears to be committed to creating the conditions needed to implement the CPA.
President George W. Bush, who twice received Southern Sudanese president Salva Kiir at the White House, approved a program in 2006 to transform the SPLA into a professional army.
More recently, leading American congressmen have been impressing on President Barack Obama the need for a muscular effort to implement the CPA.
Recommendations presented recently to the Senate’s Foreign Relations Committee, suggested that security guarantees for Southern Sudan be given in order to deter a renewal of the civil war.
Financial assistance is of course vital, but the political commitment of the international community is just as important. For example, although the United Nations Mission in Sudan is supposed to monitor implementation of the CPA, Darfur has practically monopolized its attention.
Moreover, whatever monitoring is taking place is rarely followed by action.
The secession of a Southern Sudanese Christian state from a Muslim country, a major member of the Arab League, would have far-reaching strategic implications.
China, a close ally of the government in Khartoum, is now carefully weighing its oil interests and its strategic concerns in the South.
A high-powered Russian delegation recently arrived in Juba, the South Sudanese capital, with the proclaimed aim of “playing a more active role on the African continent.” And Japan, a major consumer of Middle East oil, has recently invited President Kiir to Tokyo.
Sadly missing in this diplomatic action is the European Union.
International law and the indictment of war criminals are important for a civilized world order, but they are no substitute for active financial and political engagement to support an internationally legitimate, and urgently needed, peace accord such as the CPA in Sudan.
The Biofuels Trade Challenge
There is rightly growing concern among the public and policymakers about climate change and its consequences.
Combating climate change is an enormous and truly global challenge, requiring local, national, and international action.
We must tackle it both effectively and urgently. A key part of meeting our climate objectives is to minimize the harmful effects of transport on the environment.
So-called “biofuels,” such as bioethanol and biodiesel, as well as developing the next generation of biofuels, must play a part in this.
After all, every liter of petrol that is replaced with a biofuel benefits the environment.
Many countries around the world are producers or are emerging as producers of biofuels.
Global production is rapidly increasing.
World production of bioethanol, for example, doubled between 2000 and 2004.
A further doubling is expected by 2010.
As output of biofuels increases, policymakers must ensure that global supplies are allocated effectively and smoothly between countries that produce and consume them.
Free and open conditions for international trade are the most efficient way to allocate global resources, fully exploiting individual countries’ comparative advantages.
This principle also holds true for the emerging biofuels market. Today, however, trade in biofuels is limited.
According to the United Nations Conference on Trade and Development, global trade in bioethanol accounted for less than 10% of global production in 2004, suggesting a large untapped trade potential.
Part of the explanation no doubt lies in the presence of significant trade barriers.
For example, high tariffs are often placed on biofuels and biofuel feedstock – in some cases as high as 55% for bioethanol.
At the same time, subsidies are widely used to encourage domestic production.
Tax incentives are employed to stimulate use, as are mandatory blending requirements.
In addition, different standards and certification requirements are applied. While many of these measures are implemented for legitimate environmental policy reasons, they do pose challenges for trade in biofuels.
As a first step toward eliminating unnecessary barriers, we must deepen our understanding of the effects on trade in biofuels of measures to promote their production and use.
Sweden and the Netherlands recently took the initiative for further analysis of this issue by the OECD.
Sweden’s starting point is the conviction that a more liberal trade regime, coupled with global standards, is needed.
As a first measure, Sweden argues for the elimination of all tariffs on ethanol. Apart from environmental considerations, there are other important benefits of expanding world trade in biofuels.
Generally, international trade is a strong instrument for development.
Several developing countries have a comparative advantage in producing ethanol – and other biofuels, for that matter.
Brazil, which is now the world’s largest producer and exporter of ethanol, is a case in point.
But there are also other developing countries that are already exporters of biofuels, and still others that view it as an important source of future income.
Trade policy should support, not undermine, these countries’ ambitions. Of course, some have raised concerns about the possible economic, social, and ecological repercussions, not least in developing countries, of a strong increase in demand for biofuels.
For example, diverting too much land from food production to biofuel crops would risk sharp increases in food prices, while adequate environmental standards must accompany large-scale production use of biofuels.
Such concerns also matter to consumers of biofuels, who will ultimately determine demand for them.
Appropriate national policies, as well as strong international cooperation, will be necessary to minimize the risks and exploit the benefits that biofuels markets imply for developing countries. Creating an efficient market to expand world trade in biofuels is a policy for the future, one that is good for the environment and good for development.
Increased trade, protection of the environment, and poverty reduction can, and must, go hand in hand.
The Black Hole in America’s GDP
CAMBRIDGE – The massive downturn in American’s economy will last longer and be more damaging than previous recessions, because it is driven by an unprecedented loss of household wealth.
Although the fiscal stimulus package that President Obama recently signed will give a temporary boost to activity sometime this summer, the common forecast that a sustained recovery will begin in the second half of 2009 will almost certainly prove to be overly optimistic.
Previous recessions were often characterized by excess inventory accumulation and overinvestment in business equipment.
The economy could bounce back as those excesses were absorbed over time, making room for new investment.
Those recoveries were also helped by interest rate reductions by the central bank.
This time, however, the fall in share prices and in home values has destroyed more than $12 trillion of household wealth in the United States, an amount equal to more than 75% of GDP.
Previous reactions to declines in household wealth indicate that such a fall will cut consumer spending by about $500 billion every year until wealth is restored.
While a higher household saving rate will help to rebuild wealth, it would take more than a decade of relatively high saving rates to restore what was lost.
The decline in housing construction has added to the current shortfall in aggregate demand.
The annual number of housing starts has fallen by 1.2 million units, cutting annual GDP by an additional $250 billion.
While this will eventually turn around as the inventory of unsold homes shrinks, the recovery will be slow.
So the US economy faces a $750 billion shortfall of demand.
Moreover, the usual automatic stabilizers of unemployment benefits and reduced income tax collections will do nothing to offset this fall in demand, because it is not caused by lower earnings or increased unemployment.
Although the recently enacted two-year stimulus package includes a total of $800 billion of tax reductions and increased government spending, it would be wrong to think that this will add anything close to $400 billion a year to GDP in each of the next two years.
Most of the tax reductions will be saved by households rather than used to finance additional spending.
Moreover, a substantial part of the spending will be spread over the following decade.
And some of the government spending in the stimulus package will replace other outlays that would have occurred anyway. An optimistic estimate of the direct increase in annual demand from the stimulus package is about $300 billion in each of the next two years.
The stimulus package would thus fill less than half of the hole in GDP caused by the decline in household wealth and housing construction, with the remaining demand shortfall of $450 billion in each of the next two years causing serious second-round effects.
As demand falls, businesses will reduce production, leading to lower employment and incomes, which in turn will lead to further cuts in consumer spending.
To be sure, an improvement in the currently dysfunctional financial system will allow banks and other financial institutions to start lending to borrowers who want to spend but cannot get credit today.
This will help, but it is unlikely to be enough to achieve positive GDP growth.
A second fiscal stimulus package is therefore likely.
However, it will need to be much better targeted at increasing demand in order to avoid adding more to the national debt than the rise in domestic spending.
Similarly, the tax changes in such a stimulus package should provide incentives to increase spending by households and businesses.
Although long-term government interest rates are now very low, they are beginning to rise in response to the outlook for a sharply rising national debt.
The national debt held by US and foreign investors totaled about 40% of GDP at the end of 2008.
It is likely to rise to more than 60% of GDP by the end of 2010, with the debt-to-GDP ratio continuing to increase.
The resulting increase in real long-term interest rates will reduce all forms of interest-sensitive spending, adding further to the economy’s weakness.
So it is not clear what will occur to reverse the decline in GDP and end the economic downturn.
Will a sharp dollar depreciation cause exports to rise and imports to fall?
Will a rapid rise in the inflation rate reduce the real value of government, household, and commercial debt, leading to lower saving and more spending?
Or will something else come along to turn the economy around.
Only time will tell.
The Blair Option in Palestine
The release of an abducted BBC journalist in Gaza is being seen by some as an attempt by Hamas (which denies any part in the kidnapping) to curry favor with Tony Blair, who on stepping down as Britain’s prime minister was appointed international envoy to Israel and Palestine.
Blair has the thankless task of helping the Palestinian President Mahmoud Abbas build institutions for a viable state, following Hamas’ military takeover of Gaza.
Given the stakes, this is a task worth doing despite the high risk of failure.
But unless Blair gets a lot of unexpected support, failure is what will happen.
Four basic facts govern Blair’s role:
No peace is possible unless the Palestinian government becomes master in its own house;
Nothing is possible if Gaza remains a virtual charnel house;
Abbas cannot succeed and Hamas cannot be politically weakened unless there is massive external economic assistance;
It is imperative to limit the damage caused by the Israeli-Palestinian conflict to everything else that has to be done in the Middle East.
Blair isn’t the first statesman to try helping the Palestinians.
James D. Wolfensohn, former head of the World Bank, tried earlier in Bush’s term.
Wolfensohn made some progress, but it was not enough, especially when the United States, Israel, and the European Union chose to starve the Palestinians financially after Hamas won its unexpected victory in the January 2006 Palestinian elections.
Wolfensohn quit in frustration.
Blair is the most senior out-of-power statesman ever to get engaged in the Arab-Israeli conflict.
He cannot be dismissed as a functionary with no political base.
His role has been blessed both by Abbas and Israeli Prime Minister Ehud Olmert.
He has a long history of engagement in Arab-Israeli issues, and for years pressed for effective outside efforts to move the Palestine problem toward resolution.
At the same time, Blair won’t just take orders from the US.
That would be the kiss of death, following Blair’s controversial mimicking of US policy in Iraq.
Instead, at least on paper, Blair will work for the so-called Quartet, which also includes the EU, the United Nations, and Russia.
Also, his formal role is limited to helping the Palestinians sort out their economic and political affairs, not trying to negotiate a peace settlement – a task reserved for US Secretary of State, Condoleezza Rice.
But Blair’s high political profile means that what he does can’t be divorced from the broader politics or quietly played down if things don’t go well.
At the least, Blair must press for a radical increase in funds provided by the outside world to the Palestinian government as well as to the 1.4 million Palestinians trapped in Hamas-run Gaza.
So far America has pledged $40 million in humanitarian funds for Gaza (just $30 a person), and about $86 million in security training money for the West Bank.
These sums will be added to Palestinian tax receipts that Israel collected but refused to hand to over to a government that included Hamas;
Israel is now releasing about half of the approximately $700 million.
But total funds pledged by all sources are only a small fraction of what is urgently needed.
If Abbas is to compete with Hamas and its well-developed social-welfare structure and to avert human catastrophe in Gaza, he needs billions rather than millions of dollars in aid.
Along with a major increase in US funds, the EU needs to increase its aid dramatically.
But if outside money is to flow, Blair must get the Palestinian government to rein in its rampant corruption.
All this requires clear thinking.
At the RAND Corporation, for example, a team of researchers has laid out a comprehensive approach to building a successful Palestinian state, covering governance, security, education, health, water, investment – as well as long-term economic relations with Israel and the outside world.
RAND’s practical ideas have drawn praise from some Palestinian as well as Israeli leaders, precisely because they are about people more than about politics.
But even if Blair can get the economic development issues right, he can’t stop there if Abbas is to have a chance to succeed.
Blair will need to gain Israel’s assurances that life for Palestinians, both in the West Bank and in Gaza, will become better.
That includes greater freedom of movement, both within the West Bank and between it and Gaza.
Blair will also likely press Israel to prove its intentions by stopping all settlement activity in the West Bank – no new settlements, no expansion of existing ones.
By the same token, Blair will need to press the Palestinians to deliver a virtual cessation of attacks on Israel from Palestinian territories, including by Hamas, lest all peace efforts be blown apart by renewed fighting.
As always, such a cessation would be at the mercy of extremists competing for power or bent on making peace impossible.
In the process, Blair will have to talk to all parties, including Hamas – an Israeli and US sticking-point.
These are all needs to be met even before the US can try again to broker a political settlement between Israel and the Palestinians.
In the end, the obstacles may cause the “Blair option” to fall short.
But everyone committed to a positive outcome for Israel, Palestine, and the Middle East should wish Blair good luck.
The Blinders of History
A distorted view of the present is the worst way to prepare for the challenges of the future.
To describe the struggle against international terrorism as “World War IV,” as the leading American neo-conservative Norman Podhoretz does in his new book, is wrongheaded in any number of ways.
First of all, when and where was World War III?
The Cold War, precisely because it never became “hot,” was never the equivalent of World War I or II.
Of course, the “World War” reference may be intended to create an “us” versus “them” logic, but this does not correspond to the nature of the challenge posed by radical Islam, given the complexity and the many divisions that exist within the Muslim world.
Indeed, by militarizing our thinking, it renders us incapable of finding the right answers, which must be as much political as security-oriented.
As always, words are important, because they can easily be turned into weapons that boomerang on those who use them inappropriately.
Wrong analogies have already led America to disaster in Iraq, which had nothing in common with Germany or Japan after World War II – the parallel that some in the Bush administration used in arguing that democracy could be made to sprout in former dictatorships through occupation.
Obviously, the terrorist threat is real and endures, as the recent foiled plot in Germany attests.
That plot, which included a young German convert to Islam, showed once again that terrorists can threaten us from both without and within.
The nihilistic and destructive instincts that some young Germans of the Baader/Meinhof generation acquired from extreme leftist ideology in the 1970’s, it seems, can be transformed into a “romanticization” of al-Qaeda.
We must of course protect ourselves in the most serious and determined manner from the threat that terrorism may pose should, say, extremists acquire nuclear or biological weapons.
Intelligence, diplomacy, security forces, and educating people to the requirements of life lived under the shadow of an invisible menace must all be brought to bear.
A certain “Israelization” of our daily lives has unfortunately become inevitable.
But that does not mean that we must become literally obsessed with terrorism at the expense of losing sight of broader historical challenges.
The assassination of the heir of the Austro-Hungarian Empire at Sarajevo in July 1914 was not the cause of World War I, but its pretext.
The big picture then was not the “anarchist plot” to destabilize empires, but the rise of exasperated nationalisms, coupled with the suicidal instinct of a decaying order and the fatal mechanism of the logic of “secret alliances.”
The big picture then was that, with the transportation revolution and the deployment of mass armies, war could no longer be seen as the continuation of politics through other means.
The industrialization of war had made it “obsolete” in rational terms.
Less than the defeat of Germany, Austria, and the Ottoman Empire, World War I meant the suicide of Europe.
The big picture today is the possible passage of global leadership from the West to Asia.
The paranoid reaction of neoconservatives in America to the terrorist threat can only accelerate that process, if not render it inevitable, by endangering our democratic values and thereby weakening the “soft power” of the United States, while giving fuel to the terrorist cause.
Terrorism is the product of a fusion within a part of Islam of religious extremism, thwarted nationalism, and what Dostoyevsky called “nihilism.”
Our challenge is to understand the root causes of these forces and to make distinctions among them.
In other words, we are faced with the challenge of complexity, which requires us to ensure that a small minority is not joined by greater forces.
Greater stability in the Middle East, which implies a settlement of the Israeli-Palestinian conflict, together with more effective integration of Muslims in our societies based on social justice and a stronger humanistic message, are the key elements of a cohesive Western strategy.
If we lose sight of that in our struggle against terrorism and its causes, we will be left unable to face successfully the long-term challenge of “Chindia.”
The Blinders of the Left
Is it 1956 for the Left?
Well, yes.
All over the world, the Left was thrown into confusion and crisis after Khrushchev's 1956 speech exposing (some of) Stalin's crimes.
It wasn't only Communist Party members who were dazed by Khrushchev's revelations; progressives of all stripes - from trade unionists to Trotskyites - were forced, if they were honest and brave enough, to reassess long-cherished beliefs.
September 11 th has thrust those of us who consider ourselves progressives - who believe in democracy, feminism, human rights and socialism - into a 1956-type crisis.
By this I do not mean that the Islamic fundamentalists who declared war on ``the infidels'' (including so many of their own people) are Stalinists (though the two groups certainly share some characteristics).
I do mean that we must, if we are honest and brave enough, reassess many of our long-cherished beliefs.
Questioning authority must now start with our own.
Are we up to that task?
I am not at all sure that we will do better than our forebears in the 1950s; years of self-imposed political correctness have resulted in muddled, strident and obtuse ways of approaching (or is it avoiding?) the world.
I should say here that I consider this piece primarily a self-critique; but I know, too, that though the universe of ``progressives'' I am addressing is not infinite, it is larger than one.
The holy grail of much Leftist thinking over the past two or three decades has been cultural relativity.
Terrified of being thought racist, imperialist, arrogant, elitist or ``too Western,'' we averted our eyes from (and sometimes even supported) barbarisms of all types. Along with this came an odd reverence for ``traditional cultures'' - strange for those who fancy themselves forward-looking rationalists - at least if those cultures flourish in the so-called Third World.
For example: a student of mine defended female genital mutilation in Africa on the grounds that it is ``traditional.''
True, I replied; and so was slavery in the American south.
That's different!, she cried.
Ah, but it's not.
Indeed, if Marx was writing today, he'd be vilified for blasting the idiocy of rural life, for today every idiocy is interpreted - all evidence to the contrary - as a form of intelligence.
Then there is the opiate of the people, which has somehow metamorphosed into a self-conscious, nay dialectical, cry for national liberation.
Ah, but it's not.
Bitter irony: this attempt to purify ourselves of racism resulted in a racist worldview.
What else can we call our willful ignorance of the agony of so many in the underdeveloped world: the torture chambers that litter virtually every Arab nation, the million ``martyrs'' in the lunatic Iran-Iraq war, the thousands of state executions in China, the grotesque subjugation of women?
(The Taliban's strictures against women make the Nuremberg Laws look almost mild, though in spirit the two sets of decrees are one.)
Our ``solidarity'' with the Third World has been anything but.
Yet another irony: our belief in human rights in some ways abetted this betrayal.
I often hear it said these days that human rights are inalienable - as if rights, like genes or DNA, reside ``within'' us from birth.
Convenient, this; for who needs to defend, much less create, something innate?
Rights, however, are not natural: they are artificial human constructs, the result of deliberate thought, of history, of ethical and political work .
We don't inherit rights: we make them.
The moment we stop building institutions that embody them (and resort to basking in feelings that sentimentalize them), they cease to exist.
Hannah Arendt put it well (the year was 1951, but it could be today): ``No paradox of contemporary politics is filled with a more poignant irony than the discrepancy between the efforts of well-meaning idealists who stubbornly insist on regarding as `inalienable' those human rights, which are enjoyed only by citizens of the most prosperous and civilized countries, and the situation of the rightless themselves. . . .
Equality . . . is not given us, but is the result of human organization insofar as it is guided by the principle of justice.
We are not born equal; we become equal as members of a group on the strength of our decision to guarantee ourselves mutually equal rights.''
Starting in the 18 th century and continuing into the middle of the 20 th , the Left defined itself as the defender of knowledge, science, secularism, progress, skeptical thought and universal (not relative) freedoms.
All this has been horribly turned on its head; in place of our forebears' robust values, we substituted timid, frightened rationalizations for all sorts of voodoo ideologies and practices.
September 11 th - by which I mean not just the World Trade Center massacre, but the skein of hateful, reactionary worldviews and organizations it revealed with unmistakable force - is a clarion call.
There are times when things change, when history bends if not quite breaks.
This is that time.
Because it is, we must un-learn the wretched habit of thinking that truthfulness resides in the messenger rather than the message.
If a neo-liberal or conservative has more to tell us than a Noam Chomsky, so be it.
All morality begins in realism: our ability to see the world as it is, rather than as we want it to be, must henceforth be (and should always have been) the starting point of Left-leaning politics.
Are we honest and brave enough (which in this case also means scared enough) to shuck our romantic fantasies about the downtrodden, and our shameful rationalizations borne of guilt, bravado and indifference?
Our lives - and certainly the kind of world, if any, that we bequeath to future generations - depend on this.
The Bogey of Fiscal Stimulus
NEW YORK – After the economic disaster of 2008-2009, people are understandably wary of the devastation that yet another financial crisis can wreak.
But the likelihood of another crisis is quite small, and its adverse impact would be far less devastating this time around, as there are no more massive credit or asset bubbles to burst.
That has not stopped pundits and the media from exaggerating such fears, distracting from greater efforts to overcome protracted stagnation for much of the developed world, which will inevitably drag down economic recovery elsewhere, especially in developing countries.
The current favorite bogeyman is public debt.
Much is being made of high levels of sovereign debt on both sides of the Atlantic, and in Japan.
As the economics commentator Martin Wolf has noted, “The fiscal challenge is long term, not immediate.” Likewise, while Japan has the highest debt-to-GDP ratio among rich countries, this is not a serious problem because the debt is domestically held.
And Europe’s debt problems are now widely acknowledged to be due to ill-conceived aspects of European integration.
The international community has, so far, failed to develop effective and equitable arrangements for restructuring sovereign debt, despite the clearly dysfunctional and problematic consequences of past international public-debt crises.
This prevents timely debt workouts when needed, effectively impeding recovery.
High public debt is also being invoked in support of fiscal austerity in many developed countries.
But, rather than helping, the rush to budget cutting is reversing earlier recovery efforts.
With private-sector demand still weak, austerity is slowing, not accelerating, recovery.
It has already reduced growth and employment.
And, while financial markets insist on deficit reduction, the recent decline in equity and bond prices – and the loss of confidence that this reflects – suggests that they also recognize the adverse implications of fiscal consolidation at a time of weak private demand.
Opponents of fiscal stimulus cynically claim that all such efforts are bound to fail, citing as evidence US President George W. Bush’s tax cuts!
Others point out that the US Fed’s “quantitative easing” efforts have been modestly successful, at best.
While undoubtedly mitigating the impact of the crisis, Europe’s “automatic stabilizers” are now said to be enough to ensure recovery, despite strong evidence to the contrary.
Slower growth means less revenue, and a faster downward spiral.
Most major countries’ fiscal deficits nowadays reflect the recent collapse of tax revenues that followed the growth downturn, as well as very costly financial-sector bailouts.
And yet many policymakers are insisting on immediate action to rectify not only fiscal deficits, but also trade imbalances and banks’ balance-sheet weaknesses.
While these undoubtedly need to be addressed in the longer term, prioritizing them now effectively stymies stronger, sustained recovery efforts.
The wrong public policies can induce recessions.
This happened in 1980-1981, when the US Federal Reserve raised real interest rates, ostensibly to kill inflation, inducing a global economic downturn as well.
This contributed not only to sovereign-debt and fiscal crises, but also to protracted stagnation outside East Asia, including Latin America’s “lost decade” and Africa’s “quarter-century retreat.”
Another distraction is exaggerating the threat of inflation.
Recent inflation in many countries has been the result of higher commodity prices, especially fuel and food prices.
In these circumstances, domestic deflationary policies will only further slow growth – and are helpless to stem imported inflation.
Unfortunately, today’s top policy priority is to address remote possibilities, whereas the urgent task at hand – coordinating and implementing efforts to raise and sustain growth and job creation – is being ignored.
Meanwhile, cuts in social and welfare spending are only making things worse, as employment and consumer demand fall further.
The pressure on employment and household budgets is likely to persist.
Strident calls for structural reforms mainly target labor markets, rather than product markets.
Growing worker insecurity is seen as the basis for a healthy economy.
Labor-market liberalization in such circumstances not only undermines remaining social protection, but is also likely to diminish real incomes, aggregate demand, and, hence, recovery prospects.
Moreover, in recent decades, profits have risen not only at the expense of wages, but also with much more accruing to finance, insurance, and real estate compared to other sectors.
The outrageous increases in financial executives’ remuneration in recent years, which cannot be attributed to increased productivity, have exacerbated the financial sector’s focus on the short term, while worsening its risk exposure in the longer term, thereby exacerbating systemic vulnerability.
Growing income inequality in most countries before the Great Recession only made matters worse, by reducing household savings and increasing credit for consumption and asset purchases, rather than augmenting investment in new economic capacity.
What the world needs now are leaders who look to the long-term future.
The international financial institutions created after World War II were set up to ensure not only international monetary and financial stability, but also the conditions for sustained growth, employment generation, post-war reconstruction, and post-colonial development.
Unfortunately, current policy is justified in terms of “pro-market” – effectively pro-cyclical – choices.
But it is counter-cyclical efforts, institutions, and instruments that are sorely needed instead.
Global leadership today seems to be held hostage by financial interests and associated media, ideologists, and oligarchs whose political influence enables them to secure more rents and pay lower taxes in what must truly be the most vicious of circles.
Indeed, the menace that now confronts us is not public debt or inflation, but a downward economic spiral that will be increasingly difficult to reverse.
The Bogey of Inflation
LONDON – How real is the danger of inflation for the world economy?
Opinion on this matter is divided between conservative economists and official bodies like the IMF and OECD.
The IMF and OECD project very low inflation rates over the next few years.
But former US Federal Reserv e Chairman Alan Greenspan warns of inflationary dangers.
Some bond markets, too, seem to expect sharply higher inflation.
Which view is right has big implications for policy.
If inflation has succeeded recession as today’s main problem, governments should withdraw their stimulus policies (money out of the economy) as soon as possible.
If recession remains the problem, the stimulus policies should stay in place, or even be strengthened.
Everyone expects some inflation.
During the low-inflation era, which dates from the early 1990’s, developed-country annual inflation rates averaged 2.4%.
Central bank inflation targets are now normally set at 2%.
Monetarists hail the low-inflation era as their great achievement.
They take pride in the expert “management of expectations” by central banks.
But monetary policy had little to do with it.
Low inflation resulted from a combination of cheap supply and low demand.
There was huge downward pressure on manufacturing prices from low-wage Asian economies, while unemployment in the developed world averaged 5-6% – about twice as high as in the earlier post-war decades.
Inflation was on the rise before the recession of 2008 struck, mainly because of spiking commodity prices.
This is the background against which to judge the reality of today’s inflation threat.
The first thing to notice is that, as a result of the slump, capacity utilization is lower than it was 15 months ago: global output has declined by roughly 5% since 2008, and developed-country output by 4.1%.
One would expect inflation to fall with the decline in output, and this is exactly what happened.
OECD inflation fell from an annual average of 3.7% in 2008 to around 0.5% in 2009.
It has now started to rise again, but from a low level, mainly as a result of a turnabout in commodity prices.
Moreover, the IMF and OECD estimate that global inflation will remain below the pre-2008 average for years.
In other words, the low-inflation era will become the lower-inflation era.
But what about the vast quantitative easing (printing of money) that has been occurring?
Since the start of the crisis, the Bank of England has pumped $325 billion into the British economy, the Fed has expanded the US monetary base by close to $1 trillion, and the People’s Bank of China originated a record amount of $1.4 trillion in loans.
These measures alone correspond to 4% of global GDP.
Surely that means that inflation is just round the corner unless the money is withdrawn fast, right?
For those who have had a couple of lessons in the Quantity Theory of Money, this seems a plausible conclusion.
The quantity theory states that the general price level will rise proportionately to the increase in the money supply.
So if the money supply increased by 5% globally in the last year, world prices will rise by 5% after a short lag.
But, as John Maynard Keynes never stopped pointing out, the Quantity Theory of Money is true only at full employment.
If there is unused capacity in the economy, part of any increase in the quantity of money will be spent on increasing output rather than just buying existing output.
This is only half the story, however.
By “quantity of money,” experts normally mean M3, a broad measure that includes bank deposits.
Flooding banks with central-bank money is no guarantee that deposits, which arise from spending or borrowing money, will increase in the same proportion.
In the 1990’s, the Japanese central bank injected huge amounts of money into banks in an attempt to boost the money supply.
At one time, central-bank money was up by 35% in one year, yet M3 was rose by only 7%.
Data from Europe and the US show that M3 has been falling for most of 2009, despite exceptionally low interest rates and quantitative easing.
What matters is not printing money, but spending it.
It is when money is spent that it becomes more than an inert bundle of useless paper.
A central bank can print money, but it cannot ensure that the money it prints is spent.
It may pile up in bank reserves or savings accounts, or it may produce asset bubbles.
But in such cases, little or no increase in the money supply occurs.
The new money simply replaces the old money, which has been liquidated by economic collapse.
That is why official data points to extremely low inflation rates over the next few years, despite the monetary and fiscal stimulus.
But this should be a warning signal: to say that with unemployment now much higher, inflation is expected to remain low is really to say that there will be little recovery over the next five years.
After all, when economies recover from recession, they usually grow above trend.
This means that prices will rise above trend.
The fact that there is no evidence of higher prices in the pipeline means that there is no real evidence of economic recovery.
Our economies are still on life support.
To withdraw the stimulus at this point would kill the patient.
To talk about the dangers of inflation is scaremongering.
Instead, we should be thinking of ways to restore the patient’s health.
To be sure, different economies are at different phases of convalescence, and faster growth in some regions – for example, China and India – will help feebler ones like Europe and America.
But, unless firmer evidence of recovery comes in the next quarter, European and American officials should prepare to accelerate and expand their spending programs.
Otherwise, their economies risk remaining stuck in recession.
The Bonus Risk
CHICAGO – In its July session, the European parliament approved some of the strictest rules in the world on the bonuses paid to bankers.
The aim is to curb risk-taking by financial institutions.
The new rules require that no more than 30% of bankers’ bonuses be paid in cash, that between 40% and 60% be deferred for at least three years, and that at least 50% be invested in “contingent capital,” a new form of debt that converts to equity when a financial company is in distress.
The most innovative aspect of these new rules is that the limits do not apply only to financial institutions’ chief executive officers, but to all the top managers (though the definition of top managers is delegated to national parliaments).
The alleged justification for this major interference in private contracting is the systemic effect that these bonuses can have.
High pay in the banking sector, so the argument goes, rewards success but does not penalize failure.
Managers can easily move from firm to firm when things go badly, avoiding any punishment.
This system rewards managers for taking risks, even when the risk is excessive.
This distortion is perceived to be one of the main causes of the 2008 financial crisis.
The problem with this argument is that there is no evidence supporting the first crucial link in its logic.
Much research has tried to establish a connection between bankers’ compensation schemes and risk-taking, but has failed to find one.
At most, such research has found that more highly paid executives took greater risks, but it is unclear whether this is a cause or an effect.
Executives in highly leveraged institutions should be paid more, because they bear more risk.
To be sure, these investigations are limited to the top five executives, for which data is publicly available.
Unfortunately, there is no publicly available data to establish a causal relationship between bonuses’ pay-for-performance sensitivity and risk-taking for lower-level managers.
In this respect, the Financial Crisis Inquiry Commission (FCIC), established by the United States government, has a unique opportunity.
Thanks to its subpoena powers, the FCIC can collect and analyze such data.
It is to be hoped that when its report is published in December, we will be able to answer this question.
If we assume that a causal relationship exists, the European directive seems to be fairly well designed, with one main shortcoming.
It is well designed because it interferes not with the level of compensation (as many have demanded), but with the form that this compensation takes.
It requires that most of an annual bonus not only be deferred for three years, but also that it be put at risk.
If the company performs poorly in the three years, the manager will lose part or all of his or her accumulated bonus.
This reduces incentives to take risk, though it does not eliminate them.
The main shortcoming is that these restrictions can be circumvented easily, since they apply only to bonuses, whereas banks maintain discretion over the mix between salary and bonus.
Currently, bank managers receive their bonuses at the beginning of each year, with the level based on their individual performance during the previous year.
It would be very easy to transform last year’s bonus, based on last year’s performance, into this year’s salary.
The salary, which can be paid entirely in cash, will be renegotiated every year, thereby skirting all the regulatory restrictions.
Without direct government intervention, it would be difficult to fix the problem.
In large financial institutions, however, the incentive to gamble at taxpayers’ expense does not apply only to managers; it extends to bondholders, who are de facto protected by the government.
Having access to insured credit, banks’ shareholders find it irresistible to borrow excessively.
Restricting managers’ incentive pay without changing shareholders’ incentives will only force shareholders to be more actively involved in the company and choose other ways to increase the level of risk-taking.
If the problem is the moral hazard implied by being too big to fail, the solution is not to restrict pay, but to eliminate the hazard by forcing shareholders to issue more equity or lose their stock when banks’ debt starts to become risky.
As Oliver Hart and I explained in a recent paper, this can be done easily, with a regulator intervening every time the credit-default swaps on the financial institutions’ debt becomes too high.
If we want to intervene on pay in addition to (not instead of) reforming capital requirements, the most effective way is a variation of the tax imposed by former British Prime Minister Gordon Brown: a special tax on all compensation above a certain threshold that is not paid in stock.
This tax would have two positive effects: it would induce banks to recapitalize, thereby reducing their excessive leverage, while forcing managers to have more skin in the game.
If the solution is so simple, why has no elected body implemented it?
My fear is that politicians want to be perceived as tough on bankers, but have no interest in really fixing the problem.
The Borders of Liberalism
When it comes to whether and how to regulate the economy, Western societies have a history of liberal theory upon which to rely.
But when it comes to immigration, there is not much in the liberal tradition to which they can turn.
As a result, in both Europe and the United States, much of the debate over immigration is dominated by illiberal voices, the most insistent belonging to politicians who promise to protect the cultural integrity of the homeland against the presumed degeneracy of the alien.
Xenophobia is an illiberal response to immigration from the right, but multiculturalism represents much the same thing from the left.
Many multicultural theorists, although committed to openness toward immigrants, are not committed to the openness of immigrants to their new home.
For them, newcomers, living in an environment hostile to their way of life, need to preserve the cultural practices they bring with them, even if some of those practices – for example, arranged marriages, gender segregation, religious indoctrination – conflict with liberal principles.
Group survival counts more than individual rights in the moral accounting of many multiculturalists.
One way to maintain a commitment to openness when addressing the vexing question of national borders is to recognize that cosmopolitanism is a two-way street.
Immanuel Kant teaches us that the circumstances in which we find ourselves must always be judged against the circumstances in which, but for chance, we might have found ourselves.
From this perspective, it is unfair that someone who happens to be born in the US is likely to live longer and better than someone born in Kenya. This does not mean that the US must open its borders to everyone from Kenya.
But it does mean that a New Yorker should recognize that any advantages he may have over a Nairobian are due to an accident of birth rather than merit.
From the perspective of Kantian cosmopolitanism, the least an American can do is to welcome a certain amount of immigration from Africa.
But embracing cosmopolitanism also means that once a society admits new members, those members are obliged to open themselves to their new society.
Multiculturalists are reluctant to endorse this part of the cosmopolitan bargain, but liberals must.
One can understand why, living in a foreign country they may perceive as hostile, immigrants opt to close themselves off, and some host countries – France, for example –may be too hasty in demanding that immigrants accept new ways of life.
But attempting to live a closed life in an open society is bound to be self-defeating and not something a liberal society should encourage.
An instructive example of the cosmopolitanism bargain came in 2006, when Great Britain’s former foreign minister, Jack Straw, raised concerns about the nijab, the full-head covering worn by some Muslim women.
Straw defended women’s right to wear less intrusive headscarves; yet he also argued that something is seriously wrong when, in conversation with another person, one cannot engage in face-to-face interaction.
Straw was saying that to wear the nijab is a decision to close yourself off from everyone around you.
He was not making a xenophobic argument that Muslims do not belong in Great Britain, or a multiculturalist argument that Muslims should be allowed to wear whatever traditional garb they believe best expresses their cultural and religious sensibilities.
Nor was he asking for the full assimilation of immigrants to British customs.
Instead, through a carefully chosen example, Straw was illustrating what it means to be open to others while expecting openness in return.
Some argued that, in suggesting to Muslim women what they should wear, Straw was interfering with religious freedom.
In fact, liberal values sometimes contradict each other.
Islam, for example, has historically permitted certain forms of polygamy, but no liberal society is obliged to extend religious freedom in ways that undermine its commitment to gender equality.
Fortunately, Straw’s example does not pose such a sharp dilemma.
As he pointed out, wearing the nijab is not commanded by the Koran and represents a cultural choice, not a religious duty.
So long as other ways are available for Muslim women to cover their heads, agreeing not to wear the nijab is a way of signifying one’s membership in a liberal society at minimal cost to one’s religious commitments.
For liberals, the question is never whether borders should be completely open or closed; a society open to all would have no rights worth protecting, while a society closed to all would have no rights worth emulating.
If one is looking for an abstract principle to follow on questions of immigration, liberalism cannot provide it.
But a liberal society will allow people in and make exceptions for conditions under which they must be kept out, rather than keeping people out and making exceptions for when they should be allowed in.
A liberal society will also view the world as teeming with potential that, however threatening to ways of life that are taken for granted, forces people to adapt to new challenges rather than trying to protect themselves against the foreign and unknown.
Finally, a liberal society will not focus on what we can offer immigrants, but on what they can offer us.
The goal of openness implied by immigration is worth preserving, especially if both its demands and its promise apply across the board.
The Borgia Candidate for Russia’s Presidency
In the latest interview given by Andrei Lugovoi, the man Great Britain wants Russia to extradite for poisoning the dissident Alexander Litvinenko with radioactive polonium, there was a remarkable moment that has not been fully appreciated.
Lugovoi, still rather diffident but with unmistakable pride, mentioned that when he is seen in public, he usually finds himself surrounded by people who want to shake his hand, congratulate him on his valor, and ask for his autograph.
“Well, have you thought about a career in politics?” the interviewer asked.
Unfortunately, the interviewer did not pursue the matter any further.
This is a pity, because Lugovoi’s status in Russia tells us much about my country in the seventh year of President Vladmir Putin’s rule.
Perhaps surprisingly, Lugovoi seems not to have wondered why he is enjoying such an enthusiastic reception from his compatriots.
Are ordinary Russians showing solidarity with a victim unjustly hounded by the British Crown Prosecution Service?
That seems unlikely.
When did Russians ever ask a victim for an autograph?
I myself have been attracting the interest of the Russian Public Prosecutor’s Office for several months now, and I have yet to encounter any public support in the street, let alone a single autograph hunter.
In Russia, you get asked for your autograph if you are a proper hero: an ice-hockey player, a cosmonaut, a high-society prostitute, or, like Lugovoi, an executioner.
Part of Lugovoi’s acclaim is derived from the fact that the list of unspeakable crimes committed by the late Alexander Litvinenko in the course of his brief life is growing longer in Russian media reports with every passing day.
These are crimes so treacherous that any right-minded Russian patriot can only thirst to see such a person subjected to the supreme measure of national retribution.
But only one such “patriot” was granted the honor of being allowed to perform this act.
That is why Lugovoi is being asked for his autograph.
This should not, of course, be taken to mean that the patriots gushing over Lugovoi’s achievement concede the justice of the British allegations.
The social awareness of Homo Putinicus, meticulously burnished by television propagandists, is such that pride in Lugovoi’s achievement and indignation at the infamous campaign unleashed against him by those who hate Russia can jangle within the breast of ordinary Russians without the slightest dissonance.
We are evidently facing the mystery of Russian thought that has proved so unfathomable to others, so unyielding to every analytical scalpel, and about which our Slavophiles and Eurasians wrote at length.
But I see a practical turn in all this that no one has yet broached.
Wouldn’t Lugovoi’s entrance into politics bring about the ideal solution to the problem of finding an heir for Putin?
That search, after all, is threatening to divide the nation’s elite.
So why not choose a man like Lugovoi who truly represents what that elite stands for?
Let us compare two potential presidential candidates, Putin in 1999 and Lugovoi in 2007.
The similarities are striking: the modest social background, the KGB milieu, the criminal vocabulary, the mentality and physique, the mercilessness towards “enemies of the people.”
The underworld manners of both go hand in hand with that lively interest in business which is so essential if “liberal reforms” in Russia are to be continued.
Finally, there is the additional, highly significant coincidence that both men, at the start of their political careers, were largely dependent on the oligarch Boris Berezovsky, but subsequently fell out with him.
Regarding their professional attainments, Lugovoi in 2007 seems to have the edge.
Successfully carrying out a large-scale operation in the middle of London beats a desk job in the GDR-USSR House of Friendship in Dresden in the years of perestroika and communist collapse.
So perhaps the Russian people might take to their hearts this executioner with the rank of lieutenant colonel, just as eight years ago they took to their hearts another KGB lieutenant colonel, Vladimir Putin?
Would the sybaritic, globe-trotting Lugovoi agree to wear the crown?
Running the Kremlin is, after all, a testing job.
We have all seen Putin’s face age dramatically over the last eight years.
But Lugovoi’s face, too, has also changed markedly over the last eight months of press conferences.
Once a wary non-entity, he has grown bolder.
His is the face of Putin’s new Russia, of a smug Russia that is “getting off its knees” and reaching for its gun.
The Message from Boston
PRINCETON – America has grown up.
Public reaction to the Boston Marathon bombings and the identity of the perpetrators reveals a very different nation from the one reflected in the traumatized and occasionally hysterical responses to the terror attacks of September 11, 2001.
The magnitude of the two attacks was, of course, very different – thousands were killed and major national landmarks destroyed in 2001, whereas the Boston bombing killed three people and injured roughly 260.
Still, it was the first major attack on the United States since 2001, and the contrast between now and then is instructive.
Consider the social-media buzz within minutes of the bombing.
The New York Post, a tabloid, emitted a stream of sensational reportage claiming that 12 people had been killed and that a Saudi national was “under guard” at a Boston hospital.
Veteran reporters and columnists immediately countered with questions about the Post’s sources and the lack of confirmation for what it was reporting.
Kerri Miller of Minnesota Public Radio tweeted that she had covered the Oklahoma City bombing in 1995, which was first reported as a gas explosion, then as an attack by foreign terrorists, and finally as the work of domestic extremists.
This caution and restraint stemmed directly from a collective awareness of the many innocent Muslim-Americans who suffered from Americans’ ignorance and wrath following the 2001 attacks.
Indeed, equally striking was the number of pundits who suggested that the Boston bombing was homegrown, more similar to the Oklahoma City attack or the mass shooting last December of first graders in Newtown, Connecticut, than to the 2001 plot.
The America of 2013, unlike the America of 2001, is willing to recognize its own pathologies before looking for enemies abroad.
Moreover, even amid the shock and grief fueled by images of the bombing and the many victims with shattered, shredded limbs, Americans found at least a little bandwidth to comprehend that bombs are still a feature of daily life in Iraq and Syria.
Today’s America is one that recognizes that it is not the world’s only country, and by no means the worst off.
Many commentators remarked on Americans’ resilience, and that of Bostonians in particular.
Much like Londoners after the attacks on their public-transport system in July 2005, Boston’s citizens were determined to prove that life goes on.
American flags flew at half-mast;
President Barack Obama addressed the nation; the country mourned with the families of the victims and with the young athletes who will never run again.
But even amid a massive police manhunt and a citywide lockdown, planners were already focusing on ensuring that next year’s marathon will redeem the tragedy of this one.
Likewise, when it became clear that the bombing suspects, Tamerlan and Dzhokhar Tsarnaev, were Chechens who had emigrated from the Russian province of Dagestan, the reaction – at least among regular participants in public debate – was far more nuanced than a decade ago.
Back then, Fareed Zakaria’s cover story for Newsweek – entitled “The Politics of Rage: Why Do They Hate Us?” – painted a broad-brush portrait of Muslim youth in the Middle East raging against brutal and oppressive dictatorships funded and supported by the US government.
Zakaria was right in many ways, but he had to bring his readers up to speed on six decades of history in a few short pages.
By contrast, David Remnick, the editor of The New Yorker, weighed in with a piece on the Tsarnaev brothers that opened with Stalin’s banishment of the Chechen people “from their homeland in the northern Caucasus to Central Asia and the Siberian wastes.”
Remnick’s lead-in was intended not to introduce a summary account of the brutal and violent history of the Chechen people, but to frame a detailed account of the specific history of the Tsarnaev family.
Remnick included a series of tweets from the younger brother, Dzhokhar, only 19, beginning with a message from March 12, 2012 (“a decade in America already –&#160;I want out”).&#160;In Remnick’s words, the tweets show “a young man’s thoughts: his jokes, his resentments, his prejudices, his faith, his desires.”
Even amid Americans’ anger and grief at the senselessness of what the Tsarnaev brothers did, we can see them not as faceless embodiments of Islamic rage, but as individuals, as human – even as sad.
The ability to distinguish individual features from the mass, to reach nuanced judgments, and to control initial impulses of rage and revenge are hallmarks of maturity in societies and people alike.
But America has also grown up in another way, learning to choose transparency over secrecy, and to rely on the power of its citizens.
After September 11, 2001, the security expert Stephen E. Flynn called on the government to “engage the American people in the enterprise of managing threats to the nation.”
A decade later, the FBI immediately called on all who attended the Boston Marathon to send photos and videos of the area around the finish line – anything that could help investigators identify the bombers.
The resulting flood of information enabled the authorities to identify the two suspects far sooner than would have been possible had they relied on traditional police methods.
The US of 2013 is both more reflective than it was a decade ago and more consciously connected to the world.
The result is a citizenry that is less likely to interpret events, even attacks, in simplistic and often counter-productive us-versus-them terms.
The cancer of violence is all too often found within the US, fed in part by the same inequality, alienation, lack of opportunity, and fervent search for absolute truth that we discern abroad.
The brutal repression of Chechnya, violent Islamic extremism, an American cult of violence, immigrants’ dashed dreams, and plenty of other factors still to be uncovered create a complex pattern of risk that is difficult to unravel and even harder to minimize.
The Boundaries of Anti-Semitism
Anti-Semitism nowadays is more subtle than spray-painting swastikas and other acts of vandalism.
Hundreds of European scholars are circulating a petition calling for a boycott of Israeli institutions; other academics want the EU to deny grants to Israeli universities and scientific institutions.
One British academic fired an Israeli colleague because she loathes the state of Israel.
So, what is new about today's anti-Semitism, asks George Fletcher?
Civilized people are loath to admit that they are racist, sexist, or anti-Semitic.
But they disagree about when these taboos are violated.
If they think that blacks make better athletes or that women make better caretakers, they deny that this is bias.
But what about those who believe that "rich Jews" control, say, the media?
Are they merely mistaken, or is that "mistake" a moral vice?
Today, drawing the boundaries of anti-Semitism is difficult, because much of the world disapproves of Israel's military crackdown in the occupied West Bank and Gaza strip.
Whether criticism of Israeli policies is right or wrong, pundits and politicians who speak out on the issue should not be lumped together with those who say that Hitler should have finished the job.
Yet many Americans think that much of Europe's critique of Israeli policies expresses a zeal that cannot be explained simply by Europeans' renunciation of their own colonial past and thus their sensitivity to an Israeli occupation that looks like annexation.
As one commentator put it, Europeans feel a collective guilt about the Holocaust that makes them eager to have Israel stamped as an aggressor contemptuous of Palestinian humanity.
The Germans, as one quip puts it, will never forgive the Jews for Auschwitz.
But guilt and anger have deeper roots in Europe's image of the Jew.
More than most people realize, the Gospels treat recalcitrant Jews--those who refused to accept Jesus as their Messiah--as perpetrators of a crime that lives on in every generation.
Anti-Semites often cite a passage in Matthew in which a Jewish crowd cheers for Christ's execution and voluntarily accepts permanent guilt: "His blood be on us and on our children."
Matthew then attributes to the Jews a recurrent lie explaining away the resurrection and disappearance of Jesus's body: "His disciples came at night and stole Him away while we slept."
The later Evangelist John concludes that because Jews deny the Christian Messiah they must be "sons of the devil."
Just as whites attribute extraordinary sexual powers to black men, the Christian West's instinct is to treat Jews as the masters of extraordinary forces--including the power to kill deities and control world finance.
A cartoon earlier this year in the Italian newspaper La Stampa captured this latent sentiment perfectly.
A group of Israeli soldiers surround a manger with a baby.
The caption reads: Will they kill him again?
To be sure, at the time of Jesus, Jews constituted a hegemonic majority in Jerusalem.
Jews who rejected Jesus were, indeed, among the first to be intolerant toward the early Christians.
But other hostilities soon took hold, and by the fourth century, Christians had more to fear from each other than from outsiders.
Yet the fear of Jewish prowess continued to shape the thinking of the West, both consciously and unconsciously.
In the fall of 2001 the Parisian Comedie Francaise staged a brilliant production of Shakespeare's Merchant of Venice .
As though it were second nature in French culture, the director presented Shylock's attempt to collect his pound of flesh by recalling the image of the crucifixion.
Antonio is stretched out on a rock with arms perpendicular, the Jew Shylock leaning over his breast with his knife drawn.
This is apparently the natural way for Christians to think of Jews--reenacting in every generation the crime described by Matthew.
It is as though a form of original sin entered a subspecies of humanity descended from Abraham, Isaac, and Jacob.
The belief in both the diabolical power and the permanent guilt of the Jews is, to my mind, the essence of anti-Semitism.
It is when this image is invoked in politics that critics cross the line between the constructive and the vicious.
A good example of this politicized imagery is a poster distributed by Amnesty International in Switzerland.
It displayed a composite picture of an Israeli tank and a soldier taking aim at a defenseless Palestinian.
The caption read: Let the killing stop.
Only Palestinian victims are listed.
Under protest, the poster was withdrawn.
The Catholic Church has abandoned its anti-Jewish teachings, but this does not that mean that the culture engendered by Christianity can easily redefine its premises.
In fact, the Christian image of the all-powerful Jew feeds the conspiracy theories that infect the way Muslims regard Jews.
In the Arab media, Jewish conspiracies constitute the single most popular explanation for everything from the September 11 th terrorist attacks to the Monica Lewinsky affair during the Clinton presidency (Miss Lewinsky being the Jewish spy who infiltrates the White House).
Israelis blame their critics for not shedding these irrational beliefs.
They find it hard to negotiate peace in a world that approaches them armed with the hateful echoes of medieval superstition.
In contrast to the Muslim world, Europeans pride themselves on being objective.
But it is time that they come to grips with their inner conflicts about Jewish guilt--and their own.
The Brain-Drain Panic Returns
NEW YORK – While developed countries are angst-ridden over mostly illegal immigration by unskilled workers from developing countries, a different set of concerns has surfaced in Africa, in particular, over the legal outflow of skilled, and even more importantly, highly skilled, people to developed countries.
This outflow is supposedly a new and damaging “brain drain,” with rich countries actively luring away needed skills from poor countries.
This fear is misplaced.
At the outset, we have to distinguish between “need” and “demand.”
Yes, many African countries need skills.
But they are unable to absorb them, owing to several factors associated with economic backwardness.
In India in the 1950’s and 1960’s –&nbsp;a time when many professionals were emigrating – working conditions were deplorable.
Bureaucrats decided whether we could go abroad for conferences.
Heads of departments carried inordinate power.
So, no surprise, many of us left.
We Hindus may believe in an infinity of lifetimes, but we maximize our welfare in this one, just like everyone else.
Besides, simply holding people back, even if feasible, would do little for their countries. The “brain” is not a static concept.
Trapped in Kinshasa, under appalling conditions, the brain will drain away in less time than it takes to get to New York.
Moreover, keeping people at home is easier said than done.
In many poor countries, except those like India and South Korea, which have now developed superb educational institutions, the brightest citizens receive their education abroad.
The challenge, then, is to prevent them from staying there and settling down.
But, in any event, emigration restrictions today would violate a human right enshrined in current international treaties.
But would immigration restrictions work instead, as proposed by some developed-country organizations, which worry about the “brain drain”?
Here, human-rights concerns pose serious difficulties.
Could we really say to a Ghanaian doctor that she must return to her country while an immigrant Russian doctor is allowed to settle down and start a new life? This is likely to run afoul of anti-discrimination principles and constitutional provisions in countries like the United States.
The proper response to the outflow of skilled manpower from poor countries, especially those in Africa, is to be found in a different direction.
Given that outflows of skilled workers cannot be restricted – and, indeed, should not be – we must devise institutional mechanisms to work with it.
This means adopting a “diaspora” model, which implies four policy proposals.
First, stop crying over the fact that the diaspora is not returning home.
Instead, nurture the loyalty of professionals settling abroad, so that they assist their home countries in a variety of ways.
Thus, they may be offered voting rights.
Restrictions on investment and land purchases can be dropped.
And immigration experts like me have proposed since the 1970’s that schemes be developed to enable the academic diaspora to run workshops aimed at bringing teachers up to the best international standards.
Second, while the diaspora should be integrated through more rights, its members also ought to accept obligations that put them on an equal footing with those who remain behind.
I suggested in the 1970’s that a tax be levied on citizens abroad. Known as the “Bhagwati Tax,” it is of course “the American way”: US citizens and permanent residents abroad, like those at home, must pay federal taxes.
Third, because skills are necessary for nearly all activities in most of Africa, here and now, we need to organize ways to supply such skills to these countries.
I have long argued that, because many in rich countries are retiring while still in sound health, and because altruism increases with age, we could organize a Grey Peace Corps of senior citizens to share their skills in countries whose own trained professionals prefer to settle abroad.
Finally, foreign aid should be used to expand training massively for Africans in all the essential fields in rich countries like the US, the United Kingdom, France, and the Netherlands.
They would add to the diaspora, while the Grey Peace Corps would help to fill current needs.
When development has taken off, and conditions have improved sufficiently to attract people back to their homelands, the hugely increased diaspora would indeed return, as they have done in India, South Korea, and China.
Together, these policies would benefit Africa both immediately and in the long run.
Sentimental handwringing over the “brain drain,” and foolish attempts at restricting people’s mobility, will not.
What the World Needs from the BRICS
CAMBRIDGE – In 2001, Goldman Sachs’ Jim O’Neill famously coined the term BRIC to characterize the world’s four largest developing economies – Brazil, Russia, India, and China.
But, more than a decade later, just about the only thing that these countries have in common is that they are the only economies ranked among the world’s 15 largest (adjusted for purchasing power) that are not members of the OECD.
The four countries have very different economic structures: Russia and Brazil rely on commodities, India on services, and China on manufacturing.
Brazil and India are democracies, while China and Russia are decidedly not.
And, as Joseph Nye has written, Russia is a superpower in decline, while China and (less markedly) the others are on the rise.
Yet, in a strange case of life imitating fantasy, BRICS – the original four countries, now joined by South Africa – have formed a grouping of their own with regular meetings and policy initiatives.
Their most ambitious effort to date is the establishment of a development bank.
At their meeting in Durban in March, the five countries’ leaders announced that their “New Development Bank” will focus on infrastructure investment in developing countries, which, they said, was constrained by “insufficient long-term financing and foreign direct investment.”
They pledged to make an initial capital contribution to the bank that would be “substantial and sufficient for the bank to be effective in financing infrastructure.”
A second initiative announced in Durban is the creation of a $100 billion contingent reserve facility to deal with “short-term liquidity pressures.”
It can be cause only for celebration that the world’s largest developing economies are regularly talking to each other and establishing common initiatives.
Nonetheless, it is disappointing that they have chosen to focus on infrastructure finance as their first major area of collaboration.
This approach represents a 1950’s view of economic development, which has long been superseded by a more variegated perspective that recognizes a multiplicity of constraints – everything from poor governance to market failures – of varying importance in different countries.
One might even say that today’s global economy suffers from too much, rather than too little, cross-border finance.
What the world needs from the BRICS is not another development bank, but greater leadership on today’s great global issues.
The BRICS countries are home to around half of the world’s population and the bulk of unexploited economic potential.
If the international community fails to confront its most serious challenges – from the need for a sound global economic architecture to addressing climate change – they are the ones that will pay the highest price.
Yet these countries have so far played a rather unimaginative and timid role in international forums such as the G-20 or the World Trade Organization.
When they have asserted themselves, it has been largely in pursuit of narrow national interests.
Do they really have nothing new to offer?
The global economy has operated so far under a set of ideas and institutions emanating from the advanced countries of the West.
The United States gave the world the doctrine of liberal, rule-based multilateralism – a regime whose many blemishes highlight the lofty principles according to which the system has generally functioned.
Europe brought democratic values, social solidarity, and, for all its current problems, the century’s most impressive feat of institutional engineering, the European Union.
But these old powers have neither the legitimacy nor the power to sustain the global order into the future, while the new rising powers have yet to demonstrate which values they will articulate and promote.
They have to develop their vision of a new global economy, beyond complaints about its asymmetric power structure.
Unfortunately, it is not yet clear whether they have the inclination to rise above their immediate interests in order to address the world’s common challenges.
Their own development experience makes countries like China, India, and Brazil resistant to market fundamentalism and natural advocates for institutional diversity and pragmatic experimentation.
They can build on this experience to articulate a new global narrative that emphasizes the real economy over finance, policy diversity over harmonization, national policy space over external constraints, and social inclusion over technocratic elitism.
But they must stop being supplicants, and act like real leaders, understanding that others, too, including advanced countries, face challenges that sometimes require policies that put the domestic economy first.
And they must work to uphold the bedrock principles of the global economy that have served it – and them – so well in the last 60 years: non-discrimination and multilateralism.
Ultimately, though, the BRICS must also lead by example.
The human-rights practices in China and Russia, and their suppression of political dissent, are incompatible with global leadership.&amp;
These authoritarian regimes must reform themselves at home if they are to exert any kind of moral claim abroad.
The “Browning” of African Technology
Forget MIT.
Hello, Tsing Hua University.
For Clothilde Tingiri, a hot young programmer at Rwanda’s top software company, dreams of Beijing, not Cambridge, animate her ambitions.
Desperate for more education, this fall she plans to attend graduate school for computer science – in China, not America.
The Chinese are no strangers to Rwanda.
Near Tingiri’s office, Rwanda’s largest telecom company, Rwandatel, is installing new wireless telephony equipment made by Huawei of Shenzen.
Africa boasts the world’s fastest-growing market for wireless telephony, and Huawei – with offices in 14 African countries – is running away with the business, sending scores of engineers into the bush to bring a new generation of low-cost technology to some of the planet’s poorest people.
Motivated by profit and market share rather than philanthropy, Huawei is outpacing American and European rivals through lower prices, faster action, and a greater willingness to work in difficult environments.
According to Chris Lundh, the American chief of Rwandatel, “That’s the way things work in Africa now.
The Chinese do it all.”
Well, not quite.
Across sub-Saharan Africa, engineers from India – armed with appropriate technologies honed in their home market – are also making their mark.
India supplies Africa with computer-education courses, the most reliable water pumps, low-cost rice-milling equipment, and dozens of other technologies.
The sudden influx of Chinese and Indian technologies represents the “browning” of African technology, which has long been the domain of “white” Americans and Europeans who want to apply their saving hand to African problems.
“It is a tectonic shift to the East with shattering implications,” says Calestous Juma, a Kenyan professor at Harvard University who advises the African Union on technology policy.
One big change is in education.
There are roughly 2,000 African students in China, most of whom are pursuing engineering and science courses.
According to Juma, that number is expected to double over the next two years, making China “Africa’s leading destination for science and engineering education.”
The “browning” of technology in Africa is only in its infancy, but the shift is likely to accelerate.
Chinese and Indian engineers hail from places that have much more in common with nitty-gritty Africa than comfortable Silicon Valley or Cambridge.
Africa also offers a testing ground for Asian-designed technologies that are not yet ready for US or European markets.
A good example is a solar-powered cooking stove from India, which has experimented with such stoves for decades.
Wood-burning stoves are responsible for much of Africa’s deforestation, and, in many African cities, where wood accounts for the majority of cooking fuel, its price is soaring.
The Indian stove is clearly a work-in-progress; it is too bulky and not durable enough to survive the rigors of an African village.
But with India’s vast internal market, many designers have an incentive to improve it.
How many designers in America or Europe can say the same?
Of course, technology transfer from China and India could be a mere smokescreen for a new “brown imperialism” aimed at exploiting African oil, food, and minerals.
In recent years, China’s government alone has invested billions of dollars in African infrastructure and resource extraction, raising suspicions that a new scramble for Africa is underway.
But Africans genuinely need foreign technology, and the Chinese, in particular, are pushing hard – even flamboyantly – to fill the gap.
This year, Nigeria’s government bought a Chinese-made satellite, and even paid the Chinese to launch it into space in May.
China was so eager to provide space technology to Africa’s most populous country that it beat out 21 other bidders for a contract worth $300 million.
China’s technology inroads are usually less dramatic, but no less telling.
In African medicine, Chinese herbs and pharmaceuticals are quietly gaining share.
For example, the Chinese-made anti-malarial drug artesunate has become part of the standard treatment within just a few years.
Likewise, Chinese mastery over ultra-small, cheap “micro-hydro” dams, which can generate tiny amounts of electricity from mere trickles of water, appeals to power-short, river-rich Africans.
Tens of thousands of micro-hydro systems operate in China, and nearly none in Africa.
Americans do-gooders like Nicholas Negroponte, with his $100 laptop, have identified the right problem: Africa is way behind technologically and rapid leap-frogging is possible.
But Chinese and Indian scientists argue that Africa can benefit from a changing of the technological guard.
They may be right.
The Bubble of American Supremacy
by George Soros
As American and British troops prepare to invade Iraq, public opinion in these countries does not support war without UN authorization.
The rest of the world is overwhelmingly opposed to war. Yet Saddam Hussein is regarded as a tyrant who needs to be disarmed, and the UN Security Council unanimously passed resolution 1441 which demanded that Saddam destroy his weapons of mass-destruction.
What caused this disconnect?
Iraq is the first instance when the Bush doctrine is being applied and it is provoking an allergic reaction.
The Bush doctrine is built on two pillars: first, the US will do everything in its power to maintain its unquestioned military supremacy and, second, the US arrogates the right to preemptive action.
These pillars support two classes of sovereignty: American sovereignty, which takes precedence over international treaties and obligations; and the sovereignty of all other states.
This is reminiscent of George Orwell's Animal Farm : all animals are equal but some animals are more equal than others.
To be sure, the Bush doctrine is not stated starkly; it is buried in Orwellian doublespeak.
The doublespeak is needed because the doctrine contradicts American values.
The Bush administration believes that international relations are relations of power; legality and legitimacy are mere decorations.
This belief is not false but it exaggerates one aspect of reality to the exclusion of others. The aspect it stresses is military power.
But no empire could ever be held together by military power alone.
Yet that belief guides the Bush administration.
Prime Minister Sharon of Israel shares the same belief and look where that has led.
The idea that might is right cannot be reconciled with the idea of an open society.
Hence the need for Orwellian doublespeak.
But nobody is in possession of the ultimate truth.
Those who make such claims are bound to be wrong at times, and so can enforce their claims only by coercion and repression.
Bush makes no allowance for the possibility that he may be wrong, and he tolerates no dissent.
If you are not with us, you are with the terrorists, he proclaims.
Of course, the presence of extremist views in the executive branch does not make America a totalitarian state.
The principles of open society are enshrined in the Declaration of Independence and the institutions of American democracy are protected by the Constitution.
There are checks and balances, and the President must obtain the support of the people.
Nevertheless, the Bush doctrine could do untold harm before it is abandoned - as eventually it will be.
I see parallels between the Bush administration's pursuit of American supremacy and a boom-bust process or bubble in the stock market.
Bubbles do not arise out of thin air.
They have a solid basis in reality, but misconception distorts reality.
Here, the dominant position of the US is the reality, the pursuit of American supremacy the misconception.
For a while, reality reinforces the misconception, but eventually the gap between reality and its false interpretation becomes unsustainable.
During the self-reinforcing phase, the misconception may be tested and when a test is successful the misconception is reinforced.
This widens the gap, leading to an eventual reversal.
The later it comes, the more devastating the consequences.
There seems to be an inexorable quality about this, but a boom-bust process can be aborted at any stage.
Most stock market booms are aborted long before the extremes reached by the recent bull market.
The sooner this happens, the better.
That is how I view the Bush administration's pursuit of American supremacy.
The Bush administration came into office with an ideology based on market fundamentalism and military supremacy.
Prior to September 11 th , it could not make much headway in implementing its ideology because it lacked a clear mandate and defined enemy.
Terrorism provided the ideal enemy because it is invisible and never disappears.
By declaring war on terrorism, President Bush gained the domestic mandate he lacked.
But his policies have already caused severe unintended consequences.
The EU and NATO are divided.
The US is perceived as a giant bully throwing its weight around.
Afghanistan has been liberated, but law and order has not been established beyond Kabul.
Indeed, President Karzai must be protected by American bodyguards.
The Israeli-Palestinian conflict festers.
Beyond Iraq an even more dangerous threat looms in North Korea - a crisis precipitated by President Bush in his eagerness to break with what he deemed to be Clinton's appeasement.
Bush repudiated the sunshine policy introduced by President Kim Dae Jung of South Korea and included North Korea in the axis of evil.
Rapid victory in Iraq with little loss of life could bring about a dramatic change in the overall situation.
Oil prices could fall, stock markets could celebrate, consumers could resume spending, and business could step up capital expenditures.
America would end its dependency on Saudi oil, the Israeli-Palestinian conflict could become more tractable and negotiations could start with North Korea without loss of face.
That is what Bush counts on.
But military victory in Iraq is the easy part.
It is what comes after that gives pause.
In a boom-bust process, passing an early test tends to reinforce the misconception which gave rise to it.
That is to be feared here.
It is not too late to prevent the boom-bust process from getting out of hand.
The UN could accede to Chief Inspector Blix's request for several months to complete his inspections.
America's military presence in the region could be reduced, but it could be beefed up again if Iraq balks.
Invasion could take place at summer's end.
This would be a victory for the UN and for the US whose prodding made the Security Council act resolutely.
That is what the French propose, but that is not what is going to happen.
President Bush has practically declared war.
It is to be hoped that Iraq's conquest will be swift and relatively painless.
Removing Saddam is a good thing; yet the way President Bush is going about it must be opposed.
In the long run, open society cannot survive unless the people who live in it believe in it.
The Buck Stops at the Top
Recent news coverage showed Ken Lay, the former CEO of Enron, being led away in handcuffs.
Finally - years after Enron's collapse - Lay faces charges for what happened when he was at the helm.
As is so often the case in such circumstances, the CEO pleads innocence: he knew nothing about what his underlings were doing.
Bosses like Lay always seem to feel fully responsible for their companies' successes - how else could they justify their exorbitant compensation?
But the blame for failure - whether commercial or criminal - always seems to lie elsewhere.
America's courts (like Italy's courts in the case of Parmalat) will make the final judgment over criminal and civil liability under existing law.
But there is a broader issue at stake in such cases: to what extent should a CEO be held responsible for what happens under his watch?
Clearly, no CEO of a large corporation, with hundreds of thousands of employees, can know everything that goes on inside the company he or she runs.
But if the CEO is not accountable, who is?
Those below him claim that they were just doing what they thought was expected of them.
If they were not following precise orders, they were at least responding to vague pro forma instructions from the top: don't do anything illegal, just maximize profits.
The result, often enough, is a climate within which managers begin to feel that it is acceptable to skirt the edges of the law or to fudge company accounts.
Even though a CEO cannot know everything, he or she is still ultimately responsible for what occurs in the company they run.
They choose their subordinates, so it is their responsibility to ask the hard questions about what is going on under their watch.
More importantly, it is their responsibility to create a climate that encourages, or discourages, certain kinds of activities.
Simply put, it is their responsibility to be true leaders.
What's true for business bosses is doubly true for presidents and prime ministers.
The United States is in the process of choosing who will lead it for the next four years.
President George W. Bush may claim that he didn't know that the information he was provided by the CIA concerning weapons of mass destruction in pre-war Iraq was so faulty.
He may also claim that, with many thousands of troops under his command, it was impossible for him to ensure that US soldiers were not committing atrocities, torture, or violations of civil liberties.
But there is a fundamental sense in which Bush, like Ken Lay, is culpable, and must be held accountable.
Just as a CEO with a record not only of poor performance, but also of massive corporate misconduct, should be fired, so, too, should political leaders be held to a similar standard.
Bush had a responsibility for the behavior of the people working for him.
Instead, almost across the board in his administration, he chose as advisors people akin to Ken Lay.
Bush chose as his Vice-President a man who once served as CEO of Halliburton.
Dick Cheney clearly cannot be held responsible for corporate misconduct after he left Halliburton, but there is mounting evidence about misconduct that took place while he was at the helm.
Similarly, at the Securities and Exchange Commission, Bush appointed in the person of Harvey Pitt a fox to guard the chickens - until public outrage forced Pitt's resignation.
Bush chose the people who provided him with faulty information about Iraq, or at least he chose the heads of the organizations that provided the faulty information.
He chose his defense secretary and attorney general.
He, and the people he appointed, created an environment of secrecy, a system in which the normal checks on the accuracy of information were removed.
Most importantly, Bush did not ask the hard questions - perhaps because he, like those below him, already knew the answers they wanted.
They created a closed culture, impervious to contradictory facts, a culture in which civil rights have been given short shrift and some people have been deemed not to deserve any rights protection at all.
Only such a culture - one that undermined the longstanding presumption that an accused person is innocent until proven guilty - could produce the Bush administration's niggling legal distinctions concerning what is and what is not torture.
The abuses that have been documented at places such as Abu Ghraib and Guantanamo may not have been an inevitable consequence of the administration's legal memos, but surely those memos increased enormously the likelihood that torture would be viewed as acceptable.
Many Americans will reject Bush this November because of the poor performance of the economy or the quagmire in Iraq.
Others will oppose him due to his environmental record or his budget priorities.
But the intensity of opposition in America to Bush runs deeper than any single issue.
There is a growing recognition that the values he and his administration reflect are the antithesis of what America has long stood for - the values of an open society, in which differences of view are freely debated within a culture of civility and mutual respect for the rights of all.
The battle being waged in America today to restore these values is one that has been waged repeatedly around the world.
Both in America and elsewhere, much hinges on the outcome, for it is nothing less than a battle to force our leaders to accept responsibility for their actions.
The Bumpy Road Ahead
CAMBRIDGE – If stock market and interest-rate spreads are to be believed, America’s economy has seen the worst and may be on its way to a slow recovery.
But the troubles for the world economy are just starting.
If globalization does not get the fix it needs, economic prospects will be dim for rich and poor countries alike.
The worst that could happen is a return to the 1930’s, when countries put up high trade barriers and retreated into isolationism, to the detriment of all.
Fortunately, this is a remote scenario today.
But the next worst thing is to assume that a minor patch-up will be enough to render globalization healthy and sustainable.
It will take real effort and creativity to repair the deep cracks in globalization revealed by the financial crisis.
First, the good news.
The global response to the crisis may not have been stellar, but neither has it been the free-for-all that might have been feared.
The G-20 could not agree on coordinated fiscal stimulus or concrete steps towards banking reform.
But it did coalesce behind the International Monetary Fund and provided it with additional resources.
Despite scores of new protectionist measures around the world since the onset of the financial crisis, the vast majority are nothing to lose sleep over.
Globalization has not received a mortal blow – at least not yet.
The real test is yet to come.
The problem is that none of globalization’s underlying weaknesses is likely to be adequately addressed under the current agenda.
Financial regulation and supervision will surely be strengthened, but they will remain national in character, with little safeguard against cross-border spillover and regulatory arbitrage.
Moreover, the World Trade Organization’s agenda will remain irrelevant and, in any case, deadlocked.
China has yet to discover and adopt an alternative growth strategy that does not rely on a large trade surplus.
Trade and immigration (legal and illegal), if left unchecked, will continue to exert downward pressure on rich countries’ labor markets.
The financial crisis has not helped improve the image of globalization, which has long been deeply unpopular among ordinary voters in most of the world’s advanced countries.
As a result, globalization’s tendency to produce macroeconomic imbalances and financial fragility, its adverse impact on equality and social peace in many countries, and its weak political legitimacy will continue to generate tension and periodic crises.
Two other developments will greatly aggravate these weaknesses.
The first is that the United States and other advanced countries are unlikely to recover their previous economic dynamism even after financial stability is restored.
Rich-country households have suffered a momentous loss of wealth (amounting to tens of trillions of US dollars). This implies that consumption growth will remain muted for some time.
With public debt rising very rapidly, and in some countries projected to exceed 100% of GDP, governments will not be in a position to take up the slack.
The restructuring of economies away from finance will necessarily take some time.
Stagnation rather than growth will be the name of the game.
Second, global leadership is likely to remain in very short supply.
The US will be crippled by its high debt, under-performing economy, and discredited economic model.
The European Union will be preoccupied with its own internal integration process.
And China, where income per person is one-eighth the level of the US (adjusted for purchasing power parity), is simply too poor to become the new hegemony.
History teaches that global economic order is difficult to establish and maintain in the absence of a dominant economic power.
The interwar period, which suffered from a similar crisis of leadership, produced not only a collapse of globalization, but a devastating armed conflict on a global scale.
So the stakes in righting the world economy could not be higher.
Mismanage the process, and the consequences could be unimaginable.
Unfortunately, many of the solutions on offer are either too timid or demand too much of a global leadership that is in short supply.
The conundrum of global reform is that the proposals that go far enough, such as establishing a global financial regulator, are wildly unrealistic, while those that are realistic, such as reform of the IMF, fall far short of what is needed.
What we need is a vision of globalization that is fully cognizant of its limits.
We can start with a simple principle: We should strive not for maximum openness in trade and finance, but for levels of openness that leave ample room for the pursuit of domestic social and economic objectives in rich and poor countries alike.
In effect, the best way to save globalization is to not push it too far.
Consider a traffic analogy.
One way to prevent traffic accidents is to require everyone to drive a similar car, travel at the same speed, and head in the same direction.
Another is to enforce some simple rules: don’t drive in the fast lane if going slow, stop at red lights, use a signal before a turn, and so on.
The first approach may maximize the traffic load that can be carried safely, but it fails to take most people where they want to go and is ultimately self-defeating.
The second approach allows drivers to make their own choices, even if this means that they will have to slow down or stop on occasion.
Similarly, healthy and sustainable globalization should not impose a straitjacket of common rules on everyone.
The financial crisis laid bare the soft underbelly of globalization.
It would be a mistake to respond by trying to take globalization to the next level.
The economic and political obstacles that block deep integration cannot be wished away by exhortations.
It would serve us far better to take these limits into account and scale down our ambitions.
The Burma Road Goes Through Beijing
NEW YORK amp#45;amp#45; Three hard facts are setting the boundaries for the talks United Nations negotiator Ibrahim Gambari is undertaking as he shuttles between Burma’s ruling generals and the detained opposition leader Aung San Suu Kyi.
First, despite the heroic leadership of the Buddhist clergy and the pro-democracy community, almost 50 years of military misrule and terror tactics have worn down Burma’s people, who will likely find it hard to maintain their defiance without obvious splits among the ruling generals or widespread desertions among ordinary soldiers.
Second, Burma’s generals know that they face a stark choice: either maintain power or risk imprisonment, exile, and possible death.
In their eyes, this leaves them with virtually no choice but to hold on to power at all costs.
Finally, as long as China provides political, financial, and military support for Burma’s rulers, it will be all but impossible for any meaningful change to occur.
Until China decides that it has more to gain from a more legitimate government in Burma than it does from the current incompetent military regime, little can happen.
China’s decision to block the UN Security Council from condemning the Burmese regime’s assault on the Buddhist monks and other peaceful protestors underscores its long-standing political support for the junta.
This past January, China, alongside Russia, vetoed a Security Council resolution that condemned Burma’s human rights record and called on the government to stop attacks on ethnic minorities, release political prisoners, and begin a transition towards national reconciliation and democracy.
For years, China has also blocked meaningful sanctions against Burma.
China’s economic ties to Burma’s rulers are strategically important for both sides.
Annual bilateral trade, estimated at $1.1 billion – a huge figure, given Burma’s total GDP of $9.6 billion – provides an economic lifeline for the Burmese government.
China is also Burma’s largest military supplier.
At the same time, the $2 billion oil pipeline that China is seeking to build from Burma’s southern coast to China’s Yunnan province will allow China to get Middle East oil to its southern provinces more easily and securely.
When completed, the pipeline will make China much less susceptible to foreign military pressure in the event of international conflict.
So the stakes in Burma are high for China, as are Chinese fears of about how any future “national reconciliation” government might react to China’s record of complicity with the corrupt military rulers.
It should be remembered that America and its allies, faced with strategic fears of a similar type during the Cold War, also supported repugnant and oppressive regimes in places like Zaire, Chile, and Indonesia.
But America and the West did, at key turning points, realize that times had changed so much that these dictators had outlived their usefulness.
Thus, despots like Ferdinand Marcos in the Philippines and Chun Doo-hwan in Korea were jettisoned, because the price of supporting their despicable regimes became greater than the benefits.
In today’s Internet age, the costs of China’s support for Burma’s generals are rising fast.
Just as in Darfur, where China’s perceived support for the Sudanese government translated into harsh criticism and threats to brand the 2008 Olympics the “Genocide Games,” China’s backing of the Burmese generals, particularly if the death toll rises, could cause similar problems.
Indeed, an Olympic boycott will become more likely if scenes of murdered or brutalized Buddhist monks are flashed around the world.
Moreover, Burma’s public health woes and drug and human trafficking are increasingly being exported to southern China.
Although China has expressed some vague concerns over the crisis to the Burmese government, it has not taken any action that could meaningfully affect the regime’s calculations, despite its singularly unique leverage.
To encourage China to take the lead in fostering national reconciliation in Burma, the international community must convince China that pushing for reform and change can be a win-win proposition.
The international community must make clear that China’s interests would be protected during a transition to a more open society in Burma, and that some version of the oil pipeline project will be supported by any new regime.
Because China has been competing with India for access to Burma’s natural resources, India also needs to be actively included in efforts to pressure the Burmese regime, a process that the Association of Southeast Asian Nations (ASEAN) might effectively coordinate.
In a statement issued on September 27, ASEAN foreign ministers expressed a surprising degree of condemnation of the crackdown in Burma.
They could play an essential leading role in a process including the Burmese parties, China, India, the European Union, Russia, and the United States that could devise a roadmap for change in Burma.
Such an international process simply cannot happen without China.
The road to change in Burma runs through Beijing.
The Bush Black Hole
In 2001, President George W. Bush misled the American people.
He said that a tax cut that was not designed to stimulate the economy would stimulate it, and the American people believed him.
But it did not.
He told Americans that the large surpluses that were among President Bill Clinton's legacies meant that the US could afford to cut taxes massively.
Wrong again.
He did not warn Americans how dubious such estimates can be.
In 2003 President Bush misled the American people about the economy once more.
Weeks after persuading Congress to pass another tax cut--in some ways even more inequitable than the first--his administration revealed how bad the fiscal position had become.
The $230 billion surplus inherited from Clinton had turned into a $450 billion deficit.
Now, after handing billions to rich Americans through tax cuts that almost exclusively benefit them, the Bush administration is passing the hat around, asking for contributions from other countries to help pay for the cost of the Iraq war.
Even setting aside the other dubious aspects of Bush's Iraq policy, the conjunction of misguided giveaways to America's richest people with an international US begging bowl is hardly likely to evoke an outpouring of sympathy.
Meanwhile, as all of this happens, the US trade deficit mounts.
America, the world's richest country, evidently can't live within its means, borrowing more than a billion dollars a day.
As the US thrashes around for someone to blame, it was inevitable that it would focus on China, with its large trade surplus, just as the twin fiscal and trade deficits of the Reagan era led to a focus on Japan two decades ago.
But this is blame shifting, nothing more.
America's fiscal and trade deficits are intimately linked.
If a country saves less than it invests, it must borrow the difference from abroad, and foreign borrowing and trade deficits are two sides of the same coin.
National saving has two components--private and public.
With Reagan's irresponsible tax cuts, combined with America's paltry savings, the US had no choice but to borrow abroad.
Now, under "Bush II," America is repeating that folly.
Matters may get even worse once investment is rekindled, unless private savings increase in a way America has not seen before.
Some people abroad now tend to gloat at America's problems.
For many, it is another reason to question America's ability to provide effective leadership.
It took America a dozen years to work its way out of Reagan's fiscal mess.
It may take just as long to clean up the mess Bush has created.
But non-Americans' Schadenfreude is misguided.
Globalization means that mistakes in one country--especially in the world's largest economy--have powerful repercussions elsewhere.
Three things are worth noting here.
First, America's deficits are certain to sop up vast amounts of the world's pool of savings.
But the world will recover eventually from its current slowdown, and that shortage of savings will become important.
It will mean higher real interest rates, lower investment, and lower growth, all of which will be especially costly for developing countries.
Second, America's huge trade deficit may be a major source of global instability.
Will the world continue to finance this deficit willingly, to put its money into a country with such a demonstrated lack of competence in macroeconomic management (to say nothing of the corporate, banking, and accounting scandals)?
What returns will they demand?
What happens if global investors decide that they should change their portfolio mix, shifting slightly away from American assets?
A weak Europe and skittishness about emerging markets has been one of America's great strengths, but how long can the US rely on the weakness of others?
Finally, in searching for others to blame, America may once again enter an era of protectionism, as it did under Reagan.
Bush may trumpet free markets, just as Reagan did. But just as he may exceed Reagan in fiscal irresponsibility, so he may outflank Reagan in trade hypocrisy.
By one reckoning, close to a quarter of American imports were covered by some form of trade restrictions at the peak of Reagan protectionism (including so called voluntary export restraints).
Expect no less from Bush.
Last year, Bush showed little reluctance in imposing steel tariffs--in clear violation of WTO rules.
The good news is that, the world is beginning to see a rule of law in trade--a legal framework that, although not totally fair to developing countries, and in which economic power still counts for a great deal, may circumscribe America's ability to revert to the protectionism of the past.
Europe has committed itself to fiscal responsibility--with almost too much zeal, failing to recognize that a well designed deficit in times of recession may yield high returns.
The Bush administration has pushed forward tax cuts that lead to deficits while providing only a modest amount of stimulus.
Equally worrying--both for America and the world--is the path on which it has embarked: deficits as far as the eye can see.
The Bush administration's policies bode ill for America in the long run--and hence for the world.
The Bush Bust?
CAMBRIDGE: America’s long boom is at risk.
Signs abound of an impending slowdown, even of recession.
These dark clouds are gathering as transition from the Clinton to Bush Administrations gets belatedly underway.
The quality of economic management in the new Administration’s first year will set the course for many years to come.
When President-elect Bush talks about using huge tax cuts to keep the economy humming, it is time to start worrying.
Large tax cuts are a short-term “solution” that could do serious long-term damage.
Rapid growth and huge increases in stock market wealth are nowadays almost taken as a matter of fundamental right by many Americans.
They can’t imagine the US economy slowing, or share prices falling and staying down.
They have read too many phony analyses of the New Economy promising unbounded riches and full employment forever.
The problem with these New Economy prophecies is that a bit of truth is mixed with huge exaggerations.
Yes, the New Economy is delivering big increases in US productivity; no, the New Economy has not ended economic slowdowns or recessions.
Still, less does it guarantee that companies should have stock market prices set at several hundred times their annual earnings.
America looks set to enter into a slowdown driven by a slowdown in business investment.
Undoubted advances in information technology led to an incredible restructuring of the American business sector, which re-wired itself to take advantage of electronic commerce and improved computer-based management, logistics, and communications systems.
The result was an astounding surge in business fixed investment in computers and other information technology hardware.
Investments in information processing equipment and software rose by about 19% per year between 1993 and 1999, and in 1999 constituted about half of all US business equipment investment.
This surge in business spending boosted overall demand.
Indeed, it so greatly fueled American demand that total spending (consumption plus investment) actually grew much faster than production.
The result is a trade deficit now standing at over $400 billion per year.
That trade deficit is financed by foreign investments in America, as savers the world over increase their holdings of US stocks and bonds.
The IT boom also led to visions of a long-term growth miracle in America, which in turn led to unrealistic expectations about future profitability.
High profit expectations, in turn, contributed to the unprecedented boom in the stock market between 1996 and 1999.
In short, real gains in productivity due to the New Economy became exaggerated in the public’s mind.
Rapid growth is expected; a booming stock market taken for granted.
Now the economy reflects the fact that these expectations are out of line with reality.
Business investment spending is slowing down, since firms have already stocked up on information technology systems and don’t need to replace or upgrade them for the moment.
Profit expectations are falling to earth, as company after company announces disappointing sales and profits.
The stock market has fallen big, by around half since March in the high-technology NASDAQ market.
Everybody counts on Alan Greenspan’s Federal Reserve Board to save the day, and there is little doubt that an interest rate cut would help maintain strength in consumer demand and housing construction.
But there are reasons to doubt that such a cut will affect business investment, the part of demand likely to swing sharply in the coming years.
Moreover, the Federal Reserve will be cautious in cutting interest rates when the dollar is falling, the economy is near full employment, and higher energy prices are working their way through the economy.
The Fed’s ability to control the business cycle at this moment is modest, at best.
In steps the Bush Administration, facing a divided Congress and a cloud over its legitimacy.
President-elect Bush talks about his $1.3 trillion tax cut proposal as an “insurance policy” against recession.
What was portrayed during the election campaign as a long-term measure, however dubious, is now portrayed as the medicine needed to keep America’s economy growing in the short run.
Several things are wrong with this.
First, prolonged debate over the tax cut proposal, virtually inevitable if the new President insists on it, will create huge uncertainties in financial markets and at the Federal Reserve Board.
If America spends the spring debating an enormous tax cut, you can bet that business and investor confidence will continue to weaken.
Second, a large tax cut hampers the ability of the Fed to ease interest rates.
Third, and most importantly, large tax cuts will undermine the solid fiscal conditions so crucial to America’s boom.
A return to fiscal deficits, which could result from the combination of large tax breaks and a much slower-growing economy, would make the economy more vulnerable to shocks in coming years.
We have learned repeatedly that, in the face of a weakening economy, prudence works best.
Desperate actions such as huge tax cuts, or huge cuts in interest rates, almost always fail.
With prudent management, a slowdown will likely be short and mild.
Countries who try to keep their economies growing too fast for too long, using drastic steps such as large tax cuts or highly expansionary monetary policies, frequently end up in a financial mess that takes years to clean up.
President-elect Bush’s pronouncements display an unhealthy bias towards short-run macroeconomic meddling, rather than sound emphasis on the long term.
The Bush in Obama
GUANTÁNAMO BAY, CUBA – Hearings are underway in the United States Senate to assess what to do with the 240 detainees still behind bars at Guantánamo Bay, and what will become of the military tribunals and detention without trial that the Bush administration and a compliant Congress put into place.
The US Congress is also debating what will happen to the detention camp itself, which was established in 2002 to house men who were allegedly “the worst of the worst,” in a setting deliberately framed by Bush attorneys as “legal outer space.”
But are those Senate hearings actually window dressing on a new reality that is just as bad as the old one – and in some ways worse?
Military tribunals without due process are up and running again.
While President Barack Obama has released a few prisoners, notably the Chinese Uighurs, and sent another for a real trial in New York City, he is now, chillingly, signalling that he is about to begin “preventive detention,” which would empower him to hold forever an unspecified number of prisoners without charges or trials.
On a visit to Guantánamo, Department of Defense spokesman Joe DellaVedova told me that a series of panels are reviewing the detainees’ files, a process that will take until this year’s end.
The review will sort the detainees into three categories: those who will be tried in criminal courts in the US; those who will be released and sent to other countries; and those who “can’t be released and can’t be tried and so have to be held indefinitely…what is being called ‘preventive detention.’”
I was stunned.
DellaVedova’s comment suggested that the review process was merely political theatre.
If there is to be a genuine review of the accusations against these detainees, how can it be known in advance that the third category will be required?
Indefinite preventive detention is, of course, the foundation of a police state.
Human rights organizations knew that Obama had prepared the way, in public-relations terms, for some criminal trials – talking up the “supermax” security of some US prisons, and noting that other terrorists have successfully been tried by America’s justice system.
(Other democracies, such as the United Kingdom and Spain, always try terrorism suspects, including alleged Al Qaida members, in ordinary criminal trials).
But, six months after he ordered an end to torture and CIA “black sites,” and promised to close Guantánamo within a year, Obama seems to be re-branding Bush’s worst excesses.
He has brought in planeloads of journalists to Guantánamo Bay to show them a “safe, transparent, and humane” facility that now offers fresh baklava and video viewing from a shackled loveseat.
But the roughly 240 detainees remain incarcerated without having been charged with any crime, and will still not get a fair trial, even under Obama’s proposed military commissions.
After all, the prosecutor, the judge, and the “panel” are all to be US government employees.
Furthermore, Obama’s Justice Department has invoked Bush’s argument that the State Secrets Act bars evidence about torture from being disclosed, which means that anyone who was tortured can never appear in court.
Moreover, Obama has sought to suppress hundreds of photographs depicting sexual assault in US-run prisons, and has done nothing to roll back the Patriot Act.
Why should Obama, a constitutional scholar, be backtracking this way?
First, he does not dare appear to be “soft on terror.”
Second, perhaps he needs to be able to try the Guantánamo detainees in a rigged setting, or even keep them from trial forever: lawyers claim that torture, including sexual torture, was so endemic in the CIA and the military that Obama could be holding scores, if not hundreds, of prisoners whose bodies are crime scenes.
According to Wells Dixon, a lawyer at the Center for Constitutional Rights who represents some of the detainees, the Obama administration cannot risk calling the torture practices crimes, so it calls them “classified sources and methods” that cannot be revealed in court. “I can’t even tell you about the way my clients were tortured or I will be prosecuted,” he says.
In fact, even the explanation of why this material is classified cannot be reproduced, because it is privileged.
“We are subject in all detainee cases to a protective order,” Dixon says. “Under this order, everything the detainee says is classified,” unless the Department of Defense “Privilege Team” decides otherwise.
Dixon then told me a revealing story of one of his clients, Majid Khan, a so-called “high-value detainee” who was held for three years in CIA “black sites.”
Khan was tortured, Dixon said, though “the government would say that what happened to him is an ‘intelligence source or method.’”
Because Dixon has a security clearance, he cannot discuss those classified “sources and methods.”
On the other hand, Dixon continued, “When the government does something to [Khan] that they say is classified, they have disclosed to him classified information.
But since he doesn’t have a security clearance, there is nothing that prevents him, unlike me, from saying to the outside world, ‘This is what they did to me.’
Nothing prevents that – except for the fact that he is physically in custody.”’
The “logical conclusion,” according to Dixon, is that Khan “must be detained for the rest of his life – regardless of whether he is ever charged with a crime – because if he was ever released, nothing would prevent him from disclosing this information.
Majid Khan – and there are many more like him – is a classic product of the Bush administration’s disregard for the fundamental principles of the rule of law.
Unfortunately, Obama’s administration, for all its lofty rhetoric, appears too willing to perpetuate it.
The Bush Repression
How will President George W. Bush’s administration be remembered historically?
After five years in office, and with another three years to go, some answers are already apparent.
Others are emerging gradually.
The latter category includes an increasing assault on civil liberties within the United States that now compares to that of Richard Nixon’s administration more than thirty years ago.
Of course, civil liberties were bound to suffer in the wake of the terrorist attacks of September 11, 2001.
Throughout American history, threats to national security, whether real or imagined, have led to clampdowns on the rights of citizens and, to a far greater extent, on the rights of immigrants and others suspected of acting in the interests of alien forces.
In the twentieth century, abuses of civil liberties were particularly severe during four periods.
In the years 1917 to 1919, US participation in World War I and anarchist bombings after the war led to almost two thousand federal prosecutions, mass roundups of aliens, and summary deportations.
During World War II, Japan’s attack on the US was followed by the internment of more than 120,000 Japanese-Americans because of their race, including many who were born in the US.
In the late 1940’s and the 1950’s, the Cold War and fears that the Red Menace would sap American resolve from within led to myriad anti-subversive programs, with tens of thousands of Americans losing their livelihoods as a result.
Finally, during the Nixon years, the president’s paranoia about opposition to the Vietnam War and to his policies fuelled a pattern of abuses that eventually brought about his resignation in disgrace.
The Nixon administration’s legacy is particularly instructive in assessing the Bush record.
Though Americans tend to lump Nixon’s violations of civil liberties together under the heading of “Watergate,” much more was involved than the break-in at Democratic Party headquarters and the subsequent cover-up.
The participants in those events included the “Plumbers,” a personal secret police established by Nixon and so named because one of their tasks was to eliminate leaks of information that the White House did not want to disclose.
Another secret assault on civil liberties was Nixon’s adoption of the “Huston Plan” which authorized political surveillance by burglary, electronic eavesdropping, and the use of the military to spy on civilians.
Nixon used these methods against political opponents, journalists, and government employees suspected of disloyalty to the president.
As far as we know, Bush has not gone that far.
Nevertheless, electronic eavesdropping without court authorization, of the sort Bush ordered starting in 2002, played a particularly important part in Nixon’s downfall.
One of the three counts against Nixon in the vote to impeach Nixon by the House of Representatives’ Judiciary Committee was based on such eavesdropping.
In fact, Bush pursued his policy despite a 1978 law – adopted in response to the Nixon-era abuses – that specifically requires judicial approval, and in contradiction to his public assurance that no such eavesdropping takes place without a court order.
Now that his electronic surveillance program has been exposed, Bush’s Justice Department has launched an investigation into how the news became public, threatening the journalists who reported the information.
But even before the latest revelations, the Bush administration’s assaults on civil liberties were legion, including its imprisonment of hundreds of men without charges at Guantánamo Bay in an effort to evade judicial review of their cases.
It also rounded up, jailed, and deported hundreds of aliens in an anti-terrorist drive none of whose targets was shown to have any link to terrorism.
The list does not stop there.
Bush’s subordinates authorized methods of interrogation that led to torture, and his administration adamantly resisted legislation that would ban its use.
It even insisted that it could imprison an American citizen, José Padilla, incommunicado for an indefinite period without criminal charges until, faced with the prospect of Supreme Court review, it suddenly pressed charges that had nothing to do with the allegations that had formed the basis for his detention.
Indeed, a hallmark of the Bush administration’s violations of civil liberties is that many involve efforts to evade judicial review.
Guantánamo, the deportations, the Padilla case, and the electronic eavesdropping program all share this characteristic.
At the same time, Bush has systematically packed the federal courts with judges chosen for their readiness to defer to presidential power.
His latest nominee to the US Supreme Court, Judge Samuel Alito, exemplifies this trend.
The mood in the US today is far from the point that it reached in 1973 and 1974, when the drive to impeach Nixon and convict him in the US Senate forced him to resign.
But, while it seems safe to predict that Bush will serve out the rest of his term, it also appears certain that history will look upon him as a president who sought to undermine civil liberties.
Unfortunately, given Bush’s repeated assertions – in defiance of America’s constitutional tradition of checks and balances – that his office endows him with unilateral powers to violate rights, he appears to be untroubled by that prospect.
The Business of Bodies
Medical research nowadays increasingly sounds like business.
Gene sequences are patented; cord blood is a hot property.
Geneticists talk of "prospecting" for genes.
Body tissue is "extracted," "harvested," and "banked."
This language reflects the growing ability to transform human tissue into research materials and clinical products.
Blood can serve as the basis for immortalized cell lines in biological studies and in developing pharmaceutical products.
Snippets of infant foreskin are used for generating artificial skin.
Biopsied tissues are used to manufacture therapeutic genetic material.
Human tissue, organs and cells are used in place of animal tissue for testing pharmaceuticals and cosmetics because animals are expensive and using them incites protests.
Body tissue also has commercial value beyond medicine.
Placenta is used in shampoos.
Kiotech, a British biotech firm, harvests human sweat to extract pheromones for a product called "Xcite," towelettes saturated with a sexual hormone that "boosts the wearer's sexual smell signature."
Kary Mullis, a Nobel Prize-winning geneticist, founded a company called "Star Gene" to market jewelry containing DNA cloned from rock stars.
Stranger still is "GeneLink," which markets DNA kits to funeral directors to help them extract DNA from the deceased.
Research and clinical uses of body parts have been controversial since the early days of anatomical dissection, which once evoked Dante-esque visions of Hell.
As the Renaissance brought growing interest in anatomy, body snatching became a lucrative business with cadavers obtained through grave robbing, bribing hospital attendants, or even murdering beggars.
The commercial calculus behind this business sometimes caused riots until anatomy laws allowed the bodies of executed murderers and the unclaimed dead to be used, thus reassuring middle and upper class individuals that their bodies would not be involved.
These old tensions have assumed new dimensions as the commercial potential of human tissue catches the entrepreneurial imagination.
But few laws are in place to address the uses of cells, tissues, and genes.
The most familiar case concerning the body as property is that of John Moore, a patient who developed hairy cell leukemia and had his spleen removed at the UCLA School of Medicine in 1976.
His physician patented certain chemicals in Moore's blood without his knowledge or consent, set up contracts, and sold the rights to a Swiss pharmaceutical company to produce drugs from the "Mo" cell line.
Moore became suspicious when UCLA cancer specialists kept taking samples of his blood, bone marrow, skin and sperm for seven years.
When Moore discovered in 1984 that he had become patent number 4,438,032, he sued for malpractice and property theft.
His physician claimed that Moore had waived his interest in his body parts by signing a general consent form.
But Moore felt that his integrity was violated, his body exploited, and his tissue turned into a product.
The Court held that clinicians must inform patients in advance of surgery that their tissue could be used for research, but denied Moore's claim.
Who should profit from parts taken from an individual's body?
The court decided that the doctor and biotechnology company, not the patient, should profit.
It argued that giving Moore a property right to his tissue would "destroy the economic incentive to conduct important medical research." This privileging of biotechnology companies incited today's genetics gold rush.
Disputes such as this raise fundamental questions: who profits? who loses?
Can exploitation be avoided?
Is body tissue to be defined as waste, like the material in a hospital bed-pan and thus freely available as raw material for commercial products?
Or does body tissue have inherent value as part of a person?
Are genes the essence of an individual and a sacred part of the human inheritance?
Or are they, as a director of SmithKline Beecham purportedly claimed, "the currency of the future."
Commodifying human tissue - often without knowledge or consent - is troubling because it violates social assumptions and beliefs about the body.
Commercialization can undermine trust in science and medical practice by inciting fears of exploitation.
John Moore's experience suggests that the commercial interests of doctors can encourage them to take more tissue than needed for their patients' benefit.
Physicians or institutions with economic interests can also influence the decisions of vulnerable hospital patients who are reluctant to consent to certain procedures.
Market incentives to treat body tissue as a commodity may also threaten personal beliefs.
During WWII, the Dutch for example, were reluctant to give blood that could help German soldiers.
Because of past exploitation, some African-American women refuse to allow amniotic tissue to be collected for prenatal diagnosis as they fear the uses that could be made of this tissue.
The business of bodies intrudes on privacy, too.
Banked cord blood and collected tissues can yield not only research materials, but information about future genetic conditions as well.
Body tissue can be used to identify the genetic predispositions of individuals (of interest to insurers), or to redefine political entitlements (as Native Americans fear), or to reinforce social stereotypes (say, through research on diseases of specific race groups).
Although the law remains unsettled with respect to controlling commercial interests in body tissue, we are beginning to see the principles of consent and non-commodification, developed to regulate organ donation, extended to this area.
Certain professional organizations are emphasizing the need to obtain patient consent even if tissue has already been removed from a patient's body.
Today, there are brain tissue banks, breast tissue banks, blood banks, umbilical cord banks, DNA banks and tissue repositories for studying various diseases.
Virtually all of us have tissue on file somewhere.
Who should have access to these samples?
For what purposes can they be used?
How can we assure informed consent for future uses of human body materials?
In the context of growing commercial interest in human tissue and the potential for abuse, greater regulation is essential.
The Caesar Temptation
BUENOS AIRES – On June 28 a coup deposed Honduran President Manuel Zelaya, ending his attempt to hold a referendum that would permit his re-election.
That same day in Argentina, former president Nestor Kirchner was defeated in a mid-term election that many people viewed as a test of whether or not he or his wife Cristina, Argentina’s current president and Nestor’s successor, would continue as president after the vote of 2011.
Both events crystallized a peculiar Latin American phenomenon: the temptation to empower a new, local Caesar.
This “Caesarism” is not a new idea. Instead, it marks the return of a practice that had seemed to have been consigned to history’s dustbin which has now returned with a vengeance.
In 1919, the first edition of Democratic Caesarism , by the Venezuelan historian and sociologist Laureano Vallenilla Lanz, was published and widely circulated across the continent.
Vallenilla claimed to be seeking an effective (as opposed to the formal) constitutional system for his country.
To achieve this end, Vallenilla argued that, at least in the case of Venezuela, a charismatic leader, confirmed in power through regular elections, would be best placed to concentrate political power successfully and guarantee institutional order.
Ninety years later, it looks as though, with the rise of a variety of neo- caudillos , Vallenilla’s idea of the “good Caesar” is coming back.
Indeed, the victory of presidential incumbents across Latin America has become the predominant trend in the region’s elections.
For most of the nineteenth century and well into the Cold War era, re-election of a sitting president was generally prohibited in the great majority of Latin American countries, owing to a general fear of leaders remaining permanently in power, abetted by the prevalence of electoral fraud.
Permanence and fraud are, of course, the hallmarks of authoritarian governments everywhere.
In the last century, coups d’état were often the means by which (mostly military) rulers remained in power for many years, outlawing and persecuting the opposition.
Nowadays, leaders are achieving the same end at the ballot box.
This phenomenon is relatively new.
With Latin America’s most recent democratic transition, which began in the 1980’s, national constitutions and electoral laws were gradually reformed and modernized.
Several democratically elected leaders urged constitutional modifications in order to remain in power.
Over time, what had been an exception became routine: the possibility of consecutive terms or alternating re-election of presidents in countries with little democratic tradition.
This trend was accompanied by the fact that these societies were marked by a high degree of inequality, as well as unstable economies, weak political parties, fragmented oppositions, and fragile institutions.
Indeed, in Latin America today there are 14 representative democracies that allow presidential re-election: seven consecutively and seven discontinuously.
But something new has recently been introduced in Latin America’s political system: the notion of unlimited re-election.
Hugo Chávez first achieved this in Venezuela, and there are other specters of potentially perpetual re-elections.
In the Dominican Republic, Leonel Fernández (1996-2000, 2004-2008, 2008-2012) began serving his third four-year term in office in 2008, and the party in power has not ruled out the possibility of modifying the Carta Magna to allow him yet another term.
In Colombia, Álvaro Uribe (2002-2006, 2006-2010), in power since 2002, got his chance for a first re-election in 2006 through a questionable constitutional reform, and appears set to try for a third term by forcing a referendum to amend the constitution again.
In Brazil, Luis Inácio Lula da Silva, in power since 2003, was re-elected in 2007, and now many members of his party are pushing for a constitutional reform that would allow him a third term.
In a recent interview with the British journalist David Frost, Nicaragua’s President Daniel Ortega, who returned to power in 2006, declared himself in favor of immediate re-election.
Before having completed a year in office, Fernando Lugo, President of Paraguay, declared himself in favor of presidential re-election, currently prohibited in his country.
In Bolivia and Ecuador, immediate re-election is already possible. In short, Latin America appears to be becoming a region of democracy by plebiscite.
Many of the presidents re-elected, either directly or by alternating terms with someone else, a la the Kirchners, won because they seemed to be responding to social demands for more security or less poverty.
So Latin America is now constantly presented with “extraordinary” situations that supposedly require a certain individual, such as a great, benevolent cacique , to occupy the center of the political scene and govern with an enormous discretionary capacity.
But, as the English philosopher Jeremy Bentham once wrote, the more one is exposed to the exercise of political power, the greater the temptations.
True to that dictum, the excessive personalization of politics, the search for political hegemony, and the fragmentation of the opposition reflected in Latin America’s neo-caesarism have served to concentrate power in the executive and hollow out countervailing institutions, including intermediary bodies between the state and society.
The attraction of remaining in power is getting stronger across the region.
In view of this, it is essential to seek better systems of checks and balances as well as to strengthen and sharpen public control of the executive.
All of these tasks are domestic; the danger posed by the profusion of re-elected presidents will not be checked by external forces.
Moreover, since Abu Ghraib and Guantánamo, the United States has lost its formerly strong authority in promoting democracy.
Confused and self-absorbed, Europe is not in the best position to wield influence.
Russia and China continue to apply their own authoritarian formulas at home and have little to offer internationally to curb caudillismo .
So the problem of democratic caesarism is one for Latin America’s people to confront.
They will either reject this trend, or succumb to it.
The California Syndrome
STANFORD – California has long been a harbinger of national and global trends (both wonderful and overindulgent), a birthplace of innovation in everything from technology and entertainment to lifestyles.
The world’s most important technology companies still make their start – and their headquarters – in California: Apple, Intel, Cisco, Oracle, Google, and Facebook, to name a few in the neighborhood where I teach and live.
California once was a source of widely shared rising standards of living and tremendous upward economic mobility.
The state had America’s best public schools and state universities.
Its citizens were less socially and economically stratified than in many other US states.
After World War II, Americans migrated steadily to California, a land of opportunity, great natural beauty, and some of the world’s most fertile agricultural land.
But then something went radically wrong, and understanding why offers lessons for national and subnational governments everywhere.
California’s economy, which used to outperform the rest of the country, now substantially underperforms.
The unemployment rate, at 12.4%, is higher than in every other state except Nevada.
In recent years, net migration has reversed, with hundreds of thousands of workers and their families leaving the state in search of better job opportunities elsewhere.
California’s public schools, from kindergarten to high school, rank poorly on standardized tests.
The state is an epicenter of the housing bust and the foreclosure crisis.
Silicon Valley CEOs say they will not expand in California because of high taxes and burdensome regulation, which make the state uncompetitive.
With 12% of America’s population, California accounts for more than 31% of its public-assistance recipients.
It has a vast and growing prison population, with annual spending on each incarcerated inmate equivalent to a middle-income California household’s after-tax income.
Meanwhile, the state lurches from fiscal tragedy to fiscal farce.
Governor Jerry Brown (who was also Governor in the 1970’s) inherits a budget deficit of $26 billion.
And that’s before the coming deluge from generous public employee pensions and health costs.
At the heart of California’s problem is its deranged progressive tax system, which includes among the highest personal-income, sales, corporate, and gas rates of any state.
Only property taxes are below the US average.
California’s government collects about one-half of its income-tax revenue from the top 1% of the state’s taxpayers.
But the system’s extreme progressivity makes proceeds so volatile that the state continually experiences boom-bust cycles of rapidly rising revenue, inevitably followed by collapse.
The revenue is all spent on the upswing, forcing disruptive emergency cutbacks on the way down.
Attempts to build a serious “rainy day fund” have failed badly.
The political economy of California’s budget has taken the progressive tax-and-spend experiment to the breaking point, threatening the state’s ability to fund basic services, from prisons and parks to education and health care, even those aimed at helping its most vulnerable citizens.
California’s government rarely manages to satisfy the balanced-budget requirement in the state constitution.
It winds up borrowing “temporarily” with short-term debt; then, as borrowing accumulates, it is refinanced with longer-term securities.
Spending is temporarily reduced and taxes raised, but the long-run structural deficit remains, a pattern now repeated in many state capitals and the primary reason for the current political turmoil over budgets and public sector unions.
Many other strains are also self-inflicted.
From federal water shutoffs, in the name of protecting a tiny fish, which have decimated agriculture and left tens of thousands unemployed, to severe local zoning restrictions that drive home prices higher, California now has a wide array of problems begging for solutions.
Illegal immigrants perform a substantial share of the state economy’s menial and physically demanding work.
Absent a sensible guest-worker program, they remain in the shadows, and they and their children crowd public services.
(In one school in Los Angeles, a teacher reported 70 kids who came and went during the year in a class of 25, and more than a dozen languages are spoken in some school districts).
The state’s extensive environmental and energy regulation, including micromanaging carbon emissions, in combination with globalization, has driven away much of California’s manufacturing and many of its middle-class jobs.
Among US states, California still ranks first in technology, agriculture, and entertainment.
But it also stands at or near the top in deficits, tax rates, prison inmates, and, by a wide margin, welfare recipients relative to population.
It ranks last or near the bottom in business climate, housing affordability, and state bond rating (below even the US territory of Puerto Rico).
It’s a complex picture, but at its core is a high-tax welfare state run amok.
No one should write off California; it still has great strengths.
And it can turn some of its short-term problems, such as the pressures arising from ethnic and linguistic diversity (the state is now 37% Hispanic and 13% Asian) into long-term strengths in the global economy.
But its political class will have to confront some hard realities and face up to the fact that Californians who pay no income tax (almost half the workforce) will have to start paying for services, and that services will have to be more carefully targeted.
A healthy democracy cannot have half the population paying taxes and the other half collecting benefits.
Relying on ever-higher taxes to fund payments to an outsized population of benefit recipients is a recipe for exporting prosperity elsewhere.
That is one California trend that others emulate at their peril.
The Cancer Season
As summer beckons, we should take a moment to focus on the sun's dark side. The source of all life on Earth, the sun is also a fountain of environmental carcinogens.
Specifically, we now know that the sun's ultraviolet radiation is the primary cause of most skin cancers.
Skin cancer, long thought to be a disease of little public health significance, has now become epidemic.
An estimated 90,000 new cases of malignant melanoma and well over one million cases of non-melanoma skin cancer will occur in the United States this year.
Melanoma will cause 8,000 deaths, and non-melanoma skin cancer will kill another 2,000.
Melanoma is now the most common cancer in women aged 24 to 35.
Once a disease of men in their fifties and sixties, it is not unusual for women in their twenties to develop basal cell cancer or squamous cell cancer.
While the incidence of skin cancer has risen dramatically, so has our understanding of its causes.
For over fifty years, ultraviolet radiation from the sun has been the number one suspected cause of skin cancer.
Epidemiologic data from Australia, animal studies with artificial sources of ultraviolet light, and the development of skin cancer in individuals with a genetic inability to correct the DNA damage caused by ultraviolet radiation provided circumstantial evidence of the connection.
Recent work has made the causal link between the sun and skin cancer at the molecular and cellular level.
Ultraviolet radiation causes specific and unique mutations in the tumor suppressor gene that produces a protein called p53.
This protein is involved in a process called apoptosis in which damaged cells commit "suicide" to ensure that their defective genes are not passed on to daughter cells.
(This is perhaps the first indication that self-sacrifice may be an intrinsic human trait!)
Damaged by the sun, but not quite able to commit suicide, the mutated cell continues to proliferate at the expense of normal surrounding cells, resulting in a pre-cancerous growth that can progress to a full-blown squamous cell carcinoma.
But how should we communicate to people about skin cancer and its prevention?
If our key message is "stay out of the sun forever," we are doomed to fail.
Creating a culture of cave dwellers is no way to decrease the incidence of skin cancer.
Moreover, in educating the public we confront formidable forces: cultural icons who are as bronze as the statuary in the Louvre, the sheer pleasure of being in the sun, and the perceived incremental health benefits of ultraviolet radiation.
The dearth of pale actors, actresses, corporate leaders, and politicians confirms that a tan is identified with health, wealth, and power, rather than the travails of the working class, as in the past.
The artificial tanning industry promises that ultraviolet radiation from their machines causes less damage than natural sunlight.
But in both cases, a tan is the body's response to injury.
Microscopic pigment granules produced by skin pigment cells aggregate around the cell's nucleus to shield the DNA from the marauding rays and prevent mutation.
It is irrelevant whether the ultraviolet radiation came from a bulb or a star.
Whether natural or artificial, ultraviolet radiation causes the skin to age prematurely.
The inescapable irony is that teenagers and young women pursue a tan to look more attractive, but trade a moment or two of sunny radiance for a whole lifetime of premature wrinkles, fine lines, and haggard-looking skin.
As young people consider themselves immortal, not even appeals to lifelong vanity, let alone warnings about cancer, are sufficient to deter them from the tanning booths.
But the difficulties of educating the public about the causes of skin cancer do not diminish our obligation to try.
There are enough other diseases about which we do not have a clue as to the cause.
With skin cancer, we know very well how we can prevent it - and prevention is always easier than treatment.
A good place to start is to ensure that the public has access to accurate information.
While pseudoscience and the anti-aging industry represent an important source of potential misinformation, the Internet often provides damaging false information as well.
Amazingly, the Internet has the same level of credibility with the patient as television does with the consumer: "I read it on the Web, so it must be true."
At the same time, tanning parlors should be regulated.
While barbers, hairdressers, taxi drivers, bar owners, and doctors are often licensed, permits are rarely required to operate a tanning parlor.
None of the other professions listed above, however, knowingly exposes its clients to a confirmed environmental carcinogen.
Until the tanning industry chooses to police itself, customers should eschew the bulbs and pursue the spray: wear an artificial tan.
This preventable disease should be the focus of a comprehensive educational campaign similar to anti-smoking campaigns, which are now bearing fruit in many countries.
In addition, scientific research on this most accessible of human organs will continue to identify innovative treatments and modes of prevention, which may well become applicable to other cancers.
The Case Against Emergency Food Aid
Niger’s food emergency has reached the world’s headlines, but the crisis there is only one part of a much larger disaster.
On an extended trip this summer through rural areas of Asia, the Middle East, and Africa on behalf of the United Nations, I visited countless villages afflicted with extreme hunger and struggling to survive against the odds.
The villages that I visited – in Tajikistan, Yemen, Mali, Ethiopia, Rwanda, Malawi, Cambodia, and elsewhere – reflect the condition of hundreds of millions of impoverished people worldwide.
Whether caused by drought, exhausted soils, locusts, lack of high-yield seeds, the results were the same: desperation, disease, and death.
Incredibly, the actions of the richest countries – which promised solidarity with the world’s poorest people at the G-8 Summit in July – have intensified the hunger crisis.
Even today, donor governments’ aid efforts are poorly directed.
They respond to hunger emergencies such as Niger’s with food relief, but fail to help with long-lasting solutions.
The expanding hunger crisis reflects a lethal combination of growing rural populations and inadequate food yields.
Rural populations are growing because poor farm households choose to have many children, who work as farmhands and serve as social security for their parents.
This intensifies poverty in the next generation, as average farm sizes shrink.
Food yields per acre (or hectare) are inadequate because impoverished farm households lack some or all of the four inputs needed for modern and productive agriculture: soil-nutrient replenishment (through organic and chemical fertilizers), irrigation or other water-management techniques, improved seed varieties, and sound agricultural advice.
The problem is especially severe in landlocked countries like Mali, Niger, Rwanda, and Malawi, where high transport costs leave villages isolated from markets, and in regions that depend on rainfall rather than river-based irrigation.
Yields, on average, barely support survival, and crop failures are common and deadly, while long-term global climate change, caused mainly by high energy consumption in the rich countries, may be exacerbating the frequency and severity of droughts.
These impoverished villages need financial help to buy vital inputs for farming and to invest in basic infrastructure such as roads and electrification.
Instead, donor governments and the World Bank have insisted for years that impoverished countries cut financing to these villages, under the guise of promoting “macroeconomic stability” – a polite way of demanding debt repayment – and reflecting the ideological delusion that the private sector will step in.
Instead, these policies have left hundreds of millions of people even more desperately poor and hungry, and even more vulnerable to drought, pests, and soil depletion.
Millions die each year, either of outright starvation or from infectious diseases that their weakened bodies cannot withstand.
And still, after twenty years of preaching that private markets would pick up the slack, these impoverished communities are further away than ever from using improved seeds, fertilizers, and small-scale water management technologies.
The irony is that donors then respond with very expensive emergency food aid, which typically proves to be too little and too late.
A shipment of an equivalent dollar amount of fertilizer and improved seeds from, say, the United States to Africa would yield perhaps five times more food.
But donors have not yet implemented this obvious and basic lesson.
Malawi today is an urgent case in point.
Because of rural impoverishment and a drought earlier this year, dire hunger afflicts millions of people.
Donors are rallying for food aid, but they are resisting the obvious need to help the poorest million farmers (and their four million dependents) get soil nutrients and improved seeds in time for the planting season this autumn.
The cost of sending such help would be around $50 million, and the benefits would be $200 million to $300 million in increased food production next year (and hence less needed in emergency food aid).
Moreover, Malawi has a proven track record of sharply higher food yields when impoverished farmers are helped with inputs.
Yet donors continue shipping expensive food aid while ignoring Malawi’s desperate need to grow more food.
Over the longer term, increased food yields could be turned into sustained economic growth.
First, rural households would be encouraged to have fewer children, and to invest more in each child’s health and education.
Child survival rates would rise, reinforcing lower fertility rates.
At the same time, increased educational opportunities for girls and women, and low-cost contraceptives provided by family-planning services, would empower them to marry later and have fewer children.
Second, and simultaneously, donors should help impoverished countries to invest in roads, ports, rural electricity, and diversified production (both agricultural and non-agricultural), in order to promote higher productivity and alternative livelihoods in the longer term.
Villages currently trapped in hunger and subsistence agriculture would become commercial centers for food processing and exports, and even for rural industry and services supported by electrification, mobile phones, and other improved technologies.
This is a year of both widespread hunger and solemn promises by the rich countries.
But emergency food aid is not enough.
Impoverished communities in Africa, the Middle East, and Asia are ripe for a “green revolution,” based on modern scientific techniques for managing soils, water, and seed varieties.
Donors should lend their support by backing long-term solutions aimed at increasing food production, slowing population growth, and mitigating long-term global climate change.
The Case Against International Financial Coordination
CAMBRIDGE – When US President Barack Obama announced in late January his intention to seek tough new rules for banks, he wasn’t expecting to make friends on Wall Street.
We will henceforth prevent banks from trading on their own account and from growing too large, Obama declared.
The internal battle within the Obama administration seemed to have been won by Paul Volcker, the impressive and outspoken former Federal Reserve chairman who has long been a critic of financial innovation.
Unsurprisingly, Goldman Sachs and other Wall Street firms are dubious about the “Volcker rules.”
So, too, are the Republicans in Congress, along with some Democrats who feel that the scheme has come too late and may interfere with other reform efforts under way, as watered-down as those initiatives may be.
Such domestic opposition weakens the prospect that Obama’s proposals will ever become law.
But the international reaction was less expected.
Obama’s announcement received a decidedly unsympathetic reception from Europeans, who perceived his initiative as a unilateral move that would undermine international coordination of financial regulation.
The announcement had come without international consultation. It also seemed to violate earlier agreements to cooperate with other nations through the G-20, the Financial Stability Board, and the Basel Committee on Banking Supervision.
At the World Economic Forum in Davos, US Congressman Barney Frank was surprised to discover that the greatest opposition to American plans came from international regulators .
The Obama administration’s proposed measures would simply create “regulatory confusion,” one of them complained.
This is a widely shared concern.
Financial Times columnist Martin Wolf accused the US of injecting “new and unsettling ideas” into the discussion of financial reform.
Continental European countries like big banks, and therefore will never go along with the Volcker rules, he wrote.
Accordingly, these reforms “are going to prove inapplicable outside the US and so create difficulties of international coordination.”
Dominique Strauss-Kahn, the managing director of the International Monetary Fund, was uncharacteristically blunt for an international official.
Taking direct aim at Obama’s proposals, he argued that reform of the global financial system should not be driven by what each country sees fit for itself. “We need to have coordination,” he said.
The chiefs of major European banks such as Deutsche Bank, Barclays, and Société Générale were naturally also unanimous in their hostility.
Regulation that is not globally coordinated, they warned, would create unnecessary uncertainty, prolong financial distress, and threaten economic recovery.
And oh, of course, it would cut into their profits, too!
Global coordination, like global governance, sounds good.
But the practical reality is that it cannot deliver the tough regulations, closely tailored to domestic economic and political requirements, which financial markets badly need in the aftermath of the worst financial upheaval the world economy has experienced since the Great Depression.
In a world of divided political sovereignty and diverse national preferences, the push for international harmonization is a recipe for weak and ineffective rules.
That is one reason why international bankers love international coordination.
Many scholars of international relations consider the Basel Committee on Banking Supervision, the international body of regulators charged with devising a new set of global standards, as the apogee of international rule-making.
Yet it is surely telling that this will be the third version of its guidelines in as many decades.
The last big idea the Basel committee had was that large banks should calibrate their capital requirement based on their own internal risk models.
But the dangers of permitting banks to police themselves were made amply clear in the latest crisis.
When financial regulations are devised by a coterie of global regulators in distant venues, it is bankers and technocrats who gain the upper hand.
Returning the process to national capitals would shift the balance of power to domestic legislatures and national stakeholders.
Bankers and their economist allies may rue this, but it is as it should be.
Politicization is the necessary antidote to technocrats’ tendency to be captured by banks. Democratic accountability is our only safeguard against a return to light regulation.
Democratic accountability would also result in regulatory diversity – different countries doing their own thing – and that is not a bad thing, either.
If the US wants to place size limits and tighter capital requirements on banks, it should be free to do so.
If Europe wants to devise its own rules for credit-rating agencies and hedge funds, it should simply go ahead.
Naturally, regulatory diversity would require cross-border financial controls to ensure that banks do not evade national regulations by operating from foreign jurisdictions.
The rule would have to be: if you want to serve my market, you must play by my rules.
It is easy to be swayed by arguments about how costly such market fragmentation would be.
Deutsche Bank chief Josef Ackermann has gone so far as to warn that moving in this direction would “leave us all poor.”
Regulatory diversity is indeed costly for bankers, who would have to adjust to differences in regulations across national borders.
But the rest of us suffer from too much financial globalization, not too little.
Some financial segmentation is a price well worth paying for stronger regulations that are solidly backed by domestic politics.
The Case against Kosovo Independence
Kosovo’s march toward independence is gathering pace, with the leaders of Kosovo’s Albanians – Hashim Thaci and Agim Ceku – threatening to declare unilateral independence any day now.
This is something that Serbia will undoubtedly reject, with the backing of Vladimir Putin’s Russia.
Much of the world seems to think that Serbia’s role in the Balkan wars of the 1990’s puts it in the wrong, and that that should be the end of the matter.
But Serbia’s point of view is not without merit, and many other countries with territorially concentrated ethnic minorities have reason to be anxious about the precedent that might be set if Kosovo’s declaration of independence is recognized.
Consider, first, that Kosovo is the historical heart and religious soul of Serbia.
Hundreds of Serb Orthodox churches, monasteries, and holy sites in Kosovo attest to this.
Moreover, Kosovo’s demographic transformation over the last 100 years, when Albanians overtook the local Serb population, partly reflects an influx of Albanians from Albania – for decades a political and economic basket case, owing to Enver Hoxha’s hermetic communism.
At the same time, many Serbs have left Kosovo before and after NATO’s intervention in 1999, whether fleeing from Albanian violence against them or simply lured by better opportunities in Serbia proper.
Serbia’s claim to Kosovo is, to Serbs, far stronger than Russia’s claim to Chechnya, China’s to Xinjiang, India’s to Kashmir (a claim still disputed by Pakistan), and the Philippines’ to the island of Mindanao.
All of these are provinces with Muslim majority populations that are part of non-Muslim majority states.
But Russia, China, and India are big states and will not tolerate any detachment of their territories.
So there is no serious international effort to force them to do so.
The Philippines has effectively lost control of Mindanao, just as Serbia has lost control of Kosovo, yet no one has recognized Mindanao’s unilateral declaration of independence.
So why should Kosovo’s declaration be accepted?
Nor is it only Russia, China, and India that oppose Kosovo’s independence, but also Muslim-majority Nigeria, which retains Biafra, where a bloody civil war with Catholic Ibos was fought in the late 1960’s.
Muslim-majority Indonesia lost its Catholic-majority East Timor through Western political intervention, but its claims to East Timor were tenuous, as it only invaded the island a few decades ago.
Even in Europe, where Catalonia and the Basque region push for secession from Spain, some in Flanders want an end to Belgium, and Scotland’s ruling Scottish National Party wants eventually to break away from Britain, support for Kosovo’s independence is far from universal.
Worse, ordinary Serbs see an obvious international double standard.
The territorial integrity and sovereignty of Croatia and Bosnia were enforced in the 1990’s, despite declarations of independence by the Serbian “Republic of Krajina” in Croatia and the Serbian “Republika Srpska” in Bosnia.
Why is Kosovo being treated differently?
Today, there are roughly 700,000 Serb refugees in Serbia from Croatia and Bosnia who are unable or unwilling to return to their homes, including virtually all of Croatia’s Serbs, except those converted to Catholicism to become Croats.
Indeed, Serbia currently contains the largest refugee population in Europe.
If Kosovo gains independence, these numbers will swell, as an exodus of all remaining Serbs is likely unless their territorial bastions – particularly in northern Kosovo, around Mitrovica – join with Serbia.
More broadly, to allow Kosovo’s independence would demonstrate that violent secessionism works.
In that case, the world ought to get used to seeing the Kosovo “strategy” applied elsewhere.
First, faceless ethnic secessionists attack civilians and police.
Not knowing where the enemy is hidden within the civilian population, security forces retaliate indiscriminately.
Human rights violations elicit an international outcry and condemnation, followed by intervention and occupation by foreign military forces.
And, in the denouement, the state loses control of its province as the secessionists declare independence.
Setting such a precedent in Kosovo must be avoided to ensure stability not only in the Balkans, but in all countries with dissatisfied ethnic minority populations.
The territorial integrity and sovereignty of Serbia must be preserved in accordance with the United Nations Charter, the 1975 Helsinki Agreement Final Act guaranteeing the boundaries of Europe, and UN Resolution 1244 of 1999, which guaranteed Serbia’s existing borders.
The former Yugoslavia has had enough destruction and mass killing.
Preserving national integrity is a universal principle of peace from which Serbia should not be excluded.
Britain’s European Home
BRUSSELS – British Prime Minister David Cameron's long-awaited speech on Europe, to be delivered in the Netherlands, may well mark a turning point with respect to Britain’s position within the European Union.
Any attempt by the United Kingdom to repatriate powers to Westminster is likely to be a drawn-out and cumbersome negotiation.
As previous experience has shown, internal discussions on constitutional competences – essentially political navel-gazing – can distract attention from the far more pressing issues of economic growth and jobs.
Attempting to revisit major parts of the acquis communautaire (the body of EU law), and picking and choosing the bits of which the UK approves, could set a dangerous precedent.
Indeed, it could lead to piecemeal legislation, disintegration, and potentially the breakup of the Union.
However attractive repatriation may seem on the surface, it would involve long and complex procedures – with no guarantee of a favorable outcome.
Ultimately, of course, whether to repatriate competences or exit from the EU are decisions for the British government and the British people to make.
But it is my strong belief that full UK membership is in the interest of the British and Europe alike.
The single market benefits the British economy enormously, and the EU remains by far the UK’s biggest trade partner, accounting for almost 50% of British exports.
In a globalized world, it is not in the UK’s interest to downgrade to some kind of second-class EU membership, as this would merely weaken its own influence in Europe and beyond.&#160;
Certainly, Britain’s friends recognize this.
In recent days, the United States has rightly warned that a possible referendum in the UK could mean that the country turns inward, while Irish Prime Minister Enda Kenny has said that a British exit from the EU would be a “disaster.”
Leading British business figures, too, have cautioned Cameron that he risks destabilizing the UK economy inadvertently if he seeks a wholesale renegotiation of EU membership.
Their voices, however late in the day they have come, should be heeded.
The eurozone is integrating more deeply and rapidly not on a whim, but out of sheer necessity.&#160;The UK has chosen to remain outside the monetary union with a clear opt-out from the common currency.
So, while the Cameron government’s support for deeper eurozone integration is welcome, the eurozone cannot and will not be shaped from outside and according to British interests.
The UK is not in a position to block the other EU member states from deeper integration, given most other member states’ political will to move forward.
Indeed, last year’s negotiations on the “fiscal compact” should already have demonstrated to Cameron the difficulty of exercising the so-called national veto.
Still, the UK has played a leading role in designing key EU policies, including measures concerning the single market, overseas development aid, trade, and climate change.
UK leadership in these areas has been highly appreciated – and would be sorely missed should the British decide to leave.
In the field of Justice and Home Affairs, for example, the UK has so far played a major role in shaping EU policies that all member states must adopt in less than two years.
But the Cameron government appears to be preparing to opt out of these policies completely.
Surely it cannot be expected that the EU institutions and the other 26 member states will stand idly by while the UK opts out of more than 130 of those measures – in essence re-erecting national borders in the fight against cross-border crime – and then seeks to rejoin a select few that it considers to be in its “national interest.”
Attempting to repatriate competences from the EU may play well in Britain’s notoriously Euro-skeptic media and parts of the Conservative Party, but I would question whether it is truly in the UK’s long-term interest.
The EU is much more than a set of rules governing the internal market and the free movement of goods, services, capital, and people.
It is a unique and historic project that has unified the European continent.
Nation-states have pooled sovereignty voluntarily, because they believe that, together, they are stronger.
I believe in the UK’s role in helping to lead this project – in Europe’s interest and its own.
I suspect that Cameron is playing a dangerous game for purely tactical, domestic reasons.
I believe him when he says that he wants the UK to remain a member of the EU.
But he increasingly resembles the sorcerer’s apprentice, who cannot tame the forces that he has conjured – forces that want to leave the EU for ideological reasons, to the detriment of the British people.
January 1, 2013, marked 40 years of British membership of the EU.
The Union is likely to become even more significant in the next 40 years, which is why the UK should remain fully committed to shaping its future.
The Case for a Global Financial-Transaction Tax
BERLIN – What went wrong with global financial markets?
In a nutshell: the implosion of the brave new world of modern finance, and the economic crisis that followed, was rooted in the idea that free and unregulated capital markets always work for the public good, and are all that is needed for economic prosperity.
The prologue to the crisis was a combination of cheap money, deregulation, and a race for returns by executives undeterred by the associated risks.
When the housing bubble burst and financial markets collapsed in its wake, growth slumped worldwide as never before since the Great Depression.
GDP in the advanced economies is expected to shrink about 4% this year.
Total financial-sector losses in the world’s advanced economies stand at around $1.6 trillion.
The IMF estimates that losses of more than double this total are yet to come.
Jobs will continue to be shed. Future generations are being saddled with an explosion of public debt.
It will take years before we recover fully.
Despite all this pain, the remaining financial-market participants gained significant benefits from government bailouts.
The G-20’s average headline support for the financial sector is more than 30% of GDP (including capital injections, guarantees, treasury lending and asset purchases, liquidity provision, and other central bank support).
In our political response to this crisis, new forms of financing and fiscal burden-sharing will have to play a role.
It is in this context that German Foreign Minister Frank-Walter Steinmeier and I have advanced our proposal for a global financial-transaction tax (FTT).
Remaining financial-market participants are not pulling their weight in this crisis.
But “Main Street” sees what happens on Wall Street – and in London and Frankfurt.
Citizens are aware of the hundreds of billions of euros and dollars that have been used to prop up banks.
Bonus payments in the financial sector now go hand in glove with massive job losses in the real economy.
I came to realize that the political answer to this crisis must encompass more than improved regulatory regimes, risk-management strategies, and capital requirements.
How governments handle the burden-sharing between Wall Street and Main Street will determine social cohesion, financial-market stability, ­and political leaders­’ reputations for years to come.
Of course, compensation payments and fees for government guarantees are being levied on banks participating in taxpayer-funded stabilization schemes.
But that’s not enough.
Financial-market participants need to demonstrate that they understand their role in causing the crisis, and that they are willing to significantly contribute to preventing its recurrence.
A global financial-transaction tax (FTT), applied uniformly across the G-20 countries and covering all financial transactions at a very low rate, is the obvious instrument of choice to ensure that all financial-market participants contribute equally.
Foreign Minister Steinmeier and I are suggesting that the G-20 take concrete steps toward implementing an FTT of 0.05% on all trades of financial products within their jurisdictions, regardless of whether these trades occur on an exchange.
National governments could establish a personal allowance to exempt retail investors.
Based on calculations by the Austrian Institute of Economic Research, which studied the possible effects of general FTTs on behalf of the Austrian government, a global FTT of 0.05% could yield up to $690 billion per year, or about 1.4% of world GDP.
Such a tax would not unduly burden financial-market participants, yet it would raise a significant amount of money to finance the costs of this crisis.
Financial-market participants are fighting tooth and nail not to pay their fair share, putting forward a number of arguments against an FTT to camouflage their resistance.
Some of them argue that such a tax would lead to evasive reactions by market participants and have distorting effects.
But such evasive actions by market participants would be almost impossible if the G-20 stood united.
Trading volume on G-20 and European Union exchanges accounts for roughly 97% of total global trading in exchange-traded equities, and about 94% of total volume in exchange-traded bonds.
As the tax would be very low and would include transactions in exchange-based spot and derivatives markets and OTC markets, as well as all asset classes (equities, bonds, derivatives, and foreign exchange), there would not be much of a distorting effect, either.
I don’t think such a tax would significantly impact market liquidity, but even if it did, a nudge towards buying and holding might not be such a bad thing.
The debate among finance ministers in London in the run-up to the G-20 meeting in Pittsburgh revealed a basic agreement that the burdens imposed by the financial crisis ought to be shared in a fair manner.
At the G-20 summit, we should discuss what fair and equitable burden-sharing between taxpayers and financial-market participants should look like.
German Chancellor Angela Merkel has registered initial support for such an idea from British Prime Minister Gordon Brown and President Nicolas Sarkozy of France.
We are receiving a wave of interest and readiness for further dialogue on this topic within the EU and beyond.
There is a clear-cut case for a global FTT: it would be just, would do no harm, and would do a lot of good.
If there is a better idea for fair burden-sharing between the world’s Main Streets and its Wall Streets, let’s hear it.
If there isn’t, let’s have an FTT now.
The Case for Fiscal Stimulus
CAMBRIDGE – Governments around the world are now developing massive fiscal stimulus packages that will cause unprecedented peacetime budget deficits.
The fiscal deficit in the United States this year is likely to exceed 10% of GDP.
A substantial part of the increased deficit will be due to a wide range of new government spending.
Under normal circumstances, I would oppose this rise in the budget deficit and the higher level of government spending.
When an economy is closer to full employment, government borrowing to finance budget deficits can crowd out private investment that would raise productivity and the standard of living.
Budget deficits automatically increase government debt, requiring higher future taxes to pay the interest on that debt.
The resulting higher tax rates distort economic incentives and thus weaken future economic performance.
Of course, some government spending is desirable or necessary.
But an increase in government outlays often means wasteful spending that produces less value than consumers would get from those same dollars.
Now, however, increased government spending and the resulting rise in the fiscal deficit are being justified as necessary to deal with the economic downturn – a sharp change from the reliance on monetary policy that was used to deal with previous recessions. Countercyclical fiscal policy had been largely discredited because of the delays involved in implementing fiscal changes and households’ weak response to temporary tax cuts.
By contrast, the central bank could lower interest rates rapidly, which worked to raise household and business spending through a variety of channels.
Nevertheless, I support the use of fiscal stimulus in the US, because the current recession is much deeper than and different from previous downturns.
Even with successful countercyclical policy, this recession is likely to last longer and be more damaging than any since the depression of the 1930’s.
The 40% decline in the US stock market and the dramatic fall in house prices have reduced American households’ wealth by more than $10 trillion, which is likely to reduce annual consumer spending by more than $400 billion.
And the collapse of housing starts has lowered construction spending by another $200 billion.
This $600 billion fall in demand is more than 3% of GDP.
If not reversed, it will cause further cuts in production, employment, and earnings, leading to further reductions in consumer spending.
The usual monetary-policy response of lowering interest rates is unable to reverse this sharp drop in demand.
The dysfunctional credit markets caused by the uncertain value of asset-backed securities means that banks and other financial institutions are unable to raise funds and are unwilling to lend.
As a result, the central bank’s lower interest rates do not translate into increased spending on interest-sensitive investment and consumption.
So there is no alternative to fiscal policy if we want to reverse the current downturn.
The resulting increase in the national debt is the price that we and future generations will pay for the mistakes that created the current economic situation.
Those mistakes led to an underpricing of risk and the resulting increase in excessive leverage.
There are many reasons for the underpricing of risk and the rise in leverage.
The exceptionally easy monetary policy at the start of the decade contributed to financial investors’ willingness to buy low-quality financial assets in order to get higher yield and to an explosive rise in house prices.
The rating agencies miscalculated the value of asset-backed securities.
The increase in leverage was driven in part by government policies aimed at expanding home ownership among lower-income groups that have proven unable to afford that life style.
Banking supervisors did not deal with many institutions’ low levels of capital and poor asset quality.
A major challenge for the future is to fix the institutional policies that led to these problems.
The new Obama administration and the Congress are still working out the structure of the fiscal stimulus for the US.
Although I support the need for a large fiscal package, I disagree with many of the specific features of the plans now under consideration.
Regardless of what is done to provide a fiscal stimulus, governments around the world must act to fix dysfunctional credit markets.
Otherwise, credit will not flow and growth will not resume.
In the US, reviving the credit markets requires stopping the mortgage defaults driven by negative equity.
The US Treasury Department wasted valuable time in 2008 by not using the funds provided by Congress to deal with those housing-market problems.
There is hope that the Congress and the new administration will now address that issue.
When the recession is over, the US and virtually every other country will have substantially higher debt-to-GDP ratios.
At that point, it will be important to develop policies to reduce gradually the relative level of government spending in order to shift to fiscal surpluses and reduce the debt burden.
The Case for Mitigating Greenhouse Gas Emissions
PALO ALTO &#45;&#45; Last fall, the United Kingdom issued a major government report on global climate change directed by Sir Nicholas Stern, a top-flight economist.
The Stern Review Report on the Economics of Climate Change amounts to a call to action: it argues that huge future costs of global warming can be avoided by incurring relatively modest cost today.
Critics of the Stern Review don’t think serious action to limit CO2 emissions is justified, because there remains substantial uncertainty about the extent of the costs of global climate change, and because these costs will be incurred far in the future.
However, I believe that Stern’s fundamental conclusion is justified: we are much better off reducing CO2 emissions substantially than risking the consequences of failing to act, even if, unlike Stern, one heavily discounts uncertainty and the future.
Two factors differentiate global climate change from other environmental problems.
First, whereas most environmental insults – for example, water pollution, acid rain, or sulfur dioxide emissions – are mitigated promptly or in fairly short order when the source is cleaned up, emissions of CO2 and other trace gases remain in the atmosphere for centuries.
So reducing emissions today is very valuable to humanity in the distant future.
Second, the externality is truly global in scale, because greenhouse gases travel around the world in a few days.
As a result, the nation-state and its subsidiaries, the typical loci for internalizing externalities, are limited in their remedial capacity.
(However, since the United States contributes about 25% of the world’s CO2 emissions, its own policy could make a large difference.)
Thus, global climate change is a public good (bad) par excellence .
Cost-benefit analysis is a principal tool for deciding whether altering it through mitigation policy is warranted.
Two aspects of that calculation are critical.
First, it has to be assumed that individuals prefer to avoid risk.
That is, an uncertain outcome is worth less than the average of the outcomes.
Because the possible outcomes of global warming in the absence of mitigation are very uncertain, though surely bad, the uncertain losses should be evaluated as being equivalent to a single loss greater than the expected loss.
The second critical aspect is how one treats future outcomes relative to current ones – an issue that has aroused much attention among philosophers as well as economists.
At what rate should future impacts – particularly losses of future consumption – be discounted to the present?
The consumption discount rate should account for the possibility that, as consumption grows, the marginal unit of consumption may be considered to have less social value.
This is analogous to the idea of diminishing marginal private utility of private consumption, and is relatively uncontroversial, although researchers disagree on its magnitude.
There is greater disagreement about how much to discount the future simply because it is the future, even if future generations are no better off than us.
Whereas the Stern Review follows a tradition among British economists and many philosophers against discounting for pure futurity, most economists take pure time preference as obvious.
However, the case for intervention to keep CO2 levels within bounds (say, aiming to stabilize them at about 550 ppm) is sufficiently strong to be insensitive to this dispute.
Consider some numbers from the Stern Review concerning the future benefits of preventing greenhouse gas concentrations from exceeding 550 ppm, as well as the costs of accomplishing this.
The benefits are the avoided damages, including both market damages and non-market damages that account for health and ecological impacts.
Following a “business as usual” policy, by 2200, the losses in GNP have an expected value of 13.8%, but with a degree of uncertainty that makes the expected loss equivalent to a certain loss of about 20%.
Since the base rate of economic growth (before calculating the climate change effect) was taken to be 1.3% per year, a loss of 20% in the year 2200 amounts to reducing the annual growth rate to 1.2%.
In other words, the benefit of mitigating greenhouse gas emissions can be represented as the increase in the annual growth rate from today to 2200 from 1.2% to 1.3%.
As for the cost of stabilization, estimates in the Stern Review range from 3.4% of GNP to -3.9% (since saving energy reduces energy costs, the latter estimate is not as startling as it appears).
Let’s assume that costs to prevent additional accumulation of CO2 (and equivalents) come to 1% of GNP every year forever, and, in accordance with a fair amount of empirical evidence, that the component of the discount rate attributable to the declining marginal utility of consumption is equal to twice the rate of growth of consumption.
A straightforward calculation shows that mitigation is better than business as usual – that is, the present value of the benefits exceeds the present value of the costs – for any social rate of time preference less than 8.5%.
No estimate of the pure rate of time preference, even by those who believe in relatively strong discounting of the future, has ever approached 8.5%.
These calculations indicate that, even with higher discounting, the Stern Review’s estimates of future benefits and costs imply that mitigation makes economic sense.
These calculations rely on the report’s projected time profiles for benefits and its estimate of annual costs, about which there is much disagreement.
Still, I believe there can be little serious argument about the importance of a policy aimed at avoiding major further increases in CO2 emissions.
The Case for Opening Europe’s Borders
It is time for Europe’s politicians to admit to voters that governments cannot stop people moving across borders.
Despite efforts to build a Fortress Europe, over a million foreigners bypass its defences every year; some enter covertly, but most just overstay their visas and work illicitly.
Even if Europe became a police state, migrants could get through: documents can be forged or stolen, visas overstayed, people smuggled, officials bribed.
While draconian policies can curb migration somewhat, they mostly drive it underground.
That creates huge costs.
Aside from a humanitarian crisis, with thousands drowning each year trying to reach Europe and thousands more detained, there is the soaring expense of border controls and bureaucracy, a criminalized people-smuggling industry, and an expanding shadow economy, where illegal migrants are vulnerable to exploitation, labor laws are broken and taxes go unpaid.
In addition, there is rising mistrust of politicians who cannot fulfill promises to halt immigration, accompanied by perceptions of immigrants as law-breakers rather than enterprising people, and mistreatment of refugees aimed at deterring people who want to work from applying for asylum.
These problems are due not to immigrants, but to our immigration controls, which are not only costly and cruel, but also ineffective and counterproductive.
Far from protecting us, they undermine law and order, just as Prohibition did more damage to America than drinking ever has.
Pragmatic governments surely ought to legalize and regulate migration instead.
Immigrants are not an invading army; they are mostly people seeking a better life who are drawn to Europe by the huge demand for workers to fill the low-end jobs that our aging and increasingly wealthy societies rely on, but which our increasingly well-educated and comfortable citizens are unwilling to take.
Many services cannot readily be mechanized or imported – old people cannot be cared for by a robot or from abroad – while people increasingly pay others to perform tasks that they once did themselves, freeing up their own time for more productive work or leisure.
Thus, as advanced economies create high-skilled jobs, they inevitably create low-skilled ones, too.
In fact, low-skilled jobs still account for more than a quarter of Western Europe’s workforce.
But, whereas only half of Europeans now aged 55-64 finished secondary education, four in five 25-34-year-olds have done so, and they naturally aspire to better things.
Even Europeans with few or no qualifications increasingly shun dirty, difficult, and dangerous jobs.
The only way to reconcile our aspirations to opportunity for all with the reality of drudgery for some is through immigration.
Consider old-age care, the fastest-growing employment sector in Europe.
Since young Europeans would rather work in a shop than a retirement home, persuading them otherwise would require a huge wage hike.
Given fiscal constraints, that implies either less care for pensioners, budget cuts elsewhere, or tax hikes.
Immigrants, however, face a different set of alternatives; with wages in Brussels far higher than in Manila, for example, Filipino immigrants are generally happy to do such work.
This is not exploitation; everyone – migrants, taxpayers, and Europeans young and old – is better off.
Nor does it undercut wages, since most Europeans do not want these jobs.
And it does not undermine social standards, because legal migrants have recourse to trade unions and the law.
Indeed, just as it is often mutually beneficial to import computers from China, IT services from India, and investment-banking services from Americans, it can also make sense to import Filipino care workers, Congolese cleaners, and Brazilian bar staff.
Policymakers who want products and providers of high-skilled services to move freely but people who provide less-skilled services to stay put are not just hypocrites; they are also economically illiterate.
Nor do immigrants merely take jobs; they also create them.
As they spend their wages, they increase demand for people to produce the goods and services that they consume.
Spain has admitted more immigrants in recent years than any other European country, yet its unemployment rate continues to fall;
Britain, Ireland, and Sweden still have low unemployment after opening their labor markets to the Poles and other new EU members in 2004.
This is also because immigrants often complement native workers’ efforts.
A foreign nanny may allow a British doctor to return to work, where hard-working foreign nurses and cleaners enhance her productivity.
While innovation sometimes comes from brilliant individuals – 21 of Britain’s Nobel prizewinners were refugees – it generally comes from the synergy of talented people in close proximity.
Likewise, consider Silicon Valley: Intel, Yahoo!, Google, and eBay were all co-founded by immigrants.
Millions of Europeans want EU governments to lower their barriers to developing countries’ exports, cancel Third World debt, and increase foreign aid.
Yet increased migration would help the poor far more.
Migrants from poor countries already send home $200 billion a year – perhaps another $400 billion informally – compared to the $80 billion in aid given by Western governments.
These remittances are not wasted on weapons or siphoned off into Swiss bank accounts; they go straight into local people’s pockets.
They pay for food, clean water, medicines, and to keep kids in school.
And returning migrants bring back new skills, new ideas, and the money to start new businesses.
Africa’s first Internet cafés were started by migrants returning from Europe.
Politicians should have the courage to stop fighting an unwinnable war. If open borders are not politically feasible for now, our leaders should at least create a legal route for people from developing countries to enter and work.
Of course, problems may arise; learning to live together can be tough.
But Europe would thrive on the cosmopolitan dynamism that results from treating immigration as an opportunity rather than as a threat.
The Case for Palestine
RAMALLAH – Nowhere are the grievances that perpetuate violence and war more evident than they are in Palestine today.
But the world’s politicians continue to dance around the problem, rather than confront it.
The recent deadly violence in Gaza is only the latest proof that people living under occupation and siege need a political horizon, and not simply a cease-fire: the case for an independent state of Palestine has never been so compelling as it is today.
Palestinian President Mahmoud Abbas’s decision to proceed with plans to seek a vote this week on recognition of Palestine at the United Nations General Assembly has come despite pressure, promises, and threats from Israel and some of its Western allies.
Rather than pursuing the UN route, the Palestinians, according to these interlocutors, should continue to depend on asymmetrical negotiations that have served as little more than a photo opportunity.
The UN vote (which coincides with the International Day of Solidarity with the Palestinian People) would not grant Palestine full membership.
Rather, it would upgrade Palestine’s status to a level comparable to that of the Vatican, allowing its political leaders to bring war-crimes charges against Israelis to the International Criminal Court in The Hague.
Zionists in Palestine rejoiced in 1947, following the UN General Assembly vote for partition into a Jewish and an Arab state.
It is ironic that, as rockets from Gaza reach the outskirts of Tel Aviv, those Israelis who celebrated the partition, and their descendants, do not see the importance of fulfilling the other half of the partition plan.
It is true that Palestinians, who comprised the vast majority of the population and owned an overwhelming share of the land, were unhappy with the partition plan, which awarded them 46% of mandatory Palestine.
Today, Palestinians are seeking statehood on a mere 22% of the territory that had been part of mandatory Palestine until Israel was unilaterally established on areas much larger than those awarded by UN General Assembly Resolution 181 in 1947.
Palestine’s quest for statehood within the borders of June 4, 1967, falls squarely within international law.
The UN Security Council resolved in November of that year that “acquisition of territory by war” is unacceptable.
Subsequent Security Council resolutions and international treaties have upheld this principle.
In fact, a Palestinian state based on the 1967 borders is exactly what US President Barack Obama has called for.
Similarly, the European Union has long advocated a two-state solution, with Palestine being established on areas occupied by Israel in 1967.
As Abbas has said, the upcoming General Assembly vote is not aimed at delegitimizing Israel.
It follows the Palestinian National Council’s declaration in 1988 of a Palestinian state alongside the state of Israel.
It also follows the Arab Peace Initiative, adopted by the Arab League at its Beirut Summit in 2002 (and to which Israel has yet to respond).
The Arab League initiative, which was also approved by the Organization of the Islamic Conference, embraces a two-state solution based on the 1967 borders, but goes one step further, calling for a “just” and “agreed upon” solution to the thorny Palestinian refugee issue.
By accepting the words “agreed upon,” Palestinians, Arabs, and other Muslim-majority countries have conceded that Israel will not recognize Palestinian refugees’ inalienable right to return to their homes.
This should allay Israeli fears that the right of return would end Israel’s existence as a Jewish state.
Abbas will go to New York holding an even more important card.
Israel’s recent brutal violence in Gaza has united Palestinians who were split along partisan lines.
Leaders of Abbas’s Fatah faction, which controls the West Bank-based Palestinian Authority, and of Gaza-based Hamas have been meeting regularly to implement the Egyptian-Qatari reconciliation plan.
Political prisoners from both sides have been released, and a senior Fatah delegation just visited Gaza.
Hamas officials, including Mahmoud Ramahi, the leader of a bloc in the Palestinian National Council, have publicly supported the UN recognition bid.
According to Mousa Abu Marzook, Hamas’s deputy leader, his movement is not opposed to Abbas’s diplomatic initiative.
An independent and free Palestine alongside a safe and secure Israel is a plan upon which the entire world agrees.
Palestinians have shown that they are willing to accept minor and agreed-upon land swaps, and will be open to creative ideas for solving the problem of Jerusalem, possibly following the parameters set out by US President Bill Clinton at the end of his second term.
What is needed now more than ever is political will to give the peace process a serious boost.
Obama, now free of electoral shackles, and the international community should give Palestinians’ peaceful effort a chance at life.
The case for Palestine has never been so clear.
A vote for recognition of Palestinian statehood is a vote for peace.
The Case for Slowing Population Growth
Global debates about population policy are confusing.
One side argues that rising human populations threaten our environment and prosperity.
Land, water, energy, and biodiversity all seem to be under greater stress than ever, and population growth appears to be a major source of that stress.
The other side of the debate, mainly in rich countries, argues that households are now having so few children that there won't be enough to care for aging parents.
Those who fret about population growth have the better argument.
Issues confronting Europe, Japan, and to a lesser extent the United States and some middle-income countries concerning aging populations are manageable.
Moreover, the benefits of slower population growth outweigh the adjustment costs.
By contrast, if global populations continue to rise rapidly, the stresses on the world's resources will worsen.
Governments should therefore refrain from deliberate policies to raise birthrates, even in places where birth rates are low.
Part of the confusion of the public debate reflects different population trends in different parts of the world.
The fastest population growth is taking place in the poorest regions.
Poor people, especially poor people living on farms, tend to have the most children (often six or more per woman), and therefore the highest rates of population growth.
Poor farm families rely on their children for farm chores and for security when parents reach old age.
Poor families lack access to contraception and family planning.
Finally, poor families have many children as a kind of insurance policy against high child mortality rates.
As a result of high fertility rates in Africa, the UN Population Division predicts a doubling of Africa's population from around 900 million today to around 1.8 billion in 2050.
Rapidly growing populations are also young populations, because of the high number of children per household.
In Africa, the median age is now a mere 19 years and is projected to rise to around 28 years in 2050.
In Europe, the trends run in the other direction.
The UN projects a decline in population to around 630 million in 2050, from around 725 million people today.
With few children and longer life expectancy, the median age of the population rises sharply in this forecast, from 39 years in 2005 to around 48 years in 2050.
For the world as a whole, population is expected to continue to grow by another 2.5 billion people from 2005 to 2050.
All of that growth will be in the developing world: 1.3 billion more people in Asia, 900 million more in Africa, the rest in Latin America and other regions.
Adding another 2.5 billion people to the planet will put enormous strains not only on societies with rising populations, but on the entire planet.
Total energy use is soaring, reflecting the combined effect of rising per capita incomes - and thus rising per capita energy use - and population growth.
Higher energy use is already changing the world's climate in dangerous ways.
Furthermore, the strains of increased global populations, combined with income growth, are leading to rapid deforestation, depletion of fisheries, land degradation, and the loss of habitat and extinction of a vast number of animal and plant species.
Population growth in developing regions - especially Africa, India, and other parts of Asia - needs to slow.
Public policies can play an important role by extending access to family planning services to the poor, expanding social security systems, reducing child mortality through public health investments, and improving education and job opportunities for women.
A part of the European public, looking at Europe's looming population decline, wants to head in the other direction, promoting a return to larger families.
That would be a big mistake.
Advocates of faster European population growth worry that there won't be enough young workers to pay for public pensions.
But this concern can be met through increased saving by today's young and middle-aged as they prepare for retirement, and by working past the age of 65.
These workers will reap large benefits from living in societies with stable or gradually declining populations.
Most obviously, they will spend much less in direct household expenditures to raise children.
They will also save on investments in new roads, power plants, schools, and other public services.
They will enjoy less congested cities and fewer environmental pressures on the countryside.
European economies will face lower costs in limiting emissions of greenhouse gases from energy use, leading to more effective control of climate change.
The quality of life, in short, will tend to improve as Europe's population declines in coming decades.
There is nothing radical in calling for slower population growth.
For tens of thousands of years, the human population tended to rise and fall without a substantial long-term trend.
Only in the past two centuries, with the rise of modern economic life, did the world's population soar, from around one billion people in 1820 to 6.3 billion today and around 9 billion by 2050.
This explosive growth was made possible by huge advances in science and technology.
But this unprecedented growth has also put tremendous pressures on the planet.
We should intensify our efforts to slow population growth through voluntary means, and we should recognize that leveling off of the Earth's population now would add to human happiness and strengthen environmental sustainability later.
The Case of Myrna Mack: Laying out Guatemala\u0027s Crimes
International pressure encouraged Guatemala to become a democracy and also supported the 1996 Peace Accords that ended our decades long civil war.
But if Guatemala is to truly enjoy the fruits of a new era, global efforts must persist in helping our country develop the legal, judicial and political courage to confront its past.
That history includes the brutal 1990 murder of my sister, Myrna Elizabeth Mack Chang.
At the time, Myrna's murder symbolized the savagery of a 36 year civil war in which government forces killed more than 200,000 Guatemalans.
Now it is an icon of our democracy's unfulfilled promises.
The 12 year judicial journey that we have made in pursuing her case underscores the intransigence, rather than the retreat, of the old order.
Myrna, an anthropologist, studied the populations of Mayans and other indigenous Guatemalans forced to abandon their ancestral homes during the worst years of the country's civil war.
She visited remote areas and listened to the villagers talk of watching "their land laid to waste." She reported what she saw and heard.
In doing so, she became an enemy of the state, because her work exposed the barbaric policies practiced against the displaced populations, uncovered the truth behind state actions, and called for the restoration of basic human rights.
Myrna worked as an anthropologist, but the army failed to see her work as scholarly.
Instead, intelligence officials viewed Myrna as an "internal enemy."
Shortly after she published her first study, government security forces began to investigate her.
Then on September 11 th , 1990 as Myrna left her office, two men stabbed her 27 times.
Vinicio Cerezo, head of state at the time Myrna was killed, later informed law enforcement authorities that Myrna was "targeted" because intelligence reports indicated that her work posed risks for the counterinsurgency effort.
As the chief petitioner in her case, I have sought justice in Guatemala's courts for nearly 12 years.
In 1993, ex-Sergeant Major Noel de Jesús Beteta was sentenced to 25 years in prison, making him the first agent of the state and the first member of the army so punished.
But, Beteta's conviction was only a partial victory.
He was one of the men responsible for stabbing Myrna, but in Guatemala, human rights abuses begin at a much higher level.
Responsibility for Myrna's death must be shared by the men in charge of government security in September 1990.
My task is to insure that General Edgar Godoy Gaitán and colonels Juan Valencia and Guillermo Oliva are held legally accountable for their roles in the chilling process that led to Myrna's assassination.
I am not alone in this belief.
The Supreme Court of Justice ordered an investigation of these military officials to determine their responsibility for planning the crime.
A military court issued a warrant for their arrest.
In 1999, another judge ordered that they be tried.
This was followed by the June 2001 court decision to set a date for trial, making it possible at last to present the evidence against these individuals.
The courts' actions represent Guatemala's first effort to bring high military officials to trial.
Regrettably, the trial has been delayed indefinitely because the defendants' lawyers appealed the case.
Our successes in the matter of Myrna Mack are notable, but achieving them has proved difficult: the police investigator was assassinated; judges have been threatened; and witnesses have fled into exile.
I have been harassed and campaigns to discredit me organized.
Terror works.
But so do bureaucratic bottlenecks that provide easy cover for defendants and permit the state to avoid its responsibility.
Evidence and procedural documents are lost or destroyed; documents key to the legal process are altered; and state security is invoked to deny information.
Add to these the fact that many Guatemalan judges have functioned as agents of impunity rather than as servants of justice and a legal system that can be manipulated by the defense through a series of frivolous lawsuits.
Still, we persist.
We have taken the struggle from the technical, legal, and political arena closer to a hearing in the courts.
Although the trial has been delayed, the exposure has given the Myrna Mack Foundation and other civic efforts the time to propose ways to modernize and democratize the justice system.
But the roadblocks are many so international pressure on Guatemala must persist to lift these obstacles.
Reform of the judiciary, conceived 16 years ago and strengthened through the peace accords, is sadly still being debated.
In name, Guatemala is a fledgling democracy.
In reality, power remains in the hands of the military high command and political and economic conservatives who have for years determined the nation's direction.
We lack the climate for a truly democratic arena, where criminal behavior that the state previously supported is prosecuted.
To insure such an environment, certain conditions are required: the political desire to dismantle state control, strong and independent agencies, adherence to international human rights conventions, and a commitment to justice.
Our success in Myrna's case depends on guaranteeing that legal reforms move forward, strengthened by political clout and a genuine emphasis on justice and democracy.
Our need is an international community that continues to push Guatemala toward a better, more just future.
The Caucasian Dark Circle
MOSCOW – The Russian authorities have recently begun showing off the massive security measures being implemented ahead of the 2014 Winter Olympics in the Black Sea resort of Sochi.
They have good reason to be worried – and not only for the safety of athletes and spectators.
The violence in the North Caucasus is becoming less a serious regional conflict and more an existential threat to the entire Russian Federation – an evolution that reflects almost all of the mistakes, failures, and crimes of the post-Soviet leadership.
Two horrific wars with local separatists, from 1994-1996 and from 1999- 2006, have been fought over Chechnya, presumably to secure Russia’s territorial integrity.
We Russians fought these wars in order to demonstrate to the Chechens that they, too, were citizens of Russia.
We did so by destroying their cities and villages with artillery shells and aerial bombardment, and we abducted and killed civilians, their bodies often bearing evidence of torture.
It should surprise no one that the Chechens, and other peoples of the Caucasus, do not feel very Russian.
In reality, Russia has lost the war against the Chechen separatists.
The winner was Ramzan Kadyrov, one of the field commanders in the fighting.
Ostensibly, he is an appointee of Russian Prime Minister Vladimir Putin, but in reality he is virtually independent of the Kremlin, which pays him substantial financial support, not only for his formal declaration of loyalty, but also for his public embrace of Putin.
The war against separatism in the North Caucasus has now evolved into the war against Islamic fundamentalism.
Ignited by the violence of the Chechen wars, Islamic-sponsored terrorism has spread widely in the region, as Russian policies, similar to those during the Chechen war, increase the number of Islamists.
President Dmitri Medvedev, for example, regularly calls for extremists to be “burned to ashes,” and for terrifyingly broad punishment, including of those “washing linen and preparing soup for terrorists.”
Given the morality of federal forces (or the lack thereof), Medvedev should have understood that such rhetoric could result only in a significant increase in brutality and extrajudicial killings all over the North Caucasus.
The resulting mayhem has served only to spawn new suicide bombers willing to bring fresh terror to Russia’s heartland.
Indeed, the paradox today is that Islamists seem to be losing influence in the Arab world while strengthening their position in the North Caucasus, where the Kremlin has fought a twelve-year war without understanding the scope of the tragedy taking place – a civil and ethnic war for which the Kremlin itself bears significant responsibility.
After all, the tribute that the Kremlin pays Kadyrov and the corrupted elites of the other Caucasian republics has purchased palaces and gold pistols for men who are driving the region’s young, unemployed, and disadvantaged down the path of Islamic revolution.
Across the Caucasus, a generation has grown up absolutely lost to Russia – and increasingly susceptible to recruitment into the ranks of Allah’s warriors.
A nearly unbridgeable mental gap now separates Russians and Caucasian young people.
Young Muscovites march carrying banners that read “Fuck the Caucasus!”
Young Caucasians, perceiving themselves as a winning side in the Northern Caucasus, behave in increasingly provocative and aggressive ways on the streets of Russian cities.
In the hearts and minds of people on both sides, Russians and Caucasians are becoming increasingly alienated from each other.
But neither the Kremlin nor its North Caucasian allies are ready for formal separation.
The former remains wedded to its phantom imperial illusions about a “zone of privileged interests” extending far beyond Russia’s borders, while the latter, starting with Kadyrov, rule as independent autocrats happy to accept handouts from the Russian state budget.
The irony is that, like the Kremlin and its allies, the Islamists do not want to separate.
They dream about a Caliphate that would include much more of the Russian Federation than the North Caucasus.
Recently, Medvedev convened a large public meeting in Vladikavkaz.
He accused anonymous enemies (his anonymous “they” presumably included Western governments) of pursuing an agenda to destroy Russia, and he encouraged his security officials to push back.
In Medvedev’s mental universe, savage reprisals today will somehow turn the North Caucasus into a zone of international ski tourism tomorrow.
That is not likely to happen.
The day after Medvedev’s departure from Vladikavkaz, terrorists blew up the ski lifts at the resort in Nalchik, not far from Sochi, where, for Russia, much more than winning medals will be at stake in 2014.
The Caucasus Imperative
YEREVAN – Summit season is upon us.
Following the G-20 meetings in Seoul and the NATO summit in Portugal, the Organization for Security and Cooperation in Europe will hold its first summit in 10 years in Astana, Kazakhstan’s spanking new capital city.
This is only the fourth post-Cold War summit convened by the OSCE.
The first was held in 1994 in Budapest, the year the group transformed itself into a new, post-détente organization.
There were two more, in Lisbon in 1996 and in Istanbul in 1999.
Not coincidentally, the ten-year gap between summits overlaps with Russia’s re-emergence as a global player, following the trauma of the Soviet Union’s collapse.
As a result of Russia’s revival, a range of disagreements has arisen within the OSCE – the only pan-European and trans-Atlantic organization that includes old Europe and the post-Soviet states.
On challenges ranging from election monitoring to the Conventional Forces in Europe (CFE) Treaty, there is no common ground among the 56 member states.
Worse, there is serious acrimony between Russia and the rest on many matters, including a new, alternative security architecture, which Russian President Dmitri Medvedev imagines could be placed under the OSCE’s umbrella.
With so much to disagree about and no significant agreements ready to be concluded in Astana, this looks like a case of summitry for summitry’s sake.
Without the usual pre-arranged outcomes, the delegations and their leaders will be searching for a success story to present to the world – whether in the OSCE’s human, economic, or security dimensions.
That search could lead to the only conflict in the OSCE in which the organization has a direct role: the dispute between Armenians and Azerbaijanis over the ethnically Armenian Nagorno-Karabakh.
The OSCE serves as mediator – through the Minsk Group co-chairs (the governments of France, Russia, and the United States) – in the most explosive of all the conflicts and security threats in the Caucasus.
To be sure, unlike Georgia’s war with Russia, the two sides in this clash are not so unequal as to draw global attention.
But, given Armenia’s alliance with Russia and Azerbaijan’s close ties with Turkey, an eruption over Karabakh could very well escalate regionally.
Perhaps for this reason, there has been talk of a meeting in Astana between the presidents of Russia and France, the US secretary of state, and the presidents of Armenia and Azerbaijan.
That prospect holds both great opportunity and serious risks.
There is a reason that no such meeting has been held in the 20 years of the conflict.
A meeting of presidents is, after all, the ultimate negotiating forum, and must lead to real, sustainable success.
Otherwise, it will appear that no amount of negotiation can help set the Caucasus straight – powerfully undermining a key restraint preventing the two sides from trying again to achieve a military solution.
Resolving the Nagorno-Karabakh conflict peacefully requires two parallel steps: a guarantee of non-resumption of military hostilities, and a clear, mutually binding blueprint for reaching a final settlement.
In the absence of assurances of such an outcome, a presidential-level meeting should not be tried.
This is especially true at a time when the other main deterrent to renewed violence – the military balance between the two sides – is also being weakened.
This year, Azerbaijan’s military budget alone exceeded total state spending in Armenia and Karabakh.
That, together with the more than 30 incidents occurring daily on the Line of Contact, does not bode well for peace, particularly given the absence of even a hint of agreement on a document, any document.
An acceptable blueprint might emerge from high-level negotiations in Astana if it were to build on what succeeded in breaking previous negotiating deadlocks: the idea of a referendum in which the war-weary Karabakhis can determine their final status.
The beauty of a referendum in these circumstances is that it recognizes the two fundamental principles at the heart of this conflict – self-determination and territorial integrity.
But thus far, there is no agreement on the timing of a referendum.
That failure remains the main obstacle to addressing the many other outstanding problems between the parties to the conflict.
In just two months, South Sudan will hold a referendum on independence that was agreed to in 2005.
A little more than two years ago, Kosovo voted for independence from Serbia.
If, in Astana, a high-level group reinforces the idea of a referendum and sets a mutually acceptable date, this would be a significant achievement.
The summit will have succeeded, the OSCE will have succeeded, and Karabakh will cease to be a synonym for conflict, but a laboratory for peace.
Fatal Thaws
MOSCOW – During the Cold War, the Soviet Union and, in a milder way, the United States imposed external limits on the activities of states and societies, causing longstanding conflicts among smaller countries to be “frozen.”
Following the Soviet Union’s collapse in the 1990’s, those conflicts began to “unfreeze.”
With interethnic tensions already on the rise, Yugoslavia was the first country to dissolve into conflict.
Soon after, war broke out between Armenia and Azerbaijan, followed by fighting in Transdniestria and Chechnya.
While some conflicts were addressed – the West finally intervened militarily in the former Yugoslavia; and Russia fought in Chechnya for almost a decade, and imposed peace in Transdniestria – others, such as that between Armenia and Azerbaijan, were simply frozen again.
Fortunately, not all potential conflicts erupted.
The Soviet Union did not dissolve into violence, as most other empires have – an outcome for which no explanation short of divine intervention or sheer luck seems to suffice.
Despite rising nationalist sentiments and mutual suspicions, Central and Eastern European countries also managed to avoid conflict, thanks to their rapid acceptance into NATO and the European Union.
At that point, the world breathed a collective sigh of relief.
But, in the early 2000’s, globalization triggered the “second unfreezing” by facilitating rapid economic growth in Asian countries that, for two centuries, had been constrained by Western dominance, Cold War rules and institutions, and rampant poverty.
With thriving economies came increased strategic clout, leading to the rise of regional geopolitics shaped by national interests and fears, rather than by external forces.
The West’s failures in Iraq and Afghanistan, followed by the global economic crisis (which exposed severe structural weaknesses in the US and the EU that their democratic governments have been unable to resolve), accelerated this process.
As a result, Europe has practically abandoned its global geopolitical role, with virtually no evidence of its presence, aside from trade, remaining in East Asia.
Although the US has retained considerable influence, the combination of structural economic problems, a divided elite, and two de facto military defeats has impeded its ability to exercise that power.
Old alliances – such as the Southeast Asia Treaty Organization, the Central Eastern Treaty Organization, and the Australia, New Zealand, United States Security Treaty – have died or are dying.
And forming new alliances has proved difficult, with India rejecting what the US, with uncharacteristic humility, has proposed.
Meanwhile, Asia is being roiled by intensifying territorial disputes in the South and East China Seas, as countries revive old claims against each other.
East and South Asia are embroiled in an arms race, mainly at sea.
Everyone is afraid of China, which remains relatively peaceable, but no longer bothers to conceal its growing military capacity.
With no pan-Asian security architecture expected to emerge in the near future, the West’s departure from the region is generating a security vacuum.
Furthermore, in the Greater Middle East, the fall of one secular dictatorship after another, coupled with the loosening of external control, has incited new – and rekindled old – suspicions, religious disagreements, and mistrust of outsiders in general and the West in particular.
As a result, the region has entered a period of conflict, social degradation, rising nationalism, and growing religious fanaticism.
Most threatening, however, is the possibility that the EU could collapse, triggering a third unfreezing.
The EU, established to break the destructive cycle of European nationalism that had facilitated the rise of two totalitarian systems and caused two world wars, amounted to the creation of a prototype of a humane world order.
After being its own – and thus the world’s – worst enemy for centuries, Europe became a beacon of peace.
But, resting on the laurels of the EU’s founders, successive European leaders largely failed to perceive the competitive challenges posed by globalization.
They seemed to forget that the European project’s underlying motivation was political, not economic, which led them to rush into enlargement and set unrealistic goals.
Now, they must pay for their mistakes by overhauling the entire institutional framework of the EU and the eurozone.
At the same time, Europeans must prepare for an even more profound transformation.
In order to regain economic competitiveness, European countries will have to abandon many of their social-welfare policies and reform their political institutions.
Most Europeans prefer to ignore the looming challenge of radical policy reform, owing to the decline in living standards that it implies.
Global leaders must encourage Europe to tackle its problems decisively by offering advice, financial support, and constructive criticism.
Russia must continue to press for an Alliance of Europe – a new framework for economic and diplomatic relations among the EU, Russia, and the rest of Greater Europe – which could offer a way out of Europe’s systemic crisis.
The first unfreezing had serious consequences.
Now, global leaders must work to minimize the fallout of the second, and use all available means to prevent a third.
The Challenge of Balakot
Along with a group of faculty, staff and students from my university in Islamabad, I journeyed to Balakot, close to the center of the Kashmir earthquake.
This mountainous town, situated on the banks of the Kunhar River, has been destroyed.
There is rubble and the gut-wrenching smell of decaying corpses.
The rats have it good; the one I accidentally stepped upon was already fat.
If there is a plan to clear the concrete rubble in and around the town, nobody seems to have any clue.
But the Balakotis are taking it in their stride – nose masks are everywhere.
But there is good news.
We were just one of countless groups of ordinary citizens that were on the move after the enormity of the earthquake became apparent.
The Mansehra to Balakot road, finally forced open by huge army bulldozers, is now lined with relief trucks bursting with supplies that were donated by people from across the country.
This is one of those rare times that I have seen Pakistan’s people feel and move together as a nation.
Even the armed bandits who waylay relief supplies – making necessary a guard of soldiers with automatic weapons, standing every few hundred yards – cannot destroy this moment.
Islamic groups from across the country have also arrived. Some bring relief supplies; others simply harangue those who have lost loved ones and livelihoods, lecturing that their misdeeds brought about this catastrophe.
None seem to have an explanation for why God’s wrath was especially directed to mosques, madrassas, and schools – all of which collapsed in huge numbers.
None say why thousands of the faithful have been buried alive in this sacred month of fasting.
Aid from across the world is making its way towards the destruction, and the US is here too.
Double bladed Chinook helicopters, diverted from fighting Al-Qaida in Afghanistan, now fly over the heartland of jihad and the militant training camps in Mansehra to drop food and tents a few miles beyond.
Temporarily birds of peace instead of war, they do immensely more to calm angry Islamists than the reams of glossy propaganda put out by the US information services in Pakistan.
Their visibility makes relief choppers terrific propaganda, for good or for worse.
This is undoubtedly why the Pakistani government refused an Indian offer to send in helicopters for relief work in and around Muzaffarabad, the flattened capital of Pakistani-administered Kashmir.
Sadly, in spite of a much celebrated peace process, Pakistan refuses visas to Indian peace groups and activists that seek to help in the relief effort.
It is still not too late to open this door and let Pakistanis, Indians and Kashmiris help each other.
The challenges are many.
The aid remains too little.
There are not enough tents, blankets, and warm clothes to go around. Hundreds of tent clusters have come up, but thousands of families remain out under the skies, facing rain and hail, and with dread in their hearts.
These families have lost everything but the tattered clothes on their backs.
Some even lost the land they had lived upon for generations – the top soil simply slid away, leaving behind hard rock and rubble.
Worst of all, aid is not reaching those most affected.
Hundreds of destroyed communities are scattered deep in the mountains.
We saw helicopters attempt aerial drops; landing is impossible in most places.
But people told us that they often miss and the supplies land up thousands of feet or below in deep forests.
Distribution is haphazard and uncoordinated, done with little thought.
We saw relief workers throw packets of food and clothes from the top of trucks, causing a riot.
Hustlers thrive, the weak watch passively.
The clock is ticking.
In two months, the mountains will get their first snowfall and temperatures will plummet below zero.
Millions may have been made homeless.
Those without shelter will die.
Tents will not do.
From a special university fund, we pledged to rebuild the homes of a dozen families.
But ten thousand or more families will need homes in the Mansehra-Balakot-Kaghan area alone, not to speak of adjoining Kashmir.
The task of saving lives has barely begun.
For me personally, there is a sense of deja vu.
Nearly 31 years ago, on 25th December 1974, a powerful earthquake flattened towns along the Karakorum Highway and killed nearly 10,000 people.
I traveled with a university team into the same mountains for similar relief work.
Prime Minister Zulfiqar Ali Bhutto had made a passionate appeal for funds around the world, had taken a token helicopter trip to the destroyed town of Besham, and then made fantastic promises of relief and rehabilitation.
Hundreds of millions of dollars in relief funds received from abroad mysteriously disappeared.
Some well-informed people believe that those funds were used to kick off Pakistan’s secret nuclear program.
Will today’s government do better?
This will only be assured if citizens organize themselves to play a more direct role in relief and rehabilitation for the long term.
Civil society groups must now assert themselves.
They must demand a voice in planning and implementing the reconstruction effort and, along with international donors, transparency and public auditing of where aid is spent.
The \
Samuel Huntington did alert us to the danger.
In his now famous thesis on the "Clash of Civilizations" he gave Turkey as an example of a " torn country," one divided internally, according to him, between East and West, a country neither in Europe nor in the Middle East, with a fault line running within rather than at the border.
The recent bombings in Istanbul underscore, once again, the importance of Turkey's overcoming Huntington's fault line to emerge firmly as a prosperous, secular and stable democracy.
If Turkey succeeds, it will show that there is nothing inevitable about the 21 st century becoming one of a "Clash of Civilizations," during which the Cold War's divisions are replaced by new religious antagonisms that resemble the Middle Ages. The concept of borders itself must be rethought in today's world: borders that run in minds and on the internet are as important as lines that divide geographical space.
Turkey's success in moving forward as a modern democracy will depend, of course, on many factors, most of them internal to Turkey and having to do with domestic leadership and decisions that political and economic actors will make in Turkey.
But the terrorists who struck with such deadliness understand the global, not just regional, nature of the struggle for Turkey's soul.
External factors will be critical in determining where Turkey ends up.
Indeed, the single most important factor, which will have a decisive impact on developments to come and could set the stage for a remarkable success story, or, on the contrary, lead to failure, is the European Union's forthcoming decision on whether or not to start negotiations towards Turkey's full EU membership in 2005.
In December of 2002, EU leaders committed the Union to start negotiations with Turkey on full membership, provided Turkey fulfilled the relevant criteria common to all candidate countries.
A December 2004 summit, to take place under a Dutch chairmanship, is to see the EU review Turkey's progress and decide, provided the criteria are met, on whether to start negotiations "without delay."
Economically, politically, institutionally, Turkey needs the "anchor" of the European integration process.
Europe and Turkey together must prove to themselves, and to the world, that Huntington's "clash of civilizations" is not unavoidable; that Christians, Jews, Moslems, and other believers and non-believers can build the "European Project" together; that a society with a large majority of Moslems, can be democratic and secular; and that Turks and Greeks can do what the French and Germans have done: overcome a century-long antagonism to build a "good neighborhood".
The "borders" between East and West that Ataturk largely abolished in Turkey must not be allowed to form again in the minds of a new generation.
The situation here is not unlike that which the EU faced in Eastern Europe, a region which also needed an "anchor" after the fall of communism.
The EU provided that anchor almost without hesitation and the result has been spectacular.
Countries with command economies and scant experience of democracy are about to become full members of the Union, after a decade of rapid transformation.
The anchor was there from the beginning.
Europe was decisive and generous, and it worked.
In 1990, Turkey had a more advanced market economy and a much greater experience with democracy than the Eastern European countries about to join the EU.
But, in the case of Turkey, Europe has long been reluctant to provide the same sort of incentives and hopes.
This has hurt Turkey's progress.
But when Europe did move more decisively, as it did at the Copenhagen summit in 2002, economic and political progress in Turkey accelerated in a very tangible way.
Turkey must, of course, fulfill the conditions common to all candidate countries, measured in a fair and reasonable manner.
But if it does fulfill these conditions, further hesitation by Europe will undermine all those who want to bring Turkey's democratic transition to a successful conclusion.
No doubt the challenge for Europe of integrating a large Turkey, bordering on the Middle East, is great.
The rewards of success, however, would be immense -- for Turkey, for Europe, and for the world.
Few moments in history hold the promise of the EU summit of December 2004.
A year remains before us.
Turkey must work hard to get ready.
The Unites States must think long-term and gently support the process, instead of toying with the misconceived notion of Turkey as part of a new "greater Middle East."
Most importantly, European statesmen, who know in their hearts what is required, must show the courage and the wisdom to lead.
The Challenges Of EU Enlargement
For more than 50 years, Europeans have shared aspirations for closer economic cooperation and political ties.
The accession of ten new countries to the European Union earlier this year opened the latest and perhaps most dramatic chapter in this process.
Expansion of the world's second-largest market offers historic opportunities for economic renewal.
But with enlargement come challenges.
At a time of slow growth, lingering high unemployment, and difficult fiscal situations in some countries, it is understandable that longer-standing members of the EU sometimes focus more on the potentially disruptive difficulties than the opportunities.
Those problems are real, but their solutions lie in the new vistas of the enlarged EU: more trade in goods and services, integration of markets and better allocation of capital, and the potentially disciplining effect of economic unification on economic policies.
The advantages for trade and investment - more than 450 million people in 25 countries - are self-evident.
The addition of the faster-growing, middle-income economies of Central and Eastern Europe offers a larger, more diverse internal market with rising purchasing power and a well-educated workforce.
Adoption of the Euro should foster even greater trade integration by eliminating exchange-rate risk, lowering transaction costs, and promoting greater price transparency and competition.
The experience of current euro-area members thus far suggests trade gains of roughly 10% just from the single currency.
Regrettably, one channel of greater integration has been muted: the free movement of labor.
Most established member states - fearing potential dislocations - have chosen to protect, albeit temporarily, their labor markets.
Several new members have adopted reciprocal restrictions.
It is essential that all members keep these artificial barriers to a minimum.
Europe also has much to gain from ongoing financial integration with the eventual goal of a truly pan-European financial market.
Greater market access, market reform, and efforts at regulatory harmonization - including those under the EU's Financial Services Action Plan - should help advance this trend.
Foreign direct investment is the most direct channel for integration.
By some accounts, FDI between the old and new members might be as much as 70% lower than justified by economic fundamentals.
Similarly, with bank credit to the private sector in the new members well below averages in the West, the scope for increasing lending activity is also substantial.
Financial integration could catapult financial development for new member countries, including through the advent of new financial instruments and services.
Enlargement of the euro area promises to spur further financial integration.
Enhanced competition and economies of scale in larger, more closely integrated financial markets should narrow lending margins, lower intermediation costs, and allocate funds more efficiently.
Greater diversification of portfolios and deeper cross-border linkages should help risk sharing, making the region more resilient to shocks.
Ultimately, progress in both trade and financial integration rests on improved economic policies.
New member states should continue pursuing macroeconomic stability and financial discipline, particularly with respect to public finances.
Along with strong prudential supervision, this should help manage the vulnerabilities of capital-account volatility and credit booms, and lay the groundwork for the eventual adoption of the euro.
Indeed, before joining the monetary union, the new member countries will need to make more progress toward the convergence criteria for interest rates, inflation, and public finances.
Fiscal deficits in several new member countries will need to be reduced significantly.
Trimming excessive social transfers and entitlements, together with proper use of EU structural funds, would help achieve this objective while also satisfying the need for public investment and infrastructure upgrades.
Strong financial-market supervision will also be needed to contain risks stemming from credit booms, asset bubbles, and financial-market volatility.
On the structural front, measures to enhance wage and price flexibility would improve resiliency to asymmetric shocks and would help the new countries' cyclical fluctuations become more attuned to the rest of the EU.
For longstanding members, enlargement presents an opportunity to prepare public finances for coming demographic challenges.
Restoring the credibility of the Stability and Growth Pact should be a top priority, but the larger challenge requires greater stability for long-term public financing.
A growth-friendly approach to the burdens of aging populations is required, including steps to raise the retirement age and encourage life-long training.
Enlargement should also give fresh impetus to policies to tackle deep-seated structural impediments and reverse sagging income prospects.
The Lisbon Strategy adopted in March 2000 set an ambitious course for the EU, calling for greater focus on research and development, completion of the internal market, bold education and employment objectives, and promotion of active aging, all supported by appropriate macroeconomic policies.
But as we approach the midpoint of this ten-year strategy, Europe stands well short of its many goals.
As the recent Kok report reviewing the Strategy makes clear, "The disappointing delivery is due to an overloaded agenda, poor coordination, and conflicting priorities."
I share this assessment.
The Lisbon Strategy needs to be refocused.
The issue is not the productivity of European workers when they are on the job, but rather the need to increase labor-force participation through policies that raise employment rates and reverse the decline in weekly work hours.
More flexible labor markets and reform of entitlement programs would further allow Europe to confront the demands of greater competition without recourse to insular protections, such as those placed on labor migration.
Evolving market access, competition, and integration may present Europe with challenges and some costs. But enlargement also creates new opportunities.
Improved policies will amplify these opportunities, ensuring that economic gains will benefit hundreds of millions of people throughout Europe.
The Chancellor Who Played with Fire
BERLIN – German Chancellor Angela Merkel should be happy nowadays: her party’s approval ratings aren’t bad, and her own are very good.
Her response to the European crisis has prevailed – or at least that is the impression that she conveys, and that most Germans believe. So everything is fine and dandy, right?
Not so fast. Two issues could complicate Merkel’s re-election bid in the autumn of 2013.
Domestically, her coalition partner, the liberal Free Democrats (FDP), is disintegrating.
Even if the FDP survives the next election (which is by no means certain), the current coalition is unlikely to retain its parliamentary majority, leaving Merkel increasingly dependent on the Social Democrats (SPD).
While this need not matter to her too much as long as she retains the chancellorship, in Sigmar Gabriel, the SPD’s leader, she faces – for the first time – an opponent whom she would underestimate at her peril.
But the real danger to Merkel is external: the European crisis.
If she is unlucky, the crisis will come to a head at the start of the German election year, and all previous calculations could be moot, because, despite Germans’ frustration with Europe, the electorate would punish severely those who allowed Europe to fail.
The European Union’s economy is sliding into a severe and, in all likelihood, long-lasting recession, largely self-inflicted.
While Germany is still trying to banish the specter of hyperinflation with strict eurozone austerity measures, the EU crisis countries are facing a real threat of deflation, with potentially disastrous consequences.
It is only a question of time – no longer very much time – before economic destabilization gives rise to political instability.
Hungary, where democratic backsliding appears to be taking hold, provides a foretaste of a Europe in which the eurozone crisis and deflation persist.
The mood in the Mediterranean EU members, as well as in Ireland, is heating up, owing not only to the tightening squeeze of austerity, but also – and perhaps more importantly – to the absence of policies that offer people hope for a better future.
The explosive nature of current trends, which point to eventual re-nationalization of sovereignty from the bottom up, is greatly underestimated in Berlin.
The crisis has now reached Italy and is threatening to spread to France. With Mario Monti’s premiership, Italy has mobilized its best people, and neither Italy nor Europe will get a better government for the foreseeable future.
If Monti’s administration is toppled – either in parliament or in the streets – the EU’s fourth-largest economy could come crashing down.
Monti is urgently calling for help. Where is it?
Developments in France (the second-largest eurozone economy) should also not be underestimated in this presidential election year.
If a majority of the French come to believe that a course of action is being imposed on them from outside – and by Germany, no less! – they will respond with traditional Gallic stubbornness.
What is at stake is less the election’s outcome than the margin between President Nicolas Sarkozy and the far-right National Front leader, Marine Le Pen – and whether she overtakes him to qualify for the second-round run-off against the Socialist candidate.
While she would be unlikely to win the presidency, she could reshape and realign the French right. For that reason, a Sarkozy debacle would drastically reduce his Socialist successor’s room for maneuver on European policy, fundamentally altering France’s position in Europe.
But, while the French election’s outcome will hinge to a crucial extent on European crisis politics, Germany’s government acts as if this were none of its concern. Instead, the main – almost exclusive – topic in Berlin is the upcoming election.
And the central question is not, “What needs to be done now in the interest of Europe?”
Rather, it is, “How much can people in Germany be expected to accept – in particular, how much honesty?”
No one will act in a way that jeopardizes their electoral prospects, at least while there are still alternatives.
So it is conceivable that Germany is not at all interested in a serious effort to resolve Europe’s crisis, because that would mean taking big risks and investing a lot of money.
The CDU-FDP coalition prefers to sugarcoat the situation by convincing themselves of an Anglo-Saxon conspiracy, abetted by those in the European crisis countries unwilling to perform and reform and whose only purpose is to make the Germans pay.
So far, Merkel’s coalition is like someone driving against traffic, dead certain that everyone else is going the wrong way.
Europe’s disintegration has already advanced much further than it might appear.
Distrust and national egoism are spreading rapidly, devouring European solidarity and common purpose.
Institutionally, Europe has been on the right track since the last summit, but it threatens to disintegrate from the bottom up.
To save the euro – which is essential, because the European project’s fate depends on the success of monetary union – Europe needs action now: in addition to indispensable austerity measures and structural reforms, there is no way to succeed without a viable economic program that will assure growth.
That won’t come cheap.
If Merkel’s government believes that paying lip service to growth is enough, it is playing with fire: a euro collapse in which not only Germans would be badly burned.
The Changing Climate On Climate Change
The message, it seems, has finally gotten through: global warming represents a serious threat to our planet.
At the recent World Economic Forum in Davos, world leaders saw climate change, for the first time, topping the list of global concerns.
Europe and Japan have shown their commitment to reduce global warming by imposing costs on themselves and their producers, even if it places them at a competitive disadvantage.
The biggest obstacle until now has been the United States.
The Clinton administration had called for bold action as far back as 1993, proposing what was in effect a tax on carbon emissions; but an alliance of polluters, led by the coal, oil, and auto industries beat back this initiative.
To the scientific community, the evidence on climate change has, of course, been overwhelming for more than a decade and a half.
I participated in the second assessment of the scientific evidence conducted by the Intergovernmental Panel on Climate Change, which perhaps made one critical mistake: it underestimated the pace at which global warming was occurring.
The Fourth Assessment, which was just issued, confirms the mounting evidence and the increasing conviction that global warming is the result of the increase in greenhouse gases in the atmosphere.
The increased pace of warming reflects the impact of complex non-linear factors and a variety of “tipping points” that can result in acceleration of the process.
For instance, as the Arctic ice cap melts, less sunlight is reflected.
Seemingly dramatic changes in weather patterns – including the melting of glaciers in Greenland and the thawing of the Siberian permafrost – have at last convinced most business leaders that the time for action is now.
Recently, even President Bush seems to have woken up.
But a closer look at what he is doing, and not doing, shows clearly that he has mostly heard the call of his campaign contributors from the oil and coal industries, and that he has once again put their interests over the global interest in reducing emissions.
If he were truly concerned about global warming, how could he have endorsed the construction of coal-fired electricity plants, even if those plants use more efficient technologies than have been employed in the past?
What is required, first and foremost, are market-based incentives to induce Americans to use less energy and to produce more energy in ways that emit less carbon.
But Bush has neither eliminated massive subsidies to the oil industry (though, fortunately, the Democratic Congress may take action) nor provided adequate incentives for conservation.
Even his call for energy independence should be seen for what it is – a new rationale for old corporate subsidies.
A policy that entails draining America’s limited oil supplies – I call it “drain America first” – will leave the US even more dependent on foreign oil.
The US imposes a tariff of more than 50 cents per gallon on sugar-based ethanol from Brazil, but subsidizes inefficient corn-based American ethanol heavily – indeed , it requires more than a gallon of gasoline to fertilize, harvest, transport, process, and distill corn to yield one gallon of ethanol.
As the world’s largest polluter, accounting for roughly a quarter of global carbon emissions, America’s reluctance to do more is perhaps understandable, if not forgivable.
But claims by Bush that America cannot afford to do anything about global warming ring hollow: other advanced industrial countries with comparable standards of living emit only a fraction of what the US emits per dollar of GDP.
As a result, American firms with access to cheap energy are given a big competitive advantage over firms in Europe and elsewhere.
Some in Europe worry that stringent action on global warming may be counterproductive: energy-intensive industries may simply move to the US or other countries that pay little attention to emissions.
And there is more than a grain of truth to these concerns.
A striking fact about climate change is that there is little overlap between the countries that are most vulnerable to its effects – mainly poor countries in the South that can ill afford to deal with the consequences – and the countries, like the US, that are the largest polluters.
What is at stake is in part a moral issue, a matter of global social justice.
The Kyoto Protocol represented the international community’s attempt to begin to deal with global warming in a fair and efficient way.
But it left out a majority of the sources of emissions, and unless something is done to include the US and the developing countries in a meaningful way, it will be little more than a symbolic gesture.
There needs to be a new “coalition of the willing,” this time perhaps led by Europe – and this time directed at a real danger.
This “coalition of the willing” could agree to certain basic standards: to forego building coal-fired plants, increase automobiles’ fuel efficiency, and provide targeted assistance to developing countries to enhance their energy efficiency and reduce emissions.
Coalition members could also agree to provide stronger incentives to their own producers, through either more stringent caps on emissions or higher taxes on pollution.
They could then agree to impose taxes on products from other countries – including the US – that are produced in ways that unnecessarily add substantially to global warming.
What is at stake is not protecting domestic producers, but protecting our planet.
The changing climate on climate change provides political leaders in Europe and other potential members of this “coalition of the willing” an unprecedented opportunity to move beyond mere rhetoric.
The time to act is now.
The Changing Face of France in Africa
This week, many African heads of state will attend the 24th France-Africa summit in Cannes.
Behind the glitz, the summit may mark a watershed in France’s relationship with Africa.
France is preparing for its presidential elections this May, and as that battle for the presidency heats up, so, too, does the contest to forge new ties with Africa.
In the post-Cold War era, “multilateralism” has become the latest political buzzword.
Moreover, mistakes in Africa during the 1990’s, particularly in Rwanda, together with corruption scandals, have put pressure on French leaders to bring dramatic changes in foreign policy.
In their wake, a notable shift has emerged, with a new generation of politicians claiming to herald a fresh approach and profound changes in French policy towards Africa.
However, much work remains to be done to consolidate that shift.
President Jacques Chirac launched important reforms such as redeploying French military forces in Africa, and restructuring how France distributes aid.
But he has been unable to integrate these individual measures into a more concrete vision that could address the neo-colonial links that still beset Franco-African relations.
Moreover, African affairs, and international politics more generally, do not seem to be a priority for the 2007 presidential candidates.
Ségolène Royal, despite having been raised in Senegal when it was a French colony, appears disinterested in Africa, and her opponent, Nicolas Sarkozy, has evinced an interest in Africa only in the context of illegal immigration.
The stark truth is that without strong political will and clear arguments, any future French president is unlikely to curb the strength of lobby groups and old networks that have dominated France’s relationship with Africa.
It is against this backdrop that African leaders will arrive in Cannes for the France-Africa summit, an event that in many respects will be a stage for Chirac to bid them farewell.
But the summit has also attracted controversy over whether President Robert Mugabe of Zimbabwe and his senior officials will be invited.
The EU has imposed targeted sanctions on Zimbabwe, including a visa ban on senior officials, and there were protests when Mugabe appeared in Paris in February 2003 for the last France-Africa summit on European territory.
Whatever is decided about Zimbabwe’s participation at the Cannes summit will also have an impact on plans for a major EU-Africa Summit in Lisbon this fall, during Portugal’s presidency of the EU.
During the last Portuguese Presidency (January-June 2000), the EU-Africa Summit had to be cancelled because of a visa ban on Zimbabwean officials and the reluctance of Africans to attend if Mugabe was excluded.
That issue is likely to continue to cause division, both within Europe and between Europe and Africa.
A coalition of European civil-society organizations opposes Zimbabwean government participation on human rights grounds.
But many EU states, fearful of China’s growing influence in Africa, want to ensure a successful EU-Africa Summit in Lisbon in order to counter last year’s China-Africa summit in Beijing.
France would prefer to invite Mugabe and his officials to its summit in Cannes, but the British government has lobbied against this.
By contrast, a number of African states, in particular South Africa, have lobbied for Mugabe’s participation.
Indeed, South African President Thabo Mbeki has threatened not to participate unless Mugabe is invited.
For France, there is no easy resolution.
It needs British support on issues such as Côte d’Ivoire in the UN Security Council, but it also wants to improve its bilateral relationship with South Africa for political and economic reasons.
Whatever happens regarding Zimbabwe in Cannes will directly influence the EU-Africa summit later this year.
Unfortunately, that controversy may also overshadow the incipient changes in French policy.
The Changing Map of Middle East Power
BERLIN – The eruption of the Arab revolts in late 2010 and early 2011 put power relations among Middle Eastern countries in a state of flux, and both winners and losers have emerged.
But, given that the strengths and weaknesses of most of the actors are highly contingent, the regional balance of power remains highly fluid.
As that balance currently stands, Egypt continues to be one of the region’s most influential actors, with the success or failure of its political and economic transition affecting how other Arab countries develop.
But Egypt is weighed down by domestic concerns, including a plummeting economy and a security situation in which the military is used for police tasks.
The expansion of Egypt’s soft power will depend on the ability of its first democratically elected government, led by President Mohamed Morsi, to take difficult decisions and forge domestic consensus.
Success in establishing effective governance would establish a model that many of Egypt’s neighbors would seek to emulate, at least partly.
In this respect, Turkey is a good example.
Turkey’s power rests primarily on its vibrant economy.
Its impressive military strength is of limited use as an instrument of power, and its political clout has been overestimated, particularly in Syria.
A rapprochement with Israel and, more important, a lasting peace with its Kurdish population, would boost Turkey’s regional influence.
Israel also remains an overall winner, despite the changing strategic environment and its virtual lack of soft power in the region.
The impending fall of Israel’s most reliable enemy, Syrian President Bashar al-Assad, concerns Israel almost as much as the loss of its ally, Egypt’s former President Hosni Mubarak.
With Israel’s economy and deterrent capability stronger than ever, however, no regional player poses a genuine security threat to Israel in the short term.
Meanwhile, Qatar’s diligent efforts to expand its influence over the last two decades have paid off, with the country developing considerable power of attraction.
Since 2011, Qatar has scaled up its involvement in its neighbors’ affairs, backing the Libyan revolution, the Egyptian government, and the Syrian opposition.
But the Qataris may be overplaying their hand.
Qatar has money, but no other hard power, and it has been criticized for its interference in Syria and its support for the Muslim Brotherhood.
If Qatar fails to use its resources wisely, it may lose the legitimacy that it needs to underpin its patronage.
Meanwhile, Syria’s civil war highlights the loss of that country’s once-considerable influence in the region.
Instead, Syria has become the object of a geopolitical struggle among other regional actors.
But the efforts of the Gulf states to arm the Syrian opposition are insufficient to set the conflict on a definitive course, especially given the heavy weapons that the Assad regime has at its disposal.
And the opposition has not been able to appropriate the reputation and clout that Assad has lost.
In fact, regardless of the balance of power between the regime and its opponents, Syria probably will not reestablish a strong, centralized government for decades, if ever.
At best, Syria will emerge from the current conflict with a decentralized or federal state; at worst, the country will go the way of Somalia.
Either way, Syria is currently firmly in the loser’s camp.
Iraq could have been a winner, had it been able to translate the recovery of its oil industry and the withdrawal of US troops into political stabilization and regional influence.
But, with Prime Minister Nouri al-Maliki’s government widely considered to be another authoritarian and sectarian regime, Iraq has not been able to gain any soft power.
Moreover, the chances that Iraqi Kurdistan will achieve de facto or de jure independence are greater than ever.
Iraq’s Kurds may even be able to extend their influence into Kurdish-populated northern Syria, thereby becoming a more influential regional player than the Iraqi government in Baghdad.
Neighboring Iran seems to be the quintessential survivor.
It has coped with the international community’s increasingly stifling sanctions, while maintaining its nuclear program and continuing to participate in the diplomatic process with the P5+1 (the five permanent members of the United Nations Security Council, plus Germany).
Iran has strengthened its influence in Iraq, and has helped to keep the Assad regime, a key ally, in power much longer than expected.
But rising political polarization in the region could undermine Iran’s standing.
As regional conflicts are increasingly defined along Sunni-Shia lines, it is becoming more difficult for Shia-dominated Iran to gain influence in Sunni-majority countries.
And Iran’s support for Assad’s brutal regime in Syria is damaging further its once-considerable soft power in other Arab countries.
Saudi Arabia can also be counted as a survivor, as it copes with deep strategic insecurity stemming from Iran’s efforts to undermine its position, social unrest in its neighbor and ally Bahrain, and the Muslim Brotherhood’s rise to power in Egypt.
Saudi leaders have also become increasingly suspicious of their American allies, on whom the country’s security depends.
At the same time, the Saudi leadership is facing significant domestic challenges, including vast economic disparities, inadequate services, growing frustration with the lack of political freedom, and a difficult succession process within the royal family.
Nevertheless, though Saudi Arabia’s soft power is waning, its massive oil wealth will likely ensure that it remains a regional heavyweight.
Non-state actors also play a crucial role in the Middle East’s balance of power.
Religious minorities have become more insecure.
The once-oppressed Kurds are gaining ground.
Of the main transnational political groups, the Muslim Brotherhood has been the clearest winner.
But success brings new challenges.
Islamist-led governments must deliver on the socioeconomic front, while building democratic institutions.
(Ironically, they will be able to claim success in having built a better state only when they accept their first electoral defeat.)
Indeed, the challenge facing all of the region’s current winners is to translate today’s gains into credible, long-term power.
The Chaotic Birth of South Sudan
MADRID – The Comprehensive Peace Agreement (CPA) that was reached in 2005 between mostly Christian southern Sudan and the country’s Muslim North, ended one of the bloodiest civil wars in modern times.
Lasting 22 years, that war left more than two million dead.
Now the CPA is poised to face its most vital test: the South’s referendum on independence, scheduled for January 9.
Whether or not a new state is born in one of the most strategically sensitive areas of the world is of utmost concern to Sudan’s neighbors and others.
Vital issues are at stake: the scramble for oil;
China’s robust presence in Sudan; the West’s desire to see a mostly Christian state break the contiguity of Muslim regimes – and the consequent threat of Islamic radicalism – in the region; the regional distribution of the Nile’s waters; and the possibility that independence for the South might lead to Sudan’s total dismemberment along ethnic and religious lines.
The fact that Omar al-Bashir, Sudan’s president, is not especially keen to agree to the United Nations’ plan to beef up its peacekeeping force in the country ahead of the referendum raises concern about his intentions.
He would certainly be happy to delay the vote – and, if it is held, to dispute its legitimacy.
He might not find that very difficult.
Preparations for the referendum are lagging and inadequate.
Brinkmanship and broken agreements threaten to turn the referendum’s technical and political difficulties into yet another disaster for the country.
The 2.5 million Southern Sudanese known to live in the North are under explicit instructions by the South’s Sudan People’s Liberation Army to boycott the referendum, as the SPLA has grounds to believe that Bashir would use their registration to rig the results in favor of unity.
Indeed, if not convincingly deterred by the international community, it is extremely difficult to believe that Bashir would let the South secede without a fight.
A crucial bone of contention that might ignite a new war is the future of the country’s oil industry and the North-South border demarcation.
So far, the good offices of the Norwegian government have failed to produce an agreement on the key question of the post-independence distribution of oil revenues between North and South.
Given that most of Sudan’s oil wealth is concentrated in the South, the management of the oil industry and its revenues after secession is an existential problem for Bashir’s regime and its capacity to control his vast and ethnically diverse country.
It is in the oil-rich border areas that a new war might erupt.
As one of the poorest and neediest countries in the world, for which oil revenues would be the only source of income for years to come, an independent South Sudan could not be expected to rescue the debt-ridden North.
Its own challenge lies in reforming the entire oil industry, which for years has been brutally and irresponsibly exploited by Chinese and Malaysian companies, with devastating environmental consequences.
Conspicuously, Bashir’s regime has been disqualified in the eyes of its neighbors in Africa and the Arab world to a degree that makes the South’s secession a more acceptable option to the main regional stakeholders than ever before.
Indeed, the Arab world as a whole seems to have given up on Bashir.
Some Arab leaders still toy with the idea that overthrowing him might yet salvage a united Sudan, but it is probably too late for that.
After failing to moderate Bashir into accepting a secular decentralized or confederate Sudan, Egypt, a key Arab player concerned about the stability of its southern border, has come to accept the inevitability of secession – so long as the new state lines up with it on the issue of the Nile’s waters.
Egypt’s fears are mainly of Sudan’s disintegration into a chaotic tapestry of mini-states controlled by warlords and plunged into lawlessness and bloody tribal feuds.
In that case, what remains of “Sudan” – Khartoum, Gezira, and the two northern states – might degenerate even further, probably turning into a base for global Islamic terrorism.
Black Africa, particularly the East African Community, cannot think of any solution other than secession.
To EAC members, this is a matter of de-colonization, for southern Sudan’s people have been enslaved, dehumanized, and humiliated for centuries by the Arabs.
Hence, as the Kenyans put it, the border between northern and southern Sudan should become the border between Black Africa and the Arab World.
Concerned by Bashir’s delaying tactics, both Kenya and Uganda have advised their southern Sudanese friends not to make demarcation of the border a pre-condition for the referendum, as doing so would only play into Bashir’s hands.
United States Secretary of State Hillary Clinton rightly defined the upcoming referendum as a “ticking time bomb.”
She also made it clear, however, that the outcome, independence for the South, is “inevitable.”
But, to avoid a cataclysm, the US and its allies must defuse the bomb by enforcing the provisions of the 2005 CPA, which they all endorsed.
They would have virtually all of the regional stakeholders on their side as well.
The Chechen Precedent
The Chimera of Russia’s Gas Power
Russia began 2006 by cutting off natural gas exports to Ukraine after its government refused to pay a fourfold increase in the subsidized price.
The crisis in Ukraine, many of whose Soviet-era industries depend on cheap Russian gas, soon spread to Europe, which consumes 80% of Russian gas exports, when Ukraine began to divert gas from the pipeline that crosses its territory.
Ironically, 2006 is also the year that Russia takes over the chair of the Group of Eight industrialized countries, which is set to meet in Moscow this spring.
The improbable theme that Russian President Vladimir Putin chose for the conference is energy security.
Even though it is no longer a global superpower, Russia’s vast oil and gas reserves make it an energy superpower, and Putin seems intent on playing that card.
Oil provides somewhat less economic power than gas because it is a fungible commodity, and interruptions of supply can be made up by purchases on world markets.
But gas is expensive to transport, for it depends on costly pipelines or gas liquefaction facilities that cannot be replaced quickly when flows are interrupted.
Gas provides a tempting form of leverage, and Russia had already used it against Georgia, Latvia, Lithuania, and Moldova.
But when Gazprom, the Russian state gas monopoly, followed Putin’s instructions to turn off the spigot to Ukraine, Russia crossed a new threshold.
At first glance, this looks like a classic case of a large country bullying a small country into submission.
As Thucydides put it in his history of the Peloponnesian War, “The strong do as they will and the weak suffer what they must.”
Russia had supported the losing side in Ukraine’s “Orange Revolution” a year ago, and it was time for payback.
But, as it turned out, Putin miscalculed.
He underestimated both Ukraine’s leverage as the primary conduit for Russian gas exports to Europe and Europe’s influence as the major consumer of Russian gas.
In the process, he damaged Russia’s reputation as a reliable supplier of natural gas.
The result was a hastily patched together deal in which Russia and Ukraine each gave ground on price, and a shadowy Swiss-based company half-owned by Gazprom rolled supplies of cheap gas from Turkmenistan into the equation.
Some analysts, as well as former Ukrainian prime minister Yuliya Tymoshenko, raised accusations of corruption against the company, RosUkrEnergo.
But, charges of corruption aside, this outcome indicates that gas is not such an easy source of hard economic power as it would first appear.
Some economists argue that there is little power in relationships where buyers and sellers consent to a price that clears a market.
However, in cases where buyers and sellers are not equally dependent upon the relationship, the greater vulnerability of the more dependent party can be used as a source of coercive power by the less dependent party.
Russia thought it was less dependent than Ukraine, and decided to exercise that power.
But it is one thing to hold the high hand in a game that you play only once.
For the game to go on indefinitely, you must maintain the trust of the other players.
In other words, the shadow of the future suggests that a moderate strategy is best.
Russia quickly discovered that its threats against Ukraine were too costly to its reputation as a reliable supplier for Europe.
When considered in this wider European context, there was more symmetry in the Russia-Ukraine energy relationship than the simple numbers on energy dependence implied at first glance.
Where does this leave Europe’s energy security?
Germany’s Economics Minister, Michael Glos, has said that Russia’s questionable dependability means that the time has come to explore other energy sources .
That will not be easy.
Gas provides nearly a quarter of Europe’s energy, compared to 14% for nuclear power.
Even if governments rethink their ban on new nuclear plants, accelerate development of windmills and solar panels, and search for new gas supplies, Europe will remain dependent on Russian gas for more than a decade.
At the same time, as Europe’s largest consumer of Russian gas, Germany has built its hopes for energy security on developing a rich web of economic ties with Russia.
Former Chancellor Gerhard Schroeder even became chair of a Russian-German consortium to build a new gas pipeline from Russia to Germany.
But, as the Ukraine episode indicates, pipelines dedicated to a single country may be less reliable than those that run through several countries.
If Russia is going to throw its weight around, it is better to have allies among those affected.
The key to energy security is diversity – of pipelines as well as sources of supply.
Small neighbors without options will suffer, but Europe may not.
In the end, the next decade will be marked by a delicate balance in which Europe remains dependent on Russian gas, but Russia’s need for export revenues will also make it dependent on Europe.
The lesson from the Ukraine episode is that while Russia is less of a gas superpower than it would appear, Europe would be wise for to start building greater diversity into the energy relationship.
The China Bears’ Feeble Growl
BEIJING – In recent months, bearish sentiment about the Chinese economy has surged, owing largely to three conjectures.
First, China’s housing market is on the brink of collapse.
Second, China’s fiscal position will worsen rapidly because of massive local government debt.
And, third, the collapse of underground credit networks in bustling cities such as Wenzhou will lead to a broad financial crisis across the country.
In fact, despite its problems, China’s economy remains in good condition – at least so far.
Indeed, it is not yet near to hitting the rocks.
Since the twenty-first century began, skyrocketing housing prices in China, except for a short respite during the global financial crisis, have caused serious social discontent.
After years of half-hearted effort, China’s government has finally clamped down on housing speculation.
As a result, prices fell in October for the first time this year, while real-estate investment growth fell as well.
But the fall in housing prices is unlikely to turn into a rout, because real demand for houses will remain strong after speculative demand is driven from the market.
As soon as housing prices fall to an affordable level, buyers will enter the market and set a floor under the decline.
Moreover, because there are no subprime mortgages in China and down payments are as high as 50-60%, even a significant fall in housing prices will not seriously damage China’s mega-banks.
Over the past decade, real-estate investment in China has been the single most important contributor to fixed-asset investment growth and therefore, to the economy.
Indeed, since the late 1990’s, the real estate investment-to-GDP ratio has been far higher than it was in countries like Japan and Korea during their high-growth periods.
It is simply wrong for a developing country with per capita income of $5,000 to concentrate its resources on producing concrete and cement.
Although a significant decline in real-estate investment will have a very serious negative impact on China’s growth – &#160;which can and should be prevented – as long as the fall is not too drastic, it is a welcome development.
Meanwhile, local government debts are a relatively new phenomenon.
In 2009, local governments were encouraged to create Special Purpose Vehicles, specifically “local finance platforms” (LFPs), to supplement China’s RMB4 trillion ($628.7 billion) stimulus package.
The LFPs would borrow from banks using future government revenue as collateral to finance packaged-investment projects in Chinese localities.
By 2010, some 6,576 LFPs had been created.
There is no denying that local-government debt is a ticking time bomb for the Chinese economy.
According to China’s National Audit Office (NAO), these LFPs’ total borrowing amounts to RMB10.7 trillion, of which 79.1% is bank loans.
But it is equally true that China’s local-government debt has so far been manageable, and there is no reason to believe that all of it is bad.
In fact, for the majority of the LFPs, the cash flow generated by investment so far has been enough to meet repayment of principal and interest.
According to the Industrial and Commercial Bank of China (ICBC) – the largest of China’s “big four” banks – 93% of its loans to LFPs are being repaid regularly.
Indeed, the ICBC’s non-performing loan (NPL) ratio for LFP loans is as low as 0.3%, while the corresponding coverage ratio – the bank’s ability to absorb losses from NPLs – is 1,066%.
According to the NAO, the NPL ratio for the RMB10.7 trillion in local-government debt is roughly 2.3%.
A significant proportion of total local-government debt either has no direct relation to local governments, or cannot be guaranteed by them.
Therefore, in legal terms, it is not government debt at all. In addition, given that local-government debt comprises 27% of China’s 2010 GDP, while central government debt and policy loans stand at 20% and 6% of GDP, respectively, the total public debt-to-GDP ratio is approximately 53% – lower than Germany’s.
So, while China should not be complacent about local-government debt, panic is unwarranted.
Finally, there is a long history of underground lending and borrowing in some of China’s east coast region, especially in Wenzhou.
Whenever monetary tightening causes bank credit to shrink, small and medium-size private enterprises are prepared to borrow at suicidally high interest rates from relatives or loan sharks.
In recent years, real-estate speculation has become another important source of demand for underground loans.
When real asset prices fall and cause local credit networks to collapse, not only are hundreds of families left financially shattered and enterprises bankrupted, but banks suffer collateral damage, as occurred recently in the Wenzhou region.
But the severity of Wenzhou’s underground credit crisis has been exaggerated.
In fact, Wenzhou’s underground credit accounts for less than 20% of total credit in the region, while the region accounts for less than 1% of China’s GDP.
The total volume of affected bank credit in the crisis was just above RMB3 billion – roughly 0.5% of bank loans in the Wenzhou region.
So, the damage that the breakdown of Wenzhou’s underground credit networks has inflicted on the regional banking system is limited, with scant national impact.
Thus, despite the high likelihood that China’s economic growth will slow significantly in 2012, a hard landing is unlikely.
Nevertheless, while there is no need to be overly bearish about China’s short-term economic prospects, because of the slow progress in fundamental adjustment and further reform, even Chinese Premier Wen Jiabao has noted that China’s growth is ultimately unsustainable.
The real test has yet to come.
The China Investment Challenge
NEW YORK – China now sits atop $2.4 trillion in foreign-exchange reserves, the largest stockpile of any country in the world (Japan stands in second place with $1 trillion).
But this bounty comes with one big headache: where should Chinese Communist Party officials park all that money?
International bankers estimate that roughly two-thirds of Chinese reserves have been invested in dollar assets.
In other words, China owns a huge chunk of America’s ballooning debt.
Chinese reserves invested in these conservative financial instruments are relatively safe, but they yield little return.
They have, however, helped support China’s economy by allowing Americans to run up consumer debt by buying more Chinese goods than they rightfully need.
A moment of truth is looming for both sides of this co-dependent, and ultimately dysfunctional, economic relationship.
First, there are limits to how many trillions of dollars China can, and should, put into US Treasury bills.
After all, should the dollar depreciate, China does not want to have too many eggs in the US basket.
Investors should diversify their risk, and so must China.
But with so much capital, the options are limited.
Until the euro weakened recently, Chinese bankers had been buying more euro-denominated assets, no doubt recognizing that, despite the frailty of the eurozone economy, Chinese exporters also need European consumers to keep buying their goods.
But the reality is that neither the euro nor the yen is capable of soaking up China’s growing foreign-exchange reserves.
It is hardly surprising, then, that Chinese officials have begun to seek more diverse and profitable investment possibilities worldwide.
While we have become familiar with China’s ardent interest in natural resources such as oil, coal, steel, copper, and soybeans, we are far less acquainted with other kinds of Chinese investments, including outright acquisitions of foreign companies.
Here the US has not yet shown itself to be a particularly hospitable environment for Chinese investments.
This has been especially true when Chinese state-owned enterprises (SOEs) have aspired to buy, or buy into, iconic US corporations that have a blush of national-security significance about them.
Things got off to a poor start in 2005, when the China National Off-Shore Oil Corporation (CNOOC) tried to buy Unocal.
Even though almost all of the oil produced by Unocal would have ended up on world markets rather than back in China, the US Congress’s skittishness assured that Unocal was sold to homegrown Chevron.
Although Chinese investors have since made numerous lower-visibility plays in US markets, the failed Unocal deal left a legacy of bitterness.
So it is hardly surprising that gun-shy (and miffed) Chinese investors are wary about making further major efforts in the US.
Huawei’s recent failed bids for 2Wire and Motorola will only have rekindled this bitterness.
Indeed, a case similar to Unocal arose this summer.
The Anshan Iron and Steel Group, a Chinese SOE, tried to buy a 20% interest in the Mississippi-based Steel Development in the hope of setting up a re-bar plant in the US.
News of the pending deal caused 50 Congressional Representatives from the US steel caucus to write a letter to Treasury Secretary Timothy Geithner calling for an investigation of the threat the deal posed to US national security and American jobs.
When it comes to China, the US does, of course, have legitimate reasons to worry about national-security issues.
It was precisely to assess the impact of deals with countries like China on national security that Congress established the Committee on Foreign Investment in the US.
Even though relations with the US have improved, the People’s Republic is far from being trusted.
Indeed, it is still unclear where China’s amazing evolution will ultimately lead, so it would be naïve for American leaders to assume that China’s intentions will always be friendly and constructive, or that the two countries are inevitably destined to grow closer.
Nonetheless, this most recent spurning of Chinese efforts to invest in the US comes at a time when capital-poor and job-scarce America (where unemployment is over 10%) could truly benefit from more receptivity to investment from capital-rich China.
Consider a few facts. According to The Wall Street Journal, since December 2007, the US has lost 16% of its manufacturing jobs (many to China), leaving it with the lowest employment in this sector since before World War II.
Of those workers still in the private sector, almost 5%, or 5.5 million, are employed by global companies whose headquarters are abroad.
These same companies not only pay higher salaries than their American counterparts, but account for 11.3% of capital investment in the US and provide 14.8% of its private-sector R&amp;D.
Given this, one might think the US government would be actively courting Chinese investment, not scaring it away unnecessarily.
If American officials do not begin to recognize the realities of today’s globalized world, the US may unwittingly (and self-destructively) find itself cut off from the kinds of new foreign investment flows that are sorely needed to revitalize its manufacturing and infrastructure sectors.
The bitter new reality is that the US and “old Europe” have recently edged closer to becoming “developing countries.”
Indeed, it may be a painful recognition, but America’s share of worldwide foreign direct investment is now half of what it was two decades ago.
If the Obama administration and EU officials cannot figure out the proper mix between economic engagement and protecting national security, investment capital from China will go elsewhere.
That is a strategy that will leave the US and the EU weaker, not stronger.
The China Question
President Bush’s recent visit to Asia made little news – by design.
But that’s because Bush didn’t begin to address the issue that is looming ever larger in the region: the changing face of security in Asia in view of China’s growing economic and military might.
This summer, for example, China and Russia conducted their first-ever grand-scale joint military exercise.
This was followed by Russian news reports that China, Russia, and India would conduct trilateral military exercises, named “Indira 2005,” on the same scale before the end of this year.
In the past, such a combination of countries was almost unthinkable, and these exercises cannot be explained away as simple “one-off” affairs with little resonance.
Instead, they reflect China’s long-term strategic goal of establishing hegemony across Asia.
One tool of this ambition is the Shanghai Cooperation Organization (SCO), under which the Sino-Russian exercises took place.
Established in June 2001, the SCO includes China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan.
The SCO’s original purpose was to mitigate tensions on the borders of China and the Central Asian countries after the collapse of the Soviet Union and the arrival of the United States military with the war in Afghanistan.
China regards the SCO as a stage for broadening its influence over a vast region, ranging from the Asia-Pacific to Southwest Asia, the Middle East, East Africa, and the Indian Ocean.
Indeed, its members include about 45% of the world’s population, and 28% of the landmass ranging across the Eurasian continent.
China’s active leadership of the SCO has resulted in policies that it favors.
Gradually, the SCO shifted its focus to fighting Islamic radicals.
Nowadays, however, the SCO is often used as a forum to campaign against supposed American unilateralism and to provide a united front – especially between China and Russia – against the US with respect to security and arms-reduction issues in the region.
This includes joint anti-terror training and demands to reduce US forces in the region, particularly from Uzbekistan and Kyrgyzstan.
The SCO provides China not only with a platform to confront the existing US-led alliance in the Asia-Pacific region, but is increasingly being used to prevent the formation of a US-led network to restrain China’s advance.
Ultimately, it is feared that the SCO could develop into a military alliance similar to the Warsaw Pact of the Cold War era, with an embryonic “Great China Union” at its core.
But China’s regional diplomacy goes far beyond the SCO.
It seizes every opportunity that comes its way, including the Six Party Talks on North Korea’s nuclear ambitions, to emphasize its centrality to the settlement of any and all Asian issues.
Moreover, it continues to build its “ string of pearls” of military bases at every key point on maritime transportation routes along the “arc of instability” from the Middle East to China’s coast.
No one seems to know how to respond to China’s diplomatic and military muscle flexing in Asia, for the extent of China’s ambitions remains utterly unclear.
But, while everyone else ponders China’s motives, its government is acting.
Indeed, the UK’s premier security think tank, the Institute for International Strategic Studies, recently warned that, while the world focuses on the fight against international terrorism and the unfolding events in the Middle East, China is rapidly expanding its influence from Asia to Africa.
The “pearls” in Africa include Sudan, Angola, Algeria, Gabon, Namibia, Zambia, Tanzania, Zimbabwe, Uganda, Djibouti, Mali, Central Africa, Liberia, Ethiopia, Mozambique, Sierra Leone, and the Democratic Republic of Congo.
In each country, China is nurturing special military and commercial relations intended to promote loyalty to Chinese interests.
As in Asia, there is a pattern at work: growing Chinese influence begets increased support for Chinese policies.
Of course, it’s a two-way street.
Whenever complaints come up in the United Nations’ Human Rights Committee, China can count on the support of many African countries that have their own human rights problems.
Even the selection of Beijing as the site of the 2008 Olympics benefited from “African votes.”
And China has publicly stated that it will back African nations in potential disputes at the World Trade Organization (WTO) and other international organizations.
Similarly, many African states now seem to be leaning heavily toward China in its dispute with Taiwan.
When Japan’s government tried to become a permanent member of the UN Security Council, few African countries backed its bid, despite receiving economic aid for decades.
China likes to boast of its “peaceful rise.”
But the rise of Bismarck’s Germany at the end of the nineteenth century was also peaceful – for a while.
The question is not whether China rises to great-power status peacefully, but whether it intends to remain peaceful when it gets there.
Just as the world confronted the “German Question” 125 years ago, it is now confronting the “China Question.”
We need a better answer this time.
The China Threat, Part Two?
Lost in the debates about whether the European Union should lift its arms export embargo on China is a much broader and more pressing question: does the Bush administration once again see China as a strategic competitor, as it did in the early days of the Bush presidency, before the war on terror forced Bush to seek cooperation with China’s rulers?
That Japan has joined the United States in standing alongside Taiwan in opposing an end to the EU’s arms embargo on China suggests that this is so.
Never before has Japan’s government joined a US administration so closely on the Taiwan issue.
When the two countries upgraded their alliance relationship in 1996, Japan’s military operational sphere was expanded far from the Japanese main island.
But the government remained deliberately vague about its responsibilities, and refused to clarify the geographic boundaries of Japan Defense Force activities.
Nearly ten years later, Japan is ready for strategic clarity.
Shinzo Abe, the acting secretary-general of Japan’s ruling Liberal Democratic Party and a leading candidate to succeed Junichiro Koizumi as Japanese prime minister next year, put it bluntly: it would be wrong for Japan to send a signal to China that the US and Japan will watch and tolerate a Chinese military invasion of Taiwan.
Monitoring this development and tracking its context, China’s government appears deeply disturbed.
China’s foreign ministry condemned the US-Japanese move as interference in Chinese internal affairs and expressed resolute opposition to Abe’s statement.
The Chinese regard Japan’s seizure of Taiwan in 1895 and the ensuing 50-year occupation as one of the most humiliating events in the country’s modern history.
In particular, China’s government has resented any Japanese involvement in Taiwan since 1972, when Japan severed diplomatic ties with Taiwan’s government and recognized the communist regime.
But in recent years, pro-Taiwan groups and politicians in Japan have been gaining momentum.
For example, despite Chinese protests, Japan hosted a birthday reception for the Emperor in Taipei in 2003.
Last year, Japan issued a visa to Taiwan’s former president, Lee Teng-hui, a man who explicitly advocates a US-Japan-Taiwan alliance against China.
Japan’s growing coziness with Taiwan has been accompanied by worsening political relations with China.
Despite the fact that China surpassed the US to become Japan’s largest trading partner last year, the top leaders of the two countries have not visited each other’s capitals since 2001.
Japanese Prime Minister Junichiro Koizumi has insisted on paying an annual visit to the Yasukuni shrine, where Japan’s past aggressive wars are glorified, and where war criminals are among the buried, behavior that China’s government considers unacceptable.
Tensions are also running high in the East China Sea, where the two countries dispute sovereignty over a number of islands.
China is exploring gas fields close to the border as defined by Japan.
A brief incursion by a Chinese submarine into Japanese territorial waters a few months ago caused further alarm in Tokyo.
In response, a new Japanese defense review identified China as a threat.
Japan’s Self Defense Forces outlined three scenarios of a potential Chinese invasion and are making preparations accordingly, while the Japanese government announced last month that it had formally taken control of an island chain over which China, Taiwan, and Japan all claim sovereignty.
Moreover, America’s military is closely coordinating with Japan, redeploying its troops and strengthening its command and combat capabilities near Taiwan.
So, barely two months into the second Bush administration, alarm bells about the China threat seem to be ringing again.
Key US foreign policymakers now openly contradict conclusions reached last year by the Independent Task Force on Chinese Military Power headed by former defense secretary Harold Brown and retired admiral Joseph Prueher.
That panel found that the balance of power between the US and China, both globally and in Asia, is likely to remain decisively in America’s favor beyond the next 20 years.
More significantly, with the latest statement over Taiwan, the US and Japan are poised to use their joint military forces to deter, deny, and ultimately defeat potential Chinese military actions across the Taiwan Strait.
What counter-measures China will deploy are yet to be discerned.
Europe, however, needs to decide if it is ready to sign on with the US, as Japan has now clearly done, to contain China’s strategic and military ambitions.
The China-US Climate Duet
BEIJING – Without active collaboration between the United States and China, not only will the odds for successful negotiations in Copenhagen this December to secure a successor treaty to the Kyoto Protocol be diminished, but it will be unlikely that any meaningful remedy will be found in time to arrest rising global temperatures.
Yet talks between the US and China on climate change currently present two contrasting scenarios, one hopeful, the other discouraging.
In the first scenario, the two countries’ senior delegations remain deadlocked, with their polarized stances frozen in place.
Moreover, the failure of developed countries – particularly, the US – to take responsibility for their historical emissions of greenhouse gases continues, representing a major sticking point because these emissions far surpass those of the developing world.
In the second scenario, billions of dollars in “green” stimulus packages trigger a global race that leads to new energy technologies and their deployment.
The US becomes focused on leading in six key clean-tech areas: building efficiency, battery technology, solar, carbon capture and storage (CCS), smart grids, and electric vehicles (EV).
These efforts are mirrored by Chinese initiatives in such fields as new low-energy vehicles; light-emitting diode (LED) lighting; building integrated photovoltaic (BIPV); innovative energy efficiency technologies; and various alternative energy sources such as solar, wind, bio-gas, and synthetic fuels.
Both countries express a determination to find collaborative ways to restructure their energy mixes with new, low-carbon energy technologies.
Given the stakes, it is perhaps understandable why the US and China are holding their climate-change cards close to their chests.
Right now, each side is emerging from a period in which they used the other as an excuse for inaction, but have nonetheless now actively started to explore which scenario to follow.
The nature of these two countries’ bilateral engagement will dictate how the low-carbon economic “pie” will get carved up, and thus how fast the global economy as a whole can be transformed.
Responsibility for this transformation lies irrevocably with China and the US, not only because they are the world’s biggest emitters, but also because only they have the capacity to invest enough in clean-tech Rampamp;D, provide a large enough labor force, and support a large enough change in global policy.
So the future of the world’s climate rests not just on their shoulders individually, but on their ability to work together.
Both sides agree that their roles are critical.
Indeed, climate change is now included in all major bilateral discussions, alongside trade, exchange rates, human rights, and energy security.
And recent exchanges and visits seem to give some cause for optimism.
But climate change represents China’s toughest challenge in international relations since the Cold War’s end.
Not only has China recently become the world’s largest emitter of greenhouse gases, but the pace of its future emissions is expected to far exceed forecasts.
At the same time, China remains a vast developing country, ardently seeking more rapid economic growth to lift hundreds of millions out of poverty and to provide better living standards for hundreds of millions more.
Balancing its need for growth with climate protection makes China’s role precarious.
The global financial crisis complicates matters further.
Even though parts of both the developed and the developing world increasingly look to China for leadership, the country’s leaders view such a global role as beyond their current capabilities.
Yet, China has come a long way from the days of the Kyoto Protocol.
Like many developing countries, China was more or less dragged along in that process.
It did sign the Kyoto agreement, albeit as an “Annex I state,” meaning that it did not commit to any defined limits on carbon emissions.
But China’s views have evolved.
The biggest milestone came in December 2007, when it, along with other developing countries, signed the Bali Roadmap, agreeing to work together on a new global deal by 2009 in Copenhagen.
Today, China actively and constructively participates in the global talks, discussing, for example, what it has been doing to cut emissions per unit of GDP.
(It has made an ambitious commitment in its 11th Five-Year Plan to a 20% reduction in energy intensity and attain a 10% increase in renewable energy by 2010.)
Reaction to these changes from the international community has been largely positive.
Indeed, last March, US Climate Envoy Todd Stern began to speak positively about China’s domestic efforts to address climate change.
But this does not mean that agreement is in the offing.
According to the Kyoto Protocol, what China, as a “developing” country, and the US, as a “developed” country, are required to do is completely different.
Unlike China, the US must commit to absolute limits on emissions.
So China would like to see the US lead in making such a commitment, without using China as an excuse for inaction.
As a developing country that has throughout history emitted only one-fifth of the CO2 emitted by the US, China insists that it has the moral right to resist calls to take the lead.
With a few months remaining before the Copenhagen talks, China is expected to deliver its commitment to the Bali Action Plan. It will, of course, be a far lower commitment than that expected from the European Union or the US.
If the US is serious about reaching a constructive outcome in Copenhagen, it must set radical and practical targets, take responsibility for its historic carbon emissions, and commit itself to support developing countries’ efforts by means of capacity building, technology transfer, and finance.
Only then will the developing world view the US as truly willing to assume its role as a global leader.
The Chinese Economy’s Secret Recipe
BEIJING – China’s GDP growth this year may approach 10%.
While some countries are still dealing with economic crisis or its aftermath, China’s challenge is – once again – how to manage a boom.
Thanks to decisive policy moves to pre-empt a housing bubble, the real-estate market has stabilized, and further corrections are expected soon.
This is good news for China’s economy, but disappointing, perhaps, to those who assumed that the government would allow the bubble to grow bigger and bigger, eventually precipitating a crash.
Whether or not the housing correction will hit overall growth depends on how one defines “hit.”
Lower asset prices may slow total investment growth and GDP, but if the slowdown is (supposedly) from 11% to 9%, China will avoid economic over-heating yet still enjoy sustainable high growth.
Indeed, for China, the current annualized growth rate of 37% in housing investment is very negative.
Ideally, it would slow to, say, 27% this year!
China has sustained rapid economic growth for 30 years without significant fluctuations or interruption – so far.
Excluding the 1989-1990 slowdown that followed the Tiananmen crisis, average annual growth over this period was 9.45%, with a peak of 14.2% in 1994 and 2007, and a nadir of 7.6% in 1999.
While most major economies in their early stages of growth suffered crises, China’s story seems abnormal (or accidental), and has elicited periodic predictions of an “upcoming crash.”
All such predictions have proved wrong, but the longer the story lasts, the more people forecast a bad end.
For me, there is nothing more abnormal about China’s unbroken pattern of growth than effective macroeconomic intervention in boom times.
To be sure, both economic development and institutional reforms may cause instability.
Indeed, the type of central government inherited from the old planned economy, with its over-stretched growth plans, causes fluctuations, and contributed significantly to instability in the early 1980’s.
But the central government must be responsible for inflation in times of overheating, lest a bursting bubble fuel unemployment.
Local governments and state-owned enterprises do not necessarily have those concerns.
They want high GDP growth, without worrying much about the macroeconomic consequences.
They want to borrow as much as possible to finance ambitious investment projects, without worrying much about either repayment or inflation.
Indeed, the main cause of overheating in the early 1990’s was over-borrowing by local governments.
Inflation soared to 21% in 1994 – its highest level over the past 30 years – and a great deal of local debt ended up as non-performing loans, which amounted to 40% of total credits in the state banking sector in the mid-1990’s.
This source of vulnerability has become less important, owing to tight restrictions imposed since the 1990’s on local governments’ borrowing capacity.
Now, however, the so-called “animal spirits” of China’s first generation of entrepreneurs have become another source of overheating risk.
The economy has been booming, income has been rising, and markets have been expanding: all this creates high potential for enterprises to grow; all want to seize new opportunities, and every investor want to get rich fast.
They have been successful and, so far, have not experienced bad times.
So they invest and speculate fiercely without much consideration of risk.
The relatively high inflation of the early 1990’s was a warning to central government policymakers about the macroeconomic risks posed by fast growth.
The bubble bursts in Japan’s economy in the early 1990’s, and the Southeast Asian economies later in the decade, provided a neighborly lesson to stop believing that bubbles never burst.
Since then, the central government’s policy stance has been to put brakes on the economy whenever there is a tendency toward over-heating.
Stringent measures were implemented in the early 1990’s to reduce the money supply and stop over-investment, thereby heading off hyperinflation.
In the recent cycle, the authorities began cooling down the economy as early as 2004, when China had just emerged from the downturn caused by the SARS scare in 2003.
In late 2007, when GDP growth hit 13%, the government adopted more restrictive anti-bubble policies in industries (steel, for example) and asset markets (real estate), which set the stage for an early correction.
Economic theory holds that all crises are caused by bubbles or over-heating, so if you can manage to prevent bubbles, you can prevent crises.
The most important thing for “ironing out cycles” is not the stimulus policy implemented after a crash has already occurred, but to be proactive in boom times and stop bubbles in their early stages.
I am not quite sure whether all Chinese policymakers are good students of modern economics.
But it seems that what they have been doing in practice happened to be better than what their counterparts in some other countries were doing – a lot on “de-regulation,” but too little on cooling things down when the economy was booming and bubbles were forming.
The problem for the world economy is that everybody remembered Keynes’s lesson about the need for countercyclical policies only when the crisis erupted, after demanding to be left alone – with no symmetric policy intervention – during the preceding boom.
But managing the boom is more important, because it addresses what causes crises in the first place.
In a sense, what China has been doing seems to me to be the creation of a true “Keynesian world”: more private business and freer price competition at the micro level, and active countercyclical policy intervention at the macro level.
There may be other factors that could slow down or interrupt China’s growth.
I only hope that policymakers’ vigilance will prevail (and be improved upon), enabling China’s high-growth story to continue for another 10, 20, or 30 years.
The Chávez Challenge
Venezuela’s recent legislative elections confirmed trends that have repeatedly brought the country into the headlines in recent years.
President Hugo Chávez showed once again that he enjoys broad support among the nation’s poor and desperate, and that he is miles ahead of his opposition in terms of political skill, cunning, and ruthlessness.
Yet at the same time voter turnout is declining with each passing election under Chávez, and the questionable fairness of the electoral process has grown increasingly apparent.
To be sure, the opposition’s withdrawal from the election just days before the vote was, as Chávez claimed, more a symptom of its own weakness than of problems with the electoral process.
And, just as surely, that very weakness is a function of the gradual stifling of many features of Venezuela’s traditional democratic order.
Even so, the opposition’s mistakes have been massive, ranging from support for the failed coup against the democratically elected Chávez in April 2002 to the failed strike at PEDEVSA, Venezuela’s national oil company, in early 2003.
Nothing is more lethal in politics than failure in direct confrontation.
In such circumstances, Chávez can afford to be bold, despite his policies’ failure to benefit his core constituency: the more than 50% of Venezuelans who live in destitution and despair.
Poverty has grown since Chávez took office in 1998; government finances and the trade balance are more dependent on oil revenues than before, and, aside from Cuban literacy programs and neighborhood “barefoot doctor” services, the overall welfare of the poor remains the same, if not worse.
Major changes are unlikely in the foreseeable future.
Chávez will be able to modify the Constitution largely as he pleases, and pack both the justice system and the electoral authority with his placemen.
He will continue to dole out oil-based subsidies in the well-worn Venezuelan tradition of Marcos Pérez Jiménez and Carlos Andrés Pérez.
As a result, Chávez will be re-elected late next year, and he may well remain in power until the end of the next decade.
Yet, if this is what the Venezuelan people want, then so be it.
It is, after all, their business who governs them, and how, as long as human rights are not systematically violated, democratic institutions are not indefinitely suspended, and standard norms of international conduct are respects.
Judged by the last standard, at least, Chávez may have crossed the line.
For years, he has been accused of taking over where Fidel Castro left off: supporting the rhetoric of radicalism and anti-imperialism, if not revolution, throughout Latin America.
It could now be time for other Latin American nations and the international community to take such charges more seriously.
Chávez is giving away oil to Caribbean island nations and Cuba, and buying off Argentine debt to help President Nestor Kirchner’s political fortunes.
In Mar del Plata, Argentina, last month, he openly participated in a rally against the Free Trade Area of the Americas (FTAA), in the company of, among others, Evo Morales, the coca-leaf growers’ leader from Bolivia who might well become that country’s next president.
Similarly, Chávez is clearly supporting Daniel Ortega, the perennial Sandinista presidential candidate in Nicaragua, and Shafick Handal, the equally perennial FMLN candidate in El Salvador.
His former ambassador to Mexico participated openly and vociferously in campaign events for Mexico City Mayor Andrés Manuel Lopez Obrador’s presidential campaign.
There seems to be a common thread to most of Chávez’s foreign policy: to provoke a major confrontation with the United States.
The danger, of course, is that if and when confrontation comes – over Bolivia, the FTAA, human rights, or press freedoms – it will be too late to defuse it.
The challenge, then, lies in avoiding a confrontation that Chávez clearly wants.
Unfortunately, George W. Bush’s administration has not proved particularly adept at conflict prevention.
The hemisphere’s other nations have a direct stake in attempting to pre-empt a fight that would force them to take sides and might threaten their economic and national-security interests.
Although many of Chávez’s positions have found support in certain Latin American nations, the division that he and Castro’s Cuba have created in Latin America – between left and right, free-traders and “Bolivarians,” and pro- and anti- Americans – is mainly artificial and certainly not impossible to overcome.
To be sure, many Latin American leaders have tried to assuage and control Chávez, and they have all failed.
But the cost of not trying again could be extremely high.
The last time revolutionary leaders confronted the US head-on, in Central America during the 1980’s, everyone lost.
A new split up and down the hemisphere, engineered by a leader awash in oil money, would prove far more disastrous.
The Citizen Bank
LONDON – Soon after the financial crisis began in 2008, I was at a meeting in the United States where a senior White House economic adviser put a question to me: “Do you think banks can be good citizens?”
As I started to answer “Yes,” he interjected: “If your answer is ‘yes,’ think about the fact that no one will believe you.”
His follow-up gave me pause.
I’ve thought a lot about it over the past three years, which have been so difficult for the world economy.
The economic environment in which we are all living and working nowadays is particularly challenging.
In Europe, the United Kingdom, and the US, we are feeling the effects of the unsustainable levels of public and private debt accrued in the years before 2008.
Spending cuts are being put in place by governments and households alike, with varying degrees of public acceptance and social unrest.
The single most important issue for banks and other businesses to focus on in 2012 is economic growth and job creation.
But, to play their proper role in generating employment, banks need to rebuild the trust that has been decimated by the events of the past three years.
That requires bankers to use the lessons learned from the crisis to become better and more effective citizens.
Simply put, the private sector has an obligation to be the engine of growth and employment, and banks have a vital role to play in achieving that end.
Frankly, though, banks have done a very poor job of explaining how we contribute to society.
We need to fix that as part of the process of restoring trust in what we do.
At the most fundamental level, banks are entrusted with deposits from individuals, businesses, and governments.
We put that money to work by helping people to buy homes, for example, or by lending to growing companies.
Banks also provide critical services to governments and business, by providing direct access to global buyers of debt and equity, and by establishing large, consistent markets of buyers and sellers.
Some characterize these activities as speculative trading, and even caricature financial markets as casinos.
In fact, these markets serve a fundamental client need.
Of course, to meet these needs, banks must be safer and stronger than they were prior to the crises.
The reality is that much is different in today’s financial sector.
Banks are not borrowing as much; they have more capital; and they have far more stable and liquid sources of funds to lend.
Strong banks want strong regulation, and we believe that no taxpayer money should ever again be put at risk to rescue a failed or failing bank.
But, three years on from the 2008 financial crisis, we still face considerable challenges, as the continuing eurozone crisis demonstrates.
So it’s not surprising that many people doubt that anything has really changed.
The only way that banks will win back the public’s trust is to become better citizens.
That starts with how banks behave, and in demonstrating that we act with trust and integrity.
This means that the interests of customers and clients must be at the very heart of every decision we make.
In 1970, the Nobel laureate Milton Friedman – one of my favorite economists – wrote an influential article arguing that the only social responsibility of business is to increase its profits.
On that point, I disagree with him.
Businesses must increase profits in a way that creates sustainable shareholder value, not just short-term gain.
This applies across industries, not just in banking.
One sees the benefits of this approach in the paths that companies like Unilever, PepsiCo, and Nestle are forging.
Banks can and should do the same by focusing on the interests of the customers, clients, and communities that they serve.
The challenge is to balance our obligations to all of our stakeholders, both customers and shareholders, including the pension funds that help millions of people around the world save for retirement.
That is not always easy, and the decisions that we – just like any other business – make every day are imbued with inherent dilemmas.
But doing what’s right for customers, clients, shareholders, and communities will ensure that we get those judgments right much more often than we get them wrong.
That is why the answer to the question posed to me three years ago is that banks must be good citizens.
I appreciate that persuading people of that concept will require that they see a visible difference in the way that banks participate in society.
People may not recognize any difference right now; the change that is now taking place is in its early stages.
But we are determined to keep working at it, and I am committed to making it happen.
The Climate Change Agreement: Bridging Gaps through Science
The Climate Change Debate’s Willpower Fallacy
COPENHAGEN – There is a dangerous misperception that willpower and political agreement are the only missing ingredients needed to combat global warming.
In fact, there is also a colossal technological hurdle.
Ending our reliance on fossil fuels requires a complete transformation of the world’s energy systems.
No alternative form of energy is efficient enough to compete with fossil fuels at scale.
Other than nuclear power – which is still much more expensive than fossil fuels – all of the known possibilities require significant research and development.
Consider the frightening, absurd fact that the research relied on to advance the cause of carbon cuts uses economic models that simply assume that technological breakthroughs will happen by themselves.
On our current complacent path, with a meager $2 billion of public funds spent annually worldwide on researching and developing green energy sources, the necessary breakthroughs will not happen in time.
In that case, governments will try to cut carbon emissions through taxes and trading schemes without effective replacements.
We will then make virtually no impact on climate change in the future, while in the shorter term there will be significant damage to economic growth, leaving more people in poverty and the planet in a much darker place than it could be.
Keep in mind that global energy demand will double by 2050.
Use of fossil fuels – though much maligned by some – remains absolutely vital for economic development, prosperity, and our very survival.
Alternative sources of energy have been hyped by corporate lobbyists and a credulous media to appear far more ready for widespread use than they really are.
An oft-repeated claim is that Denmark – where politicians will meet in December to negotiate a successor to the Kyoto Protocol – receives one-fifth of its power from wind, making it by far the highest share in the world.
Denmark is presented as a model for the rest of the world to follow, evidence that green job creation has been proven easy, and that wind power has been shown to be a cheap alternative.
But the reality, revealed by a recent study by the Danish Center for Political Studies, is that less than 10% of the Denmark’s electricity demand is met by wind, because much of the power is produced when there is no demand and is sold at very low cost to other countries.
This also means much less CO2 reductions in Denmark, where a ton of CO2 is reduced at more than six times the current average cost in the EU.
Danes pay the highest electricity rates of any industrialized nation, on average about $0.38 per kilowatt hour, compared to $.08 in the United States.
The Danish wind industry is nearly completely dependent on taxpayer subsidies to support a modest workforce.
Each new wind-power job costs the Danish taxpayer at least $119,000 (€81,000) per year.
The government subsidy has shifted employment to less productive employment in the wind industry, meaning that Danish GDP is approximately $270 million lower than it would be if the wind-sector workforce was employed elsewhere.
The report concludes bluntly, “No Danish wind industry to speak of would exist if it had to compete on market terms.”
Together, wind and solar energy supply a tiny fraction – less than 0.6% – of the world’s entire energy needs.
This is not just because they are much more expensive, but also because there are massive technological hurdles to overcome to make them efficient.
First, direct-current lines need to be constructed to carry solar and wind energy from the areas of highest sunshine and wind speeds to the areas where most people live.
Second, storage needs to be invented so that when the sun doesn’t shine, and the wind doesn’t blow, the world still gets power.
Indeed, according to Chris Green and Isabel Galiana of McGill University, even with these breakthroughs, the intermittency and variability in wind and solar energy means that they are unlikely to be able to supply much more than 10-15% of grid-based electricity without massive investment in such storage systems.
For this to occur, public funds on research and development must be increased dramatically.
We cannot rely on private enterprise alone.
As with medical research, early innovations will not reap significant financial rewards, so there is no strong incentive for private investment today.
As the Copenhagen Consensus, as well as the World Bank recently advocated, R&amp;D investments on the order of $100 billion a year will be needed if wind and other alternative technologies are to become truly viable.
That is ten times more than is spent by governments now, but remains a fraction of the cost of the ineffective carbon cuts that have been proposed.
Carbon taxes could play an important role in funding research and development.
But our current approach to combating global warming – focusing primarily on how much carbon to try to cut through taxes, rather than on how to achieve this technologically – puts the cart before the horse.
We are not on the right path to preventing the suffering that will result from global warming.
What is required is not simply political will.
A prosperous future requires abundant sources of energy.
We face a daunting task to find credible alternatives to fossil fuel.
The Climate Change Revolution
The world is in the midst of a great political transformation, in which climate change has moved to the center of national and global politics.
For politicians in persistent denial about the need act, including US President George W. Bush, Australian Prime Minister John Howard, and Canadian Prime Minister Stephen Harper, there is no longer any place to hide.
The science is clear, manmade changes in climate are being felt, and the electorate’s demand for action is growing.
Though unlikely just a few months ago, a strong global agreement by 2010, one that will set a path for action for decades to come, now stands a good chance of being implemented.
Political leaders in countries that produce coal, oil, and gas – like the US, Australia, and Canada – have pretended that climate change is a mere hypothesis.
For several years, the Bush administration tried to hide the facts from the public, deleting references to manmade climate from government documents and even trying to suppress statements by leading government scientists.
Until recently, Exxon Mobil and other companies paid lobbyists to try to distort the public debate.
Yet truth has triumphed over political maneuvers.
The climate itself is sending a powerful and often devastating message.
Hurricane Katrina made the US public aware that global warming would likely raise the intensity of destructive storms.
Australia’s great drought this past year has similarly made a mockery of Howard’s dismissive attitude toward climate change.
Scientists themselves have operated with great seriousness of purpose in educating the public.
We can thank the United Nations for that.
The UN sponsors the Intergovernmental Panel on Climate Change (IPCC), a worldwide body of hundreds of climate scientists who report every few years to the public on the science of climate change.
This year, the IPCC is releasing its fourth round of reports, starting with the one issued early in February.
That report was unequivocal: there is a powerful scientific consensus that human activity, mainly the burning of fossil fuels (coal, oil, gas), as well as deforestation and other land uses (such as growing paddy rice), leads to massive emissions of carbon dioxide into the air.
This is causing climate change, which is accelerating and poses serious risks to the planet.
The single biggest threat comes from the production and consumption of energy for electricity, transport, and heating and cooling buildings.
But the world’s scientists and engineers, as well as global technology leaders such as General Electric, are also sending a clear message: we can solve the problem at modest cost if we put our best thinking and action into real solutions.
By shifting to alternative energy sources, economizing on energy use, and capturing and safely storing the carbon dioxide produced by fossil fuels, global society can limit its emissions of carbon dioxide to prudent levels at an estimated cost of under 1% of global income.
The changeover to a sustainable energy system will not come quickly, and will require new kinds of electrical power plants, new kinds of automobiles, and “green buildings,” which economize on energy use.
The process will take decades, but we must start now and act on a global basis, using carbon taxes and emission permits to create market-based incentives for companies and individuals to make the necessary changes.
Those incentives will come at modest cost and huge benefit, and they can be designed to protect the poor and shift the climate-change burden to those who can afford it.
A reasonable timetable is possible.
By the end of 2007, all of the world’s governments should begin negotiations on a climate-change system for the years after 2012, when the current Kyoto Protocol expires.
Basic principles should be established during 2008, and by 2009, the world community, including the two largest emitters of carbon dioxide, the US and China, should be ready to make a serious deal, which should be concluded by 2010 and ratified in time to replace the Kyoto Protocol.
The Kyoto Protocol was the first attempt at such a system, but it applied only to rich countries and set only modest objectives.
The richest country and biggest contributor to global climate change, the US, didn’t even sign.
Neither did Australia.
Canada signed but has failed to act.
Nor did huge energy users like China and India, which must be part of any meaningful solution, face serious responsibilities under the Kyoto agreement.
All of that will have to change.
All countries will have to shoulder their responsibilities to the rest of the world and to future generations.
There is now a way for individuals and companies to make their own voices heard.
The Earth Institute at Columbia University, which I direct, hosted a Global Roundtable of leading businesses, environmental groups, and other international organizations to reach a consensus to help inform the upcoming negotiations.
The Roundtable produced an important Statement of Principles and a longer overall statement that has been signed by many of the world’s largest businesses, including those based in the US, Europe, Canada, China, and India.
Many of the world’s leading scientists signed, too.
Global climate change requires global decisions, and initiatives like the Roundtable Statement show that we can find areas of agreement for powerful action.
It’s time for the world’s political holdouts to join that effort.
The Climate Change Safari Park
COPENHAGEN – As Barack Obama prepares for his inauguration, it is worth contemplating a passage from his book Dreams from My Father .
It reveals a lot about the way we view the world’s problems.
Obama is in Kenya and wants to go on a safari.
His Kenyan sister Auma chides him for behaving like a neo-colonialist. “Why should all that land be set aside for tourists when it could be used for farming?
These wazungu care more about one dead elephant than they do for a hundred black children.” Although he ends up going on safari, Obama has no answer to her question.
That anecdote has parallels with the current preoccupation with global warming.
Many people – including America’s new president – believe that global warming is the preeminent issue of our time, and that cutting CO2 emissions is one of the most virtuous things we can do.
To stretch the metaphor a little, this seems like building ever-larger safari parks instead of creating more farms to feed the hungry.
Make no mistake: global warming is real, and it is caused by manmade CO2 emissions.
The problem is that even global, draconian, and hugely costly CO2 reductions will have virtually no impact on the temperature by mid-century.
Instead of ineffective and costly cuts, we should focus much more of our good climate intentions on dramatic increases in Rampamp;D for zero-carbon energy, which would fix the climate towards mid-century at low cost.
But, more importantly for most of the planet’s citizens, global warming simply exacerbates existing problems – problems that we do not take seriously today.
Consider malaria.
Models shows global warming will increase the incidence of malaria by about 3% by the end of the century, because mosquitoes are more likely to survive when the world gets hotter.
But malaria is much more strongly related to health infrastructure and general wealth than it is to temperature.
Rich people rarely contract malaria or die from it; poor people do.
Strong carbon cuts could avert about 0.2% of the malaria incidence in a hundred years.
The cheerleaders for such action are loud and multitudinous, and mostly come from the rich world, unaffected by malaria.
The other option is simply to prioritize eradication of malaria today.
It would be relatively cheap and simple, involving expanded distribution of insecticide-treated bed nets, more preventive treatment for pregnant women, increased use of the maligned pesticide DDT, and support for poor nations that cannot afford the best new therapies.
Tackling nearly 100% of today’s malaria problem would cost just one-sixtieth of the price of the Kyoto Protocol.
Put another way, for each person saved from malaria by cutting CO2 emissions, direct malaria policies could have saved 36,000.
Of course, carbon cuts are not designed only to tackle malaria.
But, for every problem that global warming will exacerbate – hurricanes, hunger, flooding – we could achieve tremendously more through cheaper, direct policies today.
For example, adequately maintained levees and better evacuation services, not lower carbon emissions, would have minimized the damage inflicted by Hurricane Katrina on New Orleans. During the 2004 hurricane season, Haiti and the Dominican Republic, both occupying the same island, provided a powerful lesson.
In the Dominican Republic, which has invested in hurricane shelters and emergency evacuation networks, the death toll was fewer than ten.
In Haiti, which lacks such policies, 2,000 died.
Haitians were a hundred times more likely to die in an equivalent storm than Dominicans.
Obama’s election has raised hopes for a massive commitment to carbon cuts and vast spending on renewable energy to save the world – especially developing nations.
As Obama’s Kenyan sister might attest, this could be an expensive indulgence.
Some believe Obama should follow the lead of the European Union, which has committed itself to the ambitious goal of cutting carbon emissions by 20% below 1990 levels within 12 years by using renewable energy.
This alone will probably cost more than 1% of GDP.
Even if the entire world followed suit, the net effect would be to reduce global temperatures by one-twentieth of one degree Fahrenheit by the end of the century.
The cost could be a staggering $10 trillion.
Germany has subsidized solar panels, as some hope Obama might.
Thus, everybody, including the poor, pays taxes so that mostly wealthier beneficiaries can feel greener.
But climate models demonstrate that Germany’s $156 billion expense will delay warming by just one hour at the end of the century.
For one-fiftieth of that cost, we could provide essential micronutrients to 2-3 billion people, thereby preventing perhaps a million deaths and making half the world’s population mentally and physically much stronger.
Again and again, we seem to choose the dubious luxury of another safari park over the prosaic benefits offered by an extra farm.
Most economic models show that the total damage imposed by global warming by the end of the century will be about 3% of GDP.
This is not trivial, but nor is it the end of the world.
By the end of the century, the United Nations expects the average person to be 1,400% richer than today.
An African safari trip once confronted America’s new president with a question he could not answer: why the rich world prized elephants over African children.
Today’s version of that question is: why will richer nations spend obscene amounts of money on climate change, achieving next to nothing in 100 years, when we could do so much good for mankind today for much less money?
The world will be watching to hear Obama’s answer.
The Climate Extremists
COPENHAGEN – Extreme weather is often said to be one of the main reasons for taking firm action on global warming.
Nowadays, no hurricane or heat wave passes without a politician or activist claiming it as evidence of the need for a global climate deal, like the one that just got postponed until the end of the decade in Durban, South Africa.
Such claims merit close scrutiny.
In 2007, the United Nations’ Intergovernmental Panel on Climate Change (IPCC) released a report on climate extremes that received considerable media attention.
But, two years later, it was discovered that some of the IPCC report’s key claims – for example, that global warming would cause the immense Himalayan glaciers to disappear by 2035, or halve African crop yields by 2020 – were based on statements made in appeals by environmentalist organizations, and were backed by little or no evidence.
Despite this error, the IPCC has long been a fairly reliable source of sensible and responsible estimates in an otherwise histrionic debate.
Unfortunately, sensible estimates are not breaking news.
For example, according to the IPCC, sea levels will rise by a relatively manageable 18-59 centimeters (7-23 inches) by the end of the century, whereas news organizations and activists regularly claim that we should expect sea levels to rise by meters.
The media similarly misrepresented the findings of the IPCC’s 2010 report on climate extremes.
Sweden’s most prestigious daily newspaper, Svenske Dagbladet, filled almost an entire Sunday front page with an eviscerated body showing exposed arteries, adorned with the warning: “Ever warmer climate threatens more death.”
Across two full pages inside, the paper presented a graph of seasonal deaths over the past decade, and indicated with alarming red spots how summer heat waves have killed dozens of Swedes.
Yet, even a cursory reading of the graph showed clearly that many more people die from cold than from heat.
The IPCC report did indeed state that global warming would mean more extreme warm temperatures, but it also pointed to fewer extreme cold temperatures.
Because more people almost everywhere on the planet die each year from cold temperatures than from warm temperatures, the overall impact of global warming will be fewer deaths from temperature extremes.
Indeed, according to one estimate, by mid-century, about 400,000 more people will die from heat than would have perished at current temperatures, but 1.8 million fewer people will die from cold.
Unfortunately, non-deaths are a non-story.
In November, The Christian Science Monitor focused on the IPCC’s findings on hurricanes, the strength and frequency of which have been linked to global warming ever since former US Vice President Al Gore’s film An Inconvenient Truth made media hay out of Hurricane Katrina.
The Monitor’s headline blared: “Climate change warning: brace for hotter heat waves, stronger storms.”
Yet, while the IPCC suggests that hurricanes’ maximum wind speeds will most likely increase, it also predicts that the total number of tropical hurricanes may fall, and that extra-tropical hurricanes will most likely decline in frequency, too.
The IPCC clearly states that hurricane-damage costs have increased steadily because more people, with more expensive property, now live where hurricanes strike.
Population, exposure, and vulnerability, not greenhouse gasses, are the main factors underlying future damage as well.
Indeed, the IPCC observes that increased hurricane costs “have not been attributed to climate change.”
Thus, if we want to avoid future hurricane damage, we need to invest in adaptation.
That means better risk management, including stricter building codes and improved wetlands to slow storm surges.
Considerable evidence does suggest that global warming causes increases in rain, especially heavy rain.
That has led many observers to blame global warming for devastating floods in Pakistan, Australia, and Thailand in recent years.
But the IPCC tells a different story: the evidence cannot even reliably indicate whether increased precipitation has, in fact, affected the floods’ magnitude and frequency (in UN-speak, “low confidence at the global scale regarding even the sign of these changes”).
That may sound counter-intuitive.
But much more important changes have taken place: in particular, construction of dams and large settlements on floodplains has left rivers nowhere to flood naturally.
If we want to help potential flood victims, the evidence clearly shows that we should restore floodplains.
Increased precipitation also has positive consequences – most significantly, more fresh water for a thirsty world.
Today, about two billion people are water-stressed, meaning that they make do on less than 1,700 cubic meters (60,035 cubic feet) per year.
Population growth alone suggests that this number could increase to about three billion towards the end of the century.
But more precipitation from global warming will most likely bring the actual number down to about 1.7 billion.
Scary climate stories rely on a simple narrative: more CO2 means more environmental damage and death – and the only way to address it is to cut carbon emissions.
While this makes for a catchy political message, it has the distinct disadvantage of being wrong.
Global warming will cause certain phenomena, such as heat waves and hurricane wind speeds, to become more extreme, while others, including cold waves and hurricane frequency, will become less so.
And, in some cases, such as increasing precipitation, global warming will have both positive and negative effects.
Of course, none of this means that we should not address climate change by focusing on innovation to make for less costly green energy.
The latest IPCC report is important precisely because it illustrates the real environmental problems posed by global warming, without exaggerating them for the sake of a good headline.
It provides reliable climate information, and emphasizes that adaptation is essential to improving future generations’ quality of life.
It also shows why the latest failure to conclude a comprehensive climate deal is not all bad news.
But, when it comes to climate change, the media evidently do not like any other kind.
The Climate Imperative
NEW DELHI – Today, international action on climate change is urgent and essential.
Indeed, there can no longer be any debate about the need to act, because the Intergovernmental Panel on Climate Change (IPCC), of which I am chairman, has established climate change as an unequivocal reality beyond scientific doubt.
For instance, changes are taking place in precipitation patterns, with a trend toward higher precipitation levels in the world’s upper latitudes and lower precipitation in some sub-tropical and tropical regions, as well as in the Mediterranean area.
The number of extreme precipitation events is also increasing – and are increasingly widespread.
Moreover, the frequency and intensity of heat waves, floods, and droughts are on the rise.
This change in the amount and pattern of rainfall has serious implications for many economic activities, as well as for countries’ preparedness to handle emergencies such as large-scale coastal flooding or heavy snowfall.
Some parts of the world are more vulnerable than others to these changes.
The Arctic region, in particular, has been warming at twice the rate of the rest of the globe.
Coral reefs, mega-deltas (which include cities like Shanghai, Kolkata, and Dhaka), and small island states are also extremely vulnerable to rising sea levels.
Other negative effects of climate change include possible reductions in crop yields.
In some African countries, for example, yields could decline by as much as 50% by 2020.
Climate change would also lead to increased water stress, which by 2020 could affect 75-250 million people in Africa alone.
Overall, temperature increases are projected to increase by the year 2100 within a range of 1.1 to 6.4˚C. In order to focus on this set of outcomes, the IPCC has come up with a best estimate at the lower end of this range of 1.8˚C, and 4˚C at the upper end.
Even at the lower estimate, the consequences of climate change could be severe in several parts of the world, including an increase in water stress, serious effects on ecosystems and food security, and threats to life and property as a result of coastal flooding.
There also may be serious direct consequences for human health if climate change is not checked, particularly increased morbidity and mortality as a result of heat waves, floods, and droughts.
Moreover, the distribution of some diseases would change, making human populations more vulnerable.
Because the impact of climate change is global, it is essential that the world as a whole take specific measures to adapt.
But it is already clear that the capacity of some communities to adapt will quickly be exceeded if climate change goes unmitigated.
To help these most vulnerable communities, it is essential for the world to devise a plan of action to limit the emission of greenhouse gases (GHGs).
Several scenarios have been assessed by the IPCC, and one that would limit future temperature increase to between 2.0-2.4˚C would require that emissions peak no later than 2015, and decline thereafter.
The rate of decline would then determine the extent to which the worst effects of climate change can be avoided.
The IPCC also found that the cost of such a strict effort at mitigation would not exceed 3% of global GDP in 2030.
Moreover, there are enormous co-benefits to mitigation: lower emissions of GHGs would be accompanied by lower air pollution and increased energy security, agricultural output, and employment.
If these co-benefits were taken fully into account, that price tag of 3% of GDP in 2030 would be substantially lower, perhaps even negative.
The world could actually enhance economic output and welfare by pursuing a path of mitigation.
The need for international action, therefore, stems from two important observations arising out of the IPCC’s work.
First, if we do not mitigate emissions of GHGs, the negative effects of climate change will be difficult to reverse, implying great hardship and possibly danger to mankind and other species.
Second, the benefits of mitigating emissions of GHGs are so overwhelming that this, combined with the prospect of the harm resulting from inaction, makes it imperative for the world to devise an international response and a plan of action.
Given the challenge facing us, the magnitude and nature of which were clearly brought out by the IPCC, the Copenhagen Conference later this year must produce a multi-lateral agreement that deals adequately with climate change.
The Climate of Security
CAMBRIDGE – While George W. Bush has begun to acknowledge the risks of global climate change, his administration failed to lead on the issue for eight years.
That may change after the 2008 American election.
Both presidential candidates, Barack Obama and John McCain, promise to take climate change more seriously.
Emissions of carbon dioxide, a greenhouse gas that accumulates in the atmosphere and is a major cause of rising temperatures, is a byproduct of a wide range of normal economic activities.
And, because CO2 emissions are what economists call a “negative externality” – emitters do not bear the full cost of the damage that they cause – there is little incentive to reduce them.
Smoking is a similar example: non-smokers must bear part of the increased healthcare costs that smoking imposes.
But, unlike smoking, which can be discouraged through taxes and regulations, there is no global government to regulate excessive CO2 emissions, and countries are tempted to leave remedies to others.
Moreover, some countries, such as Russia, which could benefit economically from a warmer Siberia, have different incentives from countries like Bangladesh, a poor country that is likely to be flooded by rising sea levels that will accompany global warming.
Some scientists predict that climate change will cause severe disruptions, such as weather-related natural disasters, droughts, and famines, which may lead to enormous loss of life.
Global warming between 1.6 and 2.8 degrees Celsius over the next three decades would raise sea levels by half a meter.
That is a conservative estimate, and if warming proceeds more rapidly because of the loss of the reflectivity of Arctic ice and the release of CO2 and methane from thawing permafrost, rising sea levels could lead to the submersion of low-lying islands and hence threaten the survival of entire nations.
At the same time, in Africa and Central Asia, water will become more scarce, and drought will reduce food supplies.
External shocks brought about by climate change will directly affect advanced economies.
If rising sea levels flood the Maldive Islands, the effects of climate change would be as devastating as a nuclear bomb, and even for the United States and Europe, the damage to, say, Florida or the Netherlands could be just as costly.
But such external shocks may also have indirect effects by aggravating the disparities between developed and developing countries and creating additional incentives for mass migration to rich, less affected, and more adaptable regions.
In addition, climate change will put stress on weak governments in poor countries and may lead to an increase in the number of failed states and become an indirect source of international conflict.
United Nations Secretary General Ban Ki Moon argued in 2007 that the Darfur conflict “began as an ecological crisis, arising in part from climate change.”
Such direct and indirect effects from human activity, while not malevolent in intention like terrorism, argue for a broadening of our concept of security and the adoption of new policies.
There are two basic instruments to reduce carbon emissions and thus mitigate global warming.
Technological innovation and increased energy efficiency have considerable potential.
For example, carbon sequestration allows the capture and storage of carbon in underground geological formations and deep oceans.
Thus, less CO2 gets released into the atmosphere.
But technological innovation alone is unlikely to be sufficient.
The other basic instrument includes economic incentives and disincentives.
The so-called emissions trading system aims to control carbon emissions by allocating tradable permits.
A carbon tax has also been proposed as a method to reduce consumption of fossil fuels.
Not everyone will embrace such instruments.
In 2007, China surpassed the US as the world’s leading CO2 emitter.
But China points out that on a per capita basis, US emissions are five times higher.
China, India, and other countries argue that economic development in rich countries caused most of the existing problem, and it is only fair that developing countries should not have to reduce their emissions until they reach the rich countries’ levels of emissions.
But this is a formula for global disaster.
The world’s climate is affected by total emissions, regardless of their origin.
China uses coal, a particularly CO2-intensive fuel, for 70% of its commercial energy supply, while coal accounts for a third of America’s total energy.
China is now estimated to build two new coal-fired power plants each week.
Coal is cheap and widely available in China, which is important as the country scrambles for energy resources to keep its many energy-intensive industries running.
Given that the bombs, bullets, and embargos of traditional security policy are irrelevant, what can the US and other rich countries do about this security threat?
A 2007 report from the International Energy Agency (created after the 1973 oil crisis to provide policy advice to industrial countries) urged a cooperative approach to helping China and India become more energy efficient.
In other words, to prevent dangerous climate change and promote their own security, the US and other rich countries may have to forge a partnership with China, India, and others to develop creative ideas, technologies, and policies.
Climate change is increasingly recognized as one of the transnational challenges with the greatest environmental, economic, and security implications, and a powerful global environmental movement constantly highlights its importance.
The early statements from McCain and Obama are encouraging, but finding international agreement will remain a challenge no matter who is elected.
The Closing of America?
CAMBRIDGE – The United States is locked in debate over immigration.
The state of Arizona recently enacted legislation that encourages local police to check the immigration status of people who were stopped for other reasons – and requires immigrants to produce proof of their legal status on demand.
The Obama administration has criticized the law, church groups have protested that it is discriminatory, and a federal court has issued a temporary injunction, ruling that immigration is a federal issue.
Regardless of the outcome of the legal case, the Arizona law has proven to be popular in other states, and represents the rising importance of immigration as a political issue.
If the US turned inward and seriously curtailed immigration, there would be serious consequences for America’s position in the world.
With its current levels of immigration, America is one of the few developed countries that may avoid demographic decline and keep its share of world population, but this might change if reactions to terrorist events or public xenophobia closed the borders.
Fears over the effect of immigration on national values and on a coherent sense of American identity have existed since the nation’s early years.
The nineteenth-century “Know Nothing” Party was built upon opposition to immigrants, particularly the Irish.
Asians were singled out for exclusion from 1882 onward, and, with the Immigration Restriction Act of 1924, the influx of immigrants slowed for four decades.
During the twentieth century, the nation recorded its highest percentage of foreign-born residents in 1910 – 14.7% of the population.
Today, 11.7% of US residents are foreign born.
Despite being a nation of immigrants, more Americans are skeptical about immigration than are sympathetic to it.
Depending on the poll, either a plurality or majority wants fewer immigrants.
The recession exacerbated such views, and in 2009 half of Americans favored reducing legal immigration, up from 39% in 2008.
Both the numbers and origins of the new immigrants have caused concerns about immigration’s effects on American culture.
Data from the 2000 census show a soaring Hispanic population, owing largely to waves of new immigrants, legal and illegal.
Indeed, demographers predict that in 2050 non-Hispanic whites will be only a slim majority of US residents.
Hispanics will be 25%, African-Americans 14%, and Asians 8%.
Most of the evidence suggests that the latest immigrants are assimilating at least as quickly as their predecessors.
The need to communicate effectively, together with market forces, produces a powerful incentive to master English and accept a degree of assimilation.
Modern media also help new immigrants to know more about their new country beforehand than immigrants did a century ago.
While too rapid a rate of immigration can cause social problems, proponents argue that, over the long term, immigration strengthens the power of the US.
Indeed, 83 countries and territories, including most developed countries, currently have fertility rates below the level necessary to maintain a constant population level.
To maintain its current population size, Japan, for example, would have to accept 350,000 newcomers a year for the next 50 years, which is difficult for a culture that has historically been hostile to immigration.
By contrast, despite Americans’ ambivalence, the US remains a country of immigration.
The Census Bureau projects that the American population will grow 49% over the next four decades.
Today the US is the world’s third most populous country; 50 years from now it is still likely to be third (after only China and India).
Not only is immigration relevant to economic power, but, given that nearly all developed countries are aging and face a burden of providing for older generations, it could help reduce the sharpness of the policy problem.
In addition, even though studies suggest that the short-term, directly measurable economic benefits at the national level are relatively small, and unskilled workers may suffer from competition, skilled immigrants can be important to particular economic sectors.
A 1% increase in the number of immigrant college graduates leads to a 6% increase in patents per capita.
In 1998, Chinese- and Indian-born engineers were running one-quarter of Silicon Valley’s high-technology businesses, which accounted for $17.8 billion in sales, and in 2005, foreign-born immigrants had helped start one in four American technology start-ups over the previous decade.
Equally important are immigration’s benefits for America’s soft power.
The fact that people want to come to the US, together with immigrants’ upward mobility, enhances the country’s appeal.
America is a magnet, and many people can envisage themselves as Americans, because many successful Americans look like people in other countries.
Moreover, connections between immigrants and their families and friends back home help to convey accurate and positive information about the US.
In addition, the presence of multiple cultures creates avenues of connection with other countries, and helps create an important broadening of American attitudes in an era of globalization.
Rather than diluting hard and soft power, immigration enhances both.
One senior Asian statesman, an acute long-time observer of both the US and China, concludes that China will not surpass the US as the leading power of the twenty-first century because of America’s ability to attract the best and brightest from the rest of the world and meld them into a diverse culture of creativity.
China has a larger population to recruit from domestically, but in his view, its Sino-centric culture will make it less creative than the US.
While one can understand the resistance of ordinary American citizens to competition from foreign immigrants during a period of high unemployment, it would be ironic if the current debate were to lead to policies that cut the US off from one of it unique sources of strength.
The Closing of the European Mind
PARIS – Kishore Mahbubani, a prominent Asian voice from Singapore, and a man often highly critical of Europe, was recently asked what Asia could learn from Europe.
His reply: Europe was above all the continent of peace, compassion, and cooperation.
“Asia” may not exist culturally, historically, religiously, socially, and economically, the way that Europe does. It is a much more varied continent.
But “Asians” have been looking at, and reflecting upon, the European experiment for a long time.
Enlightened Japanese elites are fascinated by Franco-German reconciliation.
Could that model be applied to Japan’s relations with its former enemies, from Korea to China?
And today, with the irresistible rise of a more assertive China, the European example of a continent where the prospect of war between traditional enemies – or contemporary rivals – has simply disappeared is more attractive than ever.
One does not naturally associate China with the quest for compassion.
Yet some Chinese have recently discovered the virtues of the Nordic social model, and Chinese delegations have been coming to Oslo regularly to see what lessons they can bring home.
The reasoning of China’s elites is pragmatic: if the Chinese were reassured by the existence of a social–welfare state, they would probably save less and spend more, allowing the domestic market to take over from export-led growth.
Although the European Union’s image has deteriorated, Asians still find Europe’s “sharing of sovereignty” model appealing in many ways.
For Mahbubani, the “lessons of Europe” are crystal clear.
If emerging Asia begins to look more and more “like a socially and politically harmonious Europe,” the world would be a much better place.
At a time when Europeans are full of self-doubt, though perhaps not as morose as the French, this praise from thoughtful Asians is more than welcome.
Europeans, unfortunately, too often fail to see the merits of their peaceful conquest over their own worst natures.
Moreover, Europeans should, in the same spirit of openness, ask themselves what they can learn from Asia.
In a multipolar world, the flow of examples and inspiration has become a two-way street.
Europeans can no longer look down upon Asians with a “Western” combination of arrogance and ignorance, perceiving themselves as the unique carriers of a universal message.
The problem, of course, is that the concept of Asia is largely a Western one.
Asians do not perceive themselves as Asians in the way that most Europeans view themselves as Europeans.
India’s historical patrimony is very different from China’s, for example, not to mention the singular experience of Japan.
Yet it is legitimate to ask what, for Europeans looking at Asia, would be the equivalent of the “peace, compassion and cooperation” that Asians see in Europe?
Could it be a combination of hope, energy, long-term thinking, and curiosity?
Hope is a state of mind and not only the result of economic growth.
Hope means confidence, and young Asians are exuding the stuff, whereas young Europeans – arrogant towards others and diffident towards themselves – too often lack “appetite” and cling to the status quo, seeming to demand protection from life.
Many Chinese may dream of spending like Europeans, but the nightmare of most Europeans nowadays is that they might have to start working as hard as the Chinese.
Beyond confidence and the energy that goes with an appetite for success, Europeans lack long-term thinking and curiosity about the “other” in general.
As a result, they know little about the history, culture, and languages of Asia.
By contrast, the large numbers of young Chinese and Indians who are graduating from the best Western universities (mostly American) know the Western mind from the inside, and thus feel that they understand “what makes us tick.”
Indeed, they are “us” while remaining themselves.
How many Europeans can claim such familiarity with the “Asian Other”?
The fact that so many Asian students come to the West to study – and so few Europeans (Westerners) do so in Asia – is not a sign of the superiority of the Western mind and model. On the contrary, it impoverishes our mindset, if not our culture.
The need to open ourselves as Europeans to the Asian mind, and even to some different societal models, does not imply, however, that we should relinquish our values.
The peace, compassion, and cooperation Asians are contemplating with such admiration are the direct product of values which some of them see as “Western,” and that, yes, we regard as “universal.”
Given Asia’s rise, it is, of course, illusory for Europeans to consider their relations with the biggest Asian power, China, only through the prism of human rights. Moreover, Europe’s ability to exert pressure on China is extremely limited at best, and may be least potent where Chinese domestic matters are concerned.
Nevertheless, Europeans should not be deterred by the Chinese government’s anger at the awarding of the Nobel Peace Prize to the Chinese dissident Liu Xiaobo.
In the name of Europe’s core values, all EU ambassadors to Norway should make a point of attending the Nobel award ceremony – which the imprisoned Liu cannot – despite China’s call for them to stay away.
It is simply a question of self-respect – and, ultimately, that of China.
The Stress Nexus
LONDON – Every day, the number of people inhabiting our planet grows by more than 210,000.
That adds up to 1.5 million more people each and every week, adding to the demands on our vital resources.
At the same time, the world is becoming more prosperous, improving the quality of life almost everywhere.
Over the past few decades, an estimated two billion people have risen into the middle class worldwide.
That is a remarkable achievement.
But this ongoing global rise in prosperity also generates stresses that threaten to undermine prosperity.
Call this the “prosperity paradox.”
By 2030, it is estimated that our world will need 30% more water, 40% more energy, and 50% more food to keep up with rising demand.
And we will need to provide that additional energy, water, and food in ways that significantly reduce CO₂ emissions.
Addressing any of these resource needs individually would be an immense task.
But the challenge of ensuring sufficient supplies of water, energy, and food is magnified many times by the linkages between them.
The potential effects of climate change will influence all three.
So, if we are to succeed, meeting our resource needs must be addressed intelligently and in unison.
Energy, water, and food are our most vital resources, sustaining life itself and fueling our modern societies.
And they comprise a tightly intertwined network: nearly all forms of energy production require water; energy also is needed to move and treat water; and producing food requires both energy and water.
Yet, around the world, little has been done to address our needs in a comprehensive way.
Inefficient use of our resources remains the norm.
In developing countries – where most of the world’s population growth is occurring – sound water management is lacking, and up to 40% of electricity is lost due to poor transmission infrastructure.
In the developed world, waste is also prevalent: more than one-third of the food produced in the United States goes uneaten, for example.
At the same time, we are in an era of greater economic volatility.
This, in turn, is generating more political volatility, which tends to impede progress on large-scale global issues.
We need to learn to adapt our resource systems and institutions to deal with the new pace of change and uncertainty.
To that end, last year Shell embarked upon a major effort to understand the future implications of what scientists refer to as the “stress nexus” of energy, water, and food.
We are searching for innovative ways to make the most of the world’s finite resources and thereby ensure greater security for our vital energy, water, and food supplies.
So, what can business do?
Plenty.
Rather than wait for governments to act, we need to take a leadership role in offering ideas and solutions.
We need to explore new forms of partnership and collaboration with governments, academia, interest groups, and businesses outside our own industries.
Shell recently brought together a small group of CEOs who have committed their companies to joint projects that may demonstrate what can be done to mitigate resource stresses.
We are trying to find practical ways to make local economies and resource systems more resilient.
What is interesting about this initiative is that it involves companies from different economic sectors, not just the energy industry.
We are also collaborating closely with top academics and researchers to develop a resilience methodology.
We want to identify what works, then replicate it elsewhere and potentially create new business opportunities in the process.
We recognize that actions are more persuasive than words, which is why we have not really talked much about this initiative yet.
It is still in its early days, and we want to wait until we have some results.
Perhaps the accumulation of collaborative efforts like this will grow into a movement and larger-scale success.
In fact, this “bottom-up” approach may be more viable and build more momentum in the long run, given the obvious failure of ambitious “top-down” approaches in recent years.
The Coming Age of Financial Automation
PRINCETON – Public debate, especially during economic crises, focuses on growth statistics, which become a kind of fever thermometer.
But the readings are unreliable and change constantly, prompting statisticians to think about different ways of measuring an economy’s very different products.
In particular, newly revised data have called into question the economic scope and role of financial services.
At the end of July, the United States Bureau of Economic Analysis released revisions to American GDP data going back to 1929.
The main consequence was to demonstrate that GDP is more volatile than had previously been assumed.
The economy grew faster in good phases, and slumped more sharply in downturns.
The annual growth rate from 1997 to 2008 was 2.8% rather than 2.7%.
In 2008, the figure fell to 0.4%, rather than 1.1%, as previously assumed.
The collapse in GDP in the first quarter of 2009 was also more substantial than previously thought.
The logic underlying these changes is more interesting than the relatively small revisions of growth rates that resulted.
One key intention was to allow for more honest accounting.
In particular, spending on financial services was treated in a different way and shown more transparently.
For example, medical expenditure is lower in the new calculation, because the costs that are attributable to insurance rather than to provision of medical services are now shown as spending on “financial services and insurance.”
The new calculation makes it clearer than before how dramatically financial services expanded over the past decade.
Spending on financial services roughly doubled between 1998 and 2007, now amounting to 8.2% of personal consumption – a figure that includes the income that is transferred from consumers to the now notorious bonuses of bankers and traders.
The response to the current crisis is not likely to be a halt to financial innovation, but it is likely to cause rationalization and cost-cutting in the provision of financial services.
There are clear historical precedents for reining in over-exuberant and over-innovative sectors.
In the nineteenth century, an orgy of railroad building created duplicating lines, before severe cyclical downturns purged many of the companies, leaving a leaner and cheaper network.
Similarly, in the early twentieth century, many entrepreneurs moved into automobile production.
Only a handful of the most efficient producers survived the collapse of the initial boom.
Many countries, including the US, have banking systems that are still overly complex.
It is also now clear that financial products themselves were overly complex and that most if not all customers did not know what they were buying.
Traditionally, banks were “black boxes,” in which operations were concealed from customers.
The bank knew more about where its money went than its depositors and creditors did.
Investment banks gave advice to corporations on mergers and acquisitions, but also issued securities and conducted their own proprietary trading.
While so-called “Chinese walls” separated these activities, in practice market participants assumed some degree of leakage, and expected better returns from dealing with big banks, with their multifaceted, international operations.
Thus, each counterparty in these transactions assumed that they were getting something special from the accumulated insights that the bank had acquired from its other branches of business, insights that derived fundamentally from permanent conflicts of interest.
The genius of securitization, the great financial innovation of the 1990’s, was that it allowed investors – in theory – to bypass non-transparent black-box banks.
Securities took the place of traditional bank credits.
But banks used the innovation to place transparent securities in highly opaque “investment vehicles.”
Banks’ black-box character survived, and became an even greater source of vulnerability.
After all, black boxes are most lethal when they conceal a malevolent or fraudulent human being.
It is possible to imagine that in the longer term finance will become less prone to problems of asymmetrical information, which demand a high level of confidence on the part of depositors and investors in order to reduce the risk of panic and crisis.
But finance will no longer be our master only if there is no need for “insiders,” and that requires both transparency and the spread of financial knowledge.
In the future, conflicts of interest might be handled by mathematical algorithms that authorize or prohibit transactions.
In the same way that automated payment mechanisms have rendered trading floors mostly obsolete, many banking functions can and will become simply an interaction of software systems.
As in previous transitional phases, when innovation leads to cost-saving, individuals who work in the financial industry will try to produce convincing arguments about why their business depends on the human touch.
Harvesting machines were alleged to lower the quality of the grain collected, because it was no longer subject to immediate inspection by the human eye.
Likewise, advanced automobile plants are now largely composed of robots, and their products are safer than ever.
A personal banker is a status symbol, but nothing more, and certainly not a necessity.
The “Monday morning car” – caused by an early and error-prone production run of a new model – is rapidly becoming a thing of the past.
Its equivalent in the financial world should meet the same fate.
The Coming Age of Interest
One swallow does not make a summer, and one month of normal job growth, and rising prices in the United States does not mean that the Federal Reserve no longer fears economic malaise and deflation.
But the time will come when world interest rates begin to rise, as central bankers prepare to resist the upward creep of inflation.
Whenever that moment arrives - whether this fall, in 2005 or 2006, or in 2007 - America and the global economy will face financial vulnerabilities that reflect the success of the past three years of monetary stimulation in stemming declines in production and moderating unemployment.
Short-term interest rates are astonishingly low: only 2% in the euro zone, just 1% in the US, and zero in Japan.
Expansionary monetary policy has been successful, but only by pushing interest rates to historic lows - and by convincing investors that borrowing costs will remain at their current levels for a long time.
The main result of monetary stimulus has been to boost asset prices: anything that pays a yield, a dividend, or a rent becomes much more attractive - and hence much more valuable in money terms - when interest rates are very low and expected to stay very low.
This explains the large gaps between current prices for real estate in the US, equities in New York, London, and Frankfurt, and long-term bonds everywhere and what one would conventionally think their fundamental values should be.
So what will happen when central banks start raising interest rates?
In 1994, rising short-term rates caused increases in long-term rates - and declines in long-term bond prices - that were at least double what standard models at the time were predicting.
Moreover, interest rates in the world's peripheral, developing economies rose far more than rates in the advanced industrial core.
Thus, the first danger to worry about for 2005 and beyond - when world interest rates will most likely rise - is another wave of emerging-market financial crises.
For countries like Mexico, Brazil, Turkey, Argentina, Korea, Malaysia, and Thailand, the record of the 1990's demonstrates that interest-rate spreads can widen and capital flows reverse remarkably rapidly, regardless of how favorably IMF officials and analyses by major banks view a country's policies.
Emerging-market interest-rate spreads now are abnormally low.
International money flows - aside from inflows into the US - are not yet at levels associated with "irrational exuberance," but there is still time for that to happen before interest rates start to rise.
This is an alarming prospect, because if there is one lesson from the 1990's, it is that nobody should overestimate the stability of international financial flows.
The second danger springs from high asset values within the advanced industrial core.
The dominant mode of thought within the Federal Reserve - with which I agree - appears to be that the information-technology revolution is continuing, that the pace of growth of potential output in the US remains very fast, and that the output gap is thus relatively wide.
This implies that interest rates may, in fact, need to stay low for a very considerable period.
Moreover, confidence in the Federal Reserve is high, and the last remnants of the 1970's inflation risk premium have been wrung out of interest rates.
As a result, even after output levels return to their potential, interest rates will stay low by the standards of the 1980's and the 1990's.
All of this is, of course, good news for those who own assets like long-term bonds, stocks, and real estate.
Indeed, elevating long-term asset prices was precisely the point of lowering interest rates: making bondholders and especially real estate owners richer, after all, provides a fillip to spending.
But the bad news is that even if interest rates are expected to remain low for a while, they will not stay this low indefinitely.
The bottom line is that when interest rates rise, asset values will fall.
It is during such periods - particularly when asset values fall swiftly and substantially - that we discover exactly how good our central bankers are at their main job: reducing financial volatility and promoting economic stability.
It is also during such periods that we discover how many people who are holding long-term bonds, real estate, or stocks are doing so not because they think current prices are attractive relative to fundamentals, but because their prices have gone up over the past several years.
This is a crucial question for policy makers, because those who bought long-term assets due to what seemed like perpetually rising prices are also those who will sell as soon as price trends seem to be reversing.
In particular, the US trade deficit looms as a massive source of instability should long-term asset prices fall significantly.
To be sure, the challenges facing the world's economic policy makers during the next several years will be different from those that they have faced since the collapse of the NASDAQ bubble.
The risks associated with inflation are probably less dangerous than those generated by collapsing output and the threat of deflation.
But, as we learned in the 1990's, this does not mean that the coming challenges will be easier to handle.
Where Europe Works
STOCKHOLM – With Swedish cities roiled for weeks now by rioting by unemployed immigrants, many observers see a failure of the country’s economic model.
They are wrong.
The Swedish/Scandinavian model that has emerged over the last 20 years has provided the only viable route to sustained growth that Europe has seen in decades.
Europeans should remember that perceptions of strength and weakness change fast.
In the 1980’s, Scandinavian countries stood for chronic budget deficits, high inflation, and repeated devaluations.
In 1999, The Economist labeled Germany “the sick man of the euro” – a monument of European sclerosis, with low growth and high unemployment.
Now, however, the specter of devaluation has disappeared from northern European countries.
Budgets are close to balance, with less public expenditure and lower tax rates, while economic growth has recovered.
The transformation of the old European welfare state started in northern Europe, and it is proceeding to most of the rest of the continent.
Today, it is difficult to imagine the mindset that prevailed before Margaret Thatcher came to power in the United Kingdom in 1979 and Ronald Reagan in the United States in 1981.
Thatcher’s greatest achievement was the liberalization of the overregulated British labor market, while Reagan turned the tide with his inaugural address: “In this present crisis, government is not the solution to our problem; government is the problem.”
The moral superiority of high marginal income taxes suddenly waned.
Free-market ideas took hold.
In northern Europe, the transformation of the welfare state started in Denmark in 1982.
In deep financial crisis, traditionally social-democratic Denmark elected a conservative prime minister, Poul Schlüter, a jovial man with a bow tie.
One of his first decisions was to peg the Danish krone to the Deutschmark to stop the inflation-devaluation cycle.
The Danish peg – now to the euro – still holds.
Schlüter’s second big decision was to deregulate the Danish economy, which now has the world’s largest number of enterprises per citizen.
But he left the country’s high taxes and welfare state in place.
In the early 1990’s, Norway, Sweden, and Finland experienced a horrendous real-estate, banking, and currency crisis.
Output fell and unemployment skyrocketed.
In 1991, Swedish voters broke the reign of the Social Democrats, electing a coalition government under conservative Prime Minister Carl Bildt, who called his program “the only way.”
Bildt tried to follow Schlüter’s lead, but, in 1992, Sweden was forced to devalue – though his deregulation of markets did work well.
Sweden’s greatest achievement was a gradual cut of public spending by no less than one-fifth of GDP from 1993 to 2007.
Meanwhile, Sweden’s public debt was reduced from 73% of GDP to 39% of GDP, while taxes have been cut repeatedly.
The Social Democrats returned to power in 1994, but they accepted Bildt’s new fiscal policies, and even carried out a revolutionary pension reform in 1998 that properly tied benefits to payments.
In parallel with the Scandinavian crisis, communism collapsed in Eastern Europe in 1989 and in 1991 in the Baltic states.
Poland’s first post-communist finance minister, Leszek Balcerowicz, showed an amazed world how communism could be abolished and a market economy built almost instantly.
The rest of Central Europe and the Baltic states followed his lead.
Former Estonian Prime Minister Mart Laar was the most radical European reformer.
Indeed, his ideas about taxation have revolutionized Europe.
In 1994, he introduced a flat personal-income tax, a policy that most Eastern European countries have since adopted.
In 1999, when Laar became Prime Minister again, he abolished the tax on corporate profit, which was harming entrepreneurship.
As a consequence of the ensuing tax competition, corporate-tax rates have fallen to 15-25% in most European countries.
More broadly, Estonia has revolutionized public finances.
Since 1992, it has maintained a more or less balanced budget, with hardly any public debt.
It slashed public expenditure and capped spending at 35% of GDP – the same level as in the United States.
As free-market thinking has taken hold and similar reforms have proliferated, the social-welfare state is being transformed into a social-welfare society.
Government spending remains large enough to guarantee reasonable public services and a social safety net.
Reformers have exposed the public sector to competition, not least from private providers, rendering it more efficient.
The systematic reforms in the United Kingdom, Denmark, Sweden, Poland, and Estonia have much in common.
First, all were caused by a profound crisis of the social-welfare state: falling output, rising unemployment, large budget deficits, inflation, and devaluation.
Without severe crisis, no significant reform was likely.
Second, a change of government through elections prompted reforms and gave them democratic legitimacy.
Reform does not require a state of emergency, as is often argued.
Third, reforms require a strong leader.
No major reform has been undertaken through consensus, though successful reforms usually generate a broad consensus a few years later.
At that point, reforms can be carried forward by those who had initially opposed them, as happened in Denmark and Sweden.
Finally, fundamental reform of the social-welfare state requires leaders who embrace free-market ideas.
Rethinking requires a new ideology, and, after one country has shown the right direction, neighbors often follow.
Europe has now reached the point at which most of its laggards are prepared to accept the social-welfare society.
This humane European capitalism is now hastening toward crisis-ridden southern Europe.
The Four Stages of Putinism
MOSCOW – In 1970, Soviet dissident Andrei Amalrik observed in Will the Soviet Union Survive until 1984? that “all totalitarian regimes grow old without realizing it.” Amalrik was right, and the regime established since 2000 by Russian President Vladimir Putin is likely to fall apart – perhaps this year – for the same reason that the Soviet Union collapsed in 1991.
The Soviet Union’s collapse, it should be remembered, was not the result of Soviet President Mikhail Gorbachev’s reformist “betrayal.”
Nor was it caused by falling oil prices or US President Ronald Reagan’s military build-up.
Soviet communism was doomed long before then,&#160;when, as Amalrik predicted, the communist myth finally died in the hearts and minds of ordinary people and officials alike.
In a mere 13 years, Putin’s regime, with its grand ideological style, has passed through all of the stages of Soviet history, becoming a vulgar parody of each.
The first stage, that of creating the regime’s legitimizing myth, generates a heroic demiurge, the father of the nation.
Whereas the Bolsheviks had the 1917 Revolution, the Putinists had the second Chechen war of 1999 and the bombings of apartment buildings in Buynaksk, Moscow, and Volgodonsk that year.
Thus was born the myth of the heroic intelligence officer who protects Russians in their homes while terrifying the nation’s enemies.
The second stage could be called the period of storms and stresses.
Stalin thrived on the barbaric forced industrialization that planted the seeds of the communist system’s destruction.
Putin, for his part, “built” a great energy power, turning the country into a banana republic with hydrocarbons.
The third stage extends the myth through heroic triumph.
The Soviets had their victory in World War II, followed by the creation of a global superpower.
Putinism claimed victory after invading tiny Georgia in 2008.
Finally, the regime suffers ideological exhaustion and death.
This stage of Soviet communism took 40 years to run its course.
But a simulacrum falls apart much faster.
Putin’s four-hour news conference in December recalled nothing so much as Romanian dictator Nicolae Ceausescu’s demise at a staged mass meeting in 1989, when he was confronted by heckling and protests.
Indeed, Russia is already living in the post-Putin era, because Putin can no longer perform his mission – providing security for a plutocracy.
As in 1999, when Boris Yeltsin had outlived his usefulness to the elite, the current infighting among elite factions means only one thing: a search is underway for a successor.
The question is no longer whether Putin’s regime will survive, but what will come after him.
The coming transition will be markedly different from the 1999 transfer of power.
It will not be a palace affair, replete with a “patriotic,” television-driven mobilization of the masses against terrorists and the Western nemesis.
The current process is more like what happened in Central and Eastern Europe in 1989 and the USSR in 1991, with protesters’ enthusiasm giving way to disappointment as individual members of the old regime retained economic and quasi-political power.
Indeed, a potential heir today needs legitimacy, not only from the powerful oligarchs but also from the street.
That is why so-called “system liberals,” or loyalists who stand for Kremlin-backed change, want to control the protest movement and use it as a lever in an ultimate fight with the “siloviks” (Putin’s military and security apparatus).
System liberals believe that Russia has, on the whole, built an acceptable market economy.
Its further development requires only the removal of some of Putin’s cronies through controlled political reform.
Until recently, the loyalists argued that the quest for change precludes criticizing the government, which should somehow be influenced through constructive suggestions.
Demands for Putin’s resignation would lead only to the marginalization of the protest movement.
Today, however, the loyalists’ rhetoric is more aggressive.
They now argue that Putin personally chose repression in responding to the protest movement that filled the streets of Moscow and other major cities in late 2011 and early 2012.
Politicians who see no alternative to tribunals and criminal prosecutions cannot be respected.
The evolution of the loyalists’ position is not coincidental.
They must consider the mood of the protest movement, as well as opinion polls, which suggest that their popular support lags behind the “republicans” by a nine-to-one margin. “Republicans” believe that uprooting the entire political and economic system that was established in the Yeltsin years – and consolidated under Putin – is a task of national salvation.
More important, over the past few months, the loyalists’ strategic vision has changed.
Back in October 2012, they planned to negotiate with Putin about replacing him in a year or so.
The idea was to appoint a more “liberal” factotum, such as Alexei Kudrin, a former finance minister, or oligarch Mikhail Prokhorov.
But something went wrong: Putin could not be convinced.
At the same time, he has become unable to control infighting among the elite.
As his opponents have hardened their stance, Russia has become ripe for a peaceful anti-criminal revolution.
Even if Putin left this year, that would not be enough.
Russia and its people can triumph only if Kremlin loyalists seeking his successor leave with him.
The Coming Global Credit Glut
HONG KONG – With world leaders meeting at the end of this week at the G-20 summit in Cannes, France, the next economic minefield that they will face is already coming into view.
It is likely to take the form of an opaque global credit glut, turbocharged by the fragile mixture of too-big-to-fail global banking with a huge and largely unwatched and unregulated shadow banking sector.
To be sure, that is not what many see.
Federal Reserve Board Chairman Ben Bernanke and others have blamed the financial crisis of 2008 on a global savings glut, which fuelled flows of money from high-savings emerging-market economies – especially in Asia – that run chronic balance-of-payments surpluses.
According to this school of thought, excessive savings pushed long-term interest rates down to rock-bottom levels, leading to asset bubbles in the United States and elsewhere.
But Claudio Borio and Piti Disayat, economists at the Bank for International Settlements, have argued convincingly that the savings-glut theory fails to explain the unsustainable credit creation in the run-up to the 2008 crisis.
They have shown that the major capital inflows were not from emerging markets, but from Europe, where there was no net balance-of-payments surplus.
The alternative theory – of a global credit glut – gained more ground with the release last week of the Financial Stability Board’s report on shadow banking.
The FSB report contains startling revelations about the scale of global shadow banking, which it defines as “credit intermediation involving entities and activities outside the regular banking system.”
The report, which was requested by G-20 leaders at their summit in Seoul last November, found that between 2002 and 2007, the shadow banking system increased by $33 trillion, more than doubling in asset size from $27 trillion to $60 trillion.
This is 8.5 times higher than the total US current-account deficit of $3.9 trillion during the same period.
The shadow banking system is estimated at roughly 25-30% of the global financial system ($250 trillion, excluding derivatives) and at half of total global banking assets.
This represents a huge regulatory “black hole” at the center of the global financial system, hitherto not closely monitored for monetary and financial stability purposes.
Its importance was exposed only by analysis of the key roles played by structured investment vehicles (SIVs) and money-market funds (MMFs) in the 2008 meltdown.
The shadow banking system is complex, because it comprises a mix of institutions and vehicles.&nbsp;Investment funds other than MMFs account for 29% of total, and SIVs make up 9%, but the shadow system also includes public financial institutions (such as the government-backed mortgage lender Fannie Mae in the US).
They are some of the largest counterparties with the regular banking system, and their combined credit creation and proprietary trading and hedging may account for much of the global liquidity flows that make monetary and financial stability so difficult to ensure.
The trouble is that, by 2010, the shadow banking system was about the same size as it was just before the 2007 market crash, whereas the regulated global banking system was 18% larger than in 2007.
That is why the FSB report pinpoints the shadow banking system, together with the large global banks, as sources of systemic risk.
But the global problem is likely to be much larger than the sum of its parts.
Specifically, global credit creation by the regular and shadow banking systems is likely to be significantly larger than the sum of the credit creation currently measured by national statistics.
There are several reasons for this.
First, credit that can be, and is, created offshore and through off-balance-sheet SIVs is not captured by national balance-of-payments statistics.&nbsp;In other words, while a “savings” glut may contribute to low interest rates and fuel excess credit creation, it is not the main cause.
Second, the volatile “carry trade” is notoriously difficult to measure, because most of it is conducted through derivatives in options, forwards, and swaps, which are treated as off-balance sheet – that is, as net numbers that are below the line in accounting terms.
Thus, in gross terms, the leverage effects are larger than currently reported.
Third, the interaction between the shadow banking system and the global banks is highly concentrated, because the global banks act as prime brokers, particularly for derivative trades.
Data from the US Comptroller of Currency suggest that the top five US banks account for 96% of the total over-the-counter (OTC) derivative trades in the US.
Indeed, the nightmare scenario haunting the world is the collapse of another shadow banking entity, causing global trade to freeze, as happened in 2008.
The Basel III agreement on capital adequacy and other recent reforms still have not ring-fenced trade financing from these potential shocks.
We urgently need to monitor and understand the role of shadow banking and the too-big-to-fail banks in creating the global credit glut.
Obtaining a full picture of global monetary and credit numbers and their determinants is a vital first step.
So far, the G-20’s call to “think globally” has turned into “act locally.”&nbsp;
We hope that the G-20 leaders will think systemically at Cannes, and act nationally and cooperatively to defuse the global credit glut minefield.
The Coming Global Energy Revolution
PARIS – Humanity’s future, to say nothing of its prosperity, will depend on how the world tackles two central energy challenges: securing reliable supplies of affordable energy, and switching to efficient low-carbon energy.
The Reference Scenario – in which no new policies are introduced – in the International Energy Agency’s 2008 World Energy Outlook sees annual global primary energy demand growing 1.6% on average up to 2030, from 11,730 million tons of oil equivalent (Mtoe) to just over 17,010 Mtoe – an increase of 45% in just over 20 years.
China and India account for just over half of this increase, with Middle East countries contributing a further 11% to demand.
Non-OECD countries account for 87% of the increase, so their share of world primary energy demand will rise from 51% to 62%.
Most oil production increases are expected to come from just a few countries – mainly in the Middle East, but also Canada with its vast oil-sands reserves, the Caspian region, and Brazil.
Gas production in the Middle East will triple, and more than double in Africa, where there are large low-cost reserves.
The trend by which consuming countries grow steadily more reliant on energy from a small number of producing countries threatens to exacerbate energy-security worries.
The supply stand-off between Russia and Ukraine of 2009 made these worries crystal clear in Europe, where gas imports are set to rise to 86% of demand by 2030, from 57% in 2006.
Of course, increasing import dependence does not necessarily mean less energy security, any more than self-sufficiency guarantees uninterrupted supply.
Yet greater short-term insecurity seems inevitable as geographic diversity of supply is reduced and reliance on vulnerable supply routes grows.
Longer-term energy-security risks are also set to grow.
As a small group of countries increasingly accounts for the world’s remaining oil reserves, their market dominance may threaten the pace of investment.
The greater the demand for oil and gas from these regions, the more likely these regions are to seek higher prices, and to maintain them by deferring investment and limiting production.
Unfettered growth in energy demand will clearly have serious consequences for the climate as well.
Under the Reference Scenario, which represents “business as usual,” the IEA points to continuing growth in CO2 and other greenhouse-gas emissions;
CO2 emissions are projected to rise 45% by 2030, with other greenhouse gases contributing to an eventual average temperature increase of up to 6°C.
Three-quarters of the extra CO2 will come from China, India, and the Middle East, and as much as 97% from non-OECD countries as a whole – although non-OECD per capita emissions will still be far lower on average than in the OECD.
Bucking the global trend, only the European Union and Japan will see lower emissions in 2030 than today.
The energy sector has a relatively slow rate of capital replacement because of the long lifetimes of much of its infrastructure.
More efficient technologies normally take many years to spread through the energy sector.
As a result, both the public and private sectors must accept the need for additional investments, as well as the potential costs of early capital retirement, in order to accelerate this process and deliver deep cuts in emissions.
Two IEA climate-policy scenarios show how we could stabilize the concentration of greenhouse gases at 550 or 450 parts per million of CO2 equivalent.
The 550 scenario equates to an increase in global temperature of approximately 3°C, while the 450 scenario implies an increase of around 2°C.
In the 550 scenario, energy demand up to 2030 rises by about 32%, with the share of fossil fuels falling markedly, and average demand up 1.2% yearly, compared to 1.6% in the Reference Scenario.
Energy-related CO2 emissions would peak in 2025 and decline slightly by 2030.
The 450 scenario presents an immense challenge.
The 2030 emissions level for the entire world would be less than the emissions projected for non-OECD countries alone in the Reference Scenario.
In other words, even if OECD countries reduce their emissions to zero, they alone could not put the world onto the 450-ppm trajectory.
To do so would mean a technology shift that – in terms of scale and speed of deployment – is unprecedented.
The good news is that we already know many of the policies and technologies that can deliver substantial savings in energy consumption and CO2 emissions.
But making and implementing the right decisions must begin now.
We’re talking about significant changes in the pattern of investment across the supply and demand chains, as well as huge additional spending on new capital stock, especially in power plants and in more energy-efficient equipment and appliances.
Although the sheer scale of the transformation means placing a substantial burden on both the public private and sectors, the current financial crisis should be used as an opportunity rather than a barrier for launching it.
Renewable energy will have a major role to play.
Global renewables-based electricity generation (mainly hydro and wind, but also solar and biomass) is set to double between 2006 and 2030.
In the EU, wind’s share in total power generation is set to rise to 14% by 2030, from 2% today, and would account for well over half the total increase in the EU power generation.
In the 450 scenario, renewables comprise 30% of the EU power-generation mix in 2030, up sharply from 10% today.
Governments must galvanize this transformation.
Clear price signals, including carbon pricing, are crucial, and many non-OECD countries, in addition to needing financial support to help reduce their greenhouse gas emissions, can benefit from the removal of fuel subsidies.
But clear price signals are not enough, as a low-carbon future requires major breakthroughs in technology development and deployment.
Governments can create incentives to innovate, encourage research, and break down international barriers.
And much of the additional spending needs be made by households, driven by a profound change in social attitudes to energy efficiency.
The Coming Ice Age in Energy Security
Worldwide dependence on fossil fuels costs far more than the price of a barrel of crude oil.
The current Middle East crisis, the gradual transformation of Central Asia into a military outpost of the West, and weak regimes in other key producers, such as Russia and Venezuela, are sobering reminders of the fragility of global energy security.
With the world economy remaining dependent on fossil fuels well into this century, energy vulnerability will only increase in the foreseeable future.
Conservation can moderate, but not reverse, rising consumption in the industrialized countries and the developing world.
Renewable energy sources are promising, but they will not soon replace fossil fuels.
Yet there is hope for an abundant, clean energy source that would boost global security by placing production closer to consumers.
Surprisingly, the energy source is a kind of ice.
When natural gas seeps up from within the earth and combines with water at and below the seafloor under certain conditions of low temperature and high pressure, the result is gas hydrate-a substance that most people have never heard of, but that is common geologically.
Once the gas is liberated from the frozen water, it can be collected in wells and put into pipelines, just like ordinary natural gas.
Gas extracted from hydrate reserves is exactly the same as the natural gas in use currently.
Natural gas is increasingly today's fossil fuel of choice, currently accounting for more than 20% of the world's primary energy consumption.
This is mainly because it burns cleaner than coal or oil.
The only byproducts of gas combustion are carbon dioxide, water, and small amounts of nitrogen oxides.
While carbon dioxide is a greenhouse gas, natural gas produces less of it than other fossil fuels.
With our current technology, the amount of recoverable natural gas worldwide-called "conventional gas" in industry parlance-represents about a 60-year supply at today's prices and rate of consumption.
Running out of gas may seem like a distant prospect, but the risk of a security breakdown that jeopardizes supplies haunts us always.
Only 6% of conventional reserves are in North America-roughly a ten-year supply for that continent.
Europe imports much of its gas from Russia, and Japan's resources are minuscule; it imports liquefied natural gas from Indonesia and the Middle East.
India is also energy-poor relative to its population and economy.
Although these reserve estimates are based today's known deposits, we should not pin our hopes on vast undiscovered supplies.
There is a well-established method for estimating reserves yet to be found, and whether one examines currently proven reserves or future projections, one fact stands out: conventional gas supplies are distributed unevenly around the world-and in places far from most consumers.
Russia accounts for one-third of total reserves; the Persian Gulf states control a similar amount.
Conventional gas production will increasingly be concentrated in these two regions over the coming decades.
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Gas hydrate, however, is abundant in offshore areas near many major consuming nations-indeed, generally within their exclusive economic zones.
The US is estimated to have a thousand-year supply at its present rate of gas consumption.
Japan is also well endowed, with a large potential resource just 50 kilometers south of Hamamatsu.
There are indications of significant gas hydrate deposits near India's eastern coast, between Madras and Calcutta.
Unfortunately, major hurdles must be overcome.
To liberate the gas, the frozen water has to be melted.
This can be done in one of three ways: increase the temperature, lower the pressure, or introduce chemicals (like antifreeze for a car).
But the optimal method is not yet known.
More importantly, in some places, hydrate fields are vast but dilute, and extraction would be similar to mining a very low-grade ore-not worth the trouble and expense.
For example, one hydrate-bearing geological formation, Blake Ridge, lies 300 kilometers from Charleston, South Carolina, in the US.
Blake Ridge alone contains six times more natural gas than all American conventional reserves combined.
But this huge resource is spread out over 26,000 square kilometers and lies under 1,000 meters of water.
The investment required to tap it would be enormous and could never be recovered.
But not all gas hydrate reserves are alike.
A more promising one lies beneath the permafrost of Prudhoe Bay, the big oil-producing region on the arctic coast of Alaska.
This deposit is smaller than Blake Ridge, but it is more concentrated and closer to the surface.
While operations in the arctic are always challenging, existing infrastructure makes the Prudhoe Bay prospect a reasonably accessible one.
A reliable assessment of global hydrate reserves and extraction costs would be a very wise investment.
Even if gas hydrate will never be economically competitive with conventional gas, it may have value as a strategic energy reserve.
Many countries subsidize domestic food production to guarantee emergency supplies.
A domestic hydrate-production capability would serve a similar purpose, while perhaps promising a new era of global energy security.
The Coming Revival in French-American Relations
With the American invasion of Iraq in 2003, French-American relations reached a low point.
The Bush Administration felt betrayed by French diplomatic tactics at the United Nations, while French President Jacques Chirac felt confirmed in his mistrust of the sole superpower and his call for a multipolar world.
Today, on the eve of the French presidential elections, opinion polls show that three-quarters of French voters believe that France should distance itself from the United States.
Despite a long history of alliance dating back to the American Revolution and including two world wars, France has always had a somewhat ambivalent attitude toward the US, and the Iraq War was not the first time that a controversial security policy undercut America’s attractiveness in France.
Polls show similar reactions after the Suez Crisis of 1956, the Vietnam War in the late 1960’s and early 1970’s, and the deployment of intermediate range missiles in Europe in the early 1980’s.
In addition, France has long had a strand of cultural anti-Americanism.
Some conservatives disliked the crude egalitarianism of American culture, while some on the left saw America’s faith in markets as a symbol of capitalist exploitation of the working class.
After World War II, France banned Coca-Cola for a time, and, more recently, the farmer José Bové became a folk hero by destroying a McDonald’s restaurant.
But the French still flock to McDonald’s and to theatres playing American movies, despite limits on their import.
While such ambivalence will not change, French-American relations are likely to improve no matter which of the three leading candidates prevails in the final round of voting on May 6, in part owing to Chirac’s exit.
In fact, French-American relations have already begun to improve, as both sides realized that their pubic dispute was damaging their interests.
The exit of some of the most strident neo-conservatives in the Bush administration over the past year has also helped, and with growing opposition to the Iraq War, some Americans are beginning to think that the French may have had a point after all.
Of the three major candidates, the conservative Nicolas Sarkozy has expressed the most pro-American views and traveled to Washington for a photo opportunity with Bush. He told a Washington audience that anti-Americanism was an elite indulgence not shared by the French at large.
“And all French parents dream of sending their child to an American university.” According to Sarkozy, “The virulence of the press and a portion of French elites against the United States reflects a certain envy of your brilliant success.”
In response, an advisor to the socialist candidate Ségolène Royal labeled Sarkozy “an American neo-conservative with a French passport.”
But while Royal has been careful to placate her socialist base, she has also talked about the need for market reforms in the French economy, and taken some foreign policy positions on Iran and Turkey that are closer to the American view than are Sarkozy’s.
The centrist candidate, former education minister François Bayrou, for his part, has relatives in the US and has called for a “third way” in French politics analogous to the paths forged by Bill Clinton and Tony Blair.
The candidates differ in other ways as well.
Both Sarkozy and Royal have appealed to nationalism.
Sarkozy has boasted that he expelled tens of thousands of illegal immigrants when he was interior minister, and in 2005 he referred to Muslim rioters in the suburbs as “scum.”
Aware of the ultra-nationalist threat from Jean-Marie Le Pen, who took second place in the 2002 presidential election, Sarkozy has said that he wants “to talk to those who have moved toward the far right because they are suffering.” While Royal has been critical of Sarkozy, she, too, has appealed to nationalism, calling for a “re-conquest of the symbols of the nation” from the right.
Only Bayrou has denounced the “nationalistic obsession” that has marked the campaign.
But one should not read too much into these differences.
All three candidates support Chirac’s opposition to the Iraq War, will protect French agriculture in global trade negotiations, and will promote French leadership in Europe.
Despite French voters’ rejection of a new constitution for the European Union in 2005 (in part a protest vote against Chirac), all three candidates recognize that the EU has been an important means to enhance French power in world affairs.
None is likely to become an American poodle.
Indeed, that is not the way French politics works.
French leaders often like to be seen resisting American pressure before striking a compromise and cooperating in a manner that serves both French and American interests.
Friction with the US is thus inevitable, but in the long run there is usually fruitful cooperation.
Despite the tension of the past few years, Europe and America have cooperated in Kosovo, Afghanistan, Lebanon, and Iran, and on countering Al Qaeda.
Whatever the outcome of the French election, French-American relations are likely to remain on a steady course, and may well improve further after the US presidential election 2008.
The Coming Showdown with Iran
FLORENCE – US President Barack Obama’s administration has lost little time in announcing that it will seek direct talks with the Iranian government.
This means, at the very least, a tough confrontation over Iran’s quest for a regional strategic advantage in the form of a nuclear weapon.
There is more at stake here than coming up with the right set of incentives and threats to change the Iranians’ minds.
Rather, the time has come to approach the nuclear question in its full regional context rather than piecemeal and operationally.
The entire world knows the risk posed by a nuclear Iran: a drastically altered balance of power in the Middle East and Central Asia, with Iran able to exert far more regional leverage – both overt and implicit – than it now possesses in pursuit of its interests.
Moreover, nearby states are likely to launch or further their own nuclear programs in response, leading to a protracted nuclear arms race in one of world’s most volatile regions.
It is not in the interest of the US or Europe for any of the states at the head of the list – Egypt, Turkey, Saudi Arabia, Syria, and Algeria – to have its own nuclear weapons capability.
While neither outcome is certain, each remains likely.
There is considerable domestic pressure in each of these countries – as there has been in Israel and Pakistan, currently the region’s only nuclear states – to secure the presumed benefits in power and prestige of possessing nuclear weapons.
Such pressure is magnified when rivals and neighbors are perceived to have any kind of strategic advantage.
Yet each of the region’s states has important security concerns and vulnerabilities.
Iran, a multiethnic state whose rulers have struggled to advance national cohesion, is no different.
Shi’a nationalism has followed Persian chauvinism as a rallying point, but neither has succeeded fully in bolstering Iran’s political institutions and securing the allegiance of its young population, nearly two-thirds of which is under the age of 30.
The nation’s unity is periodically threatened by its clerical rulers’ unpopularity among large sections of the population, as well as by regional and ethnic divisions, conflict and instability in its immediate neighborhood, and the hostility engendered by its regional clients and/or proxies in Iraq, Lebanon, Afghanistan, and elsewhere.
In theory, all of these factors are potential sources of leverage for outside powers like the US.
But opposing Iran’s nuclear ambitions directly has had the opposite effect so far.
Iran’s quest for nuclear weapons – with its boost to national pride and promise of regional preeminence – has played a critical unifying role, as well as a political and military one.
The challenge is to craft a consistent policy that both contains and deters Iran’s ambitions without exacerbating its inherent sense of national vulnerability.
The policy debate outside the region currently centers on whether to use force if talks fail.
Iran, predictably, has refused to back down, which some observers have suggested reflects the failure of the world’s major powers to speak with a unified voice.
This is true, but it is an insufficient explanation.
Others have claimed that Iran’s leaders do not care one way or the other about world opinion.
This, too, is an insufficient explanation, for no country, not even North Korea, lives in a vacuum.
Formulating the right mix of carrots and sticks is extremely difficult, and the US is hardly seen in the region as an honest broker.
Therefore, its focus should be less on calibrating tactics per se than on recasting the regional context in which Iran’s leaders will determine whether to proceed or desist.
The starting point should be further enhancement of conventional military forces throughout the region, which means more than increasing weapons inventories.
There should be more confidence-building measures, including joint training exercises and information exchanges, among all the region’s militaries.
A major boost to confidence would be a clear-cut strategic commitment from the West in the form of an extension of NATO’s own deterrent to the Middle East.
It need not single out Iran, and would be more effective than a unilateral US guarantee to Israel or any other single state.
Instead, NATO members should pledge to defend any Middle Eastern state that is attacked with nuclear weapons.
Under ideal diplomatic circumstances, Russia and China would be persuaded to join with NATO in a joint declaration.
Such steps alone are unlikely to deter Iran or fully to reassure the region’s other states.
But, along with continued international pressure from the United Nations Security Council and the International Atomic Energy Agency, they would send a clearer signal that the major powers of the world regard Middle Eastern peace and security as critical to their own.
That would help to diminish the possibility of an unbridled regional arms race if talks fail and Iran someday tests a weapon.
The Coming St. Putinsburg Summit
St. Petersburg is a great place in early summer, when the “White Nights” bathe the city’s imperial palaces and avenues.
Small wonder, then, that Russian President Vladimir Putin likes to show off his hometown.
Three years ago, during the Tsarist capital’s 300th anniversary, Putin hosted some 40 heads of state, ranging from George W. Bush and Gerhard Schroeder to Belarusian dictator Alexandar Lukashenka and Turkmenistan’s Saparmyrat Nyazov, who styles himself “Turkmenbashi,” the father of Turkmen.
Human rights activists questioned the wisdom of endorsing the leader of a growingly authoritarian Russia.
Yet Putin managed simultaneously to celebrate his anti-Iraq war cooperation with Europe, have the US swallow this, and be recognized in front of his local minions as a world leader.
This summer, St. Petersburg (dubbed by local wits “St. Putinsburg”) may see a repeat performance: Russia will preside over a G8 summit for the first time, despite increasing authoritarianism, the ongoing bloody war in Chechnya, and now support for Iran’s nuclear program.
Deflecting mounting criticism, Bush rejects appeals to boycott the summit. “I need to be in a position where I can sit down with him [Putin] and be very frank about our concerns,” Bush said in late March at Freedom House in Washington.
Is Bush wrong?
The question of whether to meet with nasty but powerful people has dogged diplomacy since its inception, and both ends of the question have been argued endlessly – and inconclusively.
So it is probably best to examine the merits of each case separately, looking to precedents and agendas for guidance.
What is now known as the G8 was launched in 1975 as an informal group of the United States, Europe’s Big Four – Britain, France, Germany, and Italy – and Japan, with Canada added as an afterthought.
It expanded to include Russia in 1998 for political, not economic, reasons.
Russia’s unhappy status as a democratizing, but still potentially threatening, former superpower, played a role, as did its huge energy reserves, which is why China, incomparably more powerful economically but politically beyond the pale, was never invited to join.
Indeed, though supposedly grouping the world’s largest economies, the G8 now includes a country with an economy the size of Holland’s, even if it is still excluded from deliberations of the other members’ finance ministers.
In retrospect, Russian membership should probably be considered a mistake.
Russia has stabilized under Putin, but its has become markedly less democratic.
Its economy has boomed thanks to oil and gas exports, not to healthy market developments.
The state still controls the economy as it sees fit, as the de-facto renationalization of Yukos amply demonstrates.
On the other hand, the Kremlin has refrained from international adventurism, and rather consistently supported the US in its “war on terror.”
As European economies grew more dependent on Russian oil and gas, and the US military in Central Asia on Russian acquiescence, reversing the decision to admit Russia to the G8 became politically unthinkable.
The 2003 summit confirmed Russia’s privileged position.
A repeat performance this summer would make it all but unshakeable.
Has “being frank about our concerns,” the justification for hobnobbing with the likes of Putin, proven effective?
Perhaps not.
Nevertheless, although Russia has been backsliding since Putin took power in 2000, his policies might have been worse had he been ostracized.
In any case, a US boycott of the forthcoming summit would be a Russian triumph, as it would throw the West into disarray.
But there need to be limits to the West’s tolerance, particularly given the summit’s agenda, which features energy security, fighting disease, promoting education, counter-terrorism, and non-proliferation.
Is Russia a trustworthy partner in these areas?
Russia is, in fact, the main provider of energy insecurity in Europe.
Its gas blackmail of Ukraine frightened the entire Continent, and its new Baltic pipeline to Germany has provoked howls of outrage from Poland and the Baltic states, which are angry at losing the economic and political dividends a land route gives them.
They are also fearful that Russia will use the energy weapon against them in the future, once the new pipeline allows the Kremlin to do so without affecting Western Europe.
This made little impression on their German EU partners – unsurprisingly, since Schroeder now chairs the consortium that will build the pipeline.
As former French Prime Minister Pierre Mauroy put it in 1981, when he refused to cancel a gas deal with the USSR over the imposition of martial law in Poland, “Should the suffering of French people deprived of gas be added to the suffering of Polish people deprived of freedom?” Old habits die hard.
Russia’s record is equally bleak on other items on the summit’s agenda.
It heads the list on the spread of preventable diseases – not only HIV, but tuberculosis, with 32,000 deaths last year alone – and its education standards are in severe decline.
On terrorism, Russia was the first country to host an official Hamas delegation after the Palestinian elections, and it continues to crush Chechen terror and resistance with methods that would bring it to an international court, were it not a Security Council member.
On non-proliferation, just ask the ayatollahs in Teheran.
Putin’s Russia is not a place for democratic leaders to hold a summit, especially after the paltry results of the last one.
Nor does the summit’s agenda justify holding it there.
While Putin’s policies could have been much worse – it is legitimate to give him credit where it is due – Russia should not be allowed to take the West for granted.
Nothing would be gained by breaking with Russia and engaging in confrontation with it, but there is no reason not to respond to Realpolitik with Realpolitik.
The Human Stew
LONDON – What defines a modern human?
The biological answer is simple: a member of the species Homo sapiens that is characterized by such features as a relatively large brain set in a globular braincase, small brow ridges over the eyes, a small retracted face, a chin on the lower jaw, and a lightly built skeleton.
Many of modern humans’ biological traits – at least those that can be preserved as fossils – were already present in Africa and Israel more than 100,000 years ago.
But other factors – such as complex societies, ceremonies, spiritual beliefs, art, music, technology, and language – also characterize modern human populations.
Which traits are crucial to the definition of a “modern human,” and how far back can the classification be applied?
Given that humans’ morphological and behavioral characteristics evolved at different rates, this question is a source of controversy.
Indeed, paleontologists studying the physical origins of Homo sapiens will inevitably differ from archaeologists reconstructing ancient behavior over what constitutes an early modern human.
Recent discoveries in paleontology, archaeology, and especially genetics of striking similarities between extant humans and some ancient populations are further complicating assessments of modern humans’ origins.
One leading idea was that modern humans’ primitive ancestor Homo erectus left Africa nearly two million years ago, and dispersed into other areas of the world.
Regional populations then steadily evolved into Homo sapiens, with modern human behaviors first emerging in Europe roughly 40,000 years ago.
But new evidence suggests that modern humans evolved relatively recently in Africa – and that the transformation that they underwent after their departure some 60,000 years ago was far from seamless.
Specifically, studies of Homo sapiens’ close but extinct relatives, the Neanderthals, are revealing new facets of modern human development, while intensifying the long-running debate over the differences between the two species’ behavioral capabilities.
Growing archaeological evidence of key elements associated with Homo sapiens is emerging at sites in Africa that are more than 60,000 years old.
These include complex tools (which require several stages of manufacture), symbolism (for example, red hematite pigments for notation and beads for display, made from sea shells and ostrich eggshells), and long-distance networks of contact and exchange.
These discoveries support some archaeologists’ view that only Homo sapiens was advanced enough to be considered truly modern humans, while non-modern groups like the Neanderthals displayed, at best, only incipient signs of such complexity.
Moreover, genetic evidence, based on distinct DNA coding that is known to be related to brain functions in modern humans, suggests at least some cognitive contrasts between Neanderthals and Homo sapiens.
And demographic differences (small, low-density populations) may have hindered Neanderthals’ cultural evolution, compared with the wider networks established by early modern human groups, initially in Africa, and subsequently worldwide.
But evidence also suggests that some Neanderthals buried their dead with grave goods (items presumably intended to help the deceased in the afterlife), produced complex tools (such as stone armatures mounted with mastics), and developed personal symbols (including manganese oxide pigments and pendants made from animal teeth).
They apparently also used plants with medicinal properties.
Furthermore, increasingly sophisticated DNA studies of extinct populations have shown that, despite their general classification as the distinct species Homo neanderthalensis, Neanderthals interbred with modern human groups as they dispersed out of Africa.
As a result, many people’s genomes contain roughly 1% Neanderthal DNA.
Given this hybridization, some researchers argue that the species boundary between modern humans and Neanderthals should be reconsidered, and that both should be classified as Homo sapiens.
But I believe that a morphology-based species distinction is still warranted.
In fact, the scientific dispute reflects the real-world limitations of the concept of distinct biological species, which does not allow for interbreeding.
The situation is further complicated by additional instances of ancient interbreeding among native populations in Africa and Australasia (for example, Australia, New Guinea, and Bougainville).
In the latter case, the interbreeding derived from a population known so far from only one site – Denisova cave in southern Siberia.
Fossils from there contain DNA related to, but distinct from, that of the Neanderthals.
Today, remnants of this DNA – amounting to roughly 3% of some people’s genomes – are present in Australasia.
This indicates that the “Denisovans” must have existed not just in Siberia, but also along the southeast Asian route that early modern humans used to reach Australasia, where the hypothesized hybridization occurred.
Even Sub-Saharan Africans of today show traces of a distinct episode of interbreeding within the last 50,000 years.
In this case, the source may have been as-yet-unknown remnants of the ancient species Homo heidelbergensis – a direct ancestor of both Homo sapiens and Homo neanderthalensis – surviving somewhere in southern Africa.
But the real-world implications of the persistence of DNA from such interbreeding should not be misconstrued.
The fact that paleoanthropologists commonly refer to the Neanderthals as “archaic” humans, owing to their primitive features, could lead to the semantic trap of regarding living humans with greater inputs of DNA from ancient interbreeding as somehow less “evolved” than the rest of humanity.
In reality, given that most human DNA shares recent African origins, all living humans should be considered equally “modern.”
But the recent discoveries cannot be ignored.
The availability of commercial genetic tests that reveal roughly how much Neanderthal DNA an individual possesses provides an opportunity to appreciate the complex origins of modern humans.
While continuing to highlight humankind’s shared modernity and African origins, we must also begin to accept and understand the emerging patchwork nature of our biological history.
The Confidence Game.
CAMBRIDGE – Next month marks the one year anniversary of the collapse of the venerable American investment bank, Lehman Brothers.&nbsp;
The fall of Lehman marked the onset of a global recession and financial crisis the likes of which the world has not seen since the Great Depression of the 1930’s.
After one year, trillions of dollars in public monies, and much soul searching in the world’s policy community, have we learned the right lessons?&nbsp;
I fear not.
The overwhelming consensus in the policy community is that if only the government had bailed out Lehman, the whole thing would have been a hiccup and not a heart attack.&nbsp;
Famous investors and leading policymakers alike have opined that in our ultra-interconnected global economy, a big financial institution like Lehman can never be allowed to fail.
No matter how badly it mismanages its business – Lehman essentially transformed itself into a real estate holding company totally dependent on a continuing US housing bubble – the creditors of a big financial institution should always get repaid.&nbsp;
Otherwise, confidence in the system will be undermined, and chaos will break loose.
Having reached the epiphany that financial restructuring must be avoided at all costs, the governments of the world have in turn cast a huge safety net over banks (and whole countries in Eastern Europe), woven from taxpayer dollars.
Unfortunately, the conventional post-mortem on Lehman is wishful thinking.&nbsp;
It basically says that no matter how huge the housing bubble, how deep a credit hole the United States (and many other countries) had dug, and how convoluted the global financial system, we could have just grown our way out of trouble.&nbsp;
Patch up Lehman, move on, keep drafting off of China’s energy, and nothing bad ever need have happened.
The fact is global imbalances in debt and asset prices had been building up to a crescendo for years, and had reached the point where there was no easy way out.&nbsp;
The United States was showing all the warning signs of a deep financial crisis long in advance of Lehman, as Carmen Reinhart and I document in our forthcoming book This Time is Different:&nbsp;
Eight Centuries of Financial Folly .&nbsp;
Housing prices had doubled in a short period, spurring American consumers to drop any thought of saving money.&nbsp;
Policymakers, including the US Federal Reserve, had simply let the 2000s growth party go on for too long.&nbsp;
Drunk with profits, the banking and insurance industry had leveraged itself to the sky.
Investment banks had transformed their business in ways their managers and boards clearly did not understand.
It was not just Lehman Brothers.&nbsp;
The entire financial system was totally unprepared to deal with the inevitable collapse of the housing and credit bubbles.
The system had reached a point where it had to be bailed out and restructured.&nbsp;
And there is no realistic political or legal scenario where such a bailout could have been executed without some blood on the streets.&nbsp;
Hence, the fall of a large bank or investment bank was inevitable as a catalyst to action.
The problem with letting Lehman go under was not the concept but the execution.&nbsp;
The government should have moved in aggressively to cushion the workout of Lehman’s complex derivative book, even if this meant creative legal interpretations or pushing through new laws governing the financial system.&nbsp;
Admittedly, it is hard to do these things overnight, but there was plenty of warning.&nbsp;
The six months prior to Lehman saw a slow freezing up of global credit and incipient recessions in the US and Europe.&nbsp;
Yet little was done to prepare.
So what is the game plan now?&nbsp;
There is talk of regulating the financial sector, but governments are afraid to shake confidence.&nbsp;
There is recognition that the housing bubble collapse has to be absorbed, but no stomach for acknowledging the years of slow growth in consumption that this will imply.&nbsp;
There is acknowledgement that the US China trade relationship needs to be rebalanced, but little imagination on how to proceed.&nbsp;
Deep down, our leaders and policymakers have convinced themselves that for all its flaws, the old system was better than anything we are going to think of, and that simply restoring confidence will fix everything, at least for as long as they remain in office.
The right lesson from Lehman should be that the global financial system needs major changes in regulation and governance.
The current safety net approach may work in the short term but will ultimately lead to ballooning and unsustainable government debts, particularly in the US and Europe.&nbsp;
Asia may be willing to sponsor the west for now, but not in perpetuity.&nbsp;
Eventually Asia will find alternatives in part by deepening its own debt markets.&nbsp;
Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three.&nbsp;
As painful as it may seem, it would be far better to start bringing fundamentals in line now.&nbsp;
Restoring confidence has been helpful and important.
But ultimately we need a system of global financial regulation and governance that merits our faith.
The Confidence Game
Confidence is a vital element of life, for nations and civilizations as much as for individuals.
Confidence is the ingredient of hope.
It allows you to project yourself into the future, to fulfill or even transcend your capabilities.
It comes from within, but can be reinforced or weakened by the way others perceive you.
But confidence, like blood pressure, must be balanced: the problem starts when you have too much or too little of it.
Overconfidence tends to be as destabilizing as a lack of it.
Consider, for example, America in Iraq.
The Bush administration’s overconfidence in the validity of its objectives – democratizing the Middle East – much more than implementation failures, was the key factor behind the unfolding catastrophe there.
I recently debated one of the key thinkers behind the decision to “liberate” Iraq from Saddam Hussein.
A prominent neo-conservative, he seemed to me something of a Bolshevik of democracy, owing to his unshakeable confidence in the validity of his vision.
According to him, the status quo in the Middle East was untenable and dangerous.
Democracy in Iraq would not only bring peace in Jerusalem, but also a new, safer, and better equilibrium in the entire Arab world.
Because the United States is the most powerful and wisest of nations, it has a unique role to play, and the world should rally behind it in courageously tackling this challenge.
In other words, even as late as the early summer of 2007, he was, like the Bush administration, in a state of denial.
For him, things were going well in Iraq, and a new balance of forces was being established – one that would benefit Iraq’s Shia majority, but not necessarily Iran.
The courage and audacity of the US government and its army was finally “paying off.” Daily violence should not be allowed to hide deeper strategic realities: victory was around the corner, and soon, the world – despite all the anti-Bush propaganda – would recognize it.
At such a level, overconfidence is generally the product of an excessive assessment of one’s capabilities and an insufficient appreciation of the capabilities of one’s adversary.
Both are the product of an ideological reading of the world that bears little connection with reality.
In invading Russia in 1941, Hitler, like Napoleon, demonstrated a military overconfidence that resulted in catastrophe.
Saddam himself fatally overplayed his cards, convinced as he was that America would not dare to attack him.
At the same time, lack of confidence on the part of a country, a culture, or a civilization can be just as dangerous.
The deep conviction that reform can only lead to revolution and chaos results in a stultification of reality that can lead to immobility and despair – and thus become a dangerous and self-fulfilling prophecy.
For example, in Egypt, which is highly representative of the prevailing political situation in the Middle East, the status quo is the result of the regime’s absolute lack of confidence in its ability to open up and reform.
This same lack of confidence is behind the potentially explosive situations in Algeria, Tunisia, and even Morocco.
Because their legitimacy does not rest upon the support of their people, these non-democratic regimes consider the risk of opening themselves greater than the cost of maintaining the status quo.
Of course, confidence and self-doubt are not mutually exclusive.
A country like Israel booms with economic confidence, but is full of self-doubt when it comes to strategic and political considerations.
Can the right amount of confidence be instilled in countries or groups that badly need it?
And if overconfidence is so dangerous, can restraint and modesty be taught to those who do not have it?
Strangely, it may be easier to gain confidence than to restrain it.
Confidence can come from three things: hope, pride, and progress.
Success breeds confidence, and confidence brings progress.
Today’s Chinese and Indians are now convinced that they are succeeding.
They see in the West a mixture of respect for their achievements and apprehension for the challenge they now pose, and that fills them with pride.
Attempting to impose democracy on others is an act of unbounded arrogance.
But democracy is also the best remedy against overconfidence, because it allows ordinary people to decide whether their leaders are behaving arrogantly or responsibly.
Only the self-correcting mechanisms of truly democratic regimes can ensure the right balance.
The Conflicted Bank of England
OXFORD – Andrew Sentance, an outgoing member of the Bank of England’s Monetary Policy Committee, has outlined a credibility-challenging scenario for the BOE.
There are two contradictory forces that could keep inflation significantly above its 2% target not only this year and next year, but even in 2013.
The dilemma is that any depreciation of sterling increases the level of imported inflation that is not offset by spare capacity in the economy.
In other words, the United Kingdom has spare capacity – output fell by 6.4% during the recession and has not fully recovered – but not enough of it.
Thus, inflation has been above the BOE’s target throughout the recovery from the financial crisis of 2008.
And, according to Sentance, it could stay above that target for the BOE’s two-year medium-term forecast window.
Worse still, if Bank of England Governor Mervyn King is right that above-target inflation is due to imported inflation, raising interest rates has little impact unless it induces sterling appreciation, which would reduce the cost of imports.
But, sterling depreciation is supposed to re-balance the economy by increasing exports. Indeed, the British government is counting on that.
Its new Office for Budget Responsibility forecasts trade contributing as much as consumption to GDP growth in the coming years.
Of course, that means closing the current account deficit, which has been about 1-3% of GDP, and that, in turn, implies further weakening of sterling.
Obviously, sterling can’t appreciate and depreciate simultaneously.
Theoretically, sterling could stay at the current rate of about $1.60 and improve the trade position if the increased volume of cheaper exports outweighed the value of more expensive imports – the so-called J-curve effect.
In that case, the trade balance would improve over time, following an initial deterioration.
It happened in the early 1990s when sterling weakened after exiting the ERM (exchange rate mechanism), but global economic conditions are now less robust.
Another problem is that British exports (particularly services) compete on quality rather than price.
And, since the UK doesn’t produce low-end manufactures anymore, they must be imported.
In other words, demand for imports and exports is not very price-elastic, and there is only limited scope for substituting domestically produced alternatives.
So far, the trade deficit has improved; but, with sterling down roughly 25% on a trade-weighted basis for four years, the upward part of the J seems a little distant.
Moreover, there is another dilemma: the output gap.
Britain has recovered only one-third of its output lost from a deep recession.
With the economy growing by only 1.5% last year and unemployment at 7.8% (not far off a 17-year high), there should be idle factors of production ready to be put to work.
But what if the economy’s potential output has been damaged?
What if, as has happened in other financial crises, output growth remains sluggish for several years as the banks rebuild their balance sheets and de-leveraging takes place slowly?
In that case, the UK might no longer grow at 2.75% annually, but say at closer to 2%.
If so, there is a smaller output gap: a lower level of potential output consistent with higher unemployment means that growth will be accompanied by inflation.
Of course, the output gap is difficult to compute.
But core inflation (which excludes energy and food prices) has been above 2% for much of the recovery, and indirect taxes like VAT – imposed to reduce the fiscal deficit – have contributed to upward pressure on prices.
On the other hand, annual wage growth of only 2% means that there are still only minimal second-order effects even after 16 months of above-target inflation.
The BOE appears truly conflicted.
The majority is voting to keep rates unchanged.
But, there are two votes for a 0.25% rate rise, one vote for a 0.50% rate rise, and even one vote for more quantitative easing.
This unusual four-way split on its nine-member MPC reflects differences in how the contradictory influences on price stability are assessed.
Moreover, with a quarter of the economy contracting (or stagnating when weather effects are discounted), it is not hard to see why the MPC’s members cannot agree.
But the BOE’s inaction – even as the ECB raised interest rates in order to begin to normalize monetary policy – could send the wrong signal, according to Sentance.
And, as he also warns, if inflation remains above the BOE’s target for another two years, abrupt and sharp monetary tightening would undermine the recovery – and could damage the credibility of the BOE itself.
The Consequences of Angela Merkel
LONDON – Germany has been leading the opposition in the European Union to any write-down of troubled eurozone members’ sovereign debt.
Instead, it has agreed to establish bailout mechanisms such as the European Financial Stability Facility and the European Financial Stabilization Mechanism, which can lend up to €500 billion ($680 billion) combined, with the International Monetary Fund providing an additional €250 billion.
These are essentially refinancing mechanisms.
Heavily indebted eurozone members can apply to borrow from them at less than the commercial rate, conditional on their committing to ever more drastic fiscal austerity.
Principal and interest on outstanding debt have been left intact.
Thus, creditors – mainly German and French banks – are not expected to suffer losses on their existing loans, while borrowers gain more time to “put their houses in order.”
That, at least, is the theory.
So far, three countries – Greece, Ireland, and Portugal – have availed themselves of this facility.
In mid-July 2011, Greece’s sovereign debt stood at €350 billion (160% of GDP).
The Greek government currently must pay 25% for its ten-year bonds, which are trading at a 50% discount in the secondary market.
In other words, investors are expecting to receive only about half of what they are owed.
The hope is that the reduction in borrowing costs on new loans, plus the austerity programs promised by governments, will enable bond prices to recover to par without the need for the creditor banks to take a hit.
This is pie in the sky.
Unless a large part of its debt is forgiven, Greece will not regain creditworthiness.
(Indeed, by most accounts, it is about to default.)
And the same is true, albeit to a lesser degree, for other heavily indebted sovereigns.
Any credible bailout plan must require creditor banks to accept that they will lose at least half of their money.
In the United States’ successful Brady Bond plan in 1989, the debtors – Mexico, Argentina, and Brazil – agreed to pay what they could.
The banks that had loaned them the money replaced the old debt with new bonds at par value, which averaged 50% of the old bonds, and the US government provided some sweeteners.
It was write-offs and devaluations, not austerity programs, that allowed bond prices to recover.
In the Greek case, creditors have yet to accept the need for write-offs, and European governments have provided them with no incentives to do so.
Germany’s opposition to debt forgiveness is thus bad economics, bad politics (except at home), and bad history.
The Germans should remember the reparations fiasco of the 1920’s.
In the Treaty of Versailles, the victorious Allies insisted that Germany should pay for “the cost of the war.”
They added up the figures, and in 1921 they presented the bill: Germany “owed” the victors £6.6 billion (85% of its GDP), payable in 30 annual installments.
This amounted to transferring annually 8-10% of Germany’s national income, or 65-76% of its exports.
Within a year, Germany had asked for, and obtained, a moratorium.
New bond issues, following a big debt write-down in 1924 (the Dawes Plan), enabled Germany to borrow the money to resume payments.
There then followed a crazy system: Germany borrowed money from the US in order to repay Britain, France, and Belgium, while France and Belgium used a bit of it to pay back Britain, and Britain used more of it to pay back the US.
This whole tangle of debts was finally de facto written off in 1932 in the middle of the global slump.
But, until 1980, Germany continued repaying the loans that it had incurred to pay the reparations.
From the start, the economist John Maynard Keynes had been a fierce critic of the reparations policy imposed on Germany.
He made three main points: Germany didn’t have the capacity to pay were it to regain anything like a normal standard of living; any attempt to force it to reduce its standard of living would produce revolution; and to the extent that Germany was able to increase its exports to pay reparations, this would be at the expense of the recipients’ exports.
What was needed was cancelation of reparations and inter-Allied war debts as a whole, together with a big reconstruction loan to put the shattered European economies back on their feet.
In 1919, Keynes produced a grand plan for comprehensive debt cancellation, plus a new bond issue, guaranteed by the Allied powers, whose proceeds would go to victors and vanquished alike.
The Americans, who would have had to provide most of the money, vetoed the plan.
The point to which Keynes kept returning was that the attempt to extract debt payments over many years would have disastrous social consequences.
“The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,” he wrote, “even if it does not sow the decay of the whole civilized life of Europe.”
History never repeats itself exactly, but there are lessons to be learned from that episode.
Germans today would say that, unlike reparations, the Greek and Mediterranean debts were voluntarily incurred, not coerced.
This raises the question of justice, but not the economic consequences of insisting on payment.
Moreover, there is a fallacy of composition: if there are too many debt collectors, they will impoverish the very people on whom their own prosperity depends.
In the 1920’s, Germany ended up having to pay only a small fraction of its reparation bill, but the long time it took to get to that point prevented the full recovery of Europe, made Germany itself the most conspicuous victim of the Great Depression, and bred widespread resentment, with dire political consequences.
German Chancellor Angela Merkel would do well to ponder that history.
Abenomics and Asia
SEOUL – Japanese Prime Minister Shinzo Abe’s economic agenda – dubbed “Abenomics” – seems to be working for his country.
Expansionary monetary policy is expected to inject liquidity into the Japanese economy until inflation hits the Bank of Japan’s 2% target, while expansionary fiscal policy is expected to continue until economic recovery takes hold.
As a result, consumer and investor confidence is returning.
The Japanese stock market has soared more than 40% since November of last year, when it became clear that Abe would form the next government, and exports and growth are also picking up.
With a large output gap and low inflationary pressure, expansionary policies show great potential for reviving economic activity.
But other countries – including neighboring Asian economies – fear that Japan is devaluing the yen to bolster exports and growth at their expense.
Some have accused Japan of fueling a global “currency war.”
Anticipation of aggressive monetary expansion has sharply weakened the yen, which has fallen by almost 20% against the dollar in just over four months.
Of course, Japan’s escape from its 15-year deflationary trap and two decades of economic stagnation would be good for the world.
Japan remains the world’s third-largest economy, the fourth-largest trader, and the third-largest export market for neighboring China and South Korea, which thus stand to benefit if “Abenomics” revitalizes Japanese domestic demand.
More broadly, given Europe’s slide into recession and only a slow rise in world trade volume, renewed growth and stronger import demand in Japan would support global recovery.
The question now is whether Abenomics can achieve its goals without destabilizing the world economy, especially neighboring Asian economies.
Doing so requires Japanese policymakers to focus on more sustainable growth while averting a vicious cycle of competitive devaluation and protectionism with Japan’s trade partners.
In particular, expansionary monetary and fiscal policies – which are helpful in the short term – must be accompanied by fundamental structural reforms.
Japan’s deflation and economic stagnation over the last two decades stemmed largely from a dysfunctional financial system and a lack of private demand.
The collapse of asset bubbles in the 1990’s left Japan’s financial system and private sector saddled with a huge debt overhang.
Recovery began only after the balance-sheet weaknesses in the financial, household, and corporate sectors were addressed.
Sustainable growth requires sustained private-sector demand.
Monetary easing and fiscal stimulus, combined with structural measures to restore private firms to financial health, would stimulate household expenditure and business investment.
Indeed, the impact of real exchange-rate depreciation on growth is likely to be short-lived&#160;unless increased corporate profits in the export sector lead to higher household consumption and investment.
And yet risks to financial and fiscal stability could arise if higher inflation and currency depreciation were to spoil investors’ appetite for Japanese government bonds, thereby pushing up nominal interest rates.
That is why the success of “Abenomics” hinges not on the short-term stimulus provided by aggressive monetary expansion and fiscal policies, but on a program of structural reform that increases competition and innovation, and that combats the adverse effects of an aging population.
Japan, of course, is not alone in using exchange-rate policies to keep exports competitive.
Many emerging economies’ authorities intervene in currency markets to prevent exchange-rate appreciation and a loss of export competitiveness.
But if Japan starts to intervene directly in global currency markets to ensure a weaker yen, neighboring competitors will respond in kind.
The danger of a currency war and protectionism should not be underestimated.
In South Korea, the government and business leaders worry that a stronger won, which recently rose to its highest level against the yen since August 2011, will hurt key export sectors, including automobiles, machinery, and electronics.
One report by a Korean research institute shows that the Korean economy will slip into recession if the yen-dollar exchange rate nears 118, its average level back in 2007.
Moreover, unlimited quantitative easing by the Bank of Japan, the Federal Reserve, and the European Central Bank also increases the risk of volatile capital flows and asset bubbles in Asian emerging economies.
Chinese policymakers have raised serious concerns about the growing risks of inflation and property bubbles.
This delicate situation could escalate into further currency intervention, trade protectionism, and capital controls.
Beggar-thy-neighbor policies could lower total trade volume – a zero-sum game from which no one would benefit.
After all, Japanese exports rely on emerging and developing markets, with East Asia alone accounting for nearly half of Japan’s foreign sales.
The regional economy would benefit from closer coordination of exchange-rate and monetary policies.
Mechanisms like the G-20 and ASEAN+3 (ASEAN, with China, Japan, and South Korea) should be used more actively for policy dialogue and surveillance.
East Asian economies could then, over time, cooperate to enhance regional exchange-rate stability, thereby creating a more conducive environment for intra-regional trade.
Japan’s economy is moving at last, which bodes well for Asia and the world.
But, despite its new vigor, the benefits of recovery could prove to be short-lived unless a sustainable and cooperative growth path is found.
The Consequences of Korean Extremism
SEOUL – Once again, the Korean peninsula is experiencing one of its periodic bouts of extremism, this time marked by the suicide on May 22 of former president, Roh Moo-hyun, and North Korea’s second test of a nuclear device.
Roh’s suicide is a disaster for his family and a national shame, while North Korean leader Kim Jong-il’s nuclear blast is something of a temper tantrum, but one which may have dire consequences for the two Koreas and the world.
The North Korean bomb, estimated at four kilotons, does not come anywhere near the magnitude of the atomic bombs of 15-21 kilotons that America dropped on Japan 64 years ago.
Indeed, this vainglorious attempt by Kim Jong-il reminds Koreans of the mother bullfrog in Aesop’s Fables who puffed herself out to imitate an ox.
Yet North Korea’s world-defying belligerency is not utter madness.
Rather, it is a by-product of its own acute fears of regime collapse.
As a Korean, I am always puzzled by Korean extremism.
Where in the world can you find a more isolated, regimented and militarized dynastic mutation of a communist totalitarian system than in North Korea?
Where on earth can you see a nuclear-armed, missile-shooting panhandler such as Kim Jong-il?
Is there another country where only a father and his son have ruled like demigods for the last 61 years?
Likewise, where else but in South Korea can you find a Christian church whose registered membership runs upwards of 800,000, and where nearly 100,000 adherents attend each of the three Sunday services every week?
Where else can you witness an ex-president commit suicide by jumping off a cliff near his residence?
And this in a country that had an estimated per capita income of $40 in the 1940’s but has now become the world’s 12th or 13th largest economy.
Cornelius Osgood, an American anthropologist, attributed Korean extremism to the peninsula’s weather.
He observed that the Korean temperament is a product of long, harsh Siberian winters and hot, humid summers, with only short springs and autumns.
I believe, however, that Korean extremism stems from the country’s geography and history.
Surrounded by hostile neighbors, such as Chinese, Mongols, and Manchus in the north and Japanese across the sea, Koreans have struggle tooth and nail for thousands of years to retain their ethnic, linguistic, cultural, and political identity.
Setting the blame game aside, what can be done with North Korea?
Unfortunately, putting the nuclear genie back in the bottle is next to impossible.
The effectiveness of available options is limited, and all of them are pregnant with unpredictable political and military consequences.
“Economic strangulation” of North Korea appears to be the fallback option.
Strengthening and tightening United Nations Security Council Resolution 1718, crafted in the wake of North Korea’s first nuclear test in October 2006, should be the immediate task.
The Security Council is already at work drafting a new resolution.
But, to make the new resolution effective, China’s full and unwavering participation – which has not yet been the case – is critical.
Any unilateral measures against North Korea by individual countries must be executed within the broader framework of the new resolution.
And, even if new sanctions are imposed, the door to the Six-Party Talks must be left open for Kim Jong-il.
In this eyeball-to-eyeball situation, the other five parties in the talks – China, Japan, Russia, the United States, and South Korea – must not give in first to North Korea.
At present, public opinion worldwide, particularly in South Korea and Japan, is highly volatile.
A cooling-off period is necessary.
Seeking dialogue with North Korea immediately after its missile tantrum and nuclear brinkmanship is unwise and impractical.
After tough and effective UN-led sanctions are imposed, the concerned parties must wait until North Korea feels the pain of the economic squeeze.
But, as North Korea is one of the world’s poorest and least globalized states, the effectiveness of sanctions will be limited.
At the same time, the nuclear threat is not the most immediate danger.
The bigger threat today is actual combat, for, the day after North Korea’s nuclear test, South Korea announced its full participation in the US-led Proliferation Strategic Initiative, which seeks to intercept ships that may be involved in illegally transporting nuclear technology.
North Korea blasted this South Korean decision as a “declaration of war.”
So great care and cool heads will be needed in the seas around Korea in the days and weeks to come.
Rising tension on the Korean Peninsula is shattering fast the glimmers of hope for re-unity that followed ten years of progress under the Kim Dae-Jung and Roh Moo-hyun governments.
South Korean President Lee Myung-bak, through his flip-flops, and Kim Jong Il, with his renewed nuclear blackmail, both seem determined to see relations deteriorate.
The two current leaders in Korea must not repeat the mistake of their predecessors in the latter part of the nineteenth century.
Blinded by internecine domestic power struggles, they failed to see the great powers’ strategic gambits in the region. That failure led directly to the colonization of Korea by Japan.
Worsening inter-Korean relations will certainly make both sides less secure and stable politically, economically, and militarily.
Caught in this vicious spiral, North and South Korea will become far more vulnerable to neighboring powers’ strategic maneuvers.
As a result, growing inter-Korean hostility may ultimately prove far more lethal to the well-being of all Koreans than Roh Moo-hyun’s tragic suicide and Kim Jong-il’s futile fireworks.
The Syria Lessons
PRINCETON – As the United States and Russia try to broker a conference that can bring the various sides in the Syrian conflict to the negotiating table, potential Western participants, at least, should be thinking about the larger implications of the Syrian conflict for dictators and democracies around the world.
Here are the lessons thus far:
Bad guys help their friends.
The Russians and Iranians are willing to do whatever it takes to keep President Bashar al-Assad in power.
Hezbollah, supplied by Iran, has now moved openly onto the battlefield in support of the Assad regime.
Russia and Iran have kept the Syrian government supplied with heavy weapons and other military assistance, including a Russian shipment of sophisticated anti-ship missiles with advanced radar systems.
These will help Assad hunker down and fend off all comers in an Alawite mini-state that will include the Russian-leased port facility at Tartus.
Diplomacy without a credible threat of force is empty talk.
“Speak softly and carry a big stick,” Theodore Roosevelt counseled.
President Barack Obama rightly wants to lead in global affairs through civilian more than military power; he understands that military solutions to foreign-policy problems are hugely expensive and often counter-productive in terms of advancing US security and prosperity over the long term.
But Obama’s strategy in Syria seems to be “speak loudly and throw away your stick.” Obama has made it clear over and over (as has NATO Secretary General Anders Fogh Rasmussen) that he has no interest in intervening militarily in Syria.
And the US response to the latest Russian missile shipment?
Secretary of State John Kerry said: “I think we’ve made it crystal clear we would prefer that Russia was not supplying assistance.”
The US has cast aside one of its most important foreign policy tools, creating an incentive for the Syrian government and its supporters to keep fighting until they are in the most advantageous position possible to negotiate a settlement – that is, if they have any incentive to negotiate at all.
If you are a dictator facing sustained political protests, be as brutal as possible and incite sectarian killing.
Part of Syria’s agony is the self-fulfilling nature of the conflict.
From March to December 2011, hundreds of thousands of Syrians marched every Friday, seeking the same political liberalization that Tunisians, Egyptians, Yemenis, Bahrainis, Jordanians, and others across the Middle East and North Africa sought in what was optimistically called “the Arab Spring.”
Unarmed, they were shot in the streets by riot police and government snipers, until they finally started forming small local militias for self-protection – militias that gradually grew into the loose federation of forces now known as the Free Syrian Army.
All the while, Assad was describing the violence as the product of terrorists and Sunni extremists seeking dominion over minority Alawites, Druze, Kurds, Christians, and other groups.
He worked assiduously to fan the flames of sectarian civil war, succeeding to the extent that now the chief reason for not intervening to stop the killing is the impossibility of doing so effectively in an environment of sectarian violence.
Regional organizations are still unable to solve regional problems without great-power leadership. Turkey has been threatening and calling for military action for 18 months, but US officials say that the Turks are not in fact ready to do anything beyond providing support for refugees and opposition fighters.
Qatar and Saudi Arabia are also sending arms to Syrian opposition groups, but the Arab League and the Gulf Cooperation Council are paralyzed.
Without a great power that is willing both to share the lead and to push from behind, regional organizations cannot take charge in their own neighborhood.
Human suffering, even on a massive and destabilizing scale, will not move the world to action.
In a recent conversation about Syria with a couple of well-known foreign policy experts, one participant suggested that the Middle East’s current borders, drawn in colonial times, cannot last and must be redrawn.
I pointed out the possibility of a Middle East conflagration equivalent to the Thirty Years War in Europe, which is estimated to have killed between half and three-quarters of the population of some of the participating states.
One of my interlocutors agreed, but said that we could do nothing to stop it, because “that’s the period of history we’re in.”
For all the world’s pious proclamations about “never again,” a mantra arising from the Holocaust, mass murder almost never motivates foreign intervention.
It is astounding to think that the world mobilized immediately to push Iraq out of Kuwait in 1991, but has dithered for more than two years as tens of thousands of Syrians have been killed, and their country, a cradle of civilization, laid waste.
“Humanitarian” intervention – action that is motivated by our concern for the fate of fellow human beings – is often described as reflecting “moral concern.”
But how many wars does it take for us to understand that killing always begets more killing?
People who watch the butchering of their children and parents, the rape of their wives, daughters, and sisters, and the wanton destruction of their homes and livelihoods do not forget.
They carry vengeance in their hearts from generation to generation, until a measure of justice is done, nursing their enmity in frozen conflicts that block economic growth, prevent the formation of social capital, and paralyze political institutions.
When no side in a war has a reason to stop fighting, a peace conference cannot succeed.
In Syria, the moral, strategic, and political arguments all converge in favor of decisive action to stop the killing, if not forever, at least for now, to create a space for peace.
But if the lessons of the past two years are any guide, the wheels of violence will keep on turning.
The Latin Difference
PRINCETON – It is increasingly popular to think of Europe in binary terms.
French President François Hollande is constantly flirting with the idea of building a new Latin bloc, in which Spain and Italy would join France in the struggle against fiscal austerity.
In this vision, Latin superiority consists in a more expansive view of the state’s capacity to secure incomes and create wealth, and less of the “Protestant” obsession with the individual’s work.
The proposal is not altogether new.
As the Italian philosopher Giorgio Agamben recently emphasized, it appeared at the beginning of the postwar era.
In August 1945, a French intellectual, Alexandre Kojève, submitted to General Charles de Gaulle a sketch for a new foreign policy, based on a Latin “third way” between Anglo-American capitalism and Soviet-Slavic Marxism.
But there are even older variants of the French vision of Europe.
In the middle of the nineteenth century, the French Emperor Napoleon III actually created a Latin Monetary Union, which included Belgium, Italy, and Switzerland.
Napoleon saw the scheme as a potential basis for a single world currency.
The British economist Walter Bagehot replied at the time that there would probably be two competing world currencies, which he termed Latin and Teutonic.
By Teutonic, Bagehot seemed to mean the Protestant world: the United States, recovering from the Civil War, Germany, and Britain.
He had no doubt about which vision would win out: “Yearly one nation after another would drop into the union which best suited it; and looking to the commercial activity of the Teutonic races, and the comparative torpor of the Latin races, no doubt the Teutonic money would be most frequently preferred.”
The modern tendency to regard economic differences in terms of religion was stimulated by Max Weber’s reflections on the Protestant work ethic.
But that interpretation is clearly unsatisfactory, and cannot account for the dynamism of the deeply Catholic world of Renaissance Italy and Flanders.
A better way to understand economic differences is to view them as a reflection of alternative institutional and constitutional arrangements.
In Europe, that difference stems from two revolutions, one peaceful and wealth-enhancing (1688 in England), and the other violent and destructive (1789 in France).
In the late seventeenth century, in the wake of Britain’s Glorious Revolution, when Britain revolted against the spendthrift and autocratic Stuart dynasty, the British government that was formed after William and Mary assumed the throne adopted a new approach to debt.
Voting budgets in parliament – a representative institution – ensured that the people as a whole were liable for the obligations incurred by their government. They would thus have a powerful incentive to impose controls on spending to insure that their claims could be met.
This constitutional approach limited the scope for wasteful spending on luxurious court life (as well as on military adventure), which had been the hallmark of early modern autocratic monarchy.
The result was a dramatic reduction in the British state’s borrowing costs and the emergence of a well-functioning capital market, which caused private borrowing costs to fall as well.
Representative government, and its logical outgrowth, the democratic principle, became part of the classic model of good debt management.
The alternative model to British constitutionalism was ancien régime France.
Official bankruptcy, a regular occurrence, required prolonging maturities on state debt and reducing interest payments.
But this solution raised the cost of new borrowing, so France began to consider the British model.
The problem was that the imitation was imperfect.
After the conclusion of the American War of Independence, instead of returning to the old model of default, which had been applied as recently as 1770, the French elite did everything it could to avoid that outcome.
Fearing that the system was fragile, the government opened its coffers in 1787, bailing out private investors who had lost in an immense speculative scheme to corner shares in a reorganized East India Company.
But there was an immediate problem: the existing tax system had reached its limits, and no more revenue could be raised without ending time-honored privileges and immunities.
In the end, the only viable course was massive confiscation – the creation of biens nationaux as the basis for the issuance of state debt. But that measure, instead of restoring financial calm, led to an escalation of expectations regarding what the state could and should do, and exacerbated social tensions.
Adherence to the principle of non-default produced the French Revolution, the lesson being that political systems will collapse if they take on too much debt and try to pay at any cost.
The situation was the reverse of Britain.
In France, there was no adequately functioning market that differentiated among risks.
The state’s commitments became incredible as it absorbed losses produced in the non-functioning market.
The French experience exacted a high long-term price: French society was poorer relative to Britain in the century after the Revolution.
But the French Revolution also produced a powerful and attractive myth of social transformation. Far from discrediting the flawed approach to debt management, the “nation,” which succeeded absolutist monarchy as the basis of political authority, remained wedded to statist solutions.
John Kerry’s Tricky Bid
LONDON – In Why You Lose at Bridge (the funniest book about bridge ever written), my uncle, S. J. Simon, advised players to aim “not for the best possible result, but the best result possible” with the partner you have.
This advice applies to the long-stalled Israel-Palestine peace process, newly revived by US Secretary of State John Kerry.
The United Nations spelled out the “best possible result” in 1947: Palestine – then a British mandate – was to be partitioned into two states of approximately equal size.
Israel accepted this, but the Palestinians did not, so the Palestinian state was never established.
In successive wars, Israel seized all the land allocated to Palestine, mainly the West Bank of the Jordan River and Gaza, now swarming with millions of Palestinian refugees.
Since the Oslo Accords of 1993, which envisaged a Palestinian state on the West Bank and in Gaza, “facts on the ground” have whittled down the putative Palestinian state still further.
Part of the West Bank has been annexed outright by Israel or seized by Israeli settlers. The Palestinian Authority has been given limited autonomy over 25% of it, in non-contiguous parcels.
Kerry’s formidable task is to persuade the Palestinians to accept a smaller state than they want and the Israelis to accept a smaller state than they have.
But, with the security situation in the “occupied territories” under control, Israeli Prime Minister Binyamin Netanyahu’s government is content with the status quo.
So Kerry’s blandishments are directed toward the Palestinians.
His strategy seems to be to bribe them with $4 billion to accept a (temporary) “bantustan” solution (so named for the nominally autonomous states to which South Africa’s apartheid regime confined most of the country’s black majority).
It just might work.
Palestinian Authority President Mahmoud Abbas might be attracted by the money if it is accompanied by the trappings and symbols of statehood.
At 78, he is a president in urgent need of a state.
The Netanyahu government, too, might conceivably agree to a Palestinian “entity” on 75% of the West Bank, provided that Israel remained in overall control.
Kerry’s initiative would have a greater chance of success were more money on the table.
One way to increase it would be to convert the Palestinian demand for a “right of return” (to Israeli lands from which they fled in 1947-1948) into a right to compensation.
At the failed Camp David summit in 2000, Israeli negotiators suggested a $30 billion international fund that would make payments to genuine refugees.
By revisiting the Israeli offer, Kerry could neatly combine economic stimulus with fulfillment of a key Palestinian demand.
Nevertheless, even with the extra cash, neither side would be likely to accept such a simulacrum of the two-state solution.
Although such a deal might satisfy Israel’s security needs, it would mean abandoning the Greater Israel project championed by hardline Zionists and religious extremists.
And, although Abbas might be tempted by cosmetic changes to the status quo, most Palestinians probably would reject them as fraudulent.
A peace settlement should not be impossible.
There would need to be agreement on the amount of territory reserved for the Palestinian state.
Since no Israeli government would surrender the West Bank border areas that have the thickest settlements, land in Israel would need to be offered as compensation.
Jerusalem would have to be divided, with UN administration of holy sites, and an agreement would be needed to police the porous frontier with Jordan.
But there is little chance that such an agreement will emerge from the current round of talks.
Most Israelis – certainly the current government – are convinced that Palestinians must be prevented by force from killing Jews. “How do we resolve the contradiction between our extreme morality and our blatantly immoral circumstances?” asks the writer Uri Avnery.
The desire for peace is more urgent in Ramallah than in Tel Aviv.
But Abbas has his own intransigents in the form of Hamas, which has ruled Gaza since 2006, and whose commitment to violence is a mirror image of Netanyahu’s “peace through strength.”
A genuine two-state solution thus requires a change of heart – and leadership – on both sides.
On the Israeli side, this means a less paranoid view of the Palestinians, coupled with a recognition that Israel’s behavior runs contrary to modern ethics.
Past conquest cannot be a legitimate basis for current rule.
That is why all civilized countries have given up the claim to rule by force.
The Palestinian side, for its part, must accept that Israel is here to stay, and that huge benefits can be reaped from economic cooperation.
Both sides need political leaders willing to take real risks for peace, including the risk of being killed.
After all, ordinary soldiers take this risk, so why should political leaders – who can do much greater good or ill – be immune to it?
But external pressure may create new facts.
Hamas has always believed that only violence can achieve a genuine Palestinian state, so the Israelis must fear a third intifada if Abbas cannot deliver.
Such a popular uprising would be brutally suppressed, strengthening both sides’ intransigents in the short run and undermining America’s automatic support for Israel in the long term.
Pressure for change may also come from unfolding events in the Middle East, with regional turmoil bound to affect the West Bank and Gaza.
Increasingly unstable Arab neighbors might give the Israelis a motive to make peace in a small area and thereby hold at bay the chaos outside.
The likeliest outcome of the current flurry of diplomacy will be a fudge, which both sides will present as the “best result possible.”
There will be another roadmap to final two-state status, with some timetable for Palestinian statehood, conditional on Hamas’s renunciation of violence.
The Israelis will claim to have conceded nothing essential;
Abbas’s Fatah will claim to have secured a road paved with gold.
And the peace process will creep forward –&#160;more process than peace – until it encounters the next roadblock.
Syria’s Hijacked Struggle
LONDON – As Syria’s civil war has progressed, the West’s views on arming the opposition have become increasingly confused, which reflects the growing muddle on the ground.
While President Bashar al-Assad’s regime remains vicious and tyrannical, and some of its opponents’ motives remain altruistic, the conflict can no longer be defined simply as one of good versus evil.
No unified, patriotic Syrian opposition has existed since extremists hijacked the peaceful protests in 2011.
Indeed, some opposition tactics are as brutal as those of the Syrian regime.
The United Nations estimates that security forces have suffered 15,000 fatalities, and the opposition 10,000, and that 45,000 civilians have died in the last two years of fighting.
And the UN has condemned militant groups – which now form the majority of fighters in Syria – for murder, kidnap, torture, assault, corruption, and reliance on child soldiers.
With Syria engulfed by chaos, the world does not know what to think.
Martin Dempsey, Chairman of the US Joint Chiefs of Staff, has admitted that the United States lacks a clear picture of the situation in Syria.
Moreover, Lakhdar Brahimi, the UN and Arab League special envoy for Syria, reports that opposition forces include 38 nationalities.
Jihadi fighters connected to Al Qaeda are now in the majority.
The United Kingdom’s Home Office has warned that hundreds of British and other European Muslims fighting in Syria alongside Al Qaeda-linked rebel groups could return home to carry out terrorist attacks.
In February, Syria’s state news agency accused jihadi rebels of firing a rocket containing chemical materials in Khan al-Assal – an allegation that the British television outlet Channel Four backs.
The rebels, however, blame the government for the attack (which neither side has been able to prove involved chemical weapons).
The Free Syrian Army (FSA), which the US, the UK, and France support, has denied involvement in the alleged chemical attacks, but has not condemned the rebels’ brutal campaigns.
Puzzlingly, US Secretary of State John Kerry, justifying plans to provide the FSA’s Supreme Military Council with additional assistance, has cited the danger of “letting this country, the heart of the Middle East … [become] hijacked by extremists.”
But to oppose extremism and support the FSA is a blatant contradiction.
Even the US Department of Justice has stated categorically that most of the FSA adhere to Al Qaeda’s ideology.
The Supreme Military Council is overwhelmingly Islamist, with rebel-controlled areas of Syria already practicing sharia (Islamic law).
Salim Idris, the council’s chief of staff, has expressed a willingness to fight alongside extremist groups that refuse to accept the unified command.
He has labeled only the Al Qaeda-linked Jabhat al-Nusra as extremist (though he rejects America’s branding of the group as a “foreign terrorist organization.”)
In this context, the West’s belief that it can channel assistance to certain elements of the opposition is absurd, as is the concept of “non-lethal” aid, such as night-vision goggles, medical equipment, and armor, given the conventionally “lethal” aid that is already pouring in from the Gulf states.
The Guardianrecently reported that Jordan is accepting Saudi money to supply arms directly to Syrian rebels.
Western proponents of such aid, such as Kerry and UK Foreign Minister William Hague, must recognize that these supply channels do not discriminate between opposition groups.
More important, Western leaders must comprehend the danger of picking sides.
And that means that they must stop ignoring the lessons of the campaign in Afghanistan in the 1980’s, which facilitated the Taliban’s rise to power, and the intervention in Libya in 2011, which produced a weak and divided government that remains locked in a power struggle with Islamist militias.
France, the US, the UK, and Turkey have recognized the Syrian National Coalition as Syria’s future interim government, despite reports that two-thirds of the SNC’s 263 founders are linked to the Muslim Brotherhood.
The SNC’s outgoing leader, Moaz Al-Khatib, has publicly criticized America’s decision to blacklist Jabhat al-Nusra – as has the SNC’s key backer, Turkey.
It is ironic, to say the least, that the West’s democratically elected governments happily engage with members of the Muslim Brotherhood, but refuse to work with more liberal groups.
Our views are much too liberal for the SNC, and its key backer, Turkey, whose foreign minister has said that jihad in Syria is not related to terrorism.
They disregard the warnings of people like Alain Chouet, the former chief officer of the French General Directorate for External Security in Damascus, who recently denounced France’s provision of weapons to the rebels as “completely illegal” and described how “the jihadi militias have taken precedence over the others.”
The repercussions of mishandling Syria will extend far beyond the country’s borders.
After all, Syria is situated on a national, sectarian, regional, and geopolitical fault line, where the strategic interests of Russia, China, Iran, Iraq, and Lebanon confront those of NATO, Turkey, Saudi Arabia, Qatar, Kuwait, and Jordan.
And regional tensions are running high.
Improving Syria’s prospects for peace and democracy must begin with diplomacy.
Democracy is about representation, and that should cover the full mosaic of Syria’s people.
Every group with an interest in the country’s future – including the government, domestic opposition groups, and those in exile – should be invited to participate in official talks.
And, in order to create a level playing field, it is essential to recognize that the Arab League (which has already given Syria’s seat to the Muslim Brotherhood-controlled SNC) represents the autocratic states that are encouraging sectarianism and extremism in Syria.
During this process, Western governments must stop providing money or other kinds of aid to opposition groups in Syria, and put pressure on Turkey and the Gulf countries to stop supporting extremists.
Any financial aid should be channeled through organizations like the Red Cross and UNICEF to supply medical care to civilians, or allocated to a fund for post-war reconstruction.
Some leaders may be starting to recognize the need for a new narrative.
The UN Security Council has condemned the opposition’s recent attack on a mosque in Damascus, which killed a senior pro-government Muslim cleric.
US President Barack Obama recently expressed concern about Syria “becoming an enclave for extremism, because extremists thrive in chaos.”
But, in reality, Syria has already become an enclave for extremism.
Responding with military aid will simply turn a catastrophe into an apocalypse.
The New-Model Nomad
MOGADISHU – One of my earliest childhood memories is of swimming in a small gully near my grandmother’s home in Yaaq Bari Wayne, a dusty collection of tin-roofed adobe buildings huddled together in the plains of southern Somalia’s Bay region.
After the Gu rains, the gully became a deep triangular cleft cut into the ground, filled with muddy water.
Children gathered like ants to spilled sugar, jumping off ledges and diving into its murky depths with screams and whoops of excitement.
Many were children of nomadic herders, who moved south in May and June in search of better pastures.
When they arrived, brown domes made of crisscrossed branches and layers of multicolored mats would appear like crowds of dappled beetles on the outskirts of town.
For me, the nomad was a romantic figure, akin to the American cowboy of the Wild West.
In the world’s harshest environment, they trekked hundreds of kilometers, surviving on camel milk and dried meat, with all of their possessions strapped to a camel’s back.
But, in the last two decades, the story of the Somali nomad has become far less romantic – and far more complex.
Nomads have been victims of famine, violent conflict, and circumstance, accounting for a significant share of the deaths – as many as one million – caused by 22 years of civil war, and of the 260,000 Somalis who died of starvation in 2010-2012.
At the same time, nomads have been perpetrators of violence and terrorism.
And yet there is another way to view nomads: as survivors, entrepreneurs, providers, and agents of transformation.
With global problems like food insecurity and climate change threatening livelihoods around the world, nomadic and pastoral lifestyles have the potential to protect and sustain millions of people.
In fact, it was cataclysmic climate change – which transformed a lush, green Sahara into a harsh desert – that triggered the emergence of such lifestyles in East Africa 5,000 years ago.
Cattle herding allowed nomads to create livelihoods in an increasingly unpredictable and challenging environment, characterized by an arid climate and scarce resources.
Today, there are some 50 million nomadic herders in Sub-Saharan Africa, and as many as 150 million agro-pastoralists, who combine traditional nomadic animal-rearing with some form of agriculture.
Policymakers often view nomadic pastoralism as an archaic and unproductive way of life, with little economic benefit.
But the opposite is true.
Pastoralist systems are 20% more productive than traditional ranching methods.
And pastoralists are more market-savvy than many believe; the Horn of Africa’s pastoral livestock and meat trade is estimated to be worth $1 billion.
Using land that cannot support conventional agriculture, pastoralists and agro-pastoralists produce meat, milk, and livestock products that sustain millions.
Indeed, according to an OECD study, they are responsible for 10% of the world’s meat production; in some regions, they supply as much as 60% of the beef and 70% of the milk consumed.
Pastoralism is thus an essential livelihood system, with the potential to help overcome food insecurity – particularly in Somalia, where more than 50% of the population are nomadic herders.
In order to unleash this potential, a strong support system that improves pastoralists’ access to capital and markets, while bolstering human-resource development and capacity-building, is needed.
Following the example of Mongolia, where pastoralists can purchase private insurance to protect against the loss of herds from drought, microcredit programs could be established to insure pastoralists against similar risks and thus provide funds for restocking after a disaster.
In order to enhance their livelihoods’ stability and profitability further, pastoralists need to be integrated into the formal economy.
Effective trade networks and access to livestock markets would enable them to increase sales substantially.
Increased access to technology is also crucial to improving nomads’ economic prospects.
In Niger, pastoralists use mobile phones to keep abreast of commodity prices in regional markets, which enables them to sell their camels where prices are highest and purchase grains where prices are lowest.
In Kenya, veterinarians send text-message alerts to warn pastoralists of disease outbreaks and provide vaccination information.
Providing such support systems for pastoralists could prove to be an effective strategy for advancing economic development, enhancing food security, and reducing dependence on food aid in Somalia and elsewhere.
Indeed, for many countries, nomads – recast as intrepid entrepreneurs – could be the key to securing a prosperous future.
The Conundrum of Scientific Fraud
Science, and the behavior of scientists, has never been perfect.
Consider the Korean scientist Hwang Woo-suk, whose claim to have extracted stem cells from human embryos that he cloned turned out to be based on phony research.
Hwang has just been fired by Seoul National University, and six of his co-workers have been suspended or had their pay cut.
Hwang and his colleagues are hardly alone.
In response to the recurrence of well-publicized and highly damaging scandals in recent years, many universities and some entire national research funding agencies now convene “institutional review boards” to deal with breaches of what has come to be known as “research ethics.”
But are such boards necessary?
If so, in what spirit should they conduct their work?
From artists to scientists, all intellectual workers are preoccupied with the giving and taking of credit.
Hiring, promoting, and rewarding academic staff is increasingly based on “citation counts” – the number of times someone receives credit in peer-approved publications.
Even if someone’s work is criticized, it must be credited properly.
Credit is often given simply because someone has produced a creditable work.
But, increasingly, the fixation on credit reflects the work’s potential monetary value.
And, however one defines the creditworthiness of intellectual work, one thing is clear: reported cases of fraud are on the rise.
Sometimes fraud consists in plagiarism: the culprit takes credit for someone else’s work.
However, especially in the most competitive scientific fields, fraud often takes the form of forgery: the culprit fabricates data.
Plagiarism is the sin of the classroom; forgery is the sin of the laboratory.
But in neither case has a standard method emerged for ensuring the integrity of research – or of the scientists who carry it out.
A useful simplification in addressing the potential work of research ethics panels is to consider two models of review: “inquisitorial” and “accusatorial.”
Whereas the inquisitorial model presumes that fraud is rampant, but often undetected, the accusatorial model adopts a less paranoid stance, presuming that researchers are innocent until proven otherwise.
The natural context for an inquisitorial system is a field where scientific integrity is regularly under threat because research is entangled with political or financial interests.
Often, these entanglements are unavoidable, especially in the case of biomedical research.
Here the inquisitors are part cost accountant, part thought police.
They conduct spot-checks on labs to ensure that the various constituencies for scientific research are getting their money’s worth.
Inquisitors must be invested with the power to cut off funding to transgressors, perhaps even excommunicating them, by barring a scientist from practicing or publishing in the future.
Hwang, for example, has lost his research license and has been banned from assuming another public post for five years.
However, the credibility of such a system relies on the inquisitors’ ability to uphold standards of science that are genuinely independent from special interests both inside and outside the research community.
Otherwise, inquisitorial ethics reviews could come to be regarded as nothing more than intellectual vigilantism.
Consider the Danish Research Council’s ominously named “Committee on Scientific Dishonesty,” which was convened in 2002 following complaints raised against the political scientist Bjørn Lomborg, whose book The Skeptical Environmentalist purported to demonstrate that ecologists systematically biased their interpretation of data to support their political objectives.
The Committee initially found Lomborg guilty of much the same error that he had alleged of the ecologists.
However, the Committee refused to comment on whether his behavior was normal or deviant for the field in question.
This enabled Lomborg to appeal the verdict, successfully, claiming that the Committee had victimized him for political reasons, given his recent appointment as director of a major national institute for environmental research.
In the end, the Committee on Scientific Dishonesty was itself reorganized.
In retrospect, the Committee probably should have refused the case, given that Lomborg’s book was subject to intense public scrutiny, often by experts writing (favorably) in The Economist and (unfavorably) in Scientific American.
His was a genuine case in which intellectual work was given a fair trial in the proverbial “court of public opinion” and required no further oversight.
Indeed, Lomborg’s case would seem to support the accusatorial model of ethics review, which assumes that scientists adequately regulate their own affairs through normal peer-review procedures.
Here, scientific integrity is understood not as a duty to stakeholders—funders, companies, or, as with Hwang, politicians concerned about national prestige—but as a collective responsibility that is upheld by identifying and correcting errors before they cause substantial harm.
The accusatorial system is designed for those relatively rare cases when error slips through the peer-review net, resulting in some concrete damage to health or the environment, or causing the corruption of later research that assumes the validity of fraudulent work.
To lodge an accusation, the accuser must establish that some harm has been committed, which is then shown to have been the fault of the accused.
The countervailing assumptions of the inquisitorial and accusatorial systems reflect the ambiguity of the concept of scientific fraud.
Many so-called frauds are cases in which researchers claimed credit for work they have not really carried out, but that pointed in the right direction and was eventually completed by others.
Strictly speaking, they are guilty more of confusing the potential and the actual than the true and the false.
Indeed, by today’s standards, Galileo and Mendel committed fraud, since they likely massaged their data to fit a neat mathematical formula.
However, they remain scientific visionaries because others built so effectively on their “work.”
Of course, in their cases, no money changed hands and no one’s life was jeopardized.
Perhaps, from the point of view of research ethics, that makes all the difference.
The Cooperative Alternative
WASHINGTON, DC – In an era in which conventional models of finance, corporate governance, and corporate responsibility are increasingly debated, if not called into question, it may be time to revisit the alternative approach taken by economic cooperatives.
The foundational values of cooperatives embody not only a humane vision, but also a pragmatic approach to production that has enabled the successful ones to thrive – and to spur economic growth in countries that desperately need it.
Cooperative movements took shape in the Americas, Europe, Australia, and Japan in the 1800’s.
Many grew from the simple proposition that ordinary people could overcome adversity in the marketplace by banding together to buy and sell goods at reasonable prices, and quickly realized the added benefits of sharing knowledge among members, promoting inclusion, and building social capital.
Today, cooperatives cover a range of activities and come in a variety of shapes and sizes, from small-scale agricultural and consumer organizations in Africa to some of the leading agricultural brands and largest financial-service providers in North America and Europe. &nbsp;&nbsp;
According to the International Cooperative Alliance, a cooperative is a “jointly owned and democratically controlled enterprise.” But, beneath this definition lie rich notions of voluntary association, accountability for strategic decisions, and concern for the communities that cooperatives serve.
Cooperatives have helped to bring information and services to far flung rural communities, empower workers, and expand financial services, healthcare, education, and housing.
In doing so, they have transformed the economic and social landscape in countless communities.
The International Cooperative Alliance reports that more than 800 million people are members of cooperatives worldwide.
Moreover, cooperatives account for a significant share of GDP in many countries, and an especially high share of the agricultural and consumer sectors.
Cooperatives are also one of the largest providers of financial intermediation to the poor, serving an estimated 78 million people globally who live on less than $2 per day.
Of course, cooperatives have sometimes struggled to live up to the ideal.
In the most egregious cases, some have fallen victim to bad politics, weak governance, or mismanagement.
Others are exposed to risks stemming from concentration in a single business sector, commodity, and/or geographic area.
Cooperatives have also wrestled with questions of members’ entry and exit, financial disclosure, and relationships with the non-cooperative sector.
And governments have often faced vexing questions with regard to financial regulation and taxation of cooperatives, including treatment of profits and consideration of exemptions.
And now, in a more mobile and urban world, one might ask: can cooperatives maintain their essential character, based on inclusion and knowledge sharing within a community?
In a world in which geography is a diminishing barrier to business, can cooperatives sufficiently distinguish themselves as a viable alternative model?
Or will they evolve to serve virtual communities, organized around new sets of challenges and opportunities?
The United Nations has declared 2012 the “Year of Cooperatives.”
This provides a good opportunity to examine the extraordinary history of cooperatives, assess their strengths and weaknesses, and rekindle a discussion about a development model that promises higher levels of inclusion, ownership, self-determination, and concern for community.
The World Bank is active in the development of producer and credit cooperatives around the world.
Some of the most notable programs include the Indian Dairy Cooperative, which has created an estimated 250,000 jobs, mostly in rural areas.
Similarly, Mexico’s National Savings and Financial Services Bank has helped to strengthen savings and credit institutions that serve millions of rural residents who would otherwise have been relegated to the margins of the formal financial sector.
The Bank’s policy work has re-affirmed the notion that rural producer organizations are fundamental building blocks of agricultural development. And it has helped governments to supervise and regulate cooperative financial institutions.
As we search for innovative solutions to today’s development challenges, we should consider what the cooperative movement can offer.
That means not only greater economic inclusion, higher agricultural productivity, strengthened food security, and financial stability, but also lessons concerning responsible and sustainable business practices, corporate governance, and community relations.
And we should consider how to facilitate the spread of cooperatives’ best practices while avoiding common pitfalls.
The cooperative movement can prompt us to think in new, inspired ways.
Capitalizing on cooperatives’ successes and learning from their mistakes can help us to expand the menu of options as we search for more inclusive and sustainable models of development, and new ways of building and sharing knowledge.
The Copenhagen Panic
COPENHAGEN – A sense of panic is setting in among many campaigners for drastic cuts in global carbon emissions.
It is becoming obvious that the highly trumpeted meeting set for Copenhagen this December will not deliver a binding international treaty that will make a significant difference to global warming.
After lofty rhetoric and big promises, politicians are starting to play the blame game.
Developing countries blame rich countries for the lack of progress.
Many blame the United States, which will not have cap-and-trade legislation in place before Copenhagen.
The United Nations Secretary General says that “it may be difficult for President Obama to come with strong authority” to reach agreement in Copenhagen.
Others blame developing countries – particularly Brazil, China and India – for a reluctance to sign up to binding carbon cuts.
Wherever you turn, somebody is being blamed for Copenhagen’s apparent looming failure.
Yet, it has been clear for a considerable time that there is a more fundamental problem: immediate promises of carbon cuts do not work.
Seventeen years ago, industrialized nations promised with great fanfare in Rio de Janeiro to cut emissions to 1990 levels by 2000.
Emissions overshot the target by 12%.
In Kyoto, leaders committed to a cut of 5.2% below 1990 levels by 2010.
The failure to meet that target will likely be even more spectacular, with emissions overshooting by about 25%.
The plan was to convene world leaders in Copenhagen and renew vows to cut carbon while committing to even more ambitious targets.
But it is obvious that even a last-minute scramble to salvage some form of agreement will fare no better in actually helping the planet.
With such a poor track record, there is a need for soul-searching and openness to other approaches.
A realistic “Plan B” does not mean plotting a second meeting after Copenhagen, as some have suggested.
It means re-thinking our strategy.
This year, the Copenhagen Consensus Center commissioned research from top climate economists examining feasible ways to respond to global warming.
Their research looked at how much we could help the planet by setting different levels of carbon taxes, planting more trees, cutting methane, reducing black soot emissions, adapting to global warming, or focusing on a technological solution to climate change.
The Center convened an expert panel of five of the world’s leading economists, including three Nobel Prize winners, to consider all of the new research and identify the best – and worst – options.
The panel found that expensive, global carbon taxes would be the worst option.
This finding was based on a groundbreaking research paper that showed that even a highly efficient global CO2 tax aimed at fulfilling the ambitious goal of keeping temperature increases below 2oC would reduce annual world GDP by a staggering 12.9%, or $40 trillion, in 2100.
The total cost would be 50 times that of the avoided climate damage.
And if politicians choose less-efficient, less-coordinated cap-and-trade policies, the costs could escalate a further 10 to 100 times.
Instead, the panel recommended focusing investment on research into climate engineering as a short-term response, and on non-carbon-based energy as a longer-term response.
Some proposed climate-engineering technologies – in particular, marine cloud-whitening technology – could be cheap, fast, and effective.
(Boats would spray seawater droplets into clouds above the oceans to make them reflect more sunlight back into space, reducing warming).
Remarkably, the research suggests that a total of about $9 billion spent implementing marine cloud-whitening technology might be able to offset this entire century’s global warming.
Even if one approaches this technology with concerns – as many of us do – we should aim to identify its limitations and risks sooner rather than later.
It appears that climate engineering could buy us some time, and it is time that we need if we are to make a sustainable and smooth shift away from reliance on fossil fuels.
Research shows that non-fossil fuel energy sources will – based on today’s availability – get us less than halfway toward a path of stable carbon emissions by 2050, and only a tiny fraction of the way towards stabilization by 2100.
If politicians change course and agree this December to invest significantly more in research and development, we would have a much greater chance of getting this technology to the level where it needs to be.
And, because it would be cheaper and easier than carbon cuts, there would be a much greater chance of reaching a genuine, broad-based – and thus successful – international agreement.
Carbon pricing could be used to finance research and development, and to send a price signal to promote the deployment of effective, affordable technology alternatives.
Investing about $100 billion annually would mean that we could essentially resolve the climate-change problem by the end of this century.
While the blame game will not solve global warming, the mounting panic could lead to a positive outcome if it means we re-consider our current approach.
If we want real action, we need to pick smarter solutions that will cost less and do more.
That would be a result for which every politician would be happy to accept responsibility.
The Corporate-Tax Conundrum
BERKELEY – The United States now has the highest statutory corporate-income tax rate among developed countries.
Even after various deductions, credits, and other tax breaks, the effective marginal rate – the rate that corporations pay on new US investments – remains one of the highest in the world.
In a world of mobile capital, corporate-tax rates matter, and business decisions about how and where to invest are increasingly sensitive to national differences.
America’s relatively high rate encourages US companies to locate their investment, production, and employment in foreign countries, and discourages foreign companies from locating in the US, which means slower growth, fewer jobs, smaller productivity gains, and lower real wages.
According to conventional wisdom, the corporate-tax burden is borne principally by the owners of capital in the form of lower returns.
But, as capital becomes more mobile, relatively immobile workers are bearing more of the burden in the form of lower wages and fewer job opportunities.
That is why countries around the world have been cutting their corporate-tax rates.
The resulting “race to the bottom” reflects intensifying global competition for capital and technological knowhow to support local jobs and wages.
Moreover, a high corporate-tax rate is an ineffective and costly tool for producing revenues, owing to innovative financial transactions and legal tax-avoidance mechanisms.
A company’s legal residence and geographic sources of income can be and are manipulated for such purposes, and the incentives and scope for such manipulation are especially large in sectors where competitive advantage depends on intangible capital and knowledge – sectors that play a major role in the US economy’s competitiveness.
In the absence of close and broad international cooperation, the US must join the race and lower its corporate-tax rate.
A lower rate would strengthen incentives for investment and job creation in the US, and weaken incentives for tax avoidance.
It would also reduce numerous efficiency-reducing distortions in the US tax code, including substantial tax advantages for debt financing over equity financing and for non-corporate businesses over corporate businesses.
But each percentage-point reduction in the corporate-tax rate would reduce federal revenues by about $12 billion per year.
These revenue losses could be offset by curtailing so-called “corporate-tax expenditures” – deductions, credits, and other special tax provisions that subsidize some economic activities while penalizing others – and broadening the corporate-tax base.
Both President Barack Obama’s plan for business-tax reform and the Simpson-Bowles deficit-reduction plan propose reducing such expenditures to pay for a reduction in the corporate-tax rate.
Corporate-tax expenditures narrow the base, raise the cost of tax compliance, and distort decisions about investment projects, how to finance them, what form of business organization to adopt, and where to produce.
As Michael Greenstone and Adam Looney show in a just-released report, the resulting differences in effective tax rates for different kinds of business activity are substantial.
That said, if the goal of corporate-tax reform is to boost investment and job creation, broadening the tax base to pay for a lower rate could be counterproductive.
Eliminating “special interest” loopholes, like tax breaks for oil and gas, or for corporate jets, would not yield enough revenue to pay for a meaningful rate cut.
And curtailing accelerated depreciation, the manufacturing production deduction, and the R&amp;D tax credit – which account for about 80% of corporate-tax expenditures – would involve significant tradeoffs.
Indeed, cutting these items to “pay for” a reduction in the corporate-tax rate could end up increasing the tax on corporate economic activity in the US.
Eliminating accelerated depreciation for equipment would raise the effective tax rate on new investments; repealing the domestic-production deduction would increase the effective tax rate on US manufacturing; and rescinding the R&amp;D tax credit would reduce investment in innovation.
Instead of cutting proven tax incentives for business investment, the US should offset at least some of the revenue losses from a lower corporate-tax rate by raising tax rates on corporate shareholders.
Most countries that reduced their corporate-tax rates have followed this path, while the US has done the opposite.
At 15%, America’s tax rates on dividends and capital gains are at historic lows, while the profit share of national income is at an all-time high.
Defenders of low rates for capital owners argue that it minimizes “double” taxation of corporate income – first of the corporation and then of its shareholders.
A lower corporate-tax rate would weaken this justification.
Moreover, pension funds, retirement plans, and non-profit organizations, which receive about 50% of all corporate dividends, do not pay tax on these earnings, and would benefit from a lower corporate-tax rate.
Although individual taxes on corporate income reduce the after-tax return to savings, they have less distorting effects on investment location than corporate taxes do, and they are more likely to fall on owners of capital than on workers.
Moreover, it is far easier to collect taxes from individual citizens and resident shareholders than from multinational corporations.
Apple can use sophisticated techniques to manipulate the location of its corporate income, but individual US citizens who own Apple stock have to report the dividends and capital gains that they earn from it in their worldwide income.&nbsp;
A recent study found that taxing capital gains and dividends as ordinary income, subject to a maximum 28% rate on long-term capital gains (the pre-1997 rate), could finance a cut in the corporate-tax rate from 35% to 26%.
Such a change would reduce corporations’ incentives to move investments abroad or shift profits to low-tax jurisdictions, while increasing the progressivity of tax outcomes by shifting more of the burden of corporate taxation from labor to capital owners.
An increase in the corporate-tax rate appeals to many US voters who believe that corporations are not paying their fair share of taxes and are worried about widening income inequality.
But, in a world of mobile capital, raising the corporate tax rate – or simply leaving it at its current level – would be a bad way to generate revenue, a bad way to increase the tax system’s progressivity, and a bad way to help American workers.
The Cost of America’s Free Lunch
BRUSSELS – For decades, the world has complained that the dollar’s role as global reserve currency has given the United States, in a term usually attributed to Charles de Gaulle but actually coined by his finance minister, Valery Giscard d’Estaing, an “exorbitant privilege.”
As long as exchange rates were fixed under the Bretton Woods system, the nature of that privilege was clear: the US was the only country that could freely determine its own monetary policy.
All others had to adapt to the policy dictated by the US.
This changed with the advent of floating exchange rates in the early 1970’s, which allowed more stability-conscious countries, such as Germany, to decouple from a US monetary policy that they considered too inflationary.
But, even under floating exchange rates, the US retained an advantage: given that the dollar remained the key global reserve currency, the US could finance large external deficits at very favorable rates.
Today, the US Treasury can still borrow unlimited amounts at rock-bottom interest rates.
Indeed, the interest rate on inflation-protected bonds has now become -0.5%, even for a five-year maturity!
The US government is thus essentially being paid in real terms to take investors’ money – a generous offer that it is accepting on a huge scale, in the hope that channeling these resources to American consumers will boost household spending and thus generate more jobs.
The US seems to have come as close as one can imagine to getting the proverbial “free lunch” – except that, as economists are fond of pointing out, there is no such thing.
And that is true here as well: performing the role of reserve currency enables the US to borrow on the cheap, but at the cost of any significant influence over the exchange rate, which is determined by the rest of the world’s demand for dollar assets.
Germany discovered this during the 1960’s and 1970’s, and resisted the Deutschemark’s trend toward becoming an international reserve currency. The German authorities feared that the country’s export-oriented economy would suffer from the wide exchange-rate swings that are the norm for global reserve currencies.
Given the weakness of other European currencies, however, and Germany’s desire to keep markets open, there was very little that its officials could do.
As the DM became a major international reserve currency during the 1980’s and 1990’s, large gyrations in the dollar exchange rate did, indeed, have at times a dramatic impact on the German economy.
One reason why Germany agreed to merge the DM into the euro was the hope that a monetary union would distribute the burden of the reserve-currency role over a wider area.
The US economy is still rather closed (imports and exports account on average for only about 15% of GDP), and historically exports have never been the main engine of its growth.
This is why the traditional US stance has been: “It is our exchange rate, but your problem.”
So why is the US now singing a different tune?
The answer is obvious: America’s high unemployment rate, which hovers between 9% and 10%.
This is the price that the US must pay for its lunch: Americans can continue to consume a lot, but the jobs are elsewhere.
Today, China has replaced Germany (and Japan) as the world’s top exporter – but with one difference: it manages its exchange rate tightly, using capital controls and massive intervention in currency markets.
As the only major economy with capital controls, China has created its own “exorbitant privilege”: it can determine its exchange rate because no other big countries impose capital controls.
The two global economic superpowers resent each other’s “exorbitant privilege.”
The US would like to have the Chinese jobs, and the Chinese would like to have better investment opportunities.
Neither side is budging, although either could easily break the impasse.
The Chinese could abolish capital controls and let the renminbi’s exchange rate float.
But the US could easily end China’s privilege by restricting sales of Treasury (and other US) debt to the Chinese monetary authorities.
In doing so, the US would break no international commitments and would not start a trade war.
Such a move is likely to be effective, given the sheer size of Chinese interventions (hundreds of billions of US dollars annually), which could not easily be recycled through offshore banks without exposing the China’s central bank to many other risks.
Prohibiting the Chinese authorities from buying US debt would, of course, be tantamount to imposing capital controls, thereby breaking China’s monopoly on such instruments.
But it might also mean an end to America’s position at the center of the world’s financial system – and thus an end to its own “exorbitant privilege.”
There really is no free lunch.
The US must choose between job creation, which requires a more competitive exchange rate, and cheap financing of its external and fiscal deficits.
While China and the US battle it out, each trying to retain its own “exorbitant privilege,” Europe seems to be stuck in the middle, suffering from the same disadvantages of the US position, but enjoying none of its privileges.
The euro is also a global reserve currency (albeit of secondary importance), but most eurozone governments’ financing costs are much higher than what the US Treasury pays.
This is one of the costs of the incomplete nature of financial integration in Europe.
The Cost of Dick Cheney
LONDON – George W. Bush has started work on his memoirs. Count to ten before you respond.
The autobiographies of political leaders are not a very elevated literary form.
First, few leaders write well, though there are exceptions, like Nehru, Churchill, and de Gaulle.
No wonder that most of them employ a “ghost,” like the one in Robert Harris’s excellent thriller of the same name, which is really a devastating critique of Britain’s former premier, Tony Blair.
Second, these memoirs are usually little more than slabs of self-justification interspersed with lists of famous people met in the course of life at the top.
To take one example, while Bill Clinton speaks with warmth, wit, and great eloquence in the flesh, his autobiography is not worth reading.
Third, these books are usually written largely for a big paycheck.
But it beats me how publishers ever recover the huge multi-million dollar advances they hand out.
When the great General George C. Marshall – whose memoirs of World War II and of his tenure as America’s Secretary of State would have been worth every penny – was offered $1 million by a publisher in the1950’s for his autobiography, the old man replied, “Why would I want $1 million?” What a different world we now inhabit.
The good news about the Bush project, so far title-free, is that it is apparently going to be different from the usual reputation polishing.
Instead of starting at the beginning of his presidency, with all those dodgy Florida voting machines, and plodding on to the bitterly unpopular end, he intends to concentrate on the 20 most consequential decisions he made in the White House.
He will also focus on key moments in his life, such as his decision to give up alcohol and to choose Dick Cheney as his Vice President.
Shaking off his addiction to booze speaks extremely well of Bush, his strength of character and the support of his wife and family.
To turn your back on an addiction is never easy.
Those who do it, helped in Bush’s case by a growing religious faith, deserve sympathy and approval.
It was never Bush’s determination that was in doubt, nor his geniality – despite that slightly annoying rich-boy joshing.
Nor did I ever believe that the former president was stupid: a criticism leveled at him by many of his European peers who were themselves hardly philosopher kings.
The problem with Bush was not lack of intelligence but a complete absence of intellectual curiosity.
He was content to camp on his own shallow prejudices, and the rest of the world had to be fitted into this narrow terrain.
This is where Cheney came in.
It was certainly a key moment when Bush chose him.
Imagine, for example, how different the world and the opinions of Bush’s presidency might have been if he had chosen Colin Powell or John McCain as his running mate?
What Cheney did was to feed and nourish the Bush prejudices, and to move ruthlessly and energetically to occupy the policymaking ground left vacant by the President’s indolence and National Security Adviser Condoleezza Rice’s lack of political clout.
What did Cheney believe?
He thought that Ronald Reagan had shown that fiscal deficits don’t matter.
He believed in capitalism – or at least in supporting big companies and the rich – though whether he understood how free markets should work under the rule of law is more doubtful.
The law was never Cheney’s strong point.
He was an apologist for American power, even though during the Vietnam years he had wriggled and dodged to avoid being at the sharp, conscripted end of it.
He thought that the American president should operate beyond the checks and balances applied by the US Constitution, just as his country should not be constrained by any international rules.
Rules were for others, and at the very end of his term in office his one public disagreement with Bush concerned the President’s refusal to pardon Cheney’s former chief of staff, Scooter Libby, who had been convicted of perjury.
Cheney’s influence resulted in the bloody disaster of Iraq, the moral humiliation of Guantanamo, water-boarding and “extraordinary rendition,” the despair of friends and the contempt of critics, a full-dress parade of double standards around the globe.
Mean-spirited and partisan, Dick Cheney was one of America’s most powerful vice presidents.
I cannot think of one who did so much damage to America at home and to its reputation abroad.
No wonder Bush regards the choice of Cheney as such a key decision.
Ideas matter in politics and having only a few simplistic ones of his own, Bush found his agenda shaped and dominated by his clever surrogate and deputy.
That is what eventually did him in.
Bush’s presidency was discredited and sunk by the man whom he fatally selected to work for him.
The bigger tragedy was that so many others paid a much higher price for this than Bush did. “The Cost of Dick Cheney” – perhaps that should be the title of Bush’s memoirs.
The Cost of the Gender Gap
Working women throughout the world have long complained of the unfairness implied by lower pay than what men receive.
But the wage disparity between men and women is more than unjust. It is also economically harmful.
Economists at the International Monetary Fund have calculated that the “gender gap” costs the world billions of dollars in economic growth each year.
A cross section of 40 poor and rich countries shows that there is a strong relationship between women’s economic and social status and overall economic growth.
Women’s lack of education, health care, and economic and social opportunities – both absolutely and relative to men – inhibits economic growth.
By contrast, economic growth ameliorates women’s subordinated condition.
In The State Of The World’s Children 2007 , UNICEF reports that gender equality renders a double dividend: healthy, educated women rear healthy, educated children.
According to UNICEF, women feel greater responsibility than men for the household, and they spend more money on food, medicine, and educating children.
But what UNICEF suggests as the solution for developing nations – that women be made responsible for the household and childrearing – is in fact the cause of the problem.
Indeed, the “double dividend” is a curse rather than a blessing, because it confines women to the home.
Policy measures that cultivate traditional role patterns should be abolished.
Instead, one must promote the economic empowerment of women to help generate economic growth.
Evidence for this can be found in Western Europe.
According to the Dutch historians Tine de Moor and Jan Luyten van Zanden, the early break with patriarchy in Europe in the late Middle-Ages (1200-1500) accounts for the rise of capitalism and growing prosperity in the Western World.
Girls were no longer married off, but selected their own spouses.
As a result, it became worthwhile for parents to invest in girls’ education and wellbeing.
As a result, Europe’s economy advanced much more than China’s over the next five centuries.
However, the tables have turned.
As The Economist pointed out last year, women have become the engine of global growth, especially in China and other Asian countries.
The Asian economies seem to make much better use of the resources that women have to offer than Europeans do.
In Asia, more women work, they work more hours, and they advance on the corporate ladder much faster than European women.
In the Philippines, 89% of companies have women in senior management positions.
China, Hong Kong, Indonesia, Taiwan, and Singapore follow closely in terms of women in top jobs.
Even in India, where more than half of girls and women are illiterate, more women hold senior management positions than in countries like Germany and the Netherlands.
In Europe, women long ago bridged the education gap with their male peers.
Still, they occupy a mere 8.5% of corporate boardroom seats.
Except for Scandinavia, the number of women on Europe’s top company boards is stagnating.
In part, this is a classic insider-outsider tale.
Male dominance in the marketplace works like a cartel, barring talented women from top jobs.
On average, women’s take-home pay is half that of men.
But European women are to blame as well.
In European countries like Germany and the Netherlands, college-educated women often choose to be stay-at-home mothers or work part-time.
Only one of 10 female professionals with children works full-time in the Netherlands, compared to nine of 10 male professionals with children.
So it should not come as a surprise that employers don’t take women seriously.
Women’s contribution to the Dutch economy is around 27%.
A raw estimate shows that if women would work a bit more outside the home and thus increase their contribution to the Dutch economy to, say, 35%, this would generate an additional 11% in GDP growth, some €60 billion per year.
Women would still be working only half as much as men outside the home.
With the extra money women would generate, the government could take care of the aging population and still have billions to spend on education and childcare.
What is true in the Netherlands and Europe is true all over the world: reducing the inequalities that exist between men and women is not only a matter of justice; it also makes economic sense.
David Cameron’s Euro-Nemesis
LONDON – Unlike some in Britain’s Conservative Party, Prime Minister David Cameron has not previously given the impression of being obsessed with Europe.
He demonstrated no enthusiasm for the European Union, but he appeared clearly less exercised by its supposed iniquities than many Tories are.
This view of Cameron’s position is now difficult to sustain.
His long-gestating speech on Europe, although containing elements that many might share, also sows the seeds for a prolonged and acrimonious debate – and not just in Britain.
Conservatives in the House of Commons (and in the wider party) want to be reassured that their leader shares their antagonism for the entire European integration process.
They have not forgotten or pardoned his “treachery” in refusing to hold a referendum on the Lisbon Treaty, signed by his predecessor, Gordon Brown.
With his speech, that reassurance may now have been given.
Cameron, of course, faced a difficult task with his party, which required a statement from him of his European policy.
Cameron then had to find something appropriate to say.
He needed to placate Tories and his domestic critics while avoiding the economic and political havoc that would be caused by announcing an imminent referendum that might lead to the United Kingdom’s withdrawal from the EU.
The time that he took to decide what he would say attests to the difficulty of squaring that circle.
In fact, as Cameron’s speech made clear, his solution to his dilemma – to buy himself short-term peace from his critics at the expense of potentially making his (and Britain’s) problems more intractable in the long term – is hardly new.
It was already clear that Cameron wanted to push any possibility of a referendum into the most distant possible future.
The idea that he would seek to renegotiate the terms of Britain’s EU membership is also familiar from his earlier speeches and interviews.
Now that position has been bluntly and uncompromisingly expressed.
The demand for far-reaching change in the structure and functioning of the EU, including repatriation of powers to Britain, is a major new demarche at a difficult time for Europe.
Cameron has said on several occasions that he wishes to avoid a referendum revolving around the simple choice of continued EU membership on the basis of the current terms of membership.
Already some are claiming to discern in his European policy the makings of an heir to Harold Wilson, another famous “renegotiator” of Britain’s terms of membership in the then-European Community who went on to win a referendum on Europe.
Britain’s relationship with European integration has been a difficult one, regardless of which party has been in power (Wilson, after all, was a Labour prime minister).
This was inevitable from the outset, owing to Britain’s deep and irreconcilable disagreement with virtually all other EU member states on the fundamental issue of pooling sovereignty.
Essentially, the British point of view has been that a loose confederation of nation-states cooperating on trade is as much Europe as the UK needs.
But Britain joined the European Community, not just the free-trade area that Cameron now apparently wants.
Nonetheless, the undertow of Euro-skepticism in British politics has never diminished and was evident in Cameron’s speech.
Even the supremacy of European law in defined areas was accepted only reluctantly by Britain, and long after many others had done so.
Indeed, in his speech, Cameron could not resist a passing shot at the European Court of Justice.
Britain has made major positive contributions to Europe, particularly with respect to the single market.
But it is no exaggeration to state that whenever Britain has perceived an opportunity to wage a war of attrition against the European supranational project, it has done so, opposing any substantial increase in the EU’s competences or resources.
Given that this position reflects the British public’s attitude toward the EU, it is not surprising.
But it nonetheless distresses other member states, particularly those, like Germany, that recognize the great benefit of having a country with a strongly pro-free trade position and a deep commitment to the rule of law play an important role in the EU.
The prolonged period of renegotiation now proposed by Cameron implies high costs for both sides.
For starters, it creates a source of deep and prolonged uncertainty at a time when the eurozone crisis already has called into question the EU’s long-term health, if not its survival.
Moreover, Cameron’s strategy seems unlikely to lead to an outcome that satisfies anyone.
If it is intended to be a negotiation that takes place in the context of broader treaty talks, it may not happen in the foreseeable future.
European Council President Herman Van Rompuy, among others, seems to doubt the need for a new treaty, which would require the unanimous support of the member states – some of which are sharply opposed – to enter into force.
Indeed, Cameron recognized this explicitly in his speech, so the new treaty to embody a “new settlement” for Britain may have to be negotiated with all member states as a separate exercise.
Part of this negotiation apparently would entail a repatriation of powers, requiring the consent of all EU members – and making the conditions under which Cameron’s renegotiation is supposed to take place both legally and politically uncertain.
Many European politicians would view a member state’s repatriation of competences as a totally destructive precedent, and thus would oppose it resolutely.
The net result is that it seems highly probable that any attempted achievement of a “new settlement,” including repatriation of competences, will make it much more difficult for Britain to remain in the EU than would be the case if a straightforward “in/out” referendum were held now.
So, far from reassuring anyone (including Tory Euro-skeptics), Cameron’s stance heralds a new era of turbulence and uncertainty for Britain and its European partners.
A Golden Rice Opportunity
SÃO PAULO – Finally, after 12 years of delay caused by opponents of genetically modified (GM) foods, so-called “golden rice” with vitamin A will be grown in the Philippines.
Over those 12 years, about eight million children worldwide died from vitamin A deficiency.
Are anti-GM advocates not partly responsible?
Golden rice is the most prominent example in the global controversy over GM foods, which pits a technology with some risks but incredible potential against the resistance of feel-good campaigning.
Three billion people depend on rice as their staple food, with 10% at risk for vitamin A deficiency, which, according to the World Health Organization, causes 250,000-500,000 children to go blind each year.
Of these, half die within a year.
A study from the British medical journal The Lancet estimates that, in total, vitamin A deficiency kills 668,000 children under the age of five each year.
Yet, despite the cost in human lives, anti-GM campaigners – from Greenpeace to Naomi Klein – have derided efforts to use golden rice to avoid vitamin A deficiency.
In India, Vandana Shiva, an environmental activist and adviser to the government, called golden rice “a hoax” that is “creating hunger and malnutrition, not solving it.”
The New York Times Magazinereported in 2001 that one would need to “eat 15 pounds of cooked golden rice a day” to get enough vitamin A. What was an exaggeration then is demonstrably wrong now.
Two recent studies in the American Journal of Clinical Nutrition show that just 50 grams (roughly two ounces) of golden rice can provide 60% of the recommended daily intake of vitamin A. They show that golden rice is even better than spinach in providing vitamin A to children.
Opponents maintain that there are better ways to deal with vitamin A deficiency.
In its latest statement, Greenpeace says that golden rice is “neither needed nor necessary,” and calls instead for supplementation and fortification, which are described as “cost-effective.”
But it is not a sustainable solution to vitamin A deficiency. And, while it is cost-effective, recent published estimates indicate that golden rice is much more so.
Supplementation programs costs $4,300 for every life they save in India, whereas fortification programs cost about $2,700 for each life saved.
Both are great deals.
But golden rice would cost just $100 for every life saved from vitamin A deficiency.
Similarly, it is argued that golden rice will not be adopted, because most Asians eschew brown rice.
But brown rice is substantially different in taste and spoils easily in hot climates.
Moreover, many Asian dishes are already colored yellow with saffron, annatto, achiote, and turmeric.
The people, not Greenpeace, should decide whether they will adopt vitamin A-rich rice for themselves and their children.
Most ironic is the self-fulfilling critique that many activists now use.
Greenpeace calls golden rice a “failure,” because it “has been in development for almost 20 years and has still not made any impact on the prevalence of vitamin A deficiency.” But, as Ingo Potrykus, the scientist who developed golden rice, has made clear, that failure is due almost entirely to relentless opposition to GM foods – often by rich, well-meaning Westerners far removed from the risks of actual vitamin A deficiency.
Regulation of goods and services for public health clearly is a good idea; but it must always be balanced against potential costs – in this case, the cost of not providing more vitamin A to eight million children over the past 12 years.
As an illustration, current regulations for GM foods, if applied to non-GM products, would bar the sale of potatoes and tomatoes, which can contain poisonous glycoalkaloids; celery, which contains carcinogenic psoralens; rhubarb and spinach (oxalic acid); and cassava, which feeds about half a billion people, but contains toxic cyanogenic alkaloids.
Foodstuffs like soy, wheat, milk, eggs, mollusks, crustaceans, fish, sesame, nuts, peanuts, and kiwi would likewise be banned, because they can cause food allergies.
Here it is worth noting that there have been no documented human health effects from GM foods.
But many campaigners have claimed other effects.
A common story, still repeated by Shiva, is that GM corn with Bt toxin kills Monarch butterflies.
Several peer-reviewed studies, however, have effectively established that “the impact of Bt corn pollen from current commercial hybrids on monarch butterfly populations is negligible.”
Greenpeace and many others claim that GM foods merely enable big companies like Monsanto to wield near-monopoly power.
But that puts the cart before the horse: The predominance of big companies partly reflects anti-GM activism, which has made the approval process so long and costly that only rich companies catering to first-world farmers can afford to see it through.
Finally, it is often claimed that GM crops simply mean costlier seeds and less money for farmers.
But farmers have a choice.
More than five million cotton farmers in India have flocked to GM cotton, because it yields higher net incomes.
Yes, the seeds are more expensive, but the rise in production offsets the additional cost.
Of course, no technology is without flaws, so regulatory oversight is useful.
But it is worth maintaining some perspective.
In 2010, the European Commission, after considering 25 years of GM-organisms (GMOs) research, concluded that “there is, as of today, no scientific evidence associating GMOs with higher risks for the environment or for food and feed safety than conventional plants and organisms.”
Now, finally, golden rice will come to the Philippines; after that, it is expected in Bangladesh and Indonesia.
But, for eight million kids, the wait was too long.
True to form, Greenpeace is already protesting that “the next ‘golden rice’ guinea pigs might be Filipino children.”
Overcautious Obama
PRINCETON – In this election season in the United States, President Barack Obama is two men in one.
The Obama of the Cairo speech of 2009, when he called for a new beginning between the United States and Muslims around the world, has been increasingly eclipsed by Obama the terrorist-slayer, the commander-in-chief who has launched hundreds of drone strikes against Al Qaeda and its affiliates and who ordered the killing of Osama bin Laden.
Commander-in-chief Obama is doing what he thinks is necessary to keep Americans safe, but he is ignoring the deeper roots of US security that the Cairo Obama understood so well.
It may well be necessary for other Muslim countries to hold him to account.
Consider Syria.
Everything happening there was both predictable and predicted: a proxy war between Saudi Arabia and Iran, increasing sectarianism and ethnic segregation, the polarization of extremes and the silencing of moderates, de-stabilization of neighboring countries, infiltration by terrorist groups, and a bloodbath from which the country could take decades to recover.
Syrian opposition groups beg for the kinds of weapons needed to fight President Bashar al-Assad’s planes, defend hard-won territory, provide safety for civilians, and signal to Assad that the world will not stand by as he does whatever it takes to subdue his own people.
Every morning, Obama receives a briefing from men who warn him of every plot and conspiracy to kill Americans.
He knows that any weapon capable of shooting down a Syrian warplane could also be used by a terrorist against a US airliner.
He believes that he is doing the right thing and following the prudent course in waiting for the Syrian conflict to burn itself out in some way while minimizing the long-term risk to American lives.
Other advisers warn him that any possible action – a safe zone on the Turkish border, for example, that could expand outward – requires taking out anti-aircraft defenses all over Syria.
That would mean bombing Damascus, which could harden Syrian support for Assad.
And perhaps it would do no good; it might save a few lives, they argue, but, with so many different countries fighting a proxy war via so many different groups of opposition fighters, it would not change the overall dynamic of the conflict.
Moreover, other countries in the region will not use offensive force without approval by the United Nations Security Council, which the Russians and Chinese continue to block.
And let’s not forget that US voters have no appetite for more military action in the Middle East, even if the price is years of civil war and the implosion and fragmentation of a country bordering Israel, Jordan, Iraq, Turkey, and Lebanon.
These arguments are advanced in good faith and deserve serious consideration.
But the art of leading rests on calculating costs and benefits and exercising judgment when the balance is unclear.
No one speaks for the Syrian people in the Oval Office every morning.
No one adds up the costs of betraying, yet again, what America claims to stand for, even while witnessing people willing to march – in the face of bullets – for precisely those universal values: dignity, freedom, democracy, and equality.
The cost is yet another generation of Middle Eastern youth who will believe the worst about the US, no matter how far-fetched the rumor or extreme the claim.
No one points out the huge opportunity cost of what could have been and what could still be – albeit barely – if the US took decisive action to save tens of thousands of Syrian lives and possibly tip the balance of the conflict.
Consider the contrast with Libya, where one of the outcomes of US intervention was tens of thousands of Libyans marching in the streets with placards declaring their support of the US and their outrage and sorrow at the murder of the US ambassador.
And, on the world stage, Russia and China have been encouraged to believe that America will never push past a veto, effectively giving them the final word.
It may well be impossible to get the US to act before its presidential election in November.
The only chance, in my view, is if countries in the region – Turkey, Saudi Arabia, Jordan, Qatar, and the United Arab Emirates – call openly for US leadership.
They should remind Obama of what foreign-policy experts Nina Hachigian and David Shorr have recently called “the responsibility doctrine”: great powers have an active responsibility to uphold global norms and solve global problems.
The Arab League should publicly charge the Security Council with abdicating its responsibility for preserving international peace and security and call on countries with important interests in the region to join with them in taking action.
They should specifically call on the US to assume the mantle of global responsibility and, in the phrase that Obama used to describe the intervention in Libya, “create the conditions and coalitions for others to step up.” The League would be asking the US to live up to its values and pursue its interests, while at the same time fulfilling its own responsibility as a regional organization.
The devastating and widening conflict in Syria does not present any good choices, only choices between bad and worse.
But a leader must choose, and Obama is making the wrong choice – for Syria, for the region, and for the US.
The Courage of Convictions
Even those who disagree with British Prime Minister Tony Blair's stance on the Iraq crisis rarely fail to praise his courage.
US President George W. Bush never faces hostile crowds in the way that Blair must.
When Blair enters Parliament for the weekly ritual of Prime Minister's Questions, members of his own Labor Party heckle him and ask hostile questions.
Outside Parliament, even on television, Blair confronts groups that emphatically demand peace.
Throughout it all, Blair has shown the courage of his convictions.
These are, quite simply, that Saddam Hussein is an evil ruler who potentially threatens his neighbors and the wider world, and that he has to go.
Mr. Blair's posture is all the more remarkable at a time when political leaders depend on opinion polls and the views expressed by so-called "focus groups" to tell them what to think.
Many politicians try to stay as close to prevailing majority views as possible.
They regard this as "democratic" and hope that such fidelity to the popular will guarantees them re-election.
Fortunately, such populism--for it is just that--is not ubiquitous.
Prime Minister Jose Maria Aznar of Spain is not far behind Blair in showing the courage of his convictions.
President Jacques Chirac of France has the support of his people, but he also has an agenda that appears to be concerned as much with French grandeur as with mere popular acclaim.
The most flagrant absence of leadership on display today, in the name of following the apparent majority view of the people, is that of Chancellor Gerhard Schröder in Germany.
He not only probably won his last election by openly opposing military action in Iraq, but he continues to behave as if he were heading a peace march rather than a country.
Perhaps Schröder should spare a thought for his two great predecessors, Konrad Adenauer and Willy Brandt.
When Adenauer took Germany firmly into the Western alliance, he was not only opposed in parliament (by the Social Democrats), but also by a popular majority that thought his policy would make reunification with Soviet-controlled East Germany impossible.
Similarly, when Chancellor Brandt launched his Ostpolitik two decades later, he was widely accused of selling out to the Communists and jeopardizing West Germany's European and Atlantic destiny, which by this point had become generally accepted.
Both leaders prevailed and in the end won elections.
Other leaders have proved the same point.
Charles de Gaulle prevailed politically after ending French colonial rule in Algeria.
Mikhail Gorbachev did not, but he remains a prophet without honor in Russia for the policies of glasnost and perestroika that led to the demise of the Soviet Union and the rise of democratic Russia.
There is a point in all these cases that cannot be overlooked.
Each political leader espoused ideas, policies, or principles that were far ahead of their peoples.
They had, as it were, only history on their side.
These leaders seemed to be working against the grain, but the grain itself was about to change direction.
Initially heterodox and apparently unacceptable views became the new orthodoxy accepted by most of their citizens.
In a sense, this is the definition of true leadership: to take a country and its people to a better future which is not yet clear to most but that has been partly discovered and partly created by those in power who hold an unerring sense of direction.
There are those who think that this is precisely what might happen to Mr. Blair over Iraq.
They foresee a short war, the rapid collapse of the Baathist regime, and a new beginning for Iraq's people.
Blair will then have triumphed in almost the classical sense of that word.
Along with President Bush, he would be acclaimed as a great leader, while voices of dissent and opposition would be silenced.
His re-election would hardly be an issue; on the contrary, those who opposed him will be in trouble.
However, other scenarios loom, not so much of defeat as of confusion and the impossibility of creating sustainable peace.
But what is at stake in the Iraq debate is not so much a vision of the future as a moral principle.
It really is a matter of conviction.
Blair, at least, is pursuing his Iraq policy because he is deeply convinced that he is right.
He will still retain that conviction even if he fails, although the price he will pay is certain to be high.
Unlike Adenauer, Brandt, and de Gaulle, Blair may really be going against the grain of his people rather than anticipating a changing general view.
Mr. Blair knows all this, which is why he has hinted more than once that he has put his political career and his position as Prime Minister on the line.
He is a true conviction politician, inspired less by a sense of the future as by a sense of morality.
Such leaders risk a great deal--and not just for themselves.
Perhaps they risk more than can be justified.
In today's crisis, anyone who believes in Western values must hope that such politicians emerge victorious.
The Cracks in the G-20
MADRID – The world financial crisis has served as a quick and efficient catalyst to the G-20.
The first three G-20 summits of chiefs of state, in Washington, London, and Pittsburgh, will be remembered for advancing multilateralism and coordinated global action.
But the G-20 remains very much a work in progress – and one that needs much work to succeed, as its most recent summit in Toronto demonstrated.
The G-20 summit in Washington in 2008 was the first at which the member countries’ chiefs of state met since the group’s creation in 1997.
The G-8 was no longer an appropriate vehicle for global economic governance, given the need to stabilize financial markets around the world.
The voices of countries such as China, India, and Brazil had to be heard if a coordinated response to the crisis was to be found.
With the financial crisis worsening, the London summit in 2009 agreed to unprecedented fiscal and monetary stimulus and backed a stronger, more coherent regulatory and supervisory framework worldwide.
In view of the G-20’s success, the Pittsburgh summit recognized it as the main forum for international economic cooperation.
This recognition raised expectations for the G-20 and granted it the prestige that it deserved: it is the only forum in which world powers and emerging countries sit as equals at the same table.
The premise is clear: as the crisis made more evident than ever, the interdependence of countries is inescapable.
In the face of today’s global challenges, the only possible response must be global.
There is no possible alternative.
But the imprecision of the agreements reached at the summit in Toronto in June has left political leaders with a bitter taste in their mouths.
Two clearly defined gaps stand out as causes of discord.
The first is transatlantic divergence over how best to assure a return to solid growth.
The United States favors continuing economic stimulus, while the European Union prefers fiscal consolidation.
The other source of dissension is disagreement over a bank tax.
The US, the EU, and Japan are in favor, while emerging countries, as well as Canada and Australia, are opposed.
While an agreement has been reached (2013 has been set as the year to reduce budget deficits by half; 2016 to stabilize sovereign debt), consensus is not headed in the right direction.
It is not a question of stimulus versus deficit.
Both are necessary.
Even respecting the idiosyncrasies of each context, there is still sufficient common ground for more precision in the agreements.
The same can be said for transparency, accountability, and regulation of the bank tax.
I know very well that this is not an easy task, but it is essential for world leaders – not markets – to lead reforms.
Moreover, a custom has been repeated that should be changed.
Obviously, holding a G-8 summit just before a G-20 summit, as happened in Canada this June, simply serves to prolong maintenance of separate clubs, which is unsustainable.
The G-20’s role should increase further in importance, owing to emerging countries’ share of global GDP – projected to reach 60% in 2030 – and to the global nature of the challenges of the twenty-first century.
If we want to make progress on global governance problems we will have to work together on getting through this economic crisis and on other essential issues, such as nuclear non-proliferation.
The problem is that, despite the clear need for multilateralism, there is a risk of a relapse into bilateralism due to a lack of global leadership.
The attention of US President Barack Obama is centered on matters of great importance, such as the Middle East, his evolving strategy in Afghanistan, and the struggling American economy.
The same is true of the EU, where attention – and action – has been centered in recent months on defending the euro and resolving the economic difficulties on the Union’s periphery.
Meanwhile, the emerging powers continue to lean toward bilateralism and are aligning themselves with other countries.
Lack of agreement on the United Nations Security Council resolution against Iran does not help coordination and cooperation within the G-20, either.
Summits should be well prepared and provide a forum to debate today’s great global issues.
Coherent, well-defined, and precise proposals would produce results that are more acceptable to all.
But just as important as making decisions is explaining them well.
A G-20 summit is not something that happens every day. It is a global event.
Especially in a time of crisis that has caused so much suffering, its decisions must be explained to the public clearly and without cacophony.
People’s anguish demands this effort, and it was lacking in Toronto.
The world remains in a very delicate transitional phase, and it is not clear yet in which direction the G-20 will lean.
The main challenge now is to continue using the “geometry of 20” to build instruments of world governance.
Although the economic storm has become less intense, it hasn’t calmed yet.
So there remains much to do.
With countries headed toward growth at different speeds, global strategy must continue to be a priority.
The degree of interdependence among countries is increasing, and the global nature of our problems is inherent.
Within the framework of multilateralism, countries must make the effort to smooth over their differences and deepen their relations: we must conquer the inertia that moves us towards old thinking – and old alliances.
The Crises of Summer
PRINCETON – Europe’s crisis is now poised at the moment that divides recovery and renewal from decline and death.
Whereas a few weeks ago, commentators and financial analysts argued that only a few months remained to rescue Europe, leading politicians, lurching from summit to summit, have recently talked in terms of days.
Summer crises are a familiar feature of European history – and of financial history.
Indeed, the twentieth century was shaped by three summer crises, whose seriousness was heightened in each case by the absence of major policymakers, who were on vacation.
In two years, Europeans will commemorate the centennial of the assassination of Archduke Franz Ferdinand on June 28, 1914, and the subsequent “July crisis” that triggered World War I that August.
On July 13, 1931, the German banking system collapsed, ensuring that what was previously an American economic downturn became the worldwide Great Depression.
On August 15, 1971, President Richard M. Nixon ended the United States’ commitment to a fixed gold price, leading to a decade of global currency instability.
Each of these crises involved a highly technical issue, but also a much broader set of political problems.
And, in each case, the intertwining of the technical and the political produced disaster.
In July 1914, diplomats were trying to devise a solution that would permit the Habsburg Empire to deal with the cross-border police investigation that was inevitable after a terrorist attack.
Political leaders were thinking about national revival and assertion.
In 1931, the experts were preoccupied with the complexities posed by the combination of reparations and war debts arising out of World War I with large private-sector indebtedness.
Populist political movements in many countries were still thinking about national revival and assertion.
In 1971, the technical issue concerned the role of the dollar in the international monetary system.
But politicians in other countries also felt uncomfortable about the continuing centrality of the US in the postwar order.
In each of these summer crises, addressing the technical issue was not enough to solve the problem.
That is true today as well.
Indeed, Europe’s current crisis reflects exactly the same mixture of elements, each requiring a different type of solution.
On the one hand, a complex set of national fiscal crises and Europe-wide banking problems calls for a comprehensive and detailed rescue operation.
On the other hand, an underlying European governance problem – at both the national level and that of supranational European Union institutions – has been intensifying since the early 1990’s.
What is now required to resolve the technical issue is some mechanism for assuming existing debt and preventing excessive borrowing in the future.
In the US, Alexander Hamilton famously negotiated the federal assumption of states’ debt in 1790, but many states behaved badly in the early nineteenth century, with multiple bankruptcies, until they adopted laws or amendments to their constitutions requiring balanced budgets.
The EU needs some fiscal authority of its own if it is to make Europe’s economic and monetary union work.
It is already a profound peculiarity that customs duties in a customs union are still administered nationally.
Hamilton made federal customs houses the key element of his proposal.
A Europeanization of some part of value-added tax would be a tremendous advance in combating the massive fraud that the existing system nurtures.
Labor mobility is also incomplete without a common pensions and benefits system: under current arrangements, a worker who spends five years in France, five years in Greece, and five years in Germany is left with a fragmented collection of small entitlements.
The crisis has already increased the extent of such migration within Europe.
But any solution will be unacceptable unless it finds broad acceptance across Europe, in debtor and creditor countries alike.
There is no reason why a constitutional solution that involves debt limitation should not command a large measure of public acceptance, especially in debtor countries, which have experienced the political and economic damage caused by previous profligate governments.
What has produced the populist backlash is the spectacle of political authorities devising technically complicated solutions that lack credibility.
Simply put, the experts need to stop treating Europe’s citizens as if they were stupid.
That is why Europe needs a longer-term constitutional renewal, through new treaties, as much as it desperately needs a short-term fix.
Working around existing treaties just looks like more of the same old recipe – a denial of a massive problem that everyone sees.
The public can be forgiven for choking on this kind of stuff.
Consider the European crises that produced good outcomes.
On June 16, 1940, Winston Churchill proposed a Franco-British political union in the aftermath of the German invasion of France.
A decade later, West German Chancellor Konrad Adenauer proposed a Franco-German political union.
That is the kind of boldness that is now needed.
In the past, it was war, immense dislocation, and suffering that could weld nations.
Is Europe’s current crisis severe and dislocating enough to generate an analogous effect?
The more Europe suffers, the more its people will correctly perceive an incrementalist agenda for reform as nothing more than an exercise in futility.
The Crisis Down Under
CANBERRA – The Great Recession of 2008 reached the farthest corners of the earth.
Here in Australia, they refer to it as the GFC – the global financial crisis.
Kevin Rudd, who was prime minister when the crisis struck, put in place one of the best-designed Keynesian stimulus packages of any country in the world.
He realized that it was important to act early, with money that would be spent quickly, but that there was a risk that the crisis would not be over soon.
So the first part of the stimulus was cash grants, followed by investments, which would take longer to put into place.
Rudd’s stimulus worked: Australia had the shortest and shallowest of recessions of the advanced industrial countries.
But, ironically, attention has focused on the fact that some of the investment money was not spent as well as it might have been, and on the fiscal deficit that the downturn and the government’s response created.
Of course, we should strive to ensure that money is spent as productively as possible, but humans, and human institutions, are fallible, and there are costs to ensuring that money is well spent.
To put it in economics jargon, efficiency requires equating the marginal cost associated with allocation (both in acquiring information about the relative benefits of different projects and in monitoring investments) with the marginal benefits.
In a nutshell: it is wasteful to spend too much money preventing waste.&#160;
While the focus for the moment is on public-sector waste, that waste pales in comparison to the waste of resources resulting from a malfunctioning private financial sector, which in America already amounts to trillions of dollars.
Likewise, the waste from not fully utilizing society’s resources – the inevitable consequence of not having had such a quick and strong stimulus –&#160;exceeds that of the public sector by an order of magnitude.
For an American, there is a certain amusement in Australian worries about the deficit and debt: their deficit as a percentage of GDP is less than half that of the US; their gross national debt is less than a third.
Deficit fetishism never makes sense –&#160;the national debt is only one side of a country’s balance sheet.
Cutting back on high-return investments (like education, infrastructure, and technology) just to reduce the deficit is truly foolish, but especially so in the case of a country like Australia, whose debt is so low.
Indeed, if one is concerned with a country’s long-run debt, as one should be, such deficit fetishism is particularly silly, since the higher growth resulting from these public investments will generate more tax revenues.
There is another irony: some of the same Australians who have criticized the deficits have also criticized proposals to increase taxes on mines.
Australia is lucky to have a rich endowment of natural resources, including iron ore.
These resources are part of the country’s patrimony.
They belong to all the people. Yet in all countries, mining companies try to get these resources for free – or for as little as possible.
Of course, mining companies need to get a fair return on their investments.
But the iron-ore companies have gotten a windfall gain as iron-ore prices have soared (nearly doubling since 2007).
The increased profits are not a result of their mining prowess, but of China’s huge demand for steel.
There is no reason that mining companies should reap this reward for themselves.
They should share the bonanza of higher prices with Australia’s citizens, and an appropriately designed mining tax is one way of ensuring that outcome.
This money should be set aside in a special fund, to be used for investment.
The country will inevitably become poorer as it depletes its natural resources, unless the value of its human and physical capital increases.
Another issue playing out down under is global warming.
If not a climate-change denier, the previous Australian government led by John Howard joined President George W. Bush in being a climate-change free rider: others would have to take responsibility for ensuring the planet’s survival.
This was especially strange, given that Australia has been one of the big beneficiaries of the Montreal convention, which banned ozone-destroying gases.
Holes in the ozone layer exposed Australians to cancer-causing radiation.
The international community banded together, banned the substances, and the holes are now closing.
Nevertheless, the Howard government, like the Bush administration, was willing to expose the entire planet to the risks of global warming, which threaten the very existence of many island states.
Rudd campaigned on a promise to reverse that stance, but the failure of the climate-change talks in Copenhagen last December, when President Barack Obama refused to make the kind of commitment on behalf of the United States that was required, left Rudd’s government in an awkward position.
The failure of US leadership has global consequences.
Citizens should consider the legacy they leave to their children, part of which is the financial debts they will pass down.
But another part of our legacy is environmental.
It is two-faced to claim to care about the future and then fail to ensure that the country is adequately compensated for the depletion of its resources, or ignore the degradation of the environment.
It is even worse to leave our children without adequate infrastructure and the other public investments needed to be competitive in the twenty-first century.
Every country faces these issues.
Sometimes, one can see them with greater clarity by observing how others are confronting them.
How Australians vote in their coming election may be a harbinger of things to come.
Let’s hope – for their sake and for the world’s – that they see through the rhetorical flourishes and personal foibles to the larger issues at stake.
The Crisis of Consumerism
FLORENCE – Major economic crises are inevitably also structural milestones.
There is no simple return to a pre-crisis normalcy.
Something changes permanently.
As we learned in 2009, patterns of expectations and demand take a new shape.
Our current crisis is not simply a blowback effect of financial globalization.
Financial globalization misfired because it took a bet on a type of economy that was becoming unsustainable.
During the past quarter-century, but especially over the five years leading up to 2008, the world seemed to revolve around the American consumer.
American-style consumption offered a new model of economic development.
It inspired widespread emulation.
Over the course of a few decades, major city centers across the world began to resemble each other much more closely, with the same brands, designs, and lifestyles.
Consumption or, more precisely, consumerism , appeared to be globalized.
American universities delivered new curricula based on studies of consumption and consumerism.
In the aftermath of the terrorist attacks of September 11, 2001, President George W. Bush advised Americans that they should not allow the trauma of the attacks to interfere with their ordinary shopping, and implied that buying had become a patriotic duty and virtue.
The United States had become the world’s consumer of last resort.
The post-2007 crisis was not simply a financial affair.
It began as a result of weakness in a specific sector – residential mortgages – after a bubble in home prices allowed many Americans to borrow massively, and often disastrously, against the putative value of their equity in order to finance purchases.
The global imbalances that many people view as being at the root of the problem reflected savings rates of near zero in the US, as well as in those economies that seemed best to emulate the American model – the United Kingdom, Ireland, and Spain.
In the course of the crisis, these debt-ridden economies’ consumers abruptly changed their purchasing habits.
Savings rates shot up.
Spending on automobiles ground to a halt, until government stimulus programs in many countries revived it.
But schemes such as public subsidies for scrapping old and fuel-inefficient cars simply led many people to re-schedule their purchases.
The automobile market was rescued in 2009 at the expense of sales in 2010 and subsequent years.
The crisis also revealed the extent of the massive over-capacity in the US retail market, with estimates that at least one-fifth of American shopping malls would be forced to close.
The response to the crisis will be a hastening of the movement toward on-line purchases, in which physical location is no longer a preeminent part of shopping decisions.
High-value and luxury brands were brutally affected by a wave of deep discounting in the last quarter of 2008.
The aura of a brand is easily destroyed.
One reaction has been to look for radically new marketing strategies, as in the case of the up-market Jimmy Choo brand of women’s shoes, now to be sold in a simpler guise by the low-price mass retailer Hampamp;M.
Such recovery as there has been in the luxury market has been largely limited to so-called affordable luxuries – shoes, handbags, or ties, rather than yachts or fast cars.
Purchases of these relatively low-cost items can be regarded as the withdrawal symptoms of the world’s consumer binge.
The consumer age was the product of two previous crises.
The Great Depression of the 1930’s was interpreted as the result of inadequate consumption, of poverty in the midst of plenty.
Governments took on the responsibility of stabilizing and organizing consumption on a wider level.
A second major global crisis, in the 1970’s, shook the heavy-industrial basis of manufacturing, and with it the idea that governments should manage the economy.
The 1970’s produced a new model of sustaining consumption through individualized desire.
Production was decentralized and focused on the creation of niche products for highly specialized markets.
Consumption became primarily an individual phenomenon through which people could distinguish themselves.
In retrospect, the 1970’s mark the end of an era dominated by mass production, and the beginning of the new consumer age.
Sometimes the age of productionism is also called “Fordism,” after Henry Ford, who supplied large quantities of cheap but identical cars.
Rather unimaginatively, the consumer age is dubbed post-Fordism.
In fact, it could be called “Tom Fordism,” after the young American designer who realized the iconic potential of the Italian fashion house of Gucci.
What will replace the age of consumerism?
The most obvious answer is that the shift to a service economy – already well under way by the beginning of the new millennium – will become more complete.
Consumerism depended on a radical notion of individualism. We become indebted in order to consume because we are convinced that our utility schedule is more important than someone else’s.
If I see a beautiful piece of jewelry or a bright new car in a shop, I am convinced that it should be mine, and that it can be more usefully employed in my possession than in someone else’s.
In that way, greed feeds on a kind of pride or self-regard.
The empirical study of happiness has produced evidence that the satisfaction from buying objects is short-lived and depends on continued repetition.
That is socially, morally, and environmentally wasteful.
On the other hand, the consumption of experiences (rather than objects) produces a more sustained satisfaction.
The new service economy emphasizes human interaction more than individualistic consumption.
In an extreme form, luxury hotels are now organizing service in local community projects as a way of engaging the passions of their wealthy patrons.
This service economy may generate higher levels of overall well-being if it emphasizes that humans do not exist as separate islands, but existentially depend on their relations with others.
The Crisis of Fiscal Imagination
CAMBRIDGE – Greedy banks, bad economic ideas, incompetent politicians: there is no shortage of culprits for the economic crisis in which rich countries are engulfed.
But there is also something more fundamental at play, a flaw that lies deeper than the responsibility of individual decision-makers.
Democracies are notoriously bad at producing credible bargains that require political commitments over the medium term.
In both the United States and Europe, the costs of this constraint on policy has amplified the crisis – and obscured the way out.
Consider the US, where politicians are debating how to prevent a double-dip recession, reactivate the economy, and bring down an unemployment rate that seems stuck above 9%.
Everyone agrees that the country’s public debt is too high and needs to be reduced over the longer term.
While there is no quick fix to these problems, the fiscal-policy imperative is clear.
The US economy needs a second round of fiscal stimulus in the short term to make up for low private demand, together with a credible long-term fiscal-consolidation program.
As sensible as this two-pronged approach – spend now, cut later – may be, it is made virtually impossible by the absence of any mechanism whereby President Barack Obama can credibly commit himself or future administrations to fiscal tightening.
So any mention of a new stimulus package becomes an open invitation to those on the right to pounce on a Democratic administration for its apparent fiscal irresponsibility.
The result is a fiscal policy that aggravates rather than ameliorates America’s economic malaise.
The problem is even more extreme in Europe.
In a futile attempt to gain financial markets’ confidence, country after country has been forced to follow counter-productive austerity policies as the price of support from the International Monetary Fund and the European Central Bank.
Yet requiring deep fiscal cuts, privatization, and other structural reforms of the type that Greece has had to undertake risks greater unemployment and deeper recessions.
One reason that interest-rate spreads in financial markets remain high is that distressed eurozone countries’ growth prospects look so weak.
Here, too, it is not difficult to discern the broad outlines of a solution.
Stronger countries in the eurozone must allow these spreads to narrow by guaranteeing the new debts of countries from Greece to Italy, through the issuance of Eurobonds, for example.
In return, the highly indebted countries must commit to multi-year programs to restructure fiscal institutions and enhance competitiveness – reforms that can be implemented and bear fruit only over the medium term.
But, once again, this requires a credible commitment to an exchange that requires a promise of action later in return for something now.
German politicians and their electorates can be excused for doubting whether future Greek, Irish, or Portuguese governments can be counted upon to deliver on current leaders’ commitments.
Hence the impasse, with the eurozone becoming mired in a vicious circle of high debt and economic austerity.
Democracies often deal with the problem of extracting commitments from future politicians by delegating decision-making to quasi-independent bodies managed by officials who are insulated from day-to-day politics.
Independent central banks are the archetypal example.
By placing monetary policy in the hands of central bankers who cannot be told what to do, politicians effectively tie their own hands (and get lower inflation as a result).
Unfortunately, US and European politicians have failed to show similar imagination when it comes to fiscal policy.
By implementing new mechanisms to render the future path of fiscal balances and public debt more predictable, they could have averted the worst of the crisis.
Compared to monetary policy, fiscal policy is infinitely more complex, involving many more trade-offs among competing interests.
So an independent fiscal authority modeled along the lines of an independent central bank is neither feasible nor desirable.
But certain fiscal decisions, and most critically the level of the fiscal deficit, can be delegated to an independent board.
Such a board would fix the maximum difference between public spending and revenue in light of the economic cycle and debt levels, while leaving the overall size of the public sector, its composition, and tax rates to be resolved through political debate.
Establishing such a board in the US would do much to restore sanity to the country’s fiscal-policymaking.
Europe, for its part, requires a determined step toward fiscal unification if the eurozone is to survive.
Removing national governments’ ability to run large deficits and borrow at will is the necessary counterpart to a joint guarantee of sovereign debts and easy borrowing terms today.
Yet this cannot mean that fiscal policy for, say, Greece or Italy would be run from Berlin.
A common fiscal policy implies that the elected leaders of Greece and Italy would have some say over German fiscal policies, too.
While the need for fiscal unification is increasingly recognized, it is not clear whether European leaders are willing to confront its ultimate political logic head-on.
If Germans are unable to stomach the idea of sharing a political community with Greeks, they might as well accept that economic union is as good as dead.
Politics, it is said, is the art of the possible.
But possibilities are shaped by our decisions as much as they are by our circumstances.
As matters currently stand, when future generations place our leaders in historical perspective, they will most likely reproach them, above all, for their lack of institutional imagination.
The Crisis of Thai Democracy
One year after he was re-elected in a landslide, Thailand’s Prime Minister Thaksin Shinawatra has been forced to dissolve the National Assembly and call a snap election.
Although his Thai Rak Thai (TRT) party commands a 75% majority in the assembly, Thaksin is embattled.
He remains immensely popular with rural voters and the urban poor, who comprise more than 60% of Thailand’s electorate, but he has been battling a fervent Bangkok-based insurrection against his rule by the intelligentsia and middle classes.
They accuse Thaksin, Thailand’s wealthiest businessman, of corruption and treason for the tax-free sale of his family-owned Shin Corporation to the Singapore government’s Temasek Holdings for $1.9 billion.
Thaksin’s rapid reversal of political fortune attests to the limits of the ballot box, as well as to democratic shortcomings that now beset a host of developing countries, including regional neighbors such as the Philippines.
Until recently, Thaksin appeared to be as unassailable at home as he was bold and credible abroad.
Exploiting Thailand’s deep urban-rural divide, Thaksin bulldozed his way to power in 2001 on a populist platform.
He stirred up national pride and promised rural Thais that their country would rise to greatness following the devastating 1997 economic crisis.
A raft of populist policies underpinned his first four-year government, from rural debt suspension and cheap universal healthcare to handing out $25,000 to each of 77,000 villages for entrepreneurial start-up funds.
Reminiscent of development strategies prevalent in East Asia, Thaksin picked strategic niche industries to propel Thailand’s economic expansion, focusing on automobiles, fashion, food, healthcare, and tourism.
In foreign affairs, Thaksin carved out his own space on the international stage with ambitious regional cooperation schemes anchored around the 25-member Asia Cooperation Dialogue (ACD), the Ayeyawady-Chao Phraya-Mekong Economic Cooperation (ACMECS) and a clutch of bilateral free-trade agreements with the major powers, including the US, China, Japan, India, and Australia.
The ACD was designed to make Thailand the political center of gravity in Southeast Asia;
ACMECS was to make it the region’s linchpin of economic development; and the bilateral agreements would cement relations with the biggest players in the region.
At his zenith, many saw Thaksin as a worthy successor to former Malaysian Prime Minister Mahathir Mohamad, buoyed by authoritarian rule at home and assertive leadership abroad.
Voters overwhelmingly returned Thaksin to office in February 2005.
But his personal popularity then plummeted, owing to the spate of separatist violence in the Muslim-dominated south and the scourge of corruption.
Sins overlooked during his first term – from harassment of the media and coercion of civil society groups to extrajudicial killings in an anti-drug campaign and conflicts of interest that benefited his Shinawatra telecommunications empire – soon caught up with him.
The shady sale of Shin Corporation in February galvanized long-simmering discontents.
The deal was viewed as the epitome of Thaksin’s sophisticated corruption and a betrayal of his proclaimed nationalism, thus exhausting his moral authority and political legitimacy.
The company’s value quadrupled during Thaksin’s reign, with assets such as satellites, a mobile phone service, and an airline having originated from state concessions that were conditioned on majority Thai ownership.
For Thaksin’s opponents, the sale of these assets to a foreign company owned by a foreign government amounted to putting Thailand’s economic sovereignty on the block.
Thaksin’s days appear numbered, for Thailand seems poised to eject a popularly elected prime minister.
The number of street protesters has since swelled from five digits to six.
His predicament illustrates the common dictum in the politics of developing countries where rural electorates elect governments but urban elites get to throw them out.
Indeed, the anti-Thaksin coalition will settle for no less than his ouster from office, permanent banishment from Thai politics, and possibly exile.
But the opposition has decided to boycott the snap election, which the TRT would likely win again by a large margin, because Thaksin has captured and manipulated the institutions established by the constitution to safeguard against graft and uphold separation of powers within the state.
Thai politics has thus reached an impasse.
Only intervention by King Bhumibol Adulyadej, who is widely revered, seems capable of saving the day.
In a fiercely contested battle between Thaksin and his opponents, King Bhumibol is the fundamental difference between Thailand and the Philippines, where “people power” revolts regularly undermine and sometimes overthrow presidents.
The King’s intervention would put an unconditional stop to the street confrontations.
But the Thai people cannot afford to look to their aging and ailing King every time they have a problem.
Moreover, a royal intervention would risk returning Thailand to square one, seeking to rewrite its constitution to remedy the shortfalls of its democratic culture.
What Thai democracy needs in order to mature is not a political safety net, but a vigilant citizenry to ensure disciplined enforcement of the constitution’s provisions and institutions, so that they can no longer be hijacked by the likes of a Thaksin.
The Crisis of the Left
After a series of electoral losses around the world, the left is in crisis.
To restore it to health, some on the left argue for a return to their parties' historical roots.
Others argue that the old myths should be abandoned in favor of a bold move forward.
This debate is occurring not only in France after the defeat of the Socialists last April.
It also characterizes the political situation in the US after the defeat of the Democrats in last November's mid-term elections.
Both parties face the same dilemma, and this is precisely my point: that the crisis confronting the left is a deep, fundamental, one.
In the past, the left was equipped with its own ideology, its own economic theory.
The fundamental economic mechanism that determined how the world worked was the struggle for rents between workers and capitalists.
With this "us versus them" view of the world, it was not hard to rally voters, from the most disenfranchised all the way up to the salaried middle class--more than enough for the left to secure electoral majorities.
But the world has changed, and the left's old view simply no longer applies.
More intense competition, within and across countries, has decreased the available rents.
Financial capital can cross borders far more easily, and physical capital can relocate almost as quickly.
The limits on redistribution through the market are much tighter: trying to appropriate the rents may lead firms to move to emerging countries, or else to go bankrupt.
This reality has taken a while to sink in, and a number of parties on the left still cannot bring themselves to acknowledge the constraints imposed by market forces.
Some do, of course, none more explicitly than the UK's Labor Party, led by Tony Blair.
Others, typically old-line communist parties, have retained much of their traditional rhetoric, but this is largely for electoral consumption.
They know all too well that the old nemesis, "capital," has become difficult or impossible to expropriate, yet they remain unready or unwilling to deliver the news to their constituency.
The same tension exists within parties themselves.
Witness the muddled debate within the French Socialist party in the aftermath of its defeat, with the "left of the left" and the "right of the left" in a fight for control both of the party and the route by which it should eventually return to power.
And yet both available strategies--doing nothing or attempting to modernize--have obvious pitfalls.
The old rhetoric, after all, still resonates powerfully with the most destitute parts of the electorate: minimum wage workers, the long-term unemployed, and all those who feel that anything would be better than what they have now.
It also allows easier contact with fringe groups, such as anti-globalization protesters and the most zealous greens.
But while the old religion still mobilizes the left, it makes it difficult to hold the center.
The middle class has lost its faith in the old rhetoric, and wherever the left, by some chance, comes to power, reality quickly sinks in.
Modernization runs into the opposite problems.
Public discussion of new ways to finance retirement pension plans, or of introducing a negative income tax, sounds sweet to economists of all stripes, but it does not exactly mobilize public opinion.
The poor don't care.
The extreme left becomes disenfranchised.
The middle class likes the tone, but wonders how different the program is from what they hear from the neo-liberal right.
As the events of the French elections last spring demonstrated, when this dynamic prevails, the left loses the elections.
Shift everything I just said regarding this strategic dilemma to the right a bit and you arrive at the problems of America's Democrats.
The choice of a candidate for the next elections is about this strategic choice, not personalities.
Shift everything a bit to the left, and you arrive at the problems facing President Lula Ignacio da Silva in Brazil.
Should he return to the old Lula rhetoric and watch capital flee the country, or try "modernity" and disappoint many of those who voted for him?
With minor adjustments, the left in Germany, Italy, Spain, Portugal, and so on faces the same Hobson's choice.
So: Damned if you do; damned if you don't?
No, or at least not quite.
The fundamental feature that must distinguish the left and the right is not their respective views on the economy, but rather their stances regarding redistribution.
One of the first lessons of economics is that there is a trade-off between efficiency and redistribution.
The right focuses on efficiency. The left emphasizes redistribution.
A clear commitment to the poor, the sick, and the unfortunate must be the message of the left.
And the means, however "boring." must be appropriate to realizing this commitment: a combination of sustainable retirement systems, better designed unemployment benefit systems, negative income taxes, training programs, and the like.
Only by employing the rhetoric of commitment to mobilize the troops while devoting careful attention to the center's concern with methods can the left hope to return to power.
The Crooked Path of Financial Reform
BRUSSELS – Two years ago, governments saved the necks of the world’s financial markets.
Yet today, those same markets intimidate governments, or at least some of them.
In Europe, the market for Greek debt has frozen, and interest-rate spreads between Irish and German euro-denominated debt recently reached alarming levels.
Spain has succeeded in reducing its own spread vis-à-vis Germany but only after a policy U-turn.
Portugal has announced a major austerity package, hoping for the same effect.
But, even when they are not in danger of losing access to the bond market, most governments in the developed world nowadays anxiously await the pronouncements of the same rating agencies that they were recently vilifying.
This change of fortune is shocking.
To public opinion, it looks as if arrogant financial-market professionals learned nothing from the crisis, feeding the impression that nothing has changed – except for the worse.
Governments with a mandate to domesticate financial markets appear to have produced a lot of sound and fury, but little reform.
Whether deliberately or not, regulators seem to have missed their chance to implement serious changes to the rules of global finance, and governments are now so weakened that they are at the mercy of those who, not long ago, were begging them for help.
This politically devastating sentiment fuels resentment against markets and financiers.
Nevertheless, while no one is proclaiming, “mission accomplished,” it is not true that nothing has been done to reform finance.
In a recent study from the Brussels-based think tank Bruegel, Stéphane Rottier and Nicolas Véron provide a comprehensive scoreboard of the progress achieved in reforming financial regulation over the last two years, starting from the program agreed in November 2008 at the G-20 meeting in Washington.
To be sure, they find that implementation has been patchy, with a gap between items whose follow-up was assigned to strong international organizations, such as the International Monetary Fund, and those merely calling for coordination among national authorities.
Overall, however, the result is far from zero.
Indeed, the US adopted wide-ranging financial reform in July, Europe is in the final steps of approval of its legislative package, and the Basel committee has just given the green light to a substantial tightening of credit-risk rules.
The benchmark for this study is admittedly far from ideal.
The G-20’s Washington program (signed by George W. Bush) was neither ambitious nor well structured.
It did not aim to domesticate global finance, and it was not based on a thorough analysis of the crisis.
Under pressure to act without delay, and unable at this early stage to identify key priorities for structural reform, governments set themselves a long and ragbag to-do list.
There was no sign of the more radical ideas that emerged later in the debate, such as the so-called Volcker rule separating banks and hedge funds (which is reflected in the US legislation), or a crisis-resolution mechanism whereby bank debt is converted semi-automatically into equity (which several countries are considering).
Nor was there any mention of banks’ size and ways to address the too-big-to-fail issue.
Almost two years on, financial reform remains incomplete, as the agenda itself is still evolving.
This was inevitable, because new, better-defined priorities could emerge only after a period of reflection and debate.
The downside is that some momentum has been lost, especially at the G-20 level.
The appetite for global solutions has diminished while national politics have taken increasing control of the agenda.
But one positive recent development is the creation of stronger public institutions.
The era when London vaunted its light-touch regulation is over.
Now the US and Europe are in the process of building institutions capable of supporting – and implementing – sustained reform.
Indeed, in pausing to reflect, governments have not missed the political opportunity to be tough, nor have financial markets regained the upper hand.
True, the balance of power certainly is not what it was two years ago.
Regulatory capture is at work again, perhaps even more forcefully, because the stakes are higher.
But it is not self-evident that governments’ ability to regulate has been seriously harmed by their status as borrowers.
While Greece has virtually forfeited its access to capital markets, Germany has never borrowed on better terms.
And, if governments’ dependence on bond markets’ willingness to lend has not rendered them unable to reform financial regulation, this is all the more true for the EU and the G-20.
Just as we have learned to distinguish between governments as shareholders and as regulators – which must be done carefully, because the actions of one do not necessarily coincide with the interests of the other – today we must distinguish between governments as borrowers and as financial regulators.
It would be unfortunate if governments requiring financial institutions to be more prudent in managing risk were at the same time asked to turn a blind eye to sovereign risk.
Even if this sounds unfair, it is logical to expect rating agencies, which had been lax in evaluating credit risk, now to be rigorous in assessing all forms of risk, including sovereign risk.
The history books are not yet written, nor the victor declared.
Financial reform could still go belly up.
But it is premature to write it off as a failure.
The Cruelty of Chance
MOSCOW – In Russia, somewhere behind every event lurks the question: Who is to blame?
In the tragedy that claimed the lives of Polish President Lech Kaczynski and 95 other Polish leaders, we can answer that question with certainty in at least one respect: history is to blame.
The event is so hideous that it seems like a bad joke, or an evil KGB plot, a mad conspiracy out of James Bond – or some combination of all three.
Yet the crash that has sent all of Poland into mourning was none of these things.
A tragedy that defies any logical explanation confirms only one thing: the cruelty of chance.
What if no fog prevented the safe landing at Smolensk airport?
What if the plane was not a 20-year-old, Russian-made Tupolev-154, but a newer and safer model?
What if the Polish pilot had obeyed the Russian air traffic controller who tried to divert the plane to Moscow or Minsk?
Unfortunately, the cruelty of chance also lies at the heart of the centuries of mistrust between Poland and Russia.
The irony (if there is an irony at all) is that this tragedy came at a time when mistrust seemed, at long last, to be giving way to better, more businesslike relations and greater understanding between the two countries.
After 70 years of denial, Russia’s leadership (if not yet ordinary Russians) were ready to admit that Joseph Stalin’s NKVD (precursor to the KGB) slaughtered more than 20,000 Polish officers, intellectuals, and clergy in the nearby Katyn forest in 1940.
Indeed, Russian Prime Minister Vladimir Putin, a former KGB officer himself, invited his Polish counterpart, Donald Tusk, to commemorate that tragedy together.
But Kaczynski, a member of Solidarity in the 1980’s who was eager to overthrow the communist regime, was more mistrustful of the Russians than Tusk.
He put together his own delegation to visit Katyn, and wondered aloud if the Russians would give him a visa.
Certainly, no Russians were invited.
When the pilot of the presidential plane (ironically, again, Soviet made) was advised not to land in the thick fog, either he, or perhaps even the president himself, may have mistrusted the Russians’ willingness to give honest advice.
Indeed, they may well have wondered if the cunning ex-KGB men around Putin simply wanted to make Kaczynski’s Katyn commemoration a mockery?
Russian-Polish suspicions and disagreements date back to the sixteenth century, when Poland was the far greater power; indeed, the Grand Duchy of Moscow was a backwater.
Across the centuries, there have been wars, started by both sides, and partitions of Poland executed by the Russians, followed by attempts at “Russification,” with the Russian Christian Orthodox Empire trying to control the “silver-tongued,” “deceptive,” West European-oriented Catholic Poland.
Then there was the 1917 Bolshevik Revolution, which the Poles refused to join, and Marshal Jozef Pilsudski’s miraculous victory over the Red Army at the gates of Warsaw in 1920.
Throughout the interwar years, Poland and the nascent Soviet regime were at daggers drawn almost without interruption.
When Stalin signed the Molotov-Ribbentrop pact with Nazi Germany in 1939, it gave him an opportunity to invade Poland.
The Katyn massacre was a direct result, with Stalin ordering the mass murder of Poland’s elite in order to decapitate Polish society and thus make it more pliable.
Katyn was also the occasion for the Soviets to break off relations with Poland’s wartime government-in-exile in London.
Because the Polish leaders refused to exonerate the Russians, Stalin accused the Poles of collaborating with the Germans in trying to shift the blame for Nazi crimes onto Russians.
Soon after, the idea of establishing a puppet regime in Warsaw took root.
Although the Nazi-Soviet Pact did not last long – Germany invaded Russia in 1941 – for Poland there was no way out.
With Hitler’s defeat, it once again became part of the Russian sphere, this time of Soviet Russia.
But Poland never stopped striding – and striking – for independence.
The rise of Solidarity in the 1980’s was the earliest and most severe blow to the stagnating Soviet system.
The Polish-born Pope John Paul II crystallized the anti-communist “threat” that Poland now posed to the Soviet Union.
The Pope’s call for religious freedom around the world, including in the socialist countries, rubbed the atheistic Soviets – and Orthodox Russians – the wrong way.
Indeed, throughout the twentieth century, animosity between Poland and Russia remained at fever pitch, manifested not only in politics but also culturally. This, of course, continued an old pattern, too.
Alexander Pushkin, Nicolai Gogol, and Fyodor Dostoyevsky were all suspicious of the Poles, calling them “cold,” “distant,” and “manipulative,” and seeing Poland as always on the side of the West, rather than standing with its Slavic brothers. Indeed, Pushkin’s friendship with Adam Mickiewicz ended in acrimony over the 1830 Polish insurrection against Tsarist rule.
In fact, the animosity ran so deep that when both countries were no longer communist, and Russia was looking to replace its November 7 Bolshevik Revolution holiday, it came up with November 4, the anniversary of the Russian boyars’ victory in 1612 over Polish King Sigismund’s short-lived occupation of Moscow.
Now there is talk, in both Warsaw and Moscow, that the second tragedy of Katyn might usher in a new era in bilateral relations.
Perhaps so, but as the Polish essayist Stanislaw Jerzy Lec said: “You can close your eyes to reality, but not to memories.”
The Cultural Bias of Genetics
All cultures impose on their members ideas about who they are, how they came to be, and where they fit in socially.
For example, pre-modern Europe believed that a woman who had sex before marriage might carry the imprint of her lover within her, so that her child born in wedlock would resemble the earlier lover, rather than the husband.
This served to justify the premium placed on female chastity.
Folk ideas about heredity are a particularly powerful cultural tool, but they are not unique to pre-modern societies.
Even contemporary science has its own cultural ideologies about heredity, which are often difficult to disentangle from the complex data and high technology that we believe produces objective, value-free glimpses of nature.
In the field of human origins, it is well-known that a human DNA sequence is nearly 99% identical to the corresponding part of a chimpanzee’s DNA.
From there, it is not uncommon to hear the conclusion that we are ”nothing but” chimpanzees (and fated to be aggressive, or to possess whatever attributes are being imputed to apes these days), or that apes merit human rights.
Once again, social meanings are enmeshed within beliefs about heredity.
Actually, that overwhelming similarity between human and chimpanzee DNA is a product of two cultural facts: our familiarity with the chimpanzee’s body, and our unfamiliarity with DNA.
After all, when the chimpanzee itself was new and interesting (in the 1700’s), contemporary scholars commonly judged it to be overwhelmingly similar to the human form – so much so, that it was commonly classified as a variant of humans.
After several centuries studying apes, we are familiar with every subtle difference in form between our species and theirs.
But the emergence of molecular comparisons in the 1960’s, and DNA technologies in the 1980’s, presented a new way of comparing species.
The comparison of linear polymers – proteins made up of chains of amino acids, or DNA made up of chains of nucleotides – held out the promise of a simple tabular approach to evolution.
When we compare the genetic material of humans and chimpanzees, we do, indeed, find that it corresponds at nearly 99 of every 100 comparable sites.
But this method omits much of what has been learned about genomic evolution in the last quarter-century.
Mutational processes are far more complex than was thought a few decades ago; with strand slippage, duplication, transposition, and illegitimate recombination producing qualitative differences between closely-related genomes.
So, while measuring nucleotide similarity in homologous regions is indeed in the 98-99% range, this number does not incorporate or acknowledge the measured difference in the size of the human and chimp genomes, or the widespread differences in chromosome or genome structure.
Because a DNA sequence is a one-dimensional entity, it lends itself much better to single-number comparisons than a four-dimensional body does.
The genes that lead to the production of the human and chimpanzee femur may be 98-99% identical, but it is impossible to say whether the bones themselves are more or less similar than that.
Perhaps the most seductive aspect of the DNA comparison is its lack of biological context.
The value of 98-99% similarity between human and ape DNA stands outside the rest of life.
We can gain some zoological perspective on what that number really means by comparing another species to apes and humans.
Compared to the body of an oyster, for example, chimpanzees and humans are at least 99% identical – bone for bone, muscle for muscle, nerve for nerve, organ for organ.
If anything, the DNA comparison underestimates the profound similarity of the human and ape bodies in the great tapestry of nature.
Context reveals something at the low end of the scale as well.
Two DNA sequences generated at random must be 25% identical, by virtue of the fact that DNA is a sequence of only four bases.
Therefore, all multicellular life, having presumably developed from a single common ancestral form, must be over 25% identical in their DNA sequences.
In other words, a human and a carrot have much in common genetically, despite their being little similarity between them physically.
Here the DNA comparison grossly overestimates the actual relationships between species.
Genetic comparisons simply do not afford an ”inner view” of the relationships between species, or an encapsulation of those relationships.
In other words, this apparent fact of nature – the overwhelming genetic similarity of human and ape – is a fact constructed from culture.
That is not to say it is inaccurate or false; just that its meaning is far less obvious than it may appear superficially. &nbsp;
We make sense of the world, and of our place in it, culturally – and science provides more information for constructing that place.
But like any other peoples, our own application of that information to the puzzle of our existence is strongly influenced by our non-scientific ideas, our pervasive folk ideologies of heredity.
The Cultural Contradictions of Multiculturalism
STOCKHOLM – State-sponsored multiculturalism has failed.
That proclamation by British Prime Minister David Cameron, following hard on the heels of similar renunciations of multiculturalism by German Chancellor Angela Merkel and French President Nicolas Sarkozy, suggests that a page is being turned in European society.
But is it?
“Frankly,” he said, “we need a lot less of the passive tolerance of recent years and a much more active, muscular liberalism.” He was not criticizing ethnic and cultural pluralism, but the idea of “state multiculturalism,” which applies different moral standards to various social groups.
In the future, Cameron declared, Muslim groups that do not, for example, endorse women’s rights, defend freedom of expression, or promote integration would lose all government funding.
It is not just official multiculturalism that has failed in Europe, however; so has the multiculturalism endorsed by large parts of European civil society.
Sweden, one of the most liberal countries in the world, but also one that has recently seen a surge in extremism, is a case in point.
Sweden has long been known for its lifestyle liberalism.
Swedes are overwhelmingly secular and indifferent toward the Swedish church.
Homosexuals have been able to register civil partnerships since 1995 and marry since 2009, and the country is one of the most radical in its understanding of women’s rights – as WikiLeaks founder Julian Assange can attest.
Moreover, Sweden’s far-reaching freedom of expression is one reason why Assange located WikiLeaks’ servers in the country.
But Sweden’s freedom of expression was also one of the motives behind a grisly suicide attack in Stockholm in December of last year.
According to a last testament left behind by the attacker, a Swedish citizen named Taimour Abdulwahab, Christmas shoppers in downtown Stockholm had to die in retaliation for “the Swedes’ support” for Lars Vilks, an artist who stirred outrage in the country with drawings of the Prophet Muhammad as a dog.
Vilks argued that his work was a provocation aimed at revealing the selective liberalism within the Swedish intellectual establishment – its multiculturalism, one could say.
The Stockholm suicide bombing was not the first act of violence linked to Vilks.
Two young men were recently sentenced to prison for trying to set fire to the artist’s home.
During a lecture at Uppsala University last summer, a mob attacked Vilks, a professor of art history, while crying Allahu akbar.
The then 64-year-old artist was head-butted, but escaped serious injury thanks to heavy police protection.
What is remarkable is not just the violence and threats against Vilks – anyone who doubts the determination of Islamist extremists in Sweden should watch the YouTube clip from that lecture – but also the reaction from the otherwise radically secular Swedish establishment.
A number of influential Swedish intellectuals and politicians have directed their harshest criticism against Vilks, not against those who have called for censorship and even incited violence.
Only a few of the country’s newspapers and political magazines published Vilks’ drawings.
Like murdered Dutch filmmaker Theo van Gogh and the British novelist Salman Rushdie before him, Vilks was criticized by liberals and the left for causing unrest with his art.
In this respect, Vilks’ work must be regarded as having succeeded in exposing moral double standards – no matter what one thinks of the drawing itself.
In Sweden, just as in similarly liberal Holland and Denmark, right-wing populists have profited from liberals’ failure to stand up for their values.
The Sweden Democrats (SD), a party with roots in the country’s white-supremacist movement, entered the parliament for the first time in September 2010, with the support of 5.7% of the Swedish electorate.
The SD has sought to position itself as the sole defender of gays and Jews in the face of intolerance stoked by large-scale Muslim immigration in the past two decades.
Swedes who stand far from the SD’s original platform are apparently willing to be represented by a party that until recently was full of neo-Nazis.
Thus, the lack of “muscular liberalism” in one of the world’s most liberal countries has paved the way for both Islamists and right-wing populists.
Europe’s leading politicians have spoken out, and now it is time for European civil society – its newspapers, critics, curators, academics, and publishers – to declare the failure of multiculturalism and show some courage in defending the values they claim to embody.
The Cultural Revolution at 40
Mao’s Cultural Revolution was launched 40 years ago this month, yet, despite 20 years of economic liberalization, its wounds remain a taboo subject.
Today’s rulers dare not face up to their own experiences or moral responsibility.
So, three decades after the Cultural Revolution ended, the national self-examination that China requires has not yet begun.
Of course, the Communist Party has deemed the Cultural Revolution a “catastrophe,” a judgment supported by mainstream opinion.
But China’s rulers permit discussion of the Cultural Revolution only within this official framework, suppressing any and all unofficial reflections.
The generalized official verdict, and the use of Lin Piao (once Mao Zedong’s Vice President and designated heir, who rebelled against him) and the “Gang of Four” as scapegoats, obscures the crimes of Mao and the Party, as well as the entrenched flaws in the system.
The Cultural Revolution’s major figures, who wrought so much mindless violence, thus either maintain their silence or offer spurious self-defenses.
Most victims also use various excuses to bottle up their memories.
Those who both persecuted and were persecuted are willing to talk only about their being victims.
For example, the fanatical Red Guard movement swallowed up almost every youth of the right age.
Yet all but a few old Red Guards remain silent, saying, “it is not worth remembering.”
During the Cultural Revolution’s early days, the Beijing-based Allied Movement, formed by the children of party cadres, committed horrendous acts of violence, operating under the slogan, “If the father is a hero, the son is a good man; if the father is a reactionary, the son is a turtle egg.”
But the memoirs of these rebellious vanguards of yesteryear highlight only their youthful passion and pure idealism, or their sufferings and those of their parents.
They do not mention their own barbaric assaults, vandalism, and looting, or their kangaroo courts.
The revolution’s veterans refuse to discuss their arrogant presumption of “natural Redness,” or to mention that they rebelled because they wanted power.
Worse still, they express no remorse toward their victims.
The Cultural Revolution swept up all of China.
So many people suffered that it is difficult to count the number of victims accurately.
This is all the more true of the persecutors.
Yet few reflect and apologize.
The terror of the Red Guards, the armed fights between the rebellious sects, the teams established to “cleanse” the social classes, and all the bloody massacres are simply left to rot in China’s memory.
The official ban blocks reflection, but human weakness and careerist self-interest among those who participated buttresses the official ban.
Consider Ye Xiangzhen, the daughter of senior general Ye Jianying, who once discussed her family’s Cultural Revolution experiences on television.
During the early stages of the Cultural Revolution, she played a dual role: daughter of a Chinese field marshal and leader of the rebels at the School of Art in the capital.
She complained that she was “too famous,” “too active,” and “too stressed” at the time, and she provided extensive details about how Mao’s wife, Jiang Qing, persecuted the Ye family and how the Ye children went to prison.
But she had only 58 words to say about her career as a Red Guard leader – no details or explanation of how she joined, which activities she participated in, and whether she was involved in “physical struggles” or persecuted others.
To call for those people who applied violence and persecuted others to examine themselves and repent is not intended to mete out legal responsibility and moral judgment.
But it would at least restore the truth about the Cultural Revolution, summarizing its lessons in order to avoid repetition.
More positively, restoring truth would counter the traditional Chinese instinct to blame all disasters on external forces, and might lead to a spiritual epiphany for a people struggling to find value in the emerging new China.
The person with the most responsibility for the catastrophe of the Cultural Revolution is, of course, Mao, yet he remains China’s savior.
The children of Mao’s senior cadres who enjoyed the greatest fame during the Cultural Revolution are now the principal beneficiaries of today’s economic reforms.
But this continuing silence by the guilty only transfers the costs to society as a whole, with Chinese life distorted by the weight of lies and evasions.
As one generation after another continues to live in denial, the lies will corrode everything they touch.
The Chinese people will no longer know what is personal honesty or historical truth, and they will repeatedly abuse, miss, or forsake historic opportunities.
As long as the Cultural Revolution remains unaccounted for, it will not have ended.
If historical truth is not restored, the lessons cannot be learned.
No amount of material prosperity can make China a healthy society without this necessary reckoning with the past.
The Culture of Entrepreneurship
Governments around the world want to promote entrepreneurship.
Though most business start-ups will never amount to much, each little company is an experiment, and a great deal of experimentation is necessary to produce the occasional firm that can transform a nation’s economy – or even rise to international significance.
In short, entrepreneurship is an incubator, and one that is essential to long-term economic success.
In explaining the variation in levels of entrepreneurship across countries, much attention is devoted nowadays to differences in national attitudes and policies.
But there are also significant differences in levels of entrepreneurship within individual countries.
People from Shanghai are said to be more entrepreneurial than people in Beijing.
People in the Ukrainian town of Kherson are more entrepreneurial than people from Kiev.
In a recent study, Mariassunta Giannetti and Andrei Simonov of the Stockholm School of Economics show the magnitude of differences in levels of entrepreneurship across Swedish municipalities.
They define entrepreneurs as people who report income from a company that they control and work in at least part-time, and find that the proportion of entrepreneurs in the population differs substantially across the 289 municipalities that they studied, ranging from 1.5% to 18.5%.
What can these differences tell us about the real causes of entrepreneurship?
Policy changes at the national level cannot account for the variation Gianetti and Simonov found.
In the 1980’s and early 1990’s, centralized wage-setting agreements were dissolved and the Swedish government cut personal and corporate tax rates.
The level of entrepreneurial activity in the country as a whole doubled as a result, but the response was very different from one municipality to another.
Why?
Cultural variables seem to explain a lot: religion and politics accounted for about half of the variation across municipalities.
Municipalities tended to have more entrepreneurs if they had a high proportion of pensioners who were members of the Church of Sweden (the official state church until 2000) and a high proportion of right-wing voters.
Beyond that, a feedback mechanism appears to be in place: cities with more entrepreneurs tend to beget still more entrepreneurs.
Once an entrepreneurial culture takes root, it typically spreads locally, as people learn about business and begin to feel attracted by it – even if it doesn’t yield an immediate or certain payoff.
Indeed, Giannetti and Simonov discovered that the average income of entrepreneurs was lower in high-entrepreneurship municipalities than in the low-entrepreneurship ones.
Similarly, studies from other countries show that entrepreneurs often have lower initial earnings and earnings growth than they would have as employees.
What these studies suggest is that differences in the degree of entrepreneurship may be due less to better economic opportunities (the “supply” side of the entrepreneurship equation) than to cultural differences that make entrepreneurship personally more rewarding (the “demand” side).
This hypothesis is supported by Giannetti and Simonov, who argue that differences in the prestige of entrepreneurs across municipalities may account for differences in levels of entrepreneurship.
In some municipalities, entrepreneurs enjoy high social status, regardless of whether they are already successful; elsewhere they are looked down upon and other occupations are more admired.
The idea that prestige is important is not new.
In her book Money, Morals & Manners, the sociologist Michèle Lamont compared definitions of success in France and the United States.
She interviewed people in both countries and asked them what it meant to be a “worthy person.”
In essence, she was asking people about their sense of what is important in life and about their own personal sense of identity.
Lamont’s study confirmed the conventional wisdom that Americans value business success, while the French place greater value on culture and quality of life.
Likewise, open contempt of “money-hungry” businesspeople and competition is expressed more often in France than in America.
But, while Lamont focused on differences between the French and the Americans, her study’s most interesting finding was that of significant differences between regions within France.
She compared Clermont-Ferrand, the capital of Auvergne, in the center of France, with Paris.
Auvergne’s inhabitants have a reputation for being parsimonious and stern, and, despite substantial recent progress, for a relative dearth of high culture.
Lamont found that people in both Paris and Clermont-Ferrand tended to express contempt for “money-grubbing.”
But the Clermontois valued “simplicity, pragmatism, hard work, and resolve,” while the Parisians put more stress on “pizzazz and brilliance.”
She concluded that, “In many respects the Clermontois are closer to the Hoosiers (as the residents of the US mid-Western state of Indiana are called) than to the Parisians.” Her evidence suggests that in Clermont-Ferrand, as compared to Paris, there is a higher intrinsic demand for starting small businesses.
Virtually every country is a pastiche of local cultures that differ in how they motivate people and shape their personal identity.
Differences in how these cultures define what it means to be a worthy person, and how worthiness is signaled, probably explain much of the variation in levels of entrepreneurship.
Economists and others often tend to look at countries as a whole and emphasize national attitudes and national policies as the main factors in encouraging or discouraging entrepreneurship.
But, in fact, the national success in entrepreneurship depends on the evolution of local cultures and their interaction with national policies.
Entrepreneurship can take root in culturally congenial regions of any country after economic barriers against it are lifted, and then feed on itself to grow to national significance.
The Currency Quandary
Two views about today's prevailing exchange rates exist: the dollar is overvalued dollar and the yen needs a deep depreciation.
The implication of the two is an explosion upward for the Euro.
But can Europe deal with such a shock, and what would happen to the US if that happened?
Now that America's recovery is underway - and it arises from a slump not a recession - the current account deficit will widen even further and in no time discussions about the unsustainable high-flying dollar will become fashionable again.
Yet, the very fact of a US upswing that is bigger, comes sooner, and is better than anywhere else - Europe remains plagued by growth cramps and Japan's economic policy kabuki is going nowhere - will support and even strengthen the dollar.
All those who predicted the collapse of America's ``house of cards'' economy (who thought that Enron's collapse was finally the sign in the sky that they were right) must now be exhausted.
No dollar collapse looms.
Financial stability, strong productivity, flexibility and dynamism make the US one of the choice places for capital, and this influx of capital finances America's large current account deficits.
It will continue doing so until, at the end of the rainbow, Japan or Europe compare favorably with the US investment climate.
Don't hold your breath for that day; don't wait for the $1.20 per Euro that is touted as the ``equilibrium'' rate.
But the dollar is not the only issue atop currency market debates.
There is another strongly held belief: that Japan cannot recover without a steep decline in the yen.
For those who hold this view, the yen would have to decline to 160 or even 200 yen/$.
Without monetary policy, fiscal policy or supply side reforms, how else can Japan return to growth except by a depreciation-driven export boom?
Because Japan's export sector is so small, barely 10% of GDP, the depreciation would have to be enormous to stoke the entire economy.
Suppose we put the two propositions together: the yen depreciates 30% against the dollar while the dollar in turn depreciates 30% against the euro.
These numbers are large but such falls are in everyday discussion.
The implication, of course, is a huge appreciation of the euro against everybody else.
Japan might get some growth, probably not even a full percentage point of GDP.
For the US the story is mostly neutral: a gain in competitiveness toward Europe, a loss relative to Japan, and with no net gain or loss in competitiveness or trade, scant inflationary effects to speak about, no interest rate hikes or stock declines - nothing to get excited about.
But that would not be the story in Europe.
A huge yen depreciation and sizeable decline in the dollar would hit European competitiveness and growth hard.
Empirical models that try to quantify the impact of exchange rate changes suggest that without an aggressive monetary policy response, a 40 % euro appreciation would knock 2.5% off European growth.
This number is not at all surprising if we remember that growth in the past few years was substantially due to the euro's weakening; this time round, the euro strengthening would take it all back.
Even as European growth turns down, sharply lower import prices would also bring down inflation.
That opens the door for a dampening the damage if the European Central Bank vigorously responded by cutting rates. ``Vigorous,'' however, is not a word one often used to describe the ECB, so there is a serious problem.
The message here is clear: Europe must hope that the dollar stays strong because, without domestic dynamism, the cheap euro is Europe's only growth ticket.
In countries like Germany, which have been on the ropes since the signing of the Maastricht Treaty, a continuation of stagnation or outright recession would deeply strain budgets and credibility.
But all this should not happen.
A big appreciation in the euro is not on the cards.
Europe's leading economies, like Germany, are a fiscal embarrassment.
Their tardiness in reforming and hostility to capital creates an impression of eurosclerosis that won't attract capital.
The euro was a great idea, but the economy that backs it is distinctly dull.
So there is no way Europe will become a magnet for world capital flows anytime soon.
The euro will stay at around 90% of the dollar and may not even pay a weekend visit at parity.
There won't much European growth, but nor will there be an outright growth crisis either.
Europe will keep talking about the American house of cards, but with a sense of yearning that its dynamism is a trick an ageing Europe can't master.
Suppose all this is wrong, suppose suddenly the US cannot attract enough capital.
No one shows up at Treasury auctions to buy US bonds, and fewer foreigners buy US stocks or companies and real estate.
What would happen?
Of course the dollar would fall in no time, and substantially so - enough to shrink the deficits or bring in capital to take advantage of a now undervalued dollar.
But there is very little pain in that - inflation won't rise, stocks won't fall, manufacturers would cheer.
Because America has low inflation and is financially stable, the exchange rate is not the risk factor it was in the 1970s.
That situation was well characterized by a line from John Connolly, the then Treasury Secretary for President Nixon: `` the dollar is our money and their problem! ''
The more things change, the more they remain the same.
The Curse of Unilateralism
The realization in the United States that the war in Iraq has been lost is perhaps the most momentous fact of international politics in 2006.
The time of American unilateralism is objectively over.
Whether US foreign policy will come to reflect this fact, only the future will tell.
Unfortunately, this also means that a unique opportunity has been lost.
For only the US – with all its power and sense of mission – had the ability to establish a new world order at the beginning of the twenty-first century.
To achieve this, the US would have had to subordinate its power to the goal of shaping the new order, much as it did at the close of World War II in 1945. Instead, America succumbed to the temptation of unilateralism.
National greatness for a world power always arises from its ability to shape the world. If a great power forgets this, or loses the ability to act accordingly, it begins to decline.
It is almost tempting to think that America’s great Cold War opponent, the Soviet Union, with its sudden disappearance 15 years ago this month, left its own Trojan horse for America – the poisoned gift of unilateralism.
Without a fundamental turnaround in American political consciousness, the unilateralist amnesia of US foreign policy will have far-reaching consequences and leave a huge vacuum in the global system.
No other nation – not China, Europe, India, or Russia – has the power and the sense of mission to take on America’s role. Only America was (and potentially still is) able to fuse realism and idealism, self-interest and ethics, in its foreign policy.
Only the US pursued a foreign policy that conceived freedom and democracy as its mission. This was not always and everywhere the case – certainly not in Latin America.
But where it did apply, America’s strength and willingness to seek international cooperation created an order whose institutions still hold the world together.
The UN, NATO, the IMF and the World Bank, the law of nations and international criminal law, even today’s free and united Europe – all are crowning achievements of US foreign policy.
They mark the moments in history when America’s power was used to further a global order, while also pursuing America’s own interests in the most effective and sustainable manner.
America’s departure from this great tradition did not begin with the terrorist attacks of September 11, 2001. Indeed, as early as the final years of the Cold War, the US began to view the whole system of international treaties and institutions as an obstacle to enforcing its own interests.
America’s foreign policy elite increasingly came to perceive the US as a Gulliver tied down and oppressed by political midgets, with their laws of nations, treaties, and multilateral institutions. The existing world order – created by the US itself – was first devalued in American eyes, then weakened, and finally consciously attacked.
Thus, the current debate in the US about the consequences of defeat in Iraq still falls short – because, despite all the critiques of American policy, that debate is still premised on the unilateral use of American power.
This applies to the views of the Democratic opposition as well as to the Baker-Hamilton report.
What is needed is a conscious, deliberate return of US foreign policy to multilateralism.
This mental turnaround is, indeed, essential if things are to improve, because the situation in Iraq represents, above all, a defeat of America’s unilateralist orientation.
The Middle East, North Korea, Darfur, Central and East Africa, the Caucasus – in none of these places can the US still act successfully on its own.
And yet, without America and its power, the prospects in all these places are still bleaker: more dangers and more chaos.
The situation is the same with respect to global growth, energy, resource management, climate change, environment, nuclear proliferation, arms control, and terrorism.
None of these problems can be resolved or even contained unilaterally.
Yet no attempted solution will get very far without the US and its decisive leadership.
This also applies to the future of the law of nations, the newly created international criminal law, and the United Nations.
Unless these rules and institutions are further developed, globalization, too, will take an ever more chaotic shape.
Madeleine Albright once called the US the “indispensable nation.”
She was right then, and she is still right today.
Only one power can rob the US of its unique position: America itself.
The question today is whether the current crisis of American consciousness marks the beginning of America’s decline or, let us hope, the beginning of a return to multilateralism. Will America hark back to the spirit of 1945 or, despite being sobered and disappointed, decide to stick to its lone and lonely path?
No other power will be able to assume America’s role in the world for the foreseeable future.
The alternative to American leadership is a vacuum and increasing chaos.
But within one or two decades maybe China will define the rules, if the US continues to reject its multilateral responsibilities. For all these reasons not only America’s friends have a vital interest in a US return to multilateralism.
Given the dangers of unilateralism for the current world order, so do America’s enemies.
The Cycles of Economic Discontent
FLORENCE – The nineteenth century was mesmerized by the cyclical behavior of business.
The French economist Clement Juglar became famous for establishing that business cycles ran for around nine or ten years.
We have recently had our own cycles of exuberance and disintegration.
But they are very different.
In the nineteenth-century world, people rapidly picked themselves up after downturns and went back to business as usual.
In that sense, the phenomenon of the business cycle looked relatively permanent and unchanging.
Nowadays, however, a cyclical collapse comes as a great surprise.
In its aftermath, we start to reinvent our view of economics.
Every ten years or so, we think that a particular model of growth is so broken that it cannot be resurrected.
The world needed to be rethought in 1979, 1989, 1998, and 2008.
Keynesianism definitively ended in 1979, following the second oil-price shock of the decade.
The coincidental combination of the election of Margaret Thatcher in the United Kingdom and Federal Reserve Chairman Paul Volcker’s interest-rate shock of October 1979 ended an era in which inflation had been seen as a solution to social problems.
State action and monetary expansion as a means of buying off discontent were discredited, as was the West European welfare state.
The association of Europe – and of European social democracy – with Keynesian demand stimulus was more than a little unfair, in that the greatest proponent of the Keynesian view was the Republican American President Richard Nixon.
But the political shift of 1979-1980, culminating in the election of Ronald Reagan, brought about a new opposition of the free market and innovation to social-democratic corporatism and centrism.
Ten years later, in 1989, the Soviet model of economic planning and modernization through centrally directed growth was discredited.
In its last phases, it had taken on large quantities of foreign debt, and over-indebtedness finally sunk a model that had fundamentally failed long before that.
The next beautiful idea that failed, in 1997-1998, was the concept of a particular “Asian miracle” (as it had been dubbed in the title of an influential World Bank publication).
Asian economies were supposedly better coordinated because of strategic interventions by the government along the lines of the initial postwar practices of Japan’s MITI.
But, like the Soviet Union and its satellites, the smaller and dynamic Asian economies had taken on too much debt.
The response to the economic crisis in Thailand and Korea in the late 1990’s was emphatic preaching about the inherent superiority of the so-called Anglo-Saxon economic model.
But this vision, in turn, also became problematic, and it was unambiguously discredited in 2007-2008, amid a massive outbreak of European and Asian Schadenfreude .
Then it became clear that the rest of the world was badly affected by the fallout from the financial crisis, and a more sinister interpretation became popular.
Many people in many countries interpreted a crisis that unambiguously began in the United States, but affected some other countries more harshly, as evidence of a fundamentally malign US plan.
The Chinese search for a replacement of the US dollar by a synthetic reserve currency is driven by a political backlash against the perceived iniquities of US financial and economic preeminence.
The cycle in which political models are torn up appears to be accelerating.
The emerging-market boom already looks as if it is the next vision to be cast in the garbage can of history.
The ratings agency Moody’s is preparing warnings about the extent and quality of Indian private-sector debt.
Chinese investors are worried about inflationary overheating.
The phase of revulsion and rejection is never complete, but the bold visions never recover their original splendor.
The European social-democratic model survived the 1970’s in a bedraggled form.
The idea of strong Asian economic growth as a permanent feature of the world economy returned with a vengeance only a few years after the Asia crisis.
If the major English-speaking economies remain open and do not close themselves off to trade and immigration, they will also see a return to growth.
But each wave of collapse breeds a greater degree of disillusion about particular institutions, which are blamed for the outcome.
It may be the welfare state in the 1970’s, the Communist Party apparatus in the 1980’s, the Asian industry and trade ministries in the 1990’s, or the nexus of the US Treasury and Wall Street in the 2000’s.
As each institution is eroded, there is less and less left in the way of alternatives.
That is also true of currencies.
The dollar has been knocked off its pedestal by the crisis, but any conceivable substitute is obviously even more flawed and more problematical.
The euro is the composite currency of an area with a poor growth record and an inadequate response to the economic crisis.
The renminbi is still non-convertible.
So there is no master currency at all any more.
The dissident Chinese artist Ai Weiwei sums up the new mood of universal and unmitigated cynicism. To make the point that all institutions are equally suspect, he created an exhibition entitled “Fuck off,” in which he shows photographs of himself with an obscene hand gesture in front of famous monuments: the Doge’s palace in Venice, once the commercial capital of the world, the Eiffel Tower, the White House, and the Forbidden City in Beijing.
His latest exhibition’s title mocks the recent (and almost universal) tendency of governments to offer meaningless apologies for past mistakes: it is called “So sorry.”
The Dirge of Cyprus
PRINCETON – Europe can choose its own musical accompaniment to its latest crisis.
In Berlin, 50 Cent’s “All Things Fall Apart” has just had its premiere, so that soundtrack might be appropriate.
Or the continent can reach back to Giuseppe Verdi, born two hundred years ago, whose penultimate, and probably greatest, operatic achievement starts on the coast of Cyprus with a storm of fantastic violence and the opening words of its hero, Otello: Esultate, rejoice!
The war has been won; but Otello’s achievement is later destroyed by his jealousy.
Today, Cyprus appears to have been rescued.
But the rescue has fueled a growing rift that jeopardizes the future of European integration, partly owing to the way that the upheaval of the early twentieth century – especially the Great Depression – has been reenacted in the debates about the post-2008 financial meltdown and the subsequent euro crisis.
The interwar economic slump became intractable because it was also a crisis of social stability, democracy, and the international political order.
Widespread bankruptcy and unemployment increased social tension, ultimately making normal democratic politics impossible.
In Germany, the epicenter of democracy’s collapse, radicals on both the right and the left raged against the postwar peace settlement and the Versailles Treaty.
In the last years of the increasingly unstable Weimar Republic, as democracy was fraying, German governments started to use their opponents’ radicalism in an effort to extract security concessions from the Western powers.
Domestic political pressure became a source of heightened international tension.
That is true in today’s Europe as well.
Democracy has become a central target of complaints by the European elite.
Luxembourg’s prime minister, Jean-Claude Juncker, a former chairman of the Euro group, has lamented that European leaders know what the right policies are, but do not know how to be reelected after implementing them.
Similarly, after his recent crushing election defeat, Italian Prime Minister Mario Monti wistfully explained that Italy’s voters were too impatient to bear reforms whose benefits would only become evident beyond the electoral cycle.
Events in Cyprus have exposed two other dimensions to the clashes over Europe’s dual sovereign-debt and banking crisis.
First, the discussion of a levy on bank deposits, and whether small customers should be exempted, put class conflict front and center.
Second, the question of foreign, and especially Russian, depositors – along with proximity to Syria – has turned the rescue of the Cypriot banking sector into an international relations problem.
The initial proposal to impose a one-time tax on accounts holding less than €100,000 came not from the European Union or from Germany, but from the Cypriot government, which must have known that it was likely to generate outrage, and that the Cypriot parliament would never vote for it.
Perhaps the government believed that mass protests – with placards denouncing the EU as a fig leaf for revived German domination of Europe – would strengthen its hand.
After all, even moderate Cypriots were outraged by the bullying of their small island by Germany and by Europe.
The other side in the negotiations also played class politics.
At one of the tensest moments, as Cyprus was seeking an alternative rescue package from Russia, the German Bundesbank announced the results of a new European Central Bank study indicating that average German wealth was lower than in the southern European states, largely because fewer Germans own their own houses.
The message seemed clearly intended to influence the negotiations: Why should poorer Germans be expected to sacrifice to support Mediterranean millionaires?
In the aftermath of the financial crisis, income and wealth distribution have moved to the center of political debate.
Even the Catholic Church seems to reflect the new mood: The election of Jorge Mario Bergoglio as Pope Francis is a clear reference to St. Francis of Assisi and the Church’s mission to stand up for the poor.
On the international-relations front, after 2010, as deposits from Europe left Cypriot banks, deposits from Russian businesses and individuals increased – and Russia has many reasons to use money as a way of buying political control.
Cyprus is a crucial staging post for American security operations in the eastern Mediterranean, and the gas fields off the Cypriot coast might be developed as an energy source that would – at least after 2017 – reduce European dependence on Russian supplies.
In an earlier phase of the crisis, Russia gave Cyprus a $3 billion credit.
Now, however, a new credit would serve only to make the burden of government debt unsustainable; what is needed is a purchase of all or some of the problematic Cypriot banks.
In the aftermath of a crisis that has been intensified by the rhetoric of class conflict, Russia might be able to extend its control more significantly, and at a lower price.
Deepening social polarization, its use in financial negotiations, and the intrusion of a new security element provide further evidence of what most economists and commentators on Europe have long argued: a monetary union is impossible to sustain in the absence of a political union.
A state, especially in the modern form of the European welfare state, depends on effective mechanisms for arbitrating and resolving social disputes – mechanisms that, as the turmoil surrounding Cyprus has shown, the EU lacks.
As long as that remains true, European integration may be doomed by the time the music stops.
The Danger of Trans Fats
Trans fats are unsaturated fatty acids with at least one double bond in the trans configuration.
While small amounts of trans fats are naturally present in meats and dairy products from cows, sheep, and other ruminants, the great majority of trans fats in our diet are industrially-produced, contained in foods made with partially hydrogenated vegetable oils.
Partial hydrogenation, which converts vegetable oils into semi-solid fats for use in margarines, commercial cooking, and manufacturing processes, converts approximately 30% of the natural fats to trans fats.
In the US, consumption of trans fats averages between 2-4% of total energy, with major sources being deep fried fast foods, bakery products (cakes, cookies, muffins, pies, etc.), packaged snack foods, margarines, and breads.
Considerable evidence exists for harmful effects of trans fat intake.
Furthermore, trans fats from partially hydrogenated oils have no intrinsic health value.
Thus, little justification can be made for the use of partially hydrogenated oils, compared with other natural oils or fats.
Importantly, adverse effects are seen at very low intakes: for example, 1-3% of total energy, or approximately 2-7 grams (20-60 calories) for a person consuming 2000 calories/day.
Thus, complete or near-complete avoidance of industrial trans fats (≤0.5% of energy) may be necessary to avoid adverse effects and minimize health risks.
In 2004, Denmark became the first country to legislate limits on trans fat content of foods, largely eliminating industrial trans fats from all foods (including restaurants) in that country.
Canada is considering similar legislation, and the city of Chicago is also considering banning industrial trans fats from restaurants.
If restaurants and food manufacturers will not voluntarily eliminate trans fats (as has largely been done in the Netherlands), several points validate the need for, and the importance, of legislative measures to reduce the consumption of trans fats:
1. The harmful health effects of trans fats are now better established than for nearly any other substance in our food supply.
The strength of evidence and the potential magnitude of harm greatly exceed those of food contaminants or pesticide residues, which are appropriately regulated to very low levels.
2. Extremely low levels of trans fat intake are associated with significantly increased risk of heart disease.
In our analysis of prospective studies totaling 140,000 men and women, we determined that intake of 2% of total calories from trans fats (or 40 calories/day, for a typical 2000 calorie/day diet) was associated with 23% higher risk of heart attacks or death from heart disease.
This indicates that for every 100,000 individuals suffering a heart attack or death from heart disease each year, 19,000 of these would be prevented if the average trans fat intake were reduced by approximately 40 calories/day.
3. Individuals have no means of evaluating the trans fat content of meals in restaurants.
In contrast to packaged foods which now have standardized labeling of trans fat content, it is impossible for an individual to determine how much trans fat is present in restaurant meals.
Mandated standardized labeling of all restaurant meals would be neither practical nor cost-efficient, given the ever-changing menus and diverse mixtures of ingredients of meals served in restaurants.
4. Use of trans fats in food manufacturing and restaurants can be limited without any significant effects on food taste, cost, or availability.
While industry often expresses concern that limiting the use of trans fats will affect food taste or cost, no evidence exists to support this hypothesis.
Conversely, substantial evidence exists that use of trans fats can be eliminated almost entirely without any effects on food taste, cost, or availability.
This has been clearly demonstrated in both Denmark and the Netherlands.
It should also be emphasized that much less is known about trans fat consumption in developing countries.
The current evidence suggests that, compared with Western nations, the intake of trans fats from partially hydrogenated oils may be much higher in developing countries, typically because partially hydrogenated oils represent the cheapest (and often subsidized) choice of fat for cooking.
Given that coronary heart disease is the leading cause of death in nearly all countries, including developing nations, intensive efforts must be undertaken to greatly reduce or eliminate use of partially hydrogenated oils in both the developed and the developing world.
In summary, considerable evidence exists for harm, and little evidence for intrinsic health value, of consumption of trans fats from partially hydrogenated vegetable oils.
Elimination of industrial trans fats from foods, either by voluntary or legislative measures, would likely prevent tens of thousands of heart attacks each year in the U.S. and other countries.
The Danger of Weak States
NEW YORK: Fateful events in Israel and Yugoslavia have obscured ongoing turmoil in Nigeria and Indonesia.
Yet ethnic and religious conflict in both “megastates” is consuming many lives.
We must not lose sight of the cataclysmic consequences that could result if such violence is not curbed.
The problem is that both countries, hobbled by legacies of tyranny and degradation, are in danger of losing the capacity to curtail violence.
The history of the struggle for rights from the Magna Carta to the Universal Declaration of Human Rights has been mainly about placing limits on state authority.
So it may seem anomalous to argue that, if rights are to be protected, what is required today in various parts of the world is reinforcement of centralized governmental power.
Liberal values, however, are threatened as thoroughly by state incapacity as by despotic power.
All over the world, including two of its largest countries, the implications of this truth loom menacingly.
The consequences for Nigeria’s 114 million people, for the rest of the troubled continent of Africa and for the international system would be catastrophic if Nigeria disintegrated.
And though the government of President Olusegun Obasanjo is the most democratic and the least corrupt Nigeria has known since independence (including a period in the late 1970s when General Obasanjo was the country's military ruler until he stepped aside voluntarily to permit election of a civilian president), the country remains dangerously weak.
President Obasanjo's administration has failed to prevent Islamic fundamentalists from imposing sharia law in several Northern states, triggering violence that has cost thousands of lives.
Nor has it brought peace to the oil rich Niger delta whose impoverished people resent exploitation of the resources of their territory for the enrichment of a corrupt elite.
Most recently, violence in Lagos between Hausas and Yorubas has cost hundreds of lives.
Multiethnic, multilingual, multireligious Nigeria is now in greater danger of fragmentation than at any time since the genocidal war in Biafra a generation ago.
Indonesia, another large, ethnically and – to a lesser extent – religiously diverse state many thousands of miles away, faces comparable difficulties.
There, too, a committed democrat, Abdurrahman Wahid (Gus Dur), has become President after an extended period of corrupt and brutal military rule.
As in Nigeria, however, the central government seems to lack the power to halt communal violence that has killed thousands.
If President Wahid's government cannot stop the carnage, Indonesia, too, could break apart.
These crises of governmental incapacity have arisen, in both Nigeria and Indonesia, at moments of great promise.
These are states with vast riches.
Given the opportunity to govern honestly and peacefully for a few years, the administrations of Presidents Obasanjo and Wahid could make vast improvements in the lives of ordinary Nigerians and Indonesians.
They may not get that chance, however, because the governments they head lack the power to curb ethnic and religious conflict.
The powerlessness of Presidents Obasanjo and Wahid is based in part on the unreliability of their armed forces.
The military regimes that preceded them derived their strength from their soldiers.
But armed might is of little use to democratic governments attempting to protect the rights of citizens if they must fear that their troops will commit abuses that foster separatist tendencies.
That is the situation that confronts President Wahid who knows that much of the popular support for independence movements in Aceh and Irian Jaya derives from resentment against military violations of human rights, and that intervention by the army in the Maluka’s at very least exacerbated the conflict between Christians and Muslims who had long lived together peaceably and may even have provoked the violence.
Perhaps an even more important factor in the weakness of these newly democratic governments is declining public identification with the state.
Decades of misrule and deprivation deepened religious and ethnic divisions.
It takes a state of great vitality, Machiavelli pointed out in “The Discourses” half a millennium ago, to survive not only changes in the membership of a government, but changes in the basic form of government.
The Soviet Union and Yugoslavia, indeed, disintegrated at the point when they were making changes in their form of government.
Because misrule sapped vitality from Nigeria and Indonesia, the same could happen to them during their transition to democratic government.
If these new democracies are to survive, their governments will require generous assistance from the international community, including debt relief.
Knowing the amount of wealth stolen and squandered by Obasanjo's predecessors, such as General Sani Abacha, and by the Suharto kleptocracy in Indonesia, pleas for such relief may not be welcomed easily.
Yet Western leaders must recognize that if these states fall apart, their debts will never be paid and, inevitably, creditor countries will face vast additional costs.
So giving democrats such as Obasanjo and Wahid a chance to hold their countries together could stave off immense suffering and may also be a matter of self-interest.
For anyone concerned with human rights, disintegration in Nigeria or Indonesia would be a calamity.
Though it is impossible to predict how events may unfold, there are precedents in the many conflicts triggered by the breakdowns of the Soviet Union and Yugoslavia.
The violence that has already taken place in Nigeria and Indonesia makes one fear that if these states cannot be held together – and here, new creative types of thinking and approaches to advocacy may be called for on the part of the human rights community – the results could be far bloodier than anything we have yet seen.
Will the Global Economy Add Up?
CAMBRIDGE – This year has begun on a note of cautious optimism for the global economy.
Europe is back from the brink.
The United States did not fall over the fiscal cliff.
Japan is moving to change its economic strategy, and China appears to be getting back on track.
Financial-market indices in the US, moreover, are near pre-crisis levels, and expected volatility is at multi-year lows.
Major financial institutions are, for the most part, better capitalized than they have been in a long time.
Balance sheets have been repaired, and many actors are awash with cash.
While 2013 will not be a banner year, it may nonetheless come to be viewed as the first year of the post-crisis period.
To be sure, the political environment remains challenging almost everywhere.
The US will face a trifecta of new fiscal hurdles – lack of legal authority to pay debt, no operating budget for the federal government, and the dreaded prospect of sequestration – before the end of March.
Crucial elections lie ahead in Italy and Germany.
China’s new government comes to power amid unprecedented levels of public concern about corruption and inappropriate enrichment of public officials.
And it is not clear that Japan’s fractured politics will permit stable governance in the years ahead.
But there is the prospect of a virtuous circle in which economic improvement leads to less surly politics, in turn reducing uncertainty and boosting recovery further.
So far, at least, the worst fears about the adverse political consequences of poor economic performance have not materialized – even in Greece.
So my guess is that if nothing else goes terribly wrong, politics will not undo the global economy.
Unfortunately, much else could go wrong.
In particular, while each of the global economy’s major regions has a plausible growth strategy, these strategies may not add up.
Virtually the only proposition on which international economists agree is that the sum of all trade balances must equal zero.
And, as a corollary, every bit of export-led growth that countries enjoy must be offset somewhere in the system by output growth that falls short of demand growth.
So, a major challenge now is that around the world there seems to be far more planning for export-led growth than acceptance of reduced competitiveness and increased imports.
At the beginning of 2010, US President Barack Obama set the lofty goal of doubling America’s exports by the end of 2014.
More than halfway through that five-year period, the US is pretty much on track to meet that target, implying that export growth is ahead of import growth or growth in the global economy.
In Europe, the only way that the financially distressed countries of the periphery can reduce their debt is to run trade surpluses.
With limits on Germany’s willingness to accept a reduction in its competitiveness and repeated signals from the European Central Bank that monetary policy will remain highly accommodating, export-led growth seems to be the goal here, too.
And, in Asia, Prime Minister Shinzo Abe’s new Japanese government has already depressed the value of the yen and buoyed export prospects by placing reflation through monetary easing at the center of its agenda, while the most recent statistics out of China suggest significantly faster export growth than was anticipated.
So, where will the extra imports needed to support all of this additional exporting come from?
Perhaps weaker commodity prices will create space for other imports, and commodity producers’ trade positions will swing toward lower surpluses.
But lower commodity prices in a highly buoyant global economy would not be in line with past patterns.
Perhaps emerging economies with improved prospects will attract higher capital flows, financing larger trade deficits as capital goods are purchased directly or indirectly.
But will this be enough to offset all that is happening in the larger economies?
It is quite likely that some would-be export champions will be disappointed as planned competitiveness increases do not materialize.
This is why serene views of the effects of austerity based on historical experience are misguided.
A single country or region consolidating or deleveraging in a thriving global economy can expect that its lower interest rates will translate into a weaker currency and an improved trade position.
But most major economies cannot expect this in a struggling global economy.
Each country’s austerity imposes external costs by reducing demand for other countries’ products.
In this sense, it has a beggar-thy-neighbor aspect, which may be enhanced if the austerity is offset by monetary expansion.
The implication for policymakers is clear.
More than at almost any time in recent years, international coordination to avoid excessive austerity will be essential for global economic success.
Ensuring that national strategies are not just locally prudent, but also globally consistent should be the central task for the G-20 and the International Monetary Fund in 2013.
The Dangers of Deficit Reduction
NEW YORK – A wave of fiscal austerity is rushing over Europe and America.
The magnitude of budget deficits – like the magnitude of the downturn –&#160;has taken many by surprise.
But despite protests by the yesterday’s proponents of deregulation, who would like the government to remain passive, most economists believe that government spending has made a difference, helping to avert another Great Depression.
Most economists also agree that it is a mistake to look at only one side of a balance sheet (whether for the public or private sector).
One has to look not only at what a country or firm owes, but also at its assets.
This should help answer those financial sector hawks who are raising alarms about government spending.
After all, even deficit hawks acknowledge that we should be focusing not on today’s deficit, but on the long-term national debt.
Spending, especially on investments in education, technology, and infrastructure, can actually lead to lower long-term deficits.
Banks’ short-sightedness helped create the crisis; we cannot let government short-sightedness – prodded by the financial sector – prolong it.
Faster growth and returns on public investment yield higher tax revenues, and a 5 to 6% return is more than enough to offset temporary increases in the national debt.
A social cost-benefit analysis (taking into account impacts other than on the budget) makes such expenditures, even when debt-financed, even more attractive.
Finally, most economists agree that, apart from these considerations, the appropriate size of a deficit depends in part on the state of the economy.
A weaker economy calls for a larger deficit, and the appropriate size of the deficit in the face of a recession depends on the precise circumstances.
It is here that economists disagree.
Forecasting is always difficult, but especially so in troubled times.
What has happened is (fortunately) not an everyday occurrence; it would be foolish to look at past recoveries to predict this one.
In America, for instance, bad debt and foreclosures are at levels not seen for three-quarters of a century; the decline in credit in 2009 was the largest since 1942.
Comparisons to the Great Depression are also deceptive, because the economy today is so different in so many ways.
And nearly all so-called experts have proven highly fallible – witness the United States Federal Reserve’s dismal forecasting record before the crisis.
Yet, even with large deficits, economic growth in the US and Europe is anemic, and forecasts of private-sector growth suggest that in the absence of continued government support, there is risk of continued stagnation – of growth too weak to return unemployment to normal levels anytime soon.
The risks are asymmetric: if these forecasts are wrong, and there is a more robust recovery, then, of course, expenditures can be cut back and/or taxes increased.
But if these forecasts are right, then a premature “exit” from deficit spending risks pushing the economy back into recession.
This is one of the lessons we should have learned from America’s experience in the Great Depression; it is also one of the lessons to emerge from Japan’s experience in the late 1990’s.
These points are particularly germane for the hardest-hit economies.
The United Kingdom, for example, has had a harder time than other countries for an obvious reason: it had a real-estate bubble (though of less consequence than in Spain), and finance, which was at the epicenter of the crisis, played a more important role in its economy than it does in other countries.
The UK’s weaker performance is not the result of worse policies; indeed, compared to the US, its bank bailouts and labor-market policies were, in many ways, far better.
It avoided the massive waste of human resources associated with high unemployment in America, where almost one out of five people who would like a full-time job cannot find one.
As the global economy returns to growth, governments should, of course, have plans on the drawing board to raise taxes and cut expenditures.
The right balance will inevitably be a subject of dispute.
Principles like “it is better to tax bad things than good things” might suggest imposing environmental taxes.
The financial sector has imposed huge externalities on the rest of society.
America’s financial industry polluted the world with toxic mortgages, and, in line with the well established “polluter pays” principle, taxes should be imposed on it.
Besides, well-designed taxes on the financial sector might help alleviate problems caused by excessive leverage and banks that are too big to fail.
Taxes on speculative activity might encourage banks to focus greater attention on performing their key societal role of providing credit.
Over the longer term, most economists agree that governments, especially in advanced industrial countries with aging populations, should be concerned about the sustainability of their policies.
But we must be wary of deficit fetishism.
Deficits to finance wars or give-aways to the financial sector (as happened on a massive scale in the US) lead to liabilities without corresponding assets, imposing a burden on future generations.
But high-return public investments that more than pay for themselves can actually improve the well-being of future generations, and it would be doubly foolish to burden them with debts from unproductive spending and then cut back on productive investments.
These are questions for a later day – at least in many countries, prospects of a robust recovery are, at best, a year or two away.
For now, the economics is clear: reducing government spending is a risk not worth taking.
The Dangers of Nuclear Disarmament
MOSCOW – Russia and the United States have signed a new strategic nuclear-arms reduction treaty (START).
Officially, the treaty cuts their weapons by one-third; in fact, each party will decommission only several dozen.
Nevertheless, the treaty is a considerable achievement.
It normalizes political relations between the two countries, thereby facilitating their further cooperation and rapprochement.
The return of strategic nuclear weapons to the center of world politics increases Russia’s political weight and highlights the field in which Russia can still assert itself as a superpower.
It also gives a political boost to Barack Obama, cast as the most constructive and progressive US president for decades, and possibly for many years to come.
After the treaty was signed, the US hosted a nuclear non-proliferation summit, a landmark event for the Obama administration, which has made the fight against nuclear proliferation a trademark policy.
The few accords reached at the summit, although welcome, are not as significant as the impression that the summit created that world leaders are ready to work together to confront nuclear proliferation.
But debates about the role of nuclear weapons in the modern world, as well as in the future, are only beginning.
The world system on which past discussions of nuclear weapons were based has become almost unrecognizable, calling into question the adequacy of the mentality and concepts inherited from that system.
The heart of the matter is this: it is obvious that nuclear weapons are immoral.
An A-bomb is millions of times more immoral than a spear or sword, hundreds of thousands of times more immoral than a rifle, thousands of times more immoral than a machine gun, and hundreds of times more immoral than salvo systems or cluster bombs.
But nuclear arms also have a significant moral distinction: unlike other weapons, they are an effective means of preventing the large-scale wars and mass destruction of people, property, and cultures that have plagued humanity throughout recorded history.
To reject nuclear weapons and strive for their elimination is, no doubt, a moral aim, at least in the abstract.
But it is feasible only if humanity changes.
Apparently, the advocates of eliminating nuclear weapons believe that such change is possible.
I do not.
Indeed, the risks of a world without nuclear weapons – or only a minimal number of them – are tremendous.
Nuclear deterrence – a threat to kill hundreds of thousands or millions of people – is a concept that does not fit into traditional morals.
Yet it has worked, preventing catastrophic wars while making people more civilized and cautious.
When one pole of nuclear deterrence weakened, due to Russia’s political decline in the 1990’s, NATO, a defensive union of democratic and peaceful states, committed aggression against Yugoslavia.
Now that Russia has restored its capability, such a move would be unthinkable.
After Yugoslavia, there was an unprovoked attack on Iraq.
In a nearly perfect world, Russia and the US would not need large nuclear stockpiles.
But cutting nuclear weapons to a bare minimum in the current conditions would give a big advantage to small nuclear powers, which will see their nuclear potential gain near-parity with larger states.
Moreover, reducing nuclear weapons to a minimum might theoretically enhance the usefulness of missile-defense systems and their destabilizing role.
And even non-strategic missile-defense systems, the deployment of which might be useful, will be questioned.
If stockpiles of tactical nuclear weapons are reduced, as some US, European, and Russian experts have proposed, the opponents of Russia’s ongoing military reform will have even more reason to object to reconfiguring the country’s conventional armed forces away from confrontation with NATO toward a flexible-response capability vis-à-vis other threats.
Similarly, if the US withdraws its largely nominal tactical nuclear weapons from Europe, US-Europe strategic ties would weaken.
Many Europeans, above all in the new NATO member-states, would then demand more protection from the mythical Russian Leviathan.
The world community seems to be losing its strategic bearings.
Instead of focusing on the real problem, namely the increasingly unstable international order, it is trying to apply Cold War-era concepts of disarmament.
At best, these are marginally useful; more often, they are harmful in today’s circumstances.
What is most needed nowadays is clear thinking about how to live with an expanding club of nuclear states while keeping the world relatively stable.
To this end, the two great nuclear powers need a coordinated deterrence policy towards new nuclear states.
Simultaneously, they should offer guarantees to non-nuclear states that might feel insecure.
In the first place, it is necessary to fill the increasing security vacuum in the Middle East.
China, the world’s rising strategic player, might join this policy, though it currently ranks third in terms of military power.
Arms-control talks are mostly needed for rendering national arsenals more transparent, and for building confidence between the great powers.
That is all there is to their usefulness.
So, instead of mimicking Cold War-era treaties, it is necessary to launch an international discussion about the role of military force and nuclear weapons in the world as it is now evolving.
We might then eventually recognize that eliminating nuclear weapons is not just a myth, but a harmful myth, and that nuclear weapons are a useful asset that has saved, and may continue to save, humanity from itself.
The Dangers of Premature Euroization
Thirteen years after the fall of the Berlin Wall, the postcommunist countries of Central and Eastern Europe stand poised to join the EU, uniting Europe at last.
The price of reform has been high.
But all the hard work these states have undertaken to prepare themselves for EU membership may be squandered should they choose to adopt the euro too soon.
It is widely believed, even among the most Euro-skeptical of observers, that joining the eurozone will affirm these countries' successful transformation into modern market economies.
Of course, the common currency's net long-term political and economic benefits are clear.
But timing matters.
Advocates of rapid euroization argue that it will promote and lock in fiscal, financial, and labor market reforms while expanding trade and boosting income.
But the evidence for believing that euroization can precede sufficient institutional reforms is scant.
Moreover, it is based on the experiences of diverse emerging-market countries whose relevance for postcommunist economies is questionable.
By contrast, euroization so far has required a fair degree of prior fiscal consolidation, a credible and independent monetary policy, reasonably competitive financial institutions, and flexible labor markets.
The debate about the timing and technical form of euroization must address which monetary regime--full-fledged euroization or floating exchange rates--is more effective in lowering risk premiums in the candidate countries.
Smooth convergence of risk premiums for inflation, exchange rates, and, perhaps most importantly, debt default with those prevailing in the eurozone are crucial for alleviating possible shocks to the financial system.
In hindsight, benchmarks of the candidates' ability to manage these risks should have supplemented the existing Maastricht criteria for adopting the euro.
On purely technical grounds, euroization will push the inflation risk premium--the difference between the average short-term interest rate and the inflation rate--to the level prevailing in the eurozone, implying lower real interest rates.
But this may not be optimal for the transition economies, which are still experiencing deep structural changes accompanied by sizable relative price adjustments and large capital inflows.
Moreover, capital inflows to the EU candidates are likely to accelerate as accession draws near, adding to inflationary pressures.
Premature euroization would keep interest rates low, but it could create a large gap between an imprudently low official inflation risk premium and the inflation risk premium that would be set by an independent monetary policy with floating exchange rates.
This gap would lead to volatility of capital inflows and output, causing investors to shun long-term projects in the new, unstable part of the eurozone.
In principle, euroization is likely to eradicate the exchange-rate risk premium for the new entrants.
But in practical terms, this effect may be implausible if a high proportion of dollar-denominated debt burdens a candidate.
At the end of 1997, the share of dollar-denominated debt in total external indebtedness among the leading EU candidates ranged from 46% in Poland to 78% in the Czech Republic.
Entering the eurozone could drive up the candidates' external debt-service costs--thus adding to the fiscal burden--if the euro remains weaker in dollar terms than their national currencies.
So far, these costs have been tamed by high domestic interest rates, keeping Central Europe's currencies strong.
But if they "euroize" too soon, candidate countries could find themselves with lower domestic interest rates but a higher external default risk.
Moreover, business failures due to premature euroization will inevitably increase as chronically weaker domestic firms and financial institutions become fully exposed to EU competition before making adequate corporate governance improvements and efficiency gains.
Given the short-term net costs of premature euroization, the most compelling alternative is an independent monetary policy based on direct inflation targeting (DIT).
A DIT framework would affirm the commitment to disinflation and price stability as the euro candidates struggle with pro-inflationary factors.
This would bolster the credibility of monetary policy, enabling the candidates to lower their inflation and exchange-rate risk premiums.
However, a DIT regime is feasible only for larger transition countries with relatively well developed financial markets.
In smaller transition countries, such as the Baltic states, the financial infrastructure may not be sufficiently advanced to conduct monetary policy through open-market operations and to provide appropriate signals for policymakers.
Hard pegs in the form of a strict currency board--these states' current arrangement--may be their only prudent policy choice.
In order to facilitate monetary convergence effectively, DIT policies should follow a two-stage adjustment process.
The initial policy emphasis should be exclusively on disinflation and on applying a strict inflation-targeting regime.
Once a satisfactory level of price stability is achieved, euro candidates might apply a more flexible variant of inflation targeting that also targets exchange-rate stability .
The Czech Republic, Poland, and Hungary have moved in this direction, preparing to target a steady, linear inflation path consistent with the long-term inflation forecast for the eurozone.
But these countries' monetary authorities should base interest rates on conditional inflation forecasts rather than historical data during active disinflation.
If Poland's central bank had applied a forward-looking DIT policy over the past two years, it would have cut interest rates (reducing the inflation risk premium) much faster.
This would have ameliorated output losses and painful unemployment effects, sparing the bank recent political pressure.
Flexible inflation targeting is intrinsically complex and thus must be conducted with a high degree of transparency.
When financial markets and the public fully understand monetary policy goals, strategies, and tactics, private-sector inflation expectations will align with official forecasts.
As expected inflation converges with the forecast for the eurozone, the financial markets will declare a candidate "ripe" for full-fledged euroization.
The Dark Matter of Financial Globalization
The recent turmoil in global financial markets – and the liquidity and credit crunch that followed – raises two questions: how did defaulting sub-prime mortgages in the American states of California, Nevada, Arizona, and Florida lead to a worldwide crisis?
And why did systemic risk increase rather than decrease in recent years?
Blame should go to the phenomenon of “securitization.”
In the past, banks kept loans and mortgages on their books, retaining the credit risk.
For example, during the housing bust in the United States in the late 1980’s, many banks that were mortgage lenders (the Savings ampamp;
Loans Associations) went belly up, leading to a banking crisis, a credit crunch, and a recession in 1990-1991.
This systemic risk – a financial shock leading to severe economic contagion – was supposed to be reduced by securitization.
Financial globalization meant that banks no longer held assets like mortgages on their books, but packaged them in asset-backed securities that were sold to investors in capital markets worldwide, thereby distributing risk more widely.
What went wrong?
The problem was not just sub-prime mortgages.
The same reckless lending practices – no down-payments, no verification of borrowers’ incomes and assets, interest-rate-only mortgages, negative amortization, teaser rates – occurred in more than 50% of all US mortgages in 2005-2007.
Because securitization meant that banks were not carrying the risk and earned fees for transactions, they no longer cared about the quality of their lending.
Indeed, a chain of financial intermediaries now earn fees without bearing the credit risk.
As a result, mortgage brokers maximize their income by generating larger volumes of mortgages, as do the banks that package these loans into mortgage-backed securities (MBS’s).
Investment banks then earn fees for re-packaging these securities in tranches of collateralized debt obligations, or CDO’s (and sometimes into CDO’s of CDO’s).
Moreover, credit rating agencies had serious conflicts of interest, because they received fees from the managers of these instruments.
Regulators sat on their hands, as the US regulatory philosophy was free-market fundamentalism.
Finally, the investors who bought MBS’s and CDO’s were greedy and believed the misleading ratings.
Nor could they do otherwise, as it was nearly impossible to price these complex, exotic, and illiquid instruments.
Similar reckless lending practices prevailed in the leveraged buyout market, where private equity firms take over public companies and finance the deals with high debt ratios; the leveraged loan market, where banks provide financing to private equity firms; and the asset-backed commercial paper market, where banks use off-balance sheet schemes to borrow very short term.
Small wonder that when the sub-prime market blew up, these markets also froze.
Because the size of the losses was unknown – sub-prime losses alone are estimated at between $50 billion and $200 billion, depending on the magnitude of the fall in home prices, which is also unknown – and no one knew who was holding what, no one trusted counterparties, leading to a severe liquidity crunch.
But the liquidity crunch was not the only problem; there was also a solvency problem.
Indeed, in the US today, hundreds of thousands – possibly two million – households are bankrupt and thus will default on their mortgages.
Around sixty sub-prime lenders have already gone bankrupt.
Many homebuilders are near bankrupt, as are some hedge funds and other highly leveraged institutions.
Even in the US corporate sector, defaults will rise, owing to sharply higher corporate bond spreads.
Easier monetary policy may boost liquidity, but it will not resolve the solvency crisis.
There are two reasons for this:
1. massive uncertainty about the size of the losses.
In part, the size will depend on how much home prices fall amp#45;amp#45; 10%? 20%?
Moreover, it is hard to price losses on exotic instruments that are illiquid (i.e. do not have a market price).
2. thanks to securitization, private equity, hedge funds, and over-the-counter trading, financial markets have become less transparent.
This opacity means that no one knows who is holding what, which saps confidence.
When the repricing of risk finally occurred in September, investors panicked causing a liquidity run and a credit strike.
So what is to be done?
It will be hard to reverse financial liberalization, but its negative side effects – including greater systemic risk – require a series of reforms.
First, more information and transparency about complex assets and who is holding them are needed.
Second, complex instruments should be traded on exchanges rather than on over-the-counter markets, and they should be standardized so that liquid secondary markets for them can arise.
Third, we need better supervision and regulation of the financial system, including regulation of opaque or highly leveraged financial institutions such as hedge funds and even sovereign wealth funds.
Fourth, the role of rating agencies needs to be rethought, with more regulation and competition introduced.
Finally, liquidity risk should be properly assessed in risk management models, and both banks and other financial institutions should better price and manage such risk; most financial crises are triggered by maturity mismatches.
These crucial issues should be put on the agenda of the G7 finance ministers to prevent a serious backlash against financial globalization and reduce the risk that financial turmoil will lead to severe economic damage.
The Dark Side of Defending Freedom
BRUSSELS – The price of freedom, it is said, is eternal vigilance.
But that price can take the form of morally squalid decisions in which innocent people bear the brunt of the cost of freedom’s defense.
Under the cover of the Cold War, Western governments were regularly forced to make many strategically realistic but morally noxious decisions.
Dictators like Zaire’s Mobuto and Indonesia’s Suharto were embraced on the principle that “he might be a bastard, but at least he’s our bastard.”
In addition, all sorts of dubious “freedom fighters,” from the Contras in Nicaragua to Hissene Habré in Chad to Jonas Savimbi in Angola received Western arms and political backing.
Even the genocidal Khmer Rouge were, for a brief time, partly defended by the US in their forest redoubts after their eviction from Phnom Penh.
Twenty years after the Cold War’s end, the West has at times recognized its duty to make amends to those who were, in a very real sense, the “collateral damage” of that ideological struggle.
For example, the countries that were consigned by Roosevelt and Churchill to Stalin’s un-tender mercies are now mostly part of the European Union.
But there are other, untold stories of people who paid a heavy price for the West’s freedoms that have not gained much attention.
The fate of the Chagossians, the former residents of the Chagos Islands in the Indian Ocean, is particularly harrowing.
The way in which the inhabitants of this archipelago were systematically dispossessed and thrown off their land in the name of Western strategic interests is a human tragedy for which the West can and should make restitution.
Between 1968 and 1973, British Labour and Conservative governments organized the removal of everyone living on the 55 islands that now constitute the British Indian Ocean Territory (BIOT), and that were split off from Mauritius at the time of its independence.
This was done at the behest of the United States, which at the time was embroiled in the Vietnam War and required, for understandable security reasons, the use of the island of Diego Garcia as an air and naval base.
The British Foreign Office claimed at the time that the Chagos Islands had no settled population.
The Chagossians were shipped off to the Seychelles and Mauritius, where they were deposited and left to fend for themselves.
They were ostracized and isolated.
Many succumbed to mental illness, drug addiction, and alcoholism.
Despite the tragic impact of this compulsory removal, the islanders never gave up their campaign to win the right to return home.
Many Chagossians eventually moved away from the Seychelles and Mauritius.
Some settled in London (my European Parliament constituency).
They have been a persistent thorn in the side of successive British governments, but at long last Prime Minister David Cameron’s coalition government seems to be seeking to conclude this matter in a fair, humane, and just way.
The Chagossians want to return to the outer islands of the Chagos archipelago.
They have never sought to resettle on Diego Garcia, which remains off-limits and leased to the US government until 2016 – and continues to play a vital role in Western security and defense.
Given Cameron’s determination to place the US-UK relationship on a more equal footing than it was under Labour, I hope he will feel free to raise this issue with the Obama administration; indeed, a deal between the late UK Foreign Secretary Robin Cook and former US Secretary of State Madeleine Albright was apparently very nearly closed some years ago.
Despite claims to the contrary, there is no possible threat to US interests from the islanders’ return to the outer islands, hundreds of kilometers away from Diego Garcia.
Ten years ago, the Chagossians won a tremendous victory in the British High Court, which ruled that the islanders’ expulsion had been unlawful, and that they should be allowed to return.
Initially, the government accepted the ruling, but it was overturned by an Order-in-Council (an executive order from the Queen and not a law passed by Parliament) in 2004.
Now is not the time to discuss how appropriate Orders-in-Council are for lawmaking in a twenty-first-century democracy, but this move showed disregard for the Chagossians’ basic human rights.
Earlier this year, we saw this cynicism in action once again, when David Miliband, foreign secretary in the previous Labour government, declared the Chagos Islands to be a protected marine zone, thereby preventing the islanders – if eventually they do return – from making their living from fishing.
The British Foreign Office has often used the excuse that resettling the Chagossians would be prohibitively expensive.
But, when answering a parliamentary question that I put to the European Commission recently, the commissioner responsible for development policy, Andris Piebalgs, indicated that the Commission would consider any request from the UK for co-financing the Chagossians’ repatriation, which the EU fully and rightly accepts as a sovereign UK matter.
Ten years after the Chagossians’ Pyrrhic legal victory – a victory that seemed merely to strengthen the Foreign Office’s resolve to stop them from returning to the Islands – they have taken their campaign to the European Court of Human Rights, which has suggested that the case be withdrawn in favor of a “friendly settlement.”
Many Chagossians who have settled in the UK would go back immediately – if only the government would let them.
The Dark Side of Self-Determination
CAMBRIDGE – National self-determination seems a straightforward moral principle, but it is fraught with problems.
After Russia sent troops into Georgia in August 2008, it recognized the independence of two breakaway Georgian provinces, South Ossetia and Abkhazia.
When few other states followed its example, Russia pointed out that the NATO countries had used force to help Kosovo separate from Serbia.
Self-determination is generally defined as the right of a people to form its own state.
This is an important principle, but who is the self that is to do the determining?
Consider Somalia back in the 1960’s. Africans used the principle of self-determination to end colonial rule.
Unlike many other African states, Somalis had roughly the same linguistic and ethnic background.
In contrast, neighboring Kenya was formed by colonial rule from dozens of different peoples or tribes, with different linguistic backgrounds and customs.
Part of northern Kenya was inhabited by Somalis.
Somalia said the principle of national self-determination should allow Somalis in northeastern Kenya (and in the southern Ethiopia) to secede, because they were one Somali nation.
Kenya and Ethiopia refused, saying they were still in the process of building a nation.
The result was a series of wars in northeast Africa over the Somali nationalist question.
The ironic sequel was Somalia’s later fragmentation in a civil war among its clans and warlord leaders.
Voting does not always solve problems of self-determination.
First, there is the question of where one votes.
Consider Ireland, where for many years Catholics objected that if a vote were held within Northern Ireland, the two-thirds Protestant majority would rule.
Protestants replied that if a vote were held within the geographical area of the entire island, the two-thirds Catholic majority would rule.
Eventually, after decades of strife, outside mediation helped.
But this still does not address the question of when one votes.
In the 1960’s, the Somalis wanted to vote right away;
Kenya wanted to wait 40 or 50 years while it went about its nation-building, or reshaping tribal allegiances into a Kenyan identity.
Does secession harm those left behind?
What about the resources the secessionists take with them, or the disruption they create in the country they leave?
For example, the victorious powers in World War I invoked the principle of self-determination, but after the dismantlement of the Austro-Hungarian Empire in 1918, the Sudetenland was incorporated into Czechoslovakia, even though its inhabitants spoke German.
After the Munich Agreement in 1938, the Sudeten Germans seceded from Czechoslovakia and joined Germany, which meant that the mountainous frontier fell under German control – a terrible loss for Czech defenses.
Similarly, when eastern Nigeria decided it wanted to secede and form the state of Biafra in the 1960s, other Nigerians resisted, in part because Biafra included most of Nigeria’s oil.
They argued that the oil belonged to all of Nigeria’s people, not just the eastern area.
After 1989, the issue of self-determination became acute again in the former Soviet Union and Eastern Europe.
In the Caucasus, Azerbeijanis, Armenians, Georgians, Abkhazians, and Chechens all demanded states on the basis of self-determination.
In Yugoslavia, the Slovenes, Serbs, and Croats managed to carve out independent republics in the early 1990’s, but the Muslims in Bosnia-Herzegovina were less successful.
The war in Bosnia devastated the civilian population, and war-crimes tribunals were convened in The Hague, starting in 1996, to convict those responsible for the massacres.
Part of what made the war in Bosnia so complicated for the international community was the problem of assessing how much of the fighting could be attributed to tensions among Bosnian Croats, Serbs, and Muslims, and how much of the violence was caused by Serbia’s intervention.
If this was not caused by simple aggression on the part of Serbia, then the only grounds for intervention would be to prevent a massacre.
As with Rwanda in 1994, the international community was united in its condemnation of the Balkan violence, but was unable to agree on effective joint action until late in the conflict, in 1995, when a NATO peacekeeping force was sent to the troubled area.
Self-determination has turned out to be an ambiguous moral principle.
Woodrow Wilson thought it would solve problems in central Europe in 1919, but it created as many as it solved.
Adolf Hitler used the principle to undermine fragile states in the 1930’s.
Today, with less than 10% of the world’s states being homogeneous, treating self-determination as a primary moral principle could have disastrous consequences in many regions.
The best hope for the future is to ask what is being determined as well as who determines it.
In situations where groups have difficulties living together, it may be possible to allow a degree of autonomy in the determination of internal affairs.
Internal self-determination could allow degrees of cultural, economic, and political autonomy similar to that which exists in countries like Switzerland or Belgium.
Where such loosening of the bonds is still not enough, it may be possible in some cases to arrange an amicable divorce, as happened when Czechoslovakia peacefully divided into two sovereign countries in 1993.
But absolute demands for self-determination are likely to become a source of endless violence unless handled carefully.
Demands for self-determination in today’s world must be judged on a case-by-case basis that assesses the motives, means, and consequences involved, and that does so in a multilateral framework.
The Dead Cat Bounce
NEW YORK – Mild signs that the rate of economic contraction is slowing in the United States, China, and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will occur in other advanced economies.
The emerging consensus among economists is that growth next year will be close to the trend rate of 2.5%.
Investors are talking of “green shoots” of recovery and of positive “second derivatives of economic activity” (continuing economic contraction is the first, negative, derivative, but the slower rate suggests that the bottom is near).
As a result, stock markets have started to rally in the US and around the world.
Markets seem to believe that there is light at the end of the tunnel for the economy and for the battered profits of corporations and financial firms.
This consensus optimism is, I believe, not supported by the facts.
Indeed, I expect that while the rate of US contraction will slow from -6% in the last two quarters, US growth will still be negative (around -1.5 to -2%) in the second half of the year (compared to the bullish consensus of +2%).
Moreover, growth next year will be so weak (0.5 to 1%, as opposed to the consensus of 2% or more) and unemployment so high (above 10%) that it will still feel like a recession.
In the euro zone and Japan, the outlook for 2009 and 2010 is even worse, with growth close to zero even next year.
China will have a more rapid recovery later this year, but growth will reach only 5% this year and 7% in 2010, well below the average of 10% over the last decade.
Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow.
My latest estimates are $3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world.
It is said that the International Monetary Fund, which earlier this year revised upward its estimate of bank losses, from $1 trillion to $2.2 trillion, will announce a new estimate of $3.1 trillion for US assets and $0.9 trillion for foreign assets, figures very close to my own.
By this standard, many US and foreign banks are effectively insolvent and will have to be taken over by governments.
The credit crunch will last much longer if we keep zombie banks alive despite their massive and continuing losses.
Given this outlook for the real economy and financial institutions, the latest rally in US and global stock markets has to be interpreted as a bear-market rally.
Economists usually joke that the stock market has predicted 12 out of the last nine recessions, as markets often fall sharply without an ensuing recession.
But, in the last two years, the stock market has predicted six out of the last zero economic recoveries – that is, six bear market rallies that eventually fizzled and led to new lows.
The stock market’s latest “dead cat bounce” may last a while longer, but three factors will, in due course, lead it to turn south again.
First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast the consensus expects.
Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures, and surging defaults on corporate bonds will limit firms’ pricing power and keep profit margins low.
Third, financial shocks will be worse than expected.
At some point, investors will realize that bank losses are massive, and that some banks are insolvent.
Deleveraging by highly leveraged firms – such as hedge funds – will lead them to sell illiquid assets in illiquid markets.
And some emerging market economies – despite massive IMF support – will experience a severe financial crisis with contagious effects on other economies.
So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable.
To be sure, much more aggressive policy action (massive and unconventional monetary easing, larger fiscal-stimulus packages, bailouts of financial firms, individual mortgage-debt relief, and increased financial support for troubled emerging markets) in many countries in the last few months has reduced the risk of a near depression.
That outcome seemed highly likely six months ago, when global financial markets nearly collapsed.
Still, this global recession will continue for a longer period than the consensus suggest.
There may be light at the end of the tunnel – no depression and financial meltdown.
But economic recovery everywhere will be weaker and will take longer than expected.
The same is true for a sustained recovery of financial markets.
The Dear Leader Cleans House for the Young General
SEOUL – There was a time, not long after the Cold War’s end, when almost everyone assumed that North Korea would soon collapse.
The sudden death in 1994 of Kim Il-sung, the founder of the tyrannical, economically disastrous North Korean experiment, reinforced this belief.
That was then.
Today, no one can credibly say that North Korea’s dynastic regime, now led by “Dear Leader” Kim Jong-il, a son of the late “Great Leader” Kim Il-sung, is certain to fall.
From insistence that the end of the Kim dynasty was approaching, consensus is emerging on the continued existence of their regime.
Immediately after the stroke that killed his father at an exclusive summer resort villa on a remote mountain, Kim Jong-il consolidated political power by concentrating it in the hands of a very few diehard loyalists – and jailing, torturing, and killing anyone he viewed as a political opponent.
Nevertheless, despite his long tenure, the Dear Leader’s hold on power sometimes has been threatened by a small group of dissidents.
And now that poor health has forced him to prepare to hand power to his third and youngest son, Kim Jong-un (the so-called “Young General”), opposition has become more visible.
On April 22, 2004, a train explosion at Ryongchon killed 160 people and injured 1,300. Many believe that it was an attempt to assassinate Kim, whose custom-built train passed through Ryongchon a few hours before the blast.
Since then, South Korean intelligence institutions have been assessing Kim Jong-il’s ability to organize an orderly dynastic succession.
In particular, they have been monitoring the body count of senior North Korean officials who have suddenly retired, disappeared, or died in automobile accidents.
Indeed, the number of recent changes in the North Korean hierarchy strongly suggests serious domestic opposition to the continuance of Kim’s misbegotten rule.
Kim Il-chol, 80, an admiral and vice-minister for the armed forces, was removed from his post in May.
He was sent into retirement supposedly because of his advanced age, but there are even older figures in North Korea’s gerontocracy.
In addition, Pak Nam-gi, the senior finance ministry official considered responsible for North Korea’s botched issuance of a new currency last year, has disappeared, and Kim Yong-il, North Korea’s prime minister, was fired on June 7.
Ri Je-gang, a senior Workers’ Party director, was killed in a bizarre car crash on June 2.
The most common explanation for all of these changes is that Kim is circling the wagons around himself and the Young General.
A disciplined succession plan is needed because Kim is 68 and in bad health (and thus unlikely to still be holding power in 2012, the year he targeted for North Korea to become a “Strong and Prosperous Country”).
In the meantime, the armed forces appear to remain loyal to Kim, willing to carry out his orders even at the risk of bringing the country to the brink of war, such as by sinking the South Korean naval ship Cheonan in March and warning of “powerful nuclear deterrence” against joint South Korean and American military drills.
While the United Nations Security Council debates how to reprimand North Korea for the attack on the Cheonan, few people in South Korea believe that any punishment will deter Kim or shorten the life of his regime.
Moreover, from the beginning South Korea had little faith in the UN even trying to act, due to China’s veto in the Security Council.
Indeed, China offered South Korea a veiled warning that it “should not sweat the small stuff,” implying that the unprovoked killing of 46 South Korean sailors is a petty matter, and certainly not one that will cause China to rethink its alliance with North Korea.
North Korea’s unpredictability and China’s cynical irresponsibility appear to be boxing in South Korean President Lee Myung-bak’s conservative government.
Lee must not only calculate how tough to be with North Korea in response to the death of the Cheonan sailors, but also find a way to keep working with Kim Jong-il’s police state.
He will most likely opt for a tactical retreat in the confrontation.
Instead of pushing for serious UN sanctions, Lee’s government will eventually, it seems, focus on reviving the six-party (South and North Koreas, the United States, China, Japan, and Russia) talks to end the North’s nuclear-weapons program.
There is no way to know what will happen in North Korea when Kim dies.
But it is time for Asia’s powers to start thinking creatively and acting cooperatively to prevent a violent implosion.
For now, South Korea will need to rely on lionhearted tolerance in its relations with the North, because there is simply no other viable option at hand.
The Dear Leader Nuclear Weapons Company
TOKYO – Next week, world leaders will gather in New York to mark the 40th anniversary of the Nuclear-Non-Proliferation Treaty and to discuss means to further limit the dangers posed by nuclear weapons. This meeting follows on a recent summit in Washington to discuss nuclear security, and the new strategic arms reduction treaty signed by US President Barack Obama and Russian President Dmitri Medvedev in early April. All this diplomatic activity is good news for everyone, everywhere.
But in Iran and Syria, there are also a growing number of specialist workers. Indeed, when Israel attacked a nuclear facility in Syria in September 2007, it was revealed that North Koreans were involved in developing the site in cooperation with the Syria National Technical Research Center.
Their mission is to propagandize the party’s ideology in the Islamic Republic. The daily life of these Koreans is constrained within a small community where the Party exercises total control over all personal exchanges.
Some of these workers are directed by North Korea’s embassy in Teheran, which is primarily concerned with acting as a Party watchdog over fellow citizens stationed in Iran. North Korean diplomatic attaches are required to conduct weekly and monthly self-criticism sessions.
But other North Koreans in Iran do not take their marching orders from the embassy, and they are of three types. Those from “Office 99” report to the Munitions Industry Department in Pyongyang.
Those from “Office 39” report to the Finance and Accounting Department. A final group reports directly to the Secretarial Office of North Korea’s “Dear Leader,” Kim Jong-Il.
While North Koreans who work in the United Arab Emirates, Qatar, or Kuwait are basically cheap labor, the missile and nuclear business conducted by North Koreans in Iran serves as a cash cow, providing Kim Jong-Il’s regime with a pile of hard currency while forging a virtual anti-American alliance. By enhancing nuclear proliferation and the transfer of essential nuclear and related technologies to the Middle East’s most radical regime, Kim Jong-Il hopes to shape radical Islamic fundamentalism as a bastion of pro-North Korean feeling.
Until 2009, the Department of Finance and Accounting and the Secretarial Office in North Korea have been responsible for the export of missiles and missile technologies to Iran through the dummy companies managed by Office 99.
All such transactions have been conducted under the direct orders of Kim Jong-Il.
This is how it works: the Second Economic Committee, which is under the command of the Party’s central leadership, manufactures missiles with the help of North Korea’s Second Academy of Natural Sciences.
Following the nuclear test conducted by North Korea in 2009, the United Nations imposed sanctions on Kim’s regime through Security Council Resolution 1874, which shut down the flow of foreign currency into North Korea. The irony is that the sanctions have made Iran an even more important partner for North Korea than it was before.
According to high-level internal Workers’ Party documents brought to Japan by North Korean informants, a new front apparatus, the Lyongaksan General Trading Corporation, was created in 2010. This organization, it appears, is now intended to play the central role in managing the export of missile and nuclear technologies to Iran.
Of course, this is simply a new wrinkle on an old practice, for North Korea has regularly used dummy companies to export missiles. Names, addresses, and phone numbers for such companies are all non-existent, as has been proved by the documents found when the UN confiscated illegally exported weapons under Resolution 1874.
Violations are punishable by death. Such a harsh measure suggests that, even though the sanctions have hardened North Korea’s desire to export nuclear weapons and technology to Iran, the process is becoming more difficult and the regime is losing its key mechanism to earn foreign currency.
If this trade is to be halted, China – through whose territory most shipments to and from North Korea pass – will need to play a more responsible role. But, given the scope of the Iranian-North Korean nuclear relationship, Asia’s democracies must start to think seriously about cooperating on regional missile defense in the way that NATO Secretary General Anders Fogh Rasmussen has urged NATO and Russia to cooperate.
The Death-Defying Dollar
BERKELEY – The blogosphere is abuzz with reports of the dollar’s looming demise.
The greenback has fallen against the euro by nearly 15% since the beginning of the summer.
Central banks have reportedly slowed their accumulation of dollars in favor of other currencies.
One sensational if undocumented story has the Gulf States conspiring with China, Russia, Japan, and France – now there’s an odd coalition for you – to shift the pricing of oil away from dollars.
Economists have no trouble explaining the dollar’s weakness after the fact.
With American households saving more in order to rebuild their retirement accounts, the country has to export more.
A weaker dollar is needed to make American goods more attractive to foreign consumers.
Moreover, disenchantment with the sophisticated instruments that American financial institutions specialize in originating and distributing means more limited foreign capital flows into the United States.
Fewer foreign purchases of US assets again imply a weaker dollar.
Extrapolating the past into the future, forecasters predict that the dollar will decline further.
The first thing to say about this is that one should be skeptical about economists’ predictions, especially those concerning the near term.
Our models are, to put it bluntly, useless for predicting currency movements over a few weeks or months.
I should know.
When the sub-prime crisis erupted in early September 2007, I published an article entitled “Why Now is a Good Time to Sell the Dollar” in a prominent financial publication.
What happened next, of course, was that the dollar strengthened sharply, as investors, desperate for liquidity, fled into US Treasury securities.
Subsequently the dollar did decline.
But then it shot up again following the failure of Bear Stearns and the problems with AIG.
Over periods of several years, our models do better.
Over those time horizons, the emphasis on the need for the US to export more and on the greater difficulty the economy will have in attracting foreign capital are on the mark.
These factors give good grounds for expecting further dollar weakness.
The question is, Weakness against what?
Not against the euro, which is already expensive and is the currency of an economy with banking and structural problems that are even more serious than those of the US.
Not against the yen, which is the currency of an economy that refuses to grow.
Thus, for the dollar to depreciate further, it will have to depreciate against the currencies of China and other emerging markets.
Their intervention in recent weeks shows a reluctance to let this happen.
But their choice boils down to buying US dollars or buying US goods.
The first option is a losing proposition.
In the longer run, OPEC will shift to pricing petroleum in a basket of currencies.
It sells its oil to the US, Europe, Japan, and emerging markets alike. It hardly makes sense for it to denominate oil prices in the currency of only one of its customers.
And central banks, when deciding what to hold as reserves, will surely put somewhat fewer of their eggs in the dollar basket.
Beyond this, the dollar isn’t going anywhere.
It is not about to be replaced by the euro or the yen, given that both Europe and Japan have serious economic problems of their own.
The renminbi is coming, but not before 2020, by which time Shanghai will have become a first-class international financial center.
And, even then, the renminbi will presumably share the international stage with the dollar, not replace it.
The one thing that could precipitate the demise of the dollar would be reckless economic mismanagement in the US.
One popular scenario is chronic inflation.
But this is implausible.
Once the episode of zero interest rates ends, the US Federal Reserve will be anxious to reassert its commitment to price stability.
There may be a temptation to inflate away debt held by foreigners, but the fact is that the majority of US debt is held by Americans, who would constitute a strong constituency opposing the policy.
The other scenario is that US budget deficits continue to run out of control.
Predictions of outright default are far-fetched.
But high debts will mean high taxes.
The combination of loose fiscal policy and tight monetary policy will mean high interest rates, sluggish investment, and slow growth.
Foreigners – and residents – might well grow disenchanted with the currency of an economy with these characteristics.
Mark Twain, the nineteenth-century American author and humorist, once responded to accounts of his ill health by writing that “reports of my death are greatly exaggerated.” He might have been speaking about the dollar.
For the moment, the patient is stable, external symptoms notwithstanding.
But there will be grounds for worry if he doesn’t commit to a healthier lifestyle.
The Death of King Fahad
Saudi Arabia’s decade long royal death watch is over.
King Fahad, the longest-serving king in Saudi Arabia’s history (24 years), is dead.
For six weeks, the King lay in a hospital fighting death, something he has done, in reality, ever since he suffered a massive stroke 10 years ago.
The identity of the new king is clear, but who will really wield power is not.
As when Marshal Tito was dying in a divided Yugoslavia, the King’s royal relations (who are also his political underlings) fear that the ruler’s death will unleash chaos.
This fear comes at a time when the wider Middle East is abuzz with talk of democratic change.
From Egypt to Lebanon to Iran, political passions are mounting, along with a renewed optimism.
Street demonstrations, elections, and political debate in cafes and on the Internet are flowering as never before.
Even the conservative states of the Arabian Peninsula are embroiled in lively disputes about women ministers, Shia representation, Islamist participation in the political process, and even the future of their ruling monarchies.
In these dynamic circumstances, Saudi Arabia stands out.
Indeed, Saudi Arabia seems trapped in a state of suspended animation, its body politic sick and infirm.
The country is caught between two choices: progressive reform or continuing paralysis and decay.
Divisions in the kingdom are sharper than ever, and the King’s death might deepen them further.
Two rival camps - the so-called reformers and the hard liners - are forming in the Al Saud, the world’s largest ruling family, with 22,000 princes and princesses.
The reformers have less authority but are the acceptable face of the Saudi dictatorship internationally.
Their new leader, King Abdullah, appears to have legitimacy because of his seniority in the family.
The reformers talk about partial municipal elections, national dialogue, and the rights of women, who they hint may one day even be allowed to drive cars!
Even these limited efforts are obstructed by the hardline Wahhabi camp, which controls the security forces, the judiciary system, and the real levers of domestic power.
Indeed, Prince Naif, the Minister of the Interior and leader of the hardliners, has either silenced or imprisoned hundreds of the key Saudi reformers.
One reason for the weakness of Abdullah’s faction is that he has scant support within the family, because the Al Saud center of power lies with the al Fahads - the six full brothers of the dead King Fahad, most importantly Prince Sultan, the Minister of Defense, and Prince Naif.
On the surface, the succession has proceeded as expected, with Crown Prince Abdullah becoming king now that Fahad has died.
In spite of this, Abdullah may not be able to shape the future, because he seems doomed to lose any showdown with Naif’s forces.
Abdullah’s power base is in the National Guard, and his claim on the support of Saudi Arabia's modernizing forces.
Both are insufficient to check Naif.
A key early test of Abdullah’s kingship will be if he can succeed in freeing the hundreds of political reformers now in prison, especially three respected academics whom he encouraged to make reform proposals, only to be incarcerated by Naif.
Now that King Fahad is gone, old scores among his numerous brothers and half brothers, not to mention the thousands of princes in the next generation, will need to be settled.
But don’t look for hope in the new generation, which is not necessarily young or progressive.
Indeed, the Al Saud clan’s third and fourth generations are divided not only in political and religious affiliation, but also range in age from 20 to 90 years old.
All await a chance to rule.
So Saudi Arabia’s people confront this key question: can an authoritative ruler emerge who will reunite the country in the progressive tradition of the late King Faisal?
The sad likelihood is that, given the power of the obstructionists under Naif, a decisive and energetic king is unlikely to emerge.
The direction the country will take in the longer term can best be assessed by whom Abdullah chooses to name as the successor to Prince Sultan, Naif’s chief ally who has already been named Abdullah’s heir.
If Abdullah (aged 83) can perhaps skip a generation and appoint a more open-minded younger figure, there may be hope.
But Naif (age 77), his full brothers - including Sultan (age 82) - and their supporters within the Wahhabi establishment appear too entrenched to allow that to happen.
Like the geriatric successions that preceded the collapse of the Soviet Union, the succession in Saudi Arabia seems to be only a step in an inexorable march toward political decay.
Russia found a young reformer in Mikhail Gorbachev too late.
It may also be too late for Saudi Arabia.
The Death of NATO
LONDON – NATO, whose foreign ministers will meet next week, is dying.
Death, of course, comes to all living things.
And, as NATO approaches its 60th birthday next spring, there seems no immediate urgency about writing its obituary; 60-year-olds may reasonably look forward to another decade, perhaps two or even three, of active and productive life.
But perhaps it is now time for some discreet reflection on the fact that “the old man will not always be with us.”
Human institutions, like human beings, can collapse with surprising speed once they have outlived their usefulness.
The dramatic dissolution of the Soviet Union stands as a reminder of what can happen to organizations when doubts take hold as to whether they still serve any real interests other than those of their own apparatchiks – and how suddenly such doubts can grow when they attempt to convert themselves into something they are not.
NATO has, of course, shown remarkable tenacity.
It should have disappeared when the Soviet Union collapsed and the Warsaw Pact evaporated; its job was done.
But then came the Balkans crises of the 1990s, culminating in the realization that only American military power could put a stop to Serbian President Slobodan Milosevic’s ethnic cleansing of Kosovo.
And then came the terrorist attacks of September 11, 2001, making the “out of area or out of business” choice seem a no-brainer.
So NATO remains in business, and in Afghanistan.
But NATO’s repeated demonstrations of resilience should not blind us to the fact that it no longer provides a healthy basis for the transatlantic security relationship.
As long as NATO’s raison d’être was to keep the Russians out and the United States in, NATO’s internal dynamic of American leadership and European obeisance was both inevitable and appropriate.
This unbalanced relationship still has advantages for both parties.
Americans may find their (old) European allies less pliable than before – but they can at least count on the absence of any serious alternatives for what NATO should become, or what it should do.
Europeans can continue to avoid responsibility for their own security, and to invoke the catechism of “NATO, the corner-stone of our security” as a substitute for serious strategic thought.
But each now resents the behavior of the other.
Americans find their patience tried by Europeans who are free with their advice and criticism yet reluctant to shoulder risks.
Moreover, the US learned from the Kosovo experience of “war by committee” to distrust NATO as a place to run operations, and now Afghanistan highlights the organization’s limitations as a mechanism for generating force contributions.
As for Europeans, they are unhappy about pressure to participate in a US-led “global war on terror” that they regard as dangerous and misconceived, and to go along with policies seemingly designed to antagonize their more difficult neighbors like Russia and the Islamic world.
So what is to be done?
None of the ideas for another dose of NATO rejuvenation looks like the answer.
All the talk of an improved NATO-European Union partnership is mainly wasted breath. “Intensified strategic dialogue in Brussels” in practice boils down to the chilling specter of interminable joint committee meetings at which one nation’s ambassador to NATO explains his government’s position to a compatriot diplomat who is accredited to the EU, and vice-versa.
The problem is not institutional relationships between the two organizations, except in the important but narrow case of Turkey and Cyprus, which remain bent on pursuing their bilateral feud without regard to the real risks to the personnel of their allies and partners deployed in Afghanistan and Kosovo.
The real problem is relations between the US and European countries, 21 of which belong to both organizations.
Nor does the answer lie in developing an EU “caucus” within NATO.
The 1990’s concept of a “European Defense Identity” within NATO proved to be unviable – and since then expansion of the alliance and proliferation of NATO “partners” has made the idea of a special collective role for EU members all the more improbable.
A double layer of decision-making would only cause an already ponderous organization to seize up.
There is nothing more dramatic to be done than to focus on upgrading the EU-US strategic dialogue.
The annual summits need to be made more substantial, and their focus shifted from transatlantic, bilateral issues to aligning EU and US global policies and actions.
The US president should keep an eye on the calendar of the European Council, which brings the EU presidents and prime ministers together four times a year, and solicit an occasional invitation.
The US mission to the EU should be scaled up, and EU representation in Washington turned into a proper embassy.
The more seriously the Americans show that they are willing to take the EU collectively, the more seriously the Europeans will take themselves.
Winston Churchill once remarked that you could always count on the Americans to do the right thing, after having tried all the alternatives.
In the same way, the Europeans will eventually find themselves having to speak with one voice and act as one body in the wider world, if only because a globalized world will not allow them the luxury of doing anything else.
As Charles de Gaulle forecast, “It is not any European statesman who will unite Europe.
Europe will be united by the Chinese.” Only collectively can Europeans be effective contributors to global security, or achieve a robust transatlantic security partnership.
As NATO enters its twilight years, the US should encourage the EU to grow into its global responsibilities.
For, despite all their differences and mutual dissatisfactions, Europe and the US know that each is the best friend either is likely to have for the foreseeable future.
The Death of Pakistan?
NEW DELHI – This is a tipping point for Pakistan.
Will it survive the current maelstrom of challenges – exemplified by the recent assassination of Governor Salmaan Taseer of Punjab by one of his bodyguards, an Islamic zealot – or will it capsize?
For the world, Pakistan’s fate is an urgent, perhaps even an existential, question.
After all, Pakistan is a nuclear-armed, terrorist-spawning regional power.
The roots of Pakistan’s instability run deep.
Following World Wars I and II, the European powers and the United States sat around distant tables and fabricated frontiers, giving birth to Iraq, Israel, Kuwait, Jordan, and Saudi Arabia – and thus to most of the of the Middle East’s current ills.
The region’s new map was based on the assumption that the fundamentals of “Muslim Asia” could be transformed by introducing the Western nation-state system.
Instead, what formed was a region of entities that have largely failed to cohere as nations.
In 1947, the Indian sub-continent, too, was vivisected in much the same way, with a religion-based entity carved out of it: Pakistan.
Of course, it is pointless at this stage to re-examine that tragic folly.
The consequences of partition, however, remain: Pakistan has not yet been able to evolve an administratively credible government.
Indeed, if Muhammad Ali Jinnah, Pakistan’s founding father, had been right that Muslims are a separate nation, Bangladesh would not have broken away from it, and the country’s relations with its neighbor Afghanistan would be free of intrigue and violence.
This brings us to the heart of the matter: the question of Islam and statehood.
In his book Islam and the Destiny of Man, Gai Eaton put the matter with elegant precision: “Islamic society is theocentric…not theocratic.”
The first, Eaton writes, is an “ideological proposition” that has “never materialized in Muslim history because no Muslim state has even been theocratic.”
Whereas the centrality of the state in human affairs is a modern, European development, traditional societies like India or Pakistan have always regarded the state as no more than a necessary evil, since large societies cannot be managed on the old tribal basis.
For Muslims, all sovereignty vests in God; indeed, nothing whatever exists or can exist outside of Him.
As Eaton puts it, the Koran’s insistence that “there is no god but God” can also be interpreted to mean that “there is no legislator but the Legislator.”
That is why in Islamic jurisprudence, laws must be derived from the Koran and the Sunnah of the Prophet, not handed down from British or classical philosophy.
So the central issue in Islam has not been whether the state can be separated from religion, but whether society can be so separated.
It cannot, which is why no Muslim state can be fully secular.
Indeed, the issue that now lies at Pakistan’s core is whether it can become a theocratic state.
Which brings us back to the horror of Taseer’s assassination and the strange and divided reaction to it in Pakistani civil society.
Taseer’s assassination, unlike that of Indian Prime Minister Indira Gandhi by her bodyguards in 1984, was not a retaliatory revenge attack.
Instead, the roots of Taseer’s assassination lay in the dark delusions of fanatical belief, his killing supposedly undertaken to protect the faith.
Worse, many citizens, if not most, have reacted by supporting the assassin (some showering him with flower petals), while hundreds of Ulemas (religious leaders) welcomed his killing and called participation in his funeral “un-Islamic.”
According to the chief of the Jamaat-e-Islami movement, “the killed is himself responsible for his killing.”
This aggressive, fundamentalist path is inexorably leading Pakistan back centuries in time.
Of course, Pakistan alone is responsible for the path it chooses, but it would not have so readily adopted its current course but for the tacit (and explicit) support that the US has given it, beginning in the 1980’s to counter the Soviet occupation of Afghanistan.
Once again, we see how misplaced Western national priorities can bring ruin on a non-Western nation.
In any contest of ideas, the extreme will usually triumph over the moderate.
In Pakistan, the extremist now wears Islamic garb, and stands for the Creator, for faith, and for a theocratic order.
What, by contrast, might a Pakistani liberal stand for? Indeed, who in Pakistan is calling for a liberal, democratic country?
In the dark, congested alleys of Lahore, Karachi, Peshawar, or Quetta, the yearning is not for democratic liberalism, but for the believers to unite behind the one true faith.
Here, in this desire, is where Pakistan’s ultimate reckoning is to be found, not in the corridors of Washington, and certainly not on the broad avenues of Islamabad.
The Death of Poland\u0027s Socrates
NEW YORK – One of the most important men you probably never heard of died last Friday.
Immersed in a bustle of events that no one will remember tomorrow, we tend to pay less attention to people who take on the issues of eternity – philosophers, moralists, sages who try to turn our minds to higher things.
Yet, in the long run, it is the latter who matter most, and their importance persists when other preoccupations turn out to be transitory.
Such men and women change the world around them, even if others do not see it until much later.
Leszek Kolakowski was one of these people.
He was a world-renowned philosopher, a professor at great universities – Oxford, Yale, Chicago – and someone who was respected and admired by his colleagues around the world.
He wrote about Spinoza, the theological controversies of 17th century Holland, and other esoteric subjects.
But Kolakowski was not a “technical” philosopher, writing for academic specialists.
He was a philosopher in the same sense that Socrates was: a thinker who questioned what others take for granted, and probed human feelings and actions to help us understand how we can better ourselves and lead lives that are morally superior, yet also more fulfilling.
In his magisterial three-volume history, “Main Currents of Marxism,” Kolakowski recorded how that political theory developed over time; but he also diagnosed the political, intellectual, and moral predicament of the European continent over the two centuries partly shaped by Marxist beliefs.
In his “Conversations with the Devil,” he created an amusing world parallel to traditional Christian “morality tales,” and deployed his sense of humor to question the hackneyed verities of religion and its opponents, strip them of their philistine shells, yet defend the true moral meaning underlying the old beliefs.
It was Kolakowski’s fate – a curse, if the Chinese proverb is to be trusted – to “live in interesting times.”
In his early youth, he witnessed the atrocities of World War II in his native Poland.
He came out of the war with an idealistic desire to make the world better through a radical reform of the “rotten” world that had allowed the Nazis to flourish.
In his naiveté, he joined the Communist party in whose program he saw the hope of change.
But while Kolakowski “traveled” with the Communists and supported them for a few years, he was never really a “good comrade” because he never allowed himself to stop thinking for himself.
He went only as far as he could bring his conscience, and refused to go further.
Indeed, he was one of the first so called “revisionists” who came to question Stalinist orthodoxy and lead the way to the important changes that shook the Communist world in 1956, when Poland gained for a short while a small but important measure of independence from Kremlin control.
But once he started to question the Marxist dogma, Kolakowski did not stop until he left the movement altogether to become one of its most important critics and opponents.
I remember being present, as a young student in Warsaw, at an illegal meeting at the university to commemorate the 10th anniversary of the reform movements of 1956 – the meeting at which Kolakowski severed his last, by then fragile, links with the official world of the Communist Party.
“In 1956,” I remember him saying, “we understood that slavery did not lead to freedom, that lies did not help the truth, that oppression did not foster ultimate equality.” What he said was simple, but it is hard to underestimate the importance of those simple truths when confronting the convoluted lies of official propaganda.
Indeed, with words like these, Kolakowski, with Solzhenitsyn, Sakharov, and other kindred souls, ultimately did as much as the trillions of dollars spent on weapons to speed the demise of the totalitarian Soviet empire.
Kolakowski paid dearly for his free thinking – less than two years after his speech in Warsaw, he was deprived of his teaching position and forced into an exile that would last for over 20 years.
From his perch at Oxford, where he became a fellow at All Souls College, he continued to tell inconvenient truths and remained an intellectual and moral presence in his country throughout its struggles against the oppressive regime, a series of workers’ uprisings, the rise of the Solidarity movement, and the final collapse of the regime in 1989.
Kolakowski came back to Poland a number of times in his last years, although he never settled there again.
He was an icon among his fellow countrymen – indeed, for his 70th birthday, the largest newspaper in Poland organized a celebration during which they crowned him (with a crown of laurel leaves, of course) … the King of Europe.
When he died, the Polish Parliament observed a minute of silence.
Poland went into mourning.
But the man himself was never a monument.
Indeed, his experience with the “Hegelian bacillus” made Kolakowski forever sensitive to all enthusiasms and all-encompassing creeds.
He preferred humor to hectoring, gently making fun of those whom he criticized, while always making sure that even the most severe intellectual critique did not deny the humanity of his opponents.
Refusing to believe anything unconditionally, he retained that most important characteristic of a truly great man: he never had unconditional faith in himself.
Another quality he shared with Socrates.
The Death of Russian Womanhood
Valentina Tereshkova, the first female Soviet cosmonaut – indeed, the first woman to go into space – recently celebrated her 70th birthday.
In an interview, she stated her only wish: to fly to Mars, even with a one-way ticket.
It was an implicit wish for a spectacular form of suicide, for a spectacularly prosaic reason: the loss, experienced by thousands of Russian women of her generation, of her life’s existential foundation.
Tereshkova’s generation, though it encompassed almost the entire era of Soviet rule, had been raised in the tradition of Russian womanhood.
Much older than the Soviet regime, this tradition emphasizes a spirit of sacrifice – not just for loved ones, but also for great causes such as revolution, state, science, or art – that is deeply hostile to accumulation of money and material goods as the goal of life.
After “perestroika” and the 1991 collapse of the USSR, these women did not change their lives and attitudes.
They did not curse what they had glorified in the past and embrace what they had once condemned.
They did not participate in “privatization” of state property or enter show business to make money.
These women – and Tereshkova is undoubtedly among them – were shocked by the changes they saw before them.
Indeed, probably more horrifying to them than the collapse of the Soviet regime was the rampant prostitution of daily life, for it negated the meaning of Russia and of Russian womanhood.
What, then, might a woman of Tereshkova’s generation think of the changes during Vladimir Putin’s presidency?
One should be fair to Putin’s regime.
Along with its restraints on liberty and its dramatic increase in the power of the Kremlin bureaucracy, Putin has overseen the rise of a Russian middle class that has become increasingly similar to Western middle classes.
There has been no “return” to Soviet or pre-revolutionary times, despite the regime’s attempts to appropriate the symbols of Czarist Russia.
The prostitutes who lined up throughout downtown Moscow in the Yeltsin era have disappeared, and “dressing to kill” for a casual walk has gone out of fashion.
But the Putin regime still bears greater resemblance to the Yeltsin era than to any prior period.
So do most of the new generation of Russian women (and men): in their modern, calculating minds, there is little place for sacrifice, whether for family, art, culture, or science.
As a result, the Putin era has become utterly sterile, producing no great works of science, literature, or art.
Such pursuits have simply become passé – something that has never happened in modern Russian history, not even in the darkest days of Stalin’s purges.
This culturally desiccated world is much more alien than the red desert of the Martian landscape that Tereshkova and her cosmonaut friends – including her husband – dreamed of in their youth.
The collapse of the country for which she lived underscores her overwhelming sense of tragedy.
This might seem strange to the Western mind, for which the great Soviet space achievements and the USSR existed as separate entities: while everyone praised Soviet science, very few admired the totalitarian USSR.
But for Tereshkova and other women of her generation, the great Soviet state and the daring achievements of Soviet science were inseparable.
The grand expansion of the Soviet empire enabled humankind’s exploration of the cosmos and its potential expansion beyond Earth.
It is understandable that the collapse of the country, and of the spirit that nurtured Russian intellectuals – regardless of their political beliefs – for generations, is unbearable for Tereshkova and people like her.
But Tereshkova’s dream about travel to Mars is not just suicidal nostalgia for a time when she was young and surrounded by people who were ready to sacrifice their lives for a greater cause.
In fact, the allusion to space exploration has another dimension: the achievements of any great are not bound to one’s time or place of origin and can be transmitted to other cultures and generations.
Tereshkova’s dream is a symbol not only of her desperation, which is the desperation of the creative mind in today’s Russia, but also of continuing belief in the great potential of the human spirit.
The Death of the Globalization Consensus
CAMBRIDGE – The world economy has seen globalization collapse once already.
The gold standard era – with its free capital mobility and open trade – came to an abrupt end in 1914 and could not be resuscitated after World War I. Are we about to witness a similar global economic breakdown?
The question is not fanciful.
Although economic globalization has enabled unprecedented levels of prosperity in advanced countries and has been a boon to hundreds of millions of poor workers in China and elsewhere in Asia, it rests on shaky pillars.
Unlike national markets, which tend to be supported by domestic regulatory and political institutions, global markets are only “weakly embedded.”
There is no global anti-trust authority, no global lender of last resort, no global regulator, no global safety nets, and, of course, no global democracy.
In other words, global markets suffer from weak governance, and therefore from weak popular legitimacy.
Recent events have heightened the urgency with which these issues are discussed.
The presidential electoral campaign in the United States has highlighted the frailty of the support for open trade in the world’s most powerful nation.
The sub-prime mortgage crisis has shown how lack of international coordination and regulation can exacerbate the inherent fragility of financial markets.
The rise in food prices has exposed the downside of economic interdependence without global transfer and compensation schemes.
Meanwhile, rising oil prices have increased transport costs, leading analysts to wonder whether the outsourcing era is coming to an end.
And there is always the looming disaster of climate change, which may well be the most serious threat the world has ever faced.
So if globalization is in danger, who are its real enemies?
There was a time when global elites could comfort themselves with the thought that opposition to the world trading regime consisted of violent anarchists, self-serving protectionists, trade unionists, and ignorant, if idealistic youth.
Meanwhile, they regarded themselves as the true progressives, because they understood that safeguarding and advancing globalization was the best remedy against poverty and insecurity.
But that self-assured attitude has all but disappeared, replaced by doubts, questions, and skepticism.
Gone also are the violent street protests and mass movements against globalization.
What makes news nowadays is the growing list of mainstream economists who are questioning globalization’s supposedly unmitigated virtues.
So we have Paul Samuelson, the author of the postwar era’s landmark economics textbook, reminding his fellow economists that China’s gains in globalization may well come at the expense of the US;
Paul Krugman, today’s foremost international trade theorist, arguing that trade with low-income countries is no longer too small to have an effect on inequality;
Alan Blinder, a former US Federal Reserve vice chairman, worrying that international outsourcing will cause unprecedented dislocations for the US labor force;
Martin Wolf, the Financial Times columnist and one of the most articulate advocates of globalization, writing of his disappointment with how financial globalization has turned out; and Larry Summers, the US Treasury chief and the Clinton administration’s “Mr. Globalization,” musing about the dangers of a race to the bottom in national regulations and the need for international labor standards.
While these worries hardly amount to the full frontal attack mounted by the likes of Joseph Stiglitz, the Nobel-prize winning economist, they still constitute a remarkable turnaround in the intellectual climate.
Moreover, even those who have not lost heart often disagree vehemently about the direction in which they would like to see globalization go.
For example, Jagdish Bhagwati, the distinguished free trader, and Fred Bergsten, the director of the pro-globalization Peterson Institute for International Economics, have both been on the frontlines arguing that critics vastly exaggerate globalization’s ills and under-appreciate its benefits.
But their debates on the merits of regional trade agreements – Bergsten for, Bhagwati against – are as heated as each one’s disagreements with the authors mentioned above.
None of these intellectuals is against globalization, of course.
What they want is not to turn back globalization, but to create new institutions and compensation mechanisms – at home or internationally – that will render globalization more effective, fairer, and more sustainable.
Their policy proposals are often vague (when specified at all), and command little consensus.
But confrontation over globalization has clearly moved well beyond the streets to the columns of the financial press and the rostrums of mainstream think tanks.
That is an important point for globalization’s cheerleaders to understand, as they often behave as if the “other side” still consists of protectionists and anarchists. Today, the question is no longer, “Are you for or against globalization?”
The question is, “What should the rules of globalization be?” The cheerleaders’ true sparring partners today are not rock-throwing youths but their fellow intellectuals.
The first three decades after 1945 were governed by the Bretton Woods consensus – a shallow multilateralism that permitted policymakers to focus on domestic social and employment needs while enabling global trade to recover and flourish.
This regime was superseded in the 1980’s and 1990’s by an agenda of deeper liberalization and economic integration.
That model, we have learned, is unsustainable.
If globalization is to survive, it will need a new intellectual consensus to underpin it.
The world economy desperately awaits its new Keynes.
The Death of Trust
BANGKOK – A friend recently asked a seemingly naïve question: “What is money?
How do I know I can trust that it is worth what it says it is worth?”
We learn in introductory economics that money is a medium of exchange.
But why do we accept that?
Banknotes are just pieces of paper with a number attached to them.
We believe in banknotes because we collectively decide to trust the government when it says that 100 is 100, not 10 or 50.
Money, therefore, is about trust, without which no society can function.
Just as we obey our leaders’ orders to fight and die because we trust their judgment, we entrust our careers and our money to those who run Citigroup and Goldman Sachs and other such banks, because we believe their leaders will be fair to their employees and clients, and honorable in their business practices.
We do not grow up wishing to work for crooks and liars.
Once that trust breaks, bad things happen.
Money ceases to have credibility.
Leaders become figures of contempt or worse.
As I write, inflation in Zimbabwe has reached an unimaginable (if not unpronounceable) level of more than 500 quintillion per cent.
One quintillion is one million trillion.
A year ago, inflation was “only” 100,000%.
This is what happens when trust vanishes.
Fortunately, Zimbabwe is not a country of real consequence for world stability.
But the Weimar Republic and China in the 1940’s were.
One opted for Hitler and the other for Mao Zedong to restore trust.
So the risks are clear.
Are we now seeing an erosion of trust in America and in the United Kingdom?
The first warning sign surfaced in 2001, with the bankruptcy of Enron in the United States.
Its fraudulent accounts were certified by Arthur Andersen.
Now, India’s Satyam, audited by PriceWaterhouseCoopers, is found to be missing billions in cash.
If we cannot rely on the best auditors, can we continue to trust chartered accountants?
Bond rating agencies have issued misleading ratings on companies in questionable health.
Will we ever again be able to trust a triple A rating issued by, say, Moody’s?
Banks have been holding our money for safekeeping since the fourteenth century, when the Florentines invented the practice.
The Royal Bank of Scotland, founded in 1727, when laissez-faire philosopher Adam Smith was only four years old, has just become a socialist state-owned-enterprise thanks to the bank’s incompetent leaders, who acquired over-priced banks filled with toxic assets.
Citicorp, Bank of America, Goldman Sachs, Merrill Lynch, and other symbols of “excellence” all would have collapsed but for public bailouts.
And yet for decades we thought that the people who were managing those firms were much smarter than we were.
We grew up admiring leaders such as Robert Rubin, John Thain, and Henry Paulson.
Rubin, a former US Treasury Secretary and ex-Chairman of Goldman Sachs, presided over the collapse of Citigroup while taking home $150 million in bonuses.
Should he really have been rewarded at all for his “performance”? Just this week, the technically bankrupt Citigroup’s senior executives were about to buy a new $50 million luxury French jet for themselves, until the White House stopped it.
Thain, also a former president of Goldman Sachs, helped himself and his Merrill Lynch staff to $4 billion in bonus payments even after he had to sell the firm to Bank of America to save it from bankruptcy.
After he was caught spending $1.2 million, even as Merrill Lynch disintegrated, to decorate his new office, Bank of America had to fire him to placate growing revulsion over Wall Street’s out-of-control culture of entitlement.
Paulson, the outgoing Treasury Secretary and another Goldman Sachs veteran, left a loophole in his rescue package big enough for a truck to drive through.
That loophole allowed his former friends and colleagues on Wall Street to pay themselves billion-dollar bonuses while keeping those firms afloat with taxpayers’ money.
The universities these men attended – Harvard and Yale for Rubin;
MIT and Harvard for Thain;
Dartmouth and Harvard for Paulson – have been magnets for the world’s finest young minds.
The rest of us thought that these institutions could instill the wisdom, insight, and character of which we all wished we had more.
Perhaps parents all over the world should re-examine their often obsessive craving for these “name-brand” universities, pushing their children as if an Ivy League degree was an end in itself.
Now we know that Wall Street’s titans were never all that smart, and certainly not very ethical, for they failed the only test that counts.
All of the firms they led collapsed, and were saved only by money from those who could never get a senior job on Wall Street or a place at Harvard.
These Wall Street princes were smarter in one way, however: they managed to pocket a fortune while the rest of us are stuck with the mess they left behind.
Bernard Madoff who hailed from down-market part of New York City and attended a middling university will spend time behind bars, but none of the titans of Wall Street with blue-chip pedigree will ever do so.
History has not been kind to societies that lose trust in the integrity of their leaders and institutions.
We need to save our economic system from its abusers, or else.
The Debt Death Trap
NEW YORK – The Greek financial saga is the tip of an iceberg of problems of public-debt sustainability for many advanced economies, and not only the so-called PIIGS (Portugal, Italy, Ireland, Greece, and Spain).
Indeed, the OECD now estimates that public debt-to-GDP ratios in advanced economies will rise to an average of around 100% of GDP.
The International Monetary Fund has recently put out similar estimates.
Within the PIIGS, the problems are not just excessive public deficits and debt ratios (in different degrees and measures in the five countries).
They are also problems of external deficits, loss of competitiveness, and thus of anemic growth.
These are economies that, even a decade ago, were losing market share to China and Asia, owing to their labor-intensive and low value-added exports.
After a decade that saw wages grow faster than productivity, unit labor costs (and the real exchange rate based on those costs) appreciated sharply.
The ensuing loss of competitiveness manifested itself in large and growing current-account deficits and slowing growth.
The final nail in the coffin was the appreciation of the euro between 2002 and 2008.
So, even if Greece and other PIIGS had the political resolve to reduce massively their large fiscal deficits – and that is a big if, given the political resistance to spending cuts and tax increases – fiscal contraction may, at least in the short run, make the current recession worse as higher taxes and lower spending reduce aggregate demand.
If GDP falls, achieving a certain deficit and debt target (as a share of GDP) becomes impossible.
This, indeed, was the debt death trap that engulfed Argentina between 1998 and 2001.
Restoring sustained growth requires real currency depreciation.
There are only three ways that this can occur.
One is deflation that reduces prices and wages by 20-30%.
But deflation is associated with persistent recession (see Argentina again), and no country’s society and political system can accept years of recession and fiscal austerity to achieve real depreciation.
Default and an exit from the euro would occur well before that.
The second path is to follow the German model of accelerating structural reforms and corporate restructuring to increase productivity growth while keeping wage growth moderate.
But it took a decade for Germany to reduce its unit labor costs that way; if Greece or Spain were to start today, the short run costs of resource reallocation would be large, while the benefits in terms of higher growth would take too many years to achieve.
Finally, the euro could fall sharply in value.
But the main beneficiary would be Germany.
And, in order for the euro to fall far enough, the risk of default in Greece would need to be so large, and the contagion to sovereign spreads of PIIGS so severe that the widening of those spreads would cause a double-dip eurozone recession before currency depreciation could yield benefits.
Short of a miracle, Greece looks close to insolvency.
At the onset of its crisis, Argentina’s budget deficit, public debt, and current-account deficit (as a share of GDP) were about 3%, 50% and 2%, respectively. Those ratios for Greece are far worse: 12.9%, 120% and 10%.
So it will take a Herculean effort, luck, and support from the European Union and the IMF to reduce the probability of an eventual default and exit from the eurozone.
Greece is currently too interconnected to be allowed to collapse: since it has about $400 billion of public debt – three-quarters of which is held abroad, mostly by European financial institutions – a disorderly default would lead to massive losses and risk a systemic crisis.
So, despite revulsion on the part of Germany and the European Central Bank at the idea of a “bailout,” Greece needs large official financial support this year at rates that are not unsustainable to prevent its current illiquidity from devolving immediately into insolvency.
But official support will only kick the can down the road until next year. The magic trifecta of sustainable debt and deficit ratios, a real depreciation, and restoration of growth looks unlikely to be achievable even with official financial support.
All successful rescues of countries in financial distress – Mexico, Korea, Thailand, Brazil, Turkey – require two conditions: the country’s credible willingness to impose the fiscal austerity and structural reforms needed to restore sustainability and growth; and massive amounts of front-loaded official support to avoid a self-fulfilling rollover crisis of maturing public and/or private short-term debts.
Reform without money on the table does not work, as nervous and trigger-happy investors would rather pull their money out if the country lacks the foreign-currency reserves needed to prevent the equivalent of a bank run on its short-term liabilities.
So, after a totally flawed plan that would have given money to Greece too late – only when the country risked a refinancing crisis – and at market rates that would make its debt unsustainable, the EU regained its senses and designed a new scheme that is closer to typical IMF conditionality: tranched support with some early front-loaded support and a semi-concessional interest rate.
Only time will tell if this plan will work: i.e. whether Greece will turn out to be illiquid but solvent, conditional on credible fiscal austerity and structural reforms and with the help of large amounts of financial support.
But, as with Argentina, Russia, and Ecuador, Greece may also be insolvent if adjustment fails to restore debt sustainability and growth.
For now, the official community has decided to stick with Plan A; if that fails, Plan B is default to reduce unsustainable debts and a Greek exit from the eurozone to allow depreciation and restoration of competitiveness and growth.
The Debt Delusion
WASHINGTON, DC &#45;&#45; A second big American interest-rate cut in a fortnight, alongside an economic stimulus plan that united Republicans and Democrats, demonstrates that US policymakers are keen to head off a recession that looks like the consequence of rising mortgage defaults and falling home prices.
But there is a deeper problem that has been overlooked: the US economy relies upon asset price inflation and rising indebtedness to fuel growth.
On one hand, policy must fuel asset bubbles to keep the economy growing. On the other hand, such bubbles inevitably create financial crises when they eventually implode.
This is a contradiction with global implications.
Many countries have relied for growth on US consumer spending and investments in outsourcing to supply those consumers.
If America’s bubble economy is now tapped out, global growth will slow sharply.
It is not clear that other countries have the will or capacity to develop alternative engines of growth.
America’s economic contradictions are part of a new business cycle that has emerged since 1980.
The business cycles of Presidents Ronald Reagan, George H.W. Bush, Bill Clinton, and George W. Bush share strong similarities and are different from pre-1980 cycles.
The similarities are large trade deficits, manufacturing job loss, asset price inflation, rising debt-to-income ratios, and detachment of wages from productivity growth.
The new cycle rests on financial booms and cheap imports.
Financial booms provide collateral that supports debt-financed spending.
Borrowing is also supported by an easing of credit standards and new financial products that increase leverage and widen the range of assets that can be borrowed against.
Cheap imports ameliorate the effects of wage stagnation.
This structure contrasts with the pre-1980 business cycle, which rested on wage growth tied to productivity growth and full employment.
Wage growth, rather than borrowing and financial booms, fuelled demand growth.
That encouraged investment spending, which in turn drove productivity gains and output growth.
The differences between the new and old cycle are starkly revealed in attitudes toward the trade deficit.
Previously, trade deficits were viewed as a serious problem, being a leakage of demand that undermined employment and output.
Since 1980, trade deficits have been dismissed as the outcome of free-market choices.
Moreover, the Federal Reserve has viewed trade deficits as a helpful brake on inflation, while politicians now view them as a way to buy off consumers afflicted by wage stagnation.
The new business cycle also embeds a monetary policy that replaces concern with real wages with a focus on asset prices.
Whereas pre-1980 monetary policy tacitly aimed at putting a floor under labor markets to preserve employment and wages, it now tacitly puts a floor under asset prices.
This is not a matter of the Fed bailing out investors.
Rather, the economy has become so vulnerable to declines in asset prices that the Fed is obliged to intervene to prevent them from inflicting broad damage.
All these features have been present in the current economic expansion.
Wages have stagnated despite strong productivity growth, while the trade deficit has set new records.
Manufacturing has lost 1.8 million jobs.
Prior to 1980, manufacturing employment increased during every expansion and always exceeded the previous peak level.
Between 1980 and 2000, manufacturing employment continued to grow in expansions, but each time it failed to recover the previous peak.
This time, manufacturing employment has actually fallen during the expansion, something unprecedented in American history.
The essential role of asset inflation has been especially visible as a result of the housing bubble, which also highlights the role of monetary policy.
Despite the massive tax cuts of 2001 and the increase in military and security spending, the US experienced a prolonged jobless recovery.
That compelled the Fed to keep interest rates at historic lows for an extended period, and rates were raised only gradually because of fears about the recovery’s fragility.
Low interest rates eventually jump-started the expansion through a house price bubble that supported a debt-financed consumer-spending binge and triggered a construction boom.
Meanwhile, prolonged low interest rates contributed to a “chase for yield” in the financial sector that resulted in disregard of credit risk.
In this way, the Fed contributed to creating the sub-prime crisis.
However, in the Fed’s defense, low interest rates were needed to maintain the expansion.
In effect, the new cycle locks the Fed into an unstable stance whereby it must prevent asset price declines to avert recession, yet must also promote asset bubbles to sustain expansions.
So, even if the Fed and US Treasury now manage to stave off recession, what will fuel future growth?
With debt burdens elevated and housing prices significantly above levels warranted by their historical relation to income, the business cycle of the last two decades appears exhausted.
It is not enough to deal only with the crisis of the day.
Policy must also chart a stable long-term course, which implies the need to reconsider the paradigm of the past 25 years.
That means ending trade deficits that drain spending and jobs, and restoring the link between wages and productivity.
That way, wage income, not debt and asset price inflation, can again provide the engine of demand growth.
Debt Without Drowning
LONDON – Since the 1970’s, economists have warned that a monetary union could not be sustained without a fiscal union.
But the eurozone’s leaders have not heeded their advice – and the consequences are becoming increasingly apparent.
Europe now faces a difficult choice: either fix this fundamental design flaw and move toward fiscal union, or abandon the common currency.
Choosing the latter option would have devastating consequences.
Indeed, while the desirability of establishing a monetary union may have been open to question in the 1990’s, dismantling the eurozone now would trigger profound economic, social, and political upheaval throughout Europe.
To avoid this outcome, Europe’s leaders must begin designing and implementing strategies aimed at bringing the eurozone closer to a fiscal union.
To be sure, a fiscal union such as that in the United States is a distant prospect that eurozone leaders should not expect to achieve any time soon – or even in their lifetimes.
But that does not mean that establishing a fiscal union is a chimera.
Small steps in the right direction now can make a significant difference.
A successful strategy would have to address one of the eurozone’s main design flaws: member governments issue debt in euros, a currency that they cannot control.
As a result, they cannot provide a guarantee to bondholders that the cash will be available to pay them at maturity.
The mistrust and fear that this elicits in the bond markets can lead to liquidity crises that, creating a self-fulfilling prophecy, drive countries closer to default. They are then forced to implement austerity programs that lead to deep recessions and, ultimately, to banking crises.
While austerity measures are appropriate in countries that have overspent in the past, the austerity that panic-stricken financial markets force upon a country can trigger a major social and political backlash.
In fact, several southern European countries – such as Greece, Italy, Portugal, and Spain – are currently experiencing exactly that.
To overcome this fundamental design flaw, government debts must be pooled.
This would protect the weakest economies from destructive, panic-fueled movements in financial markets, which, in theory, can hit any member country – even those that are strongest today.
In developing a strategy for pooling government debt, Europe’s leaders must address the possibility of moral hazard (the temptation for weaker countries to relax their debt- and deficit-reduction efforts in response to the increased credibility conferred by stronger countries).
Indeed, given stronger economies’ unwillingness to be exploited in this way, the risk of moral hazard is the most significant obstacle to pooling debts in the eurozone.
But it is not the only obstacle.
A debt-pooling scheme must also address the fact that the strongest countries will inevitably face higher interest rates on their own debts when they become jointly liable for the debts of less credit-worthy governments.
To overcome these obstacles, a eurozone debt-mutualization scheme must satisfy three crucial requirements.
First, the share of government debt that can be pooled must be strictly limited, leaving each country responsible for a significant portion of its national debt, and therefore motivated to maintain sound public finances.
(Several initiatives have aimed to achieve this, notably Jakob von Weizsäcker and Jacques Delpla’s 2010 Blue Bond proposal.)
Second, an internal transfer mechanism between eurozone member states is needed in order to ensure that less credit-worthy countries compensate, at least partly, their more economically sound counterparts.
Finally, a supervisory authority must be established to monitor governments’ progress toward achieving sustainable debt levels – and to create clear consequences for those that break the eurozone’s budgetary rules.
The Padoa-Schioppa group recently proposed that rule-breaking governments should gradually lose control over their own national budgetary processes.
Opponents of debt mutualization, especially in northern Europe, often argue that, in the absence of political unification, it amounts to putting the cart before the horse.
But what other measures could be taken to bring the eurozone closer to a political union?
Military force – so often used in the past to unite diverse nations under a single political umbrella – is out of the question.
And simply waiting will have no effect.
The only practical approach is to take small, sequential steps, starting with debt pooling.
In fact, Alexander Hamilton adopted this approach more than 200 years ago, when he decided to mutualize the debts that individual US states had incurred during the Revolutionary War – a decisive move toward further political integration.
Rather than wait for political union to happen, Hamilton took action that eventually helped the US to become a full-fledged monetary, fiscal, and political union.
The eurozone is gripped by an existential crisis that is slowly, but inexorably, destroying the monetary union’s very foundations.
The only way to stem the erosion is to take determined action that convinces financial markets that the eurozone is here to stay.
A debt-pooling scheme that satisfies the requirements outlined here would signal that the eurozone member countries are serious about sticking together.
Without this gesture, further market turmoil is inevitable – and the eurozone’s collapse will become only a matter of time.
The Decline and Fall of America’s Decline and Fall
CAMBRIDGE – The United States is going through difficult times.
Its post-2008 recovery has slowed, and some observers fear that Europe’s financial problems could tip the American and world economy into a second recession.
American politics, moreover, remains gridlocked over budgetary issues, and compromise will be even more difficult on the eve of the 2012 election, when Republicans hope that economic problems will help them unseat President Barack Obama.
In these circumstances, many are predicting America’s decline, especially relative to China.
And it’s not just pundits who think so.
A recent Pew poll found that in 15 of 22 countries surveyed, most people believe that China either will replace or has replaced America as “the world’s leading superpower.”
In Britain, those putting China on top rose to 47%, from 34% in 2009.
Similar trends are evident in Germany, Spain, and France.
Indeed, the poll found more pessimistic views of the US among our oldest and closest allies than in Latin America, Japan, Turkey, and Eastern Europe.
But even Americans are divided equally about whether China will replace the US as a global superpower.
Such sentiments reflect the slow growth and fiscal problems that followed the 2008 financial crisis, but they are not historically unprecedented.
Americans have a long history of incorrectly estimating their power.
In the 1950’s and 1960’s, after Sputnik, many thought that the Soviets might get the better of America; in the 1980’s, it was the Japanese.
Now it is the Chinese.
But, with America’s debt on a path to equaling its national income in a decade, and a fumbling political system that cannot seem to address the country’s fundamental challenges, are the “declinists” finally right?
Much will depend on the uncertainties – often underestimated – brought about by future political change in China.
Economic growth will bring China closer to the US in power resources, but that doesn't necessarily mean that China will surpass the US as the most powerful country.
China’s GDP will almost certainly surpass that of the US within a decade, owing to the size of its population and its impressive economic-growth rate.
But, measured by per capita income, China will not equal the US for decades, if then.
Moreover, even if China suffers no major domestic political setback, many current projections are based simply on GDP growth.
They ignore US military and soft-power advantages, as well as China’s geopolitical disadvantages.
As Japan, India, and others try to balance Chinese power, they welcome an American presence.
It is as if Mexico and Canada sought a Chinese alliance to balance the US in North America.
As for absolute decline, the US has very real problems, but the American economy remains highly productive.
America remains first in total R&amp;D expenditure, first in university rankings, first in Nobel prizes, and first on indices of entrepreneurship.
According to the World Economic Forum, which released its annual report on economic competitiveness last month, the US is the fifth most competitive economy in the world (behind the small economies of Switzerland, Sweden, Finland, and Singapore).
China ranks only 26th.
Moreover, the US remains at the forefront of such cutting-edge technologies as biotech and nanotechnology.
This is hardly a picture of absolute economic decline.
Some observers worry that American society will become sclerotic, like Britain at the peak of its power a century ago.
But American culture is far more entrepreneurial and decentralized than was that of Britain, where industrialists’ sons sought aristocratic titles and honors in London.
And despite recurrent bouts of concern throughout its history, America reaps huge benefits from immigration.
In 2005, foreign-born immigrants had participated in 25% of technology start-ups in the previous decade.
As Singapore’s Lee Kuan Yew once told me, China can draw on a talent pool of 1.3 billion people, but the US can draw on the world’s seven billion, and can recombine them in a diverse culture that enhances creativity in a way that ethnic Han nationalism cannot.
Many commentators worry about America’s inefficient political system.
True, America’s founding fathers created a system of checks and balances designed to preserve liberty at the price of efficiency.
Moreover, the US is now experiencing a period of intense partisan polarization.
But nasty politics is nothing new to the US: its founding era was hardly an idyll of dispassionate deliberation.
American government and politics have always experienced such episodes, and, though overshadowed by current melodramas, they were sometimes worse than today’s.
The US faces serious problems: public debt, weak secondary education, and political gridlock, to name just a few.
But one should remember that these problems are&#160;only part of the picture – and, in principle, they can be solved over the long term.
It is important to distinguish such problems from those that cannot, in principle, be solved.
Of course, whether America can implement the available solutions is uncertain; several commissions have proposed feasible plans to change America’s debt trajectory by raising taxes and cutting expenditures, but feasibility is no guarantee that they will be adopted.
Still, Lee Kuan Yew is probably right to say that China “will give the US a run for its money,” but not surpass it in overall power in the first half of this century.
If so, the gloomy predictions of absolute American decline will turn out to be as misleading as similar predictions in decades past.
And, in relative terms, while the “rise of the rest” means that America will be less dominant than it once was, this does not mean that China will necessarily replace the US as the world’s leading power.
The Decline of Ahmedinejad
Iranian President Mahmoud Ahmedinejad may be gaining support across the Muslim world for his fervent criticism of the United States, but inside Iran, he is losing strength.
His political rivals are gaining new positions of power, and the population is increasingly unhappy with the economy’s continuing decline.
Since its inception, the Islamic Republic has had a weak presidency; ultimate authority rests with the Supreme Leader, first Ayatollah Khomeini and now Ayatollah Khamenei.
The Islamic Republic’s first president, Abolhassan Bani Sadr, was dismissed from office a year after his election.
Ever since, the regime has been intolerant of a strong president, and has repeatedly demonstrated that the office is subservient to the Supreme Leader.
Ahmedinejad’s election two years ago came with great expectations, with the new president pledging to “bring oil prices to the dining table of all households in Iran,” and to crack down on corruption.
Yet many of his first appointments were rewards to his supporters and cronies in the Islamic Revolutionary Guard Corps and the Basij militia, armed groups that mobilized voters on his behalf during the campaign.
For example, an the Oil Ministry gave a $1.3 billion no-bid contract to an oil company associated with the Revolutionary Guard, and Ahmedinejad appointed his brother-in-law as cabinet secretary.
Steps like these may have been overlooked in better economic times. But the Iranian budget is now running a 15%-of-GDP deficit, and foreign reserves are shrinking, despite the oil boom.
Instead of distributing oil revenues through a program of low-cost loans, as promised, the government has been forced to ration gasoline, as economic promise has given way to crisis.
Tensions have also been on the rise since Ahmedinejad fulfilled his campaign promise to enforce Islamic strictures on social life.
For two years, police have waged an intense campaign against women and young people.
Last summer, more than 150,000 women were arrested in Tehran for wearing “bad veils,” and barber shops have been given specific instructions on acceptable hairstyles for young men.
Demonstrations by bus drivers, school teachers, women’s rights activists, and students have been brutally suppressed, with dozens of arrests.
Photos and video clips of police beating civilians in Tehran and other cities have been disseminated on the Internet.
But now Ahmedinejad’s opponents are moving to reassert longstanding constraints on the presidency.
His foremost rival, Akbar Hashemi Rafsanjani, a former president who Ahmedinejad defeated to win the post, has had a remarkable reversal of fortune, reemerging as leader of the Assembly of Experts, the powerful body that elects Iran’s Supreme Leader and that can even remove a Supreme Leader from office.
Moreover, conservatives who had aligned themselves with Ahmedinejad are now criticizing him openly.
Even Ayatollah Khamenei, who as Supreme Leader is also commander-in-chief of the armed forces, has taken steps to demonstrate his authority, recently firing the leaders of the Revolutionary Guard and the Basij militia.
Among Iran analysts, it is thought that these moves were intended to revitalize the military, particularly given the possibility of conflict with the US.
But experts also note that the former commanders were close to Ahmedinejad and had made a great effort over the last two years to help him implement his agenda.
While Ahmedinejad continues his verbal attacks on the US, he does not control the policy-making apparatus that will decide about Iran’s nuclear program and its relations with the international community.
The threat of sanctions remains potent, and the Iranian business community – not to mention the public – has felt the sting of isolation.
Considering the tangled involvement of Iran’s leaders in the economy, the effect of sanctions should not be underestimated.
The economy remains the one area of Iranian life where Ahmedinejad retains considerable power.
But here, his record is weak, and his pronouncements only exacerbate the problem by increasing Iran’s isolation from the global economy.
So, as disputes with the West come to a head, it is important to recognize the power shifts underway inside Iran’s opaque political system.
Ahmedinejad may be making increasingly challenging statements, but he does not have the authority to act on them.
Indeed, only a military confrontation with the US can bring him back to the center of decision-making.
American policymakers should bear that in mind.
The Decline of America
The first anniversary of the war in Iraq has arrived, and America's reputation continues to sink.
One year ago, the US tried to bully the world into supporting an unprovoked war, claiming that anybody who didn't believe in Iraq's weapons of mass destruction was either a fool or an accomplice of terrorists.
Now we know that the US government and its few allies were themselves either fools or liars.
But this has not stopped the Bush administration's thuggish behavior.
The US could be a great force for good.
Studies like one by the World Health Organization's Commission on Macroeconomics and Health show that with an $11 trillion dollar annual national income, America could finance the control of AIDS, malaria, tuberculosis, and many other killer diseases for a small fraction of the money it wastes in Iraq.
Instead, US financial assistance to the world's poor countries as a share of national income is the lowest of any donor country.
The US can also be a force for great ill.
America's military budget is currently about $450 billion, roughly equal to the rest of the world's combined military spending.
The Bush Administration believes that US military power buys security, even though terrorism has increased since the Iraq War.
But despite its wealth and military might, America's ability to project political power - for good or ill - will decline in future years, for at least five reasons: America's budget is in crisis.
Thanks to Bush's tax cuts and military spending, which have contributed to budget deficits of $500 billion per year, the US will have to raise taxes and limit budget spending, whether or not Bush is re-elected.
The annual military budget, which has increased by $150 billion since Bush took office, will need to be cut in coming years to get the budget under control;
The US is borrowing massively from abroad.
Asia's central banks have bought hundreds of billions of dollars of US securities.
Japan alone has foreign exchange reserves of around $750 billion, much of that in US treasury bills.
China, Hong Kong, India, Korea, Singapore, and Taiwan together have another $1.1 trillion or so in reported foreign exchange reserves.
In short, the US is in deep and growing debt to Asia.
Only massive buying of treasury bills by Asian central banks has prevented the dollar from falling even more precipitously than it has;
The rest of the world is catching up.
America's big technological lead will narrow relative to Brazil, China, India, and other major economic regions of the developing world.
China will have an economy larger than the US economy within 25 years - potentially 50% larger by 2050.
India, considerably poorer on average than China, will also close the wealth gap.
By 2050, India will conceivably have an economy the size of America's, with four times the population and roughly one-fourth of the average income level per person;
A narrower economic gap will reduce America's relative geopolitical power.
China and India, which together account for about 40% of the world's population, will begin to play much larger roles on the world scene.
The current xenophobic reactions to "outsourcing" of jobs to India's software engineers ­- a hot political issue in the US - reflects the underlying anxiety of a US population that wants to stay in the economic lead.
With or without American protectionism, Asia's technological capacities and incomes will grow.
This will be good for the world because prosperity will be more widely spread, even if America's ego gets hurt in the process.
Demographics will weaken America's militaristic approach to the world.
Much of Bush's support comes from white fundamentalist Christian men.
This, in my opinion, is a social group that is fighting a rearguard battle against the growing social power of women, immigrants, and other religions.
It is also fighting against secularism, such as the teaching of modern biology and evolutionary theory.
The religious right's backward-looking agenda - and the Manichaean worldview that underlies it - is doomed.
The US Census Bureau recently found that by 2050, the non-Hispanic white population of the US is likely to be only half of the total US population, down from 69% currently.
By 2050, 24% of the population will be Hispanic, 14% will be African-American, and 8% Asian.
The US will look more like the world, especially Latin America.
In the face of these five factors, the dream of global empire held by many US right-wingers will most likely fade.
This may happen sooner rather than later if Bush loses this November in an election that is certain to be very close.
But whatever the outcome, the US cannot postpone forever its inevitable decline relative to the rest of the world.
The Decline of France?
The French are notoriously sensitive--if not defensive--about France's stature in the world.
The French state spends vast amounts of money to propagate the French language and French culture, yet the French are painfully aware that the global position of their country is not what it once was.
No surprise, then, that during the last presidential election, the publication of a European Commission report claiming France's economic rank among European countries had fallen from 3 rd to 10 th place in the span of ten years caused soul searching and controversy.
Soon, President Jacques Chirac was accusing his rival, Lionel Jospin, of causing the "French decline."
The OECD and Eurostat, the European body in charge of such data, thought they put an end to this aspect of the debate by showing that France, Germany, Italy, and Great Britain all enjoy roughly equal per capita living standards.
But the broader controversy wouldn't go away.
Worried talk about "French decline" reappeared with this year's street protests against pension reform, mounting disputes over fiscal policy with the European Commission, and bickering with America over the war in Iraq.
Today's best-selling non-fiction book in France is a polemic by Nicolas Baverez, La France qui tombe (Falling France).
Baverez's book is filled with quotations from de Gaulle and Napoleon.
According to the author, France's last great achievements were in the 1970's, when the fast train, the TGV, and Airbus were launched.
He castigates both Mitterrand and Chirac for their "common talent to win elections and turn France into a loser."
The book's success is itself a sign of a kind of "malaise."
But of which kind?
Baverez's evidence of degeneration is not as convincing as he believes.
For example, he cites the draining away of industrial jobs as the most glaring evidence of France's decline.
But deindustrialization is common to all advanced countries.
Indeed, France does actually better than most of its rich country rivals and, unlike Germany, the UK, or the US, has retained the same global market share in the industrial sector that it had in the early 1970's.
Moreover, according to a better measure of comptetitiveness, foreign investment, France does very well.
According to a recent report by the Economic Analysis Council, direct investment in France grew to 60 billion euros in 2001, almost twice that of Germany.
French cost competitiveness also improved (by 20%) in the last three decades, with higher productivity offsetting rapid wage growth.
But the core of France's long-run economic problems is precisely the fear of losing industrial jobs.
France remains a strong industrial power in traditional areas such as automobile and aerospace industries, but it is falling behind in innovative markets, where smaller companies spread new technologies.
France, for instance, spends only $30 billion annually on high tech R&amp;D, compared with $51 billion in Germany, $98 billion in Japan, and $265 billion in the US.
In short, Baverez's analysis points in the wrong direction.
France has undergone a set of critically important reforms over the past two decades: economic and financial liberalization, elimination of price and foreign exchange controls, the end of credit restrictions, European liberalization, reduced inflation and trade deficits, the advent of the euro and the forced globalization of the country's firms.
The French malaise has nothing to do with any of them.
France's problem is that it fails to recognize the new world of which it already is a part.
French state capitalism is dead, and France is finding it hard to come to terms with its passing.
Indeed, France must be the only country in which a Prime Minister, Lionel Jospin, feels obliged to apologize the day after for saying on TV that "the state is not omnipotent."
There are many reasons for this French schyzophrenia, but a critical one has to do with the political game of the past 20 years.
Until 1981, France had a clear division between right and left.
Since then, both the Mitterand and Chirac administrations blunted their ideological edge in order to carry the difficult process of adjustment towards Europe and globalization.
A round of "shock therapy" à la Mrs. Thatcher two decades ago might have forged a new political consciousness.
But the consensual dribbling out of reforms allowed the French to live in one world and think in another.
This is a key reason for the political cataclysm that exploded during the last presidential campaign, when the far-right leader Jean-Marie Le Pen reached the second round of the presidential election, ahead of the incumbent Prime Minister, Lionel Jospin.
The rise of the extreme left, which gathered 10% of the vote during that presidential campaign, also attests to this political failure.
France needs a political revolution more than an economic one if it is to come to terms with reality, part of which is that "French decline" is a fear of the French people's own making.
The Paranoid Style in Economics
NEW DELHI – Why do high-profile economic tussles turn so quickly to ad hominem attacks?
Perhaps the most well-known recent example has been the Nobel laureate Paul Krugman’s campaign against the economists Carmen Reinhart and Kenneth Rogoff, in which he moved quickly from criticism of an error in one of their papers to charges about their commitment to academic transparency.
For those who know these two superb international macroeconomists, as I do, it is evident that these allegations should promptly be dismissed.
But there is the larger question of why the paranoid style has become so prominent.
Part of the answer is that economics is an inexact science, with exceptions to almost every pattern of behavior that economists take for granted.
For example, economists predict that higher prices for a good will reduce demand for it.
But students of economics will no doubt remember an early encounter with “Giffen goods,” which violate the usual pattern.
When tortillas become more expensive, a poor Mexican worker may eat more of them, because she now has to cut back on more expensive food like meat.
Such “violations” occur elsewhere as well.
Customers often value a good more when its price goes up.
One reason may be its signaling value.
An expensive handcrafted mechanical watch may tell time no more accurately than a cheap quartz model; but, because few people can afford one, buying it signals that the owner is rich.
Similarly, investors flock to stocks that have appreciated, because they have “momentum.”
The point is that economic behavior is complex and can vary among individuals, over time, between goods, and across cultures.
Physicists do not need to know the behavior of every molecule to predict how a gas will behave under pressure.
Economists cannot be so sanguine.
Under some conditions, individual behavioral aberrations cancel one another out, making crowds more predictable than individuals.
But, under other conditions, individuals influence one another in such a way that the crowd becomes a herd, led by a few.
The difficulties for economic policymakers do not stop there.
Economic institutions can have different effects, depending on their quality.
In the run-up to the 2008 financial crisis, macroeconomists tended to assume away the financial sector in their models of advanced economies.
With no significant financial crisis since the Great Depression, it was convenient to take for granted that the financial plumbing worked in the background.
Models, thus simplified, suggested policies that seemed to work –&#160;that is, until the plumbing backed up.
And the plumbing malfunctioned because herd behavior – shaped by policies in ways that we are only now coming to understand – overwhelmed it.
So, why not let evidence, rather than theory, guide policy?
Unfortunately, it is hard to get clear-cut evidence of causality.
If high national debt is associated with slow economic growth, is it because excessive debt impedes growth, or because slow growth causes countries to accumulate more debt?
Many an econometrician’s career has been built on finding a clever way to establish the direction of causality.
Unfortunately, many of these methods cannot be applied to the most important questions facing economic policymakers.
So the evidence does not really tell us whether a heavily indebted country should pay down its debt or borrow and invest more.
Moreover, what seem like obvious, commonsense policy solutions all too often have unintended consequences, because a policy’s targets are not passive objects, as in physics, but active agents who react in unpredictable ways.
For example, price controls, rather than lowering prices, often cause scarcity and the emergence of a black market in which controlled commodities cost significantly more.
All of this implies that economic policymakers require an enormous dose of humility, openness to various alternatives (including the possibility that they might be wrong), and a willingness to experiment.
This does not mean that our economic knowledge cannot guide us, only that what works in theory – or worked in the past or elsewhere – should be prescribed with an appropriate degree of self-doubt.
But, for economists who actively engage the public, it is hard to influence hearts and minds by qualifying one’s analysis and hedging one’s prescriptions.
Better to assert one’s knowledge unequivocally, especially if past academic honors certify one’s claims of expertise.
This is not an entirely bad approach if it results in sharper public debate.
The dark side of such certitude, however, is the way it influences how these economists engage contrary opinions.
How do you convince your passionate followers if other, equally credentialed, economists take the opposite view?
All too often, the path to easy influence is to impugn the other side’s motives and methods, rather than recognizing and challenging an opposing argument’s points.
Instead of fostering public dialogue and educating the public, the public is often left in the dark.
And it discourages younger, less credentialed economists from entering the public discourse.
In their monumental research on centuries of public and sovereign debt, the normally very careful Reinhart and Rogoff made an error in one of their working papers.
The error is in neither their prize-winning 2009 book nor in a subsequent widely read paper responding to the academic debate about their work.
Reinhart and Rogoff’s research broadly shows that GDP growth is slower at high levels of public debt.
While there is a legitimate debate about whether this implies that high debt causes slow growth, Krugman turned to questioning their motives.
He accused Reinhart and Rogoff of deliberately keeping their data out of the public domain.
Reinhart and Rogoff, shocked by this charge – tantamount to an accusation of academic dishonesty – released a careful rebuttal, including online evidence that they had not been reticent about sharing their data.
In fairness, given Krugman’s strong and public positions, he has been subject to immense personal criticism by many on the right.
Perhaps the paranoid style in public debate, focusing on motives rather than substance, is a useful defensive tactic against rabid critics.
Unfortunately, it spills over into countering more reasoned differences of opinion as well.
Perhaps respectful debate in economics is possible only in academia.
The Defeated Remain Defiant
HARARE: Before Zimbabwe's Presidential election earlier this month, I believed that if the election were not handled properly, there would be serious fallout in the country and throughout Southern Africa.
Despite the shadows of war and terrorism, I called for a fair and free election.
Zimbabwe's people did not get one.
Instead, they got terrorism.
In the two years that led up to the Presidential vote, the people of Zimbabwe were subjected to severe intimidation, harassment and fear, all of which was carried out as part of a broader program of state-sponsored terrorism by Robert Mugabe's Zimbabwe African National Union-Patriotic Front (ZANU-PF).
ZANU terrorism was conducted by rogue elements among the veterans of Zimbabwe's war of independence two decades ago, as well as by government militiamen and youths, all of whom were actively aided by the police.
This intimidation and violence meant that my party, the Movement for Democratic Change (MDC) could not reach the electorate in large parts of the countryside.
In addition, the government of President Mugabe, my opponent, effectively disenfranchised hundreds of thousands of urban voters, particularly in the capital city of Harare and in the city of Chitungwiza.
Because of an inadequate number of polling stations, I believe that in Harare and Chitungwiza alone more than 360,000 people stood in a queue to vote but never gained the opportunity to cast their ballot.
My concerns about the legitimacy of the election results are further raised by interference by Mugabe's militia, whose members prevented the MDC from placing polling agents in 52% of rural polling stations.
By the end of the voting, our party had no observers at 6 out of 10 rural stations.
This effectively meant that Mugabe's supporters could have their way at these stations.
We are compiling a comprehensive list of the polling stations where ZANU supporters had solitary control.
In our investigations so far, a pattern has emerged even at this early stage: these polling stations recorded the highest number of voters for Mugabe.
In light of all the evidence, I cannot accept the Presidential election results in which Robert Mugabe, the sitting president, was declared a winner this month with 56% of the 3 million votes tallied.
The official results do not reflect the true will of the people of Zimbabwe and are illegitimate in the eyes of the people.
Zimbabwe's people have been cheated of their right to freely and democratically elect a President of their choice.
The contest over the election results is a political issue that must be resolved politically.
Food and fuel are in short supply, jobs are vanishing, inflation is running at more than 100%.
The people of Zimbabwe deserve a celebration for their courage and determination.
We may yet get one.
As I write, I am saddened because Mugabe's regime remains intent on defying the people's will.
Whatever may happen, I as the people's loyal servant am with them all the way.
The government may want to arrest me.
Indeed, I was arrested for treason even before the election.
At worst, they may even wish to kill me.
But the government will never destroy the spirit of the people to reclaim their rights and power.
The power to achieve democratic change is in our hands.
We may have moments of fear in the days ahead, but we must never let despair overwhelm us.
The tide of political change is irreversible.
But we must be prepared to pay a high price for our freedom.
President Mugabe and his cronies are afraid of the people and we have heard they may do anything to kill the messenger.
If they do, I only ask that the people of Zimbabwe remain strong and carry on the work that we began together.
Among ordinary Zimbabweans walk heroes - heroes who waited hours and hours to vote, heroes who refused to be turned away.
These are the heroes of the new Zimbabwe whose voices must be heard around the world.
Together, we traveled a very harsh road together to achieve democratic change in my country.
Rarely in the history of humankind have a people faced such brutality while retaining such gracious exuberance.
I realize that the people of Zimbabwe are impatient.
I understand why.
But they must wait peacefully for the political process to unfold.
They will not let this election stand but neither will they succumb to Mugabe's provocative traps and resort to violence.
The people of Zimbabwe want constitutional change, legal change, legitimate change, and they are going to obtain it in spite of all the obstacles.
In this, we know we are not alone.
We know that throughout Africa, the will of the electorate has been thwarted.
It appears in the majority of African states, whenever you have elections, you have irregularities, fraud, cheating.
There's always a crisis of elections in Africa.
There is, sad to say, a lack of sincerity on the part of governments across this continent when it comes time to give people the right to choose.
But those who wish otherwise can take hope.
Zimbabwe's struggle is not over.
We have time to tally the lessons for Africa, and the world, of our experience.
My people are in their hour of greatest need.
I pledge not to abandon them.
The Demise of Parliaments
August is the traditional month when parliaments recess for the summer.
It offers a moment to examine why they are so enfeebled.
Across Europe, it is not only British Prime Minister Tony Blair who is accused of "presidentialism" nowadays.
German Chancellor Gerhard Schröder faces the same charge in the current German election campaign.
Prime Minister Silvio Berlusconi of Italy, indeed, does not even like being called Prime Minister.
Because he is technically President of the Council (of ministers), he insists on using the title of President.
France, of course, is a presidential democracy.
To many, "presidentialism" sounds like the American constitution; but those who suspect in today's trend another facet of the Americanization of Europe are wrong.
American presidents have powers which are severely restricted by Congress via the US constitution; they are but one in a triad of separate powers.
Europe's "presidential" prime ministers, on the contrary, are what a British Lord Chancellor once called, "elective dictators."
This means, above all, that they have ceased to take parliaments seriously.
Some Prime Ministers rarely attend their parliaments.
When they graciously consent to appear, they are treated with deference.
Parliaments are in some cases handmaidens of the executive rather than the source of sovereignty.
Prime Minister Berlusconi has persuaded the Italian Parliament to pass legislation which primarily benefits him and his business interests.
The mother of parliaments itself, the British parliament at Westminster, frequently cuts short debates by a procedural device known as the "guillotine," so that important legislation, like the current Asylum Bill, remains largely undebated in the House of Commons.
(The absurd consequence is that the unelected House of Lords becomes the real legislature of the country.)
All governments have acquired the habit of using secondary legislation by orders and regulations without parliamentary control.
The European Union sets a particularly bad example in all this.
Its legislature is the Council of Ministers which sometimes allows the elected Parliament to engage in a little "co-decision-making."
The Council of course meets in camera , that is without public scrutiny.
How could this happen?
What is the reason for the apparent demise of the central institution of democracy, parliament?
Why is it no longer the place in which the representatives of the people debate great issues and hold the executive to account?
Is democracy itself at risk?
One can think of a number of reasons for the evisceration of parliaments.
One is globalization.
Decisions have emigrated from the spaces for which parliaments are elected.
They take place in remote and often unknown places.
These can be the boardrooms of companies, or private international meetings of leaders, or just a course of events which escapes all controls.
The collapse of the "new economy" is an example, but in a curious way also the probable attack on Iraq will also be arrived at in such a way.
Even if national parliaments tried to come to grips with such developments, they would fail.
Another reason is the separation of the political game from the lives and concerns of most people.
Parties have become machines for allocating power rather than for gathering and representing the interests of citizens.
The party game has lost its representative quality.
As a result, leaders have developed a tendency to turn directly to the people without allowing much debate.
This can be done by opinion polls and the use of focus groups; it can also be achieved by referenda and plebiscites.
In both cases, parliaments become dispensable.
The danger of such developments is that they strengthen an already strong trend towards a new authoritarianism.
The political class becomes a kind of nomenklatura of leaders who prefer popularity to debate.
They find it awkward to give reasons for their policies and regard parliaments as no more than a reservoir for those with whom they are prepared to share power.
As reasoned debate falls by the wayside, citizens lose interest in politics.
They pursue their affairs and let those in power govern.
Along with parties and parliaments, elections have lost their charm.
Declining voter turnout tells the story.
The demise of parliaments is above all a decline in democratic debate and scrutiny.
It is not a development which defenders of the constitution of liberty can accept.
The time has come for a revolt of parliaments against both the arrogance of those in power and voter apathy.
In a sense, we need more rather than less presidentialism in Europe, at least if this is understood in the proper American way, in which legislative and executive powers are separately legitimated and equally strong.
The Demise of the Development Round
Hopes for a development round in world trade – opening up opportunities for developing countries to grow and reduce poverty – now seem dashed.
Though crocodile tears may be shed all around, the extent of disappointment needs to be calibrated: Pascal Lamy, the head of the World Trade Organization, had long worked to diminish expectations, so much so that it was clear that whatever emerged would bring, at most, limited benefits to poor countries.
The failure hardly comes as a surprise: The United States and the European Union had long ago reneged on the promises they made in 2001 at Doha to rectify the imbalances of the last round of trade negotiations – a round so unfair that the world’s poorest countries were actually made worse off.
Once again, America’s lack of commitment to multilateralism, its obstinacy, and its willingness to put political expediency above principles – and even its own national interests – has triumphed.
With elections looming in November, President George W. Bush could not “sacrifice” the 25,000 wealthy cotton farmers or the 10,000 prosperous rice farmers and their campaign contributions.
Seldom have so many had to give up so much to protect the interests of so few.
The talks bogged down over agriculture, where subsidies and trade restrictions remain so much higher than in manufacturing.
With 70% or so of people in developing countries depending directly or indirectly on agriculture, they are the losers under the current regime.
But the focus on agriculture diverted attention from a far broader agenda that could have been pursued in ways that would have benefited both North and the South.
For example, so-called “escalating tariffs,” which tax processed goods at a far higher rate than unprocessed products mean that manufacturing tariffs discourage developing countries from undertaking the higher value-added activities that create jobs and boost incomes.
Perhaps the most outrageous example is America’s $0.54 per gallon import tariff on ethanol, whereas there is no tariff on oil, and only a $0.5 per gallon tax on gasoline.
This contrasts with the $0.51 per gallon subsidy that US companies (a huge portion of which goes to a single firm) receive on ethanol.
Thus, foreign producers can’t compete unless their costs are $1.05 per gallon lower than those of American producers.
The huge subsidies have meant that the US has become the largest producer of ethanol in the world.
Yet, despite this huge advantage, some foreign firms can still make it in the American market.
Brazilian sugar-based ethanol costs far less to produce than American corn-based ethanol.
Brazil’s firms are far more efficient than America’s subsidized industry, which puts more energy into getting subsidies out of Congress than in improving efficiency.
Some studies suggest that it requires more energy to produce America’s ethanol than is contained in it.
If America eliminated these unfair trade barriers, it would buy more energy from Brazil and less from the Middle East.
Evidently, the Bush administration would rather help Middle East oil producers, whose interests so often seem at variance with those of the US, than Brazil.
Of course, the Administration never puts it that way; with an energy policy forged by the oil companies, Archer Daniels Midland and other ethanol producers are just playing along in a corrupt system of campaign-contributions-for-subsidies.
In the trade talks, America said that it would cut subsidies only if others reciprocated by opening their markets.
But, as one developing country minister put it, “Our farmers can compete with America’s farmers; we just can’t compete with America’s Treasury.” Developing countries cannot, and should not, open up their markets fully to America’s agricultural goods unless US subsidies are fully eliminated.
To compete on a level playing field would force these countries to subsidize their farmers, diverting scarce funds that are needed for education, health, and infrastructure.
In other areas of trade, the principle of countervailing duties has been recognized: when a country imposes a subsidy, others can impose a tax to offset the unfair advantage given to that country’s producers.
If markets are opened up, countries should be given the right to countervail American and European subsidies.
This would be a major step forward in trying to create a fair trade regime that promotes development.
At the onset of the development round, most developing countries worried not only that the EU and the US would renege on their promises (which they have in large part), but also that the resulting agreement would once again make them worse off.
As a result, much of the developing world is relieved that at least this risk has been avoided.
Still, there was a second risk: that the world would think that the agreement itself had accomplished the objectives of a development round set forth at Doha, with trade negotiators then turning once again to making the next round as unfair as previous rounds.
This concern, too, now seems to have been allayed.
There remains one further concern: America has rushed to sign a series of bilateral trade agreements that are even more one-sided and unfair to developing countries, which may prompt Europe and others to do likewise.
This divide-and-conquer strategy undermines the multilateral trade system, which is based on the principle of non-discrimination.
Countries that sign these agreements get preferential treatment over all others.
But developing countries have little to gain and much to lose by signing these agreements, which almost never deliver the promised benefits.
Indeed, the entire world is the loser if the multilateral trade system is weakened.
The rest of the world must not embrace America’s unilateral approach: the multilateral trade system is too precious to allow it to be destroyed by a US President who has repeatedly shown his contempt for global democracy and multilateralism.
The Democracy Paradox
PARIS – Elections stolen in Iran, disputed in Afghanistan, and caricatured in Gabon: recent ballots in these and many other countries do not so much mark the global advance of democracy as demonstrate the absence of the rule of law.
Of course, elections that lead to illiberal outcomes, and even to despotism, are not a new phenomenon.
Hitler, after all, came to power in Germany in 1933 through a free, fair, and competitive election.
Moreover, problematic elections constitute a specific challenge for the West, which is simultaneously the bearer of a universal democratic message and the culprit of an imperialist past that undermines that message’s persuasiveness and utility.
In a noted essay in 2004, for example, the Indian-born author Fareed Zakaria described the danger of what he called “illiberal democracy.”
For Zakaria, America had to support a moderate leader like General Pervez Musharraf in Pakistan, despite the fact that he had not come to power through an election.
By contrast, Zakaria argued, Venezuela’s populist president, Hugo Chávez, who was legitimately elected, should be opposed.
In our globalized world, the potential divorce between elections and democracy has assumed a new dimension.
With instantaneous communication and access to information, the less legitimate a regime, the greater will be the temptation for it to manipulate, if not fabricate, the results of elections.
The “trendy” way is to manufacture a significant but not too massive victory. Today’s despots view near-unanimous Soviet-style electoral “victories” as vulgar and old fashioned.
But another new aspect of this phenomenon are opposition forces that are willing to attempt to negate such machinations by the party in power.
Confronted with this dual process of illegitimacy, the West often finds itself condemned to sit between two chairs, and to face criticism whatever the outcome.
Those in power, as in Iran, accuse Western governments of supporting the opposition, and those in opposition accuse the West of supporting the government, as has happened to France in the case of Gabon.
So what lessons should we draw from the inevitably messy nature of electoral processes in countries where there is either no middle class or only a rudimentary one, and where a democratic culture is at best in its infancy?
The time has come for the West to reassess its policies in a fundamental way.
It cannot switch from “activism” at one moment to abstention the next.
A refusal to act, after all, is also a political choice.
Of course, the temptations of isolationism are great, and will increase in the months and years ahead.
But the West has neither the moral right nor a strategic possibility of withdrawing into an “ivory tower,” something which in most cases does not exist.
It is impossible to say to Afghanistan, for example, “You have deeply disappointed us, so, from now on, you must clean up your own mess.” In Afghanistan, Gabon, Iran, Pakistan, and elsewhere, fundamental Western interests – though very different depending on the case – are at stake.
In Afghanistan, the danger is that a terrorist haven could be reconstituted.
The risk in Iran is an ever more hostile regime armed with nuclear weapons.
In Gabon, the priority for France is to transcend neo-colonialism without losing its important links to the oil-rich African nation.
But, in pursuit of these difficult objectives, the West must get both its ambitions and its methods right.
Democracy is a legitimate objective, but it is a long-term one.
In the medium term, the absence of the rule of law constitutes the most serious problem for the countries in question.
French television, for example, recently aired a terrifying report on Haiti, where a local judge, without bothering to hide his actions, was protecting a narcotics dealer from the country’s own French-trained anti-drug force.
Corruption eats away at a society from within, destroying citizens’ trust in a future based on a shared sense of common good.
It is the West’s acceptance of corruption – either open or tacit – that makes it an accomplice to too many nefarious regimes, and makes its espousal of democratic principles appear either hypocritical or contradictory.
On the other hand, setting the rule-of-law standard too high will also misfire.
Singapore-style incorruptible one-party state bent on modernizing society is probably a far too ambitious goal for most non-democratic regimes.
The distance that separates the West from countries that rely on sham elections is not only geographic, religious, or cultural; it is chronological. Their “time” is not, has never been, or is no longer the same as that of the West.
How can they be understood without being judged, or helped without humiliating paternalism or, still worse, without an unacceptable “collateral damage,” as in Afghanistan?
The West’s status in tomorrow’s world will largely depend upon how it answers this question.
It cannot afford to ignore the issue any longer.
The Democratic Hopes of Iraqis
The escalating violence in Iraq gives a bleak impression of that country’s prospects.
Sectarian conflict seems to be increasing on a daily basis, with militias massacring hundreds of Sunnis and Shiites solely on the basis of their religious identities.
Yet it would be a mistake to think that this bloodlust represents widespread sentiment among Iraqis.
While neither American nor Iraqi security officials have yet found a way to tame the militias, the Iraqi public is increasingly drawn toward a vision of a democratic, non-sectarian government for the country.
In 2004 and 2006, I was involved in conducting two nationwide public opinion surveys in Iraq.
Contrasting the findings of these surveys demonstrates that over the two years when sectarian violence has increased, Iraqis increasingly view their fate in a national, rather than communal, context.
Over this period, the number of Iraqis who said that it was “very important” for Iraq to have a democracy increased from 59% to 65%.
These same Iraqis saw a link between an effective democracy and the separation of religion and politics, as under a western system.
Overall, those who responded that they “strongly agree” that “Iraq would be a better place if religion and politics were separated” increased from 27% in 2004 to 41% in 2006.
Particularly significant were increases from 24% to 63% during this period among Sunnis and from 41% to 65% among Kurds.
Opinion on this question within the majority Shiite community remained stable, with 23% strongly agreeing in both 2004 and 2006.
Similarly, the survey found declining support for an Islamic state.
Between 2004 and 2006, the number of Iraqis who said it was “very good to have an Islamic government where religious leaders have absolute power” fell from 30% to 22%.
Declines occurred in all three leading ethnic communities: from 39% to 35% among Shiites, from 20% to 6% among Sunnis, and from 11% to 5% among Kurds.
There was some increase in the number of Shiites who thought that there should be a strong religious element in national laws, the majority still opposed this.
Nationalist sentiment is also increasing.
Asked whether they considered themselves “Iraqis, above all” or “Muslims, above all,” the 2006 survey found that 28% of Iraqis identified themselves as “Iraqis, above all,” up from 23% in 2004.
In the capital, Baghdad, the center of so much sectarian violence, the numbers were even more impressive, with the share of the population who saw themselves as “Iraqis, above all” doubling, from 30% to 60%.
By contrast, similar surveys in other Arab capitals find a decided tilt toward a Muslim identity. In Amman, Jordan, the most recent figure is 12% who put their national identity ahead of their Muslim identity.
The figure is 11% in Cairo, Egypt, and 17% in Riyadh, Saudi Arabia.
Curiously, in Tehran, Iran, the choice is markedly in favor of Iranian, rather than Muslim, identity.
Among residents of the Iranian capital, the share of “nationalists” soared from 38% in 2000 to 59% in 2005.
At the same time, Iraqi attitudes show a strong reaction to daily violence.
Between 2004 and 2006, the proportion who strongly agreed that life in Iraq is “unpredictable and dangerous” increased from 46% to 59%.
The change was felt in all communities, rising from 41% to 48% among Shiites, from 77% to 84% among Sunnis, and from 16% to 50% among Kurds.
At the same time, the surveys found little support among any of these three major groups for sectarian conflict.
The violence has had a major effect on Iraqi attitudes toward foreigners.
By 2006, distrust of Americans, British, and French had reached 90%, and attitudes toward Iraq’s neighbors were also tense.
More than half of Iraqis surveyed said that they would not welcome Turks, Jordanians, Iranians, or Kuwaitis as neighbors.
These feelings, it appears, are directly related to the violence gripping Iraq, and the role of foreigners in the country’s perilous security situation.
So it appears that Iraqis are showing greater attachment to their national identity and are supportive of a non-sectarian approach to government.
These are the basic traits of a modern political order.
Among Sunnis, the decline in support for an Islamic state is most dramatic, and may have significant ramifications for the ability of religious extremists to recruit among them.
Although Iraqis remain angry about the violence in their country, this anger has not undermined their sense of national identity.
At the same time, they appear to be holding onto important democratic values.
The key question, of course, remains whether these values can be translated into a peaceful reality.
Why India Slowed
NEW DELHI – For a country as poor as India, growth should be what Americans call a “no-brainer.”
It is largely a matter of providing public goods: decent governance, security of life and property, and basic infrastructure like roads, bridges, ports, and power plants, as well as access to education and basic health care.
Unlike many equally poor countries, India already has a strong entrepreneurial class, a reasonably large and well-educated middle class, and a number of world-class corporations that can be enlisted in the effort to provide these public goods.
Why, then, has India’s GDP growth slowed so much, from nearly 10% year on year in 2010-11 to 5% today?
Was annual growth of almost 8% in the decade from 2002 to 2012 an aberration?
I believe that it was not, and that two important factors have come into play in the last two years.
First, India probably was not fully prepared for its rapid growth in the years before the global financial crisis.
For example, new factories and mines require land.
But land is often held by small farmers or inhabited by tribal groups, who have neither clear and clean title nor the information and capability to deal on equal terms with a developer or corporate acquirer.
Not surprisingly, farmers and tribal groups often felt exploited as savvy buyers purchased their land for a pittance and resold it for a fortune.
And the compensation that poor farmers did receive did not go very far; having sold their primary means of earning income, they then faced a steep rise in the local cost of living, owing to development.
In short, strong growth tests economic institutions’ capacity to cope, and India’s were found lacking.
Its land titling was fragmented, the laws governing land acquisition were archaic, and the process of rezoning land for industrial use was non-transparent.
India is a vibrant democracy, and, as the economic system failed the poor and the weak, the political system tried to compensate.
Unlike in some other developing economies, where the rights of farmers or tribals have never stood in the way of development, in India politicians and NGOs took up their cause.
Land acquisition became progressively more difficult.
A similar story played out elsewhere.
For example, the government’s inability to allocate resources such as mining rights or wireless spectrum in a transparent way led the courts to intervene and demand change.
And, as the bureaucracy got hauled before the courts, it saw limited upside from taking decisions, despite the significant downside from not acting.
As the bureaucracy retreated from helping businesses navigate India’s plethora of rules, the required permissions and clearances were no longer granted.
In sum, because India’s existing economic institutions could not cope with strong growth, its political checks and balances started kicking in to prevent further damage, and growth slowed.
The second reason for India’s slowdown stems from the global financial crisis.
Many emerging markets that were growing strongly before the crisis responded by injecting substantial amounts of monetary and fiscal stimulus.
For a while, as industrial countries recovered in 2010, this seemed like the right medicine.
Emerging markets around the world enjoyed a spectacular recovery.
But, as industrial countries, beset by fiscal, sovereign-debt, and banking problems, slowed once again, the fix for emerging markets turned out to be only temporary.
To offset the collapse in demand from industrial countries, they had stimulated domestic demand.
But domestic demand did not call for the same goods, and the goods that were locally demanded were already in short supply before the crisis.
The net result was overheating – asset-price booms and inflation across the emerging world.
In India, matters were aggravated by the investment slowdown that began as political opposition to unbridled development emerged.
The resulting supply constraints exacerbated inflation.
So, even as growth slowed, the central bank raised interest rates in order to rebalance demand and the available supply, causing the economy to slow further.
To revive growth in the short run, India must improve supply, which means shifting from consumption to investment.
And it must do so by creating new, transparent institutions and processes, which would limit adverse political reaction.
Over the medium term, it must take an axe to the thicket of unwieldy regulations that make businesses so dependent on an agile and cooperative bureaucracy.
One example of a new institution is the Cabinet Committee on Investment, which has been created to facilitate the completion of large projects.
By bringing together the key ministers, the committee has coordinated and accelerated decision-making, and has already approved tens of billions of dollars in spending in its first few meetings.
In addition to more investment, India needs less consumption and higher savings.
The government has taken a first step by tightening its own budget and spending less, especially on distortionary subsidies.
Households also need stronger incentives to increase financial savings.
New fixed-income instruments, such as inflation-indexed bonds, will help.
So will lower inflation, which raises real returns on bank deposits.
Lower government spending, together with tight monetary policy, are contributing to greater price stability.
If all goes well, India’s economy should recover and return to its recent 8% average in the next couple of years.
Enormous new projects are in the works to sustain this growth.
For example, the planned Delhi-Mumbai Industrial Corridor, a project with Japanese collaboration entailing more than $90 billion in investment, will link Delhi to Mumbai’s ports, covering an overall length of 1,483 kilometers (921 miles) and passing through six states.
The project includes nine large industrial zones, high-speed freight lines, three ports, six airports, a six-lane expressway, and a 4,000-megawatt power plant.
We have already seen a significant boost to economic activity from India’s construction of its highway system.
The boost to jobs and growth from the Delhi-Mumbai Industrial Corridor, linking the country’s political and financial capitals, could be significantly greater.
To the extent that democratic responses to institutional incapacity will contribute to stronger and more sustainable growth, India’s economic clouds have a silver lining.
But if India’s politicians engage in point-scoring rather than institution-building, the current slowdown may portend stormy weather ahead.
The Democratization of Aid
The outpouring of aid in response to the Indian Ocean tsunami brought hope to a troubled world.
In the face of an immense tragedy, working class families around the world opened their wallets to the disaster’s victims.
Former US President Bill Clinton called this response a “democratization of development assistance,” in which individuals lend their help not only through their governments but also through their own efforts.
But, while more than 200,000 people perished in the tsunami disaster, an equivalent number of children die each month of malaria in Africa, a disaster I call a “silent tsunami.”
Africa’s silent tsunami of malaria, however, is actually largely avoidable and controllable.
Malaria can be prevented to a significant extent, and can be treated with nearly 100% success, through available low-cost technologies.
Yet malaria’s African victims, as well as those in other parts of the world, are typically too poor to have access to these life-saving technologies.
A global effort, similar to the response to the Asian tsunami, could change this disastrous situation, saving more than one million lives per year.
Herein lies the main message of the new report of the UN Millennium Project, which was delivered in mid-January to UN Secretary General Kofi Annan.
The Project, which I direct on behalf of the Secretary General, represents an effort by more than 250 scientists and development experts to identify practical means to achieve the Millennium Development Goals to cut extreme poverty, disease, and hunger by the year 2015.
Our new report, entitled Investing in Development: A Practical Plan to Achieve the Millennium Development Goals (available for download at www.unmillenniumproject.org ), shows that these goals can be achieved.
The key to meeting the Millennium Development Goals in poor countries is an increase in investment in people (health, education, nutrition, and family planning), the environment (water and sanitation, soils, forests, and biodiversity), and infrastructure (roads, power, and ports).
Poor countries cannot afford these investments on their own, so rich countries must help.
If more financial aid is combined with good governance in poor countries, then the Millennium Development Goals can be achieved on time.
In short, our new Report is a call to action.
Rich countries and poor countries need to join forces to cut poverty, disease, and hunger.
The reason that the Millennium Development Goals are feasible is that powerful existing technologies give us the tools to make rapid advances in the quality of life and economic productivity of the world’s poor.
Illness and deaths from malaria can be reduced sharply by using insecticide-treated bed nets to stop the mosquitoes that transmit malaria, and by effective medicines when the illness strikes.
The total cost of battling malaria in Africa would be around $2 to $3 billion per year.
With around one billion people living in high-income countries, it would thus cost just $2 to $3 per person per year in the developed world to fund an effort that could save more than one million children annually.
When child mortality is reduced, poor families choose to have fewer children, because they are more confident that their children will survive to adulthood.
Thus, paradoxically, saving children’s lives is part of the solution to rapid population growth in poor countries.
Malaria is an important example where specific investments can solve the problems of disease, hunger, and extreme poverty.
Our report makes dozens of such practical recommendations.
Investments in soil nutrients and water harvesting could help African farmers double or triple their food yields.
Anti-retroviral medicines can help save millions from death due to AIDS.
Rural roads, truck transport, and electricity could bring new economic opportunities to remote villages in Latin America, Africa, and Asia.
School meal programs using locally produced food could boost attendance by poor children, especially girls, and improve their ability to learn, while also providing an expanded market for local farmers.
These investments are an incredible bargain.
Rich countries have long promised to increase their aid levels to 0.7% of national income (from around only 0.25% today).
The promise of 0.7% means that the rich world would give developing countries a mere 70 cents out of each $100 of national income.
In recent weeks, many European countries have pledged to honor the 0.7% commitment, and five European countries (Denmark, Luxembourg, the Netherlands, Norway, and Sweden) already do so.
It’s up to the US and Japan to follow through on their promises as well.
Moreover, with the “democratization” of aid now underway, we can look forward to increased private efforts alongside official development assistance.
Of course, not all developing countries are sufficiently well governed to use an increase in aid in an honest, effective way.
The world should therefore start this bold effort by focusing on the poor countries that are relatively well governed and that are prepared to carry out needed investments in an efficient and fair manner.
Ghana, Senegal, Tanzania, Kenya, and Ethiopia are on that list.
It is urgent that we get started in these and similarly well governed poor countries this year.
The Democrat’s Disease
BUCHAREST: “Paris,” Protestant King Henri of Navarre quipped before ascending the throne of Catholic France, “is worth a mass.”
Is EU membership worth the life of Romania’s democratic parties, perhaps its infant democracy?
That question will be on the lips of many of Romania’s reformers and democrats when going to the polls next week for general and presidential elections.
Baroness Emma Nicholson, the European Parliament’s special envoy to Romania, has warned that unless Romania’s next government speeds the pace of reform - particularly privatization of big state companies - hopes of joining the EU will collapse.
But our ruling center/right government is massively unpopular precisely because it tried to meet EU demands.
This unpopularity opened the way for a return to the presidency of Ion Iliescu, the Ceausescu-era apparatchik who ruled Romania during the first, wasted years of our postcommunist transition.
Iliescu’s first term were years that the locusts ate: reform lagged behind most Central European countries, corruption flourished, rabid nationalists barked, the government called in loyalist thugs from the mines to beat up people who protested.
Four years ago, on a high tide of hope, a center/right coalition and a new “democratic” president - Emil Constantinescu - took power, surprisingly defeating Iliescu and his party.
Constantinescu’s government promised to close the gap between Romania and other postcommunist countries bidding to join the EU.
It promised to clean up corruption and our banks.
Believing Jacques Chirac would deliver on his pledges of support, it promised NATO membership.
It promised that, by 2000, people would be better off.
None of this happened and Romanians feel betrayed.
They are now prepared to heed Iliescu’s siren song that the future can be found only by going back to the past.
Are they right?
Was Constantinescu’s presidency a total failure?
No.
After years of decline, the economy is growing; after numerous financial scandals, the banking system is safer.
Privatization advanced, nationalists were constrained, relations with our big Hungarian minority improved, the country stood with the West during the Kosovo war.
None of this, however, made any difference in people’s daily lives - indeed, the Kosovo war and sanctions on Serbia knocked 1-2% off Romania’s GDP last year.
Economic dissatisfaction, however, does not account for all Romania’s frustrations.
We also resent the Constantinescu coalition’s internal feuding and incompetence, what the Italians call “malgoverno.”
From day one, the coalition was riven by feuds.
Ministers acted like adversaries rather than partners.
Instead of blaming Iliescu for the shambles in which he left the country, coalition members blamed each other.
Such squabbling, it seems, is a postcommunist malady.
Poland, Hungary, even Russia: in all three, infighting among reformers allowed the political heirs to the communists to reclaim power.
Poland and Hungary’s postcommunists regained power after reform-minded governments freed prices, began privatization, and encouraged business.
Russia’s not-so-ex-communists never assumed power again, because reformers were succeeded by Viktor Chernomyrdin’s inert government.
This sequence is important because the postcommunist revival - in Poland and Hungary at least - came as growth reappeared.
Poland’s and Hungary’s postcommunists could see that reform worked and so, back in power, continued on the free-ish market road, taking credit for the economic growth nurtured by their rivals.
Even Chernomyrdin’s government did not nullify Russia’s early reforms.
But Iliescu’s first government dithered on reform; growth was a dream when Constantinescu became president.
Indeed, Romania’s reformers confronted conditions that the Polish, Hungarian, and Russian reform governments had faced when communism first collapsed.
Although much more could have been accomplished during Contstantinescu’s presidency, hard reforms were enacted but, as in Poland and Hungary half-a-decade ago, growth arrived too late to save its architects from electoral defeat.
So Iliescu and his PDSR party are cruising toward a crushing victory.
What remains unknown is whether they have learned the lesson other postcommunist parties learned - ie, to keep reform going once growth appears.
Or will they turn back the clock?
Adrian Nastase, the PDSR’s executive president and its candidate for prime minister, seems to lean toward reform.
One sign that he actually will institute reform will be demonstrated by whether or not the PDSR governs alone or in coalition with a centrist/liberal party or with the Hungarian minority party.
For to convince the world that they would continue reforming, Poland and Hungary’s postcommunists formed coalition governments despite winning overwhelming parliamentary majorities.
Nastase knows that if he surrenders to the popular mood, raising salaries dramatically and stalling privatization, the economy will be crippled and Romania’s chances of joining the EU disappear.
Whether Nastase can pursue a sensible program depends mightily on party unity, and here the PDSR is as divided as Constantinescu’s coalition.
Unreformed apparatchiks surround Iliescu; they will enjoy the prestige of the presidency in any power struggle over policy.
The current campaign shows that xenophobia and nostalgia for communism retain an alarmingly potent appeal.
The only hopeful aspect in Iliescu’s looming victory is that his opponents succeeded - just in time - in promoting growth and this may encourage the postcommunist to keep looking ahead.
If the PDSR turns backward, the malady of our democratic reformers may prove to be fatal, both for Romania’s economy and for our hopes of ever joining Europe.
The Democrats’ Line in the Sand
BERKELEY – Ever since the 1928 work of Frank Ramsey, economists have accepted the utilitarian argument that a good economy is one in which returns on investment are not too great a multiple – less than three – of the rate of per capita economic growth.
An economy in which profits from investment are high relative to the growth rate is an economy that is under-saving and under-investing.
This idea has also given rise to a very strong presumption that if an economy as a whole is under-saving and under-investing, the government ought to help to correct this problem by running surpluses, not make it worse by running deficits that drain the pool of private savings available to fund investment.
This is why most economists are deficit hawks.
Of course, governments need to run deficits in depressions in order to stimulate demand and stem rising unemployment.
Moreover, a lot of emergency government spending on current items is really best seen as national savings and investment.
Franklin Delano Roosevelt could have made no better investment for the future of America and the world than to wage total war against Adolf Hitler.
Likewise, Presidents George H.W. Bush and Bill Clinton ought to have recognized in the 1990’s that something like a Marshall Plan for Eastern Europe to help with the transition from communism would have been an excellent investment for the world’s future.
But the rule is that governments should run surpluses and not deficits, so various American presidents’ economic advisers have been advocates of aiming for budget surpluses except in times of slack demand and threatening depression.
This was certainly true of Eisenhower’s, Nixon’s, and Ford’s economic advisors, and of George H.W. Bush’s and Bill Clinton’s economic advisers.
It was true of Reagan’s economic advisers as well.
Some of Reagan’s advisers sincerely did not believe that the tax cuts of the early 1980’s would generate the large deficits that they did (Beryl Sprinkel and Lawrence Kudlow come to mind).
Others, like Martin Feldstein and Murray Weidenbaum, understood the consequences of the Reagan tax cuts and were bitter bureaucratic opponents, even if they did not speak out publicly.
In fact, since WWII, only George W. Bush’s economic advisers have broken with this consensus.
A few have done so because they are making careers as party-line Republicans, so their priority is to tell Republican politicians what they want to hear (Josh Bolton and Mitch Daniels come to mind here).
As for the rest, their reasons for supporting the Bush administration’s savings-draining policies remain mysterious.
It is not as though they were angling for lifetime White House cafeteria privileges, or that having said “yes” to George W. Bush will open any doors for them in the future.
But their failings do pose a dilemma for Democratic deficit-hawk economists trying to determine what good economic policies would be should Barack Obama become president.
Those of us who served in the Clinton administration and worked hard to put America’s finances in order and turn deficits into surpluses are keenly aware that, after eight years of the George W. Bush administration, things look worse than when we started back in 1993.
All of our work was undone by our successors in their quest to win the class war by making America’s income distribution more unequal.
A chain is only as strong as its weakest link, and it seems pointless to work to strengthen the Democratic links of the chain of fiscal advice when the Republican links are not just weak but absent.
Political advisers to future Democratic administrations may argue that the only way to tie the Republicans’ hands and keep them from launching another wealth-polarizing offensive is to widen the deficit enough that even they are scared of it.
They might be right.
The surplus-creating fiscal policies established by Robert Rubin and company in the Clinton administration would have been very good for America had the Clinton administration been followed by a normal successor.
But what is the right fiscal policy for a future Democratic administration to follow when there is no guarantee that any Republican successors will ever be “normal” again?
That’s a hard question, and I don’t know the answer.
There is, however, one fiscal principle that must be respected.
Fiscal deficits so large that they put the debt-to-GDP ratio on an explosive upward trend do not merely act as a drag on long-term economic growth; they also create the possibility that at any moment the economy might face an immediate macroeconomic and financial disaster.
A more hawkish fiscal stance may no longer be possible in future Democratic administrations, and might not be good policy if it were, given the likely complexion of successor administrations.
Stabilizing the debt-to-GDP ratio is thus the line in the sand that must not be crossed.
America’s Blinders
SINGAPORE – The time has come to think the unthinkable: the era of American dominance in international affairs may well be coming to an end.
As that moment approaches, the main question will be how well the United States is prepared for it.
Asia’s rise over the last few decades is more than a story of rapid economic growth.
It is the story of a region undergoing a renaissance in which people’s minds are re-opened and their outlook refreshed.
Asia’s movement toward resuming its former central role in the global economy has so much momentum that it is virtually unstoppable.
While the transformation may not always be seamless, there is no longer room to doubt that an Asian century is on the horizon, and that the world’s chemistry will change fundamentally.
Global leaders – whether policymakers or intellectuals – bear a responsibility to prepare their societies for impending global shifts.
But too many American leaders are shirking this responsibility.
Last year, at the World Economic Forum in Davos, two US senators, one member of the US House of Representatives, and a deputy national security adviser participated in a forum on the future of American power (I was the chair).
When asked what future they anticipated for American power, they predictably declared that the US would remain the world’s most powerful country.
When asked whether America was prepared to become the world’s second-largest economy, they were reticent.
Their reaction was understandable: even entertaining the possibility of the US becoming “number two” amounts to career suicide for an American politician.
Elected officials everywhere must adjust, to varying degrees, to fulfill the expectations of those who put them in office.
Intellectuals, on the other hand, have a special obligation to think the unthinkable and speak the unspeakable.
They are supposed to consider all possibilities, even disagreeable ones, and prepare the population for prospective developments.
Honest discussion of unpopular ideas is a key feature of an open society.
But, in the US, many intellectuals are not fulfilling this obligation.
Richard Haass, the president of the Council on Foreign Relations, suggested recently that the US “could already be in the second decade of another American century.”
Likewise, Clyde Prestowitz, the president of the Economic Strategy Institute, has said that “this century may well wind up being another American century.”
To be sure, such predictions may well prove accurate; if they do, the rest of the world will benefit.
A strong and dynamic US economy, reinvigorated by cheap shale gas and accelerating innovation, would rejuvenate the global economy as a whole.
But Americans are more than ready for this outcome; no preparation is needed.
If the world’s center of gravity shifts to Asia, however, Americans will be woefully unprepared.
Many Americans remain shockingly unaware of how much the rest of the world, especially Asia, has progressed.
Americans need to be told a simple, mathematical truth.
With 3% of the world’s population, the US can no longer dominate the rest of the world, because Asians, with 60% of the world’s population, are no longer underperforming.
But the belief that America is the only virtuous country, the sole beacon of light in a dark and unstable world, continues to shape many Americans’ worldview.
American intellectuals’ failure to challenge these ideas – and to help the US population shed complacent attitudes based on ignorance – perpetuates a culture of coddling the public.
But, while Americans tend to receive only good news, Asia’s rise is not really bad news.
The US should recognize that Asian countries are seeking not to dominate the West, but to emulate it.
They seek to build strong and dynamic middle classes and to achieve the kind of peace, stability, and prosperity that the West has long enjoyed.
This deep social and intellectual transformation underway in Asia promises to catapult it from economic power to global leadership.
China, which remains a closed society in many ways, has an open mind, whereas the US is an open society with a closed mind.
With Asia’s middle class set to skyrocket from roughly 500 million people today to 1.75 billion by 2020, the US will not be able to avoid the global economy’s new realities for much longer.
The world is poised to undergo one of the most dramatic power shifts in human history.
In order to be prepared for the transformation, Americans must abandon ingrained ideas and old assumptions, and liberate unthinkable thoughts.
That is the challenge facing American public intellectuals today.
The Denial of Caste
Deconstruction as an intellectual device has played havoc in universities across the West.
Now it is casting its spell over developing countries, making a powerful play to rewrite India's past, as Deepak Lal suggests.
India's ancient and medieval history is notoriously malleable.
The country's Hindu nationalists unleashed the latest furor over the nature of India's past.
They reject the widely accepted view, based on early sacred texts, that ancient believers did not ban the slaughter of cattle, and that such a ban probably became part of the Hindu moral code only around the fifth and sixth centuries AD, when the later Puranas were written.
The trouble with reaching definitive conclusions about this or any other contested aspect of India's distant past is that, unlike in neighboring China, there is little in the way of an objective historical record to rely upon.
Some archaeological evidence exists.
But the main sources for ancient India are orally transmitted literary accounts dating to the Rigveda (around 1500-1300 BC) and the subjective records of foreign travelers.
The social history of ancient India, as one scholar admits, "appears to be a string of conjectures and speculations."
So it is hardly surprising that India's ancient past can be manipulated to fit alternative ideological preconceptions.
Nowhere is this more evident than in discussions about the origins and nature of India's caste system.
In the early 1980's, the predominant view on the Left was that the ancient Hindu caste system was a variant of European feudalism.
The late Ashok Rudra, himself a man of the Left but an empiricist, provided the most cogent critique of this view.
He pointed out a crucial difference between the conceptions of mutual social ties in the Hindu and European systems.
Where individuals were the central actors in the characteristic rituals of dominance and homage in European feudalism, in Hindu society the relationships were always defined in terms of caste groups.
Rudra assumed that caste existed in ancient India because, despite the unreliable historical record, the caste system is so manifest even today.
But recent historians on the Left in India now question this assumption.
A school of revisionist historians and anthropologists argue that caste is an invention of the colonial British Raj.
They claim that the early British scholars and administrators who documented Indian customs and translated the early sacred texts were bamboozled by the Brahmins--the first Indians to learn English and thus the only available intermediaries--into believing that the Hindu social order was caste-based.
This imagined order became reality when British census takers forced Indians to categorize themselves by caste.
Before this, these historians argue, Hindus were allegedly no less individualistic than Europeans.
Even hitherto sensible anthropologists and social historians seem to have succumbed to this travesty of scholarship.
Much of the supposed evidence that this so-called "Subaltern" school of historians provides takes the form of contemporary anthropological studies of regions like southern India or parts of medieval central India.
But, as Susan Bayley, a "Subaltern" convert, puts it, "the initial premise is that even in parts of the Hindu heartland of Gangetic upper India, the institutions and beliefs which are often described as the elements of traditional caste were only taking shape as recently as the early 18 th century."
I can personally disprove this premise.
While visiting Kerala in the late 1960's, I--a Hindu from the Gangetic heartland--went to the Sri Padmanabhaswamy temple in Trivandrum, where the usual "pandas" accosted me.
One asked where I came from and asked about my jati and gotra .
When I answered, he rattled off the names of at least six generations of my ancestors, while asking me to fill in the details about my cousins, the family into which I had married, and the names of our children.
He did not ask for money; he was only interested in updating his records.
Unless he had imagined my ancestors, he had just traced my caste-based past to well before the 17 th century.
Aside from such examples, an economic rationale can also be provided for the origins of the Indian caste system as for European feudalism.
The great Eurasian civilizations were all dependent on agriculture and needed to create institutional means of tying labor, which was then scarce, to the land, which was abundant.
Serfdom, indenture, slavery, and the caste system all served this end.
How did ancient Indian princes tie labor to the land if neither feudalism nor caste existed?
Even if we are forced, faute de mieux , to speculate about ancient Indian social life, we must remain true to the common facts of economic and military life among European and Asian civilizations, which imposed similar institutional responses.
These caveats, however, will no doubt leave the revisionists unmoved, for they are part of the "deconstructionist" movement that has deeply influenced the humanities in American and British universities.
Deconstructionists do not believe that any settled "facts" exist.
If they are right, there is no difference between the intellectual discipline of history, founded by the Greeks 2400 years ago to record the past truthfully, and the myths that every culture tells to affirm its self-worth.
Without history, we will be exposed to the full force of the tales of our imagined pasts, which only mirror our current hates and loves.
The Depopulation of Europe
By common consent, the recent EU summit at Stockholm was a dull affair.
EU leaders made some progress on creating a single financial market throughout the Union, and on establishing a standard European patent.
Other proposals for economic liberalisation, were deadlocked.
The idea of a single European air traffic control area was blocked because of a dispute between Britain and Spain over Gibraltar; proposals for liberalisation of gas and electricity supply were resisted by France, which promotes the public service advantages of public sector utilities.
There was good news, however, in that the Stockholm summit witnessed the first signs that the EU may at last be creeping, crab-wise, toward an idea hitherto taboo: that the European Union may require an immigration policy.
Until recently, member governments held two ideas on immigration: they all took the view that ordinary immigration must be restricted or prevented; they all agreed that asylum-seekers be vilified as “bogus” economic migrants and deterred through policies of harassment, intimidation and - in some cases - detention.
In addition, some member governments, like those of Germany and Austria, have demonstrated serious anxiety that EU enlargement will incite a flood of job-seekers from Central and Eastern Europe, and made clear that they will demand a long delay in granting free movement of labour to any new member state.
Eighteen months ago, at the Tampere summit, EU leaders said that they recognised “the need for more efficient management of migration flows.”
What they really meant, however, was stronger measures to tackle illegal immigration.
Stockholm came one step closer to admitting Europe’s real population problem, when it spoke of “the demographic challenge of an ageing population of which people of working age constitute an ever-smaller part.”
Indeed, the summit communique said that “an in-depth discussion of immigration, migration and asylum” would take place at the EU summit at the end of this year.
But EU leaders have yet to admit what everybody knows: that Europe’s population is not just ageing, it is starting to decline, and is likely to decline steeply in coming decades.
At the Stockholm summit the leaders pretended that the solution to Europe’s ageing problem will be found in better job mobility, more flexibility, and further economic reform.
The plain fact, however, is that Europe’s population decline can only be stemmed by substantial inward immigration.
Last month (February 2001) the United Nations published its latest forecasts for world population over the next 50 years.
The broad picture is that the population of the world’s less developed regions is expected to rise from 4.9 billion today to 8.2 billion in 2050, whereas the population of the developed regions will, in aggregate, remain roughly stable at 1.2 billion.
Within the developed world, however, Europe’s population is expected to decline markedly.
In some European countries, like France and Ireland, the population will actually rise. But in others there will be steep falls.
The population of Germany will decline from 82m to just under 71m, that of Italy from 57.5m to 43m, and that of Spain from nearly 40m to just over 31m. “all in all, the population of the EU 15 will decline from 376m to 339.3m, a fall of 37m or 10%.
Even sharper declines are expected in the candidate countries of Central and Eastern Europe, from a total of 105m to 85m, a fall of 20m, or about 20%.
The implications are far-reaching.
First, on a medium-term time-scale, the EU needs substantial immigrants.
Second, the fear of a tidal wave of immigrants from Eastern Europe is largely a populist fantasy.
Third, Eastern Europe will itself need substantial immigration.
Two strategic footnotes need to be added to this scenario.
First, Turkey’s population is likely to rise hugely in the next 50 years, from 66m to nearly 100m.
Now, Turkey has in principle been accepted as a potential candidate for EU membership.
But if UN projections are correct, Turkey’s population in 2050 would be far larger than any other member state, including Germany, and would represent nearly 20% of the population of the enlarged EU.
The increase in Turkey’s population might almost balance out the decline in the population of the present EU 15; but it is unlikely that today’s existing member states will regard this satisfactory.
Moreover, the strategic balance to Europe’s east will also be transformed, because the populations of Russia and the Ukraine are expected to decline even more steeply than those of the EU.
Russia’s population, currently 145.5m, is expected to fall to 104.5m; Ukraine’s population is projected to fall from nearly 50m to 30m, a startling drop of 40%.
This regional pattern, of population decline in Europe, Russia and Ukraine, needs to be set against the larger picture of a 3 billion increase globally, mainly in the developing world.
It is difficult to avoid the implication that Europe’s need for immigrants is likely to combine with massive, and probably irresistible, migratory pressure from developing countries to the developed world.
What is now required is that EU leaders stop pretending that Europe’s demographic ageing can be solved by more internal labor mobility.
The EU will, instead, need a large, managed immigration policy.
This is, undoubtedly, a difficult demand to make of politicians, particularly given the legacy of xenophobic politics in so many member states.
But it must be done, and soon.
The Devaluation Delusion Revisited
"The dollar is our currency and your problem."
So America's Treasury Secretary quipped before President Nixon pulled the plug on the Bretton Woods system three decades ago.
What John Connolly's bluntness reflected was America's ability--and willingness--to export its economic problems by driving down the dollar's value while scapegoating countries opposed to that strategy.
President George W. Bush seems hell-bent on repeating Nixon's misbegotten policy.
Like the Nixon/Connolly team, the Bush administration is responding to America's massive budget and trade deficits by letting the dollar fall--and hard --while it also tries to distract attention from its responsibility by pointing an accusing finger at China as the cause for both US joblessness and deflationary pressures.
This strategy, however, is likely to prove as ineffective now as it was for Nixon, who succeeded only in ushering in an era of stagnation.
Bush's policy is doomed to fail because, as in the 1970's, America's economic problems are homegrown.
They are not imported and cannot be fixed merely by changing the dollar's value.
The world's reliance on the US as the one source of growth in global demand buttresses America's currency power play, but at the cost of aggravating vast global imbalances.
Since 2000, America's excess productive capacity has outstripped the Euro area and Japan combined, its economy growing far more slowly than its 3.5% to 4% annual potential, with US unemployment rising.
This pitiful performance incites angry cries that American jobs are disappearing abroad, and that low-cost exports may result in deflation.
Sadly, America is not alone in viewing devaluation as a panacea for domestic problems.
Too timid to undertake serious reforms at home, Japanese authorities fight to keep the yen's value as low as possible against the dollar and rival Asian currencies.
Similarly, the European Union created the euro to give its members increased currency stability.
When the euro was down, wounded pride forced EU governments to try talking it up.
Now that the euro is up, those same governments are trying to talk it down.
The euro's dizzying trade-weighted ascent over the past year is, indeed, exacerbating near-term pressures within the EU.
But the Union's finance ministers would be better off pushing the internal reforms Europe needs, rather than following the Bush example and pressing the European Central Bank to force a strong currency down to earth.
Yet America's currency strategy is the most reckless--another mighty error in an economic policy so wayward that it is hard to know where to begin listing the mistakes.
Perhaps the best place to start is with the speedy deterioration in America's federal budget in the past two years.
From a surplus of 1.4% of GDP in 2000, the Bush administration has delivered a deficit of 4.6% of GDP this year.
US budget deficits may have spared America and the world economy even worse performances over the past two years, but fixing what ails the US is now far more difficult.
Tightening fiscal policy would go a long way towards boosting confidence in the US.
It might also help push the rest of the world into moving away from its reliance on America as the sole engine of growth.
Growth elsewhere might help America export more.
But this won't provide the quick fix that the Bush administration yearns for, because a declining dollar need not bring about an equivalent rise in the price of US imports.
This is partly because the final price of an imported good reflects numerous costs such as distribution and marketing, which are unaffected by the exchange rate.
Indeed, many countries that export to the US--especially Japan and China--price their goods in dollars.
Because these countries are keen to maintain their share in the world's biggest market, they often absorb the effect of a drop in the dollar by cutting their profits rather than raise prices.
As a recent study by J.P. Morgan's Chief Economist John Lipsky shows, the link between exchange rates and trade is weakening.
What makes US strategy reckless is that the Bush administration is attacking China at the very moment that America's dependence on Chinese purchases of US government bonds is growing.
Without these purchases, the US might face a rise in domestic interest rates that could threaten both its economic recovery and the global economy.
Moreover, if China decided to sell its dollar holdings, the bond market would discount US government securities, raising US long-term interest rates and canceling much (perhaps all) of whatever stimulus has been provided by the dollar's depreciation.
Luckily, China's government knows that America's advice to let the renminbi float right now is dangerous--both to China and for the world economy.
Policies intended to benefit one country's economy at the expense of another, such as competitive devaluations, were widespread during the Great Depression of the 1930's.
For most of the postwar era, governments appeared to have learned the lesson of that time.
So it is bizarre that, today, leaders in the world's strongest economies are dabbling in such dangerous nonsense again.
To fix its domestic problems, America must tighten its budget, not drive down the dollar's value.
But with presidential elections looming, no US government would cut spending or raise taxes.
So forget about the economically illiterate Bush administration daring to do either.
The silver lining here is that this failure may revive the realization that no country--not even mighty America--can devalue its way out of trouble.
The Emerging Economies’ Eurozone Crisis
WASHINGTON, DC – Most of today’s economic institutions, from money to banking, evolved over many years – the unintended consequences of decisions by millions of individuals.
By contrast, the eurozone stands out for being a deliberate creation.
It is arguably the world’s second-largest, deliberately-planned economic structure, after Communism.
The eurozone is a remarkable experiment, a genuine vanguard of global progress.
As 2012 comes to a close, it is in trouble, and every effort must be made to nurture and strengthen it.
By the second half of 2011, it was evident that emerging economies, which had weathered the financial crisis that began in 2008 moderately well, were taking on water as the eurozone crisis deepened.
Growth slowed sharply in Brazil, India, China, and other countries.
Central banks acted as lenders of last resort, thereby averting a major crisis.
In December 2011 and February 2012, the European Central Bank announced the long-term refinancing operation (LTRO), whereby European banks were lent around €1 trillion ($1.3 trillion) in two tranches.
Then, in July, came ECB President Mario Draghi’s famous assurance to do “whatever it takes” to save the euro.
The United States Federal Reserve injected liquidity, as did other advanced countries’ central banks.
There was a collective sigh of relief, financial markets stabilized, and industrial-production rebounded.
The question on everyone’s mind now is whether this post-storm calm will last, allowing the global economy to pick up.
Nowhere does this question loom larger than in developing and emerging economies, which are outside the main theater of the crisis, but are more precariously positioned than the advanced countries.
Many had only recently begun to grow rapidly, and, with vast reservoirs of poor people, economic growth has a moral urgency that it does not have in rich countries.
So, will the global economy stage a sustained recovery?
Examining the past as carefully as I can, and aware of the risks of augury, my answer has to be no.
Until 2015, the outlook is gloomy for Europe and, by extension, for the emerging and developing economies.
The injection of liquidity that occurred over the last year was the right policy.
But it only bought time; it did not solve the problem.
And time is running out.
Unfortunately, most people have an instinctive propensity to look away from approaching problems until they are very close.
America’s “fiscal cliff,” for example, was long in coming, but we are scrambling to avoid it only now.
So we should take early stock of the fact that there is another problem coming our way, which may be called (to give it the resonance of a coming storm) Edward –&#160;the “European Debt Wall and Repayment Deadline.”
The LTRO money that banks received on such easy terms, we must recall, took the form of three-year loans, which implies a wall of debt repayment in December 2014 and February 2015.
If Europe succeeds in making major fiscal and banking reforms and gets its economy in order, Edward will lose steam.
If not, the crisis will persist, and Europe will be rocked as Edward makes landfall by the end of 2014.
Where does that leave developing countries?
The US and Europe are the world’s two largest economic powerhouses.
Their slowdown will have an adverse impact on all emerging economies.
Moreover, the US and Europe have already used large doses of fiscal stimulus, which shares an uncanny similarity to antibiotics.
Administered over a short duration, it can be a powerful antidote; but, used repeatedly over too long a period, the side effects can outstrip the benefits.
Consider the case of India.
Since 2009, India has been expanding its deficit as a deliberate measure to counter its economic slowdown.
Because fiscal expansion followed several years of restraint, it was very effective in spurring demand and output growth.
But now the scope for further expansion is limited.
Unlike advanced countries, most emerging economies are exhibiting inflationary pressures, which could be exacerbated by another round of stimulus spending.
So the short-run situation remains precarious.
Nevertheless, for emerging economies, the medium- to long-term prospects are bright.
Countries that are saving a substantial amount, investing in human capital, and providing a modicum of good governance should resume their previous rapid growth.
India, for example, is saving and investing well over 30% of its GDP, devoting a significant share of these resources to infrastructure.
Its entrepreneurial capacity is expanding.
In several recent years, India’s outward direct investment in Britain has exceeded inward direct investment from Britain.
So, once the crisis is over, annual growth should rebound to its earlier rate of more than 8%.
Investors seem to be taking this view to heart.
They have been tightfisted when it comes to short-term equity investments.
But, when it comes to long-term direct investment, they committed a record-high $43.8 billion to India in 2011-2012.
Beyond the current crisis, the prospect appears to be similar in other major emerging economies, including Brazil, China, and Indonesia.
Easing short-term jitters and paving the way for further developing-country growth will require a clear and credible program for returning high-income economies, especially those in Europe, to a sustainable fiscal path.
It will be a bumpy road ahead, requiring careful navigation and bold policy implementation.
The Diabetes Watch
WELLINGTON – The world is currently in the grip of a diabetes epidemic.
A recent major study by Majid Ezzati and colleagues from Imperial College London and Harvard University found that the number of adults with type 2 diabetes increased from an estimated 153 million in 1980 to 347 million in 2008.
The number could be 370 million today.
Every region of the world is affected, although the epidemic is growing most rapidly in Oceania and least rapidly in East Asia.
Globally, the type 2 diabetes epidemic has been growing in lockstep with rising obesity levels.
This is not surprising – an increase in body fat and a decrease in physical activity are the direct causes of type 2 (as opposed to type 1) diabetes.
In fact, much of the health effects of obesity and physical inactivity are mediated through diabetes.
These health effects are serious.
Diabetes already is the major cause of kidney failure, blindness, and lower-limb amputation in many countries, and a major cause of heart attacks and strokes.
Despite this, surveillance of diabetes remains relatively undeveloped throughout the world, even in high-income countries.
Public-health surveillance is “the ongoing systematic collection, analysis, interpretation, and dissemination of health data for the purpose of preventing and controlling disease” – in short, information for action.
There is nothing in this definition that restricts surveillance to communicable diseases, yet in practice this has generally been the case.
The reasons are not hard to find.
Communicable disease outbreaks occur over days to weeks (or at the most, months); the danger is “clear and present”; and prevention and control generally requires intervention by the state – the quarantine of victims, tracing and immunization of contacts, or elimination of environmental sources of the infectious agent.
The situation regarding chronic diseases like diabetes is very different.
The epidemic happens silently over years or decades; the danger is either not recognized or not considered avoidable; and action is often seen as the responsibility of the individual (lifestyle modification) or health-care system (pharmaceutical prescription), rather than the state.
Yet effective chronic disease surveillance can save lives.
If disease trends are monitored, along with patients’ responses to treatment and the population’s exposure to risk factors, the success or failure of policies designed to prevent or control chronic diseases can be evaluated, resource allocation can be rationally prioritized, and the public can be kept fully informed of the risks that they face.
Recognizing this, in December 2005 the New York City Board of Health mandated the laboratory reporting of test results for glycosylated haemoglobin (HbA1c) – a biomarker for diabetes and a key indicator of blood glucose control – thereby creating the world’s first population-based diabetes registry.
Mandatory laboratory reporting of HbA1c results (along with basic demographic data) for a defined population (New York City residents) allowed New York’s Department of Health to monitor trends in diabetes prevalence, assess testing coverage, and examine health-care use and glycemic control of residents living with diabetes.
Beyond these population-based surveillance functions, the registry was able to support patient care by ensuring that individual health-care providers and patients were made aware of elevated or rising HbA1c levels.
Both the patient-support function and the surveillance function required use of a unique patient identifier, so that letters could be mailed to patients and tests from the same patient could be linked over time.
In 2009, Thomas Frieden and colleagues from the New York City Board of Health reviewed the registry’s first four years of operation and concluded that it was performing well.
Getting all laboratories to report regularly and completely, however, proved challenging and not all health-care providers and patients proved willing to participate.
The Board of Health’s initiative has been widely praised as exemplifying the application of classical communicable-disease surveillance-and-control tools to a chronic disease.
Other commentators, however, have criticized the registry for potentially compromising patient confidentiality and privacy, and even for disrupting the relationship between patients and their doctors.
While these criticisms may or may not be justified, it is probably true to say that the New York City diabetes registry, though highly innovative, is at best an interim solution.
Rather than relying on laboratory reporting of a single biomarker, an ideal chronic-disease surveillance system would extract all necessary data directly from the patient record.
Any diagnosis of diabetes, or subsequent monitoring of disease progression, requires a medical consultation and hence an entry into the patient record – and so into the practice’s patient-management information system.
Logically, the surveillance system should operate by extracting the entire subset of data required for surveillance purposes from each health-care provider’s patient management information system (“front-end capture”).
This data would then be securely transferred (electronically) to a suitable data warehouse.
After appropriate cleaning (checking for missing data, correcting coding errors), and anonymizing, the data would be available for access and querying.
Given appropriate statistical analysis and careful interpretation, useful reports could be generated for surveillance purposes and, if desired, for patient-care support as well (using encrypted unique patient identifiers to preserve confidentiality of personal information).
In view of the rising burden of diabetes and other chronic diseases throughout the world, urgent attention must be devoted to strengthening surveillance systems for noncommunicable diseases at all levels – from local practices to global institutions.
The Diarrhea Pioneers
PALO ALTO – On top of the devastation caused in Haiti by the January earthquake, Hurricane Tomas this month, and the subsequent dislocations, exposure, and malnutrition, the country is now experiencing an accelerating cholera outbreak. At least 8,000 people are currently in hospital, and the death toll is near 600 from this waterborne bacterial disease.
And, given the widespread unavailability of clean water, basic sanitation, and medical facilities, those numbers are sure to increase.
Even in the absence of natural disasters, diarrhea is the number-two infectious killer of children under the age of five in developing countries (surpassed only by respiratory diseases), accounting for roughly two million deaths a year.
However, thanks to a simple but ingenious innovation by an emerging bioscience company, those numbers could become a relic of the past, like mortality from smallpox and bubonic plague.
Since the 1960’s, the standard of care for childhood diarrhea in the developing world has been the World Health Organization’s formulation of rehydration solution, a glucose-based, high-sodium liquid that is administered orally.
This low-tech product was revolutionary.
It saved countless lives and reduced the need for costly (and often unavailable) hospital stays and intravenous rehydration.
However, this product did nothing to lessen the severity or duration of the condition, which over time leads to malnutrition, anemia, and other chronic health risks.
Other approaches to treatments and preventative measures – including changes in public-health policy, improvement of water treatment, and development of vaccines – have not yielded significant, cost-effective results.
The solution (literally and figuratively) may be an ingenious, affordable innovation from Ventria Bioscience that combines high- and low-tech components to deliver what could be a veritable Holy Grail: two proteins produced inexpensively in rice that radically improve the effectiveness of rehydration solutions.
It has been known for decades that breast-fed children get sick with diarrhea and other infections less often than those fed with formula.
Research in Peru has shown that fortifying oral rehydration solution with two of the primary protective proteins in breast milk, lactoferrin and lysozyme, lessens the duration of diarrhea and reduces the rate of recurrence.&#160;
The availability of such an oral rehydration solution to people in the developing world would be a near-miraculous advance.
Ventria joined with researchers at the University of California, Davis, and at a leading children’s hospital and a nutrition institute in Lima, Peru, to test the effects of adding lactoferrin and lysozyme to a rice-based oral rehydration solution. The new brew provides more nutrition than glucose-based oral rehydration solution and tastes better to kids, so they are more likely to drink it.
The researchers found that when lactoferrin and lysozyme are added to solution, the children’s illness is cut from more than five days to 3.7.
This improvement is thought to be caused by the antimicrobial effect of lactoferrin and lysozyme, long known to be the primary protective proteins in breast milk.
Moreover, over the twelve-month follow-up period, the children who had received the rice-based solution had less than half the recurrence rate of diarrhea (8% versus 18% in the control sample).
This effect is probably caused by the lactoferrin, which promotes repair of the diarrhea-damaged cells of the intestinal mucosa.
What makes this approach to managing diarrhea feasible is Ventria’s invention of a genetic-engineering method that uses rice to produce lactoferrin and lysozyme.
This process, dubbed “biopharming,” is an inexpensive and ingenious way to synthesize the large quantities of the proteins that will be necessary.
In effect, the rice plants’ inputs are carbon dioxide, water, soil, and the sun’s energy, and its output is a rice kernel containing large amounts of the proteins.
The kernel is processed to extract and purify the proteins, which are then used to formulate the improved rehydration solution.
Rice is self-pollinating, so out-crossing – interbreeding with other rice varieties – is virtually impossible.
However, to ameliorate even such hypothetical concerns, Ventria has chosen to grow its rice in Kansas, where there are no other rice growers.
The proteins used to supplement the oral rehydration solution have the same structure and functional properties as those in natural breast milk, and the process is analogous to that used routinely for the production of proteins from other organisms, such as bacteria and yeast.
The proteins were judged by a regulatory panel of experts to be “Generally Recognized As Safe” (GRAS) for inclusion in food products like oral rehydration solution.
The typical approach prior to commercialization would be a notification to the United States Food &amp;
Drug Administration (FDA) that the rice-produced proteins had been determined to be as safe as their natural counterparts.
Then, the regulators’ review would take no more than six months.
But, while the first GRAS notification was submitted to FDA in 2004 and was followed by further notifications, the FDA took no action; eventually, Ventria withdrew the notifications in March of this year.
Although the company could market the product without the FDA’s approval, the financial risks would be prohibitive.
Researchers at the University of California, Davis, have faced similar regulatory obstacles in attempting to produce lysozyme in the milk of genetically engineered goats.
Their solution was to move the project to Brazil, where it is progressing.
Biopharming has brought us to the verge of a safe, affordable solution to one of the developing world’s most pressing health problems.
But, thanks to bureaucratic obstructionism, it will come too late for the many who will be stricken with diarrheal diseases in Haiti and other poor countries in the coming weeks and months.
Regulators and public-health authorities should be beating down doors and demanding life-saving products like lactoferrin and lysozyme.
Instead, all we hear from them is a deafening silence – and, in Haiti and elsewhere, the silence of the grave.
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The Diet Debacle
SAN FRANCISCO – Two seemingly benign nutritional maxims are at the root of all dietary evil: A calorie is a calorie, and You are what you eat.&#160;Both ideas are now so entrenched in public consciousness that they have become virtually unassailable.
As a result, the food industry, aided and abetted by ostensibly well-meaning scientists and politicians, has afflicted humankind with the plague of chronic metabolic disease, which threatens to bankrupt health care worldwide.
The United States currently spends $147 billion on obesity-related health care annually.
Previously, one could have argued that these were affluent countries’ diseases, but the United Nations announced last year that chronic metabolic disease (including diabetes, heart disease, cancer, and dementia) is a bigger threat to the developing world than is infectious disease, including HIV.
These two nutritional maxims give credence to the food industry’s self-serving corollaries: If a calorie is a calorie, then any food can be part of a balanced diet; and, if we are what we eat, then everyone chooses what they eat.
Again, both are misleading.
If one’s weight really is a matter of personal responsibility, how can we explain toddler obesity?
Indeed, the US has an obesity epidemic in six-month-olds.
They don’t diet or exercise.
Conversely, up to 40% of normal-weight people have chronic metabolic disease.
Something else is going on.
Consider the following diets: Atkins (all fat and no carbohydrates); traditional Japanese (all carbohydrates and little fat); and Ornish (even less fat and carbohydrates with lots of fiber).
All three help to maintain, and in some cases even improve, metabolic health, because the liver has to deal with only one energy source at a time.
That is how human bodies are designed to metabolize food.
Our hunter ancestors ate fat, which was transported to the liver and broken down by the lipolytic pathway to deliver fatty acids to the mitochondria (the subcellular structures that burn food to create energy).
On the occasion of a big kill, any excess dietary fatty acids were packaged into low-density lipoproteins and transported out of the liver to be stored in peripheral fat tissue.
As a result, our forebears’ livers stayed healthy.
Meanwhile, our gatherer ancestors ate carbohydrates (polymers of glucose), which was also transported to the liver, via the glycolytic pathway, and broken down for energy.
Any excess glucose stimulated the pancreas to release insulin, which transported glucose into peripheral fat tissue, and which also caused the liver to store glucose as glycogen (liver starch).
So their livers also stayed healthy.
And nature did its part by supplying all naturally occurring foodstuffs with either fat or carbohydrate as the energy source, not both.
Even fatty fruits – coconut, olives, avocados – are low in carbohydrate.
Our metabolisms started to malfunction when humans began consuming fat and carbohydrates at the same meal.
The liver mitochondria could not keep up with the energy onslaught, and had no choice but to employ a little-used escape valve called “de novo lipogenesis” (new fat-making) to turn excess energy substrate into liver fat.
Liver fat mucks up the workings of the liver.
It is the root cause of the phenomenon known as “insulin resistance” and the primary process that drives chronic metabolic disease.
In other words, neither fat nor carbohydrates are problematic – until they are combined.
The food industry does precisely that, mixing more of both into the Western diet for palatability and shelf life, thereby intensifying insulin resistance and chronic metabolic disease.
But there is one exception to this formulation: sugar.
Sucrose and high-fructose corn syrup are comprised of one molecule of glucose (not especially sweet) and one molecule of fructose (very sweet).
While glucose is metabolized by the glycolytic pathway, fructose is metabolized by the lipolytic pathway, and is not insulin-regulated.
Thus, when sugar is ingested in excess, the liver mitochondria are so overwhelmed that they have no choice but to build liver fat.
Today, 33% of Americans have a fatty liver, which causes chronic metabolic disease.
Prior to 1900, Americans consumed less than 30 grams of sugar per day, or about 6% of total calories.
In 1977, it was 75 grams/day, and in 1994, up to 110 grams/day.
Currently, adolescents average 150 grams/day (roughly 30% of total calories) – a five-fold increase in one century, and a two-fold increase in a generation.
In the past 50 years, consumption of sugar has also doubled worldwide.
Worse yet, other than the ephemeral pleasure that it provides, there is not a single biochemical process that requires dietary fructose; it is a vestigial nutrient, left over from the evolutionary differentiation between plants and animals.
It is therefore clear that a calorie is not a calorie.
Fats, carbohydrates, fructose, and glucose are all metabolized differently in the body.
Furthermore, you are what you do with what you eat.Combining fat and carbohydrate places high demands on the metabolic process. And adding sugar is particularly&#160;egregious.
Indeed, while food companies would have you believe that sugar can be part of a balanced diet, the bottom line is that they have created an unbalanced one.
Of the 600,000 food items available in the US, 80% are laced with added sugar.
People cannot be held responsible for what they put in their mouths when their choices have been co-opted.
And this brings us back to those obese toddlers.
The fructose content of a soft drink is 5.3%.
Of course, many parents might refuse to give soft drinks to their children, but the fructose content of soy formula is 5.1%, and 6% for juice.
We have a long way to go to debunk dangerous nutritional dogmas.
Until we do, we will make little headway in reversing an imminent medical and economic disaster.
The Digital War on Poverty
NEW YORK – The digital divide is beginning to close.
The flow of digital information – through mobile phones, text messaging, and the Internet – is now reaching the world’s masses, even in the poorest countries, bringing with it a revolution in economics, politics, and society.
Extreme poverty is almost synonymous with extreme isolation, especially rural isolation.
But mobile phones and wireless Internet end isolation, and will therefore prove to be the most transformative technology of economic development of our time.
The digital divide is ending not through a burst of civic responsibility, but mainly through market forces.
Mobile phone technology is so powerful, and costs so little per unit of data transmission, that it has proved possible to sell mobile phone access to the poor.
There are now more than 3.3 billion subscribers in the world, roughly one for every two people on the planet.
Moreover, market penetration in poor countries is rising sharply.
India has around 300 million subscribers, with subscriptions rising by a stunning eight million or more per month.
Brazil now has more than 130 million subscribers, and Indonesia has roughly 120 million.
In Africa, which contains the world’s poorest countries, the market is soaring, with more than 280 million subscribers.
Mobile phones are now ubiquitous in villages as well as cities.
If an individual does not have a cell phone, they almost surely know someone who does.
Probably a significant majority of Africans have at least emergency access to a cell phone, either their own, a neighbor’s, or one at a commercial kiosk.
Even more remarkable is the continuing “convergence” of digital information: wireless systems increasingly link mobile phones with the Internet, personal computers, and information services of all kinds.
The array of benefits is stunning.
The rural poor in more and more of the world now have access to wireless banking and payments systems, such as Kenya’s famous M-PESA system, which allows money transfers through the phone.
The information carried on the new networks spans public health, medical care, education, banking, commerce, and entertainment, in addition to communications among family and friends.
India, home to world-leading software engineers, high-tech companies, and a vast and densely populated rural economy of some 700 million poor people in need of connectivity of all kinds, has naturally been a pioneer of digital-led economic development.
Government and business have increasingly teamed up in public-private partnerships to provide crucial services on the digital network.
In the Indian states of Andhra Pradesh and Gujarat, for example, emergency ambulance services are now within reach of tens of millions of people, supported by cell phones, sophisticated computer systems, and increased public investments in rural health.
Several large-scale telemedicine systems are now providing primary health and even cardiac care to rural populations.
Moreover, India’s new rural employment guarantee scheme, just two years old, is not only employing millions of the poorest through public financing, but also is bringing tens of millions of them into the formal banking system, building on India’s digital networks.
On the fully commercial side, the mobile revolution is creating a logistics revolution in farm-to-retail marketing.
Farmers and food retailers can connect directly through mobile phones and distribution hubs, enabling farmers to sell their crops at higher “farm-gate” prices and without delay, while buyers can move those crops to markets with minimum spoilage and lower prices for final consumers.
The strengthening of the value chain not only raises farmers’ incomes, but also empowers crop diversification and farm upgrading more generally.
Similarly, world-leading software firms are bringing information technology jobs, including business process outsourcing, right into the villages through digital networks.
Education will be similarly transformed.
Throughout the world, schools at all levels will go global, joining together in worldwide digital education networks.
Children in the United States will learn about Africa, China, and India not only from books and videos, but also through direct links across classrooms in different parts of the world.
Students will share ideas through live chats, shared curricula, joint projects, and videos, photos, and text sent over the digital network.
Universities, too, will have global classes, with students joining lectures, discussion groups, and research teams from a dozen or more universities at a time.
This past year, my own university – Columbia University in New York City – teamed up with universities in Ecuador, Nigeria, the United Kingdom, France, Ethiopia, Malaysia, India, Canada, Singapore, and China in a “Global Classroom” that simultaneously connected hundreds of students on more than a dozen campuses in an exciting course on global sustainable development.
In my book The End of Poverty , I wrote that extreme poverty can be ended by the year 2025.
A rash predication, perhaps, given global violence, climate change, and threats to food, energy, and water supplies.
But digital information technologies, if deployed cooperatively and globally, will be our most important new tools, because they will enable us to join together globally in markets, social networks, and cooperative efforts to solve our common problems.
The Dilemma of Curiosity and Its Use
Albert Einstein once said, “I have no special gift, but I am passionately curious.” Certainly, Einstein was being tremendously modest.
But, just as certainly, curiosity is a powerful driving force in scientific discovery.
Indeed, along with talent and interest, as well as mathematical or other quantitative abilities, curiosity is a necessary characteristic of any successful scientist.
Curiosity betrays emotional passion.
It is a state of being involuntarily gripped by something that is difficult to ward off and for which, since one cannot act otherwise, one is accountable only in a limited sense.
We all come into the world curious, equipped with the psychological drive to explore the world and to expand the terrain that we think we master.
It is no coincidence that a well-known book on developmental psychology bears the title The Scientist in the Crib, a work that traces the parallels between small children’s behavior and the processes and research strategies that are usual in science.
But the urge for knowledge that drives inborn curiosity to transcend given horizons does not remain uncurbed.
Parents can tell many a tale about how, with the beginning of school, their children’s playful approach suddenly changes, as they must now focus on objects dictated by the curriculum.
Likewise, however desirable its ability to produce the unexpected and unforeseeable, science today cannot claim that it is not accountable to society.
Curiosity is insatiable and, in research, it is inextricably tied to the unforeseeability of results.
Research is an endless process, with a destination that no one can predict precisely.
The more that unexpected results, brought forth by research in the laboratory, are a precondition for further innovations, the more pressure there is to bring the production of knowledge under control, to direct research in specific directions, and to tame scientific curiosity.
But curiosity must not be limited too severely, lest science’s ability to produce new knowledge be lost.
This dilemma is at the center of many policy debates surrounding scientific research.
To be sure, not everything that arouses scientific curiosity is controversial; in fact, most scientific research is not.
Still, the dilemma is obvious in pioneering fields like biomedicine, nanotechnology, and neurosciences.
Research in these areas sometimes meets with vehement rejection, for example, on religious grounds with respect to stem-cell research, or owing to fear with respect to the possibility of altering human identity.
Curiosity implies a certain immoderation, a certain necessary excess.
That is precisely what makes it a passion: it is amoral and follows its own laws, which is why society insists on taming it in various ways.
Private investment in research directs curiosity onto paths where new scientific breakthroughs promise high economic potential.
Politicians expect research to function as a motor of economic growth.
Ethics commissions want to establish limits on research, even if these require frequent re-negotiation.
The demand for more democratic input, finally, also seeks to influence research priorities.
These considerations must be borne in all efforts to support basic research.
In Europe, the establishment of the European Research Council (ERC) is entering a decisive phase, with crucial implications concerning the role we are prepared to concede to scientific curiosity.
For the first time, support for basic research is being made possible on the EU level.
Individual teams are to enter a pan-European competition to determine the best of the best, opening a free space for scientific curiosity and enabling the unforeseeable outcomes that are characteristic of cutting-edge research.
The dilemma – and it is a decisive one – is that today we cherish the passionate curiosity of an Albert Einstein. But we still want to control the unforeseeable consequences to which curiosity leads.
The dilemma must be overcome by allowing curiosity to be protected and supported, while trying to capture those of its fruits that will benefit society.
How we accomplish this must be continuously negotiated in the public sphere.
Irreducible contradictions will remain, and therein lie the ambivalence that characterizes modern societies’ stance toward science.
The Dilemma of Multiculturalism
Many people have suddenly become very hesitant about using the term “multicultural society.”
Or they hesitate to use it approvingly, as a desirable ideal that social reality should at least approximate.
July’s terrorist attacks in London demonstrated both the strength and the weakness of the concept.
London is certainly a multicultural metropolis.
An indiscriminate attack such as a bomb in the Underground will necessarily hit people of many cultural backgrounds and beliefs.
Sitting, or more likely standing, in the “tube” (as London’s Underground is affectionately known), one never ceases to be amazed at the ease with which Jewish mothers and Muslim men, West Indian youngsters and South Asian businessmen, and many others endure the same stressful conditions and try to lighten its impact by being civil to one another.
The terror attacks demonstrated not only how particular people helped each other, but also how the whole city, with all the ingredients of its human mixture, displayed a common spirit of resilience.
This is the positive side of a multicultural society.
Careful observers have always noted that it is strictly confined to the public sphere, to life in those parts of the city that are shared by all.
It does not extend in quite the same way to people’s homes, let alone to their ways of life in the private sphere.
This is one reason why London has experienced the other, darker side of the multicultural society: the veneer of multiculturalism is thin.
It does not take much to turn people of one group against those of others with whom they had apparently lived in peace.
We know this because it lies at the core of the murderous environment that gripped the Balkans in the 1990’s.
For decades (and in some cases much longer), Serbs and Croats, – indeed, Orthodox, Catholic, and Muslim “Yugoslavs” – had lived together as neighbors.
Few thought it possible that they would turn against each other in a bloodletting of such brutal enormity that it is very unlikely that Bosnia-Herzegovina can ever become a successful multicultural society.
Yet it happened, and in a different way it is happening now in Britain.
It is important to recognize that we are not talking about the return of age-old hostilities.
Ethnic and cultural conflicts today, often in the form of terrorism, are not the eruption of a supposedly extinct volcano.
They are, on the contrary, a specifically modern phenomenon.
For the terrorists themselves, such conflicts are one consequence of the unsettling effects of modernization.
Beneath the veneer of integration into a multicultural environment, many people – especially young men with an immigrant background – are lost in the world of contradictions around them.
Their seamless, all-embracing world of tradition is gone, but they are not yet confident citizens of the modern, individualistic world.
The question is not primarily one of employment, or even poverty, but of marginalization and alienation, of the lack of a sense of belonging.
It is in such circumstances that the key feature of terrorism comes into play: the preaching of hate by often self-appointed leaders.
They are not necessarily religious leaders; in the Balkans and elsewhere, they are nationalists who preach the superiority of one nationality over others.
But to call these hate-mongers “preachers” is fitting nonetheless, because they invariably appeal to higher values to sanctify criminal acts.
The mobilization of criminal energies by such preachers of hate is itself a modern phenomenon.
It is a far cry even from such doubtful claims as the self-determination of peoples defined as ethnic communities.
Hate preachers use highly modern methods to enhance their personal power and to create havoc around them.
But countering them does not involve warfare, or even a rhetorically looser “war on terror.”
Of course, part of the answer is to identify the relatively small number of people who are prepared to use their lives to destroy the lives of others without distinction or purpose.
But the more important issue is to identify the preachers of hate and stop their murderous incitement.
This is why it is so important to capture and prosecute Radovan Karadzic, who spurred on the homicidal rage of so many Bosnian Serbs.
And this is why militant Islamist preachers must be stopped.
Beyond this carefully targeted – and, in principle, limited – task, there remains the need to strengthen the sphere of common values and cooperation in societies that will, after all, remain multicultural.
This will be difficult, and it must not be approached naively.
Differences will not – and need not – go away; but ensuring that all citizens can rely on each other requires us to find a way to extend and bolster the civic trust that we see in the public sphere.
The Diplomacy of the Blind
PARIS – Why do revolutions so often take professional diplomats by surprise?
Is there something in their DNA that makes them prefer the status quo so much that, more often than not, they are taken aback by rapid changes, neither foreseeing them nor knowing how to respond once they begin?
What is happening today in the Arab world is a revolution that may turn out to be for the Middle East the equivalent of what the French Revolution was for Europe in 1789: a profound and radical change that alters completely the situation that prevailed before.
How many Bastilles will ultimately fall in the region, and at what pace, no one can say.
The only recent analogy is the collapse of the Soviet bloc, followed by the demise of the Soviet Union itself, in 1989-1991.
Who saw that sudden and rapid transformation coming?
As the German Democratic Republic was about to disappear, some top French diplomats in Germany were still assuring their government in Paris that the Soviet Union would never accept German reunification, so there was nothing to worry about: life would go on nearly as usual.
The specter of a united Germany was not to become a reality soon.
We saw the same conservative instinct at work with the first reactions to the events in Tunisia, and then in Egypt. “President Ben Ali is in control of the situation,” some said.
The United States managed to get it right, albeit very slowly, whereas many European countries erred on the side of the status quo for a much longer time, if not systematically, as they refused to see that the region could be evolving in a direction contrary to what they deemed to be in their strategic interest.
Historical and geographic proximity, together with energy dependency and fear of massive immigration, paralyzed European diplomats.
But there is something more fundamental underlying diplomats’ natural diffidence.
They are very often right in their readings of a given situation – the US diplomatic cables released by WikiLeaks, for example, include a slew of masterful and penetrating analyses.
But it is as if, owing to an excess of prudence, they cannot bring themselves to pursue their own arguments to their logical conclusions.
Revolutionary ruptures upset diplomats’ familiar habits, both in terms of their personal contacts and, more importantly, in terms of their thinking.
A fast-forward thrust into the unknown can be exhilarating, but it is also deeply frightening.
In the name of “realism,” diplomats and foreign-policy strategists are naturally conservative.
Indeed, it is no accident that Henry Kissinger’s masterpiece, A World Restored, was devoted to the study of the recreation of the world order by the Vienna Congress after the rupture of the French Revolution, followed by the Napoleonic adventures.
Is it more difficult to predict, and adjust to, the coming of a fundamental change, than to defend the present order, under the motto of “the devil you know is always preferable to the devil you don’t know!”
But, beyond these mental habits lie more structural reasons for the conservatism of foreign policymakers and diplomats.
By emphasizing the relations between states and governments over contacts with the opposition or civil societies (when they exist in an identifiable form), traditional diplomacy has created for itself a handicap that is difficult to overcome.
By requiring their diplomats to limit their contacts with “alternative” sources of information in a country, in order to avoid antagonizing despotic regimes, governments irremediably limit diplomats’ ability to see change coming, even when it is so close that nothing can be done.
When regimes lose legitimacy in the eyes of their citizens, it is not reasonable to derive one’s information mainly from that regime’s servants and sycophants.
In such cases, diplomats will too often merely report the regime’s reassuring yet biased analysis.
Diplomats, instead, should be judged by their ability to enter into a dialogue with all social actors: government representatives and business leaders, of course, but also representatives of civil society (even if it exists only in embryonic form).
With proper training and incentives, diplomats would be better equipped to anticipate change.
Of course, not all Western foreign ministries are the same; some do understand the need to nurture relationships with people outside the government – if not in opposition to it.
But one thing is clear: the more traditional foreign ministries tend to be, the more difficult it is for them and their diplomats to grasp change.
Needless to say, the ability to comprehend change has become indispensable at a time when the world is experiencing tectonic geopolitical shifts.
The new Middle East that is emerging before us is probably both “post-Western,” given the rise of new powers, and “post – Islamist,” with the revolt led by young, technologically savvy people with no ties to political Islam whatsoever.
By being late in perceiving change that they do not want to see coming, Western diplomats run the risk of losing on both levels: the regime and the people.
Diplomats require openness and imagination in order to carry out their responsibilities.
They should not abdicate these qualities when they are needed most.
The Dirt on Nuclear Power
SINGAPORE – Japan’s nuclear crisis is a nightmare, but it is not an anomaly.
In fact, it is only the latest in a long line of nuclear accidents involving meltdowns, explosions, fires, and loss of coolant – accidents that have occurred during both normal operation and emergency conditions, such as droughts and earthquakes.
Nuclear safety demands clarity about terms.
The Nuclear Regulatory Commission in the United States generally separates unplanned nuclear “events” into two classes, “incidents” and “accidents.”
Incidents are unforeseen events and technical failures that occur during normal plant operation and result in no off-site releases of radiation or severe damage to equipment.
Accidents refer to either off-site releases of radiation or severe damage to plant equipment.
The International Nuclear and Radiological Event Scale uses a seven-level ranking scheme to rate the significance of nuclear and radiological events: levels 1-3 are “incidents,” and 4-7 are “accidents,” with a “Level 7 Major Accident” consisting of “a major release of radioactive material with widespread health and environmental effects requiring implementation of planned and extended countermeasures.”
Under these classifications, the number of nuclear accidents, even including the meltdowns at Fukushima Daiichi and Fukushima Daini, is low.
But if one redefines an accident to include incidents that either resulted in the loss of human life or more than $50,000 in property damage, a very different picture emerges.
At least 99 nuclear accidents meeting this definition, totaling more than $20.5 billion in damages, occurred worldwide from 1952 to 2009 – or more than one incident and $330 million in damage every year, on average, for the past three decades.
And, of course, this average does not include the Fukushima catastrophe.
Indeed, when compared to other energy sources, nuclear power ranks higher than oil, coal, and natural gas systems in terms of fatalities, second only to hydroelectric dams.
There have been 57 accidents since the Chernobyl disaster in 1986.
While only a few involved fatalities, those that did collectively killed more people than have died in commercial US airline accidents since 1982.
Another index of nuclear-power accidents – this one including costs beyond death and property damage, such as injured or irradiated workers and malfunctions that did not result in shutdowns or leaks – documented 956 incidents from 1942 to 2007.
And yet another documented more than 30,000 mishaps at US nuclear-power plants alone, many with the potential to have caused serious meltdowns, between the 1979 accident at Three Mile Island in Pennsylvania and 2009.
Mistakes are not limited to reactor sites.
Accidents at the Savannah River reprocessing plant released ten times as much radio­iodine as the accident at Three Mile Island, and a fire at the Gulf United facility in New York in 1972 scattered an undisclosed amount of plutonium, forcing the plant to shut down permanently.
At the Mayak Industrial Reprocessing Complex in Russia’s southern Urals, a storage tank holding nitrate acetate salts exploded in 1957, releasing a massive amount of radioactive material over 20,000 square kilometers, forcing the evacuation of 272,000 people.
In September 1994, an explosion at Indonesia’s Serpong research reactor was triggered by the ignition of methane gas that had seeped from a storage room and exploded when a worker lit a cigarette.
Accidents have also occurred when nuclear reactors are shut down for refueling or to move spent nuclear fuel into storage.
In 1999, operators loading spent fuel into dry-storage at the Trojan Reactor in Oregon found that the protective zinc-carbon coating had started to produce hydrogen, which caused a small explosion.
Unfortunately, on-­site accidents at nuclear reactors and fuel facilities are not the only cause of concern.
The August 2003 blackout in the northeastern US revealed that more than a dozen nuclear reactors in the US and Canada were not properly maintaining backup diesel generators.
In Ontario during the blackout, reactors de­signed to unlink from the grid automatically and remain in standby mode instead went into full shutdown, with only two of twelve reac­tors behaving as expected.
As environmental lawyers Richard Webster and Julie LeMense argued in 2008, “the nuclear industry…is like the financial industry was prior to the crisis” that erupted that year. “[T]here are many risks that are not being properly managed or regulated.”
This state of affairs is worrying, to say the least, given the severity of harm that a single serious accident can cause.
The meltdown of a 500-megawatt reactor located 30 miles from a city would cause the immediate death of an estimated 45,000 people, injure roughly another 70,000, and cause $17 billion in property damage.
A successful attack or accident at the Indian Point power plant near New York City, apparently part of Al Qaeda’s original plan for September 11, 2001, would have resulted in 43,700 immediate fatalities and 518,000 cancer deaths, with cleanup costs reaching $2 trillion.
To put a serious accident in context, according to data from my forthcoming book Contesting the Future of Nuclear Power, if 10 million people were exposed to radiation from a complete nuclear meltdown (the containment structures fail completely, exposing the inner reactor core to air), about 100,000 would die from acute radiation sickness within six weeks.
About 50,000 would experience acute breathlessness, and 240,000 would develop acute hypothyroidism.
About 350,000 males would be temporarily sterile, 100,000 women would stop menstruating, and 100,000 children would be born with cognitive deficiencies.
There would be thousands of spontaneous abortions and more than 300,000 later cancers.
Advocates of nuclear energy have made considerable political headway around the world in recent years, touting it as a safe, clean, and reliable alternative to fossil fuels.
But the historical record clearly shows otherwise.
Perhaps the unfolding tragedy in Japan will finally be enough to stop the nuclear renaissance from materializing.
The Disappearance of Europe
BRUSSELS – What will it mean to be European 25 years from now?
Unlike the United States, whose history as a “melting pot” has given Americans a truly multi-ethnic character, native Europeans are becoming an endangered species.
Europe badly needs immigrants, yet is not culturally prepared to welcome them. The coming decades will therefore see substantially greater social change in Europe than elsewhere, although the nature of that change is far from clear.
At first glance, much of Europe’s current debate is about political and economic integration – about how far its nation states should go in pooling resources and sovereign powers in the European Union. But beneath the surface, the real tensions are about immigration and fears that national “cultures” are threatened by the influx of non-natives, both white and non-white.
Immigration in Europe today is running at a higher rate than in the US, with almost two million people arriving officially every year, together with an unknown number of illegal immigrants.
The most conservative estimate, by Eurostat, the EU’s statistical agency, puts the total number of newcomers to Europe between now and 2050 at 40 million. Inevitably, that sort of influx will ensure that Europe’s already vociferous right-wing extremist politicians win even greater support.
The specter of rising racial tensions is worrying enough. But it is just one aspect of Europe’s urgent need to import people from Africa and Asia.
Europeans will also see the dismantling of their welfare states and social security systems; the cherished “European model” of pensions, healthcare, and unemployment benefits risks being replaced by the despised and widely feared “American model.”
This is not, needless to say, because Europeans crave the rigors of America’s less cosseted social conditions, but because it’s the only way that European governments will be able to stay afloat financially.
The root cause of all these developments is Europe’s population shrinkage.
The “demographic time bomb” that economic analysts have been discussing for a decade or more is now exploding.
The result is widespread labor shortages in many EU countries and an alarming reduction in the proportion of working-age people whose taxes pay the pensions and medical costs of those who have retired.
Many countries have themselves aggravated the problem, either by encouraging early retirement or – as with France – through job-creation nostrums like the 35-hour working week.
About one-third of male workers in Europe quit their jobs by their early fifties.
That, together with two generations in which birth rates across Europe have dropped well below the two-children-per-couple replacement rate, and what the European Commission describes as “spectacular” increases in longevity, means that by 2050, instead of four workers supporting each retiree, there will be only two.
In short, European policymakers are in an impossible position.
The political mindset in most EU countries remains firmly focused on unemployment as the chief ill to be cured, whereas the real threat is the worsening shortage of people to fill job vacancies.
The European Commission has warned that this will put a lower ceiling on GDP growth rates.
According to Klaus Regling, the Commission’s Director-General for Economic and Financial Affairs, Europe’s working population has so shrunk that from 2010 onward maximum annual economic growth in western Europe will drop to 1.8%, from an average of 2.3% in recent years, and to just 1.3% a year from 2030.
Economic stagnation on this scale has alarming implications, because it means less and less tax revenues to fund all the reform projects and infrastructural investments Europe badly needs to regain its productivity and high-tech competitive edge.
And if things look bad for Western Europe, they’re worse for the EU’s formerly communist newcomers, whose demographic trends imply that average potential growth will nosedive from today’s healthy 4.3% per year to just 0.9% after 2030.
Much of Europe already suffers from under-performing labor markets in which job seekers and would-be employers either can’t or won’t find one another.
Stubbornly high youth unemployment, along with Europe’s dwindling numbers of school-leavers, is already canceling out the positive effects of immigration. Here in Brussels, where the largely North African immigrant population comprises a quarter of the city’s inhabitants, hotels and restaurants recently resorted to an emergency on-line recruitment service to counter their worsening staff shortages.
The manpower crisis is even more acute in sectors that demand greater skills and qualifications.
Like the US, Europe’s manpower-related difficulties are accentuated by the rise of India and China.
How Europeans, and to a lesser extent Americans, will maintain their high standards of living is anyone’s guess.
But Europe’s problem is greater, for its politicians are at a loss to cope with the high-voltage issues of race, religion, and ethnicity in societies that seem determined to remain anchored in the past.
The Disappearing Sky
Some months ago, an American astronaut accidentally let a tool escape into orbit, eliciting concern about its hazardous potential as a hurtling object that could destroy an expensive satellite or even threaten lives aloft.
Shortly afterwards, China blew up one of its satellites, immediately doubling the type of fine orbiting debris that is dangerous because it is hard to track.
Once again the world became aware of the strange situation emerging in our skies.
The sky is a unique domain, and one that is inadequately regulated.
With the advent of global pollutions and technologies, remedying this is becoming an increasingly urgent problem.
In most cases, the laws for skies mirror those governing the world’s oceans.
Oceans belong to everyone except those near landmasses, which are managed in a similar manner to the country's land-bound borders.
As a result, the sky is usually conceptualized in terms of traffic.
Airliners and fighter planes operate in “controlled” air close to the ground, while nationality is supposed to matter less the higher you go.
Fragile treaties that cover this are enforced mostly by the fact that few nations can afford to place assets that high.
But lately, more complex problems are beginning to arise from humanity’s sharing the atmosphere.
Carbon and fluorocarbons affect everyone’s children.
When Chernobyl exploded, it was not Ukraine alone that inherited generations of radioactive effects.
Soon nations will colonize the moon, giving rise to the same unsatisfactory and tentative situation we have in Antarctica, where nations essentially take without legally owning.
A more enlightened approach to shared resources is needed, one less dependent on neo-colonial control.
Some suggest that sky governance follow the precedent set by the electromagnetic spectrum.
The “airwaves” are used for a variety of communications, including government use and public access like radio.
The range of usable territory – the spectrum – is administered by governments as though it were real estate, and is broken up according to wavelength, with an amount apportioned for cell phones, other bits for military pilots, and so on.
This situation would be disastrous if it could not be closely managed, because people would broadcast on top of one another.
Soon, we will see the spectrum become even more active, with the merger of cell phone infrastructure and the relatively unregulated Internet.
This will likely be followed by more sophisticated means of communications based on access to the air.
To some extent, everyone will benefit from this, because governments will be less able to censor information.
But would it be a better model of atmospheric administration?
Perhaps not.
The problem is that at least some electromagnetic waves are dangerous.
Consider this: at any given moment, the average citizen in the developed world has billions of messages passing through his or her brain.
It can be shown that cells are able to detect these messages, but the extent to which they affect the body is unknown.
However, it is known that bees are dying in the northern hemisphere.
This is a major concern because so much food depends on bees for pollination.
The primary causes of this recent epidemic are germs and mites, but these have always been with us.
So why are they affecting bees now?
A German study suggests that the proliferation of cell phone towers is weakening bees’ immune systems (the study correlates towers and signal strength to bee deaths).
The jury is still out, but it may be that there is no safe level of exposure to many common radiations; the more we are exposed, the more damage we do.
We would see the result of this in indirect effects, such as growing rates of asthma and hyperactivity in children.
So perhaps the problem with existing regulatory models lies in the assumption that the entire atmosphere is available for unconstrained use.
We have an intuitive understanding of the importance of limits when the loss of our sky is articulated in poetic terms.
As light pollution covers more of the planet, we are losing one of our oldest connections to nature: the ancient ability to gaze at the stars.
If dying bees do not inspire formal guidelines about how the sky should be shared, let us hope that empty space will.
The sky must belong to the people.
Abuse of it harms everyone, and profits from its use should benefit all as well, implying the need to establish worldwide democratic rights over what is an unarguably universal resource.
The Discreet Terror of Fidel Castro
This spring marks the third anniversary of the wave of repression in which Fidel Castro’s regime arrested and handed down long sentences to 75 leading Cuban dissidents.
Soon afterwards, many friends and I formed the International Committee for Democracy in Cuba.
The bravery of those who found their social conscience, overcame fear, and stood up to communist dictatorship remains fresh in my memory.
It reminds me of the jingle of keys that rang out on Prague’s Wenceslas Square -- and later around the rest of what was then Czechoslovakia -- in the autumn of 1989.
This is why I rang keys during the conference calling for democracy in Cuba that our committee held in Prague three years ago.
I wanted to draw the international community’s attention to the human-rights situation in Cuba, to support that country’s opposition, and to encourage all pro-democratic forces.
The European Union then introduced diplomatic sanctions, albeit mostly symbolic, against Castro’s regime.
Soon after, however, a contrary position came to the fore.
The EU opened a dialogue with the Cuban regime, sanctions were conditionally suspended, and it was even made clear to dissidents that they were not welcome at the embassies of several democratic countries.
Cowardly compromise and political alibis – as so often in history – defeated a principled position.
In return, the Cuban regime made a sham gesture by releasing a small number of the prisoners of conscience – mostly those who were tortured and seriously ill – who the regime most feared would die in its notorious prisons.
Those of us who live in Europe’s new post-communist democracies experienced similar political deals when we lived behind the former Iron Curtain.
We are also extremely familiar with the argument that European policies have not led to any mass arrests in Cuba.
But democracy has shown weakness and the Cuban regime has in turn adapted its tactics.
Respected organizations like Reporters without Borders and Amnesty International have collected ample evidence of violence and intimidation against freethinking Cubans, who can expect a different kind of ring than that from jangling keys.
Their cases often do not end in courts but in hospitals.
Groups of “fighters for the revolution” – in reality, the Cuban secret police – brutally attack their political opponents and accuse them of absurd crimes in an effort to intimidate them or to force them to emigrate.
On the island, such planned harassments are called “actos de repudio” – “acts of rejection.”
Political violence that creates the impression of mere street crime is never easy to prove, unlike jail terms of several years, and therefore it does not receive due attention from the world.
However, thousands of former political prisoners in central and eastern Europe can attest to the fact that a kick from a secret policeman on the street hurts just as much as a kick from a warden behind prison gates.
The powerlessness of the victim of state-organized street fights and threats against his family is experienced in the same way as the powerlessness of somebody harassed during a state security investigation.
Many European politicians who have sought to see the situation on the ground have been barred in recent years.
Some Europeans apparently regard Cuba as a faraway country whose fate they need take no interest in, because they have problems of their own.
But what Cubans are enduring today is part of our own European history.
Who better than Europeans, who brought communism to life, exported it to the world, and then paid dearly for it over many decades, know better about the torments inflicted upon the Cuban people?
Humanity will pay the price for communism until such a time as we learn to stand up to it with all political responsibility and decisiveness.
We have many opportunities to do so in Europe and Cuba.
And it is no surprise that the new member countries of the EU have brought to Europe fresh historical experience, and with it far less understanding for and tolerance of concession and compromise.
Representatives of the EU’s member states will meet in Brussels in mid-June to review a common policy towards Cuba.
European diplomats should weigh up the consequences of accommodating Castro’s regime.
They should show that they will neither ignore his practices nor neglect the suffering of Cuban prisoners of conscience.
We must never forget the seemingly anonymous victims of Castro’s “acts of rejection.”
The Diseases of Globalization
Globalization is under strain as never before.
Everywhere its stresses rumble.
Most of sub-Saharan Africa, South America, the Middle East, and Central Asia are mired in stagnation or economic decline.
North America, Western Europe, and Japan are bogged down in slow growth and risk renewed recession.
War now beckons in Iraq.
For advocates of open markets and free trade this experience poses major challenges.
Why is globalization so at risk?
Why are its benefits seemingly concentrated in a few locations?
Can a more balanced globalization be achieved?
No easy answers to these questions exist.
Open markets are necessary for economic growth, but they are hardly sufficient.
Some regions of the world have done extremely well from globalization - notably East Asia and China in recent years.
Yet some regions have done miserably, especially sub-Saharan Africa.
The US Government pretends that most problems in poor countries are of their own making.
Africa's slow growth, say American leaders, is caused by Africa's poor governance.
Life, however, is more complicated than the Bush Administration believes.
Consider Africa's best governed countries - Ghana, Tanzania, Malawi, Gambia.
Each experienced falling living standards over the past two decades while many countries in Asia that rank lower on international comparisons of governance - Pakistan, Bangladesh, Myanmar and Sri Lanka - experienced better economic growth.
The truth is that economic performance is determined not only by governance standards, but by geopolitics, geography, and economic structure.
Countries with large populations, and hence large internal markets, tend to grow more rapidly than countries with small populations.
(Like all such economic tendencies, there are counterexamples).
Coastal countries tend to outperform landlocked countries.
Countries with high levels of malaria tend to endure slower growth than countries with lower levels of malaria.
Developing countries that neighbor rich markets, such as Mexico, tend to outperform countries far away from major markets.
These differences matter.
If rich countries don't pay heed to such structural issues, we will find that the gaps between the world's winners and losers will continue to widen.
If rich countries blame unlucky countries - claiming that they are somehow culturally or politically unfit to benefit from globalization - we will create not only deeper pockets of poverty but also deepening unrest.
This, in turn, will result in increasing levels of violence, backlash, and yes, terrorism.
So it's time for a more serious approach to globalization than rich countries, especially America, offer.
It should begin with the most urgent task - meeting the basic needs of the world's poorest peoples.
In some cases their suffering can be alleviated mainly through better governance within their countries.
But in others, an honest look at the evidence will reveal that the basic causes are disease, climatic instability, poor soils, distances from markets, and so forth.
An honest appraisal would further show that the poorest countries are unable to raise sufficient funds to solve such problems on their own.
Rather than rich countries giving more lectures about poor governance, real solutions will require that rich countries give sufficient financial assistance to overcome the deeper barriers.
One illustration makes the case vividly. Controlling disease requires a health system that can deliver life-saving medications and basic preventive services such as bed-nets to fight malaria and vitamins to fight nutritional deficiencies.
Such a system costs, at the least, around $40 per person per year.
That's a tiny amount of money for rich countries, which routinely spend over $2000 per person per year for health, but it is a sum out of reach for poor countries like Malawi, with annual incomes of $200 per person.
A functioning health system would cost more than its entire government revenue!
Even if Malawi is well governed, its people will die of disease in large numbers unless Malawi receives adequate assistance.
Successful globalization requires that we think more like doctors and less like preachers.
Rather than castigating the poor for their "sins," we should make careful diagnoses, as a good doctor would, for each country and region - to understand the fundamental factors that retard economic growth and development.
In some regions, such as the Andes and Central Asia, the problem is primarily geographical isolation.
Here the task is to build roads, air links, and internet connectivity to help these distant regions create productive ties with the world.
Rich countries must help finance these projects.
In sub-Saharan Africa, the basic challenges are disease control, soil fertility, and expanded educational opportunities.
Once again, greater foreign assistance will be needed.
In still other regions, the main problems may be water scarcity, discrimination against women or other groups, or one of a variety of specific problems.
It is past time to take globalization's complexities seriously.
The one-size-fits-all ideology of the Washington Consensus is finished.
As we stand at the brink of war, it is urgent that the hard job of making globalization work for all gets started.
This can be done, if we remove the ideological blinkers of the rich, and mobilize a partnership between rich and poor.
Our common future depends on it.
The Diseases of Global Warming
Today few scientists doubt that Earth's atmosphere is warming.
Most also agree that the rate of heating is accelerating and that the consequences could become increasingly disruptive.
Even schoolchildren can recite some projected outcomes: oceans will warm and glaciers will melt, causing sea levels to rise and salt water to inundate low-lying coastal areas.
But less familiar effects of global warming--namely, serious human medical disorders--are no less worrisome.
Many are already upon us.
Most directly, global warming is projected to double the number of deaths related to heat waves by 2020.
Prolonged heat can increase smog and the dispersal of allergens, causing respiratory symptoms.
Global warming also boosts the frequency and intensity of floods and droughts.
Such disasters not only cause death by drowning or starvation, but also damage crops and make them vulnerable to infection and infestations by pests and choking weeds, thereby contributing to food shortages and malnutrition.
They displace entire populations, leading to overcrowding and associated diseases, such as tuberculosis.
Developing countries--where resources to prevent and treat infectious diseases are scarce--are most vulnerable to other infectious diseases associated with climate change as well.
But advanced nations, too, can fall victim to surprise attack--as happened last year when the first outbreak of West Nile virus in North America killed seven New Yorkers.
International commerce and travel enable infectious diseases to strike continents away from their sources.
Of course, not all the human health consequences of global warming may be bad.
Very high temperatures in hot regions may reduce snail populations, which have a role in transmitting schistosomiasis, a parasitic disease.
High winds--caused by parching of the earth's surface--may disperse pollution.
Warmer winters in normally chilly areas may reduce cold-related heart attacks and respiratory ailments.
Overall, however, the undesirable effects of more variable and extreme weather are likely to overshadow any benefits.
Diseases relayed by mosquitoes--malaria, dengue fever, yellow fever, and several kinds of encephalitis--are eliciting particularly grave concern as the world warms.
These disorders are projected to become increasingly prevalent because cold weather limits mosquitoes to seasons and regions with certain minimum temperatures.
Extreme heat also limits mosquito survival.
But within their survivable range of temperatures, mosquitoes proliferate faster and bite more as the air becomes warmer.
Greater heat also speeds the rate at which pathogens inside them reproduce and mature.
The immature malaria parasite takes 26 days to develop fully at 68 degrees F, but only 13 days at 77 degrees F. The Anopheles mosquitoes that spread malaria live only several weeks, so warmer temperatures enable more parasites to mature in time for the mosquitoes to transfer the infection.
As whole areas heat up, mosquitoes enter formerly forbidden territories, bringing illness with them, while causing more disease for longer periods in the areas they already inhabit.
Malaria has already returned to the Korean peninsula, and parts of the US, southern Europe and the former Soviet Union have experienced small outbreaks.
Some models project that by the end of this century, the zone of potential malaria transmission will contain about 60% of the world's population, up from 45% now.
Similarly, Dengue (or "breakbone") fever--a severe flu-like viral illness that can cause fatal internal bleeding--has broadened its range in the Americas over the past 10 years, reaching down to Buenos Aires by the end of the 1990's.
(It has also found its way to northern Australia.)
Today it afflicts an estimated 50-100 million people in the tropics and subtropics.
These outbreaks, of course, cannot be traced conclusively to global warming.
Other factors--declines in mosquito-control and other public health programs, or rising drug and pesticide resistance--could be involved.
But the case for a climatic cause becomes stronger when outbreaks coincide with other projected consequences of global warming.
Such is the case in the world's highlands.
In the 19th century, European colonists in Africa settled in the cooler mountains to escape the dangerous swamp air (" mal aria ") in the lowlands.
Today many of those havens are compromised.
As anticipated, warmth is climbing up many mountains.
Since 1970, the elevation at which temperatures are always below freezing has ascended almost 500 feet in the tropics.
Insect-borne infections are being reported at high elevations in South and Central America, Asia, and east and central Africa.
More droughts and floods due to global warming will also probably fuel outbreaks of water-borne diseases.
Paradoxically, droughts can favor water-borne diseases--including cholera, a cause of severe diarrhea--by wiping out supplies of safe drinking water, concentrating contaminants, and preventing good hygiene.
Lack of clean water also limits safe rehydration of diarrhea or fever sufferers.
Floods, meanwhile, wash sewage and fertilizer into water supplies, triggering expansive blooms of harmful algae that are either directly toxic to humans, or contaminate the fish and shellfish that humans consume.
The human health toll taken by global warming will depend to a large extent on us.
Effective surveillance of climate conditions and of the emergence or resurgence of infectious diseases (or their carriers) should be a global priority, as should providing preventive measures and treatments to at-risk populations.
But we must also limit human activities that contribute to atmospheric heating, or that exacerbate its effects.
Little doubt remains that burning fossil fuels contributes to global warming by spewing carbon dioxide and other heat-absorbing, or "greenhouse," gases into the air.
Analysis of tree rings identifies fossil fuels as the source of the 30% increase in greenhouse gases over pre-industrial levels.
Cleaner energy sources must be adopted, while forests and wetlands must be preserved and restored to absorb carbon dioxide, and to absorb floodwaters and filter contaminants before they reach water supplies.
None of this will come cheap.
But humanity will pay a far dearer price for inaction.
The Dismal Economist’s Joyless Triumph
NEW YORK – I have long been forecasting that it was only a matter of time before America’s housing bubble – which began in the early days of this decade, supported by a flood of liquidity and lax regulation – would pop.
The longer the bubble expanded, the larger the explosion and the greater (and more global) the resulting downturn would be.ampnbsp;
Economists are good at identifying underlying forces, but they are not so good at timing.
The dynamics are, however, much as anticipated.
America is still on a downward trajectory for 2009 – with grave consequences for the world as a whole.
For example, as their tax revenues plummet, state and local governments are in the process of cutting back their expenditures.
American exports are about to decline.
Consumer spending is plummeting, as expected.
There has been an enormous decrease in (perceived) wealth, in the trillions, with the decline in house and stock prices.
Besides, most Americans were living beyond their means, using their houses, with their bloated values, as collateral.
That game is up.ampnbsp;
America would be facing these problems even if it were not simultaneously facing a financial crisis.
America’s economy had been supercharged by excessive leveraging; now comes the painful process of deleveraging.
Excessive leveraging, combined with bad lending and risky derivatives, has caused credit markets to freeze.
After all, when banks don’t know their own balance sheets, they aren’t about to trust others’.ampnbsp;
The Bush administration didn’t see the problems coming, denied that they were problems when they came, then minimized their significance, and, finally, panicked.
Guided by one of the architects of the problem, Hank Paulson, who had advocated for deregulation and allowing banks to take on even more leveraging, it was no surprise that the administration veered from one policy to another – each strategy supported with absolute conviction, until minutes before it was abandoned for another.
Even if confidence really were all that mattered, the economy would have sunk.
Moreover, what little action has been taken has been aimed at shoring up the financial system.
But the financial crisis is only one of several crises facing the country: the underlying macroeconomic problem has been made worse by the sinking fortunes of the bottom half of the population.
Those who would spend don’t have the money, and those with the money aren’t spending.
America, and the world, is also facing a major structural problem, not unlike that at the beginning of the last century, when productivity increases in agriculture meant that a rapidly declining share of the population could find work there.
Nowadays, increases in manufacturing productivity are even more impressive than they were for agriculture a century ago; but that means the adjustments that must be made are all the greater.
Not long ago, there was discussion of the dangers of a disorderly unwinding of the global economy’s massive imbalances.
What we are seeing today is part of that unwinding.
But there are equally fundamental changes in the global balances of economic power: the hoards of liquid money to help bail out the world lie in Asia and the Middle East, not in West.
But global institutions do not reflect these new realities.
Globalization has meant that we are increasingly interdependent.
One cannot have a deep and long downturn in the world’s largest economy without global ramifications.
I had long argued that the notion of decoupling was a myth; the evidence now corroborates that view.
This is especially so because America has exported not just its recession, but its failed deregulatory philosophy and toxic mortgages, so financial institutions in Europe and elsewhere are also confronting many of the same problems.ampnbsp;
Many in the developing world have benefited greatly from the last boom, through financial flows, exports, and high commodity prices.
Now, all of that is being reversed.
Indeed, it is the ultimate irony that money is now flowing from poor and well-managed economies to the US, the source of the global problems.
The point of reciting these challenges facing the world is to suggest that, even if Obama and other world leaders do everything right, the US and the global economy are in for a difficult period.
The question is not only how long the recession will last, but what the economy will look like when it emerges.
Will it return to robust growth, or will we have an anemic recovery, à la Japan in the 1990’s?
Right now, I cast my vote for the latter, especially since the huge debt legacy is likely to dampen enthusiasm for the big stimulus that is required.
Without a sufficiently large stimulus (in excess of 2% of GDP), we will have a vicious negative spiral: a weak economy will mean more bankruptcies, which will push stock prices down and interest rates up, undermine consumer confidence, and weaken banks.
Consumption and investment will be cut back further.
Many Wall Street financiers, having received their gobs of cash, are returning to their fiscal religion of low deficits.
It is remarkable how, having proven their incompetence, they are still revered in some quarters.
What matters more than deficits is what we do with money; borrowing to finance high-productivity investments in education, technology, or infrastructure strengthens a nation’s balance sheet.
The financiers, however, will argue for caution: let’s see how the economy does, and if it needs more money, we can give it.
But a firm that is forced into bankruptcy is not un-bankrupted when a course is reversed.
The damage is long-lasting.ampnbsp;
If Obama follows his instinct, pays attention to Main Street rather than Wall Street, and acts boldly, then there is a prospect that the economy will start to emerge from the downturn by late 2009.
If not, the short-term prospects for America, and the world, are bleak.
The Dissident and the Mahatma
NEW DELHI – With the Nobel Peace Prize presented this month in the absence of this year’s laureate, the imprisoned Chinese dissident Liu Xiaobo, it might be wise to think of a man who never won the prize: Mahatma Gandhi.
Despite that omission, there is no doubting Gandhiji’s worldwide significance – including for Liu.
The Mahatma’s image now features in advertising campaigns for everything from Apple computers to Mont Blanc pens.
When Richard Attenborough's film Gandhi swept the Oscars in 1983, posters for the film proclaimed that “Gandhi’s triumph changed the world forever.” But did it?
The case for Gandhi-led global change rests principally on the American civil-rights leader Martin Luther King, Jr., who attended a lecture on Gandhi, bought a half-dozen books about the Mahatma, and adopted satyagraha as both precept and method.
In leading the struggle to break down segregation in the southern United States, King used non-violence more effectively than anyone else outside India. “Hate begets hate.
Violence begets violence,” he memorably declared. “We must meet the forces of hate with soul force.”
King later avowed that “the Gandhian method of non-violent resistance...became the guiding light of our movement.
Christ furnished the spirit and motivation, and Gandhi furnished the method.” Last month, Barack Obama told India’s Parliament that were it not for Gandhi, he would not be standing there as America’s president.
So, yes, Gandhism helped to change America forever.
But it is difficult to find many other instances of its success.
India’s independence marked the dawn of the era of decolonization, but many nations threw off the yoke of empire only after bloody and violent struggles.
Other peoples have since fallen under the boots of invading armies, been dispossessed of their lands, or terrorized into fleeing their homes.
Non-violence has offered no solutions to them.
Indeed, non-violence could only work against opponents vulnerable to a loss of moral authority – that is, governments responsive to domestic and international public opinion, and thus capable of being shamed into conceding defeat.
In Gandhi’s own time, non-violence could have done nothing to prevent the slaughter of Jews in Hitler’s path.
The power of Gandhian non-violence rests in being able to say, “To show you that you are wrong, I punish myself.” But that has little effect on those who are not interested in whether they are wrong and are already seeking to punish you.
Your willingness to undergo punishment merely expedites their victory.
No wonder Nelson Mandela, who told me that Gandhi had “always been a great source of inspiration,” explicitly disavowed non-violence as ineffective in South Africans’ struggle against apartheid.
Indeed, Gandhi can sound frighteningly unrealistic: “The willing sacrifice of the innocent is the most powerful answer to insolent tyranny that has yet been conceived by God or man. Disobedience, to be ‘civil,’ must be sincere, respectful, restrained, never defiant, and it must have no ill will or hatred behind it.
Neither should there be excitement in civil disobedience, which is a preparation for mute suffering.”
For many around the world who suffer under oppressive regimes, such a credo would sound like a prescription for sainthood – or for impotence.
Mute suffering is fine as a moral principle, but only Gandhi could use it to bring about meaningful change.
The sad truth is that the staying power of organized violence is almost always greater than that of non-violence.
Gandhi believed in “weaning an opponent from error by patience, sympathy, and self-suffering.” But, while such an approach may have won Burma’s Aung San Suu Kyi the Nobel that eluded the Mahatma himself, the violence of the Burmese state proved far stronger in preventing change than her suffering has in fomenting it.
And, as the Mumbai terror attacks of November 2008 demonstrated, India today faces the threat of cross-border terrorism to which the Mahatma’s only answer – a fast in protest – would have left its perpetrators unmoved.
In his internationalism, the Mahatma expressed ideals that few can reject.
But the decades since his death have confirmed that there is no escaping the conflicting sovereignties of states.
Some 20 million lives have been lost in wars and insurrections since Gandhi died.
In a dismaying number of countries, including his own, India, governments spend more for military purposes than for education and health care combined.
The current stockpile of nuclear weapons represents more than a million times the explosive power of the bomb whose destruction of Hiroshima so grieved him.
Outside India, as within it, Gandhian techniques have been perverted by terrorists and bomb-throwers who declare hunger strikes when punished for their crimes.
Gandhism without moral authority is like Marxism without a proletariat.
Yet too few who have tried his methods worldwide have had his personal integrity or moral stature.
None of these misguided or cynical efforts has diluted Gandhi’s greatness, or the extraordinary resonance of his life and his message.
While the world was disintegrating into fascism, violence, and war, the Mahatma taught the virtues of truth, non-violence, and peace.
He destroyed the credibility of colonialism by opposing principle to force.
And he set and attained personal standards of conviction and courage that few will ever match.
He was that rare kind of leader who was not confined by his followers’ inadequacies.
Yet Gandhi’s truth was essentially his own.
He formulated its unique content and determined its application in a specific historical context.
Inevitably, few in today’s world can measure up to his greatness or aspire to his credo.
The originality of Gandhi’s thought and the example of his life still inspire people around the world today – as Liu Xiaobo would readily admit.
But his triumph did not “change the world forever.”
I wonder if the Mahatma, surveying today’s world, would feel that he had triumphed at all.
The Distance Between the First and Third Rome
MOSCOW/ROME: For a decade, Pope John Paul II has been flying in circles around Mother Russia: one day he visits the Baltics or his homeland of Poland; the next, Orthodox Romania and Georgia.
In June, 2001 Pope John Paul II will visit Ukraine and Armenia, both parts of the former Soviet Union and both still watched over warily by Russia’s Orthodox Church.
Karol Wojtyla, the first Slavic Pope in history, has long dreamed of visiting Moscow; indeed he may see such a visit as putting the finishing touch on his long, turbulent pontificate.
But, a decade after communism’s collapse, it is Russia’s churchmen, not its politicians, who are blocking the way.
From Khrushchev onward, Moscow’s rulers eyed the Vatican suspiciously but not without interest.
Kremlin leaders instinctively understood the benefits of normalising relations with the Holy See for Soviet propaganda and foreign policy, and meetings between the Pope and Andrei Gromyko and Nikolai Podgorny did take place.
Not until 1989, however, did Mikhail Gorbachev dare establish official relations with the Vatican, inviting Pope John Paul II to visit the Soviet Union.
Boris Yeltsin repeated the invitation in 1991, and Vladimir Putin did the same on his visit to Rome soon after his inauguration as Russia’s president.
No papal visit to Moscow has taken place, however, because Russia’s Orthodox Church remains opposed.
The Russian Orthodox attitude is voiced repeatedly by Patriarch Alexy II and his closest aides, including the Patriarchy’s “foreign minister,” Metropolitan Kyrill.
Before the announcement of the Papal visit to Ukraine, the Italian newspaper "Corriera della Sera" quoted Patriarch Alexy II as admitting that a papal visit was possible, but only if “persecution” of Russian Orthodoxy by Catholics in western Ukraine and proselytising by Catholic clergy on the "canonic territory" of the Russian Orthodox church came to an end.
Although seemingly hardline, these two conditions are a step forward for the Patriarch from his notorious statement of a few years ago, when he said that a true Orthodox Christian must not even pick mushrooms in the same forest as a Catholic.
The Soviet Union, the Communist Party of the USSR, and the KGB may have collapsed, but the Russian Orthodox Church still defends the sacred borders of the former Russian empire.
Moreover, because almost half of the parishes overseen by the Moscow Patriarchate are abroad – in Ukraine, Belarus, Moldova, Central Asia and other regions – Patriarch Alexy II lays increasing stress on the global character of his church.
Indeed, the Russian Church’s archbishops presented their Patriarch a golden icon, one side of which depicted the Last Supper and the other a map of his vast canonical territory, to mark the tenth anniversary of his reign.
Clearly, all the bows and plaintive “mea culpas” made by the Pope over the past year to mark the 2000th anniversary of the Birth of Christ, have not satisfied the Patriarch.
So, sadly, the Pontiff’s dream of stepping on Russian soil, a soil lavishly showered with the blood of martyrs, before what the Pope has called this terrible "wolverine" century comes to an end, may never come true.
Opportunities for a meeting between the two church leaders still exist, of course.
For example, in 2001 both the Catholic and Orthodox Easter will fall on the same day – 15 April – an extremely rare occurrence.
What better pretext could there be for an ecumenical meeting?
But will the Patriarch seize the moment?
The wounds between the two churches would heal if left undisturbed.
I will never forget how two old men – the Pope and 90-year old Academician Dmitry Likhachev – leafed through a rare book together with tears in their eyes.
Likhachev was showing the Pope an album about the Solovetsy camp where Likhachev had been imprisoned for “religious propaganda”.
The album contained photographs of the windows of the old monk’s cells to which the Soviets had affixed bars; for years these cells imprisoned Catholic clergymen, such as those arrested after State Prosecutor Nikolay Krylenko proclaimed the Catholic Church “an enemy of the people” in 1917.
No one in authority in Russia, however, has ever repented for crimes committed against the country’s own people.
The hierarchy of the Russian Orthodox Church, indeed, has not admitted the sins of its collaboration with the Soviet state.
Such a “mea culpa” from Russia might also help begin to heal the wounds of the Catholic/Orthodox division.
Rapprochement between Christians is today a moral and political imperative.
The Pope made the first step in a meeting last spring with Patriarch Shenuda III of the Coptic Orthodox Church during the Pope’s visit to the Holy land.
John Paul II hinted, daringly, at the possibility of revising the thousand-year old principle of the Bishop of Rome being first of the apostles and Christ’s vicar on earth.
Since 1054, this idea has been a primary obstacle to Christian unity.
According to the Kremlin press service, President Putin speaks to Patriarch Alexy II often. Perhaps he should explain to him that failure to pursue rapprochement with the Vatican contradicts Russia’s state interests.
For the Kremlin and the Vatican see eye to eye on many problems, including the Middle East. As Russia’s struggles to find a role and a voice in world diplomacy, having the Holy See as an ally would be beneficial.
“The tears of this century laid the ground for a new spring of the human spirit," the Pope declared in his last visit to the UN.
Russia, as everyone knows, has suffered as much as, if not more than, any country.
Sadly, as the title from one of Russia’s most beloved movies of the communist era tells us, it still seems that “Moscow (or at least its Patriarch) does not believe in tears.”
The Disuniting Kingdom?
Three hundred years after the first Scottish Parliament voluntarily voted itself out of existence in 1707, the Scottish National Party has won a plurality in the devolved Scottish parliament that is one of Tony Blair’s great legacies.
Does an SNP-led government herald the break-up of the United Kingdom?
More broadly, does nationalism, that product of nineteenth-century politics, still have a role to play in Europe?
The answer to the first question is almost certainly no.
Nationalist polled only 31.9% of the votes cast with parties supporting the union polling 59.6%.
Proof positive that proportional representation can produce strange outcomes.
Back in 1957, the motive for “laying the foundations of an ever closer union of the peoples of Europe” was to make war between European nations obsolete, and, in doing so, to bring internal stability to all European nations.
For 50 years, the European Union was not much tested by this mission because nationalist impulses were crushed between the two great Cold War alliances.
With those constraints gone, nationalism in both its Bismarckian state-making and ethnic state-breaking guises has gotten a second wind.
When people nowadays speak of nationalism, sinister images from another era come to mind.
But nationalism is, of course, not inevitably violent: it flares into conflict only in places with a flammable legacy.
The break-up of the Soviet Union and its satellite empire shows that the way to address such a legacy is not to force unhappy peoples to live together in one country.
It is to recognize that in some places divorce is inevitable, and to ensure that it is as amicable as possible.
The world could not have prevented Yugoslavia’s spiral into civil war, but it might have made it less cruel by helping to negotiate terms of separation earlier.
Some suggest that the SNP’s accession to power in Scotland does herald the rebirth of a nation, many others regard that claim as rhetoric which ignores the tremendous advances made in the quality of life, opportunity and living standards.
If the claim were true it is a rebirth that is coming about in an extraordinary way.
Except for some odd and hapless individuals, there have been no underground armies, separatist terrorists, campaigns of civil disobedience aimed at unseating governments, or even any mass demonstrations.
The establishment of a Scottish Parliament vested with powers devolved from the United Kingdom Parliament at Westminster has been perhaps the first revolution of the modern era that was conducted by committees of lawyers, clergymen, and accountants rather than cells of bearded radicals.
Moreover, it was achieved without a shot being fired.
So it is not surprising that it has also been a revolution that – unlike that which divided Czechoslovakia 14 years ago – falls well short of achieving full statehood for Scotland.
The Parliament at Westminster, to which Scots continue to elect MP’s, still controls defense and foreign affairs, macroeconomic policy, taxation, and social security.
The Scottish Parliament, however, is able to legislate over health services, education, local government, housing, criminal and civil justice, and economic development.
It can also raise or lower the basic rate of income tax – though by no more than 3% – and levy charges, such as road tolls.
This semi-independence partly reflects the absence of linguistic motives in Scottish nationalism, unlike the Quebecois of Canada or Flemish nationalism in Belgium.
Gaelic is spoken by only about 80,000 of Scotland’s 5.1 million inhabitants.
Nor does religion play a discernible role; while Roman Catholics used to fear independence as being liable to result in Protestant hegemony, today Catholics and Protestants are roughly equal in their support of Scotland’s institutions.
Moreover, unlike East European or Balkan nationalism, the Scottish variety has little to do with ethnicity or religion.
Thus, in Scotland today there are none of the conditions that fomented rebellion in Ireland and led to Irish independence in 1922, the last great rupture in the political union of the British Isles.
Scottish nationalists do look longingly at Ireland, but for its recent phenomenal economic growth.
For most Scots, however, the Irish experience is not an appealing model – perhaps because it is associated with terrorism.
They also know that the huge financial assistance which Ireland received form the European Union will never be repeated
What motivates Scottish nationalism is the strong attachment to Scotland’s civic institutions.
In this respect, Scotland differs from Wales, which was forcibly incorporated into England more than 400 years before the Scots signed the voluntary Act of Union in 1707.
Distinctive Welsh institutions, apart from those concerned with the Welsh language, are difficult to identify.
By contrast, Scotland’s institutional landscape – schools and universities with their own curriculum and exam structures, a legal system with its own codes and rules, a church independent of the state, and a distinctive system of local government – were left untouched by the union.
Today’s Scottish parliament helps to dissipate Scottish discontents because it is revitalizing those institutions.
But it is also propelling British politics into a new and unfamiliar decentralized political system.
Westminster’s writ no longer runs north of the border, at least as far as things like education and health are concerned.
Equally, it is now far harder for Scots to blame a distant government in London for their problems, although the SNP will now try to make blaming Westminster for all ills even more of an art form.
So, far from being a harbinger of the break-up of Britain, devolution has brought fresh vitality to national life outside London.
The new confidence in Edinburgh, which is experiencing an economic boom, is self-evident.
What is arising is a different Scotland, and a different Britain, and this is Scotland’s lesson for Europe.
Britain’s highly centralized political culture has been irreversibly changed.
It is being replaced by a more diverse sort of politics, in which different regional and national identities gain encouragement and expression.
By cooperating with the rest of the United Kingdom, rather than clashing, Scotland is giving new meaning to the phrase “ever closer union.”
The Bilateral Threat to Free Trade
ISTANBUL – The Doha Round of global trade talks appears to have died this year, almost without a whimper.
While a small portion of the project may be saved, the essential reality is that this is a unique failure in the history of multilateral trade negotiations, which have transformed the global economy since World War II.
Many of the seven previous rounds of negotiations – including the Uruguay Round, which resulted in the establishment of the World Trade Organization (WTO) in 1995 as the successor to the General Agreement on Trade and Tariffs (GATT) – took years to complete, but none died of neglect or disinterest.
Today’s indifference is particularly, though not exclusively, evident in the United States.
President Barack Obama was silent on the issue in his re-election campaign, and breathed scarcely a word about it in his first campaign, too.
One wonders whether what is at stake is even fully understood in some capitals.
Successful multilateral trade negotiations have significantly shaped the world in which we live and have dramatically enhanced the lives of millions of people.
Between 1960 and 1990, only one person in five lived in an economically open society; today, nine in ten do.
The rule-based trading system developed by the GATT and the WTO has been embraced by virtually the entire global community.
It has provided an effective road map for the former planned and import-substituting economies, facilitating their integration into the global market.
Initially, “globalization” was a dirty word to some.
But, even among its opponents, its value for poorer countries came to be recognized, as it helped to lift more than a billion people in Asia out of abject poverty.
While much more needs to be done for Africa and parts of Latin America, the Doha Round was intended to assist in providing market access (and therefore opportunity) to many more in the developing world.
The essence of the multilateral system consists in two principles: non-discrimination and national treatment.
The former is described in the trade negotiators’ lexicon as the “most favored nation” principle, which essentially seeks to ensure that trade benefits provided to one country are provided to all.
The latter requires member states to provide the same treatment to trading partners within national borders as that provided to nationals.
The non-discrimination principle ensured that global trade did not become a “spaghetti bowl” of preferential bilateral trade agreements.
Moreover, a multilateral framework for trade negotiations gave weaker states far more balanced conditions than they would face were they forced to negotiate bilaterally with the likes of China, the United States, or the European Union.
In fact, what we have seen in recent years is an increasing rush to bilateral agreements by the major trading countries and blocs.
This has apparently consumed virtually all of their attention.
The WTO has been marginalized, and even what has already been achieved in the incomplete Doha Round appears unlikely to be delivered in a final agreement in the foreseeable future.
The damage to the credibility of the WTO – once lauded as the greatest advance in global governance since the inspired institution-building of the immediate postwar period – may yet prove lasting.
Worse, it could have a serious impact not merely on trade, but on political relationships more generally.
One of the WTO’s great achievements has been the adjudication system that it provides – the so-called Dispute Settlement Mechanism.
This independent body has been a resounding success, giving the world an effective quasi-judicial system to resolve disputes between trading partners.
But its continued success depends ultimately on the credibility of the WTO itself; it will inevitably suffer collateral damage from a failure of multilateral negotiations.
Indeed, the current rush to bilateral trade agreements has been accompanied by a rise in protectionism.
For example, there have been 424 new measures of this kind in the EU since 2008.
Furthermore, the EU’s non-discriminatory tariffs are fully applicable to only nine trading partners.
Everyone else has “exceptional” treatment.
Next, no doubt, we will have the prospect of a bilateral free-trade agreement between the EU and the US.
An EU-Japan treaty is already in the wind, as is a “Trans-Pacific Partnership” to liberalize trade among the US and major Asian and Latin American economies.
If either ever comes to pass, which I doubt, a huge share of world trade would be conducted within a discriminatory framework.
Some recognize the risks.
In May 2011, Jagdish Bhagwati of Columbia University and I co-chaired a High Level Group convened by the prime ministers of the United Kingdom, Germany, Turkey, and Indonesia to attempt to move the multilateral process ahead.
Our sponsors welcomed our recommendations, but that and similar efforts have gained little traction, leaving all countries rushing headlong toward a world full of uncertainty and risk.
It is not too late to reverse the apparently inexorable tide of bilateralism.
But the only way to do so is by proceeding with WTO negotiations.
Even if the Doha Round cannot be concluded, there may be other routes, such as implementing what has already been agreed.
Another alternative might be to advance multilateral negotiations among willing countries in specific areas, such as services, with other WTO members joining later.
But if we are to move forward rather than revert to earlier, more dangerous times, the US, in particular, must reassert a constructive role in multilateralism.
The US must lead again, as it did in the past.
The Doha Round’s Premature Obituary
NEW YORK – The Doha Round, the first multilateral trade negotiation conducted under the auspices of the World Trade Organization, is at a critical stage.
Now in their 10th year, with much negotiated, the talks need a final political nudge, lest Doha – and hence the WTO – disappear from the world’s radar screen.
Indeed, the danger is already real: when I was in Geneva a year ago and staying at the upscale Mandarin Oriental, I asked the concierge how far away the WTO was.
He looked at me and asked: “Is the World Trade Organization a travel agency?”
The threat of irrelevance is understood by leading statesmen, who have committed themselves to putting their shoulders to the wheel.
British Prime Minister David Cameron, German Chancellor Angela Merkel, and Indonesian President Susilo Bambang Yudhoyono have unequivocally endorsed the recommendation of the High-level Expert Group on Trade, which Peter Sutherland and I co-chair, that we ought to abandon the Doha Round if it is not concluded by the end of this year.
Our idea was that, just as the prospect of an imminent hanging concentrates the mind, the deadline and prospective death of the Doha Round would galvanize the world’s statesmen behind completing the last mile of the marathon.
(The analogy is all the more appropriate, given that WTO Director-General Pascal Lamy, who has brilliantly kept the process going, is a marathon runner.)
But even as these efforts are gathering momentum, The Financial Times, which used to be a staunch supporter of multilateral free trade, dropped a cluster bomb on Doha, even congratulating itself that, in 2008 (when a ministerial meeting failed to reach closure), it “argued that leaders should admit the negotiations were dead.” But if skeptics forget Mark Twain’s famous response to a mistaken obituary – “The reports of my death are greatly exaggerated” – were the negotiators who have continued to work since then akin to Gogol’s “dead souls?”
The Financial Times recommends working out a Plan B here and now, which would sabotage the political efforts to conclude the Doha Round.
Despite rhetorical bromides about requiring “ministers to unlearn ingrained habits and focus on substance, not rhetoric,” and about “business associations engaging with the granular detail of what companies want,” this proposed Plan B would strengthen the bilateral and regional trade initiatives that have diverted energy and attention from Doha and the WTO.
The irony here is that the proliferation of such preferential trade agreements (PTAs) is usually justified by pointing to the lack of progress in concluding the Doha talks.
Never have cause and effect been so dramatically reversed in arguments over trade policy.
It has become increasingly obvious that such PTAs are what I call “termites in the trading system.”
Indeed, evidence is mounting that they foster harmful trade diversion by increasing discrimination against non-members through differential use of anti-dumping actions.
Thus, recent work by the economists Tom Prusa and Robert Teh has produced convincing evidence that anti-dumping filings decrease by 33-55% within a PTA, whereas such filings increase against non-members by 10-30%.
More importantly, PTAs are used by hegemonic powers to foist on weaker trading partners demands unrelated to trade but desired by domestic lobbies, at times in a markedly asymmetric way.
Thus, Peru saw its labor legislation virtually rewritten by United States Congressmen indebted to American unions before the US-Peru PTA was concluded.
Similarly, Claude Barfield has documented how Colombia has been intimidated into making it a crime (with prison terms of up to five years) to engage in acts that “undermine the right to organize and bargain collectively.” Colombia must also pass a law dictating prison terms for anyone who “offers a collective pact to non-union workers that is superior to terms for union workers.”
Such overreach is typical of what goes on in hegemon-led PTAs, unlike at the WTO, where stronger countries like India (which asked the European Union to take all non-trade-related measures out of the proposed PTA) and Brazil cannot be so intimidated.
The danger is that overreach will lead civil society and voters in democratic developing countries to react against self-serving displays of hegemonic might by jettisoning free trade itself, on the assumption that such openness is little more than neo-colonialism.
The Dollar and the Dragon
CAMBRIDGE – For several years, American officials have pressed China to revalue its currency.
They complain that the undervalued renminbi represents unfair competition, destroying American jobs, and contributing to the United States’ trade deficit.
How, then, should US officials respond?
Just before the recent G-20 meeting in Toronto, China announced a formula that would allow modest renminbi appreciation, but some American Congressmen remain unconvinced, and threaten to increase tariffs on Chinese goods.
America absorbs Chinese imports, pays China in dollars, and China holds dollars, amassing $2.5 trillion in foreign-exchange reserves, much of it held in US Treasury securities.
To some observers, this represents a fundamental shift in the global balance of power, because China could bring the US to its knees by threatening to sell its dollars.
But, if China were to bring the US to it knees, it might bring itself to its ankles in the process.
China would not only reduce the value of its reserves as the dollar’s value fell, but it would also jeopardize America’s continued willingness to import cheap Chinese goods, which would mean job losses and instability in China.
Judging whether economic interdependence produces power requires looking at the balance of asymmetries, not just at one side of the equation.
In this case, interdependence has created a “balance of financial terror” analogous to the Cold War, when the US and the Soviet Union never used their potential to destroy each other in a nuclear exchange.
In February 2010, angered over American arms sales to Taiwan, a group of senior military officers called for the Chinese government to sell off US government bonds in retaliation.
Their proposal went unheeded.
Instead, Yi Gang, China’s director of state administration of foreign exchange, explained that “Chinese investments in US Treasuries are market investment behavior, and we don’t wish to politicize them.” Otherwise, the pain would be mutual.
Nevertheless, this balance does not guarantee stability.
There is always the danger of actions with unintended consequences, especially as both countries can be expected to maneuver to change the framework and reduce their vulnerabilities.
For example, after the 2008 financial crisis, while the US pressed China to let its currency appreciate, officials at China’s central bank began arguing that America needed to increase its savings, reduce its deficits, and move toward supplementing the dollar’s role as a reserve currency with IMF-issued special drawing rights.
But China’s bark was louder than its bite.
China’s increased financial power may have increased its ability to resist American entreaties, but despite dire predictions, its creditor role has not been sufficient to compel the US to change its policies.
While China has taken minor measures to slow the increase in its dollar-denominated holdings, it has been unwilling to risk a fully convertible currency for domestic political reasons.
Thus, the renminbi is unlikely to challenge the dollar’s role as the largest component of world reserves (more than 60%) in the next decade.
Yet, as China gradually increases domestic consumption rather than relying on exports as its engine of economic growth, its leaders may begin to feel less dependent than they now are on access to the US market as a source of job creation, which is crucial for internal political stability.
In that case, maintaining a weak renminbi would protect the trade balance from a flood of imports.
Asymmetries in currency markets are a particularly important aspect of economic power, since they underlie global trade and financial markets.
By limiting the convertibility of its currency, China is avoiding currency markets’ ability to discipline domestic economic decisions.
Compare, for example, the discipline that international banks and the IMF were able to impose on Indonesia and South Korea in 1998, with the relative freedom of the US – bestowed by denomination of American debt in dollars – to increase government spending in response to the 2008 financial crisis.
Indeed, rather than weakening, the dollar has appreciated as investors regard the underlying strength of the US as a safe haven.
Obviously, a country whose currency represents a significant proportion of world reserves can gain international power from that position, thanks to easier terms for economic adjustment and the ability to influence other countries.
As French President Charles de Gaulle once complained, “since the dollar is the reference currency everywhere, it can cause others to suffer the effects of its poor management.
This is not acceptable. This cannot last.”
But it did.
America’s military and economic strength reinforces confidence in the dollar as a safe haven.
As a Canadian analyst put it, “the combined effect of an advanced capital market and a strong military machine to defend that market, and other safety measures, such as a strong tradition of property rights protection and a reputation for honoring dues, has made it possible to attract capital with great ease.”
The G-20 is focusing on the need to “re-balance” financial flows, altering the old pattern of US deficits matching Chinese surpluses.
This would require politically difficult shifts in consumption and investment, with America increasing its savings and China increasing domestic consumption.
Such changes do not occur quickly.
Neither side is in a hurry to break the symmetry of interdependent vulnerability, but both continue to jockey to shape the structure and institutional framework of their market relationship.
For the sake of the global economy, let us hope that neither side miscalculates.
The Dollar Hits an Oil Slick
CAMBRIDGE – The rapid rise in the price of oil and the sharp depreciation of the dollar are two of the most noteworthy developments of the past year.
The price of oil has increased by 85% over the past 12 months, from $65 a barrel to $120.
During the same period, the dollar fell by 15% relative to the euro and 12% against the yen.
To many observers, the combination of a falling dollar and a rise in oil prices appears to be more than a coincidence.
But what is the link between the two?
Would the price of oil have increased less if oil were priced in euros instead of dollars?
Did the dollar’s fall cause the price of oil to rise?
And how did the rise in the price of oil affect the dollar’s movement?
Because the oil market is global, with its price in different places virtually identical, the price reflects both total world demand for oil and total supply by all of the oil-producing countries.
The primary demand for oil is as a transport fuel, with lesser amounts used for heating, energy, and as inputs for petrochemical industries like plastics.
The increasing demand for oil from all countries, but particularly from rapidly growing emerging-market countries like China and India, has therefore been, and will continue to be, an important force pushing up the global price.
The thinking behind the question of whether oil would cost less today if it were priced in euros seems to be that, since the dollar has fallen relative to the euro, this would have contained the rise in the price of oil.
In reality, the currency in which oil is priced would have no significant or sustained effect on the price of oil when translated into dollars, euros, yen, or any other currency.
Here is why. The market is now in equilibrium with the price of oil at $120.
That translates into 75 euros at the current exchange rate of around $1.60 per euro.
If it were agreed that oil would instead be priced in euros, the quoted market-equilibrating price would still be 75 euros and therefore $120.
Any lower price in euros would cause excess global demand for oil, while a price above 75 euros would not create enough demand to absorb all of the oil that producers wanted to sell at that price.
Of course, the rate of increase of the price of oil in euros during the past year was lower than the rate of increase in dollars.
The euro price of oil in May 2007 was 48 euros, or 56% below its current price.
But that would be true even if oil had been priced in euros.
The coincidence of the dollar decline and the rise in the oil price suggests to many observers that the dollar’s decline caused the rise in the price of oil.
That is only true to the extent that we think about the price of oil in dollars, since the dollar has fallen relative to other major currencies.
But if the dollar-euro exchange rate had remained at the same level that it was last May, the dollar price of oil would have increased less.
The key point here is that the euro price of oil would be the same as it is today.
And the dollar price of oil would have gone up 56%.
The only effect of the dollar’s decline is to change the price in dollars relative to the price in euros and other currencies.
The high and rising price of oil does, however, contribute to the decline of the dollar, because the increasing cost of oil imports widens the United States’ trade deficit.
In 2007, the US spent $331 billion on oil imports, which was 47% of the US trade deficit of $708 billion dollars.
If the price of oil had remained at $65 a barrel, the cost of the same volume of imports would have been only $179 billion, and the trade deficit would have been one-fifth lower.
The dollar is declining because only a more competitive dollar can shrink the US trade deficit to a sustainable level.
Thus, as rising global demand pushes oil prices higher in the years ahead, it will become more difficult to shrink America’s trade deficit, inducing more rapid dollar depreciation.
The Dollar’s Last Days?
CAMBRIDGE – Zhou Xiaochuan, the governor of the People’s Bank of China, recently suggested that replacing the dollar with the International Monetary Fund’s Special Drawing Rights as the dominant reserve currency would bring greater stability to the global financial system.
The idea of reforming the system by introducing a supranational reserve currency is also, it appears, supported by Russia and other emerging markets.
And a United Nations advisory committee chaired by the Nobel laureate Joseph Stiglitz has argued for a new global reserve currency, possibly one based on the SDR.
Transforming the dollar standard into an SDR-based system would be a major break with a policy that has lasted more than 60 years.
The SDR was introduced 40 years ago to supplement what was then seen as an inadequate level of global reserves, and was subsequently enshrined in the IMF’s amended Articles of Agreement as the future principal reserve asset.
But the world soon became awash in dollars.
So, instead of becoming the principal reserve asset of the global system, the proportion of SDRs in global reserves shrank to a tiny fraction, rendering the SDR the monetary equivalent of Esperanto.
Although the euro, created in 1999, turned out to be a more serious competitor to the dollar, its share in total international reserves has probably remained below 30%, compared to 65% for the dollar (these shares are in part estimates, as China, the world’s largest holder of reserves, does not report the currency composition of its holdings).
There are two ways in which the dollar’s role in the international monetary system can be reduced.
One possibility is a gradual, market-determined erosion of the dollar as a reserve currency in favor of the euro.
But, while the euro’s international role – especially its use in financial markets – has increased since its inception, it is hard to envisage it overtaking the dollar as the dominant reserve currency in the foreseeable future.
Such an outcome is probably only possible if two conditions are met: first, the United Kingdom joins the euro area, and, second, the United States makes serious, confidence-sapping mistakes.
The latter condition may already have been partially met, but US policies to stabilize its financial system should help avoid a major dollar slide.
Moreover, the European Central Bank has repeatedly stated that it neither encourages nor discourages the euro’s international role.
With the dollar’s hegemony unlikely to be seriously undermined by market forces, at least in the short and medium-term, the only way to bring about a major reduction in its role as a reserve currency is by international agreement.
The Chinese proposal falls into this category.
One way to make the SDR the major reserve currency relatively soon would be to create and allocate a massive amount of new SDRs to the IMF’s members.
While the G-20 leaders have decided to support an SDR allocation of $250 billion, this will increase the share of SDRs in total international reserves to no more than 4%.
In order to make the SDR the principal reserve asset via the allocation route, close to $3 trillion in SDRs would need to be created, an unrealistic proposition.
But there is a more realistic way for the SDR’s importance to grow.
Back in 1980, the IMF came close to adopting a so-called SDR Substitution Account.
The idea was to permit countries whose official dollar holdings were larger than they were comfortable with to convert dollars into SDRs.
Conversion would occur outside the market, and thus would not put downward pressure on the dollar.
Member countries would receive an asset that was more stable than the dollar, as it was based on a basket of currencies, thereby providing better protection against losses.
The plan fell apart when some major IMF shareholders could not accept the burden-sharing arrangements that would be necessary in case of losses due to exchange-rate movements.
The US also lost interest in the scheme as the dollar strengthened.
What are the chances of adopting a scheme of this kind today?
Is the US prepared to go along with a reform of the international monetary system that reduces the dollar’s role?
Until recently, I would have considered this unlikely.
But the changed international climate, and the possibility of a bout of severe dollar weakness, could convince the US to go along with a conversion scheme that would alleviate excessive pressure on the dollar.
And, apart from possible political considerations, large holders of dollars would find a substitution account attractive as a form of protection against strong fluctuations in the dollar’s value.
What about possible losses suffered by the Substitution Account? This can be dealt with by setting aside part of the IMF’s large gold stock.
Even if an SDR Substitution Account is established, it is unlikely that the dollar’s share in international reserves would fall to an insignificant level.
The dollar will remain important for many countries as a vehicle for intervention in foreign-exchange markets, as well as for invoicing and for denominating internationally traded securities.
But one can envisage a system in which international reserves are held each in roughly equal shares of dollars, euros (assuming a further gradual increase in its share), and SDRs.
While there are currently other priorities, it would be useful for the IMF to study anew an SDR substitution account and similar schemes.
If it does not, the debate will take place elsewhere.
The Dollar’s Long Tail
NEW DELHI – The ongoing economic crisis and the persistent deficits of the United States have increasingly called into question the dollar’s role as the world’s anchor currency.
Recent moves to internationalize China’s renminbi have led to anticipation of a looming shift in the global monetary system.
Many prominent economists, including the members of a United Nations panel headed by the Nobel laureate economist Joseph Stiglitz, are recommending a “Global Reserve System” to replace the dollar’s hegemony.
But the long history of global anchor currencies suggests that the dollar’s days on top may be far from over.
In ancient times, India ran a large trade surplus with the Roman empire.
As Pliny wrote in the first century: “Not a year passed in which India did not take 50 million sesterces away from Rome.”&nbsp;
That trade imbalance implied a continuous drain on gold and silver coin, causing shortages of these metals in Rome.
In modern terms, the Romans faced a monetary squeeze.
Rome responded by reducing the gold/silver content (the ancient equivalent of monetization), which led to sustained inflation in the empire.
But the frequent discovery of Roman coins in India suggests that Roman coinage continued to be accepted internationally long after it must have been obvious that its gold or silver content had fallen.
In the sixteenth century, Spain emerged as a superpower following its conquest of South America.
Between 1501 and 1600, 17 million kilograms of pure silver and 181,000 kilograms of pure gold flowed from the Americas to Spain, which spent the money on wars in the Netherlands and elsewhere.
This increase in liquidity caused both an economic boom and inflation across Europe.
Despite this wealth, Spain became increasingly indebted, eventually defaulting three times – in 1607, 1627, and 1649 –&nbsp;and heading into sharp geopolitical decline.
Yet Spanish silver coins (known as “pieces of eight” or Spanish dollars) remained the main currency used in world trade right up to the American Revolutionary War.
In fact, Spanish coin remained legal tender in the US until 1857 – long after Spain itself had ceased to be a major power.
By the middle of the nineteenth century, the world was functioning on a bi-metal system based on gold and silver.
But, following the British example, most major countries had shifted to a gold standard by the 1870’s.
The Bank of England stood ready to convert a pound sterling into an ounce of (11/12 fine) gold on demand. That system was disrupted by World War I, but Britain went back to a gold peg in 1925.
As the Great Depression took root, however, the Bank of England was forced to choose between providing liquidity to banks and honoring the gold peg.
It opted for the former in 1931.
Yet pound sterling continued to be a major world currency until well after World War II.
Even as late as 1950 – more than a half-century after the US had replaced Britain as the world’s largest industrial power – 55% of foreign-exchange reserves were held in sterling, and many countries continued to peg their currencies to it.
Three things should be clear from this history.
First, a global monetary system based on precious metals does not resolve the fundamental imbalances of a global economic system.
Second, precious metals do not resolve the problem of inflation.
And, finally, the anchor currency and the underlying eco-system of world trade often outlive the geopolitical decline of the anchor country by decades.
A new economic order was established after World War II, with the US as the anchor country.
The Bretton Woods system linked the US dollar to gold at $35 per ounce, with other currencies linked to the dollar (though occasionally allowed to make adjustments).
The flaw in the system was that it underpinned global economic expansion for only as long as the US was willing to provide dollars by running up deficits – the same deficits that would eventually undermine America’s ability to maintain the $35/ounce gold price.
In 1961, the US responded by creating the London Gold Pool, which obliged other countries to reimburse the US for half of its gold losses.
But this arrangement quickly bred discontent, with France leaving the Gold Pool in 1967.
The Bretton Woods system collapsed four years later.
Or did it?
Despite the problems of the 1970’s, the dollar remained the world’s dominant currency, with successive generations of Asian countries pegging their exchange rates to it.
As with the Bretton Woods system, a peripheral economy (for example, China) could grow very rapidly even as the anchor economy (the US) enjoyed cheap financing.
China’s relative rise did not diminish the dollar’s role – and may even have enhanced it.
Indeed, like the Japanese during their period of rapid growth, the Chinese have, until recently, resisted internationalization of the renminbi.
So, are we entering a post-dollar world?
Despite all of the pain caused by the Great Recession, there is no sign that the world is forsaking the greenback.
Investors remain willing to finance the US at rock-bottom interest rates, and the nominal trade-weighted index of the dollar has not collapsed.
Even if China replaces the US as the world’s largest economy within a decade, an anchor currency can be more resilient than the economic and geopolitical dominance of its country of origin.
That is why the dollar will most likely remain the dominant global currency long after the US has been surpassed.
The Dollar Wars Return
Faced by uncertain re-election prospects, and worried about job losses, US President George W. Bush has begun to blame other countries, sending his Treasury Secretary to demand that they raise their exchange rates in order to make foreign goods more expensive for American consumers.
That was John Snow's mission on his recent trip to China, but his goal was nothing new.
Two of Snow's predecessors, John Connally and James Baker, followed a similar quest for politically desirable exchange rates.
What Snow asked of China is an odd demand: we do not normally go into stores and ask the shopkeeper to raise his prices.
But the emergence of powerful new currencies always provokes fresh attempts at the use of exchange rates for political purposes.
For twenty years after WWII, there were just two major international currencies, as there had been through the interwar period: the British pound and the American dollar.
By the end of the 1960's, the pound had been so weakened that international markets lost interest.
Instead, two new major currencies emerged, as the strength of the Japanese and (West) German economies produced big trade surpluses.
American producers and the US government complained that American workers were being priced out of jobs because the Yen and D-mark were being held at artificially low levels.
The US government under President Richard Nixon pressed the Germans and Japanese to revalue their currencies.
The Germans did but the Japanese did not, infuriating the US Treasury Secretary, who tried his best to bully Japan.
John Connally complained that Japan had a "controlled economy" and did not play by the rules.
All sides engaged in mudslinging about who was doing the most damage to the world economy.
The Americans accused the Europeans and especially the Japanese of growing too slowly, while the Europeans and the Japanese argued that the US was exporting inflation to the rest of the world and abusing the international monetary system in order to sustain its military adventurism (at that time in Vietnam).
Indeed, US monetary expansion had itself become a weapon in the war over exchange rates.
High inflation in the US highlighted the exchange-rate problem by showing the instability of the dollar standard.
Indeed, Connally called the dollar "our currency but your problem."
In the end, the US forced the Japanese to revalue their currency by destroying the international monetary order in August 1971.
The Americans first unilaterally suspended the gold convertibility of the dollar--the backbone of the fixed but adjustable exchange-rate regime created by the post-WWII Bretton Woods conference--and then teamed up with the Europeans to force on Japan a 16.9% revaluation of the Yen against the dollar.
(Japan's Finance Minister had threatened to commit hara-kiri if the revaluation rate was set at 17%.)
But the end of the fixed exchange-rate regime for industrial countries did not end activist management of currencies.
The scenario of the early 1970's was replayed with floating rates in the mid-1980's, with the meetings of the major countries' finance ministers first forcing down the Yen and the D-mark against the dollar, and then trying in 1987 to hold rates stable.
Both of these historical episodes ended in chaos.
The breakdown of Bretton Woods in 1971, far from stopping inflation, unleashed a synchronized monetary surge.
A decade later, efforts to keep the Yen in line with American views produced the Japanese bubble economy, for which many Japanese blamed America after it burst.
Today, the US dollar is also looking at a challenge from two new or newly important currencies, China's Renmimbi and the Euro.
As in the 1970's and the 1980's, the rising Asian currency is seen as a much greater threat because that is where the biggest trade imbalances lie.
Moreover, the US still has a powerful weapon because other countries hold so many dollars: the current estimate is that 46% of US Treasury bonds are held overseas.
This invites both sides to play a game of brinkmanship.
America's leverage consists in the rest of the world's massive financial stake in the fate of the dollar.
But the rest of the world can threaten a dollar sell-off.
China's government today might find some useful lessons in the apparently remote dramas of the 1970's.
The most immediate and most obvious is that it is difficult to hold out long against the US, especially when the American government is under pressure from major domestic interest groups whose strong lobbying power might be used to lead a push for new trade protectionism.
But the world--and the US in particular--might also learn some lessons.
Previous episodes in the politically driven creation of new exchange-rate systems have been highly chaotic, and resulted in increased levels of international tension.
At an emotional level, debating exchange rates means blaming foreigners for whatever goes wrong in the domestic economy.
This approach is both unhealthy and immature, yet not necessarily very damaging.
What is worse is when the economic policy response becomes the equivalent of blaming foreigners: imposing new forms of trade barriers.
Doing so may feel good in the short term, but it merely destroys wealth and undermines job creation everywhere.
The Domestic Logic of Iran’s Foreign Plots
WASHINGTON, DC – Though Saudi Ambassador Adel al-Jubeir is alive and well in Washington, the plot to assassinate him may have succeeded – if its aim was not to kill al-Jubeir, but rather Iranian President Mahmoud Ahmadinejad’s foreign policy.
The history of the Islamic Republic is filled with cases of factions exploiting foreign policy to gain power against their domestic rivals.
It is common for competing groups to sacrifice national interests – such as Iran’s international credibility – to achieve their own goals.
During the Iran-Iraq war, Ronald Reagan’s national security adviser, Robert McFarlane, paid a clandestine visit to Iran with the approval of the country’s highest authorities, to pursue a deal that would have been to Iran’s advantage.
But anti-American elements in the government leaked the news to an Arab newspaper, killing the deal and landing both the Reagan administration and the Iranian government in huge trouble.
Mir Hossein Mousavi, the former prime minister who now leads the opposition, spelled out the problem more than 20 years ago.
On September 5, 1988, he resigned in protest against then-president Ali Khamenei’s interference in his duties.
In his resignation letter, Mousavi complained that the “government’s authority on foreign policy was taken away.”
He charged that
“[military and intelligence] operations outside the country are taking place without the government’s knowledge or orders....Only after an airplane is hijacked are we made aware of it.
Only after a machine gun opens fire in one of Lebanon’s streets and its noise echoes everywhere do we find out.
Only after [Saudi police] find explosive material in Iranian pilgrims’ baggage am I informed.”
Iranian intelligence has assassinated more than 400 Iranian dissidents outside of Iran, including the last prime minister under the Shah, Shapour Bakhtiar, and four Kurds in Berlin’s Mikonos restaurant in 1992 (a German judge later officially named Iran’s Supreme Leader as one of the senior officials involved in the terrorist attack).
Similarly, the Quds Force of Iran’s Revolutionary Guard has carried out hundreds of operations in Iraq, Afghanistan, Lebanon, and elsewhere.
By contrast, the plot targeting al-Jubeir seems to have been highly unprofessional, almost unconcerned with success.
So unlikely are the details that only a power struggle within Iran could justify it.
If so, the plot’s target likely was not al-Jubeir himself, but rather those elements in the regime that seek a diplomatic opening to the US –&#160;namely, Ahmadinejad and his circle.
When news about the assassination plot first appeared, the Supreme Leader, Ali Khamenei, was on his way to the western province of Kermanshah.
In his first speech after the story broke, he made no reference to it, most likely expecting the president to make a statement.
After two days of Ahmadinejad’s meaningful silence, Khamenei felt forced to reject the US allegations publicly.
Only after five days did Ahmadinejad issue a statement denying the accusations – and not as strongly as did Khamenei.
It is ironic to see Iran’s radical Islamist president portray himself as open to resuming US-Iran relations and suffer for it at the hands of a supposedly pragmatic Supreme Leader.
But Ahmadinejad is no exception to the historical rule in Iran: every faction that loses out to its domestic rivals looks beyond the country for an alliance with outside powers.
In the Islamic Republic, those interested in opening up to the West are typically those with little authority.
Ahmadinejad and his faction face a two-edged problem: Khamenei has boxed them in politically, while rampant economic corruption and failed efforts at reform have disillusioned many of the president’s supporters.
As a result, Ahmadinejad, in a further ironic twist, is seeking to glorify Iran’s pre-Islamic history in order to stir nationalist sentiment in his favor and accomplish what he is sure that Khamenei does not want: greater openness to the West, particularly to the US.
He has repeatedly expressed his willingness to meet with US President Barack Obama – even sending him a congratulatory letter on his inauguration – and has traveled to New York to be interviewed by the American media much more often than his predecessors.
Ahmadinejad is well aware that if he succeeds in portraying himself as someone who – in opposition to the Supreme Leader’s will – wants to solve major issues between Iran and the US, that could partly compensate for his economic failures and gain him some new supporters.
For that plan to work, Ahmadinejad needs to survive through the next parliamentary election in March 2012 and the presidential election in June 2013, despite Khamenei’s determination to marginalize him.
Regardless of whether Khamenei was aware of the plot against al-Jubeir, its purpose was to delegitimize Ahmadinejad’s foreign-policy agenda.
So, if Khamenei really was unaware of the plot, it means that some elements in the government or the Revolutionary Guards are acting on their own, which is deeply troubling in its own right.
If there are elements powerful enough to plan such a plot –&#160;even an unsuccessful one – they could do it again in the future.
That raises an even more troubling question: If such “independent” decision-makers exist, are they able to affect Iran’s nuclear policy, too?&#160;
The Domestic Wars of Hosni Mubarak
The decision by Egyptian President Hosni Mubarak’s government to try two senior judges for blowing the whistle on vote rigging in last autumn’s parliamentary elections has rocked the country.
Massive crowds have gathered to support the judges – and have caught Mubarak’s regime completely unaware.
Mubarak’s government now seems to be backtracking as fast as it can.
Judge Mahmoud Mekki has been acquitted, and Judge Hisham al-Bastawisy, who suffered a heart attack the night before, has merely been reprimanded.
Yet Cairo remains restless, and the government fears another outpouring of support for democracy, as the judges have called for renewed nationwide demonstrations.
Egyptian judges have a long-standing tradition of discretion and propriety.
But they feel abused by government efforts to sugarcoat the manipulation of election after election by claiming that judges supervise the voting.
What makes their struggle loom so large for a normally quiescent Egyptian public is partly that nearly all 9,000 judges are standing fast in solidarity.
Their representative body, the Judges’ Club, has long pushed for a new law to restore judicial independence.
Now the judges are insisting on their independence by themselves.
The Mubarak regime is adamantly opposed, and resorts to extra-judicial means, such as emergency courts and national security and military courts, which do not observe international standards.
Contrary to his campaign promises during his run for a fifth term as President, Mubarak has requested (and his rubber-stamp parliament has granted) a two-year extension of the Emergency Law by which Egypt has been ruled throughout his presidency.
It is to this law, above all, that the judges and Egypt’s civil society object.
The Emergency Law has been in force since the assassination of President Anwar Sadat in October 1981, and Mubarak claims that he needs another extension to combat terrorism.
But, according to a recent human rights report, despite the Emergency Law, 89 people were killed and 236 wounded in terrorist attacks in Egypt during the previous 12 months.
In neighboring Israel, which is still in a struggle with the Palestinians, only 18 were killed and 25 wounded in similar attacks during the same period.
Yet Israelis do not live under an emergency law.
Consider, moreover, that at the height of the Arab-Israeli conflict in 1973, Egypt’s armed forces stood at one million troops.
Now only 350,000 serve in the military, while the internal security police recently hit the one-million mark.
Mubarak’s first internal war was with Islamic militants during his early years in power, but he now finds himself caught in three more domestic wars.
The battle with the judges has incited enough popular unrest to warrant Mubarak’s deployment of thousands of black-uniformed central security forces in the heart of Cairo.
This deployment, lasting three weeks so far, is already longer than the combined duration of the last two wars with Israel.
Another domestic war, with the Egyptian Bedouins of Sinai, broke out two years ago.
Taking their cue from their Palestinian neighbors, if not from al-Qaeda, alienated young Bedouins apparently decided to rebel against their treatment as third-class citizens.
All around them, but especially in the ebullient resorts of southern Sinai, billions are spent on roads, airports, and beaches; sizeable parcels of land are allocated generously to rich Egyptians from the Nile Valley and to foreigners, but not to Sinai natives.
Indeed, Sinai Bedouins have the right of use but not ownership of land, because a lethargic, occasionally corrupt bureaucracy still deems the Sinai a military zone and its natives’ loyalty questionable.
Two years ago, on the anniversary of the war of October 1973, young Sinai militants bombed the Taba Hilton.
Last July, on another national holiday, they hit three tourist spots not far from the Mubarak family compound in Sharm el-Sheikh.
These symbolic as well as lethal warnings to a family that has grown Pharaonic in scale, style, and power have gone unheeded.
The third recent domestic war, this one over Christian Coptic citizenship rights, has been brewing for years.
Copts are the original Egyptians, and they were the majority population until the tenth century.
As Egypt was Arabized and Islamized, the Copts became a minority in their original homeland.
In Mubarak’s Egypt, citizens’ legal equality, while stipulated in the constitution, is not respected or observed, especially with regard to the construction and protection of Coptic churches.
Last November, when Muslim zealots attacked a Coptic church in Alexandria, several Copts were injured.
Six months later, a fanatic targeted three churches during Sunday services, killing a few worshippers and injuring many.
Copts marched in the streets of Alexandria for the next three days, protesting the security authorities’ leniency toward the culprits, the scapegoating of their community, or even an official hand in the attacks to justify an extension of the Emergency Law.
Hosni Mubaraks’ four domestic wars are fuelled by Egypt’s excluded, who are increasingly in rebellion against a regime that has long outlived its legitimate mandate.
The battle with the judges may well prove to be Mubarak’s Achilles’ heel.
Justice is a central value for Egyptians, and its absence is at the core of all protests.
There can be no evidence more compelling than the unprecedented numbers of people who have rallied peacefully in solidarity with the judges.
America’s Labor Market by the Numbers
NEWPORT BEACH – Politicians and economists now join investors in a ritual that typically takes place on the first Friday of each month and has important consequences for global markets: anticipating, internalizing, and reacting to the monthly employment report released by the United States Bureau of Labor Statistics (BLS).
Over the last few years, the report has evolved in a significant way – not only providing an assessment of the economy’s past and current state, but, increasingly, containing insights into its future as well.
Think of the BLS’s employment report as a comprehensive monthly check-up for the American labor market.
Among its many interesting statistics, it tells you how many jobs are created and where; how earnings and hours worked are evolving; and the number, age, and education of those seeking employment.
Despite the data’s richness, only two indicators consistently attract widespread attention: net monthly job creation (which amounted to 169,000 in August) and the unemployment rate (7.3% in August, the lowest since December 2008).
Together they point to a gradual and steady improvement in overall labor-market conditions.
This is certainly good news.
It is not long ago that job creation was negative and the unemployment rate stood at 10%.
The problem is that the headline numbers shed only partial light on what may lie ahead.
The figure for monthly job creation, for example, is distorted by the growing importance of part-time employment, and it fails to convey the reality of stagnant earnings.
Meanwhile, the headline unemployment rate does not reflect the growing number of Americans who have left the work force – a phenomenon vividly reflected by the decline in the labor participation rate to just 63.2%, a 35-year low.
To get a real sense of the labor market’s health, we need to look elsewhere in the BLS’s report.
What these other numbers have to tell us – about both the present and the future – is far from reassuring.
Consider the statistics on the duration of unemployment.
After all, the longer one is unemployed, the harder it is to find a full-time job at a decent wage.
In August, the BLS classified 4.3 million Americans as long-term unemployed, or 37.9% of the total unemployed – a worrisome figure, given that the global financial crisis was five years ago.
And, remember, this number excludes all the discouraged Americans who are no longer looking for a job.
In fact, the more comprehensive employment/population ratio stands at only 58.6%.
The teenage-unemployment rate is another under-appreciated indicator that is at an alarming level.
At 22.7%, too many American teenagers, lacking steady work experience early in their professional careers, risk going from unemployed to unemployable.
Then there are the indicators that link educational attainment and employment status. Most notable here is the growing gap between those with a college degree (where the unemployment rate is only 3.5%) and those lacking a high school diploma (11.3%).
Rather than confirming the paradigm of gradual and steady improvement, these disaggregated numbers attest to a highly segmented, multi-speed labor market – one with features that could become more deeply embedded in the structure of the economy.
If current trends persist, the BLS’s report will continue to evolve from a snapshot of the past and present to a preview of the future.
Undoubtedly, the US labor market’s uneven recovery has much to do with the structural and policy gaps exposed by the 2008 global financial crisis and the recession that followed.
The economy is still struggling to provide a sufficient number of jobs for those who were previously employed in leverage-driven activities that are no longer sustainable (let alone desirable).
Moreover, US schools, particularly at the primary and secondary levels, continue to slip down the global scale, constraining Americans’ ability to benefit from globalization.
Meanwhile, existing and newly created jobs provide less of an earnings upside.
And political polarization narrows the scope for effective tactical and structural policy responses.
This combination of factors is particularly burdensome for the most vulnerable segments of the US population – particularly those with limited educational attainment, first-time labor-market entrants, and those who have been out of work for an extended period.
So while net job creation will continue and the unemployment rate will maintain its downward trajectory – both highly welcome – the labor market’s evolution risks fueling rather than countering already-significant income and wealth inequalities, as well as poverty.
Overburdened social support mechanisms would thus come under even greater pressure.
And all of this would amplify rather than attenuate political polarization, placing other urgent policy priorities at even greater risk.
If this interpretation is correct, the heightened attention given to the monthly BLS headline indicators needs to be accompanied by a broader analysis and a different mindset.
After all, the report is much more than a scorecard on America’s performance in confronting a persistent economic, political, and social challenge; it is also an urgent call for a more focused corrective effort involving both government and business.
A better mix of fiscal and monetary policies and sustained measures to enhance productivity and competitiveness remain necessary conditions for addressing America’s labor-market challenges.
But they are not sufficient.
Both the public and private sectors – individually and through scalable and durable partnerships – need to think much more seriously about labor retraining and retooling programs, enhanced labor mobility, vocational training, and internships.
President Barack Obama’s appointment of a “jobs czar” would also help to enhance the credibility, accountability, and coordination required to overcome today’s significant and rising employment challenges.
Yes, the headline numbers will continue to signal overall improvement in the labor market.
The urgent task now is to ensure that lasting progress is not undermined by the worrisome compositional trends that the BLS’s report highlights month after month.
The Dragon and the Bear
Second honeymoons rarely, if ever, recapture the zest of lost love.
Yet ever since the Soviet Union’s collapse in 1991, Russia and China have sought to rekindle the close relations that once supposedly existed between the USSR and Mao’s China before Khrushchev’s denunciation of Stalin in 1956.
But that renewed Sino-Russian marriage always smacked more of convenience – aimed as it was at checking American hegemony – than of true romance.
Now Russia’s invasion of Georgia has shattered even the illusion of attraction.
In 1969, the Chinese and Soviet armies exchanged fire across their disputed border.
Recently, the two countries signed an agreement that seemed to put an end to their long border dispute.
The agreement was a sort of follow-up to the visit to Beijing of Dmitry Medvedev, who made China one of his first official trips abroad after being elected Russia’s president.
During Vladimir Putin’s presidency, Chinese and Russian troops engaged in joint military maneuvers, and the two countries became dominant powers in the Shanghai Cooperation Organization (SCO), which, to some Western observers, looked like an effort to counterbalance NATO.
There were also years of “Russia in China” and “China in Russia” cultural exchanges, meant to underscore that the two countries were tied together not just by geopolitical pragmatism, but by genuine cultural/historical ties as well.
But the fact is that 17 years of high-level bilateral cooperation have produced little of substance.
Indeed, in the wake of the invasion of Georgia, China may be seriously rethinking its relations with Russia.
It may not yet be ready to embark on a full-fledged policy of “containment,” but in the wake of the dismemberment of Georgia – and with Russia claiming a zone of “privileged influence” throughout the former Soviet world – China clearly views Russia as an emerging strategic threat.
For example, China has refused to endorse Russia’s recognition of the independence of South Ossetia and Abkhazia, and has encouraged the SCO’s other members to do the same.
The reasons are not hard to find.
As a general principle of foreign policy, China believes that national borders are sacrosanct.
No power, not even the United Nations, should be allowed to change them without the consent of the country concerned.
More importantly, China views the break-up of the USSR as one of the greatest strategic gifts in its history.
Instead of confronting a (usually hostile) Russian/Soviet empire on its border, a vast swath of buffer states appeared after 1991.
Their continued independence is now deemed essential to China’s national security.
As a result, any more Russian efforts to establish even informal suzerainty over the Soviet successor states are, following the dismemberment of Georgia, likely to meet Chinese resistance.
The economic components of the Sino-Russian relationship – where real attachments are tested – are also dissatisfactory, at least from China’s point of view.
China’s major interest in Russia is oil and gas.
But, while Russia is firmly committed to being a major supplier of gas and oil to Europe, it is hesitant to play a similar role with China.
Moreover, Russia’s efforts to gain monopoly control of the gas pipeline networks across Eurasia pose a direct danger for China, because monopolists can not only gouge their consumers, but also shut off supplies for political purposes, as Russia has done repeatedly over the past two decades.
So China’s national security interest is to ensure that the gas-supplying nations of Central Asia have outlets to sell their gas that are not under Kremlin control.
Other than oil, gas, and other commodities, China has rather limited interests in Russia.
Russia has been China’s major supplier of weapons since the late 1990’s.
But, given the stagnant state of Russian science and technology, even the best Russian equipment nowadays seems out of date.
Indeed, although the war with Georgia demonstrated the revived combat spirit of the Russian army – at least when compared to its ineptness in the two Chechen wars of the 1990’s – it also exhibited the grave defects of Russian military technology.
Most of the arms used were yesterday’s weapons.
As China is now able to harness its own technological might to produce sophisticated weapons, Russia’s usefulness in this area is waning fast.
Nor do the Chinese have much interest in assuming de facto control of Asiatic Russia, despite shrieks from Russian strategic pundits that this is China’s real goal.
China might, indeed, have an interest in some border areas with fertile soil and moderate climate.
But it hardly wishes to colonize the frozen wastes of Siberia.
In fact, Siberia is not much different from China’s own almost empty mountain/desert borderlands, where even agriculture is a daunting task.
As for Russia’s Far East, the Chinese believe it will eventually fall to China anyway, so there is no need to hasten the process.
China is far more interested in focusing on the United States, its major trade partner and rival, and on South Asia and Iran, which supplies much of China’s oil and regards it as a more reliable ally than Russia.
Thus, the settling of the border dispute with Russia was not aimed so much at building a geopolitical marriage as securing each other’s rear, offering both sides a free hand to explore opportunities elsewhere.
What China wants and what it gets may be different things.
With its long borders with Russia, China knows it would have much to regret if a new, oil-fired Russian empire appeared on its doorstep.
The Dream of Space
More than 50 years ago, visionaries like the British science fiction writer Arthur C. Clarke and the German (and American) rocket engineer Wernher von Braun laid out a series of steps for the journey into space.
Clark presented his vision in a 1951 book The Exploration of Space and von Braun’s proposals appeared in a series of Collier’s magazine articles published between 1952 and 1954.
A few years later – indeed, 50 years ago this week – the Soviet Union launched the first earth orbiting satellite, inaugurating the space age.
After 50 years, many elements of the original vision have been achieved, some have failed, and there have been more than a few surprises.
Clarke and von Braun encountered a wall of skepticism when their proposals first appeared.
The public viewed space travel as science fiction, a form of popular entertainment thought to have little chance of realization.
But Clarke, von Braun, and others persevered.
We would, they predicted, launch satellites, dispatch humans on orbital flights, assemble a large earth-orbiting space station, build reusable space shuttles, construct space telescopes, and send humans to the moon, Venus, and Mars.
Clarke explained how humans could build communication satellites.
Von Braun predicted that military forces would use orbiting platforms to observe troop movements and prevent surprise attacks.
All of these visions appeared before the first artificial satellite was launched.
In 1959, officials at the United States National Aeronautics and Space Administration (NASA) adopted most of these steps as part of their long-range plan.
The Soviet Union engaged the US in a race to the moon.
Government support for realizing the vision inspired the British film maker Stanley Kubrick to present the steps in his classic movie 2001: A Space Odyssey , released in 1968.
Clarke helped to write the screenplay.
The movie depicted a large space station, a winged space shuttle, a lunar base, and astronauts on a trip to the outer solar system.
True to the plan, humans built scientific satellites, communication satellites, reconnaissance or “spy” satellites, space stations, and reusable space shuttles.
They sent robotic spacecraft to the moon, Venus, Mars, and other planets, and humans to the moon.
In those respects, the original vision was achieved.
The human space effort, nonetheless, departed from the plan in unexpected ways.
The International Space Station, currently under construction, does not resemble the large, rotating wheels presented by Kubrick, Clarke, and von Braun.
Early planners viewed the space station as an assembly point for expeditions to the moon and planets.
Kubrick’s 900-foot wide wheel rotated in such a fashion as to produce a sense of gravity equal to that felt on the moon, to which many of the station’s fictional occupants were bound.
The real space station is a micro-gravity research laboratory with no capability to launch trips to the moon or beyond.
Larger capabilities were part of the original space station plan, approved in 1984, but subsequently disappeared as the cost of the facility grew.
Nor has the US space shuttle accomplished its goals.
Von Braun predicted that the US would need to launch 364 space shuttles in less than one year to prepare for the first lunar voyage.
When the space shuttle was approved in 1972, NASA officials predicted that they would launch one every week or two.
But the space shuttle has proven far more difficult and costly to operate than anticipated, flying only four times per year on average.
It has neither reduced the cost of space access nor made space flight safe and routine, as promised.
When the shuttle is retired around 2010, NASA will replace it with an old-fashioned spacecraft with no wings at all.
In contrast to human space flight, which has lagged behind expectations, the robotic space effort has exceeded them.
Von Braun endorsed an automated telescope in space, but thought that astronauts would need to visit the instrument to change the film.
Early plans for military reconnaissance stations assumed that soldiers would be stationed on board.
Clarke believed that astronauts would be dispatched to maintain and operate communication satellites.
Kubrick suggested that people – accompanied by a computer – would pilot spacecraft to explore planets like Jupiter and Saturn.
But none of this proved necessary, owing to remarkable advances in robotics, solid-state electronics, imaging, data collection, and communication.
Sensors that convert light waves into electronic signals eliminated the need for film on space telescopes, while computer chip technology (integrated circuits) allowed communication satellites to be operated without periodic human repair.
Robotic spacecraft are currently returning information from the outer regions of the solar system and roving the surface of Mars.
No military force has yet perceived the need to station soldiers on its various reconnaissance, communication, or navigation satellites.
Robotic technology is advancing more rapidly than the technologies supporting human space flight.
Around the world, clever scientists, engineers, and entrepreneurs are working to realize the remainder of the space exploration dream. Watch for humans to establish space tourism, return to the moon, and attempt an expedition to Mars.
Advances in robotics will continue to occur, with automated spacecraft that can dig and swim, and telescopes that can look for earth-like planets around nearby stars.
If the past is any guide, much of what seems like science fiction today will become reality tomorrow.
The Drug War\u0027s Failures
If we're lucky, our grandchildren will recall the global war on drugs of the late 20th and early 21st century as some bizarre mania to which only past generations could succumb.
The world's drug problems are far more severe today than they were a century ago.
Not that drug use has increased fantastically - after all, huge quantities of alcohol, opium and other drugs were consumed back then.
The real problem is that today's drug control policies foster more harm than good; indeed, they probably cause more overall harm than drug abuse itself.
Like alcohol Prohibition in the US during the 1920s and early 1930s, global drug prohibition has failed to reduce drug abuse even as it generates extraordinary levels of crime, violence, corruption and disease.
In 1998, the UN estimated the total value of the illicit drug trade at $400 billion, or 7% of global trade.
Critics say the figure is only half that - still a remarkable sum.
Colombia today is far worse than Chicago under Al Capone. So, too, are other Latin American, Caribbean and Asian countries.
Drug prohibition effectively imposes a tax on the global trade in illicit drugs that is enforced by governments and collected by those willing to violate the laws.
No other set of laws produces so much revenue for criminals, terrorists and corrupt officials.
No other laws generate so much corruption or such violence; and no other set of laws contributes so much to the spread of HIV/AIDS, hepatitis and other diseases.
The war on drugs persists in part because of two myths.
The first assumes that human beings are better off "drug free," and that all societies should strive to be drug free.
But few - if any - drug free societies ever existed.
The second myth presumes that prohibition reduces the harm associated with drugs.
Global markets in cannabis, opium and coca products are basically similar to other global commodities markets, yet global drug control policies operate on the assumption that the drug markets bear more in common with smallpox and other infectious diseases for which there is no demand.
Governments can act unilaterally and multilaterally to regulate commodity markets, but it is a mistake to perceive prohibition as the ultimate or maximum form of regulation.
Prohibition in fact represents the abdication of regulation.
Whatever is not suppressed is effectively unregulated, except by criminal organizations.
Around the world, drug law violations account for the largest share of the roughly 8 million people incarcerated in local jails and prisons.
In 1980, 50,000 people were incarcerated in the US for drug law violations.
Today, the total approaches half-a-million, with a few hundred thousand more locked up on other prohibition-related offenses.
That total represents almost 10% of all the world's inmates.
Throughout the developing world, poor peasants involved in producing opium, coca and cannabis are arrested, sometimes beaten, and often extorted by government agents enforcing drug laws.
In Bolivia and Peru, coca was integrated into society.
The same was true of opium in Asia. Prohibitions imposed by the US and other governments decimated traditions that often "domesticated" these drugs so as to reduce their harm, while simultaneously encouraging transitions to refined drugs like heroin and cocaine.
US law enforcement and intelligence agencies routinely provide information to other governments knowing that it will be used not just to arrest but to torture those they identify.
All these consequences of the drug war can be defined as human rights abuses.
But the core human rights issue is different - the notion that people should not be punished for what they put into their bodies.
That right of sovereignty over one's mind and body - which also incorporates the right not to be forced to take drugs against one's will - represents in some respects the most fundamental of all rights.
Heroin users are denied the most effective medication available to remedy their addiction, i.e., methadone.
People unable or unwilling to stop injecting drugs are denied access to sterile syringes, with devastating consequences.
Millions who smoke marijuana or consume other psychoactive drugs are harmed far more by state action than by drug use.
More and more voices are calling for a systematic review and revision of the international anti-drug conventions that sustain today's failed policies.
Some emphasize the anti-scientific and otherwise illegitimate basis for including cannabis and coca in the conventions.
Others point to the contradictions between anti-drug conventions and international human rights conventions.
Others note that the anti-drug conventions exacerbate the problems they seek to ameliorate.
A new global drug control regime is needed.
It must reject the foolish rhetoric of creating "a drug-free world" and acknowledge that the true challenge is learning to live with drugs so that they cause the least harm.
An effective strategy needs to establish realistic objectives and criteria for evaluating success or failure, and these criteria must focus on reducing the death, disease, crime and suffering associated with both drug use and drug policies.
It also must embrace the principle that people should not be punished for what they put into their bodies, but only for the harms they do others.
Those are the key elements of a more ethical and effective drug control regime than the one that haunts today's world.
The Duisenberg Legacy
The European Central Bank's first president, Wim Duisenberg, is leaving office with his head held high.
Under his leadership, Europe's first central bank has "grown up," going from infancy to eminence in little more than a mere five years.
The euro has been firmly established as a world-class currency.
Inflation in the euro-zone economy hovers around 2%--more or less in line with the definition of price stability favored by the ECB.
Inflationary expectations are stable, and the Governing Council runs smoothly.
Not everyone in Europe is happy with an anti-inflation central bank.
Critics who want a more activist, growth-oriented monetary policy have tried--albeit unsuccessfully--to soften up the 68-year-old Dutchman with personal attacks and degrading insults.
But the ECB head and the Governing Council refused to yield either to insults or to heavy-handed political pressure to cut interest rates, cut them again, and then cut them some more.
The fledgling bank earned enormous credibility, but also considerable enmity, by sticking to its anti-inflation mandate.
Of course, the ECB has had its problems--mainly in the communications area--and Duisenberg's candor sometimes did get him into trouble.
But these were small matters that were vastly distorted by critics with their own agendas for the bank.
Whatever problems may have existed in the early years--too many voices, too little clarity of message--were smoothed out over time.
In a recent personal interview in his Frankfurt office, I asked Duisenberg what had been his single most important accomplishment in office.
Without hesitation he responded that it was the smooth introduction and easy acceptance of the common currency.
Now it can be told that the central bank had 25 to 30 disaster scenarios ready in case things went badly.
None, in fact, was needed.
The introduction of the euro currency was accomplished more smoothly than even the ECB had expected.
But it was no single accomplishment that made Duisenberg's term in office a success.
Rather, it was his consensual style of leadership.
Forging twelve independent, proud, and, in some cases, powerful national central banks into a cohesive collective was no easy task.
It would not have been possible with an authoritarian personality at the ECB helm.
There is a myth now making the rounds that the search for consensus slowed down the ECB's decision-making process when setting monetary policy.
But the ECB was "slow" to cut rates not because of the need for consensus, but because it is a non-activist bank that cuts rates only when the inflation picture justifies it.
According to Mr. Duisenberg, there was not a single instance when an important monetary policy decision was delayed because of the need for consensus.
Notwithstanding the ECB's significant achievements during the Duisenberg years, important problems remain for the new president, Jean-Claude Trichet of France.
The promise of the euro--that it would set off a competitive dynamic inside the euro-zone economy that would compel structural reform--has yet to be fulfilled.
So far, Europe's politicians have resisted reform, and scarcely an opportunity went by that Wim Duisenberg didn't scold Europe's politicians for this failure.
The Growth and Stability Pact (which mandates a 3% of GDP limit on the size of the budget deficits of euro-zone members) is another contentious issue that awaits resolution.
Controversy over the Pact has set off a nasty dispute between small and big countries in the euro-zone.
There are well-founded complaints about double standards.
The small countries follow the rules but the big countries act as if they are exempt.
According to Nout Wellink, president of the Dutch Central Bank, failure to satisfactorily settle this issue could have serious negative consequences for the euro.
Finally--and perhaps most important--is the problem of integrating the economies of the ten new member states into the euro area.
This will not be easy.
The bank must be careful not to bite off more than it can chew.
Wim Duisenberg's appointment as first ECB president in May 1998 was mired in political controversy.
But as he exits his post, there is a growing consensus that history will record the straight-talking Dutchman as being the right man for the right job at the right time.
He deserves Europe's unequivocal gratitude for launching the ECB so successfully.
The Dutch Jobs Miracle
PARIS: Unemployment in the Netherlands dipped below 3% recently, a figure for the most part unheard of in Europe since the oil shocks of the 1970s.
Indeed, not so long ago unemployment in the Netherlands stood above 10%.
Have the Dutch invented a Fourth Way to improved economic performance and are there lessons for the rest of Europe in the Dutch experience?
For some observers across Europe, the economic performance of the Netherlands is so surprising that they believe it a product of smoke and mirrors, or of some statistical trick.
But as with those who doubted the reality behind American economic growth five years ago, this view is also emphatically wrong.
Not only is unemployment way down in the Netherlands, but the rate of participation by the entire population in the labour market is growing sharply as well.
True, the proportion of workers who remain classified by the state as sick or invalid – currently 12% – remains much too high, to be frank.
But this proportion is less today than it was in the 1980s; so a higher unemployment rate is not being disguised by medical certificates.
Other disbelieving observers say that what we are seeing in the Netherlands is the effect of a shortening of the work week.
The average work week in the Netherlands (counting both those who work full-time and those who work part-time) is 27 hours, compared to 29 hours in France.
Advocates of a shorter work week as the road to full employment, indeed, often cite the Dutch example to declare victory for their arguments.
Those against a shortened work week, however, dismiss the increase in the number of jobs that results from shorter working hours as a false solution – a crude swap of working hours for an increase in the number of workers.
Both hostile camps are wrong.
There is a significant increase in part-time work in the Netherlands, to be sure, but it is due, primarily, to a large increase in labor participation among women.
Thus part-time work does not mechanically explain the country’s lower unemployment rate.
So what is the secret of successful job creation in the Netherlands?
The immediate reason is easy to identify.
Since the beginning of the 1980s, wage increases have been smaller than technological progress would have allowed.
Company profits have thus gone up, leading to new investment and the creation of new jobs.
This is a classic mechanism, but one which has worked perfectly.
The more delicate question is to identify those factors that made wage moderation in the Netherlands possible.
I see two principal reasons:
• The first is a reform of unemployment insurance. The Netherlands has put into effect a reform that links unemployment compensation to searching for a new job.
Refusal by an unemployed person to take an “acceptable” job offer automatically results in the end of state support for him or her.
The longer an individual remains unemployed, the wider the definition of what constitutes an “acceptable” becomes.
In practice what this means is that an unemployed person must accept a “comparable” job for the first six months of unemployment, and must take any job on offer after eighteen months on the dole or lose state benefits.
• The second factor is cooperation among social partners.
The Dutch harp on this point, but they are right.
For at the root of the Dutch miracle lies the by now quasi-mythological Wassenaar Agreement, signed in 1982, among employers, unions, and the government.
At the time, it was clear to all concerned that the Dutch economy was in bad shape.
The Wassenaar Agreement was a plan of action: moderation of wage demands was assured in exchange for measures designed to alleviate the human cost of unemployment, from the financing of early retirement to the shortening of the work week.
By and large, this strategy has been adhered to ever since.
Important lessons are to be found in the Dutch experience for all of Europe.
Today, economic conditions in Western Europe are good – in some places, better than that even – and they are improving in many countries of Eastern Europe that are seeking EU membership.
But Europe’s economies are regularly subject to new recessions.
These recessions will require painful adjustments.
Without a mechanism for social cooperation, the adjustments that any recession will impose are likely to result in high unemployment.
With a solid mechanism of social cooperation, however, there is at least a chance to avoid it.
It is now, when economies are doing better, that such a structure for social cooperation must be considered and constructed.
The Dutch Labor Market Fudge Creates Jobs
AMSTERDAM: The Dutch like to think of themselves as leaders in social policy.
But as we discovered on a recent trip to the Netherlands and Germany, it is in economic policy that today’s Europe looks to Holland for leadership.
With unemployment in Germany, France and Italy around 10%, the Dutch jobless rate, at less than 3%, is the envy of Europe.
Holland is that rare example of a booming welfare state (“overheating” was the word used to describe the Dutch economy by three central bankers in Frankfurt).
How did this happen?
Some credit the so-called “Polder Model” of social cooperation between employers, unions and the government.
They’re wrong.
Social cooperation per se did not save the Dutch from the mistakes of the 60’s and 70’s.
So how can it be credited for economic recovery in the mid 80’s and 90’s?
True, Dutch trade unions have moderated wage demands. But this is not what sparked Holland’s dramatic employment gains.
Instead, credit structural reforms in the Dutch labor market for the jobs boom.
Primary amongst these is the widespread use of part-time and temporary employees.
The move to part-time employment in Holland was intended to increase female participation in the Dutch labor force.
Increasing availability of part-time and temporary jobs, however, raised the labor force participation rates of both men and women.
Regular full-time employees are almost impossible to sack under Dutch law, but employers can fire part-time workers and not renew temporary contracts when they expire.
There is an “iron law” of employment: If employers can’t fire workers, they won’t hire them.
Ironically, employment boomed in Holland, precisely because an increasing proportion of the work force - made up of part-time and temporary workers - can be fired if necessary.
Among the Euro-11 countries, Holland was the first to both understand this point and act upon it.
Yet Holland has not gone all the way.
An extraordinarily high proportion of the labor force - 12% - is officially classified as “sick” or “invalid” because putting a worker on disability is practically the only way Dutch employers have of ridding their firms of unwanted full-time employees.
Such finagling is costly to business, government and the employees themselves.
So, while still extremely low for continental Europe, the official Dutch unemployment rate underestimates the true level of joblessness in the Dutch economy, because it excludes the disguised unemployment of the “sick” and “disabled”.
Were Dutch law to permit the sacking of full time employees (not likely in these prosperous times) the proportion of the work force officially sanctioned as too sick or disabled to work would dramatically decline, as would the number of part-time and temporary workers.
The ability to fire workers not only means less unemployment but more flexible labor markets.
The movement of workers from low to higher productivity uses - whether from firm-to-firm, sector-to-sector or region-to-region - is thwarted if employers do not have the power to sack.
This is not an issue of class struggle, but of economic growth.
US Fed Chairman Greenspan asked recently, “why U.S. businesses and workers appear to have benefitted more from the recent advances in information technology than their counterparts in Europe and Japan?”
His answer: “the relatively inflexible and, hence, more costly labor markets of these economies appears to be a significant part of the explanation… Europe has participated in the wave of invention and innovation, but appears to have been slower to exploit it”.
What Greenspan suggests is that the labor market flexibility gap between the US and Europe may be more important in explaining relative economic performance than the alleged technology gap.
There appears to be a right way, a wrong way, and a Dutch way of doing things.
The US does labor market policy the right way.
Continental Europe, excluding Holland, does it the wrong way.
And the Dutch, neither right nor wrong, temper ideology with practicality to forge compromises that have consensus support.
Although this system works for the Dutch, can it work for the rest of Europe?
Why not?
Politically, no European country can - or really wants to - adopt the American model.
At the same time, there is a growing demand in Europe for better economic performance.
European unemployment rates are unacceptably high;
America’s long boom puts pressure on domestic politicians to do better.
The Dutch solution best fits Europe’s present political realities: Keep welfare rules in place, but give people the chance to get around them.
The Dutch retain the job-killing laws that make it impossible to sack regular full-time employees, but allow employers to sack part-time and temporary workers.
This fudge, not social cooperation, is the true “Dutch model” for success.
The Dutch solution can work for other European countries.
In fact, it already has.
When the French changed their labor law to mandate the 35 hour work week, heavy restrictions on the use of part-time and temporary employees by French employers were removed.
This explains the recent upsurge in French job creation.
Superficially, France looks as if it has become more of a welfare state, but the reality is that the French have mimicked the Dutch in increasing labor market flexibility.
This Dutch solution may be second best, but in Europe it’s the only alternative that works.
The Dynamism of Nations
Proposals for economic reform of Continental Europe keep coming.
The process does not constitute a unified, reasoned debate so much as an ongoing political auction in which special interests seek votes for the policy change that will benefit them.
Some say the bar to a good economy is the Continent's inflated welfare state and the solution is retrenchment, beginning with raising retirement ages.
Others say the impediment is the entire overgrown public sector and the solution is to cut tax rates.
The latest view, endorsed by the European Commission, blames a shortage of infrastructure and proposes more bridges and tunnels.
This approach will never reach the heart of the matter.
The West's core social values make high economic performance a moral imperative like free speech or trial by jury.
Further, the Continent will undoubtedly need some transformative changes of its economic institutions to establish high-performance economies.
To reach broad agreement on those changes requires facing some basic questions so far ignored.
A real debate on basic reform has to start with an explicit conception of economic performance - of what constitutes a good business life.
Productivity is an important element.
Only a high-productivity economy can promise all or most working-age persons a range of careers at high wage rates.
But high productivity is not the only element of high performance.
The other element is thriving, prospering participants.
This requires jobs to be rewarding in more than pecuniary ways - enlisting the minds of employees, engaging them in problem solving, leading them to discover some of their talents and expanding their abilities.
This personal growth, while an end in itself, is also a source of job satisfaction, which in turn boosts participation in the labor force, and of high employee loyalty, which lowers unemployment, making more good jobs available.
What is needed for high performance?
Basically, it is productive change, which I call economic dynamism .
For employees to develop, they must be imbedded in a stimulating workplace, with new problems to solve, harder tasks to be mastered, added abilities to strive for.
Less obviously, a country does not want misguided or pointless change; it wants investments that appear to the financial sector as productive.
The late 1990's produced evidence that low dynamism was associated with weak economic performance, particularly low prosperity.
Of the 12 large OECD economies, three--Germany, Italy, and France--were conspicuously un-dynamic: they missed the 1990's investment boom or were awfully late to it.
These same economies also ranked at or near the bottom in unemployment and labor-force participation, both before the boom and now.
What are the requirements for dynamism?
Yale University's Robert Shiller has suggested that I believe that Europeans lack dynamism owing to a deficiency of entrepreneurial "spirit."
I have pondered the expressed uneasiness of Europeans about making money, and speculated that their schooling might drain away some playfulness and creativity. But that is not my explanation of Europe's problem.
For one thing, it is hard to decide whether such cultural patterns are causes or effects of dynamic economies.
My thesis is that the degree of dynamism in a nation's economy hinges on its development of some key economic institutions - company law and corporate governance, the population's preparation for business life, the development of financial instruments such as the stock market and so forth. Such general institutions as the rule of law and provision of enough personal and national security to safeguard earning, saving and investing are needed for any market economy, even market socialism; they are insufficient for dynamism.
Evidence exists for this thesis.
One could have predicted in advance of the recent boom how the 12 large OECD economies would rank simply by knowing the percentage of the population with a university degree, the OECD index of barriers to entrepreneurs, and the breadth of the stock exchange (measured by the market value of outstanding shares relative to GDP years before the boom).
This evidence linking employment to dynamism and tracing dynamism to favorable institutions, such as a well-developed stock market, and to obstructive institutions, such as myriad licenses for entry by new firms, is an advance in our understanding of healthy economies.
It is useful to know that there is vastly more to creating economic dynamism than private property; and that high unemployment is not to be laid solely to labor market restrictions.
Is there evidence directly associating high performance - that is, high employment and high productivity - with the presence of institutions believed helpful to dynamism and the absence of those believed harmful?
Such evidence emerges even with the small sample of just 12 large OECD economies.
A cross-country analysis estimates that university education is good for all three elements of economic performance: the employment rate (relative to the working-age population), the unemployment rate (relative to labor force), and labor productivity too.
Scoring high on the OECD index of barriers to entrepreneurs is bad for all three elements of performance.
A high level of job protection is bad for productivity but does not have a clear effect on either employment rate or unemployment rate.
I have suggested that the organizational structure of the Continental economies limits their performance.
This corporatist structure - labor unions, workers councils, employer confederations, and big banks - facilitates direct interventions in economic decision making to give interest groups protection and veto power.
In fact, among the 12 large OECD nations, a higher degree of corporatism as commonly measured is loosely associated with lower employment and lower productivity.
The reason for these negative effects appears to be that high corporatism is strongly correlated with stifled entrepreneurship and obstructive job protection.
The corporatist structure by itself does not detract from performance.
Here again, the truth lies in the nuances.
This is precisely why Europe should be debating about the Continent's real problems, not locking their economies into corporatism by enshrining the "social market economy" into the emerging EU constitution.
The Eagle, the Peacock, and the Taliban
The East Asian Triangle
Once again, North Korea’s pursuit of nuclear weapons is threatening Asia’s stability.
Japan’s new prime minister, Shinzo Abe, hastily arranged a summit in China with President Hu Jintao on the eve of North Korea’s nuclear test, a meeting that saw both men agree that such a move was “intolerable.”
The meeting is a welcome development.
But Abe comes into office with a reputation as a stronger nationalist than his predecessor, Junichiro Koizumi, whose insistence on visiting the controversial Yasukuni Shrine (where Class A war criminals from World War II are buried) helped sour relations with China.
For stability to be preserved, Sino-Japanese relations must improve.
Although North Korea’s nuclear ambitions are worrying and destabilizing, China’s rise is the key strategic issue in East Asia.
For three decades, its economy has grown by 8% to 10% annually.
Its defense expenditures have an even faster pace.
Yet Chinese leaders speak of China’s “peaceful rise” and “peaceful development.”
Some believe that China cannot rise peacefully, and will seek hegemony in East Asia, leading to conflict with the United States and Japan.
Others point out that China has engaged in “good neighbor” policies since the 1990’s, settled border disputes, played a greater role in international institutions, and recognized the benefits of using soft power.
A decade ago, I oversaw preparation of the US Pentagon’s East Asian Strategy Report , which has guided American policy under the Clinton and Bush administrations.
Back then, there was a debate between those who wanted to contain China’s growing strength increased and those who urged China’s integration into the international system.
Containment was unfeasible, because, unlike the Soviet Union during the Cold War, China’s neighbors did not see it as a clear and present danger.
Moreover, treating China as an enemy would ensure that it became one, thus unnecessarily ignoring the possibility of benign outcomes.
The strategy we chose was to “balance and integrate.”
The East Asian balance of power rested on the triangle of China, Japan, and the US.
By reaffirming the US-Japan security relationship in the Clinton-Hashimoto declaration of 1996, the US helped structure a favorable regional balance.
By simultaneously encouraging China’s entry into the World Trade Organization and other institutions, we created incentives for good behavior.
So integration was hedged by realism in case things went wrong.
That strategy has largely worked.
China’s military power has increased, but its behavior has been more moderate than it was a decade ago.
China is a long way from posing the kind of challenge to American preponderance that the Kaiser’s Germany posed when it surpassed Britain at the beginning of the twentieth century.
The key to military power in today’s information age depends on the ability to integrate complex systems of space-based surveillance, high speed computers, and “smart” weapons.
It is not likely that China (or others) will soon close that gap with the US.
Of course, the fact that China is unlikely to compete with the US on a global basis does not mean that it could not challenge the US in East Asia, or that war over Taiwan is not possible.
If Taiwan were to declare independence, it is likely that China would use force, regardless of the perceived economic or military costs.
But it would be unlikely to win such a war, and prudent policy on all sides can make such a war unlikely.
So what is the strategic problem today?
Stability in East Asia depends upon good relations between all three sides of the US-China-Japan triangle, but ties between China and Japan deteriorated in the Koizumi years.
China permitted demonstrations, sometimes violent, against Japanese consulates in protest of changes in Japanese textbooks that softened descriptions of Japan’s invasion in the 1930’s.
After 22 million Chinese signed a petition against Japanese membership of the United Nations Security Council, Premier Wen Jiabao announced China’s opposition to such a step.
China also objected to Japanese statements about Taiwan.
And there are territorial disputes about small islands and potential gas reserves near the China-Japan maritime boundary.
The most contentious issue, however, has been prime ministerial visits to the Yasukuni Shrine, and, until Abe’s visit, China had been reluctant to engage in any summit meetings with Japan so long as such visits continue.
Although China has become Japan’s largest partner in trade and foreign direct investment, nationalists in the two countries have fueled each other’s extremism, while their governments play with fire.
American interests rest on regional stability and continued growth in trade and investment.
So President George W. Bush could quietly tell Abe that we welcome good relations between Japan and China, and that prime ministerial visits to the Yasukuni Shrine undercut Japan’s own interests in East Asia.
It reminds Asians of the repulsive Japan of the 1930’s rather than the attractive Japan of today.
At the same time, the US can be cautious about involving Japan in Taiwan issues – a neuralgic point for China – while encouraging the development of Asian institutions that increase contacts and dampen conflict.
This can include the development of the East Asian Summit, revival of the Asian Pacific Economic Cooperation (APEC), and the evolution of the current six-party talks on North Korea into a permanent Northeast Asia Security Dialogue.
Fortunately, there are signs that both China and Japan are seeking to back away from the impasse of recent years.
While Abe has maintained his position on Yasukuni, his summit with Chinese President Hu Jintao was a promising step forward.
Some Chinese analysts, for their part, recognize the danger in stimulating too much nationalism toward Japan.
The US should quietly try to nudge these steps forward.
The US-Japan alliance remains crucial to stability in East Asia, but it takes three sides to make a triangle.
The ECB \u0026 Europe\u0027s Upswing
CAMBRIDGE: Europe is on an upswing in growth and euphoria.
But how long can this last?
Showing the nervousness to be expected of a new recruit, the European Central Bank (ECB) has already fired a premature shot at the still hidden figure of inflation.
Will it wait for inflation to really show before firing another volley?
Or will the ECB empty its guns at the first rumblings of a stronger business cycle, fearful of accusations of running from battle or of being caught of guard.
The ECB might surprise everyone by a successful policy of pragmatism, in the manner of the Alan Greenspan led US Federal Reserve Board.
The ECB, however, should not expect to be popular in the way Mr Greenspan is.
It should simply try to be successful.
At this stage, success for the ECB means one thing only: inflation below 2%.
Everything else, including lack of a persistent economic upswing can and should be blamed on Europe's supply side.
Within a year of its establishment the ECB found its way to safe ground: it accepted the advice of Hans Tietmeyer, former head of the Bundesbank, concerning the proper "cruising speed" for Europe's economy.
To keep inflation below 2%, cruising speed cannot exceed 1.5%.
That leaves just enough room for accidents that add to inflation to happen and yet stay below 2%.
Today's upswing is the test.
Coming from a point where inflation is barely over 1%, Europe's upturn will inevitably add to inflation.
The risk of passing to 1.7% in the year ahead motivated the ECB's recent 50 basis point hike.
In capital markets, the commitment to fight inflation, to not be even remotely experimental, was welcomed with a lower long-term rate.
Over the next 6 months we will see how wage rounds are conducted in the new Europe.
To paint the extremes, there are two possibilities.
First, and most optimistically, wage earners throughout the new EMU zone understand the force of permanently fixed exchange rates.
With trade open and unrestricted, with exchange rates gone, labor in each country has lost much, if not all, of its pricing power.
No union can still pretend that it has captive employers who can and will pass wage increases on into prices without reckoning the consequences for profitability and employment.
In this vision of a New European Economy, wage discipline will be stunning.
So, the ECB will encounter no problem of inflation being driven ahead by wages.
Growth can go forward at a significant speed, for wage inflation is no longer an issue.
The pessimistic argument is this: nothing has changed;
Germany and France had fixed rates for years; so too Austria, the Netherlands, and Spain.
The only that has changed is that governments are now leftwingish almost everywhere, most dramatically in Germany.
In this view, labor views business as mostly captive, markets as segmented, and the unemployed as generously supported by the State.
So, no more wage moderation; with profits back it is time to get higher wages for workers back, too.
We won't know for a few months which alternative will prevail.
But it helps to look ahead and appreciate the narrow room for maneuver facing the ECB.
With inflation near Tietmeyer's cruising speed, there are only a few tenths of a percent of extra inflation that can be accepted, maybe 1.7 rather than only 1.5%.
Indeed, we can already hear the ECB's refrain: Assuredly, nobody will argue that a an extra one-tenth percent of inflation helps growth; surely everyone must agree that an unambiguous success on keeping inflation below 2% does help growth.
Thus, no experiments.
The ECB will then raise interest rates to slow European growth.
If the EU or the ECB forecast near 3% growth for two consecutive years, watch for interest rates to jump.
The ECB has arrived at where the Bundesbank was for over a decade.
The central bank cannot create growth in an economy that has a bad supply side; in the US, with highly competitive markets, the central bank can afford to stand by.
In Europe, where competition and flexibility are in short supply, indeed are disdained by political leaders, the central bank must be preemptive.
When in doubt, fire.
The ECB is right to establish its inflation-fighting credentials; it is right to be unambiguous in educating labor markets to its total unwillingness to accommodate the old ways.
Only when that point is established, if necessary at the cost of a growth slowdown, can we expect to start seeing improvements in labor market behavior.
Even a slowdown will not be enough so long as governments accommodate unwarranted real wage gains (and the resulting unemployment) with generous income support.
The payoff for Europe cannot come from the central bank, it must come from governments recognizing that the ECB cannot create growth.
Only they can create the conditions for growth by allowing for a far more competitive supply side.
But it is hard to see even the smallest indication of a more competitive supply side.
Governments, most strikingly in Germany, seek to escape from their political dilemmas by talking about the transition to a learning society and other dreams.
At the same time, however, they go out of their way to stop radical cures through aggressive mergers or tough corporate workouts.
None of this will change without a crisis.
But Europe is rich and for that reason won't have a crisis any time soon.
In essence, Europe is satisfied with low growth and borrowing from its grandchildren just because that keeps the peace and it keeps confused and undecided governments in power just a bit longer.
In fact, not just a bit, they can surely play the same game for another decade.
If Europe's economy performs poorly, blame Schroeder, don't blame the ECB.
A new central bank and an old economy mean one thing: low inflation and low growth.
The ECB Picks Up The Pace
Buoyant US economic growth, so far, has provided the European Central Bank with the necessary global backdrop to raise interest rates from very low levels at a slow and steady pace that limits political friction with euro-zone political leaders but that gets the job done.
That is about to change.
The latest anecdotal evidence from the US indicates that the economy is taking a sharp downward turn, which should become manifest in the coming months.
Unless the ECB picks up the pace of interest-rate increases now, the goal of interest-rate neutrality may not be politically feasible, jeopardizing achievement of the bank’s price stability goals.
The ECB should act with greater alacrity not because there are increased prospects for future growth, but for the opposite reason: the fear that European growth will slow, thus limiting the possibility for future rate hikes.
Indeed, even before the sudden downturn in the US economy, a growing number of members of the ECB’s Governing Council already had come to the conclusion that accelerating the pace of interest-rate increases was needed if its goal of monetary neutrality was to be achieved.
The key reason is that several recent “reforms” announced by German Chancellor Angela Merkel – raising the value-added tax, increasing user charges for healthcare, and taxing interest payments as a part of so-called corporate tax reform – promise to reduce German economic growth, perhaps significantly, in 2007.
When Germany sneezes, Europe catches a cold.
As a result, Merkel’s reforms have increased the angst of euro-zone central bankers that the “window of opportunity” for future rate hikes might be closing.
The latest ZEW survey of euro-zone business confidence buttresses these fears.
It shows that current conditions are good, but that expectations about future conditions have dropped off significantly.
The message for the ECB is clear: make haste while the sun shines.
That is exactly what the ECB is doing.
ECB President Jean-Claude Trichet indicated at his July press conference that the bank plans to raise interest rates by 25 basis points on August 3, not August 31, as expected.
This implies an interval of two months between interest-rate moves instead of the three-month interval that has become standard ECB practice in the current interest-rate cycle.
The next rate hike in the normalization process is expected in October, two months after the expected August move.
Ironically, the October meeting of the ECB’s Governing Council will take place in Paris this year.
French politicians have been the most aggressive in putting political pressure on the ECB to relax its interest-rate normalization policy.
French Finance Minister Thierry Breton recently warned the ECB about “nasty surprises.”
Prospective French presidential candidate Nicolas Sarkozy wants the ECB to promote economic growth, not just price stability.
The Paris meeting affords the ECB an opportunity to make a political statement – its “Declaration of Independence,” so to speak – by raising interest rates on French soil.
Trichet already has cleared the way for this to happen.
In June, the ECB jettisoned its long-standing practice of not changing rates outside of Frankfurt, increasing them by 25 basis points in Madrid.
Trichet is a clever and resourceful person.
But even he might find it daunting to reconcile the conflicting demands of the ECB to accelerate the interest-rate normalization process and those of the French political establishment to maintain the status quo.
But the recent good economic numbers coming out of France should make an October rate hike easier for French politicians to accept.
The ECB is accelerating the pace of normalization at precisely the right moment.
The danger is that it will be blamed if European growth falters.
However, with the German and US economies slowing precipitously, the ECB would have a perfect cover for its interest-rate moves.
The ECB could convincingly argue that Merkel’s reforms and the US, not its interest-rate hikes, are responsible for the European slowdown, should one occur.
Politically, the path is clear for the ECB to act.
The ECB’s Battle against Central Banking
BERKELEY – When the European Central Bank announced its program of government-bond purchases, it let financial markets know that it thoroughly disliked the idea, was not fully committed to it, and would reverse the policy as soon as it could.
Indeed, the ECB proclaimed its belief that the stabilization of government-bond prices brought about by such purchases would be only temporary.
It is difficult to think of a more self-defeating way to implement a bond-purchase program.
By making it clear from the outset that it did not trust its own policy, the ECB practically guaranteed its failure.
If it so evidently lacked confidence in the very bonds that it was buying, why should investors feel any differently?
The ECB continues to believe that financial stability is not part of its core business.
As its outgoing president, Jean-Claude Trichet, put it, the ECB has “only one needle on [its] compass, and that is inflation.” The ECB’s refusal to be a lender of last resort forced the creation of a surrogate institution, the European Financial Stability Facility.
But everyone in the financial markets knows that the EFSF has insufficient firepower to undertake that task – and that it has an unworkable governance structure to boot.
Perhaps the most astonishing thing about the ECB’s monochromatic price-stability mission and utter disregard for financial stability – much less for the welfare of the workers and businesses that make up the economy – is its radical departure from the central-banking tradition.
Modern central banking got its start in the collapse of the British canal boom of the early 1820’s.
During the financial crisis and recession of 1825-1826, a central bank – the Bank of England – intervened in the interest of financial stability as the irrational exuberance of the boom turned into the remorseful pessimism of the bust.
In his book Lombard Street, Walter Bagehot quoted Jeremiah Harman, the governor of the Bank of England in the 1825-1826 crisis:
“We lent...by every possible means and in modes we had never adopted before; we took in stock on security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some cases over-nice.
Seeing the dreadful state in which the public were, we rendered every assistance in our power...”
The Bank of England’s charter did not give it the legal authority to undertake such lender-of-last-resort financial-stability operations. But the Bank undertook them anyway.
Half a generation later, Britain’s Parliament debated whether the modifications of the Bank’s charter should give it explicit power to conduct lender-of-last-resort operations.
The answer was no: granting explicit power would undermine confidence in price stability, for already there was “difficulty restrain[ing] over-issue, depreciation, and fraud.”
But the leaders of Parliament also believed that the absence of a codified authority to act as lender of last resort would not keep the Bank of England from doing so when necessity commanded.
As First Lord of the Treasury Sir Robert Peel wrote: “If it be necessary to assume a grave responsibility, I dare say men will be willing to assume such a responsibility.”
Our current political and economic institutions rest upon the wager that a decentralized market provides a better social-planning, coordination, and capital-allocation mechanism than any other that we have yet been able to devise.
But, since the dawn of the Industrial Revolution, part of that system has been a central financial authority that preserves trust that contracts will be fulfilled and promises kept.
Time and again, the lender-of-last-resort role has been an indispensable part of that function.
That is what the ECB is now throwing away.
Saving Europe’s Real Hegemon
MUNICH – Last June, the European Commission announced its about-face on bank restructuring.
The money for recapitalizing distressed banks would now come primarily from creditors, not European taxpayers, with a pecking order to specify which lenders would be repaid first.
All of this is welcome, at least in principle.
In practice, however, the scheme leaves much to be desired.
The problem is that a very long list of exceptions reduces the recoverable assets to such an extent that in many cases it will still be impossible to make do without public money. The long-term plan is that this money should come from a fund created by European banks themselves.
But the Eurogroup (a meeting of eurozone finance ministers attended by the European Union’s economic and monetary affairs commissioner and the European Central Bank president) is suggesting that, until then, the European Stability Mechanism (ESM) – and thus the taxpayers – will fill the gap.
Given that taxpayers are thus supposed to finance guarantees for deposits up to €100,000 ($133,000) – the median level of Dutch household wealth and twice the German median – the Eurogroup’s proposal boils down to a massive redistribution of wealth in Europe, the dimensions of which are not understood by the public.
The idea of exempting banks’ secured debt from the pecking order for repayment is extremely problematic as well.
While this proposal may sound harmless and almost self-evident, it is not; secured debt needs no further protection, because it is already secured.
Viewed from this perspective, the additional protection afforded by the exemption is highly surprising.
The exemption for secured debt undoubtedly concerns mainly the refinancing loans that the ECB has extended to commercial banks against increasingly weak collateral.
For the eurozone’s crisis-ridden economies (Cyprus, Greece, Ireland, Italy, Portugal, and Spain), the combined total is €732 billion.
These loans extend far beyond providing the liquidity that these countries need for internal circulation, for which a maximum of €335 billion – their available stock of central-bank money – would have sufficed.
Instead, by weakening safety standards, bailing out foreign investors, and financing current-account deficits, the ECB has undercut and replaced the private European interbank market.
With several banks in the crisis countries on the verge of bankruptcy, many of these loans have now turned toxic.
After all, if one takes the average of estimates reported by reputable sources, the write-off losses of the six crisis countries’ banks amount to about €670 billion. Participating in these write-offs would put huge strain on the Eurosystem (the ECB and the central banks of the eurozone member states), which has only around €500 billion in equity capital.
The riskiness of the ECB’s strategy of using the printing press to bail out banks, including their public and private clients, would become apparent to everyone.
Thus, it is clear how the losses incurred by the ECB’s de facto regional fiscal policy are to be avoided: the write-off costs will be transferred from the ECB to the ESM.
This makes no difference to taxpayers, who will have to pay for both institutions’ losses in the same manner.
But it has the advantage of allowing the ECB to present itself as having a clean balance sheet, thereby enabling it to maintain its current policy.
Ultimately, this is merely a new round of the eurozone’s old game of financial hide-and-seek, whereby losses are obscured by distributing them among different institutions and time horizons. The game started with the bailout fund for Greece, which was followed by the European Financial Stability Facility, the European Financial Stability Mechanism, and the International Monetary Fund, which in turn were relieved by the ESM.
In each case, a major objective was to reduce the burden on the ECB, which had advanced the money by printing it and would have run into serious difficulties without help.
The entire arrangement is highly problematic from the standpoint of democracy, because the initial decisions about undercutting the capital markets by means of public credit were taken by the ECB’s Governing Council, in which large countries like France or Germany have the same voting power as Cyprus or Malta.
Indeed, the national central banks’ allocation of emergency liquidity assistance required approval by only one-third of the Governing Council’s members, and the six crisis countries had these votes.
According to the Eurogroup’s proposal, these self-awarded loans, too, are now to be secured by ESM funds.
While the European Union’s national parliaments must still decide on the scheme, they essentially have no option but to assent, because to do otherwise would severely harm the ECB.
When they finally get to vote on the matter – years after the ECB’s risky credit maneuvers – they will have no choice but to bail out the ECB, the true hegemon of the eurozone.
The ECB’s Honeymoon is Over
The honeymoon for the European Central Bank is over.
Because European interest rates no longer are clearly out of whack with the fundamentals of the euro-zone economy, monetary policy has become more complex.
At the same time, France has given a strong mandate to its new president, Nicolas Sarkozy, who is without question the most formidable political adversary the ECB has had to face in its brief history.
Sarkozy stands ready to pounce on any mistakes the Bank may make in this more difficult policy environment.
With European interest rates up 200 basis points since late 2005 and the euro near a record high, Sarkozy wants the ECB to stop raising rates now.
ECB president Jean-Claude Trichet and the Governing Council strongly disagree.
At the ECB press conference in early July, Trichet signaled at least one more rate hike—either in September or October.
Some Council members are known to support two more rate hikes before year-end.
What makes monetary policy tricky at this point is that the German economy—which has been Europe’s locomotive during the current cyclical upturn—may be reaching a turning point.
Surveys of business and investor confidence have softened—the respected IFO index of German business sentiment fell from 107.0 to 106.4 in Julyamp#45;amp#45;and the so-called “hard data”—industrial production, retail sales, etc.amp#45;amp#45;- has been mixed.
Second quarter German GDP has stalled after a surprisingly strong first quarter.
The jury is out but there is reason to be concerned.
The euro is at record levels, oil prices are surging and interest rates are expected to go higher.
The euro-zone economy—including Germany’samp#45;amp#45;is not bulletproof though the hawks in the Governing Council often talk as if it were.
Just as last year when there was unwarranted growth pessimism in Europe, this year there is unwarranted growth euphoria.
Many Germans, in particular, are in denial that the cyclical upturn may be coming to an end.
Were the Governing Council to miss the coming turn in the European economy while blithely raising interest rates, they would be portrayed as drunken sailors on a rate-raising binge.
The roar for greater political control over Europe’s central bank would be deafening—and not only from France.
The political costs for the ECB of making this type of mistake could be exorbitant.
This is why the ECB must be very prudent as it considers whether to maintain the current pace of rate hikes, in which case it would raise rates by 25 basis points in September, or slow the pace down a bit, in which case the next rate hike would come in October at the earliest.
In the current political environment, the dangers to the ECB from outside political interference are much greater from raising rates too fast than too slowly.
If it goes too slow, the ECB has earned sufficient credibility as an inflation fighter to make up for it in the future with little if any economic or political cost.
But if it goes too fast, the political cost could be substantial and irreversible.
Politicians will push for more control and probably get it, Maastricht treaty or no Maastricht treaty.
Waiting until October for the next move up is like buying insurance against a catastrophic loss.
But will the ECB see it this way?
As a matter of principle, the hawks refuse to consider the political costs of their actions.
In earlier times with no formidable adversaries in the political arena, this was a harmless affectation.
But it is an extremely dangerous attitude with people like Sarkozy ready, willing and able to impose high political costs upon the bank should it stumble.
There is more interest in Sarkozy’s populist ideas about currency intervention and adding a new political dimension to monetary policy decisions than is commonly realized.
The hawks also suffer from what can be called a “catch up” complex.
No matter how high rates go, they think they’re behind.
They want to go in September so that they can go again in December (even before knowing the data)—and they won’t stop there either.
Even the doves might support a rate hike in September to counter-act the charge that they are being bullied out of a September hike by Sarkozy.
There is no doubt that Sarkozy’s attacks on the ECB are having a counter-productive effect in this regard.
They are pressuring the ECB to raise rates sooner than later.
But a September rate move also serves Sarkozy’s interests, as it will give him more ammunition to portray the ECB as out of control and in need of political disciplining.
For the ECB to protect itself from such charges, far better to wait until October when the bank can go to the public and say in effect; “Look, do you see how reasonable we have been.
Now we must raise rates.”
In the final analysis, whether the next rate increase comes in September, October or whenever—and it looks like September notwithstanding current warning signs like IFO that suggest a possible slowdown in the coming monthsamp#45;amp#45; the data will determine how far the ECB goes with its rate hikes if the bank is savvy enough to keep the politicians at bay.
But this is a big “if”.
The fight is on between the two French titans—Trichet and Sarkozy—with the fate of Europe’s central bank hanging in the balance.
The ECB’s Path Not Taken
It is now clear that the European Central Bank views higher interest rates as the right response to rising oil prices.
As a result, the ECB risks painting itself into a corner, for the logic behind this week’s interest-rate hike implies that more increases will follow – a series of policy mistakes that will cost the Eurozone economies heavily.
Despite statements to the contrary, no central bank, including the ECB, can simply focus on inflation and ignore what happens to economic activity.
Suppose, for the sake of argument, that stabilizing prices came at the cost of a 30% unemployment rate.
Surely nobody would want that.
The ECB’s defenders would say that such an outcome is purely hypothetical – and irrelevant – for there is no conflict between stabilizing inflation and sustaining the appropriate level of economic activity.
Price stability, according to this view, reduces uncertainty, thereby enabling firms and individuals to take the right decisions, so it is good, not bad, for economic activity.
This argument is true – most of the time.
But when an economy faces a major adverse shock, such as a sharp increase in oil prices, then the twin goals of stabilizing inflation and maintaining economic activity conflict, and the central bank’s job becomes more difficult.
Think about what stabilizing inflation means in such a context.
Firms are likely to pass the increase in energy costs on to consumers by raising their prices.
In response, workers are likely to demand higher nominal wages.
If the central bank is to avoid an inflation spiral, it must ensure that the “first round” effects of higher energy prices on inflation do not fuel such “second round” effects.
In an environment where productivity gains and wage growth are already weak, as in Europe today, persuading workers to accept a cut in real wages may be tough.
The interest-rate increase decided this week will soon appear insufficient, and will have to be followed by further hikes and a large increase in unemployment.
In order to achieve its inflation goal, the ECB may have to contract activity until workers are, in effect, beaten into submission.
Is there a better way to respond to adverse shocks?
The answer from monetary theory is an unambiguous “yes”: give workers a chance to adjust to higher energy prices, allow for some pass-through of higher prices to wages over time (so that wages adjust more gradually), and make clear that inflation will return to its target range within, say, a year or two.
Such a policy will limit the increase in unemployment, at the cost of only temporarily higher inflation.
So, why is the ECB set on a tougher course?
There are three plausible reasons.
First, there has been little wage pressure so far.
So the ECB may not have to increase interest rates very much in order to contain inflation.
If this scenario plays out, the impact on economic activity and employment will be minimal.
But there are good historical grounds for thinking that it won’t.
What we are seeing in Europe today is more likely to be delayed adjustment rather than passive acceptance of real wage cuts by workers and unions.
The ECB should not delude itself into thinking that a small increase in interest rates will be enough.
If and when wage pressure comes, the ECB, to remain true to its word, may be forced to increase interest rates much more than it now expects.
The second argument is that if the ECB stands firm, workers will not demand higher nominal wages, for they will understand that this would only lead to higher interest rates and higher unemployment.
This argument is not irrelevant; monetary policy probably has some effect on wage bargaining.
But one should not expect too much from a tough ECB stance.
Think of the limited success of the ECB’s advocacy of greater labor-market flexibility: there has been no dramatic increase in the pace of reforms.
The third argument is that higher inflation today would endanger the ECB’s credibility in the future.
This argument, too, is hardly irrelevant: higher inflation today must not be permitted to change inflation expectations in the medium run.
Leaving interest rates on hold in the face of adverse price shocks thus requires a convincing explanation by the ECB of its underlying policy.
Here, the ECB’s task is all the more difficult because, having focused so narrowly on inflation stabilization, markets would read adoption of a more flexible stance as a change in position.
Moreover, because the ECB has actually exceeded its inflation target in recent years, its credibility is already in doubt.
True, adopting the appropriate policy would require the ECB to articulate its rationale with great care.
Here it can take lessons from its British and American counterparts: credibility does not require dogmatism, but rather clarity of purpose.
What is at stake is too important to ignore.
On its current policy path, unless oil prices fall, the ECB risks being forced to commit to substantially higher interest rates, and thus to a further increase in Eurozone unemployment.
The ECB’s Risky Business
BRUSSELS – A central bank always has a crucial role to play in a financial crisis.
But the European Central Bank’s role within the eurozone nowadays is even more “central” than that of the Federal Reserve or the Bank of England.
A key difference between the eurozone and the United States is that lending between two banks located in two different member countries is still perceived as carrying quite different risks than “domestic” lending (between two banks in the same country).
This is not the case in the US, because it has an integrated financial system, and support for banks (deposit insurance or outright bailouts) is administered at the federal level.
As a result, the fact that California might be closer to bankruptcy than some eurozone countries has no influence at all on the credit rating of banks headquartered there, or on their ability to obtain funds on the interbank market.
In Europe, by contrast, the fate of all banks depends upon their home governments.
During the credit boom before 2007, enormous cross-border interbank claims built up, because banks trusted one another.
Then, in 2008, the interbank market suddenly froze as that trust evaporated.
This was a generalized phenomenon, not focused on particular countries, because it was still assumed at the time that all eurozone governments would be able to bail out their own banks.
Now that the “southern” eurozone governments’ solvency no longer seems assured, distrust has grown along national lines.
German banks continue to lend to each other (and to other banks in northern Europe), but they are no longer willing to lend to Italian, Spanish, or other banks in southern Europe.
A sudden withdrawal of interbank funding has the same consequences as a bank run.
A bank that suddenly has to repay its interbank debt must cut credit to its own customers or sell off other assets, leading to large losses.
This is precisely what happened when the interbank market froze after Lehman Brothers collapsed in 2008.
When the cross-border interbank market stopped working this summer, a similar economic collapse was avoided only because the ECB, without much fanfare, became the eurozone’s central clearing house.
German and other northern European banks that no longer trust their southern counterparts parked their funds at the ECB’s deposit facility, whereas southern European banks used the ECB’s lending facilities to make up for the loss of private interbank funding.
Regional imbalances in interbank funding can, of course, also arise in the US Federal Reserve System.
But they are mostly intermediated within nationwide financial institutions.
For example, high-tech firms in California might deposit cash surpluses with local branches of a large bank operating throughout the US, which might then choose to lend to oil companies in Texas.
Adjustment to shocks is also independent of location in the US.
If the price of oil falls, oil companies become less creditworthy and receive less credit – not because they are in Texas, but because they are oil companies.
In the eurozone, however, banking is still predominantly concentrated along national lines.
A savings surplus in Germany is recycled to Spain mainly through interbank lending (German to Spanish banks).
Moreover, although the EU is supposed to have an integrated banking market, the few existing cross-border banking groups are not even allowed to operate as integrated international banks, because national regulators and supervisors are “ring-fencing” the liquidity and assets of foreign banks’ local subsidiaries.
For example, an international banking group headquartered in Italy was recently barred by supervisors from using the cash surplus of its subsidiary in northern Europe to fund the group’s operations elsewhere.
That would have been impossible in the US, given that the supervisors are federal.
Moreover, the Federal Reserve System’s regional organization is based on nine districts, each of which encompasses several states.
Payment imbalances between Federal Reserve districts thus cannot represent imbalances between states.
A further difference between the eurozone and the US is that the Federal Reserve normally lends only against public debt, and accepts only federal debt (T-bills) as collateral.
Banks thus cannot use any holdings of California or Texas state debt to obtain central-bank funds.
The ECB, on the other hand, accepts private assets and, in the absence of federal debt, national debt as collateral.
This puts the ECB in a very different position from the Fed, because the quality of its collateral is determined along national lines.
For example, Greek banks have received more than €100 billion in ECB financing, which is secured by a mix of private Greek assets and Greek government debt.
If the Greek people decide in a referendum to default, the ECB will incur large losses, as much of its collateral would become worthless and the Greek banking system would collapse.
The imperfect integration of Europe’s financial markets and supervisory structure thus risks overburdening the ECB, which has had to become the central counterparty for cross-border lending.
But in this function it has accumulated large risks, concentrated along national lines, thus leading to conflicts among member states.
A common money and a common monetary policy cannot work properly with a banking system that is segmented along national lines.
The most urgent step to stabilize the euro is not to follow the chimera of “euro economic government,” but to create the underpinnings of a truly integrated banking market with a common supervisor, a form of “federal” deposit insurance, and a “euro bank rescue fund” for the large cross-border institutions.
The ECB’s Tone-Deaf President
PALO ALTO – Once upon a time, European Central Bank President Jean-Claude Trichet communicated effectively with the outside world.
Not anymore.
More than a few eyebrows were raised after the ECB’s January Governing Council meeting, when Trichet threatened that the Bank would act “preemptively” if labor unions tried to embed higher energy and food prices into new contracts, risking a wage-price spiral.
This threat took a heavy toll on the ECB’s credibility, since an interest-rate hike in the midst of the most serious financial crisis in decades was obviously absurd.
No one believed it, and the ECB not only withdrew its clumsy threat the next month, but it adopted a policy of interest-rate neutrality.
But the announcement of this policy change at the February meeting also did not go smoothly.
Trichet somehow garbled the Council’s message in his press conference, making it sound as if the ECB wanted to shift to an easing bias instead of “wait and see” neutrality.
European fixed-income markets rallied strongly as a result, only to reverse course days later when Trichet and his colleagues made it clear that the markets had “misread” him.
So there was unwelcome and unneeded market volatility because Trichet couldn’t get the message out straight.
Indications that Trichet’s communicative skills were slipping already had become evident last September, when the Governing Council could not follow through with the rate increase the ECB president had promised the previous month.
For some unknown reason, Trichet is keen not to surprise markets over the very short term.
He tips them off about what he plans to do one month in advance, using code words like “vigilance” to signal policy change, all the while maintaining with a straight face that the bank never “pre-commits” its policy stance.
Many on the Governing Council object to this childish game of code words, because it eliminates their freedom of action once the Council commits itself to a course of action.
The Council may then be forced to choose between doing the right thing and preserving the credibility of the ECB’s communications.
This is precisely what happened in September, when the financial crisis made it impossible for the ECB to proceed with the interest-rate hike that it had “announced” in August.
Code word communications, which only work in a stable and crisis-free economic and financial environment, had damaged ECB credibility.
Calm economic waters had given the ECB and Trichet a honeymoon until last fall.
But, with financial markets now in turmoil and likely to stay that way, the time has come for the ECB to jettison its use of code words – a poor substitute for real central bank transparency in any case.
What also needs to be jettisoned from the ECB’s communications policy is its obsession with the short run.
With the United States now in recession (and the possibility of a deep recession not that remote), it is striking how positive ECB officials sound about the European economy: Europe’s “economic fundamentals are sound,” the economy is “robust,” economic performance is “just below potential,” and so on.
The ECB’s policymakers are not blind, merely shortsighted.
They fear that honesty about Europe’s economic prospects over the next year or so might cause markets to force it into an unwanted rate cut now.
So they exaggerate and tell stories about how the European economy is fundamentally different from the US economy.
This is a major mistake, for which the ECB could pay dearly.
Yes, today the European economy is not doing badly.
But how long is this likely to last with the US falling into a deep slump?
The ECB should be preparing Europeans for what many of its own officials admit in private: Europe has not “de-coupled” from the US.
On the contrary, America’s current economic difficulties will hit Europe hard, but with a time lag – the best guess being 2009.
This is not to argue, of course, that the ECB should cut interest rates now.
On the contrary, the Bank’s current policy of fighting inflationary pressures by slower growth, a stronger euro, and the credit crunch seems just about right for the time being.
But, after all the happy talk about the European economy, how much credibility will the ECB have if Europe eventually succumbs to recessionary pressures from abroad?
The ECB’s independence is still a contentious political issue in Europe.
It is more prudent that it voice concern for Europe’s future economic prospects today than face a deceived and angry public tomorrow.
The ECB’s Two Pillars - A Success
In October 1998, just before the start of the European Monetary Union, the Governing Council of the European Central Bank (ECB) adopted a stability oriented monetary policy strategy.
This strategy comprises three elements: First and foremost it contains a clear commitment to the primary goal of the ECB, which is to safeguard price stability. Price stability was defined as an annual increase in the price level of below two percent over the medium term.
The other two elements, which soon became famous under the headline of “two pillars”, serve as a means to assess the risks to the goal of price stability .
The monetary analysis pillar comprises all information coming from various monetary and credit aggregates and serves to figure out the risks to price stability over the medium- to long-run .
The economic analysis pillar is based on a wide set of domestic and international economic indicators from the real and financial sectors (wages, import prices, interest and exchange rates etc.).
It provides a basis for the assessment of short- to medium-term price developments.
This two pillar approach constitutes a framework for cross-checking indications from the shorter-term economic analysis with those from the longer-term monetary analysis in order to obtain a robust view about the risks to price stability.
In the standard model of the neo-keynesian approach, which has become more and more “state-of-the-art”, the usefulness of money to monetary policy analysis is challenged; there is no need for monetary cross-checking, monetary analysis has no value-added and is superfluous.
I am not convinced by these arguments.
Customary inflation forecasts and economic analysis alone are not a sufficient basis for monetary policy decisions.
While such decisions must not ignore longer-term developments, the time horizon for inflation forecasts is usually only one to two years, beyond it gets highly uncertain.
Moreover, while monetary policy has always to be conducted under uncertainty, the ECB was confronted with a situation of extreme uncertainty.
There was uncertainty concerning the state of the economy.
The data situation around the start was very unsatisfactory.
Unobservable indicators like the output gap, which plays e.g. a central role in neo-keynesian recommendations for monetary policy, are generally known to be very difficult to estimate in real time.
Estimates for the output gap of the euro area at that time were especially doubtful with data coming from different international institutions varying widely, and being revised substantially at later stages.
Nor was it clear which models provide the most reasonable account of the functioning of the economy, especially in a case where more or less heterogeneous countries were to form a monetary union.
This was compounded by strategic uncertainty related to how markets, investors and consumers would react to the replacement of national currencies with the Euro.
In this highly uncertain environment, monetary policy decisions which did not rely on a solid framework could have been misguided.
This posed a risk of substantial policy errors, which would have constituted a deadly blow on reputation, the most important capital of any central bank.
Thus the ECB needed to rely on the few robust results theory and experience can provide.
The long-run connection between money and price developments is among the most robust economic relationships. “Inflation is always and everywhere a monetary phenomenon”.
This statement by the late Nobel laureate Milton Friedman has never lost its validity.
And who would deny that monetary policy has to do with money? Certainly, monetary analysis is no easy task, though this is true for all relevant economic explanations.
No question, the neo-keynesian approach is useful for a central bank’s policy analysis.
But including monetary analysis in a monetary policy strategy is vital to the central bank’s decision making process.
It would be strange to suggest that any central bank could ignore the information from money.
Many studies have also shown that there is hardly any major asset price inflation episode which was not accompanied if not preceded by strong growth of money and/or credit.
The question is not whether or not to include monetary analysis in the monetary policy strategy, but how to reconcile the results from the monetary and the economic analyses to achieve a comprehensive and consistent assessment of the risks to price stability.
In the strategy of the ECB this is the role of crosschecking.
It is not surprising that in a world of low inflation central banks as well as academics have lost interest in “money”.
One can only hope that the world does not have to go through the same process of pathological learning via high inflation which followed the neglect of money during the fifties and sixties of the last century.
After all, is it not premature – if not plainly arrogant- to claim that all this evidence collected over many centuries and across numerous countries has lost any meaning for the present and the future?
Can models without an explicit, well developed financial sector be expected to explain an economic world in which financial markets play an ever-increasing role?
How could central banks, which depend on these financial markets to serve as the transmission mechanism of monetary policy, possibly rely on such models?
The ECB has never claimed that its strategy is the ultimate solution to the challenges monetary policy is confronted with.
But, it has recognised the need to include monetary analysis – in a very broad sense – into its policy considerations.
And the strategy was flexible enough to integrate the broadening and deepening of both the monetary and economic analysis.
The two pillar strategy responds to the fact that we (still) lack a model which encompasses both dimensions, the economic or real and the monetary, in a consistent and robust manner.
As long as such a “one-pillar-approach” is unavailable, there is no convincing reason why the ECB should change a strategy which has served it well and allowed it to establish a remarkable track record.
The Economic Consequences of America’s Elections
STANFORD – November’s mid-term elections were a sharp rebuke to the vast expansion of government spending, deficits, and debt in the United States.
Elected in the midst of the financial crisis in the fall of 2008, President Barack Obama and the Democratic leadership of Congress seemed surprised when the public rejected their stimulus, health-care reform, and energy policies by large margins.
Of course, some of the huge increase in expenditure and debt has been the result of the recession, and of the defense and other spending legacies of President George W. Bush.
But, instead of finding security and salvation from recession in a new era of dependence on government, most voters were repelled by such policies’ apparent failure to do much to improve the economy.
Thus, the election results should not be viewed primarily as an endorsement of the Republicans, but as a rebuke to the Democrats’ agenda, which voters believed was out of touch with their concerns, interests, and values.
The Republicans took control of the House of Representatives, netting more than 60 seats – the most in over 70 years – and six Senate seats.
They gained in every part of the country, but especially in the industrial heartland from Pennsylvania to Wisconsin.
They also won many governorships and took over many state legislatures; both will play a vital role in redrawing Congressional and legislative districts in the reapportionment next year following the 2010 census.
With divided government, many expect partisan gridlock on major legislation. But there is reason to be hopeful: the American economy, labor market, and stock market have historically fared a bit better in years of divided government.
Moreover, the changed Congressional landscape will be better for trade-related legislation.
The Republicans’ protectionist wing is smaller than the Democrats’, which may eventually help free-trade agreements between the US and countries such as South Korea and Colombia, as well as a revival of the moribund Doha round of global trade-liberalization talks.
Likewise, economic (but not other) tensions between China and the US should be a little easier to manage.
“Global rebalancing” requires surplus countries such as China to boost consumption, while deficit countries such as the US save more (which requires sharply lower budget deficits and increased private saving). It will get a more sympathetic hearing from the new Congress than from President Obama, who was soundly rebuked at the Second G-20 Summit for demanding more deficit-financed spending.
The new Congress will not support Obama’s additional stimulus plans, such as a national infrastructure bank.
Republicans will want to reform federal infrastructure spending – which is already substantial – rather than add to it.
They are committed to rolling back spending to 2008 levels.
In short, they want to ensure that the spending explosion is indeed temporary, not entrenched in a new baseline for the federal budget.
But Obama’s veto power is a big obstacle to reversing his policies.
While Republicans will be able to make some inroads on reducing spending and preventing tax hikes, making good on their vow to “repeal and replace” Obama’s signature health-care reform would require a Republican to be elected as president in 2012.
A showdown also looms over tax policy.
Obama’s temporary first-year expensing proposal for capital purchases (a good idea as part of a permanent corporate-tax overhaul) could get folded into broader tax legislation.
But the center of attention will be the expiring Bush tax cuts of 2001 and 2003, which reduced marginal tax rates on income, dividends, and capital gains.
Obama wants to let the cuts expire at the end of this year, but only for those with incomes over $250,000.
Republicans will mount substantial pressure to extend the tax cuts for all, as well as to prevent expansion of the so-called alternative minimum tax (which applies if it is larger than the regular tax) from hitting millions more taxpayers. Indeed, the lower marginal rate ought to be made permanent, but accompanied by spending control, with broader tax reform to come later.
Another important feature of the new Congress will be heightened polarization.
The center of gravity of the remaining Democrats has moved to the left, because the vast majority of defeated Democrats were moderates from swing districts.
Likewise, the Republicans elected several conservative senators and a sizeable number of more conservative House members.
This will make compromise even more difficult, as will partisan positioning in the run-up to the 2012 presidential election.
Meanwhile, most political analysts do not expect Obama to make as large a move to the political center as President Bill Clinton did when the Republicans took control of Congress after the 1994 mid-term elections.
Clinton then worked with Republicans to balance the budget and reform welfare, easily winning re-election in 1996.
But Obama starts much further left than Clinton, making a move to the middle a longer trek if he decides to embark on it.
That means that a period of legislative stalemate looms over many of the big issues.
We are likely to see some spending consolidation, but less than in Great Britain and other European countries.
Temporary extension of most or all of the Bush-era tax cuts is also likely.
And trade liberalization may be an area where Obama and Congress can agree.
Inaction in other areas will be bad news for many.
But America’s lurch toward a European-style social-welfare state in Obama’s first two years appears to have been halted, if not permanently ended or reversed.
And that is good news for the US – and for the global economy.
The Economic Consequences of Silvio Berlusconi
MILAN – Silvio Berlusconi has survived a confidence vote, but his government is virtually dead.
One cannot rule a country with so scant a majority.
Not for long. &#160;
The one important decision that this, Berlusconi’s fourth government, ever bothered to take was a decision not to decide.
Two years ago, when financial crisis shook the world, Berlusconi’s choice was to avoid any policy intervention to counteract the Great Recession.
This contributed to the deepest fall in output in Italy’s postwar history, with a cumulative 6.5% decline in GDP.
Within the G-20, only Japan did worse.
Remarkably, Italy had twice the fall in output seen in France, another large OECD country that, like Italy, had avoided the root causes of the crisis: a housing boom-bust sequence and a serious bank crisis.
The paradox is that the Berlusconi government’s inaction did prevent a major deterioration in the public deficit.
In light of the current debt crisis roiling the eurozone, the advantages of a policy of inertia are easy to appreciate.
Italy’s position today could have been much worse than it is.
The Italian economy’s problems, and the major issues concerning the sustainability of the country’s huge public debt, are rooted in low growth of potential output.
As is also revealed by the term structure of credit-default swaps for Italian debt, investors are not worried about, say, the 2011 budget law.
Instead, they are worried about Italy’s economic conditions in 5-10 years.
It is these medium-run problems that Berlusconi’s government has overlooked.
None of the structural reforms essential to improving Italy’s growth potential – for example, labor-market and unemployment benefit reforms, product market liberalizations, improvements of the education system, reforms of the public administration in the South &#160;– &#160;has been carried out, even though Berlusconi could count on solid majorities in both chambers of Parliament.
Why did Berlusconi’s government choose such a passive economic policy?
One reason is that the level of Italian debt did not leave much room for countercyclical fiscal policy.
But some effort to stimulate the economy at the outset of the crisis could have been attempted.
For instance, it would have been possible to provide income support to job losers – which would have been useful after the crisis as well – by reforming the system of unemployment benefits.
A possible explanation for the government’s inaction over the past two and half years is that the measures agreed upon within the coalition that won the 2008 elections were not tailored to a country entering a major recession.
There was no leadership over economic policy defining new priorities and measures to meet the changed macroeconomic conditions.
In its first month after coming to power, the government did actually try to do something for the economy.
It took three decisions, all of which were soon revealed to be utterly wrong.
The first decision was to reduce taxes on overtime work, a measure clearly aimed at increasing the number of hours worked.
Needless to say, as unemployment rose and many other countries decreased hours worked in order to contain job losses, tax reductions on overtime were phased out and the scope of short-time work was enhanced.
A similar fate occurred to a Robin Hood tax, which, according to Finance Minister Giulio Tremonti, should have forced banks and oil producers to provide resources for the poor.
The tax on banks had to be transformed into a commitment to provide fresh money to troubled financial institutions via the so-called “Tremonti Bonds.”
And the increase in the tax on oil producers, implemented when the oil price stood at $160 per barrel, had to be postponed when the price per barrel fell to $30.
The last measure taken was the dismantling of the real-estate tax, a major source of revenue for local governments.
This tax has not yet been restored, but the government is planning to introduce a number of new levies on housing, which would ultimately restore the lost revenues.
In this way, Italy lost 30 months without enacting the structural reforms that it so badly needs to restore the country’s growth potential.
True, such reforms are particularly difficult during bad times, but a large number of them have been carried in the European Union precisely during recessions.
The fact of the matter is that downturns are times of “extraordinary politics,” in which it is possible to create larger coalitions for far-ranging economic-policy changes.
A government pursuing a reform agenda should, under these circumstances, make the public aware of the emergency conditions and appeal to the responsibility of the opposition.
But the Berlusconi government, and the media directly or indirectly controlled by the prime minister, chose a different communication strategy.
They constantly underplayed the extent of the crisis, and tried to sell the idea that Italy had largely been insulated from the global recession.
This strategy may have prevented the dramatic fall in popularity experienced by other governments in the middle of the Great Recession, but sooner or later will backfire. The disappointment of the majority of Italians with Berlusconi’s rule will be even larger when they realize that this government never presented the facts as they are.
The Economic Consequences of the Arab Revolt
NEW YORK – Political turmoil in the Middle East has powerful economic and financial implications, particularly as it increases the risk of stagflation, a lethal combination of slowing growth and sharply rising inflation.
Indeed, should stagflation emerge, there is a serious risk of a double-dip recession for a global economy that has barely emerged from its worst crisis in decades.
Severe unrest in the Middle East has historically been a source of oil-price spikes, which in turn have triggered three of the last five global recessions.
The Yom Kippur War in 1973 caused a sharp increase in oil prices, leading to the global stagflation of 1974-1975.
The Iranian revolution in 1979 led to a similar stagflationary increase in oil prices, which culminated in the recession of 1980-1981.
And Iraq’s invasion of Kuwait in August 1990 led to a spike in oil prices at a time when a US banking crisis was already tipping America into recession.
Oil prices also played a role in the recent finance-driven global recession.
By the summer of 2008, just before the collapse of Lehman Brothers, oil prices had doubled over the previous 12 months, reaching a peak of $148 a barrel – and delivering the coup de grâce to an already frail and struggling global economy buffeted by financial shocks.
We don’t know yet whether political contagion in the Middle East will spread to other countries.
The turmoil may yet be contained and recede, sending oil prices back to lower levels.
But there is a serious chance that the uprisings will spread, destabilizing Bahrain, Algeria, Oman, Jordan, Yemen, and eventually even Saudi Arabia.
Even before the recent Middle East political shocks, oil prices had risen above $80-$90 a barrel, an increase driven not only by energy-thirsty emerging-market economies, but also by non-fundamental factors: a wall of liquidity chasing assets and commodities in emerging markets, owing to near-zero interest rates and quantitative easing in advanced economies; momentum and herding behavior; and limited and inelastic oil supplies.
If the threat of supply disruptions spreads beyond Libya, even the mere risk of lower output may sharply increase the “fear premium” via precautionary stockpiling of oil by investors and final users.
The latest increases in oil prices – and the related increases in other commodity prices, especially food – imply several unfortunate consequences (even leaving aside the risk of severe civil unrest).
First, inflationary pressure will grow in already-overheating emerging market economies, where oil and food prices represent up to two-thirds of the consumption basket.
Given weak demand in slow-growing advanced economies, rising commodity prices may lead only to a small first-round effect on headline inflation there, with little second-round impact on core inflation.
But advanced countries will not emerge unscathed.
Indeed, the second risk posed by higher oil prices – a terms-of-trade and disposable income shock to all energy and commodity importers – will hit advanced economies especially hard, as they have barely emerged from recession and are still experiencing an anemic recovery.
The third risk is that rising oil prices reduce investor confidence and increase risk aversion, leading to stock-market corrections that have negative wealth effects on consumption and capital spending.
Business and consumer confidence are also likely to take a hit, further undermining demand.
If oil prices rise much further – towards the peaks of 2008 – the advanced economies will slow sharply; many might even slip back into recession.
And, even if prices remain at current levels for most of the year, global growth will slow and inflation will rise.
What policy responses are available to dampen the risk of stagflation?
In the short run, there are very few: Saudi Arabia – the only OPEC producer with excess capacity – could increase its output, and the US could use its Strategic Petroleum Reserve to increase the supply of oil.
Over time – but this could take years – consumers could invest in alternative energy sources and reduce demand for fossil fuels via carbon taxes and new technologies.
Because energy and food security are matters of economic as well as social and political stability, policies that reduce commodity-price volatility should be in the interest of producers and consumers.
But the time to act is now.
The transition from autocracy to democracy in the Middle East is likely to be bumpy and unstable, at best.
In countries with pent-up demand for higher income and welfare, democratic fervor could lead to large budget deficits, excessive wage demands, and high inflation, ultimately resulting in severe economic crises.
So a bold new assistance program should be designed for the region, modeled on the Marshall Plan in Western Europe after WWII, or on the support offered to Eastern Europe after the collapse of the Berlin Wall.
Financing should come from the International Monetary Fund, the World Bank, the European Bank for Reconstruction and Development, as well as from bilateral support provided by the US, the European Union, China, and the Gulf states.
The goal should be to stabilize these countries’ economies as they undertake their delicate political transitions.
The stakes are high.
Unstable political transitions could lead to high levels of social disorder, organized violence, and/or civil war, fueling further economic and political turmoil.
Given the current risk-sensitivity of oil prices, the pain would not be confined to the Middle East.
The Economic Consequences of War with Iraq
War with Iraq seems inevitable, with or without the support of the UN.
The economic costs of such a war could be huge, both in direct American outlays for war and its aftermath, and in the indirect spillovers on the world economy.
This war would take place against a background of weak economic conditions globally, and would exacerbate those weaknesses, perhaps throwing the world economy into recession.
The economic outcome of war could well depend on the diplomatic context.
If America acts alone, the likely costs of war to the world economy will be higher than if it has the backing of the UN.
The costs of war must be balanced against the costs of alternative actions.
A high cost of war is certainly not a case for inaction, especially in the face of a serious risk that Iraq could obtain, and eventually use, weapons of mass destruction.
Yet pursuing war where diplomatic means - weapons inspections, threats of retaliation in the face of Iraqi aggression, readiness of the UN to act if dangers from Iraq become imminent - might suffice could result in huge and avoidable economic (as well as other) costs.
The traditional textbook view of war is that war stimulates an economy, at least in the short term.
But that simple view of wartime economics is too narrow to describe the possible effects of an Iraqi war.
We must also recognize that a war with Iraq, even a limited war, could profoundly disrupt the international flow of goods, services, and investments upon which our global economy now rests.
These disruptive effects would not only dampen production, but would undermine investor and consumer confidence and thereby limit both private investment and consumer spending.
The direct macroeconomic stimulus that could arise from military spending may be overwhelmed by the uncertainties and disruptions that would accompany military conflict.
Such uncertainties are already visible.
Oil prices have risen several dollars a barrel since late summer.
Since June, US and world stock markets have declined by around 20% in dollar terms.
Each rise in the probability of war has tended to push the markets down further.
The modern world economy is built upon a complex network of global economic connections, and those connections are directly threatened by war.
War would pose obvious and direct risks to shipping, notably shipping of oil from the Middle East.
The increased costs could further depress the drop of cross-border capital flows that has been underway for two years, since the end of the US stock market boom.
The decline in cross-border flows intensified after the September 11 attacks last year.
Foreign direct investment in many developing regions has dried up, and emerging markets that depend on such capital flows, particularly in South America, have seen their economies thrown into a renewed financial crisis.
Even if the US economy might experience some short-term demand boost from increased military spending, the rest of the world would not.
Most countries would feel only negative effects - disruptions of trade, higher oil prices, withdrawals of international capital, cutbacks on investment plans - without any offsetting direct stimulus.
America's macroeconomic situation is also worrisome.
The Bush Administration's fiscal policies, combined with the bursting of the US financial bubble of the late 1990s, have pushed America onto an unstable fiscal trajectory.
In contrast to budget surpluses "as far as the eye could see," the US now has large budget deficits that will linger for many years to come.
War with Iraq would likely cause those budget deficits to soar.
Rising budget deficits will poison US domestic politics and lead to budgetary gridlock.
That in turn, could lead to a loss of consumer confidence.
Since consumer spending has been the remaining bulwark of the US economy since the collapse of the financial bubble, war with Iraq could puncture the last point of stability in the US economy.
Of course, US policymakers have a hidden "ace in the hole."
They believe that the war will be quick, virtually effortless, and self-financing, as the US. effectively gains control of Iraqi oil supplies, which will not only drive down world oil prices but also finance Iraq's postwar reconstruction.
An alluring prospect, but perhaps improbable.
War might not be quick at all.
Postwar Iraq could be unstable even if the war is brief.
An alternative scenario is huge uncertainty and turmoil throughout the Middle East, with major disruptions in oil flows, for political if not military reasons.
The geopolitical costs of a unilateral US war will be even higher.
A quick and successful war, strongly and explicitly backed by the UN, offers the greatest chance of avoiding a huge negative economic fallout.
A war that pits America against the world could call into doubt the progress of globalization, particularly international trade negotiations.
Moreover, if the US acts alone, no doubt the post-conflict costs that America will bear alone will be higher as well.
Open and deep political divisions between America and other major countries will incite a loss of investor confidence, undermining global economic stability.
The Economic Costs of Fear
BERKELEY – The S&amp;P stock index now yields a 7% real (inflation-adjusted) return.
By contrast, the annual real interest rate on the five-year United States Treasury Inflation-Protected Security (TIPS) is -1.02%.
Yes, there is a “minus” sign in front of that: if you buy the five-year TIPS, each year over the next five years the US Treasury will pay you in interest the past year’s consumer inflation rate minus 1.02%.
Even the annual real interest rate on the 30-year TIPS is only 0.63% – and you run a large risk that its value will decline at some point over the next generation, implying a big loss if you need to sell it before maturity.
So, imagine that you invest $10,000 in the S&amp;P index.
This year, your share of the profits made by those companies will be $700.
Now, imagine that, of that total, the companies pay out $250 in dividends (which you reinvest to buy more stock) and retain $450 in earnings to reinvest in their businesses.
If the companies’ managers do their job, that reinvestment will boost the value of your shares to $10,450.
Add to that the $250 of newly-bought shares, and next year the portfolio will be worth $10,700 – more if stock-market valuations rise, and less if they fall.
In fact, over any past period long enough for waves of optimism and pessimism to cancel each other out, the average earnings yield on the S&amp;P index has been a good guide to the return on the portfolio.
So, if you invest $10,000 in the S&amp;P for the next five years, you can reasonably expect (with enormous upside and downside risks) to make about 7% per year, leaving you with a compounded profit in inflation-adjusted dollars of $4,191.
If you invest $10,000 in the five-year TIPS, you can confidently expect a five-year loss of $510.
That is an extraordinary gap in the returns that you can reasonably expect.
It naturally raises the question: why aren’t people moving their money from TIPS (and US Treasury bonds and other safe assets) to stocks (and other relatively risky assets)?
People have different reasons. And many people’s thinking is not terribly coherent.
But there appear to be two main explanations.
First, many people are uncertain that current conditions will continue.
Most economists forecast the world a year from now to look a lot like the world today, with unemployment and profit margins about the same, wages and prices on average about 1.5% higher, total production up roughly 2%, and risks on both the upside and the downside.
But many investors see a substantial chance of 2008 and 2009 redux, whether triggered by a full-fledged euro crisis or by some black swan that we do not yet see, and fear that, unlike in 2008 and 2009, governments would lack the power and will to cushion the economic impact.
These investors do not view the 7% annual return on stocks as an average expectation, with downside risks counterbalanced by upside opportunities.
Rather, they see a good-scenario outcome that only the foolhardy would trust.
Second, many people do see the 7% return on stocks as a reasonable expectation, and would jump at the chance to grab it – plus the opportunity of surprises on the upside – but they do not think that they can afford to run the downside risks.
Indeed, the world seems a much more risky place than it seemed five or ten years ago.
The burden of existing debts is high, and investors’ key goal is loss-avoidance, not profit-seeking.
Both reasons reflect a massive failure of our economic institutions.
The first reason betrays a lack of trust that governments can and will do the job that they learned how to do in the Great Depression: keep the flow of spending stable so that big depressions with long-lasting, double-digit unemployment do not recur.
The second reveals the financial industry’s failure adequately to mobilize society’s risk-bearing capacity for the service of enterprise.
As individuals, we appear to view a gamble that has a roughly 50% chance of doubling our wealth and a roughly 50% chance of halving it as worthy of consideration – not a no-brainer, but not out of the question, either.
Well-functioning financial markets would mobilize that risk-bearing capacity and put it to use for the benefit of all, so that people who did not think that they could run the risks of stock ownership could lay that risk off onto others for a reasonable fee.
As an economist, I find this state of affairs frustrating.
We know, or at least we ought to know, how to build political institutions that accept the mission of macroeconomic stabilization, and how to build financial institutions to mobilize risk-bearing capacity and spread risk.
The Economic Future of Egypt’s Revolution
CAMBRIDGE – For Egypt, the question of the day is whether the country will build an open, democratic political system or relapse into some form – new or old – of autocracy.
But an equally important question – above all for Egyptians, but also for other developing countries (and for development experts) – is the economic impact of its revolution.
For the past quarter-century, a major agenda item for the international development organizations, such as the International Monetary Fund and the World Bank, has been to bolster developing nations’ financial markets.
Stronger financial markets can move savings to where they can do the most to spur economic growth.
And that capacity has been seen as one of the handful of key prerequisites for economic development.
Making finance work should boost economic development significantly.
Economic historians point to financial revolutions as setting the stage for strong economic development in England (in the seventeenth and eighteenth centuries, following the Glorious Revolution), in the United States (after Alexander Hamilton in the 1790’s built up major financial structures in a primarily agricultural country), and in Japan (after the Meiji Restoration).
The World Bank, the IMF, and dozens of academics have studied long and hard what makes financial markets grow and what holds them back.
Many focus on the quality of institutions, such as courts and tax authorities.
Others emphasize the quality of corporate law.
Still others look at policies, like trade openness or lightness of taxation.
Everyone extols property rights.
Yet, when one looks at what actually happens in developing countries, the lessons are disappointing.
Though some countries have fixed their court systems, streamlined their tax administrations, and begun to get a handle on corruption, the impact on financial markets has been uneven.
Worse still for some theories of what makes financial markets flourish are the examples of the US, Great Britain, and Japan.
Financial markets leaped forward in eighteenth-century Great Britain, and in the nineteenth and early twentieth centuries in Japan and the US – a time when several key institutions, such as corporate law and the court system, were woefully substandard.
American courts in the nineteenth century were notably corrupt, sometimes incompetent, and often irrelevant, yet stock and bond markets grew, and continent-spanning firms rose up and got the financing they needed to operate, expand, and industrialize the US economy.
The core protective legal institution for outside finance, the federal securities laws, didn’t fall into place until the 1930’s – decades after US financial markets had grown to finance America’s economic rise.
Britain and Japan seem to have followed the same sequence: finance first, protective institutions later.
Japan had no corporate law until complex business finance started developing at the end of the nineteenth century.
Yet that sequence is the opposite of what one might have expected: only after financial markets developed did those with a stake in them press for better legislation to protect investors.
So, in Britain, Japan, and the US, something more foundational must have been in place before financial markets started operating.
Something else must affect which countries are most likely to get strong finance, which won’t, and when it all happens.
That “something” now usually seems to be basic political stability, preferably of the democratic kind.
In a stable political environment, informal mechanisms – such as reputations for reliability, trade associations, and stock exchanges – can develop and facilitate financial dealings.
Investors and businesses don’t fear that a new regime can take power and call off all, or too many, bets, leading to losses on their investments.
The data linking democratic political instability and financial backwardness in the modern era, which Jordan Siegel of the Harvard Business School and I analyze in a forthcoming article, show unmistakably that instability powerfully predicts an inability to develop financial markets.
Democratic political stability is the most important harbinger of financial development.
There is a deep logic to this finding.
Even if all of the rules for finance are right, few will part with their money if they fear that an unfavorable regime change might occur during the lifetime of their investment.
More importantly, the grim stability of the type displayed by Hosni Mubarak’s Egypt is oftentimes insufficient for genuine financial development.
Authoritarian regimes, especially those with severe income and wealth inequality, inherently create a risk of arbitrariness, unpredictability, and instability.
They are themselves arbitrary.
And everyone knows that beneath the stability of the moment lurk explosive forces that can change the regime and devalue huge investments.
Because financiers and savers have limited confidence in the future, such regimes can’t readily build and maintain strong foundations for financial development.
By contrast, democratic regimes with widespread property ownership typically best protect property rights over the long term, because enough people in the polity want to protect property.
Yes, the rules of the game count for finance. But what counts even more is that the polity has a continuing, stable stake in keeping those rules in place and making them work for finance and economic growth.
So, what does this mean for Egypt?
The Egyptian revolution is political thus far, not economic.
Yet, if the revolution leads to a more open, democratic, middle-class-oriented political system, in which enough people believe that they have a stake in the government’s continuity, the economic benefits for Egyptians could be large.
Financial markets will more likely flourish, and more rapid and equitable development will more likely follow.
The Economic Governance the EU Needs
BRUSSELS – Two lessons have emerged from Europe’s financial crisis. First, there is no substitute for timely and coordinated action when the single currency is under pressure.
Second, all eurozone countries are effectively in the same boat.
If the boat springs a leak, everyone sinks.
A quicker and more concerted response might have limited the fall-out from the crisis, and thus its cost.
The European Financial Stabilization Facility (EFSF), hurriedly established in May 2010 in an effort to stop the rot, will shortly be able to call on some €500 billion in the event that any more eurozone countries face serious liquidity problems.
And eurozone member states have agreed to perpetuate this financial-stability mechanism from 2013 onwards, and even to amend the Lisbon treaty to avoid any legal ambiguity.
Despite all this, markets remain unconvinced by the eurozone’s shows of solidarity.
Greek sovereign debt has been downgraded to below that of Egypt.
Portugal has had to ask for assistance from the EFSF and the International Monetary Fund.
Irish banks reportedly need an additional €24 billion to stay afloat.
And Spain is doing all it can to avoid the contagion.
The irony is that the euro has been a hugely successful project, bringing considerable stability to participating countries.
Indeed, without the single currency, many of these countries would have succumbed to a downward spiral of devaluation, default, and recourse to the IMF.
The European Central Bank has played a crucial role in preventing a worst-case scenario, but the obvious lacuna in Europe’s economic and monetary union (EMU) remains: EMU established only a monetary union and largely omitted the economic union that has proven so closely linked to the euro’s strengths and weaknesses.
The real crisis facing Europe is one of economic governance.
Eurozone member states have increasingly gone their own way, even overtly defending nationalist economic policies that harm the eurozone as a whole.
This is not to say that a single economic policy should be imposed on everyone; but Europe does need a higher degree of coordination and convergence to ensure that everyone is at least heading in the same direction.
Like cars on a highway, some may drive more slowly than others, but there are minimum and maximum speeds and all must go with the flow of traffic.
Moreover, all motorists must respect the rules of the road, and anyone who breaches them must be held to account, and possibly penalized, because even one rogue driver will most likely cause a major pile-up if not stopped.
So it is with economic governance: anarchy would be devastating.
Agreement is needed on both the rules and the impartial body to enforce them.
European Union leaders have in recent summits come close to identifying a number of economic-policy areas where closer coordination would improve competitiveness, including sustainability of pensions, wage-to-productivity ratios, corporate taxation, investment in research and development, and the financing of major infrastructure projects.
Yet the same EU members have failed to endow the European Commission with overall responsibility for holding member governments to their commitments and, where necessary, imposing penalties for breaches.
This intergovernmental approach lay behind the Lisbon Agenda’s failure to deliver the results needed to make Europe more competitive and dynamic by 2010, and the same shortcomings will bedevil its successor, the new “Europe 2020” strategy.
Indeed, it is a failure of governance that has characterized the Stability and Growth Pact, designed (largely by Germany) to ensure sound macroeconomic policy by limiting national debt and deficit ratios.
Most eurozone members are now in breach of the Pact, yet none has been subjected to the penalties envisaged by its architects.
Recently adopted changes create a more sensible and graduated system for sanctioning recalcitrant countries, but still leave the decision to initiate an excessive deficit procedure to member states, rather than establishing the more automatic mechanism sought by the European Commission.
Meanwhile, the Commission already polices the internal market – one of Europe’s major policy successes – by monitoring member states’ compliance with the single market’s rules.
It also launches infringement proceedings against member states that have not implemented valid directives on time, or in the correct manner.
Similarly, EU competition policy has stood firm for many years against monopolies and abuse of dominant market positions.
Here, too, the Commission plays the role of neutral judge.
There may be disputes in some cases, but the system has brought a degree of legal certainty across the single market that the EU’s member states could not have achieved on their own.
The challenge now for EU leaders is not to repackage old policies, but to express a collective vision and will to act together.
I have been arguing for a Community Act that would bring together all elements of economic governance under a single framework, with the European Commission at its center.
As with the single-market program of the 1980’s, the Commission could be in charge of overseeing a convergence of national economic policies, within certain parameters, throughout the EU.
Straying outside of those parameters would lead to warnings and sanctions, but otherwise there would be some flexibility for member states to pursue the EU’s collective goals at a pace adapted to their national circumstances.
A cluster of EU commissioners holding economic-related portfolios could even be made responsible for guiding the process forward, providing it with direction and momentum.
If European countries are to emerge stronger from the current crisis, they need to think bigger and put more faith, not less, in the collective enterprise that is the EU.
After all, European unification was conceived as a project of pooled sovereignty, not surrendered prosperity.
The Economic Imperatives of the Arab Spring
WASHINGTON, DC/ISTANBUL – Almost a year has passed since revolution in Tunisia and protests in Cairo’s Tahrir Square toppled ossified authoritarian regimes and ignited a much wider – and still raging – storm in the Arab world.
No one can safely predict where these events will eventually take the Arab people and nations.
But one thing is certain: there is no turning back.
New social and political movements and structures are emerging, power is shifting, and there is hope that democratic processes will strengthen and spread across the Arab world in 2012.
Events in the Arab world in 2011 recall other far-reaching regional transitions, such as in Eastern Europe after the fall of the Berlin Wall in 1989.
There are differences, of course, but the upheavals’ sweeping and contagious nature is strongly similar to that of the revolutions that brought communism to an end in Europe.
So, too, is the debate about the relative contributions of political and economic factors to the eventual eruption of popular protest.
While the yearning for dignity, freedom of expression, and real democratic participation was the driving force underlying the Arab revolutions, economic discontent played a vital role, and economic factors will help to determine how the transition in the Arab world unfolds. &nbsp;Here, three fundamental and longer-term challenges are worth bearing in mind.
First, growth will have to be much more inclusive, especially in terms of job creation.
The youth employment-to-population ratio was about 27% in the Arab countries in 2008, compared to 53% in East Asia.
Moreover, income inequality has widened, with the global phenomenon of increasing concentration of wealth at the top very pronounced in many Arab countries.
Top incomes in these countries have resulted largely from political patronage, rather than from innovation and hard work.
While Tunisia was an extreme case of a regime furthering the economic interests of a small clique of insiders, the pattern was widespread.
That is why a knee-jerk, simplistic “Washington Consensus” prescription of more liberalization and privatization is inappropriate for the Arab world in 2012.
There is a clear political need for a growth strategy in which inclusion is the centerpiece, not an afterthought.
Neither the old statist left, nor the rent-seeking, crony-capitalist right had policies to respond to the yearning for inclusion.
New political forces in the Arab world, Islam-inspired or social-democratic, will have to propose policies that do not just perpetuate rent-seeking capitalism or reliance on a discredited state bureaucracy.
It will be necessary to harness grass-roots dynamism and entrepreneurial potential to achieve social solidarity and equity.
While a truly competitive private sector has to be unleashed, the state must not be weakened but transformed, to become one that is at the service of citizens.
Generous but targeted and performance-oriented social transfers, conditional on participation in health and basic education programs, will have to replace the old, largely untargeted subsidies.
Public development finance will have to focus on large-scale access to housing and a people-oriented infrastructure.
All of this has to be achieved within a sustainable budget framework, requiring both funds and comprehensive administrative reforms.
Accompanying inclusive growth, the second challenge is skill development, for which a performance-oriented education system must become a top priority.
Many Arab countries have spent huge sums on education; the problem is that the return on these investments has been dismal.
Arab students, for example, score well below average on international mathematics and science tests.
Deep reforms – focused on quality and performance, rather than on enrollment and diplomas – are needed to transform the learning process and unleash the productivity growth that a young labor force requires.
The third challenge, instrumental to meeting the first two, will be to strengthen regional Arab solidarity.
Many outsiders underestimate or purposefully minimize the “Arabness” of the Arab world.
But the revolutions of 2011 demonstrated that a strong sense of identity, a common language, and much shared history bind Arabs together, despite huge differences in natural-resource endowments, political circumstances, and average per capita incomes.
How else can one explain that an act of revolt in Tunisia led to popular revolts from North Africa to the Arabian Peninsula?
One implication of this is that the oil-rich states and leaders cannot expect to remain isolated and protected from the unfolding events.
The future of the region is also their future; the transition that started in 2011 unleashed forces that cannot be stopped.
But the transition can be more orderly, more peaceful, and less disruptive if states that command immense resources and wealth generously support the poorer countries – and back the reforms that all Arab countries need.
Existing institutions with proven track records, such as the Arab Fund, can help, but this requires scaling up their funds dramatically.
Prosperity and peace in the region will depend on thinking big and acting fast.
The revolutions of 2011 are a historic opportunity for all Arabs.
Making the most of it will require realism, courage, willingness to change, and a readiness to support change, particularly among those who have the greatest means to do so.
The Economics of Happiness
NEW YORK – We live in a time of high anxiety.
Despite the world’s unprecedented total wealth, there is vast insecurity, unrest, and dissatisfaction.
In the United States, a large majority of Americans believe that the country is “on the wrong track.”
Pessimism has soared.
The same is true in many other places.
Against this backdrop, the time has come to reconsider the basic sources of happiness in our economic life.
The relentless pursuit of higher income is leading to unprecedented inequality and anxiety, rather than to greater happiness and life satisfaction.
Economic progress is important and can greatly improve the quality of life, but only if it is pursued in line with other goals.
In this respect, the Himalayan Kingdom of Bhutan has been leading the way.
Forty years ago, Bhutan’s fourth king, young and newly installed, made a remarkable choice: Bhutan should pursue “gross national happiness” rather than gross national product.
Since then, the country has been experimenting with an alternative, holistic approach to development that emphasizes not only economic growth, but also culture, mental health, compassion, and community.
Dozens of experts recently gathered in Bhutan’s capital, Thimphu, to take stock of the country’s record.
I was co-host with Bhutan’s prime minister, Jigme Thinley, a leader in sustainable development and a great champion of the concept of “GNH.”
We assembled in the wake of a declaration in July by the United Nations General Assembly calling on countries to examine how national policies can promote happiness in their societies.
All who gathered in Thimphu agreed on the importance of pursuing happiness rather than pursuing national income.
The question we examined is how to achieve happiness in a world that is characterized by rapid urbanization, mass media, global capitalism, and environmental degradation.
How can our economic life be re-ordered to recreate a sense of community, trust, and environmental sustainability?
Here are some of the initial conclusions.
First, we should not denigrate the value of economic progress.
When people are hungry, deprived of basic needs such as clean water, health care, and education, and without meaningful employment, they suffer.
Economic development that alleviates poverty is a vital step in boosting happiness.
Second, relentless pursuit of GNP to the exclusion of other goals is also no path to happiness.
In the US, GNP has risen sharply in the past 40 years, but happiness has not.
Instead, single-minded pursuit of GNP has led to great inequalities of wealth and power, fueled the growth of a vast underclass, trapped millions of children in poverty, and caused serious environmental degradation.
Third, happiness is achieved through a balanced approach to life by both individuals and societies.
As individuals, we are unhappy if we are denied our basic material needs, but we are also unhappy if the pursuit of higher incomes replaces our focus on family, friends, community, compassion, and maintaining internal balance.
As a society, it is one thing to organize economic policies to keep living standards on the rise, but quite another to subordinate all of society’s values to the pursuit of profit.
Yet politics in the US has increasingly allowed corporate profits to dominate all other aspirations: fairness, justice, trust, physical and mental health, and environmental sustainability.
Corporate campaign contributions increasingly undermine the democratic process, with the blessing of the US Supreme Court.
Fourth, global capitalism presents many direct threats to happiness.
It is destroying the natural environment through climate change and other kinds of pollution, while a relentless stream of oil-industry propaganda keeps many people ignorant of this.
It is weakening social trust and mental stability, with the prevalence of clinical depression apparently on the rise.
The mass media have become outlets for corporate “messaging,” much of it overtly anti-scientific, and Americans suffer from an increasing range of consumer addictions.
Consider how the fast-food industry uses oils, fats, sugar, and other addictive ingredients to create unhealthy dependency on foods that contribute to obesity.
One-third of all Americans are now obese.
The rest of the world will eventually follow unless countries restrict dangerous corporate practices, including advertising unhealthy and addictive foods to young children.
The problem is not just foods.
Mass advertising is contributing to many other consumer addictions that imply large public-health costs, including excessive TV watching, gambling, drug use, cigarette smoking, and alcoholism.
Fifth, to promote happiness, we must identify the many factors other than GNP that can raise or lower society’s well-being.
Most countries invest to measure GNP, but spend little to identify the sources of poor health (like fast foods and excessive TV watching), declining social trust, and environmental degradation.
Once we understand these factors, we can act.
The mad pursuit of corporate profits is threatening us all.
To be sure, we should support economic growth and development, but only in a broader context: one that promotes environmental sustainability and the values of compassion and honesty that are required for social trust.
The search for happiness should not be confined to the beautiful mountain kingdom of Bhutan.
The Unstarvable Beast
CAMBRIDGE – As the world watches the United States grapple with its fiscal future, the contours of the battle reflect larger social and philosophical divisions that are likely to play out in various guises around the world in the coming decades.
There has been much discussion of how to cut government spending, but too little attention has been devoted to how to make government spending more effective.
And yet, without more creative approaches to providing government services, their cost will continue to rise inexorably over time.
Any service-intensive industry faces the same challenges.
Back in the 1960’s, the economists William Baumol and William Bowen wrote about the “cost disease” that plagues these industries.
The example they famously used was that of a Mozart string quartet, which requires the same number of musicians and instruments in modern times as it did in the nineteenth century.
Similarly, it takes about the same amount of time for a teacher to grade a paper as it did 100 years ago.
Good plumbers cost a small fortune, because here, too, the technology has evolved very slowly.
Why does slow productivity growth translate into high costs?
The problem is that service industries ultimately have to compete for workers in the same national labor pool as sectors with fast productivity growth, such as finance, manufacturing, and information technology.
Even though the pools of workers may be somewhat segmented, there is enough overlap that it forces service-intensive industries to pay higher wages, at least in the long run.
The government, of course, is the consummate service-intensive sector.
Government employees include teachers, policemen, trash collectors, and military personnel.
Modern schools look a lot more like those of 50 years ago than do modern manufacturing plants.
And, while military innovation has been spectacular, it is still very labor-intensive.
If people want the same level of government services relative to other things that they consume, government spending will take up a larger and larger share of national output over time.
Indeed, not only has government spending been rising as a share of income; so, too, has spending across many service sectors.
Today, the service sector, including the government, accounts for more than 70% of national income in most advanced economies.
Agriculture, which in the 1800’s accounted for more than half of national income, has shrunk to just a few percent.
Manufacturing employment, which accounted for perhaps a third of jobs or more before World War II, has shrunk dramatically.
In the US, for example, the manufacturing sector employs less than 10% of all workers.
So, even as economic conservatives demand spending cuts, there are strong forces pushing in the other direction.
Admittedly, the problem is worse in the government sector, where productivity growth is much slower even than in other service industries.
Whereas this might reflect the particular mix of services that governments are asked to provide, that can hardly be the whole story.
Surely, part of the problem is that governments use employment not just to provide services, but also to make implicit transfers.
Moreover, government agencies operate in many areas in which they face little competition – and thus little pressure to innovate.
Why not bring greater private-sector involvement, or at least competition, into government?
Education, where the power of modern disruptive technologies has barely been felt, would be a good place to start.
Sophisticated computer programs are becoming quite good at grading middle-school essays, if not quite up to the standards of top teachers.
Infrastructure is another obvious place to expand private-sector involvement.
Once upon a time, for example, it was widely believed that drivers on privately operated roads would constantly be waiting to pay tolls.
Modern transponders and automatic payment systems, however, have made that a non-issue.
But one should not presume that a shift to greater private-sector provision of services is a panacea.
There would still be a need for regulation, especially where monopoly or near-monopoly is involved.
And there would still be a need to decide how to balance efficiency and equity in the provision of services.
Education is clearly an area in which any country has a strong national interest in providing a level playing field.
As US President in the 1980’s, the conservative icon Ronald Reagan described his approach to fiscal policy as “starve the beast”: cutting taxes will eventually force people to accept less government spending.
In many ways, his approach was a great success.
But government spending has continued to grow, because voters still want the services that government provides.
Today, it is clear that reining in government also means finding ways to shape incentives so that innovation in government keeps pace with innovation in other service sectors.
Without more ideas about how to innovate in the provision of government services, battles such as one sees playing out in the US today can only become worse, as voters are increasingly asked to pay more for less.
Politicians can and will promise to do a better job, but they cannot succeed unless we identify ways to boost government services’ efficiency and productivity.
The Economics of Strategic Containment
NEW DELHI – At their recent summit in Cannes, the G-20 shelved, if not buried, the World Trade Organization’s moribund Doha Development Round of multilateral trade negotiations.
Crisis-weary Europe and America face a rising tide of protectionism at home, and are trying to find ways to blunt the edge of China’s non-transparent trade competitiveness.
Turning his attention from the Atlantic to the Pacific, US President Barack Obama – with his eye, once again, trained on China – has now unveiled a new regional trade initiative.
Why was the US unwilling to move forward on the Doha Round, but willing to pursue a regional free-trade agreement?
The answer lies in the fact that the Trans-Pacific Partnership (TPP), launched by Obama and the governments of eight other Pacific economies – Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam – is not just about trade.
While Obama chose to stick to the economic factors driving the TPP, US Secretary of State Hillary Clinton, on the eve of the just-concluded Asia Pacific Economic Cooperation gathering in Hawaii, laid out the initiative’s wider strategic context.
“The United States will continue to make the case that….[the region] must pursue not just more growth, but better growth,” which “is not merely a matter of economics,” Clinton said.
“Openness, freedom, transparency, and fairness have meaning far beyond the business realm,” she continued.
“Just as the United States advocates for them in an economic context, we also advocate for them in political and social contexts.”
Following up on these remarks, Obama drew attention to persistent US concern about China’s exchange-rate policy, inadequate protection of intellectual property, and impediments to market access.
“For an economy like the United States – where our biggest competitive advantage is our knowledge, our innovation, our patents, our copyrights – for us not to get the kind of protection we need in a large marketplace like China is not acceptable,” Obama observed.
The TPP initiative should be viewed against this background, and not just in the context of the collapse of the Doha Round.
The TPP’s nine sponsors have resolved “to establish a comprehensive, next-generation regional agreement that liberalizes trade and investment and addresses new and traditional trade issues and twenty-first-century challenges.”
These leaders also agreed to fast-track the TPP initiative, and to consider opening it to other members – most importantly Japan, a late convert to the idea of a Pacific region free-trade agreement.
The TPP’s agenda is divided into three categories: core, cross-cutting, and emerging issues.
The core agenda is to stitch together a traditional free-trade agreement focused on industrial goods, agriculture, and textiles.
The agreement would also have provisions for intellectual-property protection and what are dubbed the social and environmental issues.
In short, the TPP’s core agenda will offer the region a “Doha Round-type” agreement that includes the social and environmental agenda that developing economies have been resisting within the WTO.
Going beyond the core, the cross-cutting issues include investor-friendly regulatory systems and policies that enable “innovative” or “employment-creating” small and medium-size enterprises to operate freely across borders within the TPP region.
Finally, the TPP seeks to bring into the ambit of a trade and investment agreement “new and emerging” issues.
These include “trade and investment in innovative products and services, including digital technologies, and ensuring state-owned enterprises compete fairly with private companies and do not distort competition in ways that put US companies and workers at a disadvantage.”
In short, the US has moved to bring together all of the economies in the region that are worried about China’s beggar-thy-neighbor trade and exchange-rate policies.
For the US, the eight other TPP countries, with a combined population of 200 million, constitute its fourth largest export market, behind only China, the European Union, and Japan.
If Japan joins, the TPP’s importance would rise dramatically.
While the economics of the TPP is important, the strategic component is even more so.
This is the second leg of America’s new “Pacific offensive,” aimed at offering nations in the region an alternative to excessive and rapidly growing dependence on a rising China.
The first leg of the offensive was the idea of the “Indo-Pacific” region, which Clinton developed a year ago and followed up this year with an essay called “America’s Pacific Century.”
There, she defines the new region of US strategic engagement as “stretching from the Indian subcontinent to the western shores of the Americas.”
Extending east from the Indian Ocean and west via the Pacific, the US is creating a new strategic framework for the twenty-first century.
The TPP is just one of the pillars of that new edifice.
The Economy and the Presidency
CAMBRIDGE – America’s presidential election is now just six months away.
If history is a reliable guide, the outcome will depend significantly on the economy’s performance between now and November 6, and on Americans’ perception of their economic future under the two candidates.
At the moment, America’s economy is limping along with slow growth and high unemployment.
Output grew by just 1.5% last year, and real GDP per capita is lower now than before the economic downturn began at the end of 2007.
Although annual GDP growth was 3% in the fourth quarter of 2011, more than half of that reflected inventory accumulation.
Final sales to households, businesses, and foreign buyers rose at only a 1.1% annual rate, even slower than earlier in the year.
And the preliminary estimate for annual GDP growth in the first quarter of 2012 was a disappointing 2.2%, with only a 1.6% rise in final sales.
The labor market has been similarly disappointing.
The March unemployment rate of 8.2% was nearly three percentage points above what most economists would consider a desirable and sustainable long-run level rate.
Although the rate was down from 9% a year ago, about half of the change reflected a rise in the number of people who have stopped looking for work, rather than an increase in job creation and the employment rate.
Indeed, the official unemployment rate understates the weakness of the labor market.
An estimated 6% of all employees are working fewer hours per week than they would like, and about 2% of potential employees are not counted as unemployed because they have not looked for work in the past few weeks, even though they would like to work.
Adding these individuals to those officially classified as unemployed implies that about 15% of potential labor-force participants are working less than they want.
Solid increases in payroll employment at the start of the year contributed to a general sense of confidence.
But the rate of increase in payroll employment fell in March to less than half of the rate recorded in previous months, and the number of workers claiming unemployment benefits recently jumped to a four-month high.
Even those who are working are seeing their incomes shrink.
Real average weekly earnings have fallen in recent months, and are now lower than they were 18 months ago.
The broader measure of real per capita after-tax personal income has also been falling, and is back to levels last seen a year ago.
Despite their declining incomes, households raised their spending in early 2012 at a rapid pace by cutting their saving rate to just 3.7%.
Without further declines in the saving rate from this very low level, consumer spending will not continue to grow as robustly.
Recent reports of declining consumer confidence reinforce the likelihood that spending will slow in the months ahead.
Moreover, the housing market remains in bad shape.
The most reliable index of comparable house prices has continued to decline month after month, and prices are now about 7% lower in real terms than a year ago, implying a $1 trillion loss of household wealth.
With roughly 25% of all homeowners with mortgages owing more than their homes are worth, the decline in house prices reflects high rates of default and foreclosure.
Falling prices, together with stricter lending standards, has spurred a shift by would-be home buyers to the rental market, causing recent declines in the sales of both new and existing homes.
The weakness of America’s economy is not limited to the household sector.
Industrial production has been unchanged for the past two months, and utilization of industrial capacity has declined.
And the monthly purchasing surveys conducted by the Institute for Supply Management now indicate weaker activity among service firms as well.
Looking ahead, strong headwinds imply that it will be difficult to achieve better economic performance in the rest of the year.
Higher energy prices are reducing real household spending on non-energy goods and services; weakness in Europe and Asia will hurt America’s exports; state and local governments are cutting their spending; and concerns about higher taxes in 2013 will dampen both business investment and big-ticket consumer spending.
The economy is thus shaping up to be a serious liability for President Barack Obama, who is likely to place the blame on the conditions that he inherited from President George W. Bush, and on the Republican majority in the House of Representatives.
But the public is likely to place the blame on the president, and surveys indicate that a growing number of Americans believe that Mitt Romney, the almost certain Republican candidate, would do a better job than Obama at managing the economy.
The polls are very close, and voters have not yet locked in their decisions.
The economy could rise more sharply than expected in the months ahead.
If not, Obama will try to shift attention from the overall economy by emphasizing his plan to raise taxes on high-income individuals.
And a variety of other issues, including immigration and the role of women, might influence voters.
But the state of the economy is usually the most important determinant of who wins national elections in the United States.
The Economy of Fear
The global economy seems to be walking on water, shrugging off soaring oil prices, policy paralysis in Europe, unsustainable borrowing by the United States, and record housing prices.
Is it because, as G-8 leaders would have us believe, investors are in a buoyant mood, confident in their leaders’ stewardship of the global economy?
Or are we being governed by a pathology of fear, fed by events such as the recent London bombings, that is holding down long-term interest rates thereby covering up a host of simmering problems?
The role of phenomenally low long-term (inflation-adjusted) interest rates in covering up a multitude of weaknesses in the global economy is all too apparent.
Soaring house prices worldwide are propping up consumer demand in many countries, and, according to a recent study by the International Monetary Fund, continually falling long-term interest rates explain two-thirds or more of the global price rise.
Europe has benefited less, but its economies would be a lot worse off if long-term interest rates climbed back to their 25-year average.
Similarly, Latin America has been booming in recent years, despite high debt burdens and a mixed record of policy reform.
Low long-term interest rates have kept the region’s debts manageable, while high consumer demand has helped bid up prices for the region’s commodity exports.
Why hasn’t the huge spike in oil prices cut the world to its knees, as it has on so many other occasions?
Again, the answer is low interest rates.
Ordinarily, a sharp rise in oil prices quickly translates into higher inflation expectations, followed by rising interest rates at all maturities.
But this time, even as the US Federal Reserve keeps hiking its short-term lending rate to keep inflation in line, long-term interest rates – which are far more important – have been magically declining.
Indeed, America has been the single biggest beneficiary of this freakish low-interest-rate environment, with everyone seeming to borrow money like it is going out of style.
Homeowners, backed by rising house prices, are piling up debt.
The Federal government has thrown fiscal prudence out the window.
The country as a whole is absorbing an astounding three-quarters of global excess savings.
But, as long as interest rates remain low and growth high, Americans can laugh at predictions that their excesses are laying the seeds of ruin.
But if low long-term interest rates are helping so many economies walk on water, why are rates so low, and will they stay that way?
Perhaps the situation is far more fragile than many policymakers would have us believe.
Perhaps people have come to feel less , not more, secure about their long-term future, either because of fears about terrorism, a global pandemic, or a severe rash of financial crises.
I am not claiming that investors are hysterical, just that they may have become a bit more concerned about the long-term outlook.
As a consequence, they are crowding into bonds and debt instruments that they view, rightly or wrongly, as safe vehicles.
Other convincing explanations are lacking.
To be sure, emerging markets have been on an unusual savings spree, rebuilding reserves and improving balance sheets, but nobody expects this to go on forever.
Even US Federal Reserve Chairman Alan Greenspan ordinarily the Oracle of Delphi on interest-rate matters, has declared the current situation “a conundrum.”
History suggests that the global technology boom has yet to play itself out, with US productivity gains likely to radiate out across the world, raising growth rates everywhere.
Ordinarily, rapid global growth translates into high long-term interest rates – that is, unless, deep down, people have become nervous.
Suppose investors are worried about a small chance of catastrophe over the next five to ten years.
(According to experts on nuclear terrorism and pandemics, the dangers are real.)
Suppose investors believe that growth will probably continue to be strong, but that maybe – just maybe – things will fall apart.
In this case, it is entirely possible to have very low interest rates co-exist with strong growth.
True, some economists point to the halcyon days of the 1950’s and early 1960’s, when Europe, the US, and Japan prospered, but interest rates generally remained well below the rate of economic growth.
Since that was a golden era for global growth, why worry if we are seeing the same phenomenon today?
What the optimists forget is that the 1950’s and 1960’s were also a period of massive insecurity.
Many people realistically feared the outbreak of World War III – and with good reason, according to many historians.
Back then, the specter of the Apocalypse helped keep borrowing cheap.
Happily, investors’ darkest fears were not realized, and we can only hope for the same.
But if insecurity is a major undercurrent of today’s record-low interest rates, then G-8 leaders should be more cautious in their self-congratulation.
Investors’ collective psychology is notoriously fragile.
If they ever calm down, interest rates will shoot up, and that could well bring the global economy’s simmering imbalances to a raging boil.
The Education Myth
We all know that more education is a Good Thing, especially for our economic futures.
This is why many countries, particularly in Europe, have numerical targets driving their education policies: 50% participation in post-secondary education in the UK or Sweden, for example, or 80% to baccalaureate level in France.
Chancellor Schroeder’s big idea for solving Germany’s economic problems is, of course, education: including yet more undergraduates in a system struggling to cope with those it has.&#160;
Governments see their main job as delivering economic prosperity, and they view education as a necessary and reliable tool for achieving that end.
But is it?
We are told that in a “knowledge economy,” a country needs ever more graduates and formal qualifications to stay competitive.
But education simply does not deliver economic growth the way our politicians – and businessmen – believe: more education in does not mean more growth out.
Worse, the education policies that follow from current beliefs have serious negative consequences for opportunities for young people and the quality of education itself.
The argument that education matters for the economy is plausible because, at one level, it is obviously right.
A modern society does need educated people: not just engineers, chemists, and doctors, but millions of people who can write coherent letters, fill in complicated forms, explain insurance policies, and interpret statistical data from machines on factory floors.
Some of these skills can be learned only in universities; others can (and should) be mastered in primary and secondary schools.
Employers naturally tend to hire the most educated workers on offer, and so as the number of graduates increase, so does the number of “graduate” jobs.
However, every study I know of – whether British, Scandinavian, or American – agrees that large numbers of these “graduate” jobs require no more than they did when non-graduates performed them perfectly well.
In this sense, many societies are already “over-educated.”
But perhaps this is irrelevant.
Maybe better-educated workers do their jobs more efficiently, in which case we will surely find a clear relationship between educational attainment and economic growth.
Alas, no.
A few recently industrialized countries have pursued successful government-driven education strategies that seem to boost economic development.
But for every such case – South Korea is the favorite example – there is another, like Hong Kong, where meteoric economic growth had nothing to do with centrally planned education policy.
Instead, parents pushed their children towards the best schools to give them an individual head start – something parents do the world over – only after they got richer.
Moreover, for every South Korea, and every Hong Kong, we can also find developing countries where expanding education merely fueled competition for white-collar jobs in a bloated, deadweight state bureaucracy.
Countries like this explain why large international studies often find a negative relationship between education and growth rates.
Egypt is a classic example of this. Between 1970 and 1998, its primary school enrollment rates grew to over 90%, secondary schooling soared from 32% to 75%, and university education doubled.
Egypt started the period as the world’s 47th poorest country; it ended the period as the 48th poorest.
But it is not only among developing countries that links between education and growth prove elusive.
Switzerland has been one of the richest countries in the world for a century – and not because of its natural resources.
Yet it has the lowest rate of university attendance in Western Europe.
If you look for a relationship between children’s performance on international surveys of achievement, and their countries’ growth rates twenty years on, you will look in vain.
No such relationship exists.
So, while any developed country obviously needs an educated population, the idea that having the most education will get you the most prosperity is a chimera.
Does this matter, though?
Surely, education has other virtues, over and above its economic role.
So maybe we should stop criticizing and start celebrating governments’ enthusiasm for spending on education.
But this would ignore the dark underside of our educational spiral.
The creation of more “graduate” jobs only proves that as credentials become more common, they become more important.
Moreover, in the past, someone who left school without the “right” qualifications could still succeed, through an apprenticeship or by working his way up from the shop floor.
Today, that is becoming impossible: we are creating societies in which the sheep and the goats are marked for life in their teens.
As university attendance becomes more common, fewer capable young people enter vocational training.
Yet our economies still need highly trained craftspeople far more than another batch of arts graduates.
Moreover, rapid expansion of university education all too often comes at the expense of quality.
Education is expensive because it uses people: there are no vast economies of scale or leaps in productivity.
Relative pay for teachers has been dropping as their total numbers increase, which affects teacher quality.
University classes become larger, which means that students are taught less effectively.
It becomes harder to maintain good university-based research because of the demands of other parts of the education budget.&#160;
Is this really the best route to a vibrant economy and a civilized, cultured, and open society?
The Egyptian Crucible
MADRID – As Egyptians tensely awaited the results of their country’s presidential elections, a thread of pessimism ran through the discourse of the young people and secular liberals who had brought down Hosni Mubarak in January 2011.
The “anything is possible” sensation of the Tahrir Square rebellion had faded, and now two candidates whom the protesters deeply opposed, the Muslim Brotherhood’s Mohamed Morsi, and Ahmed Shafiq, a factotum of the old regime (and of the current military government), prepared to face off in the second round.
The triad of fundamental forces driving Egypt since the beginning of the Arab Spring – the military, the mosque, and the masses in Tahrir Square, each with different types of power and interests – was thus broken.
Those who filled Tahrir Square 16 months ago were silenced, and the expected transfer of power from the military to a civilian, democratic government was thrown into doubt.
Since assuming power after Mubarak’s fall, the Supreme Council of the Armed Forces (SCAF), led by Field Marshal Mohamed Hussein Tantawi, a defense minister for two decades under Mubarak, has consistently undermined the delicate work of democratic transition.
The week before the presidential elections, the SCAF-allied Constitutional Court dissolved the recently elected parliament, alleging illegality in the voting process.
And, foreseeing Morsi’s victory, SCAF assumed all legislative powers; severely limited the president’s powers; seized the authority to appoint the committee tasked with drafting the new Constitution; took control of the country’s budget; and claimed sole power over domestic and foreign security.
As a result, Egypt’s power struggle will continue, with the junta no longer battling those in Tahrir Square, but political Islam.
After a decades-long clandestine (although tolerated) existence within Egyptian society, Islamist forces were able to take advantage of the Tahrir protests, despite playing no integral part in them.
The secular liberal forces’ political fragmentation and lack of organization cost them dearly in the parliamentary elections six months ago, and, in the second round of the presidential election, a majority of Egyptians chose Morsi over a restoration of the old regime.
But Morsi’s narrow margin of victory (just 3.5 percentage points) over Shafiq, and low voter turnout – 46.4% in the first round and 51.8% in the second – reflect a polarized, exhausted society that lacks confidence in the electoral process and the candidates.
Moreover, the outcome has merely fueled further uncertainty about Egypt’s direction.
With Morsi’s victory, some now fear that the Muslim Brotherhood will seek to implement radical policies aimed at Islamizing a Muslim country that is already conservative, but that has had a secular government for decades.
Others do not believe that the Muslim Brotherhood will go so far, but nonetheless doubt that the Brothers will defend a secular, truly democratic regime in the ongoing negotiations with SCAF on a transition to civilian rule.
In either scenario, Morsi has little room to maneuver in a country that, for the time being, is in political limbo – with neither a constitution nor a parliament – and whose people want tangible results in terms of good governance, institutional consolidation, and improvements to a tottering economy.
Indeed, living standards have been under severe pressure since Mubarak’s downfall.
In 2011 alone, net capital inflows fell nearly 90% year on year, tourism was down 30%, the trade deficit soared to $28 billion, and GDP growth slowed from 3.8% to 1%.
The success or failure of Morsi’s government will rest largely on the economy.
For the Muslim Brotherhood, this scenario constitutes a serious challenge, one that can be overcome only by finding an adequate balance between SCAF, with its overweening power, and Egypt’s liberal political forces – which won a combined 11 million votes, five million more than Morsi, in the presidential election’s first round.
Only this will give a Morsi administration the necessary legitimacy and capacity to carry out a joint transition with the military for a true change of regime.
The liberals, for their part, did not support Morsi in the run-off with Shafiq.
But it was their efforts that made the presidential election possible in the first place, and many now believe that close collaboration with the Brothers is the only available option that can restore some of the spirit of an endangered revolution in which they were the protagonists.
This presupposes that the Brothers reorganize themselves internally and find ways to distance themselves from more radical factions, and that they promote inclusive policies toward vulnerable groups and social minorities.
For now, the Brothers have announced that they will name a Christian and a woman as Vice Presidents.
Obviously, that represents an encouraging first step in bridging Egypt’s divides.
The Egyptian Endgame
PRINCETON – Can Egypt’s long history help us to understand the uprising, already labeled a revolution, now underway in Cairo, and how it might turn out?
I believe so.
After all, the demonstrations by millions of people to demand an end to the rule of President Hosni Mubarak and his National Democratic Party (NDP) are not an unprecedented phenomenon in the country.
Egypt’s history is replete with powerful and famous rulers (starting with Ramses II in pharaonic times, and including Saladin, Muhammad Ali, Napoleon Bonaparte, Lord Cromer, all the way up to the Egyptian military trio of Gamal Abdel Nasser, Anwar El Sadat, and Mubarak).
This suggests that, although Egyptians may not necessarily prefer strongman rule, they are entirely comfortable with it and may even believe that it is necessary.
To be sure, popular revolts are nothing new for Egypt.
Crowds rose against Napoleon’s French forces in 1798, against the monarchy in 1881-1882, against British dominance in 1919 and 1952, against Sadat in 1977, and against Mubarak in 1986.
These uprisings were repressed, often brutally, first by foreign troops (the French army in 1798 and British soldiers in 1882 and 1919) and more recently by the Egyptian army.
Unfortunately, while angry protesters have sometimes forced unwelcome rulers out of power, they have been unable to replace tyrants with governments that respect the public’s wishes.
Will this long history of authoritarian rule now be broken?
The first days of the current uprising favored the people.
The crowds were enormous and peaceful, not only in Cairo, the historic node for protest, but in all of Egypt’s cities.
In addition, the army, called out ostensibly to restore order, held back, a markedly different response from its repression of past uprisings.
French and British soldiers did not hesitate to put down resistance. Nor did the Egyptian army in 1952, 1977, and 1986.
The uprising in 1952 is particularly revealing, because it was widespread and intensely popular, for it was directed against the much-hated British.
Although the British had 100,000 troops stationed near the Suez Canal at the time, they chose not to intervene.
Instead, it was the small and highly professional Egyptian army that crushed the uprising, to the dismay of the young officer corps, who were already well advanced in their plans to seize power.
Years of fighting in Arab-Israeli conflicts, however, transformed the army, giving rise to a massive conscript force that totals approximately 400,000 soldiers today.
The army’s lower ranks are now filled with young men, drawn from all segments of Egyptian society, whose backgrounds are no different from those of the people they may be called upon to suppress.
Today’s Egyptian army is a people’s army, and, unlike the reviled security forces, it is widely admired.
Senior officers surely know the risks that they will incur if they order these men to fire on friends and relatives.
Moreover, the current mass demonstrations are radically different from previous protest movements that the army suppressed.
In 1977, many rose to oppose an end to food and other consumer subsidies; in 1986, poorly paid security forces went on a rampage.
The numbers involved in those protests were miniscule compared to now.
Nor were the protesters’ actions peaceful.
They threatened property and undermined political order from the outset.
The Egyptian high command did not need to worry that rank-and-file soldiers would disobey orders, because they were protecting the citizenry.
Yet, the current protest, which started so peacefully and with such ebullience, took a dramatic and violent turn several days ago.
Mubarak’s promise that he would not run for re-election this coming September, which might have mollified his critics two weeks earlier, was no longer enough.
When this concession failed, Mubarak and the ruling NDP began to work behind the scenes, encouraging their followers to attack protesters and provoke violence.
But Mubarak has also prepared the way for a new set of leaders – all strongly committed to the old order.
Almost all of them are high-ranking military officers, now elevated to the government’s most important offices.
Generals now hold the positions of Vice-President, Prime Minister, Deputy Prime Minister, Minister of Defense, and Minister of the Interior.
Nor are the anti-government protesters likely to find robust support from the United States, always deeply involved in Egyptian affairs, regardless of how often President Barack Obama and Secretary of State Hillary Clinton emphasize America’s commitment to freedom and democracy.
Yes, the Americans want Mubarak to leave – and quickly.
But the anchor of US policy in the Middle East is the Egyptian-Israeli peace treaty, negotiated by Sadat in 1979, maintained by Mubarak, and well liked by Egypt’s military high command, which controls the strongest Arab army, is US-trained, and has been supplied with top-shelf American weaponry.
A popular government in which the Islamist Muslim Brotherhood is represented would worry the Americans and the Egyptian military, owing to the prospect that it would repudiate the peace treaty with Israel and jeopardize relations with the US.
But that is not the most immediate concern.
Should violence increase, ordinary soldiers would likely once again feel duty-bound to intervene to restore order and prevent further bloodshed.
If not, the prospects for a transition to a government formed by leaders of the much-respected Egyptian army and moderates representing business and political elites seem high.
The Eighteenth Brumaire of Arnold Schwarzenegger
Replacing a governor whom they re-elected only a year before with Arnold Schwarzenegger must have given Californian voters an enormous--if guilty--pleasure.
Some members of the opposition in Germany would dearly love to do the same to Chancellor Gerhard Schröder, though they have not (yet!) found a film star to replace him.
Several other European governments find themselves in a similar state of unpopularity not long after being elected.
Beyond Europe this is true even for the recently acclaimed Brazilian President Luis Inacio "Lula" da Silva, to say nothing of Mexican President Vicente Fox and South Korean President Roh Moo-hyun, the latter having called for a referendum to help arrest his sinking popularity.
Electoral success, it appears, fades fast nowadays.
So should every country adopt a recall procedure to maintain the legitimacy of governments?
Absolutely not.
Democracy, in the words of the philosopher Karl Popper, is about being able to remove those in power without violence; it is in this sense about trial and error.
But leaders must be given the chance to govern.
Indeed, they need a chance to make mistakes and to learn and recover from their errors, as long as their decisions do not affect the foundations of the democratic order itself.
Trial and error implies the opportunity to err before we try again.
Californian voters' first mistake is thus what may be called "the lure of the immediate"--none too surprising in a state where instant gratification is supposedly a core value.
But sometimes this desire seems overwhelming in post-modern democracies everywhere.
Indeed, democracy nowadays has embraced a pop culture of rapidly passing fads; today's hysteria-generating pop group is forgotten tomorrow, and there are always more waiting in the wings.
In politics this can be dangerous, because it encourages basing decisions, no matter how weighty, on whatever popular opinion momentarily prevails.
The call for more referenda both reflects and fuels this trend.
Referenda are for the most part snapshots.
Switzerland, with its generally slower pace and its thorough political debates before votes are held, may be the exception.
As a rule however, referenda measure the popularity of political leaders at a particular moment, regardless of the issue at stake.
If and when Britain votes on joining the Euro, the result will most likely tell us all sorts of things about Tony Blair and about the European Union, but little about the merits of the common currency.
So the case for representative government remains strong.
Democracy is government by debate, by taking important decisions after thorough deliberation of the kind that--at least in large countries--must be conducted in a parliament through elected representatives.
Sometimes parliaments wish to act quickly, and perhaps must do so, but as a rule they take enough time to examine issues fully.
Parliaments talk before reaching conclusions; hence their name.
Consider Germany, where some leaders of the opposition Christian Democrats yearn to sink the Schröder government.
Clearly, the reforms proposed and already partly enacted by the government are unpopular, and there is little doubt that, a year after their re-election, the coalition of the Social Democrats and the Greens would not stand much of a chance at the polls.
But who knows what the electorate will think in three years, at the end of the government's full term in office?
By the time of the next regularly scheduled election, it could become clear that there were no real alternatives to Schröder's policies, and it could even be the case that the predicted beneficial effects of painful reforms will become apparent by then.
Leadership needs time to take and implement unpopular decisions as well as popular ones.
Leaders themselves need the nerve to take often precarious parliamentary majorities through the troughs of popularity.
This is why they should commit their cruelest deeds in the first year and soften up as the next election approaches.
The uneasy partnership of Prime Minister Tony Blair and Chancellor of the Exchequer Gordon Brown is a good example of this tactic.
Leaders who never risk their popularity are not worth their position.
So California has set a bad example, and Californians will probably pay a heavy price for it.
They may not pay as heavy a price as France a century and a half ago, when the popularly elected Louis Napoleon transformed himself, via a wildly popular referendum, into Napoleon III--that vote being the last the French would enjoy until the end of the Second Empire.
Californians, of course, won't be disenfranchised, but their willfulness threatens to yield a wayward and irresponsible form of state politics.
To be sure, democracy implies limiting the time that the powerful have to exercise their power without challenge.
An effective democracy must give them enough time to win the support of those elected to legislate and to carry out their program.
These two imperatives are inherently contradictory, but the balance between them is still best achieved through representative, parliamentary democracy.
Anything else is likely to be about as stable as this week's top ten pop songs.
The Electronic Money Revolution
Most journalistic accounts of the new forms of electronic money misleadingly spin the story as the emergence of yet another convenience for the technologically pampered.
So what if we can pull out a "smart card" rather than carry coins?
Big deal.
These new forms of money sound like power windows on cars, or remote control for TV sets.
Maybe we'd be better off without these gadgets.
But media coverage has failed to look far enough into the future, and to comprehend the full extent of the changes that will be wrought by new forms of electronic money, as people and businesses invent new ways of doing business.
Electronic money is not a channel changer: as it develops, it will help transform the world economy.
Two benefits of electronic money stand out, and will likely contribute to its growth. Most important, it will have profound intellectual benefits by creating incentives for the active pursuit of ideas.
Second, electronic money will advance globalization , expanding the scope and versatility of the Internet and making it easier for people to interact constructively with others around the world.
Taken together, these two benefits will enable millions of minds to work together far more effectively than ever before.
To understand electronic money's potential significance, consider the invention of coins, the first form of true money, in Lydia (now Turkey) in the seventh century BC and, independently, in China.
This was an important advance, and thus one that spread quickly.
The reason is straightforward. Before the invention of coins, commerce depended on precious metals.
But the amounts had to be cut to the size of the transaction and weighed out with balance scales.
People had to carry the scales, accompanying weights, and sometimes even tools to cut the metal, just to be able to transact.
Archeologists still find elaborate (and probably expensive in those days) two-pan balance scales and weights on sunken bronze-age merchant ships.
Most people didn't have them.
Another difficulty with using undifferentiated precious metals for exchange was that some trust or expertise was required to assure people that the metal was pure.
The same problem occurred with other commodities that people tried to use for exchange, such as gems or shells; their value was too uncertain.
As a result of these obstacles, it was hard to carry out small transactions before the invention of standardized and identical coins, and trade must have been largely confined to big deals between major parties.
With the introduction of coins, it became possible to develop many new kinds of business.
One could easily establish and operate a business selling food by the serving or providing small household items to anyone who happened to pass by.
But, most importantly, the invention of coins greatly enhanced the spread of knowledge. After the invention of coins, it became easy to sell books, lessons, and instructions.
The development of coins is part of the reason that both the classical world around ancient Lydia and China in the Han Dynasty were so advanced compared to other parts of the world.
The lesson is that the magnitude of transaction costs and contracting costs ultimately determine much of an economy's structure.
As new forms of money reduce these costs, the richness and complexity of our economy will be increased.
Lower transaction costs mean that exchange can be dramatically more fine-grained.
With the latest forms of electronic money we can sell millions of little things, to millions of different people all over the world.
Nowhere is this more important than in the realm of ideas.
Credit card companies now routinely charge the firms accepting credit card payments US$0.25 plus between two and three percent of the amount transferred per payment.
This fee structure makes it difficult to run a business selling items for less than ten dollars, and impossible to run a business selling items for less than one dollar: transaction costs eat up the profits.
Through superior payments software, micropayments companies like Paypal (founded in 1998), Yaga (founded in 2000), Peppercoin (founded in 2001) and BitPass (founded in 2002) are able to offer much lower transaction costs than credit card companies, greatly expanding the number of transactions.
A company can now charge people less than a dollar for a service (such as viewing a web page), and get significant returns by high volume.
There are skeptics who say that the public is resistant to buying digital content, because people are accustomed to getting it for free.
That is what people used to say years ago about cable TV.
Excellent TV programming is not given away for free. Neither are other substantial intellectual creations.
These skeptics overlook the profound changes that new technologies gradually make in our habits as we discover their possibilities.
Already, we have seen the success of Apple's iTunes, which sells music for US$0.99 per song.
Created in 2003, the iTunes Music Store recently surpassed its 100 millionth sale. That is certainly high volume.
What iTunes sells is one form of intellectual content.
Other forms will follow.
It will be exciting to see what new forms of intellectual content are invented in coming years and decades.
The economic revolution - both online and offline - that will be triggered as we learn how to use electronic money may be as profound as that wrought by our ancient ancestors' invention of coins.
The Elephant’s Choices
New Delhi – A month after they first queued to vote in India’s mammoth general election, the country’s voters will learn the outcome on May 16.
The election, staggered over five phases – involving five polling days over four weeks, rather than one “election day” – will determine who rules the world’s largest democracy.
Only one thing is certain: no single party will win a majority on its own.
India is set for more coalition rule.
That may not be a bad thing.
India’s last two governments each served a full term and presided over significant economic growth, even though they comprised 23 and 20 parties, respectively.
Coalition politics gives representation to the myriad interests that make up a diverse and complex society, and ensures that the country as a whole accepts the policies ultimately adopted.
But coalition rule can also often mean governance of the lowest common denominator, as resistance by any of the government’s significant members to a policy can delay or even thwart it.
In India’s parliamentary system, if a coalition loses its majority, the government falls, and keeping allies together can sometimes prove a greater priority than getting things done.
India’s national elections are really an aggregate of thirty different state elections, each influenced by its own local considerations, regional political currents, and different patterns of political incumbency.
Soon after May 16, the largest single party that emerges will seek to construct a coalition out of a diverse array of victors from the various states.
Several outcomes are possible.
The most likely is that Prime Minister Manmohan Singh’s Indian National Congress, currently leading the government, emerges once again as the largest single party and assembles a new ruling coalition.
The main alternative would be majority alliance put together by the Bharatiya Janata Party (BJP), led by the 82-year-old Lal Krishna Advani.
But there is a third possibility: a motley collection of regional parties, together with the Communists, gets enough seats to prevent either of the two big parties from forming a government.
In that case, a “hung parliament” could see a “third front” coming to power as a minority government, supported tactically by one of the big parties.
This has happened before – and each time, the government that resulted fell within a year.
Each alternative could have serious implications for India.
Though the big parties are broadly committed to continuing an economic policy of liberalization and growth, the BJP is mostly focused on the well-being of India’s merchant class, whereas Congress wishes to redistribute enhanced government revenues to the poor through generous social programs.
The left, which would strongly influence any “third front” government, are staunchly opposed to economic liberalization and wish to strengthen, rather than dilute, India’s large public sector.
In foreign policy, India’s growing closeness with the United States under both the BJP and the Congress has proved controversial at home, with leftist parties threatening to scrap the Indo-US nuclear deal and break defense ties with Israel if they come to power.
Should the regional parties dominate the government, domestic politics would strongly impact India’s foreign policy: the anger of Tamil voters over events in Sri Lanka, or of Muslims over Gaza, would be reflected in the government and therefore constrain policy options.
The BJP has promised a more hawkish security posture than Congress in the wake of the Mumbai terrorist attacks, but when it was in power it conducted itself remarkably similarly to its rival, initiating a peace process with Pakistan.
The biggest differences among the various groupings consist in the tone and tenor of their respective visions of India.
Congress remains a “big tent” party, committed to preserving India’s pluralism and conscious of the multiple identities and interests of India’s many peoples.
The BJP, which accuses Congress of “appeasing” India’s minorities, hews to a staunchly Hindu-chauvinist line, and has received support from some of the most bigoted and intolerant sections of Indian society.
The “third front” involves assorted petty particularisms – parties representing the sectarian interests of specific castes, sub-regions, or linguistic groups.
The danger is that such groups could accentuate the divisions of a fractious society, rather than pull everyone together in the collective national interest.
That would be a startling change from five years ago.
The 2004 elections were won by the Congress party, led by a woman political leader of Roman Catholic faith and Italian descent (Sonia Gandhi), who made way for a Sikh prime minister (Manmohan Singh) to be sworn by a Muslim (President Abdul Kalam) in a country that is 81% Hindu.
That single moment captured much of what elections have meant for this diverse democracy.
But the ultimate reality will remain that of a coalition government trying to make progress in a contentious polity.
In India, policy changes require political consensus within the ruling coalition, labor laws are strongly defended by unions and political parties, and controversial decisions can be challenged on the streets, in the courts, and ultimately at the polls.
Necessary policy reforms advocated by a ruling party are often held hostage to the prejudices of its allies.
So change comes slowly.
But it does come, and once a policy consensus has been established, it tends to be durable.
Indian democracy has often been likened to the stately progress of the elephant – ponderous in its gait and reluctant to change course, but not easily swayed from its new path when it does.
The elephant of Indian democracy will acquire a new set of mahouts before the month’s end.
Who they are will have a major impact on the fortunes and prospects of one-sixth of humanity.
That alone makes the election results due on May 16 worth the world’s attention.
The Elixir of Education?
Many people see education as a cure-all.
They believe that societies can be transformed by pouring money into raising educational standards.
But, while it is right to believe in the power of education – indeed, many scholars are convinced that it creates healthier, more prosperous citizens – such enthusiasm doesn’t tell us how to get more children to stay in school longer, or how to ensure that they learn useful skills while they are there.
Today, virtually every Latin American and Caribbean child enrolls in primary school, and most complete several years of secondary education – remarkable progress compared to a half-century ago.
Yet Latin American and Caribbean children gain fewer skills in each year of school than students do in high-income countries – and even in some other developing countries.
Indigenous children have a significantly lower chance of educational success.
Guatemala, Haiti, Honduras, Nicaragua, and Paraguay lag behind even other Latin American countries.
Despite the widespread enthusiasm for lifting educational performance in Latin America and the Caribbean, little effort has been devoted to working out how to maximize investments in education.
Which policies work best?
There are myriad options.
The World Bank recommends decentralizing school administration and decision-making so that schools are more responsive to local needs.
But no reliable studies have established this strategy’s effectiveness.
Bilingual education is another suggestion that requires further research if we are to establish the benefits.
Research in Africa suggests that giving de-worming medicine to primary school pupils reduces the prevalence of health problems that lower children’s concentration and attendance.
A program to provide teachers with monetary incentives and professional training was recently established in Mexico, but research conducted to date has found no significant impact on educational outcomes.
Clearly, there is a deficit of useful information and serious scientific research in this field.
However, three options should be promoted.
First, there is credible evidence that children who are better nourished in their first years of life stay in school longer and learn more each year that they remain there.
This was first demonstrated in the 1960’s, when Guatemalan researchers gave children in two randomly selected villages a nutritious porridge each day, and a much less nutritious fruit drink to children in two other villages.
More recently, Bolivia launched the Proyecto Integral de Desarrollo Infantil (PIDI), which gave low-income urban children food and extra educational activities.
This policy can be very affordable: providing porridge in Guatemala cost just $23.25 per child per year, while the monetary value of the increase in the children’s future wages is between two and four times higher.
A second option is Conditional Cash Transfer Programs, which provide cash payments to poor households whose children attend school regularly.
These programs have been shown to increase enrollment and attendance.
Families in some rural communities of Honduras, Nicaragua, and Mexico get monthly cash payments if their children’s school attendance rates are 85% or higher.
In Nicaragua, these programs have increased school enrollment rates by about 13 percentage points.
However, such incentives do not address the problem of low-quality education, and research shows that the benefits do not always outweigh the costs.
Policymakers may choose instead to follow the example of Chile and Colombia, which give students government money to pay for private education.
In Colombia, scholarships were provided to 125,000 students from poor, urban communities in the early 1990’s.
Where demand exceeded supply, private education “voucher” recipients were selected by lottery.
Each voucher cost the Colombian government $24 a year more than its previous education spending per student, but the vouchers increased attendance rates and test scores.
It is estimated that children in the program increased their future incomes by $300 per year.
With the benefits exceeding the costs by between 10 and 25 times, this seems to be a sound option.
Yet an analysis of Chile’s voucher program found no positive effect on students’ test scores or years in school.
Instead, the program’s main effect seems to have been to encourage the best students in public schools to switch to private schools.
Investing in education is vital for Latin America and the Caribbean.
But much remains unknown.
Many policy options unravel when examined closely; others show promise but require more study.
The most expensive programs aren’t necessarily the most successful.
Merely waxing lyrical about the benefits of education will do nothing to help Latin American and Caribbean countries catch up with developed countries.
Instead, governments and international organizations should support education policies that have been shown to be effective, encourage research and evaluation of other types of education policies and programs, and back non-education policies and programs that improve the quality of life in developing countries.
The Elusive Legacy of 1968
“Dany, you have been so successful. But don’t let yourself be manipulated by those far-left forces that would lead you to destroy everything that could arise from what you are creating.”
Forty years later, those words on March 22, 1968, by Jean Baudrillard – then an assistant professor at Nanterre University – still sound right.
I may disappoint my supporters and those enticed by “The Revolution,” but I’m not the leader of a revolution that allegedly occurred in 1968.
Forget it: “’68” is over – buried under cobblestones, even if those cobblestones made history and triggered radical change in our societies!
At first it seems baffling.
But, as I made clear at the time in my interview with Jean-Paul Sartre in Le Nouvel Observateur , I was only the loudspeaker for a rebellion.
Thus, “’68” symbolized the end of revolutionary myths – to the benefit of liberation movements extending from the 1970’s until now.
After all, the world of the 1960’s – the first global movement broadcast live on radio and TV – was defined by a variety of inter-connected revolts.
The change wrought by “’68” affected, above all, traditional culture, hidebound moralism, and the principle of hierarchical authority.
It altered social life, ways of being, ways of talking, ways of loving, and so on.
But, despite its scope, the movement steered clear of violence in order to create a new mode of rebellion.
Students, workers, and families – all had their legitimate demands, and all nonetheless converged on the same desire for emancipation.
The revolt was a form of political expression, but its aim was not to seize political power as such.
Indeed, its existential essence rendered it “politically untranslatable.”
The desire for freedom that carried the movement forward necessarily eluded archaic modes of thinking.
As a result, the sterile categories of political tradition could gain no purchase on events.
In France, conservatism was so entrenched on both the left and the right that both missed the movement’s meaning and could only fall back on stereotyped revolutionary interpretations. As for the anarchists, their utopia of widespread self-management – tied to outdated historical references – appeared entirely unsuitable.
Starting from an initial rejection of political institutions and parliamentarism, we understood only later that the democratic challenge lies in occupying a politically “normalized” space.
Faced with the anarchists, with their confining minimalist political grammar – reflected in the famous slogan elections, piege à cons (“elections, a trap for idiots”) – and with the Communist Party, whose revolutionary ideal was eventually linked to totalitarian types of society, the future of May 1968 could only shift to the right with the election victory of General de Gaulle.
It was, undeniably, a political failure.
But just as undeniable was the huge tremor that shook our antediluvian conceptions of society, morals, and the state.
Challenging authoritarianism, the revolt triggered an explosion at the heart of the typically French two-headed power structure, which combined a dominant Gaullism and a Communist Party managing the working class.
Thus, the radicalism of the upheaval eventually liberated the pleasure to live.
With a new generation emerges a new political imagination and poetic mottos written on walls.
The surrealist essence of the rebellion was somehow symbolized by Gilles Caron’s famous photograph, in which an insolent smile at a riot policeman subverts the frozen, established order to the point of making it ridiculous.
Of course, some people have never overcome the end of the ecstasy of those five weeks of craziness and joy, while others still wait for “’68” to culminate in God only knows what kind of “D-Day.”
For my part, I accepted the “principle of reality” long ago, without nostalgia – and without minimizing the importance of what happened.
For “’68” was, indeed, a rebellion joining two eras.
It cracked the yoke of conservatism and totalitarian thought, enabling the desire for personal and collective autonomy and freedom to express itself.
From the cultural point of view, we won.
So, revisit “’68”?
Yes, but only in order to understand it, grasp its scope, and retain what still makes sense today.
Knowing, for example, that 23 years after World War II, a multicolored France demonstrated against my deportation by claiming “We are all German Jews” provides food for thought.
But this does not justify the hasty comparison – and even less the identification – of every protest today with “’68.”
After 40 years, the context has changed radically.
The world of the Cold War is gone, as are schools and factories organized like barracks, authoritarian trade unions, gay bashing, and women’s obligation to receive permission from their husbands before being able to work or open a bank account.
That world has been replaced by a multilateral world, which includes AIDS, unemployment, energy and climate crises, and so on.
So let’s permit new generations to define their own battles and desires.
Demystifying “’68” also exposes the pretense of those who would blame it for all the wrongs of today’s world.
Because the “’68 generation” wrote on the walls “It is forbidden to forbid,” some hold it responsible for urban violence, extreme individualism, the crisis in education, executives’ “golden parachutes,” the decline of authority, and – why not? – climate change.
In this way, such people hope that they can evade their duty to explain today’s problems.
But how can one not interpret this as a political trick aimed at sabotaging the modernization of expression, thereby closing off any space for rational debate?
The Elusive Search for Global Financial Rules
BRUSSELS – If the financial crisis is global, it is said, then the solution must be global : an international financial system that works better.
And, because the Bretton Woods institutions (BWIs) – the World Bank and the International Monetary Fund – form the center of the international financial system, they must be included in the solution.
An enhanced international financial system must pursue two main lines of action.
The first is to broaden the scope of international cooperation.
At the moment, the Financial Stability Board, whose members include the G-20 countries, mainly pursues initiatives in this field.
A second line of action is to strengthen the international institutions’ soft powers to aim for more consistent economic policies, especially by systemically important economies.
This would directly involve the Bretton Woods institutions, notably the IMF.
A strengthening of the IMF was agreed after the Asian crisis in the 1990’s, and the G-7 summit in Cologne in 1999 mandated the Fund to play a strong surveillance role to ensure greater transparency and encourage early adjustment by countries with unsustainable balance-of-payments positions.
But, over the last decade, the expectations raised by this mandate have not been met.
Some emerging economies did not let their currencies float but, instead, continued to peg them at undervalued exchange rates in order to promote their exports and build up reserves as a form of insurance in case of crisis.
Moreover, the IMF has not succeeded in convincing countries to pursue macroeconomic policies consistent with sustainable current-account positions.
Nor have advanced economies, particularly the United States, taken IMF advice fully into consideration.
The accumulation of large surpluses, especially in emerging Asian economies and oil-exporting countries, enabled the US to finance its current-account deficit. It also lowered long-term interest rates in the US and made monetary conditions there more expansionary.
Emerging economies, following the advanced countries, also attached less importance to Fund surveillance, especially as their accumulation of external assets made them less dependent on IMF financing and advice.
For example, the Fund has been unable to complete a surveillance program with China for three years.
All this occurred against the background of emerging-market economies’ claims that their relatively low representation in the BWIs denied the IMF legitimacy.
In recent months, the Fund played an important role in resolving the crisis, in particular by assessing the gravity of the situation and providing countries with external finance.
But, if we are to create an international monetary system in which crises are the exception, the Fund must play a greater preventive role.
There seems to be a sense of denial in several countries that large external imbalances were a cause of the crisis.
These imbalances ultimately reflected the accumulation of excessive international liquidity by countries like the US, stemming from excessive savings by countries like China.
This spurred an unsustainable consumption boom, as well as unwarranted risk-taking by consumers and financial institutions, which contributed to the large distortions and bubbles in global financial markets that were the preconditions for the current crisis.
The risk now is that the forces favoring earlier and effective adjustment of imbalances have been weakened.
Indeed, few today are calling for the IMF to play a stronger role in preventing the accumulation of excessive external imbalances and in fostering more disciplined domestic policies.
An example of this is the way the IMF’s Decision on Bilateral Surveillance over Members’ Policies, aimed at identifying fundamental exchange-rate misalignments, was modified to allow greater discretion in surveillance, especially over exchange rates.
This might look like a tactical choice, but I doubt that it will result in a stronger hand for the IMF.
Emerging and developing countries are demanding a stronger voice in the IMF, but they also seem to be suggesting that they would like it to be less intrusive and less able to impose conditionality – while simultaneously providing more and cheaper financing.
This might be appropriate in times of systemic crisis, but it is not sustainable in normal times.
Indeed, some thought should be given to an exit strategy from cheap and unconditional IMF financing.
Instead, most IMF shareholders seem to favor making the organization’s financing easier.
Enhancing the role of its Special Drawing Rights (SDRs), or supplementing the dollar with another world reserve currency, would help facilitate the financing needs of both deficit and surplus countries.
For deficit countries, borrowing from international institutions outside the markets would be easier, giving the issuer of such currency some form of international lender-of-last-resort function.
For surplus countries that want to accumulate reserves, it would reduce exchange-rate risk.
But, if financing were to become easier, it would be unclear how both creditors and debtors would perceive the risk of excessive imbalances.
The real danger is that adjustment would take place even later, with imbalances left to accumulate for a longer period of time.
Under these circumstances, crises could be even greater, and the adjustments harsher – as occurred under the last world currency, the gold standard.
A viable international financial system requires a mechanism to keep imbalances in check.
An essential element of such a mechanism is to give the IMF a prominent role in two areas: strong and effective surveillance in order to prevent crises, and responsible lending to countries in need, but with appropriate limits and conditionality.
We don’t need to reinvent the wheel; we just need to follow up on the commitments made ten years ago.
Dealing with the short-run challenges of the current crisis should not distract us from the objective of preventing future meltdowns.
Emerging World Rising
LONDON – Now that the leadership issues in the United States and China have been settled, we can finally frame the economic outlook for 2013 with the knowledge of who will be pulling the policy levers in the world’s two biggest economies.
So, what will they do – and, perhaps more important, what will economic forces do to them?
For starters, the US will face recurring challenges with the “fiscal cliff” until financial markets pressure policymakers into more radical deficit reduction.
But, despite this and associated growth disappointments, 2013 will be a stronger year for the global economy than many people expect.
In 2011, China contributed $1.3 trillion in additional GDP to the world, the equivalent of creating another Greece every 12.5 weeks, or close to another Spain every year.
Together, the four BRIC countries (Brazil, Russia, India, and China) contributed around $2.2 trillion in 2012, equivalent to another Italy every year.
(Despite its problems, Italy is still the world’s eighth-largest economy, and will be for at least the next couple of years, until Russia and India possibly overtake it).
The eight growth market economies – the BRICs plus South Korea, Indonesia, Mexico, and Turkey – created close to $3 trillion in 2011, more than the United Kingdom in one year.
These economies’ combined size is now approximately that of the US economy, with total annual output reaching $15-16 trillion, or roughly 25% of global GDP.
Unless their growth rates slow sharply, their contribution to world output will rise dramatically, and global growth will be stronger than worried Western analysts might appreciate.
If the “Growth Eight” economies expanded by 10% on average in US dollar terms, they would add $1.5 trillion to global GDP next year.
For the decade that began in 2011, we at Goldman Sachs Asset Management have assumed that China, which accounts for about half of total Growth Eight output (probably $8.3 trillion by the end of 2012), will grow at a 7-8% annual rate in real terms, with inflation around 3%.
Unless the renminbi falls in value, this translates into an average nominal increase of at least 10-11% in dollar terms.
China will grow by 7-8% partly because that is what policymakers have decided they want.
In late 2009, within a year of their massive policy stimulus in response to the global credit crisis, the Chinese leadership, I believe, decided that 10% annual real growth had outlived its usefulness.
Income inequality was rising dramatically, environmental damage was worsening rapidly, and inflation was leading to weak real-income growth for poor households.
Indeed, a key reason for China’s slowdown in 2011-2012 is that officials wanted it.
While the real GDP growth rate stated in the 12th Five-Year Plan should not be viewed as a fait accompli, the fact that the Plan’s growth rate was lowered to 7% is a powerful signal of official intent.
Looking ahead, while China’s leadership change is important, the country’s leaders cannot decide things with the freedom that one might think.
They become leaders partly through commitment to the agreed plan.
A potential leader who deviates too much does not stay in the leadership, as we saw in 2012 with the purge of Bo Xilai.
China’s 7% growth target, while subject to a number of challenges, is based on maintaining private consumption growth of around 8% (while recognizing that exports and investment will not grow as strongly as before), thereby allowing the consumption share of GDP to rise.
More focus on innovation and creativity will be accompanied by strong real wage growth, provision of greater rights for urban migrants, and expansion of health care and pensions.
If China grows by 7-8% again in 2013, it will be more balanced growth than in 2012.
Beyond China, the other BRICs – Brazil, Russia, and India – all face challenges that their policymakers need to meet to spur stronger growth.
But there are plenty of exciting developments elsewhere, including Indonesia, the Philippines, Bangladesh, Nigeria, and Mexico – all part of what I call the “Next 11.”
South Korea and Turkey, which continue to grow reasonably well, albeit not with the others’ momentum, are two of this group’s other big members.
The 15 countries that comprise the BRICs and the Next 11 contain more than four billion people, close to two-thirds of the world’s population.
As they continue to grow, their share of the world economy will continue to rise, boosting global growth beyond what it otherwise would be.
But the global economy could be weaker in 2013 than it was in 2012 if the worst continues to prevail in Europe and the US, particularly if the new US Congress cannot work with a re-elected President Barack Obama to find a budget deal that improves the medium-term credibility of the US fiscal position while avoiding excessive deficit cutting.
This is a difficult balance to achieve, and, without pressure from the markets, I am unsure how it will play out.
I should add, however, that if the US government does not cause problems, two private-sector developments seem likely to be helpful.
One is growing evidence of a housing recovery; the other is the prospect of steadily declining energy-import costs as domestic production, particularly of natural gas, continues to rise.
As for Europe, many investors still assume that a moment will arrive when we can definitively conclude that European Monetary Union is finished or saved.
Unfortunately, it is much more likely that, at least ahead of Germany’s autumn 2013 elections, key decisions will be postponed or avoided.
This means that Europe probably faces another challenging year.
But, again, the BRICs’ output growth amounts to creating the equivalent of another Italy every 12 months.
Unless the European environment deteriorates sharply, Europe’s travails will not be the main story for the global economy in 2013.
The Emerging-Market Growth Engine
NEW DELHI – The key role of emerging and developing countries – including India, China, and Brazil – in sustaining world economic growth was brought into sharp focus during the recent global crisis, and has been well documented.
This trend is likely to continue in 2011 and beyond.
Indeed, the IMF expects that emerging and developing economies will grow by 6% in 2010 and 6.3% in 2011.
Emerging-market economies have not only cushioned the global impact of the recent crisis, but have also helped industrialized countries reverse the recessionary trend of 2008-2009.
But recovery remains fragile in the developed world, with unemployment remaining at crisis levels.
But, while emerging economies are proving to be drivers of global demand, the right mix of government initiatives and policies is still required to ensure that they continue to provide the impetus for faster world economic recovery in the short term and be the engines of sustainable growth in the medium and long term.
There is also a strong need for supporting long-term capital flows to emerging economies to stimulate investment further, particularly in their infrastructure sectors, thereby injecting much-needed additional demand into the global economy.
In this regard, another important development is the increasing number of emerging-market middle-class consumers, their growing purchasing power, and thus their potential impact on global demand.
According to one estimate, middle-class consumers in a dozen emerging economies today wield annual purchasing power totaling approximately $6.9 trillion.
Indeed, projections from McKinsey &amp;
Company suggest that the purchasing power of this rising middle class in emerging markets may rise to $20 trillion over the next decade – twice the current level of consumption in the United States.
The four biggest emerging economies – Brazil, Russia, India, and China (the BRICs) – are large producers and consumers of goods and services, and will also be important in shaping the pace, direction, and sustainability of global economic growth.
Let me turn to India specifically.
In the five years preceding the 2008-2009 crisis, the Indian economy grew at an average rate of nearly 9% annually.
During the crisis, annual growth slowed, but only to 6.7%, reflecting the economy’s inherent resilience.
The growth rate subsequently recovered to 7.4% in 2009-2010, and we expect 9% growth by 2011-12.
The strength of the Indian economy is underpinned by a high saving rate and robust investment.
The government’s prompt action to counter the crisis – fiscal stimulus, growth packages, and monetary easing – proved effective.
A sound financial and banking system with limited exposure to global markets, together with the importance of domestic consumption in sustaining demand, has also helped.
But what distinguishes India from other emerging economies, in particular China and the Southeast Asian countries, is that domestic demand, rather than exports, is the primary driver of growth.
A return to high growth rates globally will require a broader revival of demand.
Needless to say, this will occur only gradually, particularly in the developed countries.
Thus, India’s high growth rates will have to remain dependent on strong domestic demand.
In order to meet this challenge, we are focusing on investments in infrastructure sectors such as power, telecommunications, roads, ports, and airports.
While the public sector will continue to play an important role, given the massive investment required, substantial private investment – including foreign investment – would be needed to address India’s huge “infrastructure deficit” and the financing gap that accompanies it.
A strategy of private-public partnership has been adopted to address the infrastructure challenge.
At the same time, we need to invest in our human capital, supporting the development and upgrading of the workforce’s skills and capacity for innovation.
At its summit in Seoul in November, the G-20 firmly placed development at the core of its agenda.
Indian Prime Minister Manmohan Singh, underlining the importance of infrastructure investment, made the following proposal, which several leaders endorsed: “Recycling surplus savings into investment in developing countries will not only address the immediate demand imbalance, it will also help to address developmental imbalances.
In other words, we should leverage imbalances of one kind to redress imbalances of the other kind.”
As we head into the second decade of the century, innovative ideas like using global savings or surpluses to finance infrastructure in emerging and developing countries should be pursued seriously.
Doing so would not only sustain the growth momentum of these economies, but would contribute to global recovery by generating much-needed additional demand in the developed countries.
While the emerging economies’ global role will inevitably grow in the coming years, this shift will need to be anchored in a cooperative partnership with the developed world.
As for India, our resilient democratic values, ability to manage diversity, and strong economic fundamentals underpin our country’s current global posture.
The Emotional Clash of Civilizations
Throughout the so-called “war on terror,” the notion of a “clash of civilization” between Islam and the West has usually been dismissed as politically incorrect and intellectually wrongheaded.
Instead, the most common interpretation has been that the world has entered a new era characterized by conflict “within” a particular civilization, namely Islam, with fundamentalist Muslims as much at war against moderates as against the West.
The strategic conclusion derived from such an analysis was clear, ambitious, and easily summarized: democratization.
If the absence of democracy in the Islamic world was the problem, bringing democracy to the “Greater Middle-East would be the solution, and it was the historical duty of the United States, as the most powerful and moral nation, to bring about that necessary change.
The status quo was untenable.
Implementing democracy, with or without regime change, was the only alternative to chaos and the rise of fundamentalism.
Today, Iraq may be on the verge of civil war between Shiites and Sunnis.
Iran under a new and more radical president is moving irresistibly towards possessing a nuclear capacity.
A free electoral process brought Hamas to power in Palestine, and the unfortunate episode of the Danish newspaper cartoons illustrated the almost combustible nature of relations between Islam and the West.
All of these developments are paving the way to new interpretations.
Rather than a “clash of civilizations,” we might instead be faced by multiple layers of conflict, which interact with each other in ways that increase global instability.
Indeed, it appears that the world is witnessing a triple conflict.
There is a clash within Islam, which, if the violence in Iraq spreads to neighboring countries, risks causing regional destabilization.
There is also a clash that is best described not as being between Islam and the West, but between the secularized world and a growing religious one.
At an even deeper and atavistic level, there is an emotional clash between a culture of fear and a culture of humiliation.
It would be a gross oversimplification to speak, as some are doing, of a clash between civilization and barbarism.
In reality, we are confronted with a widening divide over the role of religion, which runs between the West (with the US being a complicated exception) and much of the rest of the world (the most notable exception being China), but particularly the Islamic world.
The divide reflects how religion defines an individual’s identity within a society.
At a time when religion is becoming increasingly important elsewhere, we Europeans have largely forgotten our (violent and intolerant) religious past, and we have difficulty understanding the role that religion can play in other peoples’ daily lives.
In some ways, “they” are our own buried past and, with a combination of ignorance, prejudice, and, above all, fear, “we” are afraid that “they” could define our future.
We live in a secular world, where free speech can easily turn into insensitive and irresponsible mockery, while others see religion as their supreme goal, if not their last hope.
They have tried everything, from nationalism to regionalism, from communism to capitalism.
Since everything has failed, why not give God a chance?
Globalization may not have created these layers of conflicts, but it has accelerated them by making the differences more visible and palpable.
In our globalized age, we have lost the privilege – and, paradoxically, the virtue – of ignorance.
We all see how others feel and react, but without the minimal historical and cultural tools necessary to decipher those reactions.
Globalization has paved the way to a world dominated by the dictatorship of emotions – and of ignorance.
This clash of emotions is exacerbated in the case of Islam.
In the Arab world, in particular, Islam is dominated by a culture of humiliation felt by the people and nations that consider themselves the main losers, the worst victims, of a new and unjust international system.
From that standpoint, the Israel-Palestine conflict is exemplary.
It has become an obsession.
It is not so much that Arabs and Muslims really care about the Palestinians.
On the contrary, the Islamic world left the Palestinians without real support for decades.
In reality, for them the conflict has come to symbolize the anachronistic perpetuation of an unfair colonial order, to represent their political malaise, and to embody the perceived impossibility of their being masters of their destiny.
In the eyes of the Arabs (and some other Muslims), Israel’s strength and resilience is a direct consequence of their own weakness, divisions, and corruption.
The majority of Arabs may not support al-Qaeda, but they do not oppose it with all their heart.
Instead, there is the temptation to regard Osama bin Laden as a type of violent Robin Hood, whose actions, while impossible to condone officially, have helped them to recover a sense of Arab pride and dignity.
Here, perhaps, is the real clash of civilizations: the emotional conflict between the European culture of fear and the Muslim, particularly Arab, culture of humiliation.
It would be dangerous to underestimate the depth of so wide an emotional divide, and to recognize its existence is the first step to overcoming it.
But that will be difficult, for transcending the emotional clash of civilizations presupposes an opening to the “other” that neither side may yet be ready to undertake.
The Empire of Human Rights
NEW YORK – Why are French, British, and American warships, but not Chinese or Malaysian warships, sitting near the Burmese coast loaded with food and other necessities for the victims of Cyclone Nargis?
Why has the Association of South East Asian Nations (ASEAN) been so slow and weak in its response to a natural calamity that ravaged one of its own members?
The French junior Human Rights Minister, Rama Yade, declared that the United Nations’ principle of the “responsibility to protect” should be applied to Burma, forcibly if necessary.
And the Malaysian opposition leader Lim Kit Siang has said that Asian countries’ inaction “reflects dismally on all ASEAN leaders and governments.
They can definitely do more.”
So, are Europeans and Americans simply more compassionate than Asians?
Given the West’s record of horrendous warfare and often brutal imperialism, this seems unlikely.
Moreover, the way ordinary Chinese rallied to help victims of the earthquake in Sichuan has been quite remarkable, as have been the spontaneous efforts of people in Burma to assist their fellow citizens, even as the military did very little.
Buddhism stresses compassion and mercy as much as Christianity does.
Indifference to suffering is not inherent to any Asian culture.
Indeed, none of the Asian members disagreed when the UN General Assembly adopted the Universal Declaration of Human Rights in 1948.
The declaration held that “recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice, and peace in the world.”
Nevertheless, there may be cultural differences in understanding how compassion should be applied.
The ideal of universal equality and rights does owe something to the history of Western civilization, from Socrates’ “natural justice” to Christianity and France’s Declaration of the Rights of Man.
Western peoples have not always lived up to their universalist ideals, but they have in modern times built institutions designed to implement them, in Europe and beyond.
There is, so far, no Asia-wide institution to protect the human rights of Asians, let alone mankind.
In fact, Chinese and other Asians frequently criticize the West for using human rights as an excuse to impose “Western values” on former colonial subjects.
To be sure, such accusations are especially common in autocracies whose rulers, and their apologists, view the idea of universal human rights as a threat to their monopoly on power.
But distrust of universalism in Asia is not confined to autocrats.
In many Asian countries, favors invariably create obligations, which is perhaps why people are sometimes disinclined to interfere in the problems of others.
You are obliged to take care of your family, your friends, or even your fellow countrymen. But the idea of universal charity is too abstract, and smacks of the kind of unwelcome interference that Western imperialists – and the Christian missionaries who followed them – practiced in the East for too long.
The notion of “Asian values,” promoted mostly by Singaporean official scribes, was partly a critique of universalist Western claims.
Asians, according to this theory, have their own values, which include thrift, deference to authority, the sacrifice of individual to collective interests, and the belief that countries should not stick their noses into others’ affairs.
Hence, the hesitant response of Southeast Asian governments – and public opinion – to the Burmese disaster.
One possible line of criticism of this kind of thinking is simply to claim the superiority of Western values.
But another, more sympathetic response would be to show that individual rights and notions of freedom are by no means alien to non-Western civilizations.
Amartya Sen, the Nobel Prize-winning economist, has pointed out that great Indian rulers, such as Ashoka (third century BC) and Akbar (sixteenth century), advocated pluralism, tolerance, and reason long before the European Enlightenment.
He has also observed that famines don’t occur in democracies, because freedom of information helps to prevent them.
Sen, not surprisingly, is a trenchant critic of the “Asian values” school.
It has, nonetheless, become a commonly held opinion that democracy, like universal human rights, is a typically Western idea, and that Asian autocracy, as practiced in China, for example, is not only more suited to Asians, but also more efficient.
Democratic governments are hampered by lobby groups, special interests, public opinion, party politics, and so forth, while Asian autocrats can make unpopular but necessary decisions.
The two recent natural disasters in Burma and China have put this idea to a severe test.
China has not fared too badly, largely because its government was forced by the Burmese example, bad publicity surrounding the Tibetan demonstrations, and the impending Olympic Games to allow far more freedom of information than it normally does.
One can only hope that this crack of freedom will widen in time.
Burma failed miserably, and, despite belated efforts to make the best of terrible circumstances, so has ASEAN.
In the end, of course, it doesn’t matter much whether or not we ascribe the failures of autocracy and non-intervention to anything specifically “Asian.”
Whatever the cause, the consequences remain deplorable.
Global Institutions after the Crisis
OXFORD – When Lehman Brothers collapsed and the global financial crisis erupted five years ago, many glimpsed a silver lining: the promise of more effective global economic governance.
But, despite a flurry of early initiatives, the world remains as far from that goal as ever.
The Financial Stability Board (FSB), established after the G-20 summit in London in April 2009, has no legal mandate or enforcement powers, nor formal processes for including all countries.
The International Monetary Fund still awaits the doubling of its capital (another early vow), while its existing resources are heavily tied up in Europe and its governance reforms are stalled.
The World Bank has received a modest increase in resources, but it has yet to build capacity to lend rapidly and globally beyond existing borrowers and loan arrangements, and its income trajectory is diminishing.
Yet the need for effective global economic governance remains more urgent than ever.
Banks and other financial firms roam internationally, greatly assisted by market-opening rules embedded in trade and investment treaties, but with no legally enforceable responsibility to provision adequately for their own losses when things go wrong.
Instead, massive risks have supposedly been held at bay by voluntary standards promulgated by a patchwork of public and private “standard-setting” organizations.
The crisis proved that this was inadequate.
The titans of Wall Street and the City of London were exposed as hugely over-leveraged.
Extraordinary profits when their bets paid off increased their financial and political power – which they still enjoy – with taxpayers left to bail them out when their bets turned bad.
The G-20 promised stronger global institutions to prevent this from recurring.
But the FSB is not a treaty-based global regulator with enforcement powers.
It continues to be a “standard setter” in a world with strong incentives to evade standards and negligible sanctions for doing so.
Furthermore, although the FSB’s standards are ostensibly “universal,” it does not represent all countries or have formal mechanisms to inform and consult them.
Regulators face a Sisyphean task, owing to the absence of strong and consistent political support for reining in the financial titans.
A well-resourced financial sector intensively lobbies the most influential governments in global finance.
The reforms of the IMF, another pillar of global financial management, cannot be implemented until the US Congress approves them – and there is no sign of that.
Even the new Basel 3 banking standards have been diluted and postponed.
For Brazil, Russia, India, and China, the delay in reforming the IMF is a serious annoyance.
They became major contributors to the Fund’s emergency loan pool (the New Arrangements to Borrow) immediately after the crisis and now provide 15.5% of the NAB’s resources.
But the greater voice and voting power that they were promised – commensurate with their status as four of the IMF’s top ten shareholders – has not been delivered.
Even the selection of the organization’s managing director remains a European droit du seigneur.
More seriously, an astounding 89.2% of the IMF’s General Resources Account is outstanding to European countries, with just three countries (Greece, Portugal, and Ireland) accounting for 68%.
The IMF’s resources are neither adequate nor available to respond to a crisis elsewhere.
Similarly, the G-20’s pledge in 2009 to protect the poorest and most fragile countries and communities from the effects of the crisis remains unfulfilled.
The World Bank is at the heart of these efforts, because it can pool risks globally and offset the capriciousness of official and private-sector aid flows, which create “donor darlings” (like Rwanda) and “donor orphans.”
But, while the Bank has more than doubled its lending relative to the four years prior to 2008, this was achieved mostly by front-loading existing loans.
Crisis-hit countries that were not already borrowers were largely left out.
The Bank’s failure to lend to new clients partly reflects its slowness.
Even after its loan cycle had been speeded up, the Bank took an average of 13.5 months to approve credits – a long time for a country to await “emergency” help.
But the Bank is also hampered by worsening resource constraints, as the biggest post-crisis capital infusions went to regional development banks.
The African Development Bank’s capital was increased by 200%, as was the Asian Development Bank’s.
The Inter-American Development Bank got a 70% increase.
Meanwhile, the World Bank received an increase of 30%, while its lending arm for the poorest countries, the International Development Association, received an increase of only 18%.
Crucially, it is not obvious that the Bank has “buy-in” from emerging economies, with Brazil, Russia, India, and China, which pledged significant resources to the IMF, pledging only about 1% of IDA funding.
Further exacerbating the Bank’s financial woes, its powerful creditors have opted to “pull back” its lending in order to protect its resources.
As a result, compared to the regional development banks, the Bank will be lending less to fee-paying clients, who provide income, and engaging in more “concessional lending,” which does not.
The 2008 crisis highlighted the need for international cooperation to regulate finance and mitigate the effects of a crisis.
Yet the global resources and instruments needed to manage (if not avert) the next crisis have not been secured.
Instead, regions and countries are quietly finding their own ways to manage finance, create pooled emergency funds, and strengthen development finance – an outcome that heralds a more fragmented and decentralized set of regulatory regimes and a modest de-globalization of finance and aid.
The Endgames in Iraq and Afghanistan
NEW YORK – For nearly a decade, American foreign policy has been dominated by the wars in Iraq and Afghanistan.
As 2011 begins, with 50,000 US soldiers still in Iraq and another 100,000 in Afghanistan, it may not look like that era is coming to an end.
But it is.
Iraq, the second most expensive “war of choice” (after Vietnam) in American history, is for the United States reaching a level of effort that will no longer absorb substantial military and economic resources or garner significant domestic political attention.
All US troops are due to leave Iraq by the end of 2011.&#160;
Even if, as seems likely, several thousand soldiers remain, the number will be small and their role limited to advising and training Iraqi military and police forces and conducting missions against terrorists.
Eight years, 4,300 lost American lives, and more than a trillion dollars later, it will be, for better or worse, mostly Iraqis who determine their country’s future.
The initial performance of an Iraq run by Iraqis is less than encouraging.
To be sure, there have been a number of relatively fair elections, political life is active, and the economy is growing.
But Iraqi leaders’ difficulty in forming a government following last spring’s elections bodes poorly.
Indeed, a political culture of compromise has not taken root, and the country continues to be divided by geography, ethnicity, religion, and politics.
There is no consensus on how to share the potential wealth from Iraq’s vast energy resources.
The Kurdish north is largely autonomous; where its writ ends and the central government’s begins is unsettled.
Iranian influence is pervasive in the south and extensive in the center.
Moreover, the country still experiences regular bombings, and millions of Iraqis are either internally displaced or refugees.
In short, conditions in Iraq, while significantly better than five years ago, are more likely to deteriorate than improve.
Afghanistan is moving at a much slower pace when it comes to US troop reductions.
The Obama administration is likely to remove a small number of US soldiers in July, the date selected by the president for the beginning of the American military drawdown.
But it will be only the beginning of an extended, gradual process of American military reduction, one that looks like it will take four years – and quite possibly longer.
What the US will have to show then for more than a decade of sacrifice and investment in Afghanistan is anybody’s guess.
The sum total of the US effort in terms of American money and lives will likely be less than in Iraq, but still substantial.
And it is difficult to be optimistic about Afghanistan, given the Taliban’s resilience, the weakness and corruption that plague the government, and the reality that Pakistan will continue to be a sanctuary for the Taliban and other armed groups seeking to gain a foothold (or more) in Afghanistan.
An Afghanistan that resembles a normal country is virtually impossible to foresee.
Nevertheless, the decisions to scale back American involvement decisively in Iraq, and gradually in Afghanistan, will ultimately have significant consequences for the US – many of them welcome.
One is financial.
Current US policy toward Iraq and Afghanistan costs roughly $150 billion per year, which is more than 20% of total US defense spending.
Cutting this sum will free up much-needed money for other defense needs and for deficit reduction, arguably the principal national security challenge facing the US.
Troop reductions in Iraq and Afghanistan will also allow the US military to begin to recover from these two conflicts.
Neither soldiers nor equipment can sustain the performance that has been demanded of them.
Recruitment and retention of highly skilled individuals in the US armed forces will increase as the level of effort in the two conflicts winds down, and a great deal of deferred military modernization will occur.&#160;&#160;
More fundamentally, reducing US involvement in Iraq and Afghanistan will permit a rebalancing of US foreign and defense policy.
The two conflicts have absorbed a disproportionate share of the country’s resources – military and economic to be sure, but also the time and attention of policymakers and diplomats.
In the short run, doing less in Iraq and Afghanistan will allow the US to concentrate on the two most immediate external threats to US interests: Iran and North Korea.
In the long run, the US needs to generate domestic and international support for regional and global arrangements designed to manage the defining problems of this era, from the spread of nuclear materials and terrorism to maintaining an open world economy and slowing climate change.
This will require a foreign policy that focuses on the emerging powers of the twenty-first century, many of which are in Asia.&#160;&#160;&#160;
The US largely squandered the opportunity to shape the international system in the first decade of the new century.
Iraq and Afghanistan proved to be strategic distractions, and, &#160;particularly in Afghanistan, the US should resist pressures to prolong a substantial military presence.
There is now an opportunity to reorient American foreign policy to concentrate on what matters most.
It is in the interest of the US and the world that this opportunity not be missed.
The Endless Iranian Nuclear Crisis
Iran will continue to enrich uranium regardless of whether a Republican or a Democrat is America’s president.
At the same time, the United States will oppose any Iranian nuclear program – even a civilian program – because this will contribute to the stability of the regime in Tehran.
As a result, nuclear tensions are likely to bedevil US-Iranian relations for years to come.
Iran, it is often claimed, has no need for nuclear power, given its abundant oil and natural gas reserves.
But the Iranian government is under economic and political pressure to supply increasing amounts of electricity to its growing population and fragile economy.
Using oil or natural gas for domestic electricity threatens oil and gas exports, which are the principle source of government revenues.
Indeed, with domestic oil consumption growing at a higher rate than production, government revenues from oil exports are already in decline.
Thus, nuclear power will halt the decline in government revenues by freeing more oil and natural gas for export.
Iran’s natural gas resources, if developed, would not be a substitute for cheap nuclear power, because gas is more profitable in other uses than in power generation.
The Iranian government fears that electricity shortages, slow economic growth, and high unemployment will turn the populace against it.
As social tensions increase, political turmoil will follow.
Nuclear power offers the possibility of cheap, plentiful electricity, which will contribute to social and political stability.
Iranian experts argue that, in considering the trade-off between internal unrest and external sanctions, the Iranian government must choose between domestic security and international security.
Domestic pressure could very well bring down the regime, but international pressure will not.
History is on the side of the Iranian government.
The Islamic Revolution has survived a brutal war with Iraq, economic sanctions, and decades of international pressure and isolation from the US.
Moreover, Iran’s leaders remember that the Shah was forced to flee the country in 1979, despite having strong international support.
While there may be security reasons for any future US administration to oppose even a civilian nuclear program, American policymakers also recognize the strategic impact that nuclear energy will have in stabilizing the Iranian regime.
The US and Iran have been fighting proxy wars since 1979, and their ongoing conflict means that proxy wars will continue in Lebanon, Iraq, Afghanistan, and the Caspian Sea region, as will trade and investment wars.
Indeed, as long as China and Russia have money to invest and arms to sell, most UN sanctions will be toothless.
Iran will continue to threaten the world community that it will use its oil weapon, but this is highly unlikely.
It is not in Iran’s interest, under any scenario, to decrease oil exports, let alone halt them.
However, domestic pressure, a sense of nationalism, and the need to improve its bargaining position with Western countries might force the Iranian government to respond to harsh UN sanctions or an air attack on its nuclear facilities.
But even under these extreme circumstances, Iran will still need its oil revenue.
A symbolic cut or embargo, while possible, would have little impact on world oil markets.
Iran’s government has more effective options to respond to attacks from the US and its allies.
Its supporters in Iraq might cripple Iraqi oil exports from Basra, which would damage US plans in Iraq while boosting Iran’s oil revenues, or limit the availability of fuel to the US Army by attacking roads and bridges, especially the Kuwait City-Baghdad highway.
The world community will continue to pay a high price for the nuclear standoff, which will cast a shadow over world oil markets for years to come.
Some experts argue that it has already raised oil prices by about $15 per barrel.
Ironically, an Iranian civilian nuclear program would enhance US and world energy security by making more oil and gas available in the global market.
But America’s determination to destabilize Iran and the Iranian government’s determination to retain power reduce the likelihood of this scenario.
The End of an Era in Finance
CAMBRIDGE – In the world of economics and finance, revolutions occur rarely and are often detected only in hindsight.
But what happened on February 19 can safely be called the end of an era in global finance.
On that day, the International Monetary Fund published a policy note that reversed its long-held position on capital controls.
Taxes and other restrictions on capital inflows, the IMF’s economists wrote, can be helpful, and they constitute a “legitimate part” of policymakers’ toolkit.
Rediscovering the common sense that had strangely eluded the Fund for two decades, the report noted: “logic suggests that appropriately designed controls on capital inflows could usefully complement” other policies.
As late as November of last year, IMF Managing Director Dominique Strauss-Kahn had thrown cold water on Brazil’s efforts to stem inflows of speculative “hot money,” and said that he would not recommend such controls “as a standard prescription.”
So February’s policy note is a stunning reversal – as close as an institution can come to recanting without saying, “Sorry, we messed up.” But it parallels a general shift in economists’ opinion.
It is telling, for example, that Simon Johnson, the IMF’s chief economist during 2007-2008, has turned into one of the most ardent supporters of strict controls on domestic and international finance.
The IMF’s policy note makes clear that controls on cross-border financial flows can be not only desirable, but also effective.
This is important, because the traditional argument of last resort against capital controls has been that they could not be made to stick.
Financial markets would always outsmart the policymakers.
Even if true, evading the controls requires incurring additional costs to move funds in and out of a country – which is precisely what the controls aim to achieve.
Otherwise, why would investors and speculators cry bloody murder whenever capital controls are mentioned as a possibility?
If they really couldn’t care less, then they shouldn’t care at all.
One justification for capital controls is to prevent inflows of hot money from boosting the value of the home currency excessively, thereby undermining competitiveness.
Another is to reduce vulnerability to sudden changes in financial-market sentiment, which can wreak havoc with domestic growth and employment.
To its credit, the IMF not only acknowledges this, but it also provides evidence that developing countries with capital controls were hit less badly by the fallout from the sub-prime mortgage meltdown.
The IMF’s change of heart is important, but it needs to be followed by further action.
We currently don’t know much about designing capital-control regimes.
The taboo that has attached to capital controls has discouraged practical, policy-oriented work that would help governments to manage capital flows directly.
There is some empirical research on the consequences of capital controls in countries such as Chile, Colombia, and Malaysia, but very little systematic research on the appropriate menu of options.
The IMF can help to fill the gap.
Emerging markets have resorted to a variety of instruments to limit private-sector borrowing abroad: taxes, unremunerated reserve requirements, quantitative restrictions, and verbal persuasion.
In view of the sophisticated nature of financial markets, the devil is often in the details – and what works in one setting is unlikely to work well in others.
For example, Taiwan’s use of administrative measures that rely heavily on close monitoring of flows may be inappropriate in settings where bureaucratic capacity is more limited.
Similarly, Chilean-style unremunerated reserve requirements may be easier to evade in countries with extensive trading in sophisticated derivatives.
With the stigma on capital controls gone, the IMF should now get to work on developing guidelines on what kind of controls work best and under what circumstances.
The IMF provides countries with technical assistance in a wide range of areas: monetary policy, bank regulation, and fiscal consolidation.
It is time to add managing the capital account to this list.
With this battle won, the next worthy goal is a global financial transaction tax.
Set at a very low level – 0.05% is a commonly mentioned rate – such a tax would raise hundreds of billions of dollars for global public goods while discouraging short-term speculative activities in financial markets.
Support for a global financial-transaction tax is growing.
A group of NGOs have rechristened it the “Robin Hood tax,” and have launched a global campaign to promote it, complete with a deliciously biting video clip featuring British actor Bill Nighy (www.robinhoodtax.org).
Significantly, the European Union has thrown its weight behind the tax and urged the IMF to pursue it.
The only major holdout is the United States, where Treasury Secretary Tim Geithner has made his distaste for the proposal clear.
What made finance so lethal in the past was the combination of economists’ ideas with the political power of banks.
The bad news is that big banks retain significant political power.
The good news is that the intellectual climate has shifted decisively against them.
Shorn of support from economists, the financial industry will have a much harder time preventing the fetish of free finance from being tossed into the dustbin of history.
The End of Austria\u0027s Social Partnership?
Few changes of government in Europe attract sensational journalism of the type that Austria's October 1999 elections - which brought Jörg Haider's Freedom Party into government - did.
Two years later, with the EU sanctions imposed after the government's formation now lifted, it is time to assess the impact of this government on Austria's economy, the field where the ruling coalition's pre-election rhetoric promised the biggest changes.
To understand what Austria's government is doing, it is necessary to understand where Austria has been.
Austria's economy performed solidly throughout the 1990s, roughly in line with EU and Euro Area averages.
Yet, due to Austria's accession to the EU in 1995 and the country's trade and investment in reshaping neighboring economies in Eastern Europe, many Austrians expected higher growth.
Two factors incited Austria's lower than expected economic dynamics: delayed fiscal consolidation and lagging structural reforms.
Efforts at fiscal consolidation in the 1990s were usually followed by wider structural deficits, and although market reforms were discussed, few were implemented.
Both problems contributed to the breakdown of the long-ruling coalition government of Social Democrats and Conservatives (the Volkspartei).
The Conservative and Freedom Party coalition formed after the 1999 elections confronted a difficult job.
Although the program of the coalition partners shared many points, a contradiction existed concerning Europe.
By introducing more flexibility in product and labor markets and by committing itself to overhaul public sector management, the Conservatives hoped that Austria would increase its competitiveness and thus achieve higher growth.
In contrast, the Freedom Party has never been Pro-European, at least since 1990; nor has it been open to EU accession by former communist states in Eastern Europe.
The EU sanctions imposed on Austria after the election boosted the Freedom Party by attracting anti-European sentiments within Austria to it.
As a consequence, it remains unclear whether or not Austria's current government looks at Europe and EU expansion eastward as a basis on which to secure a better international profile and added growth.
Early on in its tenure, the coalition government initiated a stability program designed to eliminate the government's deficit by 2002.
This goal may be achieved this year, mainly by raising revenues in the form of higher indirect taxes (e.g., levies on electricity, increases on the vehicle insurance tax, tobacco tax, as well as by introducing tuition fees at universities). Stricter corporate taxes were also adopted.
On the expenditure side, structural measures were implemented, notably pension reform as well as phased reductions in government employment and a more focused targeting of social transfers.
But these expenditure restraints are occurring only slowly, which means that the stability program is front-loaded with an increased tax burden reaching unprecedented levels.
These steps towards a balanced budget were, in part, courageous because they stirred up resistance by the people and institutions affected.
Some measures were well-designed, such as reform of the state pension system (although a need for further reform remains) - while others, such as the measures aimed at raising revenues and reducing costs in the health care system, were too hastily implemented - e.g. the new system of health co-payments requires redesign.
Moreover, so far, health care reform has failed to yield the savings that were expected.
The new government also began to change broad areas of public administration.
It reduced government employment, granted only moderate wage increases and slashed public investment.
All this helped consolidate the budget but created a climate of opposition.
Administrative reforms normally require meticulous preparation, which the government tried to generate quickly through a study conducted by the Task Reform Commission, which was published in March 2001.
So far, suggestions as to how to raise public sector efficiency are numerous, but legislative initiatives, based on the Commission's suggestions, are rare or have not been worked out satisfactorily.
Admittedly, it is politically difficult to turn government agencies into more entrepreneurial units.
Past experience in Austria has shown few positive examples.
One reason may be that entrepreneurial spin-offs were often created with unrealistic goals and without any thorough analyses of the expected benefits and costs.
In 2000 and 2001, many state holdings in industry were privatized, sharply reducing the debt position of the mother company of the nationalized industries (ÖIAG).
Its debts stem from a decision, taken by the old coalition government, whereby the losses of nationalized industries were assumed by the state.
In addition to continued privatization, many policy measures were initiated by the new government that aimed to improve the functioning of the market: e.g., opening the electricity and gas markets to competition ahead of other EU countries, opening the telecommunication sector, strengthening equity markets through changes in the tax system, unification of financial market supervision and other measures.
Despite these reforms, many inflexibilities remain.
For example, shop opening-hours still must comply with highly restrictive rules.
Indeed, within the OECD, Austria retains one of the tightest retail sector regulations.
Many labor market inflexibilities also persist.
But a deeper question about the nature of Austria's political/economic system remains unanswered.
Austria's economic success and political stability after World War II was premised on a system of social partnership.
Economic policy was often determined by the four social partners: the Chamber of Commerce, the association of Chambers of Agriculture, the Chamber of Labor, and the Austrian Trade Union.
The first are associated with the Conservatives, the latter two with the Social Democrats.
The formation of the Conservative/Freedom Party coalition government called that partnership into question.
The short-term consequences of this may not be negative, since it was a lack of agreement among the social partners that caused the structural problems of the 1990s to go unresolved.
So the current government's efforts to resolve them may be helpful. But the long-term consequences of a breakdown in the social partnership remain unknown.
Given that social partnership delivered stability and prosperity to Austria for decades, it must be hoped that today's changes serve as a catalyst for renewed social consensus.
The End of Banks?
BARCELONA ­– Are banks doomed as a result of the current financial crisis?
The securitization of mortgages originally was seen as a triumph, because it shifted risk to financial markets, while taking deposits and making and monitoring loans – the purview of traditional banks – was regarded as narrow and old-fashioned.
By contrast, modern banks would seek finance mainly in the interbank market and securitize their loan portfolios.
In theory, such banks should be immune to runs, because the interbank market is supposed to be extremely efficient, and risk would be shifted to investors willing to bear it.
Deposits would be replaced by mutual funds, which, as we know, are also immune to runs, and the risk of structured investment vehicles (SIV’s) would be assessed accurately by rating agencies.
All this financial engineering would avoid the obsolete capital requirements that burden banks’ operation.
The current crisis killed off this optimistic scenario.
The interbank market has almost collapsed, because banks do not trust each other in the same way that we tend not to trust an eager seller of a second-hand car.
This is a textbook market failure.
The origin of the problem is uncertainty about banks’ exposure to sub-prime mortgages, the risks of which have been carelessly assessed by rating agencies due to conflicts of interest.
Northern Rock in the United Kingdom has been a victim of this modern banking strategy, as has Bear Stearns in the United States.
Others may follow soon.
Moreover, institutions that thought they had transferred risk to the market realized that the demise of sponsored SIV’s would damage their reputations irreversibly.
This implied that they had to rescue these SIV’s.
Alas, they failed to set aside enough capital for this unforeseen contingency, and external investors such as the sovereign wealth funds of China, Singapore, and the Middle East have had to come to the rescue.
Finally, mutual funds are at risk as well, because their supposedly safe investments may sour and the insurance that backs them now appears shaky.
The sub-prime contamination of money market funds would prove disastrous, with consequences far beyond what we have seen up to now.
The supposed transfer of risk would turn out to have been a mirage.
Are banks, markets, or regulators to blame?
The answer may indicate what future awaits banks.
Some regulators were irresponsible for not anticipating the rational profit-maximizing behavior of institutions with a limited liability charter and of executives effectively protected from failure.
After all, what should banks do when, instead of keeping sub-prime mortgages on their books, monitoring their performance, and incurring capital requirements, they can securitize them advantageously (because the rating agencies have a stake in the business), avoid capital requirements, and profit from investors’ inexperience with such products.
Indeed, even if things turned ugly and banks’ equity suffered, executives knew that their own generous bonuses and pension packages most likely would not.
Given this, regulators should have thought twice before permitting off-balance sheet operations without any further provision.
The fundamental question today is who monitors opaque loans, whether of the sub-prime or any other variety.
Traditionally, the answer was banks; in the securitized world, it remains a question.
So, is there an alternative to the old-fashioned monitoring of loans by banks?
Perhaps if those securitized packages had been properly rated, the originating institution would be obliged to retain a share to signal to the market that risk was being controlled.
And, clearly, the idea that capital requirements were not needed for banks’ off-balance sheet activities (because the banks were not bearing the risk), was simply wrong.
Appropriate regulation – including regulation of rating agencies – would most likely make traditional banks popular again.
A reconsideration of banks’ limited liability charter would go even further in restoring credibility.
The principle is simple: when your own money is at stake, you tend to be careful.
But when you can play with others’ money and expect a very high reward for success and no punishment for failure, the incentives for irresponsible risk-taking become enormous.
America’s Bond-Market Blues
BEIJING – The market for United States Treasury securities is one of the world’s largest and most active debt markets, providing investors with a secure stock of value and a reliable income stream, while helping to lower the US government’s debt-servicing costs.
But, according to the US Treasury Department, overseas investors sold a record $54.5 billion in long-term US debt in April of this year, with China slashing its holdings by $5.4 billion.
This dumping of US government debt by foreign investors heralds the end of an era of cheap financing for the US.
As it stands, the US government holds roughly 40% of its debt through the Federal Reserve and government agencies like the Social Security Trust Fund, while American and foreign investors hold 30% each.
Emerging economies – many of which use large trade surpluses to drive GDP growth and supplement their foreign-exchange reserves with the resulting capital inflows – are leading buyers of US debt.
Over the last decade, these countries’ foreign-exchange reserves have swelled from $750 billion to $6.3 trillion – more than 50% of the global total – providing a major source of financing that has effectively suppressed long-term US borrowing costs.
With yields on US ten-year bonds falling by 45% annually, on average, from 2000 to 2012, the US was able to finance its debt on exceptionally favorable terms.
But the ongoing depreciation of the US dollar – which has fallen by almost half since the Bretton Woods system collapsed in 1971 – together with the rising volume of US government debt, undermines the purchasing power of investors in US government securities.
This diminishes the value of these countries’ foreign-exchange reserves, endangers their fiscal and exchange-rate policies, and undermines their financial security.
Nowhere is this more problematic than in China, which, despite the recent sell-off, remains by far America’s largest foreign creditor, accounting for more than 22% of America’s foreign-held debt.
Chinese demand for Treasuries has enabled the US to increase its government debt almost threefold over the last decade, from roughly $6 trillion to $16.7 trillion.
This, in turn, has fueled a roughly 28% annual expansion in China’s foreign-exchange reserves.
China’s purchases of American debt effectively transferred the official reserves gained via China’s trade surplus back to the US market.
In early 2000, China held only $71.4 billion of US debt and accounted for 8% of total foreign investment in the US.
By the end of 2012, this figure had reached $1.2 trillion, accounting for 22% of inward foreign investment.
But China’s reserves have long suffered as a result, yielding only 2% on US ten-year bonds, when they should be yielding 3-5%.
Meanwhile, outward foreign direct investment yields 20% annually, on average.
So, whereas China’s $3 trillion in foreign-exchange reserves will yield only about $100 billion annually, its $1.53 trillion in foreign direct investment could bring in annual returns totaling around $300 billion.
Despite such low returns, China has continued to invest its reserves in the US, largely owing to the inability of its own under-developed financial market to generate a sufficient supply of safe assets.
In the first four months of this year, China added $44.3 billion of US Treasury securities to its reserves, meaning that such debt now accounts for 38% of China’s total foreign-exchange reserves.
But the growing risk associated with US Treasury bonds should prompt China to reduce its holdings of US debt.
The US Federal Reserve’s announcement in May that it may wind down its quantitative easing (QE) program – that is, large-scale purchases of long-term financial assets – by the end of this year has sparked fears of a 1994-style bond-market collapse.
Concerns that a sharp rise in interest rates will cause the value of bond portfolios to plummet have contributed to the recent wave of foreign investors dumping US debt – a trend that is likely to continue to the extent that the Fed follows through on its exit from QE.
Yields on ten-year US bonds are now 2.94%, a 58% increase since the first quarter of this year, causing the interest-rate gap between two- and ten-year bonds to widen to 248 basis points.
According to the Congressional Budget Office, the yield rate on ten-year bonds will continue to rise, reaching 5% by 2019 and remaining at or above that level for the next five years.
While it is unlikely that this will lead to a 1994-style disaster, especially given that the current yield rate remains very low by historical standards, it will destabilize the US debt market.
For China, the benefits of holding large quantities of US dollars no longer outweigh the risks, so it must begin to reduce the share of US securities in its foreign-exchange reserves.
Given that China will reduce the overall size of its reserves as its population ages and its economic-growth model shifts toward domestic consumption, a substantial sell-off of US debt is inevitable – and, with it, a large and permanent increase in America’s financing costs.
The End of China’s Surplus
CAMBRIDGE – China’s current-account surplus – the combination of its trade surplus and its net income from foreign investments – is the largest in the world.
With a trade surplus of $190 billion and the income from its nearly $3 trillion portfolio of foreign assets, China’s external surplus stands at $316 billion, or 6.1% of annual GDP.
Because the current-account surplus is denominated in foreign currencies, China must use these funds to invest abroad, primarily by purchasing government bonds issued by the United States and European countries.
As a result, interest rates in those countries are lower than they would otherwise be.
That may all be about to change.
The policies that China will adopt as part of its new five-year plan will shrink its trade and current-account surpluses.
It is possible that, before the end of the decade, China’s current-account surplus will move into deficit, as the country imports more than it exports and spends its foreign-investment income on imports rather than on foreign securities.
If that happens, China will no longer be a net buyer of US and other foreign bonds, putting upward pressure on interest rates in those countries.
Although this scenario might now seem implausible, it is actually quite likely to occur.
After all, the policies that China will implement in the next few years target the country’s enormous saving rate – the cause of its large current-account surplus.
In any country, the current-account balance is the difference between national saving and national investment in plant and equipment, housing, and inventories.
This key fact is not a matter of economic theory or an historic regularity.
It is a fundamental national-income accounting identity that must hold for every country in every year.
So any country that reduces its saving without cutting its investment will see its current-account surplus decline.
China’s national saving rate – including household saving and business saving – is now about 45% of its GDP, which is the highest rate in the world.
But, looking ahead, the five-year plan will cause the saving rate to decline, as China seeks to increase consumer spending and therefore the standard of living of the average Chinese.
The plan calls for a shift to higher real wages so that household income will rise as a share of GDP.
Moreover, state-owned enterprises will be required to pay out a larger portion of their earnings as dividends.
And the government will increase its spending on consumption services like health care, education, and housing.
These policies are motivated by domestic considerations, as the Chinese government seeks to raise living standards more rapidly than the moderating growth rate of GDP.
Their net effect will be to raise consumption as a share of GDP and to reduce the national saving rate.
And with that lower saving rate will come a smaller current-account surplus.
Since China’s current-account surplus is now 6% of its GDP, if the saving rate declines from the current 45% to less than 39% – still higher than any other country – the surplus will become a deficit.
This outlook for the current-account balance does not depend on what happens to the renminbi’s exchange rate against other currencies.
The saving-investment imbalance is fundamental, and it alone determines a country’s external position.
But the fall in domestic saving is likely to cause the Chinese government to allow the renminbi to appreciate more rapidly.
Higher domestic consumer spending would otherwise create inflationary pressures.
Allowing the currency to appreciate will help to offset those pressures and restrain price growth.
A stronger renminbi would reduce the import bill, including prices for oil and other production inputs, while making Chinese goods more expensive for foreign buyers and foreign goods more attractive to Chinese consumers.
This would cause a shift from exports to production for the domestic market, thereby shrinking the trade surplus, in addition to curbing inflation.
China’s trade surplus and the renminbi’s exchange rate were high on the list of topics that President Hu Jintao and US President Barack Obama discussed when Hu visited Washington earlier this month.
The Americans are eager for China to reduce its surplus and allow its currency to appreciate more rapidly.
But they should be careful what they wish for, because a lower surplus and a stronger renminbi imply a day when China is no longer a net buyer of US government bonds.
The US should start planning for that day now.
The End of Fiscal Sovereignty in Europe
MILAN – The late Milton Friedman said that a common currency – that is, a monetary union – cannot be sustained without a deep form of economic and political union.
By this, he meant an open economy that ensures the free flow of goods, labor, and capital, together with a disciplined central fiscal authority and a strong central bank.
The latter two are pillars of a strong currency. They work in tandem.
But the other pieces are no less important.
The eurozone, currently wrestling with fiscal imbalance and sovereign debt risk, has a strong and autonomous central bank, but is fiscally fragmented and only partly unified politically.
Enter the Maastricht Treaty, which in theory imposes fiscal discipline by placing limits on government deficits and debt levels – clearly a structure designed to prevent free riding on the fiscal discipline of others.
Maastricht was thus intended to prevent a situation like the current one in Greece.
It didn’t work.
Eurozone sovereign debt turned out not to be homogenous with respect to risk.
In a stable world, Maastricht Treaty’s rules-based framework, if enforced, might do the job.
But in a shock-prone world, it is a fragile system, because it precludes anything but modest countercyclical policy.
No wonder, then, that the treaty’s strict limits were breached early in the euro’s first decade bycore countries as well as peripheral ones.
Indeed, with a large shock, much of the breach happens automatically, as tax revenues shrink and social-insurance payments expand.
Recent analysis by the International Monetary Fund suggests that as much as 80% of the fiscal stimulus in advanced countries during the current crisis is non-discretionary.
That kind of built-in counter-cyclicality is not a bad thing.
But if it produces the threat of fiscal instability and excessive sovereign-debt risk after a large shock, then the starting point was not sufficiently conservative – in other words, deficits or debt levels (or both) were too high.
Counter-cyclicality does not mean running modest deficits in the good times and huge deficits in major downturns.
If the current EU budget rules are too rigid and are ignored in the face of a shock, then the door is open for imprudent fiscal behavior.
In theory, strict in-depth monitoring could distinguish genuinely prudent countercyclical responses from profligacy.
But in practice it is hard to enforce.
The eurozone’s immediate challenge is declining fiscal stability in a subset of countries whose credit ratings are falling and debt-service costs rising.
Absent external assistance and a credible plan for restoring fiscal order, Greek sovereign debt could not be rolled over, forcing a default, probably in the form of a restructuring of Greek debt.
Even with external assistance, many view default as a near certainty, because the arithmetic of restoring fiscal balance is so daunting.
Eurozone membership precludes inflation and devaluation as adjustment mechanisms.
An alternative is domestic deflation combined with extreme fiscal tightening – that is, a period of slow or negative growth in wages, incomes, and some prices of non-traded goods.
But deflation is painful and cannot realistically be pursued for political reasons.
The constraints for eurozone countries are similar to those of a state in America that gets into fiscal trouble.
Devaluation is not an option because of the common currency. The Federal Reserve will not willingly resort to inflation.
Moreover, in the United States, there are rules and conventions (similar to Maastricht) that disallow or discourage states from running long-term deficits.
This means that state fiscal behavior tends to be pro-cyclical in the face of large shocks like the recent one.
So why isn’t a federal system equally fragile?
There are two key safety valves.
One is the central government’s ability to run deficits and to act decisively.
The other is labor mobility.
The EU does not have a robust centralized fiscal structure with a counter-cyclical mandate.
And labor mobility, a long-run goal in the EU, is constrained by language, laws, and diverse regulatory regimes.
In addition, state bonds are not treated as equals, and the markets penalize profligate states.
If the EU wants a monetary union in which sovereign debt is relatively homogenous with respect to risk, fiscal discipline must be similarly homogenous.
But that also means that it will need a more robust mechanism for countercyclical responses to shocks.
The EU’s leaders recently stated their intention to revisit the Maastricht structure, which in principle is a good idea.
They might take the route of adapting the Maastricht rules to allow for more inter-temporal flexibility at the national level.
But that approach would be complicated. One would need a sophisticated capability for monitoring and enforcing fiscal policy and sovereign debt – or else end up with a repeat of the current situation.
A better long-term solution is a central EU fiscal capacity that accumulates the resources to respond to shocks during periods of growth.
One could think of it as a stabilization tax that becomes negative in downturns.
But a move in this direction does involve some degree of fiscal centralization.
And it probably would require that the EU be able to issue sovereign debt.
It is unclear whether there is the political will to do all that.
But a step in the right direction could be taken by partial fiscal centralization with a limited countercyclical mandate.
That would enable effective enforcement of fiscal discipline at the national level and provide the euro with the fiscal discipline it needs to survive.
When the eurozone was created, it was widely understood that fiscal discipline was a crucial underpinning.
The current crisis vividly underscores the point.
The challenge now is to achieve a combination of discipline and flexibility that protects the collective interest.
That will involve a loss of full fiscal sovereignty, but facing up to that reality is required to sustain the monetary union.
The End of Green Ideology
PARIS – The meltdown at the Fukushima nuclear plant has sent political aftershocks racing around the globe.
More often than not, however, the shocks have been ideological, with no basis in science.
The managers of Tokyo Electric Power (TEPCO), which operates the Fukushima reactors, have been justly criticized for using an old generation of poorly maintained generators.
The Japanese, who perceive themselves as the world’s best engineers, now feel humiliated.
But, despite street protests, the collective reaction in Japan has not been to repudiate nuclear energy.
After all, the Fukushima accident has severely injured only a few people – probably less than a dozen workers are dangerously irradiated.
Almost all of the thousands of Japanese victims were drowned by the tsunami wave, not wiped out by a nuclear meltdown.
Japan will not stop using nuclear power.
Instead, its engineers will develop better and safer plants, most likely relying on the miniaturized nuclear reactors that were planned to replace the aging plant at Fukushima.
Most Japanese have remained rational in the face of their country’s tragedy, as have most people in neighboring Asian countries like China and South Korea, which, likewise, have not abandoned their commitment to nuclear energy.
This is not the case in Europe and the United States, where Fukushima’s ideological aftershocks have been most destructive.
German Chancellor Angela Merkel’s government was the first to overreact by deciding to close down all nuclear reactors in the coming years – a radical move driven by domestic politics.
Merkel’s government does not include Germany’s Greens, but the Green ideology has become a widely shared national creed in Germany.
Indeed, one can relate popular hostility toward nuclear energy to Germany’s traditional romantic cult of nature, not to science.
Germany’s nuclear plants will be replaced by more thermal plants, implying a large increase in German carbon emissions – so much for Green concern with global warming!
And so much for intellectual honesty, because a Germany without nuclear power of its own will be compelled to buy it from France, which has no intention of closing its nuclear plants.
In the US, the ideological aftershock is closer to Germany’s than to France’s: the US may not be overly prone to romanticism, but a cult of nature remains part of the American psyche.
This may go some way toward explaining why the Democrats, who control the presidency and the Senate, are so committed to so-called alternative energies.
President Barack Obama’s administration has thrown billions of dollars at wind, solar, ethanol, and other alternative-energy resources.
Now the Fukushima tragedy is being used to justify continuing these economically dubious programs.
We can bet that none of these alternative energies will easily replace oil, gas, and nuclear power in the foreseeable future.
At market prices, without public subsidies, a unit of energy produced by solar or wind in the US costs five times more than a unit produced by oil, gas, or nuclear plants.
Moreover, supporters of alternative energies systematically downplay their negative environmental impact.
A wind turbine requires 50 tons of steel and half a square mile of ground space.
If California were to rely on solar power for its electricity consumption, the entire state would have to be covered with photovoltaic cells.
The great irony of the current situation is that real innovation and entrepreneurial activity, without government support, is taking place in the field of energy generation, such as in the creation of miniaturized nuclear reactors.
The most promising breakthrough may well be the discovery of huge reserves of shale gas all over the planet.
Indeed, thanks to the new techniques in hydraulic fracturing and horizontal drilling, shale gas may well become the dominant energy resource of the future.
Shale gas could thus reduce dependency on OPEC oil and gas while reducing carbon emission.
Gas generates ten times less carbon than biomass or ethanol, which ecologists so heavily promote.
Beyond Fukushima, future energy supplies will most likely rely more and more on miniaturized nuclear plants and shale gas – a mix capable of responding to a rapidly urbanizing world population’s growing demand for electricity.
Such a renewed energy balance would impact the current global balance of power.
Shale gas is abundant in Europe and North America, in contrast to oil and gas.
Thus, the energy of tomorrow could well reinforce the world’s democracies and weaken its most repressive regimes, where most oil is to be found nowadays.
Within this new geopolitical framework, green ideology will survive like a cult or a recipe for economic suicide.
The End of History Comes to Tunisia
PARIS – Tunisia’s “Jasmine Revolution” is still unfolding, but we can already read into it lessons about democracy and democratization that extend far beyond the Maghreb.
To set the Jasmine Revolution in historical perspective, we must recall June 4, 1989 – that pivotal Sunday when the Poles voted the communists out of power and, at the other end of Eurasia, the Communist Party of China crushed a burgeoning democratic movement on Tiananmen Square.
In retrospect, that day looks like a fork in the road of human history.
One path led to the demise of communism and a new birth of freedom and democracy – at times bloody and painful – in Europe.
The other path traced an alternative course, with China remaining under the grip of its ruling party, but delivering prosperity to its impoverished masses through astounding and sustained growth.
As the revolutionary year of 1989 was unfolding, Francis Fukuyama, presciently yet controversially pondered whether the path chosen in Europe heralded the “end of history.”
Following Hegel, Fukuyama made the case that history is directional – that it is leading somewhere – for two reasons. First, the ceaseless spread of technology and of the economic liberal order, which has a homogenizing effect.
Second, the Hegelian “struggle for recognition” has been a pervasive driving force of mankind, powerful enough to lead countless individuals to the ultimate sacrifice.
But, while a widespread consensus held that communism was nothing but a dead end, China’s economic success, and the authoritarian backlash in Russia following Boris Yeltsin’s departure from the Kremlin a decade ago, prompted a more pessimistic analysis.
Theories of “democratic rollback” and of a resurgence of “authoritarian great powers” surfaced to unveil the potential of systems that combined nationalism and state-led growth-yielding capitalism.
Some argued that authoritarian rule provided a much surer and safer path to welfare than democracy could offer, others extolled the virtues of “Asian values,” and still others argued that democracy in the Arab or Muslim world would only pave the way for Islamic fundamentalists to take power.
Not surprisingly, autocrats everywhere embraced such views.
But the message of Tunisia’s Jasmine Revolution rings loud and clear: democracy – and the liberal political order in which it is rooted – is not merely a Western concept (or a Western conspiracy), but holds universal attraction, powered by the craving for “recognition.”
Moreover, it can be accessed at an early stage of a country’s modernization.
To be sure, authoritarian rule can manage the early stages of industrialization.
But a “knowledge economy” cannot operate with muzzled minds.
Even the smartest authoritarian rulers are unable to manage complexity on this scale – not to mention the corruption that inevitably breeds in the protected shadows of autocracy.
Challenging the “myth of the autocratic revival,” the American political scientists Daniel Deudney and John Ikenberry have examined China and Russia, finding “little evidence for the emergence of a stable equilibrium between capitalism and autocracy such that this combination could be dignified as a new model of modernity.” While neither country qualifies as a liberal democracy, both “are much more liberal and democratic than they have ever been, and many of the crucial foundations for sustainable liberal democracy are emerging” – one main hurdle being the centrifugal forces that democracy might unleash.
But most countries that are unburdened by such a threat have, quietly or spectacularly, rallied to the liberal order over the past decades.
Asian countries such as Japan, South Korea, Taiwan, and Indonesia have done so without being hampered by their supposed “Asian values.”
Similarly, Latin America, once the playground of myriad juntas and golpes, is now largely anchored in political liberalism.
Turkey is ruled by a mildly Islamist party that plays by the rules of democracy.
And, in the spring of 2009, the presidential campaign in Iran evinced a formidable craving for freedom.
What is obvious from these cases is that development activates the two channels that Fukuyama identifies as shaping the direction of history: cumulative economic and technological change and the desire for recognition.
Both foster individual empowerment, which is the gateway to freedom and democracy.
The paths differ between countries, setbacks are not uncommon, and it can take decades, but the leap can occur when the circumstances are ripe – as in Tunisia.
Indeed, the Jasmine Revolution embodies all the tenets of the liberal political order that the West has been advocating since the Atlantic Charter of 1941: a yearning for freedom, opportunity, and the rule of law.
Moreover, Tunisia’s revolution was indigenous, not imported as part of some forcible regime change.
The Tunisian people, led by a frustrated middle class that refused to be cowed, thus provide a healthy reminder of the steady and compelling forces driving the behavior of individuals and nations nowadays.
They illustrate the catalytic effect of digital connectivity (clearly visible, too, among China’s “twittering classes”).
And they might embolden other Arab peoples, as may be happening in Egypt, to force accountability upon their rulers.
Whatever the outcome in Tunisia, those who believe that democracy, to paraphrase Woodrow Wilson, makes the world a safe place – and that more democracy makes it safer – have every reason to rejoice at such an auspicious development.
The End of Kamikaze Pacifism?
Terror and Japan\u0027s Peace Constitution
Although I knew December 7, 2001 marked its 60 th anniversary, I never imagined that the phrase ``Pearl Harbor '' would be heard so often this year.
Its repetition began in a prosaic way, with the release of the Disney movie ``Pearl Harbor'' last June.
After September 11 th , however, many Americans spoke of the terrorist assaults as ``the first attack against the US since Pearl Harbor.''
One person even told me that, because of those attacks, Japan had received a golden opportunity to clear its name of the stigma of Pearl Harbor.
The way to achieve this, it seems, was for Japan to provide military support to the US.
Critics of Japan's defense posture over the years have sometimes been unforgiving.
The Economist, indeed, once derided the Japanese as ``kamikaze pacifists.''
The reality is that defense debates within Japan are invariably traumatic, based on sharp memories of the war and the horrors of Hiroshima and Nagasaki.
Yet, despite this, Japan responded to the terrorist acts of September by passing a new law that allows the country to support American forces in the war against terrorists.
The Anti-Terrorism Special Law, passed by Japan's Diet in October, enabled Japan to send its Self-Defense Forces (SDF) overseas to support - through supply, transportation, repair, maintenance, medical services and so on - American forces.
Even though the SDF still cannot participate in combat, the Anti-Terrorism law is the first that allows Japan to dispatch armed forces to join in military operations outside Japanese territory and territorial waters while the shooting war is on.
That Japan acted with alacrity after September 11 th reflects the trauma experienced during the Gulf War a decade ago.
Although Japan paid much of the costs of that war by raising domestic taxes, its supportive actions went largely unnoticed.
Indeed, the word ``Japan'' was nowhere to be seen in the advertisements Kuwait's government published after the war to thank the thirty nations of the international coalition that fought to expel Iraq from Kuwait.
These debates are also traumatic for an institutional reason.
Japan's so-called ``Peace Constitution,'' including Article 9 which prohibits the country from possessing ``war potential,'' was created after WWII under strong American pressure, and in atmosphere of deep self-reflection toward the Pacific War.
Some of the concepts the Constitution contained were so alien to Japanese tradition that new ideograms had to be created to express them.
The Cold War, however, soon made Article 9 seem excessively idealistic, at least to some.
Ever since, Japan has witnessed a severe confrontation between Constitutional revisionists and those who want to protect the Peace Constitution as it was written.
In reality, Japan has been realistic in interpreting the Constitution according to events.
Over the years it did not revise the Constitution in a formal way but, instead, expanded its meaning by re-interpreting critical clauses.
Such an informal revision allowed Japan to first create the SDF as well as to support the presence of American forces in Japan.
Still, for most of the postwar era, we understood that Japan could not send the SDF abroad even to support allies.
This was why Japan did not send the SDF to the Gulf.
Previous to September 11 th , Japan undertook a big step toward dispatching military forces beyond its territory when it concluded an agreement with the US in 1997 - the ``Guideline for Defense Cooperation'' - that restricted operations to the ``area surrounding Japan.''
The new Anti-Terrorism Law virtually eliminated this restriction, making it possible for Japan to send its troops anywhere in the world at any time.
To revise or not to revise the constitution, especially Article 9, remains a divisive political issues here, for pressures for change come not only from within by conservative politicians, but from without.
The so-called Armitage Report of 2000, produced by a committee headed by the now Deputy US Secretary of State Richard L. Armitage, stirred up a hornet's nest when it said that ``Japan's prohibition against collective defense is a constraint on alliance cooperation'' and that ``lifting this prohibition would allow for closer and more efficient security cooperation.''
Here was a de facto request from America that Japan broaden its military cooperation.
Because Mr. Armitage and many other American members of the joint committee became high officials in the Bush administration, Japan's politicians regarded a response to this report as vital.
Arguments within the Japanese government concerning collective defense received greater focus.
But establishing a practical meaning for ``collective defense'' remained difficult.
Japan's new Anti-Terrorist law was one effort to impose clarity on the idea of ``collective defense.''
Prime Minister Koizumi testified in the Diet that the Constitution contained obscure and unclear terms and that Japan must interpret them with common sense.
In the end, however, Mr. Koizumi avoided any formal commitment to act in ``collective defense'' or to revise the Constitution.
Although both the Upper and Lower Houses of the Diet created special committees to investigate Constitutional revision - especially Article 9 - change remains hard, for several reasons.
First, a majority of Japanese do not want to change Article 9, as opinion polls consistently show.
Article 9 remains a cherished symbol of Japan's peaceful posture, and a barrier against possible re-militarization.
Japan was able to pass the new Anti-Terrorist law without revising the Constitution, but the limits of expansive Constitutional interpretation may one day be reached.
The reaction of other Asian countries, especially China and South Korea, also creates limits on Constitutional revision.
When Prime Minister Koizumi explained Japan's new Anti-Terrorist law in China and Korea in October, leaders in both countries offered sharp cautions, with Korea's President Kim Dae Jung telling Prime Minister Koizumi that, ``I hope the SDF behaves within the limits of the Peace Constitution.''
Whether or not Japan maintains Article 9 as it is, the Japanese public must begin to argue seriously and thoroughly about the country's proper future defense policy.
Formulating a basic law governing national security, a law that would define the role and limit the actions of the SDF, is a mechanism we should seriously consider.
The End of Nuclear Power
OXFORD – Japan’s nuclear crisis, and the approaching 25th anniversary of the nuclear meltdown at Chernobyl, have incited heated new discussions about the desirability of nuclear power. By awakening dormant fears, this debate threatens to halt what to many had seemed like a budding nuclear renaissance.
The stealth-like nature of radiation taps into deep-seated human anxieties.
But, however well founded those fears might be, they are probably the wrong reason to oppose nuclear energy.
There is an even stronger argument than safety alone for why a nuclear renaissance is neither likely nor necessary: cost.
The price of nuclear power has been escalating steadily for decades.
Since 1970, the cost in constant dollars of new nuclear generating capacity has increased nine-fold, as additional safety features make plant designs more expensive.
New innovations, such as pebble-bed reactors, promise to increase safety further, but will be vastly more costly to adopt.
In addition, we have lost economies of scale because we build so few nuclear power plants.
As with fighter jets, adding features and building small quantities causes costs to skyrocket.
Globally, the median age of nuclear plants is now 27 years, so much of the learning from building the early plants has gone.
The exception is China, where a large-scale construction plan is showing evidence of lowering costs.
But with the next generation of safer reactors, costs are rising fast.
Xu Yuanhui of Chinergy, which is building two pebble-bed reactors, commented recently on the new design: “The safety is no question, but the economics are not so clear.”
The exact opposite is occurring with renewables.
We are learning quickly, and costs are plummeting through the sheer volume of construction: 40,000 wind turbines over the past decade in Europe alone.
And solar power will reach grid parity in sunny regions like South Africa, Greece, and Florida by 2015.
As the price of nuclear power steadily rises and that of renewables falls, inevitably the cost curves will cross.
The only question is when – and it is likely to occur well within the decade that it will take for the next nuclear plant to come online in the industrialized world.
In other words, before we finish building the next nuclear plant, it will be an expensive and increasingly irrelevant relic of the 1950’s dream of “atoms for peace.”
That dream always contained the seeds of a nightmare.
While the risk that nuclear power could fuel nuclear proliferation seems to have receded as a cause of public angst, by many accounts we have simply been lucky so far: the larger the nuclear economy becomes, the higher the chances of a mistake.
Even in the absence of proliferation risks, leaving dangerous trash for future generations is morally dubious.
We would judge Alexander the Great differently if his conquests had left a toxic legacy that we were still living with today.
Most advocates of nuclear energy now endorse solar and wind, but in the same breath claim that renewables alone simply are not a practicable solution for the necessary reduction of carbon emissions.
Every day brings another editorial arguing that nuclear energy is fundamental to a decarbonized power system.
But is it really true that a renewable power system is impossible?
In 2010, the European Climate Foundation (ECF) published a much-noted report called Roadmap 2050, which modeled in great detail the cost and technical feasibility of various scenarios for a carbon-free power system in Europe by 2050.
It describes a scenario of 80% renewable power, complemented by a remnant of nuclear and fossil fuels with carbon capture and sequestration.
In a nutshell, the ECF’s conclusion is that a continent-wide renewable power system is both technically possible and economically affordable.
The much-maligned and very real intermittency of supplies of renewable power is addressed through additional back-up generation capacity and, crucially, a new direct-current supergrid that enables load balancing across the European continent.
Still, if it is affordable and doable in the long term, what about in the shorter term?
The evidence of the link between carbon reduction, economic growth, and job creation is mounting.
In the past six months, studies by the United Nations Environment Program and Johns Hopkins University, as well as “A new growth path for Europe,” a blueprint proposed by six leading European universities, all project the creation of millions of job before 2020.
Notably, these are not just “Green Jobs”; they are “Green Growth jobs” across all industrial and services sectors.
What we are witnessing is a watershed in the debate on greenhouse-gas emissions.
A low-carbon growth path requires neither coal nor new nuclear power.
The way forward is to pursue more ambitious and consistent climate and energy policies that drive the massive deployment of renewables; install new load-balancing electricity grids; and ensure large-scale adoption of energy-efficiency measures.
This agenda promises to boost investments, stimulate economic growth, and create jobs while increasing competitiveness and energy security.
In both economic and ethical terms, nuclear power merits no role.
The End of Physics?
When communism collapsed, people spoke of the "End of History."
Some now speak in a similar way of the "End of Physics."
They claim that all the fundamental issues are understood; that all the great questions are answered.
Others suggest that even if some fundamental issues remain outstanding they are essentially abstractions, irrelevant to human aspirations.
So, are there any burning problems left for physicists to tackle or should physicists accept with grace the close of their science?
Questions about the end of physics are not new.
In 1890, buoyed by centuries of successful applications of Newtonian mechanics and the electromagnetism of Faraday and Maxwell, eminent voices proclaimed physics at an end.
The decade to follow, however, overturned this exuberance.
Radioactivity, x-rays and the discovery of the electron opened up a new world.
Soon after, physics reached new heights as it developed the two revolutionary pillars of 20th century physics: Quantum Mechanics and General Relativity, another of Einstein's pivotal contributions to modern science.
So, will man's hubris be capsized again?
To grasp where physics might go it is necessary to know how far it has come.
Physics emerged in the 16th century as a quantitative, mathematically based set of laws through which humans could comprehend the inanimate world.
Mysteries that confounded the ancients were replaced by an ever more concise set of principles so that the flight of projectiles, the fall of an apple, the orbit of the moon, and the trajectories of planets could be quantitatively accounted for.
Definitions of space, time, matter and energy became, thanks to physics, precise.
Complex phenomena: eclipses, comets, tides, the properties of matter (e.g. solids, liquids and gases), the stability of structures (e.g. bridges, towers, ships), the behavior of light, the processes involving heat flow, temperature, the colors of the rainbow and the more subtle colors emitted by heated substances, electrical charges and magnetism, gravitation and radioactivity were all organized into a small number of "laws of physics."
The twentieth century brought a profound understanding of the properties of the physical world, now considered as "understood" by physics.
Stars, galaxies, the evolution of the universe as well as biological entities such as proteins, cells and genes all came under the purview of physics.
With this record of advance behind it, what remains for physics to achieve?
Let me focus on a few areas where major advances may take place in the coming decades.
In particle physics and cosmology we are now on the verge of solving problems that have confounded science since antiquity: what are the ultimate blocks of matter?
How does the universe work?
Our ambition is to find an answer so elegant and simple that it will fit easily on the front of a T-shirt.
Today, however, we have only achieved a powerful, but flawed, summary, the so-called "Standard Model," which reduces all reality to a dozen or so particles and four basic forces in nature.
Why is the "Standard Model" flawed?
One obvious flaw is aesthetic - ie, it is too complex.
The model does not explain why there are so many fundamental particles and why they differ so much.
Another flaw in the standard model is that one of the fundamental forces in nature is not included: gravity.
We are still searching for a simple, all-encompassing theory that reconciles all these forces.
This effort is specially important for cosmology where peaceful coexistence between relativity, which is the theory of gravity, and quantum theory is needed to understand the universe's beginning.
During the earliest moments after the creation of the universe in the Big Bang 12 billion years ago, the universe was extremely small and dense and the laws of physics governed perhaps only one kind of particle and one force.
Unification of relativity and quantum theory is therefore necessary in order for us to understand the earliest moments of creation, when other particles and forces came into being.
With that understanding, cosmologists will begin to grasp how this dense universe started to expand and why more than 90% of its mass remains invisible to our instruments.
Over time we will begin to reveal all the essential features of the cosmos to explain how a single event billions of years ago not only created galaxies, stars and planets but the atoms that assembled into living beings intricate enough to ponder their origins and purposes.
Of course, some say that physics is unlikely to provide an ultimate explanation for evolution, the event that lies at the basis of biology and medicine.
However, I think that application of the principles of physics to chemistry and especially to biology will also assume greater prominence.
As biology becomes a quantitative, hard science, physics - in its techniques, computational power and basic laws - will influence biologists more and more.
Indeed, the ultimate role of physics may be to unify all human knowledge.
Edmund O. Wilson, the noted Harvard biologist, wrote in his book "Consilience" of the eventual unification of the hard sciences, the social sciences and the humanities.
As revolutionary as this sounds, one can - even now - glimpse its possibility through the bridge of human consciousness, because the brain appears to work by the laws of physics and these, utilizing the probabilities of quantum science and the complexity of chaos theory, may be amenable to logical analysis.
Will this knowledge hijack emotion, love, music, poetry, art?
Or will this scientific union enrich the great glories of the human spirit?
Must we fear, with Keats, to "unweave the rainbow?"
Richard Feynman, the great theoretical physicist, has offered a simple yet powerful retort: "Does our understanding of the mechanisms of stellar activity diminish in any way our appreciation of the beauty and splendor of the night sky?"
The End of Population Growth
NEW DELHI – According to the United Nations’ Population Division, the world’s human population hit seven billion on October 31.
As always happens whenever we approach such a milestone, this one has produced a spike in conferences, seminars, and learned articles, including the usual dire Malthusian predictions.
After all, the UN forecasts that world population will rise to 9.3 billion in 2050 and surpass 10 billion by the end of this century.
Such forecasts, however, misrepresent underlying demographic dynamics.
The future we face is not one of too much population growth, but too little.
Most countries conducted their national population census last year, and the data suggest that fertility rates are plunging in most of them.
Birth rates have been low in developed countries for some time, but now they are falling rapidly in the majority of developing countries.
Chinese, Russians, and Brazilians are no longer replacing themselves, while Indians are having far fewer children.
Indeed, global fertility will fall to the replacement rate in a little more than a decade.
Population may keep growing until mid-century, owing to rising longevity, but, reproductively speaking, our species should no longer be expanding.
What demographers call the Total Fertility Rate is the average number of live births per woman over her lifetime.
In the long run, a population is said to be stable if the TFR is at the replacement rate, which is a little above 2.3 for the world as a whole, and somewhat lower, at 2.1, for developed countries, reflecting their lower infant-mortality rates.
The TFR for most developed countries now stands well below replacement levels.
The OECD average is at around 1.74, but some countries, including Germany and Japan, produce less than 1.4 children per woman.
However, the biggest TFR declines in recent years have been in developing countries.
The TFR in China and India was 6.1 and 5.9, respectively, in 1950. It now stands at 1.8 in China, owing to the authorities’ aggressive one-child policy, while rapid urbanization and changing social attitudes have brought down India’s TFR to 2.6.
An additional factor could depress future birth rates in China and India.
The Chinese census suggests that there are 118.6 boys being born for every 100 girls.
Similarly, India has a gender ratio at birth of around 110 boys for every 100 girls, with large regional variations.
Compare this to the natural ratio of 105 boys per 100 girls.
The deviation is usually attributed to a cultural preference for boys, which will take an additional toll on both populations, as the future scarcity of women implies that both countries’ effective reproductive capacity is below what is suggested by the unadjusted TFR.
Indeed, after adjusting for the gender imbalance, China’s Effective Fertility Rate (EFR) is around 1.5, and India’s is 2.45. In other words, the Chinese are very far from replacing themselves, and the Indians are only slightly above the replacement rate.
The EFR stands at around 2.4 for the world as a whole, barely above the replacement rate.
Current trends suggest that the human race will no longer be replacing itself by the early 2020’s.
Population growth after this will be mostly caused by people living longer, a factor that will diminish in significance from mid-century.
These shifts have important implications for global labor supply.
China is aging very rapidly, and its working-age population will begin to shrink within a few years.
Relaxing the one-child policy might have some positive impact in the very long run, but China is already past the tipping point, pushed there by the combined effect of gender imbalance and a very skewed age structure.
The number of women of child-bearing age (15-49 years) in China will drop 8% between 2010 and 2020, another 10% in the 2020’s and, if not corrected, at an even faster pace thereafter.
Thus, China will have to withdraw an increasing proportion of its female workforce and deploy it for reproduction and childcare.
Even if China can engineer this, it implies an immediate outflow from the workforce, with the benefits lagging by 25 years.
Meanwhile, the labor force has peaked or is close to peaking in most major economies.
Germany, Japan, and Russia already have declining workforces.
The United States is one of a handful of advanced countries with a growing workforce, owing to its relative openness to immigration.
But this may change as the source countries become richer and undergo rapid declines in birth rates.
Thus, many developed countries will have to consider how to keep people working productively well into their seventies.
India, the only large economy whose workforce will grow in sufficient scale over the next three decades, may partly balance the declines expected in other major economies.
But, with birth rates declining there, too, current trends suggest that its population will probably stabilize at 1.55 billion in the early 2050’s, a full decade ahead of – and 170 million people below – the UN’s forecast.
Given this, it is likely that world population will peak at nine billion in the 2050’s, a half-century sooner than generally anticipated, followed by a sharp decline.
One could argue that this is a good thing, in view of the planet’s limited carrying capacity. But, when demographic dynamics turn, the world will have to confront a different set of problems.
The End of Russia\u0027s Second Revolution
MOSCOW: Sooner or later, all revolutions end.
People are so sickened by crime and uncertainty that ‘law and order’ becomes their primary goal.
At this point, society either succumbs to dictatorship or forges a new social compact that accepts the revolution’s key results.
In Russia, the Revolution of the 1990s has clearly entered its stabilization phase: there is broad acceptance of the market and private property; the period of feeble state authority and weak government is giving way to enhanced state power as an exhausted society allows today’s rulers wider latitude for political maneuver.
So there now exists a real possibility for a new social/political compact.
Yet a critical question remains: how will Russia’s rulers use their enhanced powers and freedom to maneuver?
They are now in a position to conduct a constructive policy and address problems too long ignored.
But there is also a danger that these stronger powers may forge an undemocratic regime; that stabilization may be followed by authoritarianism.
Hope is to be found here in the fact that market economics is no longer seriously challenged.
Struggles over the re-distribution of property, and debates about the form of the market economy continue, of course, but everybody sees Russia’s market economy as a reality.
The Primakov government, which came to power in 1998, depended on the Communist majority in the Duma; yet even it did not dare dismantle any market institution.
On this issue, basic agreement seems to have been achieved.
That agreement matters.
After years of decline, Russia’s economy is growing fast, in industrial production, investment and incomes.
This is not, in my view, primarily due to economic reforms (which are too recent to have had this effect), nor is it due to a fall in the ruble or rising oil prices.
The true explanation is that, in the past few years, there has formed in Russia a critical mass of well-managed, market-oriented enterprises capable of normal production, with resources released from the inefficient Soviet-era public sector.
Encouraged by improved economic performance, last year the government had the will to introduce a program of in-depth structural transformations.
It started on tax reform: a 'flat' income tax, a single regressive social tax, a ban on the turnover tax, etc.
The second important area of progress has been reform of Russia’s federation: establishment of federal districts and reform of the Federation Council.
These changes are controversial, but a federation whose laws are not observed by some of its constituent members cannot function normally; a federation in which the observance of laws depends on the whim of local administrators simply cannot exist.
President Putin’s moves to strengthen an integrated power system are therefore logical and correct.
As a result, Russia is today a realistic, even if imperfect, federation.
Yet, in this phase of post-revolutionary stabilization, there is real danger that the central authorities, having strengthened the ‘vertical power structure,’ might interfere in affairs that are within the competence of the regions and local government.
The third important area of progress is in military reform, including a decision to cut the numerical strength of the Armed Forces over the next three years.
There will be bitter resistance here, however, for the interests of strong political forces are at stake.
As the first revolution in the post-industrial world, the Russian revolution of the 1990s was characterized by limited violence and broad compromises with the old elites.
The main danger for today’s stabilization period concerns the functioning of democratic institutions and the preservation of freedom of speech.
These risks to democracy are greatest because of the bad and sad traditions of Soviet power and the centuries of the pre-Soviet epoch.
Admittedly, the ‘oligarchs’ helped discredit freedom of speech in this country.
But Russia and all its citizens – not just Gusinsky and Berezovsky – need freedom of speech and democratic institutions.
Despite this, many supposedly liberal economists toy with the naive and dangerous idea that “We don’t need democracy, give us a Russian Pinochet and to hell with freedom.”
Yes, economically efficient authoritarian regimes have existed, but they were exceptions.
With our traditions, authoritarianism here would likely be so corrupt as to be incapable of conducting a sensible economic policy.
Democracy may be imperfect, but compared to other arrangements it remains the best instrument for adapting to the world with flexibility and efficiency.
Today’s threats to freedom of speech and to our democratic institutions are realistic.
We see examples in many of our neighbors, where democracy seems to exist formally, but where everybody understands that it is a toy democracy.
In this country, democracy is – so far – a young but realistically working instrument.
Preserving and strengthening it is and must be our paramount objective.
The End of Secularism?
When the end of ideology was celebrated – first in the 1950’s and then, more emphatically still, in the 1990’s – no one foresaw that religion, the bane of politics in the first half of the twentieth century, would return to that role with a vengeance.
Daniel Bell and Raymond Aron wrote about the end of fascist and communist ideology in the hope that we would enter an age of pragmatism in which politics would be a subject of argument and debate, not belief and total worldviews.
Karl Popper’s approach to politics, one of reason and critical discourse, had come to prevail.
And when, after the collapse of communism, the end of history seemed near, ideological politics was thought to have vanished forever.
But history does not end, and it is forever full of surprises.
Francis Fukuyama’s End of History and Samuel Huntington’s Clash of Civilisations appeared within a mere three years of each other in the 1990’s, and a decade later the return of religion to politics is visible for all to see – and for many to suffer.
Those books are not just academic discourse, but mirror real developments.
By the time the false religions of totalitarian ideologies were defeated, real religions – so it seemed – had long passed from the political scene.
In some countries, formal allegiance to religious faith was symbolized by gestures and rites.
Yet no one thought much about it when American presidents of different faiths swore their oath of office to God and country.
In Westminster, every parliamentary sitting begins with Christian prayers presided over by Speakers who could be Christians or Jews or non-believers.
Not all democracies were as strict as France in their formal secularism but all were secular: the law is made by the sovereign people and not by some superhuman being or agency.
Suddenly, however, this secular commitment is no longer so clear.
Religious fundamentalists claim that the law must be anchored in the belief in a supreme being, or even be based on revelation.
Christian fundamentalism in the United States has come to dominate large segments of the Republican Party.
In Europe, the Vatican lobbied for acknowledgement of God in the preamble to the proposed European Constitutional Treaty.
Israel has long avoided drafting a constitution, because its secular citizens fear that orthodox Jews would impose their values on them.
Likewise, the sharia , Islamic law, entered political life in its least enlightened version in hopeful democracies like Nigeria, to say nothing of Iran.
Islamic fundamentalism – Islamism – has spread to all countries in which there are significant numbers of Muslims.
Why has religion returned to secular and democratic politics?
The main reason is probably that the enlightened countries of the world have become unsure of their values, even of the Enlightenment itself.
A moral relativism has spread, leading many to accept the taboos of all religious groups in the name of tolerance and multiculturalism.
Cartoons of Mohammed are not published, and Mozart’s opera Idomeneo is not performed in order to avoid offending religious sensitivities; and when, in the end, the publication and the performance take place, they become a demonstration almost intended to offend.
One can understand that enlightened believers in Islam (of whom there are many) find it upsetting that the world in which they want to live is in fact frail and vulnerable.
The return of religion to politics – and to public life in general – is a serious challenge to the rule of democratically enacted law and the civil liberties that go with it.
The response by enlightened communities is therefore important.
Perhaps it is right that the use of religious symbols has become the subject of public debate, though I think that wearing headscarves and even veils is as much a part of individual freedom as is the wearing of Jewish skullcaps and Christian crosses.
But there are far more important issues – above all, freedom of speech, including the freedom to say and write things that annoy, even upset, many.
In the interest of enlightened discourse, the limits of free speech should be drawn as widely as possible.
In the free world, people are not forced to read a newspaper or listen to a speech that they do not like, and they can oppose without fear what is said by those in positions of authority.
Today’s counter-Enlightenment fashion can easily get out of hand.
Those who are committed to liberty must learn to appreciate and defend it now, lest they someday have to fight to get it back.
The End of South Africa’s Honeymoon
The honeymoon is over for South Africa and the international community.
Domestic problems and regional instability mean foreign policy is becoming an increasingly rocky road for the ruling African National Congress (ANC) government of President Thabo Mbeki.
South Africa’s internal problems, most notably the upsurge in the AIDS epidemic, have been well documented since the ANC came to power more than ten years ago, but the country’s stance as a player within the international community has been less obvious.
There were high expectations, both at home and abroad, that South Africa could and would punch above its weight in international affairs, capitalizing on the extraordinary and unexpected constitutional settlement achieved by Nelson Mandela and F. W. de Klerk in 1994.
Initially, a foreign policy based on Nelson Mandela’s shining global reputation enabled the country to project itself as an exemplary international citizen.
The government aspired to play a constructive role across Africa, act as a spokesman for Third-World interests at the UN and elsewhere, and promote an end to the plethora of conflicts bedeviling the continent.
In time, however, as the impact of Mandela’s reputation faded, South Africa became just another country desperately trying to cope with immense social and economic deprivation and anxious for the foreign investment crucial to economic growth.
There was also recognition of limits to what the government could achieve on the international stage, despite some important accomplishments such as its helpful role in the renegotiation of the Nuclear Non-Proliferation Treaty in 1995.
The activist trend in South Africa’s foreign policy was initially accelerated under the presidency of Thabo Mbeki after he was first elected in 1999.
He extolled the notion of an “African renaissance” in which Africans are committed to find African solutions for African problems.
NEPAD, the New Partnership for Africa’s Development, an organization designed to promote decent and appropriate standards of economic and political development throughout the continent, has been at the core of this policy.
Despite its domestic problems and the loss of global visibility that accompanied Mandela’s retirement, South Africa is still perceived as an emerging power comparable in status and aspiration to, say, Brazil, India, and Nigeria.
Such powers seek an effective and constructive regional role, and possibly, in some instances, a global one.
They tend to have proactive and assertive foreign policies and aspire to more than the middle-power status and limited niche-style influence enjoyed by Canada, Sweden, or Saudi Arabia.
South Africa seeks a wider and more influential role reinforced by its obvious standing as a regional hegemon.
But South Africa’s aspiration to play a dynamic role beyond its borders is proving increasingly difficult, primarily because the regional environment – indeed, the continental environment – is not hospitable, defying the best efforts of Mbeki’s government to produce meaningful and sustained political and economic change.
The persistence of civil wars, periodic failure of ceasefires and mediation efforts, and protagonists that are sometimes warlords and rapacious militias – rather than states capable of making rational decisions – all add to the difficulty of conflict resolution by diplomatic means and traditional peacekeeping.
Zimbabwe is perhaps the key example of South Africa’s foreign policy problems.
Mbeki’s “quiet diplomacy” has not succeeded.
More importantly, South Africa’s ruling elite clearly believes that black liberation solidarity of the kind that links Mbeki with Mugabe inevitably trumps human rights.
The persistence of the Zimbabwean crisis profoundly damages South Africa’s claim to leadership of efforts at African transformation via organizations such as NEPAD, which is largely dependent on Western aid.
But any agreement at, say, the G-8 Summit in July to disperse such aid in the massive proportions advocated by the recent Report by the Blair Commission on Africa may be difficult to achieve.
In the face of Western and, in particular, American skepticism about South Africa’s failure, and that of the Africa Union, to engineer an acceptable outcome to the Zimbabwean crisis, money may not be forthcoming.
The long-term future of South Africa’s foreign policy is uncertain: its emergence as a power of substance with a claim to a seat in a reformed UN Security Council will ultimately depend on the government’s capacity to attract foreign investment sufficient to help deliver economic and social goods to the country’s black majority.
For, as with everywhere else, a successful foreign policy inevitably begins at home.
The End of the Age of Friedman
BERKELEY – Harvard professor Dani Rodrik – perhaps the finest political economist of my generation – recently reported on his blog that a colleague has been declaring the past three decades “the Age of Milton Friedman.”
According to this view, the coming to power of Ronald Reagan, Margaret Thatcher, and Deng Xiaoping led to an enormous upward leap in human liberty and prosperity.
I say yes – and no – to this proposition.
Friedman adhered throughout his life to five basic principles:
1. Strongly anti-inflationary monetary policy.
2. A government that understood that it was the people’s agent and not a dispenser of favors and benefits.
3. A government that kept its nose out of people’s economic business.
4. A government that kept its nose out of people’s private lives.
5. An enthusiastic and optimistic belief in what free discussion and political democracy could do to convince peoples to adopt principles (1) through (4).
Measured against these principles, Reagan failed on (2) and (4) and adopted (1) only by default – Paul Volcker’s anti-inflation policy in the 1980’s dismayed many of Reagan’s close aides.
Thatcher failed on (4). And Deng – while a vast improvement over his predecessors Lenin, Stalin, Khrushchev, and Mao – failed on all five, with the possible exception of (3).
We do not know what Deng’s desired set of economic arrangements for a system of “socialism with Chinese characteristics” was, and, in all likelihood, he did not know, either.
But I say yes in part to the “Age of Friedman” proposition, because only Friedman’s set of principles self-confidently proposed both to explain the world and to tell us how to change it.
Still, I would build up a counterbalancing set of principles, because I believe that Friedman’s principles do not, ultimately, deliver what they promise.
My principles would start from the observation that market economies and free and democratic societies are built atop a very old foundation of human sociability, communication, and interdependence.
That foundation had a hard enough time functioning when human societies had 60 members – eight orders of magnitude less than our current global society’s six billion.
So my principles would then be developed from Karl Polanyi’s old observation that the logic of market exchange puts considerable pressure on that underlying foundation.
The market for labor compels people to move to where they can earn the most, at the price of potentially creating strangers in strange lands.
The market for consumer goods makes human status rankings the product of responsiveness to market forces rather than the result of social norms and views about justice.
This critique of the market is, of course, one-sided.
After all, other arrangements for allocating labor appear to involve more domination and alienation than the labor market, which offers people opportunities, not constraints.
Similarly, “social norms” and “views about distributive justice” usually turn out to favor whomever has the biggest spear or can convince others that obedience to the powerful is obedience to God.
Market arrangements have a larger meritocratic component than the alternatives, and they encourage positive-sum entrepreneurship, making it easier to do well by doing good.
Nevertheless, the distribution of economic welfare produced by the market economy does not fit anyone’s conception of the just or the best.
Rightly or wrongly, we have more confidence in the correctness and appropriateness of political decisions made by democratically-elected representatives than of decisions implicitly made as the unanticipated consequences of market processes.
We also believe that government should play a powerful role in managing the market to avoid large depressions, redistributing income to produce higher social welfare, and preventing pointless industrial structuring produced by the fads and fashions that sweep the minds of financiers.
Indeed, there is a conservative argument for social-democratic principles.
Post-WWII social democracy produced the wealthiest and most just societies the world has ever seen.
You can complain that redistribution and industrial policy were economically inefficient, but not that they were unpopular.
It seems a safe bet that the stable politics of the post-WWII era owe a great deal to the coexistence of rapidly growing, dynamic market economies and social democratic policies.
Friedman would respond that, given the state of the world in 1975, a move in the direction of his principles was a big improvement.
When I think of Jimmy Carter’s energy policy, Arthur Scargill at the head of the British mineworkers’ union, and Mao’s Cultural Revolution, I have a hard time disagreeing with Friedman about the world in the mid-1970’s.
But there I would draw the line: while movement in Friedman’s direction was by and large positive over the past generation, the gains to be had from further movement in that direction are far less certain.
The End of the Beginning of Ending Poverty
With President Bush at the table, the “spin masters” who put a victorious gloss on all his actions had little need to lower expectations concerning the outcome of the G-8 meeting in Scotland.
Any agreement would be seen as a major achievement.
The write-off of multilateral debt for the world’s poorest countries – thanks to Britain’s leadership – is nonetheless especially welcome.
Agreement by the G-8 to debt relief is a major event, but we should not be fooled by the seeming magnanimity of the gesture: much of the debt would not have been repaid in any case.
More debt relief – encompassing more countries and more debt (including bilateral debt) – is needed.
But debt relief should be viewed as just a start.
As Britain itself has pointed out, developing countries need more assistance and a fairer international trade regime.
Perhaps not surprisingly, the IMF has tried to pour cold water on international enthusiasm for its generosity.
New studies, it warns, suggest that aid does not in general lead to faster growth.
This came as a relief for the Bush administration, which claims to have given as much as its “budgetary processes” allow.
The world’s richest country, which blithely gave its richest citizens a series of tax cuts worth hundreds of billions of dollars, now says that it simply can’t afford to spend much more on aid.
Even after the increases in annual assistance promised by Bush at the UN’s meeting in Monterey, Mexico, in 2002, the United States is still giving less than a quarter of its commitment of 0.7% of GDP.
Now, the IMF offers the following reassurance: ”You may be stingy, you may not be living up to your commitments, but the money probably wouldn’t have made much difference anyway.”
Of course, not all foreign-aid money is well spent.
But the same is true of money spent on, say, national defense.
Even if Americans have not been cheated by Defense Department suppliers like Halliburton, it is clear that the money spent in Iraq has not bought the promised peace and security in the Middle East.
But no one argues that the US should cut off defense expenditures.
The objective should be to improve the efficiency of government, to make sure that we get the most value for what we spend.
In this, surprisingly, there have been marked improvements in recent years.
The World Bank, for example, has been allocating more of its money to countries with a proven track record in spending money well.
It has been exploring new ways of “delivering” aid, sometimes using state and local governments where that appears more effective.
Similarly, so-called “Social Funds,” whereby communities design projects and compete for money, have enhanced participation and “ownership” of development projects.
In one village, a bridge was built to connect two neighborhoods separated during the rainy season.
A simple project like this can make an enormous difference to the life of a community.
For instance, children who live on one side of the river can now attend school on the other side during the rainy season.
Likewise, micro-credit schemes throughout the developing world have provided finance for the poor to expand their economic enterprise, with repayment rates that are truly impressive.
The IMF warns about “Dutch disease” problems, when an influx of foreign exchange drives up the local currency’s exchange rate, making it difficult to create jobs in the export sector or to protect jobs against an onslaught of cheaper foreign imports.
On this, the IMF is partly right.
Countries need to rely on themselves and mobilize domestic resources (although the IMF frequent insistence on tight monetary and fiscal policies often makes this more difficult.)
But there continues to be an enormous need for imported goods – medicines to promote health, technology to reduce the knowledge gap between the developing countries and the rest of the world, and machines to enhance productivity.
In any case, not much weight, in my judgment, should be given to the IMF’s statistical studies of the impact of foreign aid on growth, partly because the results do not appear to be very robust.
Different studies, with slightly different data sets, different countries, different techniques, and different years yield markedly different results.
An earlier set of studies, for instance, showed that aid does make a difference in countries with good governance and sound macro-economic policies.
Equally important, historically much foreign aid was provided not to promote development, but to purchase friendship, especially during the Cold War.
When the West gave money to Mobutu, they knew that the funds were going to Swiss bank accounts rather than benefiting the people of Zaire (now Congo).
The money worked as intended – not to promote development, but to keep Zaire on the side of the West.
Of course, Mobutu’s boundless corruption challenges us to be thoughtful about foreign aid, both about how the money is spent and who is responsible for “delivering” assistance.
Some governments have demonstrated a better capacity than others for using funds well.
In countries where governments are deficient, there are often alternative ways of providing assistance, including NGO’s.
Global support for “making poverty history” shows how the issue of Third-World poverty has finally struck a responsive chord.
Debt relief is a good beginning. But that is all it is.
The Real Interest-Rate Risk
BEIJING – Since 2007, the financial crisis has pushed the world into an era of low, if not near-zero, interest rates and quantitative easing, as most developed countries seek to reduce debt pressure and perpetuate fragile payment cycles.
But, despite talk of easy money as the “new normal,” there is a strong risk that real (inflation-adjusted) interest rates will rise in the next decade.
Total capital assets of central banks worldwide amount to $18 trillion, or 19% of global GDP – twice the level of ten years ago.
This gives them plenty of ammunition to guide market interest rates lower as they combat the weakest recovery since the Great Depression.
In the United States, the Federal Reserve has lowered its benchmark interest rate ten times since August 2007, from 5.25% to a zone between zero and 0.25%, and has reduced the discount rate 12 times (by a total of 550 basis points since June 2006), to 0.75%.
The European Central Bank has lowered its main refinancing rate eight times, by a total of 325 basis points, to 0.75%.
The Bank of Japan has twice lowered its interest rate, which now stands at 0.1%. And the Bank of England has cut its benchmark rate nine times, by 525 points, to an all-time low of 0.5%.
But this vigorous attempt to reduce interest rates is distorting capital allocation.
The US, with the world’s largest deficits and debt, is the biggest beneficiary of cheap financing.
With the persistence of Europe’s sovereign-debt crisis, safe-haven effects have driven the yield of ten-year US Treasury bonds to their lowest level in 60 years, while the ten-year swap spread – the gap between a fixed-rate and a floating-rate payment stream – is negative, implying a real loss for investors.
The US government is now trying to repay old debt by borrowing more; in 2010, average annual debt creation (including debt refinance) moved above $4 trillion, or almost one-quarter of GDP, compared to the pre-crisis average of 8.7% of GDP.
As this figure continues to rise, investors will demand a higher risk premium, causing debt-service costs to rise.
And, once the US economy shows signs of recovery and the Fed’s targets of 6.5% unemployment and 2.5% annual inflation are reached, the authorities will abandon quantitative easing and force real interest rates higher.
Japan, too, is now facing emerging interest-rate risks, as the proportion of public debt held by foreigners reaches a new high.
While the yield on Japan’s ten-year bond has dropped to an all-time low in the last nine years, the biggest risk, as in the US, is a large increase in borrowing costs as investors demand higher risk premia.
Once Japan’s sovereign-debt market becomes unstable, refinancing difficulties will hit domestic financial institutions, which hold a massive volume of public debt on their balance sheets.
The result will be chain reactions similar to those seen in Europe’s sovereign-debt crisis, with a vicious circle of sovereign and bank debt leading to credit-rating downgrades and a sharp increase in bond yields.
Japan’s own debt crisis will then erupt with full force.
Viewed from creditors’ perspective, the age of cheap finance for the indebted countries is over.
To some extent, the over-accumulation of US debt reflects the global perception of zero risk.
As a result, the external-surplus countries (including China) essentially contribute to the suppression of long-term US interest rates, with the average US Treasury bond yield dropping 40% between 2000 and 2008.
Thus, the more US debt that these countries buy, the more money they lose.
That is especially true of China, the world’s second-largest creditor country (and America’s largest creditor).
But this arrangement is quickly becoming unsustainable.
China’s far-reaching shift to a new growth model implies major structural and macroeconomic changes in the medium and long term.
The renminbi’s unilateral revaluation will end, accompanied by the gradual easing of external liquidity pressure.
With risk assets’ long-term valuation falling and pressure to prick price bubbles rising, China’s capital reserves will be insufficient to refinance the developed countries’ debts cheaply.
China is not alone.
As a recent report by the international consultancy McKinsey & Company argues, the next decade will witness rising interest rates worldwide amid global economic rebalancing.
For the time being, the developed economies remain weak, with central banks attempting to stimulate anemic demand.
But the tendency in recent decades – and especially since 2007 – to suppress interest rates will be reversed within the next few years, owing mainly to rising investment from the developing countries.
Moreover, China’s aging population, and its strategy of boosting domestic consumption, will negatively affect global savings.
The world may enter a new era in which investment demand exceeds desired savings – which means that real interest rates must rise.
The End of the End of History
Throughout modern times liberal states have always co-existed alongside many kinds of tyranny. Similarly, the modern world has always contained numerous economic systems - many varieties of capitalism, planned and guided economies, and a host of hybrid economic systems not easily classified.
Diplomacy and international law developed to cope with the fact of diverse regimes.
Yet throughout the 20 th century global politics was shaped by the project of unifying the world within a single regime.
Insofar as it remained committed to Marxist ideology, the long-term goal of the Soviet regime was world communism.
The whole world was to be a single socialist economy, administered by forms of governance that were to be everywhere the same.
This Marxist project is now widely and rightly viewed as utopian.
Even so, its disappearance as a force in world politics has not been accompanied by an acceptance of a diversity of political systems.
With communism's fall we were, in Francis Fukuyama's famous phrase, at the "end of history", a time when western governments could dedicate themselves to unifying the international system into a single regime based on free markets and democratic government.
But this project is as utopian as Marxism once was, and promises to be considerably more short-lived than the Soviet Union.
Many reasons exist for why the Soviet bloc collapsed, but--contrary to conventional opinion--economic inefficiencies were not central among them.
The Soviet bloc disintegrated because it could not cope with nationalist dissent in Poland and the Baltic states and more generally because a single economic and political system could not meet the needs of vastly different societies and peoples.
Marxism is a version of economic determinism.
It predicts that differences between societies and peoples narrow as they achieve similar levels of economic development.
Nationalism and religion have no enduring political importance, Marxists believed.
In the short run, they can be used to fuel anti-imperialist movements. Ultimately, they are obstacles to the construction of socialism.
Guided by these beliefs, the Soviet state waged an incessant war on the national and religious traditions of the peoples they governed.
In practice, Soviet rulers were compelled to compromise in order to remain in power.
Few could be described as wholehearted ideologues.
Even so, the Soviet system's rigidity was largely the result of the fact that it was established on a false premise.
The basis of the Soviet system was the Marxian interpretation of history in which every society is destined to adopt the same economic system and the same form of government.
The USSR fell apart because its monolithic institutions could not accommodate nations--Czechs and Uzbeks, Hungarians and Siberians, Poles and Mongols--whose histories, circumstances and aspirations were radically divergent.
Today, the global free market constructed in the aftermath of the Soviet collapse is also falling apart--and for similar reasons.
Like Marxists, neo-liberals are economic determinists.
They believe that countries everywhere are destined to adopt the same economic system and therefore the same political institutions.
Nothing can prevent the world from becoming one vast free market; but the inevitable process of convergence can be accelerated.
Western governments and transnational institutions can act as midwives for the new world.
Implausible as it sounds, this ideology underlies institutions such as the International Monetary Fund.
Argentina and Indonesia have very different problems, but for the IMF the solution is the same: they must both become free-market economies.
Russia at the time of communism's fall was a militarized rust-belt, but the IMF was convinced that it could be transformed into a western-style market economy.
An idealized model of Anglo-Saxon capitalism was promoted everywhere.
Unsurprisingly, this highly ideological approach to economic policy has not succeeded.
Indonesia is in ruins, while Argentina is rapidly ceasing to be a first-world country.
Russia has put the neo-liberal period behind it and is now developing on a path better suited to its history and circumstances.
Countries that have best weathered the economic storms of the past few years are those--like India, China and Japan--which took the IMF model with a large grain of salt.
To be sure, like the few remaining Marxists who defend central economic planning, the ideologues of the IMF claim that their policies did not fail; they were not fully implemented.
But this response is disingenuous. In both cases, the policies were tried - and failed at great human cost.
If the global free market is unraveling, it is not because of the human costs of its policies in countries such as Argentina, Indonesia and Russia.
It is because it no longer suits the countries that most actively promote it.
Under the pressure of a stock market downturn, the US is abandoning policies of global free trade in favor of more traditional policies of protectionism.
This turn of events is not surprising.
Throughout its history, America has always tried to insulate its markets from foreign competition.
So history has once more triumphed over ideology.
With America's loss of interest the chief prop of neo-liberal policies has been pulled away.
Mainstream politicians may still nod reverently when the global free market is invoked, but in practice the world is reverting to an older and more durable model.
It is being tacitly accepted that in future, as in the past, the world will contain a variety of economic systems and regimes.
The global free market is about to join communism in history's museum of discarded utopias.
After the Gold Rush
VENICE – The run-up in gold prices in recent years – from $800 per ounce in early 2009 to above $1,900 in the fall of 2011 – had all the features of a bubble.
And now, like all asset-price surges that are divorced from the fundamentals of supply and demand, the gold bubble is deflating.
At the peak, gold bugs – a combination of paranoid investors and others with a fear-based political agenda – were happily predicting gold prices going to $2,000, $3,000, and even to $5,000 in a matter of years.
But prices have moved mostly downward since then.
In April, gold was selling for close to $1,300 per ounce – and the price is still hovering below $1400, an almost 30% drop from the 2011 high.
There are many reasons why the bubble has burst, and why gold prices are likely to move much lower, toward $1,000 by 2015.
First, gold prices tend to spike when there are serious economic, financial, and geopolitical risks in the global economy.
During the global financial crisis, even the safety of bank deposits and government bonds was in doubt for some investors. If you worry about financial Armageddon, it is indeed metaphorically the time to stock your bunker with guns, ammunition, canned food, and gold bars.
But, even in that dire scenario, gold might be a poor investment.
Indeed, at the peak of the global financial crisis in 2008 and 2009, gold prices fell sharply a few times.
In an extreme credit crunch, leveraged purchases of gold cause forced sales, because any price correction triggers margin calls.
As a result, gold can be very volatile – upward and downward – at the peak of a crisis.
Second, gold performs best when there is a risk of high inflation, as its popularity as a store of value increases.
But, despite very aggressive monetary policy by many central banks – successive rounds of “quantitative easing” have doubled, or even tripled, the money supply in most advanced economies – global inflation is actually low and falling further.
The reason is simple: while base money is soaring, the velocity of money has collapsed, with banks hoarding the liquidity in the form of excess reserves.
Ongoing private and public debt deleveraging has kept global demand growth below that of supply.
Thus, firms have little pricing power, owing to excess capacity, while workers’ bargaining power is low, owing to high unemployment.
Moreover, trade unions continue to weaken, while globalization has led to cheap production of labor-intensive goods in China and other emerging markets, depressing the wages and job prospects of unskilled workers in advanced economies.
With little wage inflation, high goods inflation is unlikely.
If anything, inflation is now falling further globally as commodity prices adjust downward in response to weak global growth.
And gold is following the fall in actual and expected inflation.
Third, unlike other assets, gold does not provide any income.
Whereas equities have dividends, bonds have coupons, and homes provide rents, gold is solely a play on capital appreciation.
Now that the global economy is recovering, other assets – equities or even revived real estate – thus provide higher returns.
Indeed, US and global equities have vastly outperformed gold since the sharp rise in gold prices in early 2009.
Fourth, gold prices rose sharply when real (inflation-adjusted) interest rates became increasingly negative after successive rounds of quantitative easing.
The time to buy gold is when the real returns on cash and bonds are negative and falling.
But the more positive outlook about the US and the global economy implies that over time the Federal Reserve and other central banks will exit from quantitative easing and zero policy rates, which means that real rates will rise, rather than fall.
Fifth, some argued that highly indebted sovereigns would push investors into gold as government bonds became more risky.
But the opposite is happening now.
Many of these highly indebted governments have large stocks of gold, which they may decide to dump to reduce their debts.
Indeed, a report that Cyprus might sell a small fraction – some €400 million ($520 million) – of its gold reserves triggered a 13% fall in gold prices in April.
Countries like Italy, which has massive gold reserves (above $130 billion), could be similarly tempted, driving down prices further.
Sixth, some extreme political conservatives, especially in the United States, hyped gold in ways that ended up being counterproductive.
For this far-right fringe, gold is the only hedge against the risk posed by the government’s conspiracy to expropriate private wealth.
These fanatics also believe that a return to the gold standard is inevitable as hyperinflation ensues from central banks’ “debasement” of paper money.
But, given the absence of any conspiracy, falling inflation, and the inability to use gold as a currency, such arguments cannot be sustained.
A currency serves three functions, providing a means of payment, a unit of account, and a store of value.
Gold may be a store of value for wealth, but it is not a means of payment; you cannot pay for your groceries with it.
Nor is it a unit of account; prices of goods and services, and of financial assets, are not denominated in gold terms.
So gold remains John Maynard Keynes’s “barbarous relic,” with no intrinsic value and used mainly as a hedge against mostly irrational fear and panic.
Yes, all investors should have a very modest share of gold in their portfolios as a hedge against extreme tail risks.
But other real assets can provide a similar hedge, and those tail risks – while not eliminated – are certainly lower today than at the peak of the global financial crisis.
While gold prices may temporarily move higher in the next few years, they will be very volatile and will trend lower over time as the global economy mends itself.
The End of the Monroe Doctrine
The Monroe Doctrine – which in 1823 proclaimed all of Latin America to be a zone of exclusive American interest – is withering away.
Globalization and dynamic changes in the economies and politics of its myriad countries is providing Latin America with an opportunity to decrease the scope of its dependency on the United States, and thus to renegotiate, on better terms, its hitherto asymmetric relations with its giant northern neighbor.
Latin America’s increasing integration with the world is the key factor here.
China, the world’s rising power, is eagerly strengthening its trade, investment, aid, and cooperation with the region.
And Russia, deeply dissatisfied with its perceived second-class treatment by the US, is returning to the region with both business and weapon sales.
Russia may not be openly pursuing a renewed Cold War, but, in enhancing its position in Latin America, it sees itself as ending years of implosion and humiliation.
The Kremlin’s huge weapons sales to Venezuela, and the bilateral military exercises held there, as well as the restoration of security links with Cuba, demonstrate that Russia is willing, once again, to challenge US hegemony in the Caribbean.
Iran, too, has joined the game.
It is working hard to strengthen ties to South and Central America, both diplomatically and through energy politics.
Now it may include a military component in its dealings with Ecuador.
And India and South Africa are forging embryonic and productive trade and political links, especially with Brazil.
Meanwhile, Europe has become the principal source of arms to Brazil and Chile, and some EU countries – notably France – are showing growing interest in the Argentine-Brazilian nuclear agreement of February 2008 and in deepening military contacts.
In 2005, the first South America-Arab summit was held in Brasilia, Brazil, while the first South America-Africa summit was held in 2006 in Abuja, Nigeria.
Even Japan is devoting more attention to the region.
Thus, both the political and diplomatic landscape across Latin America has been changing rapidly, which has placed the US on the defensive.
It is not just that several countries have seen center-left and radical parties come to power;
US leadership and interests are routinely questioned, and even challenged, not only by Communist Cuba and “Bolivarian” Venezuela, but almost everywhere in the region.
For example, Ecuador, despite its “dollarized” economy and dependence on oil exports to the US, is now curtailing the US military’s use of its Manta Base.
Nicaragua was the first country in the Western Hemisphere to recognize the independence of Abkhazia and South Ossetia following last summer’s Russian invasion of Georgia.
And President Manuel Zelaya of Honduras has called for the legalization of drug consumption as a means to end the violence related to its production and trafficking.
Even longtime friends have taken to poking Uncle Sam in the eye.
President Fernando Lugo of Paraguay (the first non-Colorado party head of state in six decades) named Alejandro Hamed Franco to the Foreign Ministry.
Of Syrian descent, Hamed Franco is an active supporter of Palestine who has been watched by US security agencies because of his alleged links to Islamist groups.
All of Latin America and the Caribbean are demanding an end to the US embargo of Cuba and are enthusiastic about that country’s return to the Organization of American States.
A specific cause of resentment nowadays is America’s unilateral decision to re-activate the US Navy’s Fourth Fleet, devoted to Latin America, which had been decommissioned in 1950.
The decision has never been properly explained to civilian authorities in Latin America and is widely perceived as an aggressive act.
Unsurprisingly, it has served only to generate fear and mounting anti-Americanism, accelerating a Brazilian proposal to create a South American Defense Board without US participation.
Given this widening regional hostility, and the disruption caused by a financial crisis that was made in America, governments across the region are keen to find new partners and markets as alternatives to the US.
The paradox is that a US in crisis now needs Latin America more than ever.
Latin America should seize this moment of diplomatic strength to start a new dialogue with the US aimed at renegotiating the terms of the relationship.
The first step must be recognition that the Monroe Doctrine is dead and cannot be revived. Accepting this will be the most encouraging sign that President Barack Obama’s new administration can give to the region.
The End of the Russia-China Debate
Ten years ago, comparing the reform processes in China and Russia was an intellectual fashion.
Was it preferable to start with economics – try and get rich, quick, but don’t rock the boat politically – in the manner of the Chinese?
Or was it better to start with politics – recover liberty and prosperity may follow – which seemed to be Russia’s path under Mikhail Gorbachev and Boris Yeltsin?
Today, a new comparative debate has started.
This time the subject is no longer Russia versus China, because Russia has long ceased to be a point of comparison.
Instead, the new comparative debate involves Asia’s two new economic, demographic, and political giants, China and India.
China’s annual economic growth has been roughly 8-9% for the last 26 years;
India has recorded similar rates for the last decade.
In the “flat world” of globalization – to borrow Thomas Friedman’s powerful metaphor – it seems that Russia no longer has a place.
Of course, Russia is still the second-largest nuclear power in the world, and, as one of the world’s leading exporters of oil and gas, it benefits from today’s high energy prices.
But Russia’s population is disappearing before our eyes.
With average male life expectancy just 57 years, the country is losing close to 800,000 people annually.
Indeed, Russia is more a fragile oil-producing state than a modernizing economic giant.
To put it bluntly, Russia is no longer in the same category as China.
Whereas the “Middle Kingdom” is proudly regaining its former global status after centuries of decline, Russia is defiantly trying to resurrect its former imperial status, but in a manner that appears doomed to fail.
Russia has clearly taken giant steps in the wrong direction, at a time when China has taken steps, however small, in the right direction.
When you meet today’s “new Russian Nomenklatura,” you experience a sudden feeling of being 20 years younger, awash as they are in nostalgia for Cold War posturing.
By contrast, seen from afar, in their new suits, you might think that Chinese economic elites are Japanese.
Where Russia represents a return to the past, one sees in China an opening, however ambiguous, to the future.
Of course, some bias is involved here.
As a European, I and people like me almost instinctively expect more from Russia.
It is, after all, a European nation in cultural, if not political terms, whereas progress in China will not be measured by the introduction of Western-style democracy, but eventually, one hopes, by Singapore-style rule of law.
The diverse paths followed by Russia and China may be explained in part by how the two peoples perceive themselves.
The Chinese are comforted in their self-image by the world’s combination of admiration for their dynamism, greed for the market they constitute, and apprehension for the competition they represent.
Russians, by contrast, seem to be animated by a dark form of narcissism. They do not find anything to be proud of in the eyes of others.
They are respected for what they control – the Soviet legacy of nuclear arms and “Christian energy resources,” to quote Vladimir Putin’s bizarre remark on his first official trip to Paris – but not for their economic performance or their essence.
China and Russia tend to relate to their respective pasts and futures in very different ways – with self-confidence in China’s case, with self-diffidence in the case of Russia.
Chinese elites are convinced that time is working in their favor, and that it is only natural that China should regain its rank amongst the world leading powers, perhaps even emerging on top one day.
Indeed, their serene patience stands in stark contrast to the anxious reticence of Russian leaders, who have yet to surmount the humiliation that Russia suffered as a result of the Soviet Union’s disintegration at the end of the Cold War.
Russia may be experiencing a global “restoration” phase, but in politics and economics, and also with respect to its empire, restoration is headed in the wrong direction.
With Putin’s current clampdown on civil society, re-nationalization of key segments of the economy, failure to develop any political approach to resolving the conflict in Chechnya, and cultivation of imperial nostalgia, Russia is killing its only chance to matter in the future.
Yet there is no reason for China to declare victory.
The gap between the respective qualities of China’s economic and scientific elites, on the one hand, and its ruling political elites, on the other, is simply too monumental – and still growing – for stability to be taken for granted.
One senses in China the birth pangs of civil society, making the introduction of the rule of law increasingly urgent.
Without political reforms, China’s confidence in herself will quickly turn into disillusion, or even delusion.
If that happens, the Russia-China debate might be revived, this time as a comparison of competitive decadence.
The End of the Special Relationship?
TEL AVIV – Israeli Prime Minister Benjamin Netanyahu’s recent visit to Washington highlighted fundamental disagreements between Israel’s current government and President Barack Obama’s administration.
Netanyahu persists in questioning Obama’s infatuation with the two-state solution to the Israeli-Palestinian conflict, and he refuses to see the link that Obama believes exists between an Israeli-Palestinian peace and his capacity to curtail Iran’s nuclear ambitions.
Nor is Netanyahu especially happy with Obama’s reluctance to set a firm deadline for talks with Iran.
Israelis believe that Iran is galloping into the nuclear club, and will shrewdly use the prospect of talks with the US to pre-empt tougher sanctions or a military strike.
Crises and profound disagreements are not new in the relations between these two unequal allies.
But, however fundamental the current differences might be, it is the underlying suspicion that Obama is poised to shift America away from its unique relationship with the Jewish state that most worries Israelis.
A convergence of interests and a profoundly emotional attitude to Israel’s story and to the Jewish narrative since the Holocaust have been the motive forces behind what is perhaps one of the most intriguing alliances in international relations.
In fact, there is no single, exclusive explanation for America’s persistent vindication of its commitment to Israel, and for the uniquely vigorous resonance that Israel’s cause has had in the United States.
American presidents since Harry Truman, the first world leader to recognize Israel in 1948 (against the advice of then Secretary of State General George C. Marshall), have embodied in varying degrees either the emotional or the realpolitik aspect – some represented both – of the relationship.
The suspicion today is that Barack Obama is committed to neither.
Obama is a revolutionary phenomenon in American history; he certainly does not fit the traditional pattern of American presidents after World War II.
He was far less shaped by religious and biblical teachings than all of them, and the narrative of Jewish history and of Israel’s heroic emergence out of the ashes of the Holocaust is not the primordial sentiment in his attitude toward the Arab-Israeli conflict.
The narrative of the Palestinian tragedy is certainly no less central in defining his view of the Middle East.
But even when US administrations have not embodied an emotional attachment to Israel, they have still backed Israel’s cause, provided that doing so can be sustained by considerations of realpolitik.
That was clearly the case with Richard Nixon, who never suffered from an excess of love for Jews, but was nonetheless one of the staunchest allies that Israel ever had in the White House.
Devoid of sentimental attachment to Israel’s cause and deeply disturbed by its policies in the occupied territories, Obama represents the specter of a White House where neither love nor interests are shared with the Jewish state.
The thrust of Obama’s Middle East policy – reconciling America with the Arab and Muslim world – clashes with Netanyahu’s strategy.
For Obama’s emerging policy assumes that the best way to address the challenge of Islamic terrorism and stop the region’s decline into uncontrolled nuclear proliferation is to force Israel to stop building new settlements, withdraw from the occupied territories in order to allow the creation of a Palestinian state with East Jerusalem as its capital, and make peace with Syria by giving back the Golan Heights.
But this does not necessarily mean that we are witnessing the end of the US-Israel “special relationship.”
Even a revolutionary president will not depart from America’s core commitments to an Israel that fights for reasonable and morally defensible positions.
So far, Obama has been careful not to depart from any of the traditional American positions pertaining to Israel’s security.
He has accepted the logic of Israel’s special nuclear status and its position as a major recipient of American military aid.
Moreover, the watchdog of Israel’s interests, the US Congress, remains vigilant.
Netanyahu knows that the daunting task of maintaining Israel’s relationship with the US is as much a vital strategic necessity as it is a compelling domestic requirement. There is bound to be more convergence down the road, when he decides to define Israel’s real, not ideological, red lines.
It is because Netanyahu is driven by an almost Messianic determination to prevent Iran from acquiring the means to destroy Israel, that he might be amenable to a fundamental change in his position on Palestine, provided Obama makes visible headway in his drive to stop Iran’s nuclear program.
In Netanyahu’s view, solving the Palestinian problem would not remove the Iranian challenge; rather, it is the neutralization of that existential threat that would pave the way to the creation of a Palestinian state.
Netanyahu also knows that the Arab side’s failures have nurtured radical Zionism.
As John Kerry, the Chairman of the US Senate’s Foreign Affairs Committee, put it, “this peace process is not a one way street” in which the onus is put exclusively on Israel.
It remains to be seen if the abysmally dysfunctional Arab world and the powerful non-state agents in its midst, such as Hamas and Hezbollah, will respond the way Obama expects.
More importantly, the Palestinian leadership must reshape and reunite its polity to face the challenge of statehood.
So far, the task of reconciling Hamas and Fatah seems to be no less daunting than that of striking a peace deal with Israel.
The End of the World as We Know It
CAMBRIDGE – Consider the following scenario. After a victory by the left-wing Syriza party, Greece’s new government announces that it wants to renegotiate the terms of its agreement with the International Monetary Fund and the European Union.
German Chancellor Angela Merkel sticks to her guns and says that Greece must abide by the existing conditions.
Fearing that a financial collapse is imminent, Greek depositors rush for the exit.
This time, the European Central Bank refuses to come to the rescue and Greek banks are starved of cash.
The Greek government institutes capital controls and is ultimately forced to issue drachmas in order to supply domestic liquidity.
With Greece out of the eurozone, all eyes turn to Spain.
Germany and others are at first adamant that they will do whatever it takes to prevent a similar bank run there.
The Spanish government announces additional fiscal cuts and structural reforms.
Bolstered by funds from the European Stability Mechanism, Spain remains financially afloat for several months.
But the Spanish economy continues to deteriorate and unemployment heads towards 30%.&nbsp;
Violent protests against Prime Minister Mariano Rajoy’s austerity measures lead him to call for a referendum.
His government fails to get the necessary support from voters and resigns, throwing the country into full-blown political chaos.
Merkel cuts off further support for Spain, saying that hard-working German taxpayers have already done enough.
A Spanish bank run, financial crash, and euro exit follow in short order.
In a hastily arranged mini-summit, Germany, Finland, Austria, and the Netherlands announce that they will not renounce the euro as their joint currency.
This only increases financial pressure on France, Italy, and the other members.
As the reality of the partial dissolution of the eurozone sinks in, the financial meltdown spreads from Europe to the United States and Asia.
Our scenario continues in China, where the leadership faces a crisis of its own.
The economy’s slowdown has already exacerbated social conflict, and recent developments in Europe have added fuel to the fire.
With European export orders canceled en masse, Chinese factories are faced with the prospect of massive layoffs.
Demonstrations begin in major cities, calling for an end to corruption among party officials.
China’s government decides that it cannot risk further strife and announces a package of measures to boost economic growth and prevent layoffs, including direct financial support for exporters and intervention in the currency markets to weaken the renminbi.
In the US, President Mitt Romney has just taken office, following a hard-fought campaign in which he derided Barack Obama for being too soft on China’s economic policies.
The combination of financial contagion from Europe, which has already led to a severe credit crunch, and a sudden flood of low-priced imports from China leaves the Romney administration in a bind.
Against the advice of his economic advisers, he announces across-the-board import duties on Chinese exports.
His Tea Party backers, who were critical in mobilizing electoral support for him, urge him to go further and withdraw from the World Trade Organization.
Over the next few years, the world economy slumps into what future historians will call the Second Great Depression.
Unemployment rises to record-high levels.
Governments without fiscal resources are left with little option but to respond in ways that will only exacerbate problems for other countries: trade protection and competitive exchange-rate depreciation.
As countries sink into economic autarky, repeated global economic summits yield few results beyond empty promises of cooperation.
Few countries are spared the economic carnage.
Those that do relatively well share three characteristics: low levels of public debt, limited dependence on exports or capital flows, and robust democratic institutions.
So Brazil and India are relative havens, even though their growth prospects are severely diminished as well.
As in the Great Depression, the political consequences are more serious and hold longer-term significance.
The eurozone’s collapse (and, for all practical purposes, that of the EU itself) forces a major realignment of European politics.
France and Germany compete openly as alternative centers of influence vis-à-vis the smaller European states.
Centrist parties pay the price for their support of the European integration project, and are repudiated in the polls by parties of the extreme right or extreme left.
Nativist governments begin to kick out immigrants.
For nearby countries, Europe no longer shines as a beacon of democracy. The Arab Middle East takes a decisive turn towards authoritarian Islamic states.
In Asia, economic strife between the US and China spills over into military conflict, with increasingly frequent naval clashes in the South China Sea threatening to erupt into a full-scale war.
Many years later, Merkel, who has withdrawn from politics and become a recluse, is asked whether she thinks that she should have done anything differently during the euro crisis.&nbsp;
Unfortunately, her answer comes too late to change the course of history.
A remote scenario?
Perhaps, but not remote enough.
The End of Treason (or the Beginning?)
To paraphrase a famous line from Tolstoy, those loyal to their country are faithful in the same way.
They fight in armies, pay their taxes, and vote in elections.
Among the disloyal, however, each becomes a traitor in his own way.
Take the American and German postwar experiences.
The US has not seen a treason prosecution since World War II, and Germany has, arguably, abolished treason in the traditional sense, retaining only a general crime of sedition designed to protect the government from overthrow by anti-democratic forces.
Now focus on the postcommunist states, where a new wave of treason trials seems about in the offing.
The prosecution in the Czech Republic of two 78 year old men (Milos Jakes, and Jozef Lenart), both veterans of the Soviet invasion of 1968, and the four-year-long trial in Vladivostok of Grigory Pasko, a Russian naval officer, suggest the earliest stages of a cycle where injured states respond to perceptions of betrayal with charges of treason.
Why does treason appear to be dying in some countries and coming alive in others?
Some history may help here.
As originally defined by Parliament in 14 th century England, the Anglo-American version of treason includes a whole range of acts that threatened the Crown.
To even think of murdering the King (then quaintly called ``compassing'') was punishable by death.
Counterfeiting and rape of the Queen (contaminating the blood line) were thrown into the statute to assure that the King's currency and his House were safe.
Levying war against the King was a primary charge of treason, but a catch limits the crime's scope.
To be a traitor you must first have a duty to be loyal.
The French have no such duty toward the English Crown.
Only the English do.
So, one requirement of treason, virtually everywhere, is that only citizens and permanent residents of a country can commit treason.
If you intentionally kill a foreigner, then you are guilty of murder.
But as a matter of definition, if you have no duty of loyalty to a foreign country, then you cannot commit treason against it.
The Americans who signed the Declaration of Independence, as British citizens, were all guilty of treason for levying war against King George III.
Understandably, when they won independence and escaped prosecution, they trimmed the 14 th century definition of treason.
Their anxieties about treason are recorded in America's Constitution, which limits the offense to levying war and to a famous phrase originating in the 14 th century statute: ``adhering to the enemy, giving them aid and comfort.''
Still, language of such breadth could accommodate virtually any action sympathetic to a foreign power, yet Americans are reluctant to invoke their catch-all criminal charge.
Witness the debate about whether or not to prosecute John Walker, the Californian who fought for the Taliban in Afghanistan.
He surely adhered to the enemy, giving much more than aid and comfort.
Yet Americans seem reluctant to brand him a traitor.
Perhaps he will be imprisoned for assisting terrorists, but his betrayal generates little resentment.
Secure states tend to forget about treason.
Insecure states are quicker to sense acts of betrayal.
The Soviets, with their fragile legitimacy, always feared betrayal.
They called their crime izmena rodine - betrayal of the motherland - and they married this high moral language to minor transgressions, such as leaving the country illegally.
Anyone who endangered the international security of the Soviet Union was deemed a traitor deserving death.
When a group of dissident Jews conspired in 1970 to highjack an airplane, they were charged with attempted treason.
Two of the organizers were sentenced to death.
(Worldwide protests induced the Soviets to modify the penalty).
When Anatoly Shcharansky allegedly gave sensitive material to an American journalist, he was convicted of treason.
Shcharansky's case helps us understand the recent story of Grigory Pasko, convicted after a four-year trial for allegedly providing information for a Japanese television report on the Russian army dumping nuclear waste at sea.
The Russians modified the Communist definition of treason, eliminating the death penalty and changing the name to ``governmental treason.''
But they retained the clause subjecting any Russian to charges of treason for creating risks to the international security of the state.
Security, as the Russians understand it, seems to be endangered when foreign journalists write articles that bring Russia's state into disrepute.
The story in the Czech Republic differs.
Jakes and Lenart may have sided with the Russian enemy in 1968, but it is not clear what the state gains by beating a dead regime with yet another trial.
Germany's experience with treason is rife with paradox but may point toward the future.
If you examine the statute in force today you will be struck by the apparent absence of the citizenship requirement.
Anyone - foreigners as well as Germans - can commit Hochverrat [high treason] by using force or the threat of force to undermine the Basic Law, the German constitution.
The temptation is to think that postwar Germans, sickened by the nationalism of the Nazi period, eliminated the duty of national allegiance.
But things are more complicated than that.
Hitler changed the law in 1934 in the megalomaniac belief that the whole world owed him a duty of loyalty.
Still, by substituting the Basic Law for the Fuehrer in the postwar amendment of the crime, contemporary Germans have in effect nullified the crime of treason.
Even though the label of treason is used, the offense now resembles the American concept of sedition and seeks to prevent a violent overthrow of the government.
From the English King, to the American republic, to the Russian motherland, to the German constitution, the object of required loyalty is constantly changing.
Perhaps the German model will win out and we will become duty-bound to revere not a leader or a patria but a set of democratic principles.
But fears of ``enemies within,'' such as Russia's Pasko, or the French, British, and other European Muslims who fought alongside the Taliban, are also gaining ground.
Treason is dead, or it might be just aborning.
The End of Want?
Quarter after quarter the macroeconomic news from the United States teaches the same lesson: real GDP growth at a sustained rate of 3% per year is not enough to increase America's employment level.
Not even real GDP growth at a sustained annual rate of 4% is sufficient to increase the share of American adults who have jobs.
The underlying rate of labor productivity growth in the US, which we pegged at 1.2% per year at the start of the Clinton administration and at 2% to 2.5% per year at the end of the 1990's boom, now seems even higher: it is getting harder and harder to keep the estimated labor productivity growth trend below 3% per year.
How long this boom in productivity growth will continue is anyone's guess: optimists point to the fact that waiting behind the information technology revolution, ready for takeoff, is the biotechnology revolution, and behind that is a looming nanotechnology revolution.
If such improvements in productivity do last, the vistas this will open are amazing: an America 50 years from now in which the average full-time worker earns not $40,000 a year, but the equivalent of today's $160,000 a year.
The US is at one pole of the world economy.
China - even with its economic miracle since Deng Xiaoping went on his Southern Expedition - is at the other.
But China's labor productivity is now growing at roughly 6% per year.
If that rate can be sustained - and if the Chinese economy becomes and remains integrated enough for us to be able to speak of it as a single entity - China's labor productivity will be comparable to today's America sometime before 2050.
And India?
If the growth rates of the past 15 years continue, and if India remains united, its labor productivity in 2050 will be comparable to that of Spain today.
Now the world of 2050 will not be a paradise.
There will still be some regions where failed states do not protect property, enforce the law, encourage commerce, educate their citizens, or construct the physical, social, and organizational infrastructure necessary for people to make use of the magical technologies we have developed since the start of the Industrial Revolution.
Similarly, there will still be wars, fought with ever more brutal and destructive weapons.
But we have good reason to hope that there will be fewer of them.
Next winter, it will be sixty years since an army crossed the Rhine River bringing death and destruction- the longest such period since at least the late second century B.C., when the Cimbri and Teutones challenged the army of the Roman Consul Gaius Marius in the Rhone Valley.
The world of 2050 will not have "solved the economic problem."
The economy is the realm of things that have value.
Things have value when they are both desirable and scarce.
We humans are very good at figuring out ways to make scarce things desirable.
But we do have an opportunity - and hence a duty - shared by no previous human generation: to make a world by 2050 in which nearly everyone has enough food to avoid hunger, enough clothing to keep warm, and enough shelter to remain dry - plus a super-broadband Internet connection.
The stakes in this round of humanity's poker game are huge.
The first step toward winning the jackpot is to shape global public opinion in support of creating a world without want - to make progress towards this goal is the touchstone of international relations today.
We no longer have large states driven by powerful, aggressive ideologies to remake the world in their own image by any means necessary.
The major sources and uses of power in the world today are softer, although not weaker.
As long as we can keep it this way, we humans have a good chance of achieving our most important collective task.
The Energy Deficit
MILAN – I have been surprised by the recent coverage in the American press of gasoline prices and politics.
Political pundits agree that presidential approval ratings are highly correlated with gas prices: when prices go up, a president’s poll ratings go down.
But, in view of America’s long history of neglect of energy security and resilience, the notion that Barack Obama’s administration is responsible for rising gas prices makes little sense.
Four decades have passed since the oil-price shocks of the 1970’s.
We learned a lot from that experience.
The short-run impact – as always occurs when oil prices rise quickly – was to reduce growth by reducing consumption of other goods, because oil consumption does not adjust as quickly as that of other goods and services.
But, given time, people can and do respond by lowering their consumption of oil.
They buy more fuel-efficient cars and appliances, insulate their homes, and sometimes even use public transportation.
The longer-run impact is thus different and much less negative.
The more energy-efficient one is, the lower one’s vulnerability to price volatility.
On the supply side, there is a similar difference between short-term and longer-run effects.
In the short term, supply may be able to respond to the extent that there is reserve capacity (there isn’t much now).
But the much larger, longer-run effect comes from increased oil exploration and extraction, owing to the incentive of higher prices.
All of this takes time, but, as it occurs, it mitigates the negative impact: the demand and supply curves shift in response to higher prices (or to anticipation of higher prices).
In terms of policy, there was a promising effort in the late 1970’s.
Fuel-efficiency standards for automobiles were legislated, and car producers implemented them.
In a more fragmented fashion, states established incentives for energy efficiency in residential and commercial buildings.
But then oil and gas prices (adjusted for inflation) entered a multi-decade period of decline.
Policies targeting energy efficiency and security largely lapsed.
Two generations came to think of declining oil prices as normal, which accounts for the current sense of entitlement, the outrage at rising prices, and the search for villains: politicians, oil-producing countries, and oil companies are all targets of scorn in public-opinion surveys.
A substantial failure of education about non-renewable natural resources lies in the background of current public sentiment.
And now, having underinvested in energy efficiency and security when the costs of doing so were lower, America is poorly positioned to face the prospect of rising real prices.
Energy policy has been “pro-cyclical” – the opposite of saving for a rainy day.
Given the upward pressure on prices implied by rising emerging-market demand and the global economy’s rapid increase in size, that day has arrived.
Counter-cyclicality is a useful mindset for individuals and governments.
Recent history, particularly the excessive accumulation of private and public debt, suggests that we have not acquired it.
Energy policy or its absence seems another clear example.
Rather than anticipating and preparing for change, the United States has waited for change to be forced upon it.
Energy-policy myopia has not been confined to the US.
Developing countries, for example, have operated for many years with fossil-fuel subsidies, which have come to be widely recognized as a bad way for governments to spend their limited resources.
Now these policies have to be reversed, which implies similar political challenges and costs.
Western Europe and Japan, both of which are almost entirely dependent on external supplies of oil and gas, have done somewhat better.
For security and environmental reasons, their energy efficiency increased via a combination of taxes, higher consumer prices, and public education.
The Obama administration is now working to initiate a sensible long-term approach to energy, with new fuel-efficiency standards for motor vehicles, investments in technology, energy-efficiency programs for dwellings, and environmentally sound exploration for additional resources.
Doing this in the midst of an arduous post-crisis deleveraging process, a stubbornly slow recovery, the process of building a new, more sustainable growth pattern, is harder – politically and economically – than it might otherwise have been, had the US started earlier.ampnbsp;
Still, better late than never.
Obama is correctly attempting to explain that effective energy policy, by its very nature, requires long-term goals and steady progress toward achieving them.
One frequently hears the assertion that democracies’ electoral cycles are poorly suited to implementing long-term, forward-looking policies.
The countervailing force is leadership that explains the benefits and costs of different options, and unites people around common goals and sensible approaches.
The Obama administration’s effort to put long-term growth and security above political advantage thus deserves admiration and respect.
If criticism of democratic governance on the grounds of its “inevitable short time horizon” were correct, it would be hard to explain how India, a populous, complex, and still-poor democracy, could sustain long-term investments and policies required to support rapid growth and development.
There, too, vision, leadership, and consensus-building have played a critical role.
The good news for US energy security is that in 2011, the country became a new net exporter of petroleum products.
The price of fossil fuels, however, is likely to continue to trend upward.
Declining dependence on external sources, properly pursued, is an important development.
But it is not a substitute for higher energy efficiency, which is essential to making the switch to a new and resilient path for economic growth and employment.
A side benefit would be to unlock a huge international agenda for energy, the environment, and sustainability, where American leadership is required.
This effort requires persistence and a long official attention span, which in turn presupposes bipartisan support.
Is that possible in America today?
The US political system’s persistently low approval ratings stem in part from the fact that it seems to reward obstructionism rather than constructive bipartisan action.
At some point, voters will react against a system that amplifies differences and suppresses shared goals, and policy formation will revert to its more effective pragmatic mode.
The question is when.
The Enigma of China\u0027s Economic \
The People's Republic of China is a country in precarious transition from one political/ economic system to another.
Monumental contradictions abound.
Indeed, probably no nation of global significance has more unresolved issues concerning its ruling principles and structures.
But what really makes forecasting China's future so difficult is not only that recent developments have so often defied prediction, but that virtually opposite, if logical, scenarios are plausible.
China emerged over the past decade and a half as a paradigm of economic energy, determination, and progress.
Few other areas in the world have been deemed an "economic miracle" for so long.
Through thick and thin, China has managed to maintain impressively high economic growth rates.
In 1989, China rose from the ashes of the Tiananmen Square Massacre.
In the early 1990's, it weathered the implosion of the Japanese economic miracle, and maintained a steady course through the Asian economic crisis later in the decade.
In 2003, it came through the SARS epidemic with banners flying.
Now it seems to have repelled US efforts to force it into revaluing its currency.
Anyone who has visited China's large cities over the past few years must be impressed by the energy, pace, and scale of development.
The sheer number of projects--from highways, ports, railroads, and airports to skyscrapers, housing developments, telecom infrastructure, and industrial parks--leaves even skeptics gasping in awe.
But behind the dazzling skylines and impressive statistics, another reality exists, one replete with unresolved problems and daunting numbers that suggests a far darker scenario.
Consider the following:
China must create some 12-15 million new jobs annually just to keep up with population growth;
The government must deal with an estimated 270 million unemployed or underemployed people;
A "floating population" (dispossessed rural workers who have moved to the cities to find work) of between 100-150 million is growing by almost 5% annually, representing the largest migration in human history.
These migrants exist with no job security, no long-term housing, and no health care;
800 million rural peasants have been largely left out of China's latest boom, creating rising, but frustrated, expectations;
China has no functioning pension system, and the cost of creating one is estimated in the hundreds of billions of dollars;
New stock markets are all too often little more than elite-manipulated casinos, leaving China without the capacity to form the kind of indigenous pools of investment capital needed to power its own development;
State banks must provide 98% of all financing for local companies.
But, having been used to keep state-owned enterprises afloat for too long, the banks are essentially insolvent.
Standard and Poor's estimates that it would cost around $518 billion (40% of GDP) to clean up their non-performing loans.
Environmental degradation from rapid industrialization, overpopulation, and uncontrolled resource exploitation is extreme and, given the pressure to maintain high growth rates, very difficult to remedy;
Since 1998, the Chinese government has become increasingly reliant on ever larger bond issues for fiscal stimulus, pushing debt onto the next generation;
Estimates of the government's growing aggregate liabilities (bank debt, un-funded pension plans, bonded indebtedness for infrastructural projects, etc.) range from 70% to over 150% of GDP.
The government's ability to collect tax revenue remains weak, yielding less than the equivalent of 15% of GDP.
Fears of an investment bubble caused by uncontrolled, indiscriminate, and excessively exuberant investment and growth have led many experts to worry about a meltdown akin to that experienced by Silicon Valley in the late 1990's.
These fears are compounded by the fact that China's Leninist one-party government, now almost completely dependent on its "economic miracle" for legitimacy, has shown few signs of implementing political reforms to complement economic reform.
So China's entire system is in a state of perilously balanced transition.
And since every economy is cyclical in nature, even some of China's most ardent boosters are left to wonder what resources the Party and government will have to draw on, should growth rates drop, even to a respectable 3-4%.
What would the government rely on for legitimacy if unemployed workers begin agitating; if angry peasants begin to besiege local government office in large numbers; if factionalism incites a crisis in leadership; conflict erupts in the Taiwan Straits; or the global economy remains sluggish?
China may have seemed a "miracle" over the past decade.
But good economic times rarely test a political system.
The real test is a political system's ability to survive the inevitable cyclical downturns, political shocks or social upheavals that almost inevitably challenge a country, particularly developing ones.
Economists and political observers who are skeptical about the durability of China's "economic miracle"--and there are many of them--point to the country's sclerotic political system, its precarious economic institutions, the hazardous balance of hundreds of millions of marginal Chinese, and the economy's reliance on outside capital.
They are right to wonder whether the "miracle" can continue to survive the kind of shocks that have rocked almost every other part of Asia to its foundations at one time or another over the last decade.
China has weathered much, but its big test has yet to come.
The Entrepreneurial University
by Henry Etzkowitz By Henry Etzkowitz
Universities have long played an essential role in economic development, providing the skills, training, ideas, and basic research that all countries need to ensure progress and growth.
But how directly should an academic institution involve itself in for-profit activities?
If it establishes its own businesses, or supports those founded by its members, does the university risk undermining its traditional independence and commitment to open intellectual exchange?
During the past two decades, academic research in an increasing number of countries has become a profit-seeking enterprise.
According to the Association of University Technology Managers, at least 300 new companies based on inventions at US universities were formed in 2000.
What began as a unique American model in 1980, when the US Congress turned over to universities intangible intellectual property arising from federally supported academic research, has spread to such diverse countries as the United Kingdom, Sweden, and Zambia.
Inevitably, profit-oriented academic science has become an increasingly guided process, assisted by university technology-transfer offices, entrepreneurship centers, and incubator facilities.
Typically, faculty members establish private firms, often with students and support staff, while retaining their academic positions, and university administrations invest in legally independent incubator companies, usually in molecular biology, computer science, combinatorial chemistry, and other fields.
Asserting proprietary rights over academic research, opponents charge, amounts to a conflict of interest, very similar to that of a public official who uses her office for private gain, or an attorney who represents clients on both sides of a legal case.
According to this argument, academic scientists should either publish their research openly or leave the university before pursuing commercial interests.
Similarly, the universities that employ them should leave product development to existing companies.
But it is useful to recall that the university has been accused of subverting its own ideals and social role since time immemorial, yet what in the past initially looked to many like a conflict of interest often later came to be viewed as a confluence of purposes.
For example, during the late 19 th century, as US universities began to place research at the heart of the academic mission, they were accused of forsaking their traditional pedagogical role.
Many professors argued that the demands of research would render their teaching obligations impossible to fulfill.
Of course, a major reason for this broadening of the university's role was its cost effectiveness: combining research and teaching was far less expensive than maintaining separate institutions for each purpose, as became commonplace in Europe.
Nevertheless, although some still lament the emphasis that universities now place on research, proponents of expanding the university's mission have for the most part been vindicated on pedagogical grounds.
The knowledge generated by faculty members' research infuses their teaching with relevance and vitality.
Opposition to universities' new entrepreneurial role is likely to undergo a similar evolution.
For, as in the past, accusations of an inherent conflict of interest are symptomatic of a profound change in the academic mission.
This is not to say that such conflicts do not exist and will never appear; rather, they are likely to become manageable as universities and faculty members learn how to pursue basic research in tandem with the capitalization of knowledge.
As this occurs, attitudes will once again be modified and opposition will dissipate.
In fact, insistence on maintaining the traditional division of labor between public science and private-sector research is already futile.
Academic and entrepreneurial activities increasingly occur along a continuum, and there can be no turning back.
Instead, universities are learning to balance their academic and business roles in the increasingly brief interval between discovery and commercialization of research findings.
Once academic research is defined as a marketable good and treated as intellectual property, the traditional forms of dissemination, such as publication in academic journals and presentations at conferences, continue, although a new set of conditions applies, with ``limited secrecy'' delaying publication to allow time for patenting.
But even in these cases, if universities take a strong stand for openness, companies usually agree, and technology-transfer offices have dramatically reduced the time needed to file an intention to patent.
Moreover, the academic technology-transfer process often works in favor of scientific openness.
After all, having a paper published in a major journal can help a company seeking funds to support product development and boost the value of its stock.
Licensing, joint ventures, and the marketing of products that result from research offer additional avenues for wide dissemination of new knowledge, above and beyond publication.
The typical entrepreneurial university will contain, or be surrounded by, a penumbra of firms that originated from academic research, perhaps even sharing infrastructure.
Courses may include private-sector internships, and firms may use academic resources such as libraries and computing facilities.
This type of cross-utilization has proceeded farthest in newer industries, such as biotechnology, which already offer post-doctoral positions that approximate conditions in universities.
As the university immerses itself more deeply in a wider range of commercial activities, new institutional relationships will almost certainly emerge--often with the encouragement and support of government.
These changes remain largely incipient, and their ultimate impact on the university as we now know it is impossible to foresee.
But the sooner we adapt to the new academic mission that has already begun re-defining the university, the better we will be able to isolate and minimize the risks identified by its critics.
The Environmental Bullying of New Europe
RIGA &#45;&#45; Instead of helping all EU member states to meet their own Kyoto goals, the European Commission is shifting what should be a shared burden onto its newest members, which are already the most environmentally efficient in the European Union.
In doing so, the Commission is rewarding inefficiency and reducing the effectiveness of its commitments to clean up the environment.
The Commission’s decision on Latvia’s National Allocation Plan (NAP) for 2008-2012 left only 55% of the CO2 emissions that Latvia requested.
Similarly, Estonia and Lithuania received only 52-53% of their requested quotas.
Serious cuts were also made to other new EU members’ quotas, prompting Poland, the Czech Republic, and Slovakia, as well as Latvia, to launch legal challenges.
Yet almost all of the old EU members received more than 90% of the requested quotas.
What is going on here?
The Commission’s approach is misguided.
According to its own information, the aim of the European Union Emissions Trading Scheme (EU-ETS) is to help countries meet their 2010 Kyoto targets by using market instruments to encourage companies to reduce their CO2 emissions.
Logically, quotas should be linked to each member’s progress in complying with the Kyoto Protocol.
New EU member states are meeting their individual Kyoto commitments.
Most are committed to reducing emissions by 8% by 2010.
Latvia is already projected to lower its emissions by 46% by that date, even without implementing any additional CO2 reduction policies.
Indeed, the new EU members are projected to reduce their greenhouse gas emissions by at least 21% by 2010.
Old EU members also have a collective Kyoto target of lowering their CO2 emissions by 8% by 2010, but they are projected to achieve a mere 4.6% reduction.
Despite this, countries such as Belgium and the Netherlands, which are not expected to meet their Kyoto commitments, are being allowed to increase their emissions.
It is imperative that the European Commission distributes all burdens evenly and fairly among the EU’s 27 members.
Most new members have met or are approaching their Kyoto targets, and they need rapid economic growth to catch up with the rest of the EU.
But their ability to grow is being impaired because they lack the resources to confront the massive business lobbies of the EU’s most developed and richest countries.
Making the Union’s newest members carry a disproportionate share of the burden of reducing the EU’s total amount of pollution is both unjust and foolish.
Latvia’s example is the most acute.
After regaining its independence from the Soviet Union, only remnants of the industrial behemoths of the communist era remained.
As trade links with the former Soviet world collapsed, most of these giant firms collapsed.
Starting almost from an economic “point zero,” Latvian entrepreneurs have built a new and modern economy, based on new and efficient technologies.
As a result, Latvia has the lowest per capita greenhouse gas emissions in the EU.
But, despite being the EU’s third poorest country, the European Commission’s rulings mean that it must purchase emission quotas from richer and more polluting EU members that have done little to meet their Kyoto commitments.
This unbalanced approach is jeopardizing the economic development of Latvia and other vulnerable new member states, while old members enjoy a free ride.
In small economies such as Latvia and many of the other new member states, even one large project is important for the whole country’s progress.
The Commission’s decision to cut their CO2 emissions quotas may lead investors in desperately needed development projects to move outside of the EU, to countries with weaker environmental regulations, where their activities would contribute to higher global emissions.
Additional emissions would occur when the goods are transported back to the EU.
As if this weren’t bad enough, the Commission is preparing an emission-trading scheme for EU airlines, with 2004 as the base year for setting quotas.
This is a clear disadvantage for airlines from the new EU members, as the number of passengers they carry increased sharply only after 2004, when these countries joined the EU.
A recent decision to increase the share of energy from renewable sources to 20% by 2020 will also cause problems.
Latvia, for example, already generates 37% of its energy from renewable sources, but will now likely be slapped with a target of around 50%, while some other members will have targets below 10%.
Why are Latvia’s people, among the poorest in the Union, expected to pay for something that Europe’s richest people are finding difficult to do?
Latvia and other new EU members have little recourse but to challenge the European Commission in court.
But suits and countersuits are not how we imagined the EU working when we struggled to join it.
We thought that Europe believed in sharing its burdens equitably.
Unfortunately, when it comes to the environment, Europe’s have-nots are being told to carry the load by themselves.
The Environmental Effect of Tsunamis
Reports about the tsunamis that devastated Southeast Asia barely a month ago have understandably been dominated by tales of death, suffering, and the physical destruction of infrastructure.
But man was not alone in feeling the impact.
Ecosystems and other species were also hit.
To be sure, photographic and video images relayed by the media have shown trees swept away by waves and water-drenched lands.
Other reports have mentioned wildlife that escaped the destruction, as some sort of instinct seemed to tell them to seek higher ground prior to the arrival of the tsunami waves.
And yet the full scope of the tsunamis’ environmental impact remains under-reported, despite its obvious importance for the recovery of the affected areas and the well being of the survivors.
Experience from previous tsunamis and other major floods suggests that the environmental damage they inflict is linked to saltwater intrusion in ground water and to the disappearance or relocation of beaches.
Tsunamis may make small, low islands uninhabitable.
Vegetation in large stretches of lowland can be hurt substantially as saltwater-tolerant mangroves and grasses take over from other species.
For rare animals with specific reproduction sites, like marine turtles, the tsunami’s effects could spell extinction.
But whereas the damage to the environment on land can be seen, the ravages imposed on the marine environment are hidden.
Obviously, when extremely strong waves hit coral reefs, some coral breaks off.
But this is a comparatively small problem.
The surface of coral is highly sensitive, and will now be exposed to major damage from all sorts of silt and debris carried back by water receding from flooded land.
At the same time, the material brought back from land to sea include nutrients and trace elements that cause a boom among plankton, which in turn feed other marine biota.
Locally, but sometimes still at a grand scale, the shock waves cause major sediment slides on steep underwater slopes such as those of the continental shelves.
Closer to the shore, many natural ecosystems, most notably coral reefs and mangroves, act as natural shock absorbers and wave breakers.
During the past several decades, these ecosystems have been damaged and reduced in most countries along the Indian Ocean.
Indeed, the damage from the tsunami waves was far more devastating than it would have been had they still been intact.
Wildlife may fare better than the physical environment.
This is particularly true of fish stocks, owing to large-scale destruction to fisheries.
More than 13,000 fishermen were killed and another 5,000 evacuated in Sri Lanka alone, with 80% of the fishing fleet lost or severely damaged.
On the Thai coast, according to the UN Food and Agriculture Organization, 4,500 fishing vessels were smashed, jeopardizing the livelihoods of 120,000 people in fishing villages there.
The situation on Sumatra is similarly grim, and it is perhaps even worse in the Maldives, Laccadives, Andamans, and Nikobar islands, where not only fishermen and boats were lost, but harbours were ruined.
Along the coast of the Indian states of Andhra Pradesh and Tamil Nadu, some 30% of the fishery capacity was lost.
Mozambique, Somalia, and Tanzania on the African side of the Indian Ocean have also reported severe damage to their fishing.
Such major losses in fishing capacity, with their far-reaching negative socio-economic consequences on the human populations affected, are bound to have major, mostly favourable, effects on the fish stocks.
The reason is simple: with most fish populations nowadays hit hard by over-fishing, fewer fishermen will mean more fish.
Another factor that will help fish stocks is a religiously motivated hesitation by the public in some areas to eat marine fish, as they are perceived to have fed on human corpses washed to sea.
It may seem cruel or cold-hearted to focus on such environmental outcomes in the wake of vast human loss and suffering.
But as the world attempts to mount a civilized response to Southeast Asia’s human tragedy, it must also confront the humbling amorality of nature, and thus comprehend the environmental effects that will shape the lives of survivors and their descendants.
The Environmental Effects of the Iraq War
Aside from the infrastructure damage and civilian suffering and death implied by the cynical term "collateral damage," all wars have environmental effects.
The extent of environmental damage depends on a war's duration, the weapons used, and the type of terrain and ecosystems in which it takes place.
Now that the main combat in the Iraq war is over, the final environmental toll of the fighting can be uncovered through comprehensive on-the-ground analyses and the release of previously privileged information.
Neither of these steps has yet occurred, but, based on my experiences in 1991, when I led a UN team studying the environmental effects of the first Persian Gulf war, several initial observations are possible.
Some reports described the sandstorms in south central Iraq in the first week of the war as "sent by Allah against the aggressors."
In fact, US and British troops may have only themselves to blame.
Increased sand drift was one of the effects noted during and after the first Gulf war.
This is because the desert in the region normally has a crust, what Arabs call "the desert skin," consisting of sand and clay particles that have been baked together, or sintered, by the heat and sun.
Sometimes this crust is strong enough to carry a person and sometimes not, much like the hard ice crust that develops on snow in colder climates.
Under the crust, the sand particles are loose.
Crushed by the bands and wheels of military vehicles, explosions of bombs and mines, and digging of trenches and walls, the desert's crust is broken and the fine sand particles beneath it are exposed to the wind.
In the first Gulf war, this resulted in "rolling" sand dunes, sometimes ten meters high and several kilometers long, that covered roads and buildings.
Finer particles became airborne and caused environmental and health problems across northeastern Saudi Arabia, Kuwait, and southwestern Iraq.
It took between five and ten years for this effect to abate.
The unusual intensity of the sandstorms in Iraq is most likely the result of the same process.
But the consequences of the increased mobility of sand are likely to be far worse than they were in Kuwait, where in the absence of significant agriculture and forests, the impact was mainly on technical systems and infrastructure.
In Iraq, a large agricultural sector operates on fairly marginal lands, where farmers fight a constant battle against salt intrusion and face severe water shortages.
Drifting sand may frequently tip the balance to unsustainability, threatening the livelihoods of entire districts.
Another serious problem is the use of ozone-depleting substances, such as halons and freons.
Halogenated fire retardants are added to the fuel tanks of combat airplanes, causing massive damage to the stratospheric ozone layer.
Some 60-80,000 combat missions were reportedly been flown in the Iraq war, releasing an estimated 2,000 tons of ozone-destroying halons.
Stealth bombers and fighters, meanwhile, use freon fuel additives to reduce the number of exhaust particles that could otherwise be detected by enemy sensors.
Following international agreements such as the Montreal Protocol on the Protection of the Ozone Layer, global emissions of ozone-depleting substances have otherwise been substantially reduced.
The Iraq war emissions may therefore reach the equivalent of three months of normal global civilian release.
Burning oil fields were a vivid image--and a major part--of the environmental damage caused by the first Gulf war.
The six or seven Iraqi fields currently ablaze are a pittance compared to the six hundred that burned in Kuwait.
The smoke over Baghdad came mostly from oil deliberately burned in ditches and trenches to obscure potential targets from air attack.
Those emissions were insignificant from a global or regional point of view, but oil-drenched particles will likely have adverse health effects for local inhabitants and combatants.
Such effects could be reinforced by the addition of metals to the oil in order to confuse bombs' guidance systems.
During the war in Kuwait, the Iraqis pumped massive amounts of oil into the Persian Gulf, resulting in the world's largest-ever oil spill--some fifty times the amount released from the tanker "Prestige" off the Spanish coast last fall.
Nothing similar happened this time.
Similarly, large-scale bombings of Iraqi industry, power plants, and infrastructure in 1991 resulted in substantial chemical spills into the Tigris and Euphrates rivers. Nothing on a similar scale has been reported in this war.
In the first Gulf war it was also found that the Iraqis' Soviet-built tanks and artillery had PCBs (poly-chlorinated biphenyls) in their hydraulic systems for the same reason that combat airplanes use halons.
When destroyed, such as on the road north from Kuwait City, the PCBs leaked into the ground.
The extent of destruction of Iraqi tanks during this war is not yet public information, but the same ground pollution can be expected.
Finally, most of the ammunition used in wars consists of nitrogen compounds.
Whether they explode or not, these compounds are hardly benign environmentally, posing risks for both ecosystems and human health.
These initial considerations cover only a small range of the conceivable environmental effects of the Iraq war.
Destroyed water and wastewater treatment facilities, use of depleted uranium in anti-tank missiles, and ground water contamination may well lead to a host of other problems.
For now, limited information makes any accurate assessment impossible.
However, whichever administration governs Iraq in the future must be prepared to face up to an environmental debt--the cost of restoring what can be restored--that will be a substantial liability for years to come.
The Environment Fights Back
Our political systems and global politics are largely unequipped for the real challenges of today’s world.
Global economic growth and rising populations are putting unprecedented stresses on the physical environment, and these stresses in turn are causing unprecedented challenges for our societies.
Yet politicians are largely ignorant of these trends.
Governments are not organized to meet them.
And crises that are fundamentally ecological in nature are managed by outdated strategies of war and diplomacy.
Consider, for example, the situation in Darfur, Sudan. This horrible conflict is being addressed through threats of military force, sanctions, and generally the language of war and peacekeeping.
Yet the undoubted origin of the conflict is the region’s extreme poverty, which was made disastrously worse in the 1980’s by a drought that has essentially lasted until today.
It appears that long-term climate change is leading to lower rainfall not only in Sudan, but also in much of Africa just south of the Sahara Desert – an area where life depends on the rains, and where drought means death.
Darfur has been caught in a drought-induced death trap, but nobody has seen fit to approach the Darfur crisis from the perspective of long-term development rather than the perspective of war.
Darfur needs a water strategy more than a military strategy.
Its seven million people cannot survive without a new approach that gives them a chance to grow crops and water their animals.
Yet all of the talk at the United Nations is about sanctions and armies, with no path to peace in sight.
Water stress is becoming a major obstacle to economic development in many parts of the world.
The water crisis in Gaza is a cause of disease and suffering among Palestinians, and is a major source of underlying tensions between Palestine and Israel.
Yet again, billions of dollars are spent on bombing and destruction in the region, while virtually nothing is done about the growing water crisis.
China and India, too, will face growing water crises in the coming years, with potentially horrendous consequences.
The economic takeoff of these two giants started 40 years ago with the introduction of higher agricultural output and an end to famines.
Yet part of that increased agricultural output resulted from millions of wells that were sunk to tap underground water supplies for irrigation.
Now the water table is falling at a dangerous pace, as the underground water is being pumped much faster than the rains are recharging it.
Moreover, aside from rainfall patterns, climate change is upsetting the flow of rivers, as glaciers, which provide a huge amount of water for irrigation and household use, are rapidly receding due to global warming.
Snow pack in the mountains is melting earlier in the season, so that river water is less available during summer growing seasons.
For all of these reasons, India and China are experiencing serious water crises that are likely to intensify in the future.
The United States faces risks as well.
Midwestern and southwestern states have been in a prolonged drought that might well be the result of long-term warming, and the farm states rely heavily on water from a huge underground reservoir that is being depleted by over-pumping.
Just as pressures on oil and gas supplies have driven up energy prices, environmental stresses may now push up food and water prices in many parts of the world.
Given the heat waves, droughts, and other climate stresses across the US, Europe, Australia, and elsewhere this year, wheat prices are now shooting up to their highest levels in decades.
Thus, environmental pressures are now hitting the bottom line – affecting incomes and livelihoods around the world.
With rising populations, economic growth, and climate change, we will face intensifying droughts, hurricanes and typhoons, powerful El Niño’s, water stress, heat waves, species extinctions, and more.
The “soft” issues of environment and climate will become the hard and strategic issues of the twenty-first century.
Yet there is almost no recognition of this basic truth in our governments or our global politics.
People who speak about hunger and environmental crises are viewed as muddle-headed “moralists,” as opposed to the hard-headed “realists” who deal with war and peace.
This is nonsense.
The so-called realists just don’t understand the sources of tensions and stresses that are leading to a growing number of crises around the world.
Our governments should all establish Ministries of Sustainable Development, devoted full-time to managing the linkages between environmental change and human well-being.
Agriculture ministers by themselves will not be able to cope with water shortages that farmers will face.
Health ministers will not be able to cope with an increase in infectious diseases due to global warming.
Environment ministers will not be able to cope with the pressures on oceans and forests, or the consequences of increasing extreme weather events like last year’s Hurricane Katrina or this year’s Typhoon Saomai – China’s worst in many decades.
A new powerful ministry should be charged with coordinating the responses to climate change, water stress, and other ecosystem crises.
At the global level, the world’s governments should finally understand that the treaties that they have all signed in recent years on climate, environment, and biodiversity are at least as important to global security as all of the war zones and crisis hotspots that grab the headlines, budgets, and attention.
By focusing on the underlying challenges of sustainable development, our governments could more easily end the current crises (as in Darfur) and head off many more crises in the future.
The Environment of the Economy
No economy is a closed, autonomous universe, governed by rules independent from law, morals, and politics.
Indeed, the most interesting economic questions are generally located on the borderline with neighboring disciplines.
But nowhere is this clearer than in the interaction between economic processes and the natural environment.
The distinctive feature of this exchange is that it is governed not by the laws of mechanics, but by thermodynamics, particularly the law of entropy, according to which the quantity of free energy that can be transformed into mechanical work diminishes with time – an irreversible process culminating in “heat death.”
Numerous researchers, inspired by the late Nicholas Georgescu-Roegen’s pioneering work on the relationship between economic processes and physics, tried – not very successfully – to formulate an “entropic” theory of economy and society, especially during the 1970’s.
The entropic view assumes that economic processes produce irreversible consequences because of their multiple interactions with nature.
We draw from stocks of non-renewable natural resources (for example, oil and metal ores), and we deteriorate or modify the quality of other resources (for example, water and arable land) by imposing on them a rhythm of exploitation superior to their capacity for regeneration.
In fact, the exploitation of non-renewable resources frees the speed of economic growth from that of ecological renewal, aggravating the deterioration of the biosphere, including irreversible climate changes.
The law of entropy reminds us that we will leave to future generations a degraded natural patrimony, probably less adequate to their needs than what we inherited.
Unfortunately, there are no simple answers.
For the sake of what principle can we ask China and India, for example, to limit their economic dynamism so that they use smaller amounts of the planet’s natural resources?
After all, the advanced countries’ slower growth is not the consequence of voluntary self-limitation, but of our superior standard of living – and of our incapacity to settle our own economic imbalances.
We cannot impose an ecological rhythm on people who are poorer than we are when it is the very fact that we freed ourselves from that rhythm that made us richer.
Economic contraction, or even stagnation, is not a solution for the developed countries, either, for a similar reason: it would imply that we either accept existing inequalities or impose a regime aiming at an equal redistribution of resources.
That choice boils down to an unbearable cynicism or a totalitarian utopia.
But, happily for us, our evolution is determined not only by entropy, but also by the accumulation of knowledge and technological progress – a process that is just as irreversible as the decrease in stocks of non-renewable resources and the degradation of environmental quality.
Thus, the economy is entropic for resources and historical for the production, organization, and spread of knowledge, with the prospects for economic and environmental sustainability residing in the space left between those two dynamic processes: the level of growth we choose must be conditioned on a sufficient level of knowledge to ensure the system’s survival.
Yet nature, like knowledge, is a public good that needs state intervention to be “produced” in sufficient quantities.
The only way to overcome the finiteness of our world is to maintain as much space as possible between entropy and history by investing in education and research aimed at increasing renewable energies, reducing the energy intensity of our standards of living, and slowing the pace of environmental erosion.
It is widely believed that such a strategy would be useless if the only effect is to allow others to get rich faster by opting out.
But if that strategy is conceived as mastering two dynamic processes, overcoming the ecological constraint could be an accelerator of growth.
The Error of the War on Terror
Israel’s failure to subdue Hezbollah demonstrates the many weaknesses of the war-on-terror concept.
One weakness is that even if the targets are terrorists, the victims are often innocent civilians, and their suffering reinforces the terrorist cause.
In response to Hezbollah’s attacks, Israel was justified in attacking Hezbollah to protect itself against the threat of missiles on its border.
However, Israel should have taken greater care to minimize collateral damage.
The civilian casualties and material damage inflicted on Lebanon inflamed Muslims and world opinion against Israel and converted Hezbollah from aggressors to heroes of resistance.
Weakening Lebanon has also made it more difficult to rein in Hezbollah.
Another weakness of the war-on-terror concept is that it relies on military action and rules out political approaches.
Israel withdrew from Lebanon and then from Gaza unilaterally, rather than negotiating political settlements with the Lebanese government and the Palestinian authority.
The strengthening of Hezbollah and Hamas was a direct consequence of that approach.
The war-on-terror concept stands in the way of recognizing this fact because it separates “us” from “them” and denies that our actions may shape their behavior.
A third weakness is that the war-on-terror concept lumps together different political movements that use terrorist tactics.
It fails to distinguish between Hamas, Hezbollah, al Qaeda or the Sunni insurrection and the Mahdi militia in Iraq.
Yet all these terrorist manifestations are different and require different responses.
Neither Hamas nor Hezbollah can be treated merely as targets in the war on terror because they have deep roots in their societies; yet profound differences exist between them.
Looking back it is easy to see where Israeli policy went wrong.
When Mahmoud Abbas was elected president of the Palestinian Authority, Israel should have gone out of its way to strengthen him and his reformist team.
When Israel withdrew from Gaza the former head of the World Bank, James Wolfensohn, negotiated a six-point plan on behalf of the Quartet for the Middle East (Russia, the United States, the European Union and the United Nations).
It included opening crossings between Gaza and the West Bank, an airport and seaport in Gaza, opening the border with Egypt, and transferring the greenhouses abandoned by Israeli settlers into Arab hands.
None of the six points was implemented.
This contributed to Hamas’s electoral victory.
The Bush administration, having pushed Israel to allow the Palestinians to hold elections, then backed Israel’s refusal to deal with a Hamas government.
The effect was to impose further hardship on the Palestinians.
Nevertheless, Abbas was able to forge an agreement with the political arm of Hamas for the formation of a unity government.
It was to foil this agreement that the military branch of Hamas, run from Damascus, engaged in the provocation that brought a heavy handed response from Israel—which in turn incited Hezbollah to further provocation, opening a second front.
That is how extremists play off against each other to destroy any chance of political progress.
Israel has been a participant in this game and President Bush bought into this flawed policy, uncritically supporting Israel.
Events have shown that this policy leads to an escalation of violence.
The process has advanced to the point where Israel’s unquestioned military superiority is no longer sufficient to overcome the negative consequences of its policy.
Israel is now more endangered in its existence than it was at the time of the Oslo Agreement.
Similarly, the US has become less safe since President Bush declared war on terror.
The time has come to realize that today’s policies are counterproductive.
There will be no end to the vicious circle of escalating violence without a political settlement of the Palestine question.
In fact, the prospects for engaging in negotiations are better now than they were a few months ago.
Israelis must realize that a military deterrent is not sufficient on its own.
And Arabs, having redeemed themselves on the battlefield, may be more willing to entertain a compromise.
Strong voices argue that Israel must never negotiate from a position of weakness.
They are wrong.
Israel’s position is liable to become weaker the longer it persists on its present course.
Similarly Hezbollah, having tasted the sense but not the reality of victory (and egged on by Syria and Iran) may prove recalcitrant.
But that is where the difference between Hezbollah and Hamas comes into play.
The people of Palestine yearn for peace and relief from suffering.
The political--as distinct from the military-- wing of Hamas must be responsive to their desires.
It is not too late for Israel to encourage and deal with an Abbas led Palestinian unity government as the first step toward a better balanced approach.
Given how strong the U.S.-Israeli relationship is, it would help Israel achieve its own legitimate aims if the U.S. government were not blinded by the war-on-terror concept.
The Essence of Putin
MOSCOW – Few people, least of all Vladimir Putin, who plans to return to Russia’s presidency on March 4, could have imagined last December that Russians would, for the first time in 20 years, wake up and rally in their tens of thousands against the government.
Unlike the Arab Spring rebellions, the driving force behind the ongoing protests is not Russia’s poor and disadvantaged, but rather the country’s rising urban middle class.
That is an important difference, for, historically, successful democratic transitions have almost always required a politically mobilized middle class.
Well-educated and successful, middle-class Russians have taken to the streets to gain respect from a Kremlin hierarchy that is mired in deceit and corruption.
The last straw was the blatant falsification of December’s parliamentary elections, which reinforced citizens’ sense that the regime regards them with contempt.
Russians are particularly outraged by Putin’s arrogant treatment of the presidency as an office that can be “loaned” to allies – like the current incumbent, Dmitri Medvedev – and reclaimed whenever he wishes.
But, despite the large protests in Moscow, Saint Petersburg, and other cities, the authorities rejected demonstrators’ demands to nullify the election results.
Indeed, it is becoming increasingly clear that, by hook or by crook, Putin will spend six more years as Russia’s ruler.
What will another Putin presidency mean for Russia?
Securely fenced off from real political competition, Putin cannot return to the Kremlin as “the president of hope,” as he styled himself in 2000, at the beginning of his first term.
Moreover, he no longer resembles Putin the “national leader,” who, in his second term, reinvigorated the state and presided over an economic boom.
So who can Putin III be?
How will he use the enormous powers granted the Russian president in a political system that lacks any real checks and balances?
Putin’s pre-election monologues and articles suggest an ominous answer: his presidency will be based on a genuine misunderstanding of the structure of contemporary international relations, markets, and democracy, and will be driven by his uncontrollable messianism.
Calls for liberalism coexist with statist dogma, and bloviating populism trumps regard for complexity and hard choices.
In fact, Putin has nothing to offer Russians aside from his own vulgar, hackneyed rhetoric.
He no longer understands the problems facing the country, and therefore has no idea what needs to be done.
Nor does he have any anxiety about the damage that his misrule portends for Russia’s future.
Putin’s third presidency will be a reign of instinct and appetite, rather than a government of reason and restraint.
Of course, Putin will begin his new term with earnest words about renewal, development, democratization, and the scourge of corruption.
He might even offer some symbolic gestures, such as dissociating himself from objectionable political and media figures, or showing leniency towards those he has imprisoned for opposing him.
But all of this would be aimed at maintaining political power, rather than reforming it.
Indeed, the Kremlin has produced much lofty talk of freedom and modernization in recent years.
But, without the political will to implement the necessary changes, such promises are destined to remain just that.
The problem is that the principle of free and fair competition that characterizes the developed world is subversive of the Russian state that Putin has built – a state based on the merger of government and business.
As a result, even if the will to change suddenly and miraculously emerged in today’s Kremlin, the illegitimacy of the entire federal government would render effective policymaking impossible.
Instead of formulating and implementing comprehensive and transparent reforms, the government would have no choice but to continue to indulge – and, above all, avoid threatening – vested interests.
No one should be deceived by any concessions that the Kremlin makes.
Russia’s liberals would gain nothing from compromising their consciences and blessing Putin’s third term.
As before, they would get no real power in return, and any possibility of genuine change from within the existing power structure would remain minimal.
Indeed, steps by the authorities to mollify public opinion will continue to be accompanied by increased pressure on the opposition and on civil-society organizations.
In the months following Putin’s return to the presidency, much will depend upon Russia’s civil society and the protest movement’s leaders.
Russians must persevere and formulate a set of specific political demands.
They must insist upon real and dramatic changes – rather than cosmetic improvements – to Russia’s political system.
The main objective now is to strive for free and fair elections that will ultimately lead to a legitimate and responsible government.
The list of pressing issues facing Russia is already long, and their resolution can no longer be delayed.
As long as Putin remains in control, that list will only grow.
The Eternal Putin
NEW YORK – The only vote that matters in Russia’s 2012 presidential election is now in, and Vladimir Putin has cast it for himself.
He will be returning as Russia’s president next year.
When the news broke – together with the lesser news that the incumbent, Dmitri Medvedev, will step down to become Putin’s prime minister – I wanted to scream, I told you so.I have always been puzzled by the naïveté of analysts, in Russia and abroad, who believed that Putin would never be so bold as to make a mockery of Russia’s electoral system by reclaiming the presidency.
But contempt for democracy has been Putin’s stock-in-trade ever since he arrived in the Kremlin from Saint Petersburg two decades ago.
Anyone who thought that things would be different was either delusional or ignorant of Russia.
Putin can’t help himself, just as he couldn’t help himself in 2004.
Then a very popular leader – he restored to Russia its self-regard as a global power through deft use of the country’s control of a large share of the world’s supply of oil and gas at a time of limited availability – he would have won hands down.
Yet he rigged those elections nonetheless: in the KGB tradition, people are simply too unpredictable to be left uncontrolled.
If many analysts were blithely unaware of the certainty of Putin’s 2012 return, the Russian public certainly wasn’t. Culture never lies about politics.
When Putin installed his protégé, Medvedev, as president in 2008, a joke made the rounds: It is 2025, and Putin and Medvedev, now elderly, are sitting in a restaurant.
“Mine,” replies Medvedev. “Remember, I just replaced you as president again.”
Mikhail Kasyanov, a prime minister under Putin and now a leader of the opposition People’s Freedom Party, insisted that “nobody knew” about the swap.
If he believes that, he is fooling only himself.
The sad truth is that, in Russia, history does indeed repeat itself, but, in a twist on Karl Marx’s dictum, as tragedy and farce at once.
Power in Russia is a product of inertia and personal willfulness, and a generally apathetic public has traditionally surrendered to the country’s paradox of tyranny: a weak state believes that it can function as a strong state by depriving citizens of basic liberties and the ability to make their own decisions.
In such a state, initiative, especially political initiative, is worse than futile; it is a crime, as the case of Mikhail Khodorkovsky, the imprisoned former oil tycoon, has demonstrated.
The only freedom Russians have left is to devise bitter jokes that tap the country’s rich historical stores of political pathology.
If they could export them, they would be as rich as Germans.
In the absence of the rule of law and functioning state services, we Russians generally perceive ourselves as subordinate to the state rather than as citizens acting out our lives in a functioning, vibrant, and independent civil society.
This de facto surrender creates a fertile environment for despotism.
For many Russians, if not most, the authority figure embodies the powers that control everything that matters in life; they support him, regardless of the policies that he implements, because there is no possibility of doing otherwise.
This partly explains enduring popular devotion to rulers like Joseph Stalin.
The question today is not about the outcome of next year’s presidential election; that has already been determined.
With the presidential term now extended to six years, we can expect an encore lasting up to 12 years – longer than Putin’s original performance.
But now the delusional and ignorant want to believe that Putin will become a reformer this time around.
I remember a similar analysis in 2000, when experts tried to equate Putin’s KGB background with US President George H.W. Bush’s years as Director of the CIA.
Putin, they argued, is not your typical security tough guy; he is an enlightened technocrat.
But the only technique that Putin appeared to have absorbed from his earlier career as a spy in East Germany was that of social control.
That remains true today.
Still, looking beyond the 2012 elections might be worthwhile, because the economic, political, and social contexts have changed since 2004, when Putin re-elected himself, and since 2008, when he pretended to be a democrat by promoting Medvedev.
Today, Russia’s rulers have never looked more arbitrary and illegitimate.
After 12 years in power, and grasping for 12 more, Putin can no longer sustain the pretense of adhering to democracy and promoting modernization.
During the last few years, popular support for Putin has weakened considerably, largely due to a stagnating, commodities-based economy.
So manipulation of presidential powers might not prove as simple as before.
Indeed, Russia’s elites know that things are going wrong, and are voting the only way they can – with their feet and by bank transfer, moving their families and their wealth out of the country.
History also teaches us that, despite their inertia, Russians are capable of turning on their government, as they did in 1917 and 1991.
So when resettling comfortably in the Kremlin in 2012, Putin should take a moment to re-read Alexander Pushkin’s The Captain’s Daughter, a novella about the bloody Cossack-led rebellion against Catherine the Great: “God save us from a Russian revolt, senseless and merciless.”
The Eternal Wall
PARIS – Walls designed to keep people in or out – whether they are in Berlin, Nicosia, Israel, or Korea – are always the product of fear: East German leaders’ fear of a mass exodus by their citizens seeking freedom and dignity;
Israelis’ fear of terrorism; or the North Korean leadership’s fear of “abandonment” by their martyred people. To freeze a fragile status quo, to consolidate one’s position, or to remain separate from others perceived as temptations or threats (or both) – such have always been the goals of politicians who build walls.
Why is there such a difference between the fate of Berlin – now a capital city where the progress of the present is slowly covering the many scars of the past – and the fate of Nicosia, where time has been frozen, or that of Israel, whose “security wall” is expanding like a fresh scar, not to mention the North Korean regime’s unlikely consolidation behind its walls of paranoia and oppression?
To understand these different situations, one must consider the will of people to destroy their walls in the case of East Germany, to expand them in the case of Israel, and to freeze them in the case of Cyprus and the government of North Korea.
Of course, the qualities – or lack of them – of the respective leaders are also an important factor.
The Berlin Wall collapsed in 1989 much more rapidly than most West Germans would have dreamed (or dreaded).
They had underestimated the strength of “German national feeling” in the East. And they grossly overestimated the Soviet Union’s ability and will to keep its empire at all costs.
Above all, Mikhail Gorbachev will remain the man who had the vision and the courage not to oppose the course of history.
He may not have fully understood what was happening before his eyes and the forces that he had unleashed, but his restraint constitutes true greatness.
The miracle of today’s reunified Berlin is a challenge – even a provocation – to all walls.
It is proof that in a globally interdependent world, walls are unnatural and artificial – and thus doomed.
Yet the truth is far more complex, for walls are a multilayered reality, and it is always dangerous to rewrite history in a Manichean manner, while confusing the realities of the past with those of the present.
Nicosia, the divided capital of Cyprus, is the perfect antithesis to Berlin, and as such the best illustration of what happens when history does freeze.
There, empty windows filled with sandbags continue to face each other defiantly, symbols of a past that has not passed for decades.
Of course, crossing the Green Line that separates the Greek and Turkish parts of the city is nothing like crossing Berlin’s infamous Checkpoint Charlie.
It is no longer a traumatic experience, just a bureaucratic hassle.
East Germans wanted to unify the German state for the sake of the unity of their nation: “We are one people” was their motto.
Are Greek Cypriots seriously interested in reunifying their island?
Do they wish to extend to the Turkish Northern Cyprus the evident benefits that they derive from membership in the European Union, which came in 2004?
Most likely, they do not.
As for Turkey’s government, its official priority remains its own entry into the EU.
It cannot say loud and clear that it is not seriously interested in the fate of Cyprus, but that is probably not far from the truth.
In any case, the two sides have wasted so many opportunities in the past decades – owing in part to leaders characterized by what might best be described as “competitive mediocrity” – that it is difficult to see a miracle in the horizon.
Israel is closer to Nicosia than to Berlin, not only in geographic but also in political terms, because successive Israeli and Palestinian leaders have likewise failed to demonstrate qualities of vision and imagination.
A wall is a bad international symbol, especially at the time when the fall of the Berlin Wall is being commemorated.
It is also a symbol of futility, because it does not constitute a viable long-term solution.
But the situation is unfortunately more complex.
As time goes by, Israelis and Palestinians increasingly want to divorce themselves from each other.
And Israel, contrary to North Korea – a regime doomed to disappear into a single Korea united by freedom and capitalism – is here to stay.
Israel’s wall constitutes a sad but probably inevitable component of its security.
What must be discussed is the security wall’s unnecessary and aggressive geography, accompanied by the provocation of further Israeli settlements on the West Bank, not the principle that stands behind it.
After all, security alternatives that would prevent further bloodshed at the time of the Second Intifada did not exist.
Ultimately, “walls” represent the realities that lay behind their construction – realities that, unfortunately, later generations may be unable or unwilling to change.
The Ethanol Hunger
WEST LAFAYETTE, INDIANA – Food prices have in many cases surpassed the peak levels reached in July 2008.
At that time, food-price increases were attributed to growing global demand for food commodities, a major decline in the value of the US dollar, crop failures in some parts of the world, and biofuels.
But what is driving the surge in prices today?
I believe that the key factors now are somewhat different from those that drove up food prices in 2008.
Growth in global demand for food and feed commodities is still a major part of the story, as are biofuels.
But the short- and long-term implications are quite different.
As developing countries become better off, one of the first things that happens is so-called “dietary transition.”
With more income at their disposal, people begin to consume more of their food basket in the form of animal products.
Producing these animal products requires significantly more agricultural resources than a predominantly plant-based diet.
So, as incomes grow, demand for food products grows even faster.
Both population growth and dietary transition contribute to faster demand growth and higher food prices.
Biofuels policies in the US and the European Union have led to the creation of biofuels industries with significant output capacity – mainly ethanol in the US and biodiesel in the EU.
In the US, government policy mandates 48 billion liters of ethanol in 2011.
Production capacity already exceeds that level.
Since this quantity is required by the government to be blended with gasoline, regardless of the price of ethanol, corn, or gasoline, the demand that it creates for corn is not at all responsive to the price of corn.
In economic terms, such demand is highly “inelastic”: the mandate must be met at any price.
That is the situation in which we now find ourselves, at least in the short run.
The added inflexibility (or inelasticity) amplifies the price response to a real or perceived crop shortfall either in the US or elsewhere.
In addition, the fact that nearly 40% of the US corn crop is being used for ethanol, up from around 5% a few years ago, means that corn prices must be higher to meet the feed, export, and ethanol demands for corn.
The bottom line is that the current version of US biofuels policy, with its fixed requirement for blending, leads to a greater price response in the event of a crop shortfall – in the short run.
We saw this in 2008, and are now seeing it again.
But the 2011 surge appears to be rooted in broader commodity scarcity than before.
In the first half of 2008, commodity prices moved up quickly – and plummeted just as fast in the second half of the year.
There may well have been speculative behavior that contributed to the rapid swing.
Even with normal crop production around the world, we will end this year with stocks-to-use ratios near historic lows.
Stocks-to-use ratios are a primary driver of commodity prices, because they give us an indication of the cushion that we have for shortfalls somewhere in the world.
The ratio tells us essentially how many months of stocks we have, and today they are around 15% for some key commodities – meaning two months of stocks.
What about the long run?
With several years to adjust, we would expect a powerful supply-side response to higher commodity prices now prevailing all over the world.
In many regions around the world, crop yields are only a fraction of US levels – even in agricultural zones with similar climate, soils, and other production conditions.
In the US, it is common to see a gap of around 20% between test plots and actual yields in the same area.
In many other regions, these gaps are 40-60%.
The bottom line is that there is huge potential to increase production in many parts of Eastern Europe, Africa, and South America.
To the extent that higher commodity prices benefit farmers in these regions, they will respond by increasing their production, which will eventually reduce scarcity, increase stocks-to-use ratios, and attenuate the higher prices.
In fact, to the extent that developing countries permit higher prices to go to their farmers, the result could be a significant stimulus to economic growth in rural regions of developing countries – where most of the world’s poor live.
One problem is that developing countries often attempt to isolate their domestic markets from world prices, particularly price increases, in order to protect their more politically powerful urban citizens.
This policy can stymie rural development and diminish poverty alleviation.
The short- and long-term stories are simplifications, but they nonetheless convey the essence of some critical drivers of price changes.
America’s biofuels policies inevitably lead to larger price responses to supply shocks in the short run.
In the long run, the higher prices that result could become an engine of economic development in the world’s poor rural regions.
That distinction could make a huge difference to millions of people.
The Ethics of “Biosecurity”
An ominous new word has crept into the life sciences and biomedical research: “biosecurity.”
The term reflects a growing awareness that rapid developments in these fields offer the potential for great benefits, but that the knowledge, tools, and techniques that enable scientific advances also can be misused to cause deliberate harm.
Any effort to address this “dual use” dilemma must ultimately be international, since biotechnology research is a genuinely global enterprise.
The international scientific community has a key role to play in ensuring that efforts to manage the risks improve security and strengthen international collaboration to ensure non- maleficent use of scientific advances.
Professor Ronald Atlas of the University of Louisville and I recently presented a proposed Code of Ethics for the Life Sciences in the journal Science .
Our proposal what we need for a code and for its contents have both met with strongly conflicting views.
The scientific community increasingly recognizes that science itself is not a value-free activity and, therefore, the choice of what research to undertake and how to undertake it must be governed by ethical principles.
But there is still a nucleus of scientists who oppose that concept, arguing that there must be no restrictions on the search for new knowledge, and that ethical principles only become relevant in the application of that knowledge.
In our Science article, we speculated on scientists’ reasons for holding such a view.
But, as we noted, “even those who question the value of a code agree that research in the life sciences, including biodefense research, must be conducted in a safe and ethical manner.”
Bodies speaking out publicly about this need include the General Assembly of the World Medical Association, the British Medical Association, the US National Research Council, the British Parliament, and the Asia-Pacific Economic Cooperation (APEC) leaders.
A code of ethics is needed because the power of science to result in harm, if it is not well governed, has grown vastly.
Society has entrusted scientists and scientific institutions to show respect for life, in particular human life.
Safeguards are needed to ensure fulfillment of that trust, in particular, to ensure that science is not used in the cause of bioterrorism or biowarfare.
A code of ethics offers several benefits.
It would underscore the importance of ethics reviews of proposed scientific research and monitoring of ongoing research, especially research involving humans or animals as subjects.
It can also establish a basic presumption of scientific openness and transparency, while allowing for exceptions when there is a real risk that scientific knowledge could be used to cause serious harm.
Moreover, a code of ethics could help protect “whistle blowers” who bring ethical breaches to the attention of the relevant authorities or the public.
Finally, it could allow for conscientious objection to participation in certain research.
In short, a code can help to embed ethics in all aspects of scientific research from its inception.
Although no consensus has yet emerged on a code of ethics, there is wide agreement among scientists that a robust public health system is an essential safeguard against biological threats, whether intentional or unintentional.
Security and public health concerns now overlap, whereas traditionally they had been separate areas that elicited different kinds of policy responses.
Strengthening the response to naturally occurring infectious diseases or poisoning is needed to protect against the deliberate misuse of science to spread disease or poison.
In short, promoting public health, biosafety, and biosecurity, on the one hand, and protecting against bioterrorism, on the other, are linked, complementary activities.
But contemplating potential new bioweapons raises deeply worrying possibilities that return us to the problem of how to ensure ethics in scientific research.
For instance, “synthetic biology” involves the creation of living material from its DNA components, so that we can re-engineer life in the manner of our choosing.
The technology making this possible will most likely become common within the next two years at a substantially reduced cost.
Safeguards such as a moratorium on such developments or registering the equipment needed to implement them should be considered.
There are ancient taboos on the use of “poison or plague” as weapons or for warfare, and doing so has long been stigmatized in many cultures and prohibited by customary international law and international treaties.
The taboo is the companion to the sacred: that which we regard as sacred we protect with taboos.
We have lost both concepts in relation to much conduct in our contemporary world, but we urgently need to re-find them in relation to the new possibilities opened up by the life sciences if we are to continue to respect all life, especially human life.
The challenge is no less than to prevent the life sciences from becoming the death sciences.
That will require complex, multiple, varied, and integrated responses from a very wide variety of sources at individual, institutional, societal, and global levels.
Above all, it will require integrity, honesty, trust, courage, and sometimes restraint.
This is no small order at the level of international relations and cooperation.
The Ethics of Citizenship Tests
PRINCETON – Can citizenship really be tested?
An increasing number of countries – especially, but not only, in Europe – seem to think so.
Over the last decade, tests and exams for immigrants have proliferated – but so have controversies about what they may legitimately ask.
Recently, the revelation that the “Life in the UK” test tries to instill respect for the practice of queuing – standing in line, that is – caused as much ridicule as indignation.
The British minister responsible for the test justified the idea by claiming that “the simple act of taking one’s turn is one of the things that holds our country together.
It is very important that newcomers take their place in queues whether it is for a bus or a cup of tea.”
While this might sound like an excerpt from a Monty Python sketch, it raises an important issue: should there be limits as to what prospective citizens are tested for?
Can testing become counter-productive?
Critics of the spreading practice of citizenship testing certainly think so; in fact, they go so far as to lament the rise of a new “repressive liberalism” – Western states’ efforts to achieve democratic and liberal ends with increasingly illiberal means.
Making “integration courses” and language instruction compulsory, prohibiting headscarves in schools, as in France, or restricting the rights of immigrants to marry foreigners, as in Denmark, are just some instances of coercive measures adopted in the name of supposedly universal liberal values.
Such measures have the appearance of a (seemingly self-contradictory) program to force men and women to be free.
Citizenship tests are an integral part of this program; and, in the eyes of critics, they resemble “loyalty oaths” and other intolerant measures traditionally associated with the anti-communist witch-hunts of McCarthyism in 1950’s America.
But do countries somehow automatically turn illiberal just because they make certain measures mandatory?
If that were true, “progressive legislation” would inevitably be a contradiction in terms.
The real question is whether states purposefully target or even exclude certain groups – while ostensibly applying universal standards.
Think, for example, of a German (oral) test which was to apply only to immigrants from states belonging to the Organization of the Islamic Conference (the test in question was later withdrawn), and which asked, among other things, the applicant’s opinion about the fact that in Germany homosexuals hold high public office.
Similar tendencies appeared in the Netherlands, which was once committed to multiculturalism, but more recently has sought to confront would-be citizens with images of men kissing and of bare-breasted women emerging from the North Sea – presumably all to get across the point that a true Dutch citizen had better be tolerant.
It is clearly helpful for immigrants to get hints about how to navigate daily life practically – such as norms about standing in line.
But this kind of local knowledge should not be subject to testing.
Most people acquire survival skills – if not more sophisticated forms of savoir-faire – informally, as a quick glance at the immigration experience in the United States demonstrates. They will also come to get the point of more informal social norms – against homophobia, for instance.
The lesson is that national governments should not test the attitudes of immigrants to moral and cultural questions that remain controversial even among established members of the host country.
It would be hypocritical, for example, to pretend that everyone in Western liberal democracies is enthusiastic about gay people or nudists – what matters is that their rights be respected, not that everyone like them.
Tests should communicate lessons about rights and democracy, that is, politics – not about lifestyles or the supposed core content of a “national culture” (on which established members of a host country themselves would probably be hard pressed to reach consensus).
Of course, it is true that birthright citizens live their lives – and retain their citizenship – without ever being tested on the basics of their political systems.
But it is a reasonable expectation – often legitimately reinforced through civic education for all children – that citizens know how to participate in public affairs, and especially that they know what their and others’ rights are.
So, citizenship tests – rather than being repressive – can actually be empowering, if they make immigrants aware of rights and possibilities for participation. They are akin to language requirements – except that the language here is a civic, not a national one, which in the best case allows new citizens to voice their concerns with perfect political grammar.
Tests might also make the passage to citizenship meaningful, a ritual similar to the solemn swearing of an oath of allegiance, which can be integrated as a major event into the story of one’s life (to be sure, some will always dismiss such ceremonies as political kitsch).
What these kinds of exams cannot do – and should not attempt to do – is test people’s political convictions.
For one thing, such convictions can always be faked by those determined to dissimulate.
At the same time, most would-be citizens will probably feel alienated from a state that suspects political danger emanating from newcomers and consistently sends a message of distrust.
In the end, citizenship exams, rather than really being “tests” in any meaningful sense at all, are tools for communication.
And every country should think very carefully about what it wishes to communicate about itself.
The Ethics of Eating
Global meat consumption is predicted to double by 2020.
Yet in Europe and North America, there is growing concern about the ethics of the way meat and eggs are produced.
The consumption of veal has fallen sharply since it became widely known that to produce so-called “white” – actually pale pink – veal, newborn calves are separated from their mothers, deliberately made anemic, denied roughage, and kept in stalls so narrow that they cannot walk or turn around.
In Europe, mad cow disease shocked many people, not only because it shattered beef’s image as a safe and healthy food, but also because they learned that the disease was caused by feeding cattle the brains and nerve tissue of sheep.
People who naively believed that cows ate grass discovered that beef cattle in feed lots may be fed anything from corn to fish meal, chicken litter (complete with chicken droppings), and slaughterhouse waste.
Concern about how we treat farm animals is far from being limited to the small percentage of people who are vegetarians or even vegans – eating no animal products at all.
Despite strong ethical arguments for vegetarianism, it is not yet a mainstream position.
More common is the view that we are justified in eating meat, as long as the animals have a decent life before they are killed.
The problem, as Jim Mason and I describe in our recent book, The Way We Eat, is that industrial agriculture denies animals even a minimally decent life.
Tens of billions of chickens produced today never go outdoors.
They are bred to have voracious appetites and gain weight as fast as possible, then reared in sheds that can hold more than 20,000 birds.
The level of ammonia in the air from their accumulated droppings stings the eye and hurts the lungs.
Slaughtered at only 45 days old, their immature bones can hardly bear the weight of their bodies.
Some collapse and, unable to reach food or water, soon die, their fate irrelevant to the economics of the enterprise as a whole.
Conditions are, if anything, even worse for laying hens crammed into wire cages so small that even if there were just one per cage, she would be unable to stretch her wings.
But there are usually at least four hens per cage, and often more.
Under such crowded conditions, the more dominant, aggressive birds are likely to peck to death the weaker hens in the cage.
To prevent this, producers sear off all birds’ beaks with a hot blade.
A hen’s beak is full of nerve tissue – it is, after all, her principal means of relating to her environment – but no anesthetic or analgesic is used to relieve the pain.
Pigs may be the most intelligent and sensitive of the animals that we commonly eat.
When foraging in a rural village, they can exercise that intelligence and explore their varied environment.
Before they give birth, sows use straw or leaves and twigs to build a comfortable and safe nest in which to nurse their litter.
But in today’s factory farms, pregnant sows are kept in crates so narrow that they cannot turn around, or even walk more than a step forward or backward.
They lie on bare concrete without straw or any other form of bedding.
The piglets are taken from the sow as soon as possible, so that she can be made pregnant again, but they never leave the shed until they are taken to slaughter.
Defenders of these production methods argue that they are a regrettable but necessary response to a growing population’s demand for food.
On the contrary, when we confine animals in factory farms, we have to grow food for them.
The animals burn up most of that food’s energy just to breathe and keep their bodies warm, so we end up with a small fraction – usually no more than one-third and sometimes as little as one-tenth – of the food value that we feed them.
By contrast, cows grazing on pasture eat food that we cannot digest, which means that they add to the amount of food available to us.
It is tragic that countries like China and India, as they become more prosperous, are copying Western methods and putting animals in huge industrial farms to supply more meat and eggs for their growing middle classes.
If this continues, the result will be animal suffering on an even greater scale than now exists in the West, as well as more environmental damage and a rise in heart disease and cancers of the digestive system.
It will also be grossly inefficient.
As consumers, we have the power – and the moral obligation – to refuse to support farming methods that are cruel to animals and bad for us.
The EU Constitution Can Work
The final stage in drafting an EU Constitutional Treaty is underway.
Smaller and bigger EU members seem to be lining up in opposing camps.
Here Danish Prime Minister Anders Fogh Rasmussen offers his hopes for what type of treaty will emerge.
After the historic decision on enlargement, the European Union now faces the task of making a Union with 25 or more Member States a success.
That is the task of the Intergovernmental Conference, which started its work on October 4th.
Governments of the 15 current member states and the 10 new members will negotiate a Constitutional Treaty that will form the framework for European co-operation in the future.
We aim for a Treaty that can stand for several years without further changes.
Denmark has a clear goal in these talks: to ensure a strong, democratic and transparent Union.
The Intergovernmental Conference works on the basis of the draft Treaty presented by the European Convention.
The Convention worked in full transparency for more than a year, designing a single, consolidated draft Treaty that was agreed upon by a broad consensus among its members.
The Convention's draft Treaty provides for a more simple and comprehensible structure for the EU based on more democratic and transparent co-operation between member states.
Indeed, it underlines the fact that the member states are the defining building blocks of the EU and defines the competences of the Union clearly.
The Intergovernmental Conference should therefore not re-open the main political compromises of the Convention.
There are, however, a number of questions that need further deliberation.
This is the case with some of the more technical issues relating to individual policy areas.
And it is especially the case concerning institutional questions.
Denmark therefore fully supports the Italian Presidency's aim to complete the work of the Intergovernmental Conference by the end of the year.
Like the Italian President, we believe the negotiations should focus mainly on the central institutional questions.
Denmark's priorities are clear.
The new Treaty must fulfil two basic demands:
it must respect the central role of member states and it must maintain the balance between larger and smaller members;
the institutional structure must be efficient, democratic, and transparent.
The three central institutional questions confronting the Intergovernmental Conference are the future organization of the Commission and the Council, as well as determining the role of the future President of the European Council.
We must find a solution that realizes the full potential of all three actors.
Denmark presented a proposal on how to strengthen the organization of the Commission that reflects two considerations.
On the one hand, the principle of one commissioner per Member State with full voting powers carries great importance to many member states and to many citizens.
At the same time, we must ensure that the Commission can work effectively with 25 or more members.
Our proposal seeks to retain the Convention's idea of limiting the number of portfolios in the Commission while giving all commissioners full voting rights.
We suggest that the work of the Commission be concentrated in 15-19 portfolios.
The heaviest portfolios should be shared among a number of commissioners, one of them responsible for coordination.
This model will ensure an efficient Commission with strong public legitimacy.
Strengthening the Commission must go hand in hand with strengthening the Council.
It is not a zero-sum game.
The Council Presidency, in my view, should remain embedded in the member states.
With 25 and more members, however, it is necessary to improve the present rotating Presidency (in particular the lack of continuity).
While being open towards the idea of a "Team Presidency" involving, for example, three countries for a period of one year or eighteen months, I worry that it would make horizontal co-ordination and the smooth daily conduct of business more difficult.
Therefore, I believe that we should modernize the present rotating Presidency.
But whether we continue with the current format for the Presidency or introduce a team model, we must consider how the President of the European Council can play a role in coordinating work within the Council.
The purpose of the European Council Chair is to ensure the coherence and decision-making capacity of the European Council.
He or she must of course be given the necessary means to perform this task.
At the same time we must avoid creating a presidential system that functions independently of the Council, the Commission, and the member states.
But if we do not integrate the President of the European Council into the existing institutional structure and relegate the presidency to presiding over the meetings of the European Council, we will miss an important chance to strengthen the overall decision-making capacity of the Union.
We also risk creating competing structures that will weaken the institutions as a whole.
Denmark seeks an ambitious result in the institutional negotiations.
We wish to strengthen the EU's ability to solve the problems of the member states.
In order to accomplish this goal, we owe it to ourselves to create a strong, democratic, and transparent framework for co-operation in an enlarged Union.
The EU is Missing in Action in Afghanistan
The withdrawal of Britain’s Paddy Ashdown as a candidate for the post of UN envoy in Afghanistan means that the international community still has some way to go before it speaks with one voice in that country.
Such a unified voice is needed, for six years of war and the biggest military operation in NATO’s history have failed to subdue the Afghan insurgency, leaving President Hamid Karzai’s increasingly corrupt government dependent on the continued presence of international forces.
Afghanistan remains the world’s fifth poorest country and its biggest opium producer, with a weak central state that is further debilitated by warlordism and the Taliban insurgency.
There are many reasons for this outcome, but at least some of the blame lies with the European Union.
On paper, the EU effort looks impressive.
Twenty-five EU nations have contributed troops to NATO’s 35,000-strong army in Afghanistan, and now represent more than half of all troops.
EU states command a third of all Provincial Reconstruction Teams (PRTs), and, together with the European Commission, have paid for a third of the country’s post-2001 reconstruction.
But European support for the Afghan mission is in fact limited, and cooperation between the biggest EU donor governments and the European Commission remains inadequate.
Public support for Europe’s engagement has been plummeting, and most EU governments have failed to act on NATO’s request to boost troop levels.
One exception is the United Kingdom, which has recently pledged to increase its troop numbers in the restive poppy-growing province of Helmand.
But European troop contributions continue to fall short of the 17,000 US troops deployed with the International Security Assistance Force (ISAF) and its 8,000 Coalition Force troops outside of ISAF.
Apart from 1,500 Dutch soldiers in the neighboring Uruzgan province and a Polish and Romanian presence in Ghazni, Paktika, and Zabul, no other EU nations are willing to operate in the insurgency-ridden southern and eastern parts of the country, giving the Taliban free reign.
Overall, there are at least 60 such operating restrictions – known as “caveats” – on European troops, preventing commanders from deploying military assets where they are most needed.
In areas such as policing, the rule of law, and counter-narcotics, EU states have pursued policies entirely independently of each other.
The EU Police Mission (EUPOL), launched in June 2007, was meant to address this lack of coordination, but in the end its focus was narrowed to police reform, with the Commission funding a separate judicial program.
EUPOL started poorly, losing its first commander, and faces serious problems recruiting high-caliber staff.
Finally, the Commission’s annual development assistance to Afghanistan is falling this year, from €200 million to €150 million.
Individual commitments are also being cut – for example, France’s five-year, €33 million pledge for reconstruction support is strikingly low compared to its total foreign-aid budget of €9 billion.
The EU cannot alter the international coalition’s strategy alone.
But a united EU can act as a powerful advocate for a better and more coordinated international approach.
The US has argued that more troops are needed to dominate the terrain, lambasting EU governments for failing to step up their efforts as the US commits 3500 additional marines to the fray.
European countries, meanwhile, criticize the current military strategy.
They fear that more troops may only lead to more civilian casualties, antagonizing Afghans.
Without a grand bargain between the US and the EU that ensures increased European support and troops, success in Afghanistan will be elusive and alliance-testing tensions with the US will remain.
Such a bargain must contain two elements.
First, the EU should commit to sending more troops, trainers, and civilians to the Afghan mission, as well as lifting all remaining “caveats” on its troops.
The mission needs a 10% troop increase, more military and police trainers, and more military equipment, including helicopters.
In addition, the Commission should reverse the decline in assistance and spend more money though local governments and the PRTs.
In exchange, the US should accept a strategic shift from combat operations to human security.
Such a strategy means focusing more attention on ordinary Afghans, gradually expanding NATO’s security presence outward from population centers, and working hand-in-glove with state and local authorities.
This new strategy would be further strengthened if the international community abandoned the current counter-narcotics policy – including an end to aerial eradication – and helping Karzai reach a political settlement with mid-ranking, “moderate” insurgents.
All of this will require leadership that cuts across institutional boundaries, which can be provided only by the UN and a strong-willed individual.
The appointment of a new UN envoy should prove a more efficient way of coordinating Afghanistan’s international helpmates.
And it is to be hoped that whoever is chosen may be able to foster the grand bargain between the US and EU that is so badly needed.
Despite the deteriorating situation in Afghanistan, all is not lost.
But turning the situation around will require changing the way the international community operates.
By striking a bargain with the US, the EU should lead the way.
The EU or the Christmas Pig
"We must see to it that the pig--this animal that we, the Romanian nation, cannot afford to live without--is not wiped out." So a socialist deputy in Romania's Parliament exclaimed in panic a few weeks ago.
"Within a year, 4.5 million pigs will be killed, but chickens will still enter the European Union before we do," chirped the president of Romania's Pig Breeders Association.
Across Romania, fear is growing of a looming porcine genocide as the country prepares to negotiate its way into the EU.
For the fact is that most pigs are bred and slaughtered here in a way that fails to meet EU standards, and no one is prepared to invest the money needed to get our piggeries up to Union levels.
But will our beloved pig be permitted to put the supreme national interest in jeopardy?
Romania is due to end its membership negotiations with the EU in 2004.
Of course, we have lots of problems that the EU wants to see resolved: unfettered corruption, poor public administration, a justice system that makes a mockery of impartiality, and an economy which, despite some progress, has not yet been declared a "functioning market" by the European Commission.
But it is agriculture, and in particular the Romanian pig, that is causing the severest headaches in Bucharest and in Brussels.
Although Romania is just a few hundred miles away from the EU countries, it is a few centuries away in terms of agriculture.
Some 40% of our population lives in rural areas, with 80% of the land divided into small lots.
For centuries Romanian farmers have bred a few pigs each year, out of which the biggest are slaughtered just before Christmas, on St. Ignatius' Day.
It is an almost pagan sacrifice: in the farm's backyard the animal is held down by a pair of strong men, the pig squealing as much as it can.
Suddenly, a third man cuts the pig's throat, a fountain of blood sprinkling everyone.
Then the carcass is singed on a fire and cut into pieces according to the different cuts of meat.
People dance around, drink heavily, and prepare for a monstrous feast.
Unfortunately, in terms of the European Commission, nothing is less "European" than this porcine hecatomb.
In fact, EU regulations demand that pigs be raised and killed as humanely as possible, in order to make them suffer as little as possible.
Pigs should be vaccinated, given anesthesia, provided even with the chance of a merciful euthanasia.
Better yet, the pig should die in his sleep, finished off peacefully by trained executioners.
Everything should be supervised by vets.
Otherwise, you are infringing EU regulations and are guilty of exercising "unnecessary cruelty" upon animals.
Either Romania, as an EU applicant, complies with these regulations or it must abandon pig breeding on a familiar scale and, as a consequence, increase the share of pork importation.
Unless breeders adapt to the new, coming European era, Romanian pigs, at least those bred on thousands and thousands of small farms scattered across the countryside, seem doomed.
The problem is that, in Romania, we have a hard enough time comprehending and protecting human rights, let alone animal rights.
Veterinarians are few, but our human health services are in ruin as well.
Indeed, most people cannot afford proper medication, and hospitals suffer from gross under-funding.
So it seems to most Romanians not only preposterous, but immoral , for the EU to care so much for a pig's last moments of life when it seems to care so little for the everyday life of ordinary Romanians.
Moreover, how is our government supposed to get millions of farmers to give up their barbaric ancestral habit?
By trying to coerce them with fines?
In America, I am told, a slang word for the police is "pigs."
Are we to have pig police here?
Our ruling social democratic party has its stronghold in Romania's rural areas.
If Romania's peasants come to believe that the EU insists that they hug their pigs, not butcher them with knives, their fidelity towards the social democrats will wither.
Those lost votes, however, won't go to responsible center-right parties, but to the fiercely nationalistic, anti-European, Greater Romania Party, perhaps the closest thing Europe now has to a fascist party.
This is a nightmare that both European and mainstream Romanian politicians want to avoid.
Fortunately, there seems to be a way to conciliate both EU bureaucrats and even our most diehard peasants.
Our ugly pre-Christmas ritual butchery can be christened a "traditional, folk custom," a sacred rite deeply embedded in the fabric of Romanian nationhood.
The proximity of Christmas will provide the ritual with a religious patina.
Because national, religious, and folk traditions are supposed to be protected across the Union, our unsavory habit of slaughtering squealing pigs can be preserved even as Romania enters the EU.
The sad fate of our porcine population will not be frowned upon as primitive and anti-European, but will be condoned as a venerable national tradition, preserved in accordance with the best European standards.
So our Romanian pig may survive after all--at least until the next St. Ignatius' Day--thanks to multi-culturalism.
But perhaps before we Romanians are asked to establish animal rights, we should told to pay more attention to ensuring respect for our own.
The Euro-American Debt Dilemma
PALO ALTO – Wealthy Europe and America, crown jewels of mixed capitalist democracies, are drowning in deficits and debt, owing to bloated welfare states that are now in place (Europe) or in the making (the United States).
As Europe struggles to prevent financial contagion and America struggles to reduce its record deficits, their dangerous debt levels threaten future living standards and strain domestic and international political institutions.
The ratings agencies are threatening additional downgrades; others envision an eventual breakup of the euro and/or demise of the dollar as the global reserve currency.
The economists Ken Rogoff and Carmen Reinhart estimate that public debt/GDP ratios of 90% are associated with sharply diminished growth prospects.
Greece’s debt ratio is over 120%, Italy’s is around 100%, and the US is at 74%, up from 40% a few years ago – and rapidly approaching 90%.
The International Monetary Fund estimates that each 10-point increase in the debt ratio lowers economic growth by 0.2 percentage points.
Thus, increases of 40-50% of GDP risk cutting long-run growth in half in parts of Western Europe, and by one-third in America – a devastating reduction in gains in living standards over the course of a generation.
Worse yet, the burden of banking losses that will sooner or later be socialized, and that of future unfunded public pension and health costs, are often understated in official debt figures.
Moreover, the problematic finances of some sub-national governments, for example in the US and Spain, will place pressure on central governments for fiscal aid.
In Europe, voters in fiscally responsible countries like Germany and the Netherlands are balking at bailouts of governments, banks, and bondholders.
American voters traditionally have favored smaller government and lower taxes than Europeans have favored (or at least tolerated).
Add continued anger over financial bailouts, rising spending, and the exploding national debt, and even America’s Democrats – the country’s traditional big-spending party – are finally talking deficit reduction.
Following the last deep American recession, in 1981-1982, when the unemployment rate peaked at a higher level than in the recent recession, Democrats blasted President Ronald Reagan for deficits of 6% of GDP.
Republicans now berate President Barack Obama for deficits of 10% of GDP.
Similar political and substantive jockeying occurs in European countries.
The simplistic categorization of political parties by their preference for a particular size of government masks more complex intraparty tendencies.
America’s Republican Party has three types of fiscal conservatives: supply-side tax-cutters, those who would limit government spending, and budget balancers.
They historically have feuded over tactics and strategy, but, since the deficit is the difference between revenues and outlays, they are closely interconnected.
Indeed, because the sum of all future tax revenues (discounted to today) must cover the sum of all future spending plus the national debt, the only way to keep taxes relatively low is to control spending.
Just as Democrats have long championed more government spending, and more benefits for more people, either on ideological grounds or as a political coalition-building strategy, so Republicans have regarded the goal of lowering taxes.
So, not surprisingly, Republicans are using the vote on the debt ceiling to force cuts in entitlement spending, while Obama and Congressional Democrats are using it to force higher taxes, in part to fracture their opponents’ coalition.
High levels of debt combine with slow economic growth in a devilish dance.
Interest payments on the debt eventually become so burdensome that bondholders demand higher interest payments (Greek debt recently yielded over 30%).
Interest rates on US government debt remain low, so this threat is prospective, but future deficits will be far higher than government projections when rates normalize.
The best response would be to enact strong controls on budgets, together with structural reforms to promote growth.
In the US, which has the most progressive income tax among the major economies, federal tax reforms that would lower the rates and broaden the base are being discussed.
In Europe, structural reforms focus on higher retirement ages and labor-market flexibility.
The deleveraging of governments, financial institutions, and households is one major cause of the sluggish economic recovery.
But sluggish growth means less tax revenue and more demands for payments to cushion hardship, placing pressure on government budgets.
The gamble has been that a solid, durable recovery would enable banks and households to rebuild their balance sheets quickly enough to avoid the need for additional bailouts.
But, so far, that gamble isn’t working as well or as rapidly as hoped.
Banks are profitable on an ongoing basis, borrowing at very low interest rates, often from the central bank, and collecting higher interest rates on their loans.
But, while instantaneous mark-to-market accounting can overstate the expected losses during a panic, the current values are often an accounting and political fiction.
Further action on Fannie Mae and Freddie Mac (America’s huge quasi-government mortgage agencies) and on some weak banks in America, as well as on some of Europe’s weaker, more thinly capitalized banks (the recent stress tests were a tepid first step), will be necessary.
Banking systems need more capital.
The best solution is private capital – from retained earnings, new entrants, new ownership, and new investment.
But in some cases, additional public capital probably cannot be avoided, as distasteful as it is.
The debt dilemmas in Europe and the US prove yet again that elected officials will ignore long-run costs to achieve short-run benefits, and will act only when forced, in a doomed effort to circumvent the laws of economics and revoke the laws of arithmetic.
And that implies an extended period of episodic economic disruption and political upheaval far beyond this summer’s debates on America’s debt ceiling and Europe’s distressed sovereign debtors.
These debates represent just one round in an ongoing struggle, with vast political and economic consequences for years to come.
The Euro at Mid-Crisis
CAMBRIDGE – Now that the European Union and the International Monetary Fund have committed €67.5 billion to rescue Ireland’s troubled banks, is the eurozone’s debt crisis finally nearing a conclusion?
Unfortunately, no.
In fact, we are probably only at the mid-point of the crisis.
To be sure, a huge, sustained burst of growth could still cure all of Europe’s debt problems – as it would anyone’s.
But that halcyon scenario looks increasingly improbable.
The endgame is far more likely to entail a wave of debt write-downs, similar to the one that finally wound up the Latin American debt crisis of the 1980’s.
For starters, there are more bailouts to come, with Portugal at the top of the list.
With an average growth rate of less than 1% over the past decade, and arguably the most sclerotic labor market in Europe, it is hard to see how Portugal can grow out of its massive debt burden.
This burden includes both public debt (owed by the government) and external dent (owed by the country as a whole to foreigners).
The Portuguese rightly argue that their situation is not as dire as that of Greece, which is already in the economic equivalent of intensive care.
But Portugal’s debt levels are still highly problematic by historical benchmarks (based on my research with Carmen Reinhart).
With a baseline scenario of recession or sluggish growth amid budget austerity for years ahead, Portugal will likely seek help sooner rather than later.
Spain is a more difficult case.
The central government is arguably solvent, but a significant chunk of municipal and provincial bank debt seems underwater.
The big question in Spain is whether, as in Ireland, the central government will allow itself to be gamed into taking on private (and also municipal) debt.
Here again, history gives no cause for optimism.
It is very difficult for a central government to sit on the sidelines when the economy’s key players are on the brink of collapse.
But bailouts for Portugal and Spain are only the next – and not necessarily final – phase of the crisis.
Ultimately, a significant restructuring of private and/or public debt is likely to be needed in all of the debt-distressed eurozone countries.
After all, bailouts from the EU and the IMF are only a temporizing measure: even sweetheart loans, after all, eventually must be repaid.
Already facing sluggish growth before fiscal austerity set in, the so-called “PIGS” (Portugal, Ireland, Greece, and Spain) face the prospect of a “lost decade” much as Latin America experienced in the 1980’s.
Latin America’s rebirth and modern growth dynamic really only began to unfold after the 1987 “Brady plan” orchestrated massive debt write-downs across the region.
Surely, a similar restructuring is the most plausible scenario in Europe as well.
It sometimes seems that the only eurozone leader who is willing to face the likely prospect of future debt restructuring is German Chancellor Angela Merkel.
The Germans have been widely castigated for pointing out that Europe has no clear mechanism for sorting out sovereign (government) defaults, and that surely it needs one.
Many pundits would have one believe that Ireland would have pulled through unscathed absent Germany’s blundering statements.
That is nonsense.
With huge private debts, falling house prices, and external claims on Ireland amounting to more than 10 times national income (according to the Reinhart-Rogoff database), there was never going to be an easy way out.
Allowing European debt problems to fester and grow by sweeping them under the carpet through dubious theatrics can only make those problems worse.
Indeed, only last July the eurozone made a big show of its financial “stress tests” of its banks, giving almost all of them, including in Ireland, a clean bill of health.
Denial is a not a useful policy for dealing with a financial crisis.
Europe’s debt problems should, in fact, still be quite manageable – provided the requisite write-downs and debt restructurings are implemented.
Here is where the latest Irish bailout is particularly disconcerting.
What Europe and the IMF have essentially done is to convert a private-debt problem into a sovereign-debt problem.
Private bondholders, people and entities who lent money to banks, are being allowed to pull out their money en masse and have it replaced by public debt.
Have the Europeans decided that sovereign default is easier, or are they just dreaming that it won’t happen?
By nationalizing private debts, Europe is following the path of the 1980’s debt crisis in Latin America.
There, too, governments widely “guaranteed” private-sector debt, and then proceeded to default on it.
Finally, under the 1987 Brady plan, debts were written down by roughly 30%, four years after the crisis hit full throttle.
Most post-mortems of the Latin American crisis suggest that all parties would have been far better served had they been able to agree on partial debt forgiveness much earlier.
Latin America might have returned to growth far sooner than it did.
Creditors might even have received more in the end.
As European policymakers seek to move from one stage of denial to another, perhaps it is time to start looking ahead more realistically.
As any recovering alcoholic could tell them, the first step is admitting, with Merkel, that Europe has a problem.
The Euro at Ten
PALO ALTO – The beginning of 2009 will long be remembered for terrible economic news and controversial economic policy in virtually every country.
It also marks the 10th anniversary of the euro, the common currency further knitting together several hundred million Europeans in their economic and financial affairs.
It is worth pausing to commemorate this remarkable event, and the effect the euro’s existence has had on the current global crisis.
The euro was launched in January 1999 for a complex set of economic, financial, political, and historical reasons.
It was the final icing on the cake of the plan by many post-World War II leaders, driven by the memory of two horrible world wars originating in and consuming Europe in the previous half-century, to forge closer economic and political ties.
Ten years ago, there were real concerns about launching the new currency.
Would people give up their old national currencies and use the new euro?
Would it maintain its value against the dollar?
(Launched at $1.18, it plunged to almost $0.80 early on, then rose, peaking at nearly $1.60 in 2007-2008, before falling back to around $1.30.)
When a group of individual currencies is replaced by a single currency, as the Deutsche mark, French franc, Italian lira, Spanish peseta, and others were by the euro, there are two primary benefits: lower transaction costs and greater transparency.
Having neither the cost and inconvenience of constant currency transactions nor the uncertainty that arises from fluctuations among currencies is a boon to the common currency area.
And pricing of goods and labor throughout the currency area, which previously had different exchange rates, becomes much more transparent.
The cost of cell-phone minutes in Italy, for example, is much more easily compared to those in Germany or France.
These twin benefits complement the scale advantages of free-trade areas.
Europe is still realizing the full potential of these benefits, but struggling with natural cross-border mergers and the failure or replacement of prominent national companies by better competitors from other countries.
Many proponents of the euro claimed that it would quickly evolve as an alternative reserve currency alongside the dollar, or even replace it, in global markets.
Most of world trade is still invoiced in dollars, but the euro has gradually emerged as a viable alternative – a strong currency backed by the hard-earned inflation credibility of the European Central Bank.
What, then, of the costs?
Why don’t all nations join currency areas, or why not create a single global currency, as Nobel laureate Robert Mundell suggests?
One obvious reason is that there are also disadvantages to a common currency area.
Suppose that southern Europe is hit much harder by today’s recession than northern Europe. An economy has two potential ways to adapt to and mitigate its downturn.
First, its currency would naturally depreciate, making exports more competitive and imports more expensive.
This partially cushions the downturn.
Alternatively, labor could migrate from high-unemployment southern Europe to lower-unemployment northern Europe.
The United States offers an important example of such labor mobility.
In the early 1980’s, when US unemployment reached almost 11%, many workers moved from the so-called Rust Belt – the hardest-hit industrial area of the upper Midwest – to other parts of the country.
In the early 1990’s, when California had a more severe recession, people sought jobs in neighboring states.
Labor migration operated as a safety valve against even worse unemployment.
Labor migration in Europe is, historically, far less extensive.
Many don’t want to abandon the deep roots they have in their home regions; others don’t want to move to another country, where language and culture may be obstacles.
With limited labor mobility, and the euro removing the other shock absorber (exchange-rate adjustments), great pressure will fall on those countries with the worst downturns.
This has led some economists to question whether the euro zone is a good idea at all, and to predict that, when confronted with a test of a severe differential recession, it will break apart.
Low inflation, no currency risk, decreased transaction costs, and greater transparency have made the euro a success.
But the decreased flexibility in response to economic shocks will certainly test it.
At present, it is boldly highlighting the disparate, even discordant, fiscal responses now being embraced by European Union governments.
This raises the old question about whether a currency union can work without a fiscal union, or at least stronger and more binding fiscal rules (the Maastricht deficit commitments are too easily breached).
To that we must add coordinated financial regulation and bailout policies, as deposits flow rapidly across borders in response to national guarantees and insurance in the euro zone.
Will the euro’s second decade be as successful as the first?
The financial crisis and deepening recession have created many challenges.
The euro zone’s less competitive economies are tethered to monetary policy (interest rates) set by the ECB, but pursue diverse approaches to bank bailouts and fiscal stimulus.
Italy and Greece, in particular, face serious debt issues amid financial market concerns about the possibility of default or their leaving the euro zone.
The gaps between German bond yields and Italian and Greek yields are at record levels.
The price of default insurance has tripled.
But the weaker economies get the inflation credibility of the ECB and protection from severe exchange-rate swings.
Indeed, avoiding continuous competitive devaluations is more a blessing than a curse.
On balance, that may even make membership more appealing for non-members such as Denmark and Poland.
The Euro Catalyst
PARIS – In 2000, shortly after the launch of the euro, I wrote a book arguing that countries adopting the common currency should be forced in one way or another to implement structural reforms.
Ten years later, where do we stand?
Surprisingly, the first country to reform was Germany.
Thanks to an environment favorable to export-oriented firms and, most notably, to wage discipline, Germany began to post significant balance-of-payment surpluses.
This is evident today on a dramatic scale, and is sustaining German economic growth, and one of the lowest unemployment rates in Europe.
The story is markedly different in other eurozone members.
The “PIIGS” (Portugal, Italy, Ireland, Greece, and Spain) greatly benefited from the euro, thanks not only to the removal of currency-related trade barriers, but also because their interest rates suddenly fell to levels unthinkable in pre-euro times.
Furthermore, because these countries no longer faced current-account constraints, they could spend beyond their means without any immediate apparent damage to their economies.
With this artificial boost to their economic growth, they had little incentive to press ahead with unpopular reforms in line with the European Union’s Lisbon agenda.
Then came the global crisis.
During these hard times (2007-2009), the euro’s usefulness and the eurozone’s resilience were welcomed the world over.
Only during the exit from the crisis did problems begin to surface.
The size of public debts, which had been ballooning in many countries during the crisis, together with growing competitiveness gaps between member states, began worrying markets.
Some investors, doubtful of the sustainability of some countries’ public debt, began to worry about the viability of the euro itself.
Reactions to this perilous momentum came without delay.
At the European level, there has been a swift and impressive mobilization of resources.
And EU President Herman van Rompuy is preparing a framework for enhanced fiscal surveillance, prevention, and resolution.
As Jean Monnet, one of the “founding fathers” European integration, presciently observed in his memoirs 35 years ago, “the European construction is moving ahead during crisis, and it will be the sum of the solutions brought about in order to overcome them.”
No one can deny that structural reforms are currently underway in all eurozone countries that have been struck by the crisis.
Suddenly, reform became une impérieuse obligation, if not – given the pressure of financial markets – a matter of outright survival.
Consider Greece, the eurozone member in the most acute predicament.
Reforms of the labor market, the pension system, and those underway or planned in many sectors and professions – all of which generate huge reserves for enhanced growth and, therefore, hope – reflect a profound change in the public’s perception of the country’s long-term needs. Indeed, despite endemic social unrest, a large majority of Greeks acknowledges the need for change and does not oppose it.
Euroskeptics will say that it is not the euro, but the crisis itself, that has catalyzed reform.
To be sure, the euro alone has not been a sufficient trigger.
But, given past European experience, there is serious reason to doubt that, in the absence of the euro, the crisis alone would have provided the necessary impetus.
Before the euro, a country facing a public-finance crisis would have been forced into a predictable, hopeless sequence: devaluation of its currency, followed by inflation, which alleviated the public-debt burden.
It wasn’t long before it was back to “business as usual,” with hardly any structural reform.
How many Greek crises, after all, paved the way to Greece’s current crisis?&#160;
Competitive devaluation, which skeptics are calling for, must be avoided this time around.
Eurozone members facing a loss of competitiveness can no longer afford to skirt difficult but necessary reforms through a monetary “quick fix” that shifts the burden onto their trade partners: as always, beggar-thy-neighbor policies reward laxity and penalize virtue.
As for the structural reforms now underway or in the planning stage, the most important question is not whether the euro, the crisis, or a combination of the two brought them about, but whether they will succeed.
Clearly, failure would impose huge political costs that leaders will be impelled to take all necessary steps to avoid.
They already have shown remarkable determination, providing grounds to be optimistic that this time things will, indeed, be different.
The Euro Grows Up
On January 1, the euro celebrated its sixth birthday.
Today, we look back on a period in which the European Central Bank has successfully pursued a stability-oriented single monetary policy serving more than 300 million citizens.
This is a remarkable achievement.
When the Maastricht Treaty was ratified in 1993, many people doubted whether Economic and Monetary Union would work.
The Treaty’s objective was widely thought to be laudable – but realizable only in the indefinite future.
To the surprise of many, Europe demonstrated great determination to ensure that the single currency became a reality.
A single monetary policy for a currency area comprising 11 – and later 12 – countries, each with a sovereign national government, was something entirely new.
Would it be compatible with autonomous national fiscal policies?
Given the decentralized nature of the system, would national interests distort the conduct of monetary policy?
I see several reasons underlying the ECB’s success in implementing a supranational monetary policy – and thus in firmly establishing the euro’s stability.
First, the ECB’s mandate – enshrined in the Maastricht Treaty – is to deliver and maintain price stability.
Focusing on the goal of maintaining a low and stable rate of inflation is the best contribution that monetary policy can make to economic welfare, sustainable growth, and job creation.
Second, the Treaty made the ECB perhaps the most independent central bank in the world.
The political temptation is always there to resort to inappropriate monetary expansions that bring temporary relief at the expense of harming longer-term growth.
Institutional independence has allowed the central bank to conduct its monetary policy in a consistent manner, insulated from short-term political influences.
Admittedly, the ECB’s first years were a “baptism of fire.”
Blessed at the start with a very low inflation rate in the euro area, the common currency soon faced a series of one-off shocks.
The biggest impact initially came from sharply rising oil prices and later from a rapidly weakening exchange rate, which led to a sharp rise in import prices.
By the end of 2000, oil prices had risen to levels not seen since the beginning of the 1990’s.
These shocks were naturally beyond the ECB’s control.
The policy response, however, required preventing these shocks from becoming entrenched in medium to long-term inflation expectations.
In this context – and in view of the robust economic growth recorded in 1999 and 2000, the still-booming stock markets, and the continued accumulation of excess liquidity – the ECB’s Governing Council progressively tightened policy, thereby keeping upward risks to price stability from materializing.
A bigger challenge came with the protracted stock market slowdown, the terrorist attacks on the United States in 2001, and the wars in Afghanistan and Iraq.
These events hindered the global economy by thwarting confidence and momentum.
Another period of excessive pessimism arose a year ago.
In the summer of 2003, public debate and market sentiment in the euro area were influenced by Japan’s protracted deflation and the expectation of a possibly severe disinflationary process in America.
Some observers saw a risk of sustained deflation in the euro area as well.
Our assessment was different.
Inflation in the euro area was then slightly above 2%.
Given the movements in the euro’s exchange rate in previous months and sluggish growth in the euro area, we expected that inflation rates would decline, but only to levels close to 2%.
Indeed, our monetary analysis suggested that the risk of protracted deflation was negligible.
So we did not overreact.
We continued to guide monetary policy by our assessment of the risks to price stability over the medium term.
This medium-term orientation paid off.
Fears of euro-area deflation soon vanished and an incipient recovery started later in 2003.
Several lessons can be learned from these episodes.
First, in all cases we remained clearly focused on the mandate of price stability.
Second, we kept a steady hand, guided by our medium-term orientation, while eschewing oversimplified diagnostics and mechanistic reactions to a few indicators.
Third, we aimed at guiding markets and inspiring confidence in monetary policy, thereby helping to stabilize the economy by keeping inflation expectations anchored at levels compatible with our definition of price stability.
So the brief history of the ECB’s monetary policy is already a success story.
Most of the initial uncertainties and concerns – and, to a large extent, the skepticism – have been dispelled.
A still relatively young institution – and the common currency that it manages – has quickly gained public and global confidence.
A current indicator is that the world’s central banks are holding an increasing share of their foreign-exchange reserves in euros rather than US dollars.
The main question now is whether the ECB will be able to sustain its hard-won reputation following enlargement of the euro zone in coming years.
Indeed, when the ECB was established, some observers raised concerns even then about possible inefficiencies resulting from its supposedly outsized Governing Council and about possible distortions in its deliberations due to national considerations.
However, these concerns were misplaced.
So are concerns about the effect of further enlargement of the euro area.
The voting rules unanimously approved by the Governing Council and adopted by the European Council in early 2003 have prepared the ECB well.
All Governors, whatever their voting rights, will continue to attend meetings of the Governing Council and to participate fully in its discussions.
Furthermore, the “one member, one vote” principle will remain valid and apply to all members exercising a voting right.
Thus, the voting system is sufficiently robust to accommodate up to 27 euro-area members.
Moreover, the new voting system is transparent and, above all, automatic, thereby reinforcing the ECB’s independence.
This will facilitate the conduct of monetary policy by reducing uncertainty and bolstering credibility still further.
As the world has learned, credibility and reliability are the ECB’s two most important attributes.
The Euro in a Shrinking Zone
LONDON – The recent European Union summit was a disaster.
Both Britain and Germany played the wrong game: British Prime Minister David Cameron isolated Britain from Europe, while German Chancellor Angela Merkel isolated the eurozone from reality.
Had Cameron brought an economic-growth agenda to the summit, he would have been fighting for something real, and would not have lacked allies.
As it was, he fully accepted Merkel’s austerity agenda – which his own government is implementing independently – and chose to veto proposals for a new European treaty to protect the City of London.
This cheered up the Euroskeptics in Cameron’s Conservative Party, but it offered nothing to counter the lethal medicine prescribed by Germany’s Iron Lady.
The agreement reached in Brussels forecloses any possibility of Keynesian demand management to fight recession. “Structural” budget deficits would be limited to 0.5% of GDP, with (as yet undisclosed) penalties for violators.
This is the wrong cure for the eurozone crisis.
The Merkel doctrine holds that the crisis is the result of government profligacy, so only a “hard” balanced-budget rule can prevent such crises from recurring.
But Merkel’s analysis is utterly wrong.
It was not deficit spending by governments that fueled the economic collapse of 2007-2008, but excessive lending by banks.
Government’s mounting debts have been a response to the economic downturn, not its cause.
What ought to have been hard-wired into the EU’s institutional structure was not permanent fiscal austerity, but tough financial regulation.
Of this there is little sign.
More immediately important is the failure of the proposed “fiscal union” to do anything for European recovery.
The figures are grim: before the summit, the European Central Bank slashed its eurozone GDP growth forecast for 2012 from 1.3% to 0.3%.
That is almost certainly optimistic.
In fact, the eurozone will contract in the first half of next year – and probably in the second half, because of the deficit-cutting policies now being pursued – placing further pressure on banks and sovereigns.
The reason why recovery from the crash of 2007-2008 has been so anemic is straightforward.
When an economy shrinks, government debt grows automatically, because its revenues decline and its expenses rise.
When it cuts spending, its debt grows even more, because its cuts cause the economy to shrink further.
This makes the government more, not less, likely to default.
In the eurozone, most government debt is held by private banks.
As this debt increases, the value of banks’ assets falls. So the crisis of the sovereigns engulfs the banks.
To put weakened governments on iron rations, as Merkel did, was to make a financial crisis inevitable.
To continue to preach salvation through austerity as the economy declines and banks collapse is to repeat the classic mistake of German Chancellor Heinrich Brüning in 1930-1932.
To be sure, the eurozone needs more than a bailout.
The periphery needs to recover competitiveness, and some have taken heart from the Mediterranean countries’ shrinking trade deficits – the structural trade imbalances within the eurozone are correcting themselves, they say.
Unfortunately, these corrections are not based on increased exports, but on declining imports, owing to depressed levels of economic activity.
The idea that a country can achieve a trade surplus by importing nothing is as fanciful as the idea that a government can repay its debt by starving itself of revenue.
One person’s spending is another person’s income.
In insisting that its main trade partners cut their spending, Merkel is cutting Germany off from the main sources of its own growth.
So, will the single currency survive?
Two policies that might, in combination, save it are off the agenda.
The first is quantitative easing (printing money) on a heroic scale.
The ECB should be empowered to buy any amount of Greek, Italian, Spanish, and Portuguese government bonds needed to drive down their yield to near the German rate.
This might stimulate real growth through several channels: by reducing lending rates, by raising the nominal value of public and private assets, and by weakening the euro against the dollar and other currencies.
But the effects of quantitative easing on economic activity are uncertain, and such an inflationary policy might well invite retaliation from Europe’s trading partners.
That is why quantitative easing should be run in conjunction with a eurozone-wide investment program designed to modernize the creaking infrastructure of eastern and southern Europe.
Capital spending by governments, unlike current spending, can be self-financing through user charges.
But, even if it is not, well-chosen public investment produces high returns: new roads reduce transportation costs, and new hospitals produce a healthier workforce.
An institution, the European Investment Bank (EIB), already exists to carry out such a program.
It should be recapitalized on a sufficient scale to offset the contractionary effects of Europe’s national deficit-reduction programs.
Quantitative easing, combined with public investment, would impart the growth impetus that the eurozone sorely needs to bring about a gradual reduction in its aggregate debt burden.
But it is almost certain that neither policy, much less both, will be implemented.
The ECB is stealthily buying government bonds on the secondary market, but its new governor, Mario Draghi, insists that such intervention is temporary, limited, and intended solely to “restore the functioning of monetary transmission channels.”
No one at the recent EU summit suggested making the EIB an engine of growth.
So the bleeding will go on.
This means that the eurozone is beyond saving; the euro will survive, but the zone will shrink.
The only question is the scale, timing, and manner of its breakup.
Greece, and probably other Mediterranean countries, will default and regain the freedom to print money and devalue their exchange rates.
This will send shock waves throughout the world.
But sometimes shock waves are needed to break the ice and start the water flowing again.
The Euro is Coming
The European Economic Model Lives
Back in the early 1990's, American officials like me who were making long-term forecasts for the Clinton administration cautioned that it would be rash to forecast an average long-run growth rate of more than 2.5% per year - and that actual growth might turn out to be even slower.
Now we look back at a decade during which the American economy has grown at an average rate of 3.4% per year.
Indeed, the United States today is 9% richer than we would have dared forecast a decade ago, and that is true despite labor-market slack and thus the largest production shortfalls below potential output in two decades.
In America, the "new economy" has proven to be real, and there is every reason to think that growth in the next decade will be faster than it was in the past.
The acceleration of US economic growth in the late 1990's posed a puzzle for those of us who looked across the Atlantic at Western Europe: where was Europe's "new economy"?
We could see it in Scandinavia, and in scattered pockets elsewhere, but the strong imprint of improved computer and communications technologies on the growth rates of output and productivity economy-wide seemed to be missing.
Europe seemed to be falling further and further behind the US.
Yet today, if we look at transatlantic comparisons, Western Europe appears to be doing much better than one would expect if one were to judge from the past decade's business press.
Western Europe's productivity per hour worked, for example, is now only 10% or so below America's.
Northwestern University economist Robert Gordon points out several interesting features of America's GDP that should give cheerleaders of the US model and critics of Europe cause for greater circumspection.
For example, Americans must buy cars because public transport is so lousy.
The value of the cars is calculated in American GDP, but European public-transport systems are counted not at their value to passengers but as a cost to government.
Similarly, Americans keep two million of their fellow citizens in jail: the cost of building the prisons and paying the jailers is also included in GDP.
Professor Gordon also points out that America's more extreme climate - colder winters (save in Florida and California) and hotter summers (save in Washington, Oregon, and California) - must spend more on heating and cooling.
The net result of all these calculations?
Western Europeans work some 25% less than Americans, yet they have a level of social welfare (including climate) that is only around 15% lower than Americans, and they have more equal income distributions and lower poverty rates as well.
From this perspective, Western Europe appears to have at least as good a claim to the title of "Good Society" as does the US.
Moreover, the economy-wide productivity gap between the US and Western Europe does not appear to be widening very rapidly, if at all.
Western European productivity growth almost matches America's, suggesting that the new economy is coming to Western Europe, only quietly and with much less fanfare than in America.
Of course, all favorable judgments of the state of the Western European economy must come with fine print.
European unemployment, for example, appears to be half again as high as in the US.
Labor force participation is lower - and a substantial part of that lower labor force participation is not the result of untrammeled choice but of discouraged workers and institutions that make it very difficult for households that have every adult at work.
Moreover, European labor productivity figures are inflated by the fact that potential workers who would be less productive are much less likely to hold any jobs at all.
Looming over everything is the impending demographic crisis of Western Europe's social-insurance state as its population ages.
But where is the country or region without serious economic worries and deep structural problems?
During the late 1990's, the US had an amazingly long run of economic good luck, assisted by some very good institutions and some quite good economic policies.
By 2000, European senior bureaucrats began to dread the approach of each international meeting as the likely occasion for yet another lecture by the Americans on how Europe needed to become much more like America right now.
Thus, it is important to note how little - if any - ground America has gained relative to Europe in the past decade according to the yardstick of social welfare.
Learning needs to go both ways.
The Europeanization of Russia
In less than four years, Russia has undergone an astonishing sea change.
Macroeconomic stabilization is but the start.
Underlying the economy's rapid recovery is the emergence of a common set of fundamental political values.
No one questions whether private property should be the basis of economic life.
Tight monetary and fiscal policies are now de rigueur (until quite recently printing money to finance the budget deficit was widely considered acceptable).
All major political forces (even of the left) support reducing taxes.
In short, the ideological vestiges of communist economics have been swept away.
The achievement of broad political consensus means that institutional change can now become more purpose-oriented and consistent.
Indeed, the consolidation of political parties has given Russia's government a stable parliamentary majority for the first time since the postcommunist transition began.
But, unlike economic stabilization, near-universal rules do not apply to institutional reform.
While there has been noticeable progress on the legal framework of the strategic plan that the government unveiled in 2000 (the so-called "Gref Program," named after Economics Minister German Greff), a breakthrough has yet to be achieved.
Of more than one hundred reforms planned for 2000-2001, little more than a dozen were fully implemented.
Many in Russia now seek to accelerate the pace of reform by pursuing closer ties with the EU.
Just as the global strategic realignment that has marked the war against terrorism led to quasi-membership for Russia in NATO, the attraction is mutual.
The EU's Common Strategy on Russia referred in 1999 to "the future establishment of an EU-RF free-trade area ."
By 2001, the EU declared an even more ambitious goal: a Common European Economic Area based on gradual approximation of EU legislation and standards.
Romano Prodi's declaration last week that Russia was now a fully-fledged "market economy" is a step toward this cooperative notion.
A common economic area with the EU promises to provide fundamental institutional guidelines for Russia's socioeconomic transformation - a blueprint of postcommunist reform that has driven reforms in the former Soviet bloc countries of Central and Eastern Europe.
For the first time since communism's collapse, Russia can formulate its own long-term development path - one with defined criteria for appraising policy decisions.
Adapting European standards to Russian conditions can now be viewed as a set of medium-term strategic targets - institutional objectives to be achieved within the next 10-15 years.
These targets are increasingly compatible with Russia's social and economic development, as well as its strategic rapprochement with the West.
The level of educational attainment, the evolution of the political system, and the structure of GDP make the choice of European standards the most natural and appropriate.
But several caveats are in order.
First, the use of EU institutional criteria must not be confused with the goal of EU accession.
The latter is a political issue, and Russian society is not yet ready to discuss it.
Russia needs standards that are developed in Russia and for Russia, not a set of mechanical rules implemented under the control of European entities.
The idea is that Russia should determine its own targets and goals rather than formalize its desire to join the EU.
Second, and related to the first caveat, there should be no formal approximation to EU institutions when this would impair Russia's competitive advantages.
Indeed, reforms of the past few years have already put Russia ahead of the EU in several areas, including tax legislation, fiscal policy (which aims at balanced budgets), and labor rules.
Russia's agricultural policy is similarly more efficiency-oriented than that of the EU.
Third, the legal and technical parameters of the proposed Common European Economic Area remain vague.
More work is needed to develop detailed targets for Russia.
But a precedent exists: the European Economic Area (EAA), which incorporates EU countries along with Norway, Iceland, and Liechtenstein.
EEA membership implies a common market and substantial progress towards legislative harmonization with the EU, but it does not envisage establishment of supranational bodies (except for a dispute resolution mechanism).
Adaptation of the EU's economic criteria should focus on the following areas:
existence of a functioning market economy;
effective competition and operation of market forces;
structural reforms aimed at establishing secure property rights, meaningful bankruptcy legislation, an efficient tax system, and a stable financial sector;
monetary and fiscal policies that promote sustainable growth;
establishment of strong administrative and regulatory institutions.
None of this, of course, will happen overnight.
Nor is it realistic to believe that Russia will come close anytime soon to meeting the EU's Maastricht criteria for macroeconomic performance.
Russia's fiscal balance has improved dramatically over the last two years, but the rapid economic growth and moderate currency depreciation that Russia needs to catch up with Europe will keep inflation higher than the Maastricht ceiling.
Higher inflation invariably means that long-term interest rates will also exceed EU limits.
But establishment of a Common European Economic Area to include Russia would make plausible a scenario unthinkable only four years ago.
Russia can now aim for a position in Europe that resembles the current partnership between the EU and Norway.
This scenario will become even more plausible following Russia's admission to the WTO.
Russia does not need to join the EU to create institutions worthy of Europe.
The European Museum
In the late nineteenth century, Europe viewed Asia mainly as either a source of inspiration for its artists or a focus of imperial ambition.
Asians, for their part, viewed Europe as either a model of modernity, as in Meiji Japan, or a barometer of decay, as in China.
A century later, the Japanese economic miracle had transformed the image of at least a small part of Asia in European eyes into a place of rapid technological and industrial progress.
Now, in the first years of the twenty-first century, the perception of Europe in Asia and of Asia in Europe is changing dramatically, as Asia’s economies boom while the European Union finds itself mired in a crisis of identity and confidence.
Prominent Asians, such as former Singaporean leader Lee Kuan Yew, are now warning Europeans that if they continue on their current course, Europe will rapidly become irrelevant for anything other than tourism and high-end real estate.
A prominent Chinese businessman who divides his time between Hong-Kong and London was even more specific.
At a private gathering of top business and political leaders in Paris a few weeks ago, he said, “You Europeans are becoming a Third World country, you spend time on the wrong subjects –the constitution, the welfare state, the pensions crisis – and you systematically give the wrong answers to the questions you raise.”
Europeans’ views of Asia in general, and China in particular, are more complex and swing from lucid adjustment to a new and respected competitor to pure ideological rejection.
In May 1968, in France, the students – or some of them, at least – who took to the streets to invent a new world were dreaming of Maoist China, a China in the midst of the brutal and senseless Cultural Revolution.
Their absurd and baroque infatuation was as much the product of ignorance of Mao’s crimes as it was the result of boredom in a prosperous society where unemployment was virtually nonexistent.
Today, by contrast, their heirs are openly criticizing the Asian capitalist model.
Yesterday China was an anti-capitalist lodestar for utopian revolutionaries; today it has become an ultra-liberal nemesis for a new generation of utopian reactionaries – the defenders of the status quo in Europe.
The student demonstrators in the streets of Paris recently don’t want to become like Chinese and Indians; they reject the logic of globalization and refuse to surrender hard-won social guarantees.
European economic elites perceive China and India very differently.
They are now fully aware that their slightly nostalgic post-colonial view of these countries as large export markets and deep reservoirs of cheap labor has become outdated.
China and India have become genuine competitors who deserve respect, if not sheer awe.
Quality, costs, and delivery times in auto manufacturing, for example, are reaching the European level.
Europe retains an advantage in terms of pure science, as in the pharmaceutical industry, but emerging world-class companies, particularly in India, are increasingly able to recruit M.I.T. and Harvard graduates, while maintaining lower labor costs and thus global competitiveness.
Unfortunately, although European leaders recognize the Asian challenge, they have failed to use it as a reality test in the irresistible process of globalization and as a call to arms in social and economic terms.
In fact, it would be fair to say that European politicians, with few exceptions, such as Tony Blair, have been slow to adjust their worldviews in accordance with the revolutionary pace of change in Asia.
Caught between their lack of long-term strategic vision and their obsession with short-term interests, Europe’s political leaders have largely failed to win the respect of their Asian counterparts, in contrast to European companies, which are faring much better in Asian eyes.
Of course, on a continent that has largely failed to bury its past and close the door to nationalist ghosts, the EU is also often regarded by Asians as a model of reconciliation, peace, and prosperity.
But if Europe’s performance continues to decline, would this perception survive?
Perhaps Asians would then come to regard the European model as a political version of Venice – a place to visit with nostalgia for its past glory and admiration for its museum-like quality.
The European Union\u0027s Battle for Turkey
When the plotters behind the recent suicide attacks in Istanbul launched their human bombs against Jewish synagogues and British office buildings, they had several audiences in mind.
One audience--and potentially the most important--are the citizens of the European Union, which Turkey's political class is eager to join as soon as possible.
The battle over Turkish membership in the EU will be fought on many fronts: in the country itself, where the government is currently undertaking major reforms in order to qualify for candidate status; at the negotiating table once the European Council in December 2004 authorizes the Commission to enter into formal accession talks; and among the public within the existing member countries.
Of the three fronts, the latter will be the most demanding.
Most EU citizens are uneasy today over the prospect of Turkish membership.
Those responsible for the atrocities in Istanbul may have calculated that Islamic terrorism will increase that uneasiness further.
Traditionally, Europe's citizens have always accepted the new members that queued up to join the club as it went from the original group of six countries to the 25 that will form the EU in 2004.
Once a purely West European community, the Union has pushed out its frontiers in all directions.
From next year, it will stretch from the north of Finland to Cyprus and Malta in the south, from Ireland in the west to the Baltic states in the east.
While the people inside have often worried that newcomers would take away their jobs and subsidies, they usually acquiesced in the end.
But Turkey is different.
The 10 new countries that will join next year--and even the Balkan countries that are now being offered the prospect of future membership--are all embraced by a traditional definition of Europe.
None of them is of a size that could upset the EU's current balance.
Neither applies to Turkey.
Except for a small stretch of land, its territory lies in Asia, not Europe; its culture is Islamic, not Christian, and if it should join in, say, 2013, its population will be by far the largest--and youngest--of any EU member.
Moreover, because Turkey borders on such countries as Iran, Iraq and Syria, it will bring to the EU a disturbing neighborhood: a part of the world incapable of developing a regional order on its own, a cockpit of Islamic radicalism and terrorism, a collection of fragile states imbued with nationalism, a field of competition for arms, even nuclear arms, a region where the US will remain strategically involved and where Israel will continue to provide a rallying point for anti-Western sentiments.
With Turkey as a member, the EU will be part of the troubled and troubling wider Middle East, the most challenging region in today's world.
Yet it is precisely because of these implications that the advantages of having Turkey inside the EU far outweigh the risks.
First and foremost, the prospect of membership is the most powerful force for modernization in Turkey, and a modern, democratic, and prosperous Turkey is of central interest to Europe, whether inside or outside.
Moreover, including within the EU the moderate type of Islam for which Turkey stands will be a major help in integrating Muslim minorities within European countries--already large and growing even without the addition of Turkey's population.
Finally, with the opportunities that Turkey's Islamic traditions, regional contacts, resources, and geography provide, the EU will be much better placed to exert a stabilizing influence on a region that will affect Europe's security in any case.
These are powerful arguments.
The big question is whether they are powerful enough to sway a skeptical European public.
It would take only one country out of perhaps 30 EU members in 2013 to bloc Turkey's accession.
No doubt some of them will put the matter to a referendum that will leave the decision to the people, not just their parliaments.
Even in Germany, where referenda are not envisaged by the constitution, there are calls to hold one over Turkey's entry; one opposition party has already announced that it will make this a central issue in next year's election campaign for the European Parliament.
Once public unease towards Turkey can find focus in a referendum on the country's potential EU membership, the chances for it joining look fairly slim.
At the end of the negotiations it may thus come to pass that Turkey is ready for Europe, but Europe is not yet ready for Turkey.
This is why the battle over Turkish membership has already begun, and the bombers of Istanbul seem to have understood this.
Those who believe that the EU is right for both Turkey and Europe must also start to fight for what they profess.
Nothing would be worse--for both Turkey and Europe--than European governments wanting Turkey in but then failing to take their people along.
Terrorists will no doubt continue to instill fear of an Islamic Turkey among Europe's fainthearted.
Let us hope that in the end, the attacks on innocent people in the crowded streets of Istanbul do not foster European fears, but rather a sense of solidarity with that moderate and dynamic country in the face of a common enemy.
The Great Bank Debate
OXFORD – Christine Lagarde, the International Monetary Fund’s managing director, recently said of the unfinished agenda for global financial-sector reform: “To start, we need concrete progress with the too-important-to-fail conundrum.
We need a global-level discussion of the pros and cons of direct restrictions on business models.” Five years on from the start of the crisis, with the publication of the Liikanen report on European Union banking reform, that debate has finally begun.
The Liikanen proposals have much in common with those made in 2011 by the United Kingdom’s Independent Commission on Banking (ICB), which I chaired.
Both sets of recommendations stress the importance of an interlocking package of measures that combine much greater loss-absorbency with structural reform. And both make the same economic case for such reforms: to insulate basic banking services from investment banking risks; to make resolution easier and thus more credible; to shield taxpayers from risks that belong in the private sector; and hence to ensure that banks’ risk-taking is subject to adequate market discipline.
Moreover, both Liikanen and the ICB favor structured universal banking – legally separate entities with separate capital, management, and so forth – rather than calling for its demise, as urged by those who want to split commercial from investment banking fully.
For large banks, Liikanen would separate trading from deposit banking, while the ICB’s proposals, which are now incorporated in draft legislation in Britain, would ring-fence retail banking.
This by itself is a distinction without a difference.
After all, a fence to protect the deer from the lions is the same as a fence to keep the lions away from the deer.
Unlike their cousin the Volcker Rule, neither Liikanen nor the UK approach attempts to draw a line between types of trading.
Judging whether trading is proprietary might not quite require “windows into men’s souls” (which in another context Queen Elizabeth I wisely avoided), but America’s experience shows that it is difficult all the same.
Still, the Liikanen and UK designs are not identical.
Nor should they be.
The UK has a much larger banking system relative to its economy’s size than does Europe as a whole – let alone the United States.
The UK’s system is exposed to different risks, which it is in Europe’s interest to have well managed.
Moreover, Liikanen is not a one-size-fits-all approach, as it explicitly proposes powers to require wider separation, if needed, to ensure resolvability.
One clear difference, though, is that Liikanen, unlike the UK proposals, allows securities underwriting in deposit banks.
This contrasts with the US, even after the 1999 repeal of the Glass-Steagall Act’s ban on affiliation between banks and companies engaged principally in underwriting securities.
And it sits oddly with separating trading and derivatives from deposit banking, since underwriting is akin to selling a large put option, and typically riskier than normal market-making.
With underwriting on the trading side of the fence, the deposit bank could still supply the service to customers, but as a broker, not as a dealer.
Underwriting belongs with the lions.
Aside from its implementation difficulties, there are good reasons not to introduce the Volcker rule, rather than the ICB/Liikanen proposals, in the UK and Europe.
First, it does not do enough to shield retail banking from investment-banking risks, of which only a small share relate to proprietary trading.
Second, the US has a very different banking system to begin with, including various regulations on how depository institutions can relate to affiliated trading entities.
This suggests that a better question is whether to introduce the Volcker rule in addition to, rather than instead of, ring-fencing.
In the interest of simplicity, I would say no.
Enforcing total separation instead of ring-fencing would provide a stronger barrier, but at a potentially high cost, including a risk to financial stability.
After all, full separation implies that resources from elsewhere in a given banking group are unavailable to address a retail-banking crisis resulting from, say, a slump in residential and commercial property prices.
Such crises can happen.
So the ICB concluded that its reform package for the UK would achieve the main aims of full separation at a lower cost, and without creating the risk to financial stability that could come from having undiversified, correlated, stand-alone domestic retail banking.
To be sure, the success of this approach depends on the fence staying strong.
That requires good initial design and constant regulatory vigilance, but so does full separation.
Structural reform of banks does not solve all problems.
But, at least for the UK and the rest of Europe, it is a key part of the overall reform package, along with much stronger capital and liquidity standards, loss-absorbent debt (including “bail-ins” by creditors), real resolvability, and so on.
There is also the question of how to protect financial stability from risks arising from shadow banking, including the risk of contagion to traditional banking, which ring-fencing helps to contain.
Structural reform is also fundamental to the moves toward a European banking union, for a union with well-capitalized and safely structured banks has much better prospects than one without.
Otherwise, mutualization of contingent liabilities could exacerbate the too-important-to-fail problem.
Now that structural reform is explicitly on the agenda, the debate about European banking reform is entering a new phase.
But, as the IMF has stressed, the debate needs to go beyond Europe.
Moreover, it is more than a debate about public policy, because, in the post-crisis world, market incentives might point toward forms of separation between retail and investment banking.
But market incentives surrounding various business models will remain distorted so long as taxpayers are liable for bank losses.
That provides all the more reason to get them off the hook via structural and other banking reforms.
The Europe of the Future
PARIS – Whenever people seek a justification for European integration, they are always tempted to look backwards.
They stress that European integration banished the specter of war from the old continent.
And European integration has, indeed, delivered the longest period of peace and prosperity that Europe has known for many centuries.
But this perspective, while entirely correct, is also incomplete.
There are as many reasons to strive towards “ever closer union” in Europe today as there were back in 1945, and they are entirely forward-looking.
Sixty-five years ago, the distribution of global GDP was such that Europe had only one role model for its single market: the United States.
Today, however, Europe is faced with a new global economy, reconfigured by globalization and by the emerging economies of Asia and Latin America.
It is a world where economies of scale and networks of innovation matter more than ever.
By 2016 – that is, very soon – we can expect eurozone GDP in terms of purchasing power parity to be below that of China.
Together, the economies of China and India could be around twice the size of the eurozone economy.
Over a longer time horizon, the entire GDP of the G-7 countries will be dwarfed by the major emerging economies’ rapid growth.
So Europe must cope with a new geopolitical landscape that is being profoundly reshaped by these emerging economies.
In this new global constellation, European integration – both economic and political – is central to achieving ongoing prosperity and influence.
Like individuals in a society, eurozone countries are both independent and interdependent.
They can affect each other both positively and negatively.
Good governance requires that both individual member states and EU institutions fulfill their responsibilities.
First and foremost, every eurozone country needs to keep its own house in order.
This means responsible economic policies on the part of governments, as well as rigorous mutual surveillance of those policies – not just fiscal policies, but also measures affecting all aspects of the economy – by the Commission and member states.
In a society, law-enforcement institutions can ultimately compel a citizen to abide by the rules.
In the eurozone, a framework based on surveillance and sanctions has, until the most recent decisions, depended on offending states’ willingness to comply.
But what can be done if a member state cannot deliver on its promises?
For countries that lose market access, the approach of providing aid on the basis of strong conditionality is justified.
Countries deserve an opportunity to correct the situation themselves and to restore stability.
This approach nonetheless has clearly defined limits.
So a second stage is now envisaged for countries that persistently fail to meet their policy targets.
During this second stage, eurozone authorities would play a much deeper and more authoritative role in the formulation of countries’ budgetary policies.
This moves us away from the current framework, which leaves all decisions in the hands of the country concerned.
Instead, it would be not only possible, but in some cases compulsory, for the European authorities to take direct decisions.
Implementing this idea also implies embracing a new concept of sovereignty, given the complex interdependence that exists between eurozone countries.
But it is ultimately in the interests of all eurozone citizens that these changes be made.
It is my firm conviction that the Europe of the future will embody a new type of institutional framework.
What might it look like?
Would it be too bold to envisage there being an EU finance ministry one day?
Any future European finance ministry would oversee the surveillance of both fiscal policies and competitiveness policies, and, when necessary, impose the “second stage.”
Moreover, it would carry out the usual executive responsibilities regarding supervision and regulation of the EU financial sector.
Finally, the ministry would represent the eurozone in international financial institutions.
Recent events have only strengthened the case for pursuing this approach.
Europe’s leaders are discussing a Treaty change to create stronger economic governance at the EU level, and eurozone citizens are themselves calling for better supervision of the financial sector.
And I know that our partners in the G-20 look to Europe as a whole, rather than to individual member states, for solutions.
So, increasingly, it seems that it would be too bold not to consider creating a European finance ministry at some point in the future.
But an EU finance ministry would be only one component of Europe’s future institutional framework.
One can imagine that, as various elements of sovereignty come to be shared, the European Council might evolve into the EU Senate, with the European Parliament becoming the lower house.
Similarly, the European Commission could become the executive, while the European Court of Justice takes on the role of an EU judiciary.
And, given European countries’ long and proud history, I have no doubt that “subsidiarity” will play a major role in the future Europe – significantly greater than in current models of federation.
Mine are the personal views of a European citizen.
The future of Europe is in the hands of its democracies, in the hands of Europe’s people.
Our fellow citizens will decide the direction Europe is to take.
They are the masters.
But, however Europe’s institutions take shape, a truly pan-European public debate is essential.
As Europeans, we identify deeply with our nations, traditions, and histories.
These are Europe’s roots.
But we also need to extend our branches more widely.
So, today, we should not look back.
We must look forward – to opportunities of collective betterment, and to every country’s potential to be stronger and more prosperous in a well-functioning union.
Photograph of Jean-Claude Trichet: (c) European Central Bank/Andreas Böttcher
The Euro’s Greek Tragedy
AMSTERDAM – When the euro was introduced in 1999, European countries agreed that fiscal discipline was essential for its stability.
While the common currency has benefited all countries that have adopted it – not least as an anchor in the current economic crisis – the failure of euro-zone members to abide by their agreement risk could yet turn the euro into a disaster.
Indeed, too many members simply behave as if there were no Stability and Growth Pact.
The state of Greek public finances, for example, is “a concern for the whole euro zone,” according to European Commissioner for Monetary Affairs Joaquin Almunia.
Greece’s fiscal deficit is expected to reach 12.7% of GDP this year, far exceeding the SGP’s 3%-of-GDP cap.
Of course, every euro-zone country is breaching the SGP’s deficit ceiling as a result of the current crisis.
But consider the Netherlands, which will do so this year for only the second time since 1999.
When the Netherlands first exceeded the SGP limit – by only 0.1% of GDP – the government immediately took tough measures to rein in the deficit.
Germany and Austria behaved the same way.
Those countries are already working to reduce their crisis-inflated deficits as soon as possible.
Down in southern Europe, things look very different.
Exceeding the SGP’s deficit cap is the rule rather than the exception.
Indeed, throughout the euro’s first decade, Greece managed to keep within the SGP limits only once, in 2006 (and by a very narrow margin).
Moreover, the Greek government turned out to be untrustworthy.
In 2004, Greece admitted that it had lied about the size of its deficit ever since 2000 – precisely the years used to assess Greece’s application to join the euro zone.
In other words, Greece qualified only by cheating.
In November 2009, it appeared that the Greek government lied once again, this time about the deficit in 2008 and the projected deficit for 2009.
Italy also has a long history of neglecting European fiscal rules (as do Portugal and France).
Like Greece, Italy was admitted to the euro zone despite being light-years away from meeting all the criteria.
Public debt in both countries was well above 100% of GDP, compared to the SGP’s threshold of 60% of GDP.
Italy did not fulfill another criterion as well, as its national currency, the lira, did not spend the mandatory two years inside the European Exchange Rate Mechanism.
Ten years later, it seems as if time has stood still down south.
Both the Greek and Italian public debt remain almost unchanged, despite the fact that both countries have benefited the most from the euro, as their long-term interest rates declined to German levels following its adoption.
That alone yielded a windfall of tens of billions of euros per year.
But it barely made a dent in their national debts, which can mean only one thing: massive squandering.
That is evident from their credit ratings.
Greece boasts by far the lowest credit rating in the euro zone.
Standard &amp;
Poor’s has put the already low A- rating under review for a possible downgrade.
Fitch Ratings has cut the Greek rating to BBB+, the third-lowest investment grade.
Indeed, those scores mean that Greece is much less creditworthy than for example Botswana and Malaysia, which are rated A+ .
What if Greece gets into so much trouble that it cannot service its debt?
That is not impossible.
According to calculations by Morgan Stanley, with relatively low long-term interest rates, Greece needs a primary surplus of at least 2.4% of GDP each year just to stabilize its national debt at 118% of GDP.
Current European rules prohibit other European countries or the EU itself from helping Greece.
But recent history teaches us that European rules are made to be broken.
Already, many (former) politicians and economists (no prizes for guessing whence they mostly hail) are proposing that the EU issue its own sovereign debt, which would alleviate the problems of countries such as Greece and Italy.
But such schemes would come at a high cost.
They would punish fiscally prudent governments, as interest rates would inevitably increase in countries like the Netherlands or Germany.
Just a 0.1% increase in borrowing costs would mean hundreds of millions of euros in extra debt-service payments a year.
Moreover, even if the plan for EU sovereign debt never takes off, fiscally prudent euro-zone countries will face higher borrowing costs.
As financial integration in Europe deepens, the lack of fiscal discipline in one or more euro-zone countries will push up interest rates throughout the currency area.
A member of the euro zone cannot be expelled under current rules, allowing countries like Greece to lie, manipulate, blackmail, and collect more and more EU funds.
In the long term, this will be disastrous for greater European cooperation, because public support will whither.
Europe should therefore consider bearing the high short-term costs of changing the rules of the game.
If expelling even one member could establish a more credible mechanism for guaranteeing fiscal discipline in the euro zone than the SGP and financial fines have proven to be, the price would be more than worth it.
The Euro’s Imagined Community
NEW HAVEN – Great significance – probably too much – has been attached to a possible breakup of the eurozone.
Many believe that such a breakup – if, say, Greece abandoned the euro and reintroduced the drachma – would constitute a political failure that would ultimately threaten Europe’s stability.
Speaking before the Bundestag last October, German Chancellor Angela Merkel put the matter starkly:
“Nobody should believe that another half-century of peace and prosperity in Europe is guaranteed.
It is not.
So I say: If the euro fails, Europe fails.
That must not happen.
We have a historical obligation to protect by all prudent means at our disposal Europe's unification process begun by our forefathers more than fifty years ago after centuries of hatred and spilling of blood.
None of us can foresee what the consequences would be if we were to fail.”
Europe has had more than 250 wars since the beginning of the Renaissance in the mid-fifteenth century.
So, it is not alarmist to worry aloud about preserving the sense of community that Europe has enjoyed for the past half-century.
In a fascinating, but largely overlooked book, How Enemies Become Friends,Charles A. Kupchan reviews many historical case studies of how nation-states with a long history of conflict managed eventually to become secure and peaceful friends.
His examples include the formation of the Swiss Confederation (1291-1848); the creation of the Iroquois Confederation in the century or so before the first Europeans arrived in America; the establishment of the United States (1776-1789); the unification of Italy (1861), and of Germany (1871); the Norway-Sweden rapprochement (1905-1935); the formation of the United Arab Emirates (1971); and the Argentine-Brazilian rapprochement of the 1970’s.
Kupchan also examines some notable failures of friendship: the United States’ Civil War (1861-65); the end of the Anglo-Japanese Alliance (1923); the breakdown of Sino-Soviet relations (1960); the demise of the United Arab Republic (1961); and the expulsion of Singapore from Malaysia (1965).
Kupchan never mentions a common currency as a condition of comity among nations; in fact, economic integration tends to follow, rather than precede, achievement of political unity.
Rather, he regards diplomatic engagement as the essential element to strategic accommodation and mutual trust, and this is more easily accomplished if the states have similar social orders and ethnicities.
But Kupchan’s analysis implies that a common currency can help nation-states to build lasting friendships, for he argues that friendship-building is most secure after an identity-changing “narrative” takes root, leading to a sense that the nations are like members of a family.
A common currency can help to generate such a narrative.
For example, the Iroquois tell the story of a great warrior and skilled orator named Hiawatha, who, traveling with the mystic Deganawidah, negotiated the treaties that established their confederation.
He advocated new condolence ceremonies to commemorate lost warriors – and to replace wars of vengeance.
The new narrative was reinforced with physical symbols, akin to a currency or a flag, in the form of belts of beads made of wampum, the Iroquois’ money.
A surviving Hiawatha belt, dating from the eighteenth century (and probably a copy of earlier belts), contains symbols of the five nations – Seneca, Cayuga, Onondaga, Oneida, and Mohawk – much as the US flag contains stars representing each of its states.
The belt also preserves Hiawatha’s status as the confederation’s forefather.
Flags may be a more inspiring symbol of common destiny, but most of us do not carry them around, and many people never display them, except perhaps at major sports events; their origin, rooted in battle standards, can seem uncomfortably aggressive.
There is a European Union flag, but it is rarely seen anywhere but outside of EU government buildings.
A British schoolteacher expressed the sentiment well in 1910: “We suspect the man who talks patriotism and imperialism, just as we suspect him who talks religion or any of the things that are of deepest value in life.
We think him either a humbug or a shallow person who has not realized the inadequacy of words to express what is deepest.”
And yet national currency, which we display every time we make a cash purchase, arouses no such suspicions.
So currency works as a constant, if latent, reminder of identity.
In using it, one has the psychological experience of participating with others in a common venture, and thus developing a sense of trust in both the endeavor and one’s fellow-participants.
Every currency union chooses symbols of common cultural values for its coins and notes, and these symbols become part of the sense of shared identity.
We see the human faces on the notes so often that they come to seem like family, creating what the political scientist Benedict Anderson called the “imagined community” that underlies and sustains a sense of nationhood.
The euro notes feature bridges as they appeared throughout Europe in various epochs, rather than images of actual structures that might seem to imply preferential regard for some countries.
The town of Spijkenisse in the Netherlands is now in the process of building all seven bridges depicted on the euro notes.
But the bridges remain symbols of European culture, in which presumably all Europeans share.
Modern electronic technology will not eliminate paper notes and coins soon, so there is still plenty of time to make use of the symbolic value of a common currency.
Indeed, even if the eurozone breaks up, each European country could adopt a different currency but retain common symbols.
For example, there could be a Greek euro, a Spanish euro, etc.
The notes could even show the same pictures of bridges.
Even electronic transactions should be able to generate symbols of peace, trust, and unity.
The point is that if Europe can keep these symbols alive, even a eurozone breakup would not have the dire political consequences for Europe that so many predict.
The Euro’s Latest Reprieve
NEW YORK – Like an inmate on death row, the euro has received another last-minute stay of execution.
It will survive a little longer.
The markets are celebrating, as they have after each of the four previous “euro crisis” summits – until they come to understand that the fundamental problems have yet to be addressed.
There was good news in this summit: Europe’s leaders have finally understood that the bootstrap operation by which Europe lends money to the banks to save the sovereigns, and to the sovereigns to save the banks, will not work.
Likewise, they now recognize that bailout loans that give the new lender seniority over other creditors worsen the position of private investors, who will simply demand even higher interest rates.
It is deeply troubling that it took Europe’s leaders so long to see something so obvious (and evident more than a decade and half ago in the East Asia crisis).
But what is missing from the agreement is even more significant than what is there.
A year ago, European leaders acknowledged that Greece could not recover without growth, and that growth could not be achieved by austerity alone.
Yet little was done.
What is now proposed is recapitalization of the European Investment Bank, part of a growth package of some $150 billion.
But politicians are good at repackaging, and, by some accounts, the new money is a small fraction of that amount, and even that will not get into the system immediately.
In short: the remedies – far too little and too late – are based on a misdiagnosis of the problem and flawed economics.
The hope is that markets will reward virtue, which is defined as austerity.
But markets are more pragmatic: if, as is almost surely the case, austerity weakens economic growth, and thus undermines the capacity to service debt, interest rates will not fall.
In fact, investment will decline – a vicious downward spiral on which Greece and Spain have already embarked.
Germany seems surprised by this.
Like medieval blood-letters, the country’s leaders refuse to see that the medicine does not work, and insist on more of it – until the patient finally dies.
Eurobonds and a solidarity fund could promote growth and stabilize the interest rates faced by governments in crisis.
Lower interest rates, for example, would free up money so that even countries with tight budget constraints could spend more on growth-enhancing investments.
Matters are worse in the banking sector.
Each country’s banking system is backed by its own government; if the government’s ability to support the banks erodes, so will confidence in the banks.
Even well-managed banking systems would face problems in an economic downturn of Greek and Spanish magnitude; with the collapse of Spain’s real-estate bubble, its banks are even more at risk.
In their enthusiasm for creating a “single market,” European leaders did not recognize that governments provide an implicit subsidy to their banking systems.
It is confidence that if trouble arises the government will support the banks that gives confidence in the banks; and, when some governments are in a much stronger position than others, the implicit subsidy is larger for those countries.
In the absence of a level playing field, why shouldn’t money flee the weaker countries, going to the financial institutions in the stronger?
Indeed, it is remarkable that there has not been more capital flight.
Europe’s leaders did not recognize this rising danger, which could easily be averted by a common guarantee, which would simultaneously correct the market distortion arising from the differential implicit subsidy.
The euro was flawed from the outset, but it was clear that the consequences would become apparent only in a crisis.
Politically and economically, it came with the best intentions.
The single-market principle was supposed to promote the efficient allocation of capital and labor.
But details matter.
Tax competition means that capital may go not to where its social return is highest, but to where it can find the best deal.
The implicit subsidy to banks means that German banks have an advantage over those of other countries.
Workers may leave Ireland or Greece not because their productivity there is lower, but because, by leaving, they can escape the debt burden incurred by their parents.
The European Central Bank’s mandate is to ensure price stability, but inflation is far from Europe’s most important macroeconomic problem today.
Germany worries that, without strict supervision of banks and budgets, it will be left holding the bag for its more profligate neighbors.
But that misses the key point: Spain, Ireland, and many other distressed countries ran budget surpluses before the crisis.
The downturn caused the deficits, not the other way around.
If these countries made a mistake, it was only that, like Germany today, they were overly credulous of markets, so they (like the United States and so many others) allowed an asset bubble to grow unchecked.
If sound policies are implemented and better institutions established –&nbsp;which does not mean only more austerity and better supervision of banks, budgets, and deficits –&nbsp;and growth is restored, these countries will be able to meet their debt obligations, and there will be no need to call upon the guarantees.
Moreover, Germany is on the hook in either case: if the euro or the economies on the periphery collapse, the costs to Germany will be high.
Europe has great strengths.
Its weaknesses today mainly reflect flawed policies and institutional arrangements.
These can be changed, but only if their fundamental weaknesses are recognized –&nbsp;a task that is far more important than structural reforms within the individual countries.
While structural problems have weakened competitiveness and GDP growth in particular countries, they did not bring about the crisis, and addressing them will not resolve it.
Europe’s temporizing approach to the crisis cannot work indefinitely.
It is not just confidence in Europe’s periphery that is waning.
The Euro’s PIG-Headed Masters
CAMBRIDGE – Europe is in constitutional crisis.
No one seems to have the power to impose a sensible resolution of its peripheral countries’ debt crisis.
Instead of restructuring the manifestly unsustainable debt burdens of Portugal, Ireland, and Greece (the PIGs), politicians and policymakers are pushing for ever-larger bailout packages with ever-less realistic austerity conditions.
Unfortunately, they are not just “kicking the can down the road,” but pushing a snowball down a mountain.
True, for the moment, the problem is still economically manageable.
Eurozone growth is respectable, and the PIGs account for only 6% of the eurozone’s GDP.
But by stubbornly arguing that that these countries are facing a liquidity crisis, rather than a solvency problem, euro officials are putting entire system at risk.
Major eurozone economies like Spain and Italy have huge debt problems of their own, especially given anemic growth and a manifest lack of competitiveness.
The last thing they need is for people to be led to believe that an implicit transfer union is already in place, and that reform and economic restructuring can wait.
European Union officials argue that it would be catastrophic to restructure any member’s debts proactively.
It is certainly the case that contagion will rage after any Greek restructuring.
It will stop spreading only when Germany constructs a firm and credible firewall, presumably around Spanish and Italian central-government debt.
This is exactly the kind of hardheaded solution that one would see in a truly integrated currency area.
So, why do Europe’s leaders find this intermediate solution so unimaginable?
Perhaps it is because they believe they do not have the governance mechanisms in place to make tough decisions, to pick winners and losers.
The European Union’s weak, fractured institutions dispose of less than 2% of eurozone GDP in tax revenues.
Any kind of bold decision essentially requires unanimity.
It is all for one and one for all, regardless of size, debt position, and accountability.
There is no point is drawing up a Plan B if there is no authority or capacity to execute it.
Might Europe get lucky?
Is there any chance that the snowball of debt, dysfunction, and doubt will fall apart harmlessly before it gathers more force?
Amidst so much uncertainty, anything is possible.
If eurozone growth wildly outperforms expectations in the next few years, banks’ balance sheets would strengthen and German taxpayers’ pockets would deepen.
The peripheral countries might just experience enough growth to sustain their ambitious austerity commitments.
Today’s strategy, however, is far more likely to lead to blowup and disorderly restructuring.
Why should the Greek people (not to mention the Irish and the Portuguese) accept years of austerity and slow growth for the sake of propping up the French and German banking systems, unless they are given huge bribes to do so?
As Stanford professor Jeremy Bulow and I showed in our work on sovereign debt in the 1980’s, countries rarely can be squeezed into making net payments (payments minus new loans) to foreigners of more than a few percent for a few years.
The current EU/International Monetary Fund strategy calls for a decade or two of such payments.
It has to, lest the German taxpayer revolt at being asked to pay for Europe in perpetuity.
Perhaps this time is different.
Perhaps the allure of belonging to a growing reserve currency will make sustained recession and austerity feasible in ways that have seldom been seen historically. I doubt it.
True, against all odds and historical logic, Europe seems poised to maintain the leadership of the IMF.
Remarkably, in their resignation to the apparently inevitable choice for the top position, emerging-market leaders do not seem to realize that they should still challenge the United States’ prerogative of appointing the Fund’s extremely powerful number-two official.
The IMF has already been extraordinarily generous to the PIGs.
Once the new bailout-friendly team is ensconced, we can only expect more generosity, regardless of whether these countries adhere to their programs.
Unfortunately, an ultra-soft IMF is the last thing Europe needs right now.
With its constitutional crisis, we have reached exactly the moment when the IMF needs to help the eurozone make the tough decisions that it cannot make on its own.
The Fund needs to create programs for Portugal, Ireland, and Greece that restore competitiveness and trim debt, and that offer them realistic hope of a return to economic growth.
The IMF needs to prevent Europeans from allowing their constitutional paralysis to turn the eurozone’s debt snowball into a global avalanche.
Absent the IMF, the one institution that might be able to take action is the fiercely independent European Central Bank.
But if the ECB takes over entirely the role of “lender of last resort,” it will ultimately become insolvent itself.
This is no way to secure the future of the single currency.
The endgame to any crisis is difficult to predict.
Perhaps a wholesale collapse of the euro exchange rate will be enough, triggering an export boom.
Perhaps Europe will just boom anyway.
But it is hard to see how the single currency can survive much longer without a decisive move towards a far stronger fiscal union.
The Euro\u0027s Troubles
CAMBRIDGE: The script for the euro has become pure improvisation.
Everyone remembers the popping champagne corks and pride that greeted the birth of European Monetary Union.
At long last the dollar would be challenged; perhaps even dethroned.
Europe's great political project - the EU - now had an equal economic project.
Today, however, all those dreams seem up for grabs.
Daily, the euro sinks.
No longer is it inconceivable that the US Treasury may step in to bail out Europe's new money.
What an irony: a currency designed to challenge the dollar for supremacy among global currencies, now needs US assistance to stop its meltdown.
But that is where we may be heading.
All this is happening as Europe approaches the introduction of real euro notes in January 2002.
Small wonder that, in Germany, the coming disappearance of the D-mark in favor of euro notes is causing deep disquiet.
No wonder that the French, who have rarely had a hard currency to call their own, are nervous and want something, anything, to be done.
Such anxieties are exaggerated.
It is painful for Europe to lose pride in its new currency so fast, but in strict economics terms, no harm arises from the euro's present weakness.
Europe's embarrassment is not likely to worsen, nor last very long.
Five questions are useful at this point:
- Who is to blame?
- What can be done?
- Is the bottom near or can things get worse?
- How long will the euro's weakness last?
- What will bring about change?
Looking for something, or someone, to blame comes naturally to politicians and those who fear having made a big mistake.
In these circumstances, however, that instinct is wrong. The new European Central Bank, the main public suspect, is not to blame.
The ECB's performance so far is unimpressive, but it has nonetheless handled the euro's decline well.
There has been no loss of nerve, no departure from the ECB's price stability target, and its public presentation is increasingly good.
The chief reason for the euro's pains is the performance of the US economy.
Even when things look more difficult in the US, as when inflation began to run higher recently and productivity growth lowered, the stock market sell-off that followed did not burst the overall market bubble.
The euro's slide is based upon Europe's absolute and relative decline in reference to the American economy.
What can be done?
Here another common mistake beckons: do something, anything, just do it!
But anything Europe could do at this stage would make matters worse.
Raising interest rates to the sky won't be credible because it would cause a recession and the ECB could not hold to such a policy for long.
Intervention is even less plausible.
The world has too many currency choices.
So this is the time to let markets take their course.
True, the US could turn the euro around, something no European head of government or finance minister could accomplish.
Alan Greenspan might achieve this result simply by muttering that the Euro is too weak, but he rightly saves his words for more important issues.
The euro has not necessarily reached the bottom.
In 1985, the value of European currencies as a basket reached 67 US cents, 25% below today's levels.
It is unlikely, but not impossible, that the euro could fall that low again.
More likely, the euro will stabilize at some point in the range of 80 US cents, then begin to climb back up.
But it is worth remembering that a weak euro is not all pain; it makes European businesses highly competitive.
Without such stimulus, growth might be significantly less than today's 3%.
What will make the euro recover?
The answer almost certainly has to come from America.
If and when America's economy slows, and when the valuations of US assets become far more dubious, the euro will become an attractive investment.
At that point, disenchanted holders of euro positions will take a fonder view of their holdings and outsiders from the US and Japan will begin to believe that diversification into the euro is viable.
After all, the euro can now be bought cheap.
If and when that point is reached, a bit of ECB intervention can initiate the long march upwards.
That time could be months or a year off.
Meanwhile, the fragile euro is certain to remain on front pages, and debates about whom to blame and what to do will remain alive.
Benign neglect is the right answer, but let no European banker say it loud.
The False Promise of a Eurozone Budget
BRUSSELS – A key question confronts the four presidents of Europe’s major institutions (the European Commission, the European Council, the European Central Bank, and the Eurogroup) as they prepare their report on how to reform the common currency: Does the eurozone need its own budget?
They are facing the argument that the United States’ monetary union works much better because there is a large federal budget to smooth the impact of asymmetric shocks – that is, shocks to individual states.
The eurozone, it is claimed, should have its own budget to provide similarly automatic insurance to its members.
This argument, however, misreads the US experience.
True, in the US, as in most existing federal states, the federal budget redistributes income across regions, thus offsetting at least part of the interregional differences in income.
But, while this has been repeatedly documented in many cases, the inference that redistribution is equivalent to a shock absorber is wrong.
For example, in the US, the federal budget offsets a substantial part (estimated at 30-40%) of the differences in per capita income levels across states, because poorer states contribute less income tax, on average, and receive higher transfer payments.
But this does not imply that these mechanisms also provide insurance against shocks (sudden changes in income for individual states).
Many of the transfers from the federal government – especially basic social support like food stamps – vary little with the local business cycle.
On the revenue side, the degree to which federal taxation absorbs shocks at the state level cannot be very large for the simple reason that the main source of federal revenues that does react to the business cycle, the federal income tax, accounts for less than 10% of GDP.
The low sensitivity of both federal expenditure and federal revenues to local business-cycle conditions explains why only a small fraction (estimated at about 10-15 %) of any shock to the GDP of any individual state is absorbed via automatic transfers to and from the US federal budget.
One idea that has been mooted repeatedly in Europe is to create some European, or at least eurozone, unemployment insurance fund.
This idea is attractive at first sight.
But here, too, the reference to the US experience is misleading.
In the US, unemployment insurance is organized at the state level.
The federal government intervenes only in the case of major nationwide recessions and provides some supplementary benefits for the long-term unemployed.
But this support is given to all states and thus does not provide those most affected with much more support than the others receive.
Moreover, unemployment benefits are not as important as is often assumed.
In most countries, they amount to only about 2-3% of GDP, even during a major recession.
In the US, the annual supplementary federal expenditure has amounted to only about 1% of GDP in recent years.
It is thus clear that a eurozone unemployment insurance system would never be able to offset major shocks, such as those hitting Ireland or Greece, where GDP has shrunk by more than 10%.
The case of Spain illustrates another feature of European economies that makes it difficult to argue for a federal unemployment scheme.
Spanish unemployment is now close to 30%, which a priori should be a good justification for some form of shock absorber.
But Spanish unemployment has typically been consistently higher than the eurozone average, and fell to single-digit levels only as a result of an unsustainable building boom.
Any common eurozone unemployment scheme would thus risk financing the long-term unemployment created by rigid national labor-market institutions, which for decades have proved impervious to reforms.
All in all, it is difficult to base the argument for some eurozone shock absorber on the US experience.
But how can one explain the fact that the global financial crisis led to no regional banking crises in the US, whereas several eurozone countries’ banking systems are under such stress that their governments have had to rescue them (and then be rescued in turn by the eurozone’s bailout fund)?
This reflects another aspect of US arrangements that, again, is not widely appreciated.
The US “banking union” provides tangible insurance against local financial shocks.
For example, the local real-estate boom and bust in Nevada was as severe as that in Spain or Ireland.
But, in Nevada, which is similar in size to Ireland, the local banking system’s losses were absorbed to a large extent by US “banking union” institutions, particularly the Federal Deposit Insurance Corporation (FDIC) and the federal mortgage-refinancing agencies, Fannie Mae and Freddie Mac.
For Nevada, such support can be estimated at 10-20% of its “national” income.
Ireland would certainly be in much better shape if it had received a similar transfer.
This leads to a simple conclusion: The euro’s long-term stability depends far more on completing plans for a European banking union than it does on creating some new budget for the eurozone.
The Eurozone’s Autumn Hangover
NEW YORK – After a summer of Europeans forgetting their woes and tanning themselves at the beach, the time for a reality check has come.
For the fundamental problems of the eurozone remain unresolved.
First, a trillion-dollar bailout package in May prevented an immediate default by Greece and a break-up of the eurozone.
But now sovereign spreads in the peripheral eurozone countries have returned to the levels seen at the peak of the crisis in May.
Second, a fudged set of financial “stress tests” sought to persuade markets that European banks’ needed only €3.5 billion in fresh capital.
But now Anglo-Irish alone may have a capital hole as high as €70 billion, raising serious concerns about the true health of other Irish, Spanish, Greek, and German banks.
Finally, a temporary acceleration of growth in the eurozone in the second quarter boosted financial markets and the euro, but it is now clear that the improvement was transitory.
All of the eurozone’s peripheral countries’ GDP is still either contracting (Spain, Ireland, and Greece) or barely growing (Italy and Portugal).
Even Germany’s temporary success is riddled with caveats.
During the 2008-2009 financial crisis, GDP fell much more in Germany – because of its dependence on collapsing global trade – than in the United States.
A transitory rebound from such a hard fall is not surprising, and German output remains below pre-crisis levels.
Moreover, all the factors that will lead to a slowdown of growth in most advanced economies in the second half of 2010 and 2011 are at work in Germany and the rest of the eurozone.
Fiscal stimulus is turning into fiscal austerity and a drag on growth.
The inventory adjustment that drove most of the GDP growth for a few quarters is complete, and tax policies that stole demand from the future (“cash for clunkers” all over Europe, etc.) have expired.
The slowdown of global growth – and actual double-dip recession risks in the US and Japan – will invariably impede export growth, even in Germany.
Indeed, the latest data from Germany – declining exports, falling factory orders, anemic industrial-production growth, and a slide in investors’ confidence – suggest that the slowdown has started.
In the periphery, the trillion-dollar bailout package and the non-stressful “stress tests” kicked the can down the road, but the fundamental problems remain: large budget deficits and stocks of public debt that will be hard to reduce sufficiently, given weak governments and public backlash against fiscal austerity and structural reforms; large current-account deficits and private-sector foreign liabilities that will be hard to rollover and service; loss of competitiveness (driven by a decade-long loss of market share in labor-intensive exports to emerging markets, rising unit labor costs, and the strength of the euro until 2008); low potential and actual growth; and massive risks to banks and financial institutions (with the exception of Italy).
This is why Greece is insolvent and a coercive restructuring of its public debt is inevitable.
It is why Spain and Ireland are in serious trouble, and why even Italy – which is on relatively sounder fiscal footing, but has had flat per capita income for a decade and little structural reform – cannot be complacent.
As fiscal austerity means more recessionary and deflationary pressures in the short run, one would need more monetary stimulus to compensate and more domestic demand growth – via delayed fiscal austerity – in Germany.
But the two biggest policy players in the eurozone – the European Central Bank and the German government – want no part of that agenda, hoping that a quarter of good GDP data makes a trend.
The rest of the eurozone is in barely better shape than the periphery: the bond vigilantes may not have woken up in France, but economic performance there has been anemic at best – driven mostly by a mini housing boom.
Unemployment is above 9%, the budget deficit is 8% of GDP (larger than Italy), and public debt is rising sharply.
Nicolas Sarkozy came to power with lots of talk of structural reforms; he is now weakened even within his own party and lost regional elections to the left (the only case in Europe of a shift to the left in recent elections).
Given that he will face a serious challenge from the Socialist Party candidate – most likely the formidable Dominique Strauss-Kahn – in the 2012 presidential election, Sarkozy is likely to postpone serious fiscal austerity and launch only cosmetic structural reforms.
Belgian Prime Minister Yves Leterme, as current holder of the rotating EU presidency, now speaks of greater European policy unity and coordination.
But Leterme seems unable to keep his own country together, let alone unite Europe.
Even Angela Merkel – in growing Germany – has been weakened within her own coalition.
Other eurozone leaders face stiff political opposition: Silvio Berlusconi in Italy, whom one hopes may soon be booted out of power;
And politics is becoming nationalistic and nativist in many parts of Europe, reflected in an anti-immigrant backlash; raids against the Roma; Islamophobia; and the rise of extreme right-wing parties.
So a eurozone that needs fiscal austerity, structural reforms, and appropriate macroeconomic and financial policies is weakened politically at both the EU and national levels.
That is why my best-case scenario is that the eurozone somehow muddles through in the next few years; at worst (and with a probability of more than one-third), the eurozone will break up, owing to a combination of sovereign debt restructurings and exits by some weaker economies.
The Eurozone’s Coming Inflation Divide
ZURICH – Discussions within the European Central Bank’s Governing Council, which is poised to meet on April 7th, are about to get hot.
The risk that rising inflation in emerging Asia could spill over into Europe will pit the Bank’s inflation hawks against those in favor of ensuring as fast a return to full employment as possible.
But what may cause even greater dissension is a renewed clash of national interests as inflation rates within the eurozone diverge.
The underlying cause of this divergence is the much larger role that imports from China and other East Asian emerging economies play in the German or Belgian economies than in southern European countries.
For example, Germany’s imports from China totaled roughly $63 billion in 2009, nearly equivalent to the imports from France, Greece, Italy, Portugal, and Spain combined.&#160;
And China’s trade significance, as a share of GDP, is nearly twice as great for Germany as it is for any of these countries.
In addition to this difference in the relative magnitude of imports, the benign price effect of low-cost import competition is much larger in Germany’s competitive retail landscape than in the more traditional, and uncompetitive, retail systems of Italy or Greece.
Overall, these structural economic disparities have led to vast differences in the ways that various eurozone members have benefited from the rise of cheap Asian imports over the last 15 years.
Now that the era of cheap imports is waning, however, the effect on prices will be reversed, and those who benefited the most in the past may now suffer the most from Asian inflation.
The spillover of inflation from China to Europe may explain the recent upward pressure on prices in Germany.
The figure relates the inflation rate during the second half of 2010 to the relative importance of imports from China.
Among the depicted countries, a larger Chinese import share was clearly associated with a much higher inflation rate.
It is likely that in the months to come, inflation in emerging Asia will cause pronounced divergence in inflation rates in the eurozone.
Such divergence, of course, implies ample potential for discord within the ECB in the near future.
But it will also accelerate a solution to the eurozone’s main structural problem: its internal competitive imbalances, owing to wage-growth trends since the introduction of the euro that underpinned to Germany’s large trade surplus vis-a-vis the rest of the eurozone.
So now – for once – it is the German economy that is bound for higher inflation than the rest of Europe.
And make no mistake about whether rising prices will feed through to wage growth.
Already, barely a year into the recovery from the worst economic crisis since World War II, unemployment in Germany is at a post-unification low.
With the economy likely to grow substantially as Chinese firms’ competitiveness deteriorates due to rising wages, it is hard to imagine that German trade unions will not demand hefty real-wage increases as well.
But any pickup of wage growth in Germany will bring about an unintended benefit: a much-needed convergence of unit labor costs in the eurozone.
Although this might be hard to swallow for traditionalists among central bankers, it now seems likely that high inflation in Germany will be the price of achieving the eurozone’s long-term cohesion.
Notes: The Q3/Q4 inflation rate is the annualized percentage change of the Harmonized Consumer Price Index from 15.06.2010 to 15.12.2010 (15.05-15.11 for Ireland).
Sources: Eurostat and International Monetary Fund.
The Eurozone’s Last Stand
NEW YORK – The eurozone crisis is reaching its climax.
Greece is insolvent.
Portugal and Ireland have recently seen their bonds downgraded to junk status.
Spain could still lose market access as political uncertainty adds to its fiscal and financial woes.
Financial pressure on Italy is now mounting.
By 2012, Greek public debt will be above 160% of GDP and rising.
Alternatives to a debt restructuring are fast disappearing.
A full-blown official bailout of Greece’s public sector (by the International Monetary Fund, the European Central Bank, and the European Financial Stability Facility) would be the mother of all moral-hazard plays: extremely expensive and politically near-impossible, owing to resistance from core eurozone voters – starting with the Germans.
Meanwhile, the current French proposal of a voluntary rollover by banks is flopping, as it would impose prohibitively high interest rates on the Greeks.
Likewise, debt buybacks would be a massive waste of official resources, as the residual value of the debt increases as it is bought, benefiting creditors far more than the sovereign debtor.
So the only realistic and sensible solution is an orderly and market-oriented – but coercive – restructuring of the entire Greek public debt.
But how can debt relief be achieved for the sovereign without imposing massive losses on Greek banks and foreign banks holding Greek bonds?
The answer is to emulate the response to sovereign-debt crises in Uruguay, Pakistan, Ukraine, and many other emerging-market economies, where orderly exchange of old debt for new debt had three features: an identical face value (so-called “par” bonds); a long maturity (20-30 years); and interest set well below the currently unsustainable market rates – and close to or below the original coupon.
Even if the face value of the Greek debt were not reduced, a maturity extension would still provide massive debt relief – on a present-value basis – to Greece as a euro of debt owed 30 years from now is worth much less today than the same euro owed a year from now.
Moreover, a maturity extension resolves rollover risk for the coming decades.
The advantage of a par bond is that Greece’s creditors – banks, insurance companies, and pension funds – would be able and allowed to continue valuing their Greek bonds at 100 cents on the euro, thereby avoiding massive losses on their balance sheets.
That, in turn, would sharply contain the risk of financial contagion.
Rating agencies would consider this debt exchange a “credit event,” but only for a very short period – a matter of a few weeks. Consider Uruguay, whose rating was downgraded to “selective default” for two weeks while the exchange was occurring, and then was upgraded (though not to investment grade) when, thanks to the exchange’s success, its public debt became more sustainable.
The ECB and creditor banks can live for two or three weeks with a temporary downgrade of Greece’s debt.
Moreover, there would be few holdouts that refuse to participate in the exchange.
Previous experience suggests that most hold-to-maturity investors would accept a par bond, while most mark-to-market investors would accept a discount bond with a higher coupon (that is, a bond with a lower face value) – an alternative that could be offered (and has been in the past) to such investors.
At the same time, the best way to contain financial contagion would be to implement a pan-European plan to recapitalize eurozone banks.
This implies using official resources like the EFSF not to backstop an insolvent Greece, but to recapitalize the country’s banks – and those in Ireland, Spain, Portugal, Italy, and even Germany and Belgium that need more capital.
In the meantime, the ECB must continue to provide unlimited resources to banks under liquidity stress.
To reduce the risk of financial pressures on Italy and Spain, both countries need to press ahead with fiscal austerity and structural reforms.
Moreover, their debt could be ring-fenced with a larger package of EFSF resources and/or with the issuance of Eurobonds – a further step towards European fiscal integration.
Finally, the eurozone needs policies to restart economic growth on its periphery.
Without growth, any austerity and reform will deliver only social unrest and the constant threat of a political backlash, without restoring debt sustainability.
To revive growth, the ECB needs to stop raising interest rates and reverse course.
The eurozone should also pursue a policy – partially via looser monetary policy – that weakens the value of the euro significantly and restores the periphery’s competitiveness.
And Germany should delay its austerity plan, as the last thing that the eurozone needs is a massive fiscal drag.
The eurozone’s current muddle-through approach is an unstable disequilibrium: kicking the can down the road, and throwing good money after bad, will not work.
Either the eurozone moves toward a different equilibrium – greater economic, fiscal, and political integration, with policies that restore growth and competitiveness, including orderly debt restructurings and a weaker euro – or it will end up with disorderly defaults, banking crises, and eventually a break-up of the monetary union.
The status quo is no longer sustainable.
Only a comprehensive strategy can rescue the eurozone now.
More Leadership for More Europe
MILAN – The debate about improving economic governance within the eurozone is shedding new light on the system’s weaknesses.
It was already evident when the Maastricht
Treaty was signed in 1992 that a monetary union without something similar in the fiscal domain would be unsustainable in the long run.
Then, for the common currency’s first decade, that fundamental flaw was papered over.
Now the eurozone – with a centralized monetary policy, run by the European Central Bank, alongside 27 national fiscal policies – has come to look like a mockery of economic common sense.
Early on, important states like France and Germany stopped taking seriously the European Union’s Stability and Growth Pact (SGP), which was supposed to guarantee fiscal discipline and coordination among the member states.
With the euro’s introduction boosting intra-European trade and lowering inflation in many member states, fiscal obligations were simply ignored.
The euro quickly became the world’s second most important currency, and it proved to be a shield against external financial turbulence.
Optimism soared and prudence fled – reflected in premature eurozone membership for countries like Greece, as well as in the gap between the pace of EU enlargement and that of institutional integration.
In other words, Europe’s decision-makers ultimately overlooked the basic requirements of a monetary union in a heterogeneous economic area:
•&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; A sizeable common budget for the provision of public goods.
•&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Fiscal transfers from more prosperous areas to lagging or distressed regions.
•&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Some form of mutualization of public debt, carried out under stringent rules.
•&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Above all, a central bank with all of the prerogatives and instruments needed to serve as lender of last resort.
Satisfying these conditions would, of course, lead to fully-fledged political union, but the process could be gradual, starting with a banking union, a fiscal union, or a central bank with lender-of-last-resort status – a functionalist approach that might be more politically viable.
Some will oppose greater solidarity nonetheless, disregarding the elementary fact that enhanced interdependence in a monetary union requires it, and ignoring the Lisbon Treaty’s affirmation of Europe’s “social market” model.
A monetary union that does not benefit all of its participants will not survive for long.
After the eurozone’s sovereign-debt crisis erupted, defaults were avoided by establishing the European Financial Stabilization Mechanism (since replaced by the European Stability Mechanism), and by crafting a more pragmatic and reinforced role for the ECB (acting with the European Commission and the International Monetary Fund).
And a new “fiscal compact” foresees enshrining member states’ commitment to budget balance – and to reducing public debt to within 60% of GDP in 20 years – in their constitutions.
But any assessment of European economic governance must acknowledge the slow, contradictory nature of intergovernmental decision-making, in which a misconceived notion of national interest, together with upsurges in popular anti-EU sentiment and electoral pressure, has led to a stop-and-go process, punctuated by financial-market swoons.
Viewed in these terms, the European political class has clearly failed to exercise leadership.
The challenge now is twofold: how to cope with the financial crisis while creating a safer economic future through better governance.
Excessive emphasis on fiscal rigor, unaccompanied by measures to stimulate growth, has reinforced recessionary trends, placing additional strain on national budgets and debt/GDP ratios.
That drives up affected governments’ borrowing costs further, fueling a downward spiral.
Any lasting solution requires Europeans to acknowledge that they now face a common problem that can be resolved only by greater cohesion and financial solidarity.
The ECB must become a genuine central bank for Europe.
The European banking system must be turned into a banking union with the ECB responsible for prudential supervision.
The fiscal compact must be implemented quickly, and progress on harmonizing fiscal policies should continue.
But fiscal discipline must be accompanied by policies that promote growth, without which balanced budgets and debt reduction cannot be achieved.
The Europe 2020 strategy, approved two years ago in part to improve economic governance, is a good starting point, offering the basis for the “growth compact” that some EU governments have sought.
The path to improved European economic governance leads through the EU’s political institutions, with “more Europe” presupposing further strengthening of the European Parliament and the European Commission, and the abolition of veto powers in the European Council.
The argument that strengthening Europe’s common institutions would reduce national sovereignty appears very weak, for the simple reason that in today’s globalized economy sovereignty is more apparent than real.
Parallel with these changes, European leaders must publicly acknowledge that if the euro collapses, Europe will quickly revert to competitive devaluations, intra-EU protection, and “beggar-thy-neighbor” policies, all of which were evident in the 1970’s and 1980’s.
European public opinion must be made aware that increasing interdependence means that the exchange-rate stability and gradual completion of the single market implied by the euro really do benefit all participants.
Europe’s political class needs to find the courage to take the next steps toward a closer union.
The small price that nation-states will have to pay is negligible compared to the likely consequences of inaction.
The Eurozone’s Strength in Disunity
FLORENCE – For months, an increasingly frenetic, even apocalyptic, debate about the fate of the euro has been the major driver of global instability.
Can Europe’s common currency survive? No less a figure than former United States Federal Reserve Chairman Alan Greenspan has now declared that it cannot.
But the euro also seems surprisingly resilient in the face of this woe.
Unlike in the early summer of 2010, it has been largely stable relative to the dollar on foreign-exchange markets.
That stability is puzzling.
Skeptics have plenty of ammunition for their critique of the euro.
European governments’ high-level crisis diplomacy and new and ever more complex mechanisms sometimes briefly calm the markets, but the tide of doubt quickly sweeps back in.
For a day, or sometimes only for a few hours, traders succumb to the illusion of stability, fueling a euphoric but ephemeral financial-market rally.
Then they awaken to the reality that not much has really changed, and that in a few weeks or months the problems will reappear in a seemingly even more intractable form.
All manner of new legal and constitutional difficulties constantly arise.
Is an amendment to the EU treaty required?
Isn’t that politically unthinkable?
One is ineluctably led to the conclusion that governance of the eurozone is irredeemably flawed.
But the persistence of these difficulties sheds light on why the eurozone was established in the first place.
Market turbulence demonstrates a need for some institutional mechanism that can ensure greater currency stability.
An international currency is the most obvious solution.
The euro originated from the harmful effects of international currency instability in the wake of the collapse of fixed-exchange-rate regimes in the early 1970’s.
Whenever the dollar was weak, capital surged into alternative currencies, notably the Japanese yen and the German Mark.
But exchange-rate appreciation put great strain on the export industries that were central to these countries’ economic performance; and both countries tried desperately to avoid becoming reserve currencies.
Today, the major “beneficiaries” – in fact, victims – of dollar doubts are economies that are much smaller than Japan or Germany.
Nowadays, capital flows are driving up the Swiss franc, the Swedish and Norwegian krone, and the Canadian and Australian dollars, causing profound dislocations in these small economies as their products and services become uncompetitive.
The managers of these new safe-haven currencies are now desperately seeking at least a temporary peg or some system of bands relative to the exchange rates of their big neighbors.
Such a policy is fraught with danger; indeed, it is inherently self-defeating, as the establishment of a peg or a band provides an obvious target against which speculators can take huge positions.
The current turmoil eventually will lead smaller European countries to look for ways to tie themselves much more closely to the euro.
That is what happened in the 1970’s, during the original wave of currency turmoil: the Scandinavians and the Swiss negotiated to associate themselves with a European currency regime.
Today, the logic of that strategy has become even more compelling.
The benefits of euro membership are also clear to many other small economies.
Slovenia, which entered the eurozone in 2007, and Slovakia, which joined at the beginning of 2009 – just as the cresting financial crisis slammed shut the door to further euro enlargement – have enjoyed much greater financial stability than their untied neighbors.
Part of those neighbors’ problem was that domestic borrowing costs looked so high that many small borrowers, including many house buyers, turned to low-interest Swiss-franc loans and were then hit by the franc’s massive appreciation.
The turbulence reinforces the lesson – fundamental to the rationale of establishing the euro – that ordinary people and businesses should not be exposed to exchange-rate risk.
Even in larger countries, the costs and benefits of membership in a currency union are under renewed consideration.
In the initial aftermath of the financial crisis, it was widely assumed that currency flexibility gave the United Kingdom an advantage over eurozone members like Spain.
But Spanish exports recovered more quickly than British exports, and inflationary pressure via the exchange rate is now a major constraint on future British monetary policy.
Of course, there are obvious governance problems with the eurozone.
Most glaringly, the question of how to allocate the costs of some member countries’ unsustainable debt overhang has not been adequately addressed.
It is easy to conclude that no one is in charge: not the national governments, and certainly not the ineffective European Commission in Brussels, with which the large member countries seem to be practically at war.
And yet, paradoxically, the absence of control is what makes the euro attractive.
Unlike the US dollar, there is no obvious way to put pressure on the European Central Bank to depreciate the currency in order to obtain a competitive advantage over other economies.
European governments are not in a position to instruct the ECB to purchase government bonds.
The more the eurozone’s ineffective governance is criticized, the greater becomes the euro’s importance as a non-political currency that represents a secure store of value.
In a stable world of confident markets, small countries can rest easy with their own monetary regimes.
In a turbulent world of market volatility, however, they risk being overwhelmed.
There is thus a surprising resilience in the European project.
A bundle of logs lashed together in a raft – even if it lacks a rudder – has a clear advantage over a single storm-tossed trunk.
The higher the waves of doubt and uncertainty become, the more the common approach is needed.
A Breach in the Eurozone Dike
PRINCETON – While all eyes have been on the European periphery, has the core been cracking?
The Bundesbank has lowered its forecast for German annual GDP growth in 2013 to 0.4%.
The Central Bank of the Netherlands expects Dutch GDP to shrink by -0.5% this year –&#160;following a contraction of about 1% in 2012.
The eurozone crisis may be entering its third stage.
In the first stage, beginning in the spring of 2008, the locus of the North Atlantic crisis moved from the United States to the eurozone.
Banks in the eurozone came under pressure, and interbank tensions increased.
In the second stage, starting in the spring of 2009, the crisis spread to the sovereigns, as investors grew increasingly worried that propping up banks would strain government finances.
In turn, sovereign weakness made the banks appear riskier, and the banks and their home governments became joined at the hip.
Throughout the crisis, it has been widely assumed – at least so far – that the eurozone core would remain solid, and would continue to write the checks for the periphery’s distressed governments and banks.
That assumption appeared plausible.
A “two-speed” Europe was the new normal.
In particular, Germany stood above the fray.
Following strong performance in 2010, Germany’s GDP exceeded pre-crisis levels by early 2011, a somewhat better achievement than that of the US.
Indeed, given Germany’s surprisingly impressive employment performance, another Wirtschaftswunder appeared to be in the making.
Then a subtle change occurred.
The US – despite a historically slow return to normalcy –&#160;pulled ahead of Germany.
Absent a prolonged fiscal-cliff and debt-ceiling mess, the US may be cobbling together a sustainable recovery.
Following the German economy’s sharp contraction in the last quarter of 2012, the question for the country today is whether it can avoid a technical recession (defined as two consecutive quarters of economic contraction).
Europe does not have its own growth engine.
The German rebound was initially robust because world trade rose rapidly after a precipitous fall.
China’s voracious appetite for German cars and machines provided the needed boost, even as Germany’s traditional trade partners in Europe struggled.
Since then, however, Chinese demand growth has slowed, and Germany’s European trading partners are in even deeper trouble.
Fiscal austerity in the periphery requires cutting back on imports; hence, the countries exporting to the periphery need to curtail their own imports – and so the process cascades.
This trade multiplier is causing European economies to drag each other down, and the rest of the world is feeling the effects.
The Dutch economy’s poor prospects are similarly alarming.
The Netherlands is second only to Germany in the volume of credit that it channels through the so-called “Target 2” system to the eurozone periphery, and it is the periphery’s largest creditor in per capita terms.
Economic forecasters continue to promise that growth will revive.
Things will begin to look up in the second half of 2013, we are told.
But the track record of charting this recovery has been discouraging.
In his book The Signal and the Noise, the American statistician Nate Silver says that forecasters perform worst when faced with a circumstance that they have not encountered before.
This is such a circumstance.
In April 2010, the International Monetary Fund’s World Economic Outlook projected 1.8% annual GDP growth in Germany and the Netherlands in 2013.
In October of last year, the IMF lowered its 2013 growth forecast for Germany to 0.9% and to 0.4% for the Netherlands.
And, a mere two months later, both countries’ central banks report that even these reduced expectations are too optimistic.
Who is to say that the second half of 2013 will bring more hope and cheer?
The European crisis-management process has been predicated on the Scarlett O’Hara principle that “tomorrow will be a better day.” Although everyone knows that postponing hard decisions only makes the problem larger, they could still believe that there would always be a firm line of defense.
That may be changing.
The third stage of the eurozone crisis will arrive when the economic strength of the core is in doubt.
Those very doubts undermine the credibility of the safety net that has been supporting the European periphery.
A solution to the eurozone crisis that relies on Germany has always been politically uncertain.
A Green European Budget
PARIS – However predictable the difficult negotiations that accompany European politics may seem to be, in the end they seldom fail to surprise.
A crucial European Union summit aimed at securing a deal on the EU budget for 2014-2020, the so-called multi-annual financial framework (MFF), will take place later this week, and the mood music surrounding it has been intense, to say the least.
Before even a word has been spoken, Europeans are being told that the negotiations in Brussels will be “bad-tempered,” with vetoes by individual member states looming large.
Unfortunately, such talk could well become a self-fulfilling prophecy.
Consider this: A group of major companies based in various EU countries – the likes of Tesco, Shell, Barilla, and Philips – are insisting that whatever its final size, the MFF deal should commit to a proposed minimum of 20% of spending in 2014-2020 on green and low-carbon growth.
These are the same companies that Europe’s national governments court and listen to on a daily basis.
But, when it comes to the MFF, Europe’s national leaders appear not to be listening closely.
Nor do they say much about the obvious dividends that such spending could provide, from the United Kingdom in the west to the EU’s newest candidate country, Croatia, in the east.
Europe’s 500 million citizens may not be surprised by what is playing out in the corridors of power, but they ought to find it very disturbing.
The issue is not only what could be lost in the race to the bottom in which many EU national governments are now engaging, but also the manipulative anti-EU sentiment coming from many quarters of the European press, which appears intent on pushing various national leaders into another budget showdown.
In the EU’s western, net-contributor states, the MFF debate remains narrowly focused on how much money can be cut from the European Commission’s proposed €1.033 trillion ($1.3 trillion) budget for 2014-2020.
Next to nothing, though, is being said about the Commission’s more important, and more integral, proposal: the 20% spending commitment for projects and initiatives that can stimulate resource-efficient business, protect Europe’s collective, boundary-less environment, and ensure a better future for families across the continent.
The dividends promised by a “green” MFF (which recently received the support of the European Parliament) are at least threefold: a higher share of jobs in one of the world’s fastest-growing economic sectors; lower energy bills for households throughout Europe; and help in achieving the reductions in greenhouse-gas emissions to which all EU states have agreed as part of their “Europe 2020” commitments.
The green potential within EU spending has already taken root.
In France, for example, social housing organizations have rapidly deployed €320 million of EU money in the last few years to improve energy efficiency in existing housing stock.
This European finance triggered additional investment of €2.2 billion, created 15,000 local jobs, and has resulted in savings of €98 per month per household, thanks to a 40% average decrease in heating costs.
Recently, Michael Heseltine, a former minister in Margaret Thatcher’s government, stressed the importance of wind energy for deprived regions of the United Kingdom, such as the northeast of England.
And yet the penny has not dropped in London that focusing European investment funds accordingly would create opportunities to build stronger businesses and increase competitiveness in the technologies of the future – and to share these gains within and beyond the EU.
Instead, in the UK and elsewhere, the predictable MFF chest-thumping that is now underway threatens to dispatch this kind of opportunity to the bin beneath the negotiating table.
Europe has come a long way since 1951 and the creation of the European Coal and Steel Community, the forerunner of the EU.
But we are now in the process of constructing the EU economy anew, striving to overcome the economic crisis, and creating a more sustainable, globally competitive, and resilient European economy – an economy that can be green as well as productive.
The EU’s heads of government need to understand the bigger picture as they prepare for this week’s MFF summit.
Europe’s common good – indeed, its most promising path to a prosperous future – is at stake.
The EU’s Appeasement of Russia
Once again, Ukraine is in the eye of a political hurricane.
Faced with a possible constitutional coup that would have eviscerated his powers, President Viktor Yushchenko has dissolved Ukraine’s parliament and called for new elections.
His political opponent – Prime Minister Viktor Yanukovych – is violently opposing that move, fueling a bitter constitutional struggle that ultimately will settle Ukraine’s future orientation.
Will Ukraine continue its turn towards the West, as Yushchenko and his Orange Revolution ally Yuliya Tymoshenko want, or return to Russia’s strategic embrace, as Yanukovych and his allies want?
It was Russia’s attempt, only two and a half years ago, to install Yanukovych as President via rampant electoral fraud that touched off the “Orange Revolution.”
After months of struggle, Yushchenko rightfully claimed the presidency.
But the revolution petered out, former partners were soon at loggerheads, giving Yanukovych and his allies a chance to return to power.
Throughout this difficult period, the European Union has failed Ukraine, bluntly declaring that it should not hold any hope of future membership and justifying this stance by citing its internal problems – the stranded Constitutional Treaty – and growing public sentiment against further enlargement.
But political leaders in the EU are merely succumbing to ill-informed fears.
Rather than informing their populations about the economic and political benefits of the recent enlargements, most are playing on voters’ “enlargement fatigue.”
This has denied Ukraine the lighthouse that helped guide other post-communist states – most recently Bulgaria and Romania – towards Western-style democracy and rule of law.
As a result, there is now an obvious risk of a new internal split in the country.
Even current EU members feel abandoned by the Union: there is a growing sense in the three Baltic Countries, Poland, and Hungary that the EU is allowing them to be squeezed by Russia, particularly on energy policy.
Of course, EU membership gives these countries a greater sense of security.
But the EU’s old members have brought on an enormous sense of disappointment by ignoring its new members’ security concerns in favor of preserving their own ties with Russia, particularly in cutting energy deals that they think will assure them of supplies.
Other post-Soviet countries are also experiencing internal pressure to re-orient themselves towards Russia and feel abandoned by the EU.
Georgia and Moldova both face secessionist-minded, Russian-dominated enclaves that are to a large extent controlled from Moscow – Abkhasia and South Ossetia in Georgia and Transdniestria in Moldova.
Both countries suffer from Russian trade embargoes on their most important export products – wines and foodstuffs.
Moldova appears set to cave in to Russia’s pressure, partly to attract desperately needed inward investment at a time when little aid has come from the West, particularly the EU.
Indeed, like Ukraine, Moldova and Georgia have been left without any clear signals from the EU that they will have the prospect of membership at some point in the future.
Russia is also flexing its muscles over the question of Kosovo’s future, raising objections in the United Nations Security Council to the UN’s plan for independence and openly supporting Serbia’s quest to maintain its supremacy over Kosovo.
Russia argues that independence for Kosovo may “create a precedent” – a veiled threat to mobilize its secessionist proxies not only in Georgia and Moldova, but also in Ukraine’s Crimea region.
Moreover, Russia is hinting at the many worries within EU countries about potential demands for self-rule, by, for example, the Basques in Spain, the Turks in northern Cyprus, and the large Hungarian minorities in Romania and Slovakia.
All of these countries are now acting with great hesitation in the debate about Kosovo, clearly influenced by Russian warnings about “setting a precedent.”
But this argument overlooks the fundamental difference between Kosovo and the situation in all other areas with large national minorities.
Whereas Kosovo was part of a federation, the former Republic of Yugoslavia, the EU’s other potential trouble spots are all parts of unitary nation states.
Thus, independence for Kosovo in no way creates a “precedent.”
Of course, Russia knows this.
But, by using its energy resources and recovered confidence to fuel instability and discord, it is seeking to expand its sphere of interest – an outcome that can be averted only by a unanimous and determined EU response.
Unfortunately, instead of reaching out to endangered nations like Ukraine, the EU beacon remains dark and its leaders silent.
The EU\u0027s Catch-22
COPENHAGEN: Worrying signs are mounting that the European Union’s enlargement process is losing steam.
Bringing into the EU applicant countries from Central and Eastern Europe, as well from the Baltic region, however, remains the single most important item on the European agenda in our time.
It would be a mistake of historic proportions to delay it. For stalling could pose a serious threat to European stability far out of proportion to enlargement’s costs.
Enlargement will undoubtedly pose many practical problems.
But the magnitude of the economic costs should not be exaggerated: after all, the aggregate GNP of the 10 applicant countries from the former communist bloc is smaller than the GNP of Holland!
Structural support to new members from current EU members, indeed, is expected to be less than 4% of Dutch GNP.
Transfers of wealth on the scale of what took place between West and East Germany won’t happen.
Indeed, enlargement’s total cost will be less than the annual increase in the EU Commission’s own resources which "normal" economic growth provides.
Costs, of course, are not the only difficulty.
One additional problem concerns the establishment within applicant countries of administrative and democratic structures compatible to those that exist in today’s EU.
But if present EU members erect conditions on membership that are too harsh for newcomers to meet, they run the risk of creating a "Catch-22" situation.
In his novel of that title Joseph Heller described the situation faced by some fighter pilots in WWII: medics can ground anyone who is crazy, provided that the pilot requests to be grounded.
Because fear in the face of danger is a normal human reaction, however, anyone who requests grounding cannot be crazy and so cannot be grounded.
That’s "Catch-22".
The same might be said about joining the EU: if you can only become a member by living up to the standards of the Union, you will never become a member, since you need membership to entrench those standards.
Keep in mind that European integration is a political endeavour.
Economics are the means, politics the purpose.
This was made clear in the preamble to the Treaty of Rome more than 40 years ago: "...pooling their resources to preserve and strengthen peace and liberty....".
The six founding members - Germany, France, Italy, and the Benelux-countries - waged war against each other several times during the first half of the 20th century.
Nowadays, however, war between members of the EU is not only unlikely and unbelievable, but also impossible.
This proves the point: European integration is first and foremost an instrument to preserve and strengthen peace and liberty.
This was the guiding principle behind past enlargements to include democracies that were, at the time of their admission, new and fragile: first Greece, then Spain and Portugal.
It is in full conformity with its original vision that the Union now be enlarged to include the new democracies of Eastern and Central Europe and the Baltics.
This process must not be delayed by lack of perspective.
One corner of Europe is in particular need of prompt action: the Baltic Sea Region.
Estonia, Latvia and Lithuania cannot join NATO for the foreseeable future.
Therefore it is necessary to bring them into the EU as soon as possible in order to make it absolutely clear to their big neighbour, Russia, that in today’s Europe Aspheres of interest” no longer exist; that the Baltic three are equal members of the European family.
When you discuss this issue with our American allies, they fail to understand why an EU of 350 million people hesitates to absorb less than 8 million people in order to mend historic fences.
Bringing in Lithuania, Latvia, and Estonia would strengthen stability in the Baltic area, because the rules of the game would be crystal clear to everyone, both with regard to security and to human and minority rights.
There would be no room left for adventures on either side.
Alas, as always, the Devil is in the details: the EU’s institutions were originally designed for 6 members, but within a decade or two the EU will probably have 25-30 (perhaps more) member states.
So reform is vital.
But calls to reform can also be used as delaying tactics.
When I listen to the grand, visionary speeches about Europe’s future put forward recently by some EU political leaders - President Chirac’s recent speech to the Bundestag being the most otherworldly - I am struck by the thought that these visions are worthless if designed to cover up a lack of enthusiasm to face the challenges of enlargement.
Now is not the time to discuss far-reaching visions, nor to start constructing "inner circles" in the Union.
Now is the time to give concrete direction and pledges regarding enlargement.
For Europe’s task is to maintain and strengthen structures of cooperation that retain the advantages of diversity and independence without reviving the old curse of the European nation state: xenophobia, bloodshed, and war.
A stronger, wider EU must be our priority.
The EU, Serbia, and the Balkans
BRUSSELS: On September 24, despite a system heavily rigged against them, Serbia’s people voted – in huge numbers – for spring after a long political winter.
They demanded a new start for their country – the chance to consign to history the economic and political misery endured in recent years.
Today, they have that new start.
Ten years after the rest of postcommunist Europe, Serbia must begin establishing an open, democratic society.
The EU has made clear its willingness to help a democratic Serbia re-join the family of Europe.
The EU symbolizes one of history’s most successful attempts by countries and peoples to overcome division through partnership and co-operation, where competition on a level playing field replaces battlefield conflict.
Fifty years ago, few thought that possible.
Much of Western Europe was rubble.
Enmities smoldered.
With generous support from America, we built a robust community of democracies, whose economic wealth and political liberty helped us stand firm in the face of tyranny.
Yugoslavia’s enmities, and the ruins of its economy, need to be addressed in a similar spirit.
The EU’s record is clear.
When Communism collapsed, we set about helping the countries of Eastern Europe to establish democracy and make the transition to the market economy.
We did so with the same commitment and faith in their ability to succeed that the US devoted to re-building Western Europe after WWII.
In the ten years since the Berlin Wall’s fall these countries have been transformed and are on the way to joining the EU.
War in Europe, we told ourselves, could never happen again.
But it did, in the Balkans.
All Europe’s demons had not been exorcised.
After a decade of war, we are now humbler, wiser, I hope – but more determined to turn the page, to work with the countries and peoples of Southeast Europe not to escape their neighborhood, but to transform it.
That is what the Stability Pact is about – a recognition that the region’s problems must be tackled in the round; a recognition that coping with crisis after crisis is far more costly than implementing a long-term strategy for peace.
The EU, indeed, faces few greater tests of its ability to project stability than in the Balkans.
Last year in Kosovo, America bore the brunt of the military campaign.
American and European peacekeepers serve alongside each other in Kosovo and in Bosnia.
Nearly two thirds of those troops – some 30,000 of them – are from EU nations.
Our overall strategy is clear: to build a strong, stable network of democracies in the region, a network that – we hope – will now include Serbia.
We are starting to implement such a strategy by building, literally and metaphorically, Southeast Europe’s road to integration with the rest of Europe and the Euro-Atlantic community.
That road is built on a foundation in which solid reform is backed by substantial assistance.
We have spent nearly 8bn euros in reconstruction and humanitarian assistance in the region since 1991; EU financial assistance to the region during those years amounts to 17bn euros.
This year, the European Commission is spending nearly 600m euros rebuilding lives in Kosovo and Bosnia, backing brave and newly elected leaders in Croatia, supporting reform in the Former Yugoslav Republic of Macedonia (fYROM) and Albania.
In Montenegro, the EU provided considerable support as its government stood up to Milosevic.
We doubled – to 20 million euros – the EU’s assistance to Montenegro this year.
The European Council in Lisbon ordered further assistance to help alleviate the immediate financial needs of Montenegro.
We stand ready to offer assistance to Serbia in the same spirit.
When Serbia’s new leaders look around, indeed, they can see real progress in the region: in Croatia, which has blazed a democratic trail since elections earlier this year; in the former Yugoslav Republic of Macedonia, which has nearly concluded negotiations with the EU for a Stabilization and Association Agreement, the first country to do so; in Albania, which is persevering with political and economic reforms; and in Bosnia, where refugee return has accelerated.
Even in Kosovo, where obstacles remain formidable, progress is being made.
That progress is taking place at a regional level too: a regional investment compact, a regional anti-corruption initiative, media reform.
Agreements to upgrade the Blace border-crossing between fYROM and Kosovo, and to build a new bridge over the Danube between Bulgaria and Romania have been made.
These are real achievements, which the Stability Pact helped broker.
Europe is also funding a substantial package of &gt;Quick Start’ projects – ready to begin now or in the next twelve months – to upgrade bridges, roads, airports, water systems, and electricity networks across the region.
Just as important are projects to install institutional &gt;software’ - public administration, a free media, independent judiciaries, functioning, accountable institutions in which all members of the community can place trust and confidence.
The European Commission pledged 530 million euros for projects under the Quick Start package.
Cooperation, however, is a two-way street.
To succeed, these efforts must be matched with equal determination by the countries of the region in delivering on reform.
That approach – help for self-help, inextricably linked to actual reforms – lies at the heart of the EU’s Stabilization and Association process.
That process will bring – is already starting to bring – substantial benefits to the region in terms of trade access, political dialogue, and regional co-operation.
Indeed, we recently agreed radical proposals to expand trade access – through asymmetric trade measures – to the EU market for the countries of the region.
These come into effect on 1 November.
Eighteen months after the air strikes in Kosovo, we are making headway.
The changes in Serbia provide evidence that the people of Serbia, too, have noticed what is happening in the rest of their region and no longer want to miss out.
We, too, don’t want them to miss out on better ties to Europe.
The EU’s Global Mission
In some quarters, pessimism, sad to say, dominated the recent celebrations marking the European Union’s 50th birthday.
Unease about the EU’s future is, of course, understandable, especially given the uncertainty surrounding efforts to revive the Constitutional Treaty.
But the European project has been an enormous success, not only for Europe, but also for the world.
Europeans should not be dismayed by comparisons of GDP growth in Europe and, say, the United States.
Of course, Europe faces great challenges in perfecting its economic union, including the need to reduce unemployment and boost the economy’s dynamism.
But, while GDP per capita has been rising in the US, most Americans are worse off today than they were five years ago.
An economy that, year after year, leaves most of its citizens worse off is not a success.
More importantly, the EU’s success should not be measured only by particular pieces of legislation and regulation, or even in the prosperity that economic integration has brought.
After all, the driving motivation of the EU’s founders was long-lasting peace.
Economic integration, it was hoped, would lead to greater understanding, underpinned by the myriad interactions that inevitably flow from commerce.
Increased interdependence would make conflict unthinkable.
The EU has realized that dream.
Nowhere in the world do neighbors live together more peacefully, and people move more freely and with greater security, than in Europe, owing in part to a new European identity that is not bound to national citizenship.
This stands as an example that the world should emulate – one of shared rights and responsibilities, including the obligation to help the less fortunate.
Here, too, Europe has led the way, providing more assistance to developing countries than anyone else (and at a markedly higher fraction of its GDP than the US).
The world has faced a difficult period during the past six years.
The commitment to democratic multilateralism has been challenged, and rights guaranteed under international conventions, such as the Convention Against Torture, have been abrogated.
Many lessons have emerged, including the dangers of hubris and the limits of military power, and the need for a multi-polar world.
Europe, with more people than any nation except China and India, and the largest GDP in the world, must become one of the central pillars of such a world by projecting what has come to be called “soft power” – the power and influence of ideas and example.
Indeed, Europe’s success is due in part to its promotion of a set of values that, while quintessentially European, are at the same time global.
The most fundamental of these values is democracy, understood to entail not merely periodic elections, but also active and meaningful participation in decision making, which requires an engaged civil society, strong freedom of information norms, and a vibrant and diversified media that are not controlled by the state or a few oligarchs.
The second value is social justice.
An economic and political system is to be judged by the extent to which individuals are able to flourish and realize their potential.
As individuals, we are part of an ever-widening circle of communities, and we can realize our potential only if we live in harmony with each other.
This, in turn, requires a sense of responsibility and solidarity.
The EU demonstrated that sense powerfully by its assistance to Europe’s post-Communist countries.
The transition from Communism to the market has not been easy, but Europe’s unprecedented generosity has paid off: the countries that have joined the EU have outperformed all the others, and not just because of access to Europe’s markets.
Even more important was the institutional infrastructure, including the binding commitment to democracy and the vast array of laws and regulations that we too often take for granted.
Europe has succeeded in part because it recognizes that the rights of individuals are inalienable and universal, and because it created institutions to protect those rights.
America, by contrast, has witnessed a massive assault on those rights, including that of habeas corpus – the right to challenge one’s detention before an independent judge.
Fine distinctions are made, for example, between the rights of citizens and non-citizens.
Today, only Europe can speak with credibility on the subject of universal human rights.
For the sake of all of us, Europe must continue to speak out – even more forcibly than it has in the past.
Likewise, while the European project sought to bring about the “harmony” of people living together in peace, we also must live in harmony with our environment – the scarcest of all of our resources.
In this area, too, Europe has taken the lead, especially concerning global warming, showing that petty selfishness can be put aside to achieve a common good.
In today’s world, too, there is much that is not working well.
While economic integration helped achieve a broader set of goals in Europe, elsewhere, economic globalization has contributed to widening the divide between rich and poor within countries and between rich and poor countries.
Another world is possible.
But it is up to Europe to take the lead in achieving it.
The EU’s Hour, or Europe’s Darkest Hour?
COPENHAGEN – So far, Europe’s leaders seem to be mostly preoccupied with finding national answers to the global economic crisis.
In particular, the leaders of “Old Europe” have been reluctant to open up their coffers for the countries of “New Europe.”
If this attitude prevails, there is a grave risk that the European Project will become paralyzed.
This will not only delay the restoration of economic growth, but will also have dire political consequences.
The European Union’s new members from eastern and central Europe have been hit much harder by the crisis than the old member states; they are also much less prepared to confront the situation psychologically and socially.
Many were gravely disappointed when European leaders earlier this month rejected pleas to establish a special support program for them.
Of course, German Chancellor Angela Merkel was right to point out that each country should be dealt with according to its situation.
But she and her colleagues should have voiced clearer and more emphatic support for the new member states.
Emotions and expectations ran high when the new democracies from the former East Bloc joined the EU only five years ago.
Until the crisis hit last year, the enlargement had proven to be a profitable business for Old Europe: high growth rates in most of New Europe injected energy into Old Europe’s sagging economies, much to the surprise of those who had predicted that enlargement would become an economic millstone around the neck of the established member states.
But then the financial system crumbled growth rates fell like a ton of bricks.
The new democracies were shaken as public protests erupted in some of their capitals, and some governments have fallen.
Expectations and confidence in democracy, the market economy, and the larger European project have suffered as well.
If this is allowed to continue, we might end up opening a Pandora’s Box, setting free the nationalistic and xenophobic ghosts of the past.
Some of these democracies are very young and fragile.
The optimism created by their peaceful return to a free and democratic Europe has been shattered to a degree that none of us could have foreseen.
This is where political leadership is needed.
The leaders of the well established European democracies must explain to their own voters that enlargement has greatly benefited them, and that it will also be to their benefit to share the responsibilities and costs of steering the hardest-hit countries through the crisis.
There were always exaggerated claims that bringing in the new members would be a costly affair, just as petty and narrow prejudices blemished the willingness to open up Europe’s borders for “Polish plumbers.”
Any sober appraisal of what has actually happened since expansion would put the problems in perspective: when enlargement was agreed, the combined size of the ten new members’ economies roughly equaled that of the Netherlands.
Today, after five years of much stronger growth among the newcomers, their combined GNP is somewhat smaller than that of the Benelux countries.
Thus, the sheer magnitude of the task of reviving these economies is not overwhelming.
But the political consequences of failure to deliver a message of genuine European solidarity will be.
This is, indeed, “the hour of Europe.”
I remember when this phrase was last used: in 1991, when the chairman of the European Council of Ministers visited what was still Yugoslavia and eagerly accepted the empty promises of Slobodan Milosevic and his clique that they were ready to accept European pleas for a peaceful resolution to the conflicts there.
The chairman stated: “This is the hour of Europe, not the hour of the Americans.”
But this time we Europeans cannot expect others to step in.
Turning to the International Monetary Fund or others when it comes to pulling our chestnuts out of the fire will not bring us the needed confidence in the European project.
So this must be the hour of Europe.
And that means that a clear message should be sent to those who are becoming doubtful about the EU’s worth: We are in this together.
We will find common European solutions.
Solidarity among members is not just something we talk about when the future looks bright and rosy.
The EU\u0027s Istanbul Train
The Islamic and non-Islamic worlds now seem locked in a vicious circle of hatred, one that is convincing many moderates on both sides that the cultural and political divide is too large to bridge.
This fatalistic vision is tragic and could become a self-fulfilling nightmare.
In this context, Europe's dickering over Turkey's possible membership in the European Union takes on a special significance for the world.
Turkey's membership will likely be discussed at December's Copenhagen summit of EU leaders.
Since the 1960s, there has been loose talk in Western Europe that Turkey might one day become a member of the European Community, now the EU.
But no practical steps towards membership took place as Europe regularly - and rightly - pointed out that Turkey had failed to fulfill many conditions for membership, especially in regard to respect for human rights and the rule of law.
Yet lurking beneath those specific issues is a more general worry: whether Europe would accept Turkey, an Islamic society, into the European fold under any conditions.
Anti-Islamic feelings run deep across Europe, reflecting 1,000 years of rivalry, war, and cultural clashes.
Many Turks fear that their country's exclusion from the EU has nothing to do with specific policies or institutions, but rather with Europe's permanent hostility to Islamic societies.
With eastward enlargement of the EU now poised to happen, it is no surprise that deeply felt and dangerous notions are rising to the surface.
Former French President Valery Giscard d'Estaing, currently the President of the Convention on the Future of Europe, recently declared that "Turkey is not a European country," and that Turkey's admission to the EU would be "the end of Europe."
Advocates of Turkey's admission, he continued, are "the adversaries of the European Union."
As both an admirer of the EU and a supporter of Turkey's accession to the EU, I believe Giscard wrong in his crude characterization.
Yet I know that he reflects a deep-seated viewpoint, though one far from claiming a majority in Europe.
Several years ago, I heard another leading public figure in Europe explain in a public lecture that Europe is a Christian society and therefore can never admit an Islamic member.
Giscard's outburst was provocative for another reason.
Turkey has just demonstrated the vibrancy of its democratic credentials by holding national elections despite a deep economic crisis.
The winner was the Justice and Development Party.
The new Prime Minister, Abdullah Gul, immediately declared gaining accession to Europe a priority.
"Our aim is to show the world that a country which has a Muslim population can also be democratic, transparent, modern, and cooperative with the world."
To now rule out Turkish membership in the EU would be needlessly provocative.
The founder of the modern Turkish state, "taturk", accomplished an enormous amount three-quarters of a century ago to bring Turkish political, cultural, and economic institutions into line with those of Europe.
After World War II, Turkey was a recipient of Marshall Plan aid, joined the Council of Europe in 1949, joined NATO in 1952, became an associate member of the European Union in 1964, applied for membership in the European Community in 1987, and completed a customs union with Europe in 1995.
So its quest for EU membership has deep roots.
If Europe conducts serious negotiations with Turkey over eventual accession, the results will benefit both parties and also the wider world.
On the economic front, the move towards membership would force Turkey to continue to upgrade its institutions and to enhance the rule of law, thus adding long-term institutional stability to Turkey's political institutions, which will in turn help stabilize North Africa and the Middle East.
Each accession to the EU over the past quarter century, such as Spain and Portugal's drive before 1986, and more recently the efforts of the Central European postcommunist candidates, has spurred institutional modernization and contributed to stability and moderation in domestic politics.
The "prize" of European membership has helped to forge political consensus within candidate countries, and the same would happen with Turkey.
By spurring this institutional reform, moreover, economic prospects also brighten, not least by Turkey's ability to attract larger flows of foreign direct investment.
On the political front, the worldwide demonstration effect of Turkey's membership in the EU would have huge consequences.
The claims of the Islamic fundamentalists - that the West is anti-Islamic - would be proven wrong.
Turkey itself could serve as a stronger bridge to the unstable Turkic societies of Central Asia, from Azerbaijan to Kyrgyzstan, countries now at risk of destabilization from the war on terrorism and struggles over oil and other natural resources.
Fortunately, when Giscard voiced his dangerous sentiments, many in the European Commission and throughout Europe declared that the former French President spoke only for himself.
Now the European Union must make that point more forcefully by demonstrating its good faith in rising to the historic challenge of negotiating Turkey's membership in the EU.
The EU’s Kosovo Catalyst
Kosovo’s declaration of independence has put stability in the Western Balkans back on Europe’s agenda.
Unless the European Union acts quickly, the whole region could slide backwards, with dire social, economic, and security consequences.
The EU needs a comprehensive regional approach, focusing on the remaining steps that would lead each country towards membership.
The Western Balkans − a term used only since 1999 − comprises Albania, Bosnia and Herzegovina, Croatia, Macedonia (FYROM), Montenegro, Serbia, and Kosovo, with a combined population of roughly 22 million.
Economic developments in the region are promising, with almost all its economies posting high growth, fueled by increasing industrial output and exports.
Inward investment is steadily rising, as business seems to believe that the remaining political and security challenges – the possible negative effects of post-independence Kosovo and Bosnia’s malaise – will be overcome sooner rather than later.
Much work has already been done to re-establish and improve regional relations.
The EU-led Stability Pact for South Eastern Europe has since 1999 successfully stimulated regional cross-border cooperation, for the first time since the breakdown of Yugoslavia.
Energy, transport infrastructure – roads, railways, and waterways – and crime prevention have all benefited.
The Stability Pact has now been transferred to local control, re-emerging as the Sarajevo-based Regional Cooperation Council, ready to develop regional and multilateral standards for its members.
The recently revived Central European Free Trade Agreement (CEFTA) is meant to be the main regional engine for trade and business generally, and will adhere both to WTO rules and the parties’ obligations towards the EU.
Similarly, the South-East European Cooperation Process is one of the relatively new regional organizations that contribute to candidate and potential candidate countries’ preparations for EU membership, providing the first genuine region-wide policy forum where both EU members and candidates participate.
But these bodies must not be seen as substitutes for the far more comprehensive accession process, which only the EU itself can initiate.
And yet, despite the region’s favorable prospects and relatively small size, the Union has been slow in doing so.
Certainly, the pace of candidate countries’ approach to the Union depends on the speed of their reforms.
And Europe, with the vital support of the United States, worked hard to stop the carnage of the 1990’s and subsequently to help rebuild the Balkan countries.
But the EU has so far failed to prepare the Western Balkans for accession, in line with its leaders’ promise at their Thessaloniki summit in 2003 to admit the Western Balkan states when they meet the Union’s standards.
That promise was not a matter of charity; the Balkans would add value to the EU.
To be sure, the EU’s lengthy internal crisis over the proposed constitution was a major distraction, and damaged the Union’s reputation in the Balkans.
Let us hope that the new Reform Treaty will help to reassure the critics and pave the way for a new – and more robust – phase of integration.
If not, one would have to ask what had happened to the European spirit of the 1970’s and 1980’s, when countries such as Greece, Portugal, and Spain, which had just emerged from dictatorship and civil unrest, were welcomed into the European community of democratic states.
Political decisions taken then were far more risky than those at hand in the Balkans, and the Greek and Iberian success stories demonstrate the wisdom of the courageous decisions taken at that time.
What about today?
The most recent EU members, Bulgaria and Romania, are both in the Balkans and  both are examples of countries with special needs.
While the EU at first took their accession negotiations a bit too casually, it subsequently decided to continue monitoring the two countries even after accession in order to ensure that they develop the effective administrative and judicial systems that are an obligation of membership.
The EU must learn from this experience to develop an accession strategy for the Western Balkans, whose development has been delayed by a complex post-conflict transition process.
Their special needs should be taken into account in any new EU approach, giving them hope while mitigating the fallout from Kosovo.
It is in Europe’s interest as much as it is in the interest of the region to accelerate the integration process.
A reinvigorated accession process would contribute to the EU’s consolidation, both territorially and politically, while strengthening its role in its wider neighborhood – the Mediterranean, the Middle East, and around the Black Sea.
The EU’s Looming Crisis over Cyprus
The EU\u0027s Next Priority After Enlargement? Le défi Americain
The European Union summit that just ended in Copenhagen has more or less settled the EU's future frontiers.
Ten new members, from Central Europe and the Mediterranean, will be admitted in 2004.
Two other countries, Bulgaria and Romania, can aim for membership three years after that.
Turkey, after much huffing and puffing, has had its status as an officially recognized candidate for membership reaffirmed, even if mighty doubts remain as to when it will actually join.
Because this enlargement round is likely to be the last for a long time, if not forever, it is urgent for member states to think seriously about re-writing the EU treaties to deal with the new reality, in terms which will be workable for the long term.
In particular, member states will need to think much more radically about developing a strong EU foreign and security policy, for two reasons.
First, enlargement will take the EU right up to the frontier of Russia and the former Soviet Union; if Turkey joins, the EU will extend to the heart of the Middle East as well.
Second, the international context in which the EU operates is being transformed by the strategic revolution underway in Washington.
For the past 50 years, the EU was largely able to count on a benign partnership with the US in a multilateral context; that assumption no longer holds, even if we do not yet know the extent of America's new unilateralism.
The problem is aggravated by the fact that the EU remains wholly unprepared for its "big bang" enlargement, even as it is set to begin.
No one has any idea how to run a Union of 25 or more member states--not even in terms of basic logistics, starting with the geometric escalation in translation requirements. Or consider the laboriousness of conducting negotiations in a room with 25 national delegations, 10 of whom will be unfamiliar with the way the EU works.
But the enlargement schedule agreed at Copenhagen will define the final limit of the Union.
Norway may one day possibly seek to join, and that would pose no problems; it is conceivable that Switzerland may seek to join, and that too would not be a problem (except to the Swiss).
Otherwise, it is difficult to imagine further EU enlargement.
Aside from the poor, war-ravaged Balkan states--Albania, Bosnia, Croatia, Macedonia, and whatever Serbia and Montenegro end up deciding to call themselves--the only imaginable additional candidates, assuming that they are classified as "European," are Russia, Belarus and Ukraine.
The key country here is Russia.
Leaving aside all questions of human rights, democracy, and the rule of law, Russia is just too big, too Asiatic, too nuclear, and too much of a "great power," to be accommodated inside the EU.
In theory, the advantage of this "big bang" enlargement is that it may concentrate minds on the need for a radical re-think of the decision-making processes in a bigger EU.
Past enlargements have been in packets of one, two, or at most three new members.
On these occasions existing members pretended that they need not fundamentally change the EU's institutional arrangements.
With 10 new members joining, that pretence is no longer tenable.
Fortunately, the ground is being prepared for reform by the Convention on the future of the Union being chaired by former French President Valéry Giscard d'Estaing, which should make its institutional proposals next spring.
The trouble is that the steep escalation of enlargement coincides with a swing of opinion in a number of member countries in favor of a more intergovernmental EU, with more emphasis on cooperation between sovereign states and less attention to strengthening common EU institutions.
This is most notable among big member states like Britain, France, and Spain, and one can see why; these are former "great powers," which fear being submerged in a mega-Europe.
They hope to perpetuate their influence by asserting claims of national sovereignty.
But this is the wrong solution to the problem of a bigger EU.
Decision-making is already difficult in an EU with 15 members.
It will become impossible in an EU of 25-30, unless the scope for majority voting is enlarged, and the veto power of individual states reduced.
In short, a large EU will have to have much more the character of a federation than a small EU.
This is not a question of ideology; it is a question of arithmetic.
An analogous argument applies to the development of a more effective EU foreign policy.
Russia is no longer perceived as a military threat.
But if the US continues to downgrade its commitment to multilateralism, and instead determines to intervene militarily wherever it pleases, then the world will become a much more dangerous place.
British Prime Minister Tony Blair says that Europe should be a partner, not a servant or a rival, of the US.
That would certainly be progress on the European side compared with what we have now, and would require much closer foreign policy cooperation within Europe than Britain, France, or Germany seem prepared to consider.
But it takes two to tango.
Unless there is a fundamental change in the posture of the Bush administration, it seems doubtful that partnership will be on offer at all.
In short, if we are living in a world in which the US acts solely in its own immediate national interests, the EU will be compelled to do likewise.
No EU government, however, yet seems prepared to face this.
Israel’s European Peace?
MADRID – As the dramatic events unfolding across the Middle East capture global attention, the numerous challenges facing Israel are being largely overlooked.
In fact, Israel is confronting one of the most dangerous periods in its existence.
Not only do long-standing concerns like the threat of a nuclear-armed Iran remain unresolved; all of Israel’s neighbors are now either beset by or hurtling toward upheaval.
And, though US-brokered peace talks with Palestine have resumed, they are likely to end in failure.
But there is one promising development: the European Union, in an uncharacteristic show of backbone, has issued written guidelines prohibiting cooperation with Israeli companies operating in the West Bank and East Jerusalem.
This bold move could presage a game-changing role for the EU in bringing about a long-awaited resolution to the Israel-Palestine conflict.
Such an outcome could not arrive soon enough, especially given the unprecedented chaos on Israel’s borders.
In Egypt, the tense, polarized environment following the military’s overthrow of President Mohamed Morsi has created the real possibility of civil conflict.
Although Israel was initially apprehensive about an Islamist government across its Sinai border, the Muslim Brotherhood’s value – its ability to influence Hamas, the dominant political force in Gaza – quickly became apparent.
The nature and posture of the new military-led regime remains to be seen.
Meanwhile, Syria’s civil war has begun to spill over into Israel’s Golan Heights.
The introduction of chemical weapons and the possibility of Western military intervention threaten to draw Israel directly into the conflict.
The spillover effects of the Syrian crisis have also unsettled Lebanon, exemplified in the recent spate of sectarian violence, and threaten to destabilize Jordan, which is struggling under the burden of more than 500,000 Syrian refugees.
It is in this highly uncertain context that US Secretary of State John Kerry sought to restart Israel-Palestine peace negotiations.
Three potential approaches were discussed: talks without preconditions, talks following a settlement freeze, and talks following the release of Palestinian prisoners.
Unexpectedly, a modified version of the third option – whereby 104 Palestinian prisoners will be released in phases over the course of the negotiations – ultimately facilitated the resumption of talks.
Despite its apparent success, however, the bargain dealt a serious blow to the legitimacy of the peace process.
The first tranche of 26 prisoners – all of them tried and convicted by Israeli courts for their involvement in the killing of Israelis – were released from custody in July, ahead of the second round of talks.
The problem is that many of their victims were civilians, not military personnel or government officials, causing outrage among the Israeli public.
Yet the Palestinian Authority demanded their release, Israel’s government obliged, and the US supported the transaction.
By endorsing a false peace-justice tradeoff, instead of insisting on the more politically difficult option of a settlement freeze, or on the removal of preconditions, the US has jettisoned legality from the peace process.
Furthermore, this approach undercuts the credibility of the rule of law in Israel.
As Israeli Prime Minister Binyamin Netanyahu put it, the agreement “collides with the incomparably important value of justice.”
That collision is all the more jarring, given that the prisoners are not being released in support of a final agreement; they are merely facilitating the initiation of a negotiation process that appears to lack commitment from either side.
Just days before the second round of talks began, Israel announced plans to proceed with the construction of 1,200 homes in the West Bank and East Jerusalem.
This suggests that, while the prisoner release may lead to a short-term agreement, it is not backed by a genuine effort to develop the kind of trust-based arrangements that are needed for lasting peace.
Against this background, the EU’s unexpected stand is notable, not only for its technical features, but also for its practical and symbolic implications.
In all future agreements with the EU or any of its member states, Israel’s government will have to acknowledge explicitly that territories beyond the pre-1967 borders are not part of Israel.
While the guidelines simply formalized existing EU policy, they drew immediate criticism, with Netanyahu declaring that they “undermined peace” and “hardened Palestinian positions” during negotiations.
This strong reaction reflects the profound importance of the EU’s ties with Israel, undercutting the long-held assumption that the US is the only outside actor that can influence Israeli policy.
Given the EU’s robust relationship with Israel – underpinned by its role as Israel’s largest trade partner, accounting for roughly 26% of total Israeli exports and 34% of its imports – it can develop powerful incentives that could provide the impetus that the peace process needs to succeed.
The easiest option would be conditional liberalization of trade in services within the existing framework of the EU-Israel Association Agreement.
But the challenging strategic environment and legacy of failed negotiations call for a more daring approach: The EU should take the initiative in persuading its partners in the European Economic Area to offer Israel membership, conditional on the completion of a peace agreement.
Beyond deepening the EU’s internal market, such a move would serve as a powerful symbol of the value and potential of the EU-Israel relationship, opening the way to further integration in the future.
Europe has an historic opportunity to help resolve one of the world’s longest-running and seemingly most intractable conflicts.
It is thus simultaneously an opportunity for the EU to assert itself, at long last, as an effective force in world affairs.
The EU’s Rules to Default By
BRUSSELS – Greece’s ballooning public debt is again throwing Europe’s financial markets into turmoil.
But why should a debt default by the government of a small, peripheral economy – one which accounts for less than 3% of eurozone GDP – be so significant?
The answer is simple: the financial system’s entire regulatory framework was built on the assumption that government debt is risk-free.
Any sovereign default in Europe would shatter this cornerstone of financial regulation, and thus would have profound consequences.
This is particularly visible in the banking sector.
Internationally agreed rules stipulate that banks must create capital reserves commensurate to the risks that they take when they invest depositors’ savings.
But when banks lend to their own government, or hold its bonds, they are not required to create any additional reserves, because it is assumed that government debt is risk-free.
After all, a government can always pay in its own currency.
This assumption makes sense, however, only when a government issues debt in its own currency; only then can it order its central bank to print enough money to pay its creditors.
Before the introduction of the euro, this was the case in all advanced countries.
But the countries that adopted the euro can no longer rely on the printing press.
They are, instead, effectively borrowing in a “foreign” currency (or, rather, a currency that they cannot individually control).
It should thus have been clear that with the start of European Monetary Union (EMU), participating countries’ public debt should no longer have been considered risk-free.
But it was.
Indeed, eurozone regulators not only maintained the assumption that the public debt of a bank’s own country was risk-free, but chose to extend it to all eurozone countries, implying that banks did not have to provide additional capital against their holdings of any eurozone public debt.
This is the key reason why one-third of all public debt in the European Union is held by banks.
And this concentration of public debt on banks’ balance sheets is what makes the entire European banking system so vulnerable to a sovereign default.
Moreover, given the prevailing assumption that public debt was risk-free, banks were not bound by the usual rules against “large exposures”: they could accumulate as much exposure to any one government as they wanted.
That is why Greek banks could end up holding more government debt than they have capital.
A government default would thus wipe out the entire Greek banking system.
It is now too late to turn back the clock and suddenly force banks to get rid of their excessive holdings of public debt.
Unfortunately, regulators do not even appear to be learning from the current crisis in order to prevent the next one.
The EU’s rules on how much capital banks must hold are about to be revised.
The rules, which are detailed in a 500-page legal proposal, called “CRDIV” and published recently by the European Commission, will increase the amount of capital banks must hold, but only for lending to the private sector.
Lending to eurozone governments continues to have a zero risk weight.
This will only increase the bias in bank lending towards government debt and against lending to enterprises, especially small and medium-size businesses.
This is a mistake.
The European Commission should have introduced capital requirements on banks’ holdings of public debt.
The justification would be simple: no one can seriously claim that the bonds of all eurozone governments are without risk.
It should thus be obvious that banks should hold some capital against the risks they assume when lending to governments with particularly high debts or large budget deficits.
Moreover, the new rules will require banks to hold more liquid assets.
It is easy to guess which assets the authorities consider liquid: public debt.
In this way, too, banks will be induced to hold public debt rather than to finance private investment, despite the obvious fact that government bonds can become very illiquid (for example, those issued by Greece, Ireland, and Portugal).
The definition of what banks should hold for liquidity purposes should have been broadened beyond public debt to include a wide range of private-sector assets based on market size.
Both key elements of the new banking rules thus go in the same direction: they increase the bias in bank financing against lending to the private sector.
It is easy to understand why the authorities persist in favoring public debt: the rules are set by finance ministers, who are naturally inclined to give themselves a good deal.
Moreover, it is difficult for politicians to see that their budgets compete for a limited pool of savings.
Lower financing costs for public debt appear to be a net gain to society, because the government then saves on debt service and can keep taxes lower.
But any gains from lower taxes are more than offset by the losses to the private sector, which, facing higher financing costs, will invest less, in turn lowering economic growth – and thus reducing government revenues.
Many steps have been taken in recent years to reinforce regulation of the banking system.
But what is proposed now will make lending for investment even less attractive and increase the incentive to concentrate sovereign risk in the banking sector.
This can only worsen Europe’s sovereign-debt problem and weaken its already meager growth prospects.
The EU’s Small Leaders
The defeat of the EU’s Constitutional Treaty in referendums in France and the Netherlands has, it seems, given rise to a new consensus that further enlargement of the Union should be slowed down, or even stopped.
Advocates of this position see EU voters as terrified by the consequences of the May 2004 enlargement of the EU, when eight formerly communist states joined, and angry that they were not consulted about it.
One set of fears concerns the labor market – the so-called “Polish plumber” question.
In this interpretation, wages were eroded and jobs were lost because of the inflow of poorly qualified and cheap central Europeans.
Particular cases, such as the elimination of German meat processing and packing jobs, or casual workers in France, were widely discussed as evidence of a new threat.
But the “Polish plumber” is actually a weak bogeyman.
First, there had already been a substantial flow of workers before enlargement.
Poles had worked in some agricultural jobs – in sugar beet and wine harvesting – even during the communist era. With the fall of the Iron Curtain in 1989, labor flows, both legal and illegal, became much greater.
Second, inflows of new workers bring substantial benefits as well as losses: in France, which suffers a shortage of some 6,000 plumbers, there must be plenty of households that would be pleased to find someone qualified to do repair work.
Finally, the enlargements of the 1980’s, when Greece and then Spain and Portugal joined the then European Community, were not very disruptive.
By themselves, the labor-market implications of poor countries’ accession to the EU simply are not very dislocating.&#160;
What makes the debate so passionate in 2005 is a new fear that did not exist in the 1980’s: that the new members have a different social model, in which workers’ rights and the welfare state will be eroded.
It is not so much the Polish plumber as it is the Slovak 19% flat tax that is the challenge to the older West European social model and welfare state.
The EU’s large states feel particularly vulnerable, and it is there that the biggest shock to expectations has occurred.
In the past, France and Germany were the motors of European integration.
Now they are the countries that feel most threatened, and bookshops in both countries are full of alarmist and sensational accounts of national decline.
Germany’s post-1949 Federal Republic was accustomed to being regarded as Europe’s great economic success story, but it never really recovered from the post-unification recession of the early 1990’s, with growth sluggish to non-existent.
The consensual society that was at the center of the Federal Republic’s Wirtschaftswunder now looks inflexible, throwing up obstacles to change.&#160;
Germany is surrounded by small states that all seem to be prospering more in today’s geo-political and geo-economic environment.
These include not only the rapidly growing formerly communist countries to the east, Poland and the Czech Republic, but also Denmark, the Netherlands, Austria, and Switzerland, upon which Germans traditionally looked down.
Now, as one mordant and widespread slogan puts it, Austria is “the better Germany.”
Many French writers also express a vivid feeling of national decline, and many ordinary citizens believe that the rules of the global economy work against French national interests.
In short, the large states still have illusions, encouraged by their political elites, about what the state can do to guide economic development.
By contrast, the small European states – whether in Eastern or Western Europe – have been much more flexible in responding to the challenges of the modern globalized economy.
Politics can offer all kinds of goods that voters find very attractive: tax breaks, subsidies, and social benefits.
But small states are less likely to think that they can create the rules of the game, and accordingly they are more willing and able to make adjustments.
They are more keenly aware that if they try to redistribute too much, they will simply drive away the factors of production: capital will flow elsewhere, and labor will likewise migrate.
The same sort of logic applies to the large states: France and Germany are losing skilled labor at the same time as they are drawing in cheaper labor from Eastern Europe.
The result is that they are feeling less French or German, creating greater political room, on both the left and the right, for nationalist ressentiment.
In the earlier rounds of European integration, from the 1950’s to the 1980’s, the big states received very obvious gains, which their politicians could easily present as such to voters.
But since 1989 – or since the Maastricht Treaty came into force in 1992 – the political dynamic has changed.
It is now the EU’s smaller states that gain the most from wider and deeper European integration.
If the large states are to obtain similar gains, and their politicians are to recover voters’ respect, their governments will have to accept the small-state logic and abandon the Great Power posturing of the past.
The EU’s Turn in Afghanistan
Time is running out for success in Afghanistan.
The NATO summit in Riga of November 28-29 may be the last chance to pull that country back from the brink.
NATO assumed responsibility for providing security for all of Afghanistan in October.
While about 8,000 of the 20,000 US troops in Afghanistan operate independently, the rest have joined the most ambitious military venture in NATO’s history, the International Security Assistance Force (ISAF).
Each of the 26 NATO allies has troops in Afghanistan, as do 11 other countries.
Some, like Macedonia and Finland, belong to the Alliance’s Partnership for Peace.
Others, like Australia and South Korea, come from farther afield.
Soldiers from different countries operate almost as a single unit with shared objectives, similar methods, compatible equipment, and complementary skills.
A half-century of working together, plus a decade and a half of adapting to new threats and demands, is paying off.
The bad news is that the 40,000 foreign troops in Afghanistan are not enough.
A few Afghan provinces, including those along parts of the border with Pakistan and its Taliban sanctuaries, have little or no ISAF presence and no Provincial Reconstruction Teams.
Abysmal air and land transport limit the ability to move fighting forces to where they are needed most.
Several countries, including NATO allies, have imposed “national caveats” that limit where their troops can be deployed or the tasks they undertake.
So, before any operation, commanders must determine which troops can take part and in what capacity, hampering both efficiency and effectiveness.
Nevertheless, NATO would succeed if outside civilian efforts, resources, organization, and leadership in Afghanistan were equal to its own.
Unfortunately, there is no central direction or even coordination of civilian efforts.
Although non-governmental organizations are doing an effective job, responsibilities assigned to different European countries – such as helping the Afghan government with law enforcement and poppy eradication – have fallen short of both needs and promises.
Poppy production is soaring, experiments with alternative crops are lagging, and there are not enough forces to provide security for farmers willing to try growing something different.
So the Taliban are obtaining ample funds from the heroin trade – easily Afghanistan’s largest single source of foreign earnings.
Western drug addicts are putting more money into Afghanistan’s economy than Western governments.
The shortfalls of the civilian effort and the unwillingness or inability of the Afghan government to provide good governance are the country’s central problems.
These factors largely explain the Taliban’s violent revival, and the uncertainty of many Afghans about whom to support.
NATO has “bet the alliance” on Afghanistan.
No amount of “transformation” or “partnerships” or anything else will matter much if NATO fails for the first time in its history – even if that failure is not of its own making.
Firm commitments at Riga of more allied troops and equipment for the ISAF and fewer national “caveats” must be part of the answer.
But allied leaders must also act on the knowledge that NATO does not have the skills, resources, or experience to take full charge of meeting Afghanistan’s requirements for external civilian help.
That task must belong to the European Union, the one institution with the collective means, skills, resources, and – potentially – the leadership to relieve NATO and ISAF of burdens for which they are not suited.
Yet the EU holds back.
Turf battles with NATO intrude, as well as competition between the EU’s executive Commission and the member-based Council.
Even though 19 of NATO’s 26 members also belong to the EU, leaders and bureaucrats in most of these countries have been unwilling to back the commitment of their troops with the economic resources needed.
At the Riga summit, NATO should challenge the EU to take its proper share of responsibility for success in Afghanistan.
This will require the EU to contribute money, manpower, and officials on the ground of the rank and stature of ISAF commanders, in an equal partnership with NATO.
By coincidence, the EU’s rotating presidency is now held by Finland.
NATO’s presidents and prime ministers could simply cross the Baltic Sea from Riga for a half-day Afghanistan summit with the EU in Helsinki.
One or two EU countries might object that this would mix institutional apples and oranges.
But for Europeans who claim equal status with NATO for the EU’s Common Foreign and Security Policy, this is the time to put up or shut up.
Even if leaders balk at an extra half-day of meetings to address the most serious threat to NATO’s future, the Riga summit can issue a demand that its own 19 dual members, and the rest of the EU, agree to assume shared responsibility in Afghanistan.
NATO is in Afghanistan largely owing to shared concerns about terrorism.
But NATO is also acting because some European countries want to show Washington that they can pull their security weight even though they refuse to go near the war in Iraq.
All NATO allies and EU members want the US to remain committed to Europe’s future, to take the lead elsewhere in meeting security needs on which all agree, and to admit Europe into its strategic confidence.
That now requires supporting the EU’s deep involvement in Afghanistan as its key contribution to repairing and reforming the Atlantic Alliance.
The EU’s Viennese Mirror
If a European Union bureaucrat could travel to fin de siècle Vienna, he would be surprised by how closely the Hapsburg Empire resembled today’s EU.
Like the EU, Austria-Hungary was an experiment in supranational engineering, comprising 51 million inhabitants, 11 nationalities, and 14 languages.
Presiding over this microcosm of Europe was a double-throned Emperor-King and twin parliaments representing the largely independent Austrian and Hungarian halves of the realm.
The Hapsburg Empire acted as a stabilizing force for its peoples and for Europe.
To its scattered ethnic groups, it performed the twin roles of referee and bouncer, pacifying indigenous rivalries and protecting pint-sized nations from predatory states.
It also filled a geopolitical vacuum at the heart of the continent, placing a check on Germany and Russia.
So long as it performed these functions, Austria was viewed as a “European necessity” – a balancer of nationalities and of nations for which there was no conceivable substitute.
But, by the early 1900’s, the empire faced two problems that cast doubt on its ability to fulfill these missions.
First, it proved incapable of reconciling and representing its constituents’ interests.
The heart of the problem was the 1867 Compromise, which divided the empire into Austrian and Hungarian halves.
By excluding the Slavs – who accounted for half the empire’s population – the Compromise was seen as a vehicle for German/Magyar domination.
All attempts at modifying the arrangement stopped short of what was needed: a political settlement between Germans and Slavs like that between Germans and Magyars.
Second, due in part to internal nationalist crises, the empire found it increasingly difficult to chart a unified, independent course in international affairs.
Confronted after 1906 with a more assertive Russia, Austria-Hungary resorted to increasing reliance on Germany, thereby relinquishing the empire’s special status as a geopolitical stabilizer.
These problems inflicted irreparable damage to Austria-Hungary’s image as a “necessity” – both for its subjects, who came to see national self-determination as a superior alternative to supra-nationalism, and for outside powers, which dismembered the empire in 1918.
So ended the first European union.
Like Austria-Hungary, the EU’s raison d’etre consists in its ability to transcend the indigenous balance of power among its members, and the service this renders to the international system.
On both counts, the EU confronted challenges in 2007 much like those confronting Austria-Hungary in 1907.
Many of the EU’s newest members continue to grapple with questions of geopolitical trust.
This is revealed in the tensions that have existed between Poland, which fears domination by the EU’s steering group, and Germany, which is reluctant to shoulder the financial burden for a union in which it is under-represented.
If allowed to fester, this feud could metastasize, leaving the EU in a state of crisis like that which plagued Austria-Hungary.
A second set of problems confronts the EU externally.
Like Austria-Hungary, the EU finds itself lodged between two powerful neighbors: a resurgent Russia intent on regaining lost influence, and a seemingly revisionist United States preoccupied with foreign military adventures.
Three lessons of Austria-Hungary’s experience are instructive for the EU. First, despite enjoying greater political inclusion than the Habsburg Slavs, many Central Europeans see themselves as lacking equal standing with the EU-15, both economically and strategically.
The upshot may be a tendency for the new members to press their national interests more forcefully in EU fora.
Fearing a new era of obstructionism, EU leaders have revived talk of a two-speed union, in which a vanguard of western states seeks deeper integration, leaving the newcomers to catch up.
But, as Habsburg history shows, such arrangements create entrenched privileges among the “haves” and grudges among the “have-nots.”
In a union of many parts, there are no shortcuts: the EU must provide the same level of integration at the periphery as at the imperial core.
Second, just as Austria needed a settlement between Germans and Slavs, the EU needs to repeat the Franco-German reconciliation of 1952 between its largest western and eastern members, Germany and Poland.
The shared steel initiative of 1952 could find its parallel in a German-Polish initiative to jointly manage natural gas imports.
Finally, much as Austria-Hungary formed an alliance with Germany to fill a strategic need for military security, EU members have sought, through their intake of Russian gas, to meet a strategic need for energy security.
However, over-reliance on Russia for a strategically vital commodity widens the divergence of interests between members, like Germany, that share a privileged partnership with Russia, and those, like Poland, that consider the Kremlin a threat.
Much as Austria’s alignment with Germany drove the Slavs to seek Russian patronage at the expense of imperial unity, European alignments with Russia drive the new members to seek US patronage at the expense of EU unity.
As Austria-Hungary discovered, once geopolitical dependency starts, the dominant power will seek to use the dependent ally as an extension of its own interests rather than see it regain freedom of maneuver.
While the EU is unlikely to ever achieve independence from Russian energy, it can improve its ability to cope with dependence by finding what Austria-Hungary lacked: a source of leverage to maintain the relationship on relatively equal terms.
This means, above all, establishing a united voice on energy.
In the end, many who fought to bring about Austria-Hungary’s demise would live to mourn its passing; as subsequent events would show, the old empire was still more of a necessity than they realized.
By learning from its mistakes, today’s Europeans may yet be able to reform and reinvigorate an “empire” whose most important work still lies ahead.
The EU vs. Democracy
ROME – One of the ways in which the European Union effectively asserts the fundamental values of democracy and the rule of law is through its External Cooperation Programs, whereby, on the invitation of local authorities, it provides support in the form of electoral assistance projects and election observation missions.
So, during the course of 2009, the EU sent election observation missions to various countries, including Mozambique, Afghanistan, Guinea Bissau, Lebanon, Malawi, and Bolivia.
Just this month the European Parliament sent observers to Ukraine’s presidential election.
At the end of each mission, a couple of days after the election, the Head of Mission, who is normally a member of the European Parliament, first issues a preliminary report on the election and on the handling of the electoral process, followed by a final report a few months later.
On December 6 last year, Evo Morales was re-elected President of Bolivia with more than 60% of the popular vote.
In her preliminary statement, the EU Head of Mission, MEP Renate Weber, stated that the electoral process had, in general terms, adhered to international standards with respect to democratic elections, and that the Bolivian Electoral Commission had acted in a transparent, neutral, and efficient way.
But the preliminary report also included some criticism that irked the Bolivian administration.
In particular, the report stated that the country’s sharp political polarization was highly visible in the media, in particular on Bolivian television stations.
In fact, while opposition candidates were given fair exposure on private TV and radio, the EU Head of Mission observed various cases in which their state-controlled counterparts privileged the government’s parliamentary candidates.
For example, Bolivia TV devoted 62.7% of its news bulletins to the government party’s candidates, whereas the seven opposition parties combined mustered only a 37.2% share. This, according to Weber, amounted to an “abuse of institutional propaganda.”
I believe that it is important that the EU carries out such monitoring in non-EU states. But what about elections in EU member states?
Shouldn’t what is good for the goose also be good for the gander?
I have in mind the two countries of which I am a citizen (Italy and Malta), where the media situation is an absolute disaster.
More or less everybody is acquainted with the situation in Italy, where Prime Minister Silvio Berlusconi not only owns the three major private TV stations, but, as the head of government, also “manages” indirectly at least two of the three state-owned TV channels.
Media manipulation has become the order of the day in Italy, but, unfortunately, the EU, behaving on the premise that it will not interfere in internal matters, refuses to say a word about any of this.
The situation is even worse in the smallest EU member country, Malta. There, the only two political parties represented in parliament since independence in 1964 have ganged up to ensure for themselves an oligarchic duopoly on anything that goes on in the country.
The political leaders of the Nationalist (Christian Democratic) Party and the Labor Party have enacted a law whereby, since 1994, they alone share more than €200,000 state financing.
Not content with this, the two parties passed a law in 1992 that gave each of them – and no other parties – a national TV station.
Getting greedier by the day, they then decided to share on a 50-50 basis both the National Electoral Commission and the National Broadcasting Authority.
Nor have they shrunk from constitutional tinkering in order to lock in their power.
Indeed, they have changed the constitution three times since 1987 to ensure that every vote for the Nationalist Party and the Labor Party is given a higher weighting than votes received by any of the country’s other political parties when it comes to translating votes into parliamentary seats.
All of this is happening not in some remote country, far removed from civilization.
It is happening in an EU member state.
When will the EU intervene to stop this internal rot?
The Everlasting Schism
Christianity's holiest days always seem to incite fresh disputes between Roman Catholicism and Russian Orthodoxy, between the first Rome and the third Rome.
This Easter is no different.
What's new this time is that the current storm came out of the blue.
Last year, Russia's Patriarch Aleksei gave his blessing to a visit to Moscow by the Catholic girls' choir of the Saint Danilov monastery.
Soon after, and more importantly, the Patriarch raised the level of Orthodoxy's representation at an ecumenical prayer called by Pope John Paul II in Assisi on January 24 th .
This was to be followed by a visit to Moscow by a senior Vatican cleric, Cardinal Walter Kasper, President of the Pontifical Council for Promoting Christian Unity and the man who helped organize last year's papal visits to Ukraine, Kazakhstan and Armenia.
An invitation for the Pope to visit Moscow (a cherished dream of John Paul II) seemed near at last.
This budding goodwill ended when the Vatican announced plans to reorganize Catholic structures overseas, including within Russia.
A Roman Catholic arch-diocese (headed by either a Cardinal or Archbishop) was to be created for Moscow.
Four other apostolic districts in Russia were to be turned into dioceses.
These changes were intended to ``grant greater opportunities for Catholic believers,'' according to Dr. Joaquin Navarro-Valls, the Vatican press officer.
The pope's press secretary called this a matter of mere ``technical change'' with nothing to do with ``proselytism.''
Similar measures, indeed, had recently been undertaken by the Moscow Patriach in relation to Orthodox parishes in Berlin, Vienna and Brussels.
Moscow's reaction was quick and withering.
Archbishop Clement of Kaluga and Borovsk, the vice-chairman of Department for External Church Relations, declared that ``the actions outlined by the Vatican are in contravention of the canonical principles and norms of interchurch relations and stand as a serious obstacle to the development of dialogue between the two churches.''
Soon after, Cardinal Kasper's visit was canceled.
Not to be outdone, Russia's foreign ministry joined the fray.
Foreign Minister Igor Ivanov expressed ``regret'' at the Vatican's actions and, for the first time in many years, failed to make the obligatory call on the Holy See on his trip to Rome this March.
A resolution to ``save Orthodoxy'' was rushed through the Duma and street protests aimed at the papal nuncio took place.
All of this was taking place around the time that Pope John Paul II was making a ``virtual'' pilgrimage to Moscow via the internet.
This was accomplished through a televised transmission which connected the Apostolic Palace of the Vatican with the Church of the Immaculate Conception in Moscow.
Speaking on gigantic television screens, Karol Wojtyla blessed Catholic believers in Russian.
But this rather innocuous meeting did not go off without problems as, until the very last moment, the customs office at Moscow's international airport refused to approve the import of electronic equipment for the televised transmission.
Why is it that, at a time when America and Russia can begin to work together, Catholicism and Orthodoxy prefer to keep going after each other's throats?
The current crisis has actually been burning underground for some time, and has broken to the surface now because the Moscow Patriarchate fears that there is a real possibility that John Paul II will be invited by President Putin to visit Russia on governmental matters.
The Pope will be invited as a head of state (the Vatican) not in his spiritual capacity.
A stick with which to beat back any instinct in the Kremlin to issue such an invitation was needed by the Patriarch, and so the Vatican's decision to reorganize its dioceses in Russia must have seemed a godsend.
The leadership of the Orthodox Church does not want to see the current Roman pontiff ever invited to Russia, and appear to be awaiting his replacement as the head of the Holy See.
Why is this?
First, because the next pope will almost certainly not be Polish - indeed, is unlikely to be any sort of Slav.
Second, the next Pope will not be endowed initially with such enormous moral authority as John Paul II has acquired across the world, and so the Patriarch will be able to speak publicly with him, and be measured against him, on something more like equal terms.
The sharp reactions of the Orthodox Patriarchate to the actions of the Holy See reflect an ongoing crisis of leadership and legitimacy within the Russian Orthodox church, where a battle is clearly underway for the succession of Aleksey II.
After almost a century of oppression, the Orthodox Church is still struggling to define its role in Russia's postcommunist society, and finds it difficult to compete with more nimble (and self-assured) churches.
Moreover, although younger than John Paul II, Patriarch Aleksey II has entered his own ``autumn of the patriarch.''
Sad to say, reconciliation between the two churches is thus unlikely to gain momentum until two new leaders begin to command their believers.
The Exchange-Rate Delusion
MILAN – If one looks at the trade patterns of the global economy’s two biggest players, two facts leap out.
One is that, while the United States runs a trade deficit with almost everyone, including Canada, Mexico, China, Germany, France, Japan, South Korea, and Taiwan, not to mention the oil-exporting countries, the largest deficit is with China.
If trade data were re-calculated to reflect the country of origin of various components of value-added, the general picture would not change, but the relative magnitudes would: higher US deficits with Germany, South Korea, Taiwan, and Japan, and a dramatically lower deficit with China.
The second fact is that Japan, South Korea, and Taiwan – all relatively high-income economies – have a large trade surplus with China.
Germany has relatively balanced trade with China, even recording a modest bilateral surplus in the post-crisis period.
The US has a persistent overall trade deficit that fluctuates in the range of 3-6% of GDP.
But, while the total reflects bilateral deficits with just about everyone, the US Congress is obsessed with China, and appears convinced that the primary cause of the problem lies in Chinese manipulation of the renminbi’s exchange rate.
One problem with this view is that it cannot account for the stark differences between the US and Japan, Germany, and South Korea.
Moreover, the real (inflation-adjusted) value of the renminbi is now rising quickly, owing to inflation differentials and Chinese wage growth, particularly in the country’s export sectors.
That will shift the Chinese economy’s structure and trade patterns quite dramatically over time.
The final-assembly links of global-value added chains will leave China for countries at earlier stages of economic development, such as Bangladesh, where incomes are lower (though without producing much change in the balance with the US).
A somewhat more sensible concern might be that the dollar’s reserve-currency status causes it to be “over-valued” with respect to every currency, not just the renminbi.
That could create additional pressure on the tradable part of the US economy, and thus might help to explain why the US tradable sector has not generated net employment for two decades.
But, in order to explain performance relative to Japan and Germany, one would have to argue that the euro and the yen have been undervalued, which makes no sense.
In fact, the employment generated by the tradable sector has been in services at the upper end of the distributions of value-added per person, education, and income.
As a result, growth and employment in the tradable sector have gone separate ways, with healthy growth and stagnant employment.
In Germany, by contrast, the tradable sector is an employment engine. The same is true of Japan.
The US economy’s distinctive features for at least a decade prior to the crisis that began in 2008 were an unsustainably high level of consumption, owing to an illusory wealth effect, under-investment (including in the public sector), and savings that fell short of the investment deficiency.
That excess household and government consumption fueled the domestic economy – and much of the global economy as well.
In several European countries that now confront fiscal and growth challenges, the pattern was somewhat different: most of the excess consumption and employment was on the government side.
But the effect was similar: an unsustainable pattern of income and employment generation, and lower productivity and competitiveness in these economies’ tradable sectors, leading to trade deficits, stunted GDP, and weak job creation.
One could argue that the euro has been and still is overvalued, and that this has hindered many eurozone economies’ productivity relative to non-eurozone countries.
But the relative productivity deficiencies within the eurozone are more important for growth, and have nothing to do with the exchange rate.
The focus on currencies as a cause of the West’s economic woes, while not entirely misplaced, has been excessive.
Developing countries have learned over time that real income growth and employment expansion are driven by productivity gains, not exchange-rate movements.
This, in turn, requires public and private investment in tangible assets, physical and telecommunications infrastructure, human capital and skills, and the knowledge and technology base of the economy.
Of course, it is possible for a country’s terms of trade to get out of line with income and productivity levels, requiring a rebalancing.
But resetting the terms of trade is no substitute for tackling the structural underpinnings of productivity.
None of this is peculiar to developing countries.
Underinvestment has long-term costs and consequences everywhere.
Excess consumption merely hides these costs temporarily.
In the US, productivity deficiencies have led to a pattern of disconnection from global supply chains.
So the challenge for America is not only to restore productivity, but also to restore its links to the main currents of world trade.
China’s growth – and, more generally, that of the major emerging economies – provides a substantial potential tailwind.
That is certainly true nowadays for Germany, Japan, and South Korea. The US and others can take advantage of it as well, but only if productivity relative to income levels in specific areas of potential competitiveness begin to rise.&nbsp;
As long as America economic policy remains focused primarily on deficits, domestic demand, exchange rates, and backsliding on trade openness, its investment deficiencies will remain unaddressed. That means that its employment and income-distribution problems will remain unaddressed as well.
The good news is that, at a deep level, incentives across advanced and developing countries are aligned.
The emerging economies would like nothing more than the restoration of sustainable patterns of growth in the advanced economies, and are prepared to be cooperative players in that process.
But focusing on these countries’ exchange rates is not the right way to go about it.
Europe’s Crisis of Values
NEW YORK – Xenophobia and extremism are symptoms of societies in profound crisis.
In 2012, the far-right Golden Dawn won 21 seats in Greece’s parliamentary election, the right-wing Jobbik gained ground in my native Hungary, and the National Front’s Marine Le Pen received strong backing in France’s presidential election.
Growing support for similar forces across Europe points to an inescapable conclusion: the continent’s prolonged financial crisis is creating a crisis of values that is now threatening the European Union itself.
When it was only an aspiration, the European Union was an immensely attractive idea that fired many people’s imagination, including mine.
I regarded it as the embodiment of an open society – a voluntary association of sovereign states that were willing to give up part of their sovereignty for the common good.
They shared a common history, in which the French Revolution, with its slogan of liberty, equality, and fraternity, left a lasting legacy.
Building on that tradition, member states formed a union based on equality and not dominated by any state or nationality.
The euro crisis has now turned the EU into something radically different.
Far from being a voluntary association, the eurozone is now held together by harsh discipline; far from being an association of equals it has become a hierarchical arrangement in which the center dictates policy while the periphery is increasingly subordinated; instead of fraternity and solidarity, hostile stereotypes proliferate.
The integration process was spearheaded by a small group of farsighted statesmen who subscribed to open-society principles and practiced what Karl Popper called “piecemeal social engineering.”
They recognized that perfection is unattainable; so they set limited objectives and firm timelines – and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent, requiring further steps.
That is how the European Coal and Steel Community was gradually transformed into the EU.
France and Germany used to be in the forefront of the effort.
As the Soviet empire disintegrated, Germany’s leaders recognized that German reunification was possible only in the context of a more united Europe, and they were prepared to make considerable sacrifices to achieve it.
When it came to bargaining, the Germans were willing to contribute a little more and take a little less than others, thereby facilitating agreement.
At the time, German statesmen would assert that Germany had no independent foreign policy, only a European one.
This stance led to a dramatic acceleration in European integration, culminating in the adoption of the Maastricht Treaty in 1992 and the introduction of the euro in 1999.
A period of consolidation (which included the introduction of euro banknotes and coins in 2002) followed.
Then came the crash of 2008, which originated in the United States but caused greater problems in Europe than anywhere else.
Policymakers responded to the collapse of Lehman Brothers by announcing that no other systemically important financial institution would be allowed to fail, which required substituting state credit for frozen markets.
Shortly thereafter, however, German Chancellor Angela Merkel asserted that such guarantees had to be provided by each state individually, not by Europe collectively.
That marked the beginning of the euro crisis, because it exposed a flaw in the single currency of which neither the authorities nor financial markets were aware – and which is still not fully recognized today.
By creating the European Central Bank, the member states exposed their own government bonds to the risk of default.
Developed countries that issue bonds in their own currency never default, because they can always print money.
Their currency may depreciate, but the risk of default is absent.
By contrast, less developed countries that borrow in foreign currencies may run out of currency reserves.
When a fiscal crisis hit Greece, the financial world suddenly discovered that eurozone members had put themselves in the position of developing countries.
There is a close parallel between the euro crisis and the Latin American debt crisis of 1982, when the International Monetary Fund saved the international financial system by lending just enough money to the heavily indebted countries to enable them to avoid default.
But the IMF imposed strict austerity on these countries, pushing them into a prolonged depression.
Latin America suffered a lost decade.
Today, Germany is playing the same role as the IMF did then.
The setting differs, but the effect is the same.
The euro crisis pushed the financial system to the verge of bankruptcy, which has been avoided by imposing strict austerity and lending countries like Greece just enough money to avoid default.
As a result, the eurozone has become divided into creditors and debtors, with the creditors in charge of economic policy.
There is a center, led by Germany, and a periphery, consisting of the heavily indebted countries.
The creditors’ imposition of strict austerity on the periphery is perpetuating the eurozone’s division between center and periphery.
Economic conditions are continuing to deteriorate, causing immense human suffering.
The innocent, frustrated, and angry victims of austerity provide fertile ground for hate speech, xenophobia, and all forms of extremism.
Thus, policies designed to preserve the financial system and the euro are transforming the EU into the opposite of an open society.
There is an apparent contradiction between the euro’s financial requirements and the EU’s political objectives.
The financial requirements could be met by replicating the arrangements that prevailed in the global economy in the 1980’s and dividing the eurozone into a center and periphery; but that could not be reconciled with the principles of an open society.
There are ways in which the policies pursued to preserve the euro could be modified to meet the EU’s political objectives.
For example, individual countries’ government bonds could be replaced by Eurobonds.
But, insofar as the contradiction remains, the political objectives ought to take precedence.
Unfortunately, that is not the case.
The financial problems are pressing – and monopolizing politicians’ attention.
Europe’s leaders are so preoccupied with the crisis of the day that they have no time to ponder the long-term consequences of their actions.
As a result, they continue on a course that perpetuates the division between center and periphery.
This is such a dismal prospect that it must not be allowed to happen.
Originally, the EU was conceived as an instrument of solidarity and cooperation.
Today, it is held together by grim necessity. That is not the Europe we want or need.
We must reverse this intolerable transformation.
We must find a way to recapture the spirit of solidarity and shared values that once inspired the European imagination.
The Endangered Arab Christian
BRUSSELS – The recent abductions of Syriac Orthodox Archbishop Yohanna Ibrahim and his Greek Orthodox counterpart, Paul Yazigi, reflect not only the increasing brutality of Syria’s civil war, but also the escalating crisis for Christians across the Arab world – one that could end up driving them away altogether.
According to the International Society for Human Rights, 80% of all acts of religious persecution worldwide in 2012 were directed at Christians.
This surge in discrimination against Christian communities in countries where they have lived for many centuries can be explained largely by increasing Islamist militancy and the rise of political Islam in the wake of the Arab Spring.
As Islamist parties have taken power in the region, a wave of intimidation and discrimination has been unleashed on Christian minority populations.
For example, on February 26, at a garment market in Benghazi, Libya, members of a powerful Islamist militia rounded up dozens of Egyptian Coptic Christians – identified by crosses tattooed on their right wrists – whom they then detained, tortured, and threatened with execution. Among the victims was a Coptic priest, whom the captors beat severely before shaving his head and moustache.
Priests have also been assaulted in Tripoli, and churches have been torched.
All of this sends a clear message: non-Muslims are not safe in Libya.
While Libya has no significant religious minority, hundreds of thousands of Egyptians live and work in the country, where Christian proselytizing is illegal – and where one can be accused of proselytizing simply for possessing a Bible.
But Egypt’s Muslim Brotherhood-controlled government does not seem particularly eager to protect its Christian citizens in Libya; it offered only a half-hearted call for the release of its detained citizens.
This reflects the similarly deteriorating situation for Christians in Egypt, where they account for roughly 15% of the population.
In early April, a funeral at St. Mark’s Cathedral (the seat of the Coptic Church in Cairo) for four Christians killed in sectarian riots days earlier descended into chaos, with thousands of mourners attacked as they tried to leave after the service.
Police fired tear gas into the compound, standing by as those outside the cathedral launched petrol bombs, hurled rocks, and shot at those inside.
At least two died and 80 were injured in the five-hour clash.
Christians blame the Muslim Brotherhood not only for allowing Muslim Egyptians to attack them with impunity, but also for permitting – and delivering – incendiary anti-Christian rhetoric. For example, at an open rally for President Mohamed Morsi last year, the cleric Safwat Hegazy warned that Egyptian Muslims would “splash blood” on Christians who “splash water” on Morsi’s legitimacy.
In February, Egypt’s Coptic patriarch, Pope Tawadros II, sharply criticized the country’s leadership in a televised interview, calling the new constitution discriminatory and dismissing Morsi’s “national dialogues” as an empty gesture.
This unusually assertive stance reflects rising frustration among Christians, as well as the secular and liberal opposition, with the Muslim Brotherhood’s power monopoly.
Syria, which once welcomed thousands of Christians fleeing war-torn Iraq, is experiencing an analogous change, as the country’s increasingly sectarian civil war generates fear and mistrust throughout the population.
Although Christians have largely sought to remain neutral in the conflict, they have become involved gradually, some by taking up arms and others as victims of kidnapping and violence.
Melkite Greek Catholic Patriarch Gregorios III recently stated that, since 2011, over 1,000 Christians have been killed and more than 40 churches and other Christian institutions (schools, orphanages, and care homes) have been damaged or destroyed.
Some estimate that 300,000 Christians have fled Syria.
Furthermore, fallout from relentless regional conflict is destabilizing Lebanon, a country that offers Christians a constitutional guarantee of political representation.
Some 400,000 refugees – many of them Sunni Muslims, including fugitive rebels – have poured over the border from Syria, exacerbating sectarian tensions and threatening to disrupt Lebanon’s delicate social and political balance.
Given that, as Göttingen University’s Martin Tamcke points out, there is no remaining alternative for Christian refugees in the Middle East, they are increasingly heading to Europe and North America.
If this trend is allowed to continue, the Middle East will gradually lose its Christian congregations.
In order to prevent such a tragic outcome, Western leaders must take a more active role in advocating the protection of Christian minorities throughout the Arab world.
Ultimately, Christians and Muslims in the Arab world have the same desires: freedom, dignity, and equal rights.
Those who are persecuting Christians should recognize that the Arab Spring should benefit all Arabs.
The Extinction Puzzle
With six billion humans and counting – and our individual consumption growing – we face enormous challenges in using our natural resources sustainably.
And there is one clear measure of how we perform at that task: extinction rates.
For this reason, some colleagues and I have calculated the rate at which bird species became extinct in the recent past and the rate at which they will likely become extinct in the future.
Bird extinctions are our best window onto humanity’s massive and irreversible environmental impact.
For every one of the world’s 10,000 bird species, there may be 10 or perhaps even 100 other unknown species of animals, plants, or fungi.
Birds’ popularity means that they provide an unrivaled source of information about which species live where and how well those species are doing.
Estimates of the number of extinctions have tended to vary wildly, owing to differences in the assumed total number of species, which range from the one million species that have scientific names to an implausibly high estimate of 100 million species.
To avoid such uncertainties, my colleagues and I introduced the extinction rate – the number of extinctions per year per species or, to make the numbers more reasonable, extinctions per million species-years — E/MSY.
With the exception of the past five mass extinction events, estimates from the fossil record suggest that an approximate background rate is one extinction per million species-years, (1 E/MSY).
For the 10,000 bird species, there should only be one extinction in each century.
Before European exploration, the Polynesian expansion across the Pacific probably exterminated species at the rate of one every year or two, which is 50 to 100 times more extinctions than should occur naturally.
For example, parrots, rails, and doves once occured across the Pacific on sufficiently large islands.
Those islands that have been well explored archaeologically yield bones of species the Polynesians exterminated, while the islands now lack them.
We can predict which islands were likely large enough to have once supported unique species and so estimate how many species are missing.
The total is nearly 1,000.
We have yet to do comparable analyses on the fate of Caribbean and Indian Ocean islands following first human contact, but it is likely that large numbers of extinctions occurred there, too.
Early European exploration likely continued this rapid pace of extinction.
The number of species known to have expired between 1500 and 1800 is increasing as taxonomists describe new species from skeletal remains they find in caves, for example, where bones survive.
These searches are far from complete.
Linneaus invented the modern process of naming species in the mid-1700’s, although naming did not get under way until the peace following Napoleon Bonaparte’s defeat in 1815.
Whereas bird taxonomists had described only 2,000 bird species by 1815, in the next 50 years they described about 5,000 more.
This means that most of what we know about birds and their extinctions dates from the 1800’s.
To get an accurate picture of extinction, we must adjust the total number of extinctions for the length of time science has known bird species.
A second adjustment is necessary because conservationists follow the principle that a species survives even if it is not recently recorded in its native habitat.
This assumption prevents terminating conservation efforts prematurely, even as it underestimates the total number of extinctions.
We added species that are probably extinct, too.
With these two adjustments, the extinction rate has been about a 100 times higher than natural over the last two centuries.
Our predictions of twenty-first century extinctions jump an order of magnitude to 1,000 E/MSY.
Not only are 12% of bird species already in danger of extinction, but more than twice that proportion have small geographical ranges (the key predictor of threat) and mostly live in habitats that are seriously threatened.
Tropical forests, for example, hold the majority of bird species – and likely most other kinds of species too.
If present trends of deforestation continue, we project bird extinction rates to climb to 1,500 E/MSY by the last decades of this century.
Moreover, our calculations are conservative, as they do not include extinctions caused by invasive species, the expansion of human technologies (such as the long-line fishing that harms many seabirds), or global warming.
All would increase our estimates.
Likewise, birds are poor models for other kinds of species, because public concern over birds generally leads to rapid actions to save them.
Indeed, we showed that aggressive conservation actions have reduced bird extinction rates over the last few decades to about 25 E/MSY – still very high, but down sharply from the 100 E/MSY projected were conservation actions not in place.
Certainly, some other species also benefit from the protections that we afford birds, but many other species do not.
Moreover, human actions threaten substantially higher proportions of other well-known groups – such as flowering plants and amphibians.
Our results show that conservation efforts can reduce the irreversible loss of biodiversity. Nevertheless, future rates of extinction constitute a problem that will be very much harder to solve.
The Face of Evil
NEW YORK – Standing with Slobodan Milosevic 13 years ago on the veranda of a government hunting lodge outside Belgrade, I saw two men in the distance.
They left their twin Mercedes and, in fading light, started toward us.
I felt a jolt go through my body; they were unmistakable.
Ratko Mladic, in combat fatigues, stocky, walking as though through a muddy field; and Radovan Karadzic, taller, wearing a suit, with his wild, but carefully coiffed, shock of white hair.
The capture of Karadzic and his arrival at the war crimes tribunal in The Hague took me back to a long night of confrontation, drama, and negotiations – the only time I ever met him.
It was 5 p.m. on September 13, 1995, during the height of the war in Bosnia.
After years of weak Western and United Nations response to Serb aggression and ethnic cleansing of Muslims and Croats in Bosnia, United States-led NATO bombing had put the Serbs on the defensive.
Our small diplomatic negotiating team was trying to end a war that had taken the lives of nearly 300,000 people.
Milosevic, Mladic, and Karadzic were the primary reason for that war.
Mladic and Karadzic had already been indicted as war criminals by the International Criminal Tribunal for the Former Yugoslavia.
(Milosevic was not to be indicted until 1999.)
In a change of strategy, the negotiating team had decided to marginalize Karadzic and Mladic and to force Milosevic, as the senior Serb in the region, to take responsibility for the war and for the negotiations that we hoped would end it.
Now Milosevic wanted to bring the two men back into the discussions, probably to take some of the pressure off of himself.
We had anticipated this moment and agreed in advance that, while we would never ask to meet with Karadzic and Mladic, if Milosevic offered such a meeting, we would accept – but only once, and only under strict guidelines that would require Milosevic to be responsible for their behavior.
I told each member of our negotiating team to decide for himself or herself whether to shake hands with the mass murderers.
I hated these men for what they had done.
Their crimes included, indirectly, the deaths of three of our colleagues – Bob Frasure, Joe Kruzel, and Nelson Drew, who had died when the armored personnel carrier they were in plunged down a ravine as we attempted to reach Sarajevo by the only route available, a dangerous dirt road that went through sniper-filled, Serbian-controlled territory.
I did not shake hands, although both Karadzic and Mladic tried to.
Some of our team did; others did not.
Mladic, not Karadzic, was the dominant figure that evening.
He engaged in staring contests with some of our team as we sat across the table.
Karadzic was silent at first.
He had a large face with heavy jowls, a soft chin, and surprisingly gentle eyes.
When he heard our demand that the siege of Sarajevo be lifted immediately, he exploded.
Rising from the table, the American-educated Karadzic raged in passable English about the “humiliations” his people were suffering.
I reminded Milosevic that he had promised that such harangues would not occur.
Karadzic responded emotionally that he would call former President Jimmy Carter, with whom he said he was in touch, and started to leave.
For the only time that long night, I addressed Karadzic directly, telling him that we worked only for President Bill Clinton and that he could call Carter if he wished but that we would leave and that the bombing would intensify.
Milosevic said something to Karadzic in Serbian; he sat down again, and the meeting got down to business.
After ten hours, we reached an agreement that would end the siege, after more than three years of war.
The next day, we were able to fly into the reopened airfield in Sarajevo.
That indomitable city was already beginning to come back to life.
Two months later, the war would end at Dayton, never to resume.
But while the Dayton agreement gave NATO the authority to capture Karadzic and Mladic, an arrest didn’t occur for nearly 13 years.
During that period, Karadzic spread a completely false rumor that Secretary of State Madeleine Albright and I had made a deal that, with Karadzic’s disappearance from public view, NATO would not seek his arrest.
Of course, this another ridiculous fabrication from the same man who famously said that the Bosnian Muslims had shelled their own villages in order to lure NATO into the war.
Finally, one of these dreadful murderers is in The Hague.
It is imperative that Mladic follow Karadzic on this one-way journey.
Karadzic’s capture is all the more important because Serbian authorities accomplished it.
Serbian President Boris Tadic deserves great credit for this action, especially since his good friend Zoran Djindjic, then prime minister of Serbia, was assassinated in 2003 as a direct result of his courage in arresting Milosevic and sending him to The Hague in 2001.
Karadzic’s arrest is no mere historical footnote; it removes from the scene a man who was still undermining peace and progress in the Balkans and whose enthusiastic advocacy of ethnic cleansing merits emphatic repudiation.
It also moves Serbia closer to European Union membership.
Moreover, Karadzic’s arrest is another reminder of the value of war crimes tribunals.
Even though almost 13 years is an inexcusably long time, the war crimes indictment kept Karadzic on the run and prevented him from resurfacing.
In far-away Khartoum, Sudanese President Omar Hassan al-Bashir, now indicted by the International Criminal Court, should be paying close attention.
The Failure of China Bashing
With China's rapid growth increasingly affecting a wide range of issues worldwide, it has become expedient for US presidential candidates to blame China for some of America's domestic problems.
But in this year's US presidential election campaign, China bashing has been virtually non-existent.
There are good reasons for this welcome change.
Recent US elections rarely spared China, which found itself a frequent target of populist demagoguery.
Its exchange-rate regime, which pegs the Renminbi to the US dollar, was blamed for the mounting US trade deficit.
Never mind that America's bilateral trade deficit with China, even including Hong Kong, accounts for less than one-fifth of the total US deficit: growing imports from China and more direct investment by US companies supposedly fueled US unemployment.
Similarly, the unfinished reforms in China's banking sector and state-owned enterprises have been used as evidence of state subsidies for dumping activities.
Although the majority of China's exports now come from private companies that receive virtually no loans from state banks , American candidates in previous elections routinely sought to curry favor with working class voters by vowing to protect US jobs against China's supposedly unfair business practices.
The jobs issue could be exploited further by citing poor working conditions, low wages, child labor, and other problems commonly found in developing countries.
Attacking a communist country has always seemed to offer American politicians a convenient way to appeal to the average voter.
After all, most US voters can be trusted not to learn how other countries, let alone countries in the Far East, really work.
But this time, George W. Bush and John Kerry both know that it would be unwise to bash China too hard.
American companies and the entire US economy have a huge stake in China now, so both candidates have no interest in rocking the boat.
A candidate may promise more anti-dumping actions against Chinese goods, vow to press harder on China to change its exchange rate regime, or sharpen criticism of China's weak enforcement of intellectual property rights; but over-protectionism may make a candidate look irresponsible in 2004.
Indeed, protectionism can do nothing to reduce America's trade deficit and stanch domestic unemployment.
No matter how much politicians blame others, growing US imports mean greater reliance on international markets, and some China factor in America's investment portfolio is needed to compete against European and Japanese firms.
There is no hiding these facts from American voters anymore.
George W. Bush failed to honor his anti-Chinese protectionist campaign promises of 2000, as did Bill Clinton throughout his presidency.
Any China-bashing and protectionist pleas this time around will most likely ring just as hollow.
Moreover, China's geopolitical importance to the US has grown immensely since the terrorist attacks on New York and Washington D.C. of September 11, 2001.
At least for now, engaging China in the global fight against terrorism is in America's interest.
China does have some common interests in fighting Islamic extremist terrorism, and it did not try to block America's path to the Iraqi war in the UN Security Council.
China has also been cooperating constructively with the US and its allies in dealing with North Korea's nuclear capabilities.
Of course, America still wants to contain China and prevent it from becoming a major regional and world power.
But that remains a long-term strategic goal, not the stuff of presidential campaigns, especially when China seems too weak to pose any immediate threat to the US on any front in the foreseeable future.
China has never been a positive factor in American politics; so, from its perspective, the less it is mentioned in this US election season, the better.
The relative silence about China in the US these days may be due merely to the news dominance of the Iraq War.
Yet it may also indicate that America's political elites are in the process of facing up to new realities and adjusting their view of China accordingly.
The Failure of Inflation Targeting
New York – The World’s central bankers are a close-knit club, given to fads and fashions.
In the early 1980’s, they fell under the spell of monetarism, a simplistic economic theory promoted by Milton Friedman.
After monetarism was discredited – at great cost to those countries that succumbed to it – the quest began for a new mantra.
The answer came in the form of “inflation targeting,” which says that whenever price growth exceeds a target level, interest rates should be raised.
This crude recipe is based on little economic theory or empirical evidence; there is no reason to expect that regardless of the source of inflation , the best response is to increase interest rates.
One hopes that most countries will have the good sense not to implement inflation targeting; my sympathies go to the unfortunate citizens of those that do. (Among the list of those who have officially adopted inflation targeting in one form or another are: Israel, the Czech Republic, Poland, Brazil, Chile, Colombia, South Africa, Thailand, Korea, Mexico, Hungary, Peru, the Philippines, Slovakia, Indonesia, Romania, New Zealand, Canada, the United Kingdom, Sweden, Australia, Iceland, and Norway.)
Today, inflation targeting is being put to the test – and it will almost certainly fail.
Developing countries currently face higher rates of inflation not because of poorer macro-management, but because oil and food prices are soaring, and these items represent a much larger share of the average household budget than in rich countries.
In China, for example, inflation is approaching 8% or more.
In Vietnam, it is even higher and is expected to approach 18.2% this year, and in India it is 5.8% .
By contrast, US inflation stands at 3%.
Does that mean that these developing countries should raise their interest rates far more than the US?
Inflation in these countries is, for the most part, imported .
Raising interest rates won’t have much impact on the international price of grains or fuel.
Indeed, given the size of the US economy, a slowdown there might conceivably have a far bigger effect on global prices than a slowdown in any developing country, which suggests that, from a global perspective, US interest rates, not those in developing countries, should be raised.
So long as developing countries remain integrated into the global economy – and do not take measures to restrain the impact of international prices on domestic prices – domestic prices of rice and other grains are bound to rise markedly when international prices do. For many developing countries, high oil and food prices represent a triple threat: not only do importing countries have to pay more for grain, they have to pay more to bring it to their countries and still more to deliver it to consumers who may live a long distance from ports.
Raising interest rates can reduce aggregate demand, which can slow the economy and tame increases in prices of some goods and services, especially non-traded goods and services.
But, unless taken to an intolerable level, these measures by themselves cannot bring inflation down to the targeted levels.
For example, even if global energy and food prices increase at a more moderate rate than now – for example, 20% per year – and get reflected in domestic prices, bringing the overall inflation rate to, say, 3% would require markedly falling prices elsewhere. That would almost surely entail a marked economic slowdown and high unemployment.
The cure would be worse than the disease.
So, what should be done?
First, politicians, or central bankers, should not be blamed for imported inflation, just as we should not give them credit for low inflation when the global environment is benign.
Former US Federal Reserve Chairman Alan Greenspan, it is now recognized, deserves much blame for America’s current economic mess.
He is also sometimes given credit for America’s low inflation during his tenure.
But the truth is that America in the Greenspan years benefited from a period of declining commodity prices, and from deflation in China, which helped keep prices of manufactured goods in check.
Second, we must recognize that high prices can cause enormous stress, especially for lower-income individuals.
Riots and protests in some developing countries are just the worst manifestation of this.
Advocates of trade liberalization touted its advantages; but they were never fully honest about its risks, against which markets typically fail to provide adequate insurance.
Over a quarter-century ago, I showed that, under plausible conditions, trade liberalization could make everyone worse off.
I was not arguing for protectionism, but rather sounding a cautionary note that we must be aware of the downside risks and be prepared to deal with them.
When it comes to agriculture, developed countries, such as the US and European Union members, insulate both consumers and farmers from these risks.
But most developing countries do not have the institutional structures, or the resources, to do likewise. Many are imposing emergency measures like export taxes or bans, which help their own citizens, but at the expense of those elsewhere.
If we are to avoid an even stronger backlash against globalization, the West must respond quickly and strongly.
Bio-fuel subsidies, which have encouraged the shift of land from producing food into energy, must be repealed.
In addition, some of the billions spent to subsidize Western farmers should now be spent to help poorer developing countries meet their basic food and energy needs.
Most importantly, both developing and developed countries need to abandon inflation targeting.
The struggle to meet rising food and energy prices is hard enough.
The weaker economy and higher unemployment that inflation targeting brings won’t have much impact on inflation; it will only make the task of surviving in these conditions more difficult.
The Fairness of Financial Rescue
BERKELEY – Perhaps the best way to view a financial crisis is to look at it as a collapse in the risk tolerance of investors in private financial markets.
Maybe the collapse stems from lousy internal controls in financial firms that, swaddled by implicit government guarantees, lavish their employees with enormous rewards for risky behavior.
Or perhaps a long run of good fortune has left the financial market dominated by cockeyed optimists, who have finally figured that out.
Or perhaps it stems simply from unreasoning panic.
Whatever the cause, when the risk tolerance of the market crashes, so do prices of risky financial assets.
Everybody knows that there are immense unrealized losses in financial assets, but no one is sure that they know where those losses are.
To buy – or even to hold – risky assets in such a situation is a recipe for financial disaster.
So is buying or holding equity in firms that may be holding risky assets, regardless of how “safe” a firm’s stock was previously thought to be.
This crash in prices of risky financial assets would not overly concern the rest of us were it not for the havoc that it has wrought on the price system, which is sending a peculiar message to the real economy.
The price system is saying: shut down risky production activities and don’t undertake any new activities that might be risky.
But there aren’t enough safe, secure, and sound enterprises to absorb all the workers laid off from risky enterprises.
And if the decline in nominal wages signals that there is an excess supply of labor, matters only get worse.
General deflation eliminates the capital of yet more financial intermediaries, and makes risky an even larger share of assets that had previously been regarded as safe.
Ever since 1825, central banks’ standard response in such situations – except during the Great Depression of the 1930’s – has been the same: raise and support the prices of risky financial assets, and prevent financial markets from sending a signal to the real economy to shut down risky enterprises and eschew risky investments.
This response is understandably controversial, because it rewards those who bet on risky assets, many of whom accepted risk with open eyes and bear some responsibility for causing the crisis.
But an effective rescue cannot be done any other way.
A policy that leaves owners of risky financial assets impoverished is a policy that shuts down dynamism in the real economy.
The political problem can be finessed: as Don Kohn, a vice-chairman of the Federal Reserve, recently observed, teaching a few thousand feckless financiers not to over-speculate is much less important than securing the jobs of millions of Americans and tens of millions around the globe.
Financial rescue operations that benefit even the unworthy can be accepted if they are seen as benefiting all – even if the unworthy gain more than their share of the benefits.
What cannot be accepted are financial rescue operations that benefit the unworthy and cause losses to other important groups – like taxpayers and wage earners.
And that, unfortunately, is the perception held by many nowadays, particularly in the United States.
It is easy to see why.
When Vice Presidential candidate Jack Kemp attacked Vice President Al Gore in 1996 for the Clinton administration’s decision to bail out Mexico’s feckless government during the 1994-1995 financial crisis, Gore responded that America made $1.5 billion on the deal.
Similarly, Clinton’s treasury secretary, Robert Rubin, and IMF Managing Director Michel Camdessus were attacked for committing public money to bail out New York banks that had loaned to feckless East Asians in 1997-1998.
They responded that they had not rescued the truly bad speculative actor, Russia; that they had “bailed in,” not bailed out, the New York banks, by requiring them to cough up additional money to support South Korea’s economy; and that everyone had benefited massively, because a global recession was avoided.
Now, however, the US government can say none of these things.
Officials cannot say that a global recession has been avoided; that they “bailed in” the banks; that – with the exception of Lehman Brothers and Bear Stearns – they forced the bad speculative actors into bankruptcy; or that the government made money on the deal.
It is still true that the banking-sector policies that were undertaken were good – or at least better than doing nothing.
But the certainty that matters would have been much worse under a hands-off approach to the financial sector, à la Republican Treasury Secretary Andrew Mellon in 1930-1931, is not concrete enough to alter public perceptions.
What is concrete enough are soaring bankers’ bonuses and a real economy that continues to shed jobs.
The Fallen Pharaoh
Egypt’s Kifaya Movement has raised the ante in its opposition to President Hosni Mubarak’s regime by issuing a massive report that dares to name names and detail corruption among the country’s leaders.
Nothing in Egypt’s long history has ever equaled this airing of the country’s dirtiest laundry.
Kifaya’s action is especially bold in the midst of a government crackdown to prepare the way for the succession of Mubarak’s son, Gamal.
For example, a recent law mandates punishment for anyone who spreads rumors that Gamal is to be the next president.
Corruption in Egypt, as in other Arab states, is so extensive as to undermine the possibility of economic advancement, higher living standards, a free media, independent courts, and democracy.
Egypt’s political elite, fearful of critical media coverage, defeat in fair elections, and even imprisonment, prefer the existing regime and oppose any significant reform.
This is a key theme of the report, entitled Corruption in Egypt: A Black Cloud That Never Passes.
As long as the system is corrupted from above, and as long as the only way common people can deal with the government is through bribery, says the report, inefficiency will reign and people will cheat each other.
The only way to break this vicious circle is to replace the regime.
At the same time, as was seen in Yasir Arafat’s Palestine Authority, a corrupt regime encourages people to turn to radical Islamists, who work hard to present themselves as honest.
If the Muslim Brotherhood comes to power in Egypt one day, Kifaya’s report will explain a lot about how it happened.
The report begins by joking that Egypt’s name should be changed to “Fasadistan,” the land of corruption.
It documents cases relating to housing, business, health, transportation, trade, banks, drugs, agriculture, politics, culture, and the media.
One chapter covers how the security forces control appointments to all key jobs, including in schools and universities.
But the most dramatic part of the book concerns Mubarak himself.
An anecdote in the report, which rings true, has Mubarak meeting with officers of the Third Army two years ago.
Some of the younger officers complained about corruption.
Mubarak apparently surprised them by saying that he knew that many leading people in the country were thieves, but that he believed they had stolen enough to keep them happy.
He was afraid, he explained, that if he appointed new people they would start over in their depredations, putting a much heavier burden on Egypt.
According to the report, however, Mubarak; his wife, Susan; and his two sons, Gamal and Alaa, are far from being mere bystanders.
When Mubarak became president in 1981, parliament granted him the right to control all military contracts without legislative oversight.
In effect, the report states, he has a monopoly on military spending and imports, apparently a rich source of kickbacks each time he approves a deal.
Similarly, Susan Mubarak is the head of as many as 100 charities that often exist only on paper.
The report charges that as much as $5 million might go to one of these institutions in a year, but that a large portion is then siphoned off to her secret foreign bank accounts.
Ironically, Susan Mubarak, says the report, urged the passage of a 1992 law that permitted Egyptian non-governmental organizations to receive foreign funds – a provision used by some opposition groups – in order to provide channels for the NGO’s she runs.
The president’s son Gamal also has his own charities that provide him with money, claims Kifaya, including the famous al-Mustaqbal organization.
Mubarak’s two sons are said by the report to receive profit-making partnerships – without making any investment – in a large number of companies, including Phillip Morris, Skoda Auto, Movenpick, Vodafone, McDonalds, and many others.
They can also, it adds, obtain unsecured bank loans for themselves and their friends.
The report maintains that these funds are often used to participate in illegal financial transactions, arms’ dealing, and money laundering.
The sons’ interests allegedly also include forays into drug smuggling and illegal exports of archaeological treasures – Egypt’s cultural heritage – in partnership with Culture Minister Faruq Husni, who is supposed to safeguard them.
Anyone who stands in their way, according to the report, can be thrown into prison on false charges of drug dealing.
Other cabinet ministers are no better, Kifaya claims.
Boutros Ghali, nephew of the former UN Secretary-General, Interior Minister Habib Aladli, and such powerful figures as Ibrahim Suleiman and Safwat Sharif are engaged in similar deals, sometimes in partnership with Mubarak’s sons.
In short, the report says, officials can do what they like, unbound by law or transparency.
By using the “emergency law,” which has restricted freedom since 1981, together with censorship and rigged elections, Egypt’s government treats its citizens like serfs.
Meanwhile, massive corruption is devastating Egypt’s economy, with growth falling by half in the last two years, accompanied by rising unemployment, higher inflation, and currency depreciation.
Foreign investment is also declining, and local production is paralyzed, necessitating expensive imports.
The discontent fueled by these failures is a major potential cause of unrest.
By issuing such a detailed report and daring to name Mubarak and his family as the prime culprits, Kifaya is challenging the regime head-on.
The need for reform, it argues, is not based merely on a desire for better government or abstract rights, but is necessary to save a country that is being strangled.
The regime may respond by trying to tighten the noose.
The Falling Dollar
CAMBRIDGE – When the euro’s value reached an all-time high of $1.52, Jean-Claude Trichet, the president of the European Central Bank, told the press that he was concerned about its rapid appreciation and wanted to “underline” the United States Treasury’s official policy of supporting a strong dollar.
Several European finance ministers subsequently echoed a similar theme.
In reality, of course, the US does not have a dollar policy – other than letting the market determine its value.
The US government does not intervene in the foreign exchange market to support the dollar, and the Federal Reserve’s monetary policy certainly is not directed toward such a goal.
Nor is the Fed specifically aiming to lower the dollar’s value.
Although cutting the Federal Funds interest rate from 5.25% in the summer of 2007 to 3% now contributes to dollar depreciation, this has been aimed at stimulating a weakening economy.
Nevertheless, all US Treasury secretaries, going back at least to Robert Rubin in the Clinton administration, have repeated the mantra that “a strong dollar is good for America” whenever they were asked about the dollar’s value.
But, while this seems more responsive than “no comment,” it says little about the course of current and future US government action.
Indeed, the Treasury’s only explicit currency goal now is to press the Chinese to raise the value of the renminbi, thereby reducing the dollar’s global trade-weighted average.
The pressure on China is, however, entirely consistent with the broader US policy of encouraging countries to allow the financial market to determine their currencies’ exchange rate.
There is, of course, truth to the statement that a strong dollar benefits the American public, since it allows Americans to buy foreign products at a lower cost in dollars.
But, while the declining dollar does reduce Americans’ purchasing power, the magnitude of this effect is not large, because imports account for only about 15% of US gross domestic product.
A 20% dollar depreciation would therefore reduce Americans’ purchasing power by only 3%.
At the same time, the lower dollar makes American products more competitive in global markets, leading to increased exports and reduced imports.
The dollar has declined during the past two years against not only the euro but also against most other currencies, including the Japanese yen and the renminbi.
On a real trade-weighted basis, the dollar is down about 13% relative to its value in March 2006.
This improved competitiveness of American goods and services is needed to shrink the massive US trade deficit.
Even with the dollar’s decline and the resulting 25% rise in US exports over the past two years, the US still had an annualized trade deficit at the end of fourth quarter of 2007 of about $700 billion (5% of GDP).
Because US imports are nearly twice as large as US exports, it takes a 20% increase in exports to balance a 10% increase in imports.
That means that the dollar must fall substantially further to shrink the trade deficit to a sustainable level.
Investors around the world to want to reduce their dollar holdings for three major reasons.
First, interest rates are higher on euro and British bonds than on similar US securities, making investments in those currencies more rewarding than investments in dollars.
Second, since the US has a large trade deficit that can only be cured by a more competitive dollar (while the euro-zone countries collectively have a trade surplus), investors expect a trend decline in the dollar.
That predictable dollar decline makes the relative return on holding dollar bonds even lower than the interest-rate differential alone implies.
Finally, investors are adding nearly a trillion dollars worth of net dollar securities to their positions every year, thus increasing the risk of continued dollar accumulation.
With a lower total yield and increased portfolio risk, it is not surprising that investors worldwide want to sell dollars.
Although individual foreign investors can sell the dollar securities that they own, they can only sell them to other foreign investors.
As long as the US has a current account deficit, the stock of foreign-owned claims on the US economy must rise.
But when foreign investors don’t want to continue to hold dollar securities, their attempts to sell them will push down their value until the combination of reduced exposure and reduced fear of further dollar decline makes them willing to hold the outstanding stock of dollar securities.
Instead of simply wishing that the dollar would stop falling, European governments need to take steps to stimulate domestic demand to replace the loss of sales and jobs that will otherwise accompany the more competitive dollar.
This is not an easy task, because the European Central Bank must remain vigilant about rising inflation, and because many EU countries maintain large fiscal deficits.
While the ECB has limited room for maneuver, regulatory changes and revenue-neutral shifts in the tax structure (for example, a temporary investment tax credit financed by a temporary increase in the corporate tax rate) could provide the stimulus needed to offset declining net exports.
It is therefore important that EU governments turn their attention to this challenge.
The Fall of France
French influence in Europe is declining, and President Jacques Chirac is largely to blame.
He made the right choice before the Iraq war - America's intervention was never justified and has yielded a terrible failure - and so found himself in sync with an emerging European, even global, opposition to the Bush administration.
But he has failed to transform his position into one of ongoing leadership.
Chirac's stature and experience should have allowed him to rally all of Europe before, during or after the crisis.
But he never sought such a role.
Faced with American unilateralism, he failed to promote realistic multilateral solutions.
On the contrary, despite being right about Iraq, Chirac became isolated, an isolation that grew because he also failed to re-establish satisfactory relations with President Bush.
Indeed, under Chirac, France appears increasingly arrogant, a nation convinced of the righteousness of its views and the universality of its model - the very charges so often levelled against George W. Bush's America.
Chirac compounded his errors over Iraq in his approach to the new European Commission.
On the old commission headed by Romano Prodi, France was powerfully represented, with Pascal Lamy holding the trade portfolio.
Lamy is widely acknowledged for his skill, his intellect, and his strong personality.
Maintaining France's weight within the European Union should have led Chirac to re-confirm Lamy when José Manuel Barroso took over as President of the Commission.
But, in Chirac's eyes, Lamy possessed two fatal flaws: he is a socialist, and he favors reform of the Common Agricultural Policy.
Chirac, Georges Pompidou's agriculture minister in the 1970's, wants to keep the CAP as it is.
So Chirac replaced Lamy with Jacques Barrot, an honorable and experienced politician, but one with little knowledge of EU affairs and no language other than French.
No surprise, then, that Barrot was given a minor role on a new European Commission that is liberal and Atlanticist, quite out of sync with French positions.
Barrot received the transportation portfolio, a minor post far below the type of position - competition or domestic affairs - that Chirac demanded.
True, Barroso offered Barrot the symbolic title of Commission Vice-President, but this is a mere consolation prize that doesn't fool anyone.
Chirac's very character works against French influence in Europe.
He seems to belong to an era when France considered Europe a "French formal garden." He is nostalgic for the 1960's and the Gaullist ideology that shaped both France and himself.
These biases matter because they do not jibe with the enlarged Europe of today.
France was a core part of Europe when the Union had only six members and reflected the primary goal of Franco-German reconciliation.
The fall of the Berlin Wall changed all that.
Of course, the French vision still plays a major part in today's Europe of 25 members; our "exceptionality" - be it cultural or political - remains important, even if it is less well regarded.
But French ideas are not necessarily central to a Europe no longer driven by the Franco-German engine.
Given this change in European dynamics, France should have looked for new ways to assert influence.
Instead, Chirac demeaned and sometimes humiliated his European partners, gradually rallying everyone against him.
No one should be surprised that so contemptuous a French attitude, one utterly disdainful of the Union's Solidarity Pact and competition regulations, provoked a reaction detrimental to France.
That contempt is also manifested in France's nominees to serve on the Commission.
Unlike, for example, Great Britain, France rarely nominates young and talented persons capable of shaping the EU's future.
Of course, this decline must not be overestimated.
France remains a major European country: it is a founder of the Union, one of the world's richest nations, and holds a permanent seat on the UN Security Council.
It defends, with its nuclear power, an autonomous and important foreign and defense policy.
France represents values, a culture, and a history that grant it a durable global audience.
It matters and will continue to matter in the European Council and the European Parliament.
Moreover, France needs to avoid the temptation to overcompensate for the diminishing role of the Franco-German tandem, which may no longer be sufficient to power the Union, but nonetheless remains necessary.
In this respect, the composition of the Barroso Commission worries me: the role given to my friend, the German Social Democrat Günter Verheugen, is no more enviable than that given to Barrot.
A Commission that keeps France and Germany at bay and entrusts its major posts to representatives of "small countries," to more liberal actors, and partisans of the American intervention in Iraq, will not be successful.
This is why I cannot trust such a Commission.
France will also have to reform its European strategy if it is to regain influence.
I wish France could adopt a more humble attitude, show more respect for its partners and the EU's institutions, and view Europe as more than an extension of its own philosophy.
Here I have no confidence in Jacques Chirac.
Thankfully, his reign won't last forever.
The decline of French influence in Europe is undeniable, but it is neither fatal nor desirable.
It must be stopped.
But this won't be achieved by invoking past glory.
For the rising generation of French political leaders, the essential task is to spur France to lead a reunited Europe by working within it.
The Fall of the House of Murdoch
NEW YORK – During the four decades since the Watergate affair engulfed US President Richard Nixon, politicians have repeatedly ignored the scandal’s main lesson: the cover-up is worse than the crime.
Like Nixon, they have paid a higher price for concealing their misdeeds than they would have for the misdeeds alone.
Now, for once, comes a scandal that breaks that rule: the United Kingdom’s phone-hacking affair, which has shaken British politics to its foundations.
Over the past decade, the tabloid newspaper The News of the World, owned by Rupert Murdoch’s News Corporation, targeted 4,000 people’s voicemail.
The list includes not only royalty, celebrities, and other VIPs, but also the families of servicemen killed in Afghanistan and Iraq, and those of victims of the July 2005 terrorist attack in London.
It all unraveled when The Guardian reported that the tabloid had hacked into the voicemail of missing 13-year-old Milly Dowler, apparently in the hope of obtaining some private expressions of family members’ grief or desperation that it could splash on its front page.
When the girl’s murdered body was found six months later, the family and the police thought she might still be alive, because The News of the World’s operatives were deleting messages when her phone’s mailbox became full.
(According to Scotland Yard, Murdoch hacks reportedly bribed mid-level police officers to supply information as well.)
In the extensive annals of eavesdropping, all of this is something new.
Not even Stalin wiretapped the dead.
A cover-up ensued.
James Murdoch, Rupert’s son and Chairman and Chief Executive of News Corporation’s European and Asian operations, authorized a secret payment of £1 million ($1.6 million) to buy the silence of hacking victims.
Millions of in-house emails reportedly have been destroyed.
Still, it seems safe to say that the peculiarly repellant inhumanity of the original deeds will remain more shocking than the details of this or any other cover-up.
Even so, the political consequences of the phone-hacking scandal will depend on far more than the outcome of the official investigations now underway in Britain.
Above all, the scandal’s impact will depend on how governments and citizens assess what News Corporation really is.
The Murdochs call News Corporation a journalistic enterprise.
In fact, it is, first, an entertainment company, with the bulk of its revenue coming from its film and television holdings.
Second, and more importantly, it is a propaganda machine for right-wing causes and political figures.
This is News Corporation’s main face in the US, in the form of Fox News, whose hallmark has been relentless propagation of right-wing ideology.
Whereas political propaganda had once been the domain of governments and political parties, Fox News is formally independent of both – though itoverwhelmingly serves the interests of America’s Republican Party.
In Britain, News Corporation has been creating a sort of state unto itself by corrupting the police, assuming police powers of surveillance, and intimidating politicians into looking the other way.
In the US, it has behaved similarly, using corporate media power to breathe life into a stand-alone political organization, the Tea Party.
All of this is far removed from what a journalistic organization is supposed to do.
Journalism’s essential role in a democracy is to enable people to fulfill their roles as citizens by providing information about government, other powerful institutions, civil movements, international events, and so on.
But News Corporation replaces such journalism with titillation and gossip, as it did when it took over the 168-year-old News of the World and turned it into a tabloid in 1984, and with partisan campaigns, as it did when it created Fox News in 1996.
Not surprisingly, at Fox News, as at many other News Corporation outlets, editorial independence is sacrificed to iron-fisted centralized control.
News and commentary are mingled in an uninterrupted stream of political campaigning.
Ideology trumps factuality.
And major Republican figures, including possible contenders for the party’s presidential nomination, are hired as “commentators.”
Indeed, its specific genius has been to turn propaganda into a popular and financial success.
Given The News of the World’s profitability, no one should be surprised if the Murdochs have been replicating their sunken British flagship’s reprehensible behavior elsewhere.
But, whatever else is revealed, the UK phone-hacking scandal is of a piece with the Murdochs’ transformation of news into propaganda: both reflect an assault on democracy’s essential walls of separation between media, the state, and political parties.
The Murdochs are fusing these entities into a single unaccountable power that, as we see in Britain today, lacks any restraint or scruple.
That effort should compel us to confront an uncomfortable reality underlying both the British phone-hacking scandal, with its penumbra of appalling cruelty and wanton corruption, and Fox News, America’s most popular news channel: too many people want what the News Corporation has been offering.
And what too many people want can be dangerous to a civilized, law-based society.
To glimpse just how dangerous, consider Italy, where Prime Minister Silvio Berlusconi’s MediaSet conglomerate has seduced broad swathes of the electorate since the 1980’s with a Murdoch-like combination of insipid variety shows and partisan political theater.
When Italy’s postwar party system collapsed in the early 1990’s, Berlusconi was able to establish his own political party, win power, and, over the course of three governments, bend laws and government institutions to serve his business and personal interests.
The News Corporation seems determined to take Britain and the US down a similar path.
But now, at least in Britain, the political class is in revolt.
Prime Minister David Cameron – who previously cultivated close ties with News Corporation leaders, even employing as his press secretary The News of the World’s former editor, who was recently arrested for his role in the scandal – called the phone hacking “disgusting.”
Meanwhile, Labour leaders, who had also sought the Murdochs’ favor, have vowed to block News Corporation’s bid for full ownership of Britain’s largest pay-television broadcaster.
Whether the rebellion will jump across the Atlantic remains to be seen.
The Fall of the Hyper Power
Listen carefully these days to Israelis and South Koreans.
What they are hinting at is no less than a tectonic shift in the international system: the shift from a unipolar to a multipolar world.
Israelis are rediscovering Europe.
They intuitively sense that they can no longer rely only on the absolute security guarantee represented by the United States’ combination of active and passive support.
The war in Lebanon, so frustrating for Israel, accelerated that subtle change.
Now Europe and its various contingents are playing a leading role in picking up the pieces there.
America, of course, remains Israel’s life insurance policy, but enlargement and diversification of diplomatic alliances is starting to be seen as crucial by Israeli diplomats, if not by Israeli society.
The Quartet (the US, Russia, the European Union, and the United Nations) used to be regarded as “One plus Three,” but that is no longer the case.
Europe and Russia no longer see themselves as secondary players, because the US, not to mention Israel, needs them.
As for the South Koreans, they are counting on China to deal with the North Korean nuclear crisis.
They, too, see the world through a prism that makes America continue to appear essential, but no longer preeminent.
Recently, a high South Korean official listed in hierarchical order the countries that mattered most in the North Korean nuclear crisis.
China came first, followed by the US, Russia, Japan, and South Korea, whereas Europe was absent.
These are only a few signs among many others.
One could also mention the recent Sino-African summit in Beijing, or the intensification of Venezuelan-Iranian relations.
All these developments subtly indicate a deep trend that can be formalized in one sentence: America’s unipolar moment, which began in 1991 with the collapse of the Soviet Empire, is over.
Of course, one should not “bury” the US too soon.
America is much more resilient than its critics believe.
It has a unique capacity to rebound, and it controls unparalleled military, intellectual, economic, and even political resources.
The Republicans’ defeat in this month’s mid-term Congressional elections is a sign that Americans want to sanction their leaders for their strategic and ethical shortcomings, and they did so with gusto.
But this resilience should not hide a deeper evolution.
The US is no longer alone.
America no longer qualifies, if it ever did, as a “hyper power,” to use former French foreign minister Hubert Vedrine’s term, though it is still far from being a “normal” power.
America’s inadvertent “passivity” in the Clinton years and the wrong directions of the Bush years coincided with the rise of China and India, as well as Russia’s renewed international clout as a result of high oil prices.
These developments ushered in the slow, imperfect return of an unbalanced multi-polar system.
The world in which we live may be moving toward the multi-polarity wished for by French President Jacques Chirac, but not necessarily in a successful and stable way.
If, contrary to the traditional “Gaullist” vision, multi-polarity is not bringing stability, but instead generating chaos, there are two reasons for this outcome.
First, key emerging actors – China, Russia, and India – are not ready, willing, or even capable of performing a stabilizing international role.
They are either too cynical or timid in their vision of the world, or they have others priorities, or both.
They probably contemplate with barely disguised pleasure the difficulties currently encountered by the US in Iraq and elsewhere, but they do not feel any sense of a “compensating responsibility” for global stability.
The common good is not their cup of tea.
They have too much to catch up with, in terms of national ego and national interest, to care for others.
Second, the EU is the only natural American ally in terms of values.
It is the EU that can make multi-polarity work if it plays its role positively.
If the EU appears more concerned with the best ways to avoid the responsibilities that may befall it as a result of America’s new and enforced modesty, then multi-polarity will result – by default, not by design – in a more chaotic world, rather than leading to greater stability.
Europe has a unique chance to demonstrate that it can make a difference in America’s post-unipolar moment.
It starts right now in the Middle-East.
The world that Europe has called for is coming closer, and it can fail abysmally without the EU or improve at the margin thanks to it.
In some ways, the end of a unipolar world could truly be the “Hour of Europe.”
But that can happen only if the EU regains its confidence and steps into a positive role – one that it must play with, not against, the US.
The Fall of the UN
Saddam Hussein's reign of terror is about to end.
His Ba'athist government, however, will not go alone.
In a fitting irony, the United Nations is going down with him.
Perhaps the entire UN will not disappear.
Those parts devoted to "good works" (i.e., the low-risk peacekeeping bureaucracies or those that fight AIDs and malaria or protect children) will remain.
The looming chatterbox on New York's East River will also continue to bleat.
What died with the Security Council's unwillingness to sanction force to implement its own resolutions on Iraq's possession of weapons of mass destruction was the decades-old fantasy of the UN as the bedrock of world order.
As we sift the debris of the war to liberate Iraq, it will be important to preserve-the better to understand-the intellectual wreckage of the liberal conceit of security through international law administered by international institutions.
As free Iraqis document the quarter-century nightmare of Saddam's rule, we must not forget who supported this war and who did not, who held that the international community's moral authority was enshrined in pleas for more time for the UN arms inspectors, and who marched against "regime change".
In the spirit of post-war reconciliation that diplomats are always keen to engender, we must not reconcile ourselves to the timid, blighted notion that world order requires us to recoil before rogue states that terrorize their citizens and menace our own.
Decent, thoughtful, high-minded, the millions who marched against holding Iraq to account were catalyzed by the idea that only the UN Security Council has the authority to legitimize the resort to force.
A voluntary coalition of liberal democracies willing to put their own soldiers in harm's way isn't good enough.
It does not seem to matter that such troops are being used to enforce the UN's own demands.
If a country or coalition of countries other than the UN Security Council uses force, even as a last resort, "anarchy", not international law, would prevail, destroying all hope of world order.
Or so the protestors believed.
But this is a dangerously wrong idea, an idea that leads inexorably to handing great moral (and even existential politico-military decisions) to the likes of Syria, Cameroon, Angola, Russia, China, and France.
If a policy is right when the Security Council approves, how can it be wrong just because communist China or Russia or France or a gaggle of minor dictatorships withhold approbation?
Those who opposed the actions of the coalition in Iraq usually fall back on the answer that "order" must have primacy over "anarchy".
But is this right?
Is the UN Security Council the institution most capable of ensuring order and saving us from anarchy?
History suggests not.
The UN arose from the ashes of a war that the League of Nations was unable to avert.
The League was simply not up to confronting Italy in Abyssinia, much less (had it survived that debacle) taking on Nazi Germany.
In the euphoric aftermath of the victory in World War Two, the hope that security could be made collective was reposed in the UN Security Council-with abject results.
During the Cold War the Security Council was hopelessly paralyzed.
Indeed, the decision to defend South Korea from attack in 1950 was taken by the Council only because Stalin ordered his diplomats to boycott UN proceedings, which meant that no Soviet ambassador was around to cast a veto.
It was a mistake the Soviets would not make again.
In both 1967 and 1973, with war looming, the UN withdrew from the Middle East, leaving Israel to defend itself.
The Soviet empire was wrestled to the ground, and Eastern Europe liberated, not by the UN but by the mother of all coalitions, NATO.
Facing Milosevic's multiple aggressions, the UN could not stop the Balkan wars or even protect its victims.
Remember Sarajevo?
Remember Srebrenica and the slaughter of thousands of Muslims under the supposed protection of the UN?
It took a coalition of the willing to save Bosnia from extinction.
When the war was over, peace was made in Dayton, Ohio, not at the UN.
The rescue of Kosovo's Muslims was not a UN action: their cause never gained Security Council approval.
This century now challenges the hopes for a new world order in new ways.
We will not defeat or even contain fanatical terror unless we can carry the war to the territories from which it is launched.
This will sometimes require that we use force against states that harbor terrorists, as we did in destroying the Taliban regime in Afghanistan.
The most dangerous of these states are those that possess weapons of mass destruction, the chemical, biological, and nuclear weapons that can kill not hundreds or thousands but hundreds of thousands.
Iraq was such a state, but there are others.
Whatever hope exists that they can be persuaded to withdraw support or sanctuary from terrorists rests on the certainty and effectiveness with which they are confronted.
The chronic failure of the Security Council to enforce its own resolutions (with respect to Iraq) is unmistakable: it is simply not up to the task.
So we are left with coalitions of the willing.
Far from disparaging them as a threat to a new world order, we should recognize that they are, by default, the best hope for that order, and the true alternative to the anarchy caused by the dismal failure of the United Nations.
The False Promise of Crisis-Resolution Funds
ROME – Ever since financial markets began to stabilize late last year, the idea of making the financial sector pay for the costs incurred by taxpayers to keep it afloat has gained increasing support among policymakers and the wider public.
France and the United Kingdom have introduced a temporary tax on financial-sector bonuses, and the United States government has proposed legislation envisaging a “financial crisis responsibility fee” to recover the costs of America’s Troubled Asset Relief Program.
There is also a discussion about how best to reform taxation of the financial sector, which is on average lighter relative to other corporate income and unduly favors borrowing over equity financing.
But a lump-sum charge to recover past costs will not change the financial sector’s incentives concerning excessive risk-taking.
Furthermore, it is unclear what, precisely, the costs are that are to be recovered.
While the direct fiscal costs of supporting the financial sector were 2.5-3% of GDP in developed countries (with peaks around 4.5%), the total fiscal impact of the crisis is much larger, amounting to the total expected increase in public debt – an estimated 40% of GDP.
And even larger yet is the total cost suffered by the economy – including output and job losses, and the attendant destruction of material and immaterial capital, which, according to the Bank of England’s Andrew Haldane and others, could rise to a multiple of annual GDP.
More recently, the debate has changed tack: taxing the financial sector is now seen as a convenient way to set aside sufficient resources to pay for the next financial crisis.
The idea of a tax on the financial sector has become closely associated with that of a crisis-resolution fund.
This would pay for the residual costs of a large institution’s failure after its capital has fallen to zero and, presumably, creditors’ claims have been wiped out (though some proposals are ambiguous, leaving room for at least some relief for creditors).
The IMF presented one such proposal to the leaders of the G-20 when they met in Washington in April.
Other versions were recently put forth by the Committee on Economic and Monetary Affairs of the European Parliament and the European Commission.
To me, these proposals seem poorly conceived, for two reasons.
The first is obvious: any bailout fund for financial institutions creates an implicit promise of a bailout.
Sooner or later, someone will call upon that promise.
If the fund is public, it will encourage private beneficiaries to free ride on taxpayers.
If it is privately financed, swindlers will be encouraged to free-ride on honest bankers.
The only way to avoid this undesirable result is credibly to exclude all support for shareholders and creditors of a financial institution heading toward bankruptcy.
They must realize that government will not ride to their rescue.
Only in this manner will shareholders and creditors have a sufficiently strong incentive to monitor management and keep a tight lid on risk-taking by banks or other financial intermediaries.
Once it is accepted that shareholders and creditors deserve no relief, the resolution fund simply becomes deposit insurance.
Retail depositors are the only creditors in the financial system that deserve ample, if not full, protection against the mistakes of their bankers.
After all, the main source of systemic instability in financial systems is excessive leverage – and the reckless lending that it enables – by deposit-taking institutions.
Deposit-insurance fees are the appropriate instrument by which to make banks pay both for their intrinsic riskiness and the risks they impose on the rest of the system.
Regulation then must ensure that bankers don’t abuse their charter by taking excessive risks with their depositors’ money – which is precisely where regulators failed most notably in recent years, opening the way to the financial crisis.
This brings me to the second, often less readily recognized, objection to a resolution fund: banking (and quasi-banking) losses were huge in the recent financial crisis because regulators closed their eyes to misdeeds in order to ensure bankers’ international competitiveness or, more simply, because they had been “captured” by them.
If supervisors behave as they should, large residual losses from bank failures become unlikely.
So, in order to keep residual losses small, supervisors must be obliged to undertake early corrective action when a bank’s capital weakens, which is how the US Federal Deposit Insurance Corporation operates.
If a bank cannot be recapitalized, it should be resolved and liquidated.
This is where effective resolution procedures become important.
But the key point is that no reckless exposure would be possible in a system where shareholders and creditors knew that they would not be bailed out, and supervisors were not allowed to gamble on resurrection of their supervised entities, but rather were obliged to call them to account as soon as they started misbehaving.
In the effort to build a strong and coherent regulatory system for financial markets, the idea of a resolution fund is at best a distraction – and at worst a harbinger of further financial instability.
The False Promise of Debt Relief
With debt relief for poor countries shaping up as a focal issue at the July G-8 summit in Scotland, it is a shame that so few people appreciate what a farce such measures could turn out to be.
Unfortunately, most of the public, egged on by well-meaning rock stars, religious leaders, and other popular figures, seem brainwashed into believing that debt relief is a giant step on the road to ending world poverty.
But forgiving poor countries’ debts without agreeing on a better framework for future aid flows is an empty gesture.
At first glance, it seems incredibly generous and statesman-like for G-8 leaders to endorse debt relief for the world’s poorest nations.
But no one really expects the debts to be paid anyway.
Indeed, thanks to ongoing grants and future loans from national aid agencies and multilateral lenders like the World Bank, most of the poor “debtor” countries look set to receive considerably more money than they pay back, with no end in sight.
Citizens of rich countries may be self-centered and self-indulgent, but things are not quite as horrible as some would have us believe.
True, the ultra-rich United States does only give a pathetic 0.2% of its income in aid. But at least it doesn’t tax poor countries, as rich-country imperialists did until well into the twentieth century.
Besides, it is not like there is huge profit for G-8 leaders in trying to collect coins from impoverished peoples living on a dollar a day.
What would the G-8 leaders do, station troops in Africa to seize coffee beans and peanuts?
Re-colonize Africa?
Debt collection from poor nations is an absurdity, now and into the distant future.
The real issue is how much money rich-country governments will be giving poor-country governments, not vice versa.
Third-world debt burdens are little more than a scorecard for past development failures.
Generously interpreted, past loans reflected naïve optimism that with a bit of seed money, politically and economically backward countries would generate majestic growth and effortlessly repay their loans.
A not-so-generous interpretation of modern aid history is that rich countries’ legislatures were too cheap to give outright grants to the poorest countries, and could be persuaded to help out only if they were told that the money would be repaid.
Of course, I am focusing mainly on official loans, but private-sector lending to the world’s poorest countries is generally a relatively minor issue.
So now rich countries want to feel magnanimous for “forgiving” debts that should have been given as outright grants in the first place.
As all but the most belligerent critics of US President George W Bush will acknowledge, America has taken an important lead in trying to make things marginally better.
The Bush administration has put outright grants at the center of its foreign-assistance policy, a commitment that is embodied in its new aid agency, the “Millennium Challenge Account.”
Moreover, following recent changes at the World Bank, the US is aiming to follow the classic doctor’s dictum: “First, do no harm.”
The aim is praiseworthy: to ensure that aid will be unambiguously beneficial, and won’t merely be exploited by bad governments to extend their hold on power.
Admittedly, there is still a fierce debate over the right way to assist poor countries, and this will play out behind the scenes at the G-8 summit.
Many Europeans believe that aid agencies like the World Bank will shrivel and die if left to depend on grants for income.
But I believe that the problem could easily be solved by, say, giving the World Bank an endowment of rich-country bonds and permitting it to expend the interest.
The United Nations Development Program has championed the position that all countries should get significant aid, regardless of how they are governed, on the grounds that thousands of children die every day and there is no room for sanctimonious extremism.
I beg to differ; my reading of the evidence suggests that donors really do need to take extreme care not to make things worse, and that this is far more difficult to achieve in corrupt countries than the UN suggests.
In short, the fundamental problem with the debt-relief mantra is that it looks backward rather than forward.
If the G-8 leaders are serious about helping poor countries, finding a reliable way to support grant aid and promote accountability for donors and recipients, not debt relief, is the place to start.
If the political will were there, it would be neither difficult nor expensive to restructure aid agencies like the World Bank and the regional development banks as grants-only agencies.
For example, Professor Jeremy Bulow of Stanford University and I have shown that by endowing the World Bank with $100 billion dollars, it could carry out the tasks that it performs best more effectively and with greater transparency than it does today through borrowing and lending.
Given today’s exceptionally low long-term interest rates, the annual cost would be, well, peanuts.
The Electric Car’s Short Circuit
PRAGUE – For decades, the idea of the electric car has captured the imaginations of innovators – including Henry Ford and Thomas Edison more than a century ago.
Celebrities, pundits, and political leaders alike have cast these vehicles as the apotheosis of an environmentally responsible future.
German Chancellor Angela Merkel has proclaimed that there will be a million electric cars on the Autobahn by 2020.
President Barack Obama has likewise promised a million electric cars in the United States – but five years sooner.
Someday, the electric car will, indeed, be a great product – just not now.
It costs too much; it is inconvenient; and its environmental benefits are negligible (and, in some cases, non-existent).
Many developed countries provide lavish subsidies for electric cars: amounts up to $7,500 in the US, $8,500 in Canada, €9,000 ($11,700) in Belgium, and €6,000 even in cash-strapped Spain.
Denmark offers the most lavish subsidy of all, exempting electric cars from the country’s marginal 180% registration tax on all other vehicles.
For the world’s most popular electric car, the Nissan Leaf, this exemption is worth €63,000.
Yet this is clearly not enough.
In Denmark, there are still only 1,224 electric cars.
In Germany, car sales totaled 3.2 million in 2011, but only 2,154 were electric.
The numbers have forced Obama and Merkel to reconcile their projections with reality.
The US Department of Energy now expects only about 250,000 electric cars by 2015 – 0.1% of all cars on America’s roads.
Merkel recently admitted that Germany will not get anywhere near one million electric cars by 2020.
No one should be surprised.
According to an analysis by the US Congressional Budget Office, a typical electric car’s lifetime cost is roughly $12,000 higher than a gasoline-powered car.
Recent research indicates that electric cars may reach break-even price with hybrids only in 2026, and with conventional cars in 2032, after governments spend €100-150 billion in subsidies.
Costs and subsidies aside, electric cars have so far proven to be incredibly inconvenient.
A BBC reporter drove the 778 kilometers (484 miles) from London to Edinburgh in an electric Mini, and had to stop eight times to recharge – often waiting six hours or more.
In total, he spent 80 hours waiting or driving, averaging just ten kilometers per hour – an unenviable pace even before the advent of the steam engine.
Electric cars also fail to live up to their environmental billing.
They are often sold as “zero emissions” vehicles, but that is true only when they are moving.
For starters, the manufacturing process that produces electric cars – especially their batteries – requires an enormous amount of energy, most of it generated with fossil fuels.
A life-cycle analysis shows that almost half of an electric car’s entire CO2 emissions result from its production, more than double the emissions resulting from the production of a gasoline-powered car.
Moreover, the electricity required to charge an electric car is overwhelmingly produced with fossil fuels.
Yes, it then emits about half the CO2 of a conventional car for every kilometer driven (using European electricity).
But, given its high CO2 emissions at the outset, it needs to be driven a lot to come out ahead.
Proponents proudly proclaim that if an electric car is driven about 300,000 kilometers (180,000 miles), it will have emitted less than half the CO2 of a gasoline-powered car.
But its battery will likely need to be replaced long before it reaches this target, implying many more tons of CO2 emissions.
In fact, such distances seem implausible, given electric cars’ poor range: the Nissan Leaf, for example, can go only 117 kilometers on a charge.
That is why most people buy an electric car as their second car, for short commutes.
If the car is driven less than 50,000 kilometers on European electricity, it will have emitted more CO2 overall than a conventional car.
Even if driven much farther, 150,000 kilometers, an electric car’s CO2 emissions will be only 28% less than those of a gasoline-powered car.
During the car’s lifetime, this will prevent 11 tons of CO2 emissions, or about €44 of climate damage.
Given the size of the subsidies on offer, this is extremely poor value.
Denmark’s subsidies, for example, pay almost €6,000 to avoid one ton of CO2 emissions.
Purchasing a similar amount in the European Emissions Trading System would cost about €5.
For the same money, Denmark could have reduced CO2 emissions more than a thousand-fold.
Worse, electric cars bought in the European Union will actually increase global CO2 emissions.
Because the EU has a fixed emission target for 2020, it will offset emissions elsewhere (perhaps with more wind power), regardless of the type of car purchased: 38.75 tons of CO2 from a gasoline car, and 16 tons from the electricity produced for an electric car.
But, while EU emissions stay the same, most electric batteries come from Asia, so an extra 11.5 tons of emissions will not be offset.
The electric car’s environmental transgressions are even worse in China, where most electricity is produced with coal.
An electric car powered with that electricity will emit 21% more CO2 than a gasoline-powered car.
And, as a recent study shows, because China’s coal-fired power plants are so dirty, electric cars make the local air worse.
In Shanghai, air pollution from an additional million gasoline-powered cars would kill an estimated nine people each year.
But an additional million electric cars would kill 26 people annually, owing to the increase in coal pollution.
The electric-car mantra diverts attention from what really matters: a cost-effective transition from fossil fuels to cheaper green energy, which requires research and innovation.
Electric cars might be a great advance for that purpose in a couple of decades.
But lavish subsidies today simply enable an expensive, inconvenient, and often environmentally deficient technology.
The False Promise of Financial Liberalization
Something is amiss in the world of finance.
The problem is not another financial meltdown in an emerging market, with the predictable contagion that engulfs neighboring countries.
Even the most exposed countries handled the last round of financial shocks, in May and June 2006, relatively comfortably.
Instead, the problem this time around is one that relatively calm times have helped reveal: the predicted benefits of financial globalization are nowhere to be seen.
Financial globalization is a recent phenomenon.
One could trace its beginnings to the 1970’s, when recycled petrodollars fueled large capital inflows to developing nations.
But it was only around 1990 that most emerging markets threw caution to the wind and removed controls on private portfolio and bank flows.
Private capital flows have exploded since, dwarfing trade in goods and services.
So the world has experienced true financial globalization only for 15 years or so.
Freeing up capital flows had an inexorable logic – or so it seemed.
Developing nations, the argument went, have plenty of investment opportunities, but are short of savings.
Foreign capital inflows would allow them to draw on the savings of rich countries, increase their investment rates, and stimulate growth.
In addition, financial globalization would allow poor nations to smooth out the boom-and-bust cycles associated with temporary terms-of-trade shocks and other bouts of bad luck.
Finally, exposure to the discipline of financial markets would make it harder for profligate governments to misbehave.
But things have not worked out according to plan.
Research at the IMF, of all places, as well as by independent scholars documents a number of puzzles and paradoxes.
For example, it is difficult to find evidence that countries that freed up capital flows have experienced sustained economic growth as a result.
In fact, many emerging markets experienced declines in investment rates.
Nor, on balance, has liberalization of capital flows stabilized consumption.
Most intriguingly, the countries that have done the best in recent years are those that relied the least on foreign financing.
China, the world’s growth superstar, has a huge current-account surplus, which means that it is a net lender to the rest of the world.
Among other high-growth countries, Vietnam’s current account is essentially balanced, and India has only a small deficit.
Latin America, Argentina and Brazil have been running comfortable external surpluses recently.
In fact, their new-found resilience to capital-market shocks is due in no small part to their becoming net lenders to the rest of the world, after years as net borrowers.
To understand what is going on, we need a different explanation of what keeps investment and growth low in most poor nations.
Whereas the standard story – the one that motivated the drive to liberalize capital flows – is that developing countries are saving-constrained, the fact that capital is moving outward rather than inward in the most successful developing countries suggests that the constraint lies elsewhere.
Most likely, the real constraint lies on the investment side.
The main problem seems to be the paucity of entrepreneurship and low propensity to invest in plant and equipment – what Keynes called “low animal spirits” – especially to raise output of products that can be traded on world markets.
Behind this shortcoming lay various institutional and market distortions associated with industrial and other modern-sector activities in low-income environments.
When countries suffer from low investment demand, freeing up capital inflows does not do much good.
What businesses in these countries need is not necessarily more finance, but the expectation of larger profits for their owners.
In fact, capital inflows can make things worse, because they tend to appreciate the domestic currency and make production in export activities less profitable, further weakening the incentive to invest.
Thus, the pattern in emerging market economies that liberalized capital inflows has been lower investment in the modern sectors of the economy, and eventually slower economic growth (once the consumption boom associated with the capital inflows plays out).
By contrast, countries like China and India, which avoided a surge of capital inflows, managed to maintain highly competitive domestic currencies, and thereby kept profitability and investment high.
The lesson for countries that have not yet made the leap to financial globalization is clear: beware.
Nothing can kill growth more effectively than an uncompetitive currency, and there is no faster route to currency appreciation than a surge in capital inflows.
For those countries that have already made the leap, the choices are more difficult.
Managing the exchange rate becomes much more difficult when capital is free to come and go as it pleases.
But it is not impossible – as long as policymakers understand the critical role played by the exchange rate and the need to subordinate capital flows to the requirements of competitiveness.
Given all the effort that the world’s “emerging markets” have devoted to shielding themselves from financial volatility, they have reason to ask: where in the world is the upside of financial liberalization?
That is a question all of us should consider.
The False Promise of Global Governance Standards
Cambridge – In the wake of last year’s global financial meltdown, there is now widespread recognition that inadequate investor protection can significantly affect how stock markets and economies develop, as well as how individual firms perform.
The increased focus on improving corporate governance has produced a demand for reliable standards for evaluating governance in publicly traded companies worldwide.
World Bank officials, shareholder advisers, and financial economists have all made considerable efforts to develop such standards.
The notion of a single set of criteria to evaluate the governance of publicly traded firms worldwide is undoubtedly appealing.
Both investors and publicly traded firms are operating in increasingly integrated global capital markets.
But the quest for a single set of global governance standards is misguided.
Yes, over the last decade, there has been growing use of global governance standards, largely developed in the United States, to assess how countries and companies around the world protect minority investors.
But these efforts have overlooked fundamental differences between controlled companies, which have a controlling shareholder, and widely held firms that lack such a controller.
While widely held firms dominate the capital markets of the US and the UK, controlled companies dominate in most other countries.
Widely held and controlled companies differ considerably in the governance problems their investors face.
In widely held firms, the concern is about opportunism by managers, who exercise de facto control; in controlled firms, the concern is about opportunism by the controlling shareholder at the expense of minority shareholders.
Because the basic governance problems in the two types of firms are considerably different, arrangements that benefit investors in widely held firms might be irrelevant or even counterproductive in controlled firms, and vice versa.
As a result, applying a single standard for assessing investor protection worldwide is bound to miss the mark with respect to widely held firms, controlled firms, or both.
Consider, for example, the Corporate Governance Quotient system, developed by the US firm RiskMetrics, the world’s dominant shareholder advisory firm.
RiskMetrics’ system, which is used by institutional investors around the world, attaches considerable weight to the arrangements governing contests for control.
These arrangements are, indeed, important for investors in widely held firms.
When a company has a controlling shareholder, however, control contests are not possible, and the arrangements governing such contests are thus irrelevant.
Investors and public officials in countries where controlled companies dominate should stop using global governance standards based on the designers’ experience with widely held firms in the US.
Rather, they should strive to develop standards appropriate for controlled firms.
Most obviously, assessments of controlled companies should not give significant weight to arrangements governing contests for corporate control.
Similarly, arrangements that make the firm’s board of directors more responsive to the wishes of a majority of shareholders, such as making it easier for shareholders to replace directors, can serve the interests of investors in widely held firms, but are counterproductive for investors in controlled firms.
In controlled firms, where the concern is diversion from minority shareholders, making directors even more responsive to the controller will likely make minority investors still more vulnerable.
Moreover, in countries that have many controlled firms, close attention should be paid to related-party transactions and to the taking of corporate opportunities – the main ways in which value may be diverted from minority investors in such firms.
To address such problems, arrangements that enable a minority of shareholders to veto related party transactions – arrangements which are not warranted in widely held firms – could well be valuable.
Finally, when assessing controlled companies, the independence of directors should not be judged largely by looking at the extent to which they are independent of the company on whose board they serve.
Rather, considerable attention should be given to their independence from the controlling shareholder.
To improve corporate governance and investor protection, public officials and investors in countries whose capital markets are dominated by controlled companies should be wary of global governance standards developed for US companies.
They should focus on the special problems of controlled companies and on the rules that would work best for protecting smaller investors in such companies.
The False Promise of Green Jobs
COPENHAGEN – Political rhetoric has shifted away from the need to respond to the “generational challenge” of climate change.
Investment in alternative energy technologies like solar and wind is no longer peddled on environmental grounds.
Instead, we are being told of the purported economic payoffs, above all, the promise of so-called “green jobs.”
Unfortunately, that does not measure up to economic reality.
The Copenhagen Consensus Center asked Gürcan Gülen, a senior energy economist at the Center for Energy Economics, Bureau of Economic Geology at the University of Texas at Austin, to assess the “state of the science” in defining, measuring, and predicting the creation of green jobs.
Gülen concluded that job creation “cannot be defended as another benefit” of well-meaning green policies.
In fact, the number of jobs that these policies create is likely to be offset – or worse – by the number of jobs that they destroy.
On the face of it, green-job creation seems straightforward.
Deploying more wind turbines and solar panels creates a need for more builders, technicians, tradespeople, and specialist employees.
Voilà: simply by investing in green policies, we have not only helped the climate, but also lowered unemployment.
Indeed, this is the essence of many studies that politicians are eagerly citing.
So what did those analyses get wrong?
In some cases, Gülen finds that proponents of green jobs have not distinguished between construction jobs (building the wind turbines), which are temporary, and longer-term operational jobs (keeping the wind turbines going), which are more permanent.
Moreover, sometimes advocates have assumed, without justification, that the new jobs would pay more than careers in conventional energy.
In other cases, the definition of a “green” job is so fuzzy that it becomes virtually useless.
If a sustainability adviser quits a concrete factory and goes to work instead for a renewable energy project, can we really conclude that the number of green jobs has actually increased?
More disturbing is Gülen’s finding that some claims of job creation have rested on assumptions of green-energy production that go far beyond reputable estimates.
Of course, if you assume that vast swaths of the countryside will be covered in wind turbines and solar panels, you will inevitably predict that a large number of construction jobs will be required.
But the biggest problem in these analyses is that they often fail to recognize the higher costs or job losses that these policies will cause.
Alternative energy sources such as solar and wind create significantly more expensive fuel and electricity than traditional energy sources.
Increasing the cost of electricity and fuel will hurt productivity, reduce overall employment, and cut the amount of disposable income that people have.
Yet many studies used by advocates of green jobs have not addressed these costs at all – overlooking both the cost of investment and the price hikes to be faced by end users.
The companies calling for political intervention to create green jobs tend to be those that stand to gain from subsidies and tariffs.
But, because these policies increase the cost of fuel and electricity, they imply layoffs elsewhere, across many different economic sectors.
Once these effects are taken into account, the purported increase in jobs is typically wiped out, and some economic models show lower overall employment.
Despite a significant outlay, government efforts to create green jobs could end up resulting in net job losses.
Even if that is true, proponents might argue, investment in green jobs is nonetheless a good way to stimulate a sluggish economy.
But Gülen shows that there are many other economic sectors, such as healthcare, that could actually create more jobs for the same amount of government investment.
In addition to job creation, some researchers have blithely claimed that all sorts of other economic benefits will accrue from investment in alternative energy, including increased productivity, higher disposable incomes, and lower operating costs for businesses.
Here, too, Gülen concludes that the assertions are “not backed up by any evidence and are inconsistent with the realities of green technologies and energy markets.”
The fundamental problem is that green-energy technologies are still very inefficient and expensive compared to fossil fuels.
Deploying less efficient, more expensive alternative-energy sources will hurt businesses and consumers, not help them.
In order for the whole planet to make a sustainable shift away from fossil fuels, we need to make low-carbon energy both cheaper and more efficient.
That requires a substantial increase in research and development into next-generation green-energy alternatives.
Today’s research budgets are tiny, and that desperately needs to change.
In the meantime, the public should be cautious of politicians’ claims that deploying today’s inefficient, expensive technology will result in windfall benefits at no cost.
The False Promise of Later Retirement
EU Economics Commissioner Pedro Solbes warns that Europe's shrinking population will soon hit the Continent's economies hard.
Reforms to defuse the crisis are needed.
Alain Jousten examines one alluring but false reform that is often discussed.
Social welfare systems are shaking as never before. Not only in Europe, but in parts of North and South America, and Asia as well.
A collapse in fertility rates, coupled with longer life expectancy, is driving a rapid and pronounced aging of populations.
Worse still, the demographic threat is being heightened by the way most countries finance their public pension schemes.
Many retirement systems rely heavily on a pay-as-you-go (PAYG) philosophy.
Rather than forcing each generation to pay for its own retirement, benefits paid to today's pensioners are financed by contributions from the young.
Inter-generational solidarity, however, is only as strong as the number of entrants into the labor force.
When this number falls as a result of lower fertility rates, and when higher life expectancy swells the ranks of pensioners, the only way to sustain PAYG systems is to decrease the level of benefits relative to contributions.
The technical remedies for restoring financial balance are rather straightforward and entail either explicit or implicit measures.
An explicit remedy is to raise revenues through higher contributions, increased labor force participation, stronger productivity growth, or larger transfers from general tax revenue.
Alternatively, the number of working years required to qualify for a full retirement benefit can be increased.
What is the most effective method?
Many experts advocate raising the official retirement age as an efficient tool, because it would-in theory, at least-increase the pool of contributors while shrinking the pool of benefit recipients.
Unfortunately, this intuitively simple expectation does not fit with what actually happens in most industrialized countries.
What actually happens is that the average retirement age is sometimes noticeably lower than the earliest eligible age for the normal retirement system.
The period between departure from paid employment and entry into PAYG programs is bridged on a country-specific basis by a plethora of public, private, or mixed early-retirement benefit arrangements, such as unemployment insurance, disability insurance, or some form of severance pay.
Besides the generosity of benefits, there is the issue of when one can first claim them.
Individuals respond to the incentives created by the variety of early-retirement and retirement programs.
The accessibility of early retirement varies widely across different countries and different sectors.
While paths to retirement as early as age 50 exist in some countries, in others the lowest eligible age is much higher.
Recent studies show that financial incentives to promote earlier retirement are sometimes powerful, so much so that continuing to work becomes a prohibitively expensive.
The implicit tax from working another year and forgoing pension benefits can sometimes be close to a person's net earnings during that year.
This type of extreme financial incentive is particularly true in some countries like Belgium or the Netherlands with easily accessible early retirement schemes - schemes which, to boot, often fail to adjust benefit levels to offset their longer duration.
It is argued that early retirement systems cater to needs that are different from those addressed by traditional PAYG schemes.
Many European governments used compulsory early retirement to push down the unemployment rate, effectively reducing the number of applicants for any given job by ridding the labor market of older, more expensive workers.
Such policies also facilitated structural change, as older workers often lack the skills required in emerging economic sectors.
However, early retirement schemes also imply tremendous-and often neglected-costs for government budgets and the pension systems by increasing benefit payments while reducing contributions.
But even leaving aside the fiscal implications, many labor economists now believe that early retirement has failed to open up jobs for young people and reduce unemployment rates.
Early retirement policies everywhere stand in clear need of reform.
It is illogical to continue subsidizing a compulsory exit from the labor force while simultaneously trying to safeguard public retirement systems in the face of tremendous demographic challenges.
It is all the more irrational in view of the rather modest effects early retirement plans have on unemployment in general, and on youth unemployment in particular.
But reform should not be confined to public retirement systems.
Instead, change must be comprehensive and include an overhaul of the myriad pathways to early retirement.
An increase in the official retirement age - currently close to 65 in most countries - is pointless to the extent that many people no longer exit the labor force directly into official retirement systems.
In Belgium, for example, only one-third of men exit the labor force directly to one of the public retirement systems.
The rest pass through some type of early retirement scheme.
Tightening the rules governing accessibility to different early retirement systems is more likely to be effective than raising the "official" retirement age.
But reform of early retirement rules should not completely cut off access to social insurance programs before, say, age 60.
There is a considerable degree of heterogeneity in any population, so it is neither fair nor desirable that everyone should be forced to retire at the same age.
The False Promise of Private Pensions
One of the strangest claims made in the debates about social insurance now roiling the world’s richest countries is the that government-funded defined-benefit pension programs (such as America’s Social Security system) are outmoded.
These programs were fine, the argument goes, for the industrial economy of the Great Depression and the post-World War II generation, but they have become obsolete in today’s high-tech, networked, post-industrial economy.
Advocates of this argument propose a different model.
Just as corporations today are much happier supporting workers’ pensions by contributing to employees’ private accounts, so governments today should offer (or require) contributions to privately owned accounts.
The value of these accounts would fluctuate with the market rather than resting on a defined-benefit scheme that guarantees a fixed real sum of resources available upon retirement.
This argument is strange because it gets the economics of the situation backward.
When there are lots of companies offering workers long-term defined-benefit retirement pensions, there are fewer advantages to the government in setting up a parallel defined-benefit scheme and requiring workers to participate in it.
After all, in such a world, workers who set great value on a defined-benefit pension can go to work for firms that offer such pensions.
The major benefits that arise from the government’s requiring that workers also participate in a national Social Security system accrue to those workers who really ought to value a defined-benefit pension highly but have not been able to figure out what their true preferences are.
They also accrue to relatively poor workers who lack the bargaining power to induce bosses to offer the pensions they really want – and need.
But there aren’t a lot of companies today that are willing to offer long-term defined-benefit pension schemes.
One reason is that companies nowadays are much more aware of their own long-run fragility than they were in the post-World War II decades.
Not even America’s IBM – which prides itself on stability – wants to take the risk of offering defined-benefit schemes.
The risk from defined-benefit pensions used to be offset by two benefits for companies that offered them.
First, the fact that leaving the company usually meant cashing in one’s pension at a discount increased worker loyalty.
Second, complaisant accountants’ optimistic assumptions about returns on pension reserves, together with large firms’ greater risk-bearing capacity, brightened the financial picture that companies could report to investors.
Today, the risks are seen to be much greater, and the benefits are seen to be less.
As a result, an ever-smaller slice of employers are offering anything like defined-benefit pensions.
This fall-off in private defined-benefit pensions all across the rich core of the world economy is a bad thing, because the configuration of asset prices suggests that young and middle-aged workers value defined-benefit pensions extremely highly.
Historically, the gap between expected returns on low-risk assets like government or investment-grade bonds and high-risk assets like stocks and real estate has been very high.
To some degree, as economists like Harvard’s Robert Barro and mathematicians like Benoit Mandelbrot argue, this may be because high-risk investments are in reality much more risky than the theories and math of standard finance techniques suggest.
In my opinion, at least, this is partly because the memory of years like 1930 and 2000, when stocks performed very badly, occupies too large a place in investors’ minds.
Workers and other asset holders place a very high value on safety, security, and predictability, so a defined-benefit pension plan is extremely valuable.
But in today’s world, only national governments are large enough to be able to do so with any assurance that the pension assets will actually be there when workers retire.
I am enough of a social democrat to believe that if there is an economic service or benefit that citizens value extremely highly and that only the government can provide, then the government should provide it.
We economists know that there are many drawbacks to expanding government beyond its basic role of providing true public goods like defense, public safety, and justice, as well as providing citizens with incentives to counterbalance the effects of true market failures.
If the private market has the flexibility of two hands, government bureaucracy has at best two thumbs.
But the collection of payroll taxes from tens of millions of workers and the writing of tens of millions of pension checks is the kind of routine, semi-automatic task that government can do well.
With private companies backing away from defined-benefit programs, it is even more important and valuable that government do it in our post-industrial network-age society than it was in the past.
The False Promise of Stability
France, Portugal and Germany are all flagrantly flaunting the Stability Pact, the agreement among Eurozone members to keep their deficits below a critical threshold (3% of GDP today, but lower, supposedly, in the future).
France's Prime Minister, Pierre Raffarin, defends his government's position by saying that France was not prepared to impose austerity on its own people. If France will not, other European leaders must wonder, why should they?
Monsieur Raffarin was right to say that austerity would result if France obeyed the Pact's strictures, but in debates over economic policy, the truth is seldom appreciated.
Telling the truth is something best left to academics, whose squabbles make it difficult to discern who is right and who is wrong.
A few years ago, Alan Blinder, then Vice Chairman of America's Federal Reserve Board, was excoriated for stating the obvious: that monetary policy should target not only inflation, but also unemployment, and that, at least in the short run, there may be a trade-off between the two.
There is a long list of central bankers' homilies that are not supposed to be questioned; do so and you are exiled from the small circle of those who supposedly know how the world "really" works.
Here are three:
An independent central bank is necessary for sound macro-economic policy.
The truth: countries that do not have an independent central bank, like India, manage to contain inflation as effectively as those with independent central banks.
In Russia, an independent central banker, Viktor Gerashencko, could not be removed for years, though he tolerated both inflation and corruption.
More generally, there is little evidence that countries with independent central banks grow faster, have higher wages, or generate higher incomes--indeed, that they perform better in any real sense--than those that do not.
Once inflation starts, it increases at a faster and faster rate, and the costs of reversing it are high.
The truth: there is no evidence of an inflation precipice, or that the costs of reversing inflation (in terms, say, of pushing unemployment to high levels) are any greater than the benefits from inflation (in terms, say, of allowing unemployment to fall to low levels).
Inflation is bad for growth and productivity.
The truth: below a critical threshold--a threshold far beyond the levels of inflation that now prevail in Europe and North America--there is no evidence of significant adverse effects from inflation.
On the contrary, recent research by Nobel laureate economist George Akerlof and his colleagues suggests that pushing inflation too low may impede growth, and that the critical threshold is higher for countries, such as the post-communist transition economies, engaged in large structural changes.
When an economy faces a downturn, one should engage in expansionary fiscal policies. But in a downturn tax revenues fall.
Thus, debt must increase.
But the EU's Stability Pact, as commonly interpreted, requires either that tax rates be raised (always difficult, especially in a recession) or that expenditures be cut.
Either way, such policies will exacerbate the downturn.
The Stability Pact put into place an automatic economic destabilizer .
But the EU--indeed, every country--should seek automatic stabilizers, policies that automatically boost the economy in a downturn.
The US is facing, albeit in somewhat weaker form, a similar problem.
Most of America's 50 states have constitutional amendments that effectively impose a balanced budget.
As tax revenues drop due to the economic downturn, the states are cutting back on expenditures, exacerbating America's slump--and the world's.
I warned of this problem more than a year ago, and I suggested that the Federal government pick up the tab for the shortfall in state tax revenue, because the states did not cause the country's slowdown.
At the time, there was some disagreement about how long the downturn would last (I was a pessimist, and unfortunately I have been proved right).
But I argued that this was irrelevant: making up the states' shortfall would cost the government nothing if the optimists turned out to be right, but it would be just the right medicine if pessimists like me were correct.
Instead, the Bush administration pushed ahead with tax cuts for the rich, tax cuts that were not designed to stimulate the economy and that, no surprise, have failed to stimulate the economy.
The lesson for Europe is clear: the EU should redefine its Stability Pact in terms of the structural or full employment deficit--what the fiscal deficit would be if the economy were performing at full employment.
To do otherwise is irresponsible.
There does need to be a commitment to fiscal responsibility.
In the long run, governments should run balanced budgets, with surpluses in good years making up for deficits in bad years.
But to insist on an arbitrary budgetary position in an economic downturn is to ignore everything we have learned about economics in the past seventy years, risking the well being of millions of workers who are thrown out of employment.
The Stability Pact holds another important lesson: casting in stone institutional arrangements designed to address the problems of the past is a recipe for failure in the future.
In America in the 1990's, the Clinton Administration fought demands by Republicans for a balanced budget amendment to the US constitution.
US Democrats argued that if America faced an economic downturn, the government needed the flexibility to run a deficit.
Is there any reason to believe that excessive policy inflexibility works better in Europe?
The False Promise of “Targeted” Sanctions
Despite his bellicose rhetoric, George W. Bush would very much like to avoid a choice between air strikes on Iranian nuclear sites and accepting a nuclear Iran.
For the moment, administration officials are hoping that “targeted” sanctions aimed directly at Iran’s leadership will compel a compromise.
The United Nations Security Council’s recent decision to tighten existing sanctions on Iran by prohibiting dealings with 15 individuals and 13 organizations aims at precisely that.
But, while some within the US government argue that similar sanctions induced North Korea to compromise on its nuclear program, there are several reasons why the same strategy is unlikely to work with Iran.
First and foremost, targeted sanctions did not, in fact, really work with North Korea.
The freeze on $25 million of the leadership’s assets held at Banco Delta Asia in Macau has certainly irritated the North Koreans.
But the asset freeze did not prevent Kim Jong-Il from ordering a ballistic missile test last July or an underground nuclear test in October.
Instead, North Korea’s willingness to resume negotiations partly reflects the Americans’ decision to stop insisting on the “complete, verifiable, irreversible dismantlement” of North Korea’s nuclear program as a pre-condition for talks on normalizing relations.
The Bush administration has accepted that North Korea is a nuclear power and that outsiders can do little about it, so the United States has shifted its diplomatic stance from the hard-line Japanese approach to the more flexible and stability-oriented Chinese position.
That shift is understandable.
Given its simultaneous military commitments in Iraq and Afghanistan, together with North Korea’s demonstrated nuclear capability, the Bush administration can’t credibly threaten Kim with force.
Sanctions have rattled the North Korean leadership, but not nearly enough to compel them to surrender fully the nuclear program, which is their ultimate guarantee of security.
At the same time, the North Koreans’ willingness to make a deal also reflects China’s decision to put its foot down.
China remains the only foreign power with any real leverage over Kim’s government.
Exasperated by Kim’s refusal to ease international tensions, Chinese officials have made clear their refusal to protect and subsidize North Korea’s elite if it continues to push the US toward confrontation.
The Chinese can’t force Kim to disarm fully, but they can persuade him to negotiate with a now more flexible US.
As a result, the US and North Korea have agreed a deal that differs from the Clinton-era “Agreed Framework,” mainly because North Korea now has a track record as both a deal breaker and a nuclear weapons state.
Having returned to the bargaining table in a position of strength, North Korea now hopes to secure a compromise that frees up the leadership’s assets and brings new benefits that help buttress the regime a little longer.
As long as the Chinese talk tough and the US remains willing to negotiate, the agreement may hold.
But neither diplomatic stance is likely to continue indefinitely.
In any case, none of this will help the Bush administration with Iran.
No outside actor has the leverage with Iran that China has with North Korea, and even if the US offered Iran a more conciliatory approach, the Democratic-led Congress isn’t likely to follow suit.
Buffeted by criticism that their position on the war in Iraq is incoherent and that they are soft on security threats, the Democrats appear determined to ratchet up pressure on Iran, favoring much broader sanctions than the Bush administration has proposed.
For example, House Foreign Affairs Committee Chairman Tom Lantos has introduced legislation that would extend the extra-territorial reach of US law to foreign governments’ export credit agencies, financial institutions, insurers, underwriters, and guarantors.
It would bar foreign subsidiaries of US companies from investing more than $20 million in Iran’s energy sector, and would eliminate the president’s authority to waive these penalties.
It would also designate Iran’s Revolutionary Guard as a terrorist group and impose further limits on exports to the country’s civil aviation industry.
Moreover, Republicans are getting in on the act.
Representative Ileana Ros-Lehtinen has introduced legislation that would require US government pension funds, private pension funds, and mutual funds sold or distributed in the US to divest from companies that invest more than $20 million in Iran.
Finally, just as Iran faces no China – an outside player with considerable domestic influence – North Korea faces no Israel, a neighbor that believes its security could depend on an act of military pre-emption.
Israel does not want to take on Iran without US support and will maintain pressure on both Congress and the president to threaten Iran with every means at its disposal.
The appeal of targeted sanctions against Iran is obvious: they are meant to help the administration avoid military action, which could create more problems than it solves.
They allow the White House to argue that it means to undermine Iran’s leadership, not its people.
They are also much more likely to win international support than sanctions that would remove Iran’s oil and gas supplies from the international marketplace.
But the chances are slim that sanctions, whether targeted or otherwise, can undermine the consensus within Iran in favor of the nuclear program.
As in North Korea, a nuclear capability constitutes a powerful symbol of the country’s sovereignty and international clout – and would be the ultimate guarantee that America could never do there what it has done in Iraq.
Sanctions give lawmakers and diplomats plenty to talk about.
But unless a sea change occurs in Iranian domestic politics, they will merely postpone the difficult (and increasingly likely) choice between military action and accepting a nuclear Iran.
Balancing the Technocrats
ISTANBUL – A simplistic (actually, naive) view of markets is that they exist almost in a “state of nature,” and that the best of all worlds is one where they are free to operate without government interference.
An equally simplistic view of democracy is that it is a political system in which periodic competitive elections give the winner the right to govern without constraint.
The reality is far more complex, of course.
Markets can function only within an institutional and legal framework that includes property rights, enforcement of contracts, quality and information controls, and many other rules to govern transactions.
Similarly, while competitive elections are essential to any democratic system, a “winner-take-all” attitude to electoral outcomes, with the victor concentrating power, is incompatible with democracy in the long term.
Well-functioning democracies are embedded in complex constitutional and other laws that separate executive, legislative, and judicial power, and that protect freedom of speech, assembly, and peaceful dissent by those who lose elections.
Regulatory institutions – such as bank supervisory agencies and bodies that oversee the telecommunications, food, and energy industries – play a vital role by maintaining the always-delicate balance between “free” markets and the actions of elected governments and legislatures.
The central bank is perhaps the most important of these institutions, for it conducts monetary policy (and sometimes serves as the financial-sector regulator).
The policy and regulatory mistakes that contributed to the subprime mortgage crisis – and thus to the US financial system’s near-meltdown and the eurozone’s travails – have brought the issue of optimal economic regulation and its relation to democracy to the fore once again.
In the US, a significant share of the Republican Party favor abolishing not only the Department of Energy and the Environmental Protection Agency, but also the Federal Reserve!
In their view, markets and private initiative require no significant regulation.
The role of politics is to elect majorities that can abolish regulations and regulatory bodies.
Others around the world similarly oppose regulatory institutions, but for very different reasons.
They argue that politicians can regulate and supervise without intermediate bodies that have some degree of autonomy.
In their minds, these bodies merely impede and constrain realization of the people’s will.
If an elected government wants a bank to offer cheap credit to a group of enterprises so that they can hire more people, why should a supervisor be able to obstruct this democratic will?
If these enterprises are told to hire the governing party’s supporters as an implicit condition of obtaining subsidized credit, that, too, is the expression of electorally legitimized popular will.
At the other end of the spectrum are technocratic super-defenders of regulatory bodies who believe that politicians and electorates are hopelessly confused, uneducated, and often corrupt.
Management of the economy should be entrusted to competent and independent experts, a group of “Platonic Guardians” empowered to act in the state’s higher interests, regardless of electoral outcomes or public opinion.
The International Monetary Fund, the European Commission, and the European Central Bank are often viewed as such technocratic institutions – and as supporting the technocratic element within states and societies around the world.
At the height of the eurozone crisis, the IMF, the EC, and the ECB (not to mention financial markets) warmly welcomed the economists Mario Monti and Lucas Papademos as highly respected “technocratic” prime ministers for Italy and Greece, respectively.
Experience in recent decades has shown that a balanced and “moderate” approach is needed on these matters.
Electoral cycles (and the accompanying political pressures) are such that monetary policy, banking, and many other areas of policy and economic activity must be overseen by those with professional competence and a much longer time horizon than that of politicians.
Day-to-day politics cannot dominate the regulation that markets need.
The single most important institutional reform underlying price stability throughout the world has been the stronger independence of central banks.
But, if independent technocrats are allowed to determine long-term policy and set objectives that cannot be influenced by democratic majorities, democracy itself is in serious jeopardy.
I find it undemocratic, for example, that the ECB can set the eurozone-wide inflation target unilaterally.
How much inflation a society finds desirable or tolerable (taking into account other important variables, such as employment, GDP growth, or poverty) is an inherently political question that should be debated in parliament.
The central bank should be consulted, but its role should be to implement the objective without political interference: independence in terms of policy tools, not goals.
Globalization and the increasing complexity of financial and other markets make it imperative that the domains of private activity, political decision-making, and regulation be clarified.
The challenge is even greater because some regulatory agencies must be multilateral, or at least intergovernmental, given the global nature of much economic activity.
The difference and the distance between markets and politics must be clear –&#160;and, for the sake of both effectiveness and legitimacy, it must be based on rules that are well understood and on popular consent.
The Transparency Conspiracy
SOFIA – One of the most troubling outcomes of the ongoing financial crisis has been a collapse of trust in democratic institutions and politicians.
Indeed, in 2012, the global public-relations firm Edelman’s “Trust Barometer” survey registered the biggest-ever decline when it comes to government.
Can greater “transparency” – the new political mantra of civic activists and an increasing number of democratic governments – reverse this trend?
The hope is that a combination of new technologies, publicly accessible data, and renewed civic engagement can help people control their representatives more effectively.
But the idea that transparency will restore public trust in democracy rests on several problematic assumptions, primarily the belief that “if only people knew,” everything would be different.
Unfortunately, matters are not so simple.
The end of government secrecy does not mean the birth of the informed citizen; nor does more control necessarily suggest more trust in public institutions.
For example, after American voters learned that President George W. Bush had led the United States into a war with Iraq without proof of weapons of mass destruction, they re-elected him.
Likewise, Italians kept Silvio Berlusconi in power for more than a decade, despite a steady stream of revelations about his wrongdoings.
In politics, “knowing everything” still means knowing different things, which means that compelling governments to disclose information does not necessarily mean that people learn more or understand better.
On the contrary, as soon as government information is designed to be immediately open to everybody, its value as information declines and its value as an instrument of manipulation increases.
Consider how gangsters in crime movies talk when they know that the police are listening.
They speak clearly and offer banalities while exchanging notes under the table.
That is government in the age of transparency.
In his study of truth-telling in ancient Greece, the philosopher Michel Foucault pointed out that the act of truth-telling cannot be reduced to citizens learning something that they did not know before.
Paradoxically, truth in politics is something that everybody knows, but that few dare to express.
People hardly need additional data to recognize, say, a rise in inequality or mistreatment of immigrants.
The WikiLeaks cables did not teach us anything qualitatively new about America’s policies.
Living in truth cannot be reduced to having access to full information.
It is people’s willingness to take personal risks and confront the powerful by daring to speak the truth, not the truth itself, that ultimately leads to change.
Moreover, information never comes without interpretation.
Reading the same raw data, Republicans and Democrats in the US, or secularists and the Muslim Brotherhood in Egypt, will spin it differently, because policymaking cannot be divorced from decision-makers’ interests and values.
As the anthropologists Jean and John Comaroff put it, ours “is an age in which people almost everywhere seem preoccupied, simultaneously, with transparency and conspiracy.”
To see the ambiguity of the politics of trust, consider Russia’s recent experience.
In December 2011, the country’s parliamentary election triggered a civic explosion.
Hundreds of thousands of people poured into the streets of Moscow and other big cities to demand a fair vote and real choices in the subsequent presidential election.
The escalating crisis of legitimacy forced the government to invent imaginative ways to justify its power.
The central proposal was ingenious: the Kremlin proposed to guarantee the election’s fairness by installing webcams at all polling stations; every citizen could personally monitor the voting process.
As China’s Xinhua news agency enthusiastically reported: “From Kamchatka to Kaliningrad, and from Chechnya to Chukotka, more than 2.5 million net surfers registered to view live streaming from at least 188,000 webcams installed in more than 94,000 polling stations on Russian territory.”
But, in a regime like Vladimir Putin’s, where the government decides who may be a candidate, the webcams would be farcical were they not also so intimidating.
Viewed from the West, they were perceived as a tool to keep the government under control by enabling people to watch what it was doing.
But, from the point of view of a post-Soviet voter living in the countryside, the webcam sent a different message: the government knows how you vote.
In a way, Putin succeeded twice: he looked transparent to the West and menacing to most of his own citizens.
The installation of the webcams was an act of simultaneous transparency and conspiracy.
The broader issue is transparency advocates’ insistence that open government can be reconciled with citizens’ privacy.
But might wholly transparent government imply a wholly transparent citizen?
As a rule, governments monitor people.
When that becomes transparent, so do those citizens who spoke with or were monitored by the government.
Contrary to the expectations of transparency advocates, greater disclosure of government information does not make public discourse more rational and less paranoid.
If anything, it fuels conspiracy theories (there is nothing more suspicious than the claim of absolute transparency).
Who can honestly say that public debate has become more rational and less paranoid when our governments have become more transparent?
Rather than restoring trust in democratic institutions, the transparency movement could accelerate the transformation of democratic politics into the management of mistrust.
In that case, one could imagine the replacement of representative democracy with political regimes that limit citizen control to the executive.
None of this is to deny that transparency in government is a worthy goal.
But let’s not fool ourselves by thinking that achieving it will restore citizens’ faith in their political institutions.
The End of Hunger and Malnutrition
ROME – Sometimes something happens that can have a fundamental impact on mankind, but passes largely unnoticed at the time.
Such an event occurred in December in Rome.
The Council of the United Nations Food and Agriculture Organization decided that the FAO’s goal should no longer be merely to reduce hunger, but to eradicate hunger, food insecurity, and malnutrition.
The next step will be to confirm this change in June 2013 at the FAO Conference, in which all FAO member countries participate.
To many, this small change of wording must seem trivial.
Critics will also say that adopting such a goal without setting a target date for achieving it is largely meaningless.
Others may claim that even the idea of eradicating hunger is nonsense, because we lack the means to do it.
For the last 12 years, the Millennium Development Goal of halving hunger by 2015 has been the driving force for hunger reduction.
The proportion of hungry people in developing countries has declined significantly – from 23.2% in 1990-92 to 14.9% today.
However, this decrease owes more to a rise in the world’s population than it does to the slight reduction in the actual number of hungry people (from about 980 million to 852 million today).
A “halving” goal has only slight political appeal, as it implicitly condemns the excluded half to a life on the fringes of society, exposed to illness and premature death.
Brazil’s Zero Hunger strategy, by contrast, has shown that adopting the absolute goal of hunger eradication provides a powerful means of galvanizing government departments into large-scale coordinated action, and of mobilizing society in a truly national effort to end one of the greatest injustices of our time.
To be sure, it will be increasingly difficult – though far from impossible – to meet the world’s growing demand for food, and to do this in sustainable ways.
Additional food must be produced using technologies that do not damage the natural resources that future generations will need in order to feed themselves; that do not fuel climate change, which weighs heavily on farmers; and that do not accelerate the disintegration of the delicate fabric of rural society.
But the challenge may not be as daunting as it seems.
The rate of population growth will be much slower than over the past 50 years, and there is much room for reducing the vast quantities of food that are now wasted.
Moreover, as people’s incomes rise, they might more easily be persuaded to adopt healthier and more environmentally friendly diets than those taken up in the developed world.
The double burden of malnutrition – with hunger existing alongside obesity, diabetes, and other diseases of overconsumption – clearly shows the increasing importance of global dietary rebalancing.
There is nothing really new about a commitment to hunger eradication.
Indeed, the FAO was created in 1945 to bring about a world in which there would be “freedom from want,” which, in the words of its founders, “means the conquest of hunger and the attainment of the ordinary needs of a decent, self-respecting life.”
Because of the widespread fear in the postwar years of emerging global food shortages, the FAO, and the international community as a whole, focused mainly on food production – a focus that remained essentially the same in the following decades.
Those investments yielded good returns: despite staggering global population growth, from 2.5 billion in 1945 to seven billion today, food availability per person has risen by more than 40%.
The problem is that hunger still persists on a vast scale; so, our focus must now shift to ensuring universal access to adequate food.
This should be a top priority for governments and a goal embraced by citizens everywhere.
Breaking the vicious cycle of hunger and malnutrition requires complementing the focus on agriculture and rural development (more than 70% of the food-insecure population lives in rural areas of developing countries) with investment in other social and productive programs, including modest but predictable financial transfers to the poorest families.
With the right policies in place, the incremental food demand created by these transfers, as well as by school meals programs and nutrition supplements for mothers and infants, could create opportunities for small-scale farmers to expand their output and improve their livelihoods.
In June, UN Secretary-General Ban Ki-moon launched the Zero Hunger Challenge at the Rio+20 Sustainable Development Conference.
The FAO has accepted this challenge, and is formally setting its sights on hunger eradication.
I look forward with confidence to a progressive expansion in the number of member governments that commit themselves to moving as quickly as possible toward ending hunger and malnutrition within their borders – and to helping other countries to achieve the same goal.
It is never the wrong moment for the world to set its sights on ending hunger, once and for all.
The Fatal Myth of a Drug-Free World
VIENNA – Negotiations at the United Nations High Level Summit on drugs in Vienna last week fell flat.
Although 25 countries officially stated their support for proven methods such as needle exchange and overdose prevention, the summit’s outcome was a watered-down political declaration that fails to acknowledge crucial lessons that have been learned over the last decade.
The refusal to include the words “harm reduction” seems motivated by ideology rather than science, despite clear evidence showing that needle exchange and substitution treatment keep drug users alive and free of deadly infections.
Those advocating for harm reduction accept that drugs have always been a part of human history and aim to decrease the damage caused by their production and use.
A vocal few disagree with this approach, labeling it, in the Vatican’s words, “anti-life.”
Those who strive for the futile goal of a “drug-free world” refuse to recognize the proven benefits of harm reduction.
But the evidence against the “war on drugs” is overwhelming: prisons swelling with non-violent drug offenders, billions of dollars spent on military action to curb production while the availability of illicit drugs increases and prices drop, and increasing HIV rates throughout the former Soviet Union and parts of Asia.
Elsewhere, the stories of futility in the “war on drugs are more brutal: capital punishment for drug-related offenses; extra-judicial killings in the name of creating drug-free societies; drug users sent to labor camps as a form of “treatment”; and drug-using women handcuffed to beds during childbirth.
The list goes on.
But there is reason for hope.
Since assuming office, President Barack Obama has made clear his desire to lift the federal ban on needle exchange in the United States.
Indeed, while the previous Bush administration led the global opposition to harm reduction, the US delegation struck a more conciliatory tone at the Vienna summit, indicating what some perceive as a fresh start to drug policy.
Ten years ago, when a “drug-free world” became the global drug-policy mantra, no one imagined that in 2009 two million people in the former Soviet Union, and over a million in Asia, would be infected with HIV through intravenous drug use.
Also missing from Vienna was a discussion about increased numbers of destabilized countries becoming narco-states.
There is, moreover, still an important region where drug use has not contributed significantly to HIV infection rates: Africa.
Sadly, when we meet again in ten years, this will no longer hold true.
Even though no African countries voiced their support in Vienna for harm reduction, African leaders should take heed of those countries with pragmatic and humane drug policies.
Instead of signaling a new way forward for international drug policy, the Vienna declaration represents the same, failed politics of the past.
Unless that changes quickly, the result will be continued suffering and death for millions of people around the world.
A Death in Galway
NEW YORK – The case of Savita Halappanavar, a 31-year-old dentist from India who had moved, with her husband, to Ireland, continues to reverberate around the world.
Halappanavar, an expectant mother, died after her doctors, citing Ireland’s legal prohibition of abortion, refused to remove her 17-week-old fetus, despite allegedly acknowledging that the fetus was not viable and placing Halappanavar in an intensive-care unit as her condition deteriorated.
Indian activists are outraged.
“While there is no single law specific to men that states when, where, or how medical care should be provided, governments enact laws that prescribe, confuse, and curtail a woman’s access to safe abortion services,” Anjali Sen, the South Asia director of the International Planned Parenthood Federation, pointed out.
“Right and necessary care could have saved her life.
It is inexcusable that doctors, instead of undertaking efforts to save her, watched her die.”
Halappanavar suffered extreme pain on October 21.
She was miscarrying, and, according to her husband, repeatedly asked for a termination after being told that the fetus would not survive.
But Halappanavar and her husband were then informed that Ireland is a Catholic country; the fetus still had a heartbeat, so the procedure was out of the question.
Halappanavar died from septicemia, which her family is certain would not have developed if the termination had been carried out.
Protests in Ireland have put Prime Minister Enda Kenny on the spot, with activists there, like those in India, arguing that Halappanavar died because of a theocratic approach to health care.
Irish abortion-rights activists point out that, legally, the life of the fetus does not take precedence over the life of the mother in their country, but it does take precedence over the health of the mother – a distinction that American abortion opponents have long sought to replicate in the United States.
The Halappanavar case thus reverses the Western stereotype of Eastern societies as preserves of superstition and religious extremism.
Halappanavar’s death resulted from the fanatical, atavistic behavior of a Western theocracy, while Indian protesters and lawmakers have upheld the scientific, rationalist ethos of the Enlightenment.
We in the West are so used to “our” religious fanatics that we rarely view them as we do the East’s religious fanatics.
But Halappanavar’s death leaves us with no choice.
A non-Catholic, slowly being poisoned by a fetus that was no longer viable, was asked to accept that care would be withheld from her because the Pope, acting on the orders of St. Paul, was staying the hand of her doctors.
One can imagine the furor if a Western, non-Muslim woman had died because an Imam had refused her medical care for religious reasons.
The fact that the uproar has extended to India illuminates the many ways in which one can view abortion – even from a religious perspective.
As I noted almost 20 years ago, the Western Christian/Catholic view of abortion is not the only religious interpretation of the issue.
In Hinduism, abortion is considered bad karma; but that is not the same as the Manichean view defended by fundamentalist Christians and the Catholic Church.
Hindu medical ethics calls for ahimsa, or “non-harming”; that is, a doctor’s duty is to do the least harm possible in the situation.
So a Hindu perspective on the Halappanavar case would dictate saving the mother’s life if the fetus were endangering it.
In this respect, Hinduism resembles Judaism, even Orthodox Judaism, in which “the mother’s life is more important than that of the fetus.”
Abortion, while seen in a negative light, is not illegal in India, probably because it is viewed as an issue of personal morality – one’s karma shouldering the burden of what we in the West would call “choice.”
(Indeed, the abortion problem in India lies at the other end of the spectrum: pervasive termination of female fetuses, owing to a cultural preference for sons, a situation that I would argue inflicts violence against mothers as well.)
The cultural battle over Halappanavar’s death is far from settled.
Irish women are certainly right to wonder anew if next time it will be they who are endangered by a religious viewpoint that has nothing to do with their medical needs.
But it is the outcry in India, where protesters are demanding that abortion in Ireland be treated as a private medical decision between a woman and her health-care providers, that may point the way ahead – to a global dialogue about the universal right of women to reproductive health and freedom.
Such a global dialogue initiated in “the East” would not be unique.
The growing international demand for the rule of law and human rights was on display recently when Afghan lawmakers tried – futilely, but honorably – to explain the principles of the US Constitution to occupying Americans, who had sought to establish a system of detention without due process.
It is healthy when the West is asked to live up to its own self-image as the bastion of reason and human liberty.
Facing up to its own lapses into fanaticism or barbarity would be a good place to start.
The Fear Factor in US-China Relations
Opinion polls indicate that one-third of Americans believe that China will “soon dominate the world,” while nearly half view China’s emergence as a “threat to world peace.”
In turn, many Chinese fear that the United States will not accept their “peaceful rise.”
Americans and Chinese must avoid such exaggerated fears. Maintaining good US-China relations will be a key determinant of global stability in this century.
Perhaps the greatest threat to the bilateral relationship is the belief that conflict is inevitable.
Throughout history, whenever a rising power creates fear among its neighbors and other great powers, that fear becomes a cause of conflict.
In such circumstances, seemingly small events can trigger an unforeseen and disastrous chain reaction.
Today, the greatest prospect of a destabilizing incident lies in the complex relationships across the Taiwan Strait.
China, which regards Taiwan as an integral part of its territory that has sheltered behind the US navy since the days of the Chinese civil war, vows that any Taiwanese declaration of independence will be met by force.
The US does not challenge China’s sovereignty, but it wants a peaceful settlement that will maintain Taiwan’s democratic institutions.
In Taiwan itself, there is a growing sense of national identity, but a sharp division between pragmatists of the “pan-blue alliance,” who realize that geography will require them to find a compromise with the mainland, and the ruling “pan-green alliance,” which aspires in varying degrees to achieve independence.
The two sides in Taiwan will face off in a presidential election on March 22.
Current polls suggest that former Taipei Mayor Ma Ying-jeou of the Kuomintang (KMT) leads Frank Hsieh of the ruling Democratic Progressive Party (DPP).
But some observers fear that the incumbent DPP President Chen Shui-bian will seek a pretext to prevent a defeat for the pro-sovereignty camp.
He is currently advocating a referendum on whether Taiwan should join the United Nations, which China views as provocative.
Chen replies that it is China “that is acting provocatively today.”
America is clearly concerned.
Recently, US Secretary of State Condoleezza Rice told a news conference that “we think that Taiwan’s referendum to apply to the UN under the name ‘Taiwan’ is a provocative policy.
It unnecessarily raises tensions in the Taiwan Strait and it promises no real benefits for the people of Taiwan on the international stage.” She also reiterated the administration policy opposing “unilateral threat by either side to change the status quo.”
The same day, Secretary of Defense Robert Gates criticized China for unexpectedly curtailing American ship visits to Chinese ports because of American arms sales to Taiwan.
According to Gates, he had told Chinese officials that American arms sales were consistent with past policy and that “as long as they continued to build up their forces on their side of the Taiwan Strait, we would continue to give Taiwan the resources necessary to defend itself.” Gates added, however, that despite China’s rising defense budget, “I don’t consider China an enemy, and I think there are opportunities for continued cooperation in a number of areas.”
In principle, the Taiwan issue need not lead to conflict.
With increasing change in China and growing economic and social contacts across the strait, it should be possible to find a formula that allows the Taiwanese to maintain their market economy and democratic system without a placard at the UN.
Thus far, the US has tried to allow for this evolution by stressing two bright lines: no independence for Taiwan and no use of force by China.
But, given the danger of incidents that could grow out of political competition in Taiwan or growing impatience in the Peoples’ Liberation Army on the mainland, the US would be wise to encourage more active contacts and negotiations by the two sides.
The US has a broad national interest in maintaining good relations with China, as well as a specific human rights interest in protecting Taiwan’s democracy.
The US does not have a national interest in helping Taiwan become a sovereign country with a seat at the UN, and efforts by some Taiwanese to do so present the greatest danger of a miscalculation that could create enmity between the US and China.
Already, some Chinese suspect the US of seeking an independent Taiwan as an “unsinkable aircraft carrier” for use against a future Chinese enemy.
They are wrong, but such suspicions can feed a climate of enmity.
If America treats China as an enemy today, it will ensure future enmity.
While we cannot be sure how China will evolve, it makes no sense to foreclose the prospect of a better future.
America’s current policy combines economic integration with a hedge against future uncertainty.
The US-Japan security alliance means China cannot play a “Japan card.”
But, while such hedging is natural in world politics, modesty is important for both sides.
If the overall climate is one of distrust, what looks like a hedge to one side can look like a threat to the other.
There is no need for the US and China to go to war in this century.
Both sides must take care that an incident concerning Taiwan does not lead in that direction.
Americans and Chinese must avoid letting exaggerated fears create a self-fulfilling prophecy.
The Fear Factor
LOS ANGELES – The debate over fiscal expansion versus consolidation continues to divide the developed world.
In response to the global recession of 2008, the United Kingdom embarked on an austerity program while the United States enacted an $800 billion fiscal stimulus.
Despite a softening economy, British Prime Minister David Cameron is promising to stay the austerity course.
Obama, too, is sticking to his guns with his recent proposal for an additional $450 billion of government expenditure and tax cuts to help boost employment.
Unemployment in the US has remained above 9% for 22 of the last 24 months.
While some are supporting additional stimulus, others are calling for UK-style austerity.
But would either of these approaches reduce unemployment most effectively, or would a new round of “quantitative easing” (an unconventional form of economic stimulus by which the central bank purchases financial assets) work better?
With Nobel prize-winning economists on both sides of the current debate about how to solve the unemployment problem, the public is rightly confused.
Paul Krugman and Joseph Stiglitz are calling for an even larger fiscal stimulus to target government spending on education and infrastructure investment.
On the other side, Robert Mundell, Myron Scholes, and Reinhard Selten have called for “draconian measures” to tame debt levels.
The American Recovery and Reinvestment Act (ARRA) that Obama passed barely three weeks after his inauguration was disappointing.
An $800 billion stimulus did not have the effect for which its proponents hoped, largely because it was accompanied by a big increase in private savings.
Backers of the stimulus plan now claim that things would have been much worse without ARRA.
I am skeptical.
A better approach to reducing unemployment would be a new and expanded round of quantitative easing.
I am heartened by calls for this in the UK, and that the talk is now turning to the purchase of risky assets, such as corporate bonds or bundles of loans to the private sector, as opposed to long-term government securities.
This is a step in the right direction that I have been advocating for the past three years.
But I would go even further.
My work provides a new and coherent approach to macroeconomics that explains how a lack of confidence can lead to persistent unemployment.
It supports the purchase of equities by central banks to reduce asset-price volatility, restore the value of wealth, and prevent a future market crash.
When businessmen and women are afraid, they stop investing in real assets.
Lack of confidence is reflected in low and volatile asset values.
The environment of fear that arises has little to do with bad government policies, although bad policy may exacerbate the situation.
Businessmen and women become afraid that stocks, and the values of the machines and factories that back those stocks, may fall further.
Fear feeds on itself, and the prediction that stocks will lose value becomes self-fulfilling.
The 2008 recession was triggered by the collapse of a real-estate bubble.
Housing wealth in the US has fallen by 34% since its peak in 2006, and is still declining.
The stock market fell by almost 50% from its 2007 peak and remains down by nearly a third.
This enormous loss of wealth caused a large and persistent drop in consumption demand, which has led to an increase in unemployment.
Until we are willing to explore new solutions, the misery experienced by millions of unemployed workers will continue.
A quantitative-easing policy in which a central bank buys risky assets can prevent price fluctuations and restore the value of financial wealth.
These purchases would need Treasury support, since this tactic is in effect a fiscal policy, not a monetary policy.
And, by involving the Treasury, the purchase of risky assets could be financed by issuing debt, rather than by printing more money, thereby attenuating inflationary fears.
The Great Recession did not turn into Great Depression II because of coordinated action by governments around the world.
Although fiscal expansion may have played a role in this success, central bank intervention was the most important component by far.
Quantitative easing works by increasing the value of wealth.
In both the US and the UK, it reduced the real expected return on long-term government bonds, which in turn nurtured a recovery in the stock market.
We need not tolerate 9% unemployment as the new normal.
Confidence is a self-fulfilling prophecy, and we can, and should, manage it by direct intervention in asset markets.
The way ahead leads through science, not ideology, dogma, or failed theories.
The Triumph of Fear
PARIS – In May 1981, Pope John Paul II survived an assassination attempt.
Thirty years later, Osama bin Laden was killed by United States Special Forces. But, looking at the world now, one could easily conclude that the inspirational leader whose credo was Franklin Roosevelt’s injunction to fear only “fear itself” has lost, and that the fanatic who wanted fear to dominate the world of the “infidels” has prevailed.
Today, fear is ubiquitous, and the bombings at the Boston Marathon must be understood in that context, for the attack both highlights and deepens our pervasive sense of insecurity.
The scale of the Boston attack was, of course, much smaller than that of September 11, 2001.
But Americans will remember this homegrown plot as a highly symbolic moment: an attack on a venerable international sporting event on Patriots’ Day.
The marathon is a cherished event, for it reflects the peaceful values of a democratic society that seeks to transcend its challenges through sheer endurance.
Will an attack on such a symbol reinforce the prevalence of fear in an American society that was once defined by hope?
Fear of terrorism is only one segment of what might best be described as a multi-level structure of dread.
Domestically, there is fear of “spontaneous” massacres like the slaughter in December of schoolchildren in Newtown, Connecticut.
Internationally, there is fear of civil wars in the Arab world; of social unrest in crisis-ridden Europe; and of war in Asia resulting from North Korea’s brinkmanship or the irresponsible escalation of territorial disputes in the South and East China Seas.
And then there are global fears linked to climate change, epidemics, cyber wars, and more.
The list seems endless.
Revisiting my 2009 book, The Geopolitics of Emotion: How Cultures of Fear, Humiliation, and Hope are reshaping the World, it seems clear that fear has gained the upper hand.
Does this mean that a fearful West has prevailed once again?
And is fear in the rest of the world a response to the West’s strength, or to its new weakness?
Either way, the West has now spread its negative emotions, after having once imposed its mostly materialist values on the rest of the world. It is, of course, too early to say whether this is a sign of deep change, or merely a passing trend, and reality is, no doubt, much less simple.
But, to distill the essence of today’s mood, one could say that fear is the direct result of the process of globalization: the world is not necessarily flat, but it definitely feels smaller –&#160;and “others” appear more menacing than ever.
In the aftermath of World War II, a group of idealistic Frenchmen bent on reconciliation with their former enemy declared that France would have “the Germany she deserved.” That is, German behavior would be a function of how France behaved toward its defeated neighbor.
In the same vein, we will have the “other” we deserve.
If our behavior is based on fear, we will look with suspicion on all those who are different from us, deepening the alienation of the millions inside and outside our countries who believe that they cannot integrate into even the most open societies.
Their response could, in turn, call into question that very openness.
Of course, in today’s interdependent and transparent world, no society can protect itself fully.
There is no isolation from globalized markets, your neighbors’ identity crises, or the humiliation felt by those you have tried with so much (at times misguided) energy to integrate.
The simultaneity of unmanageable uncertainties – the crux of globalization itself – may lure some into seeking to reverse a process that has become inescapable and over which no one has control.
Given that all alternatives to globalization are unrealistic, frightening, or both, how can we sublimate, transcend, or at least channel our fears?
Can Western societies remain what they are, or at least should be – open, tolerant, and respectful of difference – while responding to demands for greater protection against the multifaceted threats, whether imagined or real, that we face?
How we answer these questions will in large part determine whether, in a relentlessly globalizing world, fear has the last word.
The Fear Profiteers
OXFORD – Just when it seemed that America’s “Homeland Security state” could not get more surreal, the United States Transportation Security Administration has rolled out a costly Scylla and Charybdis at major airports: either you accept dangerous doses of radiation and high-resolution imaging of your naked body, or, worried about the health risks of cumulative radiation, you opt out of the new full-body x-ray machines (rapidly dubbed “porno-scanners”).
But if you opt out, you are now subjected, as I was last week, to an extraordinarily sexualized and invasive “pat-down” by TSA officials.
“I will now touch your private parts,” a very uncomfortable female TSA official said to me when I flew out of New York’s Kennedy Airport.
And, sure enough, I experienced the invasive touching of genitals and breasts that is now standard policy for US travelers.
Men report handling of their testicles and penises, TSA officials are instructed to open and peer down waistbands, and YouTube is now rife with videos of frightened children being – to describe it accurately – sexually molested, though this is the last thing most TSA officials wish to do.
Are we free not to be radiated or groped?
We are not.
Passengers who have refused to be patted down on their genitals have been handcuffed to chairs.
Each new terror alert or high-tech innovation, it seems, makes new demands on our liberty in the name of security.
But travelers’ recent experiences in the US should give security officials elsewhere good reason to avoid implementing similar policies.
In fact, America’s bizarre new policy is likely to remain unique among airports in the industrialized countries, if not the entire world.
Israeli security officials, for example, scoff at genital pat-downs, which they say accomplish nothing.
That is not exactly true.
Twenty-four per cent of women have been sexually assaulted, or molested by a trusted adult in childhood or adolescence – as have 17% of men.
Many of these survivors will be re-traumatized when strangers grope their genitals.
And children will be placed most at risk of profound negative effects.
Years of sensitive educational outreach have finally made it the norm for American children to understand that their bodies are their own, that adults should not touch them intimately or in ways that make them uncomfortable, and that they can expect to be protected from such violation.
By desensitizing children to sexually inappropriate touching, the pat-downs are destroying those hard-won gains.
It gets worse.
TSA officials have been advised to tell small children that the sexual pat-downs are a game.
To anyone who has ever counseled survivors of childhood sexual abuse, this should set off alarm bells: the most common ploy of sexual predators is to portray the abuse as a “game.”
As Ken Wooden of the organization Child Lures Prevention puts it, the TSA’s “incredibly misinformed and misguided” advice “is completely contrary to what we in the sexual-abuse prevention field have been trying to accomplish for the past 30 years.”
Americans, for once, are fighting back against this latest violation of their rights.
Two states, New Jersey and Idaho, recently introduced legislation to seek to opt out of the new policy.
Questions about the change in practice have reached US Secretary of State Hillary Clinton – who admitted that she herself would resist a sexual pat-down – and President Barack Obama.
So what led to a policy that is appalling to citizens, damaging to children, and ineffective for improving our security?
Welcome to America’s current reality, in which threats are hyped so that a handful of insiders can make a killing.
Shortly after former Secretary of Homeland Security Michael Chertoff made the rounds of TV shows arguing in favor of such measures to thwart “bad guys,” one of his consulting firm’s clients, Rapiscan, won the $350 million contract to provide the full-body x-ray machines.
As one TSA supervisor said to me after my own sexualized pat-down, “This is about bureaucracy – people trying to cover their asses – and there is a ton of money involved as well.”
Meanwhile, the supervisor confirmed – as has online discussion by TSA employees – that workers ordered to molest travelers are traumatized, too.
One army veteran said that he cries every day from the resistance and outcry he now faces from passengers, and that the stress is worse than being on active military deployment.
Others say they feel degraded and ashamed.
Indeed, TSA workers are now working in a sexually hostile environment, which is illegal.
Finally, one must ask: is there a psychological element to the US requirement of submission to genital groping by uniformed officials?
It is impossible to forget the many strange sexual twists of Bush administration policies, from forced nudity of prisoners – which post-Abu Ghraib records show was systemic, not an aberration – to the sexual threats and sexual assaults against such prisoners, the sexualized hazing rituals and accounts of rape practiced with impunity by contractors, and so on.
I am not suggesting that sexually degrading practices are a conscious part of the TSA’s new policy.
But the history of closing societies shows that nudity and forced or degrading sexualized practices become, consciously or unconsciously, part of the state's consolidation of power.
It is not too extreme to put this into context: billions of dollars in profit now depend on insiders like Chertoff maintaining US society in a state of overhyped alert that demands increasingly costly technology.
Maintaining these profits requires a population conditioned by this theater of fear to submit to anything – even the sexual quasi-abuse of themselves and their children.
The Federal Reserve Diet
LONDON – Markets around the world were relieved by the US Senate’s confirmation of Federal Reserve Board Chairman Ben Bernanke’s reappointment.
It was the right decision from the perspective of financial stability; change at the top would have thrown in doubt the Fed’s determination to respond decisively to the crisis – and, indeed, its long-term commitment to low inflation.
Bernanke’s performance over the last two years has won high praise, and an extended political fight over control of US monetary policy was the last thing the world needed at what is still a very delicate moment for the global economy.
Nevertheless, 30 senators voted against Bernanke.
This may, in part, have just been partisan politics, but Bernanke was appointed by President George W. Bush, and there were other voices, both Democrat and independent, raised against his reappointment.
The case against Bernanke rested partly on his performance before the crisis.
Was he not a hard-core member of the “Greenspan consensus,” which held that it was not the Fed’s responsibility to look out for bubbles, whether of asset prices or credit, and that it should limit itself to mopping up after the event?
Bernanke had also supported the low-interest-rate policy implemented after the dot-com collapse, which, in the view of many economists, was maintained for too long, fueling the boom and contributing to the bust.
Indeed, just recently he defended that policy, whereas many other central bankers have tacitly or explicitly accepted that they need a new approach to credit and asset prices.
That was, I think, part of the reason for many commentators’ doubts about Bernanke’s continued suitability.
But these arguments became tangled up in a broader critique of the Fed’s actions.
Should it have been allowed to rescue the insurance giant AIG so expensively, without approval by the US Congress?
How is it that the Fed’s balance sheet can expand so dramatically, potentially committing large sums of taxpayer dollars, without Congress having a purchase on its decisions, except well after the event?
These questions have led to pressure for audits of the Fed’s actions, and for greater political control over its decision-making.
Congressman Ron Paul has been leading the pack hunting the Fed, but he is by no means as isolated a voice as he was two years ago.
This is dangerous territory.
Any suggestion that monetary-policy decisions would in future be subject to political override would, to use a non-technical term, spook the markets.
Most developed countries have concluded that central-bank independence makes good sense.
Politicians acknowledge, in their more rational moments (yes, they have them), that they can’t be trusted with the interest-rate weapon, especially as an election approaches.
So they have handed it over to technocrats, in the hope that they make rational choices that benefit everyone.
I share this consensus view.
But there is a problem, and the crisis has highlighted it.
The arguments that apply strongly in the case of interest rates are less clear when it comes to other functions that central banks may carry.
If a central bank is committing public funds in support of individual firms, even with a systemic justification, do not different accountability considerations apply?
And if it is a direct institutional supervisor, as well as being the lender of last resort, there are different considerations again.
Supervisors make decisions that, in effect, have an impact on private financial returns and property rights.
They must operate within tight legal constraints, and with rigorous accountability frameworks, involving the government and the legislature.
In its proposed reforms of the regulatory system, the Obama administration plans to give the Fed more of these powers.
That has inevitably strengthened the hands of those who argue that more power requires more accountability.
The problem is how to establish two different types of accountability for two different functions.
Is it possible to maintain a rigorously independent chairman when it comes to interest rates, and a tightly accountable chairman when he is making supervisory decisions?
Only with great difficulty, is my answer.
It is very hard to make legislators understand these delicate distinctions.
There is bound to be some contagion from one function to another.
So the proposals to strengthen the Fed’s regulatory role carry great risks.
It would be far better, in my view, to leave the Fed with an overall systemic role, which raises fewer new accountability issues.
Below it, there is the opportunity to create a single banking supervisor, combining the functions of the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the regulatory functions of the regional Feds.
In a perfect world, one would add in the state banking regulators, but I recognize that at this point I have begun to trample on cherished features of the US Constitution!
This regulatory architecture would leave the Fed free to speak openly about the development of the financial system as a whole, without worrying about the implications for individual institutions in its care.
The crisis has demonstrated that we need this plain speaking.
Moreover, such a solution would protect the Fed’s crucial independence in its monetary-policy role.
President Obama should not draw the conclusion that arguments about the Fed’s accountability have gone away with Bernanke’s confirmation.
If he proceeds with plans to give it more functions, they will persist.
To protect the Fed’s independence, which is a global public good of the highest importance, he should cut back the Fed’s authority to its core role.
The Trapdoors at the Fed’s Exit
MUMBAI – The ongoing weakness of America’s economy – where deleveraging in the private and public sectors continues apace – has led to stubbornly high unemployment and sub-par growth.
The effects of fiscal austerity – a sharp rise in taxes and a sharp fall in government spending since the beginning of the year – are undermining economic performance even more.
Indeed, recent data have effectively silenced hints by some Federal Reserve officials that the Fed should begin exiting from its current third (and indefinite) round of quantitative easing (QE3).
Given slow growth, high unemployment (which has fallen only because discouraged workers are leaving the labor force), and inflation well below the Fed’s target, this is no time to start constraining liquidity.
The problem is that the Fed’s liquidity injections are not creating credit for the real economy, but rather boosting leverage and risk-taking in financial markets.
The issuance of risky junk bonds under loose covenants and with excessively low interest rates is increasing; the stock market is reaching new highs, despite the growth slowdown; and money is flowing to high-yielding emerging markets.
Even the periphery of the eurozone is benefiting from the wall of liquidity unleashed by the Fed, the Bank of Japan, and other major central banks.
With interest rates on government bonds in the US, Japan, the United Kingdom, Germany, and Switzerland at ridiculously low levels, investors are on a global quest for yield.
It may be too soon to say that many risky assets have reached bubble levels, and that leverage and risk-taking in financial markets is becoming excessive.
But the reality is that credit and asset/equity bubbles are likely to form in the next two years, owing to loose US monetary policy.
The Fed has signaled that QE3 will continue until the labor market has improved sufficiently (likely in early 2014), with the interest rate at 0% until unemployment has fallen at least to 6.5% (most likely no earlier than the beginning of 2015).
Even when the Fed starts to raise interest rates (some time in 2015), it will proceed slowly.
In the previous tightening cycle, which began in 2004, it took the Fed two years to normalize the policy rate.
This time, the unemployment rate and household and government debt are much higher.
Rapid normalization – like that undertaken in the space of a year in 1994 – would crash asset markets and risk leading to a hard economic landing.
But if financial markets are already frothy now, consider how frothy they will be in 2015, when the Fed starts tightening, and in 2017 (if not later), when the Fed finishes tightening?
Last time, interest rates were too low for too long (2001-2004), and the subsequent rate normalization was too slow, inflating huge bubbles in credit, housing, and equity markets.
We know how that movie ended, and we may be poised for a sequel.
The weak real economy and job market, together with high debt ratios, suggest the need to exit monetary stimulus slowly.
But a slow exit risks creating a credit and asset bubble as large as the previous one, if not larger.
Pursuing real economic stability, it seems, may lead again to financial instability.
Some at the Fed – Chairman Ben Bernanke and Vice Chair Janet Yellen – argue that policymakers can pursue both goals: the Fed will raise interest rates slowly to provide economic stability (strong income and employment growth and low inflation) while preventing financial instability (credit and asset bubbles stemming from high liquidity and low interest rates) by using macro-prudential supervision and regulation of the financial system.
In other words, the Fed will use regulatory instruments to control credit growth, risk-taking, and leverage.
But another Fed faction – led by Governors Jeremy Stein and Daniel Tarullo – argues that macro-prudential tools are untested, and that limiting leverage in one part of the financial market simply drives liquidity elsewhere.
Indeed, the Fed regulates only banks, so liquidity and leverage will migrate to the shadow banking system if banks are regulated more tightly.
As a result, only the Fed’s interest-rate instrument, Stein and Tarullo argue, can get into all of the financial system’s cracks.
But if the Fed has only one effective instrument – interest rates – its two goals of economic and financial stability cannot be pursued simultaneously.
Either the Fed pursues the first goal by keeping rates low for longer and normalizing them very slowly, in which case a huge credit and asset bubble would emerge in due course; or the Fed focuses on preventing financial instability and increases the policy rate much faster than weak growth and high unemployment would otherwise warrant, thereby halting an already-sluggish recovery.
The exit from the Fed’s QE and zero-interest-rate policies will be treacherous: Exiting too fast will crash the real economy, while exiting too slowly will first create a huge bubble and then crash the financial system.
If the exit cannot be navigated successfully, a dovish Fed is more likely to blow bubbles.
The Federal Reserve’s Relevance Test
NEW YORK – With interest rates near zero, the US Federal Reserve and other central banks are struggling to remain relevant.
The last arrow in their quiver is called quantitative easing (QE), and it is likely to be almost as ineffective in reviving the US economy as anything else the Fed has tried in recent years.
Worse, QE is likely to cost taxpayers a bundle, while impairing the Fed’s effectiveness for years to come.
John Maynard Keynes argued that monetary policy was ineffective during the Great Depression.
Central banks are better at restraining markets’ irrational exuberance in a bubble – restricting the availability of credit or raising interest rates to rein in the economy – than at promoting investment in a recession.
That is why good monetary policy aims to prevent bubbles from arising.
But the Fed, captured for more than two decades by market fundamentalists and Wall Street interests, not only failed to impose restraints, but acted as cheerleaders.
And, having played a central role in creating the current mess, it is now trying to regain face.&nbsp;
In 2001, lowering interest rates seemed to work, but not the way it was supposed to.
Rather than spurring investment in plant and equipment, low interest rates inflated a real-estate bubble.
This enabled a consumption binge, which meant that debt was created without a corresponding asset, and encouraged excessive investment in real estate, resulting in excess capacity that will take years to eliminate.
The best that can be said for monetary policy over the last few years is that it prevented the direst outcomes that could have followed Lehman Brothers’ collapse.
But no one would claim that lowering short-term interest rates spurred investment.
Indeed, business lending – particularly to small businesses – in both the US and Europe remains markedly below pre-crisis levels.
The Fed and the European Central Bank have done nothing about this.
They still seem enamored of the standard monetary-policy models, in which all central banks have to do to get the economy going is reduce interest rates.
The standard models failed to predict the crisis, but bad ideas die a slow death.
So, while bringing down short-term T-bill rates to near zero has failed, the hope is that bringing down longer-term interest rates will spur the economy.
The chances of success are near zero.
Large firms are awash with cash, and lowering interest rates slightly won’t make much difference to them.
And lowering the rates that government pays has not translated into correspondingly lower interest rates for the many small firms struggling for financing.
More relevant is the availability of loans.
With so many banks in the US fragile, lending is likely to remain constrained.
Moreover, most small-business loans are collateral-based, but the value of the most common form of collateral, real estate, has plummeted.
The Obama administration’s efforts to deal with the real-estate market have been a dismal failure, perhaps succeeding only in postponing further declines.
But even optimists don’t believe that real-estate prices will increase substantially any time soon.
In short, QE – lowering long-term interest rates by buying long-term bonds and mortgages – won’t do much to stimulate business directly.
It may help, though, in two ways.
One way is as part of America’s strategy of competitive devaluation.
Officially, America still talks about the virtues of a strong dollar, but lowering interest rates weakens the exchange rate.
Whether one views this as currency manipulation or as an accidental by-product of lower interest rates is irrelevant.
The fact is that a weaker dollar resulting from lower interest rates gives the US a slight competitive advantage in trade.
Meanwhile, as investors look outside the US for higher yield, the flood of money out of the dollar has bid up exchange rates in emerging markets around the world.
Emerging markets know this, and are upset – Brazil has vehemently expressed its concerns – not only about the increased value of their currency, but that the influx of money risks fueling asset bubbles or triggering inflation.
The normal response of emerging-market central banks to bubbles or inflation would be to raise interest rates – thereby increasing their currencies’ value still more.
US policy is thus delivering a double whammy on competitive devaluation – weakening the dollar and forcing competitors to strengthen their currencies (though some are taking countermeasures, erecting barriers to short-term inflows and intervening more directly in foreign-exchange markets).&nbsp;
The second way that QE might have a slight effect is by lowering mortgage rates, which would help to sustain real-estate prices.
So QE would produce some – probably weak – balance-sheet effects.
But potentially significant costs offset these small benefits.
The Fed has bought more than $1 trillion of mortgages, the value of which will fall when the economy recovers – which is precisely why no one in the private sector wants to buy them.
The government may pretend that it has not experienced a capital loss, because, unlike banks, it is not required to use mark-to-market accounting.
But no one should be fooled, even if the Fed holds the bonds to maturity.
The attempt to ensure that the losses are not recognized might tempt the Fed to rely excessively on untested, uncertain, and costly monetary-policy tools – like paying high interest rates on reserves to induce banks not to lend.
It is good that the Fed is trying to make amends for its dismal pre-crisis performance.
Regrettably, it is far from clear that it has changed its thinking and models, which failed to maintain the economy on an even keel before – and are certain to fail again.
The Fed’s previous mistakes proved extraordinarily costly.
So will the new mistakes, even if the Fed strives to hide the price tag.
The Fed vs. the Financiers
In his August 31 address to the world’s most influential annual monetary policy conference in Jackson Hole, Wyoming, United States Federal Reserve Chairman Ben Bernanke coolly explained why the Fed is determined to resist pressure to stabilize swooning equity and housing prices.
Bernanke’s principled position – echoed by European Central Bank head Jean Claude Trichet and Bank of England head Mervyn King – has set off a storm in markets, accustomed to the attentive pampering lavished on them by Bernanke’s predecessor, Alan Greenspan.
This is certainly high-stakes poker, with huge sums hanging in the balance in the $170 trillion global financial market.
Investors, who viewed Greenspan as a warm security blanket, now lavish him with fat six-figure speaking fees.
But who is right, Bernanke or Greenspan?
Central bankers or markets?
A bit of intellectual history is helpful in putting today’s debate in context.
Bernanke, who took over at the Fed in 2006, launched his policy career in 1999 with a brilliant paper presented to the same Jackson Hole conference.
As an academic, Bernanke argued that central banks should be wary of second-guessing massive global securities markets.
They should ignore fluctuations in equity and housing prices, unless there is clear and compelling evidence of dangerous feedback into output and inflation.
Greenspan listened patiently and quietly to Bernanke’s logic.
But Greenspan’s memoirs, to be published later this month, will no doubt strongly defend his famous decisions to bail out financial markets with sharp interest rate cuts in 1987, 1998, and 2001, arguing that the world might have fallen apart otherwise.
On the surface, Bernanke’s view seems intellectually unassailable.
Central bankers cannot explain equity or housing prices and their movements any better than investors can.
And Bernanke knows as well as anyone that none of the vast academic literature suggests a large role for asset prices in setting monetary policy, except in the face of extraordinary shocks that influence output and inflation, such as the Great Depression of the 1930’s.
In short, no central banker can be the Oracle of Delphi.
Indeed, many academic economists believe that central bankers could perfectly well be replaced with a computer programmed to implement a simple rule that adjusts interest rates mechanically in response to output and inflation.
But, while Bernanke’s view is theoretically rigorous, reality is not.
One problem is that academic models assume that central banks actually know what output and inflation are in real time.
In fact, central banks typically only have very fuzzy measures.
Just a month ago, for example, the US statistical authorities significantly downgraded their estimate of national output for 2004!
The problem is worse in most other countries.
Brazil, for example, uses visits to doctors to measure health-sector output, regardless of what happens to the patient.
China’s statistical agency is still mired in communist input-output accounting.
Even inflation can be very hard to measure precisely.
What can price stability possibly mean in an era when new goods and services are constantly being introduced, and at a faster rate than ever before?
US statisticians have tried to “fix” the consumer price index to account for new products, but many experts believe that measured US inflation is still at least one percentage point too high, and the margin of error can be more volatile than conventional CPI inflation itself.
So, while monetary policy can in theory be automated, as computer programmers say, “garbage in, garbage out.” Stock and housing prices may be volatile, but the data are much cleaner and timelier than anything available for output and inflation.
This is why central bankers must think about the information embedded in asset prices.
In fact, this summer’s asset price correction reinforced a view many of us already had that the US economy was slowing, led by sagging productivity and a deteriorating housing market.
I foresee a series of interest rate cuts by the Fed, which should not be viewed as a concession to asset markets, but rather as recognition that the real economy needs help.
In a sense, a central bank’s relationship with asset markets is like that of a man who claims he is going to the ballet to make himself happy, not to make his wife happy.
But then he sheepishly adds that if his wife is not happy, he cannot be happy.
Perhaps Bernanke will soon come to feel the same way, now that his honeymoon as Fed chairman is over.
The Feminine Mystique Revisited
OLYMPIA, WASHINGTON amp#45;amp#45; This year marks the 45th anniversary of the publication of Betty Friedan’s The Feminine Mystique .
Today, many social conservatives still blame Friedan and feminism for inducing women to abandon the home for the workplace, thus destabilizing families and placing their children at risk.
But feminism was always more of a response to women entering the labor force than its cause.
In Western Europe and the United States, early capitalism drew huge numbers of young, single women into industries like textiles.
Mill owners often built dormitories to house young female workers.
Many of these workers became early supporters of both the anti-slavery and the women’s rights movements, while middle-class women were energized by (and sometimes envious of) working women’s vigorous participation in the public sphere.
By the time Friedan’s book was published in 1963, capitalism was drawing married women into the expanding service, clerical, and information sectors.
Friedan’s ideas spoke to a generation of women who were starting to view paid work as something more than a temporary break between adolescence and marriage, and were frustrated by society’s insistence that the only source of meaning in their lives should be their role as housewives.
Wherever women enter the labor force in large numbers, certain processes unfold.
Women begin to marry later and have fewer children, especially as they make inroads into higher education or more remunerative careers.
They are also more likely to challenge laws and customs that relegate them to second-class status in the public sphere or mandate their subordination within the family.
Often, governments and employers then find that it is in their interest to begin to remove barriers to women’s full participation.
The dramatic decrease in laws and customs perpetuating female subordination over the past 40 years has been closely connected to women’s expanded participation in paid employment.
Societies where women remain substantially under-represented in the labor market, such as in the Middle East, remain especially resistant to women’s rights.
Political scientist Michael Ross argues that the extreme gender inequality found in Saudi Arabia and the United Arab Emirates is not caused by the intractability of Islamic tradition.
Rather, it is the result of how oil wealth shifted economic development away from manufacturing jobs that have historically pulled women into the labor force, while promoting jobs in construction, which tend to be dominated by men.
Within the Muslim Middle East, the oil-rich states score much lower on indices of gender equity than oil-poor states such as Morocco, Tunisia, Lebanon, and Syria.
Social conservatives are wrong to blame women’s entry into work on feminism.
But women who work are much more likely to adopt feminist-inspired agendas and to reject traditional ideas about marriage. And when women gain economic and political clout, traditional family life is, indeed, destabilized.
In Western Europe and North America, divorce rates soared as married women poured into the workplace in the 1970’s and 1980’s, with women initiating most divorces.
Although divorce rates leveled off in the 1990’s, cohabitation and unwed childbearing have continued to rise.
Nevertheless, the best hope for improving family life today is not to roll back women’s rights, but to further women’s economic and political integration.
Increases in women’s power and resources are most threatening to family stability in societies marked by gender inequality, where successful women often rebel against marriage.
In countries such as Japan, Italy, and Singapore, where the terms of marriage remain favorable to men, and women have a hard time combining work and family, working women postpone marriage and motherhood much longer than in the US, leading to declines in birth rates that threaten these societies’ future.
As women gain collective rights, and especially as men accept women’s changed roles, many of the disruptive effects of family change are ameliorated.
In the US, divorce rates for well-educated women are now much lower than for less-educated women, and women with good jobs or who have completed college are more likely than more traditional women to be married at age 35.
In the past, when a stay-at-home wife went to work, the chance that her marriage would dissolve increased.
Today, going to work decreases the chance of divorce.
In families where the wife has been employed longer, men tend to do more and better child-care, with measurable payoffs in child outcomes.
Of course, marriage will never again be as stable or predictable as when women lacked alternatives.
But even where family change continues apace, it has far less negative consequences when women have access to economic rights than when they do not.
In the Nordic countries, out-of-wedlock births are much higher than in the US, but children of single mothers are much less likely to experience poverty, and spend more time on average with both biological parents, because cohabitation there is more stable than in many American marriages.
In poorer countries, women’s access to paid labor is a better predictor of children’s well-being than the stability of marriage.
In parts of Africa and Latin America, children are better nourished and have more access to education in female-headed households where the woman has a job than in two-parent households where the man earns the income. Children from female-headed households in Kenya, Malawi, and Jamaica, for example, do as well or better than children from male-headed households in their long-term nutritional and health status, despite lower household income.
Far from being a threat to family life, the further progress of women’s rights may be our best hope for well-functioning families.
The Fight for Food
GENEVA – Every year, 3.5 million mothers and children below the age of five die in poor countries because they do not have the nutrition they need to fight common diseases.
Three-quarters of them could have survived diarrhea or malaria if they had been properly nourished.
For those who do survive, the future looks grim: all studies show that children who are undernourished in the first two years of life suffer health problems and lag in development for the rest of their lives.
Insufficient nourishment impedes their capacity to learn, fitness to work, and ability to develop their talents.
Besides the human suffering, the economic costs of malnutrition are huge: according to the World Bank, countries where malnutrition is most prevalent lose, on average, between 2% and 3% of their GDP.
The issue is not severe and acute malnutrition, which hits populations suddenly, usually as a result of conflict.
The question is how we attract the attention of the European Union and the G8 countries to the malnutrition that experts call “hidden hunger,” which affects one in every three people worldwide.
It is caused by imbalanced nutrition or a lack of vitamins and essential minerals that enable the human body to grow and that maintain its vital functions.
For example, recent data show that even a moderate deficiency of Vitamin A results in higher mortality.
In fact, we could avoid the death of at least one million children every year by improving their intake of it.
Doing so would not be difficult.
Humans have added essential vitamins or minerals to their foods since time immemorial; indeed, since the beginning of the twentieth century, food fortification has been a major government policy in developed countries to reduce nutritional deficiencies and improve public health.
All scientific studies of such interventions prove that fortification of basic foodstuffs works.
Chile promoted the addition of iron to milk, resulting in a 66% reduction of anemia amongst babies.
The fortification of maize meal with folic acid in South Africa – one of the projects supported by the Global Alliance for Improved Nutrition (GAIN) – was followed by a 40% reduction in spina bifida, a serious deformation of the neural tube in new-born babies.
Moreover, these essential interventions cost little and deliver a lot: to enrich cooking oil with Vitamin A costs less than $0.10 per liter, and fortification in general has a benefit-to-cost ratio of at least eight to one.
What is missing is the willingness to act.
At GAIN, we are convinced that there is an urgent need to fight malnutrition if the world wants to achieve the United Nations’ Millennium Development Goals, which commit the world to halving global poverty and hunger by 2015.
Fighting malnutrition is the first step toward reaching this objective.
Science has demonstrated the cost-effectiveness of food fortification, and the technologies and know-how are available in the private sector, which has the capacity to innovate and deliver products to the poorest.
Europe and the G8 must act.
Not only do they need to make the fight against malnutrition a policy priority; they also must invest.
The equation is straightforward: €160 million for fortification programs could improve the health of one billion people.
To put that amount into perspective, the regular move of EU institutions between Brussels and Strasbourg costs €200 million per year.
While the latter is an understandable expense historically, the time has come for the EU and G8 to make different political choices that help keep 3.5 million mothers and children alive and well.
The Fight for Pakistan’s Soul
CAMBRIDGE – As its army confronts, ever more bloodily, the Taliban in the Swat Valley, Pakistan is fighting for its very soul.
The army appears to be winning this time around, in marked contrast to its recent half-hearted confrontations with Taliban forces in neighboring tribal areas.
For now, the Taliban are on the run, some with shaved beards and some in burqas , to avoid being recognized and thrashed.
The reason is simple: increasingly, people across Pakistan support the army’s action.
This support persists despite the terrible humanitarian cost: more than 1.5 million internal refugees.
This round of fighting was preceded by a negotiated calm, as the government sought to quell militants in Pakistan’s tribal areas by striking a deal with the Taliban leader, Sufi Mohammad.
The deal, which instituted a version of Sharia law in the region in exchange for a commitment that militants would lay down their weapons, was blessed by the comparatively liberal Awami National Party (ANP), which governs the North-West Frontier Province (NWFP), where Swat is located.
But the Taliban’s assurances of a lower profile were upended by two incidents that exposed its real face.
First, private news channels broadcast across the country a video clip recorded on a cell phone of the public flogging of a 17-year-old Swat girl.
This gave the public a stark sense of what Taliban justice really meant.
Then, Mohammad was interviewed on GEO TV, where he explained his political views.
According to Mohammad, democracy is un-Islamic, as are Pakistan’s constitution and judiciary, and Islam bars women from getting an education or leaving their homes except to perform the Hajj in Mecca.
Religious conservatives were stunned.
Leaders of the religious parties rushed to denounce Mohammad’s views.
The Pakistani media revisited a famous comment by Mohammad Iqbal, the poet-philosopher who devised the idea of an independent Muslim state in Pakistan. “The religion of the mullah,” he said, “is anarchy in the name of Allah.”
Still, it’s not over until it’s over – and in the short term a lot depends on the state’s capacity to hold the Swat area and re-establish civilian institutions there.
And, even if the state succeeds, re-asserting control over Swat will only be the first step.
The Taliban is spread throughout the NWFP and the Federally Administered Tribal Areas. “Punjabi Taliban” militants from the fighting in Kashmir against India continue to shuttle between the Punjab heartland and the Northwest Territories, posing another serious challenge to government authority.
In the long-term, however, what really matters is whether the Muslims of South Asia will be able to roll back the spread of Talibanization altogether.
The answer to that question lies within the various Muslim communities of the region, not just in Pakistan.
Afghanistan faces an election later this year.
A clear and transparent vote will make a real difference in establishing the credibility of the Afghan government.
In Pakistan, the democratic transition, after years of military rule, is still not complete.
There is much hope, though, in the vibrancy of the Pakistani media, as well as in the energy that the legal community generated last March in restoring deposed Chief Justice Iftikhar Mohammad Chaudhry to his seat on the Supreme Court.
Then there is the Pakistani army, the country’s “super political party.”
To a large degree, Pakistan’s relations with India, Afghanistan, and the United States depend on the military.
Army commander Ashfaq Kiyani has shown no interest in taking over the state, as his predecessor, General Pervez Musharraf, did.
But the army must accept its subservience to Pakistan’s political leadership.
The army command must finally recognize that repeated military interventions have not served the country well.
Most significantly, in the face of martial law and political assassination, Pakistanis have not given up their dream of democracy.
A living example of this is Afzal Lala, a Pashtun politician associated with the Awami National Party who, despite all the threats from the bloodthirsty Tehrik-e-Taliban Pakistan, remained in Swat through the recent fighting.
Democracy will be decisive because it generates investments in education, health, and economic empowerment that reward ordinary voters.
Talibanization gains ground when people lose faith in the capacity of the modern state to improve their lives.
While poor law enforcement needs urgent attention, counter-terrorism is never solely a military affair.
Financial pledges from the US and the “Friends of Pakistan” consortium (the European Union, China, and Japan) are important, but when it comes to investing wisely in development projects, Pakistan’s track record is nothing to be proud of.
Effective oversight from donors and Pakistan’s private sector will be critical.
Only one condition should be imposed on aid for Pakistan: the first money should be spent on rebuilding all the bombed-out girls’ schools in Swat.
If need be, the army should guard these schools around the clock.
The Fight for Shareholder Rights in Russia
MOSCOW: Abuse of shareholders by managers and majority owners cripples foreign investment in Russia.
No surprise, then, that improving corporate governance and protecting minority shareholders is becoming a concern of the Putin government.
Refusing shareholders entry to shareholders meetings, or striking their names off share registers – two popular gimmicks of a few years ago – are rarer nowadays.
Some “oligarchs” have undergone Damascene conversions and are trying to improve their image among investors.
A few companies, such as the oil giant Yukos, even appoint independent directors from abroad.
These private sector improvements, however, are nowhere to be seen among large businesses controlled by Government, even though many of these firms have a substantial minority of private shareholders who need protection from managerial abuse.
Management in these firms, indeed, has become more arrogant and inventive in violating shareholder rights.
As an independent member of the boards of electricity utility RAO UES and the gas giant Gazprom, I know directly of their waywardness.
United Energy Systems (UES) is headed by Anatoly Chubais, a former deputy prime minister with a reputation as a reformer.
At board meetings, tame in-house managers usually outvote me.
If UES bosses want to buy a skyscraper despite UES’s making a $350 million loss, it is fine with them.
In November we were asked to approve – without review – huge overpayments on administration.
Sometimes we hear that UES has acquired a TV station or finances a political faction in the Duma via a subsidiary.
Extracting information on any of these matters is almost impossible.
After 3 years as CEO, Chubais decided to “restructure” UES, thinking that glib talk about competition and liberalization will garner him continued support from London and New York.
He tried to brow-beat investors at a board meeting in the Kremlin where – in good Soviet tradition – everyone was expected to vote unanimously to split the company into small pieces so as to sell them at low prices to cronies, political allies, and friendly oligarchs.
When shareholders balked, Chubais sought to neutralize his opponents, unilaterally changing the agreement with the Bank of New York to control the votes of most holders of American Depository Rights (ADRs).
Disgusted, many UES shareholders sold their shares.
Others are fighting on – calling an extraordinary shareholders meeting, complaining to Government, possibly suing. What do investors want?
To solve the issue of government set electricity rates, to stop theft and mismanagement, to put the company’s house in order before any “restructuring.”
No investor believes that current management will sell UES assets at fair prices.
Similar misdeeds, with added twists, exist in the energy giant Gazprom, where old-style Soviet managers misrule.
The issue, again, is shareholder value, with shareholders worrying that billions of dollars are disappearing from the company.
These suspicions are bolstered by the fact that Gazprom’s shares have underperformed the market for years and the fact that the company does not pay proper dividends.
Shareholders know of hundreds of agricultural enterprises, hotels, luxury villas, banks, investment companies and corporate jets owned by Gazprom.
These have little to do with Gazprom’s main business, are loss-making and are probably used to channel company money to managers.
Indeed, subsidiaries where managers hold shares through their children and other relatives – say, the huge construction company Stroitransgaz which has billion-dollar contracts with Gazprom – are created regularly and shareholders seem powerless to stop such practices.
Shareholders also hear of Gazprom providing financial guarantees to parties which – officially at least – have nothing to do with its business.
One example is the Media/Most group which, for reasons unknown, was financed by Gazprom to the tune of more than half a billion dollars!
It is even said in Moscow that a reason behind the recent arrest of Media/Most’s owner, Vladimir Gusinsky, in Spain on an Interpol warrant is the desire by Moscow prosecutors to discover everything Gusinsky knows about Gazprom’s inner workings.
But secret deals with Media/Most are but the tip of the iceberg.
Creating boundless suspicions are Gazprom’s links to the Florida-based company ITERA, which grew into a multibillion enterprise on par with Gazprom in only a few years.
Investors suspect such phenomenal growth was achieved at Gazprom’s expense.
In Ukraine, for example, billions of dollars of Russian gas supplies go unpaid every year.
Russia’s Government talks with Ukraine’s government.
To no avail.
Suddenly, we discover that one-third of Ukraine’s gas supplies are controlled by ITERA, and wonder why this is so and where the money is going.
Because the Government has not sufficiently liberalized domestic gas prices, manipulation is easy.
Gazprom’s sales in Russia are often disguised as murky barter deals.
Despite this, Gazprom’s holding company appears to be rolling in cash while its production subsidiaries mostly appear bankrupt and never pay their taxes in full.
As a minister I once put pressure on Gazprom over taxes and was summoned to parliament by indignant deputies. Many Duma members and local governors owe their jobs to Gazprom.
Managers of Government-controlled companies like Gazprom and UES live in a style befitting oligarchs, create nest eggs for themselves, and play around in politics.
Why are clear suspicions of corruption, asset-stripping and outright theft not investigated and punished, even though both companies are majority-owned by the Government and most of the board membership is state appointed?
Putin’s inaction looks like weakness, and these scandals discourage foreign investment.
President Putin’s silence here is surprising.
To make progress in corporate governance at state-controlled companies Putin does not need new laws or IMF loans.
He should pick up the phone and fire managers who compromise Russia.
This would be the clearest sign of his intention to put reform on the right track.
Private investors – indeed, all Russia’s citizens – are watching and waiting.
The Final Defeat of Thomas Malthus?
The UN recently revised its population projections.
Some 6.3 billion people now live on Earth.
If fertility rates in relatively poor countries continue to follow the trends set by today's relatively rich countries, we are within shouting distance of the world's maximum population-9-10 billion-to be reached in 2050-2100.
But population may well decline thereafter.
Literate, well-educated women with many social and economic options in today's rich countries have pulled fertility below the natural replacement rate.
The problem is not that such women on average want fewer than two children; in fact, on average they wish to have a bit more than two.
But because many of them delay childbearing until their thirties, actual fertility falls short of what they desire.
A world population that peaks at 9-10 billion is not one in which we have to worry about Parson Malthus, the English 19th century economist who prophesied a future in which people multiply faster than the resources needed to sustain them and hence starve to death by the millions.
Indeed, it comes as somewhat of a shock to realize that the age of the population explosion may be coming to an end.
Just thirty years ago, people like Stanford University's Paul Ehrlich were telling us that the Malthusian Angel of Death was at the door.
They assured us that it was too late to stop the famines that would kill hundreds of millions in the Indian subcontinent, and that humanity's destiny in the 21st century was one of war and struggle for the resources to feed national populations an extra crust of bread.
Today, however, the political flashpoint over food is not that there is too little, but that there is too much.
Developing-country politicians and populations complain bitterly that the rich industrial countries are growing too much food.
"Exporting food is one of the few ways we can earn the foreign exchange we need to buy modern industrial technology," they say. "But your agricultural subsidy programs block us from establishing any sort of comparative advantage in most agricultural products.
You say free trade is good in those manufactures that you export-you say that enforcing property rights is critically important for your investors-but somehow you go deaf when the topic turns to a level playing field in agricultural trade..."
They are right.
Not every developing country can grow rich by making and exporting computer chips, or plastic toys, or bananas.
Some need to export steel. Others will have to export furniture or textiles.
Still others will have to export citrus, grains, processed foods, etc.
Yet there has been little forward motion in opening up world trade for nearly a decade.
Given the complexion of the US Democratic Party's key constituencies, this is not surprising.
On the contrary, what is surprising is that President Clinton was so willing to swim against the tide generated by his own labor/protectionist base in 1993 and 1994 and establish NAFTA and the WTO.
It is also very surprising that the post-2000 Republican administration of George W. Bush has been so hostile to freer trade.
Indeed, Bush has backed several major anti-liberal initiatives: a steel tariff, the expansion of agricultural subsidies, and a declaration that FTAA [Free Trade Agreement of the Americas] negotiations cannot even consider the impact of US agricultural subsidy programs on trade.
Blockages to world trade jeopardize global economic development.
Technology transfer is incredibly difficult.
It may well turn out that $4 worth of aid are a poor substitute for even $1 worth of exports, because there are few better schools in which to internalize the organizational forms and technologies built since the start of the Industrial Revolution than the school of exporting.
If global development is at risk, then so is the final defeat of Malthus.
If the poorest countries stay poor, their rates of population growth might fall much more slowly than the United Nations predicts.
Falling birthrates depend on a rise in the status of women, confidence in public health, growing prosperity, and strong cultural cues to convince people that there are other, better indicators of success than a large family.
The fact that most countries are completing the demographic transition does not guarantee that all will.
Perhaps Malthus will rule again, in geographically small but densely populated and immensely poor parts of the globe.
The world's high- and middle-income countries should not imagine that the relatively rich can fence themselves off indefinitely from poverty and misery in the poorest countries.
Nationalism has long been a powerful cause of political violence.
Nothing is more likely to strengthen nationalism and turn it to violence than a sense that one's own homeland is being exploited-kept poor and powerless-by other nations to satisfy their own selfish interests.
The world today is too small for any of us to be able to afford for any corner of it to be left out of the conquest of Malthusianism.
The Financial Crisis One Year After
NEW YORK – It is now almost a year since the world economy teetered on the edge of calamity.
In the span of three days, September 15-17, 2008, Lehman Brothers filed for bankruptcy, the mega-insurance company AIG was taken over by the United States government, and the failing Wall Street icon Merrill Lynch was absorbed by Bank of America in a deal brokered and financed by the US government.
Panic ensued and credit stopped circulating.
Non-financial companies could not get working capital, much less funding for long-term investments.
A depression seemed possible.
Today, the storm has broken.
Months of emergency action by the world’s leading central banks prevented financial markets from crashing.
When banks stopped providing short-term liquidity to other banks and industrial companies, central banks filled the gap.
As a result, the major economies avoided a collapse of credit and production.
The sense of panic has subsided.
Banks are once again lending to each other.
Although the worst was avoided, much pain remains.
The crisis culminated in a collapse of asset prices at the end of 2008.
Middle-class and wealthy households around the world felt poorer and therefore cut their spending sharply.
Sky-high oil and food prices added to the pain, and thus to the downturn.
Enterprises could not sell their output, leading to production cuts and layoffs.
Rising unemployment compounded the loss of household wealth, throwing families into deep economic peril and leading to further cutbacks in consumer spending.
The big problem now is that unemployment continues to rise in the US and Europe, because growth is too slow to create enough new jobs.
Dislocations are still being felt around the world.
A huge debate has ensued around the so-called “stimulus spending” in the US, Europe, and China.
Stimulus spending aims to use higher government outlays or tax incentives to offset the decline in household consumption and business investment.
In the US, for example, roughly one-third of the $800-billion two-year stimulus package comprises tax cuts (to stimulate consumer spending); one-third is public outlays on roads, schools, power, and other infrastructure; and one-third takes the forms of federal transfers to state and local governments for health care, unemployment insurance, school salaries, and the like.
Stimulus packages are controversial, because they increase budget deficits, and thus imply the need to cut spending or raise taxes sometime in the near future.
The question is whether they successfully boost output and jobs in the short term, and, if so, whether they do enough to compensate for the inevitable budget problems down the road.
The true effectiveness of these packages is not clear.
Suppose that the government gives a tax cut in order to increase consumers’ take-home pay.
If consumers expect that their taxes will rise in the future, they may decide to save the tax cut rather than boost consumption.
In that case, the stimulus will have little positive effect on household spending, but will worsen the budget deficit.
An early assessment of the stimulus packages suggests that China’s program has worked well.
The sharp fall in China’s exports to the US has been compensated by a sharp rise in the Chinese government’s spending on infrastructure – say, on subway construction in China’s biggest cities.
In the US, the verdict is less clear.
The tax cut has probably been saved rather than spent.
The infrastructure component has not yet been spent because of long lags in turning the US stimulus package into real construction projects.
The third part – the transfer to state and local governments – almost surely has been successful in maintaining spending on schools, health, and the unemployed.
In short, the US stimulus effects on spending have probably been positive but small, and without a decisive effect on the economy.
Moreover, concerns about the enormous US budget deficit, now running at $1.8 trillion (12% of GNP) per year, are bound to increase, not only creating enormous uncertainties in politics and financial markets, but also dimming consumer confidence as households focus their attention on potential future budget cuts and tax increases.
The US has reached the practical limits of reliance on short-term stimulus spending, and will need to start cutting the budget deficit and fostering alternative pathways to growth.
When the crisis deepened a year ago, Barack Obama introduced into the presidential campaign the theme of a “green recovery,” based on a surge of investment in renewable energies, new electric vehicles, environmentally efficient “green” buildings, and ecologically sound agriculture.
In the heat of the battle against financial panic, policy attention turned away from that green recovery.
Now the US needs to return to this important idea.
Debt-burdened consumers in the US and Europe will limit their spending for years to come as they rebuild their wealth and pension assets.
But the resulting economic slack gives us the historic opportunity – and need – to compensate for low consumer spending with increased investment spending on sustainable technologies.
Government policies in the US and other rich countries should stimulate those investments through special incentives.
These include a cap-and-trade system for greenhouse-gas emissions, subsidies for research and development on sustainable technologies, feed-in tariffs and regulatory incentives for renewable energy, consumer subsidies and other inducements for the uptake of new “green” technologies, and implementation of “green” infrastructure programs, such as mass transit.
The rich world should also provide the poorest countries with grants and low-interest loans to buy sustainable energy technologies, such as solar and geothermal power.
Doing so would add to the global recovery, improve long-term environmental sustainability, and accelerate economic development.
The crisis can yet be an opportunity to turn from a path of financial bubbles and excessive consumption to a path of sustainable development.
In fact, seizing this opportunity is the only recipe for genuine growth that we have left.
The Financial Hurricane Hits Latin America
LOS ANGELES – A few weeks ago, the world was on the edge of disaster.
Fortunately, the decisive actions taken by the advanced countries’ monetary authorities – including provision of unprecedented amounts of liquidity – prevented a complete financial meltdown.
The world has avoided the “Argentinization” of the international financial system.
What has not been avoided is a recession that will be deep, long, and global.
In the coming months, nearly every region in the world will experience economic deceleration, with exports declining and unemployment increasing.
Recent events have disproved the notion that emerging nations had “decoupled” themselves from the advanced economies.
The facts have shown the opposite to be true.
Most emerging economies are still fragile and affected by what goes on in the advanced countries.
The effects of this recession will be particularly severe in Latin America.
Brazil and Mexico have been the hardest hit so far, to the point that the value of their firms has fallen by approximately 50%.
The situation in these countries is so serious that a few days ago the United States granted them credit for up to $60 billion.
But Brazil and Mexico are not the only ones hit by financial volatility: Chile’s currency has lost a third of its value, in Peru the cost of external financing has soared, and in Argentina the government has had to resort to extreme measures – such as the nationalization of the pension system – in order to avert an imminent fiscal calamity.
Indeed, with the recession possibly lasting 18 months or more – which would make it the longest since World War II – Argentina will be one of the hardest hit.
Its external financing needs are enormous, and its exports will fall sharply.
But politics will also play a role in Argentina’s economic distress.
The administration of President Cristina Fernández de Kirchner generates a great deal of distrust among local and foreign investors, who fear arbitrary measures.
The recent decision of Standard and Poor’s to lower Argentina’s rating is fully justified and reflects many analysts’ fear that Argentina will again default on its public debt.
Mexico and Central America will also suffer from the long recession.
For many years, their economic fate has been closely tied to that of the US.
These ties increased with the signing of bilateral free-trade treaties with the US, so there is a good chance that they could experience negative growth in 2009 and, perhaps, in the first half of 2010, as the US goes into recession.
Less affected by the financial crisis and the US recession will be those that have developed with an eye toward Asia nations – particularly Chile, Colombia, and Peru –, and have accumulated resources to meet unexpected financial storms.
They will be quicker to recover their levels of employment.
But the most important question is what will happen in Brazil, Latin America’s giant.
Over the past few years, analysts and investors around the world began to see Brazil as an economic power in the making.
There was mention of a miracle, and many argued that Brazil would grow spectacularly like China and India, and no longer be the eternal country of “the future.”
Unfortunately, everything suggests that this was an illusion based on wishful thinking.
Brazil’s boom of the past few years stood on an incredibly weak foundation.
President Luiz Inácio Lula da Silva did indeed decide to avoid the rampant populism of Hugo Chávez of Venezuela, and successfully tackled inflation. But it takes more than that to become a great economic power.
What Lula did was simply to decide that Brazil would be a “normal” country.
But more than controlled inflation is needed to create a robust economy with a high and sustainable growth rate.
Agility, dynamism, productivity, and economic policies that promote efficiency and enterprise are required.
As many studies have shown, Brazil has not been able – or has not wanted – to adopt the modernizing reforms needed to promote a productivity boom.
Brazil is still an enormously bureaucratic country, with an educational system in crisis, very high taxes, mediocre infrastructure, impediments to the creation of businesses, and a high level of corruption.
It is sad but true: in recent years Brazil did not opt for modernization and efficiency and will have to pay the consequences during the difficult years ahead.
The Fire Next Time
The Fire This Time in Haiti
Haiti, once again, is ablaze.
President Jean-Bertrand Aristide is widely blamed, and he may be toppled soon.
Almost nobody, however, understands that today's chaos was made in Washington - deliberately, cynically, and steadfastly.
History will bear this out.
In the meantime, political, social, and economic chaos will deepen, and Haiti's impoverished people will suffer.
The Bush Administration has been pursuing policies likely to topple Aristide since 2001.
The hatred began when Aristide, then a parish priest and democracy campaigner against Haiti's ruthless Duvalier dictatorship, preached liberation theology in the 1980's.
Aristide's attacks led US conservatives to brand him as the next Fidel Castro.
They floated stories that Aristide was mentally deranged.
Conservative disdain multiplied several-fold when President Bill Clinton took up Aristide's cause after he was blocked from electoral victory in 1991 by a military coup.
Clinton put Aristide into power in 1994, and conservatives mocked Clinton for wasting America's efforts on "nation building" in Haiti.
This is the same right wing that has squandered $160 billion on a far more violent and dubious effort at "nation building" in Iraq.
Attacks on Aristide began as soon as the Bush administration assumed office.
I visited President Aristide in Port-au-Prince in early 2001.
He impressed me as intelligent and intent on good relations with Haiti's private sector and the US.
No firebrand, he sought advice on how to reform his economy and explained his realistic and prescient concerns that the American right would try to wreck his presidency.
Haiti was clearly in a desperate condition: the most impoverished country in the Western Hemisphere, with a standard of living comparable to sub-Saharan Africa despite being only a few hours by air from Miami.
Life expectancy was 52 years.
Children were chronically hungry.
Of every 1000 children born, more than 100 died before their 5th birthday.
An AIDS epidemic, the worst in the Caribbean, was running unchecked.
The health system had collapsed.
Fearing unrest, tourists and foreign investors were staying away, so there were no jobs to be had.
But Aristide was enormously popular in early 2001.
Hopes were high that he would deliver progress against the extraordinary poverty.
Together with Dr. Paul Farmer, the legendary AIDS doctor in Haiti, I visited villages in Haiti's Central Plateau, asking people about their views of politics and Aristide.
Everybody referred to the President affectionately as "Titid."
Here, clearly, was an elected leader with the backing of Haiti's poor, who constituted the bulk of the population.
When I returned to Washington, I spoke to senior officials in the IMF, World Bank, Inter-American Development Bank, and Organization of American States.
I expected to hear that these international organizations would be rushing to help Haiti.
Instead, I was shocked to learn that they would all be suspending aid, under vague "instructions" from the US.
America, it seemed, was unwilling to release aid to Haiti because of irregularities in the 2000 legislative elections, and was insisting that Aristide make peace with the political opposition before releasing any aid.
The US position was a travesty.
Aristide had been elected President in an indisputable landslide.
He was, without doubt, the popularly elected leader of the country - a claim that George W. Bush cannot make about himself.
Nor were the results of the legislative elections in 2000 in doubt: Aristide's party had also won in a landslide.
It was claimed that Aristide's party had stolen a few seats.
If true - and the allegation remains unproved - it would be nothing different from what has occurred in dozens of countries around the world receiving support from the IMF, World Bank, and the US itself.
By any standard, Haiti's elections had marked a step forward in democracy, compared to the decades of military dictatorships that America had backed, not to mention long periods of direct US military occupation.
The more one sniffed around Washington the less America's position made sense.
People in positions of responsibility in international agencies simply shrugged and mumbled that they couldn't do more to help Haiti in view of the Bush veto on aid.
Moreover, by saying that aid would be frozen until Aristide and the political opposition reached an agreement, the Bush administration provided Haiti's un-elected opposition with an open-ended veto.
Aristide's foes merely had to refuse to bargain in order to plunge Haiti into chaos.
That chaos has now come.
It is sad to hear rampaging students on BBC and CNN saying that Aristide "lied" because he didn't improve the country's social conditions.
Yes, Haiti's economic collapse is fueling rioting and deaths, but the lies were not Aristide's.
The lies came from Washington.
Even now, Aristide says that he will share power with the opposition, but the opposition says no.
Aristide's opponents know that US right-wingers will stand with them to bring them violently to power.
As long as that remains true, Haiti's agony will continue.
The Fiscal Crisis Down Below
PALO ALTO – Sub-national governments – states, countries, cities, provinces, towns, and special districts – play different roles from country to country, but usually deliver important public services such as police and fire protection, transportation, education, health care, and welfare.
In many countries, their fiscal position has collapsed under the combined weight of mismanagement and the global economic and financial crisis.
The relationship between sub-national and central governments includes the general division of responsibilities for providing and financing public services; national subsidies that at least partly pay for various services delivered locally; and tax collection.
In the United States, the federal government has primary responsibility for defense, public old-age pensions (Social Security), and health care for the elderly (Medicare); sub-national governments are responsible for education and law enforcement.
Health care for the poor (Medicaid) is a shared responsibility.
Matching funds flow from the federal government to state and local governments by formulae delineating the shared responsibilities.
Some of these formulae allow sub-national governments wide discretion; others do not.
The global economic and financial crisis has precipitated an immense expansion of central government spending, borrowing (and hence future taxing), lending, regulation, and mandates, some in “aid” to sub-national governments (about $200 billion in the US stimulus bill).
A key question is whether central governments’ power worldwide will expand permanently – over not only the private economy, but also over sub-national governments.
There is remarkable variability in the role of sub-national governments relative to central governments.
Prior to the current crisis, US government revenue was roughly 60% federal and 40% state and local.
France was the most centralized of the major economies, with roughly a 80%-20% split between the national and sub-national governments, while the United Kingdom falls in between, at 75%-25%.
China was the least centralized, at 30%-70%. Argentina was the most balanced, at about 50%-50%.
Debates about government centralization run deep in the history and constitutions of most countries.
The US Constitution knitted together the thirteen original colonies, and its Tenth Amendment reserves to the states all powers not expressly delegated to the federal government.
Even today, tensions over further centralization (e.g., to supranational authority, as in Europe) and devolution (e.g., for Scotland, Québec, or Kurdistan) are intense.
There are several reasons to favor a healthy dose of decentralization.
US Supreme Court Judge Louis Brandeis famously argued for “the states as laboratories.”
A recent example in the US was welfare reform.
When states got waivers for time limits and work or training requirements for welfare recipients, they were so successful that federal welfare reform followed.
Competition among localities – for example, between states for businesses and workers, and between school districts for students – can lead to more efficient and effective allocation of public resources.
If people are able to migrate, they will move to jurisdictions with the mix of taxes and services (e.g., quality schools) that they prefer.
As with competition in private markets, competition in government services leads to better outcomes.
Local authorities are closer to problems than national officials tucked away in a country’s capital.
There are important differences among jurisdictions.
Hospitals are more important for some areas, while schools are more important for others.
Geographic cost-of-living differences are difficult to reflect in one-size-fits-all national programs.
Some functions are better suited for central-government financing.
National defense is an obvious example, as are functions for which economies of scale are important.
Where localities try to offload support for the poor onto other localities, the central government must step in and either fund such programs directly or set minimum standards.
In the US until the past three decades, local school districts were responsible for education.
Various court rulings have determined that this process allowed richer districts to spend more than poorer ones and ordered states to equalize spending.
States from California to Texas now routinely collect previously local property taxes to fund schools, and then redistribute them to local school districts.
Many believe that the reduction of local control over the schools as a result of the elimination of local financing has been a major contributor to the poor performance of some American schools.
California is an example of long-run fiscal folly meeting short-run national and global economic crisis, resulting in chaos.
For many decades, Californians had rapidly rising living standards, great public K-12 and higher education systems, and unprecedented upward mobility.
But California’s unemployment rate, 12.3% in November 2009, was tied for the nation’s third highest.
People and jobs are seeking better opportunities elsewhere.
The state’s bond rating is dead last.
Excessive state spending, heavy regulation, and dangerously high taxes have helped create the state’s economic woes.
The top personal income-tax rate (also levied on capital gains), the sales tax rate, the corporate tax rate, and the gas tax are all at or near the highest of any state.
The top 1% of the state’s income earners pay almost half the income taxes.
Thus, the state’s coffers (and hence spending) overflow during booms, but then collapse, forcing emergency retrenchment, during busts.
Ironically, California’s progressive tax and spending policies create such volatility that they destroy the state’s ability to fund everything, even basic services from education to health for its most vulnerable citizens.
Now facing another $20 billion deficit despite temporary tax hikes and spending cuts, California’s fiscal woes foreshadow those of many sub-national – or, indeed, national –governments globally.
While all must first deal with the current emergency, sensible local fiscal, tax, and political reforms are vital to restore a balance of centralized and decentralized government.
The Fiscal Cliff and US Foreign Policy
PRINCETON – The world should be worried.
The possibility that US President Barack Obama and the Republicans in Congress will fail to reach a compromise before mandatory deep spending cuts and tax increases take effect on January 1 is very real.
Global markets are well aware of the danger of the United States falling over the “fiscal cliff,” and are watching nervously.
They know that this outcome could well throw the US – and the world – back into recession.
Foreign ministries around the world should be equally nervous.
Unless the US can get its fiscal house in order, it will be forced to abdicate leadership on a wide range of critical global issues.
In the short term, Syria and its neighbors are already paying the price of America’s inability to focus on anything other than domestic politics since Obama’s re-election.
In my view, the Syrian crisis is at a tipping point: while it is now apparent that the opposition will eventually win and President Bashar al-Assad will fall, the endgame’s duration will be a key element determining who actually comes into power and on what terms.
Syria’s implosion, and the chaos and extremism that are likely to breed there, will threaten the entire Middle East: the stability of Lebanon, Jordan, Turkey, Iraq, Gaza, the West Bank, Israel, Iran, and Saudi Arabia hangs in the balance.
But we do not even know who will succeed Hillary Clinton as US Secretary of State when Obama’s second term formally begins in January, or who will be on the White House security team.
In the medium term, the world abounds with tensions and potential crises that US leadership is likely to be indispensable to resolving.
As events over the past two weeks in Egypt have demonstrated all too vividly, the Arab awakening is still only in its first act in many countries.
Indeed, democracy is fragile, at best, across North Africa; and, in the Middle East, Jordan, the Palestinian territories, Kuwait, and Saudi Arabia have only begun to feel the ripples of the tidal wave sweeping the region.
Bahrain remains a flashpoint; Iraq is deeply unstable; and the simmering conflict between Iran and Israel could flare up at any time.
Even when the US is not on the front lines, it has played a vital role in behind-the-scenes diplomacy, nudging wary rivals closer to one another to create a united opposition, and working with regional leaders like Turkey, Egypt, and Saudi Arabia to broker deals.
In Asia, the US has been playing a similar role in pushing for multilateral resolution of dangerous bilateral disputes between China and its many neighbors over territories in the East and South China Seas, while at the same time restraining US allies who might otherwise provoke crises.
And, on big global issues like climate change, organized crime, trade, and prevention of atrocities, the absence of the US as a policy catalyst and active negotiator will be quickly and keenly felt.
Avoiding this fate requires the US to “rebuild itself at home,” as the Obama administration’s 2010 National Security Strategy promises.
But, if US politicians spend the next two years the way they have spent the last two – patching together temporary policy fixes while avoiding the hard issues that voters and markets expect them to face – America’s voice will grow fainter, and weaker, in international institutions and affairs.
Equally worrisome is the prospect of deep, across-the-board cuts in the US defense budget at a time when many rising powers are increasing their defense spending.
As much as many countries may dislike the US military, the availability and extraordinary capabilities of America’s soldiers, ships, aircraft, and intelligence assets often function as a global insurance policy.
In the long term, the challenge is more vague, but deeper.
The longer the US obsesses over its own political dysfunction and attendant economic stagnation, the less likely it is to bear the mantle of global responsibility and leadership.
Openly isolationist political forces, such as the Tea Party and libertarians like Ron Paul, will grow stronger.
A retreating US will, in turn, guarantee the emergence of what foreign-policy analyst Ian Bremmer describes as a “G-Zero world,” in which no country will take the lead and marshal the necessary economic and political coalitions to solve collective problems.
Individual presidents and secretaries of state will certainly try.
But, without Congressional support, they will bring fewer and fewer resources to the table and will suffer from an increasing credibility gap when they seek to negotiate with other countries.
Global leaders can do more than stand by and watch.
Why not remind US politicians of their global responsibilities?
The G-7 or G-8 leaders could issue a statement, for instance, urging the US to get its fiscal house in order.
NATO allies could make a similar statement.
Indeed, other regional organizations, such as the African Union or the Arab League, could weigh in. Even G-20 members, were they so moved, could make a statement.
Of course, when we think about the G-20, we immediately wonder who, other than the US, could organize the issuance of such a statement.
The Fish that Shrank
A thousand years ago, the Norse settlers of my home city of York ate cod that weighed as much as eight kilograms. We know this from archaeologists and the fascination they have for medieval waste heaps.
But today you would be lucky to find a cod that weighs more than two kilograms.
What have we done to our fish stocks to bring about changes like this, and does it matter?
Fisheries policy is designed to allow small fish to grow.
This is for the best of reasons - fish that are caught when they are too small will produce a small yield.
Moreover, the fish will not have had a chance to reproduce, undermining the fish stock altogether.
For example, the avowed intention of the EU Common Fisheries Policy is "to protect fish resources by regulating the amount of fish taken from the sea, by allowing young fish to reproduce , and by ensuring that measures are respected."
As it stands, however, we have "fished down" our stocks, until few large, old individuals remain. To see this, consider North Sea cod.
Suppose you start with ten thousand individuals aged one year. If there is only natural mortality, about one thousand of these individuals survive to reach age eight years.
A moderate level of fishing mortality brings the number of survivors down to about one hundred individuals.
But the levels of fishing mortality we have been applying over the last twenty years bring the number of survivors down to about three.
Mortality acts cumulatively, so, given the way we manage fisheries, few individuals survive to become big and old.
Yet left to their own devices, cod are thought to live for at least thirty years.
It is a testament to the great efficiency with which we exploit living marine resources that fish like cod are now much more likely to die at the hands of fishermen than for all other reasons put together, once they get into the fisheries.
The absence of big, old individual cod and other fish is worrisome from the standpoint of the short-term ecological health of the stock, as well its longer-term genetic health.
The short-term issue concerns egg production, which in many fish is proportional to body size: large individuals contribute far more to future generations than small individuals.
In fact, first attempts at spawning can be relatively unsuccessful, so a fisheries policy that depends for the most part just on first-time spawners (which is what we are approaching now), could be especially flawed.
The policy is also suspect because the success of spawning is notoriously variable from year to year.
A bad year for recruitment in a fished-down stock means losing both the new cohort and most of the spawners, because the latter are caught before they can spawn again.
By contrast, a stock with lower mortality for large individuals at least maintains an adequate reserve of large individuals available as spawners next year.
The long-term concern is that fishing is intended to be selective; fishermen aim to harvest the most profitable species and the most profitable sizes within species.
Like all other forms of life, fish stocks change genetically when directional selection is applied.
The effect of fishing-down is to give an advantage to genes causing slow growth but early adulthood.
Indeed, there is evidence from many fisheries of earlier maturation; such changes take place fast enough to be detected over the decades.
For example, early in the twentieth century, you would not find a mature cod in the North Sea less than about 50 centimeters in length, whereas by the 1980's mature cod were as small as 15 centimeters.
So there is a lot of under-age sex out there in the sea.
By cherishing our large, old fish we would reverse the selection for early maturation while selecting for faster growth through the size classes most vulnerable to fishing.
The genetic changes that we are bringing about in our fish stocks are going largely unrecognized.
Yet the precautionary principle places some responsibility on us to hand down the living resources of the marine realm in a form that can be used as much by future generations as by us.
Radical new thinking is needed in fisheries management to overcome the ecological and evolutionary problems generated by current practice.
If only one change in the prevailing mindset could be made, it should be to realize that, in the case of fish like cod, big is beautiful.
To reconstruct our approach to fisheries management with measures that increase the survival of large, old individuals would be good for the health of our stocks in the short term and would be appreciated by our descendants.
The Flawed Options in Darfur
The long-sought joint peacekeeping force for Darfur, which would combine the existing 7,000-man African Union force with as many as 20,000 additional military personnel and civilian police under UN command, has now been approved.
But several roadblocks still stand in the way, making it very difficult for the joint AU-UN mission to bring about a peaceful settlement to the Darfur conflict.
Although UN Secretary-General Ban Ki-moon pressed the UN Security Council to move rapidly to authorize the proposed joint force, member governments remain deadlocked over its mandate.
With the encouragement of Sudan’s government, China and Russia have thus far blocked a resolution sponsored by Britain and France that would allow the proposed hybrid force “to use all necessary means” to protect humanitarian workers and other civilians.
Sudan’s UN ambassador has called for a draft whose language is “more Sudan-friendly.”
Moreover, UN analysts estimate that most of the additional troops will not arrive in Darfur until early next year.
The preceding phase envisages only providing the existing AU force with extra logistical support from non-African countries, such as engineers from China.
French Foreign Minister Bernard Kouchner has called for merging these two phases to accelerate progress, which would require substantial funds to secure and deploy the additional UN peacekeepers.
According to Jean-Marie Guehenno, the head of UN peacekeeping operations, any hybrid force must be “robust” because of the “very challenging” situation in Darfur.
The draft British-French resolution would provide for an authorized ceiling of 19,555 military troops and 6,400 police officers, with an estimated cost of over $2 billion during its first year.
The Bush administration has been a leading advocate of deploying a robust peacekeeping operation in Darfur.
But the United States is impeding this process by falling far behind in its obligatory payments to the UN peacekeeping budget, with total US arrears estimated at more than $500 million – and possibly exceeding $1 billion by the end of 2007.
The EU has also encountered difficulties in fulfilling its pledged financial assistance to the existing AU force in Darfur.
Moreover, the division of labor for any joint mission – especially regarding financing and command – remains unresolved.
Many African leaders insist that they should retain principal control of any peacekeeping force in Darfur.
Their preferred model calls for the UN to provide the funding and most other support for the mission, while allowing the AU to maintain its leadership role.
Many Western governments, however, refuse to place their forces under AU command, owing to its perceived weaknesses, and have conditioned further support for peacekeeping operations in Darfur on the UN’s assuming control.
But the UN has found it difficult to attract sufficient volunteers for such a force, since foreign governments have acceded to Sudanese demands that the hybrid force remain predominantly African.
At the same time, the complex chain of command envisaged for an AU-UN force recalls some of the worst features of NATO-UN operations in the former Yugoslavia during the 1990’s.
AU commanders on the ground would retain tactical control, a joint AU-UN command would exercise operational supervision, and the UN would establish the force’s overall strategic objectives.
Such a convoluted command system will make it difficult to react to any rapidly developing crisis or threat.
Indeed, even if foreign troops reduce the violence, peace might last only as long as they remain deployed, since the conflict has evolved from a struggle between rebel groups and the Sudanese government into one between various clans and ethnic groups, with the government intervening on behalf of its allies.
The example of Kosovo is revealing.
Eight years after the 1999 NATO intervention, a 17,000-strong international force is still needed to prevent a resurgence of violence, and Kosovo’s ultimate political status remains unresolved.
A major peacekeeping operation in Darfur would likely produce a similar situation: protracted uncertainties regarding the region’s future political status, impeded socioeconomic development, persistently diverging expectations among the conflicting parties, unresolved tensions resulting from non-fulfillment of these expectations, and the likelihood of renewed violence should the foreign intervention force withdraw.
In addition, an extensive military operation in Darfur would not necessarily secure the region unless it also addressed the problems in the rest of Sudan.
The UN Human Rights Committee has found that widespread and systematic human rights abuses extend throughout Sudan, not just Darfur.
Foreign Policy magazine considers Sudan the country most at risk of state failure.
For these reasons, any major peace operation involving Western countries would soon lead their governments to consider regime change in Khartoum as the most viable exit strategy.
Because the Sudanese government recognizes this as well, it will resist any such deployment, regardless of foreign threats and blandishments.
The Flight to Quality
BERKELEY – In late May, the yield to maturity of the 30-year United States Treasury bond was 4.07% per year – down a full half a percentage point since the start of the month.
That means that a 30-year Treasury bond had jumped in price by more than 15%.
So a marginal investor was willing to pay more than 15% more cash and more than 30% more equities for US Treasury bonds at the end of the month than at the beginning.
This signals a remarkable shift in relative demand for high-quality and liquid financial assets – an extraordinary rise in market-wide excess demand for such assets.
Why does this matter?
Because, as economist John Stuart Mill wrote in the first half of the nineteenth century, excess demand for cash (or for some broader range of high-quality and liquid assets) is excess supply of everything else.
What economists three generations later were to call Walras’s Law is the principle that any market in which people are planning to buy more than is for sale must be counterbalanced by a market or markets in which people are planning to buy less.
We have seen this principle in action since the early fall of 2007, as growing excess demand for safe, liquid, high-quality financial assets has carried with it growing excess supply for the goods and services that are the products of ongoing human labor.
This is true to such an extent that there is now a 10% gap between the global economy’s current output and what it would be producing if it were in its normal relatively healthy state of near-balance.
And global financial markets are now telling us that this excess demand for safe, liquid, high-quality financial assets has just gotten bigger.
To some small degree, a change in investor sentiment has induced the rise in excess demand for such assets.
After all, we can assume that the animal spirits of investors and financiers has been further depressed as a psychological reaction to the exuberant belief just a few years ago in the powers of financial engineering.
But most of the recent shift has come not from an increase in demand for safe, liquid, high-quality financial assets, but from a decrease in supply: six months ago, bonds issued by the governments of southern Europe were regarded as among the high-quality assets in the world economy that one could safely and securely hold; now they are not.
The argument six months ago in favor of those bonds seemed nearly airtight.
Yes, the liabilities of southern Europe’s private sector were speculative and potentially insecure; but the region was part of the eurozone, and thus its governments’ debts were backed by the European Central Bank, which in turn was backed by the governments of France and Germany, which in turn were backed by the willingness of French and German taxpayers to pay for the long-run project of closer European integration.
Neither the French nor the Germans, obviously, want to contemplate any possibility of a return to the days when every generation they would kill each other over the question of which language should be spoken by the mayor of Strasbourg (or is it Strassburg?).
Now things are not so certain.
When there is excess demand for safe, liquid, high-quality financial assets, the rule for which economic policy to pursue – if, that is, you want to avoid a deeper depression – has been well-established since 1825.
If the market wants more safe, high-quality, liquid financial assets, give the market what it wants.
After all, as a social-resource planning mechanism does, a market tells us which things are valuable and thus gives us the signal to make more of them.
Markets are now signaling that US Treasury bonds are much more valuable assets than they were a month ago.
So those governments whose credit is still unshaken and whose assets are still the benchmarks of quality for the world economy should be creating a lot more of them.
Creditworthy governments around the world can create more safe, liquid, high-quality financial assets through a number of channels.
They can spend more or tax less and borrow the difference.
They can guarantee the debt of private-sector entities, thus transforming now-risky leaden assets back into golden ones.
Their central banks can borrow and use the money to buy up some of the flood of risky assets in the market.
Which of these steps should the world’s creditworthy governments take in response to the asset-price movements of May?
All of them, because we really are not sure which would be the most effective and efficient at the task of draining excess demand for high-quality assets.
How much should they do?
As long as there is a clear global excess supply of goods and services – as long as unemployment remains highly elevated and inflation rates are falling – they are not doing enough.
And the gap between what they should be doing and what they are doing grew markedly in May.
This isn’t rocket science or capping deep-sea oil blowouts.
These are problems that we have long known how to solve.
The Folklore of Buried Memories
How victims remember trauma is the most controversial issue facing psychology and psychiatry today.
Many clinical trauma theorists believe that combat, rape, and other terrifying experiences are seemingly engraved on the mind, never to be forgotten.
Others disagree, arguing that the mind can protect itself by banishing memories of trauma from awareness, making it difficult for victims to remember their most horrific experiences until it is safe to do so many years later.
While acknowledging that trauma is often all too memorable, these certain clinical trauma theorists assert that a condition known as “traumatic dissociative amnesia” leaves a large minority of victims unable to recall their trauma, precisely because it was so overwhelmingly terrifying.
However, these clinical trauma theorists do not argue that “repressed” or “dissociated” memories of horrific events are either inert or benign.
On the contrary, these buried memories silently poison the lives of victims, giving rise to seemingly inexplicable psychiatric symptoms, and therefore must be exhumed for healing to occur.
This is no ordinary academic debate.
The controversy has spilled out of the psychology laboratories and psychiatric clinics, capturing headlines, motivating legislative changes, and affecting outcomes in civil lawsuits and criminal trials.
Whether individuals can repress and recover memories of traumatic sexual abuse has been especially contentious.
During the 1990’s, many adult psychotherapy patients began to recall having been sexually abused during childhood.
Some took legal action against the alleged perpetrators, often their elderly parents.
While complaints against parents, based on allegedly repressed and recovered memories of abuse, have declined, those against large institutions, such as the Catholic Church, have increased.
Strikingly, both advocates and skeptics of the concept of traumatic dissociative amnesia adduce the same studies when defending their diametrically opposed views.
But it is the advocates who misinterpret the data when attempting to show that victims are often unable to recall their traumatic experiences.
Consider the following.
After exposure to extreme stress, some victims report difficulties remembering things in everyday life.
Advocates of traumatic amnesia misconstrue these reports as showing that victims are unable to remember the horrific event itself.
In reality, this memory problem concerns ordinary absentmindedness that emerges in the wake of trauma; it does not refer to an inability to remember the trauma itself.
Ordinary forgetfulness that emerges after a trauma must not be confused with amnesia for the trauma.
Consider, too, that one symptom of posttraumatic stress disorder is an “inability to recall an important aspect of the trauma.”
This symptom, however, does not mean that victims are unaware of having been traumatized.
Indeed, the mind does not operate like a video recorder, and thus not every aspect of a traumatic experience gets encoded into memory in the first place.
High levels of emotional arousal often result in the victim’s attention being drawn to the central features of the event at the expense of other features.
Incomplete encoding of a trauma must not be confused with amnesia – an inability to recall something did get into memory.
Moreover, a rare syndrome called “psychogenic amnesia” is sometimes confused with traumatic amnesia.
Victims of psychogenic amnesia suddenly lose all memory of their previous lives, including their sense of personal identity.
Occasionally, this sudden, complete memory loss occurs after severe stress, but not invariably.
After a few days or weeks, memory abruptly returns.
In contrast, the phenomenon of dissociative amnesia supposedly entails victims’ inability to remember their traumatic experiences, not an inability to remember their entire lives or who they are.
Several surveys show that adults reporting childhood sexual abuse often say that there was a period of time when they “could not remember” their abuse.
Claims of prior inability to remember imply that they had attempted unsuccessfully to recall their abuse, only to remember it much later.
Yet if these individuals were unable to remember their abuse, on what basis would they attempt to recall it in the first place?
Most likely, they meant that there was a period of time when they did not think about their abuse.
But not thinking about something is not the same thing as being unable to remember it.
It is inability to remember that constitutes amnesia.
Research conducted in my laboratory on adults reporting histories of childhood sexual abuse provides a solution to this bitter controversy.
Some of our participants reported having forgotten episodes of nonviolent sexual abuse perpetrated by a trusted adult.
They described it as having been upsetting, confusing, and disturbing, but not traumatic in the sense of being overwhelmingly terrifying.
Failing to understand what had happened to them, they simply did not think about it for many years.
When reminders prompted recollection many years later, they experienced intense distress, finally understanding their abuse from the perspective of an adult.
These cases count as recovered memories of sexual abuse, but not as instances of traumatic dissociative amnesia.
That is, the events were not experienced as traumatic when they occurred, and there is no evidence that they were inaccessible during the years when they never came to mind.
Sexual abuse is not invariably traumatic in the sense of being overwhelmingly terrifying.
Of course, it is always morally reprehensible, even when it fails to produce lasting psychiatric symptoms.
The Forgotten Genocide
NEW DELHI – It is exactly 40 years since the Pakistani military regime of Yahya Khan initiated “Operation Searchlight” in March 1971.
That military expedition was but the latest in a series of pogroms carried out to intimidate the restive population of what was then called East Pakistan – today’s independent Bangladesh.
What followed was one of the worst massacres in human history, now all but forgotten by the international community.
Pakistan was created by the partition of British India in 1947, but its territory was divided into two enclaves separated by hundreds of miles.
While they shared a religion, Islam, there were major cultural and linguistic differences between East and West Pakistan.
In the east, there was a strong sense of being Bengali, and a sizeable Hindu minority continued to live in the province.
There was, moreover, strong resentment that political power lay in the hands of western-based politicians and generals who were blatantly insensitive to Bengali demands.
It seemed to many that, with the creation of Pakistan, East Pakistan had merely exchanged one form of colonialism for another.
And, as Bengali demands for autonomy gained momentum, the response became more repressive.
In November 1970, tropical cyclone “Bhola” struck East Pakistan, killing between 300,000 and 500,000 people.
Bhola is still considered one of the worst natural disasters on record, and the military dictatorship’s lukewarm relief efforts incensed the Bengali population.
So, when Pakistan’s military leaders finally allowed elections in late December 1970, East Pakistan voted overwhelmingly for the Bengali-nationalist Awami League, which won 167 of 169 seats in the province.
Since East Pakistan was more populous than West Pakistan, the election’s outcome raised the prospect that the Bengalis would now rule the country as whole.
This was not palatable to the Punjabi-dominated military brass or to Zulfikar Ali Bhutto, the leader of West Pakistan’s largest political party.
The elections were “canceled,” and East Pakistan erupted in open revolt.
Yahya Khan responded by sending in the troops.
The result was a genocide in which as many as three million people, particularly minorities and intellectuals, were killed.
Dhaka University’s residential halls were particularly targeted.
Up to 700 students were killed in a single attack on Jagannath Hall.
Several well-known professors, both Hindu and Muslim, were murdered.
Hundreds of thousands of women were systematically raped in the countryside.
By September 1971, ten million refugees had poured into eastern India.
The world knew what was happening.
Time magazine’s August 2, 1971, issue quoted a United States official saying, “This is the most incredible, calculated thing since the days of the Nazis in Poland.” The article goes on to describe the streams of refugees:
“Over the rivers and down the highways and along countless jungle paths, the population of East Pakistan continues to hemorrhage into India: an endless unorganized flow of refugees with a few tin kettles, cardboard boxes, and ragged clothes piled on their heads, carrying their sick children and their old.
They pad along barefooted, with the mud sucking at their heels in the wet parts.
They are silent, except for a child whimpering now and then, but their faces tell the story.
Many are sick and covered with sores.
Others have cholera, and when they die by the roadside there is no one to bury them.”
The international community’s response to the massacres was shameful.
We now have copies of desperate cables sent by diplomat Archer Blood and his colleagues at the US consulate in Dacca (now Dhaka) pleading with the US government to stop supporting a military regime that was carrying out genocide.
Instead, President Richard Nixon concentrated on intimidating Indian Prime Minister Indira Gandhi into staying out.
He would even send the US Seventh Fleet to cow her.
Fortunately, Gandhi held her nerve and began to prepare for war.
Strengthened by promises of support from the US and China, Pakistan’s military commanders ordered pre-emptive air strikes against India on December 3, 1971.
The Indian response was swift and sharp.
With support from the civilian population, as well as from the Mukti Bahini, an irregular army of Bengali rebels, the Indian army swept into East Pakistan.
Nixon was too bogged down in Vietnam to do more than issue threats.
On December 16, the Pakistanis signed the instrument of surrender in Dacca.
Bangladesh was born.
Having acquiesced in the genocide, the international community has conveniently forgotten it, and no Pakistani official has ever been brought to justice.
On the contrary, many of the perpetrators later held senior government positions.
It is as if the Nuremberg trials never happened after WWII.
As the world watches Libya’s Muammar el-Qaddafi slaughter his own people, we should remember the human cost of international indifference.
The Forgotten Sick
LIVERPOOL – The developed world is familiar with the global threats of viral infections that incite fear in both rich populations and poor.
The pandemics of SARS, avian, and swine influenza have cost the global economy an estimated $200 billion.
These threats emerge frequently and unpredictably from human contact with animals.
Rapid response is required of governments, United Nations agencies, regulatory authorities, and the pharmaceutical industry for coordination, surveillance, and vaccine production.
But the poorest people – those who live on less than $2 per day – are often not considered important when a pandemic threat emerges.
They do not contribute significantly to the global economy, and their countries’ health systems function on a tiny fraction of what advanced economies devote to their populations’ health.
Conversely, the developed countries’ view of the diseases of the developing world is that only three are important: AIDS, tuberculosis, and malaria.
This stems from the power of advocacy constituencies and the recognition that these diseases might threaten the developed world.
As a result, these diseases receive a disproportionate amount of funding for research and control, while other infections kill, blind, deform, and disable many more – the “bottom billion” – who have little access to health care.
These infections are known as the Neglected Tropical Diseases (NTDs).
They are unfamiliar to the developed world, and their names are often difficult to pronounce: filariasis (elephantiasis), onchocerciasis (river blindness), schistosomiasis (bilharzia), and others, particularly intestinal worms.
These are not familiar diseases to people lucky enough to live in the world’s richest countries, but they are household names to hundreds of millions of poor people, who are often infected with more than one of them.
They are long-lasting conditions, often contracted at an early age, and both the illnesses and their symptoms are progressive.
Indeed, whereas the misery that worm diseases cause is extensive and the burden excessive – as much as tuberculosis or malaria – they do not kill immediately.
Instead, they gradually erode children’s development prospects.
And symptoms accumulate: sight is gradually lost, genital lesions appear around puberty (sometimes increasing risk of HIV), and skin condition declines as millions of microscopic worms become intolerably itchy.
Blood loss, causing anemia, is the result of thousands of worms chewing at the wall of the gut.
Other diseases, such as sleeping sickness, transmitted by tsetse flies are fatal if untreated, as is leishmaniasis, if the parasites that cause it – transmitted by tiny sandflies – invade the liver and spleen.
Again, the misery caused by these infections exceeds the burden of tuberculosis or malaria.
The good news is that NTDs can be treated, as quality drugs – donated by the major pharmaceutical companies – are made available.
These drug donations for river blindness, trachoma (another blinding disease), leprosy, elephantiasis, worms, and bilharzia, as well as for sleeping sickness, give hope to millions.
Moreover, the cost of the annual treatment recommended by the World Health Organization is often less than $0.50, and much less in Asia, with delivery carried out by communities or through schools.
The increase in treatment has been spectacular – more than 500 million people in 51 countries treated for elephantiasis in 2007, and 60 million in 19 countries have been treated for river blindness.
Guinea disease is now endemic in only four countries, and leprosy is a problem in only six.
These are impressive figures, and the expense is trivial compared to the anti-retroviral drugs needed to treat AIDS, which cost more than $200 annually and must be taken every day, not every year.
Given that roughly one billion people are infected with NTDs, compared to 40 million with HIV, and that the drugs targeting them are donated and actually prevent disease and stop transmission, treating NTDs is a major opportunity to lift populations out of poverty.
The main challenge is to convince policymakers that there is more to reducing poverty than focusing on just three diseases.
In fact, NTDs are “low-hanging fruit.”
If the international community is serious about alleviating poverty and achieving development goals, tackling the diseases so directly associated with economic misery should be a fundamental objective.
We can easily meet that objective, because we have drugs that are effective, free (or very cheap), that have low delivery costs, and that provide add-on benefits.
Now is the time to rethink our public-health investments and messaging, and evaluate whether we are getting the best value for our donor dollars, or whether we should do much more to tackle diseases that we have so far largely ignored.
The Forgotten Side of the War on Terrorism
During the past decade – particularly since the September 11, 2001, attacks on the United States – Westerners have generally considered international terrorism to be the most urgent threat to human security.
Accordingly, vast resources have been mobilized and expended to counter its many forms.
Unfortunately, however, the US-led invasion of Afghanistan and the subsequent invasion – without UN authority – of Iraq underscore the primacy of military solutions in the strategic thinking of affluent nations.
At the same time, developing countries have continued to grapple with the persistence of mass poverty, endemic disease, malnutrition, environmental degradation, and gross income inequity, all of which have caused a degree of human suffering that far exceeds what has been caused by terrorist attacks.
We need, therefore, to revisit today’s global challenges from a Third-World perspective.
Indeed, a fundamental lesson of terrorist attacks and insurgencies, we now know, is that no nation, however self-sufficient, can afford to remain heedless of whether others sink or swim.
For much of the developing world, the basic instability of international relations – owing to terrorist strikes, guerrilla warfare, and the preemptive wars that America threatens on its enemies – is aggravating socioeconomic anxieties and fueling doubts about the benefits of globalization.
Certainly, we are all beginning to realize how precarious that process is – how easily market mechanisms can be rolled back by cultural resentments stemming from economic exploitation, political oppression, and social injustice.
People in the industrialized countries are already an estimated 74 times richer per capita than those in the poorest countries.
Today, one-quarter of the world’s population still lives on the equivalent of less than one US dollar a day, and the World Bank says that the daily spending power of 1.2 billion people is roughly equal to the price of a hamburger, two soft drinks, or three candy bars in the West.
According to the UN Food and Agriculture Organization, 815 million people, including 200 million children under the age of five, go to bed hungry each night.
Obviously, there must be an intensification of efforts to reduce global poverty, which has become a breeding ground of resentment, envy, and despair – hence, a ready producer of violence and suicide bombers.
The G-8 countries’ agreement last year to a debt write-off for the 18 poorest states – 16 in Africa and two in Latin America – is a splendid, but insufficient, beginning.
The 100 most indebted countries still find the burden of servicing their collective $2.3 trillion in official debt increasingly hard to bear, leaving them hard put to finance national programs spelled out by the UN’s Millennium Development Goals (MDG’s), which seek to halve global poverty by 2015.
If we are to close the global gap in personal security and economic well-being, the community of nations will need to cultivate a new ethos of mutual responsibility.
The Philippine government has proposed that half of all scheduled debt payments be withheld for a specified period, to be invested in reforestation, clean water, housing, food production, primary healthcare, sanitation, basic education, farm-to-market roads, ecologically sound tourism, micro-finance, and related MDG projects.
For lenders, debt could be converted, wherever possible, into equity in MDG projects with earning potential, while building up poor countries’ capacity for self-reliance.
But self-reliance will be impossible to achieve as long as the rich countries favor free markets and free trade only when it suits them.
Even UN Secretary-General Kofi Annan has warned that the unrestrained tide of globalization might not raise all boats, but only the yachts – while overturning a lot of canoes.
The most glaring injustice in this respect has been the failure of the US and the European Union to deliver substantially on their promises of market access to agricultural exports from poor countries.
Bimal Ghosh, a former director of the UN Development Program, famously calculated that the daily subsidy for every cow in the EU – currently amounting to €2.50 – exceeds the daily income of millions of poor people around the world.
The poor countries argue that broader liberalization in the EU, the US, and Japan alone would yield benefits worth up to $142 billion by 2015.
The G-8 nations and the global alliance that America leads must aim not merely to defeat terrorism.
They must address all aspects of human security, including people’s well-being and safety in their homes, neighborhoods, and workplaces.
And they must win people’s allegiance by the power of their values and their ideals – not only by isolating terrorists and extremists, but also by helping, in meaningful ways, poor countries to prosper.
Above all, those who lead us today must create a genuinely new global order in which all peoples take part – with dignity and an assurance of fairness.
The Forgotten Twentieth-Century
BERLIN – It has been 20 years since the dissolution of the Soviet Union, which for many historians marked the real end of the “short twentieth century” – a century that, beginning in 1914, was characterized by protracted ideological conflicts among communism, fascism, and liberal democracy, until the latter seemed to have emerged fully victorious.
But something strange happened on the way to the End of History: we seem desperate to learn from the recent past, but are very unsure about what the lessons are.
Clearly, all history is contemporary history, and what Europeans, in particular, need to learn today from the twentieth century concerns the power of ideological extremes in dark times – and the peculiar nature of European democracy as it was constructed after World War II.
In some ways, the great ideological struggles of the twentieth century now seem about as close and relevant as the scholastic debates of the Middle Ages – especially, but not only, for younger generations.
Who now remotely understands – let alone takes the trouble to try to understand – the great political dramas of intellectuals like Arthur Koestler and Victor Serge, people who risked their lives for and then against communism?
Nevertheless, much more than most of us would care to admit, we remain enmeshed in the concepts and categories of the twentieth century’s ideological wars.
This was most obvious with the intellectual responses to Islamist terror: terms like “Islamo-fascism” or “third totalitarianism” were coined not just to characterize a new enemy of the West, but also to evoke the experience of the anti-totalitarian struggles that preceded and followed World War II.
Such terms seek to borrow legitimacy from the past and to explain the present – in a way that most serious scholars of either Islam or terrorism never found very helpful.
Analogizing in this way seemed more to reflect a desire to re-fight the old battles, rather than to sharpen political judgment about contemporary events.
So how should we think about the ideological legacy of the twentieth century?
For one thing, we need to stop viewing the twentieth century as a historical parenthesis filled with pathological experiments conducted by crazed thinkers and politicians, as if liberal democracy had been there before those experiments and merely needed to be revived after they failed.
It is not a pleasant thought – and perhaps even a dangerous one – but the fact remains that many people, not just ideologues, put their hopes in the twentieth century’s authoritarian and totalitarian experiments, viewing politicians like Mussolini and even Stalin as problem-solvers, while liberal democrats were written off as dithering failures.
This is not to make any excuses – it is not true that to comprehend is to forgive.
On the contrary, any proper understanding of ideologies must reckon with their power to seduce and even genuinely convince people who care little about their emotional appeal – whether to pride or to hate – but who think they actually offer rational policy solutions.
We must remember that Mussolini and Hitler were ultimately brought to power by a king and a retired general, respectively – in other words, traditional elites, not street-fighting fanatics.
Second, we need to appreciate the special and innovative nature of the democracy created by Western European elites after 1945.
In light of the totalitarian experience, they stopped identifying democracy with parliamentary sovereignty – the classic interpretation of modern representative democracy everywhere but in the United States.
Never again should a parliamentary assembly just cede power to a Hitler or a Pétain.
Instead, the architects of post-war European democracy opted for as many checks and balances as possible – and, paradoxically, for empowering unelected institutions to strengthen liberal democracy as a whole.
The most important example is constitutional courts – a different animal from the US Supreme Court, and one specifically tasked with ensuring respect for individual rights.
Eventually, even countries traditionally suspicious of “government by judges” – France being the classic case – accepted this model of constrained democracy.
And virtually all Central and Eastern European countries adopted it after 1989.
Importantly, European institutions – especially the European Court of Justice and the European Court of Human Rights – also fit this understanding of democracy through prima facie undemocratic mechanisms.
Today, many Europeans are clearly dissatisfied with this conception of democracy.
Many have the impression that the continent is entering what the political scientist Colin Crouch has called a “post-democratic” era.
Citizens increasingly claim that political elites do not properly represent them, and that directly elected institutions – national parliaments in particular – are forced to bow to unelected bodies like central banks.
Passionate grassroots protest and surging populist parties across the continent are the result.
It will not do simply to reaffirm the post-war European model of democracy, as if the only alternative were totalitarianism of one sort or another.
But we should be clear about where we are coming from, and why – and that there was no golden age of European liberal democracy, whether before World War II, in the 1950’s, or at some other mythical point.
Ordinary Europeans long trusted elites with the business of democracy – and often even seemed to prefer unelected elites.
If they now want to modify the social contract (and assuming that direct democracy remains impossible), change ought to be based on a clear, historically grounded sense of which innovations European democracy might really need – and of whom Europeans really trust to hold power.
That discussion has barely begun.
The Forgotten Virtues of Free Trade
LONDON – “Laissez-faire,” French President Nicolas Sarkozy recently declared, “is finished.” Perhaps, but should we really be satisfied if he is right?
If laissez-faire has run its course, what will possibly replace it as the foundation of an open, global society?
Now more than ever, it is worth remembering that the last great financial crash not only inspired the New Deal in the United States, but also plunged the world into a new dark age of economic nationalism and imperialism.
Free trade is far from perfect, but the alternatives are worse.
Protectionism is bad for wealth, bad for democracy, and bad for peace.
Yet a new wave of protectionism is a genuine danger.
Barack Obama, appealing to swelling protectionist sentiment among Americans, threatened during his presidential campaign to rewrite the North American Free Trade Agreement unilaterally.
This July, the World Trade Organization’s Doha trade round fell to pieces, partly because the US refused to lower its agricultural subsidies.
The world is on a slippery slope toward nationalism and exclusion.
If a government can step in to bail out failing banks, why not to protect its failing businesses or farmers as well?
We need a new deal for trade.
There is now widespread talk of a “Bretton Woods II” that would restructure global finance, promote sustainability, and offer developing countries “aid for trade.”
But, to be effective, any new deal to promote trade must involve more than a new set of international institutions.
It requires democratic reform from the bottom up.
In fact, this requirement is rooted in history.
We have become so accustomed to thinking of free trade as a specialist matter for liberal economists and trade negotiators in dark suits that we forget how a century ago, free trade was a core belief for many democrats, radicals, women activists, and, indeed, organized labor.
Back then, Britain was in a position not unlike that of the US today: a superpower in relative decline, facing new competitors and a backlash against globalization.
In the late nineteenth century, all powers raised their trade barriers – except Britain.
Britain’s stance holds lessons for today.
Most economists stress the superiority of the free-trade model and point to the power of lobbies and interest groups to explain its unpopularity in practice.
As US Federal Reserve Chairman Ben Bernanke has argued, trade expansion inevitably creates some losers, whose protests distract attention from the benefits of globalization.
This is true, but it is only half the story, for it ignores how, at crucial moments in history, free trade has mustered the support of the many winners.
A century ago, during an earlier crisis of globalization, the demand for free trade in Britain inspired a genuine mass movement.
It was not just a cause dear to bankers, merchants, or the young John Maynard Keynes.
It mobilized millions of people.
For women, who remained disenfranchised, free trade was a kind of substitute citizenship: parliament safeguarded their interests as consumers by keeping the door open for cheap imports.
For many democrats, it was a force for peace and social justice, minimizing the power of special interests and teaching citizens about fairness and international understanding.
We should not romanticize this earlier era of free trade.
Poverty did not vanish.
Many British people believed in a “Free Trade Empire.”
Others fanned the flames of Anglo-German antagonism, caricaturing protectionist Germany as a barbarian society surviving on horse sausages and dog-meat;
Lloyd George, the future prime minister, told audiences that he was more afraid of the German sausage than he was of the German navy.
One reason that free trade defeated protectionism in Britain a century ago was that its supporters appealed to people’s emotions and identities, not just their rational interest in more wealth and cheap food.
Liberals and radicals organized traveling shows, color posters, and political entertainment.
In towns, displays in shop windows illustrated the costs of tariffs to ordinary consumers.
In the countryside, people watched political slide shows late into the night.
Meetings in seaside resorts reached almost a million people in 1910.
When was the last time you went to the beach and found yourself pulled into a debate about tariffs?
The First World War and the 1920’s shattered any naïve belief in pure free trade.
Like today, consumers discovered that markets could leave them helpless, leading to calls for regulation.
Internationalists had to come to terms with the simple fact that, on its own, trade did not automatically enable peace.
Economic globalization had outpaced politics, creating new tensions over oil and other strategic resources.
Political institutions needed to catch up.
Bretton Woods and the General Agreement on Tariffs and Trade created a new order after the Second World War.
In economic terms, they have had considerable success.
Tariffs have fallen, although non-tariff barriers and preferential agreements have been on the rise.
But in terms of democratic culture, GATT also led to a further separation of trade from everyday politics.
This is why free trade has been left so defenseless in the face of anti-globalization protests.
The good news is that people have not stopped caring about the ethics of trade.
On the contrary, they have switched to other movements like fair trade and trade justice.
To be fair, the WTO under Pascal Lamy has tried to reach out to such groups.
Still, there is a long way to go to reconnect freer trade with citizenship and global solidarity.
History shows that doing so is both possible and necessary.
The Forty-Year Palestinian Tragedy
Forty years ago, Israel captured the West Bank, Gaza, and the Golan Heights after a lightning six-day war that repelled the armies of Egypt, Jordan, and Syria.
Today, ending the occupation of Palestinian territories that began that June seems as distant a dream as ever.
The Somalia-like chaos and civil war that is now unfolding in Gaza as a result of this decades-old stalemate can be blamed partly on ill-conceived Israeli policies, and partly on an American administration that, for six long years, relegated the cause of Israeli-Palestinian peace to the bottom of its agenda.
But it is misleading to attribute the failure of the Palestinians to develop an orderly system of self-government only to the pernicious effects of Israeli occupation and American policies.
The Palestinian crisis is first and foremost one of leadership.
True, Yasser Arafat was not a model democrat, but his charisma and political acumen were crucial for holding all the Palestinian factions together.
Now, not even Fatah, Arafat’s own party, can claim to be a coherent organization.
Hamas’ electoral victory in January 2006 was to a large extent due to Fatah’s fragmentation under Arafat’s successor, Mahmoud Abbas.
With no effective central authority to inspire fear or respect and the PLO devoid of legitimacy precisely because of its refusal to give Hamas its rightful share in the organization, a grotesquely ineffective brand of “cohabitation” between a Fatah president and a Hamas prime minister has emerged.
As a result, Palestinian politics has degenerated into a naked struggle for the spoils of power.
Last February’s Mecca agreement, which created the Fatah-Hamas unity government, was supposed to establish a civilized system of power-sharing.
But that deal now appears to be collapsing.
The current flare-up is largely due to the fact that Fatah, encouraged by the international community’s boycott of Hamas, never really accepted its electoral defeat and Hamas’s right to govern.
Moreover, since Hamas’s rise to power, Fatah’s challenge to the new Palestinian rulers was enhanced by lavish financial support it secured from the United States and Europe, and by a generous supply of weapons from both the US and Arab countries.
Thus, the current conflict is essentially a pre-emptive war by Hamas – aggravated by lawlessness and banditry, clashing free-lance militias, tribes, and families, and a spiral of senseless massacres – to prevent Fatah from being turned by the international community into a formidable challenger to its democratic right to govern.
For Hamas, this is a life-and-death struggle.
It has not shrunk from bombarding Abbas’s presidential compound, attacking Fatah’s command centers, and targeting Fatah military leaders like Rashid Abu Shbak, the commander of Fatah’s internal security and many others, all of them lieutenants of the supreme Fatah military authority in the Gaza strip, Mohamed Dahlan.
Hamas’s determination to assert its authority can be gauged by the desecrated corpses of Fatah fighters, many of them with bullets fired at their heads, a practice dubbed “confirmation of death.”
The rocket attacks against Israeli territory are a transparent attempt to divert attention and rally the masses around Hamas as the true champions of the Palestinian cause.
Tragically, all this is not only about human victims, but also about the Palestinians’ political horizon.
Three times in their history – in 1937,1947, and 2000 – the Palestinians were offered a state, and three times their leaders failed to meet the challenge – admittedly never an easy one for a nation built on such an unwavering ethos of dispossession.
Today, when America finally understands how vital an Israeli-Palestinian peace is for its fortunes in the broader Middle East, and the Arab world is for the first time committed to pursuing a comprehensive settlement with Israel, anarchic Palestinian politics is making a decision for peace well nigh impossible.
However vibrant, Israel’s democracy is not exactly manageable or predictable, either.
But although Prime Minister Ehud Olmert might seek to regain his popular credibility by a major new peace demarche, the two-headed Palestinian Authority, always a dubious partner in the eyes of the Israelis, is now more suspect than ever.
“Every day that goes by only causes more people to wish for the renewal of the Israeli occupation of Gaza.
Let the Jews come already and save us!” But that despairing hope, uttered by a desperate Gazan, will not materialize.
Israel will avoid at all costs a large ground incursion.
Yet, engaged in a war driven by fury and vengeance, the Israelis are now focused again on a manhunt for gang chieftains, targeted killings of Hamas squads, and the arrest of its political leaders, not on peace overtures.
Only a dramatic move by external powers can still save Gaza from becoming a second Mogadishu and both Palestinians and Israelis from a total war that would only breed more rage and desperation.
For the building blocks of a renewed peace process to be sustainable, an international force must be deployed along Gaza’s border with Egypt to prevent the constant smuggling of weapons and isolate the conflict.
Simultaneously, the international community must help make the unity government work by recognizing Hamas’ right to govern in exchange for a performance-based stability plan.
The Fountain of Youth Revealed
Since the dawn of human consciousness, we have contemplated our own mortality and dreamed of ways of overcoming it.
Until recently, achieving control over our own longevity was the stuff of fairy tales, disconnected from actual scientific progress.
But new research suggests that the molecular basis of aging may soon be understood in detail.
Applying this knowledge could be close behind.
Recent scientific breakthroughs have come from research not on humans, or even on rats and mice, but on simple laboratory organisms like yeast and roundworms.
These primitive life forms have yielded important, generally valid clues that have forced a comprehensive re-evaluation of the nature of the aging process.
Traditional evolutionary thought views aging as a process that occurs by default in the post-reproductive phase of life.
After all, Darwinian natural selection cannot prevent the wholesale decline of an individual whose genes have already been passed on to the next generation.
According to this view, many cellular and organic processes thus degrade concurrently, and aging has many causes.
As a result, the post-reproductive shortcomings of a great many genes would have to be remedied to slow the aging process.
Recent research on yeast and roundworms suggests otherwise.
It turns out that mutations even in single genes can lead to a substantial lengthening of life span and an accompanying slowdown in the aging process.
But how can this be possible if aging has many concurrent causes, as evolutionary theory maintains?
The answer can be found by examining the molecules that make up the genes in which mutations extend life span.
For example, a universal gene called SIR2 determines the life span of both yeast cells and roundworms.
In both organisms, if an extra copy of SIR2 is added by genetic intervention, the life span is extended.
Conversely, if the SIR2 gene is deleted, the life span is shortened.
In both yeast and worms, SIR2 appears to sense the availability of food and stall the aging process in times of deprivation by stimulating the formation of specialized body types--spores in yeast and dauers in worms--that can survive for extraordinarily long periods without nutrition.
When conditions improve, the dormant life forms revive and reproduce.
The survival function that SIR2 exists to serve--forestalling aging and reproduction during famine--is adaptive and therefore pervasive in nature.
So the classical evolutionary theory of aging must be modified.
In times of plenty, the aging process plays out as evolutionary biologists say, with reproduction followed by the failure of many genes and a wholesale decline of individual organisms.
But in times of scarcity, the survival program kicks in to slow the aging process.
Even more intriguingly, a single gene can promote this survival mechanism across a wide swath of nature's creatures.
Does SIR2 also promote survival in mammals?
Interestingly, in cultured mouse or human cells, the mammalian SIR2 gene determines a cell's response to DNA damage.
When faced with damaging agents, cells have the ability to commit suicide.
The mammalian SIR2 gene modulates this process, and higher levels of it dampen the cell death response.
Just like in yeast and worms, mammalian SIR2 promotes survival, in this case of cultured cells.
Does this mean that mammalian aging is at least partly caused by the gradual loss of cells and the accompanying failure of organs?
Possibly, but we must bear in mind that the cell death response is a way to cull genetically damaged cells before they progress into tumors.
So increasing SIR2 activity in mammals may actually cause cancer by keeping bad cells alive too long.
Yet this seems unlikely for two reasons.
First, as an evolutionary matter, it makes little sense that a gene anointed by nature to promote survival would also cause cancer.
Second, recent experiments in genetically altered mice show that the cell death response may be slowed without causing cancer.
This suggests that there is a window of slowing cell death that does not cause cancer and may promote longevity.
Obviously, the practical implications of these findings could prove extraordinary.
If single genes can determine the life span of mammals, it should be possible to develop drugs that bind to these genes' proteins and alter their activities.
Thus, drugs that slow the aging process could be around the corner.
But will such drugs prolong youth and vitality, or simply extend our stay in nursing homes?
To answer this question, consider the effects of calorie restriction, which has been found to increase life span in organisms ranging from yeast to mammals.
In yeast, where the process has been studied in molecular detail, the longevity triggered by calorie restriction is mediated by SIR2.
In mammals, we have not yet discovered the molecular basis of the longevity.
But we do know that restricted animals are vigorous and healthy for the duration of their longer lives.
The Fragile Roots of Productivity Growth
How fast is the US economy now growing?
Smart investors are now betting that the most recent economic data will show an annual GDP growth rate of 3% for the second quarter of 2003.
They are also betting that the current third quarter may well show a growth rate as high as 5% per year.
July saw American industrial production jump by half a percent, while Intel, the big microprocessor maker, is reporting very strong growth in demand for its key products, suggesting that business investment spending is finally accelerating.
Although Japan continues to stagnate, and Western Europe hovers on the edge of recession, a solid "output-growth" recovery in the US should prove to be a big help in boosting demand in the rest of the world.
But this good news about the US business cycle has been accompanied by bad news about employment.
Hours worked in American business fell at a 2.7% annual rate in the second quarter.
Employment-particularly manufacturing employment-fell in July.
It is very likely that hours worked will continue to fall in the third quarter.
What accounts for this wide divergence?
How can America see reasonably rapid output growth and yet rising unemployment?
The answer is that the underlying trend of productivity growth in the American economy continues to be exceptionally positive.
The 5.7% annual productivity gain recorded in the second quarter seems likely to be matched in July-September.
With America's workers producing more in less time, it is no wonder that a wedge is being driven between the (good) output news and the (bad) employment news.
In the short run, rapid productivity growth poses dilemmas for macroeconomic management, because what would otherwise be seen as reasonably strong demand growth is proving to be insufficient to keep unemployment low.
But the short-run view is not the important one.
Rapid productivity growth is-in the long run-good news for America: a higher-productivity economy is better at enhancing human welfare.
In the long run, this is also good news for America's trading partners: there is more value to be gained by trading with a richer economy than with a poorer one.
The continuation of rapid US productivity growth through the recent recession and into the subsequent low-wattage recovery is a very strong piece of evidence that America's long-run rate of GDP and productivity growth has shifted upward permanently, or, if not permanently, at least for a period of time likely to be measured in decades.
America, of course, is not alone among industrial nations that have seen productivity growth accelerate since the second half of the 1990's.
Australia, Ireland, and the Scandinavian countries all had their own sustained bursts of unexpectedly rapid growth.
But the rest of Western Europe and Japan have not.
Western Europe and Japan have vibrant high-tech sectors, able executives, and cultures easily as capable as the US of taking advantage of the boom promised by the rapidly falling prices of information technology.
So you would think that the same productivity revolution would happen in those countries.
Yet there has been no sign of it.
Why not?
The current conventional wisdom, most strongly advocated by the American economist Robert Gordon, is that the burst of productivity growth that the US is currently experiencing (and that will turn into a full-fledged economic boom whenever demand growth becomes rapid enough) is due to synergy.
According to this view, the US is especially well positioned to benefit from rapidly falling prices of information technology, owing to its openness to competition and new ways of doing business, particularly in distribution.
The comparison between the late 1990's and early 2000's in America and in Western Europe compels us to reflect on how fragile the underlying institutional mechanisms needed to support rapid economic growth truly are.
Western Europe and the US are both post-industrial democracies.
Both possess market economies.
Both have large and powerful social insurance systems.
Of course, institutional differences between America and Western Europe do exist: in the regulation of labor, in restrictions on land-use and redevelopment, in the tolerance of competition authorities for resale price maintenance and related practices.
But are these differences really so large as to affect macroeconomic performance so dramatically?
In Robert Gordon's estimation-and in mine-the roots of an economy-wide high-tech productivity boom like the one seen in the US are so delicate that they flourish in American but not in continental European soil.
The Fragility of a Flat World
The world is flat!
So says the columnist Thomas Friedman, who chose that provocative title for his bestselling book to awaken people to the dramatic effects that technology is having on the world economy.
Distance is shrinking.
Geographical barriers no longer provide easy protection.
Manufacturing workers and high-tech professionals alike in Europe and America are being challenged by global competition.
Western consumers who call a local company are likely to speak to someone in India.
Skeptics have pointed to the limits of Friedman’s metaphor.
As one put it, the world is not flat, but “spiky.” A contour map of economic activity in the world would show mountains of prosperity and many ravines of deprivation.
Moreover, distance is far from dead.
Even neighbors with low tariff barriers, like Canada and the United States, trade more internally than across borders.
Seattle and Vancouver are close geographically, but Vancouver trades more with distant Toronto than with nearby Seattle.
Such criticism notwithstanding, Friedman makes an important point.
Globalization, which can be defined as interdependence at inter-continental distances, is as old as human history.
Witness the migration of peoples and religions, or trade along the ancient silk route that connected medieval Europe and Asia.
But globalization today is different, because it is becoming quicker and thicker.
After the first trans-Atlantic cable in 1868, Europe and America could communicate in a minute.
In 1919, the economist John Maynard Keynes described the possibility of an Englishman in London using a telephone to order goods from around the world to be delivered to his house by the afternoon.
But Keynes’s Englishman was wealthy and thus exceptional.
Today, hundreds of millions of people around the world have access to global goods in their local supermarkets.
Similarly, as recently as two decades ago, instantaneous global communication existed, but was economically out of reach for most people.
Now, virtually anyone can enter an Internet café and enjoy a capability that was once available only to governments, multinational corporations, and a few individuals or organizations with large budgets.
Tremendous declines in computing, communication, and transport costs have democratized technology.
Only a decade ago, two-thirds of all Internet users were in the US.
Today, less than a quarter are located there.
Knowledge is power, and more people have access to information today than at any time in human history.
Non-state actors now have capabilities that were once limited to governments.
The nation-state is not about to be replaced as the dominant institution of world politics, but it will have to share the stage with more actors, including organizations like Oxfam, celebrities like Bono, and transnational terrorist networks like Al Qaeda.
But flattening is reversible.
It has happened before.
The world economy was highly integrated in 1914, but economic interdependence declined during the next three decades.
The global economy did not recover that same level of integration until 1970, and even then it remained divided by the Iron Curtain.
World War I was the trigger that set off the reversal, with economic globalization declining while military globalization increased, as witnessed by two world wars and a global cold war.
This reflected deeper problems of domestic inequality created by nineteenth-century economic progress.
Politics did not keep pace, and the result was the rise of pathological ideologies – fascism and communism – that divided nations and the world.
The creation of the welfare state in Western countries after World War II helped to create a safety net for people disadvantaged by economic change, thereby encouraging them to accept the return of international economic interdependence.
Some analysts see China playing a role today similar to Germany’s role in the twentieth century.
A rising power, beset with internal inequality, turns to nationalism and challenges the dominant power, provoking a war that turns back the progress of economic globalization.
While the American and Chinese economies are highly interdependent today, so, too, were Germany and Britain before 1914.
But the analogy is imperfect.
Germany had surpassed Britain in industrial production by 1900.
Even at its current high rates of growth, China’s economy is unlikely to equal that of the US for at least two more decades.
The greater threat to a flat world is likely to come from the non-state and transnational forces that have been unleashed by the diffusion of technology.
On September 11, 2001, a non-state network killed more Americans in a surprise attack than the government of Japan did at Pearl Harbor in 1941.
I have called this the privatization of war.
If such actors obtain nuclear and biological materials, the world will look very different.
Borders will become harder to cross for both people and goods.
And if such actors disrupt the flow of oil from the Persian Gulf, home to two-thirds of the world’s reserves, a global depression like that of the 1930’s could strengthen protectionism further.
Globalization has two driving forces: technology and policy.
Thus far, policy has reinforced the flattening effects of technology.
As the world’s largest economy, the US has taken the lead in promoting policies that reduce barriers.
But the events described above could reverse such policies.
Some critics of globalization might welcome such an outcome.
But the result, as we saw after 1914, would be the worst of both worlds – reversal of the economic globalization that spreads technology and power, but reinforcement of negative dimensions of military and ecological globalization, such as war, terror, climate change, and the spread of infectious diseases.
In that case, the flat world could become a desert.
The French Cul de Sac
PARIS – As France’s presidential election looms, the country is approaching a breaking point.
For three decades, under both the right and the left, the country has pursued the same incompatible, if not contradictory, goals.
With the sovereign-debt crisis pushing French banks – and thus the French economy – to the wall, something will have to give, and soon.
When the crunch comes – almost certainly in the year or two following the election – it will cause radical, wrenching change, perhaps even more far-reaching than Charles de Gaulle’s coup d’état, which led to the establishment of the Fifth Republic in 1958.
Most French politicians and bureaucrats call such notions scaremongering.
After all, aren’t key indicators like debt ratios or budget-deficit trends worse in the United States and Britain?
Indeed, France’s predicament might seem comparable with the “Anglo Saxons,” were it not for the French political class’s beloved baby, the euro.
While the euro has not caused France’s economic problems, its politicians’ commitment to the single currency represents an insurmountable barrier to solving them.
The basic problem is that the country’s super-generous welfare state (public spending amounts to about 57% of GDP in 2010, compared to 51% in the United Kingdom and 48% in Germany) stifles the growth needed for the euro to remain viable.
The most serious structural flaws concern high payroll taxes and labor-market regulation, which make it difficult – or at least prohibitively expensive – for firms to reduce their workforce when business conditions worsen.
The OECD reports that in 2010, France’s “tax wedge” (income taxes plus employee and employer social-security contributions minus cash transfers as a percentage of total labor costs) was at least 13 percentage points above the OECD average at every level of household income.
The result has been elevated unit labor costs relative to France’s peer group (especially Germany) and stubbornly high unemployment.
During Valery Giscard d’Estaing’s presidency in the 1970’s, unemployment rose every year, reaching 6.3% by 1980.
François Mitterrand promised rapid growth and lower unemployment when he came to power in 1981, but presided over an economic slowdown and rising unemployment.
By 1997, unemployment reached 11.4%, and dipped below 8% in only one year since then (2008).
High unit labor costs and unemployment rates are responsible, in turn, for reducing the trend rate of economic growth, mainly owing to under-utilized labor, while the combination of lackluster growth and an ever-mounting welfare burden has resulted in chronic budget deficits.
The last surplus was in 1974.
The current election campaign is accordingly centered on France’s fiscal position.
Everyone agrees that deficit reduction is required, while differing on how to go about it.
Sarkozy’s proposed cure is to boost growth by reducing the tax burden on employers, while simultaneously hiking the rate of value-added tax.
His main opponent, Socialist leader François Hollande, would impose higher taxes mainly on the wealthy and the financial sector, but also on big business.
With the only effective solutions – full-blown eurozone political union, or abandoning the euro – ruled out, muddling through is all that is left.
Another name for this approach is “transfer union,” which implies relentless economic austerity and declining living standards, because strong countries – first and foremost, Germany – are determined to limit their liability for bailing out deficit countries by making all transfers conditional on tough budget retrenchment.
At the same time, financial markets are forcing fiscal retrenchment on governments, as will the planned new fiscal treaty (on which Germany, among others, insisted).
Demand is therefore being drained out of the eurozone economies, with stronger external demand, stemming from the euro’s depreciation against other major currencies, unable to offset the effect on growth.
The French government expects budget revenues to match all spending except debt service by 2014.
But that forecast assumes continued growth, whereas France is slipping into recession.
So the budget deficit will persist, and more retrenchment will be required.
Will the public grin and bear it, or demand a radical change of direction?
In the latter scenario, the change would be delivered either by a part of the mainstream political class that breaks ranks, or through a successful challenge by a political outsider, whether National Front leader Marine Le Pen on the right or Jean-Luc Mélenchon’s Left Front.
Both parties are campaigning on an anti-euro, protectionist platform.
Sarkozy has adopted a statesmanlike pose, as befits the incumbent, warning voters of the hard grind to come, such as the need to work longer hours for lower hourly pay.
But selling to the French public painful structural change as the price to be paid for “Europe” no longer works.
Hollande’s program, meanwhile, implies that pain can be avoided altogether by loosening European constraints.
He has indicated that, if elected, he would re-negotiate the fiscal treaty and seek to alter the statutes of the European Central Bank – perhaps as an early sign of willingness to break with European orthodoxy.
He is also promising to emulate his predecessors by bringing Germany around to the French point of view – that is, use German fiscal transfers.
That way, France could hold onto its European project at a lower medium-term cost to domestic living standards.
This is the sort of trick that Hollande’s mentor, Mitterrand, was able to pull off.
But that was possible not because of Mitterrand’s superior wiles, but rather because France had a stronger position vis à vis Germany than it does today.
France’s response to the tension between preserving the European project (equated with the single currency) and avoiding a chronically depressed economy will be to put off the day of reckoning for as long as possible.
This dead-end strategy will feature vain attempts to game Germany and desperate economic expedients, such as the essentially coercive capture of domestic savings to finance government debt.
But the day of reckoning will come, and France’s ruling establishment will be judged harshly when it does.
The French Don’t Get It
CAMBRIDGE – The French government just doesn’t seem to understand the real implications of the euro, the single currency that France shares with 16 other European Union countries.
French officials have now reacted to the prospect of a credit rating downgrade by lashing out at Britain.
The head of the central bank, Christian Noyer, has argued that the rating agencies should begin by downgrading Britain.
The finance minister, Francois Baroin, recently declared that, “You’d rather be French than British in economic terms.” And even the French Prime minister, Francois Fillar, noted that Britain had higher debt and larger deficits than France.
French officials apparently don’t recognize the importance of the fact that Britain is outside the eurozone, and therefore has its own currency, which means that there is no risk that Britain will default on its debt.
When interest and principal on British government debt come due, the British government can always create additional pounds to meet those obligations.
By contrast, the French government and the French central bank cannot create euros.
If investors are unwilling to finance the French budget deficit – that is, if France cannot borrow to finance that deficit – France will be forced to default.
That is why the market treats French bonds as riskier and demands a higher interest rate, even though France’s budget deficit is 5.8% of its GDP, whereas Britain’s budget deficit is 8.8% of GDP.
There is a second reason why the British situation is less risky than that of France.
Britain can reduce its current-account deficit by causing the British pound to weaken relative to the dollar and the euro, which the French, again, cannot do without their own currency.
Indeed, that is precisely what Britain has been doing with its monetary policy: bringing the sterling-euro and sterling-dollar exchange rates down to more competitive levels.
The eurozone fiscal deficits and current-account deficits are now the most obvious symptoms of the euro’s failure.
But the credit crisis in Europe, and the weakness of eurozone banks, may be even more important.
The persistent unemployment differentials within the eurozone are yet another reflection of the adverse effect of imposing a single currency and a single monetary policy on a heterogeneous group of countries.
President Nicolas Sarkozy and other French politicians are no doubt unhappy that the recent European summit failed to advance the cause of further EU political integration.
It was French officials Jean Monnet and Robert Schuman who launched the initiative for European political union just after World War II with the call for a United States of Europe.
The French regarded the creation of the euro as an important symbol of progress toward that goal.
In the 1960’s, Jacques Delors, then the French finance minister, pressed for a single currency with a report, “One Market, One Money,” which implied that the European free-trade agreement would work only if its members used a single currency.
For the French, achieving a European political union is a way to increase Europe’s role in the world and France’s role within Europe.
But that goal looks harder to reach now than it did before the beginning of the European crisis.
By attacking Britain and seeking to increase British borrowing costs, France is only creating more conflict between itself and Britain, while creating more tensions within Europe as a whole.
Looking ahead, stopping the eurozone financial crisis does not require political union or a commitment of German financial support.
It depends on individual eurozone countries – especially Italy, Spain, and France – making the changes in their domestic spending and taxation that will convince global financial investors that they are moving toward budget surpluses and putting their debt-to-GDP ratios on a downward path.
France should focus its attention on its domestic fiscal problems and the dire situation of its commercial banks, rather than lashing out at Britain or calling for political changes that are not going to occur.
The French Death Rattle
PARIS – Moody’s announcement in November that it had downgraded France’s sovereign-credit rating by one notch from its AAA rating prompted one blogger to poke fun at rating agencies’ tendency either to get things completely wrong or to recognize suddenly a crisis that had long been staring them in the face.
The blogger joked, “If this recognition by a rating agency that France has problems is an example of the first failing, a recovery must have begun; if it is an example of the second failing, the country faces a dire reckoning.”
French President François Hollande’s government claims to have awoken to the threat.
In a recent interview, Finance Minister Pierre Moscovici likened the measures being undertaken to reduce the country’s debt burden and restore competitiveness to a “Copernican revolution...because these choices were not clear for a French government or for a center-left government.”
As proof of this new realism, the government has been trumpeting its response to the set of policy recommendations that an expert panel led by the business executive Louis Gallois presented two weeks before the downgrade.
The response is centered on a payroll-tax cut, which will be offset by spending cuts and a higher value-added tax.
In the run-up to the downgrade, an analyst at Moody’s said that the decision would be based largely on whether the government heeded the Gallois report’s call for a “competitiveness shock” to France’s economy.
The downgrade thus suggests that Moody’s considered the government’s response insufficient.
In fact, this negative verdict barely scratches the surface of France’s predicament.
The full picture emerges only after examining the motivations behind the government’s inadequate response.
The underlying explanation lies in the culture and prejudices of France’s governing elite, the so-called grands commis formed by the National Civil Service School of which Hollande – like virtually all of his predecessors, except Nicolas Sarkozy – is an alumnus.
In this cloistered world, a prosperous and just society requires a state-directed economy.
This dedication to dirigisme has spawned among the ruling elite a sense of entitlement and hostility to business.
Indeed, for France’s political leaders, business amounts to a zero-sum competition to capture a higher share of total value added for owners and managers, at the expense of labor.
Criticism of this anti-business approach is usually dismissed in France as “ultra-liberal” flailing against the “social model” that the French nation has embraced.
But the example set by Scandinavian countries, which combine a generous welfare state with pro-business policies and traditions, repudiates such claims.
The main difference between the failing French model and the more successful Scandinavian approach lies not in welfare “outputs” (many public services in France, such as the health-care system, remain among the best in the world), but in how they are financed.
The Scandinavian social compact rests on the understanding that citizens must pay high taxes in exchange for public services.
While French public spending – which stood at 56% of GDP in 2011 – is at or above Scandinavian levels, French households pay lower tax rates on consumption and personal income.
The gap is bridged by a mixture of deficit spending and high taxation on employment.
Relentless government borrowing and high payroll taxes (employer-paid social security) have long sustained citizens’ illusion that they are getting something for nothing, while perpetuating successive governments’ misconception that taxing business is a painless way of financing welfare and public services.
But it is increasingly apparent that this approach has undermined public finances and competitiveness – and that households end up picking up the tab.
(In fact, chronically high unemployment has meant that they have been doing so for years.)
Now, citizens are facing higher taxes and cuts to public services.
Defenders of the French system quibble over labor-cost statistics in their efforts to prove that France is not so different from its main European trading partners.
But the facts of the last decade – including a significant loss of export-market share and a 5%-of-GDP deterioration in the current-account balance – paint a different picture.
Moreover, this line of defense misses the point.
The burden of payroll taxes, together with overweening labor-market regulation, stifles entrepreneurship.
If Hollande’s tax hikes – on income (including a temporary 75% tax rate for the country’s wealthiest households), dividends, capital gains, and capital assets – are not enough to deter entrepreneurs, the cost of hiring workers and the difficulty of firing them remain powerful disincentives.
Far from signifying a pro-business shift, Hollande’s government’s response to the Gallois report reflects the French elite’s enduring interventionist mentality.
Instead of implementing deep and permanent cuts in payroll taxes on businesses, the government will give companies a €20 billion ($26 billion) income-tax credit over the next two years.
And, with companies required to apply the rebated cash to investment and job creation, the government has portrayed the measure as a cut in taxes on labor that will boost employment.
But a temporary tax break cannot change incentives.
Furthermore, companies will not receive the cash until 2014-2015, owing to the complexity of France’s tax administration.
And, when they do get it, the state cannot possibly know that reinvesting in the same enterprise will be more beneficial than, say, paying out dividends that shareholders could then use to finance a new venture.
Once again, French lawmakers are acting on the conviction that they know better than market participants.
Apart from promises to reduce employment regulation, all of the new measures boil down to officials directing state money and subsidies to companies and projects of their choosing.
So the death rattle of the French economic model continues.
What remains to be seen is how the end will come.
And, whether it comes in the form of a capital strike by foreign bondholders, or of domestic labor strikes and wider social and political unrest, France’s leaders remain entirely unprepared for the inevitable.
The Front Line of Democracy
BENGHAZI – This week, I flew to Benghazi to meet Libya’s Transitional National Council (TNC), a visit coordinated with European Union High Representative Catherine Ashton and NATO allies.
I was the first Western foreign minister to travel to Libya since the crisis began.
What I saw reminded me of my country 20 years ago, just after Poland’s first free elections, which, together with the fall of the Berlin Wall barely six months later, came to symbolize the Cold War’s end.
Peoples in transition from authoritarian rule – peaceful in Poland in 1989, bloody in Libya today – grapple with decisions that determine their fate for decades.
How should the former regime’s worst wrongdoers and security police, with their insidious archives, be treated?
Should the former ruling party be banned?
How can civilian, democratic control of the army and police be secured?
What role should religion play in public affairs?
Should the constitution establish a presidential or parliamentary system?
The former communist world made those choices 20 years ago.
But very different choices – for better and for worse – were made in Poland, Hungary, and Czechoslovakia, in the Baltic states, across the former Soviet Union, in Central Asia, and in East Germany.
The results form a crucial database of experience.
Today’s Arab reformers thus can draw on our successes – and avoid our mistakes.
We central Europeans knew the misery of communism.
Yet we knew what we wanted to replace it with – a system based on modern European democratic market values.
Building democratic structures requires time, discipline, pain, and patience.
But it pays off.
In July, Poland will assume the EU presidency for the first time; we have earned this responsibility to lead European affairs over the next six months.
Poland learned the hard way that demanding change and defying oppression are much less difficult than formulating and delivering a clear, reasonable program for a better future.
Not all popular demands for freedom succeed: in the confusion, reactionary forces can make their move.
The fall of the Shah in Iran had ruinous consequences for that country.
Belarus won independence in 1991, but, since 1994, President Alexander Lukashenko has shamelessly embraced communist symbols – and methods – to cling to power.
Europe has unfinished business here.
Today, across North Africa, millions of people are demanding a voice in their own destiny.
Each country is looking to change and move forward.
In Morocco, the King has announced constitutional reforms, including guarantees for public participation in national decision-making, an independent judiciary, and new regional authorities.
This measured, inclusive reform can be a model for others.
And reformers in the Arab world have had tremendous support from Qatar, which has provided an example of strong leadership, particularly in Libya, but also through the news channel Al Jazeera – a real force for change in the region.
Libya is experiencing a deadly struggle between people insisting on change, and a desperate, greedy regime determined to cling to power after 40 years of crass misrule.
The United Nations Security Council, supported by the Arab League, has authorized the use of all necessary means to protect Libyans from the cruelty of their own leaders.
Our NATO allies launched proportionate military operations aimed at denying Col. Muammar Qaddafi’s regime the means to attack civilian targets.
Governments worldwide have frozen illicit assets stashed abroad by the regime – money that should be used to help the opposition to build a new society.
I went to Benghazi to assess the intentions and credibility of the Transitional National Council and Libyan opposition.
We brought medical supplies for the Benghazi Medical Center, where injured people from Misurata and elsewhere are being treated.
Around the table sat improbable allies: some had been prominent officials in Qaddafi’s regime; others had spent many years in prison under sentence of death.
They were united in recognizing that their country deserved a new start.
I was reminded of Poland’s “roundtable” in 1989, when Solidarity sat with the ruling communists to negotiate the end of the regime.
I talked frankly with TNC Chairman Mustafa Abdul Jalil, Deputy Chairman Abdul Hafez Ghoga, and TNC Defense Minister Jalal Dheili, himself a former political prisoner.
They were grateful for the international community’s involvement, but described in moving terms the huge loss of life that Qaddafi had inflicted on his own people.
I told them that we considered the TNC to be our new legitimate political interlocutors in Libya and were ready to support them, but that in return we expected the TNC to work towards the best standards of transparent democratic government.
They had to realize that they need a plan – revolutionary moments are moments to be seized.
Poland would help by offering training for TNC officials.
Following this visit, my message to European leaders is twofold.
First, Libya’s TNC is the best bet we can make now for Libya’s future.
Its leaders are cooperating in an effort to bring about real reform in a way that was unthinkable a few months ago.
They deserve the world’s energetic support.
Second, while Europe has much to offer its North African neighbors in terms of financial support, advice, and training, the region needs to find its own path to freedom and success.
Let us approach this task in the best spirit of European solidarity, but also with a certain humility.
Europe’s former communist countries can make a special contribution to the process of transition across North Africa.
Above all, we understand that sustained reform requires assuming responsibility by mobilizing the energy of one’s own people, not relying on well-intentioned but often ill-focused outside help.
Poland is ready to lead the way, on its own and as EU President.
For example, former President Lech Wałesa recently visited Tunisia to offer advice as part of a Polish program to help Tunisia devise robust constitutional reforms and election laws.
North Africa’s people know what they don’t want – and won’t accept.
But they are struggling to identify what they do want, and how to build it.
As I saw in Benghazi, there is a fair chance that Libya’s emerging leaders will be good, realistic partners for good realistic policies.
The Fukushima Syndrome
BIRMINGHAM – The dramatic events that unfolded at Japan’s Fukushima Daiichi nuclear-power plant after last year’s tsunami are commonly referred to as “the Fukushima disaster.”
We need look no further than this description to begin to understand the significant misconceptions that surround nuclear energy.
It was the tsunami, caused by the largest earthquake ever to strike Japan, that killed more than 16,000 people, destroyed or damaged roughly 125,000 buildings, and left the country facing what its prime minister described as its biggest crisis since World War II.
Yet it is Fukushima that is habitually accorded the “disaster” label.
In fact, although what happened was shocking, the events in the hours and days after a giant wave slammed over the nuclear plant’s protective seawall might be interpreted as a remarkable testament to nuclear power’s sound credentials.
To be sure, the environmental impact on those living close to Fukushima may take many years to remediate.
But the response in many quarters – not least in Germany, Switzerland, and other countries that immediately condemned and retreated from nuclear energy – once again typified an enduring lack of knowledge concerning two fundamental issues.
The first is safety; the second is radiation.
We need to promote a much more inclusive and informed dialogue about both if nuclear power is to be assessed on its genuine merits, rather than dismissed on the grounds of little more than ignorance and intransigence.
Would the many people who would ban nuclear power also prohibit air travel?
After all, the parallels between the two industries are central to the question of safety.
We are often told that air travel, statistically speaking, has a better safety record than any other form of transport.
The numerous interrelated reasons for this might usefully be summarized by comparing an airplane to a bicycle.
We all appreciate that an airplane is a sophisticated device, and that a bicycle is not.
We also acknowledge that the consequences of an airplane crash are liable to be far more catastrophic than, say, those of a cyclist clipping a curb on his way home from the shops.
Accordingly, designing and manufacturing an airplane is many times more demanding and thorough than designing and assembling a bicycle is.
The same can be said of the approximately 450 nuclear reactors around the world.
The fact is that the industry’s safety record is second to none when measured against those of its rivals.
Like airplanes, nuclear reactors are conceived and constructed to mind-boggling standards.
For all of the tension and fear surrounding the fight against a nuclear meltdown at Fukushima, we should not forget that the plant – and with it the notion of a nuclear-energy industry – was subjected to an extraordinary test, in the strictest sense of the word.
Were it not for some design flaws that would not be repeated today, Fukushima might well have survived intact – and history would be so different.
Indeed, nuclear energy is a safer proposition now than ever before, but, for many people, the mere spectacle of an event like Fukushima – regardless of the outcome – is sufficient to draw the opposite conclusion.
If a 747 crashed into a nuclear facility, we would be unlikely to hear calls for all airplanes to be outlawed, but the clamor for every reactor on the planet to be shut down immediately would probably be deafening.
Remember, too, that Fukushima was built in the 1970’s, and that the technology on which it was based dated from a decade earlier.
Its successors are radically different in how they work, as is the regulatory framework, which sets astonishing new benchmarks for the care and quality required at every stage of the process.
The case against nuclear power is deeply rooted in concerns over safety in general and radiation in particular.
The Fukushima accident, having reinforced too many opinions and reshaped too few, makes it vital that we try to bring clarity to these issues – especially in those countries, including the United Kingdom, where the notion of a sustainable energy policy remains undetermined.
While we know the corollaries of high levels of radiation exposure, what happens at the other end of the scale is less clear.
The world is full of radioactivity – walls, concrete, even bananas contain traces – and our bodies have adapted to it.
In countries like Brazil and India, people live in environments that have 20-200 times the radiation commonly found in the UK, apparently with no negative genetic effects.
Some experts even argue that we may need a degree of radioactivity to stimulate our immune systems.
Of course, there remain concerns around the vital issues of waste disposal and proliferation.
Again, consensual debate is required.
But that requires formulating a roadmap that tells us where we stand and what we must do.
We need to create the necessary culture of dialogue within industry and academia.
And we need to encourage people to think and reflect more.
Above all, we need to enhance the public’s grasp of the energy sector as a whole.
Currently, there is too much “I know” and “This is what I firmly believe,” frequently from influential people, in cases where there is no incontestable right or wrong.
Fukushima is one of them.
It is still not too late – not quite – to start couching the broader discussion of nuclear energy in language that will inform rather than alarm, and in terms that will nurture well-balanced judgments rather than entrench long-held biases.
The Fusion Myth
France is now rushing to construct the International Thermonuclear Experimental Reactor, (ITER), which is supposed to show that nuclear fusion can be used to power nuclear power stations.
ITER is often presented as the long-term solution to the problem of global warming, because nuclear fusion can provide an infinite and clean source of energy.
But ITER will do nothing of the sort.
In the fission reactions that nuclear power generation relies on today, heavy elements such as uranium break into smaller ones, while in nuclear fusion small elements such as hydrogen stick together and form heavier elements (helium).
Both fission and fusion produce a lot of energy.
Some political leaders explain that nuclear fusion is at work in the sun, and that, thanks to ITER, we will harness it.
They often add that, since fusion burns hydrogen, which can be found in seawater, it is an infinite source of energy.
Unfortunately, political leaders know little about the scientific issues involved.
That nuclear fusion is a source of energy has been known since the invention of the hydrogen bomb.
But its control is still a fundamental challenge for research institutes, not some minor technical difficulty that can be easily overcome.
Confining a little sun inside a box is an extremely difficult task for three main reasons.
First, the nuclear fuel is not seawater, but a mixture of the two heavy isotopes of hydrogen, deuterium and tritium, a radioactive element that has been produced in small quantities for hydrogen bombs.
Any development of fusion reactors would require producing tritium with industrial methods that have yet to be invented.
Second, the deuterium-tritium fusion reaction starts at around 100 million degrees.
To achieve this requires using a magnet to accelerate a plasma that is a big flame of deuterium and tritium nuclei.
This must be done in a ultra-high vacuum in a large chamber.
ITER is not designed to produce electricity, but to study the stability of the flame in the magnet.
Since the fusion reactions produce alpha particles, which pollute the plasma, one has to insert a “divertor” inside the flame at 100 million degrees in order to clean it.
Nobody has ever accomplished this, but ITER may be able to try around 2030 – that is, if it solves the previous problem.
Third, fusion also emits neutrons that will produce helium gas bubbles inside the wall material, which tends to explode.
The supporters of ITER explain that if the walls are porous, the bubbles can escape.
But nothing can be both leak-proof and porous, and ITER is not designed to study this contradiction.
In the future, a “blanket” should be inserted between the plasma and the walls, with two objectives: to protect the outer walls and to produce tritium from nuclear reactions within a circulating fluid containing lithium.
This might work, but the first wall of the blanket will need to be not only leak-proof and porous, but also sufficiently permeable to neutrons, which have to hit the lithium atoms beyond it.
The problem of materials is an entire research field in itself.
In order to study it, it has been decided to build the International Fusion Materials Irradiation Facility (IFMIF) in Japan.
Some scientists have argued that the neutron irradiation in IFMIF won’t be the same as in fusion reactors, but it should be noted that its cost, at one billion euros, will be one-tenth that of ITER.
So why can’t we wait for IFMIF’s results before building ITER?
It all depends on one’s budget.
If ITER could really solve the planet’s energy problem, €10 billion would be a negligible investment – less than the net profit of the oil company TOTAL (€13 billion in 2006) and equivalent to ten days of waging the war in Iraq.
But if fusion is ever to work in industrial power stations, it will take many decades.
Even if ITER is successful, and if one solves the tritium and material problems, everything would need to be tested in real size, and only then could a first prototype of an industrial reactor be built.
A drastic reduction of CO2 emissions is an urgent priority, but fusion is unlikely to produce sufficient energy to achieve that goal before the twenty-second century.
In fact, ITER is a big instrument for fundamental research, so its €500 million Euros annual cost needs to be compared with similar scientific initiatives, such as the European Organization for Nuclear Research (CERN), which costs one billion Swiss francs per year.
In my opinion, searching for the fundamental structure of particles is far more important than studying the stability of a plasma.
In France, the contribution to ITER is more than all the available funding for research projects in all our physics laboratories.
So the danger is that ITER will squeeze out funding for other vital research.
We already have the bad example of the International Space Station, a waste of $100 billion that has produced no scientific results.
ITER will not solve our energy problem.
Although it has some scientific interest in plasma physics, the participating countries should clearly state that funding it won’t affect the rest of their research efforts.
At the same time, the international community should support research on energy saving and storage, and accelerate the development of fourth-generation nuclear reactors, which will use fission and be both clean and durable.
The Future of China’s Growth
BEIJING – The slowdown of China’s economy has captured the headlines in recent weeks.
Whether it is a permanent or temporary adjustment, the Chinese authorities have much work to do in laying the groundwork for strong economic performance in the medium and long term.
Despite extraordinary growth since the start of its transition to a market economy in 1979, China is facing serious challenges simultaneously: rising inequality, large and growing levels of environmental degradation, stubborn external imbalances, and an aging society.
Fortunately, China’s 12th Five-Year Plan (2011-2015) recognizes the need to deepen market-oriented reform, change the country’s development model, and focus on the quality of growth, structural reforms, and social inclusion to overcome the rural-urban divide and stem the rise in income inequality.
In line with this bold, long-term approach, a new report, China 2030: Building a Modern, Harmonious, and Creative High-Income Society, proposes reforms that my country needs to develop a mature, well-functioning market economy by 2030.
The report is the result of a longstanding China-World Bank partnership.
Commemorating the 30th anniversary of China’s membership, World Bank President Robert B. Zoellick proposed to the country’s leaders a joint effort to identify and analyze China’s medium-term development challenges.
China 2030 calls for structural reforms that would redefine the role of government, overhaul state-owned enterprises and banks, develop the private sector, promote competition, and deepen liberalization of the land, labor, and financial markets.
While providing relatively fewer tangible public goods and services directly, the Chinese government will need to provide more intangible public goods and services like rules, standards, and policies.
Such policies and institutional improvements increase productivity, promote competition, facilitate specialization, enhance the efficiency of resource allocation, protect the environment, and reduce risks and uncertainties.
In the enterprise sector, the focus will need to be on increasing competition in all sectors, reducing barriers to entry and exit for private companies, and strengthening state-owned enterprises’ competitiveness.
In the financial sector, the banking system must be commercialized, thereby gradually allowing interest rates to be set by market forces, while capital markets must be deepened in tandem with the development of the legal and supervisory infrastructure needed to ensure financial stability.
In the labor market, China needs to accelerate reforms of the hukou (household registration) system to ensure that, by 2030, workers can move more freely in response to market signals.
Currently, anyone who moves to another part of the country without a hukou risks losing access to education, social services, and the housing market.
China’s policymakers also need to introduce measures to increase labor-force participation rates, rethink wage policy, and make social-insurance programs portable nationwide.
Finally, farmers’ rights need to be protected, the efficiency of land use must be increased, and policies for acquisition of rural land for urban use should be overhauled.
China’s medium-term success will also require creating an open system in which competitive pressures encourage Chinesecompanies to engage in product and processinnovation, not only through their ownresearch-and-development efforts, but also through participationin global Rampamp;Dnetworks.
The priority is to increase the quality of Rampamp;D, rather than just its quantity.
Policymakers will need to focus on increasing the technical and cognitive skills of university graduates, and on building a few world-class research universities with strong links to industry.
An enlightened strategy must encourage China to “grow green,” as opposed to growing rapidly now and facing massive environmental costs later.
Encouraging new investments in low-pollution, energy- and resource-efficient industries would lead to greener development, spur investments in related upstream and downstream manufacturing and services, and build an international competitive advantage in a global sunrise industry.
China 2030 also calls for expanding opportunities, promoting social security, and reducing the country’s relatively high social and economic inequality by addressing the rural-urban disparities in access to jobs, finance, and high-quality public services.
Doing so will require greater sustained attention to underserved rural areas and migrant populations, and to restructuring social policies in order to ensure secure safety nets.
Moreover, it is vital to strengthen China’s fiscal positionby mobilizing additional revenues and ensuring that local governments have adequate financing to meet their rising expenditure responsibilities.
Such reforms can help to ensure that budgetary resources are available at different levels of government (central, provincial, prefectural, county, township, and village), and are commensurate with expenditure responsibilities.
Last but not least, China should become a proactive stakeholder in the global economy.
By continuing to intensify its global trade, investment, and financial links, which have served it well over the past three decades, China would benefit from further specialization, increased investment opportunities, and higher returns to capital, as well as mutually beneficial flows of ideas and knowledge.
China must remain committed to resuscitating the stalled Doha Round of multilateral trade negotiations, and support a global agreement on investment flows.
Global integration of China’s financial sector will require opening the capital account, which will have to be carried out steadily and with considerable care; but it will be a key step toward internationalizing the renminbi as a global reserve currency.
The proposals contained in China 2030 could provide a framework for Chinese policymakers as they seek to achieve their goal of sustainable and harmonious growth.
With the global economy entering a dangerous phase, China’s government will need to respond to new risks, shocks, and vulnerabilities as they arise.
But, in doing so, it should adhere to the principle that policy responses to short-term problems must uphold, not undermine, long-term reform priorities.
The Future of Economic Growth
CAMBRIDGE – Perhaps for the first time in modern history, the future of the global economy lies in the hands of poor countries.
The United States and Europe struggle on as wounded giants, casualties of their financial excesses and political paralysis.
They seem condemned by their heavy debt burdens to years of stagnation or slow growth, widening inequality, and possible social strife.
Much of the rest of the world, meanwhile, is brimming with energy and hope.
Policymakers in China, Brazil, India, and Turkey worry about too much growth, rather than too little.
By some measures, China is already the world’s largest economy, and emerging-market and developing countries account for more than half of the world’s output.
The consulting firm McKinsey has christened Africa, long synonymous with economic failure, the land of “lions on the move.”
As is often the case, fiction best reflects the changing mood.
The émigré Russian novelist Gary Shteyngart’s comic novel Super Sad True Love Story is as good a guide as any to what might lie ahead.
Set in the near future, the story unfolds against the background of a US that has slid into financial ruin and single-party dictatorship, and that finds itself embroiled in yet another pointless foreign military adventure – this time in Venezuela.
All the real work in corporations is done by skilled immigrants; Ivy League colleges have adopted the names of their Asian counterparts in order to survive; the economy is beholden to China’s central bank; and “yuan-pegged US dollars” have replaced regular currency as the safe asset of choice.
But can developing countries really carry the world economy?
Much of the optimism about their economic prospects is the result of extrapolation.
The decade preceding the global financial crisis was in many ways the best ever for the developing world.
Growth spread far beyond a few Asian countries, and, for the first time since the 1950’s, the vast majority of poor countries experienced what economists call convergence – a narrowing of the income gap with rich countries.
This, however, was a unique period, characterized by a lot of economic tailwind.
Commodity prices were high, benefiting African and Latin American countries in particular, and external finance was plentiful and cheap.
Moreover, many African countries hit bottom and rebounded from long periods of civil war and economic decline.
And, of course, rapid growth in the advanced countries generally fueled an increase in world trade volumes to record highs.
In principle, low post-crisis growth in the advanced countries need not impede poor countries’ economic performance.
Growth ultimately depends on supply-side factors – investment in and acquisition of new technologies – and the stock of technologies that can be adopted by poor countries does not disappear when advanced countries’ growth is sluggish.
So lagging countries’ growth potential is determined by their ability to close the gap with the technology frontier – not by how rapidly the frontier itself is advancing.
The bad news is that we still lack an adequate understanding of when this convergence potential is realized, or of the kind of policies that generate self-sustaining growth.
Even unambiguously successful cases have been subject to conflicting interpretations.
Some attribute the Asian economic miracle to freer markets, while others believe that state intervention did the trick.
And too many growth accelerations have eventually fizzled out.
Optimists are confident that this time is different.
They believe that the reforms of the 1990’s – improved macroeconomic policy, greater openness, and more democracy – have set the developing world on course for sustained growth.
A recent report by Citigroup, for example, predicts that growth will be easy for poor countries with young populations.
My reading of the evidence leaves me more cautious.
It is certainly cause for celebration that inflationary policies have been banished and governance has improved throughout much of the developing world.
By and large, these developments enhance an economy’s resilience to shocks and prevent economic collapse.
But igniting and sustaining rapid growth requires something more: production-oriented policies that stimulate ongoing structural change and foster employment in new economic activities.
Growth that relies on capital inflows or commodity booms tends to be short-lived.
Sustained growth requires devising incentives to encourage private-sector investment in new industries – and doing so with minimal corruption and adequate competence.
If history is any guide, the range of countries that can pull this off will remain narrow.
So, while there may be fewer economic collapses, owing to better macroeconomic management, high growth will likely remain episodic and exceptional.
On average, performance might be somewhat better than in the past, but nowhere near as stellar as optimists expect.
The big question for the world economy is whether advanced countries in economic distress will be able to make room for faster-growing developing countries, whose performance will largely depend on making inroads in manufacturing and service industries in which rich countries have been traditionally dominant.
The employment consequences in the advanced countries would be problematic, especially given an existing shortage of high-paying jobs.
Considerable social conflict could become unavoidable, threatening political support for economic openness.
Ultimately, greater convergence in the post-crisis global economy appears inevitable.
But a large reversal in the fortunes of rich and poor countries seems neither economically likely, nor politically feasible.
The Future of Europe
CAMBRIDGE – In the first half of the last century, Europe tore itself apart in two wars and destroyed its central role in world politics.
In the second half of the century, farsighted leaders looked beyond revenge and gradually constructed the institutions of European integration.
The thought of France and Germany fighting each other again seems impossible, and the development of the European Union has greatly enhanced Europe’s attractiveness and soft power in the world.
Unfortunately, that historic achievement is now being called into question.
In May 2010, financial markets lost confidence in the ability of Greece to manage its budget deficit and to repay its debt.
Fears of default began to affect other countries, such as Portugal and Spain, among the 16 members of the eurozone.
In response, European governments, the European Central Bank, and the International Monetary Fund arranged a €700 billion emergency eurozone rescue program to calm the financial storms.
While that intervention provided a temporary respite, uncertainty persists in financial markets.
Last month, German Chancellor Angela Merkel declared that, if the euro fails, “then not only the currency fails….Europe will fail, and with it the idea of European unity.”
European unity already faces significant constraints.
Fiscal integration is limited.
National identities remain stronger than a common European identity, despite six decades of integration, and national interests, while subdued in comparison to the past, still matter.
The enlargement of the EU to include 27 states (with more to come) means that European institutions are likely to remain sui generis, and unlikely to produce a strong federal Europe or a single state.
Legal integration is increasing, and European Court verdicts have compelled member countries to change policies.
But legislative- and executive-branch integration has lagged, and, while Europe has created a president and a central figure for foreign relations, foreign and defense policy remains only partly integrated.
Over the decades, Europe has alternated between excessive optimism and bouts of “Euro-pessimism” such as the current period.
As the journalist Marcus Walker recently put it, Europe “was supposed to come of age as an actor on the world stage, bolstered by the Lisbon Treaty.
Instead, Europe is starting to look like the loser in a new geopolitical order dominated by the US and emerging powers led by China.” A “seminal image,” according to Walker, was the meeting on December 18, 2009, that brokered the modest Copenhagen Accord – a meeting led by the US and the Chinese, who invited the leaders of India, Brazil, and South Africa, but no Europeans.
And now the recent financial crisis has exposed the limits of fiscal integration in the eurozone and raised questions about the role and future of the euro.
What is the future of Europe?
As The Economist has noted, “talk of Europe’s relative decline seems to be everywhere just now….You may hear glum figures about Europe’s future weight and with some reason.
In 1900, Europe accounted for a quarter of the world’s population.
By 2060, it may account for just 6% – and almost a third of these will be more than 65 years old.”
Europe does face severe demographic problems, but size of population is not highly correlated with power, and predictions of Europe’s downfall have a long history of failing to materialize.
In the 1980’s, analysts spoke of Euro-sclerosis and a crippling malaise, but in the ensuing decades Europe showed impressive growth and institutional development.
The EU’s approach to sharing power, hammering out agreements, and resolving conflict by multiple committees can be frustrating and lacks drama, but it is increasingly relevant for many issues in a networked and interdependent world.
As Mark Leonard, Director of the European Council on Foreign Relations, has put it, “The conventional wisdom is that Europe’s hour has come and gone.
Its lack of vision, divisions, obsession with legal frameworks, unwillingness to project military power, and sclerotic economy are contrasted with a United States more dominant even than Rome…But the problem is not Europe – it is our outdated understanding of power.”
The American political scientist Andrew Moravcsik makes the similar argument that European nations, singly and collectively, are the only states other than the US that are able to “exert global influence across the full spectrum from ‘hard’ to ‘soft’ power.
Insofar as the term retains any meaning, the world is bipolar, and is likely to remain so over the foreseeable future.”
Moravcsik argues that the pessimistic prognosis is based on a nineteenth-century realist view in which “power is linked to the relative share of aggregate global resources and countries are engaged in constant zero-sum rivalry.” Moreover, as he points out, Europe is the world’s second military power, with 21% of the world’s military spending, compared to 5% for China, 3% for Russia, 2% for India, and 1.5% for Brazil.
Tens of thousands of troops from the EU’s member states have been deployed outside of their home countries in Sierra Leone, Congo, Ivory Coast, Chad, Lebanon, and Afghanistan.
In terms of economic power, Europe has the world’s largest market, and represents 17% of world trade, compared to 12% for the US.
Europe also dispenses half of the world’s foreign assistance, compared to 20% for the US.
But all this potential strength may be to no avail if Europeans do not solve the immediate problems stemming from financial markets’ loss of confidence in the euro.
All who admire the European experiment must hope that they succeed.
The Future of Facts
BUDAPEST – At a recent conference of newspaper editors in which I took part, a small crowd gathered to talk about journalism and new media.
When I told the group that I had begun my career as a magazine fact-checker, several of them grew misty-eyed, as if someone had told a group of priests about his childhood as an altar boy.
I brought up my past because I think that fact-checking is the single best training not just for journalism, but for life in general.
It teaches you to think skeptically.
It is easy to believe something when someone who appears knowledgeable asserts it.
But if you have a responsibility for checking facts, you listen more carefully.
On what sources does the speaker base his facts?
Is there something in it for him – a higher stock price, an advertising fee, or someone else’s gratitude?
Or is he simply biased because of the people he knows, the company he works for, or the attitudes he picked up at home?
I spent hours picking through sources – mostly dusty papers in the years before the Internet, or strangers on the telephone – to clarify questions of fact: Was this really the first such product?
Was Mr. Smith 42 or already 43?
Was his claim that revenues had grown for the last five years true merely because of acquisitions that his company had made?
And so on.
My life was ruled by tk – which stands for “to kum,” or “to come,” in the jargon of reporters.
We fact-checkers would joke about the lazy reporters who would hand us copy such as, “Juan Tigar, tk years old, grew up in tk before studying at tk.
Now tk title at Widgets Corp., he…” Our job was to fill in the tk’s.
But we learned an enormous amount.
We learned not just thousands of facts that I have since forgotten, but an attitude of skepticism coupled with reverence for the truth.
That attitude contrasts with the skepticism I once heard from a Russian reporter about her early days on the job. “Whenever we read an article about the health dangers of butter, we would immediately run out and buy as much butter as we could find,” she told me.
“We knew it meant there was about to be a butter shortage.” In other words, Russians looked only for the agenda, the motivation behind the assertion.
Of course, spin, propaganda, and censorship persist in journalism, but with one big difference: Almost anyone can now operate as a reporter.
How can we ensure that these self-nominated reporters respect the truth?
In the United States, the Federal Trade Commission has announced plans to require bloggers and celebrity endorsers to disclose gifts or payments from vendors and others seeking the bloggers’ positive comments online.
But what about other kinds of bias?
As the journalistic priesthood erodes and everyone can become a citizen reporter or commentator, regulating or training all would-be journalists is not the answer.
In line with the bottom-up, do-it-yourself ethos of the Internet, where people book their own flights, publish their own photos, and sell their own second-hand goods, it should be the users’ responsibility to do their own fact-checking.
This is not to say that journalists should not check their own facts (or that priests should not observe the tenets of their own religion).
But in the end, everyone has to become a better reader – more skeptical and more curious.
Why is this story getting so much attention?
Does this blogger ever say anything negative, or is she always talking about the great products she uses?
Does she have any kind of disclosures on her blog?
Why is this politician saying nice things about that politician?
What company does the product reviewer work for?
Governments can impose regulations, but in the end we will get the kind of journalism for which we ask.
If we ask for it, Web sites will offer not just content but reputation systems, so that contributors will have reputations as reliable sources (or not).
We should not outlaw anonymity (which has its uses), but we can ask for details about the people whose words we are reading.
Someone may legitimately want to remain anonymous, but we can draw our own conclusions about their reasons.
That much thinking may sound like a lot of work, but it is what is required of a responsible adult these days.
Compared to a century ago, more people spend less time laboring to ensure their physical existence.
But, in this increasingly confusing world, we need to spend a little more time laboring to ensure our own intellectual integrity – a task that we cannot outsource to governments or even to media.
Facts are holy, but not all media that claim to report them, “new” or old, can be trusted.
The Future of Ideological Conflict
WARWICK – The just-concluded French presidential election seemed to suggest that the old left-right divisions are as potent as they have ever been – and certainly in their birthplace.
But are they?
The modern political spectrum is an artifact of the seating arrangements at the French National Assembly after the revolution of 1789.
To the right of the Assembly’s president sat the supporters of King and Church, while to the left sat their opponents, whose only point of agreement was the need for institutional reform.
The distinction capitalized on long-standing cultural associations of right- and left-handedness with, respectively, trust and suspicion – in this case, of the status quo.
In retrospect, it is remarkable that this distinction managed to define partisan political allegiances for more than 200 years, absorbing both the great reactionary and radical movements of the nineteenth and twentieth centuries.
But the decline in voter turnout in most of today’s democracies suggests that this way of conceptualizing ideological differences may have become obsolete.
Some have even argued that ideologies and parties are irrelevant in an increasingly fragmented political landscape.
But one division that looms on the horizon could reinvent the right-left distinction for the twenty-first century: precautionary versus “proactionary” attitudes toward risk as principles of policymaking.
In social psychological terms, precautionary policymakers set their regulatory focus on the prevention of worst outcomes, whereas proactionary policymakers seek the promotion of the best available opportunities.
The precautionary principle is the better known of the two, and increasingly figures in environmental and health legislation.
It is normally understood as the Hippocratic Oath applied to the global ecology: above all, do no harm.
By contrast, the proactionary principle is associated with self-styled futurists, for whom being “human” is defined by our capacity to keep ahead of the game when taking calculated risks, whether by benefiting from success or learning from failure.
The difference between the two principles is most clearly apparent in their implications for the relationship between science and technology.
Precautionary policymakers invoke scientific uncertainty to curb technological innovation, whereas their proactionary counterparts encourage innovation as an extension of scientific hypothesis testing.
They also differ subtly over their conception of humans.
Precautionary types aspire to a “sustainable” humanity, which invariably means bringing fewer of us into existence, with each of us making less of an impact on the planet.
Those with a proactionary bent are happy to increase the planet’s human population indefinitely as nothing more or less than a series of experiments in living, regardless of outcomes.
Not surprisingly, conventional political and business leaders are not entirely comfortable with either group.
After all, precautionary policymakers would have business value conservation over growth, while the proactionary camp would have the state encourage people to transcend current norms rather than adhere to them.
A precautionary firm would look like a miniature version of today’s regulatory state, whereas a proactionary state would operate like a venture capitalist writ large.
But perhaps most conspicuously absent from both precautionary and proactionary thinking is the old welfare-state ideal – that we might procreate at will in a world where our offspring are assured a secure existence.
For all of their substantial disagreements, both sides dismiss this prospect as a twentieth-century fantasy that was only temporarily realized in Northern Europe for a few decades after World War II.
Lurking behind this dismissal is a sense that humanity itself is undergoing a massive transformation in its self-understanding.
However, that transformation is moving at once in two diametrically opposed directions, which I have called “Humanity 2.0.”
Precautionary types would reacquaint us with our humble animal origins, from which we have strayed for much too long, whereas exponents of the proactionary principle would expedite our departure from our evolutionary past.
At the very least, they would re-engineer our biology, if not replace it altogether with some intellectually superior and more durable substratum.
To be sure, the precautionary and proactionary principles remain relatively marginal to mainstream political discourse.
But they have the potential to shift the ideological axis by 90 degrees.
The right is currently divided into traditionalists and libertarians; the left into communitarians and technocrats.
In the future, I suggest, the traditionalists and the communitarians will form the precautionary pole of the political spectrum, while the libertarians and technocrats will form the proactionary pole.
These will be the new right and left – or, rather, down and up.
One group will be grounded in the earth, while the other looks toward the heavens.
The Future of Power
CAMBRIDGE – Global government is unlikely in the twenty-first century, but various degrees of global governance already exist.
The world has hundreds of treaties, institutions, and regimes for governing interstate behavior involving telecommunications, civil aviation, ocean dumping, trade, and even the proliferation of nuclear weapons.
But such institutions are rarely self-sufficient.
They still require the leadership of great powers.
And it remains to be seen whether this century’s great powers will live up to this role.
As the power of China and India increases, how will their behavior change?
Ironically, for those who foresee a tri-polar world of the US, China, and India at mid-century, all three of these states – the world’s most populous – are among the most protective of their sovereignty.
Some argue that our current global institutions are sufficiently open and adaptable for China to find it in its own interests to become what Robert Zoellick, president of the World Bank, once called a “responsible stakeholder.”
Others believe that China will wish to impose its own mark and create its own international institutional system as its power increases.
The countries of the European Union have been more willing to experiment with limiting state sovereignty, and they may push for more institutional innovation.
But it is unlikely that, barring a disaster like World War II, the world will witness “a constitutional moment” such as it experienced with the creation of the United Nations system of institutions after 1945.
Today, as a universal institution, the UN plays a crucial role in legitimization, crisis diplomacy, peacekeeping, and humanitarian missions, but its very size has proven to be a disadvantage for many other functions.
As the 2009 UN climate-change summit in Copenhagen demonstrated, meetings of 192 states are often unwieldy and subject to bloc politics and tactical moves by largely extraneous players that otherwise lack the resources to solve functional problems.
As US Secretary of State Hillary Clinton put it recently, “the UN remains the single most important global institution…but we are constantly reminded of its limitations….The UN was never intended to tackle every challenge; nor should it.”
Indeed, the main dilemma that the international community faces is how to include everyone and still be able to act.
The answer is likely to lie in what Europeans have dubbed “variable geometry.”
There will be many multilateralisms and “mini-lateralisms,” which will vary by issue with the distribution of power resources.
For example, on monetary affairs, the Bretton Woods conference created the International Monetary Fund in 1944, and it has since expanded to include 186 countries.
But the dollar’s global pre-eminence was the crucial feature of monetary cooperation until the 1970’s.
After the weakening of the dollar and President Richard M. Nixon’s decision to end its convertibility into gold, in 1975 France convened leaders of five countries in the library of the Chateau de Rambouillet to discuss monetary affairs.
The group soon grew to seven, and later broadened in scope and membership – including Russia and a vast bureaucratic and press apparatus – to become the G-8.
Subsequently, the G-8 began the practice of inviting five guests from the emerging economies.
In the financial crisis of 2008, this framework evolved into the G-20, which boasts a more inclusive membership.
At the same time, the G-7 continued to meet on a narrower monetary agenda; new institutions, such as the Financial Stability Board, were created, while bilateral discussions between the US and China played an increasingly important role.
As one experienced diplomat put it, “if you’re trying to negotiate an exchange-rate deal with 20 countries or a bailout of Mexico, as in the early Clinton days, with 20 countries, that’s not easy.
If you get above 10, it just makes it too darn hard to get things done.”
He’s right, of course.
After all, with three countries, there are three bilateral relationships; with ten, there are 45; and with 100 players, there are nearly 5,000.
That is why, on issues like climate change, the UN will continue to play a role, but more intensive negotiations are likely to occur in smaller groups such as the Major Economies Forum, where fewer than a dozen countries account for 80% of greenhouse gas emissions.
Much of the work of global governance will rely on formal and informal networks.
Network organizations (such as the G-20) are used for setting agendas, building consensus, coordinating policy, exchanging knowledge, and establishing norms.
As Anne-Marie Slaughter, Director of Policy Planning in the US State Department, argues, “the power that flows from this type of connectivity is not the power to impose outcomes.
Networks are not directed and controlled as much as they are managed and orchestrated.
Multiple players are integrated into a whole that is greater than the sum of its parts.”
In other words, the network provides power to achieve preferred outcomes with other players rather than over them.
To cope with the transnational challenges that characterize a global information age, the international community will have to continue to develop a series of complementary networks and institutions that supplement the global framework of the UN.
But if major countries are divided, it is unlikely that even network organizations like the G-20 can set the agenda for the UN and the Bretton Woods financial institutions to act upon.
In the immediate aftermath of the 2008 financial crisis, the G-20 seemed to help governments to coordinate their actions and avoid rampant protectionism.
The world waits anxiously to see how it will perform when it meets again in Seoul this November.
The Future of the Dollar
CAMBRIDGE – American economic policy aims for a dollar that is strong at home and competitive abroad.
A strong dollar at home means a dollar that retains its purchasing power, thanks to a low rate of inflation.
A competitive dollar abroad means that other countries should not implement policies that artificially depress the value of their currencies in order to promote exports and deter imports.
The goal of a strong dollar at home has guided the Federal Reserve at least since Paul Volcker crushed inflation in the early 1980’s.
Although the United States does not have a formal inflation target, financial markets understand that the Fed aims for an inflation rate close to 2%.
And, while the law mandates the Fed to ensure sustainable growth as well as low inflation, monetary officials recognize that sustainable growth requires price stability.
For decades, US Treasury officials have insisted that “A strong dollar is good for America.” But that slogan has never been a guide to official US action in international markets.
The Treasury does not intervene in currency markets to bolster the dollar, and the Fed does not raise interest rates for that purpose.
Instead, the US stresses to foreign governments that an effective global trading system requires not only the removal of formal trade barriers, but also the absence of policies aimed at causing currency values that promote large trade surpluses.
In recent years, countries around the world have accumulated very large volumes of foreign exchange, topped by China with more than $2 trillion, but including hundreds of billions of dollars held by Korea, Taiwan, Singapore, India, and the oil-producing countries.
Most of these funds are now invested in dollar securities.
The US dollar is and will remain these countries’ major investment currency, reflecting the depth of the US capital market and the relatively favorable outlook for US government policies.
These large foreign-exchange reserves are no longer held to buffer temporary trade imbalances.
While some of the funds serve that purpose and must be held in the most liquid form, most of these large holdings are investment funds that will be managed to balance risk and return.
That means that, over time, these governments will seek to diversify their portfolios, moving away from the current dominance of dollar investments.
The euro is now the primary alternative to the dollar.
While the turmoil in Europe and the uncertain future of the euro have caused a pause in the shift from dollars to euros, the rebalancing in favor of euros will resume at some point in the future.
Countries with large reserves are now overweight dollars, and their effort to balance risks will cause the value of the euro to rise again relative to the dollar.
Several other currencies now have minor shares in those portfolios, and will continue to do so in the future.
The major risk to the sustained role of the dollar is the large and growing US national debt.
After varying between 25% and 50% of GDP for the past half-century, the recent budget deficits have caused the debt to reach 62% of GDP.
The official non-partisan Congressional Budget Office predicts that the policies that now seem most likely could push the debt to 100% of GDP by the end of the decade.
Foreign investors might therefore fear that future US administrations will be tempted to reduce the real value of that debt by allowing a higher inflation rate.
But that is unlikely, given the Fed’s general anti-inflationary consensus and the very short average maturity – roughly four years – of the national debt.
Higher inflation would cause the interest rate on new debt to rise in a way that prevents the erosion of the real value of the total debt.
But foreign investors, who hold nearly half of the US government’s debt now – and are likely to hold an even larger share in the future – could still have reason to worry that the US might someday try to reduce the value of its debt in a way that adversely affects them but not Americans, or that affects all debt holders but relieves the foreign-debt burden on American taxpayers.
This need not mean outright default; a plan to repay principal and interest with low-interest securities rather than cash – or to withhold income tax on interest earned from government bonds, crediting those taxes against the obligations of American taxpayers – would achieve the same result.
While such policies are extremely unlikely, fear of such possibilities could cause foreign investors to shun the dollar.
The current policies and those proposed in the government’s recent budget would cause the national debt to rise rapidly, but those policies are not inevitable.
The best protection of the dollar’s future role – and of the health of the US economy – will be policies that reduce the growth of the national debt.
The Future of the Japan-US Alliance
Cambridge – Many analysts currently detect malaise in Japan about its alliance with the United States.
Some of this relates to North Korea’s nuclear weapons and a concern that the US will not adequately represent Japan’s interests (such as accounting for Japanese citizens abducted by North Korea years ago.)
Other issues concern the basing of US marines in Okinawa and sharing the costs of moving some to Guam.
The list is long, but they might best be thought of as “housekeeping” issues: many a couple can quarrel over them without contemplating divorce.
There is a deeper level of concern, however, which relates to Japan’s fear of being marginalized as the US turns toward a rising China.
For example, some Japanese complain that China receives far more attention than Japan in the American election campaign.
Such anxiety is not surprising: US and Japanese defense capabilities are not symmetrical, and that is bound to agitate the more dependent party.
Over the years, various suggestions have been made with a view to making the alliance more symmetrical, including that Japan become a “normal” country with a full panoply of military capabilities, even nuclear weapons.
But such measures would raise more problems than they would solve.
Even if Japan implemented them, they would still not equal the capacity of the US or eliminate the asymmetry.
It is worth noting that during the Cold War, America’s European allies had similar anxieties about dependency and abandonment, despite their own military capabilities.
The real guarantee of American resolve to defend Japan is the presence of US troops and bases, and cooperation on issues – such as ballistic missile defense – aimed at protecting both Americans and Japanese.
Moreover, there are two good answers to the question of whether the US would abandon Japan in favor of China: values and threat.
Japan and the US, unlike China, are both democracies, and they share many values.
In addition, both Japan and the US face a common challenge from China’s rise and have a strong interest in ensuring that it does not become a threat.
The US regards a triangular Japan-China-US relationship as the basis of stability in East Asia, and wants good relations between all three of its legs.
But the triangle is not equilateral, because the US is allied with Japan, and China need not become a threat to either country if they maintain that alliance.
On the other hand, China’s power should not be exaggerated.
A recent poll indicates that one-third of Americans believe that China will “soon dominate the world,” while 54% see its emergence as a “threat to world peace.”
To be sure, measured by official exchange rates, China is the world’s fourth largest economy, and it is growing at 10% annually.
But China’s income per capita is only 4% that of the US.
If both countries’ economies continue to grow at their current rates, China’s could be larger than America’s in 30 years, but US per capita income will still be four times greater.
Furthermore, China’s lags far behind in military power, and lacks America’s “soft power” resources, such as Hollywood and world-class universities.
China’s internal evolution also remains uncertain.
It has lifted 400 million people out of poverty since 1990, but another 400 million live on less that $2 per day.
Along with enormous inequality, China has a migrant labor force of 140 million, severe pollution, and rampant corruption.
Nor has its political evolution matched its economic progress.
While more Chinese are free today than ever before in Chinese history, China is far from free.
The danger is that Party leaders, trying to counter the erosion of communism, will turn to nationalism to provide ideological glue, which could lead to an unstable foreign policy – including, for example, conflict over Taiwan.
Faced with such uncertainty, a wise policy combines realism with liberalism.
By reinforcing their alliance, the US and Japan can hedge against uncertainty while at the same time offering China integration into global institutions as a “responsible stakeholder.”
The greatest danger is that an escalating fear of enmity in the three countries becomes a self-fulfilling prophecy.
In that sense, the US-Japan alliance rests on deeply rooted joint interests.
There is a new dimension to the alliance, however, and to the relationship with China. This year, China surpassed the US as the world’s largest emitter of greenhouse gases.
China argues, correctly, that it is still behind the US and Japan in per capita emissions, but this does not reduce the costs imposed on the world (including Japan and the US).
A cooperative program that helps China to burn its coal more cleanly is in the interests of all three countries.
In general, transnational threats such as climate change or pandemics can cause damage on a scale equivalent to military conflict.
(In 1918, avian flu killed more people than died in World War I).
Responding to such threats requires cooperation, soft power, and non-military instruments, and this is an area in which Japan is a much more equal and important ally.
If anything, the new and growing dimension of transnational threats, when added to traditional security concerns, makes the future of the Japan-US alliance look more promising than ever.
The Future(s) of Civil Aeronautics
HAMPTON, VIRGINIA -- Civil aeronautics is in the midst of becoming a “mature” industry, with all the drawbacks that this entails.
For decades, technological advances have been essentially incremental, and the industry remains largely based on long-haul transport aircraft, with an emerging small jet component and a legacy of general aviation markets and products.
But it has become increasingly clear that the industry cannot survive in this form.
The problems bedeviling the industry include pollution from emissions, increasing competition (particularly from communications technology, which has made business travel less necessary), air traffic control delays and inefficiencies, expanding noise restrictions, safety and security concerns, and an overall business environment highly dependent on fuel prices.
Solutions for all of these problems will probably require a complete reinvention of airplane technology.
The greatest hope is to be found in the ongoing information, Bio-, Nano-, Energetics, and Quantum technology revolutions.
The IT revolution and associated “swarm” technologies enable the foremost solution: a “digital airspace” that is wholly automatic in terms of air traffic control, navigation, and vehicle operations.
Automatic aircraft operation is already becoming commonplace – especially in the military – but further increases will require a similarly automatic airspace.
A digital airspace would in turn enable a complete revolution in personal mobility.
Together with new technologies enabling Super-Short Takeoff and Landing (superSTOL) a digital airspace would put safe, quiet, affordable, street-in-front-of-your-house personal air vehicles within sight.
So-called flying HumVee’s (high mobility multipurpose wheeled vehicles) would create a superb transportation system for areas lacking intercity roads, and eventually would supplement – or perhaps supplant – automobiles.
The variety of machines currently under study is accessible at www.roadabletimes.com .
The estimated worldwide market for such vehicles is in the range of $1 trillion, and their use would erode the scheduled domestic airline customer base by enabling 300 kilometer “commutes” and providing huge cost avoidance for roads and bridges.
Nevertheless, even given eventual development of an affordable, safe, fly/drive, airport-independent personal transportation system, there would still be a need to re-invent long-haul transport, especially for transoceanic flights.
The current machines of this genre are direct descendants of the Boeing 707, and, after many decades of evolutionary improvement, this design approach simply lacks the scope to address the many problems that must be solved.
There are several alternatives, such as the blended wing body and strut/truss braced wings, which offer major potential increases in lift-to-drag ratio and improvements in structural weight fraction.
Such improvements in these parameters would provide design margins to address most of the current problems, with the exception of emissions.
The issue of water emissions can be addressed by designs that enable long-haul aircraft to cruise below 9,000 meters.
Such designs could be enabled by using circulation control for high lift and employed at cruising altitude for ride quality.
The resulting STOL (short takeoff and landing) performance could also improve airport productivity.
On the other hand, emissions of carbon dioxide can be reduced simply by using biofuels, made from plants whose carbon dioxide “price” was paid via uptake of the very same gas from the atmosphere during their growth.
Reductions of other greenhouse gases, such as nitric oxide, are attainable through clever combustor design.
Given the number and severity of problems currently plaguing civil aeronautics, the conventional approach of evolutionary changes to current paradigms is no longer sufficient.
Instead, the industry must re-invent itself.
With the advent of a digital airspace, and with appropriate research support, success would be both possible and likely.
The G-20’s Empty Gestures
CAMBRIDGE – The world’s 20 most important finance ministers and 20 most important central bankers traveled to Washington this month from every part of the globe to accomplish, predictably, exactly nothing.
The subject of the G-20’s recent meeting was “global imbalances.”
According to the communiqué issued by the group, the meeting focused on developing a procedure for identifying which G-20 countries have “persistently large imbalances” and why they have them.
This delicate analytical task was assigned to the International Monetary Fund, which is to complete its work before the ministers’ next meeting in October.
It hardly takes a team of IMF economists to answer these questions.
Anyone who has taken a first-year undergraduate course in economics would have no difficulty in identifying the countries with the largest trade surpluses and deficits.
The United States wins first prize with a trade deficit of more than $650 billion in the most recent 12 months.
No other country comes close enough to be awarded second prize.
The broader current-account indicator (which includes trade in services and net investment income) confirms America’s leading role: its external deficit is nearly $500 billion.
No other country has more than a $100 billion current-account deficit.
Even if we look at current-account deficits relative to countries’ GDP, America’s 3.3% ratio exceeds that of almost every other economy.
The three countries with larger deficit-to-GDP ratios have a combined deficit of less than $70 billion – not enough to warrant the G-20’s attention.
The country with the largest current-account surplus is, no surprise, China, with a positive balance of more than $300 billion.
Japan and Germany are the only other countries whose current-account surpluses exceed $100 billion.
China’s current-account surplus is 4% of its GDP.
Several oil producers have larger relative current-account surpluses that, combined, exceed China’s in absolute terms.
And there are several other European and Asian countries with higher relative current-account surpluses that together exceed that of China.
But the G-20’s decision to focus only on member countries that account for more than 5% of its combined GDP will exclude these smaller countries from the spotlight.
Only China and the US, and perhaps Germany and Japan, will be at center stage.
So much for the not-so-difficult task of identifying the countries with big imbalances.
But what about the causes of those imbalances?
Every student of economics knows that a country’s current-account deficit is the difference between its national investment (in business equipment, structures, and inventories) and its national saving (by households, businesses, and government).
That is not a theory or an empirical regularity.
It is an implication of the national income-accounting definitions.
The US has an enormous current-account deficit because the federal government’s dissaving (i.e., the fiscal deficit) drags down America’s overall national saving.
And the reverse is true for the Chinese, German, and Japanese current-account surpluses.
In each of those countries, the level of national saving exceeds domestic investment, leaving output to be exported and funds to be loaned abroad.
So the policy actions needed to reduce the trade and current-account imbalances are clear enough.
The US must raise its national saving rate by shrinking its budget deficit, which currently stands at nearly 10% of GDP.
Fortunately, the desirability of doing so is now clear to every policymaker in Washington and to most of the American public.
It will begin to happen as the massive “fiscal stimulus” enacted in 2009 comes to an end, the political process begins to deliver spending cuts, and economic growth yields more tax revenue.
When President Barack Obama attends the G-20’s summit of heads of state in Cannes in November, he will no doubt agree to further reductions in the US budget deficit.
But that will be an empty promise: the US president has far less control over legislation than government heads in parliamentary democracies like Britain or in countries like China.
And Obama’s power is even more limited now that his Democratic Party controls only one house of the US Congress.
The history of previous summits suggests that the president will promise in Cannes only what he has already proposed at home.
The G-20 ministers and central bankers are, of course, in no position to change the behavior of either the US or China, whose recently adopted five-year plan makes clear that it will reduce national saving by increasing consumer spending and raising government outlays for services like health care.
In other words, China will, for its own domestic reasons, reduce its current-account surplus.
The same kind of national self-interest that is driving the Chinese to stimulate domestic spending was at work when the G-20 leaders met in London in April 2009 and agreed to take steps to stimulate their economies.
That agreement was easy to achieve, since it was in each country’s interest to expand demand.
The G-20 only ratified what was going to happen anyway.
But the G-20 leaders and finance ministers nonetheless now point with pride to what they “accomplished” in London.
The same is likely to happen over the next few years as the US reduces its fiscal deficit and thereby shrinks its current-account deficit while China reduces its national saving and thereby shrinks its current-account surplus.
The leaders of the G-20 will no doubt claim credit for this achievement.
Perhaps that is why they like to meet.
The G-20’s Empty Promises
CAMBRIDGE – Talk about “exit strategies” will be high on the agenda when the heads of the G-20 countries gather in Pittsburgh a few days from now.
They will promise to reverse the explosive monetary and fiscal expansion of the past two years, to do it neither too soon nor too late, and to do it in a coordinated way.
These are the right things to promise.
But what will such promises mean?
Consider first the goal of reversing the monetary expansion, which is necessary to avoid a surge of inflation when aggregate demand begins to pick up.
But it is also important not to do it too soon, which might stifle today’s nascent and very fragile recovery.
But promises by heads of government mean little, given that central banks are explicitly independent of government control in every important country.
The US Federal Reserve’s Ben Bernanke, the Bank of England’s Mervyn King, and the European Central Bank’s Jean-Claude Trichet will each decide when and how to reverse their expansionary monetary policies.
Bernanke doesn’t take orders from the US president, and King doesn’t take orders from the British prime minister (and it’s not even clear who would claim to tell Trichet what to do).
So the political promises in Pittsburgh about monetary policy are really just statements of governments’ confidence that their countries’ respective monetary authorities will act in appropriate ways.
That will be particularly challenging for Bernanke.
Although the Federal Reserve is technically independent and not accountable to the President, it is a creation of the US Congress and accountable to it.
Because of the lagged effects of monetary policy and the need to manage expectations, early tightening by the Fed would be appropriate.
But the unemployment rate could be over 9% – and possibly even more than 10 – when it begins to act. If so, can we really expect Congress not to object?
In fact, Congress might tell the Fed that it should wait until there are clear signs of inflation and a much lower unemployment rate.
Because Congress determines the Fed’s regulatory powers and approves the appointments of its seven governors, Bernanke will have to listen to it carefully – heightening the risk of delayed tightening and rising inflation.
Reversing the upsurge in fiscal deficits is also critical to the global economy’s health.
While the fiscal stimulus packages enacted in the past two years have been helpful in achieving the current rise in economic activity, the path of future deficits can do substantial damage to long-run growth.
In the US, the Congressional Budget Office has estimated that President Barack Obama’s proposed policies would cause the federal government’s fiscal deficit to exceed 5% of GDP in 2019, even after a decade of continuous economic growth.
And the deficits run up during the intervening decade would cause the national debt to double, rising to more than 80% of GDP.
Such large fiscal deficits would mean that the government must borrow funds that would otherwise be available for private businesses to finance investment in productivity-enhancing plant and equipment.
Without that investment, economic growth will be slower and the standard of living lower than it would otherwise be.
Moreover, the deficits would mean higher interest rates and continued international imbalances.
In contrast to monetary policy, the US president does have a powerful and direct impact on future fiscal deficits.
If the presidential promise to reduce the fiscal deficit was really a commitment to cut spending and raise taxes, we could see today’s dangerous deficit trajectory be reversed.
Unfortunately, Obama shows no real interest in reducing deficits.
The centerpiece of his domestic agenda is a health-care plan that will cost more than a trillion dollars over the next decade, and that he proposes to finance by reducing waste in the existing government health programs (Medicare and Medicaid) without reducing the quantity and quality of services.
A second major policy thrust is a cap-and-trade system to reduce carbon emissions.
But, instead of raising revenue by auctioning the emission permits, Obama has agreed to distribute them without charge to favored industries in order to attract enough congressional votes.
Add to this the pledge not to raise taxes on anyone earning less than $250,000 and you have a recipe for large fiscal deficits as long as this president can serve.
I hope that the other G-20 leaders do a better job of reining in their budgets.
Finally, there is the G-20’s promise to reduce monetary and fiscal excesses in an internationally coordinated way.
While the meaning of “coordinated” has not been spelled out, it presumably implies that the national exit strategies should not lead to significant changes in exchange rates that would upset existing patterns of trade.
In fact, however, exchange rates will change – and need to change in order to shrink the existing trade imbalances.
The dollar, in particular, is likely to continue falling on a trade-weighted basis if investors around the world continue to set aside the extreme risk-aversion that caused the dollar’s rise after 2007.
Once the Chinese are confident about their domestic growth rate, they can allow the real value of the renminbi to rise.
Other exchange rates will respond to these shifts.
In short, it would be wrong for investors or ordinary citizens around the world to have too much faith in G-20’s promises to rein in monetary and fiscal policies, much less to do so in a coordinated way.
The G-20’s New Thinking For the Global Economy
NEW YORK – The Seoul G-20 summit was notable for the increasing political weight of the emerging economies.
Not only was it located in one, but, in many ways, it was also dominated by them.
In two crucial areas, macroeconomics and global economic development, the emerging economies’ view prevailed.
And an excellent proposal to link the two agendas – macroeconomics and development – emerged from the summit, and should be implemented in 2011.
A key feature of the world economy today is that it is running at two speeds.
The United States and much of Europe remain mired in the aftermath of the financial crisis that erupted in the fall of 2008, with high unemployment, slow economic growth, and continuing bank-sector problems.
Emerging markets, however, have generally surmounted the crisis.
Whereas 2009 was a tough year for the entire global economy, emerging markets bounced back strongly in 2010, while rich countries did not.
Recent data from the International Monetary Fund’s World Economic Outlook tell the story.
During 2010, high-income countries are expected to achieve modest annual GDP growth of around 2.7%, while the G-20’s emerging economies, together with the rest of the developing world, are expected to grow at a robust 7.1% rate.
Asia’s developing economies are soaring, with 9.4% growth.
Latin America is expected to grow at 5.7%. Even sub-Saharan Africa, the traditional laggard, is expected to grow at 5% in 2010.
This two-speed global economy largely reflects the fact that the 2008 financial crisis began with over-borrowing by the rich countries themselves.
Two high-income economies got themselves into trouble.
The US, where consumers – assisted by reckless lending to non-creditworthy households – had borrowed heavily to buy houses and cars, was the main culprit.
The periphery of the European Union – Ireland, Portugal, Spain, and Greece – also began a borrowing binge a decade ago, upon joining the euro, fueling a real-estate boom that likewise went bust.
Emerging economies, for the most part, avoided this disastrous over-borrowing. One reason, certainly, was the vivid memory in Asia of the 1997 financial crisis, which underscored the need for limits on bank borrowing and capital inflows.
By and large, Asian emerging economies were more prudently managed during the past decade.
The same can be said about Brazil, which learned from its own crisis in 1999, as well as Africa and other regions.
In the run-up to the Seoul summit, the US government put forward a proposal that the surplus regions of the world should increase their domestic demand – mainly consumption – to boost imports and thereby help the deficit regions (including the US) to recover.
The G-20’s emerging economies were not impressed. Their answer was straightforward: the crisis began with US over-borrowing, so it is America’s responsibility, not theirs, to clean up the mess.
The US should cut its budget deficit, increase its saving rate, and generally get its own house in order.
The emerging economies reacted similarly to a second US initiative, the Federal Reserve’s so-called “quantitative easing.”
Emerging economies once again spoke nearly in unison.
They told the US not to boost the money supply artificially, as this would create the risk of yet another financial bubble, this time in the emerging economies and in commodity markets.
Once again, the clear message to the US was to stop using gimmicks like fiscal stimulus or printing money and instead undertake a serious longer-term economic restructuring to boost saving, investment, and net exports.
For their part, emerging economies wanted to change the subject from short-term macroeconomic stimulus and imbalances to longer-term development issues.
The host government, South Korea, was especially dynamic here.
South Korea called on the G-20’s members to focus on challenges such as meeting the United Nations’ Millennium Development Goals, raising agricultural production, and building sustainable infrastructure in developing economies.
This was the first time that long-term development issues had been put so clearly on the G-20 agenda, and it is a sign of the growing geopolitical weight of the group’s emerging-market members.
The result of the deliberations is a new framework for the G-20’s engagement with the rest of the developing countries, known as the Seoul Development Consensus for Shared Growth. The G-20 rightly decided to focus on those areas of the global development agenda where the major economies have a comparative advantage: financing of infrastructure such as roads and power; business development; and support for agricultural upgrading in the poorer countries.
Other parts of the development agenda – for example, health and education – will not be the G-20’s focus.
The new G-20 development agenda offers an excellent way to merge concerns about global imbalances with the need to accelerate the pace of development in the poorer countries.
The US has been pushing China, Germany, Japan, and others to raise consumption in order to boost demand.
But there is a better way to put these surplus countries’ high saving rates to use.
Rather than pushing their households to consume more, the G-20 should work harder to channel these savings to the poorest countries in order to finance urgently needed investments in infrastructure.
India’s Prime Minister Manmohan Singh put the matter perfectly.
He noted that sub-Saharan Africa is now in a position to absorb more capital inflows to build infrastructure.
He recommended that G-20 surpluses be recycled to those countries, and to other poor countries, to finance such investments. “In other words,” said Singh, “we should leverage imbalances of one kind to redress imbalances of the other kind.”
By channeling the savings of China, Germany, Japan, and other surplus countries into infrastructure investments in the poor countries, the world’s economies truly would be working in harmony.
The G-20 Seoul Summit may well have initiated that important process.
The G-20’s Next Test
BRUSSELS – The G-20 meetings this month, first in Busan, South Korea for finance ministers, and later this month in Toronto for heads of government, mark the moment when the major players in the world economy shift gear from budgetary stimulus to retrenchment.
Not everyone is in agreement about this.
Before the Busan meeting, United States Treasury Secretary Tim Geithner warned against “a generalized, undifferentiated move to pull forward consolidation plans,” and emphasized the need to “proceed in step with the strengthening of the private-sector recovery.” But the other finance ministers did not echo Geithner’s warnings.
Instead, they emphasized the “importance of sustainable public finances” and the need for “measures to deliver fiscal sustainability.” Gone is the stress on cautious, gradually phased-in exit strategies; the search for a rebalancing was almost unnoticeable in the meeting’s communiqué.
This change affects Europe first and foremost.
Shortly before the Busan meeting, the countries of southern Europe announced major consolidation efforts in the hope of soothing debt markets.
Soon after this, British Prime Minister David Cameron announced “years of pain ahead,” German Chancellor Angela Merkel outlined a $100bn retrenchment plan, and French Prime Minister François Fillon a similar $80bn plan. .
The advanced countries face a dismal budgetary situation, with deficits averaging 9% of GDP in 2009 and the prospect of public-debt ratios rising from roughly 70% of GDP prior to the crisis to more than 100% of GDP in 2015.
According to IMF calculations, to reach a 60% debt ratio in 2030 would require a budgetary adjustment of almost nine percentage points of GDP on average between 2010 and 2020.
While some countries in the past undertook adjustments of similar magnitude, a generalized consolidation of this sort is without precedent.
How painful will the adjustment be?
In the past, some countries have enjoyed tearless consolidation, because the launch of a retrenchment program was accompanied by a drop in long-term interest rates, a decline in private savings, or a surge in exports thanks to exchange-rate depreciation (or all of these at the same time).
But conditions today are characterized by low interest rates and high private debt, so none of these are likely to help, except possibly for exchange-rate effects.
Indeed, depreciation has already started for Europe, and many observers consider the euro’s fall, from 1.5 dollars in late 2009 to 1.2 dollars in recent days, sufficient to offset in the short term the retrenchment’s negative impact on growth.
But this can work only as long as the US does not follow suit and continues to serve as consumer of last resort.
This may not happen.
Even if the US further postpones retrenchment, the US Congress is unlikely to tolerate an appreciation of the US dollar that makes European exporters more competitive and shifts the burden of sustaining the recovery onto US consumers.
More importantly, increasingly nervous bond markets will at some point start questioning the sustainability of US public finances.
The US fiscal position is no better than that of major European countries like Germany, France, or the United Kingdom; in fact, it is worse.
It is only because the EU is fragmented, so markets started off by questioning the solvency of the weakest countries within it, and because Europe does not benefit from a safe-haven effect that it was the first to suffer the pressure.
Fortunately, the public-finance situation is entirely different in the developing world, which in some cases has been hit by capital-flow reversals stemming from the collapse of world trade, but does not face an internal adjustment challenge.
While domestic credit booms may be a threat in the future, emerging-market banks have mostly remained immune from the fallout of the financial crisis.
As a result, domestic non-financial sectors do not face the prospect of deleveraging.
More importantly, the fiscal challenge for these economies is of much lower magnitude than in the advanced world; in fact, it barely exists.
The starting points are a 40% public debt-to-GDP ratio and an average budget deficit that, as a share of GDP, is four percentage points lower than in the advanced world.
Against the background of much faster potential growth, only a minor effort is needed to keep the debt ratio around the 40% level.
So, what if Europe and the US both enter a phase of prolonged budgetary adjustment while the emerging world stays on course?
What if the divergence between the North and South within the G-20 widens further?
Four consequences are likely.
First, there will be a significant drag on world growth.
Whatever the emerging world does to sustain domestic demand and reorient exports from advanced countries to other emerging countries, the European and US elephants (not to mention Japan) are just too big for their illness to have no effect on world growth.
Second, the growth differential between emerging and advanced countries will widen, which will in turn intensify flows of capital and skilled labor towards the developing world.
Third, the advanced countries will need monetary support, which implies low policy rates for years to come, while the monetary needs in the emerging and developing countries will be radically different.
This will inevitably make fixed exchange-rate links crack under pressure as the same monetary policy cannot possibly be appropriate for both regions.
Finally, instead of managing common challenges, as in 2009, the G-20 members will need to manage their divergence.
This will be a major test of resilience for an institution that demonstrated effectiveness in the crisis but still has to pass the test posed by this new phase in the global economy.
The Toronto summit will provide a first opportunity to assess the G-20’s ability to adapt to new conditions.
The G-8’s Broken Aid Promises
The Millennium Development Goals are the world’s agreed goals to cut poverty, hunger, and disease.
Established in 2000, their targets were to be met by 2015.
We are now at the halfway point.
So far, despite endless words about increasing aid to poor countries, the rich G-8 countries are reneging on their part of the bargain.
Cynicism abounds here.
At the G-8 Gleneagles Summit in 2005, member countries pledged to double aid to Africa by 2010.
Soon after the summit, I was invited to a small, high-level meeting to discuss the summit’s follow-up.
I asked for a spreadsheet showing the year-by-year planned increases, and the allocation of those planned increases across donor and recipient countries.
The response I received was chilling.
“There will be no spreadsheets.
The US has insisted on no spreadsheets.” The point was clear.
Though the G-8 had made a clear promise, there was no plan on how to fulfill it; indeed, there were clear instructions that there would be no such plan.
The G-8 is now reaping the consequences of its inaction.
For the first year after the Gleneagles meeting, aid numbers were padded by misleading accounting on debt cancellation operations.
With those debt cancellation operations largely completed, the data are now revealing the stark truth: development aid to Africa and to poor countries more generally is stagnant, contrary to all the promises that were made.
Specifically, between 2005 and 2006, overall aid to Africa, excluding debt cancellation operations, increased by a meager 2%.
In fact, total official development assistance to all recipient countries, net of debt cancellation, actually declined by 2% between 2005 and 2006.
Even the World Bank, which usually takes the donors’ point of view, recently acknowledged that except for debt cancellation, “promises of scaled up aid have not been delivered.”
Private reactions among senior government officials in the G-8 are surprising.
One senior G-8 official told me that the aid promises are all lies anyway.
I don’t agree with that, but the cynicism that such a view reflects is alarming. It shows the nature of discussions at the highest reaches of the G-8.
All this would seem to be insurmountable if the basic economics were not clear.
We are not talking about unachievable financial goals.
Indeed, the sum of money is minuscule.
The G-8, representing nearly one billion people, has promised to increase aid to Africa from $25 billion in 2004 to $50 billion in 2010 – a difference that represents less than one-tenth of one 1% of the income of the rich donor world!
To put it in perspective, the Christmas bonuses paid this year on Wall Street – just the bonuses – amounted to $24 billion.
Spending on the Iraq war, which achieves nothing but violence, is more than $100 billion per year.
So the G-8’s commitment could be honored, if rich countries cared to honor it.
To salvage its credibility, the G-8 needs to make crystal clear ­– once again – that it will honor its commitment to increase aid to Africa by $25 billion per year by 2010.
That way, cynics within the G-8 governments can understand their assignments.
Moreover, unlike in 2005, the G-8 needs to present a plan of action.
The lack of specific commitments by specific countries is a shocking display of governance at its poorest.
Finally, recipient countries need to be informed about the year-to-year increases in aid that they can expect, so that they can plan ahead.
The increased aid should be directed at building roads, power grids, schools, and clinics, and at training teachers, doctors, and community health workers.
All of that investment requires plans and years of implementation.
Aid cannot be a guessing game.
It must be committed in clear terms over a period of several years, so that recipients can use it in a sensible and accountable manner.
Admittedly, part of the problem with the G-8 is not simply lack of good faith or political will, but basic competence.
The US government doesn’t really know what it is doing in Africa, because over the years America’s aid agency has been largely emptied of its leading thinkers and strategists.
Moreover, the Bush administration politicized the delivery of aid by channeling it through private religious groups that are part of the administration’s political coalition.
That’s the reason that much of the US funding on AIDS follows religious strictures rather than science.
Fortunately, what needs to be done is not complicated.
African countries have already identified their high-priority investments in health, education, agriculture, and infrastructure (including roads, power, and internet connectivity).
These investments could be increased systematically during the period from now until 2015, in order to enable these countries to achieve the Millennium Development Goals.
The plans are already on the table, or at least on the shelf, waiting for the G-8 funding to arrive.
It’s time for the rich countries to stop giving lectures to the poor, and instead to follow through on their own words.
And G-8 citizens must hold their governments accountable for what they have pledged but not delivered.
The Gambler of North Korea
SEOUL – After a painstaking investigation, South Korea is pointing the finger of blame at North Korea for the sinking of its warship, the Cheonan, on March 26.
The debate about how to respond is complicated by the fact that the Cheonan’s sinking does not seem to be a stand-alone event, but was, instead, part of a change in North Korea’s general pattern of behavior. Indeed, North Korea has become increasingly bold and impetuous ever since Kim became ill (probably from a stroke) in August 2008.
In the past, top North Korean leaders tended to calculate carefully the costs and benefits when they acted to put pressure on the outside world.
And they were inclined to play only one of their “threat” cards at a time.
But in April and May 2009, they threw diplomatic caution to the wind, launching a long-range rocket (as well as various missiles) and conducting a second nuclear test – all in the space of several weeks.
As soon as the international community reacted, by adopting United Nations Security Council Resolution 1874, North Korea quickly shifted to a charm offensive aimed at the United States and South Korea.
The authorities released two American journalists and a South Korean worker whom they had seized in August 2009 on charges of violating North Korean law.
But when the North Korean regime realized that smile diplomacy did not get it whatever it was they wanted, the country’s rulers shifted back to hostility.
This time, the authorities froze South Korean real estate in the Geumgang Mountain tourist zone and, most seriously of all, attacked the Cheonan.
The regime even dispatched two spies to Seoul to assassinate Hwang Jang-yop, the highest-level North Korean official ever to defect to South Korea.
I believe that this change in North Korea’s pattern of behavior is profoundly related to recent fundamental changes there.
First, Kim Jong-il and his third son, Kim Jong-un, may have become much more confident as a result of North Korea’s emergence as a de facto nuclear state.
They seem to believe that possession of nuclear weapons provides them with far wider room for strategic and tactical boldness.
After all, they achieved what they wanted in defiance of enormous international pressure, and even succeeded in transferring nuclear technology to Syria several years ago without being punished.
Given such a run of successful gambles, why be timid?
The second change concerns Kim’s successor.
North Korea’s new boldness may reflect Kim Jong-il’s wish to polish the 26-year-old Kim Jong-un’s image as a strong and decisive leader.
Or, it may be that all of the provocations that have followed Kim Jong-il’s illness may be the work of Kim Jong-un himself.
In other words, the process of power transfer may be progressing much faster than anyone outside of North Korea has guessed.
Finally, long-term mismanagement and international sanctions have pushed the North Korean economy to the brink of collapse.
As a result, the regime may be trying to divert people’s attention from internal difficulties and push them to unite behind the emerging new leader.
The attack on the Cheonan may have been particularly useful in cementing the regime’s hold on the military, which felt disgraced by North Korea’s inept performance in a confrontation with the South Korean navy near the Northern Limit Line in the West Sea in November 2009. But, compared to the more fundamental factors discussed above, I believe that this is probably a secondary motive for the attack on the Cheonan.
The problem is that all three factors – nuclear-armed boldness, the succession, and economic malaise – will continue to influence North Korea’s behavior for the time being.
Without a strong and internationally coordinated response to the sinking of the Cheonan, such reckless provocations are not only likely to continue, but may become more frequent.
Thus, South Korea and the international community must respond firmly.
A joint South Korea-US military exercise near the Demilitarized Zone or a joint anti-submarine exercise at the Northern Limit Line should be considered.
A UN Security Council resolution denouncing North Korea’s brutal attack on the Cheonan must be an essential part of any international diplomatic response.
Making North Korea pay a high economic cost for its rash behavior should be considered as well.
All of these options are, however, short-term responses, and will likely be insufficient to bringing about any serious change in North Korea.
A more fundamental, long-term strategy is needed to face the new reality and achieve lasting peace on the Korean Peninsula.
One of the messages that Chinese President Hu Jintao delivered to Kim Jong-il at their bilateral summit on May 5 – concerning North Korea’s need to launch serious economic reform and open up to the world – has provided a clue as to how to move forward.
So far, the international community has focused mainly on the immediate concern of denuclearizing North Korea. But this is merely addresses the symptom, not the disease.
It is past time for the international community – particularly China, Russia, the US, Japan, and South Korea – to devote similar diplomatic effort to persuading and pressuring North Korea to reform and open its economy.
The world must develop a more carefully calibrated policy toward North Korea, one aimed at simultaneously implementing denuclearization and economic reform.
The added benefit of such an approach is that it is far more likely to gain Chinese support than today’s single-minded focus on denuclearization.
The Gangs of Central America
Central America’s presidents recently met in Tegucigalpa, Honduras, to devise a united policy to deal with the region’s rampaging street gangs.
Honduran President Ricardo Maduro, himself elected on a campaign slogan of Zero Tolerance, summed up their collective wisdom: “The gangs have internationalized and we are going to respond with force, with a strong hand.”
The problem of juvenile gangs in Central America is not new.
In El Salvador, the gangs became an issue at the end of the 1980’s; in Guatemala and Honduras, the gangs appeared in the first half of the 1990’s.
Since then, their membership has multiplied.
Most explanations of the gangs’ growth focus on two causes: the prolonged civil wars that savaged Central America during the 1980’s, and America’s deportation policies.
These theories, however, fail to reflect local realities.
Honduras, the country with the most serious gang problem, never had a civil war.
Nicaragua and Mexico, which receive many deportees from the United States, have never had the number of gang members seen in El Salvador and Guatemala.
There is no denying that the region’s civil wars and American deportations aggravate the gang crisis, but the fundamental reasons young men and women join gangs can be found in domestic social conditions.
Gang members emerge out of dysfunctional and violent families, the historic and systematic socioeconomic marginalization of the region’s poor, and a culture of aggression.
Gangs flourish because weak institutions fail to guarantee and respect the fundamental rights of children and young people.
True, such conditions exist throughout Latin America, but elsewhere they do not have the same potency.
Not even in Nicaragua, which shares many of the characteristics of the other countries of the region, have gangs become dedicated to killing and terrorizing the population in the way that they do in Guatemala, Honduras, El Salvador, and now in Chiapas, Mexico.
Part of the problem lies in how Central American governments confront the phenomena.
For many years, officials simply ignored the emerging gang problem.
They were more interested in the process of political transition and putting in place the Washington Consensus.
As a result, they disregarded social problems and devoted their energies to reforming their political and economic systems.
Far from strengthening social institutions, this lack of attention weakened them.
Sheltered by indifference, the gangs grew.
Officials saw increased crime as the natural cost of war, and many predicted that as young members matured, the gangs would disappear.
This hasn’t happened, and officials now acknowledge that they have a huge problem on their hands.
But it wasn’t increasing homicide rates that made officials pay attention; it was the realization that the violence hurt the region’s image abroad and made it difficult to attract foreign investment.
The response of the countries involved has been fragmented and repressive.
Plans with names like “Strong Hand” in El Salvador, “The Broom” in Guatemala, and “Blue Liberty” in Honduras have been created to deal with the problem, but all ignore prevention, overlook the social roots of the phenomena, and concentrate on applying force.
Instead of articulating policies to return fundamental rights to the region’s young people, Central American governments are preparing to wage war against gangs in the name of national security.
Such policies yield substantial political benefits: they help to win elections and attract the admiration and favor of the Bush administration.
Officials from America’s FBI and Department of Homeland Security have visited Central America to share experiences in combating gangs.
Still, this war on gangs, like the so-called war on drugs, is only making matters worse.
The gangs are now more organized in El Salvador because the authorities confine many of them in separate jails according to their specific group.
This gives each gang an opportunity to recruit new members among prison inmates, elect national leaders, and establish lines of authority and decision-making that are respected by all.
In Honduras, the gangs are more connected with organized crime, because the policy of cleaning the streets has pushed many gang members to align with drug traffickers for protection.
And now the gangs appear to be invading southern Mexico, because Central America’s repressive policies have sent many gang members running north.
Internationalizing the “strong hand” model across the region will incite the gangs to spread to Nicaragua and Costa Rica, which have so far been successful in preventing gang violence.
If we continue to ignore the social conditions that create gangs, their numbers will grow.
But the outlook for a new, sensible policy is not promising.
At the end of the summit of Central American presidents, El Salvador’s President Antonio Saca talked about a regional prevention plan.
Unfortunately, no one paid much attention to his idea.
The Gazpromization of European Energy Security
The term “energy security” in Europe has been hijacked to empower suppliers and weaken importers, implying a drastic reduction in competition, rising political vulnerability, and the erosion of the rule of law.
The fact that Russian President Vladimir Putin’s likely successor, Dmitry Medvedev, is Chairman of Gazprom leaves little doubt about the Kremlin’s determination to maintain an iron grip on the energy sector.
But the asymmetry in European Union-Russian energy relations must end.
Concerns in the EU over energy security, fueled by increasing dependence on Russia, have never been greater.
Together with the Russian authorities’ expropriation of oil company Yukos, foreigners have been squeezed out of Russia’s energy extraction sector.
Inevitably, many in Europe are questioning the value of the Kremlin’s word.
Rather than turning away, the EU should seek deeper engagement and reciprocity.
It should facilitate further incorporation of Gazprom into the EU market through market liberalization and downstream integration.
Yet it must also press for Gazprom’s ultimate restructuring and real market entry into Russia for European companies, because Russia’s unwillingness to do so guarantees energy insecurity for Europe.
Indeed, the Putin administration established a track record of bending rules and bullying foreign investors, with the support of prosecutors, tax authorities, regulatory agencies, and courts.
At the same time, Gazprom has evolved into the dominant market-maker in gas for Europe, and its actions have made a mockery of EU efforts at greater collaboration with Russia.
Gazprom strategy deploys three tactics: co-optation – cultivating partnerships with certain countries, political leaders, and corporations, as levers of its interests; preemption – using upstream power and Russian diplomacy to manipulate downstream conditions and scoop up assets; and disaggregation – dividing the EU through bilateral deals.
Gazprom’s co-optation of Europe has been achieved mainly through Germany, where its partnerships with energy companies and banks have helped align the authorities with Russian aims.
Extensive lobbying, directly and by proxy, is underway to persuade European regulators to allow long-term supply contracts in the EU – despite their deadening effect on competition.
Preemption by Gazprom has been accomplished through a raft of acquisitions.
Gazprom has flooded the market in Turkey, withheld gas in Ukraine, threatened to do so in Belarus, and offered preferential market access to willing partners, such as Italy.
In the Caucasus, the Kremlin has prevented Iran from establishing infrastructure to compete as a supplier of gas to Europe.
To stop Iran’s gas, Russia effectively bought Armenia’s entire energy sector, while its support for Iran’s nuclear program helps maintain Iranian isolation, keeping away the Western money Iran would need to become a rival gas exporter.
Gazprom’s dominance is reinforced by activities coordinated with the Kremlin to assert its influence in markets like Spain and Italy.
In exchange for gas deals with rival suppliers, such as Algeria, Russia has offered vast concessions on arms and preferential debt terms.
In other cases, the Kremlin acts punitively, as when it cut off oil supplies to Lithuania following the sale of the Mazeikiu Nafta refinery to a Polish company, or to Ukraine after its people voted for the “wrong” party.
The prime example of disaggregation is the Nord Stream pipeline, which appeals to Germany while angering Poland and the Baltic countries.
The undersea pipeline will cost three times as much as a new pipeline along existing land routes, undermines the energy security of Germany’s eastern neighbors, and threatens the Baltic Sea’s fragile ecosystem.
But, by delivering exports directly to Germany, Russia will be able to cut off gas to Ukraine, Poland, and the Baltic states without directly affecting West European supplies – and Russia’s recent behavior indicates that this is a real threat.
But Gazprom is worried about its upstream capabilities, as is evident from the decision to divert gas from its Shtokman field to Europe rather than liquify it for new North American markets.
As long as Gazprom remains opaque, Europe cannot know whether its key supplier is spending enough to develop future reserves.
The Kremlin’s political battle to win control of Russia’s energy sector has resulted in a dramatic reduction in the growth rate of domestic oil and gas production.
That is a problem for Europe.
Gazprom cannot be a partner to Europe if it does not invest in its own infrastructure, yet plays a leading role in stripping Russian private businesses, invests $14 billion in non-core assets, such as news media, and is run from the Office of the Presidential Administration.
The lights must not go out across Europe.
Brussels must demand transparency, symmetry, and the rule of law from Moscow, with the goal being a revolutionary integration of European and Russian energy markets.
Simultaneously, through the diversification of supply sources, massive investments in liquified natural gas (LNG), and a strong push in favor of the Nabucco pipeline and inter-connectors between the Mediterranean rim countries, Europe can move closer toward energy security.
The very downstream access Gazprom wants in Europe is the EU’s trump card.
The EU should tell Gazprom that access to Europe’s downstream assets is conditional on the reciprocal openness of Russia’s energy sector.
The result would be a welcome place in the European energy market for a Russia that is both trusted and respected by its international partners.
The Genetic Temptation
A gene for social skills, we are told, has now entered the fast growing Pantheon of genes "for" various human behaviors and dispositions--taking its place alongside genes for risk-taking, happiness, aggression, and sexual orientation, among others.
One gets the impression that we are well on the way to figuring ourselves out, and that we are far simpler than anyone imagined.
After all, adeptness at cocktail party conversation--or addiction to the cocktails--may be no less genetically determined than hair color.
Defining the role that genes play in behavior, however, is not so easy.
Many of the results of human studies are highly preliminary and do not actually identify a gene.
In fact, they cannot, for genetic experimentation on humans is impossible.
Even in animals whose genes are more easily studied and much better understood, such as Drosophila , the tiny fruit fly, there is no simple one-to-one correspondence between gene and behavioral trait.
Instead, a wide variety of genes influence each characteristic.
Fruit fly genes are surprisingly similar to ours--as they are to those of most other creatures.
Even many aspects of their behavior resemble our own.
For example, when training a fruit fly to prefer one odor to another in a simple learning task, it will remember better if trained at repeated intervals over a long time rather than in one intense session.
Fruit flies are not geniuses, but "cramming" works no better for them than it does for us.
Even more recently, scientists at the Neurosciences Institute in San Diego have shown that according to all essential definitional criteria, fruit flies sleep at night.
But those of us who study how genes affect behavior are humbled by the fruit fly's complexity.
Moreover, fruit flies exhibit this complexity under conditions in which "nurture" is kept constant--a condition that is never true of humans.
If the relationship between fruit fly genes and behavior is so complex, can it be any less so with humans?
The view that an individual gene could account for a complete biological trait is as old as genetics itself.
Whether describing genes for the color of flowers in pea plants or the shape of the fruit fly's wings, geneticists at the beginning of the last century believed that each gene governed one unique characteristic.
Soon, a few of the early geneticists, founders of the Eugenics movement, made the odious assertion that "licentiousness," "shiftlessness," and "criminality" could all be attributed to individual genes as well.
As time passed and scientific knowledge accumulated--much of it from the fruit fly--the true complexity of the relationship between genes and characteristics became clear.
By the 1920s, most geneticists had abandoned the idea of a single gene for each characteristic and were loath to ascribe human behavior solely to genes.
Those in the Eugenics movement remained hold-outs, convinced that the salvation of the human race would be found in limiting the birth-rate of those they deemed to be genetically "unfit."
We are now in the midst of an explosion of genetic information.
New technologies are uncovering more genes every day and comprehensive lists have been drawn up for worms, mice, and humans.
But these species' behavior, no less than that of the fruit fly, is the product of a vast array of genes, none of which acts in isolation.
Genes influence each other and are in turn influenced by the surrounding world.
The result is always a unique individual.
The reason for this is simple.
Any creature that reproduces sexually is made up of a unique combination of its species' gene set, which it inherits from its parents.
All humans, for example, have the same set of genes--the same genetic context--but not exactly the same versions of each gene. (The exceptions to this in any species are identical twins and clones.)
These slight variations are part of what makes each of us different from other members of our species.
The importance of genetic context has been shown in studies of behavioral mutants in fruit flies and mice.
The same mutation may have a strong effect in one genetic context but not in another.
Beyond genetics, all creatures experience a non-identical sequence of life events.
This is as true for genetically identical bacteria growing in a uniform environment as it is for a person living in Paris, Tokyo, Moscow or Buenos Aires.
Granted, the differences between any two Muscovites' experiences are greater than the differences between the experiences of any two bacteria in a test tube culture. But that is just the point.
Genetically identical bacteria represent an extreme case.
We expect them to be uniform.
So if contingency holds for them, then it certainly holds for us.
Genes enable life, but they clearly do not determine it.
So the real issue is not whether we humans are servants of our genes, but rather our infatuation with the idea that our behavior could so easily be explained and predicted.
Perhaps we should not be so eager to be relieved of the burden of reflection, evaluation, and choice--in short, of grappling with what lies at the true heart of our humanity.
The Geopolitical Consequences of the Financial Crisis
PRINCETON – Worried investors and policymakers are becoming obsessed with Great Depression analogies.
But the lesson of 1931 is only in part financial or economic. The 1931 crisis was so big and so destructive because it was a financial drama that played out on a geo-political stage.
Two surprising conclusions are emerging in today’s discussions, but only one has been fully digested.
First, big public sector action is needed. Second, such action is complicated because in a globalized world the need for assistance spans borders.
First, private sector solutions have been tried but have failed in a breathtakingly short space of time.
The most frequent consolation in this failure is that a really bad crisis is purgative.
Insolvent businesses close, bad loans are written off, and lenders can lend with new confidence again.
Hank Paulson, who came to America’s Treasury from the strongest US investment bank, Goldman Sachs, made the purgation gamble in allowing Lehman Brothers to go under. He argued that the US could not tolerate a bailout culture.
A firm denial by the government should be seen as a sign that most of the American economy is fundamentally sound, and that American financial markets are sophisticated enough to be able to identify sound business practices.
America’s Treasury Secretary in the Great Depression was also a titan of finance, Andrew Mellon. Mellon’s immediate conclusion in the face of the 1929 stock market panic has subsequently become notorious: “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate… purge the rottenness out of the system.”
It is already clear that the high risk bet of 2008 has not paid off, any more than it did in 1929. On the contrary, the failure to perform one rescue has made more rescues necessary: of AIG, of HBOS in Britain.  That is unlikely to be the end.  There are lists circulating of which institution is next on the ladder to fall off – or be picked off.  The most appropriate analogy for this kind of mood is Agatha Christie’s “And Then There Were None …” in which each murder produces more paranoia.
In a financial system that has become so demented, only institutions with more or less infinite resources can stem the tide. Such institutions can conceivably be self-help organizations, such as pools of powerful banks.  The US Treasury indeed tried to put together such a pool on Sunday, September 14th.
But in a climate of profound uncertainty, self-help is not enough. Governments or central banks are needed, because only they are both big and quick enough.
Only they could quickly come to the assistance of the giant housing finance institutions US Fannie Mae and Freddie Mac, and then deal with AIG.
The second question is what kind of government can do the job?
Not just any government will do. Mid-sized European governments can possibly rescue mid-sized European institutions, but in the case of really major financial conglomerates at the heart of the world’s financial system, there are probably only two governments that have the fire power: the US and China.
In the similar circumstances of a financial meltdown in 1931, there were also only a limited number of governments that could be effective. The old economic superpower, Britain, was too exhausted and strained to help anyone else.  World’s reserves were massively accumulated in the US.
Thus the only plausible case for a way out of the worldwide Great Depression in 1931 lay, as the great economic historian Charles Kindleberger emphasized, with some step from the US. At the time, there were all kinds of convincing reasons why Americans should not want to take on the burden of a worldwide rescue: sending more money to Europe might be seen as pouring money down a drain; had not the Europeans fought a World War that had been the fount and origin of the financial mess?  Economically such action would have made a great deal of sense from a long term perspective; but politically it was a non-starter with no short term payoff at all.
China is the America of this century. The initial stages of the credit crunch in 2007 were managed so apparently painlessly because sovereign wealth funds from the Middle East, but above all from China, were willing to step in and recapitalize the debt of American and European institutions.  The pivotal moment in today’s events came when the Chinese SWF China Investment Co. was unwilling to go further in its exploration of buying Lehman Brothers.  CIC’s turning back will be held up in the future as a moment when history could have turned in a different direction.
Now there will be plenty of reasons why the Chinese pulled back.
The logic sounds like the American case of 1931. Some of the arguments that are reverberating around Beijing are very reasonable: there is a great deal of uncertainty, and the SWFs might lose a lot of money.
CIC would have initially lost some money with Lehman.
Some lines of thought are more emotional: might not 2008 be a payback for the American bungling of the 1997-1998 East Asia crisis?
We are about to see what stake China really has in the survival of the globalized world economy. As in 1931, the political arguments are all against such an operation.  Only the far-sighted will see that the economic case for a rescue is compelling.
The Geopolitical Message from Libya
NEW DELHI – Will “mission creep” in the West’s intervention in Libya end up creating, inadvertently, a jihadist citadel at Europe’s southern doorstep?
Of course, the Western powers must be applauded for their efforts, with the support of Qatar and the United Arab Emirates, to prevent a slaughter of Libya’s civilian population.
The democratic world should never stand by idly while a tyrant uses military force to massacre civilians.
But, if despots are to be deterred from untrammeled repression, any intervention – whether military or in the form of economic and diplomatic sanctions – must meet the test of impartiality.
The current political upheaval in the Arab world could transform the Middle East and North Africa in the same way that the fall of the Berlin Wall in 1989 fundamentally changed Europe.
Indeed, 1989 was a watershed, producing the most profound global geopolitical changes in the most compressed timeframe in history.
But, in the decades since, the Arab world’s rulers, regimes, and practices seemed to have remained firmly entrenched.
In 1989, Francis Fukuyama claimed in a famous essay that the Cold War’s end marked the end of ideological evolution, “the end of history,” with the “universalization of Western liberal democracy as the final form of human government.”
Yet, two decades on, the global spread of democracy has been encountering increasingly strong headwinds.
Only a small minority of states in Asia, for example, are true democracies.
In fact, a new bipolar, Cold War-style ideological divide has emerged. The rise of authoritarian capitalism – best symbolized by China, but also embraced by countries as disparate as Malaysia, Singapore, Kazakhstan, and Qatar – has created a new model that competes with (and challenges) liberal democracy.
The popular upsurge in the Arab world shows that democratic empowerment hinges on two key internal factors: the role of security forces and the technological sophistication of the state’s repressive capacity.
In recent weeks, security forces have shaped developments in different ways in three Arab states.
Yemen’s popular uprising has splintered the security establishment, with different military factions now in charge of different neighborhoods in the capital, Sana.
In Bahrain, by contrast, the monarchy has used the foreign Sunni mercenaries that dominate its police force to fire on demonstrators, who are predominantly Shia.
In Egypt, it was the military’s refusal to side with former President Hosni Mubarak that helped end his 30-year dictatorship.
Long used to wielding power, the military had become increasingly wary of Mubarak’s efforts to groom his son as his successor.
Yet today’s heady talk of freedom cannot obscure the reality that the people’s “revolution” has so far led only to a direct military takeover, with the decades-old emergency law still in force and the country’s political direction uncertain.
As for the second key internal factor, a state’s ability to police mobile and electronic communications and Internet access has become as important as jackboots and truncheons.
China, for example, is a model of despotic efficiency: its internal-security system extends from state-of-the-art surveillance and extralegal detention centers to an army of paid informants and neighborhood patrols that looks out for troublemakers.
In response to calls by some overseas Chinese for people to gather on Sundays at specific sites in Shanghai and Beijing to help launch a molihua (jasmine) revolution, China has revealed a new strategy: preemptively flood the protest-designated squares with police to leave no room for protesters.
More importantly, as the world’s leader in stringent, real-time censorship of electronic communications, China is strongly placed to block any Arab contagion from reaching its shores.
External factors are especially important in smaller, weaker countries.
Nothing illustrates this better than Bahrain, where Saudi Arabia – which has contributed more than any other country to the spread of global jihad – sent forces under the Gulf Cooperation Council banner to crush peaceful protests.
Indeed, Saudi Arabia’s effort to prop up the Bahraini regime parallels the Soviet Union’s intervention in Afghanistan in 1979 to bolster a besieged allied regime – an invasion that led to the multibillion-dollar, CIA-scripted arming of Afghan rebels and the consequent rise of transnational Islamic terrorists.
Libya, too, is a weak, divided country.
Indeed, with the CIA conducting covert operations inside Libya and aiding the rebels there, the danger is that the West could be creating another jihadist haven.
After all, the broadening of the NATO-led mission from a limited, humanitarian goal to an all-out assault on Libya’s military signals to some Arabs that this war is really about ensuring that the region does not slip out of Western control.
The intervention has seemingly been driven by a geopolitical imperative to bottle up or eliminate Col. Muammar el-Qaddafi so that his regime cannot exploit the political vacuum in neighboring Egypt and Tunisia.
While it is now clear that much of the Arab world is in transition, the end point is not yet clear.
But Barack Obama’s administration apparently has concluded that Arab monarchs are likely to survive, whereas Arab presidents are more likely to fall, and that it is acceptable for the United States to continue to coddle tyrannical kings.
Unfortunately, this double standard sends a message that democratic empowerment in any society is possible only if it is in the interest of the great powers.
No one has a greater interest in broad acceptance of this noxious idea – that promotion of human freedom is nothing more than a geopolitical tool – than the world’s largest, oldest, and most powerful autocracy, China.
The Geopolitics of Football
In football, defeat is never definitive, but it is always passionate.
For football lovers, FIFA (the governing body of international football) should have been awarded the Nobel Peace Prize long ago.
For others, exasperated by football and the emotions it stirs up, the sport is no longer a game, but a type of war that stokes the basest sort of nationalist emotions.
Is there a relationship between football (and sports in general) and a spirit of nationalism and militarism?
During the Middle Ages, sports were regularly forbidden in England because they came at the expense of military training.
After France’s defeat by Bismarck’s Germany in the Franco-Prussian War, Baron Pierre de Coubertin (who re-launched the Olympic Games a few decades later) recommended a renewed national emphasis on sport, which by this point was seen as a form of military preparation.
In a football match, the rituals – the flag waving, the national anthems, the collective chants –and the language that is employed (the match starts with a “breakout of hostilities,” one “bombs” the goal, blows up the defense, launches “missile”) reinforce the perception of war by other means.
And, in fact, real war has actually broken out over football.
In 1969, Honduras and Salvador clashed after a qualification game for the World Cup.
Football matches can, it seems, revive national rivalries and conjure the ghosts of past wars.
During the 2004 Asia Nations Cup final, which pitted China against Japan, Chinese supporters wore 1930’s-style Japanese military uniforms to express their hostility to the Japanese team.
Other Chinese fans brandished placards with the number “300,000” written on it, a reference to the number of Chinese murdered by the Japanese army in 1937.
But can one really say that football is responsible for the currently bad diplomatic relations between China and Japan?
Of course not.
Hostility on the football pitch merely reflects the existing tense relations between the two countries, which carry the weight of a painful history.
At the opposite end of the spectrum, the dramatic semi-final between France and Germany in Seville in 1982 produced no political ripples, either for diplomatic relations between the two countries or for relations between the two peoples.
Antagonism was confined to the stadium, and ended when the match did.
What football really provides is a residual area of confrontation that allows for the controlled expression of animosity, leaving the most important areas of interaction between countries unaffected.
France and Germany will soon have a common army – they already have a common currency – yet the survival of national teams channels, within a strictly limited framework, lingering rivalry between the two countries.
Football can also be the occasion of positive gestures.
The joint organization of the 2002 World Cup by Japan and South Korea helped accelerate bilateral reconciliation.
The performance of the South Korean players was even applauded in North Korea.
Sport, indeed, seems to be the best barometer of relations between the divided Korean people.
Moreover, football, more than long speeches or international resolutions, can help induce progress towards peaceful solutions for military conflicts.
After their qualification for this year’s World Cup, the Ivory Coast’s national team, including players from the north and south, addressed all of their fellow citizens, asking the warring factions to lay down their weapons and to put an end to the conflict that has shattered their country.
After Haiti’s President Jean-Bertrand Aristide was overthrown a few years ago, Brazil’s football team acted as an ambassador for the United Nations’ Brazilian-led peacekeeping forces.
And, when conflict stops, from Kosovo to Kabul, football is the first sign of a society returning to normal.
The former president of the FIFA, Joao Havelange, often dreamed of a football match between Israelis and Palestinians: the American vice-president Al Gore regarded such a match as a means to help Washington solve the Israeli-Palestinian conflict.
Perhaps one day it will take place.
Certainly the Iran-United States football game in 1998 offered a moment of fraternization between the two teams.
Another Iran-US match might be helpful at this difficult time.
It is because football allows for symbolically limited confrontations, with no major political risks, that it is useful.
Its impact on national and international public opinion is broad, but not deep.
As the sociologist Norbert Elias put it: “The spectators of a football match can enjoy the mythical excitement of battles taking place in the stadium, and they know that neither the players nor they will suffer any harm.”
As in real life, fans can be torn between their hopes for victory and their fear of defeat.
But in football, the elimination of an adversary is always temporary.
A return match is always possible.
As a Frenchman, I cannot wait for the next World Cup match between France and Germany.
But I want France to avenge its defeat at the last World Cup in Seville, not its defeat at Verdun.
The Ghost in the Recovery Machine
NEW HAVEN – The International Monetary Fund’s October World Economic Outlook proclaimed that, “Strong public policies have fostered a rebound of industrial production, world trade, and retail sales.”
The IMF, along with many national leaders, seem ready to give full credit to these policies for engineering what might be the end of the global economic recession.
National leaders and international organizations do deserve substantial credit for what has been done to bring about signs of recovery since the spring.
The international coordination of world economic policies, as formalized in the recent G-20 statement, is unprecedented in history.
But one also suspects that world leaders have been too quick to claim so much credit for their policies.
After all, recessions generally tend to come to an end on their own, even before there were government stabilization policies.
For example, in the United States, the recessions of 1857-8, 1860-61, 1865-7, 1882-85, 1887-88, 1890-91, 1893-94, 1895-97, 1899-1900, 1902-04, 1907-8, and 1910-12 all ended without help from the Federal Reserve, which opened its doors only in 1914.
Economic theorists long ago developed models that describe how recessions end on their own.
In his 1959 book The Business Cycle , in a chapter entitled “The Lower Turning Point,” Cambridge University economist R. C. O. Matthews summarized a host of factors that business-cycle theorists of his day argued tend to bring on recovery automatically.
For example, demand for investment goods may rebound, especially in certain hard-hit sectors, after a recession has caused physical capital to become technologically obsolete.
Moreover, interest rates tend to decline in a recession, even if there is no central bank, stimulating investment demand further.
Similarly, manufacturing can expand to restore inventories depleted by over-contraction of output, while random shocks such as major innovations or harvest variations may have an asymmetric effect in a recession, with upward shocks in some sectors having a greater impact than the downward shocks in others.
On the financial front, the failure of weaker banks in a recession leaves survivors that benefit from greater public confidence and are therefore able to resume profitable business.
Some of these factors, rather than just the actions taken by governments and multilateral organizations, plausibly played a role in the current economic improvement. Unpredictable human psychology also plays a role.
Such factors, indeed, matter very much for the economic outlook, and for judging the success of the recovery program.
One can start with the stock-market turnaround since March of this year, which has been stunning.
Using monthly Sampamp;P Composite data, the 38% increase from March to September was the second-largest six-month increase since 1871, surpassed only by a 71% increase from February to August 1933, during the Great Depression.
This rebound is all the more remarkable given that it followed the second-largest six-month decrease ever, as stock prices fell 38% from September 2008 to March 2009.
(The largest six-month decrease was, you guessed it, during the Great Depression, when the index fell 47% from November 1931 to May 1932.)
Moreover, this same sharp turnaround occurred in many countries – and for many assets, including oil prices, gold, and, in some countries, residential real estate.
Any solid understanding of the causes of this turnaround is likely to prove elusive.
People are still puzzling over the reasons for other major market upturns (1933, 1982, etc.).
A market boom, once started, can continue for a while as a sort of social epidemic, and can foster inspiring “new era” stories that are spread by news media and word of mouth.
The stories themselves help magnify the boom, becoming part of the feedback that sustains it.
The agreements reached at recent G-20 meetings stand as one of these stories, for they suggest a new era of international cooperation and economic professionalism – a narrative that has probably been exaggerated in the psychology of recovery.
The G-20 story is particularly salient in the developing world, for the international recognition that the G-20’s expanded role has given to developing countries is highly resonant psychologically.
Beyond that, stories of highly profitable banks paying huge bonuses to their executives have also inspired people to think that things are not so bad in the business world.
Anger at these profits and bonuses only tends to increase the contagion of the story.
But any such speculative boom is inherently unstable, as the stories evolve in time and with new shocks, whose effect on markets is most uncertain.
It was, in fact, an excessive speculative boom in the stock market and the housing market that got us into this financial mess in the first place.
To be sure, governments and multilateral institutions made some reasonable attempts to restore confidence.
But they did not “engineer” a recovery.
They got lucky, and the G-20, as well as the governments that instituted stimulus packages, are currently in a honeymoon period of apparent success.
Where our still-ailing world economy goes from here is as uncertain as the speculative markets that played such an important role in both the financial crisis and the recovery.
We can only wish that formulating economic policy were as clear-cut as, say, mechanical engineering.
It is not: a host of poorly understood natural cyclical factors play a role, and so do the vagaries of human psychology.
The Ghost of Biafra
When Nigerian President Olusegun Obasanjo made his surprise announcement on 13 January to begin a nationwide dialogue to discuss constitutional reform, he was bowing to the inevitable.
The clamor by disaffected politicians and human rights activists for such a conference had reached a crescendo.
Obasanjo and the ruling Peoples Democratic Party were re-elected in May 2003 in controversial circumstances.
Opposition forces, led by Muhammadu Buhari, the candidate of the All Nigeria People’s Party, accused Obasanjo of using the police to intimidate voters and falsify the election results.
Initially, it looked like Obasanjo would weather the storm and serve out his last term without making concessions to his opponents.
However, in late December 2004, the national election tribunal, sitting in Abuja, the capital, ruled that while the election had been free and fair in most parts of the country, the number of votes was larger than the population in Ogun, the President’s home state.
The opposition seized on the ruling and called on Obasanjo to resign.
Simultaneously, the eastern part of the country descended into anarchy.
Political thugs linked to the president resorted to strong-arm tactics in an attempt to remove one of the governors, angry that he had not given them lucrative public contracts.
Obasanjo refused to call them to order, even after they invaded and razed government offices.
In the Niger delta, where oil production and official neglect have devastated the environment and wrecked livelihoods, enraged youths took to the swamps and led an insurgency against Federal troops.
But the most powerful push for the conference came from politicians in the largely Christian south, apprehensive that power would return to the Muslim north in 2007 after Obasanjo, himself a southern Christian, completed his second term.
Since political independence in 1960, politics has revolved round Nigeria’s major ethnic groups – the Igbo and Yoruba in the south, and the Hausa and Fulani in the north.
Southerners’ apprehension is well founded.
The north dominated the armed forces following the Biafra civil war in the late 1960’s.
As military rule became the norm in Africa in the 1970’s, northern army officers imposed an authoritarian and predatory mode of governance on the country, a vicious grip that was loosened only when a resurgent civil society forced them to return to the barracks in 1999.
Obasanjo’s election marked the return of civilian rule.
The demand for a new constitution emulating Nigeria’s First Republic of the early 1960’s, when the country was a federation of powerful regions enjoying a large measure of fiscal autonomy, grew over the years as Nigeria’s economy plummeted.
But Obasanjo is a passionate advocate of unitary government and counts many influential northerners as personal friends.
The northern business and political elite see him as a bulwark against their increasingly restive southern rivals who openly threaten a repeat of the Igbo attempt to secede in 1967 that caused the Biafra conflict, taking the rich oil fields of the Niger delta with them.
Obasanjo’s latest move, his proposed “National Political Reform Conference” in March, is an attempt to steal the opposition’s thunder.
There will be 400 delegates, but the bulk of them nominated by the president and his party, and the government-controlled National Assembly will vet their proposals.
The opposition has responded by calling on Nigerians to boycott the conference, arguing that it lacks legitimacy.
The opposition, grouped in the Pro-National Conference Organization (PRONACO), a new umbrella coalition of political parties and human rights groups, has said it would convene an alternative national conference in June.
PRONACO has formidable leaders in Wole Soyinka, the Nobel literature laureate, and Anthony Enahoro, an elderly politician who made his name as a fiery young nationalist in the 1940’s.
The group’s demands include dividing the country into six or eight new regions along broad ethnic lines with powers to generate and spend revenue.
Opposition leaders also intend to debate such issues as the rights of women and minority groups, and the place of Shari’a, the Islamic legal code, which has replaced civil courts in several northern states.
Reformers also have the Obasanjo government’s neo-liberal economic policies, which they describe as “punitive and intellectually bankrupt,” in their sights.
But it is PRONACO’s demand that at least 50% of the oil revenue derived from the Niger delta and other states in the south be retained in the area of production that most threatens the survival of the country’s survival as a united entity.
The Biafra war was largely an oil war, prosecuted by northern officers and politicians to win back the delta oil fields from the Igbo.
It is not likely that northern elites will stand by idly as a fresh attempt is made to take away what they consider a glittering prize.
For now, the north appears divided.
But a hardening of the mood there, and a brokered armistice between its disenchanted youth and older but vastly more experienced political war horses, will not only present PRONACO with a formidable opponent, but could throw West Africa into turmoil if matters degenerate into a frontal clash.
The Ghost of Pinochet
The death of General Augusto Pinochet, Chile’s former military dictator, provides perhaps an appropriate end for a year that saw the Latin American left return to glory, a revival that Hugo Chavez’s overwhelming reelection in Venezuela is but the strongest sign.
For unlike in the days of Pinochet, fear of the left has mostly vanished across the continent.
Indeed, the left has won in countries in which it has previously never held power.
Despite the fact that the victories of Felipe Calderon in Mexico, Alvaro Uribe in Colombia and Alan Garcia in Peru put a stop to a supposed tsunami of Socialist victories, the trend toward the left is unmistakable.
Chavez is no longer a lonely populist.
In the Andean region, he is accompanied by two clones that are reheating his recipes: Evo Morales in Bolivia and Rafael Correa in Ecuador.
In the rest of the continent, the other left - the one deemed reliable by Wall Street and London bankers - will not join Chavez’s postures, but neither will it join a crusade to unseat him.
This other left, however, is not radical.
The return to power from the political wilderness of Daniel Ortega in Nicaragua and Alan Garcia in Peru, two of the most demonized enemies of US foreign policy during the 1980’s, provides sardonic testimony to this.
Ortega won thanks to an alliance with the heirs of Nicaragua’s old dictator Somoza. His only ideology nowadays is Daniel Ortega.
García defeated Ollanta Humala, who would have presumably joined the drift toward Chavez.
That the Latin American right can sleep at night despite this leftward tide is not merely the result of communism’s disappearance, nor does it mean that the US has given up its hegemonic intentions.
The explanation lies in the fact that much of today’s left is not the left as we have known it.
Instead, today’s left looks at growth, fiscal discipline and competitiveness with pragmatism, and not as ideological red flags.
Its economic proposals do not define its character: it feels at ease with policies such as those followed by President Luis Inacio Lula da Silva during his first term in Brazil or those implemented by the Socialist Presidents Ricardo Lagos and Michele Bachelet in Chile.
Easy applause can no longer be had by attacking big business or the IMF.
Yet there is a frontier between today’s left and right, and it is found in the realm of social issues: same-sex couples and marriages, religious freedom, abortion and female equality.
These matters have been increasing in importance, and are inciting a clash between the political forces that have just come to power and their conservative opposition.
Foreign affairs also forms another divide.
The Latin American left does not share George W. Bush’s view of the world.
On global issues, it has not backed the US in the Iraq war, it does not tolerate American disdain for multilateralism and it is unwilling to join the anti-terror crusade.
In Latin American affairs, it balks at the Free Trade Area of the Americas (FTAA) and generally wants relations with the US that allow it to promote their local initiatives.
Right leaning rulers such as President Uribe in Colombia still like to speak about their special relationship with Bush or their backing of his foreign policy.
President Lula and others on the left mostly prefer to hold their tongues.
Everything suggests that the new moderate Latin American left is more political than economic.
And it is here where its biggest challenges will emerge.
An excessive focus on growth and macroeconomic balances can lead to frustration among those sectors that are demanding better living conditions when they raised this new social democratic left to power.
Education - its quality more than its coverage - was a key issue in Chile’s recent presidential elections.
The debate over the ability of growth alone to reduce poverty has become heated.
If the new left does not manage to answer these questions satisfactorily, it will be seen as having failed.
There is a paradox at the heart of this process: the electoral victories by the left are a clear sign of democratic maturity.
However, even though rulers are chosen through popular vote, there are worrying signs of weakness in the region’s democratic institutions.
Presidents are too easily re-elected or returned to power - Uribe, Lula, Chavez, Ortega, Garcia - with a consequent concentration of power and limits on the emergence of new leaders.
Moreover, the military remains politically influential in Chile, Ecuador, Venezuela and Colombia.
Electoral systems are precarious enough to generate pathetic situations such as that which prevailed in Mexico throughout the autumn, with its “two Presidents.”
Parties lose ground against the caudillist adventures of people like Lopez Obrador in Mexico and Chavez in Venezuela, and congresses are assured only of public antipathy.
Across Latin America, voters – voicing their economic hopes &#45;&#45; have opted for a new left.
That left has obtained historic victories thanks to a democracy whose survival is still not guaranteed.
So the ghost of Augusto Pinochet lingers.
The Ghost of the Stability Pact
Murdered when France and Germany refused to abide by its rules, the Stability Pact's ghost is haunting Europe, particularly the postcommunist countries that join the European Union in May.
By breaking the Pact's ban on fiscal deficits exceeding 3% of GDP, France and Germany undermined this limit as a key criterion for determining whether countries are ready for eurozone membership.
Would denial of admission to the eurozone because a country fails to fulfil rules that current members spurn really be legitimate?
The convergence criterion on exchange rates is in similar disarray.
Countries must remain within the European exchange rate mechanism (ERM II) for two years in order to ensure the "right" exchange rate when they adopt the euro.
Germany satisfied the criterion with ease during 1996-8, though by most measures the Deutschemark was 20% overvalued compared to the franc and other eurozone currencies.
This damaged Germany's economy, and continues to be a drag on growth in the whole eurozone.
The European Commission spent the last three years trying to tighten the exchange rate criterion, which would make it an insurmountable obstacle for eurozone candidates.
Although the criterion requires only that countries remain within the ERM's normal fluctuation band - 15% on either side of a central parity - the Commission says that it will base recommendations concerning candidate countries' admission on whether their exchange rates remain within a 2.25% band.
The final two criteria - inflation and interest rates - are also a mess.
A eurozone candidate's inflation must not be more than 1.5 percentage points above the average of the three best performing EU states for one year.
But the three countries that prospective members can be compared to may be outside the eurozone.
Indeed, in September 2003, the three "reference" countries would have been Lithuania, Poland, and the Czech Republic, were they already members of the EU (they join in May).
Moreover, the inflation criterion fails to allow for higher inflation in services and construction in faster-growing countries.
But such inflation represents a natural adjustment of relative prices resulting from faster growth.
It harms no one, and should not be penalized.
Finally, the interest rate criterion requires that rates on 10-year government bonds not be more than two percentage points above the rates in the three countries performing best in terms of inflation .
Again, these could easily prove to be three new EU members outside the eurozone.
Here is the core problem: the criteria were devised when the eurozone did not exist.
Four large countries and several small ones had to be brought into nominal convergence to ensure that the anchor of a common currency did not rip their economies apart.
But the small countries now wishing to join the eurozone, which together make up 6% of the zone's economy, cannot impose significant damage on existing members were they to get convergence wrong, let alone anything like the damage caused by Germany joining with an overvalued currency.
In any case, the Stability Pact's death means that a new fiscal framework is needed. This means that new convergence criteria are needed too.
For the inflation and interest rate criteria, one possibility is to require the same margins as now, but over the average for the entire eurozone.
However, the possibility that rapid growth might generate higher inflation in fast-growing accession countries suggests that a slight increase in the permitted inflation margin - to, say, 2.5 percentage points - should be allowed.
On the exchange rate, a narrow fluctuation band should be avoided.
I suggest creating an "ERM light."
As at present, there would be a central rate with a fluctuation band of 15% on either side to guide market expectations.
However, intervention would not be required at these margins.
If the margins were exceeded, members would consider re-alignment.
The exchange rate criterion could be assessed later on the basis of a narrower band, as the European Commission proposes, although a limit of 6% fluctuation on either side of the central parity seems more reasonable than 2.25%.
Intervention inside the narrow band would be discouraged (banned?), so that rather than trying to force the foreign exchange market to fit the policies of a candidate country, we would be "listening" to what markets say about the best rate for conversion to the euro.
The result might be a longer stay within the new ERM, but without the crises that the original eurozone members suffered.
It would certainly be better than joining the euro at a disastrously overvalued rate, as Germany did.
The hardest challenge is redefining the fiscal criterion, but one thing is clear: it would be absurd if candidates had to pass a test that was never applied after entry.
If fiscal rules are unnecessary, then a fiscal convergence criterion is also unnecessary.
Of course, most economists believe that fiscal rules are needed to prevent some countries from free riding on low interest rates and running up debt to what would otherwise be unsustainable levels.
But equality requires that any new accession criterion must be based on the fiscal rules that actually operate within the eurozone.
The Ghosts of Economics Past
In Charles Dicken's great novel "A Christmas Carol," the soulless businessman Ebeneezer Scrooge is tormented by a visit from the Spirit of Christmas Past.
Today, economists are similarly troubled by unwanted ghosts, as they ponder the reappearance of economic ills long thought buried and dead.
From Stephen Roach at Morgan Stanley to Paul Krugman at Princeton, to the Governors of the US Federal Reserve and the senior staff at the European Central Bank, to almost everyone in Japan, economists all over the world are worrying about deflation.
Their thoughts retrace the economic thinking of over fifty years ago, a time when economists concluded that the thing to do with deflation was to avoid it like the plague.
Back in 1933 Irving Fisher --Milton Friedman's predecessor atop America's monetarist school of economists-- announced that governments could prevent deep depressions by avoiding deflation.
Deflation --a steady ongoing decline in prices-- gave businesses and consumers powerful incentives to cut spending and hoard cash.
It reduced the ability of businesses and banks to service their debt, and might trigger a chain of big bankruptcies that would destroy confidence in the financial system, providing further incentives to hoard.
Such strong incentives to hoard rather than spend can keep demand low and falling, and unemployment high and rising, for a much longer time than even the most laissez-faire-oriented politician or economist had ever dared contemplate.
Hence the Keynesian solution: use monetary policy (lower interest rates) and fiscal policy (expanded government spending and reduced taxes) to keep the economy from ever approaching the precipice where deflation becomes possible.
But if this is an issue solved over fifty years ago, why is it haunting us now?
Why is this menace a matter of grave concern in Japan today, and a threat worth worrying about in the US?
In the late 1940s, those present at the creation of the post-World War II international economic order tried to create an international monetary system that would (a) allow for exchange rates stable enough for producers and consumers to escape the risks of excessive and irrational exchange rate fluctuations, (b) allow countries to follow their own domestic macroeconomic policies, and (c) prevent the catastrophic panics affecting not just individual banks but whole countries that produced the destructive international financial crisis of the Great Depression.
The result was the fixed-but-adjustable exchange rate system of Bretton Woods, which over time mutated into the floating-rate system of the 1980s.
Then came the 1990s.
All of a sudden tremendously destructive herd-driven financial crises were back: Mexico, Thailand, Korea, Brazil, and so on looked like nothing as much as the US financial panic of 1873 or the Austrian Creditanstalt crisis of 1931.
Argentina's crisis at the end of 2001 looked remarkably like Argentina's Baring Brothers crisis of 1890 -- save that politicians and international bankers seem to have had a much better idea of what to do to minimize the damage in 1890 than they do today.
But if those who built the post-World War II international monetary system worked to guard against the dangers posed by panic-driven international financial crises, why are these financial devils back?
The truth is that economic policymakers are juggling sets of potential disasters, exchanging the one that appears most threatening for a threat that seems more distant.
In the US, the Bush Administration is skeptical of the stimulative power of monetary policy and wants bigger fiscal deficits to reduce unemployment, hoping that the future dangers posed by persistent deficits -- low investment, slow growth, loss of confidence, uncontrolled inflation and exchange rate depreciation-- can be finessed, or will not become visible until after the Bush team leaves office.
In Europe, the European Central Bank believes that the danger of uncontrolled inflation following a loss of public confidence in its commitment to low inflation outweighs the costs of European employment that is far too high.
In developing countries, capital controls to prevent financial crises are feared as obstacles to attracting the finance necessary for industrialization, and as potential sources of corruption as financial flows somehow pass through the hands of the Vice Minister of Finance's nephew-in-law.
Flexible exchange rates, designed to allow the market to signal when confidence in the currency is declining, also put exporters at a competitive disadvantage against foreign-country producers whose prices aren't batted around by unpredictable exchange rates.
Even the import-substitution policies, now universally scorned, were originally adopted by the developing world for good (as well as bad) reasons: the protectionist shutting-off of developed-country markets during the Great Depression which had disastrous consequences for the developing economies.
The ghosts of economics' past return because the lessons of the present are always oversold.
Politicians and policymakers advance their approach to economics as the "One True Doctrine."
But what they are doing, however, is dealing with the biggest problem of the moment but at the price of removing institutions and policies that policymakers before them had put into place to control problems which they felt to be the most pressing.
Ebeneezer Scrooge's nocturnal visitors were able to convince him of the errors of his ways.
Let's hope that today's economists also learn the lessons of their unwanted ghosts.
The Ghosts of Summits Past
PRINCETON – The world is confronted by a dramatic financial crisis that many policymakers believe is more severe than the interwar Great Depression.
Before 2008, experts said that a new Great Depression was impossible because of the strength and the depth of the cooperative mechanisms set up at the end of World War II.
The G-20 summit has thus created enormous expectations that internationalism may once again overcome a plethora of economic problems.
Unfortunately, the magnitude of the expectations alone suggests that disappointment is almost certain.
The symbolism of the location is unfortunate, as it carries a reminiscence of the main abortive attempt to manage the world economy during the Great Depression. The 1933 World Economic Conference also met in London, at the Geological Museum, with an even broader range of participants from 66 countries.
The participants at the 2009 summit may not visit the Geological Museum, but they will have to deal with the specter of conferences past, for the failure in 1933 offers important lessons for our current leaders.
First, as with the G-20 summit, everyone expected the London Conference to fail.
The plenary meeting was paralyzed by the way in which the preparatory commissions had worked.
Monetary experts argued that an agreement on currency stabilization would be highly desirable, but that it required a prior agreement on the dismantling of trade barriers – all the high tariffs and quotas that had been introduced in the course of the depression.
Trade experts met in parallel and made the mirror image of this argument.
They agreed that protectionism was obviously a vice, but thought that it was a necessary one that could not be addressed without monetary stability.
Only leadership by a determined great power, prepared to sacrifice its particular national interests in order to break the resulting impasse, might conceivably have saved the meeting.
But such leadership was as unlikely then as it is now.
Indeed, the second lesson of the London Conference of 1933 consists in governments’ unwillingness in times of great economic difficulty to make sacrifices that might entail a short-term cost.
Even if the result would have been longer-term stability, the immediate political consequences were too unpleasant.
In adverse economic circumstances, governments felt vulnerable and unsure, and they could not afford to alienate public support.
Finally, faced by a realization of inevitable failure, participants look for a scapegoat.
The 1933 Conference looked like a classic detective novel in which every party had a reason to be a suspect.
Britain and France had turned away from internationalism, adopting trade systems known as “Imperial Preference,” which favored their vast overseas empires.
Germany’s president had just appointed Adolf Hitler’s radical and aggressive government.
The German delegation was led by Alfred Hugenberg, who was not a Nazi but wanted to show that he was an even more implacable nationalist than Hitler himself.
The Japanese government had just sent troops into Manchuria.
Of all the major powers in London, the United States looked the most reasonable and internationalist by far.
It had a new, charismatic president, who was known as an Anglophile and a cosmopolitan spirit.
Franklin Roosevelt was already taking vigorous action against the depression, and was trying to reorder the failed US banking system.
Roosevelt did not know what line to take at the conference, and his stream of advisers offered inconsistent counsel.
At last, he lost patience and announced that for the moment the US had no intention of stabilizing the dollar.
This message, delivered on July 3, 1933, was known as “the bombshell.” Roosevelt talked about the need to restore “the sound internal economic system of a nation” and condemned the “old fetishes of so-called international bankers.”
Everyone pretended to be shocked at the failure of internationalism.
But, at the same time, they were delighted to have found someone who could be blamed for the failure of the conference.
In 2009, we face a similar set of circumstances.
The lines of conflict have been clearly drawn in advance.
The US wants the world to embark on macroeconomic stimulus programs, and thinks that the complicated task of reinventing and reordering financial supervision and regulation can wait.
Many European countries cannot afford a stimulus package, owing to overstretched public finances, and instead want to make progress on the international regulation of banking.
The alibis for failure are also already prepared.
The new summit is unlikely to produce either a coordinated stimulus package or a detailed blueprint for a foolproof system of financial regulation.
Throughout the meeting, participants will be waiting for the moment when one of the leaders (maybe Angela Merkel) loses patience and makes the obvious and true remark that the process is a waste of effort.
Then everyone will denounce this honest politician for having wrecked internationalism.
In the 1930’s, it was the autocratic and belligerent governments of Germany and Japan that could derive the most capital from the failure of the London conference.
Failure at today’s London conference is also likely to be used as a rhetorical weapon against the large Western governments, and to provide a rationale for implementing new forms of state capitalism.
The Global Cost of Turkey’s Crisis
Turkey will hold its parliamentary election in July, four months earlier than scheduled, thereby narrowly avoiding a constitutional crisis over the choice of the country’s next president.
Nonetheless, Turkey’s bout with political instability has damaged its foreign policy and international standing.
At the center of the storm are Prime Minister Recep Tayyip Erdogan, head of the moderately Islamist Justice and Development Party (AKP), and Yasar Buyukanit, Chief of the General Staff of the Turkish military, which regards itself as the guardian of the secular republican tradition established by Kemal Ataturk.
When Erdogan contemplated moving from the prime minister’s job to the presidency earlier this spring, the military and secular political parties indicated profound dissatisfaction.
General Buyukanit said in April that the country’s new president must be secular “not just in words, but in essence.”
Having met and conversed with Erdogan on more than one occasion, I found him a moderate and reasonable man.
Moreover, the AKP has broad support among Turkish voters and an admirable record of economic growth, human rights legislation, and improvement in the treatment of Turkey’s Kurdish minority.
Foreign Minister Abdullah Gul, a close associate of Erdogan in the AKP, pressed Turkey’s application to join the European Union.
So when Erdogan decided to nominate Gul as the AKP candidate for the presidency, I was surprised by the strength of the secularist opposition.
The secular establishment argues that the AKP’s moderation thus far reflects the checks and balances implied by secularist control of the presidency.
They argue that if the AKP comes to control the presidency, it may no longer pursue moderate policies.
Secularists point with concern to other AKP, such as Speaker of the Parliament Bulent Arinc, who are noted for their pronounced religious and social conservatism.
When the Turkish Parliament attempted to elect the president on April 27, Gul did not receive enough votes to win on the first ballot.
The main opposition party argued that the vote was invalid, and the General Staff issued a statement that it was “watching this situation with concern.”
Massive public demonstrations were held in Istanbul to support Turkey’s Kemalist secular tradition.
The issue went to Turkey’s highest court, which annulled the parliamentary vote, effectively blocking Gul’s candidacy, resulting in Erdogan’s decision to call an early election.
These events were closely watched in Washington and Brussels.
The United States had been pressing the EU to advance Turkey’s application for admission, but Turkish membership was already controversial in several EU countries.
This reflects concerns about Turkey’s Muslim culture and its large population, as well as concern that any further enlargement will overly dilute the European project.
Now opponents of Turkey’s EU accession bid have seized upon recent events to argue that the country does not meet the democratic standards necessary for full membership.
They point out that Turkey’s military has ousted four elected governments since 1960, and continues to play an inappropriately large role in Turkish politics.
While the high court decision and the appeal to the electorate means that Turkish democracy has dodged a bullet for now, the progress of Turkey’s EU accession negotiations has been further slowed.
This is unfortunate for both Turkey and Europe.
With a slowdown in accession negotiations, Turkish politicians will have less incentive to continue the reforms necessary for membership.
Turkey suffers from nationalist sensitivity, and extremist groups have orchestrated several unfortunate incidents, including attacks on minorities and harassment of cultural figures like the Nobel Prize-winning novelist Orhan Pamuk.
If Turkey pulls away from Europe, the EU’s claim that it successfully wields “soft power” in world politics will be powerfully undermined.
In the larger picture, Turkey is not only an important member of NATO, with influence both in the Balkans and the Middle East, but it also plays a vital role in the wider world.
One of the crucial questions of twenty-first century politics will be how the world copes with the rise of political Islam.
For radical Islamists (and some Westerners), the rise of Islam sets the scene for a “clash of civilizations,” which they welcome as a polarizing device that will allow them to recruit from the much larger Muslim mainstream.
But Turkey has the potential to show the shallowness of such a scenario by demonstrating the compatibility of liberal democracy and Islam.
Unfortunately, this appears to have been lost on the neo-conservatives in the Bush administration, for whom it was the invasion of Iraq and its liberation from Saddam Hussein that was supposed to provide a beacon for a wave of democratization that would transform the Middle East.
What they produced instead was an “electocracy” that, in the absence of liberal institutions, replaced the tyranny of the Sunni minority with a tyranny of the Shiite majority and a religious sectarian civil war.
Indeed, the invasion of Iraq also hurt Turkey, both economically and by strengthening the base for the Kurdish terrorist PKK organization operating from northern Iraq.
The result has been a dramatic increase in anti-Americanism in Turkish politics.
If the neo- conservatives had instead focused their attentions on strengthening the soft power of Turkey, they could have done far more to advance the cause of democracy in the Middle East.
The Global Economics of Desire
How concerned should advanced countries be about the outsourcing of manufacturing to China or software development to India?
Fear of jobs lost to low-wage countries strikes a populist chord, but misses a vital point: the prosperity of developed countries depends primarily on entrepreneurship.
After all, no economy can raise living standards forever through innovations that make production of existing goods more efficient.
In the short run, increased efficiency reduces the cost of a good or service, so people consume more of it.
But eventually, consumers refuse to buy more even if prices continue to fall.
After that, further efficiencies require shedding workers.
Creating and satisfying new consumer desires keeps the system going by absorbing the labor and purchasing power released by the increasingly efficient satisfaction of old ones.
At the other end of this process, producers who satisfy old desires continue economizing, because they compete for employees and consumers with producers who satisfy new desires.
Similarly, outsourcing to low-wage countries improves living standards only if the human capital released can be used to make new goods and services.
Otherwise, outsourcing merely reduces demand for domestic labor, just like other efficiency gains.
For many advanced countries, expansion of markets for new goods and services facilitates - and has been facilitated by - imports from low-wage countries.
More than half of all manufactured goods consumed in the US are made abroad, particularly low technology, mass-produced labor-intensive products.
Virtually all the toys and shoes sold in the US are made in the Far East.
China alone accounts for 86% of the US bicycle market.
Resources released by these imports fostered the growth of industries that satisfy new needs.
Cheap Asian televisions gave Western households the wherewithal to purchase PC's powered by Intel microprocessors and Microsoft software, which are designed by engineering graduates who would otherwise have worked for TV manufacturers.
To be sure, the speed and magnitude of the integration of nearly a billion Chinese and Indian workers into global labor markets is unprecedented and will hurt some workers and communities in developed countries.
But as long as these economies churn out new desires, outsourcing represents an opportunity for prosperity on both sides.
The problem, of course, is that producers of new goods and services do not create jobs at exactly the same rate as efficiency gains or imports reduce the demand for labor.
Following the Internet boom of the late 1990's, job creation slowed, while efficiency improvements continued to reduce the labor required by the "old" goods and services.
Nor does the usual argument for free trade apply.
Low-cost call centers in India or Chinese made bicycles do not reflect any "natural" comparative advantage.
Rather, costs are low because for almost two centuries colonial powers and then domestic governments hobbled markets and restricted international trade, leaving a legacy of wages so low that they offset weaker productivity.
Moreover, exports to low-wage countries cannot compensate for job losses.
A Chinese worker simply cannot buy the same goods and services as a worker in the EU, and workers in low-wage countries spend only a small portion of their incomes on EU products.
As incomes in China grow, imports from other low or middle-income countries rise faster than imports from high-wage countries.
China's trade surplus with the US exceeds $100 billion, but it runs a deficit with India.
Uncertainty about jobs breeds anxiety, and anxiety stokes protectionist sentiments.
But, apart from a few industries, such as toys and bicycles, far fewer jobs are lost to imports than to efficiency improvements.
Manufacturing employment in the US fell in 2003 to its lowest level since 1964, but thanks to a tripling in output per worker, total manufacturing output was roughly three times larger.
Pressure to reduce costs in the recent downturn may have accelerated the movement of jobs to low-wage locations, but this accounts for only 15-35% of the decline in employment since the downturn began.
The Austrian economist Joseph Schumpeter attributed the boom-and-bust cycles of the 19th century to periodic bursts of "creative destruction" followed by lulls in innovative activity.
More effective use of counter-cyclical policies may have subsequently smoothed out the economic cycle, but this cannot explain why productivity and incomes also grew more rapidly than in the 19th century.
Standard supply-side arguments fare no better.
After all, tax rates were higher in the 20th century and regulation more extensive.
A critical factor is large scale, non-destructive creation.
Inventions from 1850 to 1900 may well overshadow those of the entire 20th century, but they were the result of a few inventors, such as Thomas Edison, who satisfied a small wealthy clientele.
In the 20th century, many entrepreneurs, large companies, financiers, and inventors developed products and services for the masses.
Moreover, their innovations created and satisfied many new consumer desires.
Airplanes, for instance, didn't reduce demand for automobiles: people fly when they would not otherwise have driven.
These new mass markets sustained a steady increase in average incomes and total employment.
Simply put, the long-term prosperity of developed economies depends on their capacity to create and satisfy new consumer desires.
Provided this capacity remains in good repair, job "losses" - through improvements in the efficiency of domestic production or through outsourcing to low-wage countries - will enhance standards of living.
But if this capacity is impaired, neither the low road of protection nor the high road of free trade can do much good.
The Global Economy’s Corporate Crime Wave
NEW YORK – The world is drowning in corporate fraud, and the problems are probably greatest in rich countries – those with supposedly “good governance.”
Poor-country governments probably accept more bribes and commit more offenses, but it is rich countries that host the global companies that carry out the largest offenses.
Money talks, and it is corrupting politics and markets all over the world.
Hardly a day passes without a new story of malfeasance.
Every Wall Street firm has paid significant fines during the past decade for phony accounting, insider trading, securities fraud, Ponzi schemes, or outright embezzlement by CEOs.
A massive insider-trading ring is currently on trial in New York, and has implicated some leading financial-industry figures.
And it follows a series of fines paid by America’s biggest investment banks to settle charges of various securities violations.
There is, however, scant accountability.
Two years after the biggest financial crisis in history, which was fueled by unscrupulous behavior by the biggest banks on Wall Street, not a single financial leader has faced jail.
When companies are fined for malfeasance, their shareholders, not their CEOs and managers, pay the price.
The fines are always a tiny fraction of the ill-gotten gains, implying to Wall Street that corrupt practices have a solid rate of return.
Even today, the banking lobby runs roughshod over regulators and politicians.
Corruption pays in American politics as well.
The current governor of Florida, Rick Scott, was CEO of a major health-care company known as Columbia/HCA.
The company was charged with defrauding the United States government by overbilling for reimbursement, and eventually pled guilty to 14 felonies, paying a fine of $1.7 billion.
The FBI’s investigation forced Scott out of his job.
But, a decade after the company’s guilty pleas, Scott is back, this time as a “free-market” Republican politician.
When Barack Obama wanted somebody to help with the bailout of the US automobile industry, he turned to a Wall Street “fixer,” Steven Rattner, even though Obama knew that Rattner was under investigation for giving kickbacks to government officials.
After Rattner finished his work at the White House, he settled the case with a fine of a few million dollars.
But why stop at governors or presidential advisers?
Former Vice President Dick Cheney came to the White House after serving as CEO of Halliburton.
During his tenure at Halliburton, the firm engaged in illegal bribery of Nigerian officials to enable the company to win access to that country’s oil fields – access worth billions of dollars.
When Nigeria’s government charged Halliburton with bribery, the company settled the case out of court, paying a fine of $35 million.
Of course, there were no consequences whatsoever for Cheney.
The news barely made a ripple in the US media.
Impunity is widespread –&nbsp;indeed, most corporate crimes go un-noticed.
The few that are noticed typically end with a slap on the wrist, with the company – meaning its shareholders – picking up a modest fine.
The real culprits at the top of these companies rarely need to worry.
Even when firms pay mega-fines, their CEOs remain.
The shareholders are so dispersed and powerless that they exercise little control over the management.
The explosion of corruption – in the US, Europe, China, India, Africa, Brazil, and beyond – raises a host of challenging questions about its causes, and about how to control it now that it has reached epidemic proportions.
Corporate corruption is out of control for two main reasons.
First, big companies are now multinational, while governments remain national.
Big companies are so financially powerful that governments are afraid to take them on.
Second, companies are the major funders of political campaigns in places like the US, while politicians themselves are often part owners, or at least the silent beneficiaries of corporate profits.
Roughly one-half of US Congressmen are millionaires, and many have close ties to companies even before they arrive in Congress.
As a result, politicians often look the other way when corporate behavior crosses the line.
Even if governments try to enforce the law, companies have armies of lawyers to run circles around them.
The result is a culture of impunity, based on the well-proven expectation that corporate crime pays.
Given the close connections of wealth and power with the law, reining in corporate crime will be an enormous struggle.
Fortunately, the rapid and pervasive flow of information nowadays could act as a kind of deterrent or disinfectant.
Corruption thrives in the dark, yet more information than ever comes to light via email and blogs, as well as Facebook, Twitter, and other social networks.
We will also need a new kind of politician leading a new kind of political campaign, one based on free online media rather than paid media.
When politicians can emancipate themselves from corporate donations, they will regain the ability to control corporate abuses.
Moreover, we will need to light the dark corners of international finance, especially tax havens like the Cayman Islands and secretive Swiss banks.
Tax evasion, kickbacks, illegal payments, bribes, and other illegal transactions flow through these accounts.
The wealth, power, and illegality enabled by this hidden system are now so vast as to threaten the global economy’s legitimacy, especially at a time of unprecedented income inequality and large budget deficits, owing to governments’ inability politically – and sometimes even operationally – to impose taxes on the wealthy.
So the next time you hear about a corruption scandal in Africa or other poor region, ask where it started and who is doing the corrupting.
Neither the US nor any other “advanced” country should be pointing the finger at poor countries, for it is often the most powerful global companies that have created the problem.
The Global Economy’s Dialogue of the Deaf
CHICAGO – As governments do more to try to coax the world economy out of recession, the danger of protectionism is becoming more real.
It is emerging in ways that were unforeseen by those who founded our existing global institutions.
Unfortunately, the discussion between countries on trade nowadays is very much a dialogue of the deaf, with countries spouting platitudes at one another, but no enforceable and verifiable commitments agreed upon.
There is an urgent need to reform global institutions – and more dramatically than envisaged by the G-20 thus far.
Protectionism is not just about raising tariffs on imports; it is any government action that distorts the global production and allocation of goods, services, and capital to favor domestic producers, thereby reducing overall efficiency.
So, for example, government pressure on multinational banks to lend domestically, or to withdraw liquidity from foreign branches, is protectionism, as are capital injections into multinational companies with the explicit requirement that domestic jobs be preserved.
Such actions are problematic not only because they insulate inefficient forms of production, but also because foreign countries respond by adopting similar measures towards their national champions, so that everyone is worse off.
The number of inefficient workers protected by these measures is offset by the number of efficient workers laid off by foreign multinationals responding to political pressures in their home country.
Perhaps of greatest concern, moreover, is that the public, especially in poor countries that cannot undertake offsetting measures, will come to distrust global integration, with multinationals viewed as Trojan horses.
In addition to explicit protectionist measures, governments now plan actions that will affect others across the globe.
For example, the large volume of public debt that industrial countries will issue will undoubtedly raise interest rates and affect developing country governments’ borrowing costs.
There is little dialogue about how industrial country issuances can be staggered to minimize the impact on global markets, and what alternatives can be developed for countries that are shut out.
If developing countries are left to their own devices, they will conclude that they should self-insure by rebuilding foreign-exchange reserves to even higher levels, a strategy that has clearly hurt global growth.
We need a moderate-sized representative group of leaders of the world’s largest economies to meet regularly to discuss such issues, informed by an impartial secretariat that will place its analyses before the group.
Initially, the group should only exert peer pressure on its members to comply with international responsibilities.
But, as confidence in the group’s decision-making – and in the impartiality of the secretariat – improves, members might give it some teeth, such as the ability to impose collective economic sanctions on recalcitrant members.
The United Nations is too large to serve this purpose, and the most obvious candidate for the group, the G-20, is not representative.
There is, however, a representative alternative – the International Monetary and Financial Committee (IMFC), a group of finance ministers and central bank governors that meets twice a year to advise the International Monetary Fund.
While the IMFC could be shrunk (for example, if euro-zone countries agree to a common seat), the real challenge is to make it a venue in which countries talk to one another rather than at one another.
To meet this goal, some changes would be in order.
First, the frequency of meetings should be increased, especially in times of crisis, and the level of a few of these meetings enhanced.
So, for example, two meetings a year at the head-of-government level and quarterly meetings at the finance-minister level (with more at the deputy-minister level) would provide ample time for dialogue, and thus for trust-building, and would allow the commitments made by the heads of government to be monitored.
Second, the IMF’s permanent Executive Board, established in an era when travel was costly and communications difficult, and consisting of mid-level government functionaries, should be abolished.
Important decisions should be vetted by the IMFC and others delegated to IMF management.
Current executive directors typically do not have the authority to make commitments on their countries’ behalf, so their effort is often diverted to minutiae.
And, in an attempt to preserve its turf, the Board constantly attempts to keep the IMFC from discussing anything of substance.
Third, the obvious secretariat is the IMF.
Unfortunately, the Fund is not regarded as being impartial, especially by countries that have been seared by its past conditionality.
The IMF has, however, become far more neutral than it is given credit for – though it could take more steps to distance itself from its past.
These include abolishing any region or country’s right to appoint IMF management; allowing the Fund to borrow from markets, so that it does not have to keep seeking key countries’ permission to expand; eliminating any country’s official veto power over major decisions; and having its agenda set by the IMFC rather than outside bodies.
Industrial countries should be happy that developing countries would take greater responsibility for global economic outcomes, rather than simply sulking about their lack of voice and representation.
Developing countries, in turn, would gain greater voice, but would also be forced to contribute ideas (and resources) to deal with global problems.
And maybe, just maybe, we would preserve faith in globalization.
The Global Economy’s Inevitable Hard Landing
In recent weeks, the global liquidity and credit crunch that started last August has become more severe.
This is easy to show: in the United States, the euro zone, and the United Kingdom, spreads between Libor interest rates (at which banks lend to each other) and central bank interest rates – as well as government bonds – are extremely high, and have grown since the crisis began.
This signals risk aversion and mistrust of counterparties.
To be sure, major central banks have injected dozens of billions of dollars of liquidity into the commercial banking sector, and the US Federal Reserve, the Bank of England, and the Bank of Canada have lowered their interest rates.
But worsening financial conditions prove that this policy response has failed miserably.
So it is no surprise that central banks have become increasingly desperate in the face of the most severe crisis since the advent of financial globalization.
The recent announcement of coordinated liquidity injections by the Fed and four other major central banks is, to be blunt, too little too late.
These measures will fail to reduce interbank spreads significantly, because monetary policy cannot address the core problems underlying the crisis.
The issue is not just illiquidity – financial institutions with short-term liabilities and longer-term illiquid assets.
Many more economic agents face serious credit and solvency problems, including millions of households in the US, UK, and the Eurozone with excessive mortgages, hundreds of bankrupt sub-prime mortgage lenders, a growing number of distressed homebuilders, many highly leveraged and distressed financial institutions, and, increasingly, corporate-sector firms.
At the same time, monetary injections cannot resolve the generalized uncertainty of a financial system in which globalization and securitization have led to a lack of transparency that has undermined trust and confidence.
When you mistrust your financial counterparties, you won’t want to lend to them, no matter how much money you have.
The US is now headed towards recession, regardless of what the Fed does.
The build-up of real and financial problems – the worst US housing recession ever, oil at $90 a barrel or above, a severe credit crunch, falling investment by the corporate sector, and savings-less and debt-burdened consumers buffeted by multiple negative shocks – make a recession unavoidable.
Other economies will also be pulled down as the US contagion spreads.
To mitigate the effects of a US recession and global economic slump, the Fed and other central banks should be cutting rates much more aggressively, rather than relying on modest liquidity injections that are bound to fail.
The Fed’s 25-basis-point cut in December was puny relative to what is needed; similar cuts by the Bank of England and Bank of Canada do not even begin to address the increase in nominal and real borrowing rates that the sharp rise in Libor rates has induced.
Central banks should have announced a coordinated 50 basis-point reduction to signal their seriousness about avoiding a global hard landing.
Likewise, the European Central Bank’s decision not to cut rates – deluding itself that it may be able to raise them once the allegedly “temporary” credit crunch is gone – is mistaken.
With deflating housing bubbles, high oil prices, and a strong euro already impeding growth, the ECB is virtually ensuring a sharp euro-zone slowdown.
In any case, the actions recently announced by the Fed and other central banks are misdirected.
Today’s financial markets are dominated by non-bank institutions – investment banks, money market funds, hedge funds, mortgage lenders that do not accept deposits, so-called “structured investment vehicles,” and even states and local government investment funds – that have no direct or indirect access to the liquidity support of central banks.
All these non-bank institutions are now potentially at risk of a liquidity run.
Indeed, US legislation strictly forbids the Fed from lending to non-depository institutions, except in emergencies.
But this implies a complex and cumbersome approval process and the provision of high-quality collateral.
And never in its history has the Fed lent to non-depository institutions.
So the risk of something equivalent to a bank run for non-bank financial institutions, owing to their short-term liabilities and longer-term and illiquid assets, is rising – as recent runs on some banks (Northern Rock), money market funds, state investment funds, distressed hedge funds suggests.
There is little chance that banks will re-lend to these non-banks the funds they borrowed from central banks, given these banks’ own severe liquidity problems and mistrust of non-bank counterparties.
Major policy, regulatory, and supervisory reforms will be required to clean up the current mess and create a sounder global financial system.
Monetary policy alone cannot resolve the consequences of inaction by regulators and supervisors amid the credit excesses of the last few years.
So a US hard landing and global slowdown is unavoidable.
Much greater and more rapid reduction of official interest rates may at best affect how long and protracted the downturn will be.
The Economic Fundamentals of 2013
NEW YORK – The global economy this year will exhibit some similarities with the conditions that prevailed in 2012.
No surprise there: we face another year in which global growth will average about 3%, but with a multi-speed recovery – a sub-par, below-trend annual rate of 1% in the advanced economies, and close-to-trend rates of 5% in emerging markets.
But there will be some important differences as well.
Painful deleveraging – less spending and more saving to reduce debt and leverage – remains ongoing in most advanced economies, which implies slow economic growth.
But fiscal austerity will envelop most advanced economies this year, rather than just the eurozone periphery and the United Kingdom.
Indeed, austerity is spreading to the core of the eurozone, the United States, and other advanced economies (with the exception of Japan).
Given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries.
With growth anemic in most advanced economies, the rally in risky assets that began in the second half of 2012 has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy.
Most major advanced economies’ central banks – the European Central Bank, the US Federal Reserve, the Bank of England, and the Swiss National Bank – have engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan, which is being pushed toward more unconventional policies by Prime Minister Shinzo Abe’s new government.
Moreover, several risks lie ahead.
First, America’s mini-deal on taxes has not steered it fully away from the fiscal cliff.
Sooner or later, another ugly fight will take place on the debt ceiling, the delayed sequester of spending, and a congressional “continuing spending resolution” (an agreement to allow the government to continue functioning in the absence of an appropriations law).
Markets may become spooked by another fiscal cliffhanger.
And even the current mini-deal implies a significant amount of drag – about 1.4% of GDP – on an economy that has grown at barely a 2% rate over the last few quarters.
Second, while the ECB’s actions have reduced tail risks in the eurozone – a Greek exit and/or loss of market access for Italy and Spain – the monetary union’s fundamental problems have not been resolved.
Together with political uncertainty, they will re-emerge with full force in the second half of the year.
After all, stagnation and outright recession – exacerbated by front-loaded fiscal austerity, a strong euro, and an ongoing credit crunch – remain Europe’s norm.
As a result, large – and potentially unsustainable – stocks of private and public debt remain.
Moreover, given aging populations and low productivity growth, potential output is likely to be eroded in the absence of more aggressive structural reforms to boost competitiveness, leaving the private sector no reason to finance chronic current-account deficits.
Third, China has had to rely on another round of monetary, fiscal, and credit stimulus to prop up an unbalanced and unsustainable growth model based on excessive exports and fixed investment, high saving, and low consumption.
By the second half of the year, the investment bust in real estate, infrastructure, and industrial capacity will accelerate.
And, because the country’s new leadership – which is conservative, gradualist, and consensus-driven – is unlikely to speed up implementation of reforms needed to increase household income and reduce precautionary saving, consumption as a share of GDP will not rise fast enough to compensate.
So the risk of a hard landing will rise by the end of this year.
Fourth, many emerging markets – including the BRICs (Brazil, Russia, India, and China), but also many others – are now experiencing decelerating growth.
Their “state capitalism” – a large role for state-owned companies; an even larger role for state-owned banks; resource nationalism; import-substitution industrialization; and financial protectionism and controls on foreign direct investment – is the heart of the problem.
Whether they will embrace reforms aimed at boosting the private sector’s role in economic growth remains to be seen.
Finally, serious geopolitical risks loom large.
The entire greater Middle East – from the Maghreb to Afghanistan and Pakistan – is socially, economically, and politically unstable.
Indeed, the Arab Spring is turning into an Arab Winter.
While an outright military conflict between Israel and the US on one side and Iran on the other side remains unlikely, it is clear that negotiations and sanctions will not induce Iran’s leaders to abandon efforts to develop nuclear weapons.
With Israel refusing to accept a nuclear-armed Iran, and its patience wearing thin, the drums of actual war will beat harder.
The fear premium in oil markets may significantly rise and increase oil prices by 20%, leading to negative growth effects in the US, Europe, Japan, China, India and all other advanced economies and emerging markets that are net oil importers.
While the chance of a perfect storm – with all of these risks materializing in their most virulent form – is low, any one of them alone would be enough to stall the global economy and tip it into recession.
And while they may not all emerge in the most extreme way, each is or will be appearing in some form.
As 2013 begins, the downside risks to the global economy are gathering force.
Global Markets\u0027 Time Factor
BARCELONA – In recent months, the dichotomy between booming financial markets, on the one hand, and sluggish economies and dysfunctional politics, on the other, has loomed large.
Yet insufficient attention is being devoted to a critical factor – time, and who controls it – that could well mean the difference between an orderly global resolution of today’s growing inconsistencies and a return to a more troubled phase.
Markets have been understandably buoyant in the first quarter of 2013.
Most economic data confirm that, after the trauma caused by the global financial crisis, the United States’ economy is healing, and doing so in an accelerated fashion.
The sequence is now well established.
It started with large multinational companies, which are on as solid a financial footing as I can remember.
Smaller firms are gradually recuperating; banks have rebuilt their capital cushions and reduced their dubious assets; the housing sector has stabilized; and a growing number of households are reestablishing healthier balance sheets, especially as employment gradually picks up.
This private-sector recovery is helping government finances.
The US budget deficit has been on a downward trend for now, helped by both higher revenues and lower pressure on spending (for example, payments to the unemployed have fallen as joblessness has declined).
The healing process is also evident in Europe, though, unfortunately, it is effectively limited only to sovereign-bond markets.
The real economy remains under enormous pressure in several countries, as economies contract and unemployment remains alarmingly high.
After flirting with disaster last July, interest-rate spreads for eurozone bonds have generally been subdued, and financial segmentation has been slowly reversed (that is, at least before European officials embarked on the controversial path of trying to impose losses on guaranteed bank deposits in Cyprus).
Moreover, as Ireland’s highly successful €5 billion ten-year bond issue in mid-March demonstrated, some countries are in the process of restoring normal access to capital markets.
The impact on markets of these trends has been turbocharged by central banks, which are risk markets’ best friends.
This is not because they wish to play that role; rather, it is because higher asset prices are essential if central bankers stand any chance of delivering the desired economic outcomes of higher growth and stronger job creation.
This is most evident in the US, where markets love the Federal Reserve’s trifecta of near-zero policy interest rates (negative in real terms), aggressive forward policy guidance, and asset purchases – all of which push investors to take more risk.
Markets also welcome the fact that the Fed’s hyperactive experimentation is forcing other central banks around the world to pursue more expansionary policies.
Indeed, from the Bank of Japan’s dramatic policy U-turn to the Bank of Mexico’s surprise interest-rate cuts, the Fed’s approach is affecting central banks in a growing number of countries.
Pushed further away from best-case scenarios, they are unable to ignore the global liquidity impact of the Fed’s policies, yet they lack the right policy tools to address it.
The mix of endogenous healing and strong central-bank tailwinds, including from a “whatever it takes” European Central Bank, has also helped markets shrug off troubling political uncertainties.
Be it the US Congress’s paralyzing polarization or Italy’s protest vote against the established political order, politicians are being given time to overcome their dysfunction, thereby minimizing any immediate disruptive impact.
Understandably, investors have interpreted all of this as a green light to take more risk.
And with the hype this month over eight successive records for the Dow Jones index (and many other records around the world), excitement induces more investors to enter riskier asset markets.
The excitement is not anxiety-free, however, and rightly so.
Investors worry about the longer-term consequences of political dysfunction, another year of European economic contraction, disastrously high unemployment, unprecedented – and thus untested – central bank policies, and increasing global tensions.
And the recent bungling of the Cyprus rescue does not help.
No wonder some have called the recent market rally “one of the most unloved” in history.
This mix of excitement and anxiety is, in fact, a sign of the looming crossroads that faces investors.
One road, involving a relatively orderly handoff from policy-assisted recovery to self-sustaining growth, offers the possibility of even greater financial rewards, as rapidly improving economic and political conditions validate current artificial pricing and drive it higher.
The other road is a lot less attractive.
With insufficient endogenous healing and no economic escape velocity, the effectiveness of central banks’ policies wanes and political dysfunction increases, leading to financial losses, volatility spikes, and huge risk-management challenges.
Given current policy and political uncertainties – and the multiple equilibria that they entail – it is difficult to predict with a high degree of confidence which road eventually will be taken and when.
Those who claim otherwise may well fail to appreciate fully the exceptional nature of the current situation.
In these circumstances, timing may not be everything, but it may prove to be a key determinant of the probabilities.
If the journey to the crossroads is accelerated by a large geopolitical shock (originating in, say, the Middle East or North Korea) and/or a serious political breakdown in Europe (for example, a meltdown in Cyprus or prolonged political paralysis in Italy), the probability of taking the adverse path rises to an uncomfortably high level.
If, however, central banks can contain domestic and global inconsistencies long enough, the combination of endogenous healing and eventual political progress would significantly improve the probability distribution.
Have no doubt: today’s markets rely heavily on the old adage that “time heals all wounds.”
But their control of the clock is less than perfect; and it will become increasingly ineffective if economic improvement faces additional political headwinds in the months ahead.
The Global Home
Homes are the most local of investments, rooted to a particular place like a tree, and thus thriving or withering in response to local economic conditions.
The whole world flashes by on our television screens, but the market for our homes, which is comprised almost entirely of local amateurs, remains grounded right there in our own backyard.
Soon, however, this could all change.
Within a month, the Chicago Mercantile Exchange (CME), in collaboration with my company, MacroMarkets, as well as Fiserv and Standard & Poor’s, will launch futures and options contracts on home prices in ten cities in the United States.
The contracts will be settled on the S&P/Case-Shiller Home Price Indices, which developed out of academic work that my colleague Karl Case and I pioneered almost twenty years ago.
For many years we have been campaigning for housing futures, but no exchange wanted to use such indices to create a futures market until now.
The futures markets on home prices will allow investors around the world to invest in US homes indirectly, by buying interests in them through these markets.
An investor in Paris, Rio de Janeiro, or Tokyo will be able to invest in owner-occupied homes in New York, Los Angeles, and Las Vegas.
A fundamental principle of financial theory – “diversification” or “risk spreading” – implies that interest in the new contracts will be high.
People and businesses in New York, for example, are overexposed to their local real estate risks, so they should reduce this risk by selling New York home price futures.
People in Tokyo will assume some of this risk by purchasing New York home price futures if the price is right.
The New Yorkers still live in their own homes, but now they have spread their investment risk worldwide.
A genuine futures market on single-family homes has not been attempted since 1991 when the London Futures and Options Exchange (now merged into Euronext.liffe) failed in its effort to launch such a market in Britain.
That attempt never generated much trading volume.
The Exchange threw a party and no one came.
British spread-betting markets for home prices, and some retail online markets, have never amounted to much either.
Will it be different this time?
To be sure, starting a new market is always an uncertain proposition: people want to go to parties only if a lot of other people are there; if no one is there, no one wants to come.
Likewise, in markets without many investors, not enough trades can be executed to generate the returns needed to attract them.
As is often true of great parties, it can be a bit of a mystery how substantial new markets get started, but we know that it does happen from time to time.
Initial indications suggest growing interest in futures trading for home prices, particularly as so much talk about the “housing bubble” underscores the importance of diversifying risk.
After the CME’s announcement, one of its competitors, the Chicago Board Options Exchange, said that it plans to create futures and options contracts on major US regions, to be based on the median home price published by the National Association of Realtors.
But, aside from strong public interest in investing in housing and in hedging housing risks, another critical issue must be resolved if futures markets are to succeed: prices must be revealed, and investors must understand what these prices mean.
I believe there is a very good chance that many of these futures markets will soon be predicting substantial price declines in some US cities over the next year.
They will be in what traders call “backwardation”: the future price in the market today is lower than the price of a home today.
Maybe backwardation won’t appear on the first day that housing futures are traded, but there is a good chance it will come within a matter of months.
We may need backwardation in some of these markets if they are to fulfill their function.
Everyone knows that there has been a huge real estate boom in many of these cities (and elsewhere in the world) in recent years.
International investors are not likely to want to invest in these cities unless expectations of a price decline are built into the futures markets, as people in Tokyo understand from their own bitter experience.
But if backwardation is strong enough, even investors who think that the US housing market is headed for a fall will still be able to expect a good return from home price futures, because they are already getting a discounted price in the futures market.
Nevertheless, it will require some adjustment for New Yorkers seeking to hedge their own real estate investments to sell futures contracts that have a built-in price decline.
They will have to get used to the idea that the market already expects the decline, and that they can protect themselves only for that margin of possible future price declines that exceed this expectation.
In fact, such adjustments in our thinking will likely occur when we actually see the futures market prices.
Until now, the future course of real estate prices has been merely a matter of diverse opinion.
When markets create an international consensus on the future price of homes in cities around the world, we will be better able to manage the risks facing these cities, thereby stabilizing their economies – and our own lives.
The Global Impact of America’s Health Care Debate
CAMBRIDGE – Since assuming the presidency earlier this year, Barack Obama’s primary legislative focus has been on reforming the financing of American health care.
Yet his proposals are meeting strong opposition from fiscally conservative Democrats as well as from Republicans, owing to their potential impact on future fiscal deficits.
Because those deficits are the primary cause of America’s current-account deficit – and thus of global imbalances – the health-care debate’s outcome will affect governments and investors around the world.
About 85% of all Americans are now covered by some form of health insurance. All individuals over the age of 65 are eligible to be insured by the federal government through the Medicare program.
Low-income families (and those whose income and assets are depleted by high medical costs) are covered by the Medicaid program, which is financed jointly by the states and federal government.
Many uninsured get free care in emergency rooms of public and private hospitals and receive free care for chronic conditions in those same institutions.
In the most recent budget, the federal government’s outlays for Medicare in 2010 are projected to be over $500 billion, while Medicaid will cost taxpayers over $250 billion.
Private health insurance is generally provided by employers, which is encouraged by treating employer payments for health insurance as a tax-deductible business expense while not including the value of that insurance as taxable income to employees.
That rule reduces income and payroll taxes by more than $200 billion.
In short, an overwhelming majority of Americans are insured, with government a major financer of health care.
But there remain about 54 million individuals who are not formally insured, and some insured individuals still face the risk of financially ruinous medical costs if they have very expensive medical treatment.
Obama campaigned on the goals that everyone should have health insurance, that high medical costs should not bankrupt anyone, and that increased efficiency in the production and delivery of care should slow the overall growth of health-care costs.
But, rather than producing a specific proposal, he left it to Congress to design the legislation.
Several competing plans emerged from the different Congressional committees that have jurisdiction over the issue.
The leading proposal, produced by the Senate Finance Committee, fails to achieve any of Obama’s goals.
It would cut the number of uninsured roughly in half, but would still leave about 25 million people uninsured – with the threat of ruinously high medical bills deterring them from getting care.
There is also no clear plan to slow the growth of health-care costs.
As a sign of their support for the administration’s goals, the pharmaceutical industry and the hospital industry have together promised to reduce costs by a total of about $20 billion a year – a token amount, given government health spending of roughly $1 trillion and total health outlays of more than $2 trillion.
The non-partisan Congressional Budget Office (CBO) estimates that the Senate Finance Committee plan would cost about $800 billion between now and 2019.
Most of this increased cost would, in principle, be financed by $215 billion of taxes on high-premium insurance policies, and by about $400 billion of cuts in payments to physicians and hospitals that provide services to older patients in the Medicare program.
If the cost and financing estimates are accurate, and if Congress does not change any of these provisions in the future, the CBO’s calculations imply that the Senate Finance Committee plan would reduce fiscal deficits between now and 2019 by $49 billion, less than 1% of the projected deficits of more than $7 trillion.
In fact, there is a strong risk that this legislation would ultimately add to the fiscal deficit.
Increasing the number of insured by 35 million and broadening protection for some who are now insured implies increased demand for health care, which could raise the cost of care paid for by the government as well as by private health-care buyers.
In addition, both sources of financing are also uncertain.
Taxes on high-premium insurance policies would lead many employees and employers to shift their sources of tax-free income from these health-insurance benefits to other forms of untaxed compensation.
If they do this, the government would not collect the additional revenue from the insurance companies, employers, or employees.
Similarly, the proposed cuts in payments to providers of services to Medicare patients are unlikely to receive the necessary Congressional support in future years, especially if it turns out that doing so would reduce the volume of services, rather than just providers’ incomes.
There is a long history of legislating such spending cuts, only to reverse them in subsequent years.
In considering the fiscal implications of Obama’s health proposals, it is important that the current legislation would still leave 25 million individuals without insurance.
How much would it cost to insure them if the gross cost is now projected at $800 billion for the easier-to-insure 35 million?
And how could that cost be financed if the proposed taxes on existing health policies and the reductions in Medicare outlays have already been used?
Closing that gap could add more than $1 trillion to the government’s cost over the next 10 years.
It is clear that there is a significant danger that the current legislation would add substantially to future US deficits – and establish a precedent for even more expensive expansions of health care in the future.
This would come on top of the currently projected fiscal deficits in both the near term and over the coming decade – and before America’s demographic shift substantially raises the cost of Social Security and Medicare.
Surprisingly, the bond market still seems almost oblivious to this risk.
But holders of US debt worldwide have every reason to be concerned.
The Global Impact of America’s Housing Crisis
CAMBRIDGE – The bursting of America’s housing bubble in the summer of 2006 triggered the global financial crisis and recession.
The sharp fall in house prices that followed caused a dramatic downturn in household wealth, leading to lower consumer spending and an overall fall in GDP.
By now, wealth in the form of owner-occupied housing is down about 30%, equivalent to a loss of more than $6 trillion of household wealth.
The fall in house prices also led to a sharp rise in mortgage defaults and foreclosures, which has increased the supply of homes on the market and caused house prices to fall further.
As a result, one-third of all American homeowners with mortgages are already “underwater” – their mortgage debt exceeds the value of the house.
For one-sixth of these homes, the debt is 20% higher than the price of the house.
In addition, high loan-to-value ratios in the US interact with household financial problems to increase the number of defaults and foreclosures.
More specifically, the rising unemployment rate, along with the large number of employees on involuntary part-time work, has increased the number of people who cannot afford their monthly mortgage payments.
Unlike virtually every other country, US residential mortgages are effectively “no recourse” loans.
If a homeowner stops making mortgage payments, the creditor can take the property but cannot take other assets or a fraction of wages.
Even in those states where creditors have the legal authority to take other assets or wage income, the personal bankruptcy laws are so restrictive that creditors don’t bother to try.
Although it is tempting to think of this as a purely domestic problem affecting the United States, nothing could be further from the truth.
When homeowners default, banks lose money, and uncertainty about the extent of future defaults undermines confidence in banks’ capital, making it more difficult for them to raise funds and causing them to reduce their lending in order to conserve existing resources.
As a result, the recession has been deeper and longer than it would otherwise have been.
The resulting weakness of the US economy will mean lower US import demand.
And, if the downward spiral in house prices continues, the value of mortgage-backed securities held by financial institutions around the world will continue to decline, affecting the supply of credit far beyond the US.
Some recent data suggest that the decline in house prices may be coming to an end. The rate of decline of US house prices fell in the past three months for which we have data (ending in May), and the figures for May show essentially no decline at all.
If that trend continues, it will prevent further erosion of household wealth and strengthen the banks’ capital positions.
But the recent data, while encouraging, may be the result of temporary factors rather than an indication that the fall in house prices has actually come to an end.
Mortgage interest rates fell below 5% in March and April, but have risen significantly since then.
Moreover, a government program of subsidies to first-time homebuyers may have released a backlog of pent-up demand.
And banks had a voluntary moratorium on foreclosures, holding supply off the market.
All of this may have caused a temporary improvement in house prices.
In short, we will have to wait for the data on house prices in June and July to know whether there has been a permanent turnaround.
The recent rise in existing home sales in the US may also be misleading, since a large proportion are sales of foreclosed properties.
Indeed, property that has either been foreclosed or is on the verge of foreclosure now accounts for nearly one-third of all existing home sales.
Foreclosed property is generally sold at auction, guaranteeing that there will be a buyer – but driving down prices.
Significantly, foreclosures rose 7% month on month in June, and a whopping 32% compared to June 2008.
The Obama administration has enacted legislation aimed at helping individuals who are having difficulty making their monthly mortgage payments because of a decline in their incomes or a rise in the interest rate on their mortgage.
For individuals with high monthly mortgage payments relative to their disposable income, the US government will share with the creditor bank the cost of reducing the monthly payment to 31% of disposable income.
This is a new program, and it remains to be seen how well it will work to prevent future defaults.
Some limited previous experience with mortgage modifications is not encouraging.
Nearly 50% of those who had their mortgages modified nevertheless defaulted within six months.
Unfortunately, there is no program to deal with the defaults and foreclosures caused by high loan-to-value ratios.
Given the large number of negative-equity homeowners, there is a risk that defaults and foreclosures will continue.
If they do, the sale of foreclosed properties will continue to depress house prices, reducing household wealth and hurting financial institutions.
Unless house prices have stopped declining, it is important for the Obama administration to turn to the problem of high loan-to-value ratios.
That would help not only the US economy, but also the economies of all of America’s trading partners.
The World After November
MADRID – On November 6, either Barack Obama or Mitt Romney will emerge victorious after an exhausting electoral race, setting the wheels in motion for the coming four years.
An ocean away, on November 8, more than 2,000 members of the Chinese Communist Party (CCP) will gather in Beijing.
Approximately a week later, the members of the Politburo Standing Committee will walk out in hierarchical order, preparing to take charge of a growing country of 1.3 billion people.
The leaders of the world’s two largest economies are changing.
So is the world itself.
The Middle East, in particular, is experiencing a moment of intense transformation.
While reconstruction – both literal and figurative – is commencing in some parts of the region, countries like Syria are aflame.
Others, such as Iran, with its moribund revolution, have never ceased rumbling.
Amidst a crumbling economy, the country remains belligerent, using its Lebanese proxy, Hezbollah, to launch at least one successful drone flight above Israel and reportedly initiating recent cyber attacks.
As a result, relations among regional actors remain tense.
After his speech at the United Nations appealing for a “red line” on the Iranian nuclear program in the spring or summer of 2013, Israeli Prime Minister Binyamin Netanyahu called an early general election, which could potentially give him a strong mandate for action against Iran.
Egypt, meanwhile, is finding its own equilibrium, both domestically, drafting a new constitution, and in terms of foreign policy.
Then there is Turkey, straddling Europe and the Middle East.
An emerging economy poised to become a regional power, it has exchanged fire with its neighbor to the south, Syria, and has called on its NATO allies to bolster its security.
This is part of the changing panorama that new world leaders will inherit in the Middle East – a region in which the United States has been deeply involved.
After nearly a decade of draining military engagement, the US combat mission in Iraq concluded in 2010, and the combat mission in Afghanistan is set to end in 2014.
The next American president will also inherit a country with a markedly changed geopolitical perspective.
Technological advances and innovation have begun to turn the longstanding dream of energy independence into a reality.
Whereas extraction of America’s extensive reserves of natural gas was previously thought to be unfeasible, technologies such as hydraulic fracturing (“fracking”) have ushered in a shale-gas revolution.
Indeed, the US is on the cusp of energy self-sufficiency.
Last year, for the first time in 15 years, less than one-half of the oil consumed in the US was imported.
Annual growth in shale-gas production has increased from 17% between 2000 and 2006 to 48% between 2006 and 2010.
By 2035, shale gas is projected to account for roughly one-half of total US energy production.
The repercussions of this revolution will not be only economic.
Politically, reduced reliance on foreign oil may allow the US to concentrate on its foreign-policy shift toward Asia.
But it is not just the new US leader who will inherit a changed world.
Across the Pacific, the days of record-breaking economic growth in Asia – a key component of social and political stability – may be coming to an end.
Indeed, events in China in recent months have revealed internal unease.
Though nationalist sentiment directed against external foes tends to divert attention temporarily from internal turmoil, the country’s serious domestic problems need to be addressed.
China’s economy and politics, ideologically transformed in all but name, will soon need to be adapted to address rising social inequality.
Despite global economic headwinds, China’s leaders will surely remain focused on maintaining and boosting growth, in order to lift more Chinese out of poverty and avert social unrest; they are also certain to continue monitoring the oil-rich Middle East.
After years of relying on America’s presence in the region, playing an advantageous waiting game, China’s next leaders may embrace a more active role.
And, because China’s reputation in the region is untainted by a legacy of imperialism, they may be in a rather advantageous position to do so.
Meanwhile, the European Union is struggling with its own demons.
Despite the EU’s need to focus inward while weathering the global economic crisis, the Union must not abandon its neighbors to the south.
It is crucial to engage with the southern Mediterranean region as a critical meeting point – a place of political, economic, and energy cooperation.
In this respect, the EU’s most valuable tools are its signature, Nobel Prize-winning model of multilateral dialogue and soft power.
Next door, Russia, too, must respond to new vulnerabilities stemming from changing global conditions.
The Kremlin continues to support Syrian President Bashar al-Assad’s regime, maintaining a strict aversion to military intervention and seeking to defend its strategic interests, including its naval base in the Syrian city of Tartus.
That stance has translated, most obviously, into repeated vetoes of UN Security Council resolutions aimed at ending a conflict that has already produced tens of thousands of victims.
International inaction on Syria is bad news not only for the country’s people; it is also eroding the legitimacy of one of the world’s most important multilateral institutions.
Given that the issues of Iran and Syria are closely connected, internal division among the Security Council’s five permanent members (the US, China, Britain, France, and Russia) could be extremely damaging to the search for a solution to Iran’s nuclear-enrichment drive.
That is reflected in the current stalemate in talks between them (plus Germany) and Iran.
Too much is at stake, which is why all possible tracks for a negotiated outcome must be pursued.
Whether or not recent rumors of bilateral US-Iran talks prove true, such initiatives should be welcomed.
While the big players remain preoccupied with their internal changes, the region continues to smolder.
The main question now is whether the leaders who emerge in November will be firefighters or fire starters.
Mental Health for All
MELBOURNE – One spring evening in 1997, when I was a mental-health researcher at the Australian National University in Canberra, I was discussing with my wife, Betty Kitchener, a registered nurse who taught first-aid courses for the Red Cross in her spare time, the inadequacy of conventional first-aid training.
Such courses typically neglect mental-health emergencies, leaving participants poorly equipped to help people who are struggling with suicidal thoughts, panic attacks, post-traumatic stress, the effects of alcohol or drug abuse, or a diminishing grip on reality.
Betty knew firsthand the potential consequences of this lack of knowledge.
When she was 15, she experienced an episode of severe depression, which culminated in a suicide attempt.
But her family and teachers failed to recognize the problem, so she received no support or professional help.
This lack of early treatment undermined her recovery, and she has continued to experience episodes of depression throughout her life.
In order to help ensure that more people did not have to suffer alone as Betty had, we resolved to create a mental-health first-aid training course in our local community.
Three years later, when Betty reduced her paid employment in order to develop Mental Health First Aid training, we were finally able to launch the course.
The benefits of this initiative quickly became apparent, with evaluation studies showing that participants became more accepting of the health significance of mental illnesses, more confident in their ability to help others, and motivated to apply their knowledge after completing the course.
Such positive results helped to drive the course’s expansion.
By 2005, it was operating across Australia and in Scotland and Hong Kong, and has since spread to more than 20 other countries.
Over 200,000 people in Australia alone – more than 1% of the population – have now received the training.
This rapid growth should not be surprising, given the prevalence of mental-health problems worldwide.
In Australia, roughly one in five adults is affected by a diagnosable mental-health problem each year, but many of these people receive no professional help.
The statistics are similar in other developed countries.
This means that everyone will either be personally affected by a mental-health problem or have close contact with someone who is.
Indeed, most people will have contact, whether they are aware of it or not, with someone who is suicidal.
Research shows that whether or not a person obtains professional help is strongly influenced by the encouragement and attitudes of those close to them.
People with strong support networks have a significantly better chance of recovery than those whose problems go undetected or are ignored or minimized.
Given this, ensuring awareness and acceptance in communities, while enhancing people’s ability to identify potential mental-health problems in others and to provide help, is vitally important.
This need is particularly pressing for those – such as parents, teachers, youth workers, and sports coaches – who are in regular contact with young people.
Mental-health problems tend to arise early in life, with the first episode occurring during adolescence or early adulthood – a critical phase of development, when people are completing their education, joining the work force, building key relationships, and forming health habits.
Without a strong support system, mental-health problems can disrupt these developments, damaging the future prospects of those whom they affect.
While the Mental Health First Aid course’s rapid expansion has helped to improve the situation in many communities, there is much left to do.
In the short term, all developed countries should aim to achieve 1% participation rates in mental-health first-aid courses, as Australia has.
In the longer term, countries should aim to match participation rates in conventional first-aid courses.
In the last three years, 11% of Australia’s population has completed such a course, partly owing to requirements that people in certain positions, such as child-care workers, have a first-aid certificate.
Requiring that people in particular occupations – including high-school teachers, nurses, and police officers – acquire a mental-health first-aid certificate would significantly enhance participation, thereby strengthening support for those who are struggling with mental-health problems.
Such certifications are even more important in the developing world, given the limited availability of mental-health professionals.
Pilot work in rural India shows that the mental-health first-aid approach can be successfully adapted to the needs of communities with limited resources.
In developed and developing countries alike, the scope of the problem is too large to be left exclusively to mental-health professionals.
Every member of the community must be empowered to protect and improve their own mental health, and that of those around them.
The Global Innovation Revolution
BERKELEY – As countries around the world struggle to lay the foundations for stronger sustainable growth in the future, they would do well to focus on policies that encourage innovation.
Empirical studies across time and countries confirm that innovation is the primary source of technological change and productivity growth.
And investments in research and development, as well as in the scientific and engineering workforce on which they depend, are critical drivers of innovation and national competitiveness.
A new study by the National Science Board, the governing body of the National Science Foundation in the United States, examines trends in such investments for both individual countries and regions.
These trends indicate that the global landscape for innovation changed significantly during the last decade.
That landscape is likely to change further as several Asian economies, particularly China and South Korea, increase their investments in R&amp;D and scientific and engineering education to secure their place as significant hubs of innovation.
At the same time, crushing debt burdens may compel the US, Europe, and Japan to reduce their investments in these areas.
The US remains the global leader in R&amp;D investment, spending an estimated $400 billion in 2009 – a total boosted by President Barack Obama’s stimulus package, and higher than China, Japan, and Germany combined.
But, in terms of R&amp;D spending as a share of GDP, the US ranked only eighth in 2009 (at 2.9% of GDP).
The US share remained above the OECD average, but this was mainly the result of national differences in the amount of R&amp;D defense spending.
Indeed, defense accounted for 52% of US R&amp;D in 2009, and for more than 50% during the last 25 years.
The defense share of R&amp;D in the European Union and Japan has been and remains markedly lower – less than 10% in the EU and less than 5% in Japan in 2009 (no comparable data are available for China and South Korea).
Over the next decade, sizeable cuts in defense spending as part of overall deficit reduction could mean a significant reduction in R&amp;D investment in the US.
Between 1999 and 2009, global R&amp;D spending grew at an average annual rate of 7%, accelerating to 8% during the last five years, despite the global recession.
During the entire period, R&amp;D spending grew significantly faster than global output, reflecting both increasing government support and a rising share of technology-intensive industries in global production and trade.
But these aggregate figures obscure differences among countries and regions.
Over the decade, the US share of global R&amp;D fell from 38% to 31%, the EU share fell from 27% to 23%, and Asia’s share rose from 24% to 32%.
Within Asia, R&amp;D spending in China grew at an astounding 20% annual pace –&#160;twice the country’s GDP growth rate – and by 2009 China had surpassed Japan to become the world’s second-largest investor in R&amp;D. Spending on R&amp;D also grew rapidly – about 10% annually – in South Korea.
By contrast, R&amp;D spending grew by 4% in Japan, 5% in the US, and roughly 6% in Europe.
Throughout the world, the business sector remains both the predominant performer and the predominant funder of R&amp;D investment.
In 2009, business accounted for 75% of R&amp;D funding in Japan, 73% in South Korea, 72% in China, 67% in Germany, and 60% in the US, whose companies are the largest R&amp;D investors in terms of absolute purchasing power, spending more than twice as much as Japanese businesses.
But business investment as a share of GDP has changed very little in the US over the last decade, while it has risen rapidly in many other countries, including China, Singapore, South Korea, and Israel.
Global multinational companies are the largest business-sector R&amp;D investors in the US and other countries.
For example, multinational companies, whether headquartered in the US or elsewhere, accounted for about 84% of private (non-bank) R&amp;D investment in the US in 2009, about the same as a decade earlier.
And US multinationals still locate about 84% of their R&amp;D activities in the US, often in innovation clusters around research universities.
But this share has declined during the last decade, as US multinationals have shifted some of their R&amp;D from the US and Europe to Asia in response to rapidly growing markets, ample scientific and engineering talent, and generous subsidies.
Global competition for multinational companies’ R&amp;D activity, and for the local benefits that it brings, is likely to intensify in the future, with many countries already offering sizeable tax credits and extended tax holidays.
The Asian economies have been particularly aggressive in the use of such incentives.
And, recognizing that the availability of a workforce with the necessary skills is a key determinant of where businesses locate their R&amp;D activities, many countries are increasing their investments in tertiary education and training in science, engineering, and technology.
Engineering accounts for only 4% of all bachelor’s degrees in the US, compared to 19% in Asia – which now accounts for half of all engineering degrees being awarded – and 33% in China.
Many countries are also changing their immigration laws to make it easier to attract highly skilled workers, especially scientists and engineers, who are increasingly mobile.
Meanwhile, immigration policies in the US and Europe are making it more difficult to attract and retain such workers, compelling companies to shift R&amp;D abroad to find the talent that they need.
As a result of these changes, the global landscape for innovation has been transformed over the last decade.
Ours is now a world in which many emerging-market countries have made advancement in science and technology a top priority, and in which multinational companies’ R&amp;D investments have become much more mobile.
As the US and other developed countries embark on austerity plans to contain their debt, they must heed these changes in the innovation landscape and boost their investments in R&amp;D – and in science and engineering education – even as they make painful cuts elsewhere.
The Globalization of Ethics
Many Europeans doubt that Asia can catch up with Europe in terms of regional integration.
But Asia not only has the type of stable common ethical foundations that were so important to European integration; it also has a well developed set of moral principles, some of which were an established part of Asian culture long before similar principles were adopted in Europe.
Indeed, these Asian principles can serve as a part of an emerging common global ethic.
Of course, Asia does not yet have a cohesive core culture comparable to that of Europe, which is founded on the Judeo-Christian tradition and the Enlightenment.
But Europeans ought not to be too arrogant, because, in recent years, that common European culture has itself proven to be fragile, particularly in light of the Bush administration’s divide-and-rule strategy pitting “Old Europe” against “New Europe.”
And, just as the inhuman terror attacks of September 11, 2001 severely damaged Islam’s credibility in many people’s eyes, the invasion of Iraq, which was based on lies, has damaged both Christianity and the Western community of values.
Although Asia seems to lack Europe’s cultural core, there are core ethical constants that have long governed Asian societies and indicate common ethical foundations.
Indeed, in some respect, Asia has more experience with intercultural relations than Europe.
As early as the third century B.C., Buddhism spread peacefully from India to Sri Lanka and to large parts of Southeast Asia.
In the first century C.E., it continued its advance, spreading along the Silk Road to Central Asia and China, and finally made its way to Korea and Japan centuries later.
Ethnically homogeneous Japan is an example of how three different religions – Shinto, Confucianism, and Buddhism – can coexist peacefully and, in many cases, intermingle.
Even Islam – which mostly spread in the wake of military conquests in the Middle East, India, and North Africa – expanded rather peacefully into Southeast Asia in the footsteps of merchants, scholars and mystics.
Moreover, there was a historically important and ethically oriented humanism in China as early as the fifth century B.C. The concept of “ren,” which corresponds to our “humanum” is a central term in the Chinese tradition.
Likewise, Confucius was the first to formulate the Golden Rule of Reciprocity: “Never impose on others what you would not choose for yourself.”
This Golden Rule, however, also appears in the Indian tradition. In Jainism, it is stated as: “A man should wander about treating all creatures as he himself would be treated.”
In Buddhism: “A state that is not pleasant or delightful to me must also be so to him; and a state that is not pleasing or delightful to me, how could I inflict that upon another?”
This is the essence of morality.”
This “Golden Rule” can also, of course, be found in the Abrahamic religions. Rabbi Hillel (60 B.C.) said: “What is hurtful to yourself do not do to your fellow man.”
Jesus worded it positively: “So in everything, do to others what you would have them do to you.”
Moreover, such commonalities go beyond the principle of humanity and the Golden Rule of Reciprocity.
Four concrete ethical rules were laid down in the Buddhist canon by Patanjali, the founder of Yoga, in the Chinese tradition and, of course, in the three prophetic religions: “Do not kill,” “do not steal,” “do not bear false witness,” and “do not abuse sexuality.”
These trans-cultural ethical rules form structural elements of a common human ethic, whatever we call it, and make almost irrelevant the idea of a deep antagonism between “Asian” and “Western” values.
If Asia focuses on its trans-cultural ethical core, an entirely new spirit of unity can be developed that uses soft power instead of military force and does not know enemies, but only partners and competitors.
In this way, Asia could catch up with the West in terms of its cultural integration while contributing to the establishment of a genuinely peaceful new world order.
This project differs from the West’s human rights movement, which is based on natural law thinking.
The point is rather to integrate values, standards, and attitudes of ethical-religious traditions that, while appearing in each culture in a specific form, are common to all, and that can be supported by non-religious people as well.
The Globalization of Mass Politics
Globalization has assumed a new form: global mass politics.
Of course, political protests have been global for decades, as past marches against the Vietnam War, nuclear weapons, and globalization itself demonstrated.
The revolutions of 1989 and 1991 in Eastern Europe and the former Soviet Union blanketed a huge region within months.
But the anti-Iraq War protests reveal a new dynamic.
Up to 10 million protestors in some 60 countries and 600 cities took to the streets on schedule on a single day, February 15, showing that mass politics can now be approached globally.
Communications and mass media have long enabled "copycat" effects--protests in one place ignite similar actions elsewhere.
The overthrow of King Louis Phillipe in France in 1848 was carried by the recently introduced telegraph to Germany, igniting revolution.
Television images of the fall of the Berlin Wall spurred revolutionary changes throughout the former Soviet bloc.
On other occasions, protests such as May Day marches were transformed into widespread social mobilization, as happened in France on May 1, 1968.
What is distinctive about the recent mass protests against US plans for a war against Iraq is that the February 15 event was planned ahead of time, at short notice, for a specific date, and with an explicit goal of worldwide scale.
The decision to launch February 15 as a day of mass protest was apparently taken at a meeting of activists at the European Social Forum in Florence in November last year.
In ninety days, these organizers turned out more than 5 million protestors worldwide.
There are three keys to this phenomenon:
The Internet allowed for a rapid worldwide dissemination of organizational plans at an extraordinarily low cost to the organizers.
Mass action depended on local organizations seizing the initiative, based on a loose global plan.
This is what network theorists call "self-organizing" behavior.
As each unit took its own steps, these local actions were communicated to the rest of the world through Web sites that tracked and disseminated global plans, as well as offering information, advice, and encouragement.
A worldwide common concern: the prospect of an Iraq War.
There was a fourth specific feature fuelling the global protests, too: the exceptionally high level of arrogance and ineptitude displayed by the Bush Administration.
US Defense Secretary Donald Rumsfeld provoked the world's ire through a mocking disdain for global public opinion.
Rumsfeld's juvenile attack on "old Europe" no doubt helped bring millions into the streets.
Indeed, it's no longer possible in an age of mass communication to "play to the home audience" without the world also listening.
Bush's swaggering style plays well in Texas, but not in Paris and Berlin.
It is unlikely that worldwide protests will stop the Bush Administration's war plans, but they will help shape the political, security, and economic ramifications of such a war.
The war is likely to proceed because the US can carry out the military phase of the war largely on its own, and because the Bush Administration has no easy way to back down from its military mobilization.
Moreover, the uncertainties over war are hurting America's economy (and economies elsewhere), by causing a postponement of business plans and falling consumer confidence.
If today's stalemate drags on, the weak economy will threaten Bush's re-election bid in November 2004.
His political advisors may well advise him that it will soon be "now or never" to launch the war.
But America will pay dearly for launching a war against global public opinion.
Unless the Bush administration is vindicated in its actions--for example, if Saddam Hussein launches weapons of mass destruction that unite the world against him, or if the US discovers hidden nuclear weapons in the Iraqi desert--anti-American sentiments, and terrorism, unleashed by war, are likely to be massive.
America's people have never been told about the huge financial and political burdens that lie ahead, and they are not ready to bear them.
Already the US is facing huge fiscal deficits and a squeeze on popular programs, even before the costs of war and its aftermath are taken into account.
Cheap and instantaneous means of global communication are here to stay.
February 15 demonstrates that people throughout the world will use them to demand their right to help shape global political decisions.
The Globalization of Old Age
Anti-globalization campaigners gripe that the rich are getting richer.
That's true in many ways. But rich countries are also getting older.
This "graying" of the world's richest nations will profoundly affect not only these societies, but poorer countries as well.
According to the UN, the world's population now stands at 6.3 billion and will reach 9.3 billion by mid-century.
People aged 60 or more are projected to increase from 629 million now to nearly 2 billion by 2050.
Furthermore, the elderly population itself is aging.
The 80+ age group makes up the fastest-growing segment of the population; its share of the over-60 population will increase from 12% to 19% by 2050.
This "graying of the world" is a natural result of falling fertility rates and rising life expectancy.
While the decline in fertility is global, its speed varies across countries.
Rich countries in Europe, North America, and East Asia have a sharply higher share of the elderly than developing countries.
Fertility reductions in the richer parts of the world have already brought population growth rates close to zero.
Furthermore, due to improved access to quality health care and better living conditions, life spans in rich countries are now much longer than in the developing world.
People aged 60 or more represent almost 20% of the population in rich countries today, whereas in the world as a whole this ratio is not expected to be reached before 2050.
By that point, this age group in industrial countries will claim one-third of the total population.
It will take another century for the rest of the world to catch up.
One result of all this is that the relative number of working-age individuals between 15-64 who pay the taxes to support pensioners is declining much faster in the industrial world than in developing countries, where populations remain young and grow rapidly.
Rich economies are already challenged by this decline, and so are scrambling to meet the insatiable demands of public pension and health care systems, which causes their fiscal balances to deteriorate.
The effects of population aging will become even more obvious and widespread in the decades ahead, as domestic labor supply in rich countries shrinks even further.
Moreover, because the elderly tend to spend more and save less, rich countries will also face changes in the ratio of savings to consumption in their national income, as well as in the composition of what is purchased.
These demographically induced developments will not only affect investment and growth patterns of industrial economies, but the allocation of resources as well.
In a globalized world, what happens in rich countries has an impact on developing economies.
Yet, there is little discussion of the opportunities and challenges this presents.
Nowadays, most talk focuses on migration as a means of letting overpopulated developing countries fill the labor shortages of developed countries with graying populations.
Japan's population, for example, is projected to decline by 17.9 million by 2050, while the share of its 60+ population will climb to 42%, and the share of its 80+ population will exceed 10%.
The number of working-age Japanese will thus fall sharply, bringing the ratio of workers to retirees to about one.
Estimates suggest that Japan would need 10 million immigrants per year until 2050 just to maintain the ratio of workers to pensioners that it had in 1995!
Will developed countries really allow for migration on such a scale?
Or will they instead increase their imports of manufactured products and food, thus creating jobs in developing countries that might help absorb their surplus labor?
Even if rich countries choose increased imports, the growing volume of trade will merely expand an existing channel for routing the effects of an aging population onto developing countries.
Trade serves as such a channel because nations with aging populations are economically powerful and so are capable of setting the terms on which they trade with poorer countries.
Developing countries that trade intensively with advanced economies must adopt their relative prices and allocate their resources accordingly.
But these relative prices will increasingly reflect the changed demands of the aging citizenry of industrial nations.
International capital flows will also magnify such demographic spillover effects, as capital is traded at the interest rates determined in large industrial economies.
These rates will increasingly be influenced by the changing age composition within advanced countries.
Because the old save less, lower aggregate savings in rich countries will crimp the relative abundance of capital available to poorer economies.
The powerful combination of globalization and aging will make developing economies ever more susceptible to changes in the terms of trade, interest rates, and exchange rates in rich countries.
All developing countries should monitor these demographic developments closely, even if they have yet to experience population aging themselves.
Young nations such as Mexico and Turkey should be particularly careful, due to their strong economic ties with NAFTA and the EU, where the gradual aging of populations is well under way.
The Globalization of Protest
NEW YORK – The protest movement that began in Tunisia in January, subsequently spreading to Egypt, and then to Spain, has now become global, with the protests engulfing Wall Street and cities across America.
Globalization and modern technology now enables social movements to transcend borders as rapidly as ideas can.
And social protest has found fertile ground everywhere: a sense that the “system” has failed, and the conviction that even in a democracy, the electoral process will not set things right – at least not without strong pressure from the street.
In May, I went to the site of the Tunisian protests; in July, I talked to Spain’s indignados; from there, I went to meet the young Egyptian revolutionaries in Cairo’s Tahrir Square; and, a few weeks ago, I talked with Occupy Wall Street protesters in New York.
There is a common theme, expressed by the OWS movement in a simple phrase: “We are the 99%.”
That slogan echoes the title of an article that I recently published, entitled “Of the 1%, for the 1%, and by the 1%,” describing the enormous increase in inequality in the United States: 1% of the population controls more than 40% of the wealth and receives more than 20% of the income.
And those in this rarefied stratum often are rewarded so richly not because they have contributed more to society – bonuses and bailouts neatly gutted that justification for inequality – but because they are, to put it bluntly, successful (and sometimes corrupt) rent-seekers.
This is not to deny that some of the 1% have contributed a great deal.
Indeed, the social benefits of many real innovations (as opposed to the novel financial “products” that ended up unleashing havoc on the world economy) typically far exceed what their innovators receive.
But, around the world, political influence and anti-competitive practices (often sustained through politics) have been central to the increase in economic inequality.
And tax systems in which a billionaire like Warren Buffett pays less tax (as a percentage of his income) than his secretary, or in which speculators, who helped to bring down the global economy, are taxed at lower rates than those who work for their income, have reinforced the trend.
Research in recent years has shown how important and ingrained notions of fairness are.
Spain’s protesters, and those in other countries, are right to be indignant: here is a system in which the bankers got bailed out, while those whom they preyed upon have been left to fend for themselves.
Worse, the bankers are now back at their desks, earning bonuses that amount to more than most workers hope to earn in a lifetime, while young people who studied hard and played by the rules see no prospects for fulfilling employment.
The rise in inequality is the product of a vicious spiral: the rich rent-seekers use their wealth to shape legislation in order to protect and increase their wealth – and their influence.
The US Supreme Court, in its notorious Citizens United decision, has given corporations free rein to use their money to influence the direction of politics.
But, while the wealthy can use their money to amplify their views, back on the street, police wouldn’t allow me to address the OWS protesters through a megaphone.
The contrast between overregulated democracy and unregulated bankers did not go unnoticed.
But the protesters are ingenious: they echoed what I said through the crowd, so that all could hear.
And, to avoid interrupting the “dialogue” by clapping, they used forceful hand signals to express their agreement.
They are right that something is wrong about our “system.”
Around the world, we have underutilized resources – people who want to work, machines that lie idle, buildings that are empty – and huge unmet needs: fighting poverty, promoting development, and retrofitting the economy for global warming, to name just a few.
In America, after more than seven million home foreclosures in recent years, we have empty homes and homeless people.
The protesters have been criticized for not having an agenda.
But this misses the point of protest movements.
They are an expression of frustration with the electoral process.
They are an alarm.
The anti-globalization protests in Seattle in 1999, at what was supposed to be the inauguration of a new round of trade talks, called attention to the failures of globalization and the international institutions and agreements that govern it.
When the press looked into the protesters’ allegations, they found that there was more than a grain of truth in them.
The trade negotiations that followed were different – at least in principle, they were supposed to be a development round, to make up for some of the deficiencies highlighted by protesters – and the International Monetary Fund subsequently undertook significant reforms.
So, too, in the US, the civil-rights protesters of the 1960’s called attention to pervasive institutionalized racism in American society.
That legacy has not yet been overcome, but the election of President Barack Obama shows how far those protests moved America.
On one level, today’s protesters are asking for little: a chance to use their skills, the right to decent work at decent pay, a fairer economy and society.
Their hope is evolutionary, not revolutionary.
But, on another level, they are asking for a great deal: a democracy where people, not dollars, matter, and a market economy that delivers on what it is supposed to do.
The two are related: as we have seen, unfettered markets lead to economic and political crises.
Markets work the way they should only when they operate within a framework of appropriate government regulations; and that framework can be erected only in a democracy that reflects the general interest – not the interests of the 1%.
The best government that money can buy is no longer good enough.
The Globalization of Science
SAN FRANCISCO – Science provides an invaluable source of guidance to individuals and governments.
This is true, in part, because scientists can often predict the future consequences of current actions.
For example, we know that someone who smokes two packs of cigarettes a day is likely to have a serious problem with cancer some 40 years later.
And science predicts that, unless we severely constrain consumption of oil and coal around the world, the climate will continue to warm, increasing ocean volume and melting huge amounts of ice in the Arctic and Antarctic – thereby causing disastrous rises in sea level.
These are but two examples of thousands of instances in which it makes good sense for decision-makers to take into account what science can predict about the future.
And yet, what science knows is far too often overlooked when high-stakes decisions are made.
This is not to say that scientists should dominate the government decision-making process.
It is the business of politicians, not scientists, to consider the relative costs and benefits of the options before them, weighing them as they see fit in reaching their conclusions.
But many such judgments will be poor ones without effective scientific input.
For example, the United States government is well-served by an organization called the National Academies, based on three honorary organizations composed of the nation’s most distinguished scientists, engineers, and health professionals (the National Academy of Sciences, National Academy of Engineering, and Institute of Medicine, respectively).
This independent, non-governmental organization produces more than 200 reports a year, most in response to specific requests from the US government.
These requests range from questions about the health hazards of trace amounts of arsenic in drinking water, to questions about how best to support various forms of scientific research.
Through a rigorous review process, the Academies insist that each report be limited to what science can say about the subject based on evidence and logic, without preempting the decisions that need to be made by others.
Thus, for example, the report on drinking water predicted the frequency of bladder cancers that would eventually occur in a population exposed to levels of five, 10, or 20 parts per billion of arsenic.
But it did not say what maximum arsenic concentration the government should legislate.
The full text of some 3,000 reports by the Academies are available online (at www.nap.edu ), and each can be downloaded for free in any of 146 countries.
The dangers of arsenic are the same across the globe, and in this case a US-based report can help all nations.
However, there are other important science-based issues that require study by internationally-based organizations in order to be widely accepted.
To meet this need, the InterAcademy Council (IAC) in Amsterdam was founded in 2000 by a worldwide organization of science academies called the InterAcademy Panel (IAP).
The IAC is governed by a Board that includes a rotating group of 15 Academy presidents from around the world, representing nations at a range of economic development levels, and its reports present a truly international perspective backed by the world’s best scientists and engineers.
The IAC provides advice on subjects requested by the United Nations and other international organizations, all of which is freely available at www.interacademycouncil.net .
The first IAC report was entitled Inventing a Better Future: A Strategy for Building Worldwide Capacities in Science and Technology .
It argued convincingly for the importance of supporting science and technology institutions in every nation that focus on harnessing the increasing store of international scientific and technical knowledge to meet that nation’s needs.
Inventing a Better Future also provided detailed guidance to governments and international organizations on how to build institutional capacities for science and technology in both developing and industrialized countries.
The IAC’s most recent effort, entitled Lighting the Way: Toward a Sustainable Energy Future, presents an ambitious science-based agenda for meeting the world’s enormously challenging energy requirements.
An important audience for each IAC report are the 100 academies of science that belong to the IAP.&#160;
Each has a special responsibility for disseminating a report’s recommendations throughout its own country, which can considerably enhance the academy’s effectiveness in influencing national policies.
The combination of the IAP and the IAC is an important new experiment for providing international scientific advice – an experiment that has only just begun to demonstrate its potential effectiveness for spreading the benefits of science and technology to all humanity.
The Global Jobs Challenge
NEW YORK – Over the past three decades, hundreds of millions of new workers have entered the global economy.
They arrived with various levels of education and skill, and over time have generally gained in terms of “human capital” – and in terms of value added and income.
This has brought a tremendous, and ongoing, growth in income levels, opportunities, and the size of the global economy.
But these new workers have also brought more employment competition and significant shifts in relative wages and prices, which is having profound distributional effects.
These massive structural changes in the global economy present three great employment challenges worldwide, with different countries facing their own variants.
The first challenge is to generate enough jobs to accommodate the inflow of new entrants into the labor market.
Clearly, a wide range of advanced and developing countries is failing to do so.
Youth unemployment is high and rising.
Even in fast-growth developing countries, surplus labor is awaiting inclusion in the modern economy, and the pressure is on to sustain job creation.
The second challenge is to match skills and capabilities to the supply of jobs – an adjustment that takes time.
It is also a moving target.
Globalization and major labor-saving technologies have thrown labor markets in many countries into disequilibrium.
Skills mismatches abound.
Moreover, with continuing rapid growth in developing countries, the global economy’s structure is far from static, and it seems clear that the pace of market adjustment is lagging that of structural change.
The third challenge is distributional.
As the tradable part of the global economy (goods and services that can be produced in one country and consumed in another) expands, competition for economic activity and jobs broadens.
That affects the price of labor and the range of employment opportunities within all globally integrated economies.
Subsets of the population gain, and others lose, certainly relative to expectations – and often absolutely.
Many advanced countries – in fact, most of them – have experienced limited middle-income growth. In some European countries, where income inequality has remained in check, this has been a component of a deliberate strategy to maintain employment growth and competitiveness in the tradable part of the economy, with wage restraint partly shared across the income distribution.
In the United States, income inequality has risen as the upper end of the income and education spectrum benefits from globalization, while the rest experience declining employment opportunities in the tradable sector.
For two decades prior to the 2008 crisis, employment levels were maintained – and downward pressure on incomes mitigated – by creating jobs in non-tradable sectors.
In some cases, this took the form of rapid growth in government; in others, like the US, a pattern of excessive, debt-fueled consumption underpinned a large shift in employment to (non-tradable) services and construction.
Indeed, government and health care (both largely non-tradable) accounted for almost 40% of net employment growth in the US between 1990 and 2008.
That pattern came to a sudden stop in the financial crisis of 2008.
Private-sector leverage declined and public-sector leverage reached – and exceeded – sustainable limits, with Greece being only the most extreme example.
But expectations created by pre-crisis growth patterns adjust slowly.
Because the dominant narrative still maintains that the pre-crisis period was normal, at least in terms of the growth pattern in the real economy, the perceived challenge is to restore growth according to the pre-crisis pattern.
Unfortunately, this narrative cannot explain why, particularly in the advanced countries, growth is faltering and the employment engines have largely shut down.
Part of the answer consists in the long, lingering impact of financial crises and deleveraging, well documented by Carmen Reinhart and Kenneth Rogoff in their book This Time is Different.
At the same time, the financial imbalances and distortions that precede a crisis delay appropriate and necessary responses to technological and global market forces in the real economy as well.
In short, economies and policies adjusted in an unsustainable fashion, to some extent obscuring the need for a more sustainable pattern of adaptation.
What does it mean – for individuals, businesses, and governments – that structural adjustment is falling further and further behind the global forces that are causing pressure for structural change?
Above all, it means that expectations are broadly inconsistent with reality, and need to adjust, in some cases downward.
But distributional effects need to be taken seriously and addressed.
The burden of weak or non-existent recoveries should not be borne by the unemployed, including the young.
In the interest of social cohesion, market outcomes need to be modified to create a more even distribution of incomes and benefits, both now and in inter-temporal terms. After all, underinvestment now implies diminished opportunity in the future.
The imperative of structural adjustment also implies that individuals, governments, and other institutions (especially schools) need to focus on increasing the speed of adjustment to meet rapidly shifting market conditions.
Attention to both the demand and supply sides of job markets is required.
This means not only matching skills to jobs, but also expanding the range of jobs to match skills.
Finally, global economic-management institutions need to address whether the pace of globalization, and its implied structural change, is faster than the capacity of individuals, economies, and societies to adjust can withstand.
If so, the next challenge will be to find non-destructive ways to moderate the pace in order to bring capacity to adjust and the need for adjustment into closer alignment.
None of this will be easy.
We do not now have well developed frameworks for understanding structural change.
Nevertheless, the unemployed and underemployed, especially younger people, expect their leaders and institutions to try.
The God of Suffering?
PRINCETON – Do we live in a world that was created by a god who is all-powerful, all-knowing, and all good?
Christians think we do.
Yet a powerful reason for doubting this confronts us every day: the world contains a vast amount of pain and suffering.
If God is all-knowing, he knows how much suffering there is.
If he is all-powerful, he could have created a world without so much of it – and he would have done so if he were all good.
Christians usually respond that God bestowed on us the gift of free will, and hence is not responsible for the evil we do.
But this reply fails to deal with the suffering of those who drown in floods, are burned alive in forest fires caused by lightning, or die of hunger or thirst during a drought.
Christians sometimes attempt to explain this suffering by saying that all humans are sinners, and so deserve their fate, even if it is a horrible one.
But infants and small children are just as likely to suffer and die in natural disasters as adults, and it seems impossible that they could deserve to suffer and die.
Once again, some Christians say that we have all inherited the original sin committed by Eve, who defied God’s decree against eating from the tree of knowledge.
This is a triply repellant idea, for it implies that knowledge is bad, disobeying God’s will is the greatest sin of all, and children inherit the sins of their ancestors, and may justly be punished for them.
Even if we were to accept all this, the problem remains unresolved.
For animals also suffer from floods, fires, and droughts, and, since they are not descended from Adam and Eve, they cannot have inherited original sin.
In earlier times, when original sin was taken more seriously than it generally is today, the suffering of animals posed a particularly difficult problem for thoughtful Christians.
The seventeenth-century French philosopher René Descartes solved it by the drastic expedient of denying that animals can suffer.
Animals, he maintained, are merely ingenious mechanisms, and we should not take their cries and struggles as a sign of pain, any more than we take the sound of an alarm clock as a sign that it has consciousness.
People who live with a dog or a cat are not likely to find that persuasive.
Last month, at Biola University, a Christian college in southern California, I debated the existence of God with the conservative commentator Dinesh D’Souza.
In recent months, D’Souza has made a point of debating prominent atheists, but he, too, struggled to find a convincing answer to the problem I outlined above.
He first said that, because humans can live forever in heaven, the suffering of this world is less important than it would be if our life in this world were the only life we had.
That still fails to explain why an all-powerful and all-good god would permit it.
Relatively insignificant as this suffering may be from the perspective of eternity, the world would be better without it, or at least without most of it.
(Some say that we need to have some suffering to appreciate what it is like to be happy.
Maybe, but we surely don’t need as much as we have.)
Next, D’Souza argued that since God gave us life, we are not in a position to complain if our life is not perfect.
He used the example of a child born with one limb missing.
If life itself is a gift, he said, we are not wronged by being given less than we might want. In response I pointed out that we condemn mothers who cause harm to their babies by using alcohol or cocaine when pregnant.
Yet since they have given life to their children, it seems that, on D’Souza’s view, there is nothing wrong with what they have done.
Finally, D’Souza fell back, as many Christians do when pressed, on the claim that we should not expect to understand God’s reasons for creating the world as it is.
It is as if an ant should try to understand our decisions, so puny is our intelligence in comparison with the infinite wisdom of God.
(This is the answer given, in more poetic form, in The Book of Job .)
But once we abdicate our powers of reason in this way, we may as well believe anything at all.
Moreover, the assertion that our intelligence is puny in comparison with God’s presupposes just the point that is under debate – that there is a god who is all-knowing, all-powerful, and all good.
The evidence of our own eyes makes it more plausible to believe that the world was not created by any god at all.
If, however, we insist on believing in divine creation, we are forced to admit that the god who made the world cannot be all-powerful and all good.
He must be either evil or a bungler.
The Gold Bubble and the Gold Bugs
NEW YORK – Gold prices have been rising sharply, breaching the $1,000 barrier and in recent weeks rising towards $1,200 an ounce and above.
Today’s “gold bugs” argue that the price could top $2,000.
But the recent price surge looks suspiciously like a bubble, with the increase only partly justified by economic fundamentals.
Gold prices rise sharply only in two situations: when inflation is high and rising, gold becomes a hedge against inflation; and when there is a risk of a near depression and investors fear for the security of their bank deposits, gold becomes a safe haven.
The last two years fit this pattern.
Gold prices started to rise sharply in the first half of 2008, when emerging markets were overheating, commodity prices were rising, and there was concern about rising inflation in high-growth emerging markets.
Even that rise was partly a bubble, which collapsed in the second half of 2008, when – after oil reached $145, killing global growth –the world economy fell into recession.
As concerns about deflation replaced fear of inflation, gold prices started to fall with the correction in commodity prices.
The second price spike occurred when Lehman Brothers collapsed, leaving investors scared about the safety of their financial assets – including bank deposits.
That scare was contained when the G-7 committed to increase guarantees of bank deposits and to backstop the financial system.
With panic subsiding towards the end of 2008, gold prices resumed their downward movement.
By that time, with the global economy spinning into near-depression, commercial and industrial gold use, and even luxury demand, took a further dive.
Gold rose above $1,000 again in February-March 2009, when it looked like most of the financial system in the United States and Europe might be near insolvency, and that many governments could not guarantee deposits and backstop the financial system, because banks that were too big to fail were also too big to be saved.
That panic subsided – and gold prices started to drift down again – after US banks were subjected to “stress tests,” America’s Troubled Asset Relief Program further backstopped the financial system by removing bad assets from banks’ balance sheets, and the global economy gradually bottomed out.
So, with no near-term risk of inflation or depression, why have gold prices started to rise sharply again in the last few months?
There are several reasons why gold prices are rising, but they suggest a gradual rise with significant risks of a downward correction, rather than a rapid rise towards $2,000, as today’s gold bugs claim.
First, while we are still in a world of global deflation, large, monetized fiscal deficits are fueling concerns over medium-term inflation.
Second, a massive wave of liquidity, via easy monetary policy, is chasing assets, including commodities, which may eventually stoke inflation further.
Third, dollar-funded carry trades are pushing the US dollar sharply down, and there is an inverse relation between the value of the dollar and the dollar price of commodities: the lower the dollar, the higher the dollar price of oil, energy, and other commodities – including gold.
Fourth, the global supply of gold – both existing and newly produced – is limited, and demand is rising faster than it can be met.
Some of this demand is coming from central banks, such as those of India, China, and South Korea.
And some of it is coming from private investors, who are using gold as a hedge against what remain low-probability “tail” risks (high inflation and another near-depression caused by a double-dip recession).
Indeed, investors increasingly want to hedge against such risks early on.
Given the inelastic supply of gold, even a small shift in the portfolios of central banks and private investors towards gold increases its price significantly.
Finally, sovereign risk is rising – consider the troubles faced by investors in Dubai, Greece, and other emerging markets and advanced economies.
This has revived concerns that governments may be unable to backstop a too-big-to-save financial system.
But, since gold has no intrinsic value, there are significant risks of a downward correction.
Eventually, central banks will need to exit quantitative easing and zero-interest rates, putting downward pressure on risky assets, including commodities.
Or the global recovery may turn out to be fragile and anemic, leading to a rise in bearish sentiment on commodities – and in bullishness about the US dollar.
Another downside risk is that the dollar-funded carry trade may unravel, crashing the global asset bubble that it, together with the wave of monetary liquidity, has caused.
And, since the carry trade and the wave of liquidity are causing a global asset bubble, some of gold’s recent rise is also bubble-driven, with herding behavior and “momentum trading” by investors pushing gold higher and higher.
But all bubbles eventually burst.
The bigger the bubble, the greater the collapse.
The recent rise in gold prices is only partially justified by fundamentals.
Nor is it clear why investors should stock up on gold if the global economy dips into recession again and concerns about a near depression and rampant deflation rise sharply.
If you truly fear a global economic meltdown, you should stock up on guns, canned food, and other commodities that you can actually use in your log cabin.
The Golden Haves
CAMBRIDGE &#45;&#45; Lately, I have been trying to explain to my eleven-year-old son Gabriel the astronomical differences between people’s income.
Microsoft founder Bill Gates first penetrated Gabriel’s consciousness a couple of years ago, when his father served as a warm-up act to Gates at a large conference sponsored by the Danish government.
Ever since, Gabriel has been fascinated by the seemingly infinite possibilities of having $60 billion.
For example, whenever I tell Gabriel that something is unbelievably valuable (even, say, a great painting in a museum), he invariably says, “But Bill Gates could buy it, right?” Yes, Gates could buy the whole museum.
But then he would just turn around and give it back so everyone else can see it, so there is no point.
Gabriel is not entirely convinced.
Gabriel has decided that if he can’t become a professional basketball player when he grows up, then he’d like to buy a team.
As an economics professor, I cannot help but ask him if he knows that it costs $300-500 million to buy a National Basketball Association team. “But Bill Gates could do it.
He could buy all the teams in the league, right?” Yes, I say.
But if Bill Gates were to own the entire NBA, how would he decide which team to root for?
Gabriel concedes the point, but I can tell that again he is not convinced.
Gates is not the only one who can easily buy teams and paintings.
The latest Forbes list of America’s wealthiest individuals showed that last year’s highest nine earners, whose ranks include New York City’s mayor, Michael Bloomberg, managed to increase their wealth by $5-9 billion last year.
Yes, that is just the annual increase in their wealth.
Collectively, their $55 billion in earnings outstripped the entire national income of more than 100 countries.
To put these astronomical numbers in perspective, I had Gabriel try to confirm that to be among the top nine earners in the United States, you had to pull in at least $150 per second , including time spent eating and sleeping.
That is $9,000 per minute, or $540,000 per hour.
How much do America’s highest income earners make compared to the world’s billion poorest individuals?
Well, if the top nine donated their earnings, it would be the equivalent of about three months income for the bottom billion.
(Gabriel knows, of course, that Bill Gates and Warren Buffet have donated tens of billions already.)
As for the other nine months, given that the US accounts for only 25% of world income, it is a fair guess that there are some very wealthy individuals elsewhere who might be able to kick in.
(Mexican telephone magnate Carlos Slim, for example, is a close competitor to Gates for the title of the world’s richest man.)
Mind you, the idea that the ultra-rich could easily solve poverty is stupefyingly naïve.
Most serious academic research strongly supports the view that rich countries can best help poor regions like Africa by opening their markets, and by providing assistance in building physical and institutional infrastructure.
The greatest successes in fighting global poverty have come from China and India, two countries that have largely pulled themselves up by their own bootstraps.
But this seems too complicated to explain to Gabriel just yet.
So I retreat to the simplistic rock star/United Nations view of how great it would be if we could give more money.
Are massive income and wealth differences an inevitable outcome of fast growth?
By and large, the answer from history is “yes.”
China, whose growth performance since 1970 has now broken every record, is well on its way to having the world’s most unequal income distribution.
Indeed, China has passed the US and is nearing Latin American levels of inequality.
Policy solutions are not easy.
Many super-earners are also super-creative and bring enormous value.
Places like the United Kingdom actively court wealthy foreign nationals through extraordinary preferential treatment of their investment income.
The ultra-rich are an ultra-mobile group, too.
If you are earning $540,000 an hour, it does not take too long to save up to buy an apartment, even in London.
Anyway, there are limits to how much tax pressure the political system can apply to the ultra-rich.
Consider that any of the top nine American earners make more in two days than leading US Presidential candidate Hillary Clinton raises for her campaign in a good quarter of the year.
Rather than punitively taxing wealth, globalization strengthens the case for shifting to a flat tax on income (or better yet consumption) with a moderately high exemption.
Aside from the usual efficiency arguments, it is just going to become increasingly difficult and costly to maintain complex and idiosyncratic national tax arrangements.
Unfortunately, movements towards fundamental tax reform are on the back burner in most countries.
One can only hope that our children’s generation will grow up to live in a world that does a better job of balancing efficiency and equity than we do.
Gabriel says he is going to think about it.
The Goldstone Reversal
NEW YORK – Justice Richard Goldstone was condemned by many apologists for Israel’s human-rights record for his conclusion that Israel intentionally targeted Palestinian civilians as a matter of policy during the 2008-9 Gaza war.
Goldstone’s United Nations-backed report accused both Israelis and Palestinians of war crimes, and called on both sides to investigate, prosecute, and punish their own personnel.
The Israeli government reacted furiously to Goldstone’s efforts.
Now he is being condemned by some critics of Israel’s human rights record for retracting his finding of intentionality.
The controversy illustrates the care that is required in publishing human-rights reports.
What is not in dispute about the “Goldstone Report” is the fact-finding on which its conclusions are based.
In difficult circumstances, and with no cooperation from the Israeli government, Goldstone documented in substantial detail a large number of Israeli attacks that killed many hundreds of civilians, injured thousands, and destroyed a significant part of Gaza’s civilian infrastructure.
Goldstone also documented attacks against Israeli civilians by Hamas, and did not restrict himself to a discussion of the notorious rockets indiscriminately fired from Gaza.
Goldstone included in his report a detailed discussion of Hamas’s seizure of the Israeli soldier Gilad Shalit and its refusal even to allow the International Committee of the Red Cross to see him.
It is extremely difficult to prove a policy of intentionality when conducting human rights investigations.
That is why Human Rights Watch, which covered much of the same ground as Goldstone in its own reporting on Gaza – and was also vigorously denounced by apologists for Israeli human rights abuses – did not reach such a conclusion.
But that does not make it wrong for a seasoned investigator like Goldstone, reviewing the evidence that he collected, to infer intentionality from the pattern and quantity of abuses.
In certain cases, the evidence requires a judgment on such a question.
The original Goldstone Report could have limited its conclusory judgment to an assertion that Israel did not meet its obligation under the international laws of armed conflict to take all feasible measures to minimize harm to civilians.
Yet, because Goldstone went further and found a policy of intentionality, before revising that judgment, he should have insisted on additional evidence that his finding was not warranted.
Instead, Goldstone says that his revised judgment is based on the fact that “Israel has dedicated significant resources to investigate over 400 allegations of operational misconduct in Gaza.”
That sounds impressive.
Yet, to my knowledge, none of those investigations so far has resulted in the criminal prosecution and punishment of any Israeli soldier or official for a human-rights abuse committed against a civilian in Gaza.
Only three have resulted in indictments.
Moreover, there is no indication that any of the Israeli investigations address questions of policy.
In other words, Goldstone’s retraction is either not warranted by the evidence on which he says that he now relies, or it is premature.
At the very least, it alleviates much of the pressure on the Israeli authorities to go forward with good-faith prosecutions.
It would have been better to wait for the outcome of the Israeli authorities’ investigations.
The most important part of human-rights reporting is collecting the facts of abuses accurately.
This must be done fairly, so that disproportionate focus on one side’s abuses does not create distortions.
And it must be done as quickly as is consistent with accuracy and fairness, so that the information can be used effectively to help prevent additional abuses.
In withdrawing his conclusion that there was a policy of intentional targeting of civilians by Israel, Goldstone has not said that his judgment, based on the evidence before him at the time, was wrong.
Rather, he has said that subsequent investigations by the Israeli authorities have made him change his judgment.
The evidence available to him and to us about those investigations is clearly too paltry to warrant such a shift.
In recanting on this basis, Goldstone conveys to the Israelis that they can receive absolution from a highly respected voice of the international community by making a show of investigations.
Yet his distinguished record in ensuring that human-rights abuses are reported fairly and accurately remains untarnished.
The Good Fallout from Iraq
Reconciling morals with how a society is organized - in other words, reconciling ethics with politics - is one of humanity's oldest ambitions.
Hammurabi, Raamses II, Solon, Confucius, and Pericles were among the first great figures to embark on this effort.
The emergence of the nation-state in the eighteenth century, and the extreme level of barbarism reached in the twentieth century, may have created the impression that an ethical politics was an unrealizable dream, or that it was a dream growing ever more distant as it receded into the future.
Yet, despite the rivalry of nations and the bloodiness of modern warfare, democracy is spreading.
Indeed, in but half a century, Latin Americans rid themselves of all of that continent's military and civilian dictatorships, and Africa has eliminated more than half of the despots that have blighted its era of independence.
Compared with all the other political regimes known to mankind, democracy represents ethical progress twice over: first, because it is based on respect for human rights; and secondly, because the universal suffrage that modern democracy embraces prohibits neglecting or oppressing minorities.
Of course, progress towards more democracy and morality in international public affairs remains extremely slow.
Yet the year 2004 may leave to history some of the greatest progress in this area that humanity has seen.
Signs of hope and progress abound.
A Spanish government was overthrown because it lied to its public about the origin of the terrorist bombs that ripped apart Madrid's train station last spring.
Tony Blair and George W. Bush are having huge problems with their electorates, also because they lied about the reasons they gave to justify their war in Iraq.
Democracy is alive and well in the developing world, too.
The electoral process in Indonesia is reaching a level of equity and accountability hitherto unknown in that country.
Morocco and Algeria are working to strengthen women's rights.
Turkey has committed itself to a vast legislative effort to improve human rights, freedom of thought, treatment of prisoners, and civilian control over the military.
Even China, though highly insensitive to democratic principles, is discovering, with the dangerous spread of AIDS, an obligation to listen to popular clamor, and the need for public support to justify government actions.
The US, owing to its horrific treatment and torture of prisoners in Baghdad, has had no option but to search for international legitimacy after denying and defying it for so long, in order to extricate itself from the chaos and drama of what is now Iraq.
Israel has seen both the legitimacy of its "security wall," as well as the wall's proposed path through Palestinian territory, called into question - differently, but in a parallel manner - by both its own Supreme Court and by the International Court of Justice in The Hague.
Israel will not be able to ignore completely the rulings of either court.
In replacing the Organization of African Unity with the African Union, Africa, for its part, is making a huge effort to control conflict on the continent, as well as to spread observance of human rights and pursue the struggle against poverty.
Moreover, capitalism itself is feeling pressure in every direction. It sees ever increasing anger against bloated payments to bosses, risky speculation, and outright fraud.
The creation of the International Criminal Court strengthens all of these efforts to bring abuses of power by the powerful to book.
So, despite the Iraq war and the seeming impotence of world institutions, the beginning of the twenty-first century could well bring faster global improvement in political ethics than at any time in the past.
But for this trend to truly take hold, good politics needs something more than morals alone. States must begin to explain their toughest actions, those deeds that the search for security and the inevitable mistrust among states make necessary.
"Reason of State" will not disappear entirely.
But for democracy to continue its march of ethical progress, reasons of state must be submitted to greater public accountability and justification.
The Gospel According to Gates
Bill Gates and Warren Buffett, the richest and second richest person in America, and perhaps the world, are often described as admirers of Andrew Carnegie’s famous 1889 essay “The Gospel of Wealth.”
Carnegie’s treatise, an American classic, provides a moral justification for the concentration of wealth that capitalism tends to create by arguing that immense wealth leads to well-spent charitable contributions and support of the arts and sciences.
In short, Carnegie thought that great personal wealth leads to great civilizations.
”The Gospel of Wealth” is based on the premise that business competition results in “survival of the fittest” – the fittest being those endowed with the most “talent for organization.”
Carnegie argued that those who thrive in business and acquire huge personal fortunes are better at judging how the world really works, and thus are better qualified to judge where resources should be directed.
Successful people, according to Carnegie, should retire from business while they still retain those talents and devote their remaining years to spending their fortunes on philanthropy.
Carnegie also advocated an inheritance tax as an incentive, arguing that it would “induce the rich man to attend to the administration of wealth during his life.” Encouraging the rich to spend their fortunes on good causes while still alive, Carnegie maintained, is far better than leaving the disposition of their wealth to the care of their (probably untalented) children.
Last month, Bill Gates announced that he will do what Carnegie recommended: in two years, he will change his priorities so that he can work full time for the Bill and Melinda Gates Foundation, which he and his wife founded.
Even earlier than Carnegie, who quit at 65, Gates will devote his life to spending his huge fortune on philanthropy.
Warren Buffett, by contrast, is 76, so he has missed his chance to apply his talents to running a charitable foundation.
But, by leaving the bulk of his fortune, approximately $31 billion, to the Gates Foundation, he will have done the next best thing.
Bill Gates is a controversial figure, but few doubt that he is smart.
Even so, whereas Carnegie’s theory makes some sense (which is why his essay is remembered so well more than a century later), it isn’t obvious that he was right to believe that successful business people are the best administrators of charitable foundations.
Useful traits in business, like aggressiveness or political savvy, might be poorly suited to philanthropy.
Likewise, running a foundation may well require studying social problems or the arts and sciences – activities that may not accord with former capitalists’ inclinations and talents.
The deeper flaw in Carnegie’s theory may be that it is just too difficult psychologically for business people to make the mid-life career transition to philanthropy.
Having accumulated great wealth as “survivors” of the business world, will they really turn their talents to the task of giving it away?
Regardless of whether Gates lives up to his promise, are people like him the exception that proves the rule?
It is easy to be skeptical that his example will spur a new wave of early retirements to run philanthropies.
The public-spirited justification of the concentration of wealth offered in “The Gospel of Wealth” has more support in the United States than elsewhere, which reflects Americans’ relatively greater admiration of business people.
But Carnegie’s argument never became received doctrine even in America, because most people reject the view that rich business people are smarter and morally superior.
Certainly, Gates and Buffett claim nothing of the sort.
Similarly, even in America, movies and TV shows do not dramatize the lives of great tycoon philanthropists.
Americans, like everyone else, prefer portrayals of business people who are truly evil and in the end receive their just deserts.
And yet there is more charitable giving in the US than in other countries, reflecting a greater sense in America that private benevolence is an obligation.
According to the Johns Hopkins University Comparative Nonprofit Sector Project, headed by Lester Salamon, the US leads major countries in private contributions to nonprofits.
Excluding donations to churches, such contributions amount to 1% of GDP in the U.S., which is six times higher than in Germany or Japan, and 30 times higher than in Mexico.
However, 1% of GDP is still not a very big number, and the Gates Foundation, with about $60 billion after Buffett’s bequest, now accounts for a substantial share of the total.
Of course, Gates and Buffett deserve praise, and we should certainly wish them well.
But we should not yet consider their example a vindication of “The Gospel of Wealth.”
The Government Debt Bomb
STANFORD – As economies around the world return to growth after the deepest recession in a generation, renewed attention is being paid to enormous fiscal deficits and vast expansions of government debt.
This year’s projected deficits (as a share of GDP) are estimated to be a remarkable 13.5% for the United States, twice the previous record at the depth of the horrific early 1980’s recession.
Among other major economies: the United Kingdom, 14.4%;
France, 8.2%;
India, 8.0%;
Japan, 7.4%;
Italy, 5.4%;
Germany, 4.7%;
China 4.2%; and Canada, 2.4%.
In addition to the automatic decline in tax revenues and increase in social-welfare spending during a recession, many nations added large spending increases and/or tax cuts to try to stimulate their economies.
The increase in the deficit is the sum of these “automatic stabilizers” and discretionary programs.
The discretionary policy response has been largest in the US, at a cumulative 4.8% of GDP, and China, at 4.4%, over 2008-2010, while it has been modest in Germany and Canada, and smaller in the UK, France, and India.
The automatic increase in the deficit has also been largest in the US, modest in the UK and Germany, and smaller in Japan, India, Canada, China, France, and Italy.
These automatic effects should soon begin to reverse as economic activity recovers, but there is much debate, including at the G-8 and G-20 meetings, over whether the discretionary stimulus should be extended or ended, repeated or reversed.
Since every dollar, euro, yen, rupee, or yuan borrowed today requires the same present value in future interest payments – and therefore future taxes – there are important long-term costs to balance against whatever benefits the deficits create today; there is no fiscal free lunch.
Some politicians, for example President Barack Obama in the US, herald their fiscal stimulus programs as effective responses to the economic crisis.
They pledge allegiance to long-term fiscal responsibility, yet propose budgets with large deficits for years to come and big hikes in the debt-GDP ratio.
Politicians from political parties out of power denounce the deficits and debt as a horrific legacy for our children and an insurmountable burden on the economy.
In the US in the 1980’s, Democrats excoriated President Ronald Reagan on deficits; Republicans now excoriate President Obama on his much larger deficits and debt.
Deficits are convenient for politicians as they hide and delay the true tax cost of spending.
But when are deficits desirable, and when are they damaging?
The impact of the economy on the budget balance is swifter, surer, and larger than the impact of the budget balance on the economy.
All economists agree that we should allow the automatic stabilizers to work.
Discretionary fiscal policy is often clumsy in responding to recession, given the usual lags in legislative and administrative implementation and the politics of pork and special interests surrounding spending and tax decisions.
The current US stimulus has been much slower to enter the economy than promised.
Indeed, most of the stimulus money will be spent after the recession “appears to have ended,” and the evidence is that so far it has had little effect.
It is appropriate to finance (some) long-lived public-capital investment by government borrowing, since the benefits will accrue for many years, and future taxpayers might equitably bear part of the burden.
This is standard practice for US state and local governments.
It is also more efficient to keep tax rates stable over time, and thus to finance with debt temporary large spending needs such as military buildups during war (or to prevent war), while reversing the debt buildup thereafter.
The US federal government’s borrowing exceeded tax revenues in every year since the end of World War II.
Such debt finance is both equitable and efficient.
But little in the current stimulus programs is justifiable on either of the grounds mentioned above.
The level, composition, and growth of spending and taxes are the fundamental fiscal indicators.
Even with a balanced budget, there is still the issue of the effectiveness and efficiency of spending, as each dollar of government revenue costs the economy about $1.30, given the distortions to private decisions caused by taxes.
Large deficits shift the bill for today’s consumption to future generations and can crowd out private investment, thereby slowing the improvement of living standards.
Deficits are riskier if the level of the national debt, the accumulation of all previous deficits, is high or rapidly rising relative to GDP.
The debt-GDP ratio varies a lot by country.
It will double in the US unless President Obama reverses course, as President Bill Clinton did when he and a Republican Congress balanced the budget.
Deficits are problematic if they finance consumption, not productive public investment on infrastructure.
The crisis funding of the modest delayed infrastructure component of most stimulus programs suggests that much of it would not pass a rigorous cost-benefit test.
Some US federal agencies are trying to spend ten times their previous budgets – not a recipe for efficiency or speed.
And deficits can lead to inflation if central banks monetize the government debt, a serious concern in financial markets, as China has warned America.
These concerns require that fiscal exit strategies be planned, announced, and implemented soon, before the stimulus programs become permanently entrenched, develop powerful dependent constituencies, and greatly increase the risk of rising interest rates, inflation, and taxation.
On this score, citizens everywhere, from Boston to Berlin, Mumbai to Moscow, are right to be appalled at the explosion of government debt.
The Grand Illusions
Politicians are often accused of promising what cannot be delivered.
In Argentina, economists sold politicians on two dreams that could not be fulfilled.
Their failure plunged the country into its deepest political and financial crisis in decades.
President Fernando de la Rúa was brought down by riots that left 29 dead.
Citizens, facing unpaid salaries, frozen bank accounts and unemployment of 20%, are suffering the consequences of two grand economic illusions.
The first concerned the supposed restorative powers of a currency board.
Call it the magic wand illusion.
When in 1991 Argentina tied the peso to the dollar and prevented its central bank from printing pesos freely, the world applauded - with good reason.
The new policy ended decades of high inflation and currency debauchery.
But the currency board was not just a monetary system; it was also a reform strategy.
That overreach began Argentina's undoing.
The country had not reformed previously - the theory went - because it did not need to.
If unions bid up wages too high, a devaluation could fix the problem; if provincial governments spent a little too much, a quick round of peso printing would save the day.
Inflation was the grease that had kept the wheels of Argentine politics going.
Shut off the peso spigot - economists counseled - and politics would fix itself.
Without an inflationary cushion labor markets would have to be modernized, and peso wages would fall to the point were the country could compete internationally.
Fiscal policy would also be straightened out because the central bank was no longer the lender of last resort.
Local banks and corporations would never again overborrow, knowing that no safety net would catch them when they fell.
Even politicians liked this theory, since they could blame the monetary straightjacket for some of their unfulfilled promises.
The magic wand illusion was not invented in Argentina.
Like many things in that country, it was imported from Europe.
Adopt a common currency, many a Continental economist had promised, and fiscal laggards such as Italy and Greece would shape up.
In Europe, the combined carrot of northern transfers and the stick of northern reproach did the trick.
Most southern European nations today display public finances that are Lutheran in their prudence.
In Argentina the currency board did the trick - at the start.
In the early-to-mid 1990s budget deficits turned into surpluses, bank and financial supervision tightened and labor market reform was repeatedly attempted (if never achieved).
Argentina was briefly Wall Street's darling.
Then came Mexico's crisis, and Russia's, and Asia's.
The world economy turned sour for emerging markets.
At that point Argentina fell victim to the second false promise - call it the golden child illusion.
The world economy will help you as long as you help yourself, policy gurus told Argentina's politicians.
If you suffer a shock, just turn the other cheek.
If you need to borrow for liquidity, world market will supply those funds at reasonable interest rates.
No matter what, don't touch the currency board, the linchpin of your credibility.
Until late in the game, Argentina did as it was told.
President de la Rúa countered the terms of trade and interest rate shocks from abroad with domestic tax increases, even as the economy contracted.
Contrary to conventional wisdom, the government did not go on a spending binge.
Despite the temptation to spend its way out of slump, Argentina's non-interest expenditure remained roughly constant.
In 2000 the nation ran a budget surplus of 1% of domestic output, which became a total deficit of 2.4% once interest payments were added in.
Public debt stood at a moderate 45% of output.
In short, it did as much as the once-golden child in the class could have been expected to.
World capital markets did not reciprocate.
Spreads charged on loans to Argentina went from huge to obscene.
Interest payments drove up the deficit, which spooked investors who demanded even higher spreads, enlarging the deficit even more.
Most governments forced to pay 40% a year or more on dollar loans would eventually run out of money and stop paying.
This is what has happened to Argentina.
In the endgame, the consequences of a policy based on illusions reared their ugly heads.
The temporary discipline imposed by the currency board had masked the absence of crucial reforms.
The weakest link was the fiscal regime tying the federal government and the rest of the country together, which remained discretional and full of loopholes.
As the budget situation deteriorated, transfers from Buenos Aires to provincial governments became a matter for day-to-day political bargaining.
The lack of a fiscal framework hindered credibility.
Cut off from credit, Argentina entered a deflationary spiral.
Never mind that Cavallo promised a zero-deficit policy, spending only what the government took in.
Budget cuts reduced demand and output, which caused revenue to collapse, making additional budget cuts inevitable.
The lesson would have been obvious to Keynes: with monetary policy immobilized by the currency board, and with fiscal policy immobilized by lack of financing, the economy could only go down.
The shock absorbers that were dismissed as unnecessary for a golden child (world capital markets, remember, were supposed to finance your way out of a slump) turned out to be crucial.
In defending the currency board and trying to avoid a default vis-à-vis those who hold pesos in their pockets, Argentina ended up defaulting against everyone else: its public employees, whose salaries were either never paid or arbitrarily cut; its provinces, who have not received the transfers accorded them by law; its depositors, who can no longer withdraw their funds freely from the bank; and, crucially, its democracy, with the mandate of a popularly elected president cut short by rioting and looting.
Now is the time to cut free of these two illusions.
Since no one will save Argentina, Argentines must save themselves.
A necessary step is to abandon convertibility and let the peso float, while transforming outstanding obligations to pesos so as to prevent the devaluation from wrecking the balance sheets of local banks and corporations.
The moratorium on foreign debt payments announced by incoming President Rodríguez Saá will help cushion the blow.
With the currency at a level that makes Argentina competitive again, reconstruction can begin.
With no currency board to instill a false sense of discipline, real institutional reform will have to be tried.
Provincial finances will finally have to be cleaned up.
It will be a long, painful road.
But this time Argentina will not travel under the illusions fostered by economic scribblers, both dead and alive.
The Great American Mirage
NEW HAVEN – In September 1998, during the depths of the Asian financial crisis, Alan Greenspan, the United States Federal Reserve’s chairman at the time, had a simple message: the US is not an oasis of prosperity in an otherwise struggling world.
Greenspan’s point is even closer to the mark today than it was back then.
Yes, the US economy has been on a weak recovery trajectory over the past three years.
But at least it’s a recovery, claim many – and therefore a source of ongoing resilience in an otherwise struggling developed world.
Unlike the Great Recession of 2008-2009, today there is widespread hope that America has the capacity to stay the course and provide a backstop for the rest of the world in the midst of the euro crisis.
Think again.
Since the first quarter of 2009, when the US economy was bottoming out after its worst postwar recession, exports have accounted for fully 41% of the subsequent rebound.
That’s right: with the American consumer on ice in the aftermath of the biggest consumption binge in history, the US economy has drawn its sustenance disproportionately from foreign markets.
With those markets now in trouble, the US could be quick to follow.
Three regions have collectively accounted for 83% of America’s export-led growth impetus over the past three years – Asia, Latin America, and Europe.
(Since regional and country trade statistics assembled by the US Department of Commerce are not seasonally adjusted, all subsequent comparisons are presented on the basis of a comparable seasonal comparison from the first quarter of 2009 to the first quarter of 2012.)
Not surprisingly, Asia led the way, accounting for 33% of the total US export surge over the past three years.
The biggest source of this increase came from the 15-percentage-point contribution of Greater China (the People’s Republic, Taiwan, and Hong Kong).&nbsp;
Needless to say, China’s unfolding slowdown – even under the soft-landing scenario that I still believe is most credible – is taking a major toll on the largest source of America’s export revival.
The remainder of the Asian-led US export impetus is spread out, led by South Korea, Japan, and Taiwan – all export-led economies themselves and all heavily dependent on a slowing China.
Latin America provided the second-largest source of America’s export resurgence, accounting for another 28% of the total gains in US foreign sales over the past three years.
Brazil and Mexico collectively accounted for 19 percentage points of that increase.
Growth in both economies is now slowing significantly, especially in Brazil. But, given the close linkages between Mexican production and US consumption (which is now sputtering again), any resilience in the Mexican economy could be short-lived.
Finally, there is the sad case of Europe, which has accounted for 21% of the cumulative growth in US exports over the past three years.
Here, the US Commerce Department statistics are not as helpful in pinpointing the source of the impetus, because only a partial country list is published.
What we do know is that the United Kingdom, Germany, and France – the so-called core economies – collectively accounted for just 3.5% of total US export growth since early 2009, with the UK grabbing the bulk of that increase.
That suggests that most of America’s European export gain was concentrated in the region’s so-called peripheral economies.
And that is clearly a serious problem.
Forecasts are always hazardous, but some “what-if” scenarios shed considerable light on what all of this means for the world’s largest economy.
Since the second quarter of 2009, US annualized real GDP growth has averaged 2.4%.
With roughly 40% of that increase attributable to exports, that means the remainder of the economy has grown at an anemic 1.4% pace.
Under a flat-line export scenario, with no rise in US exports, and if everything else remains the same (always a heroic assumption), overall real GDP growth would converge on that 1.4% bogey.
That is a weak growth trajectory by any standard – likely to result in rising unemployment and further deterioration in consumer confidence.
Alternatively, in a moderate export-downturn scenario, with real exports falling by 5% over a four-quarter period, real GDP growth could slip below the 1% “stall speed” threshold – leaving the US economy vulnerable to a recessionary relapse.
By way of reference, the assumption of a 5% export downturn pales in comparison with the precipitous 13.6% decline in real exports that occurred in 2008-2009.
As such, this “what if” is a cautiously optimistic assessment of the downside risks stemming from weak external demand.
All of this underscores one of the more obvious, yet overlooked, implications of an increasingly interdependent world: we are all in it together.
The euro crisis is a serious shock, and is now producing ripple effects around the world.
Europe is export-led China’s largest source of external demand; as China goes, so goes the rest of China-centric Asia; and, from there, the ripples reach the shores of an increasingly export-dependent US economy.
As recent weakness in employment and retail sales suggests, that may already be happening.
Greenspan’s warning in 1998 came at a time when US exports accounted for only about 10.5% of GDP.
Today, that share stands at a record-high 14%, as post-crisis America has made a big bet on an export-led revival.
The current global slowdown is not on a par with what occurred in the late 1990’s or the more wrenching shocks of 3-4 years ago – at least not yet. But today’s global downturn can hardly be dismissed as unimportant for the US or anyone else.
In an era of globalization, there are no innocent bystanders.
There are certainly no oases of prosperity in the face of yet another major shock in the global economy.
The Great American Tea Party
NEW YORK – Who were those flag-waving, cheering, hollering, singing, and praying Americans who gathered in Washington DC on the last Saturday in August at a rally to “restore the honor” of the United States?
This tax-free jamboree of patriotism was ostensibly non-partisan (otherwise it could not have been tax-free).
The main organizer and speaker was Glenn Beck, the right-wing populist radio and TV personality, who promised to restore not only the nation’s honor, but “American values,” too.
The other star was Sarah Palin, the darling of the populist Tea Party crowds, who began by paying her respect to Martin Luther King, Jr.
For it was here, on this very same spot and date, that he gave his “I have a dream” speech in 1963.
She then quickly proceeded to give a long celebratory speech about the heroism of US soldiers “fighting for freedom” abroad.
It seemed an odd – and to many offensive – transition: from King’s great plea for civil rights to Palin’s sentimental clichés about the military.
But then there was something odd about the entire event, just as there is something odd about the Tea Party movement itself.
This latest surge of American populism is financed by some extremely wealthy men, including a couple of oil billionaires named David and Charles Koch, who favor cutting taxes for the super-rich and abolishing government subsidies for the poor, such as Social Security and President Barack Obama’s health-care plan.
This agenda might seem selfish, though understandable from the point of view of an oil billionaire.
But who are all those people wildly cheering for the billionaire’s dream, on of all days the anniversary of Martin Luther King’s speech? They are almost uniformly white, largely middle-aged and above, and for the most part far from wealthy.
The majority have no college degree.
Many say that they are afraid of losing their jobs.
No doubt quite a few of them would have trouble paying the astronomical costs of American health-care bills without government assistance.
In other words, they would benefit from the publicly financed programs that the Tea Party’s sponsors wish to abolish.
And yet, there they are, denouncing as “socialism” Obama’s health-care legislation, or a slight tax increase for the richest 1% of the population.
To them, “socialism” means “European”, or simply “un-American.”
Unlike the movement’s sponsors, the crowds chanting “USA!
USA!” do not appear to be motivated by economic self-interest.
It is possible that many Americans are still so convinced that anyone who works hard will end up rich that they will support anything that favors billionaires.
But it is more likely that the grassroots of American populism are motivated by something else.
Populism everywhere is driven by fear and resentment: fear of being powerless, without status or privilege, and resentment of those – educated liberal elites, foreigners who supposedly take our jobs, and Muslims, Jews, blacks, or illegal immigrants – who seem to enjoy undeserved benefits.
These fears and resentments exist everywhere, now more than ever.
But they are not expressed in the same way in every country.
Rural Americans, living on the vast plains, uprooted and isolated from the outside world, have a history of expressing their longing for community and mystical identity by gathering in large numbers in churches and tents, listening to the grand statements of charismatic hucksters.
Sarah Palin and Glenn Beck are heirs to a long line of preachers and politicians who made their fortunes by stirring up anxious crowds, promising them Heaven on Earth, or at least a place in Heaven.
In the case of Beck’s rally in Washington DC, the link with history of rural churches and religious “revival” meetings was overt.
America, after “wandering in darkness… today begins to turn back to God,” Beck declared, in the typical style of a TV evangelist.
Part of such rabble-rousers’ stock-in-trade is to conflate patriotism, freedom, and God.
This is the myth of the US, the God-blessed land of the free.
Underlying Beck’s “non-partisan” preacher’s talk about restoring American honor and values was a message that everyone in the crowd understood: such un-American elements as the liberal elites in New York and Washington, Democrats, and other God-less socialists had robbed America of its honor and values.
After the event, Beck gave an interview, in which he criticized Obama – not for his tax policies, but for having the wrong religious beliefs.
Obama, he said, believes in “liberation theology,” which means that he must be a “socialist,” thus un-American.
This is also what Palin means when she tells her Tea Party crowds that they are the “real Americans,” implying that all Americans who disagree with her views are not.
They are aliens who have no right to govern the nation.
The success of the Tea Party movement has made many Democrats (and some sober Republicans) nervous.
There are calls for the Democrats to fight back.
This is not impossible.
Democratic politicians have a populist tradition, too.
Talk of God, freedom, and nation is not unique to right-wing radicals or Republicans.
Franklin D. Roosevelt knew how to inspire the patriotism of working men.
John F. Kennedy was good at selling the American dream.
Lyndon B. Johnson had the common touch of rural Texas.
Barack Obama is from urban Hawaii but has all the rhetorical gifts of an old-fashioned preacher.
Alas, he has several distinct disadvantages, too: he was educated at two elite universities, his middle name is Hussein, and his father was black.
The Tea Party movement – an economic agenda for the rich masquerading as the salvation of God-fearing white Americans – knows that all too well.
The Great Ape Debate
In his History of European Morals, published in 1869, the Irish historian and philosopher W.E.H. Lecky wrote:
At one time the benevolent affections embrace merely the family, soon the circle expanding includes first a class, then a nation, then a coalition of nations, then all humanity and finally, its influence is felt in the dealings of man with the animal world...
The expansion of the moral circle could be about to take a significant step forwards.
Francisco Garrido, a bioethicist and member of Spain’s parliament, has moved a resolution exhorting the government “to declare its adhesion to the Great Ape Project and to take any necessary measures in international forums and organizations for the protection of great apes from maltreatment, slavery, torture, death, and extinction.” The resolution would not have the force of law, but its approval would mark the first time that a national legislature has recognized the special status of great apes and the need to protect them, not only from extinction, but also from individual abuse.
I founded the Great Ape Project together with Paola Cavalieri, an Italian philosopher and animal advocate, in 1993.
Our aim was to grant some basic rights to the nonhuman great apes: life, liberty, and the prohibition of torture.
The Project has proven controversial.
Some opponents argue that, in extending rights beyond our own species, it goes too far, while others claim that, in limiting rights to the great apes, it does not go far enough.
We reject the first criticism entirely.
There is no sound moral reason why possession of basic rights should be limited to members of a particular species.
If we were to meet intelligent, sympathetic extraterrestrials, would we deny them basic rights because they are not members of our own species?
At a minimum, we should recognize basic rights in all beings who show intelligence and awareness (including some level of self-awareness) and who have emotional and social needs.
We are more sympathetic to the second criticism.
The Great Ape Project does not reject the idea of basic rights for other animals.
It merely asserts that the case for such rights is strongest in respect to great apes.
The work of researchers like Jane Goodall, Diane Fossey, Birute Galdikas, Frans de Waal, and many others amply demonstrates that the great apes are intelligent beings with strong emotions that in many ways resemble our own.
Chimpanzees, bonobos, and gorillas have long-term relationships, not only between mothers and children, but also between unrelated apes.
When a loved one dies, they grieve for a long time.
They can solve complex puzzles that stump most two-year-old humans.
They can learn hundreds of signs, and put them together in sentences that obey grammatical rules.
They display a sense of justice, resenting others who do not reciprocate a favor.
When we group chimpanzees together with, say, snakes, as “animals,” we imply that the gap between us and chimpanzees is greater than the gap between chimpanzees and snakes.
But in evolutionary terms this is nonsense.
Chimpanzees and bonobos are our closest relatives, and we humans, not gorillas or orangutans, are their closest relatives.
Indeed, three years ago, a group of scientists led by Derek Wildman proposed, in the Proceedings of the National Academy of Sciences, that chimpanzees have been shown to be so close to humans genetically that they should be included in the genus Homo.
Like any important and novel idea, Garrido’s proposal has aroused considerable debate in Spain.
Some are concerned that it will interfere with medical research.
But the only European biomedical research that has used great apes recently is the Biomedical Primate Research Centre at Rijswijk, in the Netherlands.
In 2002, a review by the Dutch Royal Academy of Science found that the chimpanzee colony there was not serving any vital research purposes.
The Dutch government subsequently banned biomedical research on chimpanzees.
Thus, there is no European medical research currently being conducted on great apes, and one barrier to granting them some basic rights has collapsed.
Some of the opposition stems from misunderstandings.
Recognizing the rights of great apes does not mean that they all must be set free, even those born and bred in zoos, who would be unable to survive in the wild.
Nor does it rule out euthanasia if that is in the interest of individual apes whose suffering cannot be relieved.
Just as some humans are unable to fend for themselves and need others to act as their guardians, so, too, will great apes living in the midst of human communities.
What extending basic rights to great apes does mean is that they will cease to be mere things that can be owned and used for our amusement or entertainment.
A final group of opponents recognizes the strength of the case for extending rights to great apes, but worries that this may pave the way for the extension of rights to all primates, or all mammals, or all animals.
They could be right.
Only time will tell.
But that is irrelevant to the merits of the case for granting basic rights to the great apes.
We should not be deterred from doing right now by the fear that we may later be persuaded that we should do right again.
The Great Brain Race
WASHINGTON, DC – For decades, research universities in the United States have been universally acknowledged as the world’s leaders in science and engineering, unsurpassed since World War II in the sheer volume and excellence of the scholarship and innovation that they generate.
But there are growing signs that the rest of the world is gaining ground fast – building new universities, improving existing ones, competing hard for the best students, and recruiting US-trained PhDs to return home to work in university and industry labs.
Is the international scholarly pecking order about to be overturned?
There is no question that the academic enterprise has become increasingly global, particularly in the sciences.
Nearly three million students now study outside their home countries – a 57% increase in the last decade.
Foreign students now dominate many US doctoral programs, accounting for 64% of PhDs in computer science, for example.
Tsinghua and Peking universities together recently surpassed Berkeley as the top sources of students who go on to earn American PhDs.
Faculty are on the move, too.
Half of the world’s top physicists no longer work in their native countries.
And major institutions such as New York University and the University of Nottingham are creating branch campuses in the Middle East and Asia.
There are now 162 satellite campuses worldwide, an increase of 43% in just the past three years.
At the same time, growing numbers of traditional source countries for students, from South Korea to Saudi Arabia, are trying to improve both the quantity and quality of their own degrees, engaging in a fierce – and expensive – race to recruit students and create world-class research universities of their own.
All this competition has led to considerable hand-wringing in the West.
During a 2008 campaign stop, for instance, then-candidate Barack Obama spoke in alarmed tones about the threat that such academic competition poses to US competitiveness. “If we want to keep on building the cars of the future here in America,” he declared, “we can’t afford to see the number of PhDs in engineering climbing in China, South Korea, and Japan even as it’s dropped here in America.”
Nor are such concerns limited to the US.
In some countries, worries about educational competition and brain drains have led to outright academic protectionism.
India and China are notorious for the legal and bureaucratic obstacles they place in front of Western universities that want to set up satellite campuses catering to local students.
And sometimes students who want to leave face barriers.
Several years ago, the president of one of the prestigious Indian Institutes of Technology effectively banned undergraduates from accepting academic or business internships overseas.
There are other impediments to global mobility, too, not always explicitly protectionist, but all having the effect of limiting access to universities around the world.
In the years following the terrorist attacks of September 11, 2001, for example, legitimate security concerns led to enormous student-visa delays and bureaucratic hassles for foreigners aspiring to study in the US.
Student numbers have since rebounded, despite intermittent problems, but there remain severe limits on work and residency visas, which should serve as an enticement for the best and brightest to study in the US.
Perhaps some of the anxiety over the new global academic enterprise is understandable, particularly in a period of massive economic uncertainty.
But educational protectionism is as big a mistake as trade protectionism.
The globalization of higher education should be embraced, not feared – including in the US.
There is every reason to believe that the worldwide competition for human talent, the race to produce innovative research, the push to extend university campuses to multiple countries, and the rush to train talented graduates who can strengthen increasingly knowledge-based economies will be good for the US as well.
Above all, this is because the expansion of knowledge is not a zero-sum game.
More PhD production and burgeoning research in China, for instance, doesn’t take away from America’s store of learning; on the contrary, it enhances what we know and can accomplish.
Because knowledge is a public good, intellectual gains by one country often benefit others.
Chinese research may well provide the building blocks for innovation by US entrepreneurs – or those from other countries.
Indeed, the economic benefits of a global academic culture are significant.
Just as free trade provides the lowest-cost goods and services, benefiting both consumers and the most efficient producers, global academic competition is making free movement of people and ideas, on the basis of merit, more and more the norm, with enormously positive consequences for individuals, universities, and countries.
Today's swirling patterns of mobility and knowledge transmission constitute a new kind of free trade: free trade in minds.
The US should respond to the globalization of higher education not with angst but with a sense of possibility.
Neither a gradual erosion in the US market share of students, nor the emergence of ambitious new competitors in Asia, Europe, and the Middle East means that American universities are on an inevitable path to decline.
By resisting protectionist barriers at home and abroad, by continuing to recruit and welcome the world’s best students, by sending more students overseas, by fostering cross-national research collaboration, and by strengthening its own research universities, the US can sustain its well-established academic excellence while continuing to expand the sum total of global knowledge and prosperity.
The Great Contraction of 2008-2009
CAMBRIDGE – A popular view among economic forecasters and market bulls is that “the deeper the recession, the quicker the recovery.” They are right – up to a point: immediately after a normal recession, economies do, indeed, often grow much faster than usual over the ensuing twelve months.
Unfortunately, the Great Recession of 2008-2009 is far from being a normal global recession.
The Great Recession was turbo-charged by a financial crisis, making it a far more insidious affair that typically has far more long-lasting effects.
As Carmen Reinhart and I argue in our new book This Time is Different: Eight Centuries of Financial Folly , the Great Recession is better described as “The Great Contraction,” given the massive and simultaneous contraction of global credit, trade, and growth that the world has experienced.
Fortunately, despite a hobbled recovery in the developed world, emerging markets in Asia, Latin America, and the Middle East have enormous latent growth potential.
Most should be able to grow strongly, despite the challenging global environment.
Nevertheless, the legacy of the huge contraction in credit is not likely to go away anytime soon.
Yes, if you are a bank, particularly a big one, you can raise money easily enough, thanks to sweeping explicit and implicit government guarantees.
But, for everyone else, particularly small and medium-size firms, the credit environment continues to be very challenging.
Even firms in established industries such as energy report facing great difficulties in raising capital.
The optimists say not to worry.
Credit will soon come to everyone else as easily as it has to the banks.
After all, credit also dried up during the 1991 global recession, and yet funds were flowing briskly within 18 months.
But this parallel fails to recognize the fact that balance sheets remain far more impaired this time.
Housing prices are being propped up temporarily by myriad subsidies, while a commercial real-estate tsunami looms.
Many banks’ weaknesses are simply being masked by government guarantees.
Indeed, G-20 governments now face the daunting prospect of trying to rein in the monster they have created.
It is now very clear that the taxpayer will always be there to guarantee that bondholders get paid.
Unchecked, large financial firms will be able to tap bond markets for decades to come at rates just above what the government pays, regardless of the inherent risk of their asset positions.
Lenders to banks will not bother worrying about what kinds of gambles and investments financial institutions are making, or whether regulation is effective.
The good news is that most governments do see the need to implement significant new regulation on financial firms.
But here’s the rub: financial regulation is enormously complicated, all the more so given that there must be some degree of international consistency.
It would be a disaster if countries were to rush in individually to implement their own new system.
On the other hand, if regulators take their time to “get it right,” there will be a huge shadow of uncertainty hanging over the financial system.
Banks know that they face higher capital requirements, which will force them to scale back lending relative to their resources).
But how much higher?
There is much discussion of breaking up banks that are too big to fail.
But what will actually happen?
Given this environment, no wonder credit is still contracting in the United States, Europe, and elsewhere.
If banks don’t know what the rules of the game are going to be, they have to be very cautious about over-extending their balance sheets.
So government regulators – and ultimately all of us – are caught between a rock and a hard place.
Regulate in haste, repent at leisure. Overly strict regulation could seriously impair global growth for decades.
But if regulation is too soft, the next monster global financial crisis could come within a decade.
And even if regulators take their time to try to get it right, as most of us think they should, the world may have to live with weak credit expansion as banks hold back, awaiting a clearer verdict on their future.
And here is another painful thought that Harvard historian Niall Ferguson often emphasizes: many of the leaders and legislators who are passing judgment on new rules for banks are the same leaders and legislators who oversaw the regulation in the run-up to the financial crisis.
I am often asked why economies get themselves into such a bind again and again throughout economic history.
Unfortunately, as Reinhart and I document empirically for hundreds of financial crises, covering 66 countries and eight centuries, the answer is all too simple: arrogance and ignorance.
Investors and policymakers are often altogether ignorant of the myriad historical experiences with financial crises.
And the few that are dimly aware of what has happened in other times and other places all too often say, “Don’t worry, this time is different.”
Perhaps the Great Contraction of 2008-2009 will be different from other deep financial crises, and we will see a sustained sharp recovery worldwide.
But G-20 policymakers are best advised not to bet on it, and to counsel patience, particularly in epicenter countries.
The Great Debt Scare
NEW HAVEN – It might not seem that Europe’s sovereign-debt crisis and growing concern about the United States’ debt position should shake basic economic confidence.
But they apparently have.
And loss of confidence, by discouraging consumption and investment, can be a self-fulfilling prophecy, causing the economic weakness that is feared.
Significant drops in consumer-confidence indices in Europe and North America already reflect this perverse dynamic.
We now have a daily index for the US, the Gallup Economic Confidence Index, so we can pinpoint changes in confidence over time.
The Gallup Index dropped sharply between the first week of July and the first week of August – the period when US political leaders worried everyone that they would be unable to raise the federal government’s debt ceiling and prevent the US from defaulting on August 2.
The story played out in the news media every day.
August 2 came and went, with no default, but, three days later, a Friday, Standard &amp;
Poor’s lowered its rating on long-term US debt from AAA to AA+.
The following Monday, the S&amp;P 500 dropped almost 7%.
Apparently, the specter of government deadlock causing a humiliating default suddenly made the US resemble the European countries that really are teetering on the brink.
Europe’s story became America’s story.
Changes in public confidence are built upon such narratives, because the human mind is very receptive to them, particularly human-interest stories.
The story of a possible US default is resonant in precisely this way, implicating as it does America’s sense of pride, fragile world dominance, and political upheavals.
Indeed, this is arguably a more captivating story than was the most intense moment of the financial crisis, in 2008, when Lehman Brothers collapsed.
The drop in the Gallup Economic Confidence Index was sharper in July 2011 than it was in 2008, although the index has not yet fallen to a lower level than it reached then.
Most confidence indices today are based on survey questions that ask respondents to assess the economy today or in the near future.
George Gallup, the pioneer of survey methods and creator of the Gallup poll, created a confidence index in 1938, late in the Great Depression, when he asked Americans, “Do you think business will be better or worse six months from now?”
He interpreted the answers as measuring “public optimism” and “the intangible mental attitude which is recognized as one vital element in the week-to-week fluctuations of business activity.”
But it hardly seems likely that big changes in people’s confidence (the kind of confidence that affects their willingness to spend or invest) are rooted in expectations over so short a time horizon.
When George Gallup wrote, almost nine years after the Great Depression began, a sense of ultimate futility – a belief that high unemployment would never end – was widespread.
That sentiment probably held back consumption and investment far more than any opinions about changes in the next six months.
After all, consumers’ willingness to spend depends on their general situation, not on whether business will be a little better in the short term.
Likewise, businesses’ willingness to hire people and expand operations depends on their longer-term expectations.
The Consumer Sentiment Survey of Americans, created by George Katona at the University of Michigan in the early 1950’s, and known today as the Thomson-Reuters University of Michigan Surveys of Consumers, has included a remarkable question about the reasonably long-term future, five years hence, and asks about visceral fears concerning that period:
“Looking ahead, which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?”
That question is usually not singled out for attention, but it appears spot-on for what we really want to know: what deep anxieties and fears do people have that might inhibit their willingness to spend for a long time.
The answers to that question might well help us forecast the future outlook much more accurately.
Those answers plunged into depression territory between July and August, and the index of optimism based on answers to this question is at its lowest level since the oil-crisis-induced “great recession” of the early 1980’s.
It stood at 135, its highest-ever level, in 2000, at the very peak of the millennium stock market bubble.
By May 2011, it had fallen to 88. By September, just four months later, it was down to 48.
This is a much bigger downswing than was recorded in the overall consumer-confidence indices.
The decline occurred over the better part of a decade, as we began to see the end of debt-driven overexpansion, and accelerated with the latest debt crisis.
The timing and substance of these consumer-survey results suggest that our fundamental outlook about the economy, at the level of the average person, is closely bound up with stories of excessive borrowing, loss of governmental and personal responsibility, and a sense that matters are beyond control.
That kind of loss of confidence may well last for years.
That said, the economic outlook can never be fully analyzed with conventional statistical models, for it may hinge on something that such models do not include: our finding some way to replace one narrative – currently a tale of out-of-control debt – with a more inspiring story.
The Great Depression Analogy
PRINCETON – Whenever today’s economic crisis is discussed, analogies to the Great Depression are never far away.
In its latest “World Economic Outlook,” the IMF examines the analogy explicitly, in terms not only of the collapse of financial confidence, but also of the rapid decline in global trade and industrial activity.
In general, history, rather than economic theory, seems to offer a guide to interpreting wildly surprising and inherently unpredictable events.
Almost every contemporary use of the depression analogy takes the year 1929 as a reference point.
But two completely different pathologies were manifest in the Great Depression; each called for different diagnoses – and different cures.
The first, and most famous, pathology was the stock market crash of October 1929 in the United States.
No other country had a stock market panic of similar magnitude, in large part because no other country had experienced the euphoric run-up of stock prices that sucked large numbers of Americans, from very different backgrounds, into financial speculation.
The second pathology was decisive in turning a bad recession into the Great Depression.
A series of bank panics emanated from central Europe in the summer of 1931 and spread financial contagion to Great Britain, then to the US and France, and finally around the world.
The 1929 panic has dominated all analysis of the depression for two rather peculiar reasons.
First, no one has ever been able to explain satisfactorily the October 1929 market collapse in terms of a rational cause, with market participants reacting to a specific news event.
So the crash presents an intellectual puzzle, and economists can build their reputations on trying to find innovative accounts.
Some people conclude that markets are simply irrational.
Others strain to produce complicated models, according to which investors might have been able to foresee the Depression, or ponder the likelihood of protectionist reactions in other countries to the American tariff act, though the US legislation had not yet even been finalized.
The second reason that 1929 has been popular with academic and political commentators is that it provides a clear motive for taking particular policy measures.
Keynesians have been able to demonstrate that fiscal stimulus can stabilize market expectations, and thus provide an overall framework of confidence.
Monetarists tell an alternative but parallel story of how stable monetary growth avoids radical perturbations.
The 1929 crash had no obvious cause, but two very plausible solutions.
The European banking disaster of 1931 was exactly the other way round.
No academic laurels are to be won by finding innovative accounts as its cause: the collapses were the result of financial weakness in countries where bad policies produced hyper-inflation, which destroyed banks’ balance sheets.
Intrinsic vulnerability made for heightened exposure to political shocks, and disputes about a Central European customs union and about war reparations was enough to topple a house of cards.
But repairing the damage was tough.
Unlike 1929, there were (and are) no obvious macroeconomic answers to financial distress.
Some famous macroeconomists, including Larry Summers, the current chief economic thinker of the Obama administration, have tried to play down the role of financial-sector instability in causing depressions.
The answers, if they exist, lie in the slow and painful cleaning up of balance sheets; and in microeconomic restructuring, which cannot simply be imposed from above by an omniscient planner, but requires many businesses and individuals to change their outlook and behavior.
The improvement of regulation and supervision, while a good idea, is better suited to avoiding future crises than to dealing with the consequences of a catastrophe that has already occurred.
The consequence of the long academic and popular discussion of the 1929 crisis is that people have come to expect that there must be easy answers.
But the collapse of Lehman Brothers in September 2008 was a 1931-like event, highly reminiscent of the world of depression economics.
Austrian and German bank collapses would not have driven the entire world from recession into depression if those countries had simply been isolated or self-contained economies.
But they had built their economies on borrowed money – chiefly from America – in the second half of the 1920’s.
That dependence is analogous to the way in which money from emerging economies, mostly in Asia, flowed into the US in the 2000’s, when an apparent economic miracle was based on China’s willingness to lend.
The bank collapses in 1931, and in September 2008, have shaken the confidence of the international creditor: then the US, now China.
Both lessons – about the slowness and painfulness of bank reconstruction, and about dependence on a large external provider of capital – are unpalatable. For a long time, it was much easier to repeat the soothing mantra that the world community had collectively learned how to avoid a 1929-style collapse, and that the world’s central banks clearly showed this in 1987 or 2001.
Governments undoubtedly merit praise for stabilizing expectations, and thus preventing crises from worsening.
But it is misleading when officials tout simple, if not simplistic, policy proposals as the basis for hoping that we can avoid a long period of difficult economic adjustment.
The Great Depression in Economic Memory
PARIS – The dispute that has emerged in the United States and Europe between proponents of further government stimulus and advocates of fiscal retrenchment feels very much like a debate about economic history.
Both sides have revisited the Great Depression of the 1930’s – as well as the centuries-long history of sovereign-debt crises – in a controversy that bears little resemblance to conventional economic-policy controversies.
The pro-stimulus camp often refers to the damage wrought by fiscal retrenchment in the US in 1937, four years after Franklin Roosevelt’s election as US president and the launch of the New Deal.
According to computations by the economist Paul van den Noord, the net result of the 1937 budget was a fiscal contraction amounting to three percentage points of GDP – certainly not a trivial amount.
Economic growth plummeted from 13% in 1936 to 6% in 1937, and GDP shrank 4.5% in 1938, while unemployment rose from 14% to roughly 20%.
Although fiscal policy was not the only cause of the double dip, ill-timed retrenchment certainly contributed to it.
So, are we in 1936, and does the budgetary tightening contemplated in many countries risk provoking a similar double-dip recession?
Clearly there are limits to the comparison.
For starters, much less time has elapsed since the financial crisis, the recession has been much shallower, and recovery has come faster.
Moreover, important developments that occurred between the 1929 stock-market crisis and the 1937 fiscal retrenchment – especially America’s turn to protectionism in 1930 and the monetary turmoil of subsequent years – have no analog today.
Nevertheless, the 1937 episode does seem to illustrate the dangers of attempting to consolidate public finances at a time when the private sector is still too weak for economic recovery to be self-sustaining.
(Another case with similar consequences was Japan’s value-added tax increase in 1997, which precipitated a collapse of consumption).
Fiscal hawks also rely on history-based arguments.
The economists Carmen Reinhart and Kenneth Rogoff have studied centuries of sovereign-debt crises, and remind us that today’s developed world has a forgotten history of sovereign default.
A particularly telling example is the aftermath of the Napoleonic wars of the early nineteenth century, when a string of exhausted states defaulted on their obligations.
The 1930’s are relevant here as well, given another series of defaults among European states, not least Germany.
What history tells us here is that defaults are not the privilege of poor, under-governed countries.
They are a threat to all, especially in times of high capital mobility, when governments rely too much on foreign lenders’ apparent willingness to provide funds and find themselves in dire straits when capital inflows stop.
Again, there are limits to comparisons: it is especially hard to infer from past episodes the limits to public debt.
After all, British public debt exceeded 250% of GDP in the aftermath of World War II, and Britain did not default.
But an important insight from history is that unsustainable fiscal policies are more likely to result in defaults when fiscal problems cannot be inflated away.
This was the case under the gold-based monetary regimes such as the Gold Standard of the nineteenth century, and it is the case today for countries that have relinquished their monetary autonomy, such as the members of the eurozone.
In normal times, history is left to historians and economic-policy debate relies on models and econometric estimates.
But attitudes changed as soon as the crisis erupted in 2007-2008.
Indeed, central bankers and ministers were obsessed at the time by the memory of the 1930’s, and they consciously did the opposite of what their predecessors did 80 years ago.
They were right to do so.
In extraordinary times, history is, in fact, a better guide than models estimated with data from ordinary times, because it captures variance that standard time-series techniques ignore.
If one wants to know how to deal with a banking crisis, the risk of a depression, or the threat of a default, it is natural to examine times when those dangers were around, rather than to rely on models that ignore such dangers or treat them as distant clouds.
In times of crisis, the best guides are theory, which captures the essence of a problem, and the lessons of past experience.
Everything in between is virtually useless.
The danger with relying on history, however, is that we have no methodology to decide which comparisons are relevant.
Loose analogies can easily be regarded at proofs, and a vast array of experiences can be enrolled to support a particular view.
Policymakers (whose knowledge of economic history is generally limited) are therefore at risk of being drowned in contradictory historical references.
History can be an essential compass when past experience provides unambiguous headings.
But an undisciplined appeal to history risks becoming a confusing way to express opinions.
Governance by analogy can easily lead to muddled governance.
The Great Escapism
NEW YORK – Barack Obama, however mixed his accomplishments to date as US president, has sought to rebrand America and reclaim its former signature asset: its ability to embody universally admired values. As popular culture is usually the way those values are transmitted, it is worth considering what it is about American cinema, music, and popular literature that makes them so compelling to many other parts of the world.
After all, much of what America once monopolized in Hollywood movies and other pop-culture exports is now being reproduced locally.
Bollywood competes with California in terms of glamorous stars and big production numbers;
Japan and South Korea mint their own pop singers and fashion trends.
But consider Entourage, the American TV show that centers on a rising male film star and his posse of dudes. Or a recent article in The New Yorker about two scruffy young chefs who have set out across the country to start the great adventure of running their own crazy restaurant, called Animal.
Or Swingers, the 1996 worldwide hit movie about a twenty-something guy in Hollywood and his band of male friends who drag him to Las Vegas to mend his broken heart.
One of America’s last competitive cultural exports, it seems, is the post-adolescent male escape fantasy.
Ever since Huck Finn took his friends down the Mississippi River on a raft, American men have created and consumed fantasies of setting out with their males friends for parts unknown, or of traveling in an all-male group to have adventures closer to home.
In the 1950’s, Jack Kerouac took his buddy careening across the country in On the Road.
A decade later, Ken Kesey took his buddies, the Merry Pranksters, across the country in the other direction in their painted bus (granted, with female hangers-on).
From Easy Rider in the 1960’s to the Harold and Kumar movies today, the “buddy film” – typically involving travel-based adventure – has become an established genre.
Savvy American politicians even make use of it for their own purposes.
Both John McCain and George W. Bush cleverly tapped into this fantasy – with its easy bonhomie and absence of wives and kids – to capture the hearts of the male journalists aboard their campaign buses, who could imagine themselves once again as tough, unfettered, and venturesome Kerouac figures.
President Obama even gave the actor who played Kumar a job in the White House (which he has now left to return to Hollywood).
As you survey the rest of global culture, the male-escape scenario is hard to spot emerging from any other place.
Save for the recent hit film 3 Idiots, Bollywood doesn’t send groups of Indian guys off on merry, irresponsible adventures.
Male protagonists in French films don’t take off together in convertibles for the Pyrenees; they stay home and urbanely have affairs.
Nor does Japanese pop culture manufacture escape fantasies aimed at Japanese men.
Yet men all over the world tune in to American-made fantasies of male bonding and male escape – escape from the bonds of work and domesticity, and, if only for a youthful period of the male lifespan, from long-term commitment to women themselves.
This fantasy, derived, no doubt, from American history – from westward expansion and Manifest Destiny, from the Gold Rush and a settlement policy that valorized staking a claim to the wilderness and subduing it – is powerfully appealing to men in general, and to many women as well.
Indeed, American women have recently begun to film and export their own versions of this fantasy – starting with the groundbreaking 1991 film Thelma and Louise and continuing in a growing trend of girl-group travel and escape packages.
Other countries’ lack of male escape fantasies in their popular culture may be no less historically rooted: less transient, more traditional societies will not warmly welcome homegrown films and pop songs about local young men taking off and fleeing their responsibilities.
But, judging by the appetite shown worldwide for this narrative, it seems clear that identification with such adventures is almost universal.
It seems to speak to a deep longing in men – and in the women who also enjoy these films and TV shows – for a time in one’s life when one could dash toward freedom, adventure, and self-reinvention, unencumbered by social ties and family obligations.
At its best, this genre is part of America’s gift to the rest of the world.
At its worst, it is part of America’s curse.
That whiff of careening, heedless adolescent fecklessness is part of what makes the archetypal American male presence alarming when he is equipped with a global cudgel.
To the rest of the world, those same qualities are part of his charm only so long as he stays safely up on the screen.
The Great Firewall of China
Writing from 1930’s Shanghai, China’s great essayist Lu Xun once observed: “Today there are all kinds of weeklies.
Although their distribution is not very wide, they are shining in the darkness like daggers, letting their comrades know who is attacking the old, strong castles.” Muckraking broadsheets in the first half of the last century played cat-and-mouse games with Chinese government censors, ultimately helping to expose the corruption and moral bankruptcy of the Nationalist (KMT) government and contributing to the Communist victory in 1949.
If that sounds familiar, its is because the Chinese Communist Party never forgets its history – and is determined to prevent history from repeating itself.
Thus, China’s rulers acted in character last December, when they cracked down on news organizations that were getting a bit too assertive.
The editor and deputy editors of Beijing News, a relatively new tabloid with a national reputation for exposing corruption and official abuse, were fired.
In protest, more than 100 members of the newspaper’s staff walked out.
Most Chinese might not have known about the walkout if it hadn’t been for Chinese bloggers.
An editorial assistant at the New York Times, Zhao Jing, writing under the pen name Michael Anti, broke the news on his widely read Chinese-language blog.
He exposed details of behind-the-scenes politics and called for a public boycott of the newspaper, evoking strong public sympathy for the journalists, expressed online in chatrooms and blogs.
Zhao’s blog wasn’t under the direct control of the Party’s Propaganda Department. It was published through a Chinese-language blog-hosting service run by Microsoft’s MSN Spaces.
On December 30, Zhao’s blog disappeared.
Since then, Microsoft has confirmed that its staff removed the blog from an MSN Internet server, citing the need to respect Chinese law when doing business in China.
Microsoft’s contribution to Chinese political repression follows Yahoo’s role in the sentencing of a dissident reporter and Google’s decision not to display search results that are blocked by what has become known as the “Great Chinese Firewall.”
Indeed, China has developed the world’s most sophisticated system of Internet blocking and censorship, thereby hiding information unfavorable to China’s rulers from all but the most technologically savvy.
The system is bolstered by human surveillance and censorship carried out not only by government employees, but also by private service providers.
Some liken Microsoft’s behavior to IBM’s infamous collaboration with the Nazis in Germany.
Human rights activists in the United States are calling for legislation that would prevent American companies from engaging in business practices that help repressive regimes stifle democratic movements.
But the companies argue that there is absolutely no other way to compete – they must either comply with censorship or discontinue business.
If MSN Spaces did not censor its Chinese blogs, Microsoft argues, the Great Chinese Firewall would simply be programmed to block Chinese Internet users from accessing its service.
In fact, most international blog-hosting services are blocked in China, which provides a competitive boon to several hundred domestic blog-hosting services.
These services, with names like Bokee.com, Blogbus.com and Blogcn.com, all comply with Chinese government censorship requirements.
Software prevents users from posting politically sensitive words, and provocative content that gets past the automated controls is frequently removed.
These businesses would not be allowed to exist otherwise.
Despite the censorship, the Chinese blogosphere is blossoming, with probably somewhere between 5-10 million active blogs.
The Chinese public has grown expert over the years at finding plenty of things to do and talk about while avoiding politically dangerous issues.
Chinese bloggers are no different.
New pop cultural celebrities are emerging online, and people are creating their own radio and even TV shows.
Naturally, the Chinese companies that provide most of the tools used to create and host this content have censorship built into their software, management structure, and business models.
But most Chinese bloggers accept this as part of the reality of life in China.
They are not willing to fight for greater freedom of speech and are even willing to censor each other in order to preserve what they have.
Which brings us back to China’s greatest modern writer, Lu Xun.
In 1921, he wrote a biting piece of social criticism, “The True Story of Ah Q,” about a hapless character who adjusts his values to whatever the circumstances and people around him seem to demand.
Unfortunately, faced with a choice between protecting the long-term interests and human rights of their customers and complying with laws implemented by unelected power-holders, technology firms like Microsoft, Yahoo, and Google seem to have embraced the Ah Q spirit.
They have made it clear that when it comes to free expression, their priorities lie on the side of surrender.
In the long run, this does not bode well for their global reputations, which depend on users’ trust in the openness and independence of their products and services.
One day, perhaps, censorship will no longer make good business sense anywhere.
The Great Game’s New Players
NEW DELHI – Two “great games” currently roil South Asia.
In the West, Afghanistan – and what Henry Kissinger calls “Islamist Jihadists” – challenges the international order.
In the East, a large number of Chinese troops have entered Pakistani-held territory high in the mountain fastness of the Kashmir Karakorams, in the picturesque Gilgit-Baltistan region, not far from the glacial battlefield of Siachen, where India and Pakistan confront each other.
Senge Hasan Sering, from Skardu, the director of the Gilgit-Baltistan National Congress, believes that the number of Chinese People’s Liberation Army troops now present “could be over 11,000,” as there are also additional “PLA construction corps personnel” deployed.
It is here that China is currently investing “billions of dollars in mega projects like expressways, tunnels, and oil and gas pipelines.” This, Sering says, is “surely not on account of any overflowing altruism.”
The Chinese say that some of their troops are present in Pakistan because of another sort of “overflowing,” of which there has been a great deal in this part of Kashmir and in the rest of Pakistan. This year’s heavy monsoon rains have wrought havoc in the area, severing road connections, washing away bridges, and rendering over half a million people homeless in these mountains – without “dwellings, farmlands, moveable assets,” or even “graveyards.”
This is over and above the many thousands in the Hunza region, who in January lost everything on account of a cloudburst that wiped out several villages and created a highly unstable artificial lake.
Rudyard Kipling’s old “Great Game” now has new contestants.
Instead of an expansionist Russian empire confronting Imperial Britain, it is now a China hungry for land, water, and raw materials that is flexing its muscles, encroaching on Himalayan redoubts and directly challenging India.
China’s incursion reaffirms the ancient strategic axiom that “geography is the real determinant of history” – and, as a result, of foreign and security policy, too.
Robert Kaplan wisely observes that “Indian geography is the story of invasions from a northwesterly direction,” and “India’s strategic challenges still inhere in this fact,” which is why Afghanistan, to Indian eyes, is linked to the sub-continent’s history, and thus our future.
It is also why there exists an “organic connection of India to Central Asia,” the key to that link lying in the Himalayas, which is where the India-China rivalry is currently focused.
Fortunately, at least for the present, this rivalry is far less emotional than India-Pakistan relations, having not been born of historical grievances.
The Chinese urge is to break from the confines of their country’s history, and thus China’s own geography.
An assertive and relatively stable China, it seems, must expand, lest pent-up internal pressures tear it apart.
A strong and stable India, on the other hand, will always be a status quo power.
It is against this backdrop that the latest contest between India and China must be assessed.
Several thousand PLA troops are indisputably stationed in the Khunjerab Pass on the Xinjiang border to protect the Karakoram Highway, which PLA soldiers are now repairing in several places.
The road, after all, is a vital link in China’s quest for direct access to the Arabian Sea.
But this is also Indian territory, wherein lies the rub, for the region is now victim to a creeping China acquisitiveness, with Pakistan acquiescing as a willing accomplice.
Despite India’s historically established territorial claims to the region, China terms the area “disputed,” a description that it has now begun to extend to the whole of the Indian state of Jammu and Kashmir.
This sort of verbal trickery to hide a strategic objective has been seen before.
Indeed, some years back, a planned visit to Indian Ladakh by the PLA’s commander of the Lanzhou Military Region was canceled on the grounds that Pakistan had protested – implying that Pakistan had a legitimate claim to the area.
It would be a mistake to presume that the vast expansion of trade between India and China, currently worth more than $60 billion annually (with China now India’s largest trading partner), must lead to improved bilateral relations.
Even while trade expands, China is attempting to confine India within greatly foreshortened land and sea borders through its so-called “string of pearls policy.”
This effort to encircle India by sea with strategically positioned naval stations from Hainan in the East to Gwadar in the West, and on land by promoting bogus Pakistani claims that undermine India’s territorial integrity, takes the “Great Game” to a new and more dangerous level.
Indeed, the pincer of Afghanistan and Gilgit/Baltistan poses the gravest challenge to India’s statecraft since Independence.
More than that, the struggle now underway at the top of the world may well determine whether this will be an “Asian Century” or a “Chinese Century.”
The Great Global Bargain Hunt
TOKYO – Few recent elections have grabbed world attention in the way that Greece’s vote on June 17 did.
Now that the center-right New Democracy, which finished first, has formed a coalition government with the center-left PASOK and the Democratic Left, the key issue for Prime Minister Antonis Samaras’s administration is whether it can implement the austerity measures agreed with Greece’s eurozone partners in exchange for continued support from the International Monetary Fund and the European Union.
The situation remains dangerous – and not only for Greece.
Spain and Italy face the redemption of government bonds valued at €13.2 billion ($16.5 billion) and €17 billion, respectively, in July, with redemptions continuing every month thereafter like an unstoppable tsunami, ensuring continued turmoil in Europe and beyond.
Given the global menace posed by Europe’s sovereign-debt and banking crises, measures to strengthen the European banking system and encourage fiscal integration gained some momentum at the recent G-20 summit in Los Cabos, Mexico.
The summit’s concluding statement declared that countries with ample finances are prepared to provide economic stimulus if growth weakens.
One result of this promise is that pledges to boost the IMF’s funding have now reached $456 billion.
These pledges come on top of the $430 billion expansion of IMF funding that was announced in April, so the Fund should have the financial firepower to act in any crisis – if, that is, the money pledged at the G-20 summit is actually contributed.
The BRICS (Brazil, Russia, India, China, and South Africa), which are all members of the G-20, now account for 43% of the world’s population and 18% its economy.
Their share of “international responsibility” was revealed at the recent summit: contributions to the IMF of $43 billion by China, $10 billion by Brazil, Russia, and India, and $2 billion by South Africa.
Mexico, the G-20’s host, also pledged $10 billion.
This renewed international cooperation was intended, of course, to protect the global financial system.
But contributing money also means having a say, and the BRICS – no surprise – are pressing their demand for voting reform in the IMF, and are increasingly offering currency swaps to economically troubled countries.
Various countries, however, are also strengthening their own positions with little regard for the impact of their actions on the international financial system.
The most active of these countries is, of course, China, which can call upon its vast and still-rising foreign reserves of $3.3 trillion to push its interests in every corner of the globe.
For example, although China has done little to bolster the Greek government’s balance sheet, its active approach to the crisis has been conspicuous.
Prime Minister Wen Jiabao visited Greece in October 2010 and agreed to strengthen cooperation between China and Greece during a meeting with then-Prime Minister George Papandreou – timely support that the weakened Greek government was delighted to receive.
But the form of Chinese support for Greece will likely benefit China far more than Greece in the long term.
Indeed, in an editorial published on June 15, China Daily described Greece as a “gateway” for China into Europe.
Already, the China Ocean Shipping Company (COSCO) has obtained a 35-year lease to operate the second pier at the port of Piraeus, one of the busiest in the world, for €3.5 billion, and has purchased a truck-loading facility and packaging center in the Piraeus suburbs.
The company has also expressed its intention to acquire 23% of Piraeus Port Authority, and is seeking to lease or acquire ports on the island of Crete.
Likewise, though COSCO’s bid for the Thessaloniki Container Terminal met local opposition, Chinese investors are in negotiations with the Greek government to acquire a 20-year interest (2026-2046) in Athens International Airport for €500 million.
China may look like a white knight for Greece, which remains mired in fiscal crisis and severe recession; but this was also a perfect chance for China to go bargain hunting around the world.
So instead of using its vast foreign exchange reserves to bolster the international system, China is picking up strategic assets on the cheap.
Consider Iceland, which suffered bitterly following the collapse of Lehman Brothers in September 2008.
An enormous Chinese Embassy has been built in Reykjavik with an eye to improving China’s intelligence about future developments in the Arctic Ocean.
And Chinese companies’ land purchases in Iceland have been so extensive as to fuel local paranoia, with some investment plans blocked for fear that they might be a stepping-stone to a Chinese military presence.
For almost a decade, people have wondered how China would use its gargantuan foreign-exchange reserves, particularly whether it would challenge the supremacy of the dollar.
It now seems clear that China intends to use its foreign reserves to further its own global geopolitical strategy, not to buttress the international system that has enabled its three-decade boom.
As governments and citizens around the world become aware of the influence that China can buy with its deep pockets, is an anti-Chinese backlash inevitable?
Or have some countries been so scarred by the financial crisis that they don’t care where their next meal ticket comes from?
Time will tell, but there is a danger that Chinese hubris is beginning to extend to global finance.
The Great Hydrogen Hope
RHINECLIFF, NEW YORK – In Jules Verne’s novel The Mysterious Island , published in 1874, Cyrus Harding, the book’s engineer/hero, declares that “water will one day be employed as fuel, that hydrogen and oxygen which constitute it, used singly or together, will furnish an inexhaustible source of heat and light.” Water, Harding announces, would be decomposed “doubtless by electricity” into hydrogen and oxygen.
Many of Verne’s musings remain fantasy, but where hydrogen is concerned, his time has come.
Today, several hundred hydrogen-powered prototype cars, buses, vans and minivans, a motorcycle or two, a few scooters, utility vehicles (including a slew of forklift trucks), and even a couple of farm tractors are already operating.
Two years ago, the European Parliament in Strasbourg overwhelmingly passed a declaration urging a green hydrogen economy.
The hydrogen projects are being developed in North America, Europe, Japan, Korea, Australia, South America, and, embryonically, in China and India.
Most of the hydrogen-driven vehicles are powered by fuel cells, but both BMW and Mazda have converted gasoline engines to hydrogen fuel (spiffy V-12s for BMW, rotary engines for Mazda).
Indeed, such major carmakers as Toyota, Honda, Daimler, General Motors, and Hyundai/Kia are deep into plans for commercial production of cars powered by hydrogen fuel cells.
Honda showed a prototype fuel cell car assembly line last year;
Daimler already launched one this year;
Hyundai/Kia plans to have one by 2012, and Toyota, probably the biggest player, by 2015, with small outputs initially, by the thousands later, and increasing steeply after that.
Like natural gas, hydrogen can be used as a car fuel with engine modifications.
But carmakers think fuel cells are the better, more efficient, silent, clean power source for transportation.
They function somewhat like a battery, except that their fuel is constantly replenished, reacting electrochemically with the air’s oxygen to make electricity to drive an electric motor.
Today, such vehicles are hand-built and expensive, typically costing roughly a million dollars each, give or take a few hundred thousand dollars.
But costs will come down once series production gets underway: Toyota says that it expects to “shock” the industry with its cost reduction numbers when it launches commercial production.
It expects costs for the fuel cell stacks, the heart of the drive train, to decline as much as 90%.
In its most recent analysis, the US Department of Energy estimated that, using 2010 technology and assuming a production volume of 500,000 units, production costs for an 80-kilowatt fuel cell would be about $57 per kilowatt.
With expected technology improvements, the cost would drop to about $47/kW by 2015, within shouting range of the department’s target of $30/kW, a benchmark figure that more or less corresponds to today’s manufacturing cost for gasoline engines.
As for hydrogen fuel costs, there are currently no fixed numbers, but the US target is $2-3 per kilogram by around 2018 (a kilogram of hydrogen has about the same energy content as a gallon of gasoline).
Because fuel cells are about twice as efficient as internal combustion engines, the effective cost per unit of distance would be about half that.
The US has traditionally been in the forefront of research and development in this field, but in recent years hydrogen has been elbowed aside by intense lobbying for other alternatives.
Some influential supporters argue plug-in hybrids, battery-powered vehicles, and biodiesel cars are closer to market, and that they are better, less costly technologies than hydrogen and fuel cell cars.
That view was embraced by the Obama administration, leading to some embarrassment this summer for new Energy Secretary Steven Chu, a Nobel Prize-winning physicist.
Chu had ordered a $130 million cut in funding in 2010 for hydrogen and fuel cell transportation technology.
But an outcry from groups ranging from the Union of Concerned Scientists, the National Research Council, fuel cell and hydrogen associations to the American Lung Association and car manufacturers, coupled with strong support in Congress, will probably lead to a reversal of the cuts.
It is worth noting that hydrogen’s supporters do not oppose battery powered cars, and they embrace biofuels as another renewable source of hydrogen.
But because of the weight of electric batteries, their limited range, cost, and other considerations, batteries are best suited primarily for short-range city cars.
In any case, hydrogen fuel cell cars typically incorporate batteries in hybrid configurations, enabling them to cover the 300-mile range demanded by consumers.
Countless laboratories are working on better, cheaper hydrogen production and storage methods, and on ways to bring down costs and boost fuel cell durability.
Both shortcomings remain major concerns.
Moreover, a hydrogen fueling infrastructure must be built.
This will be expensive, but probably not more so than maintaining the current fossil fuel structure, and will most likely start as station clusters or corridors in metropolitan areas that gradually spread outward.
Cluster seeds are already underway in the Los Angeles and New York metropolitan areas and, very significantly, in Japan.
Indeed, in Tokyo more than a dozen major Japanese energy companies are said to be banding together to push the creation of a national hydrogen fueling infrastructure by 2015
The hydrogen revolution has started, but with a slow-burning fuse.
Hydrogen is not the only weapon in the fight against global heating, but it is an essential element – in the truest sense of the word.
The Great Illusion
The saddest of the books on my office bookshelf is an old one published nearly a century ago: Norman Angell's The Great Illusion: A Study of the Relation of Military Power in Nations to Their Economic and Social Advantage , which tried to prove that military conquest was obsolete.
Angell's argument was simple: in all prolonged modern industrial wars, everybody loses.
Losers lose the most, but winners also are worse off than if peace had been maintained.
Many fathers, sons, and husbands are dead, and so are many mothers, wives, and daughters.
Much wealth has been blown up.
Much architecture has been turned into rubble.
Confiscation damages the rule of law on which modern industrial prosperity rests.
The most that even the winners can say is that they are little losers rather than big losers.
Modern industrial war is, as the computer in the 1982 movie War Games put it, a very peculiar game: "The only way to win is not to play."
At the time that Angell wrote, some people argued that war was an important means to promote national prosperity; that commercial prosperity was the fruit of military power.
Angell puzzled over how pre-WWI pan-German politicians could believe that German prosperity required a big battle fleet when the absence of one made no difference to the prosperity of Norway, Denmark, or Holland.
He looked forward to the coming of an age of rational statesmanship, when every prime minister and foreign minister would recognize that regardless of the matter in dispute, binding arbitration between nations was a better strategy than war.
He was, of course, right in his judgment that the only way to prevent any modern industrial war from becoming a destructive tragedy for all was to quickly conclude a ceasefire.
Governments that view aggressive war as a means to prosperity have been rare since the end of World War I: the Imperial Japanese government that launched World War II in the Pacific and Saddam Hussein's two grabs for oilfields are examples that spring immediately to mind.
In one sense, governments have learned the lesson Norman Angell preached.
But what makes The Great Illusion the saddest book on my office bookshelf is that we have found other reasons to fight wars, and the years since Angell wrote his book have seen the most terrible and bloody wars ever.
We have fought wars to preserve colonial domination and wars to end it.
We have seen civil wars. We have seen ideological wars.
We have seen wars of extermination like the one that Hitler and the Nazis waged against not just Jews and Gypsies, but Poles and Russians.
We have seen ethnic wars and wars fought to make governments stop killing their citizens.
Indeed, we have seen more religious wars than at any time since the end of the Thirty Years War in 1648.
Yet there is cause for hope.
From the pro-consulate of Julius Caesar until 1945, there was most likely at least one army crossing or about to cross or thinking of crossing the Rhine in arms.
Now there are none.
A little more than a century and a half ago the United States appeared willing to go to war with the world's only superpower of the time to try to turn Vancouver, British Columbia, into a city ruled from Washington, D.C. rather than from Ottawa or London.
Vancouver is a lovely city, and I would love to have the voters of British Columbia inside the US, because I think they would add much health to the American electorate.
But nobody thinks that idea worth fighting a war over.
A century ago, a French politician was no more likely to advocate peace and detente with Germany than a modern Arab politician is likely to advocate peace and detente with Israel.
Academic foreign policy "realists" (who somehow strike me as not a very realistic bunch) attributed the end of Franco-German antagonism to the fact that they had something bigger to be scared of: Russia, which was terrifying under Stalin, frightening under Khrushchev, and worrisome under Brezhnev.
Let the Cold War end, they said, and then we will see France and Germany begin to rattle their sabers again, for that is the tragedy of international power politics.
Yet the Cold War has been over for fifteen years, and military conflict between France and Germany today seems as unlikely as military conflict between America and Canada.
I hope that it is the fact of European interdependence - an interdependence carefully constructed by Jean Monnet, Robert Schumann, Konrad Adenauer, and those who followed in their footsteps - and not the memory of the horror of World War II that has caused the armies that used to cross the Rhine in arms to vanish.
If so, there is a chance that the globalized economic age to which we look forward will be a more peaceful age than the twentieth century was.
If not, then Angell may well continue to be as irrelevant as he was right.
The Great Man Syndrome
In our globalized age, vast impersonal forces are supposed to determine events.
Globalized markets, unfettered trade, militant Islam, China’s awakening: these are the things historians and strategists usually portray as the key forces shaping our destiny.
But most people don’t see things this way.
Instead, most people still instinctively look at “great men” as the agents of history, the men (and women) who seem to forge events through their political vision, personal charisma, and the force of their moral claims.
By sheer force of conviction and personality, such figures, many of us believe, can carry the day, bringing a glimmer of hope to an otherwise detached and impersonal universe.
This yearning for providential men or women in our global age results from at least three factors.
The first concerns the complexity and vulnerability of our world.
The second, paradoxically, reflects our growing cynicism towards politics and politicians.
And the third is the result of our media culture, obsessed as it is with putting a “face” to events.
Confronted with the problem of bringing about positive changes in a domestic or international environment that seems to defy the power of “normal” leaders, one looks for new Alexanders to untie the “Gordian knot” and transcend complexity by sheer force of will and dynamism.
For example, structural reforms in Europe are thought impossible to enact unless imposed by some reincarnation of Margaret Thatcher.
In the Middle East, everyone waits for a new Anwar Sadat to arise among the Arabs.
Disillusion with politics and politicians also is a key element of our yearning for providential leaders.
In France for example, the overly flattering commemoration of President François Mitterrand’s death ten years ago primarily reflects widespread disillusion with his successor, Jacques Chirac.
Indirect criticism of the present is usually a key element in idealized views of the past.
The less we expect from a “normal” politician, the more we look for a hero.
With the world becoming a global stage, the media’s role in fueling the appetite for providential leaders is essential.
The public demands quick answers to complex problems that, unsolved, risk endangering the planet.
They need figures with whom they can identify, immediately recognize, and, above all, trust.
The emergence of an embryonic “world civil society” heightens demand for universal and charismatic figures, holding out the hope of global accountability, but also carrying populist overtones.
In a world searching for providential leaders, the case of Ariel Sharon is both symbolic and paradoxical, for this universal man remains one of the most controversial figures of recent decades.
He has become a nearly revered figure in his country, and large segments of Western public opinion believe that his political demise represents a potentially fatal blow to any hope of progress in the region, even as he remains hated in large parts of the Arab and Muslim world.
Sharon’s transformation from villain to hero within the space of a mere few years is a source of fascination for his people, the region, and the world – all the more so because his ultimate intentions will remain a subject of endless dispute among historians tomorrow and among politicians claiming to be his faithful heirs today.
Was Sharon really convinced by demographers that the “Great Israel” that once seemed to be his dream would actually mean the end of a Jewish State, or did his disengagement strategy of “Gaza first” really mean “Gaza last”?
For those who support one or the other reading, Sharon will forever hold the benefit of the doubt.
That Sharon’s stroke could be compared – in terms of political consequences – with the assassination of Yitzak Rabin demonstrates that his personality had become associated with hope and security.
The “bulldozer” had become the grandfather of most Israelis and the last card of Western diplomacy, for Americans and, surprisingly, for Europeans, too.
He alone seemed to incarnate the combination of reassuring strength and vision to carry the majority of Israelis behind him in a process of unilateral disengagement.
In fact, one may wonder if the world has made of Sharon a providential man because it wanted so much to believe that there was still “hope around the corner” in the Middle East.
Was this wishful thinking or self-fulfilling prophecy?
We will never know.
What is certain is that the vacuum left by Sharon’s departure from politics is all the more striking in view of the images of chaos emerging from the Gaza that Israel has vacated, and the collapse of the Palestinian authority before our eyes.
Nor will the emergence of another providential figure come easily.
Not all exceptional periods create their Bonapartes, and this is probably a good thing, for exceptional leaders may give the illusion that all problems have solutions, which is far from true.
The natural course of history in the most optimistic sense is progress “at the margin,” but the rapid pace of technological change is pushing us to expect equally rapid progress in human affairs.
Many of us believe that such an impossible wager can be fulfilled only by a providential man, with all the hopes – and dangers – that this entails.
The Great Moderation
It has been 20 years since Alan Greenspan became chairman of America’s Federal Reserve Bank.
The years since then have seen the fastest global average income growth rate of any generation, as well as remarkably few outbreaks of mass unemployment-causing deflation or wealth-destroying inflation.
Only Japan’s lost decade-and-a-half and the hardships of the transition from communism count as true macroeconomic catastrophes of a magnitude that was depressingly common in earlier decades.
This “great moderation” was not anticipated when Alan Greenspan took office.
America’s fiscal policy was then thoroughly deranged – much more so than it is now.
India appeared mired in stagnation.
China was growing, but median living standards were not clearly in excess of those of China’s so-called “golden years” of the early 1950’s, after land redistribution and before forced collectivization turned the peasantry into serfs.
European unemployment had just taken another large upward leap, and the “socialist” countries were so incompatible with rational economic development that their political systems would collapse within two years.
Latin America was stuck in its own lost decade after the debt crisis at the start of the 1980’s.
Of course, the years since 1987 have not been without big macroeconomic shocks.
America’s stock market plummeted for technical reasons in the fall of that year.
Saddam Hussein’s invasion of Kuwait in 1991 shocked the world oil market.
Europe's fixed exchange rate mechanism collapsed in 1992.
The rest of the decade was punctuated by the Mexican peso crisis of 1994, the East Asian crisis of 1997-98, and troubles in Brazil, Argentina, Turkey, and elsewhere, and the new millennium began with the collapse of the dot-com bubble in 2000 and the economic fallout from the September 11, 2001, terrorist attacks.
Moreover, today’s global imbalances and misaligned real exchange rates threaten to bring on not just mild recession, but significant and prolonged depression.
Yet, so far, none of these events – aside from Japan starting in the early 1990’s and the failures of transition in the lands east of Poland – has caused a prolonged crisis.
Economists have proposed three explanations for why macroeconomic catastrophes have not caused more human suffering and deranged long-run economic growth over the past generation.
First, some economists argue that we have simply been lucky, because there has been no structural change that has made the world economy more resilient.
According to this view, we have simply rolled the dice and won five times in a row. We should be happy and grateful, but we should not expect it to continue.
Second, central bankers have finally learned how to do their jobs.
Before 1985, according to this theory, central bankers switched their objectives from year to year.
One year, they might seek to control inflation, but the previous year they sought to reduce unemployment, and next year they might try to lower the government’s debt refinancing costs, and the year after that they might worry about keeping the exchange rate at whatever value their political masters prefer.
The lack of far-sighted decision-making on the part of central bankers meant that economic policy lurched from stop to go to accelerate to slow down.
When added to the normal shocks that afflict the world economy, this source of destabilizing volatility created the unstable world before 1987 that led many to wonder why somebody like Alan Greenspan – who had previously only spent a couple of years in government – would want the job.
The final explanation is that financial markets have calmed down.
Today, the smart money in financial markets takes a long-term view that asset prices are for the most part rational expectations of discounted future fundamental values.
Before 1985, by contrast, financial markets were overwhelmingly dominated by the herd behavior of short-term traders, people who sought not to identify fundamentals, but to predict what average opinion would expect average opinion to be, and to predict it before average opinion did.
Thus, central bankers were stuck trying to control a world economy shocked by random changes in the animal spirits of investors and traders.
When I examine these issues, I see no evidence in favor of the first theory.
Our luck has not been good since 1985.
On the contrary, I think our luck – measured by the magnitude of the private sector and other shocks that have hit the global economy – has, in fact, been relatively bad.
Nor do I see any evidence at all in favor of the third explanation.
It would be nice if our financial markets were more rational than those of previous generations.
But I don’t see any institutional changes that have made them so.
So my guess is that we would be well-advised to put our money on the theory that our central bankers today are more skilled, more far-sighted, and less prone to either short-sightedly jerking themselves around or being jerked around by political masters who unpredictably change the objectives they are supposed to pursue year after year.
Long may this state of affairs continue.
The Great Organ Bazaar
LUND, SWEDEN – The Web site 88DB.com Philippines is an active online portal that allows service providers and consumers to find and interact with each other.
Naoval, an Indonesian man with “AB blood type, no drugs and no alcohol,” wants to sell his kidney.
Another man says, “I am a Filipino.
I am willing to sell my kidney for my wife.
She has breast cancer and I can’t afford her medications.” Then there is Enrique, who is “willing to donate my kidney for an exchange.
21 years old and healthy.”
Other offers of this type could, just a few years ago, be found at www.liver4you.org, which promised kidneys for $80,000-$110,000.
The costs of the operation, including the fees of the surgeons – licensed in the United States, Great Britain, or the Philippines – would be included in the price.
All of this Internet activity is but the tip of the iceberg of a new and growing global human-tissue economy.
Indeed, the World Health Organization (WHO) has estimated that about 10% of organ transplants around the world stem from purely commercial transactions.
Trade in organs follows a clear, geographically linked pattern: people from rich countries buy the organs, and people in poor countries sell them.
In my research on organ trafficking, I have entered some of these shadow markets, where body parts from the poor, war victims, and prisoners are commodities, bought or stolen for transplant into affluent ill people.
One woman, originally from Lebanon, told me that a wealthy businessman from Spain paid a huge sum for her kidney.
In the end, however, she received no monetary payment.
Today, her life is much worse than before, because medical complications following the operation make it difficult for her to work.
Similar stories are told by organ vendors I have met from the former Soviet states, the Middle East, and Asia.
Organ trafficking depends on several factors.
One is people in distress.
They are economically or socially disadvantaged, or live in war-torn societies with prevalent crime and a thriving black market.
On the demand side are people who are in danger of dying unless they receive an organ transplant.
Additionally, there are organ brokers who arrange the deals between sellers and buyers.
It is also necessary to have access to well-equipped clinics and medical staff.
Such clinics can be found in many countries, including Iran, Pakistan, Ukraine, South Africa, and the Philippines.
Indeed, the Philippines is well known as a center of the illegal organ trade and a “hot spot” for transplant tourism.
From the 1990’s until 2008 (when a new policy was adopted), the number of transplantations involving organ sales by Filipinos to foreign recipients increased steadily.
Many organ sellers from Israel, for example, were, together with their buyers, brought to Manila for the transplants.
Hector is one of the several hundred cases of kidney vendors documented by social workers in three impoverished towns in the Philippines’ Quezon province.
His brother was trapped in Malaysia with high debts to criminal gangs, so Hector sold his kidney in order to buy his freedom.
Another vendor, Michel, became a broker himself; after selling one of his kidneys to pay for his father’s medicines, the surgeon forced him to deliver more organs.
The vendors’ organs were transplanted to recipients mainly from the Philippines, Israel, Japan, South Korea, and Saudi Arabia.
Trade in humans and their bodies is not a new phenomenon, but today’s businesses are historically unique, because they require advanced biomedicine, as well as ideas and values that enhance the trade in organs.
Western medicine starts from the view that human illness and death are failures to be combated.
It is within this conceptual climate – the dream of the regenerative body – that transplantation technology develops and demand for biological replacement parts grows.
One of the more obvious manifes­tations of treating the human body as a resource to be mined is the hospital waiting list, used in many countries.
A man I interviewed recently for a study of Swedes who had been on the waiting list, but who decided to purchase kidneys abroad, described to me his trip to Pakistan for the transplant: “I’m not the kind of man who uses other people, but I had to.
I had to choose between dying and getting back my life!”
In an era of transplants on demand, there is no way around this dilemma.
The biological imperatives that guide the priority system of transplant waiting lists are easily transformed into economic values.
As always where demand exceeds supply, people may not accept waiting their turn – and other countries and other peoples’ bodies give them the alternative they seek.
The Great Real Estate Bust of 2008
NEW HAVEN – What brought on the collapse of home prices in 2008 that is the root of the financial crisis now enveloping much of the world?
Home prices in the United States, as measured by the Standard ampamp;
Poor’s/Case-Shiller Home Price Indices, have plummeted more than 40% in real inflation-adjusted terms in some major cities since the peak around the beginning of 2006.
Nationally, including all cities, the fall is over 25%.
The futures market at the Chicago Mercantile Exchange is now predicting declines of around 15% more before the prices bottom out in 2010.
These are the market’s forecasts – and it is not a very liquid market.
But those who make these forecasts are implying real declines, from peak to trough, of more than 50% in some places.
Why are we seeing such big price drops?
And why does the housing market in so many other countries now reflect similar conditions?
The answer has both proximate and underlying causes.
The proximate answer for the US is that a decline in lending standards helped people buy houses at ever-increasing prices before 2006.
Freer lending meant that people were freer to bid up prices of homes to ridiculous levels.
Shacks were selling for a million dollars.
After the peak, lenders tightened their standards.
When buyers find it difficult to finance home purchases, sellers have to cut the asking price.
The up and down of lending represents a credit cycle, and credit cycles have played a major role in economic fluctuations for centuries.
In his 1873 book Lombard Street , Walter Bagehot, the British businessman and editor of The Economist , described these cycles perfectly.
The boom just before the depression of the 1870’s that he described sounds a lot like what happened just before the current crisis.
When credit expands, he wrote, “The certain result is a bound of national prosperity; the country leaps forward as if by magic.
But only part of that prosperity has a solid reason…this prosperity is precarious.”
But the credit cycle was not the ultimate cause of the 1870’s depression or the crisis we are seeing today.
Ultimately, one must always ask why lending standards were loosened and then tightened.
The credit cycle is an amplification mechanism.
The instability in the lending sector is always there, and the crisis manifests itself only if some precipitating factor triggers it.
Moreover, the extreme weakening and then tightening of credit standards seems particularly prominent only in the US, while the housing boom-bust cycle is prevalent throughout much of the world.
The precipitating factor that led to the current situation has to do with our evolving world culture, spread rapidly through enhanced media outlets and the Internet, and its perceptions of the markets.
It has to do with the deep admiration of markets that has developed during the boom, in line with the “efficient markets theory” in academic finance.
It became widely believed that financial markets are such sublime poolers of information that they represent a collective judgment that transcends that of any mere mortal.
James Surowiecki’s bestselling 2004 book, with the outrageous title The Wisdom of Crowds , pressed this idea forward at the very height of the real estate boom.
The boom in the world’s housing markets and stock markets between 2003 and 2006 was caused by this faulty idea, and the idea that investments in homes and equities are a sure route to wealth.
It had become an article of faith that the value of both types of assets only goes up in the long run, and that it is foolish to try to “time the market.”
It was sincerely believed, and supported by deep intuitive judgment, that interruptions in this upward trajectory could only be small and transient.
People seemed to think that rapid appreciation in these markets had become a universal constant, like the speed of light.
Nothing else ultimately explains lenders’ immense willingness, in the boom up to 2006, to lower their credit standards on home mortgages, regulators’ willingness to let them do it, rating agencies’ willingness to rate mortgage securities highly, and investors’ willingness to gobble them up.
There is no theory in economics that provides a reason to think that prices in these markets can only go up.
On the contrary, economic theorists have been puzzled by the historical rate of increase in the stock market, which they call “the equity premium puzzle.”
They do not have a corresponding name for the behavior of the housing market, because, historically, its prices (correcting for inflation) have not generally gone up very much on average, until the post-2000 bubble.
The booms in these markets can be traced substantially to the growth of the idea that one should always continually hold as many of these assets as possible, just as that you should drink green tea or eat dark chocolate every day for antioxidants.
Such ideas create artificial demand – but only for a while.
After all, we no longer smoke cigarettes to prevent infections.
People will believe many things if they have the impression that the rich and famous believe them, too.
But their belief can suddenly be disrupted if plainly visible events contradict it.
That is what is happening now, and 2009 will shape up as a year of even more profound disenchantment.
The Greek Conundrum
The euro is a unique and unusual construction whose viability is now being tested.
Otmar Issing, one of the fathers of the common currency, correctly stated the principle on which it was founded: the euro was meant to be a monetary union, but not a political one.
The participating states established a common central bank, but they explicitly refused to surrender the right to tax their citizens to a common authority.
This principle was enshrined in Article 125 of the Maastricht Treaty, which has since been rigorously interpreted by the German constitutional court.
The principle, however, is patently flawed.
A fully-fledged currency requires both a central bank and a treasury.
The treasury need not be used to tax citizens on an everyday basis, but it needs to be available in times of crisis.
When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a treasury can deal with problems of solvency.
This is a well-known fact that should have been clear to everyone involved in the euro’s creation.
Issing admits that he was among those who believed that “starting monetary union without having established a political union was putting the cart before the horse.”
The European Union was brought into existence step-by-step by putting the cart before the horse: setting limited but politically attainable targets and timetables, knowing full well that they would not be sufficient, and thus that further steps would be required in due course.
But, for various reasons, the process gradually ground to a halt.
The EU is now largely frozen in its current shape.
The same applies to the euro.
The crash of 2008 revealed the flaw in the euro’s construction, as each member country had to rescue its own banking system instead of doing it jointly.
The Greek debt crisis brought matters to a climax.
If member countries cannot take the next steps forward, the euro may fall apart, with adverse consequences for the EU.
The original construction of the euro postulated that each member would abide by the limits set by the Maastricht Treaty.
But previous Greek governments egregiously violated those limits.
The Papandreou government, elected in October 2009 with a mandate to clean house, revealed that the budget deficit reached 12.7% of GDP in 2009, shocking both the European authorities and the markets.
The European authorities accepted a plan that would reduce the deficit gradually, but the markets were not reassured.
The risk premium on Greek government bonds continues to hover around three percentage points, depriving Greece of much of the benefit of euro membership – namely, being able to refinance government bonds at the official discount rate.
With the risk premium at current levels, there is a real danger that Greece may not be able to extricate itself from its predicament, regardless of what it does, because further budget cuts would further depress economic activity, reducing tax revenues and worsening the debt-to-GDP ratio.
Given that danger, the risk premium will not revert to its previous level in the absence of outside assistance.
The situation is aggravated by the market in credit default swaps, which is biased in favor of those who speculate on failure.
Being long CDS, the risk automatically declines if they are wrong.
This is the exact opposite of short-selling in equity markets, where being wrong means that the risk automatically increases.
Recognizing the need, the last Ecofin meeting has, for the first time, committed itself “to safeguard financial stability in the euro area as a whole.”
But Ecofin has not yet found the mechanism for doing so, because the current institutional arrangements do not provide one – although the Lisbon Treaty establishes a legal basis for it.
The most effective solution would be to issue jointly and separately guaranteed eurobonds to refinance, say, 75% of the maturing debt, as long as Greece meets its agreed-upon targets, leaving Greece to finance the rest of its needs as best it can.
This would significantly reduce the cost of financing, and it would be the equivalent of the IMF disbursing its loans in tranches as long as conditions are met.
But this is politically impossible at present, because Germany is adamantly opposed to serving as the deep pocket for its profligate partners. Therefore, makeshift arrangements will have to be found.
The Papandreou government is determined to do whatever is necessary to correct the abuses of the past, and it enjoys a remarkable degree of public support.
There have been mass protests and resistance from the old guard of the governing party, but the general public seems ready to accept austerity as long as it sees progress in correcting budgetary abuses – and there are plenty of abuses to allow progress.
So makeshift assistance will be sufficient to allow Greece to succeed, but that leaves Spain, Italy, Portugal, and Ireland.
Together they constitute too large a portion of the euro zone to be helped out by makeshift arrangements.
The survival of Greece still leaves the future of the euro in question.
Even if the EU handles the current crisis, what about the next one?
It is clear what is needed: more intrusive monitoring and institutional arrangements for conditional assistance.
Moreover, a well-organized eurobond market would be desirable.
The question is whether the political will to take these steps can be generated.
The Green Guevara’s
“Bolivia is rich,” a Tacana Indian woman told me last week inside Madidi National Park.
Earlier in the day, we’d witnessed a hundred capuchin and squirrel monkeys rush down from the Amazon jungle canopy and were now relaxing beside Lake Chalalan while her cousin, a shaman, blessed coca leaves as the evening’s traditional drumming and dancing began.
This is Chalalan Lodge, a wholly Indian-owned and -operated ecotourism outfit through which a hundred indigenous families lifted themselves out of poverty – while creating benefits worth a half million dollars for the Bolivian economy each year.
It is one of dozens of similar operations – from the world’s largest salt flats in the south, to Lake Titicaca in the west, to the eastern Pantanal wetlands – that combine economic growth with conservation.
It seems improbable that such enterprises should exist in Bolivia, a fragile democracy, and the hemisphere’s poorest place next to Haiti.
As the December 18 presidential elections approach, the front-runners could not look much different from one another.
In first place is Evo Morales, an Amayra Indian running under the Movement Toward Socialism banner who is sometimes seen as Che Guevara’s second coming.
Running behind “Evo” is Jorge “Tuto” Quiroga, a millionaire former IBM executive from the European-descended Bolivian elite; he is closely aligned with America’s Republican Party and is married to a Texas blonde named Ginger.
Tuto warns that, should Evo win, he might consolidate a Latin American axis-of-evil connecting a leftist Bolivia with Fidel Castro’s Cuba and Hugo Chávez’s Venezuela.
Evo counters that Tuto is too linked to Bolivia’s corrupt political establishment – one of the most dishonest in the world according to the watchdog group Transparency International – to do much for Bolivia’s two-thirds Indian majority.
Whichever man wins will face Bolivia’s seemingly intractable pair of ills: social-exclusion and poverty.
It’s a combination that has led to the overthrow of two presidents in the last three years.
Workable solutions will lie not in ideology but rather in capitalizing on what the nation has to offer to the global economy: its stock of pristine ecology.
Noel Kempff, for example, one of Bolivia’s national parks, is home to the world's biggest forest-based Kyoto Protocol experiment.
The park contains the biggest chunk of virgin cerrado habitat left on Earth, with tapirs, red brocket deer, silvery marmosets, and pumas living amid twenty waterfalls crashing off the Huanchaca Mesa into forests.
The park’s waterways contain one-tenth of the world’s remaining 1,000 giant river otters, along with black and speckled caiman, pink river dolphins, and capybaras.
The 2,000 Chiquitanos living around the park contend that a tree holds up the Amazon’s seven skies, and they are living that belief in a modern way: by using their forests to help reduce the stratospheric greenhouse gasses that cause global warming.
British Petroleum and American Electric Power, the largest electricity supplier in the United States, have helped the Chiquitanos buy up logging concessions, thereby doubling Noel Kempff to three million acres.
The firms earn cap-and-trade carbon credits to fulfill their Kyoto requirements.
Bolivia’s Indians have also used their eco-clout to convince the energy companies to bankroll their fight for a 750,000-acre homeland bordering Kempff.
It now pays for nature to stay, as the locals earn their neo-traditional living by ranching oxygen traded on the Chicago Climate Exchange (CCX), and through shipping certified timber and organic palm-hearts to Chile and Europe.
Bolivia destroys the myth that Third World countries are too poor to be green, and casts serious doubt on the famous “environmental Kuznets Curve” – the theory that environmental quality correlates with wealth.
Bolivia’s track record is remarkable: the world’s first debt-for-nature swap; the world’s largest protected dry tropical forest; experimental Indian park management; a rapidly growing protected-areas system; a National Environmental Fund; a world leader in international efforts to protect the endangered vicuna; progressive forestry legislation; a national biodiversity conservation agency; and a total ban on trade in domestic species.
Conservation resonates with local political parties.
On the left, Evo delivers homilies exalting Pacha Mama, or Mother Nature; on the right, Tuto favors market mechanisms like Kyoto over command and control.
Both candidates want jobs to be created in ecological services.
Regardless of who comes to power, the West should channel a larger portion of the billions of dollars in development aid each year, including the newly approved $535 million for the country from the UN’s Millennium Challenge Account, to foster a local spirit of natural capitalism instead of providing charity.
The Indian-run lodge I visited is part of a $175 million ecological tourism industry that has been growing at 20% a year precisely because of the country’s natural splendor.
Economists argue that should the current trickle of 350,000 visitors each year grow to a quite reasonable million, every Bolivian would be employed. “Bolivia is where Costa Rica was 20 years ago,” an eco-tourism expert told me at the first national summit on the industry on the shores of Lake Titicaca.
Finally, the Bush administration must ratify the Kyoto Protocol, in order to allow both global firms and Bolivian community entrepreneurs to create yet more rainforest ranches and other creative initiatives that reduce poverty, harbor biodiversity, and cool a warming world.
Perhaps Bolivia is indeed rich – in a way that could benefit all of us well into the future.
The Greening of Bush
The United States is usually regarded as an environmental laggard, with President George W. Bush perceived as being little better than the head of a gang of willful polluters who do everything they can to obstruct global action to protect the environment.
Of course, there is some truth in this characterization of America (and quite a lot in that of Bush), but the picture is not uniformly bleak.
Indeed, the environmental movement – like most modern social movements – began in the US.
The roots of America’s “environmental movement” lie in the nineteenth century, when the damage wrought by the industrial revolution and the fragmentation of the natural landscape by individual property rights and tenures first became apparent.
But it was the publication in 1962 of the book Silent Spring – a polemic against the use of pesticides in agriculture – by the biologist Rachel Carson that jump-started the modern ecological movement.
Carson drew on scientific findings, but also voiced fundamental misgivings about consumer capitalism and a “postmaterialistic” belief in the primacy of the quality of life over economic growth.
In Carson’s wake, the “Woodstock” generation of the 1960’s, with its Earth Days, soon began to organize a broad campaign, which saw, in April 1970, around 20 million Americans take to the street to defend the environment.
In this new movement, the libertarian tendencies of the New Left and the protectionist tendencies of the traditional right became intertwined.
Paul Ehrlich’s bestseller The Population Bomb exerted an influence that lasts to this day.
America’s environmental movement was soon exported to Europe and elsewhere: on one hand, the pragmatic Friends of the Earth and the media-oriented organization Greenpeace , and, on the other hand, eco-fundamentalist groups like Earth First! and the Environmental Justice Movement (EJM) or lobbying groups like the World Wildlife Fund.
This movement managed to force the first environmental laws out of the conservative Nixon administration: the National Environmental Act of 1969, the Clean Air Act of 1970, the Clean Water Act of 1972, and the Endangered Species Act of 1973.
Then as now, the focus in America was on “green” topics (clean water, fresh air, and biological diversity) rather than with the “brown” topics of ecological disasters such as the Chernobyl (or Harrisburg) disaster, which have played a dominant role in mobilizing Europeans.
America’s influential Environmental Protection Agency (EPA) also was established under Nixon.
Environmentalists hired scientists, lawyers, and lobbyists who made sure that laws weren’t just passed in Congress, but also implemented in practice.
But the current Bush administration has been hacking away at these 1970’s laws from all directions.
He approved oil exploration in closed nature reserves, and also systematically fought to suppress scientific evidence on climate change.
Now, however, due to the surge in crude oil prices, even Bush has had to begin to consider alternative energy sources, and it won’t be possible to limit these to nuclear power or ethanol, which is so popular among farmers, a key Bush constituency.
Indeed, even Bush’s own political base, the Christian fundamentalists, are becoming “green,” pressuring the administration to sign the Kyoto Protocol because they believe that the environment must be protected just like unborn life. “Eco-theology” and evangelical pro-life propaganda have become one of the liveliest branches of the US environmental movement.
“Green” eco-activists, while feeling awkward about support from this quarter, nonetheless find them useful allies.
Indeed, the greening of America is becoming a general proposition.
Many Americans can only shake their heads at the energy lobbyists who surround Bush and Vice-President Dick Cheney, and for a long time now a majority has been in favor of signing multilateral agreements, particularly in the area of climate protection.
Catastrophic events like Hurricane Katrina have reinforced this stance.
All this has caused Bush to seek to accommodate – verbally, at least – the will of an overwhelming majority of Americans to conserve energy.
Moreover, although Bush has given mainly national security reasons for his seeming change of heart, America’s federal system, helps the country get around even a roadblock as powerful as the president, as “localism” promotes eco-political initiatives at the state level and even within municipalities.
It is not just California Governor Arnold Schwarzenegger who has recognized the signs of the times and proclaimed bold Kyoto targets for his state that may become a pacemaker of All-American modernization again.
Political climate change has also been brought about by people like Jerome Ringo, the president of the National Wildlife Federation (NWF) , whose 4.5 million members make it one of the largest environmental organizations.
Ringo also heads the Apollo Alliance , a coalition of trade unions, environmentalist groups, managers, and local politicians that demands clean energy and good jobs.
How green America will actually become remains to be seen, of course, but, as an ecological avant-garde, the US might even regain its lost influence in the world.
Those who disdain environmental concerns have been ousted at the polls in large numbers, companies invest huge amounts in environmental technologies, states are suing car producers for their climate-adverse policies, and the requirements of the Kyoto Protocol have long been surpassed by some states – a lesson for German and European cities and municipalities.
As in the past, the effectiveness of these initiatives ultimately will depend on whether these impulses reach Europe and Japan, as well as emerging nations like China and Brazil.
It is time for Greens everywhere to start attending to ecological matters again – and, strange as it may sound, to look again to America for inspiration.
The Greening of China
Two countries – the United States and China – remain aloof from global efforts to create a new post-Kyoto framework on climate change.
Fifty years ago, the rest of the world might have carried on with remedying the problem of conventional and greenhouse gas emissions and let China and the US stew in their own waste.
But the world is now so interdependent that what happens in one place affects all others.
For example, visitors and residents alike have long thought of Hong Kong as a beautiful city clinging to the South China coast.
But, for at least five years, Hong Kong’s citizens have found themselves starting to cough and wheeze from the city’s increasingly degraded air.
Corporate employers are even complaining about not being able to attract overseas talent.
Pollution from Hong Kong’s own power generation plants, growing number of vehicles, and burgeoning shipping industry can certainly be reduced.
But the lion’s share of this industrial haze – like the growing pollution of its coastal waters – is a direct result of the rapid industrialization of the Pearl River Delta across the border in China’s Guangdong Province.
China is exporting not only more and more goods, but also its environmental degradation.
The inescapable truth is that the futures of Hong Kong and China are integrally linked.
There are roughly 58,000 factories in the Pearl River Delta with Hong Kong connections, and together they employ more than 10 million workers.
Guangdong accounts for about 30% of China’s total foreign trade, while Hong Kong is China’s international finance center.
Officials in both Hong Kong and Guangdong are powerless to clean up their environmental problems on their own.
In fact, development plans in China may be heading in the opposite direction.
Political heavyweights in Guangdong still favor a form of development that relies on speed and quantity while ignoring overall environmental quality.
And Hong Kong’s economic blueprint also focuses on accelerating large infrastructure projects whose environmental impact has not been rigorously examined.
It will not be easy for leaders on either side of the border to reverse gears, but there is still chance that people and companies can make a difference.
Increasingly loud complaints about deteriorating air quality have goaded Hong Kong and Guangdong into embarking on a joint program in which a series of monitoring stations now provides emissions data.
Hong Kong’s data have been released regularly, and in 2006, Guangdong’s data were made publicly available for the first time.
There is now also talk about monitoring water quality.
These are laudable steps for China, given its poor record on transparency.
Indeed, the joint air-monitoring network provides a foundation for the region to develop a sophisticated regional air management program.
Furthermore, new coal-fired power plants may no longer be allowed on either side of the border, necessitating greater use of natural gas and renewable energy sources.
The first challenge for authorities is to regulate power generation very differently.
People are used to paying for the electricity that they actually use.
But, to optimize efficiency, utilities need to be rewarded for what they help consumers save.
In other words, utilities must be given incentives to help consumers use less power.
This idea is clearly feasible.
Amory Lovins of the Rocky Mountain Institute has proposed what he calls the “negawatt,” or energy that is never used.
All that is needed are the right financial incentives to induce utility companies to produce less electricity (and still be more profitable) and consumers to reduce their use (and gain savings without sacrificing comfort).
This can be done by refitting households with high-efficiency light bulbs and other technological improvements, and by retrofitting industrial plants with energy-saving technologies.
Another innovative idea that Hong Kong and Guangdong are exploring is the “P2E2” scheme.
To help industries in the region upgrade environmentally, firms can now obtain special loans for which the Asian Development Bank assumes the risk – a program made possible by Hong Kong’s sound banking practices.
Another initiative worth watching is the Hong Kong stock exchange’s exploratory project to offer a trading platform for emissions derivatives, which will most likely include conventional pollutants as well as carbon.
The exchange will undertake a study this summer, with trading to begin as early as 2008.
If these reforms are not trumped by efforts to maintain high growth at all costs, the region could not only clean itself up while continuing to prosper, but could also establish a model for all of China.
Nothing is more necessary in a country that, according to the United Nations Development Program, contains 16 of the world’s 20 most polluted cities.
Hong Kong’s leaders to do not want to end up on that infamous list.
By saving themselves, they may also be able to play an instrumental role in saving China.
The Greening of New York
In the coming days, the United States will make a critical decision that has the potential to change America’s standing in the world: whether to approve a $537 million grant that will help make New York City the first environmentally sustainable megacity in the twenty-first century.
Officials at the US Department of Transportation must appreciate that their decision to fund Mayor Michael Bloomberg’s visionary project, called PlaNYC, will determine the quality of air that more than 10 million New Yorkers breathe daily and the amount of carbon dioxide emissions the city coughs into the atmosphere.
Already, New York City produces more CO2 emissions than all of Norway.
More importantly, officials must realize that their actions will shape America’s response to the global challenge of unparalleled urbanization and carbon-induced climate change.
This year, for the first time in human history, more people will live in urban areas than rural communities.
In the US, the urban population has grown from 97 million in 1950 to 222 million in 2000.
Today, nearly 80% of Americans live in urban areas.
Such unprecedented and unplanned urbanization wreaks environmental havoc by increasing carbon emissions, since higher population density results in greater automobile and energy use.
PlaNYC encourages the use of public transportation systems by creating powerful disincentives to automobile use.
The plan’s proposed congestion charge on automobile use during peak times in certain parts of the city would reduce traffic and generate revenue that would go toward improving public transportation.
Mayor Bloomberg’s plan comes at the right time for a city burdened by worsening traffic and pollution problems.
Vehicles cause nearly a fifth of New York City’s CO2 emissions.
Traffic congestion, in particular, is not only environmentally detrimental; it also imposes substantial time and resource costs on drivers.
Americans lose around 3.7 billion hours and 2.3 billion gallons of fuel sitting in traffic jams.
This implies an annual cost of around $200 billion.
Due to congestion, New Yorkers face the longest commutes in the US, and their children have the highest rate of asthma hospitalization.
PlaNYC would impose the congestion charge on the 4.6% of New York City residents who drive to work, while its benefits would accrue to everyone.
New Yorkers would enjoy cleaner air, shorter average commuting time, and better public transportation.
Neither the economy in general, nor the retail sector in particular, should be adversely affected.
In fact, service and delivery providers in Manhattan, among others, would benefit from shorter travel times and fewer delays.
However, despite its many advantages, congestion charges face some skepticism.
Fortunately, we can learn from other cities such as Stockholm, Singapore, and London, which have successfully implemented them.
In all of these cities, CO2 emissions declined sharply and congestion was significantly reduced, with Singapore experiencing an immediate 45% drop in traffic.
These cities have also benefited from more efficient public transportation.
In London, bus-travel rose by 46%.
According to an independent report, almost 60% of the businesses in London judged the program’s impact on the economy as positive or neutral.
Automobile dependent countries like America need smart solutions to ensure environmentally sustainable development.
Having one of the largest urban populations and the highest per capita CO2 emissions, the US has the responsibility – and the means – to lead the world on this front.
If the US does not act soon, American cities will lag behind not only European capitals, but also developing country cities such as Bogota (Colombia) and Curitiba (Brazil), which are already implementing innovative environmentally friendly solutions.
New York City has always been a global leader in finance, the arts, and many other fields.
It is an ideal candidate for creating a blueprint for cleaner and more efficient urbanization in the US and the world.
The Green Inquisition
COPENHAGEN – When it comes to global warming, extreme scare stories abound.
Al Gore, for example, famously claimed that a whopping six meters (20 feet) of sea-level rise would flood major cities around the world.
Gore’s scientific advisor, Jim Hansen from NASA, has even topped his protégé.
Hansen suggests that there will eventually be sea-level rises of 24 meters (80 feet), with a six-meter rise happening just this century.
Little wonder that fellow environmentalist Bill McKibben states that “we are engaging in a reckless drive-by drowning of much of the rest of the planet and much of the rest of creation.”
Given all the warnings, here is a slightly inconvenient truth: over the past two years, the global sea level hasn’t increased.
It has slightly decreased .
Since 1992, satellites orbiting the planet have measured the global sea level every 10 days with an amazing degree of accuracy – 3-4 millimeters (0.2 inches).
For two years, sea levels have declined.
(All of the data are available at sealevel.colorado.edu.)
This doesn’t mean that global warming is not true.
As we emit more CO2, over time the temperature will moderately increase, causing the sea to warm and expand somewhat.
Thus, the sea-level rise is expected to pick up again.
This is what the United Nations climate panel is telling us; the best models indicate a sea-level rise over this century of 18 to 59 centimeters (7-24 inches), with the typical estimate at 30 centimeters (one foot).
This is not terrifying or even particularly scary – 30 centimeters is how much the sea rose over the last 150 years.
Simply put, we’re being force-fed vastly over-hyped scare stories.
Proclaiming six meters of sea-level rise over this century contradicts thousands of UN scientists, and requires the sea-level rise to accelerate roughly 40-fold from today.
Imagine how climate alarmists would play up the story if we actually saw an increase in the sea-level rise.
Increasingly, alarmists claim that we should not be allowed to hear such facts.
In June, Hansen proclaimed that people who spread “disinformation” about global warming – CEOs, politicians, in fact anyone who doesn’t follow Hansen’s narrow definition of the “truth” – should literally be tried for crimes against humanity.
It is depressing to see a scientist – even a highly politicized one – calling for a latter-day Inquisition.
Such a blatant attempt to curtail scientific inquiry and stifle free speech seems inexcusable.
But it is perhaps also a symptom of a broader problem.
It is hard to keep up the climate panic as reality diverges from the alarmist predictions more than ever before: the global temperature has not risen over the past ten years, it has declined precipitously in the last year and a half, and studies show that it might not rise again before the middle of the next decade.
With a global recession looming and high oil and food prices undermining the living standards of the Western middle class, it is becoming ever harder to sell the high-cost, inefficient Kyoto-style solution of drastic carbon cuts.
A much sounder approach than Kyoto and its successor would be to invest more in research and development of zero-carbon energy technologies – a cheaper, more effective way to truly solve the climate problem.
Hansen is not alone in trying to blame others for his message’s becoming harder to sell.
Canada’s top environmentalist, David Suzuki, stated earlier this year that politicians “complicit in climate change” should be thrown in jail.
Campaigner Mark Lynas envisions Nuremberg-style “international criminal tribunals” against those who dare to challenge the climate dogma.
Clearly, this column places me at risk of incarceration by Hansen &amp;
Co.
But the globe’s real problem is not a series of inconvenient facts.
It is that we have blocked out sensible solutions through an alarmist panic, leading to bad policies.
Consider one of the most significant steps taken to respond to climate change.
Adopted because of the climate panic, bio-fuels were supposed to reduce CO2 emissions.
Hansen described them as part of a “brighter future for the planet.”
But using bio-fuels to combat climate change must rate as one of the poorest global “solutions” to any great challenge in recent times.
Bio-fuels essentially take food from mouths and puts it into cars.
The grain required to fill the tank of an SUV with ethanol is enough to feed one African for a year.
Thirty percent of this year’s corn production in the United States will be burned up on America’s highways.
This has been possible only through subsidies that globally will total $15 billion this year alone.
Because increased demand for bio-fuels leads to cutting down carbon-rich forests, a 2008 Science study showed that the net effect of using them is not to cut CO2 emissions, but to double them.
The rush towards bio-fuels has also strongly contributed to rising food prices, which have tipped another roughly 30 million people into starvation.
Because of climate panic, our attempts to mitigate climate change have provoked an unmitigated disaster.
We will waste hundreds of billions of dollars, worsen global warming, and dramatically increase starvation.
We have to stop being scared silly, stop pursuing stupid policies, and start investing in smart long-term R&amp;D. Accusations of “crimes against humanity” must cease.
Indeed, the real offense is the alarmism that closes minds to the best ways to respond to climate change.
The Green Paradox
The protesters have returned to their home countries, the injured are licking their wounds, the heads of state are back to business as usual, and Heiligendamm, the old spa on Germany’s Baltic coast, is resuming its dream of imperial beauty.
And German Chancellor Angela Merkel achieved a substantial diplomatic success.
With charm and unassuming clear-headedness, she wrought a compromise from the G8 countries that may help save the world from the most severe devastations caused by global warming.
The world’s eight richest countries promised to “seriously consider” halving their CO2 emissions by 2050.
The wording may sound vague, but, given the positions the countries held at the outset, the outcome was an important achievement.
The United States, in particular, shifted its stance significantly since its rejection of the Kyoto Protocol, even accepting that the United Nations will have to organize the future negotiations.
But, while the compromise is more than could have been hoped for at the outset, several important countries did not partake of it.
To be sure, China, India, Brazil, South Africa, and Mexico signed on; but many countries, including the Asian tigers and most European countries, did not, despite their large contributions to polluting the world’s atmosphere.
Moreover, the oil sheiks and other producers of fossil fuels who ultimately control the amount of carbon released to the atmosphere were not part of the deal.
If major consumer countries and most producer countries do not join the agreement to reduce CO2 emissions, it could be useless.
Many believe that aggregate CO2 emissions are the result of independent decisions in individual countries.
Thus, if a group of countries decides to have lower emissions, worldwide emissions will decline by the sum of these countries’ reductions.
Sure, it would be better if all countries curtailed their emissions, but it is already a great help if at least some countries do so.
Unfortunately, this view is too good to be true, because one country’s emissions are not independent from those of another.
If countries decide to cut their emissions, they will have to reduce their consumption of fossil fuels, in particular oil.
This will reduce the world price of these fuels, inducing other countries to consume even more than they otherwise would.
Countries that cut their emissions would, in effect, be subsidizing their competitors’ growth, not necessarily reducing the speed of global warming.
The sacrifices of the participating countries would alleviate the CO2 problem only if their restraint meant that some of the fossil resources they do not consume remain underground.
They must succeed in inducing the oil sheikhs and other producers of fossil fuels to throttle their pumps.
If the sheikhs are stubborn and continue to extract as much as they had planned to extract without the G8’s restraint, the price of fuels will fall sufficiently to induce so much extra consumption among the non-participating countries that the net effect on aggregate CO2 emissions will be nil.
Will the oil sheikhs reduce output of fossil fuels?
At first glance, it seems natural to assume this, as most suppliers reduce production when the price falls.
But the sheikhs are sitting on fixed stocks of oil.
If they do not extract it today, they will have to do it in the future if they want to make a profit.
At best, it seems that the time path of extractions can be tilted toward the future.
This would not solve the CO2 problem in the long run, but at least it would postpone the catastrophe.
The oil sheikhs would likely be inclined to postpone extraction only if they could reasonably assume that the demand reductions of the signing countries and the comparative price reduction that this implies are stronger today than they will be in the future.
This is not plausible.
Indeed, the sheikhs will know that, in all likelihood, concerns about global warming will increase over time.
They will therefore speed up rather than reduce production, in order to avoid selling their oil when anxiety about CO2 peaks and the artificial measures of the signing countries to reduce their consumption have dampened the oil price most.
Thus, green policies will paradoxically accelerate rather than mitigate global warming.
Two lessons arise from these considerations.
First, all polluters must sit at the negotiating table and be forced or induced to participate in reducing pollution.
The commitments of single countries like Germany to over-fulfill their duties are useless.
Germany has already contributed three-quarters of the aggregate EU-wide reductions of CO2 emission from 1990 to 2008-2012 to which the EU committed in the Kyoto protocol.
Such a policy simply subsidizes other polluters’ CO2 emissions, but does not alleviate the problem of global warming.
Second, and more difficult, the oil sheikhs and other producers of fossil fuels must be talked into postponing their extraction plans or, better yet, not to extract some of their resources at all.
The best policy against global warming is to keep the CO2 imbedded in fossil resources deep underground.
The good news from Heiligendamm is that the UN will now have to organize a common solution.
The bad news is that this is unlikely to happen in the foreseeable future, and that the owners of natural resources will therefore make every attempt to extract their resources and thus pump the fossil carbon into the atmosphere before the UN finds a way out of this impasse.
The Green Pseudo-Revolution
COPENHAGEN – With a worldwide recession advancing, strong action on global warming has been thrown into jeopardy. This matters, because in little more than a year, the world will sit down in Copenhagen to negotiate the follow-on treaty to the failed Kyoto Protocol.
Yet, with people losing jobs and income, immediate economic help seems to matter more than temperature differentials 100 years from now.
Many green pundits have, however, started saying that the financial crisis only makes the need for action on climate change greater.
They urge America’s president-elect Barack Obama to pursue a “green revolution” with big investments in renewable energy, arguing that this could create millions of new “green collar” jobs and open huge new markets.
Such sentiments, no surprise, are strongly voiced by business leaders who live off such subsidies.
But are such pleas smart investments for society?
The problem with the green revolution argument is that it doesn’t trouble itself about efficiency.
It is most often lauded for supplying new jobs.
But billions of dollars in tax subsidies would create plenty of new jobs in almost any sector: the point is that many less capital-intensive sectors would create many more jobs for a given investment of taxpayers’ money.
Similarly, green initiatives will open new markets only if other nations subsidize inefficient technologies bought abroad.
Thus, the real game becomes which nations get to suck up other nations’ tax-financed subsidies.
Apart from the resulting global inefficiency, this also creates a whole new raft of industry players that will keep pushing inefficient legislation, simply because it fills their coffers.
A good illustration is Denmark, which early on provided huge subsidies for wind power, building thousands of inefficient turbines around the country from the 1980’s onwards. Today, it is often remarked that Denmark is providing every third terrestrial wind turbine in the world, creating billions in income and jobs.
A few years ago, however, the Danish Economic Council conducted a full evaluation of the wind turbine industry, taking into account not only its beneficial effects on jobs and production, but also the subsidies that it receives.
The net effect for Denmark was found to be a small cost , not benefit.
Not surprisingly, the leading Danish wind producer is today urging strong action on climate change that would imply even more sales of wind turbines.
The company sponsors the “Planet in Peril” show on CNN, which helps galvanize public pressure for action.
The crucial point is that many green technologies are not cost-effective, at least not yet.
If they were, we wouldn’t need to subsidize them.
The standard reply is that green technologies seem more expensive only because the price of fossil fuels does not reflect their climate costs.
That makes some sense.
Given that fossil fuels contribute to global warming, standard economic theory suggests we should tax them according to their cumulative negative effects.
But this would make little difference to the inefficiency of most green technologies.
The most comprehensive economic meta-study shows that total future climate impacts justify a tax of €0.012 per liter of petrol ($0.06 per gallon in the US.)
This is dwarfed by the tax that many European countries already impose, and it is much less than in the European trading system.
Yet it is argued that much higher taxes and subsidies are the best way to increase research and development in new, cheaper renewable energy sources.
This is untrue.
During the massive investment associated with the Kyoto treaty, the participating countries’ investment in R&amp;D as a percentage of GDP has declined , not increased.
It is rather obvious that if you invest massively in inefficient solar panels, most of your money will go to buy the physical panels, whereas only a very small part will go to R&amp;D. If you want more R&amp;D, you should spend your money directly on R&amp;D. This could tackle global warming in the longer run.
Finally, it is often claimed that high CO2 taxes and subsidies for green technology will actually do good, and again Denmark is often taken as an example.
After all, it is argued, Denmark has kept its CO2 emissions flat while enjoying 70% economic growth since 1981.
But could it have grown more if it had not restricted CO2 emissions?
During the same period, US emissions grew 29%, but its GDP grew 39% more than Denmark’s, indicating a simple truth: CO2 cuts and subsidies don’t necessarily mean no growth, but they probably do mean slower growth.
President-elect Obama is now facing countless people who claim that subsidies for renewable energy and CO2 taxes are great ways to tackle global warming and forge a new green economy.
Unfortunately, this is almost entirely incorrect.
Taxes and subsidies are always expensive, and will likely impede growth.
Moreover, if we really want to tackle global warming, we shouldn’t spend vast sums of money buying inefficient green technology – we should invest directly in R&amp;D to make future green technology competitive.
Obama should seize the initiative and make the meeting in Copenhagen next year not about bloated subsidies for inefficient technologies, but about lean investments in future breakthroughs.
That is the way to tackle global warming and support a genuinely vibrant economy.
The Blurry Frontiers of Economic Policy
MILAN – Around the world, policies, technologies, and extended learning processes have combined to erode barriers to economic interaction among countries.
Pick any indicator: trade relative to global GDP, capital flows relative to the global capital stock, and so forth – all are rising.
But economic policies are set at the national level, and, with a few notable exceptions like trade negotiations and the tracking of terrorist funding and money laundering, policymakers set goals with a view to benefiting the domestic economy.
And these policies (or policy shifts) are increasingly affecting other economies and the global system, giving rise to what might be called “policy externalities” – that is, consequences that extend outside policymakers’ target environment.
Of course, such externalities have always existed.
But they used to be small.
As they grow more significant (the result of greater global connectedness), they inevitably become harder to manage.
After all, global optimization would require a global policymaking authority, which we do not have.
These external effects are particularly consequential in the financial sector, owing to the potential for large and relatively abrupt changes in capital flows, asset prices, interest rates, credit availability, and exchange rates, all of which have powerful effects on output growth and employment.
The economic crisis and its aftermath is a case in point.
Defective growth models in advanced countries, based on excess credit and domestic aggregate demand (and complicated by structural flaws and limited adjustment mechanisms in Europe), led to instability, a crisis, and a large negative shock to the real economy.
Emerging economies were immediately affected by credit tightening (including trade finance) and rapid declines in exports, leading to similar shocks there.
Advanced countries moved to prevent a downward spiral using monetary and fiscal policy tools.
These, too, had external effects; but, at least in the short run, the medicine (distortions in capital markets) was generally considered less damaging than the disease (economic collapse in the advanced economies).
This was followed by an extended version of the assisted-growth model in the advanced countries, largely revolving around unconventional monetary policy; in the United States, this implied several rounds of quantitative easing, which is simply the government borrowing from itself – a form of price control.
Savers were repressed in order to lower the costs of credit for debtors (including governments) and those seeking to borrow for business expansion.
This did not work very well, because investment was constrained by deficient domestic aggregate demand relative to capacity.
So savers did what one would expect: seek higher risk-adjusted returns in emerging economies, causing increases in credit and fueling upward pressure on exchange rates and asset prices.
This obvious externality required policy responses in the emerging countries: limits on capital inflows, reserve accumulation, and measures to restrict credit and restrain asset-price inflation.
Complaints from emerging-market policymakers about the distortionary effects of the advanced countries’ policies were largely ignored.
All of that has changed dramatically since May, when the US Federal Reserve began signaling its intention to “taper” its massive monthly purchases of long-term assets.
Asset prices shifted, and capital rushed out of emerging markets, causing credit conditions to tighten and exchange rates to fall.
At a minimum, a short-term growth slowdown is nearly certain; some wonder whether the destabilizing impact of capital-flow reversals will have longer-term adverse effects.
For the most part, the latter fear appears overblown, though the risks caused by unexpected policy shifts and related financial adjustments should not be underestimated or dismissed.
The emerging economies generally have the policy instruments, balance sheets, and expertise to respond effectively.
In addition, while China’s output is affected by advanced-country economic performance, its financial system is largely insulated from monetary-policy externalities.
The capital account is less open, foreign-currency reserves of $2.5 trillion mean that the exchange rate is controllable, and, with savings exceeding investment (the current-account surplus is declining but still positive), China is not dependent on foreign capital.
China’s systemic importance with respect to emerging-market growth, its relative stability, and other emerging countries’ domestic policy responses suggest that the main effect of the Fed’s coming policy shift will be a new equilibrium with less distorted asset prices.
This should create opportunity for investors, especially if there is a downward overshoot as the new equilibrium emerges.
Some level of policy coordination might be achieved by an early-warning system, which would provide sufficient time for an organized response.
But multilateral communication of significant policy shifts would almost inevitably result in leaks and confidence-damaging insider trading.
Given an expanded mandate and a much larger balance sheet, the International Monetary Fund, with advance notification, could in principle reliably act to stabilize volatile international capital flows, buying time for more orderly domestic responses.
But that would be a rather large step in the direction of global economic governance and management.
Decentralized policy and growing externalities will result in partial de-globalization, especially in macroeconomic configurations, finance, and capital accounts.
Thus, it is not a good idea to run persistent current-account deficits and become dependent on (temporarily) low-cost foreign capital.
Open capital accounts may be replaced not by whimsical ad hoc interventions that heighten uncertainty and weaken confidence, but rather by predictable rules-based constraints on financial-capital flows.
Second, as we learned from the crisis, substantial domestic ownership of the banking sector is crucial, in part because multinational resolution mechanisms in cases of insolvency are largely non-existent.
Moreover, the pattern of accumulating reserves via current-account surpluses, net private capital inflows, or both – a legacy of the 1997-1998 Asian financial crisis – will continue and perhaps become even more pronounced.
Finally, public purchases of domestic assets to stabilize asset prices and net capital flows will become increasingly common.
We are in the process of learning how to manage growing policy interdependence without much policy coordination.
The challenge is to identify policy circuit breakers that have relatively high benefit/cost ratios.
Time and experience will help – that is, so long as high volatility does not destabilize many economies in the interim.
Missing America
BERLIN – Madeleine Albright, the former US secretary of state, once described the United States as the “indispensable nation.”
Current developments around the world are proving her right. But the proof has been almost entirely negative: Today, America’s importance has become apparent from the absence of US leadership in one crisis after another –&#160;an absence that is most immediately obvious in Syria.
In fact, a post-American world is taking shape before our eyes, characterized not by a new international order, but by political ambiguity, instability, and even chaos.
This is unfortunate, and could turn out to be so dangerous that even die-hard anti-Americans end up longing for the passé American century and the US role as a global force for order.
Both subjectively and objectively, the US is no longer willing or able to play that role.
There have been many causes: a decade of war in the greater Middle East, with its enormous cost in “blood and treasure”; the financial and economic crisis; high public debt; reorientation toward internal problems; and a new focus on Pacific affairs.
I am relatively certain that the US will successfully manage its reorientation and realignment, but the relative weight and reach of its power will nonetheless decline in the new world of the twenty-first century, as others grow in strength and catch up.
Certainly, America’s global role will not be called into question.
China will be busy addressing its own internal contradictions for a long time yet.
Nor is India or Russia likely to pose a serious challenge.
And Europe’s din of conflicting voices appears to preclude it from claiming America’s mantle.
But, while none of these powers represents a serious alternative to America’s global role, the US will no longer be able to act unilaterally, as it did after the Cold War’s end, and it will be weakened substantially.
This change has become particularly obvious in the Middle East and the Asia-Pacific region.
In the Middle East, the regional order created by the colonial powers, France and Britain, following World War I, was maintained throughout the Cold War and the brief era of unilateral US domination that followed; the convulsions of recent years, however, could well bring about its end.
The colonial borders are being called into question, and what will become of Syria, Lebanon, Iraq, and Jordan is difficult to forecast.
The potential for regional disintegration and reconstitution – a process that can unleash untold violence, as in Syria – is greater than ever.
Moreover, while there is no new regional hegemon to follow America, there are numerous contenders for the role. But none – Iran, Turkey, and Saudi Arabia being the most prominent – is strong enough to decide matters in its own favor.
Given the lack of a new force for order in the region in the foreseeable future, and the old one’s unwillingness to act, the danger of long-lasting violent confrontation is growing.
Even if America once again pursued military intervention in the region, its power would no longer be sufficient to enforce its will.
Indeed, it is precisely because the US, after more than a decade of war, understands this only too well that any American administration will think twice before intervening militarily in the region again.
Things look different in Asia, where the US not only remains present, but has increased its commitments.
In East and South Asia, nuclear powers (China, Russia, India, Pakistan, and North Korea) or near-nuclear powers (Japan and South Korea) are all entangled in dangerous strategic rivalries.
Add to this a regular dose of North Korean irrationality.
While the US presence in the region has so far prevented its numerous conflicts and rivalries from intensifying, sources of uncertainty are multiplying.
Will China be wise enough to seek reconciliation and partnerships with its neighbors, large and small, rather than aiming for regional domination?
What will become of the Korean Peninsula?
And what implications does Japan’s nationalist turn – and its risky economic policy – hold for the region?
Can India and China stem the deterioration in bilateral relations?
Is state failure looming in Pakistan?
Imagine this situation without America’s military and political strength. The region would be dramatically more dangerous.
At the same time, America’s straitened resources mean that its new global role will require more careful consideration of national interests in setting priorities. Clearly, the Asia-Pacific region takes precedence in US calculations.
This new, more focused and limited American role thus raises the following question for America’s European partners: Can they afford the luxury of being unable to defend themselves without US help?
Certainly, America’s guarantee of its NATO allies’ security will not become worthless; but it will become far more difficult to redeem it in full.
And, if a post-American world entails greater risk of chaos and its consequences than hope for a new, stable order – a risk that affects Europe in particular – then perhaps Europe should reverse course on its apparent determination to dismantle itself.
Too Big To Handle
WASHINGTON, DC – In the discussion of whether America’s largest financial institutions have become too big, a sea change in opinion is underway.
Two years ago, during the debate about the Dodd-Frank financial-reform legislation, few people thought that global megabanks represented a pressing problem.
Some prominent senators even suggested that very large European banks represented something of a role model for the United States.
In any case, the government, according to the largest banks’ CEOs, could not possibly impose a cap on their assets’ size, because to do so would undermine the productivity and competitiveness of the US economy.
Such arguments are still heard – but, increasingly, only from those employed by global megabanks, including their lawyers, consultants, and docile economists.
Everyone else has shifted to the view that these financial behemoths have become too large and too complex to manage – with massive adverse consequences for the wider economy.
And every time the CEO of such a bank is forced to resign, the evidence mounts that these organizations have become impossible to manage in a responsible way that generates sustainable value for shareholders and keeps taxpayers out of harm’s way.
Wilbur Ross, a legendary investor with great experience in the financial services sector, nicely articulated the informed private-sector view on this issue.
He recently told CNBC,
“I think it was a fundamental error for banks to get as sophisticated as they have, and I think that the bigger problem than just size is the question of complexity.
I think maybe banks have gotten too complex to manage as opposed to just too big to manage.”
In the wake of Vikram Pandit’s resignation as CEO of Citigroup, John Gapper pointed out in the Financial Times that “Citi’s shares trade at less than a third of the multiple to book value of Wells Fargo,” because the latter is a “steady, predictable bank,” whereas Citigroup has become too complex.
Gapper also quotes Mike Mayo, a leading analyst of the banking sector: “Citi is too big to fail, too big to regulate, too big to manage, and it has operated as if it’s too big to care.”Even Sandy Weill, who built Citi into a megabank, has turned against his own creation.
At the same time, top regulators have begun to articulate – with some precision – what needs to be done.
Our biggest banks must become simpler.
Tom Hoenig, a former president of the Federal Reserve Bank of Kansas City and now a top official at the Federal Deposit Insurance Corporation, advocates separating big banks’ commercial and securities-trading activities.
The cultures never mesh well, and big securities businesses are notoriously difficult to manage.
Hoenig and Richard Fisher, the president of the Federal Reserve Bank of Dallas, have been leading the charge on this issue within the Federal Reserve System.
Both of them emphasize that “too complex to manage” is almost synonymous with “too big to manage,” at least within the US banking system today.
George Will, a widely read conservative columnist, recently endorsed Fisher’s view .
Big banks get a big taxpayer subsidy – in the form of downside protection for their creditors.
This confers on them a funding advantage and completely distorts markets.
These subsidies are dangerous; they encourage excessive risk-taking and very high leverage – meaning a lot of debt relative to equity for each bank and far too much debt relative to the economy as a whole.
Now these themes have been picked up by Dan Tarullo, an influential member of the Board of Governors of the Federal Reserve System.
In an important recent speech, Tarullo called for a cap on the size of America’s largest banks, to limit their non-deposit liabilities as a percentage of GDP – an entirely sensible approach, and one that fits with legislation that has been proposed by two congressmen, Senator Sherrod Brown and Representative Brad Miller.
Tarullo rightly does not regard limiting bank size as a panacea – his speech made it clear that there are many potential risks to any financial system.
But, in the often-nuanced language of central bankers, Tarullo conveyed a clear message: the cult of size has failed.
More broadly, we have lost sight of what banking is supposed to do.
Banks play an essential role in all modern economies, but that role is not to assume a huge amount of risk, with the downside losses covered by society.
Ross got it right again this week, when he said:
“I think that the real purpose and the real need that we have in this country for banks is to make loans particularly to small business and to individuals.
I think that’s the hard part to fill.”
He continued,
“Our capital markets are sufficiently sophisticated and sufficiently deep that most large corporations have plenty of alternative ways to find capital.
Smaller companies and private individuals don’t have really the option of public markets.
They’re the ones that most severely need the banks.
I think they’ve kind of lost track of that purpose.”
Hoenig and Fisher have the right vision.
Tarullo is heading down the right path.
Ross and many others in the private sector fully understand what needs to be done.
Those who oppose their proposed reforms are most likely insiders – people who have received payments from big banks over the past year or two.
Two Dollar Fallacies
CAMBRIDGE – The United States’ current fiscal and monetary policies are unsustainable.
The US government’s net debt as a share of GDP has doubled in the past five years, and the ratio is projected to be higher a decade from now, even if the economy has fully recovered and interest rates are in a normal range.
An aging US population will cause social benefits to rise rapidly, pushing the debt to more than 100% of GDP and accelerating its rate of increase.
Although the Federal Reserve and foreign creditors like China are now financing the increase, their willingness to do so is not unlimited.
Likewise, the Fed’s policy of large-scale asset purchases has increased commercial banks’ excess reserves to unprecedented levels (approaching $2 trillion), and has driven the real interest rate on ten-year Treasury bonds to an unprecedented negative level.
As the Fed acknowledges, this will have to stop and be reversed.
While the future evolution of these imbalances remains unclear, the result could eventually be a sharp rise in long-term interest rates and a substantial fall in the dollar’s value, driven mainly by foreign investors’ reluctance to continue expanding their holdings of US debt.
American investors, fearing an unwinding of the fiscal and monetary positions, might contribute to these changes by seeking to shift their portfolios to assets of other countries.
While I share these concerns, others frequently rely on two key arguments to dismiss the fear of a run on the dollar: the dollar is a reserve currency, and it carries fewer risks than other currencies.
Neither argument is persuasive.
Consider first the claim that the dollar’s status as a reserve currency protects it, because governments around the world need to hold dollars as foreign exchange reserves.
The problem is that foreign holdings of dollar securities are no longer primarily “foreign exchange reserves” in the traditional sense.
In earlier decades, countries held dollars because they needed to have a highly liquid and widely accepted currency to bridge the financing gap if their imports exceeded their exports.
The obvious candidate for this reserve fund was US Treasury bills.
But, since the late 1990’s, countries like South Korea, Taiwan, and Singapore have accumulated very large volumes of foreign reserves, reflecting both export-driven growth strategies and a desire to avoid a repeat of the speculative currency attacks that triggered the 1997-1998 Asian financial crisis.
With each of these countries holding more than $200 billion in foreign-exchange holdings –&#160;and China holding more than $3 trillion – these are no longer funds intended to bridge trade-balance shortfalls.
They are major national assets that must be invested with attention to yield and risk.
So, although dollar bonds and, increasingly, dollar equities are a large part of these countries’ sovereign wealth accounts, most of the dollar securities that they hold are not needed to finance trade imbalances.
Even if these countries want to continue to hold a minimum core of their portfolios in a form that can be used in the traditional foreign-exchange role, most of their portfolios will respond to their perception of different currencies’ risks.
In short, the US no longer has what Valéry Giscard d’Estaing, as France’s finance minister in the 1960’s, accurately called the “exorbitant privilege” that stemmed from having a reserve currency as its legal tender.
But some argue that, even if the dollar is not protected by being a reserve currency, it is still safer than other currencies.
If investors don’t want to hold euros, pounds, or yen, where else can they go?
That argument is also false.
Large portfolio investors don’t put all of their funds in a single currency.
They diversify their funds among different currencies and different types of financial assets.
If they perceive that the dollar and dollar bonds have become riskier, they will want to change the distribution of assets in their portfolios.
So, even if the dollar is still regarded as the safest of assets, the demand for dollars will decline if its relative safety is seen to have declined.
When that happens, exchange rates and interest rates can change without assets being sold and new assets bought.
If foreign holders of dollar bonds become concerned that the unsustainability of America’s situation will lead to higher interest rates and a weaker dollar, they will want to sell dollar bonds.
If that feeling is widespread, the value of the dollar and the price of dollar bonds can both decline without any net change in the holding of these assets.
The dollar’s real trade-weighted value already is more than 25% lower than it was a decade ago, notwithstanding the problems in Europe and in other countries.
And, despite a more competitive exchange rate, the US continues to run a large current-account deficit.
If progress is not made in reducing the projected fiscal imbalances and limiting the growth of bank reserves, reduced demand for dollar assets could cause the dollar to fall more rapidly and the interest rate on dollar securities to rise.
Democracy in Arabia?
PARIS – In Democracy in America, Alexis de Tocqueville argued that the public’s trust alleviates pressure on the state, allowing it to function more effectively.
This should give some comfort to governments in the Arab world, where a 2012 survey of young people showed 72% of the respondents expressing greater trust in their governments.
But what, then, accounts for the continuing civil turmoil and government paralysis in the Arab-Spring countries?
A more recent version of the survey provides some clues.
A large majority of Arab youths, around 70%, say that they are most influenced by parents, family, and religion, whereas only about a third report that elite groups – writers, business leaders, community leaders, and media outlets – have any influence on their outlook on life.
Indeed, just 16% reported that pop stars influenced their outlook.
These figures provide some useful insights into the evolving social fabric of Arab societies.
Normally, people are open to influence from those whom they trust and wish to emulate.
The fact that a large majority of Arabs turns to family and religion is highly revealing.
Arab societies, particularly those in turmoil, are regressing to what another French social theorist, Émile Durkheim, called “mechanistic solidarity.”
This is social solidarity that evolves along lines of kinship and religion, underpinned by a sense of belonging to the same “homogenous” group.
Durkheim contrasts this phenomenon with the more progressive “organic solidarity” that evolves in modern societies according to people’s professional and functional relationships.
In times of elevated risk, real or perceived, people begin to organize increasingly on the basis of homogenous identities.
As a result, “mechanistic solidarity” grows stronger at the expense of “organic solidarity.”
The trend is often accelerated by the loss of jobs, which often leads people to abandon their professional and functional identities in favor of identities based on ethnicity, kinship, or religion.
In culturally diverse societies, such as Iraq and Lebanon, networks of social solidarity are based almost entirely on religious and ethnic affinity.
In more homogenous societies, such as Libya, social solidarity tends to follow tribal and partisan lines.
In Tunisia, too, there has been a similar regression to mechanistic types of solidarity organized around tribal, regional, and religious identities.
A dramatic manifestation of the mechanistic pattern of solidarity is now emerging in Syria, as well.
While Syrians have been facing death, violence, and displacement for more than two years, the international community has been busy debating the nature of the Syrian rebels.
Left to its fate, Syrian society began to disintegrate and reorganize on a sectarian basis.
As the conflict intensified, established profession-based identities began to disappear, giving way to family, regional, and religious solidarities.
Civil-society and professional groups have been unable to respond in a way that maintains organic social cohesion, owing to a lack of resources, weak capacity, or both.
Mechanistic solidarity has emerged as a more effective means to mobilize people and resources.
At the heart of the crisis is a strong element of indifference.
For example, the role of the Arab middle class has been notably muted in efforts to support Syrian refugees.
The American actress Angelina Jolie’s highly publicized visits to Syrian refugee camps in Jordan and Turkey underscored the near-absence of similar awareness campaigns by Arab celebrities.
Indeed, while millions of Arabs tune in weekly to watch and vote for their favorite singers on the Arabic version of The Voice and Arab Idol, a fund-raising campaign for the benefit of Syrian refugees has yet to be organized.
By contrast, TV channels with specific religious and sectarian affiliations have been very active, including on social media, in fundraising efforts.
It is perhaps not surprising, then, that most Arab youth do not see role models beyond their close social circles.
In short, Arab countries are hemorrhaging social capital, which can significantly derail economic recovery and state-building.
As the Nobel laureate economist Kenneth Arrow argued in 1972, “much of the economic backwardness in the world can be explained by the lack of mutual confidence.”
Against this background, the recently announced Arab Stabilization Plan, an Arab-led private-sector initiative aimed at creating tens of thousands of jobs through large-scale infrastructure investment, is exactly the type of action needed to preserve social cohesion.
International efforts, led by the World Bank and other international donors, have tended to focus on strengthening relations between the state and its citizens in order to achieve “Tocquevillian” gains – that is, operational democracy and effective government.
But what is urgently needed is a strong complementary focus on job creation to preserve and foster Durkheim’s organic solidarity.
The Gulag of the Russian Mind
It is now 15 years since the failed coup of August 1991 against Mikhail Gorbachev.
At the time, Gorbachev’s policies of perestroika and glasnost were seen by Soviet hardliners as a sell-out of communist Russia to the capitalist West.
But it is now clear that the KGB and the military who launched the coup were not defending the idea of communism.
Instead, they were protecting their idea of Russia’s imperial mission, a notion that had given the Kremlin commissars greater control of the vast Russian empire, and of Russia’s neighbors, than any of the Tsars had ever enjoyed.
Gorbachev’s reforms not only liberated ordinary Russians from the straitjacket of Marxism-Leninism, but also released the national aspirations of people who had been locked in the empire for centuries.
Having seen the peoples of Central Europe free themselves from Soviet domination just two years before, the constituent nations of the USSR were beginning to seek the same freedom for themselves.
The Baltic republics of Estonia, Latvia, and Lithuania were the first to insist on traveling their own national path, and have since linked their fate to Europe as members of the European Union and NATO.
Others soon followed.
By December 1991, the Soviet empire was no more.
But only the Baltics have secured the sort of independence dreamed of in 1991.
Georgia, which is both European and Asiatic, teeters on the edge of instability.
Traditionally Asian Uzbekistan and Turkmenistan have resumed the tribal forms of autocracy they practiced throughout the centuries.
Azerbaijan and Kazakhstan have in essence become their presidents’ wholly owned family fiefs.
Ukraine’s break with Russia was perhaps the most wrenching, both for those in the Kremlin nostalgic for imperial control and for ordinary Russians who see Ukraine as the wellspring of Russian civilization.
The Orange Revolution of 2004, which overturned a rigged presidential election, proved that Ukraine was no longer a Malorossiya (a small Russia), an inferior and subordinate Slavic brother.
Indeed, that peaceful revolution, led by Viktor Yushchenko and Yuliya Tymoshenko, was a reminder of how enlightened Kievan Rus had been before it was forced to give way to the despotic princes of Moscow.
Two years after the Orange revolt, Yushchenko (a politician who seems out of his depth) has now accepted the Kremlin placeman Viktor Yanukovych, the foe he had vanquished in 2004, as his new prime minister.
Nonetheless, the Orange movement – now led by Yushchenko’s former partner and prime minister, Tymoshenko – has not fully lost its way, and still aims to preserve Ukraine as a truly independent and free country.
Malorossiya , for the majority of Ukrainians, remains a thing of the past.
Despite all these epochal changes, Russians cannot accept the loss of their imperial role.
The dream of empire is, indeed, the gulag that imprisons the Russian mind.
Most Russians do not regard Europe’s approach to their country’s borders as a sign that they have, at long last, fully united with the civilization of which they are a part, but as a source of insecurity.
Something more is at work here than mere nostalgia.
During the chaotic years of Boris Yeltsin’s presidency, it was perhaps understandable that Russians regretted their loss of great power status.
Something had to be blamed for their dire economic conditions.
Yet under President Vladimir Putin, with the economy growing robustly, these feelings have hardened, not diminished.
Russians are reverting to the past – to the grand pronouncements of Russia as a unique great nation, destined to rule the world.
As before the advent of Gorbachev – indeed, restoring a centuries-old tendency – Russians yet again believe that the people should be willing to forfeit their freedoms for the sake of the greatness of the state, which wins wars and launches Sputniks.
A free press, free speech, and free elections, it is feared, may diminish the brute power that is needed for Russia to assert itself.
Russians have long boasted of their various unique forms of greatness: first it was the holy Russian soul, so superior to Western practicality.
In the fifteenth century, Moscow was declared a “Third Rome,” the savior of spiritual Christianity.
The seventeenth century united this spiritual mission with imperial expansion, which eventually encompassed a landmass spanning 11 times zones.
In the early twentieth century, the imperial and spiritual mission became one, as Russia became the bastion of world communism.
All these forms of greatness, however, demanded that ordinary Russians accept their debasement and enslavement.
Development is not seen as a means of improving people’s lives, but as helping Russia prove itself to be superior to everybody else.
So, ultimately, the material achievements of Russian development always come with a body count.
Joseph Stalin’s industrialization killed millions – and became obsolete in only 30 years.
Putin’s Russia doesn’t go in for mass killing, yet it has not lost the country’s “superiority” complex.
For Russia’s elite, a restaurant bill cannot be too expensive, and one can never have enough bodyguards waiting out front for you.
On a grander scale, Putin’s Russia has become a great power in terms of energy production, but that looks to be temporary, as scant investment is being made to maintain and improve the oil and gas fields.
What matters is selling the reserves and being rich now, not finding more for later.
So, as always, the trouble with Russia is that the state develops, but society doesn’t.
The good of the people is sacrificed for the good of the nation.
The dream of great Russia remains the gulag of the Russian mind.
The Guns and Gold of August
CAMBRIDGE – China and Russia have just provided the world with sharp contrasts in the use of power.
As the French analyst Dominique Moisi recently put it, “whereas China intends to seduce and impress the world by the number of its Olympic medals, Russia wants to impress the world by demonstrating its military superiority – China’s soft power versus Russia’s hard power.” Some American analysts, such as Edward Luttwak, have concluded that Russia’s invasion of Georgia proves the “irrelevance” of soft power, and the dominance of hard military power.
In reality, the story will turn out to be more complicated for both countries.
Soft power is the ability to get what you want through attraction rather than coercion or payment.
It is not the solution to all problems.
North Korean dictator Kim Jong Il’s fondness for Hollywood movies is unlikely to affect his nuclear weapons program.
And soft power got nowhere in dissuading Afghanistan’s Taliban government from supporting Al Qaeda in the 1990’s.
But other goals, such as the promotion of democracy and human rights, are better achieved by soft power, which can also create an enabling or disabling environment, as the United States discovered in the aftermath of the invasion of Iraq.
Skeptics who belittle soft power because it does not solve all problems are like a boxer who fights without using his left hand because his right hand is stronger.
Soft power is rarely sufficient, but it is often crucial to combine soft and hard power to have an effective “smart power” strategy.
As the American Defense Secretary Robert Gates said last year, “I am here to make the case for strengthening our capacity to use soft power and for better integrating it with hard power.”
Military force is obviously a source of hard power, but the same resource can sometimes contribute to soft power behavior.
The impressive job by the American military in providing humanitarian relief after the Indian Ocean tsunami in 2004 and the South Asian earthquake in 2005 helped restore America’s attractiveness.
On the other hand, misuse of military resources can undercut soft power.
The Soviet Union had a great deal of soft power in the years after World War II, but destroyed it by the way the Kremlin used its hard power against Hungary and Czechoslovakia.
Russia is now going through a period of nationalistic reaction to what it regards as the humiliation it suffered after the Soviet empire collapsed.
With the rise in energy prices boosting its economy, Russia has seen an opportunity to reassert its power over its neighbors.
In addition, it felt aggrieved by plans for further expansion of NATO, a proposed ballistic missile defense system in Eastern Europe, and Western recognition of Kosovo’s secession from Russia’s ally, Serbia.
Russia has sought to weaken Georgia’s government for some time.
In early August, Russia set a trap in South Ossetia, and Georgia foolishly walked into it.
If the Russians had used their “peacekeeping” force solely to protect South Ossetians’ “self-determination” (citing the precedent of Western actions in Kosovo), they would have done little damage to their soft power, and the benefits could have exceeded the costs.
By bombing, blockading, and occupying many parts of Georgia, delaying its withdrawal, parading blindfolded Georgian soldiers, and failing to protect Georgian citizens, Russia lost its claims to legitimacy and sowed fear and mistrust in much of the world.
Neighbors such as Ukraine have become more wary.
An immediate cost was Poland’s reversal of its resistance to an American anti-ballistic missile system.
When Russia appealed for support of its Georgia policy to its fellow members of the Shanghai Cooperation Organization, China and others refused.
Longer-term costs may include the failure of Russia’s proposal for a new European security system, a revived European interest in the Nabucco and White Stream gas pipelines that skirt Russia, and a decline in foreign investment.
In contrast, China ended August with its soft power enhanced by its successful Olympic Games.
In October 2007, President Hu Jintao declared China’s intent to increase its soft power, and the Olympics were an important part of that strategy.
With its establishment of Confucius Institutes to promote Chinese culture, increased international broadcasting, attraction of foreign students to its universities, and softer diplomacy toward its neighbors in Southeast Asia, China has made major investments in soft power.
Opinion polls show an improvement in its international reputation.
But China’s government did not achieve all its Olympic objectives.
By not keeping its promises to allow peaceful demonstrations and free Internet access, China undercut its soft-power gains.
It will take more than a successful Olympics to overcome these self-imposed limits.
For example, a recent Pew poll showed that despite China’s efforts to increase its soft power, the US remains dominant in all soft-power categories.
So, while China won the most gold medals, the Beijing Olympics did not turn the tables on the US outside the sports arenas.
One hopes that China’s leaders will learn the importance of free expression for establishing soft power.
Of course, only time will tell the ultimate outcomes of the guns and gold of August for Russia and China.
Unlike an Olympic competition, their recent performance will not be given a final score until well after their power games have been played.
The Hague Tribunal: Belgrade\u0027s View
BELGRADE: Opinion polls in Serbia show that large majorities believe the International Criminal Tribunal for the Former Yugoslavia to be a political instrument to bash Serbs.
So they oppose extradition of the indicted - including ex-president Milosevic - to the Hague Tribunal.
When the Tribunal's chief prosecutor, Carla del Ponte, comes to Belgrade this Tuesday her welcome will not be warm.
Democratic politicians everywhere vie for the support of ethnic lobbies.
To gain the Cuban vote in Florida, American politicians are tough on Fidel Castro; to secure Jewish votes in New York, they are soft on Israel.
At the same time as they play this game, US policymakers (both Democrats and Republicans) demand that Vojislav Kostunica, President of Yugoslavia, cooperate with the Hague Tribunal unconditionally.
Kostunica, however, is a sensible politician.
He knows that, although the Serbian lobby is weak in the US, it is all�powerful in Serbia.
Taking the mood of his voters seriously, Kostunica criticizes the Tribunal and expresses reservations about receiving Mrs. del Ponte.
Long before the civil war in former Yugoslavia, I concluded that the world needed an international court to try governments and army commanders for war crimes, crimes against humanity, and genocide.
But ever since the International Criminal Tribunal for the Former Yugoslavia was established in 1993 by the UN Security Council, I have been disappointed.
I feel like some communist true believer who, in the 1930s, suddenly realized that terror existed in the Soviet Union.
Why this change of heart?
Biljana Plavsic, professor of biology and a leader of Bosnia’s Serbs, recently appeared before the Hague Tribunal to face charges of genocide.
But the prosecutor merely repeated accusations about crimes committed by the Bosnian Serbs that have been known for years.
Not a shred of new or recent evidence was presented.
When Mrs. Plavsic was the pro�Western president of the Serbian part of Bosnia - between 1996 and 1998 - and in conflict with her more nationalist colleagues, she was hailed in the West as a democrat and champion of tolerance.
I remember seeing President Jacques Chirac kiss her hand at the entrance to the Elysee Palace.
I am reminded of Stalin's purges.
One day you are a Hero of the Soviet Union, and the next you are shot as an enemy of the people.
On May 27, 1999, at the height of the NATO bombing campaign, Judge Louise Arbour of Canada, Mrs. del Ponte’s predecessor as the Hague Tribunal’s chief prosecutor, issued a warrant for the arrest of President Slobodan Milosevic.
The indictment was based on evidence gathered by American and British intelligence services about the expulsions and killings of Albanians in Kosovo.
Milosevic could have been charged by the Tribunal years before because of his responsibility for the war in Bosnia.
But America’s State Department needed his support to conclude the Dayton peace agreement of 1995, so Milosevic’s crimes of the time were conveniently forgotten.
Soon after the warrant for Milosevic was issued, I heard in Belgrade that Vuk Draskovic, an opposition leader, was being threatened with indictment by US officials for the activities of his short�lived paramilitary organization during the 1991 war in Croatia.
It seems as if the Americans were saying: stop creating conflicts with other opposition leaders, or we will indict you.
Is it really so easy to dismiss out of hand as unreconstructed nationalists those Serbs who ask: why was Franjo Tudjman (the former president of Croatia) never indicted?
Under his rule almost half a million Serbs were expelled from Croatia; he, too, sent troops into Bosnia to partition Bosnian territory.
What of Alija Izetbegovic, the Muslim former president of Bosnia, who never wanted a multi�ethnic (Muslim�Serb�Croat) Bosnia, but rather the first Muslim state in Europe?
Under his rule, Sarajevo was "cleansed" of most of its Serbs and Croats.
And what of Hashim Thaci, the young leader of the Kosovo Liberation Army?
When, in June 1999, Serbian troops moved out of Kosovo and NATO moved in, it was the KLA that really took over.
Since then it has destroyed dozens of Serbian Orthodox churches and monasteries, killed hundreds of civilians, and expelled almost all Serbs and other non�Albanians.
Last but definitely not least can we avoid asking questions about NATO’s responsibility?
Perhaps several thousand Serbian civilians were killed during the NATO bombing.
It may turn that the depleted uranium bullets used during the Kosovo war cause lethal radiation and that some commanders and politicians knew about this.
By bombing Serbia's infrastructure, NATO also violated Article 14 of the 1977 Protocol of the Geneva Convention of 1949, which prohibits attacks on "objects indispensable to the survival of the civilian population."
America will never accept the jurisdiction of an independent international court over its political leaders and military forces.
Nor will any other great power.
The spokesman for the International Relations Committee of the U.S. House of Representatives has stated this bluntly: "You're more likely to see the UN building dismantled brick�by�brick and thrown into the Atlantic than see NATO pilots go before a UN tribunal.”
Instead of being fair and delivering justice, the Hague Tribunal has surrendered to political pressures and manipulation.
Rather than helping Serbs achieve a moral catharsis by punishing their guilty leaders for their misdeeds, the Hague Tribunal is only reinforcing anti�Western prejudices and the sense of victimization already pervasive in Serbia.
The Haitian Miracle?
This spring’s presidential election in Haiti sadly re-enforced the country’s blighted reputation.
The paradox is that today Haiti has a chance, perhaps the best in its modern history, to escape from its long history of extreme poverty and turmoil.
A mere one-hour flight from Miami, the country struggles with poverty levels akin to the poorest parts of sub-Saharan Africa.
But, whereas many parts of the world are extremely poor because of their isolation, Haiti is extremely poor despite its proximity to the world’s largest market.
Now, Haiti can turn its geography into a competitive advantage, but only if the United States helps.
Haiti recalls a famous lament once heard about another US neighbor, Mexico: “So far from God and so close to the United States.”
Proximity to the US should, of course, be an advantage for exports and attracting investment.
However, proximity has also meant US meddling.
Haiti was the second country, after the US, to win its independence from Europe, following a slave rebellion in 1804.
But America regarded Haiti as a threat rather than as a colleague in freedom, refusing to extend diplomatic recognition until after the outbreak of the Civil War, which finally brought an end to slavery in the US.
Even after recognition by President Abraham Lincoln in 1862, relations remained sour.
Haiti was exploited and occasionally occupied by US troops, rather than being regarded as a legitimate partner in trade and diplomacy.
Meanwhile, Haiti’s ecological and demographic conditions posed huge development challenges that have never been overcome.
The island is hit regularly by devastating hurricanes.
It has been massively deforested, and its soils have been depleted of nutrients.
Tropical diseases remain killers to this day.
A devastating economic blow occurred in the mid-nineteenth century, when Europe learned to produce sugar from a temperate-zone crop, beets, rather than from tropical sugar cane.
World sugar prices collapsed, and Haiti fell into deeper disarray.
Extreme poverty bred illiteracy and miserable governance, which in turn intensified hunger, disease, and instability.
Haiti’s recent economic history is marked by a remarkable and tragic downslide since the mid-1980’s, exacerbated by sometimes well-intentioned but typically disastrously executed US diplomacy.
In an attempt to push Haiti toward democracy, the US imposed economic sanctions, which crippled Haiti’s fragile and newly emerging export sector, especially apparel and other labor-intensive production.
Unemployment soared.
Urban violence spiraled.
The US then entered into a destructive 15-year relationship with Jean-Bertrand Aristide, who is massively popular among Haiti’s poor, but distrusted by most of the business sector and many leading US politicians.
When Aristide came to power in 2001, the Bush administration cut off most international aid, thereby helping to send the economy into a freefall.
Aristide’s government was ousted under highly contested circumstances in 2004.
The newly elected president, Rene Preval, is a highly talented and experienced agronomist, and thus has the perfect background to revive Haiti’s degraded rural economy.
With the US market close by, Haiti could achieve a remarkable recovery of exports of horticulture, fruits, and other agricultural products, as well as tourism and light manufactured goods.
The key will be for the new government to provide a sound framework which combines key public investments – roads, power, soil nutrients, improved seed varieties, public health, safe water – with confidence-building outreach to the business community and fruitful relations with the US and other donor countries.
This time, the US has a strong interest in cooperating fully to promote economic progress: another round of failure would only provoke chaos, including massive numbers of new refugees to the US.
The gap between Haiti’s performance and its potential is now so large that great gains can be achieved in income levels, farming, health, education, and more.
Crop yields are below one ton of cereal per hectare of farmland – far less than half of what is readily achievable if farmers are helped to gain access to fertilizers, improved seeds, and basic infrastructure.
Similarly, health conditions are horrendous, but could be improved dramatically just with immunization, de-worming, safe water, antibiotics, and anti-malaria bed nets.
Community health workers could be trained in a matter of months to extend basic health care throughout rural areas, which could then be better mobilized to fend off the debilitating results of future hurricanes.
On the economic front, Haiti can become a profitable exporter of tropical crops such as groundnuts, mangos, cut flowers, string beans, and bamboo – a source of progress among Haiti’s Caribbean-basin neighbors.
Preval’s own hometown has successfully used a modest level of external donor support to create new rural cooperatives to market improved crops.
And, with its beautiful beaches and remarkable arts and music, Haiti could once again become a major tourist destination.
Indeed, Haiti can become an inspiration for many other fragile and impoverished new democracies.
The US, France, Canada, and other major donor countries must not miss this historic opportunity to give vital help to Preval’s democratically elected new government.
The Hamas Earthquake
Hamas’s crushing defeat of Fatah in this week’s elections brings the Palestinian people to a crossroads.
An Islamist political party that previously abstained from national politics and rejects Fatah’s policy of negotiations with Israel, is now in charge in Palestine.
Hamas won 76 of 132 seats in the Palestinian Legislative Council, and can count on support from four independent deputies.
Overall, that’s 60% of the seats in Parliament, won in nearly every district in the West Bank and Gaza.
Hamas entered electoral politics only recently, but its massive victory was preceded by wide success in municipal elections.
Hamas’s political moment has come.
Under Palestinian law, Mahmoud Abbas, the Palestinian president, must now ask Hamas to form a new government.
For their part, Fatah officials seem unwilling to join a Hamas-led government.
Although Hamas has said that it would seek such a coalition, Fatah’s humiliating defeat has left it with little credibility as a governing partner.
So far, Fatah’s senior leaders have declared that they will be a loyal opposition in Parliament, leaving governmental responsibility to Hamas.
Instead, they will have to focus on rebuilding and reenergizing Fatah.
Hamas is well aware of the shock that its victory has produced.
If Fatah refuses to join a coalition, Hamas may opt for a government of independents and technocrats.
It is unlikely that Hamas will form a government composed of hardliners.
The political, security, and economic circumstances of the Palestinians require a government focused on solving problems, not ideological purity.
The most urgent challenge facing the new government is rampant lawlessness and anarchy throughout Palestinian society.
Murder, kidnapping, and extortion have reached record heights.
Armed individuals resort to kidnapping to get jobs, free family members from prison, and exact revenge.
Often, the people involved in these crimes belong to local gangs or even to the militias of large clans.
In opposition, Hamas adamantly refused to collect illegal weapons.
Now, it will have to deal with a Palestinian society that is armed to the teeth, with poverty rates reaching 70% and unemployment at 35% .
Having benefited from overwhelming political rejection of Fatah, Hamas will now be judged by how it uses its new authority.
For the first time, a political clock is ticking for Hamas.
Senior Hamas officials are well aware of the challenge, and have promised a complete overhaul of Palestinian public services and administration.
More than anything else, Hamas’s success in the coming months will be measured by its response to these issues.
Will Hamas be able to root out corruption and incompetence, and deliver services fairly and efficiently?
How will its election affect Palestine’s foreign aid inflows, which form major component of the national budget?
Initial international reaction to the Hamas victory has been severe.
The Bush administration has declared that it will not deal with a Hamas government, because Hamas remains committed to Israel’s destruction.
This, indeed, is the language of Hamas’s 1988 covenant.
Interestingly, however, Hamas’s election platform combined different approaches to the issue of a Palestinian state.
On the one hand, Hamas agreed for the first time to the establishment of a Palestinian state in the West Bank and Gaza, with East Jerusalem as its capital.
On the other hand, the platform repeats Hamas’s refusal to relinquish even an inch of historic Palestine.
Whether Hamas can actually be transformed into a more moderate organization is impossible to say right now.
But it is clear that Hamas is now vulnerable to public opinion and, as a governing authority, will have to deal with the international response to its victory.
Immediately after the election, a senior Hamas official, Mahmoud al-Zahar, said that Hamas would maintain the cease-fire with Israel begun last February, if Israel did the same.
Hamas may be signaling that it will not provoke Israel.
Perhaps its governing responsibilities will push Hamas toward ongoing discussions with the United States and the international community.
In any case, despite the election results, and even without Fatah in government, Abbas remains in charge of negotiations with Israel.
He has quickly called for a revival of peace talks, although Israel, like the US, has refused to deal with Hamas.
Palestinians have entered uncharted waters.
They turned out in droves to vote in an election that former US President Jimmy Carter described as honest, fair and unmarked by violence.
They elected a party which called for “reform and change” in response to a decade of violence and lawlessness.
And Palestinians accepted Hamas’s view that negotiations based on the Oslo Accords could not achieve Palestinian rights and political ambitions.
Victory achieved, Hamas will take on the responsibility for the Palestinian side in the Israeli-Palestinian conflict.
With the Palestinians’ future at stake – not to mention the future of Israel and the Middle East – no one can say if Hamas is up to the task.
The Hamas Moment
Hamas’s capture of the Gaza Strip has created, along with Iran, a second radical Islamist state in the Middle East.
The region, probably the Arab-Israeli conflict, and certainly the Palestinian movement, will never be the same.
Fatah’s defeat in Gaza is not due to American foreign policy, Israel, or anyone but Fatah itself.
It is Yasir Arafat’s ultimate legacy, for he encouraged not only terrorist violence against Israel, but also anarchy and corruption within his own organization.
Most importantly, Arafat failed to resolve the conflict or give his people an alternative vision to one of extreme radicalism and endless fighting.
By rejecting a compromise peace solution in 2000 that would have created an independent Palestinian state with its capital in east Jerusalem and $23 billion in international aid, Arafat made clear that there would be no alternative, moderate scenario for resolving the Palestinians’ problems.
It was clear before the January 2006 elections that Hamas was heading toward a victory.
Under weak leadership, Fatah did nothing to address its deep-seated divisions and corruption.
Competing Fatah candidates split the vote, ensuring that Hamas nominees won.
Even after the defeat, Fatah implemented not a single reform or leadership change.
Its leaders squabbled, regarding themselves as the sole possible rulers and engaging in wishful thinking that some external factor would hand them whatever they wanted.
Meanwhile, like communist and fascist parties in the past, Hamas moved forward, with a clear doctrine, relative discipline, and grim determination.
Fatah’s ideology and practice laid the basis for Hamas to advance.
With Fatah demonizing Israel, rejecting compromise, demanding total victory, glorifying terrorist violence, and portraying moderation as treason, Hamas merely needed to prove that it was better at pursuing this course.
No one should underestimate Hamas’s extremism.
Indeed, the only difference between Hamas and al-Qaeda – though the two groups do not generally work together – is that the latter emphasizes attacks on Western targets, while the former has until now focused on Israel.
Consequently, Hamas will not moderate its stance, and its victory sets back the chances of Israel-Palestinian peace for decades.
Buoyed by its triumph, enjoying backing from Syria (where its headquarters are located) and Iran, Hamas will pursue its genocidal and openly stated goal: the extinction of Israel and its people.
Any thought of concession or compromise is gravely mistaken.
Four specific issues now move to center-stage: the fate of the Palestinians in the Gaza Strip, the future of the Fatah-ruled West Bank, the world’s attitude toward Israel, and the strategic impact of Hamas’s victory on the Middle East.
Until now, while Gazans have suffered from the constant fighting and economic failures brought about by their leaders’ policies, they have been left alone in their private lives.
Hamas might go slower or faster with an “Islamicizing” program. Nevertheless, it is determined to transform the lives of those it rules.
It will kill as it chooses, abolish women’s rights, and indoctrinate schoolchildren with hatred and the ambition to be suicide bombers.
Gaza has suffered from anarchy; now it will be under the heel of a ruthless dictatorship.
For example, when Hamas forces seized the Shati refugee camp, they deliberately executed three women – two teenagers and a 75-year-old – because they were relatives of Fatah officials.
Those truly concerned with the Palestinians’ well-being should direct their criticism at that people’s leaders and seek to protect their human rights in the Gaza Strip.
Fatah’s rule is still strong in the West Bank, but even the Gaza catastrophe is unlikely to lead it to change its ways.
Israel’s willingness to work with Mahmoud Abbas’s Fatah regime and resumption of full-scale aid by the United States are intended to consolidate a relatively moderate Palestinian government on the West Bank.
But, whereas Abbas appointed Salam Fayyad, a veteran economist who is respected in the West, as his new prime minister, he probably should have picked someone capable of being tough, organizing his forces, and fighting back.
Logically, Fatah should now embrace moderation, crack down on cross-border terrorism, and seek some kind of peace with Israel.
But Fatah has its own view of what is logical – one that might not coincide with such prescriptions.
As wildly different as the two cases are, Fatah resembles the French monarchy before the revolution, incapable of learning from experience or taking the steps needed to avoid its own downfall.
The world cannot save Fatah; only Fatah can save itself.
For Israel, of course, developments in Gaza pose a great challenge.
Israel has long since decided that it has no interest in renewing its control over the Gaza Strip.
In some ways, Hamas’s coup makes things clearer.
Gaza is ruled by a completely hostile regime.
Israel will feel free to retaliate for cross-border attacks and continuing rocket fire at civilian targets within the country.
At last, the world must recognize that the hopes stirred by the 1990’s peace process have been completely dashed.
In effect, Hamas has returned the conflict to the 1960’s and 1970’s, when progress toward peace had to await the PLO’s readiness to stop using terrorism and accept Israel’s existence.
Israel’s survival and right to self-defense now has to be supported internationally, and the slander and demonization of recent years should come to an end.
The strategic implications for the region are equally grim.
Hamas’s takeover of Gaza is a victory for the bloc comprising Iran, Syria, and Hezbollah, as well as the separate branches of the Muslim Brotherhood (of which Hamas is one) seeking to capture power in their own countries.
These forces fully comprehend that the most important global contest today is between radical Islamism and the rest of the world.
The question is when the rest of the world will figure that out.
The Hamas Veto
GAZA CITY – The resumption of direct peace talks between the Palestinians and Israelis has broken 20 months of stalemate, and marked the entry of Prime Minister Binyamin Netanyahu into this round of diplomacy.
But these difficult talks face significant challenges from outside the negotiating room, particularly from Hamas, which is intent on ensuring that nothing happens without its approval.
Hamas refuses all direct peace negotiations with Israel, and has vowed to derail the current talks through violence.
Their first blow came on the eve of the talks, when the al-Qassam Brigades, Hamas’ military wing, carried out an ambush on Israeli settlers in Hebron, killing four people.
Hamas has vowed to continue launching its attacks from inside the West Bank, but not from Gaza.
This follows from Hamas leaders’ frequent statements since the 2008 Gaza war that they do not want to provoke another Israeli attack, which could cost them their governing position.
Israel does not recognize a distinction between Hamas-planned attacks from the West Bank and from Gaza.
However, a large-scale Israeli assault on Hamas’s Gaza redoubt in response to the West Bank killings could bring the negotiations to a halt.
Hamas’s strategy is to expose the Palestinian Authority’s weakness by demonstrating that it cannot control the West Bank, as it promises in negotiations.
Moreover, Hamas is well aware that their attacks cause Israel to insist even more strongly on security as the centerpiece of any agreement.
This, in turn, puts the spotlight on ongoing security cooperation between Israel, the PA, and the United States, again undermining the PA’s claims to represent the Palestinian people.
Rhetoric aside, Hamas’s opposition to direct talks with Israel is intended to make clear to the US that Hamas is central to the political reality of the region and cannot be ignored.
If Hamas is not part of the process, there will be no process.
Hamas insists that Palestinian President Mahmoud Abbas does not have the legitimacy to negotiate on behalf of the Palestinians, and that any deal he reaches with Israel is not binding.
Hamas claims to be the Palestinians’ true representative, having won the majority of seats in the Palestinian Legislative Council (PLC) in January 2006 (the PLC’s term expired in January 2010, but fresh elections have yet to be held).
As Hamas knows, the US holds the key to ending the political isolation imposed on it after its victory in 2006.
Indeed, Hamas leaders recently acknowledged sending messages to the Obama administration calling for dialogue.
The most recent note, sent through a group of visiting American academics, asked the US government to take a more balanced position in the Israeli-Palestinian conflict.
Hamas, for its part, has expressed its willingness to accept a Palestinian state on the West Bank and Gaza, subject to a return of all refugees and Israel’s release of all Palestinian prisoners.
But Hamas has not taken what the US considers the critical step of recognizing Israel – and thus accepting a two-state solution.
For now, Hamas and the Palestinians of Gaza are excluded from the peace talks, which means that the negotiations will most likely not lead to an end to the Palestinian-Israeli conflict.
But every day that Gazans are left to stew in an unhealthy mix of siege, poverty, and unemployment is a day that strengthens the Hamas hardliners.
The US has invested much in shuttle diplomacy to bring Netanyahu and Abbas to the negotiating table and is not ready to see these talks collapse.
But the continuing US boycott of Hamas reinforces the logic of those who are trying to sabotage the negotiations.
What do they have to lose?
The future of these direct peace talks thus depends not only on Netanyahu and Abbas, but also on how they relate to the extremists within their camps.
Will Netanyahu abandon his ideological rhetoric, negotiate seriously with the Palestinians, and make the needed concessions? Can the Palestinians rise to the political moment and take advantage of the pressure coming from US President Barack Obama?
The stakes are high, and failure would be costly to Americans, Israelis, and Palestinians.
If the talks collapse, US foreign policy in the Middle East would be further discredited, and nothing would remain to keep the parties from launching another round of conflict.
For Palestinians, this is likely to be Abbas’s last chance.
He is wagering his scant remaining authority on the talks’ success, and Palestinians will be counting down his days in office should he fail.
For Netanyahu, perhaps maintaining the status quo will be seen as a victory, at least in the short term.
But Israel’s margin for strategic error will shrink even further.
Meanwhile, Hamas bides its time.
A failure of Palestinian-Israeli talks would only prove Hamas’s basic point: nothing moves forward without us.
The Hard Right Goes Soft
PARIS – The central paradox of French politics was confirmed once again on March 27.
In a nationwide vote to select local authorities (the so called Conseiller Général), the far-right National Front gained 11% of the votes cast, but secured only 0.1% of the seats.
This discrepancy between the National Front’s popular strength and its actual representation has been a permanent feature of French politics since Jean-Marie Le Pen established the party 40 years ago.
But Le Pen was replaced in January by his no less charismatic daughter, Marine.
And, with that change, the fate of the Front may be changing, too.
The Front’s scant number of elected officials reflects the strategy pursued by its two main adversaries, the Socialist Party and President Nicolas Sarkozy’s Union pour un Mouvement Populaire (UMP, formerly the Gaullist party), which have essentially shared all elected posts at the national and local level since the 1980’s.
In order to preserve their shared domination, they have more or less agreed to a “Republican Front” strategy aimed at excluding the National Front in the second round of all elections.
Thus, in a direct run-off between a Front candidate and a Socialist or UMP candidate, the Socialists and the UMP usually vote for each other.
The most striking demonstration of this “Republican” alliance was the 2002 Presidential election, when, with Socialist support, Jacques Chirac, the Gaullist incumbent, received 85% of the popular vote in the run-off against Jean-Marie Le Pen.
So far, this “Republican Front” strategy of exclusion has succeeded in keeping the far right out of any significant political office for four decades, but it has never reduced the size of its electoral base.
On the contrary, the National Front gains credibility by never having to test its program in government.
For last Sunday’s run-off, however, Sarkozy broke with convention: in races where a Socialist candidate faced off against the National Front, his position was “No, neither.”
As a result, UMP voters split between abstaining, supporting the Socialist, and voting for the National Front.
Compared to Chirac’s rigid refusal to consider any kind of rapprochement with the Front, Sarkozy’s policy is thus a small step towards recognition of the Front’s legitimacy.
The left has, of course, denounced this move as risking fascism.
But, like it or not, the Front is a legal party.
It may be xenophobic, but its leaders never denigrate the Republic: there may be fascists members within it, but the party plays by the democratic rules.
And, like it or not, the Republican Front may crumble altogether under Marine Le Pen’s leadership of the party her father founded.
Her father was, above all, an ideologue, a “populist” Napoleon who would never moderate his vision of a white and Catholic France in need of a moral revival.
Thus, he rejected the French Revolution and the modern welfare state as much as he opposed Muslim immigration.
Gaullists and Socialists are proud that they never compromised with Jean-Marie Le Pen, but he would not have negotiated with them, anyway.
Le Pen’s ambition was always to “save” France, not to become Minister of Tourism.
His daughter, however, has clearly softened the tone.
Since Marine Le Pen took the helm, she has proven herself able to combine the National Front’s trademark anti-immigration stance, the hard core of its ideology, with praise for the state and the Republic.
And she has brought a fresh anti-capitalist tone to the Front’s rhetoric – always a crowd pleaser in France.
Marine Le Pen is seeking the same path to power traveled by Italy’s Northern League, the Flemish Interest Party, Liveable Netherlands, and the Danish People’s Party, all of which first became “soft” populist parties.
As a result of this shift, in the near future Sarkozy’s conservatives may have no choice but to ally with the Front.
Sarkozy’s attempt to co-opt far-right rhetoric on security and immigration has not worked, because, when it comes to national chauvinism, the French prefer its authentic purveyors.
And the French – and voters elsewhere in Europe – vote for far-right parties the most when the far left is weakest.
Indeed, the National Front is strongest precisely where the Communist Party once was the leading force.
Between one-quarter and one-third of Continental Europeans feel permanently disenfranchised, and are prepared to vote for any “protest” party, whether far right or far left.
The reason is essentially the same throughout Europe: slow economic growth implies few prospects for a better life, while the welfare state has failed to create jobs.
The far left indicts capitalism; the far right points the finger of blame at immigrants.
The far left would recommend revolution; the far right, ethnic cleansing.
Anti-capitalist revolution was tried in half of Europe in the last century, with dire results.
Expulsion of immigrants has not.
Given a slow economy, a failed welfare state, and uncontrolled immigration – challenges for which no mainstream parties on the right or the left have any coherent proposals – the appeal of the far right’s soft populism will continue to haunt France and Europe.
The Harmony Trap
A widespread feeling exists that European integration is proceeding sideways, if not backwards.
But in at least one field, real progress has been made: the Commission's endeavor to build a single market for financial services.
An ambitious Financial Services Action Plan - launched in 1999 to bring about a single European wholesale market, open and secure retail markets, and state-of-the-art prudential rules and supervision - envisaged 42 measures to be implemented by 2003-2005.
After a slow start, rapid progress has been achieved, with 36 measures formally adopted, including important directives on market abuse, prospectuses, financial collateral, distance marketing, collective investment schemes, and a common set of International Accounting Standards for the consolidated accounts of all listed companies.
A common position has been reached on four more measures, including directives on investment services, on transparency, and on takeovers.
There has also been an institutional leap forward with the adoption of the so-called Lamfalussy method for quick adoption of implementing measures and approval of a European regulators' committee.
Impressive results.
But to assess their relevance, three questions must be asked: was such harmonization necessary?
How satisfactory are its results, over and above the sheer number of measures adopted?
Most importantly, is completion of the FSAP sufficient to achieve the single financial market?
The first question reflects a long-standing and apparently philosophical dispute between Britain - more accurately, the so-called British financial industry, which comprises almost exclusively non-British firms - and the Continent.
A one-size-fits-all approach, the British argue, is incompatible with existing differences between EU states: all that is needed is mutual recognition, leaving the rest to competition and investors' choices.
Insufficient harmonization, however, has often allowed member states to erect barriers to competition, which can only be removed by consistent implementation of laws and standards.
This is why securities law, unlike company law, has federal status in the US.
A more level playing field, achieved by a gradual increase in the level of harmonization that is driven by both institutions and markets, will in the end provide a better opportunity for the fittest to survive.
As for what has already been achieved, some measures deserve unqualified praise.
Adoption of a common set of advanced accounting principles will remove a key obstacle to meaningful comparison of European listed companies' profitability, although more needs to be done to achieve common standards of enforcement, as recent corporate scandals show.
The directive on market abuse provides European regulators with greater investigative and sanctioning power, as well as enhancing cooperation.
The prospectus directive allows companies to issue shares and raise capital in all European markets by using the same prospectus as approved by each company's national authority.
The most delicate issues are those raised by the Investment Services Directive, on which only a majority of member states have reached a common position.
The directive firmly, and rightly, frees competition among all trading venues, removing the privileges enjoyed by "official" exchanges.
Trades must no longer be concentrated on an officially regulated market, which means that assessment of "best execution" remains an open question, especially when trades are "internalized" by intermediaries acting as counterparts to their customers.
No obvious solution to this problem exists in a multi-venue world, where "best execution" can neither be presumed nor categorically defined.
But the fullest possible information in executing trades is a necessary condition: hence the imposition of pre-trade (posting orders and prices) and post-trade transparency for intermediaries trading on their own account with retail investors - a requirement that has been firmly opposed by all the states where the relevant "internalizers" reside.
This resistance should not be allowed to prevent the European Parliament from endorsing the common position: markets and regulators alike urgently need a new ISD, as innovations have made the old one obsolete.
Thus, while certain necessary requirements for the existence of a single European financial market have been established, they are far from sufficient , at least at the retail level.
This is not so much because further top-down measures are needed, but because market failures hamper the required bottom-up drive. "Markets are created and developed by market participants, not by rules and regulation," says the City of London.
True, perhaps but the record is far from brilliant.
The persistent fragmentation of privately owned European exchanges is not due primarily to regulatory obstacles.
More relevantly, the high cost of cross-border transactions reflects inefficiencies in the post-trade stage, especially clearing and settlement.
As stated in the so-called Giovannini Report to the European Commission, "The post-trade landscape could be significantly improved by market-led convergence across national systems."
But a major obstacle to this is the existence of local rent-seeking franchises and monopolies.
Silent progress is instead being made on another front.
As a result of the Lamfalussy report, not only was the legislative process improved, but an important institutional status was conferred upon the Committee of European Securities Regulators.
Apart from its consultative role in drafting legislation, the CESR has now been mandated to set guidelines and common standards for national regulation and enhancing cooperation.
This is potentially the most important step towards establishing a level playing field, as the transposition of Community legislation into national regulation still leaves too much room for discretion.
The plea for a single European regulator (a "European SEC") is, at the moment, misguided: there is no legal basis in the Treaty (or in the draft constitution), member states' legal systems are too different, rules are not sufficiently harmonized, and Community law appears to be moving towards decentralization.
A gradual approach, based on growing coordination of national regulations and regulatory practices at the CESR level, appears to be the most viable alternative.
The Harsh Lessons of 2009
NEW YORK – The best that can be said for 2009 is that it could have been worse, that we pulled back from the precipice on which we seemed to be perched in late 2008, and that 2010 will almost surely be better for most countries around the world.
The world has also learned some valuable lessons, though at great cost to both current and future prosperity – costs that were unnecessarily high given that we should already have learned them.
The first lesson is that markets are not self-correcting.
Indeed, without adequate regulation, they are prone to excess.
In 2009, we again see why Adam Smith’s invisible hand often appears invisible: it is not there.
The bankers’ pursuit of self-interest (greed) did not lead to the well-being of society; it did not even serve their shareholders and bondholders well.
It certainly did not serve homeowners who are losing their homes, workers who have lost their jobs, retirees who have seen their retirement funds vanish, or taxpayers who paid hundreds of billions to bail out the banks.
Under the threat of a collapse of the entire system, the safety net– intended to help unfortunate individuals meet the exigencies of life – was generously extended to commercial banks, then to investment banks, insurance firms, auto companies, even car-loan companies.
Never has so much money been transferred from so many to so few.
We are accustomed to thinking of government transferring money from the well off to the poor.
Here it was the poor and average transferring money to the rich.
Already heavily burdened taxpayers saw their money – intended to help banks lend so that the economy could be revived – go to pay outsized bonuses and dividends.
Dividends are supposed to be a share of profits; here it was simply a share of government largesse.
The justification was that bailing out the banks, however messily, would enable a resumption of lending.
That has not happened.
All that happened was that average taxpayers gave money to the very institutions that had been gouging them for years – through predatory lending, usurious credit-card interest rates, and non-transparent fees.
The bailout exposed deep hypocrisy all around.
Those who had preached fiscal restraint when it came to small welfare programs for the poor now clamored for the world’s largest welfare program.
Those who had argued for the free market’s virtue of “transparency” ended up creating financial systems so opaque that banks could not make sense of their own balance sheets.
And then the government, too, was induced to engage in decreasingly transparent forms of bailout to cover up its largesse to the banks.
Those who had argued for “accountability” and “responsibility” now sought debt forgiveness for the financial sector.
The second important lesson involves understanding why markets often do not work the way they are meant to work.
There are many reasons for market failures.
In this case, too-big-to-fail financial institutions had perverse incentives: if they gambled and succeeded, they walked off with the profits; if they lost, the taxpayer would pay.
Moreover, when information is imperfect, markets often do not work well – and information imperfections are central in finance.
Externalities are pervasive: the failure of one bank imposed costs on others, and failures in the financial system imposed costs on taxpayers and workers all over the world.
The third lesson is that Keynesian policies do work.
Those countries, like Australia, that implemented large, well designed stimulus programs early emerged from the crisis faster.
Other countries succumbed to the old orthodoxy pushed by the financial wizards who got us into this mess.
Whenever an economy goes into recession, deficits appear, as tax revenues fall faster than expenditures.
The old orthodoxy held that one had to cut the deficit – raise taxes or cut expenditures – to “restore confidence.” But those policies almost always reduced aggregate demand, pushed the economy into a deeper slump, and further undermined confidence – most recently when the International Monetary Fund insisted on them in East Asia in the 1990’s.
The fourth lesson is that there is more to monetary policy than just fighting inflation.
Excessive focus on inflation meant that some central banks ignored what was happening to their financial markets.
The costs of mild inflation are miniscule compared to the costs imposed on economies when central banks allow asset bubbles to grow unchecked.
The fifth lesson is that not all innovation leads to a more efficient and productive economy – let alone a better society.
Private incentives matter, and if they are not well aligned with social returns, the result can be excessive risk taking, excessively short-sighted behavior, and distorted innovation.
For example, while the benefits of many of the financial-engineering innovations of recent years are hard to prove, let alone quantify, the costs associated with them – both economic and social – are apparent and enormous.
Indeed, financial engineering did not create products that would help ordinary citizens manage the simple risk of home ownership – with the consequence that millions have lost their homes, and millions more are likely to do so.
Instead, innovation was directed at perfecting the exploitation of those who are less educated, and at circumventing the regulations and accounting standards that were designed to make markets more efficient and stable.
As a result, financial markets, which are supposed to manage risk and allocate capital efficiently, created risk and misallocated wildly.
We will soon find out whether we have learned the lessons of this crisis any better than we should have learned the same lessons from previous crises.
Regrettably, unless the United States and other advanced industrial countries make much greater progress on financial-sector reforms in 2010, we may find ourselves faced with another opportunity to learn them.
The Healing of Taiwan
BANGKOK – Last week, a Taiwanese court sentenced Chen Shui-bien, Taiwan’s president from 2000 until 2008, to life imprisonment for corruption.
Chen had been caught stealing millions of dollars of public funds.
He did not act alone.
His wife (who also received a life sentence), children, and other relatives all helped to hide the stolen loot in overseas accounts.
Taiwan’s former first family turned out to be a den of common thieves.
Chen and his ruling Democratic Progressive Party camouflaged their personal and parochial financial interests behind the patriotic mask of ensuring the survival of a democratic Chinese society in an independent Taiwan. For years, Chen was perceived as a brave David fighting the communist Goliath, and attracted many admirers around the world (including me at one point).
Presenting himself and his Party as champions of democracy, Chen sought to create the impression among Taiwan’s voters that their freedom would perish in the hands of the Kuomintang (KMT) or any party other than his own.
But in fact, it was the late President Chiang Ching-kuo, the son of Generalissimo Chiang Kai-shek, who instituted the unprecedented democratic reforms that paved the way for the eventual electoral triumph of Chen’s formerly banned DPP.
Chen’s personal wealth grew conspicuously shortly after he assumed office, but no one could produce hard evidence of his corruption back then.
His political supporters initially brushed aside the mushrooming rumors of his self-enrichment as opposition KMT propaganda.
But, one by one, most of the DPP’s founding fathers all left the party, accusing Chen of corruption and autocratic behavior even within his own party – which Chen dismissed as sour grapes from people who wanted their share of the political spoils.
In fact, Chen was always more concerned with consolidating his own power than with defending Taiwan.
His most controversial political moves were aimed at his domestic opponents, not the Chinese government on the mainland.
He led a vicious campaign to portray all Taiwanese with mainland Chinese roots, even if born and bred in Taiwan, as untrustworthy carpetbaggers – wai shen ren , or “not native people” – as if they were aliens from a different culture.
This official effort to portray native “Taiwanese” as a separate ethnic group, with scant relation to Chinese culture, was extended to language, as Chen favored using the Fujian dialect in lieu of the Mandarin spoken by 1.3 billion Chinese and taught all over the world.
Meanwhile, the Ministry of Education sought to expunge all references to China in school textbooks.
So insistent was Chen’s campaign that it reminded some people of Mao’s Cultural Revolution, a time when Chinese were divided into “us” and “them.”
Indeed, under Chen’s policy, Taiwan nearly became a rigidly divided society, where “local” and “not native” Chinese lived as potential enemies.
Taiwan ’s sole aboriginal parliamentarian once provided the logical rebuttal to Chen and the DPP, delivering a speech to a packed Congress entirely in his native tongue, which nobody else in the chamber could understand.
The message was obvious: his was the only group with a legitimate claim to being native Taiwanese.
In the end, Chen’s effort was as futile as it was foolish.
The Chinese culture embodied in the daily lives of 23 million Taiwanese of whatever political beliefs was not so easily eliminated by decree.
Moreover, the attempt to do so angered the overwhelming majority of Taiwanese, who finally understood the stupidity of Chen’s policy, particularly how it led to economic stagnation at a time when mainland China was booming.
Indeed, Taiwanese capital and know-how built much of China’s hi-tech industries, and well over a half-million Taiwanese live and work near Shanghai in a virtual replica of Hsin Chu, Taiwan’s Silicon Valley.
But in Chen’s Taiwan, domestic squabbles took precedence over economic development.
Chen invariably blamed the KMT for blocking sensible economic plans, but even some of his moneyed supporters knew better.
When it was finally proved that power had turned Chen into a common criminal, the KMT was voted back into power.
But, while Chen’s legacy of lies and corruption has ended, the reborn KMT under President Ma Ying-jeou has much to do to convince a cynical public that Chen’s ways, reminiscent of KMT’s own darker past, have not become embedded in the system.
Chen’s jail sentence should also serve to remind the DPP that it must become a party for all Taiwanese, “local” or not if it is to have any chance at a revival.
Taiwan’s people know that they cannot prosper as a democracy if ethnic divisiveness is allowed to hold sway.
The Health Challenge in Emerging-Market Cities
OXFORD – Emerging markets – Brazil, China, India, Indonesia, Mexico, Russia, Turkey, and some 15 other countries in Africa, Asia, Europe, and Latin America – account for a rapidly growing share of the world’s population and economy.
But their governments now face one of the major challenges of the twenty-first century: creating public-health solutions that match the speed and scale of urbanization.
The four largest emerging markets account for more than 40% of the world’s population and have a collective GDP of nearly $9 trillion.
It is expected that their economies will overtake those of the G-7 by 2030, and that, by 2050, Brazil, China, India, Mexico, and Russia will, with the US, be the worlds’ dominant economies.
Today, however, these countries’ cities must contend with economic and social issues that are more acute, more urgent, and of a vastly larger scale than those that confronted European and American cities in the nineteenth and twentieth centuries.
A principal challenge is managing the consequences of the explosive growth of urban populations.
More than half of the world’s population now lives in cities.
In my own country, Pakistan, Karachi is growing at a rate of 1,000 people per day.
Massive migration to urban areas, high unemployment, low incomes, poor housing and sanitation, inadequate infrastructure, and social deprivation are shared symptoms of economic hubs where population growth has not been reconciled with cohesive approaches to public-health policy.
As government, business, and academic leaders agreed at a recent meeting held under the auspices of the Emerging Markets Symposium, the promise of emerging-market countries will not be realized if their cities, and consequently their economies, are sick.
A seminal 1995 report on human development by my compatriot, Mahbub ul Haq, stressed the differences between human security viewed as personal security and viewed as national security.
He used human-development indicators rather than aggregate national indicators to measure economic and social progress.
His fundamental proposition was that development is about people.
Nothing is more fundamental to human security than health, which permits human choice, enables human freedom, and underpins human development.
We often focus on health care and emphasize the roles of medicine and physicians.
But health is also about wellness, the security of life, and the capacity to work and learn.
As the economist and philosopher Amartya Sen has put it, “health is a precondition for functional effectiveness across a whole range of human activities.”
Even as the disease burden in emerging-market cities shifts from infectious to chronic illnesses, urban populations remain vulnerable to epidemic disease, childhood diseases born of malnutrition, HIV/AIDS, malaria, tuberculosis, and mental disorders rooted in unemployment and poverty.
They are also vulnerable to death and injury from natural disasters and traffic accidents – and to the health consequences of social disorder and breakdown.
The speed of urban growth and the resulting concentration of poverty have overwhelmed the capacity of some national and municipal governments to provide services – sustainable and affordable housing, clean water and sanitation, and education – essential to urban public health.
But the concentration of people and economic activity in emerging-market cities and megacities does offer invaluable opportunities of scale for building health-related infrastructure and delivering health-care services.
Several steps should be taken.
Emerging-market governments must address critical issues arising from weak coordination within, and between, national and municipal governments on health and health-care policies and programs.
They should consider reforms that include giving city governments the authority, resources, and responsibility that they need to address health and health-care outcomes.
Anticipatory city planning, based on realistic demographic forecasts, patient registers, and health-information systems, as well as participation in urban health-knowledge networks, needs to be implemented.
Proven systems and reforms should be shared between emerging-market cities, and successful new innovations and ideas should be adapted to local conditions.
This includes new and affordable technologies, such as low-cost mobile telephony for use by community-health workers.
In Pakistan, for example, there are 60 million mobile phone subscribers in a population of 160 million.
Mobile telephones can help deliver affordable urban health care by serving as diagnostic tools for taking pictures, and by their usefulness for writing prescriptions and monitoring the condition of patients in low-income areas.
In short, urban public health needs to be reinvented.
The health of emerging-market cities – and countries – demands no less.
The Healthier Poor
Life expectancy in the world’s high-income countries is now 78 years, while it is only 51 years in the least-developed countries, and as low as 40 years in some AIDS-ridden African countries.
For every 1,000 children born in rich countries, seven die before their fifth birthday; for every 1,000 births in the poorest countries, 155 children die before their fifth birthday.
These deaths are not only human tragedies, but also calamities for economic development, systematically reducing economic growth and helping to keep the poorest countries trapped in poverty.
But a growing number of programs around the world are proving that the death and illness of the poor can be reduced sharply and rapidly with targeted investments in public health programs.
Big victories in recent years have come through the Global Fund to Fight AIDS, Tuberculosis, and Malaria.
The Fund, established six years ago, has provided financing to more than 130 countries to scale up their programs against these three killer diseases.
Since then, Global Fund programs have helped roughly one million Africans to receive anti-retroviral medicines to treat AIDS, financed the distribution of around 30 million bed nets to combat malaria, and supported treatment of around two million people with TB.
Malaria can be brought under decisive control through bed nets, indoor spraying of insecticides, and making medicines freely available to poor people in malaria-prone villages.
In just two days last year, Kenya’s government distributed more than two million bed nets.
Similar mass distribution programs have been implemented in Ethiopia, Rwanda, Togo, Niger, Ghana, and other places.
The results are amazing.
The poor use the bed nets effectively, and the burden of malaria comes down rapidly.
Likewise, a campaign led by Rotary International and several partners has nearly eradicated polio.
The number of cases worldwide each year is now in the hundreds, compared to many tens of thousands when the campaign began.
Success is being achieved in even the most remote and difficult places, such as the poverty-stricken states of northern India.
Indeed, India is doing much more with its remarkable National Rural Health Mission (NRHM), which is the single largest mobilization of public health measures in the world.
An astounding half-million young woman have recently been hired as health workers to link impoverished households and public clinics and hospitals, which are being improved, and to increase women’s access to emergency obstetrical care in order to avoid tragic and unnecessary deaths in childbirth.
Another remarkable success in India is the safe home-care of newborn infants in the first few days of life. Currently, an alarming number of newborns die because of infection, mothers’ failure to breastfeed during the first days, or other preventable causes.
By training community health workers, the NRHM has achieved a marked reduction in newborn deaths in Indian villages.
All these programs refute three widely held myths.
The first is that the burden of disease among the poor is somehow inevitable and unavoidable, as if the poor are bound to get sick and die prematurely.
In fact, the poor die of known and identifiable causes that are largely preventable and treatable at very low cost.
There is no excuse for millions of deaths from malaria, AIDS, TB, polio, measles, diarrhea, or respiratory infections, or for so many women and infants to die in or after childbirth.
The second myth is that aid from rich countries is inevitably wasted.
This fallacy is repeated so often by ignorant leaders in rich countries that it has become a major barrier to progress.
The rich like to blame the poor, partly because it lets them off the hook, and partly because it gives them a feeling of moral superiority.
But poor countries are capable of establishing effective public health programs rapidly when they are helped.
Recent success stories have been made possible through a combination of increased spending from poor countries’ budgets, supplemented by aid from rich-country donors.
The third myth is that saving the poor will worsen the population explosion.
But households in the least-developed countries have many children – an average of five per woman – partly because fear of high childhood death rates leads them to overcompensate with large families.
When childhood death rates come down, fertility rates tend to decline even more, since families are now confident that their children will survive.
The result is slower population growth.
It is time to make good on a basic global commitment – that everybody, poor and rich alike – should have access to basic health services.
If just 0.1% of rich-world income were devoted to life-saving health care for the poor, it would be possible to raise life expectancy, decrease child mortality, save mothers in childbirth, slow population growth, and spur economic development throughout the poor world.
The success stories in public health for the poor are multiplying.
Given the low cost and the huge benefits of supporting such efforts, there is no excuse for inaction.
The Health of American Politics
CAMBRIDGE – When the United States Congress approved President Barack Obama’s plan to extend health-care coverage to nearly all Americans, it marked the most important social legislation the country had seen since the 1960’s.
While Republican opposition remains strong, the law was a major domestic political victory for Obama.
Its enactment also has broader implications, because, like Obama’s election in 2008, it addresses questions about the health of America’s political system.
After all, it was once widely asserted that an African-American without a political machine could not become president.
Recently, many observers argued that America’s gridlocked political system would prevent the country from translating its abundant power resources into leadership.
As one perceptive journalist recently argued, “America still has the means to address nearly any of its structural weaknesses… energy use, medical costs, the right educational and occupational mix to rebuild a robust middle class.
That is the American tragedy of the early 21st century: a vital and self-renewing culture that attracts the world’s talent and a governing system that increasingly looks like a joke.”
Power conversion – translating power resources into effective influence – is a long-standing problem for the US.
The Constitution is based on an eighteenth-century liberal view that power is best controlled by fragmentation and countervailing checks and balances.
In foreign policy, the US Constitution has always invited the president and Congress to struggle for control.
Strong economic and ethnic pressure groups fight for their self-interested definitions of the national interest.
Congress always pays attention to squeaky wheels, and special interests press it to legislate foreign-policy tactics, codes of conduct, and sanctions for other countries.
As Henry Kissinger once noted, “what is presented by foreign critics as America’s quest for domination is very frequently a response to domestic pressure groups.”
The cumulative effect, Kissinger continued, “drives American foreign policy toward unilateral and bullying conduct.
For, unlike diplomatic communications, which are generally an invitation to dialogue, legislation translates into a take-it-or-leave-it prescription, the operational equivalent of an ultimatum.”
There is also a concern about the decline of public confidence in US institutions.
In 2010, only one-fifth of Americans said that they trusted the government to do what is right all or most of the time.
As former Clinton administration official William Galston put it, “trust is never more important than when citizens are asked to make sacrifices for a brighter future.
Mistrust of the government making this request could be the harbinger – even the cause – of national decline.”
The US was founded in part on mistrust of government, and a long tradition traceable to Thomas Jefferson holds that Americans should not worry too much about low levels of confidence in government.
When asked not about day-to-day governance but about the underlying constitutional framework, the public is positive.
Indeed, if you ask Americans where the best place to live is, 80% say the US.
If asked whether they like their democratic system of government, 90% say yes.
Few people believe that the system is rotten and must be overthrown.
Some aspects of the current mood are probably cyclical, while others represent discontent with political bickering and deadlock.
True, when compared to the recent past, party politics has become more polarized.
But nasty politics is nothing new, and much of the evidence for loss of trust in government comes from polling data, which weighs responses that are sensitive to the way questions are asked.
Moreover, the sharpest decline occurred more than four decades ago, in the late 1960’s and early 1970’s.
This does not imply that expressions of declining confidence in government are not problematic.
Whatever the reasons for the decline, if the public becomes unwilling to provide such crucial resources as tax dollars, or to comply voluntarily with laws, or if bright young people refuse to go into government service, governmental capacity will be impaired and people will become more dissatisfied with it.
A climate of distrust can also trigger extreme actions by deviant members of the population, such as the bombing of a federal office building in Oklahoma City in 1995.
So far, such behavioral results do not seem to have materialized.
The Internal Revenue Service sees no increase in tax cheating.
By many accounts, government officials have become less corrupt than in earlier decades, and the World Bank gives the US a high score (above the 90th percentile) on “control of corruption.”
Moreover, after a 40-year drop in voting rates in presidential elections, from 62% to 50%, the decline stopped in 2000, and returned to 58% in 2008.
Citizens’ behavior does not seem to have changed as dramatically as have their responses to poll questions.
Three-quarters of Americans feel connected to their communities, and say the quality of life there is excellent or good; 40% say working with others in their community is the most important thing that they can do.
In recent years, American politics and political institutions have become more polarized than the distribution of opinions in the American public would suggest.
The situation was exacerbated by the economic downturn after 2008.
As an editorial in The Economist recently concluded, “America’s political system was designed to make legislation at the federal level difficult, not easy.
Its founders believed that a country the size of America is best governed locally, not nationally….So the basic system works; but that is no excuse for ignoring areas where it could be reformed,” such as the gerrymandered safe seats in the House of Representatives and the blocking procedures of Senate rules and filibusters.
Whether the American political system can reform itself and cope with such problems remains to be seen.
Obama’s health-care victory, like his 2008 election, suggests that America’s political system is not as broken as critics who draw analogies to the fall of Rome or other empires would have us believe.
The Hedge Fund Hegemon
The recent volatility in global capital markets should give pause to those who say German leaders, who have been arguing for greater transparency in global hedge funds, are just sore losers US and UK policymakers, in particular, say the German whining is nonsense, and that hedge funds, along with other new age financial entities such as private equity firms are key innovators in today’s, global economy.
This debate is at the cutting edge of today’s globalization, yet it is clouded by a healthy dose of national self-interest.
With New York and London the centers of global finance, the United States and Britain have enormous profits at stake.
So it is convenient for them to downplay the likelihood that risks to the world’s financial system will be spread more evenly than the benefits.
German leaders, by contrast, must reckon with a populace that is deeply resistant to rapid change, particularly when it involves job cuts.
Many German workers believe, as one trade unionist recently lamented, that takeovers are being driven by a philosophy of “buy it, strip it, and flip it.”
To be sure, the profits currently being earned by the leading financial firms are dizzyingly high.
Goldman Sachs, the venerable Wall Street firm at the epicenter of financial globalization, paid more than $16 billion dollars in compensation to its 25,000 employees in 2006, and spun out another $9 billion for its shareholders – a total that is greater than the annual income of most African countries.
The spectacular profits on Wall Street and elsewhere in the financial industry also have a huge macroeconomic impact.
The US is running an $800 billion annual trade deficit in traditional goods and services.
Yet, because Americans consistently earn a higher return on their investments abroad than foreigners earn on their US investments, US debt is rising at perhaps only half the rate that it might otherwise.
Even we economists who believe that global financial innovation yields huge net benefits must admit that today’s hedge fund boom is becoming like the tech bubble.
My own recent experience is perhaps emblematic.
An “Eddie” in Los Angeles sent me an email asking if I wanted to serve on the advisory board to his new hedge fund.
Eddie’s accompanying flattery aside, I would normally trash such a letter, figuring it was a fraud or scam of some kind.
However, my curiosity was piqued when I noticed a missing attachment outlining the firm’s planned investment strategy.
I shot a line back, requesting the missing attachment.
I should have stifled myself: Eddie, figuring he had a live one, sent the missing attachment with a note saying “We are so glad someone of your stature might be interested and, by the way, if you have any friends or colleagues who might be interested, could you please forward this email to them also?”
The point is that in today’s go-go ultra-high liquidity environment, Eddie was probably successful in raising money with similar techniques.
Of course, roughly 1,000 of the world’s 9,000 hedge funds went out of business last year.
The big question is whether this Wild West mentality poses broader risks to the global financial system, particularly given circumstances where a large number of firms are all collectively making the same bet.
If they lose, a long string of bankruptcies can cut deeply into banking systems that had generated huge profits by lending to these same hedge funds.
At the moment, the most glaring weakness is the so-called “yen carry trade.”
Hedge funds have borrowed hundreds of billions of dollars at ultra-low interest rate in Japan, and invested the proceeds in countries like Brazil and Turkey, where interest rates are high.
As long as the yen remains weak, this investment strategy will be a money machine.
But if the yen appreciates sharply, as it easily could given Japan’s huge current account surplus, some hedge funds will suffer huge capital losses and the yen carry trade will implode.
And, while today’s main risk is the yen, in a couple months it could be something completely different.
So pressure outside the US and Britain to put the hedge fund industry on a tighter regulatory leash is hardly surprising.
The Germans, for example, want to reduce risk by forcing hedge funds to adhere to stricter reporting requirements.
The funds respond to such proposals by arguing that if they are required to reveal their investment strategies, they will lose their incentive to innovate, and a recent US government report – a multi-agency effort headed by Treasury Secretary Hank Paulson (formerly of Goldman Sachs) – supports that position.
Greater regulation would be a mistake, the report argues, because the global economy’s best defense against systemic risk is the exercise of common sense and “due diligence” by each and every person who invests or interacts with hedge funds.
In other words, the US is telling investors to carry their own guns, because, as in the Wild West, there might not be a sheriff around to help.
But frankly, as we are reminded by recent events, it is hard to see how at least a small increase in transparency can hurt.
The Germans, in chairing the G8 this year, should not surrender on this issue.
No country wants to put itself at the mercy of the likes of Eddie.
The Hero of His Time
Boris Yeltsin was utterly unique.
Russia’s first democratically elected leader, he was also the first Russian leader to give up power voluntarily, and constitutionally, to a successor.
But he was also profoundly characteristic of Russian leaders.
Using various mixtures of charisma, statecraft, and terror, Peter the Great, Catherine the Great, Alexander II, Peter Stolypin (the last tsar’s prime minister), Lenin, and Stalin all sought to make Russia not only a great military power, but also an economic and cultural equal of the West.
Yeltsin aimed for the same goal.
But he stands out from them in this respect: he understood that empire was incompatible with democracy, and so was willing to abandon the Soviet Union in order to try to build a democratic order at home.
At the height of Yeltsin’s career, many Russians identified with his bluntness, impulsiveness, sensitivity to personal slight, even with his weakness for alcohol.
And yet in the final years of his rule, his reputation plunged.
Only in the last few months of his second presidential term, after he launched the second war in Chechnya in September 1999, did he and his lieutenants regain some legitimacy in the eyes of the Russian public, while causing revulsion among any remaining Western admirers.
Despite his caprices, however, Yeltsin kept Russia on a course of broad strategic co-operation with America and its allies.
Although he opposed America’s use of force against Iraq and Serbia in the 1990’s, his government never formally abandoned the sanctions regime against either country.
Moreover, no nuclear weapons were unleashed, deliberately or accidentally, and no full-scale war of the kind that ravaged post-communist Yugoslavia broke out between Russia and any of its neighbors, although several of them were locked in internal or regional conflict in which Russia’s hand was visible.
The tasks that faced Yeltsin when he attained power in 1991 were monumental.
At several crucial moments, he established himself as the only person who could rise to the challenges of transforming Russia from a dictatorship into a democracy, from a planned economy into a free market, and from an empire into a medium-ranked power.
In 1992, as the emerging Russian Federation teetered on the brink of economic and monetary collapse, he opted for radical reform, prompting a backlash from vested interest groups.
In the years that followed, he would tilt toward liberal economics whenever he felt powerful enough to do so.
Yeltsin was quintessentially a product of the Soviet system, which makes his turn to democracy and the free market, though imperfect, even more miraculous.
The son of a poor building worker, he had a meteoric rise through communist ranks to become party boss in the industrial city of Sverdlovsk (now Yekaterinburg) in the Urals.
Unlike most other party leaders, he was good at talking to ordinary people, a skill that helped him win support and then power later, but he also showed no sign of questioning the Marxist-Leninist gobbledygook that he was required to recite at public events.
It was only after Mikhail Gorbachev summoned Yeltsin to Moscow in 1985 that he began to differentiate himself from dozens of other senior party apparatchiks.
Sensing the bitter frustration of Moscow’s middle class-in-waiting, Yeltsin quickly gained a reputation as a harsh, if not always coherent, critic of the party’s old guard.
Campaigners for democracy admired Yeltsin’s struggle against the conservatives in the politburo – especially after he was forced out of the party’s inner circle in November 1987.
Determined to outbid Gorbachev as a reformer, he persuaded liberals to overcome their distrust of his provincial manners.
They gave him lessons in democratic theory, while he gave them tactical advice.
As the Soviet Union steadily disintegrated, with virtually all of its 15 republics straining at the leash, Yeltsin gained the leadership of the largest – the Russian Federation – which placed him in a tactical alliance with independence campaigners in Ukraine, the Baltic states, and Georgia.
By June 1991, after quashing a series of challenges to his leadership, he became the first elected president of Russia; two months later, real power fell into his hands, after the failed putsch against Gorbachev of August 1991 by conservatives seeking to prevent the Soviet Union’s disintegration.
For most Westerners and many Russians, his finest hour came on August 19th that year, when he stood on a tank outside the Russian parliament and defied the hardliners who had seized power.
But Yeltsin himself never succeeded in fully throwing off the intellectual shackles of the past.
As president, he talked of economic performance as if it could be improved by decree.
Like most Russians, he wanted the material advantages of capitalism, but had little respect or understanding for the rule of law and dispersion of power, which makes capitalist institutions work.
Nevertheless, for most of his presidency, Yeltsin kept alive – albeit with many tactical retreats – the goal of economic reform.
At some level, he sensed that Russia’s potential could be unleashed only if the government either faced down, or bought off, the special interests – military, industrial, and agricultural – that stood in the way.
The economic orthodoxy pursued after the collapse of 1998 laid the groundwork for today’s sustained Russian boom.
Yeltsin’s tragedy, and Russia’s, was that, when the country needed a leader with vision and determination, it found an agile political operator instead.
By not permitting Russia to disintegrate into anarchy or leading it back to authoritarianism, Yeltsin kept the way open for such a leader to one day emerge.
Unfortunately, that man is not his handpicked successor, Vladimir Putin, who has only perpetuated the vicious cycles of Russian history.
The Hidden Costs of Money
PRINCETON – When people say that “Money is the root of all evil,” they usually don’t mean that money itself is the root of evil.
Like Saint Paul, from whom the quote comes, they have in mind the love of money.
Could money itself, whether we are greedy for it or not, be a problem?
Karl Marx thought so.
In The Economic and Philosophical Manuscripts of 1844, a youthful work that remained unpublished and largely unknown until the mid-twentieth century, Marx describes money as “the universal agent of separation,” because it transforms human characteristics into something else.
A man may be ugly, Marx wrote, but if he has money, he can buy for himself “the most beautiful of women.”
Without money, presumably, some more positive human qualities would be needed.
Money alienates us, Marx thought, from our true human nature and from our fellow human beings.
Marx’s reputation sank once it became evident that he was wrong to predict that a workers’ revolution would usher in a new era with a better life for everyone.
So if we had only his word for the alienating effects of money, we might feel free to dismiss it as an element of a misguided ideology.
But research by Kathleen Vohs, Nicole Mead, and Miranda Goode, reported in Science in 2006, suggests that on this point, at least, Marx was onto something.
In a series of experiments, Vohs and her colleagues found ways to get people to think about money without explicitly telling them to do so.
They gave some people tasks that involved unscrambling phrases about money.
With others, they left piles of Monopoly money nearby.
Another group saw a screensaver with various denominations of money.
Other people, randomly selected, unscrambled phrases that were not about money, did not see Monopoly money, and saw different screensavers.
In each case, those who had been led to think about money – let’s call them “the money group” – behaved differently from those who had not.
When given a difficult task and told that help was available, people in the money group took longer to ask for help.
When asked for help, people in the money group spent less time helping.
When told to move their chair so that they could talk with someone else, people in the money group left a greater distance between chairs.
When asked to choose a leisure activity, people in the money group were more likely to choose an activity that could be enjoyed alone, rather than one that involved others.
Finally, when people in the money group were invited to donate some of the money they had been paid for participation in the experiment, they gave less than those who had not been induced to think about money.
Trivial reminders of money made a surprisingly large difference.
For example, where the control group would offer to spend an average of 42 minutes helping someone with a task, those primed to think about money offered only 25 minutes.
Similarly, when someone pretending to be another participant in the experiment asked for help, the money group spent only half as much time helping her.
When asked to make a donation from their earnings, the money group gave just a little over half as much as the control group.
Why does money makes us less willing to seek or give help, or even to sit close to others?
Vohs and her colleagues suggest that as societies began to use money, the necessity of relying on family and friends diminished, and people were able to become more self-sufficient. “In this way,” they conclude, “money enhanced individualism but diminished communal motivations, an effect that is still apparent in people’s responses today.”
That’s not much of an explanation of why being reminded of money should make so much difference to how we behave, given that we all use money everyday.
There seems to be something going on here that we still don’t fully understand.
I am not pleading for a return to the simpler days of barter or self-sufficiency.
Money enables us to trade – and thus to benefit from each other’s special skills and advantages.
Without money, we would be immeasurably poorer, and not only in a financial sense.
But now that we are aware of the isolating power that even the thought of money can have, we can no longer think of money’s role as being entirely neutral.
If, for example, a local parents’ organization wants to build a children’s playground, should it ask its members to do the work on a voluntary basis, or should it launch a fundraising campaign so that an outside contractor can be employed?
Harvard economist Roland Fryer’s proposal to pay poor students for doing well at school is another area where using money is open to question.
If money were neutral, this would be just a question of whether the benefits of using money outweigh the financial costs.
Often, they will – for example, if the parents lack the skills to build a good playground.
But it would be a mistake to assume that allowing money to dominate every sphere of life comes without other costs that are difficult to express in financial terms.
The Hidden Future of the US Economy
CAMBRIDGE – Just how bad is the outlook for the United States’ economy?
Unfortunately, you cannot tell from the forecasts.
These days, it is common to read forecasts predicting that the US economy will grow at a 3% annual rate in the coming year.
But just what does that mean?
The forecaster is not saying that he or she is confident that growth will be exactly 3%.
Every forecaster recognizes that the actual growth rate may be higher or lower than the number that he states.
There is a distribution of possible growth rates, and the forecaster is telling us just one of the outcomes that he can contemplate.
But if a forecaster tells us that he “expects” a growth rate of 3%, does that mean that he thinks that it is as likely to be above 3% as it is to be below 3% – the “median,” as he sees it, of the distribution of possible growth rates?
Or could it mean that the he thinks the most likely growth rate will be close to 3% (the “modal” value), even though he may believe that it is much more likely to be less than that value than to be greater?
Many forecasters currently believe that there is a significant probability that the economy will slump during the next 12 months – a “double dip” in the expansion process.
It is possible for them to hold that view and still forecast 2% growth for the next 12 months as the most likely outcome or the “median” of their probability distribution.
Any decision maker who depends on forecasts – a businessman, an investor, or a government official – needs to know the probability of very low or very high growth rates, as well as the median forecast.
But that information remains hidden.
Some surveys of forecasts report the distribution of the forecasts of the different individuals being surveyed.
We might read that the average forecast of 20 different forecasters is 2.8%, with the five highest forecasts above 3.2% and the five lowest forecasts below 2.5%.
While that is useful information, it does not say anything about the extent to which each forecaster believes that growth might turn out to be less than 1%, or even less than zero.
Recent US data have clearly raised the probability that the economy will run out of steam and decline during the next 12 months.
The key reason for increased pessimism is that the government stimulus programs that raised spending since the summer of 2009 are now coming to an end.
As they have wound down, spending has declined.
The government programs failed to provide the “pump-priming” role that was intended.
They provided an early spark, but it looks like the spark did not catch.
For example, a tax subsidy for car purchases caused GDP to rise in the third quarter of 2009, with more than two-thirds of the increase attributable to motor-vehicle production.
But now that the subsidies have ended, the level of both sales and production has declined.
A recent survey of consumers reported the lowest level of intended car buying in more than 40 years.
Although annual GDP growth was 3% in the first quarter of this year, almost all of it reflected inventory accumulation – some of which, no doubt, was unwanted build-up caused by disappointing sales.
When inventory accumulation is excluded, first-quarter growth of “final sales” was just 0.8% in annual terms – and 0.2% compared to the fourth quarter of 2009.
The second quarter benefited from a surge in home purchases, as individuals rushed to take advantage of the tax subsidy for home buyers that expired in April.
But what will happen in the third quarter and beyond now that that program has ended?
While it would be rash to forecast a double dip as the most likely outcome for the economy during the rest of this year, many of us are raising the odds that we attribute to such a downturn. Unfortunately, those forecasts of what might happen remain hidden.
The Hidden Purposes of High Finance
BERKELEY – No one questions the usefulness of “low” finance: the ability to use checks, banknotes, and credit cards rather than having to cart around chests of silver, scales, and reagents to assay purity, and needing armed guards to protect the silver – and more guards to watch the first set of guards – has obvious efficiencies.
So does the ability of households to borrow and lend in order not to be forced to match income and expenditure every day, week, month, or year.
But what use is “high” finance?
Economists’ conventional description depicts high finance as providing us with three types of utility. First, it allows for many savers to pool their wealth to finance large enterprises that can achieve the efficiencies of scale possible from capital-intensive modern industry.
Second, high finance provides an arena to curb the worst abuses by managers of large corporations.
Shareholder democracy simply does not work, but managers’ fear that if the stock price drops too low they will be out on their ears provides a useful restraint.
Finally, high finance allows for portfolio diversification, so that individual investors can seek high expected returns without being forced to assume large, idiosyncratic risks of bankruptcy and poverty.
But these are the benefits of high finance as they apply to the ideal world of economists – that is, a world of rational utilitarian actors who are skilled calculators of expected utility under uncertainty, who are masters of dynamic programming, and who breathe stochastic calculus in their daily life.
We do not live in such a world.
Economists have spent their lives attempting to evolve theories that would account for how salient features of reality might emerge if we did live in their ideal world, but since we don’t, their theoretical enterprise is of doubtful utility.
It is like describing how one could bake a delicious wedding cake using only honey, bicarbonate of soda, and raw eggplant.
If we take the world as it really is, we quickly see that high finance performs two further tasks that advance our collective economic welfare.
It induces us to save, accumulate, and invest by promising us safe and liquid investments even in extraordinary times.
It also induces us to save and invest as a prerequisite to indulging our love of gambling, and as a byproduct of it.
It is a fact that we are much happier saving and accumulating, and that we are much more likely to do so when we think that the resources we have saved and accumulated are at hand.
It is also true that when we invest our wealth – in Pfizer’s intellectual property, factories in Shenzhen, worldwide distribution networks, or shopping malls in Atlanta – it is not , in fact, at hand.
Our invested wealth can only be made to appear liquid to any one of us, and only if there is no general shift in our collective desire for liquidity.
And it is also a fact that we are happier saving and accumulating if we receive positive and negative feedback on our decisions on a time scale that allows us to believe that we can do better next time by altering our strategy – hence marketwatch.com and CNN/Money.
Of course investors who believe that their wealth is securely liquid, and that they are adding value for themselves by buying and selling are suffering from a delusion.
Our financial wealth is not liquid in an emergency.
And when we buy and sell, we are enriching not ourselves, but the specialists and market makers.
But we benefit from these delusions.
Psychologically, we are naturally impatient, so it is good for us to believe that our wealth is safe and secure, and that we can add to it through skillful acts of investment, because that delusion makes us behave less impatiently.
And, collectively, that delusion boosts our savings, and thus our capital stock, which on turn boosts all of our wages and salaries as well.
Seventy-three years ago, John Maynard Keynes thought about the reform and regulation of financial markets from the perspective of the first three purposes and found himself “moved toward... mak[ing] the purchase of an investment permanent and indissoluble, like marriage...”
But he immediately drew back: the fact “that each individual investor flatters himself that his commitment is ‘liquid’ (though this cannot be true for all investors collectively) calms his nerves and makes him much more willing to run a risk...”
Moreover, for Keynes, “[t]he game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll...”
It is for these reasons that we have seemed frozen for the past generation or two whenever we have contemplated reforming our system of financial regulation.
And it is why, even in the face of a severe financial crisis, we remain frozen today.
The High Cost of Feeling Low
Depression is, according to a World Health Organization study, the world’s fourth worst health problem, measured by how many years of good health it causes to be lost.
By 2020, it is likely to rank second, behind heart disease.
Yet not nearly enough is being done to treat or prevent it.
The study, led by Saba Moussavi and published last month in The Lancet , also revealed that depression has more impact on the physical health of those who suffer from it than major chronic diseases like angina, diabetes, arthritis, and asthma.
Yet in the same issue of The Lancet , Gavin Andrews and Nickolai Titov, researchers at the University of New South Wales, reported that Australians with depression are far less likely to receive an acceptable level of care than patients with arthritis or asthma.
This pattern is consistent with reports from other developed nations.
Treating depression is often, if not always, effective, and without it, those who suffer from depression cannot live happy, fulfilling lives.
But, even in narrow cost-benefit terms, it makes sense to spend more on treating depression.
A study of 28 European countries found that depression cost them €118 billion in 2004, or 1% of their combined GDP.
The cost of treating depression accounted for only 9% of this huge sum.
A much larger share was lost productivity.
Richard Layard, of the Centre for Economic Performance at the London School of Economics, has said that mental illness is Britain’s biggest social problem, costing 1.5% of GDP.
He estimates that while treatment may cost £750 per patient over two years, the result is likely to be an extra month of work, worth £1880.
Lord Layard advocates more psychotherapy rather than drug treatment.
In the United States, a research team headed by Philip Wang of the National Institute of Mental Health in Rockville, Maryland, reported similar results last month in the Journal of the American Medical Association .
Wang’s team conducted a randomized controlled trial that showed that depression screening – to find workers who could benefit from treatment – was cost-effective, reducing health insurance costs to employers, decreasing absence due to sickness, and increasing job retention and productivity.
Depression is also costly in developing countries.
In China, according to a recent article by Teh-wei Hu and colleagues in Social Psychiatry and Psychiatric Epidemiology , depression costs 51 billion renminbi, or more than $6 billion, per year at 2002 prices.
A few years ago, a research team led by Vikram Patel reported in the British Medical Journal that depression is common in Zimbabwe, where it was often known by a Shona word that means “thinking too much.”
Around the world, many primary care physicians underestimate the seriousness of depression.
Many of them lack adequate training in recognizing mental illness, and may not be up to date with treatments options.
Patients, too, may fail to seek treatment, because mental illness still carries a stigma that can make it harder to acknowledge than a physical illness.
The problem has been aggravated, in the US at least, by the refusal of some health insurance policies to cover treatment for mental illness.
Thus, the US Senate’s recent approval of the “Mental Health Parity Act” is a significant step forward.
The legislation, which still has to pass through the House of Representatives, would require health insurance plans provided by employers to cover treatment for mental illness at a level similar to coverage for general health care.
(Unfortunately, the legislation will do nothing for the 47 million Americans who have no health insurance at all.)
Depression is an individual tragedy that is multiplied more than 100 million times worldwide.
So, while we can and should do much better at treating it, perhaps the more significant question is whether we can learn to prevent it.
Some depression appears to be genetic, in which case genetic therapy may ultimately offer a solution. But much mental illness appears to depend on environmental factors.
Perhaps we need to focus on aspects of living that have a positive effect on mental health.
Many recent studies show that spending time relaxing with family and friends contributes to how happy people are with their lives, while long working hours, and especially long commuting times, contribute to stress and unhappiness.
Of course, relaxed and happy people can still become depressed, and stressed and unhappy people may not be depressed, but it is a reasonable hypothesis that happier people are less likely to become depressed.
LaSalle Leffall, who chaired the President’s Cancer Panel, wrote to President George W. Bush in August, saying, “We can and must empower individuals to make healthy choices through appropriate policy and legislation.” If that is true for encouraging healthy diets and discouraging smoking, it is no less true for lifestyle choices that promote greater mental health.
Governments can’t legislate happiness or ban depression, but public policy can play a role in ensuring that people have time to relax with friends, and pleasant places to do it.
The Historical Significance of China\u0027s Entry to the WTO
CAMBRIDGE: Yesterday, America joined Europe in agreeing on the principles of economic reform in China that will permit China to enter the World Trade Organization.
This sets the stage for China's membership in the WTO by the end of 2000.
China's addition to the WTO brings 1.3 billion people - more than one-fifth of humanity - formally into the mainstream of the international economy.
This is an epochal change of direction for China's relations to the world that trace back to events five centuries ago.
For economists and historians with a long view, China's situation in the world poses a puzzle.
Simply put, why is China so poor today?
GNP per person averages around $3,200, compared with around $25,000 on average in the US and Europe, when such calculations are made at a standardized set of prices.
The puzzle is that, from 550 to 1500 AD, Chinese civilization once led the world in technology and probably in economic well-being.
China's relative decline for the last 500 years is one of the greatest themes of world history.
Turn the clock back six centuries, to the early 1400s.
China could boast technological wonders - the compass, navigational abilities, the printing press, fireworks and explosives - that barely touched the rest of the world.
China's state had been unified for more than 1500 years; its statecraft was considerably sophisticated.
Chinese fine arts, exemplified by its porcelains that would be craved by the world for centuries to come, were remarkable by the standards of any age.
Perhaps the greatest symbol of these accomplishments in the early years of the 15th century were the great naval expeditions of the Chinese fleet, in which ships of monumental proportion sailed the routes of Southeast Asia, to India, and even to East Africa during the years 1405 to 1431.
Archeologists today find Chinese porcelain shards in Kenya and Tanzania.
Then China's dominance faded.
While economists, historians, political theorists, and demographers, can all add something to the puzzle, my view is that, more than anything, China turned its back to the world.
In the 1430s, China abandoned naval expeditions, dismantling its fleet.
The imperial court, under a financial squeeze and threatened by nomadic incursions from Central Asia, canceled the naval expeditions in the 1430s, moved the capital inland to Beijing, and began isolating China for centuries to come.
Decree followed decree, eliminating the shipyards, closing ports, and forbidding Chinese to leave the mainland.
Trade and exchange continued only at a trickle.
China unilaterally abandoned its role in the world.
By the time Adam Smith wrote AThe Wealth of Nations@(1776) he could accurately describe China as a rich civilization held back by archaic laws of trade isolation.
He noted that the Chinese held foreign commerce Ain the utmost contempt.@ While China retreated into a shell, Europe exploded on the world scene.
Smith described the European discoveries of the sea passage to Asia (around the southern tip of Africa) and the Americas as the two greatest events in world history.
Globalization was born, but it was Europe, not China, which grabbed the lead.
China squandered its economic and technological potential by itself, not because of external force.
By the time Europe and China crossed paths in the Opium Wars of 1839-42, a technologically superior Europe had vast military advantages and so forced China into a series of unilateral, humiliating concessions.
China's imperial state and society were destabilized by European incursions.
The imperial dynasty collapsed in 1911, under external pressures and internal demands for change.
Change, however, did not come smooth.
The dynasty's collapse was followed by civil strife, Japan's invasion of China in the 1930s, World War II, civil war, and thirty years of disastrous and cruel dictatorship under Mao Zedong and the Chinese Communist Party.
It wasn't until 1978, under Deng Xiaoping, that China opened up to the world.
Of course, Deng was more interested in economic reform than political liberalization, but the liberalization of the 1980s and 1990s was extraordinary by any standard, essentially the first time in several centuries that a sovereign China willingly adopted policies of open trade with the rest of the world.
Admission of China to the WTO will consolidate the reforms started in 1978, as China formally accepts open trade and shared rules of international economic life, as a sovereign and equal member of the international community.
Critics of free trade with China say that its political system remains authoritarian.
They have a point, but not a decisive one.
China is indeed burdened by an authoritarian political system, one that has been authoritarian for two millennia.
Indeed, only an authoritarian state could have closed China by edict for several centuries, and only an authoritarian state could have led China into the disasters of man-made famine, failed economic policy, and cultural destruction that marked Mao's rule.
China's turn towards openness is making deep inroads, creating a more open, free, and vibrant society than in the past.
China's young generation, and the ones that will follow, will want and demand political freedoms to accompany their increased economic opportunities and participation in world events.
In the coming decades China's opening to the world will also prove to be an opening to Chinese democracy, good for China and good for the rest of us as well.
The History at the End of History
Fifteen years ago in my book The End of History and the Last Man I argued that, if a society wanted to be modern, there was no alternative to a market economy and a democratic political system.
Not everyone wanted to be modern, of course, and not everyone could put in place the institutions and policies necessary to make democracy and capitalism work, but no alternative system would yield better results.
While the “ End of History ” thus was essentially an argument about modernization, some people have linked my thesis about the end of history to the foreign policy of President George W. Bush and American strategic hegemony.
But anyone who thinks that my ideas constitute the intellectual foundation for the Bush administration’s policies has not been paying attention to what I have been saying since 1992 about democracy and development.
President Bush initially justified intervention in Iraq on the grounds of Saddam’s programs to develop weapons of mass destruction, the regime’s alleged links to al-Qaida, as well as Iraq’s violation of human rights and lack of democracy.
As the first two justifications crumbled in the wake of the 2003 invasion, the administration increasingly emphasized the importance of democracy, both in Iraq and in the broader Middle East, as a rationale for what it was doing.
Bush argued that the desire for freedom and democracy were universal and not culture-bound, and that America would be dedicated to the support of democratic movements “with the ultimate goal of ending tyranny in our world.”
Supporters of the war saw their views confirmed in the ink-stained fingers of Iraqi voters who queued up to vote in the various elections held between January and December 2005, in the Cedar Revolution in Lebanon, and in the Afghan presidential and parliamentary elections.
Inspiring and hopeful as these events were, the road to liberal democracy in the Middle East is likely to be extremely disappointing in the near to medium term, and the Bush administration’s efforts to build a regional policy around it are heading toward abject failure.
To be sure, the desire to live in a modern society and to be free of tyranny is universal, or nearly so.
This is demonstrated by the efforts of millions of people each year to move from the developing to the developed world, where they hope to find the political stability, job opportunities, health care, and education that they lack at home.
But this is different from saying that there is a universal desire to live in a liberal society – that is, a political order characterized by a sphere of individual rights and the rule of law.
The desire to live in a liberal democracy is, indeed, something acquired over time, often as a byproduct of successful modernization.
Moreover, the desire to live in a modern liberal democracy does not translate necessarily into an ability to actually do so.
The Bush administration seems to have assumed in its approach to post-Saddam Iraq that both democracy and a market economy were default conditions to which societies would revert once oppressive tyranny was removed, rather than a series of complex, interdependent institutions that had to be painstakingly built over time.
Long before you have a liberal democracy, you have to have a functioning state (something that never disappeared in Germany or Japan after they were defeated in World War II).
This is something that cannot be taken for granted in countries like Iraq.
The End of History was never linked to a specifically American model of social or political organization.
Following Alexandre Kojève, the Russian-French philosopher who inspired my original argument, I believe that the European Union more accurately reflects what the world will look like at the end of history than the contemporary United States.
The EU’s attempt to transcend sovereignty and traditional power politics by establishing a transnational rule of law is much more in line with a “post-historical” world than the Americans’ continuing belief in God, national sovereignty, and their military.
Finally, I never linked the global emergence of democracy to American agency, and particularly not to the exercise of American military power.
Democratic transitions need to be driven by societies that want democracy, and since the latter requires institutions, it is usually a fairly long and drawn out process.
Outside powers like the US can often help in this process by the example they set as politically and economically successful societies.
They can also provide funding, advice, technical assistance, and yes, occasionally military force to help the process along.
But coercive regime change was never the key to democratic transition.
The History Man
President George W. Bush is not generally known for his firm grasp of history.
But this has not stopped him from using history to justify his policies.
In a recent speech to American war veterans in Kansas City, he defended his aim to “stay the course” in Iraq by pointing out the consequences of the American withdrawal from the war in Vietnam.
He also mentioned the post-1945 occupation of Japan and the Korean War as success stories in America’s efforts to bring freedom to Asia, and by extension, the world.
Historians, Democrats, and other Bush critics were quick to denounce his speech, particularly his reference to Vietnam, as self-serving, dishonest, and inaccurate.
Yet, for once, Bush actually hit upon a historical analogy that was true.
Of course, the Vietnam War was different in almost every respect from the war in Iraq.
Ho Chi Minh was not Saddam Hussein.
In Vietnam, the United States was not invading a country, but defending a corrupt authoritarian ally against an aggressive Communist regime.
But what Bush actually said was that the US withdrawal from Indochina was followed by a bloodbath in Cambodia, and brutal oppression in Vietnam.
A withdrawal from Iraq, he implied, would result in similar bloodshed, or worse.
That is almost certainly true.
However, what Bush did not say is that neither the mass murders in Southeast Asia, nor the potential mass murders in Iraq, would have occurred without the chaos caused by US intervention.
But what about the Asian success stories, in Japan, Korea, and other places under American protection?
Was Bush right to boast of America’s role in giving these countries their freedom?
As he put it to the Kansas City veterans: “Will today’s generation of Americans resist the allure of retreat, and will we do in the Middle East what the veterans in this room did in Asia?”
What exactly did the US do in Asia?
The first few years of the occupation of Japan were indeed a remarkable success for democracy.
Instead of helping Japanese of the old school restore an authoritarian system, General Douglas MacArthur’s administration helped Japanese liberals restore and improve their prewar democratic institutions.
Trade unions were given more clout.
Women got the vote.
Civil liberties were boosted.
And the semi-divine Japanese Emperor was brought down to earth.
Much of the credit for this goes to the Japanese themselves and to the idealistic, left-leaning New Dealers in MacArthur’s government who supported them.
When China fell to Mao’s Communists, however, and North Korea got Chinese and Soviet backing for an invasion of the south, democratic idealism was stopped in its tracks.
In Japan, former war criminals were released from prison, “reds” were purged, and right-wing governments led by some of those same former war criminals got enthusiastic American backing.
Democracy, instead of being nurtured, was distorted, with active American encouragement, to make sure the right stayed in power and the left was kept at bay.
South Koreans certainly have much to thank the Americans for.
Without UN intervention in the Korean War, led by the US, the South would have been taken over by Kim Il Sung, the Great Leader, and their current freedom and prosperity would never have been possible.
But South Korean democracy was not something the US gave to the Koreans, or even always encouraged.
From the late 1940’s to the late 1980’s, the US played along with, and sometimes actively backed, anti-Communist authoritarian rulers, who grabbed and consolidated their powers through violent coups and the suppression of dissent.
The same was true in the Philippines, Taiwan, Indonesia, and Thailand, and, indeed, in the Middle East, where democracy is yet to take root.
As long as the Cold War lasted, US administrations consistently favored military strongmen and civilian dictators in the name of fighting Communism – anything to keep the left down, even the kind of left that would have been regarded as simply liberal in the democratic West.
True, for most people, life under right-wing Asian strongmen was, on the whole, preferable to life under Mao, Pol Pot, Kim Il Sung, or even Ho Chi Minh.
But to call the citizens under Park Chung Hee, Ferdinand Marcos, or General Suharto “free” is an abomination.
The happy fact that Koreans, Filipinos, Thais and Taiwanese did eventually become free, or at least freer, is not so much to the credit of the US as it is to the people who fought for their freedoms themselves.
It was only in the late 1980’s, when the Communist empire was crumbling, that US governments actively backed democratic politicians and demonstrators in Seoul, Taipei, or Manila.
But the heroes of democracy were Asian, not American.
Bush is right to claim that people in the Middle East would like to be as prosperous and free as the South Koreans, but his notion that the war in Iraq is simply a continuation of US policies in Asia could not be more mistaken.
In Asia, as in the Middle East, US strategy was to prop up dictators against Communism until their own people toppled them.
In the Middle East today, it is reckless and radical: invading a country, wrecking its institutions, and expecting that freedom will grow in the ensuing state of anarchy.
To confuse these different enterprises and pretend that they are the same is not only wrong, but dangerous, and deeply disappointing to those of us who still regard the US as a force for good.
The Hollow Heart of the West
BERLIN – It is tempting to compare NATO and the European Union to the French and Italian football teams in this year’s Euro 2008 competition.
What unites them, above all, is a process of “competitive decadence.”
The EU and NATO may see themselves as potential rivals or complementary partners in the field of defense. But what their leaders say in private reveals a sense of common frustration.
“We fail to translate military presence into political influence,” says the NATO person, who sounds very much like EU representatives commenting on the Union’s role in the Middle East. “We have failed to transform economic aid into political influence,” they lament.
The crises that the two institutions now face in the wake of Ireland’s vote against the Lisbon Treaty and the deterioration of security in Afghanistan are of course very different.
Yet both are ultimately identity crises.
Both NATO and the EU have been forced to redefine how they function and rethink their purposes after a dual process of enlargement.
From that standpoint, the challenge confronting NATO may be even more difficult, for enlarging the security organization not only means taking on new members, but also exercising new “out of area” responsibilities.
Moving from the North Atlantic to Afghanistan, and from deterrence to combat, has proved to be a major challenge for NATO – a test that may prove harder than the disappearance of the Soviet Union nearly 20 years ago.
Can NATO survive defeat in Afghanistan?
The question is far from abstract.
The challenge posed by Afghanistan was underestimated from the start, and the Alliance has under-resourced it.
The lack of a clear plan – is the goal to defeat Al Qaeda or to create democracy? – remains problematic, but less so in the short term than the lack of adequate resources.
Indeed, while Afghanistan is the size of France, NATO has sent the same number of troops as it has in tiny Bosnia.
The war in Iraq has not only caused NATO to lose focus in Afghanistan; it has also undermined solidarity of purpose among allies.
And, without confronting much more seriously the “sanctuary” role unwillingly played by Pakistan, there is no solution ahead for NATO in Afghanistan.
The other major problem facing NATO is linked to the United States’ loss of the moral high ground.
In the artistic imagination of Europeans, America has become associated more with servitude than with freedom.
In the Berlin Opera’s latest version of Beethoven’s Fidelio, the prisoners seemed to be coming out of Guantánamo.
The Afghan quagmire and America’s image are not the only problems facing NATO.
The organization has to redefine its purpose, particularly its relationship with a resurgent Russia.
NATO’s aim cannot simply be, to use Lord Ismay’s famous formula, “to keep America in, Russia out and Germany down.”
By losing its geographic focus, NATO is now confronted with a major identity challenge.
Is it to become a “league of democracy”?
If so, it must consider having a special relationship with countries like India and Japan, to name a few.
If it is to remain a “Western Alliance” in a “globalized” world, must it define a much clearer relationship with Russia without giving the Kremlin a veto in the Alliance?
Or will NATO eventually become an “alliance for stability” that includes all the new powers – China, India, and Brazil, not to mention Russia – of the emerging “multi-polar world”?
One thing is certain; a “shrinking West,” as long as it retains some influence, must create the best institutions it can during the time it still has.
In essence, the EU’s fundamental dilemma is not that different from NATO’s.
It has succeeded so well that it has taken on new members and new responsibilities, but has lost focus and clarity of purpose.
What is Europe’s project today?
Where does the EU end?
It no longer dreams of becoming the “United States of Europe,” and Jacques Delors’ suggestion of “the United Nations of Europe” has remained too ambivalent, if not deliberately ambiguous, to be effective.
After the Irish “No,” can the Union find salvation in NATO’s idea of a “coalition of the willing”?
Can the most determined pro-integration Europeans leave the pack without being paralyzed by the coalition of the unwilling?
Of course, the Irish “No” is not the equivalent for the EU of what the Afghan quagmire represents for NATO.
Yet it also constitutes a major setback and challenge of an institutional, political, and even psychological nature.
How do you recreate a European “narrative” that reconciles the Union with its citizens?
The EU has lately failed – far more than NATO has – not only to win hearts, but also to convince Europeans that in a global world, it is part of the solution, not part of the problem.
The Honor of Exile
The Romanian sculptor Brancusi once said that when the artist is no longer a child, he is dead.
I still don't know how much of an artist I have become, but I grasp what Brancusi was saying.
I can grasp - even at my age - my childish enduring self.
Writing is a childish profession, even when it becomes excessively serious, as children often are.
My long road of immaturity began more than half a century ago.
It was July 1945, a few months after I returned from a concentration camp called Transnistria.
I lived that paradisiacal summer in a little Moldavian town, overwhelmed by the miraculous banality of a normal, secure environment.
The particular afternoon was perfect, sunny and quiet, the room's semi-obscurity hospitable.
I was alone in the universe, listening to a voice that was and wasn't mine.
My partner was a book of Romanian fairy tales with a hard green cover, which I had been given a few days before when I turned the solemn age of 9.
That is when the wonder of words, the magic of literature started for me.
Illness and therapy began at the same time.
Soon, too soon, I wanted myself to be part of that family of word wizards, those secret relatives of mine.
It was a way of searching for ``something else'' beyond the triviality of everyday life, and also of searching for my real self among the many individuals who inhabited me.
I must confess that I also tried, several times, to get rid of that inner self, to find a surrogate capable of representing me better on the social scene.
I studied engineering, not only because I wanted a profession that might protect me from the daily political demagogy, but also because I hoped it would protect me from that essential self I had discovered on an unforgettable post-war July afternoon.
Yet the need for something drastically different and higher than the framed daily routine of an engineer and a citizen of the socialist paradise did not diminish.
In that doubled estrangement, reading and writing proved to be, again and again, a saving disease.
Finally, I was able to hear my own voice in my own book, which also had, as it happened, a green cover.
In the world-circus the poet looks like an Augustus the Fool, ill-equipped for everyday life in which his fellow men offer and receive their share of edible reality.
Yet his weakness may be seen as an unconventional and devious strength, his solitude a deeper kind of solidarity, his imagination a shortcut to reality.
Inevitably, in the bright public square, Augustus the Fool, the poet, faces the Clown of Power.
All human tragicomedy may be seen, occasionally, in this encounter, in the history of Circus as History.
Nonetheless, the totalitarian experience remains incomparable in its pathology, in its masks and mendacity.
An artist who has lived under tyranny (and even one who hasn't) cannot ignore the barrier that separates the two roles.
For a writer, the exile par excellence - always a ``suspect,'' as Thomas Mann said - language is his placenta.
More than for any other ``alien'' in his country, language is for a writer not only an achievement, but a spiritual home.
Through language he feels rich and stable; and when he is fully in charge of his wealth, he gains his citizenship, a sense of belonging.
Language is always home and homeland for a writer.
To be exiled from this last refuge represents the most brutal decentering of his being, a burning that reaches all the way to the core of creativity.
I postponed the decision to leave Romania because I was childish enough to fool myself that I didn't live in a country, that I lived only in a language.
Eventually, I took the language, the home, with me, as a snail does.
It still is my childish refuge, my place of survival.
Topics such as totalitarianism or exile may say a lot about my life and my writing, but however important, they don't in themselves tell about a piece of literature.
Even in collective tragedies and extreme situations, the writer is searching, through his own vision, strategy, and style, for the destiny of the individual, for the human specificity of weakness and resilience and dreams, for the ambiguities and limits and surprises of individuality caught in the social deadlock.
I hope that even in the dark frame of such topics the light of the human soul and mind, its contradictions and potential, the ceaseless questions about love and death, about commitment and cowardice, about solitude and solidarity, about the tragicomedy of humans reveal, for better or worse, the imprint of the author.
I was, in fact, more preoccupied with the ``gray zone'' in which I saw a kind of rainbow zone of truth, allowing me to search beyond undifferentiated darkness for individual features, and thus to introduce in the apparent uniformity of the extreme situation unsettling nuances.
As liberating as it was, going from internal exile into exile itself was a no easy experience.
I have learned, however, in the more than ten years that have passed since I felt that burning, to honor exile, doing so in the name of all that is challenge and epiphany, of all the doubts and the lifelong apprenticeship it implies, for its emptiness and richness, for the unfettering of myself and the clash within myself.
The stranger consciously or unconsciously is always a potential or partial exile and all real writers are perpetual exiles from this world, even when, like Proust, they hardly leave their rooms.
More and more, exile is an emblem of our time.
Everywhere, people face the contradiction between centrifugal, cosmopolitan modernity and the centripetal need (or at least nostalgia) for belonging.
It is impossible to predict what place, if any, literature will have in the future.
I don't dare to believe, as Dostoevsky did, that beauty can save our world.
But we may hope that it can play a role in consoling and redeeming our loneliness.
We may hope that its promise of beauty, its challenge of truth, its redefinition of goodness, its unpredictable playfulness will be difficult to abandon even in uncertain and dangerous times.
The artist remains, no matter how childish it may seem, a secret laborer of love.
He daily reinvents the premises of the difficult search; he honors his reader, a stranger similar and dissimilar, with the gift of an exacting love.
Thus he can continue his never-ending adventure and humanize his shipwreck wherever he may be.
The Hothouse of US-China Relations
As Hu Jintao, China’s Communist Party Secretary General and President, prepares to visit the US on April 20, myriad unresolved issues are disturbing Sino-US relations.
Debates rage over the bilateral trade balance and revaluation of the renminbi, the status of Taiwan and Tibet, human rights violations, and intellectual property theft.
China’s role in restraining North Korea’s nuclear ambitions and its tense relations with Japan are an additional burden on ties.
There is even disagreement about whether Hu’s trip to Washington is an official “state visit.”
These issues will dominate the headlines, but they pale in comparison to another problem that is on neither side’s agenda: global warming.
That is a pity, because as British Prime Minister Tony Blair recently observed, over the long term, “there is no issue more important than climate change,” and there can be no agreement to reduce it “that doesn’t involve China, America and India.”
Moreover, climate change is no longer such a long-term problem, and only the lunatic fringe remains in doubt about whether the escalating use of carbon-based fuels is responsible for global warming.
Indeed, recent assessments by the British Antarctic Survey suggest that temperatures over the Antarctic have increased 3.6 degrees since the early 1970’s, and that warming is taking place far faster than researchers had hitherto believed.
Similarly, the journal Science reports that new studies show that ocean levels may rise much more rapidly and precipitously than anticipated.
Although the US and China are the world’s two primary producers of greenhouse gases – the US being the largest – neither has signed the Kyoto Protocol, which commits countries to cut carbon emissions 5% below 1990 levels by 2008-12.
With China and the US out of the picture, the problem will likely get far worse before it gets better.
The increasing climate-change danger is mainly due to developments in China.
The country derives almost 76% of its energy needs from coal, burning almost 2.2 billion tons of it in 2005, with consumption set to rise to 2.6 billion tons by 2010.
Moreover, car production soared from only 640,000 in 2000 to 3.1 million by 2005, and annual growth is expected to continue rising by 80%.
Petroleum independent until 1993, China now consumes more and more imported petroleum every year, and power consumption is predicted to double by 2025, requiring an average of one new coal-fired plant to come on line each week.
Small wonder, then, that the water in 75% of China’s rivers is undrinkable, that the country is home to seven of the world’s most polluted cities, and that one can often live in Beijing or Shanghai for weeks without ever seeing the sun.
Indeed, China is on the precipice of becoming an environmental wasteland.
Unlike George W. Bush’s administration, which remains cavalier in its disregard for the warning signs of climate danger both at home and globally, Hu Jintao’s leadership has begun to evince a hopeful assertiveness, at least in domestic environmental policy.
There is a paradox here: while China’s central government is trying to provide national environmental leadership, local governments have often resisted.
In the US, it is the federal government that has been weak – even retrograde – in providing environmental leadership, while states such as California have led the way with higher standards.
While US Vice President Dick Cheney denigrates the idea of energy conservation, China’s leaders have adopted a new five-year plan that commits the country to cut energy use by one-fifth, industrial pollution by one-tenth, and industrial water consumption by one-third.
A 12% tax increase has been imposed on gas-guzzling cars, along with reductions for cars with small-engines, and a new 5% tax is being levied on wooden flooring and even chopsticks, which are estimated to use two million cubic meters of timber each year.
Nevertheless, because both Hu and Bush fear the economic effects of reducing their country’s carbon emissions, each has hidden behind the non-participation of the other to justify absence from international efforts and failure to assume a global leadership role.
Having awakened to the environmental threat, the next challenge for Hu is to begin translating some of China’s new awareness and boldness into its foreign policy – exactly what the US has failed to do.
It would be a pity if China, the new industrial hub of the world, overlooked the benefits of capitalizing economically on the multinational effort to control carbon emissions that is inevitable if the global environment is to remain hospitable.
Indeed, any national leadership that anticipates the new research, development, manufacturing, and trade possibilities that will grow out of this new imperative may find itself positioned for exactly the kind of sustained economic growth that every country seeks.
If the US and China were to team up to address the challenge of climate change, the results might not only be a more congenial climate and a better Sino-US relationship, but also new and vibrant economic sectors in both countries.
If climate change were on the agenda for Hu’s upcoming trip, the meeting, whether or not it is designated a “state visit,” could be one of historic consequence.
The Hour of the Technocrats
CAMBRIDGE – Greece and Italy, desperate after their gridlocked political systems left them mired in debt and crisis, have both chosen technocratic economists – Lucas Papademos and Mario Monti, respectively – rather than politicians to lead new governments.
Both can be described as professors: Monti has been president of Milan’s Bocconi University as well as a European Commissioner, and Papademos has been my colleague at Harvard’s Kennedy School of Government in the year since he finished his term as Deputy Governor of the European Central Bank.
Not long from now, both men will most likely provoke headlines such as the following: “Professors Earn ‘A’ in Economics, but Flunk Politics.”
That will be unfair. It is not a lack of political ability which will stymie them, but rather a lack of political power.
Monti, despite strong popular support for his technocratic government, does not have a parliamentary majority upon which he can rely.
Meanwhile, former Prime Minister Silvio Berlusconi has made it clear that he will not set aside his personal political interests for the good of the country.
Papademos has been dealt an even weaker hand.
Despite his best efforts to insist on a term longer than three months and the ability to appoint some members of his cabinet as conditions for accepting the premiership, in the end he won neither demand.
The elevation of these two outstanding civil servants comes after a period when other professors have been squeezed out by the political process.
In June, several well-qualified economists from emerging-market countries were passed over in the selection of a successor to Dominique Strauss-Kahn as Managing Director of the International Monetary Fund.
In Germany, Axel Weber resigned as President of the Bundesbank and member of the Governing Council of the ECB last January, reportedly because his statements opposing the Banks’ purchases of troubled eurozone countries’ bonds reflected his political naivety.
The press could not imagine that a technocrat might voluntarily relinquish a sure shot at a position of great power – successor to Jean-Claude Trichet as ECB President – on a matter of principle.
But that is precisely what Weber did.
The willingness to give up power if necessary is one of the advantages that professors bring to such positions.
(The ECB presidency then went to another economist and technocrat, Mario Draghi, who is, in fact, the perfect man for the job.)
It is a mistake to conflate technocratic elites (those with PhDs or other advanced economics degrees) with other kinds of elites (those with money or power, especially if they inherited one or the other).
Most economists understood the downside risks of European monetary union.
It was the politicians who underestimated the technical difficulties when they opted for monetary integration.
It goes without saying that academic or technical expertise is neither necessary nor sufficient to ensure government officials’ success.
Indeed, many of my Harvard colleagues would make terrible policymakers, owing to a lack of leadership, managerial, or other interpersonal skills.
And many excellent political leaders – for example, George Washington and Dwight Eisenhower, among US presidents – have not been intellectuals.
Technocrats can play a useful role as honest brokers when traditional politicians have become discredited or parties are deadlocked.
Moreover, they have the credibility that comes with a lack of desire to be re-elected, either because their term in office has been limited in advance or because they are known to prefer a quiet academic life.
Their most obvious advantage is apparent when a country faces problems – for example, proposing economic reforms or negotiating loan terms – that are largely technical.
A good precedent in Italy is Carlo Ciampi, who took the reins of government in 1993, after Italy was forced to drop out of the European Exchange Rate Mechanism, and managed to repeal the scala mobile (the wage-indexation system), beat down inflation, and re-board the train of European monetary integration.
Among some technocrats’ obvious disadvantages are lack of managerial experience, lack of perceived legitimacy, and lack of a domestic power base.
Monti and Papademos both have managerial experience and, for now, legitimacy.
They will be limited, however, by their inability to command the stable support of a political bloc.
Several current heads of state could be considered technocrats: President Felipe Calderónof Mexico, President Sebastián Piñera of Chile, and President Ellen Johnson Sirleaf of Liberia, among others.
Nobody could accuse them of having led sheltered lives, or of being unaccustomed to making difficult decisions.
At the same time, all three received academic training at Harvard.
(Calderóntook three courses from me; unfortunately, dealing with violent drug lords was not on my syllabus.)
Having good international credentials is not always an advantage.
When Sirleaf received the Nobel Peace Prize in 2011, there was speculation that her good image abroad could hurt her campaign for re-election at home.
Analogously, both Papademos and Monti are certified European Union and eurozone elites, which will help them to obtain support for their countries abroad, but will leave them vulnerable to domestic charges that they are lackeys of foreign powers.
It is fitting that Rome and Athens, the two seats of classical Western civilization, have turned to these two urbane, erudite men for leadership.
But neither Papademos nor Monti can work any technocratic magic if they are not given the political tools to get the right policies enacted.
The Humiliation of Britain
BERKELEY – At the end of 2008, as the financial crisis hit with full force, the countries of the world divided into two groups: those whose leaders decided to muddle through, and China.
Only the Chinese took seriously Milton Friedman’s and John Maynard Keynes’s argument that, when faced with the possibility of a depression, the first thing to do is use the government to intervene strategically in product and financial markets to maintain the flow of aggregate demand.
Then, at the start of 2010, the countries that had been muddling through divided into two groups: those where government credit was unimpaired continued to muddle through, while countries like Greece and Ireland, where government credit was impaired, had no choice but to pursue austerity and try to restore fiscal confidence.
Today, another split is occurring, this time between those countries that are continuing to muddle through and Great Britain.
Even though the British government’s credit is still solid gold, Prime Minister David Cameron’s administration is about to embark on what may be the largest sustained fiscal contraction ever: a plan to shrink the government budget deficit by 9% of GDP over the next four years.
So far, China is doing the best in dealing with the financial crisis.
The mudding-through countries lag behind.
And those where confidence in the government’s liabilities has cracked, forcing the government into austerity, are doing worst.
Now the question is: will Britain – where confidence in the government has not cracked and where austerity is not forced but chosen – join the others at the bottom and serve as a horrible warning?
Cameron’s government used to claim that its policies would produce a boom by bringing a visit from the Confidence Fairy that would greatly reduce long-term interest rates and cause a huge surge of private investment spending.
Now it appears to have abandoned that claim in favor of the message that failure to cut will produce disaster.
As Chancellor of the Exchequer George Osborne put it:
“The emergency Budget in June was the moment when fiscal credibility was restored.
Our market interest rates fell to near-record lows.
Our country's credit rating was affirmed.
And the IMF went from issuing warnings to calling our Budget ‘essential’ Now we must implement some of the key decisions required by that Budget.
To back down now and abandon our plans would be the road to economic ruin.”
But if you ask the government’s supporters why there is no alternative to mammoth cuts in government spending and increases in taxes, they sound confused and incoherent.
Or perhaps they are merely parroting talking points backed by little thought.
What is so bad about continuing to run large budget deficits until the economic recovery is well established?
Yes, the debt will be higher and interest on that debt will have to be paid, but the British government can borrow now at extraordinarily favorable terms.
When interest rates are low and you can borrow on favorable terms, the market is telling you to pull government spending forward into the present and push taxes back into the future.
Advocates of austerity counter that confidence in the government’s credit might collapse, and the government might have to roll over its debt on unfavorable terms.
Worse, the government might be unable to refinance its debt at all, and then would have to cut spending and raise taxes sharply.
But that is what the British government is doing now.
How is the possibility that a government might be forced into radical fiscal consolidation an argument for taking that step immediately, under no duress and before the recovery is well established?
To be sure, back in the 1970’s, confidence in the credit of the British government collapsed, forcing it to borrow from the IMF so that spending could be cut and taxes raised gradually rather than abruptly.
But that is why Keynes and Harry Dexter White established the IMF in the first place.
An IMF program restores confidence in the fiscal soundness of governments that markets distrust.
The lending allows the necessary medium- and long-term spending cuts and tax increases to be undertaken at a more appropriate time.
Borrowing from the IMF may be humiliating for government officials.
But businesses establish lines of credit for future contingencies all the time, and they don’t think there is anything humiliating about resorting to them when those contingencies come to pass.
And what, really, is so humiliating about borrowing from your own citizens?
Britons, as Osborne knows, are willing to lend to their government on an enormous scale – and on terms that are more generous than those on offer from the IMF.
And, if one is worried that the British people might change their minds, well, the princes of Wall Street or the barons of Canary Wharf or US Treasury Secretary Tim Geithner would certainly be willing to sell derivatives contracts to protect Britain against exchange-rate risk for the next several years.
To borrow from your own people is especially non-humiliating when your economy is in depression, when the interest rates at which you can borrow are at near-record lows, and when every economic argument cries out for spending now and taxing later.
What is humiliating is to have a government that cuts a half-million public-sector jobs and causes the loss of another half-million jobs in the private sector.
In an economy of 30 million jobs, that translates into an increase in the unemployment rate of 3.5 percentage points – at a time when no sources of expanding private-sector demand exist to pick up the slack.
Britain’s finest hour this is not.
Hybrid Humans
SINGAPORE – The election of a new pope always sparks debate about the tension between tradition and modernity in the Catholic Church.
Perhaps more interesting is the ongoing modernization of the language in which those debates are conducted: Latin.
While Catholic doctrines have evolved slowly, the Latin vocabulary has been expanding steadily in recent years, reflecting the surge of neologisms (new words, usages, and expressions) that has accompanied technology’s increasingly prominent role in people’s daily lives.
The addition of terms like telephonium albo televisifico coniunctum (video telepresence) and usus agonisticus medicamenti stupecfactivi (performance-enhancing drugs) has helped to spark a revival of Latin education in the West, despite growing competition from Mandarin.
Likewise, the English language’s ability to produce and absorb neologisms is an important reason why it will endure as the world’s lingua franca.
The Oxford English Dictionary, now updated quarterly, revised more than 1,900 entries in its March 2011 edition, and added new terms, such as “subdomain,” “dataveillance,” and “geotagging.”
Humans use language to make sense not only of specific concepts, but also of larger scientific, social, and historical movements.
With technology changing the face – and pace – of such movements, devising terms that capture its far-reaching impact on human life is becoming increasingly important.
For example, according to Nobel laureate Robert Fogel, medical and nutritional advances since the Industrial Revolution have accelerated and directed the evolutionary process, making modern humans a fundamentally different species from Homo sapiens.
In 2011, bio-technology investor Juan Enriquez coined the term Homo evolutis to denote this shift.
But do widely accepted labels like “Information Age” and “knowledge-based society” adequately describe the global movement that is underway?
Technology-fueled development is causing historical eras to become cumulative, rather than linear.
As the world enters the Information Age, most countries are still experiencing the Agricultural and Industrial Ages.
In order to describe emerging socio-technological patterns – including the merging of scientific disciplines and the fusion of human life with progress in these fields – the current era should be called the “Hybrid Age.”
It is an age, most tellingly, of proliferating new terminology.
For example, we now have “synthetic biology” to describe a hybrid of biology and chemical engineering in which scientists create biological systems that are not found in nature.
Man-made cells can now be inserted into humans.
In 2010, the biologist Craig Venter created the first fully synthetic and self-replicating cell.
In another hybrid discipline, “molecular computing,” organic or artificial enzymes are programmed to conduct complex calculations faster than silicon chips.
The field could provide an avenue, alongside 3D silicon chips, for maintaining – or even accelerating – the pace of Moore’s Law, which states that the number of transistors on the integrated circuits used by computers doubles every two years.
Humans’ biological hybridization with technology also requires new vocabulary.
At the MIT Media Lab, double-amputee Hugh Herr has pioneered “biomechatronics,” which combines biology, mechanical engineering, and electronics to invent efficient, lifelike prosthetics.
Some believe that Herr’s work heralds an age of bionic superhumans.
Moving from muscles to the mind, brain-computer interface technologies have advanced significantly in recent years, giving rise to “neuro-prosthetics,” which has already enabled paraplegics to navigate a computer mouse with their thoughts and monkeys to operate a giant robotic arm.
Scientists are now working to pinpoint the neuro-chemistry of thought and emotions so accurately that new technologies could be developed to allow humans to communicate them silently.
With scientists working tirelessly to refine such technologies, the public must become more knowledgeable about their socioeconomic implications.
Neither of the existing paradigms for assessing individual potential – intelligence quotient and emotional quotient – can assess a person’s ability to compete against the growing “robo-collar” workforce.
Industrial robots are now displacing Foxconn workers making iPhones in China; Intuitive Surgical’s da Vinci robot reduces the need for surgical assistants in operating rooms; and the Engkey robot teaching English in South Korea may gradually fill the 30,000 teaching positions that Westerners there currently occupy.
Increasingly sophisticated algorithms are replacing currency traders, paralegals, and even news reporters.
Competing with the increasingly competent robotic labor force will require people to enhance their “technology quotient.”
Societies and governments must drive this shift by boosting technology’s role in both the form and content of educational curricula.
Improved technological capacity would not only help citizens to compete for jobs; it would help countries thrive in the new global environment of increasing hybridization.
The rise and fall of empires has long been considered a geopolitical matter, based on factors such as military assets, resource endowments, and population size.
Likewise, geo-economic calculations of relative GDP, terms of trade, and foreign-exchange reserves carry significant weight in determining the balance of power.
But all of these metrics fail to account for factors like research and development, technological innovation, and commercialization, which are now more indicative of future success than nuclear arsenals or economic size.
Indeed, the Hybrid Age is shaping up to be an era of “geo-technology.”
The stakes of geo-technological competition are higher than ever.
Cyberwarfare is proving to be as threatening to political and economic stability as conventional military conflict.
At the same time, technologies like water filtration systems, drought-resistant seeds, renewable energy, and the Internet have the potential to fulfill the basic needs of a crowded planet better than any empire could.
Many historical periods have been named after imperial hegemons: Pax Romana, Pax Britannica, Pax Americana.
Some believe that, with the rise of China, Pax Sinica is next.
But these eras have been characterized by conquest and exploitation, not peace.
Perhaps what comes next will be a fundamental break from the past, a truly modern era of Pax Technologica.
The Identity Clinic
"Become who you are," wrote the philosopher Friedrich Nietzsche.
A century later, millions of people are taking Nietzsche's advice to heart.
But instead of turning to philosophy, they are using drugs and surgery.
"I feel like myself again on Paxil," says the woman in advertisements for that antidepressant; so, supposedly, do users of Prozac, Ritalin, Botox, Propecia, Xenical, anabolic steroids, cosmetic surgery, hormone replacement therapy, and sex-reassignment surgery.
Even as people undergo dramatic self-transformations, altering their personalities with psychoactive drugs and their bodies with surgery, they describe the transformation as a matter of becoming "who they really are."
"It was only by using steroids," writes the bodybuilder Samuel Fussell, "that I looked on the outside the way I felt on the inside." With sex-reassignment surgery, writes Jan Morris, "I achieved Identity at last."
If Nietzsche were alive today, he might be pitching antidepressants for Pfizer.
Many people nowadays do not expect to find the meaning of their lives by looking to God, Truth, or any other external moral framework.
Instead, they expect to find it by looking inward.
Being in touch with one's inner feelings, desires, and aspirations is now seen as a necessary part of living a fully human life.
To be fulfilled, you must be in touch with yourself.
The language of authenticity has come to feel like a natural way to describe our aspirations, our psychopathologies, even our self-transformations.
What is new is the involvement of doctors in fulfilling this desire for self-transformation.
In recent decades, doctors have become much more comfortable giving physical treatments to remedy psychological and social problems.
Today doctors give synthetic growth hormone to short boys, or Propecia to middle-aged men to remedy the shame of baldness.
Now that enhancement of psychological well-being is regarded by some as a proper medical goal, the range of potentially treatable conditions has expanded enormously.
Is the success of these technologies a problem?
Not necessarily.
Some drugs and procedures alleviate the darkest of human miseries.
For every person using an antidepressant to become "better than well," another is using it for a life-threatening sense of hopelessness.
If sex reassignment surgery can relieve a person's suffering, then the question of whether or not it is treating a conventionally defined illness seems beside the point.
Yet remaining untroubled by all this medically induced self-transformation is hard.
One worry is about what the philosopher Margaret Olivia Little calls "cultural complicity."
As difficult as we may find it to condemn individuals who use drugs and surgery to transform themselves in accordance with dominant aesthetic standards, on a social level these procedures compound the problems they are meant to fix.
The more Asians get plastic surgery to make their eyes look European, for example, the more entrenched will become the social norm that says Asian eyes are something to be ashamed of.
The same goes for light skin, large breasts, Gentile noses, or a sparkling personality.
Market pressures compound this worry.
For several years now, antidepressants have been the most profitable class of drugs in the US.
These antidepressants are not used simply to treat severe clinical depression.
They are also widely used to treat social anxiety disorder, post-traumatic stress disorder, generalized anxiety disorder, obsessive-compulsive disorder, eating disorders, sexual compulsions, and premenstrual dysphoric disorder.
Many of these disorders were once thought to be rare, even non-existent.
But once a pharmaceutical company develops a treatment for a psychiatric disorder, it acquires a financial interest in making sure that doctors diagnose the disorder as often as possible.
This may transform what was once seen as an ordinary human variation - being shy, uptight, or melancholy - into a psychiatric problem.
The more people who are persuaded that they have a disorder that can be medicated, the more medication the company can sell.
Perhaps the hardest worry to pin down is what Harvard political theorist Michael Sandel calls "the drive to mastery."
Sandel is worried less about the possible consequences of enhancement technologies than about the sensibility they reflect - a sensibility that sees the world as something to be manipulated and controlled.
As Sandel points out, perhaps we could design a world in which we all have access to mood-brightening drugs and cosmetic surgery; in which athletes have access to safe, performance-enhancing drugs; in which we could safely choose and manipulate the genetic traits of our children; and in which we eat factory-farmed pigs and chickens that are genetically engineered not to feel pain.
Many of us would resist such a world -- not because such a world would be unjust, or because it would lead to more pain and suffering, but because of the extent to which it has been planned and engineered.
We would resist the idea that the world exists merely to be manipulated for human ends.
The Ideological Crisis of Western Capitalism
NEW YORK – Just a few years ago, a powerful ideology – the belief in free and unfettered markets – brought the world to the brink of ruin.
Even in its hey-day, from the early 1980’s until 2007, American-style deregulated capitalism brought greater material well-being only to the very richest in the richest country of the world.
Indeed, over the course of this ideology’s 30-year ascendance, most Americans saw their incomes decline or stagnate year after year.
Moreover, output growth in the United States was not economically sustainable.
With so much of US national income going to so few, growth could continue only through consumption financed by a mounting pile of debt.
I was among those who hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government.
Alas, that has not been the case.
On the contrary, a resurgence of right-wing economics, driven, as always, by ideology and special interests, once again threatens the global economy – or at least the economies of Europe and America, where these ideas continue to flourish.
In the US, this right-wing resurgence, whose adherents evidently seek to repeal the basic laws of math and economics, is threatening to force a default on the national debt.
If Congress mandates expenditures that exceed revenues, there will be a deficit, and that deficit has to be financed.
Rather than carefully balancing the benefits of each government expenditure program with the costs of raising taxes to finance those benefits, the right seeks to use a sledgehammer – not allowing the national debt to increase forces expenditures to be limited to taxes.
This leaves open the question of which expenditures get priority – and if expenditures to pay interest on the national debt do not, a default is inevitable.
Moreover, to cut back expenditures now, in the midst of an ongoing crisis brought on by free-market ideology, would inevitably simply prolong the downturn.
A decade ago, in the midst of an economic boom, the US faced a surplus so large that it threatened to eliminate the national debt.
Unaffordable tax cuts and wars, a major recession, and soaring health-care costs – fueled in part by the commitment of George W. Bush’s administration to giving drug companies free rein in setting prices, even with government money at stake – quickly transformed a huge surplus into record peacetime deficits.
The remedies to the US deficit follow immediately from this diagnosis: put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich.
But the right will have none of this, and instead is pushing for even more tax cuts for corporations and the wealthy, together with expenditure cuts in investments and social protection that put the future of the US economy in peril and that shred what remains of the social contract.
Meanwhile, the US financial sector has been lobbying hard to free itself of regulations, so that it can return to its previous, disastrously carefree, ways.
But matters are little better in Europe.
As Greece and others face crises, the medicine du jour is simply timeworn austerity packages and privatization, which will merely leave the countries that embrace them poorer and more vulnerable.
This medicine failed in East Asia, Latin America, and elsewhere, and it will fail in Europe this time around, too.
Indeed, it has already failed in Ireland, Latvia, and Greece.
There is an alternative: an economic-growth strategy supported by the European Union and the International Monetary Fund.
Growth would restore confidence that Greece could repay its debts, causing interest rates to fall and leaving more fiscal room for further growth-enhancing investments.
Growth itself increases tax revenues and reduces the need for social expenditures, such as unemployment benefits.
And the confidence that this engenders leads to still further growth.
Regrettably, the financial markets and right-wing economists have gotten the problem exactly backwards: they believe that austerity produces confidence, and that confidence will produce growth.
But austerity undermines growth, worsening the government’s fiscal position, or at least yielding less improvement than austerity’s advocates promise.
On both counts, confidence is undermined, and a downward spiral is set in motion.
Do we really need another costly experiment with ideas that have failed repeatedly?
We shouldn’t, but increasingly it appears that we will have to endure another one nonetheless.
A failure of either Europe or the US to return to robust growth would be bad for the global economy.
A failure in both would be disastrous – even if the major emerging-market countries have attained self-sustaining growth.
Unfortunately, unless wiser heads prevail, that is the way the world is heading.
The Ides of August
The Idle Fireman
WASHINGTON, DC – One of the IMF’s main purposes is to “give confidence to members by making [its] general resources temporarily available to them.”
However, its members are increasingly facing capital volatility, and there is a sharp decline in the use of Fund resources.
Ironically, this is happening at a moment when the Fund should want to be lending: it is awash in liquidity and has almost no sources of income other than repayment of its loans.
If the IMF had to live up to private-sector standards, it would create a new instrument that would meet members’ potential demand for short-term liquidity.
Alas, there is no urge to do this.
Until a year ago, the IMF used to congratulate itself for running out of clients.
An idle fireman looked desirable.
But the situation is different now.
There is a fire out there, but no one is calling the fire brigade.
Only Georgia, not surprisingly, is asking for help.
Potential borrowers have been accumulating massive reserves and pooling them regionally to protect themselves against shocks and speculative capital, but not at the Fund’s urging.
On the contrary, accumulating reserves beyond a certain threshold carries a high opportunity cost and suggests the need to let the currency appreciate.
The implication is that potential borrowers are not absorbing as many imports as they could and not relying, as they should, on the multilateral pooling of reserves that the Fund is meant to use to “give confidence” to its members.
So what’s wrong with the fireman?
The traditional model of trading financial support for conditionality does not bode well with emerging economies that, despite having strong macroeconomic fundamentals, still need help to cope with external shocks.
“Giving confidence” to this sort of customer requires the capacity to provide quick, automatic, meaningful, and front-loaded financial support; otherwise, accumulating reserves and pooling them in regional agreements will still look like a more reliable option.
But the IMF is in no position to provide such support.
Its financial support is limited to a percentage of members’ quotas, which do not reflect their potential borrowing needs.
Unfortunately, a recently approved reform, despite being marketed as a strategic improvement, has only benefited a few, and far too little.
According to the “new quota formula,” members that issue international reserve currencies still appear to be those with more “potential need to borrow” from the IMF.
This is laughable.
So this brings us to the need to increase “normal” access limits.
In 2003-2004, arguably the last period in which the Fund had to provide meaningful assistance to members, approximately 80% of the volume of financial support was provided on an “exceptional” basis, defined as more than 300% of quotas. Needless to say, “exceptional” access comes at exceptional financial and political costs.
No wonder, then, that members rely more on their capacity to accumulate reserves than on the Fund’s ability to provide opportune, affordable, and reliable financial support.
The Fund has no instrument to provide short-term liquidity to emerging markets facing capital volatility.
In today’s crisis, we have seen some agile and creative reactions from central bankers in advanced economies.
They stepped beyond their mandates to provide quick financial support to investment banks, mostly by supplying private banks with liquid instruments in exchange for longer-term and less liquid assets.
Why couldn’t the Fund do the same thing for central banks from developing countries and emerging economies?
If the IMF is to provide short-term liquidity to members in need, a crucial question that must be resolved is whether such financial assistance should be available only to those with strong macroeconomic fundamentals.
Overly strict qualification criteria are likely to deter members that may need this kind of support most from applying for it; but overly loose criteria may stigmatize potential users.
The Fund could solve this dilemma by applying an insurance-like approach.
All members would, in principle, be eligible, but premium rates would be differentiated and established on the basis of quantitative criteria.
The scale of premium rates would need to be transparent but the actual cost of access for individual members would remain strictly confidential (as in any insurance contract).
Admittedly, this would require departing from the Fund’s traditional lending in exchange for conditionality.
It could also require some adjustments to the Fund’s Charter, but so what? The recently approved reforms already require changes to the IMF’s “Articles of Agreement.”
Some argue that furnishing members with rapid and front-loaded liquidity insurance would encourage irresponsible policies or reckless borrowing.
Admittedly, it could help members cope better with volatility and, therefore, be more open to inflows of short-tern capital, but this need not result in bad policies.
Given the Northern Rock and Bear Stearns bailouts, overplaying the “moral hazard” argument here sounds hypocritical.
If the IMF fireman remains idle, it is not because of a lack of fires, but because neighbors, rather than relying on the fire brigade, are protecting themselves. This undermines the IMF’s relevance and is at the root of the early repayments that have left the Fund with almost no income.
The IMF must change this.
“Normal access” should be raised to levels that are concomitant with members’ potential need to borrow, and a new liquidity line to provide reliable and meaningful front-loaded financial support should be created.
This would make emerging markets and developing country members regard reserve accumulation as expensive and extravagant, thereby helping to liberate those resources to help the world economy overcome today’s crisis.
The Illusion of a Chinese Bubble
BEIJING – On the eve of Chinese New Year, the People’s Bank of China (PBC) surprised the market by announcing – for the second consecutive time in a month – an increase in banks’ mandatory-reserve ratio by 50 basis points, bringing it to 16.5%.
Shortly before that, China’s government acted to stop over-borrowing by local governments (through local state investment corporations), and to cool feverish regional housing markets by raising the down-payment ratio for second house buyers and the capital-adequacy ratio for developers.
This latest round of monetary tightening in China reflects the authorities’ growing concern over liquidity.
In 2009, M2 money supply (a key indicator used to forecast inflation) increased by 27% year on year, and credit expanded by 34%.
In January 2010, despite strict “administrative control” of financial credit lines (the PBC actually imposed credit ceilings on commercial banks), bank lending grew at an annual rate of 29%, on top of already strong expansion in the same period a year earlier.
While inflation remains low, at 1.5%, it has been rising in recent months.
Housing prices have also soared in most major cities.
These factors have inspired some China watchers to regard the country’s economy as a bubble, if not to predict a hard landing in 2010.
But that judgment seems premature, at best.
To be sure, China may have a strong tendency to create bubbles, partly because people in a fast-growing economy become less risk-averse.
Thirty years of stable growth without serious crises have made people less aware of the negative consequences of overheating and bubbles.
Instead, they are so confident that they often blame the government for not allowing the economy to grow even faster.
There are also several special factors that may make China vulnerable to bubbles.
China’s large state sector (which accounts for more than 30% of GDP) is usually careless about losses, owing to the soft budget constraints under which they operate.
Local governments are equally careless, often failing to service their debts.
In addition, various structural problems – including large and growing income disparities – are causing serious disequilibrium in the economy.
But a tendency toward a bubble need not become a reality.
The good news is that Chinese policymakers are vigilant and prepared to bear down on incipient bubbles – sometimes with unpopular interventions such as the recent monetary moves.
Whatever one thinks of those measures, taking counter-cyclical policy action is almost always better than doing nothing when an economy is overheating.
Whereas some policies may be criticized for being too “administrative” and failing to allow market forces to play a sufficient role, they may be the only effective way to deal with China’s “administrative entities.”
In any case, the new policies should reassure those who feared that China’s central government either would simply watch the bubble inflate or that it lacked a sufficiently independent macroeconomic policy to intervene.
The consequences of burst bubbles in Japan in the 1980’s and in the United States last year are powerful reasons why China’s government has acted with such determination, while the legacy of a functioning centralized system may explain why it has proven capable of doing so decisively.
After all, although modern market economics provides a sound framework for policymaking – as Chinese bureaucrats are eagerly learning – the idea of a planned economy emerged in the nineteenth century as a counter-orthodoxy to address market failures.
Some people would prefer China to move to a totally free market without regulation and management, but the recent crises have reminded everyone that free-market fundamentalism has its drawbacks, too.
No one has proven able to eliminate bubbles in economies where markets are allowed to function.
But if the fluctuations can be “ironed out,” as John Maynard Keynes put it, total economic efficiency can be improved.
Government investment, which represents the major part of China’s anti-crisis stimulus package, should help in this regard.
Roughly 80% of the total is going to public infrastructure such as subways, railways, and urban projects, which to a great extent should be counted as long-term public goods.
As such, they will not fuel a bubble by leading to immediate over-capacity in industry.
Moreover, roughly 40% of the increase in bank credit in 2009 accommodated the fiscal expansion, as projects were started prior to the budget allocations needed to finance them.
Over-borrowing by local government did pose risks to the banking system and the economy as a whole, but, given China’s currently low public-debt/GDP ratio (just 24% even after the anti-crisis stimulus), non-performing loans are not a dangerous problem.
Indeed, they may be easily absorbed as long as annual GDP growth remains at 8-9% and, most importantly, as long as local government borrowings are now contained.
Finally, the leverage of financial investments remains very low compared to other countries.
Using bank credits to speculate in equity and housing markets is still mostly forbidden.
There may be leaks and loopholes in these rules, but firewalls are in place – and are more stringently guarded than ever before.
So is a Chinese bubble still possible?
Perhaps.
But it has not appeared yet, and it may be adequately contained if it does.
A Metaphor for Obama
NEW HAVEN – As US President Barack Obama begins his second term, he needs a simple way to express his vision and policies for the economy – a metaphor around which support for his policies might crystallize, thereby boosting his administration’s political effectiveness.
So, what makes a successful metaphor work?
The 2008 Obama campaign used the slogan “Change we can believe in.”
But “change” is not a metaphor for a new government: it does not stand for any policies.
Nor does “Hope” or “Yes we can!”
The 2012 Obama campaign used the one-word slogan “Forward!”
Once again, it signifies nothing about policies or their underlying philosophy.
Every politician, whether liberal or conservative, wants to move forward, not backward.
Obama’s slogans are examples of “dead metaphors”: they are not part of an overall conceptual scheme.
By contrast, in the 1930’s, President Franklin Roosevelt used a metaphor that remains very much alive today.
The idea of a “new deal” was conceived during his first presidential election campaign in 1932, though at the time he was still very vague about what the term stood for.
Apparently, Roosevelt, or his speechwriters, borrowed it from A New Deal, a book by Stuart Chase that was published in 1932 and adapted the same year into a cover story for the magazine The New Republic.
Chase described his new deal in general terms as “the drastic and progressive revision of the economic structure, avoiding an utter break with the past.”
And, while the book’s specific policy proposals bear little resemblance to Roosevelt’s subsequent actions, the title had an intrinsic appeal that he must have recognized.
The New Deal created an image of a commercial transaction, like the buyout of a company or an incentive package for executives – something that contracting parties bargain over and agree to.
It is not imposed.
By calling it a “deal,” Roosevelt made clear that the plan was not anti-business: it sounded like an offer to work, to participate, to seize an opportunity.
And, because deals can be good or bad, fair or exploitative, the word “new” provided metaphoric depth, suggesting that Roosevelt’s deal was better, fairer, and more attractive.
The metaphor, overwhelmingly endorsed by voters, stood for Roosevelt’s mandate to fix the ailing economy along lines that were innovative but still essentially capitalist.
Some of his administration’s initiatives, such as the creation of the Securities and Exchange Commission, seemed anti-business to some at the time, but have long since been accepted as a boon to competition and dynamism by hemming in unfair or manipulative behavior.
Metaphors, it turns out, are not just words.
Modern neuroscience is revealing that metaphors are intrinsic to creativity, for their use activates diverse regions of the brain associated with their multiple meanings.
Good metaphors are those that set off the right intuitive connections in our brains.
For example, much progress in understanding sound and light resulted when scientists imagined them in terms of sea waves.
Formulating a good metaphor for Obama’s second term is itself a task for intuitive creative thought that entails rethinking what he will propose in his second term.
A good metaphor might embody the idea of an “inclusive economy.”
The word “inclusive” resonates strongly: Americans do not want more government per se; rather, they want the government to get more people involved in the market economy.
Opinion polls show that, above all, what Americans want are jobs – the beginning of inclusion.
The parallel to Chase’s book today is the 2012 bestseller Why Nations Fail by the economist Daron Acemoglu and the political scientist James Robinson.
Acemoglu and Robinson argue that in the broad sweep of history, political orders that include everyone in the economic process are more likely to succeed in the long term.
The time seems ripe for that idea, and it fits with the triumph of inclusiveness symbolized by Obama himself.
But another step in metaphor-building is needed to encapsulate the idea of economic inclusion.
The biggest successes of Obama’s first term concerned economic inclusion.
The Affordable Care Act (“Obamacare”) is providing more people with access to health care – and bringing more people to privately-issued insurance – than ever before in the United States.
The Dodd-Frank financial reforms created the Consumer Financial Protection Bureau, so that privately issued financial products would serve the public better, and created incentives for derivatives to be traded on public markets.
And he signed the JOBS Act, proposed by his Republican opponents, which aims to create crowdfunding Web sites that allow small investors to participate in start-up ventures.
We have not reached the pinnacle of economic inclusion.
There are hundreds of other possibilities, including improved investor education and financial advice, more flexible mortgages, better kinds of securitization, more insurance for a broader array of life’s risks, and better management of career risks.
Much more progress toward comprehensive public futures and derivatives markets would help, as would policies to encourage the emerging world to participate more in the US economy.
(Indeed, the inclusion metaphor is essentially global in spirit; had Obama used it in the past, his economic policies might have been less protectionist.)
The right metaphor would spin some of these ideas, or others like them, into a vision for America’s future that, like the New Deal, would gain coherence as it is transformed into reality.
On January 29, Obama will give the first State of the Union address of his new term.
He should be thinking about how to express – vividly and compellingly – the principles that have guided his choices so far, and that set a path for America’s future.
The IMF after DSK
PRINCETON – How the mighty International Monetary Fund has fallen.
More than a decade ago, the French magazine Paris Match carried a picture of the Fund’s then Managing Director, Michel Camdessus, with the title: “The Most Powerful Frenchman in the World.”
One unanticipated result of the lurid New York sex scandal involving DSK is that the question of his successor is attracting an unprecedented level of public interest and concern.
Indeed, the scandal has exposed some fundamental problems about the IMF’s governance, and even about its existence.
DSK tried to remake the IMF into a doctor of global finance, rather than a policeman.
In mitigating or even preventing financial crises, however, sometimes policemen are needed.
At the moment, the combination of excesses still evident in the financial sector and in public finance in many countries calls for some fairly tough police action.
Any organization is always much more than simply the person who happens to lead it, but a weak or politicized figure at its head can do great damage.
Unfortunately, about half of the IMF’s past managing directors have been either weak or overly political – or both.
The IMF’s first two managing directors, the Belgian Camille Gutt and the Swede Ivar Rooth, were both weak figures.
Indeed, the Fund almost disappeared into complete oblivion during their tenure.
The IMF’s two most recent managing directors before DSK, a German and a Spaniard, were also weak.
Horst Köhler, appointed in 2000, got the millennium started on a bad note.
He had been an influential state secretary in Germany’s finance ministry, before becoming the head of the associations of savings banks.
Germany’s then chancellor, Gerhard Schröder, pressed hard for a German appointee to lead the Fund, but Köhler was always an implausible second-choice candidate.
He resigned in 2004 to run as Angela Merkel’s candidate for the largely ceremonial office of President of the German Federal Republic, a job he performed capriciously until he abruptly resigned.
Köhler’s successor, Rodrigo Rato, had been the leader of Spain’s center-right party, which was unexpectedly defeated in the 2004 general election by current Prime Minister José Luis Rodríguez Zapatero.
He was sent to Washington as a consolation prize, and was never very happy there.
The IMF’s influence dwindled, and he resigned in 2007 “for personal reasons.”
DSK, too, began his tenure at the IMF as a politician-in-exile, after emerging as French President Nicolas Sarkozy’s most formidable domestic opponent.
Sarkozy and his strategists, no doubt, thought that sending DSK to the Fund, which before the global financial crisis looked unimportant and marginal, was a brilliant coup.
They may have even calculated that his private life might cause a stir in a country that is both more prudish and prurient than France.
But when the IMF reemerged after 2008 as a central global institution, with DSK appearing to reorient it with substantial political and economic skill, he started to look again like a threat to Sarkozy’s re-election bid.
The IMF’s heavy engagement in resolving Europe’s sovereign-debt crisis adds another element of political complexity.
Non-Europeans suspected that the Europeans were getting favorable deals under a French politician-turned-economist who wanted to return to politics.
And some Europeans worried that the Fund was taking sides in a polarized intra-European dispute about how the costs of the financial crisis should be shared.
Recent appointments to head the IMF have all been pushed through after high-level bargaining among European governments.
There is now a need to break decisively with the discredited political logic that drives such decisions.
The convention that the IMF’s managing director needs to be a West European is not written down anywhere, least of all in the Fund’s Articles of Agreement.
Indeed, even back in 1973, there was substantial support for a non-European candidate, Roberto Alemann, the distinguished economist and former Argentine economics minister.
The IMF’s history is also a guide to the kind of figure who works most productively in Washington.
None of the three most powerful and influential managing directors had been a politician or government minister.
Per Jacobsson, the Swedish economist who brought the Fund back from obscurity in the 1950’s, had been an official at the Bank for International Settlements in Basel.
As the BIS’s chief economist in the 1930’s, Jacobsson knew how to use economic analysis as a basis for influence.
Jacques de Larosière and Michel Camdessus were French civil servants who combined high-level technical and managerial expertise with a vision of how the world economy should operate.
Today, the world’s overwhelming strategic problem is to adjust to a new economic and political geography, in which the weight of the global economy is shifting eastwards and southwards.
It is tempting to conclude that appointing a well-connected figure from an emerging-market economy could solve the problem.
But such an outcome would be to repeat the thinking of the past, when the main need was to broker influence between Europe and the US.
Appointing an Asian political icon would merely change the names of the players; it would not reinvent the game.
The IMF needs a managing director who transcends political logic and can lay out the economics of the new global order.
The next one should be Eastern rather than Western, an economist rather than a politician, and a visionary rather than a tactician.
The IMF and Global Coordination
NEW YORK – Before the crisis of 2008, the International Monetary Fund was in decline.
Demand for loans was low, leaving it short of revenue.
Asia remained leery of the Fund a full ten years after the currency crises of the late 1990’s.
Its analytical talents remained high but downsizing placed them at risk.
The crisis changed all that.
It became clear that the IMF has a crucial role to play in dealing with crisis-induced instability.
Moreover, because of the Fund’s broad and deeply embedded multinational expertise, its activities are central to achieving globally cooperative solutions to economic and financial problems.
Without such solutions, the system will tend to become periodically unstable, and to go off on unsustainable paths that end destructively.
We have just lived through one of these episodes.
The IMF is needed for several key purposes.
One involves crisis response.
In a global financial upheaval like our most recent one, capital flows shift abruptly and dramatically, causing credit, financing, and balance-of-payments problems, as well as volatile exchange rates.
Left unattended, these problems can cause widespread damage in a wide range of countries, many of which are innocent bystanders.
The system needs circuit-breakers in the form of loans and capital flows that dampen the volatility and maintain access to financing across the system.
A well capitalized IMF, much better capitalized than pre-crisis, should be able to fill this backstop – similar to what central banks do (and did in the crisis) to prevent a credit freeze and the inevitable and excessive economic damage that would result.
The new IMF Flexible Credit Line performs this function for what amount to AAA-rated countries.
A program that meets the needs of the more vulnerable countries is under construction.
The challenge is to find the right mix of pre-approval, limited conditionality, and speed.
At the same time, while getting the crisis-response mechanisms right is important, it is not the whole story.
The IMF is at the epicenter of large-scale global coordination challenges.
Having initially been shunned, it has assumed a key role in financing – and, more importantly, implementing – fiscal-stabilization programs for the European Union’s peripheral countries.
These programs are needed to limit contagion and restore stability to the eurozone, pending deeper institutional reforms that address fiscal interdependency in the context of monetary union.
The most important issue on the global economic agenda – rebalancing and restoring global demand – is a coordination challenge par excellence.
The sudden reduction in excess consumption in the United States as a result of the crisis makes meeting this challenge all the more urgent.
Without an effective rebalancing program, growth will be sub-par, and employment difficult to restore on a sustainable basis.
Government stimulus programs are limited in their ability to restore demand.
The global economy needs the surplus countries to sustain growth and reduce excess savings – no easy task.
It also needs deficit countries (and the advanced countries more generally) to develop and enact credible growth strategies that involve structural change as well as fiscal stabilization.
The G-20 is now the priority-setting and decision-making body for this kind of challenge, the crisis having made it clear that the G-7 could no longer perform this function.
The major emerging economies are too large and too important to be left out of the search for globally cooperative outcomes.
The crisis also convinced most of us that non-cooperative outcomes are likely to be distinctly sub-optimal in terms of growth, stability, and sustainability.
The G-20 can say the right things about cooperation.
But, to perform this function, it needs a knowledgeable, credible, and effective secretariat.
That is the IMF.
The Mutual Assessment Process to which the G-20 countries have agreed is a crucial component of the rebalancing program, for it is where the pieces of a cooperative strategy for growth will be identified, evaluated, and assembled.
If it works, what will emerge will be commitments from G-20 countries to undertake policies that are globally beneficial – on the condition that others are keeping their commitments. The US may reduce its deficits faster than it would in the non-cooperative case, but only if surplus countries are working to reduce their excess savings.
Rebalancing is not the only cooperative imperative.
The international exchange-rate system is at least partially broken. The old hybrid – in which advanced countries operated with floating exchange rates and open capital accounts, while developing countries managed the exchange rate via capital controls and reserve accumulation as part their growth strategies – worked as long as emerging markets’ systemic effects were relatively small.
Those days are gone.
The distortions and distributional issues are set to become more pressing as the size and impact of the major emerging economies increases, owing to their return to rapid growth, and as the advanced countries experience an extended period of sluggish performance.
To accommodate the needs of the emerging economies, as well as the interests of advanced countries, a new system will be needed, in which exchange rates are managed but adjusted according to criteria that balance domestic growth and global stability.
The IMF will be at the center of the design and implementation of any new system, by reason of mandate and expertise.
The IMF is already playing a constructive role in Europe in cooperation with the EU, and its leadership is rebuilding relations with Asia.
It is much better capitalized than before the crisis, and its governance structures are being reformed to give emerging-market members a larger voice in strategy and policy.
All of this is needed to enable the Fund to support the global coordination functions for which it is uniquely well equipped.
Even with an authoritative IMF, the problems we face are daunting.
But without it, the G-20 will mostly likely be reduced to a talking shop, characterized by good intentions, but with no effective way of realizing them.
The IMF Beyond The Crisis
WASHINGTON, DC – When world leaders gather in Pittsburgh for the G-20 summit, they will take stock of the impact of the stimulus measures undertaken so far and discuss how to coordinate an orderly exit from those measures.
They will need to strengthen international guidelines for capital requirements for large multinational banks and address the perverse financial incentives that led to irresponsible risk-taking in the financial sector.
But the most lasting imprint they could leave is to give the International Monetary Fund a broader mandate after this crisis is over.
The IMF’s relevance has greatly increased during the crisis.
It successfully contributed to a coordinated fiscal and monetary stimulus, which helped avert a cyclical meltdown.
Its resources have tripled, enabling it to come to the rescue of countries as diverse as Iceland, Pakistan, and Ukraine, which were cut off from international capital markets.
And the Fund has assisted low-income countries with large loans at unprecedented zero interest rates.
The G-20 has shown leadership in providing the political and financial backing for these changes, and the IMF has responded swiftly.
There is, however, a genuine risk that the political momentum will dissipate as the world economy slowly recovers.
It would be a big mistake to let that happen.
This crisis has shown that economic interdependence has grown to such an extent that policy coordination is unavoidable.
The IMF should be given a clear mandate that would give it the political clout to help prevent such crises from recurring.
The G-20 leaders should authorize the IMF to safeguard international financial stability.
All crises of the past two decades had their origin not so much in misguided fiscal and monetary policies, nor in misaligned exchange rates, but rather in the explosive dynamics of financial markets.
A strengthened role in ensuring financial stability would be a logical complement to the existing, but too narrow mandate the IMF has for overseeing the international monetary system.
The two are clearly interlinked.
A stronger financial stability role does not imply that the IMF would itself become a supervisor.
Rather the Fund should build on work done by the Financial Stability Board (FSB), the multilateral rule setting body established by the G-20.
This body is comprised of ministers of finance, central bankers, and supervisors from the G-20 countries.
The IMF can help monitor whether countries follow up on agreed undertakings in the FSB, and alert leaders to gaps in the regulatory framework and vulnerabilities in the financial system that need to be addressed.
But, for effective fulfillment of such a strengthened mandate, the IMF needs strong political backing that countries will follow up on its own advice as well.
This has been lacking in the past, as the IMF had insufficient instruments to enforce policy action.
Moreover, G-20 leaders should express their commitment to future policy coordination by, for example, organizing a peer-review process in which ministers would hold each other accountable for their economic and financial-sector policies.
The IMF would contribute to this process with analysis, focusing on economic interdependencies and spillovers from one economy to another.
Such surveillance can build on the findings of the early-warning exercise, which the IMF has initiated, together with the FSB.
This exercise alerts ministers on low-risk but high-impact events and advises them on appropriate courses of action.
The IMF can monitor the follow-up that countries give to policy advice following from these exercises.
Global financial stability must be secured by a better functioning international monetary system.
The IMF should analyze how to move in an orderly way from a dollar-based system to a multipolar system.
The Special Drawing Right, the IMF-issued reserve currency based on a basket comprising the dollar, euro, yen, and pound sterling, may play a useful role here.
(The yuan should be included as soon as China makes its currency convertible.)
A multipolar system may help better address global imbalances than the current dollar-based system, which simply perpetuates large imbalances as countries pile up large dollar reserves.
The need for such build-up would lessen if the IMF develops into an insurance-type of institution that has SDR credit lines readily available.
Today’s political momentum should be used to carve out a strong role for the IMF beyond the crisis.
International policy coordination, which has been effective in averting a financial meltdown, should continue after the crisis, preferably in the form of a peer-review process in the G-20 underpinned by IMF analysis.
But continued political support for the IMF needs to be based on fairness in the institution itself.
Quotas and influence in the international financial institutions should be based on countries’ economic weight and the ability to contribute financially.
Therefore, the upcoming quota review will have to give a greater weight to countries that are currently underrepresented, particular the world’s dynamic emerging economies.
The IMF: Change it or Close It
LONDON: New management usually signals a new beginning.
For the International Monetary Fund, however, the opposite is needed.
Michel Camdessus' successor as IMF managing director should be charged not with renewing and reinvigorating the Fund, but with either drastically curtailing its functions or closing it down.
Founded in 1944 and financed by its member governments, the IMF was designed as a type of insurance arrangement to support a system of fixed exchange rates based on the American dollar and, ultimately, on gold.
The competitive devaluations that plagued the interwar years were to be made a thing of the past.
Countries suffering temporary setbacks and in need of dollars to buy imports could turn to the IMF for "balance of payment support," thus saving them from devaluation.
Once an economy turned around, the IMF loan would be repaid.
Back then there was a dearth of private lenders.
International capital markets were small and constrained by exchange controls, a minefield of regulations, and the lack of convertibility of even the major currencies.
Most capital flows were official – government to government.
In such a world, the IMF's founders rightly discerned that IMF-type aid was essential.
Today, with no fixed exchange rates to defend, the raison d' tre for the IMF has vanished. The world has witnessed an explosive expansion of private international capital markets.
So the IMF should have disappeared years ago, but it is in the nature of international institutions that they live on long after they have lost their usefulness. Lose one role, they create another.
The IMF has transformed itself into a purveyor of aid in the form of dollar loans to the rulers of the Third and postcommunist worlds.
Heavily subsidized, the loans are attractive to borrowing governments, especially those whose credit ratings have plummeted.
No surprise, then, that countries are ambivalent about preparing themselves to insure against financial shocks.
Relax, the Fund will bail us out: seems to be the motto.
The IMF argues that it must lend with a subsidy, otherwise countries would never accept the Fund's severe "conditionality."
The IMF often ruthlessly requires a reform program which, inter alia, increases tax revenues, restricts the printing of money, and frees up international trade and payments.
Although the Fund has committed grave errors (Thailand and Russia of late), a majority of economists reckon that they are hawking the right medicine.
But there is many a slip between Washington's mouth and Moscow's lip.
Although sometimes bridling at liberalization measures, on the whole, borrowing governments welcome reforms that increase their revenues, as these improve the prospects of staying in power.
The rise in taxation can be blamed on the IMF, with the increased revenues siphoned off for political purposes.
What is to be done?
Can the IMF be abolished, or its functions turned over to a privatized World Bank? Both are probably beyond the realm of possibility.
So the question really is, not one of abolition, but of reform – of renegotiating the Bretton Woods agreements of 1944 (as amended) that gave birth to the IMF, and of setting specific and limited functions for it in the new articles.
One basic reform should be to transform the IMF into a super rating agency, like Standard & Poors or Moodys.
The IMF would then have primary responsibility for assessing the credit worthiness of all 160 member governments and perhaps government agencies.
The IMF, of course, would do more than S&P because it would be responsible for giving advice when requested by governments.
The loan operations of the IMF would be wound up over a suitable period.
It is now widely appreciated that the real role of the IMF today is to give its views on macroeconomic policy which can inform the very large flows of private capital that are moving about the globe.
I agree. But then what is the role of subsidized lending?
Rating agencies do a splendid job without compromising themselves by lending – and of course they do themselves lead the markets.
Why not the IMF?
Elimination of the IMF's lending functions would solve the problem of perpetual turf wars between it and the World Bank. The confusion that this has caused among borrowers and lenders would disappear.
The IMF could continue with its other roles, such as providing and official center and forum for discussing international economic problems, and perhaps even for the resolution of disputes.
Such reforms, though feasible, I confess are unlikely.
Despite the Asian and Russian fiascos, the general view among the international financial clerisy is that the IMF needs more, not fewer functions.
It is said that with the globalization of finance the world needs a central bank and that the IMF is the natural basis on which to build such a capacity.
The IMF would be freed from its political straitjacket, and like the new European Central Bank, should be independent of national governments. The IMF, it is argued, should have the power to create money and to carry out the lender-of-last-resort function to countries, rather than banks, on a global scale.
After all, it is said that the advent of globalization has rendered distinct national moneys dependent, if not powerless.
The call is for a new financial architecture that reflects these realities.
One may readily dismiss such suggestions as mere pipe dreams of the "one-worlders' which will be resolutely opposed by the giants of America's Federal Reserve Board and Congress.
I suspect that this is true today, but I also know that only two decades or less ago many of us thought that there would never be a euro.
Perhaps we should be less sanguine this time.
The IMF Comes to Germany
Horst Koehler's departure as Managing Director of the IMF to seek election as President of Germany provides an occasion for a moment of reflection, both about the Fund and the state of economics.
On the eve of Koehler's arrival as Managing Director, the world had experienced a period of financial turbulence not seen since the 1930's.
Confidence in the IMF was at an all time low.
It had badly mismanaged the East Asian crisis, the Russian crisis, and the Brazilian crisis.
A cloud hung over his predecessor. Kohler's election was itself clouded in controversy.
Surely, in choosing its leader, an international public institution should look for the most qualified person, and the choice should be made in as open and transparent manner as possible.
Principles of democratic accountability, about which the IMF spoke forcefully in the developing world, demanded this.
Yet in the end, an agreement between America and Europe dictated that the leader of the IMF should be a European.
The Europeans then agreed that Germany had not had its fair turn at the leadership of a major international organization, and so the choice was a simple one: a German acceptable to America would get the job.
Experience in developing countries, where virtually all of the crises with which the IMF has had to deal occur, was not even thought to be a pre-requisite!
In the last three years, much has changed - but much remains the same.
It appears that the selection of the new IMF managing director will be no more open than the last.
If confidence in the IMF is slightly higher than it was at its all-time low, its performance has been mixed.
The rhetoric has certainly improved.
The Fund now openly talks about the need to focus on poverty, and it candidly acknowledges that it had imposed too much conditionality when providing financing to poor countries.
With the successive failures of IMF bailouts, the Fund has been looking for alternative strategies for handling crises.
It has yet to find one.
But at least it now recognizes that capital market liberalization ­- long the centerpiece of its agenda - did not bring developing countries faster growth, only more instability.
These are big changes, and they should be lauded.
But on the fundamental questions of economic management, the record is far less positive.
It is almost unanimously recognized that Argentina was badly handled, with recovery beginning only after the authorities abandoned the IMF's strictures.
Lending resumed when the authorities made it clear that Argentina would rather default than let the IMF continue to dictate policies that had contributed to disaster in the first place.
In Brazil, the IMF is given credit for averting another disaster, but at what price?
The economy has virtually stagnated, making it impossible for President Lula to advance the social goals on which he had run for office.
The IMF's economic framework still does not provide for countercyclical fiscal policies, because the IMF remains ambivalent about the standard Keynesian prescription of stimulating an economy in a downturn.
In Brazil and elsewhere, the IMF's distorted accounting frameworks ­- what it does and does not count as expenditures - continues to impede the investments required to modernize public-sector enterprises and to put a major roadblock in the way of land reform.
For example, when the government borrows to buy land, it is treated as debt, but the offsetting transaction when it sells the land through a mortgage effectively goes unrecognized.
While the President of Germany is not supposed to intervene in the day-to-day management of the country, his voice will no doubt be influential.
It is here that Germany should take pause and look at the record.
Clearly, Germany faces many difficulties; most economists agree that reunification was mishandled and the burden on the German economy correspondingly excessive.
European enlargement, creating large numbers of lower-wage workers at Germany's borders, will pose new challenges.
Economists differ on how best to meet these challenges.
But the IMF's track record on diagnosing problems and prescribing solutions is not enviable.
Its conservative philosophy has consistently failed to produce economic growth, and the benefits of what growth has occurred have disproportionately gone to the wealthy.
Latin America, where the Fund's doctrines have been taken most seriously, has suffered far slower growth as a result.
Indeed, growth in the 1990's was little more than half the rate recorded in the pre-reform decades of the 1960's and 1970's.
Meanwhile, East Asia, where governments eschewed these doctrines and were active in promoting growth has seen incomes soar and poverty plummet - despite the crisis of 1997.
In Europe, the record of "conservative" economic prescriptions is little better.
The contractionary fiscal and monetary policies imposed by the Stability Pact and a European Central Bank fixated on inflation have taken a heavy toll.
The strong Euro has made matters worse.
Europe needs structural reforms, but such reforms alone will not end the Continent's malaise, and some measures - those that weaken employment protection or the social safety net - may come at a high price, especially for people at the bottom.
Sweden has shown that there is another model of a market economy.
While it has trimmed its welfare state, it has not abandoned it.
Economic performance equals or exceeds that in most of the rest of Europe.
Germany will be sadly disappointed if it thinks that by veering in the direction of economic conservatism, it will rise out of its current doldrums.
The IMF Does Europe
CAMBRIDGE – With the International Monetary Fund playing a central role in the eurozone’s blueprint for a bailout of Greece, the multilateral lender has come full circle. In its early days after World War II, the IMF’s central task was to help Europe emerge from the ravages of the war.
Once upon a time, the Fund had scores of programs across the Continent (as Rong Qian, Carmen Reinhart, and I illustrate in new research on “graduation” from sovereign debt crises.)
But, until the financial crisis, most Europeans assumed they were now far too wealthy to ever face the humiliation of asking the IMF for financial assistance.
Welcome to the new era.
Europe has become ground zero for the biggest expansion of IMF lending and influence in years.
Several large Eastern European countries, including Hungary, Romania, and Ukraine, already have substantial IMF loan programs.
Now, the eurozone countries have agreed that the Fund can come into Greece and, presumably, Portugal, Spain, Italy, and Ireland, if needed.
The IMF’s resurgence over the past year is breathtaking.
Castrated by populist rhetoric during the Asian debt crisis of the late 1990’s, the Fund had been struggling to re-anchor its policies and rebuild its image.
When France’s Dominique Strauss-Kahn took over the helm in the fall of 2007, even poor African countries were shunning the IMF like a leper, preferring to make deals with non-traditional lenders such as China.
Absent new business and new revenues, the Fund was facing dire cutbacks to ensure its own survival.
What a difference a crisis makes.
Now the IMF has ascended Mount Olympus.
In April 2009, G20 leaders approved a quadrupling of the Fund’s lending capacity.
The increase was perhaps exaggerated in the heat of the moment, but a good chunk of the money actually appears to have materialized.
And for Europe, the help has come none too soon.
Does the IMF’s arrival in Europe signal the beginning of the end of the region’s staggering debt woes?
Hardly.
The Fund does not bestow gifts; it only offers bridge loans to give bankrupt countries time to solve their budget problems.
Although countries occasionally can grow their way out of debt problems, as China did with its 1990’s banking crisis, bankrupt countries usually face painful budget arithmetic.
Short of default and inflation, most countries are forced to accept big tax hikes and spending cuts, often triggering or deepening a recession.
To be fair, the Fund’s reputation for imposing austerity is mostly an illusion.
Countries usually call in the IMF only when they have been jilted by international capital markets, and are faced with desperate tightening measures no matter where they turn.
Countries turn to the Fund for help because it is typically a far softer touch than private markets.
But gentleness is relative.
It will be very tough – not only for Greece, but for all the other overextended countries of Europe – to tighten fiscal policy in the midst of recession without risking a deepening spiral.
Simply put, no one wants to be the next major IMF supplicant.
Nor does the IMF’s arrival mean that bond holders are off the hook.
As Qian, Reinhart, and I document, there have been numerous instances in which countries enter IMF programs but end up defaulting anyway.
The most famous case is Argentina in 2002, but other recent examples include Indonesia, Uruguay, and the Dominican Republic.
The endgame could be the same for many European countries.
Ukraine is already struggling.
But, for the most part, the sovereign default process is slow-motion Kabuki theater.
Why should a country choose to default as long as there are rich benefactors willing to lend money to preserve an illusion of normalcy?
Bond markets are easily lulled.
The stakes for the IMF in Europe are huge.
It is not going to be an easy balancing act. If the Fund attaches tough “German-style” conditions to its loans, it risks provoking immediate confrontation and default.
This is the last thing that it wants to do.
So far, it has been pretty soft in Eastern Europe, endorsing programs that depend on optimistic projections of both future budget cuts and economic growth.
The problem with being “Mr. Nice Guy” for too long is that, even with its vast new resources, the IMF cannot let clients hang on forever.
If it does, it might not have sufficient funds for the next crisis, which will inevitably come, possibly from an unexpected quarter such as Japan or China.
Moreover, if the Fund loses all credibility for catalyzing budget reform, its magnanimous bailouts will only serve to exacerbate the larger global sovereign-debt crisis that is brewing not just in Europe, but in the United States, Japan, and elsewhere.
Slow growth, aging populations, and soaring deficits are a dangerous mix.
The question for the IMF in Europe is not whether it has a plan viable for getting in.
It has landed in force.
The question is whether it has a plausible exit strategy.
The IMF Fails Again
It is six years since the IMF's fateful meeting in Hong Kong, just before the global financial crisis.
I was there.
What a peculiar meeting it was.
To those paying attention, it was clear that a crisis loomed.
Capital market liberalization was the culprit, exposing countries to the vagaries of international capital flows--to both irrational pessimism and optimism, not to mention the manipulation of speculators.
Yet the IMF was still lobbying to change its charter in order to force countries to liberalize their capital markets, ignoring the evidence that this did not lead to enhanced growth or more investment, but only to more instability.
The crises that erupted later that year undermined confidence in the IMF and led to discussions about "reforming the global financial architecture."
Now six years later, we can say that those discussions did not lead to much real change.
Some suggest that the fancy term "reforming the global financial architecture" was a dead giveaway.
The US Treasury and the IMF knew, or at least hoped, that with the passing of the crisis, global attention would turn elsewhere.
While wrong about what to do in the crisis, on this point they were right.
But change has occurred, though sometimes more in rhetoric than reality.
Today the IMF is more aware of the impact its programs have on poverty--though it still does not produce a "poverty and unemployment impact" statement when it presents a program.
The Fund has recognized the importance of participation and ownership.
No longer are programs simply a matter between the IMF, central bank governors, and finance ministers.
The IMF has recognized that there was excessive conditionality, and that these conditions led to a lack of focus.
The IMF has not, however, fully grasped that the conditions were often dangerously misguided, and often dealt with political issues that were beyond its mission.
After criticizing the East Asian countries for a lack of transparency, the IMF acknowledged that it, too, was insufficiently transparent, and made reforms--though sometimes it seems that it thinks that a better Web site is a substitute for real transparency.
Unfortunately, it still has not recognized a basic principle underlying modern democracy: citizens' right to know.
After the failure of the Argentina bail out, the IMF recognized the need for an alternative approach.
Earlier, it ignored calls for standstills and bankruptcy, saying that that would entail the abrogation of the debt contract.
Finally, the IMF recognized that just as individuals need the right to a fresh start, so do governments.
Unfortunately, it did not recognize that as a major creditor it could never be viewed as an impartial judge, and so could not have a pivotal role.
It never fully grasped the political and economic issues underlying the design of bankruptcy laws.
Under pressure from global civil society, the IMF finally did agree to an enhanced debt forgiveness program for the poorest countries.
Regrettably, it set standards and procedures such that few countries achieve the debt relief they need.
At least in East Asia, the IMF recognized that excessive fiscal stringency contributed to the downturn, though it still pushed excessive fiscal stringency in Argentina when that country went into crisis, with predictably disastrous results.
It is good news that the IMF has recognized the limits of its policies and positions.
But we should expect more of the IMF than just doing less harm than in the past.
Even without capital market liberalization, the world will continue to face enormous volatility.
Crises will not be things of the past.
Those who expected major reforms in the global financial architecture may well be sorely disappointed by what has happened in the past six years.
For any fundamental reforms must address not only the difficult problems posed by the global reserve system and the burdens of risk borne by the developing countries, but also global governance.
But there are strong vested interests in upholding the status quo.
It is one thing to rearrange the chairs around the table, and quite another to change the table itself or those who have a seat at it.
So it is no surprise that another annual meeting of the IMF passed without any major steps forward in "reforming the global financial architecture."
Instead, there was much discussion of another one of the symptoms that something is wrong.
The issue of the day was whether China's exchange rate is overvalued, and if so, what should be done about it.
Developing countries were told, once again, to get their houses in order, to address issues of governance, and to undertake "painful" structural reforms.
It is, of course, always much easier to encourage others to undertake painful reforms than to look inward.
The failed WTO meeting in Cancun of two weeks ago should serve as a warning: something is fundamentally wrong with how the global trading system is managed.
So, too, is something fundamentally wrong with the global financial system.
How many more meetings of the IMF will pass, how many more crises will occur, before this harsh truth sinks in?
The IMF Is Bleeding Argentina to Death
When Argentina's financial crisis first exploded, I pinned the primary responsibility on Argentina itself, rather than on international institutions such as the IMF.
Now, half-a-year later, the balance of responsibility needs to be reconsidered.
Even though Argentina is, in the last analysis, mainly responsible for its fate, the IMF is not helping.
The problem is not only, or even mainly, the IMF's delay in providing money to Argentina. The bigger problem is the paucity of correct ideas coming from the IMF.
The IMF lacks a clear idea about what to do in Argentina.
It continues to pound on one theme alone: that Argentina's economic crisis is the result of fiscal profligacy, the result of a government living beyond its means.
So it emphasizes the need for Argentina to cut budget expenditures.
As Argentina's crisis worsens, indeed with output possibly collapsing by 10 to 15% this year and with unemployment soaring, the IMF keeps asking for deeper cuts.
This is something like the 18 th century medical practice in which doctors "treated" feverish patients by drawing blood from them, weakening the patients further and frequently hastening their deaths.
This IMF approach was abandoned in rich countries about seventy years ago during the Great Depression.
When output crumbled due to a profound banking and financial crisis (linked to the collapse of the gold standard), tax revenues plummeted in the US and Europe, and conservative governments tried to cut budget spending to limit budget deficits.
As they cut, output fell further and economic misery deepened.
In 1936, John Maynard Keynes demonstrated the futility of trying to balance the budget in the midst of an economic depression.
The IMF is tragically ignoring this logic in Argentina.
Argentina's widening budget deficit is mainly the result of its economic collapse since 1999, not the cause of it.
The deficit was relatively mild until 1999, when the economy went into recession.
Yes, budgetary waste exists, but it is not the cause of an extreme macroeconomic crisis.
The recession was mainly caused not by budgetary spending, but rather by Brazil's sharp devaluation of its currency in February 1999, a step which made Argentina's own Peso uncompetitive and led investors (rightly, it turned out) to expect a similar devaluation in Argentina.
As investors fled the country because of fear of devaluation (in a period in which the Argentine Government was promising never to devalue the peso, fixed at one-to-one with the US dollar), interest rates rose and bank deposits fell.
This deepened the recession in 2000 and 2001 and led to a rising budget deficit because of declining tax revenues.
Argentina's Government of the time (under President de la Rua) and the IMF tried the Depression-era false "cure" of budget cuts, but there was no way that austerity could keep up with falling tax revenues.
The budget deficit continued to widen as the economy collapsed.
The correct approach to solving Argentina's problems in 2001, and now, would have been to end speculation over devaluation.
I favored the approach of "dollarization", or replacing the Peso by the US dollar and thereby ending the fear of a future change of the exchange rate.
Instead, the government closed down the banking system, so that depositors could no longer convert their pesos into dollars!
Closure of the banking system led to a full collapse of confidence in the country.
Now, Argentines are emigrating to Europe and the US in large numbers and are trying to convert Pesos to dollars at any opportunity.
The Peso is collapsing in value, and the bank system remains frozen.
The economy is "dead in the water."
The correct move now is to restore confidence in the banking system and the currency.
This can best be accomplished by dollarizing the economy, just as Argentina should have done last fall.
In addition, the international community should offer emergency funding to help provide deposit insurance for the banking system, thereby re-establishing a modicum of confidence in financial institutions.
International banks in Argentina should work with the Government to restore banking functions within days, not months.
Argentina should be given a year's full suspension of payments on its foreign debts, to be followed by a deep reduction in overall indebtedness.
With banks reopened, a currency that works, and suspension of debt servicing, some short-term IMF loans could boost confidence and help the country overcome its crisis of confidence.
Only then should the Government pledge a responsible path of budget spending, but not extreme cuts.
Instead, the IMF recommends antiquated and phony solutions.
By focusing on the budget deficit, it is chasing symptoms, not causes.
It is putting forward economically and politically impossible recommendations, telling Argentina to cut public services to the extreme, when schools and hospitals are already on the verge of collapse.
For centuries, doctors weakened or killed their patients in large numbers through bleeding, until medicine became a science.
It is high time that the IMF approach its mission scientifically and recognize that it is on the wrong track in Argentina.
As a result, the IMF must increasingly share responsibility and blame for Argentina's havoc.
The IMF Is Not the Problem
Brazil's current presidential election campaign has again brought the IMF to the center of international debate.
Are IMF cures worse than the disease, as critics such as Nobel laureate Joseph Stiglitz allege?
Kenneth Rogoff, the IMF's chief economist, speaks for the defense.
Throughout much of the world, the IMF is caricatured as a demon of austerity.
Wherever the IMF appears on the scene to provide financial assistance, painful government budget cuts seem certain to follow.
This image of austerity appeals to the emotional need for stories with villains.
After all, good villains sell books--including books about globalization that demonize the IMF.
But does the image reflect reality?
Is the IMF, the member of the UN family charged to maintain global financial stability, really so evil or misguided that it can only propose policies that inflict economic pain instead of alleviating it?
I admit that the IMF has its faults, and I don't aim to gloss over them.
Until a year ago, when I left a professorship at Harvard University to become the Fund's chief economist, I was a vocal, if perhaps not vitriolic, critic of the IMF's management of the international monetary system.
Although the IMF has changed a lot in recent years, there is no denying that there are still major holes in the international system--not least the lack of a fair and orderly procedure for dealing with highly indebted countries that become insolvent.
The IMF is working to fill that gap now.
But the austerity charge is misconceived.
Troubled countries knock on the Fund's door for financial assistance only when all other creditors have turned their backs.
In most cases, a country is already in desperate fiscal straits by the time IMF economists arrive on the scene to discuss a loan.
More often than not, the country has over-extended itself financially through some combination of imprudence and bad luck.
Countries come to the IMF precisely because they know that it will lend to them when no one else will, and at interest rates lower than most could only dream of, even in the best of times.
IMF loans thus relieve austerity: they help governments limit the amount of budgetary belt-tightening required in a crisis.
You think I am crazy?
Allow me to draw an analogy from my personal finances.
Just after I finished school, my older brother Hal ran into some financial difficulties.
He and his wife had started ripping out all the walls, plumbing, and wiring in their modest Washington apartment, hoping to refurbish it prior to the arrival of their first child.
It was an ambitious plan, but it seemed doable--until Hal started having problems with his baking business.
Suddenly they found themselves desperately over-extended.
Hal went to the bank for a loan, but with his business struggling, he didn't qualify.
With all his credit cards at their limit, and all his cash gone, Hal finally came to me for a loan.
I had managed to put aside some modest savings, which I freely lent him indefinitely at zero interest.
Even with my help, things weren't easy.
Hal had to work longer hours than ever before, and he still had to sharply cut back on household expenditures across the board.
But my loan did help, eventually Hal's business recovered, my nephew was born and--much later--the apartment remodeling project came to a successful conclusion.
Now, did my brother blame me for the period of belt-tightening austerity his family had to face?
No, obviously not.
Admittedly, this is a simplistic analogy, but it captures the essence of the issue.
Yes, I did not ask Hal what, exactly, he planned to do with my money (would he use it to fix his plumbing, to help his business, or would he waste it somehow?).
When the IMF comes in, it typically applies some degree of conditionality, as would any other lender, to ensure that its loan is eventually repaid, and used for its intended purpose.
Unlike my loan to Hal, the IMF usually does ask government officials to show how they plan to put their country back on its feet.
Indeed, it is this planning dialogue that does more than anything else to help stabilize the economy and restore a viable balance of payments.
It is not always an easy process, and reasonable people can and do disagree about the design of IMF-supported programs both before and after the fact.
The IMF really does need to listen to its critics and constantly to seek better ways to accomplish its aims.
But it is patently absurd to charge that misguided IMF policy advice is the main reason why debt-crisis countries face austerity.
When a country finally suffers through austerity and repays its IMF loans, no rich private shareholder gets fat as a result.
The IMF's shareholders are its 184 member countries, and the Fund does not really pay dividends, other than in an accounting sense.
As soon as one country repays its loans, the IMF is better placed to re-lend the foreign exchange to the next country in crisis.
However effective the IMF's crisis prevention efforts are, realistically there will always be a next crisis country.
Yes, the IMF needs many changes, as does the broader international financial system within which it operates.
But saying that it causes austerity is like saying that doctors cause plagues.
The IMF Needs Fresh Thinking on Capital Controls
CAMBRIDGE – Why does the International Monetary Fund make it so hard for people like me to love it?
The IMF has said and done all the right things since the crisis.
It has acted as quickly as any international bureaucracy can to establish new lines of credit for battered emerging-market countries.
It revamped its loan conditions to fit the times.
Under its capable managing director, Dominique Strauss-Kahn, and distinguished chief economist, Olivier Blanchard, it has been a voice for sanity on global fiscal stimulus in the midst of much cacophony.
For an institution that seemed on the verge of irrelevance not too long ago, this is quite a transformation.
But now Strauss-Kahn is throwing cold water on proposals to tax international flows of “hot money.”
The occasion was Brazil’s decision to impose a 2% tax on short-term capital inflows to prevent a speculative bubble and further appreciation of its currency.
When asked about the role of capital controls, Strauss-Kahn said he was not wedded to any rigid ideology on the subject.
Nonetheless, according to the Financial Times which reported the IMF chief’s views, “the IMF would not recommend them as a standard prescription either – as they carried costs and were usually ineffective.”
Unfortunately, this makes the new IMF sound too much like the old one.
Prudential controls on capital flows make a lot of sense.
Short-term flows not only wreak havoc with domestic macroeconomic management, but they also aggravate adverse exchange-rate movements.
In particular, “hot” capital inflows make it difficult for financially open economies like Brazil to maintain a competitive currency, depriving them of what is in effect the most potent form of industrial policy imaginable.
To be sure, by sending mixed signals to financial markets, the Brazilians may have botched their attempt to cool down inflows.
President Luiz Inácio Lula da Silva had dismissed talk of capital controls just a few days before they were imposed.
A meaningful effort to influence the currency’s level requires determination to adjust financial taxes and complementary policies until they show their effects.
Timidity is counterproductive, because it backfires.
But more important was the symbolism of Brazil’s move, for it suggests that emerging markets may be getting over their doomed infatuation with foreign finance.
Surely, as the economists Arvind Subramanian and John Williamson have written, emerging markets deserve the IMF’s help in designing better prudential controls over capital inflows instead of having their wrists slapped.
Strauss-Kahn’s response that taxes on capital flows are costly and ineffective is therefore unfortunate.
It is also emblematic of the knee-jerk reaction that often obfuscates the pros and cons of capital controls.
You can oppose capital controls because you believe financial markets are on the whole a force for good, and that any interference will therefore generate efficiency losses.
Or you can oppose controls because you think that they can be easily evaded and are therefore doomed to remain ineffective.
What you can’t do is oppose capital controls because they are both costly and ineffective.
Think about it.
If capital controls can be easily evaded – say, by manipulating the timing of transactions or through mis-invoicing of trade flows – then there will be little effect on the actual volume of capital inflows.
The controls will impose few costs on markets (though they may involve some administrative costs for the government).
If, on the other hand, market participants do bear significant costs – either because of the taxes they pay or because of the expenses they incur to evade them – the controls will be effective in restraining inflows.
If you are trying to have it both ways, the chances are you have made up your mind before you have really thought hard about it.
It may seem curious that Strauss-Kahn’s instincts are so off the mark on the matter of capital controls.
One might have thought that a socialist, and a French Socialist at that, would be more inclined toward finance skepticism.
But the paradox is more apparent than real.
Financial markets in fact owe French Socialists a great debt.
Received wisdom holds the United States Treasury and Wall Street responsible for the push to free up global finance.
But far more influential may have been the change of heart that took place among French Socialists following the collapse of their experiment in Keynesian reflation in the early 1980’s.
When capital flight forced François Mitterrand to abort his program in 1983, France’s Socialists performed an abrupt volte-face and embraced financial liberalization on a global scale.
According to Harvard Business School’s Rawi Abdelal, this was the key event that set in motion the developments that would ultimately enshrine freedom of capital movement as a global norm.
The first stop was the European Union in the late 1980’s, where two French Socialists – Jacques Delors and Pascal Lamy (the president of the European Commission and his assistant, respectively) – led the way.
Then it was the turn of the Organization of Economic Cooperation and Development (OECD).
Eventually, the IMF joined the bandwagon under Michel Camdessus, another Frenchmen who had served as Governor of the Bank of France under Mitterrand.
The IMF’s reaction to Brazil’s financial taxes reflects how ingrained finance fetishism has become, and how difficult it is to reintroduce some balance in the debate on capital flows – even in the aftermath of the greatest financial crisis the world has experienced since the Great Depression.
The problem is not just right-wing market fundamentalists.
The failure of imagination extends across the entire political spectrum.
Referring to capital controls, John Maynard Keynes famously said: “what used to be heresy [restrictions on capital flows] is now endorsed as orthodoxy.”
What an irony that more than 60 years later we need to undergo the same shift in mindset.
The IMF’s America Problem
The IMF’s meeting this spring was lauded as a breakthrough, with officials given a new mandate for “surveillance” of the trade imbalances that contribute significantly to global instability.
The new mission is crucially important, both for the health of the global economy and the IMF’s own legitimacy.
But is the Fund up to the job?
There is obviously something peculiar about a global financial system in which the richest country in the world, the United States, borrows more than $2 billion a day from poorer countries – even as it lectures them on principles of good governance and fiscal responsibility.
So the stakes for the IMF, which is charged with ensuring global financial stability, are high: if other countries eventually lose confidence in an increasingly indebted US, the potential disturbances in the world’s financial markets would be massive.
The task facing the IMF is formidable.
It will, of course, be important for the Fund to focus on global imbalances, not bilateral imbalances.
In a multilateral trading system, large bilateral trade deficits are often balanced by bilateral surpluses with other countries.
China might want oil from the Middle East, but those in the Middle East – with so much wealth concentrated in so few hands – might be more interested in Gucci handbags than in China’s mass-produced goods.
So China can have a trade deficit with the Middle East and a trade surplus with the US, but these bilateral balances indicate nothing about China’s overall contribution to global imbalances.
The US is jubilant about its success in expanding the IMF’s role, because it thought that doing so would ratchet up pressure on China.
But America’s glee is shortsighted.
If one looks at multilateral trade imbalances, the US stands head and shoulders above all others.
In 2005, the US trade deficit was $805 billion, while the sum of the surpluses of Europe, Japan, and China was only $325 billion.
Any focus on trade imbalances thus should center on the major global imbalance: that of the US.
The task of assessing trade imbalances – whom to blame and what should be done – involves both economics and politics.
Trade imbalances are the result, for instance, of household decisions about how much to save and how much – and what – to consume.
They are also the result of government decisions: how much to tax and spend (which determines the amount of government savings or deficits), investment regulations, exchange-rate policies, and so forth.
All of these decisions are interdependent.
For example, America’s huge agriculture subsidies contribute to its fiscal deficit, which translates into a larger trade deficit.
But agricultural subsidies have consequences for China and other developing countries.
Were China to revalue its currency, its farmers would be worse off; but in a world of free(r) trade, US farm subsidies translate into lower global agricultural prices, and thus lower prices for Chinese farmers.
By extending its largesse to rich corporate farms, the US may not have intended to harm the world’s poor, but that is the predictable result.
This poses a dilemma for Chinese policymakers. Subsidizing their own farmers would divert money from education, health, and urgently needed development projects.
Or China can try to maintain an exchange rate that is slightly lower than it would be otherwise.
If the IMF is to be evenhanded, should it criticize America’s farm policies or China’s exchange-rate policies?
Ascertaining whether a country’s trade imbalances are the result of misguided policies or a natural consequence of its circumstances is also no easy task.
A country’s trade deficit equals the difference between domestic investment and savings, and developing countries are normally encouraged to save as much as they can.
Evidently, China’s population has more than responded to such admonitions.
Stronger safety net programs might reduce the need for precautionary savings in the future, but such reforms cannot be accomplished overnight.
Investment is high, but further investment growth risks misallocating money, so reductions in China’s trade imbalance may be hard to achieve.
Moreover, a change in China’s exchange rate would do little to alter the multilateral trade deficit in the US.
Americans might simply switch from buying Chinese textiles to imports from Bangladesh.
It is difficult to see how a change in China’s exchange rate would have a significant effect on either savings or investments in the US – and thus how it would redress global imbalances.
With the US trade deficit the major global imbalance, attention should focus on how to increase its national savings – a question that US governments have struggled with for decades, and one that was frequently debated when I was chair of President Clinton’s Council of Economic Advisers.
While it’s true that tax preferences might yield slightly higher private savings, the loss of tax revenues would more than offset the gains, thereby actually reducing national savings.
We found only one solution: reduce the fiscal deficit.
In short, the US bears responsibility both for trade imbalances and the policies that might quickly be adopted to address them.
The IMF’s response to its new mission of assessing global imbalances will thus test its battered political legitimacy.
At its spring meeting, the Fund failed to commit itself to choosing its head on the basis of merit, regardless of nationality, and it did not ensure that voting rights are allocated on a more limited legitimate basis.
Many of the emerging-market countries, for example, are still underrepresented.
If the IMF’s analysis of global imbalances is not balanced, if it does not identify the US as the major culprit, and if it does not direct its attention on America’s need to reduce its fiscal deficits – through higher taxes for America’s richest and lower defense spending – the Fund’s relevance in the twenty-first century will inevitably decline.
The IMF’s Lending Overhaul
The International Monetary Fund should be an essential port of call for emerging-market and developing countries facing financing needs.
With its ability to mobilize large financial resources and buttress policy credibility, the IMF can help mitigate the large economic and social costs often associated with crises.
Against this background, the world has come together in the midst of the crisis to radically overhaul the framework for IMF lending.
Now and in the future, the world needs the IMF to respond flexibly and effectively to its members’ needs.
First and foremost, our financing packages should be large enough relative to the size of the problem to make a difference.
In addition, the absence of an IMF insurance facility with acceptable terms has been a major gap in the global financial architecture, especially for the more dynamic emerging-market economies.
This is despite all the evidence of the value of early access to IMF financing, before a tough situation deteriorates into a crisis.
Moreover, while it remains essential to attach policy conditions to IMF-supported programs, they should be focused squarely on solving a country’s critical problems, so that the conditions will be relevant rather than intrusive.
With our members’ support, we are implementing important reforms to our lending policies that will encourage countries to approach the IMF early on, before crises become severe and almost intractable.
The reform comprises three core elements:
First, policy conditions associated with future IMF lending will be better tailored to country circumstances.
A new Flexible Credit Line makes high-volume financing available – even before a crisis has struck – without any ex post policy conditionality to qualifying countries with strong economic fundamentals and policy frameworks.
Some observers have dubbed the new facility “EZ loan,” though few countries meeting the qualifying criteria would consider their policy achievements – and their commitment to maintaining that record – anything but “easy.”
For others, conditionality will be more tightly focused on core areas, and “structural” conditions that require hard-to-time legislative measures will be judged in a less formalistic manner.
Second, for those not qualifying for the new instrument, the Fund’s workhorse lending facility, the Stand-By Arrangement, will be made more flexible along several dimensions.
These include permitting high financial access even before a crisis materializes, and allowing disbursements to be more front-loaded.
Third, the amount of lending available from the IMF is being raised substantially.
Normal limits on access to IMF resources are being doubled – a development consistent with the growing consensus that the Fund’s lending capacity needs to be at least doubled given the severity of this crisis.
This is extremely important, since few things are as fatal to the credibility of a policy package as insufficient financing.
Taken together, these steps address the core problems – the stigma associated in the past with IMF conditionality, the availability of early pre-crisis financing, and the overall size of rescue packages – that have sometimes diminished the effectiveness of the Fund’s role as a crisis lender.
Emerging markets that approach the IMF early on for pre-crisis financing will find shelter from the winds of global deleveraging, which in turn will help contain the spread of the crisis.
The IMF has already moved quickly to help many of our member countries in this time of crisis, including by protecting social spending in order to cushion the impact of the crisis on the most vulnerable.
The lending reforms adopted this week will enable us to be even more flexible and responsive in assisting even more countries.
At the same time, these reforms are only a part of a much larger plan for IMF renewal.
Still in the pipeline are initiatives to increase concessional lending to low-income countries hit by the crisis, to strengthen the Fund’s surveillance and early warning capacity, and to improve its governance structure in ways that recognize the larger role of emerging-market countries in the world economy.
It is my hope that further action in all these areas will be taken in the coming months.
Together, they constitute a turning point in the way the IMF works, and will allow it to serve its global membership even better.
The IMF’s Half Step
BOSTON – “What used to be heresy is now endorsed as orthodox,” John Maynard Keynes remarked in 1944, after helping to convince world leaders that the newly established International Monetary Fund should allow the regulation of international financial flows to remain a core right of member states.
By the 1970’s, however, the IMF and Western powers began to dismantle the theory and practice of regulating global capital flows.
In the 1990’s, the Fund went so far as to try to change its Articles of Agreement to mandate deregulation of cross-border finance.
With much fanfare, the IMF recently embraced a new “institutional view” that seemingly endorses re-regulating global finance.
While the Fund remains wedded to eventual financial liberalization, it now acknowledges that free movement of capital rests on a much weaker intellectual foundation than does the case for free trade.
In particular, the IMF now recognizes that capital-account liberalization requires countries to reach a certain threshold with respect to financial and governance institutions, and that many emerging-market and developing countries have not.
More fundamentally, the Fund has accepted that there are risks as well as benefits to cross-border financial flows, particularly sharp inward surges followed by sudden stops, which can cause a great deal of economic instability.
What grabbed headlines was that the IMF now believes that countries could even use capital controls, renamed “capital flow management measures,” if implemented alongside monetary and fiscal measures, accumulation of foreign-exchange reserves, and macroprudential financial regulations.
Even under such circumstances, CFMMs should generally not discriminate on the basis of currency.
But has the IMF’s reconsideration of financial globalization gone far enough?
This month, the IMF’s Independent Evaluation Office released an assessment of the Fund’s policy on reserve accumulation that implies that a “one size fits all” approach to reserve accumulation continues to prevail within the organization.
Many emerging-market policymakers view accumulation of foreign-exchange reserves during the 2000’s as having insured their countries against exchange-rate volatility and loss of export competitiveness.
Yet the IMF pinned significant blame for global financial instability on this policy.
Not surprisingly, given their decades of experience with the management and mismanagement of capital flows, emerging-market policymakers have been watching the IMF’s “rethink” on these issues very closely.
From 2009 to 2011, with advanced economies pursuing near-zero interest rates and quantitative easing, yield-hungry investors flooded countries like South Korea and Brazil with hot money, fueling currency appreciation and inflating asset bubbles.
When the eurozone panic ensued in July 2011, inflows came to a halt and fled to the “safety” of the United States, Switzerland, and beyond.
Unlike in the past, however, emerging and developing countries avoided the worst, precisely because they had learned to accumulate foreign reserves and regulate cross-border capital flows, and to ease such measures to prevent or mitigate sudden stops.
And yet, despite abundant academic evidence and country experience to the contrary, the IMF remains stubbornly wedded to the idea of eventual capital-account liberalization.
In a new study that surveys and updates the economics literature, Arvind Subramanian, Olivier Jeanne, and John Williamson conclude that “the international community should not seek to promote totally free trade in assets –&#160;even over the long run – because…free capital mobility seems to have little benefit in terms of long-run growth.”
Thus, the IMF’s recommendation to use capital controls only after exhausting interest-rate adjustment, reserve accumulation, and prudential regulation is out of step with the profession.
Indeed, recent work in economic theory shows that capital controls can actually be the optimal policy choice.
For example, the new welfare economics of capital controls views unstable capital flows as negative externalities on recipient countries, which implies that regulations on cross-border flows are the optimal tools to address market failures, improve market functioning, and enhance growth, not worsen it.
Indeed, the IMF’s own research shows that countries that deployed capital controls first – or alongside a host of other macroprudential measures – were among the most resilient during the global financial crisis.
In many cases, the controls were neither market-based nor temporary.
The IMF also fails to appreciate fully that capital flows should be regulated at “both ends,” or at least that advanced-country regulations will not make matters worse.
IMF research over the last year has outlined circumstances in which industrialized countries should also take part in regulating global capital flows.
But the new view also highlights an important obstacle: many advanced countries’ trade and investment treaties prohibit the regulation of cross-border finance.
The good news is that Article VI of the IMF Articles of Agreement still stands: “Members may exercise such controls as are necessary to regulate international capital movements.”
The IMF is making strides in the right direction, but emerging markets will have to remain in the lead.
They have proven to be the best judges of their economic needs and priorities; as they consider the IMF’s new stance on financial globalization, they should continue to heed their own counsel.
The IMF’s Missed Opportunity
The IMF’s New Direction
WASHINGTON, DC – Roughly one year ago, the global economic situation looked grim: a severe global recession, sizeable wealth destruction, and declines in trade and employment.
But a disaster of “Great Depression” proportions was averted, thanks to unprecedented economic-policy coordination by governments around the world.
Continued cooperation, one hopes, will be the legacy of this crisis.
The global economy is now on a recovery path, albeit uneven, and financial conditions have improved substantially.
Clouds of uncertainty linger, however, and there is much unfinished business.
Indeed, the work needed to build a more robust, stable, and safe global financial system has only just begun.
Moreover, the recovery is not global, unemployment is still rising in most countries, global savings imbalances have not been addressed, and conditions in the worlds’ poorest states remain vulnerable.
These issues have broad implications for global stability and peace.
Remember, economic stability lays the groundwork for peace, while peace is a necessary precondition for trade and sustained economic growth.
In the annals of economic crises then, where do we find ourselves?
In policy terms, we are at a critical point where fundamental changes to the system can be made, in part because our collective memory is sufficiently fresh to supply the necessary political will.
We must not waste this opportunity.
What needs to be done?
Global economic governance, including at the IMF, must be reformed to reflect the realities of the current era, and global financial-sector supervision and regulation need to be strengthened.
Progress is well underway in both areas, but we must maintain the momentum into 2010 and beyond.
This year, leaders have moved decisively to make the G-20 the main forum for international economic cooperation; tripled the IMF’s resources; agreed to shift some of the Fund’s quota share to under-represented emerging and developing countries; and committed to submitting their economic policy frameworks to “mutual assessment,” with the IMF’s help.
Recognizing that countries can no longer expect to achieve their economic goals in isolation, this peer review aims to incorporate systematically the goal of collective global welfare into national policy planning.
More specifically, what are the governance priorities for policymakers in 2010?
This past autumn, IMF members endorsed the G-20’s proposals, and asked the Fund to address four key reform areas – the so called “Istanbul Decisions” – in 2010: the IMF’s mandate, the Fund’s financing role, governance, and multilateral surveillance.
First, we will re-assess the Fund’s original mandate – as set out in the IMF’s Articles, and as practiced in recent years – in light of the range of economic and financial-sector policies that currently affect global stability.
While the broad goals of promoting global financial stability and sustainable growth remain relevant, the surge in international capital flows, financial sector linkages, cross-border asset holdings, and the nature of this crisis all underscore the need to review the mandate and how we execute it.
Second, following from the mandate question, we need to work closely with members to determine the optimal financing role of the IMF.
Many countries have built up large official foreign-exchange reserves, in part as greater self-insurance against adverse external developments.
Self-insurance, however, complicates domestic monetary and exchange-rate management, represents a misallocation of capital domestically and globally, and raises the risk of bigger financial crises down the road.
As part of an overhaul of the Fund’s lending facilities, we introduced the Flexible Credit Line (FCL), a pre-emptive insurance facility for members with strong policies.
While three countries (Mexico, Poland, and Colombia) have used this facility, innovation on a greater scale is probably needed.
Third, in Istanbul, the IMF’s governing body endorsed the big step forward on governance agreed by the G-20: a shift in quota shares of at least 5% (by January 2011) from over-represented countries toward dynamic but under-represented emerging markets and developing countries.
This change will mark a much-needed step toward making the Fund more democratic, giving members a more credible stake in its management, strategic operations, and aspirations.
Greater legitimacy, in turn, will make the IMF more effective in promoting economic growth and stability in all of our member states.
Members must push ahead to ratify the 2008 quota increase, and to move forward the 2010 quota review.
Fourth, the IMF’s governing body endorsed the G-20 proposal for the Fund to help with their peer review.
The IMF has considerable experience with cooperative, peer reviews of members’ policy frameworks.
But its advice has not always brought about concrete policy action by members.
With the quota change noted above and the new G-20 “mutual assessment,” the traction of surveillance should become significantly deeper.
Policymakers need to follow through on their commitment to the peer review process.
Finally, in the area of financial-sector supervision and regulation, governments should forge ahead on reform of micro-prudential (individual entities) and macro-prudential (globally and nationally systemic) regulation.
The IMF is working with the Financial Stability Board and other organizations to develop new principles and guidelines, including on capital, liquidity, leverage, interconnectedness, systemically important institutions, the “perimeter” of regulation, and the pro-cyclical nature of rules.
The challenge in this field will be to guard against complacency, while not overburdening the system with excessive regulation.
Policymakers have a big agenda ahead, but they have already made an impressive start.
As long as they continue working together to address common challenges in a cooperative spirit, the prospects for success look good.
The IMF’s Next Mission?
The world economy is increasingly threatened by volatile market reactions to global imbalances at a time when the IMF has largely lost its original raison d’être as the world’s central monetary institution.
These two developments should stimulate the Fund to claim a new purpose as the world’s reserve manager.
In the 1960’s, the IMF managed the problems of all the major economies, and in the 1980’s and 1990’s, it developed as a crisis manager for emerging markets.
But that job is much harder now, because of the size of some of the big emerging economies.
And, in any case, the focus of financial nervousness is shifting back to the world economy’s core countries, such as the United States, the United Kingdom, and Australia, which are funding large current account deficits with surpluses from much poorer countries.
These surpluses reflect high savings rates, both in the private and the public sector, in oil-producing and emerging Asian economies, which have resulted in their rapid accumulation of foreign reserves.
But this is hardly a blessing for these countries.
Their reserves have become so large that even the announcement of a small shift in assets – say, from euros to dollars – can move markets and cause disruptions and panics.
Like past reserve regimes that offered a choice of assets (for example, the dollar, the pound, and gold in the interwar period), instability is inherent.
The new surplus countries’ attempts to find alternative reserve assets have been problematic.
Most of the attention has been fixed on China’s $1 trillion in reserves, and its efforts to maintain the value of those assets.
Diversification from US Treasury bills by investing some $3 billion in the Blackstone private equity fund this summer was swiftly followed by an embarrassing collapse in value.
On the receiving end, industrial countries’ governments are anxious that new sovereign wealth funds (SWF’s) are being used strategically, rather than simply following the logic of the market.
Even the successful model for SWF’s, Singapore’s Temasek, which for a long time went largely unnoticed, is now attracting a level of attention that its owners and managers never wanted.
The growing anxiety is understandable.
After all, given that emerging market economies’ central banks and SWF’s nowadays effectively dominate capital markets, outcomes no longer result from the interplay of millions of independent guesses, decisions, or strategies.
When entities of such a size make decisions, they are bound to act in a strategic way.
All the parties begin to suspect political manipulation.
But the resulting controversies can be resolved, and the political venom neutralized, through surveillance by multilateral institutions that are committed to achieving an overarching good.
That should be the IMF’s core function.
Today surveillance means, in effect, merely giving advice.
But in the 1960’s – when the IMF still supervised the rules of the Bretton Woods order’s par value system before its disintegration in 1971 – surveillance was linked to the Fund’s effectiveness as a major financial intermediary.
The IMF’s ability to give powerful advice to the most important countries, such as the UK, was enhanced by these countries’ dependence on IMF resources.
It was the IMF’s financial power that gave it its bite, and that power was enhanced by Fund borrowing, at first from the G-10, which established the General Arrangements to Borrow.
In the years after the collapse of Bretton Woods, the IMF reinvented itself as a principle vehicle for managing the surpluses that followed the oil price shocks of the 1970’s.
It borrowed from the new surplus countries, which thus partly managed their new assets through the intermediation of the IMF.
As a result, to the Fund could lend to those countries that suffered shocks from the increase in petroleum prices.
Indeed, a large financial actor can play a stabilizing role.
In the past, the counter-cyclical behavior of large private institutions stabilized market expectations during panics.
The house of Rothschild made the first half of the nineteenth century stable.
In the great panics of 1895-6 and 1907, J.P. Morgan calmed the US economy.
At the time of the Great Depression in the 1930’s, there was no equivalent power.
In 2007, there are some signs that Goldman Sachs feels obliged to lean against the wind in order to stabilize markets.
The IMF could be a powerful financial stabilizer if it managed a significant part of the new surplus countries’ reserve assets, for it would be well placed to take bets against speculators.
This would ultimately benefit the reserve assets’ owners, who, by virtue of accumulating large surpluses, have a similar interest in world economic and financial stability.
At the same time, the management of reserve assets by an internationally controlled asset manager would remove suspicions and doubts about the use of assets for strategic political purposes.
But, to carry out this completely new task, the IMF would need to regain the trust of its members.
The rise in reserves in many Asian countries was a deliberate response to the 1997 financial crisis, which fueled disillusion with the IMF.
So, before it could assume the role of global reserve manager, new surplus countries would need substantially more influence over the Fund’s governance.
Only then could they be confident that they would not be subject to politically motivated manipulation.
The IMF’s Switch in Time
NEW YORK – The annual spring meeting of the International Monetary Fund was notable in marking the Fund’s effort to distance itself from its own long-standing tenets on capital controls and labor-market flexibility.
It appears that a new IMF has gradually, and cautiously, emerged under the leadership of Dominique Strauss-Kahn.
Slightly more than 13 years earlier, at the IMF’s Hong Kong meeting in 1997, the Fund had attempted to amend its charter in order to gain more leeway to push countries towards capital-market liberalization.
The timing could not have been worse: the East Asia crisis was just brewing – a crisis that was largely the result of capital-market liberalization in a region that, given its high savings rate, had no need for it.
That push had been advocated by Western financial markets – and the Western finance ministries that serve them so loyally.
Financial deregulation in the United States was a prime cause of the global crisis that erupted in 2008, and financial and capital-market liberalization elsewhere helped spread that “made in the USA” trauma around the world.
The crisis showed that free and unfettered markets are neither efficient nor stable.
They also did not necessarily do a good job at setting prices (witness the real-estate bubble), including exchange rates (which are merely the price of one currency in terms of another).
Iceland showed that responding to the crisis by imposing capital controls could help small countries manage its impact.
And the US Federal Reserve’s “quantitative easing” (QEII) made the demise of the ideology of unfettered markets inevitable: money goes to where markets think returns are highest.
With emerging markets booming, and America and Europe in the doldrums, it was clear that much of the new liquidity being created would find its way to emerging markets.
This was especially true given that America’s credit pipeline remained clogged, with many community and regional banks still in a precarious position.
The resulting surge of money into emerging markets has meant that even finance ministers and central-bank governors who are ideologically opposed to intervening believe that they have no choice but to do so.
Indeed, country after country has now chosen to intervene in one way or another to prevent their currencies from skyrocketing in value.
Now the IMF has blessed such interventions – but, as a sop to those who are still not convinced, it suggests that they should be used only as a last resort.
On the contrary, we should have learned from the crisis that financial markets need regulation, and that cross-border capital flows are particularly dangerous.
Such regulations should be a key part of any system to ensure financial stability; resorting to them only as a last resort is a recipe for continued instability.
There is a wide range of available capital-account management tools, and it is best if countries use a portfolio of them.
Even if they are not fully effective, they are typically far better than nothing.
But an even more important change is the link that the IMF has finally drawn between inequality and instability.
This crisis was largely a result of America’s effort to bolster an economy weakened by vastly increased inequality, through low interest rates and lax regulation (both of which resulted in many people borrowing far beyond their means).
The consequences of this excessive indebtedness will take years to undo.
But, as another IMF study reminds us, this is not a new pattern.
The crisis has also put to the test long-standing dogmas that blame labor-market rigidity for unemployment, because countries with more flexible wages, like the US, have fared worse than northern European economies, including Germany. Indeed, as wages weaken, workers will find it even more difficult to pay back what they owe, and problems in the housing market will become worse.
Consumption will remain restrained, while strong and sustainable recovery cannot be based on another debt-fueled bubble.
As unequal as America was before the Great Recession, the crisis, and the way it has been managed, has led to even greater income inequality, making a recovery all the more difficult. America is setting itself up for its own version of a Japanese-style malaise.
But there are ways out of this dilemma: strengthening collective bargaining, restructuring mortgages, using carrots and sticks to get banks to resume lending, restructuring tax and spending policies to stimulate the economy now through long-term investments, and implementing social policies that ensure opportunity for all.
As it is, with almost one-quarter of all income and 40% of US wealth going to the top 1% of income earners, America is now less a “land of opportunity” than even “old” Europe.
For progressives, these abysmal facts are part of the standard litany of frustration and justified outrage.
What is new is that the IMF has joined the chorus.
As Strauss-Kahn concluded in his speech to the Brookings Institution shortly before the Fund’s recent meeting: “Ultimately, employment and equity are building blocks of economic stability and prosperity, of political stability and peace.
This goes to the heart of the IMF’s mandate. It must be placed at the heart of the policy agenda.”
Strauss-Kahn is proving himself a sagacious leader of the IMF.
We can only hope that governments and financial markets heed his words.
Global Capital Rules
CAMBRIDGE – It’s official.
The International Monetary Fund has put its stamp of approval on capital controls, thereby legitimizing the use of taxes and other restrictions on cross-border financial flows.
Not long ago, the IMF pushed hard for countries – rich or poor – to open up to foreign finance.
Now it has acknowledged the reality that financial globalization can be disruptive – inducing financial crises and economically adverse currency movements.
So here we are with yet another twist in the never-ending saga of our love/hate relationship with capital controls.
Under the classical Gold Standard that prevailed until 1914, free capital mobility had been sacrosanct.
But the turbulence of the interwar period convinced many – most famously John Maynard Keynes – that an open capital account is incompatible with macroeconomic stability.&#160;
The new consensus was reflected in the Bretton Woods agreement of 1944, which enshrined capital controls in the IMF’s Articles of Agreement.
As Keynes said at the time, “what used to be heresy is now endorsed as orthodoxy.”
By the late 1980’s, however, policymakers had become re-enamored with capital mobility.
The European Union made capital controls illegal in 1992, and the Organization for Economic Cooperation and Development enforced free finance on its new members, paving the way for financial crises in Mexico and South Korea in 1994 and 1997, respectively.
The IMF adopted the agenda wholeheartedly, and its leadership sought (unsuccessfully) to amend the Articles of Agreement to give the Fund formal powers over capital-account policies in its member states.
As long as it was developing countries that were whipsawed by global finance, it was fashionable to blame the victim.
The IMF and Western economists argued that governments in Mexico, South Korea, Brazil, Turkey, and elsewhere had not adopted the policies – prudential regulations, fiscal restraint, and monetary controls – needed to take advantage of capital flows and prevent crises.
The problem was with domestic policies, not with financial globalization, so the solution lay not in controls on cross-border financial flows, but in domestic reforms.
Once the advanced countries became victims of financial globalization, in 2008, it became harder to sustain this line of argument.
It became clearer that the problem lay with instability in the global financial system itself – the bouts of euphoria and bubbles, followed by the sudden stops and sharp reversals that are endemic to unsupervised and unregulated financial markets.
The IMF’s recognition that it is appropriate for countries to try to insulate themselves from these patterns is therefore welcome – and comes none too soon.
But we should not exaggerate the extent of the IMF’s change of heart.
The Fund still regards free capital mobility as an ideal toward which all countries will eventually converge.
This requires only that countries achieve the threshold conditions of adequate “financial and institutional development.”
The IMF treats capital controls as a last resort, to be deployed under a rather narrow set of circumstances – when other macro, financial, or prudential measures fail to stem the tide of inflows, the exchange rate is decidedly overvalued, the economy is overheating, and foreign reserves are already adequate.
So, while the Fund lays out an “integrated approach to capital flow liberalization,” and specifies a detailed sequence of reforms, there is nothing remotely comparable on capital controls and how to render them more effective.
This reflects over-optimism on two fronts: first, about how well policy can be fine-tuned to target directly the underlying failures that make global finance unsafe; and, second, about the extent to which convergence in domestic financial regulations will attenuate the need for cross-border management of flows.
The first point can be best seen using an analogy with gun controls.
Guns, like capital flows, have their legitimate uses, but they can also produce catastrophic consequences when used accidentally or placed in the wrong hands.
The IMF’s reluctant endorsement of capital controls resembles the attitude of gun-control opponents: policymakers should target the harmful behavior rather than bluntly restrict individual freedoms.
As America’s gun lobby puts it, “Guns don’t kill people; people kill people.”
The implication is that we should punish offenders rather than restrict gun circulation.
Similarly, policymakers should ensure that financial-market participants fully internalize the risks that they assume, rather than tax or restrict certain types of transactions.
But, as Princeton economist Avinash Dixit likes to say, the world is always second-best at best.&#160;
An approach that presumes that we can identify and directly regulate problematic behavior is unrealistic.
Most societies control guns directly because we cannot monitor and discipline behavior perfectly, and the social costs of failure are high.
Similarly, caution dictates direct regulation of cross-border flows.
In both cases, regulating or prohibiting certain transactions is a second-best strategy in a world where the ideal may be unattainable.
The second complication is that, rather than converging, domestic models of financial regulation are multiplying, even among advanced countries with well-developed institutions.
Along the efficiency frontier of financial regulation, one needs to consider the tradeoff between financial innovation and financial stability.
The more of one we want, the less of the other we can have.
Some countries will opt for greater stability, imposing tough capital and liquidity requirements on their banks, while others may favor greater innovation and adopt a lighter regulatory touch.
Free capital mobility poses a severe difficulty here.
Borrowers and lenders can resort to cross-border financial flows to evade domestic controls and erode the integrity of regulatory standards at home.
To prevent such regulatory arbitrage, domestic regulators may be forced to take measures against financial transactions originating from jurisdictions with more lax regulations.
A world in which different sovereigns regulate finance in diverse ways requires traffic rules to manage the intersection of separate national policies.
The assumption that all countries will converge on the ideal of free capital mobility diverts us from the hard work of formulating those rules.
The Immigration Game
Green Papers, as they are called in Europe, or White Papers, as they are known in America and Britain, are often mere rhetorical essays – government-backed studies that state broad principles unlikely ever to be applied in practice.
The recent Green Paper released by the European Commission on international migration is no exception.
Indeed, the Paper is a hodgepodge of illogic and half-baked ideas that aims at “launching a public debate” on the issue, “choosing a bottom-up, rather than a top-down approach.”
But while the objective is to “harmonize policies towards economic migrants across the EU,” the Paper states at the outset that decisions on this matter should remain solely under the jurisdiction of national governments.
Some of the rules that it proposes are unenforceable – and thus merely a source of red tape for migrants and their employers that would require huge public bureaucracies to administer.
Co-ordination of national migration policies will remain a dream if decisions continue to be kept under the exclusive responsibility of national governments.
There is no sign in the EU that national regulations on economic migration are converging.
Policies on migrants are becoming increasingly tough, especially in those countries that already had the most restrictive provisions.
Since 1995, there were 26 reforms of migration policies in the EU-15: two-thirds tightened regulations by increasing procedural obstacles faced by visa applicants, reducing the duration of work permits, or making family reunification more difficult.
Countries are getting tougher because migration flows can be diverted across jurisdictions.
This raises concerns among public opinion that migrants rejected by some countries could flood those that do not impose tighter restrictions.
Cross-national policy spillovers are frequent.
Finland tightened its immigration regulations in 2004, following closely the restrictive stance taken by Denmark in 2002.
Portugal adopted more restrictive provisions in 2001, after Spain implemented a similar reform in 2000.
Ireland did the same in 1999, after the UK enacted two reforms in 1996 and 1998 designed to curb immigration.
This race to restrict pervaded decision-making on transitional arrangements following accession of 10 new members – eight of them postcommunist countries – to the EU last May.
Twelve of the 15 countries reneged on promises not to restrict worker flows from the new members as they realized that Austria and Germany were closing their borders to immigration from their eastern neighbors.
But tight national restrictions do not seem to prevent migration; they only alter the geographical orientation of flows and fuel increases in illegal immigration, thereby inflating the size of the informal economy.
Indeed, illegal immigration is larger when restrictions to legal migration are tight.
Illegal flows as a proportion of the population are about 25% larger in Europe than in the US; at the same time, legal flows are roughly 25% larger in the US than in Europe.
The US also has more realistic migration restrictions than most European countries.
Realistic restrictions in Europe can be adopted only by taking into account migration spillovers across jurisdictions, which requires implementing policies that are agreed at the EU level.
But national governments remain reluctant to delegate authority: in November 2004, the European Council accepted qualified majority voting on measures concerning illegal migration, but left restrictions on legal migration subject to unanimity rules, as if legal and illegal migration were not merely two sides of the same coin.
The Green Paper will not make EU leaders change their minds.
It states that national governments can better “respond to the specific needs of their labor markets.”
It does not stress the obvious advantages of having the EU as a unique player in enforcing border controls, signing cooperation agreements with migrants’ countries of origin, and encouraging the type of flows that are best suited for Europe.
The Green Paper also suggests that, when admitting migrants, member countries “require proof that no one already part of the domestic labor market can fill the vacancy concerned.”
It is unlikely that this would be possible even under central planning.
Migrants change jobs twice a year on average, as they “grease the wheels” of European labor markets with their mobility from less to more productive jobs.
Should we prevent them from doing so?
Similarly, the Paper proposes that the self-employed should be admitted after an evaluation of their business plans.
In Milan this year, more foreigners than Italians registered as self-employed.
Who will examine their business plans?
Even if the Paper’s suggestion were plausible, which it is not, it begs a larger question: should we prevent migrants from taking entrepreneurial risks?
If taken seriously, these rules will accomplish nothing, except to force migrants and their prospective employers to find other ways to each other.
The European Commission’s Green Paper on immigration looks like an invitation to join the underground economy.
The Arab Spring’s Crowd Psychology
ABU DHABI – In 1896, the social psychologist Gustave Le Bon warned his contemporaries of the dangers of crowds, writing that, “It is necessary to arrive at a solution to the problems offered by [crowds’] psychology, or to resign ourselves to being devoured by them.”
As spontaneous protest overtakes organized political movements across the Arab world, the leaders of Tunisia, Egypt, and Libya’s nascent democracies should heed Le Bon’s warning.
Since crowds took to the streets of Tunis, Cairo, Benghazi, and other Arab cities, toppling decades-old regimes, spectators and analysts have wondered where the Arab world is headed.
But they have focused almost exclusively on the events’ political dimension: Who are the leaders, and what are their demands?
In fact, the persistence, intensity, and frequency of protests – exemplified in September, when local militia in Benghazi killed US Ambassador to Libya J. Christopher Stevens – demonstrate the role that the culture and psychology of crowds are playing in determining the Arab world’s trajectory.
After decades of authoritarian rule, citizens, frustrated with discredited institutions and paralyzed political parties, have begun to employ social media to organize civil resistance.
As a result, countries affected by the Arab Spring now face political spheres that are shaped by crowd dynamics, rather than by genuine political or ideological movements.
Indeed, much of what is happening in the Arab world today can be best understood through the study of crowds.
Crowds are the opposite of organizations; rather than being dominated by rigid hierarchies, they are often led by individuals with no formal rank.
And, unlike political movements, crowds tend to form quickly and organically, like dark clouds gathering to form a storm, and their objectives are immediate: surround this police station, seize that ministry, etc.
Lebanon was perhaps the first Arab country to experience crowd politics.
After Prime Minister Rafic Hariri was assassinated in February 2005, crowds led by various political parties filled Martyrs’ Square in downtown Beirut.
But non-organized crowds eventually eclipsed structured groups, becoming a dominant force in Lebanese politics.
In fact, Lebanon’s two competing political coalitions, the March 8 alliance and the March 14 alliance, take their names from major crowd gatherings that occurred on those dates in 2005.
Lebanon’s experience reveals the discord between the psychology of crowds and the goals of the political elites who rally behind them – a conflict that can also be seen in Egypt’s Tahrir Square, Tunisia’s Sidi Bouzid, and Tripoli, Libya, where crowds have stormed the parliament building several times in the last few months.
This discord is threatening to derail these countries’ burgeoning democratic processes, owing to growing competition between what Le Bon called the “sovereignty of the crowds” and the sovereignty of political elites.
Under these conditions, the real challenge facing the Arab Spring countries, at least in the short term, is not ideological, but institutional.
Governments must find a way to prevent small groups from using the crowd effect as political capital, thereby causing crowd sizes to become more decisive than the number of ballots cast.
But traditional democratic institutions, such as political parties, parliaments, and consultation committees, are not experienced in coping with such challenges.
Social media are both part of the problem and part of the solution.
Unlike Eastern Europe in the late 1980’s and early 1990’s, the crowds of the Arab Spring formed on the Internet before hitting the streets – the first movement of its kind. The Arab Spring, following the lead of Iran’s Green Movement in 2009, ushered in the era of “iCrowds” – attracted, mobilized, and organized through social media.
But social media can also be used effectively to demobilize people, by reducing the chasm between the psychology and power of political leadership and that of the masses.
The emerging political class must improve its understanding of iCrowd politics, and learn to harness the power of tools like Facebook, Twitter, YouTube, blogs, apps, and text messages.
In the United States, President Barack Obama’s election campaigns recognized this opportunity, using social media extensively to communicate political messages, and to energize and mobilize supporters.
Once in office, Obama launched the White House app, designed to give citizens a new way to connect with their leaders in Washington, including updates on the latest events, insight into administration initiatives, and access to high-resolution photos and live streams of White House events.
Private enterprises, too, benefit from an understanding of iCrowd politics.
In their research, Quy Huy and Andrew Shipilov of INSEAD have shown that business leaders who use social media build so-called “emotional capital” within their employees.
This helps leaders to develop and maintain human bonds with a large group of people, despite the power gap, while making it easier for employees to identify with the organization.
For the Arab world’s new political elites, the lesson is clear: crowd dynamics cannot be ignored.
When observed carefully, social media can be interpreted like clouds portending storms.
If detected early enough, solutions can be found to diffuse tempestuous crowds before they inundate fragile new institutions.
The Politics of a Slowing China
SINGAPORE – The recent financial turmoil in China, with interbank loan rates spiking to double digits within days, provides further confirmation that the world’s second-largest economy is headed for a hard landing.
Fueled by massive credit growth (equivalent to 30% of GDP from 2008 to 2012), the Chinese economy has taken on a level of financial leverage that is the highest among emerging markets.
This will not end well.
Indeed, a recent study by Nomura Securities finds that China’s financial-risk profile today uncannily resembles those of Thailand, Japan, Spain, and the United States on the eve of their financial crises.
Each crisis-hit economy had increased its financial leverage – the ratio of domestic credit to GDP – by 30 percentage points over five years shortly before their credit bubbles popped.
Economists who insist that China’s financial leverage is not too high are a dwindling minority.
Certainly the People’s Bank of China, which engineered a credit squeeze in June in an attempt to discourage loan growth, seems to believe that financial leverage has risen to dangerous levels.
The only questions to be answered now concern when and how deleveraging will occur.
At the moment, China watchers are focusing on two scenarios.
Under the first, a soft economic landing occurs after China’s new leadership adopts ingenious policies to curb credit growth (especially through the shadow banking system), forces over-leveraged borrowers into bankruptcy, and injects fiscal resources into the banking system to shore up its capital base.
China’s GDP growth, which relies heavily on credit, will take a hit.
But the deleveraging process will be gradual and orderly.
Under the second scenario, China’s leaders fail to rein in credit growth, mainly because highly leveraged local governments, well-connected real-estate developers, and state-owned enterprises (SOEs) successfully resist policies that would cut off their access to financing and force them into insolvency.
Consequently, credit growth remains unchecked until an unforeseen event triggers China’s “Lehman” moment.
Should this happen, growth will collapse, many borrowers will default, and financial chaos could ensue.
Two intriguing observations emerge from these two scenarios.
First, drastic financial deleveraging is unavoidable.
Second, Chinese growth will fall under either scenario.
So, what impact will the coming era of financial deleveraging and decelerating growth have on Chinese politics?
Most would suggest that a period of financial retrenchment and slow GDP growth poses a serious threat to the legitimacy of the Chinese Communist Party (CCP), which is based on economic performance.
Rising unemployment could spur social unrest.
The middle class might turn against the party.
Because economic distress harms different social groups simultaneously, it could facilitate the emergence of a broad anti-CCP coalition.
Moreover, massive economic dislocation could destroy the cohesion of the ruling elites and make them more vulnerable politically.
Indeed, members of the ruling elite will be the most immediately affected by financial deleveraging.
Those who borrowed recklessly during China’s credit boom are not small private firms or average consumers (household indebtedness in China is very low), but local governments, SOEs, and well-connected real estate developers (many of them family members of government officials).
Technically, successful financial deleveraging means restructuring their debts and forcing some of them into bankruptcy.
By definition, such people have the political wherewithal to mount a fierce fight to preserve their wealth.
But, given the huge size of China’s credit bubble and the enormous amounts of money needed to recapitalize the banking system, only some of them will be bailed out.
Those who are not will naturally harbor resentment toward those who are.
Slower GDP growth undermines elite unity according to a different political dynamic.
The current Chinese system is a gigantic rent-distributing mechanism.
The ruling elites have learned to live with each other not through shared beliefs, values, or rules, but by carving up the spoils of economic development.
In a high-growth environment, each group or individual could count on getting a lucrative contract or project.
When growth falters, the food fight among party members will become vicious.
The people who should be most concerned with financial deleveraging and slower growth are President and CCP General Secretary Xi Jinping and Prime Minister Li Keqiang.
If the deleveraging process is quick and orderly, they will emerge stronger in time for their reappointment in 2017 (the Chinese political calendar thus dictates that they turn the economy around by the first half of that year).
Xi and Li are inseparably linked with the CCP’s promise of economic prosperity and national greatness, embodied in the official catchphrase, “China dream.”
What, then, will they do when faced with a political nightmare?
Emerging Markets’ Feminine Future
LONDON – According to the United Nations, 70% of women worldwide experience violence in their lifetime.
The World Bank adds that women aged 15-44 are more likely to experience rape or domestic violence than cancer, car accidents, war, or malaria.
Such indicators are even more alarming in emerging markets, where discrimination and gender inequality are particularly prevalent.
This partly reflects the failure of public policy to ameliorate the distributive consequences of rapid economic growth.
With the informal sector continuing to play a major role in emerging economies, women often have access to only unreliable and transitory employment that offers casual and irregular wages.
Meanwhile, unprecedented urbanization has disrupted traditional family structures, further undermining the role that women can play in economies and societies.
The damaging impact of active gender discrimination – such as bride burning and female infanticide – is clear.
But passive discrimination – tolerating rules and institutions that deny women equal say in reproductive decisions, equal access to education and employment, equal pay for equal work, equal rights before the law, and equal political influence – is similarly destructive.
In all of its forms, gender discrimination makes women vulnerable to sexual slavery, trafficking, and forced marriage, deprives women of their inalienable rights, and diminishes their quality of life.
At the same time, it stunts the capacity of boys and men to understand women’s plight, thus diminishing their motivation to change the situation.
While these issues are global, they are most urgent in emerging markets, where they are undermining the social and economic progress on which the rest of the world increasingly relies.
In the wake of the global economic crisis, emerging markets have become the engines of worldwide growth.
But these countries face growing constraints to sustainability, social cohesion, and political stability, including erosion of their international competitiveness, environmental degradation, weaknesses (including corruption) in national, local, and corporate governance, wasted human capital, and growing social, economic, and gender inequality.
Failure to make full use of women’s talents undermines emerging markets’ economic development, while the marginalization and abuse of women threatens their social advancement and impairs their political stability.
With most countries worldwide facing continued economic uncertainty, the international community has a vested interest in emerging economies’ resilience, collective capacity to sustain global demand for goods and services, and ability to confront the challenges, such as gender inequality, that threaten their success.
The importance of overcoming these barriers to development was emphasized at a recent symposium (of which I was the chair) at Green Templeton College, Oxford.
Fifty leaders from government, business, civil society, and academia identified gender inequality as the most urgent constraint to sustainable growth, social cohesion, and political stability, and agreed on the steps needed to address the issue effectively.
First and foremost, national policymakers must take concrete, comprehensive action to ensure that women are forced to abandon neither productive nor reproductive activities.
To this end, governments should implement measures that guarantee, directly or indirectly, affordable child- and elder-care support systems for working parents.
Moreover, private employers should be encouraged to build supportive workplaces by implementing creative solutions to common constraints.
For example, MAS Holdings in Sri Lanka has incorporated into the workplace nursing stations, on-site banking, and company buses that ease employees’ commutes and facilitate participation in sports programs.
Such measures not only lead to increased productivity; they also bolster loyalty, morale, and thus employee retention.
At the same time, it is crucial that women enjoy total reproductive autonomy and sexual sovereignty.
This can be achieved only with the provision of universal and unfettered access to reproductive and other relevant health-care services.
But even healthy reproduction has a dark side.
Neonaticide (killing infants that are less than one day old), infanticide (killing infants that are more than one day old), and the practice of disposing of female children in favor of male offspring are not only barbaric; they have led to imbalanced gender ratios in many emerging markets.
Policymakers must enforce criminal sanctions against these practices.
Subsequently, educational programs for children and adults should be launched, in collaboration with religious groups, in order to improve public understanding of gender inequality.
By promoting a shift in public perceptions, such programs can catalyze fundamental behavioral changes.
International action is also crucial.
The World Bank and regional development banks should be encouraged to incorporate gender-equality criteria into their eligibility criteria for loans and credit to emerging-market governments and private-sector corporations.
Such a clear economic link would help to motivate local policymakers to take strong action, while helping to bolster public support for policies promoting gender equality.
The international community has a profound stake in the future performance of emerging markets.
In order to bolster these countries’ social and economic advancement, the development agenda in the coming years should include a robust commitment to promoting gender equality.
The Impotence of the Federal Reserve
CAMBRIDGE – The United States Federal Reserve’s recent announcement that it will extend its “Operation Twist” by buying an additional $267 billion of long-term Treasury bonds over the next six months - to reach a total of $667 billion this year - had virtually no impact on either interest rates or equity prices.
The market’s lack of response was an important indicator that monetary easing is no longer a useful tool for increasing economic activity.
The Fed has repeatedly said that it will do whatever it can to stimulate growth.
This led to a plan to keep short-term interest rates near zero until late 2014, as well as to massive quantitative easing, followed by Operation Twist, in which the Fed substitutes short-term Treasuries for long-term bonds.
These policies did succeed in lowering long-term interest rates.
The yield on ten-year Treasuries is now 1.6%, down from 3.4% at the start of 2011.
Although it is difficult to know how much of this decline reflected higher demand for Treasury bonds from risk-averse global investors, the Fed’s policies undoubtedly deserve some of the credit.
The lower long-term interest rates contributed to the small 4% rise in the S&amp;P 500 share-price index over the same period.
The Fed is unlikely to be able to reduce long-term rates any further.
Their level is now so low that many investors rightly fear that we are looking at a bubble in bond and stock prices.
The result could be a substantial market-driven rise in long-term rates that the Fed would be unable to prevent.
A shift in foreign investors’ portfolio preferences away from long-term bonds could easily trigger such a run-up in rates.
Moreover, while the Fed’s actions have helped the owners of bonds and stocks, it is not clear that they have stimulated real economic activity.
The US economy is still limping along with very slow growth and a high rate of unemployment.
Although the economy has been expanding for three years, the level of GDP is still only 1% higher than it was nearly five years ago, when the recession began.
The GDP growth rate was only 1.7% in 2011, and it is not significantly higher now.
Indeed, recent data show falling real personal incomes, declining employment gains, and lower retail sales.
The primary impact of monetary easing is usually to stimulate demand for housing and thus the volume of construction.
But this time, despite historically low mortgage interest rates, house prices have continued to fall and are now more than 10% lower in real terms than they were two years ago.
The level of real residential investment is still less than half its level before the recession began.
The Fed has noted that structural problems in the housing market have impaired its ability to stimulate the economy through this channel.
Business investment is also weak, even though large corporations have very high cash balances.
With so much internal liquidity, these businesses are not sensitive to reductions in market interest rates.
At the same time, many very small businesses cannot get credit, because the local banks on which they depend have inadequate capital, owing to accrued losses on commercial real-estate loans.
These small businesses, too, are not helped by lower interest rates.
The Fed’s monetary easing did temporarily contribute to a weaker dollar, which boosted net exports.
But the dollar’s decline has more recently been reversed by the global flight to safety by investors abandoning the euro.
Even if the US economy continues to stumble in the months ahead, the Fed is unlikely to do anything more before the end of the year.
The next policy moves to help the economy must come from the US Congress and the administration after the November election.
Nonetheless, what needs to be done is already clear.
The cloud of a sharp rise in personal and corporate income-tax rates, now scheduled to occur automatically at the start of 2013, must be removed.
The projected increase in the long-term fiscal deficit must be reversed by stemming the growth in transfers to middle-class retirees.
Fundamental tax reform must strengthen incentives, reduce distorting “tax expenditures,” and raise revenue.
Finally, the relationship between government and business, now quite combative, must be improved.
If these things happen in 2013, the US economy can return to a more normal path of economic expansion and rising employment.
At that point, the Fed can focus on its fundamental mandate of preventing a rise in the rate of inflation.
Why Bo Stole the Show
CLAREMONT, CALIFORNIA – As show trials go, the drama featuring Bo Xilai, the once-swaggering, media-savvy former Chinese Communist Party (CCP) chief of Chongqing, veered anomalously into improvisation.
Before the proceedings began, the conventional wisdom was that Bo’s trial had been carefully scripted and rehearsed to portray a forlorn and penitent sinner confessing his crimes and apologizing to the Party.
But the historic five-day trial dispelled any notion that Bo would go quietly to his cell in Beijing’s infamous Qincheng Prison, where China’s fallen top leaders are incarcerated.
He challenged the prosecution vigorously, defending himself with a feistiness that surprised nearly all who read the transcripts released by the court in real time on the trial’s first day.
Bo dismissed one of his accusers as having “sold his soul.”
He characterized testimony given by his wife, Gu Kailai, now serving a suspended death sentence for murdering the British businessman Neil Heywood in 2011, as “comical” and “fictional,” and he called her “crazy.”
Throughout the trial, Bo flatly denied most of the corruption charges, often professed ignorance of the facts, and claimed to be unable to recall any details of the matters in question.
He even retracted his confession to the CCP’s anti-graft agency, blaming mental stress for his admission that he accepted bribes from a man he called “soulless” in court.
In his closing statement, he dropped a bombshell: he claimed that Wang Lijun, his former police chief and henchman (and a “vile character”), was secretly in love with his wife.
The trial transcripts create an impression of a man who, had he not gone into politics, would have excelled as a trial lawyer.
Bo made the prosecution look sloppy and incompetent.
However, anyone who believes that the courtroom drama in the provincial capital of Jinan will determine the trial’s outcome (the verdict and sentence will be announced in September) is seriously mistaken.
The CCP’s leaders have already decided that Bo is guilty and must spend years in jail (the scale of Bo’s alleged bribe-taking ensures a sentence of 15-20 years).
A logical question to ask, then, is why the Party allowed an unprecedented degree of openness at the trial.
The two most recently purged Politburo members were tried in secret, as were Bo’s wife, and his former police chief.
The optimistic view is that China’s new leadership wants to demonstrate its commitment to the rule of law and fairness.
But that is a naive interpretation.
While the trial proceedings on the first day were refreshingly open by Chinese standards, that quickly changed.
Transcripts were not released in real time on subsequent days, and they omitted some crucial details (for example, Bo claimed that the Party’s representatives threatened to execute his wife and prosecute his son if he refused to cooperate).
Perhaps worried that Bo’s defiant behavior was winning the public-relations battle, the official media also launched a media blitz savaging Bo’s character and all but pronouncing him guilty.
Even more disturbing, on the second day of the trial, the Chinese police formally arrested Xu Zhiyong, a human-rights lawyer who was leading a campaign to force mandatory disclosure of the wealth of senior officials and their family members.
The Chinese government has also begun a ferocious crackdown on social media, arresting prominent activists on dubious charges.
So there must be a different – and more political – interpretation of the Chinese government’s handling of Bo’s trial.
It is worth recalling that purging him was a deeply divisive affair at the CCP’s highest levels.
His patrons and allies could not save him, but they were well positioned to demand that his trial be conducted as openly as possible.
Given Bo’s gift for dazzling an audience, his allies must have felt confident that a spirited defense would serve him well, both legally and politically.
Bo certainly did not disappoint.
He could have groveled his way through the trial, like other senior Party officials brought down by corruption scandals, and as most defendants have done in the long grim history of communist show trials beginning with Stalin.
But Bo apparently is not accepting his political demise as a final act – in his closing statement, he told the court that he wanted to keep his Party membership (he was expelled anyway) – and a comeback calculus may well have motivated his spirited performance.
Bo understands that he should not be perceived as a pitiful loser who gutlessly besmirches his honor.
By appearing dignified, defiant, and forceful, Bo evidently sought to preserve his image among his allies and supporters as a strong leader.
Denouncing himself in order to gain leniency – in a case that he portrayed as a grievous miscarriage of justice – would have made him look like a coward.
Bo may be heading to jail, but he retains some chance of political rehabilitation should things change dramatically in China.
His botched – but riveting – trial may be over, but the Bo Xilai show will go on.
Economic Rebalancing Acts
LONDON – We all know how the global economic crisis began.
The banks over-lent to the housing market.
The subsequent burst of the housing bubble in the United States caused banks to fail, because banking had gone global and the big banks held one another’s bad loans.
Banking failure caused a credit crunch.
Lending dried up and economies started shrinking.
So governments bailed out banks and economies, producing a sovereign debt crisis.
With everyone busy deleveraging, economies failed to recover.
Much of the world, especially Europe, but also the slightly less sickly US, remains stuck in a semi-slump.
So how do we escape from this hole?
The familiar debate is between austerity and stimulus.
“Austerians” believe that only balancing government budgets and shrinking national debts will restore investor confidence.
The Keynesians believe that without a large fiscal stimulus – a deliberate temporary increase of the deficit – the European and US economies will remain stuck in recession for years to come.
I am one of those who believe that recovery from the crisis requires fiscal stimulus.
I don’t think monetary policy, even unorthodox monetary policy, can do the job. Confidence is too low for commercial banks to create credit on the scale needed to return to full employment and the pre-crisis growth trend, however many hundreds of billions of whatever cash central banks pour into them.
We are learning all over again that the central bank cannot create whatever level of credit it wants!
So, like Paul Krugman, Martin Wolf, and others, I would expand fiscal deficits, not try to shrink them.
I advocate this for the old-fashioned Keynesian reason that we are suffering from a deficiency of aggregate demand, that the multiplier is positive, and that the most effective way to reduce the private and public debts a year or two down the line is by taking steps to boost growth in national income now.
But the argument between austerians and Keynesians over how to encourage sustained recovery intersects with another debate.
Simply put, what kind of post-recovery economy do we want?
This is where economics becomes political economy.
Those who believe that all was fine with the pre-crisis economy except for banks making crazy loans are convinced that preventing such crises in the future requires only banking reform.
The new reform orthodoxy is “macro-prudential regulation” of commercial banks by the central bank.
Some would go further and either nationalize the banks or break them up.
But their horizon of reform is similarly confined to the banking sector, and they rarely ask what caused the banks to behave so badly.
In fact, it is possible to regard excessive bank lending as a symptom of deeper economic flaws. The economist Thomas Palley sees it as a means of offsetting growth in income inequality, with access to cheap credit replacing the broken welfare guarantee of social democracy.
So reform requires redistribution of wealth and incomes.
Redistributive measures go quite well with stimulus policies, because they may be expected to increase aggregate demand in the short term (owing to lower-income households’ higher propensity to consume) and minimize the economy’s dependence on debt financing in the long term.
Initial damage to the confidence of the business class caused by higher taxes on the wealthy would be balanced by the prospect of&#160;higher overall consumption.
Others argue that we should try to rebalance the economy not just from rich to poor, but also from energy-wasting to energy-saving.
The premise of the green economic agenda is that we have reached the ecological limits of our current growth model, and that we will need to find ways of living that reduce demands on non-renewable sources of energy.
So stimulus policies should aim to stimulate not just demand per se; they must focus, instead, on stimulating ecologically-friendly demand.
For example, greens advocate free municipal transport in major cities.
In general, they argue, we need more care, not more cars, so stimulus money should go to health, education, and the protection of the environment.
The truth is that any fiscally-driven recovery policy is bound to have reformist implications.
That is why the austerians are so against it, and why even those who accept the theoretical case for a stimulus insist on implementing it through monetary policy alone.
Re-balancing the economy from gas-guzzling to energy-saving – and from private to public consumption – is bound to alter the goal of economic policy.
Maximizing GDP growth will no longer be the top priority; rather, it should be something we might want to call “happiness,” or “well-being,” or the “good life.”
The radical case is that the pre-crisis economy crashed not because of preventable mistakes in banking, but because money had become the sole arbiter of value.
So we should be energetic in seeking recovery, but not in a way that simply reproduces the structural flaws of the past.
As Dani Rodrik has well put it: “If economics were only about profit maximization, it would be just another name for business administration.
It is a social discipline, and society has other means of cost accounting beside market prices.”
The Indian Exception
NEW DELHI – The ratification by the United States Congress of the historic India-US Nuclear Agreement marks a remarkable new development in world affairs.
Initially signed in July 2005, the agreement is a major milestone in the growing partnership between the world’s oldest and largest democracies.
That agreement signals recognition of what may be called “the Indian exception” – a decision by the world’s sole superpower, together with all other nations involved in commerce in nuclear-related materials, to sell such materials to India, despite India’s refusal to sign the Nuclear Non-Proliferation Treaty and its two nuclear tests.
India’s refusal to sign the NPT was based on principle, for the NPT is the last vestige of apartheid in the international system, granting as it does to five permanent members of the United Nations Security Council the right to be nuclear weapons states while denying the same right to others.
A long-time advocate of global nuclear disarmament, India’s moral stand on the NPT enjoys near-unanimous backing within the country.
Its weapons program is also widely (though far from universally) supported at home as a security imperative in a dangerous neighborhood.
Unlike Iran and North Korea, which signed the NPT and then violated its provisions through clandestine nuclear weapons programs, India has openly pursued its own nuclear development, and it has a stellar record on non-proliferation, never exporting its technology or leaking a nuclear secret.
Moreover, its nuclear program is under strict civilian control.
All of this is implicitly recognized in the newly ratified India-US accord, which survived tough bilateral negotiations, codification of its provisions into US law, and unanimous approval in August by the Board of Governors of the International Atomic Energy Agency.
Finally, the Nuclear Suppliers Group of 45 countries, urged by the Bush administration to follow the IAEA’s example, did so unconditionally.
Congressional action in America was the last act of a long drama, and it cleared the way for US companies to bid for Indian nuclear contracts, an area in which they will face stiff competition from France and Russia.
But the agreement’s main significance should be seen in terms of the burgeoning Indo-American relationship.
Estranged during the Cold War by American support for Pakistan and India’s leadership of the non-aligned movement, the two countries have been drawing ever closer during the last decade.
Bilateral trade is booming.
American companies have quintupled their investments in India over the last decade.
Indians are reading MRIs for American patients, providing call-center support for American consumers, and delivering world-class research and development services for American companies.
Polls have repeatedly revealed that India is one of the few countries in the developing world where America is still held in high regard.
India has also become a more visible presence in the US.
There are more Indian students at American universities than those of any other foreign nationality.
The successes of the growing Indian-American population have made it an influential minority in the US, including thousands of doctors and nurses, innovative Silicon Valley professionals (one of whom invented the Pentium chip, while another created Hotmail), the CEOs of Citigroup and Pepsi, two US astronauts, and the young governor of Louisiana – in addition to taxi-drivers, gas-station attendants, and clerks at all-night convenience stores.
Yoga clinics are rampant across the country, Indian restaurants are mushrooming in the remotest exurbs, and Bollywood DVDs have found unlikely American fans.
India’s place in America’s consciousness is fundamentally different from what it was just half a generation ago.
Clearly, both the Bush administration and Congress have recognized this intensifying partnership when they approved the India-US Nuclear Agreement.
There was, of course, opposition within both countries to the deal.
In the US, the “non-proliferation ayatollahs,” who hypocritically consider nuclear weapons an unmitigated evil except in their own hands, railed against it.
In India, parties on both the left and the right opposed it—the former claiming that it mortgaged India’s foreign policy to the US, and the latter arguing that it didn’t go far enough to preserve India’s nuclear independence.
But, like all good agreements, the deal is a “win-win”: it helps India cope with crippling energy shortages by tripling its nuclear power generating capacity, and it provides major business opportunities for American companies to sell reactors and nuclear technology.
Moreover, by subjecting India’s civilian nuclear installations to international inspections, it achieves an important US foreign policy objective by bringing India into the worldwide non-proliferation fold.
And there’s no question that helping India to grow will earn America the gratitude of the world’s largest free-market democracy.
The agreement will not transform India’s energy situation overnight, or end the country’s dependence on expensive fuel imports.
But its passage confirms that the US relationship with India promises to be one of America’s closest and strategically most important in the twenty-first century.
As America struggles with a financial crisis and quagmires in the Middle East and Central Asia, sealing this agreement with India may be one of the beleaguered Bush administration’s only enduring foreign policy accomplishments.
The Indians Strike Back
Long quiescent, Ecuador's Indians--like native groups in much of Latin America--are finding their political voice and making their presence felt.
In November, Indians' votes were the key factor behind the election of a populist political outsider, ex-army colonel Lucio Gutierrez, as president of this small Andean nation.
The victory of Gutierrez, who participated in the failed coup against President Jamil Mahuad in 2000, is a serious blow to speedy approval of the Free Trade Area of the Americas (FTAA)--the Bush administration's effort to create a hemispheric trade bloc rivaling the European Union.
Ecuador's election demonstrates the growing strength of Indians and other groups estranged from governments that adhere too closely to policies dictated from Washington.
Gutierrez is the first president to have the support of Ecuador's powerful Confederation of Indigenous Nationalities of Ecuador (CONAIE).
Historically marginalized and impoverished indigenous peoples make up between 25% and 40% of Ecuador's population.
CONAIE, founded in 1986, originally focused on cultural rights and land redistribution.
After winning a bilingual education system in the late 1980's and securing land titles for many peasants in 1992, CONAIE expanded its agenda.
Today, it is the leading critic of Ecuador's "neo-liberal" policies related to globalization.
In the last ten years, CONAIE has spearheaded protests to stop privatization, the extraction of natural resources, and export-oriented agricultural policies.
After leading massive street protests to unseat the corrupt president, Abdalá Bucarám, in 1997, indigenous leaders from CONAIE helped to forge a new constitution that guarantees collective rights for indigenous peoples, participatory environmental reviews of resource extraction projects, and fixed increases in budgetary spending on health and education.
In January of 2000, following the economic implosion caused by a banking scandal that implicated President Mahuad, and Mahaud's subsequent replacement of the Sucre with the US dollar as Ecuador's currency, CONAIE solidified its role at the heart of Ecuadorian politics.
Tens of thousands of indigenous peoples--who were too repressed only 15 years earlier to participate even minimally in national public life--marched on the capital, Quito, demanding Mahuad's resignation.
On the initiative of Lucio Gutierrez, Indians and a contingent of mid-level army officers took control of the presidential palace and announced a short-lived ruling triumvirate that included then CONAIE president Antonio Vargas.
However, pressure by the US Embassy and the Organization of American States resulted in a change of heart by Ecuador's military and jail sentences for Gutierrez and Vargas.
Gutierrez began campaigning for the presidency shortly after his release from prison, but his chances looked slim until CONAIE decided to support his candidacy last summer.
Indians and campesinos , who get their information from provincial organizations' radio programs, voted overwhelmingly for Gutierrez.
Gutierrez's past as a fomenter of coups has linked him in the minds of many to Venezuela's Hugo Chavez, another former military officer who also authored a failed coup before becoming president.
But unlike Chavez, who leads one of the world's top oil producers, the need to stabilize an economy closely monitored by international financial markets forced Gutierrez to abandon campaign promises that helped secure his victory.
For example, he has backtracked on ending "dollarization" and has stopped opposing America's military presence at the coastal Manta Air Base, both key CONAIE demands.
Even so, Guttierrez's election will have a significant impact on hemispheric geopolitics, particularly on the question of the FTAA.
CONAIE opposes the FTAA and is advancing a proposal entitled Alternatives for the Americas , which offers a more balanced approach to trade liberalization. It would ensure enforceable international human rights, environmental, and labor laws.
Gutierrez, following CONAIE's lead, has called the FTAA "suicide" and proposes strengthening ties with the Andean Community and with Brazil and Venezuela, who are also skeptical of the FTAA.
So far, the Bush administration is playing tough and trying to force South American countries to submit by discussing trade agreements with Chile and Central America.
Maybe it is time, though, to look at why South America's peoples are voting for candidates who question free trade and America's military policy in the region.
Groups like CONAIE see the FTAA as a project initiated to give US corporations more access to Latin America's natural resources and cheap labor.
Even if America were to reverse its current policies and reduce its domestic agricultural subsidies--just one reason that Latin Americans view the FTAA as rank hypocrisy--a focus on export-oriented agriculture in Ecuador tends to favor large landowners over small farmers, shifting income from the poor to the rich.
The FTAA is far too concerned with protecting corporations to be capable of addressing the issues that most trouble Latin America's citizens.
Countries like Ecuador, hobbled by massive external debt, poor infrastructure, a corrupt ruling class, and yawning inequality, need international agreements akin to those of the European Union that help reduce debt burdens, boost technology transfer, and promote social and economic justice.
Latin America's native peoples have awakened.
Policies throughout the continent must and will begin to reflect their desires.
The Indian Tortoise and the Chinese Hare
“India everywhere” was the theme at this year’s World Economic Forum.
In the West, there is so much focus on China that India’s achievements are often acknowledged only as an afterthought.
As if to underscore the point that political stability must triumph in the long run, the Indians plastered Swiss buses with the banner: “India: The World’s Fastest Growing Democracy.”
The India media blitz was a huge success.
In Davos, speaker after speaker touted the idea that even if China is ahead now, over the longer run, the race between Asia’s two giants is a toss-up.
For a few days at least, India’s emergence as a superpower on par with China was taken as a fait accompli.
But what is the reality in the race between economies with more than a billion people each?
On the surface, China has opened up quite a lead on India.
Twenty-five years ago, at the start of the contemporary wave of globalization, national output in India and China was about the same.
Now, by any measure, China is more than twice as rich.
But the real difference is not so much that successful Chinese are doing better than successful Indians.
After all, the Indian elite are world-beaters, as Lakshmi Mittal’s bold $22 billion bid for French steelmaker Arcelor shows.
No, the real difference – whether we like to admit it or not – is that China’s communist government has succeeded in globalizing a much larger share of its population than India’s democratic government has managed to do.
Not that China is exactly egalitarian.
It is only along the coast, home to roughly one in three Chinese citizens, that most people can be said to have really joined the twenty-first century.
Much of rural China is still miserable, with 150 million people effectively unemployed and health and education standards often befitting an earlier century.
But caste-bound India’s record of exclusion is worse.
Perhaps only one in five persons are integrated into the global economy.
For every call center employee, there are many more people still eking out a subsistence living on the land.
Whereas China probably has about 450 million people in its globalized economy, India has at most 200-250 million.
It is this difference, more than anything else, that sets the two economies apart.
What can India do to close the gap?
Its biggest shortcoming is its lack of roads, bridges, ports, and other infrastructure, where the contrast with China is just stunning.
If your products can’t get to the global economy, you cannot conquer it.
Over the past five years, China has multiplied its highway system five-fold.
Its 50,000 kilometers of new roads are built to handle even large aircraft, which is more than one can say about some of the runways at India’s shambolic airports.
It is not just a matter of money – India’s central bank is rolling in cash, which it has mainly invested in low-yield foreign treasury bills.
The real problem is that China’s authoritarian system faces little opposition when it decides to bulldoze a shantytown that stands in the way of a new airport.
India’s government, by contrast, has neither the power nor the inclination to trample over poor people to make rich people richer.
Unfortunately, without infrastructure, the 800 million-plus Indians who have not yet “made it” don’t have a chance.
India will never be able to create enough jobs in services alone; it must be able to compete in low-end manufacturing areas as well.
Without better infrastructure, the majority of India’s citizens will remain frozen out of globalization.
So, is the idea that India’s economy could overtake China’s hopeless romanticism?
Not necessarily, if only because the areas where India excels, notably services, have far higher potential margins than manufacturing.
Here, the Chinese, hampered by a vastly inferior legal system, will not be able to compete easily.
Western companies are far more inclined to trust Indian firms with sensitive financial information or patents than they are in the case of China.
Foreign companies know that if they outsource any high-tech process to China, they might as well publish their blueprints on the Internet.
India also has a much better developed financial system than China, an advantage that will be increasingly important as the two countries develop.
Command and control financing (“directed lending,” as economists call it) works well when it comes to building bridges; it is a lot less effective when it comes to choosing what companies deserve to survive.
The challenge for the Indians, and, indeed, for other emerging markets like Brazil, Russia, and Mexico, is that they need to find ways to broaden the successful sectors of their economies without strangling them.
If India is to ever catch up with China, it must globalize more of its citizens, through better provision of health, education and infrastructure.
Only then will we truly start seeing “India everywhere.”
The India Option
French President Jacques Chirac’s visit to India this month to complete the sale of 6 attack submarines to India will confirm once more India’s emergence as an economic and diplomatic powerhouse.
The “strategic partnership” that both America and the European Union have at times sought with China looks both more plausible and more desirable with democratic India.
With a Muslim President, a Sikh Prime Minister, a Hindu Foreign Minister, and a foreign-born Christian President of its ruling Congress party, India is as remarkable a success story as the twenty-year boom that China’s Communist Party has delivered.
Indeed, since 1991, when a balance-of-payments crisis loomed, India has been shedding its socialist legacies and posting 7.5% average annual GDP growth – only marginally slower than China.
India has opened up its economy to world trade and started to privatize many of its state-owned industries (albeit often too slowly).
High-tech businesses have helped enormously in this effort by showing that India has more to gain than lose from competing in the global marketplace.
Perhaps for the first time since inventing the zero, India has a hot product to sell – and, this time, it can keep the profits for itself.
Moreover, a global bidding war has broken out for Indian brains.
The EU is keen to link into India’s boom.
The first EU Galileo satellite – intended as an alternative to America’s GPS system – was launched in late December with India as a full partner.
Also in December, India became the latest nation to join the EU in the International Thermonuclear Experimental Reactor (ITER) team, which aims to produce electricity using nuclear fusion, as happens in the sun.
For obvious historical reasons, the United Kingdom has led the way in building EU links with India.
Indian businesses naturally chose Britain over other locations in Europe for reasons of language and cultural ties, but even that is changing, as Indian investments spread across the Continent.
In a sense, India’s democracy sometimes hinders immediate growth.
Unlike in China, India’s government cannot simply ride roughshod over local interests by, say, leveling a village to build a roadway or a dam.
But this is a sacrifice that India seems more than willing to make to safeguard its freedoms.
That sacrifice is particularly visible in today’s Congress-led Indian government, which relies on support from the Left Front Communist Party.
India’s communists (unlike China’s) remain ideologically driven, and the Left Front is resisting privatization of state assets, lifting caps on foreign direct investment, and creating a more flexible labor market.
Yet the essential reforms, which date back to Prime Minister Manmohan Singh’s time as finance minister in 1991 and include liberalization of external trade and dismantling the “license raj,” remain on track.
It is clearly in India’s interests to join forces with the EU in negotiations within the World Trade Organization to lower protectionist barriers, particularly in services such as accounting, law, and finance, as this will free up trade and generate greater investment flows.
India already is being treated with growing respect in global economic councils.
When “new economy” issues such as e-commerce come up at the WTO, India, the EU and the United States often find themselves on the same side.
On “old economy” issues, ideological clashes have given way to tough-minded bargaining, as has happened in the Doha round of trade talks.
India supports a Millennium Round of trade talks, but rejects any linkage of trade to labor standards.
The Indians want faster liberalization of the textile and clothing trades; the EU wants better enforcement of intellectual- property protection.
Indeed, India is keen to share intelligence with the EU in the fight against international terrorism.
The main problem in pushing this strategic partnership ahead lies mostly within the EU, where there is a split between protectionists and advocates of free trade.
In particular the EU must resist calls for higher tariffs from southern European textile manufacturers, as these businesses have failed to restructure, despite ample warnings over the last decade to do so.
Indeed, the EU should regard growth in India not as a competitive threat but as a golden opportunity that will benefit everyone.
The global economy is not a zero-sum game, and the challenge for European politicians will be to explain this to EU members, particularly countries like France that are resistant to globalization and keen on building a “Fortress Europe.”
Chirac’s visit provides a perfect moment for India to make it clear that strategic partnerships and protectionism (as seems to be occurring in the French effort to block Mittal’s bid for the Belgian-French steel group Arcelor.) don’t mix.
The second point of convergence between Indian and Western interests is one that will probably get no public mention during Chirac’s visit: India can perhaps serve as a counterweight to China.
The world is beginning to notice that India has nearly the same number of people as China, plus a more benign system of government and no designs on its neighbors.
China hawks in both India and the West dream that “strategic partnership” will link the world’s great democracies.
That will not happen soon.
To be sure, India is as wary of China as some in Europe and America are.
After all, China supplied much of Pakistan’s nuclear-weapons technology and beat India in a 1962 war; their borders remain disputed in places.
Yet neither India nor the EU wants their friendship to be part of an anti-China axis.
Indeed, India has mostly succeeded in ending the chill that set in after 1998, when it declared China to be the main target of its nuclear weapons.
Nonetheless, Europe, India, and America are all aware that today’s friendship could become tomorrow's alliance if China turns hostile.
The Indispensable UN
The United Nations’ sixtieth anniversary summit in September reflected its strengths and importance in the many areas in which the international community must work together.
Unfortunately, the summit also exposed the UN’s weaknesses and limitations.
Founded at the end of World War II to prevent another major disaster of that kind, the UN has now vastly expanded its mandate beyond peacekeeping, as important as that is. For instance, the Millennium Development Goals (MDG), adopted at the UN Millennium summit five years ago, proclaimed the international community’s resolve to reduce poverty in all of its manifestations and set concrete goals to be achieved by 2015.
Reaching political consensus on such complex issues is never easy, given the diversity of interests that must be addressed.
Success requires diplomacy and patience, and the UN’s latest summit continued the march forward in the creation of a community of nations responsible for the well being of all.
To be sure, the attempt by America’s new UN ambassador, John Bolton, to introduce hundreds of last-minute changes to the summit’s concluding declaration doomed the agreement – perhaps deliberately – to being less comprehensive and forceful than had been hoped.
Indeed, Bolton even wanted to eliminate any reference to the MDG.
Nevertheless, even the United States had to give way in the end to this moral imperative.
The summit’s declaration also enunciated, in refined diplomatic language, new rights and obligations concerning international intervention in a country’s internal matters, as in Darfur.
We are, it seems, at last becoming a world in which each of us is our brother’s keeper.
Some have suggested that the Iraq war proved the UN’s irrelevance.
On the contrary, I believe that the Iraq debacle underscores the value of the UN, and the need to strengthen it further.
Let’s not forget that, within the limits of its powers, the UN worked.
It was asked to judge whether there was an imminent threat to world peace requiring pre-emptive military action.
After reviewing the evidence, it concluded that the case for going to war had not been made, while the risk of turmoil – about which most experts in the region warned – almost certainly weighed on the deliberations.
Since then, evidence has mounted not only that there were no weapons of mass destruction, but that the American and British governments provided deceptive, distorted, and misleading information.
Similarly, the evidence is overwhelming that there was little if any link between Iraq and Al-Qaeda – at least before the war.
In other words, deliberative democracy ­­– perhaps our most important safeguard against headstrong and reckless action – worked at the UN, but not in the US.
Unfortunately, the UN could not prevent the US and other countries from taking actions that almost surely contravene international law.
The story since then is well known.
When weapons of mass destruction were not found, the US and its small (and dwindling) “coalition of the willing” conjured up a new rationale – the struggle for democracy.
But if that were the objective, clearly a long list of countries should have been drawn up, and it is hardly certain that Iraq would have come out on top.
Replacing repressive dictatorships would, in fact, represent a vast expansion of the UN’s mandate, one that I suspect the US would not support.
More to the point, it did not bode well for a supposedly democratizing project to reject democratic processes at the UN.
The US had made it clear that it would abide by only one outcome at the UN – a principle under which no democratic body can operate, for to insist that a decision must accord with the wishes of one member is dictatorship. Subsequent events have shown how difficult it is – even for the strongest country in the world – to impose a stable democratic regime.
Iraq thus showed both the strength and the limitations of the UN.
Inevitably, its major source of strength is moral suasion.
Even most Americans were reluctant to enter Iraq without the UN’s blessing. The democratic deliberative process worked, and it yielded the right answer.
This should enhance confidence in the UN.
But the UN needs to be strengthened, by, for example, funding a permanent peacekeeping force.
Too often, UN peacekeeping missions require passing the hat among the advanced industrial countries, giving them virtual veto power over when, where, and how the UN acts.
At the same time, a strengthened economic and social security council would enable the UN to shape more effectively debates about reforming the global economic and financial system. Today, by contrast, such debates are too often centered at the IMF, where the financial interests of the advanced industrial countries predominate.
These reforms will eventually come.
Globalization has meant closer international integration, and that in turn has meant a greater need for collective action.
The UN is the international institution created for that purpose, and as the world changes, the UN must change with it.
But meaningful reform will almost surely have to await an American administration that is committed to global democracy in deed as well as rhetoric.
The Inequality Trap
WASHINGTON, DC – As evidence mounts that income inequality is increasing in many parts of the world, the problem has received growing attention from academics and policymakers.
In the United States, for example, the income share of the top 1% of the population has more than doubled since the late 1970’s, from about 8% of annual GDP to more than 20% recently, a level not reached since the 1920’s.
While there are ethical and social reasons to worry about inequality, they do not have much to do with macroeconomic policy per se.
But such a link was seen in the early part of the twentieth century: capitalism, some argued, tends to generate chronic weakness in effective demand due to growing concentration of income, leading to a “savings glut,” because the very rich save a lot.
This would spur “trade wars” as countries tried to find more demand abroad.
From the late 1930’s onward, however, this argument faded as the market economies of the West grew rapidly in the post-World War II period and income distributions became more equal.
While there was a business cycle, no perceptible tendency toward chronic demand weakness appeared.
Short-term interest rates, most macroeconomists would say, could always be set low enough to generate reasonable rates of employment and demand.
Now, however, with inequality on the rise once more, arguments linking income concentration to macroeconomic problems have returned.
The University of Chicago’s Raghuram Rajan, a former chief economist at the International Monetary Fund, tells a plausible story in his recent award-winning book Fault Lines about the connection between income inequality and the financial crisis of 2008.
Rajan argues that huge income concentration at the top in the US led to policies aimed at encouraging unsustainable borrowing by lower- and middle-income groups, through subsidies and loan guarantees in the housing sector and loose monetary policy.
There was also an explosion of credit-card debt.
These groups protected the growth in consumption to which they had become accustomed by going more deeply into debt.
Indirectly, the very rich, some of them outside the US, lent to the other income groups, with the financial sector intermediating in aggressive ways.
This unsustainable process came to a crashing halt in 2008.
Joseph Stiglitz in his book Freefall, and Robert Reich in his Aftershock, have told similar stories, while the economists Michael Kumhof and Romain Ranciere have devised a formal mathematical version of the possible link between income concentration and financial crisis.
While the underlying models differ, the Keynesian versions emphasize that if the super-rich save a lot, ever-increasing income concentration can be expected to lead to a chronic excess of planned savings over investment.
Macroeconomic policy can try to compensate through deficit spending and very low interest rates.
Or an undervalued exchange rate can help to export the lack of domestic demand.
But if the share of the highest income groups keeps rising, the problem will remain chronic.
And, at some point, when public debt has become too large to allow continued deficit spending, or when interest rates are close to their zero lower bound, the system runs out of solutions.
This story has a counterintuitive dimension.
Is it not the case that the problem in the US has been too little savings, rather than too much?
Doesn’t the country’s persistent current-account deficit reflect excessive consumption, rather than weak effective demand?
The recent work by Rajan, Stiglitz, Kumhof and Ranciere, and others explains the apparent paradox: those at the very top financed the demand of everyone else, which enabled both high employment levels and large current-account deficits.
When the crash came in 2008, massive fiscal and monetary expansion prevented US consumption from collapsing.
But did it cure the underlying problem?
Although the dynamics leading to increased income concentration have not changed, it is no longer easy to borrow, and in that sense another boom-and-bust cycle is unlikely. But that raises another difficulty.
When asked why they do not invest more, most firms cite insufficient demand.
But how can domestic demand be strong if income continues to flow to the top?
Consumption demand for luxury goods is unlikely to solve the problem.
Moreover, interest rates cannot become negative in nominal terms, and rising public debt may increasingly disable fiscal policy.
So, if the dynamics fueling income concentration cannot be reversed, the super-rich save a large fraction of their income, luxury goods cannot fuel sufficient demand, lower-income groups can no longer borrow, fiscal and monetary policies have reached their limits, and unemployment cannot be exported, an economy may become stuck.
The early 2012 upturn in US economic activity still owes a lot to extraordinarily expansionary monetary policy and unsustainable fiscal deficits.
If income concentration could be reduced as the budget deficit was reduced, demand could be financed by sustainable, broad-based private incomes.
Public debt could be reduced without fear of recession, because private demand would be stronger.
Investment would increase as demand prospects improved.
This line of reasoning is particularly relevant to the US, given the extent of income concentration and the fiscal challenges that lie ahead.
But the broad trend toward larger income shares at the top is global, and the difficulties that it may create for macroeconomic policy should no longer be ignored.
The Inequality Wildcard
DAVOS – As the dramatic events in North Africa continue to unfold, many observers outside the Arab world smugly tell themselves that it is all about corruption and political repression.
But high unemployment, glaring inequality, and soaring prices for basic commodities are also a huge factor.
So observers should not just be asking how far similar events will spread across the region; they should be asking themselves what kind of changes might be coming at home in the face of similar, if not quite so extreme, economic pressures.
Within countries, inequality of income, wealth, and opportunity is arguably greater than at any time in the last century.
Across Europe, Asia, and the Americas, corporations are bulging with cash as their relentless drive for efficiency continues to yield huge profits.
Yet workers’ share of the pie is falling, thanks to high unemployment, shortened working hours, and stagnant wages.
Paradoxically, cross-country measures of income and wealth inequality are actually falling, thanks to continuing robust growth in emerging markets.
But most people care far more about how well they are doing relative to their neighbors than to citizens of distant lands.
The rich are mostly doing well.
Global stock markets are back.
Many countries are seeing vigorous growth in prices for housing, commercial real estate, or both.
Resurgent prices for commodities are creating huge revenues for owners of mines and oil fields, even as price spikes for basic staples are sparking food riots, if not wholesale revolutions, in the developing world.
The Internet and the financial sector continue to spawn new multi-millionaires and even billionaires at a staggering pace.
Yet high and protracted unemployment plagues many less-skilled workers.
For example, in financially distressed Spain, unemployment now exceeds 20%.
It cannot help that the government is simultaneously being forced to absorb new austerity measures to deal with the country’s precarious debt burden.
Indeed, given record-high public-debt levels in many countries, few governments have substantial scope to address inequality through further income redistribution.
Countries such as Brazil already have such high levels of transfer payments from rich to poor that further moves would undermine fiscal stability and anti-inflation credibility.
Countries such as China and Russia, with similarly high inequality, have more scope for increasing redistribution.
But leaders in both countries have been reluctant to move boldly for fear of destabilizing growth.
Germany must worry not only about its own vulnerable citizens, but also about how to find the resources to bail out its southern neighbors in Europe.
The causes of growing inequality within countries are well understood, and it is not necessary to belabor them here.
We live in an era in which globalization expands the market for ultra-talented individuals but competes away the income of ordinary employees.
Competition among countries for skilled individuals and profitable industries, in turn, constrains governments’ abilities to maintain high tax rates on the wealthy.
Social mobility is further impeded as the rich shower their children with private education and after-school help, while the poorest in many countries cannot afford even to let their children stay in school.
Writing in the nineteenth century, Karl Marx famously observed inequality trends in his day and concluded that capitalism could not indefinitely sustain itself politically.
Eventually, workers would rise up and overthrow the system.
Outside Cuba, North Korea, and a few left-wing universities around the world, no one takes Marx seriously anymore.
Contrary to his predictions, capitalism spawned ever-higher standards of living for more than a century, while attempts to implement radically different systems have fallen spectacularly short.
Yet, with inequality reaching levels similar to 100 years ago, the status quo has to be vulnerable.
Instability can express itself anywhere.
It was just over four decades ago that urban riots and mass demonstrations rocked the developed world, ultimately catalyzing far-reaching social and political reforms.
Yes, the problems facing Egypt and Tunisia today are far more profound than in many other countries.
Corruption and failure to embrace meaningful political reform have become acute shortcomings.
Yet it would be very wrong to suppose that gaping inequality is stable as long as it arises through innovation and growth.
How, exactly, will change unfold, and what form will a new social compact ultimately assume?
It is difficult to speculate, though in most countries, the process will be peaceful and democratic.
What is clear is that inequality is not just a long-term issue.
Concerns about the impact of income inequality are already constraining fiscal and monetary policy in developed and developing countries alike as they attempt to extricate themselves from the hyper-stimulative policies adopted during the financial crisis.
More importantly, it is very likely that countries’ abilities to navigate the rising social tensions generated by gaping inequality could separate the winners and losers in the next round of globalization.
Inequality is the big wildcard in the next decade of global growth, and not just in North Africa.
Regime Change in China?
CLAREMONT, CALIFORNIA – One question that should have been asked about the Chinese Communist Party’s just-completed leadership transition is whether the entire elaborately choreographed exercise was akin to rearranging the deck chairs on the Titanic.
The installation of a new leadership may matter little if the end of CCP rule is both foreseeable and highly probable.
Many observers would find this assertion shocking.
The CCP, they insist, has proved its resilience since the Tiananmen crisis in 1989 and the collapse of Soviet communism in 1991.
Why should predictions of the collapse of CCP rule be taken seriously now?
While the future of China is unpredictable, the durability of its post-totalitarian regime can be estimated with some confidence.
China may be unique in many ways, but its one-party rule is hardly exceptional.
Indeed, its political order suffers from the same self-destructive dynamics that have sent countless autocratic regimes to their graves.
Among many of the systemic flaws of autocracy, degeneration at the top, epitomized by ever-weaker leaders, is progressive and incurable.
The exclusive and closed nature of autocracy bars many talented individuals from rising to senior government positions, owing to a pattern of succession that rewards political loyalty over capabilities.
In fact, savvy autocratic rulers favor less talented successors, because they are easier to groom and control on their way to power.
Leadership degeneration accelerates as the autocratic regime ages and grows more bureaucratic.
As individuals in such regimes ascend the hierarchy, patronage and risk-aversion become the most critical factors in determining their chances for promotion.
Consequently, such regimes grow increasingly sclerotic as they select leaders with stellar resumes but mediocre records.
The most lethal strain of leadership degeneration is escalating predation among the ruling elites.&#160;
The most visible symptom is corruption, but the cause is intrinsic to autocratic rule.
Typically, first-generation revolutionaries have a strong emotional and ideological attachment to certain ideals, however misguided they may be.
But the post-revolutionary elites are ideologically cynical and opportunistic.
They view their work for the regime merely as a form of investment.
And, like investors, they seek ever-higher returns.
As each preceding generation of rulers cashes in its illicit gains from holding power, the successors are motivated by both the desire to loot even more and the fear that there may not be much left by the time they get their turn at the trough.
This is the underlying dynamic driving corruption in China today.
In fact, the consequences of leadership degeneration are easy to see: faltering economic dynamism and growth, rising social tensions, and loss of government credibility.
The puzzle is why neither the compelling self-destructive logic of autocratic rule nor the mounting evidence of deteriorating regime performance in China has persuaded even some of the most knowledgeable observers that the end of CCP rule is now a distinct possibility.
An obvious explanation is the power of conventional thinking.
Long-ruling regimes – think of the Soviet Communist Party, Indonesia’s Suharto, and Egypt’s Hosni Mubarak – are typically considered invulnerable, even just before they collapse.
But those who believe that the CCP can defy both the internal degenerative dynamics of autocracy and the historical record of failed one-party regimes might benefit from reading Leon Trotsky, who knew something about revolutions.
Dictatorships are regarded as indestructible before they fall, Trotsky reminds us, but their demise is viewed as inevitable once they are toppled.
Another explanation is fear of contemplating the unknown.
CCP rule may not last, but the alternative – state failure and civil chaos – could be far worse than the status quo.
But the record of democratic transitions since 1974 suggests that regime change in China is unlikely to be calamitous.
The decisive factor will be whether it is initiated and managed by the ruling elites, as in Taiwan, Mexico, Brazil, and Spain.
Managed transitions produce more stable democracies.
Should such a process occur in China, the CCP could transform itself into a major political party competing with others for power, as formerly autocratic parties have done in Mexico and Taiwan.
Even a disorderly regime transition, however traumatic and chaotic in the short term, could yield a system that, on balance, is an improvement over a stagnant, repressive, and corrupt autocracy.
Indonesia’s new democracy may be imperfect, but has thrived despite its initial poor prospects.
Likewise, Vladimir Putin’s Russia, a deeply flawed hybrid autocracy, is nonetheless a far better place to live than the Soviet Union was.
If there is one lesson to be learned from the remarkable history of the democratic transitions of the past 38 years, it is that when elites and the public reject authoritarian rule, they do their best to make the new system work.
Should such a transition occur in China, there is no reason to think that the process and the outcome will be fundamentally different.
The Inevitable Re-Birth of European Integration
ATHENS – European integration implies successive transfers of national sovereignty to the Union.
But, while member states readily comply with decisions that abolish protective measures – say, import duties – they hesitate to formulate or advance policies that would grant the European Union discretionary powers to take initiatives.
Typical examples of this are the stalled Lisbon Strategy, the incomplete Economic and Monetary Union, and now, following the Irish public’s blocking maneuver, the uncertain fate of the new EU Constitutional Treaty (the “Lisbon Treaty”).
A similar weakness is evident in the EU’s attempt to define itself in the global system.
Energy security, climate change, the rise of China, and the revival of Russia are among the many issues that require effective responses.
Often, however, the EU cannot respond or can do so only slowly, because its structure obstructs quick decisions and fast action.
This structure was appropriate in an era when the free market was practically the only issue that the EU had to confront at the global level.
But that era is over.
Change is rendered more difficult by the insufficient democratic legitimacy of EU bodies.
The lack of a direct relationship with Europe’s people deprives these bodies of the pressure required to bring about rapid action and responsive policies.
There is no easy solution to these problems.
Democracy in the EU cannot be guaranteed by the models and rules that apply in the member states.
The scale of the problems makes more elaborate solutions necessary.
When dealing with the EU, member states usually aim for arrangements and regulations that ensure cooperation within agreed-upon frameworks.
And, as the Irish referendum showed, they do not readily accept unifying initiatives that would make the EU an autonomous center of power.
But, assuming that the obstacle thrown up by Ireland’s voters can be overcome, experience has shown that the EU’s future evolution will be marked by increasingly centralized power in Brussels and the retreat of individual states.
The lever for this process will continue to be the EU’s central bureaucracy, the mechanism that formulates the member states’ common interests and whose field of action is determined by loose, and periodic, inter-governmental collaboration.
The more responsibilities the Brussels bureaucracy acquires, the more independent it will become.
The prime concern for the EU bureaucracy is to find compromises that meet the wishes of member states, and to accommodate often divergent and contradictory national preferences.
A common will usually emerges without any emphasis on conflicting political tendencies and ambitions.
In fact, de-politicization is seen to be advisable because it allows for the easy achievement of balances.
Bolstering democracy, however, requires emphasizing the political dimension and public debate that is free and open to all.
National forums must make it their concern to discuss common European issues, thereby ensuring information for all, transparency, control, and accountability.
Instituting public debate on European policy throughout the Union will help clarify the aims of the unification project, make common interests apparent, and determine Europe’s institutional shape.
This is why the Lisbon Treaty is so important.
The provisions in the chapter on democratic principles, which concern the EU’s institutions and procedural functions, lay the groundwork for a system that is more open to public debate on EU policies.
The Lisbon Treaty also succeeds in tackling another major weakness of the EU ­– its ineffectiveness.
By means of extensive reforms to the structure, operation, and decision-making processes of EU institutions, the treaty enhances their effectiveness and enables greater dynamism.
True, many ordinary Europeans do not think that Europe should play an important part in global developments.
They believe that foreign policy should be handled by their national governments.
This view is outdated.
Even in bilateral or regional crises, viable solutions are possible only at the supranational level.
The Lisbon Treaty envisages the EU as a highly outward-looking entity on the international stage.
But there are limits to what the EU can do, limits determined by the Union’s inter-governmental nature.
Indeed, on crucial issues, it is the 27 members, not the Union, that will decide.
Internally, the treaty takes a big step toward creating a Europe of freedom, security, and justice.
It both sets the normative framework for EU policy and establishes institutions and procedures for policies on border controls, asylum, reception of migrants, and cooperation between judicial and police authorities.
Thus, it creates greater security for people in their everyday lives.
The treaty is less detailed in other areas, particularly in achieving an economic union equivalent to the currency union, because it was simply not possible to reach agreement.
Nonetheless, the Lisbon Treaty paves the way for planning and implementing policies needed to tackle crucial contemporary challenges, such as climate change, energy, research, technology, and tourism.
Whatever Irish voters intended by rejecting the treaty, socio-economic change will continue to force the EU to seek new forms of organization, combining inter-governmental and federal approaches.
For example, the need to adapt the operation of the European Central Bank to a policy of development for Europe, as laid out by the Ecofin Council, is already apparent.
The EMU is evidence of that.
More generally, however the problem of the Irish referendum result is addressed, the EU will gradually acquire its definitive shape on the basis of the ongoing problems that it must address, because as the dimensions of these problems grow, their management will require solid and durable forms of cooperation.
Why Is US Inflation So Low?
CAMBRIDGE – Why has quantitative easing coexisted with price stability in the United States?
Or, as I often hear, “Why has the Federal Reserve’s printing of so much money not caused higher inflation?”
Inflation has certainly been very low.
During the past five years, the consumer price index has increased at an annual rate of just 1.5%.
The Fed’s preferred measure of inflation – the price index for personal consumption expenditures, excluding food and energy – also rose at a rate of just 1.5%.
By contrast, the Fed’s purchases of long-term bonds during this period has been unprecedentedly large.
The Fed bought more than $2 trillion of Treasury bonds and mortgage-backed securities, nearly ten times the annual rate of bond purchases during the previous decade.
In the last year alone, the stock of bonds on the Fed’s balance sheet has risen more than 20%.
The historical record shows that rapid monetary growth does fuel high inflation.
That was very clear during Germany’s hyperinflation in the 1920’s and Latin America’s in the 1980’s.
But even more moderate shifts in America’s monetary growth rate have translated into corresponding shifts in the rate of inflation.
In the 1970’s, US money supply grew at an average annual rate of 9.6%, the highest rate in the previous half-century; inflation averaged 7.4%, also a half-century high.
In the 1990’s, annual monetary growth averaged only 3.9%, and the average inflation rate was just 2.9%.
That is why the absence of any inflationary response to the Fed’s massive bond purchases in the past five years seems so puzzling.
But the puzzle disappears when we recognize that quantitative easing is not the same thing as “printing money” or, more accurately, increasing the stock of money.
The stock of money that relates most closely to inflation consists primarily of the deposits that businesses and households have at commercial banks.
Traditionally, greater amounts of Fed bond buying have led to faster growth of this money stock.
But a fundamental change in the Fed’s rules in 2008 broke the link between its bond buying and the subsequent size of the money stock.
As a result, the Fed has bought a massive amount of bonds without causing the stock of money – and thus the rate of inflation – to rise.
The link between bond purchases and the money stock depends on the role of commercial banks’ “excess reserves.”
When the Fed buys Treasury bonds or other assets like mortgage-backed securities, it creates “reserves” for the commercial banks, which the banks deposit at the Fed itself.
Commercial banks are required to hold reserves equal to a share of their checkable deposits.
Since reserves in excess of the required amount did not earn any interest from the Fed before 2008, commercial banks had an incentive to lend to households and businesses until the resulting growth of deposits used up all of those excess reserves.
Those increased deposits at commercial banks were, by definition, an increase in the relevant stock of money.
An increase in bank loans allows households and businesses to increase their spending.
That extra spending means a higher level of nominal GDP (output at market prices).
Some of the increase in nominal GDP takes the form of higher real (inflation-adjusted) GDP, while the rest shows up as inflation.
That is how Fed bond purchases have historically increased the stock of money – and the rate of inflation.
The link between Fed bond purchases and the subsequent growth of the money stock changed after 2008, because the Fed began to pay interest on excess reserves.
The interest rate on these totally safe and liquid deposits induced the banks to maintain excess reserves at the Fed instead of lending and creating deposits to absorb the increased reserves, as they would have done before 2008.
As a result, the volume of excess reserves held at the Fed increased dramatically from less than $2 billion in 2008 to $1.8 trillion now.
But the new Fed policy of paying interest on excess reserves meant that this increased availability of excess reserves did not lead after 2008 to much faster deposit growth and a much larger stock of money.
The size of the broad money stock (known as M2) grew at an average rate of just 6.2% a year from the end of 2008 to the end of 2012.
While nominal GDP generally rises over long periods of time at the same rate as the money stock, with interest rates very low and declining, households and institutions were willing to hold more money relative to total nominal GDP after 2008.
So, while M2 grew by more than 6%, nominal GDP grew by just 3.5% and the GDP price index rose by only 1.7%.
So it is not surprising that inflation has remained so moderate – indeed, lower than in any decade since the end of World War II.
And it is also not surprising that quantitative easing has done so little to increase nominal spending and real economic activity.
The absence of significant inflation in the past few years does not mean that it won’t rise in the future.
When businesses and households eventually increase their demand for loans, commercial banks that have adequate capital can meet that demand with new lending without running into the limits that might otherwise result from inadequate reserves.
The resulting growth of spending by businesses and households might be welcome at first, but it could soon become a source of unwanted inflation.
The Fed could, in principle, limit inflationary lending by raising the interest rate on excess reserves or by using open-market operations to increase the short-term federal funds interest rate.
But the Fed may hesitate to act, or may act with insufficient force, owing to its dual mandate to focus on employment as well as price stability.
That outcome is more likely if high rates of long-term unemployment and underemployment persist even as the inflation rate rises.
And that is why investors are right to worry that inflation could return, even if the Fed’s massive bond purchases in recent years have not brought it about.
The Information State
MOSCOW – The new American administration of Barack Obama is planning to appoint a chief technology officer, following the lead of most large corporations nowadays.
Should other countries have one, too?
Rather than slavishly copy the United States, I think most countries should have a chief information officer – someone who thinks about information as an agent of change, not just as an agent of efficiency.
The free flow of information constrains official power and gives individuals the power to act for themselves.
It is the essence of a free market, and it should also be the essence of a free democracy.
People should know what their officials are doing, what their government’s policies cost, who pays for them, and who benefits.
Of course, such a government CIO couldn’t make all that happen alone.
But he or she could encourage it – everywhere information is used and everywhere it’s hidden.
The CIO wouldn’t have policymaking authority per se , but he or she should sit high in the government – ideally with little bureaucratic encumbrance.
The CIO would not have a fiefdom and would not compete for power or turf with other senior officials, but would simply remind the president or other people of the role of information every time it was appropriate.
To the extent that more than persuasion is required, that would be up to the president [head of government].
Indeed, the CIO would illustrate the power of information’s power by using it , rather than legal power, to persuade people to do the right thing.
No governmental “information agency” is needed.
The CIO would operate more like a “virus,” spreading everywhere, rather than being an additional appendage grafted onto the government.
This virus would continuously nudge government agencies to become more effective and accessible, rather than merely more efficient.
Ideally, it would affect employees and citizens by changing their expectations.
It wasn’t laws that created online banking; it was changed expectations and consumer demand.
(Yes, there were a few laws about liability, but they played only an enabling role.)
In short, the CIO would not press the government on “tech policy,” such as the rollout of broadband, but would set strategy about how to collect, manage, and disseminate information for public use and analysis.
The CIO would consult agencies on their public relations – but public relations would be redefined, as in the non-government world, to mean listening as well as talking, and to mean admitting faults as a way to correct them.
What the CIO should not do is almost as important.
He or she should not attempt to centralize information, but rather to make it flow more smoothly.
Call it information liquidity, akin to financial liquidity.
What specific goals should the CIO pursue?
Openness and transparency do not mean simply making everything available online, but making information easy to get to, compare, and analyze.
This includes everything from actual data to how those data are represented, facilitating comparisons of data across organizations and across time.
The data also need to be easy to manipulate so that third parties - whether commercial data services or journalists – can create compelling and revealing visualizations.
A government CIO also needs to remind us that as wonderful as the Internet is, it is most useful to people who can read and write.
The digital divide isn’t much of a divide anymore; it’s the literacy divide that is holding many people back.
The CIO should not be the minister of education, but he or she can provide advice on the use of information technology for everything from curriculum content to the institutional changes that can be wrought by better teacher-parent-student communications concerning homework assignments, grades, and even school-bus schedules and lunch menus.
Just as consumers can rate products, parents and students should be able to rate and provide feedback on the performance of individual teachers.
The CIO also needs to take a serious look at information security – in conjunction with the CIOs of other countries (since cybercrime knows no borders).
A big factor that contributes to the existence of viruses, spam, and the like is their lucrativeness.
Unlike the drug trade, legalization would not make much of the problem go away, but the issue is similar, because economics plays a much bigger role than is generally acknowledged.
Two big changes are necessary.
First, sending an e-mail will need to cost more than it does currently.
Second, Internet service providers, which are in the best position to manage the security of individual users’ machines, need to get more involved – again with a system that understands the costs of poor security and charges those costs back to the people responsible.
(Just as we require drivers to have insurance, maybe we should require users either to buy security services from their ISP or to post some kind of bond/insurance.)
There are many such examples; all we need is better information to find them and take action, whether inside the government or in the private sector.
A government can do three major things: make (and enforce) laws, spend (or take) money, and inspire people.
Every country needs a CIO who can inspire its people with the power of information.
Love the Bank, Hate the Banker
NEW DELHI – Public discourse is rarely nuanced.
The public’s attention span is short, and subtleties tend to confuse.
Better to take a clear, albeit incorrect, position, for at least the message gets through.
The sharper and shriller it is, the more likely it is to capture the public’s attention, be repeated, and frame the terms of debate.
Consider, for example, the debate about bank regulation.
Bankers are widely reviled today.
But banking is also mystifying.
So any critic who has the intellectual heft to clear away the smokescreen that bankers have laid around their business, and can portray bankers as both incompetent and malevolent, finds a ready audience.
The critic’s message – that banks need to be cut down to size – resonates widely.
Bankers can, of course, ignore their critics and the public, and use their money to lobby in the right quarters to maintain their privileges.
But, every once in a while, a banker, tired of being portrayed as a rogue, lashes out.
He (it is usually a man) warns the public that even the most moderate regulations placed on banks will bring about the end of civilization as we know it. And so the shrillness continues, with the public no wiser for it.
A more specific example drives home the point. A significant number of banks operated at very high levels of leverage prior to the recent crisis, with debt/equity ratios of 30-1 (or more) in some cases, and with much of the debt very short-term.
One might reasonably conclude that banks operated with too little equity capital, and too little margin of safety, and that a reasonable regulatory response would be to require that banks be better capitalized.
But this is where the consensus breaks down.
The critics want banks to operate with far less leverage, especially regarding short-term borrowing; indeed, some want all-equity banks, so that the system becomes safe.
The bankers retort that they must pay a higher return on any additional equity that they issue, so that more equity would increase their cost of capital, forcing them to raise interest rates on the loans they make, which would reduce economic activity.
Neither side is quite right in their public arguments.
The bankers do not seem to have internalized a fundamental axiom of modern finance: risk emanates from the assets that a bank holds.
According to the Modigliani-Miller theorem, the mix of debt and equity that it uses to finance its assets does not alter its average cost of financing. Use more “cheap” debt, and equity becomes riskier and costlier, keeping overall financing costs the same.
Use more equity, and equity becomes less leveraged and less risky, which causes investors to demand lower returns to hold it, and again the overall financing cost remains the same.
Put differently, given a set of cash flows from a bank’s assets, the bank’s value is not affected by how those cash flows are distributed among investors, so more leverage does not reduce the bank’s cost of funding.
If their public argument is incorrect (and they must know it), why do bankers prefer short-term borrowing to long-term equity finance?
The critics would say that it is because of the tax preference accorded to debt, or because banks are too big to fail.
But these arguments do not withstand scrutiny.
If the tax deductibility of interest made debt attractive, then bankers should be indifferent between long-term debt and short-term debt.
Yet they seem to prefer the latter.
Similarly, too-big-to-fail banks would not care about the failure risk associated with debt financing.
But, again, it is unclear why they should prefer short-term debt.
After all, if bankers were trying to benefit, would they not issue long-term debt, for which the default risk, and the gain from the implicit government guarantee, is high?
Furthermore, why do small banks, which have no implicit backing from the government, also have so much leverage?
The critics’ arguments about the benefits of equity are equally unsatisfying.
Of course, given a set of bank assets, more equity would reduce the risk of failure.
But failure is not always a bad thing; a banker operating an all-equity bank, with no need ever to repay investors, would be likelier to take unwarranted risk. The need to repay or roll over debt imposes discipline, giving the banker a stronger incentive to manage risk carefully.
For example, when Washington Mutual collapsed in 2008, following an uncontrolled lending spree (it was the largest bank failure in American history), it was not because equity holders decided to close it down, but because depositors did not trust it anymore.
How much more value would Washington Mutual’s management have destroyed if the bank had been all-equity financed?
In sum, there are tradeoffs.
Too much short-term debt makes banks more prone to failure, while too much equity places little restraint on bankers’ capacity to destroy value.
The truth lies somewhere between the positions of today’s strident critics and indignant bankers, which may be why the moderately leveraged bank has been a feature of Western economies for a thousand years.
Our distaste for the banker must not be allowed to destroy the bank.
The Inspectors Have Failed Us
On February 5 th Colin Powell will present America's case against Iraq to the UN Security Council.
His appearance will come a week after Hans Blix and Mohammed al-Baradei--the chiefs of the UN inspectors--demonstrated their inability to fulfill their mandate.
Khidhir Hamza, a former advisor to the Iraqi Atomic Energy Organization and former Director of Iraq's Nuclear Weapons Program, explains how and why the UN inspections failed.
Faced with reports of their failure to cooperate with the heads of the two UN inspection teams, the Iraqis have abandoned their description of the inspectors as independent professionals.
Amir Rashid, the former head of the Iraqi military industry and an adviser to Saddam Hussein, now openly describes the inspectors as spies.
It was this Iraqi attitude of implacable hostility that, in 1998, forced UN weapons inspectors to leave the country, leading to today's confrontation.
In view of that precedent, and what has happened in Iraq since Blix and al-Baradei have filed reports that contain some troubling surprises.
The UN's Resolution 1441 requires Iraqi disarmament in terms of actual weapons of mass destruction and the ability to make them.
This is where the inspectors have focused so far.
But Resolution 1441 also empowers the inspectors to gather intelligence about Iraq's weapons and weapon-making capabilities through in-depth interviews with Iraqi experts, either inside or outside the country, but certainly without Iraqi-government minders present.
To assure the experts that they could talk without fear, the Resolution gave the inspectors the authority to bring entire families out of the country.
Control of access to Iraqi experts has always been essential to uncovering the truth about weapons and weapon programs.
Without independent access, the Iraqi government retains total control of the information supplied to inspectors.
In fact, after inspections were suspended in 1998, Iraq worked tirelessly to build an impenetrable wall around the people responsible for its weapons programs.
The small community of Iraqi experts was put under a harsh security regime.
Some have been murdered; others have been imprisoned.
Security officials keep constant tabs on the whereabouts of family members.
For the most part, these measures have succeeded.
The outside world currently knows little about the inner workings of the Iraqi weapons program.
Since 1998, there has not been a single defection from the upper levels of the program, despite low pay and substandard living conditions--deteriorating medical care, erratic electricity supplies, and a ban on travel.
Incredibly, neither Blix nor al-Baradei pressed for any interviews with scientists outside Iraq, although they are fully aware that this is the only safe way to conduct effective inquiries.
Both men understood disarmament as simply the removal of weapons and equipment, if and when they were found.
Understanding the system that produces these weapons, and finding the means to disable this system, has not been on their agenda.
As a result, Iraq's refusal to cooperate in making the scientists available for interviews--the key to its entire strategy of denial--was mentioned only in passing at the end of the inspectors' reports.
The fact that this entire exercise has told us nothing about Iraq's weapons infrastructure has simply been filed away for future reference.
The inspectors even managed to falter when they stumbled across hard evidence of Iraqi cheating.
For example, the inspectors found a dozen chemical weapons warheads in mint condition in a relatively new warehouse, but minimized the significance of their discovery by arguing that the warheads were empty.
Never mind that storing warheads in this way is simply an elementary protocol of proper handling procedures.
Storing warheads that are filled with chemicals would be dangerous and wasteful.
Because the chemicals are likely to corrode the warhead over time, extended storage has a high probability of leakage and degradation of the weapon.
But Blix dismissed this as "not a serious problem," and did not require Iraq to produce the poisons to be used to arm the warheads.
Al-Baradei was even more accommodating.
Relying solely on radiation detection equipment at various sites and some environmental samples--but without interviewing a single scientist in private, he declared that there was no evidence that Iraq had reconstituted its nuclear weapons program.
This is a lamentable repeat of the International Atomic Energy Agency's performance in both 1990 and 1994, when, under the leadership of Blix, Iraq was given a clean bill of health on nuclear weapons development.
Only after the defection of Hussein Kamel, Saddam's son-in-law and head of the Iraqi military industry, did Blix get the clues to uncover the actual workings of Iraq's ambitious program.
Most shockingly, the inspector's reports failed to state clearly and unequivocally that Iraq remains unwilling to disarm.
Neither Blix nor al-Baradei was willing to suspend the inspections until Iraq provides forthright, open cooperation.
These gentlemen inspectors fail to understand a fundamental point: to disarm a thuggish, murderous regime you need strict enforcement.
Any concession will be interpreted as weakness.
Iraq's government knows exactly what it needs to do to hide its weapons of mass destruction.
Unfortunately, the inspectors' reports make one thing clear: they will not take the bold steps that the international community needs to expose Iraqi cheating.
The Instability of Inequality
NEW YORK – This year has witnessed a global wave of social and political turmoil and instability, with masses of people pouring into the real and virtual streets: the Arab Spring; riots in London;
Israel’s middle-class protests against high housing prices and an inflationary squeeze on living standards; protesting Chilean students; the destruction in Germany of the expensive cars of “fat cats”; India’s movement against corruption; mounting unhappiness with corruption and inequality in China; and now the “Occupy Wall Street” movement in New York and across the United States.
While these protests have no unified theme, they express in different ways the serious concerns of the world’s working and middle classes about their prospects in the face of the growing concentration of power among economic, financial, and political elites.
The causes of their concern are clear enough: high unemployment and underemployment in advanced and emerging economies; inadequate skills and education for young people and workers to compete in a globalized world; resentment against corruption, including legalized forms like lobbying; and a sharp rise in income and wealth inequality in advanced and fast-growing emerging-market economies.
Of course, the malaise that so many people feel cannot be reduced to one factor.
For example, the rise in inequality has many causes: the addition of 2.3 billion Chinese and Indians to the global labor force, which is reducing the jobs and wages of unskilled blue-collar and off-shorable white-collar workers in advanced economies; skill-biased technological change; winner-take-all effects; early emergence of income and wealth disparities in rapidly growing, previously low-income economies; and less progressive taxation.
The increase in private- and public-sector leverage and the related asset and credit bubbles are partly the result of inequality.
Mediocre income growth for everyone but the rich in the last few decades opened a gap between incomes and spending aspirations.
In Anglo-Saxon countries, the response was to democratize credit – via financial liberalization – thereby fueling a rise in private debt as households borrowed to make up the difference.
In Europe, the gap was filled by public services – free education, health care, etc. – that were not fully financed by taxes, fueling public deficits and debt.
In both cases, debt levels eventually became unsustainable.
Firms in advanced economies are now cutting jobs, owing to inadequate final demand, which has led to excess capacity, and to uncertainty about future demand.
But cutting jobs weakens final demand further, because it reduces labor income and increases inequality.
Because a firm’s labor costs are someone else’s labor income and demand, what is individually rational for one firm is destructive in the aggregate.
The result is that free markets don’t generate enough final demand.
In the US, for example, slashing labor costs has sharply reduced the share of labor income in GDP.
With credit exhausted, the effects on aggregate demand of decades of redistribution of income and wealth – from labor to capital, from wages to profits, from poor to rich, and from households to corporate firms – have become severe, owing to the lower marginal propensity of firms/capital owners/rich households to spend.
The problem is not new.
Karl Marx oversold socialism, but he was right in claiming that globalization, unfettered financial capitalism, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct.
As he argued, unregulated capitalism can lead to regular bouts of over-capacity, under-consumption, and the recurrence of destructive financial crises, fueled by credit bubbles and asset-price booms and busts.
Even before the Great Depression, Europe’s enlightened “bourgeois” classes recognized that, to avoid revolution, workers’ rights needed to be protected, wage and labor conditions improved, and a welfare state created to redistribute wealth and finance public goods – education, health care, and a social safety net.
The push towards a modern welfare state accelerated after the Great Depression, when the state took on the responsibility for macroeconomic stabilization – a role that required the maintenance of a large middle class by widening the provision of public goods through progressive taxation of incomes and wealth and fostering economic opportunity for all.
Thus, the rise of the social-welfare state was a response (often of market-oriented liberal democracies) to the threat of popular revolutions, socialism, and communism as the frequency and severity of economic and financial crises increased.
Three decades of relative social and economic stability then ensued, from the late 1940’s until the mid-1970’s, a period when inequality fell sharply and median incomes grew rapidly.
Some of the lessons about the need for prudential regulation of the financial system were lost in the Reagan-Thatcher era, when the appetite for massive deregulation was created in part by the flaws in Europe’s social-welfare model.
Those flaws were reflected in yawning fiscal deficits, regulatory overkill, and a lack of economic dynamism that led to sclerotic growth then and the eurozone’s sovereign-debt crisis now.
But the laissez-faire Anglo-Saxon model has also now failed miserably.
To stabilize market-oriented economies requires a return to the right balance between markets and provision of public goods.
That means moving away from both the Anglo-Saxon model of unregulated markets and the continental European model of deficit-driven welfare states.
Even an alternative “Asian” growth model – if there really is one – has not prevented a rise in inequality in China, India, and elsewhere.
Any economic model that does not properly address inequality will eventually face a crisis of legitimacy.
Unless the relative economic roles of the market and the state are rebalanced, the protests of 2011 will become more severe, with social and political instability eventually harming long-term economic growth and welfare.
The International Atomic Energy Agency at 50
This summer’s 50th anniversary of the International Atomic Energy Agency’s (IAEA) founding offers an opportunity for stocktaking about the world’s most important nuclear watchdog.
It comes at a time when the Agency has assumed increasing responsibility for nuclear security.
The recent dispatch of inspectors to verify the shutdown of North Korea’s weapons reactor and the continuing efforts to ferret out Iran’s nuclear intentions are only the most visible signs of its monitoring function.
But, while there is much to celebrate, questions remain about whether the IAEA can increase its capacity both to combat proliferation and promote nuclear power plant safety.
History suggests that without greater authority, the Agency will be incapable of dramatically reducing global nuclear risks.
The IAEA traces its lineage to the early dark days of the Cold War.
In his December 1953 UN General Assembly “Atoms for Peace” address, US President Dwight Eisenhower sought to relax atomic weapons competition with the Soviet Union by calling for the creation of an international nuclear fuel bank stocked with superpower fissile material.
Management would come from a new global nuclear organization.
Although the fuel bank never emerged, the seed for the organization took root, giving rise to the IAEA in 1957.
In time, the IAEA became a nuclear brain bank, assisting developing countries with their peaceful nuclear needs.
It educated nuclear operators, generated safety and protection standards, promoted the benefits of the atom for industry, agriculture, and medicine, and much more.
In 1970, boosted by the new Nuclear Nonproliferation Treaty (NPT), the IAEA acquired expanded authority to safeguard nuclear elements against diversion.
Today, this responsibility extends to more than 180 countries.
In practice, however, the IAEA has an uneven record in tracking down nuclear cheats.
In 1981, following Israel’s bombing of Iraq’s Osirak reactor, IAEA inspector Roger Richter told the US Congress how Saddam had blocked IAEA access to nuclear sites.
After the 1991 Persian Gulf War, Iraq once again embarrassed the IAEA, when inspectors uncovered a major covert nuclear weapons program.
In 2003, Libya’s renunciation of its secret weapons revealed how another country had hoodwinked the Agency.
And, only recently, the IAEA discovered that Egypt conducted non-safeguarded nuclear experiments decades ago.
Despite these errors, in the past few years, the IAEA has demonstrated its worth as an effective nuclear sleuth.
In 2002, its inspectors revealed North Korea’s cheating, prompting UN sanctions.
(Unfortunately, this did not halt the country’s subsequent withdrawal from the NPT.)
The IAEA’s tenacity also has smoked out much of Iran’s nuclear program, albeit only after an Iranian dissident group disclosed the existence of some of the regime’s secret facilities.
In early 2003, its onsite presence in Iraq established that Saddam did not have a nuclear weapons program, contrary to the Bush administration’s representations.
And in 2004, the IAEA blew the whistle on South Korea’s non-safeguarded plutonium and enrichment experiments.
Beyond truth seeking, the IAEA has taken a leadership role in promoting new initiatives to reduce weapons proliferation.
It has pressed for multinational nuclear fuel facilities that would eliminate the need for national installations that draw proliferation concerns.
Director General Mohamed El Baradei has called upon the US to negotiate directly with Iran over its atomic program.
He also has attempted to generate momentum for a Middle East nuclear weapons-free zone.
Looking forward, the IAEA confronts both internal and external challenges.
Internally, mandatory retirements will soon cost the Agency 50% of its senior management.
Nor has the Agency’s budget kept pace with its increasing workload.
More significant is the IAEA’s failure to overcome resistance to conclude comprehensive safeguard agreements.
Some countries oppose the application of NPT safeguards to small quantities of nuclear materials.
The unwillingness of more than half the NPT membership to apply the Additional Protocol, which gives the IAEA new flexibility to uncover clandestine nuclear activity, undermines global security.
The projected rapid growth of nuclear energy will generate yet more challenges.
To date, reactor construction has been concentrated in the industrial world.
In coming years, developing countries with little nuclear experience – Indonesia, Vietnam, Thailand, Jordan, Turkey, Egypt, and others – will attempt to leap onto the atomic bandwagon.
Without authority to enforce safe practices, the IAEA cannot better assure nuclear safety in these or other countries.
And without better intelligence and backing from the UN Security Council to impose significant, timely, and certain penalties on nuclear violators, the IAEA will have difficulty in fulfilling its security mandate.
So, although the IAEA will continue to play a vital role, it will be more of a band-aid than a cure for the atomic risks that we will all have to assume.
The World in 2030
CAMBRIDGE – What will the world look like two decades from now? Obviously, nobody knows, but some things are more likely than others.
Companies and governments have to make informed guesses, because some of their investments today will last longer than 20 years.
In December, the United States National Intelligence Council (NIC) published its guess: Global Trends 2030: Alternative Worlds.
The NIC foresees a transformed world, in which “no country – whether the US, China, or any other large country – will be a hegemonic power.”
This reflects four “megatrends”: individual empowerment and the growth of a global middle class; diffusion of power from states to informal networks and coalitions; demographic changes, owing to urbanization, migration, and aging; and increased demand for food, water, and energy.
Each trend is changing the world and “largely reversing the historic rise of the West since 1750, restoring Asia’s weight in the global economy, and ushering in a new era of ‘democratization’ at the international and domestic level.”
The US will remain “first among equals” in hard and soft power, but “the ‘unipolar moment’ is over.”
It is never safe, however, to project the future just by extrapolating current trends.
Surprise is inevitable, so the NIC also identifies what it calls “game-changers,” or outcomes that could drive the major trends off course in surprising ways.
First among such sources of uncertainty is the global economy: will volatility and imbalances lead to collapse, or will greater multipolarity underpin greater resilience?
Similarly, will governments and institutions be able to adapt fast enough to harness change, or will they be overwhelmed by it?
Moreover, while interstate conflict has been declining, intrastate conflict driven by youthful populations, identity politics, and scarce resources will continue to plague some regions like the Middle East, South Asia, and Africa.
And that leads to yet another potentially game-changing issue: whether regional instability remains contained or fuels global insecurity.
Then there is a set of questions concerning the impact of new technologies.
Will they exacerbate conflict, or will they be developed and widely accessible in time to solve the problems caused by a growing population, rapid urbanization, and climate change?
The final game-changing issue is America’s future role.
In the NIC’s view, the multi-faceted nature of US power suggests that even as China overtakes America economically – perhaps as early as the 2020’s – the US will most likely maintain global leadership alongside other great powers in 2030. “The potential for an overstretched US facing increased demands,” the NIC argues, “is greater than the risk of the US being replaced as the world’s preeminent political leader.”
Is this good or bad for the world?
In the NIC’s view, “a collapse or sudden retreat of US power would most likely result in an extended period of global anarchy,” with “no stable international system and no leading power to replace the US.”
The NIC discussed earlier drafts of its report with intellectuals and officials in 20 countries, and reports that none of the world’s emerging powers has a revisionist view of international order along the lines of Nazi Germany, Imperial Japan, or the Soviet Union.
But these countries’ relations with the US are ambiguous.
They benefit from the US-led world order, but are often irritated by American slights and unilateralism.
One attraction of a multipolar world is less US dominance; but the only thing worse than a US-supported international order would be no order at all.
The question of America’s role in helping to produce a more benign world in 2030 has important implications for President Barack Obama as he approaches his second term.
The world faces a new set of transnational challenges, including climate change, transnational terrorism, cyber insecurity, and pandemics.
All of these issues require cooperation to resolve.
Obama’s 2010 National Security Strategy argues that the US must think of power as positive-sum, not just zero-sum.
In other words, there may be times when a more powerful China is good for the US (and for the world).
For example, the US should be eager to see China increase its ability to control its world-leading greenhouse-gas emissions.
US Secretary of State Hillary Clinton has referred to the Obama administration’s foreign policy as being based on “smart power,” which combines hard and soft power resources, and she argues that we should not talk about “multipolarity,” but about “multi-partnerships.”
Likewise, the NIC report suggests that Americans must learn better how to exercise power with as well as over other states.
To be sure, on issues arising from interstate military relations, understanding how to form alliances and balance power will remain crucial.
But the best military arrangements will do little to solve many of the world’s new transnational problems, which jeopardize the security of millions of people at least as much as traditional military threats do.
Leadership on such issues will require cooperation, institutions, and the creation of public goods from which all can benefit and none can be excluded.
The NIC report rightly concludes that there is no predetermined answer to what the world will look like in 2030.
Whether the future holds benign or malign scenarios depends in part on the policies that we adopt today.
The Internet’s Immune System
NEW YORK – Viruses, phishing, spyware, spam, denial-of-service attacks, botnets… You have probably heard these words, and perhaps even suffered from what they signify, with or without knowing it.
I’d like to lay out a simple path to addressing (not resolving) these security problems, one that does not require agreement among all governments (or people) on what really constitutes a crime, much less a global police force or unenforceable global treaties. If we can increase security in general, then governments can focus on the real criminals.
A better approach is to view computer security as an issue of public health and economics, in which people can protect themselves but must pay for the costs they impose on others.
We need to enable people to defend themselves against others; prevent innocent, well-meaning people from becoming infected and harming others; and reduce the incentives and ability of the ill-intentioned to do harm.
That sounds like a lot of different challenges.
But there are effective approaches to each of them that do not require tracking everyone online, or requiring IDs for every interaction.
Tracking user IDs will not enable us to catch or stop bad guys, and it will render the Internet impossible to use.
We can’t save cyberspace by destroying its openness.
To implement effective security, the entities best equipped to do so, the Internet service providers, must take the lead.
They are technically savvy organizations with the ability (more or less) to protect users and detect abusers; they have a direct (though impersonal) relationship with their users; and they compete for users’ business, so that, unlike governments, they will suffer if they perform badly.
The ISPs (rather than governments) should provide basic security – anti-virus, anti-phishing, anti-spam, and the like – as a regular feature of consumer Internet services.
This is not hard to do.
A number of anti-virus companies compete to offer consumer security services; each ISP could select one, or offer its customers a choice of three, for example. The trick is to get consumers to use these tools – which will require an awareness campaign along the lines of public health messages.  The result should be something closer to widespread hand-washing than to a system of acute-care hospitals.
As for spam, ISPs (including mail service providers) could limit their users to, say, 100 e-mails a day; for more, you have to pay or at least post a security bond, or pass some good behavior test.
At the same time, all ISPs should implement an e-mail ID system (there are two good standards, called Domain Keys and SPF).
This is not to track everyone’s mail, but to prevent bad guys from spoofing good guys.
ISPs would throttle traffic from ISPs that did not join the security collective, and pretty soon their customers would complain, forcing them either to join or find themselves relegated to the underworld, from which it would be hard to launch attacks because no one would accept their traffic.
And, because ISPs answer to other ISPs, not governments, dissidents and whistleblowers could maintain their anonymity.
As for anti-phishing and malware downloads, there are a number of services that track “bad” sites and warn users off.
Users can still go where they want, but at least there are signposts warning that they are entering a dangerous neighborhood.
Google does this in its search results, working with StopBadware.org (I am an advisory board member), and both Mozilla Firefox and Microsoft’s Internet Explorer offer similar protections. In all cases, adventurous users or professionals can overcome the paternalism, but only by paying what amounts to liability insurance, for the risks they impose on the system.
The point is to create economic incentives to reduce cybercrime.
Real criminals won’t be deterred, but such a system would prevent the rest of us from being pulled along or becoming victims.
With fewer victims, crime will pay less.
There are several reasons why this has not yet happened.
The first is inertia, combined with (or disguised as) idealism – the mistaken idea that the Internet should be free not just for speech, but also from payment. Yet it costs something to maintain an infrastructure that keeps people safe.
Indeed, cost – both to users and to ISPs – is the second obstacle.
The challenge is to acknowledge the costs (as we are now doing with pollution) and assign them to people who can – and can be compelled to – pay for them.
After all, we accept the costs of police forces and health care, including not just hospitals, but also clean water, safe food, etc.
So how do we make this happen?
ISPs need to pass these costs on to their customers.
But they won’t, because they compete mostly on price.
So customers need to demand security as part of their service, while ISPs need to shun ISPs that don’t comply.
To help things along, someone should file a lawsuit – not too many! – against ISPs who tolerate misbehavior. The targets should be ISPs that willfully serve criminal customers, refusing to deal with complaints to the point that ignorance is no longer a legitimate excuse.
But ISPs’ costs also include warning people away from bad sites, which requires a due-process system to notify owners of compromised websites – so that they can fix them or realize that they have been exposed.
Such a system is relatively expensive to manage, but it is cheaper than the costs of not having it.
These changes would not create some digital nervous system with a centralized brain that could solve all problems.
Instead, they would result in something like an immune system of competing ISPs and evolving security services, local and omnipresent. That would vastly improve the overall computer-security situation: Ordinary people would feel secure and law enforcement and security specialists could focus on the biggest threats.
The Intervention Dilemma
CAMBRIDGE – When should states intervene militarily to stop atrocities in other countries?
The question is an old and well-traveled one.
Indeed, it is now visiting Syria.
In 1904, US President Theodore Roosevelt argued that, “there are occasional crimes committed on so vast a scale and of such peculiar horror” that we should intervene by force of arms.
A century earlier, in 1821, as Europeans and Americans debated whether to intervene in Greece’s struggle for independence, President John Quincy Adams warned his fellow Americans about “going abroad in search of monsters to destroy.”
More recently, after a genocide that cost nearly 800,000 lives in Rwanda in 1994, and the slaughter of Bosnian men and boys at Srebrenica in 1995, many people vowed that such atrocities should never again be allowed to occur.
When Slobodan Milošević engaged in large-scale ethnic cleansing in Kosovo in 1999, the United Nations Security Council adopted a resolution recognizing the humanitarian catastrophe, but could not agree on a second resolution to intervene, given the threat of a Russian veto.
Instead, NATO countries bombed Serbia in an effort that many observers regarded as legitimate but not legal.
In the aftermath, then-UN Secretary-General Kofi Annan created an international commission to recommend ways that humanitarian intervention could be reconciled with Article 2.7 of the UN Charter, which upholds member states’ domestic jurisdiction.
The commission concluded that states have a responsibility to protect their citizens, and should be helped to do so by peaceful means, but that if a state disregarded that responsibility by attacking its own citizens, the international community could consider armed intervention.
The idea of a “responsibility to protect” (R2P) was adopted unanimously at the UN’s World Summit in 2005, but subsequent events showed that not all member states interpreted the resolution the same way.
Russia has consistently argued that only Security Council resolutions, not General Assembly resolutions, are binding international law.
Meanwhile, Russia has vetoed a Security Council resolution on Syria, and, somewhat ironically, Annan has been called back and enlisted in a so-far futile effort to stop the carnage there.
Until last year, many observers regarded R2P as at best a pious hope or a noble failure.
But in 2011, as Colonel Muammar el-Qaddafi prepared to exterminate his opponents in Benghazi, the Security Council invoked R2P as the basis for a resolution authorizing NATO to use armed force in Libya.
In the United States, President Barack Obama was careful to wait for resolutions by the Arab League and the Security Council, thereby avoiding the costs to American soft power that George W. Bush’s administration suffered when it intervened in Iraq in 2003.
But Russia, China, and other countries felt that NATO exploited the resolution to engineer regime change, rather merely protecting citizens in Libya.
In fact, R2P is more about struggles over political legitimacy and soft power than it is about hard international law.
Some Western lawyers argue that it entails the responsibility to combat genocide, crimes against humanity, and war crimes under the various conventions of international humanitarian law.
But Russia, China, and others are reluctant to provide a legal or political basis for actions such as what occurred in Libya.
There are other reasons why R2P has not been a success in the Syrian case.
Drawn from traditional “just war” theory, R2P rests not only on right intentions, but also on the existence of a reasonable prospect of success.
Many observers highlight the important physical and military differences between Libya and Syria that would make Syrian no-fly zones or no-drive zones problematic.
Some Syrians who oppose President Bashar al-Assad’s regime, pointing to Baghdad in 2005, argue that the one thing worse than a cruel dictator is a sectarian civil war.
Such factors are symptomatic of larger problems with humanitarian interventions.
For starters, motives are often mixed (Roosevelt, after all, was referring to Cuba).
Moreover, we live in a world of diverse cultures, and we know very little about social engineering and how to build nations.
When we cannot be sure how to improve the world, prudence becomes an important virtue, and hubristic visions can pose a grave danger.
Foreign policy, like medicine, must be guided by the principle, “First, do no harm.”
Prudence does not mean that nothing can be done in Syria.
Other governments can continue to try to convince Russia that its interests are better served by getting rid of the current regime than by permitting the continued radicalization of his opponents.
Tougher sanctions can continue to delegitimize the regime, and Turkey might be persuaded to take stronger steps against its neighbor.
Moreover, prudence does not mean that humanitarian interventions will always fail.
In some cases, even if motives are mixed, the prospects of success are reasonable, and the misery of a population can be relieved at modest expense.
Military interventions in Sierra Leone, Liberia, East Timor, and Bosnia did not solve all problems, but they did improve the lives of the people there.
Other interventions – for example, in Somalia – did not.
Recent large-scale interventions in Iraq and Afghanistan, though not primarily humanitarian, have eroded public support for military action.
But we should recall Mark Twain’s story about his cat.
After sitting on a hot stove, it would never sit on a hot stove again, but neither would it sit on a cold one.
Interventions will continue to occur, though they are now more likely to be shorter, involve smaller-scale forces, and rely on technologies that permit action at greater distance.
In an age of cyber warfare and drones, the end of R2P or humanitarian intervention is hardly foretold.
The Intervention Syndrome
Kosovo is often held up as a test case for the concept of “humanitarian” intervention.
But as Iraq spirals into chaos, diplomats and leaders everywhere are again asking themselves if it is ever appropriate for alliances of nations or the international community as a whole to intervene when a sovereign country appears unable or unwilling to defend its citizens from genocide, war crimes, or ethnic cleansing.
At the center of this debate is the so-called doctrine of the “responsibility to protect.”
As the United Nations-appointed Ombudsperson in Kosovo for the past five years, I have had the unique opportunity to observe the aftereffects of that doctrine following NATO’s intervention in the former Yugoslavia in 1999.
Kosovo has subsequently become an international experiment in society building, led by the UN Interim Administration Mission in Kosovo (UNMIK).
Experiment is the right word here.
Indeed, Kosovo has become a Petri dish for international intervention.
Having lived and worked long enough in Kosovo to see the outcome so far, I contend that such experiments require further research.
Clearly, the need for international intervention in crises is often time-specific and a fairly swift response is frequently required.
However, apart from military factors, where such intervention is being considered, it is of vital importance to focus international policy discussion on the rapid deployment of a linked civilian and security presence.
This is especially true where human suffering is caused by communal conflict, as was the case in Kosovo.
An immediate deployment of an adequate civilian and security presence during the months immediately after the end of the 1999 NATO bombing campaign might well have provided suitable protective mechanisms against the backlash that allowed victims to become victimizers.
NATO peacekeeping troops were not directed to stop the abductions, disappearances, retaliation killings, and massive property destruction by groups of ethnic Albanians, which led to a vast reverse ethnic cleansing of the non-Albanian (mainly Serb) population.
As a result of this neglect, a noxious social and political residue pervades today’s Kosovo.
Instead of cooling communal conflict, interethnic hatred remains as heated as ever.
In addition to the lack of an adequate civilian and security presence to reassure every community of its safety, the overall lack of legal mechanisms to deliver swift justice for crimes committed during and after the intervention created additional tension.
So pervasive is this tension, in fact, that any chance of even beginning the much-needed reconciliation process must now be pushed far into the future.
Similarly, in Kosovo the international community has devoted little time to helping former combatants contemplate their collective responsibility for atrocities, no matter how direct or indirect their personal involvement.
Without such an effort, attempting to improve the situation is like building a house on a sand dune.
This lack of foresight about and planning for the aftermath of armed intervention is not only dangerous to the people who have ostensibly been “saved”; it is counterproductive.
Unless a humanitarian intervention is structured in such a way that it guarantees basic security, the underlying antagonisms that inspired the intervention in the first place will merely be reinforced, not diminished.
So, six years after NATO’s intervention, Kosovo seems as far from stability and social peace as ever.
Despite the frequent assurances of UN authorities that Kosovo is on a path toward reconciliation and true home rule, NATO officials indicate that there are plans to maintain a long-term military presence in the province in order to “guarantee that the political process will be concluded successfully.”
This brings me to another key point: a workable exit strategy is just as important to the success of any future humanitarian intervention as the entry strategy.
If an international intervention is to have any credible chance of success, clear criteria for what constitutes “success” are needed from the start.
Only such clarity can allow for a proper end to international actors’ engagement.
In Kosovo, such clarity is and has been absent; as a result, NATO and the UN have no clear idea about when and how both should leave.
Someone once rightly said that it is easy to bomb, but much harder to build; it is relatively easy to defeat a regime militarily, but it is far more difficult to create a solid, sustainable, civil society in its place.
The UN General Assembly should keep this in mind as it starts to codify the doctrine of the “responsibility to protect.”
The Iowa Caucuses and the Atlantic Alliance
What do the victories of two relatively inexperienced outsiders, Barak Obama and Mike Huckabee, in the Iowa Caucuses mean for American foreign policy in general and the Atlantic Alliance in particular? It is too soon to predict, on the basis of a plurality of votes cast by a sliver of eligible voters in a small state, who will eventually prevail in the nomination process.  But it is not too soon to ask if the Bush Administration’s unfathomably cavalier and gratuitously alienating attitude toward America’s European allies will change substantially on January 20, 2009.
Commentators seem to agree that the voters who chose Obama and Huckabee felt that they were rejecting the status quo. To put the missteps of the past behind them, they apparently voted for the candidates about whom they knew the least.  But exactly what status quo did they imagine they were rejecting?  Upon inspection, the “politics as usual” that they apparently sought to rebuff looks nebulous.  Obama has repeatedly linked Hillary Clinton, whose political team is personally and ideologically committed to wresting power from the current incumbents, to the thinking dominant in Washington from 2001 to 2007.  Even more oddly, the genial and erratic Huckabee says that the Mormon former governor of Massachusetts, Mitt Romney, represents the powers that be.
To focus the discussion, we can ask the following question: Did the status quo rejected by the Obama’s and Huckabee’s voters include the deterioration of American-European relations under the Presidency of George W. Bush? After all, the current Administration’s denigration of “old Europe” was not just a rhetorical aside, but a centerpiece of its reckless approach to foreign affairs.  That is why any serious break with the disastrous Bush legacy should start with rethinking and rebuilding the Atlantic Alliance.  That a renewed Atlanticism would be a priority for either Obama or Huckabee is extremely doubtful, however.
Relations between the US and Europe have gone virtually unmentioned in the dozens of Presidential debates held over the past six months. This is not surprising.  Candidates have no incentive to focus attention on a subject, such as the strained Atlantic Alliance, that seldom if ever enters the consciousness of the average voter.  Obama’s failure to convene a single policy meeting of the Senate European sub-committee which he chairs (a committee that oversees, among other things, US relations with NATO and the EU) has had absolutely zero resonance among the electorate at large.  When the topic arises, the Republican candidates, for their part, seem less blandly indifferent than overtly hostile to Europe.  Their anti-European animus, while crudely uninformed, reflects, among other factors, the scorn for secularism typical of Southern white evangelicals and the perverse notion promulgated by some distinguished Republican defense intellectuals that Europe today can contribute little or nothing to American security.
Why does Europe matter to the United States? Five reasons stand out.
First, Europe is as much a frontline region in the war on terror as it was during the Cold War. As last year’s aborted attack on ten airliners heading to the US from London revealed, the likelihood of a terrorist attack on American citizens emanating from a European country remains high.  America may not need the French military, but it certainly needs the French intelligence services.
Second, Europeans’ linguistic skills and cultural knowledge alone ensure that they can make indispensable contributions to US security.
The spread of English as the world’s language has had a paradoxical effect on American national security, making the United States transparent to people around the world, while making the rest of the world increasingly opaque to Americans.
Europeans can supply this defect.
Third, the narcissism of small differences and Bush’s war aside, Americans and Europeans share a common way of life and cultural commitment to tolerant individualism that is not found with the same intensity, concentration, and unchallenged dominance in most of the rest of the world. Europeans and Americans also face many of the same foreign policy challenges.  These include not just terrorism, but also politically destabilizing immigration pressures caused by the wealth gap between North and South, the job-destroying expansion of low-wage labor in China, Putin’s unpredictable petro-politics, nuclear proliferation involving politically unstable countries, contagious disease, global warming, and so forth.  It would be culturally suicidal for “the West” not to work together to devise ways to manage these immensely difficult problems.
Fourth, NATO can not only bring important military capabilities to the table, reducing the drain on American forces in a turbulent world; it also offers a much more plausible vehicle for serious foreign-policy multilateralism than either the EU or the UN.
Fifth, and perhaps most important, elementary human psychology teaches that individuals who shun contact with others have a weak grasp of reality.
Individuals who are never criticized by companions whom they trust, and with whom they share a basic value orientation, have a hard time remaining mentally balanced.
The same is true of nations.
What makes allies indispensable to an effective national-security policy is the ability of like-minded nations to provide the reality checks without which a fallible superpower is, as we have regretfully seen, unable to keep its balance on swiftly evolving and treacherous international terrain.
Because 60% of Huckabee’s Iowa vote came from evangelicals, it still seems probable that the Republican nominee will end up being Mitt Romney, John McCain or Rudi Giuliani.
All of them are strong supporters of Bush’s bellicose foreign policy, and all would campaign on the premise that “fear” has a greater emotional hold on the American electorate than “hope.” They may well be right.
Obama is an obviously gifted politician who, if elected President, would probably break, or attempt to break, from some frustratingly inflexible American policies, especially concerning Israel. But other candidates, notably Hillary Clinton, would be more likely to conduct an intensely Atlanticist foreign policy, placing emphasis on rebuilding America’s alliance with those extraordinarily prosperous countries best positioned to help the US face the daunting challenges to global stability that lie ahead.
The Iranian Nuclear Threat Goes Global
TEL AVIV – The current drive to prevent Iran from developing a nuclear arsenal reflects two important, and interrelated, changes.
From Israel’s perspective, these changes are to be welcomed, though its government must remain cautious about the country’s own role.
The first change is the escalation of efforts by the United States and its Western allies to abort the Iranian regime’s nuclear quest.
This was instigated in part by the International Atomic Energy Agency’s finding in November 2011 that Iran is indeed developing a nuclear weapon, and that it is getting perilously close to crossing the “red line” – the point beyond which its progress could no longer be stopped.
Moreover, the US and its allies understand that failure to take serious action might prompt Israel to launch its own unilateral military offensive.
The second change is the perception that Iran’s nuclear capacity would threaten not only Israel.
In a speech to the Union for Reform Judaism in December, US President Barack Obama stated that “another threat to the security of Israel, the US, and the world is Iran’s nuclear program.”
But, by this February, Obama was saying of Iran that “my number-one priority continues to be the security of the US, but also the security of Israel, and we continue to work in lockstep as we proceed to try to solve this…”
That choice of words was no accident; rather, it was a sign that the US is changing tack when it comes to Iran.
For more than a decade, the question “Whose issue is it?” has been part of the policy debate about Iran’s nuclear ambitions.
Israel’s former prime minister, Ariel Sharon, used to caution his colleagues against “rushing to the head of the line” on Iran.
He argued that if Israel were to take the lead in sounding the alarm on Iran’s nuclear ambitions, the issue would be perceived as yet another “Israeli problem.”
Indeed, Israel’s critics were already arguing that this was another case of the tail wagging the dog – that Israel and its American lobby were trying to push the US into serving Israel’s interests rather than its own.
The most egregious examples of this view were statements made by the political scientists John Mearsheimer and Stephen Walt.
In a paper published prior to the release of their much-debated book The Israel Lobby, they argued:
“… Iran’s nuclear ambitions do not pose an existential threat to the US.
If Washington could live with a nuclear Soviet Union, a nuclear China, and even a nuclear North Korea, then it can live with a nuclear Iran.
And that is why the [Israel] Lobby must keep constant pressure on US politicians to confront Tehran.”
Israel’s current prime minister, Benjamin Netanyahu, has been less worried than Sharon was about Israel’s perceived role.
He is too busy being directly engaged in the attempt to eliminate the deadly threat that a nuclear-armed Iran would pose to the Jewish state.
Prior to the 2009 election that brought him to power, Netanyahu campaigned on the Iranian danger, and his government made the issue its cardinal concern.
Together with his defense minister, Ehud Barak, Netanyahu succeeded in persuading Obama and the rest of the world that Israel was preparing a military attack as a last resort, should the US and its allies fail to stop the Iranian program in time.
That policy has been effective, but it has also drawn attention to Israel’s influence on the Iran question.
Curiously, this has not been held against Israel, at least not so far, partly because Obama and other leaders now regard Iran as a more serious threat, and therefore feel the need to take appropriate action.
The international community must underscore that its members are acting in the service of their national interests, and not simply for Israel’s sake.
But their willingness to engage could wane, particularly if sanctions exact a high financial price or military action causes a large number of casualties.
Israel would therefore be wise to remember Sharon’s cautionary words, and reinforce its pressure on the US administration with a broader diplomatic campaign.
Like it or not, Israel must urge the world to remember that Iran is everyone’s problem.
The Iraqi Public Speaks
Most of what we think about Iraq is shaped by the daily violence that plagues the country.
Intelligence and military analysts debate how much of the violence is due to the presence of foreigners, though it is widely conceded that most of the attacks can be attributed to what American officials call “former regime elements,” with the Iraqi Sunni community the main pillar of the resistance.
Having dominated Iraq under Saddam Hussein, and despite numbering less than a quarter of the overall population, Sunnis, it is said, are fighting to prevent their communal interests from being overwhelmed by the majority Shi’ites and the Kurds, a distinct ethnic group concentrated in the north.
Late last year, I was an organizer of a major national survey of Iraqi public opinion that demonstrated the complexity of the country’s communal relations.
To be sure, Iraqis of different ethnic or religious backgrounds are divided over many issues, but they also embrace a common national identity, as well as a desire for democracy.
To begin, we asked Iraqis to reflect on the fall of Saddam: Was Iraq better off without him?
Among Sunnis, only 23% thought so.
Among Shi’ites, however, 87% saw a better Iraq without Saddam.
Kurds exceeded this number, with 95% claiming an improvement.
At the same time, overwhelming majorities of Kurds, Sunnis, and Shi’ites – more than eight out of ten – preferred to be seen as Iraqis first, believing that “Iraq will be a better society if people treat one another as Iraqis.”
Strong majorities also endorsed the idea of a democratic system for Iraq.
Important divergences re-emerge on social questions.
Kurds have a much more egalitarian view of gender relations than either Sunnis or Shi’ites.
Asked if university education was more important for boys than girls, 78% of Kurds disagreed.
Among Shi’ites, the number disagreeing was 50%. Among Sunnis, the number fell below a majority: only 44% believed in the equal importance of higher education for girls and boys.
Similarly, 78% of Kurds rejected polygamy, compared to just 49% of both Shi’ites and Sunnis.
While these findings demonstrate the shadings of opinion across Iraq’s dominant communities, they do not explain attitudes that may be behind the continuing violence that disfigures Iraqi life.
The most radical differences in opinion can be found in communal perceptions of control of the future – the possibility of building a better life in post-Saddam Iraq – and security.
We asked respondents to indicate how much control they had over their lives and how optimistic they were about the future, using a scale on which ten indicated a highly optimistic sense of control and one a deep level of powerlessness and pessimism.
Kurds had the highest perception of control and optimism, with 19% indicating the highest level of control over their lives and 17% the greatest degree of hope in the future.
The comparable figures for Shi’ites were 10 and 14%, respectively, but were just 4% and 5%, respectively, for Sunnis.
The results for extreme pessimism were skewed in the opposite direction: 14% of Sunnis thought things were as bad as could be, while only 2% of Kurds and 3% of Shi’ites shared this opinion.
The effects of localized violence were also made clear in the survey: 17% of Kurds, 41% of Shi’ites, and 77% of Sunnis felt that life in Iraq is unpredictable and dangerous, a clear demonstration of the effects of the ongoing resistance that is centered in the Sunni Triangle.
This disparity in attitudes toward the future could determine what eventually happens in Iraq.
Widespread political violence in both Iran and Latin America in the 1960’s and 1970’s demonstrated a connection between popular feelings of powerlessness and the growth of urban guerilla movements.
Leaders of these groups often defended terrorism by insisting that violence was the only means of bringing hope to demoralized people.
This argument, long discredited, resonates in the actions of the Iraqi insurgents and their fanatical allies.
This is not to say that an insecure and demoralized community supports violence. By its immobilization, however, such a community may simply be too passive to oppose the violent men acting in its name.
If Iraqi Shi’ite leader Muqtada al-Sadr and his followers chose to stop their own violence, it was not simply because of the superior firepower of the coalition forces.
It was because Shi’ite religious leadership felt empowered, optimistic, and secure enough to press the Sadrists to end their revolt.
If the Sunni leadership were to feel that it has a stake in the outcome of political events now unfolding, it would also be able to stop the insurgency.
That’s why the political talks – open and clandestine – now reported to be underway are vital.
They offer the possibility for the Sunni community to participate in the new system.
The American-led coalition can help by taking more steps that would reinforce a message of hope and optimism for the exhausted and demoralized Sunnis of Iraq.
Military action by itself may simply make matters worse.
The Iraq War Ten Years Later
CAMBRIDGE – This month marks the tenth anniversary of the controversial American-led invasion of Iraq.
What has that decision wrought over the last decade?
More important, was the decision to invade rightly made?
On the positive side, analysts point to the overthrow of Saddam Hussein, the creation of an elected government, and an economy growing at nearly 9% per year, with oil exports surpassing their pre-war level.
Some, such as Nadim Shehadi of Chatham House, go further, arguing that, while “the US certainly bit off more than it could chew in Iraq,” America’s intervention “may have shaken the region out of [a] stagnation that has dominated the lives of at least two generations.”
Skeptics reply that it would be wrong to link the Iraq War to the “Arab Spring,” because events in Tunisia and Egypt in 2011 had their own origins, while President George W. Bush’s actions and rhetoric discredited, rather than advanced, the cause of democracy in the region.
Removing Saddam was important, but Iraq is now a violent place governed by a sectarian group, with one corruption index ranking it 169th out of 174 countries.
Whatever the benefits of the war, skeptics argue, they are too meager to justify the costs: more than 150,000 Iraqis and 4,488 American service members killed, and an estimated cost of nearly $1 trillion (not including long-term health and disability costs for some 32,000 wounded US soldiers.)
Perhaps this balance sheet will look different a decade from now, but at this point most Americans have concluded that the skeptics are right, and that thinking has influenced current US foreign policy.
In the next decade, it is very unlikely that the US will try another prolonged occupation and transformation of another country.
As former Secretary of Defense Robert Gates put it shortly before stepping down, any adviser recommending such action “should have his head examined.”
Some call this isolationism, but it might better be called prudence or pragmatism.
After all, President Dwight D. Eisenhower refused in 1954 to send US troops to save the French at Dien Bien Phu because he feared that they would be “swallowed up by the divisions” in Vietnam.
And Ike was hardly an isolationist.
While a decade may be too soon to render a definitive verdict on the long-term consequences of the Iraq War, it is not too soon to judge the process by which the Bush administration made its decisions.
Bush and his officials used three main arguments to justify invading Iraq.
The first tied Saddam to Al Qaeda.
Public-opinion polls show that many Americans accepted the administration’s word on the connection, but the evidence has not sustained it.
Indeed, the evidence that was presented publicly was thin and exaggerated.
The second argument was that replacing Saddam with a democratic regime was a way to transform Middle East politics.
A number of neoconservative members of the administration had urged regime change in Iraq well before taking office, but were unable to turn it into policy during the first eight months of the administration.
After September 11, 2001, they quickly moved their policy through the window of opportunity that the terrorist attacks had opened.
Bush spoke often of regime change and a “freedom agenda,” with supporters citing the role of American military occupation in the democratization of Germany and Japan after World War II.
But the Bush administration was careless in its use of historical analogies and reckless in its inadequate preparation for an effective occupation.
The third argument focused on preventing Saddam from possessing weapons of mass destruction.
Most countries agreed that Saddam had defied United Nations Security Council resolutions for a dozen years.
Moreover, Resolution 1441 unanimously put the burden of proof on Saddam.
While Bush was later faulted when inspectors failed to find WMDs, the view that Saddam possessed them was widely shared by other countries.
Prudence might have bought more time for the inspectors, but Bush was not alone in this mistake.
Bush has said that history will redeem him, and compares himself to President Harry S. Truman, who left office with low poll ratings because of the Korean War, yet is well regarded today.
Will history really be so kind to Bush?
Truman biographer David McCullough warns that about 50 years must pass before historians can really appraise a presidency.
But one decade after Truman left office, the Marshall Plan and the NATO alliance were already seen as solid accomplishments.
Bush lacks comparable successes to compensate for his mismanagement of Iraq.
History tends to be unkind to the unlucky, but historians also judge leaders in terms of the causes of their luck.
Good coaches analyze their game and their opponent’s game, so that they can capitalize on errors and benefit from “good luck.”
By contrast, reckless reality-testing and unnecessary risk-taking are often part of “bad luck.”
Future historians are likely to fault Bush for these shortcomings.
Even if fortuitous events lead to a better Middle East in another ten years, future historians will criticize the way Bush made his decisions and distributed the risks and costs of his actions.
It is one thing to guide people up a mountain; it is another to lead them to the edge of a cliff.
The Irish Think Again About the Lisbon Treaty
MAYNOOTH, IRELAND – For months, the European Union has been battered by economic storms that now seriously threaten a protracted Europe-wide recession.
But, although banking and finance have taken center stage, the EU’s constitutional problem refuses to go away.
The Irish rejection of the Lisbon Treaty in June plunged the EU into a renewed period of uncertainty about the Union’s future.
Now, in the run-up to the European Council summit on 11-12 December, expectations are growing that Irish Prime Minister Brian Cowen will provide a clear roadmap for an Irish solution to the EU’s constitutional dilemma.
Pragmatists acknowledge that the ratification crisis set in train by the Irish rejection of the Lisbon Treaty has grown into a wider European problem.
The Irish “No” emboldened Euro-skeptics in other member states, not least the irascible Czech president, Václav Klaus, who has signaled that he may refuse to sign the Lisbon Treaty until Ireland’s ratification is secured.
With the Czech Republic set to assume the presidency of the EU on January 1, 2009, there is a distinct fear that Klaus will use his position as Czech head of state to try to sabotage efforts to rescue the Lisbon Treaty.
These concerns remain acute, even in the aftermath of the decision by the Czech Constitutional Court on November 26 that the Lisbon Treaty is compatible with the Czech constitution and can be ratified in the normal way by the Czech Parliament.
But the current constellation of Czech political forces is finely balanced between pro-Treaty and anti-Treaty forces.
So the inter-linkage between the ratification crises in Ireland and the Czech Republic is now explicit and threatens to spill over into the wider EU arena in 2009.
In contrast to the Czech Republic, there is clear agreement among political actors in Ireland about the need to ratify the Lisbon Treaty.
The Irish problem remains how to convince popular opinion to accept a Treaty that was decisively rejected by 53.4% to 46.6% in the June 12 poll.
The core elements of the Irish plan to “rescue” Lisbon have now emerged, and it is clear that a second referendum is central to this effort.
One reason Irish voters rejected the Lisbon Treaty lay in concerns that Ireland’s voice and representation within EU institutions would be eroded, in particular through the periodic loss of Irish representation on the European Commission.
As a first step toward convening a second poll, Cowen has sought EU-wide agreement that, rather than reducing the size of the Commission, the provision of the Lisbon Treaty that allows for a “one member state, one commissioner” rule will be enacted, allowing Ireland to retain a permanent place.
Although this concession is not yet a done deal, there is increasing acknowledgment that it would give Dublin considerable breathing space to conduct a more effective second referendum campaign.
The second part of the plan is for the EU to provide the Irish with a series of clarifications on other key issues.
These include Ireland’s exclusive right to decide policy on issues such as abortion and corporation tax as well as participation in European security and defense operations.
The model for this approach is Denmark’s attainment of legal opt-outs in defined areas.
Political declarations on the issues outlined would be registered as international treaties at the United Nations to provide binding legal force.
The Lisbon Treaty would remain unchanged.
The paradox of the Irish position is that opinion polls continue to demonstrate strong popular attachment to the EU.
A total of 82% of Irish people surveyed earlier this year believed Ireland had benefited from EU membership, the highest score in Europe, where the average was 54%.
The most recent opinion poll on attitudes about the Lisbon Treaty also demonstrates a “bounce” in favor of the Yes side.
But the problem for Cowen (and for the EU) is that this level of support does not seem to translate to the ballot box: the Irish rejected EU treaties on two of the last three occasions when they were asked to vote.
The gap between the Yes and No sides remains within the margin of error and could easily reverse itself, as it did in the weeks leading up to the June referendum.
One positive development for Cowen is that a second referendum would most likely bring back into play the significant economic dimension of Ireland’s EU membership.
Ireland has been a major beneficiary of EU subvention since joining in 1973, and, in 2007, it was still receiving a net total of €500 million from the EU budget.
Reminding voters of the potentially catastrophic cost of being excluded, not just from core parts of the Single Market, but from the vital decision-making structures in the Council of Ministers and the European Central Bank, reinforces what is at stake in a second referendum campaign.
The extraordinary implosion of global financial markets may also work to the advantage of the Yes side in a second referendum, because Ireland’s economic future cannot be contemplated seriously outside of EU structures.
Indeed Irish ministers argue that Ireland would have gone the way of Iceland in recent months were it not for EU membership and the protections afforded by euro-zone membership.
The Irrepressible 1930’s
LONDON – The just concluded G-20 meeting in Seoul broke up without agreement on either currencies or trade.
China and the United States accused each other of deliberately manipulating their currencies to get a trade advantage.
The Doha Round of global trade talks remain stalled.
And, amid talk of the “risks” of new currency and trade wars, such wars have already begun.
Thus, despite global leaders’ vows to the contrary, it seems that the dreadful protectionist precedent of the 1930’s is about to be revived.
That decade’s trade war was started by the US with the Smoot-Hawley tariff of 1930.
The British retaliated with the Import Duties Act of 1932, followed by Imperial Preference.
Soon, the world economy was a thicket of trade barriers.
Britain fired the first shot in the 1930’s currency war, leaving the gold standard in September 1931. The US retaliated by leaving the gold standard in April 1933.
The pound fell against the dollar, then the dollar against the pound.
While the two main currencies of the day were slugging it out, France headed a European “gold bloc” of countries whose currencies became increasingly overvalued against both, until the bloc collapsed in 1936.
A world economic conference, convened in London in 1933 to end the currency war, adjourned without reaching any decision.
Substitute China for Britain and today’s eurozone for the gold bloc and the trend of events today has the same ominous feel.
The US Federal Reserve now proposes to stimulate the American economy by printing more money – a second round of (quantitative easing, or QE2), to the tune of $600 billion.
Almost no one remembers that President Franklin Roosevelt tried the same thing in 1933.
Prices had started falling in September of that year, following a brief commodity boom.
George F. Warren, a professor of farm management at Cornell University, told FDR that the way to raise prices was by reducing the gold value of the dollar.
Under the gold standard, the dollar was convertible into gold at a fixed price of $20.67 an ounce.
To stabilize the price level, the economist Irving Fisher had produced a plan for a “compensated dollar,” which would vary the dollar’s gold value to offset rising or falling prices, in effect allowing the Fed to issue more or fewer dollars as dictated by business conditions.
In response to deflationary pressure, Fisher’s plan would have enabled banks to draw down their reserves and thus, supposedly, increase their lending (or create deposits).
The extra spending would cause prices to rise, which would stimulate business activity.
Fisher provided a new rationale for an old practice of debasing the coinage called seignorage.
The variant proposed by Warren, and followed by FDR in 1933, was to raise the price at which the government bought gold from the mint.
Since a higher price meant that each dollar cost less in terms of gold, the result would be the same as in the Fisher plan.
Domestic prices would rise, helping farmers, and the external value of the dollar would fall, helping exporters.
Starting on 25 October 1933, Roosevelt, Henry Morgenthau, his acting Secretary of the Treasury, and Jesse Jones, head of the Reconstruction Finance Corporation, met every morning in Roosevelt’s bedroom to set the price of gold.
One day, they increased it by $0.21, since 21 seemed like a lucky number.
At first, they bought only newly minted gold in the US.
Later they bought up gold supplies from abroad.
The gold-buying policy raised the official gold price from $20.67 an ounce in October 1933 to $35.00 an ounce in January 1934, when the experiment was discontinued.
By then, several hundred million dollars had been pumped into the banking system.
The results were disappointing, however.
Buying foreign gold did succeed in driving down the dollar’s value in terms of gold.
But domestic prices continued falling throughout the three months of the gold-buying spree.
The Fed’s more orthodox efforts at quantitative easing produced equally discouraging results.
In John Kenneth Galbraith’s summary: “Either from a shortage of borrowers, an unwillingness to lend, or an overriding desire to be liquid – undoubtedly it was some of all three – the banks accumulated reserves in excess of requirements.
Reserves of member banks at Fed were $256 million more than required in 1932; $528 million in 1933, $1.6 billion in 1934, $2.6 billion in 1936.”
What was wrong with the Fed’s policy was the so-called quantity theory of money on which it was based.
This theory held that prices depend on the supply of money relative to the quantity of goods and services being sold.
But money includes bank deposits, which depend on business confidence. As the saying went, “You can’t push on a string.”
Keynes wrote at the time: “Some people seem to infer…that output and income can be raised by increasing the quantity of money.
But this is like trying to get fat by buying a larger belt.
In the United States today, the belt is plenty big enough for the belly….It is [not] the quantity of money, [but] the volume of expenditure which is the operative factor.”
Now the US, relying on the same flawed theory, is doing it again.
Not surprisingly, China accuses it of deliberately aiming to depreciate the dollar.
But the resulting increase in US exports at the expense of Chinese, Japanese, and European producers is precisely the purpose.
The euro will become progressively overvalued, just as the gold bloc was in the 1930’s.
Since the eurozone is committed to austerity, its only recourse is protectionism.
Meanwhile, China’s policy of slowly letting the renminbi rise against the dollar might well go into reverse, provoking US protectionism.
The failure of the G-20’s Seoul meeting to make any progress towards agreement on exchange rates or future reserve arrangements opens the door to a re-run of the 1930’s.
Let’s hope that wisdom prevails before the rise of another Hitler.
The Islamic Case for Religious Liberty
ANKARA – Ecumenical Patriarch Bartholomew of the Orthodox Church recently said on American TV that he feels “crucified” in Turkey, upsetting many Turks. Sadly, his Holiness is right.   Yet his complaint is not with Islam but with the secular Turkish Republic.
The Turkish state has kept the Halki Seminary, the only institution able to train Orthodox priests, closed since 1971.
Even the Patriarch’s title “ecumenical” is lashed out at by some Turkish authorities and their nationalist supporters.
Every year, international reports on religious freedom point to such pressures on the Patriarchate with concern, and they are right to do so. But why does Turkey do all this?
What is the source of the problem?
Things were better long ago.
The first Turkish ruler to reign over the Ecumenical Patriarchate was Mehmed II, the Ottoman Sultan who conquered Constantinople in 1453.
In line with the Islamic tradition of accepting the “People of the Book,” the young sultan granted amnesty to the patriarchate.
He also gave the institution many privileges and authorities, no less than that which existed under the Byzantine emperors.
Armenians and Jews later enjoyed the same autonomies.
In the 19th century, the non-Muslim peoples of the empire also achieved the rights of equal citizenship with Muslims.
That’s why the late Ottoman bureaucracy and the Ottoman Parliament included a great number of Greeks, Armenians and Jews — something you never see in republican Turkey.
The Halki Seminary, opened in 1844, is a relic from that bygone age of pluralism.
Nationalism is what destroyed this Pax Ottomana.
It affected the peoples of the empire one by one, including, towards the end, the Turks.
Many conflicts took place between the latter and the rest, and the great empire’s colossal collapse left a bitter taste in the mouths of all.
The Armenians, who suffered the worst tragedy in 1915, never forgot nor forgave.
What the Turks remember, however, was the perceived “treason” of the other components of the empire, especially that of the Ecumenical Patriarchate.
The latter had cheered the Greek armies when they invaded western Anatolia in 1919.
From that point on, the Patriarchate, in the eyes of many Turks, became a “fifth column.”
When Mustafa Kemal Atatürk founded the Republic in 1923, he defined the Patriarchate as “a center of perfidy.”
As an alternative, he promoted a rival “Turkish Orthodox Patriarchate,” which became a bastion of ultra-nationalist ideology.
(Some members of this artificial &quot;Patriarchate&quot; are currently on trial in the so-called Ergenekon case, a covert network of officers and civilians accused at conspiring to stage a military coup against the current Turkish government.)
Over the years, Atatürk’s ideas evolved into an official ideology called “Kemalism,” which had two main pillars: A self-styled secularism that bans anything but “the secular way of life,” and a fierce nationalism that defies anything it deems “non-Turkish.”
The Ecumenical Patriarchate, as both a religious and “non-Turkish” institution, fits in neither category.
Hence, throughout the Republican regime, and especially at times of military dominance, it faced official pressure and confiscation of property, as did all other non-Muslim and Muslim religious institutions.
So part of the problem is the curse of history.
But you can either trap yourself inside history or take lessons from it and move on.
To date, unfortunately, Turkey’s nationalists, within both state and society, have opted for the former option.
If one cause of the repression of the Ecumenical Patriarchate is nationalism, though, the other one is the other pillar of the Kemalist ideology: secularism.
Turkey’ draconian laws on “national education” ban any sort of religious education unless it is strictly controlled by the state.
The real motive behind this is the regime’s distaste for Islam.
The Ecumenical Patriarchate, as a foreign observer observes, only receives “collateral damage.”
A telling manifestation of this was seen recently in a live discussion on CNNTurk, the Turkish counterpart of the international news channel.
A deputy from the CHP, the staunchly Kemalist People’s Republican Party, Muharrem İnce, who opposed the reopening of the Halki Seminary became angry. “Do you know who most wants to open the seminary in this country,” he loudly asked.
“The Islamists! They want this, because they want to open Islamic schools as well.”
Yes, this is indeed the position increasingly adopted by Turkey’s Islamic opinion leaders — who are striving not for jihad or an “Islamic state,” but just a modest preservation of tradition.
They realize that religious freedom must be championed for all.
And they have a good frame of reference in the pluralism of the Ottomans.
This more liberal approach to non-Muslims can be observed in today’s AKP (Justice and Development Party) government, in power since 2002.
Although labeled as “Islamist” by its opponents, the AKP has been much more willing to liberalize Turkey than its secular counterparts, most of which are zealously nationalist. The Annual Report of the United States Commission on International Religious Freedom makes this point nicely:
“In November 2006, the [AKP dominated] Turkish parliament, as part of the reforms related to possible EU accession, passed a new law governing Lausanne religious minority foundations, easing procedures to establish foundations and allowing non-Turkish citizens in Turkey to open them… Then President Ahmet Necdet Sezer [a staunch Kemalist], however, vetoed the legislation.
In February 2008, the parliament passed a similar law on the return of property confiscated from non-Muslim minorities...
President Gül signed the legislation, which was also supported by Prime Minister Erdogan, but was vehemently opposed by Turkish nationalists on the grounds that the law granted too many rights to minority communities.”
The Ecumenical Patriarch himself acknowledged in a recent interview that the AKP has shown goodwill on this issue.
His All Holiness also said that the real obstacle is probably “the deep state” — a reference to Turkey’s Kemalist state establishment that considers itself above any elected government and democratic law.
The Islamic Democratic Paradox
The rage across the Arab world over the publication in Denmark (months ago) of cartoons depicting the prophet Mohammed, together with the victory of Hamas in Palestine and the increasing radicalization of Iran’s politics, has made “political Islam” a fundamental question of international diplomacy.
But a one-size-fits-all response won’t work.
Indeed, we need to abandon the idea that there is a holistic or global Islamist movement.
Political Islam of all colors has emerged as the main alternative to secular Arab nationalist regimes whose legitimacy, based on the struggle for national liberation, has evaporated due to their inability to resolve economic and social problems, establish the rule of law, and guarantee fundamental freedoms.
In Palestine, for example, the Islamists triumphed over Fatah because of years of bad governance under the harsh conditions spawned by Israeli occupation.
Successive European and American governments share an atavistic fear of the “Islamic alternative” to Arab secular nationalists like Fatah, and so have defended the status quo.
But repression of all Arab opposition movements by the region’s monarchs and secular dictators meant that “protection of the Mosque” became the only umbrella under which to engage politically.
Now political Islam can no longer be contained, because democracy cannot be built by driving underground parties that have a strong social base, as was tragically demonstrated in Algeria 15 years ago.
The only alternative to authoritarianism is to craft a transition that allows Islamists to participate in public life and encourages them to accept unequivocally the rules of the democratic game.
There are already many examples of more or less conservative Islamist parties that are willing to play along.
It is no accident that there are Islamists in the legislatures of all the countries undergoing some form of political reform, including Lebanon, where Hezbollah is part of a freely elected government, as well as Jordan and Morocco.
In Egypt, the Muslim Brotherhood has become a strong force in parliament despite the limits imposed on the participation of Islamist groups in last year’s elections.
In Iraq, free elections have revealed the enormous influence of Islamist currents.
In Turkey, the transition to democracy led the Islamist Justice and Development Party to power.
That government has undertaken various important democratic reforms and initiated accession negotiations with the EU.
These Islamist parties have nothing to do with Al Qaeda, even though some of the most conservative among them have adopted somewhat similar ideological positions.
The risk of political transitions that may lead to the victory of Islamist parties is a democratic paradox that Europe and the US must accept if they are to devise inclusive reform policies – in other words, policies that are the polar opposite of the type of democratic imposition practiced in occupied Iraq.
Indeed, one of the less fortunate consequences of the intervention in Iraq was to reinforce the notion of a “clash of civilizations” between the West from Islam, which in turn serves to create a climate favorable to Islamist movements.
After all, political reform movements in the Muslim world emerged long before the US-led “war on terror,” and reformists were not waiting for the EU to become stronger to press for change.
These movements were not created in the US or Europe after September 11, 2001, and they will not wait for or depend on the US or the EU to act.
Nevertheless, the success of Muslim moderates may well depend on how the EU and the US respond to pressure for reform and how they decide to encourage change.
It is now necessary to show that democracy is the best path for Palestinians to attain their national goals.
This depends largely on the new Hamas government and its transformation into a democratic force that respects the rule of law, democracy, and international legality.
But it also depends on Israel and the international community, which must do all they can to ensure a future Palestinian state with Jerusalem as its capital.
Supporting Palestinian democratization does not mean that the international community should not demand that Hamas abandon terror for once and for all, demilitarize, respect the Palestinian constitution, and accept the existence of the state of Israel.
But it also does not mean supporting sanctions that would hurt the Palestinian people after they have expressed their will democratically.
This would be a terrible mistake in any effort to consolidate Palestine’s new democracy, with a negative impact in other reforming countries in the Arab world.
Similarly, accepting the right of non-violent Islamists to participate in public life does not mean giving up on the political and ideological struggle to defeat ultra-conservative, and in some cases totalitarian, conceptions of society.
Combating racism, promoting tolerance, and respecting the religious sentiments of others does not mean that we need to question press freedom or accept Islamists’ demands for censorship, even when real religious sentiments are offended, as in the case of the Danish caricatures.
Islamist conceptions of society that violate individual rights must be rebutted politically.
That political challenge is one of the paradoxes of democracy, which allows all ideas to compete freely with each other.
Political Islam is a risk, but we can minimize it only by devising intelligent, case-sensitive strategies that promote democracy, not by denouncing the results of democratic choice.
The Islamist Identity
Everywhere you look nowadays, Islam is used (and misused) as a political force.
Some Muslims employ it as a call to action; many in the West (and elsewhere) perceive it as an "other" demanding containment and exclusion.
As a Turk, I feel both sides of this debate directly.
The reason that Islam seems like a religion of the "other" to Western eyes is that the West has witnessed a systematic de-institutionalization of religion.
It is not religion that disappeared from modern Western life, of course, but rather the claims that religious institutions can make on individual behavior.
Religion in the modern world is a much more personal and spiritual experience than ever before.
Yet a process of de-institutionalization of religious experience is also taking place within Islam.
Politicization of Islam is displacing the authority of Islam's religious classes, the ulema .
As in the West, Islamic religious experience is becoming more personal.
Interpretation of religious texts by individual Muslims, including political militants, intellectuals and women, is one result.
Another is the vulgarization of religious knowledge, with the Koran's teachings abused and taken out of context to support political ends.
Who now decides what is legitimate and what is illicit in Islam?
Who has the authority to interpret religious texts?
Who can issue a "fatwa" or declare "jihad"?
Nowadays, activism and terrorism provide, or rather impose, a new source of legitimacy.
So lay people decide what Islam does and does not mean, without the authority of religious schools and specialized training.
Indeed, Islam today is primarily interpreted through political actors and cultural movements, not religious institutions.
This de-institutionalization has enabled Islam to move from being a local and national social bond to forging imaginary ties between all Muslims, everywhere, who feel oppressed or displaced.
Thus, Islamism can unite adherents who previously were deeply divided: spiritual Sufi and canonized Shariat Muslims;
Shia and Sunni Muslims; conservative Saudi Arabia and revolutionary Iran.
At the same time, Islam is on the move, with its believers leaving rural areas for cities, including the cities of the West.
Many see this movement as something negative, emphasizing the fact that these people are socially uprooted, which leads to alienation and, for some, to terrorism.
But social mobility is also a precondition for creating a modern outlook.
Of course, through migration Muslims experience a sense of distancing, if not an outright break, from their social origins.
So their religious experience is of a new kind, bereft of theological, community, or state institutions.
Religious experience instead becomes a form of social imagination within which they reconstruct a sense of belonging to Islam in new and strange surroundings.
It is not distance from modern life, but proximity to it that triggers a return to religious identity.
Indeed, most radicalism arises in groups who, by their experience of mobility and displacement, are acquainted with secular Western ways of political thinking and urban living.
Disoriented by unfamiliar surroundings, Islam becomes their anchor.
But for this anchor to work, Islam must be liberated from its traditionally subservient, passive and docile posture in the face of modernity.
By wearing a veil or beard, claiming the right for places to pray at work or school, and demanding special foods, Muslims identify themselves overtly as Muslims.
They are telling everyone around them that they are more zealous and meticulous in their religious observance than those who confine their religiosity to private life.
For example, non-Muslims usually see veiling as a sign of the debasement and inferiority of Muslim women.
From a stigma, however, it has become for Muslims a sign of their positive affirmation of an Islamic identity.
Young Muslim women in Europe illustrate this transformation perfectly.
Girls who adopt the headscarf in French and German schools are closer in many respects (namely youth culture, fashion consciousness, and language) to their classmates than to their homebound, uneducated mothers.
In adopting the headscarf for Europe's public sphere, these girls are unintentionally altering the symbol and the role of Muslim women.
This tendency extends deeper than headscarves.
All Western Muslims possess a double sense of belonging, a double cultural capital.
They define themselves through their religiosity, but they also have gained universal, secular knowledge.
Because they have a double cultural capital, they can circulate relatively freely between different activities and spaces--home, school, youth associations, and urban leisure space.
Being a Muslim and being an Islamist are not the same thing.
What we are witnessing today is a shift from a Muslim identity to an Islamist identity.
The religious self for individual Muslims is being shifted from the private to the public realm.
The question for everyone is whether that search for identity can be satisfied with headscarves and wide public acceptance of Islamic religious practice, or if positive affirmation of Islam demands a more fundamental renunciation of modernity.
The IT Boom Was a Myth Only in Europe
America's economy remains on the brink of a double dip recession, the dollar is weak, and Wall Street seems unable to recover.
An apocalyptic scenario in the making?
Hardly.
The US economy, it should be remembered, finished 2002 with an annual growth rate of 2.5%--above the long-run trend estimated for the Euro area by many experts, including the European Central Bank.
The point is that, despite the excesses of 1999-2000, the economic difficulties of the last two years, and the tendency to think of the technology boom of the 1990's as mere hype, the US underwent deep structural changes in its economy during that decade.
Productivity growth almost doubled, increasing from just above 1% in the period 1990-95 to over 2% in 1995-2000.
Moreover, we see no sign of a slowdown: in 2001-02 productivity growth averaged almost 3%.
New information technologies account for perhaps 80% of the acceleration in US productivity.
Moreover, because much of the recent technological progress seen in the US largely remains to be exploited, the acceleration of productivity is not a temporary phenomenon, but a lasting one.
Looking ahead, this is of crucial importance, because the long-term economic well being of any country depends on steady productivity growth.
Since the new information technologies are easily available in all advanced countries, one would think that productivity would have accelerated everywhere, not just in the US.
But this did not happen.
While productivity was accelerating in the US, it was slowing down markedly in the largest EU economies.
What accounts for this divergence?
Why aren't the large EU economies benefiting from IT, despite its diffusion on the "Old" continent as well?
One reason, not necessarily worrying, has to do with labor-market reforms.
Towards the end of the 1990's, the large EU countries encouraged employment of less qualified workers through temporary work contracts.
One partial result of this is that production in Europe has in many places become more labor-intensive, with the capital-to-labor ratio tightening markedly.
This undoubtedly had a negative impact on productivity growth.
A second reason is that IT investment in Europe is a more recent phenomenon than in the US.
Even though in 2001 the share of GDP devoted to IT investment was about the same in the EU and in the US, this was due to recent, concentrated bursts in Europe, as well as to the rapid investment slowdown in the US after the dot.com bubble burst.
Because the period of rapid IT spending in Europe coincided with a cyclical downturn in the world economy, it may still be too early to see its benefits.
But there is a third, more worrisome, difference between Europe and the US.
Between the first and second half of the 1990's, the "residual component of yearly productivity growth" (the part measuring the efficiency with which all the factors of production are used), declined by over 1% in Italy, Spain, and the UK.
It remained constant in France and Germany, while going up by 0.66% in the US.
Some of the data suggest that European performance was particularly disappointing in the sectors that are intensive users of IT.
In wholesale and retail distribution, but also in financial services and in other advanced service sectors, productivity was roughly constant in Europe, while it was growing at 4-5% a year on average in the US.
Moreover, the hi-tech sectors that produce IT, and that typically grow faster than the rest of the economy, are much smaller and less dynamic in Europe than in the US.
In other words, Europe has not been able to exploit the new technologies for productive purposes, both as a user and as a producer of IT.
With regard to IT use , Europe has spent a lot of money investing in IT, but often not for productive purposes.
For example, cell phones are widespread in Europe; this probably improves the quality of free time, but does little to enhance labor productivity.
With regard to IT production , the large EU countries lag far behind the US.
Sectors producing advanced technologies are much smaller in Europe, and their share in world exports has shrunk.
It is no coincidence that the only European countries with fast productivity growth in the second half of the 1990's were Ireland, Finland, and Sweden, where IT production accounts for a large share of aggregate output and employment.
But why does Europe find it so hard to exploit IT for productive purposes?
Perhaps this has to do with other differences between Europe and the US.
Many of the institutions of the large EU economies stifle individual incentives, hamper the mobility of resources, and make it difficult to select the most efficient and dynamic enterprises.
It would not be surprising if these institutions also retard efficient exploitation of the new technological advances in the workplace.
If this interpretation is correct, the contrast between the dynamism of the US and the small countries in Northern Europe on the one hand, and the stagnation of the large EU countries on the other hand, is likely to become starker.
The Ivory Coast Shipwreck
West Africa’s jewel is fracturing.
The Ivory Coast miracle is now the Ivory Coast hell, where natives and non-natives live in fear.
Since the arrival of a small contingent of French troops in 2003, the horror of this latest African civil war has occasionally intruded on the awareness of the global public, only to recede again.
Last November, for example, seven French soldiers were killed in a regime-ordered air raid against the northern rebels.
France retaliated by destroying the minute Ivoirian air force.
With its peacekeeping mandate due to expire on April 4, France may decide to leave.
Many Ivorians fear that this will mean renewed civil war.
But instead of international intervention, the Ivory Coast needs homegrown solutions for its problems.
It must avoid the pernicious ethnic nationalism of recent years that led to one ethnic group being banned from running in the presidential election.
Without solutions that claim broad support, the Ivory Coast will likely join the grim list of the world’s failed states precisely because of its inability to develop into a cohesive nation based on equal political rights for all.
The problem of inter-ethnic conflict is, sadly, all too typical of Africa.
The Ivoirian example is neither unique nor the most extreme – at least not yet.
Rwanda’s horrors, and more recently Darfur, come quickly to mind.
But the Ivory Coast’s dilemma is notable both because the country’s decline came from a relatively greater height, and for the lessons it holds concerning how states fail.
At first sight, the Ivory Coast’s post-colonial history looks like a variation on standard themes.
Independence from France (in 1960) spawned a dictatorship remarkable mainly for its longevity.
Felix Houphouet-Boigny’s rule lasted more than 30 years, until his death in 1993, when power passed to his handpicked successor, Henri Konan Bedie.
Houphouet’s fondness for money and power was plain from the outset, and his regime offered no exception to the dismal African rule of corruption, fraud, cheating, cronyism, embezzlement, and weak law enforcement.
These handicaps to the country’s development grew worse over time.
As early as the 1960’s, Houphouet was spending lavishly on his native jungle-bound village, Yamoussoukro, which in 1983 replaced the port city of Abidjan as the capital.
Yamassoukro boasts grand eight-lane highways lined with over 10,000 lights and a full-scale replica of St Peter’s in Rome.
Alongside such Pharaonic waste, however, the infrastructure and economic development supported by continuing dependence on French finance and public-spirited expatriate French technocrats helped produce what became known as the “Ivoirian miracle.”
Indeed, at independence, the Ivory Coast was the most prosperous state in French West Africa, with coffee and cocoa exports accounting for 40% of the region’s total exports.
This relative prosperity lasted until the second oil shock of 1979, when global stagflation depressed prices for the primary commodities that comprise the Ivory Coast’s narrow export base, while rising interest rates increased the cost of servicing the debt contracted by the Houphouet regime.
Economic crisis and corruption undermined Bedie’s presidency, leading to a military coup in 1999.
But the new regime, facing continued unrest, eventually allowed multi-party democracy.
The result has been disastrous, as ethnic rivalries sharpened.
Whatever else is said about such French-backed authoritarian regimes, hindsight leaves no doubt about the benefits of the social stability seen in the Ivory Coast during the period until the 1980’s, when France remained paternalistically engaged with its former colony.
The political upheavals of 1999-2000 resulted in a new “democratic” constitution that became an invitation to civil war.
Regional and religious tensions had been growing since Houphouet’s death and were aggravated by the new constitution, which enshrined ethnic discrimination. About four million northerners were denied political participation or land ownership on the grounds that they were descendants of migrants from neighboring countries.
Yet the only real difference between most inhabitants of the Ivory Coast – which has the most immigrants of any West African country – is the timing of their forefathers’ arrival.
The nationality issue first came to a head over the status of Alassane Ouattara, the Muslim opposition leader and talented technocrat whom Bedie barred from running in the 1995 presidential election on account of his “foreign” ancestry.
Stripped of his Ivorian citizenship in 1999, Ouattara is popular in the north of the country, which has been held by the “New Forces” rebels since 2002.
The rebellion led in January 2003 to a French-brokered deal in which all sides – including the New Forces – signed up to a government of national reconciliation.
The parties also agreed to work together on modifying national identity, eligibility for citizenship, and land tenure laws.
But the deal has not stuck, and the conflict has continued.
The best hope for the Ivory Coast is probably a parliamentary-based system that will require inter-ethnic alliances to form governments.
The division of the country into more ethnically homogeneous federal components might also promote stability.
Above all, dominance by one group through a powerful presidency must be avoided.
But that will require strong international supervision, resembling today’s EU Protectorate in Bosnia.
The alternative is a vicious circle of violence and poverty, exacerbated by rapid population growth.
The Japan Myth
BRUSSELS – The first decade of this century started with the so-called dot-com bubble. When it burst, central banks moved aggressively to ease monetary policy in order to prevent a prolonged period of Japanese-style slow growth.
But the prolonged period of low interest rates that followed the 2001 recession instead contributed to the emergence of another bubble, this time in real estate and credit.
With the collapse of the second bubble in a decade, central banks again acted quickly, lowering rates to zero (or close to it) almost everywhere.
Recently, the United States Federal Reserve has even engaged in an unprecedented round of “quantitative easing” in an effort to accelerate the recovery.
Again, the key argument was the need to avoid a repeat of Japan’s “lost decade.”
Policymaking is often dominated by simple “lessons learned” from economic history.
But the lesson learned from the case of Japan is largely a myth.
The basis for the scare story about Japan is that its GDP has grown over the last decade at an average annual rate of only 0.6% compared to 1.7 % for the US.
The difference is actually much smaller than often assumed, but at first sight a growth rate of 0.6 % qualifies as a lost decade.
According to that standard, one could argue that a good part of Europe also “lost” the last decade, since Germany achieved about the same growth rates as Japan (0.6%) and Italy did even worse (0.2 %); only France and Spain performed somewhat better.
But this picture of stagnation in many countries is misleading, because it leaves out an important factor, namely demography.
How should one compare growth records among a group of similar, developed countries?
The best measure is not overall GDP growth, but the growth of income per head of the working-age population (not per capita).
This last element is important because only the working-age population represents an economy’s productive potential.
If two countries achieve the same growth in average WAP income, one should conclude that both have been equally efficient in using their potential, even if their overall GDP growth rates differ.
When one looks at GDP/WAP (defined as population aged 20-60), one gets a surprising result: Japan has actually done better than the US or most European countries over the last decade.
The reason is simple: Japan’s overall growth rates have been quite low, but growth was achieved despite a rapidly shrinking working-age population.
The difference between Japan and the US is instructive here: in terms of overall GDP growth, it was about one percentage point, but larger in terms of the annual WAP growth rates – more than 1.5 percentage points, given that the US working-age population grew by 0.8%, whereas Japan’s has been shrinking at about the same rate.
Another indication that Japan has fully used its potential is that the unemployment rate has been constant over the last decade.
By contrast, the US unemployment rate has almost doubled, now approaching 10%.
One might thus conclude that the US should take Japan as an example not of stagnation, but of how to squeeze maximum growth from limited potential.
Demographic differences are relevant not just in comparing Japan and the US, but also in explaining most of the differences in longer-term growth rates across developed economies.
A good rule of thumb for the average growth rates of the G-7 countries would be to attribute about one percentage point in productivity gains to the growth rate of the working-age population.
The US has done slightly worse than suggested by this rough measure;
Japan has done a bit better; and most other rich countries come pretty close.
Looking to the decade ahead, this analysis suggests that one can predict the rich countries’ relative growth rates based on the growth pattern of their working-age populations, which one already knows today, given that anybody starting to work over the next two decades has already been born.
On this basis, Japan’s relative decline as a major economic power will continue, as its working-age population will continue to shrink by about 1% per year.
Germany and Italy increasingly show Japanese patterns of decline in their working-age populations, and are thus likely to grow very little as well.
In the case of Germany, one observes an interesting kink in its demography: from 2005-2015, the working-age population is temporarily stabilized.
But this will be followed by accelerating decline, as the working age population declines even faster than in Japan.
The current strength of the German economy is also partly due to this temporary demographic stabilization.
But a Japanese-style scenario seems inevitable after 2015.
By contrast, the US, the United Kingdom, and France are likely to grow faster for the simple reason that their working-age populations are continuing to grow, even if at a relatively slow pace.
Two lessons emerge from this consideration of the influence of demographic factors on economic growth.
First, the idea of a Japanese-style “lost decade” is misleading – even when applied to Japan.
Slow growth in Japan over the last decade was due not to insufficiently aggressive macroeconomic policies, but to an unfavorable demographic trend.
Second, a further slowdown in rich countries’ growth rates appears inevitable, given that even in the more dynamic countries the growth rates of the working-age population is declining.
In the less dynamic ones, like Japan, Germany, and Italy, near-stagnation seems inevitable.
The Jewish Conspiracy in Asia
TOKYO – A Chinese bestseller, entitled The Currency War , describes how Jews are planning to rule the world by manipulating the international financial system.
The book is reportedly read in the highest government circles.
If so, this does not bode well for the international financial system, which relies on well-informed Chinese to help it recover from the current crisis.
Such conspiracy theories are not rare in Asia.
Japanese readers have shown a healthy appetite over the years for books such as To Watch Jews Is To See the World Clearly , The Next Ten Years: How to Get an Inside View of the Jewish Protocols , and I'd Like to Apologize To the Japanese - A Jewish Elder’s Confession (written by a Japanese author, of course, under the made-up name of Mordecai Mose).
All these books are variations of The Protocols of the Elders of Zion , the Russian forgery first published in 1903, which Japanese came across after defeating the Czar’s army in 1905.
The Chinese picked up many modern Western ideas from the Japanese.
Perhaps this is how Jewish conspiracy theories were passed on as well.
But Southeast Asians are not immune to this kind of nonsense either.
The former prime minister of Malaysia, Mahathir Bin Mohammed, has said that “the Jews rule the world by proxy.
They get others to fight and die for them.”
And a recent article in a leading Filipino business magazine explained how Jews had always controlled the countries they lived in, including the United States today.
In the case of Mahathir, a twisted kind of Muslim solidarity is probably at work.
But, unlike European or Russian anti-Semitism, the Asian variety has no religious roots.
No Chinese or Japanese has blamed Jews for killing their holy men or believed that their children’s blood ended up in Passover matzos.
In fact, few Chinese, Japanese, Malaysians, or Filipinos have ever seen a Jew, unless they have spent time abroad.
So what explains the remarkable appeal of Jewish conspiracy theories in Asia?
The answer must be partly political. Conspiracy theories thrive in relatively closed societies, where free access to news is limited and freedom of enquiry curtailed.
Japan is no longer such a closed society, yet even people with a short history of democracy are prone to believe that they are victims of unseen forces.
Precisely because Jews are relatively unknown, therefore mysterious, and in some way associated with the West, they become an obvious fixture of anti-Western paranoia.
Such paranoia is widespread in Asia, where almost every country was at the mercy of Western powers for several hundred years.
Japan was never formally colonized, but it, too, felt the West’s dominance, at least since the 1850’s, when American ships laden with heavy guns forced the country to open its borders on Western terms.
The common conflation of the US with Jews goes back to the late nineteenth century, when European reactionaries loathed America for being a rootless society based only on financial greed.
This perfectly matched the stereotype of the “rootless cosmopolitan” Jewish moneygrubber.
Hence the idea that Jews run America.
One of the great ironies of colonial history is the way in which colonized people adopted some of the very prejudices that justified colonial rule.
Anti-Semitism arrived with a whole package of European race theories that have persisted in Asia well after they fell out of fashion in the West.
In some ways, Chinese minorities in Southeast Asia have shared some of the hostility suffered by Jews in the West.
Excluded from many occupations, they, too, survived by clannishness and trade.
They, too, have been persecuted for not being “sons of the soil.”
And they, too, are thought to have superhuman powers when it comes to making money.
So when things go wrong, the Chinese are blamed, not just for being greedy capitalists, but also, again like the Jews, for being Communists, since both capitalism and communism are associated with rootlessness and cosmopolitanism.
As well as being feared, the Chinese are admired for being cleverer than everybody else.
The same mixture of fear and awe is often evident in people’s views of the US, and, indeed, of the Jews.
Japanese anti-Semitism is a particularly interesting case.
Japan was able to defeat Russia in 1905 only after a Jewish banker in New York, Jacob Schiff, helped Japan by floating bonds.
So The Protocols of the Elders of Zion confirmed what the Japanese already suspected; Jews really did pull the strings of global finance.
But, instead of wishing to attack them, the Japanese, being a practical people, decided that they would be better off cultivating those clever, powerful Jews as friends.
As a result, during World War Two, even as the Germans were asking their Japanese allies to round up Jews and hand them over, dinners were held in Japanese-occupied Manchuria to celebrate Japanese-Jewish friendship.
Jewish refugees in Shanghai, though never comfortable, at least remained alive under Japanese protection.
This was good for the Jews of Shanghai.
But the very ideas that helped them to survive continue to muddle the thinking of people who really ought to know better by now.
The Joblessness Threat
NEW YORK – Recent data suggest that job market conditions are not improving in the United States and other advanced economies.
In the US, the unemployment rate, currently at 9.5%, is poised to rise above 10% by the fall.
It should peak at 11% some time in 2010 and remain well above 10% for a long time.
The unemployment rate will peak above 10% in most other advanced economies, too.
These raw figures on job losses, bad as they are, actually understate the weakness in world labor markets.
If you include partially employed workers and discouraged workers who left the US labor force, for example, the unemployment rate is already 16.5%. Monetary and fiscal stimulus in most countries has done little to slow down the rate of job losses.
As a result, total labor income – the product of jobs times hours worked times average hourly wages – has fallen dramatically.
Moreover, many employers, seeking to share the pain of recession and slow down layoffs, are now asking workers to accept cuts in both hours and hourly wages.
British Airways, for example, has asked workers to work for an entire month without pay.
Thus, the total effect of the recession on labor income of jobs, hours and wage reductions is much larger.
A sharp contraction in jobs and labor income has many negative consequences on both the economy and financial markets.
First, falling labor income implies falling consumption for households, which have already been hard hit by a massive loss of wealth (as the value of equities and homes has fallen) and a sharp rise in their debt ratios.
With consumption accounting for 70% of US GDP in the US, and a similarly high percent in other advanced economies, this implies that the recession will last longer, and that economic recovery next year will be anemic (less than 1% growth in the US and even lower growth rates in Europe and Japan).
Second, job losses will lead to a more protracted and severe housing recession, as joblessness and falling income are key factors in determining delinquencies on mortgages and foreclosure.
By the end of this year about 8.4 million US individuals with mortgages will be unemployed and unable to service their mortgages.
Third, if you plug an unemployment rate of 10% to 11% into any model of loan defaults, you get ugly figures not just for residential mortgages (both prime and subprime), but also for commercial real estate, credit cards, student loans, auto loans, etc. Thus, banks losses on their toxic assets and their capital needs will be much larger than recently estimated, which will worsen the credit crunch.
Fourth, rising job losses lead to greater demands for protectionist measures, as governments are pressured to save domestic jobs.
This threatens to aggravate the damaging contraction of global trade.
Fifth, the higher the unemployment rate goes, the wider budget deficits will become, as automatic stabilizers reduce revenue and increase spending (for example, on unemployment benefits).
Thus, an already unsustainable US fiscal path, with budget deficits above 10% of GDP and public debt expected to double as a share of GDP by 2014, becomes even worse.
This leads to a policy dilemma: rising unemployment rates are forcing politicians in the US and other countries to consider additional fiscal stimulus programs to boost sagging demand and falling employment.
But, despite persistent deflationary pressure through 2010, rising budget deficits, high financial-sector bailout costs, continued monetization of deficits, and eventually unsustainable levels of public debt will ultimately lead to higher expected inflation – and thus to higher interest rates, which would stifle the recovery of private demand.
So, while further fiscal stimulus seems necessary to avoid a more protracted recession, governments around the world can ill afford it: they are damned if they do and damned if they don’t.
If, like Japan in the late 1990’s and the US in 1937, they take the threat of large deficits seriously and raise taxes and cut spending too much too soon, their economies could fall back into recession.
But recession could also result if deficits are allowed to fester, or are increased with additional stimulus to boost jobs and growth, because bond-market vigilantes might push borrowing costs higher.
Thus, even as mounting job losses undermine consumption, housing prices, banks’ balance sheets, support for free trade, and public finances, the room for further policy stimulus is becoming narrower.
Indeed, not only are governments running out of fiscal bullets as debt surges, but monetary policy is having little short-run traction in economies suffering insolvency – not just liquidity – problems. Worse still, in the medium turn the monetary overhang may lead to significant inflationary risks.
Little wonder, then, that we are now witnessing a significant correction in equity, credit, and commodities markets.
The irrational exuberance that drove a three-month bear-market rally in the spring is now giving way to a sober realization among investors that the global recession will not be over until year end, that the recovery will be weak and well below trend, and that the risks of a double-dip W-shaped recession are rising.
The Judicial Massacre of Srebrenica
The judgment of the International Court of Justice (ICJ) concerning Serbia’s involvement in the massacre of Bosnian Muslims at Srebrenica in 1995 should be greeted with considerable ambivalence.
On the one hand, the fact that an international tribunal has pronounced on the responsibility of a state in the matter of genocide is an undeniably positive development.
On the other hand, however, the Court’s decision is one of those judicial pronouncements that attempts to give something to everybody and leave everything as it was.
The Court was not supposed to hold specific individuals criminally responsible; that is the job of the International Criminal Tribunal for the former Yugoslavia (ICTY).
The ICJ, which instead deals with controversies between states, was faced with Bosnia’s claim that Serbia was responsible for the Srebrenica massacre.
Although the Court ruled that genocide had taken place, it decided that Serbia was not responsible under international law.
According to the Court, the Bosnian Serb generals who were guilty of this genocide, the various Mladic’s and Kristic’s, were neither acting as Serbia’s agents nor receiving specific instructions from Belgrade.
The genocide could not therefore be imputed to Serbia, even if the Serbian government was paying salaries to Mladic and his colleagues, as well as providing them with financial and military assistance.
Nor was Serbia guilty of complicity, because, though it exercised considerable influence over Mladic and his people, it did not know, at the moment when the genocide was taking place that such a crime was being committed.
Having “absolved” Serbia from the principal crime, the ICJ offered a sort of “consolation prize” to Bosnia, affirming that the killings in Srebrenica had the character of genocide – a conclusion already reached by the ICTY.
Moreover, according to the ICJ, Serbia violated international law by failing to prevent genocide, because, though it could have thwarted the massacres, it did not, and subsequently did not help the ICTY arrest Mladic (who, notoriously, is still hiding in Serbia).
The Court’s decision thus attempts to run with the hare and hunt with the hounds.
To decide whether Mladic acted on Serbia’s account when he was planning and ordering the Srebrenica massacre, the Court demanded proof that Serbian officials sent him specific “instructions” to commit this act of genocide.
Obviously, such instructions would never be found.
Why was it not enough to prove that the Bosnian Serb military leadership was financed and paid by Serbia and that it was tightly connected to Serbia political and military leadership?
More importantly, the ICJ’s decision that Serbia is responsible for not having prevented a genocide in which it was not complicit makes little sense.
According to the Court, Serbia was aware of the very high risk of acts of genocide and did nothing.
But Serbia was not complicit, the Court argued, because “it has not been proven” that the intention of committing the acts of genocide at Srebrenica “had been brought to Belgrade’s attention.”
This is a puzzling statement at best.
The massacre was prepared in detail and took place over the course of six days (between July 13 and 19).
Is it plausible that the Serbian authorities remained in the dark while the killing was in progress and reported in the press all over the world?
It seems far more reasonable to believe that Serbia’s leaders were informed about what was going on, and that, despite this, Serbia’s military, financial, and political assistance to Mladic was never interrupted.
The fundamental problem with the ICJ’s decision is its unrealistically high standard of proof for finding Serbia to have been legally complicit in genocide.
After all, one can also be guilty of complicity in a crime by not stopping it while having both the duty and the power to do so, and when, through one’s inaction, one decisively contributes to the creation of conditions that enable the crime to take place.
The survivors of Srebrenica, for whom Bosnia was seeking damage awards, will receive nothing from Serbia.
And if former Serbian President Slobodan Milosevic were alive, he would be absolved of the charge of genocide.
The Keynes-Hayek Rematch
LONDON – The Austrian economist Friedrich von Hayek, who died in 1992 at the age of 93, once remarked that to have the last word requires only outliving your opponents.
His great good fortune was to outlive Keynes by almost 50 years, and thus to claim a posthumous victory over a rival who had savaged him intellectually while he was alive.
Hayek’s apotheosis came in the 1980’s, when British Prime Minister Margaret Thatcher took to quoting from The Road to Serfdom (1944), his classic attack on central planning.
But in economics there are never any final verdicts.
While Hayek’s defense of the market system against the gross inefficiency of central planning won increasing assent, Keynes’s view that market systems require continuous stabilization lingered on in finance ministries and central banks.
Both traditions, though, were eclipsed by the Chicago school of “rational expectations,” which has dominated mainstream economics for the last twenty-five years.
With economic agents supposedly possessing perfect information about all possible contingencies, systemic crises could never happen except as a result of accidents and surprises beyond the reach of economic theory.
The global economic collapse of 2007-2008 discredited “rational expectations” economics (though its high priests have yet to recognize this) and brought both Keynes and Hayek back into posthumous contention.
The issues have not changed much since their argument began in the Great Depression of the 1930’s.
What causes market economies to collapse?
What is the right response to a collapse?
What is the best way to prevent future collapses?
For Hayek in the early 1930’s, and for Hayek’s followers today, the “crisis” results from over-investment relative to the supply of savings, made possible by excessive credit expansion.
Banks lend at lower interest rates than genuine savers would have demanded, making all kinds of investment projects temporarily profitable.
But, because these investments do not reflect the real preferences of agents for future over current consumption, the savings necessary to complete them are not available.
They can be kept going for a time by monetary injections from the central bank. But market participants eventually realize that there are not enough savings to complete all the investment projects.
At that point, boom turns to bust.
Every artificial boom thus carries the seeds of its own destruction.
Recovery consists of liquidating the misallocations, reducing consumption, and increasing saving.
Keynes (and Keynesians today) would think of the crisis as resulting from the opposite cause: under-investment relative to the supply of saving – that is, too little consumption or aggregate demand to maintain a full-employment level of investment – which is bound to lead to a collapse of profit expectations.
Again, the situation can be kept going for a time by resorting to consumer-debt finance, but eventually consumers become over-leveraged and curtail their purchases.
Indeed, the Keynesian and Hayekian explanations of the origins of the crisis are actually not very different, with over-indebtedness playing the key role in both accounts.
But the conclusions to which the two theories point are very different.
Whereas for Hayek recovery requires the liquidation of excessive investments and an increase in consumer saving, for Keynes it consists in reducing the propensity to save and increasing consumption in order to sustain companies’ profit expectations.
Hayek demands more austerity, Keynes more spending.
We have here a clue as to why Hayek lost his great battle with Keynes in the 1930’s.
It was not just that the policy of liquidating excesses was politically catastrophic: in Germany, it brought Hitler to power.
As Keynes pointed out, if everyone – households, firms, and governments – all started trying to increase their saving simultaneously, there would be no way to stop the economy from running down until people became too poor to save.
It was this flaw in Hayek’s reasoning that caused most economists to desert the Hayekian camp and embrace Keynesian “stimulus” policies.
As the economist Lionel Robbins recalled: “Confronted with the freezing deflation of those days, the idea that the prime essential was the writing down of mistaken investments and…fostering the disposition to save was…as unsuitable as denying blankets and stimulus to a drunk who has fallen into an icy pond, on the ground that his original trouble was overheating.”
Except to Hayekian fanatics, it seems obvious that the coordinated global stimulus of 2009 stopped the slide into another Great Depression.
To be sure, the cost to many governments of rescuing their banks and keeping their economies afloat in the face of business collapse damaged or destroyed their creditworthiness.
But it is increasingly recognized that public-sector austerity at a time of weak private-sector spending guarantees years of stagnation, if not further collapse.
So policy will have to change.
Little can be hoped for in Europe; the real question is whether President Barack Obama has it in him to don the mantle of President Franklin Roosevelt.
To prevent further crises of equal severity in the future, Keynesians would argue for strengthening the tools of macroeconomic management.
Hayekians have nothing sensible to contribute.
It is far too late for one of their favorite remedies – abolition of central banks, supposedly the source of excessive credit creation.
Even an economy without central banks will be subject to errors of optimism and pessimism. And an attitude of indifference to the fallout of these mistakes is bad politics and bad morals.
So, for all his distinction as a philosopher of freedom, Hayek deserved to lose his battle with Keynes in the 1930’s.
He deserves to lose today’s rematch as well.
The Keynesian Cure
BERKELEY amp#45;amp#45; It is not yet foredoomed that the world economy will undergo a substantial recession in the next three years or so: we might still escape.
But governments should play it safe by starting to take more steps now to cushion, soften, and shorten the period of high unemployment and slow or negative growth that now looks very likely.
It is a fact of nature – human nature, at least – that prudent and appropriate policies now will later seem excessive.
At some point, the world economy will begin expanding rapidly again.
But it would be most imprudent to assume that the turning point is right now, and that things are as bad as they will get.
Perhaps the best way to look at the situation is to recall that three locomotives have driven the world economy over the past 15 years.
The first was heavy investment, centered in the United States, owing to the information technology revolution.
The second was investment in buildings, once again centered in the US, driven by the housing boom.
The third was manufacturing investment elsewhere in the world – predominantly in Asia – as the US became the world economy’s importer of last resort.
For 15 years, these three locomotives kept the world economy near full employment and growing rapidly.
When the high-tech boom ended in 2000, the Federal Reserve orchestrated its replacement by the housing boom, while investment in Asia to supply the US market was chugging along at an increasing pace.
Many today are complaining about Alan Greenspan’s monetary stewardship, which kept these three locomotives stoked: “serial bubble-blower” is the most polite phrase that I have heard.
But would the world economy really be better off today under an alternative monetary policy that kept unemployment in America at an average rate of 7% rather than 5%?
Would it really be better off today if some $300 billion per year of US demand for the manufactures of Europe, Asia, and Latin America had simply gone missing?
The first locomotive, however, ran out of fuel seven years ago, and there is no clear technology-driven alternative leading sector, like biotechnology, that can inspire similar exuberance, rational or otherwise.
The second locomotive began sucking fumes two years ago, and is now coasting to a halt, which means that the third – the US as importer of last resort – is losing speed as well: the weak dollar accompanying the housing finance crash makes it unprofitable to export to the US.
The world economy, as John Maynard Keynes put it 75 years ago, is developing magneto trouble. What it needs is a push – more aggregate demand.
In the US, the weak dollar will be a powerful boost to net exports, and thus to aggregate demand.
But, from the perspective of the world as a whole, net exports are a zero-sum game.
So we will have to rely on other sources of aggregate demand.
The first source is the government.
Fiscal prudence is as important as ever over the medium and long term.
But for the next three years, governments should lower taxes – especially for the poor, who are most likely to spend – and spend more.
The second source is private investment.
The world’s central banks are already cutting interest rates on safe assets, and will cut them more as the proximity and magnitude of the likely global slump becomes clear.
But low interest rates are entirely compatible with stagnation or depression if risk premia remain large – as the world learned in the 1930’s, and as Japan relearned in the 1990’s. The most challenging task for governments is to boost the private sector’s effective risk-bearing capacity so that businesses have access to capital on terms that tempt them to expand.
China’s End of Exuberance
MILAN – China’s growth has slowed considerably since 2010, and it may slow even more – a prospect that is rattling investors and markets well beyond China’s borders.
With many of the global economy’s traditional growth engines – like the United States – stuck in low gear, China’s performance has become increasingly important.
But now growth rates for Chinese exports and related indices in manufacturing have fallen, largely owing to weak external demand, especially in Europe.
And the Chinese authorities are now scaling back the other major driver of their country’s growth, public-sector investment, as low-return projects seem to generate aggregate demand but prove unsustainable fairly quickly.
The government is using a variety of instruments, including financial-sector credit discipline, to rein in investment demand.
Essentially, the government guarantee associated with financing public-sector investment is being withdrawn – as it should be.
But, to circumvent the restrictions in the state-dominated financial system, a shadow banking system has developed, raising new risks: economic distortions; reliance on excess leverage to drive growth in the consumer, real estate, corporate, and government sectors; and dangers associated with inadequate regulation.
As a result, investors are worried that China could slip into the excess-leverage growth model that has served many developed economies so poorly.
Much has been made of domestic consumption as a driver of Chinese growth in the future.
But Justin Lin, a former World Bank chief economist, has argued forcefully that investment will and should remain a key growth driver, and that domestic consumption in China’s growth pattern should not be pushed beyond its natural limits into a high-leverage model based on rising consumer debt.
That seems right.
The risk is that Lin’s warning will be interpreted as an argument for sticking with an investment-led model, which would imply more low-return public-sector projects and excess capacity in selected industries.
The right target for generating growth is domestic aggregate demand based on the right mix of consumption and high-return investment.
Analysts and investors have at least two related concerns. One is that, facing declining growth, policymakers will resort to excess investment or leverage (or both), creating instability.
The other is that they will resort to neither, and that no alternative growth engines will have been started, leading to an extended slowdown with unpredictable political consequences at home and serious economic consequences abroad.
In short, many investors are nervous because China’s future growth story is unclear to them.
It is certainly less clear than the previous story, which cannot be retold.
There is no real way to allay these concerns quickly.
Only time, implementation of the policy and systemic reforms to be revealed this fall, and actual economic performance will settle the matter one way or the other.
The shift in the growth pattern, if successful, will occur over several years.
So, what one should be looking for is movement in the right directions, which are fairly clear.
One is a shift in comparative advantage.
Rising incomes require rising productivity.
That means increasing capital and human capital intensity across both the tradable and non-tradable sectors of the economy.
On the tradable side, one should look for structural change and a shift in output to higher-value-added components of global supply chains.
Here, innovation and the conditions that support it – including competition and free entry and exit from the market – play an important role.
If policymakers choose a model based on a large state-dominated sector protected from internal and external competition, innovation objectives are unlikely to be met, adversely affecting future growth.
Meanwhile, the non-tradable side should grow.
As China becomes richer, its middle-class citizens will not just buy more tradable goods like cars, electronics, and appliances; they will buy housing and a host of non-tradable services, too.
An efficient supply-side response to this large and growing source of demand requires regulatory reform in many services, including finance, product safety, transport, and logistics.
But households still control too little income and save at very high rates.
The control of income by the overlapping corporate and public sectors makes it easier to push the investment-led growth model to the point of low (or even negative) returns.
So the entire fiscal system is a crucial item on China’s reform agenda, especially management of public capital.
Fiscal reform will determine many things: the components of domestic income and demand that will drive structural change on the supply side, the allocation of income and expenditure across levels of government, and the embedded incentives that this allocation implies.
Outside of China, this part of the reform agenda is the least well understood.
Moreover, social services and social security will need to be strengthened in order to reverse a pattern of rising inequality.
Beyond that, more inclusive growth depends on the completion of the urbanization process that underpins the creation of a modern economy; addressing corruption and unequal access to market opportunities; and aggressively mitigating well-known and serious environmental problems.
With significant elements of the global economy and external demand facing headwinds, China’s acceptance (so far) of a growth slowdown, while its new growth engines kick in, is a good sign, in my view.
It suggests that policymakers are playing for longer-run sustainable growth and have become warier of policies that, if used persistently, amount to a defective, unsustainable growth model.
Watching for progress on these key elements of structural change and reform seems to be the right stance.
If markets are confused or pessimistic about China’s longer-term agenda, but if the direction of structural change and reform is positive, there may be investment opportunities that were absent in the more exuberant recent past.
The Key to Ending Hunger
EUGENE, OREGON – The recent news that two-thirds of adults in the United States are overweight or obese – and the number continues to grow – brings to mind a question that has bothered me since the 1970’s: Why aren’t we all starving?
It was not that long ago that experts were predicting that our skyrocketing human population would outstrip its food supply, leading directly to mass famine.
By now millions were supposed to be perishing from hunger every year.
It was the old doom-and-gloom mathematics of Thomas Malthus at work: population shoots up geometrically while food production lags behind.
It makes eminent sense.
I grew up with Malthus’s ideas brought up-to-date in apocalyptic books like The Population Bomb .
But someone appears to have defused the bomb.
Instead of mass starvation, we seem to be awash in food.
And it’s not just the US.
Obesity is on the increase in Mexico.
Fat-related diabetes is becoming epidemic in India.
One in four people in China is overweight, more than 60 million are obese, and the rate of overweight children has increased almost 30-fold since 1985.
Everywhere you look, from Buffalo to Beijing, you can see ballooning bellies.
Instead of going hungry, humans around the world on a per capita basis are eating more calories than ever before.
If you’re looking for reasons behind today’s obesity epidemic, don’t stop with the usual suspects, all of which are being trotted out by the press: fast food, trans fat, high sugar, low exercise, computer games, strange bacteria in your gut, weird molecules in your blood.
I personally blame some hardwired human instinct for sitting around eating salty, greasy, sugary snacks in preference to hard physical labor.
All of these factors are certainly related to the "insidious, creeping pandemic of obesity . . . now engulfing the entire world," as one gung-ho expert recently put it.
But they are only bits of the puzzle.
The underlying answer is this: There’s a lot of cheap food around .
There’s inexpensive, high-calorie food piled all over the place.
Somehow we outsmarted Malthus.
Food production has not only kept up with population growth but has managed somehow to outstrip it.
There are ups and downs from year to year because of the weather, and there are pockets of starvation around the world (due not to a global lack of food, but to a lack of ways to transport it where it’s needed).
In general, silos are bursting.
Tons of food gets plowed under the ground because there’s so much of it farmers can’t get the prices they want.
Tons of cheap food (corn, for instance) is used to create more expensive food (like steak).
Lots of food means lots of grease, and meat, and sugar, and calories.
Lots of food means lots of overweight people.
If you like the idea of avoiding mass starvation – and I certainly do – you owe thanks to two groups of scientists: one that gave us the Green Revolution back around the 1980’s via strains of hardy, high-yielding grains, and another that figured out how to make bread out of air .
You heard me right.
If you’re looking for someone to blame for today’s era of plenty, look to a couple of German scientists who lived a century ago.
They understood that the problem was not a lack of food per se, but a lack of fertilizer – then they figured out how to make endless amounts of fertilizer.
The number-one component of any fertilizer is nitrogen, and the first of the two German researchers, Fritz Haber, discovered how to work the dangerous, complex chemistry needed to pull nitrogen out of the atmosphere – where it is abundant but useless for fertilizer – and turn it into a substance that can grow plants.
A first demonstration was made 100 years ago.
Carl Bosch, a young genius working for a chemical company, quickly ramped up Haber’s process to industrial levels.
They both won Nobel Prizes.
It ranks among the great ironies of history that these two brilliant men, credited with saving millions from starvation, are also infamous for other work done later: Haber, a German Jew, was a central force in developing poison gas in World War I (and also performed research that led to the Zyklon B poison gas later used in concentration camps);
Bosch, an ardent anti-Nazi, founded the giant chemical company I.G. Farben, which Hitler took over and used to make supplies for World War II.
Today, jaw-droppingly huge Haber-Bosch plants, much refined and improved, are humming around the world, pumping out the hundreds of thousands of tons of fertilizers that enrich the fields that grow the crops that become the sugars and oils and cattle that are cooked into the noodles and chips, pizza, burritos, and snack cakes that make us fat.
If you don’t think this work important, consider that half the nitrogen in your body is synthetic, a product of a Haber-Bosch factory.
Or that without the added food made possible by their discovery, the earth could only support about 4 billion people – at least 2 billion less than today.
And yes, before you email me, I understand the concomitant problems: stress on ecosystems, pollution (including nitrogen pollution), etc. etc.
Even with a world population that continues to add tens of millions of new mouths every year, given continuing growth in Haber-Bosch fertilizer and a surprising trend toward a worldwide decline in birth rates (if you live about 50 years longer, according to the best estimates, you’ll see humanity reach zero population growth), it might be within humanity’s grasp to avoid mass starvation forever.
The Khmer Rouge in the Dock
These days suspected war criminals - from Rwanda to Serbia to Sierra Leone - are in the dock.
Dozens are still on the run, but hope remains that they, too, will face justice.
This is not true of the perpetrators of the Cambodian genocide of the 1970's.
They remain free, and nobody is looking for them.
A quarter of Cambodia's population of eight million was executed, starved to death, or succumbed to disease during the Khmer Rouge's rule from 1975-79.
There has been no real trial, no truth commission, and no official acknowledgement of one of the most heinous crimes in human history.
As a result, many Cambodians born since 1979 do not understand the scope and gravity of the atrocities.
Meanwhile, the anguish and sorrow of survivors - almost all of whom lost loved ones - have not found redress.
This may be about to change.
A year ago, the United Nations and the Royal Government of Cambodia agreed in principle to establish an "Extraordinary Chambers" composed of Cambodian and international prosecutors and judges to investigate and try the "senior leaders of Democratic Kampuchea and those who were most responsible for crimes" under Khmer Rouge rule.
Ratification of the agreement has been delayed by the stalemate among Cambodia's bickering political parties following last year's elections.
But a breakthrough appears close.
The formal decision to create a tribunal for the Khmer Rouge represents a major achievement after a decade of diplomatic effort.
To implement it, however, a number of hurdles remain to be overcome.
The first obstacle is cost.
Cambodian authorities can help build their credibility by curbing the temptation to pad bills and inflate salaries.
But outsiders will inevitably bear the lion's share of the budget for the tribunal.
The current estimate - $50 million over three years - has shocked donor governments.
But this compares favorably with the Special Court in Sierra Leone (more than $70 million over three years), and the $100 million spent annually on the international courts for Rwanda and Yugoslavia.
The price is appropriate.
The United States and other western governments fueled Cambodia's civil war in the 1970's, then lent the Khmer Rouge legitimacy in the 1980's by insisting that they continue to occupy Cambodia's seat at the UN.
If the Khmer Rouge trials are to proceed, donor countries must see the Extraordinary Chambers as a prudent investment toward a stable and productive Cambodia.
Given how long it has taken to get this far, donors must act quickly to come up with the necessary funds.
The second hurdle stems from the fact that Cambodia's tribunal will be the first internationalized court in which domestic judges form a majority.
This poses a particular challenge in a country where lawyers were among the targets of genocidal violence, where few sitting judges possess formal legal training, and which has little tradition of judicial independence.
There is thus concern that some in Cambodia's government - which includes officials who once served under the Khmer Rouge - will seek to hijack the trials for political ends.
In order to ensure a credible process, Cambodia and the UN must select judges of the highest caliber, not those that toe a party line.
Prosecutors must follow the evidence wherever it leads.
The trials should be conducted transparently and with broad public involvement.
Non-governmental monitors need to scrutinize the proceedings to ensure that errors are identified early enough to be corrected.
The UN must make clear that it will halt the tribunal if it falls short of international standards.
The third hurdle is the danger that the Extraordinary Chambers will be regarded as the end rather than the beginning of a long-term search for accountability and legal reform.
Given time and resource constraints, it is unlikely that more than a dozen defendants will be tried.
But thousands of others took part in the violence.
Their many victims will rightly seek some form of accounting - at a minimum, an official record of the crimes they suffered.
Before long, an effort to document and publish the truth will be necessary.
Done properly, the proceedings of the Extraordinary Chambers could have further positive ramifications by contributing to lasting changes in Cambodia's ordinary courts.
By highlighting positive models of judging and legal advocacy, the trials may stimulate public demand for domestic tribunals that dispense justice fairly and effectively.
Cambodia's government and international donors should respond to this demand by launching reform programs that extend beyond the life of the Extraordinary Chambers.
The Khmer Rouge prosecutions will not be perfect.
But they are necessary.
Pol Pot died in 1998, but aging senior associates like "Brother Number Two" Nuon Chea and ex-Khmer Rouge president Khieu Samphan live freely in Cambodia.
With sufficient resources, and a determination not to compromise on quality, the Extraordinary Chambers can provide a measure of justice for the victims and an example of law's power to serve the public good.
The Killings in Colombia
The murder of 11 provincial legislators held hostage by Colombia’s FARC guerrillas is a reminder of that country’s eternal agony.
But strange to say, Colombia is in better shape today than it has been for years, thanks largely to President Alvaro Uribe’s leadership.
Of course, as the murders show, Colombia remains a bizarre place, one facing strange and intractable challenges.
The FARC guerrillas have held some of their kidnapping victims for many years.
Child soldiers still linger in paramilitary groups, and there are compromising video recordings of leading Colombian politicians and drug lords.
Perhaps weirdest of all, there are imprisoned guerrillas who refuse to be set free, and a government that insists on liberating them, even against their will.
Uribe was re-elected just over a year ago by a landslide, a tribute to the popularity and effectiveness of his “democratic security” policy of combating both the guerrillas and the country’s generalized violence.
Latin America’s oldest standing two-party system was decimated in that election, as the Polo Democrático presidential candidate won more votes than the Liberal Party’s contender, finally giving electoral expression to left-wing forces that had never been able to see more potential for change at the ballot box than by fighting in the mountains.
Negotiations on Colombia’s Free Trade Agreement (FTA) with the United States had been finalized.
Even the questionable deal Uribe cut with the right-wing paramilitary AUC groups, pardoning up to 30,000 of their members for often horrendous crimes in exchange for their disarmament, appeared successful.
With Uribe in charge, Colombia seemed to be on a roll.
But much of this success has since been squandered, with both Colombia and Uribe now in deep trouble.
The so-called parapolítica scandals have rocked Uribe’s government, forcing the resignation of some cabinet ministers, and embarrassing others, including the president himself.
Photographs, videos, and audio recordings of politicians and paramilitary thugs (including one who boasts of having personally killed more than 300 of his enemies) have discredited a political elite that, while never very popular, has now had some of the worst suspicions that many held about it graphically confirmed.
For years human rights activists and scholars suspected the obvious: the emergence of an enormous, vicious, well-armed, and well-trained parallel army to fight the guerillas was not some spontaneous act.
It was, many believed, a deliberate policy devised and carried out by the official military and the political elite to wage war “off the books.”
The parapolítica or paragate revelations seem to confirm another suspicion as well: the distinction between the paramilitaries and the drug cartels, like that between the guerrillas and the cartels, is a nuanced one.
Unfortunately, these revelations come at the worst possible moment.
Colombia’s FTA with the US was in danger the moment the US Republicans lost their majority in both houses of Congress last November.
Still, it seemed more likely to pass than the other two pending Latin American trade deals with Panama and Peru.
Now it appears that President George W. Bush’s closest ally in the hemisphere will not only have its FTA rejected, owing to human rights concerns in the US House and Senate. Moreover, it might also lose Plan Colombia, the huge – and hugely controversial – American aid program that has funneled tens of billions of dollars into Colombia since the late 1990’s, ostensibly to fight the drug cartels, but also, in fact, to wage counter-insurgency.
Uribe has spent weeks directly and personally lobbying key American legislators, and he is undoubtedly his own best advocate.
But, just as former US Vice-President Al Gore recently refused to share a dais with Uribe in Miami, many members of Congress refuse to approve a trade agreement or an aid package that may link them to a government tainted by egregious human rights abuses, complicity with drug lords, or both.
The US has never really wanted to include human rights issues in trade agreements; at best, and only when forced, US presidents have consented to incorporating labor and environmental chapters.
The European Union thinks differently; in its economic cooperation and free trade agreement with Mexico, for example, it insisted on – and achieved – the inclusion of a “democracy clause” that made its economic benefits conditional on ongoing respect for democratic rule and human rights.
Colombia’s blemished human rights record is affecting its government’s international standing and providing ammunition for those who wish to sabotage the FTA.
For example, protectionist Democrats in the US Congress have been able to insulate themselves from charges of opposing free trade if they scuttle Colombia’s FTA, because they will most likely ratify the deals for Panama and Peru.
Can Uribe survive his current travails?
The answer is almost certainly yes, unless the parapolítica mess reaches him directly, or the US explicitly rejects the FTA and postpones or attaches conditions to renewal of funding for Plan Colombia.
Uribe’s political demise would hurt everyone, but the rejection of the FTA on human rights grounds could set a healthy precedent.
In a region where threats to democracy and human rights are growing, linking trade and economic policy to these considerations is not a bad idea.
Uribe may not deserve such a fate, but history works in strange ways.
The Kindness of Strangers
NEW HAVEN – I admit that it is an unusual way to see the world, but, when reading the newspaper, I am constantly struck by the extent of human kindness.
The newest bit of good news comes from The Center on Wealth and Philanthropy at Boston College, which estimates that Americans will give about $250 billion in individual charitable contributions in 2010, up several billion from last year.
People donate their blood to strangers, travel on humanitarian missions to places such as Haiti and the Sudan, and risk their lives to fight injustice elsewhere.
And New Yorkers have grown accustomed to reading about subway heroes – brave souls who leap onto the tracks to rescue fallen commuters and then often slip away, uncomfortable with attention or credit.
As a psychologist, I am fascinated by the origin and consequences of such kindness.
Some of our moral sentiments and moral motivations are the product of biological evolution.
This accounts for why we are often kind to our own flesh and blood – those who share our genes.
It also can explain our moral attachments to those we see as members of our immediate tribe.
There is an adaptive logic to being kind to those with whom we continually interact; we scratch their backs, they scratch ours.
But there is no Darwinian payoff to sacrificing our resources to anonymous strangers, particularly those in faraway lands.
The explanation for our expanded morality comes from intelligence, imagination, and culture.
One powerful force is the use of language to tell stories.
These can motivate us to think of distant people as if they were friends and family.
The vicarious experiences generated by Greek tragedies, televised sitcoms, and newspaper stories have all played an important role in expanding the scope of moral concern.
Another factor is the spread of ideologies, both secular and religious, that encourage us to care for distant others, that persuade us to expand our kindness beyond our immediate circle.
Even the much-maligned force of capitalism might make us nicer.
A recent study of 15 diverse populations, reported in the journal Science, found that the societies that treat anonymous strangers most fairly are those with market economies.
As Robert Wright has emphasized, as people become increasingly inter-dependent, the scope of moral concern expands accordingly.
Nobody would argue that we are losing the distinction between those who are close to us and distant strangers.
I can’t imagine that this would ever happen. An individual who didn’t distinguish between his or her own child and an unknown child in a faraway land – who felt the same love and the same obligation toward both – would hardly be human anymore.
What has happened, though, is that the distinction between “us” and “them” is not as sharp as it used to be.
The effects of our kindness are not zero-sum.
Those who receive charity have their lives improved, but those who provide it also benefit.
It feels good to be good.
Indeed, one recent study found that spending money on others is more rewarding than spending it on oneself.
It’s not just short-term pleasure: those who donate wealth and time to others tend to be a lot happier in their entire lives than those who do not.
The paradoxical finding here is that one great trick to being happy is to forget about being happy and instead try to increase the happiness of others.
All is not sweetness and light, though; morality is more than compassion and charity.
As moral creatures, we are driven to enforce justice.
Experimental economists have found that people will sacrifice their own resources to punish cheaters and free riders, and will do this even to anonymous strangers that they will never again interact with – a behavior dubbed “altruistic punishment.”
There is a pleasure to this as well.
Just as giving to someone in need elicits a positive neural response, so does taking from someone who deserves it.
This is the flip side of charity.
We are motivated to be kind to anonymous others, but we are also motivated to harm those who treat these anonymous others badly.
This can drive our powerful impulse to deal with distant evils through sanctions, bombings, and war.
We want these wrongdoers to suffer.
The problem that arises is that our gut moral feelings are poorly attuned to consequences.
The patterns of charitable donation to foreign countries often have more to do with the salience of news reports than to actual considerations about where the money is most needed.
And laboratory findings show that people will continue to punish even if they are well aware that doing so is actually making things worse.
It is not difficult to see the consequences of this in the real world.
The extension of human morality is a wonderful development for humanity, but it would be even better if it were tempered by cold-blooded rationality.
The Kingdom and the Afghan Chaos
LONDON – In his quest to stabilize his country, Afghanistan’s President Hamid Karzai, dressed in white robes, arrived last week in Mecca on what can only be called a diplomatic pilgrimage.
Although Karzai undoubtedly spent time praying at Islam’s holiest site, his mission was intended to prove more than his piety.
So what diplomatic or financial gain was Karzai seeking?
Why travel to Saudi Arabia at the very moment that US President Barack Obama’s military surge has become operational?
Can Saudi Arabia play a serious role in resolving his country’s increasingly bloody conflict?
One card the Saudis can play is their severe Islamic ideology, which the Taliban shares.
Indeed, the Saudis, backed by Pakistani military intelligence, nurtured the madrasas that educated the Taliban before their march to power in the 1990’s.
In theory, the Saudis also have the economic clout both to entice and rein in the Taliban.
Being present at the Taliban’s creation, the Saudis know how to talk to its leaders.
Moreover, Saudi Arabia has been increasingly willing to use Mecca as a forum to attempt to resolve regional political disputes.
Only recently, it seems, has the Saudi regime discovered the great soft power that its custodianship of Mecca and Medina – Islam’s holiest sites – provides.
Mecca has, indeed, become a potent venue for political summitry and a tool for mediation if not media manipulation.
In October 2006, for example, Mecca was used to host talks among Iraq’s warring sectarian factions.
In February 2007, the short-lived Palestinian government of national unity was created as the result of a summit there.
In December 2007, Iranian President Mahmoud Ahmadinejad performed the Hajj at the personal invitation of King Abdullah, marking the first time a head of state of the Islamic Republic was able to do so.
In October 2008, the Kingdom held mediation talks between the Taliban and the Afghan government following Karzai’s request to King Abdullah, whom Karzai describes as “the leader of the Muslim world.”
The Taliban could not spurn an invitation to negotiate in Mecca.
Today, the Saudi regime uses Mecca’s status among Muslims in a calculated way designed to reassert the Kingdom’s paramount status as the Islamic world’s “leading state.”
Through the strategic deployment of Mecca, it is hoped that the region’s radicals – Iraqi Shi’a, Hamas, Hezbollah, the Taliban, and the Iranians – will undergo a kind of “healing” as they gain access to Islam’s holiest sites.
At the same time, potential Sunni Arab rivals like Hashemite Jordan and Egypt are reminded that Saudi Arabia remains the ideological heartland of Islam.
But Saudi soft power extends beyond custodianship of Mecca and Medina, for Saudi diplomacy is also backed by the largest oil reserves in the world.
This could help the Taliban accept negotiations – and perhaps even renounce violence – if Saudi money is deployed to assist Taliban fighters create new lives for themselves.
Saudi Arabia’s diplomatic mission in Afghanistan is an essential step in its efforts to “whiten its face” and restore its reputation in the West, particularly the United States, which has not forgotten that the majority of the September 11, 2001, hijackers were Saudi citizens, and that the government failed to manage the Taliban during the years leading up to those attacks.
The subsequent fall of the Taliban in Afghanistan as a result of the US-led invasion embarrassed the Saudi regime, because it had recognized the Taliban government in 1997 and supported it ideologically and financially.
Indeed, Saudi Arabia was one of only three countries, alongside Pakistan and the United Arab Emirates, to form diplomatic relations with the Taliban government.
Although bilateral tensions began to build from 1998 onward, due to the Taliban’s refusal to turn over Osama bin Laden to Saudi Arabia (his homeland), the Kingdom still hoped that petro-dollar diplomacy might solve this problem.
The Saudis even invited Taliban officials – including Mullah Omar – to perform the Hajj .
Mohammed Rabbani, the Taliban prime minister, did so that year, yet his government still failed to hand over bin Laden.
For the Saudis, a bid to rehabilitate the Taliban, despite the damage they have caused to the Kingdom’s diplomatic standing in the West, serves a strategic purpose.
The Kingdom has suffered from the rise of the Shi’a in neighboring Iraq and is keen to maintain Sunni supremacy in the Islamic lands further to the east.
Yet they see that, under Karzai, Saudi influence has declined in Afghanistan since 2001, while that of the Iranians has strengthened.
The Iranians vehemently oppose the return of Taliban control over Afghanistan’s government.
Culturally, ethnically, and linguistically, Afghans are more closely related to Iranians than they are to Arabs.
Apart from sharing their ideology with the Taliban and their past recognition of the Taliban government, the Saudis lack any understanding of the diversity and fluidity of Afghan society.
Saudi ambivalence about Karzai, despite his being a Sunni Muslim, was on open display during his visit to the Kingdom.
Indeed, King Abdullah sent only a junior prince to accompany Karzai in Mecca, a studied diplomatic affront.
So the question for the Saudis now is how to get the Taliban invited to the negotiating table. Their best hope is to be found in Pakistan, which views Afghanistan in much the same strategic way that Saudi Arabia does, but with India, instead of Iran, being the rival for influence.
Given the Obama administration’s belief that Pakistan is essential to any solution in Afghanistan, the Saudis have probably placed their bet correctly in choosing a diplomatic partner for determining the Afghan end game.
With only 18 months left before Obama’s promised draw-down of US forces, Western strategy is clearly aimed at splitting the “good” Taliban from “bad” Al Qaeda.
But, given Saudi Arabia’s past record of supporting radicalism in Afghanistan, it is highly unlikely that the Kingdom can help secure this aim.
The Kingdom Betrayed?
LONDON – The old saying “lonely is the head that wears the crown” has literally taken on new meaning for Saudi Arabia’s King Abdullah.
Not only has he watched close regional allies, Egypt’s President Hosni Mubarak and Yemen’s Ali Abdullah Saleh, be toppled, but fellow crowned heads in Bahrain, Morocco, and Jordan have also felt their thrones quake from public protest.
Now the Kingdom’s longtime protector, the United States, which let down Abdullah by (reluctantly) embracing the Arab Spring, is poised to pull its troops out of neighboring Iraq.
Who, Abdullah wonders, will keep the Iranian wolf from the Kingdom’s door?
According to a security agreement reached with Iraq’s government, the US is to withdraw its forces by the end of this year.
Saudi Arabia, along with its Sunni-ruled Gulf neighbors, is anxious that some US troops remain in Iraq to help keep a resurgent Iran at bay.
The US government does not need to be convinced about that, but the American people – and ordinary Iraqis – want to see the troops go home.
No Iraqi political faction wants to be blamed for prolonging the occupation, but most, with the exception of Muqtada al-Sadr’s movement, will agree to extend America’s military presence by another five years.
Although the US and the Gulf monarchies share a fear of Iran, much else about Iraq and the region is now in dispute.
Saudi Arabia still loathes the idea of a democratic Iraq under majority Shia rule.
The Shia, considered apostates by the Kingdom’s Wahhabi establishment, are viewed as a threat to the Saudi state’s legitimacy and existence, not only because of Iran’s power, but also because of the Kingdom’s large, indigenous Shia population, which is concentrated around the country’s oil fields.
Ever since the fall of Saddam Hussein, the US has urged Saudi Arabia to invest politically and economically in Iraq.
Instead, Saudi authorities treated Iraq’s leaders with contempt and closed their eyes to Wahhabi fatwas that encouraged jihadi volunteers to fight against the Shia “apostates.”
By shunning Shia-dominated Iraq, Sunni-majority Saudi Arabia, Jordan, and the Gulf states have virtually no influence in Baghdad, thus leaving the field open to Iran.
Saudi Arabia’s fears about Iraq are driven by security concerns.
Despite the bloody civil war that followed Saddam Hussein’s ouster, Iraq still believes that it has a right to regional leadership.
The region’s monarchs, however, have excluded Iraq from the Gulf Cooperation Council.
Saudi Arabia, fearing that any role for Iraq in determining regional security would diminish Saudi political and military dominance among the Gulf countries, has still not opened an embassy in Baghdad.
Saudi Arabia also fears that Iraq will regain its oil-output quota within OPEC, which the country couldn’t meet, owing to poor security and infrastructure constraints.
The Saudis suspect that rising oil prices will revive Iraq’s economy, and that of Iran, thus boosting their regional clout.
This explains the Kingdom’s eagerness to increase oil production, which would weaken its competitors’ economies (and please the West).
So the Saudi and Sunni Gulf rulers want to keep US military forces in Iraq partly in order to keep the country down.
Indeed, Kuwait refuses to forgive Iraq’s Saddam-era debts, and is building a port at Mubarak al-Kabir, which Iraqis view as a naked attempt to suffocate Iraq’s already limited access to the Persian Gulf.
And Bahrain has responded to Iraqi criticism of its political repression by halting its national airline’s flights to Baghdad, Beirut, and Teheran, all perceived to be Shia demons.
The majority of Iraqis deeply resent Saudi Arabia – and with good reason.
Saudi jihadis were at the heart of the mayhem that killed hundreds of thousands in the years immediately following the 2003 US-led invasion.
The Saudis even spent billions of dollars to build a security wall along its vast border with Iraq, in order to contain the violence that it was exporting there.
But the real protective shield for the Gulf rulers is the presence of US troops in Iraq, because the Kingdom’s blinkered strategists failed to see that a failure to engage with post-Saddam Iraq would leave the field open to Iran.
But the Saudi dream of turning back the clock and to a minority Sunni-ruled Iraq made realistic diplomacy impossible.
Despite this failure, Iraq continues to be shunned by the region’s Sunni-controlled states.
Iraq has attempted to forge a political role for itself within the Arab world by participating in Arab summits, but when its turn came to play host, the summit was postponed for a year, owing partly to the Arab spring, but also to some Gulf countries’ refusal to participate in a meeting held in Baghdad.
In the Saudi view, a US military exit would mean handing the entire country to Iran.
The Saudis could well be right: the departure of US troops would represent a sweeping victory for Iran, which has no military presence in Iraq, but is the strongest player there.
No other country allied to the US, not even Turkey, could equal Iranian influence in the country.
America’s military withdrawal from Iraq will indeed be a gift to Iran.
But that is entirely because the Saudis have behaved since 2003 as if they feared Iraq’s Shia – and their own – much more than they do the Iranian regime.
The Knife’s-Edge Economy
Berkeley – Since 2003, I have been saying that the global economy is badly unbalanced and vulnerable to a macroeconomic catastrophe that would yield one of the worst episodes of economic distress of modern times.
Since 2004, I have been saying that the situation, once it started, would probably become clear within a year: we would know whether the global economy would right itself or begin a downward spiral.
In 2004-2007, I considered that I might be wrong about a relatively rapid resolution to the world’s economic distress: as the late Rudi Dornbusch put it, unsustainable macroeconomic imbalances can sustain themselves longer than economists (with their touching faith in rational human decision making) believe is possible.
A year ago, however, with the subprime mortgage meltdown of August 2007, I became certain.
The situation had to resolve itself within a year – or else.
Either central banks would manage somehow to thread the needle and guide exchange rates and asset prices back to some stable and sustainable equilibrium configuration, or the chaos and disruption in financial markets would spill over into the real economy and a major global downturn would begin.
The odds heavily favored the second outcome: global macroeconomic distress.
But I was wrong.
Here we are, fully a year later, and things are still balanced on the knife’s edge.
Let me stress that I have no complaints about the policies implemented by the United States Federal Reserve, which has had the main burden of responsibility for “managing” the crisis.
I wish – as the Fed does – that some way could have been found to make financial-sector equity holders bear an even larger share of the losses that are coming down the road than they have borne so far or are likely to bear.
But I agree with Fed Vice Chairman Donald Kohn that it is not wise to focus on teaching financiers lessons about moral hazard when doing so risks collateral damage in the form of the destruction of millions of jobs.
The Fed’s first priority is to try to keep the American economy from dropping too far below full employment, and to try and avoid a US meltdown contaminating other economies.
If employment and incomes in America crash, US demand for imports crashes – and not just America but the whole world will slide into recession.
Employment in construction and related industries is collapsing, as Americans and foreigners recover from their fit of irrational exuberance over housing prices.
Less enthusiasm about housing means that manufacturing firms will no longer be squeezed when they seek capital to expand.
It also means a lower value for the dollar, and thus more opportunities for US-located firms to export and supply the domestic market.
Jobs are moving from construction (and related occupations) into tradable goods and services production (and related occupations).
But if the system of financial intermediation collapses in universal bankruptcy, producers of tradable goods will be unable to get financing to expand.
And if housing and mortgage security prices don’t just fall but collapse, everyone should remember that construction employment falls faster than employment in tradable goods can grow.
That would not be good for America or the world.
And so far, so good, at least on the real side of the US economy.
Of course, US unemployment is rising, but if the American economy is in recession, it is the mildest recession ever.
On the financial side, however, the magnitude of the chaos is staggering: mammoth failures of risk management on the part of highly leveraged financial institutions that must be first-rate risk managers in order to survive.
If you had asked me a year ago whether this degree of financial chaos was consistent with a domestic US economy not clearly in recession, I would have said no.
If you had asked me a year ago whether a year could pass without either a restoration of confidence in financial institutions or widespread nationalizations and liquidations, I would have said no.
Unstable and unsustainable configurations must come to an end.
Rudi Dornbusch was right: imbalances can last for longer than economists believe possible.
But that does not mean that the water will not eventually run down the hill.
The Kouchner Conversion
French President Nicolas Sarkozy’s appointment of Bernard Kouchner as France’s foreign minister was a brilliant political stroke.
Having beaten his Socialist rival, Ségolène Royal, Sarkozy decided to compound the Socialists’ crisis by appointing to his government several political figures long associated with the center-left.
Sarkozy persuaded two women from immigrant backgrounds, Rama Yade and the well-known feminist activist Fadela Amara, to accept sub-cabinet positions, while Kouchner has been the most popular political figure in France for the past several years.
Kouchner’s popularity is a curious phenomenon.
Although he has been in politics for decades, he has not held a government post since serving as deputy health minister under former Socialist Prime Minister Lionel Jospin.
Yet, whether through the force of his intellect and talent, as he and his supporters say, or his genius at self-promotion, as many of his detractors contend, Kouchner succeeded in remaining at center stage no matter who was France’s president or prime minister.
But the hour was growing late.
Kouchner, the co-founder of the relief group Doctors Without Borders, who later split with the organization to found a second humanitarian organization, Doctors of the World, and who ran Kosovo as a United Nations protectorate after NATO’s war with Serbia in 1999, is now 67. Realistically, Sarkozy’s invitation was probably his last chance to play a major political and international role.
But what kind of role?
Kouchner did not invent the so-called “droit d’ingerence,” which can be rendered in English as the right of intervention.
That title belongs to the Italian legal theorist Mario Bettati.
But he is best known as its champion.
Since the 1970’s, Kouchner has argued that states have a duty to prevent dictatorial governments from committing the worst abuses against their people.
While not denying that state sovereignty was the basis of the international system, Kouchner insisted that it could not be a license for governments to kill.
His words were eloquent and resonated with people of conscience throughout Europe.
Arguably, the “droit d’ingerence” served as the inspiration for much of the so-called “humanitarian intervention” in the Balkans and in Africa in the 1990’s.
Kouchner’s stance also set the stage for the United Nations’ adoption of the still more interventionist doctrine of the “responsibility to protect” – a call for outside military force to prevent genocide or widespread human rights abuses – during the secretary-generalship of Kofi Annan.
Kouchner was consistent throughout his career.
His vision of humanitarian action was one in which relief was not only an end in itself – the traditional Red Cross view that humanitarians palliate the worst effects of war and natural disaster – but also a means for righting wrongs.
That difference is fundamental.
Where the Red Cross view, adopted by Kouchner’s former colleagues at Doctors Without Borders, insists that humanitarian action is a vital but limited activity that can be coherent and effective only if it understands its limitations, the Kouchner view is that humanitarian action can be a lever for changing the world.
Anything less is a dereliction of moral duty.
In practical terms, whereas the Red Cross and Doctors Without Borders believe in neutrality and remain skeptical of the motives of outside states that might intervene, Kouchner’s view is that humanitarian action should be understood as part of what the Canadian writer-politician Michael Ignatieff calls a “revolution of concern.”
Grave human rights abuses, ethnic cleansing, and genocide would no longer be permitted.
When they occur, states would stand ready to intervene to put an end to them, peacefully if possible, by force if necessary.
The often unstated corollary to this doctrine is regime change.
That was what activists like Kouchner called for, whether or not they admitted it even to themselves, in Rwanda and Kosovo.
It probably explains why Kouchner was one of the few important French political figures to support the Anglo-American overthrow of Saddam Hussein (something Sarkozy did not do).
After the debacle in Iraq, what is surprising is that a man who has regime change inscribed in his DNA could occupy so central a position in the French government.
Perhaps fewer lessons have been learned from Iraq than might have been hoped.
In fairness to Sarkozy, his motives in appointing Kouchner had more to do with wrong-footing his Socialist adversaries than with the “droit d’ingerence.”
And Kouchner himself, to the cynical amusement of the French press, has retreated radically from his insistence on an immediate intervention to protect refugees and internally displaced people in Darfur from further slaughter by the Sudanese government-backed Janjawid militia.
That was the activist Kouchner.
Foreign Minister Kouchner calls international conferences, speaks of establishing contact groups, and of the need for deliberate action.
There should be no surprise in any of this.
Despite some of the more fevered declarations made by Kouchner and other human rights activists, states do not tend to behave altruistically, and electorates do not tend to wish to see their sons and daughters kill and die in altruistic wars.
Indeed, Kouchner’s appointment is likely to demonstrate just how vain a hope humanitarian intervention always was.
This may not be a bad thing.
Kouchner always wanted to be a minister.
Perhaps now, humanitarian relief groups can get back to doing their vital but not world-transforming work.
The Kremlin’s Failing Monopoly
CAMBRIDGE – Ever since Vladimir Putin came to power a decade ago, the Kremlin regime has relied on two pillars: the security forces and energy exports.
By suppressing internal rivals and absorbing their assets, the regime created a dual monopoly.
Redistributing some of the profits from high energy prices enabled the regime to improve living standards and make itself popular with ordinary Russians.
And resolving internal problems through a disproportionate use of force reassured even the regime’s security obsessed ex-KGB men.
Until recently, this combination of carrots and sticks functioned effectively.
The virtual absence of popular protest in Russia during the Putin years seems amazing.
But make no mistake: Putin’s popularity ratings relied not on his vigor, humor, or mystique, but on salaries and credits that Russians had never enjoyed before.
And, as long as oil prices were growing faster than Russian salaries, those in power could still grab a big slice of the profits.
Now that happy union between the Kremlin and ordinary Russians is ending.
Few Russian policymakers, much less the Russian public, expected oil and gas prices to collapse as they have.
We do not know what will happen next.
If prices rebound, Putin and his people will glorify themselves for their wisdom.
But if prices remain stagnant at current levels, Putin’s system is doomed to failure.
It is no coincidence that George W. Bush’s and Putin’s disastrous presidencies were cotemporaneous.
By driving up energy prices, Bush was Putin’s greatest ally, with Putin returning the favor by refocusing Russia from its multiple problems to “terrorism.”
Both sought to undo the work of their successful predecessors, Bill Clinton and Boris Yeltsin.
Both led their countries into traps with which their successors must deal.
When Bush said that he liked what he saw in Putin’s eyes, he meant it.
But their successors are as different as the procedures that brought them to power.
Since Soviet times, the Kremlin has traditionally been wary about Democratic administrations in the United States.
John F. Kennedy refused to tolerate the Soviet military presence in Cuba.
Jimmy Carter boycotted the Moscow Olympics.
Clinton led the successful operation against Slobodan Milosevic’s Serbia, the Kremlin’s best friend in Europe.
And Obama’s triumph heralded the fall in oil prices.
With energy revenues screeching to a halt, Putin’s regime will lose popularity.
Central myths about Putin the healer of the nation and the supplier of giveaway budgets are collapsing.
And Putin cannot avoid responsibility.
If the Kremlin claimed credit for the oil- and gas-fired prosperity of the past six years – prosperity due solely to economic exuberance elsewhere in the world – the Kremlin should be accountable for the current devastation.
Americans today compare their current crisis to the Great Depression; Russians compare theirs to the crisis of 1998, which is much fresher in the collective memory.
In 1998, the whole world, which was then enjoying a global boom, looked at Russia with sympathy.
Things could not be more different now.
In 1998, Russians did not yet take for granted imported cars, foreign tourism, and other middle-class perks.
The ruling group in the Kremlin was variegated and conflict-ridden, but its response to the crisis was effective and even creative.
Now, the ruling group is uniform, unanimous, and most likely unfit for any serious revision of policy.
It is a dangerous situation.
Though the current level of anti-Americanism in Russia’s official media seems unprecedented, the regime is most worried about internal problems.
During the current financial crisis, which hit Russia right after the war with Georgia last August, the Kremlin and the Duma issued a series of laws and orders that have turned Putin’s authoritarianism into a dictatorship.
Opposition parties have become negligible.
The oligarchs’ businesses have been largely nationalized.
The presidential term has been extended.
Industrial centers with growing unemployment will receive more troops.
Trial by jury, which was infrequent anyway, is being seen less and less.
The concept of high treason is bandied about almost daily.
We will see more persecution of scientists, journalists, and businessmen, whose work with international charities, media, or corporations will now be construed as treachery.
Some of these people will be murdered rather than tried; others will be tried by state-appointed judges rather than murdered.
But this is not news anymore in Putin’s Russia.
What will become news will be the sort of mass protests that were seen recently in Ukraine, Thailand, or Greece.
Can Putin’s dual monopoly survive them?
Perhaps, but it will do so only if it risks deep change, a new perestroika rather than simply a thaw.
But it is more likely that the regime is too rigid and too blinkered to act.
The Kremlin Temptation
PARIS – What is the significance of France’s recent sale of four powerful Mistral-class warships to Russia?
Was it business as usual or an irresponsible move contributing to a dangerous shift in the balance of power in the Baltic and Black Seas?
It is sometimes said that Germany has become a “second France” in its “selfish” approach to the European Union.
But is France really on its way to becoming a “second Germany”?
If Germany is Russia’s main economic partner, why should not France be its principal strategic partner?
France does not share Germany’s natural closeness to Russia – a relationship based on both geography and history.
But France does have a long tradition of a “special” bilateral relationship with Russia – marked by a deep cultural dimension – that somehow transcended the Cold War.
General Charles de Gaulle once described himself as a “bad weather friend” of the United States, which implied that in “better weather” he could go his own way, leave NATO’s integrated military command, and behave as some kind of bridge between East and West.
De Gaulle’s policy of detente towards the Soviet Union, coming years before Nixon and Kissinger tried it, personified France’s desire to “exist” diplomatically on its own and to maximize its room for maneuver with the US.
Times have changed.
The Cold War is over.
Nicolas Sarkozy is not de Gaulle, and Russia is not the Soviet Union.
Yet there is an undeniable whiff of nostalgia in the current rapprochement between two powers that are both conscious of their relative decline in the world.
Both intend to reinforce their respective status – diplomatic in the case of France, strategic in the case of Russia.
Yet the reality is more prosaic for both.
The high point of Russian President Dmitri Medvedev’s recent visit to Paris, where the arms deal was concluded, was the two countries’ agreement not so much on long-term strategic visions, but on pragmatic considerations.
For France, above all, “it’s the economy, stupid.”
France is keen to maintain its independent arms industry, and to keep open its naval arsenal, based in Saint-Nazaire on the West coast.
This legitimate “mercantile” concern has supposedly been reciprocated by “small steps” by Russia in the direction of a policy of sanctions against Iran.
It will be interesting to see in a few weeks or a few months whether the Kremlin will really deliver.
In reality, as was the case in August 2008, when Sarkozy successfully negotiated a cease-fire and then a peace deal between Georgia and Russia (largely on Russian terms), the French president’s actions are music to Russian ears.
And “Sarkozy the American” (as he was once known in France) no longer thinks he has to prove anything to America nowadays.
France symbolically returned to NATO’s military command in April 2009.
Even if some American officials are irritated by French sales of sophisticated military equipment to Russia, no one has dared to complain openly.
After all, isn’t the US in the process of pushing the “reset button” with Russia?
With China looming on the horizon as a much more confident and defiant force than Russia, including as a key player in the G20, Russia is being courted by all the world’s powers.
And everybody seems to be making the same calculus, hoping to alter the balance of power within Russia to reinforce Medvedev’s position vis-à-vis Prime Minister Vladimir Putin.
But does such a calculus make sense, or is it simply wishful thinking, a reassuring and comfortable illusion designed to make French leaders feel good, when in fact they are dealing with Russia on purely commercial grounds?
As a Russian friend of mine told me recently, “Putin wants to live like Roman Abramovich and to rule like Stalin.”
He is the man in charge. The idea that you can play a Medvedev card to balance Putin is a dangerous illusion.
There is no division of power between the two men.
The first one is paving the way for the second to return to the Kremlin in 2012.
In Russia, power is money and money is power.
The stakes are simply too high.
France should not delude itself.
There is nothing inherently wrong in selling weapons to Russia, but by so doing one merely plays into the hands of Putin’s effort to reinforce his policy of domination over Russia’s “near abroad.”
The sale of such warship will not positively affect the balance of power within Russia, but it will affect the regional balance of power – in favor of Russia.
What is clear is that any ambition to define a common European energy and security policy toward Russia is slowly disappearing.
From Berlin to Paris, and from Paris to Rome, European leaders may ultimately be doing the same thing, but they are all doing it separately, as competitors vying for Russian favor rather than as partners within a supposedly tight-knit Union.
The Kursk and Russia’s Democracy
MOSCOW: Will the sinking of the submarine Kursk and the death of all its crew also sink the Putin revolution?
Until now President Putin’s power was unique in Russian history – it was based on his vast popularity, one legitimized by the vote.
He could browbeat Russia’s oligarchs into submission and recast the upper house of the Duma to make it bend to his will because he was universally popular and the other elements of Russia’s mostly discredited government knew it.
His handling of the Kursk crisis, however, dented that democratic mandate because Putin seemed as contemptuous of human life as all his predecessors in the Kremlin.
How well he recovers will determine whether or not Putin’s revolution will remain a democratic one, or whether he will revert to autocracy to pursue his goals.
I have no doubt that Putin will find people to blame for the failure to seek outside help for the Kursk in time.
Indeed, the Kursk crisis may provide him with an opportunity to further clean house in the military.
The first tests of his ability to recover are the looming regional elections across Russia.
Between October and December over 40% of our country’s governorships will be up for grabs in new elections.
As a restoration of Moscow’s authority over the country is a central plank in the president’s platform, he needs to restore his popularity fast.
Although Putin's reforms to the upper house of the Duma have already stripped the governors of their status as federal power brokers as well as of their parliamentary immunity, governorships retain wide powers in their regions.
Few can now strut the national stage, or thumb their nose at the Kremlin, as they did during the Yeltsin era, but their powers are real and reigning them in won’t be easy.
Putin’s dominance has already changed the way these campaigns will be run. Money is now less important than even a year ago.
What matters now is control over administrative power, and the appointment of presidential prefects throughout Russia gives the Kremlin a powerful hand in directing state administration.
Since campaigns will be cheaper, governors will find it hard to buy reelection because opponents will be able to mount a credible opposition.
Even if a governor wants to buy an election, the sources of campaign cash are drying up.
The oligarchs, who once sought close ties to regional bosses in hope of securing the help of governors in taking control of local factories, mines, and other assets, have been cowed by Putin.
Indeed, the President’s blunt "message" to them is clear: stay out of politics.
But if Russia’s richest men think the president damaged seriously, they may jump back into politics and fund his regional opponents.
Still, even if weakened, Putin benefits from a changed economy.
Only 17.9% of potential voters now deem the country’s situation as "catastrophic", a much smaller proportion than at any time since communism’s end; only 15.6% say that they live below the poverty line.
So the protest vote is falling.
Moreover, economic growth is everywhere to be seen.
In some places, the Chelyabinsk region, for example, it is up a whopping 25% on a year ago.
This "economic miracle" in some parts of the Federation means that some regions have long since paid their pension and wage arrears.
A democratic "feel good" factor is in play.
Here, Putin has delivered something unique in Russian history: people are more satisfied with their government’s economic performance, not because of propaganda, but because their lives are visibly improving.
This means that the great battle of communists versus democratic reformers, that dominated every election since 1991, is a thing of the past.
People do not care a bit about ideology.
They are more concerned about prices, job opportunities, healthcare and education.
They want a government that reflects their human values, as the response to the Kursk shows.
Gripes about restrictions on freedom of expression or economic freedom, which are popular in Moscow, have few echoes in the provinces.
So, even if Putin remains weakened, the Kremlin can look forward to getting rid of the notorious "Red Governors" of Bryansk, Volgograd and Voronezh through the normal workings of democracy; that is, if the Kremlin makes certain that votes in these regions are relatively honest.
The same holds true in regions with well-known but wayward governors such as Kursk with Governor Rutskoi (who led the coup against Yeltsin of October, 1993) and Kaliningrad’s corrupt Governor Gorbenko.
But in those regions headed by strong politicians – Astrakhan, Chelyabinsk, Krasnodar and Stavropol regions, for example – the damage Putin has suffered in the past week makes it unlikely that he will be able to oust leaders who oppose him.
In this, there is something vaguely reassuring.
Presidential power it appears is now dependent on popular support, and isn’t the consent of the governed what democracy is all about?
If this proves to be the case, perhaps the sailors of the Kursk will not have died in vain.
The Language of Genomics
DALIAN, CHINA – Last week, a company called Complete Genomics announced 10 new customers for its genome-sequencing service.
The price was not specified, but the company said its goal is to offer the service for $5,000 within a year.
What struck me was not the announcement itself, but the name of the CEO: Cliff Reid, the CEO when I knew him in the 1980’s of a text-search company called Verity.
The connection hit me almost immediately.
Genes are, in a sense, the instruction language for building humans (or any other living thing).
And language is symbols that interact to build meaning.
And, yes, of course, it was the same Cliff Reid I knew back in the late 1980’s.
What Complete Genomics is doing with the $91 million it has raised so far is exciting.
It has built a genome-sequencing factory and plans to build several more over the next few years.
Many academic and commercial research facilities want one, as do several countries.
What I find interesting are the implications.
Right now, a genome is akin to a novel written in an unknown language.
There is a huge amount of information in there, but we can’t understand it.
Imagine getting a copy of Tolstoi’s War and Peace in Russian and (assuming you can’t read Russian) trying to figure out the story.
Impossible.
That’s pretty much the situation of natural-language understanding at the time Reid joined Verity.
On the other hand, we have started recognizing some words – specific genetic variants – that seem to correspond to certain incidents in history.
In the case of genetics, those incidents are diseases and conditions.
And just as it usually takes several individuals to cause an incident, so it often takes several genetic variations, plus ambient factors, to cause a disease.
Genes often work together, sometimes aided by factors such as a person’s diet or behavior, to cause a condition.
There are two key challenges in genomics.
One is simply detecting the genes, alone or in combination, that seem to lead to certain diseases.
That alone can be useful.
With enough data, we can then figure out that the same “disease” is in fact a variety of different disorders, some susceptible to particular known treatments and some susceptible to others or simply incurable.
For this, mere correlation is sufficient.
People with BRCA-derived breast cancer benefit from treatment with herceptin, whereas those with other kinds of breast cancer do not.
We don’t know why, but the correlation is clear.
The second challenge is to understand how the genes interact among themselves or with other factors to produce the condition, which should enable the development of new preventive measures or treatments based on the details of how the condition begins and how it progresses.
That, of course, is much more interesting – and harder to do.
In a sense, it’s the difference between matching words and understanding a piece of text.
So, it is no surprise that Reid has found a role in this new marketplace.
Complete Genomics and its competitors are about to create huge amounts of data.
CGI’s edge is not just sequencing the genomes cheaply, but also refining the data into lists of variations.
In other words, for most research the questions revolve not around an entire genome, but around the relevant differences of any individual’s genome from the norm.
There are common differences, like the differences between blue eyes and brown eyes, or even between people likely to have Crohn’s disease and those who are unlikely to have it.
Then there are differences that result simply from a “broken” gene, which is not a variant but simply a mistake.
Most of these are harmless; the really harmful ones don’t survive long enough to show up anywhere.
The researchers’ task is to find meaning from all this data.
We’re just at the beginning of this process, which will take many years.
While some researchers are looking for statistical correlations, others are studying how the individual genes interact.
For all of them, access to genome sequences is important.
But the genomes mean little without the corresponding medical records, just as the Russian novel – in any language – means little without a corresponding knowledge of Russian history.
Obtaining that history requires consent from the individuals whose genomes are sequenced.
It also requires a lot of data processing to make the records usable.
Much of the information is simply not recorded.
And much is still on paper, or in scanned images, insurance company records, and pharmacy transactions.
There is a standard language for representing diseases, but in many cases the records containing this language might as well be hidden in mattresses.
The current movement in many developed countries towards electronic medical records will improve health care directly, but it will also lead to much improved information liquidity to help genetic and other medical research.
We now have the ability to sequence genomes at increasingly lower costs, and we are slowly making the corresponding health information computer-readable.
Companies such as Complete Genomics are developing software that can process the information.
There is, of course, still a huge amount of data to collect and process, and huge amounts of research and discovery to happen.
But it is hard not to be optimistic about our increasing medical knowledge.
The challenge five years from now will be to turn all that knowledge into practice through better preventive measures, better drugs, and better care.
The Language of Global Protest
PRINCETON – The protest movements that have flared up across the West, from Chile to Germany, have remained curiously undefined and under-analyzed.
Some speak of them as the greatest global mobilization since 1968 – when enragés in very different countries coalesced around similar concerns.
But others insist that there is nothing new here.
The Bulgarian political scientist Ivan Krastev, for example, has claimed that what we are actually experiencing is 1968 “in reverse.”
“Then students on the streets of Europe,” he says, “declared their desire to live in a world different from the world of their parents.
Now students are on the streets to declare their desire to live in the world of their parents.”
No name and no clear interpretation have yet attached itself to the movements.
But how they describe themselves – and how analysts describe them – will make an important difference in the direction they might take.
Such self-understandings should also influence how citizens generally should respond to these movements.
Nineteen sixty-eight was famously over-theorized.
Student leaders, or so most people remember, were constantly producing convoluted manifestos that combined Marxism, psychoanalysis, and theories about Third World liberation struggles.
What is easily forgotten is that even the most theory-eager leaders of the time understood that ultimately, the protest movements that helped to define 1968 didn’t come out of seminar-room discussions.
The German leader Rudi Dutschke, for example, insisted that the movement was driven by “existential disgust” – and anger, provoked by the Vietnam War in particular.
Many putative “theorists” themselves declared that the enragés should let go of revolutionary textbooks and, instead, “practically problematize” inherited radical strategies.
Put more simply: they were supposed to make it up as they went along.
In that sense, 1968 and today’s protests are not as different as some observers claim.
There is no political playbook, but there are events and also books that inspired outrage: Frantz Fanon’s Wretched of the Earth in the 1960’s and, nowadays, the unlikely bestseller Indignez-Vous!, by the 93-year old former French Resistance fighter Stéphane Hessel.
As critics have mockingly pointed out, Hessel’s booklet at times reads more like a call for a free-floating, almost arbitrary desire to be agitated by something – almost anything, really, as long as it can somehow be justified by one’s own subjective sense of justice.
It did not help that Hessel nostalgically invoked Jean-Paul Sartre and existentialism, and the “great stream of history” – longings reflected on a hand-painted sign at Occupy Wall Street: “Get excited and do something.”
Tellingly, that sign was flanked by posters for the left-wing anarchist philosopher Noam Chomsky and the right-wing libertarian politician Ron Paul.
Still, for all the theoretical weaknesses of Hessel’s treatise, “indignation” has become a watchword for movements in France, Spain, and elsewhere.
And language matters here: indignation suggests that some social actors – a government or elites in general – have violated shared norms or moral understandings.
This is the literally “reactionary” interpretation of these movements: they are animated by a sense that the social contract has been broken, and that elites ought to return to the status quo that preceded the policies which ultimately led to the financial crisis.
If so, the people on the squares of Madrid, Athens, and New York are not so much demonstrating against those in power – give or take a few anarchists – as demonstrating to those in power that they should feel ashamed for having reneged on supposedly shared commitments.
Indignation is different from outrage – a sentiment that is ultimately blind and not necessarily connected to any presumption that one shares commitments with the people against whom it is directed.
This is to some degree also the story of 1968: righteous disgust led to outrage, but, when channeled through completely unrealistic revolutionary theorizing, also to self-righteousness and, ultimately, to elaborate justifications for physical violence on the part of radical factions.
In such a scenario, self-empowered minorities come to speak in the name of imaginary majorities – a populism of sorts, and, like all populism, driven by emotions more than by norms, let alone reasons.
Or it simply all ends in riots.
The distinction between indignation and outrage might seem like nitpicking.
But the lessons that elites learn – and they clearly will want to turn the protests to their electoral advantage – will partly depend on how these movements are described, and how they conceive of themselves.
On that point, the demonstrators have so far remained curiously mute: they have yet to articulate any wider demands or a sense of what a different society, or “real democracy” – a stock phrase of the Spanish movement – should be all about.
If today’s protest movements are based on righteous indignation, the lack of concrete demands should not be a problem: shared norms (and the policies that would follow from them) can still broadly be assumed.
But if they are being driven by rage, then a lack of clear goals might merely produce more anger and frustration, which in turn could eventually lead to physical violence and some kind of political nihilism.
This also means that political elites should try to understand and work with the message of indignation – and not cynically play up anger for electoral advantage.
It is not just ridiculous, but downright irresponsible, for example, that the British Labour Party intellectual Maurice Glasman now feels compelled to reveal the so-far hidden “angry insurgent side” of party leader Ed Miliband.
Elites – and protesters’ fellow citizens – should respond conscientiously and creatively to moral indignation, comprehending that it is ultimately about an affirmation of liberal democracy, and not about all-out revolution, let alone nihilism.
And they should seek to calm anger and defuse outrage, which can be a serious threat to liberal democracy.
The Last Interventionist
When Tony Blair, having procrastinated about his departure almost to the point of unreason, finally gives up the British premiership this month, it will be to the general relief not only of the British public as a whole, but also of the overwhelming majority of his own party.
After three terms in office, it could hardly be otherwise.
Despite the cliché, power does corrupt, and the late Blair era, like that of Margaret Thatcher before it, has been a squalid spectacle.
The paradox is that, for a man who wielded so much power for so long, it is unclear what domestic legacy, if any, Blair will leave.
Blairism was a mood, a style, but, in substantive terms, it represented no radical break with the Thatcherite legacy that New Labour repackaged so cleverly, and, in fairness, administered more humanely than the Iron Lady ever did.
Foreign policy is another story.
Whatever one thinks of him, in international affairs Blair was a leader of consequence.
Indeed, he can be plausibly described as being chiefly responsible for formulating and successfully propagating the doctrine of “humanitarian intervention.”
That idea captured the imagination of much of the elite of the developed world over the course of the 1990’s, and provided the moral rationale for the principal Western military interventions of the post-Cold War period, from Bosnia to Iraq.
Given how catastrophic the invasion of Iraq has turned out to be, it is hard even to remember when interventions on moral grounds – whether to thwart a dictator, as in the case of the Balkan wars, or to put an end to anarchic cruelty, as in the case of British intervention in Sierra Leone – seemed like a great advance in international affairs.
No longer would the powerful sit by idly while butchers like Slobodan Milosevic or Foday Sankoh slaughtered their own people.
Today, humanitarian intervention has become a dirty word for many of the same people who once believed in it.
Only American neo-conservatives, understandably grateful for his championing of the Iraq war and his ability to argue for it coherently and eloquently (unlike President Bush, who was and is unable to do either), are sorry to see Blair go.
But what may be lost is how many people did believe.
Blair still does.
In a recent interview, he replied to the question of the core of his foreign policy with two words: “liberal interventionism.”
The world may have moved on, chastened by the realization that interveners, even when intervening in the name of human rights, can be as barbaric as tin pot dictators.
But Blair, it seems, is not to be moved.
What was famously said of Thatcher – “the lady’s not for turning” – can be said of him as well.
In fairness to Blair, this is not mere stubbornness, as it seems to the case with Bush and his current and erstwhile minions, Donald Rumsfeld, Paul Wolfowitz, and, of course, Vice President Dick Cheney.
For Blair, there is a moral unity between the interventions in Kosovo and Iraq, both of which he presents as examples of a post-Westphalian idea that powerful states are called upon to defend suffering communities globally, including by military means.
To the charge that this idea is actually old-fashioned liberal imperialism updated for the post-Cold War world, Blair has consistently replied that what he called for in Kosovo, Sierra Leone, and Iraq are wars of “values, not interests.”
In his more petulant moments, he has asked why so many of those who saw no harm in NATO undermining Milosevic adamantly opposed the ouster of Saddam Hussein.
Actually, the answer is quite simple.
Blair’s vision of wars of values rather than interests has increasingly come to seem like a moral flag of convenience – in a way similar to the use of human rights by the rich world’s governments to justify their continued domination of institutions like the World Bank and the IMF.
The fact that NATO now considers its area of operations to legitimately extend all the way to the Hindu Kush has given pause even to many who once believed as fervently in humanitarian intervention as Blair still does.
Of course, Blair does not think of himself as a new imperialist.
On the contrary, as he has frequently made clear, he considers his critics immoral for not supporting liberal interventions.
But nor did nineteenth-century colonialists think of themselves as immoral.
Indeed, perhaps the greatest of British imperial conquerors in Africa, Cecil Rhodes, once defined imperialism as “philanthropy plus 5%.”
Take that, Dick Cheney and Halliburton.
Doubtless, we will learn more about Blair’s justifications for what he did, and further articulations of his interventionist creed, when he goes on the lecture circuit and, in due course, publishes his memoirs.
The pathos of his situation, though, is that no one is listening anymore.
Blair is the last interventionist.
Neither his successor, Gordon Brown, nor George W. Bush’s successor, whoever he or she turns out to be, will be able to mount another intervention similar to that in Kosovo, let alone Iraq.
Those pressing for military intervention in Darfur would probably say that this is a bad thing.
But, as they rail against the failure of the West to take action, they should remember why such action is impossible.
By putting liberal interventionism at the heart of his foreign policy, Tony Blair has made it radioactive – a political non-starter for at least a generation.
The Last of the Neo-Cons
NEW YORK – With George W. Bush’s presidency about to end, what will happen to the neo-conservatives?
Rarely in the history of American politics has a small number of bookish intellectuals had so much influence on foreign policy as the neo-cons had under Bush and his vice president, Dick Cheney, neither of whom are noted for their deep intellectual interests.
Most presidents hope to attach some special meaning to their time in office.
The terrorist attacks of September 11, 2001, gave neo-con intellectuals the chance to lend their brand of revolutionary idealism to the Bush/Cheney enterprise.
Writing for such journals as The Weekly Standard , and using the pulpits of think tanks, such as the American Enterprise Institute, neo-cons offered an intellectual boost to the invasion of Iraq.
The logic of the American mission to spread freedom around the globe – rooted, it was argued, in US history since the Founding Fathers – demanded nothing less.
Objections from European and Asian allies were brushed away as old-fashioned, unimaginative, cowardly reactions to the dawn of a new age of worldwide democracy, enforced by unassailable US military power.
The neo-cons will not be missed by many.
They made their last stand in the presidential election campaign of John McCain, whose foreign policy advisers included some prominent members of the fraternity (most were men).
None, so far, seem to have found much favor in the ranks of Barack Obama’s consultants.
Such clout as the neo-cons wielded under Bush is unusual in the political culture of the US, which is noted for its skepticism toward intellectual experiments.
A certain degree of philistinism in politics is not a bad thing.
Intellectuals, usually powerless themselves outside the rarified preserves of think tanks and universities, are sometimes too easily attracted to powerful leaders, in the hope that such leaders might actually carry out their ideas.
But wise leaders are necessarily pragmatic, because messy reality demands compromise and accommodation.
Only zealots want ideas to be pushed to their logical extremes.
The combination of powerful leaders with authoritarian bent and intellectual idealists often results in bad policies.
This is what happened when Bush and Cheney took up the ideas promoted by the neo-cons.
Both had previously been pragmatic men.
Bush first ran for office as a cautious conservative, prepared to be moderate at home and humble abroad.
Cheney was better known as a ruthless bureaucratic operator than a man of bold ideas.
But he was obsessed with the notion of expanding the executive powers of the president.
The combustible mix of autocratic ambition and misguided idealism took hold soon after the terrorist attacks in September 2001.
Even if, by some miracle, Iraq were to evolve into a stable, harmonious, liberal democratic state, the price already paid in (mostly Iraqi) blood and (mostly American) treasure is already too high to justify the kind of revolutionary military intervention promoted by the neo-cons.
Another casualty of neo-conservative hubris might be the idea of spreading democracy itself.
The very word “democracy,” when voiced by US government spokesmen, has become tainted by neo-imperialist connotations.
Similar things have happened before, of course.
The idealism of Japanese intellectuals in the 1930’s and early 1940’s was partly responsible for Japan’s catastrophic war to “liberate” Asia from Western imperialism.
The ideal of pan-Asian solidarity in a common struggle for independence was not a bad one; in fact, it was commendable.
But the idea that it could be enforced by the Imperial Japanese Army running amok through China and Southeast Asia was disastrous.
Socialism, too, was a brave and necessary corrective to the social inequalities that emerged from laissez-faire capitalism.
Watered down by the compromises without which liberal democracies cannot thrive, socialism did a great deal of good in Western Europe.
But attempts to implement socialist or communist ideals through force ended in oppression and mass murder.
This is why many Central and Eastern Europeans now view even social democracy with suspicion.
Even as Barack Obama is worshipped in Western Europe, many Poles, Czechs, and Hungarians think he is some kind of socialist.
The neo-cons, despite their name, were not really conservatives at all.
They were radical opponents of the pragmatic approach to foreign strongmen espoused by people who called themselves “realists.”
Even though the arch-realist Henry Kissinger endorsed the war in Iraq, his brand of realpolitik was the primary target of neo-con intellectuals.
They believed that aggressive promotion of democracy abroad was not only moral, and in the American tradition, but in the national interest as well.
There is a core of truth in this assertion.
Liberals, too, can agree that Islamist terrorism, for instance, is linked to the lack of democracy in the Middle East.
Realism, in the sense of balancing power by appeasing dictators, has its limits.
Democracy must be encouraged, wherever possible, by the most powerful democracy on earth.
But revolutionary wars are not the most effective way to do this.
What is needed is to find a less belligerent, more liberal way to promote democracy, stressing international cooperation instead of blunt military force.
Obama is unlikely to repeat the mistakes of the neo-cons.
But, in order to succeed, he will have to save some of their ideals from the ruins of their disastrous policies.
The Last of the Tibetans
NEW YORK &#45;&#45; Are the Tibetans doomed to go the way of the American Indians?
Will they be reduced to nothing more than a tourist attraction, peddling cheap mementos of what a once-great culture?
That sad fate is looking more and more likely, and the Olympic year already has been soured by the Chinese government’s efforts to suppress resistance to it.
The Chinese have much to answer for, but the fate of Tibet is not just a matter of semi-colonial oppression.
It is often forgotten that many Tibetans, especially educated people in the larger towns, were so keen to modernize their society in the mid-twentieth century that they saw the Chinese Communists as allies against rule by holy monks and serf-owning landlords.
In the early 1950’s, the young Dalai Lama himself was impressed by Chinese reforms and wrote poems praising Chairman Mao.
Alas, instead of reforming Tibetan society and culture, the Chinese Communists ended up wrecking it.
Religion was crushed in the name of official Marxist atheism.
Monasteries and temples were destroyed during the Cultural Revolution (often with the help of Tibetan Red Guards).
Nomads were forced to live in ugly concrete settlements.
Tibetan arts were frozen into folkloric emblems of an officially promoted “minority culture.”
And the Dalai Lama and his entourage were forced to flee to India.
None of this was peculiar to Tibet.
The wrecking of tradition and forced cultural regimentation took place everywhere in China.
In some respects, the Tibetans were treated less ruthlessly than the majority of Chinese.
Nor was the challenge to Tibetan uniqueness typical of the Communists.
General Chiang Kai-shek declared in 1946 that the Tibetans were Chinese, and he certainly would not have granted them independence if his Nationalists had won the civil war.
If Tibetan Buddhism was severely damaged, Chinese Communism has barely survived the ravages of the twentieth century, either.
But capitalist development has been even more devastating to Tibetan tradition.
Like many modern imperialist powers, China claims legitimacy for its policies by pointing to their material benefits.
After decades of destruction and neglect, Tibet has benefited from enormous amounts of Chinese money and energy to modernize the country.
The Tibetans cannot complain that they have been left behind in China’s transformation from a Third World wreck to a marvel of supercharged urban development.
But the price in Tibet has been higher than elsewhere.
Regional identity, cultural diversity, and traditional arts and customs have been buried under concrete, steel, and glass all over China.
And all Chinese are gasping in the same polluted air.
But at least the Han Chinese can feel pride in the revival of their national fortunes.
They can bask in the resurgence of Chinese power and material wealth.
The Tibetans, by contrast, can share this feeling only to the extent that they become fully Chinese.
If not, they can only lament the loss of their own identity.
The Chinese have exported their version of modern development to Tibet not only in terms of architecture and infrastructure, but also people – wave after wave of them: businessmen from Sichuan, prostitutes from Hunan, technocrats from Beijing, party officials from Shanghai, and shopkeepers from Yunnan.
The majority of Lhasa’s population today is no longer Tibetan.
Most people in rural areas are Tibetan, but their way of life is not likely to survive Chinese modernization any more than the Apaches’ way of life survived in the United States.
Since Chinese is the language of instruction at Tibetan schools and universities, anyone who wishes to be more than a poor peasant, beggar, or seller of trinkets must conform to Chinese norms, that is, become Chinese.
Even Tibetan intellectuals who want to study their own classical literature must do so in Chinese translation.
Meanwhile, Chinese and other foreign tourists dress up in traditional Tibetan dress to have their souvenir pictures taken in front of the Dalai Lama’s old palace.
Religion is now tolerated in Tibet, as it is in the rest of China, but under strictly controlled conditions.
Monasteries and temples are exploited as tourist attractions, while government agents try to ensure that the monks stay in line.
As we know from the recent events, they have not yet been entirely successful; the resentment among Tibetans runs too deep.
In the last few weeks, that resentment boiled over, first in the monasteries, and then in the streets, against the Han Chinese migrants, who are both the agents and main beneficiaries of rapid modernization.
The Dalai Lama has repeatedly said that he does not seek independence.
And the Chinese government is certainly wrong to blame him for the violence.
However, as long as Tibet remains part of China, it is hard to see how its distinct cultural identity can survive.
The human and material forces arrayed against Tibet are overwhelming.
There are too few Tibetans, and too many Chinese.
Outside Tibet, however, it is a different story.
If the Chinese are responsible for extinguishing the old way of life inside Tibet, they may be unintentionally responsible for keeping it alive outside.
By forcing the Dalai Lama into exile, they have ensured the establishment of a Tibetan diaspora society, which might well survive in a more traditional form than would have been likely even in an independent Tibet.
Diaspora cultures thrive on nostalgic dreams of return.
Traditions are jealously guarded, like precious heirlooms, to be passed on as long as those dreams persist.
And who is to say that such dreams will never come true?
The Jews managed to hang on to theirs for almost 2,000 years.
The Last Straw for Zimbabwe?
The solidarity among African leaders that has sustained Robert Mugabe's brutal regime in Zimbabwe may be on the verge of disintegrating.
Mugabe's decision to shut down Zimbabwe's only independent newspaper, The Daily News , could prove to be crucial in weakening the support that he still enjoys in the region.
Three years ago a truck packed with explosives careened into the building housing the newspaper.
Its printing press was destroyed.
With the assistance of foreign donors, The Daily News acquired a new press and managed to keep publishing a first-rate newspaper.
Despite government attempts since then to shut the paper down-arresting and even torturing some of its staff, as well as tampering with its circulation and newsprint supply- The Daily News adhered to its slogan of "telling it like it is."
As Zimbabwe plunged into economic chaos and Mugabe stepped up his repression, circulation, once around 100,000 a day, fell by roughly a third.
Last month, Mugabe's riot police, armed with AK-47 rifles, raided the paper, halting production and looting much of its equipment-though not the new printing press, which was too big to carry away.
The purported reason for closing The Daily News is that the paper refused to register under the bizarrely named Access to Information and Protection of Privacy Act (AIPPA) of 2002 on the grounds that it violates Zimbabwe's constitutional guarantee of freedom of expression.
Under the AIPPA, reporters are required to file their home addresses with the government; presumably this is what the word "privacy" in the law's title means.
Reporters may face criminal prosecution for publishing inaccurate information; apparently, this is the basis for the reference to "access to information."
At least a dozen journalists have been arrested under AIPPA, including the only foreign correspondent permanently based in the country, Andrew Meldrum of the British newspaper The Guardian .
Meldrum was subsequently deported.
The Mugabe regime has committed outrage after outrage.
Its catalogue of crimes includes: stealing the 2002 elections that enabled Mugabe to hold on to power; torturing and murdering supporters of the opposition Movement for Democratic Change; transformation of a fertile, prosperous country once considered Africa's breadbasket into a place where half the population barely survives on foreign food handouts; and, as exemplified by its attacks on The Daily News , the suppression of critical voices.
Yet Zimbabwe's neighbors, particularly those in Southern Africa, have defended President Mugabe.
In late August, the heads of state of thirteen members of the Southern African Development Community (SADC), including Mugabe and President Thabo Mbeki of South Africa, the leading regional power, met in Dar es Salaam, Tanzania, to consider the challenges before them.
Among the 54 paragraphs of the Summit Final Communiqué, two dealt with Zimbabwe.
One proclaimed "solidarity with Zimbabwe... to encourage and sustain the positive developments that are taking place."
The other condemns "the Commonwealth, the European Union (EU), and the United States of America (US) sanctions as they hurt not only ordinary Zimbabweans but also have profound social and economic implications on the region as a whole."
The suggestion that international sanctions are a cause of Zimbabwe's economic woes is ludicrous, as the measures that have been imposed have nothing to do with trade.
Indeed, it is the governments cited in the communiqué that are donating the food that keeps Zimbabweans alive.
The targeted sanctions address such matters as the foreign bank accounts of Mugabe and his associates and their right to travel to Europe and the US on holidays and shopping trips.
Yet the closing of The Daily News seems to have prompted the first signs that things may be changing.
Nigeria's President Olusegun Obasanjo responded to the paper's closure by announcing that Mugabe would not be invited to the December meeting of the Commonwealth Heads of Government Meeting scheduled to take place in his capital, Abuja.
President Mbeki reacted to Obsanjo's announcement with what South Africa's business weekly, The Financial Mail , described as "surprise and consternation."
Much depends on whether Africa follows the path now being charted by Obasanjo or whether the continent's leaders stick to the line of SADC and Mbeki.
It is not only the future of Zimbabwe that is at stake.
Also at issue is whether the rest of the world takes seriously the commitments to democracy and good governance in the New Economic Partnership for Africa Development (NEPAD) and the Constitutive Act for the new African Union.
Mbeki and Obasanjo took the lead in making these commitments.
Zimbabwe tests whether they will deliver.
The Lawless Sheriff
I usually limit myself in my newspaper commentaries to my area of expertise, economics.
But as an American, I am so horrified by what has happened in my country - and what my country has done to others over the past two years - that I feel I must speak out.
I believe American abuses of human rights and the canons of civilized peoples that have come to light in Iraq, Afghanistan, and Guantanamo Bay, and the more horrendous abuses that almost surely will come to light later, are not merely the act of aberrant individuals.
They are the result of a Bush administration that has trampled on human rights and international law, including the Geneva conventions, and tried to undermine basic democratic protections, ever since it took office.
Sadly, torture and other atrocities do happen in war - and the Iraq war is certainly not the only time torture has been used - but I believe that the Bush administration is responsible for creating a climate in which international law and democratic processes have been disregarded.
When Vice President Dick Cheney spoke at the last World Economic Forum in Davos, Switzerland, he was asked how the administration could justify what was taking place in Guatanamo Bay, where prisoners are being kept without being charged and without counsel.
Cheney's answer was jarring: he said that because the detainees were captured in Afghanistan where they had been trying to kill US troops, the rules regarding prisoners of war did not apply.
Many in the audience were shocked by his remarks, but Cheney seemingly failed to grasp how appalled his audience was.
They were not concerned with legalisms, about whether, technically, the Geneva conventions did or did not apply.
They were concerned about basic canons of human rights.
Among the most appalled were those who had recently struggled to achieve democracy, and were continuing to fight for human rights.
The Bush administration has also trampled on citizens' basic right to know what their government is doing, refusing, for example, to disclose who was on the task force that shaped its energy policy - though one really doesn't need that information to see that it was shaped by the oil industry and for the oil industry.
When abuses occur in one area, they can quickly spread to others.
For weeks the Bush administration kept the report on abuses in Iraqi prisons from the American people by pressuring CBS not to air the photographs in its possession.
Similarly, it was only through the use of the Freedom of Information Act that the dramatic photographs of the coffins of US soldiers coming home were finally made public.
The American media have not emerged unscathed.
Why did CBS refuse to release information of vital concern to the public?
The abuses should have been covered months ago.
Amnesty International held a press conference on the topic in Baghdad in July 2003.
And while the pictures and the story of Abu Ghraib ran on front pages in Europe and elsewhere, it was at first buried in many American newspapers, including leaders like The New York Times .
Were they worried about offending the Bush administration?
Defenders of President Bush, Secretary of Defense Donald Rumsfeld, and the military emphasize the difficulty of the task they face in Iraq, human frailty and fallibility, and the fact that there are always a few "rotten apples."
America's system of government, however, recognizes all of this, and attempts to guard against it.
Had the letter and spirit of these safeguards been followed, we would not have been in this war at all, or at least not alone.
Yes, it is conceivable that Bush did not have accurate information about whether Iraq possessed weapons of mass destruction.
But under the international rules that America is supposed to follow, wars should not be undertaken based on the judgment of one individual and his cabal.
The judgment of the world was that the evidence was not there - and the world was right.
Had Bush only gone along with the democratic processes enshrined in the UN Charter, the trauma of Iraq need not have occurred.
We know that individuals and institutions make mistakes.
Such mistakes are all the more likely in times of stress.
We have to put in place rules and procedures, safeguards, a system of due process, to make it more likely that justice is done; and in times of stress it is all the more important that we respect these safeguards.
It is clear that the checks needed to prevent abuse in the Iraqi and Afghan prisons were not in place, and that the Bush Administration had created a climate that made such abuses more likely, if not inevitable.
More fundamentally, something has gone wrong with the system of checks and balances in America's democracy.
Congress and the press should have checked the president.
The international community tried.
Unfortunately, the global system of international law and governance remains too weak to prevent the determined misbehavior of the president of the world's most powerful country if he is hell bent on starting a war on his own.
It is at moments such as these that we realize how thin a veneer our civilization may be.
As statements of shared values and principles, the UN Charter, the Declaration of Human Rights, and the Geneva conventions are great achievements.
Whether they have the force of law is not the point; they provide guidance for civilized behavior.
Each of them was motivated by the horrific lessons of the past.
Let us hope that, emerging out of today's scandals, there will be a renewed commitment to live up to these ideals and to strengthen the institutions that were designed to enforce them.
The Lebanese Labyrinth
Lebanon is poised to hold a presidential election that none of its contending factions – indeed, none of the rival parties in the region – can afford to lose.
Let’s start with Syria.
In 2005, President Bashar Assad’s regime was forced to withdraw its army from Lebanon, following the assassination of former Lebanese Prime Minister Rafiq Hariri.
Syria is widely believed to have been responsible for the crime, and domestic Lebanese and international pressure helped force Syria’s pullout.
Yet in a speech soon thereafter, Assad warned that nothing could sever the Syrian-Lebanese relationship.
Assad knows that the election of a president who bolsters Lebanon’s sovereignty and independence would make Syria’s return difficult – and Assad, as even his allies privately admit, wants nothing less.
Indeed, it was his decision to extend, unconstitutionally, the term of the reliably pro-Syrian Emile Lahoud as Lebanon’s president in 2004 that triggered the political crisis leading to Hariri’s murder and the emergence of a coalition of anti-Syrian groups, which included many former Syrian allies.
Assad is particularly worried about the creation of a mixed Lebanese-international court to try suspects in the Hariri assassination.
The court was approved under Chapter VII of the United Nations Charter and will be situated in Holland.
Once the trial begins, Syria may find itself in the dock.
Closely allied with Syria is Hezbollah, which presides over a virtually autonomous mini-state in south Lebanon.
Hezbollah has an armed militia that is far more effective than Lebanon’s national army, and has openly rejected UN Security Council resolutions asking for its disarmament.
Hezbollah’s priority is to maintain the military capacity to fight Israel, and also to play a pivotal role in the broader regional rivalry between Iran, Syria, Hezbollah, and Hamas on one side, and the United States, the Sunni-led mainstream Arab states, the Mahmoud Abbas-led Palestinian Authority, and Syria’s Lebanese foes on the other.
But there are constraints on Hezbollah.
The party’s leaders know that any crisis in Lebanon could provoke a Sunni-Shiite conflict.
Hezbollah’s patrons in Iran, like the party itself, realize that the consequences would be disastrous.
Iran would find itself the bogeyman of the Arab world’s Sunnis, while Hezbollah could be swallowed up by another debilitating Lebanese civil war.
In the coming weeks, Hezbollah will have to calculate at several levels.
It will, above all, take Syrian priorities into consideration.
If Assad decides to scuttle the presidential election in order to strengthen Syria’s hold in Beirut, then the party will go along.
But a political vacuum in Lebanon only makes violence more likely, which Hezbollah doesn’t want.
On the other side, interests vary.
Syria’s Lebanese enemies know that the election’s outcome will determine their fate.
Given that several prominent critics of Syria have been killed since 2005, there is little room for compromise.
The problem is that the anti-Syrian coalition, known as “March 14,” is not yet united around a single presidential candidate.
That said, the leaders of March 14, which controls a parliamentary majority, will block any step that revives Syrian domination.
The US has made it clear that it will not accept a president close to Hezbollah or Syria.
While America will not bargain with Syria over the election, it would probably accept a candidate with whom Syria feels comfortable, provided he is acceptable across the political spectrum.
The US must also calculate what the Europeans will accept.
France, Italy, and Spain all have large contingents in the UN force in south Lebanon that was expanded after the summer 2006 war.
No election, they fear, would endanger their soldiers.
This makes them vulnerable to Syrian leverage, and is why they may be more amenable to dealing with Syria on the presidency.
Another key actor is Saudi Arabia, whose relations with Syria are at an all-time low.
The Saudis, deeply disturbed by the Syrian-Iranian alliance, worry that re-imposition of Syrian supremacy in Lebanon, and with it the strengthening of Iranian and Shiite power there, would threaten the Kingdom itself.
But, as the Saudis also want Syria to be included in King Abdullah’s regional peace plan, and with the US planning to hold a regional peace conference in November, they are not looking for an open-ended confrontation with Assad.
These clashing interests will be played out after September 25, when the two-month period during which Lebanon’s parliament must elect a president begins.
No side has a yearning for war, which is why compromise solutions are possible.
But what would such a compromise look like?
One idea – to elect a candidate with whom everyone can live – would likely produce a weak president.
So would an agreement by all sides to elect an interim president for two years, buying time until the regional balance of power changes or solidifies.
Whatever the outcome, the choice of Lebanon’s next president will emerge from a political maelstrom – one that he will almost certainly be powerless to allay.
The Lebanon Proxy
Over the past few weeks, Lebanese politicians from groups as diverse as Hezbollah and the Christian Lebanese Forces have been meeting intermittently in what has been dubbed a “National Dialogue.”
Their primary objective is to forge a consensus for Lebanon’s future in the wake of the withdrawal of Syrian forces last year.
But what their dialogue has exposed is how much Lebanese politics continues to be shaped by external forces.
The Syrian regime of President Bashar Assad retains huge influence over key levers of the Lebanese state, including the security and intelligence apparatus, the army, and the judiciary – not to mention an alliance with the militarily powerful Hezbollah.
Though Syrian soldiers may have withdrawn a year ago, Assad’s regime never got over its departure from Lebanon, and it seeks to re-impose some form of hegemony over the country.
Syria’s stance is complicated by an ongoing United Nations investigation that accuses it of involvement in the February 14, 2005, assassination of former Prime Minister Rafiq Hariri.
While Syria’s Lebanese allies have called for improved ties between the two countries, the Hariri murder makes this doubtful.
For the moment, the Lebanese parties have agreed not to allow their territory to be used as a base for any presumed threats to the Syrian regime.
At the same time, Egypt and Saudi Arabia want desperately to avoid the downfall of Assad’s regime.
Publicly, they support the UN’s investigation, but privately they have encouraged, even pressured, the Lebanese government to lower the heat on Syria.
Lebanese adversaries of Syria have resisted such demands, but the Egyptian and Saudi stance highlights how, for reasons of self-interest, Arab regimes rarely like to see fellow despots fall.
Indeed, the Egyptian and Saudi attitude contrasts starkly with that of two Western powers with extensive influence in Lebanon, the United States and France, which support the UN inquiry wherever it might go.
Nevertheless, all four states agree that Syrian influence in Lebanon must be curbed, and all, in theory, approve of Hezbollah’s disarmament – required by UN Security Council resolution 1559 – even if they differ over how to bring it about.
Another regional issue shaping Lebanese domestic politics is the ongoing violence between Sunnis and Shiites in Iraq.
Lebanon’s Sunnis and Shiites – the country’s two most powerful communities, owing mostly to their demographic weight and the backing they enjoy from elsewhere in the region – are nowhere near the point of mutual violence, but there has been palpable political tension recently.
Hariri was the leading Sunni politician, and after his murder both communities found themselves in opposing corners with respect to Syria.
Within Lebanon, the Sunni-Shiite divide reflects broader regional frictions between the Sunni-majority Arab states, particularly Saudi Arabia, which backs Saad Hariri, the late prime minister’s son, and Iran, which supports Hezbollah.
The Saudis fear that Sunni-Shiite discord, spreading from Iraq across the Arab world, might harm the kingdom, whose Shiites are concentrated in the oil-rich eastern part of the country.
That is why Riyadh has encouraged Hariri to keep lines open to Hezbollah, the leading Shiite force.
Their sectarian anxieties aside, the Saudis and Egyptians fear that a nuclear Iran might secure Shiite dominance in the region.
Grafted onto this is America-Iranian enmity, fed by the nuclear issue, but also by disagreement in Iraq.
The Arab states have found themselves uncomfortably caught in the middle, as have the Lebanese, who are alarmed that they may pay the price for any American or Israeli attack against Iran’s nuclear facilities, because in either case, Hezbollah may retaliate against Israel from South Lebanon.
Inside Lebanon, Hezbollah has interpreted UN demands for its disarmament as a plot by the Bush administration to weaken the party, and as a means of affirming American supremacy in the region.
Hezbollah has refused to disarm in the face of what it has called the Israeli threat, although its definition of this threat has shifted frequently enough to cast doubt on whether it would ever be willing to surrender its weapons.
More recently, Hezbollah agreed to place the issue on the domestic negotiating agenda – perhaps because Iran doesn’t want it to be a source of national dissension – but it is doubtful that genuine disarmament will ensue, at least for now.
Finally, as they maneuver around the shoals of regional and international affairs, the Lebanese must also consider domestic American politics.
Whatever one thinks about the war in Iraq, the US presence there has helped Lebanon to ward off Syrian efforts to reverse its withdrawal, as well as Arab efforts to compel the Lebanese to compromise with a regime that loathes Lebanese sovereignty.
A US administration in full withdrawal from Iraq would likely become indifferent to what happens in Lebanon.
Who but Syria and Iran would benefit from that?
Such an outcome might satisfy some parts of Lebanese society, particularly Hezbollah.
But most Lebanese remain committed to seeing their country living in peace, free from the isolation and militancy that are the hallmarks of Iran and Syria.
Unfortunately, Lebanon has always been buffeted by its surroundings, and the country could once again become an arena for destructive regional conflicts, regardless of what the Lebanese prefer.
The Lebanon War One Year Later
LONDON &#45;&#45; It is now almost one year since the European Union committed to stabilize Lebanon following last summer’s war.
With its decision to send thousands of soldiers to Lebanon to implement United Nations Security Council Resolution 1701, the EU took its boldest step yet in creating a common foreign and security policy.
But it remains an open question as to whether the EU will actually be able to stabilize the most fractured polity in the most dangerous area of conflict in Europe’s immediate neighborhood.
The Israel-Hezbollah war of 2006 reminded the Union, once again, that its strategic interests do not always coincide perfectly with those of the United States.
Because the Bush administration took a “hands off” approach to the Israel-Hezbollah war in south Lebanon, and given the military straitjacket the US finds itself in because of the Iraq war, the EU had to take the lead.
The EU remains – for now – relatively uncontaminated by America’s disintegrating reputation in the Middle East.
But the Union could see its reputation worsen if it allows its commitment to Lebanon to become part of the emerging US strategy of isolating Iran by hardening today’s regional Sunni-Shia divisions.
To avoid this fate, the EU’s commitment in Lebanon needs to be supplemented with a nuanced political strategy that seeks to avoid isolating Lebanon’s long suppressed Shia population.
The threats emanating from the Middle East are diverse: regional conflicts, totalitarian religious ideologies (mainly led by Shia Iran and Wahhabi Saudi Arabia), terrorism, nuclear armament programs, obstacles to modernization, and unstable regimes.
All of these affect Lebanon, and are aggravated by the country’s own peculiar socio-political dynamics – i.e., its Maronite, Sunni, and Shia divisions.
The EU’s mission in Lebanon is risky.
Neither Hezbollah nor Syria, let alone Iran, has an interest in stability without some say in creating it.
Resolution 1701 presupposes – in addition to separating the combatants – enforcement of the internal and external sovereignty of Lebanon’s elected government, without saying how this is to be accomplished given Hezbollah’s superior military power relative to the government’s forces.
In effect, the resolution envisaged reversing Hezbollah’s gains and ignores the deep changes that have occurred in Lebanese society, most importantly the Shia community’s growing self-confidence.
Attempting to politically isolate and disarm Hezbollah is a task that the EU-led UN force cannot accomplish and should not attempt, for it would mean war, with Syria and Iran in the background.
But were the EU to resign itself to mere observer status in Lebanon, the UN and Europe would lose all credibility.
An armed peace has held for a year. But an armed peace never lasts.
The mission must therefore walk a fine line to bridge the country’s communal divisions, which will be possible only with a clear understanding of Lebanon and the wider Middle East.
The road toward peace rather than ceasefire in Lebanon precludes the EU’s participation in America’s emerging “containment” strategy vis-à-vis Iran, at least in its current form, which is based on organizing the resistance of Sunni states to Shia influence.
For the Shia are the biggest of Lebanon’s three religious communities.
They also form a majority in some Gulf states, as well as in the oil-rich regions of Saudi Arabia.
So a neat Shia-Sunni dividing line cannot be drawn.
Europe should instead push for new constitutional and institutional solutions that ensure the Shia a legitimate role in the political arrangements of Lebanon, Saudi Arabia, and the Gulf states – all places where they now regard themselves as third-class citizens.
Giving the Shia a real stake in the nations in which they live is the only way to satisfy the craving for empowerment that they feel after so many years of suppression.
Europe must also recognize why leaders like Hezbollah’s Sheikh Hasan Nasrullah are popular.
Anti-Americanism and an aggressive foreign policy are, of course, part of the allure of men like Nasrullah.
But what has really allowed Hezbollah (and Hamas, for that matter) to win elections and cement support is their ability to provide education, health, and other social services, particularly to the poor.
The US and the political groups that it tends to support in the region, by contrast, offer very little in this regard.
The Bush administration stresses democracy and human rights, which is a good agenda as far as it goes.
But it is an agenda for the region’s “haves,” not its “have nots.”
In places like south Lebanon, which suffer from deep social cleavages and inequalities, free elections and free trade hold little resonance for people who are impoverished and marginalized.
If the EU mission is to compete successfully against Lebanon’s Islamists and populists, it must start thinking seriously about a social agenda that appeals to the poor.
Of course, no one wants to break budgets or create dependency.
But healing Lebanon’s wounds requires finding the means to offer alienated Shia what they want and need most, and not what outsiders think they should want or need.
The Left is in the Streets
PARIS – The riots that have rampaged across Greece may have many causes, but one that is rarely mentioned is the fracturing of the Greek left into George Papandreou’s traditional socialist party, PASOK, and an increasingly radicalized faction that refuses all accommodation with either the European Union or modern economics.
To varying degrees, this divide is paralyzing Socialist parties across Europe.
That the traditional left is so inert in the midst of today’s economic crisis is more than strange. Instead of thriving on renewed doubts about capitalism, Europe’s Socialist parties have failed to make any serious political inroads.
In countries where they hold power, such as Spain, they are now very unpopular.
Where they are in opposition, as in France and Italy, they are in disarray – as are Germany’s Social Democrats, despite their being part of the ruling Grand Coalition.
Even Sweden’s out-of-power Socialists, the country’s dominant party for a century, have failed to capitalize on the crisis.
The United Kingdom may be the exception, though the pro-market Labour Party shaped by Tony Blair may not count as a party of the left anymore.
European socialists have failed to address the crisis cogently because of their internal divisions.
Born anti-capitalist, these parties all (to greater and lesser degrees) came to accept the free market as the foundation of the economy.
Moreover, since 1991 and the collapse of the Soviet system, the left has lacked a clear model with which to oppose capitalism.
But, despite paying lip service to the market, the European left remains torn by an inner contradiction between its anti-capitalist origins and its recent conversion to free-market economics.
Is the present crisis a crisis of capitalism or just a phase of it?
This controversy keeps left-wing intellectuals, pundits, and politicians busy on television talk shows and in café debates across Europe.
As a result, a struggle for power has erupted.
In France and Germany, a new far left – composed of Trotskyites, communists, and anarchists – is rising from the ashes to become a political force again.
These rejuvenated ghosts take the form of Oskar Lafontaine’s Left Party in Germany, as well as various revolutionary movements in France; one of them has just named itself the Anti-Capitalist Party.
Its leader, a onetime postman, says that in the present circumstances, he is part of a “Resistance,” a word resonant of the anti-fascist struggles of the Hitler era.
The actual alternative to capitalism that this far left seeks is anyone’s guess.
In the face of this new radicalism, which is attracting some traditional Socialists, what are the more established socialist leaders to do?
When they bend towards the Trotskyites, they lose “bourgeois” supporters; when they seek the middle ground, like the SDP in Germany, the Left Party grows.
As a consequence of this dilemma, Socialist parties across Europe seem paralyzed.
And they are.
Indeed, it is hard to find any persuasive analysis of today’s crisis from the left beyond anti-capitalist slogans.
The Socialists blame greedy financiers, but who does not?
In terms of remedies, the Socialists do not offer anything more than the Keynesian solutions that are now being proposed by the right.
Since George W. Bush showed the way towards bank nationalization, vast public spending, industrial bailouts, and budget deficits, the Socialists have been left without wiggle room.
French President Nicolas Sarkozy tries to rekindle growth through the protectionist defense of “national industries” and huge investments in public infrastructure, so what more can Socialists ask for?
Moreover, many Socialists fear that excessive public spending may trigger inflation, and that their core constituencies will become its first victims.
When the right has turned statist and Keynesian, the free market’s true believers are marginalized, and old-style anti-capitalism seems archaic, one wonders what Socialism in Europe can possibly mean?
The future of European Socialism is also hampered, strangely, by the EU.
To build Socialism in one country is impossible nowadays because all of Europe’s economies are now interdependent.
The last leader to try go-it-alone socialism, French President François Mitterrand in 1981, surrendered to the European institutions in 1983.
These institutions, based on free trade, competition, limited budget deficits, and sound money, are fundamentally pro-market; there is little leeway within them for doctrinaire Socialism.
This is why the far left is anti-European.
European Socialists are also finding it hard to distinguish themselves in foreign affairs.
They used to be reflexively pro-human rights, much more so than conservative parties.
But ever since George W. Bush included these ideas as part of his democracy-promotion campaigns, European Socialists have become more wary of them.
Moreover, without the Soviet Union, European socialists have few foreign causes to take to heart: few understand Putin’s Russia, and today’s totalitarian-capitalist China is too far and too strange.
And, since Barack Obama’s election, anti-Americanism is no longer a viable way to garner support.
The good old days when Trotskyites and Socialists found common ground in bashing the United States are over.
The ideological weakness and division of the left will not, of course, exclude them from power.
It can cling to office, as José Zapatero is doing in Spain and Gordon Brown is doing in the UK.
The left may ultimately win general elections elsewhere if the new Keynesian right proves unable to end the crisis.
But whether in opposition or in power, the Socialists have no distinct agenda.
The lesson from Greece, however, is that what European Socialists should fear most is the far left’s taste and talent for disruption.
For the hollowing out of Socialism has a consequence.
To paraphrase Marx, a specter is haunting Europe – the specter of chaos.
Austerity in Small Places
BRUSSELS – Interest in small countries’ economic policies is usually confined to a small number of specialists.
But there are times when small countries’ experiences are interpreted around the world as proof that a certain policy approach works best.
Nowadays, Greece, the Baltic states, and Iceland are often invoked to argue for or against austerity.
For example, the Nobel laureate economist Paul Krugman argues that the fact that Latvian GDP is still more than 10% below its pre-crisis peak shows that the “austerity-cum-wage depression” approach does not work, and that Iceland, which was not subject to externally imposed austerity and devalued its currency, seems to be much better off.
Others, however, have noted that Estonia pursued strict austerity in the wake of the crisis, avoided a financial crisis, and is now growing again vigorously, whereas Greece, which delayed its fiscal adjustment for too long, experienced a deep crisis and remains mired in recession.
Both sides in these disputes usually omit to mention the key idiosyncratic characteristics and specific starting conditions that can make direct comparisons meaningless.
For starters, Latvia, like the other Baltic states, was running an enormous current-account deficit when the crisis started.
This implies that the pre-crisis level of GDP simply was not sustainable, as it required capital inflows in excess of 20% of GDP to finance outsize consumption and construction booms.
Thus, when the inflows stopped at the onset of the financial crisis, it became inevitable that GDP would contract by double-digit percentages.
Seen in this light, it is not at all surprising that Latvia’s GDP is now still more than 10% below its pre-crisis peak; after all, no country can run a current-account deficit of 25% of GDP forever.
Any comparison of the Baltics with the Great Depression (or the United States today) is thus meaningless.
The Baltics simply had to adjust to a sudden stop in external financing.
That was not the problem of the US during the 1930’s; nor is it America’s problem today.
A better way to judge post-crisis performance is to look at the output gap –&#160;that is, actual GDP relative to potential GDP.
According to a European Commission estimate, Latvian GDP was almost 14% above potential at the peak of the boom, then fell to 10% below potential when the boom went bust.
The recovery, however, was equally rapid, with GDP now back to potential (albeit below the unsustainable peak of the boom).
Latvia’s government increased taxes during the bust to keep revenues roughly constant as a share of GDP, but a sizeable fiscal deficit emerged nonetheless as social-security expenditure, such as unemployment benefits, soared while demand and output collapsed.
With a V-shaped recovery, however, this expenditure fell again, reducing the deficit rapidly.
The recovery could only be partial, because the previous level of output was unsustainable, but it was enough to allow the government to balance its books again.
Thus, Latvia today enjoys a sustainable fiscal position, with output close to its potential and growing.
Austerity might have worsened the slump temporarily, but it did deliver fiscal sustainability without permanent damage to the economy.
By contrast, output in Greece, which was slow to adopt austerity, is still 12% below its estimated potential and continues to fall.
Does Iceland constitute a counter-example to Latvia?
After all, its GDP fell much less, although it ran similarly large current-account deficits before the crisis – and ran much larger fiscal deficits for longer.
In contrast to Latvia, Iceland let its currency, the krona, devalue massively.
But, the devaluation was much less important than is widely assumed.
While exports did indeed perform very well, Iceland’s main exports are natural resources (fish and aluminum), demand for which held up well during the post-2008 global crisis.
That sustained demand provided an important stabilizer for the domestic economy, which the Baltic states did not have.
Indeed, Latvia was particularly hard hit by the slump in global trade in 2008-2009, given its dependence on exports.
Iceland’s superior economic performance should thus not be attributed to the devaluation of the krona, but rather to global warming, which pushed the herring farther North, into Icelandic waters.
Nor is Iceland a poster child for the claim that avoiding austerity works.
In small, open economies, higher deficits are unlikely to sustain domestic output, because most additional expenditure goes toward imports.
So it is not surprising that, despite its large devaluation, Iceland continues to run a high current-account deficit, adding to its already-large foreign debt.
Moreover, Iceland’s public debt/GDP ratio now stands at 100%, compared to only 42% in Latvia.
Part of the difference, of course, reflects different starting conditions and the cost of bank rescues.
But there can be no doubt that, by keeping deficits under control, Latvia’s public finances are in much better shape today, with debt sustainability no longer a problem. By contrast, Iceland’s debt has become so large that it is likely to constrain future growth.
One must be careful when attempting to draw lessons from the experience of small countries that sometimes have very particular characteristics.
The one conclusion that appears to hold generally is that shunning austerity does not allow one to avoid the problem of achieving both fiscal and external sustainability.
The Lessons of Liberia
At the United Nations last week, US Secretary of State Colin Powell and UN Secretary General Kofi Annan stood together to urge swift and substantial financial support for Liberia, which is poised on a knife's edge between the possibility of recovery and a new descent into violence.
The response was gratifying, with the European Union fully backing the effort to rebuild that shattered nation.
Nearly a hundred countries participated in the meeting, promising Liberia more than $500 million in reconstruction aid.
Many observers saw this display of unanimity as a conspicuous contrast to the deep divisions in the world community that surrounded the war in Iraq.
But in many ways it is Iraq that was anomalous.
The international consensus about the urgent need to pacify and rebuild Liberia - with UN leadership guided by a united Security Council - is in line with global responses to peace accords in many other national and regional conflicts, from East Timor, Cambodia, and Mozambique to Liberia's neighbors Sierra Leone and Cote d'Ivoire.
But despite global agreement on the need to seize these moments, we too often find ourselves scrambling after the fact, in ad hoc fashion, to convene willing donors and organize teams of experts and logisticians to deliver urgently needed aid.
Even in the best of cases, as we have seen with Liberia, where a peace accord was signed in August, this takes a perilously long time.
Before the next Liberia comes along, we the world needs to find a way to provide resources for peacemaking much, much sooner.
As we look at the wider global context, it is clear that this kind of post-conflict intervention is going to be a major part of the UN's work in coming years.
We cannot always afford to wait for gatherings of world leaders and financial pledges from donor nations.
In Liberia's capital city of Monrovia last month, young men began to riot because full funding was not yet in place for the UN's disarmament program.
Having come to turn in weapons for a fee, some of them became violent when they discovered that the money wasn't there to pay them.
If ex-combatants are not provided with alternative civilian opportunities - and quickly - many will simply pick up their guns again.
The critical importance of economic support in these ephemeral post-conflict moments has been underscored by both the successes and failures seen elsewhere in Africa, and around the world.
As I stressed in remarks to the Security Council last week, the UN cannot respond quickly and substantially if people and money are not standing by, ready to go.
Effective peace-building cannot wait for slow fundraising.
Conflicts are overwhelmingly likely to re-ignite in the first year of peace.
To prevent new downward spirals of violence, our intervention needs to be swift, smart, and on a sufficient scale to turn the tide towards a sustainable peace.
International organizations like the UN must have at their disposal beforehand enough financial and human resources to go beyond the tokenism that too often characterizes the international response to post-conflict societies.
More is needed than a handful of combatants reintegrated, a school or two re-built, and an under-funded young government lauded abroad but unable to deliver jobs or law and order to its war-scarred people at home.
Liberia and Iraq both demonstrate the need for this kind of freestanding capacity, as 21st century geopolitics is likely to continue to be more preoccupied with nation-building intervention in the aftermath of conflict than with wars between states.
The conference in New York Friday drew on the collective resources and expertise of UN agencies, the World Bank, and the major donor countries led by the United States, an impressive and effective collaboration that offers a rough framework for preparation for future post-conflict response.
Having money available in advance, on standby for the inevitable, would be sound global policy.
Until that money is available, the UN and its many multilateral partners will remain collectively unprepared to aid these post-conflict societies at their moment of greatest political opportunity and economic need.
We will all ultimately pay dearly, in human and financial terms, if we fail to ensure that these peace processes lead to long-term stability for societies that have already suffered far too much, for their immediate neighbors, and for the world at large.
The Lessons of Perestroika, 20 Years After
Twenty years after Mikhail Gorbachev launched perestroika, many people have come to lament the slow pace of reform in Russia under President Vladimir Putin.
But could it have been otherwise?
This should not be a surprise, because the tumultuous Gorbachev and Yeltsin eras left the country exhausted.
So who can blame Russians for suffering from the reform fatigue?
But if Russia is to get back on its feet, more reforms are needed.
Yet before a new round of reforms is to begin, some basic principles about Russia's political capacities must be understood.
The first question that any would-be Russian reformer should ask nowadays (and which we did not ask during Gorbachev's perestroika) is the following, is society prepared to endure the short-term pains of reforms, and how willing it is to endure the pain?
The experience of perestroika underscores the importance of this question.
Perestroika took place at a unique moment in Russian history.
The great reforms of the past, including the liberation of the serfs in 1861, followed many years of discussions among westerners, slavophiles, and others.
The revolutions of 1905 and 1917 also came at a time when those discussions were finished, and everyone knew who stood for what.
Indeed, I once read that Stalin's appointment to his first key party post was a mistake.
But it is still obvious that the entire party knew who Stalin was.
When they entrusted him with responsibility for convening the constituent assembly, the Bolsheviks knew what they wanted to do with the constituent assembly, because they knew Stalin as a person who would not stop at anything.
Perestroika was different, because debate had not ended; indeed, countless debates were raging about what Gorbachev should do.
Moreover, all previous eras of Russian reform eras and revolutions were connected with some historical model.
Perestroika had no such historic precedent.
The transformation from state socialism into a postindustrial society had never occurred anywhere else.
Thus, perestroika took place in a void.
Alas, this experience is being repeated.
Various political leaders of different political parties flash across Russia’s television screens, but there is no real national discussion about how to lead the country forward.
We are not moving toward a choice reached after countless discussions.
The second lesson of perestroika concerns the program of reform.
After two decades of earthshaking change, Russia has still not had a real program of constructive reform.
To use a modern expression, we don’t have a road map.
Practically everyone knows what is unacceptable, and what needs to be eliminated.
But we simply don’t know what should replace things that are eliminated.
Of course, the exit from socialism was unprecedented.
Much of what socialism built needed to be undone.
But it was done using slogans, not a program of change that ordinary Russians could understand and embrace.
All we have are endless arguments, not practical alternatives to discuss and decide upon.
One reason that Russia’s reform debates are so barren is the country’s lack of coherent political parties.
During perestroika and the Yeltsin presidency, the legacy was a widespread hatred and fear of the Communist Party with all its force and power.
This fear extended to all political parties and all in all blocked the desire to create powerful parties.
But this suspicion of political parties as such meant that there was no organized body across the country committed to carrying out a consistent, well-thought-out reform program.
Instead the reforms were decreed from high above, without having any grassroots support – and thus with no lasting durability.
All we had were direct appeals to the street and the masses rather than encouragement of a genuine social consensus.
Such a direct method is the wellspring of authoritarianism.
We must recognize that and understand that it emerges not only when the public is apathetic or frightened, but also when there is no apparent stable advanced guard, such as powerful political parties, which choose the leaders and control them.
As a result Russia now confronts a situation in which the election of the president is the only political issue.
In reality, what Russia need are powerful independent social and political organizations that would say: in any presidential term the following things should be done to steer policy, thus making the question of who is president secondary.
In this respect, Putin’s recent effort to assert tighter state control over private organizations is particularly worrisome.
But the final and most vital lesson of perestroika concerns the pace of reforms and society’s expectations.
Simply put, the government must meet the people halfway.
Yet it also cannot reduce reform to a nullity in order to ingratiate itself with the masses.
This is a tricky road to pursue, but it is the only one worth taking.
Indeed, perestroika and the decade of reform that followed demonstrated that just following the formal structures of the Western democratic model isn’t enough if Russia is to see reform implemented consistently.
For this model, as we have seen in Russia, leads to populist democracy and timid reform.
The country needs a deeper commitment to reform that will come only when its institutions engage the Russian public in the sort of open debate that we have lacked.
We must jettison populist democracy and embrace what democracy has always stood for—the engagement of all citizens in running their government.
The Lessons of South Africa
South Africa is now beginning to contemplate the retirement of Thabo Mbeki, its second president since the end of the apartheid era.
So this is a particularly opportune moment to look back and assess our achievements, note our failures, and perhaps see what elements in our transition to democracy may be applied elsewhere.
This is an exercise we in South Africa are not accustomed to undertaking, for as a people we tend to sell ourselves short.
We seem to take for granted remarkable achievements and do not give ourselves enough credit.
As a result, we tend to see an invisible cloud behind every ray of sunshine; we seem to think that our achievements have meaning only for ourselves.
The wider world has still not fully appreciated South Africa’s reasonably peaceful transition from repression to democracy.
They and we remember the first days of that transfer of power to the black majority, when most people believed we would be overwhelmed by a ghastly racial bloodbath.
It was a desperate time, brief but seared in our memories, when indiscriminate killings on trains, in taxis, and on buses were common, a time of massacres at regular intervals – Sebokeng, Thokoza, Bisho, Boipatong, and the killing fields of KwaZulu Natal, owing to the bloody rivalry between the African National Congress and the ethnic Zulu Inkatha Freedom Party.
There were many occasions when South Africa’s fate appeared touch and go. But catastrophe was avoided.
Instead, the world marveled – indeed, was awed – by the spectacle of long lines of South Africans of every race snaking their way slowly to polling booths on April 27, 1994.
Of course, part of the success of South Africa’s transition success was due to a miracle: the moral colossus that is Nelson Mandela, whose calm and sagacity, and his status as an icon of forgiveness, compassion, magnanimity and reconciliation, make us the envy of every nation on earth.
We were blessed that it was he who guided our state through its rebirth.
And we must also thank F. W. de Klerk, the last ruler of the dying apartheid regime, who exhibited moral courage by setting in motion our liberating revolution.
But ordinary South Africans also can be proud of themselves, for it was truly their self-discipline, simple decency, and ability to forgive that prevented a bloodbath.
In their example is a model for other troubled parts of the world to follow.
We, especially white South Africans, have tended to be dismissive of our Truth and Reconciliation Commission, which allowed those who had committed great crimes under apartheid to confess their acts openly and thus avoid prosecution.
Truth, not punishment, was to bring about healing.
Almost everywhere in the world, the TRC is regarded highly and considered a benchmark against which other efforts to move from dictatorship to democracy must be judged.
Yes, the TRC was flawed – so are all human enterprises.
But it was a remarkable institution, for many had thought that the advent of a black-led government would signal the onset of an orgy of revenge and retribution against whites for all the degradations that black South Africans had suffered from colonial times to the apartheid era.
Instead, the world gaped at the nobility of spirit displayed each and every day before the TRC, as victims of gruesome atrocities forgave their tormentors – and even embraced them on occasion.
All South Africans were traumatized by apartheid.
The TRC helped to open festering wounds, cleanse them, and pour balm on them to help in healing all of South Africa’s people.
It is easy to take the TRC’s work for granted, until one looks at the Middle East and the chaos of Iraq, where revenge, reprisal, and retaliation are fueling a ghastly, inexorable cycle of violence.
Likewise, South Africa was spared the horrors of genocide, as in Rwanda, and the endless conflict that has gripped Sri Lanka, Burundi, Sudan, the Ivory Coast, and many other countries.
The harsh truths put before our people by the Truth and Reconciliation Commission drew the poisons from our politics.
That is a lesson that other damaged countries can and must benefit from.
The lesson of South Africa’s transition is that no divided country has a future if it insists on going forward without truth and forgiveness.
Russia’s transition to democracy began at almost the same time as ours.
The Berlin Wall fell in November 1989.
Nelson Mandela was released in February 1990.
But what is happening in Russia today – rampant organized crime, the conflict with Chechnya, and carnage like the theater hostage disaster and the Beslan school catastrophe – makes South Africa’s transition to democracy look like a Sunday school picnic.
By avoiding the truth of the Soviet past, Russians have stored up trouble for the future.
A crime can never be buried.
Political crimes never fade.
We have not forgotten what was done to ordinary black people in the name of apartheid.
Indeed, by launching the Truth and Reconciliation Commission, we know far more about the full horrors of that era than we would had we sought to prosecute people, or tried simply to move on.
Literally, the truth has set us free to be at peace with ourselves.
Remembrance and forgiveness have allowed our remembered nightmares to be consigned to the past.
It is my deepest hope that Iraqis and other peoples haunted by the past can find a way to live in peace with peace of mind.
The Meaning of Cyprus
BRUSSELS – The root of the problem in Cyprus is well known.
Its two major banks had attracted huge deposits from abroad, largely from Russia, and presumably mostly from individuals who wished to escape scrutiny at home or elsewhere.
The proceeds were then invested in Greek government bonds and loans to Greek companies.
When Greece imploded, the investments turned sour, and the Cypriot banks that had engaged in this strategy became insolvent.
Given this situation, the logical choice for the country should have been clear: if the government wanted to survive, foreign depositors must bear part of the losses.
It is thus difficult to understand why the Cypriot government was at first so reluctant to inflict any losses on depositors.
But the solution that was eventually agreed makes sense: the country’s two largest banks are effectively resolved.
Their bad assets will be separated and wound down over time.
Neither the Cypriot government nor European taxpayers will put any additional funds into these banks.
The losses that remain after the bad assets have been disposed of will thus have to be borne by the banks’ uninsured creditors, which in this case means those with deposits of more than €100,000 ($130,000).
Although Cyprus is too small to matter for global financial markets, the crisis there could turn out to be an important precedent guiding how European policymakers deal with future banking problems.
In particular, it could affect current plans for a “banking union,” which needs three elements: a single supervisor, a common resolution authority, and a credible system of deposit insurance.
The Cyprus crisis holds important lessons on all three counts.
First, the crisis has underscored the need for a single supervisor that is not captured by local interests.
The European Central Bank would never have allowed Cypriot banks to attract huge deposits by paying above-market interest rates, and then to put all of their eggs in one basket (Greece).
This was a high-risk strategy without a safety net.
Second, while there is still some discussion about how to create a common resolution mechanism for eurozone banks, events have shown that the ECB already de facto fills this role.
No bank in difficulties can survive if the ECB does not grant or renew emergency liquidity assistance.
This accumulation of power in the hands of a completely independent institution is, of course, not ideal from the standpoint of democratic accountability.
But this should serve as an additional incentive for the eurozone’s member states to agree to the creation of a genuine common resolution authority with enough funding to resolve even larger banks in an orderly way.
Finally, the revolt of Cyprus’s small savers highlighted the need for a credible system of deposit insurance.
The EU directive that stipulates the protection of bank deposits up to €100,000 does not provide a European guarantee; it only requires member states to create a deposit-insurance system at the national level.
In reality, however, there has been a widespread misperception that somehow “Europe” protects small depositors.
Yet a common deposit-insurance system had, at least so far, not even been under discussion, because the issue was not perceived as a live problem.
Cyprus has shattered this complacency.
Leaving deposit insurance exclusively at the national level is no longer an option.
Cyprus also holds a more general lesson: Given the extreme reaction of financial markets to the collapse of Lehman Brothers in 2008, it had become axiomatic among European policymakers that no bank should be allowed to become insolvent.
But financial markets reacted calmly to the news that, for the first time, even depositors in a bank in the European Union will lose part of their money (and this was noted with glee in Berlin and elsewhere in northern Europe).
The key lesson for European policymakers is thus that it is possible to “bail in” a bank’s creditors.
This has not been officially admitted, but Eurogroup President Jeroen Dijsselbloem, the Dutch finance minister, expressed it clearly, saying that, after Cyprus, Europe should become more courageous in bailing in bank creditors.
This realization – that the European taxpayer does not have to save every troubled bank – might have a very beneficial effect, because Germany’s resistance to a banking union is motivated by the fear that German taxpayers would be forced to underwrite indirectly the losses of banks in the distressed countries of the eurozone periphery.
This fear may now ease.
The crisis in Cyprus represents an extreme and special case in many respects.
But the way that the problem arose, and the solution that was finally adopted, is likely to have very important consequences for the way that Europe will address its banking problems.
America’s Flawed Election
PRINCETON – No doubt many people around the world, if not most, breathed a sigh of relief over the re-election of US President Barack Obama.
A BBC World service poll of 21 countries found a strong preference for Obama everywhere except Pakistan.
Joy over the election’s outcome, however, should not blind us to its failure to meet a series of ethical benchmarks for democratic choice.
According to the US-based Center for Responsive Politics, spending on the election – for President and Congress, and including spending by outside groups as well as by the candidates and their political parties – is estimated to have exceeded $6 billion.
That makes the 2012 US election the most expensive ever held.
The bulk of this spending is just the two opposing parties canceling each other out.
This benefits advertising agencies and the media, but no one else, and surely not the parties themselves, or the viewers who are bombarded with ads, especially if they happen to live in hotly contested swing states.
It is difficult to believe that, say, $200 million would not have been enough to inform the electorate adequately of the candidates’ policies.
In this scenario, spending limits would have saved about $5.8 billion.
And, if such limits were combined with public financing of election campaigns, they would also help the election to meet an important ethical standard by denying the rich a disproportionate influence on outcomes, and hence on the subsequent actions of the president and Congress.
No one really expects political advertising to provide citizens with the information they need to assess the candidates’ merits properly.
For the presidential election, however, the practice of holding three televised debates between the two major parties’ candidates should be an opportunity for a thorough airing of those issues.
Unfortunately, the most recent debates failed to achieve that goal.
Consider, for example, the final debate in October, which was supposed to focus on foreign policy.
The US may no longer be the world’s undisputed leader, as it was in the decade following the Soviet Union’s collapse, but it nonetheless has a vital role to play in international affairs.
Obama referred to the US as “the indispensable nation,” and that description still holds true, in part because US military spending exceeds that of the next nine countries combined – five times more than China, the world’s second-largest military spender.
There was, however, no serious discussion of the conditions under which it would be right to use that military might.
Both candidates indicated that they did not favor military intervention to prevent the Syrian government from killing more of its citizens; but, neither was prepared to say when they would be prepared to accept the responsibility to protect citizens who come under attack from their own government, or from forces that their government is unwilling or unable to restrain.
Both candidates said that they would support Israel and not allow Iran to develop nuclear weapons, but there was no discussion of solutions to the Israel-Palestine conflict, or of the grounds on which countries that possess nuclear weapons might be justified to use force to prevent others from developing them.
Indeed, what was not discussed in the candidates’ debate on foreign policy was more significant than what was.
All of the discussion focused on the region that stretches from Libya to Iran.
China was mentioned only in terms of its supposed “cheating” on trade and currency matters.
Issues like the eurozone’s troubles and relations with Russia received no attention at all.
Needless to say, neither candidate thought it worthwhile to put forward a proposal to assist the more than one billion people living in extreme poverty.
The gravest omission was climate change.
The closest Obama got to it during a debate was to talk about “energy independence,” which implies not being reliant on oil from the Middle East.
That, obviously, is something that every patriotic American wants.
Obama also mentioned that he had raised fuel-economy standards for cars in the US, and had invested in renewable energy sources, like solar and wind power.
But, when Romney talked about increasing coal production, Obama neglected to point out that carbon dioxide from coal-fired electricity generation is already a major contributor to climate change; that we still lack the technology to produce “clean coal”; and that increasing the use of coal will impose huge burdens on people worldwide.
It took the devastation of Hurricane Sandy to get the president to mention climate change.
After that, New York City Mayor Michael Bloomberg announced that he was endorsing Obama, because his policies were better on climate change.
In response, Obama acknowledged that climate change is “a threat to our children’s future, and we owe it to them to do something about it.”
Now that he has been re-elected, the question is whether he will pay that debt to our children and to the generations that follow them.
The Lessons of the World Cup
This year’s World Cup has proven once again that football is the world’s most popular sport; it has also proven that football is probably the world’s most globalized profession.
It is inconceivable that Brazilian, Cameroonian, or Japanese doctors, computer scientists, blue-collar workers, or bank tellers could move from one country to another as easily as Brazilian, Cameroonian, or Japanese football players do.
Indeed, London’s Arsenal football club is composed entirely of foreigners, including a French coach.
Even the captain roles are no longer reserved for domestic players: Thierry Henry, a Frenchman, is Arsenal’s captain, Andriy Shevchenko, a Ukrainian, was often the captain of AC Milan and will play next year for the English champions Chelsea.
Christiano Zanetti, an Argentine, is captain of Inter Milan.
Similarly, dozens of South Americans and Africans play in Russian, Turkish, Polish, and various Southeast European leagues.
Football thus provides a glimpse of how true globalization of labor would work.
In football, as in other occupations, restrictions on labor mobility came entirely from the demand side.
No limits were ever imposed on players’ movements, except by Communist countries.
But the demand side was heavily regulated, owing to a rule that clubs could field no more than two foreign players in any single game.
The Bosman ruling, named after a Belgian player who successfully challenged the rule’s application to players from other European Union countries, eroded the limit, which collapsed altogether under the onslaught of the richest European clubs’ demand for a free hand in hiring the best players, wherever they might be found.
So wherever globalization and full commercialization reign supreme, there is an unmistakable concentration of quality and success.
Consider the number of clubs that have qualified for the European Champions’ League top eight slots.
If we look at five-year periods between 1967 and 1986, the number of different teams that qualified for the quarterfinals varied between 28 and 30. In the next two five-year periods, however, the number fell to 26, and in the most recent period (2000-2004), there were only 21.
The bottom line is simple: fewer and fewer clubs are making it into the European elite.
National leagues are similar.
Since the English Premier League was started in 1992, only one championship was not won by Manchester United, Arsenal, or Chelsea. In Italy, all but two Serie A championships since 1991 have been won by either Juventus or AC Milan.
In Spain, all but three championships since 1985 have been won by either Real Madrid or Barcelona.
The reason for this concentration at the top is obvious: the richest clubs are now able to attract the best players in the world.
Yet this has arguably been accompanied by improved quality in the game itself, owing to what economists call “increasing returns to scale.”
When the best players play together, the quality of each, and of the team as a whole, increases exponentially.
When Ronaldinho and Messi, or Kaka and Shevchenko, play together, their combined “output” (number of goals) is greater than the sum of goals that each would score if he played in a different club with less talented co-players.
Free mobility of labor in other areas would probably produce the same effect.
If doctors, computer specialists, or engineers (let alone the proverbial Polish plumbers!) were allowed to move freely, the concentration of talent in the richest countries would most likely increase.
Inequality in the distribution of talent across countries would rise, even if total world output of goods and services, and their average quality, improved, as with football today.
Poorer or smaller countries can hardly dream of winning a European championship, as Steaua (Romania), Red Star (Serbia), or Nottingham Forest (now languishing in the English third division) once did.
But, while we see inequality and exclusion in club-level football, the opposite is true for competitions between national teams.
The average winning margin among the top eight World Cup national teams has steadily decreased, from more than two goals in the 1950’s, to about 1.5 goals in the 1960’s, 1970’s and 1980’s, and only 0.88 goals in the 2002 World Cup.
The same is true of all games played at the final tournament, not only those among the top eight national teams.
The decrease in winning margins is all the more impressive because the World Cup has grown from 16 to 32 national teams – many of them new and rather inexperienced.
Remarkably, they are not trounced by the traditional powerhouses.
On the contrary, the elite eight teams of the last four World Cups have included two “newcomers ” that had never been quarterfinalists, such as Turkey and South Korea in 2002.
There are again two reasons for this.
First, free movement has meant that good players from small leagues improve much more than they would had they stayed home.
A good Danish or Bulgarian player improves much faster if he joins Manchester United or Barcelona.
Second, that improvement in quality was “captured” by national teams playing in the World Cup thanks to FIFA’s rule requiring players to play only for their national team.
Eto’o can play for any Spanish, Italian, or English club, but in the national competitions, he can play only for Cameroon.
In other words, FIFA has introduced an institutional rule that allows small countries (in the football sense) to capture some of the benefits of today’s higher-quality game, thereby partly reversing the “leg drain.”
The same rule could be applied to other activities.
Free movement of skilled labor could be accompanied by binding international requirements that migrants from poor countries spend, say, one year in five working in their countries of origin.
They would bring home skills, technology, and connections that are as valuable as the skills that Eto’o, Essien, or Messi bring back to Cameroon, Ghana, or Argentina.
Job placement would remain a problem, but the principle is sound: the world should learn from the World Cup.
The Liars’ Last Reunion
Next week’s G-8 summit will probably be the last such meeting for Presidents George W. Bush and Vladimir Putin.
Seven years ago, at their first meeting in Ljubljana, Slovenia, Bush looked into Putin’s eyes and somehow spotted the soul of a Christian gentleman, not that of a secret policeman.
Next week, they shouldn’t be surprised if they see a mirror of each other, because both men have exemplified the arrogance of power.
Bush and Putin both came to power in 2000, a year when their countries were scrambling to regain international respect, Russia from the chaos of the Yeltsin years and the US from the failed impeachment of President Clinton.
Each country thought it was getting an unthreatening mediocrity.
But both men, on finding themselves in positions of authority, ruled from their default positions: Bush as an evangelical convinced that God was on America’s side, and Putin as a KGB graduate convinced that all power comes from intimidation and threats.
And what was the result?
Convinced that he is right, and incurious to hear contrary arguments, Bush felt free to undermine the rule of law in America with warrantless domestic surveillance, erosion of due process, and defense of torture, in addition to misleading the public and refusing to heed expert advice or recognize facts on the ground.
From the tax cuts in 2001 to the war in Iraq, Bush’s self-righteous certitude led him to believe that he could say and do anything to get his way.
The damage Bush’s self-confidence and self-delusion has inflicted was magnified by his gross overestimation of America’s power.
Quite simply, he thought that America could go it alone in pursuing his foreign policy because no one could stop him.
While his father lined up world support, and troops from over a dozen countries, for the first Gulf War, the son thought that allies were more hindrance than help; except for Tony Blair, he did not care to have them.
Four years later, Bush’s arrogance and mendacity have been exposed for the entire world, including the American public, to see.
Putin also succumbed to the same arrogance of power.
Buoyed by high oil prices, he now seeks to bestride the world as if the social calamities that bedevil Russia – a collapsing population, a spiraling AIDS and tuberculosis crisis, corruption mushrooming to levels unimagined by Yeltsin – do not matter.
At a high-level security meeting in Munich this past February, Putin, who usually draws on the secretive, manipulative, and confrontational Cold War paradigm of what constitutes Russian diplomatic behavior, lashed out at the United States with the sort of language unheard of since Khrushchev said “We will bury you.”
American actions were “unilateral,” “illegitimate,” and had forged a “hotbed of further conflicts.”
Putin’s assessment of US unilateralism (if stripped of its overheated rhetoric) may be correct; the trouble is that he lacks credibility to extol moderation in foreign policy.
High oil prices have helped him rebuild and centralize the “strong state” that was his goal from the outset of his presidency.
But his recent attempts to use Russia’s energy resources for political coercion in Georgia, Ukraine, Belarus and elsewhere have exposed Russia as an unreliable partner, unnerving even the Chinese, who do not wish to see a reconstituted Russian empire on their border.
The Russian public, habituated to authoritarianism, wants Russia’s rulers to be firm.
Yet the true test of a ruler is not to pander to his people’s expectations, but to peer into the future and match the country’s aspirations with its needs and capacities.
In this, Putin’s arrogance is failing Russia miserably.
His monomaniacal drive to centralize power is driving out the very expertise that the country needs to flourish.
Shell and BP are being expelled from the oil industry at the very moment that Russian oil production is declining dramatically.
His embittered attempts to counter American power are equally short-sighted: helping Iran develop its nuclear program and selling high-tech weapons to China are hardly in Russia’s long-term strategic interest.
As usual, history is set on fast-forward in America.
Everyone can now see the gross and historic failures of the Bush presidency.
Indeed, the American people have preempted the historians, rebuking Bush by electing a Democratic Congress in November 2006.
Meanwhile, Russia’s troubles remain hidden behind the strong arm tactics and oil bloated coffers of Putin’s autocratic bureaucracy.
But the fact that Russia’s social and economic diseases are going unaddressed has consigned the country to the long-term decline that his presidency was supposed to reverse.
In the twentieth century, the Cold War parity between Russia and America was apparent.
For Russians, America was an evil empire, the world of capitalist exploitation and a nuclear superpower, but also a cradle of economic prosperity and individual freedom.
For America, Russia, too, was an evil empire, the world of communist expansionism and a nuclear superpower, but also a cradle of science, spirit, and soul.
A similar parity characterized the Bush-Putin era.
Unlike America, however, Russia’s people have not yet understood the price of arrogant power run amuck.
The Libertarian and the Lobbyists
WASHINGTON, DC – In the three years since the global financial crisis erupted, two dominant views of what went wrong have emerged.
It is crucial that we understand each, because their implications for policymakers – and thus for the future health and stability of the global economy – could not be greater.
The first view is that governments simply lost control of the situation, either through incompetence or because politicians were pursuing their own agendas.
This is the view heard most frequently from the political right – for example, from people who think that the main problem in the run-up to the financial meltdown of 2008 was government housing policies.
In the United States, among the candidates still competing for the Republican Party’s nomination to challenge Barack Obama in November’s presidential election, Ron Paul stands out for arguing consistently that government is the problem, not the answer, with regard to banking.
If the government were removed more fully from the financial sector (including abolishing the Federal Reserve), he argues, the economy would function better.
The second view is that the financial sector lobbied long and hard for deregulation in recent decades, and spent a great deal of time and money persuading politicians that it constituted the safe and modern approach to banking.
According to this view, government policies did not fail; on the contrary, they operated exactly as intended – and as bought and paid for.
If this view is correct, the kind of policy prescription recommended by Ron Paul is less appealing.
Unless you think that a modern financial sector really can operate with absolutely no regulation of any kind (including, presumably, the rules for banks that come with deposit insurance), the real problem is not government officials’ policy preferences, but what financial-sector lobbyists are able to persuade officials to do.
Fresh evidence supporting the second view is now available in the form of a recent study by Deniz Igan and Prachi Mishra of the International Monetary Fund.
In “Three’s Company: Wall Street, Capitol Hill, and K Street,” the authors look at the data – lots of it – on lobbying by financial-sector companies in the US.
Legislators, of course, have different preferences about what kinds of laws to support, which can make it hard to study mechanisms of political influence precisely.
But Igan and Mishra approach the problem in a clever way – they look for instances when elected officials switched their position on legislative proposals that surfaced more than once.
And they devote a lot of effort to figuring out what caused this switch.
In addition to analyzing information about lobbying expenditures, the authors map out the network connections of lobbyists (known collectively as “K Street,” because so many have their Washington offices there) and legislators.
For example, lobbyists were often previously employed by legislators on their staffs.
The results are simply staggering – although surely not a surprise to professional lobbyists.
A big increase in lobbying expenditures helps to persuade legislators to switch their votes.
And “whether any of the lobbyists working on a bill also worked for a legislator in the past sways the stance on that bill in favor of deregulation.”
It is deregulation, of course, that financial firms want – fewer rules and less oversight of any kind.
And it really is all about whom you know, and how you know them.
In particular, your value as a lobbyist seems to depend very highly on whom you worked with in the past.
Igan and Mishra find “spending an extra dollar is almost twice as effective in switching a legislator’s position if the lobbyist is connected to the legislator compared to the case where the lobbyist is unconnected.”
The revolving door between Congress and lobbying firms appears to have been central to how the financial sector became deregulated, which effectively allowed excessive risk-taking in the run-up to the crisis.
In another paper, Igan and Mishra, working with Thierry Tressel, found that firms taking more risks before 2008 were also engaged in more lobbying.
Essentially, financial firms have been buying the right to take on more risk.
When things go well, executives in these firms get the upside – mostly in terms of immediate compensation, because few executives are compensated on the basis of risk-adjusted returns.
That means that when the risks materialize and the firms suffer losses, the costs fall on taxpayers.
Ron Paul is right to point to imbalances of power and massive distortions within the financial sector.
He is also correct that many government policies favor relatively few big firms – and favor them in a way that encourages excessive and dangerous risk-taking.
But Paul and others are wrong to argue that the government is the ultimate cause of all financial evil.
Executives in financial firms want to take big risks.
They like arrangements under which they win even when they lose.
Big financial firms can more readily buy the necessary political protection (in the form of deregulation), enabling them to become even bigger and more dangerous.
This incentive structure has only become more extreme since the financial crisis of 2008.
The Libya Option In Iran
LOS ANGELES – International efforts to prevent Iran from developing nuclear weapons will be given a new lease on life this month, because France has assumed the presidency of the United Nations Security Council.
As Council president, France, which shares America’s views about the need to strengthen sanctions on Iran’s government, can raise the matter, something that China eschewed during its tenure in January as Council leader.
But, even were a revived Franco-American effort to succeed in getting the UN organ to endorse targeted penalties to hamstring the financial underpinnings of the Revolutionary Guards and other Iranian elites, the proposed measures appear to be too modest. They arguably add little to three prior sanction resolutions that ban the export of nuclear and ballistic-missile technology and conventional arms, and that freeze the assets and travel of a handful of Iranian officials.
Moreover, despite the pain they impose, economic sanctions historically have a poor record of prompting countries to change fundamental policy.
But there is a notable exception to this pattern: Libya’s decision in December 2003 to abandon its nuclear weapons program.
The country’s dramatic shift from the nearly quarter-century effort to get the bomb marks a remarkable proliferation reversal – and sanctions played a key role.
How those sanctions worked in tandem with other forms of pressure provides hope that they may yet help turn Iran around.
If nothing else, Muammar Qadaffi’s efforts to acquire nuclear weapons were far more audacious than Iran’s. The saga began within a year of Qadaffi’s 1969 overthrow of King Idris. With no wherewithal to manufacture a nuclear bomb, Qadaffi sought to buy one.
During the 1970’s, he approached China, India, and Pakistan. Fortunately, despite the fact that India and Pakistan lay outside the Nuclear Non-Proliferation Treaty (NPT) – and thus were not subject to its prohibition on disseminating arsenals – they, along with China, rebuffed Qadaffi’s requests. Undaunted, he sought to acquire technologies to produce the weapons.
Here, the non-proliferation dikes failed.
Qadaffi exploited a network of opportunity. French-controlled mines in Niger provided uranium ore. An undisclosed country conveyed a pilot uranium conversion facility.
And the Soviet Union followed with a research reactor from which Libyan scientists extracted small amounts of plutonium.
But it was the father of Pakistan’s nuclear program, A. Q. Khan – and his network – that furnished the technological linchpin: the rudiments for a nuclear centrifuge program. And the Pakistanis added a nuclear weapon design as well.
As Libya mounted its effort, the International Atomic Energy Agency remained clueless. Despite published speculation about the country’s nuclear intentions, the IAEA considered Libya to be NPT-compliant. The absence of international resistance normally would have allowed Libya a clear field to realize its ambition. But Qadaffi’s hubris and revolutionary zeal blunted the goal by stimulating the imposition of international sanctions that ultimately brought down his nuclear program.
By 1988, Libya’s clash with the West reached its apex with the bombing of Pan Am 103 over Lockerbie, Scotland. Until then, the United States had led a lonely battle to isolate Libya by severing diplomatic relations and imposing economic sanctions and embargos on oil imports and arms exports. But not even the Reagan administration’s 1986 military strike would move Libya away from its confrontational ways.
Prompted by the Lockerbie tragedy, Security Council sanctions adopted in 1992 and 1993 changed the dynamic. To force Libya to hand over the plotters, compensate victims’ families, and cease terrorism, the Council froze all air commerce in an out of the country, all aircraft maintenance, and all arms shipments, as well as reducing diplomatic representation.
In addition, a freeze on Libya’s financial assets abroad and exports of oil equipment cost the country an estimated $33 billion in revenue, exacerbating already high unemployment and inflation rates.
As a result, the government’s confidence and hold on power were shaken.
Military coup makers and Islamists felt encouraged to contest the regime.
They were brutally suppressed, but the sanctions nonetheless provoked an internal battle within Qadaffi’s coterie that pitted hard liners committed to the anti-Western crusade against pragmatists who promoted integration into the global economy.
Confronting continued, albeit fraying sanctions, Qadaffi threw his weight behind the pragmatists, turning the Lockerbie bombers over to face trial, renouncing the terrorism that he had promoted, and expelling the foreign terrorists who made Libya their home. In 1999, the Security Council responded by suspending sanctions.
But the nuclear program remained a laggard. Qadaffi continued to import nuclear technology secretly, even as his diplomats privately negotiated a modus vivendi with the US and Britain.
In October 2003, Italian inspectors of a German ship moored in Taranto, Italy, uncovered a stash of centrifuges bound for Libya.
Faced with re-imposition of harsher measures, and with the pragmatists continuing their push to steer the country in a new direction, Qadaffi relented, trading the nuclear program for political normalization. On May 31, 2006, the US reopened its embassy in Tripoli, ending the quarter-century hiatus in diplomatic relations.
The demise of Libya’s nuclear venture offers a template for dealing with Iran.
It suggests that seriously challenging the nuclear venture will come not from more timid sanctions now, but from measures that encourage the pragmatists who populate the fractious Iranian government to promote normalization.
The time to implement such a strategy is long overdue.
The Limits of Bonapartism
PARIS – After four decades, France has returned to NATO’s unified military command.
At a stroke, President Nicolas Sarkozy overturned one of the pillars of French policy – and of the legacy of Charles de Gaulle, the founder of Sarkozy’s own political party.
The decision is consistent with the way Sarkozy has governed since his election in 2007.
Whether he is seeking to reform France’s judicial system, redrawing its administrative map, proposing a new alliance of Mediterranean countries, or seeming to end France’s ambiguous foreign policy of being both aligned and not aligned with the United States, Sarkozy is nothing if not ambitious.
The problem is that far too many of Sarkozy’s decisions have proved purely symbolic, like the ill-fated Mediterranean Union; badly conceived, such as judicial reform, which is opposed by virtually the entire legal profession; or nakedly self-serving, like the administrative reform, which somehow managed to abolish only those departments and regional administrations controlled by the opposition Socialists.
Many in Sarkozy’s governing UMP have become increasingly public in expressing their unhappiness with his decision-making method.
In effect, rather than according serious room for decision-making to his prime minister, François Fillon, or to Fillon’s cabinet, Sarkozy has arrogated almost every lever of power to himself and his advisers within the Élysée Palace.
Indeed, few informed observers doubt that Sarkozy’s chief foreign policy adviser, Jean-David Levitte, has far more influence than France’s foreign minister, Bernard Kouchner.
Likewise, on matters of domestic policy, the interior minister, Michele Alliot-Marie, has nothing close to the agenda-setting power of Claude Guéant, Sarkozy’s longtime aide and director-general of the President’s office.
For all the authoritarian habits of de Gaulle or François Mitterand, Sarkozy’s personalization of the presidency is unprecedented in the history of the Fifth Republic.
Sarkozy makes little secret of his disdain for members of his own party, luring Socialists like Kouchner and Rama Yade, the junior minister for foreign affairs, into his cabinet, and naming retired Socialist politicians like former Prime Minister Michel Rocard to head national commissions and represent France in international treaty negotiations.
Sarkozy can afford to thumb his nose at his party, given the total collapse of the opposition Socialists, who will almost certainly lose the 2012 election.
If Sarkozy governed effectively, such political and institutional departures might seem like a breath of fresh air in a society whose institutions seem increasingly ill-suited to the challenges of a multi-ethnic and post-industrial society (even though dirigiste France has conserved its industrial base better than many other rich countries).
This was how many who supported Sarkozy’s presidential bid viewed him. Despite policy differences, Sarkozy would be for France what Margaret Thatcher was for Britain: someone who would lead the country out of its impasse, conserving the best aspects of dirigisme but finally giving entrepreneurs room to grow, cracking down on crime, and reforming education.
But Sarkozy has not governed effectively, as his party’s disenchantment with him and polling data make abundantly clear.
The manic character of his presidency – initiative spilling into initiative, each being the transformative solution to the problem at hand, all opposition denounced as lies, bad faith, and cowardice – has worn thin.
On a number of issues, notably wages, liberalization of employment rules, and reform of the judiciary and of secondary education, programs announced with tremendous fanfare have had to be delayed or withdrawn.
Almost invariably, Sarkozy has blamed the minister in question, and then moved on to the next subject to strike his interest.
In the meantime, his obsession with dominating the daily news cycle, no matter how flimsy the pretext, continues unabated.
He has even appeared at crime scenes – not urban riots, but private crimes of passion, where no reason of state could possibly warrant the presence of the President of the Republic.
Given the pathetic state of the Socialist opposition, it is difficult to see what price, if any, Sarkozy will pay for his record in office.
But this style of government – essentially an electoral campaign, not a government – virtually guarantees that almost nothing of real importance can be accomplished.
At a recent press conference, US President Barack Obama remarked that he was loathe to comment immediately on matters of great public importance before being absolutely sure that he knew – and knew what he thought about – the subject in question.
Many French wish that such self-discipline could rub off on Sarkozy.
Given his temperament, however, that hardly seems likely.
As a result, an administration in which many had placed high hopes is lapsing into demagoguery and ineffectiveness.
The Limits of China’s Charm Offensive
BRUSSELS – To many people in the West, China seems to have gone from a country that “keeps a cool head and maintains a low profile,” in Deng Xiaoping’s formulation, to one that loves a good international bust-up.
Putting an Australian mining executive behind bars for ten years, squeezing out Google, keeping the European Union at bay for an important dialogue, and letting a mid-level official wag his finger at US President Barack Obama at the Copenhagen Climate summit is not, after all, the best way to convince partners of your constructive intentions.
Nor is it reassuring to recall that China, up to now, has been stubbornly watering down sanctions on Iran, investing in major offensive military systems, and pillorying Western leaders for irresponsible financial policies and protectionism.
But the point in reciting this litany is not so much to highlight China’s wayward behavior as it is to demonstrate the dilemma in which the country finds itself: if it behaves like a “normal” power, the world will forget the many hundreds of millions of people that it still needs to pull out of poverty.
The Chinese leadership seems to be aware of this dilemma and is not, in fact, eager to be dragged into fierce competition with the West or its neighbors.
During the recent National People’s Congress, Chinese Premier Wen Jiabao stressed that China should not punch above its weight, and that the People’s Republic still needs stability if it is to become a society that offers a decent life to all of its citizens.
In recognition of this, China has stepped up its efforts to mend fences.
President Hu Jintao’s visit to Washington was a clear attempt to de-escalate tensions with the US over American arms sales to Taiwan, the renminbi’s exchange rate, and Obama’s meeting with the Dalai Lama.
China will likely go to great lengths to foster a more positive attitude among the dozens of European leaders visiting this year’s World Expo in Shanghai.
At a lower level, too, China has unleashed an impressive charm offensive.
State broadcaster CCTV will launch a worldwide program to explain the Chinese position on international affairs.
In Brussels and Washington, one gets the impression that the mission of China’s diplomats nowadays is to meet and charm everyone.
Hardly a week passes without the Chinese ambassador giving eloquent speeches for different audiences.
Indeed, in Brussels, events are organized for members of the European Parliament, the business community, and even high school students.
Chinese diplomats now maintain closer relations with think tanks than their European counterparts do, and are praised for their constructive contribution to the public debate.
But charm will not make up for lack of progress at the official level.
It is unlikely that cajoling Western elites will mitigate the deep-seated uncertainty in the US and Europe about China’s rise.
And economic stagnation in the West will inevitably exacerbate distrust vis-à-vis the rising power as the relative gains from trade diminish and defensive and even protectionist policies likely follow – no matter how much China smiles at the world.
China needs a mature strategic dialogue, particularly with the EU.
This will not rescue the partnership, but at least it could help define common interests, identify policy options, and create the conditions to achieve results.
Interests, not comradeship, should guide policies.
One can have the most visible business summits possible, but if Western companies do not gain greater access to the Chinese market, or if they feel threatened by heavily subsidized state-owned enterprises, relations will continue to sour.
We can stage round-table after round-table to discuss the importance of our relations with China, but if issues like Iran, Africa, or other trouble spots are not managed better, the West will inevitably consider China a security threat.
Cultivating high expectations without progress could even be dangerous.
In the short term, it would reduce the sense of urgency among decision makers to get serious about translating ambitions into deeds.
In the long run, the growing expectation gap would aggravate the inevitable setbacks, and political leaders who championed closer relations could even be replaced by hard-liners.
“The crash will come if things go on like this,” Otto von Bismarck wrote in the nineteenth century. “We ought to do all we can to weaken the bad feeling, which has been called out through our growth to the position of a real great power.
In order to produce this confidence, it is above all necessary that we are honorable, open, and easily reconciled in case of frictions.” But even Germany’s Iron Chancellor had to watch as distrust, economic nationalism, and populism pulled the European powers into a downward spiral of trade wars and diplomatic rivalry.
History offers too many examples of once-promising partnerships collapsing in a climate of uncertainty for China and the West to take their relations for granted.
For China, it will be hard to build confidence if Europe and the US doubt their own future.
And China will remain prickly as long as it fears protectionism or a new containment strategy.
Neither side can talk its way out of this predicament.
If Beijing is serious about building strategic partnerships with the West, it should back up its charm offensive with deeds and take the initiative in fostering more effective cooperation.
The Limits of China’s Consumer Revolution
SHANGHAI – China’s economy is at a crossroads.
As 2013 begins, foreign and domestic observers alike are asking which path the country’s economic development should take in the next decade.
How can China ensure stable and sustainable growth in the face of significant internal and external challenges, including slowing medium- and long-term growth, rising labor costs, and growing inflationary pressure?
After the global economic crisis weakened external demand, which sustained China’s unprecedented economic growth for three decades, the authorities agreed that internal demand, especially domestic consumption, must become the country’s new growth engine.
At the Chinese Communist Party’s congress in November, China’s leaders declared their intention to double per capita income by 2020, unleashing 64 trillion renminbi ($10.2 trillion) of purchasing power.
Indeed, with roughly 130 million middle-class consumers, China’s domestic market holds significant potential.
The Boston Consulting Group estimates that, with an average annual GDP growth rate of 7% in China and 2% in the United States, Chinese domestic consumption will rise to half of America’s by 2015, and 80% in 2020 (assuming that the renminbi appreciates at an average rate of 3% against the US dollar over the next few years).
Moreover, the current-account surplus plummeted from more than 10% of GDP in 2007 to 2.8% in 2011, reflecting China’s decreasing reliance on exports to drive economic growth.
In 2010, China’s imports ranked second in the world, and are expected to grow at an average annual rate of 27% in 2011-2015, outpacing export growth by five percentage points.
As a result, the total value of imports is expected to exceed $10 trillion in only two years, providing lucrative investment opportunities and broader markets to foreign investors.
This potential is not lost on multinational companies.
A survey conducted in May 2012 by China’s State Council Development Research Center asked 394 Chinese and foreign companies about their future strategic orientation in China.
The respondents most often viewed China not only as a market opportunity, a research-and-development base, and an export base, but also as a high-end manufacturing base, a regional-headquarters site, and a service base.
The results also reflected China’s declining attractiveness as a base for product assembly, low-cost manufacturing, and parts production.
In fact, while the US and other developed countries have sought to bring manufacturing home (“reshoring”), they have been establishing innovation facilities in China.
Multinational companies have created nearly 1,000 R&amp;D centers in China, including 194 in 2010 alone, enabling them to develop products for the local market.
More than 1,400 foreign-funded R&amp;D institutions are currently operating in China, and data from China’s Ministry of Commerce indicate that 480 of the world’s top 500 companies have established local subsidiaries.
But China cannot rely on consumption as its only growth engine.
History has shown that a one-dimensional development model cannot ensure sustainable competitiveness, just as no single market can sustain global demand.
Given this, China must continue to develop its manufacturing sector.
China is the world’s top manufacturing country by output.
But, while it accounts for 19.8% of total global manufacturing, it receives less than 3% of the world’s manufacturing R&amp;D investment. As a result, China’s innovative capacity remains relatively low, with its high-tech and knowledge-intensive industries unable to compete globally.
On average, China’s industrial enterprises are relatively small, and, although its industrial labor productivity (real manufacturing value added per employee) has improved over the last decade, it remains much lower than that of developed countries – just 4.4% of America’s and Japan’s productivity, and 5.6% of Germany’s.
And the “pauperization” phenomenon – in which companies must adjust their commercial strategies to cope with an impoverished consumer base – is increasingly affecting traditional industries, further undermining China’s capacity for sustainable development.
Moreover, the quality of Chinese-manufactured products continues to lag behind that of developed countries’ manufactured goods.
Whereas one unit of intermediate input in developed countries typically generates one unit or more of added value, in China the ratio is only 0.56.
As China’s “demographic dividend” disappears, its low-end labor market is shrinking, driving up its once rock-bottom labor costs and diminishing its rate of return on capital.
Over the next decade, as Chinese workers demand higher salaries, basic benefits, and improved working conditions, the country may well lose the comparative advantage that has driven its manufacturing boom.
While manufacturing wages remain significantly lower in China than in the US, the rapidly narrowing gap is already fueling American reshoring.
Given that Chinese wages are rising at an annual rate of 15-20%, productivity-adjusted wage rates in low-cost US states are expected to exceed those in some coastal regions of China by only 40% in 2015.
Add to that reduced energy costs in the US, owing to the country’s shale-gas revolution, as well as the global supply chain’s complexity, and China’s cost advantages will soon be negligible.
Meanwhile, other emerging economies – including Vietnam, India, Mexico, and Eastern European countries – are vying for China’s position as the world’s factory.
These lower-cost alternatives are fast becoming developed-country investors’ preferred destinations.
Although the enormous potential of China’s consumer market can provide a new impetus for economic growth, the country’s economic transformation cannot succeed unless it upgrades its manufacturing sector.
China’s leaders must begin by increasing investment in science and technology, focusing their efforts on parlaying key technological breakthroughs into higher-value-added production.
Only by combining growing Chinese consumption with enhanced Chinese manufacturing will the country be able to develop a new comparative advantage, which is the key to sustainable growth over the next decade.
The Limits of Democracy
The election of the militant and hitherto extra-parliamentary group Hamas in the Palestinian territories reminds us of what democracy cannot achieve.
No one in a more established democratic state is surprised if one’s own side does not win.
Democracy is about competing parties, and, unless they form a “grand coalition,” they cannot all win.
But what if an election’s winners have no intention of abiding by the rules that are part and parcel of the democratic process?
One remembers Hitler, who, while his own party did not quite get 50% of the vote, could base his “seizure of power” on a parliamentary majority.
More recently, elections in the post-communist countries of Europe have brought groups to power whose democratic credentials are dubious, to say the least.
This is not to compare Hamas to any of these political forces.
Nevertheless, one must wonder about a winning movement with quite a few elected members in Israeli prisons and others who are not likely to get permission to enter the country in which they were elected, so that the new parliament cannot function properly.
All of this tells us three things about democracy.
First, elections rarely solve fundamental problems.
In particular, they do not create a liberal order.
To be effective, elections must be preceded by an extensive period of debate and argument.
Cases have to be made and attacked or defended.
First elections, in particular, are almost inevitably of limited value as foundations of democracy, because they take place in an emotionally charged atmosphere and largely without substantive debate.
They are an invitation to assert who one is and where one belongs rather than to a competition of well-defined and comprehensive political programs.
This means, secondly, that first elections, and perhaps elections more generally, are not themselves a sufficient guarantee of liberty.
As the German constitutional court judge Ernst-Wolfgang Böckenförde famously put it, democracies cannot create the conditions of their survival and success.
What are these conditions, and who creates them?
The answer to the first question is, the rule of law.
There must be certain accepted rules of the political game that are binding on all, so that whoever does not accept or obey them is disqualified.
This is, to be sure, easier said than done.
Who sets the rules of the game?
There is an obvious logic to establishing a constitutional convention first and then holding elections under the rules agreed by it.
This is what happened in Iraq, for example.
But the constitutional convention, too, must be elected, and this election may run into the very difficulties that plague first elections to parliaments in new democracies.
Once the rules of the game are set, there still remains the question: who enforces them?
Who could say to Hamas that unless they accept certain rules, their election is not valid?
This requires a constitutional court of sorts, as well as a judiciary and institutions to enforce its rulings.
In sovereign states and territories, this is highly unlikely to come about on its own.
It is no accident that the democratic process has emerged most smoothly where there was some external power to back up the constitution.
The third lesson follows from such considerations.
Democracy in the sense of free elections within certain rules does not allow the rest of us to say that the cause of freedom has prevailed and that we can walk away.
On the contrary, democracy is a long-term task.
Some say that it is achieved only once a country has passed the “two-turnover test,” that is, two changes of government without violence.
One must add to this criterion a culture of debate that makes elections a genuine contest of a plurality of answers to the issues at stake.
For the Palestinian territories, this means that people’s expectations of the elections were probably too high.
By the same token, reducing expectations means that the significance of the results should not be exaggerated.
Who knows?
The result may yet turn out to be a stepping-stone towards an effective state that deserves international recognition.
In the meantime, the key task is to promote the rule of law, backed by the international community.
The Limits of Dubai
Cambridge – Global investors are in a giant huff over Dubai’s decision to allow its flagship private company Dubai World to seek a six-month standstill (implying at least partial default) on payments on some $26 billion in debt.
What exactly did investors expect when they purchased bonds in companies with names like “Limitless World,” one of Dubai World’s bankrupt real-estate subsidiaries?
Talk about a bubble mentality.
The idea, I guess, was that the emirate’s government would stand behind every loan, no matter how risky.
And if the oil-poor Dubai government didn’t have the money, then somehow its oil-rich sister state Abu Dhabi would cough up the cash.
An absurd expectation, one might think.
But it is hardly more improbable than many of the other massive bailouts we have seen around the world in the wake of the recent financial crisis.
What really upset investors, of course, was the realization that, yes, some day untenable debt guarantees will have to be withdrawn.
Eventually, an over-leveraged world is going to have to find a way to cut debt burdens down to size, and it won’t all be pretty.
There are those that revel in what they see as a come-uppance for brash Dubai’s outsized ambitions.
I, for one, do not share this view.
Yes, Dubai, with its man-made islands, hotels simulating Venice, and roof-top tennis courts, is a real-world castle in the sand.
Yet, Dubai has also shown the rest of the Middle East what entrepreneurial spirit can accomplish.
Its airport has become a global hub of such significance that German regulators recently had to force Emirates Airlines to raise its rates to Frankfurt, lest national champion Lufthansa lose too much business.
And, with its relatively open goods and capital markets, Dubai has become a trading hub not only for the entire Middle East, but also for parts of Africa and Asia.
On the eve of the financial crisis, other Gulf states had started to look to Dubai for insight into how they might diversify their economies and continue to thrive when the oil wells run dry.
Yes, Dubai is certainly an autocratic state where finances are tightly and secretively controlled.
Indeed, lack of detailed information on the Emirates’ finances was a central reason why the Dubai World default came as such a shock.
But, in many ways, Dubai’s rulers have been remarkably tolerant of free expression.
A year ago, I sat through an evening of presentations at the University of Dubai by local artists.
One artist, an Emirati photographer, presented a visual time line of the construction of one of the stations of Dubai’s new metro system.
This local artist has lived through the stunning transformation of the city-state over the past 13 years, which has been driven by the kind of building boom that one associates with the fastest growing Chinese cities, not the Middle East.
Rather than simply praising the government’s new constructions, the artist emphasized how jarring the change was to long-time citizens.
How does one relate to the inanimate objects rising out of the barren yet majestic desert sands?
Another artist presented a vision of how outside lighting could be used to transform minarets, and help them to stand out in the blur of modern buildings that characterizes the contemporary Middle Eastern city.
His visions were magnificent, and apparently somewhat radical.
One had to be impressed that such ideas could be expressed openly.
Anyone familiar with Dubai understands that these are but small examples of a much broader embrace of creativity that has allowed the country to court elite foreign professionals in finance and other industries.
Much as in the United States, elite foreigners have played a key role in developing Dubai’s various service industries.
Of course, other countries in the Gulf also have some stunning accomplishments to their credit.
Saudi Arabia’s national oil company has achieved homegrown expertise in oil drilling that is widely admired in the West.
Qatar has had success in media with Al Jazzera , while Abu Dhabi has helped sponsor remarkable advances in artificial intelligence though its support of computer chess.
But Dubai, with very little black gold of its own, has done more with less than any other state in the region.
Unfortunately, Dubai ultimately proved subject to the laws of financial gravity.
This time was not different. Massive speculation and borrowing led to excessive debt burdens and ultimately, to default.
Is this the end of the road for Dubai’s epic growth?
I doubt it.
Countries throughout the world and throughout history have defaulted on their debts and lived to talk about it, even prosper.
There is no way around the need for Dubai to restructure and prune its excesses before it can resume a more sustainable growth trajectory, though achieving this will take time.
Will there be contagion to vulnerable countries in Europe and elsewhere?
Not just yet.
While the Dubai case is not different, it is special, so the effect on investor confidence should remain contained for now.
But investors are learning the hard way that no country’s possibilities and resources are limitless.
The Limits of Energy Innovation
Winnipeg – President Barack Obama has promised an energy revolution in the world’s largest economy, with renewable sources of power and “green” technologies breaking America’s – and ultimately the world’s – dependence on conventional fuels.
The environmental, strategic, and economic benefits – including lower use of carbon-emitting fossil fuels, less reliance on politically volatile oil-and-gas exporters, and the creation of millions of well-paid jobs – are uncontroversial.
But how realistic is this vision?
There is only one kind of primary energy (energy embodied in natural resources) that was not known to the first high civilizations of the Middle East and East Asia and by all of their pre-industrial successors: isotopes of the heavy elements whose nuclear fission has been used since the late 1950’s to generate heat that, in turn, produces steam for modern electricity turbo-generators.
Every other energy resource has been known for millennia, and most of them were harnessed by pre-modern societies.
The fundamental difference between traditional and modern uses of energy consists not in access to new or better energy resources, but in the invention and mass deployment of efficient, affordable, reliable, and convenient “prime movers,” devices that convert primary energies into mechanical power, electricity, or heat.
History could be profitably subdivided into eras defined by the prevailing prime movers.
The longest span (from the first hominids to the domestication of draft animals) is made up of the age when human muscles were the only prime mover.
Then came the addition of draft animals and gradual supplementation of animal prime movers by mechanical prime movers, such as sails and wheels, that capture natural energy flows.
A fundamental break with this millennia-long pattern came only with widespread adoption of the first practical mechanical prime mover able to convert the heat of fuel combustion – James Watt’s improved steam engine, designed in the 1780’s.
More efficient versions of this prime mover dominated the modernization of the Western world until the first decade of the twentieth century.
During the 1830’s, the first water turbines marked the beginning of the end of the waterwheel era.
The next two key milestones came during the 1880’s, with the invention by Benz, Daimler, and Maybach of the gasoline-fuelled Otto-cycle internal combustion engine and the patenting of Charles Parsons’ steam turbine.
The 1890’s witnessed the arrival of Rudolf Diesel’s inherently more efficient version of the liquid-fueled internal combustion engine.
There is only one more prime mover to add to this sequence.
The gas turbine was conceived at the beginning of the twentieth century, but its first working prototypes (both stationary and for flight) came only during the 1930’s, and began to be rapidly diffused in the 1950’s.
Today’s most ubiquitous mechanical prime mover – installed in nearly a billion road and off-road vehicles, water vessels, airplanes, and countless machines and tools – is the gasoline-fueled internal combustion engine, fundamentally unchanged since the 1880’s.
Economic globalization would have been impossible without the diesel engines that power enormous crude and liquefied natural gas tankers, bulk cargo vessels transporting iron ore and grain, and massive container ships: some of them now have unit capacities close to 100 MW, but their basic design was mastered within two decades of Diesel’s test of his final engine prototype in 1897.
Most of the world’s electricity is generated by steam turbines in fossil-fuel-burning and nuclear power plants, and, except for much larger capacities and higher efficiencies, Parsons would recognize in them every key feature of his invention, now more than 120 years old.
And intercontinental flights would be an even greater trial without the gas turbines invented in the 1930’s by Frank Whittle (who thought about turbofans, now the dominant commercial design, even before he built the first turbojet) and Joachim Pabst von Ohain.
These realities offer three obvious but under-appreciated conclusions about the mechanical prime movers that are the foundations of our economic progress.
First, because of their large numbers and their associated (and often expensive and extensive) infrastructures, prime movers are remarkably inert.
There has been little real innovation ever since these prime movers were first commercialized more than a century ago (water turbines, steam turbines, internal combustion engines) or more than 50 years ago (gas turbines).
Second, any transition to new prime movers is an inherently prolonged affair, taking decades to accomplish.
Even today, for example, there are few indications that steam turbines will not continue to generate the bulk of our electricity in the decades ahead, or that gas turbines will be replaced anytime soon.
Recent developments show that even automotive internal combustion engines will not yield to electric motors or fuel cells as rapidly as many enthusiasts have hoped.
Finally, the wider the scale on which an energy prime mover is deployed, the longer it will take for substitutions to appear.
A century ago, the world used coal and a relatively small volume of oil at the rate of 0.7 TW, but in 2008 established commercial energies – fossil fuels and primary (water and nuclear) electricity – flow at the rate of nearly 15 TW.
Obviously, this scale limits the speed with which new prime movers can be introduced to replace any significant share of the old devices.
For example, if 20% of the world’s electricity were to be generated by wind turbines, then, considering their inherently low load factor of about 25% (compared to 75% for thermal stations using steam turbines), we would need to install new capacity of some 1.25 TW in these machines.
Even with large 3-MW turbines, this would require more than 400,000 new tall towers and giant triple blades.
That is a task for many decades.
Tempering the Genetic Revolution
LEUVEN – We may not be fully aware of it, but future generations will likely consider our era truly historic.
Never before has mankind been able to understand the functioning of cells, tissues, and organs, the precise molecular mechanisms of evolution, and where and how our species originated and spread throughout the world.
The technology that allows us to unravel cellular and subcellular processes and mechanisms, identify the causes of diseases and develop more specific and effective treatments, and determine who is biologically related to us and to what degree combines knowledge from biology, computer sciences, information technology, and material sciences.
As might be expected, such a revolution in knowledge must also have a significant societal impact, requiring answers to questions that, until recently, were considered pure science fiction.
Today, it is technically possible to sequence the 2.4 meters of DNA –&#160;present in the nucleus of every cell of our body – in only a few days.
And, just as the speed of reliable sequencing continues to increase, the price of sequencing has dropped precipitously, and will soon amount to just a few hundred dollars.
Once the function of every fragment of DNA is known, nothing will stand in the way of routine sequencing.
Already, variations in the composition of about 500,000 DNA building blocks (SNPs or Single Nucleotide Polymorphisms), spread over the total length of the DNA and shown to correlate with particular physical and behavioral characteristics or susceptibility to diseases, are being analyzed routinely.
Major errors in DNA composition that are responsible for about 3,000 of the 7,000 known genetic diseases can be visualized, and efforts are underway to identify the causes of the remaining 4,000.
Meanwhile, a growing number of companies are offering a new commercial service: direct-to-consumer analysis of DNA for genealogical or medical purposes.
While their activities and clientele are steadily increasing, many of the results currently are of only limited value for determining physical and behavioral characteristics or risks of common diseases such as hypertension, cardiovascular diseases, diabetes, and depression.
Some people, however, claim the right to know all information pertaining to them, including even the slightest elevated risk for these diseases.
Some are even willing to undergo preventive measures or modify their behavior to decrease or control this risk.
Others must cope with results showing that they carry defects that significantly increase their risk of developing a hereditary form of cancer or dementia, or of transmitting a defect to their children that could, in turn, cause a serious defect in their grandchildren.
Some people – so far still a minority – are fascinated by this new knowledge, and take the results for granted.
But more research is needed before we can understand the results of sequencing correctly and apply this knowledge appropriately in risk calculations.
For example, more than 97% of our DNA contains no information for the synthesis of proteins – that is, it contains no genes – but nonetheless interacts with our genes to increase, decrease, or inhibit the production of proteins.
We also know that even if our DNA is somewhat responsible for increased risks for common diseases, and in some cases is fully responsible for inherited diseases, the environment in which this DNA functions can be as important as the composition of the DNA itself.
Indeed, from fertilization on, the environment in which the fertilized egg develops – for example, what the mother eats, whether she smokes or drinks alcohol, and whether she develops diseases or infections – places so-called epigenetic marks on the DNA or on the proteins surrounding it, affecting its function.
This conditioning effect continues and increases after birth, leading to different degrees of epigenetic marking in different organs.
Individual differences in susceptibility to diseases can be the consequence.
This is nicely illustrated in identical twins, who show as they age increasing differences in the way that their identical DNA is marked by the environment.
Nonetheless, the dangers implied by recent technological progress have become increasingly obvious.
For example, it is now possible to analyze the DNA of an unborn child from the blood of its mother and determine its risk for diseases later in life.
This opens the way to full-blown eugenics – the selection (by parents, authorities, or others) of children with characteristics considered “appropriate.”
We must take care that we do not become more fascinated by the composition of DNA and what characteristics and risks it carries than we are by the human qualities of less-than-perfect individuals, which we all are.
This does not mean that there are no applications of our knowledge that are not important, life-saving, and even necessary.
But they are more limited in number and scope than many seem to believe.
Now is a time not only to advance current research, but also to reflect and to tread cautiously.
The Limits of Legal Imperialism
“First thing we do,” wrote Shakespeare in Henry VI, Part II, “is kill all the lawyers.” Nowadays, the first thing countries trying to get rich seem to do is import dozens of lawyers.
In Eastern Europe, former communist countries applying for European Union membership must harmonize their laws with those of the EU.
So extensive is this process that it sometimes appears as a “legislative tornado.”
Importing laws and legal standards has dominated attempts by former communist countries to join the West.
Foreign experts helped draft model legal codes and revised draft laws throughout the Yeltsin era in Russia; outsiders helped craft Ukraine’s postcommunist constitution, the charters for the central bank of Estonia, Poland’s secured transaction regime, and Bulgaria’s securities regulations.
But importing well-designed laws from outside a country’s borders didn’t begin with communism’s fall.
Legal transplants, indeed, are as old as the law.
The most extensive transplants of law took place when Europe’s empires spanned the globe.
After World War II, the US launched the first “law and development movement” to promote growth and slow communism’s spread.
Legal reform efforts in the former socialist bloc mark the second major law and development movement.
This time around, however, Europe competed with the US in spreading laws eastward.
What is new today is that, not only individual governments but international organizations, are embracing the idea of strengthening legal structures so as to improve the globe’s international financial architecture.
The International Monetary Fund (IMF), for example, pushes widespread improvement in laws related to corporate and financial institutions.
The IMF endorsed legal standards and codes of best practice developed by other institutions, but also promotes the development of new standards, including accounting and auditing standards, securities market regulations, bankruptcy law, codes for corporate governance, insurance and banking regulations.
The root idea is that such imported laws, once incorporated into domestic legal systems, improve a country’s legal framework and enhance development.
Is this effort worthwhile?
Experience suggests that importing laws and legal standards rarely works well.
For centuries, Western law arrived with colonial rulers.
Even after Europe’s empires retreated, laws were still exported in order to foster development in post-colonial countries.
In many cases, however, these imported laws were ignored, selectively enforced, or were complied with only in form, not substance.
American antitrust law, when transplanted to Japan after World War II by General MacArthur, for example, led to only six criminal prosecutions in thirty years.
Land registration systems introduced in Africa conflicted with local customs, ignored soil conditions, and rarely led to the emergence of viable real estate markets.
Regular presidential elections in Mexico failed to disguise the fact that the same party ruled the country for over seven decades until earlier this year.
Imported legal solutions, it appears, are unlikely to work unless key constituencies - local farmers or business owners, say - support the process of legal transplantation and develop a demand for the legal solutions the transplanted rules offer.
Compatibility of imported rules with existing laws also matters.
Transplanting laws, indeed, seems as risky as transplanting organs because, like organs, legal transplants may be rejected.
Three factors are at work here:
- Only a few rules are freestanding, i.e. can be fully understood and enforced without reference to other legal terms and concepts.
Most legal terms and concepts are embodied in preexisting legal systems, whether informal or formal.
These preexisting conditions determine the interpretation of new rules as well as the receptivity of a country to imported rules and concepts;
- Application and enforcement of rules is determined by the perceptions of both users and law enforcers.
With the exception of highly technical rules, such as accounting standards, the contents and interpretation of rules is dependent on the context in which they are enforced.
So, even though a law may be standardized, law enforcement may see divergent outcomes;
- Effective law enforcement depends on voluntary compliance.
A law ignored by most is difficult to enforce, unless the state employs excessive punishment in a few cases or substantial resources.
Voluntary compliance in turn depends on the perception and acceptance of rules by domestic constituencies in the country that imported a law.
Moreover, the process by which a law is developed has consequences for the effectiveness of legal institutions.
Countries that developed their formal legal order internally develop more effective legal institutions than those who rely - or were forced to rely - on legal transplants.
Still, not all transplants fail.
Countries that actively select legal norms from elsewhere, adapting them to local conditions, are on a par with countries that develop their legal order internally when it comes to the effectiveness of legal institutions.
Perhaps the effectiveness of legal institutions in developing countries and emerging markets is not the only goal.
Standardization of laws could be intended as a signal to international investors.
If countries that adopt standards are defined as “safe” investments, foreign investors can justify their actions even if things go badly wrong.
But laws enacted for this reason could lose their signaling power when a financial crisis hits.
Investors need to take account of the effectiveness of domestic legal institutions, not just the laws on the books.
As the push to transplant legal norms grows, international agencies should focus on helping countries make their laws effective in practice, not just on paper.
They should improve access to information about how legal systems and laws actually function in their home jurisdictions.
This will provide recipient countries a clearer understanding of the context in which these institutions operate and the complexity of the tasks ahead.
It may also avoid transplanting solutions that simply won’t work absent complementary domestic legal rules and institutions.
Of course, this task is more difficult and time consuming than designing general standards, but the payoff may be worth it.
Europe’s Pain without Gain
VITORIA-GASTEIZ – In a recent interview, French President François Hollande made the crucial, but often forgotten, point that there are limits to the level of sacrifice that can be demanded of the citizens of southern Europe’s financially distressed countries.
To avoid turning Greece, Portugal, and Spain into collective “correctional houses,” Hollande reasoned, people need hope beyond the ever-receding horizon of spending cuts and austerity measures.
Even the most rudimentary understanding of psychology supports Hollande’s assessment.
Negative reinforcement and delayed gratification are unlikely to achieve their goals unless there is a perceived light at the end of the tunnel – a future reward for today’s sacrifices.
Public pessimism in southern Europe is largely attributable to the absence of such a reward.
As declining consumer confidence and household purchasing power deepen the recession, projections of when the crisis will end are repeatedly pushed back, and those bearing the brunt of austerity are losing hope.
Throughout history, the concept of sacrifice has merged theology and economics.
In the ancient world, people made often-bloody offeringsto divinities, whom they believed would reward them with, say, good harvests or protection from evil.
Christianity, with its belief that God (or the Son of God) sacrificed Himself to expiate humanity’s sins, inverted the traditional economy of sacrifice.
In this case, divine suffering serves as an exemplar of the selflesshumility with which earthly misfortunes should be endured.
Despite secularization, the belief that rewards, or achievements, require sacrifice has become an integral part of European cultural consciousness.
The idea of a “social contract” – which arose during the Enlightenment in orderto address, without resort to divine right, the legitimacy of the state’s authority over its citizens – rests on the premise that individuals surrender a certain degree of personal liberty in order to secure peace and prosperity for all.
As a result, political leaders have often asked citizens to sacrifice personal freedoms and comforts in the name of secularized spiritual entities, such as the nation or the state – and citizens have eagerly obliged. In his first speech to the House of Commons as Prime Minister of the United Kingdom, Winston Churchill inspired hope in a beleaguered nation when he famously declared that he – and thus Britain – had “nothing to offer but blood, toil, tears, and sweat.”
Given such countless precedents, it may be surprising that the rhetoric of sacrifice under the banner of austerity has proven so ineffective in Europe’s current crisis.
Some observers blame declining levels of commitment to anything that transcends the individual, including the political system.
But resistance to austerity in southern Europe is not rooted in general hostility toward sacrifice.
Rather, Europeans have come to believe that their leaders are demanding sacrifices that do not advance their interests.
Churchill gave Britons something to look forward to: victory.
Without a clear end that justifies it, sacrifice becomes meaningless.
Prosperity was supposed to legitimize the European Union.
After the period of rapid economic growth ended, Europe’s leaders came to rely, instead, on the threat of an evil that is greater than austerity: further destabilization of debtor countries, leading to default, expulsion from the eurozone, and economic, social, and political collapse.
But the rhetoric of fear is losing sway, because the “new deal” taking shape across southern Europe offers morerepression and less protection, thus violating the social contract’s fundamental tenets.
Indeed, while European citizens are being asked to sacrifice their standard of living – and even their livelihoods – for the sake of the “national economy,” transnational corporations are thriving.
The conditions imposed by the “troika” – the European Commission, the European Central Bank, and the International Monetary Fund – amount to an indefinite delay in addressing the needs of those asked to sacrifice and in repairing tattered social safety nets.
Yet national governments continue to implement policies that exacerbate injustice.
For example, Portugal’s 2013 budget reduces the number of tax brackets from eight to five – a move that will devastate the middle class.
Sacrifice used to involve ransoming the body – its pleasures, basic needs, and even vitality – for the sake of the spirit.
While the discourse of sacrifice persists, the logic that has shored it up for millennia has been abandoned.
Europe’s leaders must imbue their citizens with renewed hope.
The legitimacy of “post-national” Europe – based on the EU’s obligation, enshrined in the Lisbon Treaty, to promote “the well-being of its people” – is at stake.
The Limits of Self-Reliance
Being President of an African nation isn't easy.
Fifteen months ago, my government was freely elected to office.
No honeymoon period greeted us.
Instead, we faced a catastrophic economic situation: runaway inflation, unsustainably high interest rates, a collapsed currency, and a general loss of confidence.
Under the circumstances, my government took hard decisions and took them quickly.
We committed ourselves to spending only what we have or can reasonably expect to have.
We proceeded with caution and pragmatism in the management of the exchange rate of our currency and our monetary affairs, leading to a measure of stability.
I can claim credit for modest successes, but Ghana needs more than modest successes.
Ghana was the first sub-Saharan nation to win its independence from a colonial power, in 1957.
Yet the average per capita income of my people is lower now than in the 1960s, a decade after independence.
Many of our families subsist on less than one dollar a day.
Our galloping rate of population growth overwhelms our schools and hospitals.
Endemic diseases threaten us all, but especially our children.
Some of the blame for this we Ghanaians must accept.
My country must acknowledge that corruption has been a canker on our public and economic life and must be contained.
Corruption distorts the truth and saps the confidence and enthusiasm of Ghana's friends.
We know that the fight against corruption is no easy battle, but we have joined that battle and will do our best to minimize corruption as much as possible.
As a country, Ghana needs more trade, but the truth is that we do not have much to trade with.
There has been no diversification in our economy over the years.
One hundred years ago, our trading was limited to the supply of raw materials, mainly gold, timber and cocoa.
One hundred years later, our trading consists of raw materials, mainly gold, timber and cocoa.
Even though we have fertile land, water and hardworking people, somehow we have not managed to master the process of adding value to what we produce and have, as a consequence, been reduced to being at the whim of the world's unpredictable and capricious commodity markets.
Our agricultural practices are ancient and require urgent and wholesale modernization.
We pay $100 million a year to import rice we do not grow.
Irrigation should be the key to growing all the rice we need and yet we lose opportunities to irrigate.
One of our dams, the Kpong, each day sends 5 million gallons of fresh water into the Atlantic despite the fact that on one side of the river the land lies arid and the people are mired in poverty.
The same situation applies to other rivers in our country.
The reality of our situation can be spelt out in even more graphic terms.
In a globalized world where instant communications drives economic success, Ghana a nation of 19 million people has only 250,000 fixed phone lines.
My point is not only to advertise our backwardness, but to explain that at Ghana's current rate of development it is almost impossible to generate the necessary revenues from our own resources to finance our plans and needs.
That is not because my government is not willing or able to do what is required of it.
Costs are rising for consumers.
Electricity, water, petroleum products and many other consumer basics are seeing double-digit increases, partly as a result of a decrease in government subsidies.
Electricity prices, for instance, have doubled, while fuel for cars has risen 64%.
My government is looking for ways to raise revenue to pay for services, but it is unrealistic and even negative to exact more taxes from an already overburdened people.
Ghana needs foreign donors to plug the gap in its finances and assist us in standing on our own two feet.
To adapt the Chinese proverb, we want help to learn how to fish, rather than to be given fish for food.
We want Ghana to become a beacon in West Africa.
We want to show that good governance and growth will help to eradicate poverty and the instability that has characterized our region for so long.
We believe the Ghana story can become an example of how, with inspired leadership, a determined people in Africa can transform their country within one generation.
I must admit that Ghana's path towards self-reliance has not been smooth.
I am painfully aware that our past can be characterized by one step forward and two steps backward.
This time, however, we are determined not to slip up.
Learning from Germany
BRUSSELS – Ten years ago, Germany was considered the sick man of Europe.
Its economy was mired in recession, while the rest of Europe was recovering; its unemployment rate was higher than the eurozone average; it was violating the European budget rules by running excessive deficits; and its financial system was in crisis.
A decade later, Germany is considered a role model for everyone else.
But should it be?
In considering which lessons of Germany’s turnaround should be applied to other eurozone countries, one must distinguish between what government can do and what remains the responsibility of business, workers, and society at large.
The one area in which government clearly is in charge is public finance.
In 2003, Germany ran a fiscal deficit that was close to 4% of GDP – perhaps not high by today’s standards, but higher than the EU average at the time.
Today, Germany has a balanced budget, whereas most other eurozone countries are running deficits that are higher than Germany’s ten years ago.
The turnaround in Germany’s public finances was due mostly to a reduction in expenditure.
In 2003, general government expenditure amounted to 48.5% of GDP, above the eurozone average.
But expenditure was cut by five percentage points of GDP during the next five years.
As a result, on the eve of the Great Recession that began in 2008, Germany had one of the lowest expenditure ratios in Europe.
But the government could not really do much about Germany’s key problem, namely its perceived lack of competitiveness.
It is difficult to imagine today, but during the euro’s first years, Germany was widely considered uncompetitive, owing to its high wage costs.
When the euro was introduced, it was widely feared that Germany’s competitiveness problem could not be resolved, because the authorities would no longer be able to adjust the exchange rate.
But, as we now know, Germany did become competitive again – too competitive, according to some, owing to a combination of wage restraint and productivity-enhancing structural reforms.
In fact, that analysis is only half right.
On one hand, wage restraint was the key element, though the government could not impose it.
Persistently high unemployment forced workers to accept lower wages and longer working hours, while wages continued to increase by 2-3% per year in the eurozone’s booming peripheral countries.
On the other hand, while the German government did enact important labor-market reforms a decade or so ago, those measures apparently had no impact on productivity.
All of the available data show that Germany had one of Europe’s lowest rates of productivity growth over the last ten years.
That is not surprising, given the absence of any reforms whatsoever in the service sector, which is widely regarded as over-regulated and protected.
Manufacturing productivity increased somewhat, owing to intense international competition.
But, even in Germany, the service sector remains twice as large as the industrial branches.
Deep service-sector reforms would thus be necessary to generate meaningful productivity gains in the German economy.
But this did not happen even in 2003, because all the attention was focused on international competitiveness and manufacturing.
Nonetheless, the German model does hold some useful lessons for the eurozone’s embattled peripheral countries today.
Long-term fiscal consolidation requires, in the first instance, expenditure restraint; and labor-market reforms can, over time, bring marginal groups into employment.
But the biggest challenge for countries such as Italy or Spain remains competitiveness.
The periphery can grow again only if it succeeds in exporting more.
Wages are already falling under the weight of extremely high unemployment rates.
But this is the most painful way out, and it generates intense social and political instability.
A much better way to reduce labor costs would be to increase productivity – and Germany is no model in this respect.
Fortunately, however, some peripheral countries are now being forced by their creditors to undertake drastic reforms not only of their labor markets, but also of their service sectors.
The reforms, even if initially implemented under duress, represent the strongest grounds for optimism.
Over time, they will foster productivity and flexibility, and the countries that implement them thoroughly should thus become more competitive.
The most important lesson that has emerged from the reversal of fortunes within the eurozone over the last ten years is that one should not extrapolate from the difficulties of the moment.
The reforms undertaken in some peripheral countries are much deeper than those undertaken by Germany a decade ago.
Those countries that persist with these reform efforts could well emerge leaner and more competitive.
Those that do not (Italy appears to be heading in this direction) will be stuck in a low-growth trap for a long time, while Germany’s top position is not guaranteed forever.
Indeed, where individual countries will end up in ten years is highly uncertain, and the current pecking order within the European economy could change quickly.
The Only Game in Town
TOKYO – What should central banks do when politicians seem incapable of acting?
Thus far, they have been willing to step into the breach, finding new and increasingly unconventional ways to try to influence the direction of troubled economies.
But how can we determine when central banks overstep their limits?
When does boldness turn to foolhardiness?
Central banks can play an important role in a cyclical downturn.
Interest-rate cuts can boost borrowing – and thus spending on investment and consumption.
Central banks can also play a role when financial markets freeze up.
By offering to lend freely against collateral, they “liquify” assets and prevent banks from being forced to unload loans or securities at fire-sale prices.
Anticipating such liquidity insurance, banks can make illiquid long-term loans or hold other illiquid financial assets.
To the extent that unconventional monetary policy – including various forms of quantitative easing, as well as pronouncements about prolonging low interest rates – serves these roles, it might be justified.
For example, the US Federal Reserve’s first round of so-called quantitative easing (QE1), implemented in the midst of the crisis, was doubly effective: By purchasing mortgage-backed securities, the Fed brought down interest rates in that important market (in part, probably, by signaling its confidence in those securities), and restored it to vitality.
Similarly, with its outright monetary transaction (OMT) program, the European Central Bank has offered to buy peripheral eurozone countries’ sovereign bonds in the secondary market – provided that they sign up to agreed reforms.
The logic is that conditionality will ensure that countries are solvent, while OMTs will restore trust to a market that has broken down because investors fear that the countries concerned will exit the eurozone.
Again, its effect, thus far, has been significant.
Other unconventional policies, however, have been undertaken to stimulate the economy, rather than to deal with broken markets.
The benefits have been commensurately smaller.
QE2, in which the Fed bought long-term government bonds, did not have a discernible effect on long-term government interest rates.
Indeed, with its recent decision to pursue QE3, the Fed is focusing once again on the mortgage-backed securities market; but, given that the market is much healthier now, it is unclear how much good this will do.
Recently, the Fed expressed its intent to keep policy rates low for a long time – until employment picks up strongly.
The hope is that if investors consider this announcement credible, long-term interest rates will come down further, encouraging spending.
But the immediate effect on long-term bond rates has not been encouraging.
As central banks venture farther into uncharted territory, advocates argue that at worst they will do no harm.
In fact, no one really knows.
For example, sustained low interest rates hurt savers who traditionally prefer safe short-term investments.
Pensioners and those near retirement, facing low income from interest, may cut back further on consumption, weakening the economy.
Bolder pensioners, desperate to generate higher returns, may take undue risks – for example, investing in junk bonds – that could jeopardize their nest eggs.
And, unfortunately, such financial risk-taking may have little impact in terms of spurring corporations to assume more risk by investing.
Similarly, a potential downside to quantitative easing is that low interest rates send capital to higher-growth, high-interest-rate countries.
In theory, as capital floods in, these countries’ exchange rates will appreciate rapidly, making them look unattractive and automatically stemming the flow.
In practice though, as investors make money on their trades, they bring in yet more money, forcing further currency appreciation.
All too often, the process does not end smoothly but in a crash.
No wonder recipient countries resist inflows of hot capital.
We also know little about how smooth the exit from quantitative easing will be.
In theory, as the economy picks up and interest rates begin to climb, central banks will simply pay higher interest rates on their reserves, so that they can finance their holdings of long-term securities and shrink them slowly.
But higher interest rates also imply large capital losses for central banks’ asset holdings.
Even if some of these losses are offset for the government as a whole (as the central bank loses on its holdings of government debt, the treasury gains in equal measure, because the debt it owes is worth less), the losses on long-term private debt holdings are real.
Moreover, the argument that losses are offset is not easy to explain to the public.
Will opinion be sympathetic to the Fed when politicians like Ron Paul excoriate it for losing tens of billions of dollars monthly on its asset holdings?
Will bond markets fall sharply (and interest rates rise) as markets fear that the Fed will be pushed to sell its enormous holdings in short order?
A last defense offered by advocates of continuing on the path of adventurous monetary policy, even when the perceived benefits are small, is that, because politicians refuse to settle their differences and act, monetary policy is “the only game in town.”
In democracies, when there are no other alternatives, politicians often eventually do the right thing.
By creating the impression that something beneficial is being done, unconventional monetary policy relieves pressure on politicians.
So, when central bankers argue that they are the only game in town, they are ensuring that outcome.
Central bankers nowadays enjoy the popularity of rock stars, and deservedly so: their response to the difficult and uncertain environment during and after the financial crisis has been largely impeccable.
But they must be able to admit when they are out of bullets.
The Lingering Shadow of Mad Cow Disease
Optimists are proclaiming that variant Creutzfeldt-Jakob disease (CJD), the human form – always fatal – of bovine spongiform encephalopathy (BSE), or “Mad Cow Disease,” is on the wane.
Obviously, given the degree of suffering and public anxiety that variant CJD has caused, the possibility that it is receding is welcome news.
But is it true?
CJD belongs to the family of what are called prion diseases, a unique group of neurodegenerative diseases that can be transmitted.
Although the precise nature of the disease’s transmission remains uncertain, a key event in these disorders is the conversion of the prion protein’s normal cells to an abnormal form that appears to be the major (if not the sole) component of the infection.
Variant CJD was first described in 1996, following intensive surveillance activities undertaken by the UK National CJD Surveillance Unit (NCJDSU) in Edinburgh.
This new form of prion disease had distinctive clinical and pathological features, and occurred in young patients within a single genetic subgroup.
My colleagues and I in NCJDSU argued that this new form of human prion disease was likely to be linked to exposure to the BSE agent, probably by eating BSE-infected meat products.
Later investigations have shown that the transmitting agent in variant CJD shares identical biological properties with BSE’s agent, supporting a causal relationship.
BSE occurred as an epidemic in the UK after its identification in 1986, and several million BSE-infected cattle are likely to have entered the human food chain between 1980 and 1996.
It is estimated that most of the UK population was exposed to BSE through diet at this time.
Subsequent epidemiological studies in the NCJDSU indicate that individuals with variant CJD are likely to have consumed more meat products than control patients, further supporting a link between these disorders.
Moreover, epidemiological studies indicated that BSE was likely to have been transmitted to cattle (and other species) by meat-and-bone-meal animal feed produced by UK rendering plants and exported to many countries.
This pattern of trade has now been mirrored in the increasing geographical spread of BSE from the UK to other countries in Europe, and more recently to Japan and the United States.
This unfortunately has been accompanied by increasing number of variant CJD cases in Canada, France, Ireland, Italy, Japan, Netherlands, Portugal, Saudi Arabia and the USA.
In the UK, however, the epidemic of variant CJD seems to have peaked in 2000 and is now in decline, with 156 cases being identified so far.
However, a retrospective study of abnormal prion protein accumulation in appendix and tonsil samples from over 12,600 people in the UK has yielded three more cases, which suggests that the level of BSE infection in the UK population is much higher than the actual number of confirmed variant CJD cases indicates.
Given the extensive exposure of the UK population to BSE in the late 1980’s and early 1990’s, what explains the low number of confirmed cases?
One clue lies in the results of studies of the transmission of BSE and variant CJD in mice, which in many cases does not result in death from clinical disease, but instead can produce an asymptomatic “carrier state,” in which the disease has not yet manifested itself.
These findings have been reinforced by an extensive control study to identify risk factors for variant CJD, which recently identified two cases of human-to-human transmission of variant CJD infection through transfusions of particular types of red blood cells.
These cases are particularly interesting, because the first case resulted in the clinical onset of variant CJD (with typical symptoms and pathology) 6.5 years after the transfusion from a donor who, although asymptomatic at the time of donation, subsequently developed and died from CJD.
The second case involved a known recipient of such cells transfused from another asymptomatic donor who subsequently died from variant CJD, whereas the recipient showed no evidence of neurological disease and died of unrelated causes.
However, abnormal prion protein was detected in the recipient’s lymphoid tissues, indicating transmission of infection from an asymptomatic individual.
These cases have major implications for blood safety everywhere, implying additional restrictions on eligibility for blood donation and on the processing and handling of blood and blood products.
Individuals infected with BSE who remain in an asymptomatic state during their lives could represent a risk to others of potential secondary transmission of variant CJD through blood transfusion or surgery.
Further uncertainty regarding the future of variant CJD arises from the observation that the average age of the patients in the UK has not increased significantly over the past 10 years.
If the epidemic were in decline, it might be anticipated that the average age of the patients would increase in the final stages (as occurred with cattle in the UK that were infected with BSE).
But variant CJD affects patients who are much younger than sporadic CJD patients, which might be due to either age-related exposure to BSE or age-related susceptibility.
Until we know the answers to these questions, it seems premature to decide that we are witnessing the beginning of the end of variant CJD.
On the contrary, the cases identified so far may be only the tip of the iceberg, with a much larger number of asymptomatic infections posing a risk to public health through secondary transmission.
Indeed, secondary transmission by blood transfusion or surgical instruments might even result in variant CJD becoming endemic in the UK population.
This would prove impossible to eradicate in the absence of improved means of cleaning and decontaminating surgical instruments and a specific test – preferably based on a blood assay – to screen asymptomatic carriers.
Nutrition for Growth
GENEVA – This week, British Prime Minister David Cameron, whose country holds this year’s G-8 Presidency, is hosting a “Nutrition for Growth” summit in London.
The issue could not be more urgent.
We need the political will to tackle malnutrition now, with access to nutritious food recognized as a fundamental human right.
Malnutrition kills an innocent child every five seconds, and is responsible for 11% of the global burden of disease.
The summit rightly focuses on the direct links between nutrition and productivity, economic growth, and political stability.
Investment in nutrition is investment in generations of children in poor communities, and the summit must place women and mothers at the center of proposed solutions.
That is all the more important because a new baby boom is taking place – not in the United States or Europe, but in Sub-Saharan Africa and Southeast Asia.
Infants born over the next 20 years will enter adulthood at a unique time: these regions’ working populations will outnumber their non-working populations by two to one.
This provides a rare opportunity to boost economic growth, save and improve lives, and help families, communities, and countries move from poverty to prosperity.
Recent research has shown that nutrition can be a major catalyst of inclusive economic growth, with each dollar of investment yielding a return of $15-138 dollars.
Defeating malnutrition is not only an ethical duty; we also know that it can boost GDP growth in Africa and Asia by up to 11%.
We now know that giving pregnant mothers and their babies essential nutrients in the critical 1,000-day window from conception to a child’s second birthday is the best investment in their health and that of society at large.
The alternative is stunting, which currently afflicts an astronomical 165 million children.
Indeed, stunting has come to represent the true face of contemporary global poverty, causing irreparable damage to children’s cognitive development and physical growth.
Moreover, there is ample medical evidence that malnutrition in this “window of nutrition” is linked to increases in hypertension, cardiovascular disease, diabetes, and even obesity, resulting in higher health-care costs later in life.
But in India, a 2011 study of 112 rural districts across the country found that “less than 20% of mothers had heard the word for malnutrition in their local language.”
In Africa, most food is produced by women smallholder farmers.
Yet malnutrition is rife because these women own only 2% of the land and access only 10% of the available extension services.
To paraphrase what many women farmers have said to me, “We are the primary producers.
But we receive very little for our hard work, because by the time our produce reaches the market, middlemen have taken the profit.
But Africa would starve if we went on strike.”
Any solution to hunger and malnutrition must place such women at its core.
Recent development research is unambiguous: empowering women and raising their incomes results in better education, health, and nutrition for their children.
We must make markets work for them and their families.
The summit’s appeal for global unity to combat malnutrition must target heads of state, finance and health ministers, as well as business and civil-society leaders.
We have to make the food system work for all citizens, which requires stronger action from each of these actors.
In particular, governments must invest in nutrition through budgets, introduce mandatory fortification of staple foods, curb “junk food,” and improve quality control.
Similarly, civil-society organizations must build robust advocacy and education programs that work with local communities to change unhealthy eating habits, emphasize the critical importance of exclusive breast feeding in the first six months, and explain the link between lifestyle, diet, and exercise in preventing disease.
Finally, the business community should use its management expertise, marketing, technology, logistical capacity, and reach to improve the quality and affordability of nutritious foods on the market.
Moreover, large companies should use their global supply chains to empower their workforces and women smallholder farmers.
Local, large-scale solutions are emerging.
In Bangladesh, where the rate of malnutrition is among the highest in the world, an affordable vitamin and mineral supplement is now available that can be added to porridge and soup.
A partnership between BRAC, the world’s largest development NGO, and the Bangladeshi pharmaceutical company Renata produces the supplement from locally available chickpeas and lentils; tens of thousands of health-care workers then distribute it.
Similarly, in India’s Rajasthan state, high-quality complementary foods produced by decentralized women’s self-help groups are improving the nutrition of children aged 6-36 months.
In Ghana, a new instant maize-based product, enriched with vitamins and minerals, is the first of its kind on the market, owing to its affordability and natural integration with breastfeeding.
As a result, the nutrition of more than one million children will be improved during their first 1,000 days of life.
We need greater innovation in finding solutions.
We need partnerships that leverage the knowledge and solutions that come from local communities.
While we recognize the commitment of the United Kingdom in promoting the new Scaling Up Nutrition movement, coordinated by the United Nations, we also know that who sits at the table to design solutions determines who eats at the table later.
By investing now in nutrition and improved food security, by 2020 we can lift 50 million people out of poverty, prevent stunting in 20 million children under the age of five, and save 1.7 million lives.
The Liquidity Puzzle
We increasingly hear that “the world is awash with liquidity,” and that this justifies expecting asset prices to continue rising.
But what does such liquidity mean, and is there really reason to expect that it will sustain further increases in stock and real estate prices?
Liquid assets are assets that resemble cash, because they can easily be converted into cash and used to buy other assets.
The idea seems to be that there are a lot of liquid assets lying around, and that they are being used to get money to bid up the prices of stocks, housing, land, art, etc.
That theory sounds as general and fundamental as the theory that global warming is melting glaciers and raising sea levels around the world.
Rising sea levels would explain a lot of geological and economic events.
Is rising financial liquidity really a similar force?
What is this theory anyway?
Traditionally, “awash with liquidity” would suggest that the world’s central banks are expanding the money supply too much, causing too much money chasing too few goods.
But if that were the problem, one would cause all prices – including, say, clothing and haircuts – to rise.
That is what the Federal Reserve Chairman Arthur Burns meant when he said that the United States was “awash with liquidity” in 1971, a period when the concern was general inflation.
But the recent popular use of the term “awash with liquidity” dates to 2005, a time when many central banks were tightening monetary policy.
In the US, the Fed was sharply raising rates.
Central banks worldwide clearly have been behaving quite responsibly with regard to general inflation since 2005.
According to the IMF, world inflation, as measured by consumer price indices, has generally been declining since 2005, and has picked up only slightly in 2007.
So it is something of a puzzle why people started using the term so much in 2005.
It may have had something to do with the near-total lack of response of long-term interest rates to monetary tightening.
If central banks are tightening and long-term rates aren’t rising, one needs some explanation.
Liquidity is just a nice-sounding word to interpret this phenomenon.
Another interpretation is that people are saving a great deal, and that all this money is chasing investment assets, bidding up prices.
Current Fed Chairman Ben Bernanke raised this idea a few years ago, alleging a world “saving glut.”
But, once again, the data do not bear this out.
The IMF’s world saving rate has maintained a fairly consistent downward trend since the early 1970’s, and, while it has picked up since 2002, it is still well below the peak levels attained in the previous three decades.
True, savings rates in emerging markets and oil-rich countries have been increasing since 1970, and especially in the last few years, but this has been offset by declining saving rates in advanced countries.
Another interpretation is that “awash with liquidity” merely means that interest rates are low.
But interest rates have been increasing around the world since 2003.
Hardly anyone was saying the world was “awash with liquidity” in 2003.
The use of the term has grown in parallel with rising , not falling, interest rates.
Yet another theory is that changes in our ways of handling risk have reduced risk premia.
The growth of the financial markets’ sophistication has allowed risks to be sliced and diced and spread further than ever before.
Indeed, the much-vaunted market for collateralized debt obligations, which divides risks into tranches and places the different risk levels in different places according to the willingness to accept them, has plausibly played a role in boosting asset prices.
But this is really a theory about risk management for certain kinds of products, not “liquidity” per se .
Hyun Song Shin of Princeton University proposed a theory of excess liquidity in a paper with Tobias Adrian that he presented last month at the Bank for International Settlements in Brunnen, Switzerland.
He says that it merely reflects a feedback mechanism that is always present: any initial upward shock to asset prices strengthens the balance sheets of financial institutions, so in response they borrow more and bid up prices even more.
But if that is what the term “awash with liquidity” means, then its widespread use today is simply a reflection of the high asset prices that we already have.
It could even be called an approximate synonym for “bubbly.”
The term “awash with liquidity” was last in vogue just before the US stock market crash of October 19, 1987, the biggest one-day price drop in world history.
The reasons for that crash are complex, but, as I discovered in my questionnaire survey a week later, it would appear that people ultimately did not trust the market’s level.
As a result, they were interested in strategies – such as the portfolio insurance strategies that were popular at the time – that would allow them to exit the market fast.
The term “awash with liquidity” was also used often in 1999 and 2000, just before the major peak in the stock market.
So its popular use seems not to reflect anything we can put our finger on, but instead a general feeling that markets are bubbly and a lack of confidence in their levels.
Under this interpretation, the term’s popularity is a source of concern: it may indicate a market psychology that could lead to downward volatility in prices.
Beggar Thy Currency Or Thy Self?
NEWPORT BEACH – Not many countries nowadays seek a strong exchange rate; a few, including systemically important ones, are already actively weakening their currencies.
Yet, because an exchange rate is a relative price, all currencies cannot weaken simultaneously.
How the world resolves this basic inconsistency over the next few years will have a major impact on prospects for growth, employment, income distribution, and the functioning of the global economy.
Japan is the latest country to say enough is enough.
Having seen its currency appreciate dramatically in recent years, Prime Minister Shinzo Abe’s new government is taking steps to alter the country’s exchange-rate dynamic – and is succeeding.
In just over two months, the yen has weakened by more than 10% against the dollar and close to 20% against the euro.
European leaders have already expressed reservations about Japan’s moves.
The US auto industry is up in arms.
And, a few days ago, Jens Weidmann, the president of the Bundesbank, publicly warned that the world risks a harmful and ultimately futile round of competitive exchange-rate depreciations – or, more bluntly, a “currency war” (a term used previously by Brazil to express similar concerns).
Of course, Japan is not the first country to go down this path.
Several advanced and emerging economies preceded it, and I suspect that quite a few will follow it.
It is just over a year since Switzerland surprised many when it announced, and strictly implemented, a threshold beyond which its currency would not be allowed to appreciate against the euro.
And, remember, the country’s operating model for centuries has been to provide a safe haven for foreign capital.
One need not be an economist to figure out that, while all currencies can (and do) depreciate against something else (like gold, land, and other real assets), by definition they cannot all weaken against each other.
In order for some currencies to depreciate, others must appreciate.
Here is where things get interesting, complex, and potentially dangerous.
In today’s world, no significant group of countries is looking for currency strength.
Some resist appreciation actively and openly; others do so in a less visible manner.
Only the eurozone seems to accept being on the receiving end of other countries’ actions.
None of this is unprecedented, and there is a lot of scholarship demonstrating why such beggar-thy-neighbor approaches result in bad collective outcomes.
Indeed, multilateral agreements are in place to minimize this risk, including at the International Monetary Fund and the World Trade Organization.
Yet, when push comes to shove, country after country is being dragged into abetting a potentially harmful outcome for the global economy as a whole.
Worse, this process has not yet registered seriously on the multilateral policy agenda.
There are many reasons for this, ranging from the rather debilitated state of multilateral governance to the urgency of domestic issues currently commanding national policymakers’ attention.
But there is also something else at work: The causes of today’s predicament are difficult to comprehend and counter effectively.
Unlike the old days, the threat of currency wars is not directly related to trade imbalances and balance-of-payments crises.
Rather, an important driver is major central banks’ pursuit of experimental measures in order to compensate for policy inadequacies and political dysfunction elsewhere.
If the world is to avoid serious harm, it is important to understand the dynamics at work.
A simplified description runs as follows: Facing low growth and high unemployment, and with other policymakers stuck on the sideline, a central bank like the US Federal Reserve feels that it has no choice but to adopt a highly accommodating monetary policy.
As policy interest rates are already floored at zero, it is compelled to venture ever deeper into the uncharted realm of “unconventional policies.”
The aim, as Fed Chairman Ben Bernanke said again in December, is to “push” investors to take more risk.
Specifically, it is hoped that an artificial surge in asset prices will make people feel richer and more optimistic, thus triggering “wealth effects” and “animal spirits” that stimulate consumption and investment spending, bolster job creation, and, in the process, “validate” the artificial asset pricing.
In practice, the strategy has proved not to be so straightforward.
Moreover, part of the liquidity that the Fed injects finds its way into other countries’ financial markets.
Witness the surge in capital flows to emerging markets as investors chase higher financial returns.
Complicating matters even more, these inflows have become less and less connected to the recipient countries’ economic and financial fundamentals.
Many investors also feel the need to balance increasingly speculative investments (“satellite positioning”) with much safer investments (“core positioning”).
To meet the latter objective, they turn to prudently managed countries, placing upward pressure on their currencies, too – and, again, beyond what would be warranted by domestic fundamentals.
It is no wonder that more and more governments are worried about exchange-rate appreciation.
In addition to short-term policy headaches, stronger currencies carry potentially significant costs in terms of hollowing out industrial and service sectors.
So, after a varying mix of tolerance and “heterodox” responses, officials are pulled into loosening their own monetary policy in order to weaken their countries’ currencies or, at a minimum, limit the pace of appreciation.
This period of expanding policy inconsistencies could prove to be temporary and reversible if central banks succeed in jolting economies out of their malaise, and if countries come to recognize that greater cross-border policy coordination is urgently needed.
The risk is that the phenomenon leads to widespread disruptions, as increasingly difficult national policy challenges stoke regional tensions and the multilateral system proves unable to reconcile imbalances safely.
If policymakers are not careful – and lucky – the magnitude of this risk will increase significantly in the years ahead.
The Long March in Nepal
KATMANDU – Confounding everyone except themselves, Nepal’s hard-line Maoists have taken a commanding role following the country’s landmark elections.
The people of Nepal have more than one reason to celebrate.
The first nationwide poll in nearly a decade passed off relatively well and was endorsed by Nepali officials as well as the hundreds of international election observers.
According to former US President Jimmy Carter, the election was the most “transformational” of the many polls he has observed around the world.
The high voter turnout, coupled with the relatively peaceful manner in which the election took place, is a testament to the Nepali people’s desire to cement the peace process and contribute in determining the political future of the country.
The Maoists, former rebels who until two years ago were waging a brutal “people’s” war, will soon lead the next government in Nepal.
The former rebels have received the maximum number of seats in the constituencies where counting is complete.
Surprisingly, both local and international analysts had predicted them to finish third, behind the Nepali Congress (NC) and the United Marxist-Leninists (UML), the two largest parties that have been at the helm since multi-party democracy was restored in Nepal in 1990.
While experts are busy trying to explain the Maoists’ unprecedented triumph, much hope rests on the newly elected members of the 601-seat Constituent Assembly.
The Assembly’s first responsibility will be to draft a new constitution that can help reunify Nepal’s disparate communities.
A second priority will be to decide the fate of Nepal’s centuries-old monarchy.
The Maoists ran on an anti-royalist platform, and it is widely anticipated that the first meeting of the Assembly will abolish the monarchy and declare Nepal a “people’s republic.”
But the king still has some support, though clearly far short of a majority.
Nepal has had a long history of monarchy, spanning close to two and a half centuries, and bringing an end to this tradition might prove to be more difficult than expected.
The Maoists’ willingness and ability to display a degree of sympathy and respect for their opponents will go a long way toward determining their success in office.
It would certainly behoove the Assembly to give serious and immediate consideration to the country’s deplorable socioeconomic conditions.
Nepal is one of the world’s poorest countries, ranking near the bottom even in the South Asian region.
The incoming members of the Assembly therefore must address everyday issues – employment, healthcare, education, social justice, minority rights, security, etc.
Suffice it to say that there Nepal faces a multitude of flashpoints, as well as a large number of detractors who would like to see this historic process derailed.
The success or failure of the Constituent Assembly will rest on whether the presumptive winner, the Communist Party of Nepal (Maoists), will work collaboratively with the other parties rather than trying to push its own agenda exclusively.
The main challenge for the Assembly is to forge onward, keeping in mind that the road ahead is full of seemingly insurmountable challenges.
Nepal’s earlier experiments with democratic governance were not very successful; democratically elected governments (in the late 1950’s and the 1990’s) were unceremoniously replaced by prolonged autocratic rule.
So, leaving responsibility solely to political leaders and policymakers this time would be a grave mistake.
Every Nepali has a role to play to ensure that the country’s dark political history does not repeat itself, and thus to help move the country in the right direction.
Voting for change has sent a clear message; making sure that Nepal’s leaders follow the will of the people is an altogether different challenge.
It is to be hoped that Nepal’s newly elected Maoists have the wisdom to listen to their newly empowered electorate.
The Full Value of Childhood Vaccines
GENEVA – If you want to know the value of vaccines, just spend some time in a clinic in Africa.
The faces of the mothers and fathers say it all: vaccines prevent illness and save lives.
But what these parents probably do not realize is that the story does not end there.
As they leave the clinic and head home, they have already taken steps to improve not just their child’s health, but also his or her educational prospects and long-term future.
What’s more, they will have also helped to improve their own lives and enhance the economic prospects of their wider community.
The reasons are simple.
We know that children who are healthier do not require medical treatment or care, both of which cost time and money.
So, by avoiding illness, infants have a greater chance of growing into healthier children who are able to attend school and become more productive members of society.
Meanwhile, instead of caring for a sick child, parents can work, thereby increasing their ability to earn.
So, rather than spending money on medical bills, they are boosting their income and spending capacity, both of which help the economy to grow.
All of this intuitively makes sense, and there is a growing body of scientific evidence to back it up.
It has been shown, for example, that vaccinated children not only do better at school, but also that, through the prevention of damage that can be caused by infectious diseases and resulting nutritional imbalances, they appear to benefit in terms of cognitive development.
Similarly, vaccination has been shown to lead to wage gains across populations, while improvements in child survival rates are associated with lower fertility rates.
And, in terms of the wider gains, one study found that a five-year improvement in life expectancy can translate into a 0.5-percentage-point increase in annual per capita income growth.
What all of this means is that by measuring the effectiveness of vaccines merely in terms of “lives saved,” we could be seriously underestimating the full extent of the benefits that they offer.
As things stand, in terms of the cost effectiveness of health interventions, vaccines are already considered one of public policy’s “best buys.”
Indeed, it has been calculated that the work being done to expand vaccine coverage in developing countries by my organization, the GAVI Alliance, should yield an 18% return on investment by 2020.
But now, as more evidence is gathered, it looks likely that even this may not do justice to the full value of vaccines.
Given the progress made in expanding vaccination programs in recent years, this revelation represents a unique opportunity for the global community, particularly as we begin to close the lid on polio.
With poliovirus now endemic in just three remaining countries, we are already beginning to use the momentum that has carried eradication efforts so far to broaden the scope of routine immunization to reach more of the poorest children.
Now the same health systems and strong immunization services can act as a platform to help fight poverty, too.
But, with current estimates indicating that, by 2030, only half the world’s children will be fully immunized with the 11 vaccines recommended globally by the World Health Organization, we clearly still have some way to go.
For our part, we are helping to change that.
Since it was formed in 2000, GAVI has already helped to immunize more than 370 million children against a range of deadly diseases.
As a result, we have prevented 5.5 million deaths, and we aim to immunize a further 245 million children and save five million more lives by 2015.
At the same time, we now know that the value of vaccines extends far beyond the number of lives saved.
Investment in vaccines is not about short-term savings, either in terms of lives or economic costs; it is about providing children with lifetime protection and the ability to realize their full potential.
So, while reducing mortality is already reason enough to want to immunize every child on the planet, now we have the added motivation that we are not just saving lives, but also helping to improve many more lives in the process.
The Looming Crisis with Iran
NEW YORK – When Barack Obama takes office in January, he will be greeted by many difficult challenges, beginning with the acute economic crisis.
But he will not have the luxury of focusing on this exclusively.
He will also have to contend with an array of foreign policy challenges.
Of these, Iran and its nuclear program may well constitute the Obama administration’s first foreign policy crisis.
The reason is simple.
Iran is well down the path to being able to enrich uranium on a large enough scale to produce a nuclear weapon.
The International Atomic Energy Agency just reported that Iran may well reach this point in 2009.
An Iran with a nuclear weapon or the ability to produce one or more bombs in short order poses a true danger.
Still, one path for the new American administration would be to adopt the “North Korea” option and live with the threat.
The risk is that doing so would make an already unstable and conflict-prone Middle East even more so.
In a crisis, Israel or Iran could be tempted to use nuclear weapons out of fear that the other would if they did not.
There is also the chance that other countries such as Egypt or Saudi Arabia would develop or acquire nuclear weapons of their own.ampnbsp;
The United States could take steps to reduce these risks, including providing missile defense and security guarantees to selective countries, but it is far from clear that such efforts would succeed.ampnbsp;
Moreover, further nuclear proliferation is not the only danger if Iran proceeds with its nuclear efforts.
What Iran does directly and through such groups as Hezbollah and Hamas has and will continue to have a major and mostly adverse impact on the future of Iraq, Afghanistan, Lebanon, and Palestine.
Iran is already one of the Middle East’s most powerful countries.
A nuclear Iran would likely act more aggressively throughout the region in the belief that its nuclear capability afforded it considerable protection.
A second policy option would be for the US, Israel, or both to attack Iran’s known nuclear installations.
Such a preemptive attack would certainly destroy some or even most of Iran’s existing nuclear facilities and materials.
But some capability would likely survive, and the nuclear program could be rebuilt over several years in a manner that would make a second attack much more difficult.
There would also be serious consequences long before then.
It is highly unlikely that Iran would simply absorb a US or Israeli military strike.
Instead, it could be expected to retaliate by attacking US forces in Afghanistan and Iraq, unleashing terrorist attacks throughout the region and the world, and interrupting the flow of tanker traffic through the Strait of Hormuz.
The last thing the world economy needs is a $200 barrel of oil, but this could be the result.
What is certain is that both options – living with a nuclear Iran or attacking it – involve serious risks and costs.
The best outcome would be one in which Iran was persuaded to freeze or suspend its nuclear efforts or, better yet, give up an independent capability to enrich uranium.
It is conceivable that Iran could be allowed a symbolic “right” to enrich, but any enrichment program would have to be extremely small so as not to pose a strategic threat.
It would also need to be subject to highly intrusive inspections, so that the world could be confident that Iran was not secretly enriching uranium and developing nuclear weapons.
What would it take to essentially eliminate Iran’s uranium enrichment effort?
To begin with, it would entail putting together a diplomatic package that offered Iran access to nuclear energy but not physical control over nuclear materials.
Economic sanctions that are hurting Iran’s troubled economy could be eased.
Security assurances could be provided to Iran and normal diplomatic relations between Iran and the US and others could be established.
There is no guarantee that Iran would accept such an offer.
But it might, especially now that the price of oil has fallen below $50 a barrel, a level that leaves Iran’s inefficient economy in worse shape than ever.
What would also help would be to make clear that Iran would face additional sanctions, including constraints on its ability to import refined petroleum, if it refused to accept a fair and reasonable compromise.
Convincing Russia and China to support a package of requirements, incentives, and penalties would be important.
In addition, the odds Iran would accept such an offer might increase if the details were made public.
The Iranian people may well choose leaders in their June 2009 elections who can deliver a much higher standard of living over those who would run the country into the ground.
But it is possible that Iran will reject any diplomatic compromise, even one put forward directly by the US.
Obama and the world would then have to choose between tolerating an Iran with nuclear weapons (or the ability to produce them quickly) and using military force to prevent this outcome.
It is the worst sort of choice, as neither option is attractive.
For that reason, it is all the more important that diplomacy be recast and given one last chance.
The Lost Continent
LONDON – Home to one-sixth of the world’s people, but contributing only one-fortieth of world GDP, Africa is the most conspicuous victim of the global recession.
After a half-decade of 5% growth, the continent’s growth rate is expected to halve in 2009.
Some countries, like Angola, are contracting.
Elsewhere, the crisis has swept away the benefits of several years of economic reform.
Many Africans will fall back into desperate poverty.
Development economists wring their hands in despair: Africa defies their best efforts to create a miracle.
On the eve of decolonization in 1960, real GDP per head in Sub-Saharan Africa was almost three times higher than in Southeast Asia, and Africans were expected to live two years longer on average.
In the 50 years since, African real GDP per head grew by 38% and people lived nine years longer, while in Southeast Asia GDP per head grew by 1000% and people lived 32 years longer.
At first, the solution for Africa’s under-development seemed obvious.
Africa needed capital, but lacked savings.
Therefore, money had to be provided from outside – by institutions like the World Bank.
Since extracting commercial interest rates from starving people seemed like usury, the loans had to be offered on a concessionary basis – in effect, aid.
Throwing money at poverty became a panacea.
It was easy to sell, and it appealed to people’s humanitarian instincts.
It also assuaged the guilt of colonialism, as with parents who give their children expensive gifts to make up for neglecting or mistreating them.
But it did no good.
Most aid was stolen or wasted.
Despite the eight-fold increase in aid per head to the Democratic Republic of the Congo between 1960 and 2007, real GDP per head decreased by two-thirds in the same period.
“Trade not Aid” became the new watchword.
Spearheaded by the economist Peter Bauer in the 1980’s, it became the nostrum of the Washington Consensus.
Africa, it was fashionable to say, would catch up only if it deregulated its economies and embraced export-led growth like the “miracle” economies of East Asia.
Advisers from the World Bank and the International Monetary Fund told African governments to stop subsidizing “national champions” and drop their trade barriers.
Provision of a reduced volume of aid was to be conditioned on dismantling the public sector.
By 1996, only 1% of the population in Sub-Saharan Africa was civil servants, compared to 3% in other developing regions and 7% in the OECD.
Yet despite the rollback of the state, Africa has not made the leap to prosperity.
In a complete affront to economic theory, the little capital there is in Africa is fleeing the continent to be invested in already capital-rich societies.
The problem with Africa, economists then started to say, was that it lacked effective states.
Many countries had “failed” states that could not provide even the minimum conditions of security and health.
With 15% of the world’s population, sub-Saharan Africa accounted for 88% of the world’s conflict-related deaths and 65% of AIDS victims.
What historians have known for 2,000 years – and what the eighteenth century’s classical economists also knew – suddenly struck the new breed of mathematical economists in the 1990’s like a flash of lightning: prosperity depends on good government.
So how to get good government?
Restoring or securing it conjures up the dreaded specter of colonialism.
After all, for all its other failings, colonialism provided the essential precondition of economic development: peace and security.
The development discussion today is essentially about how such preconditions of poverty reduction and economic growth can be achieved without colonialism.
The most interesting contemporary contribution is by the Oxford economist Paul Collier.
He argues that many African states have fallen into one or several development traps that are extremely difficult to escape.
Moreover, once a country is mired in one of them, it is easy to fall into the next.
Being poor makes you prone to conflict, and being in conflict makes you poor.
So what hope is there for a poor country torn by civil war?
Citing the British mission to Sierra Leone, Collier argues for military intervention, when feasible, to secure peace.
He supports international involvement to enforce post-conflict peace.
But ongoing international assistance should be limited to providing voluntary good-governance templates.
Frameworks for how governments should make public spending transparent or how foreign resource-extracting companies should report their profits would make yardstick comparisons easier for local political activists, as well as providing a source of legitimacy for the government.
The much-discussed Kimberly Process is a pilot project.
Diamond companies volunteer not to buy from conflict areas in an attempt to prevent diamonds from funding warlords.
This would be good for business, as affluent Western customers are now put off by the thought of buying blood-soaked jewelry.
Regional integration has featured prominently only in the last 50 years in Europe, but it has already resulted in a host of political and economic benefits to Europeans.
Considerable evidence indicates that integration could be beneficial for Africa as well, given a framework suitable for African conditions.
This is a project worth supporting.
Other efforts worthy of attention include formalizing the huge informal economy in states such as Ghana.
Typically, these are projects that employ international expertise under domestically issued mandates.
It is a sign of the poverty of development economics that proposals such as these are regarded as cutting edge.
However, as long as there is a roadblock every 14 kilometers between Lagos and Abidjan – two of West Africa’s leading cities – progress on the ground will be slow.
With refugees spilling over borders, pirates hijacking ships, and terrorists finding shelter, it is clear that, although Africa’s solutions are its own, its problems are not.
The rest of the world can no longer afford Africa’s poverty.
But the evidence of 50 years of failed efforts is that it hasn’t a clue what to do about it.
The Lost Wealth of Nations
The phrase “sustainable development” is commonplace, but economic commentators offer no guidance on how we are to judge whether a nation’s economic development is, indeed, sustainable.
The famous Brundtland Commission Report of 1987 defined sustainable development as “... development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Sustainable development therefore requires that, relative to their populations, each generation should bequeath to its successor at least as large a productive base as it inherited.
But how is a generation to judge whether it is leaving behind an adequate productive base?
Economists argue that the correct measure of an economy’s productive base is wealth, which includes not only the value of manufactured assets (buildings, machinery, roads), but also “human” capital (knowledge, skills, and health), natural capital (ecosystems, minerals, and fossil fuels), and institutions (government, civil society, the rule of law).
Development is sustainable so long as an economy’s wealth relative to its population is maintained over time.
In other words, economic growth should be viewed as growth in wealth, not growth in GNP.
There is a big difference between the two.
There are many circumstances in which a nation’s GNP (per capita) increases even while its wealth (per capita) declines.
In broad terms, these circumstances involve growing markets in certain classes of goods and services (natural-resource intensive products), concomitant with absent markets and collective policies for natural capital (ecosystem services).
As global environmental problems frequently create additional stresses on the local resource bases of the world’s poorest people, GNP growth in rich countries can fuel downward pressure on the wealth of the poor.
Of course, a situation where GNP increases while wealth declines can’t last forever.
When an economy eats into its productive base in order to raise current production, eventually GNP will decline, too, unless policies were to so change that wealth begins to accumulate.
For example, using World Bank data on the depreciation of a number of natural resources at the national level, economists estimate that, although GNP per capita has increased in the Indian sub-continent over the past three decades, wealth per capita has declined somewhat.
The decline has occurred because, relative to population growth, fixed-capital investment, knowledge and skills, and improvements in institutions have not compensated for the degradation of natural capital.
In sub-Saharan Africa, both GNP per capita and wealth per capita have declined.
Economists have also found that in the world’s poorest regions (Africa and the Indian sub-continent), areas that have experienced higher population growth have also lost wealth per capita at a faster rate.
The economies of China and the OECD countries, by contrast, have grown both in terms of GNP per capita and wealth per capita.
The latter regions have more than substituted for the decline in natural capital by accumulating other capital assets.
In other words, during the past three decades the rich world seems to have enjoyed “sustainable development,” while development in the poor world (barring China) has been unsustainable.
These are early days in the quantitative study of sustainable development.
Even so, one can argue that current estimates of wealth are biased.
As for natural capital, the World Bank has so far limited itself to the atmosphere as a sink for carbon dioxide, oil, and natural gas, and forests as sources of timber.
Many types of natural capital, however, have not been included: fresh water, soil, forests as providers of ecosystem services, and the atmosphere as a sink for such pollution as particulates and nitrogen and sulphur oxides.
If these missing items were included, the poor world’s economic performance over the past three decades, including China’s, would look far worse.
But the estimates of wealth accumulation in recent years in the rich world are biased upward too.
Empirical studies by earth scientists have revealed all too often that the capacity of natural systems to absorb disturbances is not unlimited.
When their absorptive capacities are reached, natural systems are liable to collapse into unproductive states.
Recovery is then costly, in terms of both time and material resources.
On the other hand, if, say, the Atlantic current that keeps northern Europe warm were to shift direction or to slow down on account of global warming, the change would be essentially irreversible.
In short, we know that up to some unknown set of limits, knowledge, institutions, and manufactured capital can substitute for natural resources, so that even if an economy loses some of its natural capital, in quantity or quality, its wealth would increase if it invested sufficiently in other assets.
The remarkable increase in agricultural productivity over the past two centuries demonstrates this clearly.
But there are limits to substitutability: the costs of substitution (including human ingenuity) often increase in previously unknown ways as key resources are degraded.
Global warming is a case in point.
When the downside risks associated with such limits and thresholds are brought into estimates of sustainable development, the growth in wealth among the world’s wealthy nations will probably turn out to have been less than we now think.
The Lucifer Effect
Why do good, ordinary people sometimes become perpetrators of evil?
The most extreme transformation of this kind is, of course, the story of God’s favorite angel, Lucifer – a story that has set the context for my psychological investigations into lesser human transformations in response to the corrosive influence of powerful situational forces.
Such forces exist in many common behavioral contexts, distorting our usual good nature by pushing us to engage in deviant, destructive, or evil behavior.
When embedded in new and unfamiliar settings, our habitual ways of thinking, feeling, and acting no longer function to sustain the moral compass that has guided us reliably in the past.
Over the past three decades, my research and that of my colleagues has demonstrated the relative ease with which ordinary people can be led to behave in ways that qualify as evil.
We have put research participants in experiments where powerful situational forces – anonymity, group pressures, or diffusion of personal responsibility – led them blindly to obey authority and to aggress against innocent others after dehumanizing them.
My recent book The Lucifer Effect: Understanding How Good People Turn Evil describes the radical transformations that took place among college students playing randomly assigned roles of prisoners and guards in a mock prison created at Stanford University.
It goes on to establish direct parallels with the abuses committed by American soldiers at Iraq’s Abu Ghraib prison, presenting much of the social science research illustrating the power of social situations to dominate individual dispositions.
This body of work challenges the traditional focus on the individual’s inner nature, dispositions, and personality traits as the primary – and often the sole – factors in understanding human failings.
Instead, I argue that while most people are good most of the time, they can readily be led to act anti-socially, because most people are rarely solitary figures improvising soliloquies on the empty stage of life.
On the contrary, people are often in an ensemble of different players, on a stage with various props, costumes, scripts, and stage directions from producers and directors.
Together, they comprise situational features that can dramatically influence behavior.
What individuals bring into any setting is important, but so are the situational forces that act on them, as well as the systemic forces that create and maintain situations.
Most institutions that are invested in an individualistic orientation hold up the person as sinner, culpable, afflicted, insane, or irrational.
Programs of change follow either a medical model of rehabilitation, therapy, reeducation, and treatment, or a punitive model of incarceration and execution.
But all such programs are doomed to fail if the main causal agent is the situation or system, not the person.
As a result, two kinds of paradigm shift are required.
First, we need to adopt a public health model for prevention of violence, spouse abuse, bullying, prejudice, and more that identifies vectors of social disease to be inoculated against.
Second, legal theory must reconsider the extent to which powerful situational and systemic factors should be taken into account in punishing individuals.
Although much of The Lucifer Effect examines how easy it is for ordinary people to be seduced into engaging in evil deeds, or to be passively indifferent to the suffering of others, the deeper message is a positive one.
It is by understanding the how and why of such deeds that we are in a better position to uncover, oppose, defy, and triumph over them.
By becoming more “evil smart,” we build up resistance to having our moral compass reset negatively.
In this sense, The Lucifer Effect is a celebration of the human capacity to choose kindness over cruelty, caring over indifference, creativity over destructiveness, and heroism over villainy.
At the end of my narrative, I invite readers to consider fundamental strategies of resisting and challenging unwanted social influences, and I introduce the notion of “the banality of heroism.”
After all, most heroes are ordinary people who engage in extra-ordinary moral actions.
With this in mind, I propose a situational perspective for heroism, just as I do for evil: the same situation that can inflame the hostile imagination and evil in some of us can inspire the heroic imagination in others.
We must teach people, especially our children, to think of themselves as “heroes-in-waiting,” ready to take heroic action in a particular situation that may occur only once in their lifetime.
The Lunchbox and the Bomb
Each anniversary of the bombings of Hiroshima and Nagasaki reminds us that memory is not morally neutral.
It leans towards good or evil, and four main perspectives powerfully shape every historical account: the benefactor or his beneficiary, and the malefactor or his victim.
To be the beneficiary of an action is less glorious than to be the benefactor, because it hints at powerlessness and dependence.
But to be the victim of a crime is obviously more respectable than being a criminal.
And while no one wants to be a victim, many people nowadays want to have been a victim: they aspire to victim status .
Victimhood confers a right to complain, protest, and demand.
It is in your best interest to retain the role of the victim, rather than receive reparation.
Instead of a one-time satisfaction, you retain a permanent privilege.
What is true about individuals is even truer of groups.
If it can be convincingly shown that a group has been the victim of a past injustice, the group in question obtains a bottomless line of moral credit.
The greater the crime in the past, the more compelling the rights in the present -- which are gained merely through membership in the wronged group.
Of course, we now recognize more clearly than ever that history has always been written by the victors, which gave rise in recent decades to frequent demands that the history of the victims and the defeated be written, at least next to that of the victors.
This is an entirely legitimate demand, because it invites us to become familiar with a previously ignored past.
However, speaking in the name of victims doesn't bring additional ethical merit.
Indeed, no moral benefit can be derived from evoking the past if we fail to realize our group's shortcomings or errors. But doing so is problematic.
For example, in 1995 the Smithsonian Institution in Washington sought to take a fresh look at the Enola Gay , the plane that dropped the atomic bomb on Hiroshima.
John Dower, an American historian and specialist of modern Japan, studied the issue at length.
He demonstrated how history can be presented and valued in totally different ways: from an American or Japanese point of view, even though no one is making up facts or falsifying sources.
Selection and combination of data is enough.
For the Americans, there was ``a heroic or triumphant account in which atomic bombs represent the final blow against an aggressive, fanatic, and savage enemy.''
From the Japanese perspective, there was an ``account of victimization,'' in which ``atomic bombs have become the symbol of a specific type of suffering -- rather similar to the Holocaust for the Jews.''
At the Hiroshima museum itself, the victim role has been exploited in ways that similarly distort memory.
Neither the Japanese government's responsibility for initiating and continuing the war nor the inhumane treatment that prisoners of war or the subject civilian populations suffered under Japanese rule are adequately acknowledged.
Everyone chooses the point of view that fits him best.
Whether we identify with the heroes or the victims, with the pilots of the plane that put an end to WWII or with the passive population subjected to the hell of atomic annihilation, we are always rooting with the ``innocents'' and the ``good guys.''
At the Smithsonian, the Enola Gay was to play a central role in an exhibition meant to depict the Hiroshima bombing in all its complexity.
However, due to the pressure of various US patriotic groups, the exhibition was canceled, because it was seen as an offense against memory.
By failing to depict the Americans in the role of heroic benefactors, it suggested that they were responsible for a massacre that could not be totally justified.
What would an account about evil be like if the author refused to identify himself with either the hero or the victim?
Dower's research into the different ways Americans and Japanese remember Hiroshima provides us with a good example.
He could identify with both groups: he belongs to one and his work has made him intimately familiar with the other.
The title he gave to his version of the facts, after trying out ``Hiroshima as a victimization'' (the Japanese point of view) and ``Hiroshima as a triumph'' (the American point of view), was ``Hiroshima as a tragedy.''
Tragedy: the word signifies not only suffering and distress, but the impossibility of redemption.
Whatever path is chosen, in a tragedy tears and death inevitably follow.
The cause of the Allied forces was undoubtedly superior to that of the Nazis or the Japanese, and the war against them was just and necessary. However, even ``just'' wars provoke tragedies that cannot be dismissed lightly under the pretense that it was the enemy that suffered them.
The 12-year-old child's lunchbox blasted at Hiroshima, preserved by chance, with its rice and peas charred by the atomic explosion, weighs as much on our conscience as the Enola Gay .
Indeed, it was the display of the box among the artifacts that the Hiroshima museum lent to the American institution that made the exhibition unacceptable to the former ``heroes.''
Only if one musters the courage to envision the bomber and the lunchbox at the same time is it possible to comprehend the tragic vision of history that Hiroshima -- like other episodes that have seared our modern conscience -- most clearly represents.
The Machine That Ate Jobs
Insecurity about jobs is a defining characteristic of our age.
Two worries arise most often: globalization, which makes jobs migrate to poorer regions, and computer technology, which can make them disappear altogether.
These worries plague people of all incomes, ages, and in all countries.
As shown by Mexico's laments about job losses to China, people in emerging countries worry as much as those in advanced countries.
In response, politicians propose various job retraining or education programs, but rarely confront the real long-term issues.
Worries about globalization and the computer revolution ultimately boil down to the same thing, because globalization is mostly a consequence of new information technology.
Computers and the Internet made it possible to send information almost costlessly, and to do business across cultures and continents.
The worry is that information technology is now on the bend of a "hockey stick" curve, where it will suddenly take off at much greater speed than before.
The resulting changes will not all be welcome in economic terms.
Hockey stick curves often occur in nature.
Exponential growth at a fixed percentage rate can look like a hockey stick.
Five percent per year of $1 is only five cents, 5% of $10 is only 50 cents, and the curve appears flat for a while.
But then the growth becomes massive: five percent of a billion is $50 million.
Information technology is growing at a faster pace than 5%.
According to "Moore's Law" -- named after the president of Intel, who formulated it in 1975 -- the amount of components on a computer chip doubles every two years.
That is about a 40% annual growth rate.
The economic impact of such an exponential growth path, starting from small beginnings and viewed over decades, will certainly look like one very large hockey stick.
Fears about computers eliminating jobs are, of course, not new.
Fifty years ago, Norbert Wiener of MIT, a great 20th century mathematician and pioneer of computer science, warned of the threat that computers posed to jobs.
The economic problems that Wiener worried about have not materialized so far .
A half-century later, nothing really bad happened to any major segment of our population that can be blamed on computers.
But that is because computers started from small beginnings, so that we have up to now only been on the flat part of the hockey stick.
Now that a critical mass has been reached, will we see a dramatically different effect on employment?
Of course, on average, advances in computer technology must be good news.
Not only are computers productive, but they serve people, rather than being their competitors.
Powerful new computers will make the human race as a whole better off.
The problem is that real people are not just "average," so the real question concerns how the benefits derived from computers are distributed.
The core problem with information technology is that its economic benefits might be concentrated and that the wealth it creates may accrue predominantly to people who have subtle skills that computers can't duplicate, or who have the first-mover advantage, or who have the right business connections.
Older information technology has already created "winner-take-all" effects in some occupations.
Phonograph records (an early example of information technology) created musical superstars who sell their services to millions of people, putting out of business countless local performers who found their talents obsolete.
Television (another older form of information technology) did the same thing for actors and athletes.
But phonographs and television are limited compared to what is possible now - or may be possible soon.
In the new economic world, many more occupations may follow the route of discarded local musicians, resulting in wealth concentrations on a vastly greater scale than before.
The risks created by computer technology are real and frightening.
They will not be seriously changed by retraining and reeducation programs, which will not give most people the skills they need to remain more efficient than the new machines.
Instead, these risks must be dealt with by fundamental changes - changes that will not make individuals more productive than machines, but will allow society to manage risks better and to redistribute them.
For example, as the difference in rewards provided by the market to those with and without special skills grows, a progressive tax system to subsidize low-wage jobs becomes more necessary.
Other likely steps include broadening the scope of private insurance policies, so that they cover some risks that generate inequality, such as the loss of the market value of human capital or of one's home.
Borrowing and lending institutions will need to change, so that they better cushion people against the risk of personal bankruptcy.
Financial markets will have to be broadened, so that people and businesses can better hedge their risks.
It is important to start thinking about what changes lay ahead, because it may be harder to agree later on.
As long as people remain under a relative "veil of ignorance," in the sense that they do not yet know how they will personally be affected, they may find it easier to agree that progressive taxes should be used to subsidize low-wage earners.
When greater income inequality is a fait accompli, principled discussion may give way to naked class struggle between the new super-rich and those who have only their misery to lose.
The Maghreb’s Modern Islamists
FEZ – Just over a year ago, the Arab Spring sparked dramatic change throughout the Arab world.
Popular movements have brought a range of avowedly Islamist political parties to power, replacing the largely secular former regimes.
What that will mean for these countries, and for the region, is one of today’s central geopolitical questions.
In North Africa, two Islamist parties have come fully to power via democratic elections: al-Nahda (Renaissance) in Tunisia, where the Arab Spring began, and the Justice and Development Party (PJD) in Morocco, both of which now lead new coalition governments.
Whereas a popular revolution produced regime change in Tunisia, Morocco underwent a peaceful transformation that left the monarchy in place.
Last July, Moroccans voted overwhelmingly to approve a new constitution that shifts executive power from the king to the prime minister, who will now be fully responsible for the cabinet, the civil service, and the implementation of government policies.
The king retains some prerogatives, such as the authority to select the prime minister (from the parliament’s majority party) and the head of the army.
Furthermore, like heads of state in other parliamentary systems, he has the right to appoint the government ministers and ambassadors, dissolve the parliament, and dismiss the cabinet.
While the PJD’s success was based on institution-building within a constitutional monarchy, al-Nahda has revolutionized the Tunisian system.
But both parties won after running on a moderate platform of constitutionalism, separation of powers, civil liberties, and women’s rights.
This new political reality in the Maghreb will bring Europe –&nbsp;particularly France, the region’s old colonial master – face-to-face with Islamist governments determined to promote a new type of relationship.
But these governments have much work to do at home first.
Currently, the Maghreb countries suffer from soaring unemployment, poverty, and high prices for basic commodities.
In response, both al-Nahda and the PJD are emphasizing job creation, free trade, foreign investment, and a crackdown on the corruption that has plagued their countries’ economies.
These governments’ first major test of economic stewardship will be how they treat the tourism industry.
Although Western tourism is a critically important source of employment and foreign currency in both countries, some Muslims have criticized the industry for promoting alcohol and other relaxed social conventions that threaten Islamic values.
So far, both al-Nahda and the PJD have taken a pragmatic stance.
They recognize that, while their supporters may be devout Muslims, they also need to earn a living; empty hotels and beaches would be economically disastrous.
Thus, tourism professionals in both countries have received strong government assurances that business will continue as usual.
Some European analysts predict that, over the longer term, greater stability will follow the political changes in the Maghreb, with perhaps more than a million unemployed Moroccan and Tunisian immigrants returning home if their countries’ economies improve.
That remains very much an open question.
Islamist parties will now have enormous influence on economic policy, after decades of official separation of mosque and state.
Islamic banking, for example, may soon be introduced, though some local and foreign investors argue that sharia regulations could drive away much-needed foreign investment.
There are also concerns about inexperienced Islamist officials’ ability to run finance ministries.
But the region’s Islamist parties appear to be conscious of these risks, and determined to mitigate them.
They know that they need economic growth to curb unemployment and pay for social services, so they are working to bolster the private sector.
In many cases, they are even advocating the kind of free-market policies that their secular predecessors favored.
Those policies should include trade liberalization.
Until now, less than 2% of the Maghreb countries’ foreign trade has remained within the region.
If the region’s new leaders can integrate their economies, a market of more than 75 million consumers would attract more foreign investment and trade with the rest of the world.
Before an economically unified Maghreb can be realized, however, inter-state conflicts such as the Algerian-Moroccan dispute over the “Western” Sahara must be resolved.
Otherwise, it will be difficult even to conceive a common future – without which the economic grievances that fueled the Maghreb’s revolutions are likely to continue.
Much like the Muslim Brotherhood in Egypt, al-Nahda and the PJD will have to marginalize Islamic extremists in their movements, such as the Salafis, and adopt a pragmatic approach.
To succeed economically, they will need Western support – and the West will not be eager to fund radical Islamist governments.
As they negotiate the realities of modern economic life, the Maghreb’s Islamist ruling parties are likely to lose some supporters.
But, unless they are willing to break with the past, they will not succeed in the present.
Autumn’s Known Unknowns
NEW YORK – During the height of the Iraq war, then-US Secretary of Defense Donald Rumsfeld spoke of “known unknowns” – foreseeable risks whose realization is uncertain.
Today, the global economy is facing many known unknowns, most of which stem from policy uncertainty.
In the United States, three sources of policy uncertainty will come to a head this autumn.
For starters, it remains unclear whether the Federal Reserve will begin to “taper” its open-ended quantitative easing (QE) in September or later, how fast it will reduce its purchases of long-term assets, and when and how fast it will start to raise interest rates from their current zero level.
There is also the question of who will succeed Ben Bernanke as Fed Chairman.
Finally, yet another partisan struggle over America’s debt ceiling could increase the risk of a government shutdown if the Republican-controlled House of Representatives and President Barack Obama and his Democratic allies cannot agree on a budget.
The first two sources of uncertainty have already affected markets.
The rise in US long-term interest rates – from a low of 1.6% in May to recent peaks above 2.9% – has been driven by market fears that the Fed will taper QE too soon and too fast, and by the uncertainty surrounding Bernanke’s successor.
So far, investors have been complacent about the risks posed by the looming budget fight.
They believe that – as in the past – the fiscal showdown will end with a midnight compromise that avoids both default and a government shutdown.
But investors seem to underestimate how dysfunctional US national politics has become.
With a majority of the Republican Party on a jihad against government spending, fiscal explosions this autumn cannot be ruled out.
Uncertainties abound in other advanced economies as well.
Germany’s general election appears likely to produce a repeat of the current government coalition of Chancellor Angela Merkel’s Christian Democratic Union and the Free Democrats, with opinion polls suggesting that a grand coalition between the CDU and the Social Democrats is less likely.
In the former case, current German policies toward the eurozone crisis will not change, despite austerity fatigue in the eurozone’s periphery and bailout fatigue in its core.
Political risks in the eurozone’s periphery include the collapse of Italy’s government and a fresh election as a result of former Prime Minister Silvio Berlusconi’s criminal conviction.
Greece’s ruling coalition could collapse as well, and political tensions may rise even higher in Spain and Portugal.
On monetary policy, the European Central Bank’s forward guidance – the commitment to keep interest rates at a low level for a long time – is too little too late and has not prevented a rise in short- and long-term borrowing costs, which could stifle the eurozone’s already-anemic economic recovery.
Whether the ECB will ease policy more aggressively is also uncertain.
Outside of the eurozone, the strength of the United Kingdom’s recovery and the Bank of England’s soft forward guidance have led to similar “unwarranted” increases in interest rates, which the BoE, like the ECB, seems unable to prevent in the absence of more muscular action.
In Japan, the policy uncertainty concerns whether the third arrow of Abenomics – structural reforms and trade liberalization to boost potential growth – will be implemented, and whether the expected rise in the consumption tax in 2014 will choke economic recovery.
In China, November’s Third Plenum of the Communist Party Central Committee will show whether China is serious about reforms aimed at shifting from investment-led to consumption-led growth.
Meanwhile, China’s slowdown has contributed to the end of the commodity super-cycle, which, together with the sharp rise in long-term interest rates (owing to the scare of an early Fed exit from QE), has led to economic and financial stresses in many emerging-market economies.
These economies – the BRICS (Brazil, Russia, India, China, and South Africa) and others – were overhyped for too long.
Favorable external conditions – the effect of China’s strong growth on higher commodity prices and easy money from yield-hungry advanced-economy investors – led to a partly artificial boom.
Now that the party is over, the hangover is setting in.
This is especially true in India, Brazil, Turkey, South Africa, and Indonesia, all of which suffer from multiple macroeconomic and policy weaknesses – large current-account deficits, wide fiscal deficits, slowing growth, and above-target inflation – as well as growing social protest and political uncertainty ahead of elections in the next 12-18 months.
There are no easy choices: defending the currency by hiking interest rates would kill growth and harm banks and corporate firms; loosening monetary policy to boost growth might push their currencies into free-fall, causing a spike in inflation and jeopardizing their ability to attract capital to finance their external deficits.
There are two major geopolitical uncertainties as well.
First, will the looming military strikes by the US and its allies against Syria be limited in scope and time, or will they trigger a wider military confrontation?
The last thing that a fragile global economy needs now is another round of peak oil prices.
Second, a year ago the US convinced Israel to give its non-military approach to Iran’s nuclear-weapons ambitions time to bear fruit.
But, after a year of economic sanctions and negotiations with no result, Israel’s patience on what it regards as an existential issue is wearing thin.
Even short of an actual military conflict – which could double oil prices overnight – the resumption of saber-rattling by Israel and the war of words between the two sides could lead to a sharp rise in energy costs.
The looming known unknowns are plentiful.
Some outcomes may be more positive, or at least less damaging, than expected.
But the realization this autumn of even some of the risks described here could derail the global economy’s still-wobbly recovery.
And the meta-risk of policy mistakes and accidents remains very high.
The Making of a Murder in Pakistan
The assassination of Benazir Bhutto, the first Muslim woman to lead a Muslim country, is a serious blow to Pakistan’s prospects for democracy and, indeed, its viability as a state.
As chaos and confusion set in, we should not lose sight of President Pervez Musharraf’s partial responsibility for this turn of events.
At the very least, he cannot be absolved from his government’s failure to provide Bhutto with adequate security.
Instead, Bhutto had to pay with her life for courageously challenging extremists of all stripes – from Al-Qaeda and Taliban to the country’s religious political parties and military hardliners.
As heir to Zulfikar Ali Bhutto, the legendary democratic leader who was hanged by General Muhammad Zia-ul-Haq’s government in 1979, Benazir emerged as a symbol of resistance at a young age – but languished in jails and exile in the 1980’s.
Z. A. Bhutto’s legacy was empowerment of the impoverished and defense of ordinary people’s rights amid feudalistic politics and military rule.
Rather than bowing to the military junta, he embraced the gallows.
Hours before his hanging, Benazir was allowed to see her father for the last time, writing in her autobiography: “I told him on my oath in his death cell, I would carry on his work.”
Her first stint as prime minister (1988-90) was brief and disorganized.
Lt. Gen. Hamid Gul, the former Inter-Services Intelligence (ISI) chief, confirmed that he sponsored an alliance of right-wing political parties to stop her from getting a parliamentary majority.
Information about Pakistan’s nuclear program and ISI operations in Afghanistan were out of her domain.
Her second term in office (1993-96) was longer and better, but her government again fell early, owing to charges of mismanagement and corruption.
In reality, machinations by the intelligence agencies also played a part.
The military had developed an entrenched distrust of her, given her position as a popularly supported pro-Western leader who wanted peace with India.
After almost a decade in self-imposed exile, Bhutoo’s return to Pakistan in October gave her a fresh political start.
Pakistan had changed, as military dictatorship and religious extremism in the north played havoc with the fabric of society.
A tentative arrangement with Musharraf, together with Western support – particularly from the United Kingdom and the United States – eased her return, which hundreds of thousands of people welcomed, though terrorists greeted her with a string of suicide bombings.
Bhutto’s contacts with Mushararf’s military government drew criticism, but she remained adamant that a return to democracy was possible only through a transition in which Musharraf would give up his military post, become a civilian head of state, and conduct free and fair elections.
To the dismay of some democratic forces, Bhutto stayed the course even after Musharraf imposed emergency rule on November 3 and removed the country’s top judges to ensure his re-election.
Indeed, she even persuaded other important political leaders to participate in the planned January 8 election, which she viewed as an opportunity to challenge religious extremist forces in the public square.
She seized that opportunity by bravely traveling throughout the country, despite serious threats to her life, arguing for a democratic and pluralistic Pakistan.
One can understand why religious extremists like Al-Qaeda and Taliban would target her, and the government claims that it is impossible to defend against a suicide attack.
But Bhutto was reportedly killed by a sharp shooter before the terrorist blew himself up.
So, in the eyes of Pakistan’s people, and especially of Bhutto’s supporters, the intelligence services, either alone or in collaboration with extremists, finally decided to eliminate her.
Whether or not the government was involved, the fact remains that Pakistan has lost a desperately needed leader.
With Pakistan’s future in the balance, the West’s help and support will be crucial, but that means recognizing that Musharraf is not the only leader who can resolve Pakistan’s myriad problems and manage the war on terror.
On the contrary, by nurturing the current environment of instability and uncertainty, Musharraf himself must be regarded as one of Pakistan’s biggest problems.
The Making of China’s Trade Deficit
BEIJING – China registered a monthly trade deficit of $7.2 billion in March 2010, its first since April 2004.
And yet, at around the same time, the United States Congress issued its loudest call ever to classify China as an exchange-rate manipulator, accusing Chinese leaders of maintaining the renminbi’s peg to the dollar in order to guarantee a permanent bilateral trade surplus.
China’s March trade deficit indicates, first of all, that it is incorrect to claim that Chinese economic growth depends mainly on exports.
Exports are an important part of the Chinese economy, and any global market fluctuation or external shock will certainly have an impact on overall growth.
But, like any other large economy, China’s economy is driven by domestic consumption and investment.
Indeed, China’s exports fell by 16% year on year in 2009, owing to the global financial crisis and recession.
Nevertheless, annual GDP grew by 8.7%, thanks to 16.9% growth in consumption (measured by gross sale of consumer goods) and a 33.3% surge in fixed-investment demand.
Moreover, although China’s “trade dependency” is now reckoned to be 70% of GDP, that figure is greatly distorted by the fact that Chinese exports require massive imports of materials and parts.
The net value added of total Chinese foreign trade accounts for only about 15% of GDP.
Thus, net exports contributed 10.8% to China’s overall GDP growth rate, or only about 1.1 percentage point of 9% growth in 2008.
Compare that figure to Germany, where net exports accounted for 64% of growth in 2008. Similarly, the figure was 33% in Japan, 28.6% in Korea, and 20% in the Philippines.
Clearly, China is nothing special in this regard.
To be sure, China’s domestic consumption is not as high as it should be, standing at 49% of GDP in 2008, with household consumption accounting for only 35%.
Such figures have led many observers to believe that overall domestic demand must be low, leaving China dependent on external markets for growth.
But domestic demand, which determines imports, consists not only of consumption, but also of fixed-asset investment.
Indeed, rapid growth in investment may translate into high import growth and trade deficits.
That is exactly what is happening in China now.
Some people may argue that investment growth without consumption growth will result in overcapacity and eventually lead to recession.
Perhaps.
But we need to remind ourselves that housing investment accounts for about 30% of China’s total fixed investment, with much of the rest directed toward infrastructure – that is, long-term, durable public infrastructure investments– including subways, railways, highways, urban public facilities, and the national water system.
Moreover, one can easily imagine that import demand would soar further if the US and the European Union lifted their bans on exports of high-tech products to China.
In that case, the trade deficit recorded in March could be at least 40% higher.
The renminbi’s exchange rate, then, is really a secondary factor in China’s external account.
Put another way, the global imbalance could be corrected more efficiently by addressing other, more fundamental factors.
The fundamental factors underlying the US external imbalance are large fiscal deficits and low household savings, owing to excessive financial leverage.
The fundamental factors on the Chinese side are high corporate and household savings, together with some distortion of resource/utility prices.
Indeed, the current situation indicates that a significant adjustment in exchange rates may not be needed at all in order to redress global imbalances.
If that is true, and China shouldn’t worry about the renminbi’s exchange rate, should it worry about its economy overheating?
After all, its previous trade deficits in the era of reform – such as in 1992-1996 and 2003-2004 – all occurred at times of overheating.
But there are differences between now and those earlier periods.
For example, when rapid investment growth in 2004 led to overheating, world markets were booming.
At that time, both domestic investment and exports required immediate tightening.
Today, by contrast, although domestic investment is growing very strongly, external demand has not recovered to its previous levels.
The result is the March trade deficit, caused mainly by exceptionally high annual import growth (65%) coupled with relatively low export growth, which reached a nominally impressive 24% only because of the sharp decline recorded in the base period.
Such a single-factor situation is easier to deal with than the double-factor situation of 2004, and because the high investment demand has been mainly stimulus-related this time, policymakers can handle it in a more timely fashion if they perceive a problem.
That said, the ratio of capital formation does require careful monitoring.
The last time China saw such high growth in domestic investment, the savings rate was not as high as it is now.
The problem currently is that a trade deficit has emerged at a time when the national saving rate is as high as 51%.
That means that investment is extremely high – and that, despite the high share of infrastructure investment, there is an urgent need to manage the potential risks.
The Making of Great Communicators
CAMBRIDGE – Perhaps the most impressive current example of leadership based on the ability to communicate is Barack Obama, who has given three times as many interviews as George W. Bush and held four times as many prime press conferences as Bill Clinton at this stage in their presidencies.
Some critics are now wondering if all this talking is too much of a good thing.
All inspirational leaders communicate effectively.
Winston Churchill often attributed his success to his mastery of the English sentence.
The ancient Greeks had schools of rhetoric to hone their skills for the assembly.
Cicero made his mark in the Roman Senate after studying oratory.
Good rhetorical skills help to generate soft power.
Woodrow Wilson was not a gifted student as a child, but he taught himself oratory because he regarded it as essential for leadership.
Martin Luther King, Jr. benefited from growing up in an African-American church tradition rich in the rhythms of the spoken word.
Clinton was able to combine a sense of theater with narrative stories and an overall ability to convey an argument.
According to his staff, he developed and improved this gradually over his career.
Oratory and inspirational rhetoric, however, are not the only forms of communication with which leaders frame issues and create meaning for their followers.
Alan Greenspan, the former chairman of the Federal Reserve Board, was hardly an inspirational speaker, but markets and politicians hung on his every word, and he tailored the nuances of his language to reinforce the direction in which he wanted to lead monetary policy.
Unfortunately, as the financial crisis of 2008 demonstrated, it would have been better if Congressional committees had pressed him to communicate more clearly.
Non-verbal signals are also an important component of human communications.
Symbols and examples can be very effective.
Some inspirational leaders are not great orators – witness Mahatma Gandhi.
But the symbolism of Gandhi’s simple dress and lifestyle spoke louder than words.
If one compares those images with pictures of the young insecure Gandhi dressed as a proper British lawyer, one can see how carefully he understood symbolic communication.
He ensured that actions such as the famous 1930 salt march to the sea maintained a slow pace that allowed the drama and tension to build.
The march was designed for communication, not the ostensible reason of resisting the colonial government’s prohibition on the fabrication of salt.
T.E. Lawrence (“Lawrence of Arabia”) also understood how to communicate with symbols.
When he went to the Paris Peace Conference at World War I’s end, he wore Bedouin robes to dramatize the Arab cause.
A year later, at a Cairo conference that negotiated borders in the region, he changed to a British officer’s uniform as he engaged in hard transactional bargaining.
Or, to take a contemporary example, the British entrepreneur Richard Branson overcame dyslexia and poor academic performance by using events and public stunts to promote his Virgin brands.
In addition to communicating with distant audiences, leaders need the ability to communicate one-on-one or in small groups.
In some cases, that close communication is more important than public rhetoric.
Organizational skills – the ability to attract and inspire an effective inner circle of followers – can compensate for rhetorical deficiencies, just as effective public rhetoric can partly compensate for low organizational skills.
Hitler was skillful at communicating with both distant and inner-circle audiences.
Stalin relied primarily on the latter.
Harry Truman was a modest orator, but compensated by attracting and ably managing a stellar set of advisers.
A good narrative is a great source of soft power, and the first rule that fiction writers learn about good narrative is to “show, not tell.”
Franklin Roosevelt used the fictional story of lending a garden hose to a neighbor whose house was on fire to explain his complex lend-lease program to the American people before World War II.
Ronald Reagan was a master of the well selected anecdote.
Setting the right example is another crucial form of communication for leaders.
Anticipating a skeptical public reaction when Singapore raised the salaries of government officials in 2007, Prime Minister Lee Hsien Loong announced that he would forgo the raise himself.
In the aftermath of the recent financial crisis, some business executives voluntarily reduced their salaries as a means of communicating concern for their employees and public opinion.
During the 2008 presidential election campaign, Obama proved to be a talented communicator.
Not only was his rhetorical style effective, but after inflammatory comments by his pastor threatened to derail his campaign, he produced one of the best speeches on race in America since the days of King.
As president, Obama continues to communicate effectively, but an American president has a problem of dual audiences.
Sometimes rhetoric that fares well at home – such as Bush’s second inaugural address – sounds hypocritical to foreign ears.
In contrast, Obama’s inaugural address was well received both at home and abroad.
In a series of foreign-policy speeches, most notably one delivered in Cairo and addressed to the Muslim world, polls show that Obama has been able to restore some of America’s soft power.
So far, so good, but effective leadership is also communicated by actions and policies.
At this stage, it is too early to determine whether Obama’s policies will reinforce or undercut the effects of his words.
As we await the results, it helps to remember the complexity of the relation between effective leadership and communications.
The Making of International Monetary Reform
BRUSSELS – If French President Nicolas Sarkozy had written the prologue to his presidency of the G-20, which has just commenced, he could not have done better.
The run-up to the G-20’s summit in Seoul was marred by a series of currency controversies, bringing international monetary reform to the fore.
Whereas French intentions to reform the international monetary system had initially been received skeptically, suddenly reform looks like the right priority at the right time.
The task is anything but simple.
The subject is abstruse.
No one outside academia has taken any interest in it for the last 20 years.
Accordingly, there are hardly any comprehensive proposals on the table.
The United States, for which international monetary reform is synonymous with diminution of the dollar’s global role, is lukewarm.
China, which launched the idea, is happy to see the discussion gaining momentum, but lacks precise ideas.
As time is on its side, it sees no reason to hurry.
Emerging countries hold a similar opinion: they want their current problems to be solved but are not ready to re-write the rules of the game.
Japan is keen, but its views on regional monetary cooperation do not match China’s.
And Europe is distracted more than ever with its internal crises.
Nevertheless, international monetary reform remains a legitimate aspiration.
As Vladimir Lenin once reputedly put it, “the surest way to destroy the capitalist system [is] to debauch its currency.” This applies to the world economy today.
When the rules of the global monetary game are unclear, inadequate, or obsolete, countries cannot abide by them, and some may attempt to exploit them to their own advantage.
This undermines the fabric of international economic relations.
The agenda for reform boils down to four key problems.
The first is exchange-rate relationships.
Developed countries’ currencies have been floating against each other for several decades, but this has been only partly true of emerging and developing countries.
Many, especially in Asia and the Persian Gulf, are de facto linked to the dollar, others to the euro.
But fixed exchange rates often lead to undervaluation (as in China) or overvaluation (as in Argentina at the beginning of the 2000’s, and, in a different context, several eurozone countries now).
And floating and fixed exchange-rate regimes coexist uneasily, because volatility tends to affect the floating currencies (often the euro, and recently the Latin American currencies).
So the system needs a reshuffle.
The touchstone is currently the renminbi – not so much because of China’s bilateral relationship with the US, but because other emerging and developing countries monitor the renminbi-dollar exchange rate in setting their own policy.
China knows that the current situation is not sustainable, but it remains reluctant to move aggressively to let the renminbi strengthen.
The second problem is imposing discipline on national policies in order to preempt the temptation to export domestic inflation or unemployment.
Under the gold standard, discipline was automatic.
With floating exchange rates, it is not.
According to an unwritten rule that has emerged over the years, central banks can do as they see fit, as long as they keep inflation stable over the medium term.
This rule normally ensures a modicum of coherence and avoids overreactions in exchange rates, but it is insufficient in deflationary times.
The US Federal Reserve argues, with some justification, that its quantitative easing is compatible with price stability, while Europe and several emerging countries deem it beggar-thy-neighbor behavior.
The problem is that the current context provides no yardstick for assessing when a national policy stops being cooperative.
So we need what the jargon calls “surveillance.”
This is the International Monetary Fund’s role, but the IMF’s mandate is just that – surveillance, not enforcement.
It is also the G-20’s role, but neither the US nor the emerging countries are keen on collective constraints.
The third problem concerns international liquidity.
Financial flows are excessively volatile.
Emerging countries are inundated with capital inflows one day, and faced with abrupt and equally destabilizing outflows the next.
To prevent their currencies from appreciating too much in the first case and falling too far in the second, emerging countries have accumulated foreign-exchange reserves, two-thirds of which are denominated in dollars.
These reserves now amount to 15% of global GDP, compared to 6% ten years ago.
Ultimately, whether this is due to self-insurance or to exchange-rate targeting matters little: yesterday this unproductive growth in reserves was an indirect cause of the crisis; today it is undermining demand.
The goal should be to make self-insurance unnecessary by guaranteeing access to international credit lines in case of abrupt outflows of private capital.
The IMF started to do this when it created credit facilities without the Fund’s usual (and humiliating) conditionality.
But suspicion of the IMF persists, and most countries, especially in Asia, still prefer costly self-insurance to a form of mutualization perceived as uncertain.
The fourth problem is collective anchoring.
Naturally, the major central banks are concerned with the inflation that they can control – homemade inflation.
But this neglects global inflation driven by rising commodity prices, which has been increasingly evident.
This was not an issue in the disinflationary environment of the last decade, but it is becoming more of one, which is probably what prompted World Bank President Robert Zoellick’s proposal to restore a role for gold.
The notion is absurd – John Maynard Keynes long ago spoke of gold as a “barbarous relic” – but the problem of anchoring global monetary policy and ensuring its alignment with developments in global supply is nonetheless real.
The Nobel laureate economist Robert Mundell once compared a monetary regime to a political constitution, because it establishes the rules of the game.
The analogy is apt.
Unfortunately, it also indicates how ambitious and challenging a task it is to reform the international monetary order.
The Making of Sputnik
MOSCOW &#45;&#45; On October 4, 1957, my father, Nikita Khrushchev, awaited a telephone call.
Chief Designer Sergei Korolev was expected to call from the Tyuratam launch site (later renamed Baikonur Cosmodrome) in Kazakhstan to report on the launch of the world’s first man-made satellite.
Earlier that day, my father was in Kyiv, Ukraine, on military business.
He attended a demonstration of tanks crossing the Dnieper River, then discussed with Soviet generals the fate of Defense Minister Marshal Georgy Zhukov.
(Zhukov was suspected of plotting to seize power, and, before forcing a decorated World War II general to resign, my father and his colleagues enlisted the support of other high-ranking generals, who all agreed with Khrushchev’s plan.)
That evening, my father dined with the Ukrainian leaders.
I sat at the end of the table, not paying attention to their conversation.
Everybody was tired, but my father wasn’t in a hurry to sleep.
Around midnight, the door opened and the secretary asked my father to take a phone call.
When Khrushchev came back, he was smiling: Sputnik’s launch was successful.
Soviet engineers began designing Sputnik in January 1956.
The plan was to launch it with the R-7, an intercontinental ballistic missile in development since 1954.
But the rest of the world paid no attention to the vague pronouncements of a possible launch that had been appearing in the Soviet press; everybody outside the Soviet Union knew the United States would launch the world’s first satellite.
Soviet scientists believed that the Americans would keep their plans secret until after they had succeeded in launching a satellite, so all our efforts were put into beating the Americans to the launch.
In August and September, R-7 missiles were successfully launched twice.
Work went on around the clock.
Sputnik’s launch made the front page of Pravda, but just barely.
The story occupied the same amount of space as a report on Zhukov’s visit to Yugoslavia, and ran in a less prestigious position.
There were no banner headlines or enthusiastic comments.
The reason was simple.
My father and all the Soviet people thought that Sputnik’s success was natural, that, step by step, we were getting ahead of the Americans.
After all, we – not the Americans – had opened the world’s first nuclear power plant.
The Soviet MiG set world records in the 1950’s, and the Soviet Tu-104 was the most efficient airliner of its class.
So Sputnik did not surprise us.
Nor did the press report Korolev’s name.
The KGB knew that there was really no need to keep his name secret, but, as KGB chief Ivan Serov told me, the enemy’s resources were limited, so let them waste their efforts trying to uncover “non-secret” secrets.
But the world was desperate to learn his identity.
The Nobel Prize committee decided to give an award to Sputnik’s “chief designer,” but first it needed the person’s name.
The committee requested it from the Soviet government.
My father weighed his response carefully.
The matter was complicated, and his concern wasn’t confidentiality.
The Council of Chief Designers was in charge of all space projects.
Korolev was the head of the council, but the other Chief Designers ­– more than a dozen – considered themselves no less significant.
My father understood that the Chief Designers were ambitious and jealous people.
If the Nobel committee were to give the award only to Korolev, my father thought, the members would fly into a rage.
They would refuse to work with Korolev.
A well-organized team would collapse like a house of cards, and the hopes for future space research and missile design would be dashed, threatening the country’s security.
As my father saw it, you could order scientists and engineers to work together, but you couldn't force them to create something.
In the end, my father told the Nobel committee that all of the Soviet people had distinguished themselves in the work on Sputnik, and that they all deserved the award.
Korolev was offended but kept silent.
The Nobel Prize went to somebody else.
But, despite the pains my father had taken, the other designers expressed growing discontent about Korolev getting all the publicity, even if anonymously.
In their “secret” world, it wasn’t any secret who was behind the title “Chief Designer.”
The first to revolt was engine designer Valentin Glushko, whose RD-170 liquid-propellant engine is used on Russian and some American rockets.
During one council meeting, Glushko said, “My engines could send into space any piece of metal.” Korolev was offended; his rocket wasn’t just a piece of metal, and, after his success with Sputnik, he no longer considered Glushko his equal.
The dispute was hushed up, but the resentment lingered.
Soon, Glushko offered his services to other Soviet rocket designers, Mikhail Yangel and Vladimir Chelomei – Korolev's rivals.
Even my father couldn’t make peace between them.
Technically, Glushko, by government order, continued to design engines for Korolev, but the work wasn’t good.
So, despite Sputnik’s initial triumph, a decade later the Soviets lost the race to the moon to the Americans.
The Malaysian Miracle
August 31 marked the 50th anniversary of Malaysia’s Merdeka: independence after more than 400 years of colonialism.
Malaysia’s peaceful, non-violent struggle may not have received the attention that Mahatma Gandhi’s did in India, but what Malaysia has accomplished since then is impressive – and has much to teach the world, both about economics, and about how to construct a vibrant multi-racial, multi-ethnic, multi-cultural society.
The numbers themselves say a lot.
At independence, Malaysia was one of the poorest countries in the world.
Though reliable data are hard to come by, its GDP (in purchasing power parity terms) was comparable to that of Haiti, Honduras, and Egypt, and some 5% below that of Ghana.
Today, Malaysia’s income is 7.8 times that of Ghana, more than five times that of Honduras, and more than 2.5 times that of Egypt.
In the global growth league tables, Malaysia is in the top tier, along with China, Taiwan, South Korea, and Thailand.
Moreover, the benefits of the growth have been shared.
Hard-core poverty is set to be eliminated by 2010, with the overall poverty rate falling to 2.8%.
Malaysia has succeeded in markedly reducing the income divides that separated various ethnic groups, not by bringing the top down, but by bringing the bottom up.
Part of the country’s success in reducing poverty reflects strong job creation.
While unemployment is a problem in most of the world, Malaysia has been importing labor.
In the 50 years since independence, 7.24 million jobs have been created, an increase of 261%, which would be equivalent to the creation of 105 million jobs in the United States.
There were many reasons not to have expected Malaysia to be a success.
Just as Malaysia was gaining its independence, the Nobel Prize winning economist Gunnar Myrdal wrote an influential book called Asian Drama , in which he predicted a bleak future for the region.
Malaysia is rich in natural resources.
But, with few exceptions, such countries are afflicted with the so-called “natural resource curse”: countries with an abundance of resources not only do not do as well as expected, but actually do worse than countries without such benefits.
While natural resource wealth should make it easier to create a more equalitarian society, countries with more resources, on average, are marked by greater inequality.
Moreover, Malaysia’s multiracial, multi-cultural society made it more vulnerable to civil strife, which has occurred in many other resource-rich countries, as one group tried to seize the wealth for itself.
In many cases, minorities work hard to garner the fruits of this wealth for themselves, at the expense of the majority – Bolivia, one of the many rich countries with poor people, comes to mind.
At independence, Malaysia also faced a Communist insurgency.
The “hearts and minds” of those in the countryside had to be won, and that meant bringing economic benefits and minimizing “collateral” damage to innocent civilians – an important lesson for the Bush administration in Iraq, if it would only listen to someone outside its closed circle.
And Malaysia had a third strike against it: for all the talk of the “white man’s burden,” the European powers did little to improve living standards in the countries they ruled.
The dramatic decline in India’s share of global GDP under Britain’s rule, as Britain passed trade laws designed to benefit its textile producers at the expense of those in its colony, is the most visible example.
The colonial powers’ divide-and-rule tactics enabled small populations in Europe to rule large numbers outside of Europe, pillaging natural resources while investing little in the physical, human capital, and social capital necessary for an economically successful, democratic self-governing society.
It has taken many of the former colonies decades to overcome this legacy.
How, then, does an economist account for Malaysia’s success?
Economically, Malaysia learned from its neighbors.
Too many of the ex-colonies, rejecting their colonial heritage, turned to Russia and communism.
Malaysia wisely took an alternative course, looking instead to the highly successful countries of East Asia.
It invested in education and technology, pushed a high savings rate, enacted a strong and effective affirmative action program, and adopted sound macroeconomic policies.
Malaysia also recognized that success required an active role for government.
It eschewed ideology, following or rejecting outsiders’ advice on a pragmatic basis.
Most tellingly, during the financial crisis of 1997, it did not adopt IMF policies – and as a result had the shortest and shallowest downturn of any of the afflicted countries.
When it re-emerged, it was not burdened with debt and bankrupt firms like so many of its neighbors.
This success was, of course, not only a matter of economics: had Malaysia followed the policies recommended by the IMF, it would have torn apart the social fabric created over the preceding four decades.
Malaysia’s success thus should be studied both by those looking for economic prosperity and those seeking to understand how our world can live together, not just with toleration, but also with respect, sharing their common humanity and working together to achieve common goals.
The Malleable Mr. Medvedev
LONDON – As Dmitri Medvedev waits in the wings for his inauguration on May 7, the West is examining his every word, eager for the slightest sign that Russia’s new president will be more “reasonable” and easier to deal with than Vladimir Putin, the man who got him elected.
If one is selective with the evidence, a semi-reasonable case can be built for those desperate enough to believe it.
Medvedev was in his twenties when the Soviet Union broke up, and thus is less “contaminated” by a Soviet mentality.
He is a fluent English speaker who does not have a secret-service background and has been dealing with the West for almost a decade as the Russian energy industry’s leading figure.
Moreover, he is a lawyer by training – presumably instilling in him at least some respect for the rule of law – and his pronouncements and interviews thus far have been largely moderate, even liberal­.
Unfortunately, however, words mean almost nothing in such a Byzantine country.
In fact, Medvedev will be Russia’s most malleable leader since Tsar Nicholas II.
While Medvedev’s liberal instincts are debatable, the forces arrayed against him not in doubt are: the Sechin clan, the Cherkessov clan, the siloviki of the military and security services, his rivals who he beat to the top job, and of course, his predecessor and mentor, Putin.
The irony is that Medvedev has almost no room for maneuver, despite holding one of the most powerful presidencies in the world.
His popularity has been bestowed, not earned, so it can be taken away as easily as it was given.
For all his semi-encouraging talk, Medvedev has stressed continuity over change, and his references to Putin’s presidency have been as reverential as he has been obedient.
He was chosen for his unquestioning loyalty, and it is difficult to envisage Putin playing second fiddle to a man who has been his underling for 18 years.
Moreover, Medvedev, who was at the helm of the state-owned gas giant Gazprom for the last six years, is likely to be constrained in a more prosaic way.
Given Gazprom’s record of opacity while Medvedev’s was in charge, the existence of kompromat (compromising material), used as blackmail against him to keep his energy policy in line and others’ vested interests safe, is highly likely.
Gazprom itself will continue to operate as a non-commercial actor.
Despite serious problems with extraction, production and depletion (production at three of Russia’s four major fields is already declining), the propensity to use hydrocarbon resources as a geo-strategic weapon trumps economics.
And, with the resource boom fueling Russia’s self-proclaimed return to international influence, the Kremlin will continue to exploit its successful strategy of playing one European country off against another, aided by the EU’s lack of a coherent Russia strategy and a common energy policy.
The widespread misconception that Europe is massively dependent on Russian oil and gas explains its frequent appeasement.
But Russia needs the revenue at least as much as Europe needs the energy.
Nearly all oil pipelines in the region head west.
While Europe accounts for 90% of Russia’ gas exports, Europe’s gas imports are only 60% Russian.
Europe is seeking to diversify supply, and Russia its demand – though neither is doing so very successfully.
Perhaps the most worrying prospect is that Medvedev could learn all of Putin’s bad habits and none of his good ones.
“Putinism” is predicated on the need for an enemy, and that enemy, at least since 2003, is the West.
Medvedev is unlikely to try to change course.
He could, however, smooth over some of the rougher edges of Putin’s energy policy – a small concession here, a new deal there – but only at the fringes.
In that case, the West will need to be ever more vigilant.
Putin was a wolf, but at least he – unlike Medvedev – dressed the part.
Foreign investors and EU politicians may not see through Medvedev’s benign disguise – or may choose not to.
It’s no use complaining about Russia’s strategic bullying when we are not being strategic ourselves.
The West can’t change Russia’s behavior with persuasion, so it must try to use its leverage: make the Nabucco pipeline bypassing Russia a reality, build LNG terminals, include energy in Europe’s Common Foreign and Security Policy, diversify supply, and screen companies seeking capital in London’s stock exchange more carefully.
Our energy security is in our own hands, not Russia’s.
The Malthus Gun
WASHINGTON, DC – Science and technology changed agriculture profoundly in the twentieth century.
Today, much of the developed world’s agriculture is a large-scale enterprise: mechanized, computer-controlled, and based on sophisticated use of chemistry and knowledge of plant and soil physiology. amp#160;
The invention of chemical fertilizers early in the century and their increasing use, together with mechanization and the development of high-yielding grain varieties, propelled the growth of agricultural productivity in the developed world. The Green Revolution brought these benefits to less developed nations.amp#160;
As a result, despite a tripling of the global population, we have so far evaded Malthus’ 1798 prediction that human population growth would inevitably outstrip our ability to produce food.
Over the second half of the twentieth century, the hungry of the Earth shrank from half of its three billion human inhabitants to less than a billion of the current 6.5 billion.
Twentieth-century plant breeders learned to accelerate genetic changes in plants with chemicals and radiation – a rather shotgun approach to the genetic improvement of plants.
The introduction of molecular methods began the current agricultural revolution.
The use of such techniques is referred to as genetic modification (GM), genetic engineering, or biotechnology.
GM crops that resist certain pests and tolerate herbicides have gained rapid acceptance in many countries.
According to the International Service for the Acquisition of Agri-biotech Applications (ISAAA), GM crop adoption is growing at double-digit rates, reaching 114.3 million hectares in 23 countries in 2007.
Perhaps most importantly, 11 of the 12 million GM farmers are resource-poor smallholders.
In the 12 years since their commercial introduction, insect-resistant GM crops have increased yields while significantly decreasing the use of toxic pesticides.
Herbicide-tolerant plants have decreased herbicide use and encouraged the widespread adoption of no-till farming, markedly reducing topsoil loss and promoting soil fertility.
Despite dire predictions, no adverse effects of GM crops on health, biodiversity, and the environment have been documented to date.
The only unanticipated effects so far have been beneficial.
Insect-resistant GM corn, for example, shows much lower levels of mycotoxin contamination than conventionally or organically grown corn because the plants are resistant to the insect larvae that bore holes through which fungi enter plants.
No holes, no fungi, no mycotoxins.
GM techniques are widely accepted in medicine and food technology.
What would we do today in the face of the growing world-wide diabetes epidemic without human insulin, now produced on a very large scale from human insulin genes expressed in microorganisms?
But the use of molecular techniques to improve crop plants continues to be rejected emphatically by many countries in Europe, by Japan, and – most tragically – by many African countries.
Recent food and energy price shocks have pulled the world up short.
The so-called “food crisis” of 2008 was not really a crisis in the sense of a condition that can be resolved by the quick application of emergency measures.
It has been developing for decades.
And it is not likely to disappear soon, though food prices are moderating for the moment.
A human population approaching seven billion is straining the limits of the planet’s ecological support systems.
Water and arable land are in short supply.
The climate is changing.
Fossil fuel energy is expensive and contributes to climate change.
Unexpectedly, we find ourselves once again staring down the barrel of Malthus’ gun.
Most of the world’s poorest people are rural, small-holding farmers, virtually untouched by modern agriculture.
There is much room for increasing productivity.
And yet, while we hear talk of a second Green Revolution, expanding the food supply today in the poorest, most crowded, and insecure nations is a formidable task.
It seems that somewhere between the Green Revolution and the biotechnology revolution, the developed world declared the battle for food security won and moved on.
Citizens of many urbanized, developed countries have grown nostalgic, increasingly convinced that organic farming, a throwback to nineteenth-century agriculture, produces nutritionally superior food (it doesn’t) and can solve the world’s food problems (it can’t).
Where land is not yet limited, small-scale organic farming is an affordable luxury.
The amount of arable land on the planet has not changed substantially in more than half a century.
Land is lost to urbanization, desertification, and salinization as fast as it is added by clearing forests and plowing grasslands.amp#160;
Yet the human population’s growth and increasing affluence continue to push up demand for food, feed, and fiber.
Now, as we begin to confront the inevitable exhaustion of fossil fuel supplies, we are asking agriculture to satisfy some of our energy appetite, as well.
This is like expecting your modest annual salary to satisfy all the appetites you developed while burning through a large inheritance.
Adapting to climate change and decreasing agriculture’s environmental impact, while substantially increasing its productivity, are among the key challenges confronting us in the twenty-first century.
Despite the bad rap they’ve gotten, the GM crops in use today have already contributed to meeting both challenges.
Developing an environmentally friendly agriculture for a hot and crowded planet will require the most advanced agricultural methods available, including GM techniques.
Indeed, there are projects underway to develop crop varieties that use less water and maintain their yield potential under harsher drought conditions than today’s crops.amp#160;
Will we have the wisdom to accept the growing evidence of safety and welcome these necessary survival tools?
The Manufacturing Fallacy
NEW YORK – Economists long ago put to rest the error that Adam Smith made when he argued that manufacturing should be given primacy in a country’s economy.
Indeed, in Book II of The Wealth of Nations, Smith condemned as unproductive the labors of “churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers, etc.”
We may agree with Smith (and Shakespeare) about the uselessness of lawyers perhaps, but surely not about Olivier, Falstaff, and Pavarotti.
But the manufacturing fetish recurs repeatedly, the latest manifestation being in the United States in the wake of the recent crisis.
In mid-1960’s Great Britain, Nicholas Kaldor, the world-class Cambridge economist and an influential adviser to the Labour Party, raised an alarm over “deindustrialization.”
His argument was that an ongoing shift of value added from manufacturing to services was harmful, because manufactures were technologically progressive, whereas services were not.
He even got a Labour Chancellor of the Exchequer, James Callaghan, to introduce in 1966 a Selective Employment Tax, which taxed employment in services more heavily than employment in manufactures – a measure that was reversed in 1973, once it was realized that it would hit the tourist industry, which generated badly needed foreign exchange.
Kaldor’s argument was based on the erroneous premise that services were technologically stagnant.
This view no doubt reflected a casual empiricism based on the mom-and-pop shops and small post offices that English dons saw when going outside their Oxbridge colleges.
But it was clearly at odds with the massive technical changes sweeping across the retail sector, and eventually the communications industry, which soon produced Fedex, faxes, mobile phones, and the Internet.
In fact, the dubious notion that we should select economic activities based on their presumed technical innovativeness has been carried even further, in support of the argument that we should favor semiconductor chips over potato chips.
While rejection of this presumption landed Michael Boskin, Chairman of President George H.W. Bush’s Council of Economic Advisers, in rough political waters, the presumption prompted a reporter to go and check the matter for himself.
It turned out that semiconductors were being fitted onto circuit boards in a mindless, primitive fashion, whereas potato chips were being produced through a highly automated process (which is how Pringles chips rest on each other perfectly).
The “semi-conductor chips versus potato chips” debate also underlined a different point.
Many proponents of semiconductor chips also presumed that what you worked at determined whether, in your outlook, you would be a dunce (producing potato chips) or a “with-it” modernist (producing semiconductor chips).
I have called this presumption a quasi-Marxist fallacy.
Marx emphasized the critical role of the means of production. I have argued, on the other hand, that you could produce semiconductor chips, trade them for potato chips, and then munch them while watching TV and becoming a moron.
On the other hand, you could produce potato chips, trade them for semiconductor chips that you put into your PC, and become a computer wizard!
In short, it is what you “consume,” not what you produce, that influences what sort of person you will be and how that affects your economy and your society.
Ignorant of the extensive “deindustrialization” debate in 1960’s Great Britain, two Berkeley academics, Stephen Cohen and John Zysman, started a similar debate in the US in 1987 with their book Manufacturing Matters, which claimed that, without manufactures, a viable service sector is untenable.
But this argument is specious: one can have a vigorous transportation industry, with trucks, rail, and air cargo moving agricultural produce within and across nations, as countries such as pre-Peronist Argentina, Australia, New Zealand, and modern Chile have done very successfully.
Cohen and Zysman argued that manufactures were related to services like “the crop duster to the cotton fields, the ketchup maker to the tomato patch,” and that if you “[o]ffshore the tomato farm…you close or offshore the ketchup plant….No two ways about it.” My reaction was: “[A]s I read the profound assertion about the tomato farm and the ketchup plant, I was eating my favorite Crabtree ampamp;
Evelyn vintage marmalade.
It surely had not occurred to me that England grew its own oranges.”
While these episodes reflected academic obsession with manufactures and therefore died early deaths, the same cannot be said for the latest revival of the “manufactures fetish” in the US and Great Britain.
The latest flirtation with supporting manufactures has come from the current crisis, especially in the financial sector, and is therefore likely to have greater prospects for survival.
The fetish is particularly rampant in the US, where the Democrats in Congress have gone so far as to ally themselves with lobbyists for manufactures to pass legislation that would provide protection and subsidies to increase the share of manufactures in GDP.
Because of the financial crisis, many politicians have accepted the argument, in a virtual throwback to Adam Smith, that financial services are unproductive – even counterproductive – and need to be scaled back by governmental intervention.
It is then inferred that this means that manufactures must be expanded.
But this does not follow.
Even if you wanted to curtail financial services, you could still focus on the multitude of non-financial services.
Diesel engines and turbines are not the only alternatives; many services, like professional therapy, nursing, and teaching are available.
The case for a shift to manufacturing remains unproven, because it cannot be proved.
The Manufacturing Imperative
CAMBRIDGE – We may live in a post-industrial age, in which information technologies, biotech, and high-value services have become drivers of economic growth.
But countries ignore the health of their manufacturing industries at their peril.
High-tech services demand specialized skills and create few jobs, so their contribution to aggregate employment is bound to remain limited.
Manufacturing, on the other hand, can absorb large numbers of workers with moderate skills, providing them with stable jobs and good benefits.
For most countries, therefore, it remains a potent source of high-wage employment.
Indeed, the manufacturing sector is also where the world’s middle classes take shape and grow.
Without a vibrant manufacturing base, societies tend to divide between rich and poor – those who have access to steady, well-paying jobs, and those whose jobs are less secure and lives more precarious.
Manufacturing may ultimately be central to the vigor of a nation’s democracy.
The United States has experienced steady de-industrialization in recent decades, partly due to global competition and partly due to technological changes.
Since 1990, manufacturing’s share of employment has fallen by nearly five percentage points.
This would not necessarily have been a bad thing if labor productivity (and earnings) were not substantially higher in manufacturing than in the rest of the economy – 75% higher, in fact.
The service industries that have absorbed the labor released from manufacturing are a mixed bag.
At the high end, finance, insurance, and business services, taken together, have productivity levels that are similar to manufacturing.
These industries have created some new jobs, but not many – and that was before the financial crisis erupted in 2008.
The bulk of new employment has come in “personal and social services,” which is where the economy’s least productive jobs are found.
This migration of jobs down the productivity ladder has shaved 0.3 percentage points off US productivity growth every year since 1990 – roughly one-sixth of the actual gain over this period.
The growing proportion of low-productivity labor has also contributed to rising inequality in American society.
The loss of US manufacturing jobs accelerated after 2000, with global competition the likely culprit.
As Maggie McMillan of the International Food Policy Research Institute has shown, there is an uncanny negative correlation across individual manufacturing industries between employment changes in China and the US.
Where China has expanded the most, the US has lost the greatest number of jobs.
In the few industries that contracted in China, the US has gained employment.
In Britain, where the decline of manufacturing seems to have been pursued almost gleefully by Conservatives from Margaret Thatcher until David Cameron came to power, the numbers are even more sobering.
Between 1990 and 2005, the sector’s share in total employment fell by more than seven percentage points.
The reallocation of workers to less productive service jobs has cost the British economy 0.5 points of productivity growth every year, a quarter of the total productivity gain over the period.
For developing countries, the manufacturing imperative is nothing less than vital.
Typically, the productivity gap with the rest of the economy is much wider.
When manufacturing takes off, it can generate millions of jobs for unskilled workers, often women, who previously were employed in traditional agriculture or petty services.
Industrialization was the driving force of rapid growth in southern Europe during the 1950’s and 1960’s, and in East and Southeast Asia since the 1960’s.
India, which has recently experienced Chinese rates of growth, has bucked the trend by relying on software, call centers, and other business services.
This has led some to think that India (and perhaps others) can take a different, service-led path to growth.
But the weakness of manufacturing is a drag on India’s overall economic performance and threatens the sustainability of its growth.
India’s high-productivity service industries employ workers who are at the very top end of the education distribution.
Ultimately, the Indian economy will have to generate productive jobs for the low-skilled workers with which it is abundantly endowed.
Much of that employment will need to come from manufacturing.
For developing countries, expanding manufacturing industries enables not only improved resource allocation, but also dynamic gains over time.
This is because most manufacturing industries are what might be called “escalator activities”: once an economy gets a toehold in an industry, productivity tends to rise rapidly towards that industry’s technology frontier.
I have found in my research that individual manufacturing industries, such as auto parts or machinery, exhibit what economists call “unconditional convergence” – an automatic tendency to close the gap with productivity levels in advanced countries.
This is very different from the “conditional convergence” that characterizes the rest of the economy, in which productivity growth is not assured and depends on policies and external circumstances.
A typical mistake in evaluating manufacturing performance is to look solely at output or productivity without examining job creation.
In Latin America, for example, manufacturing productivity has grown by leaps and bounds since the region liberalized and opened itself to international trade.
But these gains have come at the expense of – and to some extent because of – industry rationalization and employment reductions.
Redundant workers have ended up in worse-performing activities, such as informal services, causing economy-wide productivity to stagnate, despite impressive manufacturing performance.
Asian economies have opened up too, but policymakers there have taken greater care to support manufacturing industries.
Most importantly, they have maintained competitive currencies, which is the best way to ensure high profits for manufacturers.
Employment in the manufacturing sector has tended to increase (as a share of total employment), even in India, with its services-driven growth.
As economies develop and become richer, manufacturing – “making things” – inevitably becomes less important.
But if this happens more rapidly than workers can acquire advanced skills, the result can be a dangerous imbalance between an economy’s productive structure and its workforce.
We can see the consequences all over the world, in the form of economic underperformance, widening inequality, and divisive politics.
The Man Who Made Malaysia
Once again, Malaysia ' s Mahathir Muhammed acerbic tongue has incited controversy.
But his long rule in his country -- which ends November 1 -- amounts to much more than intemperate remarks, as Wang Gungwu, one of Southeast Asia's leading strategic analysts, suggests.
Dr. Mahathir Muhammed is stepping down after serving more than 22 years as the leader of Malaysia and its ruling United Malay National Organisation (UMNO).
Today's gleaming, modern Malaysia is unimaginable without Mahathir and UMNO, which also produced Tunku Abdul Rahman, the country's first prime minister.
Like Mahathir, Malaysia's fourth prime minister, Tunku led the government and the party for more than twenty years.
Generation-long reigns seem to have served Malaysia exceedingly well since independence.
Indeed, the continuity delivered by these two men is the secret of Malaysia's success as a rapidly developing multi-cultural state.
Both began their careers as Malay nationalists who sought to promote the rights of the Malay majority after the British left.
But they also recognized that the country's sizable, and economically powerful, Chinese and Indian minorities, among other groups, were critical to the country's development and should be persuaded to accept the new Malay-led state as their own.
Mahathir became prime minister in 1981 when the region was on the eve of historic change, following the end of the Vietnam War and Indonesia's stabilization following the bloody civil strife of the 1960's.
The global economic system was buoyant and East Asia, not least post-Maoist China, was more deeply committed than anyone expected to support that system.
This encouraged Mahathir to make a clean break with the British colonial heritage.
His call to "look East" marked the beginning of an ambitious industrialization policy that culminated, during his 10th year in power, with the Vision 2020 plan to catch up with Western levels of development.
By 1997, Mahathir was at the pinnacle of his power, inspiring the country to believe that it would not be long before all of the country's communities would see themselves as sharing a common Malay nationality.
But the Asian financial crisis that struck later that year halted the region's trajectory of rapid growth.
Against most international advice, Mahathir imposed capital controls and a fixed exchange rate for the ringgit to buy time for recovery.
He also sought to shift the sense of crisis away from economics to politics (where he retained an iron grip) by removing his designated heir, Anwar Ibrahim, who was Deputy Prime Minister and Minister of Finance.
Anwar's arrest and trial stunned the country, but Mahathir surprised few Malays--either allies or opponents--by restoring his authority so thoroughly following the crisis that he was able to handpick Abdullah Badawi as his successor.
The launch of the war on terror provided Mahathir with another opportunity to recover politically.
In the face of a world frightened by Islam, Mahathir was able to affirm a neglected facet of his leadership, repeatedly reminding the world that he presided over the one country in the world where a Muslim majority and large non-Muslim minorities live in peace.
There are several reasons for this success, and Mahathir deserves much of the credit.
Despite wearing his Malay nationalism on his sleeve, Mahathir ultimately persuaded most non-Malays that he was not simply a communal leader but someone who cared for all Malaysia's communities.
In time, he made people forget that he had opposed Tunku Abdul Rahman for not being sufficiently "Malay" and for conceding too much to the Chinese and Indian coalition partners in Tunku's early post-independence governments.
Mahathir, the first commoner to be Malaysian prime minister, became a leading Asian modernizer in another fundamental way, as well.
He quickly took up a divisive constitutional battle against the hereditary Malay rulers, the nine sultans, and succeeded in curtailing their privileges and powers.
Having overcome the inertia of communal suspicions and dynastic traditions, Mahathir was able to drive the country onto a course of rapid industrialization.
Initially, his ambitious plans to make Malaysia an economic model for developing nations exposed him to both ridicule and admiration.
Many thought that he was moving too far, too fast; that he was expecting too much from Malays asked to make the cultural quantum leap from village to boardroom in a generation.
But he was determined to break the traditional Malay mold and succeeded in building a new--albeit still small--urban middle class.
Mahathir appears to have been spurred on by the successes of the neighboring island-state of Singapore, briefly a part of Malaysia, on its swift march to First World status.
Having studied for his medical degree in Singapore, he appreciated the country's commitment to modernity.
He will not want Malaysia to fall far behind.
This competitive approach towards Singapore is in line with the concerns he expressed in his influential book, The Malay Dilemma .
His thinking has become more adventurous and he has moved on to tackling the world of cyberspace and multimedia corridors.
But the goal is still to build a Malaysia where Malays will always lead non-Malay minorities in shaping the country's future.
That, perhaps, is the greatest continuity of all in Malaysia's legacy of generational rulers.
The Many Crises of Health Care
PRINCETON – President Barack Obama’s administration spent much of 2009 preoccupied domestically with the political fight over extending health insurance to the tens of millions of Americans who have none.
People living in other industrialized countries find this difficult to understand.
They have a right to health care, and even conservative governments do not attempt to take that right away.
The difficulties that some Americans have with health-care reform tell us more about American hostility to government than it does about health care in general.
But the debate in the United States highlights an underlying issue that will worry almost every developed country in 2010 and beyond: the struggle to control health-care costs.
Health care now accounts for about one dollar in every six of all US spending – private as well as public – and is on track to double by 2035.
That is a greater share than in anywhere else in the world, but rising health-care costs are also a problem in countries that spend far less.
There are many places where savings can be made.
Encouraging people to exercise, to avoid smoking, to use alcohol only in moderation, and to eat less red meat would help to reduce health-care costs.
But, given developed countries’ aging populations, the cost of caring for the elderly is bound to rise.
So we will have to find other ways to save money.
Here it makes sense to start at the end.
Treating dying patients who do not want to go on living is a waste, yet only a few countries allow physicians actively to assist a patient who requests aid in dying.
In the US, about 27% of Medicare’s budget goes towards care in the last year of life.
While some of that is spent in the hope that the patient will have many years to live, it is not unusual for hospitals to provide treatments costing tens of thousands of dollars to patients who have no hope of living more than a week or two – and often under sedation or barely conscious.
One factor in such decisions is fear on the part of doctors or hospitals that they will be sued by the family for letting their loved one die.
So, for example, patients close to death are resuscitated, against the doctor’s better judgment, because they have not specifically stated that they do not want to be resuscitated in such circumstances.
The system by which doctors and hospitals are paid is another factor in providing expensive treatment that is of little benefit to the patient.
When Intermountain Healthcare, a network of hospitals in Utah and Idaho, improved its treatment for premature babies, it reduced the time they spent in intensive care, thereby slashing the costs of treating them.
But, because hospitals are paid a fee for each service they provide, and better care meant that the babies needed fewer services, the change cost the hospital network $329,000 a year.
Even if such perverse incentives are removed, tougher questions about controlling costs need to be faced.
One is the cost of new drugs.
Development costs of $800 million are not unusual for a drug, and we can expect to see more of a new type of drug – biopharmaceuticals made from living cells – which cost even more.
Development costs have to be passed on in drug prices, which may be exceptionally high when a drug benefits only a relatively small number of patients.
Gaucher’s disease, for example, is a rare crippling genetic condition that, in its more severe forms, usually killed its victims in childhood.
Now those with the disease can lead an almost normal life, thanks to a drug called Cerezyme – but it costs $175,000 a year.
New medical devices pose equally difficult dilemmas.
The artificial heart machine, also known as a left ventricular assist device, or LVAD, has been used to keep patients alive until they receive a heart transplant.
But there is a shortage of hearts for transplantation, and in the US, LVADs are now being implanted as a long-term treatment for heart failure, just as a dialysis machine replaces a kidney.
According to Manoj Jain of Emory University, every year 200,000 US patients could be kept alive a little longer with an LVAD, at a cost of $200,000 per patient, or $40 billion.
Is that a sensible use of resources in a country in which there are officially 39 million people below the poverty line, which for a family of four is $22,000?
In countries that provide free health care to their citizens, it is extraordinarily difficult for officials to tell anyone that the government will not pay for the only drug or medical device that can save their life – or their child’s life.
But eventually the point will come when such things must be said.
No one likes putting a dollar value on a human life, but the fact is that we already do, implicitly, by failing to give enough support to organizations working in developing countries.
GiveWell.net, which evaluates organizations working to save the lives of the world’s poor, has identified several that can save a life for under $1,000.
The World Health Organization estimates that its immunization programs in developing countries cost about $300 per life saved – lives that are saved not for a year, but usually for a lifetime.
Similarly, the World Bank’s Disease Control Priorities Report tells us that a program to treat tuberculosis in the developing world, promoted by the Stop TB Partnership, gives people an extra year of life at a cost ranging from $5 to $50.
Against that background, spending $200,000 to give a patient in an affluent country a relatively short period of extra life becomes more than financially dubious.
It is morally wrong.
The Many Faces of the Arab Spring
MADRID – The attack by a Western-led alliance on Muammar Gaddafi’s forces in Libya is driven largely by principled motives.
Had it turned its back on the Libyan rebels, the West would have betrayed its very identity.
Of course, the same principles are not being applied to save the brutally repressed masses in Yemen or the Shia protesters in Bahrain.
It is doubtful whether they will be extended to Saudi Arabia and Syria, let alone to Iran.
Nor is it improbable that a protracted war in Libya would end by vindicating the warning of the region’s authoritarian rulers that the Arab Awakening is but a prelude to chaos.
These built-in contradictions are compounded by the domestic conditions in each of the Arab states, as well as by strategic constraints, all of which define the shades of this uneven Arab Spring.
The legitimacy of hereditary monarchies, a principle established by Metternich, the architect of the post-Napoleonic order, eventually prevailed in the 1848 European Spring.
So far, the same principle remains in effect throughout the Arab world today.
Monarchies – in Morocco, Saudi Arabia, Jordan, and most of the Gulf dynasties – still appear to their subjects to be more acceptable than secular autocracies.
The vulnerability of the regimes in Egypt, Tunisia, Libya, Syria, and Yemen, which rely on rigged elections and a repressive state apparatus, reflects their lack of any acceptable source of legitimacy.
Of course, the Arab monarchies are not entirely immune to the threat of popular uprisings.
But, because their legitimacy stems from a religious or even divine source, rather than on a fiction of democratic support, as was the case of the Arab presidents, their rule is less questionable.
Moreover, unlike the Arab “republics” – almost all of which arose from “socialist’ revolutions or military takeovers that promised grandeur and social justice, only to end in corrupt, repressive regimes – the region’s monarchies never promised Utopia.
All such promises in history have ended either at the gates of the gulag or, as in Egypt and Tunisia, with the deceived masses’ cathartic overthrow of the rulers.
In none of the Arab monarchies have protesters gone after the king’s head; their demand is for limits on absolute power, not an end to the monarchy.
The revolutionary map is also influenced by attitudes toward the West.
A sad lesson of the West’s duplicity with regard to democratic reform in the Arab world, which both Syria and Iran have been happy to embrace, is that pro-Western moderate leaders who gave ground to pro-democracy protesters ended up being swept away, while those who brutally crushed their opponents are hanging on.
The West, after all, never put irresistible pressure on any Arab regime to undertake reforms, and deserted its autocratic clients in Tunisia and Egypt only when they failed to nip the revolutionary bud.
The lesson is that the West will coexist with tyranny, provided that it is swiftly and efficiently repressive.
The United States, in particular, has been far more lenient with regard to the repression of democratic movements in the Gulf than it was in Egypt, Tunisia, or Libya.
For, in the Gulf, the issue for the US is not democracy versus autocracy; it is one of an Iran-led Shia axis versus the Sunni pro-Western incumbent regimes.
Given rampant fear of Iranian influence, the movement for democracy in Bahrain and Saudi Arabia is bound to be stifled with US connivance.
The Saudi-led intervention in Bahrain is aimed at curtailing Iran’s effort to make headway in the region on the waves of Shia unrest.
Indeed, the uprising by Bahrain’s Shia majority has now become a struggle for regional mastery between Iran and the US-backed Sunni monarchies in the Gulf.
Even Turkey, an ally of Iran whose prime minister, Recep Tayyip Erdoğan, sharply criticized the military intervention against Libya – lashing out at the West for viewing the region as “as a pawn in oil wars for decades” – called on Iran to restrain its bellicose rhetoric during the Bahrain crisis.
The Saudi monarchy’s immunity from US pressure for democratic reform owes much to fear of the “Shia crescent” looming over the Gulf, with Iran at its center.
Indeed, Saudi Arabia views political empowerment of Iraq’s Shia majority as a calamity of historic proportions, a view vindicated by Iraq’s outspoken support of Iranian designs in the Gulf.
Prime Minister Nouri al-Maliki joined the Iranian chorus against “the intervention of Sunni forces in a neighboring state.”
He was seconded by the Iraq’s powerful Shia leader, Mukhtada el-Sadr, and by its supreme Shia cleric, Ayatollah Ali Sistani, who urged Bahrain to get rid of the “foreign forces.”
It has become fashionable to lay the blame for the vicissitudes of Arab democratization on the West.
But historical turning points have never been characterized by easy choices, and human blunders frequently shape outcomes more than human wickedness.
In their admirable march to civil liberty, the Arab peoples must face a preliminary test of any democracy, however incipient: assuming responsibility for the consequences of one’s decisions.
The Maoists and the Massacre
The March of Folly in Afghanistan
NEW DELHI – When the Wikileaks exposé of raw United States intelligence data and reports from Afghanistan hit computers worldwide, commentators in Pakistan reacted with vitriolic broadsides.
One spoke of “Neocon vampires…blood-thirsty Islamaphobes…think tank irredentists…(Indian) revanchists…planning another dismemberment, so that they (can) continue their blood-fest in…Afghanistan.” Strong words, particularly when compared to US Defense Secretary Robert M. Gates, who was only “mortified” and “appalled” by the leaks.
The leaks provoked such fiery debate because the US-led fight against “jihadism” had suddenly run into an unexpected adversary: truth.
Indeed, it now seems clear to anyone with eyes that the invasion of Afghanistan was built upon a great miscalculation: that Afghanistan can be successfully invaded.
Throughout history, such undertakings have always floundered.
The country may, perhaps, be occupied for a time, but only temporarily; it cannot be conquered.
The realization of this historical truth, which the Wikileaks affair has brought home, is now troubling today’s invaders.
The great miscalculation that led to the Afghan invasion was based on a faulty response to the terrorist attacks of September 11, 2001.
Of those who attacked the US, an overwhelming number were citizens of Saudi Arabia, aided by Pakistanis.
How curious that in revenge, following the Afghan invasion, the US attacked Iraq, and then, even before that mission had been concluded, ratcheted up the Afghan war with the so-called “surge” of military force.
So, almost a decade after the war began, we are back to asking a basic question: toward what goal is this endeavor directed?
If it is about countering terrorism, then why are the US and NATO not present in Yemen, Somalia, or Pakistan, which are increasingly terrorist havens?
Or is the war in Afghanistan really now about countering the insurgents fighting Hamid Karzai’s government?
In attacking “terrorism” and simultaneously engaging in “counter-insurgency,” the US- led NATO forces in Afghanistan have, unfortunately, become a perpetrator of what they are fighting.
Worse yet, a feeling of imperial revival has also become part of the picture, and not only among Afghans.
This sense of imperial occupation has transformed the supposed solution to the problem of terror in Afghanistan into the problem itself.
And if the muddle of motives in Afghanistan is not bad enough, there is Pakistan to add to the confusion.
Without Pakistan as a strategic partner to provide land, resources, and military support, operations in Afghanistan would be stymied further.
But Pakistani support clearly comes at a high price.
The US “buys” an ally in Pakistan that dictates the terms of its collaboration, and simultaneously guards its flanks by keeping open its channels of communication to the Taliban.
This, however, is an entirely understandable precaution by Pakistan, whose government, like every other government in the region, must be prepared for the day when the US and NATO withdraw from Afghanistan.
It is, of course, good that the US no longer thinks that Afghanistan can be transformed into some Jeffersonian democracy on the Hindu Kush.
But an even more fundamental reservation should have followed, because Afghanistan is more of a concept – a polyglot entity of various ethnic groups – than a functioning state.
Yes, Afghans live in a shifting pattern of loyalty to Kabul, but this unity has historically been only episodic, with frequent periods of fragmentation as well.
Only when the ruling “emir” in Kabul demonstrates understanding, tolerance, and strength do Afghan unity and a sort of peace prevail.
Finding that type of Afghan leadership is the true challenge today.
So it is vital to accept that Afghanistan cannot be governed centrally, only guided.
Herein lies the crux of the many failures of the Western alliance: their demonstrated lack of a true understanding of Afghanistan’s essence.
As for other complicating factors, such as the support of some parts of Pakistan’s military establishment for the Taliban and Al Qaeda, a three-decade-old reality must be kept in mind: the Taliban were born of a 1980’s confluence of national interests between the US and Pakistan.
Moreover, any attempt to drive the Taliban out of Waziristan risks tearing Pakistan apart.
In addition, Pakistan, in the words of chief military officer General Ashfaq Kayani, views the Taliban as “a strategic asset” in the struggle with India.
The US and NATO do not seem to have begun to consider what will be needed to separate Pakistan’s foreign-policy objectives from the requirements of domestic cohesion, since irredentist agitation against India is part of the glue that holds Pakistan together.
In targeting the Taliban, the US has converted them into an insurgent “army,” an idea of resistance that the population is beginning, once again, to find acceptable.
Of course, Al Qaeda is made up of unwelcome “foreigners,” but when US and NATO forces attack them, all unite – and Pakistan covertly backs that union.
This dynamic is something that we in South Asia have known and lived with for ages.
Wikileaks has now documented our hard-earned knowledge in a language that ordinary Americans and Europeans understand.
The urgent task facing US President Barack Obama is to move American strategy away from the current cul de sac in which it is now stuck towards one that maintains a balance between its own national interests, and those of India, Pakistan, and a China that is looking on intently.
An extraordinarily complex end game is underway.
The longer it drags out, the more destructive the final outcome will be.
The March of Scientific Folly
Scientists take enormous pride in their avowals of intellectual impartiality.
They profess such sobriety of view as to regard all concepts as equal in weight or significance until new evidence decrees otherwise.
The irony of scientists accepting this belief about themselves at face value is that, among the innumerable kinds of human errors, bias is a relentless nemesis to which scientists are as likely to succumb as anyone else.
Given a problem, scientists are quick to urge the solution that either promotes - or appears to be demanded by - their most cherished ideas.
Like many ordinary people, they firmly believe that "in the last analysis," the mechanisms explained by their pet theories will prove to be most decisive and relevant.
Recall the exaggerated influence vouchsafed, not too long ago, to psychoanalytic theory.
Sigmund Freud taught that no act of daily life is ever trivial or meaningless.
Hence, theoretical schemes were extended beyond reason.
Roger Caillois (1913-1978) ironically mocked such thinking: If I forget my umbrella at X's house, it is because I feel a subconscious sympathy for X. My lapse was only apparent.
It was, "in reality," a pretext to return to see X, and thereby to reward my secret affection.
What if I had left my umbrella at Y's, whom I cordially detest?
In that case, my slip was a desire for self-punishment.
I atone for experiencing this antipathy, or for wishing Y's disappearance.
But what if I forget my umbrella at Z's house?
Toward Z, I am indifferent, neither friend nor foe.
Here, the psychoanalyst resorts to theory, and tells me that I am mistaken.
I only think that I am indifferent; "in reality" I either love or hate, and with uncommon vehemence to boot.
The proof?
Why, the proof is that I forgot the umbrella!
Thus, the circle is closed.
In this system, nothing escapes definitive interpretation.
Caillois may have been using irony, but his point was well taken.
Psychoanalysis grew into a formidable, intimidating logic.
In the above example, absent-mindedness is first a symptom of a subconscious feeling.
Then, the latter becomes what the ancients called the petitio principii; we name it begging the question.
Whether the umbrella is forgotten at home or elsewhere no longer matters.
Whether there is an apparent reason - or none at all - is irrelevant: psychoanalysis can always supply an explanation.
Nothing, indeed, resisted the psychoanalytic exegesis.
Politics, sociology, history, or medicine: all were grist for the psychoanalyst's mill.
So agrarian communism was viewed - wait for it - as a return to the maternal womb.
The capitalist economy was linked to a sado-masochistic anal complex.
The communist slogan "Proletarians of the world, unite!" was interpreted by some as a sublimated expression of homosexuality.
In Soviet Russia, Marxism-Leninism incurred comparable excess.
Everything had to do with the class struggle.
To believe Marxist theoreticians, even romantic love between a man and a woman could be explained as a desire of possession and domination, an attitude that mirrored the oppression of the bourgeoisie over the proletariat.
Biology was no exception.
Biological facts were seen through the light of ideological bias.
Alas, when orthodox genetics was discarded in favor of the ruling ideological doctrines, as was done by Stalin's favorite Trofim Lysenko (1898-1976), the results were disastrous.
Soviet science was set back fifty years.
In the West, Charles Darwin's theories suffered no less egregious distortions at the hands of supposed Darwinian acolytes.
It is now a commonplace that evolutionary theory was used to justify capitalist injustice.
Illegality and wrongdoing were artfully cloaked as an incontrovertible, science-tested natural law, "the survival of the fittest."
Every time a new, powerful scientific formulation appears, it must go through a period of abusive application.
Today, it is the turn of molecular genetics.
Temperament, obesity, heart disease, intelligence, homosexuality or criminal behavior: everything is said to reside in the genes.
Distinguished scientists proclaim that our very destiny is inscribed on the DNA molecule, and science-popularizers join the exultant choir, asserting that human beings are nothing but "programmed" entities.
The genome contains the complete set of instructions, and is therefore named The Holy Grail, The Bible, The Book of Man.
When thoroughly deciphered, it is said, the essence of human nature will be fully understood.
Against these claims, a healthy humanism imposes limits.
No science can completely explicate human nature: all the sciences, even the most exact, are partial endeavors.
In other words, a man or a woman is more than his or her psyche; more than his or her biochemistry; and more than his or her social identity.
Assuredly, Man is more than his genes.
He is also his past, his present and his future.
Indeed, Man is more than himself, because the specifically human qualities can only be fully deployed in society.
A person reared in utter isolation (or by animals, as the semi-legendary "feral children" adopted by wolves) can never attain full humanity.
Thus, the Spanish philosopher Ortega y Gasset (1883-1955) could truthfully state that "the I of Man is immersed precisely in what is not himself, in the pure other that is his circumstance."
In the measure that scientists, absorbed in their research and fascinated by technology, forget this profound teaching of the humanities, they will continue to fall prey to Bias, their implacable nemesis.
The March of the Caudillos
LA PAZ &#45;&#45; The re-election for unlimited periods that Presidents Hugo Chávez and Evo Morales have sought in Venezuela and Bolivia, respectively, reflects a phenomenon – caudillismo – that has, sadly, never been far from the surface of Latin American politics.
At least Russian president Vladimir Putin had the decency to honor the form of his country’s constitution when he recently promised to step down and run for parliament.
Of course, several recent Latin American presidents succeeded in changing their countries’ constitutions to lengthen their terms in office.
Argentina’s Carlos Menem, the heir to Peronism, the continent’s most enduring form of caudillismo , was one such example, but his was a soft caudillismo , which basically maintained democratic norms .
C audillismo has two key facets.
First, because it is, above all, a form of political representation, it can have its own local particularities.
Second, although caudillismo personalizes politics, it depends less on the characteristics of the caudillo than on the social, political, and economic conditions of the country in which caudillismo takes root.
In other words, although a caudillo ’s charisma matters, he or she is a social creation.
These two ideas are helpful in understanding Chávez and Morales.
Like the old caudillos , they concentrate representation of their supporters in themselves.
Whereas representation in democratic countries is based on people’s confidence that they can achieve a better future under their elected leaders, in countries like Venezuela and Bolivia nowadays, representation is based on a simple identification with the leader: “He’s one of us.”
The way “us” is defined links the caudillo with his supporters by building an uncomplicated and easily invoked collective identity that facilitates communication and political mobilization, while also implying submission by all citizens.
Morales and Chávez always emphasize their humble origins in order to appeal emotionally to those who share those characteristics with them, and to blackmail those who do not.
This image is strengthened each time the caudillo engages in confrontation with some large, and usually vaguely defined, enemy: the Empire or the United States, the oligarchies, the traditional parties, or the transnational corporations.
But caudillos have other uses for conflict: it allows them to strengthen the unity of their popular bases and evade the management responsibilities that exercising political power entails.
They construct politics in such a way that there will always be an enemy to blame for any problems that arise.
Chávez and Morales have been accumulating power by dismantling their societies’ fragile institutional checks and balances, while permanently weakening their adversaries.
Traditional parties and the administrations that preceded the caudillo are dismissed as corrupt and elitist.
It follows from this that constitutions must be changed to reduce the role of Congress, subordinate the judiciary, and centralize economic resources.
In such schemes, Chávez has so far had more success than Morales, whose Constitutional Assembly has not yet been able to organize itself.
President Rafael Correa of Ecuador looks like he also wants to move in the same direction.
The rise of these modern caudillos reflects a crisis in political parties and an acute intensification of social unease across the continent.
Latin America’s economic and social structures remain marked by great inequality, weak institutions, and an abundance of natural resources.
Chávez and Morales, each in his own way, have taken advantage of this situation, worsening conditions to enfeeble their opponents and living off the wealth generated by natural resources, not new economic activity.
With a popular base that demands change – and that knows that change requires gaining access to state-owned wealth – social attitudes have developed that are receptive to the promises made by the caudillos .
The weaker a country’s institutions, the more evident the inequalities, and the more concentrated the economic resources, the greater the caudillo’s powers will be.
Concentration of resources is probably the key factor, because it increases both the discretionary power of whoever controls them and the population’s social expectations, which in the end cannot ever be met, because the caudillo’s power depends on maintaining that concentration of resources.
Caudillismo will be weakened only if profits are not captured by the state, but directly shared with citizens in a stable and continuous manner.
A decline in extreme poverty and inequality, and the creation of trustworthy institutions, can be achieved in the country’s beguiled by caudillismo only if the caudillo loses control of the wealth that sustains his rule.
The March to Barbarism
One consequence of the Iraq war is to expose (once again) the false divide between "civilized" and "barbarous" nations.
The United States seems as capable of barbarism as anyone else, as the abuses at the Abu Ghraib prison make clear.
Much of the time the barbarism in Iraq goes unrecorded, as when American tanks sweep into Iraqi neighborhoods and kill dozens of innocents in the name of fighting "insurgents."
But barbarism is found in many quarters, as the grisly beheading of an American hostage made clear.
Every society, under certain conditions, is vulnerable to a descent into barbarism.
Many historians have argued that German society under Hitler was somehow uniquely evil.
False.
Germany was destabilized by defeat in World War I, a harsh peace in 1919, hyperinflation in the 1920's, and the Great Depression of the 1930's, but was otherwise not uniquely barbarous.
On the contrary, in the early part of the twentieth century, Germany was one of the world's richest countries, with enviably high education levels and scientific prowess.
Hannah Arendt was closer to the mark when she wrote about the "banality of evil," not its uniqueness.
There seem to be two common characteristics of the descent into barbarism.
The first is the relentless human tendency to classify the world as "us" versus "them," and then to reduce "them" to sub-human status.
Such classifications probably evolved because they strengthened the cohesion of the "in" group, facilitating cooperation by harnessing hatred for those outside.
Hatred and violence against "others" seem to be manifested most powerfully as the result of fear: they are survival reactions.
The descent into barbarism generally occurs in the midst of economic crisis or when localized violence has already flared.
Fear leads one group to coalesce in order to protect itself, perhaps by attacking a competing group.
This pattern was evident in Yugoslavia's wars of the 1990's, where ethnic communities that had lived together more or less peacefully became enmeshed in civil war in the midst of a deep economic crisis.
Similarly, Israelis and Palestinians have both engaged in barbaric acts in a tragic interplay of mutual fear that empowers extremists in both communities.
There is no glory on either side of the Israel-Palestine debacle. But Israel, with its vastly stronger army, could and should have taken much wiser political decisions than occupying the West Bank with settlers.
American reactions to the Abu Ghraib torture scenes, followed by the beheading of the American hostage Nicholas Berg, show clearly the route to barbarism in a supposedly civilized country.
In May 2004, The New York Times polled readers in a city in the US heartland, Oswego, Illinois.
One retired businessman said, "Let's kill them all.
Let's wipe them off the face of the earth."
A Nazi leader would not have said it differently.
A tow truck driver said that the beheading "just affirms what I thought before.
We're not being tough enough.
This is something that we've got to do.
We should attack our enemies directly and not back off till we succeed." A third respondent said something similar.
"There was so much outrage about the prisoner abuse, which I certainly don't approve of, but this was much worse," she said, referring to the Berg murder. "What it tells me is that we can't let this kind of evil put down roots.
We have to fight it decisively right now, or else we'll never be able to stamp it out."
Barbarous thinking comes easily, and right-wingers fuel the fervor, as when Rush Limbaugh said on his radio program "They're the ones who are perverted.
They're the ones who are dangerous.
They're the ones who are subhuman.
They're the ones who are human debris, not the United States of America and not our soldiers and our prison guards."
I am not saying that the US is more depraved than other countries.
What I am saying is that human society, even in the twenty-first century, is capable of sliding into barbaric thinking and action, no matter the level of "development."
The idea that any nation is morally superior, or that it has been divinely chosen as a leader of nations, is dangerous.
Once we recognize how vulnerable all of the world is to this kind of descent into violence, the importance of international law and international institutions such as the United Nations become all the more obvious.
The UN successfully resisted the powerful pressures of the US to condone a war with Iraq despite repeated US claims, now known to be false, that Iraq was in possession of weapons of mass destruction.
The UN process worked.
It was US policy that failed.
The events at Abu Ghraib underscore why international rules such as the Geneva Conventions on the treatment of combatants are so vital.
By putting itself above the law, America allowed itself to succumb to barbaric behavior.
Similarly, these events prove why the new International Criminal Court (ICC) is vital.
The US strongly resisted the jurisdiction of the ICC, but American abuses at Abu Ghraib show why the US, should be subject to international law.
Perhaps that lesson - the need to subject even the most powerful country to international law - will be one benefit of the otherwise disastrous war that the US launched in Iraq.
If this lesson is learned, the world will be far safer.
America itself will be safer, in part because it will be less likely in the future to unleash a spiral of violence fueled by its own irrational fears and misunderstandings of the world.
The Market Confidence Bugaboo
CAMBRIDGE – A specter is haunting Europe – the specter of “market confidence.”
It may have been fear of communism that agitated governments when Karl Marx penned the opening line of his famous manifesto in 1848, but today it is the dread that market sentiment will turn against them and drive up the spreads on their bonds.
Governments all over are being forced into premature fiscal retrenchment, even though unemployment remains very high and private demand shows few signs of life.
Many are driven to undertake structural reforms that they don’t really believe in – just because it would look bad to markets to do otherwise.
The terror spawned by market sentiment was once the bane of poor nations alone.
During the Latin American debt crisis of the 1980’s or the Asian financial crisis of 1997, for example, heavily indebted developing countries believed they had few options but to swallow bitter medicine ­– or face a stampede of capital outflows.
Apparently, now it’s the turn of Spain, France, Britain, Germany, and, many analysts argue, even the United States.
If you want to keep borrowing money, you need to convince your lender that you can repay.
That much is clear.
But in times of crisis, market confidence takes on a life of its own.
It becomes an ethereal concept devoid of much real economic content.
It turns into what philosophers call a “social construction” – something that is real only because we believe it to be.
For, if economic logic were clear-cut, governments wouldn’t have to justify what they do on the basis of market confidence.
It would be evident which policies work and which do not, and pursuing the “right” policies would be the surest way to restore confidence.
The pursuit of market confidence would be superfluous.
So, if market confidence has a meaning, it must be something that is not pinned down simply by economic fundamentals.
But what is it?
In his Communist Manifesto, Marx went on to say that it is “high time that Communists should openly, in the face of the whole world, publish their views, their aims, their tendencies, and meet this nursery tale of the specter of Communism with a Manifesto of the party itself.” Similarly, it would be nice if markets would clarify what they mean by “confidence” so that we would all know what we are really dealing with.
Of course, “markets” are unlikely to do any such thing.
This is not just because markets comprise a multitude of investors and speculators who are unlikely ever to get together to publish a “party program,” but more fundamentally because markets have little clue themselves.
A government’s capacity and willingness to service its debt depend on an almost infinite number of present and future contingencies.
They depend not just on its tax and spending plans but also on the state of the economy, the external conjuncture, and the political context.
All of these are highly uncertain, and require many assumptions to reach some form of judgment about creditworthiness.
Today, markets seem to think that large fiscal deficits are the greatest threat to government solvency.
Tomorrow they may think the real problem is low growth, and rue the tight fiscal policies that helped produce it.
Today, they worry about spineless governments unable to take the tough actions needed to deal with the crisis.
Perhaps tomorrow they will lose sleep over the mass demonstrations and social conflicts that tough economic policies have spawned.
Few can predict which way market sentiment will move, least of all market participants themselves.
Even with hindsight, it is sometimes not clear why markets go one way and not the other.
Similar policies will produce different market reactions depending on the prevailing story, or fad of the moment.
That is why steering the economy by the dictates of market confidence is a fool’s errand.
The silver lining in all this is that, unlike economists and politicians, markets have no ideology.
As long as they make money they do not care if they have to eat their words. They simply want whatever “works”—whatever will produce a stable, healthy economic environment conducive to debt repayment.
When circumstances become dire enough, they will even condone debt restructuring—if the alternative is chaos and the prospect of a greater loss.
This opens up some room for governments to maneuver.
It permits self-confident political leaders to take charge of their own future. It allows them to shape the narrative that underpins market confidence, rather than play catch-up.
But to make good use of this maneuvering room, policymakers need to articulate a coherent, consistent, and credible account of what they are doing, based on both good economics and good politics.
They have to say: “we are doing this not because the markets demand it, but because it is good for us and here is why.”
Their storyline needs to convince their electorates as well as the markets.
If they succeed, they can pursue their own priorities and maintain market confidence at the same time.
This is where European governments (along with their economist advisors) have kept missing the boat.
Rather than face up to the challenge, leaders first procrastinated and then buckled under pressure.
They ended by fetishizing the pronouncements of market analysts.
In doing so, they have denied themselves economically desirable policies that have greater chance of garnering popular support.
If the present crisis gets worse, it will be political leaders that bear primary responsibility – not because they ignored markets, but because they took them too seriously.
The Marx Renaissance
PRINCETON – Karl Marx has returned, if not quite from the grave then from history’s dustbin.
German Finance Minister Peer Steinbrück recently said that Marx’s answers “may not be irrelevant” to today’s problems.
French President Nicholas Sarkozy allowed himself to be photographed leafing through the pages of Marx’s Das Kapital . A German filmmaker, Alexander Kluge, is promising to turn Das Kapital into a movie.
Few of today’s new “Marxists” want to spell out the attractions of a man who wanted to unite German philosophy (building on Hegel) with British political economy (carrying on from David Ricardo), and thereby turn two rather conservative traditions into a theory of radical revolution.
Marx was certainly a perceptive analyst of the nineteenth century’s version of globalization.
In 1848, in The Communist Manifesto , he wrote: “In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations.”
To be sure, there were plenty of other nineteenth-century commentators who analyzed the creation of global networks.
But we do not see a new rush for the works of such figures as John Stuart Mill or Paul Leroy-Beaulieu.
The implication of Marx’s renewed popularity is that capitalism is now universally accepted as being fundamentally broken, with the financial system at the heart of the problem.
Marx’s description of “the fetishism of commodities” – the translation of goods into tradable assets, disembodied from either the process of creation or their usefulness – seems entirely relevant to the complex process of securitization, in which values seem to be hidden by obscure transactions.
From the analysis of the deceptive nature of complexity, there followed the recommendation of the Communist Manifesto that seems most attractive to contemporary “Marxists.”
It came as point five in a ten-point program.
Point five, which was preceded by “confiscation of the property of all emigrants and rebels,” was “centralization of credit in the hands of the State, by means of a national bank with State property and an exclusive monopoly.”
The major problem in the aftermath of today’s financial crisis is that banks are no longer providing credit for many transactions needed in the basic operation of the economy.
Even the recapitalization of banks through state assistance has not been enough to revive economic activity.
In the face of the difficulties of big automobile producers and smaller suppliers alike, many are demanding that, as part of the rescue package, the state should compel banks to lend.
Everyone thinks of the horse that can be led to water, but cannot be made to drink.
Even pro-market commentators have taken up the cry that the market will not provide the needed credit.
State-compelled lending has been adopted in the past, and not just in the central planning systems of communist economies.
It was part of the standard armory of early modern European states as they dealt with their creditors.
Immediately after World War II, it was at the heart of French economic policy.
More recently, in the early 1980’s, the International Monetary Fund and the central banks in the big industrial countries teamed up to pressure banks into extending more credit to the big Latin American debtor countries.
Many bankers grumbled about having to throw good money after bad, but they gave in under the threat of greater regulatory intervention.
The result of credit compulsion was rather paradoxical.
The 1980’s solution saved the banks (and the bankers) from the debt crisis, but in the long run increased burden of repayment, and in this way decreased living standards in Latin America.
A better solution would have been debt reduction at an earlier stage of the crisis.
In today’s circumstances, the financial system would have been better off if some version of US Treasury Secretary Henry Paulson’s original plan to purchase toxic assets and take them off banks’ balance sheets had been realized.
But that proved too complex, because valuing each asset raised different and unique problems.
In running away from complexity, we have come to look for simple solutions.
When opening a new building at the London School of Economics, the Queen of England asked why no one had predicted the crisis.
In fact, the clearest anticipation was given by two British comedians (John Bird and John Fortune) in a television show over a year ago, at a time when high-powered financiers were still in denial.
In other words, the financial world has reached a kind of carnival season, in which fools are wise and clever people turn out to be idiots.
That does not necessarily mean that the idiot’s solution makes sense.
When economic activity starts up again after a deep recession, it will not be as a consequence of people having been compelled to channel financial resources into the projects selected as politically desirable, but as a result of new ideas.
The chances are higher that a large number of decision makers will be able to identify these new projects, and much slimmer that a centralized version of financial planning will do so successfully.
The “Marxist” revival was probably an inevitable byproduct of the current crisis.
But its acolytes should reflect on the uniformly disastrous results of centralized credit provision in the past.
The Mauritius Miracle
NEW YORK – Suppose someone were to describe a small country that provided free education through university for all of its citizens, transportation for school children, and free health care – including heart surgery – for all.
You might suspect that such a country is either phenomenally rich or on the fast track to fiscal crisis.
After all, rich countries in Europe have increasingly found that they cannot pay for university education, and are asking young people and their families to bear the costs.
For its part, the United States has never attempted to give free college for all, and it took a bitter battle just to ensure that America’s poor get access to health care – a guarantee that the Republican Party is now working hard to repeal, claiming that the country cannot afford it.
But Mauritius, a small island nation off the east coast of Africa, is neither particularly rich nor on its way to budgetary ruin.
Nonetheless, it has spent the last decades successfully building a diverse economy, a democratic political system, and a strong social safety net.
Many countries, not least the US, could learn from its experience.
In a recent visit to this tropical archipelago of 1.3 million people, I had a chance to see some of the leaps Mauritius has taken – accomplishments that can seem bewildering in light of the debate in the US and elsewhere.
Consider home ownership: while American conservatives say that the government’s attempt to extend home ownership to 70% of the US population was responsible for the financial meltdown, 87% of Mauritians own their own homes – without fueling a housing bubble.
Now comes the painful number: Mauritius’s GDP has grown faster than 5% annually for almost 30 years.
Surely, this must be some “trick.”
Mauritius must be rich in diamonds, oil, or some other valuable commodity.
But Mauritius has no exploitable natural resources.
Indeed, so dismal were its prospects as it approached independence from Britain, which came in 1968, that the Nobel Prize-winning economist James Meade wrote in 1961: “It is going to be a great achievement if [the country] can find productive employment for its population without a serious reduction in the existing standard of living….[T]he outlook for peaceful development is weak.”
As if to prove Meade wrong, the Mauritians have increased per capita income from less than $400 around the time of independence to more than $6,700 today.
The country has progressed from the sugar-based monoculture of 50 years ago to a diversified economy that includes tourism, finance, textiles, and, if current plans bear fruit, advanced technology.
During my visit, my interest was to understand better what had led to what some have called the Mauritius Miracle, and what others might learn from it.
There are, in fact, many lessons, some of which should be borne in mind by politicians in the US and elsewhere as they fight their budget battles.
First, the question is not whether we can afford to provide health care or education for all, or ensure widespread homeownership.
If Mauritius can afford these things, America and Europe – which are several orders of magnitude richer – can, too.
The question, rather, is how to organize society.
Mauritians have chosen a path that leads to higher levels of social cohesion, welfare, and economic growth – and to a lower level of inequality.
Second, unlike many other small countries, Mauritius has decided that most military spending is a waste.
The US need not go as far: just a fraction of the money that America spends on weapons that don’t work against enemies that don’t exist would go a long way toward creating a more humane society, including provision of health care and education to those who cannot afford them.
Third, Mauritius recognized that without natural resources, its people were its only asset.
Maybe that appreciation for its human resources is also what led Mauritius to realize that, particularly given the country’s potential religious, ethnic, and political differences – which some tried to exploit in order to induce it to remain a British colony – education for all was crucial to social unity.
So was a strong commitment to democratic institutions and cooperation between workers, government, and employers – precisely the opposite of the kind of dissension and division being engendered by conservatives in the US today.
This is not to say that Mauritius is without problems.
Like many other successful emerging-market countries, Mauritius is confronting a loss of exchange-rate competitiveness.
And, as more and more countries intervene to weaken their exchange rates in response to America’s attempt at competitive devaluation through quantitative easing, the problem is becoming worse.
Almost surely, Mauritius, too, will have to intervene.
Moreover, like many other countries around the world, Mauritius worries today about imported food and energy inflation.
To respond to inflation by increasing interest rates would simply compound the difficulties of high prices with high unemployment and an even less competitive exchange rate.
Direct interventions, restrictions on short-term capital inflows, capital-gains taxes, and stabilizing prudential banking regulations will all have to be considered.
The Mauritius Miracle dates to independence.
But the country still struggles with some of its colonial legacies: inequality in land and wealth, as well as vulnerability to high-stakes global politics.
The US occupies one of Mauritius’s offshore islands, Diego Garcia, as a naval base without compensation, officially leasing it from the United Kingdom, which not only retained the Chagos Islands in violation of the UN and international law, but expelled its citizens and refuses to allow them to return.
The US should now do right by this peaceful and democratic country: recognize Mauritius’ rightful ownership of Diego Garcia, renegotiate the lease, and redeem past sins by paying a fair amount for land that it has illegally occupied for decades.
The Meaning of Chernobyl
KYIV – It began as a grey and muddy spring day, like so many others in my homeland.
It ended in dread and mourning.
Of course, none of us knew the precise moment when catastrophe struck at Chernobyl 25 years ago.
Back then, we lived under a system that denied ordinary people any right whatsoever to know about even essential facts and events.
So we were kept in the dark about the radiation leaking from the shattered reactor at Chernobyl – and blowing in the winds over northern Europe.
But the more bizarre fact about the Chernobyl disaster, we now know, is that Mikhail Gorbachev, General Secretary of the Communist Party of the Soviet Union, was also kept in the dark about the magnitude of the disaster.
Indeed, it may be this very fact that finally condemned the old system to the dustbin of history a mere five years later.
No regime built on limitless self-delusion is capable of retaining a shred of legitimacy once the scale of its self-deception is exposed.
Because only fragments of reliable information reached ordinary Ukrainians at the time, my memories of Chernobyl are necessarily sketchy.
I recall now only the first hushed, frightened whispers of disaster from a family friend.
I remember the abject fear I felt for my young daughter.
A virtual torrent of near hysterical hearsay and trickledown stories about the disaster soon followed.
All of these memories, of course, remain indelible.
But even 25 years later I find it difficult to connect what I really know of the disaster with when I came to know it.
Today, the Chernobyl meltdown is judged severely in both moral and metaphysical terms.
It cast a dark shadow over humanity, one unseen since the atomic bombings of Hiroshima and Nagasaki in 1945.
But, unlike Japan’s Fukushima nuclear crisis, Chernobyl’s real lesson is not about nuclear-plant safety.
It is about official arrogance and indifference to suffering, and a cult of secrecy that allows information to be shared only among a narrow elite obsessed with stability.
Ukrainians are being reminded of the consequences of this mindset right now – by a government that has slashed health benefits for the men who heroically fought to contain the Chernobyl disaster.
So, what was the source of the carelessness with which the Chernobyl crisis was handled?
What caused such arrogant unconcern for the health of those who lived near the plant, for those heroic men and women who tried to limit the damage (whom officials still treat as pawns), and for the millions who lived beneath the radioactive cloud as it spread?
Government indifference is a strange and unnatural state of mind, in which the lines between crime and punishment, cruelty and compassion, and good and evil blur.
Having grown up in the USSR, I know that Soviet leaders practically made contempt for suffering and moral concerns a foundation of their philosophy of rule.
Unaccountable governments are almost inevitably unconcerned about their citizens’ fate.
Can indifference ever be a virtue?
Of course, in times of horror such as the Holocaust and Ukraine’s Holodomyr, isolated and powerless individuals may swaddle themselves in indifference simply to retain some shred of sanity.
But, even then, it can never be justified fully, and the nameless, nagging guilt of which Primo Levi wrote so movingly invariably follows.
It is official indifference, however, that is truly unpardonable, perhaps because indifferent officials never feel the guilt of which Levi wrote.
Indeed, for some political leaders, indifference is seductive.
It is so much easier to avert your eyes from citizens than to grapple with their plight.
It is so much easier – and often less costly – to avoid individuals’ tragic circumstances than it is to adjust your policies to their needs.
For the state official who turns his back on suffering, his country’s citizens lack consequence.
Their lives are meaningless.
Their hidden or even visible anguish is worthless, a cipher’s despair.
Such indifference is more dangerous than anger and hatred.
Anger can actually be artistically and politically creative.
Pushkin wrote some of his greatest poems as a result of anger; Beethoven’s great symphonies were written in the grip of overpowering emotions; and Nelson Mandela, Václav Havel, and Aung San Suu Kyi all endured imprisonment because they were angry at the injustice they had witnessed.
Indifference, by contrast, is never creative, for it means that no response to injustice, and no help for the suffering, will ever come.
It is the tool of governments that are, in fact, the enemy of their people, for it benefits only the ruler – never the victim, whose pain is magnified by neglect.
Political prisoners, hungry children, the homeless Chernobyl refugees, or the irradiated workers in need of a lifetime of medical help – to dismiss their plight, to refuse to offer some spark of hope, is to exile them to a netherworld of helplessness.
Government officials who deny human solidarity in this way deny their own humanity.
From his prison cell awaiting his execution by Hitler’s Gestapo, Dietrich Bonhoeffer declared that we must all “share in God’s suffering.”
Indifference for Bonhoeffer was not only a sin, but also a type of punishment.
This is perhaps the central lesson of Chernobyl: governments that systematically turn a blind eye to their citizens’ fate ultimately condemn themselves.
The Media Cold War
PRINCETON – An information war has erupted around the world.
The battle lines are drawn between those governments that regard the free flow of information, and the ability to access it, as a matter of fundamental human rights, and those that regard official control of information as a fundamental sovereign prerogative.
The contest is being waged institutionally in organizations like the International Telecommunications Union (ITU) and daily in countries like Syria.
The sociologist Philip N. Howard recently used the term “new cold war” to describe “battles between broadcast media outlets and social-media upstarts, which have very different approaches to news production, ownership, and censorship.”
Because broadcasting requires significant funding, it is more centralized – and thus much more susceptible to state control.
Social media, by contrast, transforms anyone with a mobile phone into a potential roving monitor of government deeds or misdeeds, and are hard to shut down without shutting down the entire Internet.
Surveying struggles between broadcast and social media in Russia, Syria, and Saudi Arabia, Howard concludes that, notwithstanding their different media cultures, all three governments strongly back state-controlled broadcasting.
These intra-media struggles are interesting and important.
The way that information circulates does reflect, as Howard argues, a conception of how a society/polity should be organized.
But an even deeper difference concerns the fundamental issue of who owns information in the first place.
In January 2010, US Secretary of State Hillary Clinton proclaimed that the United States “stand[s] for a single Internet where all of humanity has equal access to information and ideas.”
She linked that stance not only to the US Constitution’s First Amendment, which protects freedom of expression and freedom of the press, but also to the Universal Declaration of Human Rights, which holds that all people have the right “to seek, receive, and impart information and ideas through any media and regardless of frontiers.” Many governments’ determination to “erect electronic barriers” to block their citizens’ efforts to access the full resources of the Internet, she said, means that “a new information curtain is descending across our world.”
This larger struggle is playing out in many places, including the ITU, which will convene 190 countries in Dubai in December to update an international telecommunications treaty first adopted in 1988.
Although many of the treaty’s details are highly technical, involving the routing of telecommunications, various governments have submitted proposals to amend the treaty that include provisions aimed at facilitating government censorship of the Internet.
Russian President Vladimir Putin has been open about his desire to use the ITU “to establish international control” over the Internet, thereby superseding current arrangements, which leave Internet governance in the hands of private groups like the Internet Corporation for Assigned Names and Numbers and the Internet Engineering Task Force.
The US would never sign a treaty that fundamentally changed Internet governance arrangements, but the point is that many governments will try to use the treaty process to increase their ability to control the information that their citizens can access.
On the ground, governments are often still primarily focused on blocking information about what they are doing.
One of the Syrian government’s first moves after it began shooting protesters, for example, was to expel all foreign journalists.
Several weeks ago, the government of Tajikistan blocked YouTube and reportedly shut down communications networks in a remote region where government forces were battling an opposition group.
The Chinese government barred all foreign journalists from Tibet when it cracked down hard on protesters before the 2008 Olympics.
These more traditional tactics can now be supplemented with new tools for misinformation.
For close followers of the Syrian conflict, tracking key reporters and opposition representatives on Twitter can be a surreal experience.
Two weeks ago, Ausama Monajed, a Syrian strategic communications consultant who sends out a steady stream of information and links to opposition activities in Syria, suddenly started sending out pro-government propaganda.
The Saudi-owned satellite news channel Al Arabiya has also reported the hacking of its Twitter feed by the “Electronic Syrian Army,” a shadowy group most likely comprised of free-lance operatives with the direct or indirect support of the Syrian government.
It is one thing to read about sophisticated cyber-war capabilities; it is quite another to see the online identities of familiar people or Web sites suddenly hijacked.
In the many manifestations of the ongoing and growing information war(s), the pro-freedom-of-information forces need a new weapon.
A government’s banning of journalists or blocking of news and social-media Web sites that were previously allowed should itself be regarded as an early warning sign of a crisis meriting international scrutiny.
The presumption should be that governments with nothing to hide have nothing to lose by allowing their citizens and internationally recognized media to report on their actions.
To give this presumption teeth, it should be included in international trade and investment agreements.
Imagine if the International Monetary Fund, the World Bank, and regional development banks suspended financing as soon as a government pulled down an information curtain.
Suppose foreign investors wrote contracts providing that the expulsion and banning of foreign journalists or widespread blocking of access to international news sources and social media constituted a sign of political risk sufficient to suspend investor obligations under the contract.
Americans say that sunlight is the best disinfectant.
Citizens’ access to information is an essential tool to hold governments accountable.
Government efforts to manipulate or block information should be presumed to be an abuse of power – one intended to mask many other abuses.
The Media Versus the Mentally Ill
MELBOURNE – James Holmes, accused of opening fire in a crowded movie theater in Aurora, Colorado, last summer, had no criminal history, but was seeing a psychiatrist prior to the incident.
Adam Lanza, suspected of murdering his mother and gunning down 20 children and six adult staff members at a Connecticut elementary school before taking his own life, had never been in legal trouble, but had been diagnosed with a “personality disorder,” as well as the developmental disorder Asperger syndrome.
Anders Behring Breivik in Norway, Jared Lee Loughner in Arizona, Seung-Hui Cho in Virginia – the list of mass murderers defined according to their mental illnesses goes on.
The fact is that deciding to murder, at random, a large number of innocent people reflects deeply disturbed thinking, which might reflect a mental illness.
But, contrary to popular belief, this does not mean that people with mental illnesses are likely to be dangerous or violent.
The belief that they are – and the reporting that feeds it – is reinforcing widespread stigmatization of those with mental illness, increasing their suffering and preventing them from participating fully in society.
Public perceptions of the risk of violence associated with mental illness are at odds with the facts.
In the United States, for example, roughly 42% of adults believe that a depressed child is likely to be dangerous.
And 70% of Americans believe that patients hospitalized for a mental illness may be dangerous.
But, according to the American Psychiatric Association, people with mental disorders, who account for roughly one-quarter of the population in a given year, commit only 4-5% of violent crimes.
Indeed, while mentally ill people may be more likely to commit violent acts if they are not treated, or are misusing alcohol or drugs, the risk is small.
Personal experience usually refutes the link between mental illness and violence.
A survey of the American public found that, while 68% of adults knew at least one person who had been hospitalized with a mental illness and 10% knew five or more people, only 9% had ever been threatened or physically harmed by such a person.
People in close contact with the mentally ill, such as mental-health professionals and family members of people affected, are the least likely to believe that they are dangerous.
The discrepancy between experience and perception is largely caused by the media, which frequently link mental illness with acts of violence.
One study of American newspaper reports found that 39% of reports concerning mental illness were focused on violence or danger.
In Germany, extensive reports on violent attacks against prominent politicians by two people suffering from schizophrenia in 1990 bolstered the German public’s belief that mentally ill people are dangerous.
Coverage of violent acts that result in multiple deaths is particularly extensive.
The public inevitably seeks some explanation, and the media will explore any potential link to mental illness to provide one – for example, acquaintances’ reports of “odd” behavior and social withdrawal or accounts of previous interactions with mental-health professionals.
Meanwhile, defense attorneys may try to lessen their client’s culpability by claiming insanity, as Breivik’s lawyers attempted to do after he killed 77 people to protest the multiculturalism that he claims threatens Norway.
Although this approach is rarely successful – Breivik received a 21-year sentence – it is widely reported, linking crime to mental illness in the minds of the public.
The perception that mentally ill people are dangerous is global.
But it is more prevalent in developing countries than in the developed world.
The major exception is the US, where the ready availability of firearms contributes to one of the highest homicide rates – and the highest gun homicide rate – among developed countries.
Given that multiple homicides in the US draw international interest, media reports highlighting a perpetrator’s mental illness or describing insanity pleas inform perceptions of mental illness worldwide.
Loughner’s shooting of 19 people in 2011, including Congresswoman Gabrielle Giffords, attracted global attention, as did the court-ordered evaluation of his mental competency.
Indeed, on the other side of the world, the newspaper The Australian mentioned Giffords 160 times in the six months following the shooting, compared to just one mention in the previous 12 months.
Though mass shootings are extremely rare even in the US, the media’s coverage continually reinforces negative perceptions at home and abroad.
In this manner, the US may well be exporting the mental-illness stigma to the rest of the world.
Similarly, Cho’s history of mental illness was widely discussed.
Moreover, his mental-health records were released to the public two years later, reviving the link between his crime – killing 32 people and wounding 17 others before committing suicide – and his mental illness.
In this context, US President Barack Obama’s gun-control efforts – which include intensifying background-check requirements and increasing financing for mental-health programs for young people – hold global significance.
While expanding the scope of mental-health services is a positive step, with the potential to contribute to the physical safety of US citizens, it is crucial that this link not be allowed to feed the perception that people with mental illnesses are dangerous.
Rather, American legislators and media outlets must use their international influence to reduce the stigma experienced by people suffering from mental illnesses worldwide.
The Media War on Terror
“More than half of this battle is taking place on the battlefield of the media, [for] we are in a media battle in a race for the hearts and minds of [Muslims].” The speaker was not some public relations executive, but Osama bin Laden’s chief lieutenant, Ayman al-Zawahiri.
Terrorists have skillfully adapted to fighting wars in today’s media age, but, for the most part, America and the governments of the other democracies have not.
Consider that the violent extremists have their own “media relations committees” aimed at manipulating elite opinion.
They plan and design headline-grabbing attacks using every means of communications to intimidate and break the collective will of free people.
They know that communications transcend borders, and that a single news story, handled skillfully, can be as damaging to our cause – and as helpful to theirs – as any military attack.
And they are able to act quickly with relatively few people, and with modest resources compared to the vast, expensive bureaucracies of democratic governments.
Today we are fighting the first war in the era of e-mail, blogs, blackberries, instant messaging, digital cameras, the Internet, mobile phones, talk radio, and 24-hour news.
In Tunisia, the largest newspaper has a circulation of roughly 50,000 in a country of 10 million people.
But even in the poorest neighborhoods, you see satellite dishes on nearly every balcony or rooftop.
A few years ago, under Saddam Hussein, an Iraqi could have his tongue cut out if he was found in possession of a satellite dish or used the Internet without government approval.
Today, satellite dishes are ubiquitous in Iraq as well.
Regrettably, many of the news channels being watched through these dishes are hostile to the West.
Media outlets in many parts of the world often serve only to inflame and distort – rather than to explain and inform.
While al-Qaeda and extremist movements have used this forum for many years, further poisoning the Muslim public’s view of the West, we in the West have barely even begun to compete.
We saw this with the false allegations of the desecration of a Koran last year.
First published in a weekly news magazine, the story was then posted on Web sites, sent in e-mails, and repeated on satellite television and radio stations for days before the facts could be discovered.
That false story incited deadly anti-American riots in Afghanistan and Pakistan.
The United States military, appropriately and of necessity, took the time needed to ensure that it had the facts before responding that the charges were untrue.
In the meantime, innocent lives were lost.
But we have begun to adapt.
In Iraq, for example, the US military, working closely with the Iraqi government, has sought non-traditional means to provide accurate information to the Iraqi people.
Yet this has been portrayed as “buying news.”
The resulting explosion of critical press stories then causes everything – all activity, all initiative – to stop.
This leads to a “chilling effect” among those serving in the military public affairs field, who conclude that there is no tolerance for innovation.
Consider for a moment the vast quantity of column inches and hours of television devoted to the allegations of detainee abuse at Abu Ghraib.
Compare that to the volume of coverage and condemnation associated with, say, the discovery of Saddam Hussein’s mass graves, which were filled with hundreds of thousands of innocent Iraqis.
Free governments must make communications planning a central component of every aspect of this struggle.
Indeed, the longer it takes to put a strategic communications framework into place, the more the vacuum will be filled by the enemy.
There are nonetheless signs of modest progress.
Soon after the devastating earthquake in Pakistan, a public affairs team was deployed with our sizable military forces in the disaster area.
They worked to help focus media attention on America’s commitment to help the Pakistani people.
Public opinion surveys conducted by private groups before and after the earthquake suggest that attitudes in Pakistan regarding the US changed dramatically because of this new awareness.
Government public affairs and public diplomacy efforts are slowly beginning to reorient staffing, schedules, and bureaucratic culture to engage the full range of today’s media.
Still, government must develop the institutional capability to anticipate and act within the same news cycle.
That requires instituting 24-hour press operations centers and elevating Internet operations and other channels to the status of traditional twentieth-century press relations.
It will require less reliance on the traditional print media, just as the publics of the US and the world are relying less on newspapers.
This also will mean embracing new ways of engaging people throughout the world.
During the Cold War, institutions such as Radio Free Europe proved to be valuable instruments.
We need to consider the possibility of new organizations and programs that can serve a similarly valuable role in the War on Terror.
We are fighting a war in which the survival of our way of life is at stake.
And the center of gravity of that struggle is not just the battlefield.
It is a test of wills and it will be won or lost in the court of global public opinion.
While the enemy is skillful at manipulating the media and using the tools of communications to their advantage, we have an advantage as well: truth is on our side, and, ultimately, truth wins out.
The Mediterranean Crucible
BERLIN – For most Europeans, the Mediterranean is an annual object of longing – the holiday idyll where they spend the best weeks of the year.
But many Europeans’ sunny view of the region has yielded to lowering clouds of pessimism.
Inside the European Union, the ugly term PIGS (Portugal, Italy/Ireland, Greece, Spain) is now a commonplace, denoting countries that have endangered the euro’s stability and are forcing northern Europeans into costly bailouts.
Where not long ago sunshine and solidarity were the order of the day, depression and confrontation are now the rule.
Worse still, Europe’s debt and confidence crisis is also the EU’s gravest political crisis since its inception: at stake is nothing less then the future of the European project itself.
And now the crisis has reached the southern shore of the Mediterranean, in the form of a revolution in Tunisia and a political showdown in Lebanon that has once again brought the country to the verge of war and disaster.
With the EU’s Mediterranean member states simultaneously faltering, great changes are afoot in Europe’s southern neighborhood.
So it is time to think geopolitically, not just fiscally, about the Mediterranean.
What the EU is facing in the Mediterranean isn’t primarily a currency problem; first and foremost, it is a strategic problem – one that requires solutions urgently.
The overthrow of Tunisia’s Zine El Abidine Ben Ali is the first such spontaneous democratic uprising in the Arabic world, showing that in an age of satellite television and the Internet, suppression of information and free expression by individual governments doesn’t really work anymore.
Add to this the fact that the Arab world’s nationalist regimes, which have calcified into militarized dictatorships, lost their popular legitimacy long ago. The “Chinese option” – economic rights and prosperity in exchange for public quiescence – is not feasible, owing to these regimes’ ineptness and rampant corruption.
As a result, their inability to reform, combined with rapid population growth and a rising cohort of young people, is placing them under pressure, creating a possibility of explosive change.
Whether a development will occur in the Arab world similar to that in Eastern Europe after the fall of the Iron Curtain is impossible to predict for the time being.
In Eastern Europe, with the withdrawal and eventual disappearance of the Soviet hegemon, the floodgates were opened, and a torrent of change washed over the region.
In the Middle East and the Maghreb, this external factor is missing; democratic change must come from within each society.
Tunisia shows that no government that has lost its legitimacy and is supported only by bayonets is sustainable in the long term.
Whether Tunisia becomes a democratic, economic, and social success story or, instead, sees its revolution end in chaos, civil war, and a new authoritarian regime will have consequences far beyond the country’s borders.
Europe, as Tunisia’s northern neighbor, will be directly affected either way, and should therefore become seriously involved in terms of promoting democracy and aiding economic progress.
Whatever mistakes Europe may have made vis-à-vis the region’s authoritarian regimes in the past, it can now correct them by providing decisive help.
Indeed, Tunisia is a stern test of the EU’s “Mediterranean partnership” – a long-promoted policy that so far consists of little more than empty phrases.
Tunisia’s revolution is a unique historical opportunity, and the EU’s stake in the outcome can hardly be overestimated. European officials in Brussels and the major EU governments should not go for political and economic half-measures.
Specifically, beyond direct help for Tunisia at this critical moment, the EU must breathe new life into the Mediterranean partnership.
Projects for strategic cooperation in energy – say, production of solar and wind energy in the Sahara for sale to Europe – would be especially valuable.
The EU and its member states – particularly Spain, France, Germany, and Italy – should make this new form of energy production and cooperation the key project of the Mediterranean partnership, and must ensure the necessary political conditions to accomplish it rapidly.
This would create new prospects for the countries in the EU’s southern neighborhood, and thus give the transformation process an economic and technological impetus.
Moreover, such projects would promote cooperation between the states in the EU’s southern neighborhood, potentially boosting investments in education, infrastructure, and industrial development.
This would create the most important thing that these states and their rapidly growing young populations need to produce stability within the framework of democratic development: grounds for hope of economic and social progress.
If the Europeans continue to look inward, allowing accountants to dominate discussions of Europe’s future, they will miss a historic opportunity – one that will directly affect Europe’s security.
In that case, the costs tomorrow would be far higher than the savings today.
The Mexican Muddle
MEXICO CITY – This month, Mexico’s Felipe Calderón celebrates his second anniversary as president.
Calderón took office in December 2006 under adverse circumstances.
Elected with 35% of the vote, he lacked a majority in Congress, and the opposition refused to acknowledge his victory.
He has also had to govern in a persistently difficult environment: a lame-duck president next door in the United States, a severe economic downturn, and the legacy of corruption, negligence, and complicity handed down by his predecessors since 1968, when Mexico’s old one-party political system began to crumble.
Most immediately, Calderón had to address his immediate predecessor’s failure to implement any of the major reforms that Mexico needed.
Vicente Fox took office in 2000 with a broad mandate, but, like Calderón, without a majority in Congress.
He proved unable to forge lasting legislative coalitions, leading Calderón to decide that his first break with the past should consist in building alliances to enact reform.
Soon, however, this became an end in itself, and Calderón proved adept at constructing short-lived coalitions for largely inconsequential reforms.
This watered-down gradualism has become his trademark.
Given this, it is no surprise that the list of question marks attached to Calderón’s administration is longer than that of his achievements.
His poll numbers reflect this ambivalence.
He remains personally popular and well regarded, but the public is increasingly dissatisfied and disappointed with his government’s actual performance.
Among his few successes are state-employee pension fund reforms, which will save the system from bankruptcy.
Another lies in having weakened and neutralized the left-wing opposition, and being able to govern without major confrontations in the streets or Congress.
Other changes – a counter-productive electoral reform, a minor revenue-enhancing tax reform, and hypothetical oil-sector reform – all suffer from Calderón’s penchant for minimalism: enacting legislation seems more important to him than the content.
Indeed, Mexico’s monopoly structures and immense concentration of power remain untouched – as they were under Calderón’s only two democratic predecessors, Ernesto Zedillo and Fox.
Public monopolies like Pemex, private monopolies like Telmex and Cemex, labor monopolies like the teachers’ union, media monopolies like Televisa, and the iron political lock the country’s three parties have on every level of electoral representation, are all stronger than before.
Calderón has refused to touch these power structures, even though everyone, from the World Bank to left-wing rabble-rouser and former presidential candidate Andrés Manuel López Obrador, agree that they are the main impediments to Mexico’s progress.
Because of this enduring status quo, Mexico’s people do not blame Calderón for today’s harsh economic downturn; it is business as usual, they think.
But public opinion is becoming more skeptical about the wisdom of the president’s signature policy: using the armed forces to launch an all-out drive against drug dealers.
Ultimately, this is what he will be judged by.
Mexico’s government and military had established a tacit, semi-violent, corrupt, but effective modus vivendi with the drug cartels since the early 1970’s.
Mexico was then a producer of heroin and marijuana, and a transit country for cocaine from South America.
Calderón decided, in late 2006, that accommodation was no longer tolerable: the violence had gotten out of control; the corruption and complicity had infected the nation’s police and political elite; and Mexico had become a major producer of methamphetamines for the US, as well as a significant consumer of cocaine.
But the new president kicked over the narcotics beehive with neither a fumigator nor protective netting on hand.
So he couldn’t defend himself.
The bees have overwhelmed him, and violence, corruption, complicity, and contamination of the state have all skyrocketed.
The reasons for Calderón’s rejection of the former arrangements now appear less self-evident than before.
It is unclear that drug use in Mexico is extending more widely into the population: alarming rates of addiction growth are misleading, because addiction starts from an extremely low base.
Calderón had tried to sell his “war on drugs” by insisting that he is waging it to “save our children.”
If that connection proves faulty, it will not work, and Mexicans may question the point of a “war” that has more than doubled the number of gangland executions, from 2,000 in 2006 to 5,000 in 2008, when their children, statistically at least, are not in harm’s way.
Moreover, the capacity of Mexico’s security machinery appears diminished.
The police are at best useless and at worst outright employees of the drug lords; the army is less tainted, but unprepared for the role.
It will take years and billions of dollars to change this state of affairs;
Calderón does not have the time, and only the US has the money.
But Calderón doesn’t want American aid on American terms.
He rejects the Colombian model, which would put American advisers, instructors, mechanics, agents, and maintenance personnel on the ground in Mexico.
He may be right, but the alternative is no military makeover, and no likelihood of winning a war that perhaps should not have been declared in the first place.
Had it not been for the world economic crisis, or if it ends up being short and shallow, many observers, including me, remain convinced that Mexico can continue to muddle through, as it has done since 1996.
These past 13 years have been fair-to-middling for the country: mediocre economic growth, but no collapse; democratic rotation in power, with no uprisings or massacres; a slow but steady expansion of the middle class; and a slow but steady drop in corruption.
Given 15 to 20 more years of this unsatisfactory progress, Mexico will become a lower-middle class country like Portugal, Greece, or Poland.
But we realistic optimists are no longer holding our breath: we may be disappointed, once again.
The Middle East Dream Map
The recent push given by President George W. Bush to the so-called Middle East "road map" is welcome, and the fact that both Israel and the Palestinians have accepted it is a good omen.
Yet the chances that it will bring real, as opposed to merely rhetorical, progress toward reconciliation remain slim.
The reasons are manifold: first, what is called a "road map" is in reality little more than a wish list of what has to be done in order to achieve peace between Israel and the Palestinians.
It is a noble set of goals, but it sometimes appears to be distant from the region's political realities.
For example, the road map rightly acknowledges that the Israeli-Palestinian conflict cannot be solved in a void; regional considerations must be taken into account.
The plan calls for far-reaching Israeli concessions: withdrawal from the West Bank and Gaza, dismantling of settlements, some compromise about Jerusalem.
At the same time, the "quartet" that composed the road map--the US, the EU, Russia, and the UN--realizes that Israel cannot be convinced to make such concessions without a fundamental change in the general attitude of the Arab world to the existence of the Jewish state.
Despite peace with Egypt and Jordan, Israel remains threatened by such countries as Syria and Libya, whose extremist regimes are deeply involved in violent terrorism against civilians in Israel and either possess or try to possess weapons of mass destruction.
For this reason, the road map premises peace between Israel and the Palestinians on normalization of relations between Israel and all Arab countries.
Can this really be achieved in the foreseeable future?
Does the US--or, for that matter the Quartet--really believe they know how to move Syria or Libya from their current closed-mind position, which threatens Israel's existence?
There is no indication in the road map that the initiators have thought this out beyond wishing out loud that it would happen.
Similarly, the road map is an attempt to revive the Oslo peace process.
But this process, based in the 1993 Oslo accords between Israel and the PLO, has been in serious trouble since Yasser Arafat rejected the peace package offered to him by Prime Minister Ehud Barak, with the support of President Bill Clinton, at Camp David in December 2000.
This was a watershed in Middle East politics--a massive change for the worse.
The Palestinians' refusal to accept - or even continue to negotiate about -- the most generous and comprehensive Israeli offer since l967 in exchange for an end-of-conflict agreement signified that the Palestinians are not ready to accept Israel's legitimacy.
There is now much more bitterness, fear, and hatred on both sides than in 2000, when the Camp David negotiations failed.
The direct and indirect support given by the Palestinian Authority to suicide bombing against civilians in Israel suggested to most Israelis that the Palestinians still view attacks against civilians as a legitimate weapon.
The sometimes-brutal Israeli responses to such terrorism further embittered the Palestinians against Israel.
True, the sidelining of Arafat and the appointment of Abu Mazen as the Palestinian Prime Minister is an important step in the right direction.
But Abu Mazen's real power has yet to be tested.
Does he really control the murky financial resources of the PLO, which gave Arafat so much real power beyond the formal title of head of the Palestinian Authority?
Most importantly, does Abu Mazen have the political will and power to really suppress--harshly, if necessary--the murderous terrorist gangs that control so much of the Palestinian population?
Much depends on the answers to these questions.
Last but not least: by the admission of its drafters, the road map will take a number of years to implement--in the best case two, in the worst case three or four.
It would need constant follow-up on dozens of contentious points at the highest level, i.e., the US President.
Is President Bush--or any US President--capable of effectively exercising his enormous authority, day in and day out for two or three years, to ensure that the parties really translate what might be just a verbal acceptance of vague language into painful, and even politically dangerous, decisions?
Past experience is not encouraging.
The attention span of a US President is limited on any issue. Yet without his constant attention, the road map will run into the Middle East sand dunes that have already buried so many well-intentioned peace plans.
What, then, can be achieved?
Perhaps, as in Bosnia and Kosovo--where nobody talks about a permanent solution, but violence has been stopped--what is needed is stabilization, an end to daily bloodshed, de-escalation of hostility, and some mutual confidence building.
Israelis and Palestinians are not yet ready for the tough political decisions envisaged by the road map.
They need a series of stopgap measures to bring stability and safety for civilians on both sides.
With such de-escalation, perhaps at some time in the future true reconciliation will be possible.
However difficult or sad to admit, the moment is not ripe for more than this.
The Middle East’s Democratic F-Words
LONDON – The Middle East continues to have the highest concentration of dictatorships in the world.
But 2009 was the year that democracy appeared to take root in the region – and yet the future looks as bleak as ever.
In the Palestinian territories, Gaza’s democratically elected Hamas government and the democratically elected president of the Palestinian Authority are locked in a seeming death grip, which has seen Gaza fall into an economic black hole and paralyzed as it also allowed space for Israeli intransigence.
All the while the supposed political savior, Marwan Barghouti, sits in an Israeli prison with a life sentence.
Meanwhile, the result of Iran’s presidential election was effectively hijacked, which in turn fractured the ruling elite and left the rulers more suspicious and insular than at any time since the Iran-Iraq war of the 1980’s.
Next door, Afghanistan’s president similarly decided not to leave his re-election bid to chance – or to the Afghan people.
These are but the latest signs that, more often than not, the Middle East’s recent democratic experiments have only increased instability.
Sometimes the source of that instability is embedded: succession problems, electoral fraud, corruption, the absence of the rule of law, human rights violation, or official ethnic discrimination.
Whatever the case, the region’s populations are growing restless, and the gap between rulers and ruled is widening.
The states in the Middle East can be characterized by a series of “F-words:” failed, frozen, flexible, flourishing, or frightening.
For example, Yemen is now a failed state.
Its political institutions have ceased to function, leading to civil war in its north and separatism in the country’s south.
Meanwhile, Al Qaeda is finding a safe haven in Yemen as the state disintegrates.
Frozen states include Saudi Arabia, where “democracy” is omitted from official discourse, even limited partial elections have been put on hold, and the royal succession remains a secret kept from the population.
Frozen states appear more stable in the short term, as oil revenues still buys subservience and submission of most of the subjects, but stability coincides with the possibility of increasing violence and civil unrest, owing to widespread grievances over sectarian rule.
The region’s flexible states are frightened of war.
Most have experienced it recently and are eager for stability and economic development. Despite sectarian struggle, especially in Iraq and Lebanon, some flexible states hope to rebuild their stability by holding elections.
As we saw in Lebanon and Iraq in 2009, others probably could not.
The small, emirates of the Gulf Cooperation Council are – with the exception of now tottering Dubai &#45;&#45; flourishing states that have joined the global economy through political and economic reform.
Managing social and political inclusion is not difficult for states blessed with an advantageous position along one of the world’s major trade routes, traditions of cosmopolitanism and commerce, massive oil wealth, and small national populations.
The frightening state in the region is the United States, which, following the terrorist attacks of September 2001, was anxious to bring about democratic regime change – a failed policy that now appears to have left the US unable to leave.
Two other external powers, Russia and China, have established a strategic presence in the region, but their pursuit of their interests, which are chiefly economic, is not destabilizing and has nothing to do with democracy promotion.
The change of administration in Washington replaced America’s emphasis on democratizing the Middle East with a more realistic approach in 2009.
But Barack Obama has also raised expectations of a transformation in US relations with the region.
Can that happen without democratization?
Oil is not a reliable deterrent to democracy in the long term, owing to price volatility and the development of alternative energy sources.
Moreover, democratic experiments in countries like Qatar, the only state on the Arabian Peninsula other than Saudi Arabia that embraces the austere Wahhabi form of Islam, provide a telling counterpoint.
If Saudi Wahhabis accept democratic procedures, Wahhabism will be forced to change its guiding attitudes and principles.
In Kuwait, another flourishing state, Wahabbi participation in parliament came only after permission was granted by the Grand Mufti of Saudi Arabia, Sheikh Abdul Aziz Bin Baz, and his successor, Sheikh Abdul Aziz Al Sheikh.
Saudi Arabia’s Wahhabi establishment, it seems, objects to democratic reform only at home, where the regime’s power would be weakened.
Following the turbulence and violence of Iran’s presidential elections in June, the question of democracy has moved to the forefront for the region’s states and populations.
In Iran, an indigenous movement is pushing for reform, and the country’s brand of Islam, which on the surface seems the most implacable, has the potential to become more moderate and more democratic, owing in part to the Shi’a tradition of ijtihad , religious debate or innovation.
But the push to democratization is connected not only to oil, Islam, and US policies; demographic forces and the technologies of globalization are creating pressures for change as well.
An overwhelmingly young population is being exposed to the outside world and communicating with peers in the region – through travel, satellite TV, and the Internet – as never before. This has increased demands for social and political rights and greater economic opportunity, placing authoritarian rule under growing strain.
Indeed, political change in the Middle East will increasingly become an internal affair in 2010 and beyond.
Although some democratic experiments have led to greater instability, the poorer countries have no option but to continue on that path.
As for those who rely exclusively on oil for continued stability, delaying democratization will lead to violence in the long term.
Unless sectarian politics are replaced by inclusiveness, all of the region’s “f-states” types of states will remain in a condition of prolonged turbulence.
The Middle East’s Feminist Revolution
OXFORD – Among the most prevalent Western stereotypes about Muslim countries are those concerning Muslim women: doe-eyed, veiled, and submissive, exotically silent, gauzy inhabitants of imagined harems, closeted behind rigid gender roles.
So where were these women in Tunisia and Egypt?
In both countries, women protesters were nothing like the Western stereotype: they were front and center, in news clips and on Facebook forums, and even in the leadership.
In Egypt’s Tahrir Square, women volunteers, some accompanied by children, worked steadily to support the protests – helping with security, communications, and shelter.
Many commentators credited the great numbers of women and children with the remarkable overall peacefulness of the protesters in the face of grave provocations.
Other citizen reporters in Tahrir Square – and virtually anyone with a cell phone could become one – noted that the masses of women involved in the protests were demographically inclusive.
Many wore headscarves and other signs of religious conservatism, while others reveled in the freedom to kiss a friend or smoke a cigarette in public.
But women were not serving only as support workers, the habitual role to which they are relegated in protest movements, from those of the 1960’s to the recent student riots in the United Kingdom.
Egyptian women also organized, strategized, and reported the events.
Bloggers such as Leil Zahra Mortada took grave risks to keep the world informed daily of the scene in Tahrir Square and elsewhere.
The role of women in the great upheaval in the Middle East has been woefully under-analyzed.
Women in Egypt did not just “join” the protests – they were a leading force behind the cultural evolution that made the protests inevitable.
And what is true for Egypt is true, to a greater and lesser extent, throughout the Arab world.
When women change, everything changes, and women in the Muslim world are changing radically.
The greatest shift is educational.
Two generations ago, only a small minority of the daughters of the elite received a university education.
Today, women account for more than half of the students at Egyptian universities.
They are being trained to use power in ways that their grandmothers could scarcely have imagined: publishing newspapers (as Sanaa el Seif did, in defiance of a government order to cease operating); campaigning for student leadership posts; fundraising for student organizations; and running meetings.
Indeed, a substantial minority of young women in Egypt and other Arab countries have now spent their formative years thinking critically in mixed-gender environments, and even publicly challenging male professors in the classroom.
It is far easier to tyrannize a population when half are poorly educated and trained to be submissive.
But, as Westerners should know from their own historical experience, once you educate women, democratic agitation is likely to accompany the massive cultural shift that follows.
The nature of social media, too, has helped turn women into protest leaders.
Having taught leadership skills to women for more than a decade, I know how difficult it is to get them to stand up and speak out in a hierarchical organizational structure.
Likewise, women tend to avoid the figurehead status that traditional protest has in the past imposed on certain activists – almost invariably a hotheaded young man with a megaphone.
In such contexts – with a stage, a spotlight, and a spokesperson – women often shy away from leadership roles.
But social media, through the very nature of the technology, have changed what leadership looks and feels like today.
Facebook mimics the way many women choose to experience social reality, with connections between people just as important as individual dominance or control, if not more so.
You can be a powerful leader on Facebook just by creating a really big “us.”
Or you can stay the same size, conceptually, as everyone else on your page – you don’t have to assert your dominance or authority.
The structure of Facebook’s interface creates what brick-and-mortar institutions, despite 30 years of feminist pressure, have failed to provide: a context in which women’s ability to forge a powerful “us” and engage in a leadership of service can advance the cause of freedom and justice worldwide.
Of course, Facebook cannot reduce the risks of protest.
But, however violent the immediate future in the Middle East may be, the historical record of what happens when educated women participate in freedom movements suggests that those in the region who would like to maintain iron-fisted rule are finished.
Just when France began its rebellion in 1789, Mary Wollstonecraft, who had been caught up in witnessing it, wrote her manifesto for women’s liberation.
After educated women in America helped fight for the abolition of slavery, they put female suffrage on the agenda.
After they were told in the 1960’s that “the position of women in the movement is prone,” they generated “second wave” feminism – a movement born of women’s new skills and old frustrations.
Time and again, once women have fought the other battles for freedom of their day, they have moved on to advocate for their own rights.
And, since feminism is simply a logical extension of democracy, the Middle East’s despots are facing a situation in which it will be almost impossible to force these awakened women to stop their fight for freedom – their own and that of their communities.
The Middle East’s Five Crises
The region between Egypt and Pakistan is a cauldron of five discrete, explosive components: Iraq’s civil strife, Afghanistan’s insurgency, Iran’s nuclear ambitions, the longstanding Israel-Arab conflict, and the risk of clashes between extremist groups and corrupt, repressive governments.
A comprehensive policy is needed, yet the threats are so diverse and complex that separate approaches have to be applied simultaneously.
In Iraq, America’s policy of building a semi-federal state of Shiites, Sunnis, and Kurds runs a high risk of failure because of Shiite domination, Sunni and Shiite terrorism, Kurdish separatism, and meddling by Iran.
The cost in lives is already unbearably high.
The United States cannot sustain the current rate of casualties (either American or Iraqi), or the expense.
To create the conditions for long-term stability, a negotiated separation may be needed, comparable to the Dayton Peace Agreement that ended the war in former Yugoslavia.
Separating Iraq’s populations would be painful.
The United Nations High Commission for Refugees (UNHCR) and the US-led coalition forces should help people who want to move to other parts of the country.
One may object that to facilitate internal relocation is to collaborate with “ethnic or religious cleansing”; but the toll of prolonged war in Iraq, which could lead to its dismemberment anyway, is much worse.
The principle of pluralism is valuable, but curbing bloodshed deserves priority.
A Dayton-like agreement can be achieved only if the UN Security Council backs it.
It would be in the long-term interest of the permanent members to do so.
Russia and China would, however, be helpful only if America changes the current Bush administration’s approach.
Such an initiative would need to be supported strongly by the European Union.
Perhaps tri-partite mediation, backed by the US, the EU, and Russia would increase the chances.
The Arab League and the Conference of Islamic States should be consulted and involved.
The US and other coalition forces would have to withdraw gradually, beginning from the south of Iraq.
Foreign forces would still be needed to help protect the Sunni population west of Baghdad and in the middle of Iraq against the Shiite south, as well as in the Kurdish north to keep Turkey from intervening.
A peaceful separation agreement would require international peacekeepers with contributions from many powers, including Islamic states, India, China, and Japan.
As stability in the Middle East is essential to them, this is a matter of enlightened self-interest.
Those of Iraq’s neighbors that are potential spoilers would need to be restrained by a Security Council mandate for such a Dayton-type settlement.
In Afghanistan, NATO-led military operations against the neo-Taliban and other opponents of state-building offer only a partial and temporary solution.
The influx of insurgents from Pakistan will not stop.
The population sees little improvement in living conditions and expects Western forces to leave after a few years.
Most Afghans will then be ruled again by tribal leaders, Islamists, drug barons, and warlords.
The Western aim of building Afghanistan up as a stable and more or less democratic state is extremely ambitious; it may be wiser to help stabilize Kabul and the relatively quiet northern part of the country.
The difficult south will sooner or later return to Pashtun politics.
The outside world’s chief interest is to curb heroin production and destroy terrorist training camps.
But destroying poppy crops has been turning Afghan farmers against NATO.
So it is smarter to go after the heroin bosses and their foreign networks, and in the meantime buy the poppy crop from farmers to destroy it.
Encouraging a shift to legal cash crops and food requires time and heavy investment.
This will only work where there is security for the local population.
Meanwhile, international sanctions are unlikely to dissuade Iran’s government from pursuing nuclear weapons, while a preventive strike by Israel – which would not sit idly by when Iranian nuclear forces become operational – or by the US, would encourage terrorist attacks against their populations.
The most promising approach might be sanctions against leading personalities, and against transfers of technology and funding, as well as covert operations, to delay Iran’s nuclear weapons program.
In the meantime, Iran’s youthful population may become more politically active and demand democratization and improved living conditions.
It is uncertain how long the old clerical leadership and the country’s nationalist politicians can hold on to power, although high oil and gas prices have been shielding them so far.
Gaining time before a disastrous confrontation between Israel and Iran becomes inevitable would be smarter than taking an aggressive approach now.
As for Israel and its neighbors, an agreement on the Golan Heights has already been prepared, but needs external mediation and pressure if it is to be signed.
State-building in Lebanon will require strong UN and EU support, and the courage to curb Hezbollah’s influence.
The Israeli government and Palestinian political leaders are locked in a ruinous struggle, which merely aids extremists on both sides.
The mutual struggle will therefore continue until there is strong enough external pressure to accept a peace agreement.
Israel will have to vacate a large number of Jewish settlements on Palestinian territory, and accept joint international administration or division of Jerusalem.
Israel will never agree to this unless forced by the US.
A US-brokered peace agreement would need to be supported by the UN Security Council and implemented by peacekeeping troops with large contributions from many members of the UN.
Of course, it is unlikely that the Bush administration would bring this about.
The EU is still too slow and fragmented.
So the new American president will have to take the lead in 2009.
In the meantime, the EU should get its act together and take clear decisions on a joint Middle East policy.
The Middle East’s Hair Trigger
TEL AVIV – Across the Middle East, a fatalistic conventional wisdom is taking hold: war is unavoidable.
Some see war as a way of resolving an increasingly deadlocked situation, shaking up a dysfunctional regional order whose main actors are not only at loggerheads, but are also incapable of resolving the legitimacy deficits of their respective regimes.
A volley of incendiary remarks between Israel and both Syria and Hezbollah has fueled anxieties about the possibility of war on Israel’s northern border.
The level of sensitivity is such that the latest tension was initiated by the Syrians, who misinterpreted as a threat Israeli Defense Minister Ehud Barak’s call to start peace negotiations precisely in order to prevent “an all-out regional war.”
Hezbollah’s leader, Hassan Nasrallah, for the first time explicitly warned the Israelis that a new round of conflict would no longer be confined to an Israeli-Lebanese showdown, but would involve the entire regional “axis of confrontation” – Syria, Iran, Hezbollah, and Hamas.
This would also be the case if Israel unleashed its Air Force against Iran’s nuclear installations.
Moreover, Nasrallah made it clear that Israel’s “Dahyia Doctrine” of total devastation of Lebanon in case of war would be answered in kind.
The prospect of a Middle East conflagration has prompted an airlift of senior American officials to Israel to warn of the devastating consequences that an Israeli attack on Iran might have.
Indeed, the Obama administration’s main challenge these days is not peacemaking, but regional conflict management and preemption.
CIA Director Leon Panetta and Chairman of the Joint Chiefs of Staff Adm. Mike Mullen have already come and gone, with Vice President Joe Biden and a high-level delegation of the State Department and the National Security Council due in Jerusalem in early March.
But preventing war will not be easy, because Barack Obama’s mystique has worn off in the Arab world.
The expectation that he would allow the Arabs, particularly the Syrians and the Palestinians, to recover their land without resorting to arms has been proved, by his own admission, to be unrealistic.
Nor has he been able to rein in Iran’s relentless drive for regional hegemony, or convince it to abandon its quest for nuclear arms.
Israel will most likely listen to America’s advice and consider a preemptive attack on Iran only after all diplomatic means have been exhausted, and after whatever sanctions are agreed upon fail to cut short Iran’s march toward possessing the bomb.
No matter how unjustified Israel’s traditional military behavior seems in the eyes of its enemies and critics, it has always aspired to base its military actions on grounds that can be justified.
This would seem to be particularly true when it comes to an attack on Iran’s nuclear installations.
Israel would not like to be seen as the spoiler of a diplomatic solution to a dispute that in any case cannot be resolved by military means alone.
Wars in the Middle East, it should be recalled, have started even when the parties did not really want them.
The 1967 war is one example.
Today’s anxieties, too, are fed by perceptions and fears, by real and imagined concerns.
The Iranian challenge to Israel’s strategic hegemony is presented as a Holocaust-style existential threat, and Israel’s other enemies – Hezbollah, which believes that it can bring about “the end of the Zionist entity,” and Syria, which publicly boasts of its ballistic missiles’ capacity to destroy Israel’s main urban centers – are similarly viewed as irrational actors.
A covert war between Israel and Iran has been going on for some time now.
The assassinations – allegedly by Israel – of Imad Mughniyah, Hezbollah’s military chief and Iran’s closest ally in the organization, two years ago, and more recently of Mahmoud al-Mahbouh, Hamas’s liaison officer with the Al-Quds force of Iran’s Revolutionary Guards, suggest that an unplanned chain of events could trigger a real war.
The Lebanese front may ignite if Hezbollah seeks to avenge Mughniyah’s death, or simply as a result of a knee-jerk reaction to a provocation, as in 2006.
If Iran and Syria then decide to back Hezbollah, a direct Israeli-Iranian showdown could follow.
What Israel planned as a preemptive attack on Iran might then be presented as an act of self-defense .
General James Jones, President Obama's national security adviser, recently put forward a different, albeit equally ominous, prediction.
Iran's response to the mounting international pressure might be, he said, to launch an attack on Israel through its proxies, Hezbollah and Hamas.
Such attacks might trigger a wider regional conflagration.
War threats in the Middle East should never be dismissed as hollow.
Prophecies of war, moreover, have too frequently proven themselves to be self-fulfilling.
But America’s extraordinary efforts to rein in Israel might not be enough to avert a calamity.
The days of Pax Americana in the region are over, which means that avoiding a regional explosion will require mobilizing the major international actors that favor diplomatic solutions for the Arab-Israeli conflict and for Iran’s quest to become a legitimate partner in a new regional system.
The Middle East’s Military Delusions
The paradox of the current violence in Israel, Gaza, and Lebanon is that the solution to the Israeli-Palestinian conflict is not hard to see.
A large majority of Israelis and Palestinians favor a two-state solution essentially along the pre-1967 boundaries.
The major Arab states, including Egypt, Saudi Arabia, and others, share that view.
The problem lies not in seeing the solution, but in getting to it, because powerful and often violent minorities on both sides oppose the majority-backed solution.
Perhaps three-quarters of Israelis and Palestinians are eager for peace and compromise, while a quarter on each side – often fueled by extreme religious zeal – wants a complete victory over the other.
Radical Palestinians want to destroy Israel, while radical Israelis demand control over the entire West Bank, through either continued occupation or even (according to a tiny minority) a forcible removal of the Palestinian population.
When peace appears to be close at hand, radicals on one side of the conflict or the other provoke an explosion to derail it.
Sometimes this involves overt conflict between moderates and radicals within one side, such as when an Israeli religious zealot assassinated Israeli Prime Minister Yitzhak Rabin when peace negotiations were making progress.
Sometimes this involves a terrorist attack by radical Palestinians against Israeli civilians, in the hope of provoking an exaggerated violent response from Israel that breaks the process of trust building among moderates on both sides.
The moderates are in a daily battle with their own extremists, who claim that compromise is impossible.
Israeli extremists insist that all Palestinians are intent on destroying the state of Israel itself.
They take the Palestinian suicide bombings and kidnappings as proof that peace with the other side is impossible. “There are no partners for peace,” goes the refrain.
Palestinian extremists insist that Israel is simply plotting to maintain its occupation over all of Palestine and that withdrawal from Gaza or announced plans to withdraw partly from the West Bank are merely tactical, without giving up real control over land, transport, water, defense, and other attributes of sovereignty.
The extremists have been able to block peace because any attack from one side has systematically provoked a violent counterattack from the other.
Moderates are repeatedly made to look weak, naïve, and idealistic.
The extremists also peddle the appealing fantasy that total victory is somehow possible, often by personalizing the battle.
Israeli forces regularly try to “decapitate” the violent opposition by killing Palestinian leaders, as if the problem were a few individuals rather than ongoing political stalemate.
Violent Palestinians, for their part, propagandize that Israel will lose its nerve in the face of another terrorist attack.
In an environment as deadly as this, the details and symbolism of a possible settlement are bound to loom very large.
Israelis and Palestinians came close to agreement on “land for peace” in the context of the Oslo peace process.
Both sides endorsed something like the pre-1967 borders, yet the deal was not quite struck, with each side claiming intransigence by the other on one or another point.
Such a deal can be struck now, but only by avoiding the useless debate over who blocked peace in the past.
An insight of Nobel Prize-winning game theorist Tom Schelling is especially useful in this context.
Schelling identified the practical importance of a bargaining “focal point” as the way forward for negotiators who are in range of an agreement.
The pre-1967 boundaries are the inevitable focal point in the Israeli-Palestinian conflict.
Both sides should agree to the pre-1967 boundaries in principle, and then swap small land parcels and definitions of control (especially regarding Jerusalem) in slight and mutually convenient deviations from the 1967 boundaries.
In other words, quibbling over details should come after both sides agree on the principle of respect for the pre-1967 borders, which are recognized by key countries throughout the region and around the world, and are enshrined in numerous UN resolutions.
Today’s tragedy is that we are receding from this possible agreement.
Israel is rightly aggrieved by the abduction of its soldiers by Hamas-backed insurgents in Gaza and Hezbollah forces in Southern Lebanon, but Israel’s massive and disproportionate military response plays into the hands of the extremists.
Indeed, each side says that the other struck first.
Israel refused even to negotiate with the Hamas-led Palestinian government, trying to squeeze it financially and make it capitulate.
Hamas refused to acknowledge a two-state solution except obliquely, and then under considerable pressure.
Yet broad Palestinian public opinion is on the side of compromise.
Blame is easy enough to assign, but misses the point.
Compromise based on the pre-1967 borders is the way to peace.
Nor is the United States playing a stabilizing role.
It, too, is playing into the hands of extremists by fighting terrorism with military rather than political means.
Just as the war in Iraq was a mistaken response to the threat of al-Qaeda, the Bush administration’s green light to Israel’s military assaults in Gaza and Lebanon offers no real solution.
The US and other powerful outside parties should be pressing both sides to the focal point solution, not sitting on their hands as the violence spirals out of control.
The most powerful ideology in the world today is self-determination.
Until there is a Palestinian state and an Iraq free of US occupation, Islamic extremists will win recruits.
Military reprisals will swell their ranks still further, and, until political grievances are addressed, the spread of democracy will not change that equation, because the extremists will win at the ballot box.
In short, specific terrorist threats should be fought through narrowly targeted counter-terrorist operations, while moderates should undercut extremism through the politics of compromise rather than the false and dangerous delusions of military victory.
The Middle East’s Moment of Truth
JERUSALEM: Whatever the outcome of the summit convened by President Clinton at Camp David between Prime Minister Ehud Barak of Israel and PLO Chairman Yassar Arafat, one thing is clear: the moment of truth for Israeli-Palestinian peace negotiations has arrived.
Defections from Prime Minister Barak’s government and coalition, including the resignation of his foreign minister, David Levy, who refused to accompany Barak to Washington, will make the negotiations even more dramatic.
Israel and the Palestinians have been negotiating since 1995, when they signed the Oslo Accords whose major achievement was mutual recognition and autonomy in areas of the West Bank and Gaza for the Palestinians.
Further negotiations were to decide the final status of the Palestinian Authority (ie, whether Palestine is to be an independent state), the border issue, the future of Jewish settlements, whether refugees could return to their homes, and the final status of Jerusalem, which both sides claim as their capital but which Israel controls in its entirety.
According to a series of agreements signed over the years within this framework, a Palestinian Authority, with Yassar Arafat as its head, was established.
Arafat returned from exile in Tunis to Gaza, and Israel turned over to the Palestinian Authority most of Gaza and most of the towns in the West Bank.
Today, although the Palestinian Authority controls less than 30% of the West Bank and Gaza, over 80% of Palestinians in these territories live under Palestinian rule, free from Israeli military occupation.
A Palestinian legislature and cabinet have opened, as well as Palestinian police and security services.
The economy in areas under Palestinian control is administered by the Palestinian Authority, as are education and other internal matters.
While economic results are mixed, the most important change in the daily life of Palestinians is that most no longer live under Israeli rule.
Yet Jewish settlements, built mainly under the right-wing governments of Menachem Begin, Yitzhak Shamir, and Benjamin Netanyahu, remain in place, and relations between settlers - some of them extremely radical nationalists - and Palestinians remain raw.
Prime Minister Yitzhak Rabin’s assassination by a nationalist-religious extremist Jewish student slowed the peace process, especially after Netanyahu was elected Prime Minister in 1996.
But in 1999 Ehud Barak, Labour’s leader, was elected Prime Minister in a sweeping personal victory that restored momentum to the peace negotiations.
It is this new momentum that now may drive the process.
Although most territorial issues have been negotiated, the most difficult ones, which were intentionally left to the latter stages of the negotiations, now must be addressed. Here is where the whole process will stand or fall.
What will be the status of Jerusalem?
To go back to the 1967 dividing lines, which cut the city in two, is impossible, especially as over 120,000 Israelis now live across the old dividing line.
What will be the future of Jewish settlements?
Should they stay, be partly evacuated, or be put partly under Palestinian rule?
These are the thorny problems, which combine political, strategic, religious and symbolic issues that transcend the human dimensions of what is to happen to the populations - Jewish and Arab - involved.
The weakening political positions of the leaders complicates matters even more.
Prime Minister Barak’s position suffers from a very brittle coalition, and he has recently lost his parliamentary majority.
Arafat is under pressure from his extremists.
In the past he condoned acts of violence against Israelis in order to please fundamentalist radicals, which greatly diminished the trust of the Israeli public (and not only of right-wing extremists) in Arafat’s credibility and reliability.
It is under these circumstances that an outside push is required, and this is what President Clinton provided in launching this week’s Camp David talks.
If no agreement on the last remaining issues is achieved, escalation will ensue: the Palestinians may declare independence unilaterally;
Prime Minister Barak appears ready to accept an independent Palestinian state - something no Israeli leader has, until now, been willing to do.
He has made clear that perhaps 30,000 settlers, may be evacuated to Israel proper or could remain in their homes under Palestinian rule.
This is a courageous and novel Israeli step, with an enormous price paid by Barak.
But the Palestinians want all the settlers to leave, a political impossibility for any Israeli government.
Mutually unacceptable positions are also voiced on both sides on the Jerusalem issue.
This is why a compromise is needed - and will in all probability be reached at Camp David.
It is difficult for Barak and Arafat, when in conclave with Clinton, to allow America’s President to fail.
The Camp David talks will likely witness a series of tough bargaining rounds with ups and downs, real and concocted crises, and a lot of tip-toeing to the edge by both sides.
But the logic of the situation is that, sooner or later, perhaps after a crisis or two, compromise will be found.
Reaching that point will be arduous for both sides, but as President Clinton said when announcing the summit, the alternative is far worse.
The Middle East’s New Game
MADRID – Whether or not the Arab Spring will usher in credible democracies across the Arab world remains uncertain.
But, while the dust has not yet settled after months of turmoil in Tunis, Cairo, and elsewhere, the Arab revolts have already had a massive impact on the strategic structure of the Middle East.
Until recently, the region was divided into two camps: an incoherent and weakened moderate Arab alignment, and an “Axis of Resistance,” formed by Iran, Syria, Hamas, and Hezbollah, against American and Israeli designs for the region.
Driven by a strategy of “zero problems” with its neighbors,” Turkey’s quest for a leading role in Middle East politics brought it closer to Syria and Iran.
The Arab Spring exposed the fragile foundations upon which the entire Axis of Resistance was built, and has pushed it to the brink of collapse.
The first to opt out was Hamas.
Fearful of the consequences of the demise of its patrons in Damascus, Hamas tactically withdrew from the Axis and let Egypt lead it towards reconciliation with the pro-Western Palestinian Authority on terms that it had refused under former Egyptian Hosni Mubarak.
Turkey is genuinely interested in a two-state solution to the Israeli-Palestinian dispute and in a regional system of peace and security, whereas Iran and Hezbollah are bent on derailing both in order to deny Israel the kind of peace with the Arab world that would end up isolating Iran.
Notwithstanding its bitter conflict with Israel, Turkey, unlike Iran, is not an unconditional enemy of the Jewish state, and would not discard an accommodation with Binyamin Netanyahu’s government.
Indeed, talks are now under way between the parties to restore more normal relations.
Nor do Iran and Turkey share a common vision with regard to the strategically sensitive Gulf region.
Turkey, whose 2008 treaty with the Gulf Cooperation Council made it a strategic partner of the region’s monarchies, was unequivocally assertive during the Bahrain crisis in warning Iran to cease its subversive intrusion into the region’s affairs.
The stability and territorial integrity of the Gulf States is a strategic priority for Turkey; that is clearly not the case for Iran.
Similarly, when it comes to Lebanon, Turkey certainly does not share Iran’s concern about the possible interruption of Hezbollah’s lifeline should the Syrian regime collapse.
And Iran and Syria, for their part, have never been too happy with Prime Minister’s Recep Tayyip Erdoğan’s aspirations to act as a broker in Lebanon, which they consider to be their strategic backyard.
This explains Hezbollah’s rejection of a Turkish-Qatari initiative to act as mediators after the fall of Saad Hariri’s Lebanese government in January 2011.
Turkey’s commitment to peaceful democratic transitions in the Arab world has alienated it from its Syrian ally, Bashar al-Assad – with whose repressive practices both Iran and Hezbollah are fully complicit – and is now driving Iran and Turkey even further apart.
Iran is working to ensure that free elections open the way to truly Islamic regimes in the Arab world, while Turkey assumes that its own political brand, a synthesis of Islam and democracy with secular values, should ultimately prevail.
The rift reflects not only ideological differences, but also disagreement about the objective of regime change.
Iran expects the new regimes to rally behind it in radically changing the region’s strategic equation through a policy of confrontation with the US and Israel, while Turkey expects the new regimes to follow constructive policies of peace and security.
Instability and confusion in the Arab world serve the agenda of a radically non-status quo power such as Iran.
Instability has the potential to keep oil prices high, benefiting the Iranian economy.
Moreover, with the West focused on the formidable challenges posed by the Arab revolts, Iran finds it easier to divert the world’s attention from its nuclear program, and to circumvent the international sanctions regime designed to curtail its efforts to acquire nuclear weapons.
Turkey’s foreign policy, unlike Iran’s, needs a stable environment to prosper.
Instability undermines its entire regional vision; it certainly challenges its idealistic strategy of “zero problems.”
It also puts at risk Turkey’s robust economic penetration into Arab markets.
And, with the Kurdish problem as alive as ever, the Turks also know only too well that upheavals in neighboring countries can spill over into Turkey itself.
It is on the Syrian question that the differences between Turkey and Iran are especially apparent.
Turkey has practically resigned itself to the inevitable demise of Syria’s repressive Baath regime.
For Iran and its Hezbollah clients, the fall of Assad would be nothing short of a calamity – one with far-reaching consequences.
Devoid of its Syrian alliance and estranged from Turkey, Iran would become an isolated revolutionary power whose fanatical brand of Islam is repellent to most Arab societies.
Turkey was wrong to try to gain wider influence in the Middle East by working with the region’s revolutionary forces.It is far wiser for Turkey to make common cause with the region’s responsible forces.
A democratic Egypt would certainly be a more reliable partner.
Egypt has already managed to draw Hamas away from Syria into an inter-Palestinian reconciliation.
Instead of competing for the role of regional power broker, as was the case under Mubarak, Egypt can join forces with Turkey – whose officials the Egyptians wisely invited to the ceremony that sealed the Palestinian reconciliation – to promote an Israeli-Arab peace and a civilized security system in the Middle East.
The Middle East’s Springtime of Democracy
Election results around the Middle East mark a new trend: Islamist political parties – those that base their platforms on Islamic law – are highly popular.
Where elections are held, Islamists do well: Hamas among Palestinians in the West Bank and Gaza; the religiously-oriented Shi’ite coalition in Iraq; a parliamentary faction in Morocco and, most significantly, the ruling Justice and Development Party (AKP) in Turkey.
Democracy movements in Lebanon, Egypt, and elsewhere in the region must face the challenge of incorporating Islamist parties into democratic systems.
But can the Islamists be trusted?
If they rise to power, will they respect the rights of minorities and women and leave office when voted out?
Will they tolerate dissent?
Or will such elections be based on “one man, one vote, one time?”
As a sociologist, I have been studying these issues for 30 years.
As an inmate of an Egyptian prison, I discussed them with my fellow prisoners, many of whom were imprisoned as supporters of Egypt’s Islamic movement.
My conclusion?
Islamist parties are changing.
These parties understand the social transformations underway in the Middle East that are leading toward democracy, and they want to take part.
In my view, we may be witnessing the emergence of Muslim democratic parties, much like the rise of Christian Democratic parties in Europe in the years after World War II.
The Islamists’ popularity is not difficult to understand.
Since autocratic regimes in the Middle East left little room for free expression, the mosque emerged as the only place where people could freely congregate.
Religious groups responded to this opportunity, emerging first as social welfare agencies, and then becoming the equivalent of local politicians.
In the process, they gained credibility as trustworthy advocates of the people – a real distinction from repressive and corrupt governments.
In principle, it would be hypocritical to advocate democracy and at the same time the exclusion of Islamists from peaceful political participation.
But the practice of electoral politics also gives us reason for optimism.
By my count, some two-thirds of the 1.4 billion Muslims in the world now live under elected governments in which Islamist parties are players.
When Islamist groups are denied access to electoral politics, their cause takes on a mythic aura.
Their principles remain untested ideals, never forced to confront the practical realities of governance.
The late King Hussein took up this challenge in 1989, after bread riots in the southern Jordanian city of Ma’an.
The King brought all the political forces together to draft a national charter for political participation.
The Islamists signed on, pledging their respect for the rules of the game.
In the years since, Islamists have participated in four Jordanian elections.
The first time, they gained a governing plurality, put their slogans into practice, and failed to maintain their popular support.
In the four ministries the Islamists ran, they imposed restrictions on female staff members, triggering widespread protests that ultimately forced the four ministers to resign.
Their share of the vote in subsequent elections declined sharply.
By contrast, it is a mistake to believe that force can eliminate Islamist movements.
Instead, political reform ought to include them – under the following conditions: Respect for the national constitution, the rule of law, and the independence of the judiciary;
Acceptance of the rotation of power, based on free, fair and internationally monitored elections;
Guaranteed equal rights and full political participation for non-Muslim minorities;
Full and equal participation by women in public life.
The role of external actors in promoting democracy in the Middle East is also critical.
Much has been said of President George W. Bush’s American-led “crusade” to bring democracy to the Muslim world.
Wars in Afghanistan and Iraq were predicated, at least in part, on spreading freedom; similarly, the Middle East Partnership Initiative is supposed to make democracy the centerpiece of American assistance in the region.
It is important to remember, though, that democracy was on the international agenda before the United States was attacked in September 2001.
Under the Barcelona Accord of 1995, the European Union offered aid and trade to several Arab countries, in exchange for progress on democratic reform.
The trade improvements have been delivered, but little has been accomplished on Arab domestic reform.
In the 1970’s, the Helsinki Accord helped bring down the Soviet Empire.
We need a comparable formula for the Middle East.
Whatever one thinks of American military intervention, one must concede that it has altered the region’s dynamics.
Domestic opposition forces, while distancing themselves from the US, have been markedly emboldened in Lebanon, Egypt, Saudi Arabia, and elsewhere.
We are all watching for signs of opening among our neighbors.
I know that stirrings of democracy have been crushed before: in Budapest in 1956, Prague in 1968, and in Tiananmen Square in 1989.
Yet something about the last few months feels new and irreversible.
Too many people in too many places are defying their oppressors and taking risks for freedom.
To a long-time activist, today’s climate feels like spring.
The Middle Kingdom’s Middle Class
HONG KONG -- Why has China succeeded so spectacularly in the span of just three decades since the launch of Deng Xiaoping’s economic reforms?
The reasons that are usually cited are China’s compelling demographic, geographic, and broad cultural factors.
What is less understood is that China’s success has also depended on its entrepreneurs – and their deeply rooted patterns of activity.
There are two key aspects of Chinese entrepreneurship.
Traditionally, successful Chinese businessmen emphasized trust and reliability in fulfilling commitments (xinyong), the gradual development of sentiments (ganqing) with customers and suppliers, and the ability to build on networks of relationships (guanxi) that are often based on common origin or kinship.
They also stressed the need to be bold, frugal, and highly driven to succeed, as well as the ability to adapt to changing market conditions.
Some of these characteristics are more culturally specific than Joseph Schumpeter’s description of entrepreneurship as a process of “creative destruction” might imply.
But boldness and adaptability do accord with Schumpeter’s emphasis on forming new combinations and doing things in new ways.
For example, traditional businesses, from fabric wholesaling to banking and salt mining, evolved elaborate profit-sharing schemes among owners, partners, and employees as their business expanded over time or into chain outlets across the country.
When new forms of business such as textile manufacturing and department stores came to China from the West in the late nineteenth century, Chinese businessmen quickly adopted them and adapted them to local conditions.
More recently, local managers who took on McDonald’s franchises transformed several aspects of the business to fit Chinese tastes and habits.
A second aspect of Chinese entrepreneurship is the kind of institutions and the management style that it embodies.
I have studied many Chinese firms that flourished from the early-nineteenth to the mid-twentieth century.
They all seem to have the following core features:
· Small to medium size, with a relatively simple organizational structure;
· Considerable overlap of ownership by individuals linked by family and kinship ties, or by partnerships among kin and family friends;
· Centralized and disciplined decision-making;
· Personal and family networking that encourages opportunistic diversification, transcending regional and national boundaries to expand;
· Cooperation with affiliate firms to reduce transaction costs in sourcing, capital acquisition, and contracts;
· A high degree of strategic adaptability.
These structural features fit well with Chinese merchants, who did not want to see their companies grow so large that they attracted official attention.
Successful businessmen could in fact build up extensive holdings by owning or sharing several businesses.
Since China never established male primogeniture, this meant that when he died, each son could have his own business to start with.
Likewise, the functional features of Chinese entrepreneurship were heavily dependent on cultural values, particularly given a financial and legal system that was often unreliable.
Thus, control and management were carried out mostly by family members and kin, with support through networking with those in an established relationship of trust.
This history and evolution matter in trying to understand today’s Chinese entrepreneurs.
Of course, one special group today comprises the children of officials, from powerful national party leaders to local satraps who use their family connections to their advantage.
But this group’s members are usually not among the most successful entrepreneurs; none, for example, has been included in the annual Forbes list of the ten richest persons in China.
The great majority of the roughly 24 million private individuals estimated to have gone into business between 1980 and 2005 were ordinary folk with very small capital – usually obtained by pooling the savings of family members and perhaps friends.
Their businesses include small stores or a stand on a busy sidewalk selling specific goods or providing some service.
Only some three million of these businesses gained sufficient size and organization to form limited-liability corporations that issued shares.
And all firms with annual revenues of $1 million or more seem to have required some form of support from party officials, who serve as gatekeepers for all forms of licensing, sourcing, and financing.
In recent years, some of these controls have been relaxed.
Attending to the gate-keeping role of party officials has become less of a necessity.
But networking and party connections continue to matter.
And, aside from a relatively small number of joint ventures with foreign partners and state enterprises that are in fact hybrid public-private firms, most businesses today, including publicly listed companies, remain family owned or dominated.
Some may have grown large in size and scale, but only to the point where they could compete efficiently in international markets.
Even the small number of national companies that have grown large are relatively small when compared to the Japanese kereitsu or the Korean chaebol.
Chinese entrepreneurs nowadays are particularly well adapted to take advantage of new market trends brought about by rapidly changing fashion and similarly rapid technological progress.
Their relatively small companies and their efficient decision-making processes allow them to remain nimble and to react quickly.
In addition, their often highly diversified structure and their loose network of affiliates and supply chains allow Chinese entrepreneurs to reconfigure business strategy and production facilities quickly, thereby bringing new products to market with shorter lead time.
For example, Chinese cell-phone companies offered 3-G phones much earlier than in America, and when they learned that each phone was being used by several individuals in rural China, they programmed their phones to allow multiple accounts for each phone, thereby adding tens of millions of new subscribers.
Despite continuing political restrictions imposed by an authoritarian regime, Deng Xiaoping succeeded beyond his wildest imagination.
The Mind’s New Eye
CAMBRIDGE – Modern physics and cosmology suggest that basic truths about how nature operates, and how our universe arose, are visible only to those who can see events that occur faster than the time it takes for light to cross a proton, and whose vision can resolve sub-nuclear distances.
Fortunately, that does not rule out humans, for we can augment the eyes we were born with.
The Large Hadron Collider (LHC) rises to the opportunity.
By smashing protons together with unprecedented energy, monitoring the many particles that emerge from the collisions, and reconstructing the primary events that produced them, physicists will in effect have constructed the fastest, highest-resolution microscope ever, with each proton taking a snapshot of the other’s interior.
The LHC is a magnificent engineering project, whose many “gee-whiz’’ features have been widely reported.
I will forego all that, and skip to the chase: what can we hope to see?
We will see what the universe was like when it was a thousandth of a second old, in the earliest moments of the Big Bang.
The primary events at the LHC are in effect Little Bangs, tiny fireballs that reproduce Big Bang conditions, albeit over very small volumes.
This re-creation of the early universe opens up an exciting possibility.
We know that the universe today contains a form of matter, the so-called dark matter, that is different from anything we have ever observed.
The dark matter is actually not dark in the usual sense, but utterly transparent.
It neither emits nor absorbs light significantly, which is why astronomers failed to notice it for millennia, even though dark matter contributes five times as much to the total mass of the universe as normal matter.
It was only in the late twentieth century that careful study of the motion of normal, visible matter revealed the gravitational influence of lots of otherwise invisible stuff.
Because the original Big Bang produced dark matter, the LHC’s Little Bangs might produce some more.
So experimenters will be looking for new particles with the right properties to provide the astronomical dark matter: very long-lived and very feebly interacting with ordinary matter or light.
There is a good chance, then, that we will learn what that ubiquitous, abundant, yet elusive substance is.
Imagine a race of intelligent fish that start to think deeply about the world.
For millennia, their ancestors took their watery environment for granted; to them, it was “emptiness” as empty as they could conceive.
But, after studying some mechanics and using their imaginations, the physicist-fish realize that they could deduce much simpler laws of motion by supposing that they are surrounded by a medium (water!) that complicates the appearance of things.
We are those fish.
We have discovered that we can get a much simpler set of equations for fundamental physics by supposing that what we ordinarily perceive as empty space is actually a medium.
We have observed the effects of the “water” that we use to simplify our equations – it slows down particles, and makes them heavy – but we do not know what it is made out of.
The LHC will allow us to discern the microscopic structure of the universal medium.
The simplest idea is that it is made out of one new kind of particle, the so-called “Higgs particle,” but I suspect that there is more to it.
(One gets prettier equations with five new particles, and there might be even more.)
In the 1860’s, James Clerk Maxwell assembled the equations for electricity and magnetism, as they were then known, and discovered an inconsistency.
He repaired the inconsistency by adding new terms to the equations.
The augmented equations, today known as the Maxwell equations, described a unified theory of electricity and magnetism.
The new equations showed that light is a moving, self-renewing disturbance in electrical and magnetic fields, and they predicted that new kinds of disturbances are possible.
Today we call those disturbances radio waves, microwaves, infrared and ultraviolet radiation, x-rays, and gamma rays.
We use them to communicate, cook, and diagnose and cure disease.
The unified theory of electromagnetism has led to profound advances across all physical science, from atomic physics (where lasers and masers are essential tools) to cosmology (where the microwave background radiation is our window on the Big Bang).
Our current understanding of physics is powerful and accurate, as far as it goes, but it is not as beautiful and coherent as it should be.
We have separate equations for four forces: strong, weak, electromagnetic, and gravitational.
This jumble recalls the piecemeal equations of electricity and magnetism before Maxwell.
Some of us have proposed expanded equations that unify the different forces.
These expanded equations, which incorporate an idea called supersymmetry, predict many new effects.
A couple of the predicted effects have already been observed (for experts: tiny neutrino masses and unification of couplings).
But, as Carl Sagan observed, “extraordinary claims require extraordinary evidence,” while here the existing evidence is still circumstantial.
Fortunately, these ideas for a new unification predict that extraordinary things will be seen at the LHC.
If so, a whole new world of particles will be discovered: each currently known particle will have a heavier relative – its superpartner – with different, but predictable, properties.
Such are my hopes and expectations for the LHC.
Other speculations for what might be seen abound; they include extra dimensions of space, strings instead of particles, and mini-black holes.
Very likely, reality will outrun apprehension.
Europe’s Youth Unemployment Non-Problem
BRUSSELS – European policymakers have decided that they must be seen to be “doing something” about youth unemployment.
A special summit of Europe’s heads of state has been called, and a “Youth Employment Initiative,” proposed at the EU Council of Ministers’ meeting in February, aims to “reinforce and accelerate” measures that were recommended in a “Youth Employment Package” in December 2012.
This activism comes mainly in response to the latest alarming figures on youth unemployment in southern Europe, with sky-high rates of joblessness widely regarded as politically unacceptable.
But there are several reasons to doubt that youth unemployment is a discrete problem meriting special treatment.
Indeed, official youth unemployment statistics are misleading on two counts.
First, the data refer to those from 15 to 24 years old.
But this age group consists of two sub-groups with very different characteristics.
The “teenagers” (15-19 years old) should mostly still be in school; if not, they are likely to be very low skilled – and thus to have difficulty finding a full-time job even in good times.
Fortunately, this group is rather small (and has been declining in size over time).
Unemployment among those aged 20-24 should be more troubling.
Members of this cohort who are seeking full-time employment have typically completed upper secondary education, but have decided not to pursue university education (or have completed their university studies early).
Second, the data on youth unemployment are based on active labor-market participants.
But labor-market participation averages just 10% among teenagers in Europe.
(Teenage activity rates come close to 50% only in countries like the Netherlands and the United Kingdom, where having a part-time job while in school is very common.)
Labor-market experts thus consider the unemployment rate a potentially misleading indicator, because a youth unemployment rate of 50% does not mean that half of the young population is unemployed.
That is why one should look at the unemployment ratio – the percentage of the unemployed in the reference population – rather than at the unemployment rate.
Indeed, this indicator paints a somewhat less alarming picture than that created by the headline youth-unemployment rate of more than 50% in Spain, or even the 62.5% rate recently reached in Greece.
The youth-unemployment rate in Greece does not mean that close to two-thirds of young Greeks are unemployed.
Only 9% of Greek teenagers are labor-market participants; two-thirds of that number cannot find a job.
The unemployment ratio among teenagers in Greece is thus less than 6%.
But this figure is not reported widely because it is much less alarming.
Among those in the 20-24 age group, the difference between the reported unemployment rate and the percentage of youth without a job and looking for one (the unemployment ratio) is less stark.
But, even among this age group, one finds that the unemployment ratio is often about one-half of the widely reported unemployment rate.
Moreover, one must ask how much youth unemployment contributes to total unemployment.
Looking at the problem this way reveals a completely different picture from the one usually presented.
In those countries where the problem makes the biggest headlines (the eurozone’s south, with Greece and Spain supposedly the worst cases), youth unemployment accounts for less than a quarter of overall unemployment.
By contrast, youth unemployment contributes relatively much more (about 40%) to overall unemployment in countries like Sweden and the UK.
One could argue that the latter two should worry about their youth unemployment more than Spain or Greece should.
The fact that youth unemployment is just a part of a larger problem leads to the real policy question: Why should officials spend limited time, energy, and public funding specifically on unemployed young people, rather than on all of the unemployed?
Does a teenager’s unemployment represent a greater loss to society than that of a single mother or an older worker, who might have been providing an entire family’s only income?
The loss of the value added produced by a teenager is probably much lower.
In purely economic terms, one could thus argue that youth unemployment (especially teenage part-time unemployment) is much less important than unemployment among those who are in their prime earning years.
Moreover, young people have the option of continuing their education, thus adding to future earnings power, whereas continuing education is a much less viable alternative for their elders.
Europe has a general macroeconomic problem, owing to demand factors that interact with a rigid labor market, rather than a specific youth-unemployment problem.
This implies that there is no need for ad hoc measures for young people, which merely risk overloading welfare systems with even more exemptions and special rules.
The Mirage of Youth Unemployment
PARIS – Economists worldwide need better ways to measure economic activity.
Relying on GDP growth rates to assess economic health, almost all of them missed the warning signs of the 2008 financial crisis, including an $8 trillion real-estate bubble in the United States, as well as property bubbles in Spain, Ireland, and the United Kingdom.
Together with households, financial institutions, investors, and governments, economists were swept up in the financial euphoria that led to excessive risk-taking and severe over-leveraging of banks and households.
Even the eurozone’s macroeconomic imbalances largely went unnoticed.
Unemployment estimates also are surprisingly misleading – a serious problem, considering that, together with GDP indicators, unemployment drives so much economic-policy debate.
Outrageously high youth unemployment – supposedly near 50% in Spain and Greece, and more than 20% in the eurozone as a whole – makes headlines daily.
But these numbers result from flawed methodology, making the situation appear far worse than it is.
The problem stems from how unemployment is measured: The adult unemployment rate is calculated by dividing the number of unemployed individuals by all individuals in the labor force.
So if the labor force comprises 200 workers, and 20 are unemployed, the unemployment rate is 10%.
But the millions of young people who attend university or vocational training programs are not considered part of the labor force, because they are neither working nor looking for a job.
In calculating youth unemployment, therefore, the same number of unemployed individuals is divided by a much smaller number, to reflect the smaller labor force, which makes the unemployment rate look a lot higher.
In the example above, let us say that 150 of the 200 workers become full-time university students.
Only 50 individuals remain in the labor force.
Although the number of unemployed people remains at 20, the unemployment rate quadruples, to 40%.
So the perverse result of this way of counting the unemployed is that the more young people who pursue additional education or training, the higher the youth unemployment rate rises.
While standard measures exaggerate youth unemployment, they likely understate adult unemployment, because those who have given up their job search are not counted among the unemployed.
As the Great Recession drives up the number of such “discouraged workers,” adult unemployment rates appear to fall – presenting a distorted picture of reality.
Fortunately, there is a better methodology: The youth unemployment ratio – the number of unemployed youth relative to the total population aged 16-24 – is a far more meaningful indicator than the youth unemployment rate.
Eurostat, the European Union’s statistical agency, calculates youth unemployment using both methodologies, but only the flawed indicator is widely reported, despite major discrepancies.
For example, Spain’s 48.9% youth unemployment rate implies significantly worse conditions for young people than its 19% youth unemployment ratio.
Likewise, Greece’s rate is 49.3%, but its ratio is only 13%.
And the eurozone-wide rate of 20.8% far exceeds the 8.7% ratio.
To be sure, a youth unemployment ratio of 13% or 19% is not grounds for complacency.
But, while the eurozone’s youth unemployment rate has increased since 2009, its ratio has remained the same (though both significantly exceed pre-2008 levels).
During the 2006 French student protests, France’s 22% youth unemployment rate appeared to compare unfavorably to rates of 11%, 12%, and 13% in the United Kingdom, the US, and Germany, respectively.
But the Financial Times showed that only 7.8% of French under-25’s were unemployed – about the same ratio as in the other three countries.
France simply had a higher percentage of young people who were full-time students.
Failing to account for the millions of young people either attending university or in vocational training programs undermines the unemployment rate’s credibility.
And, while some young people use higher education to escape a rocky job market, their choice to build new skills should not negatively impact perceptions of their country’s economic health.
Policymakers do, of course, need to address the problem of youth unemployment; but they must also acknowledge that the problem is not as serious as the headlines indicate.
Unfortunately, these distorted results have become conventional wisdom – even for respected economists like the Nobel laureate Paul Krugman, who recently invoked the flawed “50% youth unemployment” figure.
Thus, four years after the crisis erupted, methods for measuring and assessing economic health remain alarmingly inadequate.
As any pilot knows, flying without radar or accurate weather forecasts is likely to end in a crash.
The Misconduct of Science?
WOLLERAU, SWITZERLAND – Scientific fraud, plagiarism, and ghost writing are increasingly being reported in the news media, creating the impression that misconduct has become a widespread and omnipresent evil in scientific research.
But these reports are more an example of sensationalist media latching on to a hot topic than a true account of the deterioration of scientific values.
Far from being the norm in scientific research, fraud and cheating are rare exceptions, and are usually quickly identified by other scientists.
And the public seems to understand this.
Indeed, trust and confidence in scientific research have not been seriously undermined by reports of misconduct.
Nor have these rare incidents curtailed scientific progress, which is so valuable to humankind.
To be sure, even a few cases of scientific misconduct are too many.
Scientists are expected to be beacons of hope in the search for knowledge – and clever enough not to try to get away with cheating.
Preventive mechanisms are in place to hold responsible the few who take the gamble.
But, while the scientific community – including academic and professional institutions, agency heads, managers, and editors – is often reluctant to handle cases of misconduct rigorously, the reputation of science as a whole is at stake, not just that of a person, institution, journal, or national science entity.
Ironically, those who are caught often blame their misconduct on competition, pressure to publish, and recognition and prizes – the very practices and incentives that the scientific community introduced and fostered.
Indeed, while the menace of misconduct has been exaggerated, we have to rethink how we conduct science – its values, virtues, and shortcomings.
Scientists must follow a path that is not scientifically predefined, and that requires decisions at every step. Whether they are right or wrong becomes clear in retrospect, which is why errors are unavoidable (though they should not be left uncorrected for long).
Science means constantly walking a tightrope between blind faith and curiosity; between expertise and creativity; between bias and openness; between experience and epiphany; between ambition and passion; and between arrogance and conviction – in short, between an old today and a new tomorrow.
But, nowadays, research increasingly is misdirected toward lucrative prizes, professional recognition, and financial gains – rewards that are suffocating the creativity and passion that scientific progress demands.
As T.S. Eliot put it, “Where is the wisdom we have lost in knowledge?
Where is the knowledge we have lost in information?”
In the “hard” sciences, such as mathematics and physics, the truth can be established more transparently, making these fields less prone to scientific misconduct.
But branches like medicine, humanities, philosophy, economics, and other social sciences, which rely more heavily on openness and imagination, can be manipulated more easily to suit the goals of bureaucrats.
Indeed, today, too many areas that are being called “science” – for example, collecting biased statistics in order to make a politician’s (or corporation’s) point, or publishing a variation of existing knowledge – fall far short of scientific standards of originality and the quest for basic insight.
And yet, while bureaucratization of science has fueled concerns about its attractiveness to talented thinkers, we should not be overly pessimistic.
To be sure, many people have lamented the loss of brilliant minds to the financial sector over the past few decades.
But perhaps we should consider it a stroke of luck that these geniuses created their mess somewhere else.
Moreover, we underestimate the younger generation of scientists.
Like the previous generation, many gifted young researchers know that they must work hard to meet monumental challenges and make valuable contributions to society.
But we must be careful not to corrupt their work with the questionable practices that the scientific community has adopted in recent years.
The new generation of researchers must be given the skills and values – not just scientific ideals, but also awareness of human weaknesses – that will enable it to correct its forebears’ mistakes.
Misreading the Global Economy
PRINCETON – In April 2010, the International Monetary Fund’s World Economic Outlook offered an optimistic assessment of the global economy, describing a multi-speed recovery strong enough to support roughly 4.5% annual GDP growth for the foreseeable future – a higher pace than during the bubble years of 2000-2007.
But, since then, the IMF has steadily pared its economic projections.
Indeed, this year’s expected GDP growth rate of 3.3% – which was revised downward in the most recent WEO – will probably not be met.
Persistent optimism reflects a serious misdiagnosis of the global economy’s troubles.
Most notably, economic projections have vastly underestimated the severity of the eurozone crisis, as well as its impact on the rest of the world.
And recovery prospects continue to depend on the emerging economies, even as they experience a sharp slowdown.
The WEO’s prediction of a strengthening recovery this year continues the misdiagnosis.
European Central Bank President Mario Draghi’s announcement last summer that the ECB would do “whatever it takes” to preserve the euro reassured financial markets.
But, as pressure from financial markets has eased, so has European leaders’ incentive to address problems with the eurozone’s underlying economic and political dynamics.
Easy ECB liquidity is now sustaining a vast swath of Europe’s banking system.
The eurozone is operating under the pretense that public and private debts will, at some point, be repaid, although, in many countries, the distress now is greater than it was at the start of the crisis almost five years ago.
As a result, banks, borrowers, and governments are dragging each other into a vicious downward spiral.
Politicians have exacerbated the situation by doubling down on fiscal austerity, which has undermined GDP growth while failing to shrink government debt/GDP ratios.
And no decisive policy action aimed at healing private balance sheets appears imminent.
Moreover, Europe’s problems are no longer its own.
Europe’s extensive regional and global trade networks mean that its internal problems are impeding world trade and, in turn, global economic growth.
In 2012, world trade expanded by only 2.5%, while global GDP grew at a disappointing 3.2% rate.
Periods in which trade grows at a slower pace than output are rare, and reflect severe strain on the global economy’s health.
While the trauma is no longer acute, as it was in 2009, wounds remain – and they are breeding new pathologies.
Unfortunately, the damage is occurring quietly, enabling political interests to overshadow any sense of urgency about the need to redress the global economy’s intensifying problems.
Against this bleak background, it is easy to celebrate the success of emerging markets.
After all, emerging and developing economies are growing much faster than the advanced countries.
But even the world’s most dynamic emerging markets – including China, Brazil, and India – are experiencing a sharp deceleration that cannot be ignored.
Consider India, where growth is now running at an annualized rate of 4.5%, down from 7.7% annual growth in 2011.
To be sure, the IMF projects that India’s economy will rebound later in 2013, but the basis for this optimism is unclear, given that all indicators so far suggest another dismal year.
The emerging economies’ supposed resilience, which has buoyed economic forecasts in recent years, needs to be reassessed.
Like the advanced economies, emerging economies experienced a boom in 2000-2007.
But, unlike the advanced economies, they maintained high GDP growth rates and relative stability even at the height of the crisis.
This was viewed as powerful evidence of their new economic might.
In fact, it was largely a result of massive fiscal stimulus and credit expansion.
Indeed, as the effects of stimulus programs wear off, new weaknesses are emerging, such as persistent inflation in India and credit misallocation in China.
Given this, the notion that emerging economies will recapture the growth levels of the bubble years seems farfetched.
Economic forecasts rest on the assumption that economies ultimately heal themselves.
But economies’ powerful self-healing capabilities work slowly.
More problematic, a misdiagnosis can lead to treatments that impair the healing process.
Overly optimistic economic projections based on mistaken assessments of the global economy’s ailments thus threaten recovery prospects – with potentially far-reaching consequences.
In Europe, the banks’ wounds must be closed – weak banks must be shut down or merged with stronger banks – before recovery can begin.
This will require an extensive swap of private debts for equity.
For the global economy, the malaise reflected in anemic trade growth calls for coordinated fiscal stimulus by the world’s major economies.
Otherwise, the risk of another global recession will continue to rise.
Misreading Chinese Rebalancing
NEW HAVEN – The punditocracy has once again succumbed to the “China Crash” syndrome – a malady that seems to afflict economic and political commentators every few years.
Never mind the recurring false alarms over the past couple of decades.
This time is different, argues the chorus of China skeptics.
Yes, China’s economy has slowed.
While the crisis-battered West could only dream of matching the 7.5% annual GDP growth rate that China’s National Bureau of Statistics reported for the second quarter of 2013, it certainly does represent an appreciable slowdown from the 10% growth trend recorded from 1980 to 2010.
But it is not just the slowdown that has the skeptics worked up.
There are also concerns over excessive debt and related fears of a fragile banking system; worries about the ever-present property bubble collapsing; and, most important, the presumed lack of meaningful progress on economic rebalancing – the long-awaited shift from a lopsided export- and investment-led growth model to one driven by internal private consumption.
With respect to the last point, recent shifts in the composition of Chinese GDP appear disconcerting at first glance.
Consumption (private as well as public) contributed only 3.4 percentage points to economic growth in the first half of this year, and an estimated 2.5 percentage points in the April-June period – a deceleration on a sequential quarterly basis that underscores a cyclical, or temporary, weakening in Chinese consumer demand.
At the same time, the contribution from investment surged from 2.3 percentage points of GDP growth in the first quarter of 2013 to 5.9 percentage points in the second quarter.
In other words, rather than shifting from investment-led to consumer-led growth, China appears to be continuing along its investment-led growth track.
For an unbalanced economy that has under-consumed and over-invested for the better part of three decades, this is unnerving.
After all, China’s leadership has been talking about rebalancing for years – especially since the enactment of the pro-consumption 12th Five-Year Plan in March 2011.
It was one thing when rebalancing failed to occur as the economy was growing rapidly; for the skeptics, it is another matter altogether when rebalancing is stymied in a “slow-growth” climate.
This is superficial thinking, at best.
The rebalancing of any economy – a major structural transformation in the sources of output growth – can hardly be expected to occur overnight.
It takes strategy, time, and determination to pull it off.
China has an ample supply of all three.
The composition of GDP is probably the worst metric to use in assessing early-stage progress on economic rebalancing.
Eventually, of course, GDP composition will provide the acid test of whether China has succeeded.
But the key word here is “eventually.”
It is far too early to expect significant shifts in the major sources of aggregate demand.
For now, it is much more important to examine trends in the potential determinants of Chinese consumption.
From this perspective, there is good reason for optimism, especially given accelerated growth in China’s services sector – one of the key building blocks of a consumer-led rebalancing.
In the first half of 2013, services output (the tertiary sector) expanded by 8.3% year on year – markedly faster than the combined 7.6% growth of manufacturing and construction (the secondary sector).
Moreover, the gap between growth in services and growth in manufacturing and construction widened over the first two quarters of 2013, following annual gains of 8.1% in both sectors in 2012.
These developments – first convergence, and now faster services growth – stand in sharp contrast with earlier trends.
Indeed, from 1980 to 2011, growth in services output averaged 8.9% per year, fully 2.7 percentage points less than the combined growth of 11.6% in manufacturing and construction over the same period.
The recent inversion of this relationship suggests that the structure of Chinese growth is starting to tilt toward services.
Why are services so important for China’s rebalancing?
For starters, services are far more labor-intensive than the country’s traditional growth sectors.
In 2011, Chinese services generated 30% more jobs per unit of output than did manufacturing and construction.
This means that the Chinese economy can achieve its all-important labor-absorption objectives – employment, urbanization, and poverty reduction – with much slower GDP growth than in the past.
In other words, a 7-8% growth trajectory in an increasingly services-led economy can hit the same labor-absorption targets that required 10% growth under China’s previous model.
That is good news for three reasons.
First, services growth is beginning to tap a new source of labor-income generation, the mainstay of consumer demand.
Second, greater reliance on services allows China to settle into a lower and more sustainable growth trajectory, tempering the excessive resource- and pollution-intensive activities driven by the hyper-growth of manufacturing and construction.
And, third, growth in the embryonic services sector, which currently accounts for just 43% of the country’s GDP, broadens China’s economic base, creating a significant opportunity to reduce income inequality.
Far from crashing, the Chinese economy is at a pivotal point.
The wheels of rebalancing are turning.
While that is not showing up in the composition of final demand (at least not yet), the shift from manufacturing and construction toward services is a far more meaningful indicator at this stage in the transformation.
So, too, are signs of newfound policy discipline – such as a central bank that seems determined to wean China off excessive credit creation and fiscal authorities that have resisted the timeworn temptation of yet another massive round of spending initiatives to counter a slowdown.
Early steps toward interest-rate liberalization and hints of reform of the antiquated hukou (residential permit) system are also encouraging.
Slowly but surely, the next China is coming into focus.
China doubters in the West have misread the Chinese economy’s vital signs once again.
The Mixed Blessing of Genetic Choice
The advance of knowledge is often a mixed blessing.
Over the past 60 years, nuclear physics has been one obvious example of this truth.
Over the next 60 years, genetics may be another.
Today, enterprising firms offer, for a fee, to tell you about your genes.
They claim that this knowledge will help you live longer and better.
You might, for example, have extra checkups to detect early signs of the diseases that you are most at risk of contracting, or you could alter your diet to reduce that risk.
If your chances of a long lifespan are not good, you might buy more life insurance, or even retire early to have enough time to do what you always wanted to do.
Defenders of privacy have worked, with some success, to prevent insurance companies from requiring genetic testing before issuing life insurance.
But if individuals can do tests from which insurance companies are barred, and if those who receive adverse genetic information then buy additional life insurance without disclosing the tests that they have taken, they are cheating other holders of life insurance.
Premiums will have to increase to cover the losses, and those with a good genetic prognosis may opt out of life insurance to avoid subsidizing the cheats, driving premiums higher still.
We need not become too alarmed yet.
The United States Government Accountability Office sent identical genetic samples to several of the testing companies, and got widely varying, and mostly useless, advice.
But as the science improves, the insurance problem will have to be faced.
Selecting our children raises more profound ethical problems.
This is not new.
In developed countries, the routine testing of older pregnant women, combined with the availability of abortion, has significantly reduced the incidence of conditions like Down syndrome.
In some regions of India and China where couples are anxious to have a son, selective abortion has been the ultimate form of sexism, and has been practiced to such an extent that a generation is coming of age in which males face a shortage of female partners.
Selection of children need not involve abortion.
For several years, some couples at risk of passing a genetic disease on to their children have used in vitro fertilization, producing several embryos that can be tested for the faulty gene and implanting in the woman’s uterus only those without it.
Now couples are using this technique to avoid passing on genes that imply a significantly elevated risk of developing certain forms of cancer.
Since everyone carries some adverse genes, there is no clear line between selecting against a child with above-average risks of contracting a disease and selecting for a child with unusually rosy health prospects.
Thus, genetic selection will inevitably move towards genetic enhancement.
For many parents, nothing is more important than giving their child the best possible start in life.
They buy expensive toys to maximize their child’s learning potential and spend much more on private schools or after school tutoring in the hope that he or she will excel on the tests that determine entry to elite universities.
It may not be long before we can identify genes that improve the odds of success in this quest.
Many will condemn this as a resurgence of “eugenics,” the view, especially popular in the early twentieth century, that hereditary traits should be improved through active intervention.
So it is, in a way, and in the hands of authoritarian regimes, genetic selection could resemble the evils of earlier forms of eugenics, with their advocacy of odious, pseudoscientific official policies, particularly concerning “racial hygiene.”
In liberal, market driven societies, however, eugenics will not be coercively imposed by the state for the collective good.
Instead, it will be the outcome of parental choice and the workings of the free market.
If it leads to healthier, smarter people with better problem-solving abilities, that will be a good thing.
But even if parents make choices that are good for their children, there could be perils as well as blessings.
In the case of sex selection, it is easy to see that couples who independently choose the best for their own child can produce an outcome that makes all their children worse off than they would have been if no one could select the sex of their child.
Something similar could happen with other forms of genetic selection.
Since above-average height correlates with above-average income, and there is a clearly a genetic component to height, it is not fanciful to imagine couples choosing to have taller children.
The outcome could be a genetic “arms race” that leads to taller and taller children, with significant environmental costs in the additional consumption required to fuel larger human beings.
The most alarming implication of this mode of genetic selection, however, is that only the rich will be able to afford it.
The gap between rich and poor, already a challenge to our ideas of social justice, will become a chasm that mere equality of opportunity will be powerless to bridge.
That is not a future that any of us should approve.
But avoiding this outcome will not be easy, for it will require that selection for genetic enhancement is either available to no one or accessible to everyone.
The first option would require coercion, and – since countries will not accept that others should gain a competitive edge – an international agreement to forego the benefits that genetic enhancement can bring.
The second option, universal access, would require an unprecedented level of social assistance for the poor, and extraordinarily difficult decisions about what to subsidize.
The Moon Illusion
Few would argue that the Moon is more wondrous and enchanting than when it is near the horizon, appearing closer and looming larger than when it is high in the sky.
But this is an illusion-the "Moon Illusion," to be precise: the distance traveled by light reflected from the moon to the eye of an observer is essentially the same regardless of the Moon's elevation.
A similar illusion is observed for the setting sun and for celestial distances between star points at different elevations.
But the Moon Illusion is not only captivating to behold; it also happens to be perhaps the oldest unsolved problem in science.
References to it can be found on clay tablets from the royal library of Nineveh and Babylon, dating from before the sixth century BC, as well as in a collection of Chinese legends ascribed to Lieh Tzu dating from the fifth century BC. Many of history's leading scientists and mathematicians have analyzed the phenomenon: da Vinci, Kepler, Descartes, to name but a few.
For most of recorded history, the illusion was thought to be a consequence of physical processes.
For example, Aristotle in the third century BC and Ptolemy in the second century AD incorrectly attributed the illusion to the magnifying properties of the atmosphere.
Alhazen (Ibn al-Haytham) related the illusion to the flattened appearance of the dome of the sky.
In the nineteenth century, it became clear that the Moon Illusion is psychological, a consequence of the cognitive processes underlying the human brain's visual space perception.
Many theories have since been offered to explain the illusion, but there is still little agreement among researchers.
Most modern explanations treat the illusion as a static phenomenon, in which a stationary observer views a fixed illuminated object over a ground.
The perceived size of the moon is determined by two factors: the physical extent of the light falling on the eye - also known as the angular subtense or the visual angle - and the distance information provided by the ground.
Some theorists include in this formulation the perceived distance of the moon (how far it appears to be from an observer).
The relationships between the stimulus (visual angle) and the perceived size and distance of the moon are summarized by the so-called "static size-distance invariance hypothesis" (SDIH): stimulus determines the ratio of perceived size to perceived distance.
The information from the ground fixes the unique values of each variable in this ratio.
The SDIH is sometimes assumed to be a fundamental law of visual perception.
But it is this relationship that makes the Moon Illusion such a puzzle, because applying the SDIH requires that the moon appear farther away if it appears large, and close if it appears small.
This is also why the illusion has sometimes been called "paradoxical."
Since observation contradicts the hypothesis, modern explanations of the Moon Illusion have proposed a variety of changes to the SDIH.
One modification allows perceived distance to be evoked simultaneously by different behavioral responses.
Thus, the moon may appear more distant to people who say: "The moon looks close."
Other explanations exclude perceived distance.
Verbal statements about the perceived distance of the moon are described as inferences based on perceived size rather than descriptions of experience: "The Moon looks big so it must be close."
Other researchers have gone beyond the SDIH altogether, substituting a perceptual outcome - perceived visual angle - for the stimulus input.
Unlike the SDIH, this implies a purely psychological relationship.
But none of these theories answers the age-old question: what accounts for the simultaneous perception of a large and near moon?
I have proposed a solution that approaches the illusion from a different starting point.
I begin with the nature of the perceptual system: What were the circumstances in which it evolved?
Clearly, motion was an essential feature.
Our visual systems evolved in an environment that contained (mostly) rigid moving objects.
Objects that move radially, i.e., directly toward or away from a viewer, produce a stimulus on the eye that is continuously increasing or decreasing in size.
Our visual system automatically transforms such changing stimulus inputs into objects that appear to be rigid - i.e., unchanging in perceived size - but moving radially in three-dimensional space.
Call this mechanism a type of kinetic form of SDIH.
Now, how would such a perceptual system respond to the stimulus of the Moon Illusion - a stimulus that changes only in the elevation of the Moon over the ground?
The perceived distance of the moon would be determined by contextual stimulus information from the ground and the horizon - when the moon is low, it would appear close (that is, at or near the apparent distance of the horizon) and when the moon is high in the sky, it would appear to be at a far greater distance.
The perceived size of the moon would be determined by the kinetic SDIH, which produces the perception of rigid objects moving radially when stimulus size changes continuously.
Accordingly, when the object appears to be at different distances, the perceived size of the object must change.
This makes the moon that appears closer (i.e., the moon at the horizon) also appear larger than the moon that appears farther away.
Understanding the perceptual system in evolutionary terms makes it possible to uncover the processes that determine our awareness of objects moving in space.
Presented with an anomalous stimulus such as the moon, this system has graced humanity with a sublime illusion about both the object's size and its distance.
The Morality of Amorality in Foreign Policy
When it comes to morality, diplomats are usually seen as cold and calculating.
Machiavelli and Metternich are synonymous with the ruthless pursuit of interest verging on dishonesty.
Sir Henry Wootton, Queen Elizabeth's Ambassador to Venice and Bohemia, described his profession as being made up of honest gentlemen sent abroad to lie for their countries.
But good reasons exist for diplomacy's amoral tradition; paradoxically, this tradition embodies important moral values.
Many of us, despite our great respect for the US, react against phrases like "Axis of Evil" not because the countries listed do not present serious challenges, but because of the difficulties that follow from mixing foreign policy and morality. "Evil" is a religious term, not a foreign policy principle.
Foreign policy is about war and peace.
If wars are fought on moral or religious grounds, no basis for restraint exists.
After all, to call something evil is to invoke a moral duty to destroy it.
No compromise, no modus vivendi, no peaceful co-existence is possible.
Even containment is ruled out, for there is simply no room for negotiation and compromise.
You cannot do business with the Great Satan.
Europe twice endured unrestrained wars.
The Thirty Years War, fought over religion, laid waste to the Continent, killing one-third of Germany's population.
Memory of the war's horrors led to a period of rationalism and restraint in international politics.
But memories fade.
In the last hundred years, contests of nationalism (with God on both sides) nearly annihilated Europe, and the Cold War could have done so.
The moment you believe "better dead than Red" you are in trouble.
Dying to save your home, family, or country may be rational.
But martyrdom is different and dangerous.
As the Romanian philosopher E. M. Cioran says: "Once man loses his faculty of indifference he becomes a potential murderer; once he transforms his idea into a God the consequences are incalculable."
The amoral approach has been Europe's main tradition since the Thirty Years War.
Its pantheon includes such passionless executors of raison d'état as Metternich, Talleyrand, Richelieu, Bismarck, and Kissinger--people who make alliances with morally repugnant partners and then sometimes reverse them at the drop of a hat.
The objective of amoral foreign policy is to sustain order in an anarchic international system by ensuring tolerance and pluralism among a number of independent actors.
This is the best way to restrain power in a world where there is no one but us to do so.
In such a world, interests must come first, because we cannot negotiate about values.
Naturally, several qualifications apply.
Tolerance has limits.
Genocide cannot be defended on the grounds of pluralism. There is also an imperative to deal with anyone who threatens the pluralistic nature of the system.
Second, although an "amoral" international system may be necessary to support pluralism, an individual country's foreign policy need not be value-free.
There is also ample scope to decide whether we define our interests broadly or narrowly, and whether we pursue them by negotiation or violence.
We have choices to make about all our policies, and these choices are not morally indifferent.
For the most part, there is no such thing as an "objective" national interest.
Abolition of the slave trade, or the triumph of socialism, or the spread of human rights and democracy can all be deemed a national interest. Sometimes countries adopt policies that threaten their survival, conscious that they are doing so.
Poland and Czechoslovakia reacted differently to the Nazi threat not because their interests were different, but because their people were different.
How you define your interests reflects how you define your country.
The Soviet Union and America had similar interests at the end of the Second World War.
America pursued its interests through openness and multilateral systems.
The USSR pursued its interests by force, reflecting the brutal nature of its regime.
Some argue that insisting on amoral diplomatic language is no longer necessary, because human rights are more or less universally accepted, if not always observed.
But this is true only to a point.
Globalisation has brought increasing acceptance of common rules and legal norms, but this is not the same thing as universal acceptance of human rights.
Many countries claim that their law is based on divine authority, say, the Koran, returning us to the bleak potential for unlimited conflicts over values.
There is also a different order of priorities between weak and strong states.
In countries where order may break down at any moment, it may not be better--as it is in stable, well ordered countries--to let ten guilty men go free rather than punish one innocent man wrongly.
In practice, order must be established before it can be limited by the rule of law and international human rights norms.
Today, the threat of terrorist attack causes people to re-examine human rights and legal standards.
It may be more important instead to look at the language in which we discuss terrorist incidents.
At times dialogue with terrorists may be needed; there may be reason to avoid making this impossible by fixating too rigidly on moral imperatives and condemning all terrorists as unspeakable criminals.
The case for a morally neutral diplomacy remains more compelling than ever, for on closer inspection, it is also a case in favor a foreign policy based on clear moral values.
The Morality of Capital Punishment
The US is often criticized for its refusal to abolish capital punishment.
Many now claim that abolition of capital punishment is a precondition of a civilized criminal-law system.
Nobel laureate Gary Becker disagrees.
European governments are adamantly opposed to capital punishment – the European Union bans it outright – and some Europeans consider its use in the United States barbaric.
Indeed, many European intellectuals argue that not just capital punishment, but punishment in general, does not deter criminals.
But, whereas Europeans, with crime rates well below American rates for the past half-century, could long afford to be relatively “soft” on most crimes, they have seen their crime rates increase sharply during the past twenty years.
By contrast, American rates have fallen, in part because of greater use of punishment.
This includes capital punishment.
I support executing some people convicted of murder because – and only because – I believe that it deters other murders.
If I did not believe that, I would oppose capital punishment, because revenge and other possible motives should not be a basis for public policy.
Serious empirical research on capital punishment in the US began with a pioneering study by Isaac Ehrlich, published in 1975 in the American Economic Review.
Some subsequent studies have sometimes found a much weaker deterrent effect, while others have found a much stronger effect.
The available data are quite limited, however, so one should not base any conclusions solely on the econometric evidence.
Of course, public policy on any punishment cannot wait until the evidence is perfect.
But, even with the limited quantitative evidence available, there are good reasons to believe that capital punishment deters.
Most people, and murderers in particular, fear death, especially when it follows swiftly and with considerable certainty following the commission of a murder.
As David Hume put it in discussing suicide, “no man ever threw away life, while it was worth living.
For such is our natural horror of death…” Likewise, Schopenhauer believed that “as soon as the terrors of life reach a point at which they outweigh the terrors of death, a man will put an end to his life.
But the terrors of death offer considerable resistance…”
Opponents of capital punishment frequently proclaim that the state has no moral right to take anyone’s life, including that of the most reprehensible murderer.
Yet that is absolutely the wrong conclusion for anyone who believes that capital punishment deters.
To see why, suppose that for each murderer executed (instead of, say, receiving life imprisonment), the number of murders is reduced by three, which is a much lower number than Ehrlich’s and some other estimates of the deterrent effect.
This implies that for each murderer not executed, three innocent victims would die.
In fact, the government would indirectly be “taking” many lives if it did not use capital punishment.
Saving three innocent lives for every person executed seems like a very attractive trade-off, and even two lives saved per execution seems like a persuasive benefit-cost ratio for capital punishment.
Admittedly, however, the argument in favor of capital punishment becomes less clear-cut as the number of lives saved per execution falls.
But, even if only one life were saved per execution, the tradeoff might still be desirable if the life saved is much better than the life taken, which would usually be the case.
Many people object to comparing the quality of the life spared and the life taken.
Yet I do not see how to avoid such a comparison.
Consider a career criminal who robs and kills a victim who led a decent life and left several children and a spouse behind.
Suppose it would be possible to save the life of an innocent victim by executing such a criminal.
To me it is obvious that saving such a victim’s life must count for more than taking the criminal’s life.
Obviously, not all cases are so unambiguous, but a comparison of the qualities of individual lives must be part of any reasonable social policy.
This helps explain why capital punishment should be used only for murders, and not for lesser crimes.
When the tradeoff is between taking lives and, say, reducing property theft, the case for milder punishments is far stronger.
Although severe assaults, including some gruesome rapes, may approach some murders in severity, and might conceivably call for capital punishment, I do not support its use in these cases.
A powerful argument for reserving capital punishment for murders is “marginal deterrence.”
If assault were punished with execution, perpetrators would have an incentive to kill their victims to avoid discovery (which is a major reason why the severity of punishments more generally should be matched to the severity of crimes).
One complication is that capital punishment may make a murderer fight harder to avoid being captured, which could lead to more deaths.
But, while marginal deterrence is important, I believe the resistance of murderers to being captured, possibly at the expense of their own lives, is really indirect evidence that criminals do fear capital punishment.
Of course, I worry about the risk of executing the innocent.
My support for capital punishment would weaken greatly if the rate of killing innocent people were as large as that claimed by many.
However, I believe that the appeal process in the US offers enormous protection, not so much against wrongful conviction as against wrongful execution, so that there are very few, if any, documented cases of innocent people being killed.
And this process has been strengthened enormously with the development of DNA identification.
Again, the debate about capital punishment is essentially a debate about deterrence (which may be reduced by lengthy appeals).
I can understand that some people are skeptical about the evidence, although I believe they are wrong about both that and the common sense of the issue.
It is very disturbing to take someone’s life, even a murderer’s life, but sometimes highly unpleasant actions are necessary to prevent even worse behavior that takes the lives of innocent victims.
The Morality of Non-Proliferation
Nearly all the world’s nations are meeting in New York to review the Non-Proliferation Treaty.
The NPT was negotiated in the 1960’s after five countries (the United States, the Soviet Union, Britain, France, and China) developed nuclear weapons.
India, Pakistan, and Israel refused to join the treaty and, over time, constructed their own atomic bombs.
Now North Korea and Iran stand accused of violating their treaty commitments by pursuing nuclear weapons.
Aside from the legal issues, is there a moral case for non-proliferation?
In a world of sovereign states, is it hypocritical for some to have nuclear weapons and deny them to others?
If no one had the bomb today, it would be best if it were not invented.
But history depends on the paths that were taken in the past.
Suppose it were 1939, and states were debating whether the US should invent the bomb.
They might have argued that all should get it or none.
But if they knew that Hitler’s Germany would get it, they might have approved Franklin Roosevelt’s decision to develop it before the Nazis.
Besides, turning back the clock is impossible.
Even if all countries agree to disarm, some might cheat.
The successful cheaters would most likely be authoritarian states with little transparency.
After all, North Korea says that it has developed nuclear weapons despite having signed the NPT.
Libya was also a party to the NPT while it pursued a covert nuclear program.
If one regards impartiality and attention to consequences as essential to morality, one could imagine countries accepting the morality of unequal possession of nuclear weapons if certain conditions were met.
For example, the purposes should be limited to self- defense.
States possessing weapons should take special steps to reduce the prospect of their use.
The weapons should be used to help preserve the independence of all states, rather than for imperial aggrandizement, and steps should be taken to reduce arsenals as political conditions permit.
Today’s NPT comes close to reflecting such conditions.
Of course, the NPT does not rest solely on moral arguments, but primarily on self-interest and prudence.
Most states adhere because they believe that their security would be diminished if more states obtained nuclear weapons.
The treaty helps them to reduce fears of cheating by neighbors because it provides for inspections by the International Atomic Energy Agency.
The credibility of American security guarantees for its allies is one of the reasons that the bomb did not spread to 25 countries within a decade, as President John F. Kennedy once expected.
Non-proliferation is not hypocritical if it is based on an impartial and realistic estimation of risks.
But if a state like North Korea or Iran decides to accept such risks, should that be purely its own choice?
Perhaps, if the risks were borne solely by its own people, but they are not.
Third parties are justified in rejecting the risks that would be imposed upon them.
The history of proliferation shows that political chain reactions often occur – witness China, India, and Pakistan – and there are real fears that North Korea and Iran might trigger such chains in Northeast Asia and the Middle East.
Some people argue that nuclear proliferation will actually reduce risks.
Call it the “porcupine theory.”
In such a prickly world, no country would dare aggression.
But this assumes perfect rationality.
In the real world, accidents occur, so more proliferation means a greater chance of eventual inadvertent use, weaker capacity in managing nuclear crises, and greater difficulty in establishing controls and reducing the role of nuclear weapons in world politics.
In addition, the more states possess nuclear weapons, the greater the prospects that terrorists will gain access to them.
Of course, transnational terrorists usually have no “return address” that allows the threat of mutual deterrence to work, but North Korea or Iran has no moral right to impose this risk upon others.
Three European Union countries – Britain, France, and Germany – are trying to persuade Iran to give up its nuclear enrichment program, which would give it bomb material to use after a quick withdrawal from the treaty.
Iran claims a right to enrichment under Article 4 of the NPT, but that article has to be read in light of the other articles and of Iran’s past deception vis-à-vis the IAEA.
In East Asia, North Korea withdrew from the NPT after using it to disguise its weapons program, and China, America, Japan, Russia, and South Korea are trying to persuade Kim Jong Il’s regime to reverse course.
It seems right for these states to use pressure to dissuade Iran and North Korea from imposing new risks on the world.
But the existing nuclear weapons states also must be mindful of the moral conditions that underlie the NPT bargain.
The obligation under Article 6 to reduce arsenals cannot be interpreted to require prompt disarmament unless that would enhance stability.
Such conditions do not yet exist in a world where undemocratic states cheat on legal obligations.
But the nuclear weapons states should continue to reduce the role of nuclear weapons, and refrain from new programs that suggest the prospect of their use.
Given the dangers that increased risks imply for everyone, there is a strong moral case for a policy of stopping further proliferation rather than arguing that Iran or North Korea have a right to do whatever they wish as sovereign states.
But it is also important to remember that obligations of non-proliferation bind nuclear weapons states as well.
Why Pay More?
PRINCETON – When Radosław Sikorski, Poland’s foreign minister, went to Ukraine for talks last month, his Ukrainian counterparts reportedly laughed at him because he was wearing a Japanese quartz watch that cost only $165.
A Ukrainian newspaper reported on the preferences of Ukrainian ministers, several of whom have watches that cost more than $30,000.
Even a Communist member of Ukraine’s parliament, the Rada, was shown wearing a watch that retails for more than $6,000.
The laughter should have gone in the opposite direction.
Wouldn’t you laugh (maybe in private, to avoid being impolite) at someone who pays more than 200 times as much as you do, and ends up with an inferior product?
That is what the Ukrainians have done.
They could have bought an accurate, lightweight, maintenance-free quartz watch that can run for five years, keeping virtually perfect time, without ever being moved or wound.
Instead, they paid far more for clunkier watches that can lose minutes every month, and that will stop if you forget to wind them for a day or two (if they have an automatic mechanism, they will stop if you don’t move them).
In addition, the quartz watches also have integrated alarm, stopwatch, and timer functions that the other watches either lack, or that serve only as a design-spoiling, hard-to-read effort to keep up with the competition.
Why would any wise shopper accept such a bad bargain?
Out of nostalgia, perhaps?
A full-page ad for Patek Philippe has Thierry Stern, the president of the company, saying that he listens to the chime of every watch with a minute repeater that his company makes, as his father and grandfather did before him.
That’s all very nice, but since the days of Stern’s grandfather, we have made progress in time-keeping.
Why reject the improvements that human ingenuity has provided to us?
I have an old fountain pen that belonged to my grandmother; it’s a nice memento of her, but I wouldn’t dream of using it to write this column.
Thorstein Veblen knew the answer.
In his classic The Theory of the Leisure Class, published in 1899, he argued that once the basis of social status became wealth itself – rather than, say, wisdom, knowledge, moral integrity, or skill in battle – the rich needed to find ways of spending money that had no other objective than the display of wealth itself.
He termed this “conspicuous consumption.”
Veblen wrote as a social scientist, refraining from rendering moral judgments, though he left readers in little doubt about his attitude toward such expenditure in a time when many lived in poverty.
Wearing a ridiculously expensive watch to proclaim that one has achieved an elevated social standing seems especially immoral for a public official in a country where a significant portion of the population still lives in real poverty.
These officials are wearing on their wrists the equivalent of four or five years of an average Ukrainian’s salary.
That tells Ukrainian taxpayers either that they are paying their public servants too much, or that their public servants have other ways of getting money to buy watches that they would not be able to afford otherwise.
The Chinese government knows what those “other ways” might be.
As the International Herald Tribune reports, one aspect of the Chinese government’s campaign against corruption is a clampdown on expensive gifts.
As a result, according to Jon Cox, an analyst at Kepler Capital Markets, “it’s no longer acceptable to have a big chunky watch on your wrist.” The Chinese market for expensive watches is in steep decline.
Ukrainians, take note.
Wearing a watch that costs 200 times more than one that does a better job of keeping time says something else, even when it is worn by people who are not governing a relatively poor country.
Andrew Carnegie, the richest man of Veblen’s era, was blunt in his moral judgments.
“The man who dies rich,” he is often quoted as saying, “dies disgraced.”
We can adapt that judgment to the man or woman who wears a $30,000 watch or buys similar luxury goods, like a $12,000 handbag.
Essentially, such a person is saying;
“I am either extraordinarily ignorant, or just plain selfish.
If I were not ignorant, I would know that children are dying from diarrhea or malaria, because they lack safe drinking water, or mosquito nets, and obviously what I have spent on this watch or handbag would have been enough to help several of them survive; but I care so little about them that I would rather spend my money on something that I wear for ostentation alone.”
Of course, we all have our little indulgences.
I am not arguing that every luxury is wrong.
But to mock someone for having a sensible watch at a modest price puts pressure on others to join the quest for ever-greater extravagance.
That pressure should be turned in the opposite direction, and we should celebrate those, like Sikorski, with modest tastes and higher priorities than conspicuous consumption.
The Moral Vulnerability of Markets
LONDON &#45;&#45; Today, there seems to be no coherent alternative to capitalism, yet anti-market feelings are alive and well, expressed for example in the moralistic backlash against globalization.
Because no social system can survive for long without a moral basis, the issues posed by anti-globalization campaigners are urgent – all the more so in the midst of the current economic crisis.
It is hard to deny some moral value to the market.
After all, we attach moral value to processes as well as outcomes, as in the phrase “the end does not justify the means.”
It is morally better to have our goods supplied by free labor than by slaves, and to choose our goods rather than have them chosen for us by the state.
The fact that the market system is more efficient at creating wealth and satisfying wants than any other system is an additional bonus.
Moral criticisms of the market focus on its tendency to favor a morally deficient character type, to privilege disagreeable motives, and to promote undesirable outcomes.
Capitalism is also held to lack a principle of justice.
Consider character.
It has often been claimed that capitalism rewards the qualities of self-restraint, hard-work, inventiveness, thrift, and prudence.
On the other hand, it crowds out virtues that have no economic utility, like heroism, honor, generosity, and pity.
(Heroism survives, in part, in the romanticized idea of the “heroic entrepreneur.”)
The problem is not just the moral inadequacy of the economic virtues, but their disappearance. Hard work and inventiveness are still rewarded, but self-restraint, thrift, and prudence surely started to vanish with the first credit card.
In the affluent West, everyone borrows to consume as much as possible.
America and Britain are drowning in debt.
Adam Smith wrote that “consumption is the sole end and purpose of production.” But consumption is not an ethical aim.
It is not positively good to have five cars rather than one.
You need to consume in order to live, and to consume more than you strictly need in order to live well.
This is the ethical justification for economic development.
From the ethical point of view, consumption is a means to goodness, and the market system is the most efficient engine for lifting people out of poverty: it is doing so at a prodigious rate in China and India.
But this does not tell us at what point consumption tips us into a bad life.
If people want more pornography or more drugs, the market allows them to consume these goods to the point of self-destruction.
It oversupplies some goods that are morally harmful, and undersupplies goods that are morally beneficial.
For quality of life, we have to rely on morals, not markets.
No doubt it is unfair to blame the market for bad moral choices.
People can decide when to stop consuming or what they want to consume.
But the market system relies on a particular motive for action – Keynes called it “love of money” – which tends to undermine traditional moral teaching.
The paradox of capitalism is that it converts avarice, greed, and envy into virtues.
We are told that capitalism discovers wants that people did not realize they had and thus moves humanity forward.
But it is truer to say that the market economy is sustained by the stimulation of greed and envy through advertising.
In a world of ubiquitous advertising, there is no natural limit to the hunger for goods and services.
The final moral issue is capitalism’s lack of a principle of justice.
In a perfectly competitive market, with full information, models of the market show that all the factors of production receive rewards equal to their marginal products, i.e., all are paid what they are worth.
The full competition and information requirements ensure that all contracts are uncoerced (there is no monopoly power) and all expectations are fulfilled, i.e., people get what they want.
Justice in distribution is supposedly secured by justice in exchange.
But no actually existing capitalist market system spontaneously generates justice in exchange.
There is always some monopoly power, insiders have more information than outsiders, ignorance and uncertainty are pervasive, and expectations are frequently disappointed.
Justice in exchange has to be supplied from outside the market.
Moreover, the endowments that people bring with them to the market include not just their own innate qualities, but their starting positions, which are radically unequal.
That is why the liberal theory of justice demands at a minimum equality of opportunity: the attempt – as far as is compatible with personal liberty – to eliminate all those differences in life chances arising from unequal starting points.
As a result, we rely on the state to provide social goods like education, housing, and health care.
Finally, the claim that everyone is – under ideal conditions – paid what they are worth is an economic, not a moral, valuation.
It does not conform to our moral intuition that a CEO should not be paid 500 times the average wage of his workers, or to our belief that if someone’s market-clearing wage is too low to support life, he should not be allowed to starve to death.
As our societies have become richer, we have come to believe that everyone is entitled to a minimum standard, whether in work or sickness or unemployment, which allows for a continuing level of comfort and flourishing.
The market system does not guarantee this.
While the market today has no serious challenger, it is morally vulnerable.
It has become dangerously dependent on economic success, so that any large-scale economic failure will expose the shallowness of its moral claims.
The solution is not to abolish markets, but to re-moralize wants.
The simplest way of doing this is to restrict advertising.
This would prune the role of greed and envy in the operation of markets, and create room for the flourishing of other motives.
The Morning After Israel’s Vote
TEL AVIV— “The voters”, said Binyamin Netanyahu in his strange victory speech, during Israel’s bizarre post-election night, “have spoken.” And so they have, in a multiplicity of self-contradictory voices.
Welcome to the mad world of Israeli parliamentary democracy.
The world’s most multifarious political system has just crashed-landed into a dead-end.
A local joke claims that Israelis have more parties than voters.
If other democracies boast Right, Center and Left, we have Jewish and Arab parties, secular and religious, peacenik and hard-line, socialist and free-market.
Each group is finely divided among itself in a dynamic crisscross of creeds and interests, ideals and appetites.
What is a paradise for political scientists is a nightmare for anyone trying to rule the country in earnest.
But these elections have brought Israel to the mother of all deadlocks.
Therein may lie a blessing in disguise, but the curses are more obvious.
The greatest curse is Israel’s inability to raise a leadership strong enough to make peace.
Even weak prime ministers can wage war, but it takes a Menachem Begin or a Yitzhak Rabin to go the opposite way.
Such leaders are thin on the ground, and the electoral system is partially to blame.
Israel has lost its few capable leaders – Sharon alongside Begin and Rabin - to assorted calamities.
Other prime ministers, who win elections by a whisker, end up with cat-and-dog coalitions.
For years, this democracy hobbled on stilts, with big and small parties shooting up, crashing down, vanishing and reincarnating time and again.
Few governments lived to their natural term of four years.
Right and Left swapped seniority around a barely-existent central pole.
Even Ariel Sharon’s break from Likud and the establishment of Kadima, a genuine embodiment of moderate Middle Israel, did not undo the stalemate.
Take the brand new political map: Tzipi Livni’s Kadima with 28 Knesset seats, Binyamin Netanyahu’s Likud with 27, both leaders giving triumphal orations during one dizzy night. ampquot;Tzippyampquot; claims victory for leading the largest party, ampquot;Bibiampquot; for heading the largest bloc.
He has a point, of course: all six right-of-center parties, often at each other’s throats, are behind his candidacy.
But she has a point, too: Kadima won more seats than Likud, disproved prophecies of doom, and emerged as the only major party with an optimistic and peace-seeking message.
This election’s maverick, Russian-born, secular and hawkish Avigdor Lieberman, got 15 seats for his hardline Yisrael Beitenu party.
In the wake of the Gaza war Lieberman deftly rode a hawkish tide, demanding ‘declarations of loyalty’ from Israel’s Arab citizens.
He is now likely to act as kingmaker, propping the underperforming Netanyahu with a solid right-of-center bloc.
Ehud Barak’s Labor follows with a 13-seat low.
Unless it teams up with Kadima, Likud, or both, Labor will head for soul-searching in the desert.
It will not die any time soon: in the Israeli aviary both doves and hawks are capable phoenixes.
If the numbers seem too small for the major players, here’s the catch: Knesset’s 120 seats will fill up smaller parties, each comprising anything from two to 11 fervent politicos.
Arab parties are among them, as well as fractions of the far right and left.
Thus have Knessets been comprised from Israel’s beginning: the messier the merrier. Never before, however, have the major parties stalemated so neatly.
So will Livni or Netanyahu be called by the President and charged with building a new government?
Shimon Peres, seasoned political wizard that he is, could give his largely ceremonial role a fresh edge by helping all sides out of the muddle.
Peres could, for example, make both Livni and Netanyahu prime ministers, using a two-year rotation formula.
Thus, Israel might scrabble out of the present political mud through job-sharing at the top.
Alternatively, Livni could concede victory to Netanyahu despite her small electoral advantage, serve in his government, and pull her weight in favor of moderation.
Livni, at last widely accepted as a leader worth her salt, spoke loudly of peace with the Palestinians in the last day of her campaign. It did her no harm at the ballot box.
She embodies the meager good news of this election: Middle Israel is alive and large, though not as effective as it could be.
Tel Aviv, who voted Livni and Left of her, should finally be able to stand up to Jerusalem, who voted Netanyahu and Right of him.
This election may sound a wake-up call to the moderates, and Livni is their tested leader.
Even more important is the constitutional wake-up call.
All three major leaders now agree on the need to revise the ramshackle political system.
Even Israelis, they say, should be able to work in a two-party system.
Okay, three parties.
To be realistic, call it five.
But that’s that.
Israel must learn to speak in fewer political tongues.
It’s the only way out of a dangerous impasse at a dangerous historical moment.
Its democracy would not grow weaker by becoming tidier: rather, it would grow up.
Fewer choices are sometimes the hallmark of maturity, and not only in politics.
Is it doable?
Yes.
Plans for constitutional reform are already on the table.
The bigger parties must ignore the vested interests of their junior partners, go back to the drawing board, and raise the Knesset entry-level substantially.
Voters will learn to compromise, replacing tailor-made niche-parties with a couple of solid off-the-shelf options.
Prime ministers will be able to rule full-term with comfortable majorities.
Difficult decisions will at last be made rather than quirkily postponed: on the peace with the Palestinian and with Syria, on the economy, on social justice, on education.
Only then would Israel be able to speak to the world, especially to its Arab neighbors, in a clear and practical voice.
I hope, but cannot promise, that it would be the well-tempered voice of Middle Israel.
The Mosque and Its Enemies
WASHINGTON, DC – Opposition to plans to build a mosque near “Ground Zero,” the spot where the World Trade Center’s twin towers fell on September 11, 2001, comes in various shades.
To their credit, many of the project’s opponents have avoided the crass bigotry that is becoming a standard trait of right-wing discourse in the United States.
But even moderate critics of the mosque (actually an Islamic cultural center with a prayer room called Park 51) betray in their arguments two assumptions that are as questionable as they are ingrained in the prevailing public discourse in the US.
The first of these misbegotten assumptions is to underrate social intolerance as a threat to freedom.
While accepting the project’s impeccable legal credentials, its opponents nevertheless demand that it be relocated on the grounds that even fully lawful conduct may be offensive to a group of citizens.
This is a dangerous road to take in a liberal society.
More than 150 years ago, in his essay On Liberty, John Stuart Mill demolished the belief that the quest for individual freedom is, above all, a struggle against the state.
This belief still features prominently in the rhetorical arsenal of US conservatives, notably in the inflamed proclamations of the Tea Party movement.
But, as any member of a historically persecuted community – from gays to Jews to Roma – can attest, social intolerance may curtail civil rights as much as any law.
Indeed, up until the 1967 Supreme Court ruling that struck down anti-miscegenation laws throughout the US, interracial marriages were an oddity even where they were legally allowed.
A majority considered them offensive, and therefore expected interracial couples to show what is demanded today from Muslims in Manhattan: respect for other people’s sensitivities.
In a nation of laws, such as the US, it is disingenuous and unfair to grant legal protection to a right – in this case the right to worship God as we see fit – and then selectively ban its exercise de facto because a majority or minority takes offense.
Thus, the strident calls to stop the Park 51 project are as serious a threat to freedom as an outright legal ban.
If Muslims are not to be allowed to build anything Islamic anywhere near Ground Zero, let those who feel insulted strive to change the law through an open democratic process in which the reasons for a legal ban can be argued openly and without fig leafs.
Democracy demands no less.
The second, more invidious assumption of the opponents of Park 51 concerns what happened in September 2001.
Some of the project’s adversaries claim that it must be stopped because it will be a tribute to the perpetrators of a despicable deed.
Underlying this argument is the idea that the attack was an explicitly religious act carried out by an enemy faith, whose believers – even those who denounced the atrocity – are tainted and deserve to have their constitutional rights restricted.
Feeling uncomfortable with this rationale, other opponents deny the religious nature of the dispute and make clear that theirs is not a quarrel with Islam.
Instead, they couch their opposition to Park 51 in terms of sensitivity to the aggrieved.
Of course, if their reasoning were followed to its logical conclusion, allowing the project to be built would be the most robust statement that this dispute really does not have anything to do with religion.
The real problem, however, lies elsewhere.
For the moment one stops seeing the terrorist attacks of 2001 as a purely religious statement, one is forced to confront the elephant in the room: the attacks were, in essence, a political statement.
At its root it is possible to find concrete US government decisions made over the years, from nurturing alliances with corrupt and authoritarian Middle Eastern regimes to maintaining a conspicuous military presence in Saudi Arabia and showing a general obliviousness to the plight of Palestinians in the occupied territories.
The policies that resulted from these decisions may or may not be necessary for America’s long-term security interests, but it is undeniable that they have fueled a backlash in the Muslim world which has, on occasion, reared its head in murderous ways.
In any case, disputes over these policies are far from a theological conflict.
For nearly a decade, any attempt to recast the debate about the events of September 11, 2001, away from the prevailing theological narrative has been depicted as subversive and unpatriotic.
One only has to recall the vitriol visited upon Rev. Jeremiah Wright during the last presidential campaign for his now infamous sermon in which he said that, with the attacks, the chickens of US foreign policy had come home to roost.
It is possible to disagree with Wright and his ilk, but it is hardly disputable that public debate in the US has systematically failed to engage in a serious discussion about the disturbing political issues that lurk beneath – although never justify – those attacks.
Perhaps that is why most opponents of Park 51 have sought refuge in the religious narrative of the terrorist attacks.
After all, it is a narrative that, while demanding a suspension of one’s critical faculties, bestows an unmitigated blessing upon those purportedly fighting on the side of light.
The other option – that US policy was in the terrorists’ crosshairs – is too upsetting for these opponents to contemplate.
We can only hope that the American public will reject not just the insistent calls to derail the construction of the Park 51 project, but also the contested assumptions that underpin opposition to it.
Doing so would re-affirm American freedom and tolerance, and make the US a stronger and more respected actor abroad.
The Mugabe of Latin America
MANAGUA – Like thousands of Nicaraguans, I voted for Managua’s mayor in local elections last November.
After the voting, the authorities of my jurisdiction posted a copy of the certificate of results on the door of the Electoral Board, which registered 155 votes for the opposition candidate, 76 votes for the candidate of the Sandinista National Liberation Front (FSLN) and two votes for other candidates.
The next day, however, the results from my board were not included on the Supreme Electoral Board (CSE) Web site with the results of Managua, and victory was awarded to the FSLN candidate.
It has taken months to find this out, but the same thing happened in 660 other local boards: roughly 120,000 votes – 30% of the total – were never made public.
If the results of these boards had been counted, the opposition would have won the capital’s mayoralty by a wide margin.
This month, the new mayors took office without the electoral commission (CSE) having made public 100% of the votes, an open violation of Nicaraguan electoral law.
Although the electoral fraud in Managua was the most widely documented, the same modus operandi occurred across the country, affecting more than 40 municipalities.
Despite complaints from the Episcopal Conference of the Catholic Church, chambers of commerce and political parties, the CSE has refused to allow a recount of the ballots or scrutiny by impartial observers.
And, when citizens protested peacefully, the government resorted to violence to curb them.
Thus, the FSLN government proclaimed itself winner in 109 of the 153 municipalities.
This culminated a process of electoral fraud that began five months earlier with the suspension of the legal standing of the opposition Conservative Party and the Sandinista Renewal Movement, a rival to President Daniel Ortega’s FSLN.
National and international observers were barred from monitoring the vote until the last moment.
Until November, Nicaragua was on the way to developing a healthy electoral tradition, backed by high levels of participation.
Ironically, the democratic opening began with Ortega, who unintentionally inaugurated an era of electoral competition when he lost power in 1990.
But the stolen local elections that took place last autumn have set the country back 50 years, to the time of the Somoza dictatorship.
As a result, politics in Nicaragua is fraying dangerously once more.
And the international community, which provides almost a third of the resources needed to make the country work, is being alienated.
Why did Ortega decide to steal the municipal elections, despite the risks this fraud has imposed on his government?
The only plausible explanation is the need to clear the way for his re-election as president, whatever the cost.
Unlike presidents Hugo Chávez in Venezuela or Evo Morales in Bolivia, who came to power by majority vote, Ortega regained Nicaragua’s presidency in 2007 despite securing only 38% of the vote in the first round of polling.
He crossed the majority threshold only because of a pact he made with former president Arnoldo Alemán, once Ortega’s rival, who was in jail at the time for corruption.
Two years into his term, Ortega needed to win majorities in the local elections in order to impose a constitutional reform that will allow him to seek a second consecutive term.
Had he failed to win in the capital and the country’s principal cities, he would have had to recognize the failure of his authoritarian political model, which has also had no success in reducing poverty.
So Ortega ran the risk of committing electoral fraud, and now the country is paying the price.
The European Union has suspended $70 million in aid.
The outgoing American administration froze $64 million of assistance, leaving a final decision on what to do to the new Obama administration.
But, despite its international isolation and its domestic discredit, Ortega’s has nonetheless renewed his pact with Alemán to preserve his misrule.
Last month, the Supreme Court of Justice acquitted Alemán of the corruption charges that had sent him to prison for 20 years.
An hour later, Alemán returned Ortega’s favor with interest: his representatives gave Ortega’s Sandinistas control of parliament, putting an end to the legislative paralysis caused by the protests against the electoral fraud.
In allying himself with Alemán’s forces, Ortega has only bought himself time to work out a response to the approaching economic disaster brought on by the world recession.
But he has lost the battle for political legitimacy.
The benefit of the doubt that had been granted to his administration up to now has been forfeited.
Fortunately for Latin America, there is little indication that Sandinista-style electoral fraud is spreading.
The case of Ortega – who Europeans are already calling the Mugabe of Latin America – seems, instead, to be an exception.
And it should be remembered that Latin America’s most recent electoral fraudsters – Manuel Noriega of Panama in 1989 and Alberto Fujimori in Peru in 2000 – were evicted from power before finishing their terms in office.
The Muslim Civil War
Is the Sunni-Shia divide in the Middle East now deeper than the antagonism between Israel and the Arabs?
You might think so given the response of some Arab governments to Hezbollah’s decision to attack Israel.
Even as Israeli bombs fell on Beirut and Tyre, Saudi Arabia, perhaps the most conservative Arab Muslim state of all, openly condemned the actions of the Shia Hezbollah in instigating conflict with Israel.
Never before in the history of the Arab-Israeli conflict has a state that considers itself a leader of the Arab Muslim peoples backed Israel so openly.
Moreover, Saudi Arabia’s breach with Hezbollah is not a one-time occurrence.
Egypt and Jordan have also roundly condemned Hezbollah and its leader, Sheik Hassan Nasrallah, for their adventurism.
What is behind this stunning development?
Are we seeing a fundamental shift in relations between Arab nationalism and Islamic sectarianism?
Is Saudi Arabia’s Sunni government more concerned and frightened by Shia Islam than it is committed to Arab unity and the Palestinian cause?
Arab denunciations of Hezbollah suggest that the Muslim sectarian divide, already evident in the daily violence in Iraq, is deepening and intensifying across the Middle East.
President George W. Bush’s desire to shatter the Arab world’s frozen societies was meant to pit the forces of modernization against the traditional elements in Arab and Islamic societies.
Instead, he appears to have unleashed the region’s most atavistic forces.
Opening this Pandora’s Box may have ushered in a new and even uglier era of generalized violence, perhaps what can only be called a “Muslim Civil War.”
The Shia-Sunni divide has existed from the dawn of Islam, but the geographical and ethnic isolation of non-Arab Shiite Iran, together with Sunni Arab countries’ dominance of their Shia minorities, mostly kept this rivalry in the background.
These tensions further receded in the tide of the “Islamization” created by the Iranian revolution, for in its wake Arabs’ sectarian identity as Sunni was pushed further into the background as a generalized “Islamic” assertiveness appeared.
That all changed when Al Qaeda, a Sunni terrorist force that draws heavily on Saudi Wahabbi ideology and personnel, launched its attacks on America in September 2001.
A specifically Sunni brand of militant Islam was now on the march.
When the United States initiated wars on both the Sunni Taliban in Afghanistan and the Sunni Iraqi regime, this new radical Sunni strain became even more emboldened.
The region’s newly assertive Sunni Arabs perceive Israel and the West as being only one threat, the other comprising the so-called “Shia crescent” – the arc of land extending from Lebanon to Iran through Syria and Iraq that is inhabited by the allegedly heretical Shia.
Saudi Arabia’s rulers, as custodians of the Muslim faith’s holiest places in Mecca and Medina, perhaps feel this threat most keenly.
In Sunni eyes, the Shia not only dominate the oil-rich areas of Iran, Iraq, and the eastern region of Saudi Arabia, but are – through the actions of Hezbollah – attempting to usurp the role of “protector” of the central dream of all Arabs, the Palestinian cause.
It is because the Saudi royal family derives its legitimacy from a strict form of Sunni Islam and doubts the loyalty of its Shia population that the Kingdom has turned on Hezbollah.
Ironically, it is America, Saudi Arabia’s longtime protector, which made Shia empowerment possible by overthrowing Saddam Hussein and bringing Shiite parties to power in Iraq.
The Bush administration seems to recognize what it has done; as the Shia arc rises in the east of the Arab Muslim world, the US is attempting to strengthen its protection of the Sunni arc – Egypt, Jordan, and Saudi Arabia – in the region’s west.
Israel, the once implacable enemy of the Arab cause, now seems to be slotted into this defensive structure.
But such a defensive posture is bound to be unstable, due to pan-Arab feelings. Today, ordinary Saudi citizens are glued to Al Jazeera and other Arab satellite TV networks to follow events in Gaza and south Lebanon.
They see Arab (not Shiite) blood being shed, with only Hezbollah fighting back.
In their eyes, Hezbollah has become a heroic model of resistance.
This is causing the Saudi state to deepen the Sunni-Shia schism.
Following the Kingdom’s official denunciation of Hezbollah, the Saudi state called on its official Wahhabi clerics to issue fatwas condemning Hezbollah as Shiite deviants and heretics.
Such condemnations can only sharpen sectarian divisions within Saudi Arabia and the region.
As these antagonisms deepen, will the Sunni regimes come to believe that they need their own Hezbollah to fight in their corner?
If that is what they conclude, they need not look far, for many such fighters have already have been trained – by Al Qaeda.
Lives versus Profits
NEW YORK – The United States Supreme Court recently began deliberations in a case that highlights a deeply problematic issue concerning intellectual-property rights.
The Court must answer the following question: Can human genes – your genes – be patented?
Put another way, should someone essentially be permitted to own the right, say, to test whether you have a set of genes that imply a higher than 50% probability of developing breast cancer?
To those outside the arcane world of intellectual-property rights, the answer seems obvious: No.
You own your genes.
A company might own, at most, the intellectual property underlying its genetic test; and, because the research and development needed to develop the test may have cost a considerable amount, the firm might rightly charge for administering it.
But a Utah-based company, Myriad Genetics, claims more than that.
It claims to own the rights to any test for the presence of the two critical genes associated with breast cancer – and has ruthlessly enforced that right, though their test is inferior to one that Yale University was willing to provide at much lower cost.
The consequences have been tragic: Thorough, affordable testing that identifies high-risk patients saves lives.
Blocking such testing costs lives. Myriad is a true example of an American corporation for which profit trumps all other values, including the value of human life itself.
This a particularly poignant case.
Normally, economists talk about trade-offs: weaker intellectual-property rights, it is argued, would undermine incentives to innovate.
The irony here is that Myriad’s discovery would have been made in any case, owing to a publicly funded, international effort to decode the entire human genome that was a singular achievement of modern science.
The social benefits of Myriad’s slightly earlier discovery have been dwarfed by the costs that its callous pursuit of profit has imposed.
More broadly, there is increasing recognition that the patent system, as currently designed, not only imposes untold social costs, but also fails to maximize innovation – as Myriad’s gene patents demonstrate.
After all, Myriad did not invent the technologies used to analyze the genes.
If these technologies had been patented, Myriad might not have made its discoveries.
And its tight control of the use of its patents has inhibited the development by others of better and more accurate tests for the presence of the gene.
The point is a simple one: All research is based on prior research.
A poorly designed patent system – like the one we have now – can inhibit follow-on research.
That is why we do not allow patents for basic insights in mathematics.
And it is why research shows that patenting genes actually reduces the production of new knowledge about genes: the most important input in the production of new knowledge is prior knowledge, to which patents inhibit access.
Fortunately, what motivates most significant advances in knowledge is not profit, but the pursuit of knowledge itself.
This has been true of all of the transformative discoveries and innovations – DNA, transistors, lasers, the Internet, and so on.
A separate US legal case has underscored one of the main dangers of patent-driven monopoly power: corruption.
With prices far in excess of the cost of production, there are, for example, huge profits to be gained by persuading pharmacies, hospitals, or doctors to shift sales to your products.
The US Attorney for the Southern District of New York recently accused the Swiss pharmaceutical giant Novartis of doing exactly this by providing illegal kickbacks, honoraria, and other benefits to doctors – exactly what it promised not to do when it settled a similar case three years earlier.
Indeed, Public Citizen, a US consumer advocacy group, has calculated that, in the US alone, the pharmaceutical industry has paid out billions of dollars as a result of court judgments and financial settlements between pharmaceutical manufacturers and federal and state governments.
Sadly, the US and other advanced countries have been pressing for stronger intellectual-property regimes around the world.
Such regimes would limit poor countries’ access to the knowledge that they need for their development – and would deny life-saving generic drugs to the hundreds of millions of people who cannot afford the drug companies’ monopoly prices.
The issue is coming to a head in ongoing World Trade Organization negotiations.
The WTO’s intellectual-property agreement, called TRIPS, originally foresaw the extension of “flexibilities” to the 48 least-developed countries, where average annual per capita income is below $800.
The original agreement seems remarkably clear: the WTO shall extend these “flexibilities” upon the request of the least-developed countries.
While these countries have now made such a request, the US and Europe appear hesitant to oblige.
Intellectual-property rights are rules that we create – and that are supposedto improve social well-being.
But unbalanced intellectual-property regimes result in inefficiencies – including monopoly profits and a failure to maximize the use of knowledge – that impede the pace of innovation.
And, as the Myriad case shows, they can even result in unnecessary loss of life.
America’s intellectual-property regime – and the regime that the US has helped to foist upon the rest of the world through the TRIPS agreement – is unbalanced.
We should all hope that, with its decision in the Myriad case, the Supreme Court will contribute to the creation of a more sensible and humane framework.
The Myth of Authoritarian Growth
CAMBRIDGE – On a recent Saturday morning, several hundred pro-democracy activists congregated in a Moscow square to protest government restrictions on freedom of assembly.
They held up signs reading “31,” in reference to Article 31 of the Russian constitution, which guarantees freedom of assembly.
They were promptly surrounded by policemen, who tried to break up the demonstration.
A leading critic of the Kremlin and several others were hastily dragged into a police car and driven away.
Events like this are an almost daily occurrence in Russia, where Prime Minister Vladimir Putin rules the country with a strong hand, and persecution of the government’s opponents, human-rights violations, and judicial abuses have become routine.
At a time when democracy and human rights have become global norms, such transgressions do little to enhance Russia’s global reputation.
Authoritarian leaders like Putin understand this, but apparently they see it as price worth paying in order to exercise unbridled power at home.
What leaders like Putin understand less well is that their politics also compromise their countries’ economic future and global economic standing.
The relationship between a nation’s politics and its economic prospects is one of the most fundamental – and most studied – subjects in all of social science.
Which is better for economic growth – a strong guiding hand that is free from the pressure of political competition, or a plurality of competing interests that fosters openness to new ideas and new political players?
East Asian examples (South Korea, Taiwan, China) seem to suggest the former.
But how, then, can one explain the fact that almost all wealthy countries – except those that owe their riches to natural resources alone – are democratic?
Should political openness precede, rather than follow, economic growth?
When we look at systematic historical evidence, instead of individual cases, we find that authoritarianism buys little in terms of economic growth.
For every authoritarian country that has managed to grow rapidly, there are several that have floundered.
For every Lee Kuan Yew of Singapore, there are many like Mobutu Sese Seko of the Congo.
Democracies not only out-perform dictatorships when it comes to long-term economic growth, but also outdo them in several other important respects.
They provide much greater economic stability, measured by the ups and downs of the business cycle.
They are better at adjusting to external economic shocks (such as terms-of-trade declines or sudden stops in capital inflows).
They generate more investment in human capital – health and education.
And they produce more equitable societies.
Authoritarian regimes, by contrast, ultimately produce economies that are as fragile as their political systems.
Their economic potency, when it exists, rests on the strength of individual leaders, or on favorable but temporary circumstances.
They cannot aspire to continued economic innovation or to global economic leadership.
At first sight, China seems to be an exception.
Since the late 1970’s, following the end of Mao’s disastrous experiments, China has done extremely well, experiencing unparalleled rates of economic growth.
Even though it has democratized some of its local decision-making, the Chinese Communist Party maintains a tight grip on national politics and the human-rights picture is marred by frequent abuses.
But China also remains a comparatively poor country.
Its future economic progress depends in no small part on whether it manages to open its political system to competition, in much the same way that it has opened up its economy.
Without this transformation, the lack of institutionalized mechanisms for voicing and organizing dissent will eventually produce conflicts that will overwhelm the capacity of the regime to suppress.
Political stability and economic growth will both suffer.
Still, Russia and China are both large and powerful economies.
Their example can sway leaders elsewhere to think that they can aspire to economic ascendancy while tightening the screws on domestic political opposition.
Consider Turkey, a rising economic power in the Middle East that seemed destined until recently to become the region’s sole Muslim democracy.
During his first term in office, Prime Minister Recep Tayyip Erdogan relaxed some restrictions on Kurdish minorities and passed reforms that aligned the country’s legal regime with European norms.
But more recently Erdogan and his allies have launched a thinly disguised campaign to intimidate their opponents and cement government control over the media and public institutions.
They have incarcerated hundreds of military officers, academics, and journalists on fabricated charges of fomenting terror and plotting coups.
So widespread is wiretapping and harassment of Erdogan’s critics that some believe the country has turned into a “republic of fear.”
This turn towards authoritarianism bodes ill for the Turkish economy, despite its strong fundamentals.
It will have corrosive effects on the quality of policymaking, as well as undermine Turkey’s claim to global economic standing.
For the true up-and-coming economic superpowers, we should turn instead to countries like Brazil, India, and South Africa, which have already accomplished their democratic transitions and are unlikely to regress.
None of these countries is without problems, of course.
Brazil has yet to recover fully its economic dynamism and find a path to rapid growth.
India’s democracy can be maddening in its resistance to economic change.
And South Africa suffers from a shockingly high level of unemployment.
Yet these challenges are nothing compared to the momentous tasks of institutional transformation that await authoritarian countries.
Don’t be surprised if Brazil leaves Turkey in the dust, South Africa eventually surpasses Russia, and India outdoes China.
The Myth of Chinese Meritocracy
CLAREMONT, CALIFORNIA – Political scandals sometimes perform a valuable function in cleansing governments.
They destroy the political careers of individuals of dubious character.
More importantly, they can debunk political myths central to the legitimacy of some regimes.
That appears to be the case with the Bo Xilai affair in China.
One enduring political myth that went down with Bo, the former Communist Party boss of Chongqing municipality, is the notion that the Party’s rule is based on meritocracy.
In many ways, Bo personified the Chinese concept of “meritocracy” – well-educated, intelligent, sophisticated, and charming (mainly to Western executives).
But, after his fall, a very different picture emerged.
Aside from his alleged involvement in assorted crimes, Bo was said to be a ruthless apparatchik, endowed with an outsize ego but no real talent.
His record as a local administrator was mediocre.
Bo’s rise to power owed much to his pedigree (his father was a vice premier), his political patrons, and his manipulation of the rules of the game.
For example, visitors to Chongqing marvel at the soaring skyscrapers and modern infrastructure built during Bo’s tenure there.
But do they know that Bo’s administration borrowed the equivalent of more than 50% of local GDP to finance the construction binge, and that a large portion of the debt will go unpaid?
Unfortunately, Bo’s case is not the exception in China, but the rule.
Contrary to the prevailing perception in the West (especially among business leaders), the current Chinese government is riddled with clever apparatchiks like Bo who have acquired their positions through cheating, corruption, patronage, and manipulation.
One of the most obvious signs of systemic cheating is that many Chinese officials use fake or dubiously acquired academic credentials to burnish their resumes.
Because educational attainment is considered a measure of merit, officials scramble to obtain advanced degrees in order to gain an advantage in the competition for power.
The overwhelming majority of these officials end up receiving doctorates (a master’s degree won’t do anymore in this political arms race) granted through part-time programs or in the Communist Party’s training schools.
Of the 250 members of provincial Communist Party standing committees, an elite group including party chiefs and governors, 60 claim to have earned PhDs.
Tellingly, only ten of them completed their doctoral studies before becoming government officials.
The rest received their doctorates (mostly in economics, management, law, and industrial engineering) through part-time programs while performing their duties as busy government officials.
One managed to complete his degree in a mere 21 months, an improbable feat, given that course work alone, without the dissertation, normally requires at least two years in most countries’ doctoral programs.
If so many senior Chinese officials openly flaunt fraudulent or dubious academic degrees without consequences, one can imagine how widespread other forms of corruption must be.
Another common measure used to judge a Chinese official’s “merit” is his ability to deliver economic growth.
On the surface, this may appear to be an objective yardstick.
In reality, GDP growth is as malleable as an official’s academic credentials.
Inflating local growth numbers is so endemic that reported provincial GDP growth data, when added up, are always higher than the national growth data, a mathematical impossibility.
And, even when they do not doctor the numbers, local officials can game the system in another way.
Because of their relatively short tenure in one position before promotion (less than three years, on average, for local mayors), Chinese officials are under enormous pressure to demonstrate their ability to produce economic results quickly.
One sure way of doing so is to use financial leverage, typically by selling land or using land as collateral to borrow large sums of money from often-obliging state-owned banks, to finance massive infrastructure projects, as Bo did in Chongqing.
The result is promotion for such officials, because they have delivered quick GDP growth.
But the economic and social costs are very high.
Local governments are saddled with a mountain of debt and wasted investments, banks accumulate risky loans, and farmers lose their land.
Worse, as competition for promotion within the Chinese bureaucracy has escalated, even fake academic credentials and GDP growth records have become insufficient to advance one’s career.
What increasingly determines an official’s prospects for promotion is his guanxi, or connections.
Based on surveys of local officials, patronage, not merit, has become the most critical factor in the appointment process.
For those without guanxi, the only recourse is to purchase appointments and promotions through bribes.
In the Chinese parlance, the practice is called maiguan, literally “buying office.”
The official Chinese press is full of corruption scandals of this type.
Given such systemic debasement of merit, few Chinese citizens believe that they are governed by the best and the brightest.
But astonishingly, the myth of a Chinese meritocracy remains very much alive among Westerners who have encountered impressively credentialed officials like Bo.
The Myth of Decoupling
PALO ALTO, CALIF. &#45;&#45; The fact that America’s economy is slowing is bad news for Europeans, regardless of claims that Europe’s economy has successfully decoupled itself from the United States.
Decoupling is an idea that is based on bad economics – and on some Europeans’ reluctance to accept the fact that Europe’s short but sweet economic expansion is also coming to an end.
True, the US market has become less important for European exports, while Asia’s trade significance for Europe has grown.
So what?
Trade is just one among the many linkages between the US and European economies that matter.
In today’s inter-connected global economy, uncertainty about the US economic outlook increases one day, and Dutch consumer confidence, for example, takes a tumble the next.
The links between Europe and America are, frankly, much more complex than the advocates of decoupling appreciate.
The US Federal Reserve, for example, is aggressively cutting interest rates to forestall a possible recession.
As a consequence, the euro is rising not only against the US dollar, but also against Asian currencies, whose central banks intervene in foreign exchange markets to fix their currencies’ value against the dollar.
This damages European exports to both the US and Asia.
Reduced European dependence on the US export market can hardly protect Europe from the effects of the US economic slowdown if the euro appreciates as much against the key Asian currencies as it has against the dollar.
The decoupling argument also assumes that recession in America has no effect on Asia.
This is nonsense.
Asian income certainly will decline if Asians export less to the US – and this, in turn, will reduce Asian imports from Europe.
Thus, the US slowdown affects European exports in two ways.
It has an indirect effect on European exports to Asia, which can be sizeable because the US market is so important for Asian exports.
And it has a direct impact on European exports to the US.
Even in the case where the direct effect is small – the decoupling assumption – the US slowdown still can have a substantial net impact on European exports because of its indirect effect on Asian imports from Europe.
So Europeans should not be tempted to think that they are somehow “decoupled” from America’s foibles and woes.
Until recently, many Europeans thought they were insulated from the current US housing and mortgage crisis.
But in what has been a truly malignant “export” from America to Europe, the US created “garbage debt” in the form of sub-prime mortgages, and Europeans – hungry for extra yield, and as reckless as Americans – bought it.
Many European banks’ balance sheets are now as contaminated as those of American banks, and no one is sure who is holding – or hiding – the junk, and how to value it.
This is why European banks are now reluctant to lend to each other.
They could be lending to an institution that is in serious financial trouble.
It is hard to imagine that higher interest rates and reduced credit availability will not lead to distress for Europe’s overall economy.
Yet this is exactly the stance of the European Central Bank, which is treating the euro zone as if its financial sector was somehow decoupled from the rest of the economy – and running a different monetary policy for each sector at the same time.
By pumping in whatever liquidity the financial sector needs to alleviate the credit crunch, the ECB is effectively maintaining a deflationary bias for the financial sector, whereas it has announced an inflationary bias for the rest of the economy.
A monetary policy at war with itself cannot long endure.
The ECB’s inflationary bias will most likely be dropped, as the effect of the financial crisis and the US slowdown sends Europe’s economy into a spin that even the ever-optimistic ECB will be unable to deny.
That outcome should moderate Europe’s inflation concerns.
Until then, decoupling arguments, whether applied to relations between Europe and America or Europe’s financial sector and the rest of the economy, should be seen as having a single purpose – to deny the very real threats to the continued expansion of the European economy.
Some of this, no doubt, is wishful thinking on the part of economically unsophisticated people.
Others have a special interest.
After all, a strong economy makes it easier for the ECB hawks to sell rate hikes.
It makes it easier to sell stocks and other investment vehicles.
It makes it easier for politicians to sell their policies, themselves, and their parties.
But ordinary Europeans should not be fooled.
The very existence of decoupling arguments is a warning that they should be concerned about the continuing robustness of Europe’s economy.
Special interests would not be peddling such dubious pabulum if they felt confident about the economy’s future.
The Myth of “Eurabia”
LONDON – There is a powerful narrative today about how many young European Muslims are susceptible to terrorism, how Islam leads to radicalization, and how Muslims, because of their creed, choose to live in ghettos and therefore create swamps that breed terrorists.
This narrative’s most extreme form is the idea of “Eurabia,” an incendiary term that purportedly describes a phenomenon by which Muslim hordes are now contaminating Europe’s very DNA.
From this narrative, fear of homegrown terrorism resonates the most, as does the impetus to deal with Muslims as a foreign foe.
So, too, does the idea that accommodating religious differences is dangerous.
A false dichotomy is created in which Muslims must choose between a Western and European identity or a supposedly separate Islamic identity.
But the relationship between European Muslims’ faith and identification with European nations seldom conforms to the “Eurabia” stereotype.
A wide-ranging global Gallup study that culminated in the book Who Speaks for Islam: What a Billion Muslims Really Think , by John L. Esposito and Dalia Mogahed, includes detailed and sophisticated analysis of European Muslims’ attitudes.
The results suggest that religious and national identities are complementary, not competing, concepts.
Muslims living in Paris, London, and Berlin are more religious than the general public, but they are just as likely as anyone else to identify with their nation and its democratic institutions, and just as likely to reject violence.
The prevailing narrative often regards mosques and Islamic associations as spaces for radicalization, but I contend that some young people are actively turning away from these peaceful institutions.
This may be because mosques and Islamic associations find it difficult to compete with the promises of solace available through the Internet, where voices can address political issues, feed off injustices around the world, and launch calls to arms that can ultimately be murderous.
The Internet is where some young Muslims succumb to the alluring narrative of Islam constructed by those behind the terror attacks of our age.
We also know that the Internet’s devastating impact on handfuls of young people is not confined to the Muslim community, as evidenced by the tragic events in Bridgend in the United Kingdom, where 17 young people, seemingly connected through the Internet, committed suicide.
For some young Muslims, the paramount sub-culture is virtual, and it operates on the fringes of Muslim communities, whether in Europe or in the Islamic world.
The story it presents is of a world beset by real injustices, for which the only solution is violent action that will supposedly lead to the victory of a monolithic Muslim world.
Never mind the inconvenient truth that the acts may be theologically impermissible; the ends justify the means, and there really is no alternative.
Such a narrative is appealing because it feeds into the alienation that many young Muslims feel.
Some may look to unpopular and unjust foreign adventures in Iraq as examples of the futility of lawful political action.
Others feel suffocated by the prevailing toxic discourse that casts European Muslims as foreign, alien, and suspect.
Laws enacted to single out and “persecute” Muslims, and statements that affirm the Islamophobia of our media, buttress the absurd notion that what we are really witnessing is a “war on Islam.”
In Muslim communities everywhere, there is a need to challenge this narrative by making known Islam’s theological repudiation of violence.
We must redouble our efforts to reach out in local communities and demonstrate the realities of our faith.
Thus, one should pay tribute to the resilience of Dutch Muslims as they resist the provocations of the right-wing politician Geert Wilders, who is bent on releasing a film that can only inflame public prejudice against Islam.
Muslims in The Netherlands are responding by opening up their mosques and reaching out to neighbors.
There is a collective responsibility to treat such problems not as Muslim issues, but as problems whose solutions will enhance the values on which European society is based.
Addressing the sense of injustice, siege, and alienation faced by young Muslims is not a victory for the extremists.
Rather, it is a victory for European liberal values because it demonstrates that every individual and every minority is of equal worth.
Indeed, we should view neither homegrown terrorism nor the presence of Muslims as new to Europe.
Islam’s interaction with European society sparked a flowering of knowledge, and large numbers of Muslims have inhabited the Balkans and eastern and central Europe for hundreds of years.
They helped rebuild the economies of war-torn Europe in the 1950’s, arriving as immigrants and then making Europe their home.
In almost every field of life, Muslims have been an integral part of the European tapestry.
All Europeans, including those who are Muslim, are right to worry about the issue of homegrown terrorism.
Our right to security and life is paramount, as is the need to inhabit a space free of prejudice and suspicion.
The 7/7 bombings in 2005 in my home city of London brought this into sharp relief.
The victims were of all faiths and races, including Muslims, as were the heroes who helped London get back on its feet so quickly.
Londoners’ collective message after 7/7 was decisive, and it must be Europe’s message as well: we will not allow such atrocities to divide us.
The Myth of Green Energy Security
COPENHAGEN – Turmoil across the Middle East and Northern Africa has refocused attention on the impact that political tensions or interference can have on the price and availability of energy imports.
Against consumer fears of gas-price hikes, energy security ranks high on many Western governments’ policy agendas.
Of course, this is hardly a new phenomenon: Europe started trying to build up its energy reserves back in the 1960’s.
Likewise, every American president since Richard Nixon in the early 1970’s has tried, and failed, to reduce dependence on foreign oil.
A new trend, though, is that policies that just a few years ago were being touted to fight climate change are being presented as a necessary way to increase energy security.
Against the backdrop of the financial crisis, and as public support for climate-change policies scrapes new lows in many developed countries, we hear less from leaders about the threat of global warming, and more about the supposed economic benefits of climate policies.
This shift is hardly surprising, given the increasing number of analyses that demonstrate that current – unilateral – climate policies will have virtually no impact on the rise in global temperature.
The European Union offers a classic illustration of this point.
Its “20-20-20” climate plan – by far the most comprehensive climate-change policy in effect anywhere – aims to reduce greenhouse-gas emissions by 20% from 1990 levels by 2020, ensure that renewable energy delivers 20% of energy consumption, and cut primary energy use by 20%.
An analysis of the costs and benefits of the policy in 2010 by climate economist Richard Tol showed that the annual price tag would be around €210 billion.
Running the policy through the RICE climate-economic model reveals that by the end of this century, it will reduce temperature rises by just 0.05°C (0.1ºF).
Undaunted by the policy’s utterly feeble impact on global warming, politicians have declared that the policy will at least enhance the EU’s energy security.
So the Copenhagen Consensus Center asked Professor Christoph Böhringer and Andreas Keller of the University of Oldenburg to test this claim.
Of course, the notion of energy security is fuzzy.
In their research paper, “Energy Security: An Impact Assessment of the EU Climate and Energy Package,” Böhringer and Keller note that the EU has never set itself a clear metric for energy security.
Despite – or because of – this lack of definition and measurability, policymakers, write Böhringer and Keller, “exploit the energy security argument to justify a myriad of measures.”
Such measures even include bans on light bulbs and patio heaters, tax breaks for bicycle owners, standards for tire pressure, and tests for fuel-efficient driving – none of which would appear to have much impact on the level of Russian or Middle Eastern oil imports.
What is clear, according to Böhringer and Keller, is that the EU Climate and Energy Package violates basic principles of cost-effectiveness, if the sole objective is emission reduction.
The package stands out for its tangle of instruments – and thus the risk of counterproductive, overlapping regulation, which will substantially increase costs compared to an effective climate policy.
The researchers measure the impact of the 20-20-20 package through independent energy-security indices.
Without implementation of the package, slightly more than half of Europe’s energy needs would be met by imported fossil fuel by 2020, compared to 50% today.
If the EU is successful in reducing CO2 emissions by 20% by 2020, Böhringer and Keller find that its reliance on imported fossil fuel would be reduced by just two percentage points.
This is an awfully long way from self-reliance.
Of course, the EU 20-20-20 plan aims to do more than just reduce emissions; it also attempts to increase renewable-energy use and cut overall energy consumption.
The researchers find that the full 20-20-20 plan would actually mean “increased energy imports as well as increased price risks” – mainly because the tax imposed on electricity to achieve the efficiency target of the 20-20-20 plan will affect nuclear power the most.
In other words, the very policy that was supposed to achieve greater energy security is in fact likely to hike prices and lead to greater reliance on foreign energy imports.
It is worth noting that these outcomes are based on the optimistic reference scenario used in the US Department of Energy’s International Energy Outlook, under which renewable-energy use will grow at a higher rate than in the past.
Without this expectation, the EU’s policy would likely be even more costly.
In many Western countries, policies are increasingly being wrapped in promises of greater energy security rather than in threats of climate catastrophes.
But, because energy security is such a vague concept, these policies are seldom subjected to rigorous scrutiny to determine whether they will live up to politicians’ claims.
As the new research shows, we should be especially cautious about the claims of politicians who use current events to justify the old, ineffective climate-change policies on the new and equally problematic basis of energy security.
The Myth of Rising Protectionism
CAMBRIDGE – There was a dog that didn’t bark during the financial crisis: protectionism.
Despite much hue and cry about it, governments have in fact imposed remarkably few trade barriers on imports.
Indeed, the world economy remains as open as it was before the crisis struck.
Protectionism normally thrives in times of economic peril.
Confronted by economic decline and rising unemployment, governments are much more likely to pay attention to domestic pressure groups than to upholding their international obligations.
As John Maynard Keynes recognized, trade restrictions can protect or generate employment during economic recessions.
But what may be desirable under extreme conditions for a single country can be highly detrimental to the world economy.
When everyone raises trade barriers, the volume of trade collapses.
No one wins.
That is why the disastrous free-for-all in trade policy during the 1930’s greatly aggravated the Great Depression.
Many complain that something similar, if less grand in scope, is taking place today.
An outfit called the Global Trade Alert (GTA) has been at the forefront, raising alarm bells about what it calls “a protectionist juggernaut.”
The GTA’s latest report identifies no fewer than 192 separate protectionist actions since November 2008, with China as the most common target.
This number has been widely quoted in the financial press.
Taken at face value, it seems to suggest that governments have all but abandoned their commitments to the World Trade Organization and the multilateral trade regime.
But look more closely at those numbers and you will find much less cause for alarm.
Few of those 192 measures are in fact more than a nuisance.
The most common among them are the indirect (and often unintended) consequences of the bailouts that governments mounted as a consequence of the crisis.
The most frequently affected sector is the financial industry.
Moreover, we do not even know whether these numbers are unusually high when compared to pre-crisis trends.
The GTA report tells us how many measures have been imposed since November 2008, but says nothing about the analogous numbers prior to that date.
In the absence of a benchmark for comparative assessment, we do not really know whether 192 “protectionist” measures is a big or small number.
What about the recent tariffs imposed by the United States on Chinese tires?
President Barack Obama’s decision to introduce steep duties (set at 35% in the first year) in response to a US International Trade Commission ruling (sought by US labor unions) has been widely criticized as stoking the protectionist fires.
But it is easy to overstate the significance of this case, too.
The tariff is fully consistent with a special arrangement negotiated at the time of China’s accession to the WTO, which allows the US to impose temporary protection when its markets are “disrupted” by Chinese exports.
The tariffs that Obama imposed were considerably below what the USITC had recommended.
And, in any case, the measure affects less than 0.3% of China’s exports to the US.
The reality is that the international trade regime has passed its greatest test since the Great Depression with flying colors.
Trade economists who complain about minor instances of protectionism sound like a child whining about a damaged toy in the wake of an earthquake that killed thousands.
Three things explain this remarkable resilience: ideas, politics, and institutions.
Economists have been extraordinarily successful in conveying their message to policymakers – even if ordinary people still regard imports with considerable suspicion.
Nothing reflects this better than how “protection” and “protectionists” have become terms of derision.
After all, governments are generally expected to provide protection to its citizens.
But if you say that you favor protection from imports , you are painted into a corner with Reed Smoot and Willis C. Hawley, authors of the infamous 1930 US tariff bill.
But economists’ ideas would not have gone very far without significant changes in the underlying configuration of political interests in favor of open trade.
For every worker and firm affected adversely by import competition, there is one or more worker and firm expecting to reap the benefits of access to markets abroad.
The latter have become increasingly vocal and powerful, often represented by large multinational corporations.
In his latest book, Paul Blustein recounts how a former Indian trade minister once asked his American counterpart to bring him a picture of an American farmer: “I have never actually seen one,” the minister quipped.
But the relative docility of rank-and-file workers on trade issues must ultimately be attributed to something else altogether: the safety nets erected by the welfare state.
Modern industrial societies now have a wide array of social protections – unemployment compensation, adjustment assistance, and other labor-market tools, as well as health insurance and family support – that mitigate demand for cruder forms of protection.
The welfare state is the flip side of the open economy.
If the world has not fallen off the protectionist precipice during the crisis, as it did during the 1930’s, much of the credit must go the social programs that conservatives and market fundamentalists would like to see scrapped.
The battle against trade protection has been won – so far.
But, before we relax, let’s remember that we still have not addressed the central challenge the world economy will face as the crisis eases: the inevitable clash between China’s need to produce an ever-growing quantity of manufactured goods and America’s need to maintain a smaller current-account deficit.
Unfortunately, there is little to suggest that policymakers are yet ready to confront this genuine threat.
The Myth of “Superstar Cities”
In a much-talked-about recent paper entitled “Superstar Cities,” economists Joseph Gyourko, Christopher Mayer, and Todd Sinai argue that such high-status cities – not only London, Paris, and New York, but also cities like Philadelphia and San Diego – may show an “ever-widening gap in housing values” when compared with other cities.
The authors seem to be saying, in effect, that a housing boom in these areas can go on forever.
Any claim like that will inevitably attract attention.
As a well-known skeptic about booming housing prices, I have been asked on several recent occasions to participate in debates with one or another of the authors.
Many people view the superstar city theory as confirming their hunch that, despite the current slowdown in home prices elsewhere (particularly in the United States), investors can expect to make huge long-term gains by buying homes in these cities, even though the homes there are already expensive.
But, as I have said in my debates with the authors, if one reads their paper carefully and thinks about the issues, one would see that there is no reason at all to draw such a conclusion.
Why should home values in glamour cities increase forever?
Gyourko, Mayer, and Sinai justify their claim by arguing that these cities really are unique.
They have only limited land, and if one assumes ever-increasing GDP and rising income inequality, there will always be more and more wealthy people to bid up prices in these scarce areas.
They show convincing evidence for these basic facts.
Rich people increasingly populate the most expensive cities.
Real GDP has been increasing at around 3% a year in advanced countries, and even faster recently in many emerging countries.
And, of course, we aren’t getting any more land in these cities.
But what do these arguments really mean for the outlook for investments in homes in superstar cities?
Let us consider the fixity of land.
While there is only so much land in any one of the existing superstar cities, in every case, there are vast amounts of land where a new city could be started.
And new cities are started, taking away from the “uniqueness” of existing cities.
The best-known examples of such grand new cities are planned capitals, typically built near countries’ geographic center.
These include Brasilia (1950’s), Canberra (1910’s), Islamabad (1960’s), New Delhi (1910’s), and Washington DC (1790’s).
In each of these cases, a planner built the whole city infrastructure to make it a cohesive, attractive place.
The obvious success of these cities, as both government and economic centers, attests to the fact that urban land derives value from the presence of a well-planned city there.
Where land today is cheap, it will have great value in the future if only someone takes the dramatic step of planning and creating a whole city there.
True, the establishment of such cities is a relatively rare event. Private developers have trouble getting a large plot free of restrictions.
But they tend to be ingenious at developing glamorous new areas from little towns within an hour’s commute from major cities. It happens in so many places and so regularly that we take it for granted and rarely even notice it.
Indeed, since the industrial revolution, the development of such new urban areas is a central theme in the history of the world.
New cities are constantly ripening like so many cherries on a tree, drawing people away from older, original cities.
And the new cities have a way of looking brighter and fresher than the old urban areas, which are often seen as jumbled and decaying.
How much might we expect a home in a famous city to outperform other real estate as a long-term investment?
The answer: not much at all.
Prices in the cities that Gyourko, Mayer, and Sinai identify as superstars generally appreciated by no more than one or two percent a year more than in the average city from 1950 to 2000, and even that difference is probably largely due to an increase in the size and quality of homes.
According to the Coldwell Banker Home Price Comparison Index, which compares the price of a standard 2,200 square-foot four-bedroom house across cities, the most expensive city in the US is Beverly Hills (the legendary home of movie stars).
The standard home there is 4.25 times as expensive as one in an average city in the US.
Assuming that quadrupling of relative value occurred over a hundred years, the excess return on investment amounts to only 1.5% per year – hardly the kind of performance that real estate enthusiasts are expecting.
Finally, as Gyourko, Mayer, and Sinai themselves note, even these small long-term differences in home price across cities have tended to be offset by lower rent-price ratios in the superstar cities.
For an investor, the rate of return is the sum of the rate of appreciation and the rent-price ratio, so the low rent-price ratio reduces the advantage of faster appreciation.
Most of the popular attention that the “superstar cities” theory has received merely reflects the psychology of the housing boom that we have been seeing, as well as a wishful thinking bias.
People want to believe that the boom will continue, and that their investments in their favorite city are thus special and exciting.
But there is no generally applicable reason to make aggressive investments in superstar cities.
On the contrary, there are many reasons to worry about investing in such places.
The Myth of the China Stock Market
Across China, many look at Shang Fulin as a savior.
The new head of China's Securities Regulatory Commission (CSRC) takes the helm in the midst of an 18-month bear market, one caused by government policies--or so conventional wisdom has it.
His challenge will be to resist the temptation to seek short-term popularity, recognizing instead that China's stock market must endure short-term pain to win long-term gains.
Eight myths cloud debate over stock market policy in China.
Mr. Shang's job will be easier if each is dispelled:
#1.
China's stock market has grown extremely large, extremely quickly.
At the end of 2002 the official capitalization of China's stock market was $458 billion, making it the eighth largest in the world--an apparently astounding achievement given where China was a decade ago.
Unfortunately, the figure is misleading, because it includes non-tradable, state-owned shares valued at market prices.
In 1992, the State Council, seeking to stop mass privatization, ruled that two-thirds of the equity capital of restructured state-owned enterprises (SOEs) had to be issued to state organs and could not be traded.
Former SOEs--whose market valuation is pumped up by the artificial shortage of tradable shares--account for more than nine-tenths of the 1,224 companies listed on China's stock exchanges.
Strip out all this non-tradable equity and what is left is a market worth about $145 billion (around 12% of GDP) at the end of 2002.
The equivalent figure in developed markets is usually over 100% of GDP.
Because share prices, therefore, cannot possibly affect the macro-economy, Mr. Shang should be able to improve the quality of regulation without worrying about the effect on growth.
#2. Initial public offerings (IPOs) are now as important a source of capital as banks.
During the 1990s, the stock market did grow in significance for Chinese firms, or at least for the former SOEs that were listed.
But enterprises still rely on banks for the bulk of financing.
In 2002, domestic share issues raised $8.9bn, while banks provided twenty times that amount.
The corporate debt market remains tiny.
Indeed, only 20 corporate bonds are currently listed in Shanghai and Shenzhen.
#3. The stock market allocates capital more efficiently than banks.
One rationale for creating China's stock market was that it would channel finance to where it was most needed, side-stepping indebted and inefficient banks.
But all stock markets rely on their local institutional environment.
While the CSRC should be congratulated for its good work in improving this environment, more needs to be done.
Firms do not compete freely for stock market capital; former SOEs, indeed, receive preferential treatment.
Fraudulent disclosures are commonplace.
Artificially low interest rates create extra incentives for putting money into shares.
Tough regulatory enforcement need to continue.
More private firms must be allowed to make IPOs.
#4. Restructuring a SOE into a shareholding firm and listing it improves performance.
Good theory, but, again, only one-third of most SOEs' shares are privatized.
Local officials remain involved in running listed firms, and while regulatory institutions remain weak, asset stripping on the part of managers and owners is extensive.
Real privatization is needed.
Mr. Shang needs to grasp the nettle and come up with a new scheme for selling off the central government's shares.
#5. China's stock market is dominated by small investors.
Roughly 68.7m individual share accounts were opened by the end of 2002.
A majority of these are empty or disused.
A recent survey by the Shanghai Stock Exchange found that only 8m of its 35m accounts were active.
Institutional investors fraudulently opened millions of accounts in order to manipulate prices.
A plausible estimate is that there are just 10-20 million active individual investors.
China is not yet a nation of shareholders - another reason why Mr. Shang need not worry too much about pursuing unpopular policies.
#6. The market lacks institutional investors.
Sixty-one closed and open-ended investment funds currently own about 10% of traded shares.
But demand for asset management outstrips supply, and several thousand financial-management, trust, and consultancy companies now manage individual and corporate wealth.
These are institutional investors in everything but formal registration.
A survey conducted in 2001 suggests that funds under their management account for about 40% of the market.
#7. The CSRC, the securities and fund-management firms, and listed companies are all ultimately owned by the state and so little improvement in regulation is likely.
For much of the 1990s, the political logic was clear: use the stock market to finance former SOEs and slacken regulation.
That logic is now in question.
An increasing number of officials recognize that privatization is the only way to improve efficiency and to raise funds to meet the government's liabilities.
With intensification of privatization, the CSRC should be freer to do its job properly.
#8. China's stock market cannot be a vehicle for privatization.
According to Changjiang Securities, 320 listed companies experienced a change in their controlling shareholder in 1996-2001.
However, this usually involved the off-market sale of locally held state-owned shares to a private investor.
At least 150, and perhaps as many as 200, listed firms have been privatized.
As the government steps up privatization, the CSRC must encourage such sales and continue to establish a framework for mergers and acquisitions to support them.
The Myth of the “Ownership Society”
&quot;No,&quot; said former Fox News journalist Tony Snow, newly appointed as one of George W. Bush’s closest aides, his Press Secretary, when asked recently about his retirement savings. “As a matter of fact, I was even too dopey to get in on a 401(k).
So there is actually no Fox pension.
The only media pension I have is through AFTRA.”
A 401(k) is a heavily tax-favored account in which workers can save money for their retirement.
Typically, employers – including Fox News – match workers’ 401(k) contributions, so setting up a 401(k) is an irresistible financial deal, a true no-brainer.
Yet Tony Snow didn’t.
Only the union he was forced to join, the American Federation of Television and Radio Artists, has been doing any formal saving and earmarking of his retirement assets.
Snow’s case, I think, holds very important lessons, and not just for the United States.
To the extent that the Bush administration has a coherent philosophy for domestic policy, it is the idea of the “ownership society” – the belief that intermediary institutions, whether governments, unions, or the benefits departments of companies, should get out of the business of providing social insurance.
Instead, individuals should rely on their own assets to provide them with financial security in retirement or in case of serious illness.
Give people the incentives to plan for their future, ownership-society advocates argue, and they will.
In the future, Snow will have to stand up at the podium in the White House briefing room and advocate the various components of Bush’s ownership-society proposals.
He will have to praise Health Security Accounts – and argue that people won’t stop going to the doctor for preventive care even if their HSA-tied insurance plan doesn’t pick up any of the bills.
He will have to praise privatization of Social Security – and argue that individuals will make prudent and wise investment decisions with this baseline tranche of their potential retirement resources.
And he will have to praise the decline of unions and the shedding of benefits by firms – and argue that individuals will make better choices than union experts or firms’ benefit departments.
The assembled reporters will look at him, and they will recall that when he was offered an unbelievably good financial deal, he was too “dopey” to take advantage of it.
And they might reasonably conclude that his failure to channel some of his Fox News salary into a 401(k) account is a very powerful argument against the words coming out of his mouth.
This is not to say that the issues are simple or that there are easy answers.
America has many people who do not set up 401(k) accounts, despite enormous incentives to do so.
It also has people who do set up 401(k) accounts and then invest them badly – for example, Enron workers whose 401(k) money was overwhelmingly invested in company stock lost not only their jobs when the company went bankrupt, but also their pension assets.
There are also well-known examples of highly corrupt union pension funds, such as the one bilked for years by the leadership of the Teamsters.
Finally, there is the example of politicians like George W. Bush, who enacted a government program that promises comprehensive drug benefits to the elderly and mammoth profits to pharmaceutical companies.
His administration may preach the virtues of individual responsibility, but its program makes no provision for how and where the government is going to secure the resources needed to finance its promises.
In short, there are psychological and moral failures at all levels – individuals, firms, unions, insurance companies, and governments.
Difficult problems of institutional design compound the difficulty of reforming social-welfare programs.
America must also deal with the potential for corruption, both illegal in the case of the diversion of Teamsters’ pension resources and legal in the campaign contributions provided by the pharmaceutical lobby to complaisant members of Congress.
These problems are not America’s alone, for they are inherent to all efforts to privatize social welfare.
As Americans and others look at this Gordian knot of public policy problems, we should learn one thing from the example of Tony Snow: the vision of an “ownership society” espoused by Bush is simply not plausible.
If it were, his new press secretary would not be describing himself as “dopey.”
The Myth of the Shia Crescent
AMMAN – Recently, Israel’s Vice Prime Minister Shaul Mofaz offered an unequivocal veto on a key issue in the Middle East peace process.
Any return of the Golan Heights to Syria would result in an “Iranian foothold” on Israel’s border and would thus not only be politically naïve but irrational.
Mofaz’s statement is symptomatic of a perception that is now deeply entrenched, not only in the Middle East, but in the United States as well.
That notion is of a hegemonic Iran that is attempting to dominate the region through an array of Shiite proxies.
This Iranian fifth column is believed to stretch from Beirut via Damascus, Gaza to Baghdad and finally from Iran to Saudi-Arabia to Yemen. Recent armed clashes between Hezbollah and the Lebanese government are, it is said, just another sign of Iran’s hegemonic reach.
Ironically, this perception brings Israel some rather unlikely partners.
President Hosni Mubarak of Egypt claims that Shiites are “always loyal to Iran,&quot; while King Abdullah of Jordan has coined the axiom about a rising “Shiite crescent.”
This “rise of the Shiites” and the resulting “Sunni/Shia divide” is alleged to be creating an ever widening chasm in the region.
Although this perception may convince at first glance, it is ultimately based on generalizations that reveal more about its advocates than the actual reality on the ground.
Take Iraq, where the looming “Shia crescent” is often blamed for much of the chaos.
Recent developments in Iraq allegedly point to a fundamental clash between Sunnis and Shiites in the region and bear witness to malevolent Iranian interferences.
But is Iraq really symptomatic of a greater Shia scheme?
True, sectarian tensions between Sunnis and Shiites in Iraq have escalated since the fall of Saddam. But contrary to common perception, Iraqi Shiites do not form a homogenous block that opposes the supposedly unified Sunnis.
Indeed, the contrary is true. In the light of Iraqi nationalism that crosses sectarian boundaries, it is farfetched to consider the Iraqi Shia merely proxies of Iran.
Instead, what we are witnessing in Iraq today is not ever increasing friction between religious communities but escalating internal power struggles within the Sunni and Shiite communities.
Ongoing violence in Basra and the fighting between Sunni “Awakening Councils” and Al Qaida in Iraq demonstrate this.
In fact, the current escalation points to an increasing political struggle between the federalist position of Shia Prime Minister Nouri Al Maliki and the centralist position of Shiite cleric Moqtada al Sadr.
This struggle will ultimately define the political structure of Iraq.
Here is where Sunni-Shiite cooperation comes in.
Widely unnoticed, Iraqi Sunni and Shia centralists have managed in the last couple of months to form a united parliamentary platform that leaves sectarian tensions behind.
More than a hundred followers of Ayad Allawi, Al Sadr, and others have joined their ranks.
This supra-sectarian platform calls for a central government administration of Iraq’s natural resources and the postponement of the looming referendum to settle the status of the city of Kirkuk.
Change within the government is also noteworthy.
Sunni ministers who had been boycotting the government since last year have returned to their posts.
Thus, Iraq is seeing both escalating intra-sectarian violence and cautious steps towards inter-sectarian alliances.
And what about Iran?
Contrary to the blame games being played out in the US, Iran cannot be accused of an unrestrained aggressive stance toward Iraq.
Of course, no Iranian decision-maker is interested in a US-success in Iraq that might well put regime-change in Iran back on the agenda.
But the rationale behind Iran’s policy of economic, social and military engagement seems to be first and foremost, defensive.
Memories of Iraq’s eight year war of aggression against Iran in the 1980’s have not faded.
From Iran’s perspective, any future threat originating from Iraq needs to be averted by ensuring the participation in Iraq’s government of Shiites and Kurds.
These complexities are lost on many observers when matched up against the convenient and catchy rhetoric of the “Shia Crescent.”
But they have not gone unnoticed among ordinary Arabs.
A recent poll by the University of Maryland indicates that a large majority of Arabs in the region consider Iranian President Mahmud Ahmadinejad one of the three most popular political leaders worldwide.
Only 11% identified Iran as the biggest threat to their security.
So if a Shia threat organized by Iran really does exist, why is it being ignored by those that it purportedly targets – the Sunni Arab majorities?
Rather than objectively describing the actual political situation in the Middle East, the notion of a fundamental Iranian threat is being used to continue unconditional Western support for increasingly unstable regimes. Moreover, the overstatement of the threat posed by Iran is also being used as a convenient excuse for political inflexibility and stagnating reform processes throughout the region.
But exaggerating the supposed Shia threat has a price.
Continuous talk of a “Sunni-Shia divide” might ultimately develop into a self-fulfilling prophecy.
Alarmist rhetoric may, in the end, jeopardize rather than protect the status quo in the region.
The Naked ECB
LONDON – The crisis in the eurozone remains far from resolution.
Investor worries are now concentrated on the health of European banks, many of which have large exposures to Greece and the other southern European countries with severe fiscal problems.
Europe’s leaders have so far applied only plaster to the wounds.
A stabilization fund has been established, but on a temporary basis.
New arrangements for monitoring member states’ budget balances have been introduced, but they can do nothing about the stock of debt outstanding.
And the European Central Bank has begun to buy government bonds, including those of Greece, at prices well above those that would prevail in a free market.
The latter move by the ECB has underscored a number of unresolved questions about the structure of the Bank and how it makes its decisions.
Some issues that Europe’s decision-makers have wanted to keep under the carpet have now been rudely exposed.
The decision to buy Greek bonds directly was not unanimous.
The world now knows that Axel Weber, the president of the Bundesbank, voted against it.
His was one vote out of 22, but he represents 27% of eurozone GDP, so he cannot be dismissed as an insignificant outlier.
It was the first time that the president of the ECB has had to reveal that a decision was not unanimous.
In theory, we have always known that the ECB would, if necessary, make decisions on the basis of majority rule.
But, until now, no such case had arisen, and there were no procedures for disclosing votes.
This stands in marked contrast to the United States Federal Reserve, and also the Bank of England, where individual votes on the Monetary Policy Committee are routinely revealed.
The argument against transparency has been that, in the unusual circumstances of the ECB, to expose the votes of individual members of the Governing Council would put pressure on them as representatives of member states.
The governor from a country in recession might feel almost bound to vote against an increase in interest rates, or for a cut, regardless of overall conditions in the eurozone.
But can an absence of clarity about the ECB’s voting arrangements last forever?
Nout Wellink of the Dutch Central Bank has explicitly said that more disclosure would one day be needed as the ECB reaches maturity.
Weber’s dissenting voice on Greek bond purchases brings that day dramatically closer.
It also exposes a more fundamental problem.
The voting structure in the ECB is flawed.
In any federal system, a balance must be struck between those who are charged with assessing economic conditions in the whole monetary area and those who represent the interests of particular regions.
This problem has been addressed before, in both the Federal Reserve and the Bundesbank.
In the case of the Fed, seven members of the Board in Washington have a federal remit, and twelve presidents of regional reserve banks vote in rotation, with only the New York president having a permanent voice.
So the ratio of central to regional votes is 1:0.7.
The ECB is different, for some good reasons.
It is the monetary authority of a federation of sovereign states.
The weight of individual national members of the Governing Council is much greater.
In fact, the ratio of federal to national votes in the ECB is 1:2.5.
Germany has the same weight as Malta.
The ECB has thought about this problem, but all that has been agreed (in the Nice Treaty) is some modest rotation of voting membership as the federation grows further.
This will not correct the imbalances that exist today.
So far, this problem has attracted little attention.
But Weber’s dissent opens up the possibility that small countries could vote down the center and the large members.
It is theoretically possible that the six Executive Board members plus France, Germany, and Italy, representing 65% percent of the eurozone’s GDP, could be outvoted by a coalition of small countries.
That could matter a lot in relation to interest-rate decisions.
It could also be relevant to purchases of debt from distressed member states.
It is highly likely that the Greek debt that the ECB has acquired is not worth what it has paid.
If Greece were forced to restructure its debt and impose a “haircut” on holders of its bonds, the ECB would incur a sizeable loss.
That loss would be borne by eurozone member states in proportion to their share of eurozone GDP, even though the votes are one per country.
This peculiar arrangement is a further major risk for economic and monetary union, to add to those of uncoordinated fiscal policies and the lack of a European equivalent of the International Monetary Fund.
Especially in nervous markets, which we certainly have today, any perception that the ECB’s decisions might not take into account the interests of the whole eurozone, or could commit the major countries to significant losses, could itself be destabilizing.
This points to a clear need to revisit the terms of the Nice Treaty. That will be tough to do for political reasons.
But it is increasingly clear that the eurozone needs a major overhaul if it is to survive.
And the ECB’s voting arrangements are one further element in need of reform.
The Narrative Structure of Global Weakening
NEW HAVEN – Recent indications of a weakening global economy have led many people to wonder how pervasive poor economic performance will be in the coming years.
Are we facing a long global slump, or possibly even a depression?
A fundamental problem in forecasting nowadays is that the ultimate causes of the slowdown are really psychological and sociological, and relate to fluctuating confidence and changing “animal spirits,” about which George Akerlof and I have written.
We argue that such shifts reflect changing stories, epidemics of new narratives, and associated views of the world, which are difficult to quantify.
In fact, most professional economists do not seem overly glum about the global economy’s prospects.
For example, on September 6, the OECD issued an interim assessment on the near-term global outlook, written by Pier Carlo Padoan, that blandly reports “significant risks” on the horizon – the language of uncertainty itself.
The problem is that the statistical models that comprise economists’ toolkit are best applied in normal times, so economists naturally like to describe the situation as normal.
If the current slowdown is typical of other slowdowns in recent decades, then we can predict the same kind of recovery.
For example, in a paper presented last spring at the Brookings Institution in Washington, DC, James Stock of Harvard University and Mark Watson of Princeton University unveiled a new “dynamic factor model,” estimated using data from 1959 to 2011.
Having thus excluded the Great Depression, they claimed that the recent slowdown in the United States is basically no different from other recent slowdowns, except larger.
Their model reduces the sources of all recessions to just six shocks – “oil, monetary policy, productivity, uncertainty, liquidity/financial risk, and fiscal policy” – and explains most of the post-2007 downturn in terms of just two of these factors: “uncertainty” and “liquidity/financial risk.”
But, even if we accept that conclusion, we are left to wonder what caused large shocks to “uncertainty” and to “liquidity/financial risk” in recent years, and how reliably such shocks can be predicted.
When one considers the evidence about external economic shocks over the past year or two, what emerges are stories whose precise significance is unknowable.
We only know that most of us have heard them many times.
Foremost among those stories is the European financial crisis, which is talked about everywhere around the globe.
The OECD’s interim assessment called it “the most important risk for the global economy.”
That may seem unlikely: Why should the European crisis be so important elsewhere?
Part of the reason, of course, is the rise of global trade and financial markets.
But connections between countries do not occur solely through the direct impact of market prices.
Interacting public psychology is likely to play a role as well.
This brings us to the importance of stories – and very far from the kind of statistical analysis exemplified by Stock and Watson.
Psychologists have stressed that there is a narrative basis to human thinking: people remember – and are motivated by – stories, particularly human-interest stories about real people.
Popular stories tend to take on moral dimensions, leading people to imagine that bad outcomes reflect some kind of loss of moral resolve.
The European crisis began with a Greek meltdown story, and it appears that the entire global economy is threatened by events in a country of only 11 million people.
But the economic importance of stories bears no close relation to their monetary value (which can be measured only after the fact, if at all).
It depends, instead, on their story value.
The Greek crisis story began in 2008 with reports of widespread protests and strikes when the government proposed raising the retirement age to address a pension funding shortfall.
Reports began to appear in global news media portraying an excessive sense of entitlement, with Greeks taking to the streets in protest, even though the increase was modest (for example, women with children or in hazardous jobs would be able to retire with full benefits at just 55, up from 50).
That story might have invited some gossip outside of Greece, but it gained little purchase on international attention until the end of 2009, when the market for Greek debt started to become increasingly unsettled, with rising interest rates causing further problems for the government.
This augmented news reports about Greek profligacy, and thus closed a negative feedback loop by attracting intensifying public interest, which eventually fueled crises in other European countries.
Like a YouTube video, the Greek story went viral.
One might object that most people outside of Europe surely were not following the European crisis closely, and the least informed have not even heard of it.
But opinion leaders, and friends and relatives of the least informed in each country, were following it, and their influence can create an atmosphere that makes everyone less willing to spend.
The Greek story seems connected in many people’s minds with the stories of the real-estate and stock-market bubbles that preceded the current crisis in 2007.
These asset bubbles were inflated by lax lending standards and an excessive willingness to borrow, which seemed similar to the Greek government’s willingness to take on debt to pay lavish pensions.
Thus, people saw the Greek crisis not just as a metaphor, but also as a morality tale.
The natural consequence was to support government austerity programs, which can only make the situation worse.
The European story is with us now, all over the world, so vivid that, even if the euro crisis appears to be resolved satisfactorily, it will not be forgotten until some new story diverts public attention.
Then as now, we will not be able to understand the world economic outlook fully without considering the story on people’s minds.
The Nation-State Reborn
CAMBRIDGE – One of our era’s foundational myths is that globalization has condemned the nation-state to irrelevance.
The revolution in transport and communications, we hear, has vaporized borders and shrunk the world.
New modes of governance, ranging from transnational networks of regulators to international civil-society organizations to multilateral institutions, are transcending and supplanting national lawmakers.
Domestic policymakers, it is said, are largely powerless in the face of global markets.
The global financial crisis has shattered this myth.
Who bailed out the banks, pumped in the liquidity, engaged in fiscal stimulus, and provided the safety nets for the unemployed to thwart an escalating catastrophe?
Who is re-writing the rules on financial-market supervision and regulation to prevent another occurrence?
Who gets the lion’s share of the blame for everything that goes wrong?
The answer is always the same: national governments.
The G-20, the International Monetary Fund, and the Basel Committee on Banking Supervision have been largely sideshows.
Even in Europe, where regional institutions are comparatively strong, it is national interest and national policymakers, largely in the person of German Chancellor Angela Merkel, who have dominated policymaking.
Had Merkel been less enamored of austerity for Europe’s debt-distressed countries, and had she managed to convince her domestic electorate of the need for a different approach, the eurozone crisis would have played out quite differently.
Yet even as the nation-state survives, its reputation lies in tatters.
The intellectual assault on it takes two forms.
First, there is the critique by economists who view governments as an impediment to the freer flow of goods, capital, and people around the world.
Prevent domestic policymakers from intervening with their regulations and barriers, they say, and global markets will take care of themselves, in the process creating a more integrated and efficient world economy.
But who will provide the market’s rules and regulations, if not nation-states?
Laissez-faire is a recipe for more financial crises and greater political backlash.
Moreover, it would require entrusting economic policy to international technocrats, insulated as they are from the push and pull of politics – a stance that severely circumscribes democracy and political accountability.
In short, laissez-faire and international technocracy does not provide a plausible alternative to the nation-state.
Indeed, the erosion of the nation-state ultimately does little good for global markets as long as we lack viable mechanisms of global governance.
Second, there are cosmopolitan ethicists who decry the artificiality of national borders.
As the philosopher Peter Singer has put it, the communications revolution has spawned a “global audience” that creates the basis for a “global ethics.”
If we identify ourselves with the nation, our morality remains national.
But, if we increasingly associate ourselves with the world at large, our loyalties will expand, too.
Similarly, the Nobel laureate economist Amartya Sen speaks of our “multiple identities” – ethnic, religious, national, local, professional, and political – many of which cross national boundaries.
It is unclear how much of this is wishful thinking and how much is based on real shifts in identities and attachments.
Survey evidence shows that attachment to the nation-state remains quite strong.
A few years ago, the World Values Survey questioned respondents in scores of countries about their attachments to their local communities, their nations, and to the world at large.
Not surprisingly, those who viewed themselves as national citizens greatly outnumbered those who regarded themselves as world citizens.
But, strikingly, national identity overshadowed even local identity in the United States, Europe, India, China, and most other regions.
The same surveys indicate that younger people, the highly educated, and those who identify themselves as upper class, are more likely to associate themselves with the world.
Nevertheless, it is difficult to identify any demographic segment in which attachment to the global community outweighs attachment to the country.
As large as the decline in transport and communications costs has been, it has not obliterated geography.
Economic, social, and political activity remains clustered on the basis of preferences, needs, and historical trajectories that vary around the globe.
Geographical distance is as strong a determinant of economic exchange as it was a half-century ago.
Even the Internet, it turns out, is not as borderless as it seems: one study found that Americans are much more likely to visit Web sites from countries that are physically close than from countries that are far away, even after controlling for language, income, and many other factors.
The trouble is that we are still in the grasp of the myth of the nation-state’s decline.
Political leaders plead impotence, intellectuals dream up implausible global-governance schemes, and the losers increasingly blame immigrants or imports.
Talk about re-empowering the nation-state and respectable people run for cover, as if one has proposed reviving the plague.
To be sure, the geography of attachments and identities is not fixed; indeed, it has changed over the course of history.
That means that we should not entirely dismiss the likelihood that a true global consciousness will develop in the future, along with transnational political communities.
But today’s challenges cannot be met by institutions that do not (yet) exist.
For now, people still must turn for solutions to their national governments, which remain the best hope for collective action.
The nation-state may be a relic bequeathed to us by the French Revolution, but it is all that we have.
The Nation State Revisited
It has become fashionable to claim that the nation state has lost its place.
Globalization, it is said, means that nations can no longer control their own affairs.
They must join with others, as in the European Union or ASEAN or Mercosur, and they must increasingly rely on global institutions like the United Nations, the World Bank, and the World Trade Organization.
But such a view is risky.
Indeed, on closer inspection, it proves to be dubious, when not simply wrong.
The nation state, with both its strengths and weaknesses, is alive and well.
To begin with its strengths, the nation state remains the only political space in which the constitution of liberty thrives.
The democratic credentials of organizations like the EU are doubtful, and entirely absent in the case of the UN and other world institutions.
Moreover, despite the frequent search for new identities, European or Latin American or otherwise, and despite many references to a new cosmopolitanism, or even a “world civil society,” most people feel at home in their own country – the nation state of which they are citizens.
Migration is generally migration to other countries.
Many countries are currently debating the integration of migrants.
What does it take to be British or German or American?
Such debates about immigration make sense only if we recognize that citizenship is defined by and for nations.
This is, for most people, the positive side of the nation state.
The nation state has been, and continues to be, the relevant unit of belonging and civic involvement for most human beings for more than two centuries.
It is the context in which we find our liberties safeguarded or destroyed.
Certainly, the countries freed from communism in 1989 felt that restoring national sovereignty and recovering liberty were bound together.
Yet there is, and always has been, another, uglier face of the nation state: nationalism.
The nationalist impulse can be aggressive or defensive, directed against others or inward-looking.
Either way, it vitiates all attempts to create an international community of open societies.
This was the problem in Iraq: a nation state had become a disturber of peace in the region and beyond.
More recently, a less violent but equally worrying phenomenon has gained ground, the revival of national protectionism.
The Doha Round of trade negotiations is stalled because developed countries do not want to open their markets to cheaper products from developing countries, which in turn try to protect what nascent industries they have.
Many would prefer privileged relationships to open trade.
In this regard, the EU has often obliged.
But now the nationalist bug has infected the EU itself.
France, Spain, and Poland have attempted to keep major industries firmly in “national hands.”
Suddenly, the single European market is forgotten, and a return to fragmented markets is taking root.
Consider, for example, the European Commission’s so-called “services directive.”
Although freedom of movement for labor is one of the single market’s “four freedoms,” many EU countries are trying to protect their domestic labor markets by suspending this freedom for as long as possible.
Germany, in particular, argues that the high unemployment resulting from reunification in 1990 requires it to close its labor market to the new member states to its east.
Such trends are dangerous.
Historically, protectionism has often led to economic conflict, which can rapidly turn into more serious clashes.
The signs are not good, even in Europe.
A recent summit of EU leaders addressed energy policy – one area where cooperation is not only highly desirable, but necessary.
Yet even German Chancellor Angela Merkel – clearly a pro-European – went to the meeting with the explicit intention of barring the creation of other European powers in this field.
The German-Russian agreement to build a gas pipeline bypassing Poland and Lithuania, with former Chancellor Gerhard Schröder leading the effort, has already harmed Polish-German relations, to say nothing of European cooperation.
For a time, the pendulum of political opinion may have swung too far against the nation state and its role.
This is one reason why so many people have felt estranged from their political leaders.
But it would be unfortunate – indeed, dangerous – if the pendulum now swung back to old-fashioned nationalism.
Nation states are welcome; they are important elements of a liberal world order.
But they have to be open to cooperation and coordination with others.
We must be vigilant in resisting the start of a trend reminiscent of developments in the early years of the twentieth century ­­– a trend that quickly led to global disaster.
Central Banks’ Outdated Independence
BUENOS AIRES – The global financial crisis has raised fundamental questions regarding central banks’ mandates.
Over the past few decades, most central banks have focused on price stability as their single and overriding objective.
This focus supported the ascendancy of “inflation-targeting” as the favored monetary policy framework and, in turn, led to operational independence for central banks.
The policy was a success: the discipline imposed by strict and rigorous concentration on a sole objective enabled policymakers to control – and then conquer – inflation.
But, as a consequence of this narrow approach, policymakers disregarded the formation of asset- and commodity-price bubbles, and overlooked the resulting banking-sector instability.
This, by itself, calls for a review of the overall efficacy of inflation-targeting.
Moreover, after the financial crisis erupted, central banks were increasingly compelled to depart from inflation targeting, and to implement myriad unconventional monetary policies in order to ameliorate the consequences of the crash and facilitate economic recovery.
With advanced economies struggling to avoid financial collapse, escape recession, reduce unemployment, and restore growth, central banks are being called upon to address, sometimes simultaneously, growing imbalances.
This has triggered a search for a radical redefinition of central banks’ objectives – and has cast doubt on the appropriateness of maintaining their independence.
In particular, central banks’ behavior during the crisis has called into question whether inflation-targeting is an effective framework in the presence of systemic shocks, and, more broadly, whether it can be sustained throughout economic cycles.
After all, a policy regime that sets aside its only goal during a crisis seems to lack the ability to cope with unexpected challenges.
Critics identify this “crisis straitjacket syndrome” as the main problem with single-minded inflation targeting.
While theoretical arguments can be made to justify recent departures from policy, the reality is that in the post-crisis world, advanced-country central banks’ goals are no longer limited to price stability.
In the United States, the Federal Reserve has essentially adopted a quantitative employment target, with nominal GDP targets and other variations under discussion in other countries.
And financial stability is again a central-bank responsibility, including for the more conservative European Central Bank.
This shift toward multiple policy objectives inevitably reduces central-bank independence.
Some analysts have recently claimed that this is because the pursuit of GDP growth, job creation, and financial stability, as well as the establishment of priorities when there are tradeoffs, clearly requires political decisions, which should not be made by unelected officials alone.
Moreover, by pushing interest rates toward zero, the current policy of quantitative easing (increasing money supply by buying government securities) has strong, often regressive, income effects.
Opponents of central-bank independence contend that, given the allocational and distributional consequences of current monetary-policy interventions, central banks’ decision-making should be subject to political control.
But this argument neglects an important point.
While it is true that multiple policy targets tend to increase the political sensitivity of central banks’ decisions, concentrating only on price stability also has important distributional consequences and political implications.
In fact, politicization is a matter of scale, not a substantive transformation of monetary policymaking.
The real reason why central-bank independence tends to create a democratic deficit under a multi-target monetary-policy regime, and why it has become increasingly vulnerable, is that the two main arguments in favor of it no longer apply.
The first argument in favor of central-bank independence is that, without it, politicians can exploit expansionary monetary policy’s positive short-run effects at election time, without regard for its long-run inflationary consequences.
(By contrast, fiscal and exchange-rate policies rarely imply comparable temporal trade-offs, and thus are difficult to exploit for political gain.)
But this argument becomes irrelevant when ensuring price stability is no longer monetary policymakers’ sole task.
The second argument for institutional independence is that central banks have a clear comparative advantage in dealing with monetary issues, and can therefore be trusted to pursue their targets independently.
But this advantage does not extend to other policy areas.
Given that central banks are likely to continue to pursue multiple objectives for a long time, their independence will continue to erode.
As long as governments do not encroach excessively on central-bank decision-making, this development will restore balance in policymaking and support policy coordination, particularly in times of stress.
To ensure a positive outcome, policymakers should develop a fully transparent framework with well-defined “rules of engagement.”
A strict framework for allowing, and at the same time limiting, government’s involvement in central-bank decision-making is particularly crucial in emerging markets, given that, in most of them, central-bank independence has contributed not only to the eradication of inflation, but also to institution-building.
Central-bank independence is a peculiar institutional innovation.
Seemingly irrefutable theoretical models underlie a paradigm that has changed in significant ways, and that, if preserved, is bound to cause serious political problems.
Like it or not, policymakers must accept that central-bank independence will continue to weaken, and they should prepare to cope with the consequences.
Inequality is Killing Capitalism
LONDON – It is generally agreed that the crisis of 2008-2009 was caused by excessive bank lending, and that the failure to recover adequately from it stems from banks’ refusal to lend, owing to their “broken” balance sheets.
A typical story, much favored by followers of Friedrich von Hayek and the Austrian School of economics, goes like this: In the run up to the crisis, banks lent more money to borrowers than savers would have been prepared to lend otherwise, thanks to excessively cheap money provided by central banks, particularly the United States Federal Reserve.
Commercial banks, flush with central banks’ money, advanced credit for many unsound investment projects, with the explosion of financial innovation (particularly of derivative instruments) fueling the lending frenzy.
This inverted pyramid of debt collapsed when the Fed finally put a halt to the spending spree by hiking up interest rates.
(The Fed raised its benchmark federal funds rate from 1% in 2004 to 5.25% in 2006 and held it there until August 2007).
As a result, house prices collapsed, leaving a trail of zombie banks (whose liabilities far exceeded their assets) and ruined borrowers.
The problem now appears to be one of re-starting bank lending.
Impaired banks that do not want to lend must somehow be “made whole.”
This has been the purpose of the vast bank bailouts in the US and Europe, followed by several rounds of “quantitative easing,” by which central banks print money and pump it into the banking system through a variety of unorthodox channels.
(Hayekians object to this, arguing that, because the crisis was caused by excessive credit, it cannot be overcome with more.)
At the same time, regulatory regimes have been toughened everywhere to prevent banks from jeopardizing the financial system again.
For example, in addition to its price-stability mandate, the Bank of England has been given the new task of maintaining “the stability of the financial system.”
This analysis, while seemingly plausible, depends on the belief that it is the supply of credit that is essential to economic health: too much money ruins it, while too little destroys it.
But one can take another view, which is that demand for credit, rather than supply, is the crucial economic driver.
After all, banks are bound to lend on adequate collateral; and, in the run-up to the crisis, rising house prices provided it.
The supply of credit, in other words, resulted from the demand for credit.
This puts the question of the origins of the crisis in a somewhat different light.
It was not so much predatory lenders as it was imprudent, or deluded, borrowers, who bear the blame.
So the question arises: Why did people want to borrow so much?
Why did the ratio of household debt to income soar to unprecedented heights in the pre-recession days?
Let us agree that people are greedy, and that they always want more than they can afford.
Why, then, did this “greed” manifest itself so manically?
To answer that, we must look at what was happening to the distribution of income.
The world was getting steadily richer, but the income distribution within countries was becoming steadily more unequal.
Median incomes have been stagnant or even falling for the last 30 years, even as per capita GDP has grown.
This means that the rich have been creaming off a giant share of productivity growth.
And what did the relatively poor do to “keep up with the Joneses” in this world of rising standards?
They did what the poor have always done: got into debt.
In an earlier era, they became indebted to the pawnbroker; now they are indebted to banks or credit-card companies.
And, because their poverty was only relative and house prices were racing ahead, creditors were happy to let them sink deeper and deeper into debt.
Of course, some worried about the collapse of the household savings rate, but few were overly concerned.
In one of his last articles, Milton Friedman wrote that savings nowadays took the form of houses.
To me, this view of things explains much better than the orthodox account why, for all the money-pumping by central banks, commercial banks have not started lending again, and the economic recovery has petered out.
Just as lenders did not force money on the public before the crisis, so now they cannot force heavily indebted households to borrow, or businesses to seek loans to expand production when markets are flat or shrinking.
In short, recovery cannot be left to the Fed, the European Central Bank, or the Bank of England.
It requires the active involvement of fiscal policymakers.
Our current situation requires not a lender of last resort, but a spender of last resort, and that can only be governments.
If governments, with their already-high level of indebtedness, believe that they cannot borrow any more from the public, they should borrow from their central banks and spend the extra money themselves on public works and infrastructure projects.
This is the only way to get the big economies of the West moving again.
But, beyond this, we cannot carry on with a system that allows so much of the national income and wealth to pile up in so few hands.
Concerted redistribution of wealth and income has frequently been essential to the long-term survival of capitalism.
Nuclear Disarmament’s Asian Pivot
WASHINGTON, DC – In 2009, US President Barack Obama pledged to seek a world without nuclear weapons.
But, while he delivered on his promise to negotiate a New Strategic Arms Reduction Treaty with Russia a year later, progress has since stalled.
To break the deadlock, the current bilateral framework for negotiation, which has remained largely unchanged since the Cold War, must be transformed into a trilateral framework that includes China.
To be sure, such a move would significantly complicate negotiations.
After all, while decades of bilateral dialogue have given the United States and Russia a good sense of each other’s strategic perspectives – including the issues on which they disagree – China’s perception of strategic stability is unfamiliar.
But trilateral dialogues, catalyzed by skillful US diplomacy, could also serve as an opportunity to manage the countries’ strategic relations, which currently are characterized by contradictions and mistrust.
Russia seeks China’s support in opposing American missile-defense systems, and calls for the involvement of all nuclear states in future strategic arms-control talks, but then cites concerns about China’s military modernization to justify its refusal to negotiate with NATO on tactical nuclear-weapon reduction.
China, which has never adopted legally binding limits on its nuclear weapons or strategic nuclear-delivery vehicles, rejects Russia’s call to join negotiations – a stance that the US supports until the Russian and US nuclear arsenals move closer in size to those of China.
At the same time, US officials deny that their country’s missile-defense programs are directed against Russia or China, but refuse to offer a legally binding guarantee.
And the US Department of Defense is developing a robust program of long-range conventional strike weapons, which China and Russia cite to justify their efforts to strengthen their offensive nuclear forces.
Although multilateral cooperation on nuclear issues has been effective in some cases, such as in ratifying the Nuclear Nonproliferation Treaty, it has been inadequate in others, such as in easing tensions with Iran and North Korea.
In fact, even when China, Russia, and the US share the same agenda, their differing diplomatic tactics often undermine their ability to achieve their objectives.
For example, the three countries’ policies are inadvertently contributing to proliferation pressures in Asia and Europe.
US pledges to defend Japan against a nuclear attack from China or North Korea have played a decisive role in dissuading the Japanese from seeking their own nuclear weapons.
Given this, a Chinese nuclear surge – even one that did not lead to US-China parity – could undermine the credibility of American deterrence commitments, possibly motivating Japan to launch its own nuclear program.
Similarly, some of NATO’s newer members, many of which are former Soviet-bloc states, are anxious about the prospect of Russian rearmament.
As a result, they oppose efforts to reduce the number of American nuclear weapons in Europe, part of NATO’s “nuclear sharing” policy.
Perhaps the biggest obstacle to initiating a trilateral dialogue is Chinese resistance to formal nuclear arms-control agreements, which is rooted in the memory of Cold War-era nonproliferation initiatives aimed partly at preventing China from developing its own nuclear deterrent.
Since then, Chinese officials have insisted that they do not belong in US-Russian strategic-arms talks, because the two countries’ nuclear arsenals dwarf theirs.
But, as the US and Russia reduce their nuclear stockpiles, this excuse is becoming less valid, and China’s exclusion from negotiations is becoming an increasingly significant hindrance to disarmament.
Securing a binding commitment from China’s government to limit its nuclear development is crucial to reassuring the US and Russia that further strategic-weapons cuts will not undermine global or regional stability.
China’s new leadership is further removed from Maoist-era reflexive opposition to nuclear negotiations; Russian leaders’ confidence in their economic and military resurgence is waning; and both countries are increasingly frustrated by the lack of progress in nuclear talks with North Korea and Iran.
Meanwhile, faced with a large federal budget deficit, many American voters would welcome reduced spending on nuclear weapons.
The US should capitalize on this situation, leveraging Russian concerns and interests to induce China to join strategic arms-control efforts.
China might be willing to make a unilateral, but enforceable, commitment not to augment its nuclear arsenal, if Russia and the US reduce theirs further.
Determining the circumstances that might induce such restraint – and the conditions that would be needed to sustain it – is crucial to reinvigorating nuclear disarmament efforts.
With Russia ostensibly on board, it is up to the US to initiate a transformation in the nuclear-negotiation framework – and that means convincing China to participate.
The Nemesis of Turkish Power
PARIS – A few days ago, Turkey’s Prime Minister Recep Tayyip Erdoğan told Al Jazeera, the pan-Arab television network, that he would use his warships to prevent Israeli commandos from again boarding Gaza-bound ships, as they did last year.
And in a speech in Cairo, he declared support for the United Nations’ recognition of a Palestinian state “an obligation.”
So, will a “Turkish Summer” be the first, if not the main, strategic result of the “Arab Spring”?
Is the Middle East faced with a neo-Ottoman Turkey’s irresistible rise to regional power?
And could the world be witnessing the “Orientalization” of Turkey?
The Arab revolutions, following on the European Union’s resounding “No, Yes, But” to Turkey’s membership bid, have reinforced among Turks the attraction of the Orient while liberating their mix of nationalistic and religious impulses.
Indeed, Erdoğan makes more references to God in his public statements nowadays than he ever did in the past.
Over the last few years, the Western world has been asking itself, with a mixture of guilt and apprehension, “Who lost Turkey”? But is Turkey, enthralled by its economic and diplomatic successes, now running the risk of losing itself?
Turkey’s government was no better at anticipating the changes in the Arab world than were local regimes and Western powers.
At the end of 2010, Erdoğan was the (last) recipient of a human-rights prize granted by Libya’s Col. Muammar el-Qaddafi.
Turkey has also tried, desperately at times, to maintain good relations with Bashar al-Assad’s regime in Syria, despite the Syrian government’s abominable behavior.
Turkey’s position was, to say the least, perceived badly by the “Arab street.”
A major reason for Turkey’s tougher position towards Israel, one suspects, is Erdoğan’s attempt to rebalance the country’s regional image.
Despite its difficulty in grasping the reality and depth of the Arab revolutionary process, Turkey is nonetheless more than ever a key player in the region.
It may not be a model in the strict sense of the term, but it is at least a source of inspiration throughout the region, even though much of its record is ambiguous in both essence and performance.
In seventeenth- and eighteenth-century Europe, the “exoticism” of the Ottoman Empire was used as a mirror to project Europeans’ own shortcomings and insecurities.
In France, one spoke of “Turqueries,” such as in Moliere’s play “The Bourgeois Gentilhomme.”
Today, it is the Arab world that tends to use Turkey the way that Europe did in the past.
This time, however, it is modernity, not exoticism, that is the source of fascination.
But, because of its secular tradition (now being challenged by the current regime), its non-Arab identity, its behavior towards its Kurdish minority, and the ambivalence of the Ottoman legacy, Turkey is as much a counter-model as a model.
It is a mirror in which the Arab world projects its fears, as well as its hopes.
At a strategic level, Turkey is correct in thinking that the Arab revolutionary process has weakened its direct rivals.
Iran, for example, is on the verge of losing the faithful junior partner that it had in Syria.
But what will happen if Turkey has to live next to a nuclear-armed Iran?
Will it have to get the bomb, too?
Likewise, while Egypt is in the midst of a messy revolution, and must give priority to internal change, it also intends to regain a more visible and influential role within the Palestinian national movement(s) and in the region as a whole.
The “Middle Empire” of the Middle East will no longer remain a sleeping giant.
Of course, Turkey is less destabilized than its Arab rivals and partners by a revolutionary process that does not directly challenge it.
After all, Turkey is already a functioning democracy.
Turkey is also much less worried about its future than Israel is.
Compared with the small Jewish state, Turkey has an expanding population and a deep awareness of its historical, religious, and cultural affinities with its neighbors.
These important assets make Turkey an “indispensable nation” in the region.
So, what threatens Turkey today is Turkey itself.
Turkey is not “Asian” only in terms of economic energy and rapid growth: it is also Asian in a more political sense, with the rising temptation of a form of “Oriental despotism.”
Indeed, for many years, domestic critics of Erdoğan’s government have been denouncing what they describe as the “Putinization” of the regime.
Turkey, not the European Union, is currently making its presence felt in the world.
But the course of history may change rapidly.
In reality, Turkey needs Europe as much as Europe needs Turkey.
Europe is for Turkey “a principle of moderation” and an enticement to remain democratic.
Turkey is for Europe, beyond its demography, “a principle of energy” and a cure for pessimism – even if, as Erdoğan is showing, self-confidence can easily turn into hubris.
Bubbles Forever
NEW HAVEN – You might think that we have been living in a post-bubble world since the collapse in 2006 of the biggest-ever worldwide real-estate bubble and the end of a major worldwide stock-market bubble the following year.
But talk of bubbles keeps reappearing – new or continuing housing bubbles in many countries, a new global stock-market bubble, a long-term bond-market bubble in the United States and other countries, an oil-price bubble, a gold bubble, and so on.
Nevertheless, I was not expecting a bubble story when I visited Colombia last month.
But, once again, people there told me about an ongoing real-estate bubble, and my driver showed me around the seaside resort town of Cartagena, pointing out, with a tone of amazement, several homes that had recently sold for millions of dollars.
The Banco de la República, Colombia’s central bank, maintains a home price index for three main cities – Bogotá, Medellín, and Cali.
The index has risen 69% in real (inflation-adjusted) terms since 2004, with most of the increase coming after 2007.
That rate of price growth recalls the US experience, with the S&P/Case-Shiller Ten-City Home Price Index for the US rising 131% in real terms from its bottom in 1997 to its peak in 2006.
This raises the question: just what is a speculative bubble?
The Oxford English Dictionary defines a bubble as “anything fragile, unsubstantial, empty, or worthless; a deceptive show.
From 17th c. onwards often applied to delusive commercial or financial schemes.” The problem is that words like “show” and “scheme” suggest a deliberate creation, rather than a widespread social phenomenon that is not directed by any impresario.
Maybe the word bubble is used too carelessly.
Eugene Fama certainly thinks so.
Fama, the most important proponent of the “efficient markets hypothesis,” denies that bubbles exist.
As he put it in a 2010 interview with John Cassidy for The New Yorker, “I don’t even know what a bubble means.
These words have become popular.
I don’t think they have any meaning.”
A “speculative bubble,” I wrote then, is “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase.” This attracts “a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”
That seems to be the core of the meaning of the word as it is most consistently used.
Implicit in this definition is a suggestion about why it is so difficult for “smart money” to profit by betting against bubbles: the psychological contagion promotes a mindset that justifies the price increases, so that participation in the bubble might be called almost rational.
But it is not rational.
The story in every country is different, reflecting its own news, which does not always jibe with news in other countries.
For example, the current story in Colombia appears to be that the country’s government, now under the well-regarded management of President Juan Manuel Santos, has brought down inflation and interest rates to developed-country levels, while all but eliminating the threat posed by the FARC rebels, thereby injecting new vitality into the Colombian economy.
That is a good enough story to drive a housing bubble.
Because bubbles are essentially social-psychological phenomena, they are, by their very nature, difficult to control.
Regulatory action since the financial crisis might diminish bubbles in the future.
But public fear of bubbles may also enhance psychological contagion, fueling even more self-fulfilling prophecies.
One problem with the word bubble is that it creates a mental picture of an expanding soap bubble, which is destined to pop suddenly and irrevocably.
But speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reflate.
It would seem more accurate to refer to these episodes as speculative epidemics.
We know from influenza that a new epidemic can suddenly appear just as an older one is fading, if a new form of the virus appears, or if some environmental factor increases the contagion rate.
Similarly, a new speculative bubble can appear anywhere if a new story about the economy appears, and if it has enough narrative strength to spark a new contagion of investor thinking.
This is what happened in the bull market of the 1920’s in the US, with the peak in 1929.
We have distorted that history by thinking of bubbles as a period of dramatic price growth, followed by a sudden turning point and a major and definitive crash.
In fact, a major boom in real stock prices in the US after “Black Tuesday” brought them halfway back to 1929 levels by 1930.
This was followed by a second crash, another boom from 1932 to 1937, and a third crash.
Speculative bubbles do not end like a short story, novel, or play.
There is no final denouement that brings all the strands of a narrative into an impressive final conclusion.
The New Age Divide
LONDON – So what does 2009 hold in store for us?
As ever, the unpredictable – a terrorist atrocity or a rash decision by a national leader – will take its toll.
But much of what happens tomorrow will be a result of history.
In the last century, the world’s population increased four-fold, and the number of people living in cities thirteen-fold.
The world’s output grew by a factor of forty, water use by nine, energy use by thirteen, and the emission of carbon dioxide by seventeen.
The twenty-first century has to live with the consequences of all that, good and bad.
Some of the factors that will shape our lives appear to tug in different directions.
The age profiles of our societies are changing dramatically.
Asia and Europe have experienced sharp falls in fertility rates.
The figures in Hong Kong, Singapore, and South Korea are even more remarkable than those in Catholic European countries like Spain, Italy, and Poland.
At the same time, people are living longer, so that in a generation the number of elderly dependents in some countries will outgrow that of the young.
We have been accustomed to societies with a demographic structure that resembles a pyramid – a broad youth base tapering to an elderly tip.
But now the structure is more like the profile of a skyscraper, more or less the same from top to bottom.
Our older populations have to cope with ever younger technology.
This expands educational and employment opportunities.
Many students today are being prepared for jobs that do not yet exist.
Moreover, some sorts of knowledge can rapidly become redundant.
Indeed, half of what a student learns in the first year of a four-year technical course will be out of date by the third year.
Change itself accelerates.
Its results are magnified.
Its benefits and its disadvantages penetrate more deeply.
Every month there are 31 billion searches on Google.
It took radio 38 years to reach an audience of 50 million.
Facebook did that in two years.
We usually reckon that it is easier for young, unformed minds to handle changes like these.
How does someone like me, at university in the early 1960’s, adapt and cope?
How will older societies manage new technology and remain dynamic?
The biggest challenge for all of us, young and old, next year and for the indefinite future, will result from a different sort of change that is unlikely to respond simply to technological determinism.
It results from the way we have been living for two centuries.
If older leaders do not produce the right answers soon, younger generations will reap the whirlwind – sometimes literally.
2009 is supposed to see the conclusion of an agreement on global warming and climate change to succeed and build on the Kyoto Protocol.
Copenhagen is the venue for the meeting.
Optimists cheer the departure of the Bush administration and assume that the arrival of the Obama presidency, which unlike its predecessor is not in denial about the science of global warming, will unlock the prospect of a deal.
Pessimists note that our mounting economic woes around the world are being used as an excuse for inaction on cuts in carbon emissions.
But continuing to use energy inefficiently will not mitigate the painful effects of the global economic crisis.
If we make today’s problems the excuse for failure to save the environment, we will simply pile up much bigger – and potentially catastrophic – problems tomorrow.
China, the biggest of the emerging economies, clearly understands this.
Whether India does as well seems to me rather more doubtful.
China faces its own environmental dangers, for example, water stress.
It does not want to see its industries outdated and uncompetitive.
China will work for a global consensus on climate change.
The big question is whether it will be able to impose tougher environmental standards throughout the whole country.
For America, the problem is also mainly one of domestic politics.
There will be no worthwhile American offer on the environment until there is a deal in Congress.
This year’s task may be to reach a global understanding in Copenhagen that is not too prescriptive, but which is more than aspirational and into which an American domestic political agreement can be incorporated once Obama achieves it.
But all of this sensitive diplomacy could be wrecked if, in response to rising unemployment, there is an outbreak of trade protectionism involving America, Europe, and China.
That is when the economic and environmental agendas could fatally collide.
So young and old alike should hold onto their hats in the exciting but dangerous years ahead.
All of us must hope that the first Internet-generation American President can lead his own country and the rest of humanity into a safer and more sustainably prosperous future.
The New Bogeymen of Financial Capitalism
The sub-prime crisis has diverted attention from rising fears about Sovereign Wealth Funds (SWF’s) as the new bogeyman of global finance.
But the minute the sub-prime crisis subsides, anxieties about SWF’s will return.
For the emergence of this vast and growing pool of state-controlled funds may have implications more far-reaching, and certainly more politically sensitive, than the hopefully temporary distress caused by the subprime crisis.
Indeed, if SWF’s continue to grow their investments are bound to permanently alter the relative weight of state and privately controlled assets in advanced economies.
According to Morgan Stanley, SWF’s are expected to manage $12 trillion by 2015, up from about $2.5 trillion today.
Both sums dwarf the sums controlled by hedge funds and private equity groups.
Thus some of the biggest investors – both passive and strategic – in financial markets in the coming years will be government institutions.
That the biggest of these institutions are in China, Vladimir Putin’s Russia and some unstable petro-states adds another worry to the mix.
The growth of SWF’s is a direct consequence of the accumulation of more than $5 trillion in foreign reserves by emerging-market economies in Asia and among oil and commodity exporting countries.
These economies’ current-account surpluses, together with massive inflows of capital, have led their monetary authorities to try to prevent their national currencies from appreciating in order to maintain the competitiveness of their industries.
Initially, these countries invested their foreign reserves in liquid assets – short-term United States Treasury bills and government securities issued by other reserve currency countries.
Then they realized that their holdings in liquid and low-return assets far exceed what is needed to avoid the type of speculative runs that East Asia experienced in 1997, and Russia in 1998.
After all, why hold US T-bills with a meager 5% return, German Bunds with a 4% return, or Japanese government bonds with a 0.5% return when you can acquire foreign firms, invest in real assets, stock markets, or higher-yielding corporate bonds?
The answer seemed a no-brainer.
So central banks are transferring their excess reserves to existing or newly created SWF’s, which in turn invest in high-return equities.
But the emergence of SWF’s is creating a political backlash in the form of “financial protectionism.”
Examples include the China National Overseas Oil Company’s failed effort to buy the US energy firm UNOCAL, and Dubai Ports’ failed bid to buy a firm managing major US ports.
There is now legislation pending in the US Congress aimed at tightening the approval process for foreign acquisition of US firms, and a similar reaction is occurring in Asia and Europe.
Of course, not all SWF’s favor strategic investments, i.e. taking controlling stakes in the acquired firms.
Some, like Singapore’s Government Investment Corporation, prefer passive and diversified investments with no controlling stake in companies.
And China, when it took a 10% stake in the US private equity group Blackstone, eschewed any voting rights in the company’s management, perhaps as a way of keeping US financial regulators happy.
A third type of SWF takes the form of oil investment funds among oil/energy exporting countries, which are saving their windfalls into foreign assets.
Norway, indeed, has been doing this – very quietly – for many years
Views about how to respond to the SWF’s vary.
The United Kingdom has adopted a laissez faire approach, while political concerns dominate in the US, France and Germany.
Some worry about reciprocity: if Chinese firms are allowed to invest in US and EU firms, shouldn’t US and EU firms be allowed to invest freely in any Chinese firm?
Others worry about national security: what would happen if “our” ports and security industries or other “strategic” firms were taken over by China, Russia, or Saudi Arabia?
Still others worry about the fact that SWF’s are state-owned: what would happen to corporate governance when investors may have objectives other than maximizing risk-adjusted returns?
Similarly, there are concerns about transparency: many SWF’s do not reveal their investment strategies and how they operate.
What would happen if a small group of huge state-owned SWF’s made very large investments in a variety of assets?
How might equity prices or bond yields be distorted by $200 billion gorillas that need to invest $4 billion per week?
Dire predictions that the rise of the SWF’s means that the global financial system is becoming a form of state capitalism may be exaggerated.
But a small group of government players managing a vast amount of foreign assets does create complications.
Of course, so long as the US runs annual current-account deficits of almost a trillion dollars, it will need to borrow from strategic rivals such as China, Russia, and unstable Middle East petro-states, which increasingly will lend in the form of high-yield equity investments rather than low-yield T-bills.
So unless the US starts to save more, it will find it hard to complain about the form – equity rather than debt – that the financing of its external deficit takes.
It is also true that the massive accumulation of foreign reserves that is now feeding the SWFs’ growth is excessive and driven by misguided exchange-rate policies, with vastly undervalued currencies resulting in current-account surpluses.
These countries need to allow greater exchange-rate flexibility and currency appreciation to reduce their external surpluses – and thus the need to accumulate huge foreign reserves in the first place.
Indeed, emerging-market economies should reduce their accumulation of foreign assets rather than hope to weather the political backlash against SWF’s in the US and EU.
SWF’s are, it seems, here to stay and grow, and they do offer significant benefits.
But if they grow too large while their activities remain opaque, widespread “financial protectionism” will become all but inevitable.
The New Bush Doctrine
President George W. Bush’s second inaugural address set forth an ambitious vision of the role of the United States in advancing the cause of freedom worldwide, fueling worldwide speculation over the course of American foreign policy during the next four years.
The ideas expressed in Bush’s speech thus deserve serious consideration.
“It is the policy of the United States to seek and support the growth of democratic movements and institutions in every nation and culture,” Bush declared, “with the ultimate goal of ending tyranny in our world.”
There is a bow to diplomacy in the assurance that fulfilling this mission “is not primarily the task of arms, though we will defend our friends and ourselves by force of arms when necessary.”
Similarly, Bush recognizes that outsiders cannot force liberty on people.
Instead, “Freedom by its nature must be chosen and defended by citizens and sustained by the rule of law and the protection of minorities.”
Finally, there is acceptance of diversity, for “when the soul of a nation finally speaks, the institutions that arise may reflect customs and traditions very different from our own.
America will not impose our own style of government on the unwilling.
Our goal instead is to help others find their own voice, attain their own freedom and make their own way.”
I agree with this goal, and have devoted the last fifteen years of my life and several billion dollars of my fortune to attaining it.
Yet I find myself in sharp disagreement with the Bush administration.
It is not only that there is a large gap between official words and deeds; I find that the words sometimes directly contradict the deeds in a kind of Orwellian doublespeak.
When Bush declared war on terror, he used that war to invade Iraq.
When no connection with Al Qaeda could be established and no weapons of mass destruction could be found, he declared that we invaded Iraq to introduce democracy.
Now the elections in Iraq are about to be converted into a civil war between a Shi’a-Kurd dominated government and a Sunni insurrection.
In Iraq and beyond, when Bush says that “freedom will prevail,” many interpret him to mean that America will prevail.
This impugned America’s motives and deprived the US of whatever moral authority the country once had to intervene in other countries’ domestic affairs.
If, for example, America offers support to Iranian students who are genuinely striving for greater freedom, they are now more likely to be endangered by US support, as the regime’s hardliners are strengthened.
To explain what is wrong with the new Bush doctrine, I have to invoke the concept of open society.
That is the concept that guides me in my efforts to foster freedom around the world.
The work has been carried out through foundations operating on the ground and led by citizens who understand the limits of the possible in their countries.
Occasionally, when a repressive regime expels our foundation – as happened in Belarus and Uzbekistan – we operate from the outside.
Paradoxically, the most successful open society in the world, the US, does not properly understand the first principles of an open society; indeed, its current leadership actively disavows them.
The concept of open society is based on the recognition that nobody possesses the ultimate truth.
To claim otherwise leads to repression.
In short, we may be wrong.
That is precisely the possibility that Bush refuses to acknowledge, and his denial appeals to a significant segment of the American public.
An equally significant segment is appalled.
This has left the US not only deeply divided, but also at loggerheads with much of the rest of the world, which considers our policies high-handed and arbitrary.
President Bush regards his reelection as an endorsement of his policies, and feels reinforced in his distorted view of the world.
The “accountability moment” has passed, he claims, and he is ready to confront tyranny throughout the world according to his own lights.
But the critical process that is at the core of an open society – which the US abandoned for eighteen months after September 11, 2001 – cannot be forsaken.
That absence of self-criticism is what led America into the Iraq quagmire.
A better understanding of the concept of open society requires that promoting freedom and democracy and promoting American values and interests be distinguished.
If it is freedom and democracy that are wanted, they can be fostered only by strengthening international law and international institutions.
Bush is right to assert that repressive regimes can no longer hide behind a cloak of sovereignty: what goes on inside tyrannies and failed states is of vital interest to the rest of the world.
But intervention in other states’ internal affairs must be legitimate, which requires clearly established rules.
As the dominant power in the world, America has a unique responsibility to provide leadership in international cooperation.
America cannot do whatever it wants, as the Iraqi debacle has demonstrated; but, at the same time, nothing much can be achieved in the way of international cooperation without US leadership, or at least active participation.
Only by taking these lessons to heart can progress be made towards the lofty goals that Bush announced.
China’s New Path
CAMBRIDGE – The opaque nature of China’s government makes it difficult to see where Chinese economic policy is heading, and thus how the Chinese economy will develop in the years ahead.
But the scale of China’s economy and its role in global trade and financial markets compel us to try to understand the intentions of China’s new leadership.
A useful starting point is to examine the key appointments that have been made since President Xi Jinping assumed office.
One surprise was the decision to retain Zhou Xiaochuan as Governor of the People’s Bank of China (PBOC).
Zhou had come to the end of his term – and had reached an age at which officials are supposed to retire.
So the decision to keep him on for at least the next two years represents a significant endorsement by the new Chinese leadership.
Zhou is an intelligent and internationally respected expert on monetary policy and finance.
As the head of the PBOC, he has favored more market-based monetary policies and increased internationalization of China’s currency, the renminbi.
He has also worked successfully to contain inflationary pressures.
We can expect more of the same in the coming years.
The new finance minister, Lou Jiwei, comes to the ministry from the China Investment Corporation, China’s sovereign wealth fund, where he dealt with global capital markets on a daily basis.
Lou, a trained economist who previously served in the Ministry of Finance as a deputy minister, where he was a voice for pro-market reforms, indicated his current approach to tax and budget policy at a recent meeting in Beijing.
He rejected what he described as the European style of very large government and high tax rates and the American style of lower tax rates but large fiscal deficits, in favor of low budget deficits and a tax system that would promote “opportunities” for individuals and private enterprises.
Xi and Premier Li Keqiang obviously knew what they were getting when they appointed Lou.
And, despite his age, they promised that he would have a full five years as Finance Minister, which would push his tenure past the normal retirement age.
Liu He is perhaps the least visible of the key economic thinkers. Liu played an important role in shaping the recently adopted 12th Five-Year Plan, with its emphasis on urbanization and service-sector development as a means to increase personal incomes and the share of consumer spending in GDP.
He has recently been promoted to the post of Deputy Director of the National Development and Reform Commission, the principal body that advises the State Council on economic-development strategy and macroeconomic policy.
Taken together, these appointments demonstrate the new Chinese leadership’s emphasis on pro-market reforms and a shift from heavy industry to greater reliance on consumption and services.
That shift is likely to mean a slower rate of GDP growth than the annual rate of nearly 10% that China achieved during the last three decades. But a slowdown to 7% annual growth would still double China’s GDP over the next decade.
More consumption and less heavy industry will also reduce China’s demand for raw materials, dampening global commodity prices.
Even more significant, shifting income from state-owned enterprises to middle-class workers and increasing consumer spending will reduce China’s enormous saving rate.
Since a country’s current-account surplus is the difference between its national saving and its national investment, China’s current-account surplus is likely to continue to shrink in the coming years.
That is consistent with the Five-Year Plan’s goal of basing GDP growth more on domestic demand and less on exports.
Since China’s external surplus is already down to less than 2% of GDP, a decline in domestic saving could result in China beginning to run a current-account deficit. In that case, China would no longer be a net buyer of foreign bonds and other assets.
If China wanted to continue to invest in foreign businesses and natural resources, it would have to become a net seller of bonds from its portfolio.
The new leadership will, of course, face serious obstacles as it tries to shift policy in these market-friendly directions.
China’s state-owned enterprises are powerful forces in the economy, with substantial political influence; they will resist the shift from heavy industry to services.
Likewise, the widespread and official recognition of corruption introduces a new source of uncertainty into national and local politics.
But China’s new leaders have signaled where they want the economy to go and have emphasized their determination to reduce corruption.
Most important, they have put talented people in charge of the process.
The New Cosmopolitans
As globalization proceeds, with the help of ever-faster communications, faster travel, and more powerful multinational corporations, a new, cosmopolitan social class seems to be emerging.
These citizens of the world are developing loyalties to each other that cross national boundaries.
I was at a dinner the other night with Yale World Fellows, a carefully selected group of professionals, representing every major country of the world, who spend a semester here.
It was an unusual experience, because I began to feel that none of these people were really foreign to me.
It seemed they were probably easier to talk to than the local Americans who were waiting on us as and serving food.
Of course, a cosmopolitan class is hardly new.
In fact, 50 years ago, in his classic book Social Theory and Social Structure, the late sociologist Robert K. Merton described the results of a case study of influential people in a typical American town, Rovere, New Jersey.
As a sociologist, he chose this tiny town to study how people relate to each other and influence each other, just as biologists study tiny worms with only a few hundred cells so that they can study how each cell relates to an organism as a whole.
Merton discovered a strong pattern.
Rovere’s influential people seemed to be sharply divided into “cosmopolitan influentials,” who habitually orient themselves with respect to the world at large, and “local influentials,” who orient themselves with respect to their own town.
As he and his assistants interviewed people, the division between the two groups became more intriguing, and significant, in his mind.
Merton did not say that the cosmopolitan influentials were influential outside Rovere – apparently none of them was.
What stood out instead was their habitual frame of reference, which was tied to their personal identities.
When Merton engaged people in conversation, any topic would remind the cosmopolitan influentials of the world at large, while local influentials were reminded of things in their own town.
Cosmopolitan influentials, Merton said, tended to hang their success on their general knowledge, whereas locals relied on their friendships and connections.
The cosmopolitan influentials were often uninterested in meeting new people in town; the locals wanted to know everyone.
The cosmopolitan influentials tended to take positions in local government that reflected their broad expertise: board of health, housing committee, or board of education.
The local influentials tend to be in positions that they got through their local popularity: street commissioner, mayor, or township board member.
The cosmopolitan influential in the town is like the medical specialist; the local influential is like the family doctor.
Merton concluded: “It appears that the cosmopolitan influential has a following because he knows , the local influential because he understands .”
The local influentials, Merton discovered, spoke affectionately of their town, as if it were a unique and special place, and often said they would never leave.
The cosmopolitans spoke as if they might leave any day.
What was true in Merton’s day is becoming even more starkly true in today’s globalized economy.
What I find particularly striking is the sense of loyalty developing among cosmopolitans.
After the World Fellows Dinner, the Fellow from Namibia was extolling to me, in impeccable and relaxed English, the beautiful vacation homes I might find (and even buy) there.
I felt as if I could perhaps fall into a relationship with him that might work against the interests of the locals in Namibia.
I could picture doing that, and he and I would be natural allies, if I let it happen.
I was left wondering why this is happening on such a scale now.
Obviously, improved communications technology plays a role.
But how much does that explain the impression that the division between cosmopolitans and locals is so much wider now?
One must realize that individuals choose whether to play the role of cosmopolitan or local, and how much to invest in that role.
People make a conscious choice to become either cosmopolitans or locals, depending on their own personal talents and the perceived returns from making the choice.
In the twenty-first century, the new information age creates opportunities not just to be cosmopolitan in spirit and orientation, but to forge strong connections with other cosmopolitans.
The cosmopolitans have shared experiences: they are directly communicating with each other across the globe.
Many cosmopolitans around the world now also share the English language, the new lingua franca.
The term “global village” was first popularized in the late 1960’s by Canadian communications maven Marshall McLuhan in response to the already powerful communications media of that day.
But McLuhan could not have anticipated the cosmopolitan class, because he could not have anticipated the immense development of direct interpersonal communications media that allow cosmopolitans around the world to form friendships.
The cosmopolitans tend to be increasingly wealthy, and their wealth helps mark them as cosmopolitan.
Thus, economic inequality is felt differently in today’s world.
Perhaps it is accepted resignedly, as the cosmopolitan class is too amorphous and ill-defined to be the target of any social movement.
There is no spokesperson for the cosmopolitan class, no organization that could be blamed for what is happening.
I fear for the future.
How will the cosmopolitan class behave as their role in the world economy continues to strengthen?
How unfeeling will they come to be about the people who share their neighborhoods?
Most importantly, if resentment by the locals emerges, what political consequences will result?
The New Economy’s Have and Have Nots
CAMBRIDGE: Improving technology, radical restructuring, and increasing competition are the hallmarks of the New Economy.
But the higher productivity growth and pressures to cut costs that result test a society's cohesion.
Are we marching forward technologically only to march backward socially?
The New Economy’s social pressures are highest in America because (at least in comparison with Europe) its social safety net is riddled with holes.
The old jibe about American prosperity was that it was composed of jobs flipping hamburgers and armies of homeless people; the new joke seems to be one of Silicon Valley billionaires and displaced workers from the Atlantic to the Pacific.
What is the real record?
Recent US economic data reveals four facts:
- America’s poverty rate is at its lowest point in 20 years.
Although more than 30 million people still live in poverty, this is millions less than only a few years ago;
- Real median family income is at its highest level in over 30 years;
- Unemployment is at its lowest level in 30 years;
- Over the past few years, the income share of the bottom 20% of households is at its lowest in over 30 years, while the income share of the top 5%-20% of households is at its highest.
Those seeking the positive will find in the statistics concerning increased median income, reduced poverty, and record low unemployment; those in search of the bleak will find it in the 12% of America’s population that remains poor and in the country’s increasing concentration of wealth at the top.
So, the New Economy did not abolish poverty amidst plenty, though there are now relatively fewer people in destitution in America (i.e. less than $17,000 for a family of 4).
Of course, the rich are getting richer (a lot richer!), but low-income groups are gaining ground, too.
Yet their advance is disappointing compared to the economy at large and even more so when compared with the top 20%, or even 40%, of America’s population.
The top 5% starts at an income of $142,000 while the bottom 20% peaks at $17,000, a ratio of 8/3, which is a big jump from the ratio of 6/3 of 30 years ago.
Thus the mixed verdict is this: less poverty, higher median incomes, and more inequality.
But increased competition, restructuring, and new technologies inevitably displace workers.
How, then, is it possible that even these people seem to be getting ahead?
The answer lies in this fact: increased competition and improving productivity reduce the inflationary pressures that arose during previous economic expansions.
As a result, economic expansion continues for much longer – America’s current boom is its longest expansion ever -- allowing more and more people to become employed.
And a job remains the single most important element in getting ahead.
Europeans look at the US picture and argue that inequality, not jobs, is the key issue.
They argue that a country where more than 30% of households earn less that $25,000 is one where working does not provide you with enough money with which to live.
True, and this is America’s chief predicament.
America’s answer is that it is better to work than to be marginalized through welfare or unemployment.
Europe’s policy is to abolish extreme inequality and poverty by lavish unemployment compensation that puts a floor under the willingness of people to accept poor jobs.
That strategy, however, costs a fortune and is becoming unaffordable.
As this system is gradually dismantled, Europeans will begin to experience more inequality though perhaps not American-style poverty.
Education, not the economic system, is what is seen by an increasing number of Americans as the prime cause of inequality in their country.
They may be right.
But bad schools are not the result of skimpy education budgets.
They reflect an inability to get results.
Will the New Economy eventually reinvent American education?
It will do so only when people are allowed to create broad alternatives to schools dominated by teachers' unions.
America’s church-operated schools and private, charter schools work extremely well.
So the problem is not America’s students but its unionized teachers, who in addition to being well organized are big donors to political campaigns.
This influence keeps New Economy-style reforms such as education vouchers off the table and poverty on the charts.
Amazingly, in the one area vital to its economic and social performance, America shies away from biting the reform bullet.
The New Face of Fascism
Extreme-right and post-fascist parties, whose rising popularity caused alarm across Western Europe a few years ago, seem to be fading from the electoral scene.
But does this mean that political radicalism, extreme-right sentiments, and fascism in Europe are dying out?
Hardly.
Just as both extreme-right and post-fascist groups in Western Europe weaken, Eastern Europe has seen a revival of extreme-right and fascist parties, most ominously with the successes of nationalist radicals in the recent Russian and Serbian elections.
At the same time, the costs of weakening extreme-right, nationalist, and post-fascist parties in Western and Central Europe have been high: mainstream political forces were forced to adopt some of the extreme right's vocabulary and agenda.
Many mainstream European politicians and parties now espouse anti-immigration policies, express greater skepticism toward European integration, or wield a form of anti-Semitism that masquerades as criticism of Israel's policies.
Extremist parties have also been marginalized owing to their weak position in pan-European politics.
Voters in Italy, France, the Netherlands, or Austria - the countries in which post-fascist or extreme-right parties incited the greatest concerns - gradually realized that mainstream democratic forces in Europe would allow extremist parties only limited influence in the European Parliament and other EU institutions.
Some - for example, Jörg Haider's Free Democrats in Austria, or Gianfranco Fini's Italian post-fascists - were forced to temper their radicalism after joining government coalitions.
While xenophobia - provoked mostly by fears about immigration, EU enlargement, and pressures of globalization - has driven West European extremism, xenophobic radicalism in Europe's east has different causes.
The recent electoral successes of the Serbian Radical Party of Vojislav Seselj, Russian nationalist parties, as well as the strong position of Vadim Tudor's Greater Romania Party in Romania, were caused mainly by a combination of rabid nationalism and the pressures of modernization.
These countries, after some delay, are following in the footsteps of some postcommunist nations in Central Europe, where nationalist/populist parties, such as the Movement for a Democratic Slovakia of Vladimir Meciar, retarded democratization and market reform a decade ago.
As in Western Europe, in most postcommunist countries that will become EU members in May 2004, both political radicalism and nationalism have been neutralized at the cost of being to some extent embraced by mainstream political parties.
Milder versions of nationalist, euroskeptic, or xenophobic slogans can now be heard from political parties such as the Czech Republic's Civic Democrats or Hungary's Fidesz, the largest opposition forces in those countries.
In other words, both the language and the agenda that originally belonged to extreme-right parties have been appropriated by the political mainstream.
But Russia, Serbia, and Romania probably have a more difficult road ahead in fending off their extremists.
First, unlike the postcommunist countries of Central Europe, they lack Western political and philosophical traditions.
Close ties between the state and their Orthodox churches forged state religions that helped to create a strong sense of national messianism.
So nationalists in Russia, Serbia, and Romania draw on deep-rooted beliefs that their nations have special historical missions.
Second, because the role of the state has traditionally been strong in these countries - the democratic separation of powers and efforts to introduce the rule of law are relatively new developments - corporatist tendencies that characterized, for example, Italian fascism in the 1930's, remain potent.
Finally, globalization, the pressures arising from market reform, modernization of institutions, and other new phenomena, disrupt and disorient these societies.
A strong sense of historical mission, social and economic problems, a diminished international status: all combine to form an explosive mix that plays into the hands of radicals.
So, at least in these three countries, the rise of post-fascist tendencies, nationalism, and political extremism may not be temporary, as in Central Europe, or remain the marginal phenomena witnessed recently in Western Europe.
But important differences between Russia, Serbia, and Romania should be noted.
The last of the three countries is a candidate for EU membership in 2007, and the accession process has had a moderating effect on Romanian politics.
Romania's two million ethnic Hungarians, the main political targets of Romanian nationalists, represent a bridge to the EU, because Hungary will be a member of the EU three years before Romania.
Transylvania, where the country's ethnic Hungarians are overwhelmingly concentrated, is also Romania's cultural bridge to the West, because this part of Romania belonged for centuries to the Hapsburg Empire.
The hope of EU membership gives mainstream Romanian politicians and the Romanian public strong incentives not to succumb to nationalist sentiments.
Serbia and Russia pose more difficult cases, as the national pride of both - for different reasons - has been wounded.
While Russia has almost completely lost its superpower status, Serbia was deeply humiliated by NATO in 1999.
Many Serbs also feel mortified by the ongoing trials of their former leaders at the International Criminal Tribunal at The Hague.
The international community, especially the EU, can offer few incentives to encourage moderate politics in these two countries.
Moreover, the average Russians' experiences of liberal economic and political reforms since communism's fall have been rather negative.
While most Russians seem to realize that their country can no longer be "salvaged" by the Communists, many are betting on semi-authoritarian rule and national revival stemming from traditional Russian values.
That fusion, however, remains modern politics'other lethal temptation.
The New Face of the United Nations
On January 1, 2007, Ban Ki-Moon, South Korea’s former foreign minister, will become United Nations Secretary-General, following Kofi Annan’s ten-year tenure.
Annan inspired the world with his diplomacy and leadership on poverty reduction and human rights, but the war in Iraq divided the world and drew attention and financial resources away from crisis regions and critical long-term problems like climate change, disease control, sustainable energy, and access to water.
With the recent elections in the United States and the rise of Asia’s global influence, there is an opportunity to turn the world’s attention to the most critical challenges facing our planet.
In addition to the long-term challenges of poverty, the environment, nuclear proliferation, and UN reform, the new Secretary-General will inherit a long list of hotspots: Iraq, Iran, Afghanistan, Palestine, Lebanon, Somalia, Myanmar, Sudan, North Korea, and others.
Recent attempts to influence developments in these countries through threats and sanctions, and sometimes war, have failed.
Most are less stable today than they were five years ago.
Clearly, a new approach is needed.
The leading Asian countries, including Ban’s South Korea, have long favored a balance of diplomatic approaches and economic incentives as the way to solve complex challenges.
Rather than relying on sanctions and threats of force, the idea is to underpin long-term prosperity in today’s unstable regions.
This balanced approach is important because most of the world’s hotspots are in trouble not only, or even mainly, because of politics, but because of the underlying challenges of hunger, disease, and environmental crisis.
Consider Darfur, a crisis that has been debated in the UN Security Council as a confrontation between the Sudanese Government and the people of Darfur.
But the deeper truth is that Darfur is unstable because it is home to an impoverished and fast-growing population without adequate supplies of water, food, health clinics, schools, and other basic services.
Rather than focusing on sanctions, the major powers would do much better to work with Sudan’s government to propose and help to finance long-term development strategies.
Defusing the crises in Darfur and elsewhere will be among the greatest challenges facing the new Secretary-General.
Yet it is vital that the UN not simply lurch from one hotspot to the next.
The UN also has the unique role and opportunity to offer leadership in building a global consensus around vital long-term environmental and economic challenges facing the planet.
Climate change, deforestation, growing populations, and other ecological strains will challenge the very survival of hundreds of millions of people around the world in the coming decades.
UN leadership will be instrumental to proposing and forging solutions to such daunting long-term global challenges.
In fact, from 1992 to 2002, the UN’s member governments signed a number of treaties and agreements that can and should provide the foundation for long-term global solutions.
Three treaties emerged in 1992 out of the so-called Rio Conference on the Environment – on climate change, biodiversity conservation, and desertification.
In 2000, the member governments agreed on the Millennium Development Goals.
And in 2002, they agreed on the Monterrey Consensus, pledging concrete efforts to triple aid flows to the poorest in order to reach the international goal for foreign assistance of 0.7% of rich-world GNP.
The key for today’s UN, therefore, is not to create more goals, but to implement those that have been set.
This, too, fits strongly with the spirit in which Ban has approached his new position.
He has made clear his intention that the UN should implement the commitments that the world community has made.
Without implementation, all of the treaties in the world would lead us nowhere.
During his mandate, the Secretary-General will face the pressing challenge of forging a global agreement on climate change for the years beyond 2012, when the Kyoto Protocol ends.
The Millennium Development Goals remain far off track in the poorest countries, with just nine years to go.
Despite a global pledge to reduce significantly the loss of biological diversity by 2010, huge areas of rainforest and oceans continue to be destroyed.
If the United States works more closely within the UN framework, it will find willing partners in the rising Asian powers, which are intent on using their influence and resources to solve today’s challenges.
After all, Asian countries are interested in global stability to underpin their own long-term development.
They are acutely aware of their increasing influence around the world, as investors, trading partners, and as contributors to and victims of environmental change.
Behind the scenes, the Asian powers can help to defuse the crises in Darfur, North Korea, Myanmar, and elsewhere.
And they will be crucial to forging new cooperative approaches to climate change, water scarcity, and the like.
The new Secretary-General comes to office with the world yearning to solve festering problems.
Importantly, there is already broad agreement on a set of shared goals.
Those goals are achievable.
The challenge is implementation.
The New French Fashion in Civil Rights
NEW YORK – First the Swiss ban minarets.
Now the French parliament wants to ban Muslim women from wearing the burqa – the full, face-covering garment worn in orthodox Arab countries, and now adopted by some orthodox non-Arabs – in public places.
The hijab, the headscarf that some Muslim women wear, is already banned in French public schools, where the “ostentatious” display of any religious symbolism is forbidden.
The burqa, however, is worn far more rarely in France – by about 1,900 of nearly six million Muslims, almost none of them from a traditional burqa-wearing country.
The reason why French parliamentarians, ranging from Communists to conservatives, support this ban is a general consensus that wearing the burqa is “contrary to the values of the Republic.” As the French president, Nicolas Sarkozy, famously said, the burqa is “not welcome in France.”
Immigrants who cover their faces have been refused French citizenship for that reason.
Feminists, including some women from Muslim backgrounds, have backed the ban, because they regard the custom as degrading.
A Communist member of parliament, André Gerin, warned that terrorism and extremism were “hiding behind the veil.”
In fact, only the Socialists refused to vote for the parliamentary resolution.
They do not like the burqa either, but they don’t believe that legislation is the best way to fight it.
I think the Socialists are right.
Aside from the fact that more serious issues face the French government than the sartorial habits of a small number of women, there is the matter of individual freedom.
Some women may, indeed, be forced by family or peer pressure to cover themselves up.
The same is true of orthodox Jewish women who must shave their heads and wear wigs when they marry.
It is not immediately apparent why Jewish or some extreme forms of Christian orthodoxy should be more compatible with Republican values, let alone feminism, than Muslim salafism.
Still, no one should be forced to cover herself up.
But should they be forced not to?
One French woman, who took to the burqa entirely through her own volition, protested: “France is supposed to be a free country.
Nowadays, women have the right to take their clothes off, but not to put them on.” Another protester said, “If they make us take it off, they’ll be taking a part of us.
I’d rather die than let them do it.”
Some Muslims, including clerics, maintain that covering women’s faces is not actually a Muslim tradition.
The Egyptian imam, Sheikh Mohammed Tantawi, wants to ban the wearing of face-covering veils in Egyptian schools.
But this is still no reason why French women should not be allowed to enter a post office, a bank, a school, or any other public place in a burqa.
Interpreting Islamic tradition is not part of the French government’s brief.
One could take the view that national governments should enforce laws, but not values.
But, whereas most democracies are less prone than the French Republic is to impose “national values” on their citizens, the law cannot be totally divorced from shared values either.
The fact that Europeans can marry only one spouse is both a legal and a cultural norm.
And views on sexual, gender, and racial discrimination, which change with time, are reflected in the laws as well.
There is always a delicate balance, to be sure, between commonly held views and individual liberties.
Some people might still condemn homosexuality, but few Europeans wish to ban it by law anymore.
On the whole, individual practices, as long as they do no harm to others, should be allowed, even if many people don’t particularly like them.
It may be undesirable to have people who carry out public functions – judges, teachers, or policewomen, for example – cover up their faces.
But one can impose dress codes for certain jobs, without banning a type of clothing for everyone.
After all, we don’t have judges and teachers wearing bikinis on the job, either.
There is another, practical, reason why the burqa ban is a bad idea.
If we are serious about integrating immigrants into Western societies, they should be encouraged to move around in public as much as possible.
Banning the burqa would force this tiny minority of women to stay at home, and be even more dependent on their men to deal with the outside world.
So what should be done about practices that are judged to be illiberal, if we don’t ban them?
Sometimes it is better to do nothing.
Living with values that one does not share is a price to be paid for living in a pluralist society.
Making sure all citizens get a good education could help to reduce potential grounds for conflict.
And so could a sense of humor.
This does not have to be hostile, as with the Danish newspaper cartoons.
One of the wittiest advertisements on the market today is for a brand of German lingerie.
The commercial shows a beautiful nude woman, posing in front of her mirror, taking pleasure in slipping on sexy black panties and black stockings with garters – before covering up in a black burqa.
All we see, as she looks out of the window, are her eyes, nicely framed in mascara.
The tagline?
“Sexiness for everyone: everywhere.”
Not only is it humorous and well produced, but, based on my observations in the Middle East, this advertisement is also an accurate reflection of reality.
It is certainly possible to imagine, as the French Communist deputy does, a woman in a burqa harboring an extremist or terrorist agenda.
The same can be true of a man in jeans or a woman in a business suit.
What we sometimes forget is that the average person inside a burqa is also simply a woman.
The New German Problem
As Germany prepares to elect its next Chancellor, the two main candidates, Gerhard Schroeder and Edmund Stoiber, agree on one thing: unemployment must be reduced.
Over the past two decades, high unemployment has transformed Europe in general and Germany in particular into a sociological time bomb.
What will the unemployed - especially the long-term unemployed with only dim memories of integration into the world of work - do with themselves and their time?
What will happen to confidence in governments that can not solve the problem?
It is easy to forget that little more than 50 years ago, Europe was the world's most violent continent.
Europeans spent the previous forty years slaughtering each other on a scale unprecedented in human history.
Against this backdrop, Western Europe after 1950 was remarkably peaceful and stable, even taking into account the fall of the French Fourth Republic and the transitions from dictatorship to democracy in Portugal, Spain, and Greece.
The most remarkable transformation of all was that of the Federal Republic of Germany.
Anyone familiar with German history since 1800 is still astonished at the enthusiasm with which the nation that emerged from total defeat in 1945 embraced what many in previous generations would have called "unsuitable" Anglo-French political and economic models.
Without the peace and stability that this assured in Germany - the largest linguistic nation west of Russia - it is difficult to imagine today's peace and stability in Europe as a whole.
Germany owes its transformation in part to a combination of three factors: a backlog of unexploited technological opportunities to fuel rapid income growth, nearly full employment, and a state that shared the benefits of growth widely through public programs (rather than serving one class or interest as a weapon to concentrate wealth and power).
Other factors - the memory of the Nazi catastrophe, the example of life east of the Iron Curtain, the potential threat posed by Stalin and his heirs - also clearly played an important role.
But the fact that the system worked for almost everyone was the final buttress holding up the cathedral.
To everyone's relief, political democracy and mixed market economies proved highly resilient against the oil price shocks of the 1970s.
Incomes stagnated, but the institutional order endured.
And it has also endured the subsequent emergence and persistence of high unemployment.
Within the Federal Republic, where unemployment remains near its early-1980s peak, the failure to address the problem was offset by other successes.
The early 1990s witnessed the reunification of Germany, and the elimination of even moderate inflation risks.
The late 1990s delivered deeper European integration, culminating in European Monetary Union.
In short, lack of progress on reducing unemployment could be excused in the past: Europe faced more urgent problems and opportunities.
But what more urgent problem or attractive opportunity exists today?
Inflation no longer threatens anyone's savings.
Germany is unified.
Monetary union has been accomplished.
Whoever leads the next German government must tackle unemployment, both for the sake of the economically most vulnerable and to ensure public confidence in the current system.
Unfortunately, whoever wins the election - Schroeder or Stoiber - will be helpless in the medium term to address the problem.
Germany's Employment Commission has called for sweeping labor-market and social-welfare reforms, but it will be very difficult for any government to implement them.
Without increased private-sector demand, the removal of supply-side restrictions that fuelled high "classical" unemployment will simply result in high "Keynesian" unemployment in the future.
European integration was supposed to take care of this by driving decades of rapid economic growth as companies realize continent-wide economies of scale.
So where is this demand-driven growth?
The European Central Bank (ECB) seems more interested in keeping interest rates high enough to force insolvent firms into bankruptcy than in promoting higher employment.
With private-sector demand stalling, the Employment Commission wants the government to serve as employer of last resort.
But the Maastricht Treaty's Stability and Growth Pact limits fiscal deficits to 3% of GDP - a ceiling that Germany is already hitting.
Unless a future government is bold enough to violate the pact with abandon, its only alternative will be to increase taxes, which would merely prolong the very downturn in private-sector demand that has kept unemployment high.
Were it not for the Stability and Growth Pact, a Keynesian spending-led program could provide the demand needed to reduce unemployment.
The problem could be solved once and for all if the ECB were willing to risk the following bargain with governments: if you liberalize product markets and make labor markets flexible, we will reduce interest rates and permit higher spending to fulfill the promise of near-full employment.
But the ECB and the Stability and Growth Pact being what they are, both German parties are what they are: a sculptor who has promised to carve a marble statue overnight but has lost his chisel.
There may be little cause for immediate worry.
The sociological time bomb may simply continue ticking.
As Adam Smith put it, "There is a lot of ruin in a nation."
But while Western Europe's post-war institutional order has worked almost miraculously well in historical terms, voters have narrower views and focus on more private concerns.
They are more likely to judge a party, a regime, or an institutional order by asking, "What have you done for me lately?"
With the great tasks of reunification and European integration behind it, future German governments are increasingly likely to be forced to answer, "Not much."
The New Global Economy’s (Relative) Winners
CAMBRIDGE – The world economy faces considerable uncertainty in the short term.
Will the eurozone manage to sort out its problems and avert a breakup?
Will the United States engineer a path to renewed growth?
Will China find a way to reverse its economic slowdown?
The answers to these questions will determine how the global economy evolves over the next few years.
But, regardless of how these immediate challenges are resolved, it is clear that the world economy is entering a difficult new longer-term phase as well – one that will be substantially less hospitable to economic growth than possibly any other period since the end of World War II.
Regardless of how they handle their current difficulties, Europe and America will emerge with high debt, low growth rates, and contentious domestic politics.
Even in the best-case scenario, in which the euro remains intact, Europe will be bogged down with the demanding task of rebuilding its frayed union.
And, in the US, ideological polarization between Democrats and Republicans will continue to paralyze economic policy.
Indeed, in virtually all advanced economies, high levels of inequality, strains on the middle class, and aging populations will fuel political strife in a context of unemployment and scarce fiscal resources.
As these old democracies increasingly turn inward, they will become less helpful partners internationally – less willing to sustain the multilateral trading system and more ready to respond unilaterally to economic policies elsewhere that they perceive as damaging to their interests.
Meanwhile, large emerging markets such as China, India, and Brazil are unlikely to fill the void, as they will remain keen to protect their national sovereignty and room to maneuver.
As a result, the possibilities for global cooperation on economic and other matters will recede further.
This is the kind of global environment that diminishes every country’s potential growth.
The safe bet is that we will not see a return to the kind of growth that the world – especially the developing world – experienced in the two decades before the financial crisis.
It is an environment that will produce deep disparities in economic performance around the world.
Some countries will be much more adversely affected than others.
Those that do relatively better will share three characteristics.
First, they will not be weighed down by high levels of public debt.
Second, they will not be overly reliant on the world economy, and their engine of economic growth will be internal rather than external.
Finally, they will be robust democracies.
Having low to moderate levels of public debt is important, because debt levels that reach 80-90% of GDP become a serious drag on economic growth.
They immobilize fiscal policy, lead to serious distortions in the financial system, trigger political fights over taxation, and incite costly distributional conflicts.
Governments preoccupied with reducing debt are unlikely to undertake the investments needed for long-term structural change.
With few exceptions (such as Australia and New Zealand), the vast majority of the world’s advanced economies are or will soon be in this category.
Many emerging-market economies, such as Brazil and Turkey, have managed to rein in the growth of public debt this time around.
But they have not prevented a borrowing binge in their private sectors.
Since private debts have a way of turning into public liabilities, a low government-debt burden might not, in fact, provide these countries with the cushion that they think they have.
Countries that rely excessively on world markets and global finance to fuel their economic growth will also be at a disadvantage.
A fragile world economy will not be hospitable to large net foreign borrowers (or large net foreign lenders).
Countries with large current-account deficits (such as Turkey) will remain hostage to skittish market sentiment.
Those with large surpluses (such as China) will be under increasing pressure – including the threat of retaliation – to rein in their “mercantilist” policies.
Domestic demand-led growth will be a more reliable strategy than export-led growth.
That means that countries with a large domestic market and a prosperous middle class will have an important advantage.
Finally, democracies will do better because they have the institutionalized mechanisms of conflict management that authoritarian regimes lack.
Democracies such as India may seem at times to move too slowly and be prone to paralysis.
But they provide the arenas of consultation, cooperation, and give-and-take among opposing social groups that are crucial in times of turbulence and shocks.
In the absence of such institutions, distributive conflict can easily spill over into protests, riots, and civil disorder.
This is where democratic India and South Africa have the upper hand over China or Russia.
Countries that have fallen into the grip of autocratic leaders – for example, Argentina and Turkey – are also increasingly at a disadvantage.
An important indicator of the magnitude of the new global economy’s challenges is that so few countries satisfy all three requirements.
Indeed, some of the most spectacular economic success stories of our time – China in particular – fail to meet more than one.
It will be a difficult time for all.
But some – think Brazil, India, and South Korea – will be in a better position than the rest.
The New IMF
WASHINGTON, DC – When Ministers meet for the IMF’s Spring Meeting this month they will find an institution with regained self-confidence.
The London G20 summit gave a strengthened mandate to the IMF, while tripling its resources.
More concessional finance will be available for low-income countries, and international liquidity will be increased by a hand-out of $ 250 billion in special drawing rights (SDRs).
This is a boost for the IMF, and it gives hope to emerging and developing countries that have been severely hit by a crisis that originated elsewhere.
The IMF is well-positioned to help its members overcome the financing gaps resulting from the crisis.
In the run-up to the G20 summit access to the Fund’s credit facilities was increased and policy conditions were streamlined.
In a watershed with former practice, a new non-conditional credit line was introduced for well-performing countries.
Mexico and Poland will be its first users and more countries will line up.
These more flexible lending policies reflect a new image of the IMF.
The negative stigma attached to IMF financing is a thing of the past.
Its financing role in this crisis secured, the IMF now needs to strengthen its position as guardian of an open international financial system.
The IMF was created to prevent crises like the current one and in this it has failed.
Admittedly, there were warnings, but policy makers, particularly in advanced countries, did not follow suit.
The ‘new’ IMF should be an institution that communicates better with its members, balances the interests of its advanced, emerging and developing members in an evenhanded manner, and aligns its policies better to the needs of the moment.
Now that the IMF has been given a second lifetime, it needs to regain its central position in the international financial system.
For this, it needs to focus on three issues: improved surveillance of financial stability, strengthened international coordination, and an updated decision-making process.
The new IMF needs to become more vocal on global financial stability issues.
The IMF should see to it that there are no gaps in the surveillance of financial institutions.
It can help shape a more robust global supervisory system which needs to be built in order to preserve the benefits of global financial markets.
And it should help develop a vision on what the future financial landscape should look like.
To this end IMF surveillance should include regular updates on supervisory regimes in systemically important countries.
Early warnings, commissioned by the G20, should be specific and the IMF should monitor whether policymakers give follow-up to the Fund’s advice.
The new IMF needs to take a fresh look at international policy coordination.
The demand for a different monetary order, as advocated by China, sets the stage for a renewed effort to avoid the international imbalances which were at the root of this crisis.
First, the US saving deficit will need to be addressed in a sustainable manner.
Second, China will have to make its currency convertible.
Third, the position of the euro will strengthen over time as more countries will join the euro zone.
With more key currencies in place, the perspective of a truly multipolar currency system comes in sight, with an increased role for the SDR.
This will lessen the need felt by emerging economies for self-insurance against financial instability, by building up large reserves.
Finally, the new IMF needs governance structures that better reflect today’s new global realities.
The perception that advanced countries are running business in the Fund, but do not adhere to Fund advice, has undermined the IMF’s authority.
The G20 summit marked the return of the United States to multilateralism.
This acceptance of collective responsibility should come with abandoning US veto power in the IMF by lowering required voting majorities, as well as abandoning Europe’s prerogative of appointing the Managing Director.
One of the strengths of the IMF’s present governance structure, the constituency system, should be duplicated at the G20 as well, so as to ensure inclusiveness.
The rapid growth of China, India, and other emerging countries should come with increased influence, to be implemented through the planned quota increase in 2011.
Advanced countries, including European countries, will see a relative decrease in voting power.
An increased say for emerging economies will imply taking more international responsibility as well, also in financial terms.
Now European countries finance 42% of IMF lending and 62% of concessional World Bank lending.
This task will have to be shared by emerging countries with large reserves.
These reserves are put to better use by assisting the IMF in maintaining an open and stable financial system and prevent crises like these from recurring
The New International Economic Disorder
NEWPORT BEACH – A new economic order is taking shape before our eyes, and it is one that includes accelerated convergence between the old Western powers and the emerging world’s major new players.
But the forces driving this convergence have little to do with what generations of economists envisaged when they pointed out the inadequacy of the old order; and these forces’ implications may be equally unsettling.
For decades, many people lamented the extent to which the West dominated the global economic system.
From the governance of multilateral organizations to the design of financial services, the global infrastructure was seen as favoring Western interests.
While there was much talk of reform, Western countries repeatedly countered serious efforts that would result in meaningful erosion of their entitlements.
On the few occasions that such resistance was seemingly overcome, the outcome was gradual and timid change.
Consequently, many emerging-market economies lost confidence in the “pooled insurance” that the global system supposedly put at their disposal, especially at times of great need.
This change in sentiment was catalyzed by the financial crises in Asia, Eastern Europe, and Latin America in the late 1990’s and early 2000’s, and by what many in these regions regarded as the West’s inadequate and poorly designed responses.
With their trust in bilateral assistance and multilateral institutions such as the International Monetary Fund shaken, emerging-market economies – led by those in Asia – embarked on a sustained drive toward greater financial self-reliance.
Once they succeeded in overcoming a painful crisis-management phase, many of these countries accumulated previously unthinkable levels of international reserves as precautionary cushions.
They extinguished billions in external indebtedness by generating and sustaining large current-account surpluses.
And they increased the scale and scope of domestic financial intermediation in order to reduce their vulnerability to external storms.
These developments stood in stark contrast to what was happening in the West.
There, unprecedented leverage, massive debt creation, and a seemingly infinite sense of credit entitlement prevailed.
Financial excesses become the rule rather than the exception, facilitated by financial innovation and the erosion of lending standards and prudential regulation.
Suddenly, the world turned upside down: “rich” countries were running large deficits and, in some cases, tipping from net creditor status to net indebtedness, while “poor” countries were running surpluses and accumulating large stocks of external assets, including financial claims on Western economies.
Little did these countries know that their divergent paths would end up fueling large global imbalances, and eventually trigger a financial crisis that has shaken the prevailing international economic order to its foundations.
There is no restoring fully that order.
Rather than recovering strongly, sluggish Western growth is periodically flirting with recession at a time of high unemployment and multiplying debt concerns, particularly in Europe.
In an amazing turn of events, virtually every Western country must now worry about its credit ratings, while quite a few emerging economies continue to climb the ratings ladder.
We can now consider the image of Western delegations heading to emerging countries to plead, cap in hand, for financial support, both direct and through the IMF.
At first blush, this unusual convergence between Western and emerging countries seems to reflect what advocates of a new international economic order had in mind.
But appearances can be misleading, and, in this case, they are misleading in a significant way.
Advocates envisaged an orderly process in which economic convergence accompanied and facilitated global economic growth.
They foresaw a collaborative process guided by enlightened policymaking.
But what is occurring is far different and more unpredictable.
Rather than exhibiting enlightened leadership, Western policymakers have consistently lagged realities on the ground, with a bewildering mixture of denial, misdiagnosis, and bickering undermining their responses.
Rather than proceeding in an orderly manner, today's global changes are being driven by the disorderly forces of de-leveraging emanating from a Europe in deep financial crisis and an America seemingly unable to restore sustained high rates of GDP growth and job creation.
Multilateral institutions, particularly the IMF, have responded by pumping an unfathomable amount of financing into Europe.
But, instead of reversing the disorderly deleveraging and encouraging new private investments, this official financing has merely shifted liabilities from the private sector to the public sector.
Moreover, many emerging-market countries have noted that the policy conditionality attached to the tens of billions of dollars that have been shipped to Europe pales in comparison with what was imposed on them in the 1990’s and early 2000’s.
Fortunately, despite having lagged rather than led this process of consequential (and increasingly disorderly) global change, it is not too late for policymakers to catch up.
But doing so requires more than just better national policymaking in Europe and America; it is also time for urgent and deep reform of the multilateral system and its main institutions.
That process requires joint leadership by the emerging world as a true equal and partner of Western powers.
The “New” Iraq Insurgency
Sun Tzu, the great Chinese philosopher of war, once wrote, “If you know the enemy and know yourself, you need not fear the result of a hundred battles.”
The absence of such knowledge invites trouble, often disaster.
This certainly applies to the ongoing conflict in Iraq, where understanding the insurgents is both crucial and difficult.
To some degree, the Iraq insurgency reflects its historic predecessors.
The conflict is “armed theater,” in which the antagonists are simultaneously locked in struggle with each other and sending messages to wider audiences, particularly the Iraqi people.
Like all insurgencies, public support – or the lack of it – will determine the outcome.
Moreover, it is likely to be a protracted performance.
History suggests that once an insurgency reaches “critical mass,” it takes a decade or more to eradicate it.
And, like past insurgencies, the Iraq conflict is one in which the insurgents use horrific acts to intimidate the public, expose the shortcomings of the government, and goad the regime into overreactions that might turn the public against it.
But the Iraq insurgency deviates from its forebears in vital ways.
Its cultural context differs from twentieth-century insurgencies, particularly the use of a radical ideology derived from religion.
By contrast, twentieth-century insurgencies were usually secular, based on economic class, sectarian differences, or other deep political cleavages.
The intermingling of religious passion and political radicalism makes the Iraqi insurgency particularly dangerous and difficult to quell.
The strategic context of the Iraq insurgency is also new.
In the twentieth century, the superpowers supported insurgency and counterinsurgency as a type of proxy conflict.
The Iraq conflict, by contrast, is part of the world’s first global insurgency – the web of individual conflicts spawned by Islamist extremism, most of them related in some way to al Qaeda, and the global war on terrorism.
For the first time in history, terrorism gives insurgents the ability to strike directly at their enemies’ external allies.
Moreover, the organization and methods of the Iraq insurgency, while not unique, differ from those seen in the late twentieth century.
Multiple insurgencies co-exist in time and space, each with differing objectives and tactics.
One component is the jihadists, some of them foreign and some local, with direct ties to al Qaeda or, at least, sympathy with its worldview.
The jihadists appear to want a Taliban-style Iraq that could serve as a bastion for the wider global Islamist insurgency.
A second component consists of former Ba’athist officials seeking a return to power.
With access to extensive funds, this group appears to sub-contract many of its operations to organized crime or “casual” insurgents motivated more by pay than by ideology.
The third component is sometimes called “Sunni nationalist,” but that phrase is a misnomer, because this group’s members are less concerned with Iraq as a nation than with Sunni domination of post-Hussein Iraq and responding to what they see as personal injustices or abuses.
This group appears to rely heavily on tribal structures, kinship, and other local affiliations.
While successful twentieth-century insurgencies developed some degree of hierarchy and a political wing, the Iraq insurgency remains a loose, amorphous network.
The various components, and the subdivisions within them, do not appear to be centrally commanded.
Some may cooperate; others do not.
Finally, the insurgency as a whole remains nihilistic, focused on destroying the new Iraqi government and the emerging economic and political system rather than articulating a coherent alternative.
In many ways, the Iraq insurgency is analogous to urban street gangs: each component shares behavioral and organizational similarities but pursues its own aggrandizement and undertakes autonomous operations within its “turf” rather than pursuing a master plan or strategy.
The good news for those who desire stability and democracy in Iraq is that an amorphous, disorganized, and nihilistic insurgency cannot “win” in the traditional sense of replacing the government and forming a new regime.
The bad news is that an amorphous, disorganized, and nihilistic insurgency can eventually evolve into a coherent, efficient, and purposeful one.
This would obviously pose a much more serious threat, but even an amorphous, disorganized, and nihilistic insurgency can survive and block stability, democratization, and prosperity for many years.
To return to the analogy, urban street gangs cannot seize political power, but they can certainly keep their neighborhoods dangerous, backward, and grim.
There are, then, three paths for Iraq: evolution of a more serious insurgency, persistent violence at current levels, or resolution of the insurgency.
At least three factors will determine which path that injured nation takes.
One factor is the will of the new government.
Insurgent movements that succeed do so because the government’s will collapses.
It is not clear at this point how much determination Iraq’s emerging democratic leaders will have.
A second factor is restraint on the part of the Shi’ite community.
There are ominous indications that the relative forbearance of this group may end.
If that happens, the insurgency will be superseded by a much more dangerous sectarian civil war.
The third factor is the willingness of outside groups – both states and non-state groups – to prolong Iraq’s misery by supporting the insurgency, whether overtly or by inaction.
Until states such as Saudi Arabia, Syria, and others vigorously dry up the inflows of people and money that sustain the insurgency, Iraq will never become stable, democratic, and prosperous.
The New Middle East Order
Sometime this month, President George W. Bush will – reluctantly – announce a new policy for the United States in Iraq.
A new policy is needed not only in order to halt America’s drift into impotence as it tries to prevent Iraq from spiraling into full-scale civil war, but also because the map of power in the Middle East has changed dramatically.
That map has been in constant flux for the last 60 years, during which the main players – Egypt, Iraq, Saudi Arabia, Syria, Israel, and Iran – have formed and broken alliances.
Now, something like a dividing line is emerging, and if Bush finally begins to understand the region’s dynamics, he may be able to craft a policy with a chance of success.
This regional realignment is typified by the emergence of a de facto alliance that dare not speak its name.
Israel and Saudi Arabia, seemingly the most unlikely of allies, have come together to contain their common enemy: Iran, with its mushrooming influence in Iraq, Lebanon, and Palestine.
Iran not only threatens Israel (and the region) with its desire for a nuclear capability and its Shi’a proxy militants; it is also seeking to usurp the traditional role of moderate Sunni Arab regimes as the Palestinians’ defenders.
After decades of using concern for the Palestinian cause to shore up popular support for their own ineffective and undemocratic regimes, these moderate Arab leaders have now been put on the defensive by Iran’s quest for hegemony. If Iran succeeds in being seen as the genuine patron of Palestinian national aspirations, it will also succeed in legitimizing its claim for dominance in the Middle East.
Israel, a country in shock following its failure to destroy Hezbollah last summer, and humiliated by Iranian President Mahmoud Ahmadinejhad’s vow to “wipe Israel off the map” – a threat backed up by Iran’s support of Hamas and Hezbollah – now talks about a “quartet of moderates” as the region’s only hope.
Indeed, Israel now sees its security as relying not so much on a US guarantee, but on Egypt, Jordan, Saudi Arabia, and Turkey (which is seeking regional influence in fear of rejection by the European Union) restraining Iran and its paid proxies.
According to Israeli Vice Premier Shimon Peres, Israel hopes to isolate and contain the Shi’a/Farsi spheres of power by forging open cooperation with the Sunni/Arab domain.
Saudi Arabia is just as eager to contain the Iranian threat and the growing “Shi’a crescent” that, with the empowerment of the Shi’a in Iraq, has moved westward to begin to include the Shi’a regions of the Kingdom.
So it should be no surprise that the Saudi regime was the first to condemn Shi’a Hezbollah at the start of the war with Israel, and that it announced in December that it would support Iraq’s Sunnis militarily should a precipitate US withdrawal incite a Sunni/Shi’a civil war there.
The Shi’a threat to the Saudi government is ideological.
Indeed, it goes to the heart of the Saudi state’s authority, owing to the Al Saud royal family’s reliance on Wahhabi Islam to legitimate its rule.
Since the Wahhabis consider the Shi’a apostates, the challenge from the Shi’a – both within and without Saudi Arabia – represents a mortal threat.
So Saudi Arabia is ready to cooperate with Israel not only against Iran, but also against other “radicals,” such as Hamas.
Remarkably, Palestine’s Hamas prime minister, Ismael Haniyeh, was not received in Saudi Arabia in December, when he was traveling through the region pleading for support for his beleaguered government.
Conservative Saudi Arabia prefers dealing with traditional and predictable leaders, such as Palestinian President Mahmoud Abbas and Lebanon’s premier, Fouad Siniora, rather than firebrand populist leaders like Hezbollah’s Hassan Nasrallah, Hamas’ Khalid Meshal, and Iran’s Ahmadinejhad.
Last year, Saudi Arabia’s King Abdullah, worried by Shi’a expansionism, was persuaded by Prince Bandar bin Sultan, the head of his National Security Council, to coordinate policy with Israel to counter Iran’s growing influence.
Israel, after all, is a “reliable enemy” for Saudi Arabia, having destroyed Nasser’s Egyptian army in 1967 – a time when the Saudis were fighting Egypt by proxy in Yemen.
So Prince Turki al-Faysal, the long time head of Saudi intelligence, has met with Meir Dagan, the head of Israel’s Mossad, while Bandar met with Israeli Prime Minister Ehud Olmert in Jordan the same month.
Yet covert support from Israel, America, and the Saudis for Abbas and Siniora does little to help them in their domestic battles.
From Morocco, Algeria, Libya, and Sudan to Bahrain and Yemen – indeed, throughout the Muslim world from Jakarta to Nigeria – Islamic radicals have won the popularity sweepstakes.
A recent poll in Egypt ranked Nasrallah, Meshal, and Ahmadinejhad as the three most popular figures.
This leads to an unavoidable dilemma: Bush will have to choose between supporting democracy and backing those who want to fight Islamic radicalism.
Yet Israel, America, and the region’s moderates can benefit from the deepening schism in the Arab/Muslim world.
That schism is being consolidated by Saudi support of all the region’s Sunni Muslims.
It is this sense of “Sunni solidarity” that is becoming the decisive factor in the war for the soul of Islam, and in the struggle for mastery in the Middle East that is now underway.
The New Monetary Disorder
PRINCETON – Currency chaos is back, highlighting demands for a revised international monetary order.
The rapid decline of the dollar and the pound, but also of the renminbi – now more firmly tied to the dollar than ever – is fanning tensions.
Some of the ghosts of the 1930’s have returned, too – in particular, the fear of unfair trade advantages caused by competitive devaluation.
United States Treasury Secretary Timothy Geithner has already accused China of currency manipulation.
There are two alternative and sharply contrasting approaches to getting currencies right.
One is to have an international conference at which experts can suggest models to calculate exchange rates and politicians can negotiate deals.
The only successful instance of such an arrangement is the Bretton Woods conference in 1944, but even then the exchange rates that were fixed there proved unrealistic, and a major wave of parity alterations was soon needed (as well as the maintenance of exchange controls).
Other currency-centered conferences were dismal failures.
President Richard Nixon hailed the 1971 Smithsonian agreement as “the most significant monetary agreement in the history of the world.” But it was soon in tatters, and the world moved to generalized floating.
In 1987, at the Louvre conference, there was not even any agreement about what had been concluded.
Some participants thought they had agreed to a sort of semi-fixing of exchange rates in the form of target zones, but the powerful German Bundesbank never shared that interpretation.
History suggests that collective negotiation about currencies and a new approach to the issue of reserves are unlikely to succeed.
The second, and better, approach lies in agreements in each country about what the appropriate basis for monetary policy should be.
If those agreements have widespread acceptance and mutual consistency, the result will be a stable international monetary system.
There have been two models for such a consensus.
In the first, a century ago, confidence was underpinned by gold; in the more recent wave of globalization, it depended upon the power of the human intellect to solve policy problems.
The end of inflation and “the great moderation” of the past three decades were fundamental to the liberalization of large parts of the world and to increased confidence, trade, and prosperity.
The search for a monetary rule during the latter period had two phases: in the earliest attempt to construct a basis for stable monetary policy, the emphasis was on monetary targeting.
In the second, more successful, phase, an increasing number of countries adopted either explicit or implicit inflation targets.
But inflation targeting was never an obvious concept, and the financial crisis has discredited it.
In 2003, Ben Bernanke, then a Governor of the US Federal Reserve, stated in a speech that many Americans considered inflation targeting “foreign, impenetrable, and possibly slightly subversive.”
That feeling is stronger now.
There was always uncertainty over the extent to which central banks should attempt to correct or limit asset-price bubbles when there was no corresponding rise in the general level of inflation.
Rising asset prices lead to a general increase in purchasing power, because many asset holders are willing (and able) to borrow more.
Many Europeans tried to argue in recent years that monetary policy should also take asset-price developments into account, whereas American policymakers and academics largely resisted this approach.
The problem is that asset prices and consumer-price inflation may move in different directions, as they did in the 2000’s, and that weighing both factors would produce inconsistent policy recommendations.
As a result, central banks ran the risk of no longer appearing to follow a clearly formulated policy guideline.
The credibility associated with a simple rule disappeared.
After the financial crisis, we have become wiser.
Formulating monetary policy has become a more complex process, but also a more politicized process, which is why it is likely to become more chaotic, with sharp differences between national approaches.
The Fed and the Bank of England remain less likely to be concerned about the emergence of new kinds of asset bubbles in stock markets or commodities.
But the European Central Bank (ECB) will be more worried.
As divergences become explicit, the demand for a wider political debate about monetary policy and for political involvement in its formulation will become more intense.
The Bank of England’s Monetary Policy Committee has often been presented as a pioneer in making monetary policy transparent.
But, from an early stage, the transparency that resulted from the early publication of who voted for and against rate increases led to a public identification of members of the Committee as hawks or doves.
If it is clear who will vote for which measure, there will be increased demand for a public debate about who should be chosen: why not elect the MPC, since it is effectively a monetary government?
In Europe, a similar debate about the political accountability of European central banks has been simmering since before the ECB was even established.
Tensions between advocates of different policy solutions will lead to a demand for a greater political say.
This exercise looks like a dramatic repeat of the interwar story, when it was impossible to obtain consensus about policy and about mutually consistent policy frameworks.
Then, too, central banks were blamed when their policy framework (at that time the gold standard) disintegrated.
Consequently, nationalization of the central bank became a major platform of the British or French left.
That, in turn, cleared the way for manipulation of currencies in the interests of exporters, businesses, and labor unions.
The result was international monetary chaos – precisely the path we are heading down now.
The New New Thing in Economics
The Great Depression brought John Maynard Keynes to the forefront of economic thought.
The key "Keynesian" insight was that private investment spending is inherently unstable--due to fads and fashions among investors, or because of shifts in the "animal spirits" of businessmen, or because falling prices disrupt the financial system.
Keynesians thought that prudent monetary policy--central banks raising and lowering interest rates to diminish fluctuations in private investment spending--could go part of the way toward stabilizing the economy.
But they also believed that government had to be willing to step in directly, through expansive fiscal policy, to keep the overall level of spending in an economy stable.
Such a policy, they believed, would forever banish the specter of large-scale mass unemployment, as in the Great Depression.
Moreover, near-full employment might effectively be guaranteed.
The Keynesians foresaw that near-full employment raised the threat of inflation.
After all, why should workers and unions moderate wage demands if governments will boost spending whenever high unemployment looms?
One big curb on high wage demands--fear of being let go when unemployment rises--was gone.
What would replace it?
For the first post-1945 generation, the predominant answer was that corporatist social democracy would replace it.
Unions would bow to government requests to moderate their demands for wage increases, and governments would bow to union demands for public spending and social insurance.
Keynesian thinking guaranteed that nothing like the Great Depression would ever return.
But its solution to the problem of creeping inflation was jury-rigged, and broke down completely in the 1970's.
In the aftermath of the main industrial countries' burst of inflation in the 1970's, mainstream economic thought in the world's industrial core shifted into a "semi-Monetarist" channel.
Milton Friedman's victory was never as complete as the Keynesians' had been.
But by the mid-1980's policymakers throughout the world were assenting to the following propositions:
Central banks must make their commitments to long-run price stability credible;
Central banks must accept that the average level of unemployment is determined not by cyclical factors, but by "structural" factors, which they have no business trying to address;
Announcing and trying to maintain a money-supply growth target is an easy way for a central bank to communicate its principal intentions, gain credibility, and give outsiders a way to check whether sound policies are really being followed.
Monetarism was the mirror image of Keynesianism.
It seemingly guaranteed that nothing like the inflation of the 1970's would ever return.
But it offered no solution to the problem of structural unemployment that arose in western Europe.
The past decade and a half demonstrated that monetarism is as ill-equipped to deal with the challenges of falling prices in the context of highly-leveraged firms and banks as the Keynesian prescription was ill-equipped to deal with the challenges of inflation.
Back in the 1970's and at the start of the 1980's, many (I was one) blamed bad decisions for the breakdown of the social-democratic systems' ability to control inflation.
Politicians did not understand that expanding social insurance was the inevitable price of wage restraint, while union leaders did not understand that if corporatist social democracy did not restrain inflation, political power would shift to the right and high unemployment would be used to restrain it.
Today, many blame today's alarming economic conditions in the world's industrial core--more than a decade of stagnation in Japan, deflation there and in Germany, recession in Germany--on other bad decisions.
Japanese and European central bankers did not lower interest rates far enough fast enough, banking-sector regulators shied at the jump in speculative lending, and politicians were unwilling to expand fiscal policy sufficiently.
But politicians and central bank governors cannot always be expected to make good decisions: good policies must be designed to function even when rulers are short-sighted and badly advised.
The inflation of the 1970's was a natural failure of Keynesian political economy.
The deflation that threatens Japan, Europe, and perhaps the US with the prospect of a long period of large gaps between potential and actual output is a natural failure of the semi-Monetarist orthodoxy that governed macroeconomic policy in the world's industrial core since the early 1980's.
Round and round we go.
But it's not quite a circle: no government would allow a repeat of the liquidity collapse seen in the 1930's, or the failure of banks and companies on a scale that puts the entire financial system at hazard.
It is an upward spiral.
The world's macroeconomic problems are real, but they will not lead to another Great Depression--in large part because policymakers remember that there once was a Great Depression.
We need another policy-making revolution like the Keynesian and semi-Monetarist ones, a revolution that will not (wholly) lose sight of its predecessor's achievements, but will eliminate its natural failures.
Where might that revolution come from?
Perhaps the next revolution in economics will grow out of US Federal Reserve Governor Ben Bernanke's career-long concern with asset prices, the role of adverse selection in credit markets, and the need for central banks in difficult situations to do more than conduct short-term open-market operations.
He believes that banks should try things like putting a floor beneath key long-term bond prices.
Bernankeism, anyone?
The “New Normal” for Growth
Cambridge – Markets are bubbling over signs of “green shoots” in the global economy.
An increasing number of investors see a strong rebound coming, first in China, then in the United States, and then in Europe and the rest of the world.
Even the horrible growth numbers of the last couple quarters don’t seem to discourage this optimistic thinking.
The deeper the plunge, the stronger the rebound, some analysts say.
Perhaps these optimists are right.
But how strong an expansion can one reasonably expect when the worst is finally over?
Is the “new normal” going to be the same as the “old normal” of the boom years from 2002 to 2007?
I have trouble seeing how the US and China, the main engines of global growth for two decades, can avoid settling on a notably lower average growth rate than they enjoyed before the crisis.
Let’s start with the US, the epicenter of the financial crisis, and still the most important economy in the world.
In the best of worlds, the US financial sector will emerge from the crisis smaller and more heavily regulated.
Not to worry, some economists, say.
The US grew rapidly in the 1950’s and 1960’s with a relatively heavily regulated banking system.
Why not again?
Sure, but the early post-war financial sector wasn’t called upon in those days to support nearly as diverse and sophisticated an economy as it is today.
If authorities set the clock back several decades on banking regulation, can we be so sure they will not also set the clock back on income?
US consumption, the single biggest driver of global growth, is surely headed to a lower level, on the back of weak housing prices, rising unemployment, and falling pension wealth.
During the boom, US consumption rose to more than 70% of GDP.
In the wake of the crisis, it could fall down towards 60%.
And what about the major political shift the US has experienced?
Tired of go-go growth, voters now look for more attention to addressing environmental concerns, health-care issues, and income inequality.
But achieving these laudable goals will be expensive, coming on top of the giant budget deficits the US is running to counter the financial crisis.
Higher taxes and greater regulation cannot be good for growth.
True, there is room to run the government more efficiently, especially in the areas of education and health care.
But will these savings be enough to offset the burden of a significantly larger overall government?
I hope so, and certainly the Obama administration is a breath of fresh air after the stunning ineptness of the Bush-Cheney years.
But governments all over the world are always convinced that their expansions can be substantially financed by efficiency gains, and that dream usually proves chimerical.
Chinese growth is set to slow over the longer run, as well.
Even before the financial crisis, it was clear that China could not continue indefinitely on its growth trajectory of 10% or more.
Environmental and water problems were mounting.
It was becoming increasingly clear that as China continued to grow faster than almost anyone else, the rest of the world’s import capacity (and tolerance) could not keep up with China’s export machine.
China was becoming too big.
With the financial crisis, the Chinese economy’s necessary adjustment towards more domestic consumption has become far more urgent.
True, even as exports have collapsed, the government has managed to prop up growth with a huge spending and credit expansion.
But, while necessary, this strategy threatens to upset the delicate balance between private- and public-sector expansion that has underpinned China’s expansion so far.
The growing role of the government, and the shrinking role of the private sector, almost surely portends slower growth later this decade.
Europe, too, faces challenges, and not just from the fact that it now has the worst downturn of the world’s major economic regions, with Germany’s government warning of a surreal 6% decline in GDP for 2009.
The ongoing financial crisis will almost surely slow the integration of the accession countries in Central and Eastern Europe, whose young populations are the single most dynamic source of growth in Europe today.
Not all regions will necessarily have slower economic expansion in the decade ahead.
Assuming continuing reforms in countries such as Brazil, India, South Africa, and Russia, emerging markets could well fill some of the growth gap left by the largest economies.
But, in all likelihood, after years of steadily revising up its estimates of trend global growth, the International Monetary Fund will start revising them down.
Even after the crisis, global growth is almost certain to remain lower than the pre-crisis boom years for some time to come.
This change may be good for the environment, for income equality, and for stability.
Governments are right to worry about the quality of growth, not just its speed.
But when it comes to tax and profit estimates, investors and politicians need to reorient themselves to the “new normal” – lower average growth.
The New Nuclear Thing
WASHINGTON, D.C.: For half a century, nuclear war was avoided thanks to deterrence and the notion that striking first held little attraction because the other party could and would retaliate with devastating consequences.
This concept was codified in the 1972 Anti-Ballistic Missile Treaty (ABM) Treaty, in which the United States and the Soviet Union agreed to keep to a minimum their capacity to shoot down the ballistic missiles of the other side.
Subsequent arms-control agreements – the SALT and START pacts – were negotiated and implemented in this context.
Levels and types of nuclear weapons were permitted and limited so as not to challenge the fundamental reality of mutual vulnerability.
The nuclear proposals and counter-proposals of the recent summit between President Clinton and President Putin may be among the last put forward under these Cold War concepts.
For the question now is whether the time is ripe to make the transition to another strategic paradigm altogether, one in which the levels of offensive and defensive systems change in both absolute and relative terms.
More specifically, the question is whether it makes sense to move to a world of less nuclear offense and more missile defense.
This question results from several changes.
First is the end of the Cold War.
It makes no sense (if it ever did) for the US and Russia to maintain massive nuclear arsenals capable of destroying one another many times over.
The two countries may not be allies, but neither are they adversaries in a global struggle, bent on the other's destruction.
Moreover, maintaining large inventories of missiles is dangerous – the chance of accidental or unauthorized launches can never be eliminated – and expensive.
Second, new threats are appearing; more may follow.
A number of countries, including but not limited to North Korea, Iraq and Iran, are developing ballistic missiles and possibly nuclear weapons to go with them.
Depending on their range, these missiles could threaten US troops in critical regions, American allies or US territory.
Leaders of these countries may not be deterred by the same logic that worked vis-ŕ-vis the Soviet Union.
The third development involves the emergence (and promise) of new technologies that make the prospect of intercepting ballistic missiles at one or another stage of their flight – hitting a bullet with a bullet – more real than ever before.
This logic appears to have persuaded the Republican Party's presidential nominee George W. Bush to support moving to a new strategic paradigm.
Speaking in Washington on May 23, Bush committed himself to a nuclear weapons arsenal reduced to "the lowest possible number consistent with our national security."
He advocated a defense designed "to protect all 50 states and our friends and allies and deployed forces overseas from missile attacks by rogue nations or accidental launches."
Such new thinking is not universal.
Critics contend that a missile defense system will prompt Russia to refuse to reduce nuclear weapons and China to build more.
Critics also claim that missile defense will not work against incoming warheads surrounded by decoys, that it will be terribly expensive and that rogue-state proliferation can be better addressed through prevention (using diplomacy and export controls) and deterrence.
The Clinton administration has sought to split the difference by advocating a policy of somewhat smaller arsenals coupled with somewhat more defense.
It wants to persuade Russia to agree to amend the 1972 ABM Treaty to allow each side to build a limited national missile defense with 100 interceptor missiles located in Alaska and possibly 150 more at a second site.
This attempt to introduce modest changes within the existing strategic paradigm has won few converts.
Clinton's brand of limited missile defense appears to be too much for the Russians, who fear it as the start of something bigger that threatens their strategic position.
It is too little for American advocates of missile defense, who fear being locked into a framework that will be overly confining.
It disconcerts many European leaders who appear to favor the strategic status quo to the alternatives.
Given these realities, President Clinton should defer taking any decision on missile defense in the final months of his presidency.
Too little is known about various options to commit the US to one and reject others.
Instead, the US should undertake three things: aggressive testing of various architectures for a missile defense system, including sea-based systems that could intercept missiles in the immediate post-launch, boost phase before warheads and decoys can be released; careful study of the consequences of moving to various mixes of offensive and defensive systems; and intense consultations with Russia, China and America's allies in Europe and Asia about how to maintain strategic stability in the post-Cold War era.
Paradigm shifts, particularly in diplomacy and security issues, are by definition major undertakings.
Americans never would alter the way entitlement programs are funded or education administered without serious study and widespread debate.
Maintaining stability in what remains a nuclear age warrants no less responsible an approach.
The New/Old Politics of Globalization
Debates and protests about globalization have been muted since last September's terrorist attacks.
But that silence does not mean that they are over.
Indeed, protests about globalization seem likely to return with more normal times.
When they do, our understanding of the process will be greater if we look back at history.
Among historians, globalization provokes a keen sense of déjà vu : we were here a century ago.
Then, as now, the backlash came chiefly from rich industrial countries, rather than from poor peripheral countries which were often seen as the objects of capitalist exploitation.
It was advanced countries that imposed tariffs against "unfair" competition from abroad.
Central banks were instituted with the responsibility of managing disorderly capital flows.
Migration policy became more restrictive, as some big recipients of immigration began to debate selectivity in their choice of immigrants.
The process of integration was reversed after the WWI and finally destroyed in the Great Depression, in a series of vicious shocks: tariff protection, contagious financial panics that spread from the periphery to the heart of the world's financial system, and a turn to economic nationalism and autarky.
What had before 1914 been safety nets against excessive globalization became after the WWI gigantic snares which strangled the world economy.
The most remarkable characteristic of globalization backlashes is how they create an odd alliance of right and left.
In the late 19th century, Europe's land-based aristocracy was weakened by the competition of cheap grain and other foods shipped across the oceans.
As farm prices and rents fell, aristocracy faced decline.
So it mobilized small-scale farmers, artisans, and small producers who shared the landed elite's belief that unfettered competition was harmful.
For these groups, globalization amounted to redistribution.
On the left, the growing working class sought to use political power to change economic relations - to advance more progressive tax policies, or to stop the use of tariffs to protect the old order.
Progressives also decried international capitalism's undermining of labor standards.
The German sociologist Max Weber made his reputation with warnings of the dire consequences of further Polish immigration to Germany.
"There is," he wrote in an echo of today's globalization debates, "a certain situation of capitalistically disorganized economies, in which the higher culture is not victorious but rather loses in the existential fight with lower cultures."
In the center - beleaguered by the anti-global reactions of left and right - a liberal commercial elite saw the products of economic opening or globalization as wholly beneficial.
Instead of a two part split between left and right, there was thus a triple division, between anti-globalization conservatives, pro-globalization liberals, and re-distributionist leftists.
When the extremes of the political spectrum became radicalized, as they did in the interwar period - the anti-international right moved to fascism, the left to communism - democratic politics became paralyzed.
For much of the post-1945 period, these divisions disappeared as right and left fought battles for redistribution within national economies.
The old triple polarization only returned with the new wave of globalization.
Again, there is an anti-international right that has come to play some role in all the major industrial countries, and that tries to defend existing prosperity and property rights from the vagaries of international markets.
The protectionist anti-globalization impetuses of the left are less visible in political parties than in labor movements, but these can shape political programs.
For unions, the new right is a competitive challenge for support.
For their members, international competition is a major threat as imports or immigrants may cut the wages of less skilled workers.
Consequently a demand for the exclusion of the products of "unfair competition" is transmitted to main-stream center-left parties, such as the French Socialists or America's Democrats.
Fear of lowered wages plays into a broader coalition based on umbrella anti-globalization resentments directed against multi-national corporations and international financial institutions.
In the modern center is something similar to the endangered liberal order of late 19th century Europe: the political movement of an elite that espouses globalization because it benefits from it.
This is the group that cynics have termed "Davos man."
It is hardly likely that such a program - presented in these terms - can ever command massive electoral popularity.
The costs of globalization, and the resentments that it generates, are too obvious.
This type of party, committed to simple liberalization and opening, rarely moves beyond the range of five to ten percent of the vote that Germany's liberal Free Democrats attracts.
When Leszek Balcerowicz's Freedom Union in Poland won 13% of the vote in a parliamentary election in 1997, this represented a stunning success.
But in Poland's elections of last year the Freedom Union received less than 5% of the vote - much closer to a "normal" level of support for a liberal political movement.
This new politics incites wide feelings of malaise and helplessness.
The old movements of the 20th century are largely exhausted: classic conservatism because the world changes too rapidly for conservatism as stasis to be coherent or appealing; classic socialism because the rapidity of change erodes traditional labor positions in exactly the same way.
The bankruptcy of these two respectable but now out-moded positions opens the door for a new populism, based on an anti-globalization groundswell.
The new/old politics is inward-looking and likes the idea of the revival of the nation as a protective bulwark against foreign goods and foreign migrants and foreign ownership.
It is also dangerous and destructive, and was in large part responsible for Europe's hideous politics in the first half of the 20th century.
The New Pharmaceutical Frontier
SINGAPORE – It has been a challenging decade for the pharmaceutical industry.
With patents expiring in high numbers, new-product pipelines drying up, and intensifying competition from generics, branded pharmaceuticals have been haemorrhaging value.
At the same time, traditional markets are becoming saturated.
Stark realities in industrialized countries – such as the impact of aging populations on tax-based and employer-funded health-care models – are leading governments to adopt regulatory regimes that demand more economical, value-based, and transparent drug pricing.
Under these circumstances, emerging markets present a new frontier.
Originally attractive for offering low-cost production, developing countries now present a viable market for multinational corporations.
The pharmaceutical industry has been eyeing this trend for a while.
A recent study predicts that sales in 17 “pharmerging” countries – including India, Indonesia, Pakistan, Thailand, and Vietnam – will “in aggregate expand by $90 billion during 2009-2013.”
But in many emerging economies, a large proportion of the population is poor, and those who are not remain vulnerable to falling into poverty in times of crisis.
Healthcare is financed largely out-of pocket – up to 60% in Asia – and many countries shoulder a “triple disease burden” of “old” diseases like tuberculosis and malaria, new infectious diseases like Influenza A (H1N1), and a “silent pandemic” in the form of non-communicable diseases such as diabetes and cancer.
The challenges surrounding access to medicines remain critical, and, indeed, relevant to the industry’s business model.
Philanthropic approaches to the problem have achieved little systemic change.
Drug donations by companies have been criticized for being mostly unsustainable.
Often, the medicines are unsuitable for patients, unfamiliar to local prescribers, do not match national clinical guidelines, or are near expiry.
Because supplies of donated medicines can be unpredictable, they can create chaos in the market by preventing accurate quantification of needs and thus affecting planning.
Donated supplies also have the overarching negative effect of undermining market competition – even generics cannot compete with free medicines.
Price discounts have been more effective, though their effect is limited by their focus on specific high-profile diseases and least developed countries (LDCs).
Advocates of improved access to medicines have posed three demands of the pharmaceutical industry:
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Transparent pricing schemes that systematically address the challenge of affordability;
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Investment in research and development that is relevant to the diseases affecting developing countries, and in medicines suitable for resource-poor contexts (for example, heat-stable formulations or fixed combination drugs); and
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Leading companies are starting to understand how integrating these concerns into core business practices may hold the answer to sustainable long-term profitability in emerging markets.
Reliance on the traditional “blockbuster” model, which targets the elite, is proving unfeasible and short-sighted.
For starters, it limits the size of the consumer base.
More importantly, the model’s dependence on aggressive defense of patents and high profit margins, in order to generate the all-important $1 billion per annum, keeps companies from serving target markets effectively by providing products that are relevant, affordable, and accessible.
Many argue that the perverse incentives created by the blockbuster model discourage innovation.
Finally, developing-country governments are beginning to prioritize health care and are seeking cost-efficient outcomes, as well as the means to effectively manage disease burdens.
In these countries, building access to medicine into companies’ core business models has become vital to securing a license to operate.
At the end of 2008, one company attempted to beat a new path.
The chief executive of GlaxoSmithKline (GSK) unveiled a four-point plan that included a commitment to cap prices for patented medicines in LDCs at 25% of the price in the developed world.
In middle-income countries, prices would more closely reflect a country’s ability to pay (for example, GSK cut the price of its cervical cancer vaccine, Cervarix, by 60% in the Philippines and gained a 14-fold increase in volume sales).
Further, it proposed the establishment of an LDC patent pool for neglected tropical diseases and donated to it 13,500 compounds for malaria vaccines.
Slowly, other companies are following suit.
Sanofi-Aventis recently announced that it would halve the price of its diabetes drug, Lantus, and cancer treatment, Taxotere, in Indonesia and the Philippines.
The Japanese firm Eisai dropped its price for Aricept, an Alzheimer’s treatment in six Asian countries.
Other companies are experimenting with base-of-pyramid models that seek to boost sales.
Novartis’s Arogya Parivar model sells medicines in smaller, more affordable package sizes.
The jury is still out on whether or not these new approaches deliver systemic change, and whether companies are adopting a “serve” rather than “capture” market strategy, but at least the issue of access to medicines is no longer being viewed at arm’s length.
More needs to be done on the issue of IP rights – the sacred cow of the pharmaceutical industry.
Developing-country governments continue to go head-to-head with Big Pharma in battles over compulsory licensing and patent legislation.
There is serious questioning of whether IP rights are actually an effective incentive for drug development, especially with respect to medicines that are relevant to diseases in developing countries, given the current dearth of Rampamp;D into these diseases.
New models are being tested.
UNITAID’s patent pool for AIDS medicines, for example, allows generics producers to make cheaper versions of patented medicines by enabling patent holders to license their technology in exchange for royalties.
Ultimately, generics remain the current front-runner in terms of delivering affordable medicines.
Formulating policies that enable generic competition with the branded pharmaceutical industry will require creative measures that emphasise the imperative of maximizing public health.
The New Public Diplomacy
CAMBRIDGE – The world of traditional power politics was typically about whose military or economy would win.
In today’s information age, politics is also about whose “story” wins.
National narratives are, indeed, a type of currency.
Governments compete with each other and with other organizations to enhance their own credibility and weaken that of their opponents.
Witness the contest between the government and protesters after the Iranian elections in June 2009, in which the Internet and Twitter played crucial roles, or the recent controversy between Google and China.
Reputation has always mattered in world politics, but credibility has become crucial because of a “paradox of plenty.”
When information is plentiful, the scarce resource is attention.
Under the new conditions, a soft sell may, more than ever, prove more effective than a hard sell.
For example, the relative independence of the BBC, sometimes a source of consternation to British governments, has paid rich dividends in credibility, as illustrated by this account of Tanzanian President Jakaya Kikwete’s day: “he rises at dawn, listens to the BBC World Service, then scans the Tanzanian press.”
Skeptics who treat the term “public diplomacy” as a mere euphemism for propaganda miss the point.
Simple propaganda is counterproductive as public diplomacy.
Nor is public diplomacy merely a public-relations campaign.
Public diplomacy also involves building long-term relationships that create an enabling environment for government policies.
The contribution of direct government information to long-term cultural relationships varies with three dimensions or stages of public diplomacy, and all three are important.
The first and most immediate dimension is daily communications, which involves explaining the context of domestic and foreign-policy decisions.
This dimension also involves preparation for dealing with crises.
If there is a vacuum in information after an event, others will rush in to fill it.
The second dimension is strategic communication, which develops a set of simple themes, much as a political or advertising campaign does.
While the first dimension is measured in hours and days, the second occurs over weeks, months, and even years.
The third dimension of public diplomacy is the development of lasting relationships with key individuals over many years or even decades, through scholarships, exchanges, training, seminars, conferences, and access to media channels.
These programs develop what the American journalist Edward R. Murrow once called the crucial “last three feet” – face-to-face communications, with the enhanced credibility that reciprocity creates.
But even the best advertising cannot sell an unpopular product.
A communications strategy cannot work if it cuts against the grain of policy.
Actions speak louder than words.
All too often, policymakers treat public diplomacy as a bandage that can be applied after damage is done by other instruments.
For example, China tried to enhance its soft power by successfully staging the 2008 Olympics, but its domestic simultaneous crackdown in Tibet – and subsequent repression in Xinxiang and arrests of human rights lawyers – undercut its gains.
Great powers try to use culture and narrative to create soft power that promotes their advantage, but they do not always understand how to do it.
Critics in the United States complain that the over-militarization of foreign policy undercuts its credibility.
Instead, they advocate diplomacy “on steroids,” staffed by diplomats trained in new media, cross-cultural communications, granular local knowledge, and networks of contacts with under-represented groups.
The centralized mass-media approach to public diplomacy still plays an important role.
Governments need to correct daily misrepresentations of their policies, as well as to try to convey a longer-term strategic message.
The main strength of the mass-media approach is its audience reach and ability to generate public awareness and set the agenda.
But its weakness is its inability to influence how the message is perceived in different cultural settings.
The sender knows what she says, but not always what the targets hear.
Cultural barriers are apt to distort what is heard.
Networked communications, on the other hand, can take advantage of two-way communications and peer-to-peer relations to overcome cultural differences.
This type of decentralization and flexibility is difficult for governments to accomplish, given their central accountability structures.
The greater flexibility of non-governmental organizations in using networks has given rise to what some call “the new public diplomacy,” which is no longer confined to messaging, promotion campaigns, or even direct governmental contacts with foreign publics serving foreign-policy purposes.
It is also about building relationships with civil-society actors in other countries and facilitating networks between non-governmental parties at home and abroad.
In this approach to public diplomacy, government policy is aimed at promoting and participating in, rather than controlling, such cross-border networks.
Indeed, too much government control, or even the appearance of it, can undercut the credibility that such networks are designed to engender.
The evolution of public diplomacy from one-way communications to a two-way dialogue treats publics as co-creators of meaning and communication.
Power in a global information age, more than ever, will include a soft dimension of attraction as well as the hard dimensions of coercion and payment.
Combining these dimensions effectively is called “smart power.”
For example, the current struggle against transnational terrorism is a struggle over winning hearts and minds, and over-reliance on hard power alone is not the path to success.
Public diplomacy is an important tool in the arsenal of smart power, but smart public diplomacy requires an understanding of credibility, self-criticism, and the role of civil society in generating soft power.
If it degenerates into propaganda, public diplomacy not only fails to convince, but can undercut soft power.
Instead, it must remain a two-way process, because soft power depends, first and foremost, upon understanding the minds of others.
The New Revolt of the Masses
PARIS – Is the current economic crisis uniting the democratic world in anger as much as in fear?
In France, with many factories closing, a wave of executive hostage-taking – “bossnapping,” as this newfangled crime is called – is agitating board rooms and police across the country.
In the United States, big bonuses given to executives from firms receiving billions of dollars in taxpayer bailouts – the insurance giant AIG, in particular – has infuriated public opinion, with a populist press and Congress fueling popular rage.
Similarly, in Great Britain, an increasingly inquisitive and critical public is now lumping together bankers and members of Parliament in a common climate of suspicion.
Is the current crisis creating or revealing a growing split between rulers and ruled?
Populist anger is one of the most predictable, and certainly inevitable, consequences of today’s financial and economic crisis.
The unifying factor behind this rising “anger” is rejection of both real and perceived inequality – inequality in both treatment and economic conditions.
In terms of the French Republic’s credo, “Liberty, Equality, Fraternity,” the first principle, liberty, became the motto of our age after the fall of the Berlin Wall in 1989; the second is gaining greater precedence today as the economy falters.
Can a renewed quest for equality close the traditional gap that has existed between America and Europe?
Will the “American dream” be Europeanized?
And, with their country’s economy humbled, will countless Americans’ secret hope that they, too, might one day be rich now give way to European-style envy?
It would be dangerous for America if things went that far.
America is not France – at least not yet.
But it seems obvious that increasing economic inequality in the US and, indeed, throughout the OECD, has stoked a perception of injustice and growing anger.
In the US, as the financial sector soared, the manufacturing base contracted sharply.
It is clear that all over the western world, particularly in the last 20 years, those at the top of the income ladder have done much better than those in the middle or at the bottom.
While the rich got richer, the poor did not get poorer, but the gap between rich and poor expanded significantly.
The current crisis may have seriously eroded the wealth of many of the very rich, destroying their assets in an unprecedented way.
But the fear, if not despair, of the poor and not-so-poor has increased tremendously.
Of course, inequalities between countries are one thing, and inequalities within countries are quite another.
But today the two processes are taking place simultaneously and at an accelerating pace.
Anger is no longer restricted to extreme anti-capitalist, anti-globalization forces.
A deep feeling of injustice is spreading across large swaths of society.
This sense of injustice is only partly contained by political considerations in the US, thanks to the “Obama factor,” a rare phenomenon that can be described as the restoration of trust in one’s political leaders.
But the more you distrust politics and your politicians, the more anger will manifest itself in uncontrollable ways, especially if your country is imbued with a romantic “revolutionary” tradition and culture.
This is obviously the case in France, where, contrary to what the French historian François Furet thought in the immediate aftermath of communism’s collapse 20 years ago, the French Revolution is neither over nor a closed chapter in history.
In France the decreasing popularity of President Nicolas Sarkozy and of his main “classical” opponent, the Socialist party (still deeply divided and in search of a leader), favors the rise of the extreme left behind the energy and charisma of its young leader, Olivier Besancenot.
In the US, the reverse is true.
President Barack Obama’s popularity remains largely intact and acts as a kind of buffer against an uncontrolled explosion of anger.
It is possible, but far from certain, that what Obama describes as a “glimmer” of hope in the US could be sufficient to keep popular anger at bay and bring about a recovery in trust in politics and politicians.
And European discontent will probably continue to grow, whatever happens in the US.
Economic recovery, when it comes, will probably start in America, but it is likely that the public’s sharpened sense of injustice, and the resulting resentments, will linger, poisoning politics in the Western world long after the crisis has passed.
America by Proxy?
PARIS – The demise of the Roman Empire resulted from a combination of strategic overreach and excessive delegation of security responsibilities to newcomers.
Without making undue comparisons, the question for the United States today is whether it can remain the world’s leading power while delegating to others or to technological tools the task of protecting its global influence.
Drones and allies – non-human weapons and non-American soldiers – have become central to America’s military doctrine.
Leading the world in technological prowess while leading it from behind in terms of combat forces on the ground, if not in the air, America’s shift of emphasis is impossible to ignore.
First there was the combined French and British action in Libya that led to the overthrow of Colonel Muammar el-Qaddafi’s regime; then came French intervention in Mali, and now Israeli airstrikes in Syria.
Each case is, of course, utterly different, but all have something in common: America has not been on the front line of intervention.
Yet, without direct US military support or indirect (and in some cases implicit) political support, it is difficult to imagine that such risky operations would have been launched.
Have the British, French, and even Israelis become armed extensions of the US in their respective spheres of influence?
If so, the contrast with the recent past could hardly be starker.
In the aftermath of the terror attacks of September 11, 2001, Americans simply could not envisage sharing their security responsibilities with others.
At best, Europeans could be America’s “cleaning ladies,” to use the indelicate analogy coined at the time by some neo-conservative thinkers during George W. Bush’s first term in office.
But, even before September 2001, some US conservatives had expressed disdain toward their European allies. I still remember the warning uttered by a top US diplomat in Strasbourg in the early 1990’s, on the eve of the Balkan wars.
“If we leave Europeans in charge of themselves, they will prove irresponsible, divisive, and suicidal, and then we will have to rescue them from themselves.” Today, Americans are only too happy to rely on the military competence and interventionist inclinations of some (in fact, very few) of their European friends.
It would be easy to interpret this shift as a response to the human and economic cost of America’s interventions in Afghanistan and Iraq.
The reality is more complex.
America’s newfound taste for delegating military responsibilities to others is not the result of a series of events, but the product of a long-term process driven by America’s simultaneous ambivalence toward the world and active engagement with it.
Is it worth fighting for a world that cannot be saved, and that only invites murky, inconclusive entanglements?
From this perspective, America’s involvement in World War I and, even more so, in World War II, are exceptions to the rule.
The US troops that landed on Normandy beaches in June 1944 were animated by a strong sense of mission.
They knew that they were fighting evil in an environment that was historically and culturally familiar.
In Vietnam, US soldiers, many of them black, often did not understand why they were fighting. In Iraq, their equivalents were very often Latinos for whom integration into American society – including, for many, the promise of permanent residence or citizenship – was at least as important as toppling Saddam Hussein.
When a country engages in the world, its authority stems from its willingness and ability to take “personal” risks.
Its authority is diminished when the perceived gap between the value of its population’s lives and the lives of its enemies is too wide.
In this respect, drone warfare reinforces the perverse nature of “asymmetrical wars.”
In her recent book Drone Warfare: Killing by Remote Control, Medea Benjamin, a peace activist and shrewd observer of international relations, makes a crucial point: “While drones make it easier to kill some bad guys, they also make it easier to go to war.”
Likewise, delegating security to allies can have perverse psychological effects.
This is particularly true in the Middle East.
How can the US exert pressure on Israel to engage in serious negotiations with the Palestinians, or to refrain from attacking Iran, when it offers encouragement – if only through public silence – to Israeli military intervention in Syria? If America’s purpose is to deliver a message to Iran – “Beware, you could be the next target” – many will question its sincerity about restraining Israel.
For some, the US has moved from too much engagement under Bush to doing too little under Barack Obama. For others, Obama is merely pursuing Bush’s foreign policy through other means – drones instead of soldiers.
The reality is probably somewhere in between.
But it is clearly not beneficial to the US, its allies, or global stability.
Precisely because America remains indispensable to international security, one wishes that its leaders would act in a more discerning way.
In international politics, as in education, there is no such thing as care by proxy.
If responsibility is to be exercised effectively, it cannot be delegated to machines or other countries.
The Measurement of Hope
SEATTLE – The lives of the world’s poorest people have improved more rapidly in the last 15 years than ever before, yet I am optimistic that we will do even better in the next 15 years.
After all, human knowledge is increasing.
We can see this concretely in the development and declining costs of new medicines like HIV drugs, and in the creation of new seeds that allow poor farmers to be more productive.
Once such tools are invented, they are never un-invented – they just improve.
Skeptics point out that we have a hard time delivering new tools to the people who need them.
This is where innovation in the measurement of governmental and philanthropic performance is making a big difference.
That process – setting clear goals, picking the right approach, and then measuring results to get feedback and refine the approach continually –helps us to deliver tools and services to everybody who will benefit.
Innovation to reduce the delivery bottleneck is critical.
Following the path of the steam engine long ago, progress is not “doomed to be rare and erratic.”
We can, in fact, make it commonplace.
Though I am an optimist, I am not blind to the problems that we face, or to the challenges that we must overcome to accelerate progress in the next 15 years.
The two that worry me the most are the possibility that we will be unable to raise the funds needed to pay for health and development projects, and that we will fail to align around clear goals to help the poorest.
The good news is that many developing countries have growing economies that allow them to devote more resources to helping their poorest people.
India, for example, is becoming less dependent on aid, and eventually will not need it.
Some countries, like the United Kingdom, Norway, Sweden, South Korea, and Australia, are increasing their foreign-aid budgets; others, even traditionally generous donors like Japan and the Netherlands, have reduced theirs.
The direction of many countries, including the United States, France, Germany, and Canada, is unclear.
Still, aid is critical.
It helps people in the poorest countries to meet their basic needs.
It funds innovation in the creation of new tools and services, and in their delivery.
Unfortunately, aid budgets are threatened by fiscal weakness in almost all of the advanced countries.
Unless voters hear about the positive impact that their generosity is having, they will inevitably focus on issues closer to home.
A single story, true or not, about a small amount of aid being misused can often cloud the entire field.
Imagine how you would feel about investing if every article you read were only about stocks that did poorly, with no reporting on the big successes.
Historically, aid was discussed largely in terms of the total amount of money invested.
But now that we are measuring indicators like child mortality more precisely, people are able to see the impact that aid has in stark terms – that it means the difference between, say, giving people access to HIV treatment and letting them die.
When framed this way, aid has a better chance of becoming a priority.
But will the world align around a clear set of goals in the next 15 years?
The United Nations is starting to map out new goals for the years following the 2015 expiration of the current Millennium Development Goals.
As with the MDGs, the next set of goals could help to align groups doing the work, remind voters what their generosity supports, and allow us to see where we are making progress in delivering solutions to the poor.
The MDGs’ success means that there is a lot of interest in expanding them to include a broader set of issues.
But many of the potential new goals lack unanimous support, and adding a lot of new goals – or goals that are not easily measurable – may sap momentum.
The MDGs were coherent because they focused on helping the poorest people in the world.
The groups that needed to work together to attain them were easy to identify, and they could be held accountable for cooperation and progress.
When the UN reaches agreement on other important goals like mitigating climate change, it should consider whether a different set of actors and a separate process might be best for those efforts.
The progress that the world has made in helping the poorest in the last 15 years is the kind of good-news story that happens one life at a time, so it often does not have the same visibility as a big setback, such as the outbreak of a new epidemic.
From time to time, we should step back and celebrate the achievements that come with having the right goals, the necessary political will, generous aid, and innovation in tools and their delivery.
The Next American Leader
Cambridge &#45;&#45; The American presidential race commands attention around the world.
The fact that the final three contenders included a woman, an African-American, and an older man who often challenged his own party suggests that the United States, after a decline in popularity during the Bush years, retains a capacity to reinvent itself.
But the next president will need to recognize that the nature of leadership also is changing.
The information revolution is transforming politics and organizations.
Hierarchies are becoming flatter, and knowledge workers respond to different incentives and political appeals.
Polls show that people today have become less deferential to authority in organizations and in politics.
Soft power – the ability to get what you want by attraction rather than coercion or payment – is becoming more important.
Even the military faces these changes.
The Pentagon reports that American army drillmasters do “less shouting at everyone,” because today’s generation responds better to instructors who play “a more counseling-type role.”
Military success against terrorists and insurgents requires soldiers to win hearts and minds, not just break bodies.
Leadership theorists speak of “shared leadership” and “distributed leadership,” and suggest images of leaders in the center of a circle rather than atop a hierarchy.
Of course, the hard power of command remains important.
Hard and soft power are related, because they are both approaches to achieving one’s objectives by affecting the behavior of others.
Sometimes people are attracted to others with command power by myths of invincibility.
As Osama bin Laden put it in one of his videos, “when people see a strong horse and a weak horse, by nature they will like the strong horse.”
Sometimes, intimidators have a vision, belief in their cause, and a reputation for success that attracts others despite their bullying behavior.
Consider Admiral Hyman Rickover, the father of America’s nuclear navy.
Rickover was a small man, far from the top of his class at the US Naval Academy, who did not look like a warrior or swashbuckling sea captain.
His leadership success came from his bureaucratic skill in cultivating Congressional support and obtaining resources, and from a rigid discipline that tolerated no failures among his officers.
The result was an efficient and accident-free nuclear submarine force that developed a mystique of success and attracted bright young officers.
Able people wanted to join him because Rickover was renowned for implementing an important strategic vision, not because he was a nice boss.
Hard and soft power can reinforce or undermine each other.
In response to al-Qaeda’s terrorist attacks on the US, Vice President Dick Cheney argued that strong military action would deter further attacks.
Certainly, the hard power of military and police force was necessary to counter al-Qaeda, but the indiscriminate use of hard power – illustrated by the invasion of Iraq, the Abu Ghraib prison photos, and detentions without trial – served to increase the number of terrorist recruits.
The absence of an effective soft power component undercut the strategic response to terrorism.
Almost every leader needs a certain degree of soft power.
The great leadership theorist James McGregor Burns once argued that those who rely on coercion are not leaders, but mere wielders of power.
Thus, in his view, Hitler was not a leader.
But even tyrants and despots such as Hitler need a degree of soft power, at least within their inner circle.
No individual is strong enough to coerce everyone else.
A dictator must attract or induce henchmen to impose his coercive techniques on others.
At the same time, except for some religious leaders, such as the Dalai Lama, soft power is rarely sufficient, while leaders who only court popularity may be reluctant to exercise hard power when they should.
Alternatively, leaders who throw their weight around without regard to the effects on their soft power may find others placing obstacles in the way of their hard power.
Indeed, psychologists have found that too much assertiveness by a leader worsens relationships, just as too little limits achievement.
In the words of CEO Jeff Immelt, “when you run General Electric, there are 7-12 times a year when you have to say, ‘you’re doing it my way.’ If you do it 18 times, the good people will leave.
If you do it three times, the company falls apart.”
Machiavelli famously said that it is more important for a prince to be feared than to be loved.
He may have been correct, but we sometimes forget that the opposite of love is not fear, but hatred.
And Machiavelli made it clear that hatred is something a prince should carefully avoid.
When the exercise of hard power undercuts soft power, leadership becomes more difficult – as President Bush found out after the invasion of Iraq.
Soft power is not good per se , and it is not always better than hard power.
Nobody likes to feel manipulated, even by soft power.
On the other hand, soft power allows followers more choice and leeway than hard power does, because their views and choices matter more.
And, in an age of flatter hierarchies and empowered knowledge workers, soft power is likely to increase in importance.
Hard power has not become irrelevant, but leaders must develop the contextual intelligence that allows them to combine hard and soft power resources into a “smart power” strategy.
Whoever the next president will be, he or she will need to learn that lesson.
The Next Bretton Woods
NEW YORK – The world is sinking into a major global slowdown, likely to be the worst in a quarter-century, perhaps since the Great Depression.
This crisis was “made in America,” in more than one sense.
America exported its toxic mortgages around the world, in the form of asset-backed securities.
America exported its deregulatory free market philosophy, which even its high priest, Alan Greenspan, now admits was a mistake.
America exported its culture of corporate irresponsibility – non-transparent stock options, which encourage the bad accounting that has played a role in this debacle, just as it did in the Enron and Worldcom scandals a few years ago.
And, finally, America has exported its economic downturn.
The Bush administration has finally come around to doing what every economist urged it to do: put more equity into the banks.
But, as always, the devil is in the details, and United States Treasury Secretary Henry Paulson may have succeeded in subverting even this good idea; he seems to have figured out how to recapitalize the banks in such a way that it may not result in resumption of lending, which would bode poorly for the economy.
Most importantly, the terms that Paulson got for the capital provided to America’s banks were far worse than those obtained by British Prime Minister Gordon Brown (not to mention those that Warren Buffett got for putting far less into America’s soundest investment bank, Goldman Sachs).
Share prices show that investors believe that they got a really good deal.
One reason to be concerned about the bad deal that American taxpayers are getting is the looming national debt.
Even before this financial crisis, America’s national debt was scheduled to increase from $5.7 trillion in 2001 to more than $9 trillion this year.
This year’s deficit will approach a half-trillion dollars; next year’s will be even larger, as the US downturn steepens.
America needs a big stimulus package.
But Wall Street’s fiscal conservatives (yes, the same people who brought us this downturn) will now be calling for deficit moderation (reminiscent of Andrew Mellon in the Great Depression.)
Now the crisis has spread, predictably, to emerging markets and less developed countries.
Remarkable as it may seem, America, for all its problems, is still seen as the safest place to put one’s money.
No surprise, I suppose, because, despite everything, a US government guarantee has more credibility than a guarantee from a third-world country.
As America sops up the world’s savings to address its problems, as risk premiums soar, as global income, trade, and commodity prices fall, developing countries will face hard times.
Some – those with large trade deficits before the crisis hit, those with large national debts that must be rolled over, and those with close trade links to the US – are likely to suffer more than others.
Those countries that did not fully liberalize their capital and financial markets, such as China, will be thankful that they did not follow the urging of Paulson and the US Treasury to do so.
Many are already turning to the International Monetary Fund for help.
The worry is that, at least in some cases, the IMF will go back to its old failed recipes: fiscal and monetary contraction, which would only increase global inequities.
While developed countries engage in stabilizing countercyclical policies, developing countries would be forced into destabilizing policies, driving away capital when they need it most.
Ten years ago, at the time of Asia’s financial crisis, there was much discussion of the need to reform the global financial architecture.
Little – too little, it is now evident – was done.
At the time, many thought that such lofty appeals were a deliberate attempt to forestall real reform: those who had done well under the old system knew that the crisis would pass, and with it, so too would the demand for reform.
We cannot let that happen again.
We may be at a new “Bretton Woods” moment.
The old institutions have recognized the need for reform, but they have been moving at glacial speed.
They did nothing to prevent the current crisis; and there is concern about their effectiveness in responding to it now that it has hit.
It took the world 15 years and a world war to come together to address the weaknesses in the global financial system that contributed to the Great Depression.
It is to be hoped that it will not take us that long this time: given the level of global interdependence, the costs would simply be too high.
But, whereas the US and Great Britain dominated the old Bretton Woods, today’s global landscape is markedly different.
Likewise, the old Bretton Woods institutions came to be defined by a set of economic doctrines that has now been shown to fail not only in developing countries, but even in capitalism’s heartland.
The forthcoming global summit must face these new realities if it is to work effectively toward creating a more stable and a more equitable global financial system.
The Next Gas Crisis Awaits
Europe’s sigh of relief at the supposed end of the dispute between Russia and Ukraine over gas pricing was audible here in Kyiv.
But the settlement raises more questions than it answers.
By placing Ukraine’s energy needs in the hands of a shadowy company linked to international criminals, the agreement has planted the seeds of new and perhaps more dangerous crises.
As a result, I am challenging this deal in court and asked the members of my party to vote no confidence in the government.
Let a public hearing before a judge reveal exactly who will benefit from this deal, and let parliament examine all of the agreement’s terms and secret protocols.
The settlement between Ukraine and Russia’s state-owned gas monopoly, Gazprom, is intolerable because Ukraine’s energy future has been placed in the hands of RosUkrEnergo, a criminal canker on the body of our state gas corporation.
RosUkrEnergo was established in the last months of the regime of our former ruler, Leonid Kuchma.
Yet it miraculously gained control of all of Ukraine’s gas imports from Central Asia.
Under the deal agreed this week, it retains that control.
As one who worked in the gas industry before entering politics, I know that the gas trade in the countries of the former Soviet Union is riddled with corruption.
During my premiership, my government sought to investigate RosUkrEnergo – to discover who precisely its owners are, how it gained a virtual monopoly on the import of Central Asian gas, and where its profits go.
Now that I am not in government, that investigation has been shelved.
Ukraine’s energy needs, and thus the certainty of energy supplies across Europe, will never be secure as long as gas transit is in the hands of secretive companies with unknown owners.
But the issues raised by the gas dispute between Ukraine and Russia go beyond energy security, reviving questions about Ukraine’s place in Europe and the world.
As this struggle shows, Ukraine has been obliged to assume a higher-profile role in European affairs.
It must consider where and in what sort of Europe it fits, what balance it should strike between Russia and the European Union, and how it should find the self-assurance needed to play its full part in world affairs.
It would be sheer folly to suggest that Ukrainians start with a blank slate.
Centuries of being part of the Russian and Soviet empires have, in different ways, shaped how Ukrainians view their country and its interests.
One consequence of this is that Ukrainians are often shy about asserting Ukraine’s independent interests plainly – exemplified by Ukraine’s acceptance of a deal that leaves its energy future so insecure.
Like any country, Ukraine’s relations with the world are determined by four interlocking factors: history, patriotism, national interests, and geography.
Each factor has special resonance here.
True, Ukrainians rightly feel like citizens of a normal, independent country, and want to be treated that way.
But this does not mean we want to bury history and our historic ties.
We are a normal country with an abnormal history.
Indeed, Ukraine’s interests form a comfortingly familiar triangle of economic, political, and strategic priorities: free trade and open markets across the globe; prosperous and democratic neighbors; and not being on the front-line of a conflict, still less a potential battleground, between Russia and the West.
Our goal is thus a democratic Ukraine located between prosperous like-minded neighbors to east and west.
Of course, the risk of tyranny, turmoil, and war within the so-called “post-Soviet space” is large, leaving Ukraine keen to limit its vulnerability.
Ukrainian enthusiasm about the EU is based on the idea that European security is indivisible.
We recognize, of course, that few of even the most fervent supporters of European integration want to help Ukraine quickly become a member.
But the risk to EU gas supplies shows that our fates are linked.
Europe must play its part as Ukraine redefines its historic ties to Russia, and its actions must do nothing to undermine Ukraine’s national independence – or, indeed, that of any of the countries that emerged from the Soviet Union’s breakup.
The proposed Baltic Sea pipeline, which would bring gas to Germany directly from Russia, bypassing Poland, Ukraine, the Baltic states, and the rest of Central Europe, is dangerous in this regard, because it may allow Gazprom the freedom to cut gas supplies to customers without endangering supplies to its favored western markets.
That is a recipe for renewed threats, not only to Ukraine, but to EU members like Poland, the Czech Republic, Hungary, Slovakia, Slovenia, and the three Baltic states.
In broad terms, Ukraine seeks security and stability, and it should be remembered that our record here is strong.
Our decision more than a decade ago to surrender Ukraine’s status as a nuclear nation is the clearest sign of our good neighborly intentions and political maturity.
Today’s crisis over gas supplies must not be overblown.
Objectively speaking, Ukraine today is more secure as a nation than at any time in its history.
But Ukrainians do not feel as secure as they should.
The way to deal with uncertainty and complex situations is to think clearly and act decisively, not cut deals that place Ukraine’s future in the hands of shadowy businesses.
Only by clearly articulating and defending Ukraine’s national interests can today’s dispute over gas supplies establish our role in a transformed Europe.
The Next IMF
The international monetary and financial system has witnessed tremendous change over the recent decades.
Rapid expansion in cross-border capital flows, continued financial innovation, and deepening financial markets pose increasing challenges not only for national policy makers, but also for international financial institutions.
This has been particularly true of the IMF as it seeks to serve its global membership, and it has triggered a critically important discussion of the Fund’s strategic direction.
The IMF’s current strategic review does not start from scratch.
The reform process was launched at the end of the 1990’s and was continued by former Managing Director Horst Köhler with important initiatives.
These initiatives – particularly efforts to strengthen the IMF’s surveillance function and the so-called “exceptional access framework” – must now be locked in and implemented consistently.
For example, the introduction of standards and codes, reports on their observation (ROSC’s), Financial Sector Assessment Programs (FSAP’s), and the resulting increase in the Fund’s transparency might contribute to an improvement of bilateral, regional, and multilateral surveillance.
The exceptional access policy, which seeks to both enhance the predictability of the Fund’s lending policy and to safeguard its financial position, is still waiting for its first real test.
But the world needs to look beyond even these issues.
The IMF’s management shares many strategic considerations repeatedly raised by the Bundesbank, which has argued that the Fund should limit its activities to its core mandate: promoting monetary and financial stability.
Thus, the IMF’s role in the international monetary system should not go beyond applying its key instruments for promoting macroeconomic stability: surveillance and economic policy advice.
In fact, these two instruments should go hand in hand as the IMF’s internal reforms continue.
Increasing analytical focus and improving transparency by providing comprehensive advice and timely information would serve to strengthen surveillance further.
By contrast, an IMF that attempted to act, say, as an international umpire of national exchange-rate policies would face insurmountable implementation and acceptance problems.
Similarly, positioning the IMF as a general risk insurer by introducing precautionary credit lines above normal access limits would be compatible neither with its mission to provide financial assistance on deliberately non-risk-adjusted terms nor with the current system of refinancing short-term Fund credit through risk-free official reserves.
Only in true balance-of-payments crises should the IMF stand ready to provide limited temporary financial assistance to member countries, thereby encouraging their own policy adjustments and signaling this commitment to the markets.
Nor is becoming a development institution consistent with the Fund’s mission.
Development financing should be left to the World Bank.
By concentrating on their specific comparative advantages in line with clearly defined mandates, both institutions will fulfill their tasks more efficiently.
Indeed, the implementation of the Multilateral Debt Relief initiated by the G-8 already provides an unprecedented opportunity to complete the process of debt relief for a large number of low-income countries.
This also opens the way for the IMF to dispose of its current diffusion of activity in low-income countries and intensify its agenda in the areas of its core expertise.
Finally, adequate representation and the right of each member to have a say in the Fund is a prerequisite of the legitimacy that the IMF needs to fulfill its global role.
The quota distribution should be guided by members’ economic weight and degree of integration into the global economy, and any quota adjustments must be undertaken in a coherent manner that applies the same standard for all countries.
But, in order to maintain the creditor countries’ willingness to contribute to the Fund’s finances, a strong link must be maintained between quotas, on the one hand, and voting rights, access to IMF resources, and financial contributions on the other hand.
The issue of representation is an important component of the IMF’s strategic review.
However, that review, and the reforms that follow from it, must be much more comprehensive in order to benefit the Fund and all of its members.
The Next Liberation of France
Ségolène Royal has turned the tables on the Socialist Party to become its standard bearer in next year’s election.
But her triumph is only part of an intense political debate of the sort France has not seen for decades.
With parliamentary and presidential elections next year, the stakes are as high as at any previous turning point in modern French history.
A unique feature of today’s debate is its cohort of public intellectuals like Jacques Marseille, Nicolas Baverez, Elie Cohen, and Stephane Rozes, none of whom subscribe to the hoary notion of French uniqueness (the so-called exception française ).
Their thinking is at the forefront of a widening recognition that France must face the world’s challenges as they really are, not as the French want them to be.
That means accepting and dealing with globalization.
France certainly has the tools to cope.
With only 1% of the world’s population, France is the sixth largest economy, ranking fourth in international trade and third in exports of goods and services.
More than 40% of the largest companies quoted on the Paris stock exchange are in foreign hands.
Indeed, one in seven workers is employed by a foreign company, compared to one in ten in the UK and one in 20 in the United States.
Productivity is relatively high, at $33 per hour, compared to $27 for the UK.
Moreover, France will enjoy large gains from exports to the fast-growing emerging world, since it produces more competitive high value-added goods than, for example, southern European countries, whose exports are closer to those of the leading emerging countries.
France could handle globalization, if not for the French state.
Its relatively poor business environment was highlighted by the World Bank’s latest Doing Business survey.
The section “Starting a business,” which identifies the bureaucratic and legal hurdles to incorporating and registering a new firm, ranks France in 35th place, whereas the UK ranks sixth and the US ranks third.
But the worst damage done by state policies is unemployment.
If there is an exception française , it is that for the past 30 years, the unemployment rate has never fallen below 8.5%.
If you exclude the cosseted army of public-sector workers, the rate approaches 15%.
Youth unemployment, including the female population, averages 23%, while in deprived suburbs with concentrated immigrant populations, the rate hits 70%.
Much of the political class and public opinion blames globalization – outsourcing and company relocations to cheaper labor markets – for unemployment.
But the chief culprit is France’s own labor code – a forest of regulations that offers the strongest employment protection anywhere in the world.
In the section “Employing workers” of Doing Business , France ranks 134th, compared to 17th for the UK and first for the US.
With employers unwilling to hire workers that they cannot easily fire, French young people are right to feel uncertain about their future.
Joblessness is the main cause of poverty.
The primary protection against poverty is earned income – for which even France’s generous unemployment benefits and other welfare payments are an inadequate substitute.
Much of the high tax burden required to finance them falls on companies in the form of payroll taxes (employers’ social security contributions), which further deter companies from taking on more staff.
Successive French governments have let this situation fester.
Dominique de Villepin’s government turned away from this challenge in favor of “economic patriotism” – that is, protecting supposed national champions from foreign takeover.
Despite comical episodes such as classifying the dairy company Danone as a national security asset to head off a possible bid from Coca Cola, France’s foreign investment regime is no less restrictive than other developed countries, including the US.
This scapegoating of globalization reflects another key problem.
Successive governments, not companies, are responsible for the most damaging outsourcing in France – that of responsibility.
Instead of proposing reforms to the electorate and then implementing them on the strength of a clear democratic mandate, the few serious reforms in the past 20 years have been presented as being externally imposed – mainly to comply with European Union requirements.
As a result, reform has come to seem illegitimate, which has strengthened resistance to it.
Breaking the impasse requires restoring political legitimacy by electing a president who, having promised reform, gains a mandate to deliver it.
Both leading contenders in the 2007 presidential election, Ségolène Royal and Nicolas Sarkozy, share relative youth (compared to the geriatrics of recent decades) and have their fingers on the pulse of public opinion.
Their common approach is to enter into a real dialogue with the French people based on an understanding that the only viable basis for reform is a strong political contract between government and citizens.
This stands in sharp contrast to the reigns of François Mitterrand and Jacques Chirac, with their elitism, arrogance, paternalism, and stagnation.
Whatever the election’s outcome, the return of political will and legitimacy to France will come not a moment too soon.
The Nine Lives of Daniel Ortega
Once again, Nicaragua faces a possible Sandinista restoration.
The country votes on November 5 in an unprecedented presidential election with four competitive candidates, and the question on everyone’s lips is whether Sandinista leader Daniel Ortega, who lost by more than 10% in each of the last three presidential votes, will succeed in regaining power this time.
Nicaragua’s politics are polarized between a Sandinista minority and a majority that is clearly anti-Sandinista, yet Ortega has a real chance of winning.
How is this so?
Despite conspicuous efforts by the Bush administration to unify Nicaragua’s right, the anti-Sandinista forces are divided.
The traditional wing, the Constitutional Liberal Party (PLC), controlled by former President Arnoldo Alemán, who is under house arrest since being convicted of corruption, has José Rizo as its candidate.
The moderate wing, the Nicaraguan Liberal Alliance (ALN), is led by banker Eduardo Montealegre, with huge support from the private sector and the Bush administration.
But the FSLN (the Sandinista National Liberation Front), too, has suffered a major rupture, with the emergence of a new option on the democratic left in the form of a breakaway Sandinista faction that has managed to win the support of independent voters.
Its candidate, the economist Edmundo Jarquín, is a former expert on governance issues at the Inter-American Development Bank.
A backroom deal reached between Alemán and Ortega in 2000, intended to carve up power between the two men, established a 40% threshold for a candidate to win the presidency in the first round.
In addition, and in exchange for personal benefits, then President Alemán promulgated a rule that looks tailored-made to suit Ortega: candidates can win on the first round with only 35% of votes if there is a 5% difference between the leading contender and the runner-up.
The emerging forces represented by Montealegre and Jarquín agree on the need for political reform to undo that Ortega/Alemán pact, which has politicized the judiciary, the national accounts, and the electoral system.
Concerning economic policy, they differ on the degree of continuity or change that should be pursued, and over recent reforms that have produced moderate economic growth but with no improvement whatsoever in the living conditions of the 50% of the population who live in poverty.
Paradoxically, Ortega enters the final stages of the campaign with about 33% of the vote, far below his historical high of 42%.
Yet he may just win due to the divided opposition.
In a parody of John Lennon’s song “Give Peace a Chance,” Ortega barnstorms the country in the manner of a religious preacher, offering “peace, jobs, and reconciliation.”
He condemns wild capitalism, but proposes no systemic change as an alternative.
The only new elements in his program are handouts for Venezuela’s populist president, Hugo Chávez, which will also mean political alignment between the two leaders if Ortega wins.
But polls that put Ortega in the lead should be read cautiously, because many voters keep their views hidden.
With this warning in mind, three scenarios are possible:
· Ortega cannot win in the first round.
As in previous elections, the hidden vote turns massively against him.
He then is soundly defeated in a run-off against Montealegre as anti-Ortega voters unite against him.
If that happens, Nicaragua would have a president with a strong popular mandate and the possibility of establishing a viable democratic alliance in Congress.
Ortega wins outright in the first round, fueling economic uncertainty, as investors, savers, and external donors are seriously worried by his past.
How long they would worry, of course, depends on his behavior in office.
Despite his revolutionary rhetoric, Ortega would have no chance of enacting substantial change, because he would lack a Congressional majority.
Even so, the country’s stability, always precarious, would depend on his relations with the US, which have long been poisoned by mutual hostility.
Moreover, his victory would mean a new and unconditional ally for Chávez, one with more symbolic than real influence, but economically dependent on Venezuela in a region dominated by the influence of the United States and the Free Trade Agreement of the Americas.
The electoral result is too close to define a non-controversial winner after the first round.
It is feared that the Supreme Electoral Council, strongly dominated by the FSLN and the PLC, may not administer the vote counting impartially.
And, even if massive fraud is not foreseeable, selective fraud remains a risk.
This poses a huge challenge for international electoral observers – the Organization of American States, the European Union, and the Carter Center – if they are to prevent a situation similar to, or even more serious than, Mexico’s recent post-election impasse.
The only certain result that will come out this election is that a new Congress will emerge, and that it will weaken the Alemán-Ortega pact that has held current President Enrique Bolaños administration hostage.
Thus, any new government will have more room for democratic maneuver in a fragmented Congress of four strong electoral blocs.
Nicaragua faces a hugely complex future. But that complexity is much more promising than the current immobility.
The Nobel Cult
OSLO &#45;&#45; The dance around the golden Nobel medallion began over a 100 years ago, and is still going strong.
As icon, myth, and ritual, the Nobel Prize is well secured. But what do we actually know about the Nobel Prize?
Shrouded in secrecy and legend, the Nobel Prize first became an object for serious scholarly study after 1976, when the Nobel Foundation opened its archives.
Subsequent research by historians of science leaves little doubt: the Nobel medallion is etched with human frailties.
Although many observers accept a degree of subjectivity in the literature and peace prizes, the science prizes have long been assumed to be an objective measure of excellence.
But, from the start, the Royal Swedish Academy of Sciences, which awards the physics and chemistry prizes, and the Caroline Institute, which awards those for medicine/physiology, have based their decisions on the recommendations of their respective committees.
And the committee members’ own understanding of science has been critical in determining outcomes.
From the beginning, the inner world of those entrusted to make recommendations was marked by personal and principled discord over how to interpret Alfred Nobel’s cryptic will and to whom prizes should be awarded.
While committee members tried to be dispassionate, their own judgment, predilections, and interests necessarily entered into their work, and some championed their own agendas, whether openly or cunningly.
Winning a Prize has never been an automatic process, a reward that comes for having attained a magical level of achievement.
Designated nominators rarely provided committees with a clear consensus, and the committees often ignored the rare mandates when a single strongly nominated candidate did appear, such as Albert Einstein for his work on relativity theory.
Academy physicists had no intention of recognizing this theoretical achievement “even if the whole world demands it.” The prize is a Swedish prerogative.
Moreover, a simple change in the composition of the committee could decide a candidate’s fate.
Not until committee strongman C. W. Oseen died in 1944 could the theoretical physicist Wolfgang Pauli – one of the giants of quantum mechanics – receive a prize.
Conversely, the Academy of Sciences sometimes rebelled against its committees.
Harboring a grudge, one chemist rallied the Academy to block the committee’s recommendation for the Russian Dmitry Mendeleyev, who created the periodic table.
Even when all involved tried to rise above pettiness and partiality, selecting winners was always difficult– and remains so.
Committee members occasionally confessed privately that often several candidates could be found who equally deserved a prize.
Unambiguous, impartial criteria for selecting a winner were not at hand – and never will be.
The confused situation faced by the Caroline Institute in 1950 reminds us that all prize committees face difficult choices: after four indecisive rounds of preliminary voting, three primary alternatives emerged, but the out-come was still uncertain.
When urging a colleague to come to the meeting, one committee member noted that if somebody were to catch cold, a completely different decision might be reached.
The image of science advancing through the efforts of individual genius is, of course, appealing.
Yet, to a greater extent than the prizes allow, research progresses through the work of many.
Brilliant minds do matter, but it is often inappropriate and unjust to limit recognition to so few, when so many extremely talented scientists may have contributed to a given breakthrough.
The Nobel bylaws do not allow splitting a prize into more than three parts, thereby excluding discoveries that entailed work by more than three researchers, or omitting key persons who equally deserved to share in the honor.
Moreover, it has become clear that many important branches of science are not addressed by Alfred Nobel’s testament (limited to physics, chemistry, physiology/medicine).
Some of the past century’s greatest intellectual triumphs, such as those related to the expanding universe and continental drift, have not been celebrated.
Environmental sciences – surely of fundamental importance – also come up empty.
There is nothing wrong with wanting heroes in science, but we should understand the criteria used to select those whom we are asked to revere.
Why do people venerate the Nobel Prize?
There is no easy answer.
The cult of the Prize began even before the first winners were announced.
Media fascination whipped up speculation and interest.
The creed of the Prize did not depend so much on the merit of the winners, as much as the understanding that the Prize was a powerful means to gain prestige, publicity, and advantage.
Even scientists who frowned upon the Swedish committees’ limitations and sometimes odd choices nevertheless still nominated and lobbied for candidates, knowing that if successful, a winner can draw attention and money to a research specialty, institution, or national scientific community.
Is science or society well served by a fixation on prizes and on nurturing a culture of extreme competition?
Perhaps once the mystery of the Nobel Prize is reduced, we might reflect on what is truly significant in science.
The soul and heritage of science going back several centuries is far richer than the quest for prizes.
The Nobel Message
Al Gore’s Nobel Peace Prize is a fitting tribute to a world leader who has been prescient, bold, and skillful in alerting the world to the dangers of manmade climate change.
Gore’s co-recipient of the Nobel Peace Prize is less known, but no less deserving.
The Inter-Governmental Panel on Climate Change (IPCC) is the UN’s global body for assessing the scientific knowledge on climate change and bringing that knowledge to the attention of the public and the world’s policy makers.
Its receipt of the Nobel Peace Prize sends three powerful messages.
First, the world’s leading climate scientists and most of the world’s governments have brought climate science to the forefront of global policy debates.
Climate change is complicated.
Mastering the subject requires expertise in many scientific fields, including climatology, oceanography, atmospheric chemistry, ecology, engineering, politics, and economics.
No lone scientist or national team can do this.
A worldwide effort is needed to understand changes in all parts of the world.
Since its inception in 1988, the IPCC has harnessed the best scientific minds from around the world to document and explain what is known and not known about human-induced climate change.
Various working groups prepare reports by scrupulously reviewing scientific publications.
The review process is transparent and governments are invited to participate by nominating experts to various working groups, reviewing and commenting on IPCC draft documents, and approving final IPCC reports.
This process builds accuracy and confidence.
Years are required for each major IPCC report, including the “Fourth Assessment Report,” which was completed this year.
One reason for the IPCC’s notable success has been the skilled guiding hand of the IPCC Chairman, Dr. R. K. Pachauri, who will accept the prize on the body’s behalf.
The second message is that such a global process linking scientists and governments in a common effort is vital, because without it the airwaves can get clogged with the ignorance and misinformation peddled by special interest groups.
For years, oil companies such as Exxon tried to pretend that climate change wasn’t real or that the risks were exaggerated.
Exxon and others sponsored misleading journalism and groups that masqueraded as “think tanks.”
The IPCC faced down these vested interests.
Today, ExxonMobil and other major oil companies are much more honest and constructive in their discussions of the issues.
They could not, in the long-term, beat the science without gravely damaging their reputations.
Finally, this year’s Nobel Peace Prize is a wake-up call to governments, starting with the United States, to get more serious about science and sustainable development.
The Bush administration has been disastrously anti-scientific.
It has been staffed with ideologues who reject or neglect climate science, and who set the US on a dangerous and irresponsible path.
Today, Bush has begun to acknowledge the serious risks of climate change, though his administration has still failed to put forward any realistic proposals to reduce the rate of human-induced climate change.
Most governments are in fact ill-equipped to understand the scientific issues, even when they are much less ideological and dogmatic than Bush.
Governments tend to be organized according to nineteenth- or twentieth-century topics such as diplomacy, defense, internal security, and finance, not twenty-first century challenges such as sustainable development.
They are mostly unable to harness advanced scientific knowledge to protect their citizens or participate in global negotiations on the challenges of climate, water, energy, biodiversity, and the like.
The world should respond in three ways.
First, we should take seriously the need for a new climate-change accord when global negotiations begin in Bali, Indonesia this December.
The weak and only partly implemented Kyoto Protocol expires in 2012, and the world requires a much stronger framework, one that sets a strong target for stabilizing greenhouse gases by 2050 by including agreements on ending tropical deforestation, developing high-mileage automobiles, and shifting to low CO2-emitting power plants.
Second, we should initiate IPCC-like scientific processes for other global challenges, including the global loss of biodiversity, desertification, and over-fishing of the oceans.
In each area, the general public and the world’s governments only dimly perceive a global crisis.
Governments have signed treaties to limit the damage, but they are not acting on those promises with the urgency required, in part because they do not understand the underlying scientific challenges.
Finally, we must revamp national governments so that they have processes and capabilities similar to the IPCC.
Global processes like the IPCC are crucial, but the issues must also be “brought home” to the conditions and challenges facing each country.
Virtually all countries will face a host of intersecting challenges from climate change, such as overhauling the energy sector and adjusting to changing patterns of rainfall, storms, droughts, and floods.
The IPCC proved that science can contribute powerfully to meeting these challenges, and that scientists and policymakers can work together to help solve problems of critical importance for humanity.
The Nobel Prize and Einstein\u0027s Ghost
This December 10 th marks the one hundredth anniversary of when the first Nobel Prizes were awarded.
Ever since, they have been a subject of great interest and debate.
Alfred Nobel died on 10 December 1896.
When his will was opened it was found that he had donated his considerable wealth to creating the prizes that bear his name.
Five prizes were mentioned: physics, chemistry, physiology or medicine, literature and peace; and four prize-awarding institutions named: the Royal Swedish Academy of Sciences (for physics and chemistry), the Karolinska Institutet (for physiology or medicine), the Swedish Academy (for literature) and a group appointed by the Norwegian Parliament, later called ``The Norwegian Nobel Committee'' (for peace).
Sweden and Norway were then tied together in a union.
Since the creation of the Nobel prizes, more than 650 medals and diplomas have been given away in the original prize areas.
A prize in economic sciences in memory of Alfred Nobel was established by the Bank of Sweden in 1968.
Most of these prizes are connected with scientific breakthroughs, literary masterpieces and attempts to make peace in a violent century.
The thread running though all the stories of the prize winners is the concept of creativity: both individual creativity and creative environments.
One story - that of a Nobel Laureate in Physics, Albert Einstein - is particularly explicative of the process.
Perhaps the most common question about the Nobel Prize in Physics is this: ``Why didn't Einstein get the prize for his theory of relativity?''
At the age of 26, during his ``annus mirabulis'' of 1905, Einstein published three papers that were to influence the entire 20 th century, not only in physics.
One of these papers concerned the special theory of relativity, which describes how space and time, or mass and energy, are mixed at high speeds.
One paper describes the ``Brownian motion,'' the irregular motion performed by small particles in a liquid as a result of their collisions with the liquid molecules.
The third paper, finally, explains the photo-electric effect, why light can make electricity leave metal surfaces, something we apply in ordinary photocells.
Of the three theories, the theory of relativity became the most written about and discussed.
When the Royal Swedish Academy of Sciences year after year asked scientists for their nominations, many answered that Einstein deserved the Nobel Prize in Physics for his special theory of relativity.
But the Nobel Committee for Physics didn't agree, and for years no prize was awarded to Einstein!
At first the Nobel Committee argued that the theory might be wrong and wrote that it would be best to wait for experimental evidence that confirmed Einstein's theory.
When Einstein managed to generalise his theory and introduced the curved space-time, in which light bends around heavy astronomical bodies, the number of nominations increased even more.
But the Nobel Committee for Physics had a powerful member, Allvar Gullstrand, professor at Uppsala University and Nobel Laureate in Physiology or Medicine 1911 for his work on how the light bends in the eye.
In his opinion, Einstein was wrong, and he tried to prove it by making his own calculations.
Today, we know that Gullstrand was wrong, but his opposition was enough to block the prize-awarding process.
In Uppsala, however, another professor, Carl Wilhelm Oseen, a specialist on mathematical physics, understood Einstein's theories and had also understood the power balance in the Nobel Committee for Physics.
As a newly elected member of the Academy, in 1921 he was the first to propose giving to Einstein a Nobel Prize for his work on the photoelectric effect.
This single nomination made the wheels begin to turn in Einstein's favor.
Oseen was made a member of the Nobel Committee and wrote a positive report on the theory of the photoelectric effect.
The very next year, Albert Einstein was awarded the 1921 Nobel Prize in Physics ``for his services to Theoretical Physics, and especially for his discovery of the law of the photoelectric effect.''
So was the Royal Academy of Sciences mistaken in not giving its award of a Nobel Prize to Einstein for what most people would consider his most important intellectual discovery?
Many have argued that this is the case.
But one has to study a little bit more history of physics before making the final judgment.
In this history it is clear that Einstein's paper from 1905 not only explained the photoelectric effect, but also initiated something of a greater magnitude, something revolutionary: it introduced the concept of the photon, the wave-particle which not only lies at the heart of our understanding of both micro- and macrocosmos, but which led to technical applications such as medical laser scalpels and the laser diodes of the Internet.
With regard to the text of Alfred Nobel's will, which requires that a Nobel Laureate confer the greatest benefit on mankind, Einstein's introduction of the photon by far surpasses the theory of relativity!
Today the work of the five Nobel Committees goes on, mainly along the same lines as at the beginning of the 20 th century.
The big difference is the number of nominations, which today tend to run in the several hundreds.
If a new Albert Einstein is hidden somewhere among the hundreds of candidates, only the future will tell!
The Non-Communicable Disease Paradox
WELLINGTON – Albert Einstein is reputed to have said that “everything should be made as simple as possible, but not simpler.”
Yet the current debate about the global epidemic of non-communicable diseases (NCDs) – chronic diseases such as heart disease, stroke, diabetes, and cancer – has ignored this advice.
Policymakers have oversimplified the challenge by focusing on the growing prevalence of NCDs – the sheer number of people with these diseases –&#160;which, I argue, is not really the problem.
True, almost all regions of the world are currently experiencing an increase in the prevalence of NCDs – in part because, as deaths from acute infectious diseases and injuries decline, people live long enough to develop these diseases.
But NCDs are increasing for many other demographic and epidemiological reasons as well – and understanding these has implications for health policy, and even for economic development.
In much of the world, populations are growing and aging simultaneously.
Most NCDs increase in prevalence with age – a consequence of the cumulative exposure to risk factors (including unhealthy behaviors such as tobacco use and biological risk factors such as high blood pressure) over a lifetime.
All else being equal, larger and older populations mean more people with NCDs.
This “population aging” effect is well understood.
Far less well understood are the epidemiological forces that drive NCD dynamics.
From an epidemiological perspective, NCD prevalence is determined by the difference between the rate at which previously healthy people become ill (incidence) and the rate at which ill people either recover or die (from any cause).
If inflow exceeds outflow, prevalence rises.
Over the past several decades, standards of living, lifestyles, and biological risk factors have generally improved worldwide (obesity is an exception).
So, contrary to popular belief, the incidence of most NCDs other than diabetes has actually been falling.
Nevertheless, NCD prevalence has increased, because improvements in survival have outpaced reductions in incidence.
Inflow and outflow have both fallen, but outflow has fallen further and faster.
Several factors underpin the recent dramatic gains in survival at older ages.
People living with a chronic disease may die not only from that disease, but also from other causes – including other NCDs, acute infections, and injuries.
In particular, more accessible and higher-quality health care has significantly improved survival rates for people living with NCDs, including diabetes.
Yet health care is not solely responsible for the observed improvement in survival rates.
Improvements in lifestyle and related risk factors have contributed as well.
A decline in the proportion of people who use tobacco, consume unhealthy diets, are physically inactive, and/or have elevated blood pressure and cholesterol does more than just prevent disease.
Not only do fewer cases occur, but the NCD cases that do tend to be less severe, and to progress more slowly than was previously the case.
As a result, the increase in prevalence that has been seen in recent decades for many NCDs largely reflects an increase in the prevalence of early stages of the disease only.
Increasing overall disease prevalence has hidden decreasing prevalence of late-stage or complicated disease.
I have called this shift towards the milder end of the NCD spectrum the “severity effect.”
Most health problems linked to NCDs – problems such as chronic pain, disordered sleep, depression, disability, and premature death – are associated with late-stage or complicated disease, rather than with early-stage or uncomplicated disease.
Whenever the “severity effect” outweighs the “prevalence effect,” the increasing overall prevalence of the NCD will be accompanied by a decreasing health impact, not an increasing disease “footprint,” as is widely assumed.
This is the paradox of NCDs: objective measures of poor health (severe symptoms, disability, premature death) are declining, even as the prevalence of these diseases is increasing.
And, while this paradox is no excuse for complacency in responding to what the United Nations has rightly called a global NCD crisis, it does have practical implications for that response.
First, the primary concern should not be with reducing disease prevalence, but rather disease burden – the health impact as measured by disability and premature mortality.
That means channeling resources according to burden rather than according to prevalence, particularly as co-morbidity (two or more diseases in the same patient) increases.
Second, we should concentrate less on improving health care and more on strengthening disease prevention, for example by driving down tobacco use, expanding opportunities for physical activity, and increasing the availability and affordability of a healthy diet.
A greater focus on prevention can both reduce the incidence of NCDs and ensure that those cases that continue to occur will tend to be less severe and will progress more slowly, allowing scope for inexpensive but effective treatment in primary-care settings.
Both mechanisms – lower incidence and lesser severity – will contribute to a smaller disease “footprint,” even as NCD prevalence continues to rise.
The Non-Crisis of the Euro
BERKELEY – The global financial crisis has breathed new life into hoary arguments about the euro’s imminent demise.
Such arguments often invoke Milton Friedman, who warned in 1998 that Europe’s commitment to the euro would be tested by the first serious economic downturn.
That downturn is now upon us, but the results have been precisely the opposite of what Friedman predicted.
Unemployment is rising – and with it populist posturing.
In countries like Italy, already suffering from Chinese competition, and Spain, which is experiencing a massive housing bust, the pain will be excruciating.
Yet neither country shows any inclination to abandon the euro.amp#160;
They understand that even whispering about that possibility would panic investors.
They see how countries like Denmark that maintained their own currencies have been forced to raise interest rates to defend their exchange rates when the United States Federal Reserve and the European Central Bank are cutting interest rates.
They see how, if there was still a lira or a peseta, they would be experiencing capital flight.
They understand that they would have to fend off an old-fashioned currency crisis at the worst possible time.
They appreciate that there is stability and security in numbers.
Similarly, the euro-collapse scenario in which such countries successfully pressure the ECB to inflate, compelling Germany to abandon the euro, has shown no signs of developing.
The ECB, protected by statutory independence and a price-stability mandate, has shown no inclination to accede to pressure from French President Nicolas Sarkozy or anyone else.
One can argue that the worst is yet to come – that there will be more inflation and unemployment down the road – and that, when they come, the euro area will collapse.
Euro skeptics always make this argument.
But, given recent events, it is now they who bear the burden of proof.
What neither Friedman nor anyone else anticipated in 1998 was that the first serious downturn following the advent of the euro would coincide with the mother of all financial crises.
Runs by panicked investors have required central banks to undertake unprecedented lender-of-last-resort operations.
Extensive loan losses have required expensive bank recapitalization operations.amp#160;
There have been predictions that governments stretched to the limit by the financial crisis might respond by abandoning the euro.
They might resort to the inflation tax and inject the national currency to restore liquidity to their banking systems and financial markets.
In fact, the response has been the opposite.
The ECB has provided essentially unlimited amounts of liquidity to euro-area financial systems.
The Stability and Growth Pact has been relaxed in order to increase governments’ capacity to borrow to recapitalize their banks.
It is European countries outside the euro area, still with their own currencies, that have suffered the gravest difficulties.
Because their currencies are not widely used internationally, many of their bank liabilities are in euros.
This renders them dependent on interest rate hikes to attract – via the market and on swap lines from the ECB – the euro liquidity that their banks desperately need.
So far, those swaps have been forthcoming, but with delay and political baggage attached.
The implication is clear.
National banking systems need a lender of last resort.
In small countries, where a significant share of bank liabilities is in someone else’s currency, the national central bank lacks this capacity.
The only options are then to slap draconian controls on the banking system or join the euro area.
Given the difficulty of rolling back the financial clock and the constraints of the Single Market, it is clear which way European countries will move.
One already sees a shift in public opinion toward euro adoption in Denmark and Sweden.
Poland has reiterated its commitment to adopting the euro.
Hungary, given the trauma of an IMF program, is certain to do likewise.amp#160;
Obviously, the crisis will be economically and financial challenging for Eastern Europe.
It will heighten the difficulty of meeting the convergence criteria for euro adoption.
But it will also heighten the will to succeed.
The implication, then, is a larger euro area, not a smaller one, as more countries see the writing on the wall.
Indeed, there are already signs of countries not even in the European Union, notably Iceland and Switzerland, contemplating accession as a step toward adopting the euro and resolving their financial dilemma.
The one exception is probably Britain, whose currency is used internationally as a legacy of its history.
In any case, Britain has always had one foot in Europe and one foot out.
It is conceivable, therefore, that Europe will have two currencies, the euro and sterling, in the long run.
But having three currencies, much less three dozen, is out of the question.amp#160;
The Normalization of Fatah
RAMALLAH – Fatah, the leading guerrilla movement within the Palestine Liberation Organization, has moved one step closer to becoming a normal political party.
Its just concluded sixth congress was held for the first time in the occupied territories, which meant that former guerrillas from Lebanon and Jordan were allowed entry by Israel.
The conference, it appears, succeeded in reuniting and reinvigorating the movement, which has suffered since the death of its founder and long-time leader, Yasser Arafat.
More than 2,000 delegates, representing former Fatah fedayyin (guerrillas) and intifada activists, voted to continue all forms of resistance for the liberation of Palestine.
Yet the term “armed resistance” was missing from all the documents approved at the conference.
Mahmoud Abbas – unanimously elected as Fatah’s leader and commander-in-chief – made clear that while all options remain available for ending the occupation, the preference is still negotiations.
While some (such as Israeli Defense Minister Ehud Barak) took the resistance rhetoric of some delegates seriously, Fatah spokesman Nabil Amr officially assured all concerned that Fatah is committed to “peaceful resolution of the Palestinian-Israeli conflict.”
Any organization that has not provided democratic mechanisms for change and renewal tends to age and become monotonous and ineffective.
This aging and dullness became most evident in the past few years, as Fatah first lost the 2006 legislative elections to Hamas, and then its presence in the Gaza Strip.
Signs that Fatah is moving towards becoming a normal political party were ample.
Gone were the khaki suits and militaristic paraphernalia, replaced by business suits and proper conference IDs for delegates.
Backroom decisions and top-down guidance was replaced by a democratic free-for-all that saw many of Fatah’s historic leaders fall to the wayside, making room for younger, locally popular leaders.
Prisoners held in Israeli jails were granted 20 seats in the enlarged 100-member revolutionary council.
A jailed intifada leader, Marwan Barghouti, was among the highest elected new leaders to the central committee, the movement’s executive body.
Naturally, the 20-year hiatus since the last congress created a huge gap that was quickly filled by intifada veterans rather than old-style guerrillas, who had dominated the movement since its establishment.
Fourteen of the 19 elected members of the central committee are first-time members, most of whom represent the leadership of the 1987 uprising in the occupied territories.
The shifting age and geographic location of the Fatah membership was the reason for the failure of some of Fatah’s historic leaders, such as Ahmad Qureia and Intisar Wazir, the widow of the late Abu Jihad.
Moreover, holding the congress in Palestine ended the role of many Fatah leaders who had opposed the Oslo accords, such as Farouk Qaddoumi and Mahmoud Jihad.
Sidelining men like Qaddoumi, whose accusation, on the eve of the congress, that Abbas and Mohammad Dahlan had helped Israel poison Arafat, also distances Fatah from its one-time alliance with hard-line Arab countries such as Syria and Libya.
While the old guard had to strike a balance between the different Arab countries that backed the PLO, the new guard will have to find a workable solution with their rivals in Hamas if a viable compromise agreement with Israel is to be found.
Opinions vary, with some calling for a tough position towards Hamas and others advocating a softer approach.
Another major challenge facing the new Fatah leadership will be how it deals with the duality of holding party posts while also holding ministerial positions within the Palestinian Authority.
Some are calling for Fatah leaders to abstain from ministerial roles, whereas others see no reason why one can’t be a leader of a party and the government simultaneously.
In his acceptance speech, Abbas referred to the leaders of the first Intifada, telling the congress that they drew the guidelines that have become the movement’s political platform.
Leaders like Barghouti, former preventative security chief Jibril Rajoub, and Gaza’s Dahlan are now in the driver’s seat of the Fatah movement.
Dahlan, accused by some of being responsible for the loss of Gaza to Hamas, gave a strong speech accusing the previous Fatah leadership of having lost Gaza long before it actually fell to Hamas in June 2007.
Dahlan detailed how the former Fatah leadership repeatedly ignored his warnings and his pleadings with the central committee members to come to Gaza and see for themselves the situation on the ground.
The Fatah congress also dealt a blow to the abuse and corruption that have plagued the movement in recent years, especially since the establishment of the Palestinian Authority.
Speaker after speaker insisted that the movement’s weakness was brought about by the fact that its leaders succumbed to the temptations that come with government positions.
Thus, for example, Ahmad Qurei (Abu Ala’a), a former prime minister and senior negotiator who is accused of owning shares in a Palestinian company that supplied cement for Israel’s construction of the hated wall that cuts through Palestinian territory, lost his position within Fatah’s leadership.
The Fatah movement has a long way to go before it becomes a full-fledged political party.
The delegates overwhelmingly agreed that the movement must keep open the option of returning underground if negotiations for statehood fail, while being ready to become a political party if a Palestinian state is born.
Nevertheless, the results of the Sixth Fatah Congress reflect a clear bias in favor of becoming a party rather than an armed resistance movement.
The North Korean Enigma
CAMBRIDGE – What is going on in North Korea?
On November 23, its army fired nearly 200 artillery rounds onto the South Korean island of Yeonpyeong, near the two countries’ disputed maritime border, killing four – including two civilians – and demolishing scores of houses and other structures.
The presence of civilians, many of whom had to be evacuated, made North Korea’s attack even more provocative than its sinking in March of the South Korean warship Cheonan, which killed 46 sailors.
And, just a few weeks before the shelling of Yeonpyeong, North Korea showed a delegation of American scientists a new and previously undisclosed uranium-enrichment plant, which will increase the regime’s capacity to make nuclear weapons.
North Korea’s nuclear weapons program has been a matter of concern for two decades. Pyongyang violated its obligations under the Nuclear Non-Proliferation Treaty by secretly reprocessing enough plutonium to produce two nuclear weapons in the early 1990’s.
After it withdrew from a restraining agreement negotiated by the Clinton administration in 1994, it expelled International Atomic Energy Agency inspectors and began reprocessing spent fuel that could produce another six bombs’ worth of plutonium.
Now, with its new enrichment plant, North Korea’s access to fissile materials will greatly increase.
Its leaders have a reputation for selling dangerous items such as missiles, narcotics, and counterfeit currency, and many worry that they might transfer nuclear materials to other countries or to terrorist groups.
The recent WikiLeaks disclosures of classified American diplomatic documents, for example, suggest that North Korea has been helping Iran with its advanced missile program.
George W. Bush’s administration initially hoped that it could solve the North Korean nuclear problem through regime change.
The idea was that isolation and sanctions would topple Kim Jong-il’s dictatorship.
But the regime proved resistant, and the Bush administration finally agreed to enter into six-party talks with China, Russia, Japan, and the two Koreas.
In September 2005, it fleetingly appeared that the talks had led North Korea to agree to forgo its nuclear program in exchange for security guarantees and removal of sanctions.
But the agreement soon collapsed, and North Korea refused to return to the talks until the United States stopped shutting down bank accounts suspected of counterfeiting and laundering money for Kim’s regime.
Then, with diplomacy stalled, North Korea launched a series of missiles into the Sea of Japan.
All five permanent members of the United Nations Security Council agreed on a resolution condemning North Korea’s actions, and China warned North Korea to moderate its behavior.
Instead, in 2006, North Korea detonated a nuclear device, and did so again in 2009.
Ostensibly, North Korea is a weak country with a disastrous economic system.
Starting from similar levels a half-century ago, South Korea has grown to become one of the world’s most prosperous economies, with nearly 50 million people enjoying a per capita income of $30,000 (at purchasing price parity).
North Korea has half the population and per capita income of less than $2,000.
In the 1990’s, North Korea suffered extreme famine, which probably killed 1-2 million people, and even today North Korea depends on China for food and fuel.
How, then, can North Korea manage to defy its neighbor?
For one thing, North Korea has “the power of weakness.”
In certain situations, weakness – and the threat that a partner will collapse – can be a source of bargaining power.
A bankrupt debtor who owes $1,000 has little power, but if it owes $1 billion, it may have considerable bargaining power – witness the fate of institutions judged “too big to fail” in the 2008 financial crisis.
As the Financial Times observed, “North Korea’s Kim Jong-il is probably the only world leader who can make Beijing look powerless.
Diplomats say Kim brazenly plays on Chinese fears.
If the Chinese do not pump aid into his crumbling economy, he argues, they will face refugees pouring across the border and possible unrest.”
China does not want a nuclear or belligerent North Korea, but it is even more concerned about a failed state collapsing on its border.
China has tried to persuade Kim’s regime to follow its market-oriented example, but Kim is afraid that an economic opening would lead to a political opening and loss of dictatorial control.
So, while China is trying to moderate the current crisis, its influence is limited.
The other source of North Korea’s power is its audacity in playing a weak hand.
Yes, a full-scale military invasion would meet with a devastating defeat by superior South Korean and US military forces, whose current naval exercises in the Yellow Sea are designed to remind North Korea of this disparity.
But, with 15,000 artillery tubes embedded in the Demilitarized Zone, just 30 miles north of Seoul, North Korea knows that firing just a few shells could wreak havoc on the South Korean stock market and economy, while it has less to lose in comparison.
By flaunting its willingness to take greater risks, the North hopes to further enhance its bargaining power.
Most observers attribute the recent provocations to the anticipated succession of power in Pyongyang.
Kim Jong-il had years to prepare as an understudy to his father, Kim Il-sung , but many reports suggest that he is nearing the end of his life.
This autumn, he promoted his hitherto little-seen son, Kim Jong-un, to the rank of general, and introduced him at a Communist Party conference.
Demonstration of military success in “protecting” the regime may indeed be designed to strengthen the 28-year-old general’s claim to power.
If so, the risky behavior we have seen recently is part of the process of solidifying a unique political system: a hereditary Communist monarchy.
The North Pole in Peril
PARIS – Ever since mankind began to map the world, the north and south poles have fascinated us, both poetically and scientifically.
But, save for a few whalers and explorers, not many people ever went to have a closer look.
The serene stillness of the Arctic and Antarctic was a perfect match for human indifference.
The onset of global warming, however, has changed everything.
Of course, that old indifference was not universal.
In a rare spurt of collective political intelligence, and in order to prevent any risk of international conflict, an international treaty was signed in 1959 to govern Antarctica.
This treaty dedicated Antarctica to exclusively peaceful aims.
It recognized the existing territorial claims, declared them “frozen,” and forbade all physical assertions of sovereignty on the land of Antarctica.
The nature and content of that treaty were purely diplomatic.
Only after its ratification did the first environmental issues arise.
These were added to a revised treaty in 1972 by a convention on seal protection, followed, in 1980, by a convention on wildlife preservation.
Most importantly, a protocol signed in Madrid in 1991, dealt with protecting the Antarctic environment.
As French Prime Minister, together with Australia’s then Prime Minister Robert Hawke, I was responsible for proposing the Madrid protocol, which transformed the Antarctic into a natural reserve dedicated to peace and science for 50 years, renewable by tacit agreement.
It was not an easy success.
We had to reject first a convention on the exploitation of mineral resources that had already been negotiated and signed in Wellington in 1988, thus risking reopening very uncertain negotiations.
We were bluffing, but our bluff worked.
The Antarctic environment is now effectively protected by the international community, which is the de facto owner of this continent, without any national differentiations.
It is the only such case in the world.
Indeed, international lawyers who are seeking to define the legal status of outer space – Who will own the moon?
Who will own the resources that may one day be extracted there? – often look to the “Antarctic treaty system” for precedents and analogies.
But Antarctica had one great advantage, as compared to the Arctic, which is now in peril: there were only penguins in Antarctica, not voters, especially voters of different nationalities.
Antarctica, though a huge continental archipelago, measuring 24 million square kilometers, and covered in ice that is 4-5 kilometers thick, is far from any inhabited continent.
The Arctic is only water, with the North Pole itself 4,200 meters under the surface.
But five countries are very close: Norway, Russia, the United States, Canada, and Denmark (via Greenland, which will become independent in the coming years).
Throughout most of human history, ice almost completely barred all navigation in the seas surrounding the North Pole, and the Arctic was asleep in a silent indifference.
Everything has changed radically during the last three years.
The International Panel on Climate Change (IPCC) has established that global warming is not uniform: whereas temperatures rose, on average, by 0.6°C in the twentieth century, the increase in the Arctic region was 2°.
Some estimates suggest that about 20% of the world’s total oil reserves lie under the Arctic.
In 2008, for the first time in human history, two navigation channels through the polar ice field – in the East along Siberia, and in the West along the Canadian islands – were open for a few months, allowing boats to go from Europe to Japan or California via the Bering Straits, rather than the Panama Canal or the Horn of Africa, thereby saving some 4,000 or 5,000 kilometers.
Given global warming, this may now become a regular occurrence: thousands of ships will pass through the Arctic passages, emptying their fuel tanks and causing oil slicks and other forms of pollution.
This poses a real threat to the Eskimo and Inuit populations, as well as to polar bears.
Moreover, according to the Convention on the Law of the Sea, countries’ enjoy absolute sovereignty in the first 12 nautical miles (about 20 kilometers) of their coastal waters sea, and almost absolute sovereignty, limited by a few conventions, within 200 nautical miles (360 kilometers) of their coasts.
Any country that can prove that the seabed beyond 200 nautical miles is an extension of the continental shelf on which it is sovereign can claim sovereignty over it as well.
Russia, which three years ago used a submarine to plant a platinum copy of its national flag at the North Pole, claims sovereignty over 37% of the surface of the Arctic Ocean.
The territories claimed by Russia include the North Pole and a huge oil field.
If this oil is exploited, the pollution risks will be far higher than anywhere else.
And could Russia, given its rearmament policy, be planning to set up underwater missile launch sites?
It is therefore urgently necessary to negotiate a treaty that guarantees peace and environmental protection in the Arctic region.
It will probably be very difficult to achieve, but the effort should be viewed as a great cause for humankind.
The Not So United Nations
The good news for Ban Ki-moon is that he has become Secretary General of the United Nations at a time when the prospects for conflict between or among the world’s great powers – the United States, China, Japan, Russia, Europe, and India – are remote.
The bad news is that the prospects for just about every other sort of conflict are high and the international agenda is both crowded and demanding.
Ban needs to begin with a cold, hard assessment of his new position.
A Secretary General of the UN is more secretary than general.
He cannot command.
It is not the same as being a president or a CEO.
He possesses more influence than power.
Moreover, power at the UN is divided, not simply between the Security Council and the General Assembly, but more fundamentally between the 192 members and the UN itself.
The UN is comprised of sovereign states, but it is not sovereign itself and cannot act as if it were.
More than anything else, the UN reflects the ability of the major powers (above all, the US, China, Russia, France, and the United Kingdom, the five permanent, veto-wielding members of the Security Council) to agree – and to back up their agreements with resources.
When they are willing and able to do so, the UN can make a difference; when they are not, the UN can act in only the most limited way, if at all, regardless of what the Secretary General wants.
Consider Darfur.
The world has largely stood by in the face of genocide.
This is not a failure of the UN or the Secretary General so much as a reflection of the reality that the major powers are divided.
China clings to a notion of sovereignty that allows governments freedom of action within their borders.
In today’s world, such an unconditional definition of sovereignty is inadequate.
But the reality is that no amount of time spent negotiating in New York will turn things around.
What matters are the instructions sent to China’s UN ambassador from Beijing.
In this case, Ban needs to spend time in China’s capital, making the case for the notion that governments have a responsibility to protect their citizens, and that when they fail to do so (as Sudan’s government clearly is), they forfeit some of the advantages that normally are associated with sovereignty.
Ban cannot simply reform the Security Council to reflect better the realities of this era.
But he can make the case that countries such as Japan, India, Germany, and others deserve an enhanced position in the UN’s most important body, one more commensurate with their power and status.
Again, what is holding the UN back is not the UN itself, but its leading members, who cannot agree on what change is needed.
Ban can also make the case that there is no justification in today’s world for terror – defined here as the intentional harming of civilians for political purposes.
Not just governments, but religious and other leaders need to be persuaded to denounce terror, shaming and de-legitimizing those who carry it out.
The Secretary General is positioned to make this point loudly and repeatedly.
Two other areas exist where practical changes are both achievable and desirable.
Ban should support the creation of an international facility that would provide governments access to (but not physical control of) enriched uranium and plutonium for the generation of electrical power.
Such an innovation would help stem the spread of nuclear materials and weapons, while also contributing to a shift away from use of oil and gas, thereby reducing global warming in the process.
The other area is peacekeeping.
Establishing a large, standing international force under the UN’s control is not feasible and may not be optimal.
But providing incentives for governments to maintain such forces at a high level of alert and setting standards for equipment, training, and professionalism is something the UN can and should do.
All these suggestions highlight what might be any secretary general’s most important asset: his voice.
What Ban chooses to say, and how and where he says it, can enhance his influence.
Over time, enhanced influence will enable him to get more things done.
All this will be especially important now given the status of the US, the most powerful country in the world, but one with an often uneasy relationship with the UN.
Opinion polls indicate a good deal of support among the American public for the UN.
But there is also intense distrust of the UN among segments of the public and with certain elites.
Here again, Ban would be well advised to leave New York and spend more time in the capital and around the country.
The US needs and benefits from effective multilateralism in a global world, one in which challenges cannot be met by any single country acting by itself.
The US has a particular need for effective international cooperation now, when it is stretched militarily, economically, and politically owing to its policies toward Iraq and Afghanistan.
Contributing to the emergence of a more productive relationship between the world’s most important international organization and its most powerful member would be no small feat.
Syria’s Chemical Genie
LOS ANGELES – Since Syria’s civil war erupted, its large chemical-weapons arsenal has haunted the conflict zone and beyond.
Now Israel says that chemical weapons have been used by the Syrian regime.
Escalating fears have driven US President Barack Obama to declare repeatedly that any Syrian use or transfer of chemical weapons would cross a “red line,” for which President Bashar al-Assad’s regime would be “held accountable.”
But the practical implications of this warning remain vague.
As dangerous as Syria’s chemical-weapons stockpile is, it pales in comparison with another risk that became evident in late February, when Syrian rebels overran a Scud-missile base in Al-Kibar, in the country’s remote northeastern desert.
Beneath the installation lay the buried remnants of the North Korean-engineered nuclear reactor that Israel’s air force had destroyed on September 6, 2007.
Had Israel not learned of the secret plant, which was on the verge of launching operations to produce material for an atomic arsenal, the rebels effectively would have been in possession of a radiological weapon.
The mere threat could have held the Syrian government hostage.
Far more worrying, had Syrian engineers built a lab at the site, or in other rebel-held territory, to extract plutonium from the reactor’s spent fuel, the insurgents might even have found themselves with the ingredients of an atomic bomb.
Fortunately, Syria does not face these threats today.
But Pakistan, North Korea, and Iran – all potentially unstable countries with growing nuclear enterprises – may in the future.
How concerned should the world be?
History provides grounds for optimism.
After all, host countries have been able to contain nuclear risks in the most challenging circumstances.
During Yugoslavia’s violent collapse, adversaries never struck or invaded Serbia’s research reactor, powered by weaponizable enriched uranium.
When Serbian fighter jets flew threateningly low over Slovenia’s nuclear power plant, they spared the reactor.
Likewise, during China’s Cultural Revolution, the imposition of martial law prevented attempts by rival factions to seize nuclear facilities in Xinjiang and Qinghai.
In 1961, as a group of former French generals revolted in French Algeria, an atomic-bomb test in the Sahara went off without a hitch.
And, most significant, during the collapse of the Soviet Union, the vast nuclear arsenal remained intact.
However, concern that the Syrian government could intensify &#160;its use of chemical weapons against rebel-held areas, or that rebels could initiate attacks or respond with captured chemical weapons, raises questions about the pattern’s durability and the international community’s reaction.
The United States, which has become the world’s leader in containing the chemical-weapons risk, seems befuddled.
Early last year, the US Department of Defense let it be known that 75,000 troops would be needed to secure Syria’s chemical facilities.
After the wars in Afghanistan and Iraq, it is not surprising that this estimate did not exactly generate a groundswell of public support for military intervention in Syria.
Recent statements from US officials have not been reassuring.
In January, then-Secretary of Defense Leon Panetta said that the US was not pursuing options that involve “boots on the ground” to secure Assad’s arsenal during the conflict.
At the same news conference, Martin E. Dempsey, Chairman of the Joint Chiefs of Staff, conceded that preventing the Syrian government’s use of chemical weapons would require such clear, comprehensive intelligence that obtaining it is “almost unachievable.”
Appearing before the Senate Armed Services Committee on April 17, Dempsey added that he had no confidence that US forces could secure the arsenal given the number of sites.
Such remarks from senior military authorities suggest that Obama’s warnings may be hollow.
Worse, they inspire little confidence that the US can deal with future cases in which countries with nuclear assets find themselves in revolt, civil war, or political collapse – and with compromised domestic atomic safeguards risking the spread of nuclear havoc to other regions.
Such risks demand examination and planning.
But, to rely on the US government alone to plot the most effective strategy in the shadow of possible internal group-think is asking too much.
Outside vetting – including published reviews by congressional investigative bodies, think tanks, and scholars – could add important insights.
In the aftermath of America’s poorly executed recent wars and confounded planning with respect to Syria’s chemical weapons, such vetting is the least that Americans and their allies should expect in order to prevent the realization of the sum of all our fears: the first nuclear attack or intentional major radiological event of the twenty-first century.
The Obama Doctrine and Africa
MADRID – President Barack Obama’s much discussed Cairo speech represented not only the demise of George W. Bush’s ideological drive to reconstruct the Muslim world through a democratic revolution; it marked the end of American liberalism’s quest to remake the world in its own image.
Instead, Obama’s administration is guided by a relativist political realism that assumes respect for cultural and religious distinctions.
His secretary of state, Hillary Clinton, underscored this tendency during her first visit to China, where her unmistakeable message was that order and stability take priority over liberty and human rights.
But what about Africa, the forgotten continent that has been conspicuously absent from Obama’s hectic agenda?
There, both the resilience of the local political culture and strategic imperatives are converging to define the limits of the West’s capacity to impose its values.
A fortnight before Obama’s Cairo speech, a delegation of the United Nations Security Council visited four African countries to express concern about the resurgence of unconstitutional change on the continent.
Africa does indeed present a gloomy picture, with countries virtually crumbling to dust as a result of autocracy and stagnation.
But the emerging Obama doctrine suggests that “elections alone do not make true democracy,” and that, as has been the case in the Arab world, any abrupt move to democracy is bound to produce chaos.
Moreover, in Africa post-authoritarian rulers are not necessarily respectful of human rights and decent governance.
The West’s attitude toward democracy in the Third World has always been erratic.
It applauded the military takeover in Algeria in the early 1990’s aimed at curtailing the democratic emergence of an Islamist regime, and is happy to conduct business with authoritarian regimes throughout the Arab world.
Yet, public infatuation with the external trappings of democracy is usually the norm.
Take Guinea Conakry.
After years of turmoil, lower-ranking officers headed by Captain Moussa Dadis Camara took power in December 2008 in what was a widely supported and peaceful takeover.
Both the European Union and the United States immediately reacted by threatening the ruling junta with a total cut-off of aid unless constitutional rule and elections were restored.
Though President Camara eventually succumbed to pressure and declared elections for the coming fall, he has a valid point in insisting that he first must secure stability so that elections do not become a mere prelude to civil strife.
The case of neighbouring Guinea-Bissau, where a blood-bath has just taken place ahead of general elections, should serve as a warning.
Why should the West insist on elections in a country that since 1984 was ruled by a Western-backed dictator, Lansana Conté, who himself came to power in a military coup?
He maintained a constitution, and held elections, but this did not make him a democratic ruler, nor was he able to extricate his country from appalling backwardness despite its tremendous potential for economic development.
The problem in Africa is one of effective government, not of elections and high-minded constitutions.
Rulers should be encouraged instead to engage in bottom-up democracy building, create an honest police force and judicial system, and allow civic organizations to flourish.
Training police forces to secure law and order without resorting to bloodshed is no less important than elections.
Elections and constitutions in Africa – Zimbabwe and Gabon’s dictatorship have both – have never been a safeguard against tyranny and human rights violations.
Camara’s test – indeed, the test for most African rulers – consists in protecting civilians and their property, in establishing law and order without oppressive measures, and in fighting corruption.
Highly responsive to international pressure, he was recently praised by Human Rights Watch for his “very important effort” in recognizing the destructive role of corruption and drug trafficking, and for launching an official crackdown on both.
Order and stability, even in the absence of constitutional rights, is what makes countries like Libya and Tunisia legitimate in the eyes of the international community.
To recover the confidence of the international business community and the world’s mining giants, who were enraged in recent years by forced renegotiations of existing deals by governments in Congo, Mongolia and Guinea, Camara was also wise to retreat from his threat to renegotiate existing mining concessions.
The West is right to insist on norms of decent government, but it risks losing its capacity to influence events in Africa when it automatically links aid to elections.
For as it does, China is using its colossal financial firepower to expand its strategic position on the continent, without linking aid and investment to pesky demands for good governance.
China’s drive to retain a significant say in the pricing of iron and bauxite, of which Guinea is the world’s major producer, means that it can always receive a warm welcome from officials tired of being lectured to by Westerners.
It is not good news for Western human rights champions if China ends up training policemen in countries like Guinea.
Not much imagination is required to discern what norms the Chinese might inculcate into the 1,000 Central Asian policemen and judicial officials they are currently training.
As Obama understands, such authoritarian aid is a serious challenge to the West’s geo-strategic interests, including the fight against drug traffic (Guinea has become a transit point on the route from South America to Europe).
It is also undermining the opportunity to lay the basis for true democratic reform throughout the continent.
The Obama Doctrine’s First Term
ASPEN – Public-opinion polls in the United States indicate a close presidential election in November.
While President Barack Obama outpolls the Republican challenger, Mitt Romney, on foreign policy, slow economic growth and high unemployment – issues that are far more salient in US elections – favor Romney.
And, even on foreign policy, Obama’s critics complain that he has failed to implement the transformational initiatives that he promised four years ago.
Are they right?
Obama came to power when both the US and the world economy were in the midst of the worst financial crisis since the Great Depression.
Indeed, some of Obama’s economic advisers counseled him that unless urgent steps were taken to stimulate the economy, there was a one-in-three chance of entering a full-scale depression.
Thus, although Obama also inherited two ongoing wars, nuclear-proliferation threats from Iran and North Korea, and the continuing problem of Al Qaeda’s terrorism, his early months in office were devoted to addressing the economic crisis at home and abroad.
His efforts were not a complete success, but he managed to stave off the worst outcome.
Obama’s rhetoric during his 2008 campaign and the first months of his presidency was both inspirational in style and transformational in objective.
His first year in office included a speech in Prague in which he established the goal of a nuclear-free world; a speech in Cairo promising a new approach to the Muslim world; and his Nobel Peace Prize speech, which promised to “bend history in the direction of justice.”
In part, this series of speeches was tactical.
Obama needed to meet his promise to set a new direction in foreign policy while simultaneously managing to juggle the issues left to him by George W. Bush, any of which, if dropped, could still cause a crisis for his presidency.
Nonetheless, there is no reason to believe that Obama was being disingenuous about his objectives.
His worldview was shaped by the fact that he spent part of his youth in Indonesia and had an African father.
In the words of a recent Brookings Institution book, Obama had an “activist vision of his role in history,” intending to “refurbish America’s image abroad, especially in the Muslim world; end its involvement in two wars; offer an outstretched hand to Iran; reset relations with Russia as a step toward ridding the world of nuclear weapons; develop significant cooperation with China on both regional and global issues; and make peace in the Middle East.”
But his record of achievement on these issues has been mixed.
“Seemingly intractable circumstances turned him from the would-be architect of a new global order into a leader focused more on repairing relationships and reacting to crises – most notably the global economic crisis,” the report continued.
And while he eliminated Osama bin Laden and weakened Al Qaeda, some counterterrorism policies ended up undercutting his appeal in places like the Middle East and Pakistan.
Some of the half-empty glasses were the result of intractable events; some were the product of early naiveté, such as the initial approaches to Israel, China, and Afghanistan.
But Obama was quick to recover from mistakes in a practical way.
As one of his supporters put it, he is a “pragmatic idealist.”
In this sense, though Obama did not back away from rhetorical expressions of transformational goals regarding such issues as climate change or nuclear weapons, in practice his pragmatism was reminiscent of more incremental presidential leaders like Dwight Eisenhower or George H. W. Bush.
Despite his relative inexperience in international affairs, Obama showed a similar skill in reacting to a complex set of foreign-policy challenges.
This was demonstrated by his appointments of experienced advisers, careful management of issues, and above all, keen contextual intelligence.
This is not to say that Obama has had no transformational effects.
He changed the course of an unpopular policy in Iraq and Afghanistan; embraced counter-insurgency tactics based on less costly uses of military and cyber power; increased American soft power in many parts of the world; and began to shift America’s strategic focus to Asia, the global economy’s fastest-growing region.
With respect to Iran, Obama struggled to implement United Nations-approved sanctions and avoid a premature war.
And, while the Arab Spring revolutions presented him with an unwelcome surprise, after some hesitation he came down on what he regarded as the side of history.
In a new book, Confront and Conceal, David Sanger describes what he calls an “Obama Doctrine” (though he faults the president for not communicating it more clearly): a lighter military footprint, combined with a willingness to use force unilaterally when American security interests are directly involved; reliance on coalitions to deal with global problems that do not directly threaten US security; and “a rebalancing away from the Middle East quagmires toward the continent of greatest promise in the future – Asia.”
The contrast between the killing of Bin Laden and the intervention in Libya illustrates the Obama Doctrine.
In the former case, Obama personally managed a unilateral use of force, which involved a raid on Pakistani territory.
In the latter case, where national interests were not as clear, he waited until the Arab League and the UN had adopted resolutions that provided the legitimacy needed to ensure the right soft-power narrative, and then shared the leadership of the hard-power operation with NATO allies.
The long-term effect of the Obama Doctrine will require more time to assess, but, as he approaches the November election, Obama appears to have an edge over his opponent in foreign policy.
Obama has not bent the arc of history in the transformational way to which he aspired in his campaign four years ago, but his shift to a pragmatic approach may turn out to be a good thing, particularly if voters continue to have doubts about the economy.
The Obama Effect
LONDON – In the last two months, I have been in eight American cities – Boston, New York, Washington, Houston, Chicago, Los Angeles, San Francisco, and Seattle.
Phew!
I am left with several sentiments.
First, if you have to travel from city to city in the United States, you would do yourself a favor if you could find a way of journeying by train.
American airlines are pretty awful.
They are lucky that hostility to competition in what purports to be the homeland of free-market capitalism has kept Asian airlines out of their domestic marketplace.
Do American air travelers know just how bad the service that they get really is?
American airports are as dire as British ones, maybe worse.
Los Angeles gets the Oscar, with Soviet-style queues through security.
How is it that America gives us Silicon Valley wizardry and Third World infrastructure?
But, for all the misery of air travel in America, when you get to your destination it can still blow your socks off.
The lakeside architecture of Chicago.
The sight of Puget Sound in Seattle (one of my favorite cities).
The view across San Francisco’s bay from Nob Hill.
Park Avenue in New York on a fine late spring morning.
They are all, to borrow from Frank Sinatra, “my kind of town.”
What is surprising for a European – at least for this European – at the moment is the relative optimism in all these cities.
Yes, the economic news has been and remains grim.
Much of the automobile industry is bust.
Car dealerships are being closed.
House prices remain pretty flat.
Unemployment and the budget deficit are soaring.
But there is not the same sense of gloom that envelops you in Britain and much of Europe.
My guess is that much of this is the result of traditional American ebullience: the view that what goes down will sooner or later bounce back up.
This is one of the reasons why America has represented a quarter or more of the world’s output for the best part of 150 years.
But there is another factor at work.
We often talk – a good Marxist point – about the impact of economics on politics. And we have seen this recently in Britain.
Down goes the economy and down goes the Labour government’s standing.
Britain’s Labour government is just about as unpopular as it is possible to be.
It performed disastrously in recent elections for local councils and the European parliament.
Prime Minister Gordon Brown is sustained in office primarily by the calculation of his ministers that getting rid of him would trigger an early election that they would lose heavily.
But what about the impact of politics on economics?
That is what I believe you see today in the US.
The economy may look bad, but the president looks great.
Despite the ubiquitous efforts of Fox News, President Barack Obama dominates, enthralls, and enthuses the audience of American voters – consumers, workers, investors, one and all.
He is, as one American commentator calls him, The One.
Obama seems to have every political talent, and he passes the character test too.
Moreover, his wife is a star in her own formidable right.
Turn on any TV channel and there they are: glamorous, decent, and smart.
So, while the economic numbers may look bad, the country’s political leadership looks great.
And if you’re an American, you observe other countries around the world (especially in Europe) where people say, “If only he was ours.”
I am a fan myself: a fan with two worries.
First, what happens if politics does not trump economics, and Obama’s policies don’t start to produce a recovery?
That is when the old political calculus may take its grim toll.
If there are no signs of economic recovery by the end of the year, the polls may start to turn.
Obama is smart enough to understand this.
So why – my second worry – does he take quite so much on his own shoulders?
Every day, on every news bulletin, he is out there swinging.
He might argue that he has to be.
There are so many issues, from health-care reform to the Middle East, that need his attention.
I just worry about the boredom factor.
If you assume that governing is like campaigning – that you have to be on top of the debate 24 hours a day, seven days a week – can you really anticipate a long shelf life?
Don’t you risk becoming, even if you are smart as hell, too much of a good thing?
I hope I am wrong.
Barack Obama is a star.
The world needs one.
But it needs one who continues to shine brightly for several years to come.
The Obama Surprise
NEW YORK – The high hopes surrounding Barack Obama’s presidency are mostly a good thing, as they remind us that much of the anti-American sentiment that is so apparent around the world is not and need not be permanent.
But this anticipation is also a problem for Obama, as it will be difficult – and in some instances impossible – for him to meet expectations.
There will be no Palestinian state this spring; nor will there be a global climate change pact or a new trade accord or an end to poverty or genocide or disease anytime soon.
The reasons go beyond the reality that big accomplishments require time and effort.
The incoming president faces extraordinary constraints – constraints that will make it essential for other countries to do more if stability and prosperity are to be the norm rather than the exception.
The most obvious limitation stems from the state of the American economy.
Two million jobs disappeared in the last four months alone.
The housing market continues to deteriorate. America’s GDP is contracting at an almost unprecedented rate.
As a result, Obama will have no choice but to devote the lion’s share of his time and attention to reviving the economy.
More than anything else, his success in this domain will determine the perception of his administration.
Even he acknowledges that this will require him to delay fulfilling several other campaign promises.
A second constraint stems from all the crises that will greet the new president. Israelis and Palestinians are fighting a low-level war.
The situation in Iraq is improving but is by no means assured.
Obama may have to choose between attacking Iran’s nuclear installations and living with an Iran that has the capacity to build a nuclear weapon in a matter of weeks.
Afghanistan’s government is losing ground in its struggle against a revived Taliban.
Pakistan, which possesses dozens of nuclear weapons and is host to the world’s most dangerous terrorists, could become a failed state, as could nuclear-armed North Korea.
Many of these challenges are less problems to be solved than conditions to be managed.
A third constraint stems from trends in the international system.
The era of American unipolarity is over.
Obama will inherit a world in which power in all of its forms – military, economic, diplomatic, and cultural – is more widely distributed than ever before.
This means that he will have to deal with a large number of threats, vulnerabilities, and independent actors who may resist bending to America’s will.
All of this will make it more difficult for the United States to get things done in the world – and for Obama to have any chance of meeting the expectations being set for him – without the active assistance of others.
And since Obama will want to meet some of those expectations, other countries had better be prepared for American requests – and pressure – that they act with the US rather than act against it or sit on their hands.
China will come under pressure to revalue its currency (now being held at artificially low levels) so that Chinese exports are more expensive and imports from others (including the US) cheaper.
And China and other developing countries will be expected to do their share to reduce carbon emissions and slow the pace of global climate change.
European countries should be prepared for US calls to do more to meet the increasing security challenge in Afghanistan.
At stake is the relevance of NATO in a world in which the principal security challenges facing Europe are to be found outside the NATO treaty area.
Countries of every sort will face requests to do their part to overcome hurdles to a new global trade accord.
Tariff and non-tariff barriers will need to come down.
Rich countries will be asked to reduce subsidies; poor countries to open up their markets.
Arab leaders that criticize the US for the perceived shortcomings of its policies toward the Middle East will be asked in turn how much more they are prepared to do to bolster the government in Iraq. Once the fighting between Israel and Hamas subsides, the question of what the Arab states will do to strengthen Palestinian moderates and to make peace with Israel is sure to arise.
Russia and China should expect enormous pressure from Obama to do more to discourage Iran from proceeding with uranium enrichment.
This will include calls for greater political and economic sanctions, and conceivably even support for limited uses of military force to buttress sanctions.
This list is a long one, but it could easily be much longer.
The rest of the world was often unhappy with George W. Bush, for both the content and style of his foreign policy.
Now others will find that the alternative to America going it alone or withdrawing from the global scene is real multilateralism, which requires their willingness and ability to commit resources to deal with pressing challenges.
Obama is likely to be more diplomatic than his predecessor, but he is also likely to be more demanding.
The Official Pursuit of Happiness
CAMBRIDGE – In a time of tight budgets and financial crisis, politicians nowadays look to economic growth as the centerpiece of their domestic policy programs.
Gross domestic product is taken to be the leading indicator of national well-being.
But, as we look ahead to 2011 and beyond, we should ask ourselves: is it really wise to accord such importance to growth?
Granted, many studies have confirmed that wealthier nations tend to be happier than poor ones, and that rich people are generally more satisfied than their less affluent fellow citizens.
Yet other findings from several relatively well-to-do countries, such as South Korea and the United States, suggest that people there are essentially no happier today than they were 50 years ago, despite a doubling or quadrupling of average per capita income.
Moreover, in a recent Canadian study, the happiest people turned out to reside in the poorest provinces, such as Newfoundland and Nova Scotia, while citizens in the richest provinces, notably Ontario and British Columbia, were among the least happy.
Since happiness is ultimately what people want the most, while wealth is only a means to that end, the primacy now accorded to economic growth would appear to be a mistake.
What seems clear from such research is that people do quite poorly at predicting what will make them happy or sad.
They focus too much on their initial responses to changes in their lives and overlook how quickly the pleasure of a new car, a pay increase, or a move to sunnier climes will fade, leaving them no happier than before.
It is hazardous, therefore, for politicians simply to rely on opinion polls and focus groups to discover what will truly enhance people’s happiness.
In the findings to date, however, two conclusions have emerged that seem especially useful for policymakers to ponder.
First, most of the things that do bring enduring satisfaction for individuals are also good for other people – strong marriages and close relationships of all kinds, helping others, engaging in civic affairs, and effective, honest, democratic government.
Thus, policies that promote individual well-being tend to benefit society as well.
Second, experiences that bring lasting pleasure or unhappiness do not always command a high priority in government circles.
For example, three medical afflictions that create especially acute and enduring distress – clinical depression, chronic pain, and sleep disorders – are all conditions that can often be treated successfully, to the vast relief of sufferers.
But such people are frequently underserved by health-care systems.
The natural response to all this is to ask whether happiness research is really reliable enough to be used by policymakers.
Researchers have paid close attention to this issue, and, after much testing, have found that the answers people give to questions about their well-being seem to correspond fairly well to more objective evidence.
People who claim to be happy tend to live longer, commit suicide and abuse drugs and alcohol less often, get promoted more frequently by their employers, and enjoy more good friends and lasting marriages.
Their assessments of their own well-being also align quite closely with the opinions of friends and family members.
So, overall, statistics about happiness seem to be as accurate as many of the statistics regularly used by politicians, such as public-opinion polls, poverty rates, or, for that matter, GDP growth – all of which are riddled with imperfections.
Of course, happiness research is still new.
Many questions remain unexplored, some studies lack sufficient confirmatory evidence, and still others, like those involving the effects of economic growth, have yielded conflicting results.
Thus, it would be premature to base bold new policies on happiness research alone, or to follow the example of tiny Bhutan by adopting Gross National Happiness as the nation’s principal goal.
Yet the findings may be useful to lawmakers even today – for example, in assigning priorities among several plausible initiatives, or in identifying new possibilities for policy interventions that deserve further study.
At the very least, governments should follow Great Britain and France and consider publishing regular statistics on trends in the well-being of their citizens.
Such findings will surely stimulate useful public discussion while yielding valuable data for investigators to use.
Beyond that, who knows?
Further research will doubtless provide more detailed and reliable information about the kinds of policies that add to people’s happiness.
Someday, perhaps, public officials may even use the research to inform their decisions.
After all, what could matter more to their constituents than happiness?
In a democracy, at least, that should surely count for something.
The Old Economies Strike Back
TOKYO – The impact of Abenomics on Japan’s economy is gradually beginning to be felt.
Annual GDP growth in the first quarter has been revised upward, to 4.1%, exceeding market expectations and providing a strong indication that the Japanese economy is finally recovering, after two decades of stagnation.
Consumer spending is particularly robust, as wages show signs of upward movement.
Moreover, the currency depreciation in the wake of the Bank of Japan’s efforts to increase the annual inflation rate to 2% is expected to benefit exporters, though a substantial effect on the trade balance is yet to be seen, probably owing to higher import costs. In particular, thermal electricity plants have replaced the country’s nuclear plants – offline since the Great East Japan Earthquake in 2011 – and the weak yen has hit the import bill for oil and gas hard.
Japan’s growth revival comes at a time of increasing economic uncertainty in much of the developing world.
For example, Japan’s trade statistics for May indicate that exports to the United States increased at a double-digit pace year on year, to around ¥5.1 trillion, while exports to China were sluggish, reaching ¥4.8 trillion.
Indeed, the US has overtaken China as Japan’s main export market, as America’s economy, too, recovers from half-a-decade of sluggishness.
In China, by contrast, exports in May rose by just 1% year on year – the lowest rate since last July – while imports fell by 0.3%.
Exports to Japan were down by 5.7%, while exports to the US and the European Union decreased by 1.6% and by 9.7%, respectively, with both falling for three months in a row.
As a result, the trade surplus continued to fall, to $20.4 billion, fueling growing concern about a Chinese slowdown.
China’s downturn appears sudden; after all, its exports had been rising at double-digit rates every month this year until May.
In fact, the Chinese economy’s true condition had long been obscured, but has now been exposed by more stringent regulation of activities such as speculative trading of the renminbi masquerading as trade payments.
In particular, China’s “two systems in one country” enabled exports to bonded warehouses in Hong Kong to be used to pad trade statistics. Moreover, Chinese exports sometimes would increase in the face of a slump in the volume of cargo being shipped from ports.
The reason was simple: businesses benefit from tax exemptions or reductions for products that are exported.
So, when companies from the mainland dealt with each other, they would export to Hong Kong first and then import back to the mainland, resulting in the transaction being treated as an export.
For example, trade in Guangdong Province and Hong Kong in the first quarter of 2013 increased by 91.6% year on year.
In particular, there was a sudden increase in exports via the free-trade zone in Guangdong.
After the regulatory authorities intervened in May, annual exports to Hong Kong rose by only 7.7%, down sharply from the 57% increase reported in April.
Economic conditions in China appear set to worsen further.
The enormous investments launched in China’s interior as part of the government’s stimulus program following the 2008 global financial crisis have now become a burden and are increasingly showing up as bad debt on the balance sheets of the country’s banks.
China is not alone in finding its economy stumbling.
More broadly, as the US and Japan recover, cracks are starting to appear in emerging countries that, relative to the advanced countries, had enjoyed enviable rates of economic growth since 2008.
Growth in India has slowed significantly in the last two years, and large-scale street protests in Turkey and Brazil could herald hard times ahead in both of those countries.
For most of the twenty-first century, emerging markets’ rising importance –&#160;and, with it, a reordering of the global economy and international relations – has been conventional wisdom.
But, today, it is the two largest “old” economies – Japan and the US – that are showing signs of increasing vitality.
Japan is seeking to revive its economy through Abenomics.
The US economy’s road to recovery is being built on the shale-gas revolution, a revived manufacturing sector, and a decline in the US budget deficit in GDP terms.
The “old” economies appear to be returning to the spotlight.
If current trends continue, they may well become the next new thing.
The Old in the New Anti-Semitism
Why do so many Holocaust survivors sense emerging anti-Jewish threats before seeing them?
Because they know how supposedly "innocent" insinuations grow into accusations and that accusations can become discrimination and soon after legislation.
It is then that hysteria is set loose.
Survivors sound the alarm because they know what is at stake.
By doing so they strengthen our democracies in ways that no other people can.
We listen to the survivors so that we survive.
That we have cause to listen is clear, as the results of the first round of the French presidential elections demonstrate.
But not only demagogues like Jean-Marie Le-Pen and Europe's other lumpen extreme rightists incite trouble.
Throughout the 20 th century people who regarded themselves as "intellectuals" often became fellow travelers of fascism or communism without joining political parties based on those ideologies.
In the 21 st century - in the "chattering classes" linked to the mass media, to politics, government and universities - we encounter people who condemn Israel in language that reminds us of the fellow travelers of those fallen anti-democratic movements.
These are not majority voices in the Western world - not yet, thankfully - but are powerful and influential minority ones.
Take the case of the French Ambassador to Britain. At a dinner party in London not long ago he described Israel as "that shitty little country."
His vulgar comments are not particularly frightful.
What is worrying is the response.
He was not recalled by his government;
Tony Blair's government did not request his recall; popular opinion treated the matter as merely another scandal.
Indeed, the French press thought the ambassador a victim of Britain's tabloid press, not of his contemptible sentiments.
Sadly, the French ambassador to the Court of St. James has many allies among Europe's elites.
But Ambassador Bernard did provide a service; he helped us to recognize how widespread this new anti-Jewishness is.
As one columnist notably said, Israel has become "the object of hate that dare not speak its name."
But we must not only dare, we are obliged to speak.
We must not be silent about the daily attacks in France against Jews and synagogues.
It is a shame for all of Europe that many French Jews cannot send their children to school without worrying about their security.
Anti-Semitic outrages are also reported elsewhere: in Berlin and London, in Switzerland, Italy, Sweden, the Netherlands, and in parts of Eastern Europe.
We must not be silent about the fact that denial of the Holocaust is becoming routine; so too the parallels that anti-Semites/anti-Zionists draw between Israel and the Third Reich.
We must "confront the new Nazi plague which is nesting in Israel," wrote a Syrian paper as Palestinian TV portrays Israeli soldiers as rapists and cold-blooded murderers.
The Mufti of Jerusalem stated that "it's not my fault that Hitler hated the Jews, they hate them just about everywhere."
One Friday sermon on Palestinian TV told Muslims "to have no mercy on the Jews, no matter where you are...kill them... and those Americans who are like them."
What we must remember about anti-Semitism is that, although it always starts with Jews, it never stops with Jews.
Jew-hatred, if not contained, almost always develops into assaults on other groups and minorities and finally undermines democratic institutions and the rule of law.
So the struggle against anti-Semitism is a task for Jews and non-Jews alike.
But it is now a more diffuse struggle than ever because an astonishing element in today's anti-Semitism is its flexibility.
Although anti-Semitism never changes its goal - to attack Jews - it does change its face, its strategy, its rationalizations, even its vocabulary.
Once Jewish religion was the target.
When Judaism did not surrender, Jews were expelled or killed.
In the 19 th century, when race became an intoxicating theory, Jews were attacked for being an evil race.
Today, with Israel a source of pride and protection for most Jews, Zionism is slandered as a racist ideology.
I do not equate criticism of Israel with anti-Semitism.
It is as legitimate to oppose certain Israeli policies and decisions as it is to scrutinize any nation.
But anti-Zionism is becoming akin to anti-Semitism.
Sometimes anti-Zionists claim that they are not against Jews but are "only" against the Jewish state.
But suppose someone said: "I am only against the existence of Great Britain, I am not anti-British!"
Or if somebody told me that "I love Swedes, but Sweden should be abolished."
You would not believe them.
It is hard to love or respect a people and hate their state.
Yet people pretend that they can where Israel is concerned.
In several UN agencies, Israel-bashing is routine.
This demonization of the only democracy in the Middle East is a central part of the new anti-Jewishness.
When Israel is described "as the enemy of all good and the repository of all that is evil," says Professor Irwin Cotler, a member of Canada's parliament, it becomes a "teaching of contempt" within the UN.
This constant singling out of one nation as humanity's enemy is in fact a campaign directed against the Jewish people.
Indeed, many anti-Jewish outbursts in a number of countries are rooted in condemnations of Israel that exploit anti-Semitic terminology.
Attacks on synagogues are often triggered by a defaming language about the Middle East.
Compared to previous anti-Jewish outbreaks, today's anti-Semitism is less an attack on individual Jews than an attack on the "collective Jew," the state of Israel.
Such attacks, however, have started a chain reaction of assaults across Europe and Latin America on individual Jews and Jewish institutions.
In the past the most dangerous anti-Semites were those who sought to make the world Judenrein , free of Jews.
Today the most dangerous anti-Semites are those who want to make the world Judenstaatrein , free of a Jewish state.
The One Percent Solution
More than a billion people now live on less than the purchasing power equivalent, in their own country, of what can be bought in the US for $1.00.
In the year 2000, Americans made private donations for foreign aid of all kinds totaling about $4 per person, or roughly $20 per family.
Through their government, they gave another $10 per person, or $50 per family.
That makes a total of $70 per family.
In comparison, in the aftermath of the destruction of the World Trade Center, the American Red Cross received so much money that it abandoned any attempt to examine how much help potential recipients needed.
It drew a line across lower Manhattan and offered anyone living below that line the equivalent of three months' rent (or, if they owned their own apartment, three months' mortgage and maintenance payments).
If recipients claimed to have been affected by the destruction of the Twin Towers, they received money for utilities and groceries as well.
Most residents of the area below the line were not displaced or evacuated, but they were offered mortgage or rent assistance nonetheless.
Red Cross volunteers set up card tables in the lobbies of expensive apartment buildings where financial analysts, lawyers, and rock stars live, to inform residents of the offer.
The higher the rent people paid, the more money they got.
New Yorkers, wealthy or not, living in lower Manhattan on September 11, 2001, were able to receive an average of $5,300 per family.
The difference between $70 and $5,300 may be a solid indication of the relative weight that Americans give to the interests of their fellow citizens compared with what they give to people elsewhere.
Even that underestimates the difference, since the Americans who received the money generally had less need of it than the world's poorest people.
At the UN Millennium Summit, the nations of the world committed themselves to a set of targets, prominent among which was halving the number of people living in poverty by 2015.
The World Bank estimated the cost of meeting these targets to be an additional $40-$60 billion per year.
So far the money has not been forthcoming.
Although described as "ambitious," the millennium goals are modest, for to halve the number of people living in poverty, all that is required - over 15 years - is to reach the better-off half of the world's poorest people, and move them marginally above the poverty line.
That could, in theory, leave the worst-off 500 million people in poverty just as dire as they are now experiencing.
Moreover, during every day of those 15 years, thousands of children will die from poverty-related causes.
How much would it require, per person, to raise the necessary $40-60 billion?
There are about 900 million people in the developed world, 600 million of them adults.
A donation of about $100 per adult per year for the next 15 years could achieve the Millennium goals.
For someone earning $27,500 per annum, the average salary in the developed world, this is less than 0.4% of annual income, or less than 1 cent out of every $2 that they earn.
Of course, not all residents of rich countries have income to spare after meeting their basic needs.
But there are hundreds of millions of rich people who live in poor countries, and they could also give.
We could, therefore, advocate that everyone with income to spare, after meeting their family's basic needs, should contribute a minimum of 0.4% of their income to organizations working to help the world's poorest people, and that would probably be enough to meet the Millennium goals.
A more useful symbolic figure than 0.4% would be 1%, and this, added to existing levels of government aid (which in every country of the world except Denmark fall below 1% of GNP, and in the US is only 0.1%) might be closer to what it would take to eliminate, rather than halve, global poverty.
We tend to think of charity as something that is "morally optional" - good to do, but not wrong to fail to do.
As long as one does not kill, maim, steal, cheat, and so on, one can be a morally virtuous citizen, even if one spends lavishly and gives nothing to charity.
But those who have enough to spend on luxuries, yet fail to share even a tiny fraction of their income with the poor, must bear some responsibility for the deaths they could have prevented.
Those who do not meet even the minimal 1% standard should be seen as doing something that is morally wrong.
Anyone who thinks about their ethical obligations will rightly decide that - since, no matter what we do, not everyone will give even 1% - they should do more.
I have in the past advocated giving much larger sums.
But if, in order to change our standards in a manner that stands a realistic chance of success, we focus on what we can expect everyone to do, there is something to be said for setting a donation of 1% of annual income to overcome world poverty as the bare minimum that one must do to lead a morally decent life.
To give that amount requires no moral heroics.
To fail to give it shows indifference to the continuation of dire poverty and avoidable, poverty-related deaths.
Commodities on the Rise
SEOUL – The commodity super-cycle – in which commodity prices reach ever-higher highs, and fall only to higher lows – is not over. Despite the euphoria around shale gas – indeed, despite weak global growth – commodity prices have risen by as much as 150% in the aftermath of the financial crisis.
In the medium term, this trend will continue to pose an inflation risk and undermine living standards worldwide.
For starters, there is the convergence argument.
As China grows, its increasing size, wealth, and urbanization will continue to stoke demand for energy, grains, minerals, and other resources.
For example, the US consumes more than nine times as much oil as China on a per capita basis.
As more of China’s population converges to Western standards of consumption, demand for commodities – and thus their prices – will remain on an upward trajectory.
Of course, not all commodities are equal.
For example, although the case for copper seems straightforward, given that it is a key input for wiring, electronics, and indoor plumbing, a strong bid for iron is not as obvious, given the Chinese infrastructure boom that already has occurred in the last two decades.
Worst-case estimates have China’s real GDP growing at around 7% per year over the next decade.
Meanwhile, the supply of most commodities is forecast to grow by no more than 2% annually in real terms.
All else being equal, unless China’s commodity intensity, defined as the amount of a commodity consumed to generate a unit of output, falls dramatically, its demand for commodities will be greater this year than it was last year.
As long as China’s commodity demand grows at a higher rate than global supply, prices will rise.
And the rapid economic growth that China’s leaders must sustain in order to lift enormous numbers of people out of poverty – and thus prevent a crisis of legitimacy – places a floor under global food, energy, and mineral prices.
To be sure, intensity of use has fallen for some commodities, like gold and nuclear energy; but for others, such as aluminum and coal, it has risen since 2000 or, as is the case for copper and oil, declines have slowed markedly or stalled at high levels.
As the composition of China’s economy continues to shift from investment to consumption, demand for commodity-intensive consumer durables – cars, mobile phones, indoor plumbing, computers, and televisions – will rise.
There is also the issue of the so-called reserve price (the highest price a buyer is willing to pay for a good or service).
The reserve price places a cap on how high commodity prices will go, as it is the price at which demand destruction occurs (consumers are no longer willing or able to purchase the good or service).
For many commodities, such as oil, the reserve price is higher in emerging countries than in developed economies.
One explanation for the difference is accelerating wage growth across developing regions, which is raising commodity demand, whereas stagnating wages in developed markets are causing the reserve price to decline.
By implication, if nothing else, global energy, food, and mineral prices will continue to be buoyed by seemingly insatiable emerging-market demand, which commands much higher reserve prices.
Ultimately, emerging economies’ absolute size and rate of growth both matter in charting commodity demand and the future trajectory of global commodity prices, with per capita income clearly linked to consumers’ wealth. If people feel rich and enjoy growing wages and appreciating assets, they are less inclined to cannibalize other spending when commodity consumption becomes more expensive.
They just pay more and carry on.
Of course, upward pressure on commodity prices also stems from supply-side challenges.
It is not just that global supplies of resources are increasingly scarce, but also that supplies are increasingly falling into inefficient hands.
Around the world, governments are taking greater control of resources and imposing policies that hamper global production and ultimately force prices higher.
(Following the recent fracas surrounding Argentina’s nationalization of Yacimientos Petrolíferos Fiscales (YPF), Australia’s 2012 mining tax on iron and coal companies is a stark reminder that such tendencies are not limited to emerging-market politicians.)
Such price increases can prove particularly inflationary in countries that import commodities.
And they can be disastrous to exporting economies, which risk rapid currency appreciation and thus a loss of competitiveness.
Of course, technological advances, like hydraulic fracturing (“fracking”) in the shale-gas industry, could increase supply and therefore lower prices.
But mounting environmental challenges, and the limited availability of commodity substitutes, suggest that a reprieve on commodity prices is not near.
There is a perennial temptation to focus on – even to overemphasize – the short-term, tactical drivers of commodity-price movements, at the expense of giving longer-term, structural factors their due.
While short-term factors – for example, political instability, weather-related disruptions, and speculative activity – are important determinants of prices, they tell only part of the story.
The economic fundamentals of supply and demand remain the key factors in driving the direction of commodity prices and determining whether the commodity super-cycle will persist. In practical terms, this means that oil prices, for example, are more likely to hover near $120 per barrel over the next decade, rather than $50; and we are unlikely to see a $20 barrel of oil ever again.
A New Greek Test for Europe
PRINCETON – Over the last year, it has been easy to lose sight of the Greek debt crisis.
Brimming with official funds, Greece was apparently on the mend.
Though privatization plans lagged, the Greeks won high marks for doubling down on fiscal austerity.
In Europe’s summer of quiet triumphalism, ever-lower expectations were easy to beat.
But Greece is set to test Europe again, with a vengeance.
Greece’s crisis was spectacularly outsize.
After it was revealed that successive governments had misled their way to mammoth fiscal deficits and macroeconomic imbalances, Greece lost access to international bond markets.
Since 2010, the country has been dependent on unprecedentedly large official bailout funds.
But, because Greece’s creditors – the International Monetary Fund and European governments – misread the challenges facing the country, the rescue merely delayed the inevitable sovereign default and caused the Greek economy to contract sharply, magnifying the pain.
The hope was that the Greeks would ultimately bear their own burden.
That was never realistic.
The Greek crisis was always destined to spill across national borders – the question was who would share the cost.
Today, the leading edge of that dénouement is the impending decision on the next round of Greek aid, which threatens to break the mold on the scale of official debt forgiveness, defy the IMF’s presumed insulation from default, and fundamentally alter the eurozone’s legal framework.
The conclusion that Greece needed official loans to repay its private creditors ensured that Greek debt remained large, compelling eurozone leaders to demand economically debilitating fiscal austerity.
Last year, it became clear that Greece could not repay its official creditors on the agreed terms.
But the European debt-forgiveness plan, though painstakingly crafted, was bogus.
Continued reduction of interest rates and extension of repayment maturities have served only to prolong Greece’s struggles.
Greece has so far repaid almost none of the €282 billion ($372 billion) in loans that it has received since 2010.
And matters may be even worse.
Some analysts argue that, given guarantees of debt incurred by public corporations, the Greek government’s obligations are even higher.
To escape from this morass, Greece needs a massive debt write-down.
But there is a twist.
Virtually all of the debt repayments due in the next few years are to the IMF, whose implicit status as “senior” creditor ensures that it is repaid first.
Because Greece is rapidly running out of cash, it will first have to borrow more from either its European neighbors or the IMF itself.
If the IMF were to ease the terms on its Greek loans, it would likely face fierce protests from its less wealthy debtors and risk compromising its status as senior creditor – an outcome that even the Fund’s largely quiescent Board of Governors is unlikely to accept.
The Fund, having swooped in to pluck Greece from the abyss, is ready to step back from the brink.
For that reason, European governments will probably lend new money, despite knowing that they will not be repaid.
For the creditor countries’ leaders, a write-down would mean breaking the promise that their taxpayers would not foot the bill – a pledge that also formed the legal basis for supporting Greece.
The European Court of Justice ruled that loans to protect financial stability would not violate the Lisbon Treaty’s “no bailout” clause, provided that their terms were “reasonable.”
But how reasonable is it if Greece does not have to fulfill its repayment obligations?
Despite domestic opposition, German Chancellor Angela Merkel decided to commit to keeping Greece in the eurozone, because the risk that a Greek exit would precipitate the monetary union’s disintegration was deemed too great.
But this logic failed to account for the political ramifications, which threaten to undermine European unity further.
German voters – who will head to the polls later this month – are unmistakably anxious.
While it may be too late to avoid forgiving Greece’s existing debt, Germany’s next government will not have a mandate to provide more loans.
As a result, important projects like establishing a European banking union, which would require a fiscal backstop, are likely to be delayed or even endangered.
The practice of presenting technocratic faits accomplis to national parliaments will only breed deeper resentments.
To be sure, there is always the possibility that Greece’s increasingly dire situation will finally catalyze the creation of a democratically legitimate pan-European bailout fund that provides automatic and unconditional relief to struggling countries.
The European Union would thus be transformed into a true federation, the United States of Europe.
That would be a triumph for the European project.
Given the improbability of such an outcome, Europeans must brace themselves for another bout of political and legal turmoil.
The Europe that emerges from it could look, for better or worse, very different from the Europe of today.
The Operating System that Stole Christmas
Before asking for a new Windows PC this holiday season, remember the old adage: “Be careful about what you wish for.”
In the best of all worlds, we would all benefit from the so-called “network effects” that result from most people using the same software: everyone could easily communicate with each other and teach each other how to use the software efficiently.
Unfortunately, since Microsoft uses network effects to maximize its profits rather than to benefit users, the world it delivers is far from the best.
Consider Vista, yet another “great” new operating system that Microsoft rolled out this year, together with Office 2007.
The first person at my company to use Vista was our Executive Vice-President.
He was furious.
Vista and Office 2007 came with his new Dell computer by default.
Dell didn’t ask: “Would you prefer the old versions of the operating system and MS Office that you know how to use?”
Think of the productivity cost of millions like him having to adjust to a new system.
Moreover, his coworkers couldn’t read the Microsoft Word files that he sent them in the new “.docx” format.
They wrote back and asked him to resend files in the older “.doc” format – which might not have worked if he had inadvertently used some new-fangled formatting feature.
To be sure, Microsoft does provide a patch that allows old versions of Office to read the new “.docx” format. But Microsoft doesn’t publicize it – or warn you if your Office 2007 file is about to become incompatible with older versions.
While Microsoft could have kept the traditional “.doc” as its default format for MS Word, this would not have served its purpose: eventually, after enough of the world pays for Office 2007, holdouts will be dragged along, kicking and screaming.
Then, in four or five years, Microsoft will begin our agony all over again.
Obviously, Microsoft owns its old software and can decide at what price to sell it – or whether to sell it at all.
More subtly, Microsoft can control expectations, which turn out to be self-fulfilling when network economies are substantial, as they are in software markets.
If everyone woke up tomorrow expecting that the world would shift to Apple within a year, sales of Windows would plummet.
Why buy a Windows machine when all your colleagues will own Macintoshes and can help you on them but not Windows, and when all the independent software developers will be programming for the Mac’s new Leopard operating system?
But that is not our world.
Whenever Microsoft rolls out a new operating system, the question is not whether you should switch, but when.
Adding new features can speed the transition, but what is necessary is only that the new system be incompatible with existing systems in certain respects, and that a sufficient number of people expect that it will become the new standard.
Of course, creating new software is costly.
So why should Microsoft bother?
The Nobel laureate Ronald Coase answered that question long ago.
According to “the Coase Conjecture,” a monopolist selling a durable good must sell it at marginal cost.
For Microsoft, the problem is that the marginal cost of software is zero.
As a result, Microsoft cannot extract anything close to its full monopoly rents unless it sells upgrades.
After all, even though Microsoft has a monopoly of primary sales of its software, copies sold in 2007 compete with those sold in 2006.
So, by creating incompatibilities, some subtle and some obvious, that make its old software obsolete, Microsoft can sell its operating systems at high profit margins without fear that people will wait until the price drops.
The price will never drop, because Microsoft will just roll out a new system, again at high profit margins.
Microsoft has been in antitrust trouble for 15 years, and, despite the company’s recent agreement with the European Union to license its source code, it will probably be in trouble again.
When that happens, I hope the antitrust authorities will consider a remedy that Ian Ayres, Hal Varian, and I devised.
Suppose Microsoft had to license its old software freely whenever it brings out a new version.
This would give the company an incentive to ensure that new versions are compatible with and significantly better than old versions – otherwise the new versions wouldn’t sell, or at least not easily.
If Microsoft’s new software had to compete successfully at least against its old software, we would know the world was improving.
In the meantime, I recommend installing the Microsoft patch to your old computer ( http://office.microsoft.com/en-us/word/HA100444731033.aspx ) and just suffering the devil you know.
The Opportunity in Seoul
SEOUL – Hubris usually gives birth to disaster.
The root cause of the current global crisis was intellectual hubris in the form of the blind belief that markets would always resolve their own problems and contradictions.
Thirty years after the Reagan-Thatcher revolution, the ideological pendulum has begun to swing in the opposite direction.
Each time in the last hundred years that a shift of this magnitude has occurred in beliefs about state-market relations, a major political-economic upheaval has ensued.
For example, World War I marked the end of the nineteenth-century’s laissez-faire liberalism and ushered in a period of state-centered economic systems.
The Great Depression and World War II opened the new era of the Bretton Woods system of a more balanced state-market relationship.
Similarly, the 2008 global financial crisis ended three decades of neo-liberalism, characterized by free trade and financial globalization.
We still do not know the nature of the era ahead of us; we can only be certain that the global economy is in the middle of a major transition, and that the old ways will not work anymore.
The main concern in this period of great uncertainty is whether the transition to a new paradigm can be managed without further destabilizing the international political-economic order.
There are already some serious signs of distress – the currency war between the United States and China, and its spread to other countries, being a case in point.
Indeed, current global conditions have more worrying similarities to the early 1930’s than they have differences.
Then, every state looked inward, squandering valuable opportunities to achieve common prosperity through international policy coordination.
The leadership vacuum caused by America’s unwillingness to cooperate and Britain’s sudden inability to lead resulted in the failure of the London Conference of 1933, which is often seen as opening the way to the Great Depression and the catastrophe of World War II.
Having learned the lessons of the 1930’s, the post-war global economic order was built on a network of international institutions, such as the International Monetary Fund, the World Bank, and what ultimately became the World Trade Organization.
But the lessons of the past seem to be too distant in policymakers’ minds these days, whereas domestic political pressure to put national economies first appears overwhelming.
In addition, the institutions created in the days following WWII no longer seem effective enough to meet the new challenges of the global economy, and thus have lost some of their legitimacy.
For example, the IMF’s authority has suffered in the recent decade – especially in Asia – from the fund’s deep commitment to neo-liberal orthodoxy and the so-called “Washington Consensus.”
Reinvigorating these institutions is the first step toward solving the global economy’s current problems.
We need their help to implement norms, principles, rules, and decision-making procedures, thereby mitigating the endemic free-rider problems in quasi-anarchical international society.
Thus, the first task for the G-20 meeting on November 11-12 in Seoul must be to revitalize and strengthen the IMF and global financial regulation.
If the G-20 leaders can also make meaningful progress towards resolving the Doha Round of trade negotiations, they will add momentum for global economic stabilization.
There are signs that the Seoul meeting may be successful.
The meeting of G-20 finance ministers and central bankers in the South Korean city of Kyeongju on October 22 produced some noteworthy achievements, such as shifting 6% of the IMF’s voting quota from overrepresented Europe to underrepresented emerging countries, doubling members’ quotas, and reducing Europe’s representation on the Fund’s executive board by two seats.
IMF Managing Director Dominique Strauss-Kahn declared the move “historic” and the most important decision on the Fund’s governance since its establishment in 1944.
The IMF also was empowered to conduct the Mutual Assessment Process of each country’s macroeconomic policies under the Framework for Strong, Sustainable, and Balanced Growth.
That authority should allow the Fund to inspect even the world’s mightiest economies, the US and China.
The recent agreement by the Basel Committee on Banking Supervision on a new capital-adequacy framework is another positive step.
But the key issues lingering in the minds of the G-20 leaders will be exchange rates and global imbalances.
The Kyeongju meeting decided that the G-20 countries would move toward market-determined exchange rates and pursue “politics conducive to reducing excessive imbalances and maintaining current-account imbalances at sustainable levels.”
These two issues may or may not be on the table for further discussion in Seoul.
If G-20 leaders can reach specific and effective agreements on exchange rates and global imbalances without overshadowing other issues, the prospects for a soft-landing for the global economy will improve greatly.
If not, protectionism and trade wars will intensify, and we will come one step closer to reliving the nightmare of the 1930’s.
Either way, the Seoul G-20 summit will likely mark a watershed in the history of the post-war global political economy.
The Orange Velvet Revolution
Ukraine’s ‘Orange Revolution’ will reach its climax on December 26, when Prime Minister Viktor Yanukovych and former Prime Minister Viktor Yushchenko will replay their run-off for the presidency.
The massive fraud that was supposed to bring victory to Mr Yanukovych, and which incited hundreds of thousands of Ukrainians to take to the streets of Kyiv to defent their rights, no longer looks possible.
Yet Ukraine’s democratic future is still not guaranteed.
Ukraine is undergoing a true liberal revolution, akin to the great European liberal revolutions of 1848, and reminiscent of Prague’s Velvet revolution of 1989.
Ukrainians demand democracy, freedom and the rule of law.
After five years of an average annual economic growth of 9%, economic claims are strikingly absent, as are all socialist and even social demands.
The discredited election results suggested that the country is geographically and ethnically divided, with the democratic opposition candidate Yushchenko winning overwhelmingly in seventeen western and central regions, while Yanukovych dominated in ten eastern and southern regions.
However, Yushchenko did carry several Russian-speaking regions, notably the capital Kiev, and Yanukovych won most in the authoritarian Donetsk and Luhansk regions furthest to the east.
Much of the regional differences can be explained by their degree of democracy and openness rather than ethnicity.
Wisely, Yushchenko launched the slogan “East and West together!” emphasizing his endeavor to unite the country. Similarly, miners bussed by their managers to Kiev were soon being convinced of the ‘Orange’ cause by the demonstrators and were quickly sent back East by their minders.
The role of business is palpable on both sides.
A quip says this is a revolt of the millionaires against the billionaires.
The Yanukovych candidacy was supported by the three dominant business clans with rather few allies, while the business community, and even some billionaires, overwhelmingly supported Yushchenko.
This is a truly bourgeois revolution.
Both the Ukrainian revolution and high economic growth have been caused by President Leonid Kuchma’s patent habit of playing everybody against everybody, while abstaining from fair play.
Ordinary Ukrainians aspire to law and order; businessmen want their playing field to be leveled with the richest and most well connected.
Yushchenko is careful not to criticize oligarchs but “bandits” and corruption, because smaller oligarchs support him.
Rarely has one country intervened so heavily in another country’s elections as Russia did here. Yushchenko’s campaign alleges that Russian enterprises were forced by the Kremlin to put up $300 million for the Yanukovych campaign.
Kyiv and its airwaves were flooded with Russian political advisors, slandering Yushchenko worse than any Ukrainian did. President Putin himself campaigned twice for Yanukovych in Ukraine and congratulated him twice before the forged final results had been presented, rendering him little but ridiculous.
Russia’s extreme activism is curious.
Yanukovych stands for a truly oligarchic state of the sort Putin defeated at home, and Yanukovych accused Yushchenko of having sold Ukrainian companies to Russian corporations.
President Putin’s behavior is probably best explained by his dislike for democracy.
In addition, if Ukraine’s President becomes an international pariah, he can only turn to Russia, as is the case of President Aleksandr Lukashenko in Belarus.
After this spectacular Russian failure, however, Putin’s “managed democracy” looks anachronistic and faces the threat of a real democracy in its neighbor spreading to Russia.
For the first time, Ukrainians have thrown their little-brother complex toward the Russians overboard.
With new self-confidence, they note that they are thinking and facing the truth unlike their Russian brethren.
Ukraine has little choice but to turn to Europe and the West.
Ukrainian exports of steel have boomed on China’s appetite, but sooner or later that appetite will be sated, and Ukrainian steel producers will need new markets.
Europe is the obvious choice, while Russia has little but stiff competition to offer.
If Ukraine becomes a democracy, it will undoubtedly soon develop the rule of law.
It is already a market economy and it is certainly located in Europe.
Thus, it becomes a formidable challenge to the European Union to offer anything but welcome to Ukraine.
Yet much can still go wrong.
The most obvious risk is that the elections are not concluded or that Yushchenko is denied executive power.
Solidarity suffered that frustration in Poland in 1980-81, which prolonged communist rule for a decade.
Fortunately for Ukraine, its business is private, and a common view of the whole business community is that the electoral rerun must be conclusive.
Otherwise, financial destabilization will threaten the fortunes of the very rich.
Another danger lies in the prominent role in the revolution of multi-millionaires.
No doubt they want to dominate the new cabinet, and with their impressive executive and intellectual skills they are dispersed over all parties.
Alas, if they are allowed to run the show, Ukraine might face more redistribution of fortunes than cleansing of corruption, letting the revolutionary public down.
Ideally, Yushchenko should reach out to the new professionals who have not as yet been intoxicated by the pervasive corruption of the old administration.
Nor has the old regime disappeared.
Yushchenko has gained a majority in Parliament because many adherents of the old regime switched their allegiance out of convenience.
They can change again, and no less than 300 of the 450 members of the Ukrainian Parliament are supposed to be millionaires.
Ukraine needs early parliamentary elections, but that is constitutionally difficult to accomplish.
Meanwhile, Yushchenko was forced to accept a poorly designed political reform full of traps.
The Russian threat lingers, whereas the West is more likely than not to be too passive.
Fortunately, Yushchenko’s camp is painfully aware that time is short and that they must act fast. Ukraine has a great opportunity, but its leaders must act radically to exploit it.
The Organ Crisis
LONDON – Organ transplantation is one of the most impressive achievements of modern medicine. It has brought hope to millions of patients suffering from previously fatal organ failure.
It has benefited many professionals and industries, too, by becoming a new source of pride, funding, and profit. Struggling to contain costs, health-care payers are also among its beneficiaries.
Yet, since its inception, transplant medicine has been grappling with a rapidly increasing gap between the supply of organs and demand for them. For most stakeholders, the often dire consequences gave rise to a whole set of solutions, all based on one general strategy: if we are short of organs, then let us get more of them.
On the one hand, it has given rise to some exceptionally corrupt practices, such as organ trafficking, transplant tourism, and many other ugly phenomena associated with a black market in organs. On the other hand, it has put transplant ethics under severe strain.
Indeed, transplant ethics has been on a slippery slope almost since transplants began. The strategy of getting more organs has pushed, and continues to push, the ethical line to places that had previously been deemed immoral.
To tackle insufficient supply from the dead, we first embraced an increasingly inclusive, and at any rate flexible, definition of death. This has often raised suspicions about the motivations of doctors in pronouncing a candidate donor’s death.
We then came up with the idea of opt-out consent for deceased organ donation. This system, which allows organs to be harvested also from refusers who have failed to express their refusal, has not increased trust in medicine, either.
As the organ crisis continued to deepen, we allowed donations from the living. This was particularly audacious, for it required us to abandon the supreme Hippocratic principle according to which it is unprofessional to injure a healthy person.
In the category of living donations, we first permitted only directed donations by relatives and non-directed donations by non-relatives. We assumed that family ties and non-directedness would preclude coercion and commerce.
By that time, we had already become aware that interests in organ commerce were constantly intensifying, and that those in need of organs or money were increasingly likely to turn to the black market or seek a legal loophole that would allow them to conceal the commercial transaction behind some legitimate gesture. Until recently, we have not done much about the black market (the 2008 Declaration of Istanbul marks the beginning of a determined struggle against this market), but we banned altruistic directed donations by living non-relatives out of fear that they would become that legal loophole.
The increasing demand for more organs has driven us to legitimize this category as well. Indeed, it has helped a lot, but it has not sufficed, either.
This material incentive is in clear breach of the principle that organs should be distributed according to need only. Moreover, it is likely to discriminate against people who are either unaware of the donor-card system or tend to refuse to sign the card for reasons associated with religious beliefs or low trust in the medical authorities.
Moreover, the Israeli National Transplant and Organ Donation Center now openly encourages providers, insurance companies, and the Donor Card Institution, to pay families who consent to donate the organs of their deceased relative. Such arrangements, which should be described as government-sponsored commercialism, are considered unacceptable by all relevant international declarations.
But let us not even go there! For even if we believe that buyers and sellers of organs can in principle enter the transaction on the basis of free choice, none of them has chosen to face the underlying dilemma in the first place.
Both are victims: the buyer is a victim of morbidity and declining social solidarity, while the seller is a victim of poverty and other forms of financial distress.
Instead of medicalizing and ethicalizing it, let us direct our main efforts at draining the swamp. Organ transplantation, like mosquito repellent, should be used sparingly, and only when there is no other choice.
The Origin of Life
According to modern science’s version of Genesis -- less colorful than the biblical story, but no less wonderful -- Earth was born, together with the Sun and the other planets, in a whirlwind of gas and dust, some 4.5 billion years ago, a little more than nine billion years after the Big Bang.
A half-billion years later, our planet had recovered sufficiently from the pangs of its violent birth to become physically capable of harboring life.
After less than another half-billion years, it did indeed harbor life, in particular an entity, called the last universal common ancestor (LUCA), that gave rise through evolution to all known living creatures, including microbes of various kinds, plants, fungi, animals, and humans.
Primitive organisms arose from nonliving matter in what were probably hot, sulfurous, metal-laden, volcanic waters.
This unsavory brew was likely “spiced” with abundant small organic molecules such as amino acids, sugars, nitrogenous bases, and other typical components of biological constituents.
One of the most astonishing discoveries of the last decades, revealed by exploration of space, nearby celestial objects, and especially meteorites that fell to Earth, is that many of the chemical building blocks of life form spontaneously throughout the universe.
Organic chemistry, so named because it was believed to be a prerogative of living organisms, has turned out to be the most widespread and banal chemistry: the chemistry of carbon.
How this “cosmic chemistry” gave rise to the first living cells is not known in detail, but the process may be summed up in two words.
The first is chemistry , the essence of life.
Living beings continually manufacture their own constituents from small inorganic and organic building blocks, with the help of catalysts called enzymes and of energy derived from sunlight, mineral sources, or foodstuffs made by other organisms.
Something similar happened in the origin of life, but along pathways, by the action of catalysts, and with sources of energy that remain to be identified.
Enormous research efforts have already been devoted to this problem.
Much has been learned, but no solution is in sight.
All that can be said is that the processes involved must, being chemical, have been highly deterministic and reproducible, that is , bound to occur under prevailing conditions.
If chemistry admitted even a small element of chance, there could be no chemical laboratories, no chemical factories.
The second key word is replicability , the ability of certain information-bearing molecules to induce the making of (complementary) copies of themselves by the machineries responsible for the synthesis of their kind.
This function, fulfilled mostly by DNA today, was probably first carried out by RNA, a close relative of DNA.
In the beginning, replication concerned only RNA molecules.
Soon, RNA molecules became involved in the synthesis of proteins according to RNA-supplied blueprints, so that replication extended to proteins, by way of RNA (eventually DNA).
In turn, replication came to affect, by way of proteins, increasingly complex objects, up to cells and multi-cellular organisms.
Replication allowed the endless reproduction of the same entities, generation after generation, which is the basis of genetic continuity.
Furthermore, because of the inevitable failures in the fidelity of the process, replication necessarily led also to variation (in replicable form), hence to competition among variant lineages for available resources.
The necessary outcome, as first divined by Charles Darwin, was the selection of those lineages most apt to survive and , especially , produce progeny under existing conditions.
This process became added to chemistry as soon as replicability appeared, operating first on molecules and, subsequently, on increasingly complex assemblages, until the present day.
With replication, chance made its appearance, by way of the variations, or mutations, that were offered to the screening action of natural selection.
According to all we know, these variations are strictly accidental, totally devoid of any intentionality or foresight – hence the widespread notion that the history of life was ruled by contingency.
But this view ignores the possibility that the array of choices offered by chance to natural selection may be sufficiently extensive to allow an optimal or near-optimal solution to emerge, in which case the process is actually close to obligatory and reproducible under the prevailing conditions.
Indeed, there are strong reasons to believe that optimizing selection may have occurred in the origin and evolution of life more often than is generally assumed.
This implies that life, to the extent that it is the product of deterministic chemistry and of optimizing selection, is likely to arise, in a form similar to life as we know it, wherever conditions mimic those that surrounded its birth on Earth, thus justifying today’s interest in extraterrestrial life.
But this optimizing selection during evolution is nothing like proof of intelligent design.
Irrespective of the arguments put forward in support of ID, which have been abundantly refuted, let it simply be stated that a theory based on an a priori declaration that things are not naturally explainable is not a scientific theory.
By definition, the science is based on the idea that the object of study is naturally explainable.
Why look for an explanation otherwise?
What is truly wonderful is how much of nature, including the fundamental features of life, has already proven to be explainable.
The Osama Opening
NEW DELHI – The image, caught on home video, is a defining one: a hunched Osama bin Laden, in pathetic, lonely domesticity, with a grey beard and a blanket covering him like a shawl, surveying the television wasteland for images of himself.
How banal this epitome of evil turned out to be.
That is why Osama’s elimination by US commandoes is such a marvelous case study.
Start with this question: Was it poetic or divine justice that Al Qaeda’s leader, whose group, born in Peshawar, Pakistan, in 1988, was fathered by Pakistan’s Inter-Services Intelligence agency and midwifed by the CIA, was finally killed by his figurative creators?
This question leads to two more that are anything but rhetorical: Where, in the end, does the fault for Bid Laden’s murderous decades lie?
And will his death mark the end of global jihadist terrorism?
To be sure, street protests and a chaotic clamor of recrimination have gripped Pakistan, while dire threats float in the Internet ether and a bizarre indifference pervades the rest of the Muslim world.
But events in the Maghreb and the Middle East seem to demonstrate that the streams of Arab and Muslim political life are flowing away from Osama’s murderous messianism.
That is why the crucial test today is what happens tomorrow in Pakistan and Afghanistan.
The future of Pakistan, peace in Afghanistan, normalcy in India-Pakistan relations, and economic progress in South Asia all hinge on whether Bin Laden’s death dilutes extremism and dissolves intolerance or re-concentrates both.
The history of the region’s discord is a complex mix of ethnic, territorial, and existential fears, imaginary or real.
But now that America’s mission in Afghanistan has, at least symbolically, achieved its objectives, a new chapter must open.
To persist with the old “reordering” of Afghanistan would be sheer folly, dissipating whatever good might come from the end of Bin Laden’s blood-soaked career.
But the United States alone cannot bring peace to the region.
A broader regional condominium, involving Afghanistan, Pakistan, India, China, Russia, and, yes, Iran, must be brought into play.
For this to happen, however, the first step must come from Pakistan.
It must now renounce terrorism as an instrument of state policy; stop employing groups like Lashkar-e-Taiba as strategic reserves against India; and abandon aspirations of acquiring overweening influence over the government in Kabul.
Of course, Pakistan’s concerns about Afghanistan are fuelled by a near-paranoid anxiety about India.
This fear must be overcome, for the geopolitical challenge in Afghanistan is too great to allow such misbegotten apprehensions to persist.
Here, India bears a grave responsibility: it must assuage Pakistan’s valid security concerns convincingly.
After all, there is no solution in retributory, panic-ridden responses by Pakistan, or in chest-thumping schadenfreude elsewhere.
Now is the moment for South Asia to revert to its “natural balance,” gain breathing space, and recover its shattered peace.
To this end, and to facilitate a withdrawal of US and NATO troops from Afghanistan, the region’s countries must create a credible template for reconciliation.
The design for such a process cannot accommodate malevolently carnivorous forces like jihadist terrorism, which merely sucks credibility out of its principal progenitor, Pakistan.
Is this too idealistic, and thus unattainable?
Perhaps, but the alternatives to doing nothing are infinitely worse: the continued condemnation of South Asia to the scourge of terrorism; almost one-third of humanity reduced to self-perpetuating penury; and a near-permanent US/NATO military presence, which would make Afghanistan (and Pakistan?) tantamount to a Western-controlled protectorate.
Unless we accept our responsibility, more “Abbottabads” will surely follow.
Of course, no one questions Pakistan’s sovereignty.
But both its identity and faith in its word are now doubted by almost everyone outside the country.
Surely we can caution its people that they are sliding towards Talibanization, and that this threatens to tear their country apart?
Pakistani President Asif Ali Zardari proclaims that the war on terror is Pakistan’s war too, and that the country has paid a high price in waging it – not only the thousands of Pakistani soldiers and policemen killed, but also in terms of social progress foregone.
But that is all the more reason why Pakistan must act now – if only to save itself.
A new, complex endgame has already begun, because ideologies are harder to kill than the individuals who espouse them.
So the central challenge is to devise a feasible new regional order.
For the US, whose military drawdown in Afghanistan is set to begin in July, a game-changing moment has been further complicated by Pakistan’s self-relegation from strategic ally to untrustworthy obstacle.
But it would be unwise at this critical moment for the US to shortchange Pakistan.
Some of the old relationship must be restored if Pakistan – until lately a pillar of US and NATO policy, but now with diminished relevance – is to have the confidence it needs to save itself.
Equally important is the now discernible fragmentation of Al Qaeda, which is why the respective national aims of Afghanistan, the US, India, Pakistan, China, Russia, Iran, and the region’s other important countries must somehow be reconciled.
Only a truly regional initiative can ensure a lasting end to the cruel and senseless Thirty Years War that has ravaged Afghanistan and frustrated South Asia’s hopes for peaceful development.
The US has a unique opportunity to assist in finding the correct balance in the region.
As Philip Zelikow, a key adviser to former US Secretary of State Condoleezza Rice, put it: “All the major policies are ripe for re-evaluation.
Leadership is defined by the way people use such moments.”
The Other and Ourselves: Is Multi-culturalism Inherently Relativist?
Understanding "the other" will pose the 21 st century's greatest social challenge.
The days are over when "Westerners" could consider their experience and culture as the norm and other cultures merely as earlier stages in the West's development.
Nowadays, most of the West senses the arrogant presumption at the heart of that old belief.
Sadly, this newfound modesty, so necessary for understanding other cultures and traditions, threatens to veer into relativism and a questioning of the very idea of truth in human affairs.
For it may seem impossible to combine objectivity with the recognition of fundamental conceptual differences between cultures.
So cultural openness poses the risk that we debase the currency of our values.
To grapple with this dilemma, we must understand culture's place in human life.
Culture, self-understanding, and language mediate whatever we identify as fundamental to a common human nature.
Across human history, always and everywhere, these basic faculties have demonstrated endless extraordinary innovation.
In accounting for such variety, some people anchor our understanding of human nature at a level below that of culture.
Sociobiology, for example, seeks to discover human motivation in the ways that human beings evolved.
Advocates of this view claim that cultural variation is but the surface play of appearances.
But we can never discover species-wide laws, because we can never operate outside of our historically and culturally specific understanding of what it is to be a human being.
Our account of the decline of the Roman Empire is not and cannot be the same as that put forward in 18 th century England, and it will differ from accounts offered in 22 nd century Brazil or 25 th century China.
Here the charge of relativism arises.
But it is wrong to believe that accepting cultural differences requires abandoning allegiance to truth.
The 17 th century scientific revolution's great achievement was to develop a language for nature that purged the purpose- and value-terms bequeathed by Plato and Aristotle to earlier scientific languages, which were nourished by earlier civilizations.
But the universality of the language of natural science cannot be applied to the study of human beings, where a host of theories and approaches compete.
One reason for this is that the language of human science draws on our ordinary understanding of what it is to be human, to live in society, to have moral convictions, aspire to happiness, and so on.
No matter how much our everyday views may be questioned by a theory, we nonetheless draw on our understanding of basic features of human life that seem so obvious as to need no formulation.
It is these tacit understandings that make it difficult to understand people of another time or place.
Ethnocentrism results from the unchallenged understandings that we unwittingly carry with us, and which we cannot dispel by adopting another attitude.
If our tacit sense of the human condition can block our understanding of others, and if it is so fundamental to who we are that we cannot merely wish it away, are we utterly imprisoned in our own outlooks, unable to know others?
True understanding in human affairs requires a patient identification and undoing of those facets of our implicit assumptions that distort the reality of "the other."
This can happen when we begin to see our own peculiarities clearly, as facts about us , and not simply as taken-for-granted features of the general human condition.
At the same time, we must begin to perceive, without distorting, corresponding features in the lives of others.
Our understanding of the "other" will be improved through these corrections, but it will remain imperfect.
If the historiography of the Roman Empire in 25 th century China turns out to be different from our own, this will not be because the facts will be found to be different than we (or 22 nd century Brazilians) thought.
The difference will be that different questions will be asked, different issues raised, and different features will stand out as remarkable.
Of course, as in our time, some accounts will be more ethnocentric and distortive, others more superficial.
In short, some will be more "right" and come closer to truth than others.
Avoiding distortion requires acknowledging that our way of being is not uniquely "natural," that it merely represents one among many possible forms.
We can no longer relate to our way of doing or construing things as if it were too obvious to mention.
There can be no understanding of "the other" without a changed understanding of the self - an identity shift that alters our understanding of ourselves, our goals, and our values.
This is why multiculturalism is so often resisted.
We have a deep investment in our distorted images of others.
Most of us recognize that we are enriched by understanding other human possibilities.
It cannot be denied, however, that the path to acknowledging their existence and value can be painful.
The crucial moment occurs when the "other's" differences can be perceived not as error, or as a fault, or as the product of a lesser, undeveloped version of what we are, but as the challenge posed by a viable human alternative.
Other societies present us with different and often disconcerting ways of being human.
Our task is to acknowledge the humanity of these "other" ways while still living our own.
That this may be difficult to achieve, that it will demand a change in our self-understanding and hence in our way of life, is the challenge our societies must reckon with in the years ahead.
The Other Central Europe
A specter is haunting Central Europe as its countries prepare for EU membership.
That promising development is being endangered by a fevered electoral nationalism which seeks to gain votes by promising to reopen old wounds and settle old scores.
The clearest case of this comes from Hungary, where Prime Minister Viktor Orban demanded an abrogation of President Edvard Benes' decrees of 1945 (which confiscated the assets of and stripped citizenship from the German and Hungarian populations deported from Czechoslovakia at that time) as part of a re-election campaign that failed narrowly.
But Orban is not alone in seeing electoral advantage in summoning the memories of old ghosts.
Orban argued that revoking the "Benes decrees" must be made a condition for the Czech Republic (as well as Slovakia) joining the European Union.
The ill will Orban's gambit inspired brought to a halt much of the regional cooperation of the last decade.
In its place, an ugly new form of national populism is emerging across the plain that extends between Bavaria and the Danube.
The chain reaction of reawakening nationalisms is altering the political landscape in dangerous ways.
Since the election that brought the coalition of Wolfgang Schüssel's and Jorg Haider's parties to power in Vienna, Austria's relations with the neighboring Czech Republic have deteriorated over two issues: a demand that the Czechs shutdown the Temelin nuclear power plant on the Austrian border, and revoke the Benes decrees in which Sudeten Germans were deported from Czechoslovakia and settled massively in Bavaria but also in Austria.
When the nuclear plant issue was resolved, populist pressure was forced into a single channel, the demand to abrogate the Benes decrees.
Czech Prime Minister Milos Zeman quickly demonstrated that he, too, could play a demagogic nationalist card.
He described the Sudeten Germans as Hitler's "Fifth Column" and suggested that Israel could solve its Palestinian problem through resort to the Czech method of 1945: deportation.
Edmund Stoiber, Bavaria's leader, the conservative CDU/CSU candidate for German chancellor against current Chancellor Schroeder, and a staunch advocate of the Sudeten Germans, demanded that Schroeder cancel a scheduled visit to Prague in response to Zeman's outburst.
To defuse an electoral fight with his rival, Schroeder agreed.
That Orban seconded Stoiber's demands came as something of a gift from god to the Slovak nationalist Vladimir Meciar in his bid to become Prime Minister once more, as it allowed him to argue that his domestic opponents were preparing to surrender to EU pressure and force Slovakia to compensate the Hungarians expelled by Benes in 1945.
So Meciar pounced, denouncing the "Hungarian menace," undoing in a stroke four years of hard work by Slovakia's current government to integrate representatives of the ethnic Hungarian minority into Slovakia's government.
Questions about postwar Europe's juridical order go beyond the former Czechoslovakia.
Erika Steinbach, President of the Association of Deportees (from the East) and a member of Stoiber's CDU, argues that the issue of the deportation of German populations is one faced by Poles, Czechs, Slovaks and Slovenes, thus taking in most of East/Central Europe.
In the 1930s, the pet hate of some Central European countries was "the Versailles Order."
Today, it appears that the Potsdam declarations of 1945, which sanctioned the mass eviction of German populations, are the new enemy.
The worry now is that such demagoguery may incite a cycle of populist victories.
That worry was dented when Viktor Orban's Fidesz party lost in Hungary's recent parliamentary elections, but other politicians happy to demagogue national resentments - Vaclav Klaus in Prague, Edmund Stoiber in Germany, Vladimir Meciar in Slovakia - still see nationalism as an electoral plus despite Orban's defeat.
Linked to EU skeptics like Italy's Berlusconi and Austria's Schüssel-Haider coalition, the very nature of European politics may turn decidedly nasty.
Since its inception, the EU has sought to reach beyond past grief and, through cooperation, to build a better future.
Today, some politicians want to capitalize on Eastern Europe's desire to be part of Europe to reopen historical issues to their political advantage.
Two savage consequences are foreseeable: first, that there is no better way to turn parts of public opinion in the candidate countries against the EU than by allowing local populists to portray the Union as an agent of spreading German power.
An extended EU should represent a means to balance the asymmetrical relationship between Eastern Europe's small countries with Germany.
There's a chance that it would be perceived as a pointer to this asymmetry.
The second worry is that, as NATO and the EU expand, these ugly debates will infect relations within these international bodies.
Fear about this may be one reason why President Bush refused to meet Prime Minister Orban recently, and there are frequent suggestions that, had Orban spoken as he now does before Hungary joined NATO, his country's application would have been rejected.
What can halt this?
After 1945, Western Europe undertook painful debates about history, and these helped bring about Franco-German reconciliation.
Notions about "collective guilt" were put aside as having no place in a united and uniting Europe.
So President Vaclav Havel courageously argued during his first trip to Germany in January 1990, but his comments were mistaken for weakness.
As EU expansion looms, Europe's mission must not become undermined by the advocates of that old and "other" Central Europe, politicians who prefer to wallow in the past rather than think in responsible ways about building a peaceful and prosperous Europe.
The Other Europe’s 1968
WARSAW – In Paris, West Berlin, London, and Rome, the spring of 1968 was marked by student protests against the Vietnam War.
In Warsaw, too, students were protesting, but their cause was not the same as their Western counterparts.
Young Poles took to the streets of Warsaw not to chant “Ho, Ho, Ho Chi Minh” in solidarity with the Viet Cong, but rather to defend their own country’s freedom and culture against a smothering Communist rule.
Instead of chanting Ho’s name, young Poles put flowers under the monument of Adam Mickiewicz, a nineteenth-century poet whose drama Forefathers Eve , written in praise of the struggle for freedom, had recently been declared subversive and anti-Soviet, and its performance at the National Theater in Warsaw closed down.
These are only a few of the differences between West and East European students in that springtime of rebellion of forty years ago.
Although the two youthful revolts were undertaken by the same generation and took similar forms of street demonstrations and sit-ins, there were far more differences than similarities as students rebelled on both sides of the Iron Curtain.
It was, of course, the context that made the difference.
The point of departure for Western students – freedom of speech and assembly, ideological pluralism, and a democratic political system – was, for their Eastern colleagues, a distant objective that they were unlikely to achieve.
Unhappy with the capitalist consumer society that was metastasizing all around them, West European and American students attacked the system from far-left positions.
Polish, Czechoslovak, and Yugoslav students directed their protests against the Communist dictatorship, which was depriving their societies of elementary civic freedoms.
For the Westerners, the main threat was American imperialism, blamed for the “dirty” war in Vietnam.
For the Poles and other Easterners, the threat was Soviet imperialism – a threat soon realized in Brezhnev’s crushing of the Prague Spring.
While the former wanted a revolution, the latter demanded only – but no less audaciously – that the authorities obey the law.
“The press lies!” demonstrators shouted in Warsaw and burned Party-controlled newspapers.
For Wladyslaw Gomulładyslaw Gomułka, then Poland’s Party leader, and other Communist brass, free media was a bourgeois aberration.
That same spring, demonstrators in Paris burned cars in opposition to the bourgeois lifestyle.
What you see depends on where you sit.
While students in Paris and Berkeley turned against academic science, their contemporaries in Warsaw and other Polish cities demonstrated in defense of the traditional role of the university and its autonomy, and were supported by many of their professors.
Unlike in the West, intergenerational conflict played a minor role in the Polish 1968.
Writers and scientists, who were also enraged by official censorship of Mickiewicz’s play and national culture, joined the young in protest.
The student movement in Poland took on a mass character during a demonstration at the University of Warsaw on March 8, 1968.
Students united to support two of their colleagues who had been expelled for their protests at the National Theater.
One student was Adam Michnik, later a long-term political prisoner, who became a political strategist of Solidarity in the 1980’s.
The peaceful demonstration was brutally dispersed by the police and “volunteer” party vigilantes.
No dialogue was ever sought.
In violation of a centuries-long tradition of university autonomy, the police marched onto campus, beat up students, and arrested a large number of demonstrators.
In response, a wave of protests spread to universities around the country, often supported by young workers.
Mendacity in the Communist press, which distorted the protests’ meaning and personally attacked student leaders, inflamed matters more.
The party resorted to anti-Semitic propaganda, pointing to the Jewish ancestry of some of the student leaders.
The campaign of hatred that followed underscored the country’s utter lack of free speech.
The demand for the abolition of censorship was one of the first political slogans of the Polish March ‘68.
Demands for freedom of assembly and the right to organize followed.
Crucially, the protesters did not demand free elections.
In this they were realists, but they did demand a measure of civic control over the authorities, both in the political and the economic sphere.
One slogan was “No bread without freedom.”
After 1968, Western student protestors gradually entered their countries’ political and intellectual establishments.
The Polish dissidents found themselves in prison or exile.
Several thousand were expelled from universities, and 80 were imprisoned following political trials.
The authorities also sacked prominent professors who had influenced and supported the students.
The regime’s darkest response, an anti-Semitic purge, resulted in an exodus of more than 10,000 people, who were also deprived of their citizenship.
The springtime of protests that many in the West remember fondly led to very different outcomes.
Anti-capitalist radicalism pushed many Western protesters toward the extreme left, rejection of liberal democracy, and, in some cases, terrorism.
The ideological evolution of the Polish students led in the opposite direction – from efforts to “improve” socialism in the name of “true” Marxism to anti-totalitarian opposition and the construction of a free civil society.
Imprisonment completed the evolution of the March combatants and left them free of illusions.
In the 1970’s, they created the biggest center of opposition in the socialist “camp.”
The Solidarity movement of the 1980’s and the peaceful overthrow of communism was, in large measure, the work of their generation.
It was the only suitable end to the road begun in 1968 under the monument of Mickiewicz.
The Other Half of the Peace Process
PRINCETON - American officials usually spend enormous energy highlighting the “process” in the Middle East “peace process.”
Only in the last 18 months of a second term president or following a military engagement in the Middle East does the United States actually start to concern itself with “peace.”
This pattern seems to be holding true for next week’s US-sponsored Middle East peace conference in Annapolis, Maryland.
The difference now is that, unlike the Madrid Conference after the 1991 American-led Gulf War, the current effort is coming after a perceived American defeat in Iraq.
Assuming that the Bush administration is serious in its current efforts, the US must have a Plan B in case the talks fail.
For Palestinians, the main concern is to avoid negative repercussions if they do.
Unlike former President Bill Clinton, who blamed Yassir Arafat for the failure of the Camp David talks in 2000, the Bush administration must honor its commitment not to point fingers or allow either side to use failure to advance its strategic goals.
Palestinian negotiators have always had to balance three issues: historic rights, current realities, and the price of using their negative power.
For Palestinians, the code words for historic rights –liberating Palestinian land, securing the right of return for refugees, and insisting on a truly independent state – are “international legitimacy.”
For both the PLO and Hamas, this refers to various UN resolutions and international public opinion, which have amounted to little more than lip service on the part of Western powers and Arab and Islamic leaders, whose statements raise false hopes, enticing Palestinian negotiators to harden their positions.
The current realities that the Palestinians must reckon with include their strategic, political, and economic imbalance vis-à-vis Israel and the US, the reality of occupation, and the challenges of diaspora life.
For example, Israel’s harsh policies to confront the 1987 intifada , coupled with the boycott of the PLO by oil-rich Arab countries (because of its failure to oppose Saddam Hussein’s occupation of Kuwait) formed a potent reality check for the Palestinian leadership.
Finally, Palestinian negotiators must consider the consequences of using their most valuable bargaining chip – the ability to reject a perceived bad deal – in terms of its direct effect on Palestinians and the strong possibility of continued expansion of Jewish settlements on Palestinian lands.
The late Haider Abdel Shafi repeatedly stated one of the major problems in the Oslo Accords, namely that it didn’t secure the halt of settlement expansion in the interim period or if the final status talks failed.
At Camp David II, former Israeli Prime Minister Ehud Barak cleverly insisted that the first clause of his offer included acceptance of the end of the conflict, which was a problem for Palestinians, given that historic rights remained unresolved.
Arafat used his negative power and blocked a settlement, but he couldn’t predict the consequences.
This time, Palestinian negotiators insist that they do not plan to engage in substantive negotiations.
They argue that the positions acceptable in Taba (following the failure of Camp David II) must be the basis of any agreement, and that what needs to be negotiated now is the timetable for implementation.
Backed by a reasonable Arab peace plan, they will insist that there is already a worldwide consensus on restoring the 1967 borders (with mutual adjustments of equal size and quality), the need for a fair agreement on dealing with refugees, and a formula to share Jerusalem.
As a result, Palestinian negotiators have reversed their position on the step-by-step approach to negotiations – an approach that proved disastrous, as it was exploited by radicals on both sides and gave the Israelis time to build more illegal settlements.
They insist that a broad agreement (in writing) must be reached before the talks.
Fears abound among Palestinians of another spasm of violence if no agreement is reached before Annapolis and this round of talks fails.
But what is crucially important for Palestinians is that, whatever the outcome, new settlements must not be built and land expropriation must end.
US Secretary of State Condoleezza Rice has said that the creation of a Palestinian state is a component of US national security.
But a Palestinian state will not appear now or in ten years if Israel continues build settlements in areas slated to be part of it.
The Other Palestinian Revolution
The euphoria that has, for over a week, greeted Mahmoud Abbas's election as President of the Palestinian Authority was perhaps justified.
But now it is time for a clear-eyed assessment of what lies before Palestinians, Israelis, and, perhaps more importantly, for the wider Arab world.
Such an assessment requires acknowledging that the election was far from flawless: Hamas and Islamic Jihad boycotted the poll, and Marwan Barghouti, a fellow Fatah member with Abbas and the one candidate who could seriously have challenged him, was ungently persuaded by the movement's leadership to withdraw his candidacy in order to present a unified front.
Moreover, Abbas (also known as Abu Mazen) succeeded in getting the dozen or so Palestinian security services and militias under his control.
This guaranteed his victory, though the parades of armed men brandishing guns at his rallies were not exactly what democratic norms call for.
Yet the fact remains that after decades of Yasir Arafat's autocratic rule, and despite the obvious constraints of continued Israeli occupation, the Palestinians did elect a leader in a relatively free and competitive election.
For years, Arafat avoided holding elections, as required by the laws of the Palestinian Authority, under the pretense that they cannot be held under occupation: but, lo and behold, two months after his demise, an election was held - and with resounding success.
The presidential election will obviously serve as a catalyst for renewed, and possibly more successful, negotiations with Israel.
But the impact of the Palestinian vote will also be watched closely in the Arab world, because what happened in the West Bank and Gaza is unparalleled in the annals of Arab politics.
Abbas will now bask in the glow of having been elected.
Nothing like this has happened in any Arab country.
Indeed, Abbas is now the only Arab leader who came to power in a more or less free election.
Is Palestinian society so different from other Arab societies?
Not really.
But there were several unique factors in the Palestinian context.
First, there was strong external pressure: confronted and exasperated by Arafat's deviousness and autocratic style, the United States and the European Union clearly told the Palestinians that any future support for their quest for independence would depend on their going through a reasonably acceptable democratic process.
Second, most Palestinians perceived that their ability to go through such a democratic process was itself a significant step in their struggle against Israel.
Finally, Palestinians have been exposed not only to the obvious hardships of occupation while living under Israeli rule for the better part of four decades; they were also able to experience, at close range, a liberal democracy at work - a free press, an independent judiciary, and political pluralism.
The dialectic of occupation plays strange games, both with occupier and occupied.
The Palestinian elections were seen all over the Arab world on Al-Jazeera and other Arab TV channels.
They must have focused people's minds on their own stunted political conditions.
If the Palestinians, under Israeli occupation, can choose their own leaders, why can't the same happen in Cairo or Damascus, in Ryadh or Algiers?
When the jubilation and the justly earned compliments for the Palestinians subside, both Arab rulers and Arab masses (the much hyped "Arab street") may start asking some hard questions.
The Palestinians have shown that it is not true that an Arab society cannot progress towards representative institutions.
So why can't this progress be emulated in other Arab societies?
Perhaps a time bomb has been planted under the thrones of Arab potentates - kings, emirs and presidents.
While Iraq - an attempt to import democracy by force - is failing, the paradoxical conditions of an Arab democracy under Israeli occupation may be a threat that Arab rulers have not yet comprehended.
The Other Poland
Recently, the European Parliament condemned the Polish government’s attempt to strip Bronislaw Geremek of his parliamentary mandate.
A leader of Solidarity, a former political prisoner, and the foreign minister responsible for Poland’s accession to NATO, Geremek had refused to sign yet another declaration that he had not been a communist secret police agent.
The EU parliamentarians called the Polish government’s actions a witch-hunt, and Geremek declared Poland’s “lustration” law a threat to civil liberties.
In response, Polish Prime Minister Jaroslaw Kaczynski accused Geremek of “damaging his fatherland” and “provoking an anti-Polish affair.”
The same phrases were used by Communists when Geremek criticized their misrule.
A ruling by Poland’s Constitutional Court issued on May 11 gutted much of the lustration law, and made Germek’s position in the EU parliament safe – at least for now.
But the lustration law was but one act among many in a systematic effort by Poland’s current government to undermine the country’s democratic institutions and fabric.
What is happening in Poland, the country where communism’s downfall began?
Every revolution has two phases.
First comes a struggle for freedom, then a struggle for power.
The first makes the human spirit soar and brings out the best in people.
The second unleashes the worst: envy, intrigue, greed, suspicion, and the urge for revenge.
The Polish Solidarity revolution followed an unusual course.
Solidarity, pushed underground when martial law was declared in December 1981, survived seven years of repression and then returned in 1989 on the wave of Gorbachov’s “perestroika.”
During the Round Table negotiations that brought about the end of communist rule, a compromise was reached between the reform wing of the communist government and Solidarity. This cleared a path to the peaceful dismantling of communist dictatorship throughout the entire Soviet bloc.
Solidarity adopted a philosophy of compromise rather than revenge, and embraced the idea of a Poland for everyone rather than a state divided between omnipotent winners and oppressed losers.
Since 1989, governments changed, but the state remained stable; even the postcommunists approved the rules of parliamentary democracy and a market economy.
But not everyone accepted this path.
Today, Poland is ruled by a coalition of post-Solidarity revanchists, postcommunist provincial trouble-makers, the heirs of pre-WWII chauvinists, xenophobic, and anti-Semitic groups, and the milieu of Radio Maryja, the spokesmen for ethno-clerical fundamentalism.
Worrying signs are everywhere: the authority of the courts is undermined, the independence of the Constitutional Tribunal is attacked, the civil service corrupted, and prosecutors are politicized.
Everyday social life is being repressively regulated.
Why is this happening?
Every successful revolution creates winners and losers.
Poland’s revolution brought civil rights along with increased criminality, a market economy along with failed enterprises and high unemployment, and the formation of a dynamic middle class along with increased income inequality.
It opened Poland to Europe, but also brought a fear of foreigners and an invasion of Western mass culture.
For the losers of Poland’s revolution of 1989, freedom is a great uncertainty.
The Solidarity workers at giant enterprises have become victims of the freedoms they won.
In the prison world of communism, a person was the property of the state, but the state took care of one’s existence.
In the world of freedom, nobody provides care.
It is in this anxious atmosphere that the current coalition rules, combining George W. Bush’s conservative nostrums with the centralizing practices of Vladimir Putin.
Solidarity veterans believed that the dictatorship’s demise would be followed by their own reign.
But guilty communists were not punished, and virtuous Solidarity activists were not rewarded.
So feelings of injustice gave rise to resentment, envy, and a destructive energy focused on revenge against former enemies and old friends who seemed successful.
The losers refused to admit that the achievement of freedom was Poland’s greatest success in 300 years.
For them, Poland remained a country ruled by the communist security apparatus.
Such a Poland required a moral revolution in which crimes would be punished, virtue rewarded, and injustice redeemed.
The means chosen by these losers’ parties after they won the general election of 2005 was a great purge.
Lustration, according to early estimates, would affect 700,000 people and take 17 years to complete.
A list of names found in the reports of the Security Services was to be prepared and made public.
Moreover, was the duty of every one of the 700,000 people subjected to lustration to declare that he or she did not collaborate with the security services.
Those who refused or filed a false declaration were to be fired and banned from working in their profession for ten years.
The result of all this was a pervasive climate of fear.
But not everyone fell silent. Cardinal Dziwisz of Cracow argued that there could be no place in Poland “for retribution, revenge, lack of respect for human dignity, and reckless accusations.”
Never since the fall of communism had a Catholic Cardinal used such words of condemnation.
The goal of Poland’s peaceful revolution was freedom, sovereignty, and economic reform, not a hunt for suspected or real secret police agents.
If a hunt for agents had been organized in 1990 when the democratic revolution began, neither Leszek Balcerowicz’s economic reforms nor the establishment of a state governed by law would have been possible.
Poland would not be in NATO or the European Union.
Today, two Polands confront each other. A Poland of suspicion, fear, and revenge is fighting a Poland of hope, courage, and dialogue.
This second Poland – of openness and tolerance, of John Paul II and Czeslaw Milosz, of my friends from the underground and from prison – must prevail.
I believe that Poles will once again defend their right to be treated with dignity.
The Constitutional Tribunal’s decision gives hope that the second phase of the Polish revolution will not consume either its father, the will to freedom, or its child, the democratic state.
The Other Switzerland
BRUSSELS – As policymakers scratch their heads and wonder how best to absorb different cultures and religions into Europe’s very distinct national societies, they could do worse than consider some new ideas being developed in Switzerland.
Switzerland, the country that recently voted to ban the construction of minarets on mosques?
Absolutely.
It is time for Europe to adjust the way that it thinks about nationality, cultural roots, and how it deals with immigrants.
In a world of increasing mobility, an aging Europe will badly need the immigrants of whom it is so frightened – and it should give them a voice in local politics soon (say, one year) after they arrive.
After all, it is more important for taxpayers to participate in local politics than to sit on the sidelines waiting to be given the rights of native citizens.
Democratic participation is the best way to integrate people into society and make them feel that their opinions count, regardless of whether they have formal citizenship and thus the right to vote.
I should declare a personal interest here: I was stateless for a time after my birth in Geneva.
My father was American, but naturalized too recently to hand his US citizenship on to me.
I was born on Swiss soil, but that did not give me the right to a Swiss passport.
In the end, the Irish accepted me because that was my mother’s nationality.
I have a framed copy of the Act of Parliament by Dail Eireann that was needed.
I have lived in Europe all my life, mostly in Belgium, but never in Ireland, and I have never voted, despite the fact that the Maastricht treaty entitles me to vote both in European elections and in Belgium’s local elections.
I suppose that I belong to an expat generation that has not been educated to consider voting an essential right, if not a duty, and I regret that.
But voting in Belgium is compulsory, so once you have started there is no jumping ship without a fine or a good excuse.
Foreign voter participation is clearly bound to work best at a local level, where the issues are more concrete.
That is where Switzerland demonstrates that giving foreigners a voice is good policy, one that also means teaching citizens to understand the benefits of open democracy.
The canton of Neuchatel (one of the 26 mini-states that comprise the Swiss confederation) lies alongside the French border.
Its official language is French, it has its own constitution, and it has created a highly efficient Multicultural Cohesion Service.
The Council of Europe, which for 60 years has promoted European integration through human rights and culture, includes Neuchatel among 10 “intercultural” cities that it is studying for “best practice” policies and governance in multicultural societies.
In the case of Neuchatel, this includes the canton as well as the picturesque lakeside city.
Unemployment is relatively low, despite hard times for its major industry – watch-making – and foreigners represent one-quarter of its 170,000 residents.
Much of Neuchatel’s progressive attitude toward foreign residents is attributable to one man, Thomas Facchinetti, who started a multicultural cohesion service 20 years ago and has steadily built it up.
Among his achievements is a Citizens’ Charter that is handed to every new resident to explain Swiss participatory democracy and lay out its rules.
His offices also have an anti-racism service, offer well publicized access to inexpensive French classes, and distribute booklets on topics like forced marriages and headscarves.
The fact that Facchinetti himself is the lynchpin of the canton’s open-minded views may be seen as a weakness, but it is also its strength.
Tolerance has a face – the neat smiling figure of this son of Italian immigrants, who is easily accessible to the canton’s citizens.
Partly as a result of his efforts, Neuchatel was one of the four cantons in Switzerland to vote against the ban on new minarets.
If people are to feel committed to the place where they live, they must be allowed to influence decision-making, and that influence should not depend on nationality.
In Neuchatel, many naturalized citizens, including elected local councilors, retain their foreign passports for several reasons: among European Union passport-holders, doing so allows their children to study in the EU or to work there themselves.
Among non-EU citizens, it allows them to re-settle in their parents’ or grandparents’ country if they so desire.
No two countries, regions, or cities are the same.
Geography, budgets, political systems, and the number and nature of its immigrants differ.
But where Neuchatel could serve as a model is in its hands-on attitude to helping foreigners fit in by making it easy for people to learn the local language, opening the voting booths to all, and encouraging foreigners to represent their country’s communities.
The Prion Puzzle
ZURICH – The outbreak of mad cow disease in the United Kingdom, which ultimately led to the slaughter of 3.7 million cows and severely damaged the British cattle industry, began insidiously.
In 1986, a UK cow developed an unknown brain disease.
The following year, tests revealed that the brain had been eroded by a myriad of small vacuoles, producing the sponge-like appearance that inspired the disease’s scientific name: bovine spongiform encephalopathy.
Within a few months, cases began appearing throughout the country.
A similar disease, called scrapie, was common in sheep, but had not previously been diagnosed in cows.
And a nearly identical, invariably lethal disease, kuru, had ravaged the aboriginal people in Papua New Guinea throughout the twentieth century.
Both kuru and scrapie are infectious.
Kuru was transmitted through cannibalistic rituals that were commonplace in Papua New Guinea until the 1950’s.
Similarly, in the UK and elsewhere, healthy cattle were fed meat and bone meal made from infected cattle.
The resulting epizootic (animal epidemic) affected more than 280,000 cows.
At its peak in 1992, mad cow disease was claiming nearly 1,000 head of cattle weekly.
Faced with a rapidly growing health crisis, the British authorities – equipped with little scientific understanding of the disease, and under pressure from a powerful industrial lobby – made a fatal mistake.
Because scrapie had never been definitively linked to human disease, they assumed that infected cows were also innocuous.
This assumption not only ignored the kuru tragedy; it also overlooked the hundreds of young people who had died of spongiform encephalopathy after receiving growth hormones extracted from human corpses.
This mixture of hubris, ignorance, and subservience to commercial interests reached peak toxicity in 1990, when the UK’s agriculture minister, John Gummer, televised his daughter eating a hamburger, declaring that British beef was safe.
But British beef was not safe.
In late 1995, two young people were diagnosed with Creutzfeldt-Jakob disease – a rare disease typically seen in elderly patients.
Post-mortem examinations of their brains revealed deposits of prions – the infectious agents that cause scrapie, kuru, and mad cow disease.
But these were not the prions of classic Creutzfeldt-Jakob disease.
Since then, “new variant” Creutzfeltdt-Jakob disease has claimed roughly 300 lives.
As the tragedy unfolded, however, scientists gained a greater understanding of the disease.
Prions seem to defy all conventional wisdom, surviving pressure-cooking, irradiation, and even incineration at 340°C for four hours – treatments that are routinely and reliably used to deactivate all known viruses and bacteria.
Furthermore, prions lack their own genes.
The prion gene is provided by the infected individual, in whom it resides in an innocuous state.
The infectious prion then hijacks the body’s machinery, reprogramming it into a willing executioner of prion replication.
Since the disease’s outbreak, it has been revealed that many common ailments – including Alzheimer’s disease and Parkinson’s disease – have similar properties.
While no cure has been found, some progress has been made, particularly on early detection of prions, which had been a daunting problem.
Sensitive detection of pathogens, such as HIV, typically relies on the presence of nucleic acids (DNA or RNA), which are absent in prions.
Recently, however, effective methods for amplifying prions have been developed, which could enable detection of the pathogen before it can damage its host.
Moreover, there is hope that an effective vaccination can be developed.
Introducing an innocuous version of a pathogen into the body causes the immune system to produce antibodies, which will neutralize the “wild” pathogen if it enters the body later.
A decade ago, my laboratory showed that an anti-prion antibody could significantly delay – and, in some cases, prevent – infection in mice that had been exposed to prions.
But several problems have emerged.
The host’s body produces its own version of the prion protein, and it is difficult to create a high-quality antibody against a body’s own components.
As a result, rather than trying to induce immunity, researchers must develop prefabricated anti-prion antibodies that can be delivered directly to patients.
This solution might work for related diseases like Alzheimer’s, but it has its own array of problems, including the difficulty of driving such antibodies from the injection site to the brain.
Severe side effects in animals, meanwhile, may prohibit the antibodies’ use in humans altogether.
Another possibility could be to eradicate prion diseases in livestock by removing the host’s prion gene.
The Swiss scientist Charles Weissmann demonstrated this using mice in a series of experiments two decades ago.
Using recently developed “zinc finger nuclease” technology, any given gene can be removed from an animal’s DNA.
In fact, prion-free sheep and cows have already been created.
These animals cannot host infectious prions.
While the quality of their meat remains to be assessed, they can provide a safe source of biological agents – such as therapeutic antibodies and growth factors – for use in human medicine.
The Outsourcing Bogeyman
NEW YORK – Outsourcing of services has been a persistent cause of panic and protectionism in recent years, especially in the United States since the 2004 presidential election.
Back then, the Democratic candidate, Senator John Kerry, upon hearing that digital x-rays had been outsourced from Massachusetts General Hospital in Boston for examination by radiologists in India, denounced firms that outsourced as Benedict Arnolds, the most infamous traitor in US history.
Kerry’s misstep was followed by alarm over outsourcing across the West.
If free trade is to regain the support of statesmen who now hesitate over liberalizing trade with developing countries, the myths that turn outsourcing into an epithet must be countered.
Myth 1: Outsourcing will be like a tsunami.
While even a shrewd economist like the former US Federal Reserve Board member Alan Blinder thought this, it is not likely for several reasons, both “natural” and manmade.
Consider just two.
First, it is simply not possible to outsource everything.
For example, the fact that I can call someone in Bangalore to tell me how to fix a computer problem presupposes that I can understand her instructions.
I tried this with a Dell computer and gave up after repeated attempts.
I was so desperate that I asked Michael Dell, whom I met at the World Economic Forum in Davos, for a replacement.
That is a remedy unavailable to others, of course.
So Dell has now given up relying on call centers.
Besides, many “electronic plumbers” have emerged who will come to your computer and fix the problem as you while away the hours working where your competence lies.
Second, there are manmade restrictions to outsourcing particular types of expertise: professional organizations often intervene to kill outsourcing simply by requiring credentials that only they can provide.
Thus, foreign radiologists need US certification before they are allowed to read the x-rays sent from the US.
Until recently, only two foreign firms qualified.
Myth 2: Outsourcing will be only from rich to poor.
There is a lot of two-way trade in manufactures, even within a single industry.
Economists call it “intra-industry” trade.
But when it comes to services, the popular fear is that outsourcing will go in only one direction.
This fear is baseless.
Indeed, there has been substantial growth in “reverse outsourcing,” i.e., “insourcing.”
Indian firms like Infosys and Wipro, giants in the information-technology sector, are now looking for cutting-edge services and high-grade talent as they compete for local markets such as the US.
At IQor, the hugely successful outsourcing entrepreneur Vikas Kapoor now has 12 US locations, which account for half of its 11,000 employees.
Myth 3: Outsourcing costs jobs.
A standard argument used by US Democrats against Republican business CEOs who were running for Congress last year was that they had exported US jobs.
Senator Barbara Boxer railed continually against Carly Fiorina, a former CEO of Hewlett-Packard, that she had exported 35,000 jobs.
The obvious reply should have been: “Yes, I outsourced 30,000 jobs.
But, if I had not, HP would have become uncompetitive in fiercely competitive markets, and I would have lost 100,000 jobs.”
Another “jobs fallacy” is that when a job disappears in a Western country and turns up in India, it must have been “exported” by nefarious businessmen.
But, in many cases, the job has simply become uneconomic to maintain in the West, regardless of whether or not India exists.
If it costs a US nursing home $2 per call to get someone to remind a patient to take her medicine, the job of providing such reminders will disappear.
But if Indians can make the call for $0.25, the nursing home might well sign on.
This would make its patients healthier, drug makers more profitable, and India better off, because employment increases.
In short, everyone wins from outsourcing of services.
Alas, few understand this.
The Ozone Mafia
Now that the Kyoto Protocol has been ratified, with even Russia belatedly signing on, a threat is emerging against an earlier landmark in international environmental protection – the Vienna Convention and the Montreal Protocol for defending the stratospheric ozone layer.
The threat comes from an unlikely source: organized crime.
The reason is simple.
To protect the stratospheric ozone layer, international agreements have been reached to ban the use and trade of the ozone-destroying chemicals called chlorofluorocarbons (CFC’s).
In order to replace these chemicals with others that are more benign, the equipment in which they are used – like freezers, coolers, and units for foam plastic production – must be substituted for new ones.
But it’s much cheaper, although forbidden, to use the old equipment and refill them with CFC’s when needed than to buy new machines and use the more environmentally benign but more costly alternatives.
As with any ban, a market was thus created – and with it a business opportunity for well organized and environmentally reckless criminals.
Organized crime is constantly on the lookout for such opportunities, and it continues to find them.
So it is no surprise that CFC or freon smuggling has developed without much attention, and risks jeopardizing the Vienna Convention and the Montreal Protocol.
These agreements are hailed as great successes, and annual reports summarizing official statistics are published showing that the use of CFC continues to decrease.
The content of chlorine (from decay of CFC’s) in the stratosphere has leveled off, and two years ago the ozone hole over the Antarctic was the smallest in decades (and broken up into two).
However, new reports show a thinning of the ozone layer over the Arctic, and last year’s Antarctic ozone hole was as large and deep as ever.
There is no way of telling yet whether these represent mere fluctuations in a slow recovery process or a break in the positive trend.
Is the volume of illicit CFC trading so large that it is now a factor of real importance?
As with illicit drugs, it is difficult to estimate the extent of smuggling operations.
A number of extensive catches have been made by national customs agencies, the largest in Japan, in recent years.
In most cases, the forbidden CFC’s have been labeled as permitted HFC’s (hydrogenfluorocarbons), but labels like “spray paint” and “lubricants” also have been used.
Ships and airplanes have been used for transport in this black-market trade.
The shipments caught by customs authorities mostly originate from free industrial zones, also called export-processing zones, in China, Vietnam, Thailand, and Egypt.
In most parts of the world, customs agencies are not especially focused on CFC’s, and the compounds are not easy to distinguish from HFC’s without sophisticated analytical equipment.
So it is reasonable to assume that the proportion of the total smuggled volume that is discovered is smaller than for narcotic drugs.
Complicated lines of transport using transit countries are often used.
One such line, which is presumed to be significant, goes from Europe (Spain) via Singapore or Dubai, through India to Nepal or Bangladesh and back again to the market in India.
Some features in the conventions for protecting the ozone layer constitute holes of a legal kind.
One is that industrial and developing countries march at different speeds when it comes to phasing out CFC’s.
This means that what is banned in one country is permitted elsewhere.
Another problem is that there are no restrictions on the sale of old equipment that runs only on the banned substances.
For example, freezers that require CFC’s can be freely exported from, say, Sweden, where they can no longer legally be refilled when required, to Egypt, where refilling is allowed.
The rapid increase of foam plastic production in export processing zones is thought to be based on their purchase of CFC-dependent production units from OECD countries.
So, do such practices constitute a real threat to the conventions for protecting the stratospheric ozone, or are they “only” a factor that will delay the final phase-out of CFC’s within years or a decade?
If the latter, that is bad enough, but the answer is not self-evident, and the whole question of organized crime and the illegal trade with CFC’s demands attention.
Customs officials all over the world and fighters of organized crime have a new battle – this time for the environment – on their already busy hands.
The Palestinian Struggle for Mastery in Palestine
Israel's reoccupation of Palestinian cities and towns culminates a predictable pattern.
American willingness to accept Ariel Sharon's portrayal of that reoccupation as an acceptable part of its global "war against terror"was not only surprising, but misguided and dangerous.
By helping to de-legitimize Yasir Arafat and by accepting Prime Minister Sharon's characterization of Israel's reoccupation as "self-defense," American policy threatens to weaken the moral clarity and credibility of the US in the eyes of the world.
The consequences for the Middle East and beyond could be deadly.
Eighteen months of violent Israeli-Palestinian confrontations have set new dynamics in motion.
These follow a predictable pattern, locking the two sides into an escalation that will push toward a total and final confrontation.
It now seems doubtful that these dynamics can be contained.
Secretary of State Colin Powell's April mission was doomed to failure because American policy failed to reverse, or even address, the causes of deterioration.
On the Palestinian side, the current intifada created a Young Guard that despises the Old Guard, represented by Yasir Arafat and the Palestinian Authority.
Unlike the members of the Old Guard who spent much of their lives outside the West Bank and Gaza Strip, the Young Guard is a product of domestic Palestinian society.
Not just younger, they are more educated than the old leaders, and are convinced that they know better how to deal with Israel.
While the two groups share the vision of a two-state solution to the Palestinian-Israeli conflict, the Young Guard tends to rule out any return to previous channels of negotiation.
These, they argue, served to consolidate the Old Guard's domination of Palestinian politics.
Fueled by the failure of the peace process to deliver an end to Israel's occupation, and by the Old Guard's failure to deliver good governance, the Young Guard allied themselves with radical Islamists.
Despite important ideological and political disagreements with the Islamists, the young nationalists hoped that alliance would strengthen their hand against the Old Guard and increase pressure on the Israelis.
Supported by an enraged and desperate public, this new alliance set out to achieve two goals: 1) to displace the Old Guard of the PLO, and 2) to use violence to end Israel's 35-year-old occupation of the West Bank and the Gaza Strip, using Israel's unilateral withdrawal from South Lebanon as a model.
Most Palestinians support violent attacks because they believe that only violence will end the occupation, not negotiation.
This extends to suicide bombing, an immoral and cruel act of terror.
In a widespread Palestinian view, suicide bombing creates a "balance of terror" that may, over time, neutralize Israel's superior firepower.
Suicide bombings make Israelis feel vulnerable, and comprise, Palestinians hope, a powerful incentive to end the occupation.
So the intifada produced the first big change in the balance of Palestinian political power since the peace process began a decade ago, with more and more people shifting loyalty from the nationalists to the Islamists.
Support for the Islamists, which stood in 1995 at about 15%, doubled to 30% by 2001. Support for the nationalists decreased from 55% to 30% over the same period.
With some 40% of the population uncommitted to either camp, the competition between the two forces is far from resolution.
By destroying the Palestinian Authority's civil and security infrastructure, Israel dealt a severe blow to the PA's ability to deliver services to this "up-for-grabs" population.
The Islamists will likely see further gains.
The nationalist Young Guard, which suffered a serious setback during the April reoccupation, will likely remain a powerful force in Palestinian politics - for now.
In the long run, the ability of the national movement to continue to lead will be put to the test.
On the Israeli side, the new dynamics include loss of public confidence in the peaceful intentions of the Palestinians.
So Israelis turned to a hard-line leadership.
So long as they feel threatened, Israelis are likely to choose leaders committed to a military solution to Israel's security problems.
This could lead to a long-term reoccupation of Palestinian areas.
But a long-term reoccupation of the West Bank could destroy whatever moderate elements remain in the Palestinian leadership, closing the door on further peacemaking for years to come.
That would threaten Israel's peace treaties with Egypt and Jordan, as popular anger at Israel turns against pro-American regimes in the region.
Unlike President Bush and Prime Minister Sharon, most of the world sees a clear difference between the American-led war against al-Qaida and Israel's war against the Palestinians.
The US never occupied Afghanistan, but Israel occupies Palestinian land.
It is not just Osama bin Laden's means that are condemned everywhere, but also his cause.
Unlike bin Laden, the Palestinian cause enjoys nearly universal support among Arabs and Muslims.
While America found many Arab and Muslim countries willing to support the US campaign against al-Qaida, none endorses a war that equates Palestinian violence against Israeli occupation with the terror of al-Qaida.
A successful Israeli effort to make that equation plausible would abruptly turn a legitimate global war against terror into a war against Arabs and Muslims, indeed a war against Islam, which is precisely what the Bush administration seeks to avoid.
If that happens, Sharon will have succeeded where bin Laden failed.
The Palin Charade
New York – The selection of Sarah Palin as John McCain’s running mate hit the United States like an electric storm.
To her legions of lipstick-waving fans on the right, Palin is a down-to-earth, God-fearing “hockey mom” whose moose hunting, evangelical faith, and even chaotic family life are all evidence that she is a real, typical American.
To her equally frantic detractors on the left – and increasingly in the center – she is a frightening harbinger of a theocratic America, a mafia-style executrix of state business who lies about the connection of the September 11, 2001, terrorist attacks to Iraq, mocks Barack Obama for his opposition to torturing prisoners, and defies subpoenas.
Think of her as George W. Bush II, but in designer pumps.
Both groups are reacting to genuine evidence.
Her supporters are responding to a potent set of symbols, and her detractors to an even more potent set of facts.
Palin’s symbolic appeal to a certain group of female voters is important to understand, and we must respect the rage and hunger that it reflects.
The subtext of that appeal is class.
Working-class white women in America have had their talents exploited and undervalued for as long as the nation has functioned.
While affluent white women, or women of any background who managed to get a high-quality education – America’s Hillary Clintons, Madeline Albrights, and Condoleezza Rices – broke through the glass ceiling, and even have the women’s movement to lionize them, working-class white women have watched their rise with understandable resentment.
Their more affluent peers hire women like them to do the dirty work, or else they have had to deal with stagnant minimum-wage pay in the US labor market’s “pink-collar” or service-industry ghetto.
Their ceiling is made of concrete, and it is pitched far lower over their talents and their mobility.
Above all, they have been excluded, practically and symbolically, from the country’s political discourse, and are treated regularly with condescension by politicians.
Race, too, is a factor.
While reports are surfacing that Palin told a group of African-Americans that she did not have to hire black people, working-class white women often understand their own experience in terms of racial hostility.
They perceive an underclass that they believe receives benefits denied to them and a thriving economy in the developing world that siphons off well-paying blue-collar jobs.
So, when Sarah Palin is escorted into the media limelight, she becomes the symbolic revenge fantasy of many of those silenced, exhausted factory workers and secretaries.
To see a working-class white woman be picked to serve a heartbeat away from the US president resonates powerfully with them.
Think of the appeal of films like Thelma and Louise or Working Girl, in which the leading character is a gutsy, exploited secretary who, trampled by a snooty female Ivy League boss, nonetheless manages to end up with the dream job, the dream guy, and the corner office.
Just about any woman who was not born into privilege, has small children at home, and is not a cannibal or a Satanist would elicit initial roars of approval from women in general, and surely from a group that has been silenced and trivialized for so long.
When you’ve been making the coffee forever, it’s nice to imagine leading the free world.
That said, Palin’s sinking approval ratings show that, while such women thrill to symbolic validation, they are not fools.
They have begun to notice how Palin is trotted out like a model at an auto show to be introduced to heads of state as if they are local car dealers, and how the media are allowed to take pictures but not ask questions (“That’s me with Henry Kissinger!”).
They also notice that the economy is imploding, while Iraq is calming down only because the US is paying insurgents and al-Qaeda sympathizers the equivalent of a monthly car payment per person not to kill its soldiers.
Moreover, as Palin’s political persona takes shape, it looks increasingly alarming.
The problem is not just that the McCain campaign has surrounded her with veterans of the Bush-Cheney cabal (Karl Rove’s acolytes and operatives now write her speeches and manage her every move).
It’s also that she believes that God set her legislative agenda in Alaska, and that she has failed to venture much beyond the Discovery Channel when it comes to foreign travel.
Meanwhile, the elephant in the room is the fact that dermatologists are confirming that the form of cancer for which McCain has been treated has an actuarial survival rate of two to four years for a person his age.
So, as the disturbing prospect of a long Palin presidency starts to set in, she doesn’t look so great to working-class white women anymore.
So, what should this brief Palin bubble teach us?
In becoming the poster girl for a re-branded continuation of the Bush administration, Palin is showing herself to have much in common with glossy faux-populists like Eva Peron or Denmark’s anti-immigrant leader Pia Kjærsgaard.
What we should learn – for next time and for every time to come – is that great leaders and great dreams are being overlooked in the women who prepare our food, process our Internet orders, and wipe up the spills in our hospitals.
It is these women’s voices that deserve support – not that of a scary stalking-horse for eight more years (or more) of rule by the thugs who looted America’s treasury, wrecked its economy, and sent 4,000 brave young men and women to die in a war based on lies.
The Palin Non-Factor
LONDON – Senator John McCain is a genuine American hero.
He was a brave airman, with a fine war record.
Unlike the so-called “chicken hawks” who avoided service in the Vietnam War themselves but could barely wait to send young Americans into Iraq to fight, McCain’s life is not at odds with his politics.
In the Senate, while supporting President Bush’s war of choice in Iraq, he has been prepared to stand up for his independent judgment on issues such as campaign finance reform and climate change.
So when, as a presidential candidate, McCain said that, if elected, he would seek to work with Democrats and independents, and that he would search for consensus, it was easy to believe him.
After all, this is exactly how he had behaved as a senator.
There seemed every chance that he would apply this approach to the choice of his running mate.
His friend Senator Joseph Lieberman, a former Democrat and a hawk on the Iraq war, appeared to be the most likely pick.
We know what happened.
With his campaign apparently dead in the water, McCain reached out all right – to the right-wing fundamentalists in his own party.
Governor Sarah Palin strode onto the national stage, rhetorical guns blazing.
Whatever else you say about the governor’s views, no one could call the choice of the “hockey mom” from Alaska a bold bid for consensus.
She was chosen, to borrow the commentators’ jargon, to energize the party base, which comprises hard-liners suspicious of McCain’s lack of enthusiasm for the causes that fire them up, such as creationism and a ban on abortion.
According to the McCain campaign’s calculus, a political outsider with redneck views would appeal to white working-class voters.
Moreover, a woman on his ticket might attract some of those disappointed by Senator Hillary Clinton’s loss to Senator Barack Obama in the Democratic race.
So far, the selection of Palin seems to have paid off.
Questions about her record have been sidestepped; her inexperience is lauded as a virtue; any criticism is dismissed as sexism.
Speaking as a one-time campaign manager in British politics, there seem to be three important points for the Democrats to remember.
First, Palin is not at the top of the ticket.
It is impossible to imagine her surviving a primary campaign.
She would never have withstood the searching inquiries of months of campaigning.
But no one seems disposed to contemplate her heroic lack of qualifications to sit a heartbeat away from the Oval Office.
Second, it is McCain whom the Democrats should attack.
He would be president, not the Alaskan.
It is McCain’s views on the economy and foreign policy, not Palin’s on Darwin and the wickedness of sex education, which should be the targets.
The economy is not McCain’s strong suit.
He was arguing as Wall Street went into meltdown that the American economy’s fundamentals were still strong.
McCain’s solution seems to be more of Bush’s policies – tax cuts for the rich plus promises to curb public spending.
How credible is that?
The Republicans under Bush have turned huge surpluses into terrifyingly large deficits.
The mortgage crisis and the credit crunch have led to bailouts for the banks and the nationalization of housing finance and insurance.
America needs to rein in its household and fiscal spending, so that it can cut the amount of money that it borrows and owes.
It is not easy to do this when the rich get richer – enjoying their biggest spree since the Roaring Twenties – and average household income remains stagnant for the third decade running.
Social equity is not irrelevant even in America, the land of opportunity.
When they get into the polling booth in November, will Americans vote on “culture wars” issues – sex and guns – or on the basis of whether they can afford to pay their mortgages?
As for foreign policy, it is Obama who has rightly said that America needs to switch the focus of its military operations from Iraq to Afghanistan.
His opponent originally derided what has rapidly become the conventional wisdom.
Al-Qaeda still has bases with the Taliban on the Afghanistan-Pakistan border.
A serious effort to contain them and stamp them out requires an effective campaign in Helmand Province, North and South Waziristan, and the troubled areas between the poppy fields of Afghanistan and the madrasas of Pakistan.
Finally, if America wants change, why vote for a ticket that has embraced the very attitudes that gave the Bush years their character, and exemplifies some of the reasons for its unpopularity and failures, from partisan bigotry and the assault on reason and science to the “America First” dismissal of the opinions of the rest of mankind?
If I were a Democrat, I would leave Palin to the mercies of the investigating bloggers.
The election is too important to all of us to begin and end with her.
I would get back to the central issues.
That is where the election will be lost or won.
The Pandemic That Wasn’t
PALO ALTO – Last June, the United Nations’ World Health Organization, responding to an outbreak of the H1N1 virus, or swine flu, boosted the pandemic alert to the highest level, Phase 6, meaning that a pandemic was under way – the first time in 41 years that the organization had taken that declared step.
But the outbreak appears to have ended less like the rogue wild boar that WHO bureaucrats predicted and more like a roasted pork tenderloin with apples and sage.
In fact, the WHO repeatedly violated Sherlock Holmes’ warning, “It is a capital mistake to theorize before you have all the evidence.” And the pandemic alert was doubly strange, given that ordinary seasonal flu sweeps the world annually, is invariably far more lethal than the currently circulating low-virulence H1N1, and certainly meets the WHO’s definition of a pandemic: infections over a wide geographic area and affecting a large proportion of the population.
Ironically, the appearance of the H1N1 flu during the past nine months might be thought of as a net public-health benefit, because it appears to have suppressed, or at least supplanted, the far more virulent and lethal seasonal flu strains.
During the second week of January, 3.7% of Americans tested positive for the seasonal flu, compared to 11.5% during the same week in 2009.
The official death toll worldwide from H1N1 is under 14,000, while seasonal flu kills about 36,000 on average in the United States and hundreds of thousands elsewhere.
Most flu and public-health experts consider the WHO to have been overly alarmist.
The decision in April 2009 to raise the pandemic flu threat to the penultimate level, Phase 5 (“Pandemic Imminent”), already raced far ahead of the accumulated data, so the Phase 6 declaration in June revealed the organization’s paradigm to be fundamentally flawed.
A warning system based solely on how widely a virus has spread, but that does not consider the nature and severity of the illness it causes, would classify as “pandemics” not only seasonal flu, but also the frequent but largely inconsequential outbreaks of virus-caused colds and gastroenteritis, for example.
(The WHO has never explained why these obvious examples do not meet their criteria.)
False alarms make the “pandemic under way” designation almost meaningless and diminish its usefulness.
And that, in turn, has important consequences: as Jack Fisher, a professor of surgery at the University of California, San Diego, School of Medicine, observed, “Keep crying ‘wolf,’ and WHO can expect lower than customary compliance with flu vaccine advisories next fall.”
The UN’s false alarms also have had more immediate negative effects.
According to Matthew Hingerty, the managing director of Australia’s Tourism Export Council, the country lost thousands of tourists because of the WHO’s pandemic declaration.
Egyptian public-health authorities overreacted and ordered the slaughter of all pigs in the country.
In addition to the direct economic losses, because the pigs were no longer available to consume much of the garbage produced in Cairo, the numbers of rodents rose to fearsome levels.
The publicity and resulting panic surrounding the WHO’s announcement of Phase 5 and 6 alerts – especially in the absence (until December) of widely available vaccine – also brought out fraudsters peddling all sorts of ineffective and possibly dangerous protective gear and nostrums: gloves, masks, dietary supplements, shampoo, a nasal sanitizer, and a spray that supposedly coats the hands with a layer of anti-microbial “ionic silver.”
For all these reasons, the declaration of a pandemic must not be a prediction but rather a kind of real-time snapshot.
The WHO’s performance has been widely criticized: the Parliamentary Assembly of the Council of Europe, for example, said on January 12 that it plans to debate “false pandemics, a threat to health” later this month.
And yet WHO officials continue to defend their actions.
In a January 14 conference call with reporters, Keiji Fukuda, the special adviser to the WHO’s director general for pandemic flu, argued that the organization did not overplay the dangers but “prepared for the worst and hoped for the best.”
The WHO’s dubious decisions demonstrate that its officials are either too rigid or incompetent (or both) to make necessary adjustments to the pandemic warning system – which is what we have come to expect from an organization that is scientifically challenged, self-important, and unaccountable.
It may be able to perform and report worldwide surveillance – i.e., count numbers of cases and fatalities – but its policy role should be drastically reduced.
The Panthers of Identity Politics
LONDON – I was in Jordan, that beautiful oasis of calm and moderation in a difficult and dangerous neighborhood, when I first heard the news about the murder of two British soldiers and a Catholic policeman by dissident republican terrorists in Northern Ireland.
We had looked out across what Christians call the Holy Land from the Jordanian hills.
What struck me, thinking back to the days I once spent in Northern Ireland, was how both there and here the crucible of so much struggle, bitterness, and bloodshed is very small. There is an intimacy about the geography of Northern Ireland, Gaza, and the West Bank that makes the violence seem all the more inexplicable and obscene.
Is this violence made inevitable by the clash of cultures, religions, and ethnicities?
Is it programmed into DNA by history, language, and our different ways of meeting our spiritual yearnings?
It was my good fortune to be reading in Jordan a book called On Identity by Amin Maalouf.
It is a brilliant assault on what the author, who is Lebanese, French, Arab and Christian, calls “the panthers” of identity politics.
Maalouf hopes that one day he can call all of the Middle East his homeland, and that his grandson will find his book a strange memento of a time when these arguments had to be put forward.
What is true of identity politics in the Middle East, and in shaping America’s and Europe’s relationship with the Islamic world, is equally true about Northern Ireland.
Or at least it was as true.
I spent part of my life working on the problems of terrorism in Northern Ireland, first as a minister in the early 1980’s and, later, chairing the commission that drew up reform for policing and security in the Province as part of the Belfast Peace Agreement.
For centuries, the Protestant and Catholic tribes had intermittently clashed, and over a period of three decades – a time euphemistically known as “the Troubles” – terrorism had claimed more than 3,000 lives and tens of thousands of injuries.
This was an identity clash that had nothing to do with the essential messages of Christianity.
But it was bleakly horrific.
I recall that the first time I visited a hospital in Belfast, the young nurses in the Accident and Emergency Unit had to describe patiently to me the difference between a Protestant and a Catholic knee-capping. This was not a matter of theology or even liturgy.
But the Catholics used a shotgun for this brutal punishment, and the Protestants an electric drill.
“That is all for the history books,” we thought, until the recent murders.
The Belfast peace agreement of 1998 has secured more than 10 years of peace.
At its heart lay a simple proposition: the republicans, who called for and bombed for a United Ireland – hammering together the predominantly Protestant North and the overwhelmingly Catholic South – accepted that constitutional change could come only through the ballot box.
We talked the terrorist IRA and their political wing into the political process and the sharing of power.
In return, the Protestant majority in the north accepted that republicans should not have to accept the symbols of a state to which they felt no loyalty.
Moreover, the police and security forces were to be reorganized so that they were seen to represent the whole community, not primarily its Protestant majority.
Interestingly, the issue of police reform was the only one that the political parties could not resolve by themselves.
So I was called in, together with a group of experts on policing, to sort it out.
The result of that deal has been years of peace.
It is not perfect.
Some of the compromises that democrats must occasionally make with one-time terrorists are difficult to stomach.
But the outcome has been the return of normality to the one and a half million people of Northern Ireland.
I do not take an apocalyptic view of what recently happened – tragic though it is for the bereaved families. It is an anarchic spasm of violence by a tiny minority.
In a way, it underlines the importance of what has been achieved in Northern Ireland.
First, virtually the whole of Ireland is united against what has happened.
Second, the violence has strengthened the political process, with one-time IRA leaders standing shoulder to shoulder with the police to condemn the murders.
Third, the reformed police service itself has been widely seen as the protector of the whole community, and young Catholics have been encouraged to join it by their priests and bishops.
It is now more, not less, able to deal with terrorism.
So did I think of lessons to be learned in the Middle East as I drove from one end of Jordan to the other?
Perhaps there are two.
Obviously, there will be no peace in Palestine unless we start to talk to Hamas – a point that President Barack Obama’s special envoy to the region, Senator George Mitchell, will surely appreciate after his experiences as a successful mediator in Northern Ireland.
And, second, we should abandon outdated and wrong-headed notions of identity.
That is perhaps an easy point to recognize for this author, the Catholic grandson of Irish potato famine emigrants who, nevertheless, became a British minister and Britain’s last colonial governor.
The Paracetamol Dilemma
WELLINGTON – Paracetamol (known as acetaminophen in the United States) is one of the world’s most commonly used drugs.
It is the preferred medication for relieving fever and pain because of its safety profile. However, 10 years ago, a hypothesis was proposed that the use of paracetamol may increase the risk of developing asthma.  It was suggested that a change from the use of aspirin to paracetamol among children in the US during the 1980’s may have contributed to the increasing prevalence of childhood asthma noted during this period.
Substitution of paracetamol for aspirin, researchers proposed, may have led to an enhanced allergic immune response, thereby increasing susceptibility to asthma and other allergic disorders.
Since then, a number of epidemiological studies have reported an association between asthma and exposure to paracetamol in the womb, in childhood, and in adulthood.
These studies led to the suggestion that the use of paracetamol may represent an important risk factor in the development of asthma.
The latest evidence to support this hypothesis comes from a large international epidemiological study of childhood asthma that was recently published in the medical journal The Lancet .
This analysis, from the International Study of Asthma and Allergies in Childhood (ISAAC), involved more than 200,000 six- and seven-year-old children from 73 centers in 31 countries.
The children’s parents or guardians completed written questionnaires about current symptoms of asthma, rhinitis (hayfever), and eczema, and about several risk factors, including use of paracetamol for fever in the child’s first year of life and frequency of paracetamol use in the past 12 months.
The study identified that the reported use of paracetamol for fever in the first year of life was associated with symptoms of asthma in the six- and seven-year-old children.
The association was present in all major regions of the world, with an estimated 46% increased risk following adjustment for other risk factors.
A dose-dependent association between asthma symptoms at 6-7 years and paracetamol use in the previous 12 months was also observed.
Similar associations were observed between the use of paracetamol and the risk of severe asthma symptoms.
The proportion of asthma cases that could be attributed to exposure to paracetamol was calculated to be between 22% and 38%.
Paracetamol use both in the first year of life and in children aged 6-7 was also associated with an increased risk of symptoms of rhinitis and eczema.
This suggests that the potential effect of paracetamol is not restricted to the airways and may affect a number of organ systems.
Identifying the potential mechanisms that might underlie the association between paracetamol and asthma (and other allergic disorders) was not a part of this study.
But other researchers have proposed a number of plausible mechanisms, primarily related to paracetamol’s negative effect on the body’s ability to withstand oxidant stress and its potential enhancement of the allergic immune response.
The authors emphasised that causality could not be established from a retrospective study of this design due to the numerous potential biases that may confound the association. For example, it is known that viral respiratory tract infections in infancy such as respiratory syncytial virus (RSV) are associated with an increased risk of asthma in later childhood and that paracetamol use for such episodes could have caused confounding in the study.
The study has contributed to the debate as to whether it is beneficial to treat fever in children, an issue comprehensively reviewed by Fiona Russell and colleagues in the Bulletin of the World Health Organization.
They propose that the available scientific evidence suggests that fever is a universal, ancient, and usually beneficial response to infection, and that its suppression under most circumstances has few if any demonstrable benefits.
On the contrary, they suggest that suppressing fever may occasionally produce harmful effects, and conclude that widespread use of drugs to reduce fever should not be encouraged.
They recommend that in children their use should be restricted to situations of high fever, obvious discomfort, or conditions known to be painful.
What is agreed is the need for randomized controlled trials of the long-term effects of repeated use of paracetamol in children.
Only then will it be possible to develop evidence-based guidelines for its recommended use.
Pending the results of such research, paracetamol remains the preferred drug to relieve pain and fever in childhood, to be used in accordance with WHO guidelines, which recommend that it should be reserved for children with a high fever (38.5Co or above).
The use of aspirin in young children is contraindicated, owing to the risk of Reye’s syndrome, a rare but serious complication.
Paracetamol also remains the preferred drug to relieve pain or fever in children or adults with asthma, because aspirin or other non-steroidal anti-inflammatory drugs may provoke attacks of asthma in susceptible people with this condition.
The Paranoid Style in Russian Politics
An old saying in politics in Moscow is that relations between the United States and Russia are always better when a Republican rules in the White House. We are statesmen, and the Republicans are statesmen.
Because we both believe in power, it is easy for the two of us to understand each other.
The problem with this saying is the paranoid mindset behind it, for it implies that the nature of Russian-US relations has not changed fundamentally since the Cold War’s end; that the animosities that exist between the two countries are those of two permanently implacable geopolitical opponents.
Russians, it seems, can only feel good about themselves if they are contesting the world’s great power head to head.
Indeed, Russian President Vladimir Putin considers the Soviet Union’s collapse “the largest geopolitical catastrophe of the twentieth century.”
As a result of this mindset, key elements in the Russian elite have tried mightily – and with some success, especially in recent years – to bring about a deterioration in Russian-US relations.
The Kremlin appears to be seeking systematically to obstruct the US, even when obstruction does not seem to be in Russia’s national interest.
Thus, Russia sells high-technology weapons, including bombers, submarines, and perhaps an aircraft carrier, to China, which not only shares the world’s longest border with Russia, but also disputes parts of that border.
Russia’s assistance to Iran in realizing its nuclear ambitions also falls into the category of self-destructive folly.
Not only is Russia building a civilian nuclear reactor in Iran, thereby helping to advance Iranian knowledge of the nuclear process; it is also reluctant to support efforts by the United Nations Security Council to press Iran not to develop nuclear weapons.
Diplomatic obstruction is not the only means Russian elites use to foster antagonism with the US.
They also seek to inflame domestic public opinion.
To maintain their influence, it seems, they believe that they need to create an image of America as Russia’s implacable enemy, which, by extending NATO membership to ex-communist countries, is bringing an existential threat right to the country’s doorstep.
Of course, this demonization is nothing like what we saw during the days of the USSR.
Nevertheless, Putin still considers it necessary to pose in front of television cameras every few months to report that Russian scientists have developed some new missile that can penetrate any anti-ballistic missile system that the US may erect.
Why Putin’s advisors and public-relations managers encourage him to make these banal triumphalist announcements is difficult to fathom unless one comprehends the sense of grievance that almost all Russians feel at the loss of Great Power status.
That trauma burns even deeper among Russia’s rulers, where it has generated a powerful and persistent psychological complex.
For them, America and the West remain the ultimate enemy.
Descartes famously said, “I think, therefore I am.” Russia’s rulers appear to live by the credo, “I resist America, therefore I am great.”
Consider the words of Vitaly Tretyakov, the editor of the weekly Moscow News , on the recent US elections.
According to Tretyakov, “the coming to power of a Democrat as president in America is incomparably worse for us than the savage imperialism of today’s Republican administration.”
Whereas “the Republicans’ actions are not aimed at us,” but instead “at Islamic terrorists and rogue states,” under a Democratic president, Russia would likely “become a prime focus of antagonism, due to our authoritarianism, our lack of democracy, stifling of freedom, and violation of human rights.”
Thus, for Tretyakov, “bad Bush and his Republicans are better for us than the very bad Democrats.”
Tretyakov is hardly alone.
On the contrary, his morbid logic is a perfect reflection of the paranoid vision that has taken hold in the Kremlin.
But what if these people get their wishes, and NATO collapses and Islamists triumph?
Who then will stop their advance towards Russia’s southern borders from Afghanistan and Central Asia?
The problem with diplomatic paranoia is not that someone is after you, but that you are unable to tell the difference between a real enemy and an imagined one.
The Party is Over
MUNICH – With the United States teetering into recession, the global economic boom has ended.
The boom was unusually long and persistent, with four years of roughly 5% growth – a period of sustained economic dynamism not seen since around 1970.
The clearest sign that the boom is ending is the IMF’s forecast of 1.5% growth for the US in 2008.
That may not sound like a recession, but the Fund’s marginally positive projection primarily reflects the growth overhang from 2007, with hardly any new contribution in 2008.
It is compatible with three consecutive quarters of zero growth in 2008.
Many argue that a US recession will no longer affect the world because China has supplanted America as an engine of the global economy.
Wrong. Although China is growing fast, its economic power remains tiny.
While the US contributes 28% to world GDP, China accounts for only 5%.
The whole of Asia, from Turkey to China, contributes 24%, less than the US alone.
At some stage, the world may no longer catch a cold when the US sneezes, but that is far from being true now.
Twenty-one percent of China’s exports and 23% of the EU’s exports to non-member countries go to the US.
Thus, the world cannot help but be pulled down by a US slump.
The most recent CESifo World Economic Survey (WES) from 90 countries confirms this.
Assessments of the current economic situation and expectations for the next six months have worsened everywhere.
In both western and eastern Europe, the index sank more than in Asia or Latin America.
The decline in the WES indicator during the last two quarters was the sharpest since 2001, when the stock market bubble burst.
In the US, the WES indicator is now below the level of September 11, 2001 and so is the Michigan index of consumer confidence.
For many years, the US has lived beyond its means: a household saving rate close to zero and investment financed solely with foreign funds.
The US current account deficit, which is identical to net capital imports, grew steadily to an annual $811 billion in 2006, or 6% of GDP – by far the largest since the Great Depression.
Year after year, the US managed to sell its assets abroad and enjoy the high life at home.
No longer.
The world has caught on.
Banks everywhere are learning the hard way that the debt with which the US financed its consumption boom will not necessarily be repaid.
The mortgage-backed securities that US banks succeeded in selling to the world are not comparable to European assets with similar names.
In Europe, particularly Germany, a mortgage-backed security ( Pfandbrief ) is an ultra-safe asset, as normally banks finance no more than 60% of a house’s value.
By contrast, such US securities are like a lottery ticket.
US banks finance up to 100% of a house’s value, sometimes even more, and the sub-prime market even includes loans to people without jobs and income.
Many European banks may not have understood this, yet they still shied away from revealing these dubious investments on their balance sheets. Instead, they placed them in conduits based in low-tax countries.
Those conduits are now showing gigantic losses that have to be covered by the parent banks, some of which are being driven to the brink of bankruptcy.
This spring will show the necessary write-offs in the annual balance sheets, but the full truth will not become known before the 2008 balance sheets are published in the spring of 2009.
As American assets have lost their attractiveness, their prices have dropped. This has meant either a decline in asset prices quoted in dollars or in dollars quoted in other currencies.
Indeed, adjusted for inflation, the dollar is now nearly as low against the euro as it was against the deutschmark in 1992, when German unification resulted in the breakdown of the European currency system.
The prices of US homes are also declining at an accelerating rate, in many areas by more than 10% per year.
The prices of traded mortgage-backed securities have followed house prices down.
Only US stock market prices have remained relatively stable.
But it is only a matter of time until they fall, too.
After all, the Standard ampamp;
Poor’s US price-earnings ratio is still above its long-term average – 26.84 in 2007, compared to its long-term average since 1881 of 16.31.
This asset meltdown is the reason for the likely recession.
First, consumers, faced with tighter credit and falling house values, will need to cut spending, slowing the US economy and affecting all countries via world trade.
Second, with banks losing substantial amounts of equity capital – estimates now reach $300 billion and more – the need to maintain minimum equity-debt ratios will force them to curtail business lending, hindering investment demand.
True, the US Federal Reserve has tried to prevent a recession by cutting its interest rates.
But the Fed cannot endow the banks with new equity capital and prevent a credit crunch.
More promising is the $150 billion tax cut that the US Congress recently enacted.
Equivalent to 1% of US GDP, it is large by all accounts.
Whether it is enough to compensate homeowners for the wealth losses resulting from declining house prices and to prevent the impending recession remains to be seen.
But, whatever happens, the party is over.
The Past in China\u0027s Present
What is a reasonable view of China's recent history?
To put it crudely: does it matter that the Chinese Communist Party killed millions upon millions people, desecrated the environment and deeply wounded China's traditional culture?
Chinese intellectuals tend to avoid the issue, shrugging it off as irrelevant and anyway too unpleasant to contemplate.
We need to look ahead and not back, they say.
Things are finally moving in the right direction and let's not, please, do anything that may upset that hopeful movement.
I don't think it is that simple.
The party in power in China today is the same as the one that did so much harm to China and to millions of Chinese.
It no longer practices the policies that led to multiple disasters.
But it has not formally reneged on its core beliefs or canonical texts, and the man responsible for more deaths than most people in history is still officially revered (though it is nowadays admitted that he did in fact commit a few "mistakes").
The party's leadership technique, a form of Leninism, remains basically unchanged.
There are millions of people in China today whose lives were devastated by the Communist regime.
If you include parents, children and relations of the prime victims, you probably get a hundred million or more.
It is reasonable to believe that they are angry, feel humiliated or wronged, or all of the above.
A lot of people feeling this way is not good for any society.
To say, as surprisingly often happens, at least outside China, that this may be an issue in the Baltics and the Balkans but not in China because "the Chinese" somehow do not feel such things, seems to me, frankly, to be racist.
No nation that so energetically suppresses so many things about its recent past, which everyone knows to be true, can be a great nation.
Such actions demand that a government habituate its people to a level of hypocrisy that will eventually find its way into other aspects of life.
Nor will China attain that genuine respect from the outside world that its leaders and its people (on that score, at least, there seems to be agreement) so desperately crave, until a genuine and open reassessment of the past takes place.
Not until then can China be truly at peace with itself and with the world.
While much of the communist party's view of history is now discredited, it is also true that competing views of the past are not allowed.
So the past continues to fester.
Some say that reassessing the past would be too dangerous because in China so many people did so many appalling things to so many others.
The place would explode if the truth came out about what actually happened in villages during land reform and the various stages of collectivization during and after the revolution; or about who persecuted whom during the "anti-rightist campaign" in 1957; or about how many millions died during the great famine induced by the disastrous policies of the "great leap forward" a few years later; or who denounced whom in the universities and residence committees during the "cultural revolution" of the late sixties.
Reassessing the past is certainly difficult and doubtless painful.
No country's history can be written in black and white.
But in the long run China cannot avoid this reckoning.
It finally happened even in the USSR, where - to take but one example - disclosure of the secret protocols of the Molotov/Ribbentrop pact was both a result of and a further catalyst of democratization in the late 1980's.
Such a process has now started in Taiwan.
Compared to China, it must be said to have started even in Japan.
What reason is there to believe that China might forever keep itself exempt?
One may well despair about getting these points across in China, but as outsiders we must insist on not betraying ourselves - at least.
In dealing with official China it is often necessary to "sup with the devil", yes, but we need not also flatter him and pretend that we do not know his past.
The Past is Now
In the debate over what went wrong with Argentina, too much analysis has focused on the country's exchange rate policy or the mistakes the IMF may have made; too little attention has been paid to the social and political factors that contributed to the country's demise.
Argentina is unique among the world's emerging economies because its problem is not underdevelopment, but arrested development.
Seventy years ago, it was one of the world's richest countries.
Over time, however, political instability and misguided economic policies have left it lagging behind its former peers.
Despite that, until recently, literacy levels were high by Latin American standards and there was a broad middle class.
The social welfare state never reached par with its European counterpart, but life was reasonably good on the pampas.
Democracy was restored in 1983, but decades of economic mismanagement began catching up to the country with a vengeance.
The troubles were compounded by the failure of the first post-dictatorship government, headed by Raul Alfonsin, to adapt to the emerging new global economy.
Shortly after taking office, the next President, Carlos Menem, reversed half a century of economic and foreign policy.
The country was opened to foreign trade and investment and state-owned companies were privatized.
To whip hyperinflation, the peso was pegged one-to-one with the dollar, and a once standoffish relationship with the United States became, in the words of the foreign minister at the time, "carnal."
While the money flowed and the economy boomed with a stable currency, everybody went along for the ride.
But distaste for Menem's economic "model" and his autocratic, corruption-tainted ways ran deep.
When a new center-left government took office in the midst of a recession in 1999, there was hope it would correct the excesses of the Menem years.
There was little effort, however, to engage in the needed institution building or to weed out corruption.
As the recession deepened and unemployment grew, blame fell increasingly on the "model," though questioning the wisdom of its central feature, the dollar peg, was taboo.
Nor could anyone articulate an alternative that didn't sound like a return to the statist, protectionist policies of the past.
The public's reaction was thus contradictory.
Despite the growing disenchantment with the model, people were still more afraid of what would replace it.
The increasingly unpopular President De la Rua's stuck to his austerity program, while Argentines stopped spending and investing.
Then they lost confidence in the banking system and rushed to take their money out.
The end result was De la Rua's forced resignation and today's economic chaos.
Many developing countries have grown disenchanted with the free market model in recent years.
But it is difficult to explain why Argentina, a country that a generation ago had more in common with Australia than Peru, has been unable to make the transition to modernity.
One factor is the still prevailing myth that Argentina is a rich country, or would be, if it weren't for a cabal of corrupt politicians, greedy local businessmen, and international financiers who have robbed the place blind.
There is certainly some truth in that, but what many Argentines fail to realize is that a country's wealth is no longer measured by its endowment of natural resources but by the strength of its institutions, the quality of its human resources, and its productivity.
Oblivious to this, all the major political forces in Argentina are still populist, more intent on figuring out how to distribute the country's fictitious wealth than on how to create it.
Echoing the corporatist, nationalistic rhetoric of Juan Peron, his party's founder, the new President, Eduardo Duhalde has promised to implement a new "economic model" founded on an alliance between the government and the domestic manufacturers and agricultural producers.
That kind of nationalistic talk strikes a chord and sends a collective shiver down the Argentine spine.
But the Argentines are as schizophrenic in their attitude toward nationalism as in their attitude to modernity in general - not for nothing does Argentina have, per capita, the world's highest number of psychoanalysts.
Nationalism is widespread, but its roots are shallow.
Anti-US sentiment is common, but the only currency people trust is the U.S. dollar.
The Argentine's contempt for his own country is unsurpassed anywhere in the world.
Indeed, thousands of Argentines reacted to the crisis by lining up at the embassies of North American and European countries in the hopes of obtaining a visa that would allow them to leave.
Another factor in Argentina's inability to reform can be traced back to the Dirty War of the last military dictatorship.
Most of today's politicians, intellectuals, and other professionals over the age of 40 were the victims of that unequal conflict.
As the economic model began taking shape a decade ago, they saw many of the same people who had sided with the military in the 1970s turn into some of the biggest beneficiaries of the new economy.
Had Argentina managed to get through the ideologically charged 60s and 70s relatively unscathed, the mostly educated opponents of the ``model'' would have probably mellowed with age.
Like their counterparts in the north, they would still be socially committed, but mindful of their stock options, as they bored their children with stories of the "I was at Woodstock" variety.
But the murderous events of the past have left scars that a brief, unsustainable lapse of prosperity was unable to make disappear.
As a consequence, much of the political elites could never be won to back the impersonal market, which made no distinction between them and their old enemies.
The question now - one that few are willing to ask openly - is: will the downward economic spiral reopen the wounds of the past - and renew conflicts that are unbearable to even think about?
The Path to Financial Re-Regulation
BRUSSELS – Today, some people are saying that the storm of the financial crisis is subsiding.
I am not so sure.
Interbank lending rates are slowly coming down, but they are still far higher than they should be, share prices continue to be volatile, and conditions in global markets remain fragile.
More worryingly, we are seeing the effects on the real economy across Europe, in the United States, and now further afield.
GDP is contracting.
Industrial production is falling at a record-high pace.
So where do we go from here?
The answer is that we have to rebuild trust.
That is the core challenge for Europe, the European Commission, global leaders, and the financial services industry over the next five years.
It will not be easy.
We need healthy financial markets, without which we will not recover.
We need to ensure transparency and adequate risk management, measures on which are part of my proposal on capital requirements.
We need adequate oversight and crisis management, which is why I am submitting a paper on early intervention and look forward to the analysis of the High Level Group of experts working under Jacques de Larosière, which is due imminently.
Finally, we need international cooperation in bad and good times alike.
We need reform of the international financial institutions and adequate monitoring and surveillance mechanisms.
The current European and global frameworks for accounting standards and capital requirements, for example, have exacerbated turmoil in the markets.
The rules, frankly, are too pro-cyclical.
When market liquidity becomes tight, as it is currently, sales decisions and valuations based on mark-to-market accounting reinforce the downward spiral by causing further forced sell-offs, which amplifies the decline in mark-to-market prices.
That is why I recently proposed a measure to provide firms with more flexibility on mark-to-market requirements and to facilitate asset transfer from the trading book to the banking book.
Dynamic provisioning has benefited many banks in the past.
In the current turmoil, it has served Spanish banks particularly well, and I would like to see a return to it more broadly.
A system that requires banks to accumulate more substantial buffers in good times so that they can let them run down in bad times makes sense both from a micro viewpoint and from a macro viewpoint.
It restrains excessive credit expansion during booms, while reducing the risk of bank failure or a much diminished capital base in recessions, thereby enabling bank lending to kick-start a sustainable recovery.
Ideally, we should get international agreement on such a revised regime, and I will be pushing for it.
This issue aside, I have never been persuaded that capital requirements on trading books should be materially lower than for those on banking books.
When liquidity dries up, trading becomes impossible without a very sharp discount.
To be sure, the probability of default might be lower on a trading book because of the shorter time that the assets are held.
But the scale of total capital erosion in the event of default is the same, regardless of whether the asset has been held for a single day on the trading book or an entire decade on the banking book.
Much tougher capital requirements for trading-book exposures are therefore needed and will be brought forward as soon as possible.
As to value-at-risk models, we now have inconvertible evidence they are very useful when they don’t matter and totally useless when they do matter.
I am convinced that we need an overall cap on leverage on banks’ balance sheets, regardless of risk asset weightings or value at risk measurements.
The fact that equity-to-asset ratios are currently averaging out at about 3% tells you everything that you need to know about the inadequacy of the current pro-cyclical capital requirement framework.
In the current climate, it is impossible to measure the valuation of many financial assets to an accuracy of 3%, and the excessive leverage that has been a feature of many banks’ balance sheets through this crisis needs to be put right – and kept right for the future.
Again, this must be a feature of further revisions to the capital requirement framework for banks.
We need to strike a balance between regulation to correct the failings that we have witnessed and the need to preserve dynamic and innovative banks and markets.
What we do not need are forests of reports going to supervisors who appear to devote ample resources to ensuring they arrive on time but fewer on interpreting their content and drawing the relevant conclusions.
Nor can we afford to become captives of those with the best-paid and most persuasive lobbyists.
After all, it was many of those same lobbyists who in the past managed to convince legislators to insert clauses and provisions that contributed so much to the lax standards that created the systemic risks for which taxpayers are now being forced to pay.
The PC Turns 25
In August 1981, IBM introduced the 5150 personal computer.
It was not really the first personal computer, but it turned out to be “The Personal Computer,” and it revolutionized not just business life, but also the way people thought about the world.
The 1981 PC was a break with IBM’s previous business model, according to which it did not sell computers, but leased them.
With the 5150, IBM moved into mass production of a standardized commodity using components produced by other companies. “Big Blue” (as IBM is known) allowed other companies (notably the infant Microsoft) to develop its software.
No good deed goes unpunished: by making the PC, IBM practically destroyed itself as a company.
Its innovation gave rise to a huge number of new and dynamic companies, forcing IBM to reinvent itself completely in order to compete with them – just one example of the socially transformative effects of the PC.
Before 1981, visionaries who thought about the impact of technology on society believed that the computer would allow a centralization of knowledge and power.
This was the world of George Orwell’s Big Brother, the extrapolation of the twentieth century’s experience of totalitarianism. Powerful computers led to potent states and powerful and centrally directed business corporations.
The PC seemed at first to promise a restoration of the balance in favor of the individual.
Computing became decentralized, and the new flexibility produced a sense that control was moving away from big agglomerations of power – whether governments or companies.
It is not surprising that the triumph of the PC seemed to be accompanied by a revival of the nineteenth-century vision of classical liberalism and individualism.
The idea was that an individual could buy a computer and the software needed for a specific (and increasingly complicated) purpose, and immediately generate a productive result.
Indeed, within a few years, individuals would possess in a small machine as much computing power as the mainframe IBM 360’s that had revolutionized centralized computing in the 1960’s.
But this initial triumph of the PC (and very substantial sales in the 1980’s) did not immediately fulfill all the initial hopes for individual empowerment and social transformation.
It did not seem to produce many efficiency gains, despite enormous investments in information technology.
Immense amounts of time were wasted in enterprises by informal requests for assistance, forcing knowledgeable workers to become computer gurus in order to aid their colleagues.
The initial disappointment about electronic productivity was thus a vivid demonstration of the limits of classical individualism.
Only with inter-connection in the 1990’s, above all through the Internet, did the PC realize its potential.
Suddenly, economists (especially in the United States) began to measure substantial productivity gains.
New forms of activity – Internet auctions, Internet encyclopedias, Internet chat rooms –reproduced over a much wider area the interactions of individuals.
Interlinked PC’s really created a sense of a vibrant social market.
Individuals could realize themselves, as in the old nineteenth-century model, but only to the extent that they interacted with as many other people as possible.
It was these interactions, rather than the individual on his or her own, that created value and set in motion a dynamic process.
The potential was alluring, but also terrifying.
The linking of PC’s produced scares about the potential dangers of the new world.
People were afraid of malevolent computer viruses that would sweep the world and destroy information and programs in the space of a few hours.
There was widespread fear that dependence on computers would produce a millennial catastrophe, as hospitals, airplanes, power grids, and communications would all grind to a halt when 1999 became 2000.
These traumas required responses very different from previous technological changes.
Government regulation was incapable of dealing with the issues involved, although it was certainly helpful to devise ways of making destructive hackers criminally responsible.
Nor would innovation by one company help.
A solution required generally collaborative efforts – of a sort that corresponded to an ancient vision of civic republicanism rather than the modern ideas of centralized power or isolated and autonomous individuals.
Some observers believe that this interconnectivity has now, after a quarter-century, made the PC obsolete.
There are more specialized applications of computing and information technology in smart machines and mobile telephones, whose defining characteristic is that they communicate with each other.
But the alleged obsolescence of the PC is actually a sign of how basic it has become to a new vision of society.
We need to celebrate, advertise, and propagandize new innovations only when their success is questionable, before they have become widely accepted.
In the eighteenth century, cheap and washable cotton undergarments produced a revolution in hygiene, but soon this had become so commonplace that the cotton revolution no longer generated any excitement.
The PC has become the modern equivalent of cotton: so basic has it become to our lives that, despite the fact that around 200 million PC’s are sold each year, it now simply generates an electronic yawn.
But, like the cotton revolution, the true measure of the social and political transformations wrought by the PC will become clear only after a much longer time.
The Peace Process and the Arab Spring
DENVER – President Barack Obama’s speech on the ongoing popular uprisings in the Middle East, followed by Israeli Prime Minister Binyamin Netanyahu’s recent visit to Washington, was intended to kick off a renewed effort to revive the Israeli-Palestinian peace process.
Things are not turning out as planned.
Instead, Netanyahu took the opportunity of Obama’s address to emphasize his own well-documented opposition to a two-state solution based on a return to the pre-1967 borders.
He chose not to address either the issue of using those borders as a starting point for negotiations, or Obama’s idea of land swaps (a very common element of international peace negotiations) as the means to get from that starting point to the end game.
Netanyahu’s response to Obama’s initiative signaled what has been apparent for some time: the complex regional process known as the Arab Spring, and the eve of a US presidential election year, are difficult circumstances in which to try to re-start the peace process.
As Netanyahu’s statements suggested, the Israelis have some serious concerns: if the basic equation remains after all “land for peace,” just who will their interlocutors be after the dust has settled in the Arab world?
This troubled moment is an appropriate occasion to ask some fundamental questions about the peace effort itself, a process whose length in years is beginning to span the lifetimes of some of the people engaged in it.
The elements of an eventual settlement have been known for years: the creation of a viable Palestinian state – a goal endorsed by the last two US presidents – together with secure borders for Israel, some arrangement on Jerusalem, and an economic package.
If these components were boxed and sold as a parlor game, those playing it would not find creating Middle East peace especially challenging.
Yet, for decades, neither the parties nor any of the many peace mediators have been able to claim the prize.
Now that a raucous regional situation is being joined to a raucous American election season (where no issue is excluded from the political arena), the task of assembling these components will be even more difficult.
It is too early to assess the historical effect of the Arab Spring, but if there is one conclusion that can be drawn today, it is that Israel and its Palestinian neighbors had little to do with it.
For Americans (and others) who believe that the Arab world thinks about nothing but the Palestinian cause, events this spring in North Africa, the Arabian Peninsula, and even the Levant should have convinced them otherwise.
In the months ahead, we can expect the region’s countries to remain focused on issues of governance and capacity building, human rights, and how to create economies that respond to their restive citizens’ demands for a better life. New Arab leaders will struggle mightily with the public’s rising expectations, and their willingness to get behind a peace process will take a backseat to that struggle.
Thus, an argument could be made that during this delicate time of transition, and in the complete absence of any indication of progress, the peace process might well benefit – at least for the time being – from stalemate, if not benign neglect.
When nothing is moving in the right direction, the most appropriate step might be to press the pause button.
Here, everyone needs to tread with care.
There has been considerable discussion about how regional developments could eventually affect the peace process.
For example, any leadership in Egypt must deal with more democratic internal structures (such as parliamentary committees) in the future.
But the absence of a peace process could also eventually influence internal developments in Middle East countries undergoing reform.
We should not ignore how the absence of a peace process could ultimately erode the fragile (and by no means universal) gains in the rest of the Arab world.
If the peace process does not exist, the resulting vacuum might tempt some in the Arab world to deal with the problem of rising economic expectations – and, alas, dashed political expectations – through old-fashioned anti-Israel demagoguery.
One of the most hopeful and refreshing aspects of the Arab Spring has been the retreat of Arab radicalism in the face of real people anxious to address real problems.
But the absence of a peace process could encourage its return.
So policymakers are facing difficult challenges.
It is critical to respond to the Arab Spring with assistance that is commensurate to the movement’s historical possibilities.
The Obama administration’s efforts in Egypt, as well as the G-8’s proposals for what needs to be done for the region as a whole, signals that international leaders understand that this is a defining moment.
But this recognition won’t be enough.
World leaders must help the battered peace process pick itself up from the canvas, clear its head, and fight on.
The People Versus Putin
I helped select Vladimir Putin to succeed Russia’s first democratically elected President, Boris Yeltsin.
Because KGB/Mafia structures now rule Russia and manipulate the judicial system, it is assumed that Yeltsin wanted to handpick his successor in order to avoid future prosecution.
But we who chose Putin were charged with finding someone to continue Yeltsin’s reforms, not shield him and his family.
Indeed, Yeltsin was fearless, and sought not his personal survival, but the survival of the democratic idea that he introduced to Russia.
Yet that idea is now under threat because of the successor we chose.
I don’t deny my responsibility for supporting Putin.
We weren’t close friends, but he and I worked together in critical situations, and I never doubted his sincerity.
Putin acts according to his convictions.
The problem is that his convictions – including his belief that Russia can prosper only if it is ruled by a single source of power – are wrong.
This gross error is leading Russia to political ruin.
Of course, no one holds high office without making mistakes, even fundamental ones, and this is especially true in tumultuous periods.
Yeltsin was no exception, but he recognized his errors.
When he retired on New Year’s Eve 1999, for example, he asked forgiveness for launching the war in Chechnya.
Putin, by contrast, seems incapable of recognizing and admitting his mistakes, and persists in a policy long after its failure is visible to the world.
One of Yeltsin’s errors was his failure to put moral priorities at the head of his reform agenda.
Russia should have repented for Stalinism and the gulag system.
The whole nation, with no exception, should have repented, the way the Germans have repented since 1945.
This failure matters, for it allowed Putin’s unqualified belief in central authority to lead to the recapture of the state by the security services.
Indeed, a direct result of national repentance for the gulag era should have been the banning of the communist party and the disqualification from political office of those who worked in the KGB.
Although such political screenings are complicated in postcommunist societies, where both victimhood and collaboration were so widespread – and the lines between them so often blurred – a sound solution could have been found, as in the Czech Republic.
Doing nothing left Russia’s security structures unscathed and able to make a political comeback, which they have now achieved.
The political resurrection of KGB structures under Putin, and their efforts to silence dissent, has once again turned Russia into a country of defectors.
It is impossible to silence independent politicians and independent media without choking off independent sources of money, which is why Putin’s Kremlin has concentrated its attacks on the so-called “oligarchs.”
Mikhail Khodorkovsky’s arrest and trial were orchestrated for precisely this reason.
By removing independent sources of money, the security services that dominate the Kremlin hope to destroy independent political life in Russia.
Without independent bases of thought, a climate of fear is taking hold.
But fear is not only degrading; it makes for poor governance.
Yeltsin intuitively understood that fear and top-down, centralized decision-making were no way to rule a modern country, and he therefore insisted on reforming relations between citizens and the state.
Putin still doesn’t understand that a centralized political system is as incapable of comprehending and correcting mistakes now as it was in the Soviet era.
Not being a well-educated man Putin is, in full and deep sincerity, leading Russia toward the same disintegration that accompanied the collapse of the Soviet state.
People are beginning to realize this.
They see that Putin’s desire to create a strong and effective modern state cannot be realized, because a modern state is governed not from above, but by an informed citizenry that forces its rulers to acknowledge and correct their mistakes.
Putin, too, also seems to suspect his regime’s impotence.
This is one reason why Russia has become so aggressive with its neighbors, Ukraine and Georgia, and seeks to maintain a military presence in places like Transdniestria, the breakaway region of Moldova.
By throwing its weight around in Russia’s near abroad, the Kremlin thinks that it can convince Russians back home of its omnipotence.
Given the neutered debates in Russia, and the Kremlin’s ability to manipulate elections, regime change is the only option left for those who want to preserve the democratic idea in Russia.
There is no use holding onto illusions.
Those who oppose Putin must decide what they want and declare that, if the regime fails to uphold the constitution, they have the right to force it to do so by any means necessary.
Today, the question of power in Russia can no longer be decided solely at the ballot box.
As in Ukraine, Lebanon, and Kyrgizstan, it will be decided in the streets.
The People versus the Police
NEW YORK –America’s politicians, it seems, have had their fill of democracy.
Across the country, police, acting under orders from local officials, are breaking up protest encampments set up by supporters of the Occupy Wall Street (OWS) movement – sometimes with shocking and utterly gratuitous violence.
In the worst incident so far, hundreds of police, dressed in riot gear, surrounded Occupy Oakland’s encampment and fired rubber bullets (which can be fatal), flash grenades, and tear-gas canisters – with some officers taking aim directly at demonstrators.
The Occupy Oakland Twitter feed read like a report from Cairo’s Tahrir Square: “they are surrounding us”; “hundreds and hundreds of police”; “there are armored vehicles and Hummers.”
There were 170 arrests.
My own recent arrest, while obeying the terms of a permit and standing peacefully on a street in lower Manhattan, brought the reality of this crackdown close to home.
America is waking up to what was built while it slept: private companies have hired away its police (JPMorgan Chase gave $4.6 million to the New York City Police Foundation); the federal Department of Homeland Security has given small municipal police forces military-grade weapons systems; citizens’ rights to freedom of speech and assembly have been stealthily undermined by opaque permit requirements.
Suddenly, America looks like the rest of the furious, protesting, not-completely-free world.
Indeed, most commentators have not fully grasped that a world war is occurring.
But it is unlike any previous war in human history: for the first time, people around the world are not identifying and organizing themselves along national or religious lines, but rather in terms of a global consciousness and demands for a peaceful life, a sustainable future, economic justice, and basic democracy.
Their enemy is a global “corporatocracy” that has purchased governments and legislatures, created its own armed enforcers, engaged in systemic economic fraud, and plundered treasuries and ecosystems.
Around the world, peaceful protesters are being demonized for being disruptive.
But democracy is disruptive.
Martin Luther King, Jr., argued that peaceful disruption of “business as usual” is healthy, because it exposes buried injustice, which can then be addressed.
Protesters ideally should dedicate themselves to disciplined, nonviolent disruption in this spirit – especially disruption of traffic.
This serves to keep provocateurs at bay, while highlighting the unjust militarization of the police response.
Moreover, protest movements do not succeed in hours or days; they typically involve sitting down or “occupying” areas for the long hauls.
That is one reason why protesters should raise their own money and hire their own lawyers.
The corporatocracy is terrified that citizens will reclaim the rule of law.
In every country, protesters should field an army of attorneys.
Protesters should also make their own media, rather than relying on mainstream outlets to cover them.
They should blog, tweet, write editorials and press releases, as well as log and document cases of police abuse (and the abusers).
There are, unfortunately, many documented cases of violent provocateurs infiltrating demonstrations in places like Toronto, Pittsburgh, London, and Athens – people whom one Greek described to me as “known unknowns.”
Provocateurs, too, need to be photographed and logged, which is why it is important not to cover one’s face while protesting.
Protesters in democracies should create email lists locally, combine the lists nationally, and start registering voters.
They should tell their representatives how many voters they have registered in each district – and they should organize to oust politicians who are brutal or repressive.
And they should support those – as in Albany, New York, for instance, where police and the local prosecutor refused to crack down on protesters – who respect the rights to free speech and assembly.
Many protesters insist in remaining leaderless, which is a mistake.
A leader does not have to sit atop a hierarchy: a leader can be a simple representative.
Protesters should elect representatives for a finite “term,” just like in any democracy, and train them to talk to the press and to negotiate with politicians.
Protests should model the kind of civil society that their participants want to create.
In lower Manhattan’s Zuccotti Park, for example, there is a library and a kitchen; food is donated; kids are invited to sleep over; and teach-ins are organized.
Musicians should bring instruments, and the atmosphere should be joyful and positive.
Protesters should clean up after themselves.
The idea is to build a new city within the corrupt city, and to show that it reflects the majority of society, not a marginal, destructive fringe.
After all, what is most profound about these protest movements is not their demands, but rather the nascent infrastructure of a common humanity.
For decades, citizens have been told to keep their heads down – whether in a consumerist fantasy world or in poverty and drudgery – and leave leadership to the elites.
Protest is transformative precisely because people emerge, encounter one another face-to-face, and, in re-learning the habits of freedom, build new institutions, relationships, and organizations.
None of that cannot happen in an atmosphere of political and police violence against peaceful democratic protesters.
As Bertolt Brecht famously asked, following the East German Communists’ brutal crackdown on protesting workers in June 1953, “Would it not be easier…for the government to dissolve the people and elect another?” Across America, and in too many other countries, supposedly democratic leaders seem to be taking Brecht’s ironic question all too seriously.
The Perfect Storm of a Global Recession
NEW YORK – The probability is growing that the global economy – not just the United States – will experience a serious recession.
Recent developments suggest that all G7 economies are already in recession or close to tipping into one.
Other advanced economies or emerging markets (the rest of the euro zone; New Zealand, Iceland, Estonia, Latvia, and some Southeast European economies) are also nearing a recessionary hard landing.
When they reach it, there will be a sharp slowdown in the BRICs (Brazil, Russia, India, and China) and other emerging markets.
This looming global recession is being fed by several factors: the collapse of housing bubbles in the US, United Kingdom, Spain, Ireland and other euro-zone members; punctured credit bubbles where money and credit was too easy for too long; the severe credit and liquidity crunch following the US mortgage crisis; the negative wealth and investment effects of falling stock markets (already down by more than 20% globally); the global effects via trade links of the recession in the US (which still counts for about 30% of global GDP); the US dollar’s weakness, which reduces American trading partners’ competitiveness; and the stagflationary effects of high oil and commodity prices, which are forcing central banks to increase interest rates to fight inflation at a time when there are severe downside risks to growth and financial stability.
Official data suggest that the US economy entered into a recession in the first quarter of this year.
The economy rebounded – in a double-dip, W-shaped recession – in the second quarter, boosted by the temporary effects on consumption of $100 billion in tax rebates.
But those effects will fade by late summer.
The UK, Spain, and Ireland are experiencing similar developments, with housing bubbles deflating and excessive consumer debt undercutting retail sales, thus leading to recession.
Even in Italy, France, Greece, Portugal, Iceland, and the Baltic states, frothy housing markets are starting to slacken.
Small wonder, then, that production, sales, and consumer and business confidence are falling throughout the euro zone.
Elsewhere, Japan is contracting, too.
Japan used to grow modestly for two reasons: strong exports to the US and a weak yen.
Now, exports to the US are falling while the yen has strengthened.
Moreover, high oil prices in a country that imports all of its oil needs, together with falling business profitability and confidence, are pushing Japan into a recession.
The last of the G7 economies, Canada, should have benefited from high energy and commodity prices, but its GDP shrank in the first quarter, owing to the contracting US economy.
Indeed, three quarters of Canada’s exports go to the US, while foreign demand accounts for a quarter of its GDP.
So every G7 economy is now headed toward recession.
Other smaller economies (mostly the new members of the EU, which all have large current-account deficits) risk a sudden reversal of capital inflows; this may already be occurring in Latvia and Estonia, as well as in Iceland and New Zealand.
This G7 recession will lead to a sharp growth slowdown in emerging markets and likely tip the overall global economy into a recession.
Those economies that are dependent on exports to the US and Europe and that have large current-account surpluses (China, most of Asia, and most other emerging markets) will suffer from the G7 recession.
Those with large current-account deficits (India, South Africa, and more than 20 economies in East Europe from the Baltics to Turkey) may suffer from the global credit crunch.
Commodity exporters (Russia, Brazil, and others in the Middle East, Asia, Africa, and Latin America) will suffer as the G7 recession and global slowdown drive down energy and other commodity prices by as much as 30%.
Countries that allowed their currencies to appreciate relative to the dollar will experience a sharp slowdown in export growth.
Those experiencing rising and now double-digit inflation will have to raise interest rates, while other high-inflation countries will lose export competitiveness.
Falling oil and commodity prices – already down 15% from their peaks – will somewhat reduce stagflationary forces in the global economy, yet inflation is becoming more entrenched via a vicious circle of rising prices, wages, and costs.
This will constrain the ability of central banks to respond to the downside risks to growth.
In advanced economies, however, inflation will become less of a problem for central banks by the end of this year, as slack in product markets reduces firms’ pricing power and higher unemployment constrains wage growth.
To be sure, all G7 central banks are worried about the temporary rise in headline inflation, and all are threatening to hike interest rates.
Nevertheless, the risk of a severe recession – and of a serious banking and financial crisis – will ultimately force all G7 central banks to cut rates.
The problem is that, especially outside the US, this monetary loosening will occur only when the G7 and global recession become entrenched.
Thus, the policy response will be too little, and will come too late, to prevent it.
Going Against Conventional Wisdom
CAMBRIDGE – When I finished my graduate studies in 1974, I had the wonderful fortune of doing postdoctoral work with Harvard Medical School’s Judah Folkman.
Dr. Folkman had a theory that the progression of tumors could be arrested by cutting off their source of nourishment.
He suggested that tumors emit a substance called tumor-angiogenesis factor, which causes surrounding blood vessels to grow toward it, supplying nutrition and removing waste.
Folkman hypothesized that this process, angiogenesis, is crucial to the tumor’s survival.
This theory went strongly against conventional wisdom.
Scientists who reviewed Folkman’s grants said that the new blood vessels were simply due to inflammation.
But Folkman persevered, and eventually he proved that such chemical substances do exist.
Today, four decades later, such substances have been used to treat more than 10 million people with neovascular diseases such as macular degeneration and many different forms of cancer.
I had a similar experience when I was working in his lab, trying to isolate the first inhibitors of blood-vessel growth (which were large-molecular-weight substances).
This required developing a bioassay that would enable us to observe the inhibition of blood-vessel growth in the presence of tumors.
Given that tumors take several months to grow, biocompatible systems had to be developed that could release proteins and other large-molecular-weight substances slowly and continuously in the body – something that scientists were convinced was impossible.
However, after two years of work, I discovered that I could modify certain types of polymers to release molecules of virtually any size over a 100-day period.
For several years, many of the field’s most respected chemists and engineers said that our work had to be incorrect.
The negative feedback had practical consequences, inhibiting my ability not only to secure research grants, but also to find faculty positions (especially given the work’s interdisciplinary nature, which made it difficult to fit into a single university department).
But I kept at it, and, step by step, addressed different key issues – such as biocompatibility, manufacturing, reproducibility of release, and bioactivity.
Today, systems based on these principles have been used to treat more than 20 million people.
Another area I started thinking about involved creating new polymer materials.
Working in a hospital, I saw that almost all polymers used in medicine were derived from household objects.
For example, the materials used in girdles for women are used in artificial hearts because of their good flex life.
The polymers in mattress stuffing are used in breast implants.
Yet such an approach often leads to problems.
Artificial hearts, for example, can cause clots to form when blood hits their surface – the girdle material – and these clots can cause strokes and death.
So I began thinking that we needed to find alternatives to solving medical problems other than by searching for materials in everyday settings.
I believed that researchers could take an engineering-design approach: Ask the question, “What do we really want in a biomaterial from the standpoints of engineering, chemistry, and biology?” and then synthesize the materials from first principles.
As a proof of principle, we decided to synthesize a new family of biodegradable polymers, called polyanhydrides, for medical use.
The first step was to select monomers – a polymer’s building blocks – that would be safe in the human body.
We then synthesized these polymers and discovered that by changing their composition, we could make them last in the body for a period ranging from days to years.
With Henry Brem, now the chief of neurosurgery at Johns Hopkins Hospital, we thought we could use these polymers to deliver drugs locally in the treatment of brain cancer.
But I had to raise money for this project, so I wrote grant applications to government agencies that were reviewed by other professors.
Their reviews were very negative.
In our first grant proposal, in 1981, the reviewers said that we would never be able to synthesize the polymers.
Yet one of my graduate students synthesized the polymers for his doctoral thesis.
We sent the proposal back for another review, only to be told that the grant should still not be funded, because the polymers would react with whatever drug we wanted to deliver.
Several researchers in our lab showed that there was no reaction.
We returned the proposal for another review; it came back with the comment that the polymers were fragile and would break.
This time, two other researchers addressed the problem.
The revised proposal was sent again for evaluation, and now the reviewers’ reason for rejecting it was that new polymers would not be safe to test on animals or people.
Another graduate student showed that the polymers were safe.
Such reviews continued for a long time; but, in 1996, the Food and Drug Administration approved the treatment – the first new treatment for brain cancer to be approved in more than 20 years.
Moreover, the FDA’s approval of polymer-based local chemotherapy created a new paradigm in the drug-delivery field, helping to pave the way for drug-eluting stents and other local delivery systems.
Something similar happened when Jay Vacanti, a surgeon at Massachusetts General Hospital, and I had an idea in the 1980’s to combine three-dimensional synthetic polymer scaffolds with cells to create new tissues and organs.
Once again, the idea was met with great skepticism, and it was extremely difficult to obtain peer-reviewed government grants.
Today, this concept has become a cornerstone of tissue engineering and regenerative medicine, leading to the creation of artificial skin for patients with burns or skin ulcers – and someday, one hopes, to the creation of many other tissues and organs.
My experiences are hardly unique.
Scientists throughout history have often had to fight conventional wisdom to validate their discoveries.
In modern times, Stanley Prusiner’s discovery of prions, Barry Marshall and Robin Warren’s findings that bacteria can cause peptic ulcers, and Dan Shechtman’s determination of the structure of quasicrystals are just a few examples (all received Nobel Prizes for their research).
The lessons are simple to understand, if difficult to master: Don’t believe everything you read, be willing to challenge dogma, and recognize that you may pay a price for it career-wise in the short run, even if you are correct.
But the rewards of scientific discovery are worth it: technology advances, and the world can become much better for it.
The Perils of Financial Historicism
Every financial crisis is inherently unknowable – before it occurs, and as it occurs.
By contrast, we understand past crises very well.
Accountants go over the books, the participants tell their tales to the newspapers (or sometimes before a judge), politicians explain why they are sorting out a mess, and in the end historians put together a story.
Because the past is knowable, the best way of understanding a current crisis is to search for a model in past experiences, even those that are long past.
But which is the right template?
Often the choice depends less on a rational assessment of similarities and differences than on gut feelings, proclivities to optimism or pessimism, or political orientation.
Currently, two dates are circulating widely, 1907 and 1931.
At the beginning of the current credit crunch, many historically minded people picked 1907 as the key precedent.
Not only is it an arithmetically neat 100 years in the past, but it also looked like an attractive parallel.
The crisis of 1907 was both immediately devastating, provoking a massive but short economic downturn, and, as it turned out, easily resolved.
The 1907 panic started in the United States, owing to a rise in interest rates as farmers in the West were paid for their crops and financial scandals in New York that seemed to implicate a large financial institution, the Knickerbocker trust.
Suddenly, as today, even big banks did not trust each other.
The breakdown was fundamentally a liquidity crisis, and liquidity was easily restored in several ways: the New York banks issued their own liquidity through a clearing house; one massively powerful financial institution, J.P. Morgan, bought up collapsing shares, and thus reversed a market panic and a scramble for liquidity; and European central banks supplied gold to the American market.
The obvious lesson of 1907 that Americans learned was that central banks were the best placed institutions to restore liquidity in a financial panic, and, in the longer run, monetary reform gave the US its own central bank, the Federal Reserve, by 1914.
So 1907 became a comforting mantra in times of financial stress: a crisis cannot happen as long as the central bank understands the problem of liquidity.
There are modern parallels. The Fed and the European Central Bank have recently pumped massive amounts of liquidity into the global financial system.
Strategically placed private institutions have done their part to shore up confidence.
Goldman Sachs, for example, has made a point of publicly buying endangered assets in its Global Equities Opportunity Fund.
The darker parallel is to the Great Depression of the 1930’s, when no amount of liquidity helped.
This is the historical analogy drawn by those who want governments to do more, particularly banks that feel vulnerable and desperately need a public bailout.
In August 2007, some German banks, at the earliest signs of difficulty because of their exposure to US sub-prime mortgages, started to talk only of 1931.
In the Great Depression, bank collapses made the downturn far worse. They were contagious across national frontiers.
Governments not only needed to help by providing a combination of public assistance and new legislation guaranteeing deposits, but also were called on to shield their constituencies from destabilizing international influences.
This nationalist-minded rhetoric has returned in the financial crisis of 2007.
Germans do not see why they should be vulnerable because of poor quality mortgage lending in American inner cities.
Depositors with the British bank Northern Rock blame American developments for the credit turbulence that made it impossible for the bank to continue to fund its lending.
Neither of these apparent historical parallels is convincing.
We are not living in 1907, when the gold standard limited the ability of central banks to supply additional liquidity.
Nor, following the fastest five-year period of economic growth in human history, are collapsing prices endangering the financial system, as they did during the Great Depression.
Today, the responses to the 1907 and 1931 crises would only make matters worse.
The continuous injection of liquidity would imply a greater likelihood of renewed asset bubbles in housing, equities, or modern art.
Government stabilization of the banking system can either be international, provoking complaints by outraged taxpayers about subsidizing others, or national, but only at the cost of greatly extended regulation of capital movements.
Both courses are unnecessary.
If today’s credit crunch has historical parallels, they are closer to nineteenth-century “normal crises” like 1837, 1847, or 1857.
In those panics, financial innovation caused uncertainty and nervousness, but also induced an important and beneficial learning process.
The financial institutions that survived the crises went on to play a crucial role in pushing further development, and they had enhanced reputations because they withstood a crisis.
Sometimes monetary and fiscal authorities have an obligation to ignore the wilder historical parallels and look at a broader picture.
Sometimes, too, the best response to a crisis is this: don’t just do something; stand there and do nothing.
The Perils of Palestinian Strategy
TEL AVIV – It should be clear to all by now that talks between Palestinian President Mahmoud Abbas and Israeli Prime Minister Binyamin Netanyahu cannot produce a peace agreement.
Yet it would be wrong to dwell excessively on current leaders’ weaknesses, for to do so presupposes that with different leaders at the helm, an Israeli-Palestinian agreement could be reached through bilateral negotiations.
Alas, as a recent leak of Palestinian official papers demonstrates, this is not the case.
This typifies the dissonant historical rhythms of the Middle East.
In the past, Israel’s offers were rejected by the Palestinians; now it seems that Israel spurned especially flexible Palestinian positions.Personalities are, of course, important in history, but the Israeli-Palestinian peace process has for decades been a hostage to the impersonal forces of history.
Indeed, failure to reach a settlement in the past was not the result of bad faith, or inadequate negotiating skills.
Rather, failure stemmed from the inherent incapacity of both parties to reconcile themselves to each other’s fundamental requirements for a settlement.
Left to our own devices, we have proven ourselves tragically incapable of breaking the genetic code of our dispute.
Abbas is thus right to opt for a new peace paradigm, but his plan for a unilateral declaration of Palestinian independence might be the wrong choice.
He expects that a unilateral yet internationally recognized declaration of a Palestinian state along the 1967 borders would put unbearable pressure on an Israel haunted by the specter of worldwide de-legitimization.
The devastating effects of the new Palestinian strategy on Israel’s international standing cannot be denied.
The current wave of international recognition of Palestinian statehood is indeed a major blow to Israel’s foreign relations.
Particularly painful is that key Latin American countries, where Israel once enjoyed an almost mythological status, have joined that wave.
Abbas assumes that from the moment his state is recognized by the United Nations Security Council, Israel will become the illegal occupier of a sovereign state (and a full member of the UN).
At that point, Israel would thus be subject to international sanctions that would destroy its economy and further undermine its image, condemning the country to the status of an international pariah.
But, notwithstanding the damage that the Palestinian strategy is inflicting on Israel’s increasingly fragile international standing, Abbas might be embarking on what could turn out to be a self-defeating diplomatic exercise.
Already feeling the heat of a major diplomatic debacle, Israel might soon pre-empt the Palestinian diplomatic offensive with a “peace plan” of its own.
Inevitably inadequate – one idea being toyed with is recognition of a Palestinian state in provisional borders that might encompass around 50% of the West Bank – it will nonetheless occupy the attention of the international community, and perhaps even derail the new Palestinian strategy.
Moreover, should Abbas fail to muster the support of the United States and Europe, Netanyahu might feel free to cancel existing agreements and engage in unilateral steps of his own.
Nor would US and European support necessarily produce the results that Abbas expects.
If pushed to the wall, Israel might try to extricate itself from an internationally untenable position by unilaterally disengaging from the West Bank up to its “security fence.”
A hostile Palestinian state would then automatically emerge on the other side of what is in fact a massive wall – a state that might not necessarily be ruled by the PLO.
A violent Israeli disengagement, and thus the end of Israeli-Palestinian cooperation on security matters, might unleash such instability that Hamas emerges as a serious contender for power in the West Bank.
This, in turn, might draw Jordan into the affairs of the West Bank, just as Egypt is being drawn against its will into the affairs of Gaza.
Another risk implied by a unilateral Palestinian move to statehood is that it might reduce the conflict with Israel to a banal border dispute between sovereign states.
Any government that recognizes the Palestinian state would inevitably view that act as the end of the peace process, and neither Europe nor the US would include in the package any acknowledgement of the Palestinian right of return to areas lost to Israel in 1948.
Indeed, by unilaterally declaring a Palestinian state along the 1967 ceasefire line, Abbas would be putting into practice Israel’s vision of “two states for two peoples.”
Indeed, some on the Israeli side argue that, instead of fighting a Palestinian declaration of statehood, Israel should seize the opportunity to turn the conflict into a manageable state-to-state territorial dispute.
It could then negotiate with the US the wording of the UN resolution in a way that would end up creating a Palestinian state within the 1967 borders, with mutually agreed territorial adjustments.
Such a resolution would neutralize thorny “narrative” issues, such as the right of return, which have shattered every attempt to reach a settlement.
Either way, we stand at the end of the peace process as we have known it to date.
This Gordian knot cannot be untied; it needs to be cut by robust third-party mediation.
But a US peace plan aimed at bridging the gaps between the parties stands a chance only if it is built around a solid international alliance for an Israeli-Palestinian peace.
Even then, such a plan would require especially laborious and complex diplomatic engineering.
Yet, no matter how enamored of the “international community” they may be, the Palestinians might not be happy with a plan that comes from a US-led international alliance.
A plan that almost certainly would have to satisfy Israel’s security concerns and lean toward acknowledging its Jewishness – in a way that might entirely neutralize the Palestinian ethos of return – would be especially unpalatable to them.
The Perils of Prophecy
BERKELEY – We economists who are steeped in economic and financial history – and aware of the history of economic thought concerning financial crises and their effects – have reason to be proud of our analyses over the past five years.
We understood where we were heading, because we knew where we had been.
In particular, we understood that the rapid run-up of house prices, coupled with the extension of leverage, posed macroeconomic dangers.
We recognized that large bubble-driven losses in assets held by leveraged financial institutions would cause a panicked flight to safety, and that preventing a deep depression required active official intervention as a lender of last resort.
Indeed, we understood that monetarist cures were likely to prove insufficient; that sovereigns need to guarantee each others’ solvency; and that withdrawing support too soon implied enormous dangers.
We knew that premature attempts to achieve long-term fiscal balance would worsen the short-term crisis – and thus be counterproductive in the long-run.
And we understood that we faced the threat of a jobless recovery, owing to cyclical factors, rather than to structural changes.
On all of these issues, historically-minded economists were right.
Those who said that there would be no downturn, or that recovery would be rapid, or that the economy’s real problems were structural, or that supporting the economy would produce inflation (or high short-term interest rates), or that immediate fiscal austerity would be expansionary were wrong.
Not just a little wrong. Completely wrong.
Of course, we historically-minded economists are not surprised that they were wrong.
We are, however, surprised at how few of them have marked their beliefs to market in any sense.
On the contrary, many of them, their reputations under water, have doubled down on those beliefs, apparently in the hope that events will, for once, break their way, and that people might thus be induced to forget their abysmal forecasting track record.
So the big lesson is simple: trust those who work in the tradition of Walter Bagehot, Hyman Minsky, and Charles Kindleberger.
That means trusting economists like Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers.
Just as they got the recent past right, so they are the ones most likely to get the distribution of possible futures right.
But we – or at least I – have gotten significant components of the last four years wrong.
Three things surprised me (and still do).
The first is the failure of central banks to adopt a rule like nominal GDP targeting or its equivalent.
Second, I expected wage inflation in the North Atlantic to fall even farther than it has – toward, even if not to, zero.
Finally, the yield curve did not steepen sharply for the United States: federal funds rates at zero I expected, but 30-Year US Treasury bonds at a nominal rate of 2.7% I did not.
The failure of central banks to target nominal GDP growth remains incomprehensible to me, and I will not write about it until I think that I have understood the reasons.
As for wages, even with one-third of the US labor force changing jobs every year, sociological factors and human-network ties appear to exercise an even stronger influence on the level and rate of change – at the expense of balancing supply and demand – than I would have expected.
The third surprise, however, may be the most interesting.
Back in March 2009, the Nobel laureate Robert Lucas confidently predicted that the US economy would be back to normal within three years.
A normal US economy has a short-term nominal interest rate of 4%.
Since the ten-year US Treasury bond rate tends to be one percentage point above the average of expected future short-term interest rates over the next decade, even the expectation of five years of deep depression and near-zero short-term interest rates should not push the 10-Year Treasury rate below 3%.
Indeed, the Treasury rate mostly fluctuated between 3% and 3.5% from late 2008 through mid-2011.
But, in July 2011, the ten-year US Treasury bond rate crashed to 2%, and it was below 1.5% at the start of June.
The normal rules of thumb would say that the market is now expecting 8.75 years of near-zero short-term interest rates before the economy returns to normal.
And similar calculations for the 30-year Treasury bond show even longer and more anomalous expectations of continued depression.
The possible conclusions are stark.
One possibility is that those investing in financial markets expect economic policy to be so dysfunctional that the global economy will remain more or less in its current depressed state for perhaps a decade, or more.
The only other explanation is that even now, more than three years after the US financial crisis erupted, financial markets’ ability to price relative risks and returns sensibly has been broken at a deep level, leaving them incapable of doing their job: bearing and managing risk in order to channel savings to entrepreneurial ventures.
Neither alternative is something that I would have predicted – or even imagined.
Big Banks’ Tall Tales
WASHINGTON, DC – There are two competing narratives about recent financial-reform efforts and the dangers that very large banks now pose around the world.
One narrative is wrong; the other is scary.
At the center of the first narrative, preferred by financial-sector executives, is the view that all necessary reforms have already been adopted (or soon will be).
Banks have less debt relative to their equity levels than they had in 2007.
New rules limiting the scope of bank activities are in place in the United States, and soon will become law in the United Kingdom – and continental Europe could follow suit.
Proponents of this view also claim that the megabanks are managing risk better than they did before the global financial crisis erupted in 2008.
In the second narrative, the world’s largest banks remain too big to manage and have strong incentives to engage in precisely the kind of excessive risk-taking that can bring down economies.
Last year’s “London Whale” trading losses at JPMorgan Chase are a case in point.
And, according to this narrative’s advocates, almost all big banks display symptoms of chronic mismanagement.
While the debate over megabanks sometimes sounds technical, in fact it is quite simple.
Ask this question: If a humongous financial institution gets into trouble, is this a big deal for economic growth, unemployment, and the like?
Or, more bluntly, could Citigroup or a similar-size European firm get into trouble and stumble again toward failure without attracting some form of government and central bank support (whether transparent or somewhat disguised)?
The US took a step in the right direction with Title II of the Dodd-Frank reform legislation in 2010, which strengthened the resolution powers of the Federal Deposit Insurance Corporation.&#160;
And the FDIC has developed some plausible plans specifically for dealing with domestic financial firms.
(I serve on the FDIC’s Systemic Resolution Advisory Committee; all views stated here are my own.)
But a great myth lurks at the heart of the financial industry’s argument that all is well.
The FDIC’s resolution powers will not work for large, complex cross-border financial enterprises.&#160;
The reason is simple: US law can create a resolution authority that works only within national boundaries.
Addressing potential failure at a firm like Citigroup would require a cross-border agreement between governments and all responsible agencies.
On the fringes of the International Monetary Fund’s just-completed spring meetings in Washington, DC, I had the opportunity to talk with senior officials and their advisers from various countries, including from Europe.
I asked all of them the same question: When will we have a binding framework for cross-border resolution?
The answers typically ranged from “not in our lifetimes” to “never.”
Again, the reason is simple: countries do not want to compromise their sovereignty or tie their hands in any way.
Governments want the ability to decide how best to protect their countries’ perceived national interests when a crisis strikes.
No one is willing to sign a treaty or otherwise pre-commit in a binding way (least of all a majority of the US Senate, which must ratify such a treaty).
As Bill Dudley, the president of the New York Federal Reserve Bank, put it recently, using the delicate language of central bankers, “The impediments to an orderly cross-border resolution still need to be fully identified and dismantled.
This is necessary to eliminate the so-called ‘too big to fail’ problem.”
Translation: Orderly resolution of global megabanks is an illusion.
As long as we allow cross-border banks at or close to their current scale, our political leaders will be unable to tolerate their failure.
And, because these large financial institutions are by any meaningful definition “too big to fail,” they can borrow more cheaply than would otherwise be the case.
Worse, they have both motive and opportunity to grow even larger.
This form of government support amounts to a large implicit subsidy for big banks.
It is a bizarre form of subsidy, to be sure, but that does not make it any less damaging to the public interest.
On the contrary, because implicit government support for “too big to fail” banks rises with the amount of risk that they assume, this support may be among the most dangerous subsidies that the world has ever seen.
After all, more debt (relative to equity) means a higher payoff when things go well.
And, when things go badly, it becomes the taxpayers’ problem (or the problem of some foreign government and their taxpayers).
What other part of the corporate world has the ability to drive the global economy into recession, as banks did in the fall of 2008?
And who else has an incentive to maximize the amount of debt that they issue?
What the two narratives about financial reform have in common is that neither has a happy ending.
Either we put a meaningful cap on the size of our largest financial firms, or we must brace ourselves for the debt-fueled economic explosion to come.
The Phantom Middle East Peace Process
TEL AVIV – Twenty years after the Madrid Peace conference, and ten years after President Bill Clinton’s heroic efforts at Camp David failed to yield a settlement between Israelis and Palestinians, one cannot escape the conclusion that the Israeli-Palestinian peace process has become one of the most spectacular deceptions in modern diplomatic history.
The process fell victim to the parties’ inability to bridge the gap between what was politically feasible for them and what was required for a settlement.
Trapped between the possible and the necessary, Israelis and Palestinians simply learned to live without a solution.
However obsessed international opinion may be with Gaza’s agony, to most Israelis the Palestinian “problem” seems to be happening on the dark side of the moon.
The wall/fence in the West Bank and Ariel Sharon’s disengagement from Gaza have practically done away with daily friction between Jews an Arabs.
Absorbed by their booming economy, reassured by President Barack Obama’s recent commitment never to let Israel down, and convinced of their success in defeating Palestinian terrorism in the West Bank and deterring Hamas from venturing into another war, Israelis have lost any sense of urgency concerning the Palestinian problem.
Israelis also find satisfaction in the relative prosperity of the West Bank, where order and stability are being secured by well-trained security forces, in line with Prime Minister’s Salam Fayyad’s meticulous bottom-up construction of Palestinian statehood.
Moreover, massive inflows of international aid make Israel’s occupation one of the most convenient in world history; the Israelis control the land and its population without having to bear the financial burden of direct rule.
It is as if Moshe Dayan’s old existential political philosophy is being brought back to life.
When asked in November 1970 to spell out his views of a possible peace deal with the Palestinians, Dayan’s answer was one that could easily be endorsed by most of the ministers in Binyamin Netanyahu’s government. Dayan said: “The only peace negotiations are those where we settle the land and we build, and we settle, and from time to time we go to war.”
With peace plans and envoys coming and going, Israelis and Palestinians alike have finally become blasé about the chances of a final settlement.
The two-state solution is rapidly losing its appeal.
For, if a two-state solution really is the future, a social and political earthquake of untold dimensions awaits Israelis: a massive evacuation of settlers and a desperate need for a difficult political realignment to deal with the threat of civil strife and perhaps even military disobedience.
All this in order to go back to the 1967 borders, for which few Israelis feel nostalgic.
As for the Palestinians, the gap between the colossal tragedy of the Nakbah (the lost war at Israel’s founding) and the poverty of a territorial solution that sandwiches their demilitarized mini-state between Israel and Jordan – neither suffering from excessive love for Palestinian statehood – is bound to remain an open wound.
And Palestinians would view any solution to the refugee problem that Israel might accept as a betrayal of the ethos of Palestinian nationalism, namely the Right of Return.
The state of Palestine would lack legitimacy among Palestinians themselves.
True, Hamas has been indicating recently a readiness to contemplate a solution based on the 1967 borders, but it is doubtful that its leaders and members could live with the betrayal of the refugees.
Then again, the idea of Palestinian statehood is not central to Hamas’s worldview, in which the strategic objective is the ultimate victory of Islam.
For Hamas, Palestinian Authority President Mahmoud Abbas is a “transitional figure,” to be swept away together with his secular PLO in the revolutionary drive to an Islamic society.
It is the resulting sense of paralysis that explains the proliferation of new political paradigms in both Israel and Jordan.
Jordanians of the caliber of Former Prime Ministers Abdelsalam Al-Majali and Taher al-Masri, as well as a former adviser of King Hussein, Adnan Abu-Odeh, have been advancing schemes for a Jordanian-Palestinian solution.
Their argument is essentially that the peace process’s troubles stem from its deviation from the original intention of the architects of the Madrid Peace Conference, where a Jordanian-Palestinian delegation sat representing the two peoples.
Conspicuously, notable figures on the Israeli right – among them Former Defense and Foreign Minister Moshe Arens, who is also a political mentor of Netanyahu, and Knesset Speaker Rubi Rivlin – mirror the Jordanians’s position.
Whereas the latter champion the concept of one political space that would include the two banks of the Jordan River, the Israelis respond with their own concept of one political space between the Mediterranean and the Jordan River.
Never truly convinced of the viability of the two-state solution, and encouraged by the failure of the peace process so far, the Israeli right is going back to toying with the most dangerous scenario of all, the bi-national state.
As always, they want the best of all worlds: an emphatically Jewish state in which Palestinians would have citizenship rights, but no national rights whatsoever.
That is not a bad formula for a state of permanent civil war.
Trapped in their contradictions and zero-sum national dreams, Israelis and Palestinians cannot expect a perfect solution.
Their task is to embrace the least imperfect solution before they decline into Doomsday scenarios, such as a hostile Israeli unilateral disengagement, or a one-state reality of unending conflict.
The Phelps Factor
On December 10, Edmund Phelps, my colleague at Columbia University, received the Nobel Prize in economics for 2006.
The award was long overdue.
While the Nobel Prize committee cited his contributions to macroeconomics, Phelps has made contributions in many areas, including the theory of growth and technological change, optimal taxation, and social justice.
Phelps’ key observation in macroeconomics was that the relationship between inflation and unemployment is affected by expectations, and since expectations themselves are endogenous – they change over time – so, too, will the relationship between unemployment and inflation.
If a government attempts to push the unemployment rate too low, inflation will increase, and so, too, will inflationary expectations.
This insight holds two possible policy implications.
Some policymakers have concluded from Phelps’ analysis that the unemployment rate cannot be lowered permanently without ever-increasing levels of inflation.
Thus, monetary authorities should simply focus on price stability by targeting the rate of unemployment at which inflation does not increase, referred to as the “non-accelerating inflation rate of unemployment” (NAIRU).
But the NAIRU is not immutable.
The correct implication, which Phelps repeatedly emphasized, is that governments can implement a variety of policies, particularly structural policies, to allow the economy to operate at a lower level of unemployment.
Policies that focus exclusively on inflation are misguided for several other reasons.
As a practical matter, even controlling for expectations (as Phelps’ work insists that we do), the relationship between unemployment and inflation is highly unstable.
It is virtually impossible to discern the relationship from the data except in a few isolated periods.
Changes in education levels, unionization, and productivity are part of the explanation for this instability.
But, whatever the reason, policymakers face considerable uncertainty about the level of NAIRU.
Thus, they still face a trade-off between pushing unemployment too low, and setting off an episode of inflation, and not pushing hard enough, resulting in an unnecessary waste of economic resources.
How one views these risks depends on the costs of undoing mistakes, which in turn depends on other properties of the inflation-unemployment relationship that Phelps’ analysis did not address.
The weight of evidence indicates that the cost of undoing the mistake of pushing unemployment down too far is itself very low, at least for countries like the US, where the relationship has been carefully studied.
In this view, the Federal Reserve should aggressively pursue low unemployment, until it is shown that inflation is rising.
By contrast, inflation “hawks” argue that inflation must be attacked preemptively.
While most central banks are inflation hawks, this stance is a matter of religion, not economic science.
There is simply little or no empirical evidence that inflation, at the low to moderate rates that have prevailed in recent decades, has any significant harmful real effects on output, employment, growth, or the distribution of income.
Nor is there evidence that inflation, should it increase slightly, cannot be reversed at a relatively minor cost – comparable to the benefits of additional employment and growth enjoyed in the excessive expansion of the economy that led to the increase in inflation.
In the early 1990’s, the Fed, and many others, thought that the NAIRU was around 6%-6.2%.
Based on changes in the economy, I and the staff that worked with me on President Bill Clinton’s Council of Economic Advisers argued that the NAIRU was considerably lower.
We were right.
Unemployment fell to 3.8% without any surge in inflation.
This matters because, as the great economist Arthur Okun argued, reducing unemployment by two percentage points would increase output by 2%-6%, or $0.5-1.5 trillion dollars in the case of America.
Even for a rich country, that is a lot of money.
It could be used to put America’s social security system on a stable footing for the next 75-100 years.
It could even pay for a substantial share of the cost for a war like that in Iraq!
Phelps’ work helped us to understand the complexity of the relationship between inflation and unemployment, and the important role that expectations can play in that relationship.
But it is a misuse of that analysis to conclude that nothing can be done about unemployment, or that monetary authorities should focus exclusively on inflation.
That view belongs to a school of modern macroeconomics that assumes rational expectations and perfectly functioning markets.
In other words, individuals – usually assumed to be identical – fully use all available information to forecast the future in an environment of perfect competition, no capital market shortcomings, and full insurance of all risks.
Not only are these assumptions absurd, but so are the conclusions: there is no involuntary unemployment, markets are fully efficient, and redistribution has no real consequence.
But, while government policies, according to this school, are ineffective, that matters little.
Because markets are always efficient, there is no need for government intervention.
More perniciously, many supporters of this view, when confronted with the reality of unemployment, argue that it arises only because of government-imposed rigidities and trade unions.
In their “ideal” world without either, there would, they claim, be no unemployment.
For more than three decades, Phelps has shown that there is an alternative approach.
He has tried to understand what we can do to lower unemployment and increase the well-being of those at the bottom.
But he has also striven to understand what makes capitalist economies dynamic, what lies behind the entrepreneurial spirit, and what we can do to promote it further.
Phelps’ economics remains one of action, not resignation.
The Phony Attack on Climate Science
NEW YORK – In the weeks before and after the Copenhagen climate change conference last December, the science of climate change came under harsh attack by critics who contend that climate scientists have deliberately suppressed evidence – and that the science itself is severely flawed.
The Intergovernmental Panel on Climate Change (IPCC), the global group of experts charged with assessing the state of climate science, has been accused of bias.
The global public is disconcerted by these attacks.
If experts cannot agree that there is a climate crisis, why should governments spend billions of dollars to address it?
The fact is that the critics – who are few in number but aggressive in their attacks – are deploying tactics that they have honed for more than 25 years.
During their long campaign, they have greatly exaggerated scientific disagreements in order to stop action on climate change, with special interests like Exxon Mobil footing the bill.
Many books have recently documented the games played by the climate-change deniers. Merchants of Doubt , a new book by Naomi Oreskes and Erik Conway set for release in mid-2010, will be an authoritative account of their misbehavior.
The authors show that the same group of mischief-makers, given a platform by the free-market ideologues of The Wall Street Journal’s editorial page, has consistently tried to confuse the public and discredit the scientists whose insights are helping to save the world from unintended environmental harm.
Today’s campaigners against action on climate change are in many cases backed by the same lobbies, individuals, and organizations that sided with the tobacco industry to discredit the science linking smoking and lung cancer.
Later, they fought the scientific evidence that sulfur oxides from coal-fired power plants were causing “acid rain.”
Then, when it was discovered that certain chemicals called chlorofluorocarbons (CFCs) were causing the depletion of ozone in the atmosphere, the same groups launched a nasty campaign to discredit that science, too.
Later still, the group defended the tobacco giants against charges that second-hand smoke causes cancer and other diseases.
And then, starting mainly in the 1980’s, this same group took on the battle against climate change.
What is amazing is that, although these attacks on science have been wrong for 30 years, they still sow doubts about established facts.
The truth is that there is big money backing the climate-change deniers, whether it is companies that don’t want to pay the extra costs of regulation, or free-market ideologues opposed to any government controls.
The latest round of attacks involves two episodes.
The first was the hacking of a climate-change research center in England.
The e-mails that were stolen suggested a lack of forthrightness in the presentation of some climate data.
Whatever the details of this specific case, the studies in question represent a tiny fraction of the overwhelming scientific evidence that points to the reality and urgency of man-made climate change.
The second issue was a blatant error concerning glaciers that appeared in a major IPCC report.
Here it should be understood that the IPCC issues thousands of pages of text.
There are, no doubt, errors in those pages.
But errors in the midst of a vast and complex report by the IPCC point to the inevitability of human shortcomings, not to any fundamental flaws in climate science.
When the e-mails and the IPCC error were brought to light, editorial writers at The Wall Street Journal launched a vicious campaign describing climate science as a hoax and a conspiracy.
They claimed that scientists were fabricating evidence in order to obtain government research grants – a ludicrous accusation, I thought at the time, given that the scientists under attack have devoted their lives to finding the truth, and have certainly not become rich relative to their peers in finance and business.
But then I recalled that this line of attack – charging a scientific conspiracy to drum up “business” for science – was almost identical to that used by The Wall Street Journal and others in the past, when they fought controls on tobacco, acid rain, ozone depletion, second-hand smoke, and other dangerous pollutants.
In other words, their arguments were systematic and contrived, not at all original to the circumstances.
We are witnessing a predictable process by ideologues and right-wing think tanks and publications to discredit the scientific process.
Their arguments have been repeatedly disproved for 30 years – time after time – but their aggressive methods of public propaganda succeed in causing delay and confusion.
Climate change science is a wondrous intellectual activity.
Great scientific minds have learned over the course of many decades to “read” the Earth’s history, in order to understand how the climate system works.
They have deployed brilliant physics, biology, and instrumentation (such as satellites reading detailed features of the Earth’s systems) in order to advance our understanding.
And the message is clear: large-scale use of oil, coal, and gas is threatening the biology and chemistry of the planet.
We are fueling dangerous changes in Earth’s climate and ocean chemistry, giving rise to extreme storms, droughts, and other hazards that will damage the food supply and the quality of life of the planet.
The IPCC and the climate scientists are telling us a crucial message.
We need urgently to transform our energy, transport, food, industrial, and construction systems to reduce the dangerous human impact on the climate.
It is our responsibility to listen, to understand the message, and then to act.
The Pig, the Wolf, and the Dragon
HONG KONG – Political mayhem has broken out in Hong Kong, and has caught China’s government, already in the midst of a delicate political transition of its own, completely unprepared.
The 1,200 privileged delegates carefully screened by China to “elect” Hong Kong’s next Chief Executive (CE) on March 25 would normally take their cues from China’s rulers.
Indeed, the original electoral script was a one-act, one-star play.
Henry Tang, unkindly nicknamed “Pig” by the Hong Kong press for his unimpressive intellect, and a heretofore supporting actor, C. Y. Leung, nicknamed “Wolf” for his perceived chilly ruthlessness, were the entire cast.
Both men have impeccable pro-China credentials, a prerequisite to becoming CE.
While there is a third, pro-democracy, candidate standing somewhere in the wings, he doesn’t stand a chance, because China would never allow him to get the 601 votes needed to win.
Tang, the preferred candidate of the local business elite and the civil service he once headed, promises to preserve the status quo, which is music to the ears of Hong Kong’s “haves.”
But a plot twist has complicated his shoo-in campaign, with both Tang and Leung now improvising their lines – peppered with frequent insults – and each consulting the director (China) at every turn.
At the same time, the audience, the people of Hong Kong, are howling, hissing, and throwing bottles at everyone on stage – and sometimes at each other.
So, what was supposed to be a boring bit of set-piece theater has become a sensational hit.
Tang, the mild-mannered scion of a textile magnate whose father is a confidant of China’s former leader, Jiang Zemin, committed two elementary mistakes.
The first was not confessing quickly enough to his having mistresses, one of whom has a college-age offspring whose father is probably Tang.
Of course, Hong Kong’s citizens are far from being puritans, and the sex lives of their leaders are not a primary concern.
But they also understand that anyone running for office should have been prepared for such revelations.
Tang was not.
Instead, it was left to the tabloids to reveal his mistresses, one by one, week after week, like peeling an onion in front of his wife, Hong Kong’s people, and the Chinese leadership.
The second error was even more inane.
Local papers discovered that he had illegally built a large, deluxe wine cellar with a spa beneath one of his mansions.
As a senior public servant, he knew that the construction was illegal, and that he should have taken remedial steps to legalize his actions or to abandon it – a matter merely of money, of which he has plenty.
To everyone’s disbelief, Tang insisted that he did not have a wine cellar, just a storage room.
Then he trotted out his already-humiliated wife, half in tears, to face the press, blaming her for building the cellar without his prior knowledge while “gallantly” assuming responsibility.
Tang’s popularity sank, and headed towards single digits.
If China still insists on anointing him, more mayhem is likely to follow.
Leung, however, is also a deeply divisive figure – a man who comes across as someone waiting to settle scores, though no one really knows which ones.
Hong Kong’s tycoons, press, intelligentsia, and civil servants, who normally agree on little, find themselves in complete agreement where Leung is concerned: they do not want him as Hong Kong’s next leader, despite his favorable popularity ratings.
The tycoons fear that Leung’s deeply old-fashioned communist values would hurt their oligopolies.
The press finds him evasive.
The intelligentsia is wary of him as an underground Communist Party member, something that he has denied.
And civil servants believe that Leung harbors resentment of Hong Kong’s British colonial legacy, of which the civil service is the most visible.
Not even senior Communist officials in charge of the Hong Kong portfolio wanted Leung, despite his being a suspected “sleeper” cadre in the territory.
Locally recruited members do not enjoy seniority in the 70-million-strong Chinese Communist Party.
So, if Leung became Hong Kong’s CE, he would jump ahead of many of his seniors in China.
To complicate China’s predicament further, Hong Kong’s next leader will assume office tainted by retiring CE Donald Tsang’s undignified and possibly corrupt links with the city’s tycoons.
The press calls him the “petty greedy CE.”
Some legislators have called for his impeachment before he leaves office.
Tsang has been a beneficiary of favors by some of Hong Kong’s second-tier billionaires who run regulated businesses, such as radio stations and the cross-harbor tunnels.
Sir Donald enjoys riding on their private jets and luxury yachts while on personal holidays abroad.
Before he was shamed into giving it up, he rented a triplex penthouse for his retirement, leased to him at below-market rates by a wealthy businessman, who reportedly threw in a couple of million dollars worth of interior decoration.
Hong Kong’s citizens expect their leader to be a fair arbiter of conflicting public and private interests, not an obsequious toady to the rich.
But the most pathetic aspect of Tsang’s behavior is his failure to understand that Hong Kong’s rich, whose company he pathologically craved to keep, respect only those who are richer, smarter, and perhaps more ruthless than they are.
They despise those who lack serious money and can be seduced by breadcrumbs.
Deng Xiaoping promised “one country, two systems” as he negotiated Hong Kong’s return to China three decades ago.
But, because China has never succeeded in overcoming its inner control freak, it has backed leaders who are incompetent, corruptible, or universally feared and scorned.
Hong Kong’s upcoming “election” will be no different.
The Pirates of Starvation
NEW YORK – Time is running out for Somalia.
As many as three million people – one-third of the country – live under threat of starvation.
Their lifeline is the sea, from which food, medical supplies, and other aid arrives.
And there lies the problem.
Heavily armed bands of modern-day pirates in speedboats are terrorizing ships in Somalia’s coastal waters.
So far this year they have raided more than 50 vessels, stealing cargos and hijacking ships, from private yachts to oil tankers, and extorting some $100 million a year in ransom.
Just last week, a Ukrainian freighter carrying heavy weaponry, including tanks, was hijacked.
A Greek petrochemical carrier was seized, and another attacked, as was an Iranian oil tanker.
These pirates currently hold more than a dozen ships hostage in Somali ports.
Ships laden with tens of thousands of tons of maize, sorghum, split peas, and cooking oil from the United Nations World Food Program and other international aid organizations must navigate these dangerous waters.
Keeping Somalia’s sea-borne supply line open is imperative.
It carries 90% of the humanitarian assistance delivered by the WFP, which in turn supplies nearly 90% of the aid that feeds so many Somalis.
These pirate terrorists are not particularly powerful.
Estimates put their number at around 1,200.
But they are growing increasingly brazen, all the more so when not confronted.
Since November 2007, following a series of pirate raids, Canada, the Netherlands, Denmark, and France deployed naval frigates to escort WFP aid ships safely into harbor.
Under their protection, not a single ship has come under attack, ensuring the uninterrupted flow of assistance.
Yet despite that clear success, the future is uncertain.
The Canadian naval mission ends in late October, and no country has stepped forward to replace it.
Without naval escorts, food aid will not get to Somalia.
The WFP has stockpiled sufficient supplies to keep relief flowing for some days.
But once those warehouses are empty, the country and its people will be on their own.
I am optimistic that some nation will come to the rescue – but we must not risk this happening too late, or not at all.
Beyond that, we need a long-term plan.
We at the UN are duty-bound to do what compassion and human decency demand of us.
Is the world really going to stand by and watch more children die of starvation?
Somalia’s political future is uncertain at best.
Yet we need to set to work on a plan for deploying a viable multinational force to help secure peace there, or at the very least sustain its people.
There is a clear way to begin.
The first step is for some country or countries to volunteer the naval force needed to preserve Somalia’s humanitarian lifeline.
The next is to develop a comprehensive strategy, in conjunction with the UN Security Council, to eliminate piracy in Somali waters.
The time to act is now.
Lives depend on it.
The Placebo Myth
The Plagues of Transition
It seems hardly worth noting that dictatorship and war are harmful to health.
Over 20 million died of starvation in Mao’s Great Leap Forward; untold millions died under Lenin, Stalin and Hitler;
Pol Pot murdered two million Cambodians.
Accurate body counts from the cruel regimes presiding over Burma, Afghanistan and the Congo remain unavailable but are certainly huge.
During the past decade or so, greater peace and the fragile beginnings of democracy came to such troubled nations as South Africa, Mozambique, Russia and other countries of the former Soviet Union.
Millions gained essential human and civil rights, including the right to criticize their leaders.
For many, the main struggle nowadays is finding a decent job and building a decent life.
You’d think health might be improving in the places that recently became more democratic.
But all is not well in such countries.
In many, political and economic transition brought new plagues every bit as horrible as those associated with repression and war.
During the 1980s, both Mozambique and South Africa, for example, were largely spared the HIV epidemic then devastating East and Central Africa.
Mozambique was at war: villages were isolated, and migrant workers, who would eventually bring the virus into the country, were few.
South Africa, too, had few cases before 1990, largely because apartheid’s influx controls, limited migration from countries where HIV was prevalent.
After apartheid’s fall and the end of the war in Mozambique, migration soared, so that the shanty-towns surrounding South Africa’s cities and mines became among the fastest growing in the world.
It is in such places – where the impoverished, lonely and displaced end up – that HIV puts down deep roots.
South Africa now has more people living with HIV than any other nation.
Meanwhile, in Russia, cases of drug resistant tuberculosis have risen sharply since 1990, especially in the nation’s overcrowded jails.
TB is hard to cure, because patients must take a combination of up to four drugs for at least six months; if patients do not complete the treatment, drug resistance commonly results.
Under the Soviet regime, drug treatment was usually available to prisoners with TB.
The collapse of the Soviet Union, however, saw health services collapse too; now patients may receive only part of the curative regimen.
Among ordinary Russians not in jail, alcoholic binges, drug abuse and other forms of self-destruction have incited a huge surge in death rates since 1990, rates which studies indicate have been rising fastest where the effects of political transition are most pronounced; that is, where unemployment and labor turnover rose most sharply.
Dictators and warlords, terrible as they are, cannot be solely blamed for these plagues of transition.
One pattern, however, seems to be emerging. The after-effects of transition are most deadly among populations made most vulnerable by generations of abuse and tyranny.
In South Africa, more than a century of white rule stifled the indigenous economy and established a migrant labor system throughout Southern Africa that disrupted families and created a social ecology favorable to the spread of HIV.
Health care systems that served blacks received a tiny fraction of the expenditure that white services did, so when HIV arrived, it encountered an extremely vulnerable population.
In Mozambique, war, partly abetted by the Cold War superpowers, left the country profoundly under-developed without health services or employment for it’s citizens.
In Russia, the Soviet system, which once invested heavily in heath care, allowed health systems to disintegrate after the economy stalled in the 1970s.
Then, in the 1990s, price increases and government spending cuts associated with the transition to a free market, served the coup de grace.
By contrast, during the past ten years in Poland, Hungary and the Czech Republic, where Communist rule was less brutal than in Russia, health has improved.
Dictatorial regimes leave a terrible vacuum.
When they give way, disease, despair and death rush in.
But the plagues of transition are more than a health crisis; they signify a deeper malaise.
So put aside the fact that these diseases are infectious and can easily spread, or the idea that the fortunate bear some moral responsibility for the welfare of the poor and sick, and merely consider the economic consequences of the plagues of transition.
The World Bank calls AIDS “the foremost threat to African development.” Companies in South Africa stagger from losing so many workers to AIDS.
A generation of children from families ruined by AIDS, grow up without the care and education needed to become producers, let alone consumers.
Meanwhile, thousands of young Russians and Ukrainians languish in TB wards or succumb to alcohol and drug addiction.
All this disease and despair deserves more than sympathy, if only because in this globalizing world, the prosperity of one nation increasingly depends on the prosperity of others.
(Western investors were reminded of this when the Russian and Asian economies crashed in the late 1990s.)
Confronting the AIDS epidemic in the developing world will cost billions; so will rebuilding Russia’s health care system.
The longer we turn our backs, however, the more expensive solutions become and the less we can escape the fact that this is now our problem and our responsibility.
The Plight of the Roma
NEW YORK – The Roma have been persecuted across Europe for centuries.
Now they face a form of discrimination unseen in Europe since World War II: group evictions and expulsions from several European democracies of men, women, and children on the grounds that they pose a threat to public order.
Last week, France began to carry out plans to expel all non-French Roma, implicating them as a group in criminal activity, without any legal process to determine whether individuals have committed any crime or pose a threat to public order.
These French actions follow Italy’s “security package” of 2008, which described so-called “nomads” as a threat to national security and imposed emergency legislation leading to expulsions of non-Italian Roma.
Stopping criminal activity is a legitimate government concern.
But the expulsion of EU citizens on the basis of ethnicity as a proxy for criminal activity is a violation of EU directives on racial discrimination and the right to move freely from one EU member-state to another.
Indeed, it is a firmly established legal principle that crime should be addressed by a determination of individual guilt before a court of law.
Moreover, convicted criminals are not routinely deported if they are citizens of another EU member state.
Instead, European law requires an individual determination that deportation is necessary and proportionate to the crime committed, as well as consideration of other circumstances (such as the strength of the individual’s ties to the community).
Of course, European societies should not tolerate criminality and anti-social behavior.
But no ethnic group monopolizes such pathologies, and all people should be equal before the law.
Since WWII, Europeans have found it unacceptable to subject any group to collective punishment or mass expulsion on the basis of ethnicity, so, in casting aside fundamental rights in the name of security, rounding up Roma sets a worrying precedent.
By contrast, the French government is right to call for measures to improve employment and development opportunities for Roma in their countries of origin (primarily Bulgaria and Romania in this case), which would reduce the incentives and pressure for them to move to other countries.
In response to France’s position, the Swedish government also called for concerted EU action to foster Roma inclusion.
Roma want to and can integrate if they are given the opportunity, as my foundation’s programs have shown.
Most Roma share the aspirations of the majority populations: a home with adequate services, a decent education for their children, jobs that enable them to provide for their families, and to interact with the majority in their society.
It is because they face appalling discrimination and deprivation at home that they continue to migrate across Europe.
The EU must recognize that the pan-European nature of this problem demands a comprehensive and effective strategy for Roma inclusion.
Primary responsibility for safeguarding the rights and well-being of all citizens lies with EU member states.
Policies and programs to promote inclusion in employment, education, health care, and housing must be implemented at the local and national levels.
But the EU has a vital role to motivate, coordinate, financially assist, and monitor such efforts through an EU-level plan.
In 2009, the EU endorsed the principle of “explicit but not exclusive targeting” for Roma, and the European Commission allowed structural funds to be used to cover housing interventions in favour of marginalized communities, with a particular focus on Roma.
This is a welcome step and “explicit but not exclusive targeting” should be extended to education, health care, and employment.
Most importantly, the rules guiding how structural funds are spent should be changed to allow their use for health and education from early childhood, rather than only for job training.
Structural poverty in Roma communities is intimately linked to poor education and unemployment.
The Commission’s Europe 2020 initiative sets specific targets for raising school completion rates and employment levels for all EU citizens.
In both of these areas, Roma fall so far behind their fellow citizens that targeted measures to close the gap should be an integral part of the Europe 2020 plan.
The greatest divide between the Roma and majority populations is not one of culture or lifestyle – as is so often portrayed by the media – but poverty and inequality.
The divide is physical, not just mental.
Segregated schooling is a barrier to integration and produces prejudice and failure.
Segregated housing has led to huge shantytowns and settlements lacking sanitation and other basic conditions essential to a life with dignity.
The plight of so many millions of Roma in the twenty-first century makes a mockery of European values and stains Europe’s conscience.
The plight of the Roma is not just a short-term security problem that can be addressed by draconian measures to move people forcibly from one member state to another.
Not only does this undermine European values and legal principles, but it fails to address the root causes of the problem.
As Europe’s largest ethnic minority, Roma inside the EU comprise the youngest and fastest-growing demographic segment of the population.
By 2020, for example, young Roma will make up one-third of the new entrants to the workforce in Hungary.
Europe cannot afford another lost generation.
This is a matter of human rights and basic values, and it is vital to peace and cohesion in societies across Europe.
The Poetry of the Euro
PRINCETON – The purpose of creating a common currency has been largely and surprisingly forgotten in crisis-torn Europe.
Instead, there seem to be more pressing concerns: gloomy speculation about the eurozone’s impending collapse and desperate attempts to find institutional fixes to its extensive governance problems.
But the euro was not just the outcome of an idiosyncratic quest to reduce the wear on pockets stuffed with odd national coins, or to facilitate intra-European trade.
The bold European experiment reflected a new attitude about what money should do, as well as how it should be managed.
In opting for a “pure” form of money, created by a central bank independent of national authority, Europeans self-consciously flew in the face of what had become the dominant monetary tradition.&#160;
In the twentieth century, the creation of money – paper money – was usually thought to be the domain of the state.
Money could be issued because governments had the power to define the unit of account in which taxes should be paid.
This tradition went back well before paper, or fiat, currencies.
For many centuries, even while metallic money circulated, the task of defining units of account – livres tournois, marks, gulden, florins, or dollars – remained a task of the state (or of those with political power).
Abuse of this role, with governments addressing excessive debt by inflating it away, was deeply destructive of political order in the first half of the twentieth century.
After World War II, the liberal politicians most committed to European federalism saw this point clearly.
The economist, central-bank governor, finance minister, and president of the Italian Republic, Luigi Einaudi, pleaded the case in the immediate aftermath of the war: “If the European federation takes away from the individual states the power of running public works through the printing press, and limits them to expenses that are financed solely by taxes and voluntary loans, it will by that act alone have accomplished a great work.”
But monetary abuse is no less dangerous in political systems with multi-layered authority, and in the past often led to the breakup of federal states.
That is because inflation is not a benign cure for economic ills, in which beneficent and stimulatory effects are spread equally over the entire region under the inflationary monetary authority.
Making inflation depends on the central bank’s decision to monetize specific debt instruments.
After all, the monetary authority never decides simply to convert every obligation into money.
Instead, it decides that some industries, banks, or political authorities need to be sustained for the general good.
Those industries, banks, and political authorities that are not so privileged are inevitably resentful, and view the central bank’s actions as an abuse of power.
In federal systems, in particular, those businesses and political authorities far removed from the center are most likely to be excluded from the monetary stimulus and hence are inclined to be resentful.
Hyperinflation in Germany in the 1920’s fanned separatism in Bavaria, the Rhineland, and Saxony, because these remote areas thought that Germany’s central bank and central government in Berlin were discriminating against them.
The separatists were politically radical – on the left in Saxony, and on the far right in Bavaria and the Rhineland.
There are also more recent cases of the same effect. In late-1980’s Yugoslavia, as the socialist regime disintegrated, the monetary authorities in Belgrade were inevitably closest to Serbian politicians such as Slobodan Milošević and to Serbian business interests.
As a result, the Croats and Slovenes wanted out of the federation.
In the Soviet Union, inflation appeared as an instrument of Moscow bureaucrats, and there, too, more remote areas sought to break away.
The makers of modern Europe saw that unstable and politically abused money would be a European nightmare, and lead to destructive national animosities and antagonisms.
They were supported by the twentieth century’s two most influential economists, Friedrich von Hayek and John Maynard Keynes.
Hayek was the most consistent critic of state-produced money.
His proposal, competitive currencies produced by “free banking” in which numerous private authorities would issue their own money, was more radical than the solution adopted by Europeans in the 1990’s.
But the Hayekian element of a money-issuing authority that was extensively protected against political pressures, and consequently against political opprobrium, was a key part of the European Union’s Maastricht Treaty.
Keynes, too, in planning for the postwar order, proposed a synthetic global currency that would guarantee stability and prevent deflation.
The vision of central-bank independence as a necessary part of the constitution of a sound and stable political order was not simply a European construct in the 1990’s.
It was also reflected in legislative changes affecting other central banks, and in central bankers’ growing prestige.
That view is now seriously challenged.
In the aftermath of the worst financial crisis since WWII, central banks are once again being called on to monetize securities issued by some debtors, but not others.
That task of selecting between debtors is highly political, and poisons the idea of monetary stability.
Jean-Claude Trichet, until recently the president of the European Central Bank, liked to claim that money was like poetry, before adding that both give a sense of stability.
That unusual but accurate formulation is reminiscent of General August Neidhardt von Gneisenau’s famous reply to the Prussian King, who dismissed as “nothing more than poetry” von Gneisenau’s patriotic concerns in the early nineteenth century.
“Religion, prayer, love of one’s ruler, love of the fatherland, what are these but poetry?” von Gneisenau asked.
“Upon poetry is founded the security of the throne.”
Stable money, too, is the foundation of political order.
We should not allow ourselves to be so overwhelmed by today’s crisis that we forget that.
The Political Stock Market
Many economic and financial analysts complain that emerging countries' stock markets are often heavily manipulated by their governments and are more political than economic.
The unstated assumption seems to be that, in contrast, some pristine force of economic nature drives stock markets in advanced countries, and that forecasting their performance is thus like forecasting the growth of trees.
This description of stock markets in emerging countries is not wrong, just biased, because the same description applies to stock markets in advanced countries.
Indeed, the best analysts know that forecasting the performance of any country's stock market substantially means forecasting how well the government wants stock market investors to fare in the current political environment.
Consider the United States stock market, by far the world's largest.
The general perception is that the government leaves companies alone and that the returns from investing in the US stock market reflect the fundamental forces of a strong capitalist economy.
This is one reason why the US is a magnet for portfolio investors from around the world.
But the returns that make US stock markets so attractive reflect a delicate political balance.
In particular, tax rates that affect stocks have varied through time as political pressures change.
During World War II, for example, political support for great fortunes diminished and the government sharply increased taxes on capital gains, dividends, and high incomes in general.
When World War II produced a strong recovery from the Great Depression of the 1930's, President Roosevelt and Congress slapped on an excess-profits tax to ensure that shareholders would not benefit too much.
By contrast, in 1980, when there was no war but the stock market was low, US voters elected Ronald Reagan, a man many thought too right wing to be president.
He asked for - and got - cuts in capital gains, dividend, and income taxes.
Political interference in the stock market is not merely about taxes on capital gains, dividends, and income.
Property taxes, excise taxes, import duties, and sales taxes - all of which are paid, directly or indirectly, by corporations - can have a magnified impact on corporate profits, and hence on the stock market.
It is no coincidence that wherever stock markets thrive, governments take care that these taxes stop well short of destroying after-tax corporate profits.
Indeed, the politics of stock markets does not stop with taxes.
On the contrary, almost every activity of government has an impact on corporate profits, and in turn, on the stock market.
After the 1929 stock market crash the US government suspended much anti-trust activity, allowing companies to acquire monopoly power that would boost their value.
This policy delayed the recovery from high unemployment, but even that was not enough to rein in the political forces arrayed in favor of supporting the stock market.
Similarly, one of the most important things that President Reagan did was to destroy much of the remaining power of America's labor unions, which compete for their share of the corporate pie.
Reagan's defeat of the Air Traffic Controllers' strike in 1981 was a watershed event for the US labor movement - and for the stock market, which started its dramatic bull market in 1982.
The US government has been particularly aggressive in supporting the stock market since the peak of the equities price bubble in 2000, most notably cutting interest rates repeatedly.
Of course, this was publicly justified in terms of stimulating the economy, not supporting the stock market.
But it is a telling sign of the US stock market's significance that one of the most important factors perceived to be weighing on the economy was declining equity prices.
Indeed, the authorities' response was not limited to monetary stimulus.
The US National Income and Product Accounts show that the effective rate of corporate profits tax (the percentage of profits actually paid to the government in taxes) crested at 33.7% in the first quarter of 2000 - the peak of the stock market and the economy in general - and fell to 20.2% in the fourth quarter of 2003, when the market was down.
Much of that decline reflects explicit tax relief measures voted by Congress, as well as the perception among corporations that in the current economic and political environment they can be more aggressive in tax avoidance.
Moreover, after the stock market crash, the maximum tax on dividends paid on stocks was slashed from 35% to 15%, giving a substantial new advantage to long-term investors and boosting the compounding effect of reinvesting after-tax dividends.
Again, this tax cut was justified in terms of stimulating the economy, which can, of course, be said of practically any measure aimed at supporting the stock market.
But it is the balance of political forces that determines whether such a justification will be credible.
One might say that the same variables, including hostility to high taxes and a weak labor movement, have operated in the US for the past 200 years - and can thus be expected to continue operating in the future, producing high stock market returns and attracting huge inflows of foreign investment.
Those who believe that investments in the US stock market will maintain the same strong growth trend for decades may well be right.
But one should be clear about what one is forecasting.
Essentially, one is forecasting not just economics, but politics - and even the cultural values - that shape economic policies and performance.
The Politics of Business Outsourcing
Several years ago in Delhi, I called a pest control firm to treat my apartment for termites.
A South Indian gentleman with a pleasing smile arrived with canisters of chemicals and a large syringe.
He went about his task meticulously.
Each time he sprayed, a mist settled on everything.
I asked whether this would really work.
Breaking into a comforting grin, he said, “Sir, have no worry whatsoever.
This is very strong stuff.
It is totally banned in the United States.” I edged out of the room, as he reared the syringe to administer another dose.
I remembered this incident after I gave a lecture in Helsinki on global labor standards.
As my talk concluded, I got into an animated debate with my audience on developing global standards for labor markets.
A globalized world, with one country’s goods, capital, and pollution flowing into another, will inevitably need common norms and laws.
But as my pest-control agent’s answer illustrated, one man’s poison can be another’s assurance.
Common standards in a world as inequitable as ours will raise many contentious issues.
The impact of business process outsourcing (BPO) on many developing nations’ labor markets is a case in point.
With technological breakthroughs in electronic communication and increasing bandwidth, many jobs that were done in industrialized nations, but that did not require face-to-face interaction, can now be moved to poorer countries, which have cheap labor, an educated workforce, and high rates of computer literacy.
America’s General Electric was one of the pioneers here.
GE has saved $340 million annually since shifting some of its back-office work to India.
Taking all costs into account, a call center in Kansas City costs more than three times as much as one in Mumbai.
Not surprisingly, employment has boomed in India’s IT-enabled offshore services sector, soaring from 106,000 in March 2002 to 171,500 a year later.
According to the latest projections, employment will cross the one-million mark in 2008.
India has been a major and growing outsourcing location for Microsoft, Hewlett Packard, British Airways, and other major corporations.
But it its hardly alone.
Over the last few years Motorola has been laying off workers in the US and moving operations to Brazil, China, and its plant in Chihuahua, Mexico.
Poor nations look to these facts and trends with hope, while many industrialized countries view them with anxiety.
One audience member in Helsinki told me despondently that he had soured on globalization after some of his friends lost their jobs through no fault of their own, but merely because Ericsson decided to move some European plants’ operations to China.
Some economists dismiss such complaints as merely fuel for protectionism.
Wrong.
Poor workers in rich countries are the most vulnerable to BPO, and such matters, if not dealt with carefully, can fuel nativism and populism.
On the Ku Klux Klan’s Web sites, economics now vies for space with race hatred.
Indeed, the two combine to produce a neatly perverse analysis: globalization is bad because it gives our race’s jobs to other races in developing nations.
Opposition to BPO from rich countries has nothing to do with international labor standards, which deal with the poorest workers in poor nations.
Unskilled laborers in poor nations do the kind of work that virtually no one in a developed country will do.
So there is no conflict of interest with the poorest workers in developing nations because they do not compete for the same types of jobs.
But at higher skill levels, BPO does create a conflict of interest between workers in rich and poor nations.
When a corporation outsources operations to a developing country, some of its incumbent workers really do lose out (at least in the short run).
Of course, many other groups gain.
Workers in the host country, such as software technicians and call-center operators, clearly benefit from BPO, but so do shareholders and company owners (whose profits grow) and consumers (who pay lower prices).
Many gain—and are well placed to compensate the losers.
To this extent, developed countries’ bear a responsibility for cushioning the impact on their workers by providing adequate social welfare protection, together with relocation and re-training benefits.
Indeed, such measures are crucial in the long term, because if BPO makes developing countries better off, their demand for goods and services will grow.
This will create new jobs in rich countries—and more than were lost to BPO.
But they may not be in the concentrated, visible sectors that moved to developing countries.
This makes BPO an easy target for populists, which is unfortunate because what developed countries really need is a flexible workforce.
This is not to deny that workers in industrialized countries are becoming relatively impoverished over time.
I believe that there are forces at work that tend to make the total income that accrues to labor relatively small compared to the income that accrues to capital.
But this has nothing to do with the movement of back-office work to poor nations.
If BPO were stopped, industrialized nations—and their workers—would be worse off in absolute terms.
The Politics of Cosmic Catastrophe
WASHINGTON, DC – One weighty decision that the world will need to make in 2010 is whether to support an idea raised by Anatoly Perminov, the head of the Russian space agency Roscosmos, to launch an unmanned mission to redirect a large asteroid that might collide with Earth after 2030.
At more than 360 meters in diameter, the asteroid, Apophis, is a dozen times larger than the Tunguska space object (presumably a meteorite or comet) that devastated a large part of eastern Siberia a century ago.
As far as can be determined, that object detonated on June 30, 1908, with the power of a nuclear weapon, felling 80 million trees over a 2,000-square-kilometer area.
According to NASA, if Apophis hit the Earth, it could release more than 100,000 times the energy of the Tunguska event.
Thousands of square kilometers could vaporize in the blast, but the whole Earth would suffer from the loss of sunlight and other effects of the dust released into the atmosphere.
This danger explains why a Russian analyst has called Apophis a “space terrorist.”
Current projections are that Apophis, which was discovered in 2004, will orbit near the earth several times between 2029 and 2036.
In October 2009, near-Earth object (NEO) trackers Steve Chesley and Paul Chodas of NASA's Jet Propulsion Laboratory in Pasadena, California, placed the odds of Apophis striking Earth in 2036 at about one in 233,000, lower than previous estimates.
But their forecast that it would come within 30,000 kilometers of our planet in 2029 (closer than some geostationary communications satellites, as well as the Moon) is more likely to please astronomers than international security experts.
Some unknown comet or other space object could fly near enough to the asteroid in the next few decades to change its predicted path, perhaps in a way that redirected it toward Earth.
According to Perminov, the proposals that Roscosmos is considering do not envision trying to destroy the asteroid, but rather to use the laws of physics to change its path.
He says that if Roscosmos’s management decided to act, it would work with experts from Europe, the United States, China, and other space powers to decide how best to proceed.
Scientists have proposed various ways to deflect an asteroid away from the Earth.
Some have suggested placing a large object nearby to change its trajectory through mutual gravitational attraction.
Another method is to use mirrors, light, or painted colors to change the way the asteroid absorbs heat, which could also shift its direction.
Attaching “solar sails” to the asteroid could cause the Sun’s particles to steer it along a different course.
Others have suggested ramming a spacecraft or other object into the asteroid to alter its momentum.
A few scientists, and many science-fiction writers, have also speculated about using nuclear weapons to destroy or damage an asteroid, comet, meteor, or alien spacecraft heading toward the earth.
The Outer Space Treaty bans placing nuclear weapons in orbit, on celestial bodies, or stationing “such weapons in outer space in any other manner,” but may be interpreted to permit their one-time use.
It also could be amended, or the states “attacking” the asteroid could withdraw from the agreement by giving one year’s notice.
The more practical problem is that even a nuclear explosion might not prove sufficiently powerful.
Even if the nuclear warhead broke the asteroid into many small pieces, they could have time to re-combine into another large object.
In addition, the space vehicle carrying the weapon might malfunction, and the nuclear warhead could land (and perhaps detonate) somewhere on Earth.
The safest approach might be to test several techniques on nearby asteroids before using them against Apophis when it approaches Earth.
Unfortunately, it is estimated that “attacking” an asteroid would cost billions of dollars, especially since multiple space launches would likely be needed to ensure that the required number of probes could complete the mission.
This raises the issue of who should pay for such a mission and, more fundamentally, who can authorize it.
These global governance questions also apply to other worldwide threats, such as climate change, that threaten humanity’s survival.
In 2008, a report by space experts called for the United Nations Security Council to make the final decision about how to counter potential threats from near-Earth objects.
The Security Council normally votes on issues that threaten international peace and security, but this method would allow only a small number of governments to decide Earth’s fate.
Perminov similarly seemed to suggest that only countries with large existing space programs could participate in the Apophis decision.
Since an asteroid collision could, like global climate change, affect all of humanity, should not everyone have some say in the decision?
Perhaps every country should vote in the UN General Assembly on how to proceed; the option receiving the most votes – with a possible mandatory minimum requirement, such as requiring an alternative to win a majority or some higher number of votes – would prevail.
Another option would be to allow every adult to vote directly in a global referendum for his or her preferred option.
An interesting issue would arise if some countries wanted to act, but others did not.
Would Russia or a coalition of willing countries have the right to attempt to alter Apophis’ orbit without the approval of other states?
What are the rights and duties of scientists and governments who consider the risks to be graver than their counterparts in other countries do?
Are they precluded from acting without unanimity?
Perminov’s proposal has raised important questions – both scientific and political.
Whatever the danger posed by Apophis, we would do well to begin addressing them.
The Politics of Frustration
Does extreme poverty breed violence and ultimately revolution?
Many people believe that it does, and seek to explain phenomena ranging from guerrilla insurgencies to Islamist terrorism accordingly.
But Karl Marx and Alexis de Tocqueville, the two great social analysts of the nineteenth century, knew better what makes people tick, and what makes societies change.
Extreme poverty breeds apathy, not rebellion.
The very poor can at most be used for occasional demonstrations of anger, but they are not the stuff from which either terrorists or revolutionaries are made.
A far more critical group in any society are those who have begun to move forward to new conditions, but then find their path blocked.
Their desires and ambitions are not unrealistic in the circumstances, but they are frustrated. Things do not move as fast as they want them to, or not at all, owing to conditions that they do not control.
Opportunities exist, but they cannot be seized or realized.
This group, not the desperately poor and helpless, forms the great mobilizing force of violent protest, and ultimately of major change.
The politics of frustration has been particularly apparent in the postcommunist world during the last fifteen years.
The heavy hand of nomenklatura rule was gone, and the vision of a new life like that in the open societies of the West seemed real.
Yet, in fact, things initially got worse.
The route to prosperity and freedom was not straightforward. On the contrary, it led through a valley of tears.
People reacted in a variety of ways.
Those who had the chance migrated, first to their homeland’s centers of economic progress, then abroad, to countries and places where the new world could be found immediately.
Those who stayed behind began to vote in strange ways – electing, for example, the successors of the old Communist parties that they had been glad to get rid of only a few years before.
The European Union, for all its weaknesses, has helped the postcommunist countries of Eastern and Southeastern Europe immensely.
It made the valley of tears bearable both by offering financial and other assistance and by holding out the promise of membership and economic prosperity in the near future.
Equally important, had the EU not supported the creation of an administrative and social infrastructure of liberty, there might well have been a more serious communist or even fascist backlash in Poland, Hungary, and elsewhere.
While the politics of frustration was thus controlled in the postcommunist world, it broke out with a vengeance in the Islamic world.
Here, too, the phenomenon was not new.
With the onset of modernization, millions of people were uprooted from their traditional communities and ways of life.
Young men, in particular, saw the prospect of a life more like that presented to them by Western television.
But they soon discovered that realizing this prospect would require a longer and more arduous journey than they had anticipated.
In fact, it would take at least a generation, during which much of the effort of modern life would have to be made, while the fruits of this effort would remain elusive.
Earlier generations may have borne the burden of working and waiting more readily, but nowadays people want results here and now.
If the benefits do not come quickly – and for most people they do not – they get restless.
The massive migration processes that have only just begun will be the major issue of the coming decades.
Particularly in Africa, migration will be almost the only quick route to modernization.
Those who do not manage to get to other countries, or who fail in the countries to which they have migrated, are in a quandary. For them, the old world of traditional ties and customs is gone, but the new world of modernity remains out of reach.
They are lost in a limbo of uncertainty and disappointment.
It has been argued that this was one of the problems of “belated nations” like Germany a hundred years ago.
Seductive leaders (Hitler among them) exploited the resulting sense of frustration.
Whatever the value of such theories, it is evident that the frustration of young people’s ambitions in modernizing countries makes them the object of preachers of hate and tempts them to leave the course of plodding progress and turn to more dramatic action.
What we call “terrorism” has many causes, and one must beware of facile explanations.
However, the politics of frustration, of ambitions raised and then thwarted, is clearly one such cause.
It is thus also a challenge to those of us living in more fortunate circumstances.
If we do not wish to be submerged in violence and authoritarian responses to it, international institutions must do for the modernizing world what the EU has managed to do for the postcommunist countries.
For the world’s democracies, there is no greater or more important task.
The Politics of Fun
WARSAW: We in Poland have had a hectic political year.
Last autumn we had presidential elections; this autumn we will have parliamentary elections.
In both, the outcome was obvious before the campaigning started.
Indeed, the postcommunists now hold such an enormous advantage over all their competitors that a vote scarcely seems necessary.
But today’s political parties and politicians are so well known that Polish politics is boring us to sleep.
The ruling right-leaning coalition (with “Solidarity” roots) is such a failure and the centrist Union of Freedom is so well known and ineffective, that people support the postcommunists simply because they have been in opposition for four years and might (just might) behave differently.
Suddenly, however, something is changing and for totally unexpected reasons.
During the presidential elections Mr. Andrzej Olechowski ran as an independent candidate.
He had no party support, no big money, but he somehow managed to place second with 17 % of the votes, more than what the governing party achieved.
Mr. Olechowski is well known in Polish politics, for he was once a minister of finance and later a minister of foreign affairs.
He is tall, handsome, and smart.
A disc jockey in his youth, he later worked in some international financial institutions, where he spied for the communists, something he openly admits.
Now he appears as a gentleman of independent means and views.
Both of my children and a majority of Polish students voted for him mainly because he seems fun.
He has no specific program or strong ideas, but he speaks in a clear and reasonable way (he calls himself liberal-conservative) that is very different from the mechanical party language of the postcommunists and rightists.
But in looking for fun in politics, we Poles have to remember that democracy, at its root, is meant to be boring, and for a good reason.
Safety is democracy’s primary purpose: the safety of each citizen to lead their lives in ways they choose.
But, obviously, democratic participation becomes less and less meaningful the more rote and mechanical it seems.
Indeed, one explanation I have often heard for the political turmoil in France in May 1968 is that the French people were bored with the successes of General de Gaulle’s presidency and so took to the streets around the Sorbonne for fun.
So, it seems that democracy should not only provide personal satisfaction for politicians but for the people, too.
Therefore it cannot be dull for long periods because people will then begin to doubt democracy itself.
Mr. Olechowski, despite his success was, after the elections, totally neglected by the Union of Freedom (with which he was supposed to be very close) and by the Solidarity right.
He was not a member of the political class, so nobody thought about how to gain advantage by his success.
So he decided, in tandem with some major political figures both from Solidarity and from the Union of Freedom, to create a movement called “Citizen’s Platform”.
All three of the leaders of Citizen’s Platform are handsome and bright, intelligent and funny.
They now have close to 20 % of voter support as the postcommunists slowly lose their huge advantage.
(For the first time in two years, indeed, they now hold less that 40% in opinion polls.)
Former political friends of the leaders of Citizen’s Platform try to conceal their envy, but without much success.
Things can’t be the same any more.
The new movement espouses the same program as Mr. Olechowski.
It is simple, clear and thus attractive, although they do try to avoid populist temptations.
Even for cynical people – like this writer – who thought that nothing was interesting in Polish politics, Citizen’s Platform is fun.
In the wake of recent elections in the US and Europe it seems clear that the “fun factor” is becoming important everywhere.
It is said that the best way to seduce a woman is to make her laugh. Perhaps the same is true with societies.
To be funny in politics and to preserve democracy is no easy task.
To be funny in politics really means the ability to deliver feelings of satisfaction to the citizenry for their participation in the public realm.
But do politicians really want people to participate?
I doubt it.
People who participate tend to have their own opinions, which makes the task of ruling harder.
But if there is no pleasure in democratic politics we will abandon it to specialists.
Pleasure is here understood as John Stuart Mill understood it.
Mill thought that there is a big minority of people who tend to seek higher pleasures and that to be active in democratic politics is one of such pleasure.
The future of democracy may, thus, depend on the ideas and the people who might bring us some higher pleasure and so provide us satisfaction in our citizenship.
Whether or not these new people will turn out to be good people is unclear, but it is becoming obvious that the sorts of people who are arriving in leadership positions are very different types of people from those that we have known – not only in Poland but all over the democratic world.
Why Are the Wealthier Healthier?
DURHAM – In 1842, the English social reformer Edwin Chadwick documented a 30-year discrepancy between the life expectancy of men in the poorest social classes and that of the gentry.
Today, people in the most affluent areas of the United Kingdom, such as Kensington and Chelsea, can expect to live 14 years longer than those in the poorest cities, such as Glasgow.
Such inequalities exist, to varying degrees, in all developed countries.
Poorer groups fare particularly badly in the neo-liberal system of the United States; gaps in life expectancy in some US cities, such as New Orleans, are as large as 25 years.
Understanding and reducing these health inequalities remains a major public-policy challenge worldwide.
It is not only a moral issue; health inequalities carry significant economic costs.
But the causes of such inequalities are complex and contested, and the solutions are elusive.
The prevailing explanation for health inequalities is rooted in the social determinants of health – that is, the environments in which people work and live.
Affluent people have better access to health-promoting environments, such as well-maintained schools that offer a good education, high-quality housing, and stable jobs in secure, safe settings.
The poorer you are, the more exposed you are likely to be to health-damaging environments.
Various theories draw on this basic framework – and each competing explanation suggests different strategies for reducing health inequalities.
For example, the “cultural-behavioral” approach explains health inequalities in terms of differences in individual behaviors, asserting that poorer people have worse health outcomes, owing to a higher propensity to smoke, drink alcohol, and eat less healthy foods.
This view naturally underpins interventions like targeted smoking-cessation services or health-education initiatives.
The “materialist” approach takes a broader view, arguing that people with more money can essentially purchase better health through superior education, health care, and social services.
Accordingly, countries can reduce health inequalities by introducing higher minimum incomes for their poorest citizens and guaranteeing universal access to public services.
By contrast, “psychosocial” theories suggest that it is the psychological experience of inequality – the feelings of inferiority or superiority generated by social hierarchies – that matters.
This view implies that the poorest individuals and communities need to feel productive, valued, and empowered to take control of their own lives, rather than feel trapped in a subordinate position.
The “life course” approach combines multiple theories to contend that the unequal accumulation of social, psychological, and biological advantages or disadvantages over time, beginning in utero, produces health inequalities.
It demands early intervention to put children on a positive health path, together with an adequate social safety net throughout citizens’ lives.
The most encompassing view is that of the “political-economy” school, which argues that health inequalities are determined by capitalist economies’ hierarchical structure and the associated political choices about resource distribution.
This analysis calls for the most radical action: to develop an economic and social system in which resources, particularly wealth and power, are more evenly distributed.
Given that all of these theories can, to some extent, be supported by scientific evidence, politics can matter more than science in determining which strategies policymakers pursue to reduce health inequalities.
After all, some potential solutions are politically easier to implement within existing systems than others.
For example, interventions aimed at changing individual behavior are far less challenging to prevailing power structures than those that demand extensive social investment or revitalization of the entire system. Thus, governments interested in closing the health gap – such as the British Labour government in 1997-2010 – usually end up pursuing such relatively painless “downstream” interventions.
But this approach has proved to be only partly successful in reducing health inequalities, leaving little doubt that more comprehensive measures are needed.
Indeed, most of the health gains over the nineteenth and twentieth centuries were brought about by far-reaching economic, political, and social reforms.
Ultimately, more equal societies have better health outcomes.
While even the most egalitarian developed countries have health inequalities, all of their citizens are better off and live longer.
The poorest and most vulnerable groups in social-democratic countries like Sweden and Norway are far healthier and live longer than their counterparts in neo-liberal countries such as the UK or the US. These more egalitarian countries have also achieved comparatively stable, inclusive economic growth and a high standard of living.
So, if assessed from a neutral standpoint, social democracy is clearly the better choice for all.
The Politics of Psychiatry
Worldwide, annual investments in scientific research to cure devastating mental pathologies such as bipolar disorder, schizophrenia, and clinical depression are huge – comparable to spending on finding a cure for any other disease.
But while mental disorders are indeed medical diseases, with their own culprit molecules and aberrant anatomies, they are also different from “physical” diseases in important ways.
For no matter how thoroughly “medical” mental illnesses are, they are also thoroughly social.
The reasons for this stem from the nature of mental disorders themselves.
There is no question that pathologies like heart disease, pneumonia, or diabetes have a large impact on a sufferer’s sense of self and place in the community.
But only in illnesses like schizophrenia, bipolar disorder, obsessive-compulsive disorder, and depression do we find disease processes that directly and profoundly transform a person’s self, identity, and place in the community.
A person with schizophrenia may experience his self as another, may experience his identity as controlled by others, and may regard the entire community as suspect and threatening.
A person in the manic phase of bipolar disorder has, in addition to serious, even life-threatening lapses in judgment, an extraordinary sense of well-being that the mentally well rarely, if ever, experience.
The individual with obsessive-compulsive disorder both dreads and is ashamed by irrational obsessions and compulsions, yet finds engaging in these thoughts and actions irresistible.
The person with clinical depression finds his or her entire being dark and vapid, devoid of ordinary human feelings like anticipation, pleasure, and meaningfulness.
Patients with mental pathologies commonly ask their doctors, “Is it me or my illness?” The manifestations of illness and the expression of self are not so easily distinguished, and psychiatric treatment often focuses on disentangling the two.
But this intermingling of the self with the manifestations of mental illness often leads patients to have mixed feelings about treatment.
For example, treatment for a manic patient jeopardizes that extraordinary feeling of well-being and risks plunging the person into the dreaded depressive phase of the illness.
The idiosyncratic beliefs of the schizophrenic are the target of pharmacotherapy, but at the same time they may be a source of personal pride and form a distinct sense of self that the patient wants to preserve.
Because of this “self-illness” ambiguity, mental disorders are linked with personal values, belief systems, and interests in ways that are distinct from physical diseases.
Physical symptoms are almost never positively valued, but some symptoms of mental disorders typically are.
For example, almost everyone agrees that a broken leg or pneumonia are bad things to have.
But many manifestations of mental disorders – such as the increased energy of mania, the euphoria of intoxication for the addict, or the smug satisfaction of the individual with a personality disorder – may not always be viewed that way.
As a result, while many would-be patients might recognize the benefits that psychiatric treatment has to offer, they also may be deterred by the threat to what few sources of self-affirmation they have.
When one adds to this the stigma and explicitly discriminatory practices against the mentally ill, it is a wonder that failure to keep appointments and take medications is not more common than it is.
While the “self-illness ambiguity” in mental illness may not be explicitly appreciated, many societies have made accommodations, such as considering a criminal offender’s state of mind in assessing legal culpability.
Societies also often provide ways to encourage, even compel, a mentally ill person into treatment, while recognizing that, because psychiatry can potentially invade and overwhelm personal beliefs and values, mental health practices must be regulated in order to preserve civil liberties.
As science unravels many of the puzzles concerning mental disorder, it may become tempting to argue that these problems with politics and diverse values will evaporate.
According to this view, broad agreement about the causes of and cures for mental illness will make politics irrelevant, just as a broken leg or a heart attack are not really political in content today.
I am skeptical that this can happen.
Consider a bit of science fiction.
Let us say that, at some point in the future, neurobiology will explain not only major mental disorders, but also criminality.
Indeed, we will have perfected a biology of morality that allows us to explain typical morality as well as deviant morality.
But even in such a science-fiction scenario, we are left with a serious political problem: on what moral terms can we base desirable and undesirable beliefs and behaviors?
Who will define the norms of criminality and mental illness, conditions for which science provides the explanation?
Will those norms be based upon my values, your values, prevailing scientific views, or perhaps the values of a political mastermind?
The politics of psychiatry are inescapable, which is why all societies must consider them with the greatest of seriousness.
The Politics of Revolutionary Surprise
DURHAM – In setting himself ablaze following a humiliating encounter with the police, the university-educated Tunisian vegetable seller Mohamed Bouazizi triggered a wave of protests across the Arab world.
Several Arab dictators who had held power for decades have already been ousted or forced to announce that they will retire.
But protesters in Cairo, Tunis, and Sana want much more.
They also seek efficient governance, economic reforms to stimulate growth, the ouster of collaborators, democratic rights, freedom of religion (and perhaps also from religion) – in short, a comprehensive social transformation.
Everywhere, incumbent regimes have mounted resistance.
The unforgettable scene of camel- and horse-riding Mubarak supporters beating tech-savvy Egyptian protesters signals that the old order will not yield without a fight.
The revolts themselves caught seasoned observers, even Arab leaders, off guard.
Had the United States known what lay ahead, Secretary of State Hillary Clinton would not have remarked, after demonstrations broke out in Egypt, that the Egyptian government was “stable.”
Arab leaders now showering their key constituencies with pay raises and food subsidies would have done so earlier, thus avoiding the impression of vulnerability.
Longtime regime opponents, too, were caught off guard.
For days after Egypt erupted, the Muslim Brotherhood did not know how to react, making it seem out of touch with the “Arab street.”
For decades, most Arabs, however unhappy, kept their political grievances private, for fear of persecution if they turned against their leaders publicly.
Through private discussions with trusted friends, everyone sensed that discontent was common, yet no one knew, or could know, the extent of it.
Even harder to gauge was what it would take for the disaffected to say “enough is enough” and begin challenging their regime openly, defiantly, and in concert.
If a sufficient number of Arabs reached that threshold at the right time, the long-docile Arab street would explode in anger, with each group of new protesters encouraging more to join in, giving people elsewhere in the Arab world the courage to initiate protests of their own.
That much was understood widely by entrenched Arab dictators, who saw to it that their intelligence and security corps extinguished any flame before it could spread.
History will record that the match Bouazizi lit on December 17, 2010, became the fortuitous spark that ignited an Arab prairie fire.
The fire spread so fast that by the time Arab leaders understood what it would consume, it was beyond anyone’s control, and in more than one country.
The overthrown Tunisian dictator must now regret that his security forces did not arrest Bouazizi and lock him up, rather than allow his public self-immolation.
As it turned out, by the time the seriousness of the rebellion became clear, fear was already changing sides even within the halls of Tunisian power.
President Zine El Abidine Ben Ali’s aides had started worrying more about being caught on the wrong side of Tunisian history than about facing the wrath of their beleaguered boss.
Fissures within the Egyptian regime suggest that in Hosni Mubarak’s entourage, too, fear is in flux.
The mechanisms underlying this political unpredictability are not unique to the Arab world.
Unforeseen uprisings are possible wherever repression keeps people from expressing their political preferences openly.
In 1989, the fall of repressive East European regimes in quick succession stunned the world, including dissidents who had long recognized communism’s vulnerabilities.
Just before the Iranian Revolution of 1979, a CIA report characterized the Iranian monarchy as an “island of stability.”
A month before the Russian Revolution of February 1917, Lenin predicted that his country’s great explosion lay in the distant future.
All of these cases involved the mushrooming of public protest by long-quiescent constituencies with no prior record of coordinated action.
The aftermath of an unanticipated revolution will itself present surprises.
In Egypt, Tunisia, and Yemen, no one knows where power will lie in the months to come.
As in Iran in 1979, demonstrators united in opposition to the old regime have wildly differing goals.
Their biggest demands – secure jobs, faster growth, low food prices – are not necessarily compatible, and they may require policies that inflict pain.
Divisions within the opposition movements are thus inevitable.
If the Arab societies now in turmoil had democratic traditions, they could be expected to find compromises peacefully, through open and honest debate.
Alas, given their histories of autocratic rule, giant leaps forward to full-blown democracy are unlikely.
Though steps toward democracy are possible, when the euphoria of the moment passes, political contenders will realize that, if only in self-defense, they must restrict their opponents’ freedoms.
Adding to the complexity of the situation are the Islamists, who have so far kept a low profile.
They themselves are divided, with preferences ranging from Sharia rule in one form or another to a “Turkish model” involving mild Islamism capable of achieving mass support through the ballot box.
Several things are certain.
The Arab street has changed the calculus of fear not only in the countries that have witnessed major protests, but also in the rest of the Arab world, where rulers are on notice that discontent need not remain submerged forever.
Arab leaders old and new will implement policies designed to alleviate popular dissatisfaction.
They will consider both easing repression, in order to gain sympathy, and tightening it, in order to prevent uncontrollable protests.
But, whatever they do, they – and the rest of the world – must now expect surprises.
The Politics of Self-Destruction in Peru
Peru's President Alejandro Toledo has invented a new extreme sport, a soccer game in which he is the sole player.
Instead of kicking the ball to win, he aims so that his opponent scores.
This explains why, with more than half of his term left, the man who led a popular movement to unseat former President Alberto Fujimori holds a mere 7% popularity rating today - the lowest ranking of any Peruvian leader since 1980, when democracy was re-established.
Toledo assumed the presidency planning to dismantle the corruption that marked Fujimori's administrations and end the reign of his crooked chief of intelligence, Vladimiro Montesinos.
Toledo claimed that he would send all dishonest officials to prison - words that captured the imagination of Peruvians, who yearned to see criminal politicians brought to justice.
All this resolve was shattered by revelations about Toledo's personal advisor, César Almeyda, whom he appointed to head the new National Intelligence Board.
Almeyda secretly met with Army General Oscar Villanueva, the presumed "cashier" of Montesinos's mafia.
Villanueva was a fugitive from justice and Almeyda knew that he should turn him over to the police.
Instead, he sought information from Villanueva, supposedly to use against the government's enemies.
Toledo later claimed that he was wrong to trust Almeyda, but few believed that the president had not known what Almeyda, a trusted confidante, had done.
Toledo had every reason to seek Villanueva's help: as everyone knows, despite being locked up at the Callao Naval Base, Vladimiro Montesinos continues to exercise influence and can find ways to bring down Toledo's government.
Following the news of Almeyda's clandestine meetings, yet another fugitive, Daniel Borobio, made damaging revelations.
Borobio, who organized the presidential advertising campaigns for both Fujimori and Toledo, declared from exile in Chile that two of Toledo's brothers had secretly hired him to help "slow down the president's fall from popularity, improve his public image, and raise his ratings."
Recent public opinion surveys indicate why Toledo needs such assistance: many Peruvians believe that his government is as corrupt as Fujimori's.
Meanwhile, Toledo's self-destruction has given Fujimori more reason to fantasize, from the safety of his exile in Tokyo, about a political resurrection.
Never mind that Congress has prohibited him from ever returning to Peru ­- where he faces serious charges of corruption - or that he can count on only 15% of the electorate to support him.
Despite this, he brims with imagined presidential plans, such as ridding the country of terrorist groups like Shining Path and re-establishing Peru's economic standing.
On his web page and through his radio program, Fujimori assures listeners that Toledo's anti-corruption program is a fantasy and that Toledo's association with Montesinos will bring about more looting of the treasury.
This is doubtless an attempt to deflect attention from Fujimori's own crimes perpetuated from 1990 to 2000, before he fled to Japan.
But Toledo's own behavior gives such arguments a ring of truth.
Indeed, Toledo has made things worse through deception.
His first offense was raising the presidential salary to $18,000 (Fujimori's was a symbolic $1,500).
Then he revealed that his wife was doing business with one of Montesinos's banker friends and that his family members had obtained highly paid government posts.
But the scandal that has destroyed his credibility is his refusal for thirteen years to recognize his daughter, Zaraí, a child born of an extramarital affair.
Throughout his campaign, Toledo insisted that he would do so, but he admitted his paternity only two years later, after the girl's mother turned to the Supreme Court for help.
Toledo's advisors had urged honesty, assuring him that he would rise in public esteem by coming clean.
But he stubbornly refused, and his belated admission came too late to gain public favor.
The media, silent during Fujimori's reign, contribute to the feverish political climate.
Even Peru's most important newspaper, El Comercio , recently suggested that Toledo resign, leaving his first minister and cabinet to run the government.
More troubling is the fact that anyone with legal problems due to ties to either Fujimori or Toledo can find a newspaper, television, or radio outlet from which to make accusations.
The media tend to take accusers at their word, without regard for their credibility or the facts.
One newspaper, for instance, published a letter accusing Toledo of using drugs.
The letter's author, Carlos Pichiling¸ was the head of a paramilitary group that was associated with Montesinos and that killed at least 30 civilians.
In a final effort to reduce the impact of all these scandals, Toledo published an open letter, declaring that none of his brothers were authorized to represent him.
Stepping in to back the embattled president, the Organization of American States recently issued a call that Toledo be allowed to finish his term.
But opinion polls continue to show a huge drop in Toledo's popularity, and no one believes that he will make it to the end of his term in 2006.
The Politics of Values
The debate about the American elections has still not abated.
How did President George W. Bush manage to get three million votes more than Senator John Kerry, and, in addition, to have a Republican majority elected in both houses of Congress?
There is not much agreement on the answers, but two themes recur in many explanations.
One is personality.
At a time of uncertainty and threat, people had more confidence in the president they knew than in the candidate who seemed unproven.
The second theme is values.
People voted for a set of values rather than for specific policies.
Indeed, some (it is said) agreed with Kerry’s policies but nevertheless gave their vote to Bush, because they felt “at ease” with his general attitudes.
Clearly, the United States is now deeply divided in electoral terms.
An arch of blue (Democratic) states in the East, North, and West spans a huge red (Republican) area in the middle and the South.
More than that, the divisions are reproduced at the local level.
Gerrymandering – the drawing of electoral boundaries to benefit a particular political party – is no longer necessary.
People actually tend to move to areas in which a majority of others share their values, whether Republican or Democratic.
What exactly are these values?
They have to do, or so we hear, with “god, guns, and gays.”
Religion plays a part in them, including the literal truth of the bible when it comes to the story of the creation.
The possession of a gun is the ultimate test of individualism, and using guns in wars is not abhorrent.
Gays and other “modern” practices are rejected as self-indulgent.
As the political scientist Andrew Hacker recently put it, “the Bush candidacy was framed to make a majority by giving some 60 million people a chance to feel good about themselves.”
Is all this an American phenomenon, or are there similar trends elsewhere?
One answer is that as an American phenomenon, the politics of values may command a majority now, but it is by no means general.
Europe and other parts of the world are equally divided.
Personality undoubtedly matters, and beneath overt political differences there may also be issues of values that have not yet come to the fore.
But traditional political differences based on disagreement over fundamental values play a diminishing part in elections.
For example, Prime Minister Tony Blair, the next major leader to face an election, plays the personality card and talks about policies, but he represents above all a set of middle-class values.
When he speaks of “modernization,” or of “bringing things into the twenty-first century,” he manages to suggest a strange but appealing mixture of change and stability.
This has left the Conservative opposition without an effective response.
Even questions like tax cuts and stricter asylum rules do not quite hit the value chords that the Republican Party in the US has managed to touch.
The picture is similar in Germany, where the overt influence of value politics is even smaller.
The German debate is still largely a policy debate.
When the opposition offers the government talks on health-care reform or, most recently, on combating unemployment, the underlying competition is about competence rather than values.
Yet underneath the common battlegrounds of political debate in Britain and Germany and elsewhere in Europe, value clashes are lurking.
Parties fight for those who can be made “to feel good about themselves,” but they may not fully realize that this is only partly a matter of policy.
Religion is not likely to become a major factor in European politics; opinion polls show that religious observance marks one of the few major differences between Americans and Europeans.
Guns also have a different place in the European mind; it is their absence that most Europeans regard as important.
A pacifist streak of values is also unmistakable in Europe.
But the issue of political correctness (“gays”) plays a so-far underrated part in Europe as well.
Most importantly, the Europe itself divides Europeans, as the “national question” arises in each European state.
It is an issue of values, inspired by fear.
People want to know where they belong, and in the process they turn against the US and toward Europe, or against Europe and toward their country.
Either way, we leave the realms of policies, and even of politics, and enter the murky domain of symbols and myth.
This, at any rate, is the main risk that democratic countries face, for the politics of values is a dangerous development.
It reintroduces fundamental divisions in societies whose greatest democratic achievement was precisely to banish fundamentalism from politics.
Enlightened public debate must be a dispute about policies contained by a community of values.
Insisting on this is therefore a primary objective of the politics of freedom.
Robots on the Brain
CALGARY – When Harvey Cushing and William Bovie introduced electrocautery (which uses a high-frequency current to seal blood vessels or make incisions) in 1926, their innovation transformed neurosurgery.
Given the precision required to operate on an organ as delicate as the brain, the convergence of mechanical technologies with the art of surgery catalyzed progress in the field.
Neurosurgical advances always pursue minimalism.
As in any other surgical field, the less the procedure interferes with the body, the less likely it is to affect the patient’s quality of life adversely, and the sooner the patient will be able to return to normal activity.
This imperative is even more pronounced when it comes to sensitive neurological procedures.
Tasks like maneuvering small blood vessels that are 1-2 millimeters in diameter, or removing a brain tumor without damaging the surrounding tissue, require technologies, such as the operating microscope and multimodal imaging tools, that complement surgeons’ skills and augment their abilities.
A step further would be to allow a human-controlled robot to enter the brain.
Robots are capable of performing repetitive tasks with a higher degree of precision and accuracy than are humans, and without muscle fatigue.
And they can be upgraded periodically to integrate new features seamlessly.
What robots lack is the human brain’s executive capacity.
Given that comprehending – and reacting appropriately to – the immense number of variables that can arise during surgery would require enormous computing power, surgical robots aim to integrate human experience and decision-making ability with mechanized accuracy.
One example of this convergence is neuroArm, developed by my research team at the University of Calgary in conjunction with engineers at MacDonald, Dettwiler and Associates.
The neuroArm actually has two arms, which can hold various surgical tools while the surgeon maneuvers them from a remote workstation.
The workstation provides a multitude of data – including magnetic resonance imaging (MRI), a three-dimensional image of the surgical field, sonic information, and quantifiable haptic (or tactile) feedback from tool-tissue interaction – that enable the surgeon to experience the surgery through sight, sound, and touch.
Because the human brain makes decisions based on sensory input – and, of course, experience – such data are essential for the surgeon to make the most informed choices possible during surgery.
Technologies like MRI can help in surgical planning, resection control, and quality assurance.
Magnetic-resonance-compatible robotics allow for real-time imaging, providing information about anatomical structures and changes in the brain relative to surgical pathology while operating, thereby minimizing risk.
Given that the robot receives the MRIs and provides haptic feedback, electronic highways or surgical corridors can be established before the procedure, as can “no-go” zones.
Tool manipulation can thus occur only within the predetermined corridor, preventing unintended injury to the brain.
Furthermore, robotic surgery has the potential to progress beyond the scope of unaided human capability.
Motion scaling – which allows the robotic arms to mimic the exact movements of the surgeon’s hands, but on a much smaller scale – will enable surgeons to manipulate tissue that is too small for the naked eye to detect.
With the development of smaller microsurgical tools and high-performance cameras and monitors, operating at the cellular level will be possible.
A related area with important implications for neurosurgery is virtual reality.
Building on simulation technology, virtual reality will allow surgeons to rehearse procedures, including with surgical robots, in a digital environment.
The ability to map out complex cases and practice rare procedures before performing them on a patient will undoubtedly lead to better surgical performance and improved medical outcomes.
Virtual reality will also enhance surgical training, by providing students with a wider range of experience and enabling quantification of their performance.
Surgeons operating manually know how much force they exert only by the way it feels; a surgical simulator, by contrast, could measure that force and indicate when a trainee is applying excessive or insufficient pressure.
Moreover, instructors will be able to program controlled scenarios to assess how a trainee copes in challenging circumstances.
The ability to reset and retry surgeries without any risk or additional cost will enhance neurosurgical training significantly.
After all, practice makes perfect.
To be sure, virtual reality remains a relatively young technology.
Given that realistic neurosurgical simulations, which must account for a large number of variables and potential outcomes, are particularly difficult to develop, virtual reality is not yet being used widely in the field.
But surgical-simulation technology is advancing rapidly, bolstered by developments in parallel computing.
As these simulations become more realistic, their training value will increase.
The merging of human surgical experience with machines and computerized technologies is driving neurosurgical advancement, with robotic surgery serving as an important model of the benefits of the human-machine interface.
Add virtual reality to the equation and the future of neurosurgery takes shape – a future in which the discipline is elevated to new levels of excellence.
The Poverty of Dictatorship
CAMBRIDGE – Perhaps the most striking finding in the United Nations’ recent 20th anniversary Human Development Report is the outstanding performance of the Muslim countries of the Middle East and North Africa.
Here was Tunisia, ranked sixth among 135 countries in terms of improvement in its Human Development Index (HDI) over the previous four decades, ahead of Malaysia, Hong Kong, Mexico, and India.
Not far behind was Egypt, ranked 14th.
The HDI is a measure of development that captures achievements in health and education alongside economic growth.
Egypt and (especially) Tunisia did well enough on the growth front, but where they really shone was on these broader indicators.
At 74, Tunisia’s life expectancy edges out Hungary’s and Estonia’s, countries that are more than twice as wealthy.
Some 69% of Egypt’s children are in school, a ratio that matches much richer Malaysia’s.
Clearly, these were states that did not fail in providing social services or distributing the benefits of economic growth widely.
Yet in the end it did not matter.
The Tunisian and Egyptian people were, to paraphrase Howard Beale, mad as hell at their governments, and they were not going to take it anymore.
If Tunisia’s Zine El Abidine Ben Ali or Egypt’s Hosni Mubarak were hoping for political popularity as a reward for economic gains, they must have been sorely disappointed.
One lesson of the Arab annus mirabilis, then, is that good economics need not always mean good politics; the two can part ways for quite some time.
It is true that the world’s wealthy countries are almost all democracies. But democratic politics is neither a necessary nor a sufficient condition for economic development over a period of several decades.
Despite the economic advances they registered, Tunisia, Egypt, and many other Middle Eastern countries remained authoritarian countries ruled by a narrow group of cronies, with corruption, clientelism, and nepotism running rife.
These countries’ rankings on political freedoms and corruption stand in glaring contrast to their rankings on development indicators.
In Tunisia, Freedom House reported prior to the Jasmine revolution, “the authorities continued toamp#160;harass, arrest, and imprison journalists and bloggers, human rights activists, and political opponents of the government.” The Egyptian government was ranked 111th out of 180 countries in Transparency International’s 2009 survey of corruption.
And of course, the converse is also true: India has been democratic since independence in 1947, yet the country didn’t begin to escape of its low “Hindu rate of growth” until the early 1980’s.
A second lesson is that rapid economic growth does not buy political stability on its own, unless political institutions are allowed to develop and mature rapidly as well.
In fact, economic growth itself generates social and economic mobilization, a fundamental source of political instability.
As the late political scientist Samuel Huntington put it more than 40 years ago, “social and economic change – urbanization, increases in literacy and education, industrialization, mass media expansion – extend political consciousness, multiply political demands, broaden political participation.” Now add social media such as Twitter and Facebook to the equation, and the destabilizing forces that rapid economic change sets into motion can become overwhelming.
These forces become most potent when the gap between social mobilization and the quality of political institutions widens.
When a country’s political institutions are mature, they respond to demands from below through a combination of accommodation, response, and representation.
When they are under-developed, they shut those demands out in the hope that they will go away – or be bought off by economic improvements.
The events in the Middle East amply demonstrate the fragility of the second model.
Protesters in Tunis and Cairo were not demonstrating about lack of economic opportunity or poor social services.
They were rallying against a political regime that they felt was insular, arbitrary, and corrupt, and that did not allow them adequate voice.
A political regime that can handle these pressures need not be democratic in the Western sense of the term.
One can imagine responsive political systems that do not operate through free elections and competition among political parties.
Some would point to Oman or Singapore as examples of authoritarian regimes that are durable in the face of rapid economic change.
Perhaps so.
But the only kind of political system that has proved itself over the long haul is that associated with Western democracies.
Which brings us to China.
At the height of the Egyptian protests, Chinese Web surfers who searched the terms “Egypt” or “Cairo” were returned messages saying that no results could be found.
Evidently, the Chinese government did not want its citizens to read up on the Egyptian protests and get the wrong idea.
With the memory of the 1989 Tiananmen Square movement ever present, China’s leaders are intent on preventing a repeat.
China is not Tunisia or Egypt, of course.
The Chinese government has experimented with local democracy and has tried hard to crack down on corruption.
Even so, protest has spread over the last decade.
There were 87,000 instances of what the government calls “sudden mass incidents” in 2005, the last year that the government released such statistics, which suggests that the rate has since increased.
Dissidents challenge the supremacy of the Communist Party at their peril.
The Chinese leadership’s gamble is that a rapid increase in living standards and employment opportunities will keep the lid on simmering social and political tensions.amp#160;amp#160;
That is why it is so intent on achieving annual economic growth of 8% or higher – the magic number that it believes will contain social strife.
But Egypt and Tunisia have just sent a sobering message to China and other authoritarian regimes around the world: don’t count on economic progress to keep you in power forever.
The Poverty of Stimulus
PASADENA, CALIFORNIA – Most economists think that macroeconomic disruptions, such as the current recession, can be understood in terms of aggregate indicators such as total employment, the price level, and the money supply.
But this view is misleading, particularly in the current economic situation.
Worse yet, it misleads us into counterproductive economic policies.
As the economist Fischer Black explained, an economy matches a population’s desires to the available resources and production technology.
When an economy is operating efficiently, expectations are largely fulfilled; desires, resources, and production technology are well matched; and people are reasonably satisfied with their plans, relations, and contracts.
But if the world evolves in a markedly unanticipated direction, people’s existing plans, relations, and contracts require revision.
The existing matches between desires, resources, and production technology deteriorate.
While this revision occurs, resources are diverted from production, which is less efficient and less well matched with consumer desires, resulting in a reduction in the value of output – a recession.
This “realignment theory” helps explain the current downturn.
From 2000 through 2007, millions of American homeowners entered into mortgage contracts to finance their homes.
Securities based on those contracts ended up, in part, in the hands of financial institutions.
But the adequate servicing of the debt and, therefore, the performance of the securities, were based on expectations of continued rises in housing prices that proved to be unrealistic.
When housing prices fell, so did the value of the mortgages and the securities based upon them.
Because financial institutions held much of these securities, their market values declined as well, leaving balance sheets in need of restructuring, particularly given their highly leveraged capital structures.
Awaiting that restructuring, financial institutions could not perform as usual, which impeded financial intermediation and called into question plans, relations, and contracts – such as corporate and residential investment or refinancing.
Meanwhile, consumers who held a substantial fraction of their wealth in housing were forced to revise their consumption plans in the face of declining values.
This affected all the producers, distributors, and retailers whose plans and contracts were based on now-obsolete expectations.
And so it goes.
Eventually, the required restructuring became so widespread that it impacted virtually every sector of the economy.
The current recession is as deep as the misalignment of specialized plans, relations, and contracts is extensive.
Construction workers cannot become software developers overnight.
Automobile companies cannot adjust immediately to a change in consumer preferences regarding what type of cars they want to purchase, or how frequently. Would-be financiers cannot adjust to these plans overnight.
An obvious question is whether the government can do anything to speed the restructuring process or reduce its cost.
If the government could identify how the economy needed to be restructured and provide incentives to move resources more quickly in that direction, a properly designed program could alleviate and shorten the recession.
But, if the government could do that, central planning would be a good deal simpler.
Moreover, just as a command economy is invariably less efficient at resource allocation and production than a market economy, a general stimulus program will, in all likelihood, lead to highly inefficient allocations, effectively burning resources at a time when they are scarce and particularly vital to restart and re‑align our beleaguered economies.
To the extent that it is used to prop up declining industries, the stimulus could even prove harmful by delaying necessary adjustments.
Viewed from a matching perspective, there is no failure of “aggregate demand” – whatever that means.
Instead, there is a complex misalignment problem – too many autoworkers when too few people want new cars, for example – that results in a decline in overall output.
Thus, it is possible that increased government spending – say, to boost car purchases – could exacerbate the misalignment.
Given the central role of financial intermediation in the current crisis, the government should instead expedite the restructuring process through bankruptcy law.
The key is to accept bad news: losses must be recognized before efficient realignment can occur.
This suggests the following solution to the banking crisis.
First, the value of financial institutions’ investments should immediately be marked down to their market values.
Based on those values, contracts with existing equity and debt holders should then be restructured.
If the losses are big enough that existing equity and debt holders are wiped out, government insurers should make up the difference to protect depositors.
Following that, the restructured bank can be recapitalized by raising new debt and equity.
From that point, the bank should operate normally.
Unfortunately, this elegant solution assumes away all the problems associated with the complex web of contracts and relationships that constitutes the financial system, the limited information of all the affected parties, and the incentive of each of those parties to protect its own interests.
For example, there is no agreement on the market values of financial institutions’ housing‑related assets.
As a result, restructuring has been time consuming, costly, and characterized by intense lobbying, rent-seeking, stop‑and‑go policy making, and the continued failure of credit markets to function efficiently.
If the government could help break this logjam, in a fashion similar to the manner in which courts expedite corporate bankruptcy, the benefits could be large.
To the extent that government becomes involved in restructuring financial institutions, it should avoid unnecessary wealth transfers from taxpayers to the security holders of the financial institutions.
Beyond that, the realignment process is best left largely to private agents.
The government has neither the necessary information nor the proper incentives to do the job.
The Poverty of Thinking About Poverty
The World Summit on Sustainable Development in Johannesburg is, as expected, contemplating numerous bold promises, but the meeting itself is doomed to be an exercise in futility.
For if we mean by `development' human development in its widest sense, the only development that is sustainable is one that enables people to live together in peace and with respect for basic human rights.
There is very little scope for international action to eliminate the violation of these rights in many - if not most - countries of the world today, particularly those that are trying to turn the `Earth Summit' into a sounding board for criticism of the failure of advanced countries to do more to eradicate world poverty or to protect the environment.
At least we should welcome the fact that these two topics - poverty and the environment - are the two main themes of the Earth Summit.
This is a retreat from the usual fixations of the earlier sustainable development pressure groups, such the supposed exhaustion of raw materials for growth, or the sheer technical inability of the world to feed its expanding population, or biodiversity.
The wild exaggerations of environmental activists are at last being seen through by most informed commentators.
The laws of economics state that when the demand for a commodity begins to outstrip supply the price will rise.
Leaving aside short-term speculative markets, demand will then decrease and supply (including the supply of substitutes) will increase.
These laws have ensured that none of the doomsday scenarios of the 1960s and 1970s - remember the forecasts of the "Club of Rome"? - have come to pass.
Indeed, in the long run, prices of almost all minerals have followed a downward trend.
The world can never run out of any mineral resources.
Similarly alarmist predictions about imminent worldwide famine have also been falsified.
Famines do occur, of course, but rarely, if ever, in genuinely democratic countries.
From the days of Soviet collectivization in the 1930s down to President Mugabe's racist policies in Zimbabwe today, famines result from civil wars or ideological lunacies.
Local climate change can, of course, exacerbate the situation, but given the scope for world trade and the existence of surpluses in many food producing areas, democratic governments can deal with the consequences.
As for biodiversity, the most important species threatened with extinction today is the human race.
True, international action can help to deal with the twin problems of poverty and environmental degradation.
For example, rich countries should reduce agricultural subsidies and open up their markets more to Third World food exports.
International action can also help deal with global environmental problems.
There are many examples of such action, such as the Montreal Protocol to help reduce the threat to the ozone layer.
So it is unfortunate that America abandoned the Kyoto process for combating global warming, instead of trying to move that process toward sensible market-based solutions and away from the regulatory mechanism beloved of bureaucrats everywhere.
But a reduction in poverty and environmental degradation - such as lack of access to clean drinking water - that affect the lives of billions of people in the Third World will always depend chiefly on local policies.
These include, above all, increased respect for the rule of law, for property rights, for freedom for people to take advantage of their entrepreneurial spirit and to express their discontent with their lot, not to mention other basic freedoms set out in numerous international conventions to which almost all the countries participating in the Earth Summit are signatories and which many flagrantly ignore.
Greater respect for human rights is not, of course, merely a desirable means towards the ends of poverty reduction and environmental protection.
It also happens to be an important - often the most important - item of human welfare and development.
The events of the last twelve months have surely driven home to most people that the most dangerous conflict facing humanity in the future is not the conflict between Man and the environment, but between Man and Man.
Unfortunately, given the respect accorded to national sovereignty, the scope for international action to improve respect for basic human rights in the many countries where they are violated is limited.
For this reason, whatever fine, ringing pronouncement, do emerge from the Earth Summit, they are doomed to failure.
The Poverty Traps
LONDON: Few debates are more rote -- and more ideologically rigid -- than those concerning economic growth and economic justice.
Growth, of course, cannot guarantee that material wealth will be distributed in a just, let alone an equal, manner.
Yet it is impossible even to conceive of falling incomes bringing about greater justice in the world.
Neither the intensity of these arguments, nor mountains of sophisticated data, can relieve me of the feeling that this debate is stuck in a rut and stunted: stuck, because beyond the notion that growth is a necessary but insufficient condition for reducing poverty, our ideas on the matter have changed little over the years; stunted, because two vital things are often missing from these arguments.
The first missing ingredient is a clear reckoning as to how justice itself is measured, especially the net effects of trade-offs between, say, child labour and starvation.
The second missing element concerns the weight to be given to non-material factors when measuring the distribution of material rewards in richer countries as much as in poor ones.
All these tattered arguments were replayed at the G-8 summit in Okinawa last week.
Mainstream economists and policymakers had no difficulty in demonstrating that the establishment and spread of regulated, open, world trading system created extraordinary new wealth.
But such "proofs" had scant effect on their opponents, who shout that globalization aggravates poverty and inequality while blighting communities and the environment.
The best answer to such gripes is not to retreat but to remove what distortions remain in the world trading system through a comprehensive opening of rich country markets to competitively priced 'low-tech' imports from poor countries.
But, starting with the US and EU, rich countries fear increasing unemployment due to competition from developing countries armed with cheap labour. Here an irony intrudes.
Issues raised by globalization’s opponents, such as labour standards in poor countries -- all those images of exploited women and children in sweat-shops -- are manipulated by rich countries as a form of protectionism by other means.
Yet the case for greater trade liberalisation by the rich seems irrefutable; indeed, is a moral imperative.
Trade liberalisation does not decrease aggregate employment; instead, it changes the composition of the labour force, making the whole economy more efficient.
There are, of course, short term risks of some lost growth, perhaps of recession, in such sectors as agriculture or textiles.
Yet rich countries should, through education and building on their edge in know-how, be able to find new comparative advantages for what they produce.
For innovation is what creates wealth and employment, despite -- or, rather because of -- competition from poor countries.
And increased wealth in rich countries helps the poor by increasing demand for their goods.
This virtuous circle is still seen by globalization’s enemies as in fact a vicious one, encouraging exploitation of the poor and vulnerable.
It is here that questions of universal principles of justice and human rights enter the debate.
Undoubtedly, there is a strong case to be made for universal, impartial application of values.
If child labour is wrong, it is always wrong.
Yet, the weaknesses of such high-mindedness (assuming it is high-minded) are easily exposed.
Take, for example, the morality of war.
All decent people agree that war is evil.
Pacifists says it is an absolute evil, never to be justified.
Most people, however, accept that wars can occasionally be justified as a lesser evil.
So, too, with child labour in poor countries.
No one favours it, even if children work in healthy conditions for fair wages.
Children should be in school.
If the alternatives, however, are starvation or children abandoned by their families, then child labour might be tolerated in the context of policies designed to combine growth with a determination to use its fruits to reduce poverty and promote social justice.
The notion that poverty is more than a question of relieving immediate needs applies even to rich countries where malnutrition and other basic material deprivations are nearly eradicated.
Cocooned, protected, over-regulated Western Europe sees high unemployment exist in the context of generous social security systems.
But is the lower inequality that results a reflection of real justice?
Unemployment amidst plenty incites distress that statistics cannot capture.
Lost wages, of course, can be offset by benefits.
France’s unemployed are, to that extent, better off than many low-paid, unskilled workers in the more unequal societies of Britain or America.
But the effects of unemployment on a person’s self-esteem are less easily measured.
The low-paid worker who makes his way up, from whatever low base and despite hardship, is less likely to suffer the despair of the long-term unemployed who finds himself rejected by society.
A broader concept of poverty in the West would help reduce poverty in countries where it is most severe.
Slimmed down welfare states would not only help reduce unemployment in rich countries, but also reduce incentives for restricting the numbers of immigrant workers and students from poor countries -- places that would benefit from remittances and repatriation of know-how.
This win-win situation between rich and poor is a far better hope for poverty relief than continuing a nearly mindless debate about globalization and its perils.
The Power Gap
It is no surprise that President Bush's tour of Europe has been greeted by protests from Berlin to Rome.
What is surprising is that, given the differences now arising between the US and its allies - the word schism might not be inappropriate - Mr. Bush's meetings with Europe's leaders proceeded so smoothly.
Those disagreements are not only about Israel, or US tariffs on steel imports from the EU, or the possibility of American courts imposing the death penalty on suspected terrorists who carry European passports; they increasingly embody a fundamentally different vision about how the world should work.
During the Cold War, when the West feared attack by the Soviet bloc, the US and Europe were united through NATO in standing up to that threat.
Today, when the central fear in Western countries is of international instability and terrorism, the NATO allies are far less united in how to respond.
This is partly a question of trans-Atlantic differences in the levels of defense spending, and therefore of military capability.
The US spends far more on defense than its European allies, and as a result its military capability is different in quality as well as in quantity.
We saw the consequences of that gap in Afghanistan.
Article 5 of the NATO Treaty was invoked as if the Twin Towers attack was an attack on the whole alliance.
Many expected that America would call for a collective NATO response.
Instead the Bush administration decided to wage the war essentially on its own; for this kind of small war, it really did not need its European allies, although in the latter stages of the fighting, French Mirage jets, and British, German, Danish, and Norwegian special forces troops were active in battles in the mountains along the Afghanistan/Pakistan border.
With America's planned defense budget increases, the trans-Atlantic gap in military capability will become a chasm.
Gradually, effective military cooperation between the US and Europe will shift from being unnecessary and unwelcome, to being impossible.
It may be argued that the Europeans should try to close this chasm, by increasing their own defense spending.
Perhaps they should; but there are two problems.
The first problem is that European NATO consists of 16 separate countries, 16 separate defense budgets, and 16 separate defense forces.
Even if they were, collectively, to match America's defense spending, they could not match US defense capability unless they combined their defense spending in a single budget.
So Europe cannot begin to match the US unless it becomes a single federation.
The second, more important problem, is that (for a variety of reasons) Europeans do not set as high a value as the US on purely military capability.
Not all of these reasons are admirable: during the Cold War some European allies became accustomed to freeloading on America; some were double freeloaders by choosing neutrality.
But freeloading is not the whole story.
From Washington, the past half-century may look like the story of a victorious Cold War against an outside enemy; but from Europe, it looks more like the story of a slow, unremitting effort to find political, economic, legal and institutional alternatives to military power as a way of tackling geo-political problems.
For hundreds if not thousands of years, European countries made war repeatedly with each other.
In the first half of the 20th century they succeeded in turning these conflicts into two World Wars, and Europe into a charnel house.
After WWII, they tried an entirely new tack, with the great experiment of European integration and institution building.
This institution building is far from complete, but the process transformed European attitudes.
Europeans are now irrevocably committed to peaceful solutions for their own international problems, and they increasingly think that peaceful solutions, or at least partly peaceful solutions, will be useful for other peoples' conflicts.
The present US administration, by contrast, seems to put a much higher priority on war and the rhetoric of war.
We see this contrast being acted out on the ground.
In the Balkans, bombing was carried out mainly by the US; peacekeeping mainly by Europeans.
There are, of course, local reasons why the Europeans set a high priority on peacekeeping and reconstruction in the Balkans.
War in these countries is a direct threat to Europe's interests and stability, so European governments have a direct interest in promoting peace.
Moreover, EU governments decided that all these countries, like those in Central and Eastern Europe, are legitimate candidates for membership in the EU.
Therefore, it is in the EU's interest to help them qualify in terms of political, civil and economic stability.
It is this prospect of a massive enlargement that defines the central challenge facing the EU: how to strengthen its institutions to be able to handle a Union whose membership will expand from 15 to 27 countries - perhaps more.
That is the subject of the EU Convention now underway in Brussels, and which is designed to pave the way for a new treaty-making conference next year.
If EU governments are able to strengthen central political institutions, enlargement may be successful; if not, it may be blocked.
Moreover, with stronger central institutions, the EU may start to make progress in developing a more coherent European Security and Defense Policy.
But nobody should imagine that Europeans are ever likely to share the priority attached by America to the value of military power.
The Power of Cuba\u0027s Powerless
A little more than a year ago, poet and journalist Raúl Rivero Castañeda wrote that he refused to let America's embargo against Cuba define the international debate over the fate of the island's 11 million people. "In this country, the real blockade, the one that affects the daily life of the people is the internal governing system," he declared.
Since then, Rivero has endured his own private blockade.
Cuba's internal system is one that Rivero managed to avoid annoying too much until March of this year.
But over three days that month, the Cuban government arrested Rivero and 27 other independent journalists.
By April, all had been sentenced to 14-27 years in prison.
The journalists were part of a spring sweep that turned 75 Cubans-including librarians, writers, and other professionals-into political prisoners.
For Rivero and journalists who smuggled their missives abroad, it was their insistence on writing what they saw and felt that put them in jail.
That fidelity to the truth could now kill them.
Rivero and journalist Oscar Espinosa Chepe, 62, are both ill, their families tell visitors.
Rivero, who has lost much weight, has circulatory problems, and Espinosa suffers from a worsening liver disease.
Castro must realize that even if he relents and sets Rivero and others free, they are likely to stay.
Rivero has long understood that Castro may be the Father of the Cuban Revolution, but that the revolution's children are increasingly restive.
Castro can deny their simple truths like a Cuban King Lear, but Rivero and others persist.
They witness.
They write.
Rivero made his decision to go beyond the revolution's definition of journalism in 1989, when he broke from the writer's union and joined with nearly a dozen other intellectuals to sign an open letter raising the issue of political prisoners.
With the children of the revolution no longer obeying, Castro punished them.
So, one-by-one, many left.
But Rivero stayed.
Still others-including the economist Martha Beatriz Roque and Dr. Oscar Elías Biscet, who are now in jail with Rivero-continued their peaceful opposition.
Rivero formed an independent news service and under the noses-and watchful eyes-of the authorities, sent his work abroad.
In one 1998 column, he wrote about journalists jailed for operating independently and lamented an internal press "totally devoid of meaning."
In another article, he wrote that no one could make him feel like a criminal: "I am merely a man who writes; one who writes in the country where I was born."
Over the years, the authorities picked up Rivero, questioned him, harassed him, and tried to nudge him off the island, where he would presumably disappear into the black hole of Miami's exile community.
But Rivero was too smart.
He stayed, calling himself an "inixile."
Others did, too.
When I visited Cuba in 2001 with a group of students reporting on the island, one of them, Ezequiel Minaya, spent his days talking to Rivero and other writers.
Many of Rivero's old friends feared that talking to the poet would endanger them, and he appeared lonely.
My student asked why Rivero stayed and he replied with the mantra he lived: "Why should I leave, this is my country."
For years, Castro has blamed any internal problems on a draconian US trade embargo.
But writers like Rivero and his fellow political prisoners, as well as those dissidents who are not in jail, refuse to let Castro off so easily.
They don't want to leave Cuba; they want to redefine it.
More than 30,000 Cubans signed the Varela petition requesting a referendum on basic rights.
The international community is listening, and the arrests and detentions have only made them pay more attention.
The American left, long silent on Cuba, has cleared its throat.
In mid-September the pressure continued to build.
The European Parliament condemned Cuba's human rights violations and demanded that Rivero and other prisoners be released.
Earlier, the European Union agreed new sanctions against Cuba's government, enraging Castro.
The Cuban Conference of Bishops followed by demanding clemency for the prisoners.
Jailed or freed, Rivero will not go away.
In 2000, he wrote about a poetry contest in Cuba run by the dissident group Reflection.
It was clear from the entries that Castro was failing to control his island's imagination.
Rivero must still take pleasure in the poem by Nestor Leliebre Camue, a native of Santiago de Cuba.
"Don't plunge into the sea
for the love of God.
Wait.
A fascinating brightness
Is rising from the land."
To end here, however, would fail Rivero.
Cubans are known for managing humor in the worst situations.
I imagine that Rivero would want to end with a diary entry smuggled out by his fellow journalist and prison mate Manuel Vázquez Portal.
The Vázquez diary is posted on the web site for the Committee to Protect Journalists:
"Now, like T.S. Eliot, I can say, 'April is the cruelest month.'
April 4 is a bad day for me.
On April 4, my mother gave me 18 knocks on the head for joining the Young Pioneers (the communist youth organization) without her permission.
This last April 4, they gave me 18 years for writing without permission.
The first time I was a child, this second I'm an old man.
It seems repression does not work; either that or I'm very stubborn."
The Power to End Poverty
NEW YORK – Growing up as a child during the Korean War, I knew poverty first hand. I saw it around me every day;
I lived it.
One of my earliest memories is walking up a muddy track into the mountains to escape the fighting, my village burning behind me and wondering what would happen to my family and me.
The answer was the United Nations and other international agencies.
With the help of many countries and friends, my country was able to get back on its feet and carry on after that terrible and devastating conflict.
Thanks to decades of hard work and sacrifice by millions of Koreans, the Republic of Korea rose from desperate poverty to prosperity in less than a half-century.
As Secretary-General of the UN, I am still living that story.
Every day, I work to help end the extreme poverty that traps nearly a billion of the world’s people.
You may imagine, then, the powerful memories that I felt when I visited the Mwandama Millennium Village in the deeply impoverished southern African country of Malawi.
As in my youth, I saw once again the challenges and hardship of rural poverty.
Yet I also saw, once again, the power of community spirit to overcome it – the same sense of solidarity and determination that launched Korea’s rural modernization five decades ago.
In 2000, the world’s leaders committed to achieve major reductions in poverty, hunger, and disease by 2015.
These targets, endorsed by all UN member countries, comprise the eight Millennium Development Goals.
The Millennium Village Project, a partnership of academia, business, and UN agencies, aims to show how these goals can be achieved in even the poorest communities in the world.
Like South Korea’s own experience in fighting poverty, Millennium Villages in Africa, and similar projects elsewhere, are now surging ahead in food production, children’s health, and in forging a sustainable pathway out of poverty itself.
At the same time, I was impressed with one crucial difference between Korea’s efforts in the 1960’s and what is possible today.
Touring the Mwandama Village, I saw the potential of modern technologies – smart phones and mobile broadband, improved seed varieties, the latest in drip irrigation, modern diagnostic tests for malaria, and low-cost solar-energy grids – to advance human well-being in ways that simply were not feasible even a few years ago.
I saw a community health worker using a smart phone to manage malaria treatment within a household.
The worker used a low-cost diagnostic kit to confirm the malaria diagnosis, circumventing the need for a microscope and laboratory; a smart phone to key in the test results and receive advice from an “expert system” designed by public-health specialists; and state-of-the-art combination drug therapy to cure the illness.
The child was cured within the home; a few years ago, that same child would have faced a high risk of death unless he was somehow brought to a distant clinic in time.
I saw other breakthrough changes in daily life.
In a community that once could not feed itself, a giant warehouse was almost bursting with tons of surplus grain.
By using high-yield seeds, better soil management, and proper row planting, the community has more than tripled its crop production, and villagers who previously were hungry grain buyers are now food-secure grain sellers.
That surplus, in turn, has contributed directly to improved education, as families donate a portion of their surplus to the school’s mid-day meal program.
Now the students get a nutritious bowl of porridge and fruits, giving them the energy to pursue their studies throughout the school day.
As so many schools have discovered, mid-day meals lead to an end-of--year jump in performance on national exams.
This month, the Millennium Villages Project launches its second five-year stage on the way to the MDGs target date of 2015.
Around Africa, and now around the world, governments are scaling up the lessons from this particular project and others like it: empower communities, help them to invest in their futures using cutting-edge technologies, and thereby end extreme poverty.
The MDGs might once have seemed to be merely a set of hopes and aspirations.
Now we know that they are actually a practical roadmap out of poverty.
The world leaders who met at the UN in September for the annual General Debate all agreed on a central point: the importance of fighting poverty, hunger, and disease is crucial for our collective survival.
They know that extreme poverty threatens the lives of hundreds of millions of people who lack reliable access to adequate nutrition, potable water, health care, and education.
They also know that the dangers don’t stop at the edge of the village or slum; today’s hunger hotspots all too frequently become tomorrow’s violent hotspots.
Regardless of whether we are rich, poor, or in between, we share an overwhelming interest in the MDGs’ success, so that every region trapped in extreme poverty can break free, grow, and prosper.
Austere Illusions
LONDON – The doctrine of imposing present pain for future benefit has a long history – stretching all the way back to Adam Smith and his praise of “parsimony.”
It is particularly vociferous in “hard times.”
In 1930, US President Herbert Hoover was advised by his treasury secretary, Andrew Mellon: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.
It will purge the rottenness out of the system...People will...live a more moral life...and enterprising people will pick up the wrecks from less competent people.”
To “liquidationists” of Mellon’s ilk, the pre-2008 economy was full of cancerous growths – in banking, in housing, in equities – which need to be cut out before health can be restored.
Their position is clear: the state is a parasite, sucking the lifeblood of free enterprise.
Economies gravitate naturally to a full-employment equilibrium, and, after a shock, do so fairly quickly if not impeded by misguided government action.
This is why they are fierce opponents of Keynesian interventionism.
Keynes’s heresy was to deny that there are any such natural forces, at least in the short term.
This was the point of his famous remark, “In the long run we are all dead.” Economies, Keynes believed, can become stuck in prolonged periods of “under-employment equilibrium”; in such cases, an external stimulus of some kind is needed to jolt them back to higher employment.
Simply put, Keynes believed that we cannot all cut our way to growth at the same time.
To believe otherwise is to commit the “fallacy of composition.”
What is true of the parts is not true of the whole.
If all of Europe is cutting, the United Kingdom cannot grow; if the entire world is cutting, global growth will stop.
In these circumstances, austerity is exactly the opposite of what is needed.
A government cannot liquidate its deficit if the source of its revenues, the national income, is diminishing.
It is deficit reduction, not debt, that is profligate, because it implies wastage of available human and physical capital, quite apart from the resulting misery.
Austerity’s advocates rely on one – and only one – argument: If fiscal contraction is part of a credible “consolidation” program aimed at permanently reducing the share of government in GDP, business expectations will be so encouraged by the prospect of lower taxes and higher profits that the resulting economic expansion will more than offset the contraction in demand caused by cuts in public spending.
The economist Paul Krugman calls this the “confidence fairy.”
The pro-austerity argument is pure assertion, but it is meant to be a testable assertion, so econometricians have been busy trying to prove that the less the government spends, the faster the economy will grow.
Indeed, just a year or two ago, “expansionary fiscal contraction” was all the rage, and a massive research effort went into proving its existence.
Economists arrived at some striking correlations. For example, “an increase in government size by ten percentage points is associated with a 0.5-1% lower annual growth rate.”
In April 2010, the leader of this school, Harvard University’s Alberto Alesina, assured European finance ministers that “even sharp reductions of budget deficits have been accompanied and immediately followed by sustained growth rather than recessions even in the very short run.”
But two fallacies vitiated the “proofs” offered by Alesina and others.
First, because the cuts had to be “credible” – that is, large and decisive – the continuing absence of growth could be blamed on the insufficiency of the cuts.
Thus, Europe’s failure to recover “immediately” has been due to a lack of austerity, even though public-sector retrenchment has been unprecedented.
Second, the researchers committed the arch-statistical mistake of confusing correlation with causation.
If you find a correlation between deficit reduction and growth, the reduction could be causing the growth or vice versa. (Or both the deficit reduction and the growth could be due to something else – devaluation or higher exports, for example.)
An International Monetary Fund paper in 2012 brought Alesina’s hour of glory to an end.
Going through the same material as Alesina had, its authors pointed out that “while it is plausible to conjecture that confidence effects have been at play in our sample of consolidations, during downturns they do not seem to have ever been strong enough to make the consolidations expansionary.” Fiscal contraction is contractionary, period.
An even more spectacular example of a statistical error and sleight of hand is the widely cited claim of Harvard economists Carmen Reinhart and Kenneth Rogoff that countries’ growth slows sharply if their debt/GDP ratio exceeds 90%.
This finding reflected the massive overweighting of one country in their sample, and there was the same confusion between correlation and causation seen in Alesina’s work: high debt levels may cause a lack of growth, or a lack of growth may cause high debt levels.
On this foundation of zombie economics and slipshod research rests the case for austerity.
In fact, the austerity boosters in the UK and Europe frequently cited the Alesina and Reinhart/Rogoff findings.
The results of austerity have been what any Keynesian would have expected: hardly any growth in the UK and the eurozone in the last two and a half years, and huge declines in some countries; little reduction in public deficits, despite large spending cuts; and higher national debts.
Two other consequences of austerity are less appreciated.
First, prolonged unemployment destroys not just current but also potential output by eroding the “human capital” of the unemployed.
Second, austerity policies have hit those at the bottom of the income distribution far more severely than those at the top, simply because those at the top rely much less on government services.
So we will remain in a state of “under-employment equilibrium” until policy in the UK and the eurozone is changed (and assuming that policy in the US does not become worse).
In the face of clamor from the right to cut even more savagely, statesmen who are too timid to increase public spending would be wise to ignore their advice.
After Ahmadinejad
WASHINGTON, DC – Iranian President Mahmoud Ahmadinejad’s preferred successor, Esfandiar Rahim Mashai, will not be running in the June 14 election.
Neither will former President Akbar Hashemi Rafsanjani.
The disqualification of both sends a strong message from Supreme Leader Ayatollah Ali Hosseini Khamenei.
Simply put, Khamenei will not tolerate any diminution of his power, and he is determined to avoid the type of friction that has characterized his relationships with previous presidents, particularly Ahmadinejad.
The disqualification of Mashai and Rafsanjani reveals, once again, the schism embedded at the heart of Iran’s political structure by the dual executive of Supreme Leader and President.
When Khamenei publicly supported Ahmadinejad’s controversial reelection in 2009, no one could have predicted the unprecedented tensions that would subsequently emerge between the country’s two main authorities.
But supporting Ahmadinejad turned out to be a costly decision for Khamenei – and for the Islamic Republic.
Instead of aligning himself with Khamenei, as expected, Ahmadinejad began to promote a nationalist, anti-clerical agenda, effectively using Khamenei’s resources to challenge the supreme leader’s authority and to establish his own economic network and sphere of influence.
Over the last four years, Ahmadinejad has repeatedly tried to undermine the ruling clerics’ control over political and policy decisions.
In 2011, he attempted to dismiss Heider Moslehi, an ally of Khamenei, from his position as intelligence chief, but was quickly overruled.
He has also reduced the resources channeled to certain religious institutions, helped those in his circle to establish private banks by easing regulations, and challenged Iran’s most powerful economic and military institution, the Islamic Revolutionary Guards Corps (IRGC).
But, as the rift between Khamenei and Ahmadinejad has grown, support for the president has declined significantly, with even state-run media referring to Ahmadinejad’s loyalists as a “deviation circle.”
Moreover, unlike during Ahmadinejad’s first term, non-state media now publicly criticize his economic and political agenda.
With the end of Ahmadinejad’s second and final term fast approaching, it seems unlikely that the disgraced, unpopular president will abandon his efforts to destabilize Iran’s ruling establishment.
In fact, he had long promoted Mashai as his successor, but Khamenei curtailed his illegal efforts – and has now put a stop to Mashai’s candidacy altogether.
Mashai is among Iran’s most controversial figures, widely reviled among conservative leaders for his reformist, anti-clerical views.
In 2009, after Khamenei rejected Ahmadinejad’s decision to appoint Mashai as his first deputy, Ahmadinejad brazenly appointed him Chief of Staff, a move that infuriated Khamenei.
Ahmadinejad is not the first high-ranking official in Iran to challenge the supreme leader.
Grand Ayatollah Hossein Ali Montazeri, one of Iran’s most senior clerics, would have been Supreme Leader himself had he not fallen out with Grand Ayatollah Ruhollah Khomeini, the Islamic Republic’s founder, a few months before Khomeini’s death.
One of the most influential figures in Iran during the Republic’s first decade, Montazeri provided an extensive justification for the supreme leader’s absolute authority, which many ayatollahs considered heretical.
But he soon began to challenge the Islamic Republic’s hardline leadership – and continued to do so until he died in 2009.
Montazeri, whose status as Grand Ayatollah (the most senior of Shia Muslim theologians) gave him more religious authority than Khamenei, challenged Khamenei’s qualifications to issue fatwas (Islamic religious rulings) or to succeed Khomeini as Supreme Leader.
Montazeri was placed under house arrest for six years; demonstrations of support for him were suppressed; and many of his disciples and close friends were imprisoned, tortured, killed, or forced to flee the country.
Likewise, Abulhassan Banisadr, the Islamic Republic’s first president, fell out with Khomeini over the division of authority.
He was impeached in 1981, after only a year in power, and fled to France, where he continues to reside.
Violent street clashes between Banisadr’s supporters and opponents resulted in deaths on both sides.
In many ways, Ahmadinejad’s story resembles that of Banisadr.
Both were relatively unknown before their presidencies; both depended on the supreme leader’s backing to gain power; and both gradually lost support as they attempted to reduce the influence of the clerical hierarchy and the IRGC.
Most important, both failed to create an external organization on which they could rely if their official protection failed.
The fact that Ahmadinejad has been allowed to serve out his entire second term – an outcome that the media often doubted – reflects the importance to Khamenei of maintaining an image of a stable Iran.
But achieving that goal will require Khamenei to account for Ahmadinejad’s unpredictability.
With nothing to lose, Ahmadinejad could decide to destabilize the Islamic Republic if he considers it necessary for his survival.
Indeed, now that the Guardian Council has disqualified Mashai from the presidential race, Ahmadinejad’s resentment will probably manifest itself in behavior before and after the election, such as releasing information on high-level corruption.
He might also oppose Khamenei directly, portraying himself as a patriotic anti-clerical figure.
But such an approach would be dangerous; indeed, it could cost Ahmadinejad his life.
After the election, the kind of factional disputes that have long paralyzed policymaking in Iran will likely persist.
But stalemate over Iran’s nuclear policy could have serious consequences.
Indeed, the lack of a strong, unified government capable of shaping a consensus could make it impossible even for Khamenei to change course, leaving Iran no choice but to persist in its diplomatic standoff with the West.
The Press versus Privacy
LONDON – Privacy has become a big issue in contemporary jurisprudence.
The “right to privacy” is enshrined in the United Nations Declaration of Human Rights, and guaranteed by Article 8 of the European Convention on Human Rights.
But Article 8 is balanced by Article 10, which guarantees “free expression of opinion.”
So what right has priority when they conflict?
Under what circumstances, for example, is it right to curtail press freedom in order to protect the right to privacy, or vice versa?
The same balance is being sought between the right of citizens to data privacy and government demands for access to personal information to fight crime, terrorism, and so on.
Freedom of speech is a fundamental democratic liberty.
It is a necessary protection against abuses of power and cover-ups of wrongdoing by public officials.
It was never more effectively displayed than in the Watergate investigation, which brought down Richard Nixon in 1974.
So it is no surprise that press freedom is the freedom that authoritarian governments are keenest to curtail.
Indeed, provided they can sufficiently muzzle the media they can even allow (relatively) free elections, as in Putin’s Russia.
With the press heavily shackled in large parts of the world, freedom of speech is still a worthy slogan.
But one can have too much press freedom.
Over the years, the tabloid press has become increasingly intrusive, claiming the right not just to expose corruption and incompetence in high places, but to titillate readers with scandalous revelations about the private lives of the famous.
What started off as entertaining gossip about royalty and film stars has burgeoned into a massive assault on privacy, with newspapers claiming that any attempt to keep them out of the bedroom is an assault on free speech.
The issue has just been tested in Britain’s High Court.
In March, Britain’s leading scandal sheet, The News of the World published an “exclusive” front page story, under the headline “F1 BOSS HAS SICK NAZI ORGY WITH 5 HOOKERS.”
It told how Max Mosley, President of the Federation Internationale de l’Automobile (FIA, the body that oversees world motoring and racing) and son of the former British fascist leader, Sir Oswald Mosley, had, two days earlier, taken part in a sadomasochistic “orgy” with a “Nazi theme” in a private apartment in London.
The story was accompanied by photographs taken clandestinely by one of the women in cooperation with the News of the World , which readers were invited to download from the paper’s Web site.
Max Mosley admitted participating in this (not illegal) happening, but sued the News of the World for breach of privacy; the newspaper argued that it was in the “public interest” that Mosley’s sexual activities be disclosed.
The presiding judge, Mr. Justice Eady, rejected the newspaper’s defense, and awarded Max Mosley £60,000 ($115,000) compensation for the invasion of his privacy, the highest damages so far given for a complaint brought under Article 8.
There is a curious aspect to Eady’s judgment.
He rejected the News of the World’s “public interest” defense, because he found no evidence that the sadomasochistic party had a “Nazi theme.”
This implies that had there been a Nazi theme, it could have been legitimate to publish it, given Mosley’s position as FIA president.
But surely the particular nature of Mosley’s private fantasies is irrelevant to the case.
It is hard to see why I am less entitled to privacy because I am turned on by a Nazi uniform than I would be if I were excited by a pair of knickers.
What Eady’s judgment did accomplish was to highlight the crucial distinction, necessary for all clear thinking about privacy, between what interests the public and what is in the public interest.
So how can this distinction be made effective?
France has a privacy law that explicitly defines both the scope of privacy and the circumstances in which the law applies.
By contrast, in Britain it is left to judges to decide what the “right to privacy” means.
There is a natural fear that specific legislation designed to protect privacy would muzzle legitimate press inquiries.
At the same time, it is widely acknowledged (except by most editors and journalists) that a great deal of media intrusion is simply an abuse of press freedom, with the sole aim of boosting circulation by feeding public prurience.
A law that curtails the abuse of press power while protecting its freedom to expose the abuse of political power would be difficult, but not impossible, to frame.
The essential principle is that the media should not be allowed to pander to the public’s prurience under cover of protecting the public interest.
What famous people – indeed ordinary people, too – do in private should be off limits to the media unless they give permission for those activities to be reported, photographed, or filmed.
The only exceptions would be if a newspaper has reasonable grounds for believing that the individuals concerned are breaking the law, or that, even if they are not breaking the law, they are behaving in such a way as to render them unfit to perform the duties expected of them.
Thus, a pop star’s consumption of illegal drugs may be reported, but not his or her sexual habits (if they are legal).
The private life of a politician may be revealed if it is expected to have consequences for the way the country is being governed; that of a top executive of a public company if it may affect the returns to shareholders.
This should be the only “public interest” defense available to a media outlet that is sued for invasion of privacy.
The media might become a bit drearier, but public life would be far healthier.
The Price of 9/11
NEW YORK – The September 11, 2001, terror attacks by Al Qaeda were meant to harm the United States, and they did, but in ways that Osama bin Laden probably never imagined.
President George W. Bush’s response to the attacks compromised America’s basic principles, undermined its economy, and weakened its security.
The attack on Afghanistan that followed the 9/11 attacks was understandable, but the subsequent invasion of Iraq was entirely unconnected to Al Qaeda – as much as Bush tried to establish a link.
That war of choice quickly became very expensive – orders of magnitude beyond the $60 billion claimed at the beginning – as colossal incompetence met dishonest misrepresentation.
Indeed, when Linda Bilmes and I calculated America’s war costs three years ago, the conservative tally was $3-5 trillion.
Since then, the costs have mounted further.
With almost 50% of returning troops eligible to receive some level of disability payment, and more than 600,000 treated so far in veterans’ medical facilities, we now estimate that future disability payments and health-care costs will total $600-900 billion.
But the social costs, reflected in veteran suicides (which have topped 18 per day in recent years) and family breakups, are incalculable.
Even if Bush could be forgiven for taking America, and much of the rest of the world, to war on false pretenses, and for misrepresenting the cost of the venture, there is no excuse for how he chose to finance it.
His was the first war in history paid for entirely on credit.
As America went into battle, with deficits already soaring from his 2001 tax cut, Bush decided to plunge ahead with yet another round of tax “relief” for the wealthy.
Today, America is focused on unemployment and the deficit.
Both threats to America’s future can, in no small measure, be traced to the wars in Afghanistan and Iraq.
Increased defense spending, together with the Bush tax cuts, is a key reason why America went from a fiscal surplus of 2% of GDP when Bush was elected to its parlous deficit and debt position today.
Direct government spending on those wars so far amounts to roughly $2 trillion – $17,000 for every US household – with bills yet to be received increasing this amount by more than 50%.
Moreover, as Bilmes and I argued in our book The Three Trillion Dollar War, the wars contributed to America’s macroeconomic weaknesses, which exacerbated its deficits and debt burden.
Then, as now, disruption in the Middle East led to higher oil prices, forcing Americans to spend money on oil imports that they otherwise could have spent buying goods produced in the US.
But then the US Federal Reserve hid these weaknesses by engineering a housing bubble that led to a consumption boom.
It will take years to overcome the excessive indebtedness and real-estate overhang that resulted.
Ironically, the wars have undermined America’s (and the world’s) security, again in ways that Bin Laden could not have imagined.
An unpopular war would have made military recruitment difficult in any circumstances.
But, as Bush tried to deceive America about the wars’ costs, he underfunded the troops, refusing even basic expenditures – say, for armored and mine-resistant vehicles needed to protect American lives, or for adequate health care for returning veterans.
A US court recently ruled that veterans’ rights have been violated.
(Remarkably, the Obama administration claims that veterans’ right to appeal to the courts should be restricted!)
Military overreach has predictably led to nervousness about using military power, and others’ knowledge of this threatens to weaken America’s security as well.
But America’s real strength, more than its military and economic power, is its “soft power,” its moral authority.
And this, too, was weakened: as the US violated basic human rights like habeas corpus and the right not to be tortured, its longstanding commitment to international law was called into question.
In Afghanistan and Iraq, the US and its allies knew that long-term victory required winning hearts and minds.
But mistakes in the early years of those wars complicated that already-difficult battle.
The wars’ collateral damage has been massive: by some accounts, more than a million Iraqis have died, directly or indirectly, because of the war.
According to some studies, at least 137,000 civilians have died violently in Afghanistan and Iraq in the last ten years; among Iraqis alone, there are 1.8 million refugees and 1.7 million internally displaced people.
Not all of the consequences were disastrous.
The deficits to which America’s debt-funded wars contributed so mightily are now forcing the US to face the reality of budget constraints.
America’s military spending still nearly equals that of the rest of the world combined, two decades after the end of the Cold War.
Some of the increased expenditures went to the costly wars in Iraq and Afghanistan and the broader Global War on Terrorism, but much of it was wasted on weapons that don’t work against enemies that don’t exist.
Now, at last, those resources are likely to be redeployed, and the US will likely get more security by paying less.
Al Qaeda, while not conquered, no longer appears to be the threat that loomed so large in the wake of the 9/11 attacks.
But the price paid in getting to this point, in the US and elsewhere, has been enormous – and mostly avoidable.
The legacy will be with us for a long time.
It pays to think before acting.
The Price of Clarity
LONDON -- “Through the contrivance and cunning of stock jobbers there hath been brought in such a complication of knavery and cozenage, such a mystery of iniquity, and such an unintelligible jargon of terms to involve it in, as were never known in any other age or country.”
Jonathan Swift’s eighteenth-century barb resonates in today’s world of financial “intermediation”: now, as then, finance shrouds its “complication of knavery and cozenage” in “unintelligible jargon.”
As US President Barack Obama explained in a speech in April: “Many practices were so opaque and complex that few within these companies – let alone those charged with oversight – were fully aware of the massive wagers being made.”
But was Swift right to see knavery as the main motive for unintelligibility?
Obviously, it is a very powerful motive, in politics no less than in finance.
The less people understand about something, the easier it is to fool them.
There has never been a shortage of snake-oil merchants: Donizetti wrote an opera, L’Elisir D’Amore, about one of them advertising a love potion in a nonsensical patter.
But the intention to deceive, or even to make money, is not necessarily what has driven the recent explosion of financial innovation.
Consider the US Securities and Exchange Commission’s current civil suit against Goldman Sachs.
Goldman whiz-kid Fabrice Tourre is charged with having created a complicated security that was designed to fail.
Was his intention to deceive?
Or was it the intellectual pleasure he got from creating a “Frankenstein monster” (as one of his e-mails described it), regardless of the consequences?
The latter seems the dominant motive.
As another of his e-mails put it: “The entire system is about to crumble any moment...the only potential survivor the fabulous Fab...standing in the middle of all these complex, highly levered, exotic trades he created.”
Finance has always been opaque, quite apart from the motive of swindling the investing public. “Double-entry bookkeeping” is one of the great discoveries of European civilization, but five centuries later most people are still muddled about assets and liabilities.
Without such knowledge, technical terms like “balance-sheet recession” and “rebuilding balance sheets” are meaningless.
Opacity has grown with complexity.
The explosion of derivative instruments has demanded such an effort at understanding that metaphorical language is needed.
Think of collateral debt obligations (CDOs) as poisoned sausages, says the economist Nouriel Roubini, with sub-prime mortgages as the rat meat in them.
With a mental effort, the layperson can then imagine these poisonous sausages, otherwise known as “toxic assets,” spreading through the world’s banks, ruining their digestions and crippling the economies they are meant to serve.
But complexity is not the only reason for obscurity.
In his famous essay “Politics and the English Language,” George Orwell pointed to the widespread use of euphemism, which means not calling a spade a spade.
This, he thought, was due to too many facts in the modern world having become too horrible, or unpalatable, to be stated clearly.
One of his examples was the phrase “rectification of frontiers” to sugar-coat forced population movements.
Political correctness is another aspect of this: calling disabled people “differently abled,” for example.
As the historian Tony Judt points out: “It’s not a ‘different’ ability, it’s no ability.
Lousy language...conceals the effects of real power and capacity, real wealth and influences.” It enables deep inequality to happen more easily.
As important is a straightforward decline in literacy.
Orwell talked of officials putting together blocks of words like “prefabricated hen houses.”
This quality is much in evidence in a recent IMF report:
“Risks to global financial stability have eased as the economic recovery has gained steam, but concerns about advanced country sovereign risks could undermine gains and prolong the collapse of credit.
Without more fully restoring the health of financial and household balance sheets, a worsening of public debt sustainability could be transmitted back to banking system or across borders.
Hence, policies are needed to (1) reduce sovereign vulnerabilities, including through communicating credible medium-term fiscal consolidation plans; (2) ensure that the ongoing deleveraging process unfolds smoothly; and (3) decisively move forward to complete the regulatory agenda so as to move to a safer, more resilient, and dynamic global financial system.
For emerging market countries, where the surge in capital inflows has led to fears of inflation and asset price bubbles, a pragmatic approach using a combination of macroeconomic and prudential financial policies is available.”
Ironically, the same document is full of demands for greater “transparency.”
So let us translate that IMF passage into transparent English:
“The world economy has become less risky as it has recovered from recession, and as banks and households have reduced their debts.
But fears of government default in rich countries could threaten the recovery by causing interest rates to rise and exchange rates to fall.
So three things are needed: governments must (1) cut their deficits gradually in a believable way, (2) keep enough spending going to compensate for increased saving in the private sector, and (3) press on with bank regulation.
For developing countries, economic policy and bank regulation should be used together to stop inflation and asset bubbles.”
The greater the distance between the language of elites and ordinary people, the greater the risk of revolt.
To the extent that complexity in finance or politics creates new opportunities to deceive, impedes understanding, or blurs lines of accountability, we should aim to reduce it.
To the extent that such problems reflect decreased ability to express oneself clearly, the remedy is to improve education.
The price of clarity, like the price of liberty, is eternal vigilance, and the two are connected.
The Price of Crisis Prevention
BRUSSELS – Two years have passed since the financial crises erupted, and we have only started to realize how costly it is likely to be.
Andrew Haldane of the Bank of England estimates that the present value of the corresponding losses in future output could well reach 100% of world GDP.
This estimate may look astonishingly high, but it is relatively conservative, as it assumes that only one-quarter of the initial shock will result in permanently lower output.
According to the true doomsayers, who believe that most, if not all, of the shock will have a permanent impact on output, the total loss could be two or three times higher.
One year of world GDP amounts to $60 trillion, which corresponds to about five centuries of official development assistance or, to be even more concrete, 10 billion classrooms in African villages.
Of course, this is no direct cost to public budgets (the total cost of bank rescue packages is much lower), but this lost output is the cost that matters most when considering how to reduce the frequency of crises.
Assume that, absent adequate preventive measures, a crisis costing one year of world GDP occurs every 50 years (a rough but not unreasonable assumption).
It would then be rational for the world’s citizens to pay an insurance premium, provided its cost remains below 2% of GDP (100%/50).
A simple way to reduce the frequency of crises is to require banks to rely more on equity and less on debt so that they can incur more losses without going bankrupt – a measure that is currently being considered at the global level.
Thanks to reports just released by the Financial Stability Board and the Basel Committee – one on the long-term implications of requiring higher capital-to-asset ratios, and one on the transitory effects of introducing them – we know more now about the likely impact of such regulation.
The first report finds that, starting from the current low level of bank capitalization, a one-percentage-point increase in capital ratios would permanently reduce the frequency of crises by one-third, while increasing interest rates by some 13 basis points (banks would need to charge more because it costs them more to raise capital than to issue debt).
In other words, the price of losing one year of income every 75 years instead of every 50 years would lead banks to increase the rate on a loan from 4% to 4.13%.
Such an insignificant increase would at most lead a few bank customers to turn to alternative sources of finance, most likely with no discernible effect on GDP.
It is stunning to find that a regulation can do so much good at such a small cost – much smaller than in many other fields where public policy imposes economically costly safety requirements.
Think, for example, of the environment or public health, where the precautionary principle guides decision-making.
So much for the long term.
The hotly debated question nowadays is whether the transition to higher mandatory reserves would involve excessive short-term costs (as banks will likely increase lending spreads and reduce credit volumes).
Subjecting banks, some of which are still ailing, to new regulation may lead them to curtail lending even more, thereby further weakening the pace of economic recovery.
Sound judgment is needed regarding the speed and timing of regulatory tightening.
The second report finds that a one-percentage-point increase in bank capital ratios, if introduced gradually over four years, would lower GDP by about 0.2%.
Given that increases by three percentage points are frequently mentioned, the total effect could be 0.6%.
But uncertainties abound.
The report oddly finds that raising the target capital ratio would have a significantly greater adverse effect in the United States than in the eurozone, despite the latter’s more pronounced reliance on bank-based financing.
Moreover, the report assumes that monetary policy can offset part of the shock, which may not be true where near-zero interest rates already prevail – or in the euro area where the effort may vary across countries while monetary policy is uniform.
So the impact of new regulations on countries where banks are significantly under-capitalized could easily be four or five times larger than the headline figure – say, in the vicinity of a percentage point at a four-year horizon.
This may still look small, but it is hardly a trivial sum in view of the short-term growth outlook in the developed world.
At a time when growth is too slow to reduce massive unemployment, every decimal matters.
To lower growth by this magnitude at a time when the private sector has not yet completed its deleveraging cycle – and governments are starting their own – is to risk a prolonged period of near-stagnation, which could turn crisis-induced unemployment into structural unemployment.
Furthermore, tighter credit standards over a prolonged period are likely to fall disproportionately on cash-poor, fast-growing companies, with consequences for innovation, productivity, and ultimately growth potential.
None of this means that banks should be granted a regulatory holiday and forget the need to recapitalize.
But it does suggest, first, that timing matters.
Policymakers should be wary of imposing a regulatory shock simultaneously with a fiscal shock.
For this reason, enacting new regulatory standards now while setting distant deadlines is a sensible strategy.
Second, the existence and magnitude of transition costs means that not everythingthat reduces the probability of financial crises is worth undertaking.
For politicians obsessed by current difficulties, whether the next crisis occurs in 50 or 75 years may seem secondary.
As a result, regulatory reform must be designed in a way that minimizes short-term costs.
Higher capital ratios and liquidity ratios are only one of several approaches to making the financial system safer.
Other measures – say, capital insurance, or reform of the boundaries within the financial industry, à la Paul Volcker – are worth considering.
There is no doubt that the long-term price of insuring against crises is worth paying.
But that doesn’t mean that reform should not be as cost-effective as possible.
The Price of Inaction
BERKELEY – Are the world’s governments capable of keeping the world economy out of a deep and long depression?
Three months ago, I would have said yes, without question.
Now, I am not so certain.
The problem is not that governments are unsure about what to do.
The standard checklist of what to do in a financial crisis to avoid a deep and prolonged depression has been gradually worked out over two centuries: by Bank of England Governor Cornelius Buller in 1825; by the Victorian-era editor of The Economist , Walter Bagehot; and by the economists Irving Fisher, John Maynard Keynes, Milton Friedman, among many others.
The key problem in times like these is that investor demand for safe, secure, and liquid assets – and thus their value – is too high, while demand for assets that underpin and finance the economy’s productive capital is too low.
The obvious solution is for governments to create more cash to satisfy the demand for safe, secure, liquid assets.
“Men cannot be employed when the object of desire [i.e., money] is something which cannot be produced and the demand for which cannot readily be choked off.” The solution is “to persuade the public that green cheese [i.e., the notes printed by the central bank] is practically the same thing and to have a green cheese factory [i.e. a central bank] under public control...”
By buying government bonds for cash, a central bank can satisfy demand and push down the price of cash.
When there is no excess demand for cash, there will be no excess supply of the bonds and stocks that underpin and finance the economy’s productive capital.
Thus, expansionary monetary policy via standard open-market operations by a central bank is the first item on the checklist of what to do in a financial crisis.
Three months ago, I argued that all but a tiny and unbalanced fringe of economists approve of expansionary open-market operations to keep total nominal spending constant in a downturn, and I was right.
I was also right to say that all but a tiny and unbalanced fringe of economists approve of central-bank guarantees of system stability, in order to prevent the risk of a collapse of the payments system from becoming a first-order consideration boosting the demand for cash to unnatural levels.
The problem comes when expansionary monetary policy via standard open-market operations and central-bank guarantees of orderly markets prove insufficient.
Economists disagree about when, under what circumstances, and in what order governments should move beyond these first two items on the checklist.
Should governments try to increase monetary velocity by selling bonds, thereby boosting short-term interest rates?
Should they employ unemployed workers directly, or indirectly, by bringing forward expenditures or expanding the scale of government programs?
Should they explicitly guarantee large financial institutions’ liabilities and/or classes of assets?
Should they buy up assets at what they believe is a discount from their long-run values, or buy up assets that private investors are unwilling to trade, even at a premium above their likely long-run values?
Should governments recapitalize or nationalize banks?
Should they keep printing money even after exhausting their ability to inject extra liquidity into the economy via conventional open-market operations, which is now the case in the United States and elsewhere?
Three months ago, I said that there was considerable disagreement about these issues, but that two things were certain.
First, we do not know enough about when, under what circumstances, and in what order governments should resort to these checklist items.
Second, trying a combination of these items – even a confused and haphazard combination – was better than doing nothing.
All five of the world’s major economies implemented their own confused and haphazard combinations of monetary, fiscal, and banking stimulus policies during the Great Depression, and the sooner they did – the sooner each began its own New Deal – the better.
Japan and Britain began their New Deals in 1931.
Germany and the US began theirs in 1933.
France waited until 1936.
Japan and Britain recovered first and fastest from the Great Depression, Germany and the US followed well behind, and France brought up the rear.
The conclusion that I draw from this is that we should try a combination of all checklist measures – quantitative monetary easing; bank guarantees, purchases, recapitalizations, and nationalizations; direct fiscal spending and debt issues – while ensuring that we can do so fast enough and on a large enough scale to do the job.
Yet I am told that the chances of getting more money in the US for an extra round of fiscal stimulus this year is zero, as is the chance of getting more money this year to intervene in the banking system on an even larger scale than America’s Troubled Asset Relief Program (TARP).
There is an 80% chance that waiting until 2010 and seeing what policies look appropriate then would not be disastrous.
But that means that there is a 20% chance that it would be.
And the US, it should be noted, is the most aggressive and best behaved of all major governments.
The Price of Inequality
NEW YORK – America likes to think of itself as a land of opportunity, and others view it in much the same light.
But, while we can all think of examples of Americans who rose to the top on their own, what really matters are the statistics: to what extent do an individual’s life chances depend on the income and education of his or her parents?
Nowadays, these numbers show that the American dream is a myth.
There is less equality of opportunity in the United States today than there is in Europe – or, indeed, in any advanced industrial country for which there are data.
This is one of the reasons that America has the highest level of inequality of any of the advanced countries –&nbsp;and its gap with the rest has been widening.
In the “recovery” of 2009-2010, the top 1% of US income earners captured 93% of the income growth.
Other inequality indicators –&nbsp;like wealth, health, and life expectancy –&nbsp;are as bad or even worse.
The clear trend is one of concentration of income and wealth at the top, the hollowing out of the middle, and increasing poverty at the bottom.
It would be one thing if the high incomes of those at the top were the result of greater contributions to society, but the Great Recession showed otherwise: even bankers who had led the global economy, as well as their own firms, to the brink of ruin, received outsize bonuses.
A closer look at those at the top reveals a disproportionate role for rent-seeking: some have obtained their wealth by exercising monopoly power; others are CEOs who have taken advantage of deficiencies in corporate governance to extract for themselves an excessive share of corporate earnings; and still others have used political connections to benefit from government munificence –&nbsp;either excessively high prices for what the government buys (drugs), or excessively low prices for what the government sells (mineral rights).
Likewise, part of the wealth of those in finance comes from exploiting the poor, through predatory lending and abusive credit-card practices.
Those at the top, in such cases, are enriched at the direct expense of those at the bottom.
It might not be so bad if there were even a grain of truth to trickle-down economics – the quaint notion that everyone benefits from enriching those at the top.
But most Americans today are worse off – with lower real (inflation-adjusted) incomes – than they were in 1997, a decade and a half ago.
All of the benefits of growth have gone to the top.
Defenders of America’s inequality argue that the poor and those in the middle shouldn’t complain.
While they may be getting a smaller share of the pie than they did in the past, the pie is growing so much, thanks to the contributions of the rich and superrich, that the size of their slice is actually larger.
The evidence, again, flatly contradicts this.
Indeed, America grew far faster in the decades after World War II, when it was growing together, than it has since 1980, when it began growing apart.
This shouldn’t come as a surprise, once one understands the sources of inequality.
Rent-seeking distorts the economy.
Market forces, of course, play a role, too, but markets are shaped by politics; and, in America, with its quasi-corrupt system of campaign finance and its revolving doors between government and industry, politics is shaped by money.
For example, a bankruptcy law that privileges derivatives over all else, but does not allow the discharge of student debt, no matter how inadequate the education provided, enriches bankers and impoverishes many at the bottom.
In a country where money trumps democracy, such legislation has become predictably frequent.
But growing inequality is not inevitable.
There are market economies that are doing better, both in terms of both GDP growth and rising living standards for most citizens.
Some are even reducing inequalities.
America is paying a high price for continuing in the opposite direction.
Inequality leads to lower growth and less efficiency.
Lack of opportunity means that its most valuable asset – its people – is not being fully used.
Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending.
This leads to underinvestment in infrastructure, education, and technology, impeding the engines of growth.
The Great Recession has exacerbated inequality, with cutbacks in basic social expenditures and with high unemployment putting downward pressure on wages.
Moreover, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System, investigating the causes of the Great Recession, and the International Monetary Fund have both warned that inequality leads to economic instability.
But, most importantly, America’s inequality is undermining its values and identity.
With inequality reaching such extremes, it is not surprising that its effects are manifest in every public decision, from the conduct of monetary policy to budgetary allocations.
America has become a country not “with justice for all,” but rather with favoritism for the rich and justice for those who can afford it –&nbsp;so evident in the foreclosure crisis, in which the big banks believed that they were too big not only to fail, but also to be held accountable.
America can no longer regard itself as the land of opportunity that it once was.
But it does not have to be this way: it is not too late for the American dream to be restored.
The Price of Saving a Tree
Latin America is blessed with more than its fair share of wildlife and lush forests.
A third of the world’s mammal species and more than a quarter of all known reptiles and bird species can be found there.
But this abundance is under threat.
Felling seven million hectares of trees each year, South America clears more forests than any other continent.
As a result, more than 10,000 species are threatened with extinction – two-thirds of all endangered species on the planet.
In a sense, the solution to this challenge is as plain as day.
Landowners cut down trees because it is the most economically beneficial thing for them to do.
So policymakers need to provide them with an incentive not to.
If we can unlock the hidden potential in Latin America’s forests – without destroying them – then we could provide a solution to the problem of habitat destruction.
We can easily tally the costs of individual conservation efforts like saving the northern spotted owl.
Calculating how much it would cost to stop landowners felling their trees is harder.
But that doesn’t mean it hasn’t been attempted.
Economists’ estimates range from $1.23 billion a year (to save trees in Latin America’s biodiversity “hot spots”) to $5.8 billion a year (to save 2% of the continent’s land area) to $500 billion (making a one-off payment to save all of Latin America’s forests).
While the economic benefits we get from biodiversity might seem intangible, they are real and quantifiable.
One common argument is that governments should protect biodiversity because of its untapped potential for the pharmaceutical industry.
A fern deep in the forest could, for example, one day prove helpful in the fight against HIV/AIDS.
This idea became very popular in the 1990’s.
A famous project saw Merck Pharmaceutical provide $1 million to Costa Rica in exchange for 1,000 plants collected from its forest.
Although the Merck project successfully raised money for Costa Rican biodiversity research, few if any drugs have been developed, and the model has not been transferred elsewhere.
The merits of “bio-prospecting” have been examined carefully, and the returns are in fact very modest, ranging from just $0.20 per hectare in parts of California to $20 in Western Ecuador.
Thus, the potential for pharmaceutical development will not provide strong encouragement to private landowners or companies to protect their land.
Another approach for policymakers is to quantify the economic benefits of “ecosystem services” – the miraculous yet mundane things that nature provides like erosion control, water management, and purification.
The benefits from ecosystem services in Latin America amount to $11 trillion, according to one prominent economist’s methodology.
But, while this implies that the benefits of conservation outstrip the costs by an extraordinary margin, the calculations have been widely criticized.
The real hope lies in the idea of protecting forests for their value in the fight against climate change.
Forests contain huge amounts of carbon.
With the advent of concern about global warming and the role that carbon and carbon dioxide play, it is possible to estimate the value of a forest for sequestrating carbon.
Simply put, by controlling deforestation we can significantly affect the carbon emissions that cause climate change.
Recent market transactions on the European Climate Exchange place the value of carbon somewhere between $10 and $100 per ton.
Even if we use what looks like a fairly conservative price of $20, that means Latin America’s trees are worth a whopping $2 trillion.
If we count the 70 billion tons of carbon in the dead wood, litter, and soils on the forest floor, the additional value is $1.4 trillion.
Sorting out the benefits is one thing.
Next we need to work out how much we’re willing to pay to keep these trees standing.
For a landowner, the value of cleared land works out to $300 per hectare on average.
So let’s assume that governments will need to pay at least $500 per hectare to stop them from felling their trees.
That adds up to $500 billion across all of Latin America.
Thus, the benefits are between four and 6.8 times greater than the cost.
But the cost will still seem prohibitive to many policy makers.
They may, therefore, like to consider another option: discouraging tree-felling only in those areas that have high recent rates of deforestation.
This takes into account the fact that many forest owners have no intention of cutting down trees, so won’t require compensation.
Using a more realistic approach, and including monitoring and administration costs, the outlay for governments will still be less than half of the economic benefits.
A lot more research needs to be done to establish the true costs and benefits of protecting forest ecosystems and biodiversity.
But growing concern about the peril of climate change could help save some of this continent’s lush forests.
The Primacy of NATO
F OR PUBLICATION FEBRUARY 22, NOT BEFORE
Today, 26 NATO Heads of State and Government will meet at NATO Headquarters in Brussels.
They are here to demonstrate a strong spirit of unity in the transatlantic community, a determination to look forward and take action together.
There are important questions to be addressed, not only about the direction of NATO’s missions and operations, but also about the future of transatlantic security cooperation and the role the Alliance will play.
The broad range of issues to be discussed mirrors the essential place of the Alliance in addressing today’s security challenges.
They will discuss how to reinforce the success the international community has had in helping to build a new, democratic Afghanistan.
NATO and its members are already providing the essential security Afghanistan needs in order to make its aspirations for self-sustaining peace and prosperity a reality.
Today, NATO leaders will reaffirm their commitment to the courageous people of this country: we will help them for as long as it takes.
Iraq is a case in point. All 26 NATO nations are now, as an Alliance, working together to respond to the Iraqi government’s request for support: by training Iraqi security forces, by providing equipment, or by helping to fund NATO’s efforts.
We are building a stronger relationship with the broader Middle East.
Already, the Alliance is developing a deeper political dialogue and more practical cooperation with the countries of North Africa, Israel and Jordan, and opening up a discussion with the Gulf States.
When Dr. Rice made her first visit as Secretary of State to NATO headquarters two weeks ago, Alliance Foreign Ministers had a discussion about the Middle East Peace Process.
The broader Middle East will be on the agenda of Heads and State and Government again today.
Many other critical political issues will be addressed: from ensuring stability in Kosovo as the political situation evolves this year; to the importance of maintaining strong relations and a frank dialogue with Russia; to building a stronger relationship with the EU, one that maximises the complementarity between our two organisations; to supporting the new government in Ukraine as it finds its path.
In that regard, this morning NATO leaders will welcome their first meeting with President Yushchenko.
They will share with him their common determination to help him build a better, more democratic future for his people, and strengthen Ukraine’s Euro-Atlantic integration.
But NATO leaders will also lift their eyes from the immediate challenges of the day, and discuss a fundamental strategic question as well: how to use NATO to its fullest potential as a platform for holding political discussions and building transatlantic consensus across the wide range of the issues where Europe and North America share common interests and wish to defend common values.
NATO is the only permanent political forum in which North America sits together with Europe.
This is a unique framework for profound transatlantic political consultation and effective military cooperation.
And it works -- but it can do more.
The Alliance can and should be the place to discuss and debate a broader range of political issues.
Indeed, as we face today’s security challenges - terrorism, proliferation of weapons of mass destruction, failed states - we cannot afford not to.
I am encouraged that, more and more, Alliance leaders are coming to share the same view.
Today’s Summit meeting will give a new impulse to NATO’s political evolution.
That evolution will accelerate in the coming months and years, as NATO’s strengthens its role in shaping and delivering transatlantic security cooperation in the 21st century.
The Privatization of War
That many governments outside the US are skeptical about any US-led invasion of Iraq, when not openly opposed to it, is well known.
Less recognized is the division between America and much of the world on how to combat terrorism.
That division is dangerous.
It is not surprising that attitudes diverged so soon after the initial solidarity that followed the terrorist attacks on New York and Washington in September 2001.
After all, the tragedy of September 11 th happened within the US, so the sense of immediacy was greater and longer lasting there.
In Europe, many governments are anxious not to frighten their populations or damage relations with their Muslim minorities.
Some believe that American foreign policy was partly responsible for the disaster and that it would be wise to distance themselves somewhat from the US.
Perhaps the most important factor opening this divide was a widespread sense of déjà vu.
Europe lived through severe terrorist episodes in the 1970s and 1980s, yet managed to overcome them with their democracies intact.
Terrorism (most Europeans think) is a nuisance to be managed, not a challenge requiring total change.
Moreover, the political rhetoric of "evil" and "war" that mobilizes Americans seems alien to those who prefer a managerial approach.
Different perceptions are natural among different political cultures.
Unchecked, however, these conflicting views could have dangerous effects by limiting the cooperation that is needed to address common vulnerabilities.
Such cooperation is essential because today's terrorism is markedly more lethal and difficult to manage than earlier versions.
Two sets of trends are at work.
The first centers around economics and technology.
Market forces and openness combine to increase the efficiency of many vital systems--transportation, information, and energy--but also make them more vulnerable.
Democratization of technology enables instruments of mass destruction to become smaller, less costly, and more readily available.
Where bombs and timers were once heavy and expensive, plastic explosives and digital timers are light and cheap.
Hijacking a plane sometimes costs little more than the price of a ticket.
The information revolution has also helped terrorists, providing inexpensive means of communication and organization that allow groups once restricted to local and national police jurisdictions to become global.
Thirty years ago, instantaneous global communication was mostly restricted to large entities (governments, multinational firms, the Catholic Church) with big budgets.
The Internet makes it virtually free.
The second set of trends reflects changes in the motivation and organization of terrorist groups.
Mid-20 th century terrorists tended to have relatively well-defined political objectives, which were often ill-served by mass destruction.
Many were supported and covertly controlled by governments.
At the century's end, radical groups grew on the fringes of several religions.
Most numerous were the tens of thousands of young Muslim men who went to fight against the Soviet occupation of Afghanistan.
Terrorism became more brutal and indiscriminate as motivations changed from the limited and political to unlimited or retributive objectives reinforced by promises of rewards in the afterlife.
Organization also changed.
Al Qaeda's network of tens of thousands of people in loosely affiliated cells in some sixty countries gives it a scale surpassing anything seen before.
Both trends make managing terrorism more difficult.
Today's focus is properly on terrorism associated with Islamic extremists.
But limiting attention to Islamic terrorists would be a mistake, because it ignores the wider effects of the democratization of technology and the broader set of challenges that must be met.
New technologies have put into the hands of deviant groups and individuals destructive powers once limited to governments.
Every large group of humans contains members who deviate from the norm.
Some are bent on destruction.
Recall that a homegrown anti-government fanatic, Timothy McVeigh, perpetrated the worst case of terrorism in the US before September 11th, 2001.
Similarly, the Aum Shinrykio cult that spread the poison gas sarin in Tokyo's subway in 1995 had no connection to Islam.
Indeed, whatever the source of terrorism, its lethality is increasing.
In the 1970s, the Palestinian attack on Israeli athletes at the Munich Olympics or killings by the Red Brigades cost dozens of lives.
In the l980s, Sikh extremists bombed an Air India flight, killing 325 people.
Destroying New York's Twin Towers cost several thousand lives.
If one extrapolates from these trends and envisions some deviant group gaining access to biological or nuclear materials, it is possible to imagine terrorists murdering millions.
To kill so many people, deviants like Hitler or Stalin needed a totalitarian government.
But now it is easy to envisage deviant groups and/or individuals killing millions without state support.
This "privatization of war" dramatically changes world politics.
The next step in the escalation of terrorism will have profound effects on the nature of our urban civilizations.
What would happen to our willingness to live and work in cities, to real estate prices, to museums and theatres if instead of destroying two office buildings, a future attack destroys the lower half of Manhattan or the Left Bank in Paris?
Today's terrorism is nothing like the 1970s terrorism of the IRA, ETA, or the Red Brigades.
Not one but many societies are vulnerable.
One need not accept all the rhetoric or policies of George W. Bush to recognize that he is correct on a central point.
Business as usual will not be enough.
The Problem of Priorities
COPENHAGEN – This decade has seen remarkable progress against humanity’s greatest challenges.
Consider the declaration of victory over polio in India, which seemed impossible ten years ago.
January marked one year since the country’s last reported case.
Or look at the strides made against malaria: over the past decade, the number of cases has been reduced by 17%, and the number of deaths has dropped by 26%.
Despite global population growth and economic crisis, absolute poverty – the proportion of people living on less than $1.25 a day – is falling in every region of the world.
In fact, the United Nations Millennium Development Goal of cutting extreme poverty in half has been achieved five years ahead of time.
Just a few years ago, the use of male circumcision as a tool in the fight against HIV/AIDS was largely unknown.
Today, UNAIDS and the World Health Organization recommend it as a means to combat HIV/AIDS, and more than ten African countries are implementing strategies to increase its availability. Similarly, the concept of using geo-engineering to respond to climate change has moved from science fiction to an area of serious research.
This decade has also witnessed a 60% increase in global development aid.
Bill Gates’s Giving Pledge challenge has graduated from concept to campaign, with at least $125 billion promised to good causes.
But, while the last decade has given much reason for cheer, there are areas in which we cannot claim such success.
Climate change has emerged as one of the most talked-about problems, yet global negotiations have fallen apart, and we are barely any closer to cutting carbon emissions than we were ten years ago.
Similarly, violent conflicts continue to take a toll that is far too high.
And, while the world met the Millennium Development Goal for providing clean drinking water five years early, the provision of sanitation has fallen behind: an astonishing one-third of the world’s population, 2.5 billion people, lack access to basic sanitation, and more than one billion people defecate in the open.
Other problems have emerged and grown over the decade.
If current patterns continue, tobacco use may account for some 10 million deaths per year by 2030, with most occurring in low- and middle-income countries: we might see roughly one billion tobacco-related deaths in this century, compared to 100 million in the twentieth century.
Cardiovascular diseases account for 13 million deaths in low- and middle-income countries each year, more than a quarter of the entire death toll, and risk factors are growing.
The state of challenges facing humanity changes rapidly.
So does our knowledge of how best to respond.
Policymakers and philanthropists need access to regularly updated information on how to use limited funds effectively.
The Copenhagen Consensus project, which I direct, provides a link between academic research and concrete economic analysis that can be used by decision-makers in the real world.
Every four years, researchers and Nobel laureates work to identify the smartest responses to the biggest problems facing humanity.
In 2004, the Copenhagen Consensus highlighted the need to prioritize measures to control and treat HIV/AIDS.
More money and attention was soon devoted to HIV prevention and treatment.
In 2008, the Copenhagen Consensus focused the attention of policymakers and philanthropists on investments in micronutrient provision. Public acceptance of this idea led to an increase in efforts to reduce “hidden hunger” – that is, people suffering from not getting the nutrients that they need.
This May, more than 30 Nobel laureates and researchers will work together once again to identify the smartest ways to respond to global challenges, based on the latest information about the toughest problems facing our world.
Since 2008, the global economic crisis has made it even more necessary to ensure that development and aid spending is used wisely, where it can make the biggest difference.
The Copenhagen Consensus project carries out the difficult task of comparing one set of initiatives with another by using fundamental economic tools and principles.
First, teams of world-renowned expert economists write research papers on the costs and benefits of a range of investments that address specific challenges.
Debate and discussion is encouraged by ensuring that three papers are written for each topic, so that a range of expert opinions is available.
This provides a framework with which we can see the full price tag, incorporating all of the costs, benefits, and spin-offs to society from using a limited amount of money in a particular way.
All of this research constitutes a valuable contribution to international development and aid policy.
But the project goes a step further.
A panel of the world’s top economists – including four Nobel laureates – test and debate the experts’ recommendations, and identify the most attractive possibilities.
Alongside the research papers, the Nobel laureates’ prioritized list provides an important input for policymakers and philanthropists.
While the past decade has witnessed much progress and reason for hope, there are still many important problems to tackle: malnutrition, sanitation, education, civil conflicts, climate change, and natural disasters, to name some of the most prominent.
But are the most prominent problems necessarily those that we should address immediately?
The research and the prioritized list make us consider the reasons for our current priorities, and challenge us to spend limited resources to do the most good first.
And what are the best things to do first?
We find out in May.
The Problem with “China Bashing”
Pressure on China today to push up the value of the yuan against the dollar is eerily similar to the pressure on Japan 30 years ago to make the yen appreciate.
Back then, “Japan bashing” came to mean the threat of US trade sanctions unless Japan softened competitive pressure on American industries.
By 1995, the Japanese economy had become so depressed by the overvalued yen ( endaka fukyo ) that the Americans relented and an&shy;nounced a new “strong dollar” policy.
Now “China bashing” has taken over, and the result could be just as bad, if not worse.
By 2000, China’s bilateral trade surplus was as large as Japan’s; by 2004, it was twice as large.
Whereas Japan bashing included “vol&shy;untary” restraints on exports that threatened US heavy industries, where lobbies were concentrated and politically potent, recent Chinese exports have mainly been low- to middle-tech products of light industry.
Thus, China bashing primarily means pressure to revalue the yuan.
However, this demand is as unwarranted now as was pressure on Japan to make the yen appreciate.
The financial press and many influential economists argue that a major de&shy;preciation of the dollar is needed to correct America’s external deficit.
But the US current-account deficit – about 6% of GDP in 2004 and 2005 – mainly reflects a new round of deficit spending by the US federal government and surprisingly low personal savings by American households (perhaps because of the bubble in US residential real estate).
Moreover, the cure can be worse than the disease.
Sustained appreciation of a creditor country’s currency against the world’s dominant money is a recipe for a slowdown in economic growth, followed by eventual deflation, as Japan found in the 1990’s – with no obvious decline in its large relative trade surplus.
In a rapidly growing develop&shy;ing country whose financial system is still im&shy;mature, introducing exchange-rate flexibility in order to insulate domestic macroeconomic policy from the ebb and flow of international payments, as the IMF advocates, is an even more questionable strategy.
If a discrete exchange-rate appreciation is to be sustained, it must reflect expected monetary policies: tight money and deflation in the appreciated country, and easy money with inflation in the depreciated country.
But domestic money growth in China’s immature bank-based capital market is high and unpredictable, while many interest rates remain officially pegged.
Thus, the People’s Bank of China (PBC) cannot rely on observed domestic money growth or interest rates to indicate whether monetary policy is too tight or too loose.
From 1995 to July 21, 2005, China’s authorities held the now unified exchange rate constant at 8.28 yuan/dollar (plus or minus 0.3%).
They subordinated domestic monetary and fiscal policies to maintaining the fixed exchange rate – even during the 1997-98 Asian crisis, despite great pressure to devalue. They also dismantled tariffs and quotas on imports faster than their World Trade Organization obligations required.
Greater economic openness, coupled with the fixed nominal exchange rate, ended China’s inflationary roller-coaster ride, and, after 1994, real GDP growth also became more stable.
The government is now seeking to decontrol domestic interest rates, create a more robust domestic bond market, and finally remove capital controls.
However, with China’s economy currently threatened by ongoing yuan appreciation, liberalizing the financial system could have perverse short-run consequences.
In a liberalized capital market, the undiminished risk that the yuan might appreciate means that investors must be compensated by a higher interest rate on dollar assets.
But interest rates on dollar assets are given in world markets independently of what China does.
Thus, the market can establish the necessary interest differential only if interest rates on yuan assets fall below their dollar equivalents.
As the huge buildup of dollar reserves – now almost $800 billion – expands China’s domestic monetary base, short-term interest rates will be driven down, at least until they hit zero.
In May 2006, the fairly free domestic interbank rate was just 1.62%, while the US Federal Funds rate was 5%.
Just letting the yuan float upward does not resolve the dilemma.
Actual appreciation would lead to actual deflation and further downward pressure on domestic interest rates.
If actual appreciation does not reduce China’s trade surplus, pressure to appreciate the yuan further would only continue, as was true for Japan before 1995.
If China is to avoid falling into a Japanese-style liquidity trap, the best solution is to fix its exchange rate in a completely credible way so that there is no fear of currency appreciation.
Then financial liberalization could proceed with market interest rates remaining at normal levels.
But China’s abandonment of the yuan’s “traditional parity” in July 2005 rules out a new, credibly fixed exchange-rate strategy for some time.
Failing this, China must postpone full liberalization of its financial markets.
This means retaining, and possibly strengthening, capital controls on inflows of highly liquid “hot” money from dollars into yuan, and continuing to peg certain interest rates, such as basic deposit and loan rates, to help preserve the profitability of banks.
Such measures are, of course, an unfortunate detour.
True, China’s economy is now growing robustly and is not likely to face actual deflation anytime soon, but if China does fall into a zero-interest rate trap, the PBC, like the BOJ, would be unable to offset deflationary pressure in the event of a large exchange-rate appreciation.
With short-term interest rates locked at zero, pressure for further appreciation would leave the PBC helpless to re-expand the economy.
China’s monetary and foreign exchange policies are now in a state of limbo.
Instead of stable guidelines with a well-defined monetary (exchange rate) anchor and a firm mandate to complete financial liberalization, China’s macroeconomic and financial decision making will be ad hoc and anybody’s guess – as was true, and still is, for Japan.
The Problem with Proxy Wars
The Promise and Peril of Global Change
MUNICH – Panta rhei .
Everything flows.
This Greek aphorism often comes to mind when I think of the economic and political changes in my lifetime.
They seemed as impossible before they occurred as they have felt natural in retrospect.
Communism fell.
Germany was united.
The United States elected a black man president.
And now we are in a phase in which Asia is catching up with the West and American hegemony is being challenged.
While American casino capitalism has collapsed, and America’s European economic satellites are suffering, China seems to be taking advantage of the situation, increasing its trade surplus in the midst of the global economic crisis.
Indeed, in the first four months of this year, China became the world’s leading goods exporter, overtaking Germany, the previous champion.
It is true that in other economic terms, China still lags far behind.
Although China accounts for 20% of the world’s population, its share of global GDP currently is only 7%.
By contrast, the United States and the European Union account for 54% of global GDP, despite having only 12% of the world’s population.
But these figures are changing rapidly, owing to China’s exuberant growth.
From 1995 to 2008, China’s economy grew by 229%, while the world economy grew by 63%, the US by 45%, and 27-member EU by only 37%.
It may be difficult for China to ever match the success of a small Asian country like Singapore, which has already overtaken the US in terms of GDP per capita as measured by purchasing power parity.
Yet China will undoubtedly become the world’s largest economic power in the foreseeable future.
To achieve this leadership position, it needs less than a quarter of US per capita GDP, because its population is more than four times larger.
The forces of globalization that were liberated by the fall of Communism have created a better world, with rapid economic convergence and shrinking inequality.
The proportion of people living below the World Bank’s poverty line of $1.25 a day shrank from 52% in 1981 to only 25% in 2005.
More than 50% of the world’s population is now considered middle class, with a living standard above the average of the developed countries’ poverty lines ($8.2 at 1996 PPP prices).
And the worldwide Gini coefficient of inter-country inequality fell from 0.653 to 0.556 from 1980 to 2007, owing largely to the astounding performance of the emerging countries, particularly China and India.
The development of the world has not been without problems, however.
Carbon-dioxide emissions have been growing fast, fossil-fuel resources are being depleted rapidly, and global warming has accelerated.
Even if the US embraces the Kyoto Protocol under President Barack Obama, the world’s temperature will break the record of the last 800,000 years in the next 30 years.
Moreover, huge waves of migrants from developing countries to OECD countries challenge the assimilation capacity of the latter and deprive the former of its educated work force.
In the US and Germany, 13% of the population is foreign born, as are 8% of France inhabitants and 10% of Britain’s.
Unskilled migrants tend to come to Europe, where they burden the welfare state, and skilled migrants are lured to the US, although they are urgently needed at home.
The brain drain is a problem not only for South America west of the Andes and many African countries, but also for Turkey, Italy, Britain, the Balkan countries, Germany, and Finland.
Migration from developing countries partly reflects a problem that also triggered the current financial crisis: international capital flowed in the wrong direction.
In 2007 alone, the US imported $790 billion of capital, while the emerging and developing countries exported $714 billion.
This made it possible for US households to stop saving and enjoy an exorbitant consumption level, but it stood on its head the conventional wisdom that capital should flow from rich to poor countries, where it can more productively be invested.
Since the world will not continue to provide the US with goods in exchange for dubious financial securities, Americans will have to leave their dream world.
They will have to brace themselves for an extensive period of diminished expectations that will last much longer than the next economic boom, and that will require substantial structural changes in the US economy.
In the next few decades, the biggest challenge for the world will be peace, because the changing economic power structure will require corresponding political changes, which the US, as the incumbent superpower, will not easily accept.
The situation is similar to Germany’s challenge to British geopolitical hegemony in the nineteenth century, when the German economy blossomed.
The resulting political tensions led to a second Thirty Years’ War that brought Western civilization to the brink of collapse.
It can only be hoped that the political leaders who shape the course of the twenty-first century will be wise enough to avoid such an outcome.
The Hydrogen Solution
RHINECLIFF, NY – Around the world, governments and businesses are constantly being called upon to make big investments in solar, wind, and geothermal energy, as well as biofuels.
But, in the United States, unlike in Europe and Asia, discussion of hydrogen energy and fuel cells as systemic, game-changing technologies is largely absent.
That needs to change: these clean, renewable energy sources promise not only zero-emission baseload power, but also a zero-emission fuel for cars and trucks, the biggest polluters of them all.
By now, many have heard about plans by big carmakers – including Honda, Toyota, and Hyundai – to launch hydrogen fuel-cell cars commercially around 2015.
Daimler, Ford, and Nissan plan to launch such cars around 2017.
Germany plans to build at least 50 hydrogen fueling stations by 2015 as the start of a countrywide network.
Japan and Korea have announced similar plans.
But a bigger, largely unreported, message is that some European countries, especially Germany, have launched projects that combine renewables like solar and wind with hydrogen for energy storage, implying clean, zero-emission, stable power grids that require no coal, oil, or nuclear power.
Indeed, the bottom line of a new study by two American researchers, Willett Kempton and Cory Budischak, is that the combination of renewables and hydrogen storage could fully power a large electricity grid by 2030 at costs comparable to those today.
Kempton and Budischak designed a computer model for wind, solar, and storage to meet demand for one-fifth of the US grid.
The results buck “the conventional wisdom that renewable energy is too unreliable and expensive,” says Kempton. “For example,” according to Budischak, “using hydrogen for storage, we can run an electric system that today would meet a need of 72 gigawatts, 99.9 % of the time, using 17 GW of solar, 68 GW of offshore wind, and 115 GW of inland wind.”
Their study lends scientific supportto several such projects underway in Europe aimed at proving that hydrogen gas, converted from water via electrolysis – think of it as natural gas minus the polluting carbon – and stored, for example, in subterranean salt caverns, can smooth out fluctuations inherent in solar and wind energy.
It builds in part on two recent studies at Stanford University and the Carnegie Institution, which conclude that, as Carnegie atmospheric scientist Ken Caldeira put it, “there is more than enough energy available in winds to power all of civilization.”
The latest effort, scheduled to get underway outside Brussels this year, is the delightfully named “Don Quichote” project (“Demonstration of New Qualitative Innovative Concept of Hydrogen Out of wind Turbine Electricity”), designed to highlight utility-scale energy storage and transport, and to provide power for fuel-cell forklift trucks.
The project’s partners are a Belgian grocery chain, the European Commission, and various European organizations and companies.
Canada’s Hydrogenics is providing the electrolyzer and a fuel cell.
Meanwhile, near Berlin, five companies launched a €10 million ($13 million) pilot project at Berlin’s main airport in Schoenefeld in December, expanding and converting an existing hydrogen fueling station to CO2 neutrality by linking it to a nearby wind farm.
Earlier last year, two German utilities, Thüga and E.ON, announced two gas demonstration plants.
And the world’s first renewable energy/hydrogen hybrid power plant, producing both electricity and hydrogen as car fuel, started production in the fall of 2011.
The previous year, German Chancellor Angela Merkel laid the plant’s cornerstone herself, sending a strong signal of her seriousness about Germany’s shift to clean, renewable energy.
Indeed, the much-noted Energiewende, or energy turnaround, that she announced in 2010 is arguably one of the most audacious acts of environmental statesmanship yet.
According to the author and environmentalist Bill McKibben, Germany is in the international forefront of fighting climate change: “The clear alternative and the best news from 2012 came from Germany, the one big country that’s taken climate change seriously....There were days last summer when [Germans] generated more than half the power that they used from solar panels.”
In fact, hydrogen technology will be an integral part of Germany’s evolving renewable/alternative energy-based system.
Germany’s move toward renewable energy is likely to have a much broader positive impact.
A six-article series, “The German Nuclear Exit,” in the Bulletin of the Atomic Scientist argues that the move away from nuclear energy is already “yielding measurable economic and environmental benefits.”
More broadly, Lutz Mez, a political scientist at Berlin’s Free University, argues that the country’s shift has “observably decoupled energy supply from economic growth,” and that the “evolving Energiewende, rather than the nuclear phase-out” implies “continuing reforms of social, economic, technological, and cultural policy in Germany.”
What, one wonders, are lagging nations waiting for?
The Promise of Iraq’s Constitution
The constitutional process now under way in Iraq represents a hopeful milestone for all Iraqis.
After decades of successively imposed constitutions, an elected assembly has overseen the process of drafting a new permanent constitution, and the draft text will be voted on by ordinary Iraqis on October 15.
Much of the current talk about the draft’s various provisions thus misses the point.
Regardless of whether the referendum succeeds or fails, and regardless of the details of the constitutional text, what is most important is the establishment of constitutional processes and institutions in Iraq, before and after the referendum.
Concerning the pre-referendum phase, the National Assembly largely succeeded in this task.
Although Iraq’s interim constitution gave the Assembly exclusive control over the drafting process, the Assembly wisely reached out beyond its membership in creating a constitutional drafting committee.
Iraqi leaders were well aware of the decreased participation in the election by a significant portion of Iraq’s multi-ethnic and multi-confessional mosaic, particularly the Sunni community.
Accordingly, they sought out those who were under-represented in the Assembly, but whose sense of participation in and ownership of the process was essential, not merely to the constitutional exercise, but to binding the nation’s wounds.
This was no mere gesture.
Reaching out was an important component of establishing the rule of law, and it also sent a message that Iraq had truly turned a corner – that no single party sought to dominate Iraq.
This was an important signal that those elected to the National Assembly understood that democracy does not mean merely the will of the majority.
Instead, all Iraqis were allowed to participate in the process, and, though consensus was not ultimately reached, that, too, was a part of the democratization process.
In the end, Iraq’s voters will decide whether this is a constitution under which they wish to be governed for the foreseeable future.
Those who chose not to participate in last January’s elections will most certainly do so now, both in the referendum and in the upcoming elections to a new Assembly in December.
A second important feature of the drafting process was the extent to which the National Assembly complied with the requirements of Iraq’s interim constitution, the Transitional Administrative Law (TAL). At the time of the transfer of authority in June of 2004, many pundits predicted that an elected National Assembly would ignore an interim constitution drafted by an unelected Governing Council and promulgated by an occupying authority.
Yet that did not happen.
The TAL set a rigorous schedule for the Assembly to complete an initial constitutional draft, and the Assembly essentially abided by those limits.
The deadline extension that it passed was in keeping with both the spirit and the letter of the TAL.
At long last, it can be said that an Iraqi legislature understood that it was constrained by constitutional principals and the rule of law.
The test for institution building, however, will come once a constitution has been approved and a new government installed.
Regardless of who wins the elections, there will be temptations to tinker with the constitutional text.
Such temptations are understandable, and need not be animated by improper motives.
However, given the little weight given to constitutions in Iraq’s modern history, it is likely that the political class will leave the text alone.
Barring some compelling need, the calculus might well arise that it is more important to abide by the constitution for some time – and to be seen to be abiding by it – than it is even to improve its provisions.
Changes can always be proposed after a decent interval passes.
It goes without saying that it will be essential to establish that governance in Iraq is institutional, not personal.
The American administration was absolutely right to resist the call to turn Iraq over to a caudillo, as some wanted.
Iraq’s salvation from the nightmare that it endured over the previous 35 years lies not in any one man; indeed, reliance on “one man” was the central ingredient in Saddamist rule.
Here again, Iraq’s immediate past history allows one to be optimistic.
The Iraqi Governing Council was not dominated by any single member, and Iraq’s subsequent governments have also operated collegially.
Giving life to constitutionally defined political institutions is far more important to the course of Iraq’s immediate future than the specific provisions that the constitution contains.
That has been the missing ingredient, not only in Iraq, but also in other countries ruled by despots.
Constitutions frequently enshrine lofty principals, and nobly assure protection of fundamental rights.
The question is whether those guarantees are given meaning on the ground.
If the immediate past is a guide, one has reason for optimism in Iraq.
The Prophet and the Commissars
MOSCOW – Prophets, it is said, are supposed to be without honor in their homeland.
Yet Moscow has just witnessed the extraordinary sight of Alexander Solzhenitsyn – the dissident and once-exiled author of the Gulag Archipelago and One Day in the Life of Ivan Denisovich – receiving what amounts to a state funeral, with Prime Minister Vladimir Putin acting as chief mourner.
So, even in death, Alexander Solzhenitsyn will, it seems, remain a force to be reckoned with.
But will he be a force in keeping with the liberating vistas of his greatest works?
Sadly, art in Russia is always used to reinforce the narcissism of power.
Solzhenitsyn was used in this way twice.
The paradox is that, in the Soviet era, his art was used, briefly, as a force for liberation, because Nikita Khrushchev allowed the publication of One Day in the Life of Ivan Denisovich in order to buttress his anti-Stalin thaw.
In today’s supposedly free and democratic Russia, however, Solzhenitsyn is idealized for his nationalism and Orthodox messianism, his contempt for the West’s supposed decadence, all messages that Putin’s regime proclaims loudly and daily.
The old Soviet iconography has broken down completely; despite heroic efforts, not even Putin could restore Lenin, Stalin, and the old Soviet pantheon.
Yet the Kremlin understands that something is needed to replace them as Russia adapts to its new oil-fueled autocracy.
Solzhenitsyn, one of the most famous and heroic dissidents of the Soviet era, now seems certain to become a towering figure in the iconography of Putinism.
Throughout his presidency, Putin repeatedly invoked Russia as an ancient, powerful, and divinely ordained state going back a thousand years, a civilization separate from the West, neither Communist nor a western liberal democracy.
That message echoes Solzhenitsyn’s famous commencement address at Harvard in 1978: “Any ancient deeply rooted autonomous culture, especially if it is spread on a wide part of the earth’s surface, constitutes an autonomous world, full of riddles and surprises to Western thinking.
For 1,000 years, Russia has belonged to such a category.ampquot;
For Solzhenitsyn, a survivor of the gulag system enforced by the KGB, the desire to see Russia as a great nation, its eternal spirit superior to the West’s vulgar materialism, found him in old age supporting ex-KGB man Putin, who once said that there is no such thing as an ex-KGB man and who sees the Soviet Union’s collapse as the greatest geo-political catastrophe of modern times.
Despite this, Solzhenitsyn seemed to accept Putin as a “good dictator,” whose silencing of his critics enhances Russia’s soul.
It is a sad testament to Russia’s current mindset that it is Solzhenitsyn the anti-modernist crank who is being remembered, not Solzhenitsyn the towering foe of Soviet barbarism and mendacity.
Today, his writing is seen as buttressing the state, not individual freedom.
Works such as The Red Wheel series of novels, a tedious account of the end of Imperial Russia and the creation of the USSR, or his last book, written in 2001, entitled Two Hundred Years Together on the history of Russian-Jewish coexistence, seem backward, preachy, conservative, unenlightened, at times even anti-Semitic, and smack of Solzhenitsyn’s own grim authoritarianism.
Both Putin and Khrushchev sought to use Solzhenitsyn for their own purposes.
Putin vowed to revive the moral fiber of the Russians, their glory and international respect.
To achieve this goal he sought to restore high culture to a position of primacy in Russian life, and to put mass media in its (politically) subservient place.
Putin held up Solzhenitsyn as a model for those who stand for the ideal of Great Russia – “an example of genuine devotion and selfless serving of the people, fatherland, and the ideals of freedom, justice, and humanism.”
Under Khrushchev, however, Solzhenitsyn’s work was used to liberate the country from the grip of Stalinism.
In choosing to allow One Day in the Life of Ivan Denisovich to be published, Khrushchev knew that he was undermining the entire Soviet era up to that point.
But, with Khrushchev’s overthrow in 1964, Leonid Brezhnev lost no time in restoring orthodoxy and purging books that threatened the Party’s reputation.
Solzhenitsyn was banned, driven first underground and then into exile.
Yet Khrushchev, isolated and in disgrace, continued to see a bond between himself and the great author.
As Solzhenitsyn wrote in his memoir The Oak and the Calf : “as late as 1966, he [Khrushchev] sent me New Year’s greetings—which astonished me because I was on the brink of arrest.
Perhaps (in his disgrace) he did not know.”
One lesson of the 1989 revolution in Eastern Europe is the value of having truly democratic-minded figures lead the escape from communism.
Poland had Lech Walesa; Czechoslovakia Václav Havel.
Both kept their countries calm during wrenching transitions.
Russia, sadly, had no one with the moral authority to soothe people’s passions.
Only Solzhenitsyn and Andrei Sakharov came near to Walesa and Havel in terms of moral authority, but Sakharov was dead by the time communism collapsed, and Solzhenitsyn’s ideas were too conservative, too tied to Russian nationalism, for him to become a symbol of democracy in a multi-national Soviet Union.
The tragedy of Solzhenitsyn is that, although he played a mighty role in liberating Russia from totalitarianism, he had nothing to say to ordinary Russians after their liberation, except to chastise them.
Yet perhaps one day we Russians will escape our false dreams, and when that day comes, the heroic Solzhenitsyn, the Solzhenitsyn who could never surrender or be corrupted, will be restored to us.
But it is now that we need that Solzhenitsyn most.
For to paraphrase Milton’s Paradise Lost on the illumination of Hell, “Solzhenitsyn’s is no light, but rather darkness visible.”
The Protocols of Rupert Murdoch
NEW YORK – Whenever I hear people on America’s Republican right call themselves “conservative,” I experience the mental equivalent of a slight electric shock.
A conservative is someone who, in the tradition of the eighteenth-century English parliamentarian Edmund Burke, believes that the established order deserves respect, even reverence.
A liberal, by contrast, is someone ready to alter the established order in pursuit of a vision of a better world.
The Whig historian of the nineteenth century Thomas Macaulay described this difference well.
There were “two great parties” in England, he wrote, which manifested a “distinction” that “had always existed, and always must exist.”
On the one side were liberals, “a class of men sanguine in hope, bold in speculation, always pressing forward…and disposed to give every change credit for being an improvement.”
On the other were conservatives, “a class of men who cling with fondness to whatever is ancient, and who, even when convinced by overpowering reasons that innovation would be beneficial, consent to it with many misgivings and forebodings.”
By this the standard, the right in the United States – the party of Fox News, the Tea Party, and, increasingly, of the Republican Party itself – are no longer conservatives.
They are radicals.
They are ecological radicals, denying the scientific consensus on global warming; they are prepared to let the Earth cook.
(What could be less conservative than that?)
They are legal radicals, supporting the form of torture called water-boarding, as well as widespread secret wiretapping.
And, on the basis of far-fetched “originalist” interpretations of the US Constitution, they would deny the federal government the power to engage in almost any form of economic regulation or support of the general welfare, including public health.
They are even nuclear radicals, and many seek to obstruct the New START treaty with Russia, which would modestly advance the arms-control agenda pursued by all Republican presidents since Richard Nixon. Tea Party candidates have even hinted that armed resistance to the US government may soon be justifiable.
But nothing illustrates the radicalism of the new right better than the recent attack by the Fox News commentator Glenn Beck on the financier and philanthropist George Soros.
Soros is of Hungarian and Jewish origin, and Beck’s attack, called “The Puppet-Master?”, recycles, almost in carbon copy, the tropes of the most virulent anti-Semitic ideologies of the totalitarian movements of the first half of the twentieth century.
Beck, who denies that he is anti-Semitic, is a conspiracy theorist of classic vintage, though the content of his alleged conspiracies is, to put it bluntly, weird.
True, some of it is classic McCarthyite red-baiting.
Of Obama’s White House, he says, “there are communists, Marxists, revolutionaries all around this president.”
Stranger still is his attack on, of all people, US President Woodrow Wilson.
Wilson is fingered as the originator of “progressivism,” which in turn, is – believe it or not – also identified as the point of origin of Nazism and Bolshevism.
Beck regularly likens Obama’s policies to those of Hitler. (Recently, Roger Ailes, Fox’s founder and president, said of the management of mild, sober National Public Radio, “They are, of course, Nazis.”)
Wilson, Hitler, and Obama are linked by a chain of highly permissive association altogether typical of conspiracy theorizing in general, and of its anti-Semitic variety in particular: Wilson was a “progressive”; some progressives dabbled in eugenics (never mind that some conservatives did as well); the eugenics movement influenced Hitler;
Thereforeprogressives, Hitler, and Obama are the same!
Of all this we can say what the political thinker Hannah Arendt said of the anti-Semitic forgery The Protocols of the Elders of Zion. Its effect is to “reveal official history as a joke, to demonstrate a sphere of secret influence of which the visible, traceable, and known historical reality was only the outward façade…”
Now a new epicenter for the Wilson-Hitler-Obama axis has been identified in the person of George Soros.
While horror-film music plays and clips of history’s disasters are shown on the screen, a voice intones, “Eighty years ago, George Soros was born.
Little did the world know then, economies would collapse, currencies would become worthless, elections would be stolen, regimes would fall. And one billionaire would find himself coincidentally at the center of it all.”
Going on to accuse Soros of creating a shadow government in the US, the show claims that this “greatly resembles” similar organizations that “he has created in other countries” supposedly “before instigating a coup.”
Thus, Beck falsely charges that Soros has instigated coups abroad while implying that he plans to carry one out in the US.
Beck doesn’t say so, of course, but what Soros has actually done is give support through his Open Society foundations to pro-democracy movements in many countries.
Many of them, including Czechoslovakia, Hungary, and Poland, were ruled by Communist regimes at the time.
One would think that a self-proclaimed conservative like Beck would support that sort of activity.
But since when have conspiracy-mongers been hampered by contradiction?
Indeed, they have historically been no more bothered by engaging in contradictions than in ignoring facts.
After all, the Nazis accused Jews of being the secret force behind both capitalism andcommunism – a contradiction as well as lie that is resuscitated in “The Puppet Master?”.
Since roughly 1994, when Newt Gingrich engineered the Republican takeover of the US House of Representatives, Republicans have taken to calling themselves “revolutionaries” – not a word often found on the lips of conservatives.
Has the time come to take them at their word?
Glenn Beck’s assault on Soros – and the unmistakable stench of its atrocious antecedents – suggests what sort of revolution they may have in mind.
The Public and Its Problems
CHICAGO – On a recent visit to Europe, I found economists, journalists, and business people thoroughly frustrated with their politicians.
Why, they ask, can’t politicians see the abyss that yawns before them, and come together to resolve the euro crisis once and for all?
Even if there is no consensus on what a solution might be, can’t they meet and thrash out a plan that goes beyond their repeated half-measures?
It is only because of the European Central Bank’s bold decision to lend long term to banks that we have seen some respite recently, or so their argument goes.
Politicians, in contrast, are failing Europe by being forever behind the curve.
Why do they find it so hard to lead?
One answer that can be easily dismissed is that politicians simply don’t understand the gravity of the situation.
Political leaders need not be economic geniuses to understand the advice that they hear, and many are both intelligent and well-read.
A second answer – that politicians have short time horizons, owing to electoral cycles – may contain a kernel of truth, but it is inadequate, because the adverse consequences of timid action often become apparent well before they are up for re-election.
The best answer that I have heard comes from Axel Weber, the former president of Germany’s Bundesbank and an astute political observer.
In Weber’s view, policymakers simply do not have the public mandate to get ahead of problems, especially novel ones that seem small initially, but, if unresolved, imply potentially large costs.
If the problem has not been experienced before, the public is not convinced of the potential costs of inaction.
And, if action prevents the problem, the public never experiences the averted calamity, and voters therefore penalize political leaders for the immediate costs that the action entails.
Even if politicians have perfect foresight of the disaster that awaits if nothing is done, they may have little ability to persuade voters, or less insightful party members, that the short-term costs must be paid.
Talk is cheap, and, in the absence of evidence to the contrary, the status quo usually appears comfortable enough.
So leaders’ ability to take corrective action increases only with time, as some of the costs of inaction are experienced.
Calamity can still be averted if the costs of inaction escalate steadily.
The worst problems, however, are those with “inaction costs” that remain invisible for a long time, but increase suddenly and explosively.
By the time the leader has the mandate to act, it may be too late.
A classic example was Winston Churchill’s warnings against Adolf Hitler’s ambitions.
Hitler’s plans were outlined in Mein Kampf for all to read – and he did not disguise them in his speeches.
Yet few in Britain wanted to give them credence, and many thought that communism was the greater threat, especially in the bleak years of the Great Depression.
The Nazis’ dismembering of Czechoslovakia in 1938 made the sincerity of Hitler’s ambitions all too clear.
But it was only after the invasion of Poland the following year that Churchill was appointed First Lord of the Admiralty, and he became Prime Minister only after the invasion of France in 1940, when Britain stood alone.
Britain might well have been better off had Churchill held power earlier, but that would have meant costly rearmament, which was unacceptable so long as there was a chance that Hitler proved to be a paper tiger.
And, of course, it would also have meant entrusting Britain’s fate to a politician who, though now regarded as an indomitable leader, was widely distrusted at the time.
Non-linear costs of inaction are most obvious in the financial sector.
At the same time, financial-sector problems may be particularly difficult to address: if politicians emphasize the need for action too strongly in order to get a mandate, they might precipitate the very turmoil that they seek to contain.
Between the Bear Stearns crisis and the failure of Lehman Brothers, the United States government could do little to get ahead of the growing problem (though, of course, the government-backed mortgage underwriters Fannie Mae and Freddie Mac were placed under conservatorship in the interim).
It took the post-Lehman panic for Congress to authorize the Troubled Asset Relief Program, which threw a financial lifeline to banks and the auto industry, among others.
And only frenetic action by the Federal Reserve and Treasury (with authorities around the world joining) prevented a systemic meltdown.
A subprime-mortgage problem that was initially estimated to imply losses of a few hundred billion dollars imposed far higher costs on the entire world.
Similarly, eurozone politicians have obtained a mandate to take bolder action only as the markets have made the costs of inaction more salient.
Even setting aside Germany’s understandable attempt to limit how much it would have to pay, it is difficult to see how politicians could have gotten ahead of the problem.
While the ECB has bought the eurozone some time, the calming effect on markets may be a mixed blessing.
Have Europeans seen enough of the abyss to tolerate stronger action by their leaders?
If not, markets might have to deteriorate further to make possible a comprehensive resolution to the eurozone crisis.
Similarly, with government bond yields as low as they are in the US, the public has little sense of urgency about its fiscal problems, though some doomsayers, like Peter Peterson of the Blackstone Group, have been trying their best to awaken it.
One hopes that the coming US presidential election will lead to a more enlightened public debate about tax and entitlement reform.
Otherwise, a rapid escalation of yields in the bond market might be necessary for the public to accept that there is a problem, and for politicians to have the room to resolve it.
Don’t blame the leaders for appearing short-sighted and indecisive; the fault may lie with us, the public, for not listening to the worrywarts.
The Putin Parody
Such regimes rarely perish from external shocks or оррosition pressure. As a rule, they die unexpectedly from some internal disease – from irresistible existential disgust at themselves, from their own exhaustion.
Czarist rule withstood many harsh tests during its long history: peasant revolts, conspiracies, and the alienation of the educated class.
General Secretary Yuri Andropov died in 1984, leaving behind a country cleansed of dissidents. But when in several years one of his former regional First Secretaries, Boris Yeltsin that is, signed a decree banning the Communist Party none of 18 million party members went to the streets to protest.
Today, before our very eyes, Vladimir Putin’s once seemingly impregnable regime may be fading in the same way as its predecessors. In just ten years, Putinism, which was consciously designed by its image-makers as a simulacrum of a great ideological style has run through all the classical stages of Soviet history.
First comes the creation of a formative myth for the new system, one that generates a demiurge-hero, the nation’s father. Where the Bolsheviks had the October Revolution and the subsequent civil war to deify Lenin, Putinists used the second Chechen war, triggered by blowing up of Moscow apartments, to raise up Vladimir Putin as national saviour.
The second stage is the time of the tempest – the period when the country is stoically remade through the leaders’s iron will. Where Stalin had his barbarous yet monumental drive to industrial modernization, Putin boasted of making Russia a great energy power.
The Soviets had the great victory over Hitler’s Germany in World War II, which left Russia one of the world’s two superpowers. Putin’s supposedly heroic victory came in the war with Georgia of 2008, followed by the subsequent virtual annexation of Abkhazia and South Ossetia.
Under the Soviets, this stage lasted about 40 years. But Putin’s simulacrum of Sovietism began to collapse much faster, partly by virtue of the fact that his regime’s ideology never had much substance to begin with, and so couldn’t begin to be used as a prop.
Indeed, at the onset of the financial crisis, Putin tried to bestride the world, portraying Russia as an island of stability and demanding the creation of a new global financial order, with the rouble to become one of the world’s reserve currencies. But that megalomaniac position was quickly reversed.
At such moments of decline in Russia, the clans always come to the fore in a mad scramble of self-preservation and self-enrichment. Even Putin’s truest followers are now beginning to speak of their leader and the results of his governance in impertinent and disrespectful ways.
Of course, no one should think that Putinism will disappear tomorrow, even though its jackals are already circling. Let us remember that Soviet communism took four decades to rot away – decades during which the inner circle knew that the regime was disintegrating from within but lacked any real idea of how to save it.
So now we hear pathetic echoes of all the reform communist efforts of the long years of Soviet decline: Putinism without Putin, Putinism with a human face, etc.
Our “father” did not turn out to be a father at all. Even among Putin’s kleptocracy of ex-KGB men, as among the communist apparatchiks in the dying days of Gorbachev’s rule, there is a growing realization that the jig is nearly up, and that it is time to look after oneself.
So, as Putinism atrophies, the great hope among his immediate circle is that they will be able to do what the communist elite did in the early 1990’s – hijack whatever new system emerges and put it to work in the service of their own interests.
The Quality of Mercy
PRINCETON – The recent release of Abdel Basset Ali al-Megrahi, the only person convicted of blowing up Pan Am Flight 103 over Lockerbie, Scotland, in 1988, sparked outrage.
Around the same time, the Philadelphia Eagles, an American football team, offered a second chance to former star Michael Vick, who was convicted of running a dog-fighting operation in which unsuccessful fighters were tortured and killed.
And William Calley, who commanded the platoon that massacred hundreds of Vietnamese civilians at the village of My Lai in 1968, has now broken his media silence and apologized for his actions.
When should we forgive or show mercy to wrongdoers?
Many societies treat crimes involving cruelty to animals far too lightly, but Vick’s penalty – 23 months in prison – was substantial.
In addition to imprisonment, he missed two years of his playing career, and millions of dollars in earnings.
If Vick were never to play football again, he would suffer punishment well beyond that imposed by the court.
Vick has expressed remorse.
Perhaps more importantly, he has turned words into deeds, volunteering at an animal shelter and working with the Humane Society of the United States to oppose dog fighting.
It is hard to see what good would come from not allowing him to complete his rehabilitation and return to doing what he does best.
Megrahi was convicted of murdering 270 people, and sentenced to life imprisonment.
He had served only seven years when Kenny MacAskill, the Scottish Justice Minister, released him on compassionate grounds, based on a medical report that Megrahi has terminal cancer, and only three months to live.
The question of remorse has not arisen, because Megrahi has never admitted guilt, and did not drop an appeal against his conviction until just before his release.
Doubts have been raised about whether Megrahi is really near death.
Only the prison doctor, it seems, was prepared to say that he did not have more than three months to live, while four specialists refused to say how long he might have.
There has also been speculation that Megrahi’s release was related to negotiations over oil contracts between Britain and Libya.
Finally, some question whether Megrahi really was the perpetrator of the crime, and this may have played a role in MacAskill’s decision (although, if so, that would have been better left to the courts to resolve).
But let us leave such questions aside for the moment.
Assuming that Megrahi was guilty, and that he was released because he has only a short time to live, does a prisoner’s terminal illness justify compassionate release?
The answer might depend on the nature of the crime, the length of the sentence, and the proportion of it that remains to be served.
For a pickpocket who has served half of a two-year sentence, it would be excessively harsh to insist on the sentence being served in full if that meant that he would die in prison, rather than with his family.
But to release a man who served only seven years of a life sentence for mass murder is a very different matter.
As the victims’ relatives point out, in planning his crime, Megrahi showed no compassion.
Why, they ask, should we show compassion to him?
MacAskill, in a statement to the Scottish Parliament defending his decision, refrained from quoting from the best-known speech on mercy in the English language – that of Portia in Shakespeare’s The Merchant of Venice – but Portia’s words would have fitted the core of his statement.
Portia acknowledges that Shylock is under no obligation to show mercy to Antonio, who is in breach of his agreement to him.
“The quality of mercy is not strained” – that is, constrained, or obligatory – she tells Shylock, but rather something that falls freely, like rain.
MacAskill acknowledged that Megrahi himself showed no compassion, but rightly points out that this alone is not a reason to deny him compassion in his final days.
He then appeals to the values of humanity, compassion, and mercy as “the beliefs we seek to live by” and frames his decision as being true to Scottish values.
We can reasonably disagree with MacAskill’s decision, but we should acknowledge that – unless there is more going on than appears on the surface – he was motivated by some of the finest values we are capable of exercising.
And, if we believe that Megrahi was not sufficiently punished for his crime, what are we to make of the treatment of former Lieutenant William Calley?
In 1971, Calley was convicted of the murder of “no less than 22 Vietnamese civilians of undetermined age and sex.”
He was also convicted of assault with intent to murder a Vietnamese child.
Yet three days – yes, days – after his conviction, President Richard Nixon ordered that he be released from prison and allowed to serve his sentence in a comfortable two-bedroom house.
There he lived with a female companion and a staff to assist him.
After three years, he was released even from this form of detention.
Calley always claimed that he was following orders.
Captain Ernest Medina, his commanding officer, ordered him to burn the village down and pollute its wells, but there is no clear evidence that the order included killing non-combatants – and of course if such an order were issued, it should not have been obeyed.
(Medina was acquitted of murder.)
After decades of refusing to speak publicly, Calley, who is now 66, recently said that “not a day goes by” when he does not feel remorse “for what happened that day in My Lai.”
One wonders if the relatives of those murdered at My Lai are more ready to forgive Calley than the relatives of those killed at Lockerbie are to forgive Megrahi.
The Quest for Investment
The Hong Kong meeting of the Doha Round of trade negotiations has left a palpable sense of frustration in the developing world over the slow pace of agricultural liberalization agreed to by the rich countries.
It may thus appear naive and counterproductive to raise the bar and suggest that we need to go beyond trade and move investment to the top of our priority list.
Yet can any “development round” worthy of its name ignore this challenge?
It had originally been intended that the Doha Round would address investment, but the developing countries chose to downgrade the issue and concentrate on agriculture instead.
This tactic has proven to be a two-edged sword.
In China, Brazil, Malaysia, and Mexico, foreign direct investment (FDI) accounts for 8% to 12% of gross fixed capital formation – without generating debt.
Although the least developed countries attract less than 3% of north-south investments, these flows account for more than 3% of their GDP, a level higher than the average for developing countries.
In hopes of stimulating FDI, bilateral agreements have multiplied, but they rarely lead to balanced commitments.
Competition among countries to attract investors is intense, and only a few, such as China or India, are able to negotiate on equal terms with the industrialized world.
The developing countries, therefore, have an interest in calling for multilateral dialogue on investment conditions in order to obtain certain collective guarantees.
Indeed, without returning to the illusion of economic planning, these countries need to be able to set conditions for foreign investors that aim to maximize the local impact on employment, technological diffusion, strategic partnerships, and so forth.
At the same time, developing countries may need to promote local private sectors and “infant industries” through temporary protectionist measures, which would help them to upgrade their output on the road to liberalization.
There is nothing heretical about such proposals. After all, the developed countries have done much the same thing.
In the nineteenth century, the United States restricted foreign investment in several sectors, including finance.
Today, both the US and the European Union keep a close watch on international acquisitions.
The emerging countries of Asia similarly depart from the pure liberal model. Even Ireland, the champion of economic liberalization, has now turned to a more selective approach.
Refusal to recognize the legitimacy of such strategies caused the collapse of the Multilateral Agreement on Investment in 1998, after three years of negotiations between the OECD countries.
The project was perceived – rightly so – as amounting to a surrender of sovereignty, because it introduced a rigid principle of non-discrimination between foreign and local companies that would eliminate the host country’s room for maneuver without offering anything in return.
Such a prospect would be even less acceptable to developing countries.
Under what conditions can one reasonably hope to restart a multilateral agreement on investment?
To be viable, such an agreement must recognize the legitimate need for some regulation.
It would also need to help poor countries cope with the quasi-generalization of “social and environmental responsibility” standards that are increasingly shaping corporate practices and consumer demand.
It should incorporate an investor code of ethics, as well as a formula for sharing the costs of implementing such standards among the state, foreign operators, and local sub-contractors.
Of course, imposing the same investment conditions in all countries could take away the incentive to invest in the least attractive of them.
But an agreement could be reached to establish categories of countries, the most important aim being to prevent dumping between countries that are at the same stage of development.
To succeed, a multilateral negotiation would also need to address the expectations of foreign operators, who want assurances that their investments are safe.
An agreement should contain provisions to improve the business environment – its transparency and predictability – by setting a framework for state intervention without stripping government of its prerogatives.
This would reduce the probability of crises while putting in place mechanisms for cost-sharing should they occur.
No multilateral investment agreement will be able to address all of the institutional problems and market failures that prevent capital from flowing to developing countries.
Some economists point to imperfect information, which precludes companies from considering the higher returns on investment available in the developing world.
If this view is correct, an agreement could create new instruments for disseminating information, while signaling poor countries’ commitment to welcoming FDI.
Other analysts point to the increasing returns that accompany greater concentration of investment – a force that works to the disadvantage of poor countries.
At the very least, a multilateral negotiation would provide an occasion to recognize the existence of the problem, reflect on how best to coordinate investments, and help move development assistance accordingly.
Despite the complexity involved and the need for technical assistance to the weakest nations in the negotiation, a multilateral investment agreement should be among the top priorities on the international agenda.
Indeed, whereas agricultural trade issues put rich and poor countries’ national interests on a collision course, promoting investment flows to the developing world could unify all countries around a shared objective.
Scary Pictures
PRAGUE – Campaigners on important but complex issues, annoyed by the length of time required for public deliberations, often react by exaggerating their claims, hoping to force a single solution to the forefront of public debate.
But, however well intentioned, scaring the public into a predetermined solution often backfires: when people eventually realize that they have been misled, they lose confidence and interest.
Last month, there were two examples of this in a single week.
On September 19, the French researcher Gilles-Eric Séralini attempted to fuel public opposition to genetically modified foods by showing the public how GM corn, with and without the pesticide Roundup, caused huge tumors and early death in 200 rats that had consumed it over two years.
Supplying an abundance of pictures of rats with tumors the size of ping-pong balls, Séralini certainly captured the public’s attention.
France’s health, ecology, and agriculture ministers promised a prompt investigation and threatened to ban imports of Monsanto’s GM corn to the European Union.
Russia actually did block imports of Monsanto corn.
But Séralini’s research posed many problematic issues.
For starters, the Sprague-Dawley strain of rats that he used is naturally prone to tumors.
Studies of Sprague-Dawley rats show that 88-96% of those that serve as experimental controls develop tumors before they reach two years of age.
But the public saw only pictures of tumorous rats that had consumed GM corn and Roundup.
If the public had seen the similarly grotesque tumors that grow on untreated rats, officials most likely would not have acted so hastily.
Séralini used only 20 rats as a control group to be fed ordinary corn with no Roundup.
Of these, five died within two years, which is unusual, because studies of thousands of untreated Sprague-Dawley rats show that about half should have died in that period.
Using his low death rate as a base, Séralini claimed – with no statistical analysis – that the higher death rate (just below 40%) for the remaining 180 rats fed with GM corn and Roundup was suspicious.
Moreover, Séralini’s results contradict the latest meta-study of 24 long-term studies (up to two years and five generations), which found that the data do “not suggest any health hazards” and display “no statistically significant differences” between GM and conventional food.
Oddly, Séralini permitted access to his paper to only a select group of reporters, and demanded that they sign a confidentiality agreement preventing them from interviewing other experts about the research before publication.
But, while the first round of articles read like press releases, the scientific community has since spoken out forcefully.
The European Food Safety Authority, for example, has now concluded that the “design, reporting, and analysis of the study, as outlined in the paper, are inadequate.”
The study was partly funded by CRIIGEN, a group that campaigns against biotechnology.
CRIIGEN’s scientific board is headed by none other than Séralini, who has also just released a book (in French) and a documentary film decrying GM food.
This debacle matters because many GM crops provide tangible benefits for people and the environment.
They enable farmers to produce higher yields with fewer inputs (such as pesticides), so that more food can be produced from existing farmland.
That, in turn, implies less human encroachment into natural ecosystems, enabling greater biodiversity.
But, of course, Séralini’s pictures of cancer-addled rats munching GM corn have instead been burned into the public imagination.
The Séralini fiasco was only a week old when, on September 26, the Climate Vulnerability Forum, a group of countries led by Bangladesh, launched the second edition of its Global Vulnerability Monitor.
Headlines about the launch were truly alarming: Over the next 18 years, global warming would kill 100 million people and cost the economy upwards of $6.7 trillion annually.
These public messages were highly misleading – and clearly intended to shock and disturb.
The vast majority of deaths discussed in the report did not actually result from global warming.
Outdoor air pollution – caused by fossil-fuel combustion, not by global warming – contributed to 30% of all deaths cited in the study.
And 60% of the total deaths reflect the burning of biomass (such as animal dung and crop residues) for cooking and heating, which has no relation to either fossil fuels or global warming.
In total, the study exaggerated more than 12-fold the number of deaths that could possibly be attributed to climate change, and it more than quadrupled the potential economic costs, simply to grab attention.
But it will be used as a cudgel by those who claim that electric cars or solar panels – technologies that will make only a marginal contribution, given their huge incremental costs – are the solution to climate change.
The technologies that can really make a difference quickly and at lower cost are scrubbers that clean smokestack emissions, catalytic converters that reduce tailpipe emissions, and many others.
By focusing purely on cutting CO2, we neglect to help many more people, much faster, and less expensively.
Likewise, overcoming the burden of indoor air pollution will happen only when people can use kerosene, propane, and grid-based electricity.
If the Global Vulnerability Monitor’s recommendation to cut back on fossil fuels were taken seriously, the result would be slower economic growth and continued reliance on dung, cardboard, and other low-grade fuels, thereby prolonging the suffering that results from indoor air pollution.
When confronted with their exaggerations, the authors claimed that “if you reduce hazardous air pollution, it is difficult to not also reduce warming emissions.”
But, for both indoor and outdoor air pollution, the opposite is more likely true: lower carbon emissions would mean more air pollution deaths.
When scare tactics replace scientific debate, whether about GM crops or climate change, nothing good can come of it.
The Questions of Europe
In the weeks since France and the Netherlands rejected the European Union’s proposed Constitutional Treaty, the EU’s leaders have been busy pointing fingers at each other or blaming French and Dutch citizens for misunderstanding the question they were asked.
But no pan-European statesman has emerged, and no major European institution has even had the courage to provide its own analysis of the current situation, much less propose a strategic scenario for the future.
To be sure, French and Dutch citizens did not respond to the question that they were supposed to answer.
Their vote was a protest against globalization, a rejection of the contemporary world, with its distant and incomprehensible governing mechanisms.
Like the anti-globalization movement, the new anti-Europeanism can be regarded as a demand for a different European model – an “alter-Europeanism.”
The issue, therefore, is not what Tony Blair, in his inaugural speech to the European Parliament, called a crisis of leadership.
No statesman has emerged because the crisis runs deeper.
The two world wars and the Cold War shaped European integration as a project of peace, a defense of the West’s fundamental values, and common economic prosperity.
This phase culminated with the collapse of communism in 1989, but the chance to overcome the Continent’s historical divisions now required a redefinition of the European project.
The treaties of Maastricht (1992) and Amsterdam (1997) created a new organizational structure for the EU and laid the foundations for political institutions equal to Europe’s economic power.
When politicians debated the EU’s future, they spoke of “finality” – the end formula of European integration, as defined in a famous lecture by German Foreign Minister Joschka Fischer in 2000.
The accompanying intellectual debate, inaugurated by the philosophers Jürgen Habermas and Jacques Derrida, defined the nature of European identity, above all, against the foil of the United States, but also in terms of the challenges posed by globalization.
That debate must continue, even if the French and Dutch referenda appear to have killed the Constitutional Treaty.
The EU will continue to be governed under the Nice Treaty of 2000, but this leaves no room for further political integration (or enlargement), nor does it ensure the effective functioning of the Union’s institutions.
Drafting a new constitutional treaty would probably require even more time than was needed for the current proposal, and it is also unlikely that the necessary changes could be introduced through an intergovernmental conference.
The only viable course, then, is to use today’s “pause for reflection” to revive the existing Constitutional Treaty.
This would require prolonging the ratification deadline until 2008.
It also requires specifying a common date for ratification (through simultaneous referenda or parliamentary votes) for all countries that have not yet done so, including France and the Netherlands.
In other words, the current “pause for reflection” is not the time to change the draft’s text (although the intergovernmental conference could move the third part, which harmonizes the earlier treaties, to an annex).
Rather, the task is to alter the political and socio-psychological context of the ratification process by addressing key questions.
First, how should relations between national and common European interests be defined?
At issue is not only the allocation of competencies, but also the more fundamental matter of when to rely on intergovernmental institutions and when to turn to the European people as a whole.
The European Council, which represents member states in the structures of the Union, could be given a more public character.
It could then be seen, in a bicameral system, as a kind of “Chamber of Nations” within the framework of what Jacques Delors called a “federation of nation states.”
The second question concerns the EU’s scope.
Europe is a peculiar combination of geography and history, but the boundaries of the EU – and thus the prospects for its further enlargement – are determined by its absorptive capacity and the adaptive abilities of candidate countries.
Is enlargement the only effective policy of stabilization and peace?
Or can the “neighborhood policy” become an instrument for supporting development and stabilization, much as the Marshall Plan once was for Western Europe?
Third, instead of futile opposition between “liberal” and “social” models of economic development, we need a confrontation of the experiences of Great Britain and Sweden, on the one hand, and Germany and France, on the other.
Are these experiences mutually exclusive, or is convergence possible?
What policies reduce unemployment?
Which measures can ensure the EU’s global competitiveness?
How can we narrow the existing differences in development and material welfare within Europe?
Fourth, the EU’s aspiration for a common foreign and security policy must be addressed.
The threats facing the world today are supranational, so counteracting them must be supranational, too.
But this is impossible without a clear European identity – and thus a common interest to be asserted and defended.
In the aftermath of the French and Dutch referenda, the European Commission and the European Parliament have sketched plans for a Europe-wide debate on these issues.
But such a debate also demands an organizational framework to engage European civil society, national parliaments, and pan-European mass media.
Democracy carries certain costs, but they are always lower than the costs of evading popular participation.
Only a new European debate that embodies the common action of European citizens and institutions can combat “alter-Europeanism” effectively.
The time may not have come for a true European constitution, but confronting, rather than evading, the fundamental issues that the EU faces could create the proper context for reviving the constitutional treaty and preparing the Union for the challenges of our time.
The Racism of the Welfare State
One is Europe's aging population. The other is the flow of immigrants from soon-to-be new member countries in the European Union and from outside the union.
In our recent book Fighting Poverty in the US and Europe: A World of Difference , Edward Glaeser and I discuss why the welfare state is so much more generous in Europe than in the US.
One important explanation is the much larger racial heterogeneity to be found in the US relative to the more homogeneous Continental Western Europe.
Consider this: according to the World Value Survey, whereas 60% of Americans believe that the poor are "lazy," only 26% of Europeans hold this belief.
Not surprisingly, those who adhere to such beliefs are more averse to redistribution and welfare, and evidence shows that in the US, those who express more "anti-minority" points of view are also more averse to redistribution and more likely to have less sympathy for the poor.
It seems easier for white middle class Americans to consider the poor less worthy of government support if they think of them as different.
To put it crudely, but candidly, indifference comes easy if the poor are assumed to be mostly "black."
This is more difficult in Norway, where rich and poor are white, often blond and tall.
Much experimental and statistical evidence shows that individuals trust and associate more with others of the same race.
Precisely for this reason, political opportunists in the US have long used the race card to discredit welfare and redistribution, from the Jim Crow system that segregated blacks in the South before 1964 to the infamous Reagan-era charge about black "welfare queens" who drive Cadillacs.
Right wing white politicians, predisposed against taxes and redistribution, use the race issue to secure the votes of poor whites, who otherwise might vote differently on purely economic grounds.
Even more fundamentally, racial considerations also influence the nature of America's political institutions.
Proportional representation, widely adopted in Europe in the first decades of the 20th century, was never embraced by the US because it is a system that would allow black representatives to be elected regularly.
In Europe, however, socialist and communist parties imposed electoral systems based on proportional representation precisely because they open the door to representatives of minorities (the communists and socialists themselves).
The few American cities that introduced this system in the Progressive era, between 1910 and 1930, soon abandoned it - or were forced to - in order to stop the election of black representatives.
Today the only US city that uses proportional representation is the leftist bastion of Cambridge Massachusetts.
Proportional representation is widely viewed as one factor that promotes the implementation of redistributive policies by providing a political voice to minorities.
Cross-country evidence shows that the size of public redistributive spending increases with the degree of proportionality in the electoral system.
There is more.
Many redistributive programs in the US are run by the 50 states.
States that are more racially heterogeneous have smaller redistributive programs, even controlling for their level of income.
Welfare is relatively plentiful in the overwhelmingly white states of the North and Northwest (Oregon and Minnesota, to cite two examples) and in some states in New England (such as Vermont).
It is lacking in the racially mixed Southeast and Southwest.
Continental Europe is becoming, and will become, more ethnically mixed as more newcomers from Eastern Europe and the developing world arrive.
Xenophobic parties are on the rise across Europe; in some cases, they are in office.
Think of Jörg Haider and the late Pym Fortuyn, or, to a lesser extent, Italy's Northern League.
It will not be long before even Europe's more respectable conservative parties reach for rhetoric about "foreigners coming here to feast off of our taxes."
Simply put, when middle-class Europeans begin to think that a good portion of the poor are recent immigrants, their ingrained belief in the virtue of the welfare state will begin to waver.
Even Europe's leftist intelligentsia now associates crime and urban squalor with immigration.
The step from here to lamenting the high taxes spent on welfare for immigrants is a but a short one.
When this happens - and I say "when," not "if" - there are three possible political responses.
One is to close borders to poor immigrants, eliminating any correlation between poverty and immigration.
The second is to somehow restrict welfare benefits to "natives." The third is to reduce the size of welfare for all because political support for it is declining.
The first strategy is short sighted and the second odious.
I hope that the third one will win out, because it would mean relatively open borders, no discrimination, and less government intervention.
Not to worry: the European welfare state will remain more generous than the stingy American one, but it may become more manageable and less intrusive.
The fact that this will come about because of ethnic "animosity" is sad and depressing.
The silver lining is that the European welfare state does indeed need trimming!
The Rape of Burma
SYDNEY – Burma, once the richest country in Southeast Asia, today is mired in deep poverty.
Its economy ruined by nearly 50 years of economic mismanagement under military rule, the only international rankings that it tops are those for most corrupt nation, world’s worst health system, and lowest spending on education – “accolades” that are sadly indicative of its people’s suffering.
And yet, over the last few years Burma has also emerged as a significant producer of energy in Southeast Asia.
Thanks to large fields of recoverable natural gas located offshore, Burma now earns substantial foreign exchange revenues.
At present, most of these revenues ($1-1.5 billion per year, depending on price fluctuations) come from Thailand.
Gas from Burma, piped onshore from the Gulf of Martaban, generates around 20% of Bangkok’s electricity supply.
If all goes well, new gas fields recently discovered in the Bay of Bengal will provide even more gas for China’s Yunnan Province.
To get the gas into Yunnan, a much longer pipeline – running the length of Burma – must be built.
The project will be as difficult as it will be controversial.
But, with no environmental or labor standards to contend with, few doubt that the pipeline will proceed.
So, given its newfound energy riches, one might expect Burma’s public finances to be rather flush, with surpluses aplenty to spend on health, education and much else that the country so desperately needs.
Alas, almost none of Burma’s gas revenues actually feed into its budget, owing to a rather ingenious device employed by the Burmese junta.
The device is simple.
Like many countries ruled by authoritarian regimes, Burma has a dual exchange rate system.
The official exchange rate pegs Burma’s currency, the kyat , at a rate of six to one against the US dollar.
The informal or black market exchange rate determines the value of the kyat according to supply and demand in the marketplace.
Trading kyat in the black market is formally illegal (and Burma’s regime loves rounding up foreign exchange dealers from time to time), but it is the only way that people unconnected to the regime can ever hope to come across foreign currency.
According to the informal exchange rate, the kyat’s worth is currently about 1,000 to one against the dollar.
Given this dual exchange rate system, hiding Burma’s gas earnings becomes easy.
By recording earnings at the official exchange rate, they are worth nearly 200 times below what they should be.
Thus, Burma’s gas earnings of around $1.2 billion for 2006-07 are rendered into a mere 7.2 billion kyat in the country’s public accounts – less than 1% of the regime’s official public spending.
Recorded at the market exchange rate, however, these earnings translate into 1.2 trillion kyat – an amount large enough to eliminate Burma’s budget deficit, as well as the destructively inflationary money printing that is the regime’s preferred method of public finance.
So where do Burma’s generals hide all the money they keep away from the state’s budget?
No one but the generals knows for sure.
An inspection of the vaults of the country’s Foreign Trade Bank might be a good place to start, however, as well as those of some accommodatingly unscrupulous banks offshore.
Whatever the precise location of Burma’s riches, these hoards enable the junta to spend at its whim.
A nuclear reactor, a new capital city, military pay increases – all of these and more have been on the menu of late.
The one group that almost certainly will not benefit from any of the largesse are the Burmese people themselves, who are entitled to it and for whom it would mean an end to lives of poverty and want.
The “Rational” Suicide Bomber
Hamas’s surprise victory in the Palestinian parliamentary election has made the question of who is a terrorist, and how terrorism should be tackled, more urgent than ever.
How Hamas behaves in government will reveal whether terrorists and suicide bombers are alike in their implacability.
The test is suicide bombing.
Few weapons in the terrorist’s arsenal are as devastating as suicide bombing – or as poorly understood, for serious analysis has apparently given way to the desire to avoid conferring on the attackers any legitimacy whatsoever.
But this attitude thwarts urgently needed insight into who the suicide bombers really are, what motivates them, and thus how they might be stopped.
In fact, there are basically two categories of suicide bombers.
The first includes the perpetrators of the attacks on the United States in 2001, the Bali bombing in 2002, the Madrid train bombing in 2003, and the London bombings in the summer of 2005.
The perpetrators are indifferent as to whether their victims, both direct and indirect, are Muslim or non-Muslim; their goal is to terrorize and eventually to destroy a way of life in the name of a nebulous Dar-al-Islam, a utopian entity that will supposedly solve all of life’s problems.
Suicide bombers of this type, while difficult to hunt down and neutralize, can easily be identified and their criminality exposed, given their vicious and wanton disdain for ethical, moral, and religious norms.
Muslim religious and political leaders have the intellectual capital to refute their misplaced religious convictions, and can repeat sura after sura, hadith after hadith, detailing Islam's rejection of violence and repudiation of the killing of innocents.
But the second category of suicide bombers presents a far greater challenge, for it comprises organizations, such as Hamas and Islamic Jihad that fight for avowedly nationalist goals.
While terrorism is rightly viewed as an illegitimate means, nationalism is a rational, and often legitimate, goal, and it is shared by many people who are not terrorists.
Unlike in the case of millenarian terrorists like Al Qaeda, for whom the goal is amorphous–nationalist extremists’ more realistic objectives might make it possible to neutralize them by addressing the root issue (for example, the creation of a viable Palestinian state).
The distinction between the two types of suicide bombers is not always stark.
Many people enthralled by nationalistic struggle, end up rejecting all reasonable compromise and advocating genocidal goals.
Nevertheless, the distinction is important and seems lost on the US – and a host of other countries – which have lumped the nationalist groups together with Al-Qaeda and Jemaah Islamiyah (JI) in their lists of terrorist organizations.
This one-size-fits-all approach may be convenient, but the failure to differentiate among suicide bombers vastly oversimplifies the realities that define the fight against terrorism.
To be sure, Hamas and Islamic Jihad are often no less brutal than Al Qaeda or JI. But this does not mean that they should be dealt with in the same way.
Indeed, while the demands of millenarians can never be met, thus leaving repression as the only means to deal with them, nationalism may be (and often is) effectively addressed through political means: when the legitimate and more widely shared nationalist goals are met, the radical fringe often loses its wider appeal and withers away.
Failure to recognize this works to the advantage of religiously motivated terrorists because all the energy spent on fighting terrorism is spent on repression, leaving legitimate nationalist goals unaddressed and strengthening popular support for terrorism of all kinds.
Frighteningly, groups like Al Qaeda can claim the mantle of popular nationalism as a means of pursuing their ultimate utopian aims.
Moreover, although Muslim religious and secular leaders are able to isolate millenarian terrorists and undercut their popular support, they lack the moral capital to completely discredit nationalist extremists groups like Hamas and Islamic Jihad, as long as the Muslim laity shares some of their goals.
To the powerless, nationalist suicide bombers look like a great equalizer.
Israeli Apache and Cobra gunships armed with Hellfire missiles regularly hit their targets from great distances, as do F-16 fighter jets armed with laser-guided munitions, but not without frequent “collateral damage” to innocent civilians.
Suicide bombers who target innocent Israeli civilians – and sometimes legitimate military objectives – rightly or wrongly appear to counterbalance Israeli “strategic” strikes.
Thus, despite repeated condemnation by establishment figures within the ummah (the worldwide community of Muslims), some forms of suicide bombing may enjoy the quiet admiration of many.
As long as no distinction is made between nationalist extremists and fanatical terrorists like Al Qaeda, the latter will be able to masquerade as the defenders of Muslims who are seen as “driven” to resort to suicide bombing because of military weakness.
America's ill-advised foray into Iraq has further confounded the distinction between the two types of suicide bombers and created a nearly ideal breeding ground for a new generation of terrorists.
Some are inspired by Al Qaeda, others by disgruntled Sunnis, but all can claim a nationalist mantle.
Ignoring the various dimensions of suicide bombing, and the outlook of the groups responsible, America and its allies have been left helpless to comprehend, much less address, the largely indifferent reaction of many Muslims to the US-led “war on terror.”
By regarding all suicide bombers as irrational fanatics, rather than drawing distinctions between millenarians and nationalists, the US and its allies have ceded crucial political ground to groups like Al Qaeda and JI that insist on the impossibility of negotiating with Islam’s “enemies.”
This stance carries a high cost: the empathy of the Muslim masses that is required to defeat those who debase Islam in their name.
The Real Blockade in Cuba
Raúl Rivero Castañeda, a leading Cuban poet and dissident, was sentenced to 20 years in prison this week for organizing a petition that called for free elections.
Written some months before his arrests, this article details Rivero Castañeda's objections to the Castro regime.
HAVANA: A man riding the Chinese-made Forever brand bicycle under the Caribbean sun after eating a single slice of bread, washed down with very bad coffee, finds it difficult to ponder America's trade embargo against Cuba.
Such a man has lunch on his mind-his and his family's.
For him, abstract thought is a luxury that requires time, information, and a reason to reflect on a subject that, at first sight, appears to be from another galaxy.
The truth is that ordinary Cubans are more oppressed by a personal embargo, one that has transformed them into blindfolded and muzzled pawns.
The debate over the American embargo pales in comparison - removed to a far corner of the mind - to the obstructive domestic situation that envelops them.
In this country, the real blockade, the one that affects the daily life of the people, is the internal governing system.
It is the noose that ensures that Cuba remains immobilized and poor.
The old standoff between the two nations is beside the point to ordinary people; they desire a closer relationship with the US, where many of their families and friends live.
However, no political process has created a smooth path toward such an ending.
Thus, the stalemate between the two nations really concerns only Cubans who have time to contemplate lofty political questions.
These individuals read newspapers fabricated in the offices of the Communist Party; view only two television channels, both cut from the same cloth; and listen to radios that play the same worn-out speeches.
Cuba provides no free flow of information and its citizens receive and read only pure propaganda.
While the public is suspicious of government proclamations, it has no means to be heard.
Hence, its silence appears to sanction the situation.
In reality, Cubans want to remove the inequalities that exist between the people and their leaders before they deal with the problems between their country and the US.
Ordinary citizens want to own a modest business, have access to a free press, organize political parties, re-make society, and liberate prisoners.
The authorities like to paint themselves as the victims of a powerful giant set on smothering a nation and its united people, but such a victim's face cannot be found when you look closely.
The nation is not a united citizenry, but rather a mediocre country created through the universal gagging of its people.
One can systematically catalog the ways that the authorities mistreat many of its people as terribly as they claim that Cuba's enemies treat her.
These officials should take the money spent trying to convince other nations about the generous nature of Cuba's public health and education systems and apply it to the needs of Cuba's people.
In fact, medical services are becoming more and more precarious and the educational system has not advanced beyond a common system of political indoctrination.
Indeed, parents cannot really influence how schools shape their children.
Whenever the government does address basic public welfare issues, its efforts merely produce dependent individuals who submit to the will of a self-selected group of leaders who are "elected" from time-to-time by fake elections.
The leaders' commitment to the sovereignty of the masses thus rings false.
Talk about the Cubans' free will is in reality a capricious and criminal act against the people.
In recent weeks, thirty-six human rights activists, members of the alternative press, and representatives of the emerging civil rights movement have been imprisoned and may be tried.
We can all agree that human beings are not duty-bound to live according to one master or philosophy; that individuals must live freely, enjoying the right to a bountiful and joyful existence among family and friends.
But in Cuba one lives in the midst of a propaganda machine that infiltrates life on a daily basis; that emphasizes a climate of popular cheerfulness; that portrays the joy of a neutered horse, with its ability to befuddle the innocent, inspire the ignorant, and comfort the frustrated.
Cubans are in the end consigned to hold fast to rigid and impossible schemes.
As a result, hundreds of thousands of young adults are embarked on a future whose path is strewn with risky symbols and immense challenges.
Sensing that the door has been slammed shut against their country's future, they work diligently merely for their individual good.
The Real Che Guevara
PARIS – Hollywood history is often nonsensical, but filmmakers usually have the good sense not to whitewash killers and sadists.
Steven Soderbergh’s new film about Che Guevara, however, does that, and more.
Che the revolutionary romantic, as depicted by Benecio del Toro in Soderbergh’s film, never existed. That hero of the left, with his hippie hair and beard, an image now iconic on t-shirts and coffee mugs around the world, is a myth concocted by Fidel Castro’s propagandists – something of a cross between Don Quixote and Robin Hood.
Like those tall tales, Fidel’s myth of Che bears a superficial resemblance to historical facts, but the real story is far darker.
Some Robin Hood probably did brutalize the rich and, to cover his tracks, gave some of his loot to the poor.
In medieval Spain, Quixote-like knights probably did roam the countryside, ridding it not of dragons but of the land’s few remaining Muslims.
The same goes for the legendary Che.
No teenager in rebellion against the world or his parents seems able to resist Che’s alluring image.
Just wearing a Che t-shirt is the shortest and cheapest way to appear to be on the right side of History.
What works for teenagers also seems to work with forever-young movie directors.
In the 1960’s, the Che look, with beard and beret, was at least a glib political statement.
Today, it is little more than a fashion accoutrement that inspires a big-budget Hollywood epic.
Are Che theme parks next?
But once there was a real Che Guevara: he is less well known than the fictional puppet that has replaced reality.
The true Che was a more significant figure than his fictional clone, for he was the incarnation of what revolution and Marxism really meant in the twentieth century.
Che was no humanist.
No communist leader, indeed, ever held humanist values.
Karl Marx certainly was not one.
True to their movement’s founding prophet, Stalin, Mao, Castro, and Che held no respect for life.
Blood needed to be shed if a better world was to be baptized.
When criticized by one of his early companions for the death of millions during the Chinese revolution, Mao observed that countless Chinese die everyday, so what did it matter?
Likewise, Che could kill with a shrug.
Trained as a medical doctor in Argentina, he chose not to save lives but to suppress them.
After he seized power, Che put to death five hundred “enemies” of the revolution without trial, or even much discrimination.
Castro, no humanist himself, did his best to neutralize Guevara by appointing him Minister for Industry.
As could be expected, Che applied Soviet policies to the Cubans: agriculture was destroyed and ghost factories dotted the landscape.
He did not care about Cuba’s economy or its people: his purpose was to pursue revolution for its own sake, whatever it meant, like art for art’s sake.
Indeed, without his ideology, Che would have been nothing more than another serial killer.
Ideological sloganeering allowed him to kill in larger numbers than any serial killer could imagine, and all in the name of justice.
Five centuries ago, Che probably would have been one of those priest/soldiers exterminating Latin America’s natives in the name of God.
In the name of History, Che, too, saw murder as a necessary tool of a noble cause.
But suppose we judge this Marxist hero by his own criteria: did he actually transform the world?
The answer is yes – but for the worse.
The communist Cuba he helped to forge is an undisputed and unmitigated failure, much more impoverished and much less free than it was before its “liberation.”
Despite the social reforms the left likes to trumpet about Cuba, its literacy rate was higher before Castro came to power, and racism against the black population was less pervasive.
Indeed, Cuba’s leaders today are far more likely to be white than they were in Batista’s day.
Beyond Cuba, the Che myth has inspired thousands of students and activists across Latin America to lose their lives in foolhardy guerrilla struggles.
The left, inspired by the siren call of Che, chose armed struggle instead of elections.
By doing so, it opened the way to military dictatorship.
Latin America is not yet cured of these unintended consequences of Guevarism.
Indeed, fifty years after Cuba’s revolution, Latin America remains divided.
Those nations that rejected Che’s mythology and chose the path of democracy and the free market, such as Brazil, Peru, and Chile, are better off than they ever were: equality, freedom, and economic progress have advanced in unity.
By contrast, those nations that remain nostalgic for the cause of Che, such as Venezuela, Ecuador, and Bolivia, are at this very moment poised on the brink of civil war.
The real Che, who spent most of his time as Castro’s central banker supervising executions, deserves to be better known.
Perhaps if Soderbergh’s two-part Che epic succeeds at the box office, his financial backers will want to film a more truthful sequel.
There is certainly no shortage of material for “Che, The Untold Story.”
The Real Danger of Global Warming
PRAGUE – I am surprised at how so many people nowadays in Europe, the United States, and elsewhere have come to support policies underpinned by hysteria over global warming, particularly cap-and-trade legislation to reduce greenhouse gas emissions and subsidies for “green” energy sources.
I am convinced that this is a misguided strategy – not only because of the uncertainty about the dangers that global warming might pose, but also because of the certainty of the damage that these proposed policies aimed at mitigation will impose.
I was invited to address this issue at a recent conference in Santa Barbara, California.
My audience included business leaders who hope to profit from cap-and-trade policies and from subsidies for renewable energy and “green” jobs.
My advice to them was to not get caught up in the hysteria.
Europe is several years ahead of the US in implementing policies intended to mitigate global warming.
All of the European Union’s member countries have ratified the Kyoto Protocol and adopted a wide range of policies to lower their emissions and meet their Kyoto targets.
These policies include a cap-and-trade initiative known as the Emissions Trading Scheme, steep fuel taxes, and ambitious programs to build windmills and other renewable energy projects.
These policies were undertaken at a time when the EU economy was doing well and – one hopes – with full knowledge that they would have significant costs.
With the global financial crisis and the sudden economic downturn, two things are becoming clear.
First, it will be difficult to afford these expensive new sources of energy.
Second, energy rationing policies like cap-and-trade will be a permanent drag on economic activity.
Ironically, emissions have not decreased as a result of these policies, but are doing so now as the world economy moves into recession.
This is not a surprise to someone like me, having been actively involved in my country’s transition from communism to a free society and market economy.
The old, outmoded heavy industries that were the pride of our Communist regime were shut down – practically overnight – because they could not survive the opening of the economy.
The result was a dramatic decline in CO2 emissions.
The secret behind the cut in emissions was economic decline.
As the economies of the Czech Republic and other central and eastern European countries were rebuilt and began to grow again, emissions have naturally started to increase.
It should be clear to everyone that there is a very strong correlation between economic growth and energy use.
So I am amazed to see people going along with the currently fashionable political argument that policies like cap-and-trade, government mandates, and subsidies for renewable energy can actually benefit an economy.
It is claimed that government, working together with business, will create “a new energy economy,” that the businesses involved will profit, and that everyone will be better off.
This is a fantasy.
Cap-and-trade can only work by raising energy prices.
Consumers who are forced to pay higher prices for energy will have less money to spend on other things.
While the individual companies that provide the higher-priced “green” energy may do well, the net economic effect will be negative.
It is necessary to look at the bigger picture.
Profits can be made when energy is rationed or subsidized, but only within an economy operating at lower, or even negative, growth rates.
This means that over the longer term, everyone will be competing for a piece of a pie that is smaller than it would have been without energy rationing.
This does not auger well either for growth or for working our way out of today’s crisis.
The Real Hazard of Globalization
It is fashionable to blame the International Monetary Fund for the wave of financial turmoil that has swept emerging markets since Mexico's ``Tequila crisis'' of 1994.
By bailing out countries in trouble time and again, the IMF allegedly encouraged investors to take unwarranted risks, plowing money into countries without properly assessing whether they could ever pay it back.
According to IMF critics, bailouts allowed leaders from Brazil to Turkey to avoid painful but necessary reforms, with the perverse effect of making crises inevitable.
This argument - an example of what economists call ``moral hazard'' - is easy on the mind, but it has feet of clay.
In fact, foreign investment in emerging markets already started to subside after 1995, then plummeted with the Asian crisis of 1997, and has remained low ever since - even as the IMF orchestrated many of the bailouts that allegedly distorted investor behavior in the first place!
Moreover, foreign investment in emerging markets shifted after 1994 to factories, real estate, service industries, and so forth.
Unlike foreign bondholders, who could cut and run after the IMF guaranteed that they would be paid, these direct investors suffered major losses when crisis struck--and thus can hardly be said to have benefited from bailouts.
Ever since the beginning of the 1990s, when private credit to emerging markets soared to roughly ten times its annual average in 1970-89, the main source of financial contagion has not been moral hazard, but what might best be called globalization hazard.
The hazard struck after 1996, when foreign private investors fled emerging markets even faster than they had flooded them.
For example, in 1997-98 Thailand suffered an outflow of foreign capital equivalent to 26% of GDP, despite a solid record of sustained economic growth.
Why were even relatively well-run economies pulled under so suddenly?
The most likely scenario is that investors attributed the steep initial rise in credit flows after 1989 to sound policies in emerging markets.
Throughout much of the 1990s, the ``Washington establishment'' reinforced this belief, encouraging an overly optimistic belief in the permanence of large credit flows.
Ultimately, however, each crisis multiplied the worries of investors about emerging-market risk.
Worse still, their mood reversal was swift owing to the lack of a long and reliable track record for emerging-market debt.
This drove up interest rates for emerging-market debt as an asset class .
As borrowing costs rose in all emerging markets - regardless of their fundamental economic health - so did the probability of recurrent crises, forming a vicious circle.
If this were the whole story, then what lay at the root of financial contagion in emerging markets would be of secondary importance.
Whether moral hazard or globalization hazard, more careful credit rationing by investors could be expected to reduce the recurrence of financial crises.
But only up to a point.
For while the moral hazard argument emphasizes the orthodox commandment ``Thou shall not intervene,'' the crucial feature of globalization hazard is market failure .
Unlike moral hazard, market failure highlights circumstances in which government intervention is both socially desirable and economically defensible.
That the failure of international capital markets led to sudden and devastating capital outflows after 1996 is only one such episode.
Consider other devastating events that are uninsured (and often uninsurable) in the private sector.
In the US, for example, floods, hurricanes, earthquakes, and tornadoes trigger immediate Federal assistance.
Similarly, the cost of the public's aversion to air travel following the September 11 th terrorist attacks would have been much higher for the economy as a whole if the airline industry had been allowed to collapse.
Unfortunately, many emerging markets have weak governments that cannot define credible policies for financing intervention in such circumstances.
A typical case is a country whose terms of trade abruptly deteriorate - for example, Nicaragua after the recent collapse of coffee prices caused by Vietnam's bumper crop.
When this happens in a country with few other economic sectors that can compete internationally and so take up the slack, the result is similar to a natural disaster.
The government, faced with lower budget revenues, is likely to issue new debt, but without being able to specify how it will be repaid.
So, who will pay the bill eventually?
The moment official intervention is required, everyone runs for cover.
Investment decisions are postponed, implying slower growth and an even more precarious fiscal position.
In an open economy, fears of higher taxes may spur capital flight and a run against the domestic banks, requiring even bigger government transfers.
Weak governments grow weaker by the day.
But even weak governments are not entirely helpless.
They can lengthen their debt maturities by imposing controls on capital inflows, as Chile and Colombia have done.
They also can conclude trade agreements with more advanced economies.
The North American Free Trade Agreement, for example, probably contributed to Mexico's strong and lasting recovery from the Tequila crisis.
The Tequila crisis demonstrates that rapid multilateral action - in this case, a $50 billion package to refinance short-term debts at below-market rates - can also be effective in preventing the spread of contagion.
Such packages provide the breathing space that governments need in a crisis in order to launch longer-term reforms.
This was true of Thailand and South Korea, when both moved fast to strengthen their banking sectors after receiving IMF bailouts.
IMF assistance is, of course, no universal panacea.
Emerging markets are inherently fragile markets.
Precisely for this reason, the problem has been too little multilateral intervention, not too much.
The Reality of Virtual Power
DAVOS – As Arab regimes struggle with demonstrations fueled by Twitter and Al Jazeera, and American diplomats try to understand the impact of WikiLeaks, it is clear that this global information age will require a more sophisticated understanding of how power works in world politics.
That is the argument of my new book, The Future of Power.
Two types of power shifts are occurring in this century – power transition and power diffusion.
The transition of power from one dominant state to another is a familiar historical pattern, but power diffusion is a more novel process.
The problem for all states today is that more is happening outside the control of even the most powerful of them.
As for power transition, much attention nowadays is lavished on a supposed American decline, often with facile historical analogies to Britain and Rome.
But Rome remained dominant for more than three centuries after the apogee of its power, and, even then, it did not succumb to the rise of another state, but suffered a death by a thousand cuts inflicted by various barbarian tribes.
Indeed, for all the fashionable predictions that China, India, or Brazil will surpass the United States in the coming decades, the greatest threats may come from modern barbarians and non-state actors.
In an information-based world of cyber-insecurity, power diffusion may be a greater threat than power transition.
What will it mean to wield power in the global information age of the twenty-first century?
Which resources will produce power?
Every age produces its own answers.
In the sixteenth century, control of colonies and gold bullion gave Spain the edge; seventeenth-century Holland profited from trade and finance; eighteenth-century France gained from its larger population and armies; and nineteenth-century British power rested on industrial and naval primacy.
Conventional wisdom has always held that the state with the largest military prevails.
In an information age, however, it may be the state (or non-state) with the best story that wins.
Today, it is far from clear how to measure a balance of power, much less how to develop successful survival strategies for this new world.
Most current projections of a shift in the global balance of power are based primarily on one factor: projections of countries’ GDP growth.
They thus ignore the other dimensions of power, including both hard military power and the soft power of narrative, not to mention the policy difficulties of combining them into successful strategies.
States will remain the dominant actor on the world stage, but they will find the stage far more crowded and difficult to control.
A much larger part of their populations than ever before has access to the power that comes from information.
Governments have always worried about the flow and control of information, and the current period is not the first to be strongly affected by dramatic changes in information technology.
What is new – and what we see manifested in the Middle East today – is the speed of communication and the technological empowerment of a wider range of actors.
The current information age, sometimes called the “Third Industrial Revolution,” is based on rapid technological advances in computers, communications, and software, which in turn have led to a dramatic fall in the cost of creating, processing, transmitting, and searching for information of all kinds.
And this means that world politics can no longer be the sole province of governments.
As the cost of computing and communication comes down, the barriers to entry decline.
Individuals and private organizations, ranging from corporations to NGOs to terrorists, have thus been empowered to play a direct role in world politics.
The spread of information means that power will be more widely distributed, and informal networks will undercut the monopoly of traditional bureaucracy.
The speed of Internet time means that all governments will have less control over their agendas.
Political leaders will enjoy fewer degrees of freedom before they must respond to events, and then will have to compete with an increasing number and variety of actors in order to be heard.
We see this as American policymakers struggle to cope with today’s Middle East disturbances.
The fall of the Tunisian regime had deep domestic roots, but the timing caught outsiders, including the US government, by surprise.
Some observers attribute the acceleration of the revolution to Twitter and WikiLeaks.
As the Obama administration formulates policy towards Egypt and Yemen, it faces a dilemma.
In Yemen, Ali Abdullah Saleh’s regime has provided important assistance in dealing with the threat from Al Qaeda-affiliated terrorism.
In Egypt, Hosni Mubarak’s rule helped to moderate the Israeli-Palestinian conflict and balanced Iranian power in the region.
Simplistic endorsement of democracy by George W. Bush’s administration was costly both in Iraq and in Gaza, where elections gave rise to a hostile Hamas-led government.
In an information age, smart policy combines hard and soft power.
Given what the US is, the Obama administration cannot afford to neglect the soft-power narrative of democracy, liberty, and openness.
Thus, Obama and US Secretary of State Hillary Clinton have issued public as well as private appeals for reform and change in Egypt and the wider Arab world, while also urging limits to violence by all parties.
Moreover, they have aligned themselves with freedom of information in the face of efforts by the Egyptian regime to block Internet access.
How events in the Middle East will play out is anyone’s guess, but in today’s information age, upholding the freedom to access it will be an important component of smart power.
The Real Long March
Every nation has its founding myth.
For Communist China, it is the Long March – a story on a par with Moses leading the Israelites’ exodus out of Egypt.
I was raised on it.
The myth can be stated succinctly.
The fledgling Communist Party and its three Red Armies were driven out of their bases in the South in the early 1930’s by Chiang Kaishek’s Nationalist government.
Pursued and harried by their enemies, they crossed high mountains, turbulent rivers, and impassable grassland, with Mao steering the course from victory to victory.
After two years and 10,000 miles of endurance, courage, and hope against impossible odds, the Red Armies reached northwest China.
Only a fifth of the 200,000 soldiers remained, worn out, battered, but defiant.
A decade later, they fought back, defeated Chiang Kaishek, and launched Mao’s New China.
How does China’s founding myth stand up to reality?
In 2004, seventy years after it began, I set out to retrace the Long March.
It remains a daunting journey, through areas little changed to this day, inaccessible, and desperately poor.
Of the 40,000 survivors, perhaps 500 are still alive;
I tracked down and interviewed 40 of them – ordinary people who were left behind or managed to reach the end, but with stories that are highly instructive.
Huang Zhiji was a boy, little taller than his rifle, when he joined the Red Army.
He had no choice: they had arrested his father and would not release him until Huang agreed.
He thought of deserting, but stayed for fear of being caught and shot.
Many did run away.
Six weeks into the March, Mao’s First Army was reduced from 86,000 to 30,000 troops.
The loss is still blamed on the Xiang River Battle, the Army’s first big engagement of the March.
But at most 15,000 died in battle; the rest vanished.
Another battle, over the Dadu River, is the core of the Long March legend: 22 brave men supposedly overpowered a regiment of Nationalist troops guarding the chains of the Luding Bridge with machine guns, and opened the way for the Marchers.
Mao told Edgar Snow, author of Red Star Over China, that crossing the Dadu River was the single most important incident during the Long March, and today it is eulogized as such.
But documents that I have seen indicate that the general who commanded the division that crossed the Dadu River first told Party historians a very different story. “This affair was not as complicated as people made it out to be later,” he said.
“When you investigate historical facts, you should respect the truth. How you present it is a different matter.”
So the legend lives on.
There was only a skirmish over the Dadu River.
The local warlord, who hated Chiang Kaishek, let Mao pass.
As a reward, he was later made a minister in the Communist government.
The Marchers did not know where they would end up.
There were constant debates about the final destination.
When they converged in north China in October 1936, it was hailed as the end of the March.
But the “promised land” was not as promised.
It could barely support its own population, let alone the Red Armies.
Soldiers had no clothes to protect them from freezing cold.
Women were ordered to turn back and go home because there was not enough food.
Barely a month after the union of the three Red Armies, the Party decided that the Long March was to continue.
But the kidnapping of Chiang Kaishek by the general he had appointed to wipe out the Communists saved them.
As part of the price for his release, Chiang recognized the Communists as legitimate.
The Long March was over.
Not, however, for the 21,000 men and women of the Western Legion.
They belonged to the Fourth Army, headed by Zhang Guotao, Mao’s archrival. Their mission was to get help from Russia at the border in western China.
But Mao kept sending them contradictory orders; the result was that they could neither fight nor retreat.
Trapped in barren land where survival was difficult, the overwhelming forces of Muslim warlords wiped them out.
Only 400 reached the border; the rest were killed or captured.
It was the Red Army’s biggest defeat.
Yet it is missing from official history.
Wang Quanyan, a senior officer, was taken by a Muslim commander as a concubine.
That was enough to make her a traitor in the eyes of the Party, negating all her years of dedication.
She and the rest of the Fourth Army survivors had to fight for half a century to be recognized as Marchers.
The Long Marchers persevered, fought, starved, despaired, and endured.
Hunger drove the armies to take hostages for ransom.
Purges continued until practically no officers were left to command battles.
If the Marchers had doubts, they conquered them with the help of Communist propaganda.
They rose to their ordealwith a bravery and self-sacrifice unsurpassed in China’s or anyone’s history.
I asked a top general what he knew of communism at the time. “I had no idea then and now,” he replied.
“I doubt that even Mao knew what it was.” For him, a survivor of extreme poverty and oppression, communism was a beautiful, sustaining dream, the hope of a just and advanced society.
Perhaps no one knew or could know how much suffering would lie ahead, how vast the sacrifice would be, and how great the difference would be between the dream and the reality.
The Real Risks of Deficits
Deficits are back--with a vengeance.
America's government budget deficit now stands at $455 billion, 4.1% of GDP.
Two years ago, the US predicted budget surpluses as far as the eye could see.
Although marginally less bloated than the US deficit, other rich countries are drowning in red ink.
The European Commission predicts that the French government deficit will reach 3.7% of GDP this year, with Germany's widening to 3.4%--both figures well beyond the deficit cap (3% of GDP) set by the Euro-zone's Stability and Growth Pact.
By running a deficit, a country increases its national debt and imposes burdens on future generations.
Politicians naturally prefer to hide how wealth is shifted between generations.
Their priority is paying for immediate problems, and for today's promised benefits.
The accountants who compute government deficits try to keep politicians from fooling us into accepting the benefits they offer without understanding something of the future cost.
But what these accountants do not provide is a way to judge when deficits are justifiable and when they are not.
Deficits raise not only immediate political issues, but also issues of distributive justice between generations, and of intergenerational risk sharing.
No generation should be forced to accept unnecessary economic risks imposed by another generation.
Whether or not deficits treat future generations properly depends on how a government's systems for taxation and expenditure are designed.
Those who advocate running deficits often portray them as necessary to fix an economy in which confidence is draining away.
Following Keynes, they argue that running deficits will restore confidence before a recession or depression can take hold.
It is like putting a patient on Prozac before he becomes suicidal.
But such arguments, although valid at times, have their limits.
Japan's public deficits spawned a national debt of 140% of annual GDP, without producing any economic resurgence.
Indeed, today's budget deficits reflect long-term problems that are not what Keynesian theory envisions.
So discussions about deficits should be recast in terms of the really long-term intergenerational issues that matter.
The issues are subtle, because they hinge on what future governments may do.
In the past, some governments, when faced with large national debts, effectively ``inflated them away.''
They thus shifted the debt burden away from the next generation and onto investors who did not bail out of the bond market at the first sign of rising prices, or who postponed buying a house when inflation would have wiped out the real value of their mortgage debt.
Governments could decide to act this way again, especially if national debts grow bigger.
A resurgence of substantial inflation may seem unthinkable in today's environment, but remember that even a relatively modest 6% annual inflation rate cuts the real value of a nation's debt in half in just 11 years.
Continued public opposition to a gradual increase in inflation is not guaranteed.
Some future politicians may succeed again in planting the idea that inflation, being stimulative, is good for the economy.
But in addition to today's officially measured government deficits, there are also other looming obligations caused by a demographic change (declining birth rates) and the prospect of huge social-welfare payments in the future.
The scale of these obligations is monumental.
In their 2003 report, the Trustees of the US Social Security Administration Trust Funds estimate that maintaining the Social Security System's solvency for the next 75 years will require an amount whose present value is $3.5 trillion, nearly equal to today's total US government debt ($3.9 trillion).
The Trustees of the US Medicare Trust Funds (providing medical services to the retired) estimate that their unfunded obligations have a present value of $5.9 trillion--50% larger than America's official publicly-held national debt.
The potential for budgetary shortfall with social security and health care is even worse in Europe and Japan, due to their more troublesome demographics.
Moreover, unlike official national debt, social-welfare obligations are not fixed in currency.
Instead, they are promises of a certain standard of living (including the value of medical services), corrected for inflation.
No government can thus ``inflate them away.''
But this does not mean that pensions and other welfare obligations are entirely fixed.
What it does mean is that the problem is political.
Pensioners are among the most powerful lobbies in a democracy, and politicians are loath to confront them on so fundamental an issue.
Still, we need to face squarely the intergenerational issues at the core of today's economic dilemmas.
Our pension systems and our national budgets must be based on a ``generational accounting'' that assures that economic risk is spread systematically across generations.
What this means is that pension and tax institutions must be designed to take better account of the changing circumstances facing different generations, rather than make fixed promises--which most likely cannot be kept, anyway--of a certain payout in the future.
For example, when demographic trends or persistent economic hardships impose undue social-welfare burdens on working people, benefits to pensioners should be automatically modified by raising the retirement age and/or adjusting benefits.
Such adjustments will probably happen anyway in the coming decades, but only after a long lag and with many inequities in the process.
What we need is the right system from the beginning, so that we can rationally manage risks that span several generations.
Can these issues be addressed now, when the economic slowdown in most advanced countries makes most politicians focus on short-term fixes?
Hard times, like the Great Depression, have been occasions for fundamental changes.
With proper leadership (which unfortunately seems in short supply), today's milder hardships could provide an opportunity for public discussion of better ways of intergenerational risk sharing.
The Real Route to Democracy at the IMF
Emerging market countries from Chile to China have been arguing for some time that the International Monetary Fund – the nerve center of the international financial system ­– needs to become more “democratic.”
They want more policy influence the next time the Fund decides to bail out a fellow emerging-market country like Argentina, Brazil, Indonesia, and Turkey.
(Unfortunately, benign as current market conditions may seem, there will surely be a next time for some countries.)
In the meantime, as a new “Washington Consensus” of best-practice economic policies inevitably emerges, developing countries want to feel that they helped design it, for better or worse.
I couldn’t agree more.
The IMF’s perceived “democratic deficit” is a serious challenge to the Fund’s political legitimacy and to its ability to effectively stabilize crisis situations.
But let’s recognize that real democracy is only going to come when middle-income developing countries are prepared to back up their lofty rhetoric with hard cash.
Right now is precisely the time to do so, given that the United States has become, without rival, the world’s most reckless borrower.
The US is draining a whopping 75% of the world’s surplus savings.
Today, even formerly bankrupt governments from Korea to Russia to Mexico are awash in dollars.
Why not put some of those dollars to good use?
These countries need to understand that calls to cut rich-country voting shares at the IMF, unless they are backed up by real money, are naïve, if not downright hypocritical.
At the end of the day, as long as the IMF is in the lending business, it needs to keep its creditors happy.
Otherwise, they will pull up stakes, and the Fund (and its sister organization, the World Bank) will have a debt crisis of its own.
Right now, the US, Europe, and Japan put up the lion’s share of the capital, so they have disproportionate power.
It doesn’t have to be this way.
Many middle-income countries’ central banks are hoarding dollars today in order to prevent their currencies from appreciating too much against the sinking dollar.
China alone, with over $600 billion in reserves, holds more than enough dollars to recapitalize the IMF four times over.
Even Latin American governments now hold enough dollar reserve assets to buy out Europe’s shares in the Fund.
It may seem strange to make middle-income countries pay for their own bailout insurance, but it isn’t. They have much more at stake in IMF policies than do rich countries.
Many people have forgotten that the Fund was originally conceived as a cooperative – it bailed out England only a few decades ago, and almost had to bail out France.
People forget these episodes because the Fund’s resources have not kept pace with the explosion of global capital markets so that today, the IMF lacks the capacity to bail out an Italy or a Japan (though the issue may well arise one day.)
So, if the Fund is to resume its identity as a cooperative, it makes sense to shift its center of gravity.
Would middle-income developing countries actually change things if they were big creditors at the Fund?
I wonder.
Admittedly, no developing country ever seems to vote against a big bailout for one of its brethren, no matter how ill conceived.
But would such indiscriminate largesse persist if middle-income countries knew that their votes really counted, and that they were spending their own money?
I doubt it.
On the whole, I expect that the bailout policies of a more “democratic” IMF would look much as they do now.
After all, the laws of economics are always going to force prodigal debtor countries into adopting austerity measures.
If a country that has been borrowing like a drunk suddenly sees its credit dry up, it will tighten its belt – raise taxes, cut spending, or do both – with or without an international lender of last resort.
Perhaps the IMF’s bedside manners would improve, perhaps not.
In any case, greater political legitimacy would likely make the Fund’s crisis leadership smoother and more credible, potentially shortening crises and minimizing their pain.
The big question is whether the rich countries that have long ruled the roost at the Fund would actually surrender some of their power.
They might, and they should, even if global financial markets take time to adjust to a slightly smaller role for the dollar.
They really have little to lose and much to gain.
So there is an upside to today’s massive US fiscal and current account deficits.
The structure of global imbalances, with the US the big borrower and emerging markets the creditors, presents a rare opportunity to finance a change in governance at the IMF.
Let’s do it now before the chance slips away when the next round of crises hits.
Fulfilling the Genomic Promise
VIENNA – For most people, a promise is a reason to expect something, a well-founded hope without hype.
And it is a promise in this sense that connects science to society: the public trusts that scientific and technological advancement are the keys to navigating the uncertain road to a better world, in which future generations can live longer, healthier, and happier lives.
This promise originated almost 400 years ago, with the institutionalization of modern science.
After discovering that mathematics could be applied to understanding the physical world, a small group of natural philosophers turned toward experimental empiricism with practical objectives.
Spearheaded by this minority, the scientific revolution swept through Europe and, later, spread to the rest of the world.
In his Instauratio Magna, Francis Bacon, one of modern science’s most articulate proponents, conveyed a vision of a new world, transformed through the systematic inquiry of natural phenomena.
By imitating and twisting nature, he declared, its secrets would be revealed – and could be manipulated to improve humans’ lives.
Bacon’s pragmatic objective of using a scientific understanding of natural causes to “effect all things possible” – what is now called innovation – was science’s original promise to society, and formed the core of the Age of Enlightenment.
While many of science’s promises have been fulfilled – notably, the dramatic extension of the human lifespan and of leisure time – many others have been only partly achieved, or not at all.
And yet society’s trust in science has not wavered.
While specific objectives have changed, the overarching belief that scientific knowledge transforms people’s lives – as cultural, educational, and institutional factors converge with technological and industrial dynamics – has remained strong.
Today, genetics is the leading source of scientific promise.
Since James D. Watson and Francis Crick uncovered DNA’s structure in 1953, a massive amount of available genetic data has been identified, and novel forms of scientific organization and modes of working have emerged.
As a result, genetics has brought science to the brink of a new era of enlightenment, in which individuals are understood in terms of the relationships among their unique genomic data.
This movement – the latest incarnation of the endless quest for human advancement – poses new challenges to the relationship between science and society.
As the American Museum of Natural History provocatively asked at the 2001 opening of its genetics exhibition: “The genomic revolution is here – are you ready?”
For example, this revolution will undoubtedly lead to the engineering of life through synthetic biology, a prospect that remains controversial.
Likewise, epigenetics (the study of heritable changes in gene function that occur without altering the DNA sequence) has reshaped the old nature-versus-nurture debate by highlighting the multi-dimensional character of the relationship between biological and social development.
The growing understanding of transgenerational epigenetic modifications, whether nutritional or neurological, has opened new perspectives on the plasticity of the phenotype (an organism’s observable characteristics), and the factors that might affect it.
As a result, it is now clear that people’s lifestyles do not concern only themselves.
These developments – and the questions that they raise – underscore the need to redraw the map of the sciences.
A more integrated research agenda that includes the social sciences is crucial to ensuring that the promise of genetic research benefits all.
In fact, such research is integral to improving upon the factors that contribute most to a society’s wealth: health, education, and ethics.
Indeed, more encompassing knowledge of personal genomics can engender a new sense of commonality.
With a better understanding of people’s relationships to each other – from the impact that one’s lifestyle could have on the health of future generations to the corrosive effects of existing inequalities and the concomitant risk of a new genetic divide – a healthier, more equal society could be created.
But realizing this vision requires accounting for the different choices that people make within a pluralistic society.
To this end, the collaboration of social and scientific institutions would help to break down language and cultural barriers, ensuring that the genomic revolution aids, rather than alienates, the public, and thereby passes the true test of any scientific advancement: relevance to everyday experience.
In a world characterized by multiple, overlapping crises, people need to see, understand, and identify with what genetics has to offer.
When asked what should keep us awake at night, the economist Amartya Sen answered, “The tragedies that we can prevent, the injustice that we can repair.” Applying scientific advances to the prevention of tragedy and the redress of injustice fulfills science’s core promise.
Strengthening the real-world role of genetics is an essential step in that direction.
Vladimir Putin’s Potemkin Love Life
MOSCOW – From Russia with love?
Not in Vladimir Putin’s Russia.
In recent days, Putin decided to reaffirm the Russian-Syrian geopolitical marriage of convenience by following through on a sale of deadly arms to Bashar al-Assad’s regime, enabling Assad’s army to slay his opponents with greater precision and resolve.
Putin then decided to disavow his own marriage to Lyudmila Shkrebneva, his wife of 29 years, announcing the divorce in as publicly humiliating a way as possible – his wife was standing by his side – for a reserved Russian woman.
For years, rumors had persisted about&#160;the failed state of Putin’s marriage.
His alleged mistresses were named and proclaimed; one, it is said, sits in the Duma (parliament) as a member of Putin’s tame political party United Russia.
But, until now, it was taboo to discuss Putin’s private life publically.
A few newspaper editors, indeed, have been known to lose their jobs for publishing even the slightest hints about Putin’s family life.
Vladimir&#160;and Lyudmila have rarely been seen together over the past decade, so there was plenty of gossip in Moscow and Saint Petersburg.
A few years ago, social media stoked rumors that Putin was in fact already divorced and had remarried the gymnast Alina Kabaeva, who had given birth to his son.
(He has two grown daughters, twins, with Lyudmila.)
So the appearance of the couple together at a ballet in the Kremlin was a unique event, and Putin milked it for all it was worth.
A journalist, probably in connivance with Putin, had the temerity to ask him about the state of his marriage.
He said it was over, with his stone-faced wife on hand to confirm with a silence that spoke louder than words.
Why make such a public and staged announcement?
After all, in Putin’s Russia, the latter-day czar can do whatever he wants, whenever he wants.
One suggestion is that Putin is seeking to divert attention from his support for Syria’s government and from increased repression of his domestic opponents (as the leading economist Sergei Guriev’s recent flight from Russia, following police harassment, demonstrated anew).
With a woman who, unlike Lyudmila, will be regularly seen at his side in the future, Putin will present a gentler image at home and abroad.
If Russians – particularly provincial Russian women – believe that a new First Lady will provide some humanizing, empathetic influence on the hard man of the Kremlin, they may be more inclined to give him the benefit of the doubt.
This could prove important as he initiates yet another bogus show trial – this time of the anti-corruption activist Aleksei Navalny, now accused of embezzlement.
But whether a new woman will help to soften foreigners’ perception of Putin’s cynical diplomacy and increasingly brutal rule is open to question.
Or, it is said, perhaps Putin plans to use next year’s Winter Olympics in Sochi as a grandiose setting for a marriage proposal – and perhaps a wedding – to whoever comes next, possibly Kabaeva.
Another suggestion is that Putin, like many Russians, is partial to all things French.
He wants to show that, like France’s most famous politicians, he is a worldly dragueur who can “pull” beautiful women.
If former French President Nicolas Sarkozy could divorce and remarry a world-famous model and singer while in office, a Russian president can, too.
And Putin has already taken beauty tips from another leading West European Lothario, former Italian Prime Minister Silvio Berlusconi, with Putin’s 2010 facelift making his visage as smooth as that of the frequently Botoxed Berlusconi.
Yet, Italian machismo, with its polished shoes and shiny suits, is different from the more rough-hewn Russian version.
And no amount of European male panache can mask Putin’s inner brute.
Indeed, one indication of the openness of a political system is whether or not a leader appears at public functions with his or her spouse.
It is a demonstration of modernity and equality that even the secretive Chinese and North Korean leadership appear to have learned of late.
The “first lady” institution is a sign that democracies see power as something to be shared, as, say, Bill Clinton or Barack Obama do.
Dictators like Hitler, Stalin, and Kim Il-sung, as iron men of destiny, must stand alone.
When the Bolsheviks replaced Russia’s oppressive monarchy with communism in 1917, Vladimir Lenin’s “dictatorship of the proletariat” still left room for the leader not only to have a wife, but to let her have a public role.
Nadezhda Krupskaya, the first Soviet First Lady, performed a suffragist function.
By contrast, the suicide in 1939 of Stalin’s wife, Nadezhda Allilueva, underscored the reign of terror in the country.
Nikita Khrushchev’s 1950’s thaw allowed for his wife, Nina, to accompany him on trips abroad, presenting a homey image of communism with a human face.
But, with Khrushchev’s fall, Soviet first ladies returned to the dacha.
Leonid Brezhnev concealed his wife, Viktoria, from public view throughout the 1970’s, and Yuri Andropov’s wife, Tatyana Filipovna, was scarcely known until his funeral in 1984.
As with everything else in Russia, change in women’s status came with the onset of Mikhail Gorbachev’s perestroika.
Gorbachev’s wife, Raisa, stunned the nation not only by appearing in public, but by being fashionable and expressing opinions of her own.
Boris Yeltsin’s accession to power in independent Russia saw only a partial reversal, with his peasant-gowned wife, Naina, making public appearances at his side every now and then.
Just as Putin has created a “managed” democracy, Russians can now look forward to a “managed” Kremlin marriage – one that will attempt to flatter and sweeten their kitschy authoritarian leader in his dotage.
The Re-Birth of Japanese Democracy
NEW YORK – Moods and fashions in Japan often arrive like tsunamis, typhoons, or landslides.
After more than 50 years of almost uninterrupted power, the ruling Liberal Democratic Party (LDP) has been buried in a general election.
Once before, in 1993, change came when a coalition of opposition parties briefly took power, but the LDP still held on to a majority in the Diet’s powerful lower house.
This time, even that last bastion has fallen.
The center-left Democratic Party of Japan (DPJ) took more than 300 of 480 seats in the lower house.
The LDP rules no more.
The world, fixated on China’s rise, was slow to pay attention to this seismic shift in the politics of the globe’s second largest economy.
Japanese politics has a dull image in the world’s press.
Most editors, when they cover Japan at all, prefer stories about the zaniness of its popular youth culture, or the wilder shores of Japanese sex.
The main reason for this is, of course, that Japanese politics was dull, at least since the mid-1950s, when the LDP consolidated its monopoly on power.
Only real aficionados of arcane moves inside the ruling party could be bothered to follow the ups and downs of factional bosses, many of whom were from established political families, and most of whom relied on shady financing.
Corruption scandals erupted from time to time, but these, too, were usually part of intra-party maneuvers to rein in politicians who got too big for their britches, or who tried to grab power before their time.
The system worked in a fashion: LDP faction bosses took turns as prime minister, palms were greased by various business interests, more or less capable bureaucrats decided on domestic economic policies, and the United States took care of Japan’s security (and much of its foreign policy, too).
Some thought this system would last forever.
Indeed, it has often been said, by Japanese as well as foreign commentators, that a de facto one-party state suits the Japanese.
Stability, based on soft authoritarianism, is the Asian way, now followed by China.
Asians don’t like the messy contentiousness of parliamentary democracy.
Look what happens when Asians are foolish enough to import such a system, as in South Korea or Taiwan.
Instead of civilized debate, they have filibusters and fisticuffs.
But, notwithstanding the occasional bust-ups, Korean and Taiwanese democracies seem remarkably robust.
And the argument that Japanese, or other Asians, are culturally averse to political competition is not historically true.
In fact, Japanese history is full of strife and rebellion, and Japan was the first independent Asian country with a multi-party system.
Its early postwar democracy was so unruly, with mass demonstrations, militant trade unions, and vigorous left-wing parties, that a deliberate attempt was made to squeeze politics out of the system and impose the boredom of a one-party state.
This happened in the mid-1950’s, not for cultural, but for entirely political reasons.
Like Italy (perhaps the closest European parallel to Japan), Japan was a front-line state in the Cold War. Domestic conservatives, as well as the US government, worried about the possibility of a left-wing, even Communist takeover.
So a large conservative coalition party (much like the Italian Christian Democrats), funded to some degree by the US, was put in place to marginalize all left-wing opposition.
This involved some strong-arm tactics, especially against the unions, but it worked mostly because the middle class settled for an informal deal: increased material prosperity in exchange for political acquiescence.
The “LDP state” was based on the promise, given by Prime Minister Ikeda Hayato in 1960, that family incomes would soon be doubled.
Increasingly marginalized, the opposition dwindled into an impotent force, mere window-dressing to a one-party state.
But one-party rule breeds complacency, corruption, and political sclerosis.
In the last decade or so, the LDP – as well as the once-almighty bureaucracy that ran the system – began to look incompetent.
Prime Minister Junichiro Koizumi gave the LDP a last breath of life by promising to reform it in 2001.
Whatever he did was not enough.
The patience of Japan’s middle-class, rocked by economic crisis, finally cracked.
The victorious DPJ may not immediately set off any political fireworks.
Its leader, Yukio Hatoyama, is an uncharismatic scion of yet another established dynasty – his grandfather, Hatoyama Ichiro, took over as prime minister in 1954 from Yoshida Shigeru, who was the grandfather of the last LDP Prime Minister Taro Aso.
The DPJ’s aims are excellent: more authority to elected politicians, less bureaucratic meddling, more independence from the US, better relations with Asian neighbors, more power to voters and less to big business, and so on.
But it would be wrong to belittle the importance of what has happened.
Even if the DPJ fails to implement most of its reforms in short order, the fact that Japanese voters opted for change will invigorate their country’s democracy.
Even if the system were to become something like Japan’s democracy in the 1920’s, with two more or less conservative parties competing for power, this would still be preferable to a one-party state.
Any opposition is better than none.
It keeps the government on its toes.
A firm rejection of the one-party state will also reverberate far beyond Japan’s borders.
It shows clearly that the desire for political choice is not confined to a few fortunate countries, mostly in the Western world.
This is a vital lesson, especially at a time when China’s economic success is convincing too many leaders that citizens, especially but not only in Asia, want to be treated like children.
The Re-Birth of Utopia
Franz Müntefering’s resignation as chairman of Germany’s Social Democrats in the face of a challenge from his party’s leftwing has, like the divisive French referendum on the European Constitution this past May, exposed deep ideological cleavages – divisions not only about Europe, but about the very foundations of society and the economy.
Behind the critiques directed at the EU and national governments as “not being social enough,” lurks an image of the Union as a trap that is forcing its members to bend to the fateful disciplines of the market, thus depriving national leaders of their ability to realize important social goals.
This cleavage now seems set to shape not only Germany’s future coalition government, but the future of politics across Europe.
In France, this division is evident not only on the extremes of right and left, and in traditionally nationalist Gaullist circles, but also among most socialist voters, who decided to spurn the party leadership’s pro-European stance.
This fundamental debate is not about to abate.
On the contrary, as the German election shows and with a presidential election looming in France, the debate has intensified.
In France, this intensity is particularly visible within Socialist ranks.
With preparations for the party’s November congress in full swing, a conflict that goes back to the party’s founding is reappearing.
On one side is a social-democratic vision, which basically favors the market economy but seeks to alleviateits harsher effects; on the other side stands a radical vision that extols a revolutionary “break with capitalism.”
With the disappearance of the communist world and the failure of its collectivist policies, one would think that this debate had been resolved in favor of the reformist vision.
But the surprise of the last few months is that an important part of the Socialist electorate and party leaders back radical change.
Moreover, a substantial portion of the broader anti-liberal left, composed of communists, ecologists, union activists, and adherents of the movement Attac accuse the reformists of subordinating themselves to liberal globalization and advocate, instead, a radical transformation of society and the economy.
The media success of Olivier Besancenot, a 31-year-old representative of the most intransigent section of the Trotskyist Revolutionary Communist League, reflects the power of this dream.
Having received over 4% of the vote during the first round of the presidential election of 2002, Besancenotis now, according to opinion polls, the 38th most popular person in France.
Interestingly, an echo of the ideas mooted by radical anti-globalists can be found in someinitiatives coming from the right.
President Jacques Chirac of France, but also Brazil’s leftist president, Lula da Silva support a tax on airline tickets designed to finance poor countries’ development.
Similarly, the centrist leader François Bayrou, has proposed imposing a “Tobin tax” (named after its creator, the Nobel laureate economist James Tobin) on financial transactions, with the proceeds to be used to support socially worthy causes.
How do we explain this resurgent radicalism, which seems to ignore European and international political realities?
One might suspect the influence of French political traditions which, on the right as much as on the left, always prefer purity of principle to messy compromise.
Add to this the congenital French mistrust of liberalism – indeed, French is one of the rare languages in which the word “liberalism” has a pejorative connotation – joined to an equally deep-rooted perception of the state (again, on both the right and the left) as the defender of the general interest par excellence.
While pragmatism has come to dominate northern Europe’s socialist parties since the 1930’s – and, after the 1957 Congress of Bad Godesberg, the Germany’s Social Democratic Party (SPD) as well – a preference for revolutionary ideology has always prevailed, at least on the rhetorical level, among French socialists.
But this cannot be the whole explanation, because a similar radicalization is occurring within German’s left, where the alliance of the post-communist PDS – still powerful in the Länder of what was East Germany – and SPD dissidents led by Oskar Lafontaine promotes equally radical proposals.
With the evident failure of both leftist and rightist governments to stem the rising wave of unemployment, a growing part of the French and German electorates no longer seems to believe in traditional solutions.
The welfare state, largely associated with the reformist social-democratic movement, is now reaching its limits in the form of uncontrolled public deficits and unsupportable levels of taxation.
Similarly, the social mobility once fostered by the welfare state has suffered serious reverses.
Globalized markets are viewed as bringingmore inequalities, austerity, and insecurity than the promised benefits of economic growth.
In this disenchanted environment, dreams of utopia thrive.
But it is a fundamental characteristic of utopias that they cannot be implemented.
What is now needed is a more modest debate about how to reconcile the deficiencies of the market with the demands of solidarity.
Should the state confine itself to creating an economic environment favorable to private enterprise?
How extensively should it contribute to security, education, research, innovation, and protection of the poor?
But such debates can be fruitful only if they recognize the economic and political constraints under which modern states operate.
Indeed, the role of the state is made more complicated by the fact that market regulation is becoming less national and more transnational.
Instead of throwing up our hands in despair, we should adhere to a distinction dear to the great German sociologist Max Weber, for now is a time when the ethics of responsibility must prevail over the ethics of conviction.
The Recession Dating Game
STANFORD – The optimism that emerged in the early stages of the recovery from the financial crisis and recession has given way to more sobering assessments of the short-, medium-, and long-run challenges facing the global economy and its constituent national parts.
In many countries, fears have even arisen of a prolonged period of slow and occasionally negative growth, persistent obstacles to reducing unemployment, and continued economic anxiety; or worse, of a Japanese-style “lost decade” with multiple recessions; or, even worse, of a depression, (which politicians and intellectuals have stoked in an attempt to justify continued massive government intervention in the economy for years to come).
But are multiple downturns so unusual in periods of severe economic distress?
It would be useful to know the answer to this question before trying repeatedly to pump up the economy in the short run with costly policies that might worsen longer-run prospects.
The global recession was severe, unmatched since World War II, with the possible exception of the early 1980’s (when, for example, the unemployment rate in America soared to 10.8% as a by-product of the disinflation from the double-digit price growth of the late 1970’s).
From the beginning of the crisis in December 2007 to the apparent end of the recession in the summer of 2009, the decline in real GDP in the US was 3.8%.
All the other G-7 economies (Japan, Germany, Italy, France, Canada, and the United Kingdom) experienced severe recessions as well during this period.
Major middle-income trading economies, such as Brazil, South Korea, Singapore, and Taiwan, experienced brief but even sharper declines.
The downturn was so severe, and lasted so long, that some even used the term “depression,” before settling on “Great Recession.”
How exactly is a recession defined?
Different national statistical agencies define, and therefore date, such episodes somewhat differently.
In the US, recessions are officially dated by a non-partisan, non-profit private research institution, thus wisely depoliticizing the measurement.
The point at which the economy stops growing is called the “peak,” and the point at which it stops contracting, the “trough.” The period from the point at which the economy starts to grow again until the point at which it reaches the previous peak is called the “recovery.”
Thereafter, growth is labeled an “expansion.”
For economists, a recession is over when the economy starts to grow.
The economy falls to the bottom of a well, and then, as soon as it begins to climb itself out, the recession is declared “over,” even though it may be a long climb back to the top.
Little wonder, then, that ordinary citizens consider a recession over only when the economy has returned to “normal,” which means that incomes are rising and jobs are no longer desperately scarce.
A common rule of thumb is that two consecutive quarters of falling real GDP constitute a recession.
But sometimes recessions don’t satisfy this rule.
Neither the 2001 nor the 1974/1975 US recessions met that criterion. In addition to real GDP, employment, income, and sales are considered, as are the depth, duration, and diffusion of the downturn throughout the overall economy.
Sometimes dating a recession is a judgment call.
America had a brief, sharp recession in 1980, followed by a long and severe one in 1981/1982.
Many economists believe that it was one major episode, and that is probably the appropriate way to think about it in a broader historical context.
But the economy did indeed grow in the interim – just barely enough to consider them distinct recessions.
And, since they were separated by a transition from President Jimmy Carter to President Ronald Reagan, it was politically consequential that two recessions were identified.
Likewise, the recent recession was officially dated as starting in December, 2007, but it could equally well have been dated as starting in the summer of 2008 because, in the interim, the economy grew.
Double-dip downturns are more the rule than the exception.
If we focus on real GDP and define a double dip as a historical sequence in which a period long enough to be declared a recession is followed by a period of recovery, and then quickly followed by a second outright recession, the 1980-1982 period in the US is a classic example.
In fact, defined more loosely as a sequence that includes periods of growth followed by periods of decline, followed by further periods of growth and decline, the 1973-1975 period in the US, with eight quarters of alternating gains and losses in real GDP, was one quadruple-dip recession.
These are not rare occurrences.
Around the same time, Germany had this type of double dip and the UK a quadruple dip.
In the early 1980’s, the UK, Japan, Italy, and Germany all had double dips.
America’s 2001 recession was one brief, mild double dip.
Within the current recession, we have already had a double dip; a dip at the beginning of 2008, then some growth, then another long, deep dip, then renewed growth.
If the economy declines again – a highly plausible prospect – we would have a triple dip, although perhaps not an outright second recession.
So history suggests that economies seldom grow out of recessions continuously, without an occasional subsequent decline.
Double dips, triple dips, and quadruple dips have been America’s recessionary experience since WWII.
And similar episodes have been common in many other countries.
Japan, for example, had three recessions in its “lost decade,” starting in the 1990’s, despite a long string of large Keynesian stimulus programs that left it with the worst public-debt burden among advanced economies.
While the baseline forecast seems to be slow global growth – in the US around 3%, about half the usual pace following deep recessions – history suggests that another decline would hardly be surprising before sustained stronger growth emerges.
The Red and the Blue
Condoleeza Rice’s replacement of Colin Powell as US Secretary of State shows that America’s recent presidential election continues to produce powerful reverberations.
But understanding what that election tells us about America is important not only for Americans, but for the world.
This year’s presidential vote proves that America’s democracy is healthy, but that some things could be better.
Contrary to the election in 2000, when President Bush lost the popular vote and barely won the vote in the Electoral College, Bush prevailed this time by 3.5 million votes.
While some Democrats remain bitter, there is little serious questioning of the legitimacy of Bush’s victory.
America remains closely divided into red states (Republican) and blue states (Democrat).
If 100,000 votes changed in the red state of Ohio, John Kerry would be the president (albeit with a minority of the popular vote).
The Electoral College was included in America’s constitution to protect small states in a federal system, but it now means that the political campaign focuses largely on the dozen or so battleground states where public opinion is closely divided.
More fundamentally, there is something unseemly about electing presidents without a popular majority.
So it is time for a serious debate about amending the constitution to abolish the Electoral College.
Some observers also complain about the divisive negative rhetoric and advertising that characterized the campaign.
But this should be seen in historical perspective.
In the era of the Founding Fathers, newspapers were extremely partisan, and George Washington was dismayed by the harshness of political language.
For much of its early history – to say nothing of the era of the Civil War and Reconstruction – the country was as closely divided as it is today, and bitter campaign rhetoric reflected the closeness of the competition.
At the same time, despite negative advertising by both sides, the three nationally televised debates raised important issues in a serious format and were widely viewed.
In general, an incumbent president with a growing economy is likely to be re-elected.
In that sense, what was surprising about Bush’s re-election was how thin his majority was.
In large part, this was because of the unpopularity of the Iraq War.
Kerry tried to make the war, the low rate of job creation, inadequate healthcare, and Bush’s tax cuts for upper income groups the central issues of the campaign, but some observers felt that this never added up to a clear message.
Bush countered with concerns about security against terrorism and cultural populism on issues such as gay marriage and abortion rights.
In the end, security and cultural populism trumped economic populism.
Interpretation of the election has been influenced by exit polls in which voters were asked (after they voted) about which issues mattered most to them.
The largest number (22%) answered “moral values,” comparison to 20% who cited the economy and 19% who mentioned terrorism.
Social conservatives interpreted this to mean that they won the election for Bush, and that their agenda should dominate his next term.
But a Pew poll taken a week after the election indicated that the category “moral values” encompassed a wide range of issues besides abortion rights and gay marriage.
In fact, polls show that 25% of the public support gay marriage and 35% favor legal civil unions for gay couples (the position advocated by Kerry).
Nonetheless, for the 37% who oppose gay marriage, particularly in the red center of the country, the issue helped mobilize Bush supporters to come to vote.
A larger question is whether the US is hopelessly divided.
The election map of red and blue states has given rise to Internet jokes and cartoons about the two blue coasts seceding from the red center of the country.
Some call it “Coastopia.”
But the division is not that sharp.
Many states in both camps were won by narrow margins, and if one colors the map at the level of counties rather than states, much of the country looks quite purple. Cities versus suburbs and rural areas is a better description than coasts versus heartland.
Indeed, public opinion polls show that most Americans are clustered in the moderate center of the political spectrum rather than at the two extremes.
But political elites, such as party activists and members of Congress, tend to be more extreme than the public.
At first, this seems puzzling, because they should have an incentive to move to the vote-rich middle.
But many members of Congress represent districts that are safe for their parties, and the threat to their re-election comes in party primaries that are dominated by the more activist and extreme wings of the parties.
This tendency is reinforced by the rise of cable television, which attracts viewers by means of contentious “infotainment” programs, and Internet bloggers, who engage in fierce polemics with no editorial filter.
Reforms to alter the boundaries of Congressional districts to make them more competitive would help alleviate this problem, but few incumbent Congressmen will vote for changes that might increase their risk of defeat.
The closeness of the result suggests Bush won less of a mandate for change than he seems to believe.
Faced with difficult questions in foreign, fiscal, and social policy, he would be wise to turn toward the center rather than conciliate his conservative base, but it remains unclear whether the politics of conviction or of pragmatism will prevail.
The Re-Education of Hong Kong
HONG KONG – After less than 100 days in office, C.Y. Leung, Hong Kong’s new Chief Executive, is already in political intensive care.
In record time, he has managed to lose his veneer of competence, credibility, and steely leadership.
One of his cabinet appointees was arrested for corruption within two weeks of Leung’s assumption of his official duties.
Another was found to have been a slumlord who owned illegal cage-like flats that he blamed entirely on his wife, denying any involvement whatsoever.
Leung himself was caught with several illegal structures in his house, a violation that he exploited successfully against his rival, Henry Tang, in the election campaign.
Leung has also distinguished himself by inciting a large swathe of school teachers and students to stage massive street protests against his hasty effort to insert a “national education” program into the school curriculum in order to “reconnect” Hong Kong’s young people with the motherland.
For tens of thousands of student protesters, many with their parents in tow, the potential death of an honest education was too much to bear.
The goal of the program, inherited from the previous administration, is a good one: expand knowledge among the young about modern China.
But, as Tang correctly pointed out in response to a question about the protests, the “devil is in the details.”
What triggered the uproar was the appearance of a “model” textbook, financed by the government and published by a pro-China think tank.
The textbook contains mostly propaganda, including assertions that China’s one-party system is wonderful, whereas multiparty democracy as practiced in the United States has created harmful social turbulence.
It offers no discussion of the lethal policies since 1949 that led to the persecution and starvation of tens of millions of Chinese.
Nor does it mention the fratricidal political movements from the Great Leap Forward to the Cultural Revolution.
The program was clearly meant to indoctrinate, not educate.
Massive protests forced Leung to withdraw a deadline to implement the new curriculum.
He has also given the schools flexibility concerning when and perhaps how to introduce it.
Since nearly all schools are dependent on government subsidies, the grant of flexibility is widely perceived to be a tactical delay.
With the job security of schoolmasters at risk, most are sure to implement the program.
The protesters, led by a 15-year-old student, now a folk hero, have retreated, but that, too, is a tactical decision.
The students have promised to continue to fight the program until it is scrapped.
But why does China’s government seek to impose the curriculum in the first place?
After all, Hong Kong has one of the world’s most educated populations: the city has, in per capita terms, perhaps more graduates of the world’s top 20 universities than anywhere outside of Manhattan.
Nevertheless, after more than 60 years in power, the Chinese Communist Party (CCP) continues to retain a deep sense of insecurity.
The Internet may be ubiquitous in modern China, but YouTube and Facebook, so accepted as a part of normal life around the world, are still banned, and the Public Security Bureau has built a vast Internet monitoring system to filter and censor whatever China’s leaders believe they must fear.
While dissent is the lifeblood of any open society, for China it is a dangerous poison.
Moreover, China fears that Hong Kong, with a population of less than eight million, might present a systemic problem as an alternative form of government, even though many Communists and their allies hold key positions in Hong Kong’s private and public sectors.
Instead of accepting that “love” cannot be enforced and must be won, Hong Kong’s over-zealous “patriots” cannot wait to show their loyalty by trying to mandate primitive propaganda.
Few in Hong Kong are buying the political elite’s mantra that the national education program is the “right” thing to do.
They know that practically all of the ruling elite’s children attend expensive schools in the United States and the United Kingdom, where they would be shielded from the mindless drivel at home.
Leung’s son, for example, is reportedly a student at Winchester College, one of the UK’s most exclusive boarding schools.
And most, if not all, of the children of the ruling elite in Beijing are in a similar position.
The daughter of Xi Jinping, the presumptive future leader who has now reemerged from an unexplained absence, is attending Harvard under an assumed name.
Disgraced ex-Politburo member Bo Xilai’s hard-partying son, Bo Guagua, attended Harrow, Winston Churchill’s alma mater, then Oxford and Harvard.
Their parents clearly know that “national education” is not needed for a good education.
Unfortunately, Hong Kong’s younger generation is losing confidence in democracy.
Popular elections do not translate into representation in a system designed by China to ensure that its allies win a majority every time.
As a result, more and more young people are turning to street demonstrations to make their voices heard.
And, while no one in Hong Kong wants independence from China, continued strong-arm tactics to force Hong Kong to “love” China could begin to inspire such sentiments.
Leung’s tone-deafness to popular feeling revives one of the main issues that he managed to dodge during the election campaign.
At the time, he denied vehemently that he was a member of the CCP.
He claimed that he had only Hong Kong’s interest in mind within the limits of China’s “one country, two systems” formula.
So far, however, he seems inclined to make one of those systems resemble the other.
But China’s national interest is to ensure that Hong Kong remains a first-rate city, modern and open.
Pulling Hong Kong down, in the name of patriotism, can only impede the advance to modernity that all of China needs to become truly great.
The Refugee Dilemma
One reason Greek Cypriots rejected last April UN Secretary General Kofi Annan's plan for the reunification of Cyprus was that an overwhelming majority of them felt it did not do justice to the claims of refugees displaced during the 1974 Turkish invasion.
This was also one of the few occasions when international public opinion became aware that there was a refugee problem on the island, because few people knew that refugees from that war still exist.
When Turkey invaded Cyprus in 1974 after an abortive attempt by the Greek military junta in Athens to carry out Enosis (unification with Greece), 250,000 or so Greek Cypriots were uprooted from their homes.
Some fled in terror from the invading army, some were expelled - the usual complex, morally problematic picture that emerges in such situations.
Although overwhelmed, the Greek Cypriot community reacted with humanity, solidarity, and prudence.
Initially, refugees camps were set up, but the Greek Cypriot government decided that while it will not surrender the refugees' claim eventually to return to their homes in the North, it would do its utmost in the interim not to leave them vegetating in squalid camps.
No UN-sponsored refugee agency was established to help the refugees.
Instead, with some international help, but mostly out of its own resources, the Republic of Cyprus - a small, then not very prosperous country that was devastated by war - launched a re-settlement and rehabilitation program as a national project.
Government loans were offered for housing construction.
In many cases, refugees built their own new homes.
Businesses were encouraged with government subsidies and loans.
Schools and training centers were established.
Within a few years, the refugees were absorbed into the economy and society of the southern, Greek Cypriot sector of the island.
As in post-World War II West Germany, much of the current prosperity in Cyprus today is an outcome of the boost the economy received from the absorption of refugees.
Anyone visiting the Greek Cypriot part of the island nowadays will not find refugee camps: most of the millions of tourists are unaware of the fact that more than a third of the Greek Cypriots they encounter are refugees or descendants of refugees.
The Greek Cypriot community can justly be proud of the way they handled the humanitarian and social problems of the refugees, without at any point surrendering their claims to the lands they lost.
Equally commendable has been the Greek Cypriot strategic decision to follow a Gandhi-like policy of non-violence: while there is deep bitterness about the Turkish occupation, and the fact that Turkish settlers were implanted in the North, the Greek Cypriot community decided not to use violence against the occupation.
Not one incident of Greek Cypriot terrorism or violence against Turkish occupation has occurred in more than a quarter of a century.
This is also one of the reasons few people have ever heard about the Greek Cypriot refugees.
It could, of course, be different: had Greek Cypriots followed the Palestinian example since 1948 - that is, kept the refugees in camps, segregated them from the non-refugee society, and fed their children a daily militaristic message of hatred, revenge, and terrorism - a completely different atmosphere would permeate the island.
The Greek Cypriot example shows that it is simply not true that the occupied have no recourse other than violence and terrorism.
Recourse to violence and terror is a moral and strategic choice.
The Greek Cypriots chose the path of non-violence; the Palestinians chose the opposite route.
There is always a choice, and there are always consequences.
Consider what the Greek Cypriot community has achieved - a thriving economy, no one living under conditions of misery and humiliation in camps, membership in the European Union - compared to the catastrophe the Palestinian choice has brought to their own people.
Perhaps on the level of public relations, the Palestinian leadership - sacrificing their own people on the altar of propaganda - can bask in their achievement: yet it is their own people who suffer.
These leaders would do better to look across the Mediterranean at Cyprus and see how - without giving up claims to disputed land - refugees can live in dignity and honor.
But then again, the Republic of Cyprus is a democracy, while the Palestinians have not been able to emancipate themselves from the violent militarized option that has brought them such misery.
The Regional Route to Global Free Trade
MADRID – With the moribund Doha Round of multilateral free-trade talks awaiting its last rites, a new wave of regional trade negotiations has de facto taken up the mantle of establishing a global trade regime.
President Barack Obama’s administration has placed the United States at the center of this shift, embracing two major simultaneous negotiations: the Transatlantic Trade and Investment Partnership (TTIP) with the European Union; and the Trans-Pacific Partnership (TPP) with 11 countries in the Americas and Asia.
As the only party to both initiatives, the US is well placed either to move them forward in harmony or to leverage the progress of one negotiation against the other.
Beyond affecting America’s immediate negotiating partners, the latter approach would gravely damage progress in establishing a rule-based global system.
The new strategy of regional negotiations can succeed and provide a foundation upon which an international trading regime can be built only if the TTIP and the TPP are balanced and approachable to the wider international community.
Otherwise, there is the danger of creating expensive global imbalances and even fragmentation.
Europe has an important role to play in this regard.
Broadening the discussion beyond a focus on the big two agreements – and beyond some of their substantive issues – will create a sense of urgency and purpose, pushing the US to engage actively or risk losing its central role in the global trade agenda.
The EU is well placed to foster a conducive atmosphere by parlaying its existing trade partnerships, beginning with TPP members Mexico and Chile, with which it has longstanding free-trade agreements, and Singapore, with which it recently completed free-trade negotiations.
More significant are Europe’s other ongoing trade negotiations, which could be used to push the TPP/TTIP agenda forward.
The EU-Canada talks, which should become a building block for harmonizing the TTIP and the TPP, have stalled and must be revitalized.
Even smaller ongoing negotiations, like those with Malaysia and Vietnam, offer some opportunity.
Most important, however, are the recently launched EU-Japan free trade talks.
Europe and Japan are both facing difficult challenges, including rapidly aging populations and sputtering economies.
Yet Japan enjoys the significant advantage of national cohesiveness, which occasionally allows for the type of bold and decisive action lacking in Europe.
This assertiveness has been on full display under Prime Minister Shinzo Abe, who has vowed to attack Japan’s prolonged economic morass using “three arrows”: expansionary monetary policy, aggressive fiscal policy, and structural reform.
Abe’s determined pursuit of the first two prongs has been well documented.
Structural reform, however, is a more difficult proposition, with strongly entrenched interests and cultural values militating against change and opening up a partly closed economy.
Indeed, the OECD ranks Japan last among member states in terms of regulatory restrictiveness with respect to inward foreign direct investment.
The Abe government has touted trade agreements as a good way to push through needed reforms, and, although it is too soon to know what Japan’s true position will be, indications are that it is a motivated negotiator. &#160;
For Europe, which is seeking to expand its footprint in Asia, a strong link with a reformed Japanese economy would be a boon.
Indeed, investment in Japan currently accounts for less than 3% of the EU’s total outward FDI.
More significant, an engaged Japan that is willing to reach a deal will be a useful ally in pushing a forward-thinking and balanced trade agenda, particularly as the TTIP and the TPP appear headed for difficult waters.
Japan’s entry into the TPP this spring was a game changer.
With a GDP matching that of all other TPP partners combined (with the exception of the US), Japan adds significant economic heft.
But it also brings added complexity, reflected in the reluctance shown by the US Congress immediately after Japan announced its desire to join the TPP negotiations, as well as in recent comments by American auto executives.
The TPP is already in its 18th round of discussions, and, with some rumblings that China may join the negotiations, it appears that the talks will be prolonged significantly.
Meanwhile, the euphoria that surrounded the TTIP in February, when Obama included it in his State of the Union address, has faded.
Talk of “one tank of gas” has been drowned out by the drumbeat of l’exception culturelle and the revelations of US spying on Europe made by the rogue American intelligence contractor Edward Snowden.
The EU-Japan negotiations could be lithe in comparison.
The bilateral nature of the talks makes them less unwieldy than the ever-expanding TPP.
The disparity between the parties in terms of economic size – the EU’s GDP is almost three times larger than Japan’s – is not so wide as to lead to the strong-arm tactics seen in the EU-Canada talks (a relationship in which Europe has a tenfold advantage in terms of output).
Moreover, the EU-Japan talks lack the historical, cultural, and emotional baggage of the transatlantic relationship, and relatively subdued attention to them provides an easier environment in which to hash out difficult issues, such as government procurement and food safety.
Trade negotiations are never easy, and the EU-Japan talks will be no exception.
But if these two big players, both struggling to regain their luster, recognize the potential for the talks to be an engine for global trade reform, vital political will could and should be generated – particularly if European officials can develop a bit of Abe’s boldness. If we are to keep this de facto regional trade round moving forward, we need more than just the TTIP and the TPP to do the peddling.
Read more from the "What Now for Global Trade?"
The Relative Unimportance of Global Warming
Global warming has become the preeminent concern of our time.
Many governments and most campaigners meeting in Montreal now throughDecember 9tell us that dealing with global warming should be our first priority.
Negotiating a follow-up treaty to the Kyoto Protocol, they argue, requires that we seek even deeper cuts in the pollution that causes global warming.
But they are wrong about our priorities, and they are advocating an inefficient remedy.
As a result, we risk losing sight of tackling the world’s most important problems first, as well as missing the best long-term approach to global warming.
To be sure, global warming is real, and it is caused by CO2.
The trouble is that today’s best climate models show that immediate action will do little good.
The Kyoto Protocol will cut CO2 emissions from industrialized countries by 30% below what it would have been in 2010 and by 50% in 2050.
Yet, even if everyone (including the United States) lived up to the protocol’s rules, and stuck to it throughout the century, the change would be almost immeasurable, postponing warming for just six years in 2100.
Likewise, the economic models tell us that the cost would be substantial ­– at least $150 billion a year.
In comparison, the United Nations estimates that half that amount could permanently solve all of the world’s major problems: it could ensure clean drinking water, sanitation, basic health care, and education for every single person in the world, now.
Global warming will mainly harm developing countries, because they are poorer and therefore more vulnerable to the effects of climate change.
However, even the most pessimistic forecasts from the UN project that by 2100 the average person in developing countries will be richer than the average person in developed countries is now.
So early action on global warming is basically a costly way of doing very little for much richer people far in the future.
We need to ask ourselves if this should, in fact, be our first priority.
Of course, in the best of all worlds, we would not need to prioritize.
We could do all good things.
We would have enough resources to win the war against hunger, end conflicts, stop communicable diseases, provide clean drinking water, broaden educational access, and halt climate change.
But we don’t.
So we have to ask the hard question: if we can’t do it all, what should we do first?
Some of the world’s top economists – including four Nobel laureates – answered this question at the Copenhagen Consensus in 2004, listing all major policies for improving the world according to priority.
They found that dealing with HIV/AIDS, hunger, free trade, and malaria were the world’s top priorities.
This was where we could do the most good for our money.
On the other hand, the experts rated immediate responses to climate change at the bottom of the world’s priorities.
Indeed, the panel called these ventures – including the Kyoto Protocol – “bad projects,” simply because they cost more than the good that they do.
The Copenhagen Consensus gives us great hope because it shows us that there are so many good things that we can do.
For $27 billion, we could prevent 28 million people from getting HIV.
For $12 billion we could cut malaria cases by more than a billion a year.
Instead of helping richer people inefficiently far into the future, we can do immense good right now.
This does not mean losing sight of the need to tackle climate change.
But the Kyoto approach focuses on early cuts, which are expensive and do little good.
Instead, we should be concentrating on investments in making energy without CO2 emissions viable for our descendants.
This would be much cheaper and ultimately much more effective in dealing with global warming.
The US and Britain have begun to tout this message.
The parties in Montreal should rule out more Kyoto-style immediate cuts, which would be prohibitively expensive, do little good, and cause many nations to abandon the entire process.
Rather, they should suggest a treaty binding every nation to spend, say, 0.1% of GDP on research and development of non-carbon-emitting energy technologies.
This approach would be five times cheaper than Kyoto and many more times cheaper than a Kyoto II.
It would involve all nations, with richer nations naturally paying the larger share, and perhaps developing nations being phased in.
It would let each country focus on its own future vision of energy needs, whether that means concentrating on renewable sources, nuclear energy, fusion, carbon storage, or searching for new and more exotic opportunities.
Such a massive global research effort would also have potentially huge innovation spin-offs.
In the long run, such actions are likely to make a much greater impact on global warming than Kyoto-style responses.
In a world with limited resources, where we struggle to solve just some of the challenges that we face, caring more about some issues means caring less about others.
We have a moral obligation to do the most good that we possibly can with what we spend, so we must focus our resources where we can accomplish the most first.
By this standard, global warming doesn’t come close.
Rather than investing hundreds of billions of dollars in short-term, ineffective cuts in CO2 emissions, we should be investing tens of billions in research, leaving our children and grandchildren with cheaper and cleaner energy.
The Renminbi Goes Forth
BEIJING – In June, the Peoples’ Bank of China (PBC), China’s central bank, announced an end to the renminbi’s 23-month-old peg to the dollar and a return to the pre-crisis exchange-rate regime adopted in July 2005.
So far, however, the RMB’s appreciation against the dollar has been slow.
Will the pace of appreciation accelerate enough to satisfy American demands?
If it does, will global imbalances disappear sooner?
It is hard to argue that the RMB is not undervalued, given China’s large and persistent current-account and capital-account surpluses.
But, despite ending the dollar peg, faster appreciation of the RMB seems unlikely for the foreseeable future.
China’s official position is that, to avoid the negative impact of a stronger RMB on China’s exports and hence employment, appreciation must proceed in an autonomous, gradual, and controllable manner.
The current exchange-rate regime, which links the RMB to a basket of currencies, was designed to give the PBC leeway to control the pace of RMB appreciation, while creating two-way fluctuations in the exchange rate against the US dollar in order to discourage speculators from making one-way bets on the RMB.
RMB appreciation should have started earlier and at a faster pace, when China’s trade surplus was much smaller and its growth was much less dependent on exports.
Delay has made current-account rebalancing via RMB appreciation costly.
And now China faces a dilemma.
As a result of the global financial crisis, China’s export growth in 2009 dropped by 34% compared to 2008.
In the first seven months of 2010, China’s trade surplus was $84 billion, down 21.2% from January-July 2009.
This large, steady fall in the country’s trade surplus makes the Chinese government hesitant to allow the RMB to appreciate significantly, for fear of the lagged impact on the trade balance.
But the PBC is also reluctant to buy dollars constantly.
The PBC knows that rapid deterioration in America’s fiscal position and continual worsening in its external balance may create an irresistible temptation for the US to inflate away its debt burden.
The more the PBC intervenes, the larger the national welfare losses that China may suffer in the future.
The Chinese government must, therefore, strike a balance between protecting China’s export sector and preserving its national welfare.
The dilemma that officials face is that the impact of a fall in exports as a result of RMB appreciation will be felt acutely and immediately, whereas the large welfare losses due to the evaporation of the value of China’s foreign-exchange reserves will be borne by society as a whole – but not immediately.
Moreover, the increase in China’s overall price level – and wage levels in particular – has caused the RMB to strengthen steadily in real terms, reducing (to a certain extent) the need for nominal RMB appreciation.
True, commerce ministry officials recently declared their wish to see a further fall of China’s trade surplus in 2010.
But RMB appreciation is not the preferred instrument for achieving this goal.
Thus, nothing dramatic will happen to the RMB exchange rate in the near term – unless something dramatic happens.
At the same time, the effect of currency appreciation on the trade balance should not be exaggerated.
The RMB appreciated by 18.6% in real effective terms, and by 16% in dollar terms, from June 2005 to August 2008.
Yet, from 2006 to 2008, China’s annual exports grew 23.4%, outpacing import growth of 19.7%.
Exchange rates are just one of many factors that affect trade balances.
For China’s, the income effect of global demand is significantly larger than the price effect of the exchange rate.
The fall in China’s trade surplus since late 2008 is attributable mainly to the global slowdown and the stimulus package introduced by the Chinese government, rather than to changes in the RMB’s exchange rate.
But if the RMB is allowed to float, isn’t a balanced trade account likely?
Probably not.
With a fast-rising RMB, net capital outflows will increase, which is what Japan experienced after the Plaza Accord of 1985 pushed the yen upward.
As a result, balance-of-payments equilibrium would be reached at a certain exchange-rate level, but a current-account surplus (albeit smaller) would still exist.
America should not pin too much hope on a weakening dollar to correct its trade imbalances.
For the US, the fundamental cause of imbalances is not a strong dollar, but America’s over-consumption and over-borrowing.
A strengthening dollar would worsen the US trade balance, but a weakening dollar could cause panic in capital markets, which might push up risk premia on dollar-denominated assets, including US government securities, in turn leading to an economic slowdown and a further weakening of the dollar.
Of course, RMB appreciation may displace Chinese goods sold in the US.
But if the US fails to narrow its savings gap, its current-account deficit will not disappear, regardless of where the dollar goes.
Whether America can achieve decent growth while keeping its current-account deficit in check depends on whether it can reinvigorate its ability to innovate and create, thereby restoring competitiveness and creating demand at the same time.
For both China and America, the RMB-dollar exchange rate is important for achieving growth and a more balanced current account.
But that dual objective requires structural change in the Chinese and US economies.
The Resisted Rise of Segolene Royal
Two months ago, Paris’s political insiders were unanimous: the presidential race was still open, but Ségolène Royal was clearly the favorite.
Today, the reverse seems true.
While the race is not over, Nicolas Sarkozy has emerged as the consistent favorite in the polls, as well as of those who declared “him” nearly defeated in early December.
The new consensus can be described as follows: Ségolène Royal cannot defeat Nicolas Sarkozy, but Sarkozy can defeat himself.
Why has the Socialist candidate, the first woman who had a serious chance to be elected President of France, fallen from grace so quickly?
And why has Sarkozy proved to be so resilient, despite the often negative passions aroused by his personality?
If Ségolène Royal is defeated, it will not be because she is a woman, but in spite of it.
The French are ready for a woman, but perhaps not this one.
She is beautiful, energetic, resolute, and in many ways surprising.
Indeed, on issues such as law and order, respect for authority, and nationalism, one finds her positions far from what one would expect of a Socialist candidate.
But Royal has so far failed to rally her camp behind her.
Her campaign’s combination of authoritarianism and confusion, if not sheer incompetence, is sapping her supporters’ morale while confirming the deep reservations of her opponents.
Whatever their political preferences, many French voters have the feeling that an “amateur” is facing a “professional.”
Whereas Sarkozy has managed to impose himself on the right without the support of Jacques Chirac, the Socialist heavyweights cannot fully convince themselves to come out behind Royal.
Her defeat would be theirs, too, but their resentment over losing the nomination to her is so far proving stronger than their political survival instincts.
Royal’s emphasis on the concept of participatory democracy – “Tell me what you want, I will be your spokesperson” – has so far shown itself to have limited appeal.
Voters like to be consulted, and citizens love to express themselves, but at the end of the day, they want a leader, someone they can trust.
In other terms, they don’t want only a receptive ear, but a reassuring, authoritative, and competent figure.
Two months before the vote, the presidential campaign has demonstrated that the modernization, if not “Americanization,” of French politics (for example, heavy use of the Internet) has taken hold.
But the campaign is also proving the resilience of “classical politics.”
Royal may have presented herself as a “post-modern” politician, but it is a “classical” politician who seems to be winning.
At the same time, Sarkozy has been able to emerge as the natural leader of the right partly because Chirac has been less of a liability than many people, including the experts, predicted.
Indeed, the reverse seems to be true, which perhaps reflects the tendency of French voters to adopt a positive view of departing presidents.
Chirac himself has orchestrated his departure with a grace, presenting himself in the best possible light with personal confidences and public speeches.
It is as if France were now seized by a kind of nostalgic generosity toward a presidency that had been marked by suspicion and derision.
Chirac is not about to present himself as a candidate to divide the conservative camp, and the new leniency surrounding his record may actually benefit Sarkozy, his impatient and rebellious heir.
Yet opposition to Sarkozy remains high, and not only among minorities and young people, who have registered to vote in high numbers, supposedly to oppose him and his heavy use of the police in the banlieues . “Bonaparte” may be about to triumph easily over “Joan of Arc,” as some foreign commentators like to describe the two leading candidates, but Sarkozy’s supposedly “Bonapartist” qualities have fueled a potent sense of apprehension.
In fact, the persistence of strong reservations about both Royal and Sarkozy helps explain the surge in popularity for a third candidate, Francois Bayrou, a traditional centrist, pro-European politician.
Bayrou has never had it so good, but, barring the unlikely collapse of one of the two leading candidates’ campaigns, he will fail to qualify for the second-round runoff.
In our media-dominated age, personalities ultimately matter more than programs, which means that elimination prevails over selection.
That process seems to favor Sarkozy.
An anybody-but-Sarkozy reflex may exist in some circles of French society, but, in order to prevail, a credible alternative is required.
So far, Royal has failed to play that role.
The Resistible Rise of Hindu Fascism
In the 1930s, Hitler rose to power as the world focussed on Mussolini's African wars and Japan's invasion of China.
As the world concentrates on the war in Iraq, it should keep a watchful eye on India, suggests the novelist Arundhati Roy, because a form of Hindu fascism is growing ever stronger in the subcontinent.
One night a year ago, a friend called me.
Weeping, she told me of her friend, a woman caught by a mob, her stomach ripped open and stuffed with burning rags.
What Hindu scripture preaches this?
India's Prime Minister, A. B. Vajpayee, justified that deed as part of the retaliation meted out by outraged Hindus against the Muslim "terrorists" who had incinerated 58 Hindus on a train to Godhra.
What Koran verse required those travellers to be roasted alive?
The more India's Hindus and Muslims call attention to their differences by slaughtering each other, the less there is that distinguishes them.
They worship at the same altar, apostles of the same murderous god, whoever he is.
A year after the Godhra massacre and the subsequent anti-Muslim pogroms in Gujarat province, India is again sipping from its poisoned chalice - a flawed democracy laced with religious fascism.
In parliament, the government has unveiled a portrait of Vinayak Savarkar, a pre-independence Hindu nationalist, one of whose followers assassinated Mahatma Gandhi.
The drive to build a temple to the god Ram in Ayodhya, on the site of a 16 th century mosque demolished by Hindu mobs in 1992, is gaining new energy.
But once Muslims are "shown their place," will milk and Coca-Cola flow across the land?
Or will some fresh hate arise?
Will its target be Adivasis, Buddhists, Christians, Dalits, Parsis, Sikhs?
Those who speak English?
Those with thick lips?
What depraved vision imagines India without the spectacular anarchy of its many cultures?
The parallels between contemporary India and pre-Nazi Germany are chilling, but not surprising.
Many Hindu nationalists are frank about their admiration for Hitler.
Luckily, we don't yet have a Hitler.
Instead, we have, the hydra-headed Sangh Parivar - the "joint family" of Hindu political/cultural organizations.
Sangh Parivar's genius is its ability to be all things to all people.
While the Vishwa Hindu Parishad (VHP or World Hindu Congress) exhorts its cadres to prepare for the Final Solution, Prime Minister Vajpayee assures the nation that all citizens, regardless of religion, are treated equally.
Of course, every kind of pogrom - against castes, tribes, religions - has been seen here.
In 1984, following Indira Gandhi's assassination, the ruling Congress Party presided over the massacre of 3,000 Sikhs.
Indeed, on virtually every politically volatile issue--from nuclear testing to communal conflict - Congress sowed the seeds and Vajpayee's nationalist BJP party reaps the hideous harvest.
But whereas Congress whipped up communal hatred undercover and in shame, communal division is part of Sangh Parivar's mandate.
For years it has injected a slow-release poison into society.
Hundreds of thousands of children and young people are being weaned on religious hatred and falsified history.
Their curriculum is as dangerous as that found in the Pakistani and Afghani madrassas that spawned the Taliban.
Whenever hostility between India and Pakistan is cranked up, hostility toward Muslims grows.
Increasingly, Indian nationalism means Hindu nationalism, which is based not on self-respect, but on a hatred of the "Other" - not just Pakistanis, but all Muslims.
The incipient, creeping fascism that results has been groomed by our "democratic" institutions.
Everything flirts with it--parliament, the press, the police, and the administration.
If any institution (including the Supreme Court) exercises unfettered, unaccountable power, the erosion of civil liberties, and the spread of day-to-day injustices, fascism will not be far behind.
Fighting religious fascism means winning back minds and hearts.
It means demanding accountability from public institutions and listening to the powerless.
It means fighting dispossession and the everyday violence of poverty.
It means not allowing newspapers and TV to be hijacked by spurious passions and staged theatrics designed to divert attention from everything else.
It does not mean banning communally minded madrassas, but rather working toward the day when they are voluntarily abandoned.
Like termites, India's Hindu fascists have weakened the foundations of our constitution, parliament, and the courts - the backbone of every democracy.
But it's futile to blame politicians and demand from them a morality of which they are incapable.
If India's politicians let us down, it is because we allowed it.
Our fascists didn't create today's grievances.
Every strategy for real social change and greater social justice - land reform, education, public health, equitable distribution of natural resources - was cunningly scuttled by those castes and people with a stranglehold on politics.
Fascist Hindus seized upon these grievances, mobilizing people by using the lowest common denominator - religion.
People who lost control of their lives, people uprooted from home and community, stripped of culture and language, are made to feel proud of something .
Not of something they achieved, but of something they happen to be. Or, more accurately, something they happen not to be.
Unfortunately, no quick fix exists.
Fascism can be defeated only if those outraged by it commit themselves to social justice with an intensity that equals their indignation.
If we do not, we ordinary Indians will find ourselves--like the ordinary citizens of Hitler's Germany - unable to look our children in the eye because of our shame of what we allowed to happen.
The Resource Curse Revisited
There is a curious phenomenon that economists call the resource curse - so named because, on average, countries with large endowments of natural resources perform worse than countries that are less well endowed.
Yet some countries with abundant natural resources do perform better than others, and some have done well.
Why is the spell of the resource curse cast so unequally?
Thirty years ago, Indonesia and Nigeria - both dependent on oil - had comparable per capita incomes.
Today, Indonesia's per capita income is four times that of Nigeria.
Indeed, Nigeria's per capita income (as measured in constant dollars circa 1995) has fallen.
A similar pattern holds true in Sierra Leone and Botswana.
Both are rich in diamonds.
Yet Botswana averaged 8.7% annual economic growth over the past thirty years, while Sierra Leone plunged into civil strife.
The failures in the oil-rich Middle East are legion.
Economists put forward three reasons for the dismal performance of some richly endowed countries:
• First, the prospect of riches orients official efforts to seizing a larger share of the pie, rather than creating a larger pie.
The result of this wealth grab is often war.
At other times simple rent-seeking behavior by officials, aided and abetted by outsiders, is the outcome. It is cheaper to bribe a government to provide resources at below-market prices than to invest and develop an industry, so it is no surprise that some firms succumb to this temptation.
• Second, natural resource prices are volatile, and managing this volatility is hard.
Lenders provide money when times are good, but want their money back when, say, energy prices plummet.
(As the old adage has it, banks only like to lend to those who do not need money.)
Economic activity is thus even more volatile than commodity prices, and much of the gains made in a boom unravels in the bust that follows.
• Third, oil and other natural resources, while perhaps a source of wealth, do not create jobs by themselves, and unfortunately, they often crowd out other economic sectors.
For example, an inflow of oil money often leads to currency appreciation - a phenomenon called the Dutch Disease .
The Netherlands, after its discovery of North Sea gas and oil, found itself plagued with growing unemployment and workforce disability (many of those who could not get jobs found disability benefits to be more generous than unemployment benefits.)
When the exchange rate soars as a result of resource booms, countries cannot export manufactured or agriculture goods, and domestic producers cannot compete with an onslaught of imports.
So abundant natural wealth often creates rich countries with poor people.
Two thirds of the people in Venezuela, the Latin American country with the largest oil deposits, live in poverty.
No wonder that they are demanding that the small group of those who benefit from the country's wealth start to share it.
Fortunately, as we have become aware of these problems, we have learned much about what can be done about them.
Democratic, consensual, and transparent processes - such as those in Botswana - are more likely to ensure that the fruits of a country's wealth are equitably and well spent.
We also know that stabilization funds - which set aside some of the money earned when prices are high - can help reduce the economic volatility associated with natural resource prices.
Moreover, such fluctuations are amplified by borrowing in good years, so countries should resist foreign lenders who try to persuade them of the virtues of such capital flows.
The Dutch disease, however, is one of the more intractable consequences of oil and resource wealth, at least for poor countries.
In principle, it is easy to avoid currency appreciation: keep the foreign exchange earned from, say, oil exports out of the country.
Bring it in only gradually. But in most developing countries, such a policy is viewed as using oil money to help someone else's economy.
Some countries, notably Nigeria, are trying to implement these lessons.
Nigeria has proposed creating stabilization funds, and, in the future, it will sell its natural resources in transparent, competitive bidding processes.
Most importantly, the Nigerians are taking measures to ensure that the fruits of this endowment are invested, so that as the country's natural resources are depleted, its real wealth - fixed and human capital - is increased.
Western governments can help with common-sense reforms.
Secret bank accounts not only support terrorism, but also facilitate the corruption that undermines development.
Similarly, transparency would be encouraged if only payments that are fully documented were tax deductible.
Violent conflict is fed and its effects worsened by massive sales of arms by Western governments to developing countries.
This should be stopped.
Abundant natural resources can and should be a blessing, not a curse.
We know what must be done.
What is missing is the political will to make it so.
The Responsibility to Protect Libyans
ABU DHABI – Sovereignty is not a license to kill.
No state can abdicate the responsibility to protect its own people from crimes against humanity, let alone justify perpetrating such crimes itself.
When a state manifestly fails in that protection, it is the wider international community’s responsibility to provide it by taking “collective, timely, and decisive” action through the Security Council under Chapter VII of the United Nations Charter.
This is the “responsibility to protect” principle, as embraced unanimously by the World Summit of heads of state and government sitting as the UN General Assembly in 2005, and endorsed subsequently by the Security Council.
There is no clearer case for its application than in Libya today.
Colonel Muammar Qaddafi’s forces, on the ground and from the sky, have massacred hundreds – perhaps over a thousand – of Libyans protesting, at first peacefully, against the excesses of his regime.
A bigger bloodbath seems inescapable if he does not step down.
The need for “collective, timely, and decisive” action is overwhelming.
The Security Council, after moving with painful caution the first few days of the crisis, has now both invoked the responsibility to protect principle and – in an historic first – agreed on a substantial package of measures to implement it: an arms embargo, asset freeze, travel bans, and, importantly, reference of the situation to the International Criminal Court.
Such measures, like the steps being taken in the UN Human Rights Council and elsewhere, are necessary to demonstrate that Qaddafi has no remaining international support.
They are coercive, but they fall short of the threat or use of military force.
Will they be enough to stop the killing?
Is it time to apply and enforce a no-fly zone?
Or to go further still and send in ground forces with a mandate to do what it takes?
This is a difficult call.
Not even the most passionate advocate of the responsibility to protect can pretend otherwise.
Declaring a no-fly zone is not a “soft” option: it must mean being prepared to shoot down any fighters, bombers, or helicopter gunships that breach it.
That poses a huge risk of hostage-taking or other reprisals against any intervening country’s nationals still in Libya.
An invasion force, assuming that one could be mustered on short notice, would raise the stakes higher still.
It is important to keep in perspective what the responsibility to protect is about, and what the principle was designed to achieve.
The background to its introduction was a decade of gut-wrenching international division in the 1990’s about how to react to mass atrocity crimes, with the global North by and large supporting “humanitarian intervention,” the South rallying to the old cry of non-interference in states’ domestic affairs, and consensus nowhere in sight.
The result was either UN-authorized action that was erratic, incomplete, or counterproductive – as in the Somalia debacle of 1993, the Rwandan genocide in 1994, and the massacre in Srebrenica in 1995 – or action that was eventually effective, but not UN-authorized – and thus unlawful – as in Kosovo in 1999.
The “responsibility to protect” sought to recast the issue in terms of responsibility rather than rights, and protection rather than intervention, while identifying a wide spectrum of appropriate preventive and reactive responses, with coercive military intervention only a last resort.
The hope was that states’ failure to protect their inhabitants would no longer be seen as nobody else’s business, as had been the case for centuries, but as the entire world’s concern.
That part of the job is now fairly well accomplished.
The global response to the horrors in Kenya in 2008 was a spectacular contrast to the indifference that greeted the butchery in Rwanda.
And the international condemnation of Qaddafi’s atrocities today has been swift, unqualified, and effectively unanimous.
Nobody is claiming that sovereignty confers immunity; the shift in the normative consensus is more or less complete.
But the second great hope of responsibility-to-protect advocates was that this consensus in principle would make agreement on what to do in practice – how to translate normative consensus into action – easier to achieve.
That has proved harder, as experiences in Darfur, the Democratic Republic of Congo, and Sri Lanka have demonstrated.
Given the complexity and sensitivity of the issues – never more so than when military action is an option – it is not surprising that the responsibility to protect remains a work in progress.
The lesson is not that the principle is irrelevant, but that we have to do better in applying it in the future – and that future, with Libya, is now.
Sanctions, embargoes, and diplomatic isolation are the absolute minimum in terms of what is required.
If these measures do not bite immediately, and the carnage continues, there will be no alternative but to do more.
Military options should always be a last resort, but they can’t be excluded in extreme cases, and Libya is as extreme as it gets.
A no-fly zone will be easier to contemplate as the last vulnerable expatriates leave the country, and planning for its application should be rapidly advanced.
For all that it has done so far, the ball remains in the Security Council’s court.
Not only is the credibility of the responsibility-to-protect principle at stake, but also its own.
The Cooperation Crisis
PARIS – The rise of emerging economies worldwide has generated much optimism, in terms not only of economic development, but also of global cooperation.
But the shift to a multipolar world order has not bolstered multilateralism.
In fact, the opposite is true: the logic of national sovereignty has staged a comeback, with major economies consistently undermining cooperation on issues ranging from security to trade to climate change.
Consider the muddle in the United Nations Security Council over Syria’s civil war.
Just two years ago, the Council approved a resolution authorizing a military intervention in Libya – the first resolution to implement the “responsibility to protect” (R2P) principle, which the general assembly adopted unanimously in 2005.
But the emerging powers soon came to believe that the West had used the protection of Libya’s civilian population as a pretext for regime change (though, realistically, it would have been impossible to protect the population without toppling Muammar el-Qaddafi’s government).
Now, these countries are largely rejecting R2P, viewing it as a device employed by Western governments to legitimize their attempts to infringe upon national sovereignty.
Brazil has attempted to address the issue by crafting a resolution that would decouple the R2P mandate from the use of force – effectively eliminating the possibility that the doctrine could be applied.
For their part, Russia and China have blocked three resolutions condemning the Syrian regime, and Russia has worked hard – with evident success – to derail any military intervention in Syria.
In this sense, Russia and China now exercise de facto control over the formal international legality of the use of force.
To be sure, many countries ­now believe that the West is going too far in challenging state sovereignty, with even European countries like Germany recoiling at the prospect of military confrontation.
At the G-20 summit in early September, for example, US President Barack Obama struggled to convince ten states to sign a declaration on Syria that did not even mention the use of force.
Only the US, the United Kingdom, and France remain willing to use force if it is deemed necessary.
But viewing intervention in Syria within the paradigm of Western messianism is a mistake.
After all, in Syria, as in Libya, the forces challenging the government are not a creature of Western manipulation.
They are indigenous – and they are asking the West for help.
The legal basis for military intervention may be weak, but Syria is no Iraq, either.
Security is not the only area where sovereignty concerns have superseded multilateralism.
In 2008, the US abandoned its commitment to the World Trade Organization’s Doha Round of global trade negotiations.
While the decision followed a technical disagreement with India, it was driven largely by the belief that any agreement would benefit China more than the US.
Given that the Doha Round has failed to address the main problems that the US and Europe have encountered in trade relations with China – non-compliance with intellectual-property rules, subsidies for state-owned enterprises, closed government-procurement markets, and limits on access to the services market – both are now emphasizing bilateral trade agreements.
But, while the world may be happy to pretend that bilateral cooperation will revitalize multilateralism, nobody should be fooled.
The WTO will survive, but its centrality in the trade system is rapidly diminishing.
Even cooperation on climate change is crumbling, with the US and China rejecting the multilateral, top-down approach to policymaking.
This implies the end of the Kyoto Protocol model, which, like the Doha model, is based on a detailed agenda, established according to specific and ambitious targets, with all relevant actors then compelled to negotiate each topic.
Rather than being subject to an internationally agreed standard, the US and China want the fight against climate change to begin with countries’ individual commitments.
But this new, bottom-up framework, in which states determine the conditions for a multilateral agreement, lacks an authority to establish standards.
Multilateralism requires minimal consensus on global rules and norms among all major powers.
The greater the number of countries that have the power to block or veto international initiatives, the more difficult multilateralism becomes – and the less motivated dominant countries are to cooperate.
In the emerging multipolar world, characterized by sovereignty concerns and strategic competition, progress toward resolving global issues will be more difficult than ever – with potentially devastating consequences.
The Retreat of Global Democracy
A nasty, unintended side-effect of globalization is its corrosive effect on democracy.
Even if individual countries are becoming more democratic, it seems, the sum of global democracy is shrinking thanks in no small part to globalization.
Democracy means many things, but at its core it requires that people choose their rulers and that votes be weighted equally.
But globalization means that nations and peoples can exert an asymmetric influence.
America can cut off trade with Cuba not only by curtailing its own trade but by threatening punitive action against others who trade or invest in Cuba.
Cuba, however, can do little to hurt America's economy.
Likewise, China can injure Taiwan in ways that Taiwan cannot reciprocate.
Of course, the powerful have always encroached on the sovereignty of others.
Take the story, perhaps apocryphal, of an Indian diplomat showing a map of South Asia to Stalin.
"India is a very big country," Stalin observed, and then pointing to Sri Lanka said, "What is the name of this little Indian island?"
"That is not an Indian island, sir," the diplomat replied, "it is a sovereign nation."
"Why? "Stalin asked.
Thanks to globalization, however, dominant nations have a variety of new tools with which to influence other countries short of war.
Foremost is money.
Instantaneous electronic links and an improving system of global guarantees allow capital to flow across national boundaries as never before.
Rapid withdrawal of such capital can have devastating effects, as we saw in 1997 when Asia's super-performing economies succumbed to financial crisis.
In 1998, during the Asian crisis, the rescue package offered by several industrialized nations - prominently Japan and the US - required Korea to lift bans on imports of certain Japanese products and to open up its banking sector to foreign banks (which is what America wanted).
People in vulnerable nations have very little say in the imposition of these policies.
Trade sanctions for political/security ends also serve the same function.
Another consequence of the freer flow of capital is a greater intertwining of different markets.
A fall in the Thai housing market can cause the Thai baht to collapse in ways that could not have happened before; a fall in the Indian rupee can cause a meltdown of the Indian stock market in ways inconceivable ten years ago.
The large presence of overseas investors is the cause here.
Suppose a New Yorker buys shares in the Mumbai stock market.
For that, dollars are converted into rupees, which are used to buy shares.
The aim is not to hold rupees but to make money and eventually re-convert to dollars.
Suppose, then, that the rupee's exchange rate begins to fall.
The foreign investor will naturally want to sell off Indian stocks.
While a fall in the exchange rate with no decline in stock prices gives Indian investors no reason to flee the stock market, if sufficient numbers of foreign investors begin to sell, stock prices will decline so that Indian investors, too, sell their stocks.
What can be done about the erosion of global democracy and accountability?
Utopian schemes such as a global government or a global bank answerable to all nations are a distant dream.
What is needed is a system in which the poor have a voice alongside the rich in the organizations (the IMF, WTO, World Bank, and UN) that mediate in world economics and international relations.
Today, equity is violated in most international organizations through at least two routes.
First, there is the open channel, which gives a larger share of votes to the nations contributing more to organizations such as the IMF and the World Bank.
The second route is the lack of transparency in decision-making.
In domestic democratic politics, if the decision-making process is visible to all, it becomes difficult for any group to hijack the agenda.
Big business and the military are able to push through their interests much more in Pakistan than in India because India's government is more open to scrutiny.
The same goes for international organizations.
Powerful nations, by virtue of contributing senior personnel and money, gain greater access.
Decisions taken behind opaque walls are more likely to be diverted to their interests. Take the WTO.
While it does subscribe to the principle of one-country one-vote, it is widely perceived as a preserve of rich nations.
This is because of what can be called the "green room" effect, that is, what goes on behind the scenes.
If the WTO is to be a democratic institution, it must not allow its green room to be hijacked by a few.
This problem is most obvious when drafting international labor standards.
Although supposedly designed in the interests of the workers in developing countries, the biggest opposition to them comes from poor countries, and rightly so.
The form that these standards take - and the increasing talk of using trade sanctions to impose them - is close to what protectionist lobbies in industrial nations seek.
This is not surprising given the greater access of rich countries.
The fact that questioning the practices of rich nations (who contribute more funds) exercising more voting power in these organizations sounds outrageous, shows how far away we remain from global democracy.
After all, it does not seem outrageous that Bill Gates does not have multiple votes in the US elections on the ground that he contributes more to government coffers. Indeed, the suggestion that Gates should have more votes sounds outrageous.
This is because democracy within a nation is a settled idea.
Now it is time to provide more equal voting power to nations irrespective of their wealth, because one of the basic tenets of democracy is that the advantages of wealth should not be compounded by giving the rich extra voting power.
When the idea of "one-person one-vote" arose, feudal landlords predicted chaos in the decision-making process.
How wrong they were.
For the sake of global stability, economic efficiency and also the fight against terrorism we must instill greater democracy within our international organizations.
This may not be in the immediate individual interest of every state, especially big and powerful ones, but is, in the long run, in the enlightened interest of all of humanity collectively.
The Retreat of Macroeconomic Policy
BERKELEY – One disturbing thing about studying economic history is how things that happen in the present change the past – or at least our understanding of the past.
For decades, I have confidently taught my students about the rise of governments that take on responsibility for the state of the economy.
But the political reaction to the Great Recession has changed the way we should think about this issue.
Governments before World War I – and even more so before WWII – did not embrace the mission of minimizing unemployment during economic downturns.
There were three reasons, all of which vanished by the end of WWII.
First, there was a hard-money lobby: a substantial number of rich, socially influential, and politically powerful people whose investments were overwhelmingly in bonds.
They had little personally at stake in high capacity utilization and low unemployment, but a great deal at stake in stable prices.
They wanted hard money above everything.
Second, the working classes that were hardest-hit by high unemployment generally did not have the vote.
Where they did, they and their representatives had no good way to think about how they could benefit from stimulative government policies to moderate economic downturns, and no way to reach the levers of power in any event.
Third, knowledge about the economy was in its adolescence.
Knowledge of how different government policies could affect the overall level of spending was closely held.
With the exception of the United States’ free-silver movement, it was not the subject of general political and public intellectual discussion.
All three of these factors vanished between the world wars.
At least, that is what I said when I lectured on economic history back in 2007.
Today, we have next to no hard-money lobby, almost all investors have substantially diversified portfolios, and nearly everybody suffers mightily when unemployment is high and capacity utilization and spending are low.
Economists today know a great deal more – albeit not as much as we would like – about how monetary, banking, and fiscal policies affect the flow of nominal spending, and their findings are the topic of a great deal of open and deep political and public intellectual discussion.
And the working classes all have the vote.
Thus, I would confidently lecture only three short years ago that the days when governments could stand back and let the business cycle wreak havoc were over in the rich world.
No such government today, I said, could or would tolerate any prolonged period in which the unemployment rate was kissing 10% and inflation was quiescent without doing something major about it.
I was wrong. That is precisely what is happening.
How did we get here?
How can the US have a large political movement – the Tea Party – pushing for the hardest of hard-money policies when there is no hard-money lobby with its wealth on the line?
How is it that the unemployed, and those who fear they might be the next wave of unemployed, do not register to vote?
Why are politicians not terrified of their displeasure?
Economic questions abound, too.
Why are the principles of nominal income determination, which I thought largely settled since 1829, now being questioned?
Why is the idea, common to John Maynard Keynes, Milton Friedman, Knut Wicksell, Irving Fisher, and Walter Bagehot alike, that governments must intervene strategically in financial markets to stabilize economy-wide spending now a contested one?
It is now clear that the right-wing opponents to the Obama administration’s policies are not objecting to the use of fiscal measures to stabilize nominal spending.
They are, instead, objecting to the very idea that government should try to serve a stabilizing macroeconomic role.
Today, the flow of economy-wide spending is low.
Thus, US Federal Reserve Chairman Ben Bernanke is moving to have the Fed boost that flow by changing the mix of privately held assets as it buys government bonds that pay interest in exchange for cash that does not.
That is entirely standard.
The only slight difference is that the Fed is buying seven-year Treasury notes rather than three-month Treasury bills.
It has no choice: the seven-year notes are the shortest-duration Treasury bonds that now pay interest.
The Fed cannot reduce short-term interest rates below zero, so it is attempting via this policy of “quantitative easing” to reduce longer-term interest rates.
Yet America’s right wing objects to this, for reasons that largely remain mysterious: what, at the level of economic theory, is the objection to quantitative easing?
Blather about Federal Reserve currency manipulation and excessive risk-taking is not worthy of an answer.
Still, here we are.
The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression.
But the monetarist-Keynesian post-WWII near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.
The Return of 1948
TEL AVIV – The forthcoming United Nation’s conference commemorating the 60th anniversary of UNRWA (The UN Relief and Works Agency for Palestine Refugees) could not come at a better moment.
The restitution of lands occupied in 1967 will obviously continue to be indispensable to resolving the Israeli-Palestinian conflict, but it is the legacy of the 1948 war that both parties to the conflict have now put at the center of the debate.
Oddly, it was Israeli Prime Minister Binyamin Netanyahu who, by requesting that the Palestinians recognize Israel as a Jewish state, reopened the 1948 file.
That demand brought the quest for peace back to its fundamentals, where the question of the refugees is bound to play a central role.
Netanyahu’s intention was essentially to force the Palestinians into admitting that the right of return of refugees applies only to the Palestinian state, not Israel.
But the true significance of his demand lies in that it’s being pronounced at a time when Prime Minister Salam Fayaad’s policies are posing a genuine challenge to the Palestinian national movement to choose between an ethos of vindication and one of state building.
Under Fayaad, the Palestinian Authority seems to be superseding the Palestinian national movement’s diaspora-based emphasis in favor of state-building within the territorial confines of the occupied territories.
It is as if the voice of the diaspora were being silenced in Palestine.
Conspicuously, the recently elected PLO Executive Committee – which in the past consisted exclusively of representatives of the Palestinian Diaspora – now has only one member from the diaspora, a delegate from Lebanon.
This could mark a sea change in the evolution of Palestinian nationalism.
In Zionism, the Jewish community in Palestine was the focus of decision making, with the Jewish Diaspora a strategic back-up.
But the situation was reversed in the case of the Palestinians: the ethos of the diaspora, with the plight of the refugees at its center, has been the beating heart of the Palestinian cause and the focus of decision making for the national movement.
As a result, the Palestinian community in the occupied territories was always subservient to the primacy of the Palestinian Diaspora.
When it sought to assume a leading role – during the first Intifada in 1987, for example, its effort was suppressed by the diaspora-based PLO.
Fayaadism, by contrast, seeks the “Zionization” of the Palestinian national movement.
It imbues the Palestinian cause with a positive ethos of nation- and state-building by superseding Palestinian nationalism’s diaspora-centered preoccupations – and thereby transcending the paralyzing obsession with a never-fulfilled vindication of rights and justice.
In the peace process as it has been conducted up to now, the Israelis always wanted to concentrate on the issues of 1967 – that is, land and security.
The Palestinians, however, always wanted to return to the issues of 1948: refugees, dispersion, and what Akram Hanya, a close Arafat confidant, defined as the need “to make the Israelis face the tribunal of history.”
It looks as if now the roles have been inversed.
Precisely when Israel managed to domesticate the Palestinian national movement by forcing it to abandon its revolutionary path in favor of state-building and economic development – a reorientation undertaken by Zionism as well – the Israelis decided to draw the Palestinians back to the fundamentals of the conflict.
Indeed, despite of the rise of Fayaadism, the Palestinian national movement will be careful not to betray its real sources of legitimacy: the ethos of dispossession and the refugee.
The decisions taken at the last Fatah Convention were explicit in calling for the refugees to “return to their homes and cities.”
The Palestinians are attempting to hold the stick at both ends, claiming before the world their endorsement of the two-state solution while calling for the right of return at the same time.
Any sober Palestinian leadership must know by now that the rhetorical promise of a return to an abandoned house and to the olive tree is an irresponsible mirage that fundamentally contradicts the rationale for a separate Palestinian state.
Peace is frequently not about justice but about stability.
The Palestinians must align their national conversation with what is realizable, while Israel must resolve its own contradictions and address the refugee problem in a way that secures the legitimacy and durability of a future peace agreement with the Palestinians.
Because Israel will have to implement practical measures of resettlement and compensation that will not be based on an automatic right of physical return, a symbol of genuine moral compensation is also called for.
Instead of suppressing the memory of the refugees, Israel needs to recognize that in 1948 the land was bisected by the sword, and that the Jewish state came into being partly because of the massive uprooting and dispossession of Palestinian communities.
Israel should develop enough self-confidence in its solidity as a nation to integrate into its schools’ curriculum the tragedy of the Palestinian Naqbah.
The resolution of conflicts of this nature requires the recovery of historical memory and a proper hearing of the two parties’ historical narratives, perhaps through the creation of Truth and Reconciliation Committees.
Israel’s consolation would be that the Palestinians, too, will have to come to terms with their share of responsibility for the calamities that have befallen them.
Only an acceptable deal on the refugees can definitely close the 1948 file – and only then can the conflict in Palestine end.
The Return of American Realism
NEW YORK – There are many recurring debates in American foreign policy – for example, isolationism versus internationalism, and unilateralism versus multilateralism.
But no debate is more persistent than that between those who believe that American foreign policy’s principal purpose should be to influence the external behavior of other states and those who hold that it should be to shape their internal nature.
This debate between “realists” and “idealists” is intense and long-standing.
During the Cold War, there were those who argued that the United States should try to “roll back” the Soviet Union, bring down the communist system, and replace it with democratic capitalism.
Others deemed this to be too dangerous in an era defined by nuclear weapons, and the US opted instead for a policy of containment, working to limit the reach of Soviet power and influence.
As it turned out, after 40 years of containment, the Soviet Union and its empire unraveled, though this outcome was a byproduct of US policy, not its principal purpose.
George W. Bush was the most recent “idealist” proponent of making democracy promotion the main priority for US foreign policy.
Bush embraced the so-called “democratic peace” theory, which holds that democracies not only treat their own citizens better, but also act better toward their neighbors and others.
It was, of course, his father, George H.W. Bush, who was a strong representative of the alternative, “realist” approach to American foreign policy.
Much of this debate can be viewed through the lens of American involvement with Iraq.
George W. Bush went to war with Iraq in 2003 to change the government.
He expected regime change in Baghdad to lead to a democratic Iraq, a development that would in turn transform the region when people elsewhere in the Arab world saw this example and forced their own governments to follow suit.
By contrast, in the earlier Iraq war, the first President Bush, after amassing an unprecedented international coalition that succeeded in liberating Kuwait, did not press ahead to Baghdad to oust Saddam Hussein and his government, despite the urging of many that he do just that.
Nor did he intervene on behalf of the Shia and Kurdish uprisings that erupted just after the war ended early in 1991.
To him, intervention would have placed US soldiers in the midst of a complex domestic struggle, one that would have cost enormous resources to sort out if it could be sorted out at all.
President Barack Obama appears to agree with this realist approach.
The new US policy toward Afghanistan makes no mention of trying to transform that country into a democracy.
On the contrary, as Secretary of Defense Robert Gates stated before Congress in January, “If we set ourselves the objective of creating some sort of Central Asian Valhalla over there, we will lose.”
For his part, Obama said in March that “We have a clear and focused goal: to disrupt, dismantle, and defeat al-Qaeda in Pakistan and Afghanistan, and to prevent their return to either country in the future.”
This shift is also evident in US policy toward China.
Speaking during her trip to Asia in February, Secretary of State Hillary Clinton made clear that human rights issues would be a secondary concern in US-China relations.
Similarly, the joint statement issued by Obama and Russian President Dmitry Medvedev after their April 1 meeting in London, while mentioning that US-Russia relations would be “guided by the rule of law, respect for fundamental freedoms and human rights, and tolerance for different views,” placed far greater emphasis on reducing nuclear arms, addressing Iran’s nuclear program, and stabilizing Afghanistan.
US support for Russia’s admission to the World Trade Organization was unconditional.
This change in US foreign policy is both desirable and necessary.
Mature democracies do tend to act more responsibly, but immature democracies can easily succumb to populism and nationalism.
It is difficult and time-consuming to build mature democracies.
While encouraging the rule of law and the growth of civil society, the US still needs to work with other governments, democratic and otherwise.
Pressing problems, such as the economic crisis, nuclear proliferation, and climate change, will not wait.
The good news is that history shows that it is possible to make peace with and work with non-democracies.
Israel, for example, has had peaceful relations with non-democratic Egypt and Jordan for more than three decades.
The US and the Soviet Union cooperated in limited ways (for example, in controlling nuclear arms) despite fundamental differences.
Today, the US and authoritarian China have mutually beneficial trade and financial ties, and have shown on occasion that they can work together on strategic issues, for example in shaping North Korea’s behavior.
This is not to say that promoting democracy will have no role in American foreign policy.
It will, and it should.
But democracy promotion is too uncertain a proposition, and the world too dangerous a place, for it to occupy center stage in what the United States does.
Barack Obama’s foreign policy will thus resemble that of George Bush – the father, that is, not the son.
The Return of Franco-German Leadership
PARIS – Whoever wins September’s parliamentary election in Germany, the time has come once again for a major Franco-German initiative.
Regardless of their economic conditions or their confidence – or lack of it – in each other, France and Germany are more than ever jointly responsible for the future, if not the very survival, of the European project.
Are there alternatives to Franco-German leadership of the European Union?
Joining Great Britain with them in a Club of Three would be a good idea, but it is out of the question nowadays.
Britain has largely excluded itself from any leadership role in Europe.
Gordon Brown is barely surviving as prime minister, and the Conservatives, whose return to power in the next year is almost certain, are as provincially euro-skeptic as ever, if not more so.
Europe simply cannot count on the British, at least for a while.
The idea of a Club of Six, floated by Nicolas Sarkozy early in his presidency, was always abstract and is now untenable.
Given Silvio Berlusconi’s sexcapades, the Italy that he leads cannot be taken seriously, while Spain is out of the running for an EU leadership role, owing to its dire economic conditions.
As for Poland, although the bumbling Kaczynski “twins” have been removed from power, the country’s fixation on security in its immediate neighborhood is incompatible with true European leadership.
Since the other 21 EU members never liked the idea of a Club of Six to begin with, it is just as well that such a vision has been buried, probably forever.
So where but France and Germany can Europe turn for leadership?
A positive referendum result on the Lisbon Treaty in Ireland in October would be a necessary but insufficient condition to jump-start an institutional re-launch of the EU.
Above all, the EU needs political will and direction. Only Germany and France, acting together, can convey to Europe’s citizens and to the world the sense that the EU is at long last waking up to today’s global realities.
Of course, it is impossible to underestimate the combination of suspicion, tension, and exasperation that characterizes Franco-German relations lately.
To a large extent, Germany has become a “second France” in Europe, at a time when France is more French than ever.
And they are not only putting their respective nationalisms first.
They disagree on fundamentals – most of all, about how to surmount the economic crisis.
But the two giants of Europe can agree to disagree about the virtues of German-style budgetary rigor or French-style fiscal stimulus as long as they don’t insult each other, and, more importantly, as long as they compensate for their philosophical differences with a well publicized program of joint initiatives on key subjects.
As long as each remains convinced that no alternative to cooperation exists within the EU, and that European cooperation remains a priority for both, it should not be overly difficult to restore their leadership.
After all, France and Germany are closer to each other on many key topics than they have been for a long time.
With the return of France to NATO’s integrated military structure, the two countries are on the same “Atlantic” wavelength for the first time since 1966.
Despite both sides’ deep reservations about the mission in Afghanistan, they are clearly in the same boat, even if French troops, being closer to British troops in terms of combat, are more vulnerable than the Germans.
And both countries would probably subscribe to the following formulation: “Turkey’s future is with Europe, but not necessarily in the European Union, at least in the foreseeable future.”
The fundamental question about how to deal with Russia remains a divisive issue, however.
France and Germany have different sensitivities on the subject, which is both natural and inevitable, as these differences reflect both geography and history.
Germany is not only much closer physically to Russia; it is also much more dependent on Russia in terms of energy security.
France must not delude itself: Germany is not about to convert to nuclear energy to reduce its reliance on Russian oil and gas.
Yet Germany also must realize that Russia’s negative evolution has consequences that Germans cannot escape.
A spectacular Franco-German security initiative following the election in Germany, accompanied by a joint message to the Kremlin, would also have the benefit of sending a message to the rest of the EU, particularly to its Václav Klauses: “If you decide to paralyze the Union through stubborn ill will, you will only end up excluding yourselves, rather than dictating Europe’s fate.”
France and Germany cannot move Europe alone, but Europe without them cannot move at all.
Bretton Woods III
SINGAPORE – Many analysts and observers believe that the global imbalances that characterized the world economy in the years before the 2008 crisis have substantially dissipated.
But, while it is true that China’s current-account surpluses and America’s deficits have somewhat moderated since then, have the imbalances really been corrected?
More important, can the post-crisis global economy enjoy both growth and balance?
To answer these questions, it is important to understand the imbalances’ underlying dynamics.
An economy’s current account is the difference between its investment rate and its savings rate.
In 2007, the United States had a savings rate of 14.6% of GDP, but an investment rate of 19.6%, generating a current-account deficit.
By contrast, China had a fixed investment rate of 41.7% of GDP and a savings rate of 51.9%, reflected in a large surplus.
Since 2007, the US current-account deficit has narrowed, but not because of a higher savings rate.
Rather, the external deficit has been squeezed by a collapse in investment activity, while America’s overall savings rate has fallen below 13% of GDP, owing to worsening government finances.
Meanwhile, China’s savings rate remains stubbornly high.
The surplus has narrowed because investment has been ramped up even higher, to roughly 49% of GDP.
In other words, the Americans save even less today than they did before the crisis erupted, and the Chinese invest even more.
Any future recovery in the US economy will almost certainly trigger a revival in investment activity.
American businesses have postponed much-needed capital spending and, with American airports and bridges in appalling condition by developed-country standards, investment in infrastructure is crucial as well.
Indeed, it is very likely that reviving growth will lead to larger current-account deficits, even if the savings rate improves and domestic energy production curtails oil and gas imports.
China has the opposite problem.
In order to sustain growth, it needs to continue to invest half of its $9 trillion annual GDP – no easy task for a country that already has brand new highways and airports.
In fact, over the next decade, as China attempts to move up the value chain into services and adjusts to a shrinking workforce, its investment requirements will shrink – and its investment rate will fall sharply.
Of course, China’s savings rate will also decline, but Japan’s experience since the 1980’s demonstrates how a sharp fall in investment can generate large and persistent current-account surpluses, even when the savings rate is falling and the currency is appreciating.
Indeed, a stronger currency can paradoxically feed external surpluses, while discouraging investment in export-oriented industries.
The implication is that the post-crisis global economy will not be characterized by balance, but by a return to large macroeconomic imbalances.
But, although many economists will consider this problematic, history shows that symbiotic imbalances have characterized virtually all periods of global economic expansion.
The Roman Empire ran a persistent trade deficit with India for centuries.
Although the resulting outflow of gold caused monetary debasement in the Roman Empire, Indo-Roman trade remained the backbone of the global economy.
Similarly, Spain ran persistent deficits in the sixteenth and seventeenth centuries, paid for by Andean silver.
The resulting flood of liquidity caused a global boom that benefited economies from Elizabethan England to Mughal India.
And 1870-1913, another period of rapid growth and globalization, was not characterized by balance; it was funded by the United Kingdom, acting as the world’s “bank.”
In the last 60 years, the US has underpinned global growth by running persistent current-account deficits.
Under the Bretton Woods system, the US ran deficits that enabled war-torn Europe and Japan to rebuild.
In return, Europe funded the US deficits.
The system broke down when European countries, particularly France, decided to stop funding those deficits.
But the economic model persisted, with Asian economies stepping in to finance the US deficits, while using the US market to grow rapidly.
China is the latest and largest beneficiary of the economic model dubbed “Bretton Woods II.”
Clearly, periods of global growth are almost always characterized by symbiotic imbalances.
But, while each of these episodes was characterized by macroeconomic distortions caused by the imbalances, they lasted for years, or even decades.
So, the real question is what the next generation of symbiotic imbalances will look like.
It is likely that China will soon return to running very large current-account surpluses – potentially large enough to fund the US, with plenty left over for the rest of the world.
As this capital cascades through the global financial system, it will re-inflate the economy.
In the “Bretton Woods III” system, China will transform from “factory to the world” to “investor to the world.”
Like all imbalanced systems, it will have its distortions, but the arrangement could last for many years.
The Return of Industrial Policy
CAMBRIDGE – British Prime Minister Gordon Brown promotes it as a vehicle for creating high-skill jobs.
French President Nicolas Sarkozy talks about using it to keep industrial jobs in France.
The World Bank’s chief economist, Justin Lin, openly supports it to speed up structural change in developing nations.
McKinsey is advising governments on how to do it right.
Industrial policy is back.
In fact, industrial policy never went out of fashion.
Economists enamored of the neo-liberal Washington Consensus may have written it off, but successful economies have always relied on government policies that promote growth by accelerating structural transformation.
China is a case in point.
Its phenomenal manufacturing prowess rests in large part on public assistance to new industries.
State-owned enterprises have acted as incubators for technical skills and managerial talent.
Local-content requirements have spawned productive supplier industries in automotive and electronics products.
Generous export incentives have helped firms break into competitive global markets.
Chile, which is often portrayed as a free-market paradise, is another example.
The government has played a crucial role in developing every significant new export that the country produces.
Chilean grapes broke into world markets thanks to publicly financed R&amp;D. Forest products were heavily subsidized by none other than General Augusto Pinochet.
And the highly successful salmon industry is the creation of Fundación Chile, a quasi-public venture fund.
But when it comes to industrial policy, it is the United States that takes the cake.
This is ironic, because the term “industrial policy” is anathema in American political discourse. It is used almost exclusively to browbeat political opponents with accusations of Stalinist economic designs.
Yet the US owes much of its innovative prowess to government support.
As Harvard Business School professor Josh Lerner explains in his book Boulevard of Broken Dreams, US Department of Defense contracts played a crucial role in accelerating the early growth of Silicon Valley.
The Internet, possibly the most significant innovation of our time, grew out of a Defense Department project initiated in 1969.
Nor is America’s embrace of industrial policy a matter of historical interest only.
Today the US federal government is the world’s biggest venture capitalist by far.
According to The Wall Street Journal, the US Department of Energy (DOE) alone is planning to spend more than $40 billion in loans and grants to encourage private firms to develop green technologies, such as electric cars, new batteries, wind turbines, and solar panels.
During the first three quarters on 2009, private venture capital firms invested less than $3 billion combined in this sector.
The DOE invested $13 billion.
The shift toward embracing industrial policy is therefore a welcome acknowledgement of what sensible analysts of economic growth have always known: developing new industries often requires a nudge from government.
The nudge can take the form of subsidies, loans, infrastructure, and other kinds of support.
But scratch the surface of any new successful industry anywhere, and more likely than not you will find government assistance lurking beneath.
The real question about industrial policy is not whether it should be practiced, but how.
Here are three important principles to keep in mind.
First, industrial policy is a state of mind rather than a list of specific policies.
Its successful practitioners understand that it is more important to create a climate of collaboration between government and the private sector than to provide financial incentives.
Through deliberation councils, supplier development forums, investment advisory councils, sectoral round-tables, or private-public venture funds, collaboration aims to elicit information about investment opportunities and bottlenecks.
This requires a government that is “embedded” in the private sector, but not in bed with it.
Second, industrial policy needs to rely on both carrots and sticks.
Given its risks and the gap between its social and private benefits, innovation requires rents – returns above what competitive markets provide.
That is why all countries have a patent system.
But open-ended incentives have their own costs: they can raise consumer prices and bottle up resources in unproductive activities.
That is why patents expire.
The same principle needs to apply to all government efforts to spawn new industries.
Government incentives need to be temporary and based on performance.
Third, industrial policy’s practitioners need to bear in mind that it aims to serve society at large, not the bureaucrats who administer it or the businesses that receive the incentives.
To guard against abuse and capture, industrial policy needs be carried out in a transparent and accountable manner, and its processes must be open to new entrants as well as incumbents.
The standard rap against industrial policy is that governments cannot pick winners.
Of course they can’t, but that is largely irrelevant.
What determines success in industrial policy is not the ability to pick winners, but the capacity to let the losers go – a much less demanding requirement.
Uncertainty ensures that even optimal policies will lead to mistakes.
The trick is for governments to recognize those mistakes and withdraw support before they become too costly.
Thomas Watson, the founder of IBM, once said, “If you want to succeed, raise your error rate.” A government that makes no mistakes when promoting industry is one that makes the bigger mistake of not trying hard enough.
The New Mercantilist Challenge
CAMBRIDGE – The history of economics is largely a struggle between two opposing schools of thought, “liberalism” and “mercantilism.”
Economic liberalism, with its emphasis on private entrepreneurship and free markets, is today’s dominant doctrine.
But its intellectual victory has blinded us to the great appeal – and frequent success – of mercantilist practices.
In fact, mercantilism remains alive and well, and its continuing conflict with liberalism is likely to be a major force shaping the future of the global economy.
Today, mercantilism is typically dismissed as an archaic and blatantly erroneous set of ideas about economic policy.
And, in their heyday, mercantilists certainly did defend some very odd notions, chief among which was the view that national policy ought to be guided by the accumulation of precious metals – gold and silver.
Adam Smith’s 1776 treatise The Wealth of Nations masterfully demolished many of these ideas.
Smith showed, in particular, that money should not be confused for wealth. As he put it, “the wealth of a country consists, not in its gold and silver only, but in its lands, houses, and consumable goods of all different kinds.”
But it is more accurate to think of mercantilism as a different way to organize the relationship between the state and the economy – a vision that holds no less relevance today than it did in the eighteenth century.
Mercantilist theorists such as Thomas Mun were in fact strong proponents of capitalism; they just propounded a different model than liberalism.
The liberal model views the state as necessarily predatory and the private sector as inherently rent-seeking.
So it advocates a strict separation between the state and private business.
Mercantilism, by contrast, offers a corporatist vision in which the state and private business are allies and cooperate in pursuit of common objectives, such as domestic economic growth or national power.
The mercantilist model can be derided as state capitalism or cronyism.
But when it works, as it has so often in Asia, the model’s “government-business collaboration” or “pro-business state” quickly garners heavy praise.
Lagging economies have not failed to notice that mercantilism can be their friend.
Even in Britain, classical liberalism arrived only in the mid-nineteenth century – that is, after the country had become the world’s dominant industrial power.
A second difference between the two models lies in whether consumer or producer interests are privileged.
For liberals, consumers are king.
The ultimate objective of economic policy is to increase households’ consumption potential, which requires giving them unhindered access to the cheapest-possible goods and services.
Mercantilists, by contrast, emphasize the productive side of the economy.
For them, a sound economy requires a sound production structure. And consumption needs to be underpinned by high employment at adequate wages.
These different models have predictable implications for international economic policies.
The logic of the liberal approach is that the economic benefits of trade arise from imports: the cheaper the imports, the better, even if the result is a trade deficit.
Mercantilists, however, view trade as a means of supporting domestic production and employment, and prefer to spur exports rather than imports.
Today’s China is the leading bearer of the mercantilist torch, though Chinese leaders would never admit it&#160; – too much opprobrium still attaches to the term.
Much of China’s economic miracle is the product of an activist government that has supported, stimulated, and openly subsidized industrial producers – both domestic and foreign.
Although China phased out many of its explicit export subsidies as a condition of membership in the World Trade Organization (which it joined in 2001), mercantilism’s support system remains largely in place.
In particular, the government has managed the exchange rate to maintain manufacturers’ profitability, resulting in a sizable trade surplus (which has come down recently, but largely as a result of an economic slowdown).
Moreover, export-oriented firms continue to benefit from a range of tax incentives.
From the liberal perspective, these export subsidies impoverish Chinese consumers while benefiting consumers in the rest of the world.
A recent study by the economists Fabrice Defever and Alejandro Riaño of the University of Nottingham puts the “losses” to China at around 3% of Chinese income, and gains to the rest of the world at around 1% of global income.
From the mercantilist perspective, however, these are simply the costs of building a modern economy and setting the stage for long-term prosperity.
As the example of export subsidies shows, the two models can co-exist happily in the world economy.
Liberals should be happy to have their consumption subsidized by mercantilists.
Indeed, that, in a nutshell, is the story of the last six decades: a succession of Asian countries managed to grow by leaps and bounds by applying different variants of mercantilism.
Governments in rich countries for the most part looked the other way while Japan, South Korea, Taiwan, and China protected their home markets, appropriated “intellectual property,” subsidized their producers, and managed their currencies.
We have now reached the end of this happy coexistence.
The liberal model has become severely tarnished, owing to the rise in inequality and the plight of the middle class in the West, together with the financial crisis that deregulation spawned.
Medium-term growth prospects for the American and European economies range from moderate to bleak.
Unemployment will remain a major headache and preoccupation for policymakers.
So mercantilist pressures will likely intensify in the advanced countries.
As a result, the new economic environment will produce more tension than accommodation between countries pursuing liberal and mercantilist paths.
It may also reignite long-dormant debates about the type of capitalism that produces the greatest prosperity.
The Return of Post-Communism
The collapse of communism in Central and Eastern Europe 15 years ago brought vast and positive democratic changes.
But in 2006, after more than a decade of striving for acceptance by the West, the moral and political vacuum left by communism was fully exposed.
Can a new balance between the democratic ethos and the undertows of the region’s political history and culture be found?
In Poland, for example, the prevailing mix of Catholicism and nationalism made society particularly resistant to communism (certainly in comparison with the egalitarian, social-democratic ethos of pre-war Czechoslovakia).
But these anti-communist antibodies also worked against the universal acceptance among Poles of liberal democracy.
Indeed, right-wing populists in Poland and left-wing populists in Slovakia are now allied in government with extreme nationalist parties.
In Hungary, the main opposition party Fidesz organizes demonstrations in front of Parliament for the resignation of a government, even after it won a confidence vote.
In the Czech Republic, a minority right-wing government has not gained a confidence vote in Parliament after six months of bickering.
Bulgaria’s entry into the European Union was heralded by a presidential race between an ex-communist (the victor, who claimed to like the EU) and a proto-fascist (who says he hates Turks, Gypsies, and Jews).
Political instability and unpredictable behavior by elected leaders typifies affairs throughout the region.
Even more worrying is the erosion of trust in democratic institutions.
According to a recent Gallup International poll, Central and East Europeans are the most skeptical about democracy, which only about one-third of people trust.
In contrast to a majority of West Europeans, East Europeans do not consider their elections free and fair.
Only 22% responded affirmatively when asked, “Do you think your voice matters?” Democracy today has no rivals, but it is losing support.
Populist movements harvest that ambivalence and discontent.
They are not anti-democratic; indeed, they claim to be the “true voice of the people,” and constantly demand new elections or referenda.
But they are anti-liberal; they accept democracy’s demand for the popular legitimacy, but reject its demand for constitutionalism (the separation of powers).
They do not believe that constitutional norms and representative democracy have primacy over values and “legitimate” popular grievances.
In Poland, the “politics of values” is based on the assumption that a “moral order” based on religion should prevail over the freedoms guaranteed by permissive liberalism on issues such as abortion, gay rights, and the death penalty.
In Slovakia, the anti-liberal reaction applies also to the treatment of national minorities.
Although there has so far been no significant shift in practice, the legitimation of xenophobia is a major feature of this onslaught on political liberalism: Jan Slota, the leader of the Slovak National Party, has said that he envies the Czechs for having expelled the Germans after WWII, and regularly accuses the Hungarian minority of “oppressing the majority nation.”
Acute polarization is occurring everywhere, and it is here where the legacy of communist political culture is mostly keenly felt: an opponent is not someone with whom you argue or negotiate, but an enemy that you must destroy.
After 15 years of free-market policies, populists in Warsaw, Bratislava, and Budapest want to bring back the state.
And, since even socialist parties pushed liberal economic policies, it is not surprising that the far right, with its nationalist and protectionist overtones, has hijacked the social question.
The populist challenge to the pro-market, pro-Western elite consensus that has prevailed in the region since 1990 takes two forms: an anti-corruption drive and “de-communization.”
In Poland, the two are combined in a denunciation of the “original sin” of the 1989 compromise between moderate dissident elites and moderate communist elites, which enabled a non-violent exit from communism, but allegedly allowed the ex-communists to convert their political power into economic power.
Hence the need for a two-pronged attack: anti-corruption and de-communization, which is also a leitmotiv of Fidesz in Hungary, and to some extent of the right-wing Civic Democratic Party now in power in Prague.
Moreover, these populists attack the EU as an elite-imposed project, while pro-European coalitions have become exhausted, disintegrating in the aftermath of EU accession in 2004.
Significantly, the Polish, Czech, and Hungarian prime ministers resigned within days or weeks after fulfilling the “historic” task of “returning to Europe.”
Populist nationalists present themselves as the only defenders of national identity and sovereignty against “external threats,” as Polish Premier Jaroslaw Kaczynski put it.
Their vision is a “Christian Europe” of “sovereign nation-states” that opposes the existing materialist, decadent, permissive, and supra-national model.
The EU can probably learn to live with these populists, because it has to.
Indeed, populism moves in cycles.
Populists come to power promising “to clean house,” but once they move in and become identified with the house and all its flaws, they fall back on clientelism and state capture by the ruling parties (as we are now seeing in Poland) rather than becoming more radical.
Many argue that the pro-EU consensus of the last decade emptied politics of its substance, contributing to the current populist backlash.
But the EU can also constrain populism.
After all, populist nationalists have joined (and since left) government coalitions in Austria, Italy, Holland, and Denmark.
And, while nationalist populism is a trans-European phenomenon, populism today, unlike in the 1930’s, it does not hold itself out as an alternative to democracy.
The Return of Religion?
BUDAPEST – It’s a well-worn contrast: the United States is religious, Europe is secular.
Yet, in some respects, this clichéd opposition has actually been reversed recently: religion played virtually no role during the last American presidential elections, while in a range of different European countries major controversies about religion have flared up, suggesting that questions of faith are back at the center of European politics.
Consider French President Nicolas Sarkozy.
On numerous occasions, he has argued that his country needs to rethink its traditional strict separation of state and religion, called laïcité .
In particular, according to the twice-divorced self-confessed “cultural Catholic,” France should develop a “positive secularism.”
In contrast to negative laïcité , which according to Sarkozy “excludes and denounces,” laïcité positive invites “dialogue” and recognizes the social benefits of religion.
In a much criticized speech in Rome at the end of 2007, Sarkozy acknowledged the Christian roots of France, “the eldest daughter of the Church”; he also praised Islam during a visit to Saudi Arabia.
Now he wants state subsidies for faith-based organizations – a policy proposal that upsets his many secularist critics.
This new appeal to religion – after a long period when it was taken for granted that secularization would make religion less and less politically relevant – is not an exclusively French phenomenon.
The Spanish People’s Party tried hard to mobilize Catholics during the election campaign in March 2008.
The church supported the PP against a prime minister, José Luis Rodríguez Zapatero, whose advocacy of gay marriage, more relaxed divorce laws, and the removal of compulsory religion classes from the national curriculum upset many religious conservatives.
Zapatero eventually felt it necessary to tell a Vatican envoy that Spanish bishops should stop meddling in the elections (which he won).
In Italy, Prime Minister Silvio Berlusconi precipitated a constitutional crisis by trying to rush through emergency legislation to prevent a comatose patient from being taken off life support.
This reminded many observers of what the America’s Republican Party tried to do in order to demonstrate its “pro-life commitments” during George W. Bush’s presidency.
Finally, there is Britain, usually seen as perhaps the most secular country in Western Europe, and thus the least likely candidate to see the return of religion of any kind (outside its Muslim community).
Under David Cameron’s leadership, the newly invigorated Conservative Party is listening to a number of thinkers, dubbed “red Tories,” who urge the party to turn its back on Thatcherism and embrace civil society, local community, the family, and, not least, religion as a major force in fostering responsible social behavior.
In short, there is a pattern here.
But the point is not that individuals in different European countries are becoming more religious – there is hardly any evidence for that.
Globally, there might be good reasons to talk about what sociologists describe as the rise of “post-secular societies,” but Europe remains the exception.
What really explains these new public controversies surrounding religion is something else, something political: the dilemma in which right-wing and center-right European parties find themselves.
Many of these parties used to advocate market radicalism, or at least strong doses of economic liberalization.
Not just since the financial crisis have they retreated from these positions and tried to fashion a gentler, more socially conscious image.
Yet, in the search for what Cameron has called a new “look, feel, and identity,” these parties have been treading a fine line: on the one hand, they have attempted to appear more modern – for example, by appointing an increasing number of women and members of ethnic minorities to cabinet posts.
On the other hand, they have painted themselves as sworn enemies of the left’s supposed moral relativism – an image for which the recourse to religion is obviously helpful.
In fact, some intellectuals close to the right have long advocated an opening towards Europe’s Muslim immigrants and their descendants.
Where they can vote, so the argument goes, Muslim traditionalists would rather vote for a conservative party, even if it has Catholic roots, than for a secular left-wing party perceived as advocating loose morals.
This is not to say that all appeals to religion are just cynical election ploys.
Especially in the face of the financial crisis, religion has been presented as a source for what Sarkozy and German Chancellor Angela Merkel have called the project of “moralizing capitalism.”
That is not an absurd idea.
There is a long and distinguished tradition of Catholic social thought.
But taking these traditions seriously would require much larger transformations of capitalism than even avowed Christian Democrats are prepared to contemplate, including a much wider distribution of ownership and mechanisms for involving workers in management.
Theories of “red Toryism” might go some way in this direction, but it remains to be seen whether they will ever translate into practice.
For the moment, the temptation is for the European right to find its “new look” through a selective appeal to religion – and wait and see whether it works as an electoral strategy. They should remember, though, that starting a Kulturkampf is to play with fire: it might be possible to instrumentalize religious passions for a time; but such passions cannot permanently be controlled from above.
The Return of the King in Nepal
Every time we in Nepal think things can’t get worse, they do.
In 2001, as our Maoist insurgency intensified and casualties soared, almost the entire royal family – including King Birendra – were massacred by one of Nepal’s princes.
The next year, parliament was dissolved and local elected bodies were disbanded.
As political parties bickered, King Gyanendra, who succeeded his murdered brother, sacked the prime minister in 2002 and ruled through an appointed cabinet.
Last week, King Gyanendra sacked his prime minister again, declared a state of emergency, and suspended civil liberties.
Nepal’s 15-year experiment with democracy now seems over.
Since February 1, the Nepali media have been subjected to absolute censorship.
Nothing that goes against the “letter and spirit” of the king’s dismissal of his government is allowed to be printed and broadcast, and “action will be taken against anyone violating the notice.”
Armed soldiers now sit in newsrooms, vetting the galleys before they go off to press.
Sometimes, they change headlines that they think are critical of the royal move.
Nepal’s vibrant FM radio stations – once models for decentralized public-service broadcasting and community radio – have been prohibited from broadcasting current affairs.
Some FM stations have been locked down and are silent.
The BBC’s Nepalese service, which used to be relayed through a network of 12 FM stations all over the country, has been stopped.
All Indian news channels have been dropped from cable networks.
On Saturday, two senior journalists were detained for issuing statements critical of the crackdowns.
Newspapers and magazines are blandly reproducing official pronouncements and reports from the state-run news agency.
Some have taken the risk of resorting to metaphors and allegory, while others poke fun at the whole thing by writing editorials on ballet or bee-keeping.
At least one newspaper came out with its news pages completely blank.
Most young journalists, especially those in radio, have been shocked by the censorship.
The freedoms that they were so accustomed to, and maybe even took for granted, have now been snatched away.
But, for older journalists like me, there is a strong sense of déjà vu—the controls hark back to the times of the partyless absolute monarchy that existed here before 1990, when self-censorship was the order of the day.
Back then, irrational news decisions, sycophancy, and propaganda were passed off as journalism.
In those days, editors, reporters, and columnists played a cat-and-mouse game with the authorities, resorting to satire, humor, or metaphor.
But punishment could be harsh.
Many journalists spent time behind bars, and there was a price to be paid when the morning newspapers contained even accidental typos, such as occurred when a headline concerning a royal birthday read “suspicious” instead of “auspicious.”
Old jokes from the pre-1990 days have returned, like this one: a man was walking down a Kathmandu street, shouting, “Down with dictatorship in Pakistan.”
At the police station, he asked the protestor, “Why are you denouncing dictatorship in Pakistan when it exists here?”
To be sure, many Nepalis have welcomed King Gyanendra’s move this week.
Much of the public is disenchanted by the instability caused by fractious and corrupt parliamentary leaders and by the Maoist insurgency, which has cost 12,000 lives in nine years.
If this is what the king had to do to restore peace, they say, so be it.
After all, the king has staked all and gambled his own throne by taking over power.
They have a point.
Many expect the king to pull a rabbit out of his hat, to restore peace and start raising the living standards of Nepal’s 25 million people, most of whom live below the poverty line.
In his speech on February 1, King Gyanendra said the Nepali people would have to temporarily give up democracy in order to save democracy, and many Nepalese will go along with that, at least for a while.
The king has a window of opportunity to deliver on his promises.
Perhaps King Gyanendra does have something up his sleeves.
In the long run, however, the answer to Maoist totalitarianism is greater and more inclusive democracy, a vibrant free press, and civil liberties.
Curtailing freedom merely polarizes society.
Indeed, even as a short-term strategy against the Maoists, it may well prove counterproductive.
The Return of the Radicals in Iran
Twenty-six years after the Islamic Revolution, just when the West had expected Iran to settle down and become more pragmatic, the regime of President Mahmoud Ahmadinejad seems to have lurched back toward radicalism.
By looking at earlier revolutions, we can perhaps come to understand what is happening in Iran, for recent events there have clear historical precedents.
Many revolutions have passed through an initial “quiet” period after an early phase of radicalism, only to experience a resurgence of radicalism 15-25 years later.
This is because the initial quiet period is often marked by corruption and a retreat from revolutionary goals, leading idealists to feel that the revolution is losing its way.
Believing that stronger pursuit of revolutionary ideals is the only way to strengthen their country, these idealists seek to inspire a “return of the radicals,” triggering sharp conflict with their more pragmatic co-revolutionaries.
The Mexican Revolution of 1910 began with a challenge to the dictator Porfirio Díaz that ignited peasant uprisings and worker revolts.
The revolution’s radical phase seemed to end in 1920 when General Alvaro Obregón seized power; he limited land reforms and sought reconciliation with the United States.
For the next 14 years, Obregón and his ally General Plutarco Calles ruled Mexico.
Then, in 1934, resentment against growing corruption led Calles to choose an “honest idealist” to become president, a young man who had fought for him early in the revolution, who he thought he could control but who would help the government regain popularity.
That “honest revolutionary,” Lázaro Cárdenas, toured the country, building his popular support, and then turned on Calles, expelling him from Mexico.
Known for both his radicalism and his honesty, Cárdenas refused to live in the presidential palace and cut his salary in half.
He also took seriously the early goals of the revolution, embarking on massive land reforms.
In 1938 – twenty-eight years after the revolution began – Cárdenas provoked a major confrontation with the US and Britain by expropriating their oil companies and nationalizing Mexico’s petroleum.
Only in the 1940’s, after Cárdenas left power, did Mexico turn to a more conservative political path.
Similarly, China’s Communist Revolution began with a decade of attacks on the middle and professional classes and a reshaping of the countryside, culminating in the Great Leap Forward of 1958-59.
But that disastrous campaign weakened Mao’s influence; by the early 1960’s he seemed to be relegated to the sidelines while pragmatists like Liu Shaoqi and Deng Xiaoping grew stronger.
Yet Mao worried that his revolution was going off track, and in the mid-1960’s he launched an effort to regain control of the Party by educating a new generation of radical youth.
These “Red Guards” launched the Cultural Revolution in 1966-68, targeting the more conservative elements within the Communist Party.
The Cultural Revolution tore China apart, but it returned Mao to supreme power and allowed him to purge the pragmatists.
But did the battle between pragmatists and radicals end there?
In the early 1970’s, moderates gained by engineering a rapprochement with the US, capped by Nixon’s famous visit to China in 1972.
Deng was rehabilitated the following year, and in the late 1970’s, after Mao’s death, Deng’s pragmatists seized control of the regime.
What do these historical examples suggest for Iran?
It is likely that the relatively calm period dating from Khomeini’s death in 1989 is over.
The election of Ahmadinejad marks the onset of new struggles within the ruling Islamic Republican Party.
These pit the “honest radicals”- led by Ahmadinejad and supported by younger, second-generation revolutionaries known as the Abadgaran, or Developers, who are strong in the Iranian parliament, the Majlis- against the more corrupt and pragmatic mullahs who head the Party, led by Expediency Council Chairman and former President Hashemi Rafsanjani.
Supreme Leader Ayatollah Khamenei is left in the middle, perhaps increasingly isolated and without strong popular support.
How should the US and European leaders respond?
Historically, phases of resurgent radicalism have lasted 5-10 years, marked by greater aggressiveness against internal and external enemies.
This bodes ill for improved relations with Iran in the short run, and makes it imperative that Western powers unite to make it unambiguously clear that any use of nuclear weapons or materials by Iran or terror groups aligned with Iran will result in an immediate and devastating response.
(China developed its nuclear weapons just before its Cultural Revolution, mainly to deter the Soviet Union, but never used them).
It also seems advisable to offer positive incentives – including US recognition and an end to sanctions – that could help empower pragmatists in their intra-Party struggle, much as Nixon’s overtures to China helped blunt China’s radicalism and strengthened the hand of pragmatists in the Communist Party.
Nixon did not demand that China’s leaders abandon communism or that Mexico become a competitive democracy, only that they act responsibly and learn to do business with the US.
Five decades after its revolution, China is still not a democracy, and Mexico is only just becoming one nine decades after its revolution.
Neither country always sees eye to eye with the West.
But both became countries with which it is possible to do a great deal of business, and both are increasingly integrated into the global economy.
That may be the only realistic goal in dealing with Iran.
The Return of the Siloviki
STOCKHOLM – Russian Prime Minister Vladimir Putin recently announced that Russia, Belarus, and Kazakhstan have abandoned their separate talks to join the World Trade Organization.
Instead, they would seek to enter the world trade body as a single customs union.
In effect, this means that Russia seems to be casting aside its accession to the WTO – a major reversal of Russian strategy.
Putin’s statement hit like a bolt from the blue.
Two days earlier, United States Trade Representative Ron Kirk and European Union Trade Commissioner Catherine Ashton had completed successful talks on Russia’s accession to the WTO with Putin’s first deputy, Igor Shuvalov, Finance Minister Alexei Kudrin, and Minister of Economy and Development Elvira Nabiullina.
As late as June 3, Putin had declared himself sure of Russia’s “swift joining of the WTO.”
The leaders of Belarus or Kazakhstan seemed equally surprised by Putin’s statement, especially as Russia had just prohibited almost all imports of dairy products from Belarus in a protectionist ploy.
After 16 years of negotiations, Russia appeared poised to join the WTO within a couple of months.
Indeed, only three difficult hurdles remained.
First, Ukraine demands a bilateral protocol on market access, which would force Russia to abolish roughly 100 trade sanctions, primarily in agriculture.
The second obstacle is border controls with Georgia, a mainly political issue: whether Abkhazia and South Ossetia are independent, as Russia maintains, or are part Georgia, as the rest of the world believes.
Finally, the EU insists that Russia abolish planned prohibitive export tariffs on lumber.
Only the Georgian issue is really serious.
A customs union with Belarus and Kazakhstan is no alternative to Russia’s WTO accession.
No countries have ever entered the WTO collectively, nor is this legally possible says WTO head Pascal Lamy.
Moreover, while the customs union was proclaimed in 1995, the earliest it can be formed is in July 2011, which is unlikely.
Predominantly a commodity exporter, Russia has less need for the WTO than a manufacturer like China.
Even so, one-fifth of Russia’s exports comprise metals and chemicals that are sensitive to anti-dumping measures.
A series of World Bank and Russian studies have estimated that Russia can gain 0.5-1.0 percentage points in economic growth for half a decade if it joins the WTO.
Membership is also important for Russia’s international standing.
It is the only G-20 country outside of the WTO, which accounts for 96% of global trade.
The WTO also represents a choice of economic and political strategy.
Before Putin resigned as president in May 2008, he presented his “Russia 2020” program. Its heart was an “innovation strategy” based on more market reforms and investment in human capital, leading to annual growth of 6-7%.
In their rhetoric, President Dmitri Medvedev and his technocrats embrace this vision.
But Putin and his siloviki (political allies whose power base is in the security apparatus) seem to prefer an “inertia strategy,” the worst of the Russia 2020 scenarios.
This strategy amounts to state capitalism, living on Russia’s energy wealth, and doing nothing to curtail Russia’s massive red tape and corruption.
By reversing course on the WTO, Putin has again shown himself to be Russia’s master.
He did the same thing last summer by lashing out against a successful mining and metallurgical company, Mechel, and provoking the war in Georgia.
During the winter, Putin’s poor policy choices on the financial crisis undermined his power.
Rather than shielding Russia’s private enterprises, he engineered a domestic liquidity freeze, which led to a sharp drop in GDP of 9.5% in the first quarter of 2009, despite Russia’s huge foreign reserves.
The pragmatic technocrats took over, but the subsequent doubling of oil prices signals that the danger for Russia’s economy is over for now, so the siloviki are resuming command.
The question is what their next step will be.
The prominent Russian military analyst Pavel Felgenhauer insists that their prime aim is to finish off Georgia and its president, Mikheil Saakashvili, who remains in power and defiant.
Georgia has received no military support and is virtually undefended.
The Kremlin continues its propaganda offensive against Georgia, and has vetoed prolonging the mandate for United Nations observers in Georgia and Abkhazia.
A major Russian military maneuver, Caucasus 2009, is underway.
The last such maneuver, Caucasus 2008, was followed by the invasion of Georgia.
During the latter part of this maneuver, July 6-8, US President Barack Obama is supposed to meet President Medvedev in Moscow.
Medvedev obviously hopes to reach out and improve Russia’s and his own standing in the world.
The siloviki , however, prefer Russia isolated and authoritarian, with power securely in their hands.
The Kremlin wants a new strategic arms control agreement, but the siloviki desire nothing more.
Obama’s administration had hoped for a final breakthrough in Russia’s WTO talks, but Putin’s actions have eliminated prospects for such an outcome.
The US also wants progress on the territorial integrity of former Soviet states, such as Georgia, but that, too, is unlikely.
Putin or his collaborators seem to be setting up Medvedev for a failure, suggesting that their jealousy of Medvedev’s limited power is greater than their interest in defending Russia’s national interests.
Yet there is still hope that Putin encounters a sufficiently negative reaction that he changes his stance on WTO accession.
After all, he suspended Russia’s WTO accession talks after the August 2008 war in Georgia, only to allow them to restart this spring.
The Return of Tuberculosis
Generations of doctors, politicians, and public health officials have struggled to defeat tuberculosis.
But, after years of success, TB is making a comeback.
The increase in TB in the developed world since 1992 was initially attributed to HIV.
However, over time, other factors behind the growing number of cases, such as immigration and a particular type of drug-resistant TB, have emerged.
The World Health Organization has developed a strategy to fight TB’s return, including a standardized therapy that specifies appropriate drugs, doses, and timing of therapy.
Unfortunately, multi-drug resistant tuberculosis (MDR-TB), which is any TB resistant to the traditional treatments of isoniazid and rifampicin, represents a serious challenge: because standard treatment is less effective in curing it, its transmission continues.
Moreover, any inadequately treated TB becomes multi-drug resistant, so that treatment failure can be either cause or consequence of MDR-TB.
This underscores the need for a determined regimen to treat TB today, as well as a more complex strategy to control the disease, one which cures as many cases as possible, prevents acquired drug resistance and decreases the transmission of infection.
The WHO recommends what it calls a “Directly Observed Therapy Strategy” (DOTS) and has set diagnostic thresholds of at least 70% of infectious cases, and curative thresholds of 85%.
We conducted a systematic review of published reports to identify the factors that cause unsuccessful TB treatment in Europe.
Twenty-six papers were included in the review, covering 13 countries (the former USSR, the Czech Republic, Poland, and Romania in Eastern Europe, and Denmark, France, Germany, Italy, the Netherlands, Northern Ireland, Spain, Sweden, and Switzerland in Western Europe) in the period from 1988-2001.
On average, the studies found that 74.4% of the curative outcomes were “successful,” falling short of the WHO’s 85% target.
Patients were treated “unsuccessfully” 12.3% of the time, and 6.8% of treated patients died.
MDR-TB was inversely associated with successful treatments.
We found that populations with at least 10% MDR-TB showed a notable reduction in successful outcomes.
Surprisingly, no relationship was found between TB treatment outcomes and immigrant status in these studies, perhaps because all immigrants were combined, regardless of country of origin.
These results suggest the following clinical and public health implications:
· since successful TB treatment outcomes are below the 85% threshold, an enhancement of national TB control programs is needed in most European countries;
· MDR is the most important obstacle to controlling TB in Europe;
· analyzing immigrants by specific country of origin, timing of immigration, and previous treatment can help define the risk of MDR-TB associated with immigrants;
· treatment characteristics need to be reported more consistently in order to identify and correct the factors related to inadequate treatment of TB in Europe.
Although some characteristics of TB therapy, such as interruption of treatment, are well known predictors of multi-drug resistance, other aspects of treatment that reflect the health-care system, such as the drugs used and the length of therapy, must be studied to help improve control programmes.
For example, one of the studies that we reviewed found that no standard therapy in the initial or secondary phase of treatment was associated with an unsuccessful outcome or death.
Moreover, some aspects of patient management emerged as risk factors for not completing therapy, which suggests difficulties in access to health services for TB patients.
Structural barriers do not represent the only problems of access to treatment in the health care system.
Foreign-born patients may interrupt treatment due to lack of confidence in diagnosis and care, or they may ignore the more minor symptoms of the illness.
Patients who feel better after the initial treatment may also fail to complete therapy.
Social factors other than birthplace should be studied to evaluate what causes primary multi-drug resistance.
Treatment interruption has been associated with asylum seekers and refugees in Switzerland.
Interruption was also associated with homelessness, intravenous drug use, and alcohol dependence in Hamburg.
In Spain, homelessness was a risk factor for interruption and HIV positivity, and intravenous drug use was a risk factor for unsuccessful treatment.
I also believe that there is a relationship between the need for therapy and the political choices that countries make.
The DOTS strategy is not implemented in all European countries, owing in part to disagreement about whether treatment is a duty or a right.
Public health workers argue that therapy should be imposed upon patients who are at risk of failing to complete it – a policy that others claim would violate individual liberty.
Unless we act to step up the fight against TB, many health-care systems may find themselves facing a less abstract problem: securing the economic resources and organizational capacity to ensure treatment for the growing number of patients who want and need it.
The Revolt of China’s Twittering Classes
BEIJING – Last week, Liu Xiaobo was awarded the 2010 Nobel Peace Prize for his long and non-violent struggle for fundamental human rights in China.
That award comes at a crucial moment in Chinese politics, as it may well become a stepping stone on China’s long march toward greater freedom.
Yet few voices in mainland Chinese media are discussing Liu’s Nobel Prize.
The government’s propaganda department has ordered major media to keep the news from spreading to the general public by imposing strict censorship.
In fact, on CCTV’s widely viewed 7 p.m. national newscast, not a word on Liu was mentioned on the day he received the prize.
Despite this news blackout, China’s blogosphere and microblogs exploded after Liu was announced as the winner.
For example, on Sina’s microblog site, bloggers used pictures, euphemisms, and English or traditional Chinese characters to avoid censorship.
Twitter-style microblogging is extremely popular in China.
Twitter.com was officially blocked last year, following the 20th anniversary of the Tiananmen crackdown and the riots in Xinjiang that summer.
Soon afterwards, its most famous Chinese clone, Fanfou.com, also was closed down, leaving one million registered users homeless.
Nevertheless, although Twitter can be accessed in China only via proxy servers, it still plays a vital role in Chinese Internet life because of its ability to connect different news sources and social activists.
Indeed, Twitter is the only place where people can talk freely about Liu‘s Nobel prize.
A search of the hash tag “#Liuxiaobo” shows that relevant messages pop up hundreds of times per minute.
More generally, Twitter has become a powerful tool for Chinese citizens as they increasingly play a role in reporting local news in their communities.
But the social revolution brought by microblogging might be even more important than the communication revolution.
Indeed, here Chinese Twitter users lead the world, using it for everything from social resistance, civic investigation, and monitoring public opinion, to creating black satire, “organizing without organizations” in the Guangdong anti-incineration movement, and mailing postcards to prisoners of conscience.
Ever since Iranians used Twitter to swap information and inform the outside world about the mushrooming protests against the stolen presidential election of June 2009, there has been much discussion about the role of digital activism in authoritarian countries like China.
Does Web 2.0 technology imply an analogous role for “Twivolution” in a Chinese democratic transition one day?
Twitter political activism in China challenges the simplistic yet widespread assumption that social media in the hands of activists can lead swiftly to mass mobilization and social change.
Instead, these information-sharing tools and channels promote more subtle social progress.
That subtlety reflects the distinction between macro-politics and micro-politics.
Macro-politics is structural, whereas micro-politics is daily.
Changes in the micro-political system do not necessarily lead to an adjustment in the macro structure, particularly in hyper-controlled political systems like China’s.
But if small units are well organized, they can greatly improve the well-being of society as a whole, bit by bit, by working at the micro level. “Micro-information” and “micro-exchange” can push forward real change.
Why is micro-power so important?
In the past, only a few highly motivated people engaged in political activism; the masses took almost no initiative.
Passionate people did not understand why the public seemed unconcerned about their efforts.
Today, highly motivated people can lower the threshold for action so that people with less passion join their efforts.
Currently, the Chinese Twittersphere has three prominent features: First, as China’s rulers strengthen their censorship efforts, Twitter has become highly politicized.
Moreover, Twitters brings opinion leaders together around one virtual table, attracting a lot of “new public intellectuals” and “rights advocates,” as well as veterans of civil rights movements and exiled dissidents.
Its influence on Chinese cyberspace and traditional media is the result of this grouping.
Finally, Twitter can be used as a mobilizing tool in China.
Recent years have seen an explosion of activities indicating that Twitter has become the coordinating platform for many campaigns asserting citizens’ rights.
With the proliferation of Twitter clones in China (all the major portals now offer microblog services), social movements in China are getting a long-term boost.
So Twitter has become a major tool to promote contentious politics in China.
It can effectively link discourse and action, generate widespread campaigns, and forge common ground among rights activists, public intellectuals, and all kinds of Twitter users.
In fact, a series of protests and events held since the second half of 2009 suggests a close relationship between Twitter and contentious real-life politics, and thus invites new possibilities for reshaping China’s authoritarian regime.
The Revolt of the Debtors
BRUSSELS – Greek Prime Minister George Papandreou’s call to hold a referendum on the rescue package agreed at the eurozone summit in late October has profound implications for European governance, despite the fact that the referendum will not now go ahead.
It may also determine the future of the euro.&#160;
Papandreou had to reverse course quickly in response to both internal and external pressure,&#160;but the option that he put on the table will not go away whatever the fate of the present Greek government.
As long as the Greek people have to be asked to accept one austerity package after another, they might wonder when they will have a direct say on this matter.
Less than one week before Papandreou dropped his bombshell, eurozone leaders had spoken unequivocally: “The introduction of the European Semester has fundamentally changed the way our fiscal and economic policies are coordinated at European level, with co-ordination at EU level now taking place before national decisions are taken.”
Simply put, pan-eurozone financial governance had supposedly won the day.
Technically, Papandreou’s proposed referendum was not directly about fiscal or economic policy, but it is a decision that would have had huge economic ramifications for the eurozone.
Despite that, it was taken without any coordination with other eurozone leaders.
Moreover, if Greece’s voters had rejected the deal that has just been proposed to them, the outcome might have foreclosed any further coordination on the country’s debt problems with the European Union.
Greece would have sunk or swum on its own.
So, only days after the eurozone’s heads of state and government congratulated themselves on their summit success, the concept of coordination was shown to be meaningless for the one country where coordination matters most.
Papandreou’s move also exposes the fatal flaw of grand plans for a political or fiscal union to support the euro: the “people,” not governments, remain the real sovereign.
Governments may sign treaties and make solemn commitments to subordinate their fiscal policy to the wishes of the EU as a whole (or to be more precise, to the wishes of Germany and the European Central Bank); but, in the end, the people may reject any adjustment program that “Brussels” (meaning Berlin and Frankfurt) might want to impose.
The EU remains a collection of sovereign states, and it therefore cannot send an army or a police force to enforce its pacts or collect debt.
Any country can leave the EU – and, of course, the eurozone – when the burden of its obligations becomes too onerous.
Until now, it had been assumed that the cost of exit would be so high that no country would consider it.
This no longer seems to be the case – or so the Greeks, at least, seemed to believe.
This also implies that Eurobonds will never constitute the silver bullet that some had hoped would solve Europe’s sovereign-debt crisis.
As long as member states remain fully sovereign, investors cannot be assured that if the eurozone breaks up, some states will not simply refuse to pay – or will not refuse to pay for the others.
With popular resistance to paying for profligate southern Europeans rising in Germany and Holland, governments there might be forced to ask their people whether they want to pay the huge costs implied by their commitments to bail out eurozone members that are unwilling or unable to pay.
That is why the bonds issued by the eurozone’s rescue fund, the European Financial Stability Facility, are trading at a substantial premium relative to German debt, while efforts by Klaus Regling, the EFSF’s head, to convince China, Japan, and other Asians to buy the bonds have gotten nowhere.
The broader message of the Greek move is that “coordination” has so far been a code word for almost total control by creditors (sometimes together with the ECB).
The attempt to impose a benevolent creditors’ dictatorship is now being met by a debtors’ revolt.
Financial markets have reacted so strongly because investors now comprehend that “sovereign debt” is the debt of a sovereign that can simply decide not to pay.
Holders of bonds of the eurozone’s member states have now been put on notice that, when the going gets tough, the real sovereign, “We, the people,” might be asked whether they actually want to pay.
And the answer might very well be an emphatic “no,” as opinion polls in Greece and the experience of Iceland (whose population twice voted down deals agreed by the Icelandic government) suggest is likely.
Nobody can know at this point whether Portugal or Italy might be the next stops on this road of resistance.
The result, however, is quite predictable: soaring risk premia throughout the periphery.
Papandreou’s decision to call a referendum in Greece could thus have marked the beginning of the endgame for the euro.
At this point, the common currency can be saved only if systemically important countries – namely, Italy and Spain – take concerted action to demonstrate that they are different from Greece.
The Revolt of the Meritocrats
PARIS – The bailout of the financial system was a bizarre moment in economic history, for it benefited those who benefited most from the markets’ irrational exuberance – the bosses of financial firms.
Before the crisis hit, however, redistribution of wealth (and the tax and social security payments that make it possible) was considered the biggest obstacle to economic efficiency.
Indeed, the values of solidarity had given way to those of individual “merit,” judged by the size of one’s paycheck.
The paradox is that a part of this evolution may be attributable to two positive factors: the slow work of democracy, which liberates individuals but at the same time leaves them more isolated; and the development of a welfare system that shares risks and makes individuals more autonomous.
With this isolation and autonomy, people increasingly tend to believe, for better or for worse, that they alone are responsible for their own fate.
Here lies the conundrum.
An individual is free and autonomous only because of the collective decisions taken after democratic debate, notably those decisions that guarantee each person access to public goods such as education, health care, etc.
Some sense of social solidarity may remain, but it is so abstract that those for whom the wheel of fortune has spun so favorably feel little debt.
They believe that they owe their status purely to merit, not to the collective efforts – state-funded schools, universities, etc. – that enabled them to realize their potential.
When merit is measured by money, there is no ethical limit to the size of an individual’s paycheck.
If I earn ten, a hundred, or a thousand times more than you, it is because I deserve ten, a hundred, or a thousand times more than you.
Merit and skills are how we give an intrinsic value to money.
Human nature – ego and/or arrogance – does the rest.
It is no surprise, then, that many people think of themselves as priceless.
The central place where this self-(over)evaluation meets the fewest obstacles is the financial market.
Money there is an abstraction – “the abstraction of abstractions,” as Hegel put it – which helps explain why salaries are no longer rooted in reality.
Of course, when the crisis hit, financial institutions were the first to argue that autonomy was unrealistic, and that we are all interdependent.
After all, why else should taxpayers agree to rescue them?
But now these same institutions are deciding that they want to go their own way again.
So yesterday’s (pre-crisis) world is being resurrected.
Dismissing the risks that taxpayers incurred, financial institutions used the bailout to restore profitability and are now reverting to their old habits, which had worked so well for them and so badly for others.
No one should be surprised about this.
The economic stakes encourage everyone to make the best of their circumstances.
The bailout of banks led to a wave of mergers.
If they were already too big to fail, what should we now say when banks are even bigger?
Their market power has increased, yet they know they incur no risk, owing to the aggravated systemic impact of their potential bankruptcy.
Moreover, they face an economy starved of credit, in which the crisis endangered many companies whose bankruptcy would have no systemic effect.
Working in so uncompetitive a market is a real stroke of luck.
I do not know many businessmen who would not take advantage of this; to be honest, I do not know any.
The free-market doctrine, which has become almost a religion, reinforced this belief: markets are efficient, and if they pay me so much (a potentially mind-boggling amount, as seen in recent cases), it is because my own efficiency warrants it.
I also participate indirectly and abstractly in forging the common good, by creating value through my work, and I am rewarded for it.
But suddenly the system collapses, the creation of value turns into destruction and parallel universes collide.
No mathematician can remember so unprecedented and spectacular a result: parallel lines intersecting, with autonomy becoming (for the brief moment of the bailout at least) interdependence.
For the connections between the economy and the world of finance are so strong and the interdependency between the so-called parallel universes so tight that there was no choice.
Eyes are opened; the illusion of arbitrage between efficiency and solidarity fades.
The crisis reminds us what each person owes to others, highlighting an ethical truth that we were quick to forget: the rich benefit more than the poor from their cooperation with other members of society.
Two conclusions can be drawn from all this.
The first is that we all owe at least some of our success to others, given the public goods that society provides.
This calls for more modesty and restraint in determining the highest salaries, not for moral reasons but for the sustainability of the system.
The second conclusion is that the most privileged classes, which have benefited the most from the solidarity of others, notably the poor, can no longer deny the latter’s contributions.
But don’t hold your breath waiting for them to agree.
The Revolt of the Mullahs
Iran's election fiasco seemingly confirmed for Iranian reformists a conclusion that tens of millions of Iranian citizens reached long ago - the country's Islamic government, as it exists today, is beyond rehabilitation.
Whether ordinary Iranians now believe that the reformers are also beyond redemption is an open question.
Iranian reformers had tried (to no avail) since the landslide 1997 election of President Mohammed Khatami, to change the system from within.
Iranians were initially hopeful, but after years of waiting in vain they grew impatient.
Now they are despondent.
Reformists were justly criticized for lacking unity and resolve, but in truth their greatest impediment was a lack of constitutional authority.
Power in Iran lies in the hands of the unelected conservative establishment, namely Supreme Leader Ayatollah Khamenei and the twelve-member Islamic Guardian Council.
They have no intention of parting with it.
The Guardian Council's barring of over 2,000 mostly reformist candidates from participating in the parliamentary elections was the last straw.
Reformist parties boycotted the vote.
Despite a frenzied public relations campaign by regime officials, only half of all eligible voters participated.
In Tehran, the country's political heart and soul, less than a third of the electorate turned out.
Foreign journalists declared it the biggest legitimacy crisis in the 25-year history of the Islamic Republic, but Iranians seemed surprised by the commotion.
Egregious abuse of power by conservative hardliners is not newsworthy to them.
They held no illusions that their country was a democracy.
Iran's near-term political future remains unclear.
How reformists regroup, and how the youthful Iranian populace reacts, depends largely on the path the conservatives take.
Similar to reformists, who encompass a broad range of political ideals, Iranian conservatives are a mixed bag. Many are reactionary religious fundamentalists who abhor the concept of democracy.
"It doesn't matter what people think," the powerful cleric Ayatollah Mesbah Yazdi once said. "The people are ignorant sheep."
However, a small but increasing number of conservative thinkers - while not democrats - advocate a more pragmatic and conciliatory approach, essentially adopting the language that once worked so well for the now-beleaguered reformists.
"It's better for all of us that mainstream conservatives go to parliament, people who are not extremist but pragmatic and moderate," according to the influential newspaper editor Amir Mohebian, who is emerging as the face of Iranian "compassionate conservatism."
Whether conservative ideologues or pragmatists dominate the new parliament - which takes office in June - remains to be seen.
Either way, the conservatives must weigh their strategy carefully.
A more ideological and antagonistic approach - in the form of increased political and social repression - could stir Iran's discontented masses, reviving the non-violent but radicalized reformists.
Some of these now call for passive resistance and civil disobedience.
It will be the task of Ayatollah Khamenei to rein in conservative ideologues and make sure that pragmatic conservatism prevails.
That Khamenei is himself more of an ideologue makes that task doubly difficult for him.
Although he is capable of providing people with increased political and social freedoms, he is simply unwilling.
Above all, the conservatives' fate - and the fate of the regime as a whole - depends on the country's punishing economy.
Despite Iran's vast oil wealth, close to a third of the population lives in poverty.
Inflation and unemployment remain rampant.
Demographics exacerbate these conditions.
Two-thirds of Iran's 69 million people are under 30 years old, and officials admit they have no way of accommodating the burgeoning labor force.
For the majority of Iranians, economic improvement is the priority.
As a 57-year old retired Iranian professional moonlighting as a taxi driver told me, "When your stomach is empty you don't cry for democracy, you cry for bread!"
Conservatives, no less than reformers, must come to terms with this reality.
No matter how hard they try, there exists no simple or immediate solution to Iran's endemic economic corruption and mismanagement.
As a result, Iran's near-term political prospects appear ominous.
But reasons to be hopeful about the long-term political future do exist.
An indigenous civil society has emerged; indeed, Iran appears to be the only nation in the Islamic Middle East that is building a sustainable liberal foundation from the bottom up.
Monarchic and theocratic systems have both failed.
Backers of a socialist model have gone the way of the Soviet Union.
Liberal democracy is essentially the last man standing in Iran.
The road from authoritarianism to democracy will not be smooth or short.
Agitators for reform will continue to push.
Regime loyalists will continue to push back.
In the absence of a credible and readily available political alternative, deadlock will likely continue, with the pace of change slower than the population demands.
So the long term could be long in coming.
Courageous Iranians who have labored to reform their country may continue to feel as though they are plowing the seas.
The Revolt Of The States
BUENOS AIRES: Ceaseless change seems to be at the heart of today’s global civilization.
Because of this, countries that consider their domestic realities as sacrosanct find themselves unable to assimilate change or foresee its direction.
To them, change appears as something irrational, even as a catastrophe.
As we saw in the anti-IMF protests in Prague recently, and last year’s street protests against the World Trade Organization in Seattle, such fears are spreading far and wide.
People increasingly see change not as something that enhances their freedom and dignity but as a force encouraging avarice and unfairness.
By concentrating wealth narrowly, globalization produces more threats than opportunities.
The difficulty in transferring knowledge and new technologies from the center to the periphery, for example, widens economic disparity and subjugates some countries to a new form of colonialism.
Seeing this, many people fear a new dominant class intolerably manipulating globalization for its betterment.
By limiting prospects for growth for many people, today’s international economic order is inconsistent with the ideals of the great democratic revolution of our century, which says that no inhabitant of the world should be left behind.
For those peoples and countries now marginalized from the process of technological development, production, and exchange I believe that only one viable option exists: a new assertion of themselves as independent states, regionally integrated in as many ways as possible.
Only with independence does the confidence for greater participation come, and greater participation means improved governance, both in the international order and domestically.
Ungovernablity arises from attempts to maintain control over people and places who are marginalized from participating in decisions that determine their daily lives.
Citizens and countries alike become “ungovernable” when they see themselves as passive instruments of decisions taken by a closed elite that rules by transforming them into a mute “mass”.
For free individuals – free citizens, free states – are the real protagonists of governance.
Without full and equal responsibility there can be no lasting governance.
This is what market fundamentalists, management consultants, and technocrats fail to understand.
Countries, citizens, users, consumers, producers, workers, entrepreneurs, professionals cannot be left out of the decisions that hold significant consequences for their lives and goals, indeed for the very values of society.
People in the United States and Western Europe recognize how continuity in their democratic systems enhanced their prosperity.
By contrast, we in Latin America and Eastern Europe know that democracy has trouble surviving in times of crisis, poverty, and isolation.
Preserving democratic values is hard when large sectors cannot integrate with the global market, when misery obliterates human dignity and a lack of options makes freedom meaningless.
It is a bitter paradox, indeed, that the developed democracies use the power of globalization to punish us commercially by discriminating against our citizens and exports.
In individual states protection of the weak is attained by equal application of the rule of law.
This must also be made true in international relations.
But to create an international order based on law and not force – economic force having replaced military might – it is necessary to strengthen and spread multilateralism into political fields as well in economic ones.
Only the cooperation of free and equal nations can bring this about.
Related to this is the fact that nowadays economic development depends less on a particular country and more on regional integration, which can serve to avoid the negative effects of those financial speculations boosted by globalization.
So the world needs, in its regions, to facilitate integration on the basis of a general economic democratization: currency compatibility, free trade, shared legal rules and most of all a common will to fix the rules of the game according to a region’s entire interests.
Only such equal cooperation can secure the solid political basis for integration.
So long as a country is subordinated to the uncontrollable force of globalization, its future is in foreign hands.
But in agreeing to open regional economies to imports, poor and developing countries must be allowed some means to protect their new industries.
There is justice in this, particularly given the hypocrisy of those countries who proclaim their faith in free trade while every day praying at the altar of protectionism.
Everyone acknowledges that the market requires rules in order to avoid deformations such as monopolies and oligopolies.
But monopolies of wealth are just as pernicious.
The State should not abandon its redistributive role; neither can the State surrender to the market its role in development.
Indeed, quality housing and schooling, pensions and unemployment insurance, a modern health system and family social services must not be the fruits of an established democracy but a condition for democracy’s consolidation and survival.
For any program based on selfishness and injustice must generate strong forces of social dissolution and instability.
The great challenge is to increase equality, and for this the State, which globalization claims to have overthrown, is vital.
Only it can establish progressive taxes, adequate regulation of privatized public services, support to small and medium size companies, more efficiency in the public spending and a significant improvement in the education and health systems.
It is the State’s undeniable obligation to guarantee the benefits of social security to all the inhabitants of a country.
Marxists used to agitate that the workers of the world unite.
They never did, but we are now seeing a globalization of solidarity, of support for cooperative regional patterns and the need to rethink international agencies, and the impracticality of isolation.
Without such solidarity, we are marching towards a world with no center, no authority, no order; a world ruled by a globalized Mafia “where what is official and what is clandestine will meet”.
The logic of power in that future world will be unforgiving toward those who give up on their will to self-determination.
To maintain that will, we must fight the fear of going against the prevailing political orthodoxy of an inevitable globalization.
The only fish that always swims with the current is a dead fish.
The Revolutionary Conservative Pope
Twenty-five years ago, Poland's people were stunned by the choice of their compatriot, Cardinal Karol Wojtyla of Cracow, as Pope.
Some were frightened, others wept with joy.
Here, said a prominent writer, was "Poland's second baptism."
But even in our euphoria, we did not expect how much the new Pope would change not only Poland, but the world.
His first return visit to his native country soon afterwards showed to all the world the new Pope's power.
Communist police disappeared from the main streets of Warsaw, yet the streets became models of order.
After decades of disempowerment, Poles suddenly regained their capacity for self-determination.
In saying aloud that "there can be no just Europe without an independent Poland on its map," the Pope effectively swept away the unjust postwar settlement that had subjugated Poland to Soviet power.
Then, in Auschwitz, the Pope said: "I speak in the name of everyone whose rights go unrecognized and violated anywhere in the world, I speak because I am bound, we are all bound, by truth."
On that spot, that Golgotha of modern times, he called the Poles, who remembered dear ones gassed to death in Auschwitz's crematoria as well as those frozen into glass in Siberia's concentration camps, to a brotherhood devoted to struggle against even justified hatred and revenge.
Some see in the Pope the person responsible for a religious revival; others see a man of peace.
Some see a defender of the poor, others a critic of liberation theology.
For the people of Poland, John Paul II, by making human rights the central subject of his teaching, will forever be the man who gave us courage and hope, who restored our historical identity.
Indeed, the central feature of the first decade of the Pope's reign was his struggle against dictatorship--Communist dictatorship in particular.
The strategy formulated by the Pope for the Catholic Church, and his ability to mobilize millions of believers in its cause, meant that no one could ever again repeat Stalin's question: "How many divisions does the Pope have?"
John Paul II demonstrated that moral force was a weapon potent enough to undo Yalta's division of the world.
Perhaps in part because of their strong anticommunist stance, the Polish Church and John Paul II are often branded as "conservative."
The accusation is meant to suggest that the Church cannot live comfortably with a pluralist democracy.
To be sure, in the struggle against Communism, the Polish Church was, indeed, conservative--and thank God for that!
It was conservative in its absolute fidelity to evangelical values, to the truth of faith, to its historical identity.
For the system of official atheism and legalized mendacity, the Church was a living rebuke.
With Communism gone, however, the problem confronted by John Paul II and his Church today is this: in what language can evangelical values be articulated in a world where evil is not incarnated in a political system but is diffused in individual souls?
What is the Pope's message for the postcommunist world he helped create?
John Paul II undoubtedly keeps a distance from liberal economic ideas and the liberal state, which he often charges with permissiveness and moral relativism.
A critique of individualism in the name of collective values occurs frequently in the Pope's pronouncements.
He sees the failings of liberalism as particularly pernicious in postcommunist countries.
The market economy, despite its practical achievements, seems to him oftentimes to lack a heart and a human face.
He sees the market as favoring entrepreneurship over human solidarity.
So John Paul II is no enthusiast of modern Western civilization, with its divorce from the world of values, and he contrasts with it the moral sensitivity of societies with fresh memories of decades of dictatorship.
Like Alexander Solzhenitsyn, the Pope tends to believe that it was above all in resistance to totalitarianism that man could become truly free and preserve the fundamental values of civilization.
I confess that I view the heritage of Communism with more skepticism.
Totalitarian pressure did, indeed, form exceptional people such as John Paul II and Alexander Solzhenitsyn, people for whom religious faith bought freedom from mendacity and solitude.
But it did the same for Andrei Sakharov and Vaclav Havel, who defended their supreme values with reference to, and in the language of, lay humanism.
For most people, however, life under totalitarian dictatorship was not ennobling; it was, rather, a daily immersion in lies, spiritual depravity, and material corruption.
This is why postcommunist societies do not demonstrate any nobility or disinterestedness that seriously contrasts with the West.
Communism's defeat left a huge black hole in communities' souls, which is now being filled with nationalism, bigotry, and Western consumerism.
But John Paul II's basic intuition is correct: the postcommunist world--East and West--is in spiritual crisis, and the Pope wants to shake it into realizing the importance of higher values.
Indeed, by his words and example, the Pope disrupts the world: it wants to live in wealth and comfort; he reminds us that we must also live in dignity.
In the end, John Paul II does not fit neatly into any category and often represents a meeting of opposites: rejection of compromise with ecumenism, toughness with warmth, intellectual openness with insistence on theological orthodoxy.
He is a conservative who loves freedom and a "peacemonger" who condemns injustice, but who reminds us that mercy is more important than justice.
In this, he personifies the paradox that is Christianity: unbreakable and lasting principles joined by understanding and tolerance.
Twenty-five years after John Paul II left Poland for Rome, we Poles remain grateful to him for having helped us regain our freedom.
It is good that John Paul II is among us.
A world where everything changes needs a guardian of what remains the same.
The Revolutionary Ethics of Embryo Research
What appeared to be the most momentous scientific advance of 2005 is currently under siege.
In June, the prestigious journal Science published an article by the South Korean scientist Woo-Suk Hwang and an international team of co-authors describing how they had developed what were, in effect, “made to order” lines of human stem cells cloned from an adult.
Although the scientific validity of their research is now the subject of several separate investigations, it is no less important to examine its ethical implications.
Hwang and his colleagues claimed to have replaced the nucleus of an unfertilized human egg with the nucleus of an ordinary cell taken from another person, developing stem-cell lines from the resulting embryo that matched the DNA of the person who supplied the ordinary cell.
That achievement appeared to take us significantly closer to a world in which patients could be given cell or tissue transplants that their bodies would not reject, because the biological materials, cloned from the patients themselves, would be a perfect match.
At the beginning of December, Hwang disclosed that some of the eggs came from two women working in his lab, and that other “donors” had been paid for their eggs – a breach of ethical guidelines that had nothing to do with the accuracy of the science.
But then Hwang’s collaborators began questioning the validity of the experiment itself, and Hwang notified Science that he wished to withdraw the paper.
At the time of this writing, he still defends the validity of his work, while admitting “human errors” in the preservation of the stem-cell lines, including contamination by a fungus.
He has reportedly even suggested that some cells may have been tampered with.
We will not know how close we are to the production of individually tailored stem-cell lines until the scientific investigations into Hwang’s research are completed.
Nevertheless, few researchers doubt that what Hwang and his colleagues claimed to do is, in principle, achievable.
If Hwang was not the first to do it, someone else eventually will.
Once it can be done reliably, it will pave the way for important medical breakthroughs.
But the ethical significance of such research goes far beyond the undoubted importance of saving critically ill patients.
Proving the possibility of cloning from the nucleus of an ordinary human cell would transform the debate about the value of potential human life, for we would find that “potential human life” was all around us, in every cell of our bodies.
For example, when President George W. Bush announced in 2001 that the United States would not fund research into new stem-cell lines that are created from human embryos, he offered the following reason: “Like a snowflake, each of these embryos is unique, with the unique genetic potential of an individual human being.”
But it is precisely this reasoning that is threatened by what Hwang and his team claimed to have achieved.
If it is the uniqueness of human embryos that makes it wrong to destroy them, then there is no compelling reason not to take one cell from an embryo and destroy the remainder of it to obtain stem cells, for the embryo’s “unique genetic potential” would be preserved.
This possibility highlights the weakness of the argument that abortion, too, is wrong because it destroys a genetically unique human being.
By this reasoning, a woman who finds herself pregnant at an inconvenient time could have an abortion, as long as she preserves a single cell from the fetus to ensure that its unique genetic potential is preserved.
But it seems absurd that this should make any difference to the morality of aborting the fetus.
If, at a later date, the woman wants to have a child, why should she use the DNA of her earlier, aborted fetus rather than conceiving another fetus in the usual way?
Each fetus – the one she aborts and the one she later conceives through sexual intercourse – has its own “unique” DNA.
In the absence of special reasons, like a change in sexual partners, there seems to be no reason to prefer the existence of one child to that of the other.
Perhaps the assumption is that, as opponents of abortion sometimes say, the aborted fetus had the genetic potential to become a Beethoven or an Einstein.
But, for all we know, it is the next fetus that the woman will conceive, not the one she aborted, that will turn out to be the Beethoven or Einstein.
So why prefer one genetic potential over the other?
Once we abandon arguments based on potential, the claim that it is wrong to kill embryos and fetuses must be based on the nature of those entities themselves – that they are actual human beings who already possess the characteristics that make killing wrong.
But, because fetuses, at least at the stage of development when most abortions are performed, have yet to develop any kind of consciousness, it seems reasonable to regard ending their lives as much less serious than killing a normal human being.
If so, then this is all the more true of embryos.
The Revolution Betrayed
KYIV – From snowy Kyiv, I have watched the successful revolutions in Cairo and Tunis with joy and admiration.
Egyptians and Tunisians are right to be proud of their desire to peacefully overthrow despotic governments.
But, as someone who led a peaceful revolution, I hope that pride is tempered by pragmatism, because a change of regime is only the first step in establishing a democracy backed by the rule of law.
Indeed, as my country, Ukraine, is now demonstrating, after revolutionary euphoria fades and normality returns, democratic revolutions can be betrayed and reversed.
The first of Ukraine’s lessons for Egyptian and Tunisian democrats is that elections do not a democracy make.
After all, what if the enemies of freedom use elections to entrench their anti-democratic agendas?
What if elements of the old regime, or the cadres of militant minorities, only pretend to embrace democratic norms in order to hijack the new democracy?
In Ukraine today, these are not abstract questions.
Six years after our Orange Revolution, not only is my country’s democracy under threat, but the rule of law is being systematically perverted and our national independence bartered away.
Indeed, the hybrid presidential/parliamentary system that Ukraine established as part of the settlement which brought a peaceful end to our revolution is being hollowed out in order to concentrate all political power in the hands of a supposedly democratically elected president.
Of course, Ukraine’s plight does not mean that the people of Egypt and Tunisia should spurn the call for free elections.
Determining the will of the people does require expression through the ballot box.
But elections alone cannot solve the fundamental political problems confronting Egypt and Tunisia.
In particular, they cannot create a liberal order and open society.
To be effective, elections must be preceded by an extensive debate, in which political arguments are made, attacked, defended, and, ultimately, embodied in ideologically coherent party organizations.
Democratic consent can truly be given only when voters know what they are consenting to.
Whoever refuses to make a public case for what he or she intends to do when in power, or lies about it – as Ukraine’s current president, Viktor Yanukovych, did during his campaign against me last year – is no supporter of the democracy that citizens risked their lives to establish.
Moreover, democracy must be rooted in the rule of law.
There must be accepted rules that are binding on everyone in politics, so that whoever does not accept or obey them is disqualified.
Yanukovych’s naked attempt to hijack the election that precipitated the Orange Revolution should have caused him to be banned from running in future elections.
Yet he was not.
Now, as president, Yanukovych’s crude instinct is to treat the law and constitution as Karl Marx thought of them: as a mixture of sentimentality, superstition, and the unconscious rationalization of private interests.
Stealing elections, suppressing the vote, and behaving in contempt of the rule of law are negations of democracy.
Those who engage in them must be seen as democracy’s enemies and treated as such.
A second lesson follows from this.
The fact that a government has been democratically elected does not mean that the cause of freedom has prevailed.
The rest of the world must not turn a blind eye to authoritarian backsliding.
Yet today, not only are many of Ukraine’s neighbors silent about Yanukovych’s strangulation of Ukraine’s democracy, but some openly celebrate the supposed “stability” that his regime has imposed.
For decades, Egyptians and Tunisians paid a high a price in freedom for the stability of others.
They must never be asked, or forced, to pay it again.
One way to help prevent a democratic revolution from being betrayed from within is by building a genuine civil society.
We in Ukraine learned this truth from harsh experience in the communist era.
Although communism could, every now and then, coexist with private property, and sometimes with private enterprise, it could never coexist with civil society.
The most fateful attack to accompany the installation of any dictatorship is an attack on civil society.
In Ukraine, freedom of speech was, on communism’s fall, restored overnight.
But reviving civil society – the many mutually complementary ways in which citizens participate in public life – is a complicated task, as the peoples of Egypt and Tunisia will soon find out.
The reason is self-evident: civil society is an intricate, fragile, even mysterious entity that evolves over decades, if not centuries.
Its pillars – private, voluntary associations, decentralization of the state, and delegation of political power to independent bodies – must be nurtured patiently and from below.
Where civil society remains underdeveloped, every problem filters up to the “Big Man” squatting at the top.
So the more power is concentrated at the center, the more it becomes possible for anti-democratic forces to gain – or regain – control over a country.
As people around the world encourage the prospect of democracy coming to Egypt and Tunisia, let us not be beguiled by its formal trappings.
Let us celebrate the arrival in North Africa of the spirit of liberty and of solidarity, which brought Ukraine its liberty once and will do so again.
And let us pledge that our solidarity does not end at the borders of our nations.
Freedom – true freedom – is indivisible.
The Revolution Reborn
MEXICO CITY – In El Salvador, for the first time ever in Latin America, a former political-military organization that tried to gain power through the barrel of a gun has achieved its aims through the ballot box.
Although the Sandinista Front in Nicaragua did win a semi-legitimate election in 1984, it had reached power five years earlier by overthrowing the Somoza dictatorship.
By 2006, when Daniel Ortega was finally re-elected, the old Sandinista Front of 1979 was unrecognizable.
El Salvador’s Farabundo Martí Liberation Front (FMLN) was created in 1980, through the fusion of five guerrilla groups supported by Cuba and Nicaragua.
The FMLN nominated a presentable and attractive candidate, Mauricio Funes, for last Sunday’s presidential election, and, despite seeing a 10-point lead whittled down to barely two points by election night, squeaked out an uncontested victory.
The conservative ARENA party, which has governed El Salvador since the country’s 10-year civil war ended in 1992, did everything possible to prevent an FMLN victory, resorted, once again, to every red-baiting trick in the book.
According to ARENA’s relentlessly negative campaign, a triumph for the left would bring communism, Hugo Chávez, and the Castro brothers to San Salvador.
But scare tactics did not work this time.
There is obviously a lesson here to be learned by other left-wing political movements and guerrilla groups in Latin America.
The Socialist Party in Chile, the Workers Party in Brazil, the Broad Front in Uruguay, even Chávez in Venezuela and the PRD and FSLN in Mexico and Nicaragua, respectively, have shown that, after years of waiting, the left can win elections in Latin America.
The difference between these victorious leftists and El Salvador’s FMLN will be revealed when the FMLN’s old characteristics as an armed movement are challenged by the daily facts of governance.
For, while Funes is no old guerrilla hack, his vice president, Salvador Sanchez Ceren, and almost the entire FMLN leadership are unreformed Castroist guerrilla leaders and cadres.
It is they, not Funes, who control the FMLN organization.
The FMLN’s most reform-minded, democratic, modern, and brilliant leaders – Facundo Guardado, Joaquin Villalobos, Salvador Samayoa, Ana Guadalupe Martinez, and Ferman Cienfuegos – have all left the party.
A second worrying factor is the FMLN’s links to Cuba and Venezuela.
As recently as a year ago, anyone who visited FMLN headquarters in San Salvador to interview, for example, Ceren, its Secretary General, would be struck by the overwhelming presence of Chávez: red shirts, red berets, pictures of the Venezuelan caudillo, quotations from his teachings and musings.
Chávez helped the FMLN by giving free or cheap oil to its mayors in many parts of the country, and probably (though it has not been proven) by channeling funds, if only in small quantities, to the party’s electoral coffers.
The Cuban presence also remains strong, although the recent political purges initiated by Raúl Castro make it difficult to know who exactly is working for whom.
Ramiro Abreu, who “ran” El Salvador for Cuba’s Department of the Americas in the 1980’s and 1990’s, remains active, but now more as a businessman and a senior statesman than as a Cuban operative.
But Cuba’s influence on the old FMLN leadership remains intact.
Cuban and Venezuelan involvement in political parties in Mexico or Brazil, for example, is undisputable, but not necessarily very relevant.
These are large countries with huge economies, where conspiring and doling out small perks and favors is not very effective.
But El Salvador, like Nicaragua, Bolivia, and Ecuador, is another story.
A third factor that weighs in the balance in analyzing what sort of government the FMLN may deliver is the economic crisis that is battering Latin America.
For the moment, it is impossible to ascertain whether the recession will provoke a radicalization of the left in the region, which Chávez seems to be promoting, or induce moderation through resignation – that is, a postponement of revolutionary goals owing to inauspicious economic conditions.
We will know soon.
But the most important consequence of the FMLN’s victory may lie in its effect on the rest of Central America and Mexico.
Honduran President Manuel Zelaya, more out of convenience and demagogy than conviction, has moved into the Chávez orbit;
Nicaragua’s Ortega was always part of that orbit, as are people close to Alvaro Colóm in Guatemala.
If too we add El Salvador to this list, only Costa Rica and Panama to the south remain out of the loop, leaving Mexico to the north increasingly exposed.
Of course, the Central American nations do not wield huge influence in Mexico; if anything, it is the other way around.
But the Mexican left, while no longer as weak as it was after its defeat in 2006, has always needed foreign role models.
It sympathizes far more with Chávez, Bolivian President Evo Morales, Cuba, the Sandinistas, and now the FMLN than with the moderate left elected in Chile, Brazil, Uruguay, and Peru.
They will read Funes’ victory as one more notch on the barrel of “the people’s” rifle and one more hair plucked from Uncle Sam’s beard.
To dismiss the FMLN’s historical achievement as simply an act of justice or a foreseeable event in a tiny backwater would be reckless.
The Revolution Will Not Be Memorialized
Forty years ago Mao Zedong launched the Cultural Revolution.
The Propaganda Department of China’s ruling Communists have now issued an order banning any kind of reviews or commemoration of this disaster as part of the Party’s bid to make the Chinese forget about that lost decade.
But in condemning the Japanese for neglect of the Nanjing massacre during the Second World War, Chinese officials proclaim that forgetting the past betrays the people.
But. for the Chinese, the Cultural Revolution was itself a betrayal, one that continues to this day.
All the terrible events since then – the Tiananmen Square massacre, persecution of Falun Gong, and repression of civic activists – are the evil fruit of that un-cleansed original sin.
The Cultural Revolution marked the climax of class extermination practiced by the Party during the 1960’s.
The survivors of all the previous political movements, now enthralled by Mao’s personality cult, were free of all constraint, able to kill and seek revenge with impunity.
As Mao summed up this psychological state: “Now is a time of upheaval, and I’m just happy about the chaos.”
Good people get to know each other by biting each other and it serves bad people right if they are bitten by good ones…”
Friends of my generation invariably comment when I mention that I was born on August 18: “Hey, that was the anniversary of Chairman Mao first receiving the Red Guards.”
These are people who, like the Hitler Youth, turned over their bloody page of history and never looked back.
According to Wang Youqin, author of Victims of the Cultural Revolution , after Mao received the Red Guards and instructed them in the “militant fight,” more than 1,700 people were beaten, drowned, or scalded to death.
Another 100,000 were driven from their homes.
Within months, an all-out movement, under the banner of “revolutionize Chinese culture” and dedicated to the aim of “breaking away from old culture, old traditions, old thoughts, and old customs,” was raging throughout the country.
Those who had been born “landlords, rich farmers, reactionaries, bad elements, and rightists” were among the first to be victimized.
Desperate to save their lives, families voluntarily smashed their properties and pulped their ancient paintings and calligraphy.
Episodes of “burning books and burying intellectuals alive” had occurred before, but none was more radical than the destructive force unleashed by Mao.
Soon, ancient sites would be ruined.
Corpses of historic figures, such as Zhang Zhidong, a high-ranking official in the Qing Dynasty, were exhumed, with the decaying bodies left hanging in trees.
Eventually, anybody – from the President to average citizens – could be criticized, labeled an “ox-demon and snake-spirit,” persecuted, and listed for death.
People killed others to safeguard Mao, and those who were executed shouted “Long Live Chairman Mao” on their way to death.
In Guangxi province, where some of the worst violence occurred, nearly 100,000 people were killed during July and August 1968.
In the official “Memorabilia of the Cultural Revolution in Guangxi,” many infants appear on the death list.
The author Zheng Yi reported that in Wuxuan County alone, more than 100 people were eaten, because devouring enemies was the only way to prove one’s love for Mao.
Livers, eyes, or brains were removed while victims were still alive.
Mao set off yet another wave of persecutions in 1968.
In countless “suicides,” many people were simply bitten to death, or took their own lives when the suffering became too much to bear.
In Beijing, deaths occurred mostly in areas wuth trees and lakes.
Wang Youqin reports that on November 4, four bodies were found floating in the lake of the Summer Palace.
A total of 63 people were killed at the prestigious Beijing University.
Mao died aspiring to exterminate Chinese culture.
His Cultural Revolution alone killed as many as two million people, shattered traditions, uprooted spiritual and ethical values, and tore apart family ties and communal loyalties.
People who experienced it seal off the memory, for the pain, worse than a bullet to the heart, overwhelms souls.
Worst of all, Mao’s crimes against civilization, unlike those of, say, Hitler, are ongoing.
The Communist Party still uses his brainwashing methods, and his legacy continues to be officially revered.
His portrait and body remain on display in Beijing’s Tiananmen Square, and his face appears on banknotes in the wallet of every Chinese, many of whom saw parents, children, and other loved ones die under his knife.
The Chinese people, unsurprisingly, regard politics with a mixture of caution and dread.
Public figures spend a lot of time and effort to avoid offending the Party, openly endorsing indifference as the foremost tool of survival.
Last month, I watched a TV show featuring Han Meilin, a famous painter.
In his closing remarks, he announced his words of wisdom to viewers: “Long live those who don’t care!”
Han Meilin was badly persecuted during the Cultural Revolution.
His declaration was greeted by a roar of applause from the studio audience.
The Richest Get Richer
Card-carrying neo-liberals like me, who pushed for opening capital flows wide in the early 1990's, had a particular vision in mind.
But the future that we hoped for did not come to pass.
We looked at how extraordinarily strongly the world's system of relative prices was tilted against the poor: how cheap were the products they exported, and how expensive were the capital goods that they needed to import in order to industrialize and develop.
"Why not free up capital flows and so encourage large-scale lending from the rich to the poor?" we asked.
Such large-scale lending might cut a generation off the time it would take economies where people were poor to converge with the industrial structures and living standards of rich countries.
Certainly such large-scale borrowing and lending had played a key role in the late-19th century. Canada, the western United States, Australia, New Zealand, Chile, Argentina, Uruguay, and South Africa: all were developed due to imported capital a century ago.
But things didn't turn out that way this time around.
Instead of capital flowing from rich to poor, just the opposite happened: it flowed from poor to rich, the overwhelmingly largest stream going to the US, whose rate of capital inflow is now the largest of any country, anywhere, anytime.
What has fed these inflows?
One source is central banks seeking to keep the value of their home currencies down so that their workers can gain valuable experience from exporting to the rich world.
Another source is investors who feared losing their money after the various emerging market meltdowns of the 1990's, techno-enthusiasts chasing the pot of gold that the American technology boom seemed to offer, and the third-world rich, who think a Deutsche Bank account is good to have in case they need to flee their countries in a Lear jet or a rubber boat.
All of these sources contributed to the flow of money into the US, which was thus enabled to invest much more than it had managed to save.
America's economy became - and remains - a giant vacuum cleaner, soaking up the world's spare investment cash.
So those of us who still wish to be flag-waving advocates for international capital mobility are reduced to two arguments.
First, and most important, capital controls create ideal conditions for large-scale corruption.
With capital controls, people who badly want to move their capital across borders can't - unless they find some complaisant bureaucrat.
But an effective market economy needs to minimize the incentives and opportunities for corruption, or it will turn into something worse.
Second, perhaps the inflow of capital into America was and remains justified: perhaps there is something uniquely valuable about investments in America today.
(But in that case, if these investment opportunities are so great, why aren't Americans themselves saving more - both privately and publicly - to take advantage of them?)
The years 1960 to 1985 formed the era in which development was to be financed by public institutions like the World Bank, because market failures and distrust of governments made it hard for poor countries to borrow privately.
The years 1985 to 2000 were the era in which development was to be financed by private lending to countries that adopted the market-friendly and market-conforming policies that were supposed to lead to high returns and rapid growth.
The first era was not an unqualified success.
Looking at the capital flow reversal into the US, I cannot argue that the second era has been an unqualified success either.
It is nice that Mexican workers and entrepreneurs are gaining experience in export manufactures, and successful enough to run a trade surplus vis-à-vis the US.
But the flip side of the trade surplus is the capital outflow.
Should capital-poor Mexico really be financing a further jump in the capital intensity of the US economy?
It is not possible for a card-carrying neo-liberal like me to wish for anything but the most minor of controls to curb speculative of capital flows.
Capital markets can get the allocation of investment badly wrong, but governments are likely to get it wrong even worse, and the incentives to corrupt bureaucrats do need to be kept as low as possible.
But the hope for a repetition of the late 19th-century experience has - so far - proved vain.
Unlike in the heyday of liberalism, money from the world's rich countries simply is not going to give peripheral economies the priceless gift of rapid, successful development.
The Rich Should Keep Their Word
For the first time in human history, the world is within striking distance of ending global poverty.
A preposterous claim?
Perhaps.
After all, the poor seem to be everywhere and are increasing in numbers due to global recession, population growth, and economic mismanagement from Argentina to Zimbabwe.
Yet, I'll stick to my claim.
If the world - especially the US and other rich countries - shift a small amount of their military spending to meeting the needs of the world's poorest people, our generation could free humanity from poverty's iron grip.
I am not speaking of relative poverty, the nearly inevitable fact that some members of society are worse off than others, though to some extent that varies society to society.
I am speaking of the gut-wrenching, life-threatening poverty of living on less than $1 per day.
For the first time ever, the world has it in its power to eliminate those extreme conditions.
Why is this?
The world's richest countries have continued their economic ascent for generations, carried forward by the flowering of science and technology.
Even though poor countries seem to be falling ever farther behind, the truth is more heartening.
Large parts of the so-called developing world, especially in Asia, have made incredible strides away from absolute poverty.
China is the most striking success here, with hundreds of millions of people enjoying higher living standards in the past twenty years, including better health, nutrition, and sanitation.
India achieved notable successes more recently, though much remains to be accomplished.
The poorest of the poor in sub-Saharan Africa and in remote areas of Latin America and Central Asia have not shared these successes.
At least 1 billion people, perhaps nearly twice that number, live in squalid conditions of hunger, disease, and impoverishment.
In many of these countries, the past twenty years have marked a time of regress, not progress.
Disease has swept Africa, with the AIDS pandemic and the resurgence of malaria and tuberculosis.
Hunger afflicts hundreds of millions, as world weather patterns seem to become more erratic, with more dangerous droughts and floods associated perhaps with long-term changes in the climate.
Millions die each year of poverty - lives that could be saved if the poor had access to better health care, nutrition, and other essential needs.
The extreme poverty of the bottom billion people is shocking, morally intolerable, and dangerous - a breeding ground of disease, terrorism, and violence.
Yet with the richest countries richer than ever before, and with much of the developing world already escaped from the horrors of extreme poverty, the balance has shifted in favor of ending global poverty.
Rich countries could enable the poorest of the poor to escape from misery by providing just a tiny fraction of their yearly national income - or, indeed, of their military spending - to overcome the crises of hunger, education, and disease.
That aid, combined with the market-based economic growth, could end extreme poverty.
Importantly, rich countries are committed to working with the poorest countries to meet these objectives.
But as with many promises, America and other donor countries have so far failed to live up to their pledges.
At the UN's Millennium Summit in September 2000, the world's leaders made solemn pledges to tackle global poverty.
They issued a declaration calling for action now, so that extreme poverty can be dramatically reduced by the year 2015.
They even pledged to mobilize financial assistance.
Within the broad Millennium Declaration is a set of specific targets for reducing poverty, disease, hunger, illiteracy, and environmental degradation. They provide explicit, detailed commitments.
For example, rich and poor countries together have committed to reducing infant mortality rates by two-thirds as of 2015, compared with the levels in countries as of 1990.
Sadly, for dozens of countries around the world, that target is not being met, because too little money is invested in health.
Many studies, including those that I did for the World Health Organization, show that for a modest amount of money worldwide, perhaps an extra $50 - $100 billion per year in aid from rich countries, the Millennium Development Goals can be achieved.
That may seem like a lot of money, but not in comparison with the $25 trillion in income each year earned by rich countries, or the roughly $500 billion spent each year on their militaries.
Much of the world looks at the US and other rich countries with resentment, feeling that they don't keep their commitments to help less fortunate countries.
The rich world can redeem itself, indeed promote its interests in global peace and prosperity, by proving that the Millennium Development Goals are not empty words.
The key test of those commitments will come next month at a UN Conference in Monterrey, Mexico on Finance for Development.
The conference will focus on the bottom line - where is the money to fight poverty and disease?
Will the rich follow promises with actions?
In Monterrey, rich countries can show the rest of humanity, especially the poorest of the poor, that they've gotten the message.
Let's hope, for our common future, that the world's leaders get it right this time around.
The Moral of Sandy
COPENHAGEN – When “superstorm” Sandy hit the east coast of the United States on October 29, it not only flooded the New York City Subway and became the most important factor for 15% of US voters in the presidential election a week later.
It also resurrected the unwarranted claim that global warming was to blame for such events, together with the morally irresponsible argument that we should help future hurricane victims by cutting CO2 emissions.
From Bill Clinton to Robert Redford, countless pundits blamed Sandy on climate change.
Most spectacularly, the cover of Bloomberg Businessweek placed the monumental caption “IT’S GLOBAL WARMING, STUPID” over a picture of flooded Manhattan.
Now, global warming is real, and cutting CO2 is a good idea when the reduction cost is lower than that of the damage it prevents.
There is also a grain of truth in the connection between hurricanes and global warming: the United Nations Intergovernmental Panel on Climate Change (IPCC) expects stronger but fewer hurricanes toward the end of this century.
But the end of the century is 88 years from now, and blaming global warming now is simply unconvincing (Bloomberg’s first source for its claim was a 134-character tweet).
In its 2012 report on extreme weather, the IPCC said that it puts little trust in any attribution of hurricanes to global warming.
The authors of one of the central Science papers for the UN’s hurricane estimates put it clearly: “It is premature to conclude that human activities … have already had a detectable impact on Atlantic hurricane activity.”
In fact, the US has not seen a hurricane of Category 3 or higher since Wilma in 2005.
Those seven years without strong hurricanes is the longest such span in more than a century.
(Sandy, which was downgraded from a hurricane before it hit New York, was rebranded in the media as a “superstorm.”)
While Bloomberg claims that Sandy is the costliest storm in US history, and holds implications for “the survival of the human race,” this is simply wrong, as any recollection of the costs of Hurricane Katrina would show.
Indeed, when adjusted for inflation and growth of coastal communities, Sandy ranks only 17th for US storms, and both the number and power of hurricanes that make landfall in the US have been declining slightly since 1900, not increasing.
Similarly, in global terms, the energy in hurricanes during the last four years (including Sandy) has been lower than at any point since the 1970’s.
And, though hurricanes will be perhaps 2-11% stronger by the end of the century, they will also be less frequent, while societies will be more robust, with total global damage costs set to decline from 0.04% to 0.02% of world GDP over this period.
But the real damage from the claims about Sandy and climate change stems from what often follows: the insidious argument that if global warming caused this destruction, we should help future victims of hurricanes by cutting CO2 emissions now.
As Redford put it, we need to “reduce the carbon pollution that's fueling these storms.” Like so many others, he deplores doubters: “By ignoring the scientific facts, they dishonor the human suffering brought on by climate change.”
But, unfortunately, it is by focusing on cutting CO2 that we really dishonor human suffering, because any realistic carbon cuts will do virtually nothing for the next 50-100 years.
Consider sea-level rise, which caused by far the most damage in New York.
Models show that the world’s most ambitious climate policy, the EU’s “20-20-20” plan, will have a net cost of roughly $250 billion a year for the rest of the century, or about $20 trillion in total.
Yet it will reduce sea-level rise by just nine millimeters by 2100.
If the US embarked on a similar plan, the cost and the benefit would probably be on a similar scale: a two-centimeter reduction in sea-level rise by the end of the century at a net cost of about $500 billion annually.
Consider this extremely unrealistic scenario: even if we almost immediately could get the entire world – including China and India – on board for drastic carbon cuts, and even if we would suck CO2 out of the atmosphere toward the end of the century, we could reduce sea level rise by only 18-45 centimeters by the end of the century.
Models show that the cost, by then, would be at least $40 trillion annually.
Contrast this to what New York City is rightly concerned about: the 3.3% chance each year (entirely without global warming) that a Category 3 hurricane will hit New York.
This would cause sea surges of up to 7.5 meters (about three meters higher than Sandy), putting Kennedy Airport under six meters of water.
Much of the risk could be managed by erecting seawalls, building storm doors for the Subway, and simple fixes like porous pavements – all at a cost of around $100 million a year.
Sandy underscored a fundamental question for all parts of the world that are affected by hurricanes.
If we want to reduce hurricane damage, should we focus primarily on a very cheap solution that would enable us to handle storm surges much better within a few years, or on an incredibly expensive solution that would require almost a hundred years to avoid nine millimeters of 7.5-meter surges?
The morally defensible answer is clear, and it has nothing to do with immediate reductions in CO2 emissions.
The “Right” Growth for Africa
Africa has the highest level of poverty in the world and is one of the two regions where poverty has not declined in the past twenty years.
As the United Nations Economic Commission for Africa’s forthcoming Economic Report on Africa 2005 shows, the proportion of the poor – those living on less that one dollar a day – halved between 1980 and 2003 at the global level, from 40% to 20%.
But in Africa, the share of the poor increased slightly, from 45% to 46%.
Africa’s poverty rate in 2003 exceeds that of the next poorest region, South Asia, by 17 percentage points.
Recognizing the link between economic growth and poverty reduction, those who crafted the UN’s Millennium Development Goals (MDG’s) estimated that halving poverty by 2015 in Africa requires countries to achieve an average minimum growth rate of 7% annually.
Whether or not African countries will reach this goal is an open question.
Since the mid-1990’s, African economies have been recording growth rates that are higher than world averages.
According to the World Bank, the average growth rate for the period 1996-2002 in Africa was about 3.6%, compared to the world average of 2.7%.
Growth in Africa in 2004 averaged 5.1%, the fastest in eight years.
Growth rates this year and in 2006 are projected at 4.7% and 5.2%, respectively.
These average rates mask stark differences between countries.
In 2004, for example, Chad’s 39.4% annual growth rate contrasted sharply with Zimbabwe’s -6.8% economic contraction.
Nevertheless, there is no doubt that African economies, taken together, have recovered from the dark years of the 1980’s.
So the big question is why growth hasn’t translated into poverty reduction.
One reason is that Africa’s recent growth rates, while high by international standards, remain too low to have a substantial impact on poverty.
Initial conditions are so low that only high and sustained growth levels may have a noticeable impact on poverty reduction.
In no year has Africa, as a continent, achieved the 7% average growth rate required by the MDG’s.
Consider Ethiopia.
With its per capita GDP of about $100, a growth rate of 7% means that a typical Ethiopian will increase his income by $7 a year (if this additional income is evenly distributed).
But if this rate of growth were sustained over a period of just ten years, per capita income would double, which underscores the need for sustained high growth rates.
Very few countries in Africa have posted growth rates consistent with the MDG’s threshold.
In 2004, only six countries – Chad, Equatorial Guinea, Liberia, Ethiopia, Angola and Mozambique – had annual growth rates higher than 7%.
And only four countries sustained a growth rate of 7% or more over the past five years.
Moreover, most of the observed growth was generated by capital rather than labor-intensive sectors.
If the fruit of economic growth reaches the poor through employment creation, growth in capital-intensive sectors has a limited effect on poverty reduction.
Indeed, recent growth in Africa appears to have been fueled by increases in oil exports and high oil prices.
Eight of the top 10 performers in 2004 are either oil-exporting countries or post-conflict economies, with the latter’s high annual growth rates explained mostly by the proverbial “dead cat bounce” – the low base period over which growth is measured.
Economic growth reduces poverty only if it benefits the poor, and the effect of growth on poverty reduction is a function of the pattern of income distribution within a country.
Africa as a continent has the world’s second highest measure of income concentration.
This suggests that the new wealth created over the last ten years has mostly benefited the rich.
To help reduce its poverty, Africa must strive to increase even further its growth rates and sustain them over a long period.
Moreover, there must be greater balance between capital-intensive and labor-intensive activities.
But encouraging labor-intensive industries, which create jobs for the poor, must not be at the expense of capital-intensive industries.
Finally, Africa’s income distribution must become more equitable.
This is difficult, given that a skewed income distribution is usually a legacy of a country’s history.
But it is not impossible, particularly for those African countries that succeed in modernizing their political institutions.
The Right Populism for Poland
Poland’s parliamentary and presidential elections this month saw the death of a left-leaning postcommunist party that mostly dominated the country since 1995.
But the demise of the left does not mean that the right has a coherent economic program.
For the victorious coalition of the Law and Justice (PiS) party and Civic Platform (PO) is torn between liberal (PO) and populist instincts (PiS).&nbsp;
If PiS’s populist slogans become policy, government spending is likely to expand, which will exacerbate Poland’s already weak fiscal position and consequently trigger inflationary expectations.
Worse, boosting social spending will contribute little to resolving the country’s staggering 17.5% rate of unemployment – most of it structural –while any hope of quick euro adoption will be dashed.
What Poland needs most is fiscal discipline and market-oriented reforms, including relaxation of the rigid labor laws that are inhibiting job creation.
After all, over the past two decades, the enduring goals of dismantling communism and central planning, as well as joining the European Union, have served as important driving forces of reform.
But can the political will for renewed reform be mustered in a government that is half liberal and half populist?
A specific commitment to adopt the euro at the earliest possible date could serve as the same sort of springboard as the push to join the EU in the 1990’s.
Such a strategic goal would provide justification for prudent fiscal and monetary policies, and, given Poles’ desire to consider themselves full Europeans, it would boost political support for such policies.
Only such support can bring the government budget deficit, expected to reach 4.4% of GDP in 2005, down to the EU’s benchmark of less than 3% of GDP within the next two years.
Moreover, a commitment to pursue euro membership will have positive spillover effects.
It will reinforce convergence expectations among financial market participants, which will translate into lower risk premia for investors.
Lower risk also will bring inflation expectations down and reduce interest rates, which will in turn speed up the compression of Polish government bond yields to comparable EU levels, increasing financial stability.
While the current yield on 10-year Polish government bonds of 4.7% appears to be at the edge of meeting the Maastricht long-term interest-rate benchmark, sustainability will depend on the fiscal policy outlook and on the overall credit risk.
More stable financial markets and a less volatile exchange rate relative to the euro will bring many advantages.
Most importantly, lower exchange-rate risk will boost both domestic and foreign direct investment, thereby helping to alleviate unemployment.
So it is imperative that the new government prepares – in cooperation with the National Bank of Poland (NBP) – a comprehensive program to steer the course of fiscal and monetary policy toward the goal of euro membership.
Although there is no need immediately to announce a specific exchange rate for the zloty at euro entry, such a program must include among its focal points a formula for determining the rate.
By developing and disclose to the public a compelling rationale for what will determine the exchange rate when the time comes, the financial markets would then be able to forecast the future reference exchange rate more precisely.
This would reduce the potential for speculative currency arbitrage and mitigate exchange-rate risk in the run-up to euro adoption, which would contribute to lower market interest rates, as their level always incorporates the prevalent exchange-rate risk.
There is little doubt among economists that euro membership will bring enduring net benefits to Poland.
It will lower transaction costs and increase labor productivity.
But it will do so only if serious institutional deficiencies are eliminated.
These include legal impediments to labor mobility, reform of a complex tax system beset by excessive rates and porous loopholes, and substandard road infrastructure.
Each should be regarded as an urgent matter by the new government, and each, if handled adroitly, could be “sold” to the public as the type of popular reform that people have been demanding.
Poland’s new government faces several serious challenges, not the least of which will be to reconcile its liberal and populist tendencies.
Only if populism is put at the service of liberal reform will the government achieve lasting benefits.
The Right Priorities for the G8
In the run-up to the G8 meeting in Scotland on July 6-8, British Prime Minister Tony Blair has called on the international community to set the right global priorities, which he has unequivocally stated should be Africa and global warming.
Blair is right in challenging us to set priorities. But his choice is probably wrong.
While we should accept his challenge, we should also get our priorities right.
Political leaders rarely espouse clear priorities, preferring to seem capable of giving everything to everybody.
They must work with bureaucracies, which are naturally disinclined to have their efforts prioritized, lest they end up as anything less than number one.
Whenever we prioritize, we not only say where we should do more (which is good) but also where we should not increase our efforts (which is regarded as cynical).
But not talking about priorities does not make the need to prioritize go away.
Instead, the choices only become less clear, less democratic, and less efficient.
Refusing to prioritize, dealing mainly with the most publicized problems, is wrong.
Imagine doctors at a perpetually overrun hospital refusing to perform triage on casualties, merely attending patients as they arrived and fast-tracking those whose families made the most fuss.
Refusing to prioritize is unjust, wastes resources, and costs lives.
So what should be our top global priorities?
This question was addressed in a groundbreaking project involving a long list of the world’s top economists at the Copenhagen Consensus last year.
A “dream team” of eight economists, including three Nobel Laureates, confronted the basic question: if the world had, say, an extra $50 billion to do good, where could that money best be spent?
The top priority turned out to be HIV/AIDS prevention.
A comprehensive program would cost $27 billion, but the potential social benefits would be immense: avoidance of more than 28 million new cases of HIV/AIDS by 2010.
This makes it the best investment the world could make, reaping social benefits that outweigh the costs by 40 to 1.
Similarly, providing micronutrients missing from more than half the world’s diet would reduce diseases caused by deficiencies of iron, zinc, iodine, and Vitamin A with an exceptionally high ratio of benefits to cost.
If we could only find the political will, establishing free trade could be achieved at a very low cost, with benefits of up to $2.4 trillion a year.
Fighting malaria pays off at least five times the costs.
Mosquito nets and effective medication could halve the incidence of malaria and would cost $13 billion.
The list goes on to focus on agricultural technologies to tackle food production and hunger, as well as technologies to boost the supply of clean drinking water and improve sanitation.
Given that these problems are most acute in Africa, Blair’s priorities have some merit.
But the Copenhagen Consensus showed us not only what we should be doing, but also what should not be done – at least not right now.
The experts rated responses to climate change extremely low on the “to do” list.
In fact, the panel called these ventures – including the Kyoto Protocol – “bad projects” because they cost more than the good they do.
This does not mean that we should ignore climate change.
Global warming is real.
But the Kyoto rules will make an almost imperceptible difference (postponing temperature increases from 2100 to 2106) at a substantial cost (about $150 billion per year).
Given scarce resources, we must ask ourselves: do we want to do a lot of good now, or a little good much later?
We need to ask if we can do more for the world by investing differently.
Far from suggesting a policy of laissez faire, this question addresses the pressing problem of prioritization head on.
Why did thousands die in Haiti during the recent hurricanes and not in Florida?
Because Haitians are poor.
They cannot take preventive measures.
Breaking the cycle of poverty by addressing the most pressing issues of disease, hunger, and polluted water will not only do obvious good, but also make people less vulnerable.
The G-8 meeting has put global prioritization on the agenda.
Now is the time to get our priorities right.
The urgent problem of the poor majority of this world is not climate change.
Their problems are more basic: not dying from easily preventable diseases; not being malnourished from lack of simple micronutrients; not being prevented from exploiting opportunities in the global economy by lack of free trade.
We can prevent HIV by handing out condoms and improving health education.
We can prevent millions from dying from malnutrition simply by distributing vitamin supplements.
These are not space-age technologies, but staple goods that the world needs.
Doing the best things first would be a great investment in the planet’s future.
If we are serious about solving the world’s most serious challenges, we owe it to ourselves to set the right priorities.
Anchoring the Arab Awakening
LONDON – The economic situation in the countries of the so-called Arab Awakenings is deteriorating quickly.
Egypt is running low on cash – before recent rescue loans, currency reserves covered less than three months of imports – and Egyptians are hoarding fuel and foodstuffs in anticipation of future shortages.
More frequent and longer-lasting power outages foretell worse to come in an economy already struggling with mass unemployment, widespread exclusion, and deep pockets of poverty.
Short-term macroeconomic stability is the immediate priority in Egypt and the other Arab Awakening countries.
In the medium term, however, the viability of the current order is at stake – and not only in these countries, but across the rest of North Africa and the Middle East.
With so much at stake, Majid Jafar of UAE-based Crescent Petroleum was right to worry at the recent World Economic Forum on the Middle East and North Africa at the Dead Sea.
His proposal of an Arab Stabilization Plan, inspired by the post-1945 Marshall Plan in Western Europe, is laudable.
The imperative for large-scale coordinated action is overwhelming. But is the Marshall Plan the right model?
The Marshall Plan was a macroeconomic strategy involving massive capital transfers to help reconstruct the war-ravaged industrial capacity and infrastructure of economies with well-developed institutions.
But what the Arab region needs are micro-oriented, project-based, and governance-heavy investments conditioned on deep reform of a business environment that is generally considered among the worst in the world.
In a joint report on the competitiveness of the Arab countries, the European Bank for Reconstruction and Development (EBRD) and the World Economic Forum call for urgent institutional reform to support private-sector growth.
Excessive red tape and ineffective enforcement of competition policy and governance rules are hampering entrepreneurship throughout the region.
Massive investments are also needed in education to eradicate deep pockets of illiteracy, raise overall skill levels, and better match skills to the demands of the market.
Perhaps surprisingly, there is widespread consensus in the Arab Awakening countries that the private sector is central to sustained job creation and growth.
We saw this recently when the EBRD, together with the British-based organization Forward Thinking, conducted a closed-door workshop for 27 leading representatives of parties from across the political spectrum in the region.
Two days of intensive discussions revealed important differences in perspective, but also many commonalities.
Private-sector development clearly means different things to different people.
The parties on the right largely embrace free-market thinking, while Egypt’s Muslim Brotherhood and its kindred parties in Libya and Tunisia are deeply sceptical of the state, which they view as bloated, inept, and ultimately corrupt.
Moreover, the existing banks have failed to serve these parties’ small-business and farming constituencies.
Achieving ambitious goals for inclusive growth and job creation quickly without an enabling state and without using the banking system will be extremely difficult.
Without question, the main responsibility for building these countries’ political systems and reforming their economies rests with their citizens.
Outside intervention has left too many scars in the public’s collective memory.
But the region can look to the successful transition in Central Europe and the powerful anchor for reforms provided by these countries’ accession to the European Union.
Countries like Hungary and Poland can hardly be accused of having a hidden agenda when they share their development experience.
Much can also be learned from countries like Turkey, which has managed to create a dynamic and innovative private sector.
The good news is that the economies of the Arab Awakening countries do not suffer from the deep distortions that characterized post-communist Europe.
Many of the early reforms have already been implemented, and reasonably sophisticated banking systems are in place.
In post-communist Europe, banks had to be built from scratch out of the rubble of socialism.
As a result, while political uncertainty will take its toll on economic growth, the Arab Awakening countries should not have to face a transitional recession, as post-communist Europe did in the 1990’s.
On the other hand, they are unlikely to benefit from the subsequent robust growth that most European transition countries experienced.
Jafar is right that the Arab Awakening countries need a plan.
But it should be a plan for private-sector-led inclusive growth, supported by efforts in the rest of the Arab world and in the EU.
Most critically, it must be a plan owned by the countries themselves and based on an approach that recognizes the critical roles of an enabling state and a catalytic financial sector.
The ongoing socio-political transition, underpinned by widespread public recognition of the need for change, provides a historic opportunity to embark on growth-enhancing reforms.
The Rights of Apes – and Humans
MELBOURNE – On June 25, in a historic vote, the Spanish parliament’s Commission for the Environment, Agriculture, and Fisheries declared its support for The Great Ape Project, a proposal to grant rights to life, liberty, and protection from torture to our closest nonhuman relatives: chimpanzees, bonobos, gorillas, and orangutans.
Other countries, such as New Zealand and the United Kingdom, have taken steps to protect great apes from harmful experimentation, but no national parliament has declared that any animal could be a person with rights.
The resolution, which the full parliament is expected to adopt, directs the Spanish government to promote a similar European Union-wide declaration.
It also calls on the government to adopt, within a year, legislation to prohibit potentially harmful experiments on great apes that are not in their interests.
Keeping great apes in captivity will be allowed for purposes of conservation only, and then under optimal conditions for the apes.
Moreover, it recommends that Spain take steps in international forums and organizations to ensure that great apes are protected from maltreatment, slavery, torture, being killed, and being made extinct.
Paola Cavalieri and I founded The Great Ape Project in 1993 to break down the barriers between human and nonhuman animals.
Researchers like Jane Goodall, Diane Fossey, and Birute Galdikas have shown that great apes are thinking, self-aware beings, with rich emotional lives, and thereby prepared the ground for extending basic rights to them.
If we regard human rights as something possessed by all human beings, no matter how limited their intellectual or emotional capacities may be, how can we deny similar rights to great apes, who clearly surpass some human beings in their rationality, self-awareness, and emotional bonds with others?
To do so would be to display a prejudice against other beings merely because they are not members of our species – a prejudice we call speciesism, to highlight its resemblance to racism.
The Great Ape Project seeks to change the way we think about great apes, and ultimately, about animals in general.
The Spanish resolution marks the first official acceptance of that view.
The use of the term “slavery” in relation to something that it is wrong to do to animals is especially significant, for until now it has been assumed that animals are rightly our slaves, to use as we wish, whether to pull our carts, be models of human diseases for research, or produce eggs, milk, or flesh for us to eat.
Recognition by a government that it can be wrong to enslave animals is a significant breach in the wall of exclusive moral significance we have built around our own species.
While Spanish parliamentarians were sympathetically considering the rights of animals, however, in Austria ten leaders of lawful animal-welfare organizations were beginning their fifth week in prison.
At dawn on May 21, police burst into 23 separate locations, roused people from their beds, put guns to their heads, and forced one leader of an animal-welfare organization to stand in a public place in his underwear for two hours.
They seized computers and files, disabling the animal-rights movement as it was on the eve of launching a new initiative to enshrine the protection of animals in the Austrian constitution.
The ten arrested leaders are being held without charges or specific allegations made against them, under a law aimed at members of criminal organizations such as the mafia.
The police have presented no evidence that any of those arrested were involved in violence. Yet a court has now remanded all ten to be held in prison until September.
After 17 days in prison, three people were accused of threatening a press officer for a fashion store by hindering her from driving away.
Another, Martin Balluch, has been given a 1,500-page police file to justify his arrest.
In the file, his name is mentioned only three times, all in connection with interviews he gave to the media or articles he wrote.
Ironically, Balluch, a brilliant man with doctorates in both physics and philosophy, is one of the foremost spokespersons in the worldwide animal-rights movement for pursuing the nonviolent, democratic road to reform.
In an essay he wrote for In Defense of Animals , a book I edited that appeared in 2006, he wrote, “No realistic level of guerilla attacks of the kind carried out by the Animal Liberation Front could have hurt the battery farming industry as much as the new Austrian law does.”
In recent years, Austrian animal-welfare organizations have been remarkably successful in persuading voters and legislators to support laws phasing out cages for egg-laying hens, cages for raising rabbits for meat, and raising animals for fur.
As Balluch writes: “A law banning a whole industry does far more economic damage to the animal abuse industry than anything else the animal movement could do.”
The police persecution of the animal movement appears to be an attempt by the conservative party, which controls the Ministry of the Interior, and its animal industry supporters to strike back at a legitimate, peaceful challenge to the way we treat animals.
That this can happen in a European democracy is shocking.
The Right to Die
On December 21, an Italian doctor, Mario Riccio, disconnected a respirator that was keeping Piergiorgio Welby alive.
Welby, who suffered from muscular dystrophy and was paralyzed, had battled unsuccessfully in the Italian courts for the right to die.
After Riccio gave him a sedative and switched off the respirator, Welby said “thank you” three times to his wife, his friends, and his doctor.
Forty-five minutes later, he was dead.
Welby’s request to die was widely publicized in Italy, where it led to heated debate.
At the time of writing, it is unclear whether Riccio will be charged with any offense.
At least one Italian politician has called for his arrest on a charge of homicide.
Welby’s death raises two questions, which need to be distinguished.
One is whether a person has a right to refuse life-sustaining medical treatment.
The other is whether voluntary euthanasia is ethically defensible.
A patient’s informed consent should be a prerequisite for all medical treatment, as long as the patient is a competent adult in a position to make a decision.
Forcing medical treatment on a competent adult patient who does not want it is tantamount to assault.
We may think that the patient is making the wrong decision, but we should respect his or her right to make it.
That right is recognized in most countries, but not, apparently, in Italy.
Even the Roman Catholic Church has long held that there is no obligation to use “extraordinary” or “disproportionate” means to prolong life – a view reiterated in the “Declaration on Euthanasia” issued by the Sacred Congregation for the Doctrine of the Faith and approved by Pope John Paul II in 1980.
That document states that to refuse a burdensome medical treatment “is not the equivalent of suicide.”
On the contrary, such a refusal “should be considered an acceptance of the human condition, or a wish to avoid the application of a medical procedure disproportionate to the results that can be expected, or a desire not to impose excessive expense on the family or the community.”
That description applies well to Welby’s decision.
On this view, Riccio was doing what anyone should have been prepared to do for Welby, who was paralyzed and unable to implement his refusal of a burdensome medical treatment.
If the Welby case falls on the right side of the line drawn by Roman Catholic doctrine, the deeper question is whether Church doctrine draws the line in a place that makes sense.
If an incurably ill patient can refuse burdensome treatment, knowing that this refusal will mean his or her death, why should an incurably ill patient who is not being kept alive by any medical treatment, but finds that the illness itself makes life burdensome, be unable to seek assistance in escaping that burden?
Defenders of Catholic teaching would answer that in the latter case, the patient intends to end his life, and that is wrong, whereas in the former case, the patient merely intends to avoid the additional burden that treatment brings.
Death is, of course, a foreseeable consequence of avoiding that burden, but it is a byproduct that is not directly intended.
If the patient could avoid the burden and yet continue to live, that would be his choice.
Welby should not have been helped to die, they might argue, because he expressly said that he wanted to die, not that he wanted to avoid a burdensome treatment.
This distinction is dubious.
In both cases, the patient knowingly chooses a course of action that will lead to her or his death, rather than an alternative course of action that would have led to a longer but burdensome life.
By focusing on the narrower intention to refuse burdensome treatment, rather than the broader implications of the choice, the Roman Catholic Church is able to avoid the inhumane implication that patients must always accept life-prolonging treatment, no matter how painful or costly such treatment may be.
But it does so at the cost of rendering incoherent its own vigorous opposition to assisted suicide and voluntary euthanasia.
Many countries recognize a legal right to refuse medical treatment.
But only in the Netherlands, Belgium, Switzerland, and the American state of Oregon are physicians permitted to assist a patient in ending his or her life by means other than withdrawing life-sustaining medical treatment.
The Netherlands, in particular, has been subjected to a relentless campaign of vilification.
Critics allege that the legalization of voluntary euthanasia has led to a breakdown of trust in the medical profession and all sorts of other dire consequences.
But if these allegations are true, no one has told the Dutch.
Despite a change of government in the Netherlands since voluntary euthanasia was legalized, no effort has been made to repeal the measure.
There is simply no public support for such a move.
The Dutch know how voluntary euthanasia is practiced in their country, they know that legal euthanasia has improved, rather than harmed, their medical care, and they want the possibility of assistance in dying, if they should want and need it.
Isn’t that a choice that everyone should have?
The Right to Equality, Then and Now
LONDON – Following weeks of financial and economic turmoil, public debate has finally turned to the horrific potential human ramifications of the collapse of the global financial system.
Comparisons and contrasts with the Great Depression of the 1930’s have inevitably become a central part of that discourse – and rightly so.
There is much that the world can and must learn now from the lowest point of the twentieth century.
Above all, we have got to heed the proven need for applying social – as well as economic – interventions in a time of economic crisis.
Recession and depression can lead to exclusion and, at worst, persecution of societies’ most vulnerable groups.
That is why the United Nations Declaration on Human Rights was adopted in 1948, and why we need, more urgently than ever, to establish universal equality for all human beings.
Nations must act now to ensure that everyone – regardless of wealth, ethnicity, sex, or religion – has the same rights, and that these rights are enshrined in laws at the time they are enacted.
This October, 128 leading experts in the fields of human rights and equality from 44 countries launched a landmark attempt to build on the epochal 1948 UN declaration to establish universal human equality.
We did so by launching a “Declaration on Principles of Equality” – a declaration that builds on its historical precursor to establish, for the first time ever, general legal principles that define equality as a basic human right.
Based on a total of 27 principles, the Declaration reflects a moral and professional consensus among human rights and equality experts and is the product of more than a year’s work led by the United Kingdom-based Equal Rights Trust.
Needless to say, reaching a consensus among such a diverse group of people from around the world was not easy.
Equality means different things to different people – and at different times.
Interpretations largely depend on the practical realities of the social, cultural, and political environment in which the principles of equality operate.
All signatories to our new Declaration agreed that incitement to violence that is motivated by race or gender or sexual orientation constitutes a serious violation of the right to equality.
Some American civil rights lawyers, out of natural deference to the United States Constitution’s First Amendment were, however, reluctant to sign up to this principle unless it was qualified by a reference to the threat of “imminent” violence.
Some participants from the developing countries wanted poverty to be declared a proscribed basis of discrimination, while others argued that poverty is far too vague a concept to be the subject of legal rights and duties.
Some contended that absolute poverty differs from relative poverty, or asked what responsibility individuals have to raise themselves out of poverty through education and work?
These participants argued that specific legal duties, such as the right to a minimum wage and the right to vocational training, are more effective than the vague extension of anti-discrimination law to cover poverty as such.
The result was a compromise between these two groups.
For all these differences of opinion, we are unanimous in the belief that, if the Principles of Equality are to be effective in our age, they have to go well beyond the negative anti-discrimination model that was adopted in the US and Europe in the second half of the twentieth century.
They must, instead, encourage nations positively to promote the principle of equal rights in keeping with current interpretations of international obligation.
The declaration that we have developed regards equality as a “freestanding right.”
In other words, it exists as a separate right, and is not dependent on the violation of some other legal right, such as the right to education.
It follows, then, that the right to equality could be violated even where another legal right – to, say, housing or employment – does not exist.
The right to equality would exist in all areas of activity regulated by domestic, international or regional law.
It would apply to everyone, regardless of nationality or statelessness, including refugees and asylum seekers, and it would place a positive obligation on states to “promote and fulfill” the right to equality.
A new declaration was badly needed when we began work on it one year ago.
Today, it is crucial if we are to prevent an even greater chasm from dividing the world’s haves and have-nots.
The Right to Massacre?
NEW YORK – The shootings of United States Congresswoman Gabrielle Giffords and others in Arizona last month are but the latest in a series of mass shootings in the US in which the (alleged) perpetrator suffered from an apparent mental disorder.
Predictably, the Arizona tragedy has elicited calls for policy changes.
But what, if anything, should be done differently?
The vast majority of severely mentally disordered individuals are not violent.
Predicting which few without a prior history of violence will become violent is almost impossible.
At the same time, proposals to protect society from the dangerously mentally ill pose basic civil-liberties issues.
A Russian reporter, Andrei Sitov, raised this question when he asserted at a White House press conference that American freedom was complicit in the Arizona shootings: “As to why – it does not seem all that incomprehensible, at least from the outside.
It’s the reverse side of freedom.
Unless you want restrictions, unless you want a bigger role for the government...This is America, democracy, freedom of speech, freedom of assembly, the freedom to petition your government.
And many people outside would also say the ‘freedom’ of a deranged mind to react in a violent way is also American.”
President Barack Obama’s press secretary answered defensively that American values do not endorse violence.
That is true, but irrelevant.
The question is whether American values favoring individual rights somehow facilitated the Arizona tragedy.
After all, rates of severe mental illness are about the same across the developed world, yet the US seems to have more such shootings than do other countries.
One freedom-related suggestion is that the US needs stricter laws that keep guns out of the hands of the mentally ill.
But the alleged shooter had never been formally diagnosed as mentally ill, so such targeted laws would not have prevented him from obtaining a gun.
General gun control is essential, but unlikely for now.
The US also needs more accessible mental-health services.
Although his college demanded professional evaluation before he would be allowed to return, the suspect in the Arizona shootings, it seems, failed to seek help from Tucson’s available services.
Unlike those with physical illnesses, mentally ill individuals often are unaware – even vehemently deny – that they have a problem, thus forgoing treatment and losing desperately needed disability benefits.
Many colleges have increased monitoring of students’ odd behavior by threat-assessment teams.
But such mass screening is notoriously ineffective in predicting violence, often yielding enormous numbers of misidentified threats.
For example, psychiatric screening for suicide risk in one New York high school identified 44% of the student body as being at risk.
Similarly, screening for loose, eccentric thinking yields mostly individuals who never become psychiatrically disordered.
In the months before the shootings, the suspect’s behavior displayed marked signs of serious mental problems, including confusing speech, disruptiveness in class, bizarre imagery, deterioration in social, academic, and occupational functioning, and a dramatic personality change.
With such blatant signals, why didn’t others intervene?
Arizona law allows any interested party to report an individual’s bizarre or threatening behavior to the authorities, who can involuntarily commit the individual for psychiatric evaluation.
Though his community college suspended the suspect for his threatening demeanor, it took no further action.
One reason is that American educational privacy laws severely restrict the sharing of information, even with parents, let alone with other authorities.
Additional privacy protections for medical records sometimes make it difficult to notify parents when a child is troubled.
Moreover, the US Constitution prohibits preventive detention: even severely disturbed individuals cannot be detained involuntarily unless judged an imminent threat to themselves or others.
College counselors apparently did not think that the suspect met this demanding threshold.
Although disruptive, the suspect was able to function – as shown by the disciplined nature of the attack.
Such protections should not be surrendered easily.
The irony of Sitov’s comment is that during the Soviet era, Russian political dissidents were psychiatrically diagnosed, institutionalized, and drugged into submission.
Soviet Premier Nikita Khrushchev, paving the way for the political abuse of psychiatric diagnosis, argued that, “Of those who might start calling for opposition to Communism…, we can say that clearly their mental state is not normal.”
The line between angry political extremism or eccentric normality and delusional mental disorder is tricky to draw.
If restrictions on involuntary commitment to prevent crime are eased, zealous prosecutors could circumvent civil liberties.
Such abuses have emerged when preventive institutionalization has passed constitutional muster, as in the laws some US states have enacted in order to incarcerate “sexually violent predators.”
So, what can be done?
Sitov was correct to the extent that the Arizona shootings were likely facilitated by a uniquely American interaction between legal protection of individual privacy and freedom, lack of strong community bonds and resources, and easy access to handguns.
Americans must acknowledge that educational and medical privacy laws require limited exceptions for notification of family and authorities when clear signs of severe mental illness surface, so that colleges and other institutions can take timely action.
Adequate community mental-health services with educational outreach can induce disturbed youth to get help voluntarily.
Perhaps prudent loosening of the imminent-harm standard for involuntary commitment in clear cases of severe disorder might be helpful.
Screening, if carefully targeted to limit errors, also may have a role to play.
Finally, improved gun control vis-à-vis the severely mentally ill is imperative.
Such measures might have prevented the Arizona shootings.
A stronger community response, supported by limited exceptions to legal restrictions on information-sharing, could have allowed involuntary evaluation of the suspect.
If he refused treatment and was released because he posed no imminent threat, his severe mental disorder would nonetheless have been diagnosed.
Placing him immediately on a “watch list” for weapons – frequently updated under strengthened laws – could have prevented him from purchasing the gun and ammunition he subsequently used.
The Right Way to Beat Chinese Inflation
WASHINGTON, DC – High inflation is threatening social stability in China, soaring from 3.3% in March 2007 to 8.3% in March 2008.
As a result, the People’s Bank of China has raised interest rates substantially and increased banks’ reserve requirements.
The trick for the Chinese government will be to quell inflation in a way that does not compromise its long-term goal of continued strong economic growth.
The risks are high.
China’s accelerating inflation reflects a similar climb in its GDP growth rate, from the already high 11% in 2006 to 11.5 % in 2007.
The proximate cause of price growth since mid-2007 is the appearance of production bottlenecks as domestic demand exceeds supply in an increasing number of sectors, such as power generation, transportation, and intermediate-goods industries.
Sustained robust growth and rising aggregate demand have also caused production bottlenecks outside of China, most notably in the agricultural commodity and mining sectors, which have helped lift oil prices to more than $100 per barrel.
Adding to these woes are two other inflationary factors: first, Porcine Reproductive and Respiratory Syndrome (PRRS, or “blue-ear disease”) has been killing pigs – China’s main meat source – nationwide, and, second, terrible storms in January reduced the supply of grain and vegetables.
In these circumstances, continuing to raise borrowing costs would be a mistake.
To be sure, the prolonged rapid increase in Chinese aggregate demand has been fueled by an investment boom, as well as a growing trade surplus.
Thus, lowering inflation would require reducing the growth rate (if not the level) of these two demand components.
But Chinese policymakers should focus more on reducing the trade surplus and less on reducing investment spending – that is, they should emphasize renminbi (RMB) appreciation over higher interest rates to cool the economy.
A sizeable reduction in aggregate demand through RMB appreciation is achievable without being imprudent, because the current-account surplus in 2007 was 9.5 % of GDP.
Investment (especially in infrastructure in backward areas and social investments) should not bear the brunt of the expenditure squeeze, because today’s investment is also tomorrow’s growth in production capacity; and the production of more goods tomorrow would reduce inflation.
Using RMB appreciation as the primary tool to fight inflation implies accepting a temporarily higher unemployment rate now in exchange for a permanently lower unemployment rate in the future.
This is because manufactured exports are typically more labor-intensive than investment projects.
As a result, a RMB1 billion reduction in exports would create more unemployment than a RMB1 billion reduction in investment spending.
But tomorrow’s capacity expansion from today’s investment would mean a permanent increase in the number of jobs created from tomorrow onward.
Nevertheless, China must be careful when implementing RMB appreciation.
Policy makers should closely monitor potential changes in the economic conditions in the G-7.
A deep recession in the United States resulting from the sub-prime crisis would significantly lower Chinese exports and cut the prices of oil and other primary commodities.
In that case, a large RMB appreciation undertaken now would be overkill.
Moreover, the authorities should recognize that RMB appreciation is unlikely to reduce US-China trade tensions.
Consider the experience of Japan-bashing in the 1980’s, when the Yen-Dollar end-year exchange rate plunged from 248 in 1984 to 162 in 1986, and then to 123 in 1988.
While Japan’s overall current-account surplus declined significantly, from 3.7% of GDP in 1985 to 2.7% in 1988, the overall US current-account deficit only fell from 2.8% of GDP to 2.4%, because Japanese companies started investing in production facilities in Southeast Asia for export to the US.
So Japan-bashing continued under a new guise: the additional demand that Japan must remove its “structural impediments” to import.
In short, substantial RMB appreciation would reduce the bilateral US-China trade deficit and China’s overall trade surplus significantly, but it would do little to reduce the overall US trade deficit.
In the absence of a generalized appreciation of all Asian currencies and unchanged American policies, possibly only a deep recession could reduce the overall US current-account deficit.
A stronger RMB can help only the overheated Chinese economy.
And it has the virtue of doing so without hurting China’s future production capacity.
The Right Way to Electric Cars
NEW YORK – Excitement about electric cars abounds nowadays, but consider the number of existing gasoline-powered cars: about 850 million.
It would take years of new-car sales to make a dent in that number.
That fact at first depressed Jiri Räsänen, a civil servant in Helsinki – but then it gave him and his friends a good idea. Why not keep the cars but replace their engines?
That idea would solve a lot of problems, starting not just with today’s installed base of cars, but with the installed base of car makers .
Even though many of them are in trouble, it’s probably not the best time to start a new car company, either.
Yet while the market for new cars has slowed dramatically, it could be a good time to start a business replacing gasoline engines with electric ones.
The group’s initiative, led by Räsänen, is called eCars - Now!
A small operation in Finland, it is less a company than a role model for companies that the team hopes will spring up worldwide.
Borrowing from the open-software movement, Räsänen and his colleagues want to make the idea and the basic designs free, and encourage lots of companies all over the world to implement it locally.
Some companies will make batteries or electric engines or retrofit kits; others will retrofit gasoline cars with the new engines – a great job opportunity for unemployed auto workers.
eCars- Now! hopes to foster an ecosystem of car service workers and parts makers similar to the ecosystem of open-software programmers and generic computer hardware.
Of course, the parallels end at some point, because batteries and engines aren’t quite the equivalent of PCs, but the ethos is much the same.
Räsänen and his team started by measuring the potential demand for electric cars in Finland.
“No one had done that before in Finland,” he recalls.
“We decided that if we could get 500 people to show interest in a converted car, we could demonstrate that the mass conversion scheme would make sense.”
It took eCars – Now! only 11 days to sign up 500 interested customers.
To be sure, they merely indicated interest; they did not send money.
But the company’s Web site continues to attract new prospects, with 1,000 people now registered as likely or certain to buy such a vehicle.
The site also solicited advice on which car to convert.
The Toyota Corolla was the first choice – hardly surprising since it is the leading car model in Finland (with 7% of the market).
Just 15 months later, in May of this year, a retrofitted Corolla demo model with an engine from Detroit-based Azure Dynamics was on display at the Electric Vehicle Symposium, a trade show in Stavanger, Norway.
What will it take to make this idea work?
To some extent, it’s already working – by spreading. Local efforts may succeed or fail based on the talents of local implementers.
In Italy, inventor Roberto Vezzi had a Smart-EV project along the same lines.
He has now joined the eCars – Now! movement, and his eSmart car will be upgraded with the open-source graphical user interface being developed for the eCorolla in Finland.
Other initiatives are springing up in Denmark, Latvia, Spain, and Turkey, says Räsänen.
The group is now looking for an initial manufacturer/assembler for the retrofit kits (as opposed to the engines inside them).
In the meantime, eCorolla and the eSmart will go through testing.
Overall, the economics make sense.
Produced on an appropriate scale, a kit should cost about $20,000, including distribution costs and a profit margin.
It should take about eight hours for two workers in a professional garage to install such a kit, or less than a week for the car-owner himself/herself (or, as they say, two weeks if the owner’s spouse “helps”).
That’s considerably less than the cost of a new car – especially an electric one.
The real economic benefit, however, is in the cost savings thereafter.
To be sure, a lot will depend on the availability of convenient charging stations, but they are starting to appear.
The project is deconstructing the car industry – probably in a more effective way than American government officials are doing in Detroit.
In Finland, at least, all you need from the government is a certificate of inspection, which costs about €100 ($135).
If all goes well, a host of electric car-engine and retrofit kit makers will appear, serving different markets of existing car owners.
Dealers and mechanics will install the batteries, comprising a new corps of workers devoted (indirectly) to cleaning up the environment and adding value to the installed base of cars.
Any far-sighted government could help not by subsidizing these efforts, but by buying up the old gasoline engines.
That provides an incentive to retrofitting companies, while competition for customers, rather than for subsidies, will encourage the various providers to be efficient.
(Many European governments currently have “cash-for-clunker” schemes that buy and destroy old cars; a cash-for-gas-engines scheme would make more sense by lowering costs and conserving the many car bodies that still work fine.)
This project might have seemed quixotic a few years ago, but now it fits the times perfectly.
It’s modest at a time when the world is in recession.
It’s energy- and environmentally- friendly at a time when concerns about global warming are growing.
And it’s distributed, at a time when the world is skeptical of leaders’ promises and people are realizing they have to do things for themselves.
If you want to start an electric engine company, learn how to retrofit a gasoline engine, or simply figure out what you could do with your own car, go to www.ecars-now.org .
There may not yet be a ready-made solution for you unless you live in Finland, but that’s just the point: you can start a local version.
If you build it, others will come!
The Rise and Fall of Meritocracy
Meritocracy: the word sounds nothing but good.
It means rule by those who have merit.
Such merit is usually understood to be academic achievement, a combination of talent and training.
This is measured by academic degrees, which in turn are graded on merit: A, B, C, D, or First, Upper Second, Lower Second, Third.
Who would not wish to live in a meritocracy?
It is certainly preferable to a plutocracy, in which wealth determines status, or a gerontocracy, in which age leads one to the top, or even an aristocracy, in which what counts are inherited titles and properties.
So meritocracy seems preferable, at least at first sight.
But, on closer inspection, things are not so simple.
For many, France has long been the epitome of meritocracy.
Most of those in the top reaches of not only the civil service and the judiciary, but also politics, business, and academia used to be graduates of the famous grandes écoles .
Many then went through the rigorous training to become inspecteurs de finance , senior state officials.
Yet the French elites today are increasingly held in suspicion, and even reviled, by part of the population.
Certainly, French leaders are not immune to corruption.
The uneasy relationship of money and politics has given rise to several high-profile scandals in recent years.
It is no longer clear that France’s highly educated leaders are better able to run the country’s affairs more efficiently and more honestly than others.
Japan’s meritocratically selected bureaucracy, too, faces much the same public opprobrium.
Indeed, the bureaucracy itself is often blamed for the country’s rigidity and ongoing stagnation.
In Britain, a government heading for its third term in office has said more than once that it wants the country to be “meritocratic.”
Chancellor Gordon Brown, Tony Blair’s heir apparent, is particularly eager to go down that road.
Yet it was a British social scientist (and Labour Party politician), Michael Young, who forty years ago wrote a much debated book entitled The Rise of the Meritocracy .
His was not a description of the road to the promised land, but a dystopian vision of almost Orwellian dimensions.
Meritocracy was Young’s “1984.”
Two central questions raised by Young remain topical today.
First, if academic achievement is the entry ticket to power and status, what about the rest?
What about those who do not make it to university?
How do the other 50% fare in a meritocratic world?
They are, Young argued, confined, even condemned to lower-level jobs, with no chance to rise to eminence, or even to a comfortable position of responsibility.
According to Young, those who have at least some talent will form a “pioneer corps” of plumbers and builders and other skilled workers.
Those who do not even make that grade will remain in a “home help corps” of unskilled laborers.
Young’s bleak picture bears an eerie resemblance to today’s world.
The new underclass is the other side of the meritocratic elite.
Immigrants, in particular, do not enjoy the equality of opportunity that the word “merit” suggests.
Indeed, nowadays meritocracy seems to be simply another version of the inequality that characterises all societies.
It may in fact be a particularly cruel form of inequality, as those who do not succeed cannot argue that they were unlucky or kept down by those in power.
Instead, they must conclude that they personally failed, and that no amount of effort can save them.
To this must be added another feature that Young described: meritocracy means only that another ruling group closes the gates behind it once it has achieved its status.
Those who made it on “merit” now want to have everything else as well – not just power and money, but also the opportunity to determine who gets in and who stays out.
Sooner or later, Young argued, meritocratic elites cease to be open; they see to it that their children have a better chance than the offspring of the “pioneer corps” or “home help corps.”
Like all elites before them, they become firmly established – and use all available means to keep it that way.
There is no need to follow Young’s argument all the way to the eventual revolution.
There is a need, however, for a healthy skepticism towards the claims of a meritocracy based on academic achievement alone.
Such a society is not the answer to all our prayers for decency and fairness, or even for sensible and good decisions.
It is far better to remember that when it comes to leadership, many qualities other than a first-class degree come into play.
As far as institutions are concerned, we should not allow any one criterion to determine who gets to the top and who does not.
Diversity is a better guarantee of openness than even merit, and openness is the real hallmark of a liberal order.
The Rise and Fall of Putinism
MOSCOW – How did “Putinism” – that distinctively Russian blend of authoritarian politics and dirigiste economics – happen?
And, now that it has, how can Russians move beyond it, to realize the rights and liberties promised to them in the country’s constitution?
An active Russian civil society, which seemed to appear out of nowhere in Mikhail Gorbachev’s Soviet Union of 1989-1990 after the long Soviet hibernation, receded far too quickly.
The astounding difficulty of everyday survival following the USSR’s collapse trapped most Russians into focusing on their families’ most urgent needs.
Civic apathy set in.
So Vladimir Putin came to power at a very convenient moment for any ruler – when the people are quiescent.
Cunningly, Putin then strapped this apathy to the first shoots of post-Soviet economic growth in order to conclude a new social contract: he would raise living standards in exchange for ordinary Russians’ acceptance of severe limits on their constitutional rights and liberties.
Until recently, both sides adhered to this tacit contract.
But, with the global financial crisis, the Kremlin stopped meeting its side of the bargain.
Thus, a new social contract is needed, especially as a new, post-Soviet generation of Russians has entered political life – a generation that has not been poisoned by the fear that decades of state terror in the USSR implanted in their forebears.
Putin and his entourage “tightened the screws” on Russia’s people over the past decade, and faced almost no resistance to their claims to unchecked power. Now, from the entire spectrum of civil and political rights enumerated in Russia’s Constitution, we Russians have only one right remaining: the right to leave and return to the country freely.
All other rights have been lost or substantially weakened.
But Russian citizens, especially younger ones, are beginning to realize what they have lost.
By the same token, the post-Soviet generation has a very different idea of a decent standard of living than their parents had, and hence their aspirations are much higher.
Many have traveled abroad, and all have seen foreign films, from which they have learned that people of their social status in the West have a far more comfortable life than they do.
The majority of Soviet people did not have a car or a country house or even a separate apartment.
Now the young feel deprived if they can’t have all of that.
At first, people did not think of civil rights as they strove for such previously unknown comforts.
They relied on the Kremlin to set the conditions that would give them new opportunities.
Now, they are gradually coming to understand that the government has failed them.
A struggle for the restitution of constitutional rights in Russia first became noticeable in 2009.
At Triumph Square in Moscow, protestors have consistently demanded that Article 31, which guarantees the right to peaceful assembly, be respected.
Movement-31, an umbrella grouping of like-minded protestors, has spread rapidly, staging simultaneous demonstrations in Moscow and 48 other cities two months ago in support of the right to free assembly.
There have been simultaneous protests in the past, but usually against increases in rent or utility charges.
One can understand why the demand to comply with Article 31 has gained popular support.
For ordinary citizens, who have neither access to the media nor personal contacts with the authorities, protests are an opportunity to inform officials of their demands, requests, and suggestions.
There are also other signs of awakening civic engagement, which are particularly evident in Internet discussions, which the Kremlin cannot control in the same way that it does other Russian media.
Citizens have started to use the Internet for self-organization, for example, to generate simultaneous “flash mobs,” as well as protests by automobile owners, in different cities.
Most recently, the Internet has become a means of public control over civil-rights violations by the authorities, as images taken with mobile phones become available instantaneously to all.
The authorities have to reckon with the fallout, punishing officials who have come into the spotlight this way.
Russia’s federal government and regional authorities are clearly alarmed by this rapidly growing civic activism.
But, despite changed conditions, they respond with the same old methods – suppression, intimidation, and misinformation.
And, with elections to the State Duma due in December 2011, followed by the presidential election in March 2012, officials are particularly concerned by an upsurge of civic activism.
It is not hard to see why.
Over the past decade, the electoral system was “improved” in such a way that no outcome can lead to a change in the federal government.
That leaves street demonstrations and other forms of civic activism as the only way to challenge Putinism’s standard-bearers.
Indeed, given state control of the mainstream media, such activism may be the only way to learn what citizens really think about their rulers.
The Rise of Chinese “Sea Power”
In an age of missiles and terrorist threats, many people think that “sea power” is a word and concept from the past.
Not in China.
Indeed, China is increasingly emphasizing its naval and maritime interests: economic development, territorial management, energy and food security as well as trade.
A navy sufficient to promote such activities is being rapidly developed and purchased from abroad (mostly from Russia, the EU when possible).
Many of China’s neighbors are alarmed.
The United States Defense Department views China’s goal as being to build a series of military and diplomatic strategic bases – a so-called “string of pearls” – along the major sea lanes from the South China Sea to the oil rich Middle East.
China seeks not only to secure its energy supplies, but to achieve broader security goals.
For example, the Gwadar military port, which China is constructing in southwest Pakistan, is strategically placed to guard the throat of the Persian Gulf, with electronic eavesdropping posts to monitor ships -- including war ships -- moving through the Strait of Hormuz and the Arabian Sea.
Similarly, China is building container port facilities at Chittagong in Bangladesh for its naval and merchant fleets, as well as more naval bases and electronic intelligence gathering facilities on islands owned by Myanmar in the Gulf of Bengal.
Indeed, China’s ties with Myanmar’s military dictators look set to turn into a de facto military alliance.
In nearby Thailand, China has invested $20 billion in a plan to build a canal across the Kra Isthmus to connect the Indian Ocean and the Gulf of Siam, thereby providing an alternate oil import route that avoids the Strait of Malacca.
In the South China Sea, China is developing systems to allow large-scale deployment of naval and air force units by fortifying bases on Hai Nan Island and the southern Chinese coastal area.
On the Spratley and Paracel islands -- seized from Vietnam and the Philippines respectively -- China is building port facilities to moor large surface ships and runways large enough to handle long-range bombers.
In effect, China is in the process of building a group of literally unsinkable aircraft carriers in the middle of the South China Sea.
Why is China, usually considered a “continental power,” engaging in this maritime expansion?
China dominated Asia in terms of “sea power” until the seventeenth century. Indeed, during the Ming Dynasty (1368—1644), Admiral Zheng He’s “Great Navy” was the world’s most powerful.
But for the last three centuries, China has had no global maritime strategy, nor has it possessed – or sought to possess – naval forces capable of supporting such a strategy.
Ironically, China’s current maritime strategy has its roots in the US, the nation that China appears to perceive as its key strategic rival, namely in the “sea power” theory developed by Admiral Alfred Thayer Mahan at the end of the nineteenth century.
In The Influence of Sea Power upon History, published in 1890, Mahan argued that maritime power and economic development were deeply intertwined.
Only the ability to protect trade and project power by sea could assure the vitality of this nexus.
Mahan identified the conditions that determine “sea power”:
· geographical position and environment;
· territorial capacity, specifically coastline
· population;
· character of people attuned to maritime expeditions;
· character of government eager to ebrace “sea power”.
These conditions applied to the US of Mahan’s time, and they surely apply to China today.
China is already the world’s third largest trading nation and rapidly developing its port capacities to manage an ever-increasing volume of trade.
Its ship tonnage (excluding fleets that sail under flags of convenience) is the fourth largest in the world.
Rapid expansion of ship tonnage is part of China’s current Five-Year, and by 2010 its shipbuilding capabilities will likely rival those of Japan and Korea.
However, unlike the US and Britain in the past, China today must turn to overseas bases rather than colonization to enhance its “sea power” – hence its “string of pearls.”
Still, China is transforming its coastal navy into an ocean-going navy at a pace far quicker than most experts reckoned possible.
By 2010, China is expected to have 70 of the most modern surface vessels, several modern strategic nuclear submarines, and several tens of modernized attack submarines, exceeding the modern forces of both Taiwan’s navy and even Japan’s Maritime Self-Defense Force, at least in quantitative terms.
Moreover, China plans to improve and expand its capabilities for assault landing and joint logistical support, both of which used to be weak points.
This will provide China with necessary capabilities to invade, should China’s rulers wish, Japan’s most remote islands, including the disputed Senkaku Islands, as well as Taiwan.
If China’s naval growth continues at its current pace, it may have the world’s largest naval force by 2020.
All of Asia must wake up to the arrival of Chinese-style aggressive “sea power.”
Japan, in particular, must reformulate its national maritime strategy with this in mind.
Japan, America and other traditional maritime countries must also once again treat “sea power” in Asia as a key component of their ability to defend their own national interests.
The Rise of Liberal Japan
Most people looking at the rise of Asian power focus on China and India.
They often forget that Japan’s $5 trillion economy is the second largest in the world – more than China and India combined – with a per capita income that is ten times that of China.
In addition, Japan spends $40 billion annually on defense, and has one of the top five military forces in the world.
China’s economy is growing more rapidly, and its total size will probably overtake Japan’s in a decade or two, but any serious analysis of power in East Asia must include Japan as a major factor.
Japan has played a unique role in world history.
It was the first Asian country to encounter the forces of globalization, master them, and then make them serve its own interests.
Moreover, Japan has reinvented itself twice.
During the Meiji restoration of the nineteenth century, Japan scoured the world for ideas and technologies that allowed it to defeat a European great power in the Russo-Japanese War of 1904.
Unfortunately, Japan moved onto militaristic imperialism in the 1930’s, which eventually led to its surrender and occupation in 1945.
But in the post-World War II period, Japan again used the forces of globalization to reinvent itself as an economic superpower that became the envy of the world.
As Kenneth Pyle argues in his interesting new book Japan Rising , these reinventions were responses to external shifts in world politics.
Now, with the growth of Chinese power, one of the great questions for this century will be how Japan responds.
The Japanese are currently debating their role in global politics.
Prime Minister Shinzo Abe has taken a more nationalistic stance than most of his predecessors, and his Liberal Democratic Party is committed to revising Article 9 of the constitution, which limits Japan’s forces to self-defense.
Public opinion is divided on the issue, and polls vary according to how the questions are asked.
Nonetheless, many astute analysts believe that the constitution will be amended within the coming decade.
While Abe wisely visited China and smoothed over relations ruffled by his predecessor, Junichiro Koizumi, who repeatedly visited the Yasukuni Shrine (where 14 class A war criminals from WWII are interred), many people are uncertain about his long-term vision.
As one well-known Japanese intellectual told me during a recent visit to Tokyo, “I can accept constitutional revision in the long run, but not while Abe is prime minister.”
In May, Asahi Shimbun , a major newspaper known for its left/liberal inclination, proposed an alternative vision for twenty-first century Japan in a series of 21 editorials.
Asahi rejected the idea of revising Article 9, and proposed instead that the Japanese Diet legalize the role of the Self-Defense Forces.
The editorials accepted the treaty with the United States that serves as a basis for Japanese security, but rejected the idea that Japan has a right to collective self-defense.
Interestingly, one of the reasons given for retaining Article 9 was that it would better enable Japan to resist American pressures to engage in military “coalitions of the willing” far from Japan’s shores.
Asahi worried about the precedent set when Koizumi sent Japan’s Self-Defense Forces to Iraq, albeit in a non-combatant role, to please US President George W. Bush.
Conservative voices argue just the opposite – that abolishing Article 9 is important for exactly such reasons.
The alternative vision that Asahi offered was for Japan to become a world power as a provider and coordinator of global public goods from which all peoples can benefit and none can be excluded, such as freedom of the seas or a stable international monetary system.
This would be a way for Japan to escape its reputation for insularity, avoid the mistakes of its military history, improve its relations with Asian neighbors who still remember the 1930’s, and increase Japan’s “soft” or attractive power.
More specifically, Asahi urged that Japan take the lead on managing global climate change by building on its record of successful innovation in energy conservation following the oil shocks of the 1970’s.
In an interesting conjunction of events, shortly after the Asahi editorial was published, Abe committed Japan to halving greenhouse gas emissions by 2050, and to helping developing countries to join in a new post-Kyoto protocol climate regime.
The liberal vision also includes a major Japanese role in stabilizing globalization by supporting international trade and monetary institutions; alleviating global poverty by increasing overseas development assistance, particularly to Africa; helping to develop instruments for conflict prevention and management such as the United Nations Peace-building Commission; and participating in UN peacekeeping operations.
As for the rise of Japan’s giant neighbor, the liberal vision urges patience and tenacity in encouraging China to move toward greater transparency, the rule of law, and democratization, as well as adhering to international rules governing world order.
While maintaining its alliance with America, “Japan must always bear in mind the strategic importance of stabilizing its relationship with China.” By helping China in the areas of energy and environmental issues, perhaps “the scars left from the war with Japan may begin to heal.”
Japan has become more willing to use its power, and more aware of changes in the external balance of power.
It is rising, but how?
As one Japanese liberal commented to me, “this is our third response to globalization.
What can we contribute this time?”
The Rise of Mid-Level Powers
The security environment since the September 11, 2001, terrorist attacks on the United States has clearly demonstrated the limits of the United Nations, or even the US as the world’s sole military superpower, to maintain international security.
However, like-minded mid-level powers with similar intentions could complement what the UN or the US lacks, effectively generating sufficient clout to stabilize the global security environment.
Japan, Australia, Germany, or Canada might be just such powers.
They share common values as free and democratic countries.
Moreover, they are non-nuclear powers with no permanent seats in the UN Security Council.
All are long time allies of the US.
In fact, over recent years these countries have already had many opportunities to demonstrate their ability and willingness to contribute to international security if called for, for they all also share a recognition that global stability directly serves their own national interests.
Nevertheless, subtle differences among these countries may influence their bilateral cooperation or coordination with the UN or the US.
As a result, they must compliment each other’s advantages, characteristics, and interests in order to optimize their role in promoting international security.
For many years, Japan has been taking very cautious steps into this area, but substantial changes have occurred recently.
In March 2007, Japan agreed to enter a “semi-alliance” with Australia, and issued a “Joint Communiqué on Japan-Australia Security Cooperation.”
In early June, the two countries’ defense and foreign ministers held the first regular security meeting (the so-called “2+2 meeting”) in Tokyo, agreeing to promote defense cooperation in various fields, including international security.
Under Japan’s last two prime ministers, Japan has steadily been making practical contributions to the stabilization of the international security environment as a way to benefit its national and international interests.
Japan is thus helping to create conditions to allow mid-level powers to act jointly and effectively to provide an essential international “public good.”
Such practical proposals address key global issues, including international terrorism, strengthening of mechanisms for arms control, arms reduction, and non-proliferation, efforts to contain attempts by North Korea and Iran to develop nuclear weapons, encouraging transparency in China’s military, restraining Russia’s imperial ambitions, and building a global ballistic missile defense network against missiles that could be launched by rogue regimes.
However, efforts to promote this kind of cooperation should not be confined to these mid-level powers.
There are many other potential mid-level democratic countries that should take part.
Various approaches may be available for building a coalition of such powers, including the use of the UN and seeking to influence US foreign policy.
To advance such efforts, it may be necessary for mid-level powers such as Japan, Canada, Australia, and Germany to strengthen ties with other like-minded mid-level countries that possess nuclear weapons and hold permanent seats on the UN Security Council, such as the United Kingdom and France, or with smaller nuclear powers without permanent Security Council seats, such as India.
Once such a coalition gains a sure footing, the next step would be to participate actively in the negotiation of major security issues, such as international arms control, arms reduction, and non-proliferation, while encouraging the involvement of China and Russia.
The goal should be to build and exercise influence within the international community to the point that the coalition becomes tantamount to a permanent “sixth” member of the Security Council.
The Rise of Regionalism in Asia
This week, America and Singapore ironed out the final stumbling blocks to a bilateral free trade agreement (FTA).
Such pacts are spreading like wildfire across Asia.
Until recently, most East Asian countries pursued non-discriminatory trade policies through unilateral liberalisation, the Asian/Pacific Economic Community, and the World Trade Organisation (WTO).
As the US/Singapore deal shows, discriminatory bilateral and regional initiatives are growing more popular.
An East Asian economic bloc forming around either China and/or Japan now seems plausible.
Will all this deal-making sideline the region in the WTO?
East Asian countries have relatively liberal trade policies and are reasonably well integrated into the global economy.
This, however, masks huge differences.
Hong Kong and Singapore are free ports.
South Korea and Taiwan liberalised substantially in recent years.
Malaysia is fairly open but with significant protection, especially in services.
Thai protectionism remains high.
Indonesia and the Philippines are mired in political and economic instability.
Myanmar, Vietnam, Cambodia, and Laos, all very poor, have higher levels of protection.
Now consider the two regional engines, Japan and China.
Japan's sclerotic domestic economy makes it incapable of exerting regional leadership.
On trade policy it is defensive, especially in its addiction to agricultural protectionism.
China presents a different picture.
Its WTO commitments are the strongest of any developing country.
China narrowed the trade policy gap with other developing countries, bringing average tariffs down to Southeast Asian and Latin American levels (about 10%) and establishing comparable openness to foreign direct investment (FDI).
The upshot is that the emerging market policy environment is a lot more competitive, especially in terms of attracting FDI.
Traces of the "new regionalism" can be found everywhere.
Singapore pioneered this approach.
The Association of Southeast Asian Nations (ASEAN) is talking to several third countries.
To date only a proposed ASEAN-China FTA has got off the starting blocks.
Similar initiatives are afoot in Northeast Asia.
Both political and economic factors lie behind this.
China views FTAs as a means to exercise strategic leadership in the region.
The economic motivations are mostly defensive. But with the WTO stuck in drift and deadlock over the past few years, there is a race to secure preferential access to the markets of the major powers, and to defuse trade tension by locking into strong bilateral and regional partnerships.
Given today's trends, a loose East Asian trade bloc revolving around China (more likely than Japan) could emerge alongside US-led and EU-led blocs, all interlinked by a cross-regional patchwork of bilateral and "plurilateral" FTAs.
This scenario is worrying if the WTO does not get out of its rut, because a world economy that has been sliced up regionally will be dominated by discrimination, knots of red tape, and power plays.
In such a world, poor and weak countries would be losers.
However, if the global trade framework institutionalised in the WTO advances, especially through multilateral, non-discriminatory liberalisation in the present Doha Round, the new regionalism will probably turn out to be benign.
Ultimately, as a region highly dependent on trade with and inward investment from the rest of the world, FTAs are not enough for East Asia.
The region will continue to have a long-term stake in a WTO that delivers freer trade worldwide, that is, multilaterally rather than bilaterally or regionally.
The WTO is important to East Asia, but the reverse is also true.
Of the twenty or so active developing and newly developed countries in the WTO, almost half come from the region.
The Doha Round will not make sustained progress without the active participation of East Asia, on individual issues and across the board.
Because of its economic and trade muscle, China is bound to play a more prominent role as the Doha round unfolds.
There are early, positive signs that it is adopting a "Brazilian," as opposed to an "Indian," strategy within the WTO.
It is not being negative or obstructionist in blocking the liberalization process on several fronts, which is India's historic manner of conducting global trade negotiations.
This is the right approach for those in China's leadership who wish to extract maximum benefits from the WTO to bolster domestic reform.
Korea is active and constructive in the WTO, except on agriculture.
Taiwan is also set to play a constructive role--if mainland China lets it.
The city states, Hong Kong and Singapore, have clear-sighted WTO policies, focusing on market access and strong rules.
Malaysia and Thailand are also fairly active in the WTO, with a mix of free-market and protectionist positions.
Indonesia and the Philippines are weaker, overwhelmed by policy incoherence and fire-fighting at home, and with insufficient capacity to deal with the WTO's burgeoning and increasingly complicated agenda.
Vietnam, Laos, and Cambodia are in the queue for WTO accession.
The WTO is at a crossroads.
It sorely needs to liberalize trade progressively.
Strong US leadership is required to push the WTO in this direction while avoiding an EU-style future (regulatory overload) or a UN-style future (an irrelevant talking shop).
This is more likely under a Bush administration with better open-market credentials and a more assertive foreign policy than any Democratic alternative.
However, Robert Zoellick, President Bush's Trade Representative, needs allies.
Many of them--including China--are to be found in East Asia.
The New Economy of Fealty
PRINCETON – Since the 2008 financial crisis, most industrial economies have avoided anything like the collapse that occurred during the Great Depression of the 1930’s.
But, despite large-scale fiscal and monetary stimulus, they are not experiencing any dramatic economic rebound.
Moreover, the pre-crisis trend of rising income and wealth inequality is continuing (in marked contrast to the post-Great Depression period, in which inequality declined).
And survey data show a rapid decline in people’s satisfaction and confidence about the future.
The explanation of the post-crisis malaise – and people’s perception of it – lies in the combination of economic uncertainty and the emergence of radically new forms of social interaction. Long-term structural shifts are fundamentally changing the nature of work, and thus of the way that we think of economic exchange.
In the early twentieth century, a large share of even advanced economies’ populations was still employed in agriculture.
That proportion subsequently fell sharply, and the same decline could later be seen in industrial employment.
Since the late twentieth century, most employment growth has come in services, particularly personal services – a pattern that looks like a reversal of a previous historical trend.
At the beginning of the twentieth century, upper-middle-class households had a substantial staff of cooks, maids, nannies, and cleaners.
In the interwar years, these employees largely disappeared from the lives of all but the ultra-rich.
The iconoclastic British historian A. J. P. Taylor quipped that laments about the decline of Britain were really generalized reflections of Oxford academics’ view of the “servant problem.”
By the end of the twentieth century, however, many of these old service occupations were reappearing on a large scale, as dual-career households needed additional “help.”
The employment of nannies, au pairs, babysitters, and day mothers reflected carefully differentiated approaches to the problem of looking after children.
After child care, there followed hordes of private tutors, test coaches, and university admissions consultants.
And, beyond childhood and adolescence, the need for specialized personal support only grew.
Some of the new services would stretch the imagination of previous ages.
Dating agencies have developed increasingly complex algorithms to sort out their clients’ romantic lives.
Lawyers work out prenuptial contracts, and then the complexities of divorce negotiations.
Design consultants choose our interiors and clothing.
Personal trainers look after our fitness.
Cosmeticians, skin-care specialists, and tattoo artists shape our appearance.
Two of the largest areas of service-employment expansion have been education and health services. And yet this has not been a result of adding more teachers or doctors.
Instead, a new division of labor has surrounded the classical providers of education and healing with more and more layers of administration.
Doctors need experts to deal with insurance forms, negotiate with other doctors and pharmaceutical providers, and manage legal risks.
Educational specialists fill every conceivable logistical and administrative gap, run sports and arts programs, guarantee diversity, and oversee technology transfer to the private sector.
Indeed, a rapidly growing army of administrators is overrunning our universities.
None of these new services can easily be standardized, or dealt with at long distances (as can some types of clerical legal and financial work).
The caregivers and consultants need to be on location.
And that raises a question of control.
How can child-care providers be trusted?
Cautious parents seek agents to select their employees and technology to monitor them as they work. So, to find out about the reputation of service providers, we need still more service providers: ratings and surveys and agents to tell us about agents.
The new service economy extends market relations to areas of life in which, previously, informal assistance and guidance within family units prevailed.
To the extent that employment and income in the new services can be easily recorded, this change implies an increase in measurable economic wealth and output, because unpaid household services are ignored in GDP calculations.
Experts might thus interpret the macroeconomic consequences as largely positive.
But the element of personal dependence is a throwback to the preindustrial world.
The zenith of the old service economy was the court of Louis XIV, where specialist courtiers attended to the Sun King’s every need, even the most intimate (there was a Groom of the King’s Close Stool). In that pre-modern world, private life was extraordinarily public, whereas the social movements of the nineteenth and twentieth centuries dramatically expanded the realm of individual privacy and self-definition.
Today’s new service economy is driven by the resulting uncertainty over identity.
We need advice on every aspect of life, provided in a complex world by people whom we think to be experts in ever-narrower and more specialized fields.
We can easily monitor that advice and subject it to statistical testing: are our children doing better on tests?
Are we more fit?
Are we dating more people who share our perceived interests?
Paradoxically, the new technological possibilities are also eliminating privacy.
We are moving back to the Sun King’s world, in which everything personal is known, rumored, or whispered.
But now, with electronic surveillance, personal dependence has never been more extreme, more humiliating, and more depressing.
This might explain some of the public dissatisfaction captured in so many surveys, even when economic conditions are not dire.
Subjectively, modern growth feels problematic, and perhaps even immoral.
The Rise of the Beijing Consensus
BRUSSELS – President Barack Obama’s first appearances outside North America – in London, Strasbourg, Prague, and Istanbul – galvanized world attention.
But what that trip singularly failed to do was paper over a startling fact: the “Washington Consensus” about how the global economy should be run is now a thing of the past.
The question now is what is likely to replace it.
Although China is often said to lack “soft power,” many of its ideas on economics and governance are coming into ascendance.
Indeed, in pursuit of national economic stability, the Obama administration is clearly moving towards the kind of government intervention that China has been promoting over the past two decades.
In this model, the government, while continuing to benefit from the international market, retains power over the economy’s “commanding heights” through strict control over the financial sector, restrictive government procurement policies, guidance for research and development in the energy sector, and selective curbs on imports of goods and services.
All these factors are not only part of China’s economic rescue package, but of Obama’s stimulus plan as well.
China is clearly pleased to see that the United States is now also placing cool calculation of its national interests at the forefront of its foreign policy. “In delivering a better life for people on the ground, one should be more concerned with substance than with form,” Obama stated in an interview just before his inauguration.
Rather than obsessing about elections, the US now seeks to build pragmatic alliances to buttress its economic needs.
This requires, first of all, cozying up with China and the autocratic Gulf states – the main lenders to the US Treasury – as well working with Iran and Russia to limit the costs of the wars in Afghanistan and Iraq.
As the US backtracks on its liberal standards, it is flirting with what can be called the “Beijing Consensus,” which makes economic development a country’s paramount goal and prescribes that states should actively steer growth in a way that suits national stability.
What matters in this worldview is not the nature of any country’s political system, but the extent to which it improves its people’s wellbeing.
At the diplomatic level, this implies that national interests, not universal norms, should drive cooperation.
This diplomatic and economic realism is more than a reversal of the neo-conservative muscle-flexing of the George W. Bush years.
It is an attempt by a declining power to use its restrained capabilities in a more economical way.
For example, in times of crisis it is no shame for a government to be mercantilist, but by behaving in this way, the US has lost the moral high ground as a champion of free trade.
America’s new pragmatism is also the consequence of a process of “reverse socialization.”
Over the past two decades, the US and its European allies believed that they could inculcate the rest of the world with their economic and political principles.
Countries like China became enmeshed in a web of multilateral organizations and subjugated to conditional engagement strategies.
Nowadays, the West does not have the leverage to enforce these conditions.
Moreover, the majority of developing countries now actively embrace multilateral bodies as part of their development strategies.
As we move from a unipolar international order to one with multiple regional powers, realism should allow them to vie for influence while keeping the costs as low as possible.
The result will be a new concert of powers, tied together by their fixation with national economic growth and the objective of discouraging others from causing instability that risks intervention.
Instead of entrusting America with the arduous task of safeguarding international stability on its own, the BRICs (Brazil, Russia, India, and China) will assume a more prominent role in policing their own backyards.
Russia can have its Caucasus, and if the generals in Myanmar should go mad, it would become China’s and India’s problem to sort out.
America’s policy shift will inevitably erode the Western liberal axis.
America has the flexibility, capacity, and leadership to adapt to the new rules for pursuing diplomacy, but Europe simply does not.
Its strategic relevance, even in the transatlantic partnership, is destined to weaken further.
Realism will give the US more maneuverability in the short term, but it will have to sacrifice some of its soft power to achieve this.
Whether America is able to strengthen its global influence in the future will depend not so much on its moral esteem, but on the extent to which it succeeds in revamping its economy and forging new alliances.
The same will apply for other powers.
But this rising Beijing Consensus offers no guarantee of stability.
A concert of powers is only as strong as its weakest pillar, and requires a great deal of self-discipline and restraint.
It remains to be seen how the American public will respond to its national U-turn.
If one main player slides back into economic turmoil, nationalism will reduce the scope for pragmatic bargaining.
Overlapping spheres of influence and frozen conflicts could again cause major conflict.
And, if China comes out of the crisis as the big winner and continues to boost its power, zero-sum thinking will soon replace win-win cooperation.
The Rise of the BRICs
PRINCETON &#45;&#45; The winners of the great globalization push of the 1990’s were small states such as New Zealand, Chile, Dubai, Finland, Ireland, the Baltic Republics, Slovenia, and Slovakia.
The East Asian tigers that pushed themselves onto the world economy’s center stage were small units, and in some cases – Singapore, Taiwan, or Hong Kong – were not even treated as states.
Even South Korea, which is a giant in comparison, was only half a country.
Such states are vulnerable, and the past is littered with small and successful globalizers that lost out because of power politics: the Italian city states of the Renaissance, the Dutch Republic, or, in the twentieth century, Lebanon and Kuwait.
Small states frequently became the victims of larger but poorer neighbors envious of their success and eager to seize their assets, while oblivious to the fact that such seizure actually destroys the source of wealth and dynamism.
In the world of pure globalization, small states do best, because they are more flexible and can adapt more easily to rapidly changing markets.
Small states are better at public policy adjustments, freeing up labor markets, establishing a solid framework for competition, and facilitating cross-border takeovers and mergers.
The urgency of such a program has been underscored in much recent analysis of the poor performance of the major continental European economies – France, Germany, and Italy – compared with smaller and much more dynamic economies in northern and central Europe.
But, at the same time, small states are also more likely to be successful in defending crucial aspects of the welfare state.
A larger state can inevitably do more to control the economy, and hence is exposed to the costly temptation to intervene in response to political pressure from vested interests.
In a small-state setting, imposition of a dense network of controls is likely to lead to the loss of mobile factors of production, while in a large state it is harder for labor or capital to escape.
On the international stage, large states try to make international rules, and often build their domestic legitimacy on their claims to be able to shape a larger world: they think in terms of what French thinkers call “harnessing globalization.”
Instead of accepting the international system roughly as it is, with all its imperfections, they think that they can use their weight to alter the rules – in their favor.
Small states’ nervousness and fear began to increase roughly in 2000.
The new political realities were highlighted by the Iraq war, China’s search for energy sources in developing countries, and Russia’s assertiveness in foreign and domestic policy.
In today’s world, it looks as if the new winners are big states with large populations and rapid growth: Brazil, Russia, India, and China (BRICs), in addition to the United States.
These dynamic giants terrify the wealthy populations of the industrialized world with the potential power of their low-cost competition, cheap products, and outsourcing of services.
The BRICs (we might rewrite the term as Big and Really Imperial Countries) project power more easily, but they also need to project power to compensate for their weaknesses.
They have their own problems, but at the same time they are likely to behave more like traditional big states, and will try to shape globalization rather than simply accepting it as an inevitable process.
There are at least three obvious flaws that afflict these big globalizers much more than the small globalizers who had done so well previously.
First, highly populous countries must integrate their poor and ill-educated underclass (in China and India mostly rural) as they engage with world markets.
Second, China and Russia have financial systems that lack transparency, while Brazil and India are financially underdeveloped, putting further integration in the world economy at risk and increasing prospects for a financial crisis.
Third, Russia is already facing massive demographic decline and an aging and sickening population;
China faces the near certainty of a Japanese-style demographic downturn from the 2040’s onward, a belated legacy of its one-child policy.
Flawed geo-political giants have in the past been a source of instability (Germany before World War I is an obvious analogy), and there are good reasons to see them presenting increased risk in the twenty-first century.
But for the moment they are unquestionably powerful.
The result is that the BRICs will look for compensating power, and military and strategic influence and prestige, as a way to solve internal problems.
Gone are the 1990’s, when for a brief moment in the immediate aftermath of the end of the Cold War, the world looked as if it would be permanently peaceful and unconcerned with power.
That hope soon proved illusory.
Many commentators, indeed, were stunned by the rapidity with which tensions returned to the international system.
While many blame US behavior, these tensions have in fact been fueled by the unfolding of a new logic in international politics.
The Rising Power of NGO\u0027s
When Human Rights Watch declared last January that the Iraq War did not qualify as a humanitarian intervention, the international media took notice.
According to the Internet database Factiva, 43 news articles mentioned the report, in publications ranging from the Kansas City Star to the Beirut Daily Star .
Similarly, after the abuses of Iraqi detainees at the Abu Ghraib prison were disclosed, the views of Amnesty International and the International Committee of the Red Cross put pressure on the Bush administration both at home and abroad.
As these examples suggest, today's information age has been marked by the growing role of non-governmental organizations (NGO's) on the international stage.
This is not entirely new, but modern communications have led to a dramatic increase in scale, with the number of NGO's jumping from 6,000 to approximately 26,000 during the 1990's alone.
Nor do numbers tell the whole story, because they represent only formally constituted organizations.
Many NGO's claim to act as a "global conscience," representing broad public interests beyond the purview of individual states.
They develop new norms by directly pressing governments and businesses to change policies, and indirectly by altering public perceptions of what governments and firms should do.
NGO's do not have coercive "hard" power, but they often enjoy considerable "soft" power - the ability to get the outcomes they want through attraction rather than compulsion.
Because they attract followers, governments must take them into account both as allies and adversaries.
A few decades ago, large organizations like multinational corporations or the Roman Catholic Church were the most typical type of transnational organization.
Such organizations remain important, but the reduced cost of communication in the Internet era has opened the field to loosely structured network organizations with little headquarters staff and even to individuals.
These flexible groups are particularly effective in penetrating states without regard to borders.
Because they often involve citizens who are well placed in the domestic politics of several countries, they can focus the attention of media and governments onto their issues, creating new transnational political coalitions.
A rough way to gauge the increasing importance of transnational organizations is to count how many times these organizations are mentioned in mainstream media publications.
The use of the term "non-governmental organization" or "NGO" has increased 17-fold since 1992.
In addition to Human Rights Watch, other NGO's such as Transparency International, Oxfam, and Doctors without Borders have undergone exponential growth in terms of mainstream media mentions.
By this measure, the biggest NGO's have become established players in the battle for the attention of influential editors.
In these circumstances, governments can no longer maintain the barriers to information flows that historically protected officials from outside scrutiny.
Even large countries with hard power, such as the United States, are affected.
NGO's played key roles in the disruption of the World Trade Organization summit in 1999, the passage of the Landmines Treaty, and the ratification of the Framework Convention on Tobacco Control in May 2003.
The US, for example, initially had strong objections to the Convention on Tobacco Control, but dropped them in the face of international criticism.
The Landmines Treaty was created despite the opposition of the strongest bureaucracy (the Pentagon) in the world's largest military power.
Similarly, transnational corporations are often targets of NGO campaigns to "name and shame" companies that pay low wages in poor countries.
Such campaigns sometimes succeed because they can credibly threaten to damage the value of global brand names.
Royal Dutch Shell, for example, announced in 2003 that it would not drill in any spots designated by UNESCO as World Heritage sites.
This decision came two years after the company acceded to pressure from environmentalists and scrapped plans to drill in a World Heritage site in Bangladesh.
Transnational drug companies were shamed by NGO's into abandoning lawsuits in South Africa in 2002 over infringements of their patents on drugs to fight AIDS.
Similar campaigns of naming and shaming have affected the investment and employment patterns of Mattel, Nike, and a host of other companies.
NGO's vary enormously in their organization, budgets, accountability, and sense of responsibility for the accuracy of their claims.
It is hyperbole when activists call such movements "the world's other superpower," yet governments ignore them at their peril.
Some have reputations and credibility that give them impressive domestic as well as international soft power.
Others lack credibility among moderate citizens but can mobilize demonstrations that demand the attention of governments.
For better and for worse, NGO's and network organizations have resources and do not hesitate to use them.
Do NGO's make world politics more democratic?
Not in the traditional sense of the word.
Most are elite organizations with narrow membership bases.
Some act irresponsibly and with little accountability.
Yet they tend to pluralize world politics by calling attention to issues that governments prefer to ignore, and by acting as pressure groups across borders.
In that sense, they serve as antidotes to traditional government bureaucracies.
Governments remain the major actors in world politics, but they now must share the stage with many more competitors for attention.
Non-governmental actors are changing world politics.
After Abu Ghraib, even US Defense Secretary Donald Rumsfeld must take notice.
The Rising Wealth of Nations
The new Penn World Table, Version 6.2, comparing standards of living across countries, has just been released.
The latest figures are for 2004, and, because of data lags, not all countries are included.
Yet these numbers are valuable because they are of exceptional quality and they correct systematically for relative price differences across countries, which sometimes leads to surprising results.
Among the 82 countries for which 2004 data are now available, there has been really good news: real per capita GDP has risen by an average of 18.9% between 2000 and 2004, or 4.4% per year.
People generally are a lot better off than they were just a few years ago.
At this rate, real per capita GDP will double every 16 years.
Many people who could not afford a car in 2000 now have one, and people who could afford only one car in 2000 now have two.
People who could not afford to send their children to a good school or college now can.
And so it is with many different goods and services that people consume.
One surprise is that there has been relatively little change in the ranking of countries by real per capita GDP since 2000.
Despite all the talk about the Chinese economic miracle, China’s ranking has risen only slightly, from 61st out of 82 countries in 2000 to 60th in 2004 – even though per capita real GDP grew by 44% between 2000 and 2004, or 9.6% a year, the highest of the major countries.
The reason China has not risen higher is that other countries have been growing too, and because the gaps between countries are enormous.
The range between the poorest and the richest countries in the world is a factor of more than 100.
The average real per capita GDP of the top 25% of countries is 15 times that of the bottom 25%.
Watching these countries progress is like watching a marathon.
At first, one is impressed by most of the runners, almost all of whom seem to be going fast.
As they pass by, all spread out, one sees that some runners seem to be gaining rapidly.
And yet they do not often overtake one another, because the distances between them are so large.
Indeed, other runners are out of sight, perhaps miles ahead.
China isn’t the only success story.
Other big winners in terms of real per capita GDP between 2000 and 2004 are Lithuania (up 48%), Romania (up 41%), Estonia (up 40%), Chile (up 33%), Hungary (up 32%), Greece (up 31%), New Zealand (up 28%), Australia (up 25%), Korea (up 23%), Ireland (up 23%), South Africa (up 23%), and Nigeria (up 22%).
Some of the worst performers among the major countries are Israel (a beleaguered country, with real per capita GDP up only 2% between 2000 and 2004) and Argentina (hit by a terrible financial crisis in 2001-2, up only 9% between 2000 and 2004).
Economic performance in several Latin American countries was relatively weak in this period, with Uruguay’s real GDP per capita actually recording a fall by a fraction of a percent.
But the overall picture is amazingly good.
If such growth rates continue, we will see relatively poor countries like India, Indonesia, the Philippines, or Nicaragua reach the average levels currently enjoyed by advanced countries in 50 years.
But, of course, they will not have caught up with these countries, for those countries will have moved ahead too.
It is hard to imagine now what that world will be like with a doubling or quadrupling of just about every country’s GDP.
What would all these countries do with all that money?
In 1958, the economist John Kenneth Galbraith wrote the best-selling book The Affluent Society , in which he argued that the advanced world as typified by the United States had by that year finally emerged from “grim scarcity,” when dire necessity dictated our lives, to a “world of affluence.”
He wrote: “So great has been the change [in standards of living] that many of the desires of the individual are no longer even evident to him.
They become so only as they are synthesized, elaborated and nurtured by advertising and salesmanship, and these, in turn, have become among our most important and talented professions.”
But real per capita GDP in the US is now three times higher than it was in 1958.
What have people been spending all that extra money on?
Is it all dictated by advertisers and salesmen who are inventing needs?
According to my calculations comparing 1958 and 2005 data from the US Department of Commerce, Americans spent 27% of the huge increase in income between 1958 and 2005 on medical care, 23% on their homes, 12% on transportation, 10% on recreation, and 9% on personal business activities.
The kinds of things that advertisers and salesmen typically promote were relatively unimportant.
Food got only 8% of the extra money, clothing only 3%, and personal care 1%.
Unfortunately, idealistic activities also received little of the extra money: 3% for welfare and religious activities, and a similar share for education.
Thus, most of the extra money was spent on staying healthy, having a nice home, traveling and relaxing, and doing a little business.
That sounds like what really happened in the US.
Maybe that is the way it will be around the world.
As long as we can keep worldwide growth going at its current rate, billions of people can look forward to the same kind of improvement.
And that should be truly inspirational.
The Risk of European Centralization
FRANKFURT – For many European leaders, the eurozone crisis demonstrates the need for “more Europe,” the final aim being to create a full-fledged political union.
Given the continent’s history of war and ideological division, and today’s challenges posed by globalization, a peaceful, prosperous, and united Europe that wields influence abroad is surely a desirable goal.
But major disagreements about how to achieve that goal remain.
Historically, monetary union was regarded as the route to political union.
In the 1950’s, the French economist Jacques Rueff, a close adviser to Charles de Gaulle, argued that “L’Europe se fera par la monnaie, ou ne se fera pas” (Europe will be made through the currency, or it will not be made).
Germany’s President Richard von Weizsäcker echoed this view almost a half-century later, declaring that only via a single currency would Europeans achieve a common foreign policy.
More recently, German Chancellor Angela Merkel asserted that “if the euro fails, Europe will fail.”
But the crisis confronting “Europe” is not so much about political union as it is about European Economic and Monetary Union.
If anything, efforts to hold EMU together may have taken us further from the goal of a common foreign policy by re-igniting within member states (regardless of whether they give or receive financial aid) nationalist resentments that we hoped had died long ago.
Politicians launched monetary union in 1999, despite warnings that the constituent economies were too diverse.
It wasn’t long before several states violated the Stability and Growth Pact.
Later, the eurozone’s “no bail-out” principle was abandoned.
The response to these failings, however, was a demand for greater economic integration, including such intermediate steps as the creation of a “European finance minister” or an EU commissioner with sweeping powers to facilitate closer integration.
Such ideas, of course, ignored the central issues of national sovereignty and democracy, and specifically the privilege of nationally elected governments and parliaments to determine their own taxes and public spending.
The fact that sovereign member states did not deliver on their European commitments is hardly a convincing argument for giving up sovereignty now.
In short, all of the measures that would implicitly support political union have turned out to be inconsistent and dangerous.
They have involved huge financial risks for eurozone members.
They have fueled tensions among member states.
Perhaps most important, they have undermined the basis on which political union rests – namely, persuading European Union citizens to identify with the European idea.
Public support for “Europe” depends to a large degree on its economic success.
Indeed, it is Europe’s economic achievements that give it a political voice in the world.
But, as the current crisis indicates, the best-performing EU economies are those with (relatively) flexible labor markets, reasonable tax rates, and open access to professions and business.
Moreover, the impetus for economic reform has come not from the EU, but from national governments, one of the most successful examples being “Agenda 2010,” launched a decade ago by then-German Chancellor Gerhard Schröder.
Numerous academic studies, following the work of the American economic historian Douglass North, support the notion that it is competition among states and regions that lays the groundwork for technological progress and economic growth.
The total failure of the Lisbon Agenda, launched in March 2000 to make the EU “the most competitive and dynamic knowledge-base economy in the world” demonstrated the weakness of a centralized approach.
Arguably, in earlier centuries, it was competition within Europe that generated unparalleled dynamism and prosperity across much of the continent.
To be sure, this was also a time of wars. However, this does not mean that centralization is the best – much less the only –&#160;way to guarantee peace.
But, once again, EU leaders responded by concluding the opposite: the Lisbon Agenda’s failure was interpreted as justifying still more harmonization and centralization of national policies.
True to form, in his “State of the Union” address to the European Parliament in September 2012, European Commission President José Manuel Barroso called for a more powerful Commission.
This approach – harmonization, coordination, and centralized decision-making – continues to be regarded as a panacea for Europe’s problems.
It is the sort of pretense of knowledge that the economist Friedrich von Hayek denounced as a recipe for constraining freedom and ensuring economic mediocrity.
Indeed, the European project should start from the premise that appropriate institutions, property rights, and competition, together with a growth-friendly tax system and solid fiscal policies, are the basis of economic success.
The dangers of a centralizing approach can also be seen in the relationship between the 17 current eurozone members and the 11 non-eurozone EU states.
As the former press on with greater integration, the adverse economic consequences of doing so are likely to deter the latter from EMU participation (which may be another sign that institutional competition cannot be suppressed forever).
There are plenty of areas in which common action at the EU level is both appropriate and efficient.
Environmental policy is clearly one.
But centralization of economic decision-making, as an end in itself, cannot underpin a prosperous and powerful Europe.
Jean Monnet, one of the EU’s founding fathers, once said that, given the chance to start the European integration process again, he would have begun with culture – a dimension in which we neither need nor want centralization.
Europe’s cultural richness consists precisely in its diversity, and the basis for its finest achievements has been competition between people, institutions, and places.
Its current economic malaise reflects European leaders’ prolonged efforts to deny the obvious.
Ten QE Questions
NEW YORK – Most observers regard unconventional monetary policies such as quantitative easing (QE) as necessary to jump-start growth in today’s anemic economies.
But questions about the effectiveness and risks of QE have begun to multiply as well.
In particular, ten potential costs associated with such policies merit attention.
First, while a purely “Austrian” response (that is, austerity) to bursting asset and credit bubbles may lead to a depression, QE policies that postpone the necessary private- and public-sector deleveraging for too long may create an army of zombies: zombie financial institutions, zombie households and firms, and, in the end, zombie governments.
So, somewhere between the Austrian and Keynesian extremes, QE needs to be phased out over time.
Second, repeated QE may become ineffective over time as the channels of transmission to real economic activity become clogged.
The bond channel doesn’t work when bond yields are already low; and the credit channel doesn’t work when banks hoard liquidity and velocity collapses.
Indeed, those who can borrow (high-grade firms and prime households) don’t want or need to, while those who need to – highly leveraged firms and non-prime households – can’t, owing to the credit crunch.
Moreover, the stock-market channel leading to asset reflation following QE works only in the short run if growth fails to recover.
And the reduction in real interest rates via a rise in expected inflation when open-ended QE is implemented risks eventually stoking inflation expectations.
Third, the foreign-exchange channel of QE transmission – the currency weakening implied by monetary easing – is ineffective if several major central banks pursue QE at the same time.
When that happens, QE becomes a zero-sum game, because not all currencies can fall, and not all trade balances can improve, simultaneously.
The outcome, then, is “QE wars” as proxies for “currency wars.”
Fourth, QE in advanced economies leads to excessive capital flows to emerging markets, which face a difficult policy challenge.
Sterilized foreign-exchange intervention keeps domestic interest rates high and feeds the inflows.
But unsterilized intervention and/or reducing domestic interest rates creates excessive liquidity that can feed domestic inflation and/or asset and credit bubbles.
At the same time, forgoing intervention and allowing the currency to appreciate erodes external competitiveness, leading to dangerous external deficits.
Yet imposing capital controls on inflows is difficult and sometimes leaky.
Macroprudential controls on credit growth are useful, but sometimes ineffective in stopping asset bubbles when low interest rates continue to underpin generous liquidity conditions.
Fifth, persistent QE can lead to asset bubbles both where it is implemented and in countries where it spills over.
Such bubbles can occur in equity markets, housing markets (Hong Kong, Singapore), commodity markets, bond markets (with talk of a bubble increasing in the United States, Germany, the United Kingdom, and Japan), and credit markets (where spreads in some emerging markets, and on high-yield and high-grade corporate debt, are narrowing excessively).
Although QE may be justified by weak economic and growth fundamentals, keeping rates too low for too long can eventually feed such bubbles.
That is what happened in 2000-2006, when the US Federal Reserve aggressively cut the federal funds rate to 1% during the 2001 recession and subsequent weak recovery and then kept rates down, thus fueling credit/housing/subprime bubbles.
Sixth, QE can create moral-hazard problems by weakening governments’ incentive to pursue needed economic reforms.
It may also delay needed fiscal austerity if large deficits are monetized, and, by keeping rates too low, prevent the market from imposing discipline.
Seventh, exiting QE is tricky.
If exit occurs too slowly and too late, inflation and/or asset/credit bubbles could result.
Also, if exit occurs by selling the long-term assets purchased during QE, a sharp increase in interest rates might choke off recovery, resulting in large financial losses for holders of long-term bonds.
And, if the exit occurs via a rise in the interest rate on excess reserves (to sterilize the effect of a base-money overhang on credit growth), the ensuing losses for central banks’ balance sheets could be significant.
Eighth, an extended period of negative real interest rates implies a redistribution of income and wealth from creditors and savers toward debtors and borrowers.
Of all the forms of adjustment that can lead to deleveraging (growth, savings, orderly debt restructuring, or taxation of wealth), debt monetization (and eventually higher inflation) is the least democratic, and it seriously damages savers and creditors, including pensioners and pension funds.
Ninth, QE and other unconventional monetary policies can have serious unintended consequences.
Eventually, excessive inflation may erupt, or credit growth may slow, rather than accelerate, if banks – faced with very low net interest-rate margins – decide that risk relative to reward is insufficient.
Finally, there is a risk of losing sight of any road back to conventional monetary policies.
Indeed, some countries are ditching their inflation-targeting regime and moving into uncharted territory, where there may be no anchor for price expectations.
The US has moved from QE1 to QE2 and now to QE3, which is potentially unlimited and linked to an unemployment target.
Officials are now actively discussing the merit of negative policy rates.
And policymakers have moved to a risky credit-easing policy as QE’s effectiveness has waned.
In short, policies are becoming more unconventional, not less, with little clarity about short-term effects, unintended consequences, and long-term impacts.
To be sure, QE and other unconventional monetary policies do have important short-term benefits.
But if such policies remain in place for too long, their side effects could be severe – and the longer-term costs very high.
Asia’s Rebalancing Act
SEOUL – Rapid economic growth in China undoubtedly benefits the rest of Asia.
Indeed, strong Chinese demand has supported its trading partners’ export-led growth for much of the past three decades.
But now, faced with a slowdown in China and significant downside risks there, the rest of Asia must abandon over-reliance on export-oriented development strategies and strive to ensure stable and sustainable growth domestically and regionally.
China’s vulnerabilities and risks – stemming from property bubbles, shadow banking, and local-government debt – have triggered concerns about a crisis not only there, but also in neighboring Asian countries.
Some, indeed, now predict a Chinese banking or fiscal disaster; others predict long-term stagnation equivalent to Japan’s lost decades.
These “hard landing” scenarios are extreme.
But the road ahead is bumpy and uncertain.
No one can guarantee that Prime Minister Li Keqiang’s attempts to achieve deleveraging and structural reform will succeed.
Moreover, external shocks, policy mistakes, and political instability could disrupt even the best-laid plans.
In any case, China’s stellar growth record cannot be sustained.
Even if it manages a “soft landing,” annual output growth will slow to 5-6% in the coming decades.
Standard growth theory predicts “convergence” of per capita GDP: a fast-growing country will eventually encounter difficulty maintaining high rates of labor mobilization, capital accumulation, and technological progress.
In China, labor inputs have fallen as a result of declining fertility and an aging population.
Reduced rates of return will lower investment rates.
China may be able to rely on policy reforms to boost productivity growth; but, with relatively low innovative capacity, it will struggle to catch up with frontier technologies.
China’s inevitable growth slowdown, along with a large tail risk, threatens stable growth in Asian economies that have become increasingly interdependent.
Trade within Asia now accounts for more than half of the continent’s total trade turnover.
Moreover, direct investment and financial flows contribute further to economic interdependence.
The rise in intra-Asian trade reflects China’s central role in East Asia’s production networks.
From 2001 to 2011, China’s share of South Korean exports doubled, from 12% to 24%; its share of Japanese exports grew even faster, rising from 8% to 20%.
As a result, China has become South Korea’s single largest export market, and Japan’s second largest.
It is also the largest trading partner of all ten members of the Association of Southeast Asian Nations (ASEAN).
Asian economies’ deepening trade and financial integration has left them increasingly vulnerable to growth shocks from China, with exporters of commodities and capital goods especially vulnerable.
In fact, a study by the Asian Development Bank shows that Chinese shocks have larger and more persistent effects on individual Asian economies’ output than do global shocks, as a 1% increase in China’s GDP raised GDP in emerging East Asia by about 0.6%.
In terms of investment, the International Monetary Fund predicts that a disruption in China’s investment boom will adversely affect its trading partners.
A drop of one percentage point in China’s investment rate is estimated to reduce Taiwan’s GDP growth rate by 0.9 percentage points and Korea’s by 0.6 percentage points.
If China can successfully rebalance its economy and shift to consumption-based growth, its trading partners could benefit enormously from a huge retail market.
But as long as China’s import share of final consumption remains low, direct gains for exporters of consumer goods are likely to be small.
As they prepare for the coming Chinese slowdown and seek to minimize the risk of regional destabilization, Asian economies must strengthen domestic demand and reduce excessive reliance on exports to China.
In other words, sustainable growth requires all of Asia’s China-dependent economies to rebalance their two main growth engines.
To enhance domestic demand, Asia, including China, must reallocate resources and structurally transform the economy.
Reinforcing social safety nets, broadening and deepening financial markets, and supporting small and medium-size enterprises would also strengthen domestic demand.
Likewise, service-sector liberalization will be essential to promoting productivity and creating jobs.
In short, implementation of fiscal, financial, and structural reforms can mitigate the spillover effects from China’s slowdown.
But a second reform front, aimed at enhancing regional coordination, must also be opened.
With economic shocks able to spread more quickly than ever before, owing to broadened trade and financial channels, all Asian countries must maintain a sound macroeconomic environment.
Perhaps most important, deeper regional integration calls for closer cooperation in macroeconomic and financial surveillance, as envisaged by the Chiang Mai Initiative Multilateralization.
Asian countries must be able to conduct well-coordinated candid reviews of one another to reduce the likelihood of risks and detect emerging vulnerabilities.
China’s long-term growth potential – and that of the rest of developing Asia – is not pre-defined.
Maximizing it requires not only that individual countries address their weaknesses and rebalance their sources of growth, but also that they build and strengthen the regional institutions needed to manage economic integration.
Brave New Cells?
LONDON – The United Kingdom’s Human Fertilization and Embryology Authority (HFEA) has launched a public consultation to gauge attitudes toward controversial new medical procedures aimed at preventing the transmission of incurable diseases that result from mutations of cell structures called mitochondria.
Supporters of such research are framing criticism of it as opposition to saving children’s lives and an impediment to scientific development.
But this view neglects a crucial factor in the debate: the techniques being developed involve permanent genetic alterations passed on to future generations.
The mitochondria are the energy-producing “batteries” of the cell, containing the only DNA outside of the cell nucleus – 37 genes, or roughly 0.2% of a person’s genetic makeup.
Given that these genes are contained in the egg, and thus are inherited only from the mother, the new techniques aim to replace the mother’s mutated mitochondria with that of a healthy female donor of eggs without the mutation.
This results in embryos that contain genetic material from three people – the child’s father and mother, plus the egg donor.
So the real question is how the public feels about crossing the line between medical treatments for existingpeople and irreversible genetic alterations that would be passed on to future generations through genetic modification of the human germline (the sequence of germ cells,such as sperm and eggs, containing genetic material that a child may inherit).
Despite the good intentions behind mitochondrial research, international concern about the implications of breaching this barrier is mounting.
Indeed, not only do most scientists and governments worldwide consider human germline genetic modification unacceptable; it is expressly prohibited in more than 40 countries, including the UK.
As a result, experts in the United States, Canada, Germany, Israel, and elsewhere have responded critically to the prospect of Britain unilaterally undermining the consensus that prohibits such techniques.
Mitochondrial mutations can have serious consequences, including epilepsy, liver failure, diabetes, and cardiomyopathy.
But, while the number of people affected by such mutations is estimated to be between one in 200 and one in 400, mutations do not translate to serious diseases in most cases.
Because the harmful changes are often only present in low levels, and because a single cell can contain both mutated and normal mitochondria, it is widely believed that only one person in 5,000 – or even one in 10,000 – will be affected by mitochondrial disease.
Despite this relatively low frequency, the Wellcome Trust (an organization dedicated to improving human and animal health) recently donated £4 million ($6.5 million) to scientists at the University of Newcastle to establish a center for mitochondrial research.
In a 2010 paper, the scientists reported some early success with a technique involving the use of human zygotes (single-cell embryos) that had been engineered to contain only healthy mitochondria.
But they managed to develop only 8% of the zygotes to a slightly later stage.
Nevertheless, in 2011, a coalition of scientists and funders submitted a letter to former UK Secretary of State for Health Andrew Lansley requesting regulation revision, in order to permit the new techniques’ use in clinical treatment “once sufficient pre-clinical evidence [was] established.”
The influential groups backing the coalition – including the UK Academy of Medical Sciences, the Medical Research Council, and the Wellcome Trust – claimed that “translating research into treatment [looked] achievable in the near future.”
But “treatment” does not mean helping existing sufferers.
Rather, the techniques might allow a small subset of women with mitochondrial disease (in the UK, roughly 10-20 annually) to reduce the risk that their children will inherit the mutation – at the cost of setting a precedent with serious potential consequences.
In addition to national legislation, international treaties like the Council of Europe Convention on Human Rights and Biomedicine (which the UK has not signed) specifically prohibit human germline genetic modification.
The easy explanation for this prohibition would be moral aversion to eugenics, the pseudoscience of improving a population’s genetic composition, which was popular in the West in the first half of the twentieth century, before being discredited by the example of the Nazis.
Unlike eugenicists, proponents of altering mitochondrial DNA simply hope to free future generations from deadly diseases.
Nonetheless, critics fear the slippery slope.
After all, breaching the ethical and legal barrier to permanent genetic modification could make it more difficult to block its application for treating non-lethal conditions, or even for enhancing qualities like cognitive ability or athletic prowess.
But the more urgent threat is that any kind of germline genetic modification could do long-term, permanent damage.
The HFEA’s own expert panel reported that the safety of mitochondrial techniques is far from being proven for current users.
There is no telling what it could mean for their descendants.
According to Joanna Poulton, an expert in mitochondrial research at Oxford University, it is not yet appropriate to offer treatment with so little knowledge of the potential consequences when reasonable alternatives – such as egg donation from a woman unaffected by mitochondrial disease or pre-implantation genetic diagnosis – are available.
She says, “There are very few families who don’t want to use donated oocytes (eggs), where PGD would not work, and where the risk of having severely affected babies is so high that it might be worth trying the new techniques.”
In fact, mitochondrial studies have already begun to produce unexpected results.
For example, scientists in Oregon recently observed abnormal fertilization in some of the human eggs that they had manipulated.
Given that the defective eggs miscarry naturally, more eggs than expected would be needed for the technique – possibly posing a risk to the donors.
Indeed, in their study, the team used 106 eggs from seven women, one of whom donated a total of 28 eggs, indicating possible ovarian hyperstimulation, which can be dangerous or even fatal.
Like all human endeavors, science gets some things wrong.
Germline genetic modification threatens to make such errors permanent.
The UK scientific and charitable organizations advocating mitochondrial research are proud of the permissive legislative framework that has enabled them to establish an “international lead.”
But extending that leniency to human germline genetic modification may well cause future generations to view their actions very differently.
The Risk Tsunami
NEW YORK – It is time for the G-20 to take seriously its mandate to agree on steps to stabilize the global economy and launch it on a more sustainable pattern of growth.
Instead, the G-20 is behaving like a debating society, with the cooperative approach that it fostered at the outset of the crisis devolving into an array of often-heedless unilateral actions by its members.
Yet there are several significant risks to global economic stability and prosperity that must be addressed urgently.
Ireland has thrown Europe into its second sovereign-debt crisis this year, and capital markets have become schizophrenic, with investment rushing back and forth across the Atlantic in response to contagion risk in Europe and quantitative easing in the United States.
Meanwhile, capital is flooding into the higher-interest-rate emerging markets, causing inflationary pressures, driving up asset prices, and subjecting currencies to competitiveness-threatening appreciation – in short, distortions and policy headaches that require unconventional, defensive responses.
Growth and employment forecasts in the advanced countries have been reduced – a delayed recognition of the reality of an extended and difficult recovery and a new post-crisis “normal.”
With lower and more realistic growth forecasts, fiscal deficits in the short to medium term are viewed as more dangerous.
In the US, a subset of policymakers believes that weakening growth and high unemployment require a policy response.
With a cyclical mindset and fiscal space exhausted, a new round of quantitative easing (QE2) might be defended as a strategy for mitigating the tail risk of another downturn in asset markets (mainly housing) and households’ balance sheets – and with it the possibility of a deflationary dynamic.
Worryingly, QE2 appears to be viewed in the US as a growth strategy, which it isn’t, unless one believes that low interest rates will reverse the private-sector deleveraging process, raise consumption, and lower savings – neither a likely nor a desirable scenario.
It also assumes that addressing structural constraints on competitiveness can be deferred – perhaps permanently.
The view from outside the US is that QE2 is either a mistake with negative external effects, or a policy with the clear but unannounced intention of devaluing the dollar – a move whose main negative competitive and growth effects would most likely be felt in Europe, not in China, India, and Brazil.
Unilateral action in this and other dimensions has undercut the G-20’s mission of identifying and implementing mutually beneficial policies in a coordinated way.
A minimal requirement for G-20 progress is that policies in emerging and advanced countries that have significant external effects are discussed and, if possible, agreed upon in advance.
Apart from the need to deleverage for a few more years, the US economy faces longer-term problems with aggregate demand, employment, and income distribution that cannot be solved through consumption and investment alone.
America needs to expand its share in external global demand, which requires public-sector investment, structural change, and improved competitiveness in the tradable sector.
Meanwhile, Europe struggles to find a solution to its deficit and debt problems by treating them with short-term liquidity fixes whose purpose is to buy time for fiscal consolidation and, in the absence of the exchange-rate mechanism, some kind of deflationary process to restore external competitiveness.
Success is by no means assured, and the most likely outcome is a sequence of contagion events and a broader loss of confidence in the euro.
The core issue is burden-sharing across bondholders, citizens of the deficit countries, the EU, and, indeed, the rest of the world (via the International Monetary Fund).
The emerging-market economies are at risk as a result.
They can sustain relatively high growth rates in the face of weak and lengthy recoveries in the advanced countries, but not if there is a major downturn in North America or Europe (or both), a serious outbreak of protectionism, or instability in global financial markets.
The major emerging economies also have growing systemic effects on growth and employment across a broad range of countries, including the advanced ones.
They must understand this.
The old asymmetries are fading away, and there are new distributional challenges at the core of global economy-policy coordination.
For most of the postwar period, advanced countries grew by expanding the knowledge and technology base of their economies.
In a rapidly opening global economy, emerging economies learned to access both technology and markets, thereby growing at unprecedented and accelerating rates.
As global economic activity shifted and the structure of all economies evolved with it, the distributional effects were overwhelmingly benign. But that was not inevitable.
It came out that way because, for most of the period, the advanced countries benefited from market-driven innovation, while the emerging economies imported knowledge, exported goods and services, and had limited systemic impact on advanced economies.
That pattern is changing.
Emerging economies’ scale is growing, and their positioning on the global value chain is shifting rapidly.
Surveys of attitudes toward the evolving global economic system show a widening divergence among countries as well as subgroups within countries.
These almost certainly reflect divergences in terms of that system’s distributional impacts.
Guiding global interdependence in a way that ameliorates negative distributional trends is possible, but it will require wisdom and insight.
That challenge must be at the core of the G-20’s mission.
To put it differently, recognizing our collective interest in the openness of the global economy is not sufficient.
We need a pragmatic willingness to adapt incentives and outcomes to achieve distributional results that allow the major players, with their domestic political constraints, to keep the system open.
The alternative will be unilateral measures aimed at achieving the same goals, but leading to outcomes that leave everyone worse off.
The Risky Rich
NEW YORK – Today’s swollen fiscal deficits and public debt are fueling concerns about sovereign risk in many advanced economies.
Traditionally, sovereign risk has been concentrated in emerging-market economies.
After all, in the last decade or so, Russia, Argentina, and Ecuador defaulted on their public debts, while Pakistan, Ukraine, and Uruguay coercively restructured their public debt under the threat of default.
But, in large part – and with a few exceptions in Central and Eastern Europe – emerging-market economies improved their fiscal performance by reducing overall deficits, running large primary surpluses, lowering their stock of public debt-to-GDP ratios, and reducing the currency and maturity mismatches in their public debt.
As a result, sovereign risk today is a greater problem in advanced economies than in most emerging-market economies.
Indeed, rating-agency downgrades, a widening of sovereign spreads, and failed public-debt auctions in countries like the United Kingdom, Greece, Ireland, and Spain provided a stark reminder last year that unless advanced economies begin to put their fiscal houses in order, investors, bond-market vigilantes, and rating agencies may turn from friend to foe.
The severe recession, combined with the financial crisis during 2008-2009, worsened developed countries’ fiscal positions, owing to stimulus spending, lower tax revenues, and backstopping and ring-fencing of their financial sectors.
The impact was greater in countries that had a history of structural fiscal problems, maintained loose fiscal policies, and ignored fiscal reforms during the boom years.
In the future, a weak economic recovery and an aging population are likely to increase the debt burden of many advanced economies, including the United States, the UK, Japan, and several euro-zone countries.
More ominously, monetization of these fiscal deficits is becoming a pattern in many advanced economies, as central banks have started to swell the monetary base via massive purchases of short- and long-term government paper.
Eventually, large monetized fiscal deficits will lead to a fiscal train wreck and/or a rise in inflation expectations that could sharply increase long-term government bond yields and crowd out a tentative and so far fragile economic recovery.
Fiscal stimulus is a tricky business.
Policymakers are damned if they do and damned if they don’t.
If they remove the stimulus too soon by raising taxes, cutting spending, and mopping up the excess liquidity, the economy may fall back into recession and deflation.
But if monetized fiscal deficits are allowed to run, the increase in long-term yields will put a chokehold on growth.
Countries with weaker initial fiscal positions – such as Greece, the UK, Ireland, Spain, and Iceland – have been forced by the market to implement early fiscal consolidation.
While that could be contractionary, the gain in fiscal-policy credibility might prevent a damaging spike in long-term government-bond yields.
So early fiscal consolidation can be expansionary on balance.
For the Club Med members of the euro zone – Italy, Spain, Greece, and Portugal – public-debt problems come on top of a loss of international competitiveness.
These countries had already lost export-market shares to China and other low value-added and labor-intensive Asian economies.
Then a decade of nominal-wage growth that out-paced productivity gains led to a rise in unit labor costs, real exchange-rate appreciation, and large current-account deficits.
The euro’s recent sharp rise has made this competitiveness problem even more severe, reducing growth further and making fiscal imbalances even larger.
So the question is whether these euro-zone members will be willing to undergo painful fiscal consolidation and internal real depreciation through deflation and structural reforms in order to increase productivity growth and prevent an Argentine-style outcome: exit from the monetary union, devaluation, and default.
Countries like Latvia and Hungary have shown a willingness to do so.
Whether Greece, Spain, and other euro-zone members will accept such wrenching adjustments remains to be seen.
The US and Japan might be among the last to face the wrath of the bond-market vigilantes: the dollar is the main global reserve currency, and foreign-reserve accumulation – mostly US government bills and bonds – continues at a rapid pace.
Japan is a net creditor and largely finances its debt domestically.
But investors will become increasingly cautious even about these countries if the necessary fiscal consolidation is delayed.
The US is a net debtor with an aging population, unfunded entitlement spending on social security and health care, an anemic economic recovery, and risks of continued monetization of the fiscal deficit.
Japan is aging even faster, and economic stagnation is reducing domestic savings, while the public debt is approaching 200% of GDP.
The US also faces political constraints to fiscal consolidation: Americans are deluding themselves that they can enjoy European-style social spending while maintaining low tax rates, as under President Ronald Reagan.
At least European voters are willing to pay higher taxes for their public services.
If America’s Democrats lose in the mid-term elections this November, there is a risk of persistent fiscal deficits as Republicans veto tax increases while Democrats veto spending cuts.
Monetizing the fiscal deficits would then become the path of least resistance: running the printing presses is much easier than politically painful deficit reduction.
But if the US does use the inflation tax as a way to reduce the real value of its public debt, the risk of a disorderly collapse of the US dollar would rise significantly.
America’s foreign creditors would not accept a sharp reduction in their dollar assets’ real value that debasement of the dollar via inflation and devaluation would entail.
A disorderly rush to the exit could lead to a dollar collapse, a spike in long-term interest rates, and a severe double dip recession.
The Road Ahead in the Middle East
During these hard times for Israeli-Palestinian relations, it is vital that positive steps be taken and international goodwill be mobilized.
For a significant number of both Palestinians and Israelis, the use of force has come to represent the only conceivable option.
Palestinian society can feel very little hope in the immediate term, so what else is there to lose?
Yet it seems just as clear that the pursuit of extreme measures by any party will surely lead to wider and worse clashes.
Rather than resign ourselves to more years of hate and misery, it is urgent that the foundations for future peace be rebuilt before all civilized structures are swept away.
The priority in everyone's minds is the present conflict; but until human well being becomes a universal priority, conflicts will continue to dominate interpersonal and international relations.
Those who wish to contribute to reducing tensions should identify and promote starting points for peace-builders to find common ground.
Political and media support ought to focus on programs that work on the ground, as reported by humanitarian and non-governmental agencies, and not on particular religious agendas.
Priority should go to cooperative projects--enhancing cooperation between different faiths, between different schools within the same faith, and between religious and secular groups.
Islam as a religion of peace and human betterment is betrayed by anyone who commits atrocities in its name.
It is a broad and inclusive religion whose adherents across the world presently suffer from their lack of a unified voice.
For example, issuing fatwas , or religious edicts, is legitimately undertaken by those whose high standing is acknowledged by the whole Ummah , or Muslim community.
We need trustworthy and reputable bodies for issuing globally significant fatwa , with the authority to represent Muslim communities worldwide; such bodies could be based in Mecca and Najaf, representing Sunni and Shi'a centers of religious thought.
Such a step would bring to non-Muslims some of the sharpest thinking in the Islamic world, and would contribute a missing voice to debates about global values.
Globalization and Islam are not incompatible, so long as Islam is recognized as a tradition that has much to contribute to world civilization, not treated as a menace to be neutralized.
The goal today must be to modernize each tradition, while remaining faithful to its roots.
A total collapse of religious norms would truly be destabilizing.
If it is to succeed in making the world a better place, globalization can not be predicated upon market forces alone, but needs to reinforce the stability and integration of diverse societies.
In the Middle East, clear ethical leadership is needed.
But such leadership cannot achieve results in a vacuum.
Global standards of behavior can only be implemented effectively if they are upheld by all.
If a supposedly universal policy is seen to be applied inconsistently in order to further one nation's or culture's interests, that policy will lose credibility and be rejected as representing a double standard.
It is the responsibility of rulers and opinion leaders to insist that universal rights are implemented universally--that all, without exception, are subject to the rule of law.
Only when we achieve a culture of compliance with humanitarian norms will we be able to establish the framework for securing a vibrant civil society, negotiation instead of conflict, and continuing human welfare.
The developed world has an obligation to live up to the standards of the Declaration of Human Rights and other documents describing universal norms.
One of the most important expressions of goodwill is the gift of humanitarian aid.
At this time, when military conflict risks worsening in different corners of the world, western agencies in particular can support the people of a troubled area.
Yet humanitarian aid must not become just another foreign policy tool.
If aid is thought by the people receiving it to be manipulated for political gain, it will reduce the possibility for international relations based on any kind of trust.
There should be a re-evaluation of the place of altruism and compliance with universal humanitarian norms.
The international community can offer stability and improvements in living conditions for both Israelis and Palestinians by intervening now with a peacekeeping and humanitarian presence, endorsed by the United Nations and with the support of the United States.
Outside intervention may be necessary, including international commitment to specific objectives--not just to a process intended to reach those objectives--before it becomes possible to visualize a viable future in which both parties can flourish alongside each other.
The Road from Crony Capitalism
BRATISLAVA: In the ten years of postcommunist transition, political reform has often been reduced to the issue of holding free elections.
Economic reform was often simplistically understood as only (or at least above all) encompassing macroeconomic stabilisation as promoted by the so-called 'Washington consensus,' now being condemned by demonstrators in the streets of Washington.
It is no surprise that the results of so simplistic a policy prescription were often illiberal democracy and crony capitalism.
The transition in my country, Slovakia B and, indeed, across Central and Eastern Europe B has turned out to be a more complicated, complex, and longer process than originally expected.
The basic problem lies in the fact that the heritage of communism is a much greater burden than the majority of people, including experts, ever imagined, and was much more about the inheritance in people's heads than the inherited economic structure.
At a recent conference in Moscow, however, IMF Deputy Managing Director Stanley Fisher continued to stress the importance of the 'Washington consensus' - ie, macroeconomic stabilisation based on liberalizing prices and trade, currency convertibility, tight budgetary and monetary policy and rapid privatisation B for the success of reform.
That consensus remains important, but it is insufficient for success.
Building effective institutions is equally important.
For illiberal democracy and crony capitalism flourish where the institutional framework is lacking or corrupted.
Both have the same poisoned roots, so it is not surprising that they go hand in hand.
The higher the degree of a democracy's illiberality, the higher the degree of corruption, moral hazard, opportunism and rent seeking behaviour; the more corrupted the economy, the more stunted democracy is likely to be.
By illiberal democracy I mean a system where, though governments are elected in free (but not always fair) elections, they still fail to respect the basic principles and values of "constitutional liberalism," including the rule of law, division of power, an independent judiciary, and respect and protection of human rights and freedoms.
Crony capitalism can be understood as a system, which, though based on some market relations and private ownership, fails to respect such important rules as the enforce-ability of law, free and fair competition, equality of opportunity, protection of ownership, transparency, and public control.
Crony capitalism is a system that gives free rein to phenomena such as hidden connections between political and economic power, corruption, clientelism, and embezzlement.
As it takes hold, the fairness of the political process shrivels.
Can this vicious circle - which is not just a theoretical threat but an unfortunate reality in many countries - be broken?
The first step is to identify its main causes which, in my opinion, reside in a society's shared values and patterns of behaviour, its so-called informal rules.
Unlike formal rules, such as laws, these informal strictures do not need to be enforced because in principle, in every democracy (including illiberal ones), politicians only do what people allow them to do.
In the postcommunist democracies, however, these informal societal values and principles are only dimly perceived, if they are perceived at all, by a majority of the population.
In developed countries, such values have been nurtured by decades of functioning "constitutional liberalism," including, as the author Fareed Zakaria noted, regimes that can be called "liberal autocracies," such as the Austro-Hungarian Empire.
In this regard, history's heritage in Central Europe is extraordinarily tangled.
People in the territory of what is now Slovakia have lived in seven different states and under five different political systems in the 20th century, from the liberal autocracy of the Austro-Hungarian Empire (1901-1918), through the liberal democracy of the inter-war Czechoslovak Republic (1918-1939), to the fascist wartime Slovak state (1939-1945), back to a Czechoslovak liberal democracy (1945-1948), then to the communist Czechoslovak Socialist Republic (1948-1989), the liberal democracy of the Czechoslovak Federative Republic (1989-1992).
Since the "Velvet Divorce" which separated Slovakia and the Czech Republic, there have been liberal democratic periods as well as the illiberal democracy of Vladimir Meciar's regime of 1994-1998.
Patterns from that seesawing past inevitably influence the present.
By examining the voting patterns of people in individual regions of Slovakia in the 1918-1939 and 1990-1998 periods, the Slovak sociologist Vladimir Krivy revealed that municipalities and regions that inclined towards liberal parties in the inter-war period continued to be so disposed when freedom was restored after 1989-1998.
In other municipalities and regions the majority continued to support authoritarian parties and reject classic liberal principles, under both liberal and illiberal regimes.
Is it possible to break the cycle of illiberal democracy and crony capitalism?
Slovakia offers a positive example of such a rupture.
The 1998 elections that saw the defeat of Vladimir Meciar's regime clearly demonstrated that a break can be made.
Six factors played a key role here:
-- a change of generations;
-- improved education;
-- availability of information;
-- a unified opposition respecting classic liberal values;
-- growth in the influence of civil society.
Many of these forces for change grew in direct opposition to Meciar's misrule.
I believe that they are necessary factors for the success of truly liberal democracies and modern market economies to take root even in countries such as Russia, Ukraine, Belarus, and the Balkan States.
They are also needed if reform in the countries of Central Europe is to be accelerated.
Developed countries and international institutions should focus their attention and support on nourishing their growth.
The Road from Depression
NEW YORK – Financial markets are driving the world towards another Great Depression with incalculable political consequences.
The authorities, particularly in Europe, have lost control of the situation.
They need to regain control, and they need to do so now.
Three bold steps are needed.
First, the governments of the eurozone must agree in principle on a new treaty creating a common treasury for the eurozone.
In the meantime, the major banks must be put under the direction of the European Central Bank in exchange for a temporary guarantee and permanent recapitalization.
Third, the ECB would enable countries such as Italy and Spain temporarily to refinance their debt at a very low cost.
These steps would calm the markets and give Europe time to develop a growth strategy without which the debt problem cannot be solved.
Indeed, the importance of developing a growth strategy cannot be overstated, because the debt burden – the ratio of debt to annual GDP – rises and falls in part as a function of the rate of economic growth.
Since a eurozone treaty establishing a common treasury will take a long time to conclude, in the interim the member states must appeal to the financial authority that already exists, the ECB, to fill the vacuum.
In its current form, the embryo of a common treasury – the European Financial Stabilization Facility – is only a source of funds; how they are spent is left to the member states.
Enabling the EFSF to cooperate with the ECB will require a newly created intergovernmental agency, which will have to be authorized by Germany’s Bundestag and perhaps by other eurozone members’ parliaments as well.
The immediate task is to erect the necessary safeguards against contagion from a possible Greek default.
Two vulnerable groups – the banks and the government bonds of countries like Italy and Spain – need to be protected.
To accomplish these related tasks, the EFSF would be used primarily to guarantee and recapitalize the banks.
Systemically important banks would have to agree with the EFSF to abide by the ECB’s instructions as long as the guarantees are in force.
Banks that refuse would not be guaranteed, but enough would agree to provide the ECB with the required critical mass.
The ECB would then instruct the banks to maintain their credit lines and loan portfolios while closely monitoring the risks they run for their own accounts.
These arrangements would stop the concentrated deleveraging that is one of the main causes of the crisis.
Completing the recapitalization would remove the incentive to deleverage, at which point the blanket guarantee can be withdrawn.
To relieve the pressure on the government bonds of countries like Italy, the ECB would lower its discount rate.
It would then encourage the countries concerned to finance themselves entirely by issuing treasury bills – and encourage the banks to buy them.
The banks could rediscount the bills with the ECB, but they would not do so as long as they earned more on the bills than on the cash.
These measures would allow Greece to default without causing a global meltdown – which does not mean that Greece would be forced into default.
If Greece met its targets, the EFSF could underwrite a “voluntary” restructuring at, say, 50 cents on the euro.
The EFSF would have enough money left to guarantee and recapitalize the European banks, and it would be left to the IMF to recapitalize the Greek banks.
How Greece fared under these circumstances would be up to the Greeks.
I believe that these steps would bring the acute phase of the euro crisis to an end by staunching its two main sources (weak banks and vulnerable sovereigns) and reassuring the markets that a longer-term solution is in sight.
The longer-term solution itself would be more complicated because the regime imposed by the ECB would leave no room for fiscal stimulus and the debt problem cannot be resolved without growth.
How to create viable fiscal rules for the euro would be left to the treaty negotiations.
Many other proposals are under discussion, because officials now realize that “kicking the can down the road” has brought them to the end of the highway.
Most of these proposals seek to leverage the EFSF by turning it into a bank, an insurance company, or a special-purpose vehicle that takes the riskier tranche of a public-private partnership.
While practically any proposal is likely to bring temporary relief, the financial markets are just as likely to see through them and find them wanting, especially if they violate Article 123 of the Lisbon Treaty (the no-bailout clause), which my proposal scrupulously respects.
That said, some form of leverage could be used in recapitalizing the banks.
The course of action outlined here does not require leveraging or increasing the size of the EFSF.
But it is more radical, because it puts the banks under European control.
That is liable to arouse the opposition of both the banks and national authorities – opposition that only public pressure can overcome.
The Road to Arab Democracy
JERUSALEM – During the turmoil of the French Revolution, a popular saying arose: “How beautiful was the republic – under the monarchy.”
Instead, it wrought for France – and much of Europe – Jacobin terror, right-wing counter-terror, decades of war, and eventually Napoleonic tyranny.
A similar challenge now faces North Africa and the Middle East, where most Arab countries are experiencing massive upheavals.
Historically speaking, what is now happening is without precedent in the Arab world.
For the first time, Arab authoritarian regimes have been toppled, and others are threatened, by mass demonstrations calling for freedom and democracy.
Previously, Arab regimes changed through military coups and other sorts of putsches, never through popular revolutions.
During the great democratic wave of the 1990’s, which brought down dictatorships in Eastern Europe, Latin America, sub-Saharan Africa, and Southeast Asia, nothing similar happened in Arab North Africa and the Middle East.
Now, however, the region’s political inertia has been disrupted.
Cairo’s Tahrir Square has become a symbol for both hope and “people power.”
Yet, while most Arab regimes now appear threatened, only two authoritarian rulers – Zine el-Abidine Ben Ali in Tunisia and Hosni Mubarak in Egypt – have been actually deposed so far.
Theirs were relatively “soft” autocracies.
Much more oppressive and ruthless rulers – Col. Muammar el-Qaddafi in Libya, Bashar Assad in Syria, and Ali Abdullah Saleh in Yemen – though seriously threatened, have proven far more resilient (up to now) in suppressing popular opposition.
Even in tiny Bahrain, the Sunni minority has, for now, succeeded in maintaining its rule over the Shia majority, albeit with military help from neighboring Sunni-led countries.
As always, it is easier to bring down an autocracy than to construct and consolidate a democratic regime.
When communism in Eastern Europe collapsed, their old systems, despite some obvious differences, had the same characteristics: they were one-party dictatorships, with state control over the economy, education, and the media.
Today, they are very different from each other.
Poland, Czech Republic, and Hungary, for example, succeeded in navigating a successful transition to democracy and a functioning market economy.
Russia reverted to a neo-authoritarian system.
The former Soviet republics in Central Asia have all developed various “sultanistic” forms of government.
The reason for these differences is simple: democratic transition requires not only elections, but also several pre-conditions – a vibrant civil society; previous traditions, whether actual or remembered, of representation, pluralism, tolerance, and individualism; a limited role of religion; and an effective institutional framework for a multi-party system.
Where these conditions exist, a transition to democracy can succeed; where they are missing, the chances – as in Russia – for a successful transition to a consolidated democracy are slim.
Developments in Egypt will be crucial, not only because it is the largest Arab country, but also because some of the necessary pre-conditions appear to have a stronger presence there than elsewhere in the region.
Yet, even in Egypt, the challenges are enormous.
With early elections called for September, there is serious doubt as to whether opposition groups will have the time, means, and experience to organize effective political parties.
At the moment, only the army – which has effectively ruled the country since 1952 – and the Muslim Brotherhood, which has the widest social networks, appear to be serious players.
Will the army, whose monopoly of power is paradoxically legitimized by the massive demonstrations that toppled Mubarak, be willing to give up the enormous political and economic clout that it has amassed over decades?
One hears about a possible modus vivendi between the army and the Muslim Brotherhood.
Indeed, some activists are already back in Tahrir Square demonstrating against such an incongruous yet possible alliance.
In Libya, if Qaddafi falls, can such a highly tribalized country possess the building blocks needed for a functioning democracy?
The issue, one should emphasize, is not Islam as such: in Europe, the Catholic Church was for a long time the greatest enemy of democracy and liberalism.
Yet Christian Democratic parties today are one of the pillars of European democracy.
Like Christian churches, Islam can also change, and Indonesia and Turkey could well be examples for such a possibility.
But a context in which a fundamentalist Islamic group like the Muslim Brotherhood is the strongest organization in society, with very little effective countervailing powers, creates a serious challenge.
How will all of this influence the Israeli-Palestinian peace process, which appears stuck?
It may be difficult to know, especially as the fundamentalist Hamas, now in control of Gaza, might be encouraged by the rising power of its parent organization in Egypt.
The recent escalation of violence along Gaza’s border with Israel does suggest that events are developing in a dangerous direction.
As for Israel, it initially responded to the Arab revolts in a confused way.
Now its leaders maintain that they would welcome democratic changes in the region as a guarantor of peace and common values, though they express skepticism about whether such developments are actually imminent.
Skepticism is in order also with respect to the unknown consequences of Western military intervention in Libya: it may have been asked for by the Arab League and legitimized by the UN Security Council, yet the outcome is far from certain.
Whatever happens in Libya will have repercussions across the region.
The road to democracy has always been rocky – look at a century of upheavals in Europe and the difficulties the US faced when dealing with slavery and the rights of its black population.
It is to be hoped that there will be a light at the end of the tunnel in the Arab Middle East as well, but the tunnel may be a long one.
The Road to Depression
BERKELEY – For 15 months, the United States Federal Reserve, assisted by the financial regulators of the US Treasury, have been trying to make the macroeconomic consequences of the American mortgage-backed securities financial crisis as small as possible – trying, above all, to avoid a deep depression.
They have also had three subsidiary objectives:
• Keep as much economic activity as possible under private-sector control, in order to ensure that what is produced is what consumers really want.
• Prevent the princes of Wall Street who led us into the crisis from profiting from the systemic risk that they created.
• Ensure that homeowners and small investors do not absorb too much loss, for their only “crime” was to accept bad risks, which they would not have done in a world of properly diversified portfolios.
Now it is clear that the Fed and the Treasury have lost the game.
If a depression is to be avoided, it will have to be the work of other arms of the government, with other tools and powers.
The failure to contain the crisis will ultimately be traced, I think, to excessive concern with the first two subsidiary objectives: reining in Wall Street princes and keeping economic decision-making private.
Had the Fed and the Treasury given those two objectives their proper – subsidiary – weight, I suspect that we would not now be in this mess, and that the danger of a global depression would still be very far away.
The desire to prevent the princes of Wall Street from profiting from the crisis was reflected in the Fed-Treasury decision to let Lehman Brothers collapse in an uncontrolled bankruptcy without oversight, supervision, or guarantees.
The logic behind that decision was that, previously in the crisis, equity shareholders had been severely punished when their firms were judged too big to fail.
The shareholders of Bear Stearns, AIG, Fannie Mae, and Freddie Mac essentially had ownership positions and all their wealth confiscated for pennies.
But this was not true of bondholders and counterparties, who were paid in full.
The Fed and Treasury feared that the lesson being taught in the last half of 2007 and the first half of 2008 was that the US government guaranteed all the debt and transactions of every bank and bank-like entity that was regarded as too big to fail.
That, the Fed and the Treasury believed, could not be healthy.
Lenders to very large overleveraged institutions had to have some incentive to calculate the risks.
But that required, at some point, allowing some bank to fail, and persuading some debt holders and counterparties that the government guarantee of support to institutions that were too big to fail was not certain.
In retrospect, this was a major mistake.
The extended web of finance as it existed in the summer of 2008 was the result of millions of calculations that the US government did, in fact, guarantee the unsecured debt of every very large bank and bank-like entity in America.
With that guarantee broken by Lehman Brothers’ collapse, every financial institution immediately sought to acquire a much greater capital cushion in order to avoid the need to draw on government support, but found it impossible to do so.
The Lehman Brothers bankruptcy created an extraordinary and immediate demand for additional bank capital, which the private sector could not supply.
It was at this point that the Treasury made the second mistake.
Because it tried to keep the private sector private, it sought to avoid partial or full nationalization of the components of the banking system deemed too big to fail.
In retrospect, the Treasury should have identified all such entities and started buying common stock in them – whether they liked it or not – until the crisis passed.
Yes, this is what might be called “lemon socialism,” creating grave dangers for corporate control, posing a threat of large-scale corruption, and establishing a precedent for intervention that could be very dangerous down the road.
But would that have been worse than what we face now?
The failure to sacrifice the subsidiary objective of keeping the private sector private meant that the Fed and the Treasury lost their opportunity to attain the principal objective of avoiding depression.
Of course, hindsight is always easy.
But if depression is to be avoided, it will be through old-fashioned Keynesian fiscal policy: the government must take a direct hand in boosting spending and deciding what goods and services will be in demand.
The Road to Fiscal Crisis
WASHINGTON, DC – It has become fashionable among Washington insiders – Democrats and Republicans alike – to throw up their hands and say: We ultimately face a major budget crisis in the United States, particularly as rising health-care costs increase the fiscal burden of entitlements like Medicare and Medicaid.
But then the same people typically smile and point out that investors from other parts of the world still want to lend the US vast amounts of money, keeping long-term interest rates low and allowing the country to run big deficits for the foreseeable future.
This view is seriously flawed.
It implies that the US can kick the can down the road as long as the dollar remains the world’s preeminent reserve currency, and America offers the best safe haven for skittish capital owners.
By 2015, according to this logic, politicians will have done nothing to raise taxes and very little to cut expenditure, so the US will still have a budget deficit of around $1 trillion, and will finance a substantial portion of it by selling government bonds to foreigners.
By 2050, there will undoubtedly be a fiscal problem – but, again, there is plenty of time to ignore it.
This logic, supported by the clear intention of the Federal Reserve to keep all interest rates low, suggests that benchmark US interest rates – for example, on the 10-year Treasury – will remain below 4% (and perhaps under 3.5%) in the near term.
This week, such government debt paid around 3.2%, which is very low by historical standards.
If the “Washington Fiscal Consensus” proves correct, when benchmark rates eventually edge upwards, they will move slowly.
But this consensus misses an important point: the financial sector in the US and globally has become much more unstable in recent decades, and there is nothing in any of the reform efforts undertaken since the near-meltdown in 2008 that will make it safer.
People sometimes talk about “systemic risk” as if it were intrinsic to the financial system. But modern financial history, including in emerging markets, strongly indicates otherwise.
When banks and other financial institutions get into trouble, private losses are transferred – explicitly or implicitly – to the government’s balance sheet. Dangerous financial systems pose big fiscal risks.
The three people who have articulated this problem most clearly include two of the world’s leading central bankers.
Before Ben Bernanke became Chairman of the Federal Reserve Board, he was rightly renowned for his academic work on the Great Depression, which showed how, under the right (or wrong) conditions, the financial sector could act as a form of accelerant for developments in the real (nonfinancial) economy.
The Fed’s efforts in the past three years to stabilize banks and other parts of finance have no doubt been motivated in large part by this insight.
Anat Admati, a professor at Stanford’s Graduate School of Business, focuses on bank capital – specifically, the incentives that banks have to fund their activities with very high leverage – little equity and a great deal of debt.
In my view, she has the single most important page on the Web today (http://www.gsb.stanford.edu/news/research/admati.etal.mediamentions.html), containing both original research by her, Peter deMarzo, Martin Hellwig, and Paul Pfleiderer and their many interventions in the policy debate.
The insight of Admati and her collaborators is simple and very powerful.
Higher leverage allows bankers to earn more money, but it can easily become excessive for shareholders – because it makes the banks more vulnerable to collapse – and it is terrible for taxpayers and all citizens, as they face massive downside costs.
In the US, the costs include more than eight million jobs lost since 2007, an increase in government debt relative to GDP of around 40% (mostly due to lost tax revenue), and much more.
Mervyn King, a former academic who is currently Governor of the Bank of England, and his colleagues have a vivid name for the toxic cocktail that results: “doom loop.”
The idea is that every time the financial system is in trouble, it receives a great deal of support from central banks and government budgets.
This limits losses to stockholders and completely protects almost all creditors.
As a result, banks have even stronger incentives to resume heavy borrowing (as Admati argues), and, as rising asset prices lift the economy in the recovery phase, it becomes possible for them to borrow even more (as Bernanke knows). But what this really amounts to is taking on more risk, typically in an unregulated, unsupervised way – and with very little effective governance within the banks themselves (again, Admati explains why bank executives like it this way).
The Bernanke-Admati-King view suggests that the Washington Fiscal Consensus is seriously deficient.
The US and global economy will recover, to be sure.
But that recovery will be just another phase in the boom-bust-bailout cycle.
America’s too-big-to-fail banks are well on their way to becoming too big to save.
That point will be reached when saving the big banks, protecting their creditors, and stabilizing the economy plunges the US government so deeply into debt that its solvency is called into question, interest rates rise sharply, and a fiscal crisis erupts.
In other words, the “doom loop” isn’t really a loop at all.
It does end eventually, as it has – just for starters – in Iceland, Ireland, and Greece.
The Road to Justice in Iraq
As questions continue to mount concerning the true rationale behind the Iraq war, we should avoid only looking backwards.
Examining the US-led coalition's prewar actions may well expose official deception and manipulation in making the case for military intervention.
But the nagging questions about the campaign's legitimacy lie less in the past, and more in the ongoing absence of virtually any semblance of the rule of law in Iraq.
Today, the domestic security vacuum in Iraq is so profound that it calls into question whether the war is really over.
Guerrilla attacks on coalition soldiers show that no neat line separates ``before'' and ``after.''
So does the disturbing continuity between the absence of legality prior to the occupation and now, under the formal authority of the occupying powers.
After all, it is the rule of law--and only the rule of law--that distinguishes free societies from dictatorships.
Coalition military officials recognize the obvious: without proof of Saddam Hussein's demise, resistance by his hardcore supporters would inevitably continue.
But what about the need for a wider reckoning with the former regime?
Is justice for the victims and perpetrators of Saddam's crimes any less important for separating Iraq's past from the present and the future?
So far, security and law enforcement have been utterly inadequate to deal with past abuses.
Given decades of repressive rule, and tens of thousands of disappeared Iraqis, there are already endemic problems of verification.
But from the outset of the intervention, coalition officials have displayed patent disregard for mass graves and massacre sites.
Chaotic excavation and exhumation--often by family members desperate to learn the fate of loved ones--and unprofessional treatment of the evidence aggravates the challenges of uncovering the truth.
Unfortunately, the coalition's neglect of forensic issues reflects its wider failure to devise any strategy to address issues concerning the rule of law and justice, or any central body with the authority to begin building the necessary institutions.
While US Chief Administrator Paul Bremer recently vested authority in a number of judges, their powers are extremely limited, and apply only to present violations, not the sustained abuses of human rights that defined Saddam's regime.
With weapons of mass destruction nowhere to be found, the justice of this intervention remains an open question--one that now turns on the coalition's efforts to establish the rudiments of legality in Iraq.
These efforts will succeed only if they include a modicum of transitional justice.
As the occupation force in Iraq, the coalition has undertaken international obligations, under the fourth Geneva convention, to uphold security and the rule of law.
This means that the coalition cannot do whatever it wishes with Saddam's henchmen and war criminals.
It cannot simply ship them to Guantanamo Bay or Diego Garcia.
But the coalition's choices are extremely limited.
Appointing an Iraqi tribunal capable of generating some form of legal accountability for Saddam and his henchmen--an idea that is gaining ground among Bremer's staff, at least for Saddam Hussein if he is captured alive--is unrealistic.
No one is fully legitimate: neither those who thoroughly compromised themselves serving the Ba'athist judiciary, nor exile returnees.
Similarly, the coalition would inevitably face the charge of ``victor's justice'' were it to administer and staff its own courts.
Only the UN can meet the demand for transitional justice.
This requires the immediate establishment of a judicial body, whose legitimacy would be based on the same multilateral process that was sought prior to the war.
In this case, Chapter 7 of the UN charter gives the Security Council authority to set up criminal tribunals, as it did previously to adjudicate massacres in the former Yugoslavia and in Rwanda.
Unlike the UN tribunal for former Yugoslavia, which was established
But even such limited action is better than doing nothing.
We know from the many cases of regime change in recent decades that the problem of transitional justice will not merely go away if ignored.
Indeed, inaction in Iraq will not only postpone the inevitable reckoning with the past; it may
One of the main purposes of pursuing transitional justice is to reestablish legitimacy and the rule of law in the present.
If the necessary institutions remain unavailable, then at the least an investigative commission should be created to establish an evidentiary record while this is still possible.
Such a commission would afford a measure of preservative justice, enabling a more comprehensive verdict once the institutional capacity for achieving this is built.
There is still a chance to create a ``before'' and ``after'' in Iraq, and hence to redeem the legitimacy of the US-led intervention and ongoing occupation.
But the path lies before us, not behind us, in a sustained commitment to security, the rule of law, and transitional justice.
The Road to Nuclear Disarmament
NEW YORK – Weapons of mass destruction and disarmament form one of the gravest challenges facing the world. One of my priorities as United Nations Secretary-General is to promote global public goods and remedies to challenges that do not respect borders.
A world free of nuclear weapons is a global public good of the highest order.
My interest in this subject stems partly from personal experience.
My homeland, South Korea, has suffered the ravages of conventional war and faced threats from nuclear weapons and other WMD.
But, of course, such threats are not unique to Asia.
Despite a longstanding taboo against using nuclear weapons, disarmament remains only an aspiration.
So, is a taboo merely on the use of such weapons sufficient?
States make the key decisions where nuclear weapons are concerned.
But the UN has important roles to play.
We provide a central forum in which states can agree on norms to serve their common interests.
We analyze, educate, and advocate in the pursuit of agreed goals.
Most states have chosen to forgo nuclear weapons, and have complied with their commitments under the Nuclear Non-Proliferation Treaty.
Yet some states view such weapons as a status symbol, and some view them as offering the ultimate deterrent against nuclear attack, which largely accounts for the estimated 26,000 that still exist.
Unfortunately, the doctrine of nuclear deterrence is contagious, making non-proliferation more difficult and raising new risks that nuclear weapons will be used.
The world remains concerned about nuclear activities in North Korea and Iran, and there is widespread support for efforts to address these concerns by peaceful means.
There are also concerns that a “nuclear renaissance” is looming, with nuclear energy seen as a clean energy alternative at a time of intensifying efforts to combat climate change.
The main worry is that this will lead to the production and use of more nuclear materials that must be protected against proliferation and terrorist threats.
The obstacles to disarmament are formidable.
But the costs and risks of its alternatives never get the attention they deserve.
Consider the enormous opportunity cost of huge military budgets.
According to the Stockholm International Peace Research Institute, global military expenditures last year exceeded $1.3 trillion.
Ten years ago, the Brookings Institution published a study that estimated the total costs of nuclear weapons in the United States alone to be over $5.8 trillion, including future cleanup costs.
By any definition, this is a huge investment that could have had many other productive uses.
Concerns over nuclear weapons’ costs and inherent dangers have led to a global outpouring of ideas to breathe new life into nuclear disarmament.
We have seen the WMD Commission led by Hans Blix, the New Agenda Coalition, and Norway’s Seven Nation Initiative.
Australia and Japan have launched the International Commission on Nuclear Non-Proliferation and Disarmament.
Civil society groups and nuclear-weapon states have also made proposals, such as the Hoover Plan, spearheaded by Henry Kissinger.
I would like to offer my own five-point proposal.
First, I urge all NPT parties, in particular the nuclear-weapon states, to fulfill their obligation under the treaty to undertake negotiations on effective measures leading to nuclear disarmament.
They could agree on a framework of separate, mutually reinforcing instruments.
Or they could consider negotiating a nuclear-weapons convention, backed by a strong verification system, as has long been proposed at the UN.
I have circulated to all UN members a draft of such a convention, which offers a good point of departure.
The nuclear powers should actively engage with other states on this issue at the Conference on Disarmament in Geneva, the world’s single multilateral disarmament negotiating forum.
The world would also welcome a resumption of bilateral negotiations between the US and Russia aimed at deep and verifiable reductions of their arsenals.
Governments should also invest more in verification research and development.
The United Kingdom’s proposal to host a conference of nuclear-weapon states on verification is a concrete step in the right direction.
Second, the Security Council’s permanent members should begin discussions on security issues in the nuclear disarmament process.
They could unambiguously assure non-nuclear-weapon states that they will not be subject to the use or the threat of use of nuclear weapons.
The Council could also convene a summit on nuclear disarmament.
Non-NPT states should freeze their own nuclear-weapon capabilities and make their own disarmament commitments.
Third, unilateral moratoria on nuclear tests and the production of fissile materials can go only so far.
We need new efforts to bring the Comprehensive Nuclear Test Ban Treaty into force, and for the Conference on Disarmament to begin negotiations on a fissile material treaty immediately, without preconditions.
I support the creation of the Central Asian and African nuclear-weapon-free zones, and strongly support efforts to establish such a zone in the Middle East.
And I urge all NPT parties to conclude their safeguards agreements with the International Atomic Energy Agency (IAEA), and voluntarily to adopt the strengthened safeguards under the Additional Protocol.
Fourth, the nuclear-weapon states often circulate descriptions of what they are doing to pursue these goals.
But these accounts seldom reach the public.
I invite the nuclear-weapon states to send such material to the UN Secretariat, and to encourage its wider dissemination.
The lack of an authoritative estimate of the total number of nuclear weapons attests to the need for greater transparency.
Finally, a number of complementary measures are needed.
These include eliminating other types of WMD; new efforts against WMD terrorism; limits on the production and trade in conventional arms; and new weapons bans, including of missiles and space weapons.
If there is real, verified progress on disarmament, the ability to eliminate the nuclear threat will grow exponentially.
As we progressively eliminate the world’s deadliest weapons and their components, we will make it harder to execute WMD terrorist attacks.
These proposals offer a fresh start not only on disarmament, but also on strengthening our system of international peace and security.
The Road to Post-Crisis Growth
MILAN – It is about 18 months since the financial crisis hit, and 12 months since the panic started to recede, with asset prices stabilizing and beginning to turn up.
Although recovery in advanced countries remains fragile, developing countries appear to have weathered the storm.
Growth in China and India is bouncing back toward pre-crisis levels, Brazil’s growth is rising after a sharp dip, and developing-country trade is rebounding from depressed levels.
Reasons for this remarkable resilience abound, and they offer guidance for advanced and developing countries alike.
As the crisis struck, capital flowed out of developing countries to shore up damaged balance sheets in advanced countries.
Credit tightened sharply.
But rapid responses by developing-country central banks, in collaboration with relatively healthy domestic banks, prevented a severe credit freeze.
Moreover, the reserves built up over the preceding decade were, in many cases, used to offset some of the capital outflows.
Bank balance sheets had been strengthened after the 1997-1998 financial crisis, and were unencumbered by the overvalued securitized assets and complex derivative securities that caused much of the damage to advanced-country financial institutions.
Leverage was lower in several sectors.
Financial institutions – and, more importantly, households – held less debt relative to assets and income.
In advanced economies, the main mechanisms for transmitting balance-sheet damage to the real economy were credit rationing and reduced consumption due to loss of net worth in households.
Both factors were more muted in developing economies.
Of course, rapid declines in asset values had an impact for a few months, but, with less leverage, the impact on net worth was lower and domestic consumption less vulnerable.
In sum, the crisis originated in a balance-sheet shock, to which exposure was simply lower in developing countries.
All developing countries witnessed a huge fall-off in trade – much larger than the declines in income and output.
Trade bounced back relatively quickly in the second half of 2009, though this partly reflected the extraordinarily low base.
But the immediate effect was mitigated to some extent by a sharp depreciation of almost all the currencies caused by the capital outflows.
The exception was China, where the renminbi held steady against the dollar, causing an initial appreciation against almost every other currency.
That configuration has largely reversed in the past nine months as international capital flows, driven by investment opportunities and returns, return to a more normal pattern.
It is likely that China will shortly resume its pre-crisis policy of managed appreciation.
To be sure, developing countries differed – often markedly – in their capacity for fiscal stimulus to counter the loss of external demand.
Nevertheless, many were capable of at least some countercyclical measures without destabilizing their public finances.
Although the resilience in emerging markets, their rapid and effective policy responses, and speedy recoveries are encouraging signs for the global economy, instability in the advanced economies and the relatively unregulated financial system remain a cause for concern.
Re-regulation and international efforts to coordinate policy responses may eventually reduce the potential for instability, but will require the work to be finished and tested before real confidence is generated.
In the meantime, a somewhat conservative and defensive posture is warranted.
This means that developing countries are likely to retain substantial domestic ownership of their domestic financial institutions.
Securitization (and shadow banking) will be kept simple and proceed at a measured pace as a new legal and regulatory framework is built and tested.
Complex securities that are hard to value will be sharply limited as a matter of policy.
Moreover, because dependence on foreign finance creates clear vulnerabilities, developing countries will seek to fund investment mainly from domestic savings, thereby limiting the size of their current-account deficits.
And, because there is no strategic reason to run large surpluses, with an excess of savings over investment, maintaining reasonable balance on the current account appears to be the preferred course.
In any case, limiting financial interdependence is the prudent strategy and the likely outcome.
Nevertheless, the basic pillar of sustained high growth has been leveraging the global economy’s knowledge and demand.
That remains valid.
So, while a strong likelihood of diminished growth in advanced countries for an extended period means that an outward-oriented strategy may produce less-than-spectacular results for developing countries, alternative strategies are worse.
Indeed, worries about rising protectionism in a low-growth environment are on target.
Larger developing countries must assume an expanded role in unwinding the protectionist measures that came with their expanded use of the public purse, and reestablish forward motion.
This is particularly important for poorer and smaller developing countries in which domestic consumption and investment is a poor substitute for global demand.
At the same time, a renewed emphasis on maximizing the domestic market’s potential to drive growth and structural diversification – though clearly higher in the larger, higher-income developing economies – is a useful lesson of the crisis.
Those developing countries that maintain a stable macroeconomic environment, a countercyclical mindset, and steady progress on governance, education, and infrastructure will thrive.
Advanced-country growth may be diminished for a time, but the compensating factors that have emerged represent the most important lesson of the crisis.
Developing countries’ internal trade is expanding with their economic size, and the large ones are restoring growth rapidly.
Indeed, China, far from being thrown off course by the crisis, is entering a middle-income transition that over time will create considerable space in labor-intensive manufacturing and services, as the country evolves structurally and exits from these sectors.
The Road to Prosperity and Sound Markets
BERLIN – The near global financial meltdown and ensuing downturns left the Anglo-Saxon nations pondering what they should do both to set their economies on a path toward recovery and to avoid a similar crisis in the future.
Some recommendations by members of Columbia University’s Center on Capitalism and Society were sent to last April’s G20 meeting.
To create more jobs in the economy, I proposed that governments establish a class of banks that would acquire the lost art of financing investment projects in the business sector – the type of financing the old “merchant” banks did so well a century ago.
I also renewed my support for a subsidy to companies for their ongoing employment of low-wage workers.
(Singapore adopted this idea with enviable results.)
To protect commercial banks from risking their own solvency (and the whole country’s solvency besides) once again, Richard Robb suggested that a small tax on banks’ short-term debts be imposed in order to deter banks from over-borrowing.
Amar Bhide suggested that commercial banks return to “narrow banking.”
If they did that, they could not borrow at all.
But despite all the policy action and talk since then, none of these suggestions has been adopted by G20 countries.
Their emphasis has been on countercyclical measures intended to moderate the downturn rather than on restructuring.
Such moderation, taken alone, is welcome, of course.
But the measures taken may be delaying recovery.
Much of the fiscal “stimulus” to consumers causes companies to hang onto employees a little longer rather than to release them to export and import-competing industries that are expanding.
Much of the stimulus to homeowners is propping up housing prices at unsustainable levels.
This is slowing the absorption into the economy of the excess resources in the construction industry.
Another round of global stimulus after the downturn is over or nearly so would push world interest rates up and drive investment activity down.
Government initiatives to rebuild “infrastructure” – to replace waning private investment with state investment in health care, climate control and energy conservation – do not have that downside.
But as a means to job creation there are questions.
Private investment is sustained by private innovation, which renews good opportunities.
But would good opportunities for state investment be similarly renewed?
Might the uncertainties raised by entering into such unknown territory exact a serious toll on private investment activity?
Governments must shake off the delusion that full recovery is just a matter of pushing buttons.
Beginning with the astonishingly innovative economies that sprouted up in the 19th century, the tried and true method for gaining high prosperity – for an ample supply of engaging and challenging jobs – has been a system of innovative private enterprise in the business sector.
What governments ought to do is “stimulate” an innovative economy, not endless roads, wind energy and other building projects.
The best way to shorten the downturn is to restructure the economy in such ways that it recovers to a higher “new normal” level.
This December, the Center on Capitalism and Society is meeting in Berlin, just weeks after commemorations of the fall of the Berlin wall.&#160;
The meeting is intended to seek ways to streamline and buttress complex and stumbling economies so that they possess the dynamism that delivers high prosperity – plentiful jobs and ample job satisfaction.
Not all the instruments for creating that prosperity are known, of course.
Yet many are.
It is good to have a banking industry run by a diversity of canny financiers capable of recognizing and willing to fund innovative investment projects.
It is good to have a business sector in which shareowners are not prey to self-dealing CEOs.
It is bad to have fund managers that dump a company’s shares if it does not hit its earnings targets for the next quarter.
Yet the goal of high dynamism raises a problem.
Markets, being peopled by mere human beings, have trouble figuring out where profitable investment opportunities are (let alone the most profitable).
A company’s knowledge of the future results of a new business undertaking is imperfect to say the least.
And the more innovative the undertaking the more imperfect is any advance understanding of its potential outcome.
An investor’s knowledge of the results of a decision to buy this or that asset, financial or real, is likewise imperfect.
Moreover, what others think – particularly, what rivals are doing – may have a big effect on the results of a decision and much of what others understand and plan is private, thus inaccessible.
So an economy’s dynamism depends on enough people daring to act in spite of how little they know.
Those of us who, at the Berlin conference and elsewhere, seek to rebuild economies for greater dynamism must do so with awareness of these economic realities.
The market’s magic powers are limited.
Fortunately, there are some policy precepts and ideas that governments would do well to invest their political capital in if they want innovation and its attendant prosperity to resume.
A time-honored precept is to avoid shaking investor confidence unnecessarily.
When John Maynard Keynes went to see President Roosevelt in the depths of the Depression, he advised toning down the administration’s anti-business rhetoric.
Yet governments must also avoid pumping up businesses with over-confidence, which could tempt them to raise mark-ups and hurt sales.
Simplifying financial institutions, especially those with an implicit government backstop, must also play a role in rebuilding a dynamic economy.
Ratings that pretend to take into account “systemic risk” might prove as dangerous as ratings that ignore such risk.
Hedge funds, venture capital firms that actually venture into new things, and recreated merchant banks are relatively well suited to make financial decisions that require judgment, the ability to engage the unknown, and to do so over a horizon not dictated by quarterly earnings.
There are also ideas to address speculative swings.
They may induce wasteful investment and a loss in innovation.
Their “corrections” may also have costs – a business slump and a further loss of innovation.
A conceptual framework – Imperfect Knowledge Economics – recently developed by a Center member, Roman Frydman, in collaboration with Michael Goldberg, shows how excessive swings in asset prices arise from market participants’ imperfect understanding of the future rewards of their decisions.
This framework provides a rationale for policy intervention in asset markets, and also has important implications for how regulators should measure and manage systemic financial risk.
The analysis acknowledges that, within a wide range, the market does a far better (though not perfect) job in setting prices than regulators could.
But it makes the case for novel measures, including “guidance ranges” for asset prices and targeted variation of margin and capital requirements, to help dampen such excessive price movements.
Regaining a well-functioning capitalism may be a steep mountain to climb.
Yet there are grounds to hope that it is within our reach.
The Road to the Double Helix, the Structure of DNA
Fifty years ago, on April 25, 1953, James Watson and Francis Crick published a short letter in the science magazine Nature .
It described a remarkable two-chain helical structure for DNA--the genetic material in living organisms.
Their double-helix model provided the key to understanding how living cells can produce two exact copies of themselves and how genetic material stores all the information for synthesizing the proteins needed to build a living organism.
A second major advance came a few months later, when Max Perutz discovered a technique to determine the structures of large molecules like myoglobin and hemoglobin.
Since then, X-ray structural analysis of protein molecules has helped us to understand the chemistry of biological reactions.
Both discoveries--DNA structure and protein structure--were made at Cambridge University's Cavendish Laboratory.
So why were these two foundation stones of the revolution in biology and medicine that dominated science in the second half of the 20th century uncovered in a British physics lab?
The great breakthroughs of 1953 rested on the strength of experimental physics at Cambridge, beginning in the late 19th century.
This legacy shaped the intellectual environment in which the father-and-son team of William and Lawrence Bragg were trained, and where Lawrence Bragg--first as an undergraduate and then as a research student--developed in 1912 the ideas that led to X-ray structural analysis.
Although Max von Laue, Walter Friedrich, and Paul Knipping had discovered the diffraction of X-rays by crystals, it was Lawrence Bragg who understood how it could be exploited scientifically.
Reflection by "Bragg planes"--sheets of atoms that can diffract X-rays at specific angles that are determined by the separation between sheets--enabled the Braggs to calculate the exact arrangement of sodium and chloride atoms in a crystal of salt.
William Bragg graduated in mathematics in Cambridge in 1884, and became professor of physics in Adelaide, Australia.
In 1909 he returned to Britain to take up a chair at Leeds, continuing his work on the nature of X-rays.
He became director of the Royal Institution in London in 1923, where he attracted some outstanding young scientists interested in the X-ray field.
Among them were two recent Cambridge graduates, William Astbury and John Desmond Bernal, who became interested in the problem of protein structure--Astbury as a result of being asked by Bragg to provide X-ray diagrams of wool and silk.
Bernal moved back to Cambridge as a lecturer in structural crystallography in 1927, and in 1931 was promoted to assistant director of research in crystallography, by then a sub-department of the Cavendish Laboratory.
Bernal's main scientific interest was initially the atomic structure of crystals, metals, and minerals, then of hormones and sterols--and of some amino acids, the building blocks of proteins.
Astbury, meanwhile, moved to Leeds in 1928, where he also began working on amino acids and proteins.
Describing his unsuccessful attempts to obtain well-ordered X-ray diffraction patterns from crystals of the protein pepsin, he wondered whether Bernal could help obtain crystals of other proteins.
A friend of Bernal's named Glenn Millikan had happened to visit a lab in Uppsala, Sweden, where large pepsin crystals had been obtained, and he brought some of the crystals, still in their mother-liquor, back to Cambridge.
Bernal and Dorothy Crowfoot (later Hodgkin) obtained patterns of the dry crystals, as Astbury had, and with similarly disappointing results.
But when Bernal observed the crystals in a light microscope, he noticed that as the large amount of water in the crystal lattice evaporated, they became disordered.
They repeated the X-ray experiment, but with the crystal surrounded by its mother-liquor and sealed in a glass capillary, obtaining patterns with large numbers of crystalline reflections.
The results of this first defining moment in protein crystallography were published as a letter in Nature in 1934.
Having deduced the presence of polypeptide chains, Astbury continued to pursue his pioneering studies of their configurations in fibrous proteins.
He also obtained the first X-ray patterns of partially oriented samples of DNA.
Max Perutz, a chemistry graduate from Vienna, arrived in Cambridge in 1935 to work as a graduate student with Bernal.
The next year, he was given excellent hemoglobin crystals and soon produced the best X-ray diffraction patterns to date.
But the observable diffraction pattern--the intensities and positions of the individual reflections--represents only half of the data needed to deduce the structure of the diffracting object.
In mathematical terms, it gives the amplitude, but not the phases--i.e., the stages in an oscillatory motion--without which the atomic positions could not be determined.
With simpler structures made up of small numbers of atoms, chemistry could provide considerable guidance as to the atomic arrangements, and a solution could thus often be found by trial and error.
But proteins, which contain thousands of atoms, were far too complicated for this to work.
So despite the enormous amount of excellent data that was collected, the solution remained tantalizingly out of reach.
But the faith remained that detailed information about protein structure could be obtained from the X-ray patterns in some way, if only it could be discovered.
It was only natural that where chemistry fell short, physics--and its premier laboratory--showed the way forward, a way grasped by Watson and Crick in the epic breakthrough that we celebrate this month.
The Road to Tripoli
BENGHAZI – In the days since the February 17 revolution against Libyan leader Col. Muammar el-Qaddafi, opposition forces in Benghazi have formed a Transitional National Council (TNC) and a Crisis Team (CT) to serve as an interim government.
The two groups are drawn from a cross-section of society.
Some members held senior posts in Qaddafi’s government; others were social activists.
Both groups are now quite popular among the population in rebel-controlled parts of Libya.
But if rebel troops are unable to advance toward the capital of Tripoli, and instead remain deadlocked with Qaddafi’s forces between the towns of Ajdabiyya and Brega, the opposition will face a serious dilemma.
A military impasse could erode their support and even delegitimize them.
When forming the councils, the opposition sought to achieve a balance between government experience, technical expertise, and tribal support.
Thus, while some members, such as former Justice Minister and TNC Chairman Mustafa Abdel-Jalil, were affiliated with Qaddafi’s government, others, such as CT Economic and Finance chief Ali Tarhouni, have lived outside of Libya for almost 30 years.
And powerful clans from Tobruk have succeeded in placing their members in key military positions.
The councils are, moreover, largely a regional affair, with members mostly coming from eastern Libya.
Those with roots in the western regions are mainly dissidents who have lived abroad for decades. TNC officials admit that some council members are based in western Libya, but have refused to identify them for security reasons.
The two bodies are far from uniform and monolithic.
Conflicts have already erupted between TNC members as well as between members of the military leadership. Bolstered by his high profile as Justice Minister, Jalil has emerged as an interim leader. But once the TNC makes the transition toward becoming an elected body, the more charismatic CT Director Mahmoud Jibril and the astute council spokesman Abdul Hafiz Ghoga may emerge as the rebels’ true leaders.
On the military side, simmering tensions between two officers are frustrating combat strategy. Colonel Khalifa Hifter, a close Qaddafi supporter before he deserted following his capture by Chadian forces in 1987 during Libya’s war with its southern neighbor, has proved unwilling to fall into line behind the chief of staff, former Interior Minister Abdul Fatah Younis. Such political and military spats are likely to continue as officials attempt to consolidate their positions.
The two groups are hard-pressed to formulate a clear political and social platform.
TNC and CT members are largely unified in their desire to end Qaddafi’s 41-year rule and redistribute the country’s wealth to the country’s long-neglected eastern region.
As a result, they have not articulated a coherent vision of a post-Qaddafi Libya.
And, though the two councils are certainly staffed by people with the technical credentials needed to manage the economy, few members have any real political skills or experience overseeing bureaucratic bodies.
So far, these shortcomings have not prevented the TNC from achieving widespread support in the rebel-controlled east.
Inhabitants of Benghazi praise Abdul Jalil and his colleagues.
Municipal councils in Bayda, Darna, and Tobruk have pledged their support for the TNC, and fighters who battled American forces in Iraq have lined up behind the body’s military leaders.
People here are content to be free from Qaddafi’s erratic policies and pervasive security services. “Anyone but Qaddafi,” one man in Tobruk told me.
This partly explains why Libyans are willing to embrace dissidents who lived abroad for decades, about whom they know little.
This warm welcome contrasts with Iraqi distrust of the political exiles who returned on the coattails of the American overthrow of Saddam Hussein’s regime in 2003.
But support for the TNC is largely skin deep – it is neither grounded in knowledge of how the opaque council functions, nor based on an understanding of its goals.
As such, once the initial euphoria dissipates, Libyans are likely to turn against the TNC if it cannot deliver battlefield successes.
With the rebels lacking professional military training and discipline, such gains look increasingly unlikely.
To ensure that the rebels have a fighting chance against Qaddafi’s better-equipped troops, Western countries will have to move beyond air strikes and offering the TNC diplomatic recognition. They will need to provide medium-range rockets and light armored vehicles to anti-regime forces, in addition to training them to use their weapons properly. Such a mission will require sending hundreds more military specialists to Libya than the few dozen that Britain, France, and Italy have pledged.
Without a large influx of instructors and weapons, the rebels will not be able to advance toward the capital, Tripoli, in the coming months. Such a stalemate is likely to leave Libyans frustrated with the council.
And the vague slogans that its leaders are currently offering will likely be viewed as hollow promises.
Since the council’s legitimacy stems exclusively from Libyan good will and blind faith, rather than from success at the ballot box, this could be devastating.
In a few short weeks, the Libyan opposition has been able to win the support of the population in the east without accomplishing much more than forming a provisional political body.
To maintain that support, however, opposition leaders must ensure that they can respond to their constituents’ demands.
And, above all, that means piling up military victories on the road to Tripoli.
The Rocky Road to Recovery
NEW YORK – A consensus now exists that America’s recession – already a year old – is likely to be long and deep, and that almost all countries will be affected.
I always thought that the notion that what happened in America would be decoupled from the rest of the world was a myth.
Events are showing that to be so.
Fortunately, America has, at last, a president with some understanding of the nature and severity of the problem, and who has committed himself to a strong stimulus program.
This, together with concerted action by governments elsewhere, will mean that the downturn will be less severe than it otherwise would be.
The United States Federal Reserve, which helped create the problems through a combination of excessive liquidity and lax regulation, is trying to make amends – by flooding the economy with liquidity, a move that, at best, has merely prevented matters from being worse.
It’s not surprising that those who helped create the problems and didn’t see the disaster coming have not done a masterly job in dealing with it.
By now, the dynamics of the downturn are set, and things will get worse before they get better.
In some ways, the Fed resembles a drunk driver who, suddenly realizing that he is heading off the road starts careening from side to side.
The response to the lack of liquidity is ever more liquidity.
When the economy starts recovering, and banks start lending, will they be able to drain the liquidity smoothly out of the system?
Will America face a bout of inflation?
Or, more likely, in another moment of excess, will the Fed over-react, nipping the recovery in the bud?
Given the unsteady hand exhibited so far, we cannot have much confidence in what awaits us.
Still, I am not sure that there is sufficient appreciation of some of the underlying problems facing the global economy, without which the current global recession is unlikely to give way to robust growth – no matter how good a job the Fed does.
For a long time, the US has played an important role in keeping the global economy going.
America’s profligacy – the fact that the world’s richest country could not live within its means – was often criticized.
But perhaps the world should be thankful, because without American profligacy, there would have been insufficient global aggregate demand.
In the past, developing countries filled this role, running trade and fiscal deficits.
But they paid a high price, and fiscal responsibility and conservative monetary policies are now the fashion.
Indeed, many developing countries, fearful of losing their economic sovereignty to the IMF – as occurred during the 1997 Asian financial crisis – accumulated hundreds of billions of dollars in reserves.
Money put into reserves is income not spent.
Moreover, growing inequality in most countries of the world has meant that money has gone from those who would spend it to those who are so well off that, try as they might, they can’t spend it all.
The world’s unending appetite for oil, beyond its ability or willingness to produce, has contributed a third factor.
Rising oil prices transferred money to oil-rich countries, again contributing to the flood of liquidity.
Though oil prices have been dampened for now, a robust recovery could send them soaring again.
For a while, people spoke almost approvingly of the flood of liquidity.
But this was just the flip side of what Keynes had worried about – insufficient global aggregate demand.
The search for return contributed to the reckless leverage and risk taking that underlay this crisis.
America’s government will, for a time, partly make up for the increasing savings of US consumers.
But if America’s consumers go from their near zero savings to a modest 4% or 5% of GDP, then the depressing effect on demand (in addition to that resulting from declines in investment, exports, and state and local  government expenditures) will not be fully offset by even the largest government expenditure programs.
In two years, governments, mindful of the huge increases in the debt burden resulting from the mega-bailouts and the mind-boggling deficits, will be under pressure to run primary surpluses (where government spending net of interest payments is less than revenues.)
A few years ago, there was worry about the risk of a disorderly unwinding of “global imbalances.”
The current crisis can be viewed as part of that, but little is being done about the underlying problems that gave rise to these imbalances.
We need not just temporary stimuli, but longer-term solutions.
It is not as if there was a shortage of needs; it is only that those who might meet those needs have a shortage of funds.
First, we need to reverse the worrying trends of growing inequality.
More progressive income taxation will also help stabilize the economy, through what economists call “automatic stabilizers.”
It would also help if the advanced developed countries fulfilled their commitments to helping the world’s poorest by increasing their foreign-aid budgets to 0.7% of GDP.
Second, the world needs enormous investments if it is to respond to the challenges of global warming.
Transportation systems and living patterns must be changed dramatically.
Third, a global reserve system is needed.
It makes little sense for the world’s poorest countries to lend money to the richest at low interest rates.
The system is unstable.
The dollar reserve system is fraying, but is likely to be replaced with a dollar/euro or dollar/euro/yen system that is even more unstable.
Annual emissions of a global reserve currency (what Keynes called Bancor, or the IMF calls SDRs) could help fuel global aggregate demand, and be used to promote development and address the problems of global warming.
This year will be bleak.
The question we need to be asking now is, how can we enhance the likelihood that we will eventually emerge into a robust recovery?
The Roots of America’s Financial Crisis
CAMBRIDGE – The US Federal Reserve’s desperate attempts to keep America’s economy from sinking are remarkable for at least two reasons.
First, until just a few months ago, the conventional wisdom was that the US would avoid recession.
Now recession looks certain.
Second, the Fed’s actions do not seem to be effective.
Although interest rates have been slashed and the Fed has lavished liquidity on cash-strapped banks, the crisis is deepening.
To a large extent, the US crisis was actually made by the Fed, helped by the wishful thinking of the Bush administration.
One main culprit was none other than Alan Greenspan, who left the current Fed Chairman, Ben Bernanke, with a terrible situation.
But Bernanke was a Fed governor in the Greenspan years, and he, too, failed to diagnose correctly the growing problems with its policies.
Today’s financial crisis has its immediate roots in 2001, amid the end of the Internet boom and the shock of the September 11 terrorist attacks.
It was at that point that the Fed turned on the monetary spigots to try to combat an economic slowdown.
The Fed pumped money into the US economy and slashed its main interest rate – the Federal Funds rate – from 3.5% in August 2001 to a mere 1% by mid-2003.
The Fed held this rate too low for too long.
Monetary expansion generally makes it easier to borrow, and lowers the costs of doing so, throughout the economy.
It also tends to weaken the currency and increase inflation.
All of this began to happen in the US.
What was distinctive this time was that the new borrowing was concentrated in housing.
It is generally true that lower interest rates spur home buying, but this time, as is now well known, commercial and investment banks created new financial mechanisms to expand housing credit to borrowers with little creditworthiness.
The Fed declined to regulate these dubious practices.
Virtually anyone could borrow to buy a house, with little or even no down payment, and with interest charges pushed years into the future.
As the home-lending boom took hold, it became self-reinforcing.
Greater home buying pushed up housing prices, which made banks feel that it was safe to lend money to non-creditworthy borrowers.
After all, if they defaulted on their loans, the banks would repossess the house at a higher value.
Or so the theory went.
Of course, it works only as long as housing prices rise.
Once they peak and begin to decline, lending conditions tighten, and banks find themselves repossessing houses whose value does not cover the value of the debt.
What was stunning was how the Fed, under Greenspan’s leadership, stood by as the credit boom gathered steam, barreling toward a subsequent crash.
There were a few naysayers, but not many in the financial sector itself.
Banks were too busy collecting fees on new loans, and paying their managers outlandish bonuses.
At a crucial moment in 2005, while he was a governor but not yet Fed Chairman, Bernanke described the housing boom as reflecting a prudent and well-regulated financial system, not a dangerous bubble.
He argued that vast amounts of foreign capital flowed through US banks to the housing sector because international investors appreciated “the depth and sophistication of the country’s financial markets (which among other things have allowed households easy access to housing wealth).”
In the course of 2006 and 2007, the financial bubble that is now bringing down once-mighty financial institutions peaked.
Banks’ balance sheets were by then filled with vast amounts of risky mortgages, packaged in complicated forms that made the risks hard to evaluate.
Banks began to slow their new lending, and defaults on mortgages began to rise.
Housing prices peaked as lending slowed, and prices then started to decline.
The housing bubble was bursting by last fall, and banks with large mortgage holdings started reporting huge losses, sometimes big enough to destroy the bank itself, as in the case of Bear Stearns.
With the housing collapse lowering spending, the Fed, in an effort to ward off recession and help banks with fragile balance sheets, has been cutting interest rates since the fall of 2007.
But this time, credit expansion is not flowing into housing construction, but rather into commodity speculation and foreign currency.
The Fed’s easy money policy is now stoking US inflation rather than a recovery.
Oil, food, and gold prices have jumped to historic highs, and the dollar has depreciated to historic lows.
A Euro now costs around $1.60, up from $0.90 in January 2002.
Yet the Fed, in its desperation to avoid a US recession, keeps pouring more money into the system, intensifying the inflationary pressures.
Having stoked a boom, now the Fed can’t prevent at least a short-term decline in the US economy, and maybe worse.
If it pushes too hard on continued monetary expansion, it won’t prevent a bust but instead could create stagflation – inflation and economic contraction.
The Fed should take care to prevent any breakdown of liquidity while keeping inflation under control and avoiding an unjustified taxpayer-financed bailout of risky bank loans.
Throughout the world, there may be some similar effects, to the extent that foreign banks also hold bad US mortgages on their balance sheets, or in the worst case, if a general financial crisis takes hold.
There is still a good chance, however, that the US downturn will be limited mainly to America, where the housing boom and bust is concentrated.
The damage to the rest of the world economy, I believe, can remain limited.
The Roots of China’s Rapid Recovery
BEIJING – China’s GDP is estimated to have grown 8.7% year on year in 2009 – once again the highest rate in the world – with the fourth-quarter increase reaching 10.7%, compared to 6.3% in the fourth quarter of 2008.
For much of the world, China’s ability to shrug off the global financial crisis and maintain a strong growth trajectory in 2010 and 2011 seems too easy.
But securing China’s growth has been anything but easy.
The strong, decisive, and deftly timed stimulus policies at the start of the financial crisis did, of course, play a major role in China’s quick rebound.
As early as October 2008, when the crisis first hit, China’s government adopted a comprehensive policy package designed to prevent the economy from sliding further.
The fiscal deficit was equivalent to 3% of GDP in 2009, which generated 3% GDP growth, while the deficit in 2008 was literally zero.
The country’s so-called “moderate relax” monetary policy also played its part by allowing bank lending to expand by almost 34% in 2009, with M2 money supply growing by 27%.
Monetary growth may increase inflationary pressures and the risk of an asset bubble down the road, but it helped ensure that China’s economy did not fall into a vicious downturn when the financial crisis hit.
Other policy moves aimed at boosting demand in the housing and auto market also proved effective.
But China’s crisis management is only part of the story.
It does not explain why other countries that took even stronger measures failed to generate a similarly rapid recovery, or why China’s government seems to have more room than others for policy maneuver.
China ’s budget was actually in surplus and its government debt-to-GDP ratio was only 21% before the crisis (now it is about 24%), much lower than any other major economy.
That gave Chinese policymakers freedom to spend money to confront the crisis.
Moreover, the level of non-performing loans in Chinese banks was quite low when Lehman Brothers collapsed, which allowed Chinese policymakers to let it increase in order to battle the crisis.
Moreover, the Chinese economy was in good shape when the global crisis hit.
Cautious macroeconomic management during China’s boom, including early self-adjustment, put China in a favorable position.
China’s economy had been booming since 2004, but officials did not step aside and “let the market decide.”
Instead, they adopted counter-cyclical measures aimed at preventing the economy from overheating.
The government increasingly tightened its policies as the economy continued to surge ahead due to asset bubbles, high local-government investment spending, and buoyant demand in global markets for Chinese goods.
Overheating in the housing market was brought to an end in late September 2007, nipping a nascent nationwide bubble, and a stock-market bubble was punctured the following month.
Moreover, numerous local investment projects were stopped, while measures to slow the growth of net exports – including a 20% revaluation of the renminbi and a significant cut in tariff rebates for exports – brought down annual export growth from around 30% to a more reasonable 17% in late 2007.
As a result, by the fourth quarter of 2007 – one year before the global financial crisis hit – China’s economy started to cool.
The quarterly growth rate decelerated from 13% in the fourth quarter of 2008 to 9% in the third quarter of 2009.
In short, it is because China began its adjustment one year before the global crisis that its economy emerged earlier than other countries.
The lesson is that booms have to be managed adeptly, and that financiers have to be supervised in their pursuit of ever-higher returns.
That is true for developed economies no less than for a developing economy like China.
Of course, China’s economy has structural and institutional problems – what developing country does not?
China’s macroeconomic policies are probably still too “administrative.”
When many of the most important actors in an economy are insensitive to market price signals, as they are in China, economic policy will need to be administrative in order to deal effectively with those players.
But one benefit of this administrative bias over the past 30 years is that, at least most of the time, China has been cautious about overheating – and determined to step in whenever necessary to cool the economy, despite the protests of “smart” market participants.
To be sure, the authorities have sometimes been overly cautious.
But for an economy in its early stage of development, and for the first generation of companies with young “animal spirits,” excessive caution seems better than the alternative.
In fact, when a country’s economic growth is continuously above 9%, policymakers probably cannot be too cautious.
No doubt, government macroeconomic management that is too strong may delay necessary market-oriented reforms.
But the financial crisis has shown that a twenty-first-century market economy requires government participation to function.
For a developing economy like China, it is better to have a government that plays an active role in avoiding the ups and downs that the Western economies experienced in their early days – and are still experiencing today.
The Roots of Sino-American Antagonism
Although we still do not know what sent jousting Chinese and American planes as well as Sino�US relations into a nose dive, this has not hindered people on both sides from unleashing an avalanche of accusations and uncompromising demands for apologies.
While an answer to the question as to what actually happened remains elusive, a more important question begs our attention: why do such incidents balloon into crises that keep US�China ties almost permanently out of kilter?
Both nations have a long and complicated history with each other.
The United States arrived on the Chinese scene during the 19th century flushed with its “manifest destiny” to trade and save China's soul, following this in the 20th century with a messianic effort to save China from Godless Communism.
But mixed with America’s moral and economic concerns were large measures of condescension and arrogance, which arose from seeing China as a poor, benighted land in need of rescue.
For a proud and once powerful land such as China, such noblesse oblige was painful to accept and created lasting reservoirs of resentment.
To travel through urban China today is in many ways a deceptive experience.
Yes, China has emerged into the global market and boasts many of the hallmarks of a modernizing society.
Many of these emblems of modernity and cosmopolitanism, however, mask the provenance of China's “socialist revolution.”
We forget, indeed, that China had such a revolution, and that there were both reasons and consequences to that convulsive experience.
China's current government arrived through a tectonic revolution animated by anti�imperialism, anti�colonialism, and anti�capitalism codified as orthodox Marxist�Leninist doctrine.
These sentiments resulted from a century of being preyed upon by the West beginning with the first Opium War (1839�42), when Britain seized Hong Kong as a colony and then sailed up China’s coast with warships to force open one coastal “treaty port” after an other.
Over the next century, China became a patchwork of special foreign concessions, spheres of economic influence and missionary enclaves which left it, fen'gua, or “carved up like a melon,” in the parlance of the time.
This bitter experience reached an apogee in the 1930s and '40s with Japan's brutal occupation.
It was not until US involvement in the Chinese civil war on the side of Chiang Kai�shek’s Nationalists in the late 1940s and in the Korean War in the early 1950s that America became fully identified as a major “hostile foreign force” by the Chinese Communists.
Yet, by the mid� '70s, when I first went to China during the Cultural Revolution, hardly a public surface was not emblazoned with the slogan: “Down With American Imperialism And Its Running Dogs.”
Even though the Chinese felt incensed by foreign interference and domination, many also came to admire America for its democracy, openness, energy and willingness to help.
This divided attitude meant that China tended to react in ways as contradictory as they were impassioned and unpredictable, especially when its pride was piqued.
Nothing was more repugnant to China's new nationalists than the idea of a weak and aggrieved China victimized by foreign exploitation.
Nothing provoked a more muscular reaction after Mao came to power than the humiliating prospect of feeling unable to resist foreign predation.
It is from this side of China's bipolar attitude toward America that its emotional response to the aerial collision near Hainan Island arises.
Indeed, like a character trait encoded on a recessive gene which reexpresses itself even after it has lost its functionality, China continues to react to the world around it as if it were still fighting against implacable imperialist foes.
What makes the Hainan spy plane incident so provocative is the idea that US planes cruise the China coast like so many 19th century British men�of�war, now stealing China's military secrets by triggering radar systems and eavesdropping rather than firing cannons at Chinese junks and selling opium.
It is not extreme to describe China's reaction to such incidents as almost robotic.
For, if there was one thing to which Mao's revolution was committed which still endures, it is a commitment to the idea that China will never again allow itself to appear weak and defenseless against foreign incursion.
What the incident over Hainan reveals is how deeply rooted ways of reacting to the world can become in a national psyche.
Chinese leaders imagine that they are demonstrating strength when they bluster and detain the American EP�3E crew, but they are actually revealing a self�defeating backwardness because they have mis�identified their real enemy, which is not America, even when it acts in a retrograde fashion.
Their enemy is their own suspiciousness and paranoia which deludes them into believing that the world is still against them when it is not.
Whatever the result of the Hainan incident, China and the US will continue to have disputes.
America’s challenge is to escape the Cold War mind�set, China's challenge is to transcend its past in the name of its present national interest.
To achieve this, it will probably have to transcend its Marxists�Leninist heritage – something it has begun to do in important ways.
As a new form of “self strengthening,” a cause that Chinese reformers embraced at the end of the 19th century, China needs to stop brandishing old wounds and instead of demanding apologies as an aggrieved party, seek a new, equal status that the rest of the world, including America, is ready to confer.
The Rules of Reconstruction
Lebanon’s reconstruction, so painstakingly carried out in the 1990’s, is now at risk of being undone.
But Lebanon is not alone in that respect: according to the UN and several independent studies, countries in transition from war to peace face roughly a 50% chance of sliding back into warfare.
Indeed, in East Timor, Iraq, Afghanistan, Kosovo, and many other countries, the transition to peace seems to be failing.
Likewise, there is unfinished business in many other countries undergoing reconstruction.
The Democratic Republic of Congo (DRC), for example, just held its first elections in 40 years.
The stability of the Great Lakes region of Africa, perhaps that continent’s most violent area, will depend on the success of its transition and reconstruction.
When wars end, countries confront a multi-pronged transition.
Violence must give way to security for inhabitants; lawlessness and political exclusion must give way to the rule of law and participatory government; ethnic, religious, or class/caste polarization must give way to national reconciliation; and ruined war economies must be transformed into functioning market economies that enable ordinary people to support themselves.
These multiple tasks make economic reconstruction fundamentally different from “development as usual.”
To succeed, the transition to peace requires demobilization, disarmament and reintegration of former combatants, as well as reconstruction and rehabilitation of services and infrastructure.
To meet these goals, the objective of peace should prevail over that of development if the two come into conflict.
Often, optimal economic policies and best practices are not attainable – or even desirable.
This also means that peace-related programs should get priority in budget allocations.
Of course, the legitimacy of the government or other policymaking body will determine what is possible in economic policymaking.
A weak interim national government – or a United Nations or foreign occupying administration – should not attempt to implement policies such as privatizing national resources when doing so might incite political resistance.
Indeed, early privatization is likely to be destructive in its own terms, because property rights will remain in question for some time.
Thus, a new yardstick is needed to measure success.
Projects must be judged by whether they contribute to peace and reconciliation, rather than on purely economic grounds.
Effective demobilization and reconciliation in El Salvador, for example, ensured the consolidation of peace after that country’s brutal civil war of the 1980’s.
Elsewhere, however, disregarding the primacy of politics in a transition to peace has had tragic consequences.
The failure to demobilize and reconcile factions in Lebanon, where Hezbollah remained armed despite its transformation into a political party, meant that belligerency was always bubbling below the surface.
Likewise, the collapse of peace processes in Angola and Haiti and the various setbacks in Cambodia and Nicaragua during the 1990’s reflect a failure to demobilize and integrate.
On the surface, the UN seems ideally placed to lead reconstruction efforts because, unlike development institutions like the World Bank, it can integrate the political and economic objectives that are equal parts of a transition to peace.
Yet, time and again, the UN has shown itself to be incompetent in this role.
In Kosovo, for example, the transformation of the Kosovo Liberation Army into a civilian peace force has caused great insecurity over the years, which the UN administration might ultimately regret if the resolution of the province’s final status does not lead to independence.
Treating the transition to peace as “development as usual” has, moreover, led to new violence in East Timor, a country that the UN once trumpeted as a success story.
The commercial exploitation of rich oil and gas reserves in the Timor Gap could have facilitated reconstruction and created jobs for the 30% of the labor force that is unemployed.
Instead, with the strong approval of the IMF, East Timor created a Norwegian-style “petroleum fund” to save the money for a rainy day.
But in East Timor, that rainy day is now.
Iraq provides numerous examples of the dangers created by misplaced priorities.
Early efforts to privatize Iraq’s oil industry proved disastrous, confirming for many Iraqis that the occupying Americans were determined to “steal” the country’s wealth and thus fanning the flames of violent resistance.
Indeed, privatization was all the more bizarre as a policy choice because it was doomed in advance: investors clearly would not be attracted to buy assets where property rights might change once a legitimate Iraqi government took over – a huge impediment to investment in Kosovo as well.
But the United States has not learned its lesson.
On the verge of civil war, Iraq just announced a restructuring of its foreign debt.
Rather than improving services and living conditions in areas where it could have helped consolidate peace, the government, at America’s behest, will allocate hundreds of millions of dollars to pay investment banks, accounting firms, and legal advisors who assist with that refinancing.
Any transition to peace may well prove ephemeral unless policymakers make political reconciliation and integration – not optimal economic policies – the bedrock priority.
Despite its failures, the UN is probably still the best-placed organization to oversee such efforts.
But the complexity of the tasks that post-conflict countries face underscores the urgent challenge of providing the UN with the capacity to meet them.
The Russian Revival
Russia’s national revival and new assertiveness under President Vladimir Putin is not really home made but reflects highly auspicious international conditions.
Oil and gas prices are sky high, the United States is overwhelmed by serious problems in Iraq and the Middle East, and the West is divided about how it should deal with Russia.
Putin’s administration has been keen to take advantage of this favorable environment.
Yet, although some of the Kremlin’s moves seem clear and reasonable, others can scarcely be described as rational or forward-looking.
For example, Russia’s desire to take ownership stakes in Europe’s gas distribution markets makes perfect sense and is fully legitimate given Russia’s energy assets and pipeline capacity.
Likewise, Russia’s effort to expand its influence in the energy-rich countries of Central Asia is aimed at consolidating Russia’s stature as a major energy supplier.
Asserting itself as a major power outside the Western realm, Russia has boosted the Shanghai Cooperation Organization, which includes China and most Central Asian countries.
Indeed, Russia is increasingly attaching ever greater significance to its relations with China, something of a strategic shift in foreign policy, even if it is not yet clear how close Russia wants to be get to China.
But bullying Georgia and Moldova, demonstrating support for Hamas, or indulging North Korea do not seem to be guided by any strategic sense of Russia’s far-reaching interests. They seem guided by pure and simple spite.
Russia’s heavy-handed pressure on Georgia and its support of secessionist movements in South Ossetia and Abkhazia, two unrecognized republics within Georgia, inflames passions and risks destabilizing the already tense Northern Caucasus.
Should instability ignite into open warfare, Russia will find it impossible to avoid the consequences.
Of course, Georgia’s President Mikhail Saakashvili may at times be thoughtless and arrogant.
But if Russia’s policy toward him lets events in Georgia get out of control, Russia will be held accountable.
Because Russia claims the status of a world power, it is expected to show restraint and responsibility.
But the urge to project strength for the mere sake of doing so now seems overwhelming for the Kremlin.
This urge stems from a desire to make up for the years of Russia’s humiliation after the USSR collapsed, years when the West contemptuously disregarded Russia’s views and interests.
This lingering resentment may explain Putin’s somewhat uncivil behavior and dubious jokes when dealing with his Western counterparts.
It may also have been behind Russia’s irrational decision to renege on its promise to give Poland the files that document the massacre of thousands of Polish officers on Stalin’s orders in the forest at Katyn at the outbreak of WWII.
What possible benefits can Russia gain by breaking this pledge?
The motive seems to be brutally simple: “Precisely because you want it, we won’t deliver.
We can do what we like because we’re strong again.”
But this renewed vigor is too fresh for Russia to feel truly confident.
Putin’s irresistible urge to remind everyone that Russia has recovered its strength suggests underlying insecurity.
In an episode recently reported by The New York Times , at one of Putin’s informal meetings with Bush, Putin showed the US president his Labrador and said, “Bigger, tougher, stronger, faster, meaner than Barney” (Bush’s dog).
Though Putin barely implied that the dog’s superiority indicates Russia’s domination over the US, his remark appears to be in line with his general message: don’t you ever dare to doubt our high status.
Russia is by no means seeking to isolate itself.
Russia needs America and the West in order to realize its ambitious initiative to establish international centers of uranium enrichment, and it needs Western markets, which are the largest consumers of Russia’s gas and oil.
Moreover, it is in the West where the rich and powerful Russian elite likes to travel, go shopping, and send their kids to school.
But Russia’s muscle-flexing behavior leaves Western leaders perplexed and wary, which seems a dubious way for the Kremlin to secure Russia’s new stature.
Contentious foreign policy makes contacts uneasy and agreements difficult to reach.
It damages the trust needed for stronger trade relations.
As Russia’s conflict with Ukraine in early January over gas prices demonstrated, when Russia plays rough, the West grows apprehensive and suspicious rather than more amenable.
What will happen should crude strength and hard language prove inadequate to the task of insuring Russian national interests?
No one can say, but Russia’s history in this regard is not a source of hope.
The Sarkozy Option
PARIS – From the Caucasus in August 2008 to the Middle East in January 2009, is France under President Nicolas Sarkozy attempting to incarnate what might be called “the West by default,” making maximum use of the window of opportunity opened by America’s presidential transition?
Or is Sarkozy simply trying to capitalize on his global visibility to reinforce his popularity at home, where a majority of French citizens continue to support their hyperactive president’s diplomatic leadership?
Despite his failed bid to orchestrate a ceasefire between Israel and Hamas, was he not right to try?
For the French, Sarkozy’s determination to act, despite the odds, seems far superior to the passive cynicism of those who preach abstention or satisfy themselves with empty words.
Beyond its impact on the Middle East, Sarkozy’s failed but brave attempt to act as a go-between constitutes an interesting window into the foreign-policy methods and ambitions of today’s France.
For the essential question about Sarko-diplomacy is whether it reflects a well-defined strategy, based on a clear vision of the world, or merely expresses a shrewd and pragmatic activism that applies a keen domestic political instinct to the field of foreign affairs?
The answer is far from clear, and is probably a combination of both.
Sarkozy is a man prone to following his instincts.
He does not theorize about what should be done; he simply does it, without any ideological bias or constraint.
Yet, as time passes, one senses the emergence of something like a new French self-definition, which is probably the most clearly “Western” in the history of the Fifth Republic.
As a presidential candidate, Sarkozy was often described as “Sarkozy the American,” an expression that alluded to his can-do style, his taste for “bling,” and the very American way in which he used his personal history to gain the support of would-be voters.
But now one could describe him as “Sarkozy the Westerner.”
This is not only because he has been willing to have France act, from the Caucasus to the Middle East, in the name of Europe and itself at a time America was defaulting on its role.
Nor is it simply the result of Sarkozy’s decision to bring France closer to the United States, a move that will culminate symbolically with France’s likely return to the integrated military body of NATO in April 2009.
In a deeper way, Sarkozy’s diplomacy reflects changes in how the French President thinks about the idea of “the West” in today’s globalized world.
Under Charles de Gaulle, France combined faithfulness to the Western cause in time of crisis with a strong willingness to promote its diplomatic independence and freedom of maneuver. And, despite their very different styles, both Valéry Giscard d’Estaing and François Mitterrand were more “European” than “Western.”
The same cannot be said of Sarkozy, despite his claims to the contrary.
His rapprochement with Great Britain and his noticeable distancing of France from Germany are, from this perspective, no accident.
In a world where, in comparative terms, there is less America because of the rise of China and India and the resurgence of Russia, and less Europe in diplomatic and strategic terms (due to institutional paralysis), if not economic and cultural terms, France, according to Sarkozy, must clearly define itself as part of the West.
And, just as the very notion of the West must now be analyzed and probably redefined for the twenty-first century, so France must play a central part in this act of reassessment.
Is the West a concept defined above all by its political culture, i.e., democracy and human rights, by its cultural dimension, including religion, or merely by its diplomatic and strategic implications, i.e., facing the rise of new powers?
If the concept of the West is to become the new cornerstone of France’s diplomatic identity, it must be applied with prudence and moderation, even as Barack Obama’s arrival in the White House is likely to improve its image of the premiere Western power.
France is not in the same league in terms of power and influence as the US.
Moreover, it would be paradoxical if, just when America declares its willingness to call more upon its allies, particularly its European allies, the concept of the West actually leads to the diminution, if not the burial, of the European ideal.
The Scaremongers of the Roundtable
CHICAGO – How often do you see capitalists screaming and even going to court to defend the principle that legitimate owners cannot exercise any control over their property?
It is not happening in Latin America or in socialist Sweden, but in the United States of America.
The capitalists in question are nothing short of the upper echelon of corporate America: the Business Roundtable, a powerful group composed of the CEOs of major US corporations, which promotes pro-business public policies.
The object of their contention is the much-debated “shareholders’ access to proxy” rule, adopted by the Securities and Exchange Commission (SEC) in August to address the fundamental lack of accountability of corporate boards.
In the current system, corporate boards are self-perpetuating entities.
To be elected, a board member needs to be nominated by the current board, where executives have considerable influence.
As a result, board members owe their loyalty to the managers who directly or indirectly appoint them – and thus have little incentive to dissent, lest they be punished with exclusion.
Even independent directors, often acclaimed as the solution to all problems, are subject to the same pressure.
To change this state of affairs, institutional investors must be allowed to propose their own slate of directors.
The possibility of being rejected in a real election would naturally make board members accountable to shareholders, indirectly making the executives accountable as well.
The SEC rule was an attempt to grant institutional investors this right.
It did it in a very mild format.
Companies with a public share worth less than $75 million were exempted, and shareholders who want to propose a slate must hold at least 3% of voting power of the company’s securities and have held it continuously for at least three years.
This is a very high hurdle.
In June 2009, the largest US pension fund (Calpers) owned less than 0.3% of large companies such as Coca Cola and Microsoft.
Thus, one had to coordinate ten such funds to reach the quorum.
And even that would not suffice.
The average pension fund has an annual turnover of 70%, which means that the probability that a stake is retained continuously for three years is less than 3%.
Thus, to achieve that 3% of voting power and maintain it for three years continuously, one would have to assemble hundreds of institutions.
But even this cautious attempt to strengthen accountability generated an irate reaction from the Business Roundtable. “As our country works to emerge from this recession,” its executive director wrote, “American companies need to be focused on creating jobs and encouraging innovation to put us back on a path to sustained economic growth.
This unprecedented intrusion into areas historically reserved for the states would handcuff directors and boards, shut out the vast majority of retail shareholders, and exacerbate the short-term focus that is now seen as one of the root causes of the financial crisis.”
Ironically, in 2007, in response to an earlier SEC proposal to grant shareholders’ access to proxy, Wachtell, Lipton, Rosen ampamp;
Katz, a law firm famous for its anti-shareholders’-rights positions, used the opposite argument: “No real-world crisis has shown that the current system needs radical revision.
Five years after Enron and WorldCom, the capital markets are well into a cycle of unprecedented vigor.”
In other words, if the stock market is doing well, we should not change the rules of the game that are credited for this success.
But if the stock market is doing poorly, the rules of the games are not responsible and we cannot afford to change them.
That is a peculiar notion of accountability.
To block the rule, the Business Roundtable filed a petition with the US Court of Appeals to invalidate it.
The rule had been out for review for years, but the Business Roundtable accused the SEC of having “failed to engage in evidence-based rulemaking,” because it did not assess the rule’s effects on “efficiency, competition, and capital formation,” as required by law.
This is just a pretense.
A similar rule has been in place in Italy since 2005, and there is no sign that efficiency, competition, or capital formation has been affected.
There is some early sign, though, that board members nominated by institutional investors have the courage to stand up to management when it comes to excessive executive compensation.
Is this the revolution that the Business Roundtable is afraid of?
Unfortunately, the scare tactics employed by the Business Roundtable worked.
Following the suit, the SEC suspended not only the application of its rule mandating companies to grant access to qualified shareholders, but also a rule that was making it easier for shareholders to introduce a bylaw granting them access, even though the Business Roundtable had not challenged that rule.
It is a great victory for business executives, but a huge defeat for the principles that should guide capitalism.
The Science of Acupuncture
Like many other traditional Chinese medicines, acupuncture has for many centuries been viewed suspiciously in the West.
It seems to work, but how?
Is a scientific answer possible?
Most Chinese doctors and patients have, for example, long regarded acupuncture as an effective treatment for stroke, using it to improve motor, speech, and other functions that have been destroyed.
One survey showed that 66% of Chinese doctors use acupuncture routinely to treat the effects of stroke, with 63% of the doctors surveyed believing it to be effective.
Some 36% of Chinese doctors think the effectiveness of acupuncture remains uncertain, perhaps because the scientific basis for it remains so new.
Recently, however, systematic scientific studies of acupuncture’s effects in such treatment has begun.
Almost all trials on acupuncture as a treatment for stroke conducted within China have been positive.
But another recent study done in the UK showed that research conducted in several countries was uniformly favorable to acupuncture as a treatment for the damage caused by stroke.
Indeed, all the trials performed before June 1995 in China, Japan, Hong Kong, and Taiwan were deemed positive by the British researchers.
The Cochrane Collaboration, an international non-profit organization providing healthcare information, conducted a systematic review of the benefits of acupuncture, including 14 trials, of which 10 were conducted in China, involving 1,208 patients.
Acupuncture started within 30 days of stroke onset, with control groups receiving a placebo – sham acupuncture – or no treatment.
Compared to patients who received sham acupuncture or no treatment, far fewer of those who received acupuncture died or became invalid within three months.
After three months or more of treatment, the numbers rose even more significantly in favor of those treated by acupuncture.
Oddly, when comparing acupuncture with sham acupuncture, the statistical difference concerning death or the need for institutional care was small.
Indeed, another analysis, including 14 randomized trials with 1,213 patients six months after a stroke, compared the effects of conventional stroke rehabilitation with and without acupuncture as a supplement.
Acupuncture was found to have no additional effect on motor recovery, but a small positive effect on disability, which may be due to a true placebo effect, or to the varied quality of the trials.
Indeed, the efficacy of acupuncture without stroke rehabilitation remains uncertain, mainly because of the poor quality of such studies—a problem that has affected most of trials undertaken so far.
For example, many trials did not describe their method of measuring statistical relevance, and only called themselves “randomized controlled trials.”
Only four trials, with 373 patients, could provide data on death or dependency (becoming dependent on others for activities of daily living).
And only three trials—all conducted in Europe—used sham acupuncture as a control, whereas no acupuncture trials controlled with placebos or sham acupuncture have been reported in China, owing to high cultural barriers.
Part of the problem in China is choosing the patients to be studied.
After all, patients come to hospitals that practice traditional Chinese medicine because they already believe in acupuncture and are likely to be using it to treat another illness.
Getting such patients to accept being put into a control group where no acupuncture is applied is almost impossible.
This difficulty makes random studies of the effects of acupuncture treatment on stroke patients particularly difficult in a traditional Chinese medicine hospital.
More fundamentally, however, Chinese doctors who use traditional medicine argue that outcome measures of acupuncture as a treatment for stroke should be different from conventional measures used in Western trials, because the theory of acupuncture is different.
But no one has yet specified what the appropriate outcome measures for acupuncture should be.
A recent study conducted in China, including 862 patients who were between the second and tenth day after onset of acute stroke, is the largest truly randomized trial using death or dependency as the primary outcome.
The patients were randomly allocated to an acupuncture group receiving acupuncture treatment plus routine treatment or a control group receiving routine treatment alone.
The results will be reported after analysis of the trial data and could prove useful for therapy of stroke patients.
At present, however, there is insufficient evidence for routine use of acupuncture in stroke.
More high-quality trials are needed.
We do know that acupuncture is a safe, inexpensive, widely accepted, and potentially effective therapy.
Particularly at a time when standard rehabilitation is not available for most Chinese stroke patients, few will wait to try acupuncture until its role is confirmed or refuted by reliable evidence.
The Scientific Men\u0027s Club
I serve on the senior appointments and promotions committee of a medical school.
Over the years, I've come to recognize something that is as disturbing as it is undeniable: as a group, male basic scientists sail through the committee effortlessly.
Many work in fields so specialized that they have only ten colleagues in the entire world, half of whom are their mentors or one-time fellow graduate students.
These are their "peers," and they readily provide laudatory letters of recommendation establishing that the applicant has attained "national and international recognition."
In contrast, applications by clinical faculty and women provoke far more discussion.
I don't resent the ease with which basic science faculty are promoted; after all, I am sure that I also enjoyed the perks that come with this designation.
Nonetheless, the system seems blatantly unfair.
We rely on external referees for promoting basic scientists, who publish their work in national or international journals.
By contrast, it is difficult to quantify how good clinical scientists are.
Indeed, we struggle--more or less successfully, I think--even to define what a "scholarly" practicing physician is, because a clinician's reputation rests on local interactions that are often difficult to document.
The issue of women faculty members, especially in basic sciences, is far more complex.
I suspect that here the problem reflects fundamental differences between the way women and men approach science as a microcosm of life.
Most of my fellow male faculty members are not muscle-bound, testosterone-driven types, but in their scientific careers, they display two types of typically male behavior.
The first is a compulsion to be the first to establish completely trivial facts about science.
As I grow older, I'm no longer sure why this is so important, but the male members of our species seem to think that it is.
Most young male faculty members have an obsessive need to work 20 hours a day, seven days a week to make sure that a (sometimes-illusory) competitor is beaten to the punch.
Ten or 15 years from now, will anybody care?
Most women in basic sciences seem to be uninterested from the outset in playing such games.
The second male behavior is a patricidal imperative that is perhaps the most shameful and atavistic of the primal impulses that still lurk in some archaic part of our brains.
The idea that one must somehow supplant one's mentor, cast the previous generation out into the wilderness, and make oneself the leader of the pack seems to obsess men.
Women scientists seem to behave far more collegially.
There is a certain senior (male) faculty member who is one of the kindest and most accomplished investigators at my institution.
He is surrounded by and works with a group of young women he has mentored.
Most are bright, creative, and productive in their own right, but they do not seek desperately to dissociate themselves from him, establish their own little fiefdoms elsewhere, and beat him at his own game.
At the risk of sounding simplistic, I can't help feeling that working together as a group is an innately feminine tendency.
More importantly, I can't help believing that this way of operating is ultimately far more scientifically productive than the traditional male drive to establish one's own "identity" and "independence."
Unfortunately, one of the unwritten laws of academia--unquestioned by the committee on which I serve--is that a candidate who does not seek and grasp the holy grail of "independence" is not qualified to be promoted.
Almost every time a woman candidate comes up before the committee, her "independence" is questioned in a way that is irrelevant, if not insulting.
Sadder still, the most stringent adherents to and enforcers of this male paradigm are the rare women that have "made it" in the male world to serve on the committee.
"I made it," they seem to say, "so why can't she?"
In most cases, the women are as smart as the men, if not smarter.
But most have chosen to work either in a group with their mentors or with their husbands, who often work in the same fields.
Although they generate as many of the ideas as their male colleagues do, it is the latter who go to meetings and present the group's research results.
This seems to me to reflect women's all-too-common impulse to accommodate the unbridled male ego rather than any deficiency in their creativity or "independence."
There was surely a time when eschewing children and family was the only way that a woman could prove her commitment to science.
In many places, that has begun to change.
I hope that the time will come when there are enough women in science that a greater diversity of female role models is represented in bodies that decide about careers.
This would encourage greater sympathy for and empathy with the different needs and impulses of women and men--and a deeper appreciation that the male paradigm is not the only valid one within which to live life and excel in science.
The Scientific Road to Copenhagen
BERLIN – On June 10, 1859, six months before Charles Darwin published his Origin of Species , the physicist John Tyndall demonstrated a remarkable series of experiments at the Royal Institution in London.
The meeting was chaired by Prince Albert.
But neither he, nor Tyndall, nor anyone in their distinguished audience could possibly have anticipated the extent to which the experiments’ results would preoccupy the world 150 years later.
This month, thousands of people from all over the world, including many heads of state, will gather in Copenhagen to try to forge an agreement to drastically cut atmospheric emissions of an invisible, odorless gas: carbon dioxide. &#160;Despite efforts by some leading countries to lower expectations ahead of the conference about what can and will be achieved, the meeting is still being called the most important conference since World War II. &#160;And at the conference’s heart are the results of Tyndall’s experiments.
But the story starts even before Tyndall, with the French genius Joseph Fourier.
An orphan who was educated by monks, Fourier was a professor at the age of 18, and became Napoleon’s governor in Egypt before returning to a career in science.
In 1824, Fourier discovered why our planet’s climate is so warm – tens of degrees warmer than a simple calculation of its energy balance would suggest.
The sun brings heat, and earth radiates heat back into space – but the numbers did not balance.
Fourier realized that gases in our atmosphere trap heat.
He called his discovery l’effet de serre – the greenhouse effect.
It was Tyndall who then put Fourier’s ideas to the test in his laboratory.
He proved that some gases absorb radiant heat (today we would say long-wave radiation).
One of these gases was CO2.
In 1859, Tyndall described the greenhouse effect in beautifully concise words: “The atmosphere admits of the entrance of solar heat, but checks its exit; and the result is a tendency to accumulate heat at the surface of the planet.”
Then, in 1897, Svante Arrhenius, who earned a Nobel Prize for chemistry six years later, calculated how much global warming a doubling of CO2 in the atmosphere would cause.
His answer was 4-6 degrees Celsius (a little more than the 2-4 degrees that modern studies consistently find).
Arrhenius was not in the least troubled by the prospect of global warming.
Perhaps because he was Swedish, he proposed setting coal mines on fire to speed it up, since he thought a warmer climate was an excellent idea.
But it was all just theory in Arrhenius’s time, since nobody had measurements to prove that CO2 levels in the atmosphere were in fact increasing.
That changed only in the late 1950’s, when Charles Keeling started to measure CO2 with unprecedented accuracy in Antarctica and on Mauna Loa in Hawaii, far away from any sources.
By 1960, he was able to prove that CO2 was indeed on the rise.
It then took only a few years until, in 1965, an expert report – the first of many – to US President Lyndon B. Johnson warned of global warming: “By the year 2000, the increase in carbon dioxide will be close to 25%.
This may be sufficient to produce measurable and perhaps marked changes in climate.” In 1972, a more specific prediction was made in the leading science journal Nature , namely that temperatures would warm by half a degree Celsius by 2000.
And, in 1979, the US National Academy of Sciences issued a stark warning of impending global warming.
We did not have to wait until 2000 to find these predictions were correct: by the 1980’s, global warming became apparent in temperature measurements from weather stations around the world.
In 1988, the Intergovernmental Panel on Climate Change (IPCC) was founded to analyze the issue in more detail, and in 1992 at the Earth Summit in Rio de Janeiro world leaders signed a historic treaty: the Framework Convention on Climate Change.
Its goal: “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”
Unfortunately, little has been achieved in the 17 years since then.
In fact, CO2 emissions from fossil fuels were almost 40% higher in 2008 relative to 1990.
And even the rate at which emissions are increasing is now three times higher than in the 1990’s.
Global temperatures had already risen by 0.5 ºC above preindustrial levels by the early 1990’s, and another 0.3ºC have been added to that since the Rio Earth Summit.
And they keep rising.
Most countries now agree that global warming should be stopped at a maximum of two degrees centigrade.
But this has become an extremely tough challenge, as growth in greenhouse-gas emissions and atmospheric stocks accelerated in the years since Rio.
That is why Copenhagen is so important: it may well be our last to address climate change before it addresses us.
Tyndall’s measurements 150 years ago showed that carbon dioxide traps heat and causes warming.
And, 50 years ago, Keeling’s measurements showed that CO2 levels are increasing.
In the meantime, earth’s climate has been heating up, as predicted.
How much more proof do we need before we act?
The Scoundrels of Economic Patriotism
Samuel Johnson called patriotism “the last refuge of a scoundrel.”
If that is true, what should we think of today’s mounting economic nationalism, sometimes euphemistically described as “economic patriotism”?
Indeed, economic nationalism is exceptionally vigorous at the moment.
Vigorous popular opposition to a Dubai company’s plan to take over ports in the United States shocked the American government.
Poland is witnessing a populist backlash against foreign ownership of banks.
France is blocking the acquisition of French utilities by the Italian electricity company Enel.
Together with other European governments, France is also agitating against the takeover of the Luxembourg-based steel company Arcelor by a Netherlands company largely controlled by an Indian steel magnate.
Defenders of these ill-fated cross-border takeovers worry that a sinister whiff of the twentieth century’s worst moments is in the air.
An outraged Italian minister warned of a new mobilization of populist nationalism in an “August 1914” scenario.
The better analogy is from the 1930’s: in 1933, the year in which Hitler came to power, the world’s most famous economist, John Maynard Keynes, produced a plea for “national self-sufficiency.”
Both the 1914 and the 1933 analogies point to the most striking characteristic of the current debate: the key role of security worries in justifying protectionism.
Nobody worried about foreign ownership of US ports as long as the owner was a British company; the new fears reflect the belief that Dubai might be a channel for Islamic fundamentalism and terrorism.
Likewise, the deterioration of international relations before World Wars I and II was marked by governments’ increased propensity to use economics as a tool of power politics.
In 1911, the diplomatic crisis over Morocco was accompanied by a French speculative attack on German financial markets.
In the 1930’s, both France and Germany used this kind of technique as a way to bolster their own security.
The US tried to control Japanese expansion in Asia by limiting Japan’s energy (especially petroleum) imports.
The most obvious reason for increased worries about security in America is the challenge of meeting the threat of terrorism after the attacks of September 2001.
But that can scarcely explain European nervousness and the protectionist reaction.
In Europe’s case, two contrasting explanations exist.
The first is that the new worries are a strange case of psychological transference.
People in places like France and Poland who worry about national decline seek to blame somebody outside the country.
There was certainly a great deal of this type of sentiment in the 1930’s, when the populist response to the Great Depression attributed it to the sinister forces of “international capital.”
The modern version of this explanation holds that the world is changing so quickly that national security and, indeed, national identity, are under threat.
An alternative scenario suggests that these fears emanate from a real problem.
Modern economic growth still depends in almost every advanced industrial country on imported energy (Norway is an exception).
Because of fears about pollution, or about the safety of nuclear energy, most countries neglected to build up their own capacity.
The resulting vulnerability was highlighted by the Russian reduction of gas supplies to Ukraine in January, which resulted in reduced flows to central and western Europe.
The experience made Poles particularly jittery, and pushed the country’s populist right-wing government down the road of economic nationalism.
But West Europeans remember their own traumas, including electricity grid failures and widespread blackouts.
Wouldn’t an Italian company facing grid failure prefer to shut down French rather than Italian consumers?
These two scenarios of the origins of economic nationalism, one irrational and the other not, are not real alternatives, but describe responses that intertwine: the more rational the fear, the more that fear can be used as an instrument of politics.
Fear creates a demand for state action.
Politicians like this because it increases demand for their services.
They point out the potential problem and then attempt to sell solutions that lie within their nationally defined spheres of competence.
One modern politician, in particular, has been effective in placing nervousness about energy supply at the center of a new political vision.
According to Vladimir Putin, the need to control and secure energy justifies a massive extension of state intervention in the economy.
Putin’s vision was apparently vindicated by the aftermath of the terrorist attacks on the US.
Since then, Putin has projected his vision of politicized energy in a way that makes all Europeans, not just Russians, nervous.
That bolsters his strength in the Russian setting.
But a Putin in one country has a tendency to produce Putin imitators elsewhere.
We should be concerned about the efficiency losses in markets where restrictions stemming from economic nationalism have so far been imposed.
But we should be far more worried that fear about the collapse or manipulation of markets creates a demand for action that makes such a collapse more rather than less likely.
Fear generates a demand for more security that is in the end paralyzing.
The Search for Quality on the Web
NEW YORK – In the not-so-distant future, students will be able to graduate from high school without ever touching a book.
Twenty years ago, they could graduate from high school without ever using a computer.
In only a few decades,amp#160;computer technology and the Internet have transformed the core principles of information, knowledge, and education.
Indeed, today you can fit more books on the hard disk of your laptop computer than in a bookstore carrying 60,000 titles.
The number of Web pages on the Internet is rumored to have exceeded 500 billion, enough to fill 10 modern aircraft carriers with the equivalent number of 500-page, one-pound books.
Such analogies help us visualize the immensity of the information explosion and ratify the concerns that come with it.
Web search engines are the only mechanism with which to navigate this avalanche of information, so they should not be mistaken for an optional accessory, one of the buttons to play with, or a tool to locate the nearest pizza store.
Search engines are the single most powerful distribution points of knowledge, wealth, and yes, misinformation.
When we talk about Web search, the first name that pops up is, of course, Google.
It is not far-fetched to say that Google made the Internet what it is today.
It shaped a new generation of people who are strikingly different from their parents.
Baby boomers might be the best placed to appreciate this, since they experienced Rock 'n’ Roll as kids and Google as parents.
Google’s design was based on statistical algorithms.
But search technologies that are based on statistical algorithms cannot address the quality of information, simply because high-quality information is not always popular, and popular information is not always high-quality.
You can collect statistics until the cows come home, but you cannot expect statistics to produce an effect beyond what they are good for.
In addition, statistics collection systems are backward-looking.
They need time for people to make referrals, and time to collect them.
Therefore, new publications and dynamic pages that change their content frequently are already beyond the scope of the popularity methods, and searching this material is vulnerable to rudimentary techniques of manipulation.
For example, the inefficiencies of today’s search engines have created a new industry called Search Engine Optimization, which focuses on strategies to make Web pages rank high against the popularity criteria of Google-esque search engines.
It is a billion-dollar industry.
If you have enough money, your Web page can be ranked higher than many others that are more credible or higher quality.amp#160;Since the emergence of Google, quality information has never been so vulnerable to the power of commercialism.
Information quality, molded in the shadow of Web search, will determine the future of mankind, but ensuring quality will require a revolutionary approach, a technological breakthrough beyond statistics.amp#160;This revolution is underway, and it is called semantic technology.
The underlying idea behind semantic technology is to teach computers how the world operates.
For example, when a computer encounters the word “bill,” it would know that “bill” has 15 different meanings in English.
When the computer encounters the phrase “killed the bill,” it would deduce that “bill” can only be a proposed law submitted to a legislature, and that “kill” could mean only “stop.”
By contrast, “kill bill” would only be the title of the movie by that name.
At the end, a series of deductions like these would handle entire sentences and paragraphs to yield an accurate text-meaning representation.
To achieve this level of dexterity in handling languages by computer algorithms, an ontology must be built.
Ontology is neither a dictionary nor a thesaurus.
It is a map of interconnected concepts and word senses that reflect relationships such as those that exist between the concepts of “bill” and “kill.”
Building an ontology encapsulating the world’s knowledge may be an immense task, requiring an effort comparable to compiling a large encyclopedia and the expertise to build it, but it is feasible.
Several start-up companies around the world, like Hakia , Cognition Search , and Lexxe , have taken on this challenge.
The result of these efforts remains to be seen.
But how would a semantic search engine solve the information quality problem?
The answer is simple: precision.
Once computers can handle natural languages with semantic precision, high-quality information will not need to become popular before it reaches the end user, unlike what is required by Web search today.
Semantic technology promises other means of assuring quality, by detecting the richness and coherence of the concepts encountered in a given text.
If the text includes a phrase like “Bush killed the last bill in the Senate,”amp#160;does the rest of the text include coherent concepts?
Or is this page a spam page that includes a bunch of popular single-liners wrapped with ads?
Semantic technology can discern what it is.
Given humans’ limited reading speed (200-300 words per minute) and the enormous volume of available information, effective decision-making today calls for semantic technology in every aspect of knowledge refinement.
We cannot afford a future in which knowledge is at the mercy of popularity and money.
The Second Coming of Barack Obama
WASHINGTON, DC – The race was tough, but US President Barack Obama has won re-election.
The question now, for the United States and the world, is what will he do with a fresh four-year term?
To win re-election with a still-weak economy and unemployment close to 8% was not easy.
Many leaders – Nicolas Sarkozy, Gordon Brown, and José Luis Rodríguez Zapatero come to mind – have been swept away by economic discontent in recent years.
Although the financial disaster erupted on George W. Bush’s watch, after eight years of a Republican presidency, Obama had to carry the burden of an anemic recovery.
Obama won not only because of his extraordinary personal resilience, but also because a sufficient number of middle-class voters, while unhappy with the pace of economic progress, sensed that an Obama presidency would help them more than the policies championed by his Republican challenger, Mitt Romney, which were perceived as tilted to the affluent.
Moreover, America’s ongoing demographic transformation makes it harder for candidates who are unable to reach out strongly to Latinos and other minority communities – something that Romney singularly failed to do – to carry the country.
Some aspects of the campaign, particularly the amount of money spent and its negative tone, struck many observers as objectionable.
But the competitiveness of American democracy – the fact that an alternative always exists, and that those in power have to fight hard to stay there – was on admirable display for the whole world to see.
Obama will embark on his second term with the global economy at a crossroads.
In the US, the uneven and weak recovery has been sustained by extraordinarily expansive monetary policies and ongoing large fiscal deficits.
While corporate coffers hold mountains of cash, private investment stagnates.
In Japan, solid economic performance remains elusive, while prime ministers succeed each other at a breathtaking pace.
Likewise, Europe is on life support, thanks to European Central Bank President Mario Draghi’s astute maneuvering and promises of unlimited intervention in sovereign-debt markets.
But unemployment is at its highest in decades and growth has essentially stalled, even in Germany, while the troubled southern economies are mired in deep recession.
The situation in Greece, moreover, has become socially unsustainable;
Greece is small, but a total collapse there could have very negative financial and psychological effects elsewhere.
The world’s emerging-market economies are in better shape; but, while their underlying trend growth in potential output is much higher than that of the advanced economies, there is no cyclical de-coupling.
The world economy is an interdependent whole: trouble in any important part of it is transmitted globally.
That is true beyond the purview of narrowly macroeconomic problems as well: for example, the need to address climate change can no longer be ignored.
The US cannot determine the world economy’s future on its own, but the course taken by America nonetheless has huge global importance, given that it remains the largest economy and retains considerable influence in venues such as the International Monetary Fund, the World Bank, and the G-20.
American ideas continue to affect the policy debate worldwide.
So, what should Obama’s top economic-policy priorities be in his second term?
Despite the difficulties facing the global economy, there are huge investible resources in the US, China, Germany, and elsewhere.
While there are climate and resource constraints, we are still at the beginning of a technological revolution that holds tremendous potential for higher productivity and greater prosperity, along with challenging implications for labor and employment.
But sustainable economic growth requires that those with investible resources actually invest them.
And that will not happen unless and until a broad-based recovery of the middle- and lower-income groups in advanced economies, including the US, delivers the prolonged rebound in demand for which investors are waiting.
There are plenty of profits to be made – actual taxes on capital are not too high, and cheap finance is available to the corporate sector.
But the concentration of income at the top – more than 90% of the gains from US economic growth in 2011, for example, went to the top 1% – is constraining broad-based recovery and leaving macroeconomic policy caught between the need for continued “stimulus” and the dangers of growing public debt and asset bubbles inflated by record-low interest rates.
In other words, a more balanced income distribution is not only a social or ethical issue; it is crucial for macroeconomic and, indeed, long-term corporate success.
This is vital for many countries, above all the US and China.
Then there is the pressing need – in the US and globally – for education and appropriate skill formation.
Without the skills required by new and incipient technologies, too many workers will simply be unemployable.
A key benefit of prioritizing broad-based quality education is that it also helps to solve the income-distribution problem.
Finally, there is the need for effective international cooperation.
China’s current-account surplus has declined, but now northern Europe runs a $500 billion surplus, while demand in southern Europe is collapsing and the US is running a deficit that is close to $500 billion.
The longer-term challenge of climate change and extreme weather patterns also requires global cooperation and a post-election shift toward much stronger US engagement, which could unleash a multifaceted clean-energy revolution, fueling large job-creating investments and a new cycle of growth.
After America’s long, hard-fought election campaign, it is time for comprehensive policy reforms.
One hopes that the US Congress will recognize this as well, leading to support for measures that could help hundreds of millions of people in the US and around the world.
The Second Great Contraction
CAMBRIDGE – Why is everyone still referring to the recent financial crisis as the “Great Recession”?
The term, after all, is predicated on a dangerous misdiagnosis of the problems that confront the United States and other countries, leading to bad forecasts and bad policy.
The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold.
That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong.
Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.
But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.
A more accurate, if less reassuring, term for the ongoing crisis is the “Second Great Contraction.”
Carmen Reinhart and I proposed this moniker in our 2009 book This Time is Different, based on our diagnosis of the crisis as a typical deep financial crisis, not a typical deep recession.
The first “Great Contraction” of course, was the Great Depression, as emphasized by Anna Schwarz and the late Milton Friedman.
The contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete.
Why argue about semantics?
Well, imagine you have pneumonia, but you think it is only a bad cold.
You could easily fail to take the right medicine, and you would certainly expect your life to return to normal much faster than is realistic.
In a conventional recession, the resumption of growth implies a reasonably brisk return to normalcy.
The economy not only regains its lost ground, but, within a year, it typically catches up to its rising long-run trend.
The aftermath of a typical deep financial crisis is something completely different.
As Reinhart and I demonstrated, it typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak.
So far, across a broad range of macroeconomic variables, including output, employment, debt, housing prices, and even equity, our quantitative benchmarks based on previous deep post-war financial crises have proved far more accurate than conventional recession logic.
Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a “Great Recession.”
But, in a “Great Contraction,” problem number one is too much debt.
If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions.
For example, governments could facilitate the write-down of mortgages in exchange for a share of any future home-price appreciation.
An analogous approach can be done for countries. For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work), in exchange for higher payments in ten to fifteen years if Greek growth outperforms.
Is there any alternative to years of political gyrations and indecision?
In my December 2008 column, I argued that the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years.
Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors.
But, at the end of the day, such a transfer is the most direct approach to faster recovery.
Eventually, it will take place one way or another, anyway, as Europe is painfully learning.
Some observers regard any suggestion of even modestly elevated inflation as a form of heresy.
But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years.
These are times when central banks need to spend some of the credibility that they accumulate in normal times.
The big rush to jump on the “Great Recession” bandwagon happened because most analysts and policymakers simply had the wrong framework in mind.
Unfortunately, by now it is far too clear how wrong they were.
Acknowledging that we have been using the wrong framework is the first step toward finding a solution.
History suggests that recessions are often renamed when the smoke clears.
Perhaps today the smoke will clear a bit faster if we dump the “Great Recession” label immediately and replace it with something more apt, like “Great Contraction.”
It is too late to undo the bad forecasts and mistaken policies that have marked the aftermath of the financial crisis, but it is not too late to do better.
The Second Life of Chairman Mao
The Secret Language of Central Bankers
“If I seem unduly clear to you,” Alan Greenspan said to his political masters in the United States Congress, “you must have misunderstood what I said.” It was 1987, and the newly-confirmed chair of the Federal Reserve was elaborating on how he had “learned to mumble with great incoherence” in the short months since he had “become a central banker.”
Mr. Greenspan was a strong believer, in practice if not in theory – for who could understand his theory? – that central bankers should speak in an opaque and convoluted dialect.
In comparison, the Oracle at Delphi’s advice to the King of Lydia – “If you attack Persia, you will destroy a great kingdom” – is clarity itself.
There was an old argument for “Greenspanese”: voters or politicians or both are inherently short-sighted and myopic.
They would always see and want to grasp the benefits of lower interest rates and a little more demand pressure – more production, more employment, higher wages, and higher profits in the short run.
But they would either not see or be cynically indifferent to the problems of stagflation that would inevitably follow.
The job of the central bank, according to Greenspan’s distant predecessor, William McChesney Martin, was to “take away the punchbowl [of low interest rates] before the party really gets going.”
But, the argument went, the Fed could not say that this was what it was doing in clear and transparent language, for, if voters and politicians could understand central bankers, they would then force them into following destructive inflationary policies that would be worse for everyone, at least in the long run.
By using an opaque and convoluted idiom, the only outsiders – reporters, politicians, and academics – who would be able to understand what the central bank was saying would be those who had carefully studied the issues and the language.
This, in turn, would lead them all (with the rare exception of a maverick critic like William Greider) to understand and approve, and to agree that talking in “Greenspanese” is essential for enabling central banks to ensure price stability.
There seems to be general agreement today that this argument no longer applies, if it was ever truly valid.
Voters and politicians today, it seems, fear inflation and are willing to accept occasional economic recessions and unemployment above its natural rate as unfortunate but inevitable consequences of the necessary and beneficial pursuit of long-term price stability.
The debate about monetary policy can thus be fruitful and productive even if it is no longer restricted to those who have learned “Greenspanese.”
Thus, all across the North Atlantic core of the world economy, central banks have embarked on a “transparency” initiative to make their organization’s goals, guesses, procedures, and policies more widely and clearly known.
They are relying on economists’ basic predisposition to believe that more information is always better than less, that individuals are good judges of what they need to know, and that they are able to evaluate and place in perspective what they know.
But recently – and increasingly so in recent months – central bankers’ doubts about the utility of the transparency initiative have increased.
The more central banks talk, and the clearer they try to make their language, the more it seems that markets may be reacting excessively and inappropriately to statements that are not really news at all.
More information may be leading not to better knowledge, but to more confusion.
We economists have a hard time figuring out why there appears to be so much static on the communications line.
Why were so many people in financial markets so sure that the Fed’s late-March meeting statement heralded a likelihood of interest-rate hikes soon, rather than being simply an acknowledgement (as the Fed explicitly stated) that what had been very unlikely was now a possibility?
Why are cable TV personalities so eager to overstate how quickly central banks change their view of the likely future?
Why do participants in financial markets trade on the advice of cable TV personalities when a small amount of number-crunching reveals that the benefits must be lower than the transactions costs incurred by over-frequent trading?
We don’t have answers to these questions.
So we really don't know whether we should tell central bankers to brush up on their Greenspanese.
The Secret of Harvard’s Success
AHMEDABAD, INDIA – No country dominates any industry as much as the United States dominates higher education.
According to Shanghai Jiao-Tong University’s Academic Ranking of World Universities, for example, 17 of the world’s 20 best universities are American, with Harvard topping the list by a substantial margin.
The traditional explanation for this phenomenon – America’s wealth, large population, generous research funding, widespread private philanthropy, and ability to attract scholars from around the world – is incomplete.
Although the US boasts the world’s largest economy, it comprises only one-quarter of global GDP, and possesses roughly one-twentieth of the world’s population.
And its support for research is not unique.
Moreover, according to the accepted explanation, large countries such as France, Germany, Japan, and even China and India should also be represented at the top of global university rankings.
But they appear only sparsely anywhere in such rankings, if even at all.
In fact, these countries lack a crucial piece of the puzzle: America’s innovative governance model for higher education.
Harvard was established as a public institution in 1636 by the authorities of the Massachusetts Bay Colony.
Its value to Massachusetts is exemplified in the Commonwealth’s post-independence state constitution, ratified in 1780, which includes a section about the university’s function and boundaries.
When Harvard alumni dominated the Massachusetts legislature, the university was given support and consideration.
But, in the 1840’s, mass immigration, fueled by the Irish potato famine, altered the state’s demographic balance, enabling populists to gain control of the legislature.
Almost immediately, Harvard came under attack for being too elitist, too exclusive, and too expensive.
Even its curriculum was challenged.
Over the next two decades, the state increasingly impeded Harvard’s functioning by, for example, refusing to release funds and obstructing the appointment of professors.
This behavior culminated in 1862, when the legislature blocked a university president’s appointment.
In response, Harvard requested that it be placed “out of the reach of ordinary political strife and change” and into the “hands of alumni who have the interests of education most at heart.”
On April 29, 1865, this radical proposal scraped through the Massachusetts General Court (the state’s bi-cameral legislature), owing to intense lobbying and the goodwill generated by Harvard alumni’s distinguished service for the Union during the Civil War.
Since then, Harvard’s Board of Overseers, has been controlled exclusively by alumni.
Inspired by Harvard’s success, other universities – starting with Yale University and the College of William and Mary – took similar action.
This “genuine American method,” as Charles William Eliot, Harvard’s longest-serving president, called it, became the norm not only for private universities, but also for public institutions, such as the University of Michigan and Purdue University, and even religious institutions like the University of Notre Dame and Duke University.
Today, 19 of the top 20 American universities in US News and World Report’s much-watched rankings are controlled by alumni (defined as 50% or more representation on the Board of Trustees).
The only exception, the California Institute of Technology, has a board with 40% alumni representation.
Of the top five, three (Harvard, Yale, and Columbia) are managed entirely by alumni, and two (Princeton and Stanford) are under 90% alumni control.
Alumni run the show even at public institutions such as Purdue (90%) and Michigan (63%).
On average, alumni make up 63% of the boards of the top 100 US universities, both public and private.
In general, a higher percentage of alumni on the board is associated with a higher ranking, increased selectivity, and a larger endowment.
After all, no group cares more about a university’s prestige than its alumni, who gain or lose esteem as their alma mater’s ranking rises or falls.
Indeed, alumni have the most incentive to donate generously, and to manage the university effectively.
Given their intimate knowledge of the university, alumni are also the most effective leaders.
Through alumni networks, board members can acquire information quickly and act upon it without delay.
All great universities are nonprofit organizations, created to administer higher education, which benefits society as a whole.
But US universities found a way to integrate competition’s benefits into the European concept of nonprofit, or so-called eleemosynary, corporations.
The lack of profit does not diminish an alumni-dominated board’s incentive to compete for prestige by, for example, hiring distinguished faculty, accepting meritorious students, and striving for athletic or artistic achievement.
Using alumni to infuse the benefits of competition into nonprofit institutions exemplifies the genius of American adaptation.
Countries that aspire to compete with US universities should take note.
The Secret Policeman’s Fall
As Hungary’s Prime Minister Ferenc Gyurcsany found out when a recorded admission that his government was lying incited riots, openness in government doesn’t come easily in Eastern Europe’s new democracies.
Like Hungary, post-communist Romania has struggled to increase transparency and honesty in what was once one of the world’s most closed societies.
As we struggled, continued secrecy allowed an explosion of corruption and abuse of office.
But there has, at last, been real movement towards openness – progress recognized by the European Union when it gave Romania the green light to join the European Union at the beginning of 2007.
Aside from achieving what the EU now deems a “functioning market economy,” key political and legal changes, which I have overseen as Minister of Justice, range from increased transparency and control in the funding of political parties to a shakeup of the judiciary.
Judicial reforms are, in turn, helping to root out corruption.
Indictments have been issued against former and current cabinet ministers, members of parliament, judges, prosecutors, lawyers, police and customs officers, and other public officials, as well as directors of private companies.
In addition, new standardized forms have been introduced for declarations of assets and financial interests by anyone who holds an official position in government, parliament, public and local administration, and the judicial system.
The new declarations are the most detailed in Europe, and, more importantly, they are published.
Romania’s progress is confirmed in a report released earlier this month showing that citizens’ access to government information in Eastern Europe is now equal to that in established democracies.
Indeed, the report, Transparency and Silence, conducted by the Open Society Justice Initiative (available at www.justiceinitiative.org), indicates that in some ways the new democracies have something to teach the old: certain government agencies in Romania were more responsive to citizen requests for information than comparable agencies in France and Spain.
Specifically, 60% of the requests filed in Romania met, compared to 31% in France and 24% in Spain.
Other countries that performed well include Peru and Mexico, both of which adopted freedom of information laws in 2002, shortly after Romania.
But getting access to sensitive information in transitional democracies is not always easier, as I know from my previous work as a human rights lawyer with the Romanian Helsinki Committee.
Often we had to go to court to force disclosure of information, using Romania’s 2001 Freedom of Information Act.
For example, even when we won a case regarding access to the records of wiretaps authorized by the general prosecutor, the prosecutor simply ignored the court order.
We filed a civil action against the prosecutor, and the judge imposed a fine for every day the information was withheld.
But it was only when we caught the media’s attention that the data – detailing the number of wiretaps authorized over the previous 10 years, against whom, and for how long – were released.
With its publication, Romania began to move away from its Securitate-dominated past.
Now, inside government, I realize that sharing information with the public is sometimes hard.
But when painful reforms are necessary, there is no alternative.
We could not have achieved the economic and political reforms that qualified us for EU membership if we had not subjected policymaking to public scrutiny and accepted the increased public participation in decision-making that inevitably accompanies such openness.
Indeed, this has become a sine qua non of democratic government throughout the world.
When the United States adopted its Freedom of Information Act in 1966, it joined the exclusive company of Sweden and Finland.
Today, roughly 65 countries have such laws.
In Romania, those who fought for a freedom of information law have made full use of it.
As part of the Justice Initiative study, those who request information from Romania’s government were willingly supplied with the kind of information that would have been unthinkable to release just a few short years ago.
The Romanian Defense Ministry, for example, disclosed the number of armed forces personnel who died in 2003, as well as the causes of death (including 13 suicides, two shootings, and two combat deaths in Afghanistan).
Likewise, the Bucharest court was asked for the number of judges disciplined since the beginning of 2000, including grounds for any sanctions applied.
The Court transferred the request to the Superior Council of Magistrates, which provided a full response: a four-page list of all sanctioned judges, with details of the reasons and penalties.
Such information is both a product and a motor of continuing reform.
It has not always been comfortable for those in government, and there is still a tug-of-war over sensitive documents.
But, in the former communist bloc, the benefits brought by transparency have been undeniable.
At the same time, Romania’s experience demonstrates that official secrecy remains a threat to the core values of democratic governance, and that only constant vigilance, in both established and young democracies, can prevent its encroachment.
The Secret World of Female Circumcision
NAIROBI – As a child in rural Kenya, I was a secret admirer of female genital mutilation.
I was swayed by talk of friends and elders about how once a girl undergoes “the cut,” she gains respect and grown men consider her suitable for marriage.
Perhaps these were the reasons why, as a girl of 13, I longed to be “circumcised” and become a “real woman.”
My mother opposed the practice, however, because she was (and remains) a Christian and wanted me to become educated and to escape the fate of many girls in my community who are married off to older men and then lose their autonomy.
I tried to persuade my mother to permit my circumcision, but she refused.
My mother’s decision angered me.
In frustration, I spoke with a few other schoolgirls.
Each of them gave a different version of the process, but they held a common view: circumcision is intensely painful, and I must be prepared for much bleeding.
And yet the friends to whom I spoke encouraged me to get circumcised.
So one August, during my school holidays, I decided to learn more about female genital circumcision.
I decided to witness a girl undergoing the practice, and perhaps see her cry and bleed.
If possible, I would talk to her later in order to gain a clearer picture of her experience.
I went ahead with my plan and witnessed a girl being circumcised.
The experience changed my life, but not in the way I expected.
Before the operation, traditional heroic songs were sung, while a few older women sharpened their knives, preparing for the task ahead.
They also prepared special herbs for use as disinfectants.
I paid little attention to their preparations, actually.
My eyes were fixed on Lillian, a girlfriend who was waiting to be cut.
When the women began their work, Lillian’s expression turned from giddy anticipation to fear and then panic.
I thought she might change her mind and run for her life.
I was mistaken.
She sat on a traditional stool and spread her legs wide apart.
An old woman bent over her, knife in hand.
I looked away and heard a sharp scream.
The scream was swallowed by cheers from scores of women watching Lillian with me.
They celebrated Lillian’s mutilation, while I mourned her loss.
In my mind, Lillian was experiencing the worst moment of her life.
In an instant, my view of female circumcision changed forever.
While the women around me kept cheering, I resolved that from then on I would resist the practice with all my might.
Because of my mother’s support, and my own determination, I succeeded in keeping my body intact.
I went on to finish high school and then study journalism in a big city far from home.
Today, living and working in cosmopolitan Nairobi, I look back with a mixture of horror and bemusement on my girlhood fascination with female circumcision.
I escaped mutilation, but other girls from my rural Kenyan community continue to receive “the cut” to this day.
Only last month, in Narok, the town nearest my childhood village, a 13-year-old girl died after undergoing circumcision as a preparation for her marriage to a man who already had five wives.
When the girl died, her father and fiancé conspired to have her body secretly buried in the bush.
Kenya’s police learned of the girl’s death and legal action is being prepared against the men.
But punishment for the perpetrators of female circumcision remains rare.
The practice persists, despite legal bans.
As a child-welfare officer in Narok told me, “Unless attitudes are changed, efforts to stamp out the practice will be futile.&quot;
Parents’ attitudes are changing, but slowly.
Government can do more, of course.
One new initiative calls for local leaders to be dismissed whenever high numbers of girls drop out of school.
The logic is compelling: if girls remain in school, they can avoid “the cut” and early marriage.
Once educated, these girls may decide for themselves – as I did – to resist mistreatment at the hands of their family and neighbors.
At the same time, much more needs to be done to combat the practice, in Kenya and everywhere in Africa where it continues.
International opposition helps.
For decades, activists in the United States and Europe have brought attention to the problem and urged African governments to prosecute perpetrators.
Nevertheless, because female genital mutilation is tied to a wider set of traditional practices involving the control of girls’ bodies and minds, and because these traditions have a powerful hold on some Africans, ultimately the practice can be halted only through concerted efforts by Africans themselves.
Only if we change the views of our friends and neighbors can more girls escape “the cut” – and never long for it.
The Secular and Sacred in Europe\u0027s Constitution
One controversy surrounding the draft constitution for the European Union is whether or not to include an explicit reference to Europe's Christian heritage in its preamble.
Silvio Ferrari, a noted scholar of Church‑State relations, dissects the issues.
Europe's churches may be empty, but religion still incites heated debate, this time about its place in Europe's constitution.
Some people demand that the constitution include some explicit reference to Europe's Christian heritage.
Others want Europe to affirm its secular nature.
What role should the secular and the sacred play in the European Union's fundamental law?
Unsurprisingly, religious freedom is given prominence in the draft constitution.
Every European citizen has the right to practice the religion of his or her choice, to adopt another religion, or to practice no religion.
Underlying this notion is the paramount position of individual conscience, which carries with it the right of every person to make his or her own decisions on religious matters, without that choice resulting in negative legal consequences.
Whether Catholic, Protestant, or Orthodox, believer or atheist, civil and political rights must be equally apportioned regardless of a citizen's choice of religion or conscience.
The second guiding principle concerns the autonomy of religious communities.
The EU recognizes the "identity and specific contribution" of churches to European life.
That language is, of course, a little vague, but it means that religious communities have characteristics that distinguish them from other associations and institutions‑‑and that Europe is prepared to respect these distinctions.
Article 37 of the draft constitution establishes that a "regular dialogue" will be maintained between the Union and Europe's religious communities (as well as philosophical and non‑confessional organizations).
Separation of church and state does not mean mutual ignorance.
The common good benefits more from open, transparent dialogue than by turning a deaf ear to religion‑‑that is, provided that the borders between religion and politics are clearly defined.
The state's laicité ‑‑fundamental in most European countries‑‑does not require isolating churches in political ghettoes.
Finally, the EU undertakes to respect and not prejudice "the status under national law of churches and religious associations or communities in the Member States."
In other words, the boundaries of religious autonomy and cooperation with churches are matters that should primarily be framed in law by the EU's members.
This means that the EU will not interfere with the national systems of church‑state relations that now exist, and will refrain from imposing a common model of church‑state relations.
Poland and Italy can maintain their concordats with the Catholic Church, France will not be compelled to abandon its century‑long separation of church and state, and Queen Elizabeth II can continue to head the Church of England.
Defining the church‑state system and its principal features is a right of the citizens of each EU member state.
In essence, Article 10 of the Charter of Fundamental Rights and Article 37 of the draft Constitution reflect characteristics that are largely part of a common European heritage: religious liberty, autonomy of religious communities, church‑state cooperation, and respect for the specific differences in various member states.
Of course, improvements are possible.
Equal treatment of religious communities is not mentioned in the text prepared by the European Convention.
Although granting equal treatment is primarily a task of EU states, omitting this principle from the Constitution endangers not only the principle of equality, but that of religious liberty as well.
If there is no equality, religious liberty is at risk.
Moreover, the nature of church‑state cooperation could, perhaps, be defined more explicitly by drawing clear distinctions between what constitutes the spiritual and the secular.
Regular dialogue with religious communities, though a good thing, should not be extended to purely secular areas.
It is here that efforts to include a reference to Europe's Judeo‑Christian heritage in the preamble of the Constitution must be considered dispassionately.
Of course, European civilization arises from a synthesis of religious and humanistic values.
The Judeo‑Christian tradition, the legacies of Greece and Rome, and the Enlightenment are all at the root of the way many Europeans regard their lives, although a long process of secularization has made it more difficult to discern this relationship.
But mentioning a specific religious tradition in Europe's Constitution is dubious.
It would be largely symbolic and, although symbols are important and help to foster unity, they are dangerous when they exclude and divide.
A considerable part of Europe's Muslim community would certainly feel marginalized if such a reference were included in the future European Constitution, which will also be their Constitution.
This would be a bonanza for Muslim fundamentalists, and could be exploited by all who want to prevent the development of a moderate, modern European Islam.
The Security Trap
CHICAGO – Even as the world becomes more integrated, the word “security” crops up again and again, as in “food security” or “energy security.”
Typically, this means a country creating and controlling production facilities no matter what the cost.
Thus, Arab countries grow water-hungry grain in the desert, and China acquires part ownership of oil companies in Sudan.
Are these economically sensible actions?
If not, what should the world do to reduce the need for them?
Let’s start with ownership of foreign resources.
One might think that a country that owns foreign oil can use the profits from sales to insulate its economy from high world oil prices.
But this makes no economic sense.
The world market prices oil according to its opportunity cost.
Rather than subsidizing the price in the domestic oil market (and thus giving domestic manufacturers and consumers an incentive to use too much oil), it would make far better sense to let the domestic price rise to the international price and distribute the windfall profits from foreign oil assets to the population.
The key point is that fundamental economic decisions should not be affected by the ownership of additional foreign oil assets.
But, because of political pressure exerted by small, powerful interest groups, windfall profits will inevitably be spent at home in unwise subsidies.
As a result, the acquiring country will, if anything, make suboptimal economic decisions.
Could the purchase of foreign resources lead to smoother national income?
A purchase will always look beneficial if one looks backward after the resource price has risen.
But if the price of oil falls, citizens suffer a loss of income and wealth (relative to having invested the money elsewhere).
Assuming the foreign oil assets are priced fairly at the time of purchase, the country benefits only when the purchase helps smooth its income; however, purchases may increase income volatility even for a country that relies heavily on oil.
For example, in large countries like the United States or China, which account for a significant portion of world demand, the world price of oil is likely to be high when the country is growing strongly and citizens have lots of income, whereas the price is likely to be low when the country is doing poorly.
Foreign oil assets are a bad hedge in such cases, for they subtract from citizens’ income when it is already low and add to it when it is high.
Even if owning oil assets is a useful hedge (as in a small, oil-consuming country), it is not clear that buying stakes in opaque companies in foreign countries is the best strategy.
A country’s property rights in foreign oil assets are likely to diminish as the oil price rises.
Even if the foreign company does not start squeezing out its minority owners, its government will be tempted to expropriate foreign owners through windfall taxes (if the government is sophisticated) or nationalization (if it is unsophisticated) – especially if its voters feel, with the benefit of hindsight and populist incitement, that the assets were sold too cheaply.
But perhaps what countries really fear is not so much high prices but a total market breakdown and descent into an autarkic “Mad Max” world in which oil is scarce, no country is willing to allow trade in the oil it produces, and there is no world market clearing price.
If such a situation were to occur, ownership of oil assets abroad would most likely become worthless, as each country would only get to use oil produced within its political borders (or within nearby borders that could be invaded).
It is in this kind of world that seemingly nonsensical behavior like growing grain in the desert to ensure food security begins to make sense.
Alternatives do need to be explored, including more efficient use, diversification into more easily accessible substitutes, and reduction of overall consumption (though in all these cases, it is easier to deal with energy shortages than food shortages).
Moreover, even in such a bleak world, it is difficult to imagine the market breaking down completely or for long.
Indeed, one can imagine black marketeers and smugglers buying where grain is available and transporting it to sell to countries where it is not.
Unless governments build leak-proof barriers around their countries – and the costs would likely be prohibitive – an implicit world market would be re-established.
Nevertheless, and understandably, many countries make decisions to locate production locally and to protect it against foreign trade, fearing market breakdown through war, trade sanctions, or simply shortsighted decisions by foreign governments to protect their own populations from price increases.
Paradoxically, once a country ensures its own security, it has weaker incentives to avoid the market breakdown that prompts the initial search for security.
International agreement to ensure that countries do not prohibit exports, especially of critical commodities, except under severely (and verifiably) adverse domestic circumstances, would help reduce fear of market breakdown.
Similarly, the creation of international strategic resource reserves on neutral territory and under neutral management could help alleviate concerns about politically motivated disruptions.
Unfortunately, all of this requires substantial international political consensus, cooperation, and goodwill – all of which are in short supply today.
Until we find the collective will, the drive for national economic security will continue to lead to collective insecurity.
The Service Revolution
WASHINGTON, DC – China and India are both racing ahead economically.
But the manner in which they are growing is dramatically different.
Whereas China is a formidable exporter of manufactured goods, India has acquired a global reputation for exporting modern services.
Indeed, India has leapfrogged over the manufacturing sector, going straight from agriculture into services.
The differences in the two countries’ growth patterns are striking, and raise significant questions for development economists.
Can service be as dynamic as manufacturing?
Can late-comers to development take advantage of the increasing globalization of the service sector?
Can services be a driver of sustained growth, job creation, and poverty reduction?
Some facts are worth examining.
The relative size of the service sector in India, given the country’s state of development, is much bigger than it is in China.
Despite being a low-income region, India and other South Asian countries have adopted the growth patterns of middle- to high-income countries.
Their growth patterns more closely resemble those of Ireland and Israel than those of China and Malaysia.
India’s growth pattern is remarkable because it contradicts a seemingly iron law of development that has held true for almost 200 years, since the start of the Industrial Revolution.
According to this “law” – which is now conventional wisdom – industrialization is the only route to rapid economic development for developing countries.
As a result of globalization, the pace of development can be explosive.
But the potential for explosive growth has usually been seen only in the manufacturing sector.
This is no longer the case.
There is evidence that countries with high growth in services also tend to have high overall economic growth; conversely, countries with high overall economic growth have high services growth.
To be sure, the causal connection remains uncertain: after all, there is also a positive relationship – widely accepted in development economics – between manufacturing growth and overall growth.
But what has been overlooked is that the effect of services growth on aggregate economic growth appears to be as strong, if not stronger, than the effect of manufacturing growth on overall growth.
Moreover, the trend over time to a higher service-sector share in the economy suggests that higher real growth in services has not been offset by price declines.
There is no outbreak of the so-called “Dutch disease” – that is, the price of services do not fall with an increase in the supply.
India has a higher share of services, and more rapid service-sector growth, than China, although the latter is richer and has grown faster over time.
This indicates that services are not simply responding to domestic demand (which would be higher in China), but also to export opportunities.
India’s growth experience suggests that a global service revolution – rapid growth and poverty reduction led by services – is now possible.
In India, the service sector has not only led overall economic growth, but is also characterized by higher labor productivity than in the industrial sector.
Indeed, productivity growth in India’s service sector matches productivity growth in China’s manufacturing sector, thereby reducing poverty by enabling wages to rise.
Service-led growth is sustainable, because globalization of services, which account for more than 70% of global output, is still in its infancy.
Moreover, the long-held view that services are non-transportable, non-tradable, and non-scalable no longer holds for a host of modern impersonal services, which can now be produced and exported at low cost.
Developing countries can thus sustain service-led growth, given the huge room they have for catch-up and convergence.
India’s experience offers hope to other development late-comers.
The process of globalization in the late twentieth century led to a sharp divergence of incomes between those who industrialized and broke into global markets and the “bottom billion” in some 60 countries where incomes stagnated for twenty years.
It seemed as if the “bottom billion” would have to wait their turn for development, until giant industrializers like China became rich and uncompetitive in labor-intensive manufacturing.
The globalization of services, however, provides alternative opportunities for developing countries to find niches, beyond manufacturing, where they can specialize, scale up, and achieve explosive growth, just like the industrializers.
As the services produced and traded across the world expand with globalization, the possibilities for all countries to develop based on their comparative advantage expand. That comparative advantage can just as easily be in services as in manufacturing or agriculture.
The promise of the service revolution is that countries do not have to wait to get on the path to rapid development.
There is a new way ahead.
The Seven-Year Ditch
PRINCETON – There are historical precedents for sovereign-debt defaults by the countries of Europe’s southern periphery, but they are not instantly attractive ones.
Dealing with seemingly intractable problems often takes time.
And it is difficult – especially in a democracy – to be patient.
The most obvious parallel to Europe’s current woes is the Latin American debt crisis of the 1980’s.
In August 1982, Mexico threatened to default, and was quickly followed by other large borrowers, notably Argentina and Brazil.
A default contagion would have brought down the banking systems of all the major industrial countries, and caused the world to relive something like the financial crisis of the Great Depression.
What followed was a seven-year play for extra time.
The initial approach was to link policy improvements in the borrowing countries not only with help from international institutions, but also with additional lending from the banks – which seemed to defy the most elementary canons of sensible bank behavior.
Three years after the outbreak of the Latin American crisis, United States Treasury Secretary James Baker announced a systematization of the initial response.
It was not very imaginative: Banks and multilateral development institutions should all lend more, and the debtors should continue their efforts to improve their macroeconomic policies.
The Baker Plan was a universal disappointment.
Growth faltered again, and the International Monetary Fund actually reduced its lending.
More than three years passed before new US Treasury Secretary Nicholas Brady set out a more satisfactory program, in which banks would be given a menu of options that included lower interest rates on the debt and a hefty discount on the principal.
If creditor banks were unwilling to accept some form of restructuring, they would have to put in new money.
The lending of the international institutions might also be used for buying back discounted debt.
Brady’s plan looked like a great success.
Confidence returned, capital flight from Latin America was reversed, and capital markets became willing to provide financing again.
Inevitably, the Brady Plan looks like a good model for southern Europe.
Why not avoid seven years of misery, and begin some similar rescue operation now that could lead to a return to economic vigor and dynamism?
The most obvious answer is that at an earlier stage in the Latin American saga, the banks simply could not have afforded to take such losses on their capital.
They needed to fake it for seven years in order to build up adequate reserves against losses.
The initiative for the Brady Plan did not come from the official sector at all.
It was the willingness of some large financial institutions to trade in discounted debt that established a market that could clear out the legacy of past mistakes.
Two institutions, in particular, took the lead: Citicorp in the US and Deutsche Bank in Europe.
Their CEOs at the time presented their actions as being motivated by far-sighted benevolence and a concern for the well-being of the world as a whole.
That may have been plausible, but the two banks also wanted to demonstrate publicly that they had better balance sheets than their weaker rivals.
In Germany, the Dresdner Bank and the Landesbanken could not afford to take such a hit.
Moreover, despite the obvious “reform fatigue” of Latin American electorates, the debtor countries had engaged in a substantial measure of reform.
Before the Brady Plan was announced, Mexico had accepted a wide-ranging Pact of Economic Solidarity and Growth, which immediately improve investor confidence and reduced sky-high domestic interest rates.
The final move to solve the debt problem came in the aftermath of international currency adjustment.
One of the problems that had made the crisis more difficult after 1982 was the US dollar’s appreciation.
Likewise, today’s euro crisis is harder to resolve because of the euro’s strength in currency markets.
The dollar’s slide after 1985 made the real burden of Latin America’s dollar debt much lighter.
Calling for a European Brady plan today does not guarantee the necessary conditions for such a plan to succeed.
On all fronts, there has not been much progress.
There is certainly plenty of frustration about the implementation of austerity, and no real indication of the long-term sustainability of reform efforts in southern Europe.
The problems of Europe’s banks are also far from being resolved.
A truly competitive European banking system would provide incentives for the larger and stronger banks to take more risks in the hope of growing even larger and stronger.
But, in the aftermath of the financial crisis, policymakers are too pre-occupied by the real problems posed by too-big-to-fail banks, and too terrified by the potential collapse of weaker banks, to allow such a solution.
Recapitalization has not yet reached the point where there are enough strong banks.
Finally, global uncertainty about currencies stands in the way of a solution.
The euro’s strength, despite the magnitude of the eurozone’s difficulties, makes an export-led recovery strategy harder to realize.
The common currency’s strength reflects problems elsewhere in the world, but a euro exchange rate that would enable the return of confidence and growth is no less elusive for that.
Without the preconditions that made the Brady Plan work, simply transplanting a debt write-off would only augment uncertainty and fuel the political revulsion that already threatens to undermine European integration.
And it may be that Europe – because of its relative prosperity – is less in a mood for the biblical seven lean years than was a much poorer Latin America in the 1980’s.
The Shadow of Depression
BERKELEY – Four times in the past century, a large chunk of the industrial world has fallen into deep and long depressions characterized by persistent high unemployment: the United States in the 1930’s, industrialized Western Europe in the 1930’s, Western Europe again in the 1980’s, and Japan in the 1990’s.
Two of these downturns – Western Europe in the 1980’s and Japan in the 1990’s – cast a long and dark shadow on future economic performance.
In both cases, if either Europe or Japan returned – or, indeed, ever returns – to something like the pre-downturn trend of economic growth, it took (or will take) decades.
In a third case, Europe at the end of the 1930’s, we do not know what would have happened had Europe not become a battlefield following Nazi Germany’s invasion of Poland.
In only one instance was the long-run growth trend left undisturbed: US production and employment after World War II were not significantly affected by the macroeconomic impact of the Great Depression.
That is certainly how things looked, with high levels of structural unemployment and a below-trend capital stock, at the end of the 1930’s, before mobilization and the European and Pacific wars began in earnest.
In the US, we can already see signs that the downturn that started in 2008 is casting its shadow on the future.
Reputable forecasters – both private and public – have been revising down their estimates of America’s potential long-run GDP.
For example, labor-force participation, which usually stops falling and starts rising after the business-cycle trough, has been steadily declining over the past two and a half years.
At least some monetary policymakers believe that recent reductions in the US unemployment rate, which have largely resulted from falling labor-force participation, are just as valid a reason for shifting to more austere policies as reductions in unemployment that reflect increases in employment.
And much the same processes and responses are at work – with even greater strength – in Europe.
Most important, however, has been what looks, from today’s perspective, like a permanent collapse in the risk-bearing capacity of the private marketplace, and a permanent and large increase in the perceived riskiness of financial assets worldwide – and of the businesses whose cash flows underpin them.
Given aging populations in industrial countries, large commitments from governments to social-insurance systems, and no clear plans for balancing government budgets in the long run, we would expect to see inflation and risk premiums – perhaps not substantial, but clearly visible – priced into even the largest and richest economies’ treasury debt.
Sometime over the next generation, the price levels of the US, Japan, and Germany might rise substantially after some government short-sightedly attempts to finance some of its social-welfare spending by printing money.
The price levels are unlikely to go down.
Yet the desire to hold assets that avoid the medium-term risks associated with the business cycle has overwhelmed this long-run fundamental risk factor.
But the risk that the world’s investors currently are trying to avoid by rushing into US, Japanese, and German sovereign debt is not a “fundamental” risk.
There are no psychological preferences, natural-resource constraints, or technological factors that make investing in private enterprises riskier than it was five years ago.
Rather, the risk stems from governments’ refusal, when push comes to shove, to match aggregate demand to aggregate supply in order to prevent mass unemployment.
Managing aggregate demand is governments’ job.
While Say’s law – the view that supply creates its own demand – is false in theory, it is true enough in practice that entrepreneurs and enterprises can and do depend on it.
If the government falls down on the job, John Maynard Keynes wrote 76 years ago, and “demand is deficient…the individual enterpriser...is operating with the odds loaded against him.
The game of hazard which he plays is furnished with many zeros,” which represent “the increment [by which] the world’s wealth has fallen short of...savings,” owing to “the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune.
But if effective demand is adequate, average skill and average good fortune will be enough.”
For 62 years, from 1945-2007, with some sharp but temporary and regionalized interruptions, entrepreneurs and enterprisers could bet that the demand would be there if they created the supply.
This played a significant role in setting the stage for the two fastest generations of global economic growth the world has ever seen.
Now the stage has been emptied.
The Shadow Plague
The XIVth International Conference on AIDS in Barcelona last month put the global HIV epidemic back in the spotlight--justifiably so.
The UN estimates that the number of HIV/AIDS sufferers, currently at 40 million, will rise sharply in coming years, and 25 million children under age 15 are expected to lose one or both parents to the disease by 2010.
But the continuing spread of HIV is closely linked with the growing resurgence of a much older killer.
Tuberculosis (TB) is an air-borne disease, transmitted the same way as common flu, by coughing or sneezing, although it is much less infectious.
But, unlike flu, TB bacilli can survive in the lungs for years, surrounded by a "protective" wall built by the human immune system.
These latent bacteria can be activated when other factors reduce the body's immunity to infection.
This is why, over the centuries, poor living conditions, malnutrition, and diabetes always accompanied TB outbreaks.
During the past twenty years, the spread of HIV has dwarfed these historical accomplices in fuelling TB infection to an alarming rate worldwide: 8.7 million new cases per year and 2 million deaths.
The vast majority of TB deaths occur in the developing world--largely induced by HIV.
Indeed, more than 25% of preventable deaths in developing countries are due to TB.
Because the young and economically productive age groups are the hardest hit, the disease's overall impact is even more destructive--condemning poor countries to generations of grinding despair.
Unlike HIV, there is a vaccine against TB (although not very effective), and several drugs that can reliably cure the disease after it emerges.
The key element in any comprehensive eradication effort is rapid diagnosis and treatment of infectious cases.
Diagnosis is cheap, simple, and quick: for a few US cents, microscopic examination of a sputum smear can reveal the bacilli in less than 1 hour.
Treatment consists of a cocktail of antibiotics (four drugs for two months, followed by two drugs for four months) that, if correctly applied, can cure over 95% of TB cases for about $30 per case.
The problem is that treatment is too often abandoned at the first signs of clinical improvement - usually after 2-3 months.
Members of high-risk groups, such as immigrants, the homeless, commercial sex workers, and the poor, are forced to move or search for work.
In such cases, newly selected drug-resistant bacilli may appear, leaving only second-line drugs that are more toxic and expensive.
The more these second-line drugs are used, the faster drug-resistant strains emerge and spread - a huge problem in former Soviet countries, where up to 10% of newly diagnosed cases are multi-drug resistant.
The World Health Organization (WHO) recommends a broader strategy - called DOTS - that calls for government commitment to TB control, including adequate diagnostic testing, continuous drug supply, and a proper system for recording, reporting, and assessing results.
Moreover, the DOTS strategy requires that health care professionals supervise the standard treatment regimens to ensure that TB patients remain on the antibiotic cocktail for the full six months, thereby slowing the emergence of drug resistance.
Only 148 out of 211 countries (45% of the world's population), however, are currently implementing it.
The WHO estimates that 80% of all TB cases are concentrated in 23 countries, all poor and most in Africa, Asia, and the former Soviet Union - precisely where HIV infection is spreading most rapidly.
Opportunities for prevention of both diseases must be exploited simultaneously, requiring close co-operation between TB and AIDS control programs.
For example, wider use of anti-retroviral treatment in HIV cases can restore immunity and allow TB treatment to act effectively.
But this is possible only if sufficient technical and financial assistance is channeled to poor countries unable to afford anti-retroviral drugs.
Developed countries have a clear interest here.
Western Europe thought it defeated TB in the late 1970s, and dismantled its network of dispensaries.
In the early 1990s, following a TB resurgence in the US, most West European countries realized that the decline in diagnosed cases had stopped or even reversed, and that they faced new problems owing to increased immigration, HIV infection, and imported multidrug-resistance.
Outbreaks of multidrug-resistant TB revived public concern.
New control strategies were developed, and surveillance systems were implemented to measure their effectiveness.
But the quality of TB control is still low in much of the world, and TB is a global disease.
We cannot control it in one country if there is an outbreak next door.
More than 50% of TB cases in many developed countries - Denmark, Israel, Luxembourg, the Netherlands, Norway, Sweden, and Switzerland - are foreign-born.
These patients often forgo treatment, and communication with them is difficult.
There is thus an urgent need for accessible, culturally sensitive health services that are able to involve community leaders in case management from the first contact to the final cure.
International technical and financial cooperation will ensure that TB expertise is maintained even in countries facing a decline in the number of cases.
But donor countries and beneficiaries must first define targets, financial shortfalls, and technical requirements to improve TB control on a global scale.
That must mean sharing HIV's more notorious spotlight.
The Shape of America’s Recession
NEW YORK – Now that it is clear that the United States is in recession, the debate has moved on to whether it will be short and shallow or long and deep – a question that is as important for the rest of the world as it is for the US.
The answer depends on the shape of the US recession: if it is short and shallow, sufficient growth elsewhere will ensure only a slight global slowdown.
But if the US recession is long and severe, the result could be outright recession in some countries (the United Kingdom, Spain, Ireland, Italy, and Japan), and even financial crises in vulnerable emerging-market economies.
In principle, the US recession could end up being shaped like a V, U, W, or L. Which of these four scenarios is most likely?
The current consensus is that the recession will be V-shaped – short and shallow – and thus similar to the US recessions in 1990-91 and 2001, which lasted eight months each.
Most analysts forecast that GDP will contract in the first half of 2008 and recover in the second half of the year.
I expect a longer and deeper U-shaped recession, lasting at least 12 months and possibly as long as 18 months – one of the most severe US recessions in decades – because today’s macroeconomic and financial conditions are far worse.
First, the US is experiencing its worst housing recession since the Great Depression, and the slump is not over.
Construction of new homes has fallen about 50%, while new home sales are down more than 60%, creating a supply glut that is driving prices down sharply – 10% so far and probably another 10% this year and in 2009.
Already, $2.2 trillion of wealth has been wiped out, and about eight million households have negative equity: their homes’ are worth less than their mortgages.
By 2010, the fall in home prices will be close to 30% with $6.6 trillion of home equity destroyed and 21 million households – 40% of the 51 million with a mortgage – facing negative equity.
If owners walk away from their homes, credit losses could be $1 trillion or more, wiping out most of the US financial system’s capital and leading to a systemic banking crisis.
Second, in 2001, weak capital spending in the corporate sector (accounting for 10% of GDP) underpinned the contraction.
Today, it is private consumption in the household sector (70% of GDP) that is in trouble.
American consumers are shopped-out, saving-less, debt-burdened (136% of income, on average), and buffeted by many negative shocks.
Third, the US is experiencing its most severe financial crisis since the Great Depression.
Losses are spreading from sub-prime to near-prime and prime mortgages, commercial mortgages, and unsecured consumer credit (credit cards, auto loans, student loans).
Total financial losses – including possibly $1 trillion in mortgages and related securitized products – could be as high as $1.7 trillion.
Given these staggering sums, the US could face a double-dip, W-shaped recession.
The main question is whether the tax rebate that US households will receive in mid-2008 will be consumed – thus leading to positive third-quarter growth – or saved.
Given how financially stretched US households are, a good part of this tax rebate may be used to pay down high credit card balances (or other unsecured consumer credit) or to postpone mortgage delinquency.
Fortunately, an L-shaped period of protracted economic stagnation – Japan’s experience in the 1990’s – is unlikely. Japan waited almost two years after its asset bubble collapsed to ease monetary policy and provide a fiscal stimulus, whereas in the US both steps came early.
Moreover, whereas Japan postponed corporate and bank restructuring for years, in the US private and especially public efforts to restructure assets and firms will start faster and be more aggressive.
Still, given a severe financial crisis, declining home prices, and a credit crunch, the US is facing its longest and deepest recession in decades, dashing any hope of a soft landing for the rest of the world.
While a global recession will be averted, a severe growth slowdown will not.
Many European economies are already slowing, with some entering recession.
China and Asia are particularly vulnerable, given their trade links to the US.
And emerging markets will suffer once the US contraction and global slowdown undermines commodity prices.
The Sick Man of Asia
Japan is sick, but once again people are becoming hopeful that it may at long last recover, mostly because a committed reformer named Heizo Takenaka now seems to be running the economic policy.
But what policymakers and pundits fail to recognise - or refuse to recognise - is that economic policies per se will not reinvigorate Japan.
Japan's crisis is systemic, not cyclical.
Debt, deflation and other maladies are purely symptoms of Japan's disease.
The causes are a combination of institutional sclerosis, social anomie and gerontocratic governance.
For several decades after WWII the Japanese system worked remarkably well, not only in generating growth, but in providing high levels of education, long life expectancy, security, and other welfare benefits to its citizens.
This system rested on three pillars: a cohesive political-industrial establishment, the mobilisation of resources to achieve national economic ends and America's defensive shield.
Almost immediately after defeat in WWII, Japan metamorphosed from being America's enemy into its pampered protégé.
This was " real geopolitik " in action.
The Cold War, the rise of Maoist China, the Korean War all made Japan indispensable to America.
Not only did the US provide military protection to Japan - allowing Japan to concentrate on industrial goals - but it also provided vast economic assistance, including massive technology transfers and, most important, opening up its market to Japanese exports while allowing Japan to protect its home market.
Japan developed an "outward looking protectionist" strategy and structure.
Unlike India or Brazil, which opted for inward-looking protectionism, select sectors of Japanese industry actively participated in international markets.
Far ranging efforts were deployed to obtain technology transfers.
The domestic market however was protected by a combination of industrial policy, cartels and a "Buy Japanese" mentality.
As a "catch-up" strategy, it worked fantastically well.
By the mid-1980s Japan had more than caught up.
The September 1985 New York Plaza Hotel meeting of US, European, and Japan's finance ministers - a meeting where the yen was considerably re-valued - symbolized a new era, and should have set in motion new policies in Japan.
The problem was that alongside its outward-looking protectionist policy, Japan's establishment - the national bureaucracy, the ruling Liberal Democratic Party, business, universities, and the media - had fostered a corresponding ideological orthodoxy.
Instead of evolving as an open, liberal society, Japan had developed a dirigiste closed mercantilist nationalism.
This was reflected in an aggressive industrial machismo - exports and outward investments reflect virility, in contrast to inward investments and imports - and in various forms of chauvinism, illustrated by the book, The Japan That Can Say `No', (1988) co-authored by the current Governor of Tokyo, Shintaro Ishihara, and Sony founder Akio Morita.
By the late 1980s the world was changing fast, but Japan refused to change.
The country became characterized by immobility and atavism.
Japanese institutions were archaic and pursued mistaken economic strategies and structures.
But the illiberal nationalist ideological ethos that defined Japanese society brooked no genuine debate, let alone heterodox positions.
Indeed, among Japan's most moribund institutions are its universities and media.
Not only was there no new leadership, but the seniority system and the omnipresence of "senior advisors" continued to prevail throughout Japanese institutions.
This ossification was driven by the rigid, conservative and gerontocratic nature of governance.
So even as the Japanese tidal wave appeared poised to overwhelm the world economy in the late 1980s - remember "Japan Inc"? - the country was nearing collapse at home.
Collapse it did, in 1991.
But instead of reacting and adjusting, Japan went into denial and wasted a decade (and beyond) spinning its wheels in the sand.
Policymakers, business leaders, academics and journalists refused to recognize the depth of their country's problems.
A day of reckoning came with the Kobe earthquake on 17 January 1995.
As thousands died, the government froze, proving itself incapable of mounting an efficient rescue operation and displaying its ludicrous machismo by refusing the assistance of the US 7 th Fleet.
It was then that the Japanese people realized that "the emperor" (specifically the government) had no clothes.
Today's deflation arises from the state of anomie in which Japan was plunged in the mid-1990s and from which it has not recovered.
The Japanese have no confidence in the future because the establishment has lost all credibility and legitimacy.
Yet that establishment remains doggedly entrenched in power, its mooted reforms little more than cosmetic: "re-arranging of deck chairs on the Titanic-Maru."
Strange to say, but the situation may get dramatically worse, not only economically, but also socially.
The long-suffering Japanese tend to be more patient and disciplined than, say, Argentineans, but when social eruptions have occurred in Japanese history, they have been very violent.
There is also a strong extremist political minority and a not-too-difficult to tap latent national chauvinism.
But a different scenario is possible: a reinvigorated, open post-industrial, globally-oriented Japanese society can be established on liberal political foundations.
Realizing such a scenario will require thorough institutional renewal, rejuvenation of leadership at all levels, a radical change in national "mindset," and the opening up of Japan's economy and society to foreign influences and participation.
The potential is there; there is a young generation of Japanese who harbour such a vision.
They need every encouragement, for today's trends are frightening for Japan, for Asia, and for the world.
The Silence of China\u0027s Intellectuals
Public opinion, as the crisis over the US spy plane demonstrated, now matters in China.
But where do China’s intellectuals stand and what role do they play?
In the 1980s traditional Chinese respect for education was revived after the scourge of the Mao years.
So was the Confucian notion that an intellectual’s highest calling is to tell a ruler what is best for the realm, whether by persuasion or – if you dare – through criticism and taking the consequences.
In 1979, Liu Binyan's “People or Monsters?” spelled out how communism breeds corruption; in 1988 Su Xiaokang's film “River Elegy” sketched ways in which aspects of the narrow-minded despotism in China's imperial tradition remained alive and well in the Party.
Both works – and others of the 1980s – mesmerized the public.
The years since the Tienanmen Massacre seem politically and intellectually anemic by comparison. After 1989 China seemed to lose its moral compass.
Yet, at a time when an intellectual's conscience might seem most useful – they were inaudible.
Why?
Repression is one reason.
Ironclad taboos prevented public discussion of such subjects as the Cultural Revolution, the Tienanmen Massacre, Falun Gong or other topics perceived as vita the regime’s legitimacy and hold on power.
Moreover, most of China's leading public intellectuals of the 1980s fled the country after 1989.
A new generation of intellectual leaders needed time to emerge.
The collapse of socialist morality and the regime's failure to provide a credible replacement created a "values vacuum" that people sought to fill in various ways.
Falun Gong boomed, as did Christianity and other religions. Some people embraced nationalism and chauvinism.
Contemporary intellectuals embraced all these trends.
In addition, literary intellectuals – who in the 1980s led the way in criticism – fell prey to Western postmodernist jargon, even though such things have little resonance in China.
State-sponsored repression, however, only partially explains the silence since 1989.
Urban China's rapid economic growth also shaped intellectual life.
Many scholars and writers “jumped into the ocean of commerce”(xiahai)to became more comfortable than twenty years ago, when intellectuals lived on tiny salaries and were still emerging from Mao's censure that they were society’s "stinking dregs.”
Today, intellectuals with marketable skills use them to make more in business than they ever could in academe.
The social and economic status of better-off intellectuals is second only to Communist officials and the new super-rich.
Moreover, the freedoms that intellectuals treasure – speech, publication, and travel – expanded greatly.
New subcultures, and even publications flourish so long as they avoid politically sensitive subjects.
In short, personal comfort resulted in political timidity and complacency.
Yet, economic boom generated an ugly gap between rich and poor, and the new political-moral questions that have arisen about this gap show that the Chinese intellectuals' tradition of "worrying about the nation" remains alive.
How, they ask, can we accept the ways in which newly rich secured their wealth by exploiting power to steal state property?
Regardless of how wealth was acquired, they wonder if society can accept the grotesque disparities that resulted?
These questions create an awkward dilemma for intellectuals who favor opening to the West.
True, the West offers models of democracy, rule of law, a free press, and other means through which injustices can be resolved; but the West also provided the capitalist model that created these injustices.
So, do you call for more Westernization or less?
Will membership in the World Trade Organization do more harm or good?
Is more Western pop culture advisable?
A diverse, confusing spectrum of muted views has resulted.
A "new left" embraces the poor, but wants to remain distinct from the authoritarian "old left."
Liberals have grown their own left and right wings – mainly over the issue of social justice versus political freedom.
These complexities make it more difficult than before the 1980s for Chinese intellectuals to speak in unison, let alone find their voice.
The main issues back then – "more reform" and "more opening to the West" – were not freighted with ambiguity and controversy.
So, the "silence" of Chinese intellectuals has several causes, and is in part illusory.
Yet, if we ask the Confucian question, "Have intellectuals offered anything that a wise ruler might use?" the answer is yes. In terms of research and careful reasoning, books like He Qinglian's “Modernization's Pitfalls” on the weaknesses of the urban economy and Cao Jinqing's “China by the Yellow River” about poverty and oppression in the countryside – to name two such works – are more substantial than many of the generalities offered in the 1980s.
Unfortunately, China's leaders, deeply unsure of themselves, are in no mood to accept advice.
Late last year a publishing ban was imposed on ten leading intellectuals. Several were fired from state-sponsored jobs.
Happily, because the state no longer has monolithic control, some banned writers found other work, even publishing outlets, on their own.
Defiance, indeed, is now the exception rather than the rule.
But the government still is unwilling to listen.
The Silver Lining in High Commodity Prices
Cambridge – Today’s soaring commodity prices scream a fundamental truth of modern life that many politicians, particularly in the West, don’t want us to hear: the world’s natural resources are finite, and, as billions of people in Asia and elsewhere escape poverty, Western consumers will have to share them.
Here is another truth: the price mechanism is a much better way to allocate natural resources than fighting wars, as the Western powers did in the last century.
The United States’ ill-considered bio-fuels subsidy program demonstrates how not to react.
Rather than acknowledge that high fuel prices are the best way to inspire energy conservation and innovation, the Bush administration has instituted huge subsidies to American farmers to grow grains for bio-fuel production.
Never mind that this is hugely inefficient in terms of water and land usage.
Moreover, even under the most optimistic scenario, the US and the world will still be relying mainly on conventional fossil fuels until the hydrocarbon era comes to an end (which few of us will live to see).
Last but not least, diverting vast tracts of agricultural land into fuel production has contributed to a doubling of prices for wheat and other grains.
With food riots in dozens of countries, isn’t it time to admit that the whole idea was a giant, if well-intentioned, mistake?
Another wrong turn is the proposal recently embraced by two American presidential candidates to temporarily scrap taxes on gasoline.
As laudable as it may be to help low-income drivers deal with soaring fuel costs, this is not the way to do it.
The gas tax should be raised , not lowered.
The sad fact is that by keeping oil prices high, OPEC is doing far more for environmental conservation than Western politicians who seek to prolong the era of ecologically unsustainable Western consumerism.
Of course, it is not just oil prices that are high, but all commodity prices, from metals to food to lumber.
Prices for many commodities have doubled over the past couple of years. Oil prices have risen almost 400% in the last five years.
The proximate cause is a global economic boom that has been stronger, longer, and more broad-based than any in modern history.
Asia has led the way, but the past five years have been the best Latin American and Africa have enjoyed in decades.
Broad-based commodity shortages often begin to emerge at the end of long global expansions, and in this respect, the present boom is no different.
Some politicians also complain about speculators who, more and more, are trading commodities on complex and growing markets that allow them to bet on whether, say, future demand from emerging markets is likely to outstrip growth in future supply.
But why is this a bad thing?
If “speculators” are bidding up today’s commodity prices because they realize that future generations are going to want commodities, too, isn’t that a healthy development?
High prices for commodities today mean more supply for future generations, while at the same time creating an incentive to develop new ways to conserve on consumption.
Again, high prices are helping in ways that Western politicians seem afraid to contemplate.
Admittedly, the global commodity price boom has had profound, albeit enormously complex and uncertain, effects on poverty.
While surging commodity prices are helping poor farmers and poor resource-rich countries, they are a catastrophe for the urban poor, some of whom spend 50% or more of their income on food.
One element of the solution is to compensate the very poor for the higher cost of survival. Over the longer term, more money for fertilizer, and other aid to promote self-sufficiency, is also essential.
The World Bank, the United Nations, and even the Bush administration have moved to help, albeit in small measure relative to the scale of the problem.
Of course, it should be noted that if economic reform in resource-rich Africa had been proceeding at the same pace as in Asia, the era of soaring commodity prices might have been postponed for another century.
For now, though, instead of whining about high commodity prices, governments should be shielding only their very poorest citizens, and letting the price spikes serve as a wake-up call for the rest of us.
The end to Western consumerism is not yet at hand, but high commodity prices are a clear warning that big adjustments will be needed as Asia and other emerging nations begin to consume a larger share of the global pie.
True, when today’s global economic boom ends, as it inevitably will, commodity prices will plummet, easily 25%, quite possibly 50% or more.
Western politicians will cheer, and many pundits will express relief that less money will be flowing to undemocratic countries in the developing world.
But today’s era of high commodity prices is not just a bad dream that should be forgotten when it ends.
High prices send a real message about scarcity in a globalizing world.
Those who ignore it, especially by blocking market forces, are making a tragic mistake.
The Sinai Powder Keg
TEL AVIV– The crisis in the Sinai Peninsula seems to have been dwarfed by Sunday’s drama in Cairo.
But Egyptian President Mohamed Morsi’s civilian coup, in which he dismissed General Mohamed Hussein Tantawi, the leader of the army’s supreme command, has not diminished the importance of the trouble there.
Earlier this month, jihadi terrorists ambushed an Egyptian military base in Sinai, killing 16 Egyptian soldiers.
They then hijacked two armored personnel carriers and sped toward the frontier with Israel.
One vehicle failed to break through the border crossing; the other penetrated Israeli territory, before being stopped by the Israel Defense Forces (IDF).
In response, Egypt’s military and security forces launched an offensive against Bedouin militants in Sinai, while Morsi forced the General Intelligence Service’s director to retire and dismissed the governor of Northern Sinai.
These episodes highlight the complexity of the Middle East’s changing geopolitical landscape, the fragility of Egypt’s post-Mubarak political order, and the explosive potential of Sinai, which, though sparsely populated, includes Egypt’s borders with Israel and the Palestinian enclave of Gaza.
Indeed, since Hosni Mubarak’s ouster last year, security in Sinai has deteriorated, and the region has become fertile ground for Islamic extremism.
The 1979 Egypt-Israel Peace Treaty mandated that Sinai be largely demilitarized in order to serve as a buffer zone between the two former enemies.
Tourism and natural-gas pipelines linking the two countries provided economic resources for the local Bedouin.
But, as Mubarak’s regime declined, so did the government’s control over the Bedouin.
Palestinian militants from Gaza – an active arena of Israeli-Palestinian confrontation since Hamas gained control in 2007 – and jihadi terrorists affiliated with Al Qaeda and the larger “global jihad” network penetrated Sinai, exploiting the government’s neglect of the region and inflaming the local population’s feelings of disenfranchisement.
Israelis complained about Mubarak’s “cold peace,” but they appreciated that he adhered to the treaty’s fundamental provisions.
Now the behavior of his successors from the military and the Muslim Brotherhood has revived security challenges and raised difficult questions about the region’s future.
For example, in August 2011, a jihadi group from Gaza seized control of an Egyptian outpost on Israel’s border and killed eight Israeli civilians.
Their objective was to damage further the Israeli-Egyptian relationship, which is already more fragile than ever, and they succeeded: the IDF accidentally killed several Egyptian soldiers during the incident.
The Egyptian security forces’ subsequent failure to prevent demonstrators from storming Israel’s embassy in Cairo brought matters to the brink of calamity.
The uncertainty and disorder that have plagued Egypt for the last 18 months are fueling increasing lawlessness in Sinai.
Last month, a pipeline carrying Egyptian natural gas to Israel and Jordan was bombed – the 15th such attack since Mubarak’s regime was toppled – and remains out of commission.
There are four principal actors in this arena: Israel, Egypt, Hamas, and the Sinai jihadis.
Israel wants, first and foremost, peace and stability.
To this end, Israeli leaders expect Egypt’s government to reestablish its authority in Sinai, and, despite the peace treaty’s provisions, have agreed to Egyptian requests to increase its military presence in the region.
Moreover, Israel has practically abandoned any hope of receiving agreed gas supplies from Egypt, and has not pressed its demand that Egypt block the passage of sophisticated weapons to Gaza.
Israel is determined not to act against terrorist groups and infrastructure on Egypt’s territory.
And, in view of Hamas’s close links with Egypt’s Muslim Brotherhood, whose political party backed Morsi’s successful presidential run, Israel has restrained its response to terrorist and rocket attacks from Gaza.
But Egypt’s divided government has not established a correspondingly coherent policy.
Relations with Israel are managed by the defense minister, now Lieutenant General Abdul Fattah al-Sisi, and the military security establishment, whose leaders are determined to maintain a peaceful relationship with Israel and to secure Egyptian sovereignty in the Sinai.
For them, the lawless Bedouin, the Sinai jihadis, and Hamas and other groups in Gaza threaten Egypt’s national security.
But their will and ability to translate this view into policy are limited.
Meanwhile, Morsi and the Muslim Brotherhood are playing a double game.
While Morsi denounced the recent violence (particularly the deliberate killing of Egyptian policemen) and issued an implicit threat against Hamas, the Brotherhood published a statement accusing Israel’s Mossad of perpetrating the attack – a claim that Hamas’s Prime Minister of Gaza, Ismael Haniyeh, has repeated.
In fact, Hamas, too, is playing a double game.
Having lost Syrian backing, it is hoping that the Egyptian Brothers will provide its kindred movement with political and logistical support.
Yet it allows radical Palestinians and jihadi groups in Gaza to conduct operations in Sinai.
The fourth actor, the Sinai jihadis, comprises primarily Bedouins, whose distinct origins and long-time marginalization have led some to identify with radical Islamist groups (often while working in the Arabian Peninsula).
While this group’s primary goal is to undermine Israel-Egypt relations, they do not shy away from operating directly against the Egyptian state.
Given their strategic location, Sinai jihadis could easily be used by larger terrorist networks to target strategically vital locations, such as the Suez Canal.
Egypt’s government was humiliated and incensed by the recent terrorist provocation.
But it is too early to tell whether its security crackdown in Sinai is a one-time operation, intended to placate angry citizens, or the beginning of a serious effort to address the interconnected problems in Sinai and Gaza.
It is also too early to tell whether Morsi’s shakeup in Cairo was related to, or expedited by, the Sinai events.
But Sinai’s explosive potential clearly has been increased by the Muslim Brotherhood’s takeover.
Israel’s longstanding channel of communication with Egypt through the military has disappeared, and may or may not be replaced by a similar channel.
Hamas and the Bedouins in Sinai have most likely been emboldened by the latest developments in Cairo.
But, as Egypt’s domestic politics take their course, Israel, which has had to tread softly in its relationship with Egypt and in Sinai since January 2011, will have to behave with even greater sensitivity in the days ahead.
The Single Mother Makeover
NEW YORK – In the 1992 United States presidential election, George H. W. Bush’s campaign made a political splash by going after the television show Murphy Brown – one of the first times, but far from the last, that a fictitious character was introduced to score political points in America.
Murphy Brown, played by actress Candice Bergen, was a TV anomaly at that time: a sympathetically portrayed single mother.
So Bush’s vice president, Dan Quayle, attacked the show for normalizing rather than stigmatizing single motherhood.
Much hand-wringing followed, with single mothers (never, at that time, single fathers) cast as harbingers of doom for core American values.
The implication was that selfish me-first feminists (if they were affluent white women) or feckless social parasites (if they were low-income women of color) were putting their own interests above their children’s.
Daniel Patrick Moynihan’s widely reprinted study The Negro Family: The Case for National Action painted a picture of single motherhood as the primary instigator of inner-city and especially African-American criminality, illiteracy, and drug use.
How times have changed.
Just as single mothers were irrationally castigated then, so today an equally irrational hagiography has risen around them. (Europe has more single mothers than the US, but, characteristically, has less need to moralize about them one way or the other).
In US pop culture, the single mother has evolved from selfish yuppie or drug-dazed slut into a woman who is more fun, slightly more heroic, and certainly less frumpy than her married counterpart.
Indeed, single mothers are the new maternal ideal – women whose maternal drive is so selfless and intense that they choose to raise children even under the burden of their solitary status.
Angelina Jolie’s photo spread with her toddler son, adopted from Cambodia, in Vanity Fair heralded this shift: the sexy young woman and her son in a luxurious hotel bedroom made single motherhood look fun and glamorous.
Suddenly Hollywood stars and starlets who were otherwise unattached began to sprout little offspring: Calista Flockhart, who played TV’s ultimate desperate childless single woman, adopted a son – and, like a fairy tale, later met and married Harrison Ford.
Kourtney Kardashian of the reality show The Kardashians had a baby as an “unwed mother” – a stigmatizing term that has gone out of fashion – and is depicted as bravely holding down the fort and staying up all night with feedings as the child’s irresponsible father parties.
The tale of Sarah Palin’s daughter, Bristol, has also been spun as a tale of an admirable single mother and a loser father. When they split up, the story line cast the heroic young mother against what was often depicted as the beer-drinking, immature dad.
Even Jennifer Aniston, whom Brad Pitt left because she did not want kids, now sighs in interviews, as she nears 42, that she has stopped waiting for Prince Charming, and that she, too, could be ready to adopt and go it alone.
Likewise, advertisements for convenience food and insurance – which used to feature only intact nuclear families – have begun to showcase single mothers lovingly spooning out meatballs, or protectively buying a life-insurance policy.
The glorification of single mothers represents a collective exasperation on the part of women in America – and women who make decisions in the mainstream media.
The 1990’s produced a demeaning narrative of women waiting in frustration as their “biological clocks” ticked, cursing themselves for putting career first at the expense of finding Mr. Right and having children.
In a post-sexual revolution world of marriage-shy men, women would supposedly do anything to secure the blessings of a wedded father for their children.
The message from the media was one of constant nagging and blame, such as the famous Newsweek cover that asserted (wrongly) that an older single woman had more likelihood of being in a terrorist attack than of finding a husband.
The whole narrative, as the writer Susan Faludi correctly perceived, was not about marriage at all; it reflected a backlash against feminism.
At some point, women became powerful enough that they collectively rejected the high social value this narrative placed on a male offer of a ring and flipped the stereotype on its head.
It started to occur to women that they could be employed and have a family – and that it could even be pretty nice.
Glamorizing single motherhood is not realistic, but it allows female pop culture to express a revenge fantasy at all the potential husbands and fathers who walked away, or who were not the dream husband and father after all, or who wanted the sex but not the kids and the tuition bills.
When Bill O’Reilly of Fox News recently accused Aniston of making a movie about single motherhood – The Switch – that seems to say “to a twelve or thirteen year old girl, ‘You don’t need a man,’” he is right.
These images do appeal to overworked, exasperated, baby-hungry women who may have spent years waiting for “the offer,” telling them that, in fact, you don’t need a man.
This trend hardly signifies the end of civilization as we know it; all things being equal, most women would still prefer the simple fantasy of a supportive partner in childrearing.
But the new image of single mothers – and of single motherhood – does show that it is getting harder – if not almost impossible – to coerce women by trying to fix upon them the scarlet letter.
The Sino-Indian Water Divide
NEW DELHI – As China and India gain economic heft, they are drawing ever more international attention at the time of an ongoing global shift of power to Asia.
Their underlying strategic dissonance and rivalry, however, usually attracts less notice.
As its power grows, China seems determined to choke off Asian competitors, a tendency reflected in its hardening stance toward India.
This includes aggressive patrolling of the disputed Himalayan frontier by the People’s Liberation Army, many violations of the line of control separating the two giants, new assertiveness concerning India’s northeastern Arunachal Pradesh state – which China claims as its own – and vituperative attacks on India in the state-controlled Chinese media.
The issues that divide India and China, however, extend beyond territorial disputes.
Water is becoming a key security issue in Sino-Indian relations and a potential source of enduring discord.
China and India already are water-stressed economies.
The spread of irrigated farming and water-intensive industries, together with the demands of a rising middle class, have led to a severe struggle for more water.
Indeed, both countries have entered an era of perennial water scarcity, which before long is likely to equal, in terms of per capita availability, the water shortages found in the Middle East.
Rapid economic growth could slow in the face of acute scarcity if demand for water continues to grow at its current frantic pace, turning China and India – both food-exporting countries – into major importers, a development that would accentuate the global food crisis.
Even though India has more arable land than China – 160.5 million hectares compared to 137.1 million hectares – Tibet is the source of most major Indian rivers.
The Tibetan plateau’s vast glaciers, huge underground springs and high altitude make Tibet the world’s largest freshwater repository after the polar icecaps.
Indeed, all of Asia’s major rivers, except the Ganges, originate in the Tibetan plateau.
Even the Ganges’ two main tributaries flow in from Tibet.
But China is now pursuing major inter-basin and inter-river water transfer projects on the Tibetan plateau, which threatens to diminish international-river flows into India and other co-riparian states.
Before such hydro-engineering projects sow the seeds of water conflict, China ought to build institutionalized, cooperative river-basin arrangements with downstream states.
Upstream dams, barrages, canals, and irrigation systems can help fashion water into a political weapon that can be wielded overtly in a war, or subtly in peacetime to signal dissatisfaction with a co-riparian state.
Even denial of hydrological data in a critically important season can amount to the use of water as a political tool.
Flash floods in recent years in two Indian frontier states – Himachal Pradesh and Arunachal Pradesh – served as an ugly reminder of China’s lack of information-sharing on its upstream projects.
Such leverage could in turn prompt a downstream state to build up its military capacity to help counterbalance this disadvantage.
In fact, China has been damming most international rivers flowing out of Tibet, whose fragile ecosystem is already threatened by global warming.
The only rivers on which no hydro-engineering works have been undertaken so far are the Indus, whose basin falls mostly in India and Pakistan, and the Salween, which flows into Burma and Thailand.
Local authorities in Yunnan province, however, are considering damming the Salween in the quake-prone upstream region.
India’s government has been pressing China for transparency, greater hydrological data-sharing, and a commitment not to redirect the natural flow of any river or diminish cross-border water flows.
But even a joint expert-level mechanism – set up in 2007 merely for “interaction and cooperation” on hydrological data – has proven of little value.
The most dangerous idea China is contemplating is the northward rerouting of the Brahmaputra river, known as Yarlung Tsangpo to Tibetans, but which China has renamed Yaluzangbu. It is the world’s highest river, and also one of the fastest-flowing.
Diversion of the Brahmaputra’s water to the parched Yellow river is an idea that China does not discuss in public, because the project implies environmental devastation of India’s northeastern plains and eastern Bangladesh, and would thus be akin to a declaration of water war on India and Bangladesh.
Nevertheless, an officially blessed book published in 2005, Tibet’s Waters Will Save China , openly championed the northward rerouting of the Brahmaputra.
Moreover, the Chinese desire to divert the Brahmaputra by employing “peaceful nuclear explosions” to build an underground tunnel through the Himalayas found expression in the international negotiations in Geneva in the mid-1990s on the Comprehensive Test Ban Treaty (CTBT).
China sought unsuccessfully to exempt PNEs from the CTBT, a pact still not in force.
The issue now is not whether China will reroute the Brahmaputra, but when.
Once authorities complete their feasibility studies and the diversion scheme begins, the project will be presented as a fait accompli .
China already has identified the bend where the Brahmaputra forms the world’s longest and deepest canyon – just before entering India – as the diversion point.
China’s ambitions to channel Tibetan waters northward have been whetted by two factors: the completion of the Three Gorges Dam, which, despite the project’s glaring environmental pitfalls, China trumpets as the greatest engineering feat since the construction of the Great Wall; and the power of President Hu Jintao, whose background fuses two key elements – water and Tibet.
Hu, a hydrologist by training, owes his swift rise in the Communist Party hierarchy to the brutal martial-law crackdown he carried out in Tibet in 1989.
China’s hydro-engineering projects and plans are a reminder that Tibet is at the heart of the India-China divide.
Tibet ceased to be a political buffer when China annexed it nearly six decades ago.
But Tibet can still become a political bridge between China and India.
For that to happen, water has to become a source of cooperation, not conflict.
Nationalism, Madness, and Terrorism
BOSTON – If we want to understand what drove the Boston Marathon bombing suspects, Tamerlan and Dzhokhar Tsarnaev, to terrorism, the answer almost certainly does not lie in Dagestan, where the brothers lived before moving to the United States, or in the two wars fought in Chechnya in the last 20 years.
Instead, a key to the Tsarnaevs’ behavior may perhaps be found in developments in England 500 years ago.
Several new phenomena appeared in sixteenth-century England that revolutionized human experience.
English society was redefined as a “nation” – that is, a sovereign community of equal members.
With that, the era of nationalism began, and social mobility became legitimate.
At the same time, a special variety of mental illness was first observed, which we would later call schizophrenia and depressive disorders – different from a multitude of mental illnesses already known.
It called into being a new term, “madness,” the first medical specialization (eventually named “psychiatry”), and special legislation regarding the “mad.”
Madness expressed itself in degrees of mental impairment, the common symptoms of which were chronic discomfort in one’s environment (social maladjustment), uncertainty about oneself, oscillation between self-loathing and megalomania, and sometimes a complete loss of identity.
Suicide became common, and the nature of violent crime changed, with a new type – irrational and unconnected to self-interest – becoming increasingly prevalent.
These phenomena were connected.
It was nationalism that legitimated mobility; the two of them together that produced madness; and the new mental disease that expressed itself in suicide and irrational violence.
Nationalism implied a specific image of society and reality in general – a consciousness that was to become the cultural framework of modernity.
In its original, English, form it was essentially democratic.
As it spread, it carried the seeds of democracy everywhere.
By considering a living community sovereign, nationalism implicitly but drastically reduced the relevance of God; even when combined with religion and presented in a religious idiom, it was essentially secular.
National consciousness, dramatically different from the fundamentally religious, hierarchical consciousness that it replaced, shapes how we live today.
Nationalist principles emphasize the self-governing individual, including the right to choose one’s social position and identity.
But this liberty, empowering and encouraging the individual to choose what to be, complicates identity formation.
A member of a nation cannot learn who or what s/he is from the environment, as would an individual in a religious and rigidly stratified social order, in which everyone’s position and behavior is defined by birth and divine providence.
Modern culture cannot provide us with the consistent guidance that other cultures give to their members.
By providing inconsistent guidance (for we are inevitably guided by our cultural environment), nationalism actively disorients us – a cultural insufficiency called anomie.
Because a clear sense of identity is a necessary condition for adequate mental functioning, malformation of identity leads to discomfort with one’s self and social maladjustment, reaching clinical proportions among the more fragile of us.
That is why the addition of madness to the roster of familiar mental illnesses coincided with the emergence of nationalism.
The more choices for the definition of one’s identity that a society offers – and the more insistent it is on equality – the more problematic the formation of identity in it becomes.
That is why the most open and freest society today, the Unites States, leads the world in rates of severe mental disease – supplanting England, yesterday’s freest and most open society.
Indeed, foreigners at one time considered madness “the English malady.”
Most examples of violent crime by mentally ill people were committed first in England, and then in the US, often seeming politically motivated, even when mediated by religion.
The first such case was likely that of Peter Berchet, a young Protestant, who felt that he had to kill the royal councilor Christopher Hatton, also a Protestant, whom Berchet believed to be a Catholic sympathizer.
Attempting to answer this calling, Berchet murdered another Protestant whom he mistook for Hatton.
To all appearances the act of a Puritan fanatic, the authorities suspected Berchet of being a part of an organized Puritan conspiracy.
He was to be questioned to divulge the names of his co-conspirators and then executed.
But it was quickly revealed, instead, that he was suffering from a “nawghtye mallenchollye.”
It was as natural for an Elizabethan Protestant to see the cause of his mental discomfort in a government overrun by Catholic sympathizers as it is for someone with a Muslim connection in the US today to see this cause in America as the embodiment of Western offenses against the faith.
Blaming one’s existential discomfort on external factors is a kind of self-therapy.
A story is constructed, which rationalizes one’s discomfort as reflecting an awareness of some general evil.
One may then join an organization committed to fighting that evil or be impelled to act on one’s own – to the point of committing murder.
The thinking behind such acts bears the most distinctive mark of delusion: the loss of the understanding of the symbolic nature of human reality, confusing symbols and their referents, and seeing people in terms of what they represent.
It is precisely this modern irrationality – a product of modernity itself – that the terrorist attack launched by the Tsarnaev brothers reflected.
The Sixty-Year Storm
Today’s financial crisis, triggered by the collapse of the housing bubble in the United States, also marks the end of an era of credit expansion based on the dollar as the international reserve currency.
It is a much bigger storm than any that has occurred since the end of World War II.
To understand what is happening, we need a new paradigm.
It is available in the theory of reflexivity, which I first proposed 20 years ago in my book The Alchemy of Finance .
The theory holds that financial markets do not tend towards equilibrium.
Biased views and misconceptions among market participants introduce uncertainty and unpredictability not only into market prices, but also into the fundamentals that those prices are supposed to reflect.
Left to their own devices, markets are prone to extremes of euphoria and despair.
Indeed, because of their potential instability, financial markets are not left to their own devices; they are in the charge of authorities whose job it is to keep the excesses within bounds.
But the authorities are also human and subject to biased views and misconceptions.
And the interaction between financial markets and financial authorities is also reflexive.
Boom-bust processes usually revolve around credit, and always involve a bias or misconception – usually a failure to recognize a reflexive, circular connection between the willingness to lend and the value of the collateral.
The recent US housing boom is a case in point.
But the 60-year super-boom is a more complicated case.
Every time the credit expansion ran into trouble, the financial authorities intervened, injecting liquidity and finding other ways to stimulate the economy.
That created a system of asymmetric incentives – also know as moral hazard – which encouraged ever greater credit expansion.
The system was so successful that people came to believe in what former president Ronald Reagan called “the magic of the marketplace” and I call market fundamentalism.
Fundamentalists believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest.
This is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves.
Nevertheless, market fundamentalism emerged as the dominant ideology in the 1980s, when financial markets started to become globalized and the US began running a current account deficit.
Since 1980, regulations have been progressively relaxed until they practically disappeared.
Globalization allowed the US to suck up the savings of the rest of the world and consume more than it produced, with its current account deficit reaching 6.2% of GNP in 2006.
The financial markets encouraged consumers to borrow by introducing ever more sophisticated instruments and more generous terms.
The authorities aided and abetted the process by intervening whenever the global financial system was at risk.
The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves.
Similarly, the rating agencies relied on information provided by the originators of synthetic products.
It was a shocking abdication of responsibility.
Everything that could go wrong did.
What started with subprime mortgages spread to all collateralized debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market.
Investment banks’ commitments to leveraged buyouts became liabilities.
Market-neutral hedge funds turned out not to be market-neutral and had to be unwound.
The asset-backed commercial paper market came to a standstill and the special investment vehicles set up by banks to get mortgages off their balance sheets could no longer get outside financing.
The final blow came when interbank lending, which is at the heart of the financial system, was disrupted because banks had to husband their resources and could not trust their counterparties.
Central banks had to inject an unprecedented amount of money and extend credit on an unprecedented range of securities to a broader range of institutions than ever before.
That made the crisis more severe than any since World War II.
Credit expansion must now be followed by a period of contraction, because some of the new credit instruments and practices are unsound and unsustainable.
Moreover, the ability of the financial authorities to stimulate the economy is constrained by the unwillingness of the rest of the world to accumulate additional dollar reserves.
Until recently, investors hoped that the US Federal Reserve would do whatever it takes to avoid a recession, because that is what it did on previous occasions.
Now, they must recognize that the Fed may no longer be in a position to do so.
With oil, food and other commodities firm, and the renminbi appreciating somewhat faster, the Fed also has to worry about inflation.
If interest rates were lowered beyond a certain point, the dollar would come under renewed pressure and long-term bonds would actually go up in yield.
It is impossible to determine where that point is, but when it is reached, the Fed’s ability to stimulate the economy comes to an end.
Although a recession in the developed world is now more or less inevitable, China, India, and some of the oil-producing countries are in a very strong countertrend.
As a result, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other developing countries.
The danger is that the resulting political tensions, including US protectionism, may disrupt the global economy and plunge the world into recession – or worse.
The Skills Deficit
BRUSSELS – Two years after the world economy suffered a nervous breakdown in the wake of the collapse of Lehman Brothers, global financial markets remain unsettled, and the recovery that started so vigorously in 2009 seems to be stalling.
The slowdown has predictably led to calls for further fiscal and monetary stimulus.
The argument seems simple: only a massive dose of government spending and massive central-bank support for the financial system prevented a slide into a second Great Depression, so more of the same medicine is now needed to prevent a slide back into recession.
This argument seems particularly strong in the United States, which during the long boom years grew accustomed to unemployment rates of around 5% and steady growth in consumption.
But, in assessing the outlook for the US economy, one should not compare low quarterly growth rates (the data for April-June are particularly disappointing) and the current unemployment rate of almost 10% to the “goldilocks” bubble period.
A longer-term view is required, because the US is facing a structural-adjustment challenge that will be accompanied by high unemployment.
Like Southern Europe, the US economy must move away from the consumption/housing-led growth model of the last decade.
President Barack Obama has encapsulated this challenge by setting the goal of doubling US exports over the next decade.
But this is easier said than done.
The structural shift towards exports will be difficult and time-consuming mainly because producing the high-tech goods that the US should be exporting requires a skilled workforce, which has largely been lost and cannot be re-created overnight.
During the ten years preceding the peak of the bubble in 2007, about four million jobs were lost in the US manufacturing sector, whose share in total employment fell from more than 17% to 12%.
Unemployment remained low because the booming domestic economy created enough jobs in services and construction.
Reversing this shift quickly seems impossible.
Most construction workers are rather low-skilled and thus cannot be re-deployed to modern high-tech manufacturing.
The same applies to real-estate agents, social workers, and managers of credit-card accounts.
During the bubble years, the situation was exactly the opposite: most of the workers released by a rapidly shrinking manufacturing sector could be employed easily in construction and social services, which require only low skills (likewise, real-estate services demand only rather general skills).
The key point is not that manufacturing jobs are somehow better, but rather that we must consider the asymmetry in the structural-adjustment process.
It is relatively easy to manage a structural shift out of manufacturing during a real-estate boom, but it is much more difficult to re-establish a competitive manufacturing sector once it has been lost.
Post-bubble economies thus face a fundamental mismatch between the skills available in the existing work force and the requirements of a modern export-oriented manufacturing sector.
Unfortunately, there is very little that economic policy can do to create a strong exporting sector in the short run, except alleviate the social pain.
Labor-market flexibility is always touted as a panacea, but even the highest degree of it cannot transform unemployed realtors or construction workers into skilled manufacturing specialists.
Experience has also shown that retraining programs have only limited success.
Ironically, Germany might provide the most useful template for the problems facing US policymakers.
Germany experienced a consumption and construction boom after unification, with full employment and a current-account deficit.
After the boom peaked in 1995, one million construction workers were laid off and could not find jobs elsewhere.
The German economy faced a decade of high unemployment and slow growth.
Exports initially did not constitute a path to recovery because the deutsche mark was overvalued, and some manufacturing capacity had been lost during the unification boom. “International competitiveness” became the mantra of German economic policymaking.
But it still took more than ten years for Germany to become the export powerhouse of today.
It is unlikely that the adjustment process will be much faster in the US, where the manufacturing base has shrunk much more sharply.
Moreover, with the introduction of the euro, Germany had the advantage of pegging its currency to Southern Europe, which was experiencing a housing boom even more extreme than in the US, thus providing German exporters with growing markets and little competition.
By contrast, the US dollar is tied to the renminbi, whose issuer – China – has the world’s largest and fastest-growing export sector.
How long will the US adjustment take?
Since the peak of the bubble, the US economy has not even been moving in the right direction.
The contraction in manufacturing output and employment has actually accelerated – and faster than output and employment have fallen in the sectors on which the economy remains dependent for much of its growth: domestic services, such as health care, and finance, insurance, and real-estate services (the sector responsible for the crisis).
So long as this trend continues, only high and continuing doses of fiscal and monetary expansion will be able to sustain domestic demand.
And, given that many goods are no longer produced in the US, stimulus measures would suck in more imports, further undermining the trade balance.
A self-sustaining recovery is, of course, possible, but it presupposes a massive structural adjustment aimed at restoring US competitiveness in global markets.
The Sleeping Volcano of Global Finance
The rejection of the European Union’s Constitutional Treaty by French and Dutch voters was, according to all evidence, more a rejection of unregulated globalization than it was a rejection of Europe.
The general instability of social relations – most importantly, but not only, of employment – is slowly becoming intolerable for a growing part of the population in many developed countries, not just in Europe.
And there cannot be a stable economic order – at least not in democratic countries – if electorates reject its underpinnings.
Capitalism could be reconstructed after World War II because it was buttressed by three necessary types of regulation: social security, which served as a principal stabilizer, at least in the developed countries;
Keynesian tools to fight domestic cyclical downturns; and a universal high-wage policy aimed at stimulating general consumption, without which the genius of capitalism – mass production – does not work.
But the realignment of the rich, developed countries around the monetarist policies promoted by economists like Milton Friedman, which began around 1970, broke with all that.
Not long after, the dollar was detached from the gold standard.
Ever since, the international financial system has endured almost constant instability.
Crises have multiplied, with each seemingly worse than the one that came before.
Throughout the rich world, poverty has come roaring back.
Internal and international inequalities have been increasing at breakneck speed.
Employment is increasingly precariousness. And where unemployment is preferred to universal job insecurity, it has become impossible to suppress.
It is to this state of affairs that the French and Dutch said “no” two months ago.
Paradoxically, however, a united Europe is likely to be needed even more in the near future than it was in the past. After all, beyond the social misery produced by the re-institutionalized cruelty of the current global economic system, the greatest danger facing the world nowadays is that very system’s inherent instability.
I don’t see any institution other than the EU that has enough size and heft to protect Europeans from a possible implosion.
Consider the simple fact that the American economy is now more than $600 billion in debt.
The United States cannot function without being able to borrow $1.9 billion dollars each and every day of the year, mainly from the emerging economies of Asia, and China above all.
But this support could weaken or even cease if the dollar falls too low, if the price of oil rises too high, or if the American economy backfires.
In fact, the US economy has become increasingly detached from reality.
Its manufacturing sector now accounts for a mere 11% of America’s GDP.
Ford and General Motors are in dire financial straits.
Meanwhile, two speculative bubbles – in the real estate market and in mortgages – have become grafted upon each other and now dominate economic activity in the US.
A crash, or at least a sharp spasm, is quite likely in the near future, and the consequences – for America and the world – may be catastrophic.
This instability also makes it difficult to address other grave problems affecting the global financial system.
Sovereign debt, needed by all countries, but particularly by the poorest, suffers profoundly from erratic interest-rate and exchange-rate movements.
The absence of a lender of last resort in today’s world only magnifies the threat involved in each crisis.
To make matters worse, national failures can no longer be addressed without aggravating the situation.
Of course – indeed, above all – in such circumstances the immense investments needed to overcome underdevelopment and the disabilities that it entails are increasingly forgotten by the world of international finance.
With rich countries threatened by instability and poor countries largely left to their own devices, the reconstruction of the world financial system should be at the top of the international agenda.
A new Bretton Woods could not be more urgent!
Five Years in Limbo
NEW YORK – When the US investment bank Lehman Brothers collapsed in 2008, triggering the worst global financial crisis since the Great Depression, a broad consensus about what caused the crisis seemed to emerge. A bloated and dysfunctional financial system had misallocated capital and, rather than managing risk, had actually created it.
Financial deregulation – together with easy money – had contributed to excessive risk-taking.
Monetary policy would be relatively ineffective in reviving the economy, even if still-easier money might prevent the financial system’s total collapse.
Thus, greater reliance on fiscal policy – increased government spending – would be necessary.
Five years later, while some are congratulating themselves on avoiding another depression, no one in Europe or the United States can claim that prosperity has returned.
The European Union is just emerging from a double-dip (and in some countries a triple-dip) recession, and some member states are in depression.
In many EU countries, GDP remains lower, or insignificantly above, pre-recession levels.
Almost 27 million Europeans are unemployed.
Similarly, 22 million Americans who would like a full-time job cannot find one.
Labor-force participation in the US has fallen to levels not seen since women began entering the labor market in large numbers.
Most Americans’ income and wealth are below their levels long before the crisis.
Indeed, a typical full-time male worker’s income is lower than it has been in more than four decades.
Yes, we have done some things to improve financial markets.
There have been some increases in capital requirements – but far short of what is needed.
Some of the risky derivatives – the financial weapons of mass destruction – have been put on exchanges, increasing their transparency and reducing systemic risk; but large volumes continue to be traded in murky over-the-counter markets, which means that we have little knowledge about some of our largest financial institutions’ risk exposure.
Likewise, some of the predatory and discriminatory lending and abusive credit-card practices have been curbed; but equally exploitive practices continue.
The working poor still are too often exploited by usurious payday loans.
Market-dominant banks still extract hefty fees on debit- and credit-card transactions from merchants, who are forced to pay a multiple of what a truly competitive market would bear.
These are, quite simply, taxes, with the revenues enriching private coffers rather than serving public purposes.
Other problems have gone unaddressed – and some have worsened.
America’s mortgage market remains on life-support: the government now underwrites more than 90% of all mortgages, and President Barack Obama’s administration has not even proposed a new system that would ensure responsible lending at competitive terms.
The financial system has become even more concentrated, exacerbating the problem of banks that are not only too big, too interconnected, and too correlated to fail, but that are also too big to manage and be held accountable.
Despite scandal after scandal, from money laundering and market manipulation to racial discrimination in lending and illegal foreclosures, no senior official has been held accountable; when financial penalties have been imposed, they have been far smaller than they should be, lest systemically important institutions be jeopardized.
The credit ratings agencies have been held accountable in two private suits.
But here, too, what they have paid is but a fraction of the losses that their actions caused.
More important, the underlying problem – a perverse incentive system whereby they are paid by the firms that they rate – has yet to change.
Bankers boast of having paid back in full the government bailout funds that they received when the crisis erupted.
But they never seem to mention that anyone who got huge government loans with near-zero interest rates could have made billions simply by lending that money back to the government.
Nor do they mention the costs imposed on the rest of the economy – a cumulative output loss in Europe and the US that is well in excess of $5 trillion.
Meanwhile, those who argued that monetary policy would not suffice turned out to have been right.
Yes, we were all Keynesians – but all too briefly.
Fiscal stimulus was replaced by austerity, with predictable – and predicted – adverse effects on economic performance.
Some in Europe are pleased that the economy may have bottomed out.
With a return to output growth, the recession – defined as two consecutive quarters of economic contraction – is officially over.
But, in any meaningful sense, an economy in which most people’s incomes are below their pre-2008 levels is still in recession.
And an economy in which 25% of workers (and 50% of young people) are unemployed – as is the case in Greece and Spain – is still in depression.
Austerity has failed, and there is no prospect of a return to full employment any time soon (not surprisingly, prospects for America, with its milder version of austerity, are better).
The financial system may be more stable than it was five years ago, but that is a low bar – back then, it was teetering on the edge of a precipice.
Those in government and the financial sector who congratulate themselves on banks’ return to profitability and mild – though hard-won – regulatory improvements should focus on what still needs to be done.
The glass is, at most, only one-quarter full; for most people, it is three-quarters empty.
The Smartest Ways to Save the World
COPENHAGEN – If you had $75 billion to spend over the next four years and your goal was to advance human welfare, especially in the developing world, how could you get the most value for your money?
That is the question that I posed to a panel of five top economists, including four Nobel laureates, in the Copenhagen Consensus 2012 project.
The panel members were chosen for their expertise in prioritization and their ability to use economic principles to compare policy choices.
Over the past year, more than 50 economists prepared research on nearly 40 investment proposals in areas ranging from armed conflicts and natural disasters to hunger, education, and global warming.
The teams that drafted each paper identified the costs and benefits of the smartest ways to spend money within their area.
In early May, many of them traveled to Denmark to convince the expert panel of the power of their investment proposals.
The panel’s findings reveal that, if spent smartly, $75 billion – just a 15% increase in current aid spending – could go a long way to solving many of the world’s challenges.
The single most important investment, according to the panel, would step up the fight against malnutrition.
New research for the project by John Hoddinott of the International Food Policy Research Institute and Peter Orazem of Iowa State University focuses on an investment of $3 billion annually.
This would purchase a bundle of interventions, including micronutrient provision, complementary foods, treatment for worms and diarrheal diseases, and behavior-change programs, all of which could reduce chronic under-nutrition by 36% in developing countries.
In total, such an investment would help more than 100 million children to start their lives without stunted growth or malnourishment.
And comprehensive research now shows that such interventions would stay with them for life: their bodies and muscles would grow faster, their cognitive abilities would improve, and they would pay more attention in school (and stay there longer).
Studies show that, decades down the line, these children would be more productive, make more money, have fewer kids, and begin a virtuous circle of dramatic development.
Such opportunities come sharply into focus when you ask some of the world’s best minds to find the biggest bang for the buck.
Micronutrient provision is rarely celebrated, but it makes a world of difference.
Likewise, just $300 million would prevent 300,000 child deaths if it were used to strengthen the Global Fund’s Affordable Medicines Facility-malaria financing mechanism, which makes combination therapies cheaper for poor countries.
Put in economic terms, the benefits are 35 times higher than the costs – even without taking into account that it safeguards our most effective malaria drug from future drug resistance.
Later this year, donors will decide whether to renew this facility.
The panel’s findings should help to persuade them to do so.
For a similar amount, 300 million children could be dewormed in schools.
By not sharing their food with intestinal parasites, they, too, would become more alert, stay longer in school, and grow up to be more productive adults –&nbsp;another cause that needs much more public attention.
Expanding tuberculosis treatment and childhood immunization coverage are two other health investments that the expert panel endorses.
Likewise, a $100 million annual increase in spending to develop a vaccine against HIV/AIDS would generate substantial benefits in the future.
As people in the developing world live longer, they are increasingly experiencing chronic disease; indeed, half of all deaths this year will be from chronic diseases in Third World countries.
Here, the panel finds that spending just $122 million could achieve complete Hepatitis B vaccine coverage and avert about 150,000 annual deaths from the disease.
Getting low-cost drugs for acute heart attacks to developing countries would cost just $200 million, and prevent 300,000 deaths.
The expert panel’s findings point to a compelling need to invest roughly $2 billion annually in research and development to increase agricultural output.
Not only would this reduce hunger by increasing food production and lowering food prices; it would also protect biodiversity, because higher crop productivity would mean less deforestation.
That, in turn, would help in the fight against climate change, because forests store carbon.
When it comes to climate change, the experts recommend spending a small amount – roughly $1 billion – to investigate the feasibility of cooling the planet through geo-engineering options.
This would allow us to understand better the technology’s risks, costs, and benefits.
Moreover, the research could potentially give us low-cost, effective insurance against global warming.
Another priority for investment is the establishment of effective early-warning systems for natural disasters in developing countries.
For less than $1 billion a year, this would alleviate both direct and long-term economic damage, possibly securing some $35 billion in benefits.
The $75 billion budget chosen for the Copenhagen Consensus project is large enough to make a real difference, but small enough that we must choose – as in the real world – the projects that can achieve the most good.
The expert panel’s list shows us that there are many smart solutions waiting to be implemented.
The Social Brain
Imitation, as the saying goes, is the sincerest form of flattery.
But it even seems to form the heart of our humanity.
Indeed, imitation appears to be a vital key to understanding human development, from behavior and language to empathy and social skills.
Compared with most other species, human beings are so immature at birth that they require an exceptionally long period of nursing and shelter.
We spend our long infancy and childhood adapting to the widely varying and complex sociocultural environment that surrounds us.
This allows us to interact and operate successfully within our environment throughout our lives.
From the outset, even before we develop the ability to use spoken language, nonverbal communication drastically shapes our personality and sense of self.
Children learn by watching adults and other children, developing important skills under continuous social feedback.
This feedback enables proper production and, later, understanding, of emotion-related facial expressions that the subject herself cannot see.
Fortunately for human development, healthy children find imitation enormously gratifying.
They enjoy both imitating and being imitated.
Imitation is so essential to mastering basic social skills and transferring cultural knowledge that it is likely to have an organic basis in the brain.
Mirror neurons, first discovered in monkeys, may serve such a function, providing a common code between the sender and receiver of a nonverbal message.
A monkey's mirror neurons are activated both when he himself is acting, say, taking a raisin from a tray, and when he is viewing another monkey (or the human experimenter) performing the same act.
Brain imaging studies have now shown that the human brain contains a similar mirror-neuron system (MNS).
For example, merely viewing another person's movements activates our own motor cortex, which we normally use for precise control of our actual movements.
As sports fans, musicians, and students of body language know, watching other people's movements and postures may facilitate the viewer's own motor schemes, sometimes resulting in unintended imitation.
One can copy movements and motor acts without understanding their meaning.
This happens when a flock of geese suddenly takes flight from a lake, "blindly" following the flock's first frightened member.
For humans, the MNS may provide a more sophisticated copying mechanism that helps us to understand the intentions of other people--in a sense, to read their minds.
Humans compute other people's intentions and emotions continuously, constantly observing their movements, postures, and gaze.
These mind-reading skills are essential for successful social interaction.
Researchers have found that a key part of the human MNS is Broca's region, an area of the brain that, when damaged, prevents the patient from speaking.
Broca's region is the human counterpart of the monkey mirror-neuron area.
As both human and monkey mirror neurons code hand manipulation and facial gestures, some interesting hypotheses have emerged.
For example, the presence of mirror neurons in Broca's region suggests that human language co-evolved with hand and facial gestures rather than arising directly from vocalizations.
In humans, Broca's region is found in the left brain hemisphere, whose dominance for speech is well known.
But the corresponding area is larger also in the left brain of great apes, further indicating that the Broca's region evolved first for gestural communication and only later for speech.
Behavioral studies, too, have shown that gesturing is closely related to speech production.
To take a familiar example, we gesture even while speaking on the telephone, when others cannot see us.
Indeed, congenitally blind persons gesture--even while speaking with people they know to be blind as well!
The existence of the human MNS means that the same brain areas may be activated when we perform a motor act and when we merely observe another person perform a similar act.
This leads to an obvious question: how do we know that we actually performed a motor act rather than only seeing it?
For most people, physical feedback provided by muscle and tendon sensors helps in resolving this, as does proper communication between brain areas.
But misattribution of one's own acts does, in fact, occur in some psychiatric disorders.
Other disorders are associated with defective imitation skills.
For example, autistic individuals imitate others less and in a different manner than healthy subjects.
They also have poor mind-reading skills.
Some patients, by contrast, suffer at the opposite extreme of dysfunction.
They "echo," imitating almost all movements of other people.
Perhaps most intriguing, the MNS could provide a platform for mental simulation of future actions--one's own and those of others.
It might also be part of a larger mechanism that allows intentions, emotions, and even the intensity of pain to be matched by gestures and communicated between individuals.
New imaging tools enable us to study these and other questions about human brain function more productively than ever before.
We can now accurately follow in both time and space the brain's processing routes, which are determined not only by genes, but also by all the experience that an individual has gained during her entire lifetime.
In these studies, neurologists, psychiatrists, geneticists, and behavioral researchers all contribute to realizing their common interest in discovering how the human brain operates.
Brain imaging, combined with the new conceptual framework implied by research on the mirror-neuron system, promises to uncover a more holistic "social" brain.
This brain's functions and dysfunctions--its very structure--will broaden dramatically our understanding of the relationship between the self and others.
The Social Dimensions of Globalization
The war on terrorism and in Iraq has distracted much of the world's attention from the pressing issue of how globalization should be managed so that it benefits everyone.
A new report, issued by the International Labor Organization's Commission on the Social Dimensions of Globalization, reminds us how far the Bush administration is out of line with the global consensus.
The ILO is a tripartite organization with representatives of labor, government, and business.
The Commission, chaired by the presidents of Finland and Tanzania, has 24 members (of whom I was one) drawn from different nationalities, interests groups, and intellectual persuasions, including members as diverse as the head of Toshiba and the leader of the AFL-CIO.
Yet this very heterogeneous group was able to crystallize the emerging global consensus that globalization, despite its positive potential, has not only failed to live up to that potential, but has actually contributed to social distress.
The fault lies with how globalization has been managed - partly by countries, but most importantly, by the international community, including institutions like the World Bank, World Trade Organization, and the IMF, which are responsible for establishing the "rules of the game."
The Commission even reached consensus on a number of concrete measures to help put a "human face" on globalization - or at least mitigate some of its worst effects.
The gap between the emerging consensus on globalization, which this report reflects, and the Bush administration's international economic policies help explain today's widespread hostility towards America's government.
Consider two issues that have been part of recent bilateral trade agreements pushed aggressively by the Bush administration.
The crises in East Asia and the recent recessions in Latin America show that premature capital market liberalization can result in enormous economic volatility, increasing poverty, and destruction of the middle class.
Even the IMF now recognizes that capital market liberalization has delivered neither growth nor stability to many developing countries.
Yet, whether driven by narrow ideology or responding to the demands of special interests, the Bush administration is still demanding an extreme form of such liberalization in its bilateral trade agreements.
The second issue concerns the unbalanced intellectual property provisions (TRIPs) of the Uruguay Round of trade talks, dictated by America's pharmaceutical and entertainment industries.
These provisions restricted countries from making generic imitations of drugs, making many critically important medicines unaffordable in developing countries.
Spearheaded by worries about AIDS, activists around the world demanded that something be done.
Just before last year's trade talks in Cancun, the US made some concessions, so that it was no longer the only holdout.
In its bilateral trade agreements, however, the US is demanding what is becoming known as "TRIPs plus," which would strengthen intellectual property rights further, to ensure that countries only have the right to produce inexpensive generic drugs during epidemics and other emergencies.
The global consensus, reflected in the Commission report, calls for more exceptions, so that, say, drugs can be made available in any case where to do so could save a life.
To those confronting the prospect of death, what matters is access to life-saving drugs, not whether what is killing the person is part of an epidemic.
Bilateral agreements form the basis of enhanced ties of friendship between countries.
But America's intransigence in this area is sparking protests in countries facing the "threat" of such an agreement, such as Morocco, and is forming the basis of long-lasting resentment.
The Commission highlights other issues that have received insufficient global attention - such as tax competition among developing countries, which shifts more of the tax burden from business to workers.
In still other areas, the Commission's report argues for more "balanced" perspectives.
On exchange rates, for example, it is more sympathetic towards mixed systems - in contrast to the traditional belief that countries must choose between the extremes of a completely flexible system and a hard peg (of the kind that contributed so importantly to Argentina's woes).
As this example shows, bringing different voices to the table in discussions of globalization brings new perspectives.
Until now, the main worry for most experts on globalization has been excessive government intervention in the economy.
The Commission fears just the opposite.
It argues that the state has a role to play in cushioning individuals and society from the impact of rapid economic change.
The way that globalization has been managed, however, has eroded the ability of the state to play its proper role.
At the root of this problem is the global political system - if such it can be called.
Key players like the IMF and World Bank must become more transparent and their voting structures must be changed to reflect the current distribution of economic power - as opposed to that prevailing in 1945 - let alone to reflect basic democratic principles.
Whatever one thinks of the many concrete suggestions made by the Commission, this much is clear: we need a more inclusive debate about globalization, one in which more voices are heard, and in which there is more focus on the social dimensions of globalization.
This is a message the world would do well to heed, lest discontent with globalization continue to grow.
The Soft Power of the United Nations
Joseph Stalin once dismissed the relevance of “soft power” by asking, “How many troops does the Pope have?” Today, many self-styled realists dismiss the United Nations as powerless, and argue that it can be ignored.
They are mistaken.
Power is the ability to affect others to produce the outcomes one wants.
Hard power works through payments and coercion (carrots and sticks); soft power works through attraction and co-option.
With no forces of its own and a relatively tiny budget, the UN has only as much hard power as it can borrow from its member states.
It was created in 1945 to be the servant of its member states, and Article 2.7 of its charter protects the sovereign jurisdiction of its members.
After the failure of the League of Nations in the 1930’s, the UN was designed to have the Security Council’s permanent members act as policemen to enforce collective security.
When the great powers agreed, the UN had impressive hard power, as demonstrated in the Korean War and the first Gulf War.
But such cases were exceptional.
During the Cold War, the Council was divided.
As one expert put it, its permanent members’ veto was designed to be like a fuse box in an electrical system: better that the lights go out than that the house burn down.
Despite those limits, the UN has considerable soft power that arises from its ability to legitimize the actions of states, particularly regarding the use of force.
People do not live wholly by the word, but neither do they live solely by the sword.
For example, the UN could not prevent the invasion of Iraq in 2003, but the absence of its imprimatur greatly raised the costs to the American and British governments.
Some American leaders then tried to de-legitimize the UN and called for an alternative alliance of democracies.
But they missed the point: Iraq policy had divided allied democracies, and, with its universal membership, the UN remained an important source of legitimacy in the eyes of most of the world.
The greatest damage to the UN’s legitimacy has been self-inflicted.
For example, in recent years the internal bloc politics among its member states produced a Human Rights Council with little interest in fair procedures or the advance of human rights.
Likewise, administrative inefficiency has led to poor performance of high-profile efforts like the oil-for-food program.
The job of UN Secretary General involves very little hard power, but some people have filled the post with great effect, using their soft power resources to leverage the hard power of governments.
For example, Dag Hammarskjold seized the opportunity of the Suez Crisis created by Britain and France’s invasion of Egypt in 1956 to persuade governments to create peacekeeping forces – an institution that is not mentioned in the UN original charter.
In the wake of the UN’s failures to prevent genocide and ethnic cleansing in Rwanda and Kosovo in the 1990’s, Kofi Annan worked with others to persuade governments to recognize a new responsibility to protect endangered peoples.
But such innovations have their limits.
In the aftermath of the 2006 Israel-Lebanon War, states turned once again to UN peacekeepers, as they have in dealing with the problems in the Congo and Darfur.
But, while there are currently more than 100,000 troops from various nations serving in UN peacekeeping missions around the world, member states are not providing adequate resources, training, and equipment.
Moreover, governments have found ways to delay effective international action, as has been the case in Sudan.
It remains to be see whether China, concerned that its oil trade with Sudan might jeopardize the 2008 Olympics, will decide to exert more pressure.
Similarly, while the General Assembly may have agreed that states have a “responsibility to protect,” many members agreed only in a very limited sense.
Many developing countries, in particular, remain jealous of their sovereignty and fear that the new principle could infringe it.
For example, in the aftermath of the recent government crackdown in Myanmar (Burma), the Secretary General was able to send a representative to the country, but with powers limited to reporting and attempted mediation.
That may be enough to influence some governments, but the Burmese junta recently expelled the UN’s representative after he warned of “a deteriorating humanitarian situation.”
The UN has impressive power – both hard and soft – when states agree on policies under Chapter 7 of the Charter.
It has modest but useful soft power when great powers disagree but are willing to acquiesce in a course of action.
And it has very little power when the great powers oppose an action, or repressive member governments ignore the claims of the new “responsibility to protect.”
In such cases, it makes no sense to blame the UN.
Soft power is real, but it has its limits.
The fault lies not with the UN, but with the lack of consensus among member states.
The Soft Underbelly of China’s Growth
China’s explosive economic growth hinges on the rest of the world, radically changing the global production chain and challenging the global trading system.
If China maintains its growth momentum over the next two decades, the global system will face huge challenges.
Indeed, the question is not so much whether the global system will endure the imbalances spawned by China, but how severe those imbalances will prove to be.
Much of the concern over the past few years has centered on America’s yawning current account and fiscal deficits, and its effort to get China to let the yuan float more freely against the dollar.
China, by contrast, sees its growth as tied to a stable currency, and may not want to introduce a more flexible exchange-rate regime, even after the 2.1% revaluation in July, pending alleviation of structural problems for which it is extremely difficult to set a timetable.
In fact, even as China’s economy has boomed over the past decade, structural adjustment in its domestic sectors slowed, mainly owing to political constraints.
The banking system remains unhealthy and fragile; capital markets are dying.
The private sector’s growth is hemmed in by its inability to invest in economic sectors that the government still monopolizes.
Mounting regional disparities, as well as the widening urban-rural divide, impede household consumption growth, increasing the economy’s dependence on exports and foreign investment.
For years, as optimists see it, China has been the world’s cheap assembly shop for shoes, clothing, and microwave ovens.
Now, it is laying the groundwork to become a global power in more sophisticated, technology-intensive industries.
Billions of dollars are flowing into auto, steel, chemical, and high-tech electronics plants, setting the stage for China to be a major exporter of high-end products.
While this argument suggests that the global trading system must make more room for a rising China (and India), it overlooks the need to address the enormous structural problems in China’s domestic sectors if export-led growth is to become sustainable.
For these sectors, rapid investment-driven growth in the past decade has produced a mountain of excess capacity, reflected in stagnant prices and the banking sector’s soaring volume of bad loans, as price wars squeeze profitability and stimulate real-estate speculation.
Postponing structural reforms eventually constrains any economy’s performance, as we saw in Japan in the 1980’s and 1990’s.
China has similar problems, with the investment-growth nexus threatening macroeconomic stability – witness the overheating that occurred in 2003 and 2004.
Indeed, China faces tremendous challenges in maintaining macroeconomic stability under conditions of export-led growth, with huge repercussions for the rest of the world.
Given China’s size and its rising share in the global market, macroeconomic instability there fuels volatility in global prices for basic commodities and raw materials.
But the political reality is that China’s government favors rapid growth in the short run over the structural reforms needed to sustain long-term economic performance.
Fiscal consolidation and the abrupt closure and restructuring of inefficient banks and state enterprises would, after all, constitute a powerful brake on short-term growth, threatening social peace and political stability.
This may explain the growing efforts of Chinese businesses in recent years to go global themselves.
Globalization is increasingly viewed as an alternative to domestic structural complexity.
This strategy will exact a heavy price, just as it did in Japan twenty years ago.
The main lesson of Japan’s approach is that launching an aggressive buying spree overseas merely upsets established international balances of interests – thus generating greater tensions with the rest of the world – while hiding the seriousness of structural problems at home.
China has much to gain by avoiding such a strategy.
Focusing squarely on structural reforms would allay some of the fears that China’s rise has inspired in the rest of the world, while winning praise from the international business community.
Rather than scaring global corporations and their home states, China would retain strong political support abroad – and the financing that it needs for its continued development.
In economic terms, China has no choice: it must remove the structural obstacles that stand in the way of rapid growth over the next decade or two.
Above all, truly secure and sustainable economic development requires that it build a large consumer base at home.
Of course, the global imbalances associated with China’s economic rise can take longer to adjust than they otherwise would, simply because the US welcomes it as being in America’s own interest.
But China’s long-term interest, and that of the world, requires that it get serious about domestic structural reform.
The Soft Underbelly of Europe\u0027s \
France and Germany used to see themselves as the European Union's "hard core," surrounded by concentric circles of less committed partners.
Only the other four founding members of what was the European Community--Italy, Belgium, the Netherlands and Luxembourg--were admitted into the innermost circle of Europe's true believers.
No doubt, the post-WWII reconciliation between France and Germany--who once perceived and fought each other as "hereditary enemies"--has been the motor of European integration for half a century.
Today, however, that Franco-German couple looks more like Europe's soft underbelly.
The motor has turned into a brake.
The traumatic experience of western disunity over Iraq in the UN Security Council--with the governments of Jacques Chirac and Gerhard Schröder leading the resistance to the US/UK led invasion of Iraq--demonstrated that Franco-German bilateralism has destructive side effects.
Their perceived claim to speak for Europe antagonized much of the Union.
A European "hard core" is not an end in itself.
Its raison d'être is to overcome national selfishness and to set a good example.
If guided by the spirit of multilateralism, the Franco-German pair pulls Europe together.
But this is precisely what France and Germany now refrain from doing in many fields of European integration.
In October last year, Chirac and Schröder struck a deal on the EU's Common Agricultural Policy (CAP), ensuring that France will remain the biggest beneficiary of the farm budget after the EU takes in 10 new members in 2004.
The CAP consumes about half of the Union's budget--an unimpressive symbol for a community that aims to become a player in world politics.
Now, the agreement underpinning Europe's single currency, the euro, has come under Franco-German attack.
Once again, the two countries have forged a "coalition of the unwilling"--this time against the sanctions mechanism of the European Stability and Growth Pact, which limits the size of euro members' budget deficits to 3% of GDP.
The European Central Bank has indicated that the Pact's collapse could force up Euroland interest rates.
In other words, countries complying with the Pact would now pay the bill for the lack of fiscal discipline in France and Germany.
Germany's behavior is particularly galling, as it had been the strongest advocate of the Stability Pact.
Under Chancellor Helmut Kohl, it gave up its beloved Deutsche Mark for the sake of deepening European integration, but also to sooth French fears that Germany was poised to establish monetary hegemony over the continent.
France, in turn, had to swallow the Stability and Growth Pact to convince a reluctant German public that the euro would be as stable as the Deutsche Mark.
Abiding by European rules should go without saying, even if that means adopting unpopular austerity measures at home.
It is understandable that good Europeans like the Dutch and the Finns find it unacceptable that heavyweights like France and Germany now claim to be more equal than smaller countries.
If the EU becomes used to that idea--beyond fair institutional arrangements that take into account demographic differences--the process of European unification will lose its legitimacy.
What is at stake for Germany is not simply its reputation as a source of economic dynamism and an anchor of monetary stability within the EU.
It may also be destroying the main pillar of its influence in international politics more broadly--that is, its ability to act as an "honest broker," to use Bismarck's famous phrase.
The postwar architecture of German foreign policy has been made up of several bridges--to the United States, to France, to Britain, to smaller EU member states, to Central and Eastern Europe, and to Russia.
The German way of diplomacy consisted of avoiding hard choices between Paris and Washington, Moscow and Warsaw, the EU and NATO, big neighbors and small ones.
If a choice had to be made, Germany gave America priority over France.
Gaullism, or the vision of a French-led European counterweight to the US, has never been an option for Germany.
Neither, to be sure, has the Euro-skeptic British version of Atlanticism.
For all German Chancellors from Konrad Adenauer to Helmut Kohl, France was the favorite European partner, but they refused to accept French offers to create a "Franco-German union" that would destroy the mediating character of German foreign policy.
Tragically, the bridges to the US as well as to Central and Eastern Europe have been damaged by German diplomacy during the Iraq crisis, and the bridge to the smaller EU member states is now in the process of being damaged by the Teutonic colossus's noncompliance with the Stability and Growth Pact.
As for the euro, the Germans have to accept that if they want to remain good Europeans, they have to get their own fiscal house in order.
For whatever they do or refrain from doing in terms of domestic reforms affects their partners.
As for the future of Europe's "hard core," such an idea only makes sense from a German perspective if it does not limit Germany's role as a moderator.
The best solution for Europe would be an inner circle consisting of France, Germany, and Britain, at least.
Together, these three countries represent the complete diversity of foreign policy traditions that one can find in the future 25-member EU.
Trying to pool these traditions may look like trying to square a circle.
But the alternative is a European Disunion that no one will take seriously as a player in world politics.
That is an outcome that no true European believer in France and Germany should be prepared to countenance.
The Software of Life
Being alive, we tend to think that life is easy to grasp.
In the accepted classification of sciences, mathematics is thought to be the queen, and the most difficult to grasp, followed by physics, chemistry, and, finally, biology.
But this scientific hierarchy is false and misleading: we now know that biology contains more mathematics than we ever imagined.
When molecules entered the scientific understanding of life with the discovery of DNA, biology climbed one step up the scale, to chemistry.
Then, with recognition of the abstract schemas dictating how genes are expressed, biology climbed even closer to mathematics.
Today’s buzzword in the study of life is “systems” biology.
For a long time, those who studied the nature of life and heredity were divided into two camps: epigeneticists , who emphasized environmental influences on living organisms, and preformists , who stressed the similarities between parents and progeny.
The epigeneticist view was clearly wrong, because something stable had to be transmitted across generations.
But the preformist view that the entity transmitted across generations was the whole organism was contradicted by the impossibility of segmenting objects infinitely.
What had to be transmitted was not the final organism, but the recipe to make it.
Consider the old metaphysical puzzle: is a wooden boat whose planks are gradually replaced as they decay the same boat after all the planks have been changed?
“Systems” biology is biology that recognizes that what remains the same is the design of the boat – that which determines the relationships between the planks.
This thought paved the way for the concept of a “genetic program,” akin to a computer program – a metaphor that became almost self-evident when the structure of DNA was discovered, because DNA could be visualized as a linear string of symbols, which is exactly what computers read as a program.
Like a computer program, DNA does not preserve the final state of what it codes for; rather, it embeds in a symbolic but concrete way (it is a real “text”) the relationships between all the objects and agents that it specifies and controls.
A remarkable observation supports this analogy: viruses behave like individual pieces of programs, using the cell as the machine needed to make them multiply and subsequently propagate (often by destroying the machine).
When computer programming became widespread, pieces of software were found to behave the same way, and were thus called “viruses.”
And when it became possible to manipulate DNA in vitro, the metaphor of a “genetic program” appeared even more precise: scientists could construct experiments that corresponded to the reprogramming of cells merely by working on symbols in silicon.
The metaphor comes from the famous mathematician and computer scientist Alan Turing, who, along with John von Neumann and other theoreticians, uncovered the link between the mathematics of whole numbers and logic.
Turing proposed that all computations and logical operations could be performed by a simple machine, which he called the Universal Turing Machine, reading and modifying a linear sequence of symbols.
This required only the physical separation of the symbols (visualized as a tape) handled by the machine and the machine itself.
Moreover, the tape carried the data that allowed the machine to proceed.
So the data could be split into two types: a program that embedded the “meaning” of the logical sequence recognized by the machine, and the pure data that provided the context for the program to run.
Genetic engineering rests on the manipulation of DNA molecules (whether real or artificially constructed) in order to reprogram foreign cells.
As a result, many bacteria today produce human proteins.
But this represents only a small part of the genetic program.
Transfer of genes between organisms is widespread.
Nuclear cloning, illustrated by the sheep Dolly, has made the Universal Turing Machine a highly revealing, if not all explaining, model of the cell.
If we take this metaphor at face value, there is a surprising consequence.
It has been shown that, the outcome of some computer programs is at once entirely deterministic, innovative, and unpredictable.
The computer metaphor thus implies that living organisms are material systems that, facing an unforeseeable future, arrive at improbable solutions so that some of their progeny can survive in unpredictable conditions.
Life is inherently creative.
However, the metaphor is limited by a simple fact: computers do not make computers.
The challenge for the new biology is to understand how they would.
The Solid but Regrettable Argument for Israel\u0027s Security Fence
The International Court of Justice has completed its hearings on the legality of the barrier Israel is building in the occupied West Bank.
This is an isolated question among many larger issues that await a negotiated peace agreement.
Who has the right to what land?
Do Palestinian refugees and their descendants have a right to go back to what is now Israel?
Do Jews have a right to settle in the West Bank?
Basic issues of justice -- such as the right of each side to live with dignity and security -- are, of course, important in any peace agreement.
But most of them are interrelated, and it is unlikely that the ICJ can resolve them when they are truncated into technical arguments about where a defensive wall can or cannot go.
Even so, now that the issue has been put before the Court, it must be discussed.
Although the world expects a negative decision, Israel can in fact muster a sound legal case.
If the fence followed the 1967 boundary there would be few objections.
But, because it runs partly through the West Bank and protects not only people living in Israel, but also the settlers in the occupied territories, Israel stands accused of an illegal "land grab."
The argument against the fence on the West Bank assumes that the settlers are there illegally and therefore are not entitled to the protection of a defensive barrier.
As the Jordanians put it in their written submission, "no right of self‑defense. . . can be invoked in order to defend that which is itself unlawful."
There is something clearly wrong with that argument.
As a political matter, I oppose the settlements.
Most, if not all, of them will have to come down in the ultimate compromise that will emerge someday.
But the argument about legality is more complicated.
To be sure, Article 49 of the Fourth Geneva Convention provides that an occupying government "shall not deport or transfer parts of its own civilian population into the territory it occupies."
But as the parallel language of "deport or transfer" suggests, the more plausible reading is that the letter of Article 49 applies only to forcible transfers, not to settlements that are voluntary.
At least until recently, the international community assumed this to be the likely reading of Article 49 because, in drafting the crimes subject to prosecution in the International Criminal Court, the concept of transfer was expanded to include the Occupying Power's "direct and indirect transfer" of its population into occupied territories.
This language, in force since July 2002, arguably applies to official Israeli policies aimed at promoting "indirect transfer" by providing financial incentives to voluntary settlers.
Suppose that in this limited sense the settlements are unlawful.
Does that mean that the settlers are sitting ducks who can be attacked with impunity and have no right to defend themselves?
To say yes is to subscribe to a curious concept of collective responsibility.
Even if some Israeli officials are guilty of a crime in encouraging settlements, does that mean that the settlers must be viewed as complicit?
True, some made an ideological choice to colonize "Judea and Samaria," as they call it, but others are ordinary people seeking better housing and a better life for their families.
Their motives are too diverse to be reduced to any single stereotype.
Indeed, some settlements are more than 25 years old and many settlers are a second or third generation of people living in the region.
Are they, as well as children brought there by their parents, collectively guilty just because some government officials might have violated the Rome Statute since July 2002?
Further, even if the conduct of Israeli officials is judged to be illegal, and even if some settlers are willing tools of Israeli policy, civilian settlers cannot lose their right of self‑defense -- certainly not against terrorists who are violating international law by targeting innocent people both inside of Israel and in the occupied territories.
The only way in which civilians could ever lose the right of self‑defense would be if they, as individuals, were engaged in actions threatening imminent harm to others.
Whatever one thinks of the settlers, they, in their daily routine, are not engaged in a pattern of threatening to kill or assault anyone.
So if the settlers have a right to self‑defense, is the fence an acceptable means of realizing that right?
Although it imposes hardships on others, the fence is a plausible means of protection against suicide bombers.
It is neither disproportionate nor excessive.
The best argument that the Palestinians could make against the fence is to make it unnecessary by suppressing suicide bombings.
Someday, Israel's adversaries will abandon their policy of homicidal self‑destruction.
When they do, there will be a very good legal and moral case for the fence to come down.
The legal case for the fence is solid but regrettable. The fence is not only a physical reminder of the divide between the area's peoples, but also a cause of suffering for innocent Palestinians who are cut off from their fields, their jobs, and their families.
The fence assumes that they, as a people, are the source of the deadly threats to the settlers.
Thus reigns the collectivist mentality that drives the unending feud between Jews and Palestinians.
Not all Jews are guilty for the actions of a clique that might have violated international law.
Nor should all Palestinians suffer as though they acted as a single entity, posing a collective terrorist threat.
Only negotiations, not legal bickering, can put an end to this iniquity.
The Sources of Chinese Conduct
BEIJING – Six decades ago, the American diplomat George Kennan wrote an article, “The Sources of SovietConduct,” that galvanized American and world opinion, which soon hardened into the rigid postures of the Cold War.
Today, given China’s decisive influence on the global economy, and its increasing ability to project military power, understanding the sources of Chinese conduct has become a central issue in international relations.
Indeed, better understanding of China’s foreign policy motivations may help prevent relations between China and the United States from hardening into rigid and antagonistic postures.
Since 2008, discussions among Chinese scholars and strategists on the nature of their country’s foreign policy have focused on two issues: its ideological foundations, and China’s international appeal and standing – its “soft power.”
Mainstream thinking, known as the Chinese School, insists, with the government, on “Marxism with Chinese characteristics” as the bedrock principle of China’s foreign policy.
But a minority school argues that China should rely instead on the country’s traditional political thought, emphasizing the universal value of traditional Chinese philosophy.
While People’s Daily, the Chinese Communist Party’s official newspaper, consistently attacks that position, the Party itself has been rehabilitating Confucius, the central figure in Chinese traditional thought, going so far as to erect a statue of him in Tiananmen Square.
The Chinese School insists on adhering to Deng Xiaoping’s doctrine of maintaining a low profile in international diplomacy, while the traditionalist group advocates taking on greater international responsibility.
The mainstream school defines China as a developing country, pointing to China’s per capita GDP, which ranks only 104th in the world.
The traditionalists argue that China should assume responsibility for world affairs consistent with its status as the world’s second-largest economy, behind only the US.
Today, the impact of the Chinese School seems to be limited mostly to official statements, while the traditionalists are gradually gaining policy influence.
For example, the Chinese government reiterated its core diplomatic principle of non-intervention in other countries’ affairs during the Libya crisis, yet China accepted the imposition of United Nations’ sanctions on Muammar Qaddafi’s government.
Moreover, China dispatched a warship and four military aircraft to the Mediterranean to help evacuate 35,860 Chinese nationals and 2,100 others from Libya.
That measure, the first projection of Chinese naval power so far from home, is consistent with Confucianism, which regards morality as the top priority of policymaking, rather than Marxism, according to which economic interests alone drive foreign policy.
Early Confucian thinkers were writing in a world of small countries competing ruthlessly for territorial advantage.
For them, the key to international power was political power, and the central attribute of political power was a morally informed leadership.
Rulers, they believed, should act in accord with moral norms whenever possible.
And the sphere of concern for any humane ruler should be the whole world, not just the people of one state.
Thus, thinkers such as Mencius, Confucius’s leading intellectual heir, argued that humane authorities should punish immoral rulers in other states who tyrannize their people.
Rulers who rely mostly on military or economic might divorced from morality, he argued, cannot achieve long-term success on the international stage.
Although China is building Confucius Institutes across the globe, China’s traditional political philosophy does not often play decisive role in policymaking.
China’s policy toward Libya, which differs significantly from previous policy, may or may not have been shaped by it; nevertheless, we cannot rule out the possibility of it becoming the mainstream of thinking in Chinese foreign-policy circles in the near future.
Indeed, Henry Kissinger once told me that he believes that Chinese traditional thought has a greater chance than any foreign ideology (say, Marxism or liberalism) of becoming the dominant intellectual force behind Chinese foreign policymaking.
Domestic politics is always an important factor influencing a country’s foreign policy.
At the recently concluded 11th People’s National Congress, the word heard most often in policy discussions was “happiness,” which had suddenly replaced “economic growth” as the official mantra.
This change may augur future adjustments in China’s foreign policy as well, for “happiness” is a word used more frequently in Chinese traditional political thought than in Marxist political philosophy.
According to early Confucian thinkers, a key task for rulers is to strive to improve a peoples’ happiness, which is itself grounded in a moral way of life.
Because poverty was an obstacle to moral behavior, they believed that the state should be vitally concerned with eliminating it.
The idea that the state should pursue economic growth without consideration for moral concerns was anathema to Confucius and his followers.
In February 2010, at “Spring Festival” – one of China’s biggest holidays, marked by family reunions – Chinese Premier Wen Jiabao said that the government should help people live with dignity and happiness.
At a press conference this month, he said that economic reform cannot succeed without political reform, and that corruption currently poses the gravest danger to China.
Such statements sounded new to Chinese ears, because they accentuated politics rather than trumpeting the Party’s usual emphasis on economic determinism.
Today, it is impossible to tell what impact and how much influence Chinese traditional political thought – the traditional concern with moral duty, happiness, and honor – will have on China’s foreign policy.
But it is certain that the influence of traditional ideas in Chinese public life is growing.
Indeed, no force seems able to reverse this trend in the coming years.
US Interest Rates Will Continue to Rise
CAMBRIDGE – Six months ago, I wrote that long-term interest rates in the United States would rise, causing bond prices to fall by so much that an investor who owned ten-year Treasury bonds would lose more from the decline in the value of the bond than he would gain from the difference between the bonds’ interest rate and the interest rates on short-term money funds or bank deposits.
That warning has already proved to be correct.
The interest rate on ten-year Treasury bonds has risen almost a full percentage point since February, to 2.72%, implying a loss of nearly 10% in the price of the bond.
But what of the future?
The recent rise in long-term interest rates is just the beginning of an increase that will punish investors who are seeking extra yield by betting on long-term bonds.
Given the current expected inflation rate of 2%, the real rate on ten-year bonds is still less than 1%.
Past experience implies that the real rate will rise to at least 2%, taking the total nominal interest rate to more than 4%, even if expected inflation remains at just 2%.
The interest rate on long-term bonds has been kept abnormally low in the past few years by the Federal Reserve’s “unconventional monetary policy” of buying massive amounts of Treasury bonds and other long-term assets – so-called quantitative easing (QE) – and promising to keep short-term rates low for a considerable period.
Fed Chairman Ben Bernanke’s announcement in May that the Fed would soon start reducing its asset purchases and end QE in 2014 caused long-term interest rates to jump immediately.
Although Bernanke’s announcement has focused markets on exactly when this “tapering” will begin and how rapidly it will proceed, these decisions will not affect the increased level of rates a year or two from now.
The promise to keep the overnight interest rate low for an extended period was intended to persuade investors that they could achieve higher returns only by buying long-term securities, which would drive up these securities’ prices and drive down their yields.
But the current version of this promise – not to raise the overnight interest rate until the unemployment rate drops below 6.5% – no longer implies that short-term rates will remain low for an “extended” period.
With the unemployment rate currently at 7.4% – having fallen nearly a full percentage point in the last 12 months – markets can anticipate that the 6.5% threshold could be reached in 2014.
And the prospect of rising short-term rates means that investors no longer need to hold long-term bonds to achieve a higher return over the next several years.
Although it is difficult to anticipate how high long-term interest rates will eventually rise, the large budget deficit and the rising level of the national debt suggest that the real rate will be higher than 2%.
A higher rate of expected inflation would also cause the total nominal rate to be greater than 5%.
Today’s investors may not recall how much interest rates rose in recent decades.
The interest rate on ten-year Treasuries increased from about 4% in the mid-1960’s to 8% in the mid-1970’s and 10% in the mid-1980’s.
It was only at the end of the 1970’s that the Fed, under its new chairman, Paul Volcker, tightened monetary policy and caused inflation to fall.
But, even after disinflation in the mid-1980’s, long-term interest rates remained relatively high.
In 1985, the interest rate on ten-year Treasury bonds was 10%, even though inflation had declined to less than 4%.
The greatest risk to bond holders is that inflation will rise again, pushing up the interest rate on long-term bonds.
History shows that rising inflation is eventually followed by higher nominal interest rates.
It may therefore be tempting to invest in inflation-indexed bonds, which adjust both principal and interest payments to offset the effects of changes in price growth.
But the protection against inflation does not prevent a loss of value if real interest rates rise, depressing the value of the bonds.
The relatively low interest rates on both short-term and long-term bonds are now causing both individual investors and institutional fund managers to assume duration risk and credit-quality risk in the hope of achieving higher returns.
That was the same risk strategy that preceded the financial crisis in 2008.
Investors need to recognize that reaching for yield could end very badly yet again.
The Specter of Global Stagflation
New York – Will rising global inflation lead to a sharp global economic slowdown?
Even worse, will it revive stagflation, that deadly combination of rising inflation and negative growth?
Inflation is already rising in many advanced economies and emerging markets, and there are signs of likely economic contraction in many advanced economies (the United States, the United Kingdom, Spain, Ireland, Italy, Portugal, and Japan).
In emerging markets, inflation has – so far – been associated with growth, even economic overheating.
But economic contraction in the US and other advanced economies may lead to a growth recoupling – rather than decoupling – in emerging markets, as the US contraction slows growth and rising inflation forces monetary authorities to tighten monetary and credit policies.
They may then face “stagflation lite” – rising inflation tied to sharply slowing growth.
Stagflation requires a negative supply-side shock that increases prices while simultaneously reducing output.
Stagflationary shocks led to global recession three times in the last 35 years: in 1973-1975, when oil prices spiked following the Yom Kippur War and OPEC embargo; in 1979-1980, following the Iranian Revolution; and in 1990-91, following the Iraqi invasion of Kuwait.
Even the 2001 recession – mostly triggered by the bursting high-tech bubble – was accompanied by a doubling of oil prices, following the start of the second Palestinian intifada against Israel.
Today, a stagflationary shock may result from an Israeli attack against Iran’s nuclear facilities. This geopolitical risk mounted in recent weeks as Israel has grown alarmed about Iran’s intentions.
Such an attack would trigger sharp increases in oil prices – to well above $200 a barrel.
The consequences of such a spike would be a major global recession, such as those of 1973, 1979, and 1990.
Indeed, the most recent rise in oil prices is partly due to the increase in this fear premium.
But short of such a negative supply-side shock, is global stagflation possible?
Between 2004-2006 global growth was robust while inflation was low, owing to a positive global supply shock – the increase in productivity and productive capacity of China, India and emerging markets.
This positive supply-side shock was followed – starting in 2006 – by a positive global demand shock: fast growth in “Chindia” and other emerging markets started to put pressure on the prices of a variety of commodities.
Strong global growth in 2007 marked the beginning of a rise in global inflation, a phenomenon that, with some caveats (the sharp slowdown in the US and some advanced economies), continued into 2008.
Barring a true negative supply-side shock, global stagflation is thus unlikely.
Recent rises in oil, energy and other commodity prices reflect a variety of factors:
High growth in demand for oil and other commodities among fast-growing and urbanizing emerging-market economies is occurring at a time when capacity constraints and political instability in some producing countries is limiting their supply.
The weakening US dollar is pushing the dollar price of oil higher as oil exporters’ purchasing power in non-dollar regions declines.
Investors’ discovery of commodities as an asset class is fueling both speculative and long-term demand.
The diversion of land to bio-fuels production has reduced the land available to produce agricultural commodities.
Easy US monetary policy, followed by monetary easing in countries that formally pegged their exchange rates to the US dollar (as in the Gulf) or that maintain undervalued currencies to achieve export-led growth (China and other informal members of the so-called Bretton Woods 2 dollar zone) has fueled a new asset bubble in commodities and overheating of their economies.
Most of these factors are akin to positive global aggregate demand shocks, which should lead to economic overheating and a rise in global inflation.
Exchange rate policies are key.
Large current-account surpluses and/or rising terms of trade imply that the equilibrium real exchange rate (the relative price of foreign to domestic goods) has appreciated in countries like China and Russia.
Thus, over time the actual real exchange rate needs to converge – via real appreciation – with the stronger equilibrium rate.
If the nominal exchange rate is not permitted to appreciate, real appreciation can occur only through an increase in domestic inflation.
So the most important way to control inflation – while regaining the monetary and credit policy autonomy needed to control inflation – is to allow currencies in these economies to appreciate significantly.
Unfortunately, the need for currency appreciation and monetary tightening in overheated emerging markets comes at a time when the housing bust, credit crunch, and high oil prices are leading to a sharp slowdown in advanced economies – and outright recession in some of them.
The world has come full circle.
Following a benign period of a positive global supply shock, a positive global demand shock has led to global overheating and rising inflationary pressures.
Now the worries are about a stagflationary supply shock – say, a war with Iran – coupled with a deflationary demand shock as housing bubbles go bust.
Deflationary pressure could take hold in economies that are contracting, while inflationary pressures increase in economies that are still growing fast.
Thus, central banks in many advanced and emerging economies are facing a nightmare scenario, in which they simultaneously must tighten monetary policy (to fight inflation) and ease it (to reduce the downside risks to growth).
As inflation and growth risks combine in varied and complex ways in different economies, it will be very difficult for central bankers to juggle these contradictory imperatives.
The Spires of Renewal
PRAGUE - A dominant feature of Prague is the Gothic tower of the Cathedral of St. Vitus, St. Wenceslas and St. Adalbert.
That tower is now wrapped in scaffolding because – for the first time ever and, so to speak, at the eleventh hour – it is being renovated.
Temporarily, the scaffold conceals the tower’s beauty.
That concealment, however, is designed to preserve this beauty forever.
Perhaps this scaffolding serves as an analogy for all postcommunist countries.
If some of our best features are not quite visible for the time being, it is because our societies are covered by scaffolding as they undergo reconstruction, striving anew – this time in complete freedom – to rediscover and restore our true identities.
Perhaps this analogy should also be applied even more generally, in the hope that, behind some of the unsightly features of today's world, seeds of an endeavor to save, preserve and creatively develop the values offered to us by the history of nature and the human race can be found.
An unprecedented feature of our global civilization is that it is basically atheistic, notwithstanding the billions of people who profess, whether actively or passively, to believe in a religion.
Indeed, the underlying values of our global civilization rarely, if ever, relate to eternity, to the infinite and absolute.
Everywhere there is a decline in concern for that which will come after us, and for the common interest.
Humanity depletes non-renewable natural resources and interferes with the planet’s climate.
Humanity becomes estranged from itself by gradually liquidating appreciable human communities and human proportions.
Humanity tolerates a cult of material gain as the highest value to which all must yield and before which even the democratic will must sometimes fall to its knees.
Creating wealth, indeed, has ceased to correspond with creating real and meaningful values.
This denaturing of the spirit means that our civilization is wrought with paradoxes.
It is opened to possibilities that, until recently, were mere fairy-tales.
On the other hand, it holds only a limited ability to avert developments that infuse these possibilities with danger, or result in outright abuse.
Our civilization, for example, is pressured toward uniformity, but the fact that we are drawn ever closer to one another gives rise to an urge to emphasize our otherness, which can grow into callous ethnic or religious fanaticism.
New sophisticated types of criminal activities, organized crime and terrorism, are emerging.
Corruption flourishes.
The gap between rich and poor grows deeper, and while people die of starvation in some parts of the world, other places see waste as a type of social obligation.
Various government and non-governmental organizations attempt, of course, to resolve these problems.
Yet I am afraid that the measures undertaken will not lead to any reversal unless something changes in the root thinking from which contemporary human behavior grows.
For example, we often hear about the need to restructure the economies of poor countries, about wealthier nations being duty-bound to help in this.
But it is even more important that we begin to think about another restructuring, a restructuring of the system of values that forms the basis of today’s civilization.
This is of greatest urgency for those who are better off in material terms.
The course of today's global civilization, indeed, has been determined by the wealthiest and most advanced nations.
For this reason, they cannot be relieved of the necessity to engage in a critical reflection.
We know that it is possible to devise ingenious regulatory instruments to protect the Earth’s climate, non-renewable resources, and biological diversity; to find ways to ensure that resources are used accountably at the places of their origin and that cultural identities and a human dimensions for development is maintained.
Many people and institutions are actively working toward this end.
But the crucial task now being neglected involves strengthening a system of universally shared moral standards that will make it impossible, on a truly global scale, for rules to be circumvented time and again.
Only universal moral standards can generate natural respect for the rules we develop.
Actions which jeopardize humanity’s future should not only be punishable but regarded as disgraceful.
This will not happen unless we all find, within ourselves, the courage to forge an order of values that, despite all the world’s diversity, can be jointly embraced and jointly respected.
This will not happen unless we relate these values to something that lies beyond the horizon of our immediate personal or group interest.
How can this be achieved without a new and powerful advance in human spirituality?
What can be done to encourage such an advance?
Whatever our convictions, we are all threatened by our shortsightedness.
None of us can escape our common destiny.
Given this, we have only one possibility: to search inside ourselves as well as around us, for a sense of responsibility for the world; for mutual understanding and solidarity; for humility before the miracle of Being; for the ability to restrain ourselves in the general interest and to perform good deeds even if they remain unseen and unrecognized.
Allow me to return to the Cathedral of Saint Vitus, St. Wenceslas and St. Adalbert.
Why, in bygone ages, did people construct so costly an edifice, one with little use by today's standards?
One explanation is that there were periods in history when material gain was not the highest value; when humanity knew that there were mysteries never to be understood, and before which people could only stand in humble amazement and perhaps project that amazement into structures whose spires point upwards.
Upwards to be seen far and wide, highlighting to everyone that which is worth looking up to.
Upwards, across the borders of ages.
Upwards, to that which is beyond our sight – that which, by its silent existence, precludes -- for all of us -- any right to treat the world as an endless source of short-term profit and which calls for solidarity with all who dwell under its mysterious vault.
To begin to address some of the world’s deepest problems, we too must lift our eyes upwards as we bow our heads in humility.
The Spirit of September 12
WASHINGTON, DC – The terrorist attacks on the United States ten years ago provoked a powerful reaction: the dispatch of American troops, first to Afghanistan and then to Iraq, and the creation of a sprawling new federal agency, the Department of Homeland Security, to coordinate and supervise measures and programs aimed at protecting the US from further assaults.
This expensive, intensive effort – known as the “global war on terror” – can be counted as a success, a diversion, and an example.
The most important fact about the last decade is that, since 9/11, there has been no successful foreign terrorist attack in the US.
For that, US government efforts deserve credit.
No doubt a good deal of the money spent to make the US safe has been wasted.
And the group that launched the initial attacks, Al Qaeda, never posed the kind of massive threat that America’s great Cold War adversary, the Soviet Union, once did.
Still, it was clear in the wake of September 11 that a small number of people, motivated by a radical form of Islam, was determined to inflict as much harm on America and Americans as they could.
Had they managed even a few more attacks similar to the ones on New York and Washington, they could have done serious damage.
At worst, the US might have become a more closed, suspicious country, retreating from the openness that has been its hallmark.
Fortunately, they failed, surely in part because the American government, in cooperation with other governments, worked hard to thwart them, killing and capturing some and discouraging others.
In terms both of money and bureaucratic procedures – carefully scrutinizing all airline passengers, for example – Americans may have overpaid for a decade of avoiding terrorist attacks.
But overpaying was far preferable to suffering more attacks.
The highest cost of the war on terror has come not from what the US did over the last decade, but from what it failed to do.
As Thomas L. Friedman and I write in our new book That Used To Be Us: How America Fell Behind in the World It Invented and How We Can Come Back, America’s future depends on meeting four major challenges: globalization, the revolution in information technology, America’s rapidly growing deficits and debt, and its pattern of energy usage.
Failure to deal effectively with these challenges will lower America’s rate of economic growth, thereby blocking generational upward mobility and undercutting the basis of US global influence.
Over the last ten years, the US has not successfully addressed these four challenges.
There are several reasons for this, but prominent among them is America’s decade-long focus on the threat of terrorism.
While necessary in some form to protect the country, the war on terror as it played out has served to divert America’s attention and resources from the problems that it must solve in order to ensure its future prosperity and power.
The most pressing of these problems is the condition of the education system, which does not adequately prepare young Americans for the jobs available in an economy transformed by globalization and information technology.
Moreover, while over-investing in airport security and in nation-building in the Hindu Kush and Mesopotamia, the US underinvested in the roads, bridges, laboratories, and scientists that it needs for economic growth.
To meet its major challenges, America will have to cut major government programs on which many people rely – the two programs that affect older Americans, Social Security and Medicare, in particular – and increase revenue by raising some taxes.
At the same time, America will need to invest in domestic infrastructure and research and development, which are key to innovation and economic growth.
The formula of cutting, taxing, and investing is not a popular one in America’s current political climate, and can be implemented only through the emergence of a broadly shared sense of sacrifice and purpose.
The terrorist attacks ten years ago created just such a political climate.&#160;
They produced the kind of resolve that will be required in the years ahead to address the equally important tasks that the US now faces.
In the decade to come, the US must remain vigilant in order to prevent the kind of attacks that took place on September 11.
But, at the same time, America and Americans must recapture the spirit of September 12 and harness it to meet the great challenges they face.
The Spookiness of Reality
The Spring of the Zombies
New York – As spring comes to America, optimists are seeing “green sprouts” of recovery from the financial crisis and recession.
The world is far different from what it was last spring, when the Bush administration was once again claiming to see “light at the end of the tunnel.”
The metaphors and the administrations have changed, but not, it seems, the optimism.
The good news is that we may be at the end of a free fall.
The rate of economic decline has slowed.
The bottom may be near – perhaps by the end of the year.
But that does not mean that the global economy is set for a robust recovery any time soon.
Hitting bottom is no reason to abandon the strong measures that have been taken to revive the global economy.
This downturn is complex: an economic crisis combined with a financial crisis.
Before its onset, America’s debt-ridden consumers were the engine of global growth.
That model has broken down, and will not be replaced soon.
For, even if America’s banks were healthy, household wealth has been devastated, and Americans were borrowing and consuming on the assumption that house prices would rise forever.
The collapse of credit made matters worse; and firms, facing high borrowing costs and declining markets, responded quickly, cutting back inventories.
Orders dropped abruptly – well out of proportion to the decline in GDP – and those countries that depended on investment goods and durables (expenditures that could be postponed) were particularly hard hit.
We are likely to see a recovery in some of these areas from the bottoms reached at the end of 2008 and the beginning of this year.
But examine the fundamentals: in America, real estate prices continue to fall, millions of homes are underwater, with the value of mortgages exceeding the market price, and unemployment is increasing, with hundreds of thousands reaching the end of their 39 weeks of unemployment insurance.
States are being forced to lay off workers as tax revenues plummet.
The banking system has just been tested to see if it is adequately capitalized – a “stress” test that involved no stress – and some couldn’t pass muster.
But, rather than welcoming the opportunity to recapitalize, perhaps with government help, the banks seem to prefer a Japanese-style response: we will muddle through.
Repeating the Savings ampamp; Loan debacle of the 1980’s. the banks are using bad accounting (they were allowed, for example, to keep impaired assets on their books without writing them down, on the fiction that they might be held to maturity and somehow turn healthy).
Worse still, they are being allowed to borrow cheaply from the United States Federal Reserve, on the basis of poor collateral, and simultaneously to take risky positions.
Some of the banks did report earnings in the first quarter of this year, mostly based on accounting legerdemain and trading profits (read: speculation).
But thiswon’t get the economy going again quickly.
And, if the bets don’t pay off, the cost to the American taxpayer will be even larger.
The American government, too, is betting on muddling through: the Fed’s measures and government guarantees mean that banks have access to low-cost funds, and lending rates are high.
If nothing nasty happens – losses on mortgages, commercial real estate, business loans, and credit cards – the banks might just be able to make it through without another crisis.
In a few years time, the banks will be recapitalized, and the economy will return to normal.
This is the rosy scenario.
But experiences around the world suggest that this is a risky outlook.
Even &nbsp;were banks healthy, the deleveraging process and the associated loss of wealth means that, more likely than not, the economy will be weak.
And a weak economy means, more likely than not, more bank losses.
The problems are not limited to the US.
Other countries (like Spain) have their own real estate crises.
Eastern Europe has its problems, which are likely to impact Western Europe’s highly leveraged banks.
In a globalized world, problems in one part of the system quickly reverberate elsewhere.
In earlier crises, as in East Asia a decade ago, recovery was quick, because the affected countries could export their way to renewed prosperity.
But this is a synchronous global downturn.
America and Europe can’t export their way out of their doldrums.
Fixing the financial system is necessary, but not sufficient, for recovery.
America’s strategy for fixing its financial system is costly and unfair, for it is rewarding the people who caused the economic mess.
But there is an alternative that essentially means playing by the rules of a normal market economy: a debt-for-equity swap.
With such a swap, confidence could be restored to the banking system, and lending could be reignited with little or no cost to the taxpayer.
It’s neither particularly complicated nor novel.
Bondholders obviously don’t like it – they would rather get a gift from the government.
But there are far better uses of the public’s money, including another round of stimulus.
Every downturn comes to an end.
The question is how long and deep this downturn will be.
In spite of some spring sprouts, we should prepare for another dark winter: it’s time for Plan B in bank restructuring and another dose of Keynesian medicine.
The State of the World
NEW YORK – We all recognize today’s perils.
A global financial crisis.
A global energy crisis.
A global food crisis.
Trade talks have collapsed, yet again.
There are new outbreaks of war and violence.
Climate change ever more clearly threatens our planet.
We say that global problems demand global solutions.
And yet, do we act?
In truth, today, we also face a crisis of a different sort – the challenge of global leadership.
New centers of power and leadership are emerging – in Asia, Latin America and across the newly developed world.
In this new world, the challenges are increasingly those of collaboration, not confrontation.
Nations can no longer protect their interests, or advance the well-being of their people, without the partnership of the rest.
Yet I see a danger of nations looking inward rather than toward a shared future.
I see a danger of retreating from the progress we have made, particularly in the realm of economic development and fairness in sharing the fruits of global growth.
Yes, global growth has raised billions of people out of poverty. Yet if you are among the world’s poor, you have never felt poverty so sharply.
Yes, international law and justice have never been so widely embraced. Yet those living in nations where human rights are abused have never been so vulnerable.
Yes, most of us live in peace and security. Yet violence is deepening in many nations: Afghanistan, Somalia, the Democratic Republic of Congo, Iraq, and Sudan.
Their problems are part of the development emergency we face.
Over the past year, the price of fuel, food, and commodities rose alarmingly.
Wealthy countries worry about recession, while the poor can no longer afford to eat.
The Millennium Development Goals are part of the solution.
But progress here has been uneven.
Pledges have not been honored.
Yet we have achieved enough to know that the goals are within reach.
The United Nations is the champion of the most vulnerable.
When disaster strikes, we act. We did so this year in Haiti and other Caribbean nations hit by hurricanes.
We did so after Cyclone Nargis in Myanmar, where the challenge now is to push for political progress, including credible steps on human rights and democracy.
We have helped people affected by severe flooding in Southeast Asia, and by drought in the Horn of Africa, where 14 million need emergency help.
Since taking office, I have called for more strenuous action in Somalia.
Must we wait – and see more children die in the sand?
The global food crisis will not go away by itself.
It may now have faded from the headlines.
Last year at this time, rice cost $330 a ton.
Today it is $730.
People who used to buy rice by the bag now do so by the handful.
Those who ate two meals a day now get by on one.
The UN has focused on getting seeds and fertilizers into the hands of small farmers.
We seek a new “green revolution” in Africa.
But we lack new resources.
The international community has not matched words with deeds.
In Burundi and Sierra Leone, Liberia and Timor Leste, our resources are under strain because UN peacekeepers are helping nations turn the corner to peace.
Yet the UN’s preventive diplomacy is often critical.
We see the fruits in Nepal, Kenya and, we hope, Zimbabwe.
Likewise, there is a real chance to reunify Cyprus.
In Georgia, the UN can help ease the tensions resulting from the recent conflict.
In Cote d’Ivoire, we will help organize elections before year’s end – a major stride toward recovery and democracy.
But it is dangerous to think that the UN can address today’s complex problems without the full backing of its member states.
In Darfur, for example, we face a continuing challenge in meeting deployment deadlines.
We lack critical assets and personnel.
If not matched by resources, mandates are empty.
And now all of our work – financing for development, social spending in rich nations and poor, the Millennium Development Goals, peacekeeping – is endangered by the global financial crisis.
We need to restore order to international financial markets.
We must think about a new global economic order that more fully reflects the changing realities of our time.
Those realities call for continuous UN action on countless fronts: combating malaria and AIDS, reducing maternal and child mortality, fighting global terrorism, and ensuring nuclear disarmament and non-proliferation.
On the Korean Peninsula, all the agreements of the six-party talks must be implemented, and Iran must comply with Security Council resolutions and cooperate fully with the International Atomic Energy Agency.
The area of human rights, above all, demands our vigilance.
Justice must be treated as a pillar of peace, security, and development.
We must advance the “responsibility to protect.”
Despite the real political difficulties, we cannot let crimes against humanity go unpunished.
Climate change remains the defining issue of our era.
We must regain our momentum.
Our first test comes in three months in Poznan, Poland.
By then, we need a shared vision of a new global climate change agreement to replace the Kyoto Protocol, which runs out in 2012.
The foundation of all the UN’s work is accountability.
We need to change the UN’s culture.
We must become faster, more flexible, and more effective – more modern.
We must replace our current system of contracts and conditions of service, which are dysfunctional and demoralizing.
But the UN’s Member States must be accountable as well.
Resolutions mandating peace operations cannot continue to be passed without the necessary troops, money, and materiel.
We cannot send brave UN staff – 25 of whom died this year – around the world without assuring their security.
We cannot reform this organization without the required resources.
Today’s uncertainties will pass, but only if we act wisely and responsibly.
By doing so, we will set the stage for a new era of stability and global prosperity, more widely and equitably shared.
The Stem-Cell Race Continues
Scientific research is usually conducted to improve our lives, but it is also an industry, one that represents a massive investment by governments and corporations alike.
The stakes and potential rewards for a few research topics are exceptionally high, which is why the recent finding that the Korean scientist Hwang Woo-suk fabricated the results of his work on stem cells has reverberated so widely.
The episode highlights the ongoing race in global health research that is playing out in the field of stem cells.
Possibly one of the biggest prizes in medical history is up for grabs, and anyone – truly anyone – could seize it.
The last big scientific race of this type was the effort to map the human genome, which promises to alter future lives radically.
That study was initiated by the United States, which used insights developed in the wake of the atomic bombing of Japan to understand the extent of long-term genetic damage.
The current research effort on stem cells and their potential is just as grand, because it will lead to an equally radical medical revolution.
A stem cell is special because it is able to reproduce a form that is different from itself.
Whereas a skin cell or a liver cell, for instance, can reproduce only more skin or liver, stem cells, which are the most robust at the beginning of human development, are “master” cells.
As a fertilized egg turns into an embryo, and then a fetus, those initial stem cells somehow show their daughter cells how to become skin, liver, eye, or bone.
We need to know how this transformation is activated.
Such knowledge would lead to huge, patentable advances.
Most attention is focused on genetic diseases, such as Alzheimer’s and Parkinson’s, and to muscular dystrophy.
In these cases, stem cells would be encouraged to restore nerve tissue.
This would also benefit patients with brain and spinal injuries, or those who have suffered strokes and paralysis.
There would be gains in parallel fields, too, such as gene therapy.
A stem cell changes its identity through a process of “triggering” – a signal literally “turns on” the liver cell gene inside the stem version.
When scientists figure out how to flip these switches, it might be possible to introduce stem cells into the body and activate them so that they correctly replace damaged tissue, whatever it is.
Not surprisingly, given its huge potential, teams of scientists have been mobilized almost everywhere for embryonic stem cell research.
The race has become all the more dramatic since the leading researcher, the US, dropped out, owing to the influence of religion on politics (although the state of California has decided not to miss out, and recently approved a $3 billion subsidy for embryonic stem cell research).
Because the promise is so great, and the science does not require massive infrastructure, many smaller countries have rushed to take advantage of the absence of the US.
Any competent medical research center can enter the race, whether in Mexico, Ethiopia, Indonesia or Yemen.
Whoever wins will have added the equivalent of a Saudi oil field to their economy.
But, although anyone can win, science at this level is never a “eureka” event, with some single breakthrough suddenly ending the race.
Discoveries occur incrementally, and, because it is science, each step is announced and tested.
Research establishments gain momentum this way, with the leaders sweeping up talent, resources, and prestige in a rough-and-tumble intellectual ecology.
Embedded in the larger race are many smaller ones, which jostle for early, impressive results.
In May 2005, Hwang’s research center in Seoul reported the first major achievement.
They claimed that they had developed a technique whereby new, perfect stem cells could be cloned from ordinary ones.
This was big news, for it implied that sufficient numbers of stem cells could be made without controversy, thus allowing anyone to be able to do quality research while avoiding what US President George W. Bush described as “taking a life to save a life.”
More importantly, the Koreans did a common thing these days: they claimed patent rights over the process.
It almost looked for a moment as though South Korea would become a world superpower in health matters.
We now know that the Seoul researchers made up the whole thing.
An investigation by a Seoul National University investigative panel has concluded that the “cloned” stem cells were really created by test-tube fertilizations.
The fraud has bewildered the science community, particularly because the claim that the Korean researchers made was so transparently false.
Why, then, did they place their reputations and careers in jeopardy?
Medical research has always faced many challenges, even when the scientific quest was simply one of discovery.
Now, the challenges are complicated by politics, market forces, and national interests.
With stem cell research, huge fortunes depend on which group takes the lead, wherever their laboratory is located.
As the competition heats up, we should expect amazing developments – and no doubt more public relations gimmicks.
The Stimulus Ostriches
BERKELEY – Of all the strange things that have happened this winter, perhaps the strangest has been the emergence of large-scale Republican Party opposition to the Obama administration's effort to keep American unemployment from jumping to 10% or higher.
There is no doubt that had John McCain won the presidential election last November, a very similar deficit-spending stimulus package to the Obama plan – perhaps with more tax cuts and fewer spending increases – would have moved through Congress with unanimous Republican support.
As N. Gregory Mankiw said of a stimulus package back in 2003, when he was President George W. Bush's chief economic advisor, this is not rocket science. Deficit spending in a recession, he said, “help[s] maintain the aggregate demand for goods and services.
There is nothing novel about this.
It is very conventional short-run stabilization policy: you can find it in all of the leading textbooks...”
I can understand (though I disagree with) opponents of the stimulus plan who believe that the situation is not that dire; that the government spending will be slow and wasteful (whereas properly targeted tax cuts would provide a more effective stimulus); and thus that it would have been better to defeat Obama’s stimulus bill and try again in a couple of months.
I can also understand (though I disagree with) opponents who believe that the short-run stimulus effect of the plan will be small, while America’s weak fiscal position implies a large long-run drag on the economy from the costs of servicing the resulting debt.
What I do not understand is opposition based on the claim that the stimulus package simply will not work: the government will spend its money, households will receive their tax rebates, and nothing will happen afterwards to boost employment and production.
In fact, there is a surprisingly large current of thought that maintains that stimulus packages simply do not work, ever.
This opposition is not coming only from politicians who are calculating that opposition to whatever is proposed may yield electoral benefits; indeed, it does not even reflect any coherent right-wing or indeed left-wing political position.
Root-and-branch stimulus opponents whose work has crossed my desk recently include efficient-markets fundamentalists like the University of Chicago’s Eugene Fama, Marxists like CUNY’s David Harvey, classical economists like Harvard’s Robert Barro, gold bugs like the Council on Foreign Relation's Benn Steil, and a host of others.
I simply do not understand their arguments that government spending cannot boost the economy.
As far as I can tell, they are simply burying their heads in the sand.
At the start of 1996, the US unemployment rate was 5.6%.
Then America’s businesses and investors discovered the Internet.
Over the next four years, annual US spending on information technology equipment and software roared upward, from $281 billion to $446 billion, the US unemployment rate dropped from 5.6% to 4%, and the economy grew at a 4.3% real annual rate as the high-tech spending boom pulled extra workers out of unemployment and into jobs.
Back at the start of 2004, America’s banks discovered that they could borrow money cheaply from Asia and lend it out in higher-yielding domestic mortgages while using sophisticated financial engineering to wall off and strictly control their risks – or so they thought.
Over the next two years, annual US spending on residential construction roared upward, from $624 billion to $798 billion, the US unemployment rate dropped from 5.7% to 4.6%, and the economy grew at a 3.1% real annual rate.
In both of these cases, large groups of people in America decided to increase their spending.
You can argue that neither group should have boosted its spending to such a degree – that both were subject to “irrational exuberance” – and that someone should have taken away the punchbowl earlier. But you cannot argue that these groups did not increase their spending, and that their increased spending did not pull large numbers of Americans – roughly two million in each case – into productive and valued employment.
The government’s money is as good as anybody else’s.
If businesses’ enthusiasm for spending on high-tech gadgetry and new homeowners’ enthusiasm for spending on three-bedroom houses can boost employment and production, then what argument can Harvey, Fama, Barro, Steil, and company make that government spending will not?
I simply do not see it.
The Storm in Sub-Saharan Africa
WASHINGTON, DC – As the world struggles with the most serious financial turmoil of the post-war era, attention has focused on the advanced and emerging-market economies most immediately affected.
But the impact on poor countries is far more severe.
Weak global growth is shrinking export markets, and many commodity prices are plunging.
The combination of tighter credit conditions in the advanced economies and dimmer economic prospects in low-income countries is hitting investment flows.
And workers’ remittances, which now eclipse aid as the biggest financial flows to low-income countries, are also falling.
Sub-Saharan Africa depends heavily on commodity exports, so it is especially vulnerable to the global downturn.
Many African countries have used the past decade to put in place sound and sustainable economic policies that have delivered robust growth and low inflation.
Together with debt relief, these policies have resulted in low levels of public debt, relatively sound financial systems, and – most important – rising living standards.
These gains are now at risk.
The high food and fuel prices that prevailed until recently have taken a heavy toll on the finances of many African economies.
Now they face a second blow from the global recession.
The priority for Africa and the international community must be to ensure that the continent weathers the global financial storm, preserves the significant achievements of the past decade, and continues to make decisive progress in combating poverty.
This is not the time to take a break from efforts to achieve the United Nations’ Millennium Development Goals.
How to help Africa meet this challenge – including by learning from the lessons of past success – will be the goal of a major conference sponsored by the IMF and President Jakaya Kikwete of Tanzania, to be held in Dar-es-Salaam this March.
This discussion of Africa’s prospects will involve not only official policy makers, but also representatives of the private sector and civil society, which, as we all recognize, have a key role to play.
Clearly, the responsibility to implement sound economic policies rests with African countries themselves.
But the international community must stand ready to help.
My view is that strong policies on the African side, with strong support from the international community, offer the best prospects for sustained growth and poverty reduction in Africa.
Here are three priorities that should guide us:
· First, while there may be scope for fiscal stimulus in some countries, in many countries it is limited; hence, the region as a whole must protect its hard-won low level of public debt.
When the storm has passed, low levels of public debt and sustainable public finances will be crucial to preserving spending that helps the poor and to bringing back the international investors who are indispensable for Africa’s future growth;
· Second, falling international prices create an opportunity to bring inflation back down from uncomfortably high levels caused by the global food and fuel price crisis early last year.
This does not mean imposing rigid inflation targets.
But a predictable monetary policy aimed at delivering medium-term price stability – with a flexible exchange rate where appropriate – benefits both the private sector and, most importantly, the poor.
· Third, the international community is obliged to deliver on its commitment to increase aid.
This is not the time to renege on those commitments.
It is equally important to restart global trade talks and bring the Doha Round to a successful conclusion – not least in order to protect Africa from the risk of rising protectionism.
The IMF stands ready to do its part.
We are working closely with our 53 African members on crafting the appropriate policy response.
We have increased our financing to the countries most heavily affected by food and fuel shocks.
And we stand ready to provide additional support – including under a new financing mechanism for countries hit by exogenous shocks – to help those whom the global financial crisis has affected most severely.
We are also stepping up our technical assistance to strengthen economic policy making in Africa, and opening two new regional technical assistance centers.
At the conference in Tanzania, we look forward to feedback and ideas about how the Fund can do even more – and differently.
As Africa and its partners navigate the financial storm together, we must ensure that the most vulnerable are not forgotten.
We must also ensure that solutions for strengthening financial stability and avoiding future turmoil – the focus of April’s G-20 summit – are discussed with all countries concerned.
All eyes are focused right now on the immediate crisis.
But we must not lose sight of the longer-term challenges that will remain after the storm abates.
The Tanzania conference will allow us to assess what we have learned from past successes, as well as what needs to change in the future.
Our shared objective is clear: to ensure that Africa not only weathers the immediate storm, but emerges from it stronger.
The Straits of America
NEW YORK – Macroeconomic indicators for the United States have been better than expected for the last few months. Job creation has picked up.
Indicators for manufacturing and services have improved moderately. Even the housing industry has shown some signs of life.
But, despite the favorable data, US economic growth will remain weak and below trend throughout 2012.
Why is all the recent economic good news not to be believed?
First, US consumers remain income-challenged, wealth-challenged, and debt-constrained.
Disposable income has been growing modestly – despite real-wage stagnation – mostly as a result of tax cuts and transfer payments. This is not sustainable: eventually, transfer payments will have to be reduced and taxes raised to reduce the fiscal deficit.
Recent consumption data are already weakening relative to a couple of months ago, marked by holiday retail sales that were merely passable.
At the same time, US job growth is still too mediocre to make a dent in the overall unemployment rate and on labor income.
The US needs to create at least 150,000 jobs per month on a consistent basis just to stabilize the unemployment rate.
More than 40% of the unemployed are now long-term unemployed, which reduces their chances of ever regaining a decent job.
Indeed, firms are still trying to find ways to slash labor costs.
Rising income inequality will also constrain consumption growth, as income shares shift from those with a higher marginal propensity to spend (workers and the less wealthy) to those with a higher marginal propensity to save (corporate firms and wealthy households).
Moreover, the recent bounce in investment spending (and housing) will end, with bleak prospects for 2012, as tax benefits expire, firms wait out so-called “tail risks” (low-probability, high-impact events), and insufficient final demand holds down capacity-utilization rates.
And most capital spending will continue to be devoted to labor-saving technologies, again implying limited job creation.
At the same time, even after six years of a housing recession, the sector is comatose.
With demand for new homes having fallen by 80% relative to the peak, the downward price adjustment is likely to continue in 2012 as the supply of new and existing homes continues to exceed demand.
Up to 40% of households with a mortgage – 20 million – could end up with negative equity in their homes.
Thus, the vicious cycle of foreclosures and lower prices is likely to continue – and, with so many households severely credit-constrained, consumer confidence, while improving, will remain weak.
Given anemic growth in domestic demand, America’s only chance to move closer to its potential growth rate would be to reduce its large trade deficit.
But net exports will be a drag on growth in 2012, for several reasons:
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The dollar would have to weaken further, which is unlikely, because many other central banks have followed the Federal Reserve in additional “quantitative easing,” with the euro likely to remain under downward pressure and China and other emerging-market countries still aggressively intervening to prevent their currencies from rising too fast.
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Slower growth in many advanced economies, China, and other emerging markets will mean lower demand for US exports.
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Oil prices are likely to remain elevated, given geopolitical risks in the Middle East, keeping the US energy-import bill high.
It is unlikely that US policy will come to the rescue.
On the contrary, there will be a significant fiscal drag in 2012, and political gridlock in the run-up to the presidential election in November will prevent the authorities from addressing long-term fiscal issues.
Given the bearish outlook for US economic growth, the Fed can be expected to engage in another round of quantitative easing.
But the Fed also faces political constraints, and will do too little, and move too late, to help the economy significantly.
Moreover, a vocal minority on the Fed’s rate-setting Federal Open Market Committee is against further easing.
In any case, monetary policy can address only liquidity problems –&nbsp;and banks are flush with excess reserves.
Most importantly, the US –&nbsp;and many other advanced economies – remains in the early stages of a deleveraging cycle.
A recession caused by too much debt and leverage (first in the private sector, and then on public balance sheets) will require a long period of spending less and saving more.
This year will be no different, as public-sector deleveraging has barely started.
Finally, there are those tail risks that make investors, corporations, and consumers hyper-cautious: the eurozone, where debt restructurings – or worse, breakup – are risks of systemic consequence; the outcome of the US presidential election; geo-political risks such as the Arab Spring, military confrontation with Iran, instability in Afghanistan and Pakistan, North Korea’s succession, and the leadership transition in China; and the consequences of a global economic slowdown.
Given all of these large and small risks, businesses, consumers, and investors have a strong incentive to wait and do little.
The problem, of course, is that when enough people wait and don’t act, they heighten the very risks that they are trying to avoid.
The Strange Death of Multiculturalism
An ideology which holds that people from different cultures must live in separate communities within a country, should not take an interest in each other and must not criticise each other is both wrong and unworkable.
Of course, multiculturalism’s more thoughtful advocates never imagined that a cultural community could or should substitute for a political community.
They believed that so long as everyone abided by the law, it was not necessary for citizens to have a single hierarchy of values.
The ideal of multiculturalism at home was echoed with an ideology of cultural relativism abroad, especially in the 1970’s and 1980’s.
This evolved stealthily into a form of moral racism which held that white Europeans deserved liberal democracy but that people of different cultures had to wait for it.
African dictators might do dreadful things but somehow they did not meet with condemnation from many European intellectuals, for criticism implied cultural arrogance.
The Netherlands, where I was born, has perhaps been divided by the debate over multiculturalism more than any other country.
The murder of the filmmaker Theo van Gogh two and a half years ago by an Islamist assassin has incited a wrenching debate about the country’s entrenched culture of tolerance and easy access for asylum-seekers.
Long before the arrival of Muslim guest workers in the 1960’s and 1970’s Dutch society was in a sense ‘multicultural’ in that it was already organised into Protestant, Catholic, liberal and socialist “pillars,” each with its own schools, hospitals, TV stations, papers and political parties.
When guest workers from Morocco and Turkey became de facto immigrants, some began to champion the creation of an additional Muslim pillar.
But at the moment that multiculturalism’s advocates were making this suggestion, Dutch society was undergoing a dramatic transition.
With secularization taking hold, the traditional pillars began to break down.
Moreover, fierce attacks on Muslims started to come from people who, raised in deeply religious families, had turned into radical leftists in the 1960’s and 1970’s.
From defining themselves as anti-colonialists and anti-racists – champions of multiculturalism amp#45;amp#45; they have become fervent defenders of so-called Enlightenment values against Muslim orthodoxy.
These people feared the comeback of religion; that the Protestant or Catholic oppressiveness they knew first-hand might be replaced by equally oppressive Muslim codes of conduct.
But their turn away from multiculturalism is not what prevented the emergence of a “Islamic” pillar in Dutch society.
The main problem with this idea was that people from Turkey, Morocco, and the Arab countries, some deeply religious and some quite secular, and all with perceptible animosities towards each other, would never have agreed on what should constitute such a pillar.
In any case, it is now too late to create such a pillar.
With the earlier pillars having collapsed, the emergence of a new one would bring about a situation where an increasingly integrated majority would be negotiating with a minority, thus perpetuating its isolation in the process.
Whether Europeans like it or not, Muslims are part of Europe.
Many will not abandon their religion, so Europeans must learn to live with them and with Islam.
Of course, this will be easier if Muslims come to believe that the system also works to their benefit.
Liberal democracy and Islam are reconcilable.
Indonesia’s current political transition from dictatorship to democracy, although no unqualified success, shows that this is achievable.
Even if all of Europe’s Muslims were Islamists – which is a far cry from reality – they could not threaten the Continent’s sovereignty and, by the same token, its laws and Enlightenment values.
Of course, there are groups to which Islamism appeals.
The children of immigrants, born in Europe, sense they are not fully accepted in the country where they grew up, but neither do they feel a special bond with their parent’s native country.
Islamism, besides offering them an answer to the question why they do not feel happy with the way they live, gives them a sense of their self-worth and a great cause to die for.
In the end, the only thing that can truly damage European values is Europe’s response to its non-Muslim majority.
Fear of Islam and of immigrants could lead to the adoption of non-liberal laws.
By defending Enlightenment values in a dogmatic way Europeans will be the ones who undermine them.
Our laws prohibiting incitement to violence and insulting people for reasons of their religion are sufficient.
Further constraints on freedom of speech – such as anti-blasphemy laws or, indeed, those laws that make Holocaust denial punishable – go too far.
But this doesn’t mean that we should not weigh our words with care.
We should distinguish carefully between different kinds of Islam, and not confuse violent revolutionary movements with mere religious orthodoxy.
Insulting Muslims simply on the basis of their faith is foolish and counterproductive, as is the increasingly popular notion that we must make sweeping pronouncements as to the superiority of “our culture.”
For such dogmatism undermines scepticism, the questioning of all views, including one’s own, which was and is the fundamental feature of the Enlightenment.
The trouble today is that Enlightenment values are sometimes used in a very dogmatic way against Muslims.
They have become in fact a form of nationalism – “our values” have been set against “their values.”
The reason for defending Enlightenment values is that they are based on good ideas, and not because they are “our culture.”
To confuse culture and politics in this way is to fall into the same trap as the multiculturalists.
And it has serious consequences.
If we antagonize Europe’s Muslims enough we will push more people into joining the Islamist revolution.
We must do everything to encourage Europe’s Muslim to become assimilated in European societies.
It is our only hope.
The Strange Death of Solidarity
The Strange Rebirth of American Leadership
FLORENCE – At the recent annual meetings of the American Economic Association, there was widespread pessimism about the future of the United States. “The age of American predominance is over,” declared one economist.
“The US should brace for social unrest amid blame over who was responsible for squandering global primacy,” said another.
We have heard this story many times before, not only in the US, but in other places as well. George Dangerfield’s controversial history, The Strange Death of Liberal England, describes his country’s sudden decline at the peak of its power at the turn of the last century.
The world everyone knew simply and inexplicably seemed to disappear.
Many Americans – think of the Tea Party’s adherents, for example – fear that something similar is happening to their own country.
Or that it has already happened.
Dangerfield based his diagnosis on a cross-section of institutions, politics, and personalities, set against the bitter class warfare of the time.
Americans, however, have generally been averse to class warfare.
True, the US has been home to a rigid, albeit comparably fluid, class structure ever since its founding.
But Americans just don’t like to talk about it, even when they are whining about the follies of the “elite.”
Nearly all Americans, apart from the richest and poorest, define themselves as “middle class.”
Such remains America’s democratic ethos.
Still, it is right to ask if the American way of life will survive the twenty-first century, and, if it does, whether it will survive in America or migrate elsewhere as the US economy and political system collapse under the accumulated weight of decades of myopic national leadership and squandered opportunities.
Indeed, Chinese President Hu Jintao’s recent trip to Washington was seen by many – particularly many Chinese – as the passing of the torch.
Pessimists have been saying this for a long time.
Optimists, touting GDP and other indicators, will continue to insist that Americans have never had it so good.
If there is any continuity worth underscoring, it is the regular cohabitation of boosterism with declinism: America’s glass is always simultaneously half full and half empty.
It is no coincidence that during the Reagan/Bush years – the last time so assertive a foreign policy coincided with such large deficits – a book like Joseph Nye’s Bound to Lead (1990) could follow in the footsteps of Paul Kennedy’s The Rise and Fall of Great Powers (1988).
The former made a strong case for the necessity of American global hegemony; the latter warned of “imperial overstretch.”
Both authors based their arguments on an assessment of the underlying context – that is, the structure – of world power.
America was overstretched because its global liabilities were increasingly out of balance with its national assets, and it was bound to lead because the world as we know it is arranged favorably for it to do so.
Similar arguments have been raised again recently.
Writers Parag Khanna and Fareed Zakaria have regurgitated those made by Kennedy, Nye, and forebears like Hedley Bull in asserting that the US must lead the world away from a “new medievalism” amid the “rise of the rest” and the relative stagnation of the “West.”
But are such writers making a valid point?
If we look at moments of so-called structural convergence – the 1880’s, 1920’s, 1950’s and 1960’s, and 1990’s, in particular – we see the sources of American prosperity and power emerged in a global context, only to recede again.
Perhaps rise and fall is more of a cyclical than a linear phenomenon.
Or maybe it’s neither.
The missing variable in most of these arguments, even Nye’s, is leadership.
Leaders are never bound to rise or fall by circumstances alone.
Most historians place leadership in the foreground of human history, with structural variables having conditional, not causal, value.
Beneath even the richest soil, Dangerfield wrote, may lie the most perilous residue of discord and destruction.
Why have Americans been so good at leading?
Are Americans specially blessed, or just lucky?
Now that the US has at last begun to move, gradually and thoughtfully, away from the passions that characterized the country’s response to the 2001 terrorist attacks, it is worth asking if Bill Clinton was right to say that America’s virtues and assets always prevail against its vices and defects.
The writers mentioned above are less interested in the essence of power than in its exercise.
They would rather have the US become more sophisticated in the ways of the world.
Khanna, for example – presumably drawing upon the recent writing of Edward Luttwak – urges Americans to learn from the Byzantine Empire in crafting complex and obscure alliances among large and small states and non-state entities, so that diplomacy comes to resemble something like the global derivatives market.
Americans don’t do this particularly well, however Byzantine their country’s own politics and policy-making may seem.
Which takes us back to structure.
The US political system was never designed to rule the world. Its checks and balances were meant to frustrate any such mission at the hands of an all-powerful executive, and it is doubtful that Americans would support such activism in perpetuity.
The secrets of American success are transparent yet difficult to quantify.
Americans’ pragmatism, opportunism, fair-mindedness, inventiveness, adaptability, optimism, and, above all, their inherent competitiveness offset their tendencies toward violence, impatience, self-righteousness, and unpredictability, their fondness for novelty and celebrity for their own sake, and their self-assertion en masse – getting there, as they like to say, “fastest with the mostest.”
Those who understand Americans’ deep-rooted passion for “making it” know why class or any other civil warfare has not succeeded in destroying America from within.
The American character prefers displacement to destruction, the win-win to the zero-sum.
That is still true, both at home and abroad.
The Streets of 2012
NEW YORK – What does the New Year hold for the global wave of protest that erupted in 2011?
Did the surge of anger that began in Tunisia crest in lower Manhattan, or is 2012 likely to see an escalation of the politics of dissent?
The answers are alarming but quite predictable: we are likely to see much greater centralization of top-down suppression – and a rash of laws around the developed and developing world that restrict human rights.
But we are also likely to see significant grassroots reaction.
What we are witnessing in the drama of increasingly globalized protest and repression is the subplot that many cheerleaders for neoliberal globalization never addressed: the power of globalized capital to wreak havoc with the authority of democratically elected governments.
From the perspective of global corporate interests, closed societies like China are more business-friendly than troublesome democracies, where trade unions, high standards of human-rights protection, and a vigorous press increase costs.
All over the world, the pushback against protest looks similar, suggesting that state and corporate actors are learning “best practices” for repressing dissent while maintaining democratic facades.
In the United Kingdom, Prime Minister David Cameron routinely impugns human-rights laws; the Metropolitan Police have sought authority to use baton rounds – foot-long projectiles that have caused roughly a dozen deaths, including that of children, in Northern Ireland – on peaceful protesters; and a police report on the threat of terrorism, distributed to “trusted partners” among London businesses,included updates about Occupy protests and referred to “suspected activists.”
The UK has stringent internal-security legislation, but it never had a law like the United States Patriot Act.
After anti-austerity protests in early 2011, followed by riots in major cities in August, the Metropolitan Police claimed powers to monitor private social-media accounts and smartphones.
And, under the guise of protecting this summer’s Olympics against terrorism, the British military is establishing a massive base in London from which SAS (special forces) teams will operate – a radical departure from Britain’s traditional civil policing.
In Israel, Ha’aretz reports that Occupy-type protests have been met with police violence, including a beating of a 15-year-old girl, and threats of random arrest.
Israel, like Britain, has seen a push, seemingly out of nowhere, to enact new laws crippling newsgathering and criminalizing dissent: a new law makes it potentially a crime to donate to left-wing organizations, human-rights laws have been weakened, and even investigative reporting has become more dangerous, owing to stricter libel penalties.
Ha’aretz calls the push “the new feudalism.”
Finally, in America, the National Defense Authorization Act, enacted by Congress in December, allows the president to suspend due process for US citizens, detain them indefinitely, and render them for torture.
One should not be surprised to see similar legislation adopted in democracies worldwide.
Not only are laws criminalizing previously legal dissent, organizing, and reporting being replicated in advanced democracies; so are violent tactics against protesters, backed by the increasing push in countries with long traditions of civil policing to militarize law enforcement.
Indeed, increasingly sophisticated weapons systems and protective equipment are being disseminated to civilian police officers.
In the US, the federal government has spent an estimated $34 billion since the September 11, 2001, terrorist attacks to arm state and local police forces with battlefield-grade hardware.
Investigative reporting has also revealed cross-pollination of anti-protest training: local police from cities like Austin, Texas, have been sent to Israel for training in crowd control and other tactics.
The globalization of mercenaries to crack down on dissent is also proceeding apace.
Mercenaries are important in a time of global grassroots protest, because it is easier to turn a foreigner’s guns or batons against strangers than it is to turn the military or police against fellow citizens.
Erik Prince, the head of the most infamous outfit, Academi (formerly Xe Services, formerly Blackwater), has relocated to the UAE, while Pakistani mercenaries have been recruited in large numbers to Bahrain, where protesters have been met with increasingly violent repression.
But this apparently coordinated pushback against global protest movements is not yet triumphant – not even in China, as the people of Wukan have shown.
While the outcome of the villagers’ protest against the local government’s confiscation of their land remains uncertain, the standoff reveals new power at the grassroots level: social media allows sharper, coordinated gatherings and the rapid dissemination of news unfiltered by official media.
The Internet is also disseminating templates of what real democracy looks like – instantly and worldwide.
Not surprisingly, people use this technology in ways that indicate that they have little interest in being cordoned off into conflicting and competing ethnicities, nationalities, or religious identities.
Overwhelmingly, they want simple democracy and economic self-determination.
That agenda is in direct conflict with the interests of global capital and governments that have grown accustomed to operating without citizen oversight.
It is a conflict that can be expected to heighten dramatically in 2012, as protesters’ agendas – from Occupy Wall Street to Occupy Moscow – gain further coherence.
Much is at stake.
Depending on the outcome, the world will come to look either more like China – open for business, but closed for dissent – or more like Denmark.
China’s Dream Team
NEW HAVEN – China’s recent leadership transition was widely depicted as a triumph for conservative hard-liners and a setback for the cause of reform – a characterization that has deepened the gloominess that pervades Western perceptions of China.
In fact, nothing could be further from the truth.
Xi Jinping and Li Keqiang – the top two officials in China’s new governing council (the Standing Committee of the Politburo) – are both well educated, well traveled, and sophisticated thinkers who bring a wealth of experience to the many challenges that China faces.
As so-called Fifth Generation leaders, they continue the steady progress in competence that has marked each of China’s leadership transitions since the emergence of Deng Xiaoping in the late 1970’s.
While it is entirely premature to judge the style and direction that China’s new leaders will take, three early hints are worth noting.
First, Xi’s assumption of power is more complete than was the case in earlier transitions.
By immediately taking the reins of both the Chinese Communist Party (CCP) and the Central Military Commission, he has a greater opportunity to put his personal stamp on policy than his predecessors had at the start of their administrations.
Yes, China governs by a consensus of the Standing Committee. But Xi is well positioned to drive the thinking of a now-leaner decision-making body (downsized from nine members to seven).
Moreover, he has long favored a market-friendly, scientific approach to economic development, which will be vital to China’s future.
Second, Li Keqiang – the presumptive incoming premier – could be the big surprise in the new leadership team.
Unlike the current premier, Wen Jiabao, who was third in the chain of command for the past ten years, Li has been elevated to number two, which suggests a greater potential for power-sharing between the CCP and the government at the top of China’s new team.
With a Ph.D. in economics, Li, who, as Executive Vice Premier, headed the all-important “Central Committee Finance and Economy Leading Small Group,” is especially well equipped to deal with the long-awaited structural transformation of China’s economy.
Indeed, having overseen China 2030 – an extraordinary joint report recently produced by the World Bank and China’s own high-level think tank, the Development Research Center – he has a deep understanding of the roadmap that China must embrace.
His promotion could be a major step up from Wen, who emphasized rhetoric and strategy more than implementation.
Third, and contrary to prevailing wisdom in the West, Wang Qishan, one of China’s savviest and most experienced senior officials, has not been relegated to obscurity in his new position overseeing “discipline” on the Standing Committee.
Yes, Wang has invaluable experience in the financial sector, and it would have been logical for him to assume similar responsibilities on the new leadership team.
But, as one of the top seven in the CCP hierarchy, he will still be able to weigh in on all important economic and financial matters, while assuming responsibility for tackling one of China’s toughest problems – corruption.
Having known Wang for more than 15 years, my sense is that he is very well suited to this vital task.
The other members of the new Standing Committee bring a broad array of experience and skills.
That is especially true of Yu Zhengsheng and the two Zhangs, Dejiang and Gaoli, who come from senior roles in three of China’s most powerful and dynamic urban centers – Shanghai, Chongqing, and Tianjin.
Their deep knowledge of the key role played by urbanization in driving economic development will be critical to broadening the structural transformation that China now faces.
The West is not only overlooking the new Chinese leaders’ enhanced skill set, but is also misjudging the current state of the country’s economy, which, while far from perfect, is not crisis-torn and in desperate need of a quick fix.
In fact, China is emerging in reasonably good shape from yet another global slump.
This gives its new leaders leeway between now and the National People’s Congress in March 2013 to focus on the development of implementation tactics for their strategic agenda.
None of this is to minimize China’s enormous challenges.
But strategy is not the problem; the pro-consumption 12th Five-Year Plan lays that out with great clarity.
The new leadership must now shift the focus to commitment and implementation of that strategy – namely, through enactment of a new set of bold reforms, especially those related to the services sector, the social safety net, and state-owned enterprises.
Xi’s emphasis on the “top-level design” of reforms lends itself particularly well to this agenda, as does Li’s intimate familiarity with the detailed blueprint provided by China 2030.
Western observers, focusing on recent public statements by Xi and Li, highlight a dearth of comments in favor of economic or political reforms.
But the same could have been said of the early utterances of Deng, modern China’s greatest reformer.
As Ezra Vogel notes in Deng Xiaoping and the Transformation of China, Deng’s first public statement after his political rehabilitation in 1976 was, “Marxism-Leninism and Mao Zedong Thought constitute the guiding ideology of the party.”
Those were not exactly enlightened words – especially in view of what was shortly to come.
Yet Deng seized the moment at a critical juncture that is strikingly reminiscent of the one now faced by Xi and Li.
As is the case in any country’s leadership transition, no one knows for certain whether China’s incoming administration is up to the multiplicity of challenges that they face.
Since the days of Deng, China has had an uncanny ability to rise to the occasion and meet its challenges head on.
The new generation of leaders has the right skills and experience for the task.
Western biases notwithstanding, we will know soon enough if they can translate strategy into action.
The Stressed-Out Brain
NEW YORK – Stress contributes to the onset of cardiovascular disease and depression, among other illnesses.
And it is not only major stressful life events that exact a toll on our bodies; the many conflicts and demands of daily life elevate and sometimes disrupt the workings of our response systems for stress, causing wear and tear on the body and brain.
This burden of chronic stress, called “allostatic overload,” reflects not only the impact of life experiences but also our genetic constitution.
Moreover, individual habits such as diet, exercise, the quality and quantity of sleep, and substance abuse also play a major role, as do early life experiences that set life-long patterns of behavior and physiological reactivity.
There are three categories of stress:
· Positive stress, for which a person feels rewarded by surmounting a challenge.
· Tolerable stress, which results from serious life events – for example, divorce, death of a loved one, loss of a job – but where the affected person has good support systems.
· Toxic stress, which involves the same types of serious events, as well as the accumulation of daily struggles, but without good support systems.
The difference between tolerable and toxic stress depends on the perceived degree of control that a person experiences.
Moreover, low self-esteem exacerbates a feeling of helplessness and lack of control.
Social support by friends and family is vital to ameliorating the effects of tolerable stress and keeping it from becoming toxic.
These are all functions of the brain – the key organ in our response to stress.
The brain interprets what is threatening and, therefore, stressful; regulates behavioral and physiological stress responses – the latter through the autonomic, immune, and neuroendocrine systems; and is a target of stress, undergoing structural and functional remodeling of its circuits that affects its performance.
This remodeling includes limited replacement of neurons in the hippocampus, a brain region important for spatial memory and memory of events in our daily lives.
The recognition of the brain’s vulnerability and plasticity under stress began with investigations of the hippocampus, and it now includes the amygdala, a brain region involved in fear, anxiety, and mood, and the prefrontal cortex, which is important in decision making, memory, and top-down control of impulsive behavior, as well as regulation of the autonomic nervous system and stress hormone axis.
Repeated stress causes neurons in the hippocampus and the prefrontal cortex to shrink and lose connections with other nerve cells, while it also causes neurons in the amygdala to grow and form new connections.
Because the remodeling of neurons by stress is reversible, researchers now believe that chronic anxiety disorders and depression represent a lack of resilience, or spontaneous recovery, in susceptible individuals.
Such a lack of recovery then requires medication, behavioral interventions, or both.
Hormones associated with stress protect the body and brain in the short run and promote adaptation, but the chronic activity of these same hormones brings about changes in the body that cause allostatic overload, along with its potential follow-on diseases.
For example, the immune system is enhanced by acute stress but suppressed by chronic stress.
By the same token, the brain shows enhanced activity during acute stress, with improvement in certain types of memory, but undergoes structural changes that increase anxiety and decrease mental flexibility and memory capacity as a result of chronic stress.
Developmental influences involving the quality of parenting and acquisition of attachment have a powerful influence on subsequent stress vulnerability during the rest of our lives – for example,  abuse and neglect in childhood increase our vulnerability to physical and mental disorders, including obesity, cardiovascular disease, depression, post-traumatic stress disorder, substance abuse, and antisocial behavior.
Among the most potent causes of stress in adult life are those arising from competitive interactions between animals of the same species, leading to the formation of dominance hierarchies.
Psychosocial stress of this type not only alters cognitive function in lower-ranking animals, but it can also promote disease (for example, atherosclerosis) among those vying for the dominant position.
Social ordering in human society is associated with gradients of disease, with an increasing frequency of mortality and morbidity as one descends the scale of socioeconomic status, which reflects both income and education.
Although the causes of these gradients of health are very complex, they are likely to reflect, with increasing frequency at the lower end of the scale, the cumulative burden of coping with limited resources and stressors as well as differences in lifestyle, and the resulting allostatic overload that this burden places on the physiological systems involved in adaptation and coping.
The brain’s response to stress does not necessarily constitute “damage” per se and is amenable to reversal as well as prevention by treatments that include drugs, exercise, diet, and social support.
And, because the social environment has powerful effects through the brain on the rest of the body, public and private-sector policies can have a positive impact on health, providing a top-down benefit to brain and body function.
This may occur through policies that improve education, provide better housing, improve commuting, regulate working conditions, increase availability of health foods, and provide tax relief for those in the lower and middle classes.
Such policies might well prevent disease, thereby saving money, reducing human suffering, and promoting healthier and more meaningful lives.
The Stressful Life of Laboratory Animals
Research on animals is performed to gain more knowledge about diseases and how to cure them, and to evaluate drugs for toxicity before testing them on humans.
In fact, animal studies have played a vital role in almost every major medical advance.
Although researchers are committed to finding new ways to reduce and replace animal testing, current technology cannot yet replace many types of animal research.
The Nuffield Council on Bioethics estimates that between 50 and 100 million animals, from flies to monkeys, are euthanized for research each year worldwide, with roughly 90% of the vertebrate animals used for research being rodents.
Gaining useful knowledge from animal research requires robust experimental findings: different scientists should be able to reproduce them in different locations.
This requires a thorough understanding of each animal species and its biology.
Evidence is gradually accumulating that the majority of mammalian research animals, particularly rodents, are mentally stressed by their living conditions.
Stress is generally defined as the state that results when the brain instructs the body to make changes in order to adapt to a new or excessive demand and the individual perceives that the demand will exceed the personal resources which he or she has available.
The response is fuelled by stress hormones that flow through the body, altering every organ and biochemical function, with wide-ranging effects on metabolism, growth, and reproduction.
Although the environments of laboratory animals are usually well controlled in terms of lighting, temperature, and humidity, there are many uncontrolled sources of noise in animal facilities, most of which derive from human activities.
These include high-pressure hoses, cage cleaners, and air-conditioners/heaters; squeaking doors, carts, and movable chairs; and jangling keys.
Rodents, in particular, are sensitive to these noises, and studies show that this sensitivity does not diminish with time, as is commonly assumed.
These noises can alter rodents’ behavior and even adversely affect their health.
Yet, surprisingly, many scientists are unaware that loud noises in their animal facilities can affect research outcomes and compromise their data.
Apart from noise problems, research animals are often housed in small cages with no source of enrichment, such as wheels, shelves, or tubes.
Such devices enable animals to exert some control over their environment, such as escaping an attack from a cage-mate by moving to another level in the cage or hiding.
Often, researchers are unwilling to include such items in their animals’ cages because other researchers do not.
However, rigorous standardization of the environment, particularly if it leads to barren surroundings, increases the risk of obtaining results that, being specific to a narrow set of conditions, cannot be compared with other researchers’ results.
If animals are under stress, they can have permanently raised concentrations of stress hormones, reduced concentrations of sex hormones, and compromised immune systems.
These uncontrolled variables make the animals unsuitable subjects for scientific studies.
To ensure good science, research animals should be healthy and exhibit normal behavior, apart from the specific effects under investigation.
Researchers often dismiss questions concerning environmental influences on their experimental data by claiming that such effects “cancel out,” because their control animals are housed under the same conditions.
But the conclusions drawn from such experiments are specific to the stressed animals and cannot necessarily be extrapolated to healthy animals.
The increasing use of genetically modified mice since their advent 20 years ago amplifies this problem.
Genetically modified mice either lack a specific gene or gene-pair (knock-out mice) or carry a piece of foreign DNA integrated into their own chromosomes (transgenic mice), and are used to deduce the functions of particular genes.
Studies are beginning to show that an animal’s environmental conditions can completely change the results of genetic studies.
A more humane and effective way to ensure the validity and usefulness of animal experimentation would be to provide conditions that minimize stress-related activities such as excessive grooming and fighting.
In addition, the environment should allow the animals to perform the behaviors normal for their species.
Normal and aberrant behaviors for each species could be agreed upon institutionally and a list made available to all investigators.
Designing an environment to suit animals’ psychological and physiological needs would be far preferable to the minimalism, otherwise known as “standardization,” that is currently employed.
The exact conditions used to achieve these goals would probably vary between laboratories. But the end result would be similar.
Both the welfare of research animals and the quality of the science would be markedly improved, leading to data that could be meaningfully applied to our quest for medical knowledge.
The Strong Force is Almost With Us
HAMBURG – Roughly 60 years ago, the discovery of nuclear power promised the ultimate solution to the world’s energy problems.
Today, this promise remains unfulfilled.
Development of nuclear technology has stagnated, with nuclear power plants still using technology developed a half-century ago.amp#160;
Nuclear energy is produced in the decay processes of heavy elements, like Uranium or Thorium.
The nuclei of their atoms usually decay into two smaller nuclei and a couple of neutrons, releasing many million times more energy than any chemical process ever could.
Heavy elements contain so much energy because they stored a fraction of the energy released in the supernova explosion that created our Earth and the solar system around five billion years ago.amp#160;
Today’s power plants use as a fuel a special kind of Uranium, U-235, which is burned in a chain process whereby the neutrons from one nuclear decay induce the next decay.
Neither Uranium-238, which is roughly 100 times more abundant than U-235, nor Thorium, which is even more accessible, is used to produce energy on a large scale.
Indeed, in principle, every heavy element, even lead, is a potential source of nuclear energy.
Everybody who has studied nuclear decay processes has been struck by the myriad possible ways in which energy can be produced.
Progress in gaining access to this resource has, however, been very slow.
From the scientific point of view, the main problem is a lack of knowledge.
Despite many hundreds of well-functioning nuclear power plants, our understanding of nuclear forces is only empirical, and empirical knowledge is always imperfect.
For example, in producing nuclear energy, the decay reactions repeat many times, with the imperfections of every repetition resulting in a loss of predictive power of computations.
This hampers the optimization process, and is one of the main reasons why several large projects investigating energy production using more abundant Uranium-238 or Thorium (fast breeder reactors) were closed in Europe and the United States before they achieved the expected level of performance.
Another problem is the nuclear waste that emerges when energy is produced in the decay process.
The waste can be substantially, or even completely, reduced if we could use an alternative form of nuclear decay that is triggered by externally accelerated particles.
Here, too, however, we need more precise knowledge of the properties of nuclear processes.
The force binding atomic nuclei is a special case of the “strong force,” one of the four fundamental forces in nature, and is extremely difficult to investigate, because it acts very quickly and violently.
Around 50 years ago, it was proposed to study the strong forces by firing protons at each other at very high energies.
The acceleration of particles at high energy slows down all physical processes, because, according to Einstein’s theory of relativity, time runs more slowly for fast-moving objects.
Since protons are the simplest nuclei, it was hoped that, at high energy, the forces acting during the scattering of protons could be observed and analyzed like in a slow-motion film, providing a precise understanding of the strong force.
Several large accelerator research centers were built, and the scattering of particles at high energies revealed a fascinating structure of matter.
New particles, called gluons, were found to mediate the strong force.
Their discovery should provide a clue to precise knowledge of the strong force.
At short distances, gluons create an attractive force that is pretty weak and well understood.
But, at larger distances, comparable to the proton radius, the force becomes really strong, and a very large number of gluons is involved, forming complicated structures that are not well known today.
Therefore, for some time, it was not expected that the properties of the strong force could be directly derived from the properties of gluons.
In the last few years, however, experiments at the HERA accelerator in Hamburg, Germany, have observed the strong interaction effects in slow motion, which could open a way to a precise understanding of the strong force.
At the HERA accelerator, the scattering of electrons on protons was studied at the highest energies ever for this type of experiment.
The HERA machine operated from 1992 until 2007.
One of its most important discoveries was that several distinct phenomena observed at high energies and short distances could be clearly attributed to the emission of gluons and the emergence of gluonic structures.
By observing how these structures change while increasing the distance, it should be possible to follow – and thus to understand –the action of the strong force.
The appearance of such clear gluonic structures was unexpected; the experiments at HERA were not designed to study them.
But the precision experiments required to measure the strong force can be designed and built with known technology.
So two large groups of physicists – one concentrated around the Brookhaven and Jefferson National Laboratories in the United States, and the other around CERN in Geneva – are proposing to restart the investigation of electron-proton interactions.
The study of these interactions should provide a precise understanding of the strong force.
And, as the history of physics has shown, a better understanding of natural forces will open new, completely unexpected possibilities.
For example, our understanding of electromagnetic force, developed mostly in the nineteenth and early twentieth centuries, gave rise to today’s breathtaking developments in telecommunications, computers, chemistry, and material sciences.
A preciseunderstanding of the strong force could be just as important, opening new ways to use nuclear-energy resources while solving the problems of safety and nuclear waste.
What’s Stopping Europe?
PITTSBURGH – On a recent visit to Greece, French President François Hollande declared that Europe’s decline was over, and urged French companies to invest in Greece.
Bad advice.
French production costs are high, but Greek costs are higher.
Despite the considerable decline in Greek (and Italian and Spanish) real GDP since 2007, adjustment is far from complete.
In fact, one would be hard pressed to find broad agreement with Hollande’s assessment anywhere in Europe.
Before the recent Italian election, financial markets showed signs of optimism, encouraged by the European Central Bank’s policy of guaranteeing eurozone members’ sovereign debt, expanding its balance sheet, and lowering interest rates.
Bondholders gain when interest rates fall.
But unemployment continues to rise in the heavily indebted southern countries, and output continues to lag behind Germany and other northern European countries.
The main reason for the lag is not simply low demand or large debts.
There is a vast difference between unit labor costs – real wages adjusted for productivity – in Germany and in the heavily indebted southern countries.
When the crisis began, production costs in Greece were about 30% higher than in Germany, so Greece exported very little and imported very much.
Production costs in other heavily indebted countries were 20-25% higher than in Germany.
Growth will not resume until production costs in the indebted countries decline, which requires either a substantial permanent increase in productivity, a reduction in real wages, or both.
While some adjustment has occurred, much of the change is not permanent.
Austerity reduced the number of employed workers, particularly those with low skill and productivity levels. But gains in measured productivity growth from this source are not permanent changes, so a large part of the reported reductions in unit labor costs are temporary.
Indeed, major cost differences remain.
In Greece, the private sector has been forced to adjust, but the government failed to keep its promise to reduce public employment.
That will prolong excessive government spending, and deficit targets will not be met on a sustained basis.
Large reductions in public-sector wages brought down the primary deficit, but employment maintenance lowers productivity, raises costs, and delays adjustment.
In Italy, former Prime Minister Mario Monti’s government undertook some reforms, but it continued to support unions and corporate monopolies.
And Italy’s parliament rejected many of Monti’s proposed reductions in government spending.
Labor and many product markets remain closed, despite the urgent need to increase competition, lower production costs, and raise productivity.
After five years of slow growth and rising unemployment, voters in other indebted countries, like Italians (and French voters before them), are likely to reject additional spending reductions, tax increases, and further painful deregulation.
Europe must find more effective policies that reduce production costs toward German levels.
The economic historian Harold James has shown in a recent book that in the 40 years of negotiations leading to the adoption of the common currency, all of the problems that now beset the eurozone were discussed repeatedly.
Everyone understood that a monetary union would require enforceable fiscal and banking rules.
But such rules were never adopted.
Before the euro, countries adjusted misaligned production costs by devaluing or revaluing their exchange rates.
Fiscal austerity is a poor substitute.
It works slowly, if at all, because elected governments are often reluctant to implement their promises – and may not feel bound by those of previous administrations (especially if they owe their victory to voters who are rebelling against years of belt-tightening with no evidence of renewed growth).
Likewise, politicians are reluctant to adopt deregulation that eliminates state-sponsored special privileges.
For several years, I have proposed a policy that combines growth and fiscal rectitude.
Let all the heavily indebted southern European countries jointly agree to join a weak euro, which would float against the stronger northern euro.
When the weak euro reduces the heavily indebted countries’ production costs by 20-25%, they can rejoin the “hard” euro if they accept fiscal reforms that are subject to approval by the European Commission (and thus by the hard-euro creditor countries). After all, a fixed exchange rate or common currency requires limits on fiscal independence.
The Italian election sent a message.
After five years of decline in living standards, voters oppose more austerity and further retrenchment without growth.
Restoring a sound euro requires policies that revive growth, rein in government spending, and reform heavily regulated labor and product markets.
The Structure of Institutional Reforms
FRANKFURT – Despite abundant talk in Europe nowadays, there is no crisis of the euro.
Some countries, instead, are dealing with a sovereign-debt crisis and the consequences of inadequate economic reform.
The challenges are characteristic not only for the euro area.
Most advanced economies around the globe are facing similar problems.
All countries need to draw firm conclusions from the current crisis.
In the euro area, instead of continuing to deny that monetary union limits national fiscal sovereignty, they must come to terms with economic reality and follow stricter budgetary rules.
When the global financial crisis erupted, the euro shielded countries that in comparable circumstances would have been plunged into a deep currency crisis.
This shield may, perhaps, have worked too well because the more weakly performing countries faced no discipline from financial markets.
Indeed, despite massive imbalances and huge disparities in the level of private and public debt across the euro area, interest-rate spreads on government bonds disappeared in the run-up to the crisis.
Market participants – including ratings agencies – either flagrantly misapprehended risk or never took the Maastricht Treaty’s no-bailout clause seriously.
Meanwhile, the institutional mechanisms implemented for coordination of economic and fiscal policies remained idle.
On the fiscal side, the rules of the Stability and Growth Pact were even weakened, and the decisions on adjustment measures and possible sanctions became dependent on short-sighted political considerations.
As long as Europe’s potential sinners continue to judge its de facto sinners, peer pressure will not work.
Indeed, deficit-reduction programs were all too often founded on overly optimistic growth assumptions, and in times of robust economic growth, debt reduction was neglected.
Reliable statistics were not available in all countries, and for years there was no political will to protect public budgets from the impact of rapidly aging populations on pension and health-care costs.
All of these failures became fully manifest in 2005, when European governments watered down the Stability and Growth Pact’s rules to a degree that effectively made them optional.
The European Central Bank was critical of that decision, whose dramatic consequences have exceeded our greatest fears.
The financial crisis hit fragile public budgets with full force.
The effect of automatic stabilizers in the economic downturn, state support for banks, and the fiscal stimulus packages adopted by governments all undermine fiscal sustainability.
Financial markets’ sudden reappraisal of sovereign risk has now put euro-area governments under considerable pressure to reduce their deficits.
But there is a risk that fiscal consolidation will wane as soon as a degree of deficit reduction has calmed the markets.
To minimize that risk, euro-area countries must fundamentally re-work and strengthen the institutional architecture for coordinating long overdue structural reforms and for safeguarding public finances.
These efforts will require far-reaching reforms.
What is required is de-politicized fiscal and macroeconomic surveillance, stricter and more binding budgetary rules, smoother recourse to sanctions for breaching them, and close co-ordination of economic policies.
De-politicization of surveillance is best achieved by creating an independent body, whether formal or informal, while stricter and more binding rules must include a stronger link between deficit and debt criteria.
Indeed, reducing the current high debt levels in the euro area will require substantial consolidation.
First, governments should bring fiscal deficits down to below 3% of GDP, in line with what has been agreed by the European Council.
Second, to set high debt ratios on a diminishing path, governments will have to aim at reducing deficits further in line with their medium-term budgetary objectives.
Sanctions, to be credible, must come into play long before a country falls into economic difficulties; therefore, they should not be purely financial in character, but should include other measures as well.
Such sanctions should begin to be imposed when governments fail to meet minimum requirements for attaining medium-term objectives.
They should then become incrementally more severe the longer and the more seriously the rules are breached.
Where structural policy is concerned, we need a better architecture for overseeing and safeguarding individual countries’ competitiveness, and for eliminating imbalances.
This calls for competitiveness to be monitored, and made subject to surveillance.
Countries should be assigned to a risk group in line with their economic vulnerability.
The higher the risk, the more binding the recommendations for the reduction of imbalances, the stricter the surveillance of how well appropriate measures are implemented, and the harsher the possible sanctions for continued rule violations.
Some have proposed establishing a new institution for crisis management, which would most likely require a treaty change.
But, if the reforms in the realm of fiscal policy and coordination of economic policy are successful, such an institution would never need to act, and would thus be redundant.
Structural reforms and fiscal consolidation are, incidentally, tasks not only for countries with a current-account deficit.
Of course, the pressure on these countries to act is particularly high, but there is no country in the euro area whose budgetary situation can be described as enduringly sound.
Surplus countries, too, must adopt measures to strengthen the domestic economy by creating incentives for investment and employment.
These adjustment measures are painful but necessary.
Without structural reforms to strengthen employment and growth, even the most earnest efforts to foster recovery will come to nothing both economically and politically.
The Struggle for Mastery in Iran
TEHERAN: The trial of thirteen Iranian Jews on espionage charges is but the latest sign of a conservative backlash against Iran's reform movement, headed by President Mohammed Khatami.
Conservatives want not only to silence the reformers, but to provoke confrontation.
Closure of pro-reform newspapers, and the arrests of reform-minded journalists seem deliberate attempts to goad the reformers, who won a majority of seats in last February's first round of parliamentary elections.
For if the reformers are incited into demonstrating and street chaos ensues, the security forces will have a handy excuse for a crackdown.
In the state of emergency likely to follow, installation of a new parliament might be delayed.
Recognizing this, reform leaders urge restraint on their supporters.
They are confident about eventual triumph, because the majority of youth and women support reform.
Two thirds of Iran's 65 million people are under 25 years old.
But young people in Iran, as everywhere, are not known for patience.
Here lies the threat of unrest.
Tension is rife because, although the economy is a shambles, no one is doing anything about it.
Those campaigning for reform are mostly interested in the social and political changes called for by President Khatami under the rubric of 'civil society' and the 'rule of law.'
The President himself seems not very interested in economics.
He should be.
Unemployment is high, especially among young Iranians.
Of the 1.9 million youngsters in higher education who are expected to enter the labour force over the next five years, 15.2% have no hope of employment.
The total workforce will reach 17.7 million by the end of the current five-year plan, with 2.8 million or 15.8% unemployed.
More than 50% of university graduates cannot find jobs, and now look abroad for work.
Those who cannot go abroad form the base of the large number of educated young unemployed - a classic ingredient in causing public disorder.
Growth is the only viable solution to all this, but it is nowhere to be seen amidst state controls and rampant corruption.
This year's real GDP is expected to grow a mere 1.5%.
Even for those in work, incomes are low - especially, in relative terms, for professionals.
All Iranian factions blame today's economic crisis on the ruinous 1980-88 war with Iraq as well as on continued US sanctions.
But the real cause is the inertia of state control.
The Iranian economy is 80% state-owned (as provided in the revolutionary constitution - article 44) and prices of basic goods are controlled.
Massive subsidies are needed to finance the raw material inputs of state companies, and these consume the bulk of the government's oil revenues (10% of GDP).
Subsidies combined with a bloated civil service (there are over 2 million state employees) generate chronic budget deficits, estimated at 5% of GDP in 1998-99.
Worse, the deficit is financed by printing money, fanning inflation, which reached 24% in 1998-99 and is rising.
Inflation and unemployment will remain high until the government acquires the will and authority to carry through on structural reforms in the teeth of opposition from both the conservative/revolutionary establishment and the vested economic interests spawned by the revolution.
Labour market liberalization is the most necessary reform.
Existing labour laws (introduced after 1979) make it costly for employers to hire workers, who benefit from compulsory bonuses and generous severance payments.
Another key target should be the bonyads (charitable foundations).
Exempt from taxation, Bonyads and their regime-appointed directors are very wealthy, with vast powers over major industries.
Another source of fiscal and economic distortion comes from the semi-official merchants, or bazaaris, whose businesses account for 10% of GDP, and who enjoy, together with various bureaucrats, special privileges such as access to hard currencies at special rates.
Such distortions need to be replaced by investment, both from repatriated flight capital and foreign sources.
Both should come, lured by the country's rich natural resources.
But investment is impossible without privatization, to which the regime has an ideological allergy.
Rapprochement with the outside world would help.
Here, America is the key.
But the hints of d‚tente with America that emerged since Khatami's inauguration could be undermined by domestic perceptions either of US intransigence (e.g. over sanctions) or that well-intended US engagement is interference in Iran's internal affairs.
Seemingly balked on political reform, President Khatami should focus on economic renewal which, when it comes, might revive his political agenda too.
The Struggle for Mastery of the Pacific
TOKYO – On May 1, the Shanghai Expo began, illuminated by a huge fireworks display.
The festivities will continue until the end of October.
In 1970, Japan celebrated its own tremendous postwar economic growth with the Osaka Expo, as well as by launching the Bullet Train.
The world watches and wonders whether China will follow Japan’s path and emerge as a fully modern yet peacefully inclined country.
There are reasons to doubt that it will.
China’s willingness to demonstrate its new might is not confined to land; on the contrary, China’s maritime ambitions have no end in sight.
Indeed, when Admiral Timothy J. Keating, the commander of the United States Navy’s Pacific fleet, visited China in 2007, a high-ranking Chinese naval officer proposed that the two countries demarcate a “zone of control” at Hawaii, defining the limits of US naval influence and the beginning of China’s maritime sphere.
The Chinese navy, it is now believed, is trying to achieve that very aim.
China’s ambition is marked by muscle flexing.
On April 8, a helicopter from a Chinese naval vessel operating in international waters south of Okinawa came within 90 meters of a Japanese Self-Defense Force escort ship – so close that a gun-wielding Chinese soldier was clearly visible.
Japan protested, describing the incident as an “extremely dangerous act.”
As if demonstrating its intention to ignore the protest, on April 21 Chinese Navy vessels sailed northward, between Okinawa and the Miyako islands, and conducted a large-scale exercise.
Once again, a Chinese military helicopter circled a Japanese escort ship.
Although reconnaissance flights by Russia’s Air Force frequently occur in Japan’s northern skies, both countries understand the need for caution in their actions.
The Japanese and Chinese militaries, however, do not have sufficient ties to create confidence that caution will prevail.
To prevent an accident from inciting a volatile incident, it is imperative that the two sides develop a deeper bilateral military dialogue.
Nothing of the sort is happening.
Moreover, Japan’s government has encouraged Chinese regional ambitions by embracing an anti-American attitude similar to the administration of South Korea’s former president, Roh Moo-hyun.
By promising in last summer’s election campaign to expel America’s bases on Okinawa, Prime Minister Yukio Hatoyama put himself in a bind.
It now appears that he wants to backtrack on his promise, but massive protests are inhibiting him from doing so.
Sensing a widening gulf between Japan and the US, the Chinese Navy is demonstrating its growing might in the seas around Japan – and asserting its aspiration to replace the US as the Pacific’s dominant naval power.
There is a precedent for this: when the US closed Subic Bay Naval Base and Clark Air Force Base in the Philippines, the Chinese military immediately stepped up its activity around the Spratly Islands, which are recognized as Filipino territory but which China is claiming vehemently.
China’s struggle for mastery in the Pacific is now raising fears in Japan.
South of Okinawa is Yonaguni Island, with a population of just 1,800 and visible from Taiwan on a clear day.
Within Japan, there is growing controversy over the Hatoyama government’s push for a law that would allow particular foreign residents on the island to vote in local elections.
The inhabitants of Yonaguni strongly oppose the law, not because they are exclusionary, but because they believe that they are protecting a sensitive border.
Because a mere 137 votes can get a town council member elected, a large number of foreigners with a particular interest in moving onto the island could nominate a winning candidate.
The worry is that such a council could legislate in ways “friendly” to neighboring states, which might compromise Japan’s national security dramatically.
Even Hatoyama’s defense minister, Toshimi Kitazawa, who had been prone to naïve remarks on the issue, appears to have come to his senses.
He is now calling for the construction of a Self-Defense Force base on Yonaguni.
But the situation on the island demonstrates anew that China is prepared to take advantage of every misstep that the gaffe-prone Hatoyama government makes.
And it is not just the waters near Japan that should concern Hatoyama, for the Chinese Navy is not only eyeing the Pacific, but also steering toward South Asia, the Indian Ocean, the Middle East, and Africa.
Indeed, the growing contest between India and China is not only military in nature, but also concerns the acquisition of natural resources.
By controlling the sea lanes, China hopes to gain leverage over India’s capacity for economic growth.
Chinese military expansion has seen double-digit annual growth for 22 years.
Although Chinese officials say that the 2010 military budget has been restrained, and will grow by only 7.5%, China’s military expenditures already exceeds those of Japan by 15%.
In fact, China probably limited the increase this year after recognizing that the international community is becoming alarmed by the steep upward trajectory of its military build-up.
But there remain doubts about the true level of China’s military spending, owing to a pronounced lack of transparency in the budget process.
It remains unclear, for example, whether the research and development costs for an aircraft carrier are included.
History has repeatedly demonstrated that such ambiguity, particular if practiced by a rising power, can spark an arms race.
The secretive naval build-up of Kaiser Wilhelm II’s Germany, for example, helped incite World War I. US President John F. Kennedy’s belief that a “missile gap” existed in the Soviet Union’s favor inspired the production of multiple-warhead nuclear missiles, accelerating the nuclear arms race at the height of the Cold War.
China claims that it is entitled to play a role in setting the rules that govern the international system.
China should, of course, play such a part.
But until China acts with greater sincerity and transparency in eliminating the international community’s concerns, it runs the risk that its neighbors will not only suspect its efforts in the international arena, but take active countermeasures to defend their security.
The Struggle for Syria
CAIRO – As the violence in Syria mounts, the international community’s paralysis has become increasingly jarring.
But the role of external regional forces is almost as important in fueling the domestic bloodshed as what is happening internally.
If Syria could break free of the negative influences of regional politics, genuine change without continued violence might become possible.
Syria needs to manage its diverse ethnic and religious composition, and to decide its own position on the Arab-Israeli conflict.
But that is more difficult when neighboring countries are exploiting the country's heterogeneous makeup to pursue their own hegemonic agendas.
Syria, after all, sits at the center of mighty and antagonistic geopolitical forces.
To the east looms Iran, with its anti-American, anti-Western rhetoric and vast regional ambitions.
To the south sits Saudi Arabia, with its long friendship with the United States and its inherent hostility toward Iran's Islamic Republic.
And to the north is Turkey, a pro-European, largely secular and democratic country that seeks to wield influence across the Arab world.
The region in and around Syria is also populated by extremist Islamist groups that are attempting to expand their spheres of influence - and that are quick to capitalize on instability in any country.
Syria is particularly vulnerable in this regard, as extremists incite violence against minority religious groups by using, for example, television stations in Saudi Arabia and Egypt.
The current regime in Syria, in its ruthless quest to remain in power, refuses to acknowledge peaceful protesters' demands for freedom and dignity.
If it did - and if it met those demands - Islamists would not be able to hijack the demonstrations.
Peaceful change in Syria can nonetheless be achieved, and the international community can influence that process by recognizing that its continued focus on the country's “complexity” does nothing for its people.
In fact, the obsession with Syria's sectarian rivalries provides destabilizing external forces with the oxygen that their inflammatory rhetoric requires.
The incitement against Syrian religious minorities promulgated by extremist TV stations, and by people like the Chief Justice of Saudi Arabia's Supreme Judicial Council, coupled with equally damaging behavior by Iran, if left unchecked, could result in an even worse bloodbath, with Syria's people drawn into a war of all against all.
The international community allowed change in Tunisia and Egypt to proceed at those countries' own pace.
In Syria, a Libyan-style military intervention is not warranted, but diplomatic intervention is needed to allow the country's people to determine its future.
The international community's goal must be to persuade neighboring countries to halt their brazen, unwarranted attacks on parts of Syrian society.
In particular, the US, which has significant influence in Saudi Arabia, must act to stop attacks by that country's extremists on Syria's religious minorities - attacks motivated merely by a desire to provoke sectarian conflict.
Likewise, efforts to weaken Iran's disruptive influence in the region must be maintained, while Turkey's regional ambitions must be kept in mind.
Optimism about the Syrian people's future must be tempered by realism about the challenges facing Syria's opposition movement and the international community alike.
Dramatic, rapid change could result in prolonged failure.
Fortunately, Syrians have no predilection for violence.
For them, peaceful, gradual change is the best option.
And that requires a national dialogue, overseen by the international community, aimed at bolstering internal unity – and thus at protecting the country from regional interference.
The situation in Syria is usually – and rightly – described as an intricate, multi-dimensional playing field with a wide variety of political actors and competing interests.
But there has been an inadequate focus on the Syrian people’s simple desire for genuine reform, greater personal freedom, and more economic opportunity.
Syrians have experienced uninterrupted dictatorship for 40 years, and, with it, extreme economic hardship, including high unemployment, rising food prices, and endemic corruption.
They are also now suffering from water shortages and a budget deficit that has been exacerbated by declining oil revenues.
But Syrians are a remarkably resilient, resourceful people, as well as being young and well educated
With international assistance in developing Syria’s democratic institutions and political infrastructure, we can build a robust civil society that can assert its own identity and sovereignty, independent of undue outside influence.
A new Syria, based on democratic principles, would not only benefit Syrians, but would be a force for stability throughout the region.
The Sugar Season
The holiday season that is now upon us is a time for festivity, and usually of overeating.
But the rampant consumption of sugar that marks this time of year is nothing to celebrate.
In fact, this seasonal upsurge in sugar consumption is just part of a huge transition in world health that is now underway.
Many countries, especially developing countries, are facing the consequences of huge changes in lifestyle: modifications in diet, lower levels of physical activity, and increased tobacco use.
These changes are determined, to a large extent, by the globalization and expansion of food markets, and by ever-greater levels of urbanization.
Both of these factors incite sedentary behavior at home and at work, as well as profound alterations in dietary habits.
So it should be no surprise that noncommunicable diseases (NCD's), including cardiovascular diseases (CVD's), obesity, diabetes and cancer, now kill roughly 33 million people around the world each year, and cause almost 60% of total deaths.
Indeed, they account for almost half the global burden of disease.
By 2020, that contribution is expected to rise to 73% of all deaths and 60% of the global burden of disease.
Moreover, more than 60% these deaths occur in the developing world, and here NCD's increasingly appear in younger age groups, which can have huge implications for how productive a country's workers are.
Recent data from China reflect the extent of the problem.
In China's rural areas, with more than 800 million people, NDC's account for more than 80% of deaths.
Many countries are now afflicted by a double burden of diseases.
Countries that still struggle with malnutrition and illnesses like malaria, tuberculosis, and HIV/AIDS, now must contend with an explosion of CVD's, diabetes, and obesity, as well as soaring rates of high blood pressure and high blood cholesterol.
Indeed, five of the 10 leading causes of death worldwide are related to diet and physical activity: high blood pressure, high cholesterol, low intake of fruit and vegetables, high body mass index, and insufficient exercise.
Clearly, effective strategies to tackle the NCD burden require a critical examination of what people are eating and their levels of physical activity.
The World Health Organization, together with a group of international experts, has developed a global strategy on diet, physical activity, and health over a period of 18 months through an extensive series of consultations in more than 80 countries, and with the input of United Nations bodies, civic groups, and food producers.
One of the strategy's key conclusions is that reducing the burden of NCD's requires a multi-sectoral approach.
Like a toolbox, the strategy provides WHO members with a comprehensive range of policy options from which to choose.
Governments can act.
Transport ministries should provide safe roads so that children can bike to school.
Finance ministers could tax unhealthy food and subsidize healthy food.
Education ministers should demand healthy school meals.
Many countries are already developing their own national strategies.
Most of what WHO is recommending has been endorsed by public health officials for many years.
But we face a global problem, with many international stakeholders, and this requires an urgent and worldwide response.
Of course, there is considerable debate about what precisely makes for a healthy diet.
This debate is both welcome and to be expected; improving diet and finding ways to increase physical activity is a complex issue.
Moreover. there will always be groups with their own interests, using arguments that we do not have sufficient evidence to act.
But there has been no challenge to the strategy's recommendations from the global scientific or public health community.
The strongest critique has come from sugar associations, who claim that the upper limit of 10% on caloric intake from sugar is not based upon scientific evidence.
However, more than twenty national and international reports from around the world by scientific bodies governing dietary recommendations set similar or lower targets for sugar intake.
The growing NCD and CVD burden is a time bomb for world health.
The implementation of the WHO's strategy could lead to one of the largest-ever positive shifts in human health, putting populations throughout the world on pathways to lifelong and sustained improvements in well-being.
The Suicide of Hong Kong
China has been celebrating the five year anniversary of Hong Kong's return to the motherland from British rule.
Firecrackers, dragon dancers, and President Jiang Zemin's visit marked the festivities.
Now that China's rulers have returned to Beijing, it is time to take a more realistic look at what those five years have wrought.
Hong Kong's ruling elite delights in telling foreign visitors how wrong pessimistic predictions of the territory's have proven to be.
Fortune, for example, once entitled a cover story "The Death of Hong Kong."
That article forecast heavy-handed meddling by Beijing in local affairs, which would allegedly emasculate the vitality of Hong Kong's economy.
The article was wrong, because Hong Kong's deepest wounds have not come from China's ruler, but are self-inflicted.
Tung Chee Hwa, Hong Kong's leader, insists that the "one country, two systems" scheme devised by Deng Xiaoping works perfectly.
The Financial Secretary, Anthony Leung, last year boasted that Hong Kong would become Asia's "Manhattan Plus."
Chief Secretary Sir Donal Tsang calls negative assessments of the territory the product of second-rate minds.
But official bravura has little sympathy beyond this narrow circle.
Among Hong Kong's public, there is a pervasive feeling that it has changed for the worse since 1997 -- not as a result of overweening interference from Beijing, but due to worrisome decisions made by local rulers.
Mr. Tung, the scion of a shipping empire, and his tycoon friends like to blame Britain's colonial government for leaving behind "time bombs" that make Hong Kong look bad.
In 1998, for example, the government led a chorus blaming the British for the property price bubble that was punctured by Asia's financial crisis of 1997, causing the stock market to fall sharply.
But the bubble was really manufactured by China's communist rulers over a decade earlier on the advice of local property magnates, who wanted to limit the amount of land British colonials were permitted to sell.
Local officials soon began to broaden their attack.
In 1999, the government sought and received the Beijing government's direct intervention to overturn a decision by Hong Kong's Court of Final Appeals on an immigration issue because the verdict did not please the government.
Humbled and humiliated, the Court has acted timidly since.
Locals now call it the "Court of Semi-Final Appeals."
In 2000, one of Mr. Tung's political aides called on the president of the prestigious University of Hong Kong to express concern over a faculty member's opinion polls, which consistently recorded Mr. Tung's declining popularity.
Soon after the meeting, senior university officials warned the pollster that further funding for his work might not be forthcoming.
Robert Kuok, the Malaysian owner of Hong Kong's major English language newspaper, the South China Morning Post , is one of Mr. Tung's friends and fiercely loyal to China's leaders.
In 2001, the journalist Willy Lam, a respected China expert, was sacked from the paper after Mr Kuok publicly berated him for his views on China's rulers.
President Jiang and China's rulers have had very little, if anything, to do with any of these decisions.
They were taken because Mr. Tung and his allies wish to demonstrate how in tune they are with official thinking on the mainland.
But are they in tune?
The presumption that China wants Hong Kong to become more like the mainland is ludicrous.
China has had entirely too much of the "one country."
What it wants now is the "two systems."
China's search for an alternative social and economic arrangement became urgent with the student revolt of 1989, the subsequent Tienanmien massacre, and the collapse of the Soviet Bloc.
The Chinese communist party knew it had a legitimacy problem, and the driving idea behind Deng's ingenuous formula was to allow Hong Kong to show China a short cut to prosperity.
True, China's ruling elite remains a Leninist party prepared to crush all potential threats to its monopoly of power.
Yet many officials working directly under the party leaders are earnestly scrutinizing western countries for institutional details that might shed light on what China can do for itself in the future.
In other words, China is looking for a new system to replace the existing one.
Mr. Tung, whose moral precepts are informed by a doctrinaire interpretation of Confucian classics emphasizing obedience to one's superiors, seems oblivious to what China views as the fundamental challenge that it now faces.
Instead, his behavior is reminiscent of a feudal district official whose main priority is to ensure that his superiors are treated with due reverence.
Nor is Mr. Tung alone.
Much of Hong Kong's elite shares the same mindset, despite their training in Western business schools and their fortunes gained from property trading.
Their priority is to nurture a cozy relationship with Chinese officialdom -- much of which can be easily bought.
Whether Hong Kong remains an open, liberal society has never been a major issue for them.
One senior Chinese cadre doing graduate work at Harvard recently uttered in amazement that Hong Kong, with its leaders acquiescing dutifully in every inane utterance by China's rulers, struck him as more "leftist" than the mainland.
Indeed, many Chinese officials privately laugh at Mr. Tung and his cronies sycophantic behavior and are increasingly confident that the mainland has nothing to learn from Hong Kong's example.
What China regards as Hong Kong's comedy of deference is quickly becoming a tragedy of errors for Hong Kong's citizens.
The Summit of Low Expectations
SAN DIEGO – In the run-up to President Barack Obama’s first visit to China next month, American and Chinese diplomats have been compiling lists of ongoing cooperative endeavors in case no new agreements materialize.
Indeed, that outcome appears likely.
The problem is as much the fault of the United States as it is of the Chinese.
Whereas agreements require hard work on both sides, the Americans are having a difficult time negotiating their country’s domestic political obstacles in time to engage effectively with China.
With the Copenhagen climate summit only weeks away, forging a commitment on climate change is the most pressing challenge.
The US and China are the world’s two biggest emitters of carbon dioxide.
Obama administration officials had been hoping that bilateral cooperation to tackle this common threat might deepen the US-China partnership in the same way that the common Soviet threat brought Nixon and Mao together in 1972.
If Obama and Chinese President Hu Jintao could agree about what actions their countries would take, and what explicit commitments they would make as part of a global agreement, the rest of the world would follow.
Unfortunately, the two countries stand on opposing sides on climate change.
China speaks for the developing world in demanding to be let off the hook from committing to a specific national carbon-reduction target.
The US, Europe, and other industrialized states caused the problem, the Chinese say, so they bear the most responsibility for solving it.
On the ground, Chinese actions to address climate change are impressive.
China has undertaken a nationwide campaign to reduce energy consumption per unit of GDP by 20% by 2010, and will hold local officials accountable for achieving the targets.
Moreover, the Chinese have built up wind and solar power so quickly that they have just increased their goal for renewable sources to 15% of total power generation by 2020.
But, as a matter of national pride, the Chinese refuse to articulate an international commitment under duress, and Obama doesn’t have much standing in pressing China to compromise, since the US Congress hasn’t yet acted on cap-and-trade legislation.
Without any credible commitments by America, how can Obama ask China to do more?
The best that can be hoped for are serious joint research and development projects, such as collaboration on carbon capture and sequestration, aimed at demonstrating that both leaders are at least pulling in the same direction in addressing climate change.
Because both countries want to avoid being blamed for scuttling a global agreement, they will work together to make their modest plans look as substantial as possible and promise to do more after Copenhagen.
China’s diplomatic self-confidence has been buoyed by its being the first country to recover from the global economic crisis – thanks to a massive and early infusion of government and bank investment that stimulated demand.
The Chinese acknowledge that they enabled Americans to borrow and spend beyond their means by parking China’s massive foreign reserves in US government securities.
But they refuse to accept that this was the root cause of the crisis.
To the Chinese, as well as to others, it is obvious that the main cause of the crisis was America’s flawed financial system.
In fact, both sides should be working to recalibrate their bilateral imbalances: Americans should spend less and save more, and Chinese should spend more and save less.
But if Obama presses Hu to revalue the Chinese currency as the best way to achieve recalibration, Hu is likely to push back, asking Obama what he intends to do to stem the massive US deficits that will cause inflation and reduce the value of investments by Chinese and others in American securities.
Neither side will volunteer to bear the costs of recalibrating the relationship.
As a result, the summit will most likely produce sincere pledges to work together to stimulate the global recovery and adjust the two sides’ economic imbalances – but not much more.
As for North Korea, Obama and Hu will agree on the importance of bringing the regime back to the Six-Party Talks and affirming its commitments to denuclearize, and the summit communiqué will emphasize this common stance.
But, beneath the surface, clear differences in strategy will emerge.
Hu will urge Obama to resume bilateral talks with North Korea under the Six-Party umbrella; and he may press China’s position that, in the long term, economic engagement is more effective than sanctions in changing North Korea’s behavior.
Indeed, Chinese trade and investment are spurring market activity in North Korea’s northern region.
Based on their own experience over the past 30 years, the Chinese know how economic reform and liberalization can change a country’s perception of its self-interests and stance toward the world.
Why not reach out to North Korea the way you are toward Iran and Burma, Hu may ask Obama?
The US and China could work together to organize managerial and development training for North Koreans and encourage the World Bank and the International Monetary Fund to start providing technical advice.
A report by the University of California Institute on Global Conflict and Cooperation and the Asia Society makes the case for economic engagement with North Korea as a long-term strategy that would complement the sanctions now in place.
But the US Congress might well cry “appeasement” if Obama dared to propose engaging – and changing – North Korea in this way.
Hu and Obama will work hard to present an image of unity during the summit.
Both sides want to prevent any serious rupture.
But substantive agreements on climate change, the financial crisis, or North Korea would require both countries to take actions that could be domestically costly.
The era when China made all the compromises in the relationship has passed.
The Sunflower Revolutionary
LONDON – The grim news that Ai Weiwei, perhaps China’s most famous contemporary artist, has been arrested and jailed – his family and friends have not seen or heard from him since – makes me think anew about Ai’s 100 million hand-painted porcelain sunflower seeds, now being exhibited at London’s Tate Modern Gallery.
China’s people, Ai’s installation seems to imply, are like the millions of seeds spread across the Tate’s gargantuan entrance hall.
No one cares whether they are humiliated or crushed under foot (as the seeds were allowed to be at the exhibition’s opening).
Unfortunately, Ai has become one of the seeds, his freedom crushed by the heel of an inhuman state.
The Chinese official newspaper Global Times denounces Ai as a “maverick,” and mavericks are not tolerated in China.
The only way for a Chinese individual to survive is to adopt the grey, anonymous way of the sunflower seed.
According to a short item published by the official Xinhua news agency, Ai has allegedly been involved in so-called “economic crimes,” which could mean practically anything that the Marxist/Maoist minds of the leadership care to dream up.
In fact, China’s government has yet to decide whether to prosecute Ai for economic crimes or for being “maverick.”
Either way, the outside world must not be allowed to have any idea as to what fate awaits Ai.
But the true reason for Ai’s arrest is obvious.
When the police stormed Ai’s workshop, they demanded that Ai’s wife, Lu Qing, tell them, “What did Ai write on the Internet?”
In the Chinese government’s view, an artist who dares to speak for the “sunflower seeds” and cultivate an independent mind is a direct security threat.
He must be put under control, silenced.
Of course, the ruling Chinese Communist Party is prefabricating Ai’s prosecution.
It is as if three decades after China’s “opening,” nothing has changed in the Party’s way of thinking and ruling.
Ai graduated from the Beijing Film Academy in 1978, but he learned and developed his artistic talents in the United States.
His Shanghai workshop used to be a salon for Chinese artists, including the film directors Chen Kaige and Jiang Wen.
But Ai never allowed himself to be hired as an official regime hack.
Instead, he remained an outspoken, independent man, ready to speak and take action whenever art and ideals confronted repression and cruelty.
With China’s regime now gripped by fear of an Arab-style revolution, the government has chosen repression as the only means to “maintain stability.”
On the day of Ai’s arrest, former Global Times journalist Wen Tao was grabbed off the street in broad daylight.
Before that, the writers Ran Yunfei, Teng Biao, Ye Du, Zhu Yufu, Tang Jingling, Gu Chuan, Li Hai, Ding Mao, Chen Wei, Jiang Tianyong, and Liu Zhengqing were separately detained or sentenced to jail.
Other young Beijing artists have been detained as well.
To be sure, the regime considers Ai’s arrest a preemptive measure to prevent the outbreak of public demonstrations.
But Ai never participated in the many Internet appeals for such protests.
And his arrest seems to be just the beginning.
The next targets will likely be independent writers like Ai Xiaoming, Dai Qing, Cui Weiping, and Han Han.
The regime will not stop the persecution until the only voices to be heard are its own “official” artists.
Ai’s arrest and disappearance, along with the severe prison sentence imposed on the Noble Peace Prize winner Liu Xiaobo, are driven by the same motivation: to dam the potential for political unrest and purge independent intellectuals.
This process is nothing new.
The writer Li Hong received a six-year prison sentence and died in a hospital under police supervision last year.
Another writer, Li Xianbin, was sentenced to 10 years.
According to the Writers in Prison Committee of the Independent Chinese PEN Center, more than 30 of the country’s writers are currently locked up.
China’s relentless economic rise is bringing with it a decadence of civilization.
The feast of new wealth is accompanied by a famine of morality.
So when global leaders behave like conniving hucksters to do business with this new China’s rulers, they betray the values and principles that are the basis of democracy.
Ai used to argue that the Chinese regime’s despotism is boosted by shameless liars.
He always understood that true art and politics can never march hand-in-hand.
They must eventually confront each other on the field of a free conscience.
The “Arab awakening” tells something else about those sunflower seeds at the Tate Modern: the seeds, once they come together, show their unity and power.
That is the other lesson that Ai wanted his audiences to understand, and it is why his spirit and message cannot be crushed: there are 1.3 billion seeds with him.
The Sustainability Mindset
MILAN – Markets and capitalist incentives have great strengths in promoting economic efficiency, growth, and innovation.
And, as Ben Friedman of Harvard University argued persuasively in his 2006 book The Moral Consequences of Growth, economic growth is good for open and democratic societies.
But markets and capitalist incentives have clear weaknesses in ensuring stability, equity, and sustainability, which&nbsp;can adversely affect political and social cohesion.
Obviously, abandoning market-capitalist systems, and implicitly growth, is not really an option.
Collectively, we have little choice but to try to adapt the system to changing technological and global conditions in order to achieve stability, equity (in terms of opportunity and outcomes alike), and sustainability.
Of these three imperatives, sustainability may be the most complex and challenging.
For many people, sustainability is associated with finite natural resources and the environment.
The global economy will probably triple in size in the next quarter-century, largely owing to growth in developing countries as they catch up to developed-country incomes and adopt similar consumption patterns.
Thus, there is a well-founded fear that the planet’s natural resources (broadly defined) and recuperative capacities will not withstand the pressure.
To some, this logic leads to the conclusion that growth is the problem, and that less growth is the solution.
But, in developing countries, where only sustained growth can lift people out of poverty, limiting it cannot be the answer.
The alternative is to change the growth model in order to lighten the impact of higher levels of economic activity on natural resources and the environment.
But there is no existing alternative to which we can all switch.
Changing the growth model means inventing a new one over time, step-by-step, from complementary parts.
The two key ingredients seem to be education and values.
Everyone, not just policymakers, needs to understand the consequences of our individual and collective choices.
We need to be aware for example, that population growth and rising consumption levels have intergenerational consequences, and that how we conduct ourselves will affect the lifestyles and opportunities of our children and grandchildren.&nbsp;
Thus far, the quality of our choices has been unimpressive, reflecting little sensitivity to sustainability and the impact of our choices on future generations.
As a result, many developed countries have built up dangerously large public debts and even larger non-debt liabilities, owing to unsustainable growth patterns.
Most of us, I believe, do not knowingly make choices that adversely affect future generations.
So perhaps incomplete knowledge of the consequences of our choices is responsible.
Moreover, an unfunded liability path, once taken, is hard to leave, because at the point of departure, some generation is paying for past commitments and at least beginning to fund future ones.
That seems unfair, because it is.
Most people might agree that living beyond our means in the aggregate, via unfunded social services and insurance, or disproportionate use of resources, imposes a burden on our offspring.
But we might still fail to reach agreement on who should pay for funding these programs, or for reducing our consumption of resources.
Too often, it is easier to deal with the distributional problem by shifting the burden to those who are not present, and who are insufficiently represented by those who are.
Education and values are the foundation of sound individual and, ultimately, collective choices.
Without them, the incentives and policies that economists rightly argue are needed to increase energy efficiency, limit carbon emissions, economize on water usage, and much more will lack support and fail in the democratic decision-making process.
If sustainability is to triumph, it must be predominantly a bottom-up process.
Environmentalists are right to focus on education and individual choices, even when their policy proposals are not always on target.
Education and values will drive local innovation, alter lifestyles, and shift social norms.
They will also affect business behavior via choices by customers and employees, including business leaders.
Thus, they are essential components of the formulas needed to pursue sustainable patterns of growth.
But, while education and values are necessary, they clearly are not sufficient.
Complementary national policies and international agreements will require careful scientific and economic analysis and thoughtful choices.
The need for burden-sharing, particularly between advanced and developing countries, will not magically disappear.
Climate-change risks, though serious, should not be mistaken for the entire sustainability agenda.
There are clear steps that can be taken.
Appropriate regulation and sufficiently long time horizons can make structures of all kinds much more energy-efficient, without imposing burdensome costs.
In a similar way, transportation can become less energy-intensive without restricting mobility.
Some of these shifts might be subject to international coordination, in order to avoid adverse competitive consequences, whether real or perceived.
But too much coordination can be a bad thing.
That is why climate-change negotiations are shifting from the misguided objective of seeking risky 50-year commitments to binding carbon-emissions targets to focusing on parallel, step-by-step processes, including higher energy efficiency, better urban planning, improved transportation systems, and on learning as we go.
Likewise, businesses and industries that are heavy water users will simply develop new technologies and thrive in the face of scarcity.
Progress has been helped by growing awareness in populous Asia – and in developing countries generally – that sustainability is the key to achieving their longer-term growth objectives.
This perspective perhaps comes more naturally in an environment of rapid growth, because their growth models require continual review and adaptation to be sustainable.
Over time, values shift as knowledge is acquired and disseminated.
Policies aimed at sustainability are likely to follow.
What is unknown is whether we will reach that point fast enough to avoid major disruptions, or even potential conflict.
The Swedenization of Europe
Anti-Semitism, anti-Zionism, and anti-Americanism are becoming linked and ever more rabid in today's Europe.
They arise from a kind of blindness, combined with a strange mixture of alienation, guilt, and fear toward both Israel and America.
Millions of Europeans resist seeing Israel as a country fighting for its survival.
Israel cannot afford to lose one major war, as it would mean the end of the Jewish democratic state.
But huge numbers of Europeans believe that something is fundamentally wrong with the Israelis: they never compromise; they prefer using military means to solve political problems.
Something similar is at work in the European attitude to the US.
Look at Europe, many Europeans say, we have eradicated wars, dangerous nationalism, and dictatorships.
We created a peaceful European Union.
We do not wage war; we negotiate.
We do not exhaust our resources on weapons.
The rest of the planet should learn from us how to live together without terrorizing each other.
As a Swede, I have heard such pacific boasting all my life: that neutral Sweden is a moral superpower.
Now this bragging has become the EU's ideology.
We are the moral continent.
Call this the "Swedenization" of Europe.
Yes, today's EU is a miracle for a continent where two modern totalitarian movements - Communism and Nazism - unleashed rivers of blood.
But what Europe forgets is how those ideologies were overcome.
Without the US Army, Western Europe would not have been liberated in 1945.
Without the Marshall Plan and NATO, it would not have taken off economically.
Without the policy of containment under America's security umbrella, the Red Army would have strangled the dream of freedom in Eastern Europe, or brought European unity, but under a flag with red stars.
West Europeans also forget that some areas of the world have never known freedom.
In many places, torture chambers are the rules of the game, not the grotesque and shameful mistakes of ill-supervised troops.
Any attempt in such places to go behave the European way and negotiate - without the military power needed to back up diplomacy - would be pathetic.
Instead of supporting those who fight international terrorism, many Europeans try to blame the spread of terrorism on Israel and the US.
This is a new European illusion.
Spain's latter day appeasement à la Munich arises from this thinking.
But what if Spain - and Europe as a whole - had reacted in the opposite way to the Madrid train bombing of April, saying: "We promise that because of that slaughter we will double our support for stabilization in Iraq by sending twice as many troops, experts, engineers, teachers, policemen, doctors, and billions of euros in support of allied forces and their Iraqi co-workers."
The triumph of terrorists would have been transformed into a triumph of the war on terror.
The images many Europeans hold of America and Israel create the political climate for some very ugly bias.
You have the Great Satan and the Small Satan.
America wants to dominate the world - exactly the allegations made in traditional anti-Semitic rhetoric about the Jews.
Indeed, modern anti-Zionist rhetoric portrays Israel's goal as domination of the whole Middle East.
Such ideas are reflected in opinions polls in which Europeans claim that Israel and the US are the true dangers to world peace.
Ian Buruma, the British writer, claims that this European rage against America and Israel has to do with guilt and fear.
The two world wars led to such catastrophic carnage that "never again" was interpreted as "welfare at home, non-intervention abroad."
The problem with this concept is that it could only survive under the protection of American might.
Extreme anti-Americanism and anti-Zionism are actually merging.
The so-called peace poster "Hitler Had Two Sons: Bush and Sharon," displayed in European anti-war rallies, combines trivialization of Nazism with demonization of both the victims of Nazism and those who defeated Nazism.
Much of this grows from a subconscious European guilt related to the Holocaust.
Now the Holocaust's victims - and their children and grandchildren - are supposedly doing to others what was done to them.
By equating the murderer and the victim, we wash our hands.
"The ugly Israeli" and "the ugly American" seem to be of the same family. "The ugly Jew" becomes the instrumental part of this defamation when so-called neoconservatives are blamed both for American militarism and Israeli brutalities and then selectively named: Wolfowitz, Perle, Abrams, Kristol, etc.
Earlier this year, the editor of Die Zeit , Josef Joffe, put his finger on the issue: like Jews, Americans are said to be selfish and arrogant.
Like Jews, they are in thrall to a fundamentalist religion that renders them self-righteous and dangerous.
Like Jews, Americans are money-grabbing capitalists, for whom the highest value is the cash nexus. "America and Israel are the outsiders - just as Jews have been all the way into the 21st century," Joffe says.
The links between anti-Semitism, anti-Zionism, and anti-Americanism are all too real.
Unless Europe's leaders roundly condemn this unholy triple alliance, it will poison Middle East politics and transatlantic relations alike.
The Tabloid Syndrome
The world is a complex and intricate place.
So how are we to understand even just a piece of it, say, the United States government and its economic policies?
It is a big problem, for the standard sources that I was taught as a child to rely upon – newspapers and television news – are breaking down.
For example, in early February 2004, the then Chairman of the President’s Council of Economic Advisers, N. Gregory Mankiw, spent some time trying to explain the issues surrounding “outsourcing” to America’s elite political news reporters.
Mankiw’s standard description of outsourcing is very much like mine – indeed, like that of all neoclassical and neoliberal economists – and goes something like this:
As with any change in technology that increases the volume of international trade in goods and services, the outsourcing of service-sector jobs creates winners and losers – but almost surely more and bigger winners than losers.
Big winners are workers in poor countries who get better jobs working for firms that can now export services to rich countries.
The major losers are those who previously held the now-outsourced service-sector jobs; they must now find new and different jobs and almost surely find that their skills are worth less.
But even in the US, losers’ losses are outweighed by winners’ gains.
Workers in certain industries find their skills in higher demand as foreigners spend their increased dollar earnings, consumers benefit from lower prices, and shareholders and managers see their companies’ profits increase.
However much we may worry about the distributional consequences of outsourcing, we should never overlook the fact that it increases the total size of the economic pie.
Mankiw made that argument, but he failed to be understood.
Indeed, on February 10, 2004, he woke up to an unpleasant news story in the Washington Post: ”President Bush’s top economist yesterday said the outsourcing of US service jobs to workers overseas is good for the nation’s economy....
Mankiw’s comments come as the president struggles to shore up support in manufacturing states that have lost millions of jobs....Mankiw’s conclusions may prove discordant during an election year...”
It happened again on February 11: “Democrats...lit into President Bush’s chief economist yesterday for his laudatory statements on the movement of U.S. jobs abroad....
Rep. Donald Manzullo (R-Ill.) called for the resignation of N. Gregory Mankiw...”
Of course, the Washington Post’s journalists know, on some level, that they were being unfair to Mankiw.
They didn’t claim that what he said was inaccurate, or shortsighted, or analytically unsound.
The descriptive terms they used – “discordant,” “embarrassing,” “political liability” – suggest that they knew they were giving Mankiw a raw deal.
But was there any sign of the standard economic analysis of outsourcing in their stories?
Not one.
Greg Mankiw thought a bunch of reporters were coming to talk to him about the state of the economy and the analysis made by the Council of Economic Advisers in its “2004 Economic Report of the President.”
But the last thing the reporters wanted to do was to convey a thumbnail summary of Mankiw’s analysis of outsourcing.
That’s simply not the business they saw themselves as being in.
The problem is not that the Washington Post and papers like it hire people who are unintelligent or lazy.
The problem is that conveying accurate information about the economy is far down the list of priorities for normal news reporters.
Making a splash matters.
So does keeping track of who is up politically and who is down.
So does pleasing your editors so that they’ll give your stories better placement, and pleasing your sources so that they’ll keep talking to you.
Compared to these imperatives, there is little to be gained from informing the public about how the economy really functions and about the dilemmas of economic policy.
Indeed, the economy is vastly inferior to Hollywood as a source of glitterati gossip, but much economic reporting makes the coverage of the birth of Brad Pitt’s and Angelina Jolie’s baby look profoundly serious.
Likewise, government is vastly inferior to the World Cup as a sporting spectacle, but much political reporting focuses on who played well and who played badly.
What can we do about this?
The answer is simple, and it is a matter of demand, not supply.
After all, few people go into journalism to deliberately mislead the public.
If we demand better economic and political journalism the way we demand excellent coverage of the World Cup, we’ll get it.
The Tails Wagging the Kremlin Dog?
MOSCOW – Imagine a crank who tries to pass himself off as a nineteenth-century Russian baron.
He grows sideburns, wears a long frock-coat, and carries a walking stick.
Anyone who runs into such a figure would sneer and mock him.
Now, suppose that same crank attempted to treat passersby as if they were his serfs.
In that case, he would risk getting a beating, though perhaps a few beggars would indulge his fantasies in the hope of duping him out of his money.
Something of this sort now characterizes relations between Russia and several former Soviet republics, for the foreign-policy doctrine that guides today’s Kremlin is a preposterous mix of nineteenth-century Realpolitik and early twentieth-century geopolitics.
According to this view, every great power needs obedient satellite countries.
Under such an approach, NATO’s expansion is represented as an extension of America’s sphere of influence, to the detriment of Russia, of course.
In order to compensate for its growing inferiority complex, Russia has cobbled together the Collective Security Treaty Organization (CSTO), which, by its title and constitutional principles, is a parody of NATO. For all this, the Kremlin is not in the least embarrassed by the fact that the CSTO is essentially a mechanical connection of bilateral military agreements between Belarus, Armenia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, and Russia.
Nobody knows what vision of collective defense is to be implemented: one needs a fertile imagination to imagine Belarusian paratroopers defending the Tajik border.
Moreover, the constitutions of a number of CSTO countries expressly prohibit sending troops outside national territory.
But the Kremlin’s myopic concentration on military matters, and its pointless attempts to play a zero-sum game with the West has turned Russia into an object for manipulation by its junior partners.
The virtuoso of such manipulation is Belarusian President Alexander Lukashenko.
Belarus’s economy can function only if Russia subsidizes energy prices and allocates non-repayable credits.
Yet, despite all this, Lukashenko manages to avoid implementing economic projects profitable to Russia (i.e., a single currency).
Whenever Russia applies pressure, he immediately starts yelling about Moscow’s “ingratitude” – proclaiming that “10,000,000 Belarusians protect Russia from NATO’s tanks.”
Worse, whenever Moscow persists in its demands, Lukashenko abrogates agreements without a twinge of conscience.
Thus, when Russia banned imports of Belarusian dairy products (in an attempt to punish Lukashenko for accepting a $2,000,000,000 credit but not fulfilling his promise to recognize South Ossetia and Abkhazia), Lukashenko refused to attend a CSTO summit or join its collective agreement for the establishment of an operational response force.
Lukashenko avoids any major integration projects, even those in the military sphere.
The most telling example is the creation of a joint air defense system.
Both Russia and Belarus have been trying to realize this project for ten years; countless agreements have been achieved – on paper.
Yet no concrete action is taken.
Lukashenko, simply, does not intend to allow even a small part of his army to become subordinated to Moscow.
While the military threat in the West looks as illusory as it is, in Central Asia that threat is concrete.
In the event that the coalition of NATO forces in Afghanistan is defeated, a wave of Islamic extremism will submerge the Central Asian states, inciting local civil wars.
For Russia, this could mean (in the best case) tens of thousands of refugees or (in the worst case) the arrival of armed militias on its territory.
As a result, the Kremlin has a vital interested in NATO’s success in Afghanistan.
Yet, for the last four years, Russia has tried to hinder NATO in every possible way.
In 2005, at the summit of the Shanghai Cooperation Organization, Vladimir Putin pressed for the final declaration to include a demand for withdrawal of American bases from Central Asia.
Kremlin strategists explained that they feared the US would oust Russia from Central Asia.
But, now that a Russian-American agreement allows supply flights to Afghanistan to go through Russian airspace, it is clear that Russia sought only to monopolize the military cargo transportation routs in order to gain leverage over the United States.
In February, the Kremlin gave Kyrgyz President Kurmanbek Bakiyev $500 million for a promise to close America’s base in his country.
Then the Americans offered Bakiyev $160 million a year, and now there may be no official base, but a “transit center” that serves the same functions.
So the Kremlin paid out several hundred million dollars just to replace some signs.
Soon after this, Russian Vice Premier Igor Sechin and Defense Minister Anatoly Serdyukov were sent to Bishkek in an effort to get something for Russia’s money.
Bakiyev seems to have said: so, you are worried about the American military presence in Central Asia, and you want to confront it.
Fine, the Americans can have one base in Kyrgyzstan, and Russia can have two.
The resulting “military asset,” however, is strategic gibberish, having been built in Kyrgyzstan’s near-lawless Osh region, with its appalling poverty, drug trafficking, and ethnic tensions.
Seizure of a Russian military base in order to acquire weapons is, indeed, likely to become a vital goal of “extremists.”
But, in a way, the Russian soldiers there are already hostages – not least to the Kremlin’s bankrupt foreign policy.
The Talmud and Greek Debt
BUENOS AIRES – There are two ways to look at Greece’s majestically unsustainable sovereign-debt mountain.
There is, first, a pragmatic and short-term perspective, which focuses on ensuring some form of orderly restructuring (possibly for other vulnerable European states as well) without bringing down the eurozone.
And there is a “moral” perspective, which focuses on the nature of debt and on the long-term economic consequences of failing to honor it.
Neither perspective is wrong; on the contrary, the problem is how to reconcile them.
Indeed, failure to do so appears to explain why the official response to the Greek debt crisis has been so inadequate.
In these circumstances, the Talmud, the ancient repository of Jewish legal commentary – and one of the oldest sources of human thought on morality and economic activity – might hold the key.
An oft-quoted passage provides a fresh, if not exactly new, perspective on Greece’s debt and the best way to address it.
The passage concerns sales, divorces, and offerings, and specifies that these acts are legally valid only if a person performs them voluntarily.
Nevertheless, under certain circumstances, courts may force an individual until he says that he is, indeed, willing.
The verse says, literally, “We (the court) force him until he says that he wants to do it willingly.”
So, “in divorces (if the man refuses to grant it), we exercise force on him until he says ‘I want to do it voluntarily.’”
Similarly, if a court forces a person to sell his property, the sale is valid because it is considered to have been carried out voluntarily.
Understanding this apparent contradiction sheds light on the controversy surrounding the question of private bondholders’ involvement in the Greek rescue package.
It is argued that, to avoid a default, private creditors should agree to shoulder part of the cost of the bailout.
But how does one impose a financial loss on bondholders without it being classified by credit-rating agencies as a default?
The prevailing answer is that one coerces bondholders to accept the deal “voluntarily.”
One could dismiss this dispute as being mere rhetoric.
But, using the Talmudic logic, one can also show that there are mechanisms that can – and should – be used to place pressure on the parties in the interest of obtaining superior voluntary outcomes.
There are two preponderant interpretations of the Talmudic passage.
One argues that coercion can change minds.
When a court forces an individual until he surrenders and says that he wants to follow orders, his compliant actions are to be considered voluntary, because, ultimately, he has made the conscious decision to agree.
While technically correct, this is a ruthless interpretation, since this type of “willing” behavior is bound to leave resentment.
A more benign interpretation, based on the collective-action principle, envisages the court as instrumental in attaining a superior welfare equilibrium.
Individuals know fundamentally what is good for them and for society, but they are often hesitant to act accordingly, owing to fear, embarrassment, or, very often, the belief that their actions will not be worthwhile if others do not follow in their footsteps.
The court, according to this view, provides the coordinating mechanism, eliminating free riders and forcing all parties to an outcome that makes everybody better off.
Thus, individual decisions, though extracted under pressure, become, when assessing the outcome, truly voluntary.
Seen in this light, unilateral schemes, such as the original German proposal (forcing maturities on Greek debt to be voluntarily extended for several years) are only voluntary under the ruthless interpretation.
In initiatives of this sort, agreement is obtained reluctantly and pressure could provoke harsh responses.
Rating agencies are right in considering them a “selective” default that is bound to result in contagion – and, eventually, in widespread debt restructuring.
The alternative is to seek a cooperative resolution, consistent with the benign interpretation of “forced willingness.”
This can be achieved by adopting some features of the model used in Eastern Europe, known as the “Vienna Initiative.”
Some of the current proposal to deal “voluntarily” with the Greek debt goes some way in this direction.
But the initiative is insufficient, because the three pillars of the Vienna model are basically missing.
The first pillar of that model is simultaneous involvement of all parties – the sovereign, bondholders and their governments, the European Central Bank, and international organizations – in designing the scheme from the start.
The second ingredient is proper incentives to participate, including direct financing from bondholders’ governments, using the resources that today finance the transfer of Greek debt from private to official hands.
The third component is the exercise of suasion on bondholders to achieve maximum participation, obtain binding pre-commitments, and eliminate free riders.
Since this scheme would imply losses for bondholders, substantial official muscle and peer pressure is needed.
But gaining time for a more orderly resolution, mitigating contagion, and reducing the size of an eventual write-down do indeed add up to a superior outcome.
Therefore, under this model – and despite the initial pressure – the behavior of bondholders could be considered truly voluntary.
And, while rating agencies might still regard a Vienna-type outcome as a default, the Talmudic sages show us why a more thoughtful classification is required.
The Tea Party’s Modest Proposal
WASHINGTON, DC – America’s Tea Party has a simple fiscal message: the United States is broke.
This is factually incorrect – US government securities remain one of the safest investments in the world – but the claim serves the purpose of dramatizing the federal budget and creating a great deal of hysteria around America’s current debt levels.
This then produces the fervent belief that government spending must be cut radically, and now.
There are legitimate fiscal issues that demand serious discussion, including how to control growth in health-care spending and how best to structure tax reform.
But the Tea Party faction of the Republican Party cares more about small government than anything else: its members insist, above all, that federal tax revenue never be permitted to exceed 18% of GDP.
Their historical antecedent is America’s anti-revenue Whiskey Rebellion in 1794, not the original anti-British, pro-representation Boston Tea Party in 1773.
Most importantly, their tactics have proven massively destructive of wealth in the US.
Since the prolonged showdown over the budget began earlier this year, the stock market has lost about 20% of its value (roughly $10 trillion).
In effect, the Tea Party is working hard to reduce publicly funded social benefits – including pensions and Medicare – even as its methods dramatically reduce the value of private wealth now and in the future.
Part of the Tea Party’s founding myth, of course, is that smaller government will lead to faster growth and greater prosperity for all.
Never mind that the eye-popping growth projections in Representative Paul Ryan’s budget plan, for example, are utterly implausible; these projections matter politically, because, without them, the full sting of Ryan’s proposed Medicare cuts would be readily apparent.
Standard &amp;
Poor’s has received some justified criticism for the analysis behind its recent decision to downgrade US government debt; after all, there was little economic news that could explain the move’s timing.
But S&amp;P’s assessment of the political situation is on target: by creating a dysfunctional paralysis at the heart of government, the Tea Party has shown that it is willing to impose dramatic costs on the broader economy and to ensure significantly slower growth.
Confrontation and brinkmanship have become the new watchwords of American politics, even when the US government’s legal ability to pay its debts is on the line, owing to the Tea Party’s ideological rigidity.
And the tone of political debate, not surprisingly, has become much nastier.
By signing a pledge not to raise taxes, Tea Party representatives have credibly committed themselves not to acquiesce in any middle-of-the-road compromise.
If they break this pledge, presumably they will face defeat in the next round of Republican Party primaries.
So, while a budget deal would technically be easy to achieve, it looks politically impossible in the near term.
Indeed, while Congress and the Republican Party have become less popular during 2011, support for the Tea Party has remained remarkably constant, at around 30% of the population.
Its tactics thus appear politically sustainable, at least through the 2012 elections.
Perhaps the most damaging outcome of these tactics is to take countercyclical fiscal policy off the table completely.
Regardless of what happens to the global economy in the weeks and months ahead, it is inconceivable that any kind of meaningful fiscal stimulus would get through the House of Representatives.
It remains to be seen whether the US Federal Reserve will also feel constrained by the political mood on Capitol Hill.
Clearly, influential Tea Party supporters would strongly resist any attempt now by Fed Chairman Ben Bernanke to find unorthodox ways to run a more expansionary monetary policy.
And, as for protecting the financial system against disaster, the current majority on the House Financial Services Committee is clear – they favor use of the bankruptcy system when megabanks get into serious trouble.
If the eurozone crisis continues to spiral out of control, the US should expect to see Lehman or near-Lehman-type collapses among exposed financial institutions.
The irony of the Tea Party revolt, of course, is that it undermines the private sector more than it reins in “big government.”
The S&amp;P downgrade resulted in a “flight to quality,” meaning that investors bought US government debt – thus increasing its price and lowering the rate that the federal government pays to borrow.
It was the value of the stock market that fell sharply – which makes sense, given that counter-cyclical policy is now severely constrained.
The government part of the credit system has been strengthened, relatively speaking, by developments over the past few months.
It is the private sector – where investment and entrepreneurial activity are needed to generate growth and employment – that has taken a beating.
Unless and until America’s private sector recovers, investment and job creation will continue to stagnate.
But today’s atmosphere of fear and aggressive budget tactics are combining to undermine private-sector confidence and spending power.
As Jonathan Swift put it in 1727, “Party is the madness of many, for the gain of the few.”
The Terrorist Temptation
The Terror Next Door.
NEW DELHI – The fallout from the terror attacks in Mumbai last week has already shaken India.
Deep and sustained anger across the country – at its demonstrated vulnerability to terror and at the multiple institutional failures that allowed such loss of life – has prompted the resignations of the Home Minister in the national government and the Chief Minister and his Deputy in the state of Maharashtra, of which Mumbai is the capital.
As evidence mounts that the attacks were planned and directed from Pakistani territory, calls for decisive action have intensified.
But what can India do?
The terrorists hit multiple targets in Mumbai, both literally and figuratively.
They caused death and destruction to Indians with near-impunity, searing India’s psyche, showing up the limitations of its security apparatus and humiliating its government.
They dented the worldwide image of India as an emerging economic giant, a success story of the era of globalization and an increasing magnet for investors and tourists. Instead the world was made to see an insecure and vulnerable India, a “soft state” bedevilled by enemies who can strike it at will.
That was not all.
By singling out Americans, British and Israelis for their malign attention, the terrorists extended the global Islamist war against “Jews and crusaders” to new territory.
As they dominated the world’s media for three gruesome days, the killers achieved a startling success for their cause, one that must have shaken anti-terrorist experts around the world, who now realize how easy it would be for ten men unafraid of death to hold any city in the world hostage.
The interrogation of the one surviving terrorist, and evidence from satellite telephone intercepts and other intelligence, has led to an emerging international consensus that the attacks were masterminded by the Wahhabi-inspired Lashkar-e-Taiba, a terrorist group once patronized, protected and trained by Pakistan’s Inter-Services Intelligence (ISI) as a useful instrument in their country’s proxy war against India in Kashmir.
Though banned by General Pervez Musharraf under duress after the terrorist attacks of September 11, 2001, the Lashkar (which considers the United States, Israel and India “existential enemies of Islam”) simply regrouped under a different name and is even more powerful than before.
The Pakistani military finds militant outfits useful tools to bleed their adversaries in India and Afghanistan, and has shown little inclination to clamp down on them, despite years of assurances that action would be taken to curb their activities.
In July this year, American intelligence sources publicly revealed that the suicide-bombing of the Indian Embassy in Kabul had been conducted at the behest of the ISI.
This episode, along with two climbdowns by Pakistan’s government after public attempts to curb the ISI had been spurned by the Army, confirmed that the civilian government in Islamabad is too weak to challenge the all-powerful military.
So if the US and India demand, as they will, that Pakistan disband the Lashkar and similar terrorist outfits that have enjoyed military patronage in the past, dismantle their training facilities, freeze their bank accounts (before they are simply transferred to another name) and arrest their leaders, they will face a typically Pakistani conundrum: the military isn’t willing, and the civilian government isn’t able.
India’s government, which has reacted to previous terrorist outrages with calm and restraint, has no choice this time but to respond decisively.
Anything that smacks of temporizing and appeasement will further inflame the public a few months before national elections are due.
But India’s government has few good options.
An earlier assault on India’s Parliament in December 2001 by the Pakistan-based militant organization Jaish-e-Muhammad, nearly triggered a full-scale war between the two countries. &nbsp;In the end India pulled back its deployment on the border.
Though some hotheads in India now call for military action, including strikes on terrorist facilities in Pakistani territory, this would certainly lead to a war that neither side could win.
If anything, such an Indian reaction would play into the hands of the terrorists, by strengthening anti-Indian nationalism in Pakistan and diverting forces away from the Afghan borderlands, where they are aiding NATO’s fight against the Taliban and Al Qaeda.
For this reason, the US is likely to press India not to contemplate forceful retaliation that could undermine America’s objectives in Afghanistan.
And since both India and Pakistan have nuclear weapons, the risk of military action spiralling out of control is too grave for any responsible government to contemplate.
Yet inaction is not an option.
So India is likely to ask the US to use its undoubted clout with Pakistan – the US is a huge donor of both military and economic assistance to its near-bankrupt ally – to demand tougher action against the militants on its territory.
The governments of the victims of the Mumbai massacre are also likely to demand accountability from Islamabad.
Pakistan is likely to face disagreeable diplomatic and economic consequences for inaction.
But excessive pressure may only bring down the government of President Asif Ali Zardari, who is personally inclined towards rapprochement with India but who knows that every one of his civilian predecessors has been overthrown.
Contemplating such options, the world may be forced to admit its impotence.
That will have a chilling result: as long as a military-dominated Pakistan continues, willingly or helplessly, to harbour the perpetrators of Islamist terror, what happened in Mumbai could happen again -- anywhere.
The Third Way: an Epitaph
The last half-century has seen the end of ideological politics in much of the world.
First came the apocalyptic collapse of fascism as Hitler took Germany with him into a collective suicide.
Fascism's demise was followed by the more gradual disintegration of communism after Stalin's death and Khrushchev's revelations of Stalin's crimes.
The failed revolutions in Hungary in 1956 and in Czechoslovakia in 1968 foreshadowed the eventual failure of the Soviet empire in 1989.
While these pseudo-religions collapsed, a benevolent ideology of social democracy dominated much of Europe.
Its core was the belief that the state could provide both stable economic growth and social welfare to cushion the negative side effects of free markets.
Not everyone subscribed to this theory, but it was the West's strongest political force for several decades.
Christian Democrats, and even conservative parties, adopted its tenets.
But by the early 1980's social democracy had exhausted itself.
It had simply been too successful to remain a force for change.
Moreover, it had brought about new rigidities, notably bureaucratization and that deadly phenomenon of the 1970's, stagflation - economic stagnation and high unemployment coupled with galloping inflation.
The reaction to this malaise came swiftly, and it had a name - well, two names: Ronald Reagan and, above all, Margaret Thatcher.
"Thatcherism" was not really much of an ideology; it was more a gut reaction to the stagnant 1970's, an attempt to loosen the bureaucratic straitjacket of the state and to reveal that not everything that arose from state benevolence was good.
Even the word "neo-liberal" exaggerates the intellectual coherence of this counter force.
This change in political direction coincided with ­- indeed, was perhaps responsible for - the process that we now call globalization.
Thatcherism plus globalization had many liberating consequences, but the combination also created new social problems, begetting losers as well as winners.
The Thatcherite counter-revolution was so successful that it, too, began to incite countervailing pressures.
By the late 1990's, the political scene almost everywhere came to be dominated by the desire to combine competitiveness and growth-induced wealth creation on the one hand with solidarity, justice, and social cohesion on the other.
Both were to be achieved within a liberal order.
This is the main political project in most free societies, and it is in principle acceptable to all major parties.
Yet some tried to turn it into a new ideological edifice.
They believed that a new age of social democracy had dawned, and for a while they sought to prove their point: Bill Clinton, Tony Blair, Gerhard Schroeder, Romano Prodi, even some of those elected in the postcommunist countries seemed to belong to this political camp.
The new "Third Way" spreading from Washington to London to the rest of the world seemed to embody these leaders' own ideology.
As it turned out, this episode was even shorter-lived than the conservative counter-revolution.
Indeed, it was no more than an episode.
Some of us always suspected that the Schroeder-Blair idea of "New Labour" or, in German, the "New Center," had no real basis.
Soon it emerged that not all its apparent supporters actually supported it; when Chancellor Schroeder's proposed reforms caused squeals within his own party, he quickly dropped much of the Third Way program like a hot potato.
At the same time, Blair found more sympathy for the Third Way with his Spanish conservative colleague José María Aznar than among many social democrats.
The apparent hegemony of neo-social democrats began to crumble after only a few years.
Aznar was not the only conservative to replace a socialist government in the Mediterranean world, and the recent defeat of the socialists in Greece is unlikely to be the last.
The Benelux countries, some Scandinavian states, and many of the new Europeans of East Central Europe have chosen traditionally right-of-centre parties.
The German Chancellor and his "red-green" coalition still clings to power but is today severely weakened.
Even Tony Blair is struggling to hold on.
All this does not augur a new change of direction in Europe.
If Schroeder gave way to the Christian Democrats, indeed even if President Bush lost to his Democrat challenger, this would not imply the dawn of a new age.
Domestically the one and only issue in most countries remains the same: how to provide a sustainable basis for economic growth in the harsh climate of the global marketplace while at the same time maintaining solidarity and a sense of fairness throughout society.
Whoever governs must try to square this circle.
This would truly be the end of ideology at last, were it not for the new challenges arising from the temptations of various kinds of fundamentalism.
Versions of nationalism as well as the ascendancy of religiously tinted forms of integrisme threaten the fabric of a free world.
The inventors of the Third Way mostly overlooked the value of individual liberty, but it is this that remains the single most important issue in a world where open societies still face mortal enemies.
The Third Way is A Rightwing Way
CHICAGO: "Only de Gaulle could free Algeria; only Nixon could open up China."
This insight is particularly useful in Europe, and increasingly around the globe, when examining the actions of supposedly leftwing and socialist governments.
In the late 1950s France came near to civil war over Algeria.
Out of power since 1946, Charles de Gaulle was summoned back to the Elysée to lead France out of this quagmire.
Because of his patriotism, de Gaulle seemed the only man able to set Algeria free.
Starting in the late 1960’s rapprochement between Mao’s China and America became possible because China was involved in political and military conflicts with the Soviet Union.
America’s Democrats knew this as well as the Republicans, but President Johnson was afraid to approach China because his party was supposedly soft on communism.
Only a dedicated anti-Communist like Nixon had sufficient political support from the right to visit China and urge cooperation between the US and China against their common enemy in the Kremlin.
Economics is not immune from this dynamic.
Ronald Reagan and Margaret Thatcher successfully promoted lower income taxes, privatization of government enterprises, weaker unions, and a generally smaller role for government.
The popularity and success of their programs induced liberal, labor, and social democratic governments in many nations to also promote free market policies in direct conflict with their traditional ideologies.
Often, only these parties have sufficient political support on the left to succeed in introducing needed reforms in labor and other markets.
Market reforms initiated by the left started in 1984 with a New Zealand labor government which enacted legislation that transformed a small formerly isolated nation into one of the most "liberal" economies in the world.
New Zealand’s Laborites privatized the postal system and many other public enterprises, and changed the country’s employment system from highly centralized collective bargaining to one that gave employers considerable discretion to hire and fire and to pay market-determined wages.
The Democratic Party of the US has in the past strongly supported big government, but under President Bill Clinton it took heed of the popularity of the Republican Party’s stance advocating less paternalism and smaller government.
It was President Clinton, not Bush or Reagan, who declared that "the era of big government was over" as his administration radically reversed traditional Democratic positions on welfare, balanced budgets, public debt reduction, and the encouragement of business.
A telling example of this trend is found in Mexico’s economic policies of the 1980’s and 1990’s.
The Institutional Revolutionary Party (PRI) that governed Mexico uninterrupted for seven decades (until its recent loss of the presidency to Vincente Fox) had been a strong advocate of government ownership of heavy industry, prohibitive duties on imports to protect domestic companies, and detailed regulation of labor and financial markets.
Starting with President Miguel de la Madrid in the early 1980’s, however, the PRI responded to free market critics of Mexico’s weak economic performance by selling many government-owned enterprises, partially privatizing the Mexican social security system, and becoming a strong advocate of a free trade agreement with its large “enemy” to the north, the US.
So President Fox needs only to continue this revolution, not start his own.
Argentina’s Senate recently reacted to very high unemployment by passing a labor market reform bill that cuts union power and gives employers flexibility in hiring and firing.
This reform is being promoted by the new center-left government of Fernando de la Rua after the failure of attempts to reform the labor market by the previous conservative government of Carlos Menem.
But it is recent policy changes in Germany and France that provide, perhaps, the most impressive examples of the "de Gaulle/Algeria" and "Nixon/China" theory of political reform.
Both nations suffered high unemployment and slow growth during the 1990’s, in good measure due to heavy-handed regulation of labor and other markets.
Conservative governments in these nations accomplished little in the way of serious market reform, despite considerable rhetoric.
The Jospin and Schroeder governments were elected on manifestos that promised to cut unemployment and raise growth by expanding government regulation.
Each regime did in fact start out by introducing more government controls - including a law to implement a 35 hour week in France.
Both governments, however, soon -- and quite stealthily -- reversed course.
Gerhard Schroeder in Germany has now slashed corporate taxes, is encouraging startup companies, and promises to provide tax breaks for private pension plans.
French Premier Jospin quietly liberalized the French labor market by allowing for more part-time work, increased privatization, and promoted a more globally competitive financial system with reduced governmental control.
If Nixon could seek agreement with Communist China, and de Gaulle surrender Algeria, it is a relatively small step for Socialists to embrace the free market and support much lower taxes on business.
In politics as in life, ideology is usually overwhelmed by self-interest.
The Three Faces of Putin
MOSCOW: Being president of Russia is often caricatured as being like a tsar, but the powers of President Vladimir Putin are more constrained than the Kremlin’s former autocrats and Politburo chieftains.
An obvious sign of this is the amount of time Putin spends on foreign trips with little diplomatic justification.
Diplomacy, however, allows a president opportunity to enhance his authority for future domestic battles.
The constraints Putin faces are not constitutional but are formed by the three factions that make up his government.
One is a group of FSB (the successor agency to the KGB) men from St. Petersburg, headed by Security Council Secretary Sergei Ivanov.
The second consists of liberal economists and lawyers from Putin’s home town of St. Petersburg, with Minister of Finance Alexei Kudrin and Minister of Economy German Gref the leading lights.
The third faction is an “oligarchic” business-oriented group led by Putin’s chief of staff Alexander Voloshin, Prime Minister Mikhail Kasyanov and the secretive oil and aluminum tycoon Roman Abramovich, perhaps Russia’s richest man at age 33.
Because of these three very visible fault lines, some Russians describe their country as having distinct security, economic, and political/business governments.
The FSB people naturally focus on security, law, and order.
The St. Petersburg liberals pursue market economic reforms.
But, as under Yeltsin, it is the oligarchic faction that dominates, for it controls the Presidential Administration, the Council of Ministers, two centrist parliamentary factions, and much of Russia’s oil, aluminum, railways and nuclear industries.
So far, Putin has compromised with the oligarchic force, which has reduced his personal imprint on policies. It is too powerful and skillful to be challenged head-on.
Kremlin policymaking is largely an interplay between these three factions.
The institutional checks and balances built into Russia’s constitution have been neutralized.
Rampant corruption has discredited regional governors as a counterweight.
Indeed, the financial crash of August 1998 was provoked in large measure by governors issuing big subsidies to friendly local enterprises and demanding kick-backs in return.
By slashing subsidies from regional budgets, federal revenues increased from 9% of GDP in 1998 to 17% of GDP this year.
Not a surprise, then, that the governors cannot mobilize popular support as federal authorities impose accountability standards on them.
The State Duma has also faded.
Under Yeltsin, deputies’ votes were routinely purchased; now the Kremlin’s FSB faction pressures deputies by reminding them of their past bribe-taking.
Parliamentarians complain about “KGB threats,” but honesty doesn’t seem a lot to ask of Duma members.
The real problem in policymaking is forging agreement between Putin’s three factions.
Take the example of the Kursk disaster.
The politics of the sunken submarine were handled by Sergei Ivanov.
The other factions thought that he deserved the hostile criticism that followed in the wake of the Kremlin’s bumbles, and the liberals hoped that this debacle would reinforce independent media.
As no faction embraces the military, an expected rise in defense expenditures has been insignificant; indeed, Putin is slashing 600,000 men from Russia’s military.
All three factions applaud the downfalls of media oligarchs Boris Berezovsky and Vladimir Gusinsky, but for different reasons.
The FSB favors keeping the media under the Kremlin’s thumb.
Abramovich, brought to the fore by Berezovsky, is eliminating his competitors.
Liberals see Berezovsky and Gusinsky as the main practitioners of corruption and responsible for the demise of market reform in 1997.
Thus, the outstanding issue is media freedom, with the FSB faction and the liberals opposing one another.
Neither the FSB people nor the oligarchs focus on economic policy beyond their immediate interests, abandoning that field to the liberals, who radically reformed taxes, cleaned up the state budget, and monetized the economy by curbing barter.
Pension reform with private savings accounts and land reform leading to private ownership of land seem within reach.
Prospects for economic reform have never been brighter than in 2000.
The main problem is producing well-designed reforms backed by key officials.
Here a big problem arises from the fact that industrial ministers continue to interfere because they represent business interests or are even in business themselves.
Last September, Minister of Communications Leonid Reiman, a key member of the St. Petersburg FSB group, deprived two leading Russian mobile phone companies of their frequencies so as to benefit a company favored by him.
Fortunately, his decision was reversed by the government after public uproar.
In the coming year, Putin’s big test will be over control of gas monopoly Gazprom, now co-owned by its managers and the state.
Its long-time CEO Rem Vyakhirev departs next May.
Incredibly, Russia’s largest company - with one third of the world’s gas reserves - is unprofitable because of poor management and theft.
Billions of dollars are siphoned off each year through companies allegedly controlled by Gazprom managers.
Clearly, Putin wants to end this robbery of state assets, and minority shareholders are up in arms, but the insatiable Abramovich wants Gazprom, and Voloshin yearns to become its next CEO.
Will Putin stand against them?
A smaller drama concerns Russia’s railways.
Railway Minister Nikolai Aksenenko, who belongs to the oligarchic family, wants to turn the rail system into a monopoly akin to Gazprom, while the St. Petersburg liberals want to divide the rail network into competing private companies.
The outcome remains unclear.
Beside Gazprom, the banking system is Russia’s economic black hole.
No sensible person keeps money in a Russian bank.
Here, the stumbling block is the old-style apparatchik Viktor Gerashchenko, Chairman of the Central Bank of Russia, who thrives on the mess.
Because he is not involved in the power struggle, and since banking reform is a huge task, nobody seems prepared to take him on.
Daily, each of Putin’s three faces can be seen.
The future of his presidency will depend on which two ever will join into a unified faction.
The Three Mis-Represents
It is two years since the Chinese Communist Party (CCP) unveiled its new ideological credo, called the "Three Represents."
What good fortune it is that China's most sacred, encompassing, and powerful doctrine built around the triumvirate of "the interests of the majority of the people" "advanced culture," and "advanced productive forces" found one political party to be its representative!
Good fortune, that is, for the CCP, not for China and its people.
The "Three Represents" has several official versions, each including the words "always," "China," and "represent."
Their meaning is clear.
On the other hand, "majority of the people," "advanced culture," and "advanced productive forces," as well as some other phrases that dominate the doctrine, are vague, perhaps deliberately so.
Common sense suggests that the "majority of the people," whom the CCP is supposed to "represent," should include workers.
But the CCP long ago abandoned the workers.
How many lost their jobs last month?
How many were forced to take early retirement?
How many mining accidents were there?
How many workers' protests?
Who jailed their organizers?
The "Representative of the Three Represents" refuse to say.
Workers who protest and strike are "rioting." Whoever reports such events is "anti-revolutionary."
The same is true of the Party's relationship with the peasants, who provided Mao Zedong with the soldiers and supplies he needed in battles that lasted decades.
Peasants followed Mao because the CCP promised them land.
But Mao decided to take back the land from the peasants even before it was given to them.
"The serious problem is the education of the peasants," he said.
So he taught them that all land belongs to the state.
The "representatives" of the peasants are the new landlords.
In a China without democracy, student sentiment is a key political barometer.
Unlike workers or peasants, students include people from all levels of society, so whatever mobilizes them represents society's focus at that time.
From April 15th to June 4th, 1989, students demonstrating in Tiananmen Square, and their supporters, conducted the saddest opinion poll in Chinese history, expressing a common will to end totalitarianism, build democracy, and eliminate corruption.
Those who defend the Party's bloody crackdown of those students have no right to call themselves the representatives of the majority of the people.
Their claim to be "always representing the progressive direction of advanced culture" is yet another grand and empty declaration.
Chinese culture stretches three thousand years into the past and perhaps thousands of years into the future.
Is it to be "always represented" by a lone political party?
I do not know what "the progressive direction of advanced culture" is, but advanced culture played no part in the CCP-inspired "Wipe Out Poisonous Weeds Campaign," the "Anti-Rightist Movement," or the "Eliminate Demons and Evil Heresy Campaign."
Such obscurantism only creates a culture of stultifying uniformity.
Like a blade of grass beneath a stone, culture knows how and in which direction to seek light.
It does not need to be "represented."
Of the three "represents," the clearest meaning is to be found in the CCP's vow to "always represent the demands of advanced productive forces."
This means representing the interests of the da-kuan, those who suddenly became rich, usually through government connections.
The phrase has no deeper meaning.
The union of power and money in today's China originates from the steady inflation of bureaucracy.
Before the Great Leap Forward, townships could barely afford a few full-time cadres.
Today, each township has hundreds.
Their basic salary is paid by the central government, but bonuses and extra benefits depend on contributions from the "advanced productive forces" at the county and township level.
Whatever the rich ask of the CCP - land leases, low interest loans, violation of labor laws, environmental standards, contracts, and intellectual property - can be considered "the demands of advanced productive forces."
Even under less corrupt conditions, representing "the most advanced productive forces" is a flawed idea.
Imagine that the Olympic Committee represented only the interests of gold medal winners, or that the Education Ministry represented only post-doctoral programs but ignored elementary schools.
While the high-tech sector at the top of the economic pyramid is important, the traditional sectors at the bottom still form the foundation.
What will become of several hundred million rural peasants and jobless workers in sunset industries?
Who will address inequality and divergent social interests?
An increasingly pluralistic society is being forced into a procrustean structure that allows only one voice, one need, and one kind of interest: the voice, needs, and interests of the party.
But the theory of the Three Represents is nevertheless necessary, because a new situation has emerged.
When the CCP came to power in 1948, it could claim to embody socialism, Marxism, and the proletariat's historical mission.
Fifty years later, socialism's advantages, Marxism's truth, and the proletarian character of the Party have all been unanswerably challenged.
So the Three Represents is an effort to salvage one-party rule.
You may doubt socialism, but you cannot doubt "advanced productive forces."
You may not believe in Marxism, but you must believe in "advanced culture."
The CCP no longer represents workers and peasants, but it can represent the "majority of the people," including "red" capitalists.
Indeed, whether CCP members who have become "revolutionarily" wealthy remain "red" is determined solely by their acceptance of one-party rule.
Welcoming "red capitalists" therefore does not imply democratization.
Such people are more likely to seek to strengthen their privileges than promote pluralism and the rule of law.
Totalitarianism, not political reform, is their livelihood.
It is this, above all else, that the theory of the Three Represents comprehends.
The Three Swedish Models
Sweden’s economic and social system, sometimes called the “Swedish Model,” is often depicted either as an ideal or an abnormality.
But Sweden’s system has varied considerably.
In fact, broadly speaking there have been three different Swedish “models” since the late nineteenth century.
The first model lasted from about 1870 until the 1960’s.
During this “liberal” period, the government basically provided stable market-supporting legislation, education, health care, and infrastructure.
As late as 1960, both total government spending (as a share of GDP) and the distribution of earnings were similar to those prevailing in the United States.
During this century-long period, Sweden moved from being one of the poorest western countries to being the third richest country in terms of GDP per capita.
In other words, Sweden became a rich country before its highly generous welfare-state arrangements were created.
A second era lasted from 1960 until 1985.
The free-trade regime of the liberal period was retained during this period – indeed it was deepened by the various rounds of global trade liberalization – but the dominant thrust was the creation of a generous welfare state.
By the late 1980’s, total public spending reached 60-65% of GDP, compared to about 30% in 1960.
Moreover, marginal tax rates hit 65-75% for most full-time employees, compared to about 40% in 1960 (all taxes on households being included).
Economic incentives to work, save, and start businesses were also reduced through the compression of wage differentials and a big squeeze on company profits, both largely the result of strong and centralized labor unions.
Moreover, new labor-market regulations were introduced, the most important being strict job-security legislation implemented in the early 1970’s.
The regulation of financial markets that was imposed during WWII was retained.
It is this economic and social system that is usually identified as the “Swedish model.”
Although economic performance during this period was not dismal, it was certainly not impressive.
Between 1970 and 1995, GDP per capita in Sweden lagged by about 18% behind the average of rich OECD countries.
As a result, Sweden fell from third to approximately seventeenth place in the OECD in terms of GDP per capita.
This can partly be explained by the “catch up” mechanism, as technologically less advanced countries imported technology from more advanced countries.
But this does not explain why 14 countries not only caught up with Sweden during this period, but surpassed it in terms of GDP per capita.
The removal of capital-market regulations and foreign-exchange controls in the late 1980’s, and Sweden’s entry into the EU in the early 1990’s, signaled a new era – the embryo of a third Swedish model.
In 1991, marginal tax rates were cut by 10-20% for large parts of the population.
These reforms had broad political support and were, in fact, initiated during a social-democratic government.
Subsequently, mainly during a period of center-right governance, several product markets were deregulated: telecommunications, electricity, road transport, taxis, and, to some extent, railways.
A process of deregulation and privatization, although with continued tax-financing (in fact, basically a voucher system), began in the field of “human services,” in particular for childcare, education, and old-age care.
One purpose of this was to increase competition and freedom of choice.
Partly in response to these reforms, Sweden’s growth rate picked up from the mid 1990’s, and today about a third of the previous lag in GDP per capita since 1970 (as compared to other developed countries) has been recovered.
However, Sweden is still characterized by high welfare dependency, with about 23% of working-age people in recent years living on various types of government benefits, including temporary and permanent disability payments.
The new center-right government elected in the fall of 2006 has committed itself to continuing economic liberalization.
The government has announced plans to privatize state-owned companies, improve conditions for small firms, and continue increasing individual freedom of choice in the case of human services.
It has also abolished the wealth tax (after the previous social-democratic government had already abolished the inheritance tax).
Moreover, the government has modestly reduced taxes on wages and slightly scaled down the generosity of some benefits.
One argument for the latter policy is to improve the government’s budget, another to make work more economically rewarding relative to government benefits.
Indeed, in important respects today’s Sweden is moving back to the liberal economic regime that existed before the explosion of government interventionism in the 1960’s.
But there are two basic caveats.
First, all political parties agree that welfare-state arrangements should remain tax-financed, although possibly with a stronger application of insurance principles in the social insurance systems.
So even if the generosity of state benefits may be curtailed, aggregate government spending is unlikely to be rolled back dramatically from the current 53% of GDP.
Second, there is general agreement that the government should take more active responsibility for environmental issues, although policies in this area increasingly rely on market instruments (prices for environmental disturbances) rather than on quantitative regulations
Clearly, some of these policy measures may conflict with traditional egalitarianism in Sweden, at least in the short term.
Hence, the big question underlying the current wave of liberalization is whether these reform tendencies are politically sustainable.
The next general election in 2010 will give part of the answer.
The Three Trillion Dollar War
NEW YORK – With March 20 marking the fifth anniversary of the United States-led invasion of Iraq, it’s time to take stock of what has happened.
In our new book The Three Trillion Dollar War , Harvard’s Linda Bilmes and I conservatively estimate the economic cost of the war to the US to be $3 trillion, and the costs to the rest of the world to be another $3 trillion – far higher than the Bush administration’s estimates before the war.
The Bush team not only misled the world about the war’s possible costs, but has also sought to obscure the costs as the war has gone on.
This is not surprising.
After all, the Bush administration lied about everything else, from Saddam Hussein’s weapons of mass destruction to his supposed link with al-Qaeda.
Indeed, only after the US-led invasion did Iraq become a breeding ground for terrorists.
The Bush administration said the war would cost $50 billion.
The US now spends that amount in Iraq every three months.
To put that number in context: for one-sixth of the cost of the war, the US could put its social security system on a sound footing for more than a half-century, without cutting benefits or raising contributions.
Moreover, the Bush administration cut taxes for the rich as it went to war, despite running a budget deficit.
As a result, it has had to use deficit spending – much of it financed from abroad –to pay for the war.
This is the first war in American history that has not demanded some sacrifice from citizens through higher taxes; instead, the entire cost is being passed onto future generations.
Unless things change, the US national debt – which was $5.7 trillion when Bush became president – will be $2 trillion higher because of the war (in addition to the $800 billion increase under Bush before the war) .
Was this incompetence or dishonesty?
Almost surely both.
Cash accounting meant that the Bush administration focused on today’s costs, not future costs, including disability and health care for returning veterans.
Only years after the war began did the administration order the specially armored vehicles that would have saved the lives of many killed by roadside bombs.
Not wanting to reintroduce a draft, and finding it difficult to recruit for an unpopular war, troops have been forced into two, three, or four stress-filled deployments.
The administration has tried to keep the war’s costs from the American public.
Veterans groups have used the Freedom of Information Act to discover the total number of injured – 15 times the number of fatalities.
Already, 52,000 returning veterans have been diagnosed with Post Traumatic Stress Syndrome.
America will need to provide disability compensation to an estimated 40% of the 1.65 million troops that have already been deployed.
And, of course, the bleeding will continue as long as the war continues, with the health care and disability bill amounting to more than $600 billion (in present-value terms).
Ideology and profiteering have also played a role in driving up the war’s costs.
America has relied on private contractors, which have not come cheap.
A Blackwater Security guard can cost more than $1,000 per day, not including disability and life insurance, which is paid for by the government.
When unemployment rates in Iraq soared to 60%, hiring Iraqis would have made sense; but the contractors preferred to import cheap labor from Nepal, Philippines, and other countries.
The war has had only two winners: oil companies and defense contractors.
The stock price of Halliburton, Vice President Dick Cheney’s old company, has soared.
But even as the government turned increasingly to contractors, it reduced its oversight.
The largest cost of this mismanaged war has been borne by Iraq.
Half of Iraq’s doctors have been killed or have left the country, unemployment stands at 25%, and, five years after the war’s start, Baghdad still has less than eight hours of electricity a day.
Out of Iraq’s total population of around 28 million, four million are displaced and two million have fled the country.
The thousands of violent deaths have inured most Westerners to what is going on: a bomb blast that kills 25 hardly seems newsworthy anymore.
But statistical studies of death rates before and after the invasion tell some of the grim reality. They suggest additional deaths from a low of around 450,000 in the first 40 months of the war (150,000 of them violent deaths) to 600,000.
With so many people in Iraq suffering so much in so many ways, it may seem callous to discuss the economic costs.
And it may seem particularly self-absorbed to focus on the economic costs to America, which embarked on this war in violation of international law.
But the economic costs are enormous, and they go well beyond budgetary outlays.
Next month, I will explain how the war has contributed to America’s current economic woes.
Americans like to say that there is no such thing as a free lunch.
Nor is there such a thing as a free war.
The US – and the world – will be paying the price for decades to come.
The Tidal Wave of Memory
The Tobin Tax Lives Again
CAMBRIDGE – Something happened in late August that I never thought I would see in my lifetime. A leading policymaker in the Anglo-American empire of finance actually came out in support of a Tobin tax – a global tax on financial transactions.
The official in question was Adair Turner, the head of the United Kingdom Financial Services Authority, the country’s chief financial regulator.
Turner, voicing his concerns about the size of the financial sector and its frequently obscene levels of compensation, said he thought a global tax on financial transactions might help curb both.
Such a statement would have been unthinkable in the years before the sub-prime mortgage meltdown. Now, however, it is an indication of how much things have changed.
The idea of such a tax was first floated in the 1970’s by James Tobin, the Nobel laureate economist, who famously called for “throwing some sand in the wheels of international finance.”
Tobin was concerned about excessive fluctuations in exchange rates.
He argued that taxing short-term movements of money in and out of different currencies would curb speculation and create some maneuvering room for domestic macroeconomic management.
The idea has since become a cause-célèbre for a wide range of non-governmental organizations and advocacy groups that see in it the double virtue of cutting finance down to size and raising a big chunk of revenue for favored causes –foreign aid, vaccines, green technologies, you name it.
It has also been endorsed by some French (predictably!) and other continental European leaders.
But, until Turner mentioned the idea, you would not have been able to identify a single major policymaker from the United States or the UK, the world’s two leading centers of global finance, with anything nice to say about it.
The beauty of a Tobin tax is that it would discourage short-term speculation without having much adverse effect on long-term international investment decisions.
Consider, for example, a tax of 0.25% applied to all cross-border financial transactions.
Such a tax would instantaneously kill the intra-day trading that takes place in pursuit of profit margins much smaller than this, as well as the longer-term trades designed to exploit minute differentials across markets.
Economic activity of this kind is of doubtful social value, yet it eats up real resources in terms of human talent, computing power, and debt.
So we should not mourn the demise of such trading practices.
Meanwhile, investors with longer time horizons going after significant returns would not be much deterred by the tax. So capital would still move in the right direction over the longer term.
Nor would a Tobin tax stand in the way of financial markets punishing governments that grossly mismanage their economies.
Moreover, it is undeniable that such a tax would raise a great deal of money.
Revenue estimates for a small tax on international currency transactions run into hundreds of billions of dollars per year.
The receipts would be even greater if the base is extended, as was implied by Turner, to all global financial transactions.
Whatever the precise amount, it is safe to say that the numbers in question are huge – larger than, say, foreign-aid flows or any reasonable assessment of the gains from completing the Doha Round of trade negotiations.
Predictably, Turner came in for severe criticism from City of London bankers and the British Treasury. Much of that criticism misses the mark.
A Tobin tax would raise the cost of short-term finance, some argued, somehow missing the point that this is in fact the very purpose of a Tobin tax.
Others argued that such a tax fails to target the underlying incentive problems in financial markets, as if we had an effective, well-proven alternative to achieve that end.
It would threaten the role of London as a financial center, some complained, as if the proposal was meant to apply just in London and not globally.
It can easily be evaded by relying on offshore banking centers, some pointed out, as if not all financial regulations face that very same challenge.
In any case, as Dean Baker of the Center for Economic and Policy Research in Washington observed, there are many imaginative ways in which a Tobin tax could be made harder to dodge.
Suppose, he argues, that we give finance workers who turn in their cheating bosses 10% of the receipts that the government collects.
That would be quite an incentive for self-monitoring.
What the Tobin tax does not do is help with longer-term misalignments in financial markets.
Such a tax would not have prevented the US-China trade imbalance.
Neither would it have stopped the global saving glut from turning into a ticking time bomb for the world economy.
It would not have protected European and other nations from becoming awash in toxic mortgage assets exported from the US.
And it would not dissuade governments intent on pursuing unsustainable monetary and fiscal policies financed by external borrowing.
For all of these problems we will need other macroeconomic and financial remedies.
But a Tobin tax is a good place to start if we want to send a strong message about the social value of the casino known as global finance.
The Too-Quiet American
NEW YORK – It is now apparent that the United States is the main culprit in preventing the ten-year-old multilateral trade negotiations known as the Doha Round from being closed this year.
The US has even spurned World Trade Organization Director General Pascal Lamy’s desperate attempt to get member states to support a wholly emasculated agreement – described by critics as Doha Lite and Decaffeinated – which is mainly confined to some concessions to the least-developed countries.
While there are bit players who could be cast as villains, America’s ambassador to the WTO, Michael Punke, has assumed the role of global trade’s Mr. No.
But the problem is not Punke.
America’s rejectionist stance comes from the top of the US government, starting with President Barack Obama’s lack of leadership.
From the outset of his presidency, Obama’s defense of a liberal trade regime has been inadequate.
He has said repeatedly that exports are good for the US: they create jobs.
But US exports are other nations’ imports, so Obama’s argument amounts to telling others to lose their jobs.
He needs to remind Americans that imports are also good: he can surely ask his audience to think of jobs in the UPS cargo planes, freight trains, and trucks that carry imports into the American interior.
The main problem, however, is that Obama has been unable to confront, and put to rest, US labor unions’ fear-driven hostility to trade.
Nor has he been willing to confront the business lobbies that are willing to hold the Doha Round hostage in order to extract ever more concessions by other countries, even though they know that the trade talks are about to be sucked into the Bermuda Triangle of the 2012 US presidential election.
Yet there is little in the opposition by fearful unions and greedy business lobbies that Obama could not beat back with compelling arguments.
Besides, as the respected polling analyst Karlyn Bowman recently demonstrated, the US public is by no means strongly opposed to trade.
This is partly because, in virtually every state, so many jobs today – and not just at UPS – depend on trade.
Protectionism may, in fact, be an electoral dinosaur.
In any event, history’s great statesmen have always earned their spurs by bucking the political odds for a matter of principle.
If Obama actually wrote less and read more, he would find at least two historical episodes of courageous leadership on trade that are worthy of his admiration and emulation.
One is the repeal of England’s Corn Laws by Prime Minister Robert Peel in 1848.
In the critical vote for repeal that brought his political career to an end, Peel won only 106 votes from his Conservative Party, while 222 Tory MPs opposed him.
He carried the day, but he lost the support of his party.
As Lord Ashley observed in his diary: “[Peel] led the Tories and followed the Whigs.”
The other example is Winston Churchill, who was elected as a Conservative member of Parliament from the northern industrial town of Oldham.
After converting to free trade in 1904, he had to leave the party.
He then joined the Liberal Party, accepting the invitation of the Liberal Association of Northwest Manchester.
Churchill was also for free immigration, and firmly opposed the proposed Aliens Bill of 1904 (partly because he saw traces of anti-Semitism in the fear, prompted by an influx of East European Jewish immigrants, of an “alien invasion”).
Churchill was a politician of principle who, like Peel, fought against his own party and, unlike Peel, survived to go on to yet greater political triumph, in the epic battle against the Nazis.
These “profiles in courage,” to borrow John F. Kennedy’s famous phrase, ought to inspire Obama at a time when Presidential leadership is a crying need in Washington on critical economic issues.
Obama campaigned on the slogan “Yes, we can,” not “Yes, we can, but we won’t.” As he watches an American economy assailed by economic ignorance, I have a new and better catchphrase for him: Nec aspera terrent, or “Difficulties be damned.”
The Torturers of Tashkent
NEW YORK – President Islam Karimov’s regime in Uzbekistan has survived for 19 years, in no small part because it has resorted time and again to police brutality and torture to extract confessions from people who have committed no crime, and to break the spirits of political opponents and intimidate anyone who might think of becoming one.
Sometimes the police are overzealous.
Sometimes the victims die.
Sometimes the regime tries to cover up the killings.
But Karimov has never condemned torture, and he has instituted no measures to prevent it.
A few cases make it to the public eye, but only when things go too far and victims of brutality or torture die.
The latest to surface is the case of 30-year-old Muzaffar Tuychiyev, a healthy young man when the police detained him on the evening of March 24, 2008, in the region of Tashkent.
They then transported Tuychiyev to a police station in Angren, 100 kilometers south of the capital.
By the next morning, Tuychiyev was dead.
Four police officers are on trial for his killing.
His parents say higher-ranking officers are going free.
Talib Yakubov, a human-rights advocate in Uzbekistan, says that torture is an integral part of the Karimov regime’s domestic policy.
Torture, Yakubov says, enables the government to keep the public in fear and submission.
The government uses the threat of terrorist attacks to justify domestic repression of political opponents and the absence of democratic reforms.
But, according to Yakubov, “Only thanks to torture, hundreds and thousands of people admit that they are guilty of religious extremism and terrorism.
Without torture, none of them would have incriminated themselves.”
In 2003, the international community tried to persuade Karimov to publicly denounce torture before an annual meeting of the European Bank for Reconstruction and Development (EBRD).
Two months prior to the gathering, a United Nations special reporter published a paper condemning Uzbekistan for “widespread and systematic” use of torture.
The report unleashed a wave of criticism of the EBRD for choosing to hold its meeting in Tashkent.
In response, the EBRD promised to pressure Karimov to condemn torture.
Karimov, not surprisingly, dodged and weaved instead.
During a speech at the meeting, he boasted that Uzbekistan was a partner of the United States in the war on terror – and for Karimov the war on terror is tantamount to a license to torture in his quest to remain in power.
On May 13, 2005, when government troops in the eastern city of Andijan opened fire from armored personnel carriers on thousands of people demonstrating against poverty and abuse of power, the guns killed hundreds of people.
Thereafter, torture in Uzbekistan became routine.
No one has managed to speak to a victim of torture in Uzbekistan.
Dozens have died as a result of their ordeals.
Most survivors languish in prison.
Those who have been released prefer to keep silent about their experiences.
(Psychological research shows that torture causes serious psychological trauma to its victims, whose families often suffer negative consequences as well.)
I had a chance to see one of the victims of Uzbekistan’s regime.
Rasul Haitov was 27 years old when he was detained in Tashkent with his brother Ravshan, 32, in October 2001.
Police officers resorted to torture to get them to admit that they were members of an Islamist party, Hizb-ut Tahrir.
The police choked the brothers with plastic bags.
They drove needles under their fingernails, and then tore them out.
They sodomized them with glass bottles, beat them up with clubs, and threw their bodies around a room.
Ravshan died.
Rasul barely survived.
When I saw him in a courtroom, he was weak and feeble and looked like a broken old man.
After two months of treatment, he could still not sit upright.
The Trade-and-Aid Myth
Trade and aid have become international buzzwords.
More aid (including debt relief) and greater access to rich countries’ markets for poor countries’ products now appears to be at the top of the global agenda.
Indeed, the debate nowadays is not about what to do, but howmuch to do, and how fast.
Lost in all this are the clear lessons of the last five decades of economic development.
Foremost among these is that economic development is largely in the hands of poor nations themselves.
Countries that have done well in the recent past have done so through their own efforts.
Aid and market access have rarely played a critical role.
Consider a developing country that has free and preferential market access to its largest neighbor, which also happens to be the world’s most powerful economy.
Suppose, in addition, that this country is able to send millions of its citizens to work across the border, receives a huge volume of inward investment, and is totally integrated into international production chains.
Moreover, the country’s banking system is supported by its rich neighbor’s demonstrated willingness to act as a lender of last resort.
Globalization does not get much better than this, right?
Now consider a second country.
This one faces a trade embargo in the world’s largest market, receives neither foreign aid nor any other kind of assistance from the West, is excluded from international organizations like the WTO, and is prevented from borrowing from the IMF and the World Bank.
If these external disadvantages are not debilitating enough, this economy also maintains its own high barriers on international trade (in the form of state trading, import tariffs, and quantitative restrictions).
As the reader may have guessed, these are real countries: Mexico and Vietnam.
Mexico shares a 2,000-mile long border with the United States, which provides not only privileged market access in goods and labor, but also a claim to the resources of the US Treasury (as became apparent during the 1995 peso crisis).
By contrast, America maintained a trade embargo against Vietnam until 1994, established diplomatic relations only in 1995, and did not provide most-favored nation treatment to Vietnamese imports for years after that.
Vietnam still remains outside the WTO.
Now consider their economic performance.
Since NAFTA was signed in December 1992, Mexico’s economy has grown at an average annual rate of barely over 1% in per capita terms.
This is not only far below the rates of Asia’s economic superstars; it is also a fraction of Mexico’s own growth performance during the decades that preceded the debt crisis of 1982 (3.6% per year between 1960 and 1981).
Vietnam, however, grew at an annual rate of 5.6% per capita between the onset of its economic reforms in 1988 and the establishment of diplomatic relations with the US in 1995, and has continued to grow at a rapid 4.5% pace since then.
Vietnam witnessed a dramatic fall in poverty, while in Mexico real wages fell.
Both countries experienced sharp increases in international trade and foreign investment, but the pictures are utterly different where it counts most: rising standards of living, particularly for the poor.
What these examples show is that domestic efforts trump everything else in determining a country’s economic fortunes.
All the opportunities that the US market presented to Mexico could not offset the consequences of policy mistakes at home, especially the failure to reverse the real appreciation of the peso’s exchange rate and the inability to extend the productivity gains achieved in a narrow range of export activities to the rest of the economy.
What matters most is whether a country adopts the right growth strategy.
With none of Mexico’s advantages, Vietnam pursued a strategy that focused on diversifying its economy and enhancing the productive capacity of domestic suppliers.
Broader post-war experience supports the conclusion that domestic policies are what matter most.
South Korea took off in the early 1960’s not when foreign aid was at its apex, but when it was being phased out.
Taiwan did not receive foreign aid or preferential market access.
China and India, today’s two economic superstars, have prospered largely through sui generis reform efforts.
It is tempting to ascribe the rare African successes – Botswana and Mauritius – to foreign demand for their exports (diamonds and garments, respectively), but that story goes only so far.
Obviously, both countries would be considerably poorer without access to foreign markets.
But, as in other cases of successful development, what distinguishes them is not the external advantages they possess, but their ability to exploit these advantages.
Witness the mess that other countries made of their natural-resource endowments.
The word “diamond” hardly conjures images of peace and prosperity in Sierra Leone.
Similarly, few of the export processing zones proliferating around the world have delivered the results observed in Mauritius.
None of this absolves rich countries of their responsibility to help.
They can make the world less hospitable for corrupt dictators – for example, by greater sharing of financial information and by not recognizing the international contracts that they sign.
Similarly, increasing the number of poor-country workers allowed to work in rich countries, and providing greater scope for growth-oriented policies by relaxing WTO rules and conditionality from the US, would produce greater long-term development impact.
It is far from clear that expanding market access and boosting aid are the most productive use of valuable political capital in the North.
Development should focus not on trade and aid, but on improving the policy environment in poor countries.
The Tragedy of President Chen
Taiwan’s Public Prosecutor has indicted the wife of President Chen Shui-bien for embezzling public funds.
Chen, as a sitting president, cannot be indicted even though the prosecutor says that he has evidence to prove his guilt.
But Chen’s legacy was already in tatters.
Chen can remain in office until his term ends in 2008, or he could resign now in order to let his vice president and pro-independence Democratic Progressive Party (DPP) rebuild to win the next election.
Whatever his decision, Taiwan’s first DPP president will go down in history as a pathetic failure, because he used his office to divide the island’s citizens, as if his domestic political opponents were Taiwan’s mortal enemies.
The root of Chen’s moral demise is something the classical Greeks identified: hubris.
Chen’s popularity among his party followers, whose fervency often bordered on fundamentalism, changed him from a person with deep democratic instincts into a textbook case of a man who regards power and its prerogatives as being his by right.
Chen once had political courage.
Jailed years ago for his anti-Kuomintang (KMT) activities, he stood up at great odds to the Chinese Communist Party, which sought in vain to subjugate him in cross-Strait relations and in global politics.
The world has largely deserted Taiwan and its 23 million people – the only democracy among 1.2 billion Chinese.
Only 24 countries, mostly tiny island states, maintain diplomatic relations, while all but one of the world’s major powers and all important international institutions, including the United Nations, dance to the mainland’s tune on the issue.
But Chen’s behavior did not help.
Indeed, he even angered the United States, Taiwan’s only military protector, by his frequent confrontational tactics, such as pushing Taiwan towards independence, which runs counter to America’s longstanding “One-China” policy.
After winning the presidency, Chen could have risen above theatrics by focusing on two Taiwanese strengths: its economy and its unbroken humanist Chinese cultural tradition.
Instead, Chen balked at further integration into the global economy, refusing to open all of Taiwan’s economic sectors to foreign participation, which would have strengthened Taiwan’s competitiveness and efficiency.
For years, forward looking Taiwanese industrialists, including many hi-tech entrepreneurs, urged Chen to de-bureaucratize and de-politicize Taiwan’s increasingly isolated economy.
Failing to persuade him, they decamped to mainland China.
Unwisely, Chen went out of his way to shut out mainland Chinese capital and to retain barriers to other foreign investors in order to protect the domestic businesses of his political allies.
Indeed, indicators of economic freedom and competitiveness compiled by the Heritage Foundation, the Cato Institute, the World Economic Forum, and others show that Taiwan’s relative ranking has stagnated or even declined on Chen’s watch.
This stands in sharp contrast to the communist mainland, which has reinvented itself to become one of world’s more open, competitive, and dynamic economies.
As a result, big international corporations and Wall Street banks now flock to China, bypassing Taiwan.
They do so not because Taiwan is small – witness Hong Kong and Switzerland – but because it retains too many restrictions against foreign institutions.
Taiwan’s missed opportunity reflects its government’s sheer incompetence, arrogance, and ignorance.
Chen squandered six valuable years as his administration engaged mainly in polemics with its opposition parties while he pandered to the extreme wing of the DPP and mobilized his government to “de-Sinicize” Taiwan culture.
Indeed, Chen even argued that the Taiwanese were never Chinese.
He ordered the Education Ministry to revise school textbooks to promote the idea that the Taiwanese people were fundamentally different, practically a different race from the Chinese.
Clearly, Chen’s hatred of dictatorship, whether Communist or KMT, consumed him, limiting his ability to think clearly.
In fact, Taiwan’s moral superiority over mainland China lies not only in its democratic institutions, but also in its unbroken adherence to the ancient culture that the Chinese communists nearly succeeded in annihilating after coming to power in 1949.
Ironically, it is China’s rulers who are now scrambling to resurrect Confucius as a moral anchor in a culture dominated by the pursuit of money.
Chen should have celebrated Taiwan’s “Chineseness” proudly and loudly, thereby distinguishing the island from the barbaric legacy of the Chinese Communist Party.
Instead, Chen’s futile effort to “de-Sinicize” Taiwan created a wastefully divisive contentious society, pitting “mainlanders” and “locals” against each other.
Chen’s record suggests he will hang on to his failed presidency.
He will use his legal training to fight on technicalities.
But to the rest of the world, Chen has been revealed as a petty liar over a pitiful amount of money.
He and his wife lied about their involvement.
Their close aides have confessed that they forged documents and perjured themselves to protect their political boss.
What a pathetic ending for a man who could have become one of the most important leaders in modern Chinese history.
The Tragedy of Zidane
Those who the gods may destroy, they grant their wishes.
Zinedine Zidane may be pondering that bit of ancient Greek wisdom today.
Having announced that he would end his professional career with the World Cup, Zidane had his wish fulfilled.
After France barely survived the tournament’s first round, Zidane performed at the top of his game and led the team to the brink of a second World Cup championship.
But instead of finishing his career in triumph, or at least with an ovation, he was ejected from the final for head-butting an Italian player.
There have been few such tragic moments in football history.
Whatever the provocation that led to Zidane’s behavior (probably a racial comment), his violent act, seen around the world, has tarnished his image.
The sad paradox is that while the world had been learning of and celebrating his legendary kindness as a person, he will now be distinguished for all time by an act of aggression.
Indeed, Zidane’s status as an emblematic champion of the world’s most universal and popular sport does not fully explain why people have been so obsessed with him.
His human qualities, as much as his talent and technical feats on the field, counted equally in establishing his popular acclaim.
Football has always been this way.
For Argentineans, the diminutive Diego Maradona represented the revenge of the weak and the deprived.
As a result, his countrymen excused his frequent bad behavior time and again.
Similarly, Pelé became the symbol of a harmonious, inter-racial Brazil.
Zidane offered neither of these romantic images.
Moreover, after his career is over, he is unlikely to become a manager of his sport like Jean-Claude Killy, the former Alpine skier who was co-president of the 1992 winter Olympics, or his fellow football legend Michel Platini, who helped coordinate the 1998 World Cup.
After all, Zidane, arguably the world’s best football player, left with a gesture that has no place in any game.
Nevertheless, Zidane will remain a global icon, owing to his profoundly human character and his extreme simplicity.
Here is a man who is known in the most hidden corners of the planet, yet he retained the presence and discretion of a silent next-door neighbor.
At a moment when integration is being debated in France, Zidane embodied the ideal of success through talent and hard work – while never betraying himself or his Algerian origins.
Moreover, Zidane incarnated values that seem threatened nowadays, but to which ordinary people remain attached: loyalty to family, diligence, and cooperation.
Here is a man who was not only a world champion, but also a model son and father.
The almost timid way in which, after France’s victory over Spain, he expressed his love for his mother touched viewers around the world.
To understand Zidane’s popularity, one need only set his modesty and attention to others against the arrogance and indifference that characterize the behavior of so many other celebrities, including football players.
At a time when, in France as in the rest of the world, the chasm between the elite and ordinary people has never been so wide, when the smugness of the affluent has never been so cruelly felt by the less fortunate, Zidane, a son of despised immigrants, became an international star, and yet preserved the simplicity of his origins.
For this, Zidane was not only admired, but also respected.
His success was never to the detriment of others.
On the contrary, he is active in causes such as helping sick children.
It is obvious that he could one day become a tremendous ambassador of peace, or for children, working with the United Nations or another international organization.
But now the hero has fallen.
Zidane was not Superman, but a human being.
In a single instant of unfathomable fury, his moment of glory was transformed into one of madness and a curse.
His tragedy is ultimately a personal one.
Nevertheless, it would be a great loss – extending far beyond the world of football – if Zidane’s disgraceful exit as a player comes to define his legacy as a man.
The Transatlantic Blame Game
As if the diplomatic spat over Iraq weren't bad enough, relations between America and Europe are being slowly poisoned by divergent economic policies.
Indeed, the differences between the two sides' economic strategies are as sharp as they have been in two decades.
At first glance, the depth of this ``policy gap'' seems surprising.
The economic outlook for the rest of this year and for 2004 has improved recently both in the US and Europe.
Moreover, the US and Europe face a similar challenge: encouraging economic recovery.
But their governments' actions--or lack of action--make it seem as if neither side can see the problems faced by the other.
When the Euro was introduced, most EU members--Germany, in particular--looked forward to managing their economic policies with more autonomy and less US pressure.
Thus, today's framework in Euro area, with its unique mix of joint monetary policy and national responsibility for fiscal policy, was not constructed to facilitate macroeconomic coordination with the US.
But the perception of many American observers was different.
They saw the central implication of the Euro as requiring Europe to junk its supposed role as a ``free rider'' in the international economy, one that left the US shouldering the burden of policy adjustments to promote global growth.
Europe would inevitably be forced to coordinate its policies with America.
These two views were bound to conflict, and now they do.
Tensions hidden during the long Clinton-era boom rose throughout 2001, when America tried to address its economic downturn by rapidly easing its monetary and fiscal policies.
As big budget deficits returned, so did European skepticism about the sustainability of America's mounting external deficit and the overvalued dollar.
American critics, meanwhile, saw the Euro area as overly cautious for cutting interest rates slowly and maintaining the fiscal constraints of the Stability and Growth Pact.
Initially, the Europeans underestimated the slowdown they confronted.
Subsequently, they were constrained by the limits to their fiscal reactions embodied in the Maastricht Treaty; the large economies of Continental Europe had not done enough budgetary consolidation during the years of good growth.
Both monetary and fiscal policies facilitated growth, but Europe did not help much to redress America's external imbalance.
Of course, the Euro area is so large a player that it can no longer leave responsibility for stimulating global growth to America.
But US efforts to encourage Europeans to adopt their pragmatic and discretionary approach to economic policy inevitably lead to frustration: the issues confronting the European economies are different from those facing the US--as are perceptions about the challenges.
In fact, the main reasons for the massive swing in US public finances--from surplus in 2000 to a deficit of more than 4% in 2003-04--have little to do with stabilization.
Aside from the costs of the Iraq war and other security concerns, along with lapses in earlier spending controls, US tax cuts have structural and distributional rather than short-term aims.
A short-term stimulus would not have bestowed the largest benefits upon the most affluent, whose spending is less sensitive to taxes.
The cuts should sustain private demand this year and next, but at the cost of postponing improvements in private saving and indebtedness.
Although the dollar has been depreciating for a year, continuing growth in domestic demand will likely push the current account deficit above 5% of GDP.
As the deficit widens further, dollar depreciation will likely resume, despite laggardly performances by the world's other major economies.
Will the US accept a prolonged slowdown after 2004, and could Europe make a greater contribution to global growth?
Probably not.
The counterpart to the US emphasis on self-reliance rather than direct public assistance is that employment must be maintained at high levels--regardless of the party in power--whereas most European countries have been prepared to accept unemployment rates of 8% or more.
So the US is likely to opt for growth.
Despite three years of weak growth, the gap between potential and actual output in Continental Europe's largest economies is currently smaller than in the US.
Income tax cuts to stimulate demand for labor and investment are desirable, given high rates in Europe's largest economies.
But tax cuts that must soon be reversed--due mainly to demographic pressure on public pensions and healthcare--are unlikely to stimulate demand as consumers lose confidence in government's ability to control deficits.
Europe needs structural reforms and tighter fiscal management, not inflation.
The EU countries are finally accelerating their implementation of structural reforms, but the starting point has become less favorable and political resistance too entrenched, as illustrated by the recent conflicts over reforms of French pensions and the German labor market.
Further dollar depreciation as well as slower US growth will undermine EU exports, the one relatively successful component of demand in Europe.
The divergence in policy and its time horizon will be papered over by the improved outlook for growth in both Europe and the US for the next year or so.
But the medium-term outlook is one of transatlantic confrontation, potentially as divisive as the disputes over the Iraq war.
If so, the ongoing Doha Round of international trade negotiations could be first to suffer.
Protectionism will be harder to resist on both sides of the Atlantic.
The US cannot afford a continuing massive drain of demand through an external deficit, while complaints about loss of competitiveness will intensify in the EU.
It strains the imagination to think that the coming macroeconomic confrontation could subside quickly or quietly.
The Transatlantic Index
How should we assess the state of transatlantic relations nowadays?
With a nod to Wall Street, we can say that the Alliance is up, Europe is flat, and the United States is clearly down.
The Alliance is “up” for one key reason: the warming of France’s relations with the US following Nicolas Sarkozy’s election as French president.
For the first time since Charles de Gaulle established the Fifth Republic, France’s priority is no longer to live in opposition to the US.
The signs of this shift are profound, even spectacular.
From a toughening of France’s position on Iran to a real warming of relations with Israel, not to mention symbolic gestures like Sarkozy’s summer vacation in America, or Foreign Minister Bernard Kouchner’s arrival in Baghdad, this is a New France, one seriously considering a return to NATO’s integrated military structure.
France’s shift is the result of both political calculus and deeply felt emotion.
For Sarkozy, the French are not anti-Americans, but simply anti-Bush.
In his willingness to break with the past – in particular with Jacques Chirac’s legacy – and in adding a global spin to his “mandate for change,” Sarkozy is paving the way for the post-Bush America that will soon be here.
He knows that the “return of France” as an influential actor in Europe presupposes a France that is closer to America, which will automatically bring France closer to Germany and Great-Britain, not to mention Poland and Italy.
Emotionally, too, “Sarkozy the American, Sarkozy the doer,” who wants to be judged by his actions, tends to see himself as a Gallic incarnation of the American dream.
He is the son of immigrants, the outsider whose rise to the top is living proof of French openness.
In the US, too, the attitude towards the alliance with Europe has changed mightily.
The failure in Iraq, the risk of an “Iraqization” of Afghanistan, and Russia’s newfound assertiveness have moved America from the arrogant indifference that characterized most of Bush’s presidency to a rediscovery of the Alliance’s value.
America needs allies, and is not preoccupied by their potential independent strength.
As one top American diplomat put it, “The last worry I have when I wake up at three in the morning is that Europe is becoming too strong.”
But rapprochement between France and the US should not hide other realities.
First, in Afghanistan, NATO is in danger of suffering its first military defeat.
Where will the new troops that are needed come from?
And a key member of the Alliance, Turkey, may be about to embark in a dangerous military adventure in Kurdish northern Iraq.
Second, one cannot speak of NATO without noting that the Alliance’s twin pillars – Europe and the US – are not in great shape.
If Europe is “flat,” one reason is Sarkozy.
He may be encouraging news for the Alliance, his European policy is a source of worry for Europe.
While Sarkozy claims that Europe is his priority, his methods seem to contradict his intentions.
The difficult personal chemistry he has with German Chancellor Angela Merkel is reinforced by his constant attacks on the European Central Bank and its president, Jean-Claude Trichet.
One cannot simultaneously defend the Alliance in the name of Europe and weaken Europe with fits of populism and economic nationalism.
Europe’s three key new leaders – Britain’s Gordon Brown, Merkel, and Sarkozy – all belong to a generation that is no longer emotionally moved by the project of European integration.
Their links with Europe – if they exist at all – are at best rational, not emotional.
But will cool rationality be enough to create a European security pillar within the context of the Alliance?
As for America, it is “down” in terms of both “soft” ideological power and “hard” military power.
The US remains by far the world’s strongest country, particularly in military terms, but it is confronted with fundamental questions about the use and utility of force at a time when power is relative.
Today, Americans and Europeans alike must demonstrate modesty.
Unlike when the Alliance was created, a multi-polar world system has taken shape, in which the West’s demographic and economic share has fallen, and in which it must now compete with successful authoritarian models such as China or even Russia.
In this new context, solidarity is as crucial as ever.
Opinion about the US remains largely negative in Europe, and will remain so at least until the US presidential election in 2008.
Likewise, US perceptions of France and of Europe are only slowly improving.
It is only by respecting our common values and not exacerbating our differences that the West will be able to reinvent itself.
The Alliance may be “up,” but its outlook remains uncertain.
The Transatlantic Muslim Divide
Compared with the tension that exists in Muslim communities across Europe, America’s Muslims are a more contented lot.
A recent Pew Forum study found Europe’s Muslims to be “markedly less well off than the general population, frustrated with economic opportunities and socially isolated,” while most American Muslims say that “their communities are excellent or good places” to live; 71% say they can succeed in the US if they work.
Both income and college graduation levels match the national norms.
63% of American Muslims report no conflict between religious devotion and living in modern society.
Although 53% of US Muslims think that life is more difficult since the terrorist attacks of 2001, most think that this is the fault of the government, not their neighbors.
Indeed, 73% said they had never experienced discrimination while living in America.
Moreover, 85% said suicide bombing is rarely or never justified, and only 1% said violence to defend Islam was “often” permissible.
In Europe, significantly higher percentages of Muslims believe that suicide bombings are “often” or “sometimes” justified.
“What emerges,” according to Amaney Jamal, an adviser to Pew, “is the great success of the Muslim American population in its socioeconomic assimilation.” Yet “assimilation” is not what succeeds.
America’s Muslims do not so much assimilate as participate in economic, political, educational, and social life.
This might reflect a self-selection process: only the most educated Muslims immigrate to America, as poor social services allow only the best-prepared to survive.
Yet even middle-class Muslims in Britain become alienated, and, unlike the Muslim poor in Europe, poor Muslims in America don’t express alienation or sympathy with al-Qaeda.
It can be argued that only those poor eager for the harsh but open possibilities of American life immigrate to the US.
Yet this doesn’t explain why these poorer immigrants remain religious; wanting to succeed US-style, they should want to be quick to “assimilate.”
Why do US Muslims do well while remaining devout and distinctive-looking?
Why can they participate without assimilating?
Two factors seem significant: first, relatively porous economic, political and educational arenas that allow immigrants entry to these key areas of American life.
Despite the discrimination and poverty that immigrants often suffer initially, barriers to economic and political participation are relatively low.
The second factor is America’s pluralistic public sphere, an arena not without religion but with many religions, which are visible and active in civil life as the basis for institutions, publications, and symbols that influence values and conduct.
The US is not a secular society; it is a religiously pluralistic one with secular legal and political structures.
Indeed, America’s secular institutions were designed to support pluralism.
They allow people of many creeds to work in them—a workplace of multiple faiths.
The prohibition against a state religion together with freedom of conscience preserves the plurality of religion in civil life.
This design was crafted not only from enlightened principle but from necessity: America needed to persuade people to cross the ocean and endure the hardships of the frontier and, later, industrialization.
Freedom to practice one’s religion was an advertisement for America.
The benefit of that accidental generosity was the American deal: immigrants have to participate in the economic and political fracas of the nation, but without much of a social service safety “net.”
On the other hand, they can get in.
And they can keep not only their private faith but practice it publicly.
Tolerance for other people’s religion is the price paid for tolerance of one’s own.
Prejudice has tended to fall as participation increases. It has been in no one’s interest to disturb this live-and let-live pragmatism for very long.
One result of the deal is the paradoxical-sounding “familiarity with difference.” Because immigrants participate in America’s economic and political arenas, Americans are used to different sorts of people and so distinguish those differences that might damage the country from those that will not.
Americans, indeed, are familiar with difference, or at least they tend not to panic.
Even after 2001, there were only a few anti-Muslim incidents.
Europe, however, demands greater assimilation and offers a less porous economy and politics.
This means less participation and thus less familiarity with difference on the host country’s side.
On the immigrants’ side, there is more resentment against the host, more lassitude about the economy and politics, possible violence or an insistence on maintaining symbolic differences—ironically, in a society less able to accept them precisely because of its discomfort with difference.
This is Europe’s headscarf debate in a nutshell.
It speaks to none of the barriers to participation or to immigrant responses to them, but demands symbolic assimilation.
But such demands are a dead end.
To get out of it, greater entry into the economy and politics is needed, but also less demand for quick-fix assimilation.
All the religions that descend from Abraham have internal mechanisms for change that allow them to reckon with new circumstances in ways that the confessional community can respect.
Both fundamentalism and the demands of assimilation — be like us, now! — pre-empt these mechanisms.
They should be allowed to work.
But Europe demands assimilation before participation in an economy that immigrants can’t get into anyway.
This, sadly, is a road to the ghetto.
The New Obama
NEW YORK – After the second debate between US President Barack Obama and his Republican challenger, Mitt Romney, Obama’s supporters chorused in near-unison, “He’s back!” The languid, disengaged, and lackluster performer of the first debate had disappeared, and the impressive, beloved figure of the victorious 2008 campaign had reappeared.
As the commentator Andrew Sullivan put it, “I saw the person I first saw...I saw the president I thought I knew.”
To my eye, however, the old Obama was not back.
A new Obama had appeared.
The old Obama was youthful, charming, graceful, and full of hope.
His demeanor was crisp yet easy-going.
His rhetoric soared.
His smile could light up a stadium.
The Obama on display in the second debate – and the third – was harder, chillier, sadder, and more somber.
There was tension in the lines of his mouth.
His speech was clipped, as if under continuous rigorous control.
His rhetoric did not soar, could not soar.
The smile was rare and constrained.
But his command of detail and argument was rock solid.
His sentences parsed.
He spoke with a cold, disciplined energy.
In repose (as witnessed on the split screen in the reaction shots) he was often perfectly immobile, almost stony, as if posing for a portrait.
One word for all of this would be “presidential,” in the sense of competent, seasoned, and sobered by reality.
But that word also connotes the fearsome qualities of ruthlessness and brutality that any honest portrayal of the office of President of the United States must include in our day.
Obama has inhabited the White House for four years; now the White House inhabits him.
Twice this autumn, Obama had already performed before tens of millions of people – in his acceptance speech at the Democratic convention and in the first debate.
Each time, his performance was flat.
At the convention, he seemingly hoped to summon the old Obama, to charm and soar, but that man was simply no longer available.
The truth appears to be that his muse deserted him sometime in the first year of his presidency.
The result was a simulacrum of the old Obama, as if he were acting the part of himself.
Then, in the first debate, no such futile effort was even made, and there was no Obama at all, neither old nor new.
As so many commentators noted, in some sense he simply failed to show up.
Perhaps he also thought that, well ahead in the polls, he did not have to bother to engage the pesky fellow who imagined replacing him in the White House.
At the second debate, the loss of the old Obama was apparently accepted and a new one –existing, real, available, and now working in the Oval Office – made its first appearance.
Has the presidency hardened Obama?
Has it brutalized him?
There are reasons for thinking that it has.
First, Obama has taken, perhaps, a heavier beating from his political opposition than most presidents.
The theme of Obama’s life, clearly expressed in his eloquent memoir Dreams from My Father, and shown in the recent Frontline documentary The Choice, is reconciliation.
He is not a man whose identity was handed to him by birth.
Born of a white mother and an absentee Kenyan father, residing in Indonesia as a boy, raised in adolescence by a white single mother in Hawaii, he was forced to figure out his place in life on his own.
He found it in the idea of reconciliation – both racial and ideological.
That was the theme of his defining speech at the Democratic convention in 2004, with its famous line, “There is not a liberal America and a conservative America; there is the United States of America.”
It was to be the theme of his presidency.
So, when an ideologically implacable Republican opposition, in his very first days in office, threw the vision back in his face, adopting a policy of scorched-earth opposition, the rejection was about more than policy – it affected his very being.
The dreams from his father were at an end, and he was left, as he only slowly realized, with the themeless pragmatism that has become the hallmark of his administration.
Unable to find common ground with the Republican opposition, he cut deals with the other powers that immediately surround the presidency: the military and security apparatus, big pharmaceutical companies, big banks, and big media.
Perhaps more important was the permission that he gave himself for violence and suppression of rights: drone strikes that have killed children as well as terrorists, the futile “surge” in Afghanistan, the continued operation of the prison at Guantánamo Bay, reliance on military tribunals, an unprecedented campaign against whistle blowers, and the assertion of a right to order the assassination of foreigners and Americans alike at his sole discretion.
All this, too, stood behind the performance of the man on stage during the second two debates.
And if he is elected, it is this man who will govern.
The Obama of 2008 is not back.
He is not coming back.
The Transition to Sustainability
NEW YORK – The global economic crisis will be with us for a generation, not just a year or two, because it is really a transition to sustainability.
The scarcity of primary commodities and damage from climate change in recent years contributed to the destabilization of the world economy that gave rise to the current crisis.
Soaring food and fuel prices and major natural disasters played an important role in undermining financial markets, household purchasing power, and even political stability.
Viewed in this way, an essential policy that developed and developing countries should pursue in overcoming the crisis is to build infrastructure suitable for the twenty-first century.
This includes an efficient electricity grid fed by renewable energy; fiber and wireless networks that carry telephony and broadband Internet; water, irrigation, and sewerage systems that efficiently use and recycle fresh water; urban and inter-city public transit systems; safer highways; and networks of protected natural areas that conserve biodiversity and the habitats of threatened species.
These investments are needed in the short term to offset the decline in worldwide consumption spending that underlies the global recession.
More importantly, they are needed in the long term, because a world crowded with 6.8 billion people (and rising) simply cannot sustain economic growth unless it adopts sustainable technologies that economize on scarce natural resources.
In practice, the global crisis means that sustainable investments are being curtailed rather than expanded in the developing world.
As access to international bank loans, bond flotations, and foreign direct investment is lost, infrastructure projects talked about in the past are now being shelved, threatening the political and economic stability of dozens of developing countries.
In fact, every part of the world has a huge backlog of vital infrastructure investments.
It is time for a concerted global effort to bring those projects on line.
This is not easy to do.
Most infrastructure investment requires public-sector leadership to forge partnerships with the private sector.
Typically, the public sector must enter into contractual agreements with private firms not only to build the infrastructure, but also to operate it as a regulated monopoly or on a concession basis.
Governments generally lack the needed technical capacity to design such projects, opening up possibilities of favoritism and corruption when major contracts are awarded. Such charges are likely to be hurled at governments even when they are not true, though all too often they are.
Still, the backlog of such projects is now wreaking havoc with the world economy.
The world’s major cities are clogged with traffic jams and pollution.
The atmosphere is filling with greenhouse gases from heavy use of fossil fuels.
Water scarcity is hitting virtually every major economic center, from North America to Europe, Africa, India, and China.
Governments should thus strengthen their ministries of infrastructure (including power, roads, water and sanitation, and information and communication technologies), as well as their national development banks, so that they can properly design long-term infrastructure projects and programs.
The ability to offset the crisis in a constructive manner through expanded public-private partnerships will determine the subsequent success of countries and regions.
Interestingly, the US is about to create a National Infrastructure Bank for the first time.
Nevertheless, American and European economic advisers generally believe that a short sharp stimulus will be enough to restore economic growth.
This is wrong.
What will be needed is an overhaul of the world economy towards sustainability.
Moreover, policymakers in the rich world believe that they can continue to neglect the developing world, or leave it to its fate in global markets.
This is also a recipe for global failure, and even future conflict.
Developed countries will have to do far more to help poor countries through the transition to sustainability.
Whereas most of the “stimulus” legislation to date has been short-term and inward-looking, increased funding for sustainable infrastructure in poor countries would provide a powerful boost to rich-world economies.
Developed countries should agree to channel considerable savings to developing countries to finance the scale-up of sustainable investments.
This can be done directly on a bilateral basis, for example, through long-term loans from developed countries’ export-credit agencies. It can also be done multilaterally, by raising the infrastructure investment flows from the World Bank and the regional development banks (including the Inter-American Development Bank, European Investment Bank, African Development Bank, and Asian Development Bank).
Both channels should be used.
Developed countries also fail to recognize that without much greater financing of sustainable infrastructure in the developing world – especially sustainable power generation and transmission – a global agreement on climate change later this year (or any time soon) will be impossible.
The rich world somehow expects poor countries to restrict their use of fossil fuels without any significant help in financing new and sustainable sources of energy.
In almost all of the rich-country proposals about targets, limits, commitments, and permits for greenhouse gases, there is hardly a word about helping poor countries to finance the transition to sustainable technologies.
The G-20 meeting in London on April 2 offers hope for a true global effort to repair the failing world economy.
This is the time and place to launch the global drive toward sustainability.
If we fail to meet the challenge, the global crisis will endanger the world for years to come.
The Treason of the Economists
LONDON – All epoch-defining events are the result of conjunctures – the correlation of normally unconnected events that jolt humanity out of a rut.
Such conjunctures create what the author Nassim Nicholas Taleb calls “Black Swans” – unpredictable events with a vast impact.
A small number of Black Swans, Taleb believes, “explain almost everything in our world.”
The prosperity of the first age of globalization before 1914, for example, resulted from a successful constellation of developments: falling transport and communication costs, the technological breakthroughs of the second industrial revolution, the pacific state of international relations, and Great Britain’s successful management of the gold standard.
By contrast, in the interwar years poisonous international politics combined with global economic imbalances to create the Great Depression and set the scene for World War II.
Now consider recent financial innovations.
On the back of the new computer and telecommunications technology, a giant market for derivative instruments was built.
Collateralized debt obligations (CDOs, mainly tied to mortgages) made a new population of aspiring homeowners supposedly creditworthy by enabling the originating banks to sell “sub-prime” debt to other investors.
Before securitization, banks typically held mortgages; now they could get them off their books.
But securitized credit taken off one bank’s balance sheet usually ended up on another bank’s books.
What resulted was a wonderful system for diversifying individual bank risk, but only by magnifying the default risk of all banks that held what came to be called “toxic” debt.
Because all the derivatives were based on the same assets, if anything happened to those assets, all the banks holding the debt would find themselves in the same soup.
What made the spread of derivatives possible was the ease with which the volume of debt for a given set of real assets could be expanded.
This scalability was magnified by the use of credit default swaps (CDSs), which offered phony insurance against default.
Since an unlimited number of CDSs could be sold against each borrower, the supply of swaps could grow much faster than the supply of bonds.
CDSs magnified the size of the bubble by hugely speeding up the velocity of monetary circulation.
The CDO market grew from $275 billion to $4.7 trillion from 2000 to 2006, whereas the CDS market grew four times faster, from $920 billion in 2001 to $62 trillion by the end of 2007.
CDSs were the means by which derivatives found their way into the portfolios of banks all over the world.
But the dependence of the whole structure on continually rising house prices was rarely made explicit. If the housing market started to fail, these paper assurances of safety would become, in Warren Buffett’s words, “financial weapons of mass destruction.”
But financial intermediation would never have brought disaster (or indeed gone so far) save for the global imbalances arising from America’s twin trade and budget deficits, financed to a large extent by Chinese savings.
Floating exchange rates were supposed to prevent countries from manipulating their currencies, but, by accumulating large quantities of US treasury bills, East Asian countries, especially China, kept their exchange rates artificially low.
This East Asian “savings glut” enabled a debt-fuelled consumption glut in the US, Britain, and much of the Western world.
But the marriage between Chinese savings and American consumption had a fatal flaw: it created non-repayable debts.
Chinese investments increasingly took the form of official purchases of US Treasury bills.
These investments did not create new resources to provide the means of repayment.
For the counterpart of the US debt build-up was the relocation of much American manufacturing capacity to China.
Chinese savings flowed not into creating new assets, but into financial speculation and consumer binges.
“Surplus” Chinese savings made possible America’s credit expansion between 2003-2005, when the federal funds rate (the overnight rate at which US banks lend to one another) was held at 1%.
Ultra-cheap money produced a surge in sub-prime mortgage lending – a market that collapsed when interest rates increased steadily after 2005, reaching 5%.The financial crisis of 2008 was the start of a highly painful, but inevitable, process of de-leveraging.
This interpretation of the origins of the present slump is disputed by the ‘money glut’ school.
In their view, there was one cause, and one cause only of the crisis: the excessive credit creation that took place when Alan Greenspan was chairman of the US Federal Reserve.
This view draws on the ‘Austrian’ theory of booms and slumps, and also Milton Friedman’s explanation of the Great Depression of 1929.
It was wrong then, and it is wrong now.
This line of reasoning assumes that markets are perfectly efficient. &#160;If they go wrong, it must be because of mistakes in policy.
This view is also self-contradictory, for if market participants are perfectly rational and perfectly informed, they would not have been fooled by a policy of making money cheaper than it really was.
Greenspan is the sacrifice they offer to the god of the market.
This suggests a more fundamental reason for the economic crisis: the dominance of the Chicago school of economics, with its belief in the self-regulating properties of unfettered markets.
This belief justified, or rationalized, the de-regulation of financial markets in the name of the so called “efficient-market hypothesis.” It led directly to the spread of financial risk-management models, which, by excluding the possibility of default, grossly underestimated the amount of risk in the system.
If we are going pursue the blame game, I blame economists more than bankers for the crisis.
They established the system of ideas that bankers, politicians, and regulators applied.
John Maynard Keynes wrote that “practical men who believe themselves to be quite immune from intellectual influences are usually the slaves of some defunct economist.”
Most of today’s crop of economists are not defunct, but continue to work in the ideological vicinity of Chicago.
Their assumptions should be ruthlessly exposed, for they have come close to destroying our world.
The Treason of the Magistrates
PARIS – In democracies, justice is supposed to be independent.
Some prosecutors and investigating magistrates, however, conveniently forget this.
Indeed many among them are deeply enmeshed in politics, pursuing agendas – and vendettas – of their own.
The phenomenon of politicized prosecutors and investigating magistrates is becoming global, arising in democracies as diverse as Japan, Italy, France, Spain, Turkey, and Argentina.
In all these countries, prosecutors and magistrates hurl accusations of corruption against governments and ruling parties – charges that also happen to suit the political and institutional interests of the magistrates.
Japan ’s state prosecutor has, for example, accused Ichiro Ozawa, the General-Secretary of the newly elected Democratic Party of Japan, of having received illegal funds to run the DPJ’s recent campaign against the Liberal Democratic Party.
That three close aides to Ozawa have been indicted only months after the DPJ’s victory strikes many Japanese as odd, given the well known corruption of the LDP when in power.
But the LDP worked hand in glove with Japan’s deeply entrenched bureaucracy, of which the prosecutors are a part.
The DPJ has vowed to shake up the cozy relations between Japan’s bureaucrats, politicians, and big business.
By indicting people close to Ozawa, the prosecutors appear to be acting in defense of the status quo .
In Italy, prosecutors in Rome, following the lead of their colleagues in Milan, are now going after Prime Minister Silvio Berlusconi.
Italy’s investigating magistrates have consistently refused to accept the popularity and electoral power of a business tycoon whom they have tried to convict for many years.
Berlusconi may not be the most refined of Italians, but after many trials it has never been proven that he committed any crime.
Yet magistrates continue to haul him into court.
In France, Paris magistrates attempted for years to indict former President Jacques Chirac on charges of corruption.
So long as Chirac was president, there was no legal way to pursue him.
But, with Chirac retired and nearly 80, one “independent” judge has reopened the case.
Chirac is alleged to have employed municipal civil servants when he was the mayor of Paris, 20 years ago, as aides in his electoral campaign.
Let us remember that no judge ever indicted François Mitterrand, Chirac’s socialist predecessor, for using government funds to entertain his mistress and illegitimate daughter.
As further proof of the politicized nature of some French magistrates, immediately after former Prime Minister Dominique de Villepin was cleared of charges that he had tried to smear President Nicolas Sarkozy, the prosecuting magistrate announced that he would appeal the court’s ruling and prosecute de Villepin again.
In Buenos Aires, one wonders about the motives of the Supreme Court, which has forbidden President Kristina Kirchner from changing the chairman of the central bank.
Kirchner is not above suspicion, but the judges’ lack of a watertight legal case raises suspicions of a political motive.
The situation is more byzantine, but just as politicized, in Turkey, where prosecutors and judges have consistently set their sights on the moderately Islamic Justice and Development Party (AKP) in the name of protecting the secular constitution.
After the AKP was elected in 2003, the Supreme Court dissolved it in order to prevent Recep Tayyip Erdogan from becoming Prime Minister.
The AKP had to change its name and, for a time, Erdogan had to foreswear the premiership.
In 2008, prosecutors again tried to have the AKP dissolved, on charges that it was undermining the constitution.
In 2009, the Supreme Court dissolved the main legal Kurdish party, the DST, accused of being connected with the Kurdish guerillas.
This arbitrary decision deprived millions of Kurds from any legal representation and disrupted the AKP government’s attempt to reconcile the Kurds with the Turkish Republic.
Of course, not all judges and prosecutors engage in nakedly partisan activities.
European prosecutors tend to lean to the left, whereas their Latin American and Japanese counterparts tend to be conservative and pro-establishment.
Perhaps the most famous investigating magistrate of all, Spain’s Baltasar Garzon, is usually portrayed as waging a borderless crusade for justice.
His targets, however, almost invariably come from the political right. But rather than pursuing such an open ideological agenda, most activist magistrates tend to act as a corporation: their motives can be politicized, but their professional, guild interests come first.
Famously in France’s Ancien Régime, the judges collectively acted as a close-knit, self-contained social class.
The French Revolution and the introduction of universal suffrage were aimed as much at ridding France of the corporation of judges as they were at getting rid of the nobility.
But, despite democratization, judges and prosecutors everywhere have tended to resurrect themselves as a self-appointed elite, insulated by society’s desire that justice be seen as independent.
When one looks closely at the careers of judges in the above-mentioned countries, the law can vary, but cooptation is the usual rule of the game: a successful judge or prosecutor, in order to climb the professional ladder, must follow the guidance of his peers and increase the influence of his corporation.
One should also consider why anyone wants to become a judge.
Aspiring judicial candidates usually want to “clean up” society.
It is revealing that in Italy, in the 1980’s, the judges who battled the Sicilian mafia described their campaign as “clean hands.”
In that case, the label fit.
More often, however, the cleansing is a pretext to change political direction after the people have voted in a way that magistrates oppose.
Democracy is supposedly based on a separation and balance of institutional power.
That equilibrium works so long as each institution is submitted to close scrutiny – which judges and magistrates have simply avoided.
I see no reason to trust judges and prosecutors more than presidents and legislators.
It is high time for the supposed Fourth Estate – the media – to scrutinize the behavior and motives of judges and prosecutors, both individually and collectively, in the same way they do elected officials.
The Trial of Pavel S.
STRASBOURG – On a cold winter day in 2004, a young Russian named Pavel Shtukaturov discovered that a judge had stripped him of the right to speak for himself.
Deprived of legal capacity, he was prohibited from acting independently, or at all, in most areas of life.
He was no longer able to work, travel, choose his place of residence, buy or sell property, or even marry.
The judge took away these rights without even informing him – indeed, Pavel only found out a year later.
When he sought a lawyer to defend his rights, his mother, who had been made his legal guardian, had him locked up in a psychiatric hospital for seven months.
This Kafkaesque turn of events was possible because Pavel has mental health issues in a system that refuses to protect his rights.
In Russia, roughly 125,000 people with mental disabilities are confined to institutions – for life.
There are another 165,000 beds in psychiatric hospitals, with some 650,000 hospitalizations per year.
But these statistics don’t tell the real story.
Only rarely do stories like Shtukaturov’s get out.
It is astonishing how little is known about the treatment of people with mental health problems in Russia.
There are no independent inspectorates monitoring these hospitals to protect patients’ rights, and there are no advocacy services on behalf of people with mental disabilities.
Moreover, the minds of many hospital directors are as firmly closed as the institutions themselves.
So Shtukaturov’s victory before the European Court of Human Rights on March 27 provides hope that a turning point has been reached.
Back in 2004, when Shtukaturov by chance discovered the judge’s decision, he Googled his way to the only lawyer in Russia who deals with mental health and human rights.
The lawyer agreed to represent him.
But when he was subsequently detained in a psychiatric hospital, the Russian government refused to allow the lawyer access to his client.
Appeals in the Russian courts failed, and he filed a case with the ECHR in March 2006.
The court found that Pavel’s ordeal violated several articles of the European Convention on Human Rights and Fundamental Freedoms, to which Russia is a signatory.
This is the first case in which the ECHR has dealt seriously with the deprivation of legal capacity – which often facilitates abuses instead of protecting people from them.
According to the court, depriving someone of legal capacity constitutes a “very serious” interference of a person’s right to private life.
In Russia, the only legal option in these cases is “total guardianship,” which is applied indefinitely and cannot be challenged by the adult in question.
The court ruled that total guardianship was a “disproportionate” response in Shtukaturov’s case, and its judgment recognized the importance of supplying tailor-made alternatives for people who require temporary or long-term care.
Russian lawmakers should follow the lead of the ECHR decision and work to create in Russian law and practice alternative mechanisms such as advance directives, powers of attorney, and supported decision-making.
The UN Convention on the Rights of Persons with Disabilities – a new human rights treaty that Russia helped draft, but has not yet signed – mandates these alternatives, and represents an opportunity for Russia to undertake crucial human rights reforms on this issue.
Shtukaturov’s story is unique only because he was able to find his way to a lawyer.
The ECHR has now cleared a path for the tens of thousands of other people in Russia who suffer abuse at the hands of the very mental health system that is supposed to help them.
On taking office, Russia’s new president, Dmitry Medvedev, should order an independent review process to help end the country’s pattern of stigmatizing and discriminating against people with disabilities.
The Tricks of Trade Treaties
The recent trade agreement between Chile and the United States is being praised as the first significant agreement in the Western hemisphere since the North American Free Trade Agreement (NAFTA) was signed a decade ago.
But while it is celebrated in certain American circles, it displays many of the problems that characterize past trade agreements, problems that generate much discontent about globalization.
Indeed, in some ways it is a step backwards.
One source of discontent with globalization is that it deprives countries of their freedom to protect their economy and citizens.
Special interests in industrial countries, it seems, take precedence over broader interests.
Moreover, these trade agreements are often asymmetric--the North insists on the South opening markets and eliminating subsidies, while it maintains trade barriers and subsidizes its own farmers.
In some ways, the agreement with Chile broke new ground--in the wrong direction.
It failed to take advantage of opportunities afforded by more open trade with an emerging market that has a sophisticated and highly qualified public service.
Particularly ironic was the provision designed to restrict Chile's use of capital controls for short-term speculative capital flows.
Chile used these measures efficiently and effectively during the first part of the 1990s.
Research suggests that these restrictions did not affect the flow of long-term capital.
On the contrary, they probably encouraged inward flows, as funds that otherwise might have been provided on a short-term basis were induced to remain for longer.
During this period of restrictions on capital flows, Chile grew rapidly, by 7% per year on average.
More importantly, capital restrictions meant that when Latin America was sent into recession and depression later in the decade, as speculative capital fled most Latin American countries, Chile was largely spared.
(Of course, it still suffered the consequences of the downturn in copper prices--capital controls can't solve all problems).
Today, Chile imposes no barriers to the inflow of capital.
Why, then, be concerned that the new trade agreement restricts what Chile is not doing?
Indeed, the problem today is not excessive capital inflows; international markets have largely turned against emerging markets.
So restricting capital inflows is not necessary now.
In the future, however, that may change.
Much evidence, meanwhile, suggests that such flows present risk without reward: they lead to increased instability, not increased growth.
Moreover, countries with heavy short-term indebtedness risk their political autonomy.
If a leader that is not to Wall Street's liking emerges, markets may raise interest rates to exorbitant levels, threatening to bankrupt the country unless a people choose a leader more to the financial community's liking.
The recent scare in Brazil before President Lula's election is a good example of this.
The new treaty between America and Chile also represented an opportunity.
Free-trade agreements do not ensure free trade.
This is because the US uses many other protectionist measures to block foreign goods.
After NAFTA was signed, America took actions to restrict tomatoes, avocados, corn brooms, and truck transportation.
Chile now faces similar actions, as it has in the past, concerning some important exports, such as wine and salmon.
Should Chile find other products that can compete against American producers, these too will likely face restrictions.
The underlying US government philosophy is that American producers are better than those of any country.
Therefore, if a country out-competes American firms, it must be because it engaged in some unfair practice.
But this line of reasoning flies in the face of basic economic theory and common sense, which hold that trade is based on each country exporting goods that reflect its relative (or comparative) advantage.
Too many Americans believe that while trade is good, imports are bad!
A true free-trade agreement would begin with the premise that it makes no difference where a good is produced: an unfair trade practice is unfair, whether the producer is an American or Chilean.
Over the years, America has developed a well formulated body of law to determine what is an unfair trade practice inside the US; for instance, what is predatory pricing and how to decide whether it has occurred.
This law is based on economic principles.
While imperfect, it is far better than the so-called "fair trade" laws that apply to international trade, but are nothing more than blatant protectionism.
If those laws were applied within America, most companies would be found to be engaged in unfair trade practices.
The idea is not merely academic: Australia and New Zealand, in their free-trade agreement, did something along these lines.
The reason that it was not done in the case of the US and Chile is also clear: protectionist interests in America have little interest in an agreement embodying true free and fair trade.
(While Chile might, in principal, undertake similar protectionist measures against the US, there is a complete asymmetry in power.
American dumping duties on Chilean salmon could devastate that industry;
Chile could take no action against a US industry that would have more than a miniscule impact on American firms.)
So those who celebrate the new US/Chile trade agreement should be cautious.
It may inhibit Chile's ability to protect itself against the vagaries of capital markets, and it may not lead to either truly free or fair trade.
The Triumphant Return of John Maynard Keynes
NEW YORK – We are all Keynesians now.
Even the right in the United States has joined the Keynesian camp with unbridled enthusiasm and on a scale that at one time would have been truly unimaginable.
For those of us who claimed some connection to the Keynesian tradition, this is a moment of triumph, after having been left in the wilderness, almost shunned, for more than three decades.
At one level, what is happening now is a triumph of reason and evidence over ideology and interests.
Economic theory had long explained why unfettered markets were not self-correcting, why regulation was needed, why there was an important role for government to play in the economy.
But many, especially people working in the financial markets, pushed a type of “market fundamentalism.”
The misguided policies that resulted – pushed by, among others, some members of US President-elect Barack Obama’s economic team – had earlier inflicted enormous costs on developing countries.
The moment of enlightenment came only when those policies also began inflicting costs on the US and other advanced industrial countries.
Keynes argued not only that markets are not self-correcting, but that in a severe downturn, monetary policy was likely to be ineffective.
Fiscal policy was required.
But not all fiscal policies are equivalent.
In America today, with an overhang of household debt and high uncertainty, tax cuts are likely to be ineffective (as they were in Japan in the 1990’s). Much, if not most, of last February’s US tax cut went into savings.
With the huge debt left behind by the Bush administration, the US should be especially motivated to get the largest possible stimulation from each dollar spent.
The legacy of underinvestment in technology and infrastructure, especially of the green kind, and the growing divide between the rich and the poor, requires congruence between short-run spending and a long-term vision.
That necessitates restructuring both tax and expenditure programs.
Lowering taxes on the poor and raising unemployment benefits while simultaneously increasing taxes on the rich can stimulate the economy, reduce the deficit, and reduce inequality.
Cutting expenditures on the Iraq war and increasing expenditures on education can simultaneously increase output in the short and long run and reduce the deficit.
Keynes was worried about a liquidity trap – the inability of monetary authorities to induce an increase in the supply of credit in order to raise the level of economic activity.
US Federal Reserve Chairman Ben Bernanke has tried hard to avoid having the blame fall on the Fed for deepening this downturn in the way that it is blamed for the Great Depression, famously associated with a contraction of the money supply and the collapse of banks.
And yet one should read history and theory carefully: preserving financial institutions is not an end in itself, but a means to an end.
It is the flow of credit that is important, and the reason that the failure of banks during the Great Depression was important is that they were involved in determining creditworthiness; they were the repositories of information necessary for the maintenance of the flow of credit.
But America’s financial system has changed dramatically since the 1930’s.
Many of America’s big banks moved out of the “lending” business and into the “moving business.”
They focused on buying assets, repackaging them, and selling them, while establishing a record of incompetence in assessing risk and screening for creditworthiness.
Hundreds of billions have been spent to preserve these dysfunctional institutions.
Nothing has been done even to address their perverse incentive structures, which encourage short-sighted behavior and excessive risk taking. With private rewards so markedly different from social returns, it is no surprise that the pursuit of self-interest (greed) led to such socially destructive consequences.
Not even the interests of their own shareholders have been served well.
Meanwhile, too little is being done to help banks that actually do what banks are supposed to do – lend money and assess creditworthiness.
The Federal government has assumed trillions of dollars of liabilities and risks. In rescuing the financial system, no less than in fiscal policy, we need to worry about the “bang for the buck.”
Otherwise, the deficit – which has doubled in eight years – will soar even more.
In September, there was talk that the government would get back its money, with interest.
As the bailout has ballooned, it is increasingly clear that this was merely another example of financial markets mis appraising risk – just as they have done consistently in recent years.
The terms of the Bernanke-Paulson bailouts were disadvantageous to taxpayers, and yet remarkably, despite their size, have done little to rekindle lending.
The neo-liberal push for deregulation served some interests well.
Financial markets did well through capital market liberalization.
Enabling America to sell its risky financial products and engage in speculation all over the world may have served its firms well, even if they imposed large costs on others.
Today, the risk is that the new Keynesian doctrines will be used and abused to serve some of the same interests.
Have those who pushed deregulation ten years ago learned their lesson?
Or will they simply push for cosmetic reforms – the minimum required to justify the mega-trillion dollar bailouts?
Has there been a change of heart, or only a change in strategy?
After all, in today’s context, the pursuit of Keynesian policies looks even more profitable than the pursuit of market fundamentalism!
Ten years ago, at the time of the Asian financial crisis, there was much discussion of the need to reform the global financial architecture.
Little was done.
It is imperative that we not just respond adequately to the current crisis, but that we undertake the long-run reforms that will be necessary if we are to create a more stable, more prosperous, and equitable global economy.
The Triumph of the Powerless
NEW YORK – It was early June 1989.
Václav Havel had been released from jail only days before, yet he was full of what now seems an almost prophetic certainty.
Thousands of his countrymen had written letters petitioning for his release, at a time when declaring solidarity with Czechoslovakia’s most famous dissident was a clear and dangerous act of civil disobedience.
“We Czechs are finally finding our courage,” he said, as if sensing the people’s new readiness to confront the guardians of their communist police state. “Sooner or later, they will make a mistake, perhaps by beating up some people.
Then 40,000 people will fill Wenceslas Square!”
Four months later, one week after people power brought down the Berlin Wall, revolution came to Prague.
Students organized a small rally in the old Vyšehrad cemetery, the burial grounds of Smetana and Dvořák in a fortress overlooking the city.
As they marched toward Wenceslas Square, bearing candles, riot police cut them off, and many – men, women, children—were brutally beaten.
Those who fell were kicked and clubbed where they lay.
The night of November 17 – “Black Friday,” as it quickly came to be known – set Czechoslovakia alight.
The next day, thousands of Czechs turned out in the streets.
As Havel had foreseen, his job (and that of the small circle of dissidents surrounding him) would then be to fan that spark, stoke the fire – and guide it.
Twenty years later, we can only marvel at how brilliantly they performed.
Prague was 1989’s happiest revolution, a delirium of good feelings.
The “Velvet Revolution,” as Havel dubbed it, was sheer theater, a geopolitical spectacular that unfolded in vignettes, scenes, and acts, with cameo appearances by famous faces from the past, including Alexander Dubcek and Joan Baez.
Dissidents just released from jail and eminent emigres suddenly returned home.
The theme music was the Velvet Underground.
The stage was the Magic Lantern, the underground theater that served as Havel’s headquarters.
The backdrop was Prague, impossibly beautiful, impossibly romantic, the city of a hundred spires, tawny ochre houses and churches, shifting late afternoon light, moonlight on the Vltava.
The audience, of course, was the world.
We watched it happen on TV.
We saw the people, assembled in Wenceslas Square, hundreds of thousands of them, jingling their keys and ringing hand-bells in their good-humored farewell to communism: “Your time is up.”
It was so pure, so clean. It was the climax of the story, the Year of the Fall, a turning point in history: cliché transmuted into Truth.
We knew our heroes would win.
Everyone swept up by it felt young again, as though the world had suddenly, mysteriously, euphorically been made new.
Disney could not have worked a more seductive transformation.
Here were our children, taking to the streets.
Here were our children, bloodied and beaten.
Here were our children, finally, victorious.
It helped that this revolution could be counted in days, a miracle of compression.
Once confronted, the Communists almost ran from power.
An organizer of the November 17 rally told me that he knew it was over that very day, when he expected several hundred people and 20,000 showed up.
If so, the dénouement came on December 29, the day Vaclav Havel became a free Czechoslovakia’s new president.
For me, the decisive moment was on Day 11.
Half a million people had gathered in Prague’s Letná Park to hear Havel speak.
To this day, I can hardly remember it without tears.
As Havel finished, a light snow began to fall and, as if on cue, his listeners took their places.
One by one, in single-file, hand in hand, they began to march toward Wenceslas Square, more than a mile and a half away, following a rickety horse-drawn cart bedecked with the wings of angels.
It was so very gentle, so strong and irresistible.
Slowly, the procession wound its way along paths through Letná’s woods, now covered in white.
Slowly, it snaked down the medieval streets behind Prague Castle and into the square in front of the president's palace.
There were no chants, no cheers, no hints of confrontation.
Just the unbroken line of people, holding hands and passing silently in the white darkness, the line looping back and forth outside the forbidding gates.
From the castle, the line wound down the steep hills of Malá Strana, past the great Baroque cathedral, its ornate spires lighted in the snowy night, down Mostecká Street with its cafes and restaurants, across the shimmering Vltava at Charles Bridge, with its 400-year-old statues of Czech kings and religious saviors, through the narrow streets of the Old Town and finally into Wenceslas Square, where I watched three policemen join the procession, their caps set at jaunty angles, dancing along in tall black leather boots.
Still the procession came, weaving through the snow, everyone swinging their arms, skipping, happy, joyous.
The first of the marchers had reached the Square. The last still waited patiently in the park.
Hand in hand, they bisected the city.
Hand in hand, they drew a line.
Here, on one side, stood the people, on the other their oppressors.
This was the moment.
Everyone had to choose.
From high above the city, I looked out at these people dancing through the streets.
Prague lay away in the distance, lighted and luminous in the snow.
Never in my life have I seen anything so beautiful.
I doubt I ever will again.
Bo Xilai Between the Dragon and His Wrath
LONDON – After a year of unexplained delay, the trial of Bo Xilai, the former Communist Party secretary of Chongqing municipality, is finally about to begin.
Bo faces three charges: corruption, bribery, and abuse of power.
But his real offense is that he challenged the Chinese Communist Party’s way of doing things.
Moreover, his wife’s conviction of the widely publicized murder of British businessman Neil Heywood has severely embarrassed the CCP.
When the court finally convicts Bo – and he is certain to be convicted – he will probably face a prison term similar to that of former Shanghai Party Secretary Chen Liangyu, who received 18 years, or former Beijing Party Secretary Chen Xitong, who was sentenced to 16 years.
Like Bo, both men had been members of the CCP Central Committee, the Party’s inner circle – a status that allowed them to escape a death sentence (unlike the lower-ranking former Minister of Railways Liu Zhijun following his conviction on similar charges of corruption and abuse of power).
For the Party, however, Bo’s conviction will not mark the end of the scandal.
Nor will the shadow cast over the CCP by his high-living, exiled son Bo Guagua and his homicidal wife Bogu Kailai simply disappear.
But the fall of Bo and his family hardly rises to the level of Shakespearean tragedy.
King Lear this is not.
Of course, Bo and his wife and son have been morally dead for some time.
Power sapped their humanity.
Bogu killed Heywood, her lover and business partner, and many other innocent people died as a result of Bo’s ambition.
His thuggish chief henchman, the former Chongqing police chief Wang Lijun, fled to the US consulate in Chengdu, fearing that his life was in jeopardy because he knew too much about Heywood’s murder and Bo’s other crimes.
Still, the CCP wants nothing more than to whitewash the scandal.
The Central Commission for Discipline Inspection has already scrapped charges of illicit sexual relations involving several women, signaling that such crimes are to remain hidden when Central Committee members commit them.
This follows a similar official response to Chen Liangyu’s philandering and to Chen Xitong’s “Five Golden Flowers.”
Furthermore, charges that Bo received ¥20 million ($3.2 million) in bribes and misappropriated ¥5 million are trivial compared to those leveled against Liu Zhijun.
Thus, with his level of bribery deemed small, and his wife artfully scapegoated, the only high crime of which Bo stands accused is dereliction of duty.
By limiting the charges, the CCP has limited the possible punishments.
As always where the Party is concerned, Chinese law is mere window dressing.
The law is applied sparingly, if at all, to the Party elite, and the interests of justice (at least as the outside world understands the term) are rarely the highest priority in such situations.
A trial such as Bo’s is invariably part of a political deal among insiders.
The real story of Bo’s career – one of infidelity, betrayal, and corruption – is appalling.
The victims include the Heywood family, his Chinese wife, and their children.
Their tragedy stands as a profound indictment of the CCP’s rule, because no family is safe when governments are not subject to the rule of law.
Happy households and harmonious states go together.
But, in China, party leaders like Bo hold life-or-death power over citizens and their families.
For the CCP, saving face is paramount.
Bo will join a long line of incarcerated officials, though the special prisons where they are held may seem like recreation centers for retired senior officials when compared to the abusive and physically degrading conditions that the Nobel laureate Liu Xiaobo and other prisoners have had to endure.
Bo’s son, Bo Guagua, will live an invisible life abroad.
So Bo is anything but a tragic figure.
When he cries for his dead daughter Cordelia, King Lear comes to understand the personal flaws that brought about his demise, and for this he elicits sympathy.
When Bo appears in court, his pleas will not be so persuasive.
We may see in his face Lear’s desperation: “Howl, howl, howl, howl!
But in the courtroom, and all over China, the audience will remain unmoved – and rightly so.
The Trouble with Eurobonds
MUNICH – German Chancellor Angela Merkel has withstood the pressure from southern Europe: there will be no Eurobonds.
For the markets, this is a disappointment, but there is no other way for these countries to rebuild themselves than to insist patiently on a phase of debt discipline and an end to lax budget constraints.
Investors in Europe’s troubled economies are already getting enough as it is.
Eurozone leaders’ decision on July 21 to allow the European Financial Stability Facility to buy back old debts – limited only by the EFSF’s capacity – already amounts to a type of Eurobond.
And the European Central Bank will also blithely continue its bailout policy in terms of giving loans to the eurozone’s troubled members and purchasing their government bonds.
Southern Europe, however, is pushing hard for a complete changeover to Eurobonds to get rid of the interest-rate premiums relative to Germany that markets are demanding of them.
This is understandable, given that the hope of interest-rate convergence was a decisive reason for these countries to join the euro in the first place.
And, for a little more than a decade, from 1997-2007, this hope was realized.
For the Italian state, interest-rate convergence brought a medium-term reduction in debt-service payments of up to 6% of GDP.
That would have been sufficient to pay back the entire Italian national debt over about a decade and a half.
Italy, however, chose to squander that interest-rate advantage.
Italy’s debt-to-GDP ratio today, at 120%, is as high as it was when the country entered the eurozone in the mid-1990’s.
Now that interest-rate spreads are increasing again, the pain is considerable, prompting calls for Eurobonds.
When other countries guarantee repayment, it is hoped, low interest rates will return.
But who is to make these guarantees?
The debt-to-GDP ratios of France and Germany are well above 80%, which isn’t all that far below Italy’s – and far above Spain’s.
Pooling debts doesn’t make them go away.
Everybody and every country must service their own debts; there is no way around that.
And, incidentally, the current agitation about interest rates is a bit over the top.
The interest rates that countries like Italy and Spain have to pay today are only half as high as they were in 1995, before the conversion rates within the eurozone were set; likewise, interest-rate spreads vis-à-vis Germany today are only two-thirds of their size then.
There is no indication that the markets are dysfunctional and overstating the differences between countries’ creditworthiness.
The spreads are necessary to keep capital flows within the eurozone in check.
Before the introduction of the euro, capital flows had been limited by uncertainty about exchange rates.
This saved Europe from overly large external imbalances.
Now, without exchange-rate risk, interest-rate spreads based on debtor countries’ credit ratings are the only remaining defense against excessive capital movements and the resulting external imbalances.
If investors are given unlimited protection, with no risk of bearing their share of possible losses, capital will continue to flow unimpeded from one corner of the eurozone to the other, prolonging these imbalances.
For many years, Italy has disregarded the debt ceilings imposed by the Maastricht Treaty and the Stability and Growth Pact.
Only when interest rates recently began to rise a bit did the government finally – and promptly – implement an austerity program, with the approval of all political parties.
The markets, not political debt ceilings, are taken seriously; the introduction of Eurobonds would remove that disciplining function.
To a limited extent, the same applies to the EU bailouts and ECB interventions.
These could be justified during the recession of 2008-2009, but now they have become counter-productive, because they undermine the markets’ controlling function.
By replacing the private credit that is being withdrawn with public credit, the external imbalances within the eurozone are being perpetuated.
Even today, four years into the crisis, there are no signs that the overly expensive countries in Europe’s southern periphery have begun devaluation in real terms by cutting wages and prices.
That, however, is a precondition for reducing external imbalances and reliance on foreign credit.
The bailouts are prolonging the crisis because they amount to an attempt to keep asset prices at a level above the market equilibrium, creating a unilateral downward risk that is limited only by the deep pockets of the relief funds.
This is reminiscent of central banks’ futile efforts, back when fixed exchange-rate regimes were common, to stabilize rates above their market equilibrium.
The result, much like today, was merely to exacerbate market turbulence.
It is time for Europe to face reality and initiate the difficult adjustment processes within the real economy that are necessary to rebalance the eurozone.
Eurobonds would numb the distressed countries’ current pain, but, by failing to treat the underlying disease, they – and the eurozone as a whole – would end up far sicker than before.
The Trouble with European Defense
WASHINGTON, D.C.: The Nice summit of EU leaders achieved few of its aims, but it did push the creation of a military identity for the EU, the European Defense Initiative (EDI), forward.
That movement, however, is beginning to arouse worries, both in NATO and in the United States.
It has long been a bedrock principle of American foreign policy to endorse any move to further integrate the European Union.
If specific US interests might be harmed by such moves, the remedy is to seek revisions in detail, without opposing the overall initiative.
Unlike the British Tories, some French Gaullists, and many Danes and Swedes, Americans do not fear the prospect of a United States of Europe, a potential competitor to be sure, but also a much-needed partner on the world scene.
When EDI first emerged, America’s response was no different.
Although some outspoken French proponents of EDI made no secret of their desire to replace NATO altogether, this being seen by them as the only way of emancipating Europe from American hegemony, that is not how EDI was officially presented and discussed in the councils of the European Union.
That official EDI was to be an auxiliary to NATO not a competitor, its purpose to provide European forces for less demanding peace-keeping operations that did not require the participation of American combat forces.
American diplomacy, therefore, did nothing to oppose EDI, and even welcomed the possibility that it might induce Europe’s political elites to support more military spending, reducing the burden on the US.
The seemingly endless Bosnia peacekeeping force is a case in point.
If EDI would supply additional troops to allow the US Army to withdraw its 4,600 soldiers, that would suit America very well because there are many other demands on US forces around the world,
Yet in the final weeks of the Clinton Administration America’s attitude to EDI changed.
In his last visit to NATO, Secretary of Defense William Cohen replaced polite approval in principle with expressions of concern that stop just short of outright opposition.
The reason is simple: money.
Instead of adding resources to European security, it now seems that EDI will reduce them.
Measured in constant 1999 US dollars (before the distorting effect of the fall of the Euro), all the member states of the EU are now spending some $156 billion combined on defense, very much less than in the final Cold War year of 1985 when that total came to $216 billion.
Having long since collected the peace dividend, the main protagonists of EDI are still reducing their defense spending: between 1998 and 1999, France, Germany, Italy and the United Kingdom reduced their combined defense expenditure by a further $10 billion dollars.
In other words, there is no extra money to pay for EDI, but there are all sorts of extra requirements.
Most obvious is the new European General Staff now being formed in Belgium, whose work will inevitably duplicate what NATO already does, while adding yet another military bureaucracy, with its administrative support, extra pay and allowances for service abroad, mass of documents in two languages and more.
That expenditure might not be very large, but it adds to the high proportion of European military spending already consumed by each country’s defense ministry, separate headquarters for each service, and plethora of supporting bureaucracies.
These, indeed, remain almost as large as in 1985, when the number of people in uniform, aircraft, warships, armor and artillery was almost twice as large as today.
Far greater, however, is the invisible cost: the 60,000 troops assigned to EDI are already organized for joint action under NATO command.
If only because very few French officers have served in NATO commands, the joint staff work learned in almost half-a-century of NATO experience will have to be re-learned.
What is urgently needed in Europe is less bureaucratic overhead and more trained troops.
Except for the British and very small elite units elsewhere, most European troops are not trained well enough for combat, or even for peacekeeping in dangerous places.
That became obvious in Kosovo, where the soldiers and officers sent by most countries were incapable of elementary infantry missions such as night patrols in small teams, which were essential to controlling depredations by the Albanian Kosovo Liberation Army’s fighters.
But EDI will provide no additional troops and no added combat training – joint exercises are mostly ritualistic – while requiring yet more spending on bureaucracy.
For America, this means that the European forces of NATO will actually be weakened by EDI, adding to the potential burden on US combat forces.
That is not something even the most polite US diplomat can welcome.
The Trouble with Hope
PARIS – America’s presidential election campaign is being followed in Europe with passionate interest.
It is seen as a long saga full of surprises.
The human and intellectual qualities of the three remaining candidates are even viewed with some envy on this side of the Atlantic, where you can hear statements such as: “Could we borrow just one of your candidates?”
But Europeans’ interest in this presidential election cannot mask the fact that what they expect from it is far from clear.
Europeans may want a more “normal” America, closer to their own values, but they simultaneously worry that a more modest America would demand more of them in the realm of “hard” military power.
America as a model or America as a protector – this “European dilemma” is in itself new.
For, in the immediate aftermath of World War II, most Europeans viewed the United States as both its defender against the Soviet Union’s expansionist aims and the key external actor for their deeply wounded continent’s moral and economic reconstruction.
This is no longer the case.
The collapse of the USSR, America’s self-inflicted wounds – particularly in Iraq – and the spectacular rise of Asia have changed European perceptions of the US.
America is no longer the protector or model that it used to be, nor is it alone in terms of influence and power.
One can even say that the European Union has slowly become a “normative” force in the world in reaction to the evolution of America’s power.
Europe has long known that it could never balance America in the realm of “hard power”; but, with the decline of America’s “soft power,” it became more important than ever to incarnate the “humane” and law-abiding face of the West.
In this sense, Europe has come to see itself, at least in part, as an alternative dream for everyone who had stopped dreaming about America.
But, seen from within, the EU model often appears less convincing.
Thus, many Europeans continue to be nostalgic for America as a model.
For these Europeans, Barack Obama, campaigning under the banner of “hope,” is the ideal choice to restore, as if by magic, America’s soft power.
After all, he himself incarnates the American Dream.
But some Europeans prefer Hillary Clinton or even John McCain, because they are apprehensive about the consequences for America’s European partners of a more restrained and less experienced president.
They worry about not only competence, but also the old transatlantic issue of “burden sharing.”
The implicit question behind some European reservations about Obama may be formulated in one question: “Will we have to do more in Afghanistan and beyond?”
Could the restoration of America’s international reputation turn out to be bad for Europe, by eroding its new monopoly on representing Western values and calling it back to its hard power duties?
Could it be that a candidate of fear – McCain or, increasingly, Clinton – really serves Europe’s interests better than a candidate of hope?
With Obama in power, it would become – at least initially – more difficult for Europeans to denounce America, even if the “New France” of Nicolas Sarkozy has already moved away from this easy temptation.
But it would also be less easy to reject a call for greater burden sharing in the world.
This “defensive” view of transatlantic relations is problematic.
The best America for Europe and the world is a confident America – an America that sheds its culture of fear and rediscovers the roots of its culture of hope.
This is Obama’s America.
Of course, the greater your expectations are, the greater the risk of disappointment.
But, after eight years of America’s self-imposed isolation under Bush, it is a risk worth taking.
Even if America is no longer the world’s only superpower, it still remains the “indispensable nation.”
So Europeans are right to be fascinated by America’s presidential election.
Regardless of who wins, the consequences of the outcome will reverberate throughout the world.
The Trouble with Japanese Nationalism
Barely half a year into his premiership, Japan’s Shinzo Abe is provoking anger across Asia and mixed feelings in his country’s key ally, the United States.
But will the Bush administration use its influence to nudge Abe away from inflammatory behavior?
Abe’s predecessor, Junichiro Koizumi, was a mold-breaking leader, reviving Japan’s economy, reforming the postal savings system, and smashing the long-ruling Liberal Democratic Party’s faction system.
But Koizumi also legitimized a new Japanese nationalism, antagonizing China and South Korea by his annual visits to the Yasukuni Shrine.
If anything, Abe is even more committed to building an assertive and unapologetic Japan.
Anyone who believes that the Yasukuni controversy is an obscure historical matter that Chinese and Koreans use to badger Japan for political advantage has probably never spent much time there.
The problem is not the 12 Class-A war criminals interred at the shrine; the real problem is the Yushukan military museum next door.
Walking past the Mitsubishi Zero, tanks, and machine guns on display in the museum, one finds a history of the Pacific War that restores “the Truth of Modern Japanese History.”
It follows the nationalist narrative: Japan, a victim of the European colonial powers, sought only to protect the rest of Asia from them.
Japan’s colonial occupation of Korea, for example, is described as a “partnership”; one looks in vain for any account of the victims of Japanese militarism in Nanjing or Manila.
One might be able to defend the museum as one viewpoint among many in a pluralist democracy.
But there is no other museum in Japan that gives an alternative view of Japan’s twentieth-century history.
Successive Japanese governments have hidden behind the Yushukan museum’s operation by a private religious organization to deny responsibility for the views expressed there.
That is an unconvincing stance.
In fact, unlike Germany, Japan has never come to terms with its own responsibility for the Pacific War.
Although socialist Prime Minister Tomiichi Murayama officially apologized to China in 1995 for the war, Japan has never had a genuine internal debate over its degree of responsibility, and has never made a determined effort to propagate an alternative account to that of Yushukan.
My exposure to the Japanese right came in the early 1990’s, when I was on a couple of panels in Japan with Watanabe Soichi, who was selected by my Japanese publisher (unbeknownst to me) to translate my book The End of History and the Last Man into Japanese.
Watanabe, a professor at Sophia University, was a collaborator of Shintaro Ishihara, the nationalist politician who wrote The Japan That Can Say No and is now the governor of Tokyo.
In the course of a couple of encounters, I heard him explain in front of large public audiences how the people of Manchuria had tears in their eyes when the occupying Kwantung Army left China, so grateful were they to Japan.
According to Watanabe, the Pacific War boiled down to race, as the US was determined to keep a non-white people down.
Watanabe is thus the equivalent of a Holocaust denier, but, unlike his German counterparts, he easily draws large and sympathetic audiences.
(I am regularly sent books by Japanese writers that “explain” how the Nanjing Massacre was a big fraud.)
Moreover, there have been several disturbing recent incidents in which physical intimidation has been used by nationalists against critics of Koizumi’s Yasukuni visits, such as the firebombing of former prime ministerial candidate Kato Koichi’s home.
(On the other hand, the publisher of the normally conservative Yomiuri Shimbun attacked Koizumi’s Yasukuni visits and published a fascinating series of articles on responsibility for the war.)
This leaves the US in a difficult position.
A number of American strategists are eager to ring China with a NATO-like defensive barrier, building outward from the US-Japan Security Treaty.
Since the final days of the Cold War, the US has been pushing Japan to rearm, and has officially supported a proposed revision of Article 9 of the postwar constitution, which bans Japan from having a military or waging war.
But America should be careful about what it wishes for.
The legitimacy of the entire American military position in the Far East is built around the US exercising Japan’s sovereign function of self-defense.
Japan’s unilateral revision of Article 9, viewed against the backdrop of its new nationalism, would isolate Japan from virtually the whole of Asia.
Revising Article 9 has long been part of Abe’s agenda, but whether he pushes ahead with it will depend in large part on the kind of advice he gets from close friends in the US.
President Bush was unwilling to say anything about Japan’s new nationalism to his “good friend Junichiro” out of gratitude for Japanese support in Iraq.
Now that Japan has withdrawn its small contingent of troops, perhaps Bush will speak plainly to Abe.
The Trouble with Libertarian Paternalism
CHICAGO – There are many arguments against government paternalism: apart from limiting individual choice (for example, the choice to remain uninsured in the current health-care debate in the United States) and preventing individuals from learning, history suggests time and again that the conventional wisdom prevalent in society is wrong.
And, since governments typically try to enforce the conventional wisdom, the consequences could be disastrous, because they are magnified by the state’s coordinating – and coercive – power.
A clear example is financial regulation, which in many ways is a form of paternalism.
In the US, the low risk assigned to senior tranches of mortgage-backed securities made them attractive instruments for banks to hold, given the relatively high return they offered.
But they proved far from safe, despite the prior conventional wisdom.
And, because the regulator had pronounced them safe, far too many banks overloaded on them, rendering them even more risky when the banks tried to sell them at the same time.
Other examples of the danger of the coordinating power of government paternalism abound.
As I drive to downtown Chicago, I pass a series of high-rise housing projects, meant in their time to be the miracle cure for homelessness, poverty, unemployment, and crime.
Today, they are seen as the best way to concentrate and perpetuate many of those ills.
Not only were the housing projects kept a safe distance from areas that had good jobs, but, with few residents experiencing stable families and livelihoods, there were not enough local examples of success to guide young people.
As a result, many went astray.
The fashion today is to integrate poor households into flourishing communities.
No doubt we will discover some unintended consequences in the future, and the power of government coordination will ensure that those consequences are widespread.
But some amount of paternalism is necessary in civilized societies.
Social security is a paternalistic form of forced savings for old age, preventing individuals from consuming and saving as they please.
It exists, in part, because individuals know that civilized societies will never stand by and watch the elderly starve.
So individuals are forced to save in order to prevent them from gaming the system – not saving when young, knowing that they will be assured a minimum level of support by a humane society when old.
Similarly, the mandated purchase of insurance in the Obama administration’s health-care bill is an attempt to prevent the young and the healthy from remaining uninsured and turning to the government for support only when they discover that they need it.
So, if paternalism has benefits as well as costs, how do we get the former without the latter?
My colleague, Richard Thaler, along with Cass Sunstein, who currently serves in the Obama administration, wrote a best-selling book, Nudge, in which they suggest a way to reduce our uneasiness with paternalism.
Essentially, by exploiting behavioral quirks, they would nudge people into making decisions that are good for them, even while individuals have complete freedom to change their mind.
So libertarian paternalism, in their view, eliminates one of the main objections to paternalism – that it constrains individual choice.
For example, in deciding how their pension savings will be allocated, most people simply choose the default option in their employer-offered plan.
Often, the default option is unsuitable for most individuals – for instance, it typically allocates all savings to low-return money-market funds.
Sunstein and Thaler would have the employer choose a default option that works for most people, such as 60% in equities, 30% in bonds, and 10% in money-market funds.
That is the paternalistic part.
The libertarian part is that the employee has the right to opt out of the default option.
Because people rarely move away from the default option, the employer’s paternalistic choice prevails, and we get libertarian paternalism.
What is not to like?
The problem is that the semblance of choice in libertarian paternalism is an illusion.
Choice remains unexercised, because individuals do not consciously think through their decision.
If their choices can be directed, is this not paternalism plain and simple, rendered more sinister because individuals are unaware that they are being nudged, and cannot raise their guard?
One response is to point out that most plans already have a default option that determines savings allocations.
Sunstein and Thaler merely say that the default option should be set in a way that is good for people, and clearly they have an idea of what is good.
This, then, is the nub of the problem. In choosing the default option, the government or the employer nudges all employees into prevailing fads such as “buy equity for the long run.”
This, they believe, is better than the current typical default option of putting individuals’ money into money-market funds.
But it may be worse: coordinating everyone into risky asset investments may be more dangerous than coordinating them into boring investments like money-market funds.
Could there be a better alternative?
What if there were no default option, and individuals were sent repeated, and increasingly urgent, reminders to choose an allocation if they did not choose one already.
The conventional wisdom could be offered as a recommendation, along with explanations of why it makes sense, but it would not be the default.
This would force people to exercise choice.
Some people would differ from the conventional wisdom, benefiting the system by introducing some variety and resilience.
More generally, the flaw in some forms of libertarian paternalism is that the free choice that it appears to offer leaves the paternalism largely unconstrained.
Would it not be far better to force conscious choice in order to limit the consequences of paternalistic mistakes?
The Trouble with Poland
“We are only demanding one thing, that we get back what was taken from us….If Poland had not had to live through the years 1939-1945, it would be a country of 66 million.”
Thus spoke Polish Prime Minister Jaroslaw Kaczynski on the eve of the last European Union summit, when he sought to gain greater voting weight for his country within the EU by invoking the memory of Hitler’s war against Poland.
Kaczynski’s words, however, stand in contradiction with what happened in Paris this July 14th.
For on Bastille Day, a small Polish contingent marched down the Champs de Elysée alongside the forces of 26 other EU national contingents, including the Germans, in a display of European unity.
This contrast perfectly summarizes today’s confused Poland – a country that boasts one of the highest levels of popular acceptance of the EU among all member countries, yet is the place where defense of the “national” interests is practiced most fiercely.
Poland today is no longer “God’s Playground,” to use Norman Davies’s famous phrase.
Instead, it seems more like a child’s playground: a strange mixture of inferiority and superiority complexes.
The problem is that Poland’s unjustified lack of confidence is leading to an extremely unpleasant form of intolerance toward others.
To understand what went wrong with Poland, a comparison with Spain might be useful.
In the nineteenth century, Europe’s southern and eastern extremities were united by common decay.
Poland had disappeared as an independent nation, the victim of its powerful neighbors’ greed;
Spain was a country that no longer mattered.
This dual decline was a subject frequently discussed by historians across the continent.
They generally emphasized the failure of both countries to adjust their political systems to the requirements of the times.
Today, Spain and Poland both appear to be experiencing a renaissance, thanks to the framework of European unity.
Their economies are booming.
Democracy has been restored after half-century of dictatorial disruption.
Yet the buoyant self-confidence of today’s Spain is completely absent from Poland.
Is this because Poland’s sufferings were even more terrible than Spain’s?
Is it because it is more difficult to emerge from a totalitarian regime than from an authoritarian one?
Is it because Spain has had 20 more years to be vaccinated by the EU against the temptations of nationalism?
All these explanations probably contain an element of truth.
And perhaps there is another factor: there is more pride and less self-doubt in Spanish culture than in the Polish one.
What seems clear is that Poland today can choose among two paths.
It can continue to play a “nuisance value” role in the Union.
But in that case, it must at least play well.
Poland’s government cannot simultaneously pretend to resist Russia’s energy pressures and yet reject Germany’s offers of help.
When all things are considered, Germany is a more reliable ally and partner than Ukraine, which some in Warsaw see as a potential counterweight to Russia.
The realities of the present must not be obscured by the burdens of the past.
Entering the EU means integrating into a country’s politics a logic dominated by the concept of reconciliation.
In this sense, Germany, having stifled the evils of aggressive nationalism, remains the most “European” country in Europe.
To deny this, to threaten to undo Polish-German reconciliation, is to harm Poland’s fundamental national interests.
By antagonizing Germany, indeed all of the EU, Poland is merely encouraging a revisionist Russia.
If Poland’s current leaders want to re-play nineteenth-century balance-of-power games, they should understand where the real weight of power in Europe lies.
The other path Poland can take is that of Spain.
Javier Solana, the EU’s high representative for foreign policy, symbolizes the role that Spaniards are playing in building Europe’s international identity.
Spain’s influence is, to a large extent, a result of its national self-confidence.
Demographically and strategically, Poland is by far the most important of the EU’s new members.
Former French President Jacques Chirac, with his seeming contempt for these new members, is gone.
Nobody is out to insult the Polish people gratuitously.
Only the Poles can harm Poland’s reputation and influence, and one must say that they have excelled at it of late.
In the course of the last five years, while teaching at the College of Europe in Natolin, near Warsaw, I have witnessed at first hand Poland’s remarkable progress.
Sadly, there is a “disconnect” between Poland’s economic progress and the discourse and behavior of its politicians.
Warsaw exudes positive energy.
The famous Polish plumber is a guarantee of high-quality work across Europe.
Everywhere from London to Rome to Paris, Polish artisans are contributing decisively to the beautification of Europe, using the skills they used in the past to build cities like Krakow and St. Petersburg.
The problem is in the eyes of the beholder.
If Poland were less unjustifiably afraid of its future, it would be less obsessed with a past that will not pass away.
One hopes that this is just a temporary phase, and that comprehension of Poland’s real achievements will prevail over the hyper-sensitivity of its current leaders.
For the “real Poland” that emerged after 1989 is much more promising than their political incarnation of it.
The Trouble with Treating Trauma
When disaster strikes, the arrival of ``trained counselors'' is as much a part of the theater of disaster as the arrival of the emergency services.
What do these counselors actually do?
Usually, they perform some form of what is called ``debriefing'' or ``critical incident stress debriefing.''
But do these sessions do any good?
Debriefing is invariably a short, usually single session, an intervention that is performed with as many of those caught up in a traumatic event as possible.
It involves linking examination of the traumatic incident with education about the expected emotional responses and assurances that these are normal.
The hope is to reduce acute emotional distress and prevent the onset of post-trauma psychiatric disorder.
Many organizations offer debriefing as part of their response to traumatic incidents - such as police officers involved in firearm incidents, or bank staff who witness robberies.
In some institutions interventions are compulsory - perhaps out of a desire to reduce psychological distress, but also from a belief this will reduce exposure to litigation.
There are many reasons why belief in the effectiveness of debriefing has become so widespread.
When facing disasters, all of us feel a need to do something.
The idea that talking about trauma must be better than ``repressing'' or ``bottling up'' accords with a long tradition in psychological treatment - ``better out than in.''
Many people who have been debriefed judge the experience positively.
But does it work?
There is only one way to really know if any intervention does more good than harm, and that is via randomized controlled trials.
The studies undertaken so far provide no evidence of any benefit through intervention.
Perhaps the process of debriefing, part of whose purpose is to warn participants of emotional reactions that might be expected to develop over weeks and months, actually increases the occurrence of these symptoms.
Perhaps for some people not talking is the most appropriate response.
Indeed, psychological defense mechanisms may exist precisely because it is not always ``better out than in.''
Talking to a stranger, whom one has never met before and will not meet again, may impede the normal processes of recovery that rely on one's own social networks - family, friends, priest, doctor, who may be better able to place the trauma in context.
Perhaps debriefing serves merely to professionalize distress - part of the wider process nowadays by which adversity has been professionalized.
Of course, when a cherished belief is challenged, various counter claims arise - the evidence is for the wrong type of debriefing, the trials were not well done, elements of debriefing could still ``work,'' the testimonies of those who are certain it helped them cannot be discounted, and so on.
This is inevitable, but it should not distract us from the main findings.
So we must reassess how we respond to trauma.
There can be no doubt that those who are attempting to help people involved in disasters and trauma have noble motives, but that is not enough.
It is time that those who are asked to take part in debriefing are warned that the process has the capacity to do harm as well as good.
Compulsory debriefing, which is still used in some organizations, must cease forthwith.
But should we be skeptical of all ``talking treatments?''
Unlike debriefing, there is overwhelming evidence that some talking treatments, such as cognitive therapy or cognitive behavior therapy, is effective when applied to disorders such as depression, panic disorder or post-traumatic stress disorder (PTSD).
What is the difference then between these talking therapies and the vogue for debriefing?
Two things.
First, unlike debriefing these interventions work not on normal people who have been exposed to adversity, but on those who have a definite psychiatric disorder.
Second, these are skilled interventions, delivered by practitioners with well defined and well regulated professional skills, who are either clinical psychologists or psychiatrists.
They are also given over a period of time.
Sadly in mental health, effective treatments are neither swift nor easily learnt.
There is also a final paradox.
When disaster strikes, it is the experience of all health professionals that they are often overwhelmed with offers of help.
After the shootings at Columbine high school in the US a few years ago, the school received over 3,000 offers from people willing to come and ``debrief'' the children.
But it is the mundane, non-newsworthy traumas of life that cause real harm.
The old people shattered by a burglary.
The wife driven to depression by her husband's infidelity.
The bank manager who cannot get to work because of panic attacks.
Or the teenager disabled by obsessive compulsive disorder.
For them finding skilled psychological therapies and therapists is rarely easy, even though in all of these instances the evidence of effectiveness is beyond dispute.
So we should take a long, hard look at how we manage our resources.
It seems better to concentrate on delivering effective treatments to the smaller number of people who really need them, and not on the larger number of people who don't.
The story of debriefing provides a salutary lesson.
First, people are more resilient than we give them credit for.
Second, no matter how well meaning our attempts to reduce distress and prevent psychiatric disorder, and no matter how self-evident the intervention, we still require firm proof of the benefits.
Any health care intervention has the capacity to do harm as well as good, and occasionally the balance between the two will surprise us.
The True Costs of the Iraq War
The most important things in life ­ like life itself ­ are priceless.
But that doesn’t mean that issues involving the preservation of life (or a way of life), like defense, should not be subjected to cool, hard economic analysis.
Shortly before the current Iraq war, when Bush administration economist Larry Lindsey suggested that the costs might range between $100 and $200 billion, other officials quickly demurred.
For example, Office of Management and Budget Director Mitch Daniels put the number at $60 billion.
It now appears that Lindsey’s numbers were a gross underestimate.
Concerned that the Bush administration might be misleading everyone about the Iraq war’s costs, just as it had about Iraq’s weapons of mass destruction and connection with Al Qaida, I teamed up with Linda Bilmes, a budget expert at Harvard, to examine the issue.
Even we, as opponents of the war, were staggered by what we found, with conservative to moderate estimates ranging from slightly less than a trillion dollars to more than $2 trillion.
Our analysis starts with the $500 billion that the Congressional Budget Office openly talks about, which is still ten times higher than what the administration said the war would cost.
Its estimate falls so far short because the reported numbers do not even include the full budgetary costs to the government.
And the budgetary costs are but a fraction of the costs to the economy as a whole.
For example, the Bush administration has been doing everything it can to hide the huge number of returning veterans who are severely wounded – 16,000 so far, including roughly 20% with serious brain and head injuries.
So it is no surprise that its figure of $500 billion ignores the lifetime disability and healthcare costs that the government will have to pay for years to come.
Nor does the administration want to face up to the military’s recruiting and retention problems.
The result is large re-enlistment bonuses, improved benefits, and higher recruiting costs – up 20% just from 2003 to 2005.
Moreover, the war is extremely wearing on equipment, some of which will have to be replaced.
These budgetary costs (exclusive of interest) amount to $652 billion in our conservative estimate and $799 billion in our moderate estimate.
Arguably, since the government has not reined in other expenditures or increased taxes, the expenditures have been debt financed, and the interest costs on this debt add another $98 billion (conservative) to $385 billion (moderate) to the budgetary costs.
Of course, the brunt of the costs of injury and death is borne by soldiers and their families.
But the military pays disability benefits that are markedly lower than the value of lost earnings.
Similarly, payments for those who are killed amount to only $500,000, which is far less than standard estimates of the lifetime economic cost of a death, sometimes referred to as the statistical value of a life ($6.1 to $6.5 million).
But the costs don’t stop there.
The Bush administration once claimed that the Iraq war would be good for the economy, with one spokesperson even suggesting that it was the best way to ensure low oil prices.
As in so many other ways, things have turned out differently: the oil companies are the big winners, while the American and global economies are losers.
Being extremely conservative, we estimate the overall effect on the economy if only $5 or $10 of the increase is attributed to the war.
At the same time, money spent on the war could have been spent elsewhere.
We estimate that if a proportion of that money had been allocated to domestic investment in roads, schools, and research, the American economy would have been stimulated more in the short run, and its growth would have been enhanced in the long run.
There are a number of other costs, some potentially quite large, although quantifying them is problematic.
For instance, Americans pay some $300 billion annually for the “option value” of military preparedness – being able to fight wherever needed.
That Americans are willing to pay this suggests that the option value exceeds the costs.
But there is little doubt that the option value has been greatly impaired and will likely remain so for several years.
In short, even our “moderate” estimate may significantly underestimate the cost of America’s involvement in Iraq.
And our estimate does not include any of the costs implied by the enormous loss of life and property in Iraq itself.
We do not attempt to explain whether the American people were deliberately misled regarding the war’s costs, or whether the Bush administration’s gross underestimate should be attributed to incompetence, as it vehemently argues is true in the case of weapons of mass destruction.
Nor do we attempt to assess whether there were more cost-effective ways of waging the war.
Recent evidence that deaths and injuries would have been greatly reduced had better body armor been provided to troops suggests how short-run frugality can lead to long-run costs.
Certainly, when a war’s timing is a matter of choice, as in this case, inadequate preparation is even less justifiable.
But such considerations appear to be beyond the Bush administration’s reckoning.
Elaborate cost-benefit analyses of major projects have been standard practice in the defense department and elsewhere in government for almost a half-century.
The Iraq war was an immense “project,” yet it now appears that the analysis of its benefits was greatly flawed and that of its costs virtually absent.
One cannot help but wonder: were there alternative ways of spending a fraction of the war’s $1-$2 trillion in costs that would have better strengthened security, boosted prosperity, and promoted democracy?
The Truth About Climate Change
EXETER – Many people ask how sure we are about the science of climate change.
The most definitive examination of the scientific evidence is to be found in the work of the Intergovernmental Panel on Climate Change (IPCC) and its last major report published in 2007.
I had the privilege of being chairman or co-chairman of the Panel’s scientific assessments from 1988 to 2002.
Many hundreds of scientists from different countries were involved as contributors and reviewers for these reports, which are probably the most comprehensive and thorough international assessments on any scientific subject ever carried out.
In June 1995, just before the G-8 summit in Scotland, the Academies of Science of the world’s 11 largest economies (the G-8 plus India, China, and Brazil) issued a statement endorsing the IPCC’s conclusions and urging world governments to take urgent action to address climate change.
The world’s top scientists could not have spoken more strongly.
Unfortunately, strong vested interests have spent millions of dollars on spreading misinformation about climate change.
First, they tried to deny the existence of any scientific evidence for global warming.
More recently, they have largely accepted the fact of anthropogenic (man-made) climate change but argue that its impacts will not be great, that we can “wait and see,” and that in any case we can always fix the problem if it turns out to be substantial.
The scientific evidence does not support such arguments.
Urgent action is needed both to adapt to the climate change that is inevitable and to reduce emissions of greenhouse gases, especially CO2, to prevent further damage as far as possible.
At the Earth Summit in Rio de Janeiro in 1992, the world’s nations signed up to the Framework Convention on Climate Change (FCCC), the objective of which is “to stabilize the concentration of greenhouse gases in the atmosphere at a level that does not cause dangerous interference with the climate system…, that allows ecosystems to adapt naturally to climate change, that ensures food production is not threatened, and that enables economic development to proceed in a sustainable manner.” Such stabilization would also eventually stop further climate change.
It is now recognized that widespread damage due, for instance, to sea level rise and more frequent and intense heat waves, floods and droughts, will occur even for small increases of global average temperature.
Therefore it is necessary that very strong efforts be made to hold the average global temperature rise below 2º Celsius relative to its preindustrial level.
If we are to have a good chance of achieving that target, the concentration of CO2 must not be allowed to exceed 450 parts per million (it is now nearly 390 ppm).
This implies that before 2050 global emissions of CO2 must be reduced to below 50% of the 1990 level (they are currently 15% above that level), and that average emissions in developed countries must be reduced by at least 80% of the 1990 level.
The United Kingdom has already committed itself to a binding target to reduce emissions by that amount, and President Barack Obama has expressed intention that the United States should also set that target.
One clear requirement is that tropical deforestation, which is responsible for 20% of greenhouse gas emissions, be halted within the next decade or two.
Regarding emissions from the burning of fossil fuels, the International Energy Agency (IEA) in its “Energy Technology Perspectives” has set out in detail the technologies and actions that are needed in different countries and sectors to meet these targets.
For the short term, the IEA points out that very strong and determined action will be necessary to ensure that global CO2 emissions stop rising (the current increase is more than 3% per year), reach a peak by about 2015, and then decline steadily toward the 2050 target.
The IEA also points out that the targets can be achieved without unacceptable economic damage.
In fact, the IEA lists many benefits that will be realized if its recommendations are followed.
What is required now is recognition that anthropogenic climate change will severely affect our children, grandchildren, the world’s ecosystems, and the world’s poorer communities, and that the severity of the impact can be substantially alleviated by taking action now.
The Truth about NATO Burden-Sharing
BRUSSELS – When discussing Afghanistan, many newspapers continue to suggest that some of Europe’s NATO allies are under-performing in Afghanistan, and are either unable or unwilling to make a greater effort.
Naturally, these allies feel that their efforts are under-valued.
What is a fair and equitable burden?
First of all, the debate about burden-sharing should not be reduced solely to today’s force levels in Afghanistan, because, however important these force levels are, they tell only part of the story.
So let me broaden the debate and offer a more holistic perspective by covering three interconnected elements: defense transformation, operations, and the wider context of the international community’s efforts.
Defense transformation is a key aspect of burden-sharing.
It is a golden rule within the alliance that the bulk of NATO’s forces and capabilities are owned by individual nations – the alliance’s fleet of Airborne Warning and Command System (AWACS) aircraft is a rare exception.
As I don’t expect nations to abandon this principle, NATO will continue to depend on individual allies and their willingness to commit resources.
Contrary to popular opinion, the type of forces and capabilities needed by NATO are not as widely available in national inventories as one might think.
Large proportions of NATO allies’ armed forces are still better suited for static territorial defense than for the expeditionary type of operation needed in Afghanistan.
And, when the right type of forces and capabilities do exist, operations led by the United Nations, the European Union, or ad hoc coalitions, as well as national requirements, place additional demands on these assets.
Developing the necessary expeditionary capabilities is a major feature of NATO’s transformation process.
But it is not possible to convert territorial forces into expeditionary forces overnight, and the costs of transformation often must compete with the costs of deploying forces for operations.
Many allies face the dilemma of either spending money on operations or investing in new acquisition programs.
Moreover, many allies’ failure to respect the 2%-of-GDP target for their defense budgets exacerbates this dilemma, and also widens the capability gap with those allies that are investing in usable and deployable forces.
But, while there is no substitute for appropriate defense budgets, we could get more from current spending levels, especially through a smarter approach to defense acquisition.
Unfortunately, despite the efforts of NATO and the EU, Europe’s defense sector remains fragmented, which leads to duplication, unhelpful competition from too many rival systems, and, significant capability gaps or incompatibilities.
In Afghanistan, for example, national systems for friendly-force tracking, which are vital to preventing accidental attacks on one’s own forces or allies, are not compatible.
Extra time and money has therefore had to be invested in the acquisition of these capabilities.
In Europe, many national defense budgets can no longer sustain both fully-fledged national forces and a national defense industry.
Only smarter multinational and transatlantic cooperation will give us forces that are capable of dealing with today’s security challenges.
In an alliance founded on the principle of “all for one, and one for all,” it is vital that all nations are seen to contribute fairly to operations.
Thus, NATO, developed a burden-sharing mechanism to assess members’ manning commitments for critical operational activities relative to their gross national income.
This sort of arithmetic has the merit of giving some indications about burden-sharing, but it has also been shown that burden-sharing cannot be fully captured in graphs and spreadsheets.
How does one decide what is a fair contribution from a country of 50 million people compared to a country with only four million?
How can you evaluate a contribution of light infantry against the provision of critical enablers such as helicopters or air-to-air refueling tankers?
Over what time period do you make your calculations?
Common funding, with all members paying a share according to their GDP, is one instrument that can be used to achieve more equitable burden-sharing.
Traditionally, NATO applied a policy of “costs lie where they fall”: each member picked up all the costs for the operational contribution that it made to an Alliance operation.
During the past couple of years, NATO’s funding policy has been updated to allow common funding to be used as an incentive for the provision of certain theater-level enabling capabilities, like medical facilities, airports handling troops and supplies, or intelligence.
Burden-sharing is a sensitive issue, for both NATO and the international community, and passions sometimes run high.
By stepping back and looking at the broader picture, it is clear that it is not just a matter of having the right capabilities, but also of having the money and political will to deploy them.
No single measure can resolve the burden-sharing problem.
But the range of initiatives now underway within NATO should help: transformation efforts to increase the pool of usable and deployable forces; wider use of multinational initiatives; greater reliance on common funding to assist force generation; and a comprehensive approach for sharing burdens more equitably across the entire international community.
An alliance like NATO, in contrast to many “coalitions of the willing,” has the political consultation structures, proven planning mechanisms, effective command and control, and legitimacy that encourages nations to contribute to an operation.
Alliance solidarity is not just a slogan.
The sense of keeping one’s obligations and commitments to other allies, upon whom one’s own security ultimately depends, is a powerful motive for equitable burden-sharing.
Totally fair burden-sharing may not be possible, but a security organization like NATO undoubtedly allows us to come closer to it than any other approach.
The Truth about Negotiations
ATHENS – When people and countries negotiate, they often talk about their interests as though they were the only matters that could elicit agreement.
In casting his veto at the European Union’s December summit in Brussels, British Prime Minister David Cameron said, “What is on offer isn’t in Britain’s interests, so I didn’t agree to it,” as if agreement solely depended upon whether or not interests were satisfied.
Then again, reaching an agreement might never have been Cameron’s goal.
While so-called “win-win” outcomes are increasingly considered to be the ultimate purpose of every negotiation, what if the negotiating parties contemplate a win-win outcome that actually harms non-participants to the talks, or is against the law?
What if the outcome is beneficial but contrary to the principles of the negotiating parties?
Imagine that you are at a negotiating table and want the other party to agree with you.
A strategy that could work would be to stress how the outcome is beneficial to everyone involved.
But the outcome you propose might not be fair, or realistic, or you might be consciously lying. So, although based on interests, such a proposal will not be easily accepted.
Indeed, when one ponders how many issues there are to consider, it becomes obvious that negotiation is a type of communication that involves far more than interests.
Principles, morality, and simple respect for the truth guide agreement as much as interests do.
Some would argue that successful negotiators require only tact – the ability to use principles to conceal one’s true interests.
If this were correct, the United States was right to wage war on Iraq on the basis of the threat posed by Saddam Hussein’s regime.
But it is now widely accepted that the way in which the US negotiated its way into war was a mistake – one that has cost it enormous credibility as a negotiating partner.
In fact, the US often stands for high principles, such as freedom and democracy, and incorporates them successfully into its foreign policy.
Defending economic aid to Europe after World War II, General George C. Marshall, then US Secretary of State, gave an inspirational speech that argued that US policy is not directed against “any country or doctrine, but against hunger, poverty, desperation, and chaos.” The Marshall Plan was as much about principles as it was about protecting US interests.
Even if the Cameron government’s rhetoric seems to be focused on “interests,” its negotiating positions also reflect higher principles, just as other countries’ do.
The United Nations and other organizations bear witness to countries’ commitment to principles of justice and solidarity, and to their willingness to set aside their narrow agendas to serve higher causes. Negotiation should address these causes no less than it speaks to interests.
None of this is to deny that interests do, after all, play a role in negotiations, or that interests can affect morality.
Immanuel Kant famously argued otherwise – that morality should be free of non-universal interests.
But the contemporary philosopher Jürgen Habermas argues that moral norms are valid as long as people accept them freely after having considered the consequences of their implementation for the satisfaction of interests.
Of course, consideration of interests means just that: they must be taken into account; they do not have to be entirely satisfied.
In some cases, the defense of interests alone might seem appropriate –&#160;for example, in certain business transactions.
The more complicated a negotiation, though, the more difficult it is to disregard complex issues such as values and norms or the importance of being sincere.
As Aristotle said: “that which is true and better is naturally always easier to prove and more likely to persuade.”
If negotiations truly need proper argumentation of this sort, it surely makes sense that many differences are resolved outside the context of negotiations.
Likewise, certain “negotiations” are not negotiations at all, but are better understood as processes of extortion and blackmail.
In today’s globalized world, true negotiation is necessary.
Countries and peoples form an interconnected web of interests that cannot be easily disentangled and satisfied in an isolated manner.
Resolving disputes requires mutually accepted principles that guide how individuals and countries interact.
Negotiation is the path toward successful conflict resolution, but it should be conducted according to basic rules of true and open communication.
Countries and peoples should stop debating the interests that often divide them and start discussing the principles that unite them.
As long as communication is conducted truthfully and with respect to values, norms, and objective facts, negotiations will be able to achieve consensus and agreement.&#160;
The Truth About the Yugoslav Truth Commission
When dictatorships fall, how can societies heal the wounds?
Truth commissions are increasingly seen as the way forward.
But when do they work best and what structures and rules make them work most effectively?
When are they a means to unearth the truth and restore social peace and when are they merely a clever way for politicians to avoid responsibility and a reckoning with the past?
Serbia is a test case for all of these issues.
In one respect, the body appointed by President Vojislav Kostunica to examine the crimes of Yugoslavia’s recent past is like South Africa’s successful model: it is called a "Truth and Reconciliation Commission."
The resemblance ends there.
South Africa's Truth and Reconciliation Commission was established by legislation after careful consideration by parliament and extensive discussion across the country.
Fourteen months elapsed between the time Justice Minister Dullah Omar announced the government's intention to establish a commission and its signature into law by President Nelson Mandela.
The mandate and the operating procedures of the Commission were clearly spelled out. A timetable for the Commission to report was specified.
Measures were incorporated to ensure that the Commission would obtain the testimony of perpetrators as well as victims.
Though the South African Cabinet decided that the hearings at which perpetrators would disclose their crimes should be closed, Parliament amended this to require that they should do so in public.
Funds were appropriated for the Commission's operations. After the law was signed President Mandela appointed a committee to assist him in identifying those who should serve.
299 names were submitted. The committee held public hearings and selected 25 to forward to President Mandela.
He chose 17, appointing Archbishop Desmond Tutu, a man widely acknowledged as South Africa's moral conscience, to chair the Commission.
The contrast in Yugoslavia is stark.
Yugoslavia’s Commission was appointed by President Kostunica with only the vaguest of mandates, and with no procedures, no budget, no timetable, and no Chairman.
Parliament was not involved. The Yugoslav President acted on his own.
The Commission's appointment has been little noted in the Yugoslav press.
Kostunica's off-hand way of creating the Commission signaled to the public that this is not serious.
The recent resignations of two of the Commission’s most respected members exposed the body’s fundamental flaws.
It brought into question whether a commission lacking the authority to secure testimony from victims can make any progress towards a real understanding of the crimes committed, and the roots of the wars, in neighboring Croatia, Bosnia-Herzegovina, and Kosovo.
The resignations also showed that prominent Serbs have their own doubts about President Kostunica’s ill-conceived approach.
A real truth commission could play a useful role in Yugoslavia.
The International Criminal Tribunal for the former Yugoslavia in The Hague has publicly indicted Slobodan Milosevic and a small number of other Serbs for crimes committed on a large scale.
Like it or not, President Kostunica will probably not escape his obligation to turn them over for trial.
He should not be misled by the certification granted to Yugoslavia by President Bush following the arrest of Milosevic on corruption charges.
Indeed, international and domestic support for the Hague Tribunal are increasing and Milosevic, General Ratko Mladic and other indictees now sheltered by the Yugoslav government will have to face charges for the horrendous crimes committed under their leadership in the wars they started over the past decade.
Yet a broader-ranging inquiry by a well-conceived truth commission could do much to supplement criminal trials in helping their fellow Serbs to confront their own political responsibility for those crimes.
It is not self-evident how a Yugoslav truth commission should operate.
Its most difficult task will be to obtain the testimony of the victims.
Why would Croats, Bosnian Muslims and Kosovar Albanians go to Yugoslavia to talk about the crimes committed against them by the military and paramilitary forces controlled by Belgrade?
What incentives could be provided to induce them to testify?
Could the Commission obtain their testimony outside Yugoslavia?
If it cannot obtain the testimony of the victims, what other means could be used to document the crimes that it should consider?
Truth commissions in a few Latin American countries played a valuable role even though they were not able to obtain testimony from perpetrators but there is no precedent for a commission performing usefully without hearing from the victims.
In mid-May, a public conference on truth commissions will be held in Belgrade under the sponsorship of Radio B-92, a Belgrade station that distinguished itself by its outspokenness during the Milosevic years and continues in its independent ways.
Some of those who played key roles in the South African Commission and in truth commissions from all over the world will attend that conference.
President Kostunica is also slated to participate.
He would be well advised to shelve the commission he appointed as a false start, listen to the participants in B-92's conference and then start again.
The Tsunami Effect
The extraordinary international response to the tsunamis that devastated South Asia is a remarkable political phenomenon.
Though it is too soon to predict all the effects, some good consequences are already evident, as are some that are troublesome and others whose impact will play out over time.
One useful consequence is that wealthy countries’ low levels of assistance to those less fortunate has gained wider attention.
Plainly, the comment by Jan Egeland, the United Nations official in charge of humanitarian assistance, calling the West “stingy,” hit home, especially in the United States.
At that point, the Bush administration had committed a measly $35 million in aid.
While condemning Egeland’s comment, Bush quickly multiplied America’s commitment ten-fold.
In addition, he enlisted former Presidents George Bush and Bill Clinton to lead a private fundraising effort.
This neatly fit a standard response to criticism of the level of American assistance: that private philanthropy exceeds government aid.
Depending on what monies are included, this is true, although the British, Dutch, Germans, French, and other Europeans are also generous donors, despite lacking the tax benefits that encourage private philanthropy in the US.
Moreover, like official US assistance, a relatively small share of American private philanthropy ordinarily goes to the poorest countries.
In contrast, the countries that are most generous – Norway, Sweden, Denmark, the Netherlands, and tiny Luxemburg – give proportionately far more than American governmental and private assistance combined, and the lion’s share of their aid goes to the world’s most impoverished countries.
In the wake of the tsunamis, it seems possible that the US and other wealthy countries will rethink their assistance programs and, possibly, step up their aid to those most in need.
Perhaps even some oil-rich governments will be embarrassed by attention to their miserliness in doling out assistance.
But there is also a risk that assistance for tsunami victims is diverting aid from disasters that are of a more chronic character or that are less amenable to sensational media coverage.
In announcing that it would stop accepting donations for the victims of the tsunami after collecting €40 million for that purpose, Médecins Sans Frontières noted its urgent need for funds for such man-made catastrophes as Darfur in Sudan and for the Democratic Republic of Congo.
In recent years, many more people have died in the conflicts in Sudan and Congo than were killed by the tsunamis.
Some were direct victims of the fighting in those countries, while a much larger number died from war-related hunger and disease.
Similarly, the number of those forcibly displaced is a multiple of those who lost their homes and livelihoods due to the tsunamis.
Yet MSF was able to collect only €650,000 in two months of soliciting funds for Darfur, while it received €40 million for the tsunami victims in just eight days.
Given the limited number of skilled personnel available to humanitarian agencies, human resources could follow the money.
Another question likely to loom large in coming months is whether assistance is politicized and free of corruption.
Politicization is important because the two countries that were hardest hit, Indonesia and Sri Lanka, both suffer armed conflicts in tsunami-hit regions.
Aceh province in Indonesia was previously largely closed to outsiders.
It was ruled by the Indonesian army, which fought a brutal civil war against the separatist Free Aceh Movement.
Similarly, northern Sri Lanka is the main battleground for the long-running conflict between government forces and the Liberation Tigers of Tamil Eelam.
Despite headway towards settling that struggle, violence continues and could erupt again in full fury.
Germany, where combined public and private aid for tsunami victims has reached $1.1 billion (making it the largest international donor), says that it would like its aid to be used to foster peace settlements.
A worthy goal, but successful models do not come readily to mind.
More common is a situation like that of ex-Yugoslavia.
During the wars in Croatia and Bosnia the UN was responsible for humanitarian assistance and also dedicated to peacemaking.
Yet it was never able to use the former to advance the latter.
It would not be the first time that a government misused aid intended for disaster victims.
A notorious example is Nicaragua after the earthquake that leveled the capital, Managua, in December 1972. Nicaragua’s dictator, Anastasio Somoza, diverted much of the international assistance meant for the survivors into his own pockets and those of his cronies.
In the process, he incited popular support for the left-wing Sandinista guerrillas who toppled his government later in the decade.
The tsunamis provide an opportunity for the UN to reclaim the high ground that it lost recently.
Battered by the Iraqi “oil for food” scandal, which, at the least, demonstrated mismanagement, and misdeeds by officials ranging from former Dutch Prime Minister Ruud Lubbers (now High Commissioner for Refugees), who faces allegations of sexual harassment, to rapes committed by UN peacekeeping troops in Congo, the UN has a chance to rehabilitate its reputation by managing the relief effort effectively.
Doing so requires putting the right person in charge — someone like Paul Hoffman, the American industrialist who managed the Marshall Plan more than half a century ago and, subsequently, headed the UN Development Program.
It also requires making sure that the person in charge gets the staff assistance and the political backing required to do the job well.
The Tunisian Catalyst
DAVOS – The whole world celebrates Tunisia’s democratic revolution, which has set off a cascade of events elsewhere in the region – particularly in Egypt – with untold consequences.&#160;
The eyes of the world are now set on this small country of ten million, to learn the lessons of its recent experience and to see if the young people who overthrew a corrupt autocrat can create a stable, functioning democracy.
First, the lessons.
For starters, it is not enough for governments to deliver reasonable growth.
After all, GDP grew at around 5% annually in Tunisia over the last 20 years, and the country was often cited as boasting one of the better-performing economies, particularly within the region.
Nor is it enough to follow the dictates of international financial markets – that may get good bond ratings and please international investors, but it does not mean that jobs are being created or that standards of living are being increased for most citizens.
Indeed, the fallibility of the bond markets and rating agencies was evident in the run up to the 2008 crisis.
That they now looked with disfavor at Tunisia’s move from authoritarianism to democracy does not redound to their credit – and should never be forgotten.
Even providing good education may not suffice.
All over the world, countries are struggling to create enough jobs for new entrants into the labor force.
High unemployment and pervasive corruption, however, create a combustible combination.
What matters is a sense of equity and fair play.
If, in a world of scarce jobs, those with political connections get them, and if, in a world of limited wealth, government officials accumulate masses of money, there will be justifiable outrage at such inequities – and at the perpetrators of these “crimes.”
Outrage at bankers in the West is a milder version of the same basic demand for economic justice that we saw first in Tunisia, and now across the region.
Virtuous though democracy is – and as Tunisia has shown, it is far better than the alternative – &#160;we should remember the failures of those who claim its mantle, and that there is more to true democracy than periodic elections, even when they are conducted fairly.
Democracy in the United States, for example, has been accompanied by increasing inequality, so much so that the upper 1% now receives around one-quarter of national income – with wealth being even more inequitably distributed.
Indeed, most Americans today are worse off than they were a decade ago, with almost all the gains from economic growth going to the very top of the income and wealth distribution.
And corruption American-style can result in trillion-dollar gifts to pharmaceutical companies, the purchase of elections with massive campaign contributions, and tax cuts for millionaires as medical care for the poor is cut.
Moreover, in many countries, democracy has been accompanied by civil strife, factionalism, and dysfunctional governments.
In this regard, Tunisia starts on a positive note: a sense of national cohesion created by the successful overthrow of a widely hated dictator.
Tunisia must strive to maintain that sense of cohesion, which requires a commitment to transparency, tolerance, and inclusiveness – both politically and economically.
A sense of fair play requires voice, which can be achieved only through public dialogue.
Everyone stresses the rule of law, but it matters a great deal what kind of rule of law is established.
For laws can be used to ensure equality of opportunity and tolerance, or they can be used to maintain inequalities and the power of elites.
Tunisia may not be able to prevent special interests from capturing its government, but, if public financing of electoral campaigns and restrictions on lobbying and revolving doors between the public and private sectors remain absent, such capture will be not only possible, but certain.
Commitments to transparent privatization auctions and competitive bidding for procurement reduce the scope for rent-seeking behavior.
There are many balancing acts to be mastered: a government that is too powerful might violate citizens’ rights, but a government that is too weak would be unable to undertake the collective action needed to create a prosperous and inclusive society – or to prevent powerful private actors from preying on the weak and defenseless.
Latin America has shown that there are problems with term limits for political officeholders, but not having term limits is even worse.
So constitutions need to be flexible.
Enshrining economic-policy fads, as the European Union has done with its central bank’s single-minded focus on inflation, is a mistake.
But certain rights, both political (freedom of religion, speech, and press) and economic, need to be absolutely guaranteed.
A good place for Tunisia’s debate to begin is deciding how far beyond the rights enshrined in the Universal Declaration of Human Rights the country should go in writing its new constitution.
Tunisia is off to an amazingly good start.
Its people have acted with purpose and thoughtfulness in setting up an interim government, as Tunisians of talent and achievement have, on a moment’s notice, volunteered to serve their country at this critical juncture.
It will be the Tunisians themselves who will create the new system, one that may serve as a beacon for what a twenty-first-century democracy might be like.
For its part, the international community, which so often has propped up authoritarian regimes in the name of stability (or on the principle that “the enemy of my enemy is my friend”) has a clear responsibility to provide whatever assistance Tunisia needs in the coming months and years.
The Turkish Chimera
WASHINGTON – The dramatic revolts in Tunisia, Egypt, and Libya have acted as a catalyst for a broader Arab awakening that has fundamentally shaken the Middle East’s political order, which has been in place since the late 1970’s.
While it is too early to predict the final outcomes, several important regional implications are already beginning to emerge.
First, the revolts are a double-edged sword for Iran.
The Iranian regime may benefit from the ouster or weakening of pro-Western Arab leaders and regimes in Egypt, Jordan, and Saudi Arabia, but Iran’s initial encouragement of the democratic uprisings in Tunisia and Egypt came with a sting in the tail.
Iranian officials had to shift gears quickly once their own population began to call for the same democratic rights, suggesting that Iran could face stronger pressures for democracy and political change over the medium and long run.
Second, the upheavals threaten to leave Israel more isolated.
With Mubarak gone, Israel has lost its most important regional partner.
Indeed, given the serious deterioration in Israel’s relations with Turkey, Mubarak’s departure has deprived it of its two most demonstrable allies in the region.
While Egypt’s interim military regime has pledged to adhere to the 1979 peace agreement, a new, more democratic government could adopt a different attitude.
Third, the pressures for democratic change have significantly bolstered Turkey’s regional influence.
While the United States and the European Union initially hedged their bets, Turkish Prime Minister Recep Tayyip Erdoğan sided squarely with the demonstrations for democracy in Tahrir Square – a move that enhanced Turkey’s prestige among the democratic opposition in Egypt and elsewhere in the region.
Many Arabs regard the brand of moderate Islam espoused by Turkey’s ruling Justice and Development Party (AKP) as a possible model for the Middle East.
Many Turks have begun to see things the same way.
In a recent interview, Erdoğan noted that Turkey could be a “source of inspiration” for countries in the Middle East, because it has shown that Islam and democracy can coexist harmoniously.
At first glance, the Turkish model – with its emphasis on secularism and democracy – has obvious appeal in a region burdened by corrupt, autocratic, incompetent, and inefficient governments.
But Turkey’s historical experience and political evolution differ in important ways from Arab countries’.
As a result, its model cannot easily be transplanted.
Turkish Islam is more moderate and pluralistic than elsewhere in the Middle East, and, since at least the late Ottoman period, Turkey has sought to fuse Islam and Westernization.
This differentiates Turkey from most other Muslim countries in the Middle East, and has enabled it to avoid the sharp dichotomies, ruptures, and violence that have characterized political modernization elsewhere in the region.
The rise of the AKP’s moderate brand of Islam was largely in response to internal factors, particularly the cumulative effects of several decades of democratization and socioeconomic transformation, which gave rise to a new entrepreneurial class in Anatolia that was economically liberal but socially and politically conservative.
This class, one of the AKP’s main pillars of electoral support, does not exist elsewhere in the Middle East.
Moreover, the Turkish model owes much to the leadership of Kemal Ataturk, founder of the Turkish Republic.
Ataturk, a committed Westernizer and political visionary, transformed the multinational Ottoman empire into a modern state based on Turkish nationalism.
But, in transforming Turkey, Ataturk did not begin entirely from scratch.
The process of Westernization and modernization had begun in the late nineteenth century under the Ottomans during the period of the Tanzimat.
While the Kemalists sought a radical break with the Ottoman past, there were important elements of continuity between their Westernization efforts and those undertaken in the late Ottoman period.
Both were elitist and state-driven.
These important pre-conditions do not exist in the Arab Middle East.
Most countries in the region lack strong independent political institutions and traditions on which to build a democratic political order.
They also lack a vibrant civil society.
Ultimately, the Arab countries do not have the benefit of Turkey’s tradition of moderate Islam or its history of successfully fusing Islam and Westernization.
As a result, the collapse of the old power structures in many Middle East countries is likely to be accompanied by considerable political turmoil and violence.
Taksim and the Left
ISTANBUL – The small park in Taksim Square in the sprawling metropolis of Istanbul is one of the few green spaces left in the city center.
On May 28, a handful of Turkish environmentalists started a peaceful protest against a redevelopment plan for the park that would replace the greenery with a replica of an Ottoman-era army barracks, a shopping mall, and apartments.
But heavy-handed police repression launched a massive civic movement that has spread to the entire country.
The redevelopment plan for the park triggered a huge protest against what a large segment of the Turkish public, particularly young people, considers paternalistic and authoritarian political leadership.
The movement’s rapid growth was fueled by widespread opposition to what many regard as official efforts to regiment lifestyles, as well as by frustration over perceived economic inequities.
Indeed, though environmentalists and secular youth spearheaded the protest movement, it became remarkably diverse and inclusive almost overnight.
Pious Muslims – particularly those who believe that Turkey’s urban development has created too much rent-seeking and too many easy fortunes – joined the demonstrations as well, as did some far-left groups.
Some of the protests became violent.
Overall, however, the movement has remained peaceful and even joyous.
Moreover, important figures in or close to the ruling Justice and Development Party expressed their willingness to hold a dialogue with the protesters.
President Abdullah Gül, in particular, played a calming, statesmanlike role.
A striking feature of the protests has been the distance that the demonstrators have put between themselves and existing political parties, including the Republican People’s Party (CHP), the largest force in the center-left secular opposition.
In this sense, the Taksim “sit-in” resembles protests elsewhere, particularly in the advanced democracies, from the “Occupy Wall Street” movement to the protests in Spain and Italy.
To be sure, there are country-specific features to such protests – including, in Turkey’s case, the reaction against lifestyle paternalism.
But social democrats must understand why the protests developed quite independently of existing, organized, center-left politics.
Without such realism, the center left in Europe and the emerging world cannot regain political momentum.
Modern production systems, in which information technology plays an increasingly crucial role, are totally different from the large factory floors that characterized the birth of trade unionism and social democracy.
The way much of GDP is now produced has made it significantly harder for the left to organize in traditional ways.
That has weakened center-left parties.
Yet information technology and global social media have empowered people to overcome social fragmentation along occupational, residential, and national lines.
On some recent days, posts about Taksim Square have reportedly occupied a huge part of the entire world’s “Tweet space.”
In this corner of cyberspace, there is, of course, everything under the sun, including calls for the worst sort of sectarianism.
Nonetheless, what dominates is a desire for individual freedom, an acceptance of diversity, great concern for the environment, and a refusal to be “organized” from above.
Kemal Kılıçdaroğlu, the CHP’s reformist leader, quickly recognized these dynamics: “The demonstrators don’t want us on the front lines,” he said, “and we have much to learn from these events.”
And yet, while civil society can be a trigger, sooner or later democratic politics has to drive the process of change.
Whether in New York, Paris, Madrid, Rome, Istanbul, or New Delhi, a feeling of unease and a desire for change has emerged in societies that are becoming increasingly unequal, and in which politics and business mix in non-transparent ways.
Rising youth unemployment and cuts in pensions and social expenditures come at a time when many large multinational corporations legally avoid taxes by shifting their profits to favorable jurisdictions.
In the eurozone, stock prices are soaring, while joblessness is at a record-high 12.2%.
The democratic opposition can address the flaws of the existing order only if it recognizes the need for very different forms of mobilization from those of the past.
It must recognize a strong popular desire for individual autonomy, more leadership positions for women and the young, and greater support for individual enterprise (along with reforms of social insurance that make it cost-effective and truly inclusive).
Finally, the environment, climate change, and global solidarity will be defining themes of the twenty-first century.
Acting on their own, nation-states can successfully address neither tax avoidance nor carbon emissions.
The renewed patriotism seen in many places &#160;– a response to the unfairness and dislocation that globalization can generate – must be reconciled with human solidarity, respect for diversity, and the ability to work across national borders.
The success of Germany’s Green Party reflects the focus that it has placed on many of these issues.
The events that started in Taksim Square are specific to Turkey, but they mirror aspirations that are universal.
The same can be said for the challenge facing the democratic left.
The Twilight of France’s Republican Aristocracy
PARIS – No tumbrils have appeared in Paris’s Place de la Concorde, but a revolution may be underway in France nonetheless.
Recent weeks have seen the trial of former Prime Minister Dominique de Villepin and the conviction of former Defense Minister Charles Pasqua.
Now even former President Jacques Chirac has learned that he is not immune from prosecution.
Is France’s “Republican Monarchy,” to borrow a phrase from Jean-François Revel, about to be overthrown?
The French Revolution never actually ended the privileges of France’s ruling elites.
True enough, some aristocratic heads rolled, but the nobility eventually returned to France.
When the Republic replaced the monarchy for good, in 1875, ballots replaced birthright, but the new governing elite believed that it possessed the same rights and perks as the former aristocrats.
But the concept of the “Republican monarchy,” which is mostly concerned with the mores of French presidents and their entourages, did not really take hold until the Fifth Republic.
Once elected, the French president and his court gain access to financial privileges that are not always legal.
Moreover, they live behind a shroud of secrecy: how they use official airplanes, the civil servants they employ for personal service, not to mention the mistresses, has always been more or less considered private territory.
Journalists avoided commenting on these matters.
The public either was unaware of any excesses, or deemed the ruling elite corrupt by definition.
The apex of the aristocratic Republic was reached under the Socialist President François Mitterrand, who ruled from 1981 to 1995.
Unknown to the public, a government jet would ferry him to Egypt to spend weekends with his mistress and his illegitimate daughter.
Only the media elite knew, and they never mentioned it.
Chirac, who succeeded Mitterrand as president, was only slightly more cautious.
All this has changed.
In less than a week, Pasqua was sentenced to three years in jail for illegal arms trading with Angola.
Villepin, a former Prime Minister for Chirac, awaits judgment on charges of having organized a smear campaign against his rival for the presidency, Nicolas Sarkozy.
Chirac’s indictment is remarkable for the very modesty of his supposed crime: he is suspected of having asked city bureaucrats to work for his political party and run his electoral campaigns when he was mayor of Paris.
On a lighter note, Sarkozy’s Minister of Culture Frédéric Mitterrand, the nephew of the former president, is being excoriated by the media for supporting Roman Polanski against efforts by the United States to extradite him to face punishment for the rape of a minor three decades ago.
It turns out that this Mitterrand shared with Polanski a taste for teenagers (of the same sex in Mitterrand’s case).
So, something of a democratic revolution may be underway in France.
The ancien regime’s supporters call it a “populist” revolution.
But it is a revolution made in the courts, not the streets.
French judges have become more independent than they traditionally were.
Inspired by Italy’s investigating magistrates who took aim at the mafia bosses, and those Spanish judges who act as social redeemers, some French judges are determined to democratize the French Republic and eradicate corruption.
The Internet is a seminal lever in this process.
Today, President Mitterrand’s mistress and daughter could not benefit from the media’s complicity: no state secrets, and no aristocratic excess, can escape today’s bloggers.
Is the private life of France’s elite also now to be exposed?
This right to a private life, including extramarital affairs, has always been a sacred cow of French politics.
The journalists who knew about Mitterrand’s second wife argued that it was a private matter.
And so it would have been had he not used state funds to provide his other family with lodgings, chauffeurs, and jets for their Egyptian weekends.
Today, many French journalists still resist the temptation to expose the private lives of the political elite. But this is a lost battle: the bloggers do not share the journalists’ ethics.
Sarkozy understands the new rules of the game.
As soon it was known that he had an intimate relationship with a former fashion model, he decided to marry her, avoiding any further embarrassment.
But aristocratic habits do not die easily, even in Sarkozy’s overexposed regime.
Sarkozy’s son, Jean, has already been elected to a major local government office at the tender age of 22.
Being as ambitious as the father, Jean Sarkozy recently tried to have himself appointed as chairman of a powerful public company.
Bloggers, followed by traditional journalists, went up in arms against such blatant nepotism.
Young Sarkozy withdrew.
France, it seems, does not yet share the real democratic culture of, say, Scandinavia.
French ministers have yet to be seen taking the bus or the subway to their offices.
French ministries still occupy the former eighteenth-century palaces of the King and his nobility.
As long as the governing elite works in this splendor, one cannot expect that they will ever behave like common mortals.
As Bossuet, Louis XIV’s confessor, declared to the Sun King: “You’ll die, but you are immortal.”
But, like French hauteur in international affairs, the end of an era may be at hand.
The Twilight of Pervez Musharraf
It is said that political power in Pakistan flows from the three A’s: Allah, the Army, and support from America.
Of the three, it is the army leadership that has the clearest means of ridding the country of Pakistan’s president in uniform, Pervez Musharraf.
And that’s the main reason any power-sharing deal with former Prime Minister Benazir Bhutto is unlikely to end Pakistan’s political turmoil.
Musharraf hoped to extend his presidency this fall without caving in to opposition demands that he renounce his military position and restore a civilian rival to the post of prime minister.
But few international leaders face such a wide range of sworn domestic enemies.
Since seizing power following a 1999 coup, Musharraf has survived at least three serious assassination attempts.
His anti-terrorist partnership with the United States fatally undermined his political alliance with Pakistan’s religious conservatives even before his government stormed Islamabad’s Red Mosque in July, killing more than 100 people.
The threat of terrorist attacks inside the country will continue to rise.
Musharraf also has plenty of secular enemies.
Their anger, inflamed in March when he tried unsuccessfully to sack the Supreme Court’s independent-minded chief justice, rages on.
The court recently ruled that Nawaz Sharif, who Musharraf unseated eight years ago, must be allowed to return from exile.
Sharif is planning a grand entrance.
His “decisive struggle against dictatorship” – and determined opposition to any deal with Bhutto that excludes him – will intensify.
Musharraf is warning him to remain in London.
America isn’t happy with Musharraf, either.
Some in Washington charge that he has done too little to roust al-Qaeda and Taliban fighters from safe havens along the country’s border with Afghanistan.
His recent flirtation with a plan to bypass Bhutto and declare emergency rule provoked pointed Bush administration criticism.
But it’s the army that is most likely to eventually decide the fate of his presidency.
Musharraf’s rule has given the military leadership a strong role in policymaking, but his eight years in office have badly damaged domestic support for the army’s influence within the government.
His unpopularity has become their unpopularity.
Aware of a potential threat from within their ranks, Musharraf has populated his inner circle with relatively junior (and reliably loyal) officers.
But a deal that makes Bhutto prime minister would undermine the military’s influence – and eventually its support for Musharraf’s presidency.
As prime minister, she could eventually revisit her deal with Musharraf from a position of strength.
Military leaders know this, and the threat that they will eventually push him aside will plague his presidency well into next year.
The army is unlikely to move on Musharraf directly unless subtler methods fail.
The generals know that another coup would further weaken the military’s popular standing – as well as Pakistan’s relations with the US – at a moment when Bhutto and Sharif have raised expectations at home and abroad for a permanent return to civilian rule.
But if Musharraf were to refuse to go quietly, the generals could promise him a long list of public corruption charges that he must survive without their protection.
Musharraf’s presidency won’t survive long without military backing.
To preserve the appearance that their meddling is benign, senior military officers probably know that they cannot afford to install another general as president.
Instead, they will most likely support cosmetic political reforms, including a new law that formally separates the roles of army commander and head of state.
That is the strategy the military adopted in 1988, following the mysterious plane crash that killed former President (and General) Mohammed Zia ul-Haq.
The army leadership ordered elections, permitted the formation of a civilian government, and then stage-managed the political process from the wings.
Bhutto, the leader of a secular party that now enjoys substantial support in Washington, would dominate policy planning in the next government at Musharraf’s expense.
She must build on her domestic support, but she can rely on economic and security cooperation with America to safeguard the country’s stability.
In addition, the military’s role as guarantor of stability, and its tight control of Pakistan’s nuclear arsenal, the army’s crown jewels, will continue.
The Bush administration can therefore enthusiastically back a return to civilian rule and claim a much-needed victory for democracy in a Muslim country.
But Bhutto would inherit Musharraf’s domestic enemies.
Sharif would fulminate against her every misstep, threats of attack from religious radicals would continue, and the military would safeguard its interests from just off stage.
Adding to the pressure, America would expect the kind of cooperation in pacifying Pakistan’s tribal areas that Musharraf has proven unable to provide.
The military will, under any scenario, continue to quell fears of complete political chaos.
But it would also likely ensure that a Musharraf-Bhutto deal does not fully close a tumultuous chapter in Pakistan’s history.
The Two Communities of Europe
Europe finds itself at a paradoxical turning point.
While legal harmonization and constitution- making attest to deepening integration, Europe's institutions have failed to generate what every political community needs in order to survive and thrive: a feeling of belonging.
As long as this is true, integration cannot succeed.
Quite simply, if the European Union is to overcome national parochialism and embrace a shared and binding purpose, it must abandon the rhetoric of accountants and speak in a language that comprehends what is good and bad, beautiful and ugly, right and wrong.
This won't happen automatically or overnight.
Communal values and bonds evolve from a long accumulation of experience, with mythological and historical understandings that give this experience the appearance of having evolved organically.
There is nothing comparable in EU integration, which seems far more like a deliberate choice by an imperial few.
So it is difficult to see how this path could lead to the collective and individual identity that European unification requires.
Instead, Europe should draw on two periods of community building.
Medieval Christianity in its 13th-century formed a community united around a common faith, with Rome as its unifying power center.
Saint Peter's successors as Roman pontiffs oversaw a network of Church-run universities which educated cultural elites in the same way and in the same language (Latin).
A network of churches--built in the same style throughout Europe--shared a common calendar and liturgy.
Medieval Christianity was by nature European, although it avoided the word itself and accepted all national forms of cultural expression.
The ``Republic of Letters,'' lasting from Erasmus until the Enlightenment, represents Europe's second community.
As vernacular languages--particularly French--displaced Latin, religious discourse gave way to observation and analysis, with unlimited faith in reason and scientific progress.
A communications network that allowed rapid dissemination of ideas served a common spirit.
Intellectual and cultural ties were reinforced by travel, so that statements such as Montesquieu's--that ``Europe is just one nation made up of many''--flowed naturally.
The emergence of both communities--albeit in pursuit of opposite ends--forms the key reference point for a European identity.
The German philosopher Karl Jaspers once said that European liberty was founded on the antitheses of ``the secular world and transcendence, science and faith, material technology and religion.''
So the EU should not be afraid to affirm both medieval Christianity's community of faith and the modern era's community of reason.
Only this will do justice to the contradictory essence of the European spirit.
But by this standard, the preamble of the draft European Constitution drawn up by the Convention is utterly inadequate.
Initially, the Convention refused to include any mention of Christianity or Europe's Judeo-Christian heritage whatsoever, citing only the Enlightenment tradition, alongside the Greeks and Romans.
Although a compromise solution was provisionally accepted, its message is weak and obscure.
A pity.
To be sure, Europe has paid a heavy and painful price for its religious rifts, and these feuds must not be rekindled.
But the Constitution must not only introduce more clarity, transparency, and efficiency into the workings of European institutions; it must also bring the EU closer to its citizens.
This calls for a bit of ``European metaphysics.''
EU leaders should talk about the European idea and the European spirit in a way that encourages Europe's citizens to think about how they came together, why they are staying together, and what they want to do together.
The answer seems to revolve around the central place that European civilisation has given the human person since mixing barbarian customs with Christianity.
This anthropocentric vision is carried by the Christian tradition in the message that man is made in the image of God and that the Son of God sacrificed himself for man.
But we also find it in the Enlightenment tradition, which declares that man is the measure of all things or that he is vested with grandeur and dignity.
The dual foundation of European thought makes it possible to transcend the conflict between religion and secularism that accompanied the recent debate on the ideological bases of the constitution.
By taking the model of a civilisation that puts man and his dignity in a central position, it can also be the starting point for a genuine discussion on the future of Europe.
The danger here is that ``community values'' might become a partition that generates attitudes and policies of exclusion.
On the contrary, the concept of human dignity must encourage a radical opening towards others. Europe owes it to itself to be pluralist, aware of its cultural debt to the Greeks and Romans, the Arabs and the Jews, learning from its own experience the power of tolerance and the poverty and shame of closed, totalitarian ideologies.
In fact, human rights must define the very image of Europe; it must be its emblem or even its ``religion.''
Human rights should be the ideological benchmark for Europe's internal politics and foreign policy--otherwise, the creation of the post of EU foreign affairs minister will remain a dead letter.
Europe should base the multilateralism of its foreign policy on human rights, while working on reforming international law and the UN system to ensure that human rights win out over short-sighted political calculations.
But most importantly, European integration must not only define institutions and policies, but it must also galvanise ideas.
The role of the intellectual debate on the future of Europe is to strengthen European solidarity, to produce ideas and visions that are powerful enough to show realistically what direction to take, and to mobilise the imagination to build a powerful, courageous, and lucid community.
The Two-Faced Economy
ROME: Italy's economy has two faces.
On one side, sectors of the economy demonstrate extraordinary productivity, and have won big shares of international markets.
For example, the mechanical industries in the Veneto and in Emilia led by Carararo, and Ducati, as well as the optical industry in the Northeast with Luxottica in the lead.
These are firms known across the globe, and which are often the objects of acquisitive interest from foreign competitors or great international investors, such as Piaggio and Stefanel.
On the other hand, Italy's economy as a whole is stagnant: in the last ten years Italy has been growing more slowly than the median in Europe, which is already seeing much lower growth rates than the United States.
In the last eight years per capita GDP has increased, on average, by 3.2% per year in America, 2% in Europe, and only 1.2% in Italy.
How are these two economic facts to be reconciled and what does this divided economy tell us about Europe, east and west, as well as other economies where the percentage of people in work may be stagnant or falling?
The answer is at the same time simple and rich in consequences for economic policy.
GDP per capita (that is, GDP divided by the total population) depends on two factors: the productivity of those who work (that is, GDP divided by the number of people employed), and the number of people who work as a proportion of the population.
In order for an increase in the productivity of those who work to result in a growth of GDP per capita it is necessary that productivity growth not be not nullified by a simultaneous reduction in the number, and thus the proportion, of those who work.
Such a reduction happens not only when unemployment goes up, but also when the number of those who do not participate in the labor force grows: students, retired people, the unemployed who are discouraged and stop looking for work and so abandon the labor force.
In Italy, the country's stagnant GDP masks two phenomena which cancel each other out.
Productivity grows due to the expansion of the most dynamic and efficient firms, but the percentage of those who work is decreasing all the time.
The result is that the productive sectors of the economy do not succeed in "pulling" with them the ever greater mass of people who do not work.
Data on labor force participation is almost incredible.
The ratio of the labor force (that is those who are employed and those unemployed who are actively looking for work) to the number of people of working age is equal to 75% in USA, 76% in Great Britain, around 68% in France and Germany, and 58% in Italy.
This is the lowest number in all of the European Union.
Among OECD countries, the only one with a percentage of participation in the economy lower than that of Italy is Turkey, where 53% of the population makes up the labor force.
Considering that the Italian 58% includes the unemployed, only about half of Italians of working age are now working or even looking for work.
This percentage is lower today than in 1970, while in the United States the equivalent number has increased from 65% to 78%.
True, a small part of the near half of the population who officially do not work are employed in the underground economy, but this is small consolation; certainly it is not in those sectors that the future of the Italian economy is to be found.
What accounts for this propensity of people not to look for work, and why does what is happening in Italy matter to other countries?
First of all, an extremely generous system of retirement benefits makes the "no work" option attractive, though not quite obligatory.
Indeed, abandoning work at an ever younger age relative to the longer life expectancy of Italians is something particularly worrying.
In the second place, low labor force participation is a response to the heightened fiscal pressure that results from the burden of having to pay for all the retirement pensions of today's fifty-year-olds.
The pressure affects those who do work and, because of the heavier tax burden, makes work less attractive for them, especially for the second members of a family.
When a man works and marginal tax rates are very high, the wife very often prefers to stay at home.
Finally, the propensity not to look for work results from a university system that accepts anyone and which does not offer any disincentive to those who seek to indefinitely prolong their so-called "studies."
This state of affairs is reproduced inside individual families: young people of 30 survive thanks to the work of the head of the family, who supports everyone.
Reform of the pension system is often attacked as a zero-sum game, in which whatever one person loses another gains.
Put in these terms, the problem is always solved by giving more to those who have the most political power.
Professor Nicola Rossi, economic advisor to Prime Minister Massimo D'Alema, in the title of his recent book, expresses the wish that we give "Less to the Fathers and More to the Sons."
But if unions are powerful or seniors are in the majority (in Italy the two coincide, because seniors are the majority in all labor unions), the exact opposite happens.
Italy's recent budget, which neither confronted the pensions issue nor the issue of fiscal reform, demonstrates this fully.
Here is the grand delusion of the budget and the Finance Ministry in Italy.
Neither seems capable, and in fact neither has tried to understand, that we are not dealing with a zero some gain.
Those countries who also provide disincentives to work should keep Italy's sluggishness in mind and learn the lessons Italy's government has ignored.
The Two Faces of Berlusconi
Silvio Berlusconi has endured a bumpy first month of his six-month presidency of the EU.
Much of Europe is getting its first close look at Italy's billionaire Prime Minister, and many do not like what they see.
But Europe should look beyond Berlusconi's careless tongue when gauging the nature of his regime.
They may still not like what he stands for and how he governs, but they will see that he is not the unchallenged ``strong man'' that some Europeans imagine.
Berlusconi's center-right coalition won election in 2001 by claiming to be the sole political force capable of launching--and completing--an ambitious reform program.
Sadly for Italy, Premier Berlusconi turned out to have two reform agendas.
One is focused on his own judicial and economic interests (call this his ``personal reform'' program), much of which he has pursued and implemented ruthlessly.
The other, ``general reform'' agenda, has attracted scarcely any of his energy, and seems unlikely to do so.
Italy's Parliament, where Berlusconi's ruling coalition holds an overwhelming majority, has passed four laws designed to safeguard the Prime Minister against prosecution and conviction.
One legal ``reform'' almost abolishes the crime of false accounting; another makes it difficult, if not impossible, to collect evidence of a crime from abroad.
A third new law allows trials to be transferred to courts in other jurisdictions if there is ``legitimate suspicion'' that the judges are ``biased''--a claim Berlusconi repeatedly makes against the Milan magistrates (he calls them ``red magistrates'') investigating him.
Finally, a law grants immunity from prosecution to the five highest state officials, including, obviously, the Prime Minister.
Berlusconi has been equally active in pushing reforms that serve his economic interests.
The Chamber of Deputies is poised to enact a law only the White Queen in Alice in Wonderland could love.
This law defines ``conflicts of interest'' in such a way that, although the Chief Executive Officer (CEO) of a media empire cannot be Prime Minister, the man who actually owns that empire can.
More worrying is a proposed law that strengthens the oligopolistic power of Berlusconi's television and advertising corporations while weakening the public television service.
Where such personally beneficial laws are concerned, Premier Berlusconi is bull-headed, almost wrecking his coalition recently when one junior minister threatened to resign after the justice ministry sought to stop all investigations into Berlusconi's affairs.
But such energy and commitment is utterly lacking where Berlusconi's wider reform agenda is concerned.
For example, the government sought to amend Article 18 of the ``Workers' Statute,'' which compels big firms to reinstate workers dismissed without ``just cause.''
It sought this change because it believed firms would not hire people they could never fire.
Massive industrial action forced the government to back down.
Now it says that such a reform is neither urgent nor necessary.
Similarly, the government proclaims bold intentions to tackle reform of Italy's deeply indebted pension system, but lacks the political leverage to realize change.
Indeed, a powerful component of the Berlusconi coalition, the Northern League, staunchly opposes a core component of the proposed reform--abolition of early retirement--because ending early retirement is contrary to workers' interests in the North, where the party has its electoral base.
The government pledged to reduce the tax burden by about 10% of GDP.
But reaching this figure will not be possible--even if scaled back--because the government seems unable to curb public spending and because the European Commission will not accept new budgetary subterfuges from Finance Minister Giulio Tremonti aimed at evading the constraints imposed by the Euro-zone's Growth and Stability Pact.
On the contrary, state and local taxes actually increased over the past year.
From the Economic and Financial Policy Forecast Document (2003-2008), now being scrutinized by Parliament, one deduces that taxes will fall by a mere 1% of GDP in the period between 2001 (when Berlusconi took office) and 2008.
Finally, the Northern League demands that fiscal federalism should be the main goal of reform.
Umberto Bossi, the League's leader, made three promises before the last elections: to reduce the tax burden; to halt clandestine immigration; and to devolve powers from the central government in Rome to regional administrations.
Bossi now knows that the first two promises cannot be kept.
So he must deliver on the third, or the League will be gravely wounded.
But two other government parties, the National Alliance (a nationalist party) and the UDC (a Catholic one) have their electoral bases mainly in the South and oppose Bossi's project because it conflicts with their interests.
The schisms within the ruling coalition could be overcome if Berlusconi had the strength to distribute the costs and benefits of reform among its member parties.
But Berlusconi's leadership is based on his skill as a communicator (which declines as expectations go unfulfilled) more than on his skill as a mediator among squabbling allies.
Unless a robust international economic boom (unlikely) unexpectedly aids Berlusconi's government, we will hear more talk about reform but see even less action.
So by the time Italy's six-month presidency of the EU concludes, the rude reception Berlusconi received at the European Parliament may find an echo at home.
The Two Faces of Vladimir Putin
Russia’s split personality – symbolized by its Tsarist coat of arms, a two-headed eagle – has been on open display recently.
One minute, President Vladimir Putin’s regime is on a charm offensive, desiring a settlement to its six-decade-old territorial dispute with Japan over the Kurile Islands and reassuring investors following the conviction of oil billionaire Mikhail Khodorkovsky.
The next moment Putin balks at removing Russia’s military garrison from Moldova’s secessionist Transdniester region while prosecutors talk ominously of putting more oligarchs in the dock.
Perhaps the greatest display of this political schizophrenia took place last month in Red Square, where a witch’s brew of Red “Victory” flags, tri-color “Imperial” flags, Stalin portraits, and Orthodox icons marched side by side during the 60th anniversary celebration marking WWII’s end.
Putin took that occasion to repeat his political mantra – “Russia is developing it’s own brand of democracy” – while spurning requests from the Baltic countries that Russia come clean about its deal with Hitler to devour them on WWII’s eve.
This bizarre brew appears to have been concocted in an effort to reconcile the irreconcilable: the current yearning for democracy with Russia’s despotic past.
But, like any muddle, it is succeeding only in confusing Russians about themselves and their country.
Strangely, Putin seems as trapped by this muddle as everybody else.
At times, Putin truly sees himself as a “modernizer” seeking to root Russia in the West.
At other times, like Stalin, he believes that Russia’s power requires a strong hand – what he calls his “dictatorship of law.”
The problem, as Khodorkovsky’s conviction demonstrated, is that dictatorship usually seems to be trumping law.
Historically, attempts at modernization in Russia, even when they look real, as with Stalin’s industrialization or Yeltsin’s market reforms, ultimately result in a Potemkin village-like state of affairs, because Russian society cannot change fast enough or with the patience necessary to see the changes through.
So, when Yeltsin’s American-style democratization of the 1990’s failed to bring “orderly” capitalism instantly, Putin on his accession imposed a restoration of state “order,” as if a stable political or economic system demanded a fusing of the Soviet past with the Orthodox Church and Mother Russia imagery.
Indeed, Putin’s signature characteristic is to be all men for all Russia’s people.
By blending the Soviet past with the Tsarist past and a few shards of Yeltsin-era democracy, Putin seems to think that he can neutralize the extremes of Russian history.
Instead, the extremes seem to be squeezing out the desire for modernization.
High oil prices now seem to be the only factor allowing Putin to keep the reform charade going.
The nineteenth-century czar Alexander III once said: “Russia has only two true allies – its army and its navy.”
Alexander's formula is also popular today with Putin’s nationalists in Moscow and St. Petersburg.
In his pro-imperial Russia film “The Barber of Siberia,” the Oscar-winning director Nikita Mikhalkov – whose father composed the Stalin-era national anthem that Putin recently revived – used the coronation of Alexander III as the symbolic centerpiece of Russia’s greatness, inviting Russian leaders to walk in his footsteps.
This strong-willed monarch, while ruling the Russian empire autocratically, managed to bring stability and prosperity, allowing capitalism to take root.
He worked to strengthen and modernize Russia’s armed forces while avoiding armed conflict.
He became known as “The Peasants’ Tsar,” though he didn’t tolerate any opposition thinking contrary to his own.
Putin sees his own crusade to save Russia from disintegration and separatism as similar to Alexander’s.
But how forward-looking is it to model a twenty-first-century country on the absolutist example of the past?
Stalin is yet another cherished role model.
Here, too, Putin tries to walk on both sides of the street, calling Koba a tyrant to sooth the wounded feelings the Baltic leaders, yet instantly qualifying his remarks by saying that Stalin was no Hitler.
Can we really compare the degree of evil of these two men?
Despite his insistence on rubbing shoulders with world leaders and portraying himself as a modernizer, Putin, like his predecessors, is in fact a ruler who believes that only authoritarian rule can protect his country from anarchy and disintegration.
But the old ideas, the mimicry and symbols Putin employs to achieve his goals, no longer correspond to today’s realities or Russia’s present capabilities.
Previously, it was Russia’s Western mission that was pure Potemkin village.
Now Russianness itself seems to lack a secure foundation, for it is but a hollow shell of discarded state symbols.
Like a bad driver, a nation that looks left and right but never ahead is bound to crash.
The Tyranny of King Cotton
Americans like to think that if poor countries simply open up their markets, greater prosperity will follow.
Unfortunately, where agriculture is concerned, this is mere rhetoric.
The United States pays only lip service to free market principles, favoring Washington lobbyists and campaign contributors who demand just the opposite.
Indeed, it is America’s own agricultural subsidies that helped kill, at least for now, the so-called Doha Development Round of trade negotiations that were supposed to give poor countries new opportunities to enhance their growth.
Subsidies hurt developing country farmers because they lead to higher output – and lower global prices.
The Bush administration – supposedly committed to free markets around the world – has actually almost doubled the level of agricultural subsidies in the US.
Cotton illustrates the problem.
Without subsidies, it would not pay for Americans to produce much cotton; with them, the US is the world’s largest cotton exporter.
Some 25,000 rich American cotton farmers divide $3 to $4 billion in subsidies among themselves – with most of the money going to a small fraction of the recipients.
The increased supply depresses cotton prices, hurting some 10 million farmers in sub-Saharan Africa alone.
Seldom have so few done so much damage to so many.
That damage is all the greater when we consider how America’s trade subsidies contributed to the demise of the Doha Round.
Rather than offering to do away with its cotton subsidies, America offered to open up American markets to cotton imports – an essentially meaningless public-relations move that quickly backfired.
Owing to its huge subsidies, America exports cotton, and it would import little even if formal barriers are removed.
Thus, recent trade negotiations have a surreal air about them, because, whatever their outcome, ultimately cotton subsidies will have to go.
Brazil, frustrated with America’s intransigence, brought a case against US cotton subsidies before the WTO, which ruled as almost any economist would: the subsidies distort world trade and are therefore prohibited.
Faced with the WTO order, the US will try to comply with the letter of the law and avoid its spirit, making changes in the subsidy program to ensure “technical” compliance.
But these attempts will almost surely fail; in the end – though it may take years – cotton subsidies will be eliminated.
Of course, the European Union’s subsidies are far larger, but, in contrast to the US, Europe has made some effort to reduce them, especially export subsidies.
While export subsidies appear more obviously “trade distorting,” America’s cotton and other subsidies are in fact almost as bad.
When subsidies lead to increased production with little increase in consumption, as is typical with agricultural commodities, higher output translates directly into higher exports, which translate directly into lower prices for producers, lower incomes for farmers, and more poverty in the Third world, including millions of cotton farmers eking out subsistence incomes in semi-arid conditions.
America and other advanced countries are the real losers from the demise of the Doha Round.
Had the Bush administration fulfilled its commitments, Americans taxpayers would have benefited from the elimination of huge agricultural subsidies – a real boon in this era of yawning budget deficits.
Americans would have been better off as consumers, too, with increased access to a variety of low-cost goods from poor countries.
Likewise, migration pressure would have been reduced, because it is the huge disparity in incomes more than anything else that leads people to leave their homes and families to immigrate to the US.
A fair trade regime would have helped reduce that disparity.
Indeed, citizens throughout the rich developed world all stand to benefit from a more prosperous globe – especially a world in which there is less poverty, with fewer people facing despair.
For we all suffer from the political instability to which such despair gives rise.
But it is America that perhaps now stands to gain the most by reviving the Doha talks with a more credible and generous offer.
America’s influence in the world has suffered greatly in the last few years; the Bush administration’s hypocritical use of free-market rhetoric while pursuing protectionist policies has made matters worse.
America’s national interests thus dictate a change of policy.
But there is also another powerful rationale for doing so: treating fairly those who are poorer and less powerful is the morally right thing to do.
The Ultimate Computer
The personal computer on my desktop is hundreds of times as fast, and has thousands of times as much memory, as the mainframe computer that served my entire university when I was a student.
Such advances in the processing speed and storage capacity of computers are expected to continue until the laws of physics impose certain limits.
After all, we cannot shrink atoms or increase the speed of light.
Now, imagine a computer technology that eventually approaches these limits.
Imagine further that every star in every galaxy in the observable universe could somehow be fashioned into computers of this ``ultimate'' type.
That would be a lot of very fast computers.
Or if they were connected together we could think of them as a single, massively parallel computer: call it the ``Universe Computer.''
Admittedly, there are tasks - word processing, for example - at which this imaginary computer would be no more useful than any one of its constituent computers operating independently.
But for large, repetitive trial-and-error tasks, such as code breaking, the speed and power of this integrated ``Universe Computer'' would be vastly superior to anything we could ever hope to build, right?
Hold that thought.
Quantum theory - the branch of physics that deals with elementary particles and the microscopic properties of matter - has produced some of our deepest insights into nature, and describes some startlingly counter-intuitive phenomena.
For example, it implies that elementary particles, rather than being located at one position at a time, travel on several trajectories simultaneously.
No one disputes that quantum phenomena, if they could be harnessed, would revolutionize information processing, enabling ways of computing that no existing computer, even in principle, would be capable of duplicating.
Among the tasks for which quantum computing would be ideally suited are ``algorithmic searches.''
Put simply, algorithmic searches are what computer programmers use as a last resort when looking for a mathematical needle in a haystack: they make the computer try every possible answer in turn until it finds the right one.
Obviously, the resources required for such searches are proportional to the number of possible answers: common sense tells us that trying a thousand possibilities requires a thousand times as many operations as trying one.
Trying a million possibilities requires a million times as many operations.
But our ordinary common sense does not apply in fundamental physics.
In 1996, the computer scientist Lov Grover discovered a quantum algorithm - a way to program a quantum computer - that could try out a million possibilities in only a thousand times the time needed to try one, and a trillion possibilities in only a million times the time of one, and so on, without limit.
What would happen inside a quantum computer when it performs an algorithmic search?
The unseemly truth is that most physicists are perplexed and embarrassed by this question.
Many explain away quantum phenomena with weasel words, or worse, they simply eschew explanation altogether.
True, quantum phenomena cannot be observed directly.
But we can deduce their existence and attributes by measuring their effects on things that are directly observable. We have never observed live dinosaurs, either, but we know they existed - and quite a lot about how they worked - from the fossil record.
A growing minority of physicists, myself included, accept the ``many universes'' interpretation of quantum mechanics.
We concluded that what we observe as a single particle is really one of countless similar entities in different universes, subtly affecting each other through a process called ``quantum interference.''
To us, no mystery exists in quantum computation, only wonder.
Quantum computing, according to this view, is possible because a quantum computer performs vast numbers of separate computations in different universes and then shares the results through quantum interference.
The equations of quantum theory describe this phenomenon step by step.
But because such information sharing is achievable only through quantum interference, these same equations also drastically limit the types of task that quantum computation should be able to perform, or speed up.
Direct communication between universes is, for example, ruled out.
In fact, only a handful of potentially useful quantum algorithms are known at present.
Grover's algorithm is one.
Other known quantum algorithms will easily be able to crack the most widely used secure cryptographic systems of today.
Coincidentally, cryptographic systems which themselves use quantum computation are already commonplace in laboratories, heralding the development of communication that is both perfectly secure - even against quantum attack - and immune to future advances in mathematics or technology.
Quantum cryptography happens to be relatively easy to implement.
Unfortunately, we have no computers powerful enough to run any other useful quantum algorithm; building powerful quantum computers is a major scientific and technological challenge for the coming decades.
But theoretical physicists already know how many different types of components are required to make a quantum computer, and how complicated these components must be.
The astonishing answer is that virtually any interaction between two information-carrying entities, including atoms or elementary particles, will do.
As the physicist Seth Lloyd commented, ``almost anything becomes a computer if you shine the right kind of light on it.''
It has long been assumed that a single type of machine, given time and memory, could simulate the behavior of any other state of matter.
It turns out that existing computers, or even the imaginary ``Universe Computer,'' are not the ones.
But a general-purpose quantum computer would be.
In quantum physics, this ``computational universality'' is part of the essence of all matter - and thus of the comprehensibility of nature.
No other branch of physics involves such wide-ranging interaction between theory, experiment, technology, and philosophy.
No other field of scientific research holds more promising implications for our understanding of the universe.
The Unaccountable G-8
NEW YORK – In hosting the 2010 G-8 summit of major economies (Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States), Canadian Prime Minister Stephen Harper called for an “accountability summit,” to hold the G-8 responsible for the promises that it made over the years.
So let’s make our own account of how the G-8 did.
The answer, alas, is a failing grade.
The G-8 this year illustrates the difference between photo-ops and serious global governance.
Of all of the G-8’s promises over the years, the most important was made to the world’s poorest people at the 2005 G-8 Gleneagles Summit in Scotland.
The G-8 promised that, by this year, it would increase annual development assistance to the world’s poor by $50 billion relative to 2004.
Half of the increase, or $25 billion per year, would go to Africa.
The G-8 fell far short of this goal, especially with respect to Africa.
Total aid went up by around $40 billion rather than $50 billion, and aid to Africa rose by $10-$15 billion per year rather than $25 billion.
The properly measured shortfall is even greater, because the promises that were made in 2005 should be adjusted for inflation.
Re-stating those commitments in real terms, total aid should have risen by around $60 billion, and aid to Africa should have risen by around $30 billion.
In effect, the G-8 fulfilled only half of its promise to Africa – roughly $15 billion in increased aid rather than $30 billion.
Much of the overall G-8 increase in aid went to Iraq and Afghanistan, as part of the US-led war effort, rather than to Africa.
Among G-8 countries, only the UK is making a bold effort to increase its overall aid budget and direct a significant portion to Africa.
Since the G-8 was off track in its aid commitments for many years, I long wondered what the G-8 would say in 2010, when the commitments actually fell due.
In fact, the G-8 displayed two approaches.
First, in an “accountability report” issued before the summit, the G-8 stated the 2005 commitments in current dollars rather than in inflation-adjusted dollars, in order to minimize the size of the reported shortfall.
Second, the G-8 Summit communiqué simply did not mention the unmet commitments at all.
In other words, the G-8 accountability principle became: if the G-8 fails to meet an important target, stop mentioning the target – a cynical stance, especially at a summit heralded for “accountability.”
The G-8 did not fail because of the current financial crisis.
Even before the crisis, the G-8 countries were not taking serious steps to meet their pledges to Africa.
This year, despite a massive budget crisis, the UK government has heroically honored its aid commitments, showing that other countries could have done so if they had tried.
But isn’t this what politicians like to do – smile for the cameras, and then fail to honor their promises?
I would say that the situation is far more serious than that.
First, the Gleneagles commitments might be mere words to politicians in the rich world, but they are matters of life and death for the world’s poor.
If Africa had another $15-$20 billion per year in development aid in 2010, as promised, with the amounts rising over future years (also as promised), millions of children would be spared an agonizing death from preventable diseases, and tens of millions of children would be able to get an education.
Second, the emptiness of G-8 leaders’ words puts the world at risk.
The G-8 leaders promised last year to fight hunger with $22 billion in new funds, but so far they are not delivering.
They promised to fight climate change with $30 billion of new emergency funds, but so far they are not delivering.
My own country, the US, shows the largest gap between promises and reality.
Hosting this year’s G-8 summit reportedly cost Canada a fortune, despite the absence of any significant results.
The estimated cost of hosting the G-8 leaders for 1.5 days, followed by the G-20 leaders for 1.5 days, reportedly came to more than $1 billion.
This is essentially the same amount that the G-8 leaders pledged to give each year to the world’s poorest countries to support maternal and child health.
It is absurd and troubling to spend $1 billion on three days of meetings under any circumstances (since there are much cheaper ways to have such meetings and much better uses for the money).
But it is tragic to spend so much money and then accomplish next to nothing in terms of concrete results and honest accountability.
There are three lessons to be drawn from this sorry episode.
First, the G-8 as a group should be brought to an end.
The G-20, which includes developing countries as well as rich countries, should take over.
Second, any future promises made by the G-20 should be accompanied by a clear and transparent accounting of what each country will do, and when.
The world needs true accountability, not empty words about accountability.
Every G-20 promise should spell out the specific actions and commitments of each country, as well as the overall promise of the group.
Third, the world’s leaders should recognize that commitments to fight poverty, hunger, disease, and climate change are life-and-death issues that require professional management for serious implementation.
The G-20 meets later this year in South Korea, a country that has emerged from poverty and hunger over the past 50 years.
South Korea understands the utter seriousness of the global development agenda, and the poorest countries’ needs.
Our best hope is that South Korea will succeed as the next host country, picking up where Canada has fallen far short.
The Unbearable Lightness of Change
MADRID – Barack Obama’s first year in office has been a sobering exercise in the limits of presidential power.
It also carries lessons about how the resilient and impersonal forces of history can constrain any leader’s drive for change.
Obama’s current “winter of discontent” genuinely reflects the mixed record of his first year.
The Massachusetts electoral debacle only highlighted the growing rift between the president’s agenda and popular sensibilities.
Admittedly, Obama inherited a collapsing financial system, a declining world order, and the ever-present threat of global terrorism.
In his titanic efforts to stem decline and reform America, Obama has shown vision and talent, but he also learned the hard way that, as Henry Kissinger put it in his memoirs, the pledges of new administrations are almost invariably like “leaves on a turbulent sea.”
The impossible deadlines, the always ambiguous information the president is fed, and the complex choices that he must make are too frequently bound to clash with political constraints and the resistance to change of both allies and foes.
The president’s domestic agenda is bold and revolutionary, but it clashes frontally with the most fundamental tenets of America’s liberal and individualistic ethos.
His health-care reform plan, as the Massachusetts vote demonstrated, is perceived as a personal obsession and an entirely unnecessary distraction from much more urgent and vital concerns, such as the financial crisis and unemployment.
Obama’s priorities in foreign policy are definitely sound.
But creating a structure of international relations that will make a more stable and enduring world order is not a task to be completed within one year.
Nor is it at all certain that the sacrifices required of a country already stretched beyond the limits of its financial capabilities, together with the resistance of world powers, will allow this to be accomplished even in a single presidential term.
Iraq is showing some positive signs of political and institutional recovery, but the omens for the future remain, in Obama’s own words, “messy.”
The disintegration of an already fragmented country, the return of civil war, and the shadow of Iran’s power being cast over the Iraqi state are all plausible scenarios.
A man of peace, Obama has become no less a war president than his predecessor.
Having seen the harsh realities of the world as it really is , he has become the champion of the “just war.”
In Afghanistan, he opted for a substantial military surge, but the notion of victory that would allow for a withdrawal of troops remains as foggy and uncertain as it was in the case of Iraq.
The solution is ultimately political, not military.
Secretary of Defense Robert Gates was right to recognize that the Taliban are “part of the political fabric” of Afghanistan and thus “need to participate in the country’s government.”
But this might not be achieved without involving the major regional stakeholders, including Pakistan, China, and possibly Iran.
The Obama administration’s failure in re-launching the India-Pakistan peace talks over Kashmir is one of the gravest weaknesses of its “AfPak” strategy.
If these two countries’ mutual hostility is not reined in, and a fundamentalist Afghanistan continues to provide the strategic depth through which Pakistan threatens its sworn Indian enemies, the current disaster might still breed defeat.
Obama is right to boast of his success in enlisting China to join serious sanctions on North Korea, but he might be wrong to draw conclusions from this about Iran, a vital strategic partner for the Chinese.
Likewise, America’s “reset button” policy with Russia has certainly improved relations with the Kremlin, but it remains highly improbable that the Russians would endanger their privileged relations with Iran by joining an economic siege.
Israel ’s fear that the failure of sanctions might bring the United States to accept coexistence with a nuclear-armed Iran in the way it did with the Soviet Union during the Cold War is not entirely unfounded.
Obama’s administration will not start a war with a third Muslim country while the two others continue to burn.
Iran might eventually turn into the graveyard of Obama’s dream of a world without nuclear weapons.
George Bernard Shaw once observed that “in the arts of peace Man is a bungler.”
Obama has just admitted that in the Israeli-Palestinian peace process, a president can also be one. “This is as intractable a problem as you get,” he admitted after a wasted year of more error than trial.
He naively ignored the harsh lessons of 20 years of abortive peacemaking, and insisted on sticking to the worn-out paradigm of direct negotiations between parties that, when left to their own devices, are bound to come to a deadlock.
He was commendably humble to admit that he was wrong “to have raised expectations so high.”
With no breakthrough in the Arab-Israeli conflict, Obama is left with the epicenter of the Middle East’s maladies seriously undermining his entire strategy in the region.
Yet he continues to be the greatest promise for a better world that this political generation can offer.
And he still has time to vindicate Woodrow Wilson’s belief that a “president can be just as big a man as he chooses to be.”
The Japanese Experiment
NEWPORT BEACH – After years of tweaks, Japan has now initiated a major shift in its policy paradigm, with reactions ranging from great optimism that the country may finally be lifted out of a quarter-century of economic stagnation, to concerns that the authorities’ dramatic change of course may in fact end up making things worse.
But, while debate naturally focuses on Japan’s economic, financial, and political maneuvers, the tipping point could well lie abroad.
Prime Minister Shinzo Abe’s new government has embraced a revolutionary (rather than evolutionary) economic-policy approach that engages several initiatives, some of which were once deemed implausible, unthinkable, or even undesirable.
From the doubling of the money supply to additional fiscal stimulus and wide-ranging structural reforms, the new policy paradigm is nothing less than one of the boldest economic-policy experiments in Japan’s post-war history.
To demonstrate their seriousness, Japanese officials moved quickly to commit to measurable metrics.
On the policy input side, they have specified and begun to implement purchases of securities totaling $75 billion per month (three times as much, in relative terms, as the US Federal Reserve currently purchases under its unconventional monetary-policy regime).
On the output side, and after many years of persistent deflation (prices fell 0.5% last month), Japan is now targeting a 2% inflation rate within two years, thus underscoring its commitment to avoid a pre-mature withdrawal of monetary support for growth.
Already, financial markets have responded with alacrity.
The Japanese equity market is up an impressive 55% since hints of the paradigm shift started hitting investors’ radar screens.
At the same time, the Japanese yen has depreciated sharply, including by more than 20% against the struggling euro.
This response is part of the transmission mechanism for the Japanese government’s policies.
The surge in the stock market benefits domestic investors, making them likelier to spend more (what economists call the “wealth effect”).
This, in turn, should revive corporate “animal spirits,” leading to higher investment in new plants and equipment, together with higher wages and salaries.
These are, of course, the same mechanisms that the Fed has targeted for almost three years in its own efforts to stimulate higher growth in the US.
The macroeconomic outcomes have consistently fallen short of expectations, and there is reason to believe that it will be even more difficult in Japan for monetary policy alone to gain sufficient traction.
Japan’s aging population mutes the potential impact of both the wealth effect and animal spirits.
Resource flexibility is lower than in the US.
Interest rates are already low.
The experience of deflation is well entrenched.
And, given Japan’s high level of public indebtedness, the risks of collateral damage and unintended consequences are potentially higher.
With gross overall government debt already at 238% of GDP, some worry that Japan would face the threat of economic and financial dislocation were a failed policy experiment to lead its private sector – which traditionally has displayed an enormous home bias – to disinvest from Japan.
This does not mean that Japan’s policy revolution will necessarily disappoint.
But, critically, it does mean that even if you believe that the BOJ’s actions are necessary for Japan to emerge from its economic malaise, they certainly are not sufficient.
Japan’s experiment requires meeting two additional conditions if it is to avoid going the way of previous failed policy initiatives: meaningful structural reforms that essentially change how segments of the economy respond and operate; and other countries’ continued acquiescence in the currency depreciation needed to boost the impact of slower-moving domestic dynamics through meaningful gains in global market share.
Meeting the first condition is in the hands of Japanese citizens and their elected representatives.
The required reforms, though achievable, will test the government’s resolve and implementation capabilities, as well as the population’s willingness to face immediate disruptions in exchange for the promise of longer-term gains.
The second requirement is very different.
It can be achieved only if other countries are willing to sacrifice output, either because they have no choice, or because they believe that, over the medium-term, a stronger Japanese economy will benefit them as the longer-term income effects offset the impact of immediate market disruptions.
But will the rest of the world accommodate Japan’s bold policy experiment, or will it take protective steps and thus impede the operation of a crucial policy transmission mechanism?
While initial indications are encouraging, the jury is still out.
Many affected countries – including those hit by the trade effects (such as China, South Korea, Taiwan, and eurozone members) and those susceptible to the capital-flow channel (such as Brazil, Indonesia, and Mexico) – have not yet had enough time to react.
Japan’s policy change was big and abrupt, and several of the countries on the receiving end have been focused on complex domestic challenges.
A few countries – particularly Brazil, China, and South Korea – have noticed.
But their reactions have been generally muted by Japan’s success in getting a US-led initiative at the G-20 to classify its policy response as constituting the use of “domestic tools” to pursue “domestic objectives.”
It is just a matter of time until the rest of the world catches up with the reality of how Japan’s experiment affects them.
The hope is that, bolstered by evidence of Japan’s serious pursuit of structural reforms, they will accommodate the experiment in two ways: by not retaliating, and by undertaking their own domestic reforms that compensate for the output lost to Japan.
In other words, a growing pie for all better accommodates all.
The fear is that neither Japan’s subsequent actions nor the affected countries’ domestic realities will justify the risk of lost market share, especially at a time when the global economy as a whole – and global policy coordination – is struggling.
Here the risk involves currency wars and other beggar-thy-neighbor disruptions.
There is currently insufficient data to predict either outcome confidently.
As we await additional evidence, let us appreciate how rarely we witness, in real time, such a momentous policy shift.
The Undeserving One Percent?
CHICAGO – It is amazing how the “one percent” epithet, a reference to the top 1% of earners, has caught on in the United States and elsewhere in the developed world.
In the United States, this 1% includes all those with a 2006 household income of at least $386,000.
In the popular narrative, the 1% is thickly populated with unscrupulous corporate titans, greedy bankers, and insider-trading hedge-fund managers.
Reading some progressive economists, it might seem that the answer to all of America’s current problems is to tax the 1% and redistribute to everyone else.
Of course, underlying this narrative is the view that this income is ill-gotten, made possible by Bush-era tax cuts, the broken corporate governance system, and the conflict-of-interest-ridden financial system.
The 1% are not people who have earned money the hard way by making real things, so there is no harm in taking it away from them.
Clearly, this caricature is based on some truth.
For instance, corporations, especially in the financial sector, reward too many executives richly despite mediocre performance.
But apart from tarring too many with the same brush, there is something deeply troubling about this narrative’s reductionism.
It ignores, for example, the fact that many of the truly rich are entrepreneurs.
It likewise ignores the fact that many of the wealthy are sports stars and entertainers, and that their ranks include professionals such as doctors, lawyers, consultants, and even some of our favorite progressive economists.
In other words, the rich today are more likely to be working than idle.
But what might be the most important overlooked fact is that the rise in income inequality is not just at the very top, though it is most pronounced there.
Academic studies suggest that the top tenth percentile of income distribution in the US, and elsewhere, is also moving farther away from the median earner.
This is an inconvenient fact for the progressive economist.
“We are the 90%,” sounds less dramatic than “we are the 99%.”
And, for some of the protesters, it may not even be true.
Perhaps most problematic, though, is that something other than plutocrat-friendly policies is largely responsible for the growing inequality.
That something is education and skills. True, not every degree is a passport to a job.
Freshly-minted degree holders, especially from lower-quality programs, are finding it particularly hard to get a job nowadays, because they are competing with experienced workers who are also jobless.
Nevertheless, the unemployment rate for those with degrees is one-third the unemployment rate for those without a high school diploma.
Close examination suggests that the single biggest difference between those at or above the top tenth percentile of the income distribution and those below the 50th percentile is that the former have a degree or two while the latter, typically, do not.
Technological change and global competition have made it impossible for American workers to get good jobs without strong skills.
As Harvard professors Claudia Golden and Larry Katz put it, in the race between technology and education, education is falling behind.
To acknowledge the fact that the broken educational and skills-building system is responsible for much of the growing inequality that ordinary people experience would, however, detract from the larger populist agenda of rallying the masses against the very rich.
It has the inconvenient implication that the poor have a role in pulling themselves out of the morass.
There are no easy and quick fixes to education – every US president since Gerald Ford in the mid-1970’s has called for educational reforms, with little effect.
In contrast, blaming the undeserving 1% offers a redistributive policy agenda with immediate effects.
The US has tried quick fixes before.
Income inequality grew rapidly in the last decade, but consumption inequality did not.
The reason: easy credit, especially subprime mortgages, which helped those without means to keep up with the Joneses.
The ending, as everyone knows, was not a happy one.
The less-well-off ultimately became even worse off as they lost their jobs and homes.
The US needs to improve the quality of its workforce by developing the skills that are relevant to the jobs that its firms are creating.
Several steps can be taken towards these goals, including improving community attitudes towards education, reforming schools, tying the curriculum in community colleges and vocational institutions more closely to the needs of local firms, making higher education more affordable, and finding effective ways to retrain unemployed workers.
None of this is easy or likely to produce results quickly, and some of it may require more resources.
While eliminating inefficient spending, especially inefficient tax subsidies, can generate some of these funds, more tax revenues may be needed.
The rich can certainly afford to pay more, but if governments increase taxes on the wealthy, they should do it with the aim of improving opportunities for all, rather than as a punitive measure to rectify an imagined wrong.
The Unended Recessional
Zimbabwe's crisis has incited an unsettling feeling of déja vu .
The reason is clear: it is, thankfully, no longer fashionable to decry colonialism's evils in assigning blame for every national misfortune.
The imperial statues are toppled, cities and streets renamed, the vestiges of foreign rule either abandoned or adapted.
With the sole exception of Zimbabwe, no leading politician in any post-imperial country has made a notable speech in recent years attacking colonialism.
That great staple of political rhetoric appears to have been buried across the developing world.
Internationally, colonialism is even more passé.
Once, the votaries of one kind of new international order or another decried the evils of imperialism (sometimes, but not always, prefixed with a ``neo-'') in justifying demands for a more just dispensation.
That theme has died out in diplomatic discourse.
Yet followers of world affairs would be unwise to consign colonialism to the proverbial dustbin of history, for it remains a factor in understanding our world's problems and dangers.
To begin, residual problems from the end of the earlier era of colonization, usually the result of untidy exits by the colonial power, still remain dangerously stalemated.
The events in East Timor in 1999 remain fresh in memory, and difficulties linger.
But at least closure seems in sight, unlike those messy legacies of European colonialism: Western Sahara, Cyprus, and Palestine.
Moreover, fuses lit in the colonial era could re-ignite, as they have done, to everyone's surprise, between Ethiopia and Eritrea, where war broke out over a colonial border that Italy's occupiers had failed to define with precision.
In Zimbabwe, colonial land ownership patterns that gave most of the viable farmland to white settlers are at least one root of the country's current crisis.
But not only the direct results of colonialism remain relevant: the indirect ones also matter.
The intellectual history of colonialism is littered with many a willful cause of recent conflict.
One is careless anthropology: Belgium's classification of Hutus and Tutsis in Rwanda and Burundi, which reified a distinction that had not existed before, still haunts Africa's Great Lakes region.
A related problem arises from sociology: how much bloodshed do we owe, for instance, to the British invention of ``martial races'' in India?
One can never overlook the old colonial administrative habit of ``divide and rule,'' exemplified, again, by British policy in the subcontinent after 1857, which led almost inexorably to the tragedy of Partition.
Such distinctions were not merely pernicious; they were often characterized by an unequal distribution of the resources of the state within a colonial society.
Belgian colonialists favored Tutsis, leading to Hutu rejection of them as alien interlopers;
Sinhalese resentment of Tamil privileges in colonial-era Sri Lanka prompted the discriminatory policies after Independence that fueled the Tamil revolt.
A ``mixed'' colonial history within one modern state is also a potential source of danger.
When a state has more than one colonial past, its future is vulnerable.
Ethnicity or language hardly seem to be a factor in the secessions (one recognized, the other not) of Eritrea from Ethiopia and the ``Republic of Somaliland'' from Somalia.
Rather, it was different colonial experiences (Italian rule in Eritrea, British rule in Somaliland) that set them off, at least in their own self-perceptions, from the rest of their ethnic compatriots.
A similar case can be made about the former Yugoslavia, where lands that existed under Austro-Hungarian rule for 800 years were joined to lands that spent almost as long under Ottoman suzerainty.
The war that erupted in 1991 in no small measure pitted those parts that had been ruled by the German-speaking empires against those that avoided such colonization.
Boundaries drawn in colonial times, even if unchanged after independence, still create problems, especially in Africa.
Where colonial constructions force disparate peoples together by the arbitrariness of a colonial map-maker's pen, nationhood becomes elusive.
Older tribal and clan loyalties in Africa were mangled by the boundaries drawn, in distant cities like Berlin, for colonially-created states whose post-independence leaders needed to invent new traditions and national identities.
The result was the manufacture of unconvincing political myths, as artificial as the countries they mythologize, which all-too-often cannot command genuine patriotic allegiance from their citizenry.
State failure in the wake of colonialism is another source of conflict.
The collapse of effective central governments - manifested in recent years in Sierra Leone, Liberia and Somalia - could unleash a torrent of alarming possibilities because ``weak states,'' particularly in Africa, seem vulnerable to collapsing in a welter of conflict.
Underdevelopment in post-colonial societies itself causes conflict.
The uneven development of infrastructure, as a result of priorities skewed to benefit colonialists, can lead to resources being distributed unevenly, which can lead to increasing social fissures.
Underdevelopment in many countries of the South, which are faring poorly in their struggle to remain viable in a globalizing world, creates conditions of desperate poverty, ecological collapse and rootless, unemployed populations beyond the control of atrophying state systems.
We will not create a better world in the 21 st century by forgetting what happened in the 19 th and much of the 20 th .
This is not to say that our responses to the dangers emerging from the legacies of the past must be rooted in the past.
There is a greater need than ever before for innovative, forward-looking approaches to global governance.
As we embark upon the still-new millennium, though, it seems ironically clear that tomorrow's possible disorder might be due, in no small part, to yesterday's colonial order.
I have no wish to give politicians in post-colonial countries whose leadership has been found wanting any reason to find excuses in the past for their own failures.
But in looking to understand possible future sources of conflict, the best crystal ball may be a rear-view mirror.
Austerity’s Children
WASHINGTON, DC – When economists discuss “fiscal adjustment,” they typically frame it as an abstract and complex goal.
But the issue is actually simple: Who will bear the brunt of measures to reduce the budget deficit?
Either taxes have to go up for some people, or spending must fall – or both.
“Fiscal adjustment” is jargon; what austerity is always about is the distribution of income.
Much of Europe is already aware of this, of course.
Now it’s America’s turn.
And current indications there suggest that the people most directly in line for a fiscal squeeze are those who are least able to defend themselves – relatively poor children.
For example, the current budget sequester (that is, across-the-board spending cuts) is already hurting programs like Head Start, which supports pre-school education.
The American comedian Jimmy Kimmel recently poked fun at his compatriots’ lack of fiscal knowledge by asking pedestrians on Hollywood Boulevard what they thought of &#160;“Obama’s decision to pardon the sequester and send it to Portugal.”
The segment is hilarious, but also sad, because the impact on some people’s lives is very real.
Around 70,000 children are likely to lose access to Head Start on our current fiscal course.
And much larger cuts are in store for early-childhood nutrition programs and health care.
Perhaps most shocking are the dramatic cuts to the Medicaid health-insurance program that the House of Representatives’ Republican majority have embraced in their latest budget proposal.
Paul Ryan, the chairman of the House Budget Committee, proposes to balance the budget over the next 10 years largely by slashing the program.
About half of all people covered by Medicaid are children.
Is it fair to force low-income children to bear the burden of fiscal adjustment?
According to data available on the economist Emmanuel Saez’s invaluable Web site, from 1993 to 2011, average real income for the bottom 99% of the population (by income) rose by 5.8%, while the top 1% experienced real income growth of 57.5%.
The top 1% captured 62% of all income growth over this period, partly owing to a sharp rise in returns to higher education in recent decades.
(On average, those with only a high school education or less have few good income prospects.)
This implies that, if anything, the tax system should become more progressive, with the proceeds invested in public goods that are not sufficiently provided by the private sector –&#160;things like early childhood education and preventive health care to minimize educational disruption resulting from common ailments like childhood asthma.
Think of it this way: In recent decades, some families chose locations and occupations that seemed to offer a reasonable means of support – and good prospects for their children.
Many of these decisions turned out badly, largely because information technology (computers and how they are used) eliminated many middle-class jobs.
Increasing globalization of trade also did not help in this regard.
In addition, as Till von Wachter of Columbia University has documented, prolonged periods of unemployment for parents have a severe and lasting negative impact on their children.
Children whose families cannot provide a decent start in life deserve help.
But America has not provided it – a point recently made by Jeb Bush, a leading contender for the Republican presidential nomination in 2016.
“In our country today,” Bush said in a speech to fellow conservatives, “if you’re born poor, if your parents didn’t go to college, if you don’t know your father, if English isn’t spoken at home, then the odds are stacked against you.”
Nor is America likely to provide such help in the future, given the coming budget cuts’ disproportionate impact on children at the lower end of the income distribution.
America can easily afford to do better, of course.
Its large budget deficits reflect the impact of tax breaks that favor the wealthy and upper middle class; an unfunded expansion of Medicare coverage to include prescription medicines; two foreign wars; and, most important, a banking system that was allowed to get out of control, inflicting massive disruption on the real economy (and thus on tax revenue).
Today’s children did not play a role in any of these policy mistakes.
The preschoolers who are about to lose access to Head Start weren’t even born when they were made.
Imposing austerity on poor children is not just unfair; it is also bad economics.
When economists, again with their dry jargon, talk about a country’s “human capital,” what they really mean is the cognitive and physical abilities of its people.
As I pointed out in recent Congressional testimony, poor education leads to poor job prospects, poor families, and back to poor education – if not with a detour through incarceration, which makes it even harder to break the cycle.
Unfortunately, no one in a position of power is likely to heed such arguments.
They should.
When you travel to a foreign country for the first time, and you see neglected, ill-fed, and uneducated children, do you regard that country as likely to be one of the world’s great economic powers over the next half-century?
The Unfinished Cold War
MOSCOW – This November will mark the twentieth anniversary of the fall of the Berlin Wall.
But the end of confrontation in Europe may be proving only temporary.
One year after last summer’s war in Georgia, old divisions seem to be re-emerging in a different form.
Although the Cold War in Europe was declared over, the truth is, it never really finished.
When the Soviet Union withdrew from Central and Eastern Europe, we Russians believed that NATO would not be extended to the countries and territories from which we had withdrawn.
Our hope was for unification with Europe, a “common European home,” and the creation of a Europe “united and free.”
Our hopes were not starry-eyed self-deception.
After all, the leaders of the United States and Germany had promised Mikhail Gorbachev that NATO would not expand eastward.
At first, after they had vanquished communism, Russians regarded themselves as victors.
But, after a few euphoric years, the West began acting more and more like the Cold War’s winners.
Once the potential “military threat” posed by the Soviet Union had vanished into thin air, successive waves of NATO enlargement served neither a military nor an ideological purpose.
The West’s logic for enlargement was geopolitical: to bring the former Soviet republics and socialist states of Central and Eastern Europe into the Western sphere of political and economic influence.
At first, NATO’s new members were declared to have met both democratic and military criteria.
Later, these criteria were abandoned when NATO began to invite even the most backward and corrupt states to join.
NATO, moreover, not only enlarged its membership, but also transformed itself from an anti-Communist defensive alliance into an offensive grouping (with operations in Yugoslavia, Iraq and Afghanistan).
NATO’s expansion towards Russia’s own borders, and the membership of countries whose elites have historical complexes in regard to Russia, increased anti-Russian sentiment inside the alliance.
For all its efforts to improve its image, many Russians now view NATO as a much more hostile organization than they did in the 1990’s, or even before then.
Moreover, NATO enlargement has meant that Europe itself has still not emerged from the Cold War.
No peace treaty ended the Cold War, so it remains unfinished.
Even though the ideological and military confrontation of those times is far behind us, it is being replaced with a new stand-off – between Russia, on one hand, and the US and some of the “New Europeans” on the other.
My hope is that, when historians look back at Georgia’s attack on South Ossetia of last summer, the Ossetians, Russians, and Georgians killed in that war will be seen as having not died in vain.
Russian troops crushed Georgia’s army on the ground, but they also delivered a strong blow against the logic of further NATO expansion, which, if not stopped, would have inevitably incited a major war in the heart of Europe.
For the time being, the situation remains open.
The US failed to unleash some new form of Cold War after the South Ossetian episode, not least because of the global financial and economic crisis.
It is my hope that the global economic crisis and Barack Obama’s presidency will put the farcical idea of a new Cold War into proper perspective.
Greater Europe, in which I include not only Russia, but also the US, needs a new peace treaty, or rather system of accords, that draw a line under Europe’s horrible twentieth century and thus prevent a historical relapse.
What is needed is a new pan-European treaty on collective security, signed either by individual countries or by NATO and the EU, as well as by Russia and the Commonwealth of Independent States.
Countries not included in any of the current security systems would be able to join in the treaty and receive multilateral guarantees.
NATO enlargement would
With the break-up of the Soviet Union and Yugoslavia in mind, we must seek to prevent the further fragmentation of states, and also their forcible reunification.
Kosovo, South Ossetia, and Abkhazia must be the last of the states that break away through force.
The “Pandora’s box” of self-determination must be closed.
Once the legacy of confrontation inherited from the twentieth century has been overcome, perhaps deep cuts in the Russia and US nuclear arsenals may become possible, together with coordination of military-strategic policies.
In this scenario, Russian-US cooperation in crisis situations like Afghanistan, or in countering the proliferation of weapons of mass destruction, would become much more profound.
In Europe proper, a union between Russia and the EU should be founded, based on a common economic space, a common energy space – with cross-ownership of companies that produce, transport, and distribute energy – and a common human space that would be visa-free and include coordinated Russian and EU international policies.
Emphasis should also be placed on establishing a new system for governing the global economy and finance, whose creation will be even more difficult if the confrontations of the Cold War are not resolved.
Europe, Russia, and the US must finish the “unfinished war.”
Then, perhaps in 2019, the year that will mark the 100th anniversary of the Treaty of Versailles, we may finally bid farewell to the twentieth century.
DNA at 60
LONDON – On April 25, 1953, Francis Crick and James Watson published a one-page paper that many believed would revolutionize biological research.
Building on the work of Rosalind Franklin and Maurice Wilkins, they had discovered DNA’s double-helix structure, providing the first glimpse into how organisms inherit and store biological information.
But, 60 years later, has their discovery really had the transformative impact that the world expected?
The media marked the publication’s 60th anniversary with much fanfare, hailing the breakthrough that “ushered in the age of genetics,” and calling it “one of the most important scientific discoveries of all time.”
The British newspaper The Guardian featured the headline, “Happy Birthday, DNA!
The golden moment that changed us all.”
To some extent, they are right.
The finding forms the basis of genetics and has opened up promising new research areas, such as synthetic biology, in which biological systems are created or modified to perform specific functions.
Likewise, it has facilitated important innovations, such as pharmacogenetic cancer treatment, in which drugs target specific genetic defects within cancer cells.
Moreover, DNA has acquired a certain mystique in popular culture.
According to Dorothy Nelkin and Susan Lindee, it has become a sacred entity – the modern equivalent of the Christian soul, an individual’s essence.
While some forms of biological determinism, such as the belief that race or gender dictates a person’s destiny, have been widely rejected, the idea that a person can be genetically predisposed, say, to get into debt, become a ruthless dictator, or vote regularly in elections remains socially acceptable.
But, almost from the beginning –&#160;and most intensely since 1971, when Time magazine published a special section entitled “The New Genetics: Man into Superman” – science and society alike have tended to overestimate the impact of genetics.
When the Human Genome Project published the first draft of the fully sequenced human genome in 2000, Henry Gee, an editor of the journal Nature, predicted that scientists would be able “to alter entire organisms out of all recognition to suit our needs and tastes” by 2099.
“We will have extra limbs, if we want them,” he asserted, “maybe even wings to fly.”
Thirteen years later, Gee’s prediction looks increasingly unlikely, with the Human Genome Project so far having failed to meet expectations.
Indeed, in 2010, the science writer Nicholas Wade lamented that, a decade after the project was launched, geneticists were “almost back to square one in knowing where to look for the roots of common disease.”
For example, a 12-year study of 19,000 white American women found that 101 genetic markers that had been statistically linked to heart disease had no predictive value.
Self-reported family histories, by contrast, proved very accurate in predicting the disease.
In fact, most diseases are not caused by single genes.
As a result, after a few early successes with atypical single-gene disorders such as Huntington’s disease, progress has stalled.
Common variants typically explain a small fraction of genetic risk.
Genetics has been a source of particularly high hopes when it comes to cancer treatment.
Between 1962 and 1985, cancer-related deaths in the United States rose by 8.7%, despite the use of aggressive chemotherapy drugs and radiation therapy, highlighting the dangers of a one-size-fits-all approach to treatment.
An understanding of the genetic determinants of patients’ therapeutic response, it was believed, would enable doctors to develop individualized treatment programs, sparing more responsive patients from harmful overtreatment.
But patients are not the only variable.
Cancer, too, is heterogeneous, even in patients with the same diagnosis.
After sequencing the entire genomes of 50 patients’ breast cancer tumors, researchers found that only 10% of the tumors had more than three mutations in common.
According to a recent study mapping genetic mutations in 2,000 tumors, breast cancer can actually be divided into ten subgroups.
Similarly, a genome-wide analysis of malignant cells from four kidney-cancer patients showed that, while they were related, they had mutated in many different directions.
Two-thirds of the genetic faults identified were not repeated in the same tumor, let alone in any other metastasized tumors in the body.
Given that a pharmacogenetic drug targets one mutation in the tumor, it will not necessarily work on the other mutations.
In addition, as the cancer adjusts to the drug, further mutations are likely to occur, diminishing the drug’s efficacy.
To be sure, pharmacogenetics has made a profound difference for some patients.
Barbara Bradfield, one of the original subjects in research trials for the pharmacogenetic cancer drug Herceptin, has now been stable on the drug for more than 20 years.
But such success stories are far too rare to constitute a “golden age” of genetics.
The high price of such drugs is limiting their impact as well.
Herceptin can cost up to $40,000 annually, and newer cancer drugs cost even more, making them prohibitively expensive for most patients.
The US Supreme Court is currently faced with the question of whether genes can be patented.
If the court upholds the biotechnology company Myriad Genetics’ patents on two genes which, in some variants, are linked to higher risk for breast and ovarian cancer, the company will retain exclusive rights to use the genes in research, diagnosis, and treatment for two decades, preventing rivals from developing cheaper alternatives.
Women have already been denied access to a diagnostic test, because insurers refuse to pay the company’s high prices.
Manufacturers claim that gene patents, which now cover 25-40% of the human genome, are vital to recouping their investments.
But such patents mar DNA’s “birthday” celebrations for the patients who stand to benefit from the fruits of genetic research – if only they could afford them.
The Ungreening of the World
Everyone I meet claims to love trees -- I mean really love trees -- yet collectively the human race behaves as if it abhors green things.
If you take a step back from whatever biome you are in at the moment and look at the entire Earth and its forests through recorded history, you will see that the relationship between humans and trees looks Strangely Like War (the title of a recent book on forests by Derrick Jensen and George Draffan).
The exact extent of the damage is difficult to discern, because for many years records were not kept, but the estimates are that 75% of the world’s original forests have been logged or burned by humans.
Some of them have grown back of course, or have been replanted, but it is thought that we now have only half of the amount of forest land we once had on this planet.
In some places, particularly the drier places of the globe, the deforestation was so severe, and was followed by such intense grazing, that forests have not been able to grow back.
The landscape has been permanently altered.
When you imagine Greece, Italy, and Iraq, it is likely that you imagine a dry landscape with open views, the way they look today.
Historical records indicate, however, that these places were once covered by dense forests.
The forests fell as civilizations flourished, so the earlier a place became “civilized” the sooner it became deforested.
This march of so-called progress resulting in the loss of forests was documented by John Perlin in his 1989 book A Forest Journey .
So today we sit on a planet with only 50% of its forest cover remaining.
And here’s the part that should bring tears to your eyes: we continue to lose more forest cover every year.
The more recent losses are well documented.
Every five years the United Nations produces a summary report called the Global Forest Resource Assessment;
The team in charge of assembling the assessment relies on internet reporting and satellite surveillance to come up with the figures.
According to the most recent report, between 2000 and 2005, we lost forest acreage equivalent to the land mass of Panama -- more than 77 thousand square kilometers of forest gone, some of it never to return.
The next report is due to be released in 2010.
I will not be surprised when it is released and I read that the global forest area has continued to shrink.
If this happens when we claim to love trees, I shudder to think what would happen if we were ambivalent about them?
Or thought we could live without them?
In the United States, deforestation began as soon as the colonies were settled.
Before long, the colonies were exporting wood to the many nations that no longer had the timber they needed for ships, casks, shingles, and other construction materials.
Trees were also cut to clear cropland, provide heat, and the fledgling nation was using up its forests to build its own ironworks and railroads as well.
By 1920, more than three-quarters of the US’s original forests had been cut.
Similar to the global figures, today the US has only half the forest cover that it had in 1600.
And we continue to destroy forest land.
At the UN Conference on Environment and Development in Rio de Janeiro it was agreed that, “efforts should be undertaken towards the greening of the world.”
The UN recognizes that “forests are essential to economic development and all forms of life.” But the UN Charter also reads: “states have the sovereign right to exploit their own resources.”
Although the UN and my country recognize the value of forests, both ecologically and economically, such recommendations are not strong enough to stop my local council from voting “yes” to deforestation.
Last week, I went to a zoning meeting in the town where I live.
A real estate housing project developer wanted to cut many acres of trees so he could build houses.
That forest land will be lost, probably forever, and a few more numbers will be added to the global deforestation total next year.
Why do local politicians, tree lovers all, allow yet more forest destruction?
Why do humans all claim to love trees, but their actions deny their claim?
I think it has to do with fear.
When a would-be exploiter of trees stands before a politician and requests, or demands, the right to clear a forest, the politician, out of fear, complies.
But we do not fear trees.
We do not fear their retaliation.
Trees stand mute despite our betrayal.
Perhaps that is one of the reasons we really love them.
But if we want to do more than love them, if we want to save them, we must become fearless.
The UN Heresy
No other organization is held in such respect as the United Nations.
This is perhaps natural, for the UN embodies some of humanity's noblest dreams.
But, as the current scandal surrounding the UN's administration of the Iraq oil for food program demonstrates, and as the world remembers the Rwanda genocide that began ten years ago, respect for the UN should be viewed as something of a superstition, with Secretary General Kofi Annan its false prophet.
Not since Dag Hammarskjöld has a UN leader been as acclaimed as Annan.
Up to a point, this is understandable.
Annan usually maintains an unruffled, dignified demeanor.
He has charm and - many say - charisma.
But a leader ought to be judged by his or her actions when important matters are at stake.
Annan's failures in such situations are almost invariably glossed over.
Between 1993 and 1996, Annan was Assistant Secretary-General for UN Peacekeeping Operations and then Under-Secretary-General.
One of the two great disasters for which he bears a large share of the blame is the Serbian slaughter of 7,000 people in the Bosnian town of Srebrenica, perhaps the worst massacre in postwar Europe.
In 1993, Bosnia's Muslems were promised that UN forces would protect them.
This commitment was a precondition of their consenting to disarm.
The UN declared Srebrenica a "safe haven" to be "protected" by 600 Dutch UN troops.
In July 1995, Serb forces attacked.
The UN did not honor its pledge.
Annan's staff released evasive, confused statements.
Oblivious, apparently, to the dreadfulness of the situation, they failed to sound the alarm properly and did nothing to intervene.
The Dutch fired not a single shot.
NATO air power could have halted the Serbs, but Annan did not ask for NATO intervention.
Ratko Mladic, the Serb commander and war criminal, deported the women and children under the eyes of the UN, while capturing and murdering the men and adolescent boys.
No one should be surprised by the UN's inaction, because only the year before it had demonstrated utter incompetence in facing the fastest genocide in history - the slaughter of 800,000 Tutsis and moderate Hutus in Rwanda in just 100 days.
UN forces in Rwanda in 1994 were Annan's responsibility before and during the crisis.
Annan was alerted four months before Hutu activists began their mass killings by a fax message from Romeo Dallaire, the Canadian general commanding UN forces in Rwanda.
Dallaire described in detail how the Hutus were planning "anti-Tutsi extermination."
He identified his source "a Hutu" and reported that arms were ready for the impending ethnic cleansing.
Dallaire requested permission to evacuate his informant and to seize the arms cache.
Annan rejected both demands, proposing that Dallaire make the informant's identity known to Rwandan President Habyarimana, a Hutu, even though the informant had expressly named the President's closest entourage as the authors of the genocide blueprint.
Annan maintained his extreme passiveness even after the airplane crash that killed Habyarimana, which signaled the genocide's start, helped by the indifference of the great powers (America not least).
One might think Annan far too compromised for the post of Secretary-General, but the UN doesn't work that way.
Instead of being forced to resign after Rwanda and Srebrenica, he was promoted to Secretary-General.
That is the culture of the UN: believe the best of barbarians, do nothing to provoke controversy among superiors, and let others be the butt of criticism afterwards.
Even subsequent revelations about Annan's responsibility for the disasters in Rwanda and Bosnia did not affect his standing.
On the contrary, he was unanimously re-elected and awarded the Nobel Peace Prize.
He is the all-time Teflon diplomat.
The media sometimes ratchets up admiration for Annan by pointing out that his wife is Swedish and a close relative of Raoul Wallenberg.
We are meant to infer that, on top of all his talents, Annan shares the ideals embodied during the last days of WWII by the foremost Swede of modern times.
But Wallenberg's name should make us even more dismayed about Annan's record.
Wallenberg refused to ignore the threat of massacres to come.
Instead of ducking responsibility and carrying on with conventional work in Sweden, he made his way to Hungary, the scene of Hitler's last homicidal orgy against the Jews.
In Budapest, Wallenberg exploited every available contact, resorting to shady tricks, bribes, and other stratagems to save as many people as possible from the Holocaust.
He never allowed himself to be duped by Hitler's cronies.
Perhaps no one's achievement should be judged by comparison with that of Wallenberg - a titan of strength, courage, and perseverance.
The trouble with Annan is that, when similar perils loomed, he proved especially wanting.
Annan cannot plead that he faced any risk to his personal safety, whereas Wallenberg in 1944 and 1945 was in constant peril.
Nor can he possibly excuse himself by saying that no warnings were given, or that he lacked resources, or that he did not have the international position to intervene.
Annan had at his disposal all of the instruments of power and opinion that Wallenberg lacked.
Yet when thousands or hundreds of thousands of people were exposed to mortal threats that he had the authority and duty to avert, alleviate, or at least announce, he failed abjectly.
Now, despite the recent revelations about briberies in the UN's oil-for-food program for Iraq, the world is clamoring to entrust Annan with the future of more than 20 million Iraqis who survived Saddam Hussein's depraved dictatorship.
That is both because of who Annan is and what the UN has become: an institution in which no shortcoming, it seems, goes unrewarded.
The Unilateral Road to Peace
In the next three weeks, the Israeli army will do something unprecedented: instead of defending the country against external enemies or terrorism, it will evacuate – by force if necessary – 9,000 Israelis from their homes.
Israel’s unilateral withdrawal is the outcome of a deep political shift that has been caused by two somewhat contradictory convictions that have characterized Prime Minister Ariel Sharon’s policies since 2003: first, that the US-initiated “road map” is going nowhere and, second, that the status quo is untenable.
Certainly, according to Sharon’s thinking, there is no future for 9,000 Jewish settlers living among 1.2 million Palestinians in the Gaza Strip.
Hence, in the absence of negotiations, a unilateral withdrawal is the only meaningful step towards de-escalation and stabilization.
This policy has deeply divided Israel: the settlers – mostly, but not exclusively religious – feel betrayed by Sharon, “The Father of the Settlements.”
It is now the Israeli left that, however reluctantly, realizes that Sharon’s new pragmatism may be the first step in the right direction.
Like de Gaulle in Algeria, Sharon has reshuffled the cards of Israel’s politics.
The last weeks have seen massive demonstrations, some of them verging on violence; many of the settlers have declared that they will not obey government orders to evacuate.
The army and the police have mobilized almost 50,000 troops to carry out evictions.
This forcible approach is traumatic not only for the settlers, but also for many other Israelis.
Only the next days and weeks will tell whether the evacuation proceeds peacefully or not.
In the meantime, Sharon has paid heavily for his policies.
Two right-wing parties have left his ruling coalition, he has lost his majority within his own Likud Party, and his finance minister, Binyamin Netanyahu, has quit his government.
Only by bringing Shimon Peres’s Labor Party into his cabinet did Sharon manage to retain his parliamentary majority.
The question, of course, is what will happen after the Gaza disengagement.
Many governments were initially skeptical about disengagement, but realized that – as the Washington saying goes – “this is the only game in town.” Among them, as well as among the Palestinians, one hears the hope that after the Gaza withdrawal, it will be possible to return to the road map and to resume negotiations leading to a final agreement between Israel and the Palestinians.
This is a major mistake.
While motivated by the best of intentions, the hope of reviving the road map is out of touch with reality.
Future negotiations will have to deal with the ultimate borders between Israel and Palestine, the fate of 200,000 Jewish settlers in the West Bank, the status of Jerusalem, and with the problem of the 1947-48 Palestinian refugees.
On all of these issues, the gulf between the Israeli and Palestinian positions has not narrowed since the failed negotiations at Camp David in 2000, while fear and distrust have increased.
To attempt negotiations under these circumstances would not only be an exercise in futility, but may merely deepen alienation and suspicion on both sides.
The failure of the Annan Plan for Cyprus suggests that good intentions are not enough – and the disagreements in Cyprus were miniscule compared to what divides Israelis and Palestinians.
So what can be done?
Probably the only rational way to proceed would be to acknowledge that unilateral steps on both sides can still further the cause of de-escalation and ultimate reconciliation.
On the Israeli side, further disengagement from dozens of isolated and small settlements on the West Bank, entailing the evacuation of between 20,000 and 30,000 settlers, may be politically feasible and would give the Palestinians a contiguous territory on the West Bank.
On the Palestinian side, consolidation of the Palestinian Authority’s control over a dozen security services and militias would be an important step.
The Palestinian leader, Abu Mazen, recognizes this, but the question is whether he can deliver.
The Palestinian leadership could also start down the difficult road of telling the refugees that – contrary to almost 50 years of Palestinian propaganda – they will not return to Israel, but will have to be settled in the West Bank and Gaza, the areas that will become part of the eventual Palestinian state.
In an ideal world, conflicts end by agreements and treaties.
But in the real world – and Cyprus, Bosnia, and Kosovo may be examples – stabilization and the slow de-escalation of violence can sometimes achieve the same end, even without formal agreement.
In the absence of plausible alternatives, one hopes that this will also be the case for Israelis and Palestinians.
The Union and the Dragon
This month, China and the European Union mark 30 years of official relations.
During that period, changes within China, and in the nature of those relations, have been dramatic.
But how will relations evolve over the next thirty years?
Will China and the EU be competitors or partners?
Many challenges face both China and the EU.
The first are economic.
China’s development in recent years has been magnificent.
But speedy growth always incites turbulence, which China will have to minimize and manage.
As it integrates into the world economy, it must seek to sustain growth while protecting the environment and reducing poverty and inequality.
These are daunting tasks, and China cannot address them alone.
Indeed, sustainable development is a challenge for both China and Europe.
After all, by far the most important factor determining whether our children and grandchildren will enjoy secure, healthy, and productive lives is whether the world’s natural ecosystems survive the pressures put on them by modern civilization.
A recent UN report warned that we have already entered the danger zone.
Numerous land and sea ecosystems are in danger of being destroyed forever, with effects that are hard to predict.
One downside to China’s rapid growth is its rising demand for energy and the increased CO2 emissions that accompany it.
China is quickly turning into one of the world’s largest importers of oil and gas.
The International Energy Agency’s World Energy Outlook 2004 predicts that, between now and 2030, global demand for energy will rise by roughly 60%, with China and India accounting for nearly two-thirds of that increase.
Huge investments – worth trillions of euros – will be needed to meet global energy requirements.
The same report warns that, if we do not change our ways, worldwide CO2 emissions will rise exponentially.
So a new phase in international environmental cooperation is needed, with China’s active contribution.
Of course, China clearly has a right – like any country – to seek the energy, minerals, and other resources it needs.
But a lack of cooperation could result in higher-than-necessary oil and gas prices and perhaps defeat in the battle against climate change.
This means that China must treat climate change and intelligent energy use as priorities in its national policies.
Beyond economics, China must reassure others that its awakening will not make the world tremble.
Thus, in formulating its policies, China must also sell those policies to a global audience.
Most Europeans believe that China wants to be a shaper of – not a challenger to – a balanced world order, a strong United Nations, and an effective multilateral system.
But, in a global village, misperceptions can arise all too easily – and can do great damage.
China’s important role concerning North Korea’s nuclear ambitions is a good example of exercising responsibility for international security and stability.
The international community counts on China to pursue that role with vigor.
If necessary, it must use its influence even more assertively to bring Pyongyang back to the negotiating table.
Obviously, that solution must be in line with Chinese proposals and interests: a denuclearized Korean peninsula, which has the support of the EU.
Opportunities exist for a constructive Chinese role elsewhere.
Having concluded a ten-year energy agreement with Iran, China is in a position to support the EU’s efforts to prevent nuclear proliferation, as the Union supports China’s efforts concerning North Korea.
This is not just about Iran, but also about the threat of a nuclear arms race across the entire Middle East.
Chinese interests are served by a Middle East marked by regional cooperation.
We count on China’s continued support for European and American efforts in making sure that Iran’s nuclear program remains limited to purely civilian purposes.
Europe and the world are also watching China’s handling of domestic human rights issues.
The EU welcomed the inclusion last year of the following clause in the Chinese Constitution: “The government respects and protects the human rights of the people.”
But it is deeds that matter.
At the EU-China Summit, we discussed the Chinese government’s plans for ratification of the International Covenant on Civil and Political Rights.
One subject China should address is freedom of belief.
The obligation of prior registration of religious communities is discriminatory.
Ratification of the International Covenant on Civil and Political Rights – and the resulting changes in Chinese laws and practice – would help to secure social and political stability in China, boost dialogue between China and the EU, and increase China’s moral authority.
It is time to replace the old cooperation agreement between the Union and China, dating from 1985.
Our relationship has evolved from a predominantly economic one into one that includes fighting terrorism, piracy, and organized crime, as well as many other issues.
A structured dialogue – including the private sector, which is so intimately involved in China’s development – is needed on energy, sustainable development, and the environment.
We must see environmental problems and energy scarcity for what they are: threats to mankind as a whole.
China will undoubtedly find the EU a tough negotiating partner.
The EU sets all kinds of conditions for cooperation with other countries.
Some issues are non-negotiable, because they are pillars of the European model that we seek to share with the world.
These include democracy and the rule of law, respect for human rights and the environment, non-proliferation of weapons of mass destruction and their means of delivery, and the campaign against terrorism.
The EU’s political standards are high, but the fruits of cooperation are sweet.
If we tackle our common problems together, China and Europe can be instrumental in turning the twenty-first century into a century of hope.
The United States and the Test Ban Treaty
Two weeks before President George W. Bush takes office, the uncertainty that surrounded his election has been replaced by concerns about the impact his presidency will have on America’s foreign policy.
America’s allies and adversaries alike are looking for evidence of continuity or change in the new president’s approach.
One key test will be the new administration’s actions on nuclear nonproliferation in general and on the Comprehensive Nuclear Test Ban Treaty in particular.
A year ago, President Clinton and Secretary of State Albright asked me to serve as their Special Advisor for the Test Ban Treaty.
The US Senate had recently voted against the Treaty’s ratification.
I was asked to conduct a quiet, low-key dialogue with Senators in order to sort out the complex issues in the debate and think about what should be done.
To this end, I met with Democratic and Republican Senators and consulted with senior administration representatives, laboratory officials, scientists and other experts with widely disparate views on ratification.
I listened to their concerns and sought their suggestions.
My consultations assured me that there is broad bipartisan support within the US for strengthening American leadership of a comprehensive international response to the dangers posed by the proliferation of nuclear weapons.
I am more convinced than ever that the Test Ban Treaty is an integral – even indispensable – component of global nonproliferation efforts.
I hope that the Bush administration will revisit the Treaty in the context of its importance to combating the spread of nuclear weapons.
This week, I submitted to President Clinton a series of recommendations that may help the incoming administration give favorable consideration to revisiting the Treaty.
These recommendations focus on four principal concerns raised by Treaty opponents: questions about its value to the non-proliferation regime; the potential for cheating; its impact on the US nuclear deterrent; and the uncertainties associated with the Treaty’s indefinite duration.
Although too numerous to list here, the broad objectives of these recommendations are to:
· Increase bipartisan and allied support for a carefully coordinated comprehensive nuclear nonproliferation program;
· Enhance US capabilities to detect and deter nuclear testing and other aspects of nuclear proliferation;
· Improve the management of potential risks associated with the long-term reliability and safety of the US nuclear deterrent;
· Address concerns about the Test Ban Treaty’s indefinite duration through a joint legislative-executive review of its net value for national security ten years after US ratification and at regular intervals thereafter.
America recognizes that it has a deep responsibility to join with like-minded nations in leading global nonproliferation efforts.
US leadership is essential to the success here, as is the Test Ban Treaty.
Banning nuclear tests contributes to an effective nonproliferation policy predicated on the skillful use of a variety of political, diplomatic and economic responses to proliferation problems.
It helps to constrain further development and proliferation of advanced nuclear weapons and strengthens political support for the Nuclear Non-Proliferation Treaty.
It will make it easier for America and its friends to mobilize international support for other important nonproliferation measures, including tighter export controls and strengthened safeguards on civilian nuclear programs if the US were part of the Test Ban Treaty regime.
The spread of nuclear weapons is unquestionably among the greatest threats to global security.
Now more than ever, proliferation threatens to heighten regional tensions and multiply devastation should war break out.
One need look no further than the Middle East or South Asia to see the potential for catastrophe.
If unthinkable disasters in these and other regions are to be averted, America must exercise clear and consistent leadership to sustain global support for nonproliferation efforts.
Around the world, some viewed the Senate vote against the Test Ban Treaty as a sign that the US might be walking away from its traditional leadership.
I am confident that this is not the case.
The Senate and the Clinton administration have demonstrated their support for nuclear test restraints by maintaining the US moratorium on nuclear testing begun under President Bush in 1992 and by continuing to fund and participate in efforts to complete the Treaty’s verification regime.
These efforts should be continued by the incoming administration.
Ultimately, this will not be enough.
The global community’s initial reaction to the Senate vote was muted somewhat by signs that the administration and key senators wanted to build bipartisan support for eventual reconsideration of the Treaty.
Other nations will, of course, afford the new administration time to review these issues.
But they will soon want to see concrete signs of progress toward ratification.
Extended delay is unlikely to be met with extended tolerance.
If other states perceive a definite end to hopes of American ratification of the Treaty, the damage to the nonproliferation regime, over time, could be immeasurable.
Whether this can be averted depends in part on whether the Bush administration decides to pursue a bipartisan and deliberate reconsideration of the Treaty by the Senate and whether the Treaty will be viewed in isolation or within the context of a comprehensive nonproliferation strategy.
Ratification should not be expected to happen quickly, as the Bush administration and the Senate will need to become convinced that the benefits of the Treaty’s impact on nonproliferation outweigh the potential risks.
I am confident that the recommendations included in my report set forth a balanced, responsible approach to mitigating these risks without renegotiating the Treaty.
I hope that the new administration and Congress will consider implementing my recommendations at the earliest date possible as a means of facilitating a bipartisan approach to nonproliferation while reassuring the international community of America’s continued leadership in this area.
The Universe in a Grain of Sand
There was a flurry of press coverage when the Large Hadron Collider in Switzerland was turned on, and again when it was shut down by a technical problem shortly afterwards.
The collider’s operation was a much-anticipated event in science, one that could confirm or undermine one of the most successful theories about how the universe is structured.
The public attention that it has received is rare for scientific news, perhaps owing to concerns that something celestially dangerous is being cooked up in our backyard.
The lead-up coverage was accompanied by hype about the potential risks, so when the test did not seem to go as planned, it was natural to wonder if the fabric of space-time had been bruised.
Some of the initial rumors about what could happen were extreme.
One speculated that these new high energies, when combined with the specific way the particles would be broken, would annihilate us.
In another scenario, the lab might create uncontrollable tiny black holes.
In yet another, the creation of a “stranglet” would spawn new and terrible levels of nuclear power.
There are possible risks when messing around with fundamental matter, but in this case, the shutdown was due to a mundane gas leak.
What makes this test interesting for scientists, rather than newsmakers, is unchanged, and will still be exciting when CERN starts up the collider again.
Here is what is at stake.
For a scientific theory to be accepted, it must 1) explain observable phenomena; 2) be “elegant” in the sense that its truth and clarity are obvious; and 3) predict what will happen when you do something you have never done before.
The purpose of the Large Hadron Collider is to create an unprecedented situation.
If the predicted particle does not appear, a series of theoretical abstractions will be questioned – and become open to replacement by radically different alternatives.
It is not generally appreciated how much real-world impact a changed scientific model can have.
For most people, the topics that excite physicists do not seem to affect daily life in the slightest.
But there is a deeper chain of abstractions – the tools we use to think – at work here, one based on the way we perceive reality.
For example, consider how different the world was before the concept of “zero” was discovered.
Zero is essential to bookkeeping and hence all modern commerce.
And that is quite apart from the way we take for granted the idea of “nothing.”
The concept simply did not exist in the west until the Catholic Church ended its prohibition on the notion in the twelfth century, 1400 years after zero had been invented in the Arab World.
Similarly, what if theories using germs had not been proven?
We wouldn’t think about information transfer or messages the same way.
Or the concept of the force field, which enables the concept of influence?
Freud’s original model of the mind, the successors of which since shaped how we think of ourselves, were inspired by Einstein’s theory of relativity.
Powerful scientific abstractions eventually creep into the way we enjoy art, and how we form our laws and articulate our ethics.
In the highly anticipated CERN experiment, the theory in question is at the center of a controversy about what abstractions seem more fundamental in the universe.
One is based on number; the other is based on form.
The first holds that the universe is fundamentally probabilistic, generally random but with an order to its randomness.
The other posits that the universe is inherently geometric, and that geometric properties, such as symmetry, govern it.
If the experiment finds the predicted particle, it will tilt the argument toward form.
Here’s what this could mean in the long run.
When you just read the word “symmetry,” you probably thought about two balanced halves, or a reflection.
We extend this simple notion through all of our reasoning about the world: man and woman, boss and employee, love and hate, left and right.
It drives our ideas of politics, religion, and even the principles of truth underpinning our system of laws.
But what if you naturally dealt with symmetries of three?
What if it was proven, through a particle collision, that a true balance required three sides instead of two?
The tests in the Hadron Collider may trigger this change, every bit as disruptive as an explosion.
Or perhaps it will be less dramatic, dawning in the mind of a clerk gazing out the window of a patent office.
A different perception of reality has the power to change us – change the way we think – and it could come from anywhere.
The Unknown Promise of Internet Freedom
MELBOURNE – Google has withdrawn from China, arguing that it is no longer willing to design its search engine to block information that the Chinese government does not wish its citizens to have.
In liberal democracies around the world, this decision has generally been greeted with enthusiasm.
But in one of those liberal democracies, Australia, the government recently said that it would legislate to block access to some Web sites.
The prohibited material includes child pornography, bestiality, incest, graphic “high impact” images of violence, anything promoting or providing instruction on crime or violence, detailed descriptions of the use of proscribed drugs, and how-to information on suicide by Web sites supporting the right to die for the terminally or incurably ill.
A readers’ poll in the Sydney Morning Herald showed 96% opposed to those proposed measures, and only 2% in support.
More readers voted in this poll than in any previous poll shown on the newspaper’s Web site, and the result is the most one-sided.
The Internet, like the steam engine, is a technological breakthrough that changed the world.
Today, if you have an Internet connection, you have at your fingertips an amount of information previously available only to those with access to the world’s greatest libraries – indeed, in most respects what is available through the Internet dwarfs those libraries, and it is incomparably easier to find what you need.
Remarkably, this came about with no central planning, no governing body, and no overall control, other than a system for allocating the names of Web sites and their addresses.
That something so significant could spring up independently of governments and big business led many to believe that the Internet can bring the world a new type of freedom.
It is as if an inherently decentralized and individualist technology had realized an anarchist vision that would have seemed utterly utopian if dreamed up by Peter Kropotkin in the nineteenth century.
That may be why so many people believe so strongly that the Internet should be left completely unfettered.
Perhaps because Google has been all about making information more widely available, its collaboration with China’s official Internet censors has been seen as a deep betrayal.
The hope of Internet anarchists was that repressive governments would have only two options: accept the Internet with its limitless possibilities of spreading information, or restrict Internet access to the ruling elite and turn your back on the twenty-first century, as North Korea has done.
Reality is more complex.
The Chinese government was never going to cave in to Google’s demand that it abandon Internet censorship.
The authorities will no doubt find ways of replacing the services that Google provided – at some cost, and maybe with some loss of efficiency, but the Internet will remain fettered in China.
Nevertheless, the more important point is that Google is no longer lending its imprimatur to political censorship.
Predictably, some accuse Google of seeking to impose its own values on a foreign culture.
Nonsense.
Google is entitled to choose how and with whom it does business.
One could just as easily assert that during the period in which Google filtered its results in China, China was imposing its values on Google.
Google’s withdrawal is a decision in accordance with its own values.
In my view, those values are more defensible than the values that lead to political censorship – and who knows how many Chinese would endorse the value of open access to information, too, if they had the chance?
Even with censorship, the Internet is a force for change.
Last month, when the governor of China’s Hubei province threatened a journalist and grabbed her recorder after she asked a question about a local scandal, journalists, lawyers, and academics used the Internet to object.
A Web report critical of the governor’s behavior stayed up for 18 hours before censors ordered it taken down.
By then, however, the news was already widely dispersed.
Likewise, in Cuba, Yoani Sánchez’s blog Generation Yhas broken barriers that conventional media could not.
Although the Cuban government has blocked access to the Web site on which the blog is posted, it is available around the world in many languages, and distributed within Cuba on compact disks and flash drives.
The new freedom of expression brought by the Internet goes far beyond politics.
People relate to each other in new ways, posing questions about how we should respond to people when all that we know about them is what we have learned through a medium that permits all kinds of anonymity and deception.
We discover new things about what people want to do and how they want to connect to each other.
Do you live in an isolated village and have unusual hobbies, special interests, or sexual preferences?
You will find someone online with whom to share them.
Can’t get to a doctor? You can check your symptoms online – but can you be sure that the medical Web site you are using is reliable?
Technology can be used for good or for bad, and it is too soon to reach a verdict on the Internet. (In the eighteenth century, who could have foreseen that the development of the steam engine would have an impact on earth’s climate?)
Even if it does not fulfill the anarchist dream of ending repressive government, we are still only beginning to grasp the extent of what it will do to the way we live.
The Unraveling of Europe’s Peace
COPENHAGEN – The European Commission recently unveiled long-awaited measures to bring neighboring countries in the Mediterranean and the former Soviet Union closer to Europe.
On the same day, another department of the same Commission presented proposals aimed at curbing visa-waiver programs for some non-European nationals.
Few missed the irony of formulating two plans that pointed in opposite directions.
Attracting neighbors has long been a noble aspiration – and something of a European specialty.
The European Union’s embrace of post-communist republics in Central Europe represented a most powerful symbol of the reach of Western liberal democracy.
In today’s neighborhood, where EU expansion is not in the cards, Europe hopes to shore up its presence by opening its huge internal market and increasing assistance.
Crucially, the Commission’s recent proposals include the creation of “mobility partnerships” with Tunisia, Morocco, and Egypt, aimed at facilitating travel for local students and businesspeople.
By contrast, the proposed restrictions on the visa-waiver program include “safeguard clauses” that would temporarily suspend access to Europe’s Schengen area, most likely for those from Balkan countries.
This is controversial enough: the decision is motivated by a large influx of asylum-seekers, often offering frivolous reasons, originating from Serbia.
But visa liberalization has been the main concrete signal of Europe’s goodwill towards this neglected backyard, which dreams of joining the EU.
Whatever this plan’s impact in practice, the political message is clear: when in doubt, Europe is better off sealing its borders.
The same Janus-faced approach is evident in Europe’s response to the Arab Spring.
After a lukewarm reaction to the uprisings, Europe was eager to show its support for democratic movements in the region.
At the same time, with boatloads of migrants arriving from Tunisia, some rather drastic measures have been adopted.
A recent dispute between Italy (the main port of arrival) and France (the principal final destination) ended with the French reintroducing border controls.
In an unrelated move, Denmark did the same, ostensibly to prevent cross-border crime.
To its credit, the European Commission also issued strong calls to member states for better legislation and practices concerning migration.
But there is a clear correlation between unrest at the EU’s doorstep and Europe’s irresistible instinct to keep trouble at arm’s length.
For once, the rot is not in Brussels, but rather in a growing number of European capitals.
The case of Italy is instructive: “human tsunami” is the unfortunate phrase used by senior policymakers to warn against the possible flood of migrants.
But, almost six months into the North African upheavals, the number of arrivals on the southern island of Lampedusa has reached roughly 30,000.
By comparison, Sweden, with one-sixth the population of Italy, accepted the same number of asylum-seekers in 2009.
Italian officials privately confirm that the current figures are not unmanageable.
The problem for Italian officials, as for the other governments concerned by the recent migration flows, is the pressure of right-wing populist parties, which no longer need to be on the defensive.
The case for openness, inclusion, and diversity in European societies has become much harder to make.
Not coincidentally, mainstream leaders, from German Chancellor Angela Merkel to British Prime Minister David Cameron, have caught up with the current mood by deeming European multiculturalism a failure.
This turn of events comes at a price.
The genius of modern Europe has consisted in linking long-term stability to the pursuit of ever-deeper economic and political integration.
For the past half-century, this has represented Europe’s revolutionary recipe for peace, and has served as something of a microcosm of globalization.
The ever-freer and faster flow of capital, labor, goods, and ideas found in the EU a model and a forerunner.
Free movement of people within Europe constitutes this visionary project’s most tangible feat.
One unintended effect of the Arab revolutions is that the link between security and integration that forms Europe’s foundation is decoupling.
The advantages of pooling sovereignty and resources ring increasingly hollow to ordinary Europeans.
Governments find it more politically rewarding to pursue security by erecting administrative or physical barriers.
As election campaigns beckon in some of the countries that are now debating immigration controls, this trend is unlikely to be reversed any time soon.
But Europeans should make no mistake about the consequences.
Opposing Europe now means not only standing up to an unelected behemoth in Brussels, as Euro-skeptics would have it.
Nor is it merely about questioning the sources of Europe’s influence in a fast-changing world.
Unraveling the nexus between security and integration means nothing less than rejecting the formula of Europe’s peace.
Grand Mal Economics
BERKELEY – Across the North Atlantic region, central bankers and governments seem, for the most part, helpless in restoring full employment to their economies.
Europe has slipped back into recession without ever really recovering from the financial/sovereign-debt crisis that began in 2008.
The United States’ economy is currently growing at 1.5% per year (about a full percentage point less than potential), and growth may slow, owing to a small fiscal contraction this year.
Industrial market economies have been suffering from periodic financial crises, followed by high unemployment, at least since the Panic of 1825 nearly caused the Bank of England to collapse.
Such episodes are bad for everybody – workers who lose their jobs, entrepreneurs and equity holders who lose their profits, governments that lose their tax revenue, and bondholders who suffer the consequences of bankruptcy – and we have had nearly two centuries to figure out how to deal with them.
So why have governments and central banks failed?
There are three reasons why the authorities might fail to restore full employment rapidly after a downturn.
For starters, unanchored inflation expectations and structural difficulties might mean that efforts to boost demand show up almost entirely in faster price growth and only minimally in higher employment.
That was the problem in the 1970’s, but it is not the problem now.
The second reason might be that even with anchored inflation expectations (and thus price stability), policymakers do not know how to keep them anchored while boosting the flow of spending in the economy.
And here I stop, flummoxed.
At least as I read the history, by 1829, Western Europe’s technocratic economists had figured out why these periodic grand mal economic seizures occurred.
That year, Jean-Baptiste Say published his Cours Complet d’Economie Politique Pratique, admitting that Thomas Malthus had been at least half right in arguing that an economy could suffer for years from a “general glut” of commodities, with nearly everybody trying to reduce spending below income – in today’s jargon, to deleverage.
And, because one person’s spending is another’s income, universal deleveraging produces only depression and high unemployment.
Over the following century, economists like John Stuart Mill, Walter Bagehot, Irving Fisher, Knut Wicksell, and John Maynard Keynes devised a list of steps to take in order to avoid or cure a depression.
1. Don’t go there in the first place: avoid whatever it is – whether external pressure under the gold standard, asset-price bubbles, or leverage-and-panic cycles such as that of 2003-2009 – that creates the desire to deleverage.
2. If you do find yourself there, stop the desire to deleverage by having the central bank buy bonds for cash, thereby pushing down interest rates, so that holding debt becomes more attractive than holding cash.
If you still find yourself there, stop the desire to deleverage by having the Treasury guarantee risky assets, or issue safe ones, in order to raise the quality of debt in the market; this, too, will make holding debt more attractive.
4. If that fails, stop the desire to deleverage by promising to print more money in the future, which would raise the rate of inflation and make holding cash less attractive than spending it.
5. In the worst case, have the government step in, borrow money, and buy stuff, thereby rebalancing the economy as the private sector deleverages.
There are many subtleties in how governments and central banks should attempt to accomplish these steps.
And, indeed, the North Atlantic region’s governments and central banks have tried to some degree.
But it is clear that they have not tried enough: the “stop” signal of unanchored inflation expectations, accelerating price growth, and spiking long-term interest rates – all of which tell us that we have reached the structural and expectational limits of expansionary policy – has not yet been flashed.
So we remain far short of full employment for the third reason.
The issue is not that governments and central banks cannot restore employment, or do not know how; it is that governments and central banks will not take expansionary policy steps on a large enough scale to restore full employment rapidly.
And here I reflect on the 1930’s, and on how historical events recur, appearing first as tragedy and then, pace Karl Marx, as yet another tragedy.
Keynes begged the policymakers of his time to ignore the “austere and puritanical souls” who argue for “what they politely call a ‘prolonged liquidation’ to put us right,” and professed that he could “not understand how universal bankruptcy can do any good or bring us nearer to prosperity.”
Today’s policymakers, so eager to draw a bold line under expansionary measures, should pause and consider the same question.
The Unreality of the “Real” Business Cycle
LONDON – Testifying recently before a United States congressional committee, former Federal Reserve Chairman Alan Greenspan said that the recent financial meltdown had shattered his “intellectual structure.”
I am keen to understand what he meant.
Since I have had no opportunity to ask him, I have to rely on his memoirs, The Age of Turbulence , for clues.
But that book was published in 2007 – before, presumably, his intellectual structure fell apart.
In his memoirs, Greenspan revealed that his favorite economist was Joseph Schumpeter, inventor of the concept of “creative destruction.”
In Greenspan’s summary of Schumpeter’s thinking, a “market economy will incessantly revitalize itself from within by scrapping old and failing businesses and then reallocating resources to newer, more productive ones.” Greenspan had seen “this pattern of progress and obsolescence repeat over and over again.”
Capitalism advanced the human condition, said Schumpeter, through a “perennial gale of creative destruction,” which he likened to a Darwinian process of natural selection to secure the “survival of the fittest.”
As Greenspan tells it, the “rougher edges” of creative destruction were legislated away by Franklin Roosevelt’s New Deal, but after the wave of de-regulation of the 1970’s, America recovered much of its entrepreneurial, risk-taking ethos.
As Greenspan notes, it was the dot-com boom of the 1990’s that “finally gave broad currency to Schumpeter’s idea of creative destruction.”
This was the same Greenspan who in 1996 warned of “irrational exuberance” and, then, as Fed chairman, did nothing to check it.
Both the phrase and his lack of action make sense in the light of his (now shattered) intellectual system.
It is impossible to imagine a continuous gale of creative destruction taking place except in a context of boom and bust.
Indeed, early theorists of business cycles understood this.
(Schumpeter himself wrote a huge, largely unreadable book, with that title in 1939.)
In classic business-cycle theory, a boom is initiated by a clutch of inventions – power looms and spinning jennies in the eighteenth century, railways in the nineteenth century, automobiles in the twentieth century. But competitive pressures and the long gestation period of fixed-capital outlays multiply optimism, leading to more investment being undertaken than is actually profitable.
Such over-investment produces an inevitable collapse.
Banks magnify the boom by making credit too easily available, and they exacerbate the bust by withdrawing it too abruptly.
But the legacy is a more efficient stock of capital equipment.
Dennis Robertson, an early twentieth-century “real” business-cycle theorist, wrote: “I do not feel confident that a policy which, in the pursuit of stability of prices, output, and employment, had nipped in the bud the English railway boom of the forties, or the American railway boom of 1869-71, or the German electrical boom of the nineties, would have been on balance beneficial to the populations concerned.”
Contemporary “real” business-cycle theory builds a mountain of mathematics on top of these early models, the main effect being to minimize the “destructiveness” of the “creation.”
It manages to combine technology-driven cycles of booms and recessions with markets that always clear (i.e., there is no unemployment).
How is this trick accomplished?
When a positive technological “shock” raises real wages, people will work more, causing output to surge.
In the face of a negative “shock,” workers will increase their leisure, causing output to fall.
These are efficient responses to changes in real wages.
No intervention by government is needed.
Bailing out inefficient automobile companies like General Motors only slows down the rate of progress.
In fact, whereas most schools of economic thought maintain that one of government’s key responsibilities is to smooth the cycle, “real” business-cycle theory argues that reducing volatility reduces welfare!
It is hard to see how this type of theory either explains today’s economic turbulence, or offers sound instruction about how to deal with it.
First, in contrast to the dot-com boom, it is difficult to identify the technological “shock” that set off the boom.
Of course, the upswing was marked by super-abundant credit.
But this was not used to finance new inventions: it was the invention.
It was called securitized mortgages.
It left no monuments to human invention, only piles of financial ruin.
Second, this type of model strongly implies that governments should do nothing in the face of such “shocks.”
Indeed, “real” business-cycle economists typically argue that, but for Roosevelt’s misguided New Deal policies, recovery from the Great Depression of 1929-1933 would have been much faster than it was.
Equivalent advice today would be that governments the world over are doing all the wrong things in bailing out top-heavy banks, subsidizing inefficient businesses, and putting obstacles in the way of rational workers spending more time with their families or taking lower-paid jobs.
It reminds me of the interviewer who went to see Robert Lucas, one of the high priests of the New Business Cycle school, at a time of high American unemployment in the 1980’s.
“My driver is an unemployed Ph.D. graduate,” he said to Lucas. “Well, I’d say that if he is driving a taxi, he’s a taxi-driver,” replied the 1995 Nobel Laureate.
Although Schumpeter brilliantly captured the inherent dynamism of entrepreneur-led capitalism, his modern “real” successors smothered his insights in their obsession with “equilibrium” and “instant adjustments.”
For Schumpeter, there was something both noble and tragic about the spirit of capitalism.
But those sentiments are a world away from the pretty, polite techniques of his mathematical progeny.
The UN’s Mandate Gap
The United Nations peacekeeping operations now underway in Lebanon offer a big opportunity for the UN to demonstrate its relevance and impact on the world stage in the 21st century.
If only those member states who claim to be the UN’s biggest supporters put their money where their mouths are.
Many world leaders, particularly those in Europe, decry the Bush administration’s undermining of the UN, especially since 2003.
Yet leaders in France, who expressed outrage when the US sidestepped the UN and invaded Iraq without the international community’s blessing, stunned the world in August when they backed down from their promise to send 2,000 peacekeepers to intervene in southern Lebanon, and instead only committed 200.
Fortunately, France has reconsidered, Germany will provide limited naval assistance, and Italy has stepped up to contribute 3,000 peacekeepers. In addition, China has recently pledged 1,000 troops.
But Europe’s response, like the US response in other cases, highlights a critical issue for all supporters of the UN and international institutions more generally.
If we cannot do what it takes to make them more effective, we will increasingly find that nations will bypass them altogether.
UN Security Council Resolution 1701 “calls for Israel and Lebanon to support a permanent ceasefire.”
It thus set the stage for UN officials to establish the “Rules of Engagement” (ROEs) for its peacekeepers, which dictate when and under what circumstances UN troops can fire their weapons to defend themselves.
But as the current UN mission in Lebanon (UNIFIL) well knows, defending yourself is not the same as protecting yourself from hostile fire in the first place.
In this context, the French are understandably worried about the fate of their soldiers – soldiers charged with supporting the Lebanese government in its efforts to establish control over the Hezbollah-controlled south.
The terrible French peacekeeping experience in Bosnia in the early 1990s, in which France lost 84 soldiers serving in a humanitarian capacity under restrictive ROEs, justifies their fears.
But ROEs are only the symptom of a deeper problem.
The real issue is a yawning gap between paper and practice.
In the heat of an international crisis, the Security Council passes resolutions to great public fanfare, establishing an official UN “mandate.”
But then the UN Secretary General is left, resolution in hand, to ask UN member states for the actual, tangible resources necessary to implement what has been commanded.
In the overwhelming majority of cases, those resources fall far short of what is required to successfully intervene in a crisis.
A 2006 UN mandate review finds that UN member states adopt hundreds of mandates each year, conferring “additional responsibilities with neither corresponding funds nor guidance” on how resources should be used.
In American domestic politics, these kinds of commands from the US Congress to states are known as “unfunded mandates;” ordering results without providing the resources necessary to achieve them.
It’s political theater - big headlines, small results.
The UN’s experience in Lebanon is not encouraging.
According to the UN’s Department of Peacekeeping Operations, up to now UNIFIL has operated on an annual budget of $94 million and suffers chronic budget shortfalls due to unpaid assessments from member states.
Now consider what an expanded UNIFIL is mandated to do under Resolution 1701: peacekeepers must monitor the ceasefire between Israel and Hezbollah; support and accompany the Lebanese armed forces as they deploy in southern Lebanon; assist Lebanon’s government in securing the country’s borders and ports to keep illegal weapons from getting into Hezbollah’s hands; and “help ensure humanitarian access to civilian populations and the voluntary and safe return of displaced persons.”
This is a Herculean task.
But over a month after the resolution, barely 5,000 troops are deployed.
Even if all 15,000 UN troops could be found and deployed, the challenges in Lebanon will remain daunting.
The UN insists that Resolution 1701 does
That is only the military aspect of the peacekeeping effort.
Lebanon’s infrastructure – especially in the south – has been decimated.
Homes and livelihoods have been destroyed.
Who will build or re-build hospitals?
How will communications infrastructure be rebuilt?
Who will repair Lebanon’s bridges and roads?
The mandate gap reflects the way the world has done business with the UN for decades – big promises, small pay-outs, much scapegoating if the UN then fails.
But today the international community has a tremendous window of opportunity to secure a small but significant peace in the Middle East along the volatile border of Lebanon and Israel.
How member states respond now – especially those who believe in the purpose and value of the UN - may help shape the outcomes of other, wider ongoing regional conflicts, notably with Iran and Syria, both of which support Hezbollah.
The UN provides the mechanism for a global response, but as Kofi Annan often repeats, it does not exist apart from its member states.
It is up to those members – to all of our governments - to provide both the necessary will and the required resources.
Otherwise the UN is nothing more than a handy mechanism for outsourcing political blame.
Our commitment to bring peace to the Middle East, or Darfur, or Congo, or Kosovo, or Haiti, is not measured by our words but by our wallets.
The world gets what it pays for.
The UN Takes Charge
NEW YORK – While discussions about economic “green shoots” continue unabated in the United States, in many countries, and especially in the developing world, matters are getting worse.
The downturn in the US began with a failure in the financial system, which quickly was translated into a slowdown in the real economy.
But, in the developing world, it is just the opposite: a decline in exports, reduced remittances, lower foreign direct investment, and precipitous falls in capital flows have led to economic weakening.
As a result, even countries with good regulatory systems are now confronting problems in their financial sectors.
On June 23, a United Nations conference focusing on the global economic crisis and its impact on developing countries reached a consensus both about the causes of the downturn and why it was affecting developing countries so badly.
It outlined some of the measures that should be considered and established a working group to explore the way forward, possibly under the guidance of a newly established expert group.
The agreement was remarkable: in providing what in many ways was a clearer articulation of the crisis and what needs to be done than that offered by the G-20, the UN showed that decision-making needn’t be restricted to a self-selected club, lacking political legitimacy, and largely dominated by those who had considerable responsibility for the crisis in the first place.
Indeed, the agreement showed the value of a more inclusive approach – for example, by asking key questions that might be too politically sensitive for some of the larger countries to raise, or by pointing out concerns that resonate with the poorest, even if they are less important for the richest.
One might have thought that the United States would have taken a leadership role, since the crisis was made there.
Indeed, the US Treasury (including some officials who are currently members of President Barack Obama’s economic team) pushed capital- and financial-market liberalization, which resulted in the rapid contagion of America’s problems around the world.
While there was less American leadership than one would have hoped, indeed expected under the circumstances, many participants were simply relieved that America did not put up obstacles to reaching a global consensus, as would have been the case if George W. Bush were still president.
One might have hoped that America would be the first to offer large amounts of money to help the many innocent victims of the policies it had championed.
But it did not, and Obama had to fight hard to extract even limited amounts for the International Monetary Fund from a reluctant Congress.
But many developing countries have just emerged from being overburdened with debt; they do not want to go through that again.
The implication is that they need grants, not loans.
The G-20, which turned to the IMF to provide most of the money that the developing countries need to cope with the crisis, did not take sufficient note of this; the UN conference did.
The most sensitive issue touched upon by the UN conference – too sensitive to be discussed at the G-20 – was reform of the global reserve system.
The build-up of reserves contributes to global imbalances and insufficient global aggregate demand, as countries put aside hundreds of billions of dollars as a precaution against global volatility. Not surprisingly, America, which benefits by getting trillions of dollars of loans from developing countries – now at almost no interest – was not enthusiastic about the discussion.
But, whether the US likes it or not, the dollar reserve system is fraying; the question is only whether we move from the current system to an alternative in a haphazard way, or in a more careful and structured way.
Those with large amounts of reserves know that holding dollars is a bad deal: no or low return and a high risk of inflation or currency depreciation, either of which would diminish their holdings’ real value.
On the last day of the conference, as America was expressing its reservations about even discussing at the UN this issue which affects all countries’ well being, China was once again reiterating that the time had come to begin working on a global reserve currency.
Since a country’s currency can be a reserve currency only if others are willing to accept it as such, time may be running out for the dollar.
Emblematic of the difference between the UN and the G-20 conferences was the discussion of bank secrecy: whereas the G-20 focused on tax evasion, the UN Conference addressed corruption, too, which some experts contend gives rise to outflows from some of the poorest countries that are greater than the foreign assistance they receive.
The US and other advanced industrial countries pushed globalization.
But this crisis has shown that they have not managed globalization as well as they should have.
If globalization is to work for everyone, decisions about how to manage it must be made in a democratic and inclusive manner – with the participation of both the perpetrators and the victims of the mistakes.
The UN, notwithstanding all of its flaws, is the one inclusive international institution.
This UN conference, like an earlier one on financing for developing countries, demonstrated the key role that the UN must play in any global discussion about reforming the global financial and economic system.
Pakistan’s Tipping Point
LAHORE – Pakistan’s moment of political truth is fast approaching.
On May 11, some 40-50 million voters will elect a new national assembly.
The outcome, preceded by a spike in extremist violence, is likely to reverberate far and wide.
Pakistan’s homegrown terrorist groups know that the country is at a tipping point, and are attacking candidates and voters who favor a secular state.
Hundreds of people have already been killed, and more will undoubtedly die before Election Day, targeted because, if these groups prevail, they would push what is sometimes called the “idea of Pakistan” to its logical – and extreme – conclusion.
Some 70 years ago, Muhammad Ali Jinnah, Pakistan’s founding father, launched the movement to create an independent state for the Muslims of British India.
The British colonial administration finally acquiesced, creating a country out of Muslim-majority areas.
The population of what is now Pakistan was about two-thirds Muslim; the remainder were mostly Hindus and Sikhs.
That composition changed dramatically with the partition of the new states of India and Pakistan in 1947, when 14 million people moved across the newly drawn border.
Eight million Muslim refugees fled India and entered Pakistan, and six million Hindus and Sikhs moved in the opposite direction.
By the time this “ethnic cleansing” was over, Pakistan’s population was 95% Muslim.
Over time, an increasing proportion of this population began to demand the creation of an Islamic state in the areas that were now Pakistan.
The upcoming election will determine how far the country will go along this route.
Pakistan is not the only Muslim country seeking to redefine its political and economic future.
Similar processes are playing out in other large countries in the western part of the Islamic world.
By contrast, other large Muslim countries like Indonesia and Malaysia have succeeded in establishing political orders that serve all segments of highly diverse populations reasonably well.
That may eventually happen in the western Islamic world as well, but only after a struggle of the type occurring now in Pakistan.
The large countries in this part of the Islamic world – most notably Egypt, Pakistan, and Turkey – are attempting to address four problems, the most challenging of which is to define Islam’s role in the political system.
Turkey seems to have found an answer, prodded in part by its wish to join the European Union.
A conservative ruling party with deep religious roots is content to leave religion to private observance, with no direct influence on public policy.
The issue remains less settled in Egypt, while in Pakistan a small but highly motivated part of the population has embraced extreme violence as a form of political expression.
The role of the military in politics also needs to be resolved.
Once again, Turkey has taken the lead; in both Egypt and Pakistan, the men in uniform have returned to their barracks, but they have not lost influence over public policy.
Then there is sectarianism, particularly the growing strife between Sunni and Shia Muslims.
This conflict may be exacerbated by the outcome in Syria.
If Sunnis triumph there, they may become more assertive in countries that have large Shia populations.
It is not often recognized that Pakistan has the world’s second-largest Shia population, after Iran, with roughly 50 million adherents.
They have been mercilessly attacked in Karachi and Quetta in recent years, with more than 400 killed.
Finally, there is the question of the Muslim world’s relations with the West, particular the United States.
The old post-Ottoman “grand bargain” – Western acceptance of authoritarianism in exchange for the secure flow of oil, use of sensitive sea-lanes, and some tolerance for the existence of Israel – has broken down.
What replaces it will be determined by the shape of the new political order that finally emerges in the western Islamic world.
In other words, more is at stake in Pakistan’s upcoming election than just the future of Pakistan.
There is growing recognition, some of it grudging, that the coalition led by the Pakistan People’s Party has managed to create a political structure built on fairly stable foundations.
This is a real accomplishment in a country that was on a political roller-coaster for most of its history.
But the coalition proved unable to translate political success into strong economic performance.
For the last five years, Pakistan’s annual GDP growth has averaged just 3% – half the rate needed to absorb two million new labor-force entrants every year.
If growth does not pick up, the ranks of the unemployed and underemployed will swell, increasing the size of the pool from which extremist groups find fresh recruits.
The upcoming election has both nurtured hope and generated anxiety among Pakistanis.
It could go either way.
And, for good or bad, where Pakistan goes other Muslim countries could follow.
The Uptick’s Downside
RIO DE JANEIRO – Since late last year, a series of positive developments has boosted investor confidence and led to a sharp rally in risky assets, starting with global equities and commodities.
Macroeconomic data from the United States improved; blue-chip companies in advanced economies remained highly profitable; China and emerging markets slowed only moderately; and the risk of a disorderly default and/or exit by some members of the eurozone declined.
Moreover, under its new president, Mario Draghi, the European Central Bank appears willing to do anything necessary to reduce stress on the eurozone’s banking system and governments, as well as to lower interest rates.
Central banks in both advanced and emerging economies have provided massive injections of liquidity.
Volatility is down, confidence is up, and risk aversion is much lower – for now.
But at least four downside risks are likely to materialize this year, undermining global growth and eventually negatively affecting investor confidence and market valuations of risky assets.
First, the eurozone is in deep recession, especially in the periphery, but now also in the core economies, as the latest data show an output contraction in Germany and France.
The credit crunch in the banking system is becoming more severe as banks deleverage by selling assets and rationing credit, exacerbating the downturn.
Meanwhile, not only is fiscal austerity pushing the eurozone periphery into economic free-fall, but the loss of competitiveness there will persist as relief at the waning prospect of disorderly defaults strengthens the euro’s value.
To restore competitiveness and growth in these countries, the euro needs to fall towards parity with the US dollar.
And, while the risk of a disorderly Greek collapse is now receding, it will re-emerge this year as political instability, civil unrest, and more fiscal austerity turn the Greek recession into a depression.
Second, there is now evidence of weakening performance in China and the rest of Asia.
In China, the economic slowdown underway is unmistakable.
Export growth is down sharply, turning negative vis-à-vis the eurozone’s periphery.
Import growth, a sign of future exports, has also fallen.
Similarly, Chinese residential investment and commercial real-estate activity are slowing sharply as home prices start to fall.
Infrastructure investment is down as well, with many high-speed railway projects on hold and local governments and special-purpose vehicles struggling to obtain financing amid tightening credit conditions and lower revenues from land sales.
Elsewhere in Asia, Singapore’s economy shrank for the second time in three quarters at the end of 2011.
India’s government predicts 6.9% annual GDP growth in 2012, which would be the lowest rate since 2009.
Taiwan’s economy fell into a technical recession in the fourth quarter of 2011.
South Korea’s economy grew at a mere 0.4% in the same period – the slowest pace in two years – while Japan’s GDP contracted at a larger-than-expected 2.3%, as the yen’s strength weighed down exports.
Third, while US data have been surprisingly encouraging, America’s growth momentum appears to be peaking.
Fiscal tightening will escalate in 2012 and 2013, contributing to a slowdown, as will the expiration of tax benefits that boosted capital spending in 2011.
Moreover, given continuing malaise in credit and housing markets, private consumption will remain subdued; indeed, two percentage points of the 2.8% expansion in the last quarter of 2011 reflected rising inventories rather than final sales.
And, as for external demand, the generally strong dollar, together with the global and eurozone slowdown, will weaken US exports, while still-elevated oil prices will increase the energy import bill, further impeding growth.
Finally, geopolitical risks in the Middle East are rising, owing to the possibility of an Israeli military response to Iran’s nuclear ambitions.
While the risk of armed conflict remains low, the current war of words is escalating, as is the covert war in which Israel and the US are engaged with Iran; and now Iran is lashing back with terrorist attacks against Israeli diplomats.
The Islamic Republic, with its back to the wall as sanctions bite, could also react by sinking a few ships to block the Strait of Hormuz, or by unleashing its proxies in the region – the pro-Iranian Shia in Iraq, Bahrain, Kuwait, and Saudi Arabia, as well as Hezbollah in Lebanon and Hamas in Gaza.
Moreover, there are broader geopolitical tensions in the Middle East that will not ease – and that might intensify.
The Arab Spring has produced a relatively favorable outcome in Tunisia, where it started, but developments in Egypt, Libya, and Yemen remain far more uncertain, while Syria is on the brink of civil war.
In addition, there are substantial concerns about political stability in Bahrain and Saudi Arabia’s oil-rich Eastern Province, and potentially even in Kuwait and Jordan – all areas with substantial Shia or other restless populations.
Beyond the countries affected by the Arab Spring, rising tensions between Shia, Kurdish, and Sunni factions in Iraq since the US withdrawal do not bode well for a boost in oil production.
There is also the ongoing conflict between the Israelis and the Palestinians, as well as strains between Israel and Turkey.
In other words, there are many things that could go wrong in the Middle East, any combination of which might stoke fear in markets and lead to much higher oil prices.
Despite weak economic growth in advanced economies and a slowdown in many emerging markets, oil is already at around $100 per barrel.
But the fear premium could push it significantly higher, with predictably negative effects on the global economy.
With so many risks in so many places, investors, not surprisingly, will eventually prize liquidity in their portfolios, while shunning riskier fixed assets again when these tail risks materialize.
That is yet another reason to believe that the global economy remains far from achieving a balanced and sustainable recovery.
Civilizing the City
BANGALORE – Half of humanity – 3.5 billion people – live in urban areas today.
Our metropolises are the engines of growth for a global economy emerging from the shadow of financial crisis.
In Bangalore, my home, investment is pouring into a city at the forefront of the Indian economy’s transformation – home to companies like Infosys and Wipro, and named by Forbes Magazine as one of the “Fastest Growing Cities of the Next Decade.”
But, as Bangalore’s citizens prepare to go to the polls in state elections, their concerns are not merely economic.
The city’s financial success stories mask a darker reality – quality of life for many city-dwellers has deteriorated over recent years.
The movement of the rural poor to large cities is one of the exemplary narratives of the modern era.
And governments, which typically focus on crude measures of economic performance, encourage rapid urbanization.
In China, for example, the relaxation of migration controls in the 1980’s and the opening of the economy led to the spectacular growth of the country’s eastern cities.
More than 50% of Chinese live in urban areas today, up from 25% in 1990, and the proportion is expected to reach 70% by 2035.
While the majority of Indians still live in rural areas, this, too, is changing fast.
From 1970 to 2010, India’s urban population grew by 250 million.
The next quarter-billion will be added in half that time.
By 2030, 70% of India’s GDP will come from its cities.
But cities are simply unable to cope with the influx of migrants on the current scale.
The fast-growing metropolises of India, China, Brazil, and other major emerging economies offer plenty of jobs, but basic amenities are lacking; as a result, many of the urban poor live in slums, without adequate health care, water supplies, or electricity.
The problems are legion.
Municipalities, often owing to corruption or poor management, are unable or unwilling to impose rigorous planning regulations.
Infrastructure spending is either inadequate or poorly targeted.
Workers come home from their jobs to homes that are dark, dank, and depressing.
They feel unsafe on poorly-lit streets, and have little access to parks or recreational facilities.
Mornings and evenings are lost to long commutes on polluted highways.
The novelty of the rapid economic improvements seen by many city-dwellers in India, China, and elsewhere over the past ten years has insulated governments from the repercussions of poor urban planning.
As I take my morning strolls through Bangalore, though, I sense growing resentment of the inadequacies, and frustration at insufficient improvements in citizens’ quality of life.
Democracy exists precisely to remedy the kinds of injustices I hear from the hardworking Bangaloreans I encounter on the street and online.
Bangalore is a modern city, and its citizens are expressing their displeasure in modern ways – on Facebook, in chat rooms, and on Twitter.
Governments would do well to heed these complaints (indeed, to engage with them in these hi-tech incarnations of a town-hall meeting), because civil unrest could disrupt the positive momentum, not only in cities, but in the entire global economy.
That threat might seem far-off while growth continues at relatively high rates; but, unless workers see the benefit of their labors in the form of improved living conditions, protests could ensue.
Already, there have been major strikes at factories across China – Motorola, Honda, and Foxconn, among others.
That would have been unheard of several years ago, as would today’s growing trend among China’s urban middle classes for de-urbanization – a brain drain whereby educated city dwellers give up on the rat race and return to the countryside in pursuit of cleaner air, open spaces, and better accommodation.
Our cities risk becoming literally uninhabitable.
Of the world’s ten most densely populated cities, seven are in India.
The urban sprawl of Delhi, Mumbai, Chennai, and Bangalore has continued unchecked, unplanned, and with under-investment in infrastructure for far too long.
Urban pollution contributed to 620,000 needless deaths in India last year, mainly among the very poor.
The number of people living in our slums has doubled over the past decade, and is now greater than the population of the United Kingdom.
The consultancy McKinsey argues in a recent report that India needs to invest at least $1.2 trillion in its urban infrastructure over the next two decades, or $134 per capita annually.
It currently invests only $17 per capita, compared to $116 in China and $292 in the United States.
India spends less on health care and education per capita than China, Brazil, South Africa, or Mexico.
If India is to maintain its competitiveness, a focus on dramatically improving the nation’s urban areas is imperative.
McKinsey calculates that the country requires between 700-900 million square meters of new residential and commercial space each year; 350-400 kilometers (217-248 miles) of metros and subways (20 times what has been achieved in the past decade); and 19,000-25,000 kilometers of annual road construction (equivalent to all the roads built over the past ten years).
The task is daunting.
But, despite the grumbling, India’s city dwellers – like those elsewhere – do not want to sacrifice the enormous gains of the past few decades to ineffective or corrupt governance.
They want to work toward a future in which their quality of life is among the best in the world, with green spaces, sustainable public transport, clean air, well-built houses, and safe streets.
This is why I have set up the Nammu Bengaluru (“Our Bangalore”) Awards.
It is important to recognize those who are contributing to the vision of a city that is feted not just for its economic successes, but also for its quality of life.
Their example is one that emerging-country urbanites everywhere should seek to emulate.
Globalizing the Security Council
BRASILIA – The 1945 United Nations Charter represented a historic breakthrough in the pursuit of peace on a multilateral basis.
At the end of a global war that claimed more than 50 million lives, the United States and the Soviet Union emerged as the world’s two major powers.
The UN Charter, initially negotiated by the US, the Soviet Union, and the United Kingdom during World War II, established a Security Council containing five permanent members, including France and the Republic of China.
At its inception, the UN brought together 51 countries; it now has 193 member states.
But, although the Security Council was enlarged in 1965 by increasing the number of non-permanent seats from six to ten, its permanent members have not changed since 1945.
The world has gone through extraordinary transformations since then.
In addition to interstate conflict and the proliferation of weapons – particularly weapons of mass destruction – new challenges have emerged, such as terrorism and the involvement of non-state actors in internal conflicts.
Meanwhile, the global distribution of economic and political power has undergone a radical reconfiguration, setting the stage for the emergence of a multipolar international order.
In this environment, the Security Council’s frozen composition is imposing significant limits on the international community’s capacity to address global challenges.
Conflicts drag on without proper action from the body created to resolve them.
Thousands of civilians die, are displaced, or are subjected to appalling human-rights abuses, while the Security Council proves unable or unwilling to act.
Reform of the Council is thus urgent and indispensable.
A majority of UN member states are in favor of creating a new Council with an expanded roster of both permanent and non-permanent members.
This majority reflects a growing perception that the world would be more stable and more secure with a strengthened and updated multilateral system.
That means adding new voices to reflect the world in which we now live.
Only then will the Security Council have the legitimacy to act on today’s manifold conflicts.
A reformed Security Council would reflect the emergence of new powers and their readiness to contribute to the maintenance of international peace and security.
In the financial and economic arena, this new multipolarity has already led to quota reforms at the International Monetary Fund and resulted in the consolidation of the G-20 as the premier venue for multilateral economic-policy coordination.
The contrast with matters of peace and security is stark.
Entire regions of the world, such as Africa and Latin America, are excluded from the nucleus of decision-making.
A governing body that is not representative fuels uncertainty and frustration among those subject to its decisions, undermining the legitimacy – and thus the effectiveness – of its actions.
The greatest risk that we run is erosion of the Security Council’s credibility, and, with it, a diminishing capacity to confront grave threats to peace.
We all stand to lose if new international crises end up being addressed by coalitions of countries at the margins of the Security Council and in a manner that flouts international law.
The lessons of the recent past are clear.
In any conflict, neighboring countries’ participation and commitment are indispensable to the achievement of peace.
Only an expanded Security Council can enable effective conflict resolution worldwide.
The international community cannot afford to postpone reform.
It is our duty to preserve the multilateral system of peace and security – an achievement of the international community that, despite its shortcomings, has helped save the planet from another war on a global scale.
Only an increase in the number of permanent and non-permanent seats can remedy the representation deficit within the Security Council and adapt it to the realities of the twenty-first century.
If new members and regions are not offered a seat at the table, the Council will face increasing irrelevance – and the world, more than ever in need of effective conflict resolution, will be far worse off.
The Sino-American Test in North Korea
MADRID – Repeated threats from North Korea have turned the Korean Peninsula into one of the world’s most dangerous hotspots.
But the situation also offers an important opportunity: a gain in strategic trust between China and the United States, the two countries with the capacity to resolve the tensions once and for all.
If they manage to cooperate constructively in order to shape a peace acceptable to all sides, this would make not only Korea, but also the region and the world, a safer place.
Ten years after opting out of the Nuclear Non-Proliferation Treaty, North Korea clearly possesses nuclear weapons.
The regime’s nuclear test in February – its third since 2006 – was likely a miniaturized device, which makes the situation even more worrying, given that successful miniaturization is critical for using nuclear weapons in ballistic missiles.
February’s test provoked another round of United Nations sanctions, drafted by the US and China, triggering an escalation of threats and provocations from the North.
The tension on the peninsula increased further with the annual joint military exercises conducted by the US and South Korea – especially when American nuclear-capable B-52 and B-2 bombers were added to the drills.
Nobody wants war on the Korean Peninsula.
For the North, it would be suicide; for the South, with its vibrant economy and widening free-trade agreements, the opportunity cost would be particularly high.
Likewise, regional stability is a prerequisite of China’s stellar economic growth, and military conflict would be a setback for US economic rebirth as well.
Indeed, with US defense spending finally set to decline after a decade of debt-financed war in Iraq and Afghanistan, America has little fiscal room for an unforeseen military entanglement.
The US “pivot” to Asia is built on economic opportunities there; a conflict with unpredictable fallout does not fit the scheme.
China is the key geostrategic player in resolving the conflict, because it provides North Korea with 90% of its energy, 80% of its consumer goods, and 40% of its food.
But it is unclear how much influence China’s government holds over Kim Jong-un’s regime.
Sino-North Korean relations have borne a significant scar since 1991, when China recognized South Korea without insisting that the US formally recognize the North.
The North Koreans believe that China sacrificed them for commercial interests, and bilateral relations have yet to recover.
Nonetheless, China continues to regard North Korea as an important strategic asset, because it serves as a buffer state shielding China’s border from American troops on the peninsula – which has historically been used as an entry point by invading troops.
China’s ideal solution would therefore be to maintain the status quo while persuading the North to open up – a path of gradual change that avoids open conflict or the regime’s collapse.
Either of these traumatic outcomes would spell disaster, for both the region and the world.
First, the regime’s implosion would unleash a massive refugee flow, implying enormous social and economic costs.
Moreover, Asia remains a continent defined by balance-of-power diplomacy, border conflicts, and historic mistrust, with no multilateral security structures to soften regional tensions.
Given these conditions, even a small spark could ignite a wildfire.
In this environment, mistrust of China’s rise as a regional hegemon in much of East Asia only intensifies the need for active Chinese participation in promoting regional stability and peace – a peace framework with Asian roots, acceptable to all parties.
Only through such efforts will China be able to increase its international legitimacy, thereby minimizing the risk of future conflict.
It is essential that China and the US work together to resolve the current crisis.
The US must reiterate clearly that indefinitely prolonging the status quo on the Korean Peninsula would imply a strategic loss for China, and that China must join the international community in its efforts to halt North Korea’s nuclear program.
This cooperation is the only way to force the North’s hand and put an end to the incessant cycle of crisis and mounting risk.
The current crisis offers a unique test case for joint handling of international affairs – or, in this case, regional affairs with global consequences – by the world’s two biggest powers.
During US Secretary of State John Kerry’s trip to China this month, the two countries pronounced their shared goals: denuclearization of the Korean Peninsula and durable peace in the region.
This is a good starting point.
Sino-US cooperation on this flashpoint could be a huge step forward in building much-needed bilateral strategic trust.
But the two countries’ markedly different foreign-policy approaches will not facilitate matters.
While the US tends to segment problems in order to find solutions to each part within a finite period of time, China relies on broad, long-term perspective and views issues as extended, relative processes.
That is why, in dealing with impoverished, isolated, nuclearized North Korea, where Sino-US cooperation is the only option, the US and China face both a challenge and an opportunity.
To make the most of it requires a significant boost in mutual strategic trust.
The US-China Dialogue of the Deaf
NEW YORK – The visit on January 19 of China’s president, Hu Jintao, is coming at a time when economic conflict between the United States and China has become one of the most worrying global developments.
Throughout last year, the US pressed China to revalue the renminbi, while China blamed the US Federal Reserve policy of “quantitative easing” for currency-market turmoil.
The two sides are talking past each other, though both are making valid points.
The global imbalances that were at the root at the Crash of 2008 have not been corrected – indeed, some have grown larger.
The US still consumes more than it produces, running a chronic trade deficit.
Consumption remains too high, at nearly 70% of GDP, compared to an unsustainably low 35.6% of GDP in China.
Households are over-indebted and must save more.
The US economy needs higher productivity, but US corporations, which are operating very profitably, are accumulating cash instead of investing it – with quantitative easing aimed at heading off deflation.
In China, by contrast, bank lending needs to be reigned in, but regulatory efforts have been hindered by off-balance-sheet financing and the development of an informal quasi-banking sector. The economy is showing signs of over-heating.
These imbalances could be reduced by the US using fiscal rather than monetary stimulus, and China allowing the renminbi to appreciate in an orderly manner.
But domestic politics in both countries stand in the way.
In the US, the Republicans, who won the mid-term elections, were determined to extend the Bush tax cuts in their entirety. This leaves little room for fiscal stimulus, while the tax cut is more likely to be saved than invested.
That is why the Fed had to resort to quantitative easing, even though it tends to stimulate asset bubbles rather than productive investments.
China interprets quantitative easing as a plot to devalue the dollar and force a revaluation of the renminbi.
The US, in turn, cannot understand why China should be so reluctant to allow the renminbi to appreciate, as doing so would help to dampen inflationary pressures.
Maintaining a two-tier currency system and an undervalued currency has been the key to China’s success.
It is much more efficient than taxation as a means of skimming a significant share of payments for Chinese exports, which accrue as currency reserves and can be used at the central government’s discretion. This has made the central government very powerful, attracting the best brains into its service.
China would prefer to improve the trade balance through removal of trade barriers rather than exchange-rate adjustment, because it is reluctant to put additional strain on its export industries and eager to gain access to American technology.
The US maintains restrictions on high-tech exports to China because of the latter’s lack of respect for intellectual property rights. The US prefers higher Chinese import prices to help relieve deflationary pressures – which would also eliminate the need for quantitative easing, removing a source of Chinese complaints.
As things stand now, each country is pursuing policies that do not help the other and are suboptimal for their own economies.
The entire global economy would benefit if both sides listened to each other and coordinated their economic policies.
The conflict in economic policy is spreading to the geopolitical sphere. First, China asserted a “core interest” in the South China Sea, effectively claiming its 200-mile “special economic zone” throughout the region as territorial waters.
US Secretary of State Hillary Clinton countered that America also has “interests” in this area, bringing the two countries to loggerheads over a vast and critically important maritime region in Asia.
Then China became embroiled with Japan in a dispute over the Diaoyu or Senkaku Islands.
Few Westerners appreciate how seriously China takes this issue. Geologically, the islands are connected to Taiwan, and Japan gained control over them by taking possession of Taiwan in 1895.
This elevates these uninhabited rocks to the same level of importance as Taiwan or Tibet for the official “one China doctrine.”
China greatly resented it when the US endorsed the Japanese position.
China’s rapid rise, and America’s equally rapid loss of power and influence, has created a dangerous situation.
With the exception of the peaceful transition of world leadership from Britain to the US after World War I, such global power shifts have always involved armed conflict.
The deterioration in US-China relations is particularly troubling because it takes place against a background of global imbalances and serious internal political divisions, which drive both countries to take intransigent positions.
The global imbalances could be cured, and conflicts avoided, only by greater international cooperation.
But macroeconomic policy is not the only area that would benefit from better understanding between the two countries.
Consider Afghanistan. The country is rich in mineral resources that China needs, but it is the US that spends $10 billion a month occupying a country whose annual GDP is only $15 billion.
As things stand, the US is likely to reduce its presence before Afghanistan is pacified and the mineral resources developed. Since China is the obvious market for these minerals, it would make sense for China to encourage continued American engagement by making a significant contribution to the cost of training the Afghan army.
China was farsighted when it adopted the doctrine of harmonious development, but recently it has veered from it.
Apparently, the rate of change has been too rapid for Chinese leaders to adjust to it.
The leadership is preoccupied with taking care of the needs of its own people, many of whom still live in poverty.
But China has become a great power, with all the obligations for maintaining world order that go with it, whether or not the leadership acknowledges it.
When US President Barack Obama visited China in November 2009, he acknowledged China’s rapid rise and offered a partnership in maintaining and improving the world order.
But the Chinese leadership declined the offer, explaining that China is a developing country that can hardly meet its own people’s needs.
That rift is unfortunate, because improvement in Chinese living standards ought to go hand-in-hand with Chinese participation in building a better world order.
Only if China pays closer attention to how it is perceived and accepted by the rest of the world can it continue to rise in a peaceful manner.
China’s leadership knows that it must fulfill its own people’s minimum expectations in order to maintain internal peace and stability; now it must learn to make itself acceptable to the rest of the world in order to preserve external peace and stability. That means becoming a more open society and playing a more active role in maintaining a peaceful and stable world order.
China ought to regard this not as a burdensome necessity, but as an inspiration to greatness.
The best periods in Chinese history were those in which the country was most open both internally and towards the outside world.
By contrast, when it comes to military might, China will not be a match for the US for some time to come.
If current trends continue, China is bound to devote an increasing proportion of its resources to the military at the expense of the general population, whose expectations the leadership will find increasingly difficult to meet.
In that case, today’s prosperity is likely to prove transient.
Worried neighbors are likely to seek protection under the wings of the American eagle, reinforcing the US military budget, which is already oversized.
Unless a deliberate effort is made by both sides to reach a better understanding, the world faces a turbulent time in 2011 and beyond.
The Uses and Abuses of Economic Ideology
LONDON – John Maynard Keynes famously wrote that “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly understood.
Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”
But I suspect that a greater danger lies elsewhere, with the practical men and women employed in the policymaking functions of central banks, regulatory agencies, governments, and financial institutions’ risk-management departments tending to gravitate to simplified versions of the dominant beliefs of economists who are, in fact, very much alive.
Indeed, at least in the arena of financial economics, a vulgar version of equilibrium theory rose to dominance in the years before the financial crisis, portraying market completion as the cure to all problems, and mathematical sophistication decoupled from philosophical understanding as the key to effective risk management.
Institutions such as the International Monetary Fund, in its Global Financial Stability Reviews (GFSR), set out a confident story of a self-equilibrating system.
Thus, only 18 months before the crisis erupted, the April 2006 GFSR approvingly recorded “a growing recognition that the dispersion of credit risks to a broader and more diverse group of investors… has helped make the banking and wider financial system more resilient.
The improved resilience may be seen in fewer bank failures and more consistent credit provision.” Market completion, in other words, was the key to a safer system.
So risk managers in banks applied the techniques of probability analysis to “value at risk” calculations, without asking whether samples of recent events really carried strong inferences for the probable distribution of future events.
And at regulatory agencies like Britain’s Financial Services Authority (which I lead), the belief that financial innovation and increased market liquidity were valuable because they complete markets and improve price discovery was not just accepted; it was part of the institutional DNA.
This belief system did not, of course, exclude the possibility of market intervention.
But it did determine assumptions about the appropriate nature and limits of intervention.
For example, regulation to protect retail customers could, sometimes, be appropriate: requirements for information disclosure could help overcome asymmetries of information between businesses and consumers.
Similarly, regulation and enforcement to prevent market abuse was justifiable, because rational agents can also be greedy, corrupt, or even criminal.
And regulation to increase market transparency was not only acceptable, but a central tenet of the doctrine, since transparency, like financial innovation, was believed to complete markets and help generate increased liquidity and price discovery.
But the belief system of regulators and policymakers in the most financially advanced centers tended to exclude the possibility that rational profit-seeking by professional market participants might generate rent-seeking behavior and financial instability rather than social benefit – even though several economists had clearly shown why that could happen.
Policymakers’ conventional wisdom reflected, therefore, a belief that only interventions aimed at identifying and correcting the very specific imperfections blocking attainment of the nirvana of market equilibrium were legitimate.
Transparency was essential in order to reduce information costs, but it was beyond the ideology to recognize that information imperfections might be so deep as to be unfixable, and that some forms of trading activity, however transparent, might be socially useless.
Indeed, the Columbia University economist Jagdish Bhagwati, in a famous essay in Foreign Affairs entitled “Capital Myth,” talked of a “Wall Street/Treasury” complex that fused interests and ideologies.
Bhagwati argued that this fusion played a role in turning liberalization of short-term capital flows into an article of faith, despite sound theoretical reasons for caution and slim empirical evidence of benefits.
And, in the wider triumph of the precepts of financial deregulation and market completion, both interests and ideology have clearly played a role.
Pure interests – expressed through lobbying power – were undoubtedly important to several key deregulation measures in the US, whose political system and campaign-finance rules are peculiarly conducive to the power of specific lobbies.
Interests and ideology often interact in ways so subtle that is difficult to disentangle them, the influence of interests being achieved through an unconsciously accepted ideology.
The financial sector dominates non-academic employment of professional economists.
Because they are only human, they will tend implicitly to support – or at least not aggressively challenge – the conventional wisdom that serves the industry’s interests, however rigorously independent they are in their judgments concerning specific issues.
Market efficiency and market completion theories can help reassure major financial institutions’ top executives that they must in some subtle way be doing God’s work, even when it looks at first sight as if some of their trading is simply speculation.
Regulators need to hire industry experts to regulate effectively; but industry experts are almost bound to share the industry’s implicit assumptions.
Understanding these social and cultural processes could itself be an important focus of new research.
But we should not underplay the importance of ideology.
Sophisticated human institutions – such as those that form the policymaking and regulatory system – are impossible to manage without a set of ideas that are sufficiently complex and internally consistent to be intellectually credible, but simple enough to provide a workable basis for day-to-day decision-making.
Such guiding philosophies are most compelling when they provide clear answers.
And a philosophy that asserts that financial innovation, market completion, and increased market liquidity are always and axiomatically beneficial provides a clear basis for regulatory decentralization.
Here, I suspect, is where the greatest challenge for the future lies.
For, while the simplified pre-crisis conventional wisdom appeared to provide a complete set of answers resting on a unified intellectual system and methodology, really good economic thinking must provide multiple partial insights, based on varied analytical approaches.
Let us hope that practical men and women will learn that lesson.
America’s Third-World Politics
CAMBRIDGE – With its presidential election over, the United States can finally take a breather from campaign politics, at least for a while.
But an uncomfortable question lingers: How is it possible for the world’s most powerful country and its oldest continuous democracy to exhibit a state of political discourse that is more reminiscent of a failed African state?
Maybe that is too harsh an assessment of Africa’s nascent democracies.
If you think I exaggerate, you have not been paying close attention.
The pandering to extremist groups, the rejection of science, the outright lies and distortions, and the evasion of the real issues that characterized the most recent election cycle set a new low for democratic politics.
Without question, the worst offenders are America’s Republicans, whose leaders have somehow become enraptured by ideas that are beyond the pale in other advanced countries.
Of the party’s dozen presidential candidates, only two (Mitt Romney and Jon Huntsman) declined to reject scientific evidence concerning global warming and its human causes.
But, when pressed on it, Romney was sufficiently uncomfortable about his position that he wobbled on the issue.
The Darwinian theory of evolution has long been a dirty word among Republicans as well.
Rick Perry, the governor of Texas and an early frontrunner in the Republican primary, called it just a “theory out there,” while Romney himself has had to argue that it is consistent with creationism – the idea that an intelligent force designed the universe and brought it into being.
Likewise, if there is an archaic idea in economics, it is that the US should return to the Gold Standard.
Yet, this idea, too, has strong support within the Republican Party – led by Ron Paul, another contender for the party’s presidential nomination.
No one was surprised when the party’s platform gave a nod to the Gold Standard in its convention in August.
Most non-Americans would find it crazy that neither Romney nor Barack Obama supported stricter gun-control laws (with Obama making an exception only for assault weapons such as AK-47s), in a country where it is sometimes easier to buy guns than it is to vote.
Most Europeans cannot understand how, in a civilized country, both candidates can favor the death penalty.
And I won’t even get into the abortion debate.
Candidate Romney was so cowed by his party’s obsession with low taxes that he never put forth a budget that added up.
It was left to his spinners to explain, as The Economist put it, that this was “necessary rubbish, concocted to persuade the fanatics who vote in the Republican primaries.”
Obama, for his part, catered to economic nationalists by attacking Romney as an “outsourcing pioneer” and calling him an “outsourcer in chief” – as if outsourcing were evil, could be stopped, or Obama himself had done much to discourage it.
So rampant were the equivocations, untruths, and outright lies from both camps that many media outlets and non-partisan groups maintained running lists of factual distortions.
One of the best known, FactCheck.org, an initiative of the Annenberg Public Policy Center at the University of Pennsylvania, confessed that this campaign had kept them exceptionally busy.
Some of the most egregious examples included Obama’s claims that Romney was planning to raise taxes by $2,000 on middle-income taxpayers and/or cut taxes by $5 trillion, and that Romney backed a law that would outlaw “all abortions, even in cases of rape and incest.”
Romney went even further, claiming that Obama planned to raise taxes by $4,000 on middle-income taxpayers; that Obama planned “to gut welfare reform by dropping work requirements”; and that Chrysler, bailed out by the Obama administration, was moving all of its Jeep production to China.
None of these claims was true.&nbsp;
“It’s been that sort of campaign,” FactCheck.org’s analysts wrote, “filled from beginning to end with deceptive attacks and counterattacks, and dubious claims.”&nbsp;
Meanwhile, over the course of three televised presidential debates and one vice-presidential debate, climate change, the signature issue of our time and the most serious problem confronting our planet, was not mentioned even once.
One can draw two possible conclusions from America’s election.
One is that the US will ultimately be undone by the poor quality of its democratic discourse, and that it is merely at the start of an inevitable decline.
The symptoms are there, even if the disease has not yet infected the entire body.
The other possibility is that what is said and done during an election makes little difference to a polity’s health.
Campaigns are always a time for cheap populism and kowtowing to single-issue fundamentalists.
Perhaps what really matters is what happens after a candidate takes office: the quality of the checks and balances within which he or she operates, the advice offered, the decisions taken, and, ultimately, the policies pursued.
But, if American elections are nothing other than entertainment, why is so much money spent on them, and why do so many people get so exercised over them?
Can the answer be that the outcome would be even worse otherwise?
To paraphrase Winston Churchill, elections are the worst way to select a political leader, save for all other methods that have been tried – and nowhere more so than in America.
The Usual Suspect
BERKELEY – Across the Euro-Atlantic world, recovery from the recession of 2008-2009 remains sluggish and halting, turning what was readily curable cyclical unemployment into structural unemployment.
And what was a brief hiccup in the process of capital accumulation has turned into a prolonged investment shortfall, which means a lower capital stock and a lower level of real GDP not just today, while the recovery is incomplete, but possibly for decades.
One legacy of Western Europe’s experience in the 1980’s is a rule of thumb: each year that lower labor-force attachment and reduced capital stock as a result of declining investment depresses production $100 billion below normal implies that productive potential at full employment in future years will be $10 billion below what would otherwise have been forecast.
The fiscal implications of this are striking.
Suppose that the United States or the Western European core economies boost their government purchases for next year by $100 billion.
Suppose further that their central banks, while unwilling to extend themselves further in unconventional monetary policy, are also unwilling to stymie elected governments’ policies by offsetting their efforts to stimulate their economies.
In that case, a simple constant-monetary-conditions multiplier indicates that we can expect roughly $150 billion of extra GDP.
That boost, in turn, generates $50 billion of extra tax revenue, implying a net addition to the national debt of only $50 billion.
What is the real (inflation-adjusted) interest rate that the US or Western European core economies will have to pay on that extra $50 billion of debt?
If it is 1%, boosting demand and production by $150 billion next year means that $500 million must be raised each year in the future to keep the debt from growing in real terms.
If it is 3%, the required increase in annual tax revenues rises to $1.5 billion a year.
If it is 5%, the government will need an additional $2.5 billion per year.
Assuming that continued subnormal output casts a 10% shadow on future potential output levels, that extra $150 billion of production means that in the future, when the economy has recovered, there will be an extra $15 billion of output –&nbsp;and an extra $5 billion of tax revenue.
Governments will not have to raise taxes to finance extra debt taken on to fund fiscal boosts.
Instead, the supply-side boost to potential output over the long run from expansionary fiscal policy would be highly likely not only to pay for the additional debt needed to finance the spending boost, but also to allow for additional future tax cuts while still balancing the budget.
Now this is, to say the least, a highly unusual situation.
Normally, the multipliers applied to expansions in government purchases are much less than 1.5, because the central bank does not maintain constant monetary conditions as government spending expands, but rather acts to keep the economy on track to meet the monetary authority’s inflation target.
A more usual multiplier is the monetary-policy offset multiplier of 0.5 or zero.
Moreover, in a normal situation, governments – even the US government and those in Western Europe – cannot run up the national debt and still pay a real interest rate of 1%, or even 3%.
Normally, the math of increasing government purchases tells us that a small or dubious boost to output today brings a heavier financing burden in the future, which makes debt-financed fiscal expansion a bad idea.
But the situation today is not usual at all.
Today the global economy is, as Ricardo Cabellero of MIT stresses, still desperately short of safe assets.
Investors worldwide are willing to pay extraordinarily high prices for, and accept extraordinarily low interest rates on, core-economy debt, for they value as an extraordinary benefit having a safe asset that they can use as collateral.
Right now, investors’ preference for safety makes financing additional government debt abnormally cheap, while the long-run shadows cast by prolonged subnormal production and employment make the current sluggish recovery predictably costly.
Given the need to mobilize idle resources in the short run in order to maintain productive potential in the long run, a larger national debt would be, as Alexander Hamilton, the first US treasury secretary, put it, a national blessing.
The Vagina Chronicles
NEW YORK – Has there really been a sexual revolution?
One of the themes that I explore in my new book,&nbsp;Vagina: A New Biography, is that the West’s supposedly sexually liberated societies, in which sexual images and content are available everywhere, have not really been all that liberating for women.
Many of the reactions to my book tend to confirm that belief.
Many responses were positive: the book is Publishers Weekly’s top science book of the fall.
But the tone of some of the criticism – from “mystic woo-woo about the froo froo” to “bad news for everybody who has one”&nbsp;– suggests that even a culture in which&nbsp;millions of women are devouring a novel about sadomasochism, Fifty Shades of Grey, still has problems discussing women’s sexuality in a positive, empowering way.
We need to have that conversation.
Around the world, many women are targeted because of their sexuality: they are genitally mutilated, married off as children, raped with impunity, stoned for “fornication” and other sexual offenses, and told that their desire makes them sinful and worthy of abuse.
Natasha Walter, who works with refugee women in London, reports that most of the persecution they are fleeing is sexual – and that the law does not validate the grounds for their asylum applications.
Our societies do not take seriously women’s sexual integrity or crimes against it.
The modern history of female sexuality has been plagued with misinformation, embarrassment, and sexual frustration.&nbsp;When Shere Hite published The Hite Report: A Nationwide Study of Female Sexuality in 1976, about one-third of the US women surveyed reported that they did not have orgasms during sex when they wished to.
Hite’s important assertion that there is more to female sexual response than penetration triggered a wave of information about female sexuality.
Although&nbsp;The Hite Report initially spurred great controversy, in the end it was broadly accepted that women’s pleasure and sexual well-being mattered and deserved respectful inquiry.
But, in the past four decades, we have veered from informed discussion about women and their bodies into a&nbsp;raunchy culture of celebrity sex videos and zipless hookups in which women’s desire, arousal, and satisfaction – let alone their (or men’s) emotional needs – rarely play a part.
Even in this “enlightened” age, many find it difficult to acknowledge new scientific data showing that female sexuality does not diminish or weaken women, but strengthens them in some ways – whoever they are, of whatever age or sexual orientation, whether alone or in relationships.
Some critics have been upset by my argument that the neurotransmitter dopamine, which is related to motivation, focus, and reward,&nbsp;is part of what can make&nbsp;sexual pleasure empowering for women.
This&nbsp;argument is based on the latest science about dopamine’s role in arousal (as James Pfaus and his team at Concordia University in Montreal have documented), as well as on well-established summaries of the literature, such as David Linden’s The Compass of&nbsp;Pleasure.
This research indicates that positively experienced mind states are boosted when women are supported by the society in which they live and allow themselves to think about and anticipate rewarding sexual experience.
(They are inhibited, of course, when women fear being stoned, mocked, shamed, raped or brutalized in response to their desire).
Similarly, a rich body of data, including many important studies by Alessandra Rellini and Cindy Meston, now links women’s arousal to their autonomic nervous systems (Rellini and Meston have even found that rape can affect women’s baseline ANS years after the assault).
These and other studies link female arousal to women’s freedom from “bad stress” and support in relaxation – and in their having some sense of control over events affecting them.
In other words, if you want a woman to wish enthusiastically to sleep with you for the rest of her life, you must act as&nbsp;a teammate on the issues that affect her stress levels.
That is nothing if not a “feminist” validation of many women’s intuitive experiences and needs.
In fact, female and male sexual response differs in important ways: the length of response cycles, the role of “bad stress,” and the complexity of pelvic neural wiring (which in men is fairly standard, but in women is highly variegated and individualized).
This finding should help women be less judgmental about the unique nature of their sexual responses.
Here is one statistic that says it all: The Association of Reproductive Health Professionals claims&nbsp;that 30% of women do not reach orgasm regularly when they wish to, a proportion that has not budged since The Hite Report.
Moreover, while findings vary, some estimates put the prevalence rate of “hypoactive sexual desire disorder”– a loss of libido – at about one-third of American women.
The fact that science is finding connections between women’s sexual experience and their emotions and perception should not be cause for mockery, but for curiosity and respectful investigation of the facts.
There are plenty of data on male sexuality and the male brain, and sound new science on the mind-body connection is transforming medical practice, from cardiology’s use of meditation to the use of talk therapies in treating breast cancer.
If we respect both female sexuality and the female mind, surely we should not fear discussing the connections between the two that scientific research is uncovering.
It seems odd to me that one would have to make a case for this in 2012.
But, as we should know by now, the next sexual revolution – the one that actually values women as leaders, intellectuals, and sexual beings – is long overdue.
The Value of a Pale Blue Dot
Melbourne – The eighteenth-century German philosopher Immanuel Kant wrote: “Two things fill the heart with ever renewed and increasing awe and reverence, the more often and more steadily we meditate upon them: the starry firmament above and the moral law within.”
This year, the 400th anniversary of Galileo’s first use of a telescope, has been declared the International Year of Astronomy, so this seems a good time to ponder Kant’s first source of “awe and reverence.”
Indeed, the goal of the commemoration – to help the world’s citizens “rediscover their place in the universe” – now has the incidental benefit of distracting us from nasty things nearer to home, like swine flu and the global financial crisis.
What does astronomy tell us about “the starry firmament above”?
By expanding our grasp of the vastness of the universe, science has, if anything, increased the awe and reverence we feel when we look up on a starry night (assuming, that is, that we have got far enough away from air pollution and excessive street lighting to see the stars properly).
But, at the same time, our greater knowledge surely forces us to acknowledge that our place in the universe is not particularly significant.
In his essay “Dreams and Facts,” the philosopher Bertrand Russell wrote that our entire Milky Way galaxy is a tiny fragment of the universe, and within this fragment our solar system is “an infinitesimal speck,” and within this speck “our planet is a microscopic dot.”
Today, we don’t need to rely on such verbal descriptions of our planet’s insignificance against the background of our galaxy.
The astronomer Carl Sagan suggested that the Voyager space probe capture an image of earth as it reached the outer reaches of our solar system.
It did so, in 1990, and Earth shows up in a grainy image as a pale blue dot.
If you go to YouTube and search for “Carl Sagan – Pale Blue Dot,” you can see it, and hear Sagan himself telling us that we must cherish our world because everything humans have ever valued exists only on that pale blue dot.
That is a moving experience, but what should we learn from it?
Russell sometimes wrote as if the fact that we are a mere speck in a vast universe showed that we don’t really matter all that much: “On this dot, tiny lumps of impure carbon and water, of complicated structure, with somewhat unusual physical and chemical properties, crawl about for a few years, until they are dissolved again into the elements of which they are compounded.”
But no such nihilistic view of our existence follows from the size of our planetary home, and Russell himself was no nihilist.
He thought that it was important to confront the fact of our insignificant place in the universe, because he did not want us to live under the illusory comfort of a belief that somehow the world had been created for our sake, and that we are under the benevolent care of an all-powerful creator. “Dreams and Facts” concludes with these stirring words: “No man is liberated from fear who dare not see his place in the world as it is; no man can achieve the greatness of which he is capable until he has allowed himself to see his own littleness.”
After World War II, when the world was divided into nuclear-armed camps threatening each other with mutual destruction, Russell did not take the view that our insignificance, when considered against the vastness of the universe, meant that the end of life on Earth did not matter. On the contrary, he made nuclear disarmament the chief focus of his political activity for the remainder of his life.
Sagan took a similar view.
While seeing the Earth as a whole diminishes the importance of things like national boundaries that divide us, he said, it also “underscores our responsibility to deal more kindly with one another, and to preserve and cherish the pale blue dot, the only home we've ever known.” Al Gore used the “pale blue dot” image at the end of his film, An Inconvenient Truth, suggesting that if we wreck this planet, we have nowhere else to go.
That’s probably true, even though scientists are now discovering other planets outside our solar system.
Perhaps one day we will find that we are not the only intelligent beings in the universe, and perhaps we will be able to discuss issues of interspecies ethics with such beings.
This brings us back to Kant’s other object of reverence and awe, the moral law within. What would beings with a completely different evolutionary origin from us – perhaps not even carbon-based life forms – think of our moral law?
The Value of Being Undervalued
The paramount policy dilemma that emerging markets face nowadays is this: on the one hand, sustained economic growth requires a competitive (read “undervalued”) currency.
On the other hand, any good news is immediately followed by currency appreciation, making the task of remaining competitive that much harder.
So, you finally passed that crucial piece of legislation?
Your fiscally responsible political party just won the election?
Or your commodity exports hit the jackpot?
Good for you!
But the currency appreciation that follows will likely set off an unsustainable consumption boom, wreak havoc with your export sector, create unemployment, and sap your growth potential.
Success brings its reward in the form of immediate punishment!
In response, central banks may intervene in currency markets to prevent appreciation, at the cost of accumulating low-yield foreign reserves and diverting themselves from their primary goal of price stability.
This is the strategy followed by countries such as China and Argentina.
Or the central bank lets the markets go where they will, at the cost of drawing the ire of business, labor, the rest of the government, and, in fact, practically everyone except financial types.
This is the strategy pursued by countries such as Turkey and South Africa, which have adopted more conventional “inflation targeting” regimes.
The first strategy is problematic because it is unsustainable.
The second is undesirable because it buys stability at the cost of growth.
The importance of a competitive currency for economic growth is undeniable.
Virtually every instance of sustained high growth has been accompanied by a significantly depreciated real exchange rate.
This is as true of South Korea and Taiwan in the 1960’s and 1970’s, as it is of Argentina today.
Chile made its transition to high growth in the 1980’s on the back of a large depreciation.
Since the 1990’s, both China and India have received a huge boost from their undervalued currencies.
These are just some of the better-known examples.
Looking at the experience of more than 100 countries, I have found in my research that each 10% undervaluation adds 0.3 percentage points to growth.
Currency undervaluation is such a potent instrument for growth for the simple reason that it creates incentives for the economy’s growth-promoting sectors.
It increases the profitability of manufacturing and non-traditional agricultural sectors, which are the activities with both the highest level of labor productivity and with the most rapid rates of productivity increase.
An undervalued currency enables an economy to integrate into the world economy on the basis of strong export performance.
It stimulates production (and hence employment), unlike overvaluation, which stimulates consumption.
So what should policymakers do?
First, it is important to realize that a strong and overly volatile currency is not just the central bank’s problem to fix.
While the central bank bears a good part of the responsibility, it needs support from other parts of the government, most notably from the finance ministry.
Maintaining a competitive currency requires a rise in domestic saving relative to investment, or a reduction in national expenditure relative to income.
Otherwise, the competitiveness gains would be offset by rising inflation.
This means that the fiscal authorities have a big responsibility: to target a structural fiscal surplus that is high enough to generate the space needed for real exchange rate depreciation.
This may not be popular, especially in an economic downturn.
But no one has the right to complain about the central bank’s “high-interest rate, appreciated currency” policy when fiscal policy remains too lax for interest rates to be reduced without risking price stability.
There are other instruments available for increasing domestic saving and reducing consumption besides the fiscal balance.
Government policies can target private saving directly, by creating incentives for saving through appropriate tax and pension policies.
Even more importantly, policies can discourage foreign-borrowing-led consumption booms by taxing capital inflows (Chilean-style) or increasing financial intermediaries’ liquidity requirements.
There is little to be gained from letting hot money flow into an economy freely.
With such policies in place, the comfort zone for central banks is enlarged sufficiently to loosen monetary policy.
Equally important, the central bank needs to signal to the public that it now cares about the real exchange rate, because it is important to exports, jobs, and sustainable growth.
This can be done without announcing a specific target level for the exchange rate.
There is huge room to maneuver between the extremes of targeting a specific level of the real exchange rate and disowning any interest in the real exchange rate.
The central bank does need to have a view, updated over time, about the exchange rate’s appropriate range, and it should signal when it thinks the currency is moving in the wrong direction.
Once the monetary rules of the game incorporate the real exchange rate, and assuming that fiscal policy remains supportive, investors can look forward to a less volatile and more competitive currency.
This will mean more investment in tradable industries, more employment overall, and faster growth.
You will know you have succeeded when the United States’ Treasury Secretary comes knocking on your door saying that you are guilty of manipulating your currency.
The Value of European Values
Europe's leaders have revived the constitutional talks that broke down last December in a dispute about voting rights.
Such disputes are, of course, subject to compromises, which are likely to be found.
What still needs to be settled is a clear understanding of what the constitution is meant to achieve.
Two fundamental principles have underpinned European integration: solidarity and subsidiarity.
Both principles lie at the crossroads of philosophy, politics, economics, sociology, and law.
For years they have been present in the legal and institutional framework of the European Union - in treaties, in the Charter of Fundamental Rights (which quotes them in the Preamble), in the recent draft Constitution.
They are, in short, inscribed in the EU's history and ideals.
But what do solidarity and subsidiarity really mean?
Consider solidarity, which is open to at least two interpretations: static solidarity, which concerns only the distribution of income and wealth, and the broader concept of dynamic solidarity, which concerns the production of income and wealth as well.
In the postwar history of European integration, dynamic solidarity was strong in the first period - that of the European Coal and Steel Community - both in its economic development strategy (reconstruction) and in the Treaties, particularly the Treaty of Rome.
This does not mean that dynamic solidarity was subsequently suppressed: European Monetary Union, for example, is an expression of it.
Some countries did not immediately benefit from the euro, but accepted it for the sake of solidarity. They were convinced that it would have positive effects in the long run.
Dynamic solidarity, in other words, means favoring policies that foster investment, innovation, economic growth, and employment.
However, as GDP growth in the EU indicates, dynamic solidarity has been undermined over the last decade.
What is particularly worrying is the research and development lag.
Realization of the EU's so-called Lisbon strategy, adopted in 2000 with the promise of creating the world's most competitive economy, is threatened by a growing emphasis on static solidarity, reflected in high social welfare costs and the high taxes needed to finance them.
The primacy of static solidarity is due to an aging population, which, along with slower growth, has led to structural fiscal imbalances.
One of the biggest challenges for the future of the EU is addressing today's prevalence of static solidarity oriented towards old people over dynamic solidarity favoring young people.
After all, the Union cannot afford to permit current consumption to continue to prevail over the investment needed to ensure future prosperity.
Subsidiarity is similar to the concept of solidarity in that it, too, has two interpretations: vertical subsidiarity and horizontal subsidiarity.
Vertical subsidiarity concerns the distribution of powers among different levels of government and sovereignty: the EU, national states, regions, and municipalities.
The best-known application of this principle is federalism.
In the European Treaties, we find a clear expression of vertical subsidiarity.
But is this enough to encompass the emerging institutional and constitutional settings of the Union?
Horizontal subsidiarity concerns the responsibility and freedom of human beings, as well as social and economic powers.
It encompasses the relations between state, society, and market.
But society and the market have their own rights and sovereignties that are not granted by the state.
So the problem comes in assuring the autonomy of each realm.
An example of horizontal subsidiarity is the internal European market, which created a new kind of economic freedom and increased competition between firms because they are no longer protected by national governments.
Horizontal subsidiarity means that in both society and the economic sphere, the state cannot violate individual freedom and responsibility, which must be respected to the greatest possible extent.
It also means that support must be given by a "superior power" whenever individual freedom and responsibility do not suffice to achieve the ends necessary for human dignity.
This support, however, should be implemented in ways that the natural potential of individuals, society, and the market is promoted.
But that is possible only when the role of horizontal subsidiarity is clearly formulated, which it has not been in the European Treaties, the Charter of Fundamental Rights, or the work of the European Convention.
In short, solidarity has come to mean redistribution rather than growth (which is how today's generation expresses solidarity with respect to future generations), while subsidiarity has come to mean the distribution of political power, rather than a careful delineation of the boundaries between the state, civil society, and the market.
Today, both values are defined in ways that favor the state.
Indeed, focusing on market-based growth has often been identified with the semi-alien values of America.
But these values are deeply ingrained in Europe, and should be brought out again.
The EU should restore its economic vitality by pursuing a model of solidarity and subsidiarity that is more balanced in favor of the market and society, and that reduces the state's socio-economic influence.
State institutions should deliver public goods (like defense, justice, and fiscal and monetary policy), society should deliver social goods (like culture, education, and assistance to needy people), and the market should deliver economic goods (which are connected with profits, growth, and employment).
In the 21st century, Europe must reconsider the value of both principles - solidarity and subsidiarity - if it is to attain integration's historic goal: the freedom and well being needed to overcome the differences and political divisions that incited tragedy in the 20th century.
That is the spirit in which the European Constitution must be written.
Race-Based Medicine?
PALO ALTO – Race can undoubtedly be a tricky subject, with any suggestion of genetic differences among racial groups – beyond superficial characteristics like skin color – potentially invoking memories of the nineteenth-century eugenics movement and its eventual role in Nazi ideology.
Now, with drug companies increasingly seeking to develop medications that target particular racial groups, the long-taboo subject of racial genetics has reemerged.
Much of the current debate centers on whether race should be a criterion for inclusion in clinical trials – and, by extension, whether drug labeling should mention race specifically.
Although the issues are complicated, the solution is simple: follow the data.
In fact, clinical trials are not intended to demonstrate the effectiveness of a treatment (drug, medical device, or other intervention) in a completely random sample from the general population.
Rather, researchers “enrich” the study population by using a characteristic, such as age or laboratory-test results, to select a subset of patients in whom the intervention’s effects will likely be easier to detect than they would be in an unfiltered population.
In recent years, “biomarkers,” such as certain DNA sequences or the presence of a particular drug receptor, have become increasingly important indicators for determining eligibility for clinical trials.
This approach is not new.
For example, scientists have known for decades that certain drugs can cause severe and precipitous anemia in people with a genetic deficiency of the enzyme G6PD.
More recently, researchers have learned that certain cancer drugs are ineffective in fighting tumors containing the mutated variant of the gene KRAS.
Such discoveries have enhanced researchers’ ability to enrich study populations with patients who are likely to benefit from the drug, while sparing from any possible side effects of exposure those patients who are unlikely to benefit.
Enrichment thus enables researchers to strengthen clinical trials’ “statistical power,” that is, the probability of detecting differences, if any exist, between study groups.
Given that a larger number of subjects or iterations enhances an experiment’s ability to detect all of the relevant effects, which bolsters confidence in the result, outcomes of small studies tend to imply significant uncertainty – unless the intervention’s effects are potent.
Enrichment allows researchers to perform smaller, more informative trials by helping them to design studies that will show a high “relative treatment difference” between the drug and whatever it is being compared to (often a placebo, but sometimes another treatment).
In the 1980’s, a biomarker contributed to the success of the small but seminal clinical trial of human growth hormone in children who were unable to produce it naturally.
Some children lose the ability to make growth hormone due to injury or tumors; others lack normal growth-hormone activity from birth, owing to a genetic mutation; and others are missing the gene that codes for the hormone altogether.
Giving the latter group exogenous growth hormone is futile, because their immune systems react to the “foreign” protein by producing antibodies. Although the hormone may stimulate growth for a short period, the antibodies soon bind and neutralize it.
By limiting the study population to children in the other two groups, for whom exogenous growth hormone stimulates normal growth, researchers achieved a 100% relative treatment difference. In other words, every subject who received the active drug responded, and none of those who received the placebo did.
Clearly, genetic markers are useful in designing clinical trials.
But are more subjective factors like race or ethnicity also relevant?
For the cardiac drug BiDil (a combination of the vasodilators hydralazine and isosorbide dinitrate), the answer is yes.
In 1996, inconclusive clinical trials led US regulators to reject the drug.
But when more detailed analysis of the data revealed potentially elevated benefits for black patients, a new trial was performed on 1,050 self-identified “black” patients with severe heart failure for whom available treatments had proved ineffective.
The results – a 43% reduction in mortality and a 39% decrease in hospital visits among patients who received BiDil – were so striking that the study was concluded early.
Although BiDil has not been a great commercial success since its approval in 2009, it remains on the market.
Some regard race-based medical treatment as necessary to reduce health disparities, while others view it as downright discriminatory.
When BiDil was approved, Francis Collins, who was Director of the US National Human Genome Research Institute at the time, warned that “we should move without delay from blurry and potentially misleading surrogates for drug response, such as race, to the more specific causes.”
Of course, Collins was correct; race is a crude and incomplete mechanism for understanding genetic differences.
But we must fight illness with the data we have, not the data we wish we had.
Political and ethical sensitivities notwithstanding, drug testing, approval, and labeling must go wherever the evidence leads.
The Vanished Intellectual
This spring marks the centenary of the birth of two all-round intellectuals, those ideological avatars of the Cold War era, Raymond Aron and Jean-Paul Sartre.
Aron was born on March 14, 1905, Sartre on June 21.
Sartre and Aron began their 50-year acquaintance with a shared elite French education that included a formative period in Germany just before the rise of Nazism.
Each in his inimitable way displayed the contrariness both loved and loathed in intellectuals: Aron fancied Anglo-American liberalism before it became fashionable, while Sartre remained a Communist sympathiser after the fashion had passed.
Aron wrote cool, sleek prose about the most heated geopolitical conflicts, while Sartre could turn any triviality into an existential crisis.
Yet they often stood together against the French political establishment.
Both joined the Resistance when France was a Nazi puppet state, and both called for Algerian independence after France regained its sovereignty.
Unfortunately, Sartre and Aron are also joined in death: both have been disowned, ignored, or underrated by all the academic disciplines – philosophy, literature, sociology, politics – to which their voluminous works might be thought to have contributed.
Silenced by death, Sartre and Aron are remembered more for the attitudes they brought to whatever they wrote about than for what they actually said.
Theirs is a fate perennially suffered by intellectuals.
Great intellectuals like Abelard, Erasmus, Galileo, Voltaire, Zola, and Russell each challenged the pieties of his era, and we now regard their success as a good thing.
But most of us are likely to recoil at the methods they used in their work as intellectuals: caricature, deception, and even fabrication.
Consider three examples.
Abelard is credited with the introduction of theology as a critical discipline in Christianity.
Yet, he did so by juxtaposing contradictory quotes taken out of context, showing that neither the Bible nor the Church fathers speak in one voice and that readers must decide for themselves.
Similarly, Galileo is now known to have committed what we now call “research fraud” in his famed physical experiments.
Assuming he conducted them at all, they very probably did not produce the neat results that he used to assail his opponents.
As for Zola, who defended Captain Alfred Dreyfus from charges of treason fueled by anti-Semitism, he was easily convicted for libel because he merely questioned the motives of witnesses without offering any new evidence.
All three were subsequently vindicated – sometimes in their lifetimes, sometimes not.
What they shared is a paradoxical ethic common to all intellectuals: the end cause of truth justifies whatever means happens to be at your disposal.
This is because the whole truth is rarely what passes for the truth at any moment.
Such an ethic is abhorrent in today’s world, where knowledge is parceled out to academic disciplines like bits of real estate.
To an intellectual, an academic may look like someone who mistakes the means of inquiry for its end.
But to academics, intellectuals look like ramblers freely trespassing on other people’s property, picking the fruits and despoiling the soil.
Intellectuals differ from ordinary academics in holding that the truth is best approached not by producing new knowledge, but by destroying old belief.
When the Enlightenment philosophers renovated the old Christian slogan, “The truth shall set you free,” they imagined a process of opening doors, not building barricades.
In short, intellectuals want their audiences to think for themselves, not simply shift allegiances from one expert to another.
The intellectual’s ethic is both exhilarating and harsh, for it places responsibility for thinking squarely on the thinker’s shoulders.
Every act of deference thus becomes an abdication of one’s own intellectual authority.
The slogan “Knowledge is power” may be familiar, but only intellectuals see its full implications.
Obviously, greater knowledge enhances our capacity to act.
What is much less obvious is that such empowerment requires the destruction of socially sanctioned knowledge.
Only then is a society’s space for decision opened up, enabling its members to move in many more directions than previously deemed possible.
Aron and Sartre developed contrasting, but equally controversial, styles of destroying received belief.
Aron preferred demonizing fellow intellectuals as alarmists than conceding that the Cold War might eventuate in a nuclear holocaust.
Sartre castigated those who failed to resist oppression when they could have, while excusing those who enforced oppression given the chance.
Aron exaggerated the power of reason, while Sartre inflated the power of action.
Each wanted to take French society in radically different directions, but both never ceased being critical of the status quo.
In the end, the two appear to have thought both in and out of their time.
While this makes them awkward candidates for any academic discipline, such is the ambivalence of any intellectual’s legacy.
The Vanishing Swedish Exception?
For the past two years, Western Europe's voters have been turning rightward.
In Denmark, France, Italy, the Netherlands, Norway, and Portugal, concerns about immigration, chronic unemployment, high taxes, and deteriorating public services have fuelled this trend.
But as Europe's most recent parliamentary election shows, Sweden's Social Democrats--in power for 61 of the past 70 years--remain relatively immune to serious challenges from the right.
Opinion polls just a few months ago gave the Social Democrats 44% popular support.
Together with the former Communists and the Greens, the left held a comfortable 12-15% lead over the four non-socialist parties.
This margin shrank dramatically during the campaign, and the left retained power by the skin of its teeth, but the lead ultimately proved insurmountable.
Why has Sweden held out against the right-wing tide sweeping so much of Western Europe?
The immediate reason for Social Democracy's enduring appeal is foreign policy.
In early 2001, Sweden held the EU presidency, giving Prime Minister Göran Persson, the country's dominant politician, a bright spotlight in which to shine.
The Social Democrats also benefited by supporting the US after the September 11 th terrorist attacks--a popular position that thus pre-empted the non-socialist opposition.
Persson exudes competence and authority.
He bolstered his image considerably after winning the 1994 election by tightening government finances and eliminating a huge fiscal deficit.
But he has done nothing remarkable since winning again in 1998.
Sweden's economy rose and fell with the IT bubble, reflected in telecoms giant Ericsson's troubles today.
Persson's main advantages entering this year's campaign were that he was unencumbered by new promises and was well equipped to run a presidential-style contest based on his personal appeal.
But force of character cannot mask real problems and a changing political agenda.
Although foreigners often idealize Sweden's welfare state, its economy has been losing ground steadily for 30 years.
In 1970, GDP per head was the fourth highest in the world; now it is 17 th place in the OECD.
Every year Sweden attains 1% less growth on average than the rest of the West.
The decline has been gradual, so it fails to alarm voters, but Swedes certainly notice it when they go abroad.
One reason for this relative malaise is that Sweden remains the world leader in taxation, with public expenditures claiming nearly 60% of GDP.
Conservatives demand lower taxes, but this is unpopular: almost 65% of Swedes live on public salaries or social transfers.
Unlike other Europeans, Swedes are thus much keener to keep taxes high, which guarantees a large left-wing vote.
Even so, Swedes fret about the deteriorating quality of services provided by the social welfare system.
They complain about year-long waits for eye operations and hip surgery--a direct result of a Social Democratic reform of 1994 that abolished the right of patients to seek alternative care at public expense if they are not treated within three months by their regional council.
The Social Democrats shrewdly reversed themselves on this point during this year's campaign, but health care entitlements have clearly gone too far.
No less than 14% of Swedish employees are currently registered as sick, double the number five years ago.
The Social Democrats argue that this reflects a serious health problem, while non-socialists suggest that the system is defective.
Many Swedes have come to believe that it is their right to register as sick regardless of their health .
No other evidence suggests that public health is actually declining.
Deteriorating public education poses another worry.
Stockholm, ruled by conservatives and liberals, has extended its free-market experiments, such as privatization of subway trains, to education vouchers and free choice of alternative schools.
The Social Democrats lost miserably in the capital.
As in most recent European elections, immigration loomed large, but as usual, Sweden was out of step with other countries.
The small Liberal party, which campaigned in favor of free labor immigration, tripled its support.
The Liberals make the sensible argument that anybody with a job should get a work visa, but that knowledge of Swedish be a citizenship requirement and that unemployed immigrants be barred from receiving social benefits for five years.
Roughly 70% of Swedes support free immigration of laborers--far higher than elsewhere in Europe.
They see that immigrants tend to be qualified East Europeans, many of them physicians, while the number of Swedes registered as sick or in early retirement has underpinned a severe labor shortage.
But Prime Minister Persson, kowtowing to the trade unions, insists on blocking labor immigration altogether for the next decade.
Although this stance cost the Social Democrats many votes, it was hardly enough to offset their main electoral advantage: the unseemly control over key public goods that the party has accumulated during its long incumbency.
For example, the two dominant state-owned TV channels are under strict Social Democratic supervision, and the party also controls professorial appointments and academic research through politicization of funding agencies and university boards.
After so many years of Social Democratic rule, a large political caste has also developed.
The main qualification of two current ministers is that their parents were ministers.
The party itself is awash in trade union money, which is exempt from taxation as a result of sheer cronyism.
But Swedes have shown that still like the welfare state.
While they worry about the quality of public services, they are not prepared to join Europe's rightist revival.
So Sweden's Social Democrats don't have to concede much to remain remarkably strong--even if this weakens the integrity of Swedish democracy.
The Varieties of Unemployment
BERKELEY – We hear from surprisingly many quarters these days that governments in Europe and North America, and their central banks, should give up on the expansionary policies they have pursued to try to create jobs.
The high unemployment currently afflicting the North Atlantic, critics of government stimulus maintain, is not cyclical but “structural,” and thus cannot be alleviated by policies that boost aggregate demand.
Let me be the first to say that structural unemployment is a true and severe danger.
When people who in other circumstances could be happy, healthy, and productive members of the workforce lack the skills, confidence, social networks, and experience needed to find work worth paying for, we obviously have a problem.
And if unemployment in Europe and North America stays elevated for two or three more years, it is highly likely that we will have to face it.
For nothing converts cyclical unemployment into structural unemployment more certainly than prolonged unemployment.
But is that true today?
Does it look right now as if the biggest problem facing the economies of Europe and North America is structural unemployment?
It does not.
Let us remember what structural unemployment looks like.
The economy is depressed and unemployment is high not because of slack aggregate demand generated by a collapse in spending, but instead because “structural” factors have produced a mismatch between the skills of the labor force and the distribution of demand.
The structure of demand by consumers is different from the jobs that workers are capable of filling.
For example, suppose that you have many workers qualified and skilled to work in construction, but households have decided that their houses are more than large enough, and wish to fill them with manufactured goods.
This would produce structural unemployment to the extent that the ex-construction workers could not do things in manufacturing that would make it worthwhile for manufacturing firms to hire them.
In that case, we would expect to see construction depressed: firms closed, capital goods idle, and workers unemployed.
But we would also expect to see manufacturing plants running at double shifts – the money not spent on construction has to go somewhere, and, remember, the problem is not a lack of aggregate demand.
We would expect to see manufacturers holding job fairs, and when not enough workers showed up, we would expect to see manufacturers offering higher wages to attract workers into their plants, and then raising prices to cover their higher costs.
The size and duration of the excess unemployment of ex-construction workers might be substantial and long lasting.
It might require significant time to retrain construction workers and plug them into social networks in which they become good manufacturing workers.
We might see prolonged and high unemployment in the construction sector, and in regions that had seen the biggest previous construction booms.
But depression in the construction sector and unemployment among its ex-workers would be balanced by exuberance in the manufacturing sector, rising prices for manufactured goods, and long hours and high wages for manufacturing workers
That is what “mismatch” structural unemployment looks like – and it is not what we have today, at least not in Europe and North America.
In the past three years, employment in construction has shrunk, but so has employment in manufacturing, wholesale trade, retail trade, transportation and warehousing, information distribution and communications, professional and business services, educational services, leisure and hospitality, and in the public sector.
Employment is up in health care, Internet-related businesses, and perhaps in logging and mining.
In the United States, the past three years have seen employment fall from 137.8 million people in July 2007 to slightly less than 130 million in July 2010 – a decline of 7.9 million during a period in which the adult population grew by six million.
What we have witnessed is not a shift in demand into sectors lacking an adequate number of qualified and productive workers, but rather a collapse in the level of aggregate demand.
This may well look like structural unemployment in three years.
In three years, we may well see labor shortages, rising wages, and increasing prices in expanding sectors, accompanied by high unemployment elsewhere in the economy.
But that is not our problem now.
Sufficient unto the day is the evil thereof.
The Veil Wars
The Velvet Delusion
COLLEGE STATION, TEXAS – With the fall of the Berlin Wall in 1989 and the relatively non-violent overthrow of communism throughout Central and Eastern Europe, optimists predicted a new golden age of a world filled with peaceful democracies.
History, for some, seemed to have come to an end.
But the optimists have proved to be misguided, as the world’s powers, great and small, drew their own, often conflicting, lessons from the past.
For Americans, 1989 validated everything they already believed.
They had won the Cold War, or so they perceived, through hard force and conviction.
They saw demonstrators in East European capitals and Chinese crowds in Tiananmen Square chanting for freedom, and believed that those throngs wanted to be American.
As George H.W. Bush declared, “We know how to secure a more just and prosperous life for man on Earth: through free markets, free speech, free elections, and the exercise of free will unhampered by the state.”
Subsequent events seemed to validate this American recipe.
The Gulf War confirmed American military might and the age-old perils of appeasement.
The Clinton era gave us active democracy-promotion as the principle tool of American foreign policy, which George W. Bush’s administration took to unprecedented extremes.
Cold War victory provided the answer for each. “America’s resolve and American ideals so clearly articulated by Ronald Reagan,” Clinton said, “helped to bring the Wall down.” The lesson was clear: “we achieve our aims by defending our values and leading the forces of freedom.”
Barack Obama’s words echo those of Clinton.
Despite his frequent avowals of change, his central articulation of American policy seems remarkably static. “Earlier generations faced down fascism and communism not just with missiles and tanks,” Obama preached in his famous campaign speech in Berlin, “but with sturdy alliances and enduring convictions.”
This is why Obama’s America spends more on weaponry than the rest of the world combined, and why democracy-promotion remains the unquestioned foundation of American foreign policy, with debate possible only about its application.
History offers a recipe for success, so long as Americans adhere to the lesson of 1989.
But the rest of the world learned different lessons.
European strategists largely dismissed America’s interpretation that force had won the Cold War, believing that cooperation had triumphed precisely because force was absent.
They heard in pleas for freedom from behind the Iron Curtain not a desire to become American, but to join the remarkably successful European experiment in collective security and prosperity that emerged after World War II.
For today’s European leaders, the central lesson of 1989 is that force is counterproductive; what matters is consensus.
Russian leaders, not surprisingly, also drew their own conclusions.
When Mikhail Gorbachev spoke of a “Europe from the Atlantic to the Urals,” his conception was not of a continent under Soviet domination, as Josef Stalin once threatened.
Having demonstrated remarkable restraint in 1989, Russian leaders expected to be embraced by the West.
Instead, NATO expanded to Russia’s doorstep, the European Union barred its doors, and membership in the World Trade Organization seemed out of reach.
The post-Soviet economy crumbled, crime skyrocketed, and life expectancy declined.
Russia’s voice in global affairs lost authority.
For Russian leaders, 1989’s lesson was clear: trusting the West was foolish at best, dangerous at worst.
Gorbachev’s vision of European inclusion neglected centuries of Russian history; the West did not want Russian participation.
Better that Russians rely on their own power, develop their own resources, and police their own borders.
The Kremlin trusted the West in 1989. Subsequent Russian leaders refuse to be duped again.
Chinese leaders embraced 1989’s most puzzling legacy.
They recoiled at the Soviet bloc’s disintegration. “Every effort should be made to prevent changes in Eastern Europe from influencing China’s internal development,” party officials concluded in March 1989, and within months they violently crushed democratic protesters.
China took from 1989 the lesson that state stability was paramount.
Yet China’s leaders also recognized that they ignored popular demands at great peril.
The government thus made an implicit deal with its citizens: political dissent would not be tolerated, but, in exchange, the state would guarantee economic growth.
No one could question the government’s legitimacy so long as prosperity expanded.
Chinese foreign policy also prioritized legitimacy after 1989, with the regime hoping to reassert its authority globally by expanding China’s participation in international organizations.
Chinese leaders embraced the cooperative nature of the post-1945 European process, but simultaneously took the Russian lesson to heart: the West would not yield merely to good intentions.
But, unlike Russia, China de-emphasized the relevance of traditional hard power to achieve its goals.
In fact, Chinese leaders have spent remarkably little, relative to China’s growing GDP, on the military.
Chinese power today comes not from its ability to match America’s blue-water navy, but from its holdings in US Treasury bonds.
The legacy of 1989 echoes even in Iran, whose leaders seem clearly to have learned from Tiananmen Square and the collapse of the Iron Curtain that a committed government can, indeed, demobilize a public demanding reform.
The world would not soon forget the horrors of Tiananmen, global protestors promised in 1989.
But it did – and with extraordinary speed.
In looking back at 1989, we are, in effect, looking forward from that year’s momentous events at the very different legacies that they produced.
The Virtual Enemy
Five years have passed since the terrorist attacks on New York and Washington of September, 2001, yet it seems that policymakers have learned little about how terrorist cells operate, and what their weaknesses are.
The Bush administration still uses the phrase “war on terror” and behaves as though it really is a war, the ordinary kind where one government fights another.
Yet after five years of military exertions, strategies based on targeting a united aggressor have only made the situation worse.
It is time to understand the new, emerging model of conflict.
In order to make the “war” paradigm fit, the Bush administration alludes to al-Qaeda as a centrally directed enemy.
In fact, there is now no master planner or funder of terrorist activities.
The Madrid, London, and Bali attacks, as well as several thwarted operations in the United States and Britain, were all characterized by their dispersed organization.
Independently generated plots emerged and used ad hoc resources, often within the target country.
Those small operations also lacked a common internal design.
Terrorist motivations differ from cell to cell, even from person to person.
Individuals can be involved for profit and power, or for political and religious reasons, while others participate for hate or thrills.
Moreover, there are vast differences in terms of risks, rewards, and imperatives as one moves up the organizational chain, or jumps from cell to cell.
Conventional military models are geared to decapitate something that, in this case, has no head.
The characteristics of this new structure have already been studied in a very different context.
Terrorism is a violent version of an “agile virtual enterprise.” A virtual enterprise is any small group that self-assembles into an organization that is just large enough to accomplish the collective intention.
Virtual enterprises are unusually innovative, and, in the business sector, they are possibly the only system that can build a one-off product well.
A conspicuous example already exists in the movie production industry.
In fact, they are probably the commercial model of the future.
The benefits of virtual enterprises stem from their lightness over stability.
At present, most of the price of any product supports the huge, inefficient organization that assembled it.
Nearly all the creativity and problem solving occurs in small companies and is later “integrated” by mega-corporations, which have an expensive and vulnerable infrastructure, and keep most of the profit.
This model is the current basis of the business world, just as centralization has also been the favored defense strategy.
When you buy a car from General Motors, 80 cents from each dollar goes to GM, which mostly only manages itself.
The small suppliers actually provide you with 80% of the value and innovation but only receive 20% of the reward.
Ironically, extensive research into alternative models was funded through the US Department of Defense, which, as the world’s largest buyer of complex machinery, wanted better, cheaper and more tailored goods.
The research noted the conditions and triggers needed to facilitate the self-assembly of small opportunistic groups and enable them to act like large companies.
Unfortunately, the research program was cancelled before its findings could be applied in the business world, almost certainly because it threatened large companies.
It is often forgotten that US Defense Secretary Donald Rumsfeld emerged from a comfortable retirement to reorganize the American military into a smaller, more agile force, using some of these same insights.
But the planning for the Iraq invasion, in which Rumsfeld advocated the use of fewer troops than advised, suggests a poor understanding of distributed systems.
While the forces were deployed for a flexible entry and withdrawal, the Bush administration ended up using them for an old-fashioned occupation.
Terrorists have been better at capitalizing on models of distributed operation.
Scores of texts are appearing in the Muslim world on jihadi strategic studies.
The best known in the West is The Management of Savagery , but only because it was translated and made public.
These books (and the trends they indicate) are becoming less dogmatic and increasingly sophisticated in the adoption of modern management techniques.
Their research surely includes the young science of virtual enterprise management: how to nurture and support self-organizing cells.
Perhaps the first lesson for Western policymakers is that virtual enterprises run on a culture of trust.
Some kinds of trust can be based on an artificial notion of “not us” rather than on real values and direct experience.
That is why the Bush administration’s actions actually strengthen the virtual terrorist enterprise dynamic.
Bush’s “us and them” rhetoric clearly defines an “other” and positions it as a cohesive enemy.
His “war” approach is making it easier for Islamist terrorists to view the West as an equally united and malevolent force.
In the future, the virtual enterprise model will shape how business is conducted, wars will be fought and probably how government services will be administered.
It promises to decouple the management of finance from that of production, implying faster innovation and economic growth.
However, if Western governments do not develop a deep understanding of how these structures operate, they stand no chance of combating the agile terrorist enterprise.
The Virtual Imagination
MILAN: Will books, through the power of computers and the internet, be transformed into boundless “hypertextual structures” in which the reader is also author?
Today, two sorts of books exist: those to be read and those to be consulted.
With books-to-be-read, you start at page 1, say, where the author tells you a crime has been committed.
You follow until the end, when you discover who is guilty.
End of book; end of reading experience.
The same happens even if you read philosophy, say, Husserl.
The author opens at the fist page, and follows a series of questions in order for you to see how he reaches his conclusions.
Encyclopedias, of course, are never meant to be read cover to cover.
If I want to know whether it was possible that Napoleon met Kant, I pick up volumes K and N and discover that Napoleon was born in 1769 and died in 1821, and that Kant was born in 1724 and died in 1804.
It is possible that the two met.
To know precisely, I consult a biography of Kant.
A biography of Napoleon, who met many people, might disregard a meeting with Kant; a biography of Kant would not.
Computers are beginning to change the reading process.
With a hypertext, for example, I can ask for all the cases in which the name of Napoleon is linked with Kant.
I can do my job in a few seconds.
Hypertexts will render obsolete printed encyclopedia.
But although computers are diffusing a new form of literacy, they are incapable of satisfying all the intellectual needs they stimulate.
Two inventions on the verge of being exploited may help computers begin to satisfy these needs.
The first is a copying machine through which you scan library catalogues and the books of publishing houses.
You select the book you need, push a button, and the machine will print and bind your copy.
This will change all publishing; it will probably eliminate bookstores but not books.
Books will be tailored to the desires of the buyer, as happened with old manuscripts.
The second invention is the e-book: by inserting a micro cassette into the spine or by connecting it with the Internet, you will have your book.
But this book is as different as the first Shakespeare folio of 1623 is from the latest Penguin edition.
Some people who say that they never read printed books are now reading, say, Kafka, in an e-book.
On paper or on the electronic page, Kafka is the same for readers, if not from the point of view of eye doctors.
Books will survive because of their utilitarian value, but the creative process in which they arise may not.
To understand why, we must draw a distinction between systems and text.
A system is all the possibilities displayed by a given natural language.
A finite set of grammatical rules allows you to produce an infinite number of sentences and every linguistic item can be interpreted in terms of other linguistic items, a word by a definition, an event by an example, and so on.
A text, however, reduces the infinite possibilities of a system to form a closed universe.
Take the fairy tale Little Red Riding Hood.
The text starts from a given set of characters and situations (a little girl, a mother, a grandmother, a wolf, a wood) and through a series of steps arrives at a solution.
You can read the fairy tale as an allegory and attribute different morals to the events and characters, but you cannot transform Little Red Riding Hood into Cinderella.
But many internet programs suggest that a story is enriched by successive contributions.
Take Little Red Riding Hood again.
The first author proposes a starting situation (the girl enters the wood) and different contributors develop the story - the girl does not meet a wolf but, instead, meets Pinocchio.
Both enter an enchanted castle. They may confront a magic crocodile.
And so on. The notion of authorship is thrown in doubt.
This has sometimes happened in the past without disturbing authorship.
With the Commedia dell’arte, every performance was different. We cannot identify a single work due to a single author.
Another example is a jazz jam session.
We may believe there is a privileged performance of “Basin Street Blues” because a recording survives.
But there were as many Basin Street Blues as there were performances.
But there is a difference between infinite, unlimited texts and texts which can be interpreted in infinite ways but are physically limited.
Take Tolstoy’s War and Peace: you wish Natasha to spurn Kuryagin; you desire that Prince Andrzej live so that Natasha and he can be together.
Make “War and Peace” into a hypertext and you can rewrite the story: Pierre kills Napoleon or Napoleon defeats General Kutusov.
What freedom!
Everyone is Tolstoy!
In Les Miserables Victor Hugo provides us with a beautiful description of Waterloo.
Hugo not only knows what happened but also what could have happened and didn’t.
With a hypertextual program you could rewrite Waterloo so that Napoleon wins, but the tragic beauty of Hugo’s Waterloo is that things happen independent of the reader’s wishes.
The charm of tragic literature is that we feel that its heroes could have escaped their Fate but do not because of weakness, or pride or blindness.
Besides, Hugo tells us “Such a fall which astonished the whole of History, is it something without a cause?
No...Someone, to whom none can object, took care of that event, God passed over there.” That is what every great book tells us, that God passed over.
There are books that we cannot rewrite because their function is to teach us about Necessity, and only if they are respected as they are can they provide us with such wisdom.
Their repressive lesson is indispensable to reach a higher state of intellectual and moral freedom.
The Wages of Economic Ignorance
LONDON – Politicians are masters at “passing the buck.”
Everything good that happens reflects their exceptional talents and efforts; everything bad is caused by someone or something else.
The economy is a classic field for this strategy.
Three years after the global economy’s near-collapse, the feeble recovery has already petered out in most developed countries, whose economic inertia will drag down the rest.
Pundits decry a “double-dip” recession, but in some countries the first dip never ended: Greek GDP has been dipping for three years.
When we ask politicians to explain these deplorable results, they reply in unison: “It’s not our fault.”
But this is to turn the matter on its head.
The eurozone crisis did not derail recovery; it is the result of a lack of recovery.
It is the natural, predictable, and (by many) predicted result of the main European countries’ deliberate policy of repressing aggregate demand.
That policy was destined to produce a financial crisis, because it was bound to leave governments and banks with depleted assets and larger debts.
Despite austerity, the forecast of this year’s UK structural deficit has increased from 6.5% to 8% – requiring an extra £22 billion ($34.6 billion) in cuts a year.
Prime Minister David Cameron and Chancellor George Osborne blame the eurozone crisis; in fact, their own economic illiteracy is to blame.
Unfortunately for all of us, the explanation bears repeating nowadays. Depressions, recessions, contractions – call them what you will – occur because the private-sector spends less than it did previously.
This means that its income falls, because spending by one firm or household is income for another.
In this situation, government deficits rise naturally, as tax revenues decline and spending on unemployment insurance and other benefits rises.
These “automatic stabilizers” plug part of the private-sector spending gap.
But if the government starts reducing its own deficit before private-sector spending recovers, the net result will be a further decline in total spending, and hence in total income, causing the government’s deficit to widen, rather than narrow.
True, if governments stop spending altogether, deficits will eventually fall to zero.
People will starve to death in the interim, but the budget will be balanced.
That is the crazy logic of current economic policy in much of Europe (and elsewhere).
Of course, it will not be carried through to the bitter end.
Too much will crack along the way – the banks, the monetary system, social cohesion, the legitimacy of the political regime.
Our leaders may be intellectually challenged, but they are not suicidal.
Deficit reduction eventually will be put into cold storage, either openly, as I would prefer, or surreptitiously, as is politicians’ way.
In the United Kingdom, there is already talk of Plan A +.
Those who see the need for such a growth strategy, but who also want to help their friends, like the idea of tax cuts – especially for the rich.
This knocks a hole in current deficit-reduction plans, but, provided government continues to cut spending, it has the benefit (from a conservative’s point of view) of shrinking the state’s role over time.
Apart from questions of fairness, cutting top tax rates is an inferior way to increase spending, because the rich have a higher propensity to save.
Tax reductions should be targeted specifically at the poor if one wants the money to be spent to stimulate the economy.
In fact, the best option of all is for the government to spend the money itself.
Governments can do this consistently with a medium-term deficit-reduction plan by making a crucial distinction between their budgets’ current and capital accounts.
The current account covers spending on services and perishable goods that produce no assets.
The capital account is for buying or building durable assets that give a prospective future return.
The first is a charge on taxation; the second is not.
If today’s accounting rules are too insensitive to make this distinction, a separate entity could do the investing.
A national investment bank would be capitalized by the government, borrow from the private sector, and invest in infrastructure, housing, and “greening” the economy.
This would simultaneously plug a hole in demand and improve the economy’s long-term growth prospects.
There are signs that officials in the UK and the United States are starting to move in this direction.
If nothing works, it will be time to sprinkle the country with what Milton Friedman called “helicopter money” – that is, put purchasing power directly into people’s pockets, by giving every household a spending voucher with an expiration date.
This would at least keep the economy afloat pending the development of the longer-term investment program.
It would be better if such schemes could be agreed upon by all by G-20 countries, as was briefly the case in the coordinated stimulus of April 2009.
If not, groups of countries should pursue them on their own.
The European Union desperately needs a growth strategy.
Its current bailout schemes only help countries like Greece and Italy to borrow money cheaply in the face of prohibitively high market interest rates, while the schemes’ insistence on more budget-deficit reduction in these countries will reduce European purchasing power further.
The recipient governments will have to cut their spending; the banks will have to take large losses.
In the long run, the eurozone must be recognized as a failed experiment.
It should be reconstituted with far fewer members, including only countries that do not run persistent current-account deficits.
Everything else that has been proposed to save the eurozone in its current form – a central treasury, a monetary authority that does more than target inflation, fiscal harmonization, a new treaty – is a political pipe dream.
The Wall Blocking the Roadmap
The roadmap to peace between Israelis and Palestinians faces countless bloody detours.
Few Israelis expect Palestinian Prime Minister Mahmud Abbas to deliver security to Israel, or to implement far reaching political and financial reforms.
Few Palestinians expect Israeli Prime Minister Ariel Sharon to deliver what they want: a freeze on the construction and expansion of settlements, and the eventual creation of a truly sovereign Palestinian state on contiguous territory.
In a survey of Israeli and Palestinian opinion of the roadmap, Yaakov Shamir of Hebrew University and I found that only 15% of Palestinians agreed that Sharon would stand by Israel's commitments, while only 30% of Israelis believed that Abu Mazen would hold up the Palestinian end of the agreement.
Security remains the critical component in the first phase of the roadmap for both parties.
The roadmap calls upon the Palestinians to take steps that would bring violence to an end.
One early Palestinian achievement has been a ceasefire agreement among all factions, including Hamas and Islamic Jihad (although both groups claim the right to retaliate for Israel's ``targeted killings'' of their leaders).
But the roadmap stipulates that additional measures are to be taken by Palestinian authorities, including arresting individuals planning or carrying out violent attacks and the ``dismantlement of terrorist capabilities and infrastructure,'' including confiscating illegal weapons from armed groups.
The Palestinian security services are discovering that they lack the capacity to do so without risking civil war.
But even if they could disarm the extremists, Palestinians are divided about how far they are willing to go to attain security for Israel.
While the ceasefire remains popular--albeit increasingly tenuous in light of recent events--few Palestinians wish to see the Palestinian Authority permanently break the back of the armed resistance forces.
Many Palestinians view violence as a useful tool in the struggle for independence and do not want to destroy the capability to resort to arms in the future if Israel reneges on its roadmap commitment to end the occupation.
Palestinian opinion offers a different option for restraining Hamas and dismantling the ``infrastructure of violence'': incorporating Hamas and Islamic Jihad, and other factions, into the political process.
For the younger generation of Palestinian political activists, the best hope for independence lies in the emergence of an empowered young guard, incorporating both nationalists and Islamists.
These younger leaders guided the Intifada, gaining stature within Palestinian society, as well as a feeling that they might soon supplant the traditional old guard of the PLO.
Youthful nationalists believe that they will gain outright leadership among Palestinians when they convince moderate young Islamists to abandon Hamas and Islamic Jihad to join with them in ousting the old guard.
But Israelis do not accept this political logic.
For them, such developments look like a trap that would consolidate the ``infrastructure of terror.''
This is where Israel's wall of separation comes in.
They do not want to deal with the Palestinians, and so are erecting a physical barrier through areas that are now nominally under Palestinian control.
While the roadmap speaks volumes about security, it makes no mention whatsoever of the Israeli wall.
Yet the wall and the second phase of the roadmap, which calls for a Palestinian state with provisional borders, cannot co-exist.
Work on the wall started around a year ago.
Initially aimed at creating a security fence along the green line, the 1967 borders of Israel, it has gradually stretched across that would-be boundary, confiscating Palestinian land and amounting to a de facto annexation of a large part of the West Bank.
For example, the planned portion of the wall that reaches the settlement of Ariel, deep inside the West Bank, extends 15 kilometers inside Palestinian territories.
By encircling large parts of the West Bank from the east, covering as much as 50% of Palestinian territory, the wall deprives Palestinians of access to Jordan, their eastern neighbor.
In Palestinian eyes, the wall is a unilateral measure that creates facts on the ground and short-circuits the timing and effectiveness of so-called ``permanent status'' negotiations, which are envisaged in the third phase of the roadmap.
This is because the second phase, which still has to be achieved, calls for a Palestinian state with contiguous but provisional borders.
The projected path of the wall eliminates Palestinian contiguity altogether.
So continuing its construction will kill any Palestinian enthusiasm for the second phase of the roadmap.
Instead, Israelis will have a strong incentive to demand an immediate implementation of the third phase, in other words, to go directly to ``permanent status'' talks.
Permanent status negotiations, dealing with all the major issues of the conflict--including refugees, Jerusalem, settlement, security, water, and, of course, the permanent borders of the Palestinian state--are scheduled to be completed by the end of 2005, while Ariel Sharon is still slated to be Prime Minister.
Immediate resumption of these talks will lead to profound Palestinian despair, much deeper than the disillusion that followed the collapse of the Camp David summit in July 2000.
The roadmap, with its promise of fast achievements in the form of an Israeli settlement freeze and early Palestinian statehood, provides incentives for the Palestinian Authority to deliver security for Israelis on a sustained basis.
If Israel must have its wall, it must also restrict it to the 1967 Green Line.
If not, no wall will be able to contain Palestinian rage.
The Walls of August
MOSCOW – History’s milestones are rarely so neatly arrayed as they are this summer.
Fifty years ago this month, the Berlin Wall was born.
After some hesitation, Nikita Khrushchev, the Soviet Union’s leader, allowed his East German counterpart, Walter Ulbricht, to erect a barrier between East and West Berlin in order to ensure the survival of communism in the entire Soviet bloc.
By that point, East Germany had hemorrhaged three million people – including many of its most talented – as hundreds each day peacefully walked into the zones of Berlin that were controlled by the United States, the United Kingdom, and France.
And 20 years ago this month, hardliners in the Soviet government attempted to overthrow President Mikhail Gorbachev, who, two years after US President Ronald Reagan memorably called on him to “tear down this wall,” had done just that.
Somewhat miraculously, a reformer who wanted Russians to be part of the democratic West had come to power in the Kremlin.
Gorbachev’s hard-line Politburo adversaries, like those who had hemmed in Khrushchev at the time of the Berlin Wall’s construction, were determined to preserve the decrepit system that the Wall symbolized.
But, in August 1991, ordinary Muscovites stood their ground.
They defied the coup makers, and in the end carried with them much of the Russian Army.
With their defiance, the coup was doomed.
Berliners never stood a similar chance in the face of Soviet power.
Khrushchev had assented to Ulbricht’s plea that only a physical barrier would maintain the viability of the East German state.
Khrushchev’s response was reminiscent of how he dealt with the Hungarian Revolution of 1956, a time when he was just consolidating his rule and needed to keep Kremlin hardliners at bay.
But five years after the brutal suppression of the demands for freedom heard in Budapest, Khrushchev was not fully convinced of the need to divide Berlin.
He feared that his policy of improved relations with Western Europe would be destroyed in the process, and that President John F. Kennedy would view the Wall as the first provocative step in a confrontation that could lead to nuclear war.
Khrushchev had placed enormous hope in the Soviet Union’s ability to build more positive relations with Europe, particularly after the U-2 spy plane incident in 1960 (when the American pilot Gary Francis Powers was shot down over Soviet territory) had poisoned relations with the US.
While his summit with Kennedy in Vienna earlier in 1961 had done nothing to improve the situation, erecting the Wall on August 13 seemed to him a purely defensive act, not a show of force.
Khrushchev was considering his own political fortunes as well.
Ever since his 1956 Secret Speech denouncing Stalin’s cult of personality, his position within the Politburo had weakened; his support among the Kremlin leadership was shallow, and hardliners sniped at him from every direction.
In the end, the decision to build the Wall was a desperate bid both to secure the continuation of communist rule in East Germany and to appease his detractors.
Brinkmanship of the sort that took place as the Wall went up is usually the product of a politician desperate to shore up his domestic position.
The irony for Khrushchev was that, though the hardliners wanted the Wall, they later included his indecisiveness about the Wall on the charge sheet used to force his removal in 1964.
His decision preserved Soviet rule in East Germany for decades, but contributed to his own political demise.
When Gorbachev allowed the Wall to be breached and then demolished, he alienated the bulk of the Communist Party of the Soviet Union even more than Khrushchev had.
Indeed, Gorbachev once told me how Nicolae Ceauşescu, Romania’s dictator, called him to request that tanks be sent into Berlin to preserve the Wall.
But Gorbachev, though still a believer in communism, refused to maintain the Soviet empire at the barrel of a gun.
His was a brinkmanship very different from Khrushchev’s: he was daring the West to recognize and accept that the USSR had truly changed.
In a conversation with then US Secretary of State James Baker, Gorbachev took issue with the American side constantly referring to the “Western values of freedom,” insisting that “these are human values.”
By the time the West came to believe that Gorbachev and his reforms were genuine, resentment among his Kremlin colleagues was boiling over.
The coup leaders of August 1991 viewed Gorbachev’s ouster the same way Ulbricht had regarded his demand for the Wall – as the only means to preserve communist rule.
When the West tried to warn Gorbachev that a coup was coming, it was already too late.
But ordinary Russians’ sudden, unexpected defense of their newfound freedoms, together with the putschists’ sheer incompetence, defeated the effort to restore totalitarian rule.
Had the Wall not been built in 1961, would communism have collapsed sooner?
Had Gorbachev responded to Ceauşescu’s plea and sent troops to defend the Wall, would communism in Europe ever have collapsed?
These are unanswerable questions.
And, given that Gorbachev refused to use force anywhere to preserve the Soviet’s East European empire, the idea that he would do so to preserve the Wall seems preposterous.
What does seem clear is that, in the end, no wall can hold back democracy – and, conversely, that if a country’s people don’t want democracy enough, no Berlin Wall is needed to keep it out.
The world has Vladimir Putin to thank for that lesson.
The War Against Iraqi Women
BAGHDAD – Iraqi women’s organizations and international observers point to an escalating war against women in Iraq, aided by the widespread chaos and lawlessness under the US occupation.
In addition to violence by US troops inside and outside of prisons, women in Iraq face daily violence from militants under the guise of religion and “liberation.”
In Iraq’s second largest city, Basra, a stronghold of conservative Shia groups, as many as 133 women were killed last year for violating “Islamic teachings” and in so-called “honor killings,” according to the United Nations Office for the Coordination of Humanitarian Affairs.
The methods are brutal evidence of a backlash by previously subdued tribal forces that have been unleashed by the occupation: women strangled and beheaded, and their hands, arms and legs chopped off.
With US forces in Iraq now funding both Sunni and Shia tribal leaders in an effort to stabilize the country, conditions for women grow deadlier by the day.
Islamist leaders have imposed new restrictions on women, including prohibitions on work, bans on travel without a muhram (male guardian), and compulsory veiling.
According to the Organization of Women’s Freedom in Iraq (OWFI), formed in Baghdad in 2003, women are harassed if they appear in the streets of most Iraqi cities and towns, educational institutions, or work places.
Now there are even “no woman zones” in some southern cities controlled by Islamist parties and tribal leaders.
Honor killings of Iraqi women are justified by alleged promiscuity or adultery.
In fact, the practice targets holders of PhD’s, professionals, political activists, and office workers. “Politically active women, those who did not follow a strict dress code, and women human rights defenders were increasingly at risk of abuse, including by armed groups and religious extremists,” Amnesty International said in its 2007 report.
Indeed, a top police official in Basra reported that as many as 15 women are killed every month in the city.
Ambulance drivers in Basra, paid to “clean the streets” before people go to work, pick up many more bodies of women every morning.
Ironically, the forces leading this assault on women had little or no power under Saddam Hussein.
But, following the US-led invasion in 2003, southern Iraq was opened to forces known as Propagation of Virtue and Prevention of Vice (PVPV) – militant gangs and individuals committed to archaic Islamic rule and suppression of women’s rights.
Some members of these groups now serve in government, others in militias or as self-appointed vigilantes or hired guns.
The goal of the PVPV is to confine women to the domestic realm and end all female participation in public and political life.
To date, Iraqi officials have not been willing to deal with this escalating violence against women, or even to discuss it.
But, as elected representatives, they are obligated to address these crimes.
So must the US.
Under the Fourth Geneva Convention, the responsibility for protecting civilian populations in an occupied country belongs to the occupying forces, which, in this case, are clearly failing to protect Iraqi women.
Two measures are urgently needed.
First, the Iraqi government must immediately establish “Protection of Women” security patrols in Iraq’s southern cities.
These patrols must receive gender-sensitive training and prioritize women’s security over tribal or fundamentalist religious values.
Second, pursuant to its obligations under the Geneva Convention, the US must immediately take steps to protect the lives and freedoms of Iraqi civilians. Unless the US does so, it must withdraw from Iraq, because the occupation would merely continue to sustain a breeding ground for violence against women.
The timetable for action is not subject to debate.
It must begin today.
The War Against Iraq’s Children
Iraq’s children have suffered more than just successive wars and economic sanctions.
The loss of parents and family resources has boosted child labor, homelessness, and inclinations towards violence and rebellion.
They often now live in homes where 25 people live in a space of 40 square meters.
Even intact families may comprise parents and five children in a single six-meter room.
The increase in child labor reflects families’ dire economic situation: children are frequently a family’s only breadwinners, and they work cheap.
Contractors in municipal services, for example, prefer to use children in order to cut costs.
Here, a child may be used for agricultural labor or for janitorial work.
Many work in piles of garbage, either removing them to another place or collecting empty bottles and cans to sell.
Other children load and transport items in the markets, where they must pull carts weighing 60-70 kilograms and carry boxes weighing 15 kilograms in temperatures of 50 degrees centigrade.
Two children may unload a truck carrying 1,000 kilograms of food items.
Not surprisingly, Iraq’s child workers suffer from a wide array of serious health problems.
Children who work in the garbage dumps are prone to skin and respiratory problems, while those who work with paints eventually become addicted to the intoxicants that they inhale.
And all working children are vulnerable to malnutrition, as their diet typically lacks the items necessary to build body tissues.
Nor is there any official authority to protect children and defend their rights in case of incapacitation or sickness.
On the contrary, children are often beaten by family members if they do not provide the daily wage expected of them, or by their bosses when they are inattentive or make a mistake.
Indeed, Iraqi children are exposed to beating without regard for their age and for myriad reasons, thus growing up insecure, hostile, and violent.
Moreover, they are prone to being kidnapped by criminal gangs, trained to steal or pickpocket, or, worse, placed at the mercy of terrorists for use in attacks.
The deterioration of families’ financial situation has also left poor children deprived of educational opportunity.
For many children, even when they do attend school, the collapse of infrastructure, the unavailability of electricity and water, and high temperatures in the summer are hardly conducive to successful study.
The small number of schools, the poor condition of buildings, and the collapse of relationships between students and teachers is also at fault.
Older children sit in classrooms with much younger children, growing frustrated and violent, rather than becoming role models for others to emulate.
Iraqi girls suffer no less than boys – and often more.
At one end of the spectrum of deprivation, their opportunities are more constrained.
When a family’s income is insufficient to pay school fees for every child, girls are typically denied an education, owing to the traditional belief that marriage is a girl’s final destiny.
They must perform household chores and are subject to beating if they do not carry out orders issued by male family members.
In poor households, they are also likely to receive less food than boys, placing their physical health and development at even greater risk.
At the other end of the spectrum, rape, adultery, early child bearing, and abortion have become ordinary matters.
Increasingly, Iraqi girls interpret anything given to them as a means to have sex with them.
Orphans, whose number has increased sharply over the past quarter-century as a result of wars, economic sanctions, and terrorism, are especially vulnerable to the cruelest type of physical and psychological violence.
Having lost their homes and parents, they sleep in alleys, sell cigarettes or newspapers, and beg.
Grandparents are often unable or unwilling to care for them, and the pathological education given to them by criminal gangs often puts them beyond the reach of any institution’s ability to rehabilitate them.
Simply put, children in Iraq have been reduced from human beings worthy of care to tools of production and instruments of violence.
We are quite literally breeding a new generation of disorder.
The War for Oil
For decades, through Democratic and Republican presidential administrations, America has pursued a set of straightforward energy policy objectives: keep world oil prices as stable as possible; reduce domestic consumption of oil as painlessly as possible; reduce dependence on foreign imports whenever possible; and diversify the sources of imported oil.
Despite appearances, none of these objectives has changed under the Bush administration.
Many observers believe that Bush has set a new course because the invasion of Iraq seems to fly in the face of these objectives.
A big increase in Iraq's oil production would probably increase US dependence on oil relative to other energy sources, as world oil prices will probably fall in response to the additional supplies.
This, in turn, would mean an increase in US dependence on imported oil, especially from the Middle East.
The irony, however, is that the US exercised greater control over the Iraqi oil sector under the UN's pre-war "Oil-for-Food Program" (in which the UN, not Saddam Hussein, determined the level of Iraqi oil sales abroad) than it will in any future democratic Iraq.
If the Bush administration was seeking stable, secure, diverse and cheap oil supplies, it could have simply lifted the embargos on Libya, Iran, Iraq, and Sudan and let the oil gush.
But America's interest in Iraqi oil was not driven either by economics or energy policy.
The Bush administration recognized that, above all, Iraqi oil is a critical geopolitical asset.
Whoever controls Iraqi oil controls Iraq.
Saddam's power came from his control of the world's second largest oil reserve.
He understood perfectly the role that oil played in his power.
Faced with the possibility of invasion and defeat, Saddam threatened to burn Iraq's oil fields.
Much of the subsequent destruction and looting of Iraqi oil facilities and pipelines reflects the widespread realization that control of oil means control of Iraq.
As the US planned its invasion, securing the oil fields became a critical priority.
The goal was not increased supplies or reduced prices for Americans, but stripping Saddam of his power and, ultimately, establishing and solidifying a new Iraqi government.
Iraq's future depends directly on the fate of Iraqi oil production.
Yet the vagaries of the oil business, particularly in such unsettled conditions, make it hard to see how the Bush administration will be able to achieve its goals in Iraq within the next few years.
The logic is simple.
The US must use oil revenues to lift the burden of financing regime change in Iraq from American taxpayers.
All reconstruction plans depend in the long run on the ability of Iraq to export oil in large quantities.
If Iraq does not deliver its oil, President Bush cannot deliver on his promises to the Iraqi people, the American people, or the world community.
Before the invasion, Iraq's oil production capacity reached three million barrels per day.
Iraq will not be able to increase its production to that level within the time frame needed to establish an Iraqi government.
Any increase in Iraqi oil production requires developing the oil fields, which means big investments, a legal and representative government, and political stability.
Not even the Bush administration expects these requirements to be met soon.
Indeed, political stability is the main condition for increasing production capacity.
Historical evidence from Iran, Kuwait, Russia, and even Iraq itself, indicates that it takes about three years from the re-establishment of political stability for capacity to increase significantly and for those new higher levels to be sustained.
Iraq needs several years to write a new constitution, establish a legitimate and democratic government, negotiate the distribution of oil revenues among its various regions, enact new investment laws, and make the economy attractive to foreigners.
It also needs time to negotiate with the international oil companies and neighboring countries, to perform technical and feasibility studies, and to reconstruct, rehabilitate, and explore its oil fields.
So even a three-year time frame seems optimistic, for it assumes that within that period, the occupation will end, Iraqis will establish their own democratic government, and that political stability will be achieved.
Needless to say, the situation may play out differently.
Tensions may remain high for years.
No one should be surprised, moreover, if Iraqi oil production suddenly stops altogether even under a democratic government.
History suggests that labor strikes and similar disruptions that can halt oil production are a greater threat in democratic than in undemocratic countries.
If Iraq cannot quickly increase its production capacity in the next few years, this will hinder both US foreign and energy policies.
How will the US finance the long-term reconstruction of Iraq?
Who will pay to maintain a fragile Iraqi democracy?
Can the US sustain its occupation if it cannot provide food, health care, and other basic services to Iraq's people?
These are tough questions, and they are fundamentally unanswerable until a stable, democratic regime in Iraq can control and ensure a steady flow of oil exports.
The War of the Words
Nowadays, words are often seen as a source of instability.
The violent reactions last year to the caricatures of the Prophet Muhammad published in a Danish newspaper saw a confused Western response, with governments tripping over their tongues trying to explain what the media should and should not be allowed to do in the name of political satire.
Then Iran trumped the West by sponsoring a conference of Holocaust deniers, a form of speech punished as criminal almost everywhere in Europe.
As Turks well know, it is dangerous to take a position on the Armenian genocide of 1915.
The most recent Nobel laureate in literature, Orhan Pamuk, was prosecuted in Istanbul for denying Turkey’s official history by saying that the Armenian genocide actually occurred.
Other Turks have faced prosecution in Western Europe for saying that it did not.
So words are now clearly a battlefield in the cultural conflict between Islam and the West.
The West has learned that, simply as a matter of self-censorship, not legal fiat, newspapers and other media outlets will not disseminate critical pictures of Muhammad, and the Pope will no longer make critical comments about Islam.
But these gestures of cooperation with Muslim sensibilities have not been met by reciprocal gestures.
Instead, Mahmoud Ahmedinejad, Iran’s president, has threatened to wipe Israel off the map.
The Israeli Foreign Ministry now seeks prosecution of Ahmedinejad for incitement to commit genocide – a violation of international law.
But the Israeli press is also bellicose.
Israeli newspapers regularly carry stories about why Israel may need to attack Iran to prevent it from acquiring an arsenal of nuclear weapons.
President George W. Bush has made similarly ominous, if more vague, statements about Iran.
In Germany, preparing and calling for preemptive military strikes from within the government are subject to criminal sanctions.
The world’s different legal systems have never been in much agreement about the boundaries of free speech.
Even between good neighbors like Canada and the United States, there is little agreement about punishing hate speech.
Canadians punish racial insults, but Americans do not, at least if the issue is simply one of protecting the dignity of racial minorities.
But threatening violence is more serious.
Many countries are united in supporting the principle that if, say, Ahmedinejad does meet the criteria for incitement of genocide, he should be punished in the International Criminal Court.
Indeed, the International Criminal Tribunal for Rwanda punished radio station operators who made aggressive public broadcasts urging Hutus to pick up their machetes and murder Tutsis.
A decade ago there would have been a good argument in international law that the Hutu-Tutsi example supports prosecution only after the damage has been done.
All the international precedents – from Nuremberg to the present – concern international intervention after mass atrocities.
Domestic police may be able to intervene to prevent crime before it occurs, but in the international arena there is no police force that can do that.
It follows, therefore, that the crime of incitement should apply only to cases like Rwanda, where the radio broadcasts actually contributed to the occurrence of genocide.
In cases where bellicose leaders make public threats to “bury” another country (remember Khrushchev?) or to wipe it off the map, the courts should wait, it was said, until some harm occurs.
But the international community has become ever more intrusive in using legal remedies against persons who engage in provocative and dangerous speech.
In September 2005, the United Nations Security Council passed Resolution 1624 – paradoxically, with American approval – calling upon all member states to enact criminal sanctions against those who incite terrorism.
The model of incitement they had in mind is the same one that British Prime Minister Blair has publicly invoked: Muslim leaders standing up in their mosques and urging their congregations to go out and kill infidels.
Americans have traditionally said that, absent a risk of immediate unlawful violence, this form of speech should be protected under the First Amendment.
US courts reasoned that it is better to allow the release of hateful sentiments than to call attention to them by showcasing them in court.
But when it comes to terrorism in today’s world, most countries, including the world’s democracies, are not as tolerant as they used to be.
So the traditional liberal position in support of giving wide scope to freedom of speech, even for extremists, is losing ground everywhere.
When it comes to fighting terrorism and the prospect of genocide, the world is now becoming afraid of dangerous words.
The War on “Democratization”
The wars in Lebanon and Gaza constitute a grave threat to democratic reform in the southern Mediterranean.
These wars are inflicting heavy punishment on precisely those peoples who have held fully free and fair elections in the region, while eroding the legitimacy of Israel’s democracy.
At the time of its “Cedar Revolution” last year, Lebanon was held up as the best example so far of democratization in the Arab world.
The enthusiasm with which the international community welcomed those changes now seems all but forgotten, which is also true of recent elections in Palestine – another longstanding international demand.
The signal being sent is clear: it is preferable that Israel, the only state in the region that abides by the rule of law, be surrounded by authoritarian regimes where political outcomes are predictable than by democratic states where Islamists may well rise to power.
It happened in Palestine, and it could well happen in Egypt if free and fair free elections were held.
As a result, Arab nationalist governments feel justified in resisting serious political reform and vindicated in repressing all domestic opposition, particularly the swelling Islamist movements.
But it should now be clear to everyone that democratization in the southern Mediterranean cannot bypass Islamist movements, and that the success of that process largely depends on the degree to which their full participation in the political arena is ensured.
Of course, this requires their renouncing violence as a means of achieving power.
Repressing political Islam, or attempting to “erase” Islamists militarily with total disregard for national political processes (not to mention human life), is not the answer, because it won’t persuade electorates to turn away from Islamist movements.
The efforts of reformist governments in the region to integrate such movements into the public sphere have been dealt a severe blow.
Democracies have long known that extreme and indiscriminate punishment – which by definition affects friend and foe, combatant and civilian alike – is a grave violation of international law, as the United Nations High Commissioner for Human Rights, Louise Arbour, has pointed out.
They also know that such action fuels radicalism, leading to the kind of tragic consequences that are all too familiar nowadays.
Hezbollah is, after all, a creature of Lebanon’s resistance to Israel’s 1982 invasion, now trying to reassert its influence at home and in the wider region by portraying itself as a champion of the Arab-Islamic cause, namely in Palestine.
Any reinforcement of its power will necessarily weaken Lebanon and the region’s democratic forces.
The prolonged absence of the United States from truly active engagement in the Middle East peace process is partly to blame for the current situation.
For almost six years, there has been no significant US diplomatic initiative to resolve the Palestinian question or to pursue the Syrian track (Israel still occupies the Golan Heights).
Moreover, just when we were beginning to think that the Iraqi tragedy had made the limits of unilateralism and preemptive military strategies clear to all, the Bush administration encourages Israel’s military action – this time against a country that has painfully been attempting to consolidate democratic reform and to reafirm its sovereignty in relation to Syria .
Bush’s most promising initiative, promoting democracy across the Middle East, was already dealt a crippling blow by US intervention in Iraq and the ensuing civil war there.
Now the project is buried under the weight of America’s inability to protect Lebanon’s fragile democracy and Palestine’s democratic experiment.
The European Union’s feeble response to the warfare in Gaza and Lebanon has oscillated between understanding and condemnation of the disproportionate use of force by Israel (described as “ten eyes for one” by the Finnish presidency), thereby betraying its dependence on the US to end the violence.
Europeans will have learned nothing from the damaging disunity, and thus weakness, that they displayed during the Iraq war if this conflict does not compel them to speak with one voice.
What is needed is a European initiative that is backed by a credible military deterrent, consisting of forces from the EU, Turkey, and Arab countries, to be dispatched under a UN mandate to Lebanon and Gaza.
Europe must not only put forward a clear demand for an immediate cease-fire and the end to Syrian and Iranian meddling in Lebanon, it must also provide the means to enforce it as well as massive support for Lebanon’s reconstruction.
The EU should decisively back the end of the embargo on Palestine and the urgent creation of a Palestinian state.
A common European front could persuade the US to give Lebanon and Palestine enough time to consolidate their national democratic processes, thus isolating the radical elements of Hamas and steering Hezbollah to dissolution of its private army.
With the US project in ruins, a credible European policy to delegitimize war and support democratization in its neighborhood has become essential.
The War On Terrorism After Iraq
Dazzling military victories in Afghanistan and Iraq may mislead us about the war on terrorism.
If it were merely a matter of rogue states, we could think that progress is being made.
But technological progress is putting into the hands of deviant groups and individuals destructive capabilities that were once limited primarily to governments and armies.
Even if eliminating all terrorist incidents proves impossible, reducing their frequency and lethal potential will make a large difference in their impact on our societies.
The world needs a multi-faceted strategy that de-legitimizes attacks on civilians as a method of conflict; discourages states from providing resources or safe harbor to those who use such methods; hardens our targets at home; denies terrorists easy access to weapons of mass destruction; and reduces incentives to use terrorism.
Military measures may not deal with the largest part of the problem, but they are essential sometimes.
Depriving Al Qaeda of its Afghan safe haven was not sufficient, but it was necessary.
The number of states sponsoring terrorism has decreased over the past decade.
Diplomacy backed by military threat can reduce the number further.
Some failed states are so chaotically organized that they cannot be deterred from providing a haven for terrorists.
In such instances, military assistance may be relevant; in others, intervention may be necessary.
Intelligence sharing and police cooperation is often the most effective front line of defense.
Because of the sensitivity of sources and the dangers of disclosure, much of this work is carried out through bilateral arrangements.
Multilateral cooperation is possible in tracing financial flows, which can help to deprive terrorists of resources as well as provide useful information.
Information sharing can also be enhanced by devoting more resources to under-funded organizations like Interpol.
Working to raise the thresholds that terrorists must overcome requires a systemic approach, since plugging one hole can simply divert terrorists to others.
Our societies are as vulnerable as the weakest international link.
It makes no sense to beef up airport security in London if a terrorist can enter the system easily in, say, Rome or Lagos.
Because modern societies are similar in their vulnerabilities, countries have a great deal to learn from each others' mistakes and best practices.
Governments should establish regular contacts among agencies responsible for both the technical and policy dimensions of homeland security.
Homeland security is an international issue.
Aid and assistance can be used to strengthen the capacities of poor countries involved in these transnational systems.
Such investments are a clear case of coincidence between self-interest and charity.
A particularly important type of assistance is in helping other countries to develop capabilities to deal with weapons of mass destruction.
In the case of biological agents, world public health has become a security issue.
Terrorists can obtain microbes and viruses from inadequately protected foreign laboratories, or by bribing underpaid scientists in the remnants of the Russian biological warfare system, or from natural sources.
The World Health Organization has created a global network of national laboratories that do early detection work, and manages on a meager annual budget of roughly $400 million.
Another crucial area for assistance is the Cooperative Threat Reduction effort, which provides funds to help improve the control and destruction of weapons-grade materials in former Soviet countries.
These programs, too, are under-funded, although there was an agreement in principle at the G-8 summit in Canada last year for ten countries to provide an additional $10 billion over the next ten years.
Somewhat more controversial is the question of whether aid to development is an important counter-terrorist instrument.
Advocates say that it is a crucial tool for "draining the swamps."
But skeptics challenge whether poverty lies at the root of terrorism.
They point out that most of the terrorists who attacked America in September 2001 were middle-class citizens of a relatively wealthy country.
If we must wait for development assistance to raise the world from poverty as the answer to terrorism, we will all be dead.
Both sides of this argument have a point.
The time horizons of development policy are out of line with the time horizons of counter-terrorism, but terrorist groups are often led by well-off deviants who (like Osama bin Laden) recruit followers by pointing out the world's injustices.
Development assistance by wealthy countries can help deprive terrorist leaders of such arguments by showing that policies are aligned with the long term aspirations of the poor.
It is important to provide the prospect of hope, both in material terms and in our policies towards intractable conflicts such as those in the Middle East and Kashmir.
US military success in Iraq was dazzling, but the metaphor of war is misleading.
There will be no equivalent to the fall of Baghdad, and no silver bullet in the struggle against terrorism.
Success will require investment in a wide range of instruments.
Yet, while the US spends only about 1% of its federal budget on foreign affairs, an effective counter-terrorism strategy cannot be divorced from all the dimensions of foreign policy.
The War Over the Settlements
Amos Oz, one of Israel's best known writers, claims that the current Palestinian-Israeli war is actually two wars: an "unjust" war against Israel and the Jews to establish a fundamentalist Islamic state in an "Arab Palestine," and the Palestinian people's "just" war for an independent state worthy of the name.
Conversely, Israel is also fighting two wars: a just war to defend its right to exist, accepted in its integrity and security in the Middle East, and an unjust and futile war to perpetuate its occupation of the West Bank and Gaza Strip and the Jewish settlements located there.
There are about 220,000 Israeli settlers in the West Bank and Gaza, excluding the approximately 190,000 people living in the neighborhoods of Jerusalem that extend beyond the pre-1967 border of the old, divided Jerusalem.
Despite the intifada , the number of settlers has decreased in only a few of the 144 settlements, and there are over 7,000 settlers in the Gaza Strip alone, in 16 communities occupying 20% of an impoverished land already suffering one of the highest population densities in the world.
Israeli state support for expanding settlements is substantial.
In the last ten years, settlements received annual subsidies equal to roughly 920 euros per capita, while the development towns have received 575 euros and Arab communities in Israel 430 euros.
State funds finance 50% of housing costs in the settlements, compared to 25% in Israel.
What is the objective of this policy of expansion in the occupied territories?
Why have settlements been established even in areas most densely populated by Palestinians?
Those territories that were to be used after the 1967 war as bargaining chips in exchange for recognition of Israel and peace are now permanently occupied in order to prevent the formation of a Palestinian state with the sovereignty and territorial continuity necessary for a small but autonomous state.
In reality, the territories are an extension of Israeli sovereignty; the army is there to protect the settlers and to assert Israel's de facto sovereignty over them.
But the occupation has produced malignant effects: restrictions on freedom of movement, daily harassment and humiliation, road blocks.
As a result, the occupied territories have become an obstacle to peace and, paradoxically, a threat to the very security of Israel, its citizens, and its soldiers.
Israelis cannot dominate another people and live in a democratic state in keeping with Zionist ideals unless they "free" themselves of the territories and aim at the coexistence of two states with recognized borders and good neighborly relations.
Given magnitude of settlement and the power of vested interests, a forced evacuation of the occupied territories is unthinkable.
But any agreement between Israel and the Palestinians, will call for a first phase of evacuation of the at least 50,000-60,000 people living in the more distant and scattered settlements.
Three years ago, Premier Ehud Barak proposed a possible solution for approximately 150,000 settlers: combining some of the large settlements into contiguous blocks and annexing them to Israel along with the sprawling suburbs of Jerusalem, with Israeli land handed over to the future state of Palestine in exchange.
But it is unlikely that the Palestinians would accept such a solution.
So some kind of system of incentives must be devised to encourage a large portion of settlers to repatriate and to allow for the continued presence of the others in the territories while respecting Palestinian sovereignty.
This will be easier for those settlers who moved to the territories for pragmatic reasons (subsidized housing, the quality of suburban life, tax incentives), because they are basically commuters, with a lifestyle that is not much different than if they were living in Israel.
Today, with the terrorist attacks along the roads and the insecurity, and tomorrow, with the establishment of a Palestinian state, these settlers will probably want to return to live within Israel's borders.
Perhaps, in a future of peaceful coexistence and open borders, there could even be Jewish communities with autonomous administrations in the territories, just as there are such Arab communities in Israel now: the Jews that stay on would be foreign residents in the Palestinian state and subject to its laws.
But the settlers driven by a nationalist-religious ideology, devoted to the myth of a "Great Israel" and convinced that they are fulfilling the biblical dictate of repossessing the sacred land, will oppose evacuation.
They will nevertheless have to submit to the democratic decisions of their government.
How much would such repatriation cost?
Let's make a rough estimate.
If 60-70% of settlers were willing to return to Israel, this would amount to 130,000-150,000 people or approximately 25,000-30,000 families.
On the basis of the average price of a home in Israel (approximately 280,000 euros per family), one could estimate a total cost of 7-9 billion euros.
Within the framework of an overall settlement of the conflict, a number of countries could contribute to this sum: the United States and the European Union countries, as well as Saudi Arabia and the other Gulf states.
By purchasing the settlers' homes, they could then hand them over to Palestinian refugees settling in the future state of Palestine.
The Wars of Austerity
LONDON – I have become increasingly less hopeful about prospects for a rapid recovery from the global recession.
Coordinated fiscal expansion ($5 trillion) by the world’s leading governments arrested the downward slide, but failed to produce a healthy rebound.
The current frustration is summed up by The Economist’s recent cover headline: “Grow, dammit, grow.”
There are two reasons to be pessimistic.
The first reason is the premature withdrawal of the “stimulus” measures agreed upon by the G-20 in London in April 2009.
All the main countries are now committed to slashing their budget deficits.
The second reason is that nothing has been done to address the problem of current-account imbalances.
Indeed, the talk nowadays of currency wars leading to trade wars is reminiscent of the disastrous experience of the 1930’s.
The problem of current-account imbalances is closely linked to the existence of a world savings glut.
One part of the world, led by China, earns more than it spends, whereas another part, notably the United States, spends more than it earns.
Provided the surplus countries invest in the deficit countries, these imbalances pose no macroeconomic problem.
Indeed, this was the nineteenth-century pattern.
A system of foreign investment, pivoting on London, channeled the savings of rich (or surplus) countries to the poor (or deficit) countries.
Despite many financial crises and defaults, this creditor-debtor relationship worked, on the whole, to the benefit of both sides.
Rich-country investors earned a higher rate of return than they would at home, and poor-country recipients raised the development finance they needed.
There was no persistent tendency to deflation.
The current system is superficially similar, but with one crucial difference: the flow of saving now goes from developing countries like China to rich countries like the US –that is, from countries where capital is scarce to countries where it is abundant.
The global savings glut is the result of this perverse relationship.
Unlike Great Britain in the nineteenth century, China does not view its surplus as an investment engine.
It undertook reserve accumulation in the late 1990’s as a form of self-insurance against capital flight.
Reserve accumulation was also a by-product of China’s deliberate currency undervaluation to promote export-led growth strategy.
The result is that China and other East Asian countries own a large and growing stock of US Treasury bills.
Through financial intermediation, these government securities helped finance the western consumption and speculative boom that collapsed in 2008.
Cheap money in the West was the “correct” Keynesian response to the flood of saving from the East.
But, because there were insufficient outlets for “real” investment in countries that already had all the capital they could use, cheap money proved to be a dysfunctional way of dealing with the problem of excess saving.
The recession reinforced the pattern of poor countries lending to rich ones.
With vigorous recovery in East Asia and stagnation in the West, global imbalances have grown.
And, as former US Federal Reserve Chairman Alan Greenspan recently noted, “US fixed capital investment has fallen far short of the level that history suggests should have occurred, given the dramatic surge in corporate profitability.” In short, we are heading full steam ahead into the next collapse.
There are two broad strategies for unraveling the linked problems of current-account and saving-investment imbalances.
The first is to weaken China’s incentive to accumulate reserves.
In April 2009, Zhou Xiaochuan, Governor of the People’s Bank of China, proposed the creation of a “super-sovereign reserve currency” to remove the “inherent risks” of credit-based national reserve currencies.
This new currency, to be developed from the International Monetary Fund’s Special Drawing Rights (SDRs), would in time entirely replace national reserve currencies.
A “substitution account,” housed at the IMF, would enable countries to convert their existing reserve holdings into SDRs.
The principle behind this is that collective insurance would be cheaper, and therefore less deflationary, than self-insurance.
A reduced Chinese appetite for reserves would be reflected in an appreciation of its currency and a reduction in its trade surplus.
This far-sighted Chinese proposal never left the drawing board.
Instead, the US has brought intense pressure to bear on China to revalue the renminbi.
The result is a war of words that could easily turn into something worse.
The US accuses China of undervaluing its currency, while China blames loose US monetary policy for flooding emerging markets with US dollars.
The US House of Representatives has passed a bill that would allow duties to be imposed on imports from countries, like China, that manipulate their currencies for trade advantage.
Meanwhile, the dollar’s depreciation in anticipation of further quantitative easing has caused East Asian central banks to step up their purchases of dollars and impose controls on capital inflows, in order to prevent their currencies from appreciating.
As Asian countries try to keep capital out, the West moves towards protectionism.
We can learn from the experience of the 1930’s.
A rising tide lifts all boats; a receding one ignites a Hobbesian war of each against all.
This brings us back to the premature withdrawal of fiscal stimulus.
With aggregate demand depressed in Europe and the US, governments turn naturally to export markets to relieve unemployment at home.
But all countries cannot simultaneously run trade surpluses.
The attempt to achieve them is bound to lead to competitive currency depreciation and protectionism.
As Keynes wisely remarked, “If nations can learn to provide themselves with full employment by their domestic policy…there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbor.” Trade between countries “would cease to be what it is, namely a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases.”
In other words, today’s turmoil over currencies and trade is a direct result of our failure to solve our employment problem.
The Wars of the Chinese Succession
What political reforms will Hu Jintao make in China?
That is the question to ask the 59-year old engineer who will take over as head of the world's biggest and longest-ruling communist party next month.
While talk about the horse-trading surrounding Hu's accession to power - and President Jiang Zemin's seeming desire not to leave the stage - has dominated Chinese affairs since summer, more important to China's future is an appreciation of Mr. Hu's inheritance and what he will do with it.
Hu Jintao's career does not inspire optimism.
A 1998 Xinhua report quoted him as saying that "A good leader should carry forward democracy." But Hu's idea of democracy doesn't appear to contain ideas about the direct election of top leaders or of guaranteed individual freedoms.
According to Wu Jiaxiang, a former staffer on the Communist Central Committee secretariat who worked on political reforms before being jailed for three years after the 1989 Tiananmen Massacre, Hu believes in rule by elites chosen through a rigorous examination and approval process.
In internal speeches, Hu identified the grooming of cadres and improved party operations as the keys to political reform.
Those ideals were reflected in a new law governing cadres passed in July 2002 that Hu personally announced.
This elitist model appeals to Chinese intellectuals who desire refined rulers.
Hu wants nothing to do with increasing political participation or outside checks on communist party power.
In various speeches, he warned against fiddling with the party's Leninist foundation.
He advocates greater internal party democracy but rejects system-wide democracy.
His top three aides in the Central Committee - Ling Jihua, Zheng Xinli, and He Yiting - are big advocates of "cadre hearing" reforms in which internal peer-review is used to evaluate government leaders.
Hu's behavior confirms his conservatism.
Hu sanctioned a military crackdown in Tibet in March 1989, reversing a liberalizing policy introduced by former party General Secretary Hu Yaobang, and he was among the first provincial leaders to support the Tiananmen crackdown.
Hu also holds strong anti-American views, even though his daughter is believed to carry a US passport.
While the Central Party School that Hu has headed since 1993 is now more liberal and daring, Hu had little to do with that change, which was instigated by others and approved by Hu after seeking the advice of Jiang.
The issue of meaningful reform is almost certain to surface early on Hu's watch.
Forces are building inside the party, as evidenced by a stream of surveys, journal articles, and academic debates, that may lead to a split on the issue of reform in Hu's first term.
Such a split happened in the 1986-89 period, contributing to party's initially confused reactions to the Tiananmen protests.
Failure to move on the issue in his first five years may cause Hu to be supplanted, informally if not formally, by others willing to embrace change.
So, how will Hu respond?
Will he, like Gorbachev, see the writing on the wall and lead the charge?
Or will he be pushed aside by others willing to modernize China's political system more aggressively?
Hu's key rivals are Li Ruihuan, the liberal former mayor of Tianjin who will take over China's parliament next March, and Zeng Qinghong, Jiang's closest aid who now heads the party's Organization Department.
Li has called for an expansion of competitive direct elections up to the provincial level as well as for new press freedoms.
Zeng sees movement towards a more pluralistic political system as critical so that the party can continue ruling as a grand coalition of the country's main groups.
In internal speeches, Zeng has said that China could consider holding nationwide elections as long as they do not threaten national unity, ethnic cohesion, or social stability.
Both Li and Zeng urge cadres to learn from America's democratic system.
Zeng even maintains secretive but close ties to overseas pro-democracy groups and, some analysts believe, would reverse the official verdict on the 1989 Tiananmen protests and lift the ban on opposition parties and a free press if the opportunity were to arise.
So the key question for political reform concerns which man gains the upper hand.
Zeng is a master manipulator who, given the chance, would run circles around the cautious Hu.
In alliance with Li, they would form a formidable force, one likely to enjoy high-level support from senior party elders like Wan Li, Qiao Shi, and Tian Jiyun.
They would also likely enjoy the backing of the as yet unspecified leader of the "fifth generation" due to replace Hu in 2012, someone likely to be a provincial-level leader with strong reform credentials.
Within the wider party, a powerful constituency is growing that would support Li and Zeng if they seized the banner of reform while Hu dithered.
Almost unnoticed by the outside world, the last four years in China have seen a remarkable outpouring of writings on political reform from across the political spectrum.
Ideas vary, but in general there is agreement on faster political liberalization and more civic freedoms.
Hu, then, may become a mere footnote in history, a bridge between the corrupt and divided state of Jiang Zemin and the democratizing leadership of Zeng Qinghong or some other reformer.
Like Yuri Andropov and Konstantin Chernenko, who ruled the USSR between 1982 to 1985, Hu may slip dimly into memory because he was unwilling to confront political reform head-on.
The Washington Protests
CAMBRIDGE: We are entering the third round of street protests against globalization.
The City of London and Seattle were the first to be besieged.
Now demonstrators are massing in Washington against the IMF and World Bank.
Thousands will protest for human rights issues, women rights issues, gay rights issues, workers rights issues, ecological rights issues, anti-war issues, Tibetan rights, and a myriad of other concerns.
A brief look at the demonstrators' website a16.org gives a full taste of the menu of gripes on offer, including even an anarchists' domain.
What is extraordinary here are not the protests per se, but the sheer ability to gather and mobilize so many diverse groups into one giant anti-everything-that-is-wrong-in-the-world howl.
But should we take these screams seriously?
Is there a message?
Are these protests representative of a widespread rejection of the way the world economy is working?
Or does all this sound and fury signify nothing more than a well-organized mobilization of the dispossessed who cannot win support via the democratic process?
The demonstrations in Washington are certain to gain worldwide attention as the best show in town.
But we should not be dissuaded from a sound economic approach to managing the world economy.
The most important reason for ignoring these shouts is that, behind the scenes but not really hidden, the chief force organizing the demonstrations is America's organized labor, a movement with terrible problems with free trade (Nafta, trade with China, the WTO), anything, indeed, that looks like a global free market.
When union bosses play internationalist, don't believe them for a minute.
They only want to raise labor standards abroad so that workers in poor countries become overpriced and lose their jobs.
Policy makers in poor countries have long understood that their chief enemies are the "fair trade" advocates in the US, unions, and environmentalists.
But it is the IMF and World Bank who are the focus of the demonstrators rage.
The protestors are singularly inarticulate but four big "No's" do emerge:
-- No to IMF programs that hurt workers and the poor.
How to avoid it?
Their answer is bankruptcy arrangements and haircuts for creditors, bigger social programs, capital controls.
But many poor countries have recently recovered from the impact such lunatic ideas, what a tragedy if that were to shoved back into poverty by returning to those tried-and-failed policies;
-- No to pollution.
The demonstrators indulge in an idyllic world of windmills throughout the emerging world where happy farmers and their donkeys bond with an ever-renewing nature.
A wonderful image if it were not for gross poverty that results;
-- No to debt.
The demonstrators want to free the poorest nations from unbearable and crushing debts.
Yes, lets cancel those debts but lets get in exchange better governance rather than a no-ties write off that only worsens the credit rating of poor countries, locking them out from investment and improved economies.
Of course, conditionality is just what the demonstrators have the biggest problems with.
They seek a world where countries are governed by their own needs and priorities, little recognizing that misgovernment is the rule in many poor countries (just look at Robert Mugabe=s Zimbabwe) and conditionality is about getting a minimum of stability and progress;
-- No to secretive global institutions.
The demonstrators wonder why the IMF does not hold town meetings; why the World Bank does not reach out to all the world's NGOs and at least listen
Why all this rage in a booming America?
The answer is that, even with jobs and credit now plentiful, workers retain the memory of the preceding 20 years of lay-offs, deregulation, and restructuring.
They may now have a job and new jobs are easy to find.
But they believe that good and secure jobs are gone, and that greedy multinational corporations are responsible, primarily the bosses who behind closed doors made reckless decisions about people's lives and became unbelievably rich from doing so.
The New Economy may be wonderful for economic performance, but it imposes adjustment, pace of change and strain on many people which appear to be out of proportion to their ability to cope.
For too many people, the New Economy seems to be good only for young people, for winners.
The Seattle and Washington demonstrations make another point: If CNN turned the world into a global village, the Internet goes 6 steps further.
The ability to organize via the Web is mind boggling.
The Internet provides a future for activists and a scope for mobilization that is only starting to become apparent.
Around the world, we will be getting direct, in-your-face democracy in a way that we have never seen before.
The Web is making large traditional political parties as obsolete as bank branches or bookstores.
Virtual politics, whatever that will be, is around the corner.
America the Unequal
PARK CITY, UTAH – The last documentary film that used dry charts and statistics to make an abstract argument about a global issue and nonetheless became a pop-culture hit was Al Gore’s An Inconvenient Truth.
But the hit of this year’s Sundance Film Festival was a low-key affair called Inequality for All, in which Robert Reich, a labor secretary in the Clinton administration, explains how rising income inequality and the demise of the middle class is causing so many Americans to suffer.
With President Barack Obama recently taking up some of these themes in his second inaugural address, it is worthwhile to examine the message of Inequality for All more closely.
The film’s charts are not boring, but actual showstoppers: Reich makes the point that the mid-1940’s to the mid-1970’s were decades of relative income equality, which corresponded with overall affluence.
(The last time that income inequality in the United States was as deep as it is now was immediately before the 1929 stock-market crash.)
But the last 20 years have witnessed a spike in the difference between the top earners and the middle class: the “1%” really are living in a stratospheric bubble.
As the journalist Chrystia Freeland has recently argued, a meta-class of global “plutocrats” is emerging – people who have little in common with the rest of us.
Inequality for All makes the case that the wealthiest 1% simply cannot consume enough, no matter how hard they try, to generate the revenue that an affluent middle class could.
The secret to a strong economy is to invest in education, strengthen household incomes with a decent minimum wage and strong unions, and raise skill levels, thereby generating sustained consumer demand.
This, Reich argues, is the “virtuous cycle” that we see in strong economies such as Germany, in which workers are highly skilled and educated, unions are protected, and the middle class has leisure and money to spend.
Reich also persuasively describes the “vicious circle” – with falling wages undermining consumer demand and leading, in turn, to shrinking output – that has made the US economy fragile and boosted social instability.
He analyzes a middle class that is skating on the thinnest of ice, with employment coming at the price of lower wages and benefits.
Moreover, millions of middle-class American homes are “underwater” (the mortgage is more than the home’s underlying value).
The film interviews one of the rich, a charming millionaire who owns a pillow company and points out that he and his fellow rich guys and their families simply cannot spend enough to offset the lost demand of a strong middle class.
In fact, the richest save rather than spend their dollars, and send them around the globe in transnational hedge funds rather than using them to create more jobs at home.
So, the “trickle-down” story that the middle and working class are told every election cycle in America – that cutting wealthy people’s taxes means more job creation in America – is simply not true.
Those wealthy people’s untaxed dollars stay in hedge funds and out of the revenue stream.
The cost to social programs, infrastructure, and public schools intensifies stress on the middle class, who end up poorly educated, work long hours in dual-career ill-paid jobs, lack leisure time and money to spend, and so on.
Are we stuck with this vicious circle, which advocates of laissez-faire globalization have told us for 15 years is an inevitable consequence of the “invisible hand”?
Or could Reich’s retro prescriptions, which he has affirmed for decades, be taken up again?
Could they bring back the affluent years of the early Clinton era, when it seemed as if domestic policies could actually influence and even benefit the US economy?
“I’d like to see what we did so successfully in the first three decades after World War II, when prosperity was widely shared.” That means large investments in public education, including higher education; substantial investments in infrastructure, funded by a highly progressive tax whose top marginal effective rate never fell below 50%; and strong labor unions.
“Anyone who thinks these policies are no longer feasible in a global economy,” Reich told me, “hasn’t looked at modern Germany, which features all of them, and where the median wage is higher than ours.”
It sounded great – but it also seemed to contradict the conventional wisdom, according to which cut-rate labor in Pakistan or Mexico is the inescapable death knell for $25-an-hour union jobs, with benefits, in Detroit.
“How do you keep US labor unions strong if Mexico, for example, undercuts US hourly wages,” I asked.
Reich replied in more detail: “Strengthen labor unions in industries sheltered from global competition – workers in retail chains, hotel chains, restaurant chains; childcare and elder-care; hospital workers; and so on.
Attract manufacturing and manufacturing engineering back to the US by improving the skills and productivity of US workers (as Germany has done for German workers).
And encourage trading partners to improve their own wages and labor standards (for example, by requiring in all trade treaties that a country’s minimum wage be half its median wage).”
Is this agenda feasible in America today?
To be sure, one would have to mend the broken political system first.
But, looking at the affluent German middle class from the US, where a quarter of jobs pay wages that place workers at or below the poverty line, Reich’s recommendations seem worth fighting for.
The Way Forward for Global Financial Policy
Financial globalization is exploding.
Yet, as the world’s leading finance ministers and central bankers convene in Washington this month for the semi-annual International Monetary Fund board meetings, policy paralysis continues.
There is simply no agreement on how to address glaring problems such as America’s increasingly fragile trade deficit, or financial dysfunction in a number of emerging markets.
This paralysis has three layers.
First, rich countries are deeply reluctant to embrace any collective plan that might impinge on their own domestic policy maneuvers.
The United States is the worst offender.
US Treasury secretaries have always loved to lecture their foreign colleagues on America’s economic perfection, and why every country should seek to emulate it.
Never mind that this logic is now in danger of unraveling along with the US housing market; Treasury Secretary Hank Paulson will stick to it.
But the fact that the US looks set to borrow almost $900 billion this year from the rest of the world is hardly a sign of US strength and foreign weakness.
It is difficult to summarize the cacophony of European voices so succinctly.
The French are deeply ambivalent about globalization, as if it were yet another invading force.
The British have nearly the opposite perspective.
Nevertheless, Europeans generally agree that their societies produce the best lifestyles, even if their economies are less efficient than America’s in a Darwinian sense.
Thus, European finance ministers, too, will not be keen to admit any need for major policy changes to deal with risks from financial globalization.
The Japanese typically try to keep quiet.
As huge winners from globalization, they want to avoid criticism of their trade and financial policies, which arguably remain considerably more protectionist than those of their rich-country counterparts.
And they certainly don’t want to be pressed to apologize for holding hostage over $800 billion in foreign currency reserves, acquired to resist yen appreciation.
Developing countries are also at fault.
Too many policymakers still believe that externally imposed opening to international capital flows was the main culprit behind the financial crises of the 1990’s – a view that unfortunately is lent some intellectual respectability by a small number of left-leaning academics.
Never mind that most of the crises could have been avoided, or late least substantially mitigated, if governments had let their currencies float against the dollar, rather than adopting rigid exchange-rate pegs.
Instead, the bogeyman of financial globalization is used as an excuse for continuing to coddle inefficient and monopolistic domestic financial systems.
The inability of backward domestic financial systems to allocate investment efficiently is a big factor pushing funds out of poor countries and into the US.
Last but not least, the IMF, as the multilateral agency charged with maintaining global financial stability, ought to be providing more leadership.
Indeed, it is probably the only player with the universal political and intellectual legitimacy to find a way forward on collective action to address financial globalization.
Unfortunately, the IMF is paralyzed by the need to confront some internal governance problems, the biggest of which is the lack of a sensible way to recalculate the voting shares of countries as their relative influence in the global economy evolves.
In particular, a radical increase in the weight of Asia’s vote is urgently needed.
What, then, should ministers do when they gather in Washington?
First, there is the long-standing litany of policy responses needed to deal with the global trade imbalances.
These include greater fiscal discipline in the US, greater reliance on domestic demand in both Europe and Asia, and more flexible exchange rates in Asia.
But it is time to go further and begin to lobby aggressively for faster financial liberalization in the developing world.
True, most studies suggest that developing countries ought to precede any sharp opening to international financial markets by liberalizing trade.
Stable macroeconomic policies also need to be in place, while fixed exchange rates are to be avoided.
Many developing countries, however, are well on their way to achieving these preconditions.
Ironically, bad memories of the IMF’s first, premature attempt to promote long-term capital market liberalization remain an obstacle today.
The IMF’s attempt to enshrine capital market liberalization in its charter, coming as it did in the middle of the 1990’s Asian financial crisis, was a public relations disaster.
But it is now time to revisit the idea, at least in a modified and more nuanced form.
Weak financial systems in emerging markets are a major obstacle to balanced development.
They are also a big factor behind the global trade imbalances.
Pushing for greater capital market liberalization after the debacle of the 1990’s will be controversial.
But the core of the idea was right then, and it is right now.
In the absence of better mechanisms for capital allocation, global growth in this century will slow down a lot sooner than it should.
Policymakers cannot hide from that reality forever.
The Way Out of Iraq
At last the point has been reached in Iraq where everyone ostensibly wants the same thing: the departure of Coalition forces from the country.
The recent leak from Britain’s Ministry of Defense of a discussion paper on troop withdrawal highlights this desire.
The only question is how to satisfy it.
As long as the Coalition forces stay, violence is likely to escalate.
But if they leave, it will also escalate, only faster.
So the real question is how to get to the point where Iraq has a police force and army that can be trusted to maintain law as well as order.
Much ground must be covered to get anywhere close.
Notwithstanding the courage of the many Iraqis who join either the army or the police, no one should be surprised if some have motives that are less than pure.
In northern Iraq, old scores are being settled and de facto ethnic segregation is being introduced in areas, such as Irbil, that were traditionally diverse.
In other areas, sharia law is being introduced by force.
So how can Iraq create uniformed services that can be trusted to enforce the law effectively and impartially, without consideration of ethnicity, religion and gender?
The traditional answer is to recruit, train, and instill the “right values.”
But there is not enough time for that.
Other ways are needed.
In the absence of a deeply instilled value system, Iraq needs grassroots civil society organizations that will hold police and army to account.
These could take different forms, but what is important is that they are truly inclusive at a local level, and that they get support from district, regional, and national power structures when they highlight abuses.
If there is local scrutiny, and national reinforcement and recognition of the value of that scrutiny, then most members of the uniformed forces are likely to behave appropriately –and can be more easily identified and dealt with if they don’t.
This might appear excessively hopeful, yet in Afghanistan, a country akin to Iraq in many ways, there are groups working towards this goal.
The Cooperation for Peace and Unity (CPAU) provides a model of how this can be done.
In Afghanistan, as in Iraq, ordinary people’s highest priority has been to achieve a reduction in violence.
CPAU worked across the country in the last three years to set up District level Peace Committees, supported by satellite Peace Councils in villages.
The initiative faces a culture in which violence is so deeply embedded that children once learned arithmetic by counting numbers of dead Soviet soldiers.
The Committees therefore seek to bring together all sections of the community – including teachers, tribal leaders, religious leaders, women, police, soldiers, judges, and businesspeople – to develop ways of resolving conflicts non-violently.
Although monitoring has not been a formal part of the role of the committees until now (it is planned for the future), the mere fact that the police, army, and judiciary are part of these committees brings them into contact with the rest of the community, provides feedback, and starts to build trust.
Some results are remarkable.
In one workshop, the local military commander came for a couple of hours, as a courtesy, and ended up staying for the whole week.
At the end, he apologized for his violent past and made a commitment to disarm his 2,000-strong private army.
He now visits the Committee offices regularly.
In Iraq, projects such as the Humanitarian Liaison Center in Kirkuk are starting to fulfill a monitoring function by offering the ethnically diverse local population the opportunity to bring grievances and get help in having them resolved.
But, too often, even if a court ruling is made, it is not enforced as a result of intimidation.
Much good work on strengthening civil society has already been done by American and British forces.
We don’t hear about the workshops for women’s empowerment, or the successful organization of small-scale local elections across the country.
But mobilizing civil society is hugely challenging, particularly when, as in Iraq, it needs to be done quickly and on a large scale.
Military force is still necessary, but so are incentives to disarm, including the prospect of economic opportunities that are more fruitful than crime and extortion.
Fortunately, building the capacity of civil society is as cheap as it is important.
The Humanitarian Liaison Center serves the whole of Kirkuk at an annual cost of just $75,000 a year.
With $10 million, such centers could be replicated 100 times – with plenty of change left over.
The challenge is to commit to this approach, to scale up and to support to the hilt the brave people who take on the challenge of holding power to account.
Otherwise, the Iraqi people are unlikely to get the security that, after so many years of suffering, they so desperately need.
The Weak Dollar\u0027s Impossible Strength
Once upon a time, until 1997, America's current account deficit was relatively small--just 1% of GDP.
Since then, the deficit has widened dramatically, to 2.7% of GDP in 1999, 3.5% in 2001, and an estimated 4.7% this year.
Expect more of the same in 2004, when the current account deficit should reach 5.1% of GDP, despite forecasts that the US economy will grow significantly faster than most of its trading partners.
How long will the rest of the world continue to finance America's external deficit?
What will happen when it stops doing so?
Clearly, America's current account deficit is unsustainable.
As the late economist Herb Stein, an advisor to President Richard Nixon, used to say, if something is unsustainable, then someday it will stop.
I used to think that the US current account deficit would stop when the rest of the world "balanced up"--when Japan recovered from its decade-long stagnation, and when Western Europe restructured its economy, boosting aggregate demand and reducing its unemployment rate to some reasonable level.
But with every passing year, "balancing up"--rapid growth in the rest of the world boosting demand for US exports--has become less and less likely.
The other way the current account deficit could come to an end is if the inflow of capital into America stops.
As the late Rudi Dornbusch (who preceded me as the author of this series of commentaries) used to say, unsustainable capital inflows always last much longer than economists, who tend to focus firmly on the fundamentals, believe possible.
Investors funding the capital inflow and the country receiving the money always think up reasons why this time the inflow is sustainable, because it reflects some supposed permanent transformation of fundamentals.
That mass delusion, Dornbusch argued, keeps the inflow going long after it should come to an end.
But when it does end, the speed with which the capital flow turns around takes everyone--even fundamentals-watching economists--by surprise.
Whenever the capital-flow reversal hits the US, it is clear that the dollar's value will decline by 25-50%.
The exact amount depends on how rapidly Americans re-direct their spending from imports to domestically-produced goods, and how much of an expected recovery in the dollar's exchange rate is needed to persuade investors to hold US assets while the spending switchover takes place.
In Mexico in 1995, in East Asia in 1997-1998, and in Argentina in 2002, the collapse of currency values caused enormous distress: as exchange rates fell, the local-currency value of debts owed to foreigners and linked in value to the dollar soared, raising the danger of effective national bankruptcy.
Deep recessions, high real interest rates, and financial chaos were all on the menu--although the then US Treasury Secretary Robert Rubin, the IMF's Michel Camdessus and Stanley Fischer, and many Mexican and East Asian politicians and central bankers skillfully prevented at least the first two crises from becoming much more destructive than they might have been.
But should the value of the dollar suddenly collapse, the US will follow a different course.
Like Mexico, East Asia, and Argentina, America's international debts are largely denominated in US dollars.
Unlike in the case of Mexico, East Asia, and Argentina, the dollar is America's currency.
Unlike other countries, a decline in the real value of the dollar reduces the real value of America's gross international debts.
A fall in the value of the dollar reduces Americans' standard of living, but it does not cause the kind of liquidity and solvency crises we have seen so often in the past decade--at least not if New York's major financial institutions have well-hedged derivative books; if not, all bets may be off.
So an end to capital inflows to the US should not set off the worries about solvency and the derangement of finance that generated recessions in Mexico and East Asia and Argentina's deep depression.
The currency crises in Mexico, East Asia, and Argentina primarily impoverished workers who lost their jobs, those whose hard-currency debts suddenly ballooned, and rich-country investors who found themselves renegotiating terms with insolvent borrowers.
A rapid decline in the dollar is likely to have a very different impact: primarily to impoverish workers whose products are exported to America and investors in dollar-denominated assets who see their portfolio values melting away.
Dollar devaluation will only secondarily affect Americans who consume imported goods or who work in businesses that distribute imports to consumers.
So why, in the absence of solvency fears, do capital inflows to America continue?
Investors outside the US can see the magnitude of the trade deficit, calculate the likely decline in the dollar required to eliminate it, and recognize that the interest rate and equity return differentials from investing in the US are insufficient to compensate for the risk that next month will be when capital inflows into America start to fall.
The fact that so much of the risk from a decline in the dollar falls on those investing in America means that the capital inflow has already gone on much longer than any fundamentals-watching economist--including me--would have believed possible.
What stories are investors far from America now telling one another to justify continuing to add to their exposure to the risk of dollar depreciation?
We know that sooner or later they will stop believing these stories, and we know what will happen when they do.
But no economist can say when is "when."
The Mismeasure of Poverty
ROME – In early 2012, outgoing World Bank President Robert Zoellick announced that the Millennium Development Goal of halving the global poverty rate relative to its 1990 level had been achieved in 2010 – five years ahead of schedule.
But many analysts have challenged estimates that rely on the World Bank’s current poverty line, raised in 2008 from $1 to $1.25 per day, in purchasing power parity (PPP) terms.
Critics argue that, for methodological reasons, the PPP-based poverty line misrepresents the prevalence of poverty worldwide.
For example, the three rounds of the World Bank’s International Comparison Program that have been conducted so far have each defined the poverty line differently, underscoring the weakness of the current measure.
In fact, taking into account inflation in the United States, the poverty line should have been raised to $1.45 per day in 2005.
Improving global poverty estimates – the World Bank’s extend over three decades, beginning in 1981 – requires overcoming three major problems: insufficient survey data, flawed survey execution, and faulty PPP conversions.
Unfortunately, the World Bank’s approach has evaded these issues or addressed them inadequately.
First, many countries lack survey data showing how income and consumption are distributed among their citizens.
The World Bank avoids this problem by assuming that the poverty rate of any country without such data matches the region’s average.
But this approach has led to North Korea being assigned essentially the same poverty rate as China, even though the former regularly receives food aid from the latter.
Second, the World Bank accepts survey data uncritically – even when it conflicts with data from other sources.
For example, World Bank survey data suggest that India’s per capita household expenditure has grown by only 1.5% annually since the early 1990’s, implying that the average Indian spent $720 in 2010.
But national-income-accounts data show a 4.5% annual rise, on average, over the last two decades, translating into per capita expenditure of $1,673 in 2010 – roughly 2.5 times higher than the Bank’s estimate.
Likewise, World Bank survey data estimate that the Indian middle class comprises roughly 90 million people, despite more than 900 million cell-phone subscribers and 40 million cars.
Such contradictions reflect significant measurement discrepancies, which, in India’s case, could be on the order of hundreds of millions of people.
The third major challenge is using PPP estimates, measured in national currencies, to convert survey data into global poverty estimates that account for cost-of-living differences between countries.
Given that the conversions that the World Bank currently uses are based on an international exercise that was conducted for 2005, they fail to account for recent factors that are significantly affecting the poor and vulnerable, such as much higher prices for staple foods.
Furthermore, PPP conversions have little significance for some countries, most notably China.
Rather than permit price surveys in a random sample of locations (required for accuracy), China restricted data collection to a few urban areas.
The resulting data showed Chinese prices to be 40% higher than previously thought;
Chinese living standards were then revised downward by roughly the same proportion.
If taken at face value, the survey data on prices, together with China’s growth rates, would suggest that China was almost as poor in 1981 as the world’s poorest country today, with average personal consumption below the current level of Liberia – another country to which China provides significant aid.
While the Bank’s latest PPP-conversion rate puts the number of poor Chinese at 173 million, the previous rate would suggest that only 69 million Chinese were living below the poverty line.
With such a flawed system shaping the world’s understanding of poverty, declarations of success or failure carry little meaning.
An improved poverty indicator – one that addresses, rather than avoids, the three major problems plaguing global estimates – is urgently needed.
The Weakness of the Strong Dollar
It is always risky to write about exchange rates.
If a currency's exchange rate is falling, it may well be rising by the time one's article appears.
But the issue of how we should think about exchange rates and their appropriate management is a perennial one.
So what is at issue now is not just the falling dollar, but rather what US officials intend to do about it.
Paul O'Neill, the outspoken US Treasury Secretary, suggests that there is little the US could or would do to sustain the dollar.
His remarks were criticized by some as abandoning the strong dollar policy that was the Clinton Administration's hallmark.
One responsibility of economic leadership is to dispel economic myths--certainly not to create them.
The "strong dollar" policy represents an especially egregious example of an economic myth; it seems to suggest that the US Treasury could, and would, maintain the strong dollar, and that a strong dollar is good for the US.
When I was chairman of the President's Council of Economic Advisers, I was often asked if I supported the strong dollar policy.
I replied that I believed in an "equilibrium dollar."
In other words, exchange rates are no different from other prices.
Like the price of apples and oranges, market forces should determine them.
Anyone who says he believes in a "strong orange policy" would be ridiculed.
Yet some of those who seem to have the greatest faith in market forces treat exchange rates as if they were governed by laws other than those of standard economics, so that a word or even a look from a finance minister could lead currencies to soar or plummet.
Of course, there is considerable irrationality in currency markets.
Keynes once described asset markets as beauty contests, in which the objective is not to ascertain who is the most beautiful person, but whom others will think is the most beautiful.
The objective in currency markets is, indeed, often to guess what others will be thinking.
But even if government intervention can affect exchange rates in the short run, in the longer run, it is market fundamentals that matter.
There may be a legitimate role for government in limiting excessive volatility, but if underlying economic fundamentals do not drive the exchange rate, what is the basis of our confidence in the market system?
Belief in misguided notions inevitably leads to further nonsense.
On one occasion, a reporter queried the US Treasury on the adverse effects of the strong dollar on exports (at the time, car sales and other exports were suffering.)
The response was that the strong dollar meant a strong economy, and a strong economy strengthens the ability to export.
But of course, even the US Treasury, as powerful as it may be, cannot repeal the laws of economics.
Demand curves are downward sloping: typically, at higher prices, others will demand less of Americana goods, and a strong dollar means that American goods are more expensive.
Perhaps the most important objection to the strong dollar policy is that it encourages precisely this confusion between a strong dollar and a strong economy.
We should no more be emotionally attached to the exchange rate than to any other price.
A stronger exchange rate discourages exports, and when an economy is facing rising unemployment, it can make a bad situation worse.
On the other hand, a higher exchange rate may also lead to lower inflation, as import prices fall.
When inflation is the primary concern, a strong exchange rate may be good for the economy.
The strong dollar policy reeks of an economic nationalism that is out of step with the era of globalization.
If the dollar is strong, then the euro or the yen is weak.
But how are political and economic leaders in other countries to respond?
Should they simply agree to the strong dollar policy, even though it implies a weak yen or euro policy?
What is required is a debate with the US, for the strong dollar has led to an anomalous situation: the world's richest country seems unable to live within its means and must continually borrow hundreds of billions of dollars from abroad to finance its huge trade deficits.
The strong dollar--far more than Japanese protectionism--fuelled the bilateral deficit with Japan.
It also contributed to protectionism at home, reflected in the new US steel tariffs.
It is high time that the nonsense of the strong dollar policy be laid to rest.
Paul O'Neill should be commended for helping in this effort.
Perhaps we can now begin to think more seriously about creating an international economic system that acknowledges the devastating effects that market volatility among major currencies has on less developed countries, and that ensures greater stability.
For too long, we have blamed the victims.
That has merely permitted us to avoid taking a hard look at the system itself.
The Wealth of Species
Although broad scientific consensus has identified the loss of biological diversity as one of the world's most severe environmental threats, public recognition of the scale of the danger is lagging.
Ecologists and other environmental scientists bear some of the blame for failing to make their concerns meaningful to ordinary people.
But their challenge is made more difficult by nay-sayers who claim that fears about declining biodiversity are a tree-huggers' conspiracy to elevate Nature above people.
Nothing could be further from the truth: the threat to biodiversity can mean the loss of critical features of humanity's life-support systems, and therefore threatens our personal and economic well-being.
Remedial action can no longer be delayed.
Those who maintain that the biodiversity crisis is manufactured, or at least over-hyped, often point to the sometimes exaggerated estimates of extinction rates that appear in the press.
Critics seize upon these embellishments to argue that there is really not much of a problem.
Wrong.
Extinctions are only the tip of the iceberg.
To focus on how many species have become extinct, or will go extinct, obscures the fact that a large number of species have become greatly contracted in the range of their habitats, primarily due to human activity.
We appropriate land and resources for our purposes, release harmful wastes, and introduce alien species that displace natives.
Extinct or endangered species are indicators of a much bigger problem.
Little comfort can be taken in the fact that a species survives if it persists only at a fraction of its historical abundance, or if it is restricted to a narrow part of where it once thrived.
Such relics may escape the graveyard of species, but they no longer provide the services to humanity that they once did.
We must then find substitutes that are more costly and less satisfactory.
For example, marine fish populations that were once reliable sources of food for billions of people, and vital parts of the economies of nations, have been decimated.
Many such stocks, such as Newfoundland cod, which supported huge fisheries for centuries, have been reduced to a tiny proportion of their former levels.
Salmon stocks are endangered up and down the West Coast of the US, and ecologically unsustainable aquaculture is now the major source of salmon supplies for restaurants and supermarkets.
We are reducing fisheries to smaller and less attractive fish, and the situation could get much worse as those disappear.
Why care about the loss of biodiversity?
Clearly, the loss of fish stocks deprives our palates, and puts parts of our food supply at risk.
But much more is at stake.
In natural and managed systems alike, biodiversity supplies us with food, with fiber, and with fuel.
We also mine natural systems for pharmaceuticals.
Indeed, the majority of commercially available drugs owe their origins directly or indirectly to the diversity of plant and microbial life.
This is not just ancient history, irrelevant in the era of molecular biology: naturally derived compounds, such as taxol, still provide some of the most promising avenues for the treatment of cancers and other diseases.
As biodiversity shrivels, we lose a vast store of information and potential cures.
Natural systems also provide natural purification systems for air and water, supply pollinators for agriculture, mediate our climate, and recycle the elements upon which our life-support systems depend.
As we lose natural systems and biodiversity, we diminish our quality of life, threatening our existence.
So why haven't the world's peoples united to solve the problem?
The answer is all too familiar.
Competition among nations and among peoples trumps cooperation, and regional and global conflicts obstruct the pathways to a sustainable future.
There is insufficient incentive, even at local levels, for taking the long view, and for restraining our tendency to consume in order to benefit all of humanity.
As a result, we discount the future heavily.
As individuals, we ask, If others are not going to restrain their activities, why should I?
Governments use the same logic, and this makes it difficult to agree upon effective biodiversity conventions to sustain vanishing resources.
For biodiversity loss, as with so many global environmental challenges, the problem is that the social costs are not captured in market prices.
Human nature is such that voluntary actions, either by individuals or by nations, cannot be relied upon to lead to the essential constraints on profligate tendencies at such a large scale.
So we need to tighten the feedback loops and create stronger incentives for behaviors that advance the common good, including that of future generations.
To cite one example: because Costa Rica's government pays private landowners for biodiversity conservation and other ecosystem services, deforestation rates in that country have diminished dramatically.
We also need international conventions to change systems of accounting to include fully the social costs of our bahavior, as advocated by organizations such as the Stockholm-based Beijer Institute for Environmental Economics.
Incentives that reinforce practices that preserve biodiversity must be applied at all levels if they are to influence individual actions and social norms.
Without collective action, we face a bleak future of disappearing biodiversity and a steadily declining quality of life.
The Weary Titan
PARIS – The unfolding “currency war,” which is likely to dominate discussions at the upcoming G-20 summit in Seoul, must be assessed against the backdrop of the new landscape of power – a landscape that has been transformed, in just two years, by the first crisis of the globalized economy.
The economic consequences of the crisis have left a number of developed countries in a severe slump and scrambling to bring about a healthy recovery.
By contrast, the emerging-market countries, after a short slide, have managed to re-ignite their growth engines and are sailing full-speed ahead, racking up impressive growth rates.
There have been financial and monetary consequences as well.
Although no currency is as of yet qualified to replace the dollar as the world’s reserve and transaction currency, this “exorbitant privilege,” as Charles de Gaulle put it, has come under stealthy attack.
In March 2010, the “ASEAN + 3” grouping, which includes China, Japan, and South Korea, established a reserve fund of $120 billion, under the so-called “Chiang Mai Initiative.”
This time, unlike in 1997, the United States did not even attempt to torpedo this embryonic “Asian Monetary Fund.”
After coping well initially, Europe entered choppy waters when confronted with the prospect of Greece defaulting on its public debt.
The “crisis within the crisis” exposed the eurozone’s weak governance and revived doubts about the viability of a monetary union with large competitiveness gaps between its members.
The crisis has also intensified political problems.
Japan, arguably the hardest hit by the global recession, faces an increasingly severe moral, demographic, and governance crisis, highlighted by its recent loss, to China, of its status as the world’s second largest economy.
In Europe, bickering between leaders revealed the lack of solidarity underpinning European ideals and gave full view to the persistence of national egoisms against which the European project had managed to define itself since the end of World War II.
Finally, the crisis has shattered the ideological dominance of the West.
In previous decades, financial crises often originated in emerging economies, sanctimoniously patronized by the “virtuous” West and its institutions.
This time, powered by the dogma of market resilience and self-correction, the storm formed at the heart of the world economy, the US.
The natural instinct of many is still, as in the past, to look at the American economy, towering over the rest of the world with its $14 trillion GDP, as the engine of global recovery.
Indeed, the US retains an edge, owing to its capacity for innovation, its technological advances, its entrepreneurial spirit, and its indefatigable optimism.
But doubts are growing.
The economic powerhouse that for decades confidently provided hegemonic stability to the global economy seems at pains to continue doing so.
An increasingly uncompetitive civilian industry, the burden of military commitments overseas, wage stagnation: all signal that the American titan may be wearying.
The most worrisome sign, though, is America’s rising public debt – now at 95% of GDP and, even according to the official General Accounting Office’s conservative estimate, set to soar to $18.4 trillion by 2018.
When the implied liabilities of the Social Security and Medicare systems are added on, an unprecedented level of peacetime debt confronts the US.
The paradox here is that, as its hegemonic power fades, America must rely increasingly on foreign creditors, above all China, to stay afloat.
Unfortunately, the proverbial Washington political gridlock leaves little hope for fixing the problem, adding to the impression of a giant with clay feet.
The alternative to a world in which America guarantees global prosperity and stability within a liberal order is one of increasing conflict, replete with mercantilism, protectionism, and currency wars.
Only a multilateral settlement among all major actors can ensure a smoothly working global order – a cause advanced in late 2008, when the technical G-20 forum was quickly upgraded to a full summit in charge of global governance.
Encompassing all big emerging economies, this appeared to be the most effective way to muster the legitimacy denied to the G-7.
But can the G-20 deliver on its promise?
As the chaos at the climate-change conference in Copenhagen last December amply demonstrated, both the number of members around the table and the differences between them – even within the group of emerging countries – do not bode well for the future.
The present “currency war” is but another sign of that disorder.
Of course, due to its sheer military might and numerous alliances, the US will remain on top for the foreseeable future.
Indeed, while hubris and the crisis have seriously undermined the world’s “hyperpower,” no multipolar order has emerged to follow America’s “unipolar moment.”
America has become the “default power”, because China, the most likely challenger, is, by its own admission, a long way from economic or military parity with the US.
But military dominance alone is unable to confer authority, as the Afghan quagmire reminds us every day.
Having succeeded in integrating the West through prosperity and security following WWII, America must begin to craft a new global leadership structure.
The task is even more daunting than in the years after 1945, for today a number of fiercely independent-minded, aspiring world powers must be herded into the global order.
As the main architect of globalization, which awakened awareness worldwide of the need for global public goods, the US must, even in its weariness, summon its creative resources.
The Welfare State, RIP
PARIS – It is usually easier to see the beginning of something than the end of it.
Born in 1945 in post-war Britain, the welfare state met its end in Britain this week, when British Chancellor of the Exchequer George Osborne repudiated the concept of the “universal benefit,” the idea that everyone, not just the poor, should benefit from social protection.
The welfare state was described by its intellectual architect, Lord Beveridge, as a structure built to protect the individual “from the cradle to the grave.”
This model came to dominate every West European country, with local traditions and local politics dictating the diversity of its application.
By the 1960’s, all of democratic Europe was social democratic, a combination of free markets and mass social protection.
This European model succeeded beyond anyone’s wildest dreams, and for decades was the envy of the world in a way that neither “Wild West” American capitalism, nor Soviet and Maoist state socialism, ever could be.
Social democracy seemed to deliver the best of both worlds, economic efficiency and social justice.
True, there were always some nagging doubts about the European welfare state, mostly starting in the 1980’s, when globalization arrived at Europe’s door.
Hampered by the financial cost built into the welfare state – and perhaps by the psychological and financial disincentives built into it as well – European economies began to slow, with per capita income becoming stagnant and high unemployment a permanent fixture.
European advocates of the free market never proved sufficient to roll back the welfare state.
Even Margaret Thatcher failed to touch the National Health Service.
At best, like in Sweden or Denmark, the welfare state stopped expanding.
The welfare state resisted its critics and the pain of stagnating economies by making collaborators of the middle class.
Indeed, the political genius of the men who built the welfare state was their insight that it would benefit the middle class even more than it would benefit the poor.
Consider health-care benefits.
In France, it has been demonstrated that the middle class spends more per capita on its health than the 20% of the poorest French do.
As a consequence, the national health-care scheme actually provides a net benefit for the average income earner.
Indeed, even America’s smaller welfare state seems aimed at the middle class more than at the poor, with the so-called Earned Income Tax Credit being the biggest handout.
Every year, 24 million middle-class American families get a refund from the Internal Revenue Service.
Those below the poverty line do not receive cash, but only in-kind support.
So America’s welfare state means cash for the middle class and social programs for the poor.
That discriminatory pattern can be found everywhere in Western Europe as well.
Osborne’s assault on the British welfare state began with the universal child subsidy, a broad-base entitlement distributed to all families with children, regardless of their incomes.
This universal child benefit was introduced nearly everywhere in Western Europe to encourage childbearing in countries deeply damaged by World War II.
In the United Kingdom, 42% of child subsidies goes to middle-class and wealthy families.
The proportion is the same in France.
Osborne has proposed ending payments to families with incomes in the highest tax bracket – the opening shot in a campaign that could end up transforming the entire welfare system by reducing benefits handed to the middle and upper class.
The savings (£1.6 billion) implied by Osborne’s proposal represent only a tiny fraction of Britain’s £310 billion annual bill for social-welfare programs.
But, by targeting this entitlement, Prime Minister David Cameron’s government hopes to give the British people a better understanding of the unfairness of the current welfare state.
Every government in Europe will have to do the same: target the weakest link in the social protection system, the one most easily understood by most people.
The French government, in this same spirit, has gone after public-sector workers’ extravagant pension benefits, as well as the legal retirement age, trying to increase it from 62 to 65.
Anybody can grasp how child benefits for the wealthy or retirement at only 62 is unjustifiable.
Yet popular resistance to these supposedly unfair entitlement reductions is stronger than expected.
Intuitively, the middle class can see that this is the end of an era.
Will Cameron’s government – and any others that may go down this path – eventually retreat in the face of middle-class rage?
To a certain extent, governments have no choice in going after middle-class entitlements.
The 2008 financial crisis, aggravated by useless Keynesian public spending, has brought all European states to the edge of bankruptcy.
Only the United States can indefinitely print its own currency and increase its debt.
So European states have no choice but to reduce their expenditures, and targeting welfare benefits that represent, on average, half of European public spending is the easiest way to bring immediate fiscal relief.
The welfare state will not vanish from Europe, but it is set to be scaled back – and focused on those who actually need help.
If one takes unemployment as the ultimate criterion, the European welfare state has brought a safety net to the middle class, but has mired 10% of its most vulnerable people in permanent welfare dependency.
Sixty-five years after Lord Beveridge trusted the state to hold our hand from cradle to grave, Cameron and Osborne have asked us to stand more or less alone on our own two feet.
The Welfare State\u0027s Fragile Foundations
Tensions have existed between liberty and equality ever since modern democracy placed citizenship at the root of political legitimacy.
In every democratic society, freedom for all has been at odds with equality for all, and vice versa.
But no matter how frequently we proclaim that all "are born free and equal in dignity and rights," this clash of principles has not diminished.
Indeed, it has simply taken new forms, partly owing to economic and technical progress - and with it an increase in available wealth - and partly owing to efforts aimed at allaying it.
The tension between civil, legal, and political equality and the reality of economic and social inequality was noted as far back as the French Revolution.
Today, citizens inevitably use their civil, legal, and political rights to demand economic and social equality - or at least reduction of inequality.
Equal rights, according to this logic - as socialist thought has emphasized - imply public policies aimed at narrowing inequalities in the actual living conditions of all citizens.
Indeed, contemporary democracies are distinguished precisely by their ambition to combine respect for liberty and formal equality of rights with public policies that, as the Preamble of the 1946 French Constitution puts it, provide all citizens with "adequate living conditions."
Contemporary democracies base their legitimacy on ensuring both political and social rights.
But intervention by modern democratic states goes beyond the boundaries of the post-1945 welfare state, which sought to protect individuals against risks linked to old age, family responsibilities, accidents, illness, and the labor market.
Intervention has now been broadened to include education, culture, sport, and ethnicity, in the belief that only citizens who receive equal education and training, and have their historical and cultural specificity recognized, can enjoy genuine equality.
As a result, the number of participants in educational institutions, as well as the absolute and relative costs of these institutions, is increasing.
State-funded cultural programs strengthen "welfare democracy" even more, while the economic and symbolic importance of sporting events has led to state intervention that increasingly organizes athletic training along the lines of the public school system.
Thanks to the welfare state, organized sports, which first appeared among the leisured upper classes, are now practiced by everyone.
Moreover, communal rights have progressively been accorded to the various groups that compose a nation.
Can there be real equality for citizens whose language, history, and collective identity are marginalized by the dominance of the majority's language, history, and collective identity?
Even in France, where universal republican principles theoretically contradict such policies, public action is being 'ethnicized' under the mask of geographical or social criteria.
Greater equality reinforces the ambition for still more equality. "When inequality is the common law, the strongest inequalities are not conspicuous," Alexis de Tocqueville wrote in his classic Democracy in America , but "when everything is more or less leveled, the slightest inequality hurts."
Because no society can ensure complete equality, "welfare democracy" feeds dissatisfaction and frustration - and hence demands for more welfare democracy, not less.
As a result, the welfare state becomes unavoidably particularizing, as it constantly adds and refines categories and groups entitled to formal recognition and resources.
With the surge in unemployment in the 1970's, for example, several new categories of beneficiaries were created and subsequently modified to adapt to funding limitations.
All European countries then established a minimum income policy to help those whose benefits had run out. It is the source of the inflation in legislation in the European countries.
So the birth and development of the welfare state reflects an inescapable fact: freedom and equality are both in tension and intimately linked, because both values are part and parcel of the democratic project.
Democratic principles call for organizing society in such a way that both values can be realized to the greatest possible extent.
But the path for particularistic action that does not undermine the liberty and equality of all citizens is narrow.
This is a paradox intrinsic to democracy, and it is the duty of politicians to deal with the tensions to which it gives rise.
Yet it is also the duty of citizens to preserve the formal, political meaning of citizenship as state intervention broadens to ensure the well being of all. This might restrict political freedom in the name of greater equality.
Still more probably, it might confine politics to the day-to-day management of redistributing wealth among groups that coexist in the same society but do not necessarily share much else.
Such an outcome, however, would quickly render all efforts to ensure material equality unsustainable.
For without a common political identity on which to base social solidarity, redistribution of wealth by the welfare state loses its legitimacy.
The Egyptian Struggle and Beyond
LONDON – The events that led Egypt’s military to remove President Mohamed Morsi confronted the army with a simple choice: intervention or chaos.
Seventeen million people in the street is not the same thing as an election.
But it is an awesome manifestation of people power.
Morsi’s Muslim Brotherhood was unable to shift from being an opposition movement to being a governing party.
Of course, governments govern badly or well or averagely.
But this is different.
Egypt’s economy is tanking.
Ordinary law and order has virtually disappeared.
Services are not functioning properly.
Individual ministers did their best.
A few weeks back, I met the tourism minister, who I thought was excellent and had a sensible plan to revive the sector.
A few days later, he resigned, after Morsi took the mind-boggling step of appointing as Governor of Luxor province (a key tourist destination) someone who was affiliated with the group responsible for the terrorist attack in 1997 – Egypt’s worst ever – in which more than 60 tourists in Luxor were killed.
Now the army is faced with the delicate and arduous task of steering the country back onto a path toward elections and a rapid return to democratic rule.
We must hope that they can do this without further bloodshed.
Meanwhile, however, someone will have to run things and govern.
This will mean making some tough, even unpopular decisions.
It will not be easy.
What is happening in Egypt is the latest example of the interplay, visible the world over, between democracy, protest, and government efficacy.
Democracy is a way to decide who the decision-makers will be, not a substitute for making decisions.
I remember an early conversation with some young Egyptians shortly after President Hosni Mubarak’s downfall in 2011.
They believed that with democracy, problems would be solved.
When I asked what the right economic policy for Egypt should be, they simply said that all would be fine, because now they had democracy; and any economic ideas that they did have were well to the old left of anything that had a remote chance of working.
I am a strong supporter of democracy.
But democratic government alone does not guarantee effective government.
Today, efficacy is the challenge.
When governments do not deliver, people protest.
They don’t want to wait for an election.
In fact, as Turkey and Brazil show, people may protest even when, by any objective measure, their countries have made huge progress.
But, as countries move from low- to middle-income status, people’s expectations rise.
They want higher-quality services, better housing, and good infrastructure (especially transport).
And they resent – to the point of mobilizing in the streets – any hint that a clique at the top is barring their way.
This is a sort of free democratic spirit that operates outside the convention that elections decide the government.
It is fueled enormously by social media (itself a revolutionary phenomenon).
And it moves very fast in precipitating crisis.
It is not always consistent or rational.
A protest is not a policy; and a placard is not a program for government.
But, if governments lack clear arguments with which to rebut protesters, they are in trouble.
In Egypt, the government’s problems were compounded by resentment of the Muslim Brotherhood’s ideology and intolerance.
People came to believe that the Brotherhood was steadily imposing its own doctrines on everyday life.
Across the Middle East, for the first time, there is open debate about the role of religion in politics.
Despite the Muslim Brotherhood’s superior organization, those who support an intrinsically secular approach to government – and this is true in most of the region – are probably in the majority.
Society can be deeply imbued with religious observance; but people are starting to recognize that democracy works only as a pluralistic concept, requiring equal respect for different faiths and allowing a voice, but not a veto, for religion.
For a country like Egypt, with its immense and varied civilization, which includes around eight million Christians and a young population that needs to be connected to the world, there is no future as an Islamic state that aspires to be part of a regional caliphate.
So what should the West do?
Egypt is the latest reminder that the region is in turmoil and won’t leave us alone, however much we may wish it would.
Disengagement is not an option, because the status quo is not an option.
Any decision not to act is itself a decision of vast consequence.
At its crudest, the West cannot afford Egypt’s collapse.
So it should engage with the new de facto power and help the new government make the changes necessary, especially with respect to the economy, so that it can deliver adequate performance for Egypt’s citizens.
In that way, it can also help shape a path back to the ballot box that is designed by and for Egyptians.&#160;
Engagement is demanded elsewhere in the region as well.
As for Syria, the worst that can happen is unacceptable: effective partition of the country, with a poor, extremist-led Sunni state in the east, shut out from the sea and the country’s wealth.
In that case, Lebanon would be totally destabilized, Iraq further destabilized, and Jordan placed under even greater pressure (which only the king’s courageous leadership is managing to contain, on behalf of us all).
And what would be left for Syrian President Bashar al-Assad to govern would depend on Hezbollah, a terrorist organization, and Iran.
As for the Islamic Republic, incoming President Hassan Rowhani may want to reach an agreement with the world on the country’s nuclear ambition – or he may not.
Either way, ultimate power in Iran still rests with Supreme Leader Ayatollah Ali Khamenei.
The world cannot afford a nuclear-armed Iran.
And I haven’t even mentioned the challenges of Libya, Yemen, or, further afield, Pakistan, or the plague of extremism now coursing through the northern part of Sub-Saharan Africa and parts of Central Asia.
The West’s interests demand that we remain engaged.
We have to make decisions for the long-term, because, in the short term, there are no simple solutions.
US Secretary of State John Kerry’s current dedication and drive on the Israeli-Palestinian issue is exemplary: If it matters, act on it, however difficult.
A long transition in the Middle East is underway.
It is difficult, time-consuming, and expensive.
Many in the West believe that it should be someone else’s job to help sort it out.
But it is our job.
This struggle matters to everyone.
The good news is that there are millions of modern and open-minded people in the Middle East.
They need to know that we are on their side, that we are their allies – and that we are prepared to pay the price to be there with them.
The West Versus the Rest?
The Madrid bombings have made Europeans feel the scourge of terrorism in their bones.
March 11 is now Europe's version of September 11 in America.
Yet America and Europe often do not seem to see the world through the same glasses: Spain's response to the terrorist attacks - a threat common to all democracies - was to vote in a government promising an end to pro-US policy on Iraq.
Does this mean that Europe and the US have dramatically different visions?
Part of the seeming disconnect on foreign policy emerges from a misunderstanding about what "Europe" is about. The European project is a realist's response to globalization and its challenges.
It was initiated to create "solidarités de fait," promote political stability, and consolidate democracy and Europe's social model.
Having achieved these goals, Europe now wants to make a positive contribution to world developments.
This is not nostalgia for past glory.
An unprecedented degree of solidarity now exists across Europe, as was apparent in the collective mourning and outpouring of sympathy towards Spain; we must build on that huge potential to create a logic of solidarity in the world.
The US, also victim of a horrendous attack, feels drawn to the world but not to promote a similar model of cooperation.
Rather, in defending their values and security, Americans strive to defend the world, especially the Western world, from dark new threats.
The messianic idealism that liberated Europe from Nazism and protected Western Europe from communism is now directed at other enemies.
With all the attention devoted to strained transatlantic relations, it is easy to overlook how often our preoccupations overlap.
On issues such as terrorism, weapons proliferation, Iran, Afghanistan (where we jointly train the country's future army), and Africa (where French initiatives with American support recently succeeded in stabilizing Côte d'Ivoire and Congo), Europe and the US speak with a common voice.
But on some issues, such as the Iraq war, Europeans are not all ready to follow America blindly.
The world - Europe in particular - has fascination and admiration for the US.
But today we must move away from fascination and gratitude and realize that the pursuit of European integration remains in the best interest of the US, which has supported it for 50 years.
In today's world, there is clearly work for two to bring about stability and security, and in promoting common values.
In particular, the Franco-German "engine" of Europe should not be seen as a potential rival to the US.
France and Germany are not an axis aspiring to be some sort of an alternative leadership to the US.
Rather, the two countries form a laboratory needed for the internal working of the EU.
Anyone who thinks we are building a European rival to America has not looked properly at the facts.
Indeed, France and Germany do not get along naturally.
Much sets us apart: EU enlargement, agriculture, and domestic market issues.
So it is not the sum of the two that matters, but the deal between the two, which should be viewed as a prototype of the emerging Europe.
It is in that process, mostly inward looking, that France and Germany claim to make Europe advance.
So I do not believe that a lasting rift looms.
Most Americans still see in Europe a partner with largely the same aims in the world.
Most Europeans see in America a strong friend.
We are all allies of the US; our draft constitution restates the importance of the NATO link; our strategy for growth and our contribution to global stability depend on the irreplaceable nature of our relationship with America.
This is why the US should encourage the development of a common European security and defense policy, which is merely the burden sharing that America has been pressing on Europe for decades.
We must forge greater European military capacities simply to put in place a mechanism that allows us to stand effectively shoulder to shoulder when terrorism or other catastrophes strike one of our democracies, as just happened.
But we must also establish an autonomous European military planning capacity, because the EU might need to lead its own operations, perhaps because NATO is unwilling to.
We French are opposed to building a "two-speed" Europe.
But we want structured co-operation - meaning that some European states may press ahead in defense capacity - because we are not prepared to let the more cautious and hesitant dictate a recurrence of the Balkan tragedy of the 1990's, when Europeans couldn't act and Americans wouldn't (for a while).
The creation of such a capacity will make the EU a more effective transatlantic partner.
So it is hard for Europeans to understand why plans for closer European integration should be seen as anti-American.
The only way to arrest such fears is through closer and more frequent dialogue.
On defense and security matters, the EU's security doctrine provides a great opportunity to build on our common worries: terrorism and non-proliferation, but also the need to ensure sustainable development in all quarters of the world.
Europe and the US must pursue their aims in cooperation, while ensuring that such cooperation never becomes an alliance of the "West against the Rest."
Some in the West have tried to conjure a "Clash of Civilizations" out of our troubled times.
Our task is to find a way to stand together without standing against anybody in particular.
The Wild West of Electronic Waste
IRVINE , CALIFORNIA – One Troy ounce (31 grams) of gold is now selling for approximately $1,150 on the open market. The equivalent weight of platinum sells for $1,450.
High prices encourage more mining, but they don’t begin to cover the cost to human health – and to the earth itself.
For example, thousands of children in China’s Henan Province are sick from lead poisoning, because they live near a facility operated by Henan Yuguang Gold ampamp;
Lead Company, one of the world’s largest mining conglomerates.
But high prices are also encouraging many more people to extract precious metals from existing products – at great danger to themselves and others.
Indeed, the world’s population throws away nearly 10 ounces of gold and five ounces of platinum for every ton of cell phones that are discarded in landfills or incinerated.
Other precious metals that are teased from the Earth, including indium, gallium, palladium, and ruthenium, are being discarded in much the same way as other electronic waste (e-waste).
So is tantalum, the essential constituent of the capacitors used in cell phones.
Approximately 37% of the world’s supply of tantalum comes from Central Africa, where mining it has been linked to devastating wars and environmental pollution.
It can be argued that disposing of high-tech e-waste in landfills is just another way of returning these precious metals to the earth, where, millennia from now, it will have merged with the substrata, becoming just like any other ore.
But, along with the precious metals, e-waste also contains potent toxic chemicals such as lead, mercury, cadmium, and brominated flame retardants.
The short-term consequences of using landfills, shallow pits, or incinerators to get rid of e-waste is the release of these noxious chemicals, which adversely impact ecological processes, wildlife, and human health.
For more than a decade, the precious metallic component of e-waste has been fueling a polarized international trade in potentially hazardous materials, with defunct electronic products exported to countries where labor is cheap. There, the prospect of recovering a fraction of an ounce of gold or platinum entices communities to discount heavily the toxic risks and health effects of chronic exposure.
Compounding this problem is the diversity of national and international regulatory policies in place or being developed to manage e-waste.
The lack of consensus on the magnitude of the problem, and gaps in legislative coverage, only serves to deepen the holes into which vulnerable populations stumble while attempting to make a living through artisanal e-waste mining.
The Basel Convention on the control of trans-boundary movements of hazardous wastes and their disposal was meant to level the playing field between countries that produce toxic waste and those that potentially consume it.
Essentially, it sought to neutralize sentiments such as those expressed in a memo attributed to Lawrence Summers, former Harvard President and now Director of President Barack Obama’s National Economic Council: “I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.”
The Basel Convention, now 20 years old, has struggled to keep up with new technologies, unpredictable loopholes, and clandestine economic transactions involving hazardous waste.
At its inception, no one could have predicted that within two decades, electronic products would become a 50-million-ton global problem looking for local solutions.
If sustainable solutions to the global e-waste problem are to be found, conscientious international cooperation will be needed. This is because the problem permeates the entire life cycle of electronic products, from the mining of raw materials to the occupational hazards associated with manufacturing and product assembly and the disposal of outdated or broken products.
In the current global market, the life cycle of an electronic device may include the synthesis of labor and material from a dozen or more countries.
Most proposals for managing e-waste fall into one of two major categories.
Some would manage e-waste at one of the handful of sophisticated smelters that can recover precious metals from discarded electronic devices.
For example, The Umicore Group in Belgium advertises itself as the world’s largest recycler of electronic scrap, mobile phones, and laptop computers.
For numerous reasons, not every country can afford to build smelting facilities that operate at the level claimed by Umicore.
Hence, this strategy will require some cross-border shipment of e-waste.
The major challenge, however, is the difficult work of collecting unwanted devices at the street level, and sorting and coordinating collected items for international distribution and processing.
The second major category of e-waste management strategies is to decentralize recycling while keeping the environmental impact of small-scale facilities to an acceptable level.
In a way, this is already happening through cottage industries in countries such as China, Ghana, India, and Nigeria, which employ ill-equipped artisans who are not sufficiently trained to avoid harmful procedures that contaminate the environment and sicken themselves and their neighbors.
To work effectively, electronics manufacturers must assume some responsibility for training recyclers, in developing small-scale facilities that can operate at the regional level, and in working with regulators to ensure appropriate safety and environmental monitoring schemes for such operations.
Ultimately, effective strategies for managing e-waste require the development of local infrastructures, aggressive coordination of community participation, and international regulations that encourage sustainable manufacturing practices without stifling innovation.
Will Programmers Rule?
NEW DELHI – Marc Andreessen made his first fortune writing the code that became Netscape Navigator, the Internet browser.
He is now a venture capitalist who evangelizes about the growing importance of software in business today.
Indeed, he proclaims that software is taking over the world – that it will be the primary source of added value – and offers the following prediction: the global economy will one day be divided between people who tell computers what to do and people who are told by computers what to do.
Andreessen’s aim is to shock his listeners – not just for effect, but to get them to do something about it.
To stop the world from being divided between a few alpha programmers and many drones, he wants the potential drones to stop taking easy liberal arts courses in college.
Instead, he wants them to focus on courses in science, technology, engineering, and math (STEM), where the good jobs will be.
But will this solve the problem that he poses?
Perhaps not.
Two attributes of software creation allow a few talented programmers to corner the market and take all the associated profits.
First, software with a slight edge tends to get a significantly greater share of the available market; and, second, the available market is global, because it costs so little to make an extra copy and send it anywhere in the world.
As a result, those who are creative and competent enough to write that slightly better search engine will capture the global market.
In this winner-take-all environment, only a small number of those who have taken programming courses will reap a majority of the rents.
Completing the right preparatory courses is no guarantee of receiving a share of the software jackpot.
Differences in luck and talent among those equally prepared will ensure that the quality of software firms’ products lies on a bell curve, with only a few Googles and Facebooks and many more bored, moderately paid computer technicians helping the average confused person deal with malware.
Put differently, in a winner-take-all world, raising the average level of skills or education does nothing to alter the skewed distribution of income.
So, will anything prevent inequality from widening?
The obvious answer is yes.
But how society responds will mean the difference between a prosperous world and a world torn apart by slow growth and resentment.
Property rights are ultimately sanctioned by society, and, to the extent that they seem to be unfair, society has an incentive to change them.
But will society see the software billionaire as having acquired her wealth unfairly, or will it see that wealth as a fair reward for cleverness?
The more that everyone has access to the same educational opportunities, the more society will tend to accept some receiving disproportionate rewards. After all, they themselves have a chance to be winners.
Interestingly, software may itself reduce the cost of expanding educational access – witness the massive open online courses (MOOCs) offered by companies like Coursera.
But equal access is probably an unlikely ideal.
The other extreme is very unequal access, made more unequal because the wealthy have the time to help their kids with homework and the money to arrange for tuitions, while the poor leave their children watching TV while they work a second job.
Will the resentful workers who must follow a computer’s instructions – say, in assembling an order in Amazon’s fulfillment centers – vote to tax the programmers who put them there until the software creators lose the incentive to innovate, leaving society poorer?
Or will the rich programmers all migrate to Monaco or Switzerland, taking the brains and rents with them, as society falls apart into barricaded and mutually resentful enclaves and ghettoes?
In reality, many intermediate possibilities exist.
One is that cultural norms may develop that encourage billionaires to share their wealth, even if they are spared taxation.
For example, the Giving Pledge is a commitment by some of the world’s richest people, Warren Buffett and Bill Gates among them, to devote the majority of their wealth to philanthropy.
Economic competition may also play a role – if billions are to be made by innovators, more of the most talented get into innovation, so that, even in a winner-take-all world, the winner captures the market for a fleeting moment before someone else takes it away from him.
The billions to be made today may only be millions tomorrow.
And values also adjust.
While a quartz watch keeps time more accurately than the most finely crafted handmade mechanical Swiss watch, the value of a quartz watch has plummeted, while Swiss watches’ value has climbed into the stratosphere.
Even though they are virtually indistinguishable in appearance, people seem to cherish the knowledge that someone has lovingly crafted their watch.
So it may well be that the demand for discussing, say, medieval French church music in small classes at a university will grow even as the demand for MOOCs grows.
Not everyone should heed Andreessen’s exhortation to quit liberal arts programs!
That is not to say that his basic concerns are unwarranted.
Better access for all to fundamental needs like quality education is necessary to make the winner-take-all character of markets more tolerable.
But societies may also have to change.
The Wolf that Ate Georgia
FLORENCE –In Phaedrus’s well-known fable of the wolf and the lamb, the wolf easily could have eaten the lamb without a word, but prefers to set out his “reasons.”
First, he scolds the lamb because he is muddying his drinking water (even though the wolf was upstream).
Then he argues that last year the lamb had called him bad names (but the lamb was only six months old).
The wolf then snarls that if it was not the lamb, it was his father; after that, he immediately moves into action.
The wolf’s “justifications” for his evil action were a luxury that he allowed himself.
At present, the United Nations Charter legally binds wolf-states – that is, the Great Powers – to offer justifications for their use of armed violence.
This is all the more necessary for the Security Council’s five permanent members, because, aside from condemnation by public opinion, no sanctions are available against them for any serious breach of the Charter.
Russia has set forth various reasons to justify its armed intervention in Georgia, where the breakaway regions of Abkhazia and South Ossetia are nonetheless under Georgian sovereignty.
Russia argues that its invasion was aimed at 1) stopping Georgia’s aggression against South Ossetians; 2) ending ethnic cleansing, genocide, and war crimes committed by Georgia there; 3) protecting Russian nationals; and 4) defending South Ossetians on the basis of the peace-keeping agreement signed by Boris Yeltsin and Eduard Shevardnadze in 1992.
None of these legal grounds holds water.
By sending its troops to South Ossetia, Georgia no doubt was politically reckless, but it did not breach any international rule, however nominal its sovereignty may be.
Nor do genocide or ethnic cleansing seem to have occurred; if war crimes were perpetrated, they do not justify a military invasion.
Moreover, South Ossetians have Russian nationality only because Russia recently bestowed it on them unilaterally.
Finally, the 1992 agreement authorizes only monitoring of internal tensions, not massive use of military force.
Hence, as in Phaedrus’s fable, the Kremlin’s “justifications” are empty.
Russia has breached Article 2 of the UN Charter, which enjoins member states to “refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state.”
There are several morals to the tale.
First, when a lamb like Georgia gets smart and requests the protection of another wolf – in this case, NATO – he must be careful, for every wolf guards his territory, and is bent on “protecting” all those lambs that fall under his “jurisdiction.”
Second, although Great Powers are de facto unbound by international rules on the use of force, they abide by a sort of unwritten “agreement between scoundrels” to behave similarly.
The West violated that agreement in 1999 in Kosovo: NATO powers first attacked Kosovo and Belgrade, in breach of the UN Charter (although they were morally justified to do so, because there was a need to stop the serious atrocities underway); the West then promoted and blessed Kosovo’s secession.
As a result of that perilous precedent, Russia no longer feels bound by the unwritten agreement.
Finally, because it is mostly civilians that have suffered and are still suffering in Georgia, it is imperative for the world community to promote a lasting solution, as is stipulated in the agreement promoted by French President Nicolas Sarkozy.
But a lasting solution is nowhere in sight, because Russian forces, in blatant breach of that agreement – and of international customary law – remain in many parts of Georgia beyond Abkhazia and South Ossetia.
These two regions have now proclaimed their independence, and Moscow has given its blessing to a secession that is likely to be the stepping stone to incorporation by Russia.
Georgia has taken the path that lambs (small countries) normally choose when facing wolves (major powers), brandishing law as a weapon.
It has instituted legal proceedings against Russia before both the International Court of Justice for alleged violations of the UN Convention on Racial Discrimination and the European Court of Human Rights for alleged breaches of Articles 2 (right to life) and 3 (prohibiting inhuman and degrading treatment) of the European Convention on Human Rights.
Because Georgia is a party to the Rome Statute of the International Criminal Court, it could have requested the ICC Prosecutor to investigate Russia’s allegations of war crimes and genocide as well as its own allegations of Russian crimes.
Strangely, it has not done so, though, fortunately, the ICC Prosecutor has announced that he is keeping the situation in Georgia “under analysis.”
Plainly, by itself the law may not be able to offer the right solution in such a complex and dangerous situation.
Only politics and diplomacy can offer a lasting solution.
Nevertheless, with both sides claiming the mantle of international law, authoritative legal decisions about these issues might perhaps push the parties to reach a lasting agreement.
The Women of Europe’s Dream
LAUSANNE – I was born in 1945. My grandfather was a German Jew.
Fortunately, none of my immediate family perished in the Holocaust. But its shadow hung over me throughout my formative years.
When I began, in my teens, to meet with German contemporaries, there was an initial reticence and discomfort.
But we talked and talked and talked.
There was no attempt to hide the past, but there was a burning desire to make a different future.
It followed that I became an ardent Europhile.
Two decades ago, the Berlin Wall was torn asunder by jubilant crowds. Today, ten former communist nations are fully integrated members of the European Union.
Were my father to reappear suddenly and I told him that Lithuania was a member state, he would stare in disbelief and wonder what I was smoking.
The sad news, however, is that as the structure of the Union (for example, the single market and the single currency) has been put in place, the spirit of unity has died.
The European “project” has become an exercise of unalloyed cynicism.
The most depressing illustration of this has been the handling of the “European Constitution” and the Lisbon Treaty, and the totally unedifying means by which the European president, a key part of the Lisbon Treaty, is being selected.
The good news is that Tony Blair’s candidacy seems to have been ditched.
The reasons for his inappropriateness for the post are too numerous to mention – the single word “Iraq” should suffice.
It would have been an act of supreme cynicism and hypocrisy, even by European standards, had he been selected.
The bad news is that the other candidates allegedly being considered – all current or mainly former heads of government – are as inspiring as cold porridge.
The implications of what we are currently witnessing could be enormous.
As impressive as Europe’s history has been since the Treaty of Rome established the European Economic Community in 1957, by no means should it be assumed that the EU has become permanent.
Indeed, on the 50th anniversary of the Treaty of Rome, no less a Euro-luminary than Jacques Delors expressed the fear that the EU could “unravel”; Germany’s former foreign minister, Joschka Fischer, expressed similar sentiments in an interview on the BBC in early 2009.
While such an outcome may be improbable, it would be complacent folly to dismiss the possibility.
No institution, society, or civilization can survive purely on autopilot.
History, after all, is replete with “rise-and-fall” stories.
So who the EU president will be matters a lot.
What is needed is someone of impeccable integrity and the capacity to inspire – and especially to engage Europe’s young people.
I see only two possible candidates that could meet these qualities: former Irish President Mary Robinson and French Finance Minister Christine Lagarde.
I have not excluded men a priori in this exercise, but none occurred to me, and in any case the EU establishment has too many middle-aged white men as it is.
Although the differences between Robinson and Lagarde are many, both would be excellent choices.
Robinson may be the more inspirational candidate in light of the projects with which she has been involved since leaving office: Chair of the United Nations Human Rights Commission, Honorary President of Oxfam International, Chair of the International Institute for Environment and Development, Chair of the Council of Women World Leaders, and founder of the Ethical Globalization Initiative.
Lagarde has other strengths.
She is an accomplished professional, having been Chair of one of the world’s largest law firms and ranked by Forbes in 2008 as the 14th most powerful woman in the world.
Thus, she has had two brilliant careers – in business and in politics – and has enormous charisma.
Both women therefore represent very different choices as leaders and potential role models.
Moreover, Robinson, born in 1944, is a twentieth-century person. The presidency of the EU would mark the twilight of her career.
Lagarde, at 53, is considerably younger.
Reviving the European dream, however, requires not just the choice of an individual.
There has to be a cause.
And this is where a key question hangs over Lagarde: how does she feel about Turkey’s membership in the Union?
Her boss, Nicolas Sarkozy, is vehemently opposed, but Sarkozy (who cannot speak English and is computer illiterate) can hardly be described as a twenty-first-century role model.
Lagarde, by contrast, seems to be a global Renaissance woman, but her views on Turkey’s EU membership could disprove that image.
Perhaps the greatest challenge for Europe in the twenty-first century is to bring down the walls between its non-Muslim and Muslim communities.
This applies not only to Muslim citizens in the EU, but also to those in the Balkans – notably Bosnia, Kosovo, and Albania – in the former Soviet Union, and especially in Turkey.
This cannot be accomplished overnight.
But the process that was initiated has since stalled.
Incorporating Turkey – and eventually other majority Muslim European countries – into the EU is the European dream of the twenty-first century.
Getting the right president in 2010 would be an important step in this journey.
Robinson or Lagarde could be the inspiring leaders that the EU needs to make this dream a reality.
The World after Bush
LONDON – There is a marvelous painting by Brueghel in the Brussels art gallery.
The British poet, W.H. Auden, was sufficiently impressed to write a poem about it.
The painting shows Icarus, his wings melted, plunging to a watery grave.
No one seems very interested.
The world goes on, the peasants continue plowing their fields, getting on with their lives.
They show no interest in the dramatic fall of Icarus.
Real life often seems simply to tick on like that, regardless of headline news and momentous events.
So President George W. Bush will go back to Crawford, Texas at the end of the year.
Will anyone notice?
Does anyone care anymore?
His wings scorched from Iraq to Guantánamo, Bush already seems to be yesterday’s story; his minders carefully steer audiences into the front rows at public events, lest the absence of interest in what he is doing and saying becomes too obvious.
The reason we should take more notice of his departure is not what his absence will make possible, but what will remain absolutely the same.
Consider four examples.
First, we will still have to find better ways of managing the world’s economy, reducing its inequities, and coping with its environmental hazards.
Most importantly, American and European leadership is required to avoid a lurch into protectionism and the consequent killing off of the Doha trade round.
At the same time, the West needs to develop together a negotiating position on carbon emissions and climate change that will engage China and India.
It will have to take account of its historic responsibility for today’s global warming, of size of population, and of present economic strength.
Second, the Palestine-Israel struggle will continue.
Moreover, the American presidential campaign has shown that it is not only the absence of a responsible hands-on American policy in the last seven years that has contributed to today’s bloody stand-off.
Even Senator Barack Obama, who has demonstrated a clear commitment to building a more open-minded, less unilateral relationship with the rest of the world, has said things about Palestine and Israel that would appear to rule out the sort of initiatives required for a peace agreement.
Indeed, far from criticizing continuing Israeli settlement of the West Bank, Obama has pledged his support – more than some members of the Israeli Cabinet have done – to Jerusalem as an undivided capital of Israel.
This looks like a green light for all those intransigent supporters of the settlers who have campaigned for the development of East Jerusalem deep into the West Bank, a line of settlements running down to the Dead Sea.
It is difficult to see how any future American diplomacy based on this approach will attract Palestinian support.
So the Middle East will continue to dominate diplomatic argument and debate.
Third, nuclear proliferation will still plague us.
How do we deal conclusively with North Korea, which probably already possesses a handful of nuclear weapons?
How do we manage our relationship with Iran, which may – or may not – wish to develop a military nuclear capability as well as civil nuclear power?
These questions, with all the knock-on effects in East and West Asia, must be tackled in the run-up to discussions about the renewal of the Nuclear Non-Proliferation Treaty in 2010.
The nuclear powers that signed the NPT believe it is solely about preventing proliferation.
Other countries argue that it is about disarmament, and that the nuclear countries have clearly agreed to work towards giving up their nuclear weapons.
This fudge has been the foundation for the international approach to proliferation.
It now seems clear that if we want a non-proliferation treaty with more teeth – for example, tougher monitoring and surveillance – countries with nuclear weapons will have to honor what others believe is their side of an unfair bargain.
Finally, even after Bush – who became so unpopular in Europe (not always fairly) – the European Union will find it hard to become the partner in tackling global problems that America needs and seeks.
The latest row about the so-called Lisbon Treaty, caused by its rejection in a referendum in Ireland, reminds everyone of Europe’s main problem.
Europe sometimes seems more concerned about is own institutional arrangements and internal affairs than about its global responsibilities.
But global poverty, environmental catastrophe, proliferation, Afghanistan and the Middle East are not problems that can be put on hold while Europe talks to itself.
Moreover, Europe too often gives the impression that its citizens can be taken for granted.
If what Europe’s leaders decide among themselves is criticized or rejected by those who elect them, it just shows – the elite seems to suggest – how correct it was to ignore them in the first place.
But Europe cannot be built on this democratic deficit.
The EU must increase the involvement of its own voters in endorsing and supporting the decisions taken in Brussels.
This lesson needs to be learned fast.
So, Bush and Cheney will go.
But a lot of the same old problems will be around.
Welcome to the real world.
The World Bank’s Wrong Choice
NEW YORK – The selection of the American nominee Jim Yong Kim as President of the World Bank, over Nigeria’s finance minister, Ngozi Okonjo-Iweala, who was overwhelmingly regarded as a vastly superior candidate, is impossible to condone but easy to explain.
It also points to serious dangers for the unfinished task of development.
The selection process suffered from several inequities and non-transparent features that undermined the United States’ claim to the contrary.
Indeed, those claims were of a piece with the linguistic obfuscations that dominate American public debate: just as carpet bombing was called “pacification” during the Vietnam War, today illegal immigrants are called “undocumented aliens.”
Thus, the rollout of the American propaganda machine for Kim, who traveled to many capitals worldwide with US Treasury support and promises of American largesse, surely biased the vote against Okonjo-Iweala.
And, after all, the World Bank is a donor institution.
So potential borrowers like India and Mexico, which should have voted for Okonjo-Iweala, acted prudently and voted for Kim instead.
Her human capital was no match for his financial capital.
In a genuinely open, merit-based contest, the 25-member Executive Board’s deliberations should have been preceded by debates between the candidates.
I suspect that Okonjo-Iweala, with her enormous competence and renowned wit, would have gotten the better of Kim.
The world would also have seen why so many of us were rooting for her.
Again, the worldwide influence of the powerful liberal media in the US should not be underestimated.
While The Economist backed Okonjo-Iweala, The New York Times endorsed Kim.
This is an election year in the US: if President Barack Obama had nominated a lamppost, America’s “newspaper of record” would have found it to be possessed of excellent credentials.
Moreover, just as Ralph Nader’s candidacy (and the US Supreme Court) prevented Al Gore from defeating George W. Bush in 2000, one must recognize that Okonjo-Iweala was undercut by the candidacy of José Antonio Ocampo, a former finance minister of Colombia, who was backed by Brazil.
His candidacy made Okonjo-Iweala look like a regional “African candidate,” while Ocampo was the “Latin American” candidate.
Brazil should have worked with India, Mexico, and South Africa instead, to produce unified support for Okonjo-Iweala.
When Brazil did move in that direction, it was too late to make any difference.
And now one cannot suppress the thought that Kim’s election could turn into a disaster for the cause of development.
His tirade in 2000 against the liberal reforms that have transformed countries like India and China into global growth engines, reduced poverty, and benefited marginalized groups shows that he lacked good judgment on fundamental issues.
No one recalls any expression of regret by him, which suggests that he persists in such folly – and would use conditionality to turn the clock back on decades of progress in development economics.
But my fear is that Kim would be a disaster even on health-care issues – an area where he has rightly earned credit for his work on AIDS, malaria, and tuberculosis.
Thanks to the economic growth that resulted from the reforms that he denounced, countries like India and Brazil now have higher revenues to spend on health care for the poor, among other public goods.
As a result, the public-health questions that Kim will face at the World Bank are very different from the “big” diseases with which he dealt in the past.
India, for example, is struggling with the balance between public and private provisions of medical care for routine health problems, and with questions of medical training and availability (that is, should India have “barefoot doctors,” or aim for only fully qualified practitioners?).
Can Kim lead on these and other issues that are beyond his experience?
The World Cup and African Women
NAIROBI – When I was born, 25 years ago, it would have been rare – even taboo – to find African women discussing soccer.
But that is what my girlfriends and I now do.
I grew up in Kenya, where my compatriots follow the English Premier League zealously, perhaps because of our colonial connection to England.
Kenyans are so passionate about the Premier League that last year an Arsenal fan, Suleiman Omondi, hanged himself after his team lost to Manchester United.
This year, another Arsenal fan in the coastal town of Lamu stabbed a Manchester United fan in the stomach.
Kenyan women love soccer, too.
I’m a Chelsea fan, and so are most of my girlfriends.
We rarely disagree.
We console each other when Chelsea loses, and worry together when our team plays big clubs, like recently when they played Liverpool, the only major contender that stood between Chelsea and the English title.
Fortunately, Chelsea won.
But, as the World Cup moves into its quarter and semi-final matches, my girlfriends have started to argue.
Although we don’t exchange blows like men, we are just as passionate, especially since the world’s most famous tournament is being played on our continent.
Sometimes it seems like we spend more time arguing about soccer than we do chatting about men.
At the tournament’s start, my girlfriends and I could not seem to agree on which team to support.
Should we pick from Algeria, Cameroon, Cote d'Ivoire, Ghana, Nigeria, and South Africa, the countries representing Africa?
We were torn between the natural instinct to root for our brothers and the urge to side with the likes of Argentina, Brazil, Italy, Germany, and others who seemed more likely to win.
Initially, I supported France, because I like Chelsea’s Nicolas Anelka, though as an African woman I also could not resist the dream of chanting with joy those times when an African team won.
That we, young African women, are talking more about the sport is a sign of hope for women’s soccer on the continent.
A senior sports writer with a Kenyan daily paper recently told me that this time women seem to be interested in learning the rules of the game and knowing more about players and their positions.
They want to enjoy the game, rather than sit in the company of their male relatives, oblivious to what’s happening on the pitch.
But will the 2010 World Cup bring African women more than just fodder for gossip?
Holding the 1994 World Cup in the United States increased soccer’s popularity there and led to the creation of Major League Soccer in 1996.
And, in 1999, the US hosted and won its second women’s World Cup, leading to a women’s soccer revolution in the country.
The label “soccer mom” has become common in the US, as more women enroll their children in soccer camps.
Will holding the world’s greatest single sporting event in Africa spark similar interest for the continent’s women?
I was encouraged recently to read about Simphiwe Dludlu, a female player who has become one of South Africa’s top sports personalities.
FIFA has invited her to assist at the official World Cup opening ceremony.
Dludlu has been playing since the age of 10, and currently plies her trade at Tuks FC in Pretoria, where she is also studying at university.
In 2006 Dludlu got her first call to join the Banyana Banyana, as the South African women’s team is called, and has 33 caps.
Her success clearly shows that African women football players can reach great heights.
But for most African young women and girls, it’s not that simple.
Although women’s soccer in Africa is as old as the republics themselves (the first teams appeared in West Africa in early 1960), soccer on the continent is still a man’s sport.
Most African wives dread the season.
They become soccer widows, as their husbands flock to bars.
Every day at dinner, mothers are left alone to answer when children ask if daddy still lives in the house.
Even wives of men who watch the game at home have got other issues to deal with.
For instance, Joyce, my former workmate, has a husband who is a diehard Manchester United fan.
Every season, he breaks at least one piece of furniture when his team loses.
Couches are stained with beer, and kicked as he cheers his favorite teams.
She has changed her furniture at least twice since she got married four years ago.
Given male dominance in African politics and soccer, any chance to improve the state of the sport that might arise from the 2010 World Cup will most likely benefit men.
That is because in most African countries, even men’s national teams are struggling.
Male youth soccer camps and leagues are either nonexistent or mediocre.
Until brought to a level where they can compete in international tournaments beyond Africa, women’s soccer teams will continue to struggle.
And, considering the rampant corruption that plagues our continent, it might take a century to see male soccer teams managed and funded sufficiently.
American women improved their game because soccer moms do not heavily rely on husbands to fund their daughters’ training.
As more African women continue to be educated, I dream of the day when we, too, will be able to decide for ourselves.
I was, however, encouraged to learn that in South Africa, women of my mother’s generation have been playing in a soccer league for five years.
After the World Cup, Vakhegula Vakhegula (The Grannies), a team of women between 50 and 84 years old, will travel to the US to play in the Veteran’s Cup.
Our boys may not win in South Africa, but maybe The Grannies can show how it is done.
A Global Platform for Global Issues
DAVOS – As the world enters 2013, talk of participation in a “global community” is running high.
But we continue to see signs – and, more important, behavior – that run counter to such claims.
There are many reasons for this, but chief among them is the velocity, interconnectivity, and complexity of global, national, and even individual change.
Unprecedented shifts and growing imbalances – between consumption and production, savings and investment, economy and ecology, social inclusion and marginalization, and equality and disparity – persist and incubate within a complex global system in which there is no “risk-off” switch.
For more than 40 years, world leaders have gathered annually in Davos to discuss and advance the most critical issues on the global agenda.
This year, the list of problems to be discussed is a long one that includes the unresolved debt problems in the United States and Europe, the troubling global economic outlook, the turmoil in the Middle East and North Africa, and the bulge in youth unemployment.
Clearly, the need for global cooperation has never been greater, and governments, business, or civil society cannot meet our challenges alone.
Surveying these issues, it seems that the world remains in crisis mode, with many expressing little hope that the situation – particularly the economy – will improve.
But we forget how much the state of the world has improved.
When the World Economic Forum was established in 1971, the global population was roughly four billion, of which 50% lived in poverty.
Today, roughly seven billion people inhabit the world, and the number living in unacceptable conditions is the same.
Average global life expectancy has increased by ten years – from 60 to 70 – since 1970. Likewise, consider the number of authoritarian regimes that collapsed and democracies born in the last 40 years.
And the global economy still grew by 4% over the last three years, despite experiencing the deepest global recession since 1945.
We still have far to go, but we must not forget about the real progress that has been made in relative terms.
To stem today’s spiral of pessimism and avoid the burnout of crisis management, we must look at the future in a much more positive, constructive, and dynamic manner, gaining the resilience to adapt to changing contexts, withstand sudden shocks, and recover from them while still pursuing critical goals.
Combining a dynamic, “upbeat” approach – bold vision and even bolder action – with the necessary measures to strengthen risk resilience is critical for a successful future.
Thus, the theme of this year’s Annual Meeting in Davos is “Resilient Dynamism.”
Overall, I would like the Annual Meeting to achieve two additional objectives this year.
First, the economic crisis has created a more defensive, more self-centered, and – at the level of states – more protectionist attitude.
Grand unifying visions are missing, and the pressure for separation, not union, continues to increase.
This has stalled progress on many of the issues – including reducing carbon emissions, establishing global financial regulatory measures, and concluding the Doha Round of global trade talks, to name a few – that require global attention.
Embracing the Forum’s motto – “Entrepreneurship in the global public interest” – the Davos discussions are governed by a genuine spirit of global citizenship.
This means examining solutions that are in the global community’s interest (while also complementing national and local interests), particularly with future generations in mind.
The Forum has always promoted the notion of corporate social responsibility – or, expressed differently, of business leaders being accountable not only to their employees and shareholders, but also to their communities and society at large.
So, my second objective for Davos this year is for all leaders to recognize that along with their economic responsibilities come moral as well as social obligations.
Corporate social responsibility is measured in terms of businesses improving conditions for their employees, shareholders, communities, and environment.
But moral responsibility goes further, reflecting the need for corporations to address fundamental ethical issues such as inclusion, dignity, and equality.
It is my hope that the Annual Meeting will serve as a catalyst and integrator for initiatives that advance key issues on the global agenda.
As Einstein cautioned, “The world as we have created it is a process of our thinking.
It cannot be changed without changing our thinking.”
We must each take responsibility within our own sphere of action – making it more dynamic and resilient to risk – acting as true global trustees, underpinned by moral accountability for humanity.
Systems at Risk
GENEVA – Failure to adapt to climate change, persistent extreme weather, and major systemic financial failure are just three of 50 major risks monitored every year in the World Economic Forum’s Global Risks Report.
It seems natural to draw connections among them, especially after a “superstorm” shut down Wall Street this past October.
Indeed, the report reminds us of the many ways in which systems inevitably affect one another in our interdependent world.
More important, the report warns of the dangers of multiple systems failing.
Two of the world’s most fundamental systems, for example, are the economy and the environment; their interplay underpins the first of three case studies of risk in this year’s report.
The 1,000 experts who responded to the WEF’s annual Global Risks Perception Survey, on which the report is based, ranked climate-change adaptation as their top environmental concern in the coming decade.
This reflects a wider shift in thinking about the climate, with growing acceptance that we are now locked in to some degree of global temperature change and need to adapt locally – for example, by strengthening our critical infrastructure systems in order to boost their resilience to extreme weather events.
But we face these environmental challenges at a time of persistent economic weakness.
Global growth remains slow; and, with monetary and fiscal policies having a limited impact on economic recovery, governments have neither the resources nor the courage to push for major projects.
Not surprisingly, our survey group ranked chronic fiscal imbalances second among 50 global risks that are most likely to manifest themselves over the next ten years.
Strong economies provide the leeway to invest in climate adaptation, while environmental stability ensures the breathing space needed to attend to economic problems.
Facing stresses on both systems simultaneously is like losing both engines on an airplane in mid-flight.
The second case study takes another perspective on systems thinking.
What happens if an apparently “minor” system – such as social media – sparks a “major” geopolitical crisis?
With the growing reach of social networks, information can spread worldwide almost instantaneously.
The benefits of this are well documented, but the risks of misinformation are not.
Consider the real-world case of someone shouting “Fire!” in a crowded theater.
Could something similar happen digitally, with a spark of misinformation igniting a conflagration and wreaking havoc before the truth is revealed?
The report’s third case study looks at what happens when we become complacent about a vital system.
For example, constant innovation in medical science over the last 100 years has left us with the impression that our health-care systems can never regress.
But experts are increasingly concerned about the potential for pandemics caused by bacteria resistant to all current antibiotics, while our intellectual-property system is failing to create adequate incentives for the development of new varieties.
The director-general of the World Health Organization has warned that if the world falls back into a pre-antibiotic age, a scratch or throat infection could become lethal once again.
Each case highlights the need to consider how to make systems more resilient, which means that systems cannot be considered in isolation.
They are both plugged into larger systems and comprised of smaller subsystems.
While, ideally, global risks would be met with global responses, the reality is that these risks manifest themselves mainly at the national level, and countries must address them largely on their own.
So we need to assess national resilience by regularly evaluating critical subsystems within countries.
The WEF currently is developing metrics that could evaluate national subsystems across five factors of resilience – redundancy, robustness, resourcefulness, response, and recovery – by combining perception-based data with publicly available statistical data.
Initial perception-based data gathered by the Forum is pointing toward the importance of leadership ability, transparency, efficiency, and good relationships between public and private-sector stakeholders.
While the development of these metrics is in its early stages, the ultimate aim is to develop a practical diagnostic tool that would function as an “MRI” for national decision-makers to assess their countries’ resilience to global risks.
By revealing underlying weaknesses that more traditional risk-assessment methods may miss, we could pinpoint the structural reforms, behavioral changes, and strategic investments that increased resilience requires.
The result would not only directly benefit each country willing to engage in this process.
It would also imply accelerated innovation in global governance, which we need more than ever for the sake of preserving the integrity of our most crucial systems.
The World Economy: Shaken Not Doomed
The World’s Biggest Shock Absorber
MUNICH – Since last autumn, Germany has been accused by a number of Anglo-American economists, above all by the 2008 Nobel laureate Paul Krugman, of not doing enough to combat the world economic crisis and of free-riding on other countries’ stimulus programs.
Recently, The Financial Times asked where the German economists are who defend Germany’s policies, voicing the presumption that they disagree with their government’s policies but are too cowardly to say so publicly, thus conforming to the rituals of the German “consensus society.”
From a German point of view, this discussion is a ludicrous inversion of the truth.
Germany has implemented two economic stimulus programs, amounting to €80 billion, or 3.2% of GDP, of which 1% of GDP will take effect in 2009. At first glance, this is indeed less than the American program, which totals 6.2% of GDP, of which 2% will be spent in 2009.
But this impression is deceptive, since the German state, through the built-in flexibility of its extensive social-welfare system, already contributes to stabilizing the world economy.
Indeed, Germany’s generous unemployment insurance policies ensure that people are able to maintain their consumption standards even if they lose their jobs.
Germany even has short-time allowances that enable companies to reduce their employees’ working hours, with the loss in earnings partly reimbursed by the state.
Without this short-time allowance, the average number of unemployed in 2009 would be 300,000 higher than it is now.
At the same time, more than 40% of Germany’s adult population (pensioners, social-welfare recipients, unemployed, accident victims, students) receives some form of state transfer income, especially those in eastern Germany, while the burden of taxes and social security contributions on those in employment is high.
While this certainly impedes long-term economic growth and causes great structural problems, it also means that the state reacts extremely counter-cyclically and stabilizes the economy to a great extent, which benefits the entire world.
The German state recorded a budget deficit of just 0.1% of GDP in 2008, which, according to a recent OECD forecast, will soar to 4.5% of GDP in 2009.
Thus, the economic stimulus provided by the German state budget will amount to 4.4% of GDP in 2009.
In the United States, the budget deficit in 2008 stood at 5.8% of GDP, and, according to the same OECD forecast, will amount to 10.2% of GDP in 2009, which translates into exactly the same economic stimulus as in Germany, 4.4% of GDP.
In addition, Germany has much more inner stability than the US, because it does not have the problem of heavily indebted households that are now restricted in their borrowing.
German banks grant mortgages only to a maximum of 60% of the value of a house, instead of the 100% mortgages that were frequently seen in the US and United Kingdom.
Likewise, there is also virtually no credit card debt in Germany, or other reasons for US-style household indebtedness.
A normal German household is not on its last financial legs, and is therefore able to compensate for income losses by adjusting its savings.
This is an additional reason why private consumption in Germany, according to last week’s joint forecast by Germany’s leading economic institutes, will increase by 0.3% in 2009 in the midst of the worst post-war economic crisis, whereas private consumption is in freefall almost everywhere else in the world.
Germany is the world’s second largest importer, closely behind the US.
Thus, the stability of German consumption is currently the world economy’s strongest economic pillar.
Whereas German exports are falling at an annual rate of 20%, the portion of imports that does not consist of intermediate products for export goods is stable, helping the world as a whole.
The data clearly supports this view.
According to the OECD, the annualized flow of German goods exports from January 2008 to January 2009 declined by $173 billion more than the corresponding flow of imports fell, which means that Germany’s annualized trade surplus fell by the same amount.
This is the strongest decline in net foreign demand facing a single country, or, equivalently, the strongest increase in a country’s net demand for foreign goods.
Japan, for example, has confronted only a $157 billion decline in its annualized trade balance.
During the same period, annualized US imports declined by $284 billion more than US exports, and China’s annualized trade surplus increased by $249 billion.
In other words, from January 2008 to January 2009, the US withdrew $284 billion and China $249 billion in annualized demand from the world economy, whereas Germany provided $173 billion and Japan $157 billion in annualized demand stimulus to the world economy.
For Europe’s bigger countries, the picture of annualized demand in the same period is mixed.
While Italy, like Germany and Japan, has added demand, totaling $6 billion, Spain has withdrawn $101 billion, the UK $50 billion and France $19 billion. The $7 trillion decline in US house prices over the past two years was equivalent to the explosion of an atomic bomb.
Germany, Japan, and other countries absorbed and mitigated the shock waves.
So, instead of belittling German efforts, the world should show Germany a little more gratitude.
The World\u0027s Runaway Train
CAMBRIDGE – The global economy is a runaway train that is slowing, but not quickly enough.
That is what the extraordinary run-up in prices for oil, metals, and food is screaming at us.
The spectacular and historic global economic boom of the past six years is about to hit a wall.
Unfortunately, no one, certainly not in Asia or the United States, seems willing to bite the bullet and help engineer the necessary coordinated retreat to sustained sub-trend growth, which is necessary so that new commodity supplies and alternatives can catch up.
Instead, governments are clawing to stretch out unsustainable booms, further pushing up commodity prices, and raising the risk of a once-in-a-lifetime economic and financial mess.
All this need not end horribly, but policymakers in most regions have to start pressing hard on the brakes, not the accelerator.
Don’t look to the US for leadership in a presidential election year.
On the contrary, the US government has been handing out tax-rebate checks so that Americans will shop until they drop, and now Congress is talking about doing more.
Don’t look to emerging markets, either.
Desperate to sustain their political and economic momentum, most have taken a wide variety of steps to prevent their economies from feeling the full brunt of the commodity price hikes.
As a result, higher commodity prices are eating into fiscal cushions rather than curtailing demand.
I am puzzled that so many economic pundits seem to think that the solution is for all governments, rich and poor, to pass out even more checks and subsidies so as to keep the boom going.
Keynesian stimulus policies might help ease the pain a bit for individual countries acting in isolation.
But if every country tries to stimulate consumption at the same time, it won’t work.
A general rise in global demand will simply spill over into higher commodity prices, with little helpful effect on consumption.
Isn’t this obvious?
Yes, there is still a financial crisis in the US, but stoking inflation is an incredibly unfair and inefficient way to deal with it.
Some central bankers tell us not to worry, because they will be much more disciplined than central banks were in the 1970’s, when the world faced a similar commodity price spike.
This time is different, though.
The commodity price problem has snuck up on us, despite notable institutional reforms in macroeconomic policymaking all over the world.
The historic influx of new entrants into the global work force, each aspiring to Western consumption standards, is simply pushing global growth past the safety marker on the speed dial.
As a result, commodity resource constraints that we once expected to face in the middle of the twenty-first century are hitting us today.
Wait a second, you say.
Why can’t our wonderfully flexible market economies roll with the punches?
Won’t high prices cause people to conserve on consumption and seek out new sources of supply?
Yes, and that eventually happened with energy supplies in the 1980’s.
But the process takes time, and, because of the rising weight of relatively inflexible emerging market economies in global consumption, adjustment will probably take longer than it did a few decades ago.
Oil exporters and China have been accounting for two-thirds of global oil demand growth in recent years.
Rich country consumers are responding to higher energy prices, and it helps.
New York City, for example, has seen a reduction of perhaps 5% in private vehicles entering the city over the past six months.
Gridlock has abated, and you can almost get around the city by car these days.
But the response is slower elsewhere.
It certainly is not getting any easier to drive around in places like São Paulo, Dubai, and Shanghai.
For a variety of reasons, mostly related to government intervention, few emerging market economies can be categorized as having flexible resource demand, so commodity price spikes are not having a particularly big effect on demand.
The central bankers who tell us not to worry about inflation point to relative wage stability.
Expansions usually start collapsing when labor gets too scarce and too expensive.
But the current expansion is unusual in that, due to unique (in the modern era) circumstances, labor constraints are not the problem.
On the contrary, the effective global labor force keeps swelling.
No, this time, commodity resources are the primary constraint, rather than a secondary problem, as in the past.
That is why commodity prices will just keep soaring until world growth slows down long enough for new supply and new conservation options to catch up with demand.
This runaway-train global economy has all the hallmarks of a giant crisis in the making – financial, political, and economic. Will policymakers find a way to achieve the necessary international coordination?
Getting the diagnosis right is the place to start.
The world as a whole needs tighter monetary and fiscal policy.
It is time to put the brakes on this runaway train before it is too late.
The Global Growth Quest
NEWPORT BEACH – What is the most urgent economic priority shared by countries as diverse as Brazil, China, Cyprus, France, Greece, Iceland, Ireland, Korea, Portugal, the United Kingdom, and the United States?
It is not debt and deficits; and it is not dealing with the aftermath of irresponsible lending and borrowing.
Yes, these are relevant and, in a handful of cases, urgent.
But the number one challenge facing these countries is to develop growth models that can provide more ample, well-paid, and secure jobs amid a secular re-alignment of the global economy.
For both theoretical and practical reasons, this is a challenge that will not be met easily or quickly.
And, when it is met, the process will most likely be partial and uneven, accentuating differences and posing tricky coordination issues at the national, regional, and global levels.
The last few years have highlighted the declining potency of long-standing growth models.
Some countries (for example, Greece and Portugal) relied on debt-financed government spending to fuel economy activity.
Others (think Cyprus, Iceland, Ireland, the UK, and the US) resorted to unsustainable surges in leverage among financial institutions to fund private-sector activities, sometimes almost irrespective of underlying fundamentals.
Still others (China and Korea) exploited seemingly limitless globalization and buoyant international trade to capture growing market shares.
And a final group rode China’s coattails.
Recent data from the International Monetary Fund highlight these models’ simultaneous loss of effectiveness.
Global growth averaged only 2.9% in the most recent five-year period, well below the level for virtually any such multi-year period going back to 1971.
While emerging economies have out-performed developed countries, both have slowed.
Growth has been virtually flat in developed economies and, at 5.6% in the emerging world, is well below the 7.6% average in the previous five-year period.
Highly leveraged systems in finance-dependent economies were the first to hit a wall, surprising many who had uncritically bought into the “Great Moderation” – the idea that macroeconomic and asset-market volatility had eased permanently.
The bold policy action that countered the initial disorder prevented a global depression, but it encumbered public-sector balance sheets.
As a result, highly indebted governments were the next to hit the wall.
Some were pushed there by the high cost of containing the damage from banks’ irresponsible behavior.
Facing immediate credit rationing and large output contractions, they could be stabilized only by exceptional official financing from abroad, and, in some extreme cases, by defaulting on past commitments (including to bondholders and, most recently, bank depositors).
For other countries, including the US, medium-term issues came to the fore.
But, rather than catalyzing sensible policy discussions, these issues played into polarized and polarizing politics, creating new and more immediate headwinds to economic growth.
Meanwhile, a highly interdependent and (now) less dynamic world economy has been limiting the scope for external growth drivers.
Accordingly, even countries with sound balance sheets and manageable leverage have experienced a growth slowdown.
The consequences have become painfully clear, especially in Western countries.
With insufficient growth to deleverage safely, social costs have been considerable.
Alarmingly high youth unemployment, shrinking social safety nets, and under-investment in infrastructure and human capital are burdening current generations and, in a growing number of cases, will adversely affect future generations as well.
In the process, inequality has risen further.
And yet, despite the urgent need for major policy adaptations at the national level, and much better regional and global coordination, progress has been disappointing.
With the political context undermining the right mix of short- and longer-term measures, national policymaking has stumbled into partial approaches and unusual experimentation.
The focus has been on buying time, rather than on implementing a sensible transition to a sustainable policy stance.
And potential national outcomes would be less uncertain if excessive inequality were not treated as an afterthought.
The regional and multilateral dimensions are similarly inadequate.
The absence of well-articulated common analyses and policy coordination has accentuated legitimacy deficits, encouraging leaders and publics to opt for partial narratives and eroding confidence in existing institutional structures.
Given these trends, the search for more robust growth models will take much longer and be more complicated than many recognize – especially as the world economy pivots away from unfettered globalization and high levels of leverage.
We should expect countries like the US to benefit from dynamic bottom-up entrepreneurship and traditional cyclical economic healing.
Notwithstanding a dysfunctional Congress, the private sector will increasingly convert a paralyzing uncertainty premium, which impedes much investment, into a less disruptive risk premium.
But, without a short-term economic turbo-charger, the recovery in growth and jobs will remain gradual, vulnerable to political and policy risks, and disproportionately beneficial to those with favorable initial endowments of wealth and globalized talents.
Governments’ role will be different in countries like China, where officials will guide a shift from dependence on external sources of growth to more balanced demand.
As this requires some fundamental domestic re-alignments, the rebalancing will be both gradual and non-linear at times.
The outlook for other economies is more uncertain.
Undermined by a lack of policy flexibility, it will take a long time for countries like Cyprus to overcome the immediate shock of crisis and revamp their growth models.
Left to their own devices, these multi-speed dynamics would translate into higher global growth overall, coupled with larger internal and cross-country disparities – often exacerbated by demographics.
The question is whether existing governance systems can coordinate effective intervention to counter the resulting tensions.
Simultaneous progress on both substance and process is needed.
Parliaments and multilateral institutions must do a better job at facilitating cooperative policy implementation, which will require a willingness to reform outmoded institutions, including political lobbying.
No one should underestimate the growth challenge facing today’s global economy.
The stronger sectors (within countries and across them) will continue to recover, but not enough to pull up the global economy whole As a result, weaker sectors risk being surpassed at an ever-faster pace.
These trends will become more difficult to reconcile and keep orderly if governance systems fail to adjust.
The Worst of All Worlds
COPENHAGEN – Have you noticed how environmental campaigners almost inevitably say that not only is global warming happening and bad, but also that what we are seeing is even worse than expected?
This is odd, because any reasonable understanding of how science proceeds would expect that, as we refine our knowledge, we find that things are sometimes worse and sometimes better than we expected, and that the most likely distribution would be about 50-50.
Environmental campaigners, however, almost invariably see it as 100-0.
If we are regularly being surprised in just one direction, if our models get blindsided by an ever-worsening reality, that does not bode well for our scientific approach.
Indeed, one can argue that if the models constantly get something wrong, it is probably because the models are wrong.
And if we cannot trust our models, we cannot know what policy action to take if we want to make a difference.
Yet, if new facts constantly show us that the consequences of climate change are getting worse and worse, high-minded arguments about the scientific method might not carry much weight.
Certainly, this seems to be the prevailing bet in the spin on global warming.
It is, again, worse than we thought, and, despite our failing models, we will gamble on knowing just what to do: cut CO2 emissions dramatically.
But it is simply not correct that climate data are systematically worse than expected; in many respects, they are spot on, or even better than expected.
That we hear otherwise is an indication of the media’s addiction to worst-case stories, but that makes a poor foundation for smart policies.
The most obvious point about global warming is that the planet is heating up.
It has warmed about 1°C (1.8°F) over the past century, and is predicted by the United Nations’ climate panel (IPCC) to warm between 1.6-3.8°C (2.9-6.8°F) during this century, mainly owing to increased CO2.
An average of all 38 available standard runs from the IPCC shows that models expect a temperature increase in this decade of about 0.2°C.
But this is not at all what we have seen.
And this is true for all surface temperature measures, and even more so for both satellite measures.
Temperatures in this decade have not been worse than expected; in fact, they have not even been increasing.
They have actually decreased by between 0.01 and 0.1°C per decade.
On the most important indicator of global warming, temperature development, we ought to hear that the data are actually much better than expected .
Likewise, and arguably much more importantly, the heat content of the world’s oceans has been dropping for the past four years where we have measurements.
Whereas energy in terms of temperature can disappear relatively easily from the light atmosphere, it is unclear where the heat from global warming should have gone – and certainly this is again much better than expected .
We hear constantly about how the Arctic sea ice is disappearing faster than expected, and this is true.
But most serious scientists also allow that global warming is only part of the explanation.
Another part is that the so-called Arctic Oscillation of wind patterns over the Arctic Ocean is now in a state that it does not allow build-up of old ice, but immediately flushes most ice into the North Atlantic.
More importantly, we rarely hear that the Antarctic sea ice is not only not declining, but is above average for the past year.
IPCC models would expect declining sea ice in both hemispheres, but, whereas the Arctic is doing worse than expected, Antarctica is doing better.
Ironically, the Associated Press, along with many other news outlets, told us in 2007 that the “Arctic is screaming,” and that the Northwest Passage was open “for the first time in recorded history.”
Yet the BBC reported in 2000 that the fabled Northwest Passage was already without ice.
We are constantly inundated with stories of how sea levels will rise, and how one study after another finds that it will be much worse than what the IPCC predicts.
But most models find results within the IPCC range of a sea-level increase of 18 to 59 centimeters (7-23 inches) this century.
This is of course why the thousands of IPCC scientists projected that range.
Yet studies claiming one meter or more obviously make for better headlines.
Since 1992, we have had satellites measuring the rise in global sea levels, and they have shown a stable increase of 3.2 millimeters per year (1/8 of an inch) – spot on compared to the IPCC projection.
Moreover, over the last two years, sea levels have not increased at all – actually, they show a slight drop .
Should we not be told that this is much better than expected?
Hurricanes were the stock image of Al Gore’s famous film on climate change, and certainly the United States was battered in 2004 and 2005, leading to wild claims of ever stronger and costlier storms in the future.
But in the two years since, the costs have been well below average, virtually disappearing in 2006.
That is definitely better than expected.
Gore quoted MIT hurricane researcher Kerry Emmanuel to support an alleged scientific consensus that global warming is making hurricanes much more damaging.
But Emmanuel has now published a new study showing that even in a dramatically warming world, hurricane frequency and intensity may not substantially rise during the next two centuries.
That conclusion did not get much exposure in the media.
Of course, not all things are less bad than we thought.
But one-sided exaggeration is not the way forward.
We urgently need balance if we are to make sensible choices.
The Wrong Austerity Cure
BERKELEY – Fiscal profligacy did not cause the sovereign-debt crisis engulfing Europe, and fiscal austerity will not solve it.
On the contrary, such austerity has aggravated the crisis and now threatens to bring down the euro and throw the global economy into another tailspin.
In 2007, Spain and Ireland were models of fiscal rectitude, with far lower debt-to-GDP ratios than Germany had.
Investors were not worried about default risk on Spanish or Irish sovereign debt, or about Italy’s chronically large sovereign debt.
Indeed, Italy boasted the lowest deficit-to-GDP ratio in the eurozone, and the Italian government had no problem refinancing at attractive interest rates.
Even Greece, despite its rapidly eroding competitiveness and increasingly unsustainable fiscal path, could attract the capital that it needed.
Deluded by the convergence of bond yields that followed the euro’s launch, investors fed a decade-long private-sector credit boom in Europe’s less-developed periphery countries, and failed to recognize real-estate bubbles in Spain and Ireland, and Greece’s slide into insolvency.
When growth slowed sharply and credit flows collapsed in the wake of the Great Recession, budget revenues plummeted, governments were forced to socialize private-sector liabilities, and fiscal deficits and debt soared.
With the exception of Greece, the deterioration in public finances was a symptom of the crisis, not its cause.
Moreover, the deterioration was predictable: history shows that the real stock of government debt explodes in the wake of recessions caused by financial crises.
Overlooking the evidence, European leaders, spearheaded by Germany, misdiagnosed the problem as one of fiscal profligacy for which painful austerity is the only cure.
On this view, significant and rapid reductions in government deficits and debt are a precondition to restoring government credibility and investor confidence, stemming contagion, bringing down interest rates, and reviving economic growth.
There is also a moral-hazard aspect to the austerity argument: easing repayment terms for spendthrift governments will only encourage reckless behavior in the future – forgiving past sins perpetuates sinning.
Moreover, virtuous creditors should not bail out irresponsible borrowers, be they private or public.
From this perspective, austerity is the necessary and just penance for reprobates like Greece, Spain, and Italy.
But austerity is not working; indeed, it is counterproductive.
In the short to medium run, fiscal consolidation – whether in the form of cutting government spending or increasing revenues – results in lower output and employment, which means lower tax collection, higher deficits, and escalating debt relative to GDP.
Savvy investors, like frustrated voters, recognize that low growth and high unemployment actually enlarge deficits and add to debt in the short run.
That is why, after more than two years, interest rates are rising, not falling, in countries crushed by onerous austerity measures.
In fact, there is no simple relationship between the size of a government’s deficit or debt and the interest rate that it must pay.
British government bonds now offer significantly lower interest rates than those of France, Italy, or Spain, even though the United Kingdom’s fiscal position is considerably worse.
Greece is caught in a classic debt trap, as the interest rate on its public debt has soared beyond its growth rate by a considerable margin;
Spain is teetering on the brink.
Austerity in Europe has confirmed the International Monetary Fund’s warning that overdoing fiscal consolidation weakens economic activity, undermines market confidence, and diminishes popular support for adjustment.
In the long run, many eurozone countries, including Germany, require fiscal consolidation in order to stabilize and reduce their debt-to-GDP ratios.
But the process should be gradual and back-loaded – with much of the consolidation coming after Europe’s economies have returned to a sustainable growth path.
Structural reforms are also necessary in most European economies to bolster competitiveness and boost potential growth.
But such reforms take time: German Chancellor Angela Merkel appears to have forgotten that it took more than a decade and roughly €2 trillion ($2.5 trillion) in subsidies for structural reforms to make the former East Germany competitive with the rest of the country.
Italian Prime Minister Mario Monti and French President François Hollande are right: Europe needs bold, coordinated policies to promote growth, along with market-based structural reforms to foster competition and an easing of fiscal targets until output and employment recover.
But how can significant new growth initiatives be financed?
The reality is that the rest of Europe cannot succeed in restoring growth without Germany, and Germany remains wedded to the austerity cure.
With a modest fiscal deficit, record-low borrowing costs, and a huge current-account surplus, Germany has the financial firepower to unleash a significant stimulus.
But Germany sees no need to stimulate its own economy, and is willing to consider only modest eurozone measures, such as additional capital for the European Investment Bank, a small pilot program for European Union “project bonds” for infrastructure investment, and more rapid deployment of unspent EU structural funds.
Germany refuses even to allow spending on high-priority infrastructure projects to be exempted from the unrealistic deficit targets set by the EU’s new “fiscal compact.”
Despite pleas from the IMF and the OECD, Germany also remains implacably opposed to Eurobonds, which could ease the funding constraints of other eurozone members and bolster the resources of the European Stability Mechanism, which currently does not provide a credible firewall against a run on Spanish or Italian sovereign debt – or on the European banks that hold it.
Indeed, the worsening banking crisis, with deposits fleeing from the eurozone periphery, is further strangling Europe’s growth prospects.
It is probably too late to save Greece.
But a shift toward policies to promote growth, supported by the easing of deficit targets and the issuance of Eurobonds, is essential to bring Europe back from the brink of sustained recession, to stabilize Europe’s financial markets, and to prevent another significant disruption to global capital markets.
The Wrong German Foreign Policy
BERLIN – German chancellor Angela Merkel likes to navigate politically by line of sight – and a very short line of sight at that.
But when fog clouds your visibility, you’re not an instinctive driver (as seems to be the case here), and you have misplaced your eyeglasses, you place not only yourself at peril, but others as well.
That scenario sums up Germany’s foreign policy on Libya. The ensuing damage for Germany and its international standing is plain to see: never has Germany been more isolated.
The country has lost its credibility with the United Nations and in the Middle East; its claim to a permanent seat on the Security Council has just been trashed for good; and one really must fear the worst for Europe.
UN Security Council Resolution 1973, which authorized the current mission to protect Libyans, had the explicit or tacit agreement of the Security Council’s five veto-wielding powers. It also had the backing of a majority of the Council, the support of the Arab League and the Organization of the Islamic Conference, and the open military participation of two Arab states.
What use is vocal multilateralism, what use are German leaders’ lofty speeches about international law being exercised by the Security Council, if Germany refuses to endorse a resolution for the protection of Libya’s citizens from a brutal regime employing all means at its disposal in its fight for survival?
Nothing.
Empty talk.
And that will not be forgotten in the region, in the UN, or among Germany’s friends.
All I can say is that I feel ashamed for this failure of the German government and – unfortunately – also for the leaders of the red and green opposition parties who at first applauded this scandalous mistake!
Foreign policy isn’t just about cutting a good figure on the international stage and otherwise focusing on the next domestic election. It means taking responsibility for hard strategic choices even when these are unpopular at home.
And please spare me mention of the abstentions in the Security Council by Russia and China, which constituted a waiver of their veto and thus a de facto endorsement, clearing the way for intervention.
Germany’s abstention, on the other hand, is viewed as a simple “No,” because Germany has no veto and is also a key member of the European Union and NATO.
I don’t know what Germany’s foreign minister, Guido Westerwelle, could have been thinking. He rightly sided with the Arab freedom movements, then – when the matter was decided – traveled to Cairo’s Tahrir Square to receive his applause, and then rightly called for Qaddafi’s overthrow and his rendition to the International Criminal Court, only to chicken out when it came to the Security Council vote.
The rationale has nothing to do with an ethical foreign policy or with German and European interests.
The situation in Libya, we are told, is too dangerous; Germany’s government doesn’t want to get caught on a slippery slope and eventually have to commit ground troops in a civil war.
Well, if you’re afraid of slippery slopes, stay out of government, because balancing on all sorts of slippery slopes is what the job is about.
Of course, the mission in Libya is risky; it is unclear who the new local players will be and what the country’s future will look like.
But, given the alternative – a bloodbath unleashed by Qaddafi to reestablish his control over Libya – this cannot be a serious alternative to action.
Libya is neither Afghanistan nor Iraq.
Germany and other European countries went to Afghanistan in solidarity with a NATO partner – our most important security guarantor, the United States – after it had been attacked from there on September 11, 2001.
And solidarity within NATO – a term all but shunned these days in official German circles – is mutual: left to its own devices, Germany could one day wake up in a very precarious situation.
And Libya is certainly not Iraq, either, where the dominant Western power, the US, started a war for ideological reasons and against the majority of the Security Council, a war that that had to – and did – end in disaster.
If anything, Libya probably should be compared to Bosnia.
It looks as if Merkel’s government today has adopted the position of Germany’s Greens back then!
But, while the rejection of humanitarian military intervention had an element of tragedy in that case, Germany’s behavior today is pure farce.
Like the Balkans, the far shores of the Mediterranean are part of the EU’s immediate security zone.
It is naive to assume that the most populous EU member state could and should keep out of a crisis situation in a region with immediate manifold European and German security interests.
What does the German government believe the consequences Qaddafi’s retention of power would be, both in humanitarian terms and in terms of Realpolitik?
The collateral damage for EU foreign policy is also significant.
Of all countries, Germany – which can almost be termed the inventor of the European Common Foreign and Security Policy – has now dealt that policy its most dangerous blow thus far.
From now on, the principle of a “coalition of the willing” will also apply in the EU, further weakening Europe.
And if you view Germany’s behavior in respect to Libya in connection with its whining and dithering regarding the consequences for Europe of the financial crisis, you can’t but start worrying about the future of both Europe and NATO.
Germany seems to be congealing into an introspective provincialism, and that at a time where its potential, its leadership even, are more urgently needed than ever.
Unfortunately, you can forget about that.
The Wrong Growth Strategy for Japan
CAMBRIDGE – Japan’s new government, led by Prime Minister Shinzo Abe, could be about to shoot itself in the foot.
Seeking to boost economic growth, the authorities may soon destroy their one great advantage: the low rate of interest on government debt and private borrowing.
If that happens, Japanese conditions will most likely be worse at the end of Abe’s term than they are today.
The interest rate on Japan’s ten-year government bonds is now less than 1% – the lowest in the world, despite a very high level of government debt and annual budget deficits.
Indeed, Japan’s debt is now roughly 230% of GDP, higher than that of Greece (175% of GDP) and nearly twice that of Italy (125% of GDP).
The annual budget deficit is nearly 10% of GDP, higher than any of the eurozone countries.
With nominal GDP stagnating, that deficit is causing the debt/GDP ratio to rise by 10% annually.
Japan’s government is able to pay such a low rate of interest because domestic prices have been falling for more than a decade, while the yen has been strengthening against other major currencies.
Domestic deflation means that the real interest rate on Japanese bonds is higher than the nominal rate.
The yen’s rising value raises the yield on Japanese bonds relative to the yield on bonds denominated in other currencies.
That may be about to come to an end.
Abe has demanded that the Bank of Japan pursue a quantitative-easing strategy that will deliver an inflation rate of 2-3% and weaken the yen.
He will soon appoint a new BOJ governor and two deputy governors, who will, one presumes, be committed to this goal.
The financial markets are taking Abe’s strategy seriously.
The yen’s value against the US dollar has declined by more than 7% in the last month.
With the euro rising relative to the dollar, the yen’s fall relative to the euro has been even greater.
The yen’s weakening will mean higher import costs, and therefore a higher rate of inflation.
An aggressive BOJ policy of money creation could cause further weakening of the yen’s exchange rate – and a rise in domestic prices that is more rapid than what Abe wants.
With Japanese prices rising and the yen falling relative to other currencies, investors will be willing to hold Japanese government bonds (JGBs) only if their nominal yield is significantly higher than it has been in the past.
A direct effect of the higher interest rate would be to increase the budget deficit and the rate of growth of government debt.
With a debt/GDP ratio of 230%, a four-percentage-point rise in borrowing costs would cause the annual deficit to double, to 20% of GDP.
The government might be tempted to rely on rapid inflation to try to reduce the real value of its debt.
Fear of that strategy could cause investors to demand even higher real interest rates.
The combination of exploding debt and rising interest rates is a recipe for economic disaster.
The BOJ’s widely respected governor, Masaaki Shirakawa, whose term expires in April, summarized the situation in his usual restrained way, saying that “long-term interest rates may spike and have a negative effect on the economy.”
A spike in long-term rates would lower the price of JGBs, destroying household wealth and, in turn, reducing consumer spending.
The higher interest rates would also apply to corporate bonds and bank loans, weakening business investment.
Even without the prospect of faster inflation and a declining yen, fundamental conditions in Japan point to higher interest rates.
The Japanese government has been able to sell its bonds to domestic buyers because of the high rate of domestic saving.
The excess of saving over investment has given Japan a current-account surplus, allowing the country to finance all of the government borrowing domestically, with enough left over to invest in dollar-denominated bonds and other foreign securities.
But that is coming to an end.
The household saving rate has collapsed in recent years, falling to less than 2%.
The combination of high corporate saving and low business investment has sustained the current-account surplus, allowing Japan to fund its budget deficit domestically.
But the surplus has fallen sharply in the past five years, from roughly 6% of GDP in 2007 to only 1% now.
With a falling rate of household saving and the prospect of new fiscal deficits, the current account will soon be negative, forcing Japan to sell its debt to foreign buyers.
Abe plans to supplement the easy-money strategy with an increase in government spending of some $120 billion, or 2% of GDP.
It is not clear why Abe and his advisers believe that this will deliver sustained real GDP growth of 2% a year.
Although the $120 billion is presumably just for the current year (if the spending can be made to happen that quickly), he also spoke during his campaign about a ten-year rise in government spending of ¥200 trillion yen, substantially more than the $120 billion annual rate.
The impact of all of this on the national debt and on Japan’s interest rates could be staggering.
Abe is right about one thing: Japan needs to get out of its no-growth and deflationary trap.
The Wrong Lesson of Munich
NEW YORK – Seventy years ago this month in Munich, the British prime minister, Neville Chamberlain, signed a document that allowed Germany to grab a large chunk of Czechoslovakia.
The so-called “Munich Agreement” would come to be seen as an abject betrayal of what Chamberlain termed “a far away country of which we know little.”
But that was not what many people thought at the time.
Chamberlain’s belief that Britain was not yet ready for war with Nazi Germany, and that diplomacy and compromise were safer options, was in fact shared by many Europeans, who knew from personal experience the horrible consequences of war.
Nonetheless, Chamberlain has gone down in history as a coward, and his “appeasement” of Nazi Germany is often blamed for Hitler’s subsequent campaign to conquer the rest of Europe.
Chamberlain was probably wrong.
Britain and France could have stopped Germany.
“Munich, 1938,” was one of the rare occasions in the history of democracies when careful diplomacy was a mistake.
What was needed was a bloody-minded romantic hero, willing to gamble the fate of his nation by fighting on, “whatever the cost may be,” in the words of Winston Churchill.
George Santayana famously warned that “those who cannot learn from history are doomed to repeat it.” History, however, teaches many lessons, some of them contradictory, and is never repeated in quite the same way.
Sometimes too much attention paid to the past can lead us badly astray.
So, what, exactly, has the world learned from Munich, 1938?
If anything, West Europeans after World War II drew conclusions that were closer to Chamberlain’s thinking in 1938 than Churchill’s.
After two catastrophic wars, Europeans decided to build institutions that would make military conflict redundant.
Henceforth, diplomacy, compromise, and shared sovereignty would be the norm, and romantic nationalism, based on military prowess, would be a thing of the past.
Out of the ashes of war a new kind of Europe arose, as did a new kind of Japan, which even had a pacifist constitution (written by idealistic Americans, but gratefully accepted by most Japanese).
Nationalism (except in football stadiums) gave way to smug self-satisfaction at having found more civilized, diplomatic, and pacific solutions to human conflicts.
To be sure, the peace was kept.
But only because it was guaranteed by the United States, which still stuck to pre-World War II notions of national and international security.
In the US, Munich has had a very different resonance.
There, it fed the Churchillian illusions of many a “war president” who dreamed of going down in history as freedom’s heroic defender.
Munich has been invoked over and over – to fight Communism, to topple Saddam Hussein, to stop Iran, and to wage a “war on terror.”
These different perspectives have caused peculiar tensions between the US and its democratic allies.
Europeans and Japanese depend on American military power for their security, but often don’t like the way the US uses it.
Too much dependence has also had an infantilizing effect.
Like permanent adolescents, Europeans and Japanese crave the security of the great American father, and deeply resent him at the same time.
There is little doubt that the US, like all great powers, has embarked on foolish wars and acted like a bully, especially toward nations in its own hemisphere.
But, even without invoking the ghosts of Munich, there are occasions when military force is the only way to deal with a tyrant.
Europeans were unwilling to stand up to Serbian mass murderers.
The Americans (after initial reluctance) had to do the dirty work.
When the US decided to push Saddam Hussein’s killers out of Kuwait, German protesters screamed that they would never “shed blood for oil.”
On the other hand, European diplomacy has had some remarkable successes.
The prospect of joining the European Union helped consolidate democracy in central and eastern Europe, and in Turkey, too.
Some of these democracies have joined NATO, and others desperately want to.
NATO, however, unlike the EU, is a military organization.
Therein lies Chamberlain’s old problem: are Europeans prepared to fight wars on behalf of their fellow members?
During the Cold War, this was not a serious dilemma.
Europeans relied on NATO and the US to defend them in case of Soviet aggression.
Now Georgia and the Ukraine would like to expect that Europeans and Americans would shed blood to defend them against Russia.
The choice is stark: if Europeans are prepared to fight for Georgia or Ukraine, these countries should be invited to join NATO.
If not, not.
But, instead of choosing, major European countries, such as Germany, have dithered, first dangling NATO membership as a juicy carrot, and then withdrawing the offer, leaving the Americans to indulge in heroic rhetoric without the necessary follow-through.
All this is making the Western alliance look incoherent, and, despite its vast wealth and American military power, strangely impotent.
It is time for European democracies to make up their minds.
They can remain dependent on US protection and stop complaining, or they can develop the capacity to defend Europe, however they wish to define it, by themselves.
The first option may not be feasible for very much longer in the twilight days of Pax America.
The second will be expensive and risky.
Given the many divisions inside the Union, Europeans will probably muddle on, until a serious crisis forces them to act, by which point it could well be too late.
Europe’s Next Great Mistake
PRINCETON – In constructing Europe’s monetary union, political leaders did not think through all of the implications, which led to major design flaws.
Worse, they do not appear to have learned from that experience, for they are about to take the same approach to the monetary union’s political analogue.
The logic of the financial crisis is driving Europeans toward greater integration, which implies new mechanisms for political expression.
Well before the crisis, the European Union was widely perceived to be suffering from a “democratic deficit.”
Now, with many Europeans blaming the EU for painful austerity measures, that complaint has grown more powerful – and Europe’s political leaders believe that they must act now to address it.
Unfortunately, Europe confronts another deficit: a lack of political leadership.
The charismatic figures of the mid-twentieth century – Churchill, Adenauer, and de Gaulle – have no contemporary counterparts.
Citizens associate the EU with, above all, bureaucratic grayness and technocratic rationality.
European officialdom is now responding to these deficits with an initiative to reform and democratize the European Commission.
Current Commission President José Manuel Barroso suggests that ideologically like-minded political parties running in the next European Parliament elections should intensify their cooperation in political “families” that would then jointly nominate candidates for the Commission presidency.
Voters would thus play a more direct role in choosing a new European chief executive.
They would feel as if they were appointing a government.
And politicians would need to beef up their charisma in order to be elected.
This approach has been supported by luminaries such as former British Prime Minister Tony Blair.
Because it apparently does not imply any real loss of power for national governments, it has achieved a certain acceptance and seems close to being implemented.
But that does not make it a good idea.
In particular, the perceived need to channel Europe’s existing political families into a two-party system, with social democrats on one side and “people’s parties” on the other, is deeply problematic.
The two-party parliamentary model emerged in nineteenth-century Great Britain.
Electors chose only a representative for the House of Commons, and the majority party then appointed the prime minister.
The contemporary British comic opera Iolanthe celebrated the fact that “every boy and every gal that’s born into the world alive is either a little Liberal or else a little Conservative.”
But what if not every little boy and girl is born that way?
In the stable British model, if a political party is too radical, it will lose the political center in the next election.
The parties’ rivalry is healthy, though there is a built-in tendency to seek solutions that command a broad social consensus.
But such an institutional outcome is not inevitable (and it probably no longer endures even in contemporary Britain).
British lawyers liked to recommend this model to other countries.
They were especially persuasive in Britain’s former colonies, notably in newly independent African states.
The results were disastrous.
Citizens could not understand why they should be expected to align their political preferences along a simple left-right spectrum.
Instead, politics was usually recast in terms of old inter-group or inter-ethnic tensions.
The contemporary United States also is not a compelling demonstration that competition between two parties leads to increasing moderation and political centrism.
On the contrary, the partisan struggle can play to the parties’ extremes.
The two-party moderation thesis makes sense only if the main differences concern redistributive preferences in a simple model driven by an almost Marxist kind of economic determinism.
The left-wing party wants to redistribute wealth and incomes more, and the right-wing party less; but both need to restrain themselves, and in appealing to the median voter, they become near-identical alternatives.
In a globally inter-connected world, however, a new politics has developed, in which both the left and right fringes fear that outside competition or influences will limit their ability to shape political choices.
Their main political preference then becomes resistance to those external threats.
The old left-right polarity no longer works.
Artificially creating a new European polity split between left and right would create new struggles – and intensify old ones – about redistribution.
The only thing that would hold the left together would be the claim that there should be more redistribution: but to whom, and according to what mechanism?
Nor is it clear that Spanish socialists have more in common with German social democrats than with their fellow nationals.
Each ideological grouping would most likely become factionalized along complex national lines – divisions likely to be reflected in the ensuing competition to be charismatic.
Instead of encouraging new Churchills and Adenauers, the result might be new imitators of Hitler or Stalin.
There is a better model, one developed in a linguistically, culturally, and religiously diverse test-tube in the geographic heart of Europe: the Swiss model of Konkordanzdemokratie.
In the Swiss system, several parties compete, but they do not aim to control the government exclusively.
Instead, all the major parties are represented in the government, and are consequently obliged to hammer out compromises.
Members of the federal government are driven by regional loyalties at some times, and by ideological commitments at other times; they all need to be negotiated when making decisions.
The Swiss solution of electing an all-embracing and balanced government tends to produce boring and uninspiring politics.
Famously, few people know who even holds Switzerland’s annually rotating presidency.
Charismatic politicians act by polarizing, galvanizing, and mobilizing supporters; routine politics, by contrast, requires maintaining a low profile and being willing to strike compromises.
Europe today does not need inspirational leaders who can whip up a populist frenzy.
Instead, it needs locally respected leaders who are capable of working in a complex and multi-dimensional political world.
The Wrong Tax for Europe
CAMBRIDGE – Europe is already in pickle, so why not add more vinegar?
That seems to be the thinking behind the European Commission’s proposed financial transactions tax (FTT) – the Commission’s latest response to Europe’s festering growth and financing problems.
The emotional appeal of a tax on all financial transactions is undeniable.
Ordinary Europeans have to pay value-added tax on most of the goods and services that they buy, so why not tax purchases of stocks, bonds, and all kinds of derivatives?
Surely, such a tax will hit wealthy individuals and financial firms far more than anyone else, and, besides, it will raise a ton of revenue.
Indeed, the European Commission estimates that its proposed tax of only 0.1% on stock and bond trades, and 0.01% tax on derivatives, will raise more than €50 billion per year.
As a bonus, an FTT will curb destabilizing speculation in financial markets.
If only it were so simple.
Of course, taxation of financial firms’ profits and bonuses should be made more similar to that of other economic activities.
Excessive leverage needs to be reined in.
A return to pre-2007 levels of macroeconomic and financial stability would support growth.
Unfortunately, much as FTTs are the darling of leading liberal economic commentators and Robin Hood NGOs, they are an extremely misguided approach to achieving such worthy ends.
True, great thinkers like John Maynard Keynes and the late Nobel laureate James Tobin floated various ideas for taxing financial transactions as a way to reduce economic volatility.
(Tobin’s tax applied specifically to foreign-exchange trading.)
But, since then, the idea has received close attention from many economic researchers, and, frankly, it is hard to find their research results supportive.
Such taxes surely reduce liquidity in financial markets.
With fewer trades, the information content of prices is arguably reduced.
But both theoretical and simulation results suggest no obvious decline in volatility.
And, while raising so much revenue with so low a tax rate sounds grand, the declining volume of trades would shrink the tax base precipitously.
As a result, the ultimate revenue gains are likely to prove disappointing, as Sweden discovered when it attempted to tax financial transactions two decades ago.
Worse still, over the long run, the tax burden would shift.
Higher transactions taxes increase the cost of capital, ultimately lowering investment.
With a lower capital stock, output would trend downward, reducing government revenues and substantially offsetting the direct gain from the tax.
In the long run, wages would fall, and ordinary workers would end up bearing a significant share of the cost. More broadly, FTTs violate the general public-finance principle that it is inefficient to tax intermediate factors of production, particularly ones that are highly mobile and fluid in their response.
All of this is well known, even if prominent opinion leaders, politicians, and philanthropists prefer to ignore it.
The European Commission has surely been strongly cautioned by the Fiscal Affairs Department at the International Monetary Fund, whose economists have thoroughly catalogued the pros and cons of FTTs.
So why did the Commission go forward with the idea?
The most generous interpretation is that the Commission simply does not believe economists’ estimates and analysis, and views an FTT as more workable than is commonly realized (a scenario that calls to mind the debate surrounding the creation of the euro).
It is true that Latin American governments, particularly the Brazilian authorities, succeeded in raising more revenue from taxes on bank withdrawals (a crude version of an FTT) than most policy analysts thought possible.
On the other hand, Latin America’s long-term growth record is hardly an advertisement for the approach, and accounting for lost tax revenues due to lower GDP would surely yield a less impressive fiscal outcome.
Another possibility is that the Europeans concluded that an FTT’s political advantages outweigh its economic flaws.
After all, there certainly is a case to be made that an FTT has so much gut-level popular appeal that politically powerful financial interests could not block it. One can almost buy this idea, except that the tax is so counterproductive in the long run that it is hardly obvious that it would be better than nothing.
There are more cynical interpretations of the European Commission’s motives.
Perhaps officials noticed that virtually everything in Europe is already heavily taxed.
So, rather than finance the European Union’s institutions through greater contributions from existing tax bases, they are seeking a consensus for new revenue sources.
Or perhaps the Commission realizes that the FTT will be dead on arrival, owing to disputes within Europe, and simply wants to gain political capital from an enormously popular proposal.
After the financial crisis erupted with full force in 2008, former US Federal Reserve Chairman Paul Volcker claimed that the only worthwhile financial innovation in recent decades was the ATM.
And, as the Oscar-winning documentary Inside Job rightly points out, no one whose other, less useful innovations helped cause the financial crisis – politicians, financiers, and many others – has really paid a price.
There is, in short, ample reason to be angry at financiers, and real change is needed in how they operate.
But the FTT, despite its noble intellectual lineage, is no solution to Europe’s problems – or to the world’s.
The Wrong Way to Think About Oil
In his recent State of the Union address, President George W. Bush declared, “America is addicted to oil.” He announced a program of energy research that would reduce American oil imports from the Middle East by 75% over the next two decades.
But even if his program succeeds, it will not do much to increase America’s energy security.
The United States gets only a fifth of its oil from the Persian Gulf.
Americans are not alone in worrying about oil as a security problem.
China and India, the two largest countries in the world, realize that their high rates of economic growth also depend upon foreign oil.
While the two countries together consume slightly less than half as much oil as the US, their consumption is increasing faster.
When poor countries consume as much per capita as rich countries, will there be enough oil to go around?
China and India have been crisscrossing the globe making financially and politically costly deals to try to lock up the output of new oil-producing countries.
For example, when Western countries discouraged their oil companies from dealing with Sudan’s government because of its inadequate response to the genocide in Darfur, China was quick to buy up the country’s oil.
Some petroleum experts argue that world oil production will peak in a decade or so.
Others reply that new discoveries and improved technologies for extracting oil from existing fields make such projections too alarmist.
Because accurate statistics about reserves in countries like Saudi Arabia are not available, it is impossible to settle the dispute definitively.
But the majority of experts agree that the world will not run out of oil anytime soon – even with growing Chinese and Indian demand.
Over a trillion barrels of reserves have been proven, and more are likely to be found.
In any case, arguments about the size of world oil reserves and when global production will peak misses the key security issue.
The heart of the problem is not the overall quantity of oil, but its location.
Two-thirds of proven reserves are in the Persian Gulf, one of the world’s most volatile regions.
Oil supply is likely to be vulnerable to political disruptions long before issues arise from overall scarcity of supply.
For China and India, that just reinforces their desire to lock up oil supplies from countries outside the Persian Gulf.
Similarly, it led Bush to his declared objective of cutting imports from the region by 75% over the next two decades.
At first glance, Bush’s task looks easy.
The US uses about 21 million barrels of oil a day, and imports about 2.5 million of it from the Persian Gulf.
Even before new technologies produce that amount of fuel, the US could switch to imports from Nigeria, Venezuela, and other countries.
But even if those countries remain stable, America will not be safe.
What matters is the total amount of oil a country imports, not where it comes from.
Suppose there is a crisis in the Persian Gulf over Iran’s efforts to get nuclear weapons.
Iran has threatened to cut oil exports if the United Nations Security Council imposes sanctions against it for violating its nuclear pledges.
Most experts predict that such a move would drive the price of oil – including the Venezuelan, Nigerian, and other oil that the US, China, and India consume – above $100 per barrel.
The rapid spike in prices would harm all economies that import oil, regardless of where it comes from.
The world learned that lesson following the 1973 Arab-Israel war.
Arab oil-exporting countries embargoed oil sales to the US and the Netherlands to punish them for their support of Israel.
But the oil destined for the US and the Netherlands was shifted to other countries like Japan, while oil destined for other countries found its way to the US and the Netherlands.
Oil is a fungible commodity, and markets clear at a common price.
When the dust settled, it turned out that American, Dutch, and other importers all suffered roughly the same degree of shortfall and paid the same damaging high price.
This means that China and India are deluding themselves if they think that preferential deals for Sudanese or Iranian oil will provide them with security.
When a disruption occurs, China, India, and the US will all find that they face equal prices ­­– and thus equal pain.
In the meantime, China’s mercantilist misunderstanding of markets means that it often overpays for what it mistakenly thinks is energy security.
Bush is similarly mistaken.
Even if he cuts imports from the Middle East, America will not enjoy energy security unless it curbs its overall thirst for oil.
In the past, rising prices helped slow oil consumption in the US.
The US uses only half as much oil per dollar of production as it did before the price spikes of the 1970’s.
But over half the oil Americans use goes for driving cars and trucks.
The US will not solve its energy security problem until it gets better at fuel economy, possibly by a combination of technology, gasoline taxes, and regulations.
Oil was not the cause of the Iraq War in the simplistic sense that American control of Iraqi oil would make it more secure.
The world’s dependence on Persian Gulf oil means that all countries have an interest in maintaining stability in that region, while improving energy efficiency and increasing the diversity of their overall energy supplies.
The Year of Rational Pessimism
NEW YORK – Someone recently quipped that the best thing about 2011 was that it was likely better than 2012.
By the same token, while there has been much concern about America’s political gridlock, something worse for America, and for the world, could have happened: the Republicans could have prevailed in their program of austerity-cum-redistribution to the wealthy.
Automatic cuts won’t happen until 2013, which means that the economy in 2012 will be spared, ever so slightly.
Two more positive notes for 2011: America seems finally to have awakened to the yawning gap between the rich and the rest – between the top 1% and everyone else.
And youth-led protest movements, from the Arab Spring to the Spanish indignados and the Occupy Wall Streeters, have made clear that something is very wrong with the capitalist system.
The likelihood, though, is that the economic and political problems that were so manifest in the US and Europe in 2011 – and which have so far been tremendously mismanaged – will only grow worse in 2012.
Any forecast for the coming year depends, more than usual, on politics – on the outcome of the US gridlock, and on European leaders’ ability to respond to the euro crisis.
Economic forecasts are difficult enough; but when it comes to political forecasts, our crystal balls are even cloudier.
That said, here is my best guess.
European leaders repeatedly proclaim their commitment to saving the euro, but those who could have repeatedly said that they are committed to not doing what is needed.
They have recognized that austerity will mean slower growth – indeed, a recession is increasingly likely – and that, without growth, the eurozone’s distressed countries will not be able to manage their debts.
But they have done nothing to promote growth.
They are on a death spiral.
The only thing saving the euro in the short term is the European Central Bank’s purchases of sovereign bonds, which have kept interest rates from soaring.
Like it or not, the ECB is effectively financing the sovereigns.
German leaders have frowned on this, and the ECB has felt uncomfortable, limiting its purchases and saying that political leaders, not central bankers, should save the euro.
But the political response has been too little, too late, to say the least.
The most likely scenario is more of the same: austerity, weaker economies, more unemployment, and continuing deficits, with European leaders doing the minimum to fend off crisis for the moment.
In short: more turmoil.&nbsp;
The day of reckoning – when the euro breaks up or Europe takes the kind of definitive action that would make a single currency work – may come in 2012, but, more likely than not, Europe’s leaders will do whatever they can to postpone that day of reckoning.
Europe will suffer, and so will the rest of the world.
The United States had hoped for an export-led recovery, but, with economic growth slowing in Europe, its largest customer (and impeding growth in much of the rest of the world), that is unlikely.
And, with the worst effects of spending cuts potentially still to come, gridlock – and Republican spite – may mean that the Obama administration’s payroll-tax cut will not be extended, weakening household consumption.
That, combined with cutbacks at the state and local level, means that the first real manifestations of austerity’s impact will appear in 2012.
(Already, though, public employment is around 700,000 below its pre-crisis level; government, rather than acting counter-cyclically, offsetting weak private demand, has been acting pro-cyclically, exacerbating the economy’s problems.)
Meanwhile, the consequences of failure to deal with the housing crisis – which triggered financial markets’ near-meltdown in 2008 – are continuing to be felt: further decline in real-estate prices, more foreclosures, and thus even greater stress on US households.
No one in either US political party seems willing to face the fact that fixing the banking system, though necessary, was not sufficient to restore the economy to health (or that the financial system was never really fixed).
The American economy before the crisis was being maintained on artificial life support by a housing bubble that led to unsustainable consumption.
There is no way back to 2007.
But neither party has been willing to admit what is really wrong, or advance an agenda that would address the underlying ills.
Platitudes and placebos – vapid calls for more job creation, fiscal restraint, reining in entitlement programs, and so forth – will characterize America’s election year. Neither side will step forward with a program for restructuring the economy and reducing the inequality that is sapping the country’s strength.
I have been a big critic of markets, but even America’s market participants now sense that political leaders are not up to the task.
If investors suffered from irrational exuberance in the 1990’s, they are likely to suffer from rational pessimism in the coming year.
After all, Americans will have to choose between a leader who has proven that he can’t lead the US out of its economic morass, and one who has not yet proven his inability to do so – but who could make matters even worse through policies that increase inequality and slow growth.
I hope that events prove me wrong, and that my pessimism turns out to have been excessive.
But I am afraid that the risks are more on the downside.
Indeed, 2012 could prove to be the year in which the experiment with the euro, the culmination of a 50-year process of economic and political integration in Europe, comes to an end.
In that case, rather than bringing the hoped-for end of the Great Recession of 2008, a downturn that has lasted too long and caused too much suffering, 2012 may mark the beginning of a new and more frightening phase of the world’s worst economic calamity in three-quarters of a century.
The Year of the “China Model”
It will be China’s year in 2008.
The Olympic Games – no doubt perfectly organized, without a protester, homeless person, religious dissenter, or any other kind of spoilsport in sight – will probably bolster China’s global prestige.
While the American economy gets dragged down further in a swamp of bad property debts, China will continue to boom.
Exciting new buildings, designed by the world’s most famous architects, will make Beijing and Shanghai look like models of twenty-first century modernity.
More Chinese will be featured in annual lists of the world’s richest people.
And Chinese artists will command prices at international art auctions that others can only dream of.
To come back from near destitution and bloody tyranny in one generation is a great feat, and China should be saluted for it.
But China’s success story is also the most serious challenge that liberal democracy has faced since fascism in the 1930’s.
This is not because China poses a great military threat – war with the United States, or even Japan, is only a fantasy in the minds of a few ultra-nationalist cranks and paranoiacs.
It is in the realm of ideas that China’s political-economic model, regardless of its environmental consequences, is scoring victories and looking like an attractive alternative to liberal democratic capitalism.
And it is a real alternative.
Contrary to what some pundits say, Chinese capitalism is not like nineteenth-century European capitalism.
True, the European working class, not to mention women, did not have voting rights 200 years ago. But even during the most ruthless phases of Western capitalism, civil society in Europe and the US was made up of a huge network of organizations independent of the state – churches, clubs, parties, societies, and associations that were available to all social classes.
In China, by contrast, while individuals have regained many personal freedoms since the death of Maoism, they are not free to organize anything that is not controlled by the Communist Party.
Despite communism’s ideological bankruptcy, China has not changed in this regard.
The China Model is sometimes described in traditional terms, as though modern Chinese politics were an updated version of Confucianism.
But a society where the elite’s pursuit of money is elevated above all other human endeavors is a far cry from any kind of Confucianism that may have existed in the past.
Still, it’s hard to argue with success.
If anything has been laid to rest by China’s rising wealth, it is the comforting idea that capitalism, and the growth of a prosperous bourgeoisie, will inevitably lead to liberal democracy.
On the contrary, it is precisely the middle class, bought off by promises of ever-greater material gains, that hopes to conserve the current political order.
It may be a Faustian bargain – prosperity in exchange for political obedience – but so far it has worked.
The China Model is attractive not only to the country’s new coastal elites, but has global appeal.
African dictators – indeed, dictators everywhere – who walk the plush red carpets laid out for them in Beijing love it.
For the model is non-Western, and the Chinese do not preach to others about democracy.
It is also a source of vast amounts of money, much of which will end up in the tyrants’ pockets.
By proving that authoritarianism can be successful, China is an example to autocrats everywhere, from Moscow to Dubai, from Islamabad to Khartoum.
China’s appeal is growing in the Western world as well.
Businessmen, media moguls, and architects all flock there.
Could there be a better place to do business, build stadiums and skyscrapers, or sell information technology and media networks than a country without independent trade unions or any form of organized protest that could lower profits?
Meanwhile, concern for human or civic rights is denigrated as outmoded, or an arrogant expression of Western imperialism.
There is, however, a fly in the ointment.
No economy keeps growing at the same pace forever.
Crises occur.
What if the bargain struck between the Chinese middle classes and the one-party state were to fall apart, owing to a pause, or even a setback, in the race for material wealth?
This has happened before.
The closest thing, in some ways, to the China Model is nineteenth-century Germany, with its industrial strength, its cultivated but politically neutered middle class, and its tendency toward aggressive nationalism.
Nationalism became lethal when the economy crashed, and social unrest threatened to upset the political order.
The same thing could happen in China, where national pride constantly teeters on the edge of belligerence towards Japan, Taiwan, and ultimately the West.
Aggressive Chinese nationalism could turn lethal, too, if its economy were to falter.
This would not be in anyone’s interest, so we should wish China well in 2008, while sparing a thought for all the dissidents, democrats, and free spirits languishing in labor camps and prisons.
We should hope that they will live to see the day when the Chinese, too, will be a free people.
It might be a distant dream, but dreaming is what New Year’s is all about.
The Young General’s Old Tricks
TOKYO – Brinkmanship seems to be congenital in North Korea.
Under the late Kim Jong-il’s pudgy young successor – his third son, Kim Jong-un, dubbed “the Young General” – threats and mendacity still mark the Hermit Kingdom’s diplomacy.
With North Korea’s announcement of plans to use an Unha-3 rocket to launch its Bright Star-3 satellite into earth orbit in mid-April, the newest threat is a continuation of an old one.
Indeed, it signals a quick demise for the agreement reached with the United States just weeks ago.
The decision to launch the satellite, which had been planned by Kim Jong-il, is clearly intended to provide a “heroic” martial achievement for a new leader who lacks any military experience.
The regime aims to boost North Korea’s international prestige and domestic morale simultaneously, with the population supposedly keen to support this show of the country’s technological and military might.
And, no surprise, North Korea’s leaders also claim that what they propose to launch is a “peaceful” satellite.
But no one, particularly in the region, where North Korean missiles pose the gravest threat, accepts this claim at face value.
It is clear that the rocket to be launched is effectively a long-range ballistic missile, which might be able to reach Guam, the site of an important US military base.
So doubtful is the world of North Korea’s claim of peaceful intent that not only did the United Nations, South Korea, the US, Japan, and the European Union immediately express concern; so did China and Russia – perhaps the only two countries in the world that are on good terms with the Kim regime.
Despite the international community’s almost unanimous demand for restraint, North Korea is highly unlikely to roll back its launch plans.
Halting such missile tests is simply not an option for a regime whose only claim to legitimacy is the military threat that it poses to others.
The announcement of the forthcoming launch is timed, as always seems to be the case with North Korea’s provocations, to the regime’s need for food and funds from around the world to prevent the reemergence of mass starvation at home.
Moreover, 2012 is a special year for North Korea, starting with the 70th anniversary of Kim Jong-il’s birth on February 16.
That occasion will be followed by the 100th anniversary of Kim Il-sung’s birth on April 15 and the 80th anniversary of the creation of the People’s Army on April 25.
The country’s undernourished masses are not being invited to the capital, Pyongyang, for the extravagant parades that will be held at enormous cost.
The missile launch, it seems, will have to suffice for them.
The regime uses food as the currency of its domestic power and foreign policy.
For the commemoration of Kim Jong-il’s birthday in February, a kilogram of fish was provided to residents in one district, but nowhere else.
At the same time, the regime sought 240,000 tons of nutritional support in its recent negotiations with the US and South Korea, though the North was forced to return 30,000 tons of rice from a previous food-aid package as part of its recent agreement with the US.
Indeed, the North lets few diplomatic occasions pass without strong-arming its interlocutors for more.
For Kim Jong-un, even a meeting with Japanese officials in Ulan Bator, Mongolia’s capital, to discuss the return of Japanese women who went to North Korea with their Korean husbands thinking that they were journeying to a socialist paradise, served as a platform to secure food aid from Japan.
The negotiations were to be held between Song Il-ho, North Korea’s ambassador responsible for normalizing relations with Japan, and Hiroshi Nakai, a former minister who negotiates officially for the release of Japanese citizens abducted by the North.
But Nakai was unable to leave Tokyo, and a university professor replaced him as Japan’s negotiator.
Rank-conscious North Korea would normally send a lower official than Song if his counterpart were substituted, but no change was made, so desperate is the North for food.
North Korea then asked Japan for economic aid and food supplies in exchange for returning not only the Japanese wives in question, but also seven Japanese known to have been abducted by the North.
The Japanese aid, like the ransom paid to a kidnapper, must be provided by April 15, just in time for the commemoration of Kim Il-song’s birth – a clear indication of North Korea’s true intentions, and desperation.
And now, given the potential cost of scuttling the recent agreement with the US, the decision to launch a long-range missile takes that desperation a step further.
In fact, it has been suggested that the launch is intended to be a demonstration to Iran of the North’s missile prowess, as the Islamic Republic could become a customer for the illicit missile and nuclear-technology sales that are one of the regime’s few sources of hard currency.
Thus, the North Korean drama, now starring Kim Jong-un, plays on, relying on extorted proceeds from manufactured crises abroad to finance spectacular kitsch and brutal repression at home.
It is up to China, the real director of the North Korean production, to drop the curtain on this abominable show and its rogue star.
Thinking Computers Must Hallucinate, Too
Creating a computer that "thinks" is one goal of artificial intelligence research.
In 1950, the great British mathematician Alan Turing guessed that "thinking computers" would arrive by 2000.
But computers capable of simulating human thought processes are no closer today than they were then, because we put science before common sense.
Put simply, we failed to notice obvious and important facts about the nature of thought that exist right before our eyes.
Philosophy is intended to show us facts that are so obvious that we might miss them.
Most philosophers, it seems, have been asleep on the job for a long time.
Consider four familiar situations.
In one, you are thinking about a problem - say, what pension plan you should join - logically and analytically.
In the second, you are thinking casually, drawing on experience rather than analysis.
(My computer is stuck.
The last time this happened, I fixed it by doing such and such;
I'll try that again.)
In the third, you are looking out a window, letting your mind wander.
Finally, you are asleep and dreaming.
The single most important fact about thought follows from an obvious observation: these four styles are connected.
We can label them "analysis," "common sense," "free association," and "dreaming."
But the key point is that they are four points on a single continuous spectrum, with analysis at one end and dreaming at the other.
Psychologists and computer scientists like to talk about analysis and common sense as if they were salt and steel, or apples and oranges.
We would do better to think of them as red and yellow, separated not by some sharp boundary, but by a continuous range of red-oranges and orange-yellows.
Most people do their best analytic thinking when they are wide-awake.
As your alertness declines, your analytic ability declines - and you rely less on analysis, more on common sense.
As your alertness declines further, your mind starts to wander.
At some point you are looking out the window, free-associating.
Falling asleep is also a gradual transition.
(One of experimental psychology's most interesting findings is that people start to dream before they fall asleep, while they are still physiologically awake.)
Free-association and dreaming are blue and violet, with a beautiful spectrum of violet-blues in between.
To understand color, it is not enough to understand red and yellow, or blue and violet.
Understanding color requires understanding the entire spectrum.
Likewise, to understand thought, it is not enough to understand "analysis" and "common sense," or "free association" and "dreaming."
Understanding thought implies understanding the entire cognitive spectrum.
It is therefore nonsense to believe that we can simulate thought on a computer without first understanding and simulating all of its component hues.
Dreaming, for example, is merely hallucinating while you sleep.
So, to put the same point another way, no thinking computer is possible until we can build a computer that hallucinates.
To understand the mind, we can conceive of it as being equipped with an imaginary dial marked "mental focus" or "alertness" or "attention."
(I do not know the physiological basis of "mental focus"; physiologists cannot tell me, because most of them also do not know what "mental focus" is.
It is right in front of their noses, too close to notice.)
Different people have different "cognitive personalities."
Some are more comfortable than others thinking analytically, with their dials at "high focus."
Everyone's focus oscillates during the day.
Your analytic abilities decline as your "wide awakedness" declines.
You cannot fall asleep unless your focus setting dips below some threshold.
(If we understood the physiological basis of mental focus, we would almost certainly have a better understanding about sleep disorders.)
Psychologists tried for generations to understand creativity, which is distinct from analytical thinking.
Creativity evidently depends on inventing analogies.
If you are good at analogies ("that fluttering oak leaf reminds me of a butterfly wing"; "that 17th-century clock is a computer with a round screen"), you have a basis for creative thinking, for approaching old problems in new ways.
But how do we invent analogies?
The answer must have something to do with the thought-spectrum.
Notice the similarity between falling asleep and thinking creatively - no matter how hard you try, you can not force yourself to do either.
You cannot make yourself fall asleep by concentrating.
To fall asleep you must un -concentrate.
Various studies have reached the same conclusion about analogies.
Creative thinkers are most productive not when they are concentrating but when they are un -concentrating, when they are thinking not about the problem to be solved but about something else.
So, to think analytically you must set your "focus" to maximum; to think creatively, you must let your focus setting decline - but not so far that you fall asleep.
To complete the picture, we notice that emotion becomes increasingly important as "focus" falls.
Emotions then become "signatures" or "encodings" of complex thoughts.
When two ideas seem unrelated, but make you feel the same way, you have a basis for connecting them - and for inventing a new analogy.
Viewed from this perspective, it appears self-evident that no "thinking computer" whose focus is permanently set on high can come close to simulating human thought.
Thinking the Unthinkable in Europe
CAMBRIDGE – When Greece was bailed out by a joint eurozone-IMF rescue package back in May, it was clear that the deal had bought only a temporary respite.
Now the other shoe has dropped. With Ireland’s troubles threatening to spill over to Portugal, Spain, and even Italy, it is time to rethink the viability of Europe’s currency union.
These words do not come easily, as I am no Euroskeptic.
Unlike others, such as my Harvard colleague Martin Feldstein, who argue that Europe is not a natural monetary area, I believed that monetary union made perfect sense in the context of a broader European project that emphasized – as it still does – political institution-building alongside economic integration.
Europe’s bad luck was to be hit with the worst financial crisis since the 1930’s while still only halfway through its integration process.
The eurozone was too integrated for cross-border spillovers not to cause mayhem in national economies, but not integrated enough to have the institutional capacity needed to manage the crisis.
Consider what happens when banks in Texas, Florida, or California make bad lending decisions that threaten their survival.
If the banks are merely illiquid, the Federal Reserve in Washington is ready to act as a lender of last resort.
If they are judged to be insolvent, they are allowed to fail or are taken over by federal authorities, while depositors are made whole by the Federal Deposit Insurance Corporation.
Similarly, in case of bankruptcy, federal laws and courts readily adjudicate claims among creditors, and do so without regard to state borders.
Regardless of the outcome, private debt is not socialized by state governments (but by the federal government, if at all), and does not threaten public finances at the state level.
State governments in turn have no legal power to abrogate debt contracts vis-à-vis out-of-state creditors, and no incentive to do so (given the help they get from the federal government).
So, even in the throes of a financial crisis, banks and non-financial firms can continue to borrow if their balance sheets are sound, uncontaminated by the “sovereign risk” of their state government.
Meanwhile, the federal government makes up for a good chunk of the drop in state incomes by transfers or reduced taxes.
Workers who nonetheless have it bad can move easily to better-performing states without worries about language differences or culture shock.
Almost all of this happens automatically, without long, contentious negotiations among state governors and federal officials, assistance from the IMF, or calling into question the existence of the United States as a unified political-economic entity.
So the real problem in Europe is not that Spain or Ireland has borrowed a lot, or that too much Spanish and Irish debt sits on banks balance sheets elsewhere in Europe.
After all, who cares about Florida’s current-account deficit – or even knows what it amounts to?
No, the real problem is that Europe has not created the union-wide institutions that an integrated financial market requires.
This reflects the absence of adequate political institutions at the center.
The European Union has taught us valuable lessons over the last few decades: first, that financial integration requires eliminating volatility among national currencies; next, that eradicating exchange-rate risk requires doing away with national currencies altogether; and now, that monetary union is impossible, among democracies, without political union.
It should have been expected that the political side of the equation would take time to fall into place.
It is easy to blame European politicians for lack of leadership.
But let us not underestimate the magnitude of the task that European governments took on.
In fact, the closest analogue to it is America’s own historical experience with building a federal republic.
As the long American struggle for “states’ rights” – and indeed the Civil War – shows, creating a political union out of a collection of self-governing entities is hardly a smooth or speedy process.
States naturally cherish their sovereignty.
Worse still, economic union itself can fan the fires of nationalism and endanger political integration.
It places strains on each country’s institutions (seen in the pressure on Europe’s welfare states), breeds resentment against foreigners (witness the recent success of anti-immigration parties), and renders financial crises originating from abroad both likelier and costlier (as the current situation makes all too clear).
Alas, it may now be too late for the eurozone.
Ireland and the southern European countries must reduce their debt burden and sharply enhance their economies’ competitiveness.
It is hard to see how they can achieve both aims while remaining in the eurozone.
The Greek and Irish bailouts are only temporary palliatives: they do nothing to curtail indebtedness, and they have not stopped contagion.
Moreover, the fiscal austerity they prescribe delays economic recovery.
The idea that structural and labor-market reforms can deliver quick growth is nothing but a mirage.
So the need for debt restructuring is an unavoidable reality.
Even if the Germans and other creditors acquiesce in a restructuring – not from 2013 on, as German Chancellor Angel Merkel has asked for, but now – there is the further problem of restoring competitiveness.
This problem is shared by all deficit countries, but is acute in Southern Europe.
Membership in the same monetary zone as Germany will condemn these countries to years of deflation, high unemployment, and domestic political turmoil.
An exit from the eurozone may be at this point the only realistic option for recovery.
A breakup of the eurozone may not doom it forever.
Countries can rejoin, and do so credibly, when the fiscal, regulatory, and political prerequisites are in place.
For the moment, the eurozone may well have reached the point where an amicable divorce is a better option than years of economic decline and political acrimony.
Thirty Years of “Test-Tube” Babies
MELBOURNE – Louise Brown, the first person to be conceived outside a human body, turned 30 last year. The birth of a “test-tube baby,” as the headlines described in vitro fertilization was highly controversial at the time.
Leon Kass, who subsequently served as chair of President George W. Bush’s Council on Bioethics, argued that the risk of producing an abnormal infant was too great for an attempt at IVF ever to be justified.
Some religious leaders also condemned the use of modern scientific technology to replace sexual intercourse, even when it could not lead to conception.
Since then, some three million people have been conceived by IVF, enabling otherwise infertile couples to have the child they longed for.
The risk of having an abnormal child through IVF has turned out to be no greater than when parents of a similar age conceive though sexual intercourse.
However, because many IVF practitioners transfer two or three embryos at a time to improve the odds of a pregnancy occurring, twins and higher multiple births are more common, and carry some additional risk.
The Roman Catholic Church has not moved away from its opposition to IVF.
In a recently released instruction, Dignitas Personae, the Church’s Congregation for the Doctrine of the Faith objects to IVF on several grounds, including the fact that many embryos are created in the process, and few survive.
This outcome is not, however, very different from natural conception, for the majority of embryos conceived by sexual intercourse also fail to implant in the uterine wall, with the woman often not even knowing that she was ever “pregnant.”
In addition, the Vatican objects to the fact that conception is the result of a “technical action” rather “a specific act of the conjugal union.”
But while any couple would prefer to conceive a child without the intervention of doctors, that option is not available for infertile couples.
In those circumstances, it is harsh to say to a couple that they cannot have their own genetic child at all.
It also appears contrary to the broad thrust of the Church’s teaching about marriage and the family as the appropriate context for rearing children.
Dignitas Personae says that new human life should be “generated through an act which expresses the reciprocal love between a man and a woman.” But if by that the Church is referring to sexual intercourse, then it surely has an unduly narrow view of what kinds of acts can express reciprocal love between a man and a woman.
Taking the several inconvenient and sometimes unpleasant steps required to have a child together by means of IVF can be, and often is, the result of a much more deliberate and reciprocally loving act than sexual intercourse.
A better objection to IVF is that in a world with millions of orphaned or unwanted children, adoption is a more ethical way of having a child.
If that is the argument, however, why should we single out couples who use IVF?
Why not, for example, criticize Jim Bob and Michelle Duggar, the Arkansas couple who recently had their 18th child?
Yet Michelle Duggar was named “Young Mother of the Year” in Arkansas in 2004, when she had already given birth to 14 children.
I haven’t noticed the Vatican telling them that they should be adopting instead of conceiving so many children.
Religious opposition notwithstanding, the use of IVF by infertile couples of normal reproductive age has been widely accepted around the world, and rightly so.
But in countries where the Church’s influence remains strong, IVF’s opponents are fighting back.
In Poland, for example, proposed new legislation would drastically restrict its availability.
Elsewhere, the ethical debate is not about IVF itself, but the limits of its use.
Last November, Rajo Devi, a 70-year-old Indian woman, became the world’s oldest mother, thanks to IVF.
She and her 72 year-old husband have, she says, longed for a child through 55 years of marriage.
Her husband’s sperm appears to have been used, but news reports are unclear about the source of the egg.
Some will find it grotesque to become a mother at an age when most women are grandmothers, but the more significant question is what kind of care such children will have if their parents die or become incapable of rearing them.
Like many people in rural India, Devi lives in an extended family with other relatives, so she is confident that there would be others to bring up her child if necessary.
But, as this example suggests, the impact of parental age on a child’s welfare will vary from one culture to another.
Becoming a mother at 70 is more acceptable for someone living in a joint family than it would be for Western couples living in their own home without close relatives or friends nearby.
This Recovery is Different
BRUSSELS – The misguided belief that “this time is different” led policymakers to permit the credit boom of the early 2000’s to continue for too long, thus preparing the ground for the biggest financial crisis in living memory.
But now, when it comes to recovery, the belief that this time should not be different might be equally dangerous.
Many policymakers and economists have observed that the recovery from the 2007-2008 financial crisis has been much slower than most recoveries of the post-war era, which needed only a little more than a year, on average, to restore output and employment to their previous levels.
By this standard, the current recovery is unacceptably slow, with both output and employment still below the previous peak.
Policymakers thus feel justified in using all available macroeconomic levers to achieve a recovery that resembles those of the past.
In doing so, officials are reluctant to take into account that the recent crisis resulted from an unprecedented credit boom gone bust.
To some extent, it should have been logical to expect an unprecedented upturn as well.
When the crisis erupted, many hoped for a V-shaped recovery, notwithstanding a substantial body of research showing that recoveries from recessions caused by a financial crisis tend to be weaker and slower than recoveries from “normal” recessions.
The observation that recoveries following a financial crisis are different suggests that standard macroeconomic policies might not work as one would usually expect.
And a transatlantic comparison suggests that this may indeed be the case.
One would expect that the shock from the financial crisis should be comparable for the United States and the eurozone, given that they are of similar size, exhibit a similar degree of internal diversity, and experienced a similar increase in house prices (on average) in the years preceding the bust.
Moreover, the relative increase in debt (leverage) in the financial system was similar on both sides of the Atlantic.
And, indeed, US economic performance has been very similar to that of the eurozone since the start of the crisis: GDP per capita today is still about 2% below the 2007 level on both sides of the Atlantic.
The unemployment rate in the US and the eurozone has increased by about the same amount as well – three percentage points.
Of course, one can point to particular countries in Europe that are mired in recession.
But the US also has depressed areas.
For Ireland and Spain, read Nevada and California (and, for Greece, read Puerto Rico).
The proper comparison is thus between the average of two continental-sized economies, both of which are characterized by considerable internal diversity.
These similarities in economic performance are striking, given that macroeconomic policy in the US and the eurozone has been so different.
The US let its fiscal deficit rise above 10% of GDP, compared to less than 6% of GDP in the eurozone.
Measured over a five-year period (2007-2012), the US has thus not done any better than the eurozone, although it has relied on a much larger dose of fiscal expansion.
In the US (and the United Kingdom), the general government deficit today is still around 8% of GDP, compared to a little more than 3% of GDP in the eurozone, and the US debt/GDP ratio has increased by more than 41 percentage points, compared to “only” 25 points in the eurozone.
In fact, the economy that has imbibed the strongest dose of expansionary policy has recovered less: GDP per capita in the UK today is still 6% below the 2007 level.
Of course, one could argue that the UK was particularly exposed to the bust, because financial services make up a large part of its GDP.
But the fact remains that its economy, supposedly the most flexible in Europe, has not recovered from the shock five years later, despite massive fiscal and monetary stimulus, coupled with a substantial devaluation.
On balance, it thus seems that this time – or, rather, this post-crisis environment – really is different, and that macroeconomic policies have done little to improve matters.
Countries like the US and the UK, which are accumulating debt at a record pace, are betting that deficit spending will eventually pay off in a stronger economy.
But they risk ending up with debt/GDP ratios north of 100%, which would leave them at the mercy of financial markets should sentiment turn against them.
History suggests that interest rates will not remain at record-low levels indefinitely, and that when change comes, it might be abrupt.
Thailand’s Democratic Disorder
BANGKOK – From Thailand to Turkey to Ukraine, the relationship between ruling majorities and electoral minorities has become combustible – and is threatening to erode the legitimacy of democracy itself.
The unfolding crisis in Bangkok – where a political minority has taken to the streets to bring down Prime Minister Yingluck Shinawatra’s democratically elected government – is a case in point.
Yingluck’s Pheu Thai Party (PTP) won an outright majority in Thailand’s 2011 general election, gaining 265 MPs in the 500-member lower house.
But the opposition Democratic Party – which returned 159 MPs, mainly from Bangkok and southern Thailand – has lately been staging protests in the capital.
The so-called “People’s Committee for Democratic Reform” – led by former Democratic Party MP Suthep Thaugsuban and supported by the Bangkok-based establishment – has effectively attempted to stage a coup.
The protests began when the government tried to enact amnesty legislation that would have overturned the conviction of former Prime Minister Thaksin Shinawatra – Yingluck’s brother and the PTP’s founder, who was overthrown by the military in 2006 – on charges of corruption and abuse of power.
(It also would have superseded the murder charges brought against the Democratic Party’s leader, former Prime Minister Abhisit Vejjajiva.)
But Yingluck’s subsequent attempt to backtrack on the amnesty measure failed to mollify the opposition.
In fact, the street protests intensified, fueled by a new grievance.
The Yingluck government had refused to accept the Constitutional Court’s ruling against a bill to change the senate from a half-appointed to a fully elected chamber.
The government asserted that the court did not have jurisdiction over constitutional amendments.
The People’s Committee viewed this rejection as an attempt to pressure the king into countersigning the law – and thus as a threat to royal prerogatives and the king’s exalted role in Thailand.
The People’s Committee’s position deserves explanation, if not agreement.
Since the turn of the century, Thaksin’s party machines, powered by his populist policies, have overcome constant challenges – from both the military and the Constitutional Court – to beat the conservative-royalist Democrats in every election.
Opposition forces, fed up as much with Thaksin’s corrupt practices as with his longstanding popularity, have recently begun seizing government ministries and calling for a royally appointed government.
If they succeed, PTP supporters will likely descend on Bangkok, much as they did in 2009-2010, after a “judicial coup” dissolved Thaksin’s People’s Power Party, the PTP’s predecessor, and the Democrats formed a coalition government.
But, this time, the protesters will be even angrier, and the stakes will be much higher, because the monarchy’s role in Thailand’s electoral democracy will be called into question.
The mere plausibility of such an outcome underscores Thailand’s deep political polarization.
The PTP’s supporters are happy with a system that grants them a political voice – indeed, predictable electoral majorities – and that safeguards their rights.
But the minority – which comprises up to two-fifths of the electorate – is at a loss.
Its legitimacy and influence depend not on winning electoral majorities, but on its strong alliances with the military, bureaucracy, and judiciary in defense of a traditional hierarchy that places the king at its apex.
Making matters worse, voters on both sides are tuning in only to views with which they agree, rather than attempting to understand and reconcile opposing arguments.
Social media – the much-lauded catalyst of democratization in authoritarian countries – has exacerbated the trend toward polarization in Thailand, just as it has in other electoral democracies that are struggling with a widening majority-minority divide, like Turkey and Malaysia.
In emerging democracies, electoral minorities tend to be tied to the old establishment, and often oppose change led by popular upstarts.
Feeling marginalized and resentful, they may turn to public platforms like social media and the streets to advance their causes and undermine their opponents’ authority.
The proliferation of information technology, together with the unprecedented popular participation that it has fueled, means that electoral minorities have a growing number of increasingly powerful tools at their disposal to organize movements aimed at paralyzing their countries’ governments and even shortening leaders’ terms in office.
Indeed, with so much seemingly at stake, a four- or five-year term may seem too long to wait for change.
But, while the right to peaceful protest is critically important in a democracy, electoral minorities should not use endless demonstrations to take the political system hostage.
In order to create a peaceful, stable, and effective democratic system, electoral minorities must accept the ballot box as the arbiter of political legitimacy.
At the same time, majorities should not view an electoral victory as a license to act without regard for minority concerns.
While the government must deliver for its constituents, it must also protect its opponents’ rights.
To this end, Thailand urgently needs a new social contract that allows elected representatives to do their jobs, without marginalizing the establishment-based minority.
Increasingly complex majority-minority dynamics are shaping the democratization prospects of a number of countries, and could influence democracy’s durability as a system of government.
Thailand’s experience suggests that efforts to subvert the system by thwarting the will of the majority may ultimately be fruitless, though not before imposing extremely high costs on everyone.
Climate and Competitiveness
BERLIN – As Europe’s debt crisis fades, another economic disaster seems to be looming – the price of energy.
Since the early 2000’s, average electricity prices for Europe’s industries have more or less doubled, and European companies now pay twice as much for gas as their US competitors do.
Are Europe’s highly ambitious climate policies – which seek to increase costs for “bad” energy sources – destroying the continent’s industrial base?
At first glance, the numbers seem to support the doomsayers.
How can such a huge price gap not have an impact on competitiveness?
But if high energy prices lead to declining exports, how is it that Germany, which boasts some of the world’s most ambitious climate policies, has doubled its exports since 2000?
In fact, empirical evidence shows that in many cases, further reducing carbon-dioxide emissions might help to make industries more competitive.
Exploring this potential could open up significant opportunities not only to combat climate change, but also to foster Europe’s long-term economic robustness.
Since 2005, when the European Union introduced its Emissions Trading System, German industry has achieved massive gains in market share, despite energy prices having risen much faster than in the US and elsewhere.
According to OECD estimates, the relative export performance of high-cost Germany increased by 10% from 2005 to 2013, while US exports grew only 1.2% faster than demand in the rest of the world.
In 2013, both German and US exports fell slightly in relative terms – hardly a sign of an energy-driven competitiveness divide.
The same holds true, though at a more modest level, even for energy-intensive industries, like chemicals.
Despite already-high and rising energy prices, Europe’s chemical industry has grown at about the same rate as the rest of the economy since 1995.
Today, EU chemical companies specialize in high-value products, and Europe exports much more of them than it imports.
The reason is simple: there is more – much more – to competitiveness than energy prices.
Indeed, estimates for Germany show that for most of its industrial base, energy costs account for a mere 1.6% of gross value added.
Thus, even rapidly rising energy prices imply only a limited additional cost burden for firms.
Of course, this burden is higher for industries such as chemicals.
But energy-intensive industries usually benefit from exemptions on carbon charges.
And, even in these sectors, competitiveness must be defined in a much broader sense than that given simply by comparing cost statistics.
For example, factors like highly qualified labor, or the benefits of being integrated into well-functioning clusters, probably play a more important role.
Clearly, such considerations provide no guarantee that rising energy prices will not at some point seriously challenge European competitiveness.
Indeed, new investment in chemical plants has grown only slowly for years now.
But, while this risk must be taken seriously, history suggests that there may well be a way out that does not require rolling back climate policies.
What is notable is that rising energy prices have been accompanied not only by relatively robust competitiveness, but also by huge reductions in CO2 emissions.
Europe’s chemical industry has halved its greenhouse-gas emissions compared to 1990, while increasing output by 20%.
This suggests that rapidly reducing emissions may sometimes even help to maintain a firm’s competitiveness.
In a pilot study on specific chemical products for the European Climate Foundation, experts from McKinsey identified the potential for a further 50-75% reduction in CO2 emissions.
Moreover, in an estimated 60-70% of cases, exploring the additional abatement opportunity would have no effect – or would even strengthen – the industry’s competitiveness.
This is because greater reliance on recycling, for example, reduces costs – and thus enhances companies’ competitiveness – while reducing emissions and driving new approaches like cross-sector innovation.
It would certainly not be wise to allow Europe’s energy bill to explode in the name of ambitious climate policies.
There are smarter ways to reduce emissions than just raising costs for industry and consumers.
But it would be equally senseless to push for less ambitious policies, thereby stalling progress in the fight against climate change, without being sure that doing so would improve European competitiveness.
The new paradigm should focus on finding ways to reduce CO2 emissions in ways that ultimately help to produce better products at lower cost.
This will also help European producers capture new markets in emerging countries, which will increasingly demand the high-value chemical products that Europe already produces competitively.
The last thing a crisis-weary Europe needs is a new competitiveness gap.
But ambitious climate targets, as Germany and other successful European economies have shown, are not the problem.
They could even be part of the solution.
Threading the Fiscal Needle
PALO ALTO – Elections often turn on the state of the economy, especially in hard times.
When growth and jobs are down, voters throw out incumbents – whether Spanish leftists, French rightists, or Dutch centrists.
The United States is no exception.
Three years into the Great Depression, Herbert Hoover was trounced by Franklin Delano Roosevelt.
In 1980, following a severe bout of stagflation, Ronald Reagan routed Jimmy Carter.
At the same time, economic performance depends to a considerable extent on economic policy.
The Great Depression was intensified by poor monetary policy, tax hikes, and protectionist trade policies.
Likewise, loose US monetary policy in the middle of the last decade helped to set the stage for the Great Recession by contributing significantly to an explosion of leverage and fueling the housing bubble that burst in 2007-2008.
The outcome of two related policy battles will be key to the economic and political outlook in both the US and Europe.
The first is between “austerity” and “growth” –&nbsp;that is, short-term deficit reduction and additional fiscal stimulus.
Many on the left, on both sides of the Atlantic, argue that more, not less, government spending is required to lift their economies out of recession.
Those on the right believe that governments’ top priority should be fiscal consolidation.
In Europe, large deficits and exploding debt-to-GDP ratios have alarmed creditors and provoked political tension.
In particular, Germany demands more fiscal belt-tightening from heavily indebted Southern European countries, whose unions (and voters) are rejecting further austerity.
While the US has thus far avoided the bond market’s wrath, American political leaders confront the same problem of debt and fiscal sustainability. &nbsp;
The second battle involves long-run structural issues: slowing the growth of government spending, reforming taxes, and increasing labor-market flexibility.
In Europe, for example, raising the retirement age for public pensions and shrinking government employment would curtail welfare-state excesses.
In the US, Reagan’s victory in 1980 appeared to signal that America would stop well short of the European social-welfare model.
But President Barack Obama and his congressional allies have rejected the consensus that government should be only a last resort for those in need, in favor of greater dependence, for both individuals and firms, on entitlement programs and other public spending, targeted tax breaks, regulations, and loans.
Separating the budget’s effects on the economy from those of the economy on the budget is tricky.
There are several cases – Ireland and Denmark in the 1980’s, for example – in which fiscal consolidation helped to expand the economy in the short run, as lower interest and exchange rates boosted confidence enough to stimulate demand.
Of course, if many of the world’s economies attempt to consolidate simultaneously, with interest rates already low and some of the largest in a monetary union, such a favorable result is less likely.
But the evidence on whether additional deficit-financed spending would quickly revive economic growth is mixed.
In a recent survey, “Fiscal Policy for Economic Growth,” I concluded that short-run multipliers – the total change in economic activity resulting from higher government spending – could theoretically be as large as two when the central bank has reduced its target interest rate to zero.
In other words, one dollar spent by the government could boost GDP by two dollars in the very short run.
The catch is that the multiplier turns negative by year two: extra government spending contracts, rather than expands, medium-term and long-term economic growth.
Moreover, the short-run effect is lower in highly indebted countries, and can even be negative during economic expansions if households and firms, expecting higher taxes to pay for future spending, save, rather than spend, the cash.
Postponing fiscal consolidation risks aborting it, but consolidating too aggressively risks temporarily hindering growth.
But those now demanding further deficit-financed stimulus must confront considerable evidence that an overhang of public debt impedes growth for a long time.
In a recent paper following up on their book This Time is Different, the economists Carmen Reinhart and Kenneth Rogoff concluded that debt/GDP ratios above 90% tend to be associated with an annual growth slowdown of a full percentage point for 23 years.
Thus, a debt overhang cumulatively costs more in lost income than a deep recession does.
Wise policy simultaneously considers short-, medium-, and long-term effects.
Both Europe and the US badly need long-run reforms, for example, of public pensions and health care.
Europe requires structural labor-market reform and must resolve its sovereign-debt overhang, banking crises, and the euro’s future.
America must reform its tax code to raise revenue across a wider array of people and economic activity (half the US population pays no federal income tax, and the tax code either excludes or favorably treats many income sources).
Over the next several years – the medium term – all countries should implement difficult-to-reverse fiscal consolidation, which would persuade the private sector that a gradual or delayed adjustment, primarily on the spending side of the budget, will occur.
Successful consolidation generally relies on spending cuts rather than tax increases – indeed, at a ratio of five or six to one.
The US in the 1980’s and 1990’s reduced spending by 5% of GDP and balanced its budget while growing strongly.
Canada, in the past two decades, has decreased spending by 8% of GDP and similarly prospered.
In the short run, spending flexibility is appropriate only if medium- and long-term measures are in place.
That compromise – between Germany and Southern Europe, and between US Republicans and Democrats – should be economically and politically feasible.
With many citizens now struggling, political leaders face a daunting task: adopt credible medium- and long-term reforms without derailing the economy in the short term.
They have little economic – and perhaps even less political – margin for error.
Three Cheers for Brazil
World markets seem to be turning up their nose at Brazil right now.
They may be as mistaken about Brazil as world football experts were earlier this summer.
When the World Cup began, you will recall, the Brazilian team was deemed talented but flawed.
Yet somehow Brazil again became the World Cup champion.
The country, too, may prove equally surprising and resilient.
Indeed, in recent years, Brazil has created a vibrant democracy with a strong economy.
It deserves a vote of confidence from investors and political leaders alike.
As in any vibrant democracy, differences in views exist.
Not all Americans are enthused about President Bush's rapid conversion of trillion dollar surpluses into deficits, nor does a majority embrace his proposals to privatize America's social security system, which has done so much to eliminate poverty among America's elderly.
On key issues within Brazil, however, a broad political consensus (not unanimity, but no one should expect that!) exists, and this includes all the major contenders in Brazil's forthcoming presidential election in October.
There is a consensus, for instance, on sound fiscal and monetary policies: no one wants to return to the hyperinflation of earlier decades.
Brazil's monetary policy has been managed extraordinarily well by Arminio Fraga (my former student), but behind him is a strong institution , with the analytic capacities of a first world Central Bank.
The initiative that Brazil's Central Bank made to increase transparency and openness are a model for central banks throughout the world--in the developed world as well as the less developed.
To be sure, there may be disagreements about fine-tuning the economy, but such are routine in any democracy.
There is also a broad consensus that while markets are at the center of a successful economy, there is an important role for government.
Brazil's government, for instance, pushed one of the most successful telecom privatizations, but also pushed for stronger competition and regulatory policies.
Unlike America, when the country faced an electricity crisis, it didn't blithely sit by, saying let market forces (which in the US, meant market manipulation by Enron and others) "handle" the matter; rather, the government came in with strong actions.
As an American, I looked on in envy as Brazil managed its way through a difficult situation.
Brazil is a country of extraordinary human and physical resources.
It may be called an emerging market, but it has first rate financial, educational and research institutions.
Discussions about economics in Sao Paulo are as sophisticated as in New York.
University seminars in Rio are as lively as those in Cambridge, Mass or Cambridge U.K.
It produces one of the finest airplanes in the world--so good that competitors in the more advanced industrial countries have tried to impose trade barriers.
But Brazil, for all of its strengths, has one critical weakness: a high level of inequality.
It is a weakness that (unlike in America) also carries a broad consensus: most agree that it needs to be addressed, and that government has the obligation to do so.
The current government has made extraordinary strides in education.
Ten yeas ago, 20% of Brazil's school age children were not attending school; now that number is down to 3%.
Whoever wins the election almost certainly will continue to make further investments in education.
Similarly, landless peasants are both an economic and a social problem, and the current administration has taken on vested interests to push forward on an exciting market-based land reform, one which has received support from the World Bank.
Whoever wins the election will in all likelihood pursue a strong land reform program.
With the AIDS epidemic, Brazil faces challenges to its health system, and while one may agree or disagree with the particular approaches taken by the Brazilian government, this much is clear: everyone recognizes that this is a major responsibility of government.
Moreover, whoever wins the election almost surely will reflect that broad national consensus.
Brazil's debt to GDP ratio is moderate--better than in the US at the time Bill Clinton became president, far better than that of Japan and several European countries.
Unlike its neighbor to the south (prior to Argentina's crisis), Brazil has a flexible exchange rate system: its currency is not overvalued--if anything, it is undervalued.
With strong exports, it should have no problem meeting its debt obligations, so long as interest rates do not soar to levels that turn a problem into a self-fulfilling prophecy.
Brazil has carved out a path that is not based on ideology or over-simplistic economics.
It seizes opportunities while confronting and dealing with harsh realities, whether these are lack of education, landlessness, or AIDS.
By successfully charting its own course, Brazil has created a broad domestic consensus behind a balanced, democratic, market economy.
Brazil's victory in the World Cup may have no connection with these reforms, but the creativity of that winning team does say a great deal about the spirit of the country.
Three Cures for Three Crises
A full-scale financial crisis is triggered by a sharp fall in the prices of a large set of assets that banks and other financial institutions own, or that make up their borrowers’ financial reserves.
The cure depends on which of three modes define the fall in asset prices.
The first – and “easiest” – mode is when investors refuse to buy at normal prices not because they know that economic fundamentals are suspect, but because they fear that others will panic, forcing everybody to sell at fire-sale prices.
The cure for this mode – a liquidity crisis caused by declining confidence in the financial system – is to ensure that banks and other financial institutions with cash liabilities can raise what they need by borrowing from others or from central banks.
This is the rule set out by Walter Bagehot more than a century ago: calming the markets requires central banks to lend at a penalty rate to every distressed institution that would be able to put up reasonable collateral in normal times.
Once everybody is sure that, no matter how much others panic, financial institutions won’t have to dump illiquid assets at a loss, the panic will subside.
And the penalty rate means that financial institutions can’t profit from the investment behavior that left them illiquid – and creates an incentive to take due care to guard against such contingencies in the future.
In the second mode, asset prices fall because investors recognize that they should never have been as high as they were, or that future productivity growth is likely to be lower and interest rates higher.
Either way, current asset prices are no longer warranted.
This kind of crisis cannot be solved simply by ensuring that solvent borrowers can borrow, because the problem is that banks aren’t solvent at prevailing interest rates.
Banks are highly leveraged institutions with relatively small capital bases, so even a relatively small decline in the prices of assets that they or their borrowers hold can leave them unable to pay off depositors, no matter how long the liquidation process.
In this case, applying the Bagehot rule would be wrong.
The problem is not illiquidity but insolvency at prevailing interest rates.
But if the central bank reduces interest rates and credibly commits to keeping them low in the future, asset prices will rise.
Thus, low interest rates make the problem go away, while the Bagehot rule – with its high lending rate for banks – would make matters worse.
Of course, easy monetary policy can cause inflation, and the failure to “punish” financial institutions that exercised poor judgment in the past may lead to more of the same in the future.
But, as long as the degree of insolvency is small enough that a relatively minor degree of monetary easing can prevent a major depression and mass unemployment, this is a good option in an imperfect world, this is a good option in an imperfect world.
The third mode is like the second: a bursting bubble or bad news about future productivity or interest rates drives the fall in asset prices.
But the fall is larger.
Easing monetary policy won’t solve this kind of crisis, because even moderately lower interest rates cannot boost asset prices enough to restore the financial system to solvency.
When this happens, governments have two options.
First, they can simply nationalize the broken financial system and have the Treasury sort things out – and re-privatize the functioning and solvent parts as rapidly as possible.
Government is not the best form of organization of a financial system in the long term, and even in the short term it is not very good.
It is merely the best organization available.
The second option is simply inflation.
Yes, the financial system is insolvent, but it has nominal liabilities and either it or its borrowers have some real assets.
Print enough money and boost the price level enough, and the insolvency problem goes away without the risks entailed by putting the government in the investment and commercial banking business.
The inflation may be severe, implying massive unjust redistributions and at least a temporary grave degradation in the price system’s capacity to guide resource allocation.
But even this is almost surely better than a depression.
Since late summer, the United States Federal Reserve has been attempting to manage the slow-moving financial crisis triggered by the collapse of America’s housing bubble.
At the start, the Fed assumed that it was facing a first-mode crisis – a mere liquidity crisis – and that the principal cure would be to ensure the liquidity of fundamentally solvent institutions.
But the Fed has shifted over the past two months toward policies aimed at a second-mode crisis – more significant monetary loosening, despite the risks of higher inflation, extra moral hazard, and unjust redistribution.
As Fed Vice Chair Don Kohn recently put it, “we should not hold the economy hostage to teach a small segment of the population a lesson.”
No policy makers are yet considering the possibility that the financial crisis might turn out to be in the third mode.
Three Iraqs, Not One
America's mounting difficulties in setting up a coherent form of government in Iraq, let alone a democratic one, inspire a question that most statesmen consider unthinkable: is it possible that there is no way to re-constitute Iraq as one state, and that alternative options must be considered, unpalatable as they may appear?
Like so many problems in the re-birth of states wounded by dictatorship--Eastern Europe is a good example--Iraq's difficulties have deep historical roots.
To blame everything on the heavy-handedness of the Americans is too simplistic and shallow, even if their mistakes have, indeed, been legion.
Iraq was established in the 1920's by the British, who occupied the region after the Ottoman Empire disintegrated at the end of WWI.
Their policies were dictated by British imperial interests, and gave no consideration to the wishes, interests, or characteristics of the local population.
What British imperial planners did was to stitch together three disparate provinces of the old Ottoman Empire and put at their head a prince from Hedjaz (now a part of Saudi Arabia).
The three provinces--Mosul, Baghdad, and Basra--each had very distinct characters and very different population structures.
Mosul had a Kurdish majority, with significant Assyrian-Christian and Turkoman minorities;
Baghdad was mainly Sunni; and Basra was predominantly Shi'ite.
Throwing such disparate groups into one body politic doomed the newly invented country to decades of strife and repression.
The old Ottoman Empire ruled these three provinces--as it ruled all of its imperial possessions--through its historically autocratic means.
The challenge facing the new Iraqi state was to try to create a non-despotic, relatively representative form of government in which all sectors of the population would find an expression of their political will.
This turned out to be an impossible mission.
For this reason Iraq--even before Saddam Hussein--always suffered the most repressive regime of any Arab state.
In a country where Shi'ites form the majority, the Sunnis--traditionally the hegemonic group in all Arab countries--were totally unwilling to allow any democratic process to jeopardize their rule.
A Shi'ite insurrection was brutally put down in the 1920's (with the help of the British Royal Air Force).
Similarly, Kurdish attempts at autonomy before WWII were drowned in bloody massacres of tens of thousands of innocent civilians, and even the Assyrian Christian minority--a relatively small group, with no political ambitions--was exposed to murderous assaults in the 1930's.
Under these conditions, with the Sunni ruling minority constantly feeling threatened, it was no accident that the only attempt in any Arab country to establish something like a pro-Nazi fascist regime occurred in Iraq in the early 1940's under Rashid Ali al-Khailani.
The British suppressed this misadventure, but not before hundreds of Jews in Baghdad were murdered in a wild farhood (pogrom) instigated by the short-lived pro-Nazi government.
Saddam's regime was merely the most extreme manifestation of the harsh underlying fact that Iraq's geography and demography condemned it to rule by the iron fist.
Nor has Saddam's fall changed this fact: anti-US violence is not only an expression of anger at foreign occupation; it is also a Sunni attempt to abort the establishment of a democratic order that would put them--the historical masters--in a subordinate position.
Similarly, one cannot see the Kurds in the north submitting willingly to a Baghdad-dominated Arab regime, let alone a Shi'ite one (most Kurds are Sunnis).
There is little understanding in the West of how deep the Sunni/Shi'ite divide runs.
Put yourself in pre-1648 Europe, a time when Protestants and Catholics slaughtered each other with abandon, and you'll understand the enmity immediately.
So what can be done?
Yugoslavia's example shows that in multi-ethnic and multi-religious countries deeply riven by conflict, partition and separation may be the only way to ensure stability and democratization.
There is no doubt today that Croatia and Serbia--despite their difficulties--stand a better chance of becoming more or less stable democracies than if they were still fighting for mastery among themselves within the Procrustean bed of the former Yugoslavia.
Nor is federation an alternative--as the terms of the federation itself become the bones of contention (see Bosnia or Cyprus).
Even the pacific Czechs and Slovaks found it easier to develop their respective democratic structures through a velvet divorce rather than be joined in an unworkable marriage.
The time has come to think the unthinkable, about creating a Kurdish state in the north, an Arab Sunni one in the center around Baghdad, and an Arab Shi'ite state in the south around Basra.
Repeating mantras about territorial integrity--the conventional wisdom of international relations--is productive only as long as it ensures stability and averts chaos.
Again, as Yugoslavia--and the Soviet Union--showed, once strife replaces stability, territorial integrity loses its strategic meaning and legitimacy.
This is not a universal prescription for ethnically homogenous states.
The point is simply that there are moments in history when democratization and nation building coincide, and that in deeply divided societies the minimum consensus needed for both to succeed simultaneously is difficult to achieve.
All this may run contrary to conventional wisdom, but who thought that the USSR would disintegrate?
Creative and innovative thinking is needed about Iraq; otherwise today's mayhem will continue--and worsen.
Three Paths for Indebted Democracies
CHICAGO – Democratic governments are not incentivized to take decisions that have short-term costs but produce long-term gains, the typical pattern for any investment.
Indeed, in order to make such investments, democracies require either brave leadership or an electorate that understands the costs of postponing hard choices.
Brave leadership is rare.
So, too, is an informed and engaged electorate, because the expert advice offered to voters is itself so confusing.
Economists of different persuasions find it difficult to reach a consensus about the necessity of any policy.
Consider, for example, the cacophony of arguments about government spending: is it the only thing keeping depression at bay, or is it moving us steadily down the road to perdition?
The debate does not lead to agreement, moderate voters do not know what to believe, and policy choices ultimately follow the path of least resistance – until they run into a brick wall.
The build-up of public debt in industrial countries (which was rising briskly well before the Great Recession pushed it to near-unsustainable levels) reflects this kind of calculus.
The public rewards democratic governments for dealing with the downside risk caused by competitive markets – whether by spending to create jobs or by rescuing banks that have dodgy securities on their balance sheets.
Even if inaction (or action oriented towards the longer term) is the best policy, it is not an option for democratically elected politicians, whom voters expect to govern, which inevitably means action with the potential for quick results.
A sympathetic press amplifies heart-rending stories of lost jobs and homes, making those counseling against intervention or advocating longer-term fixes appear callous.
Democracies are necessarily softhearted, whereas markets are not; government action has expanded to fill the gap.
With governments in many developed countries now reaching the limits of their gap-filling capacity, three undesirable possibilities loom large (in addition to the desirable possibility that they will have no choice but to undertake long-postponed reforms that will create sustainable growth with less need for government buffers).
One is that they intervene directly in markets, both domestic and across borders, to reduce competition and volatility while they rebuild their buffering capacity.
Another is that they muzzle democracy to suppress public anger.
A third is that they find scapegoats.
All three were tried during the Great Depression of the 1930’s.
The results were not encouraging.
One factor diminishing the likelihood of governments intervening more directly in markets is that the recent crisis seems to have discredited government as much as it discredited the financial sector.
During the Great Depression, matters were different.
As economic collapse caused the public to lose faith in the private sector and markets, faith in government grew.
For example, in the United States, public support for President Franklin Roosevelt’s New Deal was broad-based throughout the 1930’s.
One possible reason for the difference in attitudes today is that bankers were visibly punished in the 1930’s.
Legislation such as the US Glass-Steagall Act clipped their wings.
Many bankers also suffered direct losses as their banks collapsed, or as investigations exposed them to public ridicule, and even jail.
Today, by contrast, broad segments of the public see the big banks and big government as being run by the same elites who created the crisis, and then spent public money under one guise or another bailing the banks out.
Even as bankers are back to reaping enormous bonuses, taxpayers have been left to foot the bill for the economic collapse.
Many workers are unemployed and in danger of being evicted from their homes, while no important banker has been put in jail.
The biggest banks now account for an even larger share of the financial sector after benefiting from a government rescue, while efforts like the Dodd-Frank Act to legislate more constraints on banks have been lobbied into shadows of their original selves.
The elite, whether in government or big business, seems to look after itself and no one else.
In the US, this sentiment has fueled the Tea Party, which coalesces around opposition to government expansion (and to elites more generally), even if that expansion is aimed at regulating big banks (presumably because government regulations tend to be shaped by the powerful among the regulated).
Movements like the Tea Party have thus tended keep in check those who, after a crisis of the sort that America has had, typically want more government action, including curbing markets and competition.
The US is not alone in having a discredited government.
In the eurozone, in addition to the perceived nexus between banks and governments, the governing elite’s willingness to embrace European integration, and taxpayer-financed cross-border financial support, without broad public consultation has generated a similar sentiment.
In Japan, two decades of relentless economic malaise has decimated the public’s faith in politicians and the government bureaucracy.
The second undesirable possibility – that governments with little spending capacity to assuage public anger turn against democracy and free expression – is also remote for now.
Democratic institutions in industrial countries are stronger, and have deeper roots, than was the case in the 1930s.
That leaves the third undesirable possibility, the search for unprotected scapegoats upon whom public anger can be dissipated.
Unfortunately, several countries are taking this path, with undocumented immigrants and Muslims being the first targets.
Politicians who seek scapegoats might argue that they mean no harm to their targets, and that they are helping their societies to avoid worse possibilities.
But, as the 1930’s showed, it is hard to imagine any possibility worse than where this type of behavior can lead.
Three Paths to America
President George W. Bush’s free-falling popularity, his loss of control over Congress, the nagging doubts about the economy, and most of all his discredited reputation as a result of the debacle in Iraq all magnify the characteristic weakness of lame-duck American presidents.
But, while Latin American governments are all watching the same news about Bush’s growing trials and tribulations, their responses to the looming transfer of power in the United States are of three kinds.
The first response can be described as realist: no matter who governs in America, concrete results need to be achieved.
Simply put, whoever is US president, his or her program will have priority.
But, at the same time, these leaders count on a great degree of continuity in US policy.
This type of thinking underpinned Brazil’s agreement to include the issue of bio-fuels in a joint declaration and subsequent meeting of Bush and President Luiz Inácio Lula da Silva at Camp David.
The same can be said of Uruguay’s interest in a Free Trade Treaty with the US, as it is seeking alternatives outside of the region’s Mercosur group, and Bush remains keen on bilateral trade deals.
Colombia, whose alliance with the US precedes President Álvaro Uribe, wants to maintain US support at its current levels, and Mexico now must make combating drug trafficking and illegal immigration priorities, in accordance with US policy.
Chile and Peru, too, have fallen in line with US priorities by emphasizing their openness to American investment.
The second Latin American position towards the US is embodied in “Chavism.”
This stance characterizes populist governments, often sustained mainly by gas and oil, that practice autocratic democracy, ignoring any formal constitutional division of powers and running roughshod over independent institutions and the press.
Indeed, these governments promote constitutional reforms that seek to authorize perpetual re-election and supposedly new forms of participation that, in fact, hollow out representative democracy from within.
As a political model, Chavism is strongly based on nationalism, so that, Bush or no Bush, its legitimacy requires a growing anti-Americanism.
Venezuela, Bolivia, Ecuador, and Nicaragua have opted for this pattern of international assertion, which also includes statist economic policies that demonize foreign investment.
At the same time, these governments practice a diplomacy inspired by one idea: America’s post-Iraq hegemony is fragile, thus making profitable a policy of confrontation aimed at weakening the enemy.
This explains the bizarre de facto alliance between Venezuela, Iran and Belarus, and Venezuela’s failed candidacy for a seat on the United Nations Security Council.
Indeed, this vision of international relations clearly rests on building influence through military power.
Finally, Argentina stands in a category by itself.
Far from being realistic, and in keeping with its ideological interpretation of international relations and growing approximation to the positions of Venezuelan President Hugo Chávez, the attitude taken by President Néstor Kirchner’s government links anti-Americanism with the Bush Administration.
It seems to take for granted a Democratic victory in the US presidential election next year.
But nothing guarantees that, even if the Democrats win, they will change America’s foreign policies.
After all, this did not occur in the transition from Bill Clinton to Bush.
Moreover, some notable candidates, such as Senator Hillary Clinton, supported the invasion of Iraq, while the Democrats are more protectionist than the Republicans and are financially unpredictable.
In fact, Kirchner should be especially worried by a Democratic victory.
Roberto Shapiro, a former number two in the Clinton-era Department of Commerce and a man close to the Democratic Party, is now co-chairman of the United States Taskforce for Argentina, an alliance of investment funds and institutional creditors who were hit hard by Argentina’s default on its international debts.
In contrast to the Clinton era, under Bush the US Treasury Secretary was closer to industry than to banks, and so America’s response to Argentina’s default was notably more tolerant than probably would have been true had it occurred during the Clinton administration.
Latin America, frankly, will not occupy an eminent position in any future US foreign policy.
Terrorism, proliferation, Iraq, Iran, Afghanistan, the Middle East, and China are higher priorities.
But that is not to say America has no interest in the region.
What the US lacks is a coherent regional policy toward Latin America comparable to what exists for Asia and Europe.
Whoever governs America next should formulate one, lest Latin America’s ideologues and dreamers gain the upper hand.
Which Way for US Foreign Policy?
BANGALORE – When US President Barack Obama recently spoke at the United Nations about countering the Islamic State, many of his critics complained that he put too much emphasis on diplomacy and not enough on the use of force.
Comparisons were made with Russian President Vladimir Putin’s military intervention in Syria’s civil war; and, with the US presidential election campaign shifting into high gear, some Republican candidates accused Obama of isolationism.
But such charges are partisan political rhetoric, with little basis in rigorous policy analysis.
It is more accurate to see the current mood as a swing of the US foreign policy pendulum between what Columbia University’s Stephen Sestanovich has called “maximalist” policies and “retrenchment” policies.
Retrenchment is not isolationism; it is an adjustment of strategic goals and means.
Presidents who followed policies of retrenchment since the end of World War II have included Dwight Eisenhower, Richard Nixon, Jimmy Carter, and now Obama.
No objective historian would call any of these men isolationists.
Eisenhower ran for president in 1952 because he opposed the isolationism of Robert Taft, the leading Republican candidate.
While Nixon believed the US was in decline, the others did not.
All of them were strong internationalists when compared to the true isolationists of the 1930s, who bitterly opposed coming to the aid of Britain in WWII.
Historians can make a credible case that periods of maximalist over-commitment have done more damage to America’s place in the world than periods of retrenchment.
Domestic political reaction to Woodrow Wilson’s global idealism produced the intense isolationism that delayed America’s response to Hitler.
The escalation of the war in Vietnam under Presidents John F Kennedy and Lyndon Johnson produced the inward-looking turn of the 1970s.
And George W. Bush’s misguided invasion of Iraq created the current mood of retrenchment.
If that mood is to become an issue in the 2016 presidential campaign, as early campaign rhetoric suggests, Americans should drop the false debate about isolationism and instead address three fundamental questions about the future of the country’s foreign policy: How much?
How interventionist?
And how multilateral?
The first question is how much the US should spend on defense and foreign policy.
Although some argue that America has no choice but to curtail its outlays in these areas, this is not the case.
As a share of GDP, the US is spending less than half of what it did at the peak of the Cold War, when the century of American leadership was being consolidated.
The problem is not guns vs. butter, but guns vs. butter vs. taxes.
Without a willingness to raise revenues, defense expenditure is locked in a zero-sum tradeoff with important investments such as education, infrastructure, and research and development – all of which are crucial to America’s domestic strength and global position.
The second question concerns how and in what ways the US should become involved in other countries’ internal affairs.
Obama has said that America should use military force, unilaterally if necessary, when its security or that of its allies is threatened.
When not, but conscience urges the country to act – against, say, a dictator killing a large number of his citizens – the US should not intervene alone and should use force only if there is a good prospect of success.
These are reasonable principles, but what are the thresholds?
The problem is not new.
Nearly two centuries ago, John Quincy Adams, America’s sixth president, was wrestling with domestic demands for intervention in the Greek war for independence when he famously said that the US “goes not abroad in search of monsters to destroy.”
But what if forbearance in a civil war like Syria’s allows a terrorist group like the Islamic State to establish a safe haven?
The US should stay out of the business of invasion and occupation.
In an age of nationalism and socially mobilized populations, foreign occupation, as Eisenhower wisely concluded in the 1950s, is bound to breed resentment.
But what takes its place?
Is air power and the training of foreign forces enough?
Particularly in the Middle East, where revolutions are likely to last for a generation, a smart combination of hard and soft power will be difficult to achieve.
Recent speeches by the US presidential candidates show that debate about the first two questions has already begun.
But the US ignores the third question at its peril. How can America bolster institutions, create networks, and establish policies for managing transnational issues?
Leadership by the most powerful country is important for the production of global public goods.
Unfortunately, America’s domestic political gridlock often blocks this.
For example, the US Senate has failed to ratify the UN Convention on the Law of the Sea, despite its being in America’s national interest – indeed, the US needs the convention to support its position on how to resolve competing territorial claims in the South China Sea.
Similarly, Congress failed to fulfill an American commitment to support the reallocation of voting power within the International Monetary Fund to emerging-market countries, though doing so would cost very little.
This paved the way for China to launch its Asian Infrastructure Investment Bank (which the US then mistakenly tried to block, at considerable cost to its reputation.)
And there is strong Congressional resistance to setting limits on carbon emissions in the run-up to the UN Climate Change Conference in Paris in December.
How much to spend on foreign affairs and how to intervene in distant crises are important questions.
But Americans should be equally concerned that their country’s “exceptionalism” is degenerating into “exemptionalism.”
How can the US maintain global leadership if other countries see Congress constantly blocking international cooperation?
Thrifty China, Spendthrift America
The saving rate in China is the highest of any major country.
China’s gross saving rate (the percentage of GDP that is not consumed immediately), which includes both public and private saving, is around 50%.
By contrast, the saving rate in the United States is the lowest of any major country – roughly 10% of GDP.
Almost all other countries fall between these two extremes.
Differences in saving rates matter a lot, and must be a major reason that China’s annual economic growth rate is now a full six percentage points higher than in the US.
If people are saving half their income, their investments in capital have the potential to propel the economy at a rapid pace.
Saving in China is in part a virtuous circle: rapid economic growth leads to high saving, which in turn sustains rapid growth.
The difference between Chinese and US saving rates has been growing for decades.
In the early 1980’s, China’s saving rate was twice as high. Now it is five times higher.
Why are these trajectories so different?
Unfortunately, explaining saving rates is not an exact science.
Some patterns across countries are obvious. Oil-rich countries tend to save a lot.
Countries with serious internal crises or conflicts tend to save little.
But neither of these patterns tells us anything about the difference between the US and China.
Some part of the high saving rates in China since the early 1980’s might be due to the decline in public confidence about health care, retirement benefits, and education, and a weakened sense of job security.
However, the same factors seem to be working in the same direction for saving in the US, too.
Engrained habits probably exlain more about China’s saving rate.
When incomes are growing rapidly, as they are in China, it is easier to save because people are not yet accustomed to a higher standard of living and do not mind terribly much maintaining a lower one for a while longer.
They also tolerate enterprise or government policies that encourage high saving.
For example, the uptrend in saving in China began at around the same time as its one-child policy was implemented in 1979.
This prevented the birth rate from rebounding after the Cultural Revolution of 1966-76.
The late Nobel laureate economist Franco Modigliani, in his last major published paper in 2004 (co-authored with Shi Larry Cao), argued that this demographic change explains much of the increase in the saving rate, as Chinese substituted investment in capital for investment in children.
But income growth and demographics do not explain everything.
After all, the virtuous circle of high savings and rapid growth operates more strongly in China than in other developing countries where incomes are rising and birth rates are falling.
This suggests that there are other, deeper factors that underlie the differences in Chinese and US saving rates – factors that reflect different life experiences and how these experiences are filtered through the two countries’ cultures.
For one thing, although the Chinese don’t elect their leaders, they trust their government more.
According to recent World Values Surveys, 96.7% of Chinese expressed confidence in their government, compared to only 37.3% of Americans.
Likewise, 83.5% of Chinese thought their country is run for all the people, rather than for a few big interest groups, whereas only 36.7% of Americans thought the same of their country.
With this relatively higher trust, China’s government and enterprises are better able to enact and implement strict policies that promote saving and growth.
Moreover, while economic inequality is on the rise in both countries, Chinese and Americans comprehend this very differently.
In the US, widely called “the land of opportunity,” the shame of being poor is unbearable, and there are no cultural resources to enable such people to maintain self-esteem, especially when the country is so successful overall.
As inequality deepens, many who fall behind struggle to save face, consuming in order to maintain the appearance of success.
At the same time, those who rise from low economic status revel in their newfound wealth by engaging in spectacular displays of personal spending.
By contrast, poor people in China mostly view their personal situation as transitional.
People still remember the Cultural Revolution and view themselves as survivors of a shared traumatic experience, underpinning a commitment to collective sacrifice in order to rebuild the country.
There is no shame in being poor in China if one reflects that one’s children or grandchildren will be wealthy and successful.
On the contrary, as in postwar Germany, it is a matter of pride that one is working hard through a difficult situation that will later be remembered as a historic transition.
In the US, one’s income is a dark secret that one might not reveal even to one’s own spouse.
In China, people tell each other how much they earn with relative ease.
Especially in Chinese villages, people know how their neighbors are faring.
Conspicuous consumption becomes less important when people already know your income.
Of course, Chinese increasingly consume fancy new cars and designer clothes.
But there is relatively less pleasure in public displays of consumption at a time when the prevailing national story is one of triumph over adversity.
More vivid in people’s minds are the stories they will one day tell their grandchildren about their travails and their economic heroism.
China will most likely be saving more than the US for years to come.
But, as the next generation takes control in China, this will change.
Today’s children will not view their own life stories from the perspective of the difficulties China has experienced.
As this change unfolds, the enormous willingness to save, and to tolerate high-saving government policies, will fade.
Tibet’s Peace of the Grave
PRAGUE – The recent events in Tibet and adjoining provinces are causes for deep concern.
Indeed, the dispersal of a peaceful protest march organized by Tibetan monks, which led to a wave of unrest that was brutally suppressed by the Chinese military and police, has caused indignation all over the democratic world.
The reaction of the Chinese authorities to the Tibetan protests evokes echoes of the totalitarian practices that many of us remember from the days before communism in Central and Eastern Europe collapsed in 1989: harsh censorship of the domestic media, blackouts of reporting by foreign media from China, refusal of visas to foreign journalists, and blaming the unrest on the “Dalai Lama’s conspiratorial clique” and other unspecified dark forces supposedly manipulated from abroad.
Indeed, the language used by some Chinese government representatives and the official Chinese media is a reminder of the worst of times during the Stalinist and Maoist eras.
But the most dangerous development of this unfortunate situation is the current attempt to seal off Tibet from the rest of the world.
Even as we write, it is clear that China’s rulers are trying to reassure the world that peace, quiet, and “harmony” have again prevailed in Tibet.
We all know this kind of peace from what has happened in the past in Burma, Cuba, Belarus, and a few other countries – it is called the peace of the graveyard.
Merely urging the Chinese government to exercise the “utmost restraint” in dealing with the Tibetan people, as governments around the world are doing, is far too weak a response.
The international community, beginning with the United Nations and followed by the European Union, ASEAN, and other international organizations, as well as individual countries, should use every means possible to step up pressure on the Chinese government to
allow foreign media, as well as international fact-finding missions, into Tibet and adjoining provinces in order to enable objective investigations of what has been happening; release all those who only peacefully exercised their internationally guaranteed human rights, and guarantee that no one is subjected to torture and unfair trials; enter into a meaningful dialogue with the representatives of the Tibetan people.
Unless these conditions are fulfilled, the International Olympic Committee should seriously reconsider whether holding this summer’s Olympic Games in a country that includes a peaceful graveyard remains a good idea.
Tiger Mothers or Elephant Mothers?
MELBOURNE – Many years ago, my wife and I were driving somewhere with our three young daughters in the back, when one of them suddenly asked: “Would you rather that we were clever or that we were happy?”
I was reminded of that moment last month when I read Amy Chua’s Wall Street Journal article, “Why Chinese Mothers Are Superior,” which sparked more than 4,000 comments on wsj.com and over 100,000 comments on Facebook.
The article was a promotional piece for Chua’s book, Battle Hymn of the Tiger Mother, which has become an instant bestseller.
Chua’s thesis is that, when compared to Americans, Chinese children tend to be successful because they have “tiger mothers,” whereas Western mothers are pussycats, or worse.
Chua’s daughters, Sophia and Louise, were never allowed to watch television, play computer games, sleep over at a friend’s home, or be in a school play.
They had to spend hours every day practicing the piano or violin.
They were expected to be the top student in every subject except gym and drama.
Chinese mothers, according to Chua, believe that children, once they get past the toddler stage, need to be told, in no uncertain terms, when they have not met the high standards their parents expect of them.
(Chua says that she knows Korean, Indian, Jamaican, Irish, and Ghanaian mothers who are “Chinese” in their approach, as well as some ethnic-Chinese mothers who are not.)
Their egos should be strong enough to take it.
But Chua, a professor at Yale Law School (as is her husband), lives in a culture in which a child’s self-esteem is considered so fragile that children’s sports teams give “Most Valuable Player” awards to every member.
So it is not surprising that many Americans react with horror to her style of parenting.
One problem in assessing the tiger-mothering approach is that we can’t separate its impact from that of the genes that the parents pass on to their children.
If you want your children to be at the top of their class, it helps if you and your partner have the brains to become professors at elite universities.
No matter how hard a tiger mom pushes, not every student can finish first (unless, of course, we make everyone “top of the class”).
Tiger parenting aims at getting children to make the most of what abilities they have, and so seems to lean towards the “clever” side of the “clever or happy” choice.
That’s also the view of Betty Ming Liu, who blogged in response to Chua’s article: “Parents like Amy Chua are the reason why Asian-Americans like me are in therapy.”
Stanley Sue, a professor of psychology at the University of California, Davis, has studied suicide, which is particularly common among Asian-American women (in other ethnic groups, more males commit suicide than females).
He believes that family pressure is a significant factor.
Chua would reply that reaching a high level of achievement brings great satisfaction, and that the only way to do it is through hard work.
Perhaps, but can’t children be encouraged to do things because they are intrinsically worthwhile, rather than because of fear of parental disapproval?
I agree with Chua to this extent: a reluctance to tell a child what to do can go too far.
One of my daughters, who now has children of her own, tells me amazing stories about her friends’ parenting styles.
One of them let her daughter drop out of three different kindergartens, because she didn’t want to go to them.
Another couple believes in “self-directed learning” to such an extent that one evening they went to bed at 11 p.m., leaving their five-year-old watching her ninth straight hour of Barbie videos.
Tiger mothering might seem to be a useful counterbalance to such permissiveness, but both extremes leave something out.
Chua’s focus is unrelentingly on solitary activities in the home, with no encouragement of group activities, or of concern for others, either in school or in the wider community.
Thus, she appears to view school plays as a waste of time that could be better spent studying or practicing music.
But to take part in a school play is to contribute to a community good.
If talented children stay away, the quality of the production will suffer, to the detriment of the others who take part (and of the audience that will watch it).
And all children whose parents bar them from such activities miss the opportunity to develop social skills that are just as important and rewarding – and just as demanding to master – as those that monopolize Chua’s attention.
We should aim for our children to be good people, and to live ethical lives that manifest concern for others as well as for themselves.
This approach to child-rearing is not unrelated to happiness: there is abundant evidence that those who are generous and kind are more content with their lives than those who are not.
But it is also an important goal in its own right.
Tigers lead solitary lives, except for mothers with their cubs.
We, by contrast, are social animals.
So are elephants, and elephant mothers do not focus only on the well-being of their own offspring.
Together, they protect and take care of all the young in their herd, running a kind of daycare center.
If we all think only of our own interests, we are headed for collective disaster – just look at what we are doing to our planet’s climate.
When it comes to raising our children, we need fewer tigers and more elephants.
Time for America to Turn South
Whatever John Kerry does about Latin America if he is elected President of the United States in November, the election could initiate a sea-change in US-Latin American relations - even or perhaps mainly if George W. Bush is reelected.
Kerry has never shown much interest in the region, while Bush has largely ignored it since the terrorist attacks of September 11, 2001.
But the unlikely nature of a shift in relations does not make it any less necessary.
The need for change in America's policy toward the rest of the hemisphere is two-fold.
First, never in recent times has anti-American sentiment run so strong and deep in Latin America.
Poll after poll shows that Latins feel more negatively about the US than at any time since the 1960's.
In contrast to that era, popular hostility is not really motivated by US actions in or toward Latin America; but today's anti-Americanism still complicates life greatly for democratic leaders in the hemisphere, and for America itself.
Second, and more importantly, the substantive issues of conflict on the US-Latin American agenda are heating up.
They will not go away by themselves, and failure to address them will probably only make them worse.
The list of problems facing Latin America is long, but the salient themes are easily distinguishable.
First and foremost is economic growth, which for the past few years - indeed, for the past two decades - has been dismal.
In countries where trade and investment is concentrated in ties with the US, this is a central issue in the bilateral relationship.
At this stage, we know that free-trade agreements are useful, but are not silver bullets.
The US has a much larger role to play than simply promoting trade liberalization in the region.
The US must help these countries build up their infrastructure, educational and legal systems, competitiveness, and transparency.
In all these areas, a pro-active policy of American support is crucial.
Why should the US bother?
Why should it care whether Latin American countries closely linked to it by trade, investment, tourism, and retirees do better or worse, grow or stagnate, become more competitive or lose ground globally?
There are many reasons for the US to pay greater attention to Latin America, but three stand out.
First, and perhaps least self-evident, is energy.
Countries like Mexico, Venezuela, and Colombia supply up to 40% of US oil imports, and could easily replace unstable suppliers in the Middle East.
Second, America has a strong security interest in the region.
Access to the US from many countries in Latin America is much easier than from Europe or Asia, owing to the volume of traffic, the number of flights, the comparative laxity of exit controls, and the porousness of borders.
If the US, as its leaders clearly believe, will be threatened for years to come by terrorist groups, the latter will inevitably conclude, as millions have done before, that the easiest way into the US is through Latin America.
Cooperation on security matters is desirable for America, and indispensable for the countries of the region.
The consequences of a new terrorist outrage originating from any nation south of the US-Mexican border would be devastating for that country, let alone for the victims of such an attack.
But the most significant issue coming to the fore in hemispheric relations is immigration.
Traditionally a Mexican, Central American, and Caribbean matter, it has now reached Brazil, Colombia, Venezuela, Ecuador, and beyond.
Every flight from Sao Paulo to Mexico City carries dozens of low-income Brazilians, who have already paid their pollero , or "people-smuggler," to route them on from the Mexican capital to the northern border.
The New York Times recently published an exceptional description of Ecuadorian polleros transporting their human cargo to the coasts of Guatemala and then onward through Mexico to the US.
Colombian displaced persons and Venezuela's middle class are fleeing to Miami.
Most dramatically, more Mexicans than ever before are risking their lives and paying up to $3,000 to enter the "promised land."
Last year, I visited the main jumping-off point on the US-Mexican border: El Sasabe on the Sonora-Arizona border.
In the month of May, before the summer's searing and deadly heat, local authorities estimated a daily average of 1,000 migrants attempting to cross.
Another visit this year generated a new estimate: from 1,500 to 1,800 crossings every day.
America cannot stem this tide by closing its borders; but it can regulate the tide by legalizing and humanizing it, and by helping to create conditions in Latin America where life-threatening emigration is not the only way out.
A first-term Kerry administration or a second-term Bush presidency must make this a high foreign policy priority.
All of these issues are crucial to the US: jobs, immigration, security, energy.
But Latin America is deeply troubled; it needs decisive, bold leadership at home and imaginative, unwavering support abroad.
Bush or Kerry - both can deliver the foreign support.
It is in America's interest that they do.
Time for China to Float
China is being pressured to halt its interventions to prop up the US dollar in world currency markets, with opponents emphasizing how much harm the policy is causing to other countries.
But China’s authorities might respond more favorably to an argument that points out how China’s own economic health might benefit from abandoning the current exchange-rate policy, which pegs the yuan to the dollar.
Such an argument is not difficult to make.
China is currently pursuing a contradictory set of policies that paradoxically undermines its own economy while propping up America’s by accommodating pump-priming by the Federal Reserve. China and Hong Kong are the largest net purchasers of US Treasury securities.
Otherwise, Treasury bond yields would be far higher, thwarting monetary expansion by the Fed.
Back in China, the dollar peg has led to large and growing foreign-exchange reserves, which are fueling domestic inflationary pressures and causing public-sector debt to balloon.
This is because official capital controls oblige exporters to deposit hard currencies with the People’s Bank of China in exchange for freshly printed yuan (usually as bank deposits) or government debt.
Both arrangements will eventually become untenable, because they will generate either an intolerable rate of inflation or an unsustainable burden of public-sector debt.
These are high prices for China to pay to maintain its current policies, including the pegged exchange rate.
There is a great deal of volatility in foreign-exchange markets across the globe, mainly owing to the weakening of the dollar.
As such, China and other countries are holding a depreciating asset that should be managed to serve domestic interests rather than those of the US.
Chinese policymakers should bear in mind that the value of the yuan is only one among many factors that affects the competitiveness of China’s economy.
After all, a currency can appreciate while an economy is sluggish, or depreciate despite robust growth.
As it is, the valuation of a country’s currency is not so much determined by the performance of its economy as by the forces of supply and demand on foreign-exchange markets.
For a given supply of money, an increase in the production of goods will increase the value of a currency, because each unit will buy more goods.
Likewise, increasing the supply of money relative to a fixed amount of output will lead to a decline in the purchasing power of money, as each currency unit buys fewer goods.
So it is nonsense to declare that China’s currency is currently undervalued.
We can only know that once all economic players have the opportunity to decide freely on where they wish to place their financial assets.
Given the high rate of growth in China’s money supply, there could be considerable pressures for the yuan to actually depreciate, because a rate of monetary growth that exceeds the growth rate of economic activity tends to cause a currency’s exchange rate to fall.
If exchange rates were fixed but capital could move freely, capital flight from the country would generate pressures to end loose monetary policies.
The debate over how to value the yuan is at the heart of the two-year struggle by the country’s policymakers to slow down China’s overheating economy.
One response was the decision by the People’s Bank of China to increase the one-year interest rate from 5.31% to 5.58%– its first rate hike in over nine years – in an effort to curb fixed-investment growth, staunch increasing prices, and offset a worrying decline in savings.
But such an insignificant rate hike will do little to relieve long-term pressures, because investors will expect more rate hikes and move money into China, increasing upward pressure on the yuan’s exchange rate.
Indeed, the logic is self-fulfilling: as more foreign currency flows into the market, the economy will continue to overheat, necessitating further interest rate hikes.
Meanwhile, the dollar’s falling value reflects the fact that the Fed is pumping more money into the system than are most of its trading partners.
So, the dollar will continue to weaken until the rate of increase in new money into the US economy no longer exceeds that of domestic economic growth and corresponds to the pace of monetary expansion followed by central banks in the rest of the world.
China’s effort to hold down the value of the yuan vis-à-vis the dollar is thus a costly and pointless policy.
By delaying a decision to float the yuan, the authorities are merely contributing to greater instability in the Chinese economy.
Time for Politics in Kabul
LONDON – As US and NATO soldiers prepare for their tenth Christmas in Afghanistan, a new buzzword is making the rounds: “transition,” the process of transferring responsibility for security from international to Afghan forces ahead of the withdrawal of foreign troops, which is set to begin in the spring of 2011.
But, in order to realize the hope that ordinary soldiers take from the new jargon, Western leaders will need to forge a clear political strategy for Afghanistan, without which the country will remain at war.
American and European military and civilian leaders have said repeatedly that there is no purely military solution to ending the war in Afghanistan.
Yet NATO states have no answer to the question that logically follows: What would a political solution entail?
Instead, they prefer to fall back on military-dominated plans for strengthening the capacity of the Afghan army and police, while heeding domestic pressure to demonstrate that Afghanistan will not be an endless conflict.
Afghans themselves are overwhelmingly supportive of seeking a political settlement to end the conflict, as a recent Asia Foundation survey of national attitudes confirmed.
They have borne the brunt of 40 years of war, and are well aware that international forces are planning their departure.
Afghans’ fears and concerns are focused on what legacy will be left behind, and whether the Afghan state can provide security, justice, and good governance, which it has so far been unable to deliver in the face of an insurgency whose strength is not significantly weakened.
Afghanistan’s international partners are not responsive to these concerns and grievances.
Though they have committed themselves rhetorically to supporting the Afghan-led Peace and Reintegration Program, Afghans are voicing discontent and wariness about a process that is decidedly marginal to “transition.”
Reintegration and reconciliation, which are meant to offer incentives to insurgents to switch sides and perhaps join Afghan security institutions or nominally pro-government militias, are seen as being driven by military logic, rather than representing an honest dialogue between the state, the insurgents, and ordinary Afghans.
Lack of transparency is driving fears that Hamid Karzai’s government is brokering a power-sharing deal with the Taliban that will do little to foster stability or better governance.
If NATO members, Afghanistan’s government and citizens, and, by many accounts, the insurgents, can all agree that there is no military solution to ending the conflict, it is high time to consider and support a comprehensive political process.
This would entail a number of immediate and longer-term steps.
As a first step, countries with forces in Afghanistan should accept that, as parties to the conflict, they need to be parties to the peace as well, and that every military operation has far-reaching and sometimes irreversible political implications.
Second, it is important to recognize the limited logic and impact of “transition.”
Leaving aside credible questions about the capacity of the Afghan security forces, transferring security responsibility to the Afghan state does not address broader Afghan grievances about bad governance or the abuse of power – both key drivers of the conflict.
For Afghans, these concerns need to be addressed through a serious political process moderated by a neutral third party, which most agree has to be the United Nations.
Correspondingly, the international community should back mechanisms that will address the grievances of all Afghans, not just the political elite, and that will seek to address regional strategic concerns and agendas, especially those of Pakistan and Iran.
A genuine and inclusive process will require engaging with the whole spectrum of Afghan civil society, including rights organizations, women’s groups, the clergy, public intellectuals, and influential tribal networks.
Peacemaking in Liberia, Nepal, Ireland, and elsewhere confirms the necessity of this approach, given such groups’ key role in shaping and monitoring the content of a political process, with real consequences for those who violate its guarantees of citizens’ rights.
For this reason, perpetrators of serious human-rights violations on all sides should be held accountable, a demand that has been pointedly ignored since 2001.
The process must also include real disarmament to ensure that Afghans do not fall prey to a continuing cycle of violence, and that the Afghan state establishes genuine control of security.
The current reintegration plan, like two previous attempts at disarmament, falls short of credibly demobilizing armed groups and regulating the arms trade.
The international community still has an opportunity to leave behind a better Afghanistan than the NATO countries are seeking to “transition” out of today.
But that requires commitment to a real vision of what constitutes a minimally functioning Afghan state, beyond the obvious need for effective security forces.
Afghans are demanding a political settlement to the conflict, which is the only means to stop the violence that disrupts their lives, promote political inclusion and accountability, and enable better governance.
As they contemplate the end of their military operations, NATO members must support a political process if they truly want to stabilize Afghanistan.
It’s Time to Ban the Bomb
STOCKHOLM – The nuclear agreement between Iran, the five permanent members of the United Nations Security Council plus Germany, and the EU, comes at a historically propitious moment.
Seventy years ago next month, the nuclear bombs dropped on Hiroshima and Nagasaki opened the darkest chapter in the long history of humanity’s wartime horrors.
Fire, bullets, and bayonets were now joined by nuclear radiation – a silent, invisible killer like gas and biological agents.
After World War I, the international community adopted the so-called Gas Protocol, to prohibit the use of chemical and bacteriological weapons.
Likewise, the demand to ban any use of nuclear weapons has been strong and persistent since the end of World War II.
But the states possessing nuclear weapons have always opposed such a ban, arguing that it would not be credible.
Instead, they have recommended a step-by-step approach, eventually leading to a ban on the possession and production of nuclear weapons.
After all, the same approach brought about today’s strict limits on biological and chemical weapons.
Yet 70 years after Hiroshima and Nagasaki, the gradualist approach has clearly failed.
During the Cold War, the total number of nuclear weapons worldwide climbed to more than 50,000.
Many, including hydrogen bombs, had explosive yields that were orders of magnitude higher than the bombs dropped on Japan.
Some measures were agreed to reduce the nuclear danger: bilateral arms-control agreements between the United States and the Soviet Union, restrictions on the testing of new weapons, and – above all – the Non-Proliferation Treaty.
The aim of the NPT, signed in 1968, is the universal elimination of nuclear weapons: non-nuclear-weapon states commit not to acquire them, and the five states that officially possess them (the US, the United Kingdom, France, China, and Russia) commit to disarmament negotiations.
But the overall threat has never diminished much.
To be sure, the first part of the NPT has had some success: Since the treaty entered into force, only four states – India, Israel, North Korea, and Pakistan – have developed nuclear weapons.
South Africa eliminated its nuclear weapons and became a party to the NPT, while Ukraine, Belarus, and Kazakhstan transferred their nuclear arsenals to Russia.
Two states – Iraq and Libya – were stopped from developing nuclear weapons, and now Iran, a party to the treaty, has committed to abide by important restrictions on its nuclear program.
And yet the commitment of the five nuclear-weapon states to disarm has had very limited results.
Nuclear stockpiles were reduced – mainly for economic reasons – following the Cold War, to less than 20,000 nuclear weapons worldwide (still enough to destroy humanity several times over).
And the 2010 New START agreement brought welcome upper limits to the number of nuclear weapons deployed by the US and Russia.
But no serious disarmament negotiations have been pursued since.
Moreover, it was once hoped that NATO’s small number of non-strategic nuclear weapons sited in Europe could be withdrawn to the US, as they were widely considered militarily useless.
Doing so, it was suggested, could lead Russia to remove its own tactical nuclear weapons.
Neither action has been taken.
Likewise, the hope that the Comprehensive Nuclear-Test-Ban Treaty (CTBT), adopted in 1996, would become binding has not been realized.
A moratorium on such tests exists, and an impressive monitoring machinery has been created, able to register not only weapons tests, but also earthquakes and tsunamis.
Yet, because eight countries, including the US and China, have failed to ratify it, the CTBT occupies a legal netherworld: it may be said to be in operation, but not in force.
Rather than nuclear disarmament, the world is witnessing an upgrading – and, in some cases, expansion – of nuclear arsenals.
There is little hope of any change for the better unless the Security Council’s permanent members conclude that their own security requires resuming détente among themselves and launching serious disarmament negotiations, as promised.
They have shown their willingness to act to restrain other states from acquiring weapons of mass destruction; now it is time for them to restrain themselves.
Of course, just as some states refuse to join the conventions that ban cluster bombs and landmines, the nuclear-weapon states will not join a convention banning their arsenals.
Yet the existence of such a treaty could serve as a constant reminder of what is expected of them.
For that reason alone, it should become an international priority.
During the Cold War, many people feared that mankind might commit suicide abruptly, by waging a nuclear war.
Today, more people may worry that humanity will suffer a more prolonged death through global warming.
But the nuclear peril is still there, and groups like Global Zero deserve our support in their efforts to raise public awareness.
It has been said that Hiroshima and Nagasaki created a taboo against any further use of nuclear weapons.
Let us hope so, but let us also demand that the taboo be made legally binding.
Time to Bring Mahatma Gandhi Back
NEW YORK – The Congress Party’s unexpected landslide in India’s general election was greeted with euphoria.
Many believe that Congress – with its commitment to secular values, economic growth, and helping the poor – now has a mandate to transform India into a great power.
Business and financial interests, in particular, are delighted with the outcome, crowing about the bonanza about to be unleashed as Congress liberalizes India’s economy further.
The Americans are happy that India’s pesky left, reduced to a paltry 24 seats, has been all but eliminated from national government.
India’s Communists had tried to topple the Congress-led government last year in an attempt to scuttle the nuclear deal brokered by the United States, and had vowed to upend it.
As for the threat from the right, anyone hoping for peace in the region and reduced tensions within India between religious communities is relieved by the defeat of the Hindu nationalist Bharatiya Janata Party (BJP).
The BJP’s strategy of painting the Congress as soft on terror and demonizing Muslims as an existential threat to India badly misfired.
Unfortunately, however, the economic trajectory that Congress is plotting, though it may well boost growth in the short term, is ultimately on a collision course with both equity and sustainability.
Despite rhetoric about “inclusive growth,” India’s wealth gap has widened during the years of exceptionally rapid economic expansion.
The majority of the world’s malnourished children live in India.
While private wealth management is a growth industry among India’s 200,000 or so nouveaux riches , 800 million Indians live on less than $2 per day.
India’s water supply is stretched to the limit, even as global warming is fast melting the Himalayan glaciers on which millions depend for water.
Moreover, climate change threatens to reduce agricultural output by up to 40% by 2080, when India will have another 450 million people.
At that point, the consultancy McKinsey &amp;
Company projects India’s middle-class consumer market will have hit 600 million people, twice the size of the current US population.
That’s exciting news to retailers looking for new markets.
But what about India’s other billion people?
And where will the resources come from to manufacture all the stuff these new consumers will buy?
The die was cast for India’s development path on July 22, 1947, when India’s Constituent Assembly resolved to replace Mahatma Gandhi’s spinning wheel, or charka , with the emperor Ashoka’s wheel of dharma on the Indian national flag.
The move symbolically rejected what the incoming government abandoned upon assuming office: Gandhi’s vision of an equitable and sustainable agrarian society based on self-sufficient, pared-down consumption.
For Gandhi, the spinning wheel symbolized the need to assume personal responsibility for consumption as a first step toward achieving justice and freedom for all.
But Jawaharlal Nehru, India’s first prime minister, believed in industrialization and urbanization, famously calling the new mega-dam projects his government underwrote the “temples of modern India.”
In his famous speech on India’s “tryst with destiny,” Nehru promised Indians that his government would seek to “bring freedom and opportunity to the common man, to the peasants and workers of India; to fight and end poverty and ignorance and disease;… to ensure justice and fullness of life to every man and woman.” For 63 years, the vast majority of India’s people have waited for this promise to be fulfilled.
As Congress retakes power, it is Rahul Gandhi, the 39-year-old great-grandson of the man who made that promise, who is the heir-apparent to current Prime Minister Manmohan Singh.
Observers expect the young Gandhi to become prime minister within two years.
The essential challenge before him and his country is not transitioning from a more to a less state-directed economic system, as many of those cheering Congress’s electoral victory believe.
While bureaucratic excess, entrenched corruption, and other inefficiencies beg remedy, the real challenge before India is its allegiance to a twentieth-century vision of modernity.
Former Finance Minister Palaniappan Chidambaram has said that his dream is to see 85% of Indians living in cities and only 15%, as opposed to the current 60%, engaged in agriculture, because to be an agrarian society in the modern era is to be poor and powerless. To be “developed” means to be industrialized and urbanized.
But, for better or worse, we are no longer in the modern era.
The post-modern realities of our grave present make a mockery of modernity.
When asked what he thought about Western civilization, Gandhi famously replied, “It would be a good idea.” He also said that “Earth provides enough to satisfy every man’s need, but not every man’s greed.”
For Gandhi, greed led to violence, violence to militarism, militarism to war, and war to annihilation. His philosophy of non-violence was aimed at the most basic form of human aggression: the appetite for more than one’s share.
India’s essential challenge is to take up Gandhi’s mantle and boldly imagine a future that is different from the West’s present.
Of course, no one is under the illusion that India or any other country will abandon its cities for a life as simple as the one Gandhi strove to live; but that doesn’t mean that India can’t look to Gandhi’s core values for inspiration.
Rahul Gandhi bears the name, if not the lineage, of the Mahatma (to whom he is not related).
If India is lucky, when he assumes leadership of the Congress Party he will let himself be as inspired by Mahatma Gandhi’s vision for India as by that of his great-grandfather.
After all, it was out of their complicated marriage of ideas that independent India was born.
Nehru’s vision has had a good run; now it is time to bring back Gandhi’s.
Time to Constrain Government
PALO ALTO –The current financial crisis in Europe providesa unique update to Lenin’s dictum that nothing so destabilizes a country as a run on its currency.
In today’s EU, nothing so destabilizes a currency union as a flight from a member’s sovereign debt.
The turmoil from the Greek debt crisis and concern over analogous problems in Ireland, Portugal, Spain, and Italy have spread fears about the stability of European banks, the global financial system, the eurozone, and the global economy.
German Chancellor Angela Merkel recently echoed these fears in public and added worries over whether the euro will survive the crisis.
The €750 billion (almost $1 trillion) bailout package from the EU, the European Central Bank, and the International Monetary Fund provided only a brief respite in international markets. This has now given way to a more sober analysis of the crisis and the efficacy of the response.
The bailout is no solution to the fundamental problems that the eurozone confronts; at best, it buys time to spread the inevitable wrenching adjustments over time and across people.
And it carries its own serious risks of moral hazard and the loss of the ECB’s credibility and independence.
The fundamental problem for Greece is its bloated fiscal commitments, enabled by lower borrowing costs when it joined the euro.
But the problems are not limited to Greece – or even to the other countries on the eurozone’s periphery.
Fiscal folly is widespread throughout Europe and much of the rest of the world.
If Greece paid no interest on its debt and regained full employment, its fiscal deficit would still be an astounding 6% of GDP, but the corresponding figures elsewhere are similar, if not worse: 8% for Ireland, 5.6% for Spain, 6.8% for Great Britain, and 7.5% for the United States.
Some argue that the only way to save the euro is for monetary union to be followed by fiscal union.
Their recipe is for the high-tax, high-social-spending (and not-so-small deficit) policies of the large northern European economies, Germany and France.
But that would be a big mistake.
What is needed are constraints on fiscal policy by each country, not a supranational fiscal authority.
The problem plaguing many advanced democracies, in Europe and elsewhere, is rising government spending, taxes, and public debt, all of which gravely threaten economic growth.
In response to this trend, the IMF urges a return to pre-crisis debt-to-GDP ratios.
Otherwise, the vast explosion of public debt will permanently depress per-capita growth by one-third or more in most advanced economies – a stunning permanent stagnation – and would hamstring governments’ ability to combat the next recession.
But to return to the pre-crisis safety zone will require a decade of large primary budget surpluses (excluding interest payments) of roughly 4% of GDP for the US, 3% for the eurozone (higher for higher-debt countries), and 7% for Japan.
The fundamental lessons of the Greek debt fiasco are not new: 1) elected officials systematically ignore long-run costs to achieve short-run benefits; 2) they wait to act until they are forced; 3) government policies cannot circumvent the laws of economics; 4) governments cannot revoke the laws of arithmetic; and 5) budget policy is not merely accounting.
When a government borrows a euro (or a dollar, pound, peso, or yuan), it commits itself to pay a euro in present value of future interest payments and eventual repayment of principal.
That money must come from higher taxes, from eroding the real value of money balances and government debt through inflation, or from outright default and debt restructuring.
The eventual costs of any of these actions are severe.
Moreover, the problem is not just one of public debt.
A much higher ratio of taxes to GDP only trades a deficit problem for more sluggish economic growth.
In recent decades, the large advanced economies with the highest taxes have grown most slowly.
And the higher-tax economies did not even have smaller budget deficits than the lower-tax US; rather, higher taxes merely enabled higher spending.
Will a new Stability and Growth Pact, with eurozone members assessing the fiscal policies of their peers, solve these problems?
IMF consultations and evaluations have had little impact outside of economies that are heavily dependent on IMF programs.
Citizens and local politicians will not outsource their policies to neighbors or international organizations unless forced to do so by strict bond covenants.
So it would be far better for each country to enact serious legal constraints on its legislators’ budget authority.
Restrictions on budget deficits are a start, but are not sufficient.
The immense growth of the welfare state and soaring public deficits and debt have become the major source of systemic economic risk at both the national and global level.
Simultaneous restrictions on spending, taxes, and debt are thus required to avert future economic and financial crises.
Analogous rules for federal budgeting were somewhat helpful in the US in the 1980’s and 1990’s, but were abandoned in 1998.
Future legislatures cannot be completely bound by such rules unless they are embedded in constitutions.
The constitutional balanced-budget rules (for operating budgets, with borrowing allowed for capital spending such as school construction) found in many US states have by and large worked well, and Germany has recently moved in this direction.
These rules include appropriate temporary safety valves for recession, and some have super-majority voting requirements.
Sensible rules promise big payoffs, given the current and long-term global crisis in public finances.
The problem is not that governments lack resources to spend, but that higher government spending, taxes, and debt are eroding economic growth and future living standards.
Such a future seems to be on the horizon not only in Europe, but everywhere, unless governments rein in their spending.
Time to Fix the Euro
NEW YORK – The euro suffers from structural deficiencies.
It has a central bank, but it does not have a central treasury, and the supervision of the banking system is left to national authorities.
These defects are increasingly making their influence felt, aggravating the financial crisis.
The process began in earnest after the failure of Lehman Brothers, when on October 12, 2008, European finance ministers found it necessary to reassure their publics that no other systemically important financial institution would be allowed to fail.
In the absence of a central treasury, the task fell to national authorities.
This arrangement created an immediate and severe financial crisis in the new European Union member states that have not yet joined the euro.
Eventually, it heightened tensions within the euro zone.
Most credit in the new member states is provided by euro-zone banks, and most household debt is denominated in foreign currencies.
As euro-zone banks sought the protection of their home countries by repatriating their capital, East European currencies and bond markets came under pressure, their economies sagged and households’ ability to service their debts diminished.
Banks with large exposure to Eastern Europe found their balance sheets impaired.
Individual member states’ capacity to protect their banks came into question, and the interest-rate spread between different governments’ bonds began to widen alarmingly.
Moreover, national regulators, in their efforts to protect their banks, have unwittingly engaged in “beggar-thy-neighbor” policies.
All this is contributing to internal tensions.
At the same time, the unfolding financial crisis has convincingly demonstrated the advantages of a common currency.
Without it, some members of the euro zone might have found themselves in the same difficulties as Eastern European countries.
As it is, Greece is hurting less than Denmark, although its fundamentals are much worse.
The euro may be under stress, but it is here to stay.
Weaker members will certainly cling to it; if there is any danger, it comes from its strongest member, Germany.
Germany’s attitude toward the financial crisis is at odds with that of most of the world, but it is easy to understand why.
It remains traumatized by its historical memory of the 1930’s, when runaway inflation in the Weimar Republic led to the rise of Hitler.
While the rest of the world recognizes that the way to counteract the collapse of credit is to expand the monetary base, Germany remains opposed to any policy that might carry the seeds of eventual inflation.
Moreover, while Germany has been a steadfast supporter of European integration, it is understandably reluctant to become the deep pocket that finances bailouts in the euro zone.
Yet the situation cries out for institutional reform, and Germany would benefit from it just as much as the others.
Creating a euro-zone government bond market would bring immediate benefits, in addition to correcting a structural deficiency.
For one thing, it would lend credence to the rescue of the banking system and allow additional support to the EU’s newer and more vulnerable members.
For another, it would serve as a financing mechanism for coordinated countercyclical fiscal policies.
Properly structured, it would relieve Germany’s anxiety about other countries picking its pocket.
The euro zone’s bond and bill markets would complement but not replace individual states’ existing government bond markets.
They would be under the control of euro-zone finance ministers.
The regulation of the financial system would then be put in the hands of the European Central Bank, while the task of guaranteeing and, when necessary, rescuing financial institutions would fall to the finance ministers.
This would produce a unified and well-supported financial system within the euro zone.
Even the United Kingdom, which is struggling with an oversized and undercapitalized banking system, might be tempted to join.
Euro-zone bonds could be used to assist the new EU states that have not yet joined the common currency area.
They could also serve to increase the EU’s lending capacity beyond the current mandates of the European Investment Bank and the European Bank for Reconstruction and Development.
The EU could then finance investment programs that combine a countercyclical function with important European objectives, such as an electricity grid, a network of gas and oil pipelines, alternative energy investments, and employment-creating public works in Ukraine.
All these investments would help break Russia’s stranglehold over Europe.
The objection that they would take too long to serve a countercyclical purpose can be rejected on the grounds that the recession is also likely to last a long time.
Two thorny issues would need to be resolved – the allocation of the debt burden among member states, and the relative voting power of the different euro-zone finance ministers.
Germany would consider the existing precedents, namely the EU’s budget and the composition of the ECB, unfair and unacceptable.
Although many member states will balk at agreeing to a solution that changes the EU’s internal balance of power, some concessions would be necessary to bring Germany on board.
Usually it takes a crisis to bring about a compromise, but the crisis is now brewing, and the sooner it is resolved, the better.
Time to Nationalize Insolvent Banks
NEW YORK – A year ago, I predicted that the losses of US financial institutions would reach at least $1 trillion and possibly go as high as $2 trillion.
At that time, the consensus among economists and policymakers was that these estimates were exaggerated, because it was believed that sub-prime mortgage losses totaled only about $200 billion.
As I pointed out, with the United States and global economy sliding into a severe recession, bank losses would extend well beyond sub-prime mortgages to include sub-prime, near-prime, and prime mortgages; commercial real estate; credit cards, auto loans, and student loans; industrial and commercial loans; corporate bonds; sovereign bonds and state and local government bonds; and losses on all of the assets that securitized such loans.
Indeed, since then, the write-downs by US banks have already passed the $1 trillion mark (my floor estimate of losses), and institutions such as the IMF and Goldman Sachs now predict losses of more than $2 trillion.
But if you think that the $2 trillion figure is already huge, the latest estimates by my research consultancy RGE Monitor suggest that total losses on loans made by US financial firms and the fall in the market value of the assets they hold (things like mortgage-backed securities) will peak at about $3.6 trillion.
US banks and broker dealers are exposed to about half of this figure, or $1.8 trillion; the rest is borne by other financial institutions in the US and abroad.
The capital backing the banks’ assets was only $1.4 trillion last fall, leaving the US banking system some $400 billion in the hole, or close to zero even after the government and private-sector recapitalization of such banks.
Another $1.5 trillion is needed to bring banks’ capital back to pre-crisis level, which is needed to resolve the credit crunch and restore lending to the private sector.
So, the US banking system is effectively insolvent in the aggregate; most of the British banking system looks insolvent, too, as do many continental European banks.
There are four basic approaches to cleaning up a banking system that is facing a systemic crisis: recapitalization of the banks, together with a purchase of their toxic assets by a government “bad bank”; recapitalization, together with government guarantees – after a first loss by the banks – of the toxic assets; private purchase of toxic assets with a government guarantee (the current US government plan); and outright nationalization (or call it “government receivership” if you don’t like the dirty N-word) of insolvent banks and their resale to the private sector after being cleaned.
Of the four options, the first three have serious flaws.
In the “bad bank” model, the government may overpay for the bad assets, whose true value is uncertain.
Even in the guarantee model there can be such implicit government over-payment (or an over-guarantee that is not properly priced by the fees that the government receives).
In the “bad bank” model, the government has the additional problem of managing all the bad assets that it purchased – a task for which it lacks expertise.
And the very cumbersome US Treasury proposal – which combines removing toxic assets from banks’ balance sheets while providing government guarantees – was so non-transparent and complicated that the markets dove as soon as it was announced.
Thus, paradoxically nationalization may be a more market-friendly solution: it wipes out common and preferred shareholders of clearly insolvent institutions, and possibly unsecured creditors if the insolvency is too large, while providing a fair upside to the tax-payer.
Nationalization also resolves the too-big-too-fail problem of banks that are systemically important, and that thus need to be rescued by the government at a high cost to taxpayers.
Indeed, the problem has now grown larger, because the current approach has led weak banks to take over even weaker banks.
Merging zombie banks is like drunks trying to help each other stand up.
JPMorgan’s takeover of Bear Stearns and WaMu; Bank of America’s takeover of Countrywide and Merrill Lynch; and Wells Fargo’s takeover of Wachovia underscore the problem.
With nationalization, the government can break up these financial monstrosities and sell them to private investors as smaller good banks.
Whereas Sweden adopted this approach successfully during its banking crisis in the early 1990’s, the current US and British approach may end up producing Japanese-style zombie banks – never properly restructured and perpetuating a credit freeze.
Japan suffered a decade-long near-depression because of its failure to clean up the banks.
The US, the United Kingdom, and other economies risk a similar outcome – multi-year recession and price deflation – if they fail to act appropriately.
Time to Ratify New START
WARSAW – As a long-time observer of American politics, I know that United States senators will decide whether to ratify New START, the arms control treaty with Russia negotiated this year, on the basis of a thorough evaluation of their country’s national interests.
As the democratically elected representatives of the American people, they alone can determine what those interests are.
The US remains the world’s most powerful state, however, and the senators’ decision will inevitably have an impact beyond their country’s borders.
It will be particularly significant for Poland, a staunch ally of the US in NATO.
So it is important to make clear: my government supports the ratification of New START, because we believe it will bolster our country’s security, and that of Europe as a whole.
President Barack Obama’s nuclear-disarmament efforts have gained wide support in Poland.
The country’s first democratic prime minister, along with two former presidents, including Lech Wałęsa, the legendary leader of Solidarity, published a joint article last year in support of Obama’s bold disarmament agenda.
For almost a year now, since the expiration of the original START treaty in December 2009, no US inspectors have been on the ground in Russia to verify the state of its nuclear arsenal.
The START verification provisions provide crucial information that is essential for the force-planning process.
Without a treaty in place, holes will soon appear in the nuclear umbrella that the US provides to Poland and other allies under Article 5 of the Washington Treaty, the collective security guarantee for NATO members.
Moreover, New START is a necessary stepping-stone to future negotiations with Russia about reductions in tactical nuclear arsenals, and a prerequisite for the successful revival of the Treaty on Conventional Forces in Europe (CFE).
While we in Poland do not perceive an immediate military threat from Russia, most of the world’s active tactical or sub-strategic nuclear weapons today seem to be deployed just east of Poland’s borders, in speculative preparation for conflict in Europe.
The cataclysmic potential of such a conflict makes it essential to limit and eventually eliminate this leftover from the Cold War.
This was the reasoning behind the Polish-Norwegian initiative aimed at addressing the issue of tactical nuclear weapons within the larger arms-control framework that was launched in this past April.
In effect, New START is the sine qua nonfor effective US leadership on the arms-control and non-proliferation issues that matter to Europe – from reviving the CFE treaty to preventing Iran from obtaining nuclear weapons.
More broadly, New START will cement the new, more positive tone in relations between Russia and the West.
Indeed, we in Poland have adopted our own way of reconciliation with Russia, one based on dialogue and reciprocity.
As a result, Polish-Russian relations have improved significantly over the last three years – no easy feat, given the burden of our shared history.
Though difficulties still lie ahead, Poland is determined to build a relationship with Russia based on mutual respect.
Also in the cards is more substantive cooperation between NATO and Russia in the field of missile defense, an issue discussed at this year’s NATO-Russia Summit in Lisbon, and that has the potential to transform NATO-Russia relations.
In order for that to happen, Russia’s leaders must come to view missile defense as an opportunity to work together to address common threats, rather than a threat in itself.
Ratification of New START will increase mutual trust and show that the West and Russia, despite our disagreements, can work together on issues critical to our common security.
Any delay to the treaty, however, will embolden those in Moscow who would rather have the West as an enemy than as a partner – and who thus would like to see the tenuous progress made in recent months to be undone.
Meanwhile, the Obama administration continues to pursue its plans for European missile defense.
More than a year ago, Poland decided to take part in the new Phased Adaptive Approach, which will primarily protect America’s European allies. The Polish government has agreed to host elements of the modified European Missile Defense System on Polish territory in the second half of the decade.
I hope that US senators take into account the view from Warsaw in making their decisions.
New START is in the interest of disarmament and of Europe.
Poland supports ratification of this vitally important treaty.
Time to Talk with Iran
BERLIN – The recent comprehensive assessment by America’s spy agencies about Iran’s nuclear program and ambitions – the so-called “National Intelligence Estimate” – has opened the door to fresh strategic discussions among the five permanent members of the United Nations Security Council and Germany.
Such a strategic reconsideration is probably most necessary for those in the Bush administration (and a few elsewhere), who until recently have been prophets of imminent danger.
For Europeans, the NIE has not removed, but rather confirmed, the concerns that in 2003 prompted the EU-3 (Britain, France, and Germany) – namely, that Iran’s nuclear program could eventually give it a military nuclear capability, and that even before that point, it might trigger regional nuclear proliferation.
The NIE also confirmed two assumptions that have since guided European diplomatic approach: Iran reacts to external incentives and disincentives, and taking legitimate Iranian interests into consideration is the best way to influence Iran’s leaders.
Most Europeans who have been dealing with the issue also assume that Iran is aiming at capacities that would eventually make available all options, including quick development of a nuclear weapon, rather than actually acquiring, let alone testing, a weapon and thereby violating the Nuclear Non-Proliferation Treaty.
So concern about Iran’s nuclear program is still justified.
The robust diplomatic approach that is needed to confront the problem must include three components.
First, it should be based on a broad international consensus.
Second, it should clearly communicate that the issue is proliferation, not the nature of the Iranian regime.
Third, any further sanctions should be accompanied by an earnest offer of dialogue and engagement.
By contrast, some American policymakers continue to believe that Iran would abandon its enrichment program if only the European Union imposed unilateral sanctions.
But a clear-headed analysis of Iranian President Mahmoud Ahmadinejad’s behavior indicates that EU sanctions would lead to more trade diversion, with China, Russia, Turkey, or Dubai benefiting from reduced levels of European exports to Iran.
Of course, some imports would become more expensive for Iran, but the economic effect of such sanctions would remain limited.
Politically, Ahmadinejad certainly would not miss the chance to exploit unilateral measures for propaganda purposes – claiming that Iran has a conflict not with the international community, but with imperialist states intent on depriving his country of technological progress.
For these reasons, Europeans favor a new Security Council resolution, even if its measures are weaker than what the United States or the EU could impose unilaterally.
Such a resolution would send an effective signal to the Iranian public and political elite that Iran is in conflict with the entire international community.
Iranians do not like to be isolated; even the clerical elite has a strong interest in exchanges with the rest of the world, and they like to send their children to Western schools.
Making it obvious that it is Ahmadinejad’s policies that are isolating Iran would strengthen the still-fragile anti-Ahmadinejad alliance of pragmatic conservatives and reformers, which has lately become more vocal.
This is important to bear in mind, as a parliamentary (majlis) election is scheduled for March 2008.
The election will not be entirely free, but the government will be unable to manipulate them entirely.
The majlis plays a role in the political process, to the point of being able to induce or hinder policy changes: witness the way a conservative majlis blocked reformist President Mohammad Khatami in the last years of his term.
Europeans should now be confident enough to call for a common policy with the US that focuses on domestic developments in Iran.
Such a policy can include additional Security Council sanctions, but it must also carry an offer of dialogue that pragmatic forces in Iran would not refuse.
Both the EU and the US should be prepared to enter into direct, comprehensive, and unconditional negotiations with Iran.
Where security guarantees are concerned, America is Iran’s actual foe and potential partner.
So far, the two governments have communicated either through the EU or on strictly limited issues through their ambassadors in Baghdad.
The US has so far insisted that it will agree to a comprehensive dialogue only if Iran first suspends its enrichment activities.
But this should be the result of, not a precondition for, negotiations.
Whatever the US and Europe decide to do about Iran will affect that country’s internal political dynamics.
There are no easy mechanics at work here.
The best method of strengthening Ahmadinejad, however, appears to be to threaten the country and the regime as a whole.
An honest offer of engagement would allow Ahmadinejad’s pragmatic opponents to show that it is Iran’s president and his controversial policies, not the West, that are at fault.
Time to Wait on the Euro
On September 14, Swedish voters will vote on whether to join the Euro.
Today, a majority of Swedes appear likely to vote no.
To advocates of the Euro, this is a mystery.
Isn't the Euro a success, as marked by the currency's increasing strength against the dollar?
Why shouldn't Sweden be part of that success story?
No one ever doubted that the Euro would gain acceptance as a currency - in economists' jargon, that the Euro would become an important "medium of exchange," or even a good "store of value."
But currencies are not ends in themselves; they are means - to stronger, more stable growth.
Whether the Euro - with its associated institutions, including an independent European Central Bank (ECB) which focuses on inflation - is "good" or "bad" should be judged by economic performance - whether it leads to faster, steadier growth.
Judged on those terms, the best that can be said for the Euro is that the jury remains out.
The worse that can be said is that the Euro has failed its first test.
Growth in Euroland since the introduction of the Euro four-and-a-half years ago has been dismal, and immediate prospects look little better.
Yet the Euro was supposed to enhance growth by lowering interest rates and stimulating investment.
While it may have done so in a few countries, it has not done so in Europe as a whole.
So the UK and Sweden are right in questioning whether it will deliver better growth to them.
Indeed, there is every reason to believe the contrary - that the Euro will lead to slower growth and higher unemployment.
Of course, the Euro alone is not to be blamed for Europe's slow growth.
The weak global economy, including moribund America, is part of the problem.
But economies are always buffeted by shocks.
A good monetary system should protect an economy against such shocks.
Before the Euro was introduced, Euro skeptics worried that in focusing on Europe's core (Germany and France), the periphery would be disadvantaged.
For example, if economic growth in the center were strong but smaller countries were showing weaknesses, monetary policy would be determined by the needs of the center.
Smaller countries would not get the monetary stimulation they needed.
Few anticipated how events turned out: institutional rigidity prevented the ECB from responding in a timely manner to weaknesses in Europe's most important economy, Germany.
Combined with the Stability Pact -- another case of institutional rigidity that prevents effective use of fiscal policy -- Europe has unnecessarily slipped into a major slowdown, if not a recession.
Confidence in the Euro, along with mounting evidence of America's economic mismanagement, provided an opportunity for Europe to lower interest rates to stimulate growth.
By focusing narrowly on inflation, the ECB made Europe lose twice: both the lost investment that lower interest rates might have prompted, and the loss of exports and increase in imports that are sure to follow from the Euro's higher exchange rate.
Supporters of the Euro point to the success of the US, with its single currency.
But America's institutional structure differs markedly from Europe.
Labor mobility is an important part of the adjustment mechanism in the US.
In the early and mid-1990's, when vast cutbacks in defense expenditure led to unemployment rates in excess of 10% in California, many Californians migrated to other parts of the country where jobs where easier to find.
Moreover, the federal government could boost California's economy by re-directing its expenditures to that state.
While cross country labor mobility in Europe is higher nowadays, language and cultural barriers mean that mobility is far lower than in the US.
Apart from the Common Agricultural Policy, expenditures at the European level are meager.
Finally, America has steadfastly refused to tie its hands in the way that Europe has.
A balanced budget amendment to the US Constitution was rejected, as were attempts to change the Federal Reserve's charter, which mandates that it focus on employment and growth, as well as inflation.
International exchange rate markets can be volatile, and this uncertainty translates into higher effective borrowing costs.
But such risks are far less important for countries with sound economic management and low levels of indebtedness.
Furthermore, modern techniques of dynamic hedging have improved the capacity to manage these risks.
It is not destabilizing speculation that poses the biggest threat to Sweden today, but rather poor monetary management - including an excessive focus on inflation in the manner of the ECB.
For economies with a strong track record, such as Sweden and the UK, joining the Euro offers little to gain and much to lose - at least for now.
Today, the Stability Pact appears frayed.
Large economies, like Germany and France, extract forbearance when they breach the Pact's deficit ceiling.
But small countries, like Portugal, do not.
The ECB is unlikely to pay serious attention to Sweden's specific needs, so Sweden will probably not be given the wiggle room granted its larger neighbors.
Euro membership may become more attractive in the future.
The institutional framework responsible for Euroland's poor economic performance may improve, or capital markets may become more volatile, making the cost of bearing exchange rate risks intolerable.
But matters within Euroland may also worsen: the Stability Pact, with its de facto separate rules for large and small countries, will almost certainly be replaced.
But with what?
Uncertainty about the future direction of economic policy may lead to higher than necessary interest rates in Euroland - and thus slower growth.
When uncertainties about the direction of institutional change within Euroland are settled, decisions about joining the Euro can be made.
For now, Britain's decision to postpone Euro membership makes sense.
Swedish voters seem likely to show similar wisdom.
To a Third Way Consensus
The century just ended was rough on simplistic ideologies, both of left and right.
Socialism had its day in court, and was found wanting.
The Great Communist experiment is virtually over (save for a few holdouts, such as Cuba and North Korea).
The ideology of the right, as represented by the Washington Consensus of neo-liberal, market fundamentalism, wasn’t much more successful, even if its failures often go unacknowledged.
The last half-century has shown that while development is possible, it is not inevitable.
Countries most successful at it – those of East Asia – followed policies markedly different from the Washington Consensus.
Before the financial crisis of 1997, East Asia experienced three decades not only of unprecedented growth, but also of unprecedented reductions in poverty.
Out of these successes arose a new view: a “Third Way” between socialism and market fundamentalism.
Ironically, America, long a zealous advocate of market fundamentalism, developed according to its own “Third Way.”
US industry grew behind tariff walls.
From the first telegraph line between Washington and Baltimore, constructed by the Federal government in 1842, to the modern internet, from agricultural extension services in the 19th century to military related research in the 20th and 21st, new industries were promoted through a quiet, market-oriented, industrial policy.
There is, of course, no single “Third Way” applicable to all countries and situations, but a multiplicity adapted to each country’s social, political, and economic circumstances.
Nonetheless, these “third ways” share much:
• They take a balanced approach to government and markets, recognizing that both are important and complementary. Alone, either can get into trouble.
Market failures are a fact of life, but so are government failures.
Neo-liberal ideologies assume perfect markets, perfect information, and a host of other things, which even the best performing market economies cannot satisfy.
• While neo-liberals worry about excessive government, weak government impedes growth because weak states cannot provide law and order, cannot enforce contracts, and cannot ensure a safe, sound banking system.
It was, after all, too little regulation – the capital and financial market liberalization foisted on East Asia by the IMF and US Treasury – that led to financial crisis in 1997.
The question should not have been about how to deregulate quickly, but about how to develop the right regulatory framework.
• Recognizing these limits, public policy should work to improve both markets and government.
One exciting experience of my time in the Clinton White House was helping spearhead Vice-President Gore’s “Reinventing Government” initiative, where techniques and policies were developed to enhance the efficiency, efficacy, and responsiveness of government agencies.
Today, in virtually all dimensions – from responsiveness to telephone inquiries to the costs of transactions – the US social security administration beats almost every private insurance company.
• Equality matters – and should be an explicit policy goal.
Older theories taught trickle down economics: that the best way to help the poor is “to grow the economy.”
Growth required inequality, it was said, because the rich would save more, and do a better job of investing.
In fact the poor may not benefit from growth – or they may have to wait too long – unless growth is accompanied by anti-poverty policies.
Long-term growth in East Asia has demonstrated that egalitarian policies aid growth.
Indonesia exposes the danger of ignoring these concerns.
IMF inspired policies in Indonesia led to a massive depression, then to the elimination of food and fuel subsidies at the very moment when unemployment was soaring and real wages plummeting.
The riots that ensued were predictable – and predicted.
Compassion apart, it was bad economic policy.
Recovery from the resulting devastation, capital flight, and erosion of confidence will take years.
Economics can never be separated from social and political concerns.
These “Third Way” precepts may seem elementary common sense.
Common sense, however, is often absent in policymaking.
While economic theory and the evidence underlying these precepts developed over the last quarter century, they remain disputed.
It may no longer be “politically correct” to ignore the poor, and few nowadays openly advocate trickle down economics.
But don’t be fooled!
The same people who promoted the Washington Consensus now bring “The Washington Consensus Plus,” paying lip service to education, especially of girls.
The same people who advocated “trickle down,” now say, “Growth is necessary and almost sufficient for poverty reduction.”
Behind the new rhetoric lurk the same old neo-liberal policies of unthinking liberalization and privatization.
Liberalization and privatization done the right way, as part of the Third Way, can help the poor.
Done mechanically, by ideology, they increase poverty and inequality, and stymie growth.
Has privatization delivered growth in Russia, for example?
A few oligarchs garnered billions, but they did so by stripping assets, rather than creating wealth.
Russia’s capital market liberalization led to vast capital flight, not the promised flow of investment.
While the state gave away the nation’s jewels, it couldn’t pay pensioners their miserly allowances.
As pushed by IMF “structural adjustment programs,” liberalization was supposed to move workers from low to high productivity jobs.
In all too many countries, however, it moved them from low to zero productivity jobs – unemployment.
This is a recipe, not for growth, but for increasing poverty.
How could it have been otherwise when IMF policies led to interest rates of 10%, 20% or higher – rates at which job creation would be stymied under the best of business environments, let alone those prevailing in developing countries.
The problems of Britain’s rail privatization and California’s electricity deregulation have stripped bare the dangers of neo-liberal policies even in the best of circumstances.
The time is ripe for a new Third Way consensus, beyond the neo-liberal Washington pensée unique: a balanced view of markets and government, a refusal to confuse means (like privatization and liberalization) with ends, and a broader conception of those ends – not higher GDP, not increased income for the few, but the creation of democratic, equitable, and sustained growth.
To A Ukrainian Spring
Every person living in Ukraine is forced to believe in three great falsehoods: the first consists of the assumption that all of today's humiliating disorders - economic collapse, poverty, unemployment - are natural consequences of our postcommunist transition.
This is cynical and cruel; moreover, it is dangerously wrong.
The truth is that, daily, Ukrainians are deprived by force of much of our national wealth.
We are deprived of it due to state treachery, illegal agreements, and corrupt and incompetent officials.
The second falsehood consists of the belief that somebody ``out there'' will help Ukraine rise to its feet.
We naively hold our breath waiting for a happy moment when another portion of foreign aid will arrive.
We must stop believing in imported cures.
Where is our dignity?
We must begin to understand that no one can help Ukraine save we Ukrainians.
We must apply our own talents and intellect, not wait for handouts from abroad.
The third falsehood is the fear of instability and social unrest that will supposedly break out if President Kuchma and his cronies lose the upcoming election.
But instead of unrest, I foresee only celebrations if Kuchma is defeated.
In any case, instability is unlikely because our state officials, at all levels, will forget about Kuchma the minute the vote-count tolls his defeat.
They will be too busy thinking about themselves to worry about him or to cause trouble.
Besides, in civilized countries a change of government is seen as a sign of stability.
Ukraine needs and is ready for such a sign.
The parliamentary elections to be held on March 31 st will provide an answer to the main question everyone asks about Ukraine: can we overcome our lack of belief in ourselves, overcome our fears, to win a true democratic independence?
Or will Ukrainians remain forever fearful slaves?
If it is to be the latter, it does not matter who the master here is to be: Kuchma, his successor, Russia, or even some other powerful state.
But Ukrainians now have peaceful and constitutional means to change their country and live their lives without a master.
To do so, we must unite against the current regime.
President Kuchma knows perfectly well how little trust the people place in him.
This is why he refrained from naming the political parties that support him after himself.
Instead, he set up dozens of parties that aim to elect pro_Kuchma figures to Parliament by stealth.
These Kuchma crony parties go under many names: ``For a United Ukraine,'' the ``Social Democratic Party (United)'', the ``Green Party of Ukraine,'' ``Women For the Future,'' the ``Democratic Union,'' ``New Generation,'' the ``Team of a Winter Generation'' among others.
Each may sound legitimate and benign, but all stand for the same corrupt system.
Ukrainians must vote for parties headed by leaders that they know and trust.
But only half of our parliament, the Verkhovna Rada, is elected from party lists.
The other half are elected directly in so_called majority constituencies.
Here is where many deputies already allied with Kuchma are to be found.
Ordinary Ukrainians know who they are because their bosses are telling them, even ordering them, to vote for these people.
Such candidates organize concerts and throw money, medicines, food, cloths, computers, and other goodies around.
Some have even promised to build gas pipelines.
My advice to voters is: take everything you are given !
These gifts were bought with money taken unjustly from ordinary Ukrainians, so ordinary citizens have a right to them.
So take these presents, but don't give your vote in return !
If Ukrainians do give these politicians-bearing-gifts their votes, they may continue to receive gifts at the next election, but meanwhile the rulers will keep ruining the country and crippling our souls.
Only three political forces offer real, viable alternatives to our ruling criminal clans.
First is Oleksander Moroz's left-wing bloc.
Those who favor the Left should support the Moroz bloc instead of the Communists, who are locked in the blind alley of the past.
The second force is the right centrist party headed by former prime minister Viktor Yushchenko, who was a reform-minded prime minister.
The third political force is the bloc which I lead.
These forces will all get into parliament, but the wider their representation, the sooner common sense and justice will prevail here.
My experience as chairwoman of the Verkhovna Rada Budget Committee and as deputy prime minister in the Yushchenko Cabinet proves that criminal elements here can be brought to heel if the fight against corruption is pursued with vigor and brains; and that Ukraine can become more powerful and prosperous.
All that is necessary is for Ukrainian voters to bring to power people devoted to this task.
In opposing the current regime, we know that we will be exposed to dirt and open slander.
But this does not matter.
We are not seeking ostentatious posts and cheap popularity.
We do not desire artificial recognition or flattering awards.
We will not timidly look around and lose our way; we will not turn back.
We will pursue our goals regardless of where we find may ourselves - in parliament (supporting the government or in opposition), in the presidential palace, or even in prison for our beliefs (as I found myself not many weeks ago).
Ukrainians need not wait long to improve their lives.
A ``Ukrainian Spring'' will surely come if we seize the moment!
South Africa’s Winnable AIDS Battle
ERFURT – In the battle against HIV/AIDS, South Africa was for many years the perfect example of what not to do.
Until recently, the government’s response to the epidemic, which threatened the country’s very lifeblood, was lackluster and foolish.
But rising pressure over the past two decades – from civil-society groups, the media, and more enlightened politicians – is finally showing results.
A disease that has inflicted profound social and economic pain, and dramatically reduced life expectancy, appears to be in retreat.
But a new UN report suggests that South Africa’s battle against the virus is far from over.
The country has the world’s most severe HIV problem, with some 5.6 million citizens – more than 10% of the population – currently living with the virus.
Every year, around 300,000 new infections, and 270,000 AIDS-related deaths, are recorded.
HIV/AIDS patients are also prone to other infections: an estimated 70% of South Africans with AIDS also contract tuberculosis, while half of those carrying the HIV virus are expected to do so during their lifetime.
Worse, a third of pregnant women – a highly AIDS-prone demographic – have been diagnosed with the virus, which can be passed on to their babies during childbirth.
The ferociousness of the disease, and the speed at which it spread, took many South Africans by surprise.
As in developed countries, HIV infections initially were concentrated among hemophiliacs, sexually active gay men, and intravenous drug users.
But, during the 1990’s, and for reasons that are still not fully understood, the virus exploded into the general population.
The number of infected South Africans (equivalent to the population of Denmark) outstrips that of neighboring Mozambique, Lesotho, Botswana, Namibia, Swaziland, and Zimbabwe combined.
Yet, incredibly, the rapid spread of HIV and the rising toll of AIDS-related deaths failed to galvanize the country’s post-apartheid leaders, especially former President Thabo Mbeki, into meaningful action.
For years, the top ranks of the governing Africa National Congress seemed to be in denial over the pervasiveness of HIV/AIDS and how best to combat it.
Civil-society organizations were not so complacent, using the courts, the media, and civil disobedience to lobby for change.
Although contradictory views about how to treat HIV persisted, at least antiretroviral therapy has been available in some public facilities over the past decade.
But a more coherent and consistent approach evolved following the appointment of Aaron Motsoaledi as Minister of Health in 2009.
The South African National Department of Health and private health-care providers now report that conditions are no longer so desperate.
Three approaches have helped to contain the spread: the provision of antiretroviral therapy by the government and donor agencies; better treatment of tuberculosis patients, who tend to contract HIV/AIDS as well; and a greatly expanded program to prevent mother-to-child transmission.
These remedies have reduced the rate of new infections (though the total number of people living with HIV, especially aged 15-49, continues to rise).
With almost two million patients now on antiretroviral treatment, annual AIDS-related deaths have fallen by around 100,000 since 2005.
Contagion among newborn babies, once running at around 70,000 per year, have been cut by some 63%, and the lives of millions of HIV/AIDS sufferers have been prolonged.
Another important factor has been better integration of treatment plans.
The government has aligned its early antiretroviral treatment programs for existing sufferers, initiated in 2008, with early monitoring programs for pregnant women.
New, more effective treatment to prevent tuberculosis, especially the multidrug-resistant strains, has also helped.
More can and must be done.
Newborn infections, for example, could be further reduced by encouraging more pregnant mothers to visit health clinics for early monitoring and for checkups after delivery.
But progress to date should be acknowledged, if not celebrated.
The recent successes demonstrate that with political will and sufficient resources, even the greatest of scourges can be beaten – a lesson not only for South Africa but also for countries elsewhere in Africa and the developing world.
Tocqueville’s Lessons in Democracy
It seems appropriate that, due to the Iraq war, the world has been debating the nature of democracy 200 years after Alexis de Tocqueville’s birth.
Tocqueville is justly famous for rejecting reactionary nostalgia and regarding democracy’s triumph as our destiny, while warning against the dangers that democracy holds for liberty.
Should we still share his worries?
Tocqueville viewed democracy not only as a political regime, but, above all, as an intellectual regime that shapes a society’s customs in general, thereby giving it a sociological and psychological dimension.
Democratic regimes, Tocqueville argued, determine our thoughts, desires, and passions.
Just as there was Renaissance man and, in the twentieth century, homo sovieticus, “democratic man” is a form of human being.
For Tocqueville, democracy’s systemic effects could lead citizens to deprive themselves of reasoned thought.
They could only pretend to judge events and values on their own; in reality, they would merely copy the rough and simplified opinions of the masses.
Indeed, what Tocqueville called the hold of “social power” on opinion is probably strongest in democratic regimes – a view that foretells the growth of modern-day demagogy and media manipulation.
Tocqueville believed that there are no effective long-term constraints on this tendency.
Neither local democracy nor small societies, neither governmental checks and balances nor civil rights, can prevent the decline of critical thought that democracy seems to cause.
Schools have the power to be little more than enclaves from the corrosive strength of social influences on how the mind works.
Similarly, while Tocqueville thought that pursuing virtue as the ancients did, or having a religious faith, could sometimes elevate the soul, both conflict with the democratic ideal if they become officially prescribed in public life.
In this sense, Tocqueville’s intellectual heirs include the neo-Marxist theorists of the Frankfurt School, as well as Hannah Arendt, all of whom feared above all the disintegration of reason in modern societies.
Indeed, the French philosopher Marcel Gauchet entitled a recent book Democracy Against Itself.
The democratic way of life, these writers argue, tends to destroy original thought and to suppress “high” culture, yielding a mediocrity that leaves citizens vulnerable to democracy’s enemies.
But, while history is replete with murderous regimes applauded by cowed and deceived masses, the greater risk for democratic nations is that their citizens withdraw into apathy and short-term thinking for immediate gratification.
The past – despite rituals that seek to commemorate historic moments – is obliterated by an addiction to the now and the new.
Even the supposedly well-educated ruling class is subject to this bewitchment.
The essential problem of the democratic mind is its lack of historical consciousness.
Do the defects of democracy really mean, as Tocqueville claimed, that resigned pessimism is the only – realistic but unsustainable – path open to us?
I don’t think so.
There are means to fight against what might be called today’s growing “democratic stupidity.”
The first defense is to push for an educational system that really forms critical minds, namely through the (nowadays) largely neglected subjects of literature, history, and philosophy.
If the informed and critical citizenry that democracy requires is to be formed, our schools must stop pandering to the latest popular fads and begin to sharpen the analytical capacities of students.
The biggest impediment to such an education are the mass media, with its tendency to cultivate superficiality and amusement.
Many people nowadays spend more of their lives watching television than they do in classrooms.
The passivity that mass media encourages is the polar opposite of the active engagement that democratic citizens need.
But it is hard to imagine that the mass media (other than quality newspapers) would, of their own volition, become instruments of an education that enhances citizens’ critical capacities.
This concern about mass media is no mere elitist scorn for popular culture.
The question is not one of popularity alone – after all, Mozart was popular in his day, and Shakespeare’s plays attracted the poor as well as the rich – but of mass culture’s refusal to challenge and provoke.
The result of the failure is a generalized indifference and passivity in audiences.
Indeed, for a long time a globalized media culture, one unable to inspire the capacity for critical thought or create elevated feelings, has been on the rise.
It is a culture that, through its carelessness, threatens democratic freedom because it fails to create any sense of obligation – to society, to history, to community.
Is it too late to do anything about a culture that so deadens the spirit?
Tocqueville despised the elites of his time for their complacency in the face of the deracinating force of mass democracy.
Will the myopia of our leaders also serve as an agent of his disquieting prophecy?
To Cure the Economy
NEW YORK – As the economic slump that began in 2007 persists, the question on everyone’s minds is obvious: Why?
Unless we have a better understanding of the causes of the crisis, we can’t implement an effective recovery strategy.
And, so far, we have neither.
We were told that this was a financial crisis, so governments on both sides of the Atlantic focused on the banks.
Stimulus programs were sold as being a temporary palliative, needed to bridge the gap until the financial sector recovered and private lending resumed.
But, while bank profitability and bonuses have returned, lending has not recovered, despite record-low long- and short-term interest rates.
The banks claim that lending remains constrained by a shortage of creditworthy borrowers, owing to the sick economy.
And key data indicate that they are at least partly right.
After all, large enterprises are sitting on a few trillion dollars in cash, so money is not what is holding them back from investing and hiring.
Some, perhaps many, small businesses are, however, in a very different position; strapped for funds, they can’t grow, and many are being forced to contract.
Still, overall, business investment – excluding construction – has returned to 10% of GDP (from 10.6% before the crisis).
With so much excess capacity in real estate, confidence will not recover to its pre-crisis level anytime soon, regardless of what is done to the banking sector.
The financial sector’s inexcusable recklessness, given free rein by mindless deregulation, was the obvious precipitating factor of the crisis.
The legacy of excess real-estate capacity and over-leveraged households makes recovery all the more difficult.
But the economy was very sick before the crisis; the housing bubble merely papered over its weaknesses.
Without bubble-supported consumption, there would have been a massive shortfall in aggregate demand.
Instead, the personal saving rate plunged to 1%, and the bottom 80% of Americans were spending, every year, roughly 110% of their income.
Even if the financial sector were fully repaired, and even if these profligate Americans hadn’t learned a lesson about the importance of saving, their consumption would be limited to 100% of their income.
So anyone who talks about the consumer “coming back” – even after deleveraging – is living in a fantasy world.
Fixing the financial sector was necessary for economic recovery, but far from sufficient.
To understand what needs to be done, we have to understand the economy’s problems before the crisis hit.
First, America and the world were victims of their own success.
Rapid productivity increases in manufacturing had outpaced growth in demand, which meant that manufacturing employment decreased.
Labor had to shift to services.
The problem is analogous to that which arose at the beginning of the twentieth century, when rapid productivity growth in agriculture forced labor to move from rural areas to urban manufacturing centers.
With a decline in farm income in excess of 50% from 1929 to 1932, one might have anticipated massive migration.
But workers were “trapped” in the rural sector: they didn’t have the resources to move, and their declining incomes so weakened aggregate demand that urban/manufacturing unemployment soared.
For America and Europe, the need for labor to move out of manufacturing is compounded by shifting comparative advantage: not only is the total number of manufacturing jobs limited globally, but a smaller share of those jobs will be local.
Globalization has been one, but only one, of the factors contributing to the second key problem – growing inequality.
Shifting income from those who would spend it to those who won’t lowers aggregate demand.
By the same token, soaring energy prices shifted purchasing power from the United States and Europe to oil exporters, who, recognizing the volatility of energy prices, rightly saved much of this income.
The final problem contributing to weakness in global aggregate demand was emerging markets’ massive buildup of foreign-exchange reserves – partly motivated by the mismanagement of the 1997-98 East Asia crisis by the International Monetary Fund and the US Treasury.
Countries recognized that without reserves, they risked losing their economic sovereignty.
Many said, “Never again.” But, while the buildup of reserves – currently around $7.6 trillion in emerging and developing economies – protected them, money going into reserves was money not spent.
Where are we today in addressing these underlying problems?
To take the last one first, those countries that built up large reserves were able to weather the economic crisis better, so the incentive to accumulate reserves is even stronger.
Similarly, while bankers have regained their bonuses, workers are seeing their wages eroded and their hours diminished, further widening the income gap.
Moreover, the US has not shaken off its dependence on oil.
With oil prices back above $100 a barrel this summer – and still high – money is once again being transferred to the oil-exporting countries.
And the structural transformation of the advanced economies, implied by the need to move labor out of traditional manufacturing branches, is occurring very slowly.
Government plays a central role in financing the services that people want, like education and health care.
And government-financed education and training, in particular, will be critical in restoring competitiveness in Europe and the US.
But both have chosen fiscal austerity, all but ensuring that their economies’ transitions will be slow.
The prescription for what ails the global economy follows directly from the diagnosis: strong government expenditures, aimed at facilitating restructuring, promoting energy conservation, and reducing inequality, and a reform of the global financial system that creates an alternative to the buildup of reserves.
Eventually, the world’s leaders – and the voters who elect them – will come to recognize this.
As growth prospects continue to weaken, they will have no choice.
But how much pain will we have to bear in the meantime?
Today’s Counter-Enlightenment
Not long ago, one might have concluded that, at least in Europe, there were no taboos left.
A process that had begun with the Enlightenment had now reached the point at which “anything goes.”
Particularly in the arts, there were no apparent limits to showing what even a generation ago would have been regarded as highly offensive.
Two generations ago, most countries had censors who not only tried to prevent younger people from seeing certain films but who actually banned books.
Since the 1960’s, such proscriptions have weakened until, in the end, explicit sexuality, violence, blasphemy – while upsetting to some people – were tolerated as a part of the enlightened world.
Or were they?
Are there really no limits?
Outside Europe, the “anything goes” attitude was never fully accepted.
And there were limits in Europe, too.
The historian David Irving is still in detention in Austria for the crime of Holocaust denial.
This is, to be sure, a special case.
The denial of a well-documented truth may lead to new crimes.
But is the answer to the old question, “What is truth?” always so clear?
What exactly are we doing if we insist on Turkey’s acknowledgement that the Armenian genocide did take place as a condition of its membership in the European Union?
Are we so sure of Darwin’s theories of evolution that we should ban alternative notions of genesis from schools?
Those concerned with freedom of speech have always wondered about its limits.
One such limit is the incitement to violence.
The man who gets up in a crowded theater and shouts, “Fire!” when there is none is guilty of what happens in the resulting stampede.
But what if there actually is a fire?
This is the context in which we may see the invasion of Islamic taboos into the enlightened, mostly non-Islamic world.
From the fatwa on Salman Rushdie for The Satanic Verses to the killing of a nun in Somalia in response to Pope Benedict’s Regensburg lecture and the Berlin Opera’s cancellation of a performance of Mozart’s Idomeneo , with its severed heads of religious founders, including Muhammad, we have seen violence and intimidation used to defend a particular religion’s taboos.
There are questions here that are not easily answered by civilized defenders of the Enlightenment.
Toleration and respect for people who have their own beliefs are right and perhaps necessary to preserve an enlightened world.
But there is the other side to consider.
Violent responses to unwelcome views are never justified and cannot be accepted.
Those who argue that suicide bombers express understandable grudges have themselves sold out their freedom.
Self-censorship is worse than censorship itself, because it sacrifices freedom voluntarily.
This means that we have to defend Salman Rushdie and the Danish cartoonists and the friends of Idomeneo , whether we like them or not.
If anyone does not like them, there are all the instruments of public debate and of critical discourse that an enlightened community has at its disposal.
It is also true that we do not have to buy any particular book or listen to an opera.
What a poor world it would be if anything that might offend any group could no longer be said!
A multicultural society that accepts every taboo of its diverse groups would have little to talk about.
The kind of reaction we have seen recently to expressions of views that are offensive to some does not bode well for the future of liberty.
It is as if a new wave of counter-enlightenment is sweeping the world, with the most restrictive views dominating the scene.
Against such reactions, enlightened views must be reasserted strongly.
Defending the right of all people to say things even if one detests their views is one of the first principles of liberty.
Thus, Idomeneo must be performed, and Salman Rushdie must be published.
Whether an editor publishes cartoons offensive to believers in Muhammad (or Christ, for that matter) is a matter of judgment, almost of taste.
I might not do it, but I would nevertheless defend the right of someone who decides otherwise.
It is debatable whether recent incidents of this kind require a “dialogue between religions.”
Public debate making clear cases one way or the other seems more appropriate than conciliation.
The gains of enlightened discourse are too precious to be turned into negotiable values.
Defending those gains is the task that we now face.
Today\u0027s Lessons from the Cuban Missile Crisis
“Thirteen Days,” a new film about the Cuban Missile Crisis, will soon be showing in many countries.
Everyone should see it; not only for its dramatization of the past, but for insights into current events, especially the controversy surrounding America’s plans to establish National Missile Defense and the various regional disputes – India and Pakistan, Taiwan and China, North and South Korea – that may one day escalate into nuclear conflict.
On 16 October, 1962 President John F. Kennedy called together his closest advisors in the White House.
Aerial photographs had revealed nuclear missile sites under construction in Cuba.
The decisions taken and not taken over the following 13 days could have led to nuclear war.
The film depicts what happened in the White House during those days.
Audio tapes from Kennedy's presidency aided in making the film.
After the film’s debut in America, the Kennedy School of Government at Harvard arranged for a panel to discuss the film and the crisis at its heart.
Participants included: Robert McNamara, President Kennedy's Secretary of Defense;
Theodore Sorensen, his close aid and speech writer;
Ernest R. May, a professor of history at Harvard who has written a book about “The Kennedy Tapes"; and Graham Allison, a professor of political science at Harvard who, 30 years ago, wrote the classic study of the missile crisis “Essence of Decision.”
Peter A. Almond, the film's producer also participated.
Although the dramatization was criticized in some ways, the panel agreed that it portrayed the problems and pressures faced by President Kennedy exactly as they were.
What conclusions can be drawn today from the Cuban Missile Crisis?
Theodore Sorensen summarized them in this way:
- Advisors have roles to play in a crisis, but only the President has ultimate responsibility.
A majority of Kennedy's advisors – civil and military – wanted to attack Cuba.
Kennedy’s sober analysis and penetrating questions brought to light alternatives and risks that were fundamental to determining the outcome;
- It is essential to understand how your opponent thinks and to keep lines of communication open.
Cornering an opponent without keeping open diplomatic channels that allow you to understand his situation may prove fatal;
- America needs friends.
Kennedy acted as he did because NATO, other allies, and world opinion supported him;
- Good decisions need time.
When life and death issues are at stake, a leader can never let the media rush him into acting.
The fact that a week passed in which to scrutinize and reflect upon all the factors involved was critical to the outcome.
But would such time for reflection exist with today’s mass media?
Robert McNamara emphasized the necessity of putting yourself in your opponent’s position.
In one of the film's many charged sequences, McNamara explains to a trigger-happy admiral that the naval blockade Kennedy had imposed on Cuba was primarily intended as a signal to Chairman Khrushchev of Kennedy’s resolve, not as a means to stop specific Soviet ships.
Could Kennedy have acted even more coolly?
After all, the US had installed nuclear missiles near the USSR.
Khrushchev’s actions in sending missiles to Cuba mirrored that policy.
But Kennedy was anxious about the consequences of having Soviet missiles in Cuba on Berlin.
Nuclear pressures from Cuba would have made defense of Berlin more difficult, which was part of Khrushchev's strategy.
In the end, “the Berlin Crisis was solved through the outcome of the Cuban Missile Crisis," the historian Ernest May argued.
“It will soon be too late,” was a common argument presented to Kennedy by his advisors.
They wanted to attack Cuba while the missiles were, as they believed, at sea and on their way to Cuba.
Around 180,000 US troops were prepared to invade; plans existed for a bombing blitz bigger than that over Kosovo thirty six years later. “It took thirty years before I found out,” McNamara said, “that there were already nuclear arms on Cuba: 162 charges, of which 90 were tactical nuclear weapons.”
McNamara received this information at a meeting with Fidel Castro.
He asked Castro three questions: 1) Did you know? 2) If so, what did you recommend? 3) What would the consequences for Cuba have been?
Castro answered: “I knew.
I strongly recommended that nuclear weapons be used.
I knew it would lead to Cuba's annihilation.”
Castro, and to a stronger degree, his comrade Che Guevara, were willing to let Cuba go up in smoke in order to make their country a martyr in the world revolutionary struggle!
So an invasion might have led to the death of 80 million Americans and the obliteration of Cuba simply because Kennedy’s government did not have the facts right (which is often more common than not when the executive must take a solitary decision.)
McNamara believes an invasion would “certainly” have triggered a Soviet nuclear attack against the US.
For Khrushchev’s control over the Soviet military in Cuba was limited; U2 planes flying over Cuba were shot at despite Khrushchev’s explicit orders to the contrary.
One difficult question not raised during those discussions at Harvard is this: what would have happened if the opponent had not been Khrushchev, who behaved rather rationally throughout the crisis, but had been an irresponsible Saddam Hussein, Kim Jong Il or a fundamentalist?
With nuclear proliferation, that risk may one day become real.
Today’s discussions about a limited missile shield and the threat of nuclear blackmail from rogue states should be analyzed in the light of this terrible but realistic thought.
Harvard has now put up a new web-site where vital documents about the Missile Crisis and today’s nuclear threats can be found: www.cubanmissilecrisis.org .
Today\u0027s Silk Road is Paved with Oil and Empires
MOSCOW: A perverse dialectic is at work in the Transcaucasus.
All the while, Turkish and American influence grows stronger.
It is a grave mistake to think of Russia, like the Ottoman Empire of a century ago, as a "sick man of Europe," incapable of maintaining its strategic and commercial interests, and to regard its traditional allies in the region as available for anyone to poach. Indeed, the idea that Russia and the Transcaucasus can be disentangled is nonsense.
The cat's cradle of connections between Russia and the Caucasus are centuries old and impossible to cut.
Russia's presence runs deeper than the troops it maintains in the area. Mixed marriages abound;
Russian is the region's lingua franca; Russian businesses (like Gazprom) dominate.
Oil, unsurprisingly, is at the root of divisions over the Caucasus.
Westerners seek to redraw the medieval "Silk Road" with air and land routes, railways, and multi-billion dollar pipelines but also with wishful thinking.
America believes oil can grease the wheels of democracy, insuring independence.
Turkey sees its growing influence in the region as a card to play in bargaining for EU membership.
Uncertain governments in the region think oil as a magic bullet with which to buy prosperity and social peace without hard work and risky reforms.
Georgia and its president Eduard Shevarnadze are perhaps the most guilty of this.
President Shevardnadze dreamed of a new Silk Road back in the 1980s, when still the USSR's foreign minister.
Like most policies of the perestroika era, this was another goal pursued by the Soviet leadership in a way unconnected to economic reality.
Shevardnadze's homeland of Georgia was then seen as incomparably wealthy.
Reality is quite different.
The Baku-Supsa oil pipeline, for example, brings Georgia less money than mineral water exports to Russia.
Yet, instead of recognizing this and addressing practical problems, Georgia's government trumpets supposed new (and huge) oil finds, or the proposed Baku-Jeikhan pipeline.
Sometimes Georgian officials talk as if they are already members of OPEC!
Azerbaijan's illusions of grandeur are easier to understand but just as debilitating.
Possessing undoubted oil resources, President Haider Aliyev's government prefers to play games about where to construct oil pipelines rather than commit to actually building one.
One day it supports the Jeikhan pipeline (bypassing Russia), the next it thinks about building one between Baku and Novorossisk in Russia.
But any of these pipelines are economically risky, so even if Azerbaijan makes up its mind about whether to build one and where, there is no guarantee that it will make money.
So, while Baku's hotels are crammed with oil men, the bankers who must fund construction are harder to find.
Meanwhile, Aliyev's government neglects basic economic reforms like privatization and land sales.
Of course, pipelines should be part of Transcaucasus development plans. But oil isn't everything.
Oil sales will not help people in the region for many years; meanwhile, for many people in the ruined economies of the Caucasus, life is no less harsh than in war-torn Chechnya.
By inciting dreams of oil, America and Turkey may or may not be playing neo-imperial games.
But whatever their purpose, by raising fanciful hopes they thwart the possibility for real reform - something, incidentally, that the West ceaselessly demands from the Kremlin.
Too busy with its own problems, Russia has neither defended its interests in the Caucasus nor offered a vision for cooperative development.
But although Russia's role in the region has decreased, cooperation with Russia is essential if the Transcaucasian states are to succeed.
Despite its own high rates of unemployment, hundreds of thousands of people from the Caucasus have jobs in Russian cities.
The value of money coming from Russia to the region outweighs all western aid and trade combined.
Exports to Russia are the difference between life and death for regional industrial and agricultural producers.
Russia's government knows that chaos and decay to its south carry grave economic, social, and security risks.
The inroads made by Islamic fundamentalism in the region can be tied to the Caucasus's stunted economies.
Breaking the old bullying habits - such as imposing visa restrictions on Georgians - won't be easy.
But the war in Chechnya revealed how abominable the alternatives are.
The Putin government must put aside wounded pride and worries about the West and embark on sustained efforts to improve infrastructure and promote trade in the region.
Only by such a program can Russia hope to eventually play an effective - not merely obstructive - role in developing the oil wealth of the Caucasus.
To Err is Science
Until now, discovery was often considered the main goal of medical science.
But nowadays discovery is almost too easy. Anyone with a little funding and a few biological specimens in a refrigerator can make thousands of postulated “discoveries.”
Indeed, the number of research questions that we can pose is increasing exponentially.
Medical kits the size of a thumbnail can measure a million different biological factors on an individual with an infinitesimal amount of blood.
A million research questions can be asked on the spot.
But even with proper statistical testing, many tens of thousands of these biological factors may seem to be important due to mere chance.
Only a handful of them really will be.
The vast majority of these initial research claims would yield only spurious findings.
So the main issue nowadays is to validate “discoveries” by replicating them under different settings.
Several different teams of researchers need to see them “work” again and again using common rules.
Moreover, all the teams should agree not to select and report only the data that seem most impressive.
With selective reporting, we would end up with a long list of all the false discoveries made across all research teams, with only a few true findings buried among this pile of non-replicated waste.
In fact, empirical data suggest the significance of this danger.
In a paper in the Journal of the American Medical Association published in July 2005, I showed that refutation is very common, even for the most prestigious research findings.
I examined the 45 clinical research findings that had received the greatest recognition in the scientific world, as documented by the number of times other scientists had cited them over the last 15 years.
Even with the most robust types of research – for example, randomized clinical trials – one of four of these results had already been found to be wrong or potentially exaggerated within a few years after publication.
For epidemiology (e.g. studies on vitamins, diet, or hormones in terms of their association with health outcomes in the general population), four-fifths of the most prestigious findings were rapidly contradicted.
For molecular research, in the absence of extensive replication, the refutation rate may occasionally exceed 99%.
But we should not panic.
It is to be expected that the majority of research findings are rapidly contradicted and refuted; indeed, it is part of how progress of science occurs.
However, we need to adapt to this situation.
Instead of taking scientific evidence as dogma, we should consider it as tentative information that should be ascribed a level of credibility.
There is nothing wrong with disseminating scientific information that has a credibility of 10%, or even 1%.
Sometimes, this will be the best evidence we have.
But we should get used to understanding that some research findings have very low credibility, while others may be more likely to stand the test of time.
Scientists themselves may be able to ascribe these levels of credibility to their own work in fairness, if they describe in detail what they set out to do, and how they did it.
Science is a noble pursuit, but genuine progress in scientific research is not easy to achieve.
It requires a lot of time, continuous effort, uncompromising integrity, appropriate funding and material support, and unwavering commitment.
Proposed scientific advances require careful validation and replication by independent scientists.
Scientific knowledge is never final, but it evolves continuously.
This is part of the great fascination of science, and it fosters liberty of thought.
While these principles are probably well known to serious scientists, they are often forgotten when scientific information is disseminated.
Our society is awash with inflated information, which is inherent to efforts in many human activities – entertainment, law courts, stock markets, politics, and sports, to name but a few – to gain greater public attention in the framework of mass civilization.
But it would be a damaging to expect science to “show off” in this way.
Exaggeration contradicts the key hallmarks of scientific reasoning: critical thinking and careful appraisal of the evidence.
The Nigerian Kidnappers’ Ideology
LONDON – The abduction of more than 240 Nigerian girls has shocked the world.
But, unfortunately, their case is not an isolated one in Nigeria.
Indeed, Nigeria’s torment is shared by many other African countries, and the motivation behind the kidnapping derives from an ideology that is global.
That ideology is based on a warped and false view of religion. It is taught in formal and informal school settings worldwide.
Of course, the hideous and crazed words of the leader of Boko Haram, the group that kidnapped the girls, are representative only of the most extreme fringe of this ideology.
But, until we clean the soil in which this poisonous plant takes root, it will continue to blight the life chances of millions of young people around the world – and jeopardize our own security.
Across Sub-Saharan Africa, this problem is now vast.
Mali, Chad, Niger, the Central African Republic, Somalia, Kenya, and even Ethiopia have all suffered or face acute anxieties about the spread of extremism.
Many other countries have now identified extremism as their single most important challenge.
Governments are often confronting the challenge with courage and determination, and the use of African forces in many countries to try to keep peace is a tribute to that resolve.
But the fact is that the problem is continuing to grow.
This is not by accident.
When I became Prime Minister of the United Kingdom in 1997, Nigeria served as an example of productive cooperation between Christians and Muslims.
The destructive ideology represented by Boko Haram is not part of the country’s traditions; it has been imported.
As the population grows, so will the problem.
Nigeria has approximately 168 million people today, with some estimates putting the population at 300 million by 2030, split roughly equally between Christian and Muslim.
Without a climate of peaceful coexistence, the consequences for the country – and the world – will be enormous.
Poverty and lack of development play a huge part in creating the circumstances in which extremism incubates.
But poverty alone does not explain the problem.
And a major factor now holding back development is terrorism.
Who would invest in northern Nigeria under current conditions?
How can local economies thrive in such an atmosphere?
This challenge is not confined to Africa.
The Middle East, as we know, is immersed in a process of revolution and upheaval that has been immensely complicated by Islamism and its extremist offshoots.
In Pakistan, more than 50,000 people have lost their lives in the terror attacks of the last decade.
Violence linked to the same ideology has taken innocent lives and destroyed communities in India, Russia, Central Asia, and the Far East as well.
What is that ideology?
Here is the crux of the issue.
Because misrepresentation follows any pronouncement on this question, let me state some things very clearly. This ideology does not represent Islam.
The majority of Muslims do not agree with it.
They are repulsed by it.
This should give us hope about the future.
But this ideology is a strain within Islam that represents an organized, substantial, powerful, and funded minority.
What might loosely be called Islamism is based on a politicization of religion that is fundamentally incompatible with the modern world, for it assumes that there is one true religion, only one interpretation of that religion, and that this interpretation should prevail and dominate all countries’ politics, government institutions, and social life.
Those who do not share this view must be overcome.
This Islamist ideology is a spectrum.
At one extreme are groups like Boko Haram.
Other groups may not advocate violence (though sometimes they do) but still preach a view of the world that is dangerous and hostile to those who disagree.
To see what I mean, read the Muslim Brotherhood’s statement in 2013 denouncing the UN women’s declaration for, among other things, defending women’s right to travel or work without their husbands’ permission.
It is the ideology, not just the acts of extremism, that must be confronted.
My foundation, which provides practical support to help prevent religious prejudice, conflict, and extremism, has been active in Nigeria for several years, bringing together Christian and Muslim clerics to foster mutual understanding.
In more than 20 countries worldwide, we have schools programs that connect children of different faiths to learn about each other.
Even in the most challenging places, the results are clear and powerful.
In Sierra Leone, where we are part of the campaign against malaria, we mobilize churches and mosques to work in their local communities and help families use bed nets effectively to protect themselves against a disease that still kills 750,000 pregnant women and children each year in Africa.
We have reached two million people in an act of compassion and care, with results that are as remarkable as the interfaith cooperation that produces them.
So the battle is not lost.
But it has to be seen for what it is.
Every year, the West spends billions of dollars on defense relationships and on fighting terrorism.
Yet the very thing we are fighting is given license to grow in the education systems of many of the countries with which we are engaged – even in our own.
Education today is a security issue.
The G-20 should agree that open-minded education that promotes religious tolerance should be a responsibility of all countries.
We should insist upon it in our own school systems – and then insist upon it in others’ systems.
Nigeria’s kidnapped girls are victims not just of an act of violence but of a way of thinking.
If we can defeat that ideology, we will begin to make progress toward a more secure world.
Education is a Security Issue
LONDON – In November, I spoke at the United Nations Security Council for the first time in 13 years. It struck me how different the mood is now.
In September 2000, the world seemed very different.
We were trying to articulate the new security order in the decade after the fall of the Berlin Wall.
Of course there were challenges.
But the atmosphere was light, positive even, as we discussed eradicating poverty in the developing world.
This time, the mood was dark.
And the first days of 2014 have made it darker still. Scroll down any day’s news summary and you find stories of terrorism and violence perpetrated in the cause of a false view of religion.
Some of it is committed by non-state actors, and some of it by state actors; but all of it is committed in the context of division and conflict defined by differences of religious faith.
This is the new struggle of the twenty-first century. We will not win it unless we fight its root causes as well as its ghastly consequences.
Today, in an arc that stretches from the Far East through the Middle East to the streets of cities in Europe and the United States, we face a scourge that has taken innocent lives, scarred communities, and destabilized countries.
It is a threat that is constantly evolving, growing, and mutating to counter our fight against it.
The extremists propagating this violence have networks of outreach to young people and know the power of education, whether formal or informal.
Extremists are filling young minds with the belief that anyone who disagrees is an enemy – and not just their enemy, but God’s enemy.
The security debate has understandably often focused on the consequences.
After an attack, states consider immediate security measures.
Terrorists are hunted down.
Then we get back to our daily lives, until the next time it happens.
But lasting change depends on dealing with the root causes of extremism.
Of course politics plays its part.
And the extremists are good at jumping on the back of political grievances.
But the soil in which they plant the seeds of hate is fertilized with ignorance.
That is why we need to start thinking of education as a security issue.
The extremists justify killing in the name of God.
This is an obscene perversion of proper religious faith.
And it is a menace, both for the harm that it does directly and for the damaging division and sectarianism that it nurtures indirectly. Every killing is a human tragedy.
But it also causes a chain reaction of bitterness and hatred.
There is real fear in the communities plagued by such extremism, fear that paralyzes normal life and pushes people away from each other.
Globalization is intensifying and multiplying this extremism.
Not limited by borders, it can spring up anywhere. We are more connected than at any point in human history, and more and more people come into contact with those who are different from them.
So the need to respect a neighbor who is not like you is much greater; but the scope to identify him or her as an enemy is also greater.
And this is not only about Islamic extremism.
There are extremist acts perpetrated against Muslims because of their religion, and today there are fanatical Christians, Jews, Hindus, and Buddhists who disfigure the true nature of their faith.
That is why education in the twenty-first century is a security issue for all of us.
The challenge is to show young people who are vulnerable to appeals from terrorists that there is a better path to having their voice heard, a more meaningful way to engage with the world.
The good news is that we know how to do this.
I use my Faith Foundation only as one example.
Our schools program promotes cross-cultural dialogue among students aged 12-17 around the world.
Reaching students in more than 20 countries, our program connects students via a secure Web site, where they interact from their classrooms under the guidance of trained teachers.
Through facilitated videoconferences, students discuss global issues from a variety of faith and belief perspectives.
They gain the dialogue skills required to prevent conflict by breaking down religious and cultural stereotypes.
For schools in the poorest areas, we use special arrangements, because they cannot access the Internet themselves.
To be sure, we are only a drop in the ocean.
But we now have experience in more than a thousand schools; over 50,000 students have been taught, and we are working in countries as diverse as Pakistan, India, the US, Jordan, Egypt, Canada, Italy, the Philippines, and Indonesia.
I have been privileged to witness these students becoming at ease with the cultures, faiths, and beliefs that inspire so many people around the world.
There are many other fantastic examples of this type of work.
But they lack the resources, weight, and recognition that they need.
We need to mobilize to defeat extremism.
And we need to act globally.
All governments must take seriously their responsibility to educate young people to accept and respect people of different faiths and cultures.
There is no issue that is more pressing.
There is a real danger that religious conflict replaces the ideologically based struggles of the last century in an equally devastating form.
It is up to all of us to show people that we have a better idea than the extremists have – to learn from each other and live with each other.
Tony Blair’s Long Goodbye
In early 1999, Paddy Ashdown, then the leader of Britain’s Liberal Democratic Party (and since then, as Lord Ashdown, Europe’s envoy in Bosnia), was found with a woman not his wife and forced to resign his post.
In his diaries, he describes calling on Prime Minister Tony Blair to inform him in advance of his intention to quit:
“Blair said: ‘Going is the most difficult thing to do in politics.
Too many people stay for too long.
I would rather stop when people said, “Why is he going?” than when they said, “Why isn’t he going?” Or, even worse, “When is he going?”
This leaves us with an enduring mystery.
Britain’s most adept and skillful politician has evidently known for years exactly what not to do about arranging his departure, and yet he has chosen to ignore his own advice.
The mystery deepens when we recall that this consideration has been a part of Blair’s calculations ever since he became leader of the Labour Party in 1994.
At a dinner in a London restaurant named Granita, in what has since become the best-known coffee-stage chat in British history, Blair made a proposal to Gordon Brown, his rival for the leadership.
That proposal fell in two parts.
He, Blair, was demonstrably more “electable,” and should lead Labour in deposing the ramshackle Tory regime of John Major.
Then, with Labour in power, Brown could expect in due time to receive the mantle.
On this condition, Brown agreed to give Blair a clear run.
That was three elections ago.
What has kept Blair going?
When I called on him in January this year, his press officer advised me not to bring up the obvious question.
(I readily agreed, since an unanswerable question is a waste of time.)
But no sooner had I asked the Prime Minister how he was than he replied with a grin: “It’s nice to know one doesn’t have to fight another election.”
So there was the topic, inescapably, right in the middle of the room.
For the rest of the conversation, and on the trip to the outskirts of London that I also took with him, Blair talked and acted as if he had a full Prime Ministerial agenda on everything from global warming to the reconstruction of Afghanistan.
He also behaved, when talking to voters and citizens, as if he was tirelessly running for office for a fourth time.
Some of the motivations for this are purely human: he likes being Prime Minister and is good at it.
Moreover, next year he will have been Prime Minister for a decade, longer than any previous Labour leader.
A little longer, and he would outlast Margaret Thatcher’s record-breaking tenure, which must have been a temptation.
But Blair inexplicably chose to compound the mistake he had made with Brown, by announcing publicly, after having defeated the Tories for the third straight time, that he would not stand again.
From then on, there was really only one question on peoples’ minds, and it was the third – the worst – of the three questions he had mentioned to Ashdown: “When is he going?”
Blair ought to have known that politics is a pitiless business.
For years, his backbench members of parliament kept quiet because they knew that they owed their seats, and their majority, to him.
Now, with the country insisting on an answer to the question he posed, they see him as a liability.
And the trade unions, whose power he has done so much to reduce, have been open in saying that they want a new party leader.
Thus, his announcement that he will leave Downing Street next year is no more than a reluctant acceptance of what has been reality for some time.
No politician is free from a sense of destiny, and I think that Blair’s got the better of him.
In the decision to send British forces to defend Sierra Leone from a barbaric invasion from Liberia, he faced down all those who warned of disaster and won great moral credit.
In deploying soldiers to Afghanistan and Iraq, he was convinced that he was both morally correct and politically right to stand by Britain’s main historic ally, the United States.
(It is reasonably certain that he would not have trusted Brown to do any of these things in the face of any serious opposition, and also reasonably certain that he was correct to think so.)
When I first interviewed Blair, as newly elected Labour leader in 1994, he answered my question about the role of his Christianity in his politics by saying, “I can’t stand politicians who go on about religion.” If I had to date the moment when my own misgivings about him began, it would be the time – starting after September 11, 2001 – when he began to emphasize his own “faith” as a motivating factor in his moral stand.
A saving element in British politics is that such appeals are usually considered embarrassing.
They may also suggest a slight tendency, on the part of those uttering them, to believe in some kind of supernatural endorsement.
So Blair’s concession that he must leave office, a decision so long postponed and so disastrously protracted, represents among other things a triumph of the mundane over the permanent temptation to believe that politics is about anything else.
Tony Blair’s Palestine
LONDON –Former British Prime Minister Tony Blair has many positive attributes, including great charm. He will need all his skills to address the bewildering range of global tasks that he has taken on since being shoehorned out of office by his dour successor, Gordon Brown.
His initial daytime job, after running Britain, was to bring peace to the Middle East by helping establish the governing institutions of a Palestinian state.
Since then, Blair has become an adviser to banks (which need all the advice they can get these days), is touring the world to promote a sensible policy on global warming and climate change, has created a foundation to help bridge the divide between different faiths, and will lecture on religion at Yale.
All that is left is to restore the fortunes of England’s national football and cricket teams.
Perhaps he could fit that in on weekends.
But Blair has just made a useful comment on Palestine and Israel, which deserves to be taken seriously.
Throughout the long years of this bloody tragedy, we have tried to inch our way to a settlement through confidence-building measures or, in the case of the long dead “Road Map,” through pushing both parties to take parallel steps towards an agreement.
Some observers, not least hard-headed Israeli peace campaigners, have suggested a different approach.
You will never succeed, they say, if you try to bob and weave your way slowly towards an end game.
Instead, you should jump straight into a final deal.
And, since you won’t get the two sides to agree to it, you’ll have to impose it from the outside.
But that ambitious outcome is easier described than achieved.
While Israeli public opinion has usually appeared to run well ahead of its political leaders in the approach to peace, it is difficult to see how one could act over their heads.
They need to be pushed and shoved into a successful negotiation.
What would it mean to go straight to Palestinian statehood?
Presumably, Blair is not proposing to the Palestinians the creation of a state before an agreement is reached on final borders.
There cannot be a Palestinian state without dealing with West Bank settlements.
If you don’t believe me, just visit the West Bank and see, for example, how the proposed suburban Israeli development of East Jerusalem stabs through the heart of Palestinian territory towards the Dead Sea.
How can you have a viable state carved up by fences, military roads, and barbed wire?
Any Palestinian state should be within the 1967 borders (as adjusted through negotiation).
Peace activists on both sides solved that in the Geneva initiative.
Yasser Arafat and Ehud Barak came close to doing so at Camp David almost eight years ago.
Moreover, a Palestinian state would not only comprise the West Bank and Gaza, but presumably would also have to accommodate the principal political parties in each area. Attempts to destroy Hamas – whether politically or physically – have not worked and cannot work.
The Americans and Europeans committed a major error in conspiring to destroy the Fatah-Hamas national unity government, which was created largely thanks to the diplomacy of Saudi Arabia and other Arab League countries.
I hope that Blair is saying that to his American friends.
His greatest achievement was the peace deal in Northern Ireland.
That historic triumph depended on bringing in Sinn Fein politicians – leaders of the Irish Republican movement who in many cases could not be distinguished from the IRA, which bombed, shot, and maimed civilians in pursuit of its political goals.
Why should what worked in Northern Ireland – indeed, what was pressed on Britain by the United States – be unthinkable in the Middle East?
Are we in the West guilty of double standards yet again?
I abhor any and every terrorist act, by Hamas or anyone else.
I have had friends killed by terrorists.
But since when were sentiment and moral denunciation sufficient ingredients of a policy?
And when did a disproportionate military response to terrorism ever work?
The third challenge in establishing a Palestinian state is to create the institutions of statehood: hospitals, ports, airports, roads, courts, police stations, tax offices, and government archives.
When I was a European Commissioner, we provided funds from European taxpayers to pay for these things.
Then we saw them systematically trashed by Israel’s response to the second intifada .
How did destroying driving licenses in Palestine preserve Israeli security?
How was it preserved by digging up runways, uprooting olive trees, and fouling wells?
A Palestinian state will need to be built from the bottom up.
And what is built should not be destroyed.
I want to see – and I’m sure Blair does, too – a peaceful Palestinian state next door to a secure Israel in a region united in prosperity and stability.
Maybe Blair has hit on how this can be achieved.
But he should dwell upon the implications of such an approach between board meetings, lectures, and photo calls.
Tony Blair’s Poisoned Legacy
Tony Blair has a powerful claim to being one of the most successful British politicians of any recent generation, at least in domestic economic and social policy.
But history will remember him mainly for his strategic error in going to war in Iraq.
During his ten years in power, Blair and his Chancellor of the Exchequer, Gordon Brown, gave Britain one of the longest periods of economic stability, relatively high growth, and low unemployment that it had ever known.
In this respect, Blair’s premiership marked a fundamental break with the Labor Party’s tax-and-spend tradition.
It also established a new tradition of stability in economic policy, continuing and reinforcing the previous Conservative government’s commitment to fiscal discipline and low inflation.
Stable economic policy and rapid growth, in turn, enabled Blair’s government to pour extra money into education and the National Health Service.
Yet Blair’s domestic legacy is a mood of disillusion and mistrust, especially of Blair himself.
One reason is that a significant portion of Blair’s party (which he renamed “New Labor”) never reconciled itself to the primacy that he gave to free-market principles over its old Socialist or Social Democratic values.
Another is that Blair consistently seemed to pay much less attention to Parliament than to the right-wing tabloid press: the spin and media manipulation to which his office devoted so much effort worked wonders at first, but soon generated deep skepticism and mistrust.
But the main reason for Britain’s popular disillusion with Blair comes down to his role in the Iraq war, which was launched with the ostensible aim of pre-empting Iraq’s use weapons of mass destruction (WMD).
Of course, as we now know, WMD were never found, and, worse, evidence came to light showing that Blair was aware that the Bush administration was committed to regime change, regardless of their existence.
The infamous Downing Street memorandum of July 23, 2002, eight months before the outbreak of war, stated explicitly that “The intelligence and the facts were being fixed around the policy.”
In short, when Blair took Britain to war, he deliberately misled Parliament and the electorate about the ostensible rationale for it.
When no WMD were found, Blair fell back on the previously unavowed justification that the removal of Saddam Hussein was the “right thing to do.”
Unfortunately, the Bush administration did not foresee that Saddam’s removal would precipitate a multi-sided insurgency and civil war.
These dangers were predictable, and the world now knows that the war has proved a terrible failure of American strategy, and may yet have even more catastrophic consequences.
So why did Blair support it?
Part of the answer goes back to Blair’s first big foreign policy adventure, NATO’s intervention in Kosovo in 1999.
In 1998-1999 Serbia had embarked on violent repression of Kosovo’s ethnic Albanian majority, driving roughly 400,000 Kosovars from their homes.
Diplomatic efforts by the outside world proved ineffective, so in March 1999, NATO began a 78-day bombing campaign against the Serbs.
Blair was at the forefront among Western leaders in pressing for NATO action, and to justify this innovation in outside intervention he proclaimed “a new doctrine of international community” that made it a “just war,” because it was based on superior Western values.
One of Blair’s character flaws is self-righteousness, an excessive confidence – perhaps an extrapolation of his Christian faith – that he knows what is correct, and is therefore entitled to act accordingly.
In the case of the Iraq war, Blair has never conceded that the war was mistaken in conception or disastrous in practice: for him, it was still “the right thing to do.”
Blair leaves office before the full consequences of the Iraq war have been played out.
There is no sign of an end to the sectarian violence, and little prospect that Iraq can become a peaceful, unitary democracy.
Moreover, the convulsions in Iraq may well have incalculable repercussions throughout the Middle East.
One consequence, from a British perspective, is that it is now virtually impossible to imagine that any future prime minister could engage in another big military adventure primarily out of loyalty to an American president.
Indeed, it is possible that Blair, through his complicity in the Iraq war, has inflicted major damage on the very idea of a “special relationship” between Britain and the United States.
This relationship was always more special for the British than for the Americans, who scarcely recognize its existence.
But if it has now been discredited in the minds of the British people, the result may be a new element of independence into British strategic thinking.
Another consequence is that Britain’s moral standing has been damaged alongside that of the US. But the damage to America’s moral position is more serious for the health of the world.
It is uncertain whether Tony Blair could have dissuaded George Bush from waging war in Iraq.
Nevertheless, by enthusiastically backing Bush’s war, his legacy will forever remain deeply compromised.
Still Too Big to Fail
WASHINGTON, DC – Nearly seven years after the global financial crisis erupted, and more than five years after the passage of the Dodd-Frank financial-reform legislation in the United States, the cause of the crisis – the existence of banks that are “too big to fail” – has yet to be uprooted.
As long as that remains the case, another disaster is only a matter of time.
The term “too big to fail” dates back several decades, but it entered wide usage in the aftermath of the collapse of Lehman Brothers in September 2008.
As problems spread throughout the financial system, the US authorities decided that some banks and other financial companies were so large relative to the economy that they were “systemically important” and could not be allowed to go bankrupt.
Lehman failed, but AIG, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, and others were all rescued through various forms of massive – and unprecedented – government support.
The official line at the time was “never again,” which made sense in political and economic terms.
These large financial firms were provided a scale of assistance that was not generally available to the nonfinancial corporate sector – and certainly not to families who found that the value of their assets (their homes) was below the value of their liabilities (their mortgages).
If large, complex financial institutions continue to have an implicit government guarantee, many people – on both the right and the left – would agree that this is both unfair to other parts of the private sector and an inducement for big banks to engage again in excessive risk-taking.
In the jargon of economics, this is “moral hazard.”
But no special training is needed to know that it is unwise and dangerous when bank executives get the upside (huge bonuses) when things go well and everyone else bears the downside risks (bailouts and recession).
At the heart of the Dodd-Frank law is a two-pronged approach to the too-big-to-fail problem.
The first section of the legislation, Title I, stipulates that all firms must be able to go bankrupt without causing large-scale damage to the broader financial system or the real economy.
Regulators are instructed, in no uncertain terms, to make sure that all large financial firms are structured in such a way that bankruptcy, using the standard rules and procedures of the court system, can happen without repeating the catastrophic post-Lehman cascade.
In Title II of Dodd-Frank, Congress created a back-up authority through which the Federal Deposit Insurance Corporation (FDIC) can take over and manage a failing financial firm and impose appropriate losses on shareholders and some creditors without creating widespread systemic damage or a global panic.
The good news is that, over the past half-decade, the FDIC has made some progress formulating the design of a workable Title II.
The bad news is that there has been almost no progress in terms of ensuring that large financial firms actually can go bankrupt.
In a hearing this week before a part of the Senate Banking Committee, there was complete agreement across the political spectrum on this point.
The disagreement concerns what must be done to finish this important piece of Dodd-Frank business.
The Republican proposal is to modify the bankruptcy code, creating special provisions for large, complex financial institutions.
There are three problems with this approach.
First, all companies in the US should be able to fail under the same rules.
Privileged treatment for anyone perpetuates the perception that it is safer to lend to some large financial firms – and further strengthens their unfair advantage.
Second, it is fanciful to believe that the private sector would want to get involved in providing funding to a huge financial firm under court supervision, particularly during a systemic crisis.
The definition of such a crisis is precisely that moment when private-sector loans are not readily available.
And a large loan – in the tens of billions of dollars – provided by the US Treasury to a bankruptcy court judge is unlikely to be politically acceptable or economically sensible.
Finally – and most fatally – the bankruptcy of any large US financial firm today would induce a scramble for assets by regulators around the world.
Some foreign regulators – such as the Bank of England – have agreed not to act preemptively in a resolution process run by the FDIC.
But such agreements do not apply to a court-run bankruptcy process; authorities everywhere would move to protect local creditors and taxpayers by seizing assets in their jurisdiction.
The only reasonable alternative is to make large, complex financial institutions smaller and less complex so that it is possible for them to fail under standard bankruptcy rules.
This is the intent of Dodd-Frank.
The FDIC has pushed hard in this direction, whereas the Federal Reserve Board of Governors has been less enthusiastic.
Too Big to Jail
WASHINGTON, DC – Among the fundamental principles of any functioning justice system is the following: Don’t lie to a judge or falsify documents submitted to a court, or you will go to jail.
Breaking an oath to tell the truth is perjury, and lying in official documents is both perjury and fraud.
These are serious criminal offenses, but apparently not if you are at the heart of America’s financial system.
On the contrary, key individuals there appear to be well compensated for their crimes.
As Dennis Kelleher of Better Markets has argued, the recent so-called “robo-signing” settlement – in which five large banks “settled” their legal liability for carrying out fraudulent foreclosures on mortgages – is a complete sell-out to the financial industry.
First, there was no serious criminal prosecution – meaning that no one will be charged with a felony, and no one will go to jail.
In terms of affecting executives’ incentives, this is the only thing that matters.
Even the terminology used to frame the discussion is wrong.
Kelleher, an attorney with extensive experience in private practice and the public sector, tells it like it is: “‘robo-signing’ is massive, systematic, fraudulent, criminal conduct.”
Alternatively, as he points out, we could just call it “lying, cheating, and stealing.”
Second, the civil penalties in this settlement – a form of fine – are minuscule relative to the size of the companies involved.
As Shahien Nasiripour, one of the best reporters on this issue, dryly put it: “None of the five lenders have said they expect to incur a material charge due to the settlement.”
In other words, from a corporate perspective, the penalty is a trifling affair.
Third, such fines are, in any case, paid by the companies’ shareholders, not by their executives or board members (all of whom carry insurance).
In the rare cases in which fines have been levied on individuals, either their insurance policies picked up most of the bill, or the penalties were trivial relative to the cash compensation that they received while committing their crimes – or both.
As if all of this weren’t bad enough, the banks reportedly will be able to use government money to write down the value of mortgages, which amounts to subsidizing them to pay their own meaningless fines.
The Obama administration and its allies have worked hard to sell its roughly $20 billion settlement with the banks as one that will have a meaningful impact on the housing market.
But nothing could be further from the truth.
As Kelleher points out, the United States has “more than 10 million homes under water” (the outstanding mortgage exceeds the house’s value).
“Twenty billion dollars doesn’t make a dent in that: one million homes at $20,000 loan forgiveness is it.”
In fact, the Obama administration’s settlement with the mortgage lenders is consistent with its track record on all of its policies related to the financial sector, which has been abysmal.
But it is also puzzling.
Why would the administration continue to bend over backwards to be lenient towards top bankers under these circumstances?
I honestly do not believe that the administration’s stance reflects any form of corruption – payments made to individuals or even to political campaigns.
And, in this case, it does not even appear to reflect the lobbying power of big financial players.
That power certainly explains why the Dodd-Frank financial reforms enacted in 2010 were not stronger, and why there is now so much opposition to effective implementation of that legislation (for example, there is currently a huge fight around the “Volcker rule,” which would limit proprietary trading by megabanks).
But mortgage lenders’ criminal activities are another matter.
Indeed, at stake in the mortgage settlement are fundamental and systemic breaches of the rule of law – perjury and fraud on an economy-wide scale.
The Justice Department has, without question, all of the power that it needs to prosecute these alleged crimes fully.
And yet America’s top law-enforcement officials have consistently – and now completely – backed off.
The main motivation behind the administration’s indulgence of serious criminality evidently is fear of the consequences of taking tough action on individual bankers.
And maybe officials are right to be afraid, given the massive size of the banks in question relative to the economy.
In fact, those banks are bigger now than they were before the crisis, and, as James Kwak and I documented at length in our book 13 Bankers, they are much larger than they were 20 years ago.
Top bankers want to make a lot of money.
They also want to stay out of prison.
Political leaders can huff and puff as much as they want, but, without a credible threat of poverty and time behind bars, bankers have no reason to comply with the law.
For them, it’s all about the trade – and you can be the sucker in public policy as easily as you can be the sucker in an individual loan agreement.
The message to bank executives today is simple: build your bank to be as big as possible – and then keep growing.
If you manage to become big enough, you and your employees are not just too big to fail, but also too big to jail.
The Obama administration has just made everyone else the sucker.
Too Big to Reform?
LONDON – The best journalism, it is said, is the first draft of history.
Too Big to Fail by Andrew Ross Sorkin is certainly worthy of that designation.
As a bit player in the dramatic events that Sorkin describes (I am an independent director of Morgan Stanley in my spare time), I can confirm that he accurately captures the atmosphere of chaos and uncertainty that reigned in New York in the autumn of 2008.
It was a time when the tectonic plates of the financial system seemed to be shifting beneath us.
Institutions that had been seen as Rocks of Gibraltar were revealed to be smoking volcanoes, at risk of imminent dissolution into lava and ash.
Even Goldman Sachs continued to exist only thanks to the kind attentions of the United States Federal Reserve.
On the other side of the Atlantic, the British government found itself to be the proud owner of over 80% of Royal Bank of Scotland, which, according to some measures, had for a while been the world’s largest bank.
The experience was a lesson for banks, regulators, central banks, and treasuries, which, not surprisingly, were unprepared to handle a comprehensive crisis.
Their tools and powers were lacking.
The overriding conclusion that emerges from any analysis of these unhappy events is that nothing will ever be the same again: the relationship between the state and the markets needs to be rethought.
A new “social contract” between finance and the people, through their governments, is required.
That is easy to say, but governments, individually and collectively, are still struggling to redefine the terms of that contract.
Progress has been painfully slow, partly because officials have been fire-fighting, and partly because urgent domestic political imperatives compete with the desire to establish new, globally applicable mechanisms that would provide a stable underpinning for the international financial system and prevent regulatory arbitrage and the de-globalization of finance.
As a result, we are seeing different national regulatory approaches emerge.
In the US, the key driver of the biggest institutions’ decision-making is the Fed’s stress tests, which essentially assumed that everything that could go wrong would go wrong.
In Switzerland, the leverage ratio is now central.
Elsewhere, various versions of the Basel 1 and Basel 2 accords on international banking standards are in operation, sometimes with ad hoc supplements.
A new global Financial Stability Board is trying to make sense of all this, and also to work out a new “macro-prudential mechanism” reflecting system-wide risks.
But it has no formal authority to mandate a common approach to capital (the G-20 should give it one).
There is not much more progress to report on the too-big-to-fail problem itself.
What should be done about the mammoths of the financial jungle – some of which were conjured into being by governments themselves in the heat of the crisis?
Sorkin’s book reminds us that only 18 months ago, the US administration saw one answer in the creation of bigger and bigger banks, on the shaky argument that lashing two sinking ships together would somehow make them both seaworthy.
The British government did the same, acting as midwife to the Lloyds-Halifax Bank of Scotland combine, now widely seen to have been a major error.
It is no secret that there are deep divisions among public authorities on this question.
In the red corner, so to speak, we find former Fed Chairman Paul Volcker and current Bank of England Governor Mervyn King, not natural revolutionaries.
They would like to carve up the megabanks and especially to separate retail banking from securities trading, or what is often now called “casino banking.”
(In fact, the analogy is unfair to casino owners, who have a much stronger record in risk management than do most investment banks).
In the blue corner sit US Treasury Secretary Tim Geithner and his British counterpart, Alistair Darling, who argue that a revival of the Glass-Steagall Act, which divided investment banking from commercial banking, is not appropriate for today’s markets.
They believe that regulators can ring-fence capital supporting different business lines, to prevent contagion risk, and perhaps impose a surcharge on large “systemic” firms, to reflect the price of their implicit support from the central bank and government.
Depending on size, this might constrain the ambitions of institutions that have plainly been “too big to manage,” as well as “too big to fail,” which is the most fearsome combination.
Where do I stand in this lively debate?
I believe that more diversity in banking, and more competition, is highly desirable.
There is far too much concentration following the crisis, certainly in the United Kingdom and other parts of Europe.
Neelie Kroes, the retiring EU Competition Commissioner, was surely right to demand some divestiture of branches from the biggest groups, though arguably she did not go far enough.
It is encouraging, too, that private equity funds look interested in creating and funding new entrants.
We need new capital, and new approaches to management, in the banking system.
But I am nervous about the idea that regulators are best placed to determine the future shape of markets.
If the authorities are seen to have brought new institutions into being by fiat, might they not be obligated to support them, come what may?
Over time, the aim must surely be to minimize the proportion of the financial sector that is subject to some form of state guarantee.
A regulator-designed banking system would make that aim more difficult to achieve.
Too European to Fail
BERLIN – Among investment bankers, there is renewed speculation about the possibility of a country leaving European Monetary Union – or being pushed out.
Rating agencies have downgraded Portugal, Greece, and Spain, owing to their poor prospects for economic growth and weak public finances.
Ireland has been assigned a negative outlook and could soon suffer a downgrade as well.
With fears mounting that one or another euro-zone country may default, yield spreads on government bonds between EMU countries have reached record highs.
For some time now, Greek ten-year government-bond yields have been about 300 basis points above German yields.
This is a sign that investors now see a significant risk of a Greek default or of Greece exiting from EMU and redenominating its government bonds.
But the panic that EMU may disintegrate is overdone.
Rather than a default and subsequent exit from the euro zone, the member states are more likely to overrule a fundamental principle of EMU and bail out a fellow member state.
Leaving EMU would be a costly option for weak-performing countries.
Of course, regaining the exchange rate as an instrument for competitive devaluation could help overcome competitiveness losses due to soaring unit-labor costs.
As Argentina showed after its default and devaluation in the winter of 2001/2002, such a move can reignite exports and economic growth.
But Greece, Portugal, Italy, and Ireland are not Argentina.
The European Union treaty does not provide for an exit from EMU.
As a default would demand a change in the currency involved in private contracts, business partners from other EU countries would surely sue, legal uncertainties would drag on and on, and an exiting country’s trade with its main trading partners would be impaired for years to come.
So none of the countries at risk would seriously consider reintroducing a national currency.
It is possible that an EMU government will come close to insolvency or illiquidity.
Indeed, even something like a self-fulfilling debt crisis is thinkable: if market participants believe that a default or an exit from EMU is imminent, this would drive up government bond yields for the country in question.
At some point, yields might become so high that the government concerned could not refinance its maturing debt or finance its current expenses.
In this situation, a country would be faced with the sole option of default.
But even if this scenario is possible in theory, it is unlikely to occur in practice.
Letting one member fail would create speculative pressure on other EMU governments with weak fiscal positions or shallow domestic bond markets.
A widespread default of several countries in EMU would lead to serious disruptions of trade within the EU and to new problems in the banking system, which would have to write down their holdings of government bonds.
The large EU governments are well aware of this problem and would act accordingly.
With its loans to Hungary and Latvia, the European Commission has already revived a credit facility which was dormant since the European Monetary System crisis in 1992 – and for countries outside EMU.
The support is huge.
Together with the International Monetary Fund’s contribution, the EU loan to Latvia amounts to more than 33% of Latvian GDP.
By supporting to such a degree two new EU members that are not part of EMU, the EU countries have demonstrated a much greater commitment to mutual aid than was thinkable only a few years ago.
And more is expected to come: in November 2008, the Ecofin Council increased the ceiling for possible balance-of-payment loans to non-EMU countries to €25 billion.
Against this background, it seems inconceivable that the EU should refuse to support an EMU member in a situation similar to that of Hungary and Latvia, especially as all the countries that are currently on market watch lists are long-time EU members.
In case of real distress, the rest of the EU will offer a bailout package.
Indeed, the no-bailout clause in Article 103 of the EU Treaty – according to which neither the European Central Bank, the EU, nor national governments “shall […]amp#160; be liable for or assume the commitments” for other national governments – has lost its credibility.
The political and economic costs of letting a fellow member government fail are simply too high in the closely interconnected EMU.
Because there is no current blueprint for this move, one can only speculate about what it would look like.
One option is for large EU countries to construct a bailout package.
Alternatively, the EU could create a special facility through which it borrows money in the bond market to help the member in trouble – an arrangement similar to the bonds that the European Commission has already issued for the emergency facility from which Hungary and Latvia have been borrowing.
The EU is good at circumventing treaty obligations in times of real crisis.
There is no reason to expect this skillfulness to desert it this time around.
Too Much Information
CANBERRA – As a British court weighs whether Julian Assange should be extradited to Sweden, and American prosecutors weigh the criminal charges they will file against Private Bradley Manning, the alleged major source for the disclosures by Assange’s WikiLeaks, global debate continues on whether such revelations do more good than harm.
But, too often, that debate is polarized as&nbsp;national security vs. democratic accountability, with no room given to the distinctions that really matter.
In government, any leak is, by definition, embarrassing to someone, somewhere in the system.
Most leaks are likely to involve some breach of law by the original source, if not by the publisher.
But that doesn’t mean that all leaks should be condemned.
One of the hardest lessons for senior government officials to learn –­ including for me, when I was Australian Attorney General and Foreign Minister – is the futility, in all but a tiny minority of cases, of trying to prosecute and punish those responsible for leaks.
It doesn’t undo the original damage, and usually compounds it with further publicity.
The media are never more enthusiastic about free speech than when they see it reddening the faces, with rage or humiliation, of those in power.
Prosecution usually boosts leakers’ stature, making it useless as a deterrent.
But some lines do have to be drawn if good government is to be possible, just as a zone of privacy in our personal and family lives is crucial to sustaining the relationships that matter most to us.
As the sex-texting former United States Congressman Anthony Weiner is painfully learning, there is such a thing as too much information.
The trick is to know how and where to set boundaries that concede neither too much nor too little to those with a vested interest, for good reasons or bad, in avoiding scrutiny.
Some of WikiLeaks’ releases of sensitive material have been perfectly defensible on classic freedom-of-information grounds, exposing abuses that might otherwise have remained concealed.
The helicopter gunship killings in Iraq, the corruption of former Tunisian President Zine el-Abidine Ben Ali’s family, and the paucity of progress in Afghanistan are, by this standard, fair game.
None of this makes Julian Assange a Daniel Ellsberg (who 40 years ago leaked the Pentagon Papers, exposing US-government thinking on Vietnam). Nor does it put him in the same league with Anna Politkovskaya, the crusading journalist who was murdered after refusing to stop investigating Russian human rights abuses.
His stated motives seem too anarchic for that.
Sometimes, however, whistles do need to be blown.
But some leaks are indefensible, and at least the sources must expect some punitive reckoning.
This category includes leaks that put intelligence sources or other individuals at physical risk (as did some of WikiLeaks’ early releases on Afghanistan and Zimbabwe). It also includes leaks that genuinely prejudice intelligence methods and military operational effectiveness; expose exploratory positions in peace negotiations (invariably helping only spoilers); or disclose bottom lines in trade talks.
What is clear in all of these cases is that the stakes are so high that it simply cannot be left to the judgment of WikiLeaks and media outlets to make the necessary calls without consulting relevant officials.
Sensibly, US officials facilitated such consultations, on a “without prejudice” basis, in some of the early WikiLeaks cases.
The trickiest cases are in a third category: private conversations whose disclosure is bound to cause offense, embarrassment, or tension, but has no obvious redeeming public-policy justification.
The problem is not that negative things are said behind closed doors – as one leader famously responded to an apologizing Hillary Clinton, “You should hear what we say about you” – but that they become public knowledge.
Particularly in Asia, loss of face means much more than most Westerners will ever understand.
Governments should not over-react to these kinds of leaks.
They do leave bruises and generate tensions that are bound to undermine the confidence and frankness with which individuals interrelate, which can sometimes impede effective cooperative decision-making.
But life will go on, because it has to.
At the same time, these kinds of leaks should not be naively applauded as somehow contributing to better government.
They don’t, and won’t, because they will strongly influence at least what is written down and circulated, thereby inhibiting the free exchange of information within government.
Leaks of this kind will reinforce the bureaucratic barriers that must be removed if policymaking and implementation are to be effective in all areas that require input, coordination, and common information and analysis across departments and agencies.
Such leaks are also bound to lead governments to place a higher premium on information generated by covert intelligence-gathering, which is generally less leak-prone, but usually of much lower quality – as I can personally attest, having once been responsible for Australia’s main secret services.
It is also bound to inhibit officials – all but the bravest tend to be inhibited anyway – from conveying foreign criticism of government policy or personalities that might find its way into the media.
None of this improves policymaking.
Those of us who see the potential for far more harm than good in the WikiLeaks disclosures, and refuse to join in the cheers for Assange and his colleagues, are probably trying to resist an inexorable tide.
We know that we will all have to get used to more exposure and make the best of it, but that shouldn’t stop the effort to draw lines where they really matter.
Too Much Saving, Too Little Investment
Talk abounds of a global savings glut.
In fact, the world economy suffers not from too much saving, but from too little investment.
To remedy this, we need two kinds of transitions.
How well the world makes them will determine whether the strong global growth of the last few years will be sustainable.
This is the central message of the IMF’s World Economic Outlook, which will be released this week [editors: on Wednesday, September 21st 2005] on the eve of the Fund’s 2005 Annual Meeting.
First, consumption has to give way smoothly to investment, as past excess capacity is worked off and as expansionary policies in industrial countries normalize.
Second, to reduce the current account imbalances that have built up, demand has to shift from countries running deficits to countries running surpluses. Within this second transition, higher oil prices mean consumption by oil producers has to increase while that of oil consumers has to fall.
The current situation has its roots in a series of crises over the last decade that were caused by excessive investment, particularly the bursting of the Japanese asset bubble, crises in emerging Asia and Latin America, and the collapse of the IT bubble in industrial countries.
Investment has fallen off sharply since, and has since staged only a very cautious recovery.
The policy response to the slowdown in investment differs across countries.
In the industrial countries, expansionary budgets, coupled with low interest rates and elevated asset prices, has led to consumption- or credit-fueled growth, particularly in Anglo-Saxon countries.
Government savings have fallen, especially in the United States and Japan, and household savings have virtually disappeared in some countries with housing booms.
By contrast, the crises were a wake-up call in many emerging-market countries.
Historically lax policies have become far less accommodative. Some countries have primary fiscal surpluses for the first time, and most emerging markets have brought down inflation through tight monetary policy.
With corporations cautious about investing and governments prudent about expenditure – especially given the grandiose investments of the past – exports have led growth.
Many emerging markets have run current-account surpluses for the first time.
We should celebrate the implicit global policy coordination that enabled the world to weather the crises of recent years.
However, the fact that rich countries are consuming more, and are being supplied and financed by emerging markets, is not a new world order; it is a temporary and effective response to crises.
Now it needs to be reversed.
Indeed, it is misleading to term this situation a “savings glut,” for that would imply that countries running current-account surpluses should reduce domestic incentives to save.
But if the problem is weak investment, then a reduction in such incentives will lead to excessively high real interest rates when the factors holding back investment dissipate.
Policy, instead, should be targeted at withdrawing excessive stimulus to consumption and loosening the constraints that are holding back investment.
There are reasons to worry whether the needed transitions will, in fact, occur smoothly.
First, with asset prices like housing fueled by global liquidity, goods prices kept quiescent by excess capacity and global trade, and interest rates held down by muted investment, domestic and external imbalances have been easily financed.
The traditional signals provided by inflation expectations, long-term interest rates, and exchange rates have not started flashing.
Instead, bottlenecks are developing elsewhere, as in oil.
It may well be that easy financing has given economies a longer leash.
The worry, then, is that when the signals change – as they must – they will change abruptly, with attendant harsh consequences for growth.
Alternatively, prices such as that of oil will have to move more in order to effect the most pressing transitions, creating new imbalances.
Policymakers should not see higher oil prices as an aberration to be suppressed, but should focus on underlying causes.
Second, more investment is needed, particularly in low-income countries, emerging markets, and oil producers (though less in China, the exception that proves the rule).
But the answer is not a low-quality investment binge led by government or fuelled by easy credit; we know the consequences of that.
Instead, product, labor, and financial markets must be reformed so that high-quality private-sector investment emerges.
It is here that the good may have been the enemy of the perfect.
Strong exports and decent government policies have enabled some countries to generate growth without the reforms that can create the right incentives for investment.
These countries are overly dependent on demand elsewhere, which in turn is unsustainable.
With the right reforms, adopted in concert, the world can make the needed transitions.
But one of the risks associated with the large current-account imbalances we now face is that politicians may decide to blame one or another country and espouse protectionist policies.
That could precipitate the very global economic downturn that we all want to avoid.
If, instead, countries see the transitions as a shared responsibility, each country’s policymakers may be able to guide the domestic debate away from the protectionism that might otherwise come naturally.
Each country should focus on what it needs to do to achieve sustained long-term growth.
In that possibility lies the well-being of us all.
Too Much “Too Big to Fail”?
LONDON – Obviously, the global financial crisis of 2008-2009 was partly one of specific, systemically important banks and other financial institutions such as AIG.
In response, there is an intense debate about the problems caused when such institutions are said to be “too big to fail.”
Politically, that debate focuses on the costs of bailouts and on tax schemes designed to “get our money back.”
For economists, the debate focuses on the moral hazard created by ex ante expectations of a bailout, which reduce market discipline on excessive risk-taking – as well as on the unfair advantage that such implicit guarantees give to large players over their small-enough-to-fail competitors.
Numerous policy options to deal with this problem are now being debated.
These include higher capital ratios for systemically important banks, stricter supervision, limits on trading activity, pre-designated resolution and recovery plans, and taxes aimed not at “getting our money back,” but at internalizing externalities – that is, making those at fault pay the social costs of their behavior – and creating better incentives.
I am convinced that finding answers to the too-big-to-fail problem is necessary – indeed, it is the central issue being considered by the Standing Committee of the Financial Stability Board, which I chair.
But we must not confuse “necessary” with “sufficient”; there is a danger that an exclusive focus on institutions that are too big to fail could divert us from more fundamental issues.
In the public’s eyes, the focus on such institutions appears justified by the huge costs of financial rescue.
But when we look back on this crisis in, say, ten years, what may be striking is how small the direct costs of rescue will appear.
Many government funding guarantees will turn out to have been costless: liquidity support provided by central banks at market or punitive rates will often show a profit, and capital injections will be partly and sometimes wholly recovered when stakes are sold.
Emerging estimates of the total fiscal costs of rescue vary by country, but are usually just a few percentage points of GDP.
As a result of this crisis, however, government debt-to-GDP ratios in the United Kingdom and the United States will likely rise by 40 to 50 percentage points, and more important measures of economic harm – foregone GDP growth, additional unemployment, and individuals’ wealth and income losses – will rise as well.
All of this implies that the crucial problem is not the fiscal cost of rescue, but the macroeconomic volatility induced by precarious credit supply – first provided too easily and at too low a price, and then severely restricted.
And it is possible – indeed, I suspect likely – that such credit-supply problems would exist even if the too-big-to-fail problem were effectively addressed.
In the US, this crisis has seen over-exuberant commercial real-estate lending by regional banks.
If such banks fail, they are resolved by the Federal Deposit Insurance Corporation (FDIC) in the normal fashion, and this has always been the market’s ex ante expectation.
In the UK, similarly, we have had problems with mid-sized mortgage banks, and with poor commercial real-estate lending by mutual building societies, as well as problems with two large banks.
Ireland faces huge economic problems as a result of a commercial real-estate boom driven by banks that are relatively small by global standards.
There is therefore a danger that excessive focus on “too big to fail” could become a new form of the belief that if only we could identify and correct some crucial market failure, we would, at last, achieve a stable and self-equilibrating system.
Many of the problems that led to the crisis – and that could give rise to future crises if left unaddressed – originated elsewhere.
Toppling Russia’s Modernizers
MOSCOW – Russian President Dmitri Medvedev’s decision to fire Moscow’s long entrenched mayor, Yuri Luzhkov, is the most decisive move he has made in his presidency.
Is it really part of his drive to modernize Russia, or part of an emerging power play with Moscow’s real strong man, Prime Minister Vladimir Putin?
Anatoly Chubais, the father of Russian privatization in the 1990’s and the current head of the country’s nano-technology conglomerate RosNano, recently admitted that the prospects for political modernization in Russia are dim. “Today,” he said, “no demand for it exists.
Such demand requires a social group to promote it.” He went even further in a conversation with foreign investors, suggesting that the threat of fascism in Russia will grow to the point that “discussions about Putin and Medvedev, Medvedev or Putin, will pale in comparison.”
This gloomy view might be explained by the interest Chubais has in stopping the West from challenging Russia’s rulers for violating human rights and curtailing freedom.
To avoid an even worse alternative, the United States and Europe should support the Putin-Medvedev tandem, in the hope that they provide a stable and secure environment for investment.
Chubais, a one-time reformer, is now totally complicit in the regime’s policies.
Nevertheless, he is telling the truth.
Russia’s chief modernizer and protégé of President Dmitri Medvedev, Igor Yurgens of the Institute of Contemporary Development, thinks in much the same way.
Indeed, he suggests that Russians “are not citizens, but rather some sort of tribe,” and that the archaic character of Russian society is not likely to change before 2050.
Of course, Russian politicians are always fond of assigning a due date for change: Nikita Khrushchev once memorably promised to build communism in 20 years.
But what matters here is a common perception that Russians are not ready to assume the responsibilities of citizenship.
Once again, all the formulas for Western-type democracy depend on the will of an enlightened and benevolent czar.
Medvedev is currently seeking to perform this role.
Once he brings about truly modernizing reforms, people will supposedly follow willingly, forgetting centuries of serfdom, the dictatorship of the proletariat, the political chaos and economic free-fall of the 1990’s, and the decade of Putin’s managed democracy.
But neither Khrushchev, nor Mikhail Gorbachev, nor Boris Yeltsin were able to uproot Russia’s stubborn culture of indifference and subordination, precisely because they insisted on top-down change and expected that the Russian people would simply acquiesce en masse.
Will Medvedev succeed where all others have failed?
The scandal over Mayor Luzhkov’s incompetence in handling this summer’s deadly heat wave and wild fires is being portrayed as a split between the “modernizing” Medvedev and the “old guard” Putin.
The Kremlin recently ran on its TV channels documentaries savaging Luzhkov, and Medvedev has indicated that it’s high time for the mayor to retire.
Putin, on the other hand, has not been publically critical of Luzhkov.
After all, it was under his (unlikely disinterested) supervision that the mayor turned Moscow into a private fiefdom.
With a city budget of almost $50 billion, Luzhkov encouraged architectural vandalism, overlooked giant traffic jams, and saw his wife become the richest woman in Russia through her Moscow construction projects.
To all of this, Putin never once said “boo.”
Most analysts suggest that this visible disagreement between Putin and Medvedev over Luzhkov’s fate is a sign of a looming contest for the presidency in 2012.
Luzhkov, after all, had been vocally critical of Medvedev, while praising Putin – allegedly an attempt to drive a wedge between the two.
So, in this scenario, unmasking Luzhkov as corrupt and incompetent, and using him as a scapegoat for Russia’s systemic inefficiency, is intended as a way for Medvedev to sway public opinion behind him and make Putin appear out of touch.
The problem, though, is that Medvedev, like Luzhkov, was also mostly invisible during the summer’s disastrous heat wave, whereas Putin was everywhere, even piloting fire-fighting airplanes over burning forests.
Since Putin did not formally take sides over what would happen to Luzhkov, had Medvedev’s campaign against Moscow’s former mayor failed, the president would have found himself without a job in 2012.
He would be forced to join Russia’s pathetic opposition, which bears part of the blame for the country’s toxic political culture.
The opposition – led by Boris Nemtsov, the former leader of the now-defunct Union of Right Forces, Mikhail Kasyanov, a former prime minister, chess master Garry Kasparov, and the writer Edward Limonov – has no coherent message with which to win support or provide a credible alternative to the country’s current leadership.
So the power elite fight among themselves, because there is no one else to fight with.
Now with Medvedev showing what appears to be a backbone, the presidential election campaign is officially on the way.
The truth is, Russian elections won’t depend on who has been more displeased with Luzhkov.
Russians who are dissatisfied with the system still have a limited choice: either support marginal, weak, and discredited oppositional candidates, or, hoping for modernization from the top, side with the very system they oppose.
There is nothing new in the mistrust of the masses expressed by people like Chubais or Yurgens, or in Medvedev’s putative desire to impose modernization from the top.
(Khrushchev’s “Thaw” and Gorbachev’s Perestroika happened the same way.)
What is new, in Russia at least, is the emergence of organized resistance to this failed paradigm.
Beyond the opposition, numerous non-political public initiatives have sprung up in the last several years to protest specific government policies – leading inevitably to confrontation with the existing political order.
To be sure, such initiatives have not become substantial, and the political opposition is constantly trying to appropriate them to make their own case more credible.
But it is these people – motorists, volunteer ecologists, and charitable-campaign organizers – rather than Russia’s politicians who represent the country’s best hope for modernization.
Toppling the Arab Berlin Wall
Tens of millions of Arabs witnessed the toppling of Saddam Hussein last spring, and saw in his fall reflections of their own situation.
Rightly so, for Iraq's transition can mark the start of the fall of the "Arab Wall"--the invisible barrier of authoritarianism and rigidity that isolates the region as surely as the Berlin Wall once cut Europe in two.
Given the Middle East's deep malaise, today's Arab status quo cannot long endure.
But what will replace it?
Three dark possibilities exist: anarchy of the type that allowed Osama bin Laden to flourish in Afghanistan, civil wars of the sort that ravaged Algeria and Sudan, or a new Saddam-style authoritarianism.
To realize any of these scenarios, the world need do nothing but wait and watch the present status quo rot and sink into chaos.
But there is a positive alternative: a reformist path leading to the establishment of the rule of law, individual rights, a more robust civil society, and democratization across the Arab world.
Despite the violence now plaguing Iraq, finding that path is possible.
The Arab world has been relatively stable for the past decade or two.
The assassinations, coups, and social disorder that dominated the region between 1945 and 1990 have virtually disappeared, the two big exceptions being the Iraqi invasion of Kuwait and the Palestinian-Israeli conflict.
But relative stability has not improved matters, delivering only failed governments, negative growth, the rise of radical Islam, and ever more repression.
Such inertia breeds hopelessness, and a nihilist yearning for violence.
As one young Arab told me when describing his homeland: "The country never invests in the young, we have no place, we are not wanted.
I could easily burn this place and move on with no regrets."
How can the Middle East halt this downward spiral of despair and rage?
Muslims have experimented with most of modernity's political faiths: socialism (Algeria, Egypt, Iraq, Libya, Syria, and Yemen), communism (South Yemen), state capitalism fused with monarchy (the Gulf states, Jordan, and Morocco).
They have even experimented with homegrown ideologies--Nasserism, Ba'athism, and Khomeinism.
Just about the only untested ideology in the region is liberal capitalist democracy.
The Kuwaitis, along with the region's other royal states--Bahrain, Qatar, Oman, and the UAE--may be the best bet to pursue a liberal approach, given the already tolerant nature of their kings and emirs.
The call for Saddam Hussein's resignation by Sheikh Zayed bin Sultan Al Nahayan of the UAE before the US invasion suggests that at least some Arab leaders are prepared to welcome far-reaching change in their region.
By contrast, viable reform in Saudi Arabia faces much greater challenges.
The al-Saud royal family failed to back the US effort in Iraq because of domestic concerns.
The country's religious laws and character--central to the regime's legitimacy--undermine liberal forces, and many Saudis fear that the pressures surrounding religious and political reform will lead to an explosion.
But the Saudi establishment's serious response to the May 2003 attack on a civilian compound in Riyadh at least gives a glimmer of hope that the al-Saud may see reform as their only hope of survival.
In Jordan, reform will require rebalancing the country's social fabric, with Palestinian Jordanians given greater freedom to contribute politically in meaningful ways.
But they will first have to make a conscious decision to accept Jordan as their home.
The Middle East's secular states confront different problems.
Egypt's once preeminent leadership role in the Arab world has eroded as influence shifted to Qatar, the UAE, even Syria--and now potentially to a democratic Iraq.
Egypt can reclaim Arab leadership only if it guides the region in the quest for cultural renaissance, liberalism, democracy, educational reform, and economic development.
Egypt's history could support this role.
The monarchy was overthrown in 1952 without violence, and for 250 years Egypt has shown itself capable of producing both radical and reformist political trends.
Indeed, the fate of reform in Egypt will in some ways mean either the death or the renewal of the Arab world.
Syria's situation is similar, but different.
Syria profited directly from trade with Iraq and from oil transport fees, while Saddam's fall turned the spotlight on subjects that the regime prefers to keep in the dark: Syria's role in Lebanon, its support for Hezbollah and some Palestinian organizations, one-party rule, and human rights violations.
Above all, Syria wants to bypass Washington's reform agenda and preserve the domestic status quo.
So the regime hopes that Iraq becomes a quagmire, forcing the US to ask Syria for help.
But if Bashir Assad wants Syria to avoid sinking deeper into poverty and irrelevance, he must undertake political, cultural, and economic liberalization.
Assad has the capacity to take bold steps, but he is constrained by the establishment that he inherited (and of which he is a product).
For the Middle East's monarchical regimes, and secular ones like Assad's, reform does not necessarily mean self-destruction.
As Mexico and postcommunist Europe demonstrated, nimble elites can re-invent themselves as they change their political system.
Iran, however, does not have this luxury.
Iranians yearn for reform, reflected in President Khatami's two landslide electoral victories.
But the ruling mullahs' stiff resistance to even modest changes suggests that they understand that serious reforms will put their rule at stake.
Even so, the possibility of reform has never been closer because Iran's huge and young population demands it.
No Arab country has yet produced such powerful social and cultural movements demanding change.
But indigenous reform in the Middle East is only half the battle.
The other half is bringing peace to Palestinians and Israelis.
Reform cannot succeed in the midst of a conflict that bolsters extremists and hatred.
All the walls that separate the region from integration into the modern and global community must be brought down.
Torture and the Politics of Ambiguity
Each new revelation of physical abuse, maltreatment, and sexual humiliation of Iraqi prisoners by American and British soldiers shocks international public opinion, leaving officials to scramble desperately to contain the damage.
US Secretary of Defense Donald Rumsfeld warns that more documentary evidence of wrongdoing at Abu Ghraib prison lies in store, evidently in the preemptive hope that the outrages stopped there.
As a former US military intelligence interrogator, I am convinced that the images from Abu Ghraib are just the beginning.
The wanton cruelty there is all too clearly symptomatic of a systemic failure.
But what system failed?
Was it a failure of discipline and training - the result of sending inexperienced and unworldly reservists into poor conditions, abruptly extending their deployments, and then leaving them understaffed in the face of a growing influx of captured insurgents?
Or did the pattern of abuse amount to so many orders from superiors to "soften up" prisoners for interrogation?
The answer is most likely both and neither.
Ultimately, what gives rise to abuses such as occurred at Abu Ghraib is a policy of deliberate ambiguity concerning how to handle detainees.
The pressure in a war setting to get information that could save lives is immense.
But, just as understandably, senior political and military officials - particularly in democracies - prefer to avoid any association with torture.
Ambiguity is thus a political strategy that encourages the spread of implicit, informal rules of behavior, thereby shifting accountability onto the lowest ranking, least powerful, and most expendable soldiers.
I completed the US Army's three-month basic interrogation course in the late 1980's, after studying Russian at the Defense Language Institute in Monterey, California.
The course was rigorous - only seven of 33 students finished it - as it required mastering the technical minutiae of collecting, crosschecking, standardizing, and reporting enormous masses of information.
But the curriculum was much less meticulous concerning interrogation techniques.
An interrogation, we were instructed, should begin with polite, direct questioning, because a certain number of detainees simply want to unburden themselves.
If more persuasion was needed, we could offer rewards for cooperation - anything from cigarettes to political asylum.
Beyond this, we were taught that we could "apply pressure."
The term was never defined in any formal setting, but the concept was not difficult to decipher.
As US Army General Antonio Taguba's report on the abuses at Abu Ghraib puts it, the "guard force" was "actively engaged in setting the conditions for successful exploitation of the internees."
This obvious violation of the Army's rule prohibiting participation by military police in interrogation sessions does not surprise me.
I was never taught that military police came under a separate chain of command.
On the contrary, between classes, during breaks in field training, and in other informal settings, some of our instructors - typically older, more experienced interrogators - let it be known through insinuation and innuendo that we could have the guards beat uncooperative subjects.
This was never said in the classroom, but even there, it was made clear that the role of military police was to serve the interrogators.
After all, an interrogator's effectiveness depends on convincing the detainee of his omnipotence.
If an interrogator promises better food or an extra blanket, the guards must provide it; if an interrogator wants the detainee's cell to remain brightly lit all night, that must happen, too.
The detainee simply must believe that his fate is entirely in the interrogator's hands.
The hidden rules of the game came closest to being officially acknowledged during two uninterrupted weeks of simulated interrogations towards the end of the training course.
These sessions involved only a student interrogator, an instructor in the role of the detainee, and a video camera.
When, during a simulation, I asked an imaginary guard to take away the detainee's chair, the instructor feigned being removed violently.
When I told the non-existent guard to hit the detainee, the instructor played along.
All of us knew that a failed interrogation could mean being dropped from the course.
I was not dropped;
I finished first in my class.
For those who benefit from the politics of ambiguity, international law is an indispensable prop.
In his recent US Senate testimony, Rumsfeld claimed that the military police at Abu Ghraib were instructed to abide by the Geneva conventions.
So was I. Throughout my training as an interrogator, the admonition to follow the Geneva conventions accompanied virtually every discussion of "applying pressure."
Unfortunately, like "applying pressure," the Geneva conventions were never defined.
We never studied them, nor were we given a copy to read, much less tested on their contents.
For many of us - teenagers or only slightly older - the Geneva conventions were at best a dimly remembered cliché from war movies that meant, "Don't do bad stuff."
Again, the tacit rules said otherwise.
One instructor joked that although the Geneva conventions barred firing a 50-caliber machine gun at an enemy soldier - an act defined as "excessive force" - we could aim at his helmet or backpack, since these were "equipment."
Others shared anecdotes about torturing detainees.
Whether such talk was true is irrelevant.
We were being conditioned to believe that the official rules set no clear limits, and that we could therefore set the limits wherever we liked.
In the end, the politics of ambiguity may fail Rumsfeld; all those high-resolution photographs from Abu Ghraib are anything but ambiguous.
If similarly shameful disclosures multiply, as I believe they will, let us at least hope that official apologies and condemnations may finally give way to wider, more genuine accountability and reform.
Toward a Genuine Economic and Monetary Union?
FRANKFURT – Since Europe’s Economic and Monetary Union (EMU) was created, no progress toward political unification has been made – or even really attempted.
Now that Europe’s current crisis has convinced many that existing institutional arrangements are unsustainable, this may be about to change.
But should it?
According to the presidents of the European Commission, the Euro Summit, the Eurogroup, the European Central Bank, and the European Parliament, the answer is yes.
Indeed, in a recent report, they call for progress toward a “deep, genuine, and fair” EMU; economic, financial, and fiscal union; and a political union that provides the foundation for the rest “through genuine democratic accountability, legitimacy, and institutional strengthening.”
The report echoes similar proposals by academics, journalists, and other public officials, including, most notably, French President François Hollande.
In my view, however, the report, like the proposal to establish a European finance minister, is fundamentally flawed.
While the report contains a number of important observations, its underlying assumption – that steps toward all of its goals should be taken in parallel, with a genuine political union emerging at the end of the process – is problematic.
After all, establishing a political union would require amendments to national constitutions and, in most countries, referendums.
But voters are far from enthusiastic about the prospect of ceding more authority to Europe.
Initially, monetary union was supposed to propel Europe toward political union.
But the euro is no longer a strong common currency that reinforces a shared European identity.
On the contrary, it is now a source of deep resentment among European peoples – resentment that, 70 years after the end of World War II, was supposed to have been eliminated.
To be sure, many have suggested that the current crisis represents a vital opportunity to overcome these tensions and build an ever-closer union, citing the belief of Jean Monnet, one of the European Union’s main architects, that crises are critical to spur progress toward integration.
But can this approach work at a time when there is so little trust among member countries?
Or would pushing forward under such circumstances create even more resistance?
The five presidents recommend launching their proposed agenda to reinvigorate integration only after 2017.
It seems likely that this timing reflects the fear that voters in the biggest countries, where elections will be held in the next two years, will react negatively to the proposal.
This is not a sign of great confidence in the suggested procedure.
The reality is that a European political union is unlikely to be established anytime soon.
And without true political unification, efforts to pursue the rest of the presidents’ plan, including the transfer of fiscal competencies to the European level, would carry serious risks.
Fiscal integration is high on the five presidents’ agenda.
Although the Stability and Growth Pact has lost more and more respect (indeed, it is now to be applied, according to the European Commission, purely according to national leaders’ discretion), it would remain the anchor for fiscal stability and confidence.
The report also specifies that a genuine fiscal union would require “more joint decision-making on fiscal policy.”
The presidents insist that this “would not mean centralization of all aspects of revenue and expenditure policy,” with member states continuing to decide on taxation and the allocation of budgetary expenditures.
But “as the euro area evolves towards a genuine EMU,” they explain, “decisions will increasingly need to be made collectively,” perhaps through a eurozone treasury.
Limited or not, this is a transfer of fiscal responsibility to the European level.
And it is difficult to imagine how the report’s call for “democratic accountability and legitimacy” in the decision-making process can be met without a full-fledged political union.
There is a fundamental conflict between the call to give priority to European needs and the dictates of member states’ constitutions, which cannot be resolved by gradually shifting competences de facto from the national to the European level, or by expanding the EU budget.
Within the existing institutional framework, political responsibility for higher transfer payments among countries must remain with the national governments, controlled by national parliaments and electorates.
Political union may remain possible in the distant future.
It cannot, however, be achieved through the back door, by eroding members’ fiscal-policy sovereignty.
Attempting to compel transfer payments would generate moral hazard on the part of the recipients and resistance from the donors, with the resulting increase in tensions possibly jeopardizing the integration that has been achieved so far.
Given this, for a considerable period of time, Europe’s monetary union will have to exist without political union.
In other words, the EMU will remain an institutional arrangement among individual countries that retain their fiscal sovereignty.
The key to making such a system work is to ensure that national governments are held accountable for their economic policies.
All treaties and commitments – including, crucially, the Maastricht Treaty’s “no bailout” clause – must be respected without exception.
Pacta sunt servanda – agreements must be honored.
If this principle is permanently violated, how can one expect a prosperous future based on a new set of treaties that are even more demanding than the existing ones?
Toward an Atlantic Divorce?
LONDON: Trends on both sides of the Atlantic are undermining the half-century’s-old partnership between North America and Europe.
If these challenges become the cockpit of rivalry, allowing one side to seek advantage over the other, the world will a become less peaceful, less stable, and less prosperous place.
What forces are beginning to drive America and Europe apart?
One is the extent to which North America’s center of gravity is shifting westwards.
California long ago overtook New York as the most populous US state.
British Columbia plays an increasingly important role in Canada.
Silicon Valley and Microsoft are both on the West Coast.
Japan, despite recent difficulties, remains an economic giant.
And China, is, for the US, both its greatest opportunity as a market and its greatest potential superpower rival.
Today, trade disputes have gotten closest to fracturing transatlantic relationships.
Attempts by the US to exert extra-territorial jurisdiction including the attempt to ban British businessmen from visiting Cuba, incite European resentment.
European attitudes to the import of Caribbean bananas and hormone treated beef arouse strong reactions in North America.
That trading relationship will remain difficult to manage, for commercial interests do differ.
Governments are increasingly called to assist their own companies.
Conflicts are inevitable.
Threats to the Atlantic partnership from Europe are equally ominous, led by the drive towards European integration.
This is, in part, explicitly motivated by a desire to create a European rival to US power.
I say, in part, for not all who espouse a single European State are anti-American.
But a number of are.
In France, during the 1992 referendum on the Maastricht Treaty, one poster used by campaigners for a 'Yes' vote featured a Yankee cowboy squashing the globe beneath his boots.
The byline read: "Faire l'Europe c'est faire le poids" (To build Europe is to give us weight).
President Mitterrand was more vivid: "France does not know it, but we are at war with America.
Yes, they are very hard, the Americans, they are voracious, they want undivided power over the world."
Recently, French Foreign Minister Hubert Vedrine, launched a sweeping attack on the US, repeated his description of it as a 'hyperpower'.
Many advocates of the euro wish to see it rival the dollar as an international reserve currency.
Within defined limits, and provided that decisions are taken by consensus, there is a case for a common EU foreign policy.
EU members have many interests in common.
It makes sense for those common interests to be safeguarded and addressed by co-operative, co-ordinated action.
But as the potential for action of this kind increases so the potential for conflict with North America increases.
European countries have different policies from the US on Cuba, Israel, Iraq and Libya to name just a few.
So far, these differences are managed without impairing the alliance’s fundamental harmony.
But it is not difficult to foresee situations in which differences might become acute.
What if the EU were to take a fundamentally different view to the US on transferring advanced technology to China?
How long would it be before relations with China became a cockpit of transatlantic rivalry?
Most sensitive of all is the future of military relations between Europe and North America.
For 50 years this has been the keystone of partnership despite complexities caused by the fact that not all European members of NATO are members of the EU and not all EU members of EU are members of NATO.
The Western European Union (WEU), which includes all relevant countries, provided the organizational structure for preserving and promoting partnership.
As a result of an initiative by the UK Government, the WEU is to be absorbed into the EU.
The UK Government signed an agreement with France at St. Malo which provides for military co-operation between the two countries "inside and outside" NATO.
Other agreements refer to building an autonomous European defence capability.
It is not difficult to see how European military co-operation outside NATO’s framework has profound implications for the Atlantic partnership.
The part played by the UK in promoting this initiative calls into question the extent to which Britain will perform its traditional bridge building role.
This is not to deny the potential of that role, which remains important.
It is, moreover, a role that Britain would no longer be able to play if it left the EU as is sometimes advocated.
But even within the EU, Britain’s role can no longer be taken for granted by the US.
The Cold War was the glue which held both shores of the Atlantic together.
Strains and stresses paled when compared to the Soviet threat.
That glue has dissolved.
Because the threat no longer exists, many think that risks can be run.
This is a profoundly mistaken and superficial view, though undoubtedly widespread in Europe, with some adherents in Britain.
If partnership is replaced by rivalry and rivalry becomes hostility both Europe and America will be the losers.
Some may say, indeed do say, that Europe could never rival North America and -- that attempts to do so are doomed to failure.
I agree.
But attempting such rivalry damages the partnership.
Many problems faced by the post Cold War world can best be overcome by Europe and America acting together.
Kosovo is one example.
Even in far away East Timor there is British and American support for the main Australian contingent.
If instead of working Europe and North America exploit problems for their own purposes and make them a focus of rivalry and hostility, the rest of the world would be gravely disadvantaged.
What if, say, Taiwan and China were to face off? Would Europe and America be on the same side?
What if Europe and America found each other at odds over some future conflict in the Balkans?
What if they found themselves backing opposing combatants?
To preserve the Atlantic partnership great effort is needed to ensure that policymakers -- on both sides -- are alert to the dangers.
Often the transatlantic dimension -- the need to promote partnership -- cannot be the decisive factor in decisions.
But if it is not overlooked, if those in positions of responsibility are resolved to do all they can to minimise the strains and mitigate the damage, danger can be averted.
Without such efforts, the Atlantic Partnership, at the moment of its greatest prosperity, may be doomed to drift and divorce.
Towards a French Sixth Republic?
PARIS – Nearly 50 years after the creation of the Fifth Republic by General Charles de Gaulle, Nicolas Sarkozy wants to change France’s fundamental institutions.
An expert council will send him its proposals by November 1.
Whereas British democracy is deeply rooted despite its supposedly “unwritten” constitution, and the US constitution has been amended only 26 times since 1787, France has redrafted its constitution 15 times since 1789.
Only the Third Republic (1875-1940) lasted longer than the current Fifth Republic.
Established quickly in 1958 by de Gaulle in the midst of the Algerian crisis, tthe institutions of the Fifth Republic came under fire from the very first day.
The antagonism that much of the left felt toward the Fifth Republic, which was tailored to fit de Gaulle’s outsized figure, faded only in 1981, when François Mitterrand, one of de Gaulle’s most vocal opponents, benefited from the power vested in the presidency.
Since then, a consensus has emerged in favor of the 1958 constitutional structure, because it has provided France with the strong executive it had always lacked.
De Gaulle’s constitution has also proved flexible enough to allow France to overcome several crises – Algeria, May 1968, de Gaulle’s resignation, changes of government from right to left, and antagonism between left-wing presidents and right-wing prime ministers or vice-versa (“la cohabitation”), as occurred in 1986, 1993, and 1997.
But, despite a half-century of political stability, there is growing criticism of the Fifth Republic’s institutional arrangements.
Some blame the hybrid nature of de Gaulle’s system for France’s seeming political paralysis.
Neither presidential (the prime minister is accountable to the National Assembly, whereas there is no accountability in a presidential regime) nor parliamentary (the president is elected by direct suffrage and has significant power), the system has seen increasing periods of “cohabitation,” which has generally proven inefficient.
Others believe that France’s current institutions are the main, if not the only, cause of an emerging democratic crisis.
Distrust of politicians is mounting, manifested in weak electoral turnout (except for the last presidential election), protest votes for extremist parties, and the state’s inability to reform itself.
All of these negative trends were symbolized by Jean-Marie Le Pen’s success in reaching the second round of the 2002 presidential election.
Since the Fifth Republic was established, both French society and the world have undergone huge changes, with important consequences for the way the country is ruled.
Globalization has reduced the state’s freedom of action, and the European Union has gained in prominence.
Does this mean that a Sixth Republic is inevitable?
As the president is already elected directly, some critics recommend a pure presidential regime, as in the United States.
Others support moving toward a pure parliamentary regime in the manner of the United Kingdom.
But a presidential regime runs the risk of a stalemate between the executive and the legislature, and a pure parliamentary regime, such as existed in the Third Republic, has a track of failure in France.
Nor does France seem ready to endorse a first-past-the-post electoral system, which gives governments strong parliamentary majorities, as in the UK.
Sarkozy seems to favor renovating the Fifth Republic.
He likes the current system’s strong presidential orientation, particularly since the presidential term was reduced from seven years to five, and is now closely timed to the legislative election cycle.
But Sarkozy also favors closer institutional links between the presidency and the parliament.
For example, he would like to address the National Assembly once a year, which he is currently barred from doing, given that only the prime minister is accountable to parliament.
Similarly, he would like to impose a two-term limit on the president, and to require parliamentary approval of the president’s appointment of certain senior officials.
Changes to correct the imbalance between presidential and parliamentary power are, indeed, needed.
The legislature should have a greater say in setting the nation’s agenda.
To strengthen this new institutional balance, Sarkozy is considering providing the opposition with a formal status, thus turning it into a real alternative power, and he wants to review the constitution’s Article 16, which gives excessive power to the president in times of crisis.
He is also weighing whether to change the current Constitutional Court into a Supreme Court to which citizens could appeal under some conditions, and whether to waive the president’s authority to preside over the High Council of the Judiciary.
Nobody can forecast what will emerge from the expert council Sarkozy has appointed to consider these constitutional changes.
The council’s members represent both the majority and the opposition, and thus have very different views on these issues.
But, given that most of the public supports the main principles of the Fifth Republic – such as direct election of the president and a strong executive – any rebalancing of France’s political institutions is unlikely to substantially alter the 1958 constitutional structure.
Besides, any constitutional change would need to be endorsed by 60% of the ballots in both the National Assembly and the Senate, which makes the search for consensus all the more necessary.
Towards a Green Nanotechnology
The advent of nanotechnology, the branch of engineering that seeks to build objects molecule by molecule – indeed, atom by atom – has evoked futuristic images of self-replicating “nanobots” that perform surgery, or that convert the planet into a mass of “grey goo” as they consume everything in sight.
These two scenarios follow a familiar story line: technological progress, such as the development of nuclear power, genetically modified organisms, information technologies, and synthetic organic chemistry, first promises salvation, but then threatens doom as the consequences, often environmental, become apparent.
Even disinfecting water – the single most important technological advance ever in prolonging human life – turns out to produce carcinogenic byproducts.
The cycle of fundamental discovery, technological development, revelation of undesirable consequences, and public aversion appears unbreakable.
Will nanotechnology be different?
Along with the early euphoria and hype that typically surround the rollout of new technologies, nanotechnology has been the subject of projections concerning its possible environmental risks well before its wide-scale commercialization.
Raising such questions when nanotechnology is still in its infancy may result in better, safer products and less long-term liability for industry.
The rapidly developing nanomaterials industry is the nanotechnology that is most likely to affect our lives first.
A 2003 estimate by the Nanobusiness Alliance identified nanomaterials as the largest single category of nanotech start-ups.
In the environmental technology industry alone, nanomaterials will enable new means of reducing the production of wastes, using resources more sparingly, cleaning up industrial contamination, providing potable water, and improving the efficiency of energy production and use.
Commercial applications of nanomaterials currently or soon to be available include nano-engineered titania particles for sunscreens and paints, carbon nanotube composites in tires, silica nanoparticles as solid lubricants, and protein-based nanomaterials in soaps, shampoos, and detergents.
The production, use, and disposal of nanomaterials will inevitably lead to their appearance in air, water, soils, or organisms.
Research is needed to ensure that nanomaterials, and the industry that produces them, evolve as environmental assets rather than liabilities.
Unfortunately, little is known about the potential environmental impacts of nanomaterials.
Ironically, the properties of nanomaterials that may create concern, such as nanoparticle uptake by cells, are often precisely the properties desired for beneficial uses in medical applications.
For example, ten years of studies of the possible health effects of a class of carbon-based nanomaterials known as fullerenes report that the soccer-ball-shaped fullerene molecules known as “buckyballs,” are powerful antioxidants, comparable in strength to vitamin E. Other studies report that some types of buckyballs can be toxic to tumor cells.
Two recent studies concluded that buckyballs could impair brain functions in fish and were highly toxic to human-tissue cultures.
But the conclusions from these studies are difficult to interpret, in part because the nanomaterials that they used were contaminated with an organic solvent added to mobilize the fullerenes in water.
A subsequent study of fullerene toxicity found no significant toxicity for buckyballs, but did observe a toxic response in cell cultures to a second group of fullerenes, called “single-wall nanotubes.”
At this point, the question of the possible toxicity of fullerene nanomaterials remains largely unanswered.
Determining whether a substance is “dangerous” involves determining not only the material’s toxicity, but the degree to which it will ever come into contact with a living cell.
Toxicity can be evaluated by putting buckyballs into a fish tank, but we must also find out whether buckyballs would ever actually arrive in a real world “fish tank”such as a lake or river.
We do know that when materials resist degradation, they may be present in the environment for long periods of time, and thus have a greater chance of interacting with the living environment.
But processes that may lead to the breakdown of nanomaterials, including degradation by bacteria, are virtually unexplored.
Moreover, like toxicity and persistence, little is known about how nanoparticles are likely to move about in the environment.
The most dangerous nanomaterials would be those that are both mobile and toxic.
The fullerenes that have been the focus of early toxicity studies are among the least mobile of the nanomaterials we have studied to date.
Our initial work on nanomaterial mobility in formations resembling groundwater aquifers or sand filters has shown that while one type of nanomaterial may be very mobile, a second may stay put.
Thus, each nanomaterial may behave differently.
Concerns over nanomaterials’ possible effects on health and the environment have perhaps overshadowed the pressing need to ensure that their production is clean and environmentally benign.
Indeed, many of the ingredients used to make nanomaterials are currently known to present risks to human health.
An encouraging trend is that the methods used to produce nanomaterials often become “greener” as they move from the laboratory to industrial production.
Setting aside the issue of nanomaterials’ toxicity, preliminary results suggest that fabricating nanomaterials entails risks that are less than or comparable to those associated with many current industrial activities.
It would be naïve to imagine that nanotechnology will evolve without risks to our health and environment.
While attempting to halt the development of nanomaterial-inspired technologies would be as irresponsible as it is unrealistic, responsible development of these technologies demands vigilance and social commitment.
Environmentally safe nanotechnology will come at a cost in time, money, and political capital.
But with foresight and care, nanotechnology can develop in a manner that will improve our wellbeing and that of our planet.
Towards a Liberal Dictatorship?
MOSCOW: Russia's presidential elections next month now look like a coronation.
The speed of Vladimir Putin's seemingly irresistible rise astounds everyone.
What is the secret of his phenomenal political success?
The answer, at its most general, appears simple: Putin took the two warring clans of Boris Berezovsky and Anatoly Chubais – which together control much of Russia's wealth and public space – and united them behind him.
The upshot of this marriage of convenience has brought an obscure former KGB officer, a strongman whose activities gave rise to rumors of illegal enrichment and shady real estate deals, reportedly hushed and covered up in Yeltsin's Russia, to the summit of power.
What Putin brings to this menage is control over the security ministries – as always in Russia, an important key to power and one of the main pillars of Putin's political edifice.
Putin is wary about relinquishing this asset, so he vested its supervision in the loyal hands of Sergei Shoigu, who is in many ways a Putin clone, for he used the ruins of the old Soviet civil defense system to construct in a short space of time a secretive empire of his own.
The second element in Putin's edifice of political power – contributed by his clan allies – is a hidden control of Russia's media.
Political scientist Sergei Markov has labeled today's Russia a "manipulative democracy" – a system in which the state pulls the strings behind a facade of democratic institutions.
During December's Duma elections, for example, the government – in violation of existing electoral laws – used its influence to give both covert and overt support to the "party of power," Unity (Yedinstvo).
Russia's leaders' willingness to ignore the law when it is not to their liking revives bad memories here, as government domination of the media shuts off the public from influence over the state, which is becomes ever more unaccountable.
The third element of Putin's order is the connection to the new Russian oligarchy, also delivered by his mentors.
When it comes to the economy, Putin is a clean slate upon which his entourage – the clans of Berezovsky and Chubais – will write.
But the price of this may be even greater than the crash of August 1998 which resulted from policies pursued by the very same people.
What the aftermath of that crisis showed was that even an underdeveloped democracy, such as Russia, is enough to turn an economically incompetent government out of power.
To continue with the privatization of the natural monopolies that will give a criminal and corrupt elite another chance to fill their pockets, may require extinguishing even the vestiges of democracy that existed under Yeltsin, thus pushing Russia on the way to a “liberal dictatorship.”
Finally, the fourth pillar of Putin's edifice is his control over the Duma.
This control is ostensibly democratic – the "Kremlin bloc" of parties holds a majority of votes.
But it was achieved by a cynical alliance with the Communists which gives them a new standing in the political establishment and restores their ability to participate in the power game.
The alliance was possible precisely because the Communists, who may not understand political reform or economics, do understand the naked use -- and abuse -- of power.
The combination of finance, media, police, and corrupt politicians may be enough to nip any opposition to Putin in the bud.
Not only is the Duma now likely to be a puppet parliament, as was the Supreme Soviet; it may “democratically” stamp out hints of real democracy in Russia.
The challenge for Putin is to make sure that his relations with the West do not sour.
His war in Chechnya, while popular at home, is responsible for much bad press recently, even if the American administration's response is tepid.
But the real test of whether Putin persuades America that he fits the West's long-term interests is not Chechnya; it is the fight against corruption, as personified by Berezovsky.
President Clinton has said that battling corruption is now Russia's priority; and the Swiss prosecutor's office has expressed its readiness to make all materials in the "Berezovsky case" available to Russia.
Should Putin turn against Berezovsky, even if superficially, and force him off the political stage, Putin could look good, and even receive IMF assistance in May this year.
Moreover, this may very well be in Putin's own interest.
Removing Berezovsky just before presidential elections would be a good publicity stunt, and a way of silencing the "unwanted witnesses" of Yeltsin's entourage.
If anti-corruption investigations target Berezovsky alone, others will keep their mouths shut.
If Berezovsky's punishment is more apparent than real, Berezovsky too will say nothing.
Removing Berezovsky would also allow Putin to establish direct control over Berezovsky's media empire – another boost to his personal power.
What's good for Putin may not be good for Russia.
Putin's war in Chechnya enables him to keep public opinion mobilized and to accuse the opposition of lacking patriotism, even of treason.
But for the second time in ten years Russia is burying its potential for economic development in Chechnya's mountains and cities.
There is by now little room for maneuver in the economy: the positive effect of devaluation has worn off, world oil prices are falling again (and with them the state's prime source of revenue), the debt crisis lingers.
The temptation to soften these blows by printing money as elections roll around will only worsen the financial situation.
In the end, mounting economic failure may make Putin follow the pathetic course pioneered by Yeltsin: trying to wash his hands of a failing economy, dismissing governments as the country lurches from crisis to crisis, hoping all the while to remain remote enough to survive.
For Russia, the result will be a further brain drain and ever greater degradation.
Towards an Asia-Europe Partnership
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Asia’s rise as an economic and political player exemplifies what globalization is all about.
By the decade’s end, China’s economy will be larger than Germany’s.
By 2040 three of the world’s five largest economies – China, India, and Japan – will be in Asia.
That is one side of the Asian picture.
The other side is persistent poverty, lack of development, massive environmental degradation, a widespread rural-urban divide, demographic problems, and troubled banking systems.
The picture is further complicated by security risks such as nuclear arms proliferation, fundamentalism, and weak or failing governance.
The sweeping changes underway in Asia are not just economic, but have also created new political realities that cannot be ignored.
Asian countries now act with much greater self-assurance than in the past.
Their military budgets are expanding, and there are regional rivalries.
Thus, along with tremendous opportunities implied by globalization, political risks must also be addressed.
German and European policymakers must make clear what Europe has to offer Asia, and can do so at this month’s EU/ASEAN and EU/China summits.
The “soft power” of Europe’s political and social model is well known.
As an Asian leader once told me, Europeans have what many Asian societies aspire to: democratic government, advanced infrastructure, civil rights, world-class companies, high educational and social standards, and a rich cultural heritage.
This gives us considerable standing.
It is crucial to ensure that our European model, with its emphasis on a fair deal for everyone, remains competitive.
Nevertheless, Germany stands to lose more than any other country from any protectionist-minded retreat from globalization.
In the first six months of 2007 alone, the value of German exports nearly passed €500 billion.
But free trade is a two-way street.
Artificially low exchange rates, restrictions on capital flows, and excessively large currency reserves all create global imbalances.
Any strategic partnership between Europe and Asia must encourage global economic responsibility based on cooperation and transparency.
Europe and Asia must jointly commit to an agenda underscoring global resources and sustainability.
Environmental, climate, and energy issues concern everyone.
China is already a top carbon dioxide emitter.
Environmental degradation in Asia not only harms its population’s health, but will become an impediment to growth.
Growth is important to us in Europe, and it is even more important to Asia‘s emerging economies.
But, as European experience shows, it is often worth sacrificing short-term benefits for the sake of longer-term gain.
The history of European integration suggests that regional cooperation, give and take, the pursuit of shared goals, and even in some areas the transfer of sovereignty are the best ways to overcome tensions and promote peaceful problem-solving.
Certain elements of this European path may be relevant to Asia’s own regional cooperation.
Indeed, Asian trade and commodity flows are increasingly interlinked.
ASEAN members conduct almost 50% of their trade within Asia.
Economic relations between major players such as China and Japan are increasingly close – owing not only to booming trade, but also to direct investment and regional production networks.
Economic links pave the way for political rapprochement and closer ties.
ASEAN, together with its affiliated bodies such as the ASEAN Regional Forum and the East Asia Summit, is the driving force behind the intensification of Asian cooperation, in which security, too, is a factor.
ASEAN is working with its partners to tackle global issues such as security, energy, and climate change, and its plans for a charter on enhanced cooperation is an encouraging first step toward creating a political architecture.
This year, the EU’s contacts with ASEAN and its members have become much closer.
The foreign ministers’ meeting held during Germany’s EU Council presidency produced the Nuremberg Declaration, which established a framework for closer EU-ASEAN partnership.
Europe must become a stakeholder in Asia if both sides are to gain maximum benefit from cooperation and help shape the world of the future.
In Asia, people increasingly realize that sharing in global prosperity also means sharing responsibility for global peace and development.
We see this in the higher profile that China has taken in defusing the North Korean nuclear crisis and in drafting the recent Security Council resolution on Darfur.
With Japan’s upcoming G-8 presidency and the Beijing Olympic Games next year, Asia will be under a spotlight as never before.
In the light of developments such as in Myanmar, ASEAN must state clearly where it stands.
This recalibration of global responsibility will have to be a step-by-step process fostering dialogue and stability.
Here, too, it would be wrong to take an all-or-nothing approach.
Europe must take Asian views on global governance seriously.
By the same token, the new Asian players must take into account the progress achieved in this regard in the latter half of the twentieth century.
The challenge for twenty-first century statecraft will be to devise joint solutions to common problems.
This was what inspired the Heiligendamm Process launched at this year’s G-8 Summit, which for the first time brought G-8 leaders together with leaders of the world’s major emerging economies, including China, India, Brazil, Mexico, and South Africa.
There is no inevitable contradiction between European values, on the one hand, and what are deemed Asian values, on the other.
Where interests conflict and opportunities coexist with tensions, a readiness and capacity for dialogue is the only way forward.
We have mutually enriching Euro-Asian traditions that could serve as a basis for such a dialogue.
It is in this context that Europe’s commitment to internal reform, human rights, international law, and responsible governance should be seen.
Global values are a cause that Europe intends to promote worldwide.
Obviously, that means meeting the standards that we expect of others.
In this progressive transformation of the international system, German and European foreign policy will play an active role.
What is needed is not rhetoric, but levelheaded efforts to find practical and forward-looking solutions to key issues on which regional and international cooperation is urgently required.
Towards a Wider Europe
According to the European security document adopted in 2003, "It is in the interest of the European Union to promote a ring of well-governed countries on its borders with whom it can enjoy close and cooperative relations."
The European Commission is now elaborating this principle in the form of a "Wider Europe Initiative."
But the initiative cannot fulfill its great promise as long as it stays within the Brussels bureaucracy.
It needs to become a political initiative.
The EU needs to reach out to its less developed neighbors.
This is of vital interest to Europe but it cannot succeed without adequate political and financial support.
The most powerful tool that the EU has for influencing political and economic developments in neighboring countries is the prospect of membership.
Unfortunately, the problems created by the current enlargement make it unrealistic to hold out membership to additional countries beyond the ones now under consideration - Bulgaria, Romania, Turkey, and possibly the Balkan countries.
In the past, the road to membership was paved with Association Agreements.
The defining characteristic of the countries on the Eastern and Southern borders of Europe is that they lack many attributes needed for membership.
The Wider Europe Initiative is meant to help develop those attributes.
Association Agreements, although desirable, may not be adequate, as the EU's Balkan experiences indicate.
The EU began with the right idea in the Balkans: to bring those countries closer to each other by bringing them closer to the Union.
Foreign ministries translated that idea into the Stability Pact, but finance ministers refused to finance it, so the pact remained an empty shell.
Then the European Commission took the idea and translated it into bilateral Stability and Association Agreements, so the original idea - regional reconciliation - got lost.
As a consequence, developments in the Balkans are unsatisfactory, as the recent riots in Kosovo and Serbia demonstrate.
The Wider Europe Initiative also starts with a good idea: recognition that relations between the EU and its neighborhood are inherently asymmetric.
The EU must promote democratic development in neighboring countries without expecting or demanding reciprocal concessions.
It should, however, expect and demand progress and tailor its assistance to the performance of the countries concerned.
Conditionality may not be the right word to describe the relationship, because it implies that certain conditions must be met before the Union bestows benefits.
Today, however, the EU must take the initiative and offer incentives; concessions could then be withdrawn if expectations are not fulfilled.
This means that EU policy must be tailor-made for individual countries.
It would be desirable to set up joint working groups with the countries concerned to establish, monitor, and adjust individual action plans.
The European Commission is already engaged in preparing such plans. They need to be given greater substance.
There is a fundamental difference between the EU's Eastern and Southern flanks.
I am personally involved in the neighboring countries to the East, so I shall confine my remarks to that region.
Wider Europe in the East happens to coincide with Russia's "near abroad."
While the EU cannot hold out the prospect of membership, Russia is happy to offer membership in a reconstituted empire.
The EU must therefore offer inducements that outweigh pressure from Russia.
Such inducements are not hard to find: greater access to Europe's common market, more favorable visa regimes, job and immigration opportunities, access to capital, cultural contacts, and technical assistance.
Admittedly, the Union's budget does not have space for the Wider Europe Initiative before 2007, but where there is a will there is a way.
Giving substance to the initiative would offer an attractive alternative to the Bush administration's policy of spreading democracy by military means.
I established Open Society Foundations in all the countries of the former Soviet Union.
They do on a small scale what the Wider European Initiative ought to do on a large scale: promote democratic development by supporting civil society while working with governments when possible.
The less receptive the government the more important supporting civil society becomes.
The same principle ought to guide the EU.
A civil society component must be included in every action plan.
Individual action plans are urgently needed even before the general Wider Europe Initiative emerges.
Elections are pending in Ukraine and Moldova, and abuses normally accompanying elections are on the increase.
It ought to be possible to persuade governments in those countries to curb such behavior by holding out the prospect of substantial rewards.
Georgia's peaceful revolution is not replicable elsewhere, but it has made neighboring regimes nervous.
They ought to be persuaded - through a judicious mixture of carrots and sticks - that strengthening the rule of law and democratic institutions would work to their advantage.
Georgia itself needs all the help it can get, which requires an emergency action plan different from the others.
Belarus seems beyond redemption, but appearances are deceptive.
Because President Alexander Lukashenka's behavior is so outrageous, a change of regime becomes possible.
EU member states reacted strongly when Lukashenka tried to sack the rector of the prestigious European Humanities University, and this, along with other developments, weakened his position.
Unfortunately, political conditions in Russia are moving the wrong way.
After a chaotic period, Russia is shedding the few attributes of an open society it had acquired.
Having failed to provide effective assistance, the West is no position to exert much political influence.
The best way to encourage openness is by strengthening commercial and economic ties while ceasing to treat Russia as a nascent democracy.
It is all the more important for the EU to take a more proactive role in the neighboring countries whose political orientation is not yet set in stone.
Toxic Tests
CAMBRIDGE – The United States government is now permitting ten of America’s biggest banks to repay about $70 billion of the capital injected into them last fall.
This decision followed the banks having passed the so-called “stress tests” of their financial viability, which the US Treasury demanded, and the success of some of them in raising the additional capital that the tests suggested they needed.
Many people have inferred from this sequence of events that US banks – which are critical to both the American and world economies – are now out of trouble.
But that inference is seriously mistaken.
In fact, the US stress tests didn’t attempt to estimate the losses that banks have suffered on many of the “toxic assets” that have been at the heart of the financial crisis. Nevertheless, the US model is catching on.
In a meeting this month, finance ministers of G-8 countries agreed to follow the US and perform stress tests on their banks.
But, if the results of such tests are to be reliable, they should avoid the US tests’ fundamental flaw.
Until recently, much of the US government’s focus has been on the toxic assets clogging banks’ balance sheets.
Although accounting rules often permit banks to price these assets at face value, it is generally believed that the fundamental value of many toxic assets has fallen significantly below face value.
The Obama administration came out with a plan to spend up to $1 trillion dollars to buy banks’ toxic assets, but the plan has been put on hold.
It might have been hoped that the bank supervisors who stress-tested the banks would try to estimate the size of the banks’ losses on toxic assets.
Instead, supervisors estimated only losses that banks can be expected to incur on loans (and other assets) that will come to maturity by the end of 2010.
They chose to ignore any losses that banks will suffer on loans that will mature after 2010.
Thus, the tests did not take into account a big part of the economic damage that the crisis imposed on banks.
Although we don’t yet have an estimate of the economic losses the stress tests have chosen to ignore, they may be substantial.
According to a recent report by Deutsche Bank, for example, borrowers will have difficulty refinancing hundreds of billions of dollars of commercial real estate loans that will mature after 2010.
Rather than estimate the economic value of banks’ assets – what the assets would fetch in a well-functioning market – and the extent to which they exceed liabilities, the stress tests merely sought to verify that the banks’ accounting losses over the next two years will not exhaust their capital as recorded in their books.
As long as banks are permitted to operate this way, the banks’ supervisors are betting on the banks’ ability to earn their way out of their current problems – even if the value of their assets doesn’t now significantly exceed their liabilities.
But doesn’t the banks’ ability to raise new equity capital indicate that, regardless of whether the stress tests are reliable, investors believe that their assets’ value does significantly exceed their liabilities?
Not at all.
Consider a bank with liabilities of $1 billion. Suppose that the bank has assets with long maturity and a face value of $1.2 billion but whose current economic value is only $1 billion.
Although the value of the bank’s assets doesn’t exceed its liabilities, depositors won’t flee as long as the government backs the bank by guaranteeing its deposits.
If in two years the bank’s assets have a 50-50 chance of appreciating to $1.2 billion or declining to $0.8 billion, the bank will be able to raise new equity capital: new investors will be willing to pay for the prospect of sharing in the excess of the value of assets over obligations if things turn out well.
To get a good picture of banks’ financial health, estimating the value of their toxic assets is unavoidable.
Regulators could encourage each bank to sell part of its toxic portfolio and extrapolate the portfolio’s value from the price obtained in such a sale, or they could attempt to estimate the portfolio’s value as well as they can on their own.
Either way, the true value of banks’ toxic assets must be estimated before concluding that banks are armed with sufficient capital to carry out their critical roles.
The kind of stress tests that the US conducted, and that other countries are being urged to emulate – and the ability of banks to raise additional equity capital – cannot provide a basis for such a conclusion.
Toying with Democracy
Democracy is supposedly on the march in the Middle East.
But Arab dictators are afraid of true democracy, with its civil liberties and competitive elections, so they conjure up potions that protect the status quo by selecting bits of Western political models and adding some religious interpretation to ensure a patina of Islamic legitimacy.
Saudi Arabia fits this description to a tee.
Its rulers – some of the most autocratic in the world – say that democracy is incompatible with Islam.
So they prefer the term “participatory government.”
But a majority of Muslim scholars, including such eminent men as the Sheikh of Al Azhar in Cairo and the influential Qatar-based Sheikh Qaradawi, believe that Islam is compatible with democracy, at least as they define it: respect for the rule of law, equality between citizens, a fair distribution of wealth, justice, and freedom of expression and assembly.
What remains debatable and contentious is the right of citizens to choose their leaders.
Yet pressure to democratize is mounting, in part due to the smaller Gulf States, which compete with each other in democratic reforms.
Qatar and Oman have elected consultative councils and enfranchised women.
Parliamentary elections occur in Kuwait and Bahrain, and at the end of last year, Sheikh Mohammad al Maktoom, Crown Prince of Dubai, in the U.A.E., suggested that Arab leaders must reform or sink.
Iraq’s elections have turned up the pressure even more.
So, threatened as the regional hegemon, Saudi Arabia has joined the reform race by announcing partial municipal elections to consultative bodies in which the royal family already appoints half the members.
The first election will be held in the capital of Riyadh on February 10, followed by the oil rich Eastern region and the southern Asir region on March 2 and Mecca and Medina in the western Hijaz region and al Jouf, in the Northern Region, on April 21.
The government describes this as a “new political era.”
But women remain excluded from the vote, despite attempts by several to participate in areas that the Wahhabi religious authorities deem acceptable to the “nature of women.”
Moreover, in accordance with Saudi tradition, the ruling family appoints a Prince as chairman of the General Committee overseeing the elections – a sign not of wider political participation, but of business as usual.
Despite efforts led by Crown Prince Abdullah to urge participation, voter registration is low, which suits the government well, as high turnout could lead to the development of an electoral culture.
Low turnout, by contrast, could convince western audiences that, despite the Saudi state’s best efforts to jump-start democracy, its people are satisfied with the status quo.
Saudi intellectuals attribute the lack of voter interest to the absence of free expression and assembly, which frustrates genuine political participation.
Moreover, leading reformers have been jailed since last March for signing a petition asking for a constitutional monarchy, which has reinforced the general lack of trust in the government’s agenda.
The most crucial questions concern reform of the al Shura (consultative council).
Can it become a real parliament?
Would it be elected?
Currently, the King appoints its members.
They do not issue legislation and they rarely even propose any.
The King proposes, they discuss.
They cannot debate the budget or military deals, nor can they question financial allocations to the regime’s countless princes.
In addition, there is the National Dialogue, started by Crown Prince Abdullah in 2004 as an acknowledgement of pluralism and diversity that brings together different religious sects – Salafis (Wahhabis), Sufis, Shi’a.
But the religious authorities have not legitimized its discussions, so nothing has changed: the Shi’a, for example, still cannot practice their religious rituals, be witnesses in court, or even work as butchers.
Indeed, the “King Abdul-Aziz Center for National Dialogue” is utterly divorced from domestic realities and serves as a mere propaganda center whose participants believe that they form part of the state’s message to the outside world.
The last meeting was entitled “Encounter with Youth: Reality and Aspirations,” which amounted to a display of grand speeches by the authorities informing the country’s youth that conditions are ideal.
Such gatherings are unprecedented to the extent that they bring together groups that never talked before.
But political expression remains constrained.
Demonstrations are illegal, and there are no venues for political expression outside the Internet, which has created a community of alienated and embittered Saudis.
Hundreds of angry Web sites have cropped up, the most extreme preaching the ideology of al-Qaeda and its ilk.
Spurred by unemployment, political uncertainty, and falling living standards, young Saudi men are easily recruited by extremist groups.
If Saudi Arabia’s rulers were serious about “participatory government,” they would encourage liberals, moderates, and pragmatists.
Instead, they repress, censor, silence and even imprison the moderates and appease the religious radicals.
The authorities have killed some of the more violent jihadis in their “war against terrorism,” but they fear that a wider crackdown, however necessary, would alienate important tribes and clans.
Despite cynicism, apathy, frustration, despair, and violence, some Saudis still hope for the emergence of a prince on a white horse who will place the kingdom onto the path of reform.
But there is no such prince; there are only the old ones, clinging to power without legitimacy and toying grotesquely with their people’s aspirations.
The TPP’s Missing Ingredient
WASHINGTON, DC – Looking for ways to stimulate economic growth and create jobs, US President Barack Obama’s administration is seeking to press ahead with the mega-regional free-trade deal known as the Trans-Pacific Partnership (TPP).
But is the US going about it the right way?
The TPP’s initial scope was relatively modest, involving the United States and a range of trading partners (Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam).
But now Japan is on board, South Korea is watching closely, and there is potential for engaging with China through this or a similar framework in the foreseeable future.
The typical approach when seeking to finalize an agreement aimed at reducing trade barriers – while attempting to protect labor and environmental standards – is to ask for less, not more, from those on the other side of the table.
But at this stage, the TPP is different: the odds of success would be much greater if the US attached the additional requirement that participating countries do not engage in currency manipulation.
One of the major shortcomings of the global trading system in recent decades has been the absence of an effective constraint on countries that intervene heavily in order to keep their currencies undervalued.
A significantly undervalued currency implies a potentially large trade surplus.
Ordinarily, a large surplus puts upward pressure on the country’s currency – making its exports less competitive and boosting demand for imported goods and services.
But a country’s authorities can prevent appreciation for a prolonged period of time by buying up foreign currency.
Such intervention results in the accumulation of foreign-exchange reserves – much of which is held in the form of US government debt.
In one way, this benefits the US by helping to keep interest rates lower than they would be otherwise.
But currency manipulation is also an unfair way to gain a trading advantage, with excessive negative effects on trading partners.
The International Monetary Fund was founded, in part, to prevent precisely this type of beggar-thy-neighbor economic strategy, which resulted in “competitive devaluations” during the 1930s.
Unfortunately, the IMF in recent years has proved unable or unwilling to do so.
Similarly, the US Treasury is legally required to determine if a country is intervening to an unfair and unreasonable extent.
In practice, however, the Treasury’s reports on this issue are generally toothless and lead to no real consequences.
Fred Bergsten and Joseph Gagnon, my colleagues at the Peterson Institute, have proposed including a currency clause in any TPP deal.
In essence, this would amount to the signatories agreeing not to manipulate their currencies.
Such a clause could come with stronger or weaker teeth. The important thing is to shift norms and expectations.
Some US officials are supportive of this approach to the TPP; others are resisting it.
But the skeptics should think hard about the likely dynamics in the US Congress when the TPP comes up for a vote.
There is strong support on Capitol Hill, from both Democrats and Republicans, for finding some way to limit currency manipulation.
Even people who are very much in favor of freer trade – and even of some version of the TPP, like Bergsten and Gagnon – believe that some Asian countries have overstepped the boundaries of reasonable behavior.
With the level of intervention by major countries currently limited (China) or non-existent (Japan), this is an ideal moment to include a currency clause in the TPP, as most countries are less likely to become defensive.
Participating countries could allow their currencies to float, or they could operate a fixed exchange rate.
In the latter case, however, they must commit not to run large current-account surpluses and accumulate excess foreign-exchange reserves.
Any blatant and repeated violation of this commitment would – and should – result in the loss of the special privileges granted under the TPP.
Of course, how the politics plays out will depend on what happens in the US mid-term congressional elections in November, as well as how key figures position themselves for the presidential election in 2016.
But both parties are generally interested in supporting free trade, along responsible lines – and recognize legitimate concerns.
Currency manipulation has become a little too ugly in recent years – with associated adverse effects on sectors and communities in the US – for elected representatives to ignore.
It is to be hoped that the other TPP countries also come to understand that the agreement is more likely to work if it strongly discourages currency manipulation.
Getting the Trans-Pacific Partnership Right
WASHINGTON, DC – The United States Congress has now given President Barack Obama so-called fast-track negotiating authority to conclude the Trans-Pacific Partnership (TPP), the proposed mega-regional free-trade agreement among the US and 11 other countries.
But Obama’s victory was not an easy one: Members of his own Democratic Party overwhelmingly opposed fast-track authority, which limits Congress to a single up-or-down vote on finished trade agreements, thereby ruling out amendments.
The fast-track measure, officially known as Trade Promotion Authority, passed only because Obama was able to rely on rare backing from the Republican majority in both the House of Representatives and the Senate.
But the Democrats have a point.
They want the Obama administration to ensure that the TPP includes core international labor standards for all participants, a high level of environmental protection, and access to affordable medicines, among other measures.
If the administration takes these entirely reasonable demands on board, the resulting agreement would have considerable bipartisan support.
If it chooses to ignore such demands, the final agreement would be much more polarizing – and would be approved by Congress with very little Democratic support.
Though Obama has promised that the TPP will be the most progressive trade agreement in history, which is achievable, the shroud of secrecy that surrounds almost all details of the negotiations has made it difficult to evaluate claims and counterclaims on this point.
But once the agreement is concluded, it will be published in full, leaving no possibility of obfuscation.
And the markers that have been laid down by congressional Democrats are very clear, quite specific, and well thought-out.
In fact, in an agreement between House Democrats and former President George W. Bush’s administration in May 2007, almost all of the key principles were already spelled out in considerable detail.
In 2005, only 15 House Democrats voted for the Central American Free Trade Agreement, precisely because its terms on labor standards and the environment were so weak.
In 2007, by contrast, 109 House Democrats voted in favor of the US-Peru Trade Promotion Agreement, precisely because its terms had been adjusted as requested and in line with the May agreement.
And, in October 2011, the House approved the much-debated US-Korea Free Trade Agreement with 59 Democrats in favor.
The extent of congressional Democratic support depends directly on what exactly is in any trade agreement.
The main principles in the May 2007 agreement are straightforward and difficult to oppose. Workers should be allowed to form trade unions.
All forms of forced or compulsory labor – including human trafficking – should be prohibited. Vague promises on these issues are not acceptable; countries must enter into compliance before a trade agreement takes effect.
Moreover, the agreement calls for the inclusion of existing international environmental standards in free-trade agreements, including rules concerning pollution and endangered animals.
Likewise, such agreements should support fair access to pharmaceutical patents and to the data used to prove the safety of medical treatments.
And the May 2007 agreement makes it clear that “foreign investors in the US will not be accorded greater substantive rights with respect to investment protections than US investors in the US.”
In a paper issued in January 2015, and again in a major speech in May, Sander Levin, the ranking Democrat on the House Ways and Means Committee, applied these principles to all of the outstanding issues regarding the TPP.
It would not be difficult for the administration to give Levin and his colleagues what they want.
Some participants in the TPP may indeed balk at being required to raise labor or environmental standards; in such case, however, policymakers need to ask whether these countries should get easier access to the US market.
Similarly, access to affordable medicines is something other countries desperately need; it is large pharmaceutical companies that are not entirely enthusiastic.
The most difficult challenge for the Obama administration may be the issue of currency manipulation.
Democrats are pushing for provisions to prohibit or limit currency-market intervention by central banks that is intended to give a country’s exporters a competitive edge.
This is also a huge potential problem with the TPP, because competitive devaluations can swamp any other gains from trade by an order of magnitude, with substantial negative effects on US jobs.
The administration urgently needs to take this point on board.
“Free trade” has always been something of a misnomer.
Yes, the logic of market-based global commerce is very strong.
But every market exists within a specific set of rules, which are not random and are not handed down from the heavens.
The TPP represents an important opportunity to write better rules for international trade and investment.
The Case for the TPP
STANFORD – Following the conclusion of the Trans-Pacific Partnership by 12 Pacific Rim countries, debates about the costs and benefits of trade liberalization are intensifying.
The early leaders in the United States’ presidential campaign, both the Republican Donald Trump and the Democrat Hillary Clinton, have expressed opposition to the TPP, though as Secretary of State, Clinton called it the “the gold standard of trade deals.”
The right level of trade openness is not a new debate.
Historically, trade systems have ranged from rather open to severely restricted by rules, tariffs, or non-tariff barriers, driven by shifts in the relative strength of liberalizing or protectionist economic and political forces.
But even in closed systems, however severe the penalties they impose on trade, black markets usually develop, owing to the “gains from trade” generated by natural economic forces.
The desire to trade arises whenever the domestic benefits of importing a good (whether a finished product or component) exceed the price paid – for example, if the imported good cannot be produced domestically, or only at a higher cost.
As the British economist David Ricardo demonstrated two centuries ago, it can even be better for a country to import goods that it can produce more cheaply, if doing so enables the production of other goods that are still cheaper to produce. Additional gains from trade include increased variety and the economies of scale implied by producing for global markets.
Of course, there are potential downsides to trade.
Alexander Hamilton, the first US treasury secretary, argued that allowing lower-cost imports would impede the development of domestic “infant” industry, which needed time to scale up enough to reduce costs to a competitive level.
In recent decades, the anti-trade argument has focused largely on “unfair” competition and economic dislocation.
But the reality is that, if two sides willingly trade, it can be assumed that both are better off; otherwise, one of them would refuse to trade.
So, while trade liberalization may entail some (smaller) losses for certain groups, these can – and should – be addressed through domestic relocation and assistance schemes, such as America’s Trade Adjustment Assistance program, and transition rules for affected industries, firms, and workers.
Past experience reinforces the view that, ultimately, voluntary trade is a good thing.
Extreme protectionism in the early 1930s, following an era of relatively free international trade, had devastating consequences, ultimately setting the stage for World War II.
As the MIT economist Charles Kindleberger showed, America’s Smoot-Hawley Tariff, in particular, helped to turn a deep recession into a global depression.
Even before the war was over, major powers convened in Bretton Woods, New Hampshire, to establish a new international trade and finance regime, including the General Agreement on Tariffs and Trade.
Through a succession of lengthy and difficult global negotiations – the so-called “GATT rounds” – tariffs were steadily lowered for an increasing variety of goods.
As a result, global trade grew faster than world GDP for most of the post-war period.
Virtually all economists agree that this shift toward freer trade greatly benefited the world’s citizens and enhanced global growth.
The economists Jeffrey Frankel and David Romer estimate that, in general, trade has a sizeable positive effect on growth.
At a time when growth is failing to meet expectations almost everywhere, the TPP thus seems like a good move.
To be sure, because tariffs in the TPP member countries are already low (with some exceptions, such as Canada’s tariffs on dairy products and Japan’s on beef), the net benefit of eliminating them would be modest (except for a few items that are very sensitive to small price changes).
But the TPP is also expected to reduce non-tariff barriers (such as red tape and protection of state enterprises); harmonize policies and procedures; and include dispute-settlement mechanisms.
Though the TPP’s precise provisions have not been made public, political leaders in the member countries predict that the deal, once ratified and implemented, will add hundreds of billions of dollars to their economies and bolster employment.
Smaller and developing economies will probably gain the most, relative to size, but everyone will benefit overall.
Other important outcomes are not included in these calculations.
The alternative to liberalizing trade is not the status quo; it is a consistent move away from openness.
This can occur in a number of ways, such as the erection of non-tariff barriers that favor domestic incumbents at the expense of lower-priced potential imports that would benefit consumers.
Moreover, it is much easier to build mutually beneficial trade relationships than it is to resolve military and geopolitical issues, such as combating the Islamic State or resolving tensions in the South China Sea.
But strong trade relationships have the potential to encourage cooperation – or, at least, discourage escalation of conflict – in other, more contentious areas.
Still, there are some legitimate concerns about the TPP.
Some worry that it could divert trade from non-member countries or undermine the moribund Doha round of multilateral trade negotiations (though 20 years ago, the North American Free Trade Agreement had the opposite effect, kick-starting the Uruguay round).
Given all of this – not to mention renewed attention to national borders, owing to contentious immigration issues, such as the influx of Middle Eastern refugees in Europe – the TPP’s ratification is far from certain, especially in the US.
The concentrated interests that oppose the agreement may turn out to be more influential than the diffuse interests of all consumers.
That would be a major loss.
Allowing existing protectionist trade barriers to remain in place – or worsen – would not only deprive citizens in TPP countries of higher incomes; it would also deal a damaging blow to international cooperation.
Tradable Prosperity
MILAN – The global economy is experiencing a major growth challenge.
Many advanced countries are attempting to revive sustainable growth in the face of a decelerating global economy.
But the challenges across countries are not the same.
In particular, the tradable and non-tradable parts of a range of economies differ in important ways.
In the non-tradable sector (60-70% of the economy in advanced countries), the main growth inhibitors are weak demand, as in the United States following the financial crisis, and structural and competitive impediments to productivity, as in Japan.
In the tradable sector, growth depends on a country’s productivity relative to incomes and competitiveness.
At the global level, there can also be a shortage of aggregate demand on the tradable side.
The Nobel laureate economist Robert Solow has shown that growth comes from three sources: the working population, capital investment, and technological progress.
A growing young population helps to maintain fiscal balance and ensure intergenerational equity, but it does not by itself increase incomes.
On the other hand, economic growth below the sum of growth in the working population and the labor-saving part of technological change fuels unemployment.
Developing countries, once they enter rapid-growth mode, generate growth from capital deepening via investment, in a sense making up for past underinvestment.
And it is possible for advanced countries to fall behind by under-investing, particularly in the public sector, relying instead on less sustainable debt-fueled means of generating demand.
So a legitimate part of a strategy to restore growth is investment.
But, as Solow noted, investment has its limits, owing to diminishing marginal returns.
Often, these limits are not binding, but, once capital deepening is exhausted, technological progress, which makes inputs more productive in creating final value, is the long-run driver of growth.
The challenge is to apply these insights in a world characterized by global economic interdependence, major imbalances, and a worsening growth and employment problem.
It is a world in which economies are connected directly in the tradable sector of the global economy, and indirectly through the demand and employment linkages between the tradable and non-tradable sectors of individual economies.
In the short run, the non-tradable sector is, by definition, subject to domestic-demand constraints.
A shortfall in non-tradable demand inevitably limits growth on that side of the economy.
Government can, of course, bridge the gap via deficit spending (preferably focused on employment-generating investment that enhances future growth).
But the advanced countries are, to varying degrees, fiscally constrained by relatively high and rising public debt, largely owing to fiscal imbalances that were hidden from view until defective growth models broke down in the crisis of 2008.
Just how fiscally constrained these countries are remains subject to debate.
Italy and Spain are clearly constrained by the absence of private capital in their respective sovereign-debt markets, with rising yields threatening their fiscal stability and reform programs.
They need the eurozone core and the International Monetary Fund as temporary lenders of last resort until they restore policy credibility and regain investors’ confidence.
The US sovereign-debt market shows no similar evidence of having reached a limit yet.
But bond markets do not issue many early warning signals: witness the sudden run-up of yields in Italy and Spain a year ago.
The more complex growth issues have to do with the tradable part of the global economy, where global aggregate demand – and the derived demand that lands in various places in global supply or value-added chains – is the target of competition.
Total demand and its growth do matter, but so does market share.
Given the growth patterns across advanced and developing countries prior to the crisis, and then the large negative shock, it is likely that there is a shortfall of tradable global aggregate demand, impeding an important component of global growth.
But, for individual economies, relative productivity versus income levels determines the share of global tradable aggregate demand that is accessible.
Unlike the non-tradable side of the economy, the domestic component of global tradable demand is not an absolute constraint on growth; nor is the rate of growth of global tradable demand an absolute constraint, given the possibility of increasing share.
Of course, not everyone can gain share at the same time.
Fortunately, if countries increase productivity with the aim of boosting relative productivity and growth potential on the tradable side, this will increase incomes and accelerate the growth of global aggregate demand.
It may look like a zero-sum game, but it is not.
When incomes get significantly out of line with productivity levels (as they have recently), reviving growth requires resetting the terms of trade, which can be done with exchange rates, whether managed or set by markets.
In the eurozone, where countries with competitiveness problems do not have the exchange-rate adjustment mechanism, restrained income growth and productivity-boosting reforms are probably needed, as was the case in Germany between 2000 and 2006, and now in several southern European countries.
What is true for countries on the tradable side is also true for workers, who are differentially affected by the evolution of global supply chains.
The efficient integration of global supply chains has created employment opportunities in developing countries and in the higher value-added sectors of advanced countries.
But it has also reduced employment options for a subset of middle-income people in the tradable sectors of advanced economies.
Many countries are struggling to adapt their growth patterns to the new challenges they face in a slowing global economy.
To be effective and properly targeted, policies need to include an accurate diagnosis of growth potential and impediments in both the tradable and non-tradable parts of the economy.
Focusing on one (say, the competitiveness problem in the tradable sector) to the exclusion of the other (perhaps a serious non-tradable demand shortfall or stagnant absolute productivity) will not be enough.
Trade and the Third World
Hypocrisy and trade-talk go together, as America's decision to impose tariffs on imported steel shows.
Although that action is expected to be judged illegal by the World Trade Organization (WTO), developing countries remain wary.
Historically, they (India prominent among them) argued that the WTO is a tool of rich countries and so resisted much of what it sought to do.
Indeed, before the WTO ministerial meeting in Doha earlier this year, India's line was to oppose the launch of a new trade round, resist further trade liberalization in industrial goods, and oppose the use of trade sanctions to punish countries that fail to meet minimal labor standards.
The perception that the WTO is largely an instrument of the powerful, industrialized nations is broadly correct.
To oppose it on all fronts, however, is wrong.
A more sophisticated approach towards the WTO (and the North in general) is needed.
The WTO says that it is a democratic organization run on the principle of one country, one vote.
Anybody who follows the WTO knows that rich countries get around this `nuisance' democratic formality by lobbying behind the scenes to fix the agenda in advance.
Despite this, constant opposition to the WTO is self-defeating.
As the dispute about America's new steel tariffs illustrates, in today's globalized world a centralized trade ombudsman is vital.
Eliminating the WTO would be like trying to run a modern society without a law court.
While law courts are typically more lenient towards the rich and powerful, it is still better to have them than not.
Chronic opposition also reveals a lack of self-confidence of the sort when you cannot decide what is good for yourself but, instead, demand the opposite of what your trading partners want in the belief that what is good for them must be bad for you.
This implies a zero-sum view of global economics that is false.
In economic transactions there are many instances where everyone gains or everyone loses.
So consider in this light India's three demands.
It is right for India to have opposed injecting international labor standards into the WTO agenda, but it is wrong that India strongly opposed a new trade round.
India's average tariff rate is around 30%.
While much lower than previously, it is higher than in most industrialized nations.
But India independently decided to lower tariffs over the next three years.
A global program to lower tariffs means that India would only be asked to do what it planned to do anyway.
As others would have to lower their tariffs, India's access to other markets would increase.
Nowadays, economic policy is so complex that it is not always clear what is good for a nation and what is not.
Last December, there was furor in India when a dispute settlement panel of the WTO ruled against India's practice of (1) forcing automobile manufacturers in India to buy a certain proportion of parts from Indian producers, and (2) requiring automotive manufacturers who need to import parts and kits to export goods worth the same value.
If we reflect on these conditions, it is not at all clear that these policies are good for India.
Forcibly creating a market for Indian automobile parts eases pressure on these manufacturers to improve quality.
Forcing Indian cars to use such parts handicaps Indian cars from matching international quality.
Similarly, coercing companies into matching every use of foreign exchange by producing foreign exchange destroys an essential feature of specialized production.
Hence, the WTO ruling, at least in this case, may be a blessing in disguise.
At times it is useful to be compelled to do what you may not have the will to do on your own.
India and other emerging economies must engage with the WTO, keeping pressure on it to give more voice to developing countries.
There are, for example, 18 African countries without any representation in the WTO's office in Geneva.
What benefit can they expect from the WTO?
When there is a WTO legal tussle and big countries bring in expensive lawyers to argue their case, what chance do poor countries have?
As a democratic country with considerable expertise in economics and law, India should fight for better representation throughout the WTO.
Once that is achieved, it will be easier to entrust the WTO with tasks, such as assuring minimal labor standards that appear contentious today.
But a rule to remember is that even if this is not achieved, India and countries like it will gain more by being active participants in WTO deliberations than by withdrawing or being habitual naysayers.
Postscript: Fortunately, not all North-South engagements are politically charged.
Some years ago I left Delhi to lecture in a city in the developing world.
I told my host that I was planning to explore his city on foot.
With the hospitality that comes so spontaneously to ``Third Worlders,'' he said he could not allow it, rang the bell on his desk, and asked his assistant to find out if the ``Fertility car'' was available.
I was intrigued and, while the assistant was away on his errand, through deft questioning discerned the etymology of the ``Fertility car.''
The institute, it seems, had received money from a Northern nation for a project on fertility and some of the funds were used to buy a car, which was christened accordingly.
Soon, the assistant reappeared, panting, to report that the Fertility car was unavailable.
But he said this with obvious pride in his ingenuity: because I was a guest of the Institute, he said, he went to another department and booked the ``Poverty'' car for me.
The next day, nursing a slight feeling of ambivalence I explored that beautiful city in ``Poverty,'' never finding out what view the Northern donor took of this excursion.
Trading In Hate
NEW YORK – The massacre in Norway in July 2011 and the recent attack on a Sikh temple in Oak Creek, Wisconsin, were the work of right-wing extremists who sought to remake the world in their neo-Nazi image.
Likewise, the terrorist attacks of September 11, 2001, were the work of Islamist extremists who view other religions and cultures as a threat.
But it would be simplistic to believe that our leaders do not add fuel to the fire of hatred, even if their chauvinism takes a more “civilized” form.
Just ask the Japanese, who were continually denounced in the 1980’s as wicked traders.
Or consider how the unceasing refrain against outsourcing nowadays has demonized India.
This is not new.
Japan’s heavy burden of atrocities during World War II effectively erased from America’s popular memory the Immigration Act of 1924 and other federal legislation aimed at excluding the Japanese and the Chinese from the United States, as well as racist state legislation, such as California’s 1913 Alien Land Act.
With the war’s outbreak, Americans of Japanese origin were expropriated and herded into concentration camps.
California Attorney General Earl Warren championed the measures – the same Earl Warren, who, a decade later, as Chief Justice of the US Supreme Court, would oversee the rejection of the separate-but-equal doctrine at the heart of America’s segregation of its black citizens.
The anti-Japanese hysteria of the 1980’s fell on fertile ground.
Many in the US feared that, just as the nineteenth century had been British and the twentieth century had been American, the twenty-first century would be Japanese.
But, unlike the British or the Americans, the Japanese allegedly were gaining ground in nefarious ways, exporting aggressively to the US and unfairly excluding US exports from their domestic market.
Virtually every Japanese policy was interpreted in the worst possible light.
The propaganda was bipartisan in the US, and, with few noteworthy exceptions, was widely disseminated by the country’s uncritical and pseudo-patriotic media.
I recall the Nobel laureate Paul Samuelson – alongside John Maynard Keynes, arguably the greatest economist of his time – remarking that anti-Japanese propaganda had gone so far that Japan’s critics would argue that the Japanese bow in greeting Westerners to make it easier to cut them off at the knees.
The effect, particularly given a long history of anti-Japanese sentiment, was a predictable wave of racist violence, including the destruction of Japanese cars.
The beating death of Vincent Chin, a Chinese-American who was mistaken for a Japanese, also resonated historically, recalling a pseudo-scientific article on how to distinguish the Chinese from the Japanese that Life magazine published in December 1941.
The Indian situation in the US today is different; there is no baggage of unpleasant memories on which prejudice and violence can draw.
Yet, like a desert cactus, hate can thrive on very little.
Unfortunately, US President Barack Obama’s administration has continually harped on outsourcing to India as a cause of American job losses.
Similarly, Senator Charles Schumer of New York has indulged in Japan-bashing, China-bashing, and India-bashing – a singular record of truculence and economic illiteracy – while Senator Barbara Boxer of California attacked her most recent electoral opponent, Carly Fiorina, for eliminating 30,000 jobs at Hewlett Packard during her stewardship of the company.
In fact, in a highly competitive world, Hewlett-Packard managed to save 150,000 jobs by sacrificing those 30,000.
In the current presidential election campaign, the Democratic Party is attacking Obama’s Republican challenger, Mitt Romney, on the same specious grounds, with a complacent media acquiescing in the Democrats’ de facto India-baiting.
The net result has been to fuel resentment against India that spills over into occasional violence.
Groups calling themselves “dot-busters” have attacked Indian women.
When I have written in favor of freer trade and liberal immigration, I have been denounced as a “curry nigger.”
Nor has the Obama administration helped matters by shifting the blame for the failure of the Doha Round of multilateral trade negotiations onto India.
Outside the US, it is well known that Obama himself pulled the plug on Doha.
The notion that “we are open and others are closed,” a cherished belief of US politicians and media – and an article of faith with the current administration – also feeds the notion that countries like India are wicked traders, much like the Japanese in the 1980’s.
Much of the world expected more elevated behavior from Obama.
Unfortunately, it has gotten a much lower standard than it anticipated.
Trading Our Way Out of Crisis
GENEVA – Global trade contracted in 2009 at a rate not seen since the Great Depression, and those paying the heaviest price are those who can least afford it.
So, when trade ministers from the World Trade Organization’s 153 members gather in Geneva later this month, the issue of how the WTO and the global trading system can help the poorest countries will be high on the agenda.
Driven largely by collapsing domestic demand and production levels, but also by a shortage of affordable trade finance, trade volumes will fall by more than 10% this year.
Whether trade will recover next year is an open question.
Despite some evidence that trade volumes grew over the summer, recovery has been patchy – and so fragile that a sudden shock in equity or currency markets could once again undermine consumer and business confidence, leading to a further deterioration of trade.
The world’s poorest countries face the greatest hardship when trade languishes.
They do not have the luxury of cobbling together fiscal-stimulus packages or rescuing ailing industries in order to cushion the shock brought about by the economic crisis.
For them, trade represents a huge share of overall economic activity and is unquestionably the best avenue for exiting a crisis that has hit them hard.
The irony is that trade has collapsed just when these countries were becoming increasingly active in global markets, with their exports rising by more than 20% during this decade.
For nations that depend on trade, the sharp drop in exports this year was crippling.
Since the crisis began, export earnings of the world’s poorest countries are down $26.8 billion, or 44%.
The WTO Ministerial Conference later this month will provide an occasion to consider the best ways to generate growth and alleviate poverty in these countries.
Concluding the Doha round of trade negotiations by the end of 2010 – as world leaders have said they wish to do – is one of them.
A Doha deal represents one of the most valuable tools at our disposal to help meet the United Nations’ Millennium Development Goals.
Frankly, all of us already know what needs to be done.
Yet the Doha Round has fallen victim to basic misunderstandings – first, about why countries trade, and, second, about how they trade.
Countries trade, first and foremost, because it is in their interest to do so.
It is in a country’s interest to lower its import barriers so that it has cheaper access to goods and services that it cannot produce competitively.
Trade increases competition and keeps inflation in check.
In this way, trade can raise living standards.
Moreover, countries that lower their import barriers also end up exporting more.
The reluctance of trade negotiators to pursue what is in their obvious self-interest reflects another, more serious misunderstanding about the manner in which nations trade.
Consider United States-China trade in iPods.
Every iPod that the US decides not to import means a $150 “decline” in China’s recorded exports, though only about $4 of that value is actually added in China.
Japan, which contributes about $100 in value, suffers far more from China’s supposed decline in exports.
Clearly, the words “made in” mean something very different from what they meant 20 years ago.
Our production processes are so globalized that a country’s import tariffs could well penalize imports from one of its own global companies.
For many countries, particularly in the developing world, reducing obstacles to trade is insufficient for fuller participate in the global economy, because they also need to build their capacity to trade.
That is the central aim of the Aid for Trade initiative.
Despite the economic crisis, Aid for Trade donor contributions to help the less fortunate have risen 10% per year since 2005, and major donors are on track to meet or exceed their pledges for future funds.
Several major countries have agreed to increase their contributions this year to building infrastructure, productive capacity, and know-how in the developing world.
But Aid for Trade is no substitute for the market-opening opportunities and improved rules promised by the Doha round.
WTO members have already agreed that rich countries – and developing countries that are in a position to do so – would open their markets completely to 97% of exports from the world’s poorest countries, and dramatically reduce duties for those products where barriers remain.
As a result, cotton subsidies, which depress prices and displace African exports, would be sharply curtailed, and cotton exports from poor countries would receive duty-free, quota-free treatment in rich-country markets.
All trade-distorting farm subsidies would be slashed by 70%-80% in the major subsidizing countries.
New rules on streamlining customs procedures would sharply reduce transit times.
We must make progress on this agenda.
What is frustrating is that we are tantalizingly close to a deal which, according to the Washington-based Peterson Institute for International Economics, would deliver global economic benefits of $300-$700 billion annually.
But, to reap these benefits, we must close the deal.
The next Ministerial Conference ought to signal that we are ready to do so.
Trading up Global Trade Talks
In the year since the breakdown of the trade talks in Cancun, sentiment has increasingly grown in the developing world that no agreement is better than a bad agreement.
But what would a good agreement look like?
The British Commonwealth recently posed this question to me and the Initiative for Policy Dialogue, an international network of economists committed to helping developing countries.
Our first message was that the current round of trade negotiations, especially as it has evolved, does not deserve even to be called a Development Round.
Well before the riots that marked the World Trade Organization talks in Seattle in 1999, I called for a true "development round" of trade talks to redress the inequities of previous rounds.
The advanced countries, with their dominant corporate and financial interests, had set the agenda for those negotiations.
Whether or not developing countries benefited was of little concern.
Indeed, in the last round of trade negotiations, the Uruguay Round, the world's poorest region, sub-Saharan Africa, was actually made worse off.
Our second message was optimistic: if the agenda of the current round is reoriented towards development, and if assistance is provided to manage implementation and adjustment costs, developing countries can gain much.
We analyzed which reforms in the international trade regime would most benefit those in the developing world, and we presented an alternative agenda based on our findings.
The results were perhaps obvious: more people live from agriculture in the developing world than from manufacturing, so agricultural liberalization must be high on the agenda.
But genuinely beneficial agricultural reform would need to go further than merely transforming export subsidies into other types of subsidies, because many supposedly non-distorting subsidies lead to more output, which hurts producers in developing countries by lowering prices.
Trade reforms must be sensitive to the effects on developing countries, many of which are net importers of subsidized agricultural commodities.
But some subsidies, like cotton subsidies in the United States, are rightly emblematic of America's bad faith.
Eliminating this subsidy would help 10 million poor cotton farmers in sub-Saharan Africa.
American taxpayers would also benefit.
The only losers would be the 25,000 rich farmers who currently divvy up $3-4 billion in government handouts each year.
Developing countries also need access for the unskilled labor-intensive services in which they have a comparative advantage.
These were off the agenda in earlier trade rounds, as the US pushed for liberalization of financial services - thus serving its own comparative advantage.
Today, unskilled services remain largely off the agenda.
Developing countries' alleged gains from capital market liberalization have been widely discussed (although recent studies raise some doubts about these benefits).
Nevertheless, the global gains from allowing freer flows of unskilled labor (even temporarily), let alone the benefits to developing countries, far outweigh the benefits from capital market liberalization.
But this issue too is not on the agenda.
The trade talks in Cancun raised new subjects - the so-called Singapore issues.
But even a cursory look at these items reveals that they primarily reflect the interests of developed countries.
Indeed, poor countries' development would arguably have been set back if they had acquiesced in some of the demands.
Consider the issue of government procurement.
The single largest area of US government procurement is defense, a sector in which even the European Union has found it difficult to make inroads.
Are developing countries really targeting this area in the next few years?
Clearly, this issue is not high on their agenda.
Competition is another example.
Without competition, lowering tariffs may merely be reflected in higher profit margins for a monopoly importer.
The most important competition issue for developing countries, however, is reform of dumping duties.
The US and EU keep out products from developing countries, alleging that they charge less than the cost of production.
But why would anyone knowingly sell at a loss?
This could only be rational if the seller can hope to establish a monopoly position and extract large profits in the future.
But few developing countries are in a position to establish such monopoly positions, so the dumping charges are mostly bogus.
As tariff barriers have come down, the unfair "fair trade" laws are increasingly being used as America's favored protectionist tool.
Treating foreign and domestic firms the same with respect to competitive practices would stop these abuses.
This, too, should be a high priority of a true development round.
The breakdown of the Cancun talks may yet provide an opportunity for deeper reflection.
Now that rich countries no longer need to worry about losing the developing world to Communism, they have an opportunity to redefine the global economic order according to the same principles on which they built successful national economies: fair competition and social justice.
Unfortunately, this opportunity was squandered in the Uruguay Round, as developed countries advanced their own interests at the expense of less developed countries.
The round of trade negotiations begun in Doha in November 2001 was launched in a different spirit.
It aspired to promote trade as a vehicle of partnership between developed and developing countries.
Regrettably, in spite of its name, the Development Round has offered far less to developing countries than one would have hoped.
Training for Stability
The Balkan wars of the 1990's ravaged not only millions of people, but also the social institutions that gave shape to their lives.
Indeed, the changes brought about by Yugoslavia's dissolution and the wars of succession that followed annihilated large parts of the traditional education and training systems of Serbia, Croatia, Bosnia, Macedonia, and Kosovo.
Since then, stability and hope have begun to return to a region affected by the destruction of war and the widespread despair of social displacement.
The Balkan Stability Pact of 1999 and massive international support have helped rebuild local education, while developing innovative vocational education and training systems that should boost long-term employment.
The results of many projects in these countries are encouraging, with the current focus on training key groups, such as entrepreneurs, teachers, and young and unemployed people.
The same model can and should be followed elsewhere in the troubled lands that border the European Union.
In a time of political and economic transition--for example, the shift from authoritarianism to democracy and from a centrally planned to a free market economy--many jobs are on the line.
The redundancies that result are not only a waste of human resources, but also a source of stress for the people involved; both in economic and social terms, mass redundancies can be tragic and can lead to dangerous instability.
Vocational training can soften these blows.
Indeed, universal access to primary education and vocational training programs are at the heart of any strategy to eliminate poverty and ensure stability.
Developing skills and qualifications is all the more vital to establishing a more peaceful and prosperous future in areas already riven by conflict.
Compared to other forms of education, targeted professional training can offer swift results when economies are undergoing transition.
For individuals, it can help turn the threat of redundancy into the challenge of venturing in new directions.
For society as a whole, it can swing the balance from recession to growth.
But not only political and economic transitions are wrenching. Demographic changes can be equally painful for a society.
In the Mediterranean countries of North Africa, the young active population is expanding fast.
Since 1990, this region's population has grown by 24%, to 167.2 million.
Yet one in every three young people is unemployed.
This joblessness naturally makes the EU a magnet for migrant labor.
To stem this trend, the emerging economies of North Africa, as well as those of Eastern Europe, need to develop homegrown human capital by raising their populations' skill levels.
This strategy alone can enable these countries to compete economically in an increasingly global market.
Vocational education and training development can make a powerful contribution towards achieving this goal.
It can offer radical change in the lives of millions of people by helping them find work and thus providing hope of a better life for their families and children.
It can also bring about crucial changes on a larger scale--helping to reduce illiteracy and crime, for example, as well as other social pathologies that impede prosperity and stability.
Equally important, professional training development in the Middle East, North Africa, and Eastern Europe can bring about improved international relations and trade, together with reduced migration pressure.
Unfortunately, in many countries vocational education and training suffers from low status, particularly compared to higher education.
Its development is often neglected.
The need to convince both policymakers and citizens of the benefits of vocational education and training is therefore pressing.
But education has always been hard to promote as a subject of foreign assistance.
Education is a field where short-term results are difficult to achieve and the sheer size of even the smallest individual country's education system makes effective external support daunting.
Regardless of how much money is spent, it never can fund comprehensive reform of any country's education and training system.
Moreover, education is often viewed as an issue of national sovereignty.
This is not to say that educational development is a field where foreign assistance is inappropriate.
But because there are limits to what foreign assistance can achieve, it needs to be planned carefully.
Rather than fund comprehensive education reform, international partners can supply the tools with which individual countries can bring about reform themselves.
However such assistance is delivered, one thing is certain: universal access to primary education and vocational training programs is at the heart of any strategy to eliminate poverty and to ensure stability.
Public and private resources must be mobilized to build, enhance, and maintain solid educational infrastructures.
Developing skills and qualifications represents a powerful step towards a more peaceful and prosperous future in areas of conflict and poverty, but the interest in helping countries take that step is universal.
Note for the Editor :
On 5-7 November the European Training Foundation organizes the conference "Learning Matters" in Turin, Italy, bringing together 250 international officials and experts from 58 countries to discuss new strategies for vocational and educational training in 40 countries neighboring the European Union.
If you need any further information regarding this chronicle or the ETF please don't hesitate to contact Director Peter de Rooij, tel.: +39 0116302248, fax: +39 011630 2200 or e-mail:
peter.de-rooij@etf.eu.int
Sheryl Sandberg’s Good Fight
NEW YORK – Is it always offensive to advise women to change something about themselves in order to ensure that they can achieve their goals?
To suggest the need for any self-scrutiny on women’s part is a minefield; the safe ground is to urge that we remain focused only on fighting all-too-real gender discrimination.
But sometimes it is necessary to cross the minefield.
Sheryl Sandberg, the chief operating officer of Facebook, has done something pretty gutsy.
She has written a manifesto about breaking the glass ceiling, called Lean In: Women, Work, and the Will to Lead, and is drawing fire for it, because she argues that women often sabotage themselves.
Critics are already attacking Sandberg on the grounds that she is blaming the victim.
Anne-Marie Slaughter, who wrote a much-read article about the glass ceiling last year, has sought an open debate about where the problems lie.
Others, unfortunately, attack ad feminam: Sandberg is rich and powerful, so how can her advice be useful to struggling, underpaid everywomen?
Sandberg is seeking not just to raise consciousness, but to forge a social movement.
She wants her “Lean In” circles – all-women spaces to be supported by corporate workplaces – to teach women negotiation, public speaking, and other skills, all merged with upbeat collective support.
I know that this seemingly trivial approach is actually a solid recipe for success.
I co-founded a similar program called The Woodhull Institute; by teaching these skill sets, and adding mutual support in an all-female space, our alumnae – whether from barrios or Ivy League universities – quickly and dramatically outpaced their peers.
At first, however, they struggled to identify their own often-remarkable achievements in publicly making a case for themselves.
That effort felt so socially transgressive to them that they found it almost painful. So the opportunity to learn and practice speaking and negotiating skills is hardly inconsequential for women’s advancement.
Indeed, as Sandberg rightly stresses, no one trains women in something as simple but critical as speaking in a strong, declarative voice.
The range of inflections that are culturally valued in women’s voices (especially young women) are those that often undermine their authority in the workplace. So they often start presentations with an apology, use girlish inflections, and end statements with question marks.
But sounding fetchingly unsure about what you are describing is not an effective way to pitch an idea to a potential investor, publisher, or constituent.
The same hard-to-address truth also goes for body language, to which Sandberg also rightly pays attention (as reflected in her book’s title).
The talented young women I trained had great difficulty at first simply standing straight and tall; they often projected a lack of confidence physically, or simply looked as if they would rather be anywhere else than in the spotlight.
Young men from elite backgrounds, by contrast, learn to project physical confidence as part of their birthright – just as they learn to speak in assertive, declarative voices and claim their achievements.
So here is another tough fact: Institutional battles to redress women’s underrepresentation in land ownership, politics, and so on must be coupled with individualized leadership and skills training for women, ideally in an atmosphere of mutual support in which women learn from peers how to achieve and enlarge their own goals.
This model shows amazing results for women, in contexts ranging from Smith College to the Grameen Bank to all-women job-training programs such as Nontraditional Employment for Women, which trains women to break into highly skilled and high-paying, but traditionally all-male, blue-collar jobs.
Likewise, Grace Belgravia, an all-female club, is attempting to rival the clout of London’s elite men’s clubs.
The all-female peer group’s emphasis on supporting women to be strong and achieve their goals is critical, as two young leaders, Courtney Martin and Katie Orenstein (both Woodhull Institute alumnae) recently noted.
But, to realize Sandberg’s vision of a social movement in which all-female groups support their members’ efforts to make their own paths successful, we need to overcome obstacles in our own thinking.
The “post-feminist” view that there is no longer a need for all-women spaces needs to be challenged. There is also the question of how workplaces should respond if all-male groups wish to convene as well.
My own view is that there is nothing wrong with some same-sex gatherings in a private setting, whereas in public contexts, discrimination is discrimination.
Sandberg will have to explain her position on this issue.
A more pressing obstacle, in a sense, is institutionalized feminism, which often finds it more comfortable to blame well-known villains and attack those who dare to call attention to women’s need to learn for themselves the skills of securing and wielding power.
It’s time to move on.
Surely we need both the broad social analysis and the leaders who will take it upon themselves to help the next generation of women entrepreneurs and workers to speak for themselves and get what they deserve.
Transforming Science Education
CHICAGO – Throughout the West, declining standards in science education are threatening future prosperity.
Since the mid-nineteenth century, the West has depended on technical innovation and scientific derring-do for its influence and growth.
But the West now faces serious competition from the rising nations of Asia, where education in math and science is flourishing.
In general, competition in science and technology is a blessing – the more advanced a nation is, the better a customer it is.
And collaboration and exchange of people make for profitable businesses and higher standards of living.
But it must be recognized that falling educational standards will eventually hit economic growth.
The West, particularly the United States, has lived through such a moment of recognition before, when the USSR launched Sputnik in 1957.
The so-called “Sputnik shock” convinced America and the West of the need for radical reform of science education, particularly recruitment, training, and retention of teachers.
One reform that demands priority today concerns high school science.
Mathematics, the foundation for all science, depends on its concise language and logical ordering.
Physics, once the subject most dependent on mathematics, provides knowledge about the structure of atoms, and the use of mathematics there has now spread to chemistry and biology.
Essentially all phenomena in chemistry find explanations in the quantum atom, while chemistry and physics undergird molecular biology, which, since the discovery of DNA in the 1950s, dominates modern biology.
All other sciences – geology, astronomy, neuroscience, oceanography, and myriad hyphenated subjects – depend upon overlapping combinations of biology, chemistry, and physics.
Yet today, the vast majority of high schools start the study of science with biology.
In America, the requirement is usually for three years of science study, and, today, most U.S. students take science in this order: biology, chemistry, physics.
This sequence of study was devised in 1893.
I believe that it is obsolete, pedagogically disastrous, and ignores the tremendous scientific advances of the twentieth century.
Other industrial nations may cycle through pieces of the disciplines, missing the essential coherence of the P-C-B sequence.
Studying science should begin with physics, not biology.
In studying physics, students study algebra simultaneously, motivating them with a sense of the power of mathematics.
Moreover, physics begins with everyday phenomena requiring few new words (as opposed to conventional ninth-grade biology): motion, velocity, acceleration, falling objects, a sense of gravity as a force, and some new concepts, e.g. mass, momentum, and energy, but with crisp definitions.
Ninth-grade physics, unlike ninth-grade biology, illustrates the grand sweep of the laws of nature, and the power of an equation to describe a vast number of different phenomena can be taught at this level.
Classroom experiments make use of simple laboratory devices: inclined planes, pulleys, springs, simple pendulums, but the rules that are revealed have validity out in the real world.
The fall of a weight (or an apple!) can be connected to the moon’s orbit around the earth and even to the structure of galaxies holding billions of solar systems.
Indeed, we can study, on a convenient classroom scale, the same forces that move atoms and planets.
The last month or more of ninth-grade physics introduces atoms, invisible to the naked eye but with strong indirect support.
Here physics introduces scales of distances, atoms to galaxies, scales of time, nanoseconds to centuries, and scales of energy from electron volts to megajoules.
These orders of magnitude require metaphors and repetition, but they serve as crucial concepts in our world, especially in cosmology and in evolutionary biology.
Tenth-grade chemistry makes use of ninth-grade physics, deepening and enriching the student’s grasp, but no basic chemical or biological principles are required for ninth-grade physics.
Instead, qualitative applications of physics to chemistry and biology heighten interest and emphasize the connections.
Chemistry is largely a study of molecules, and when they are complex, there is the mysterious transition to life and biology.
At all stages of the science curriculum, basic questions must be asked.
How does something work?
How do we know?
What are the common laws?
It was not a physicist, but a biologist, Julius Meyer, who first proposed the law of conservation of energy from a study of biological energy processes.
The chemist Dalton first gave a proof of the existence of atoms and the engineer Sadi Carnot first gave a proof of the Second Law of Thermodynamics.
The sequence Physics-Chemistry-Biology implies that continuous collegial professional development for teachers is essential.
Teachers (including those in mathematics) should meet regularly to plot the evolution of their courses, their essential coherence, and the inclusion of stories that illustrate how science works.
Teachers need time to talk together.
I know of more than 1,000 high schools that have implemented the P-C-B sequence.
There is almost universal joy as students begin to grasp the whole picture.
Elective science courses zoom up in popularity.
Because this sequence is for all students, what will be retained in the future are the stories and, most importantly, a scientific way of thinking.
There is no job, no profession, civic activity that will not profit from this kind of education.
But to restore the vitality of science, we need to look at the entire educational system: teachers from pre-school through high school, state and national standards, productive and educationally reinforcing assessments, teaching materials and educational technology, and progress in the neurosciences, cognitive psychology, developmental biology, and nutrition.
And leadership for this huge revolutionary effort will probably have to come from visionary business executives whose profits depend on education and rationality.
Transition in Crisis?
LONDON – Europe’s emerging markets have this year experienced their worst output collapse since the great “transitional recession” that followed the end of communism.
Five countries are expected to suffer double-digit declines in GDP.
Non-performing loans in the banking sector and unemployment continue to rise in many countries.
There is no doubt that the European transition region is in deep crisis.
But is the transition from communism to a market economy itself in crisis?
How have the institutions and policy frameworks that were the outcome of the transition process coped?
Will the crisis lead to a backlash against market-oriented reforms?
While Central and Eastern Europe has been the emerging-market region to suffer the most in the crisis, it has generally avoided the currency collapses, systemic banking failures, and spikes in inflation that were the staple of previous crises.
Given how deeply integrated the region has become with the rest of the world, this is remarkable.
That deep integration cuts both ways.
On the one hand, it created economic ties and financial dependence that have made many transition countries highly susceptible to the crisis in the West.
On the other hand, it mitigated the large capital outflows that were a destructive force in past crises, contributed to more mature institutions and domestic policy responses, and helped mobilize vigorous international support.
The two faces of integration (explored in the EBRD’s 2008 Transition Report) have been particularly visible in finance.
Financial integration has been an important force for long-term growth in the transition region, and the presence of strategic foreign banks helped mitigate the impact of the crisis.
At the same time, integration into the wider European and global economy has no doubt contributed to excessively fast expansion in private-sector and foreign-currency debt, which has complicated the crisis in many countries.
But the lesson from this experience is not that countries should attempt to reverse financial integration – to do so would be both unfeasible and unwise – but that they should reduce its risks.
Further east, resource-rich transition economies such as Russia and Kazakhstan are facing what is arguably an even bigger challenge.
Like the financially integrated economies of Central and Eastern Europe, the commodity-rich countries have had to manage the complications of rapid inflows of foreign currency.
But these capital inflows also seem to discourage institutional development.
In some areas, particularly macroeconomic management involving the accumulation and use of stabilization funds, resource-rich transition countries have performed fairly well.
But the ultimate goal – diversification and associated improvements in economic (and political) institutions and the business climate – has mostly proved elusive.
The crisis has also tested ideas about the ultimate aims of transition.
It confirmed the view that the transition from communism is about much more than building markets and shifting economic responsibilities from the state to the private sector.
It also involves developing certain state functions, and improving how the state interacts with the private sector.
The crisis that began in 2008 underscored the importance of market-supporting policy institutions and policies, particularly in the financial sector.
This does not necessarily mean more regulation, but it certainly means better regulation, focused on improving incentives.
A long agenda of institutional reform remains, particularly in Central Asia and some East European and Western Balkans countries.
Moreover, significant sector-specific reforms are needed even in some Central European and Baltic countries, particularly in sustainable energy and energy efficiency, transport, and the financial sector, where regulatory and supervisory regimes require strengthening, financing of small and medium-sized firms needs to be improved, and local capital markets must be developed.
In light of today’s crisis, what is the likelihood of such reforms actually being implemented?
Will this crisis act as a catalyst for more reform, or will it lead to a backlash against the market model?
One year into the crisis in the transition region, we can almost rule out the latter scenario.
While the crisis clearly slowed the pace of new reforms, it has led to far fewer reform reversals than in 1998-1999, for example, following the crisis in Russia.
Furthermore, government changes since early 2008 have either led to no change with respect to reform or favored pro-reform parties.
But an acceleration of reforms also appears unlikely, with the possible exception of the financial sector.
Thus, while the global recession plunged the transition region into crisis, at the same time it demonstrated the resilience of the reforms and economic integration achieved over the last 15 to 20 years.
It also highlighted the pitfalls of the development models that countries in the transition region have pursued.
Yet it is clear that the way to address these pitfalls is to extend the transition agenda, not to replace it.
Bridging the Transatlantic Digital Divide
BRUSSELS – On September 8, after four years of painstaking negotiations, representatives of the United States and the European Union initialed a transatlantic agreement to strengthen data protection.
The so-called Umbrella Agreement puts in place safeguards regarding data transfers for the purpose of law enforcement and addresses long-standing European concerns about the right to privacy.
In particular, it establishes the right of European citizens to access their data and request that inaccuracies be corrected.
It also sets clear limits on how long data can be held and what can be done with it.
The agreement – which must be ratified by the European Parliament before it goes into effect – should be cause for celebration; but the US immediately provided reason to doubt its commitment.
On September 9, in the so-called Microsoft case, just one day after the agreement was reached, the US Department of Justice argued in federal court that US authorities should be granted direct access to data held by private companies abroad, including in Europe.
However the court ultimately rules, the move is a dangerous breach of trust.
Indeed, it is a public demonstration of American officials’ willingness to bypass existing avenues for cooperation between Europe and the US.
Such actions undermine the slow renovation of transatlantic trust since Edward Snowden’s revelations concerning the extent of American surveillance of European governments and citizens alike.
If the US government is to gain the EU’s confidence and cooperation, it will have to accept the fact that national security and data privacy are not mutually exclusive.
Continued refusal to proceed according to agreed legal channels will seal the Umbrella Agreement’s fate before it is ratified.
Two-thirds of EU citizens are worried about the treatment of their data.
Nine out of ten want their personal information to be protected, regardless of where the server that holds it is located.
As long as the US government continues to seek illicit access to European data, instead of fully implementing its commitments, it will be difficult for the European Parliament to consent to the Umbrella Agreement.
And if existing rules, treaties, and standards are treated as if they were worthless, EU citizens’ rights become an empty shell.
The blowback from the refusal to acknowledge the rights of citizens could be dramatic, undermining national security, bilateral trade, the transatlantic strategic partnership, and the nature of the Internet itself.
Digital borders and obstacles to data flows might be erected to meet demands for privacy at a moment when the world needs data to flow freely.
Otherwise, terrorism is more difficult to combat and the digital revolution risks reversal.
Fortunately, solutions that satisfy the need for national security and demands for privacy are not out of reach.
What makes the US Justice Departments attempts to bypass existing agreements so egregious is that EU member states are ready to cooperate swiftly with the US in the fight against crime when requests are made properly.
The constitutional traditions on the two sides of the Atlantic may be different, but they are certainly not irreconcilable as shown by the umbrella agreement.
A proper balance must be struck.
Data protection should not stand in the way of legitimate law enforcement.
Nor should national security be used as a blanket excuse for public authorities’ interference with personal freedoms.
Finding mechanisms that guarantee both the rights of individuals and the public interest is crucial to establishing the trust on which the digital economy depends.
Far from undermining counterterrorism efforts, rules that clearly delineate the roles of governments and the rights of citizens help ensure the smooth sharing of information among state agencies.
We must use opportunities like the Umbrella Agreement to reaffirm the importance of cross-border data flows, establish clear mechanisms for transatlantic cooperation, and set appropriate safeguards and legal channels to ensure that the privacy of European citizens is respected.
A clearly defined and mutually agreed framework will guarantee swift action to meet security threats when necessary – and only when necessary.
That is why building transatlantic trust and cooperation is so important, and why America’s refusal to turn words into legal guarantees is likely to be self-defeating.
Good Trade Intentions Gone Bad
WASHINGTON, DC – The debate in the United States about trade has taken an unfortunate turn.
Instead of discussing the detailed issues on their merits, President Barack Obama’s administration has chosen to emphasize the need for fast-track procedures (also known as trade promotion authority, or TPA) to negotiate any trade agreement.
The administration may win that fight, but there could be real damage as a result.
The current battle is over the precise content of the Trans-Pacific Partnership, a complex 12-country free-trade agreement.
Unfortunately, the TPP’s provisions remain secret – meaning that it cannot be seen or discussed by members of the public.
(Members of Congress may read the technical text, under restricted conditions, but are not allowed to describe its contents in detail.)
Anyone who raises legitimate concerns about any aspect of the TPP deal is immediately branded “protectionist.”
The line from the White House is: TPP will lower barriers to US exports, and thus increase jobs and wages.
Everything else, in this view, is a distraction.
In fact, TPP will do little for exports – and for an obvious reason.
The US already has standard tariff-lowering agreements with almost all of the participating countries.
Almost all tariffs on trade among Canada, Mexico, and the US are long gone – that was the effect of the North American Free Trade Agreement.
Under the Australia and Singapore free-trade agreements as well, almost all tariffs on US goods sold in those countries have been eliminated.
Goods from the US have entered Chile without tariffs since January 1; and most tariffs imposed by Peru have already been phased out.
The TPP will amount to a free-trade agreement with Brunei Darussalam (with a population of less than 500,000) and New Zealand (less than five million).
Encouraging exports to these countries is surely desirable, but the economic impact on the US is unlikely to be more than a rounding error.
That leaves three larger countries where the issues are more complex: Japan (about 125 million people), Malaysia (around 30 million people), and Vietnam (90 million people).
Japan resists reducing import tariffs on hundreds of agricultural goods, including meat from the US.
In addition, non-tariff barriers have long impeded, for example, the export of American-made cars to the Japanese market.
It remains unclear to what extent TPP will really open the Japanese market for auto-related products.
And Japan has had a history of currency intervention, holding down the yen’s exchange rate to boost exports and discourage imports – with major negative consequences for the US, among others.
Japan does not engage in such currency manipulation currently, and TPP represents a good opportunity to ask the Japanese for a commitment to abandon the practice.
Unfortunately, the Obama administration has declined to go down this path – currency manipulation is off the table as far as it is concerned.
As for Malaysia, important issues regarding forced labor in the export sector have emerged – and there should be full compliance with labor standards before the TPP deal is signed.
There are some grounds for optimism here, but promises to implement changes in labor standards after a trade agreement takes effect are seldom fulfilled.
In Vietnam, moving large subsidies provided to state-owned enterprises onto a measurable, market basis would be a sensible goal.
Workers’ rights are also a significant issue.
Indications are that the TPP negotiations are making little progress – though, again, key details and potential agreements remain highly confidential.
In addition to trade, TPP includes important provisions related to investment, the most prominent of which concern intellectual property rights, such as patents.
Although Obama says that the TPP is the most progressive trade agreement in history, Sander Levin, the ranking Democrat on the House Ways and Means Committee – and someone will full access to the text – disagrees.
He says that access to low-cost medicine in poor countries, for example, will be restricted.
Médecins Sans Frontières, the Nobel Peace Prize-winning humanitarian organization, agrees.
(These and related issues were raised at a recent event on Capitol Hill in which I took part.)
And TPP will also confer special status on foreign investors, allowing them to sue for financial judgments against host-country regulations.
Why we would want to provide such differential protection to non-domestic companies is a mystery.
Creating a quasi-legal process outside the regular court system, just for foreigners, can go wrong in many ways.
As Levin recently argued in a detailed and persuasive speech, the US should be having a full and open debate about these dimensions of the TPP deal.
It needs thoughtful, public deliberation about the provisions that are included, as they can have important consequences for the US and its trading partners.
Unfortunately, the Obama administration prefers to avoid public debate on substantive issues, instead merely insisting on using the fast-track TPA procedures for whatever TPP is agreed.
That is a mistake.
If the administration gets a trade agreement and it goes bad – on workers’ rights, access to medicines, state subsidies, or anything else – how does that help trade, America’s foreign partners, or the US economy?
Trapped on the Right
LONDON: Judged by its outcome, Britain’s general election lacked suspense and surprise.
Throughout its four years in power, Tony Blair’s New Labour government enjoyed a large and steady lead in opinion polls.
When Blair called for new elections, victory was taken for granted.
Yet the election was revealing, not only of problems within British politics, but also of similar stresses in political systems across the West.
From the Labour Party’s point of view, this second election was a test of its credibility as a normal party of government.
For nearly 80 years Labour was the main political alternative to the Conservative Party or Tories, and in several general elections it defeated them.
Nevertheless, the Conservatives seemed the more normal party of government.
Labour’s position as an outsider was underlined by the fact that it was never elected to two consecutive full terms of government.
Until now.
Labour succeeded because Tony Blair jettisoned Labour’s entrenched left-wing dogmas.
Traditional Socialist nostrums – nationalization, price controls, government direction – had failed in the past, could not be expected to work in the future, and thus held no credibility with voters.
So Blair decided that New Labour would not just accept, but embrace the principle of market forces.
By stealing the economic policy clothes of the Tories, Blair exposed the ambivalent posture of the Conservative Party in Britain.
This ambivalence has been, until now, common to almost all mainstream center-right parties in Europe.
Publicly, each claims legitimacy by offering to the wider society dynamic programs of modernization, liberalization and competent economic management; privately they promise their friends that they will promote sectoral interests and preserve social privileges.
So long as left-wing parties seemed suspect, implausible or even semi-revolutionary, center-right parties could conceal their internal contradictions.
When New Labour embraced market economics, the Tories were wrong-footed.
They could no longer claim their traditional role as the party of reliable economic management because, during its four years in power, New Labour delivered an impressive record of economic competence and stability, with high growth and low inflation.
As a result, William Hague, the Tory leader, shifted his party further to the right.
At home, his main policy proposal was for large tax cuts, with the clear implication that this could lead to cuts in public services.
Abroad, his main agenda was nakedly xenophobic: No to membership in the Euro, significant disengagement from the European Union, and a harsher policy towards foreign asylum-seekers.
It is not difficult to discern parallels between Britain’s Conservatives and America’s Republican Party.
President Clinton presided over eight years of successful fiscal management and prosperity, so George W. Bush could not claim this middle ground.
Instead, he moved further right, with massive tax cuts as his main economic proposal.
Similarly, his administration’s declared positions on the environment, on energy, on defense and on foreign policy are all strongly right-wing or unilateralist or both.
But neither in Britain nor in America is there evidence that the electorate has moved to the right in this way.
The difference is that George W. Bush won the presidency by a whisker, whereas William Hague could not avoid defeat.
The dilemma in Britain is the same as that of any West European country: the move by left-of-center parties to the middle ground, and their acceptance of market forces, means that right-of-center parties have lost their traditional claim to govern on the grounds of economic moderation and good sense.
The result is a growing temptation to react by moving further right, even though elections are usually won in the center.
William Hague’s campaign was dominated by his call to “save the pound” and stay out of the Euro.
In fact, no one knows whether Tony Blair will seek to join the Euro, let alone win a referendum on it.
Most polls show a large majority against.
The irony here is that the Euro played an enormous part, directly and indirectly, in moving Britain, like other EU members, in the direction of free markets and fiscal discipline.
Britain may or may not join the Euro, but the policies adopted by Labour – privatization, low budget deficits, low inflation, an independent central bank – are precisely those it would need if it did decide to join.
Indeed, the Euro has been one of the main instruments in moving Europe’s center-left parties onto the middle ground, or even to the center-right.
But the response of some center-right parties in Europe has been to move further right, specifically in an anti-Europe or nationalistic direction.
Under Angela Merkel’s leadership, for example, Germany’s Christian Democrats are increasingly flirting with xenophobia.
In Italy, Silvio Berlusconi’s government also appears tainted with right-wing populism and xenophobia.
He, like William Hague and George W Bush, is promising to slash taxes.
Under Euro rules, governments must observe strict limits on their budget deficits and public debt.
Berlusconi’s promised tax cuts may soon run up against both Treaty limits, and will likely incite conflict with other Euro area governments if they do.
Today ought to be a golden age for center-right parties: Communists and Socialists have self-destructed, free markets are spreading as inexorably as globalization, and prosperity beckons.
So why, in these seemingly ideal circumstances, can’t the right find a plausible political story to tell – one which reconciles liberal government with liberal economics?
In Europe, this should not be too difficult, because some version of an answer can surely be found in the context of the European Union.
Many right-wing politicians, however, appear to prefer taking refuge in populism, nationalism and nostalgia.
Treason in the Air
COPENHAGEN – Discussions about global warming are marked by an increasing desire to stamp out “impure” thinking, to the point of questioning the value of democratic debate.
But shutting down discussion simply means the disappearance of reason from public policy.
In March, Al Gore’s science adviser and prominent climate researcher, Jim Hansen, proclaimed that when it comes to dealing with global warming, the “democratic process isn’t working.”
Although science has demonstrated that CO2 from fossil fuels is heating the planet, politicians are unwilling to follow his advice and stop building coal-fired power plants.
Hansen argues that, “the first action that people should take is to use the democratic process.
What is frustrating people, me included, is that democratic action affects elections, but what we get then from political leaders is greenwash.” Although he doesn’t tell us what the second or third action is, he has turned up in a British court to defend six activists who damaged a coal power station.
He argues that we need “more people chaining themselves to coal plants,” a point repeated by Gore.
The Nobel laureate in economics Paul Krugman goes further.
After the narrow passage of the Waxman-Markey climate-change bill in the United States House of Representatives, Krugman said that there was no justification for a vote against it.
He called virtually all of the members who voted against it, “climate deniers” who were committing “treason against the planet.”
Krugman said that the “irresponsibility and immorality” of the representatives’ democratic viewpoints were “unforgivable” and a “betrayal.”
He thus accused almost half of the democratically elected members of the House, from both parties, of treason for holding the views that they do – thereby essentially negating democracy.
Less well-known pundits make similar points, suggesting that people with “incorrect” views on global warming should face Nuremburg-style trials or be tried for crimes against humanity.
There is clearly a trend.
The climate threat is so great – and democracies are doing so little about it – that people conclude that maybe democracy is part of the problem, and that perhaps people ought not to be allowed to express heterodox opinions on such an important topic.
This is scary, although not without historical precedent.
Much of the American McCarthyism of the 1940’s and 1950’s was driven by the same burning faith in the righteousness of the mission – a faith that saw fundamental rights abrogated.
We would be well served to go down a different path.
Gore and others often argue that if the science of climate change concludes that CO2 emissions are harmful, it follows that we should stop those harmful emissions – and that we are morally obliged to do so.
But this misses half the story.
We could just as well point out that since science tells us that speeding cars kill many people, we should cut speed limits to almost nothing. We do no such thing, because we recognize that the costs of high-speed cars must be weighed against the benefits of a mobile society.
Indeed, nobody emits CO2 for fun.
CO2 emissions result from other, generally beneficial acts, such as burning coal to keep warm, burning kerosene to cook, or burning gas to transport people.
The benefits of fossil fuels must be weighed against the costs of global warming.
Gore and Hansen want a moratorium on coal-fired power plants, but neglect the fact that the hundreds of new power plants that will be opened in China and India in the coming years could lift a billion people out of poverty.
Negating this outcome through a moratorium is clearly no unmitigated good.
Likewise, reasonable people can differ on their interpretation of the Waxman-Markey bill.
Even if we set aside its masses of pork-barrel spending, and analyses that show it may allow more emissions in the US for the first decades, there are more fundamental problems with this legislation.
At a cost of hundreds of billions of dollars annually, it will have virtually no impact on climate change.
If all of the bill’s many provisions were entirely fulfilled, economic models show that it would reduce the temperature by the end of the century by 0.11°C (0.2°F) – reducing warming by less than 4%.
Even if every Kyoto-obligated country passed its own, duplicate Waxman-Markey bills – which is implausible and would incur significantly higher costs – the global reduction would amount to just 0.22°C (0.35°F) by the end of this century. The reduction in global temperature would not be measurable in a hundred years, yet the cost would be significant and payable now.
Is it really treason against the planet to express some skepticism about whether this is the right way forward?
Is it treason to question throwing huge sums of money at a policy that will do virtually no good in a hundred years?
Is it unreasonable to point out that the inevitable creation of trade barriers that will ensue from Waxman-Markey could eventually cost the world ten times more than the damage climate change could ever have wrought?
But I would never want to shut down discussion about these issues – whether it is with Gore, Hansen, or Krugman. Everybody involved in this discussion should spend more time building and acknowledging good arguments, and less time telling others what they cannot say.
Wanting to shut down the discussion is simply treason against reason.
Treating Al-Qaeda
PRINCETON – Although Al-Qaeda’s leadership, beliefs, and ideology are rooted in Saudi Arabia, the organization has been all but crushed in the Kingdom by a government policy that combines a big carrot and an even bigger stick.
The attempted assassination in Jeddah last month of Prince Muhammad bin Nayef, the deputy interior minister for security affairs, demonstrates both elements of the Saudi strategy, and how a bold attempt by Al-Qaeda to revive its fortunes has failed.
The bomber was Abdullah Asiri, a Saudi citizen and Al-Qaeda member who had returned from Yemen, claiming to have renounced terrorism and wishing to surrender directly to Prince Muhammad in his palace.
Earlier that day, the prince had the bomber flown in on his private jet from the Yemeni-Saudi border and reportedly ordered that he not be carefully searched.
Yet, Asiri had indeed hidden a bomb inside his body, a one-pound explosive that he detonated near the prince.
However, the bomb was not encased in metal and the terrorist was the only person killed.
To an outsider, the episode looks like a colossal security failure, as if the head of the FBI personally greeted one of Bin Laden’s lieutenants at a garden party.
But it is just this highly personalized form of politics that the Saudi royals have adopted with defecting Al-Qaeda’s members.
Indeed, this policy, even with its risks, partly explains Al-Qaeda’s defeat in Saudi Arabia.
Highly personalized politics form part of what might be called Saudi Arabia’s theatre of state, which keeps the royals firmly in power.
Since 2003, Prince Muhammad has been in charge of a successful campaign against violent Islamism in the Kingdom.
In terms of armed security action, he has developed a strong domestic intelligence and police service that is both efficient and brutal in its tactics.
At the same time, the prince has cannily used deeply rooted cultural and religions norms to pressure Al-Qaeda’s recruits to give up violence.
For example, he offers significant financial inducements to individual jihadis, as well as their families, in return for political obedience.
In effect, by not accepting Saudi largesse the militant will be keeping food off his own family’s table – a powerful restraint in a culture and religion in which parents are highly regarded and respected.
Prince Muhammad has also established a rehabilitation program that seeks to de-program the jihadis from their radical beliefs through a course of study that teaches that Islam requires obedience to a Muslim ruler.
Repentant jihadis are taught that violence undertaken by individuals – not by the legitimate ruler – is sinful and will be punished by God.
These lessons do not rule out all violence, focusing instead on Al-Qaeda’s justifications for its attacks and the forms that the violence takes.
As such, both fighting without the ruler’s explicit permission and suicide bombing are unlawful.
Entry into the program often involves a personal audience with the Saudi prince, in a ceremony that emphasizes the paternalistic and personal nature of governance in the Kingdom, where all subjects are regarded as well-cared-for children of the royals.
Finally, Prince Muhammad has launched an Internet monitoring and disinformation campaign that keeps close tabs on jihadi Web sites and online forums.
As a result, the Saudi security services have a feel for the pulse of jihadi debates, as well as for the radicals’ recruitment strategies.
Al-Qaeda has also damaged itself with the Saudi public, which has been repeatedly victimized by terrorist attacks.
Suicide bombings of public buildings and attacks on oil and other government installations have alienated many Saudis.
With at least 80% of the population dependent on government salaries or grants, the attacks have proved very unpopular.
In addition, ordinary Saudis see the chaos next door in Iraq and do not want the same turmoil at home.
For most people, stability, even if imposed by authoritarian means, trumps disorder.
In the last two years, Al-Qaeda’s increasing failures in the Kingdom have forced the surviving members to regroup across the border in Yemen.
The rugged mountain terrain, a religiously conservative population, and a weak government with a history of collaboration with Al-Qaeda have created a relatively sheltered haven.
As a result, Al-Qaeda has had a respite to try to rebuild itself and to organize attacks in Saudi Arabia and elsewhere.
With two ongoing domestic rebellions, a large population, and the rapid disappearance of oil and water resources, Yemen is quickly emerging as a Western policymaker’s nightmare.
For now, however, the Saudi royals have a prince who is seen as a courageous hero for having survived an assassination attempt while offering the hand of generosity to an unrepentant zealot.
Saudi King Abdullah chastised Prince Muhammad for recklessness, but the King must also be thankful that his family has produced a security chief who has broken the back of Al-Qaeda, at least inside the Kingdom.
Trends and Trendiness at Davos
The annual World Economic Forum is rightly perceived as a global “barometer.”
But the superb sunshine in Davos these days cannot avoid the shadows of the financial crisis that have enveloped the world, casting an atmosphere of gloom and doom on this year’s meeting.
Today, more than ever, the Forum’s proud motto, “Committed to the improvement of the world,” seems disconnected from reality.
It is not confidence that dominates Davos 2008, but rather a sense of impotence, if not bewilderment, at the world’s growing complexity.
In fact, Davos is less a barometer that helps us to understand the deep trends that are shaping the world than a mirror that reflects trendy ideas, worries, and perhaps gossip.
From formal debates and informal schmoozing with fellow members of the Davos crowd, one gets a sense of who the American establishment favors to win the next presidential election (Hillary Clinton), predictions for the upcoming referendum in Ireland on the European “simplified” treaty (it will be very close), and French President Nicolas Sarkozy’s international image (not good).
You do not need to go to Davos for this, but in the Swiss mountains these ideas acquire an aura of legitimacy – call it the “I was told in Davos” imprimatur – which explains why political and economic analysts and commentators keep coming back, despite the Forum’s combination of pomposity and intellectual vacuity.
The eminent people who pass through are given opportunities only for sound bites, developed thoughts.
As for business leaders, despite the hefty fees they must pay to become members of the “Davos Family,” they, too, keep coming because for them the Forum ultimately represents a time- and money-saving investment.
Where else in the world could they meet so many of their potential partners or customers, including heads of emerging states, in one place?
Of course, the danger of Davos lies in this concentrated commingling of the chattering classes and the real world of politics and business.
Conformism flows naturally from these encounters and creates a world in which everybody tends to think alike, as if a truly global community could create a global way of thinking, even if positions on how to address the current financial crisis are varied.
What is trendy at Davos this year is to view the crisis as reflecting two deep global trends – for example, the declining clout of the United States.
After the war in Iraq and the Bush administration’s slow reaction to Hurricane Katrina, America’s subprime mortgage crisis is perceived by many as simply accelerating the irresistible rise of Asia and the shift from a unipolar to a multipolar world, even if the wider financial crisis will equally affect Asia’s growth.
For countries like China or India, the scaling down of growth from 8% to 5% is nearly the equivalent of a recession in the West.
Yesterday, when America sneezed, the world caught a cold.
Today, when America catches pneumonia, can Asia only sneeze?
The second trend underlined at Davos is the return of the state.
In the latest issue of Foreign Affairs, Forum‘s founder and president, Klaus Schwab, asks “How can business help save the world?” But, with the financial crisis hanging over Davos participants’ heads like the sword of Damocles, the question is becoming, “Can states and international institutions save business?”
The return of the state, even when it is the power of the European Commission to sanction Microsoft, is on everyone’s lips.
Such a return further underlines a growing skepticism about the market and its key actors’ infectious and dangerous greed.
This trend, if it is confirmed by reality, could signify the end of what Davos stands for: an open, global, and transparent world.
But is the world ready for a return to protectionist policies and nationalist reflexes?
Will today’s freedom and transparency, having led to undesired results, result in a return to restrictions on movements of goods, people, and capital?
In Davos this year, great hopes have given way to great apprehensions.
How can you pretend to be acting to change the world if you no longer understand it?
Trial by Crisis
WARSAW – Episodes like the current financial crisis seriously disrupt economic growth.
But the question that we should be asking concerns such episodes’ impact on longer-term development.
And that question has attracted surprisingly little interest.
Traditional growth theories focus on systematic forces – for example, capital accumulation, employment, and technical change – that, by definition, operate all the time, although with varying degrees of intensity.
Some theories also consider underlying institutional factors like property rights, market competition, tax and regulatory burdens, and the level of the rule of law.
Another strand of research deals with crisis management, but without examining the impact on longer-term growth.
In the case of a financial crisis, this usually includes fiscal and monetary easing, as well as rescue operations for larger financial institutions.
The prevailing approach to crisis management has been short-term, and, as was amply demonstrated during this latest crisis, is based on what I call the self-justifying doctrine of intervention.
This doctrine holds that, just as one should never worry about pouring too much water on a fire, whatever crisis-management measures are adopted are justified, because the alternatives would have been worse and might well have provoked catastrophe and/or a meltdown of financial markets.
But the fire metaphor rules out such elementary questions as how to ensure that anti-crisis measures will not weaken the forces of market recovery, or how to measure such measures’ longer-term consequences.
The latter problem has only recently begun to surface in debates about “exit” strategies from sharply increased levels of public debt and money supply.
Integrating these different streams of analysis into a coherent approach to economic growth is a huge challenge to policymakers and academics alike.
But a number of points strike me as relevant to the current situation.
First, because financial crises as deep as the latest one are socially so costly, it is only natural to try to prevent them.
But, just as with medicine, this demands an accurate diagnosis of a problem’s causes.
The proximate reason for all financial crises is excessive credit growth – a credit boom that goes bust.
But the underlying reasons for the boom differ from crisis to crisis.
In the present case, as a report last year prepared by a group led by Jacques de Larosière, a former IMF managing director, emphasized, a major contributing factor was a serious failure of public policies.
For example, many central banks followed the Federal Reserve’s excessively loose monetary policy.
Other factors included defective financial regulations, expansionary fiscal policies in countries like the United States, Britain, and Ireland, a lack of appropriate macro-prudential regulations, and so on. Preventive measures should therefore focus on these policy failures rather than degenerating into hostility towards hedge funds and other private-equity devices.
My second point is that there are several obvious economic channels through which booms that turn into busts affect growth.
These include increased unemployment, the reduction of excessive debt burdens and therefore of credit-driven spending, the restructuring of sectors that had expanded in response to excessive spending, and the curtailment of lending by over-extended financial institutions.
There are no policies that could suspend the operation of all these linkages without damaging longer-term growth.
Continued fiscal expansion is certainly not the answer, as it ultimately damages both private spending and business investment.
But there are reforms that can facilitate economic adjustment, and thus ease social pain by countering the growth in long-term unemployment.
These reforms include measures to remove labor-market rigidities while also accelerating the repair of banks’ balance sheets.
The speed of economic recovery would largely reflect the extent to which these steps are taken.
A third point, intended for all but those who still believe in a free lunch, is that the employment and growth implications of a country’s commitments in the area of climate-change policy need to be carefully analyzed.
Multiplying the number of burdens on an economy is not the best policy to implement in the aftermath of a major crisis.
Fourth, it is difficult to overestimate the importance of fiscal discipline to longer-term growth.
It is all too easy to find examples of countries that subsequently suffered badly because of sustained fiscal expansion.
By the same token, I cannot think of a single economy whose long-term growth prospects were damaged by excessive fiscal stinginess.
Given the fiscal legacy of the current crisis, no efforts should be spared in anchoring fiscal discipline firmly in European Union countries.
Institutional measures such as fiscal frameworks and public-debt thresholds can do much to help.
Ultimately, though, it is public opinion that will determine governments’ fiscal stances, so fiscally conservative public opinion would be a great economic asset, as it would constrain policymakers’ profligacy.
My last point is that crises, while unpleasant, are also widely thought to facilitate growth-enhancing reforms.
This is not always the case, though, as the policy conclusions that are drawn from a crisis largely depend on what the public perceives as the cause of the crisis.
If public opinion blames earlier market reforms for the current crisis, the policy lessons may go off in the wrong direction.
That was the case in Russia in 1998 and in Argentina in 2000: in both cases, public opinion largely blamed previous reforms for the crisis, even though both crises were caused by fiscal irresponsibility and insufficient reform.
This time, too, the key to overcoming the difficult legacy of the crisis will consist in how its origins are perceived.
If public opinion attributes the crisis to policy errors or lack of reform, there is a chance that the right policy lessons will be learned, and that sound growth policies will result.
Tribes versus Terrorists
ISLAMABAD – Sitting next to a four-foot-tall water pipe, I asked the tribal leader in front of me: What does victory mean to you?
How can you have victory here?”
The United States went into Afghanistan to destroy Al Qaeda.
But seven years later, what has the US achieved?
It has spent over $170 billion in Afghanistan, and yet Al Qaeda and the Taliban are growing stronger.
We know that the road to the heart of Al Qaeda now leads to the Federally Administered Tribal Areas (FATA) in Pakistan.
Last month, Vice President-elect Joe Biden, referring to Al Qaeda leadership said, “That’s where they live.
That’s where they are.
That’s where it will come from.
And right now [the threat] resides in Pakistan.”
Yet the US has no presence in the FATA.
It has little contact or communication with its people and leaders.
It provides little support, healthcare, or aid to the population there.
America sends in missiles and air strikes that infuriate the people rather than aid and emissaries to engage them.
It is no surprise that the US has not won their support.
But there is a way to do so.
People who have influence in the “unsettled” tribal areas live nearby, in settled areas.
These tribesmen move to the settled areas for economic and security reasons, and they are the lifelines of their home villages.
The US must establish dialogue with and services for these influential people in order to build a bridge to the tribesmen in the unsettled FATA areas.
These leaders already know the tribal chiefs, spiritual leaders, and tribal customs and codes.
They also know who the enemy is and can play a role in isolating militants from local people.
A friend from the region described the FATA as “a forgotten age” where only the “law of the jungle” prevails.
These unsettled areas have become infiltrated by a multinational anti-state terror network (Al Qaeda, Taliban, the Haqqani network, and roughly 14 definable anti-state elements operating in the FATA alone), which the US government calls “anti-coalition militias” and are far more sinister and interconnected than the West imagines.
With five years of Iraqi experience – and powerful communication and financial support behind them – this network is growing rapidly.
The FATA tribesmen are completely aware of this situation.
When asked, “If Osama bin Laden was in the house next door, would you notify the authorities?,” the answer from the tribesmen I met was a resounding “no.”
As Frederick Mackeson, a British colonial officer, observed of the tribesmen in 1850, “their fidelity is measured by the length of the purse of their seducer, and they transfer their obedience according to the liberality of the donation.”
While the enemy weaves in and out of the tribal areas, living and interacting with the people, the US fights the war against Al Qaeda superficially through military air strikes and covert special operations.
Homes are destroyed and people die.
And, because the US has no presence on the ground in any capacity, Americans are seen as the aggressors, and the militants are seen as the protectors.
There are a few exceptions; in Bajaur, for example, some tribesmen regard the militants as the enemy and are fighting back – for now.
According to the Pakistani Center for Research and Security studies, 90% of the FATA’s inhabitants live below the poverty line, earning less than two dollars a day.
To a newborn, life will be a struggle for survival in a war zone.
It is not just America’s presence that is lacking.
The Pakistani government provides little to no services in this area.
And the international community is absent as well.
The links between the settled and unsettled areas started over a century ago.
Facing tribal unrest and incessant fighting, the British proposed to settle the tribes from Waziristan (present-day North Waziristan and South Waziristan) in British territory.
The Secretary of State wrote to Queen Victoria, “The pacification of border tribes by preserving in the exercise of humanizing influences is more likely to be permanent than their subjection by military force….[and would] afford a reasonable prospect of rendering the people on the frontier line between our territories and Afghanistan peaceful and friendly neighbors.”
The British moved some members of the tribes from the unsettled areas of the frontier to the settled (colonial) areas.
Prior to this policy, the British had spent 15 years and countless funds repressing and punishing the tribes, without result.
The essence of British policy continues today in the FATA.
There are effective local organizations, such as the Sarhad Rural Support Program (SRSP), with which the US could cooperate immediately in the settled areas to get started.
These organizations work with the people to assess their needs and then build the institutions to deliver care.
SRSP has the capacity; they just need direction and financial support in order to expand.
Once dialogue and cooperation are established with the tribesmen in the settled areas, inroads can be laid into the tribal unsettled areas.
Yes, the British were ultimately defeated. But they left a unique roadway to the FATA through the adjoining settled areas.
It is time to get back in the driver’s seat.
Trichet Takes Control At The ECB
The announcement by the President of the European Central Bank, Jean-Claude Trichet, that interest rates would be raised at the next meeting of the bank’s Governing Council on December 1st,could be a defining moment in his presidency.
By pre-announcing the rate increase, which senior ECB officials call a move towards greater transparency, Trichet firmly demonstrated his leadership of the Governing Council.
Press leaks by dissident members had sowed confusion in the public’s mind as to the bank’s concerns and intentions before the announcement.
Even though a consensus had emerged in the Council that a December interest rate hike would be necessary, a handful of holdouts on the ECB Governing Council – some with their own very private agendas – leaked misleading and, in one instance, clearly false information to the press in a futile attempt to thwart the increase.
In an anonymous leak to a major financial news service, an ECB official falsely maintained that unanimity was needed for a rate hike, implying a single dove could stop it.
Infuriated by what he considered to be guerilla tactics, Trichet effectively silenced the mischief-makers by the bold stroke of pre-announcing the rate hike two weeks before the meeting.
This is not the first time communications has been a problem for the ECB.
On more than one occasion, under both Trichet and former ECB chairman Wim Duisenberg before him, press leaks and the tit-for-tat responses they engender, made the Governing Council sound more like a cacophony of discordant voices than a serious deliberative body.
Now, to his credit, Trichet has done something about this long-standing problem, although not without ruffling some feathers in the process.
The doves are furious about the pre-announcement, and some hawks – perhaps nostalgic for the more collegial style of Wim Duisenberg – regard Trichet’s move as “showing off” and “taking control.”
Indeed, a leading Dutch financial newspaper attacked the pre-announcement as a sign of Trichet’s weakness rather than strength, implying that he had lost control of the Governing Council.
This is unfair.
The recalcitrance of the holdouts against the consensus – a direct challenge to Trichet’s leadership – gave the ECB president little alternative.
What was he to do?
Let the holdouts undermine his personal credibility and that of the bank?
The unwillingness of frustrated minorities to accept consensus may well require the ECB president to take more control of the governing board than it has been used to in the past or, indeed, feel comfortable with in the future.
More than anything, the pre-announcement controversy demonstrates that a renewed spirit of consensus and collegiality in the ECB’s Governing Council is sorely needed.
Because Trichet’s pre-announcement of a moderate interest rate hike conjures up visions of a Fed-like series of small interest rate hikes over an extended period of time, the ECB president also pre-announced his disinclination to follow in US Fed Chairman Alan Greenspan’s footsteps in this regard.
Indeed, a case even can be made that with the new leadership at the Federal Reserve expected to embrace European-style “inflation targeting,” we may be entering a period in which the Fed follows the ECB on critical monetary matters rather than the other way round.
“Inflation targeting” means that a central bank puts the pursuit of price stability above all other objectives.
This is what the ECB does – and what the Fed’s Alan Greenspan does not do.
“Inflation targeting” also means the central bank follows certain specified rules.
This too is what the ECB does and Greenspan doesn’t do.
Ironically, the “inflation targeting” advocated by Greenspan’s nominated successor, Ben Bernanke, lies closer to ECB monetary policy than to the discretionary activism that the Fed has practiced during Greenspan’s long tenure.
Trick or Treat?
OXFORD – A new way of thinking about individual choice has taken the political landscape by storm. America’s new president Barack Obama and the leader of the British Conservatives, David Cameron (just to drop a couple of names) have shown an interest in it.
Its intellectual and academic pedigree is impeccable.
It is said to be effective, evidence-based, and cheap to implement.
Most of all, it stakes a claim to a degree of philosophical coherence of which the various “third ways” of the last decade could only dream.
The novel idea, elucidated in Cass Sunstein’s and Richard Thaler’s book Nudge , is that skillfully controlling the way alternatives are presented to us can “nudge” us toward making the choices that our own “better selves” would make. “Libertarian paternalists” like Sunstein and Thaler claim that we have two different ways of making decisions: one “from the gut” (called System I), and the other more deliberative and far more effective (called System II).
But, while System II choices may be more effective than System-I decisions, they are more “expensive” to make: one needs data, analysis, and concentration.
Only when the importance of the task warrants the effort do we shift gear and deploy the System-II heavy artillery.
This division of labor between the System-I and System-II mechanisms would work well were it not for the fact that our lazy and cheap decision-making mode tends to take over in situations that should command our fullest attention: choosing a pension plan or a health care scheme, for example.
As one can imagine, the results of this System-I coup d’etat are not pretty.
Old-fashioned paternalists have always been very well aware of this.
In these situations, liberal paternalists feel no qualms about taking control and forcing choices upon us (“Wear seat belts and enroll in the pension plan, and in the end you’ll thank me”).
The criticisms of this attitude boil down to a simple question: “Who is better equipped than I am to make choices about my welfare?”
Libertarian paternalists are different.
To make us choose what is good for us, they avoid fines, compulsion, and prohibition in favor of “nudges” – institutional arrangements that we could, in principle, easily override, but that, given our tendency to rely on System I, we end up going along with.
With a neat twist of logic, our cognitive imperfections are turned on their heads, and made to work to achieve System-II choices. And, indeed, well-chosen nudges have been shown to be extremely effective in altering choices that make a substantive difference to the lives of many (say, enrollment in pension plans).
But here lies the rub: if the architecture of choice is truly so important in determining outcomes, does it really matter if manipulation rather than coercion is used to make us choose what someone else has decided is ultimately good for us?
What is gained by tricking rather than forcing people into making choices they wouldn’t have made?
Isn’t the power of the manipulator more insidious, and perhaps to be more greatly feared, than that of the policeman?
In short, what is so libertarian about “nudging”?
Libertarian paternalists offer a novel answer to these questions.
As long as choice engineering tricks us into making choices that our own more deliberate self would make , they say, manipulation is justifiable.
Nudges should be so chosen as to prod us toward those choices that we ourselves would make, if we would only sit down and think carefully about the matter at hand.
There are, unfortunately, some logical problems with this apparently elegant solution.
Is it really always so reasonable and effective to listen to System-II preferences?
According to neo-classical economists, the answer is a resounding “yes,” and, in many cases, they can point to substantial evidence to validate their claim.
Unfortunately, however, hyper-rationality does not always produce attractive outcomes when social , rather than individual , choices are concerned.
Indeed, sometimes it leads to results that are inefficient, “nasty,” or both.
The benefits of tax evasion may far outweigh the risk of getting caught, but imagine if everyone decided to evade taxes at the same time.
In these situations, the System-II decision maker has no tools to resort to in order to escape the sub-optimality (and social nastiness) of the rational decision.
It gets worse.
Consider the following example.
I am an organ donor. Thaler and Sunstein also believe that donating organs is a good thing.
Therefore, one of the “nudges” they recommend is to make organ donation as the default option in the case of a fatal accident.
But there is nothing irrational in having a very strong preference not to have one’s body used for spare parts after one’s death.
We cannot use System II to fault this preference.
How would we feel if we used the System-I decisional laziness about changing defaults to “trick” someone into a course of action to which she would have violently objected, perhaps on religious grounds?
Ultimately, there is a fundamental and unresolved accountability deficit in the way libertarian paternalists go about nudging us.
The Enlightenment idea that our System-II rationality can always point to an optimal choice about which every reasonable individual would agree clashes with the widely accepted modern idea that there is a plurality of reasonable choices.
If this is the case, who is to decide in what areas individuals can be fairly nudged by social engineers?
Whose and which choices are the nudgers suppose to encourage?
And who will nudge the nudgers?
These questions, I am afraid, still await a convincing answer.
Tropics of Cancer?
STANFORD – Cancer is sometimes thought of as a disease of wealthier countries, but it is a major cause of morbidity and mortality in poorer ones as well.
Indeed, by the end of this decade, about 150 million people worldwide will have cancer, with approximately 60% of them residing in developing countries.
Although fewer people in developing countries live to the age at which cancer is most prevalent, inadequate nutrition and environmental exposures to viruses and toxins, combined with a paucity of diagnostic and treatment options, increase cancer’s incidence and lethality.
Many people in poor countries die from cancers that are preventable or treatable in wealthier societies, but they often succumb to other scourges as well, such as infectious diseases.
So what could and should be done about this conundrum?
Margaret Chan, the head of the World Health Organization, and Yukiya Amano, director of the International Atomic Energy Agency (IAEA), noted in a recent article that most developing countries’ health-care systems are designed to cope with infectious diseases rather than cancer.
I find this to be a rational strategy, given the heavy toll that infections take, and that many can be prevented and treated at a relatively modest cost.
The diagnosis and treatment of most types of cancer in developing countries would require a huge and daunting investment in infrastructure.
As Chan and Amano point out:
“[M]ost lack the funds, equipment, and qualified personnel needed to provide basic care for cancer patients.
Thirty countries – half of them in Africa – do not have a single radiotherapy machine.
And these countries certainly do not have the financial resources, facilities, equipment, technology, infrastructure, staff, or training to cope with the long-term demands of cancer care.”
In order to begin addressing these deficiencies, “The IAEA’s work involves building countries’ capacity for radiation medicine.
But technology means nothing without well-trained and motivated staff to use it.”
Such an approach is, however, poorly focused and unlikely to be cost-effective.
As the United Nations’ own data make clear, infectious diseases, many of them preventable and treatable, remain the scourge of poorer populations.
In 2008, about 250 million cases of malaria caused almost a million deaths, mostly of children under five.
In virtually all poor, malaria-endemic countries, there is inadequate access to antimalarial medicines (especially artemisinin-based combination therapy).
The incidence of malaria could be reduced drastically by the judicious application of the mosquito-killing chemical DDT, but UN and national regulators have curtailed its availability, owing to misguided notions about its toxicity.
Hundreds of millions suffer from other neglected tropical diseases, including lymphatic filariasis and cholera.
Although new HIV infections worldwide declined slightly during the past decade, 2.7 million people contracted the virus in 2008, and there were two million HIV/AIDS-related deaths.&#160;
By the end of that year, more than four million people in low- and middle-income countries were receiving anti-retroviral therapy, but more than five million who were HIV-positive remained untreated.
The number of new cases of tuberculosis cases worldwide is increasing, and the growing emergence of multidrug-resistant strains of the bacteria is especially worrisome.
According to UN statistics, about 15% of the world’s population lacks access to safe drinking water, and “in 2008, 2.6 billion people had no access to a hygienic toilet or latrine,” while “1.1 billion were defecating in the open.”
Primitive approaches to managing sewage continue to spread infections such as schistosomiasis, trachoma, viral hepatitis, and cholera.
Many cancers are likely caused by chronic viral infections, another reason that it is surely more sensible to attack infectious diseases by improving access to clean water, basic sanitation, antibiotics, and vaccines than it is to build radiotherapy facilities.
In some technology-poor but oil-rich Middle East countries, state-of-the-art radiotherapy (and cardio-pulmonary bypass) equipment has been delivered, but never used, or has been damaged by electrical surges or power outages.
And many poor countries do not have a single medical school, and when their citizens study abroad, they often stay there, or are ill-equipped for a low-tech milieu that is so different from where they trained.
Although the use of big-ticket equipment, expensive chemotherapy drugs, and sophisticated and complex procedures such as bone marrow transplantation would not be wise, this is not to say that we should give up entirely on cancer treatment in developing countries.
Sometimes, prevention, diagnosis, and treatment are cost-effective.
Vaccines to prevent hepatitis A and B (and C, when one becomes available) reduce the incidence not only of the viral infections, but also of sequelae such as cirrhosis and hepatic carcinoma.
And public-health efforts to curb air pollution and smoking could reduce the prevalence of lung cancer in Asia and Africa.
Another example is cervical cancers, many of which can be prevented by vaccines against human papilloma virus.
And acetic acid can be used to visualize cervical cancers, which can then be treated with cryotherapy (freezing).
The bottom line is that in a world of limited health-care resources, we need to make hard decisions that will deliver high-impact outcomes for the most people at the least cost.
Troubling Interventions
PRINCETON – The most noteworthy commemoration of the second anniversary of Lehman Brothers’ collapse on September 15, 2008, was Japan’s unilateral currency intervention to depreciate the yen.
That move marks a shift in the character of the global financial crisis, away from concern with banking problems and toward a focus on the world’s dysfunctional exchange-rate system – or, rather, its current lack of one.
The Japanese intervention was immediately controversial.
American politicians denounced it as predatory; Europeans saw it as a step on the road to competitive devaluations.
And Switzerland’s central bank recently launched a costly and futile attempt to stop the Swiss franc’s rise against the euro – an effort that produced only large losses on the bank’s balance sheet.
Japan’s new activism also was widely imitated.
South Korea and then Brazil started similar action to drive down their currency.
The 1980’s was the last time anyone tried this sort of intervention.
At that time there was little agreement about its usefulness as a tool of international policy, and the G-7 summit at Versailles in 1982 was extraordinarily conflict-ridden and unproductive.
Indeed, it was to be the first act in a long exercise of futile mega-diplomacy.
Almost the only concrete outcome was the commissioning of a report by a group chaired by a senior French civil servant, Philippe Jurgensen, on whether intervention was an effective instrument against the volatility that seemed to be undermining trade relations.
When the report eventually came out, it acknowledged that “excess” volatility had “adverse consequences” for individual economies, as well as for the smooth functioning of the international adjustment process.
But the Jurgensen report was ambiguous about the effectiveness of intervention.
It stated that interventions aimed at objectives inconsistent with economic fundamentals were futile and counter-productive.
Americans read this as affirmation of their belief that all intervention was useless. Europeans, especially in France, drew the opposite conclusion that intervention could be useful if it were intended to get exchange rates right.
But the report gave no guidance about how to judge whether exchange rates were appropriate or not.
The high water mark of intervention came a few years later, between the Plaza meeting of finance ministers in September 1985 and the Louvre meeting in February 1987.
The Plaza meeting produced an accord on concerted intervention to push down the value of the dollar, which all participants agreed was overvalued.
The participants promised to use up to $18 billion over a six-week period.
But, in fact, the depreciation of the dollar began well before the September 1985 meeting, and the meeting was limited in the sense that there was no discussion of monetary or interest-rate policy.
By the time of the Louvre meeting, the dollar had fallen and the participants now discussed “target zones” or “reference ranges” around a central rate.
There was apparent agreement on a new wave of coordinated interventions, but the agreed exchange rates did not hold.
The Louvre agreement was not just ineffective.
In retrospect, it was blamed for triggering a highly politicized debate about exchange rates, with every country trying to devise an approach that favored its own interests.
The United States, in particular, put enormous pressure on Japan to take expansive policy measures to relieve the pressure on the international system.
The resulting monetary expansion in the second half of the 1980’s fueled Japan’s massive asset-price bubble, the collapse of which seemed to lead directly to the country’s “lost decade” of stagnation.
As debate about Japanese economic decline intensified, a consensus emerged in Japan that outside pressure had forced the country into adopting a dangerous and ultimately destructive course.
The Japanese episode still echoes in modern debates.
As the US pushes China to revalue the renminbi, American economists try to support the case for a stronger renminbi by looking at examples of surplus countries that adjusted by carrying out more expansionary policies.
The most extraordinary contribution to this debate has come from the International Monetary Fund, whose April 2010 World Economic Outlook contains a chapter on how adjustment by surplus countries can be generally beneficial.
The recommendation, which contains a long section trying to show that Japan’s 1987 and 1988 experience was not damaging, will be read in China simply as a statement that the US wants China to follow Japan in committing what amounts to economic hara-kiri.
That is not a helpful message, given the current state of the world economy.
A more sophisticated approach is required.
After all, the real lesson of the 1980’s is that exerting massive pressure for exchange-rate adjustment and looser monetary and fiscal policy won’t work – especially since China now, like Japan then, is already running substantial budget deficits.
As exchange markets became ever bigger during the past 20 years, most commentators assumed that central banks’ ability to influence exchange rates through intervention had shrunk radically.
We are in danger of forgetting that vital lesson.
The debate about China’s artificially pegged exchange rate has led Japanese Prime Minister Naoto Kan and French President Nicolas Sarkozy to begin to believe that they, too, might try shaping exchange rates.
Indeed, Sarkozy has promised to make the search for a “better” exchange-rate system a key part of France’s agenda when it chairs the G-20 next year.
But the problem is that the world’s central banks do not sing from the same hymnbook.
The political obsession with a better exchange-rate regime amounts to an invitation to private markets to make large amounts of money by betting against those central banks that are pressed by politicians to take a particular view of the exchange rate.
The bankers will laugh, while politicians wail and gnash their teeth.
Truce and Truth in Venezuela
President Hugo Chávez was forced from power not because of opposition protests but because of his own mistakes.
He returned to power two days later because of his opponents' mistakes.
Understanding the positions of the actors is a necessary step if today's impasse is to be bridged.
By 2001's end, a growing but dispersed opposition believed that President Chávez should go but disagreed how this should happen.
Their complaints were many: the government's land reform law, its oil policy, poor record on corruption, politicization and militarization of the public sector, disrespect for unions and other institutions, support for guerrillas in Colombia and for Fidel Castro, illegal arming of militants, hostility to the US, and threats to free speech.
Even though the charges were serious, the opposition lacked a smoking gun to clearly disqualify President Chávez, especially in the eyes of foreign governments.
President Chávez scorned the opposition's litany.
His legitimacy rested on free elections and his project for economic and social justice.
He predicted resistance from those whose privileges would disappear.
They would seek to block him, especially through their control of the media.
He would respect their right to say as they pleased but would pull no punches in countering their "lies."
He used his appearances on television to denounce his enemies and mobilize citizens, particularly poor ones, to support his revolution.
He sowed conflict.
The tide of events shifted to favor the opposition and facilitate coordination among its disparate parts, including politicians, business leaders, civil society organizations, active and retired military officials, intellectuals, labor unions and even members of religious groups.
A successful national strike last December convinced many that the president no longer commanded a majority among voters.
Chávez responded with intransigence, seeming to think that his hold on power depended on whether he could still turn out a big crowd.
Like a flawed hero, Chávez fell prey to his aggressive character in ways that endangered his international standing.
In mid-February, the Organization of American States criticized his abusive language in television broadcasts that chilled public debate.
Shortly after, Chávez recklessly decided to consolidate his hold on the state oil company by appointing cronies to its board.
The move sparked a managerial revolt that threatened Venezuela's biggest source of income.
Smelling blood, business and labor leaders called for a national strike to support the company.
Any observer could see that the march of several hundred thousand people on the presidential palace on April 11 th would likely provoke repression and a clash with Chávez supporters.
As violence exploded, Chávez began a television address announcing the shutdown of private television stations; meanwhile the media projected scenes of blood and chaos on one half of the TV screen and afterwards reported that snipers were firing against the defenseless crowd.
Here, at last, was the smoking gun.
Or so it seemed.
Representatives of the armed forces announced that, as defenders of the constitution, they could not support the president.
After announcing that the president had resigned, they charged Pedro Carmona, head of the businessmen's federation, with forming a government.
Many people expected that Venezuela would follow the example of several Latin American countries by respecting constitutional procedures to legitimize a new government.
No one can understand why Carmona abandoned his allies, entrenched a narrow group of associates in his proposed government, or declared himself virtual dictator for a year instead of following the democratic script.
He thus validated the condemnation of Latin American leaders and lost vital military and political support even before he swore himself in.
The next day, chaos, looting and panic spread.
Arbitrary arrests of Chávez officials began, even as their colleagues regrouped to retake the presidential palace.
The news media suspiciously stopped reporting on these facts, later protesting (too much) that they were under threat and feared instigating further violence.
Unwilling to go to war amongst themselves or against the enraged crowds, the military brought back the president as the only hope for restoring order.
A repentant Chávez sought pardon for his errors, promised generous treatment for the rebels and moved swiftly to negotiate a solution for the oil industry.
But his return leaves the political constellation of forces much as before.
The dictatorial turn of the transitional government fortified the view in the Chávez camp that the opposition is a tool of right-wing economic groups and opportunists willing to turn confused citizens into cannon fodder.
For the opposition, the government's attempts to close down the media strips bare Chávez's anti-democratic credentials.
They blame the president for the dead and wounded on both sides and consider him incapable of changing his ways or his policies, despite his promises.
A fragile consensus for conciliation and an independent commission to investigate the facts opens a window for dialogue, but no one thinks the crisis has ended.
Many on both sides may prefer that the full facts not come out.
Early elections would divert attention from a serious effort to discover what really happened, although a new cabinet and resignations by autonomous judicial and investigative bodies would help restore faith in these key institutions.
They would help Venezuela to let the truth to emerge, no matter what the truth may be.
Trust Negotiations, Not Iran
North Korea’s agreement to give up its military nuclear programme was a huge success for the international community.
Admittedly, the country’s dire economic condition and its urgent need for energy made the agreement venal in a way.
But North Korea’s decision nonetheless demonstrated the virtues and efficacy of diplomacy, which brings us once again to the case of Iran.
French President Jacques Chirac recently implied that we should not overestimate the seriousness of Iran’s possessing nuclear weapons.
I disagree.
It is true that possessing does not mean using; that for 15 years the world has had eight nuclear powers; and that nuclear force has not been used since 1945.
But it is also true that Iran’s emergence as the ninth nuclear power would provoke a regional and global upheaval, dangerously aggravate fears and suspicions, and confront the international community with a profound crisis of vision and policy.
So, what can we do?
First, resorting to force is simply not realistic.
A nuclear strike would have incalculable consequences, and the Muslim world would in this case stand together.
Nor is a conventional attack possible, as Israel has no common border with Iran and most of the American army is tied down in Afghanistan and Iraq.
Exploring diplomatic avenues is therefore absolutely necessary.
Success would be guaranteed if the international community, especially the United States, clearly understands and admits its necessity, and supports it firmly and completely.
For example, economic sanctions, to which Iran is very sensitive, could be tightened, with a commitment not to resort to military force facilitating Russian and Chinese approval.
The only possible framework for negotiations is the Nuclear Non-Proliferation Treaty (NPT), concluded in 1968.
Iran was one of the first countries to sign, and it cooperated with the International Atomic Energy Agency (IAEA) for more than 30 years – a relationship that deteriorated only in the last three years.
But the current climate of mutual wariness between Iran and the self-proclaimed triad of Germany, Great Britain, and France (with sporadic US support) is not propitious to effective negotiations.
The West’s aim, announced by the US and followed by the triad, is to force Iran to give up uranium enrichment.
Yet the NPT is clear: any signatory country that gives up nuclear weapons and accepts the IAEA’s absolute and unconditional control is entitled to produce electric energy from civil nuclear sources, and to receive from the international community, if necessary, technical and financial support.
Iran’s oil resources are not infinite, and it wants to have complete control over the civil nuclear field – a basic right as an NPT signatory.
I cannot see how a negotiation aimed at getting Iran to renounce unilaterally a right recognized for all NPT signatories simply in order to build confidence in the West could be successful.
Uranium enrichment is certainly the first condition for making bombs, but the level of enrichment must reach about 95%, compared to 3.5% for energy production.
Are the international scientific community and the IAEA really incapable of providing indicators and criteria that would allow the international community to differentiate between two types of industrial operations?
For example, forty years ago, when fear of nuclear proliferation was new, my teacher and friend Vassili Leontief, who invented the macroeconomic table of inter-industrial flows, argued that the best indicator of an illegal arms program is massive electricity consumption.
Nor has the Iranian government ever publicly expressed a will to possess nuclear weapons.
In fact, it has offered several times to accept IAEA monitoring and has suggested that its civil nuclear program would be carried out with international cooperation.
So far, the West has rejected everything, on the pretext that any uranium enrichment would indicate a military program.
Although this stance is technically wrong, it is strategically rational, given the West’s wariness regarding Iran’s true intentions.
I recently met in Paris with Iran’s ambassador to France, and I began brusquely: “So, you really want this bomb, Ambassador?”
“Of course not,” he replied. “You know very well that the actual ambition of my country is to achieve regional leadership.
If we had the bomb, the relationships with all our neighbors would immediately deteriorate.”
As everybody knows, ambassadors are paid to lie.
The West’s wariness is well founded, and we have no reason to renounce our mistrust.
But that should not prevent us from exploring all scenarios.
If we interpret the NPT correctly, we can launch negotiations with Iran that would carefully explore the potential sincerity or not of its official stance.
Yunani Tanpa Ilusi
ATHENA – “Pergantian pemerintah bersifat minor yang termahal dalam sejarah Yunani”. Pernyataan ini setidaknya merupakan satu cara menggambarkan hasil pemilihan umum Yunani pada tanggal 20 September.
Sesungguhnya, meskipun ada beberapa pengecualian, menteri-menteri yang sama kembali menjadi anggota kabinet sebagai pemerintah yang berkuasa, didukung oleh partai-partai ganjil yang sama (partai sayap kiri Syriza dan partai kecil sayap kanan Yunani Independen), dengan persentase hasil suara yang sedikit lebih rendah dibandingkan pemerintah sebelumnya.
Tetapi kesan adanya kontinuitas ini cenderung menyesatkan.
Meskipun persentase pemilih yang mendukung pemerintah relatif tetap, 0.6 juta dari 6.1 penduduk Yunani yang memberikan suara di referendum pada tanggal 5 Juli untuk meneruskan utang “extend-and-pretend” dengan syarat austerity yang ketat, tidak memilih di pemilu ini (voters turnout).
Penurunan jumlah pemilih yang anjlok dalam waktu kurang dari dua bulan menggambarkan perubahan suasana hati pemilih secara drastis – dari penuh semangat menjadi murung.
Pergeseran ini mencerminkan mandat yang dicari dan diperoleh Perdana Menteri Alexis Tsipras.
Bulan Januari lalu, ketika saya mendukung beliau, kami mengajak pemilih mendukung tekad kami mengakhiri dana talangan “extend-and-pretend” yang mendorong Yunani masuk ke lubang hitam dan diterapkan sebagai model kebijakan austerity di seluruh Eropa.
Pemerintah yang kembali berkuasa pada tanggal 20 September memiliki mandat yang berlawanan: melaksanakan program dana talangan “extend-and-pretend” – benar, ini merupakan perbedaan yang paling mematikan.
Pemerintah baru yang dipimpin Tsipras sadar akan hal ini.
Tsipras paham bahwa pemerintahnya menghadapi risiko besar terkait dengan program fiskal yang tidak bisa berhasil dan agenda reformasi yang dibenci menteri-menterinya.
Walaupun pemilih dengan bijak memilih Tsipras dan kabinetnya, bukan oposisi yang konservatif, untuk menerapkan program yang dibenci oleh sebagian besar penduduk Yunani, kenyataan agenda austerity ini akan menguji kesabaran publik.
Pemerintah Tsipras berkomitmen untuk memberlakukan daftar panjang tindakan dalam kondisi resesi.
Tiga diantaranya menyoroti rencana kenaikan pajak yang tengah ditunda: lebih dari 600.000 petani diminta membayar tunggakan pajak tambahan di tahun 2014 dan membayar di muka (pre-pay) sebesar lebih dari 50% perkiraan pajak tahun mendatang.
Sekitar 700.000 usaha kecil (termasuk buruh dengan upah rendah yang terpaksa bekerja sebagai penyedia jasa swasta) harus membayar di muka 100% pajak tahun depan (ya, saya tidak mengada-ada).
Mulai tahun depan, setiap pengusaha diharuskan membayar 26% turnover tax dari setiap euro yang dihasilkan – sembari diwajibkan membayar pajak di muka pada tahun 2016 nanti yang besarnya adalah 75% dari jumlah pajak mereka tahun 2017.
Selain dari kenaikan pajak yang menggelikan ini (yang juga mencakup kenaikan pajak penjualan secara besar-besaran), pemerintah Tsipras telah menyetujui pemotongan pensiun dan penjualan aset-aset publik (fire sales).
Bahkan penduduk Yunani yang paling reformis pun menolak keras agenda yang ditetapkan oleh “tiga serangkai” ini (Komisi Eropa, Dana Moneter Internasional, dan Bank Sentral Eropa).
Tsipras berusaha membangun dua lini pertahanan melawan gelombang penderitaan (supaya mengurangi ketidakpuasan populer).
Baris pertama adalah menekan tiga serangkai agar memenuhi janjinya untuk melakukan perundingan penghapusan utang setelah kebijakan dalam kondisi resesi ini dilaksanakan sepenuhnya.
Baris pertahanan kedua didasarkan pada janji adanya agenda “paralel” yang bertujuan untuk memperbaiki dampak terburuk dari program troika ini.
Akan tetapi kedua bentuk pertahanan ini lemah, mengingat buruknya kenyataan yang dihadapi akibat kondisi perekonomian Yunani.
Ada sedikit keraguan bahwa pemerintah Yunani akan mendapatkan penghapusan utang.
Utang-utang yang tidak mungkin terlunaskan ibarat potong rambut.
Namun kreditor-kreditor asal Yunani sudah dua kali memotong rambut mereka, pertama di musim semi tahun 2012 dan selanjutnya di bulan Desember.
Sayangnya, meskipun potong rambut ini diperlukan, sekarang sudah terlambat, hanya sedikit, dan terlalu berbahaya sehubungan dengan parameter keuangan dan hukum mereka.
Dengan demikian pertanyaan yang dihadapi pemerintah Tsipras ialah apakah potongan rambut berikutnya akan lebih berguna dibandingkan dengan sebelumnya.
Agar dapat membantu pemulihan perekonomian Yunani, penghapusan utang harus cukup besar dan menjadi pengungkit untuk menghilangkan sebagian besar upaya-upaya austerity baru, yang semata-mata memastikan terjadinya perputaran pada siklus deflasi-utang.
Lebih tepatnya, pengurangan utang harus disertai dengan penurunan target primary budget surplus jangka menengah, yang saat ini 3.5% dari PDB menjadi paling banyak 1.5%.
Tindakan lainnya tidak akan bisa memulihkan perekonomian Yunani.
Apakah hal seperti ini dimungkinkan secara politis?
Satu petunjuk baru muncul dalam artikel di Financial Times dimana Klaus Regling, kepala dana talangan Eropa, the European Stability Mechanism (Mekanisme Stabilitas Eropa), merujuk kepada mantra troika bahwa Yunani tidak memerlukan penghapusan utang secara besar.
Regling mungkin bukan pelaku utama disini karena tindakan atau upayanya, tapi ia tidak pernah bicara ketika bukan gilirannya atau menyampaikan pernyataan yang bertentangan dengan Bank Sentral Eropa dan pemerintah Jerman.
Tentu saja, ada IMF, yang mana salah satu karyawannya menyampaikan kepada semua orang yang bersedia mendengarkan bahwa utang Yunani harus dihapuskan sekitar sepertiga atau €100 miliar ($112 miliar).
Tetapi jika kejadian baru-baru ini menggambarkan masa depan, maka pandangan IMF ini akan direkayasa.
Ini menyisakan Tsipras dengan baris pertahanannya yang kedua: program “paralel”.
Gagasan ini bertujuan untuk menunjukkan kepada pemilih bahwa pemerintah dapat menggabungkan kapitulasi pada troika dengan agenda reformasinya sendiri, terdiri atas peningkatan efisiensi dan serangan terhadap oligarki yang dapat membebaskan dana dengan tujuan mengurangi dampak austerity terhadap Yunani yang melemah.
Ini adalah proyek yang layak.
Jika pemerintah Yunani berhasil, proyek ini berpotensi menjadi “game changer”.
Bagaimanapun juga, supaya upaya ini berhasil pemerintah harus membunuh dua naga sekaligus: ketidakmampuan administrasi publik Yunani dan kepandaian oligarki yang tidak ada habisnya yang tahu cara membela diri – termasuk membentuk aliansi kuat dengan troika.
Tuberculosis or Hair Loss?
Refocusing Medical Research
PRINCETON – In an ideal world, the amount of money we spend on medical research to prevent or cure a disease would be proportional to its seriousness and the number of people who suffer from it.
In the real world, 90% of the money spent on medical research is focused on conditions that are responsible for just 10% of the deaths and disability caused by diseases globally.
In other words, the diseases that cause nine-tenths of what the World Health Organization refers to as “the global burden of disease” are getting only one-tenth of the world’s medical research effort.
As a result, millions of people die every year from diseases for which no new drugs are in the pipeline, while drug companies pour billions into developing cures for erectile dysfunction and baldness.
But blaming drug companies is too easy a response.
They cannot justify developing new drugs unless they can expect to recoup their costs through sales.
If they target diseases that affect affluent people, or people living in countries with national health insurance, they will be able to patent any new drugs they discover.
For the 20 years that the patent lasts, they will have a monopoly on the drug’s sale and be able to command a high price.
If drug companies target diseases that affect only people who are unable to pay high prices for drugs, they cannot expect to cover their research costs, let alone make a profit.
No matter how much their directors may want to focus on the diseases that kill the most people, the current system of financial incentives means that if they did so, their shareholders would remove them, or their companies would soon be out of business.
That would help no one.
The problem is with the system, not with the individuals who make their choices within it.
At a meeting in Oslo in August, Incentives for Global Health, a nonprofit organization directed by Aidan Hollis, professor of economics at the University of Calgary, and Thomas Pogge, professor of philosophy and international affairs at Yale, launched a radical new proposal to change the incentives under which corporations are rewarded for developing new medicines. They suggest that governments contribute to a Health Impact Fund that would pay pharmaceutical companies in proportion to the extent to which their products reduce the global burden of disease.
The fund would not replace existing patent laws, but would offer an alternative to them. Pharmaceutical companies could continue to patent and sell their products as they do now.  Alternatively, they could register a new drug with the Heath Impact Fund, which would set a low price based on the drug’s manufacturing cost.
Instead of profiting from sales at high prices, the corporation would become eligible for a share of all payments made by the fund over the next ten years.
The size of the share would be calculated by assessing the contribution the drug has made to reducing death and disability.
The beauty of the scheme is that it gives economic support to the idea that all human lives are of equal value.
For products that drug companies register with the Health Impact Fund, corporations would get the same reward for saving the lives of Africans living in extreme poverty as they would get for saving the lives of wealthy citizens of affluent nations.
The most potentially lucrative targets would become the diseases that kill the most people, because that is where a breakthrough drug would have the biggest impact on global health.
Moreover, companies would have an incentive to produce and distribute drugs at the lowest possible price, because only when the poor could use them would the drug save the greatest possible number of lives.
A company might choose to allow cheap generic copies of its drug to be made in developing countries, because that would enable it to be used more widely, and to save more lives – for which the Health Impact Fund would reward the company that registered it.
Hollis and Pogge estimate that about $6 billion a year would be required to enable the Fund to provide a sufficient incentive for drug companies to register products that target the diseases of the poor.
That figure would be reached if countries accounting for one-third of the global economy – say, most European nations, or the United States and one or two small affluent nations – contributed 0.03 % of their gross national income, or three cents for every $100 they earn.
That’s not a trivial sum, but it isn’t out of reach, especially considering that affluent nations would also benefit from cheaper drugs and from medical research that was focused on reducing disease rather than on maximizing profits.
It’s the Economy, Tunisia
TUNIS – On December 21, Tunisia completed a remarkable democratic transfer of power, with the election of Beji Caid Essebsi, the leader of the secular political party Nidaa Tounes (Call of Tunisia).
As with the parliamentary election in October, the process of choosing a president was, for the most part, fair and free of violence.
For the moment, Tunisia is the only Arab Spring country that appears to be on a path to genuine democratic governance.
Since the ouster of President Zine el-Abidine Ben Ali in 2011, the country has endured pressures from Islamic radicals, a deterioration of its economy, and a chaotic transitional period.
But it has also written and adopted a new constitution structured to encourage the separation and balance of powers, and it seems on track to pull off a successful change in government.
Tunisia is relatively homogeneous ethnically and lacks sharp sectarian divisions; nonetheless, owing partly to its porous borders with Algeria and Libya, the specter of violence is always present.
Indeed, the issue of security dominated both the parliamentary and presidential elections, with all sides claiming to be the best qualified to counter extremism.
Lurking in the background of the presidential election was fear in some quarters that a victory by Nidaa Tounes, which won a plurality in parliament, might mean a return to authoritarian rule.
Given concerns about security and the fate of the democratic transition, economic issues were essentially put on hold in both elections.
Now it is time for Tunisia’s leaders to put the economy at the top of their agenda.
In the coming weeks, Nidaa Tounes, which won 86 of the parliament’s 217 seats, will face a difficult decision as it attempts to form a government.
The party’s leaders could strike a power-sharing arrangement with the moderate Islamist Ennahda party, which finished second, with 69 seats, and risk a stalemate over policy.
Or they could piece together a working majority from smaller political parties and try to govern in an unstable coalition beset by deep policy disagreements.
Whatever Nidaa Tounes decides, the new government will have to act quickly.
The country’s moribund economy has fueled public disillusionment.
Unemployment is falling, but it remains high, at more than 15% – and higher still among the young.
The fiscal and current-account deficits are widening, foreign investment is weak, inflation is rising, and corruption remains rampant.
Distrust of political parties and disappointment in their ability to govern is widespread, as evidenced by low voter turnout in the recent elections.
Tunisia’s political achievements could rapidly be reversed if the new government cannot quickly revive the economy and improve citizens’ daily lives.
Nidaa Tounes must take the lead in forging support from all major parties for a national-unity agenda on economic reforms.
In its first 30 days, the new National Assembly should publicly announce a consensus vision for economic growth and job creation.
A broad multi-party commitment would likely help discipline subsequent legislative action and assist in generating the necessary public support.
There is already broad agreement among the major political parties on the necessary priorities: bringing public spending under control, encouraging private-sector growth and employment, promoting regional development and social inclusion, and investing in essential infrastructure.
In the previous assembly, work stalled on several significant pieces of legislation, including laws on public-private partnerships, foreign investment, and banking reform.
The unity agenda should include early passage of these bills.
Tunisia’s politicians will be able to draw on existing work.
The program developed by acting Prime Minister Mehdi Jomaa in September 2014 deserves serious consideration.
The International Monetary Fund Stand-By Arrangement of 2013 provides a similar starting point.
To maintain support from the IMF when its current program ends in summer 2015, Tunisia will need to negotiate new commitments.
A consensus reform package could serve as a credible point of departure.
In the meantime, Western democracies must do their part and sustain engagement with Tunisia.
The 2011 Deauville Partnership with Arab Countries in Transition, in which G-8 members pledged to support Arab countries’ efforts to move toward “free, democratic, and tolerant societies,” has a role to play.
This mechanism may be unlikely to mobilize significant new financing, but participating countries can provide valuable political and technical support on structural reform, regional integration, and private-sector development.
Provided the security threats are contained, an early consensus within Tunisia on a credible economic agenda would open the taps of the largest potential source of capital: international financial markets.
The incoming funds, and the subsequent growth and job creation, would undergird the consolidation of democracy – and thus help cement the impressive gains that Tunisia has made so far.
Turkey’s ISIS Crisis
ISTANBUL – Following the recent safe return of 46 Turkish hostages held by the Islamic State, hopes were raised in the United States that Turkey would finally commit to joining the US-led coalition now fighting the group. But Turkey’s willingness to contribute to the coalition remains constrained by the legacy of its ill-fated Syria policy, as well as by a fundamental strategic disconnect between President Recep Tayyip Erdoğan’s government and US President Barack Obama’s administration.
Since Syria’s civil war began three years ago, Turkey has provided logistical and financial support to virtually all elements of the Syrian opposition, while allowing them to use Turkish territory to regroup after launching military operations across the border.
Committed to regime change in Syria, Turkey turned a blind eye to some of these groups’ brutal tactics, radical ideologies, and big ambitions.
The fear now is that this benign neglect has allowed the Islamic State to embed itself in Turkey and build the capacity to conduct terrorist activities on Turkish soil – and thus to retaliate for Turkish participation in the US-led coalition.
But there is more behind Turkey’s reticent response to the coalition.
Turkey fundamentally disagrees with the US in its interpretation of the threat that the Islamic State poses – and how to address it.
Simply put, whereas the US is approaching the Islamic State as the Middle East’s most pressing problem, Turkey views the group as a symptom of deeper pathologies.
According to this view, any campaign that focuses exclusively on destroying the Islamic State will do nothing to prevent the emergence of similar threats in the near future.
And, unlike the US, Middle Eastern countries and their neighbors cannot decide to “pivot” away from the region when the consequences of their poorly designed interventions become too unruly.
In this context, Turkey’s leaders believe that the international community’s response to the Islamic State should be far more ambitious, seeking to redress the underlying causes of the current disorder.
Such a strategy would have to include efforts to compel Iraq’s new government to break with the sectarianism of former Prime Minister Nouri al-Maliki, while supporting the new leadership’s efforts to provide basic health, educational, and municipal services to all of Iraq’s citizens.
As for Syria, the only plausible route to normalcy begins with forcing President Bashar al-Assad to cede power.
To this end, the US and its allies should consider striking Assad’s strongholds in Syria, while establishing safe havens for the moderate opposition under the protective cloak of a no-fly zone.
Here, Turkey, for which the establishment of safe havens is vital to accommodate Syrians who have been displaced by the conflict, could play a central role.
Turkey is already bearing a heavy burden of Syrian refugees, having absorbed more than one million since the crisis began in 2011.
Following Islamic State attacks against Kurdish enclaves, more than 120,000 refugees crossed into Turkey in a single weekend.
That is roughly the same number of Syrians allowed to seek refuge in the entire European Union since the crisis began in 2011.
An orchestrated military campaign against the Islamic State will undoubtedly displace even more Syrians.
But, in Turkey’s view, they should not have to cross the border to be safe.
Instead, Turkey wants to take the lead in building infrastructure that could serve the needs of Syria’s displaced people within the country’s borders.
Such projects would make sense only within internationally guaranteed safe havens protected by a no-fly zone.
Given that the Islamic State poses a graver threat to Turkey than to any other Western country, Turkey has no choice other than to participate in the campaign against it.
This means, first and foremost, adopting a zero-tolerance policy toward the Islamic State at home, aimed at preventing the group from fundraising and recruiting on Turkish soil.
Continued improvement of border security and deeper cooperation with Western intelligence agencies on the issue of foreign fighters are also essential.
But Turkey’s imperative to fight the Islamic State does not trump – much less invalidate – Turkish leaders’ concerns about Obama’s long-term goals.
If the US and Turkey are to work together to eradicate the Islamic State, they will first have to agree on a longer-term strategy for restoring some semblance of order to a crisis-ravaged region.
Turkey and the IMF
CAMBRIDGE: Without warning, Turkey dove into financial crisis.
Within days, $6 billion in foreign exchange was lost defending the lira.
Only $18 billion remain, barely enough for another week if all-out exchange rate defense becomes necessary.
Unlike in other crises, the IMF arrived in time, bringing both enough money and the policy commitments needed to make its rescue plans plausible.
So, two cheers for the IMF for heading off an unnecessary crisis.
Compliments to Turkish policymakers, too, for playing by IMF rules.
Ever since the Asian crisis of 1997 the IMF’s policies have been under attack.
As events unfold in Turkey we should ask: are there alternatives to the IMF’s regime?
The pain from a short period of IMF imposed high interest rates will, I believe, be far less than that which would follow the imposition of capital controls or currency and banking collapse.
Turkey has teetered near crisis for years.
Its budget and current account deficits are large, public debt is high, banks are bad, and foreign short-term debt is high relative to reserves.
Turkish politics - ranging from human rights abuses to Islamic fundamentalism to deep-rooted corruption - complicate matters even more.
With so much tinder around, it is surprising that a wildfire did not start before now.
The immediate catalyst for this crisis was minor.
A Turkish bank saw a Romanian subsidiary go bankrupt. A run on the Turkish bank followed.
Other banks with dubious portfolios and/or legal problems came under pressure. Capital started to flee the country.
This is the emerging market paradigm: it is presumed that banks are always much more incompetent than meets the eyes.
At first, Turkey’s central bank acted as lender of last resort, keeping bad banks afloat.
This only fed the run on deposits and drained foreign exchange reserves.
Within days, Turkey’s authorities realized that they were repeating Indonesia’s mistakes of 1997.
Exchange reserves would be exhausted saving dodgy banks yet, in the end, both banks and the currency would be lost.
Enter the IMF. Turkey is under an IMF program that includes an exchange rate-based disinflation strategy reinforced by fiscal targets, limits on the expansion of the net domestic assets of the central bank (i.e. on bailout operations funded by printing money), as well as banking reform.
The IMF, indeed, is behind the decision to let interest rates go sky high as well as its decision to put one doubtful bank into receivership.
Interest rates climbed thousands of percentage points, but within days money came back to Turkey.
As rates declined slightly, nearly $2 billion returned.
More is expected as the government sticks to its credit targets.
High interest rates and extra fiscal measures will, of course, slow growth, but that is essential to taming inflation.
The IMF program may also help knock down roadblocks to privatizing Turk Telecom, and the whiff of instability may inspire Europe to push Turkey's membership in the EU ahead.
It is too soon, however, to proclaim victory.
Offshore banks with exposure in Turkey may begin to curtail their risks, and that would mean a drain reserves far larger than what the IMF delivered.
Also, continuing high rates – and they remain at emergency levels - add deficits and debt and worsen the banking system.
It is tempting to ask whether letting the exchange rate simply go might not have been a better answer.
But in a high inflation economy like Turkey, and in the context of high growth, a big depreciation would only have reignited inflation, knocking the country back into crisis.
If the IMF had not delivered the necessary money, severe capital controls would have been imposed.
Had Turkey gone that route, every country that gets into trouble in the future would likely have followed.
That is a serious global issue.
It was certainly on the mind of the IMF but such concerns would not have deterred Turkey.
It was a close call.
There is one more interesting aspect to this IMF intervention.
In the IMF, the US Treasury, among certain German officials and in other powerful financial centers, there is now deep suspicion of anything that remotely looks like a fixed exchange rate.
Indeed, Argentina is one of the last countries with such an arrangement and it is in the IMF emergency room.
So why wasn’t a floating rate considered?
The IMF stuck to its program because it recognized that Turkey faced a banking problem not an exchange rate one.
The IMF is to be congratulated for understanding that the exchange rate is not the solution to every problem.
Turkey, Armenia, and the Burden of Memory
All wars end, eventually.
But memories of atrocity never seem to fade, as the government-fanned anti-Japanese riots now taking place in China remind us.
The 90th anniversary of the Armenian massacres of 1915, ordered by the ruling Young Turks of the Ottoman Empire and carried out with the help of the Kurds, is another wound that will not heal, but one that must be treated if Turkey’s progress toward European Union membership is to proceed smoothly.
It is believed that the Armenian genocide inspired the Nazis in their plans for the extermination of Jews.
However, in comparison with the Holocaust, most people still know little about this dark episode.
Indeed, it is hard for most of us to imagine the scale of suffering and devastation inflicted on the Armenian people and their ancestral homelands.
But many members of today’s thriving global Armenian Diaspora have direct ancestors who perished, and carry an oral historical tradition that keeps the memories burning.
It is particularly ironic that many Kurds from Turkey’s southeastern provinces, having been promised Armenian property and a guaranteed place in heaven for killing infidels, were willingly complicit in the genocide.
They later found themselves on the losing end of a long history of violence between their own separatist forces and the Turkish army, as well as being subjected to an ongoing policy of discrimination and forced assimilation.
Historically, the ancient Christian Armenians were amongst the most progressive people in the East, but in the nineteenth century Armenia was divided between the Ottoman Empire and Russia.
Sultan Abdulhamit II organized the massacres of 1895-97 but it was not until the spring of 1915, under the cover of the First World War, that the Young Turks’ nationalistic government found the political will to execute a true genocide.
Initially, Armenian intellectuals were arrested and executed in public hangings in groups of 50 to 100.
Ordinary Armenians were thus deprived of their leaders, and soon after were massacred, with many burned alive.
Approximately 500,000 were killed in the last seven months of 1915, with the majority of the survivors deported to desert areas in Syria, where they died from either starvation or disease.
It is estimated that 1.5 million people perished.
Recently, the Armenian Diaspora has been calling on Turkey to face-up to its past and recognize its historic crime.
Turkey’s official line remains that the allegation is based on unfounded or exaggerated claims, and that the deaths that occurred resulted from combat against Armenians collaborating with invading Russian forces during the First World War, or as a result of disease and hunger during the forced deportations.
Moreover, the local Turkish population allegedly suffered similar casualties.
Turkey thus argues that the charge of genocide is designed to besmirch Turkey’s honor and impede its progress towards EU accession.
There are also understandable fears that diverging from the official line would trigger a flood of compensation claims, as occurred against Germany.
For many politicians, particularly in America, there is an unwillingness to upset Turkey without strong justification, given its record as a loyal NATO ally and putative EU candidate country.
But, despite almost half a century of membership in the Council of Europe – ostensibly a guardian of human rights, including freedom of speech and conscience – Turkey still punishes a crime against national honor any suggestion that the Armenian genocide is an historic truth.
Fortunately, this article of Turkey’s penal code is now due for review and possible repeal.
Indeed, broader changes are afoot in Turkey.
The press and government, mindful of the requirements of EU membership, are finally opening the sensitive Armenian issue to debate.
Even Prime Minister Recep Tayyip Erdogan, under increasing EU pressure as accession negotiations are due to begin this October, has agreed to an impartial study by academic historians, although he has reiterated his belief that the genocide never occurred.
In France, the historical occurrence of the Armenian genocide is enshrined in law, and denial of its occurrence is regarded in the same way as Holocaust denial.
The European Parliament is pressing for Turkish recognition of the Armenian genocide.
It is also calling for an end to the trade embargo by Turkey and its close ally Azerbaijan against the Republic of Armenia, a reopening of frontiers, and a land-for-peace deal to resolve the territorial dispute over Nagorno Karabakh in Azerbaijan and safeguard its Armenian identity.
Armenia, an independent country since 1991, remains dependent on continued Russian protection, as was the case in 1920 when it joined the Soviet Union rather than suffer further Turkish invasion.
This is not healthy for the development of Armenia’s democracy and weak economy.
Nor does Armenia’s continued dependence on Russia bode well for regional co-operation, given deep resentment of Russian meddling in neighboring Georgia and Azerbaijan.
There is only one way forward for Turkey, Armenia, and the region. The future will begin only when Turkey – like Germany in the past and Serbia and Croatia now – repudiates its policy of denial and faces up to its terrible crimes of 1915.
Only then can the past truly be past.
The Case for Turkey in Europe
ANKARA – Turkey’s wider neighborhood is engulfed in crises.
To its east lie political instability, civil war, and terrorism, while its neighbors to the west are struggling to regain their financial footing, following an economic collapse nearly on the scale of the Great Depression.
In the midst of all this turmoil, Turkey represents an island of peace, democracy, security, and stability – something that the European Union should keep in mind when considering the current paralysis in accession talks.
Over the last decade, the Turkish government has overseen a social and economic transformation, in which millions of people have moved into the middle class.
A recent report by the World Bank, highlighting the steady growth that has brought Turkey to the threshold of high-income status, describes the country’s progress as socially inclusive: Poverty has been reduced by more than half, and access to high-quality health, education, and municipal services has expanded.
Indeed, since 2009, the Turkish economy has created four million new jobs, many of which require highly skilled workers.
This has sharply reduced the gaps in the quality of health services and education both within the country and between it and other OECD members.
Moreover, Turkey is among the fastest-improving countries with respect to the quality of its infrastructure, including transport, telecommunications, and energy.
And, during the 2008 global financial crisis, Turkey was the only OECD country that did not need to inject any public funds into its banks.
Turkey has also been diligent in its efforts to consolidate its democracy through the expansion of civil rights and liberties.
Over the past 12 years, Turkey has adopted more than 2,000 pieces of legislation to reach EU standards in various fields.
Given the many fires raging around Turkey, this has been achieved with a focus on striking the right balance between freedom and security.
Indeed, Turkey has implemented comprehensive reforms covering a wide range of issues, from civilian-military relations to minority rights.
In particular, Turkey has taken bold steps that aim to achieve a peaceful settlement of the Kurdish issue, which has been a source of concern for decades.
Undeniably, the EU accession process has played a role in stimulating this transformation.
Yet, despite its bold steps, Turkey is frequently, and unfairly, criticized, particularly with respect to media freedom.
The Committee to Protect Journalists claims that seven journalists are in prison in Turkey.
But two of them are actually free.
And when the remaining five cases are examined individually, it becomes clear that not one of them has been jailed for their journalistic activities or for expressing dissenting views.
Instead, they are facing a variety of criminal charges, including murder with a firearm, bank robbery, and the bombing of police stations.
As in all democracies where the rule of law prevails, members of a specific profession, including journalists, are not granted any form of immunity from these types of serious criminal charges.
Freedom of expression and of the press are guaranteed by Turkey’s constitution and statutes.
For the last 13 years, the Turkish government has proved to be the main guarantor of freedom of expression, particularly through its reform of the judiciary.
Furthermore, it should be noted that more than 7,000 newspapers and magazines are published in Turkey, with a total daily circulation of nearly five million copies.
Of the country’s five most widely read newspapers, four favor the opposition over the government.
Roughly two-thirds of newspaper columnists oppose government policies on a regular basis, and, every evening, Turkey’s 18 national television channels air a broad spectrum of opinion from some 100 talk-show guests.
Given such free and vibrant daily debate in Turkey, allegations of rising authoritarianism are without merit.
There simply can be no reasonable doubt about the country’s credentials in fulfilling the political conditions of the Copenhagen criteria for EU membership: commitment to democracy, the rule of law, human rights, and respect for and protection of minorities.
Many of the major turning points of the last several years – from the attacks on the United States on September 11, 2001, to the global financial crisis and the Arab Spring – have served to highlight the strategic importance of the relationship between Turkey and the EU.
In a region of predominantly Muslim countries, Turkey has proved itself to be the only one that can maintain and strengthen genuine democracy.
Turkey’s example in this regard should not be underrated.
Clearly, Turkey is a key country for the EU in terms of securing stability and prosperity in its immediate neighborhood.
Yet accession negotiations between Turkey and the EU have been deadlocked, owing to prevailing political attitudes in some EU member states.
Turkey is ready to open negotiations on any chapter in the accession talks, and at any time.
But, even in areas where EU interests are directly at stake – such as Chapter 23, which deals with the Judiciary and Fundamental Rights, and Chapter 24, which deals with Justice, Freedom, and Security – there has been no progress.
This is not because Turkey is refusing to embrace the criteria that these chapters demand, but because a few European governments are, for their own domestic political reasons, blocking the negotiations unilaterally.
It would be a wise step for Turkey’s European friends to facilitate the accession process.
At the end of the day, Turkey’s prospective membership will change the dynamics of the EU and the region for the better.
Turkey, Europe and Middle-East Security
Many factors contributed to the French and Dutch objections to the proposed EU Constitution.
One – usually unstated – factor is a fear of Turkish membership in the Union.
That membership drive, however, has already transformed Turkey.
In order to prepare for EU accession, Turkey has undertaken vast and serious legal, political, and economic reforms.
Turkey’s bureaucrats, politicians, and citizens united to fulfill the Copenhagen criteria for EU membership and tolerated the pain of the IMF-directed structural-adjustment programs.
The looming accession process will be even more painful, but Turkey’s people are firmly resolved to face this challenge.
Turkey’s transformation has already put an end to the Cold War-style security-state apparatus that ruled the country for half a century, and has changed the framework of the country’s domestic and foreign policy.
By modernizing and democratizing at home, Turkey’s politicians gained self-confidence in their ability to conduct a successful regional policy.
As a result, Turkey’s leaders are now willing to pursue active diplomacy in the Middle East in an effort to minimize problems with neighboring countries.
Of prime importance is the fact that Turkey is emerging as a role model for those across the Middle East who are seeking reform and modernization.
This influence does not imply a hegemonic relationship, but rather points to an alternative path for reform and economic development that other primarily Muslim countries might take.
The EU is associated with peace, democracy, and economic development, while the Middle East is characterized by instability, authoritarianism, and economic backwardness.
Turkey’s reform process shows that the latter is not an unavoidable destiny for the countries of the region.
In this respect, Syria and Iran appreciate Turkey’s EU membership process.
They consider a European Turkey an opportunity to develop their own relations with the EU.
Turkey also shows that the supposed clash between democracy and security – and, indeed, between democracy and Islam – can be reconciled.
Other Muslim states seem to grasp this: recently, a Turk was chosen for the first time and by a majority vote to be Secretary General of the Organization of Islamic Countries.
Turkey’s other major contribution comes through constructive diplomatic engagement in the region.
The Turkish government has adopted an active role as a promoter of peace and has reconfigured its policies toward a number of regional problems.
For example, Turkish Prime Minister Tayyip Erdogan broke with tradition by displaying a critical attitude toward Israel’s more hawkish policies in the occupied territories, and did so without severing diplomatic relations with Israel.
During a visit of Turkey’s Foreign Minister Abdullah Gul to Israel in early January, there was serious discussion about Turkey assuming a mediating role between Israel and the Palestinians, as well as in future Syrian-Israeli talks.
Turkey, of course, did not join the US-led occupation forces in Iraq, but it has put enormous effort into mobilizing regional support for a stable Iraqi state.
Indeed, Turkish policymakers have, on a regular basis, brought the countries bordering Iraq together for discussions about the future of the region.
The United Nations Security Council has taken these meetings seriously and has requested further regional cooperation on the Iraqi question.
Turkey’s constructive engagement with the EU creates a sense of trust in the West – among Western leaders at least, if not yet the general population -- for its regional initiatives.
Yet Turkey is also succeeding in keeping an equal distance between both the EU and the US.
For example, Turkey is closer to the EU in its policies toward Iraq and Palestine, yet follows a line similar to that of the US in the Balkans and Cyprus.
In recent history, a variety of regional powers – the Shah’s Iran and Nasser’s Egypt – have arisen in the Middle East.
Turkey’s arrival as a regional power is different in that its democratic structures make an active peacemaker, not a local bully.
This is both a necessary and a promising role, for the region needs a local dynamic force pushing for reform, transformation, and peace.
Turkey’s experience shows that true security in the region requires internal stability and social peace.
With luck, this model can be exported throughout the Muslim world.
Turkey’s Diplomatic Dogfight
MADRID – Turkey’s downing of a Russian warplane risks opening a new front in the violence engulfing Syria, thereby dashing the hopes for a rapprochement between Russia and the West that had arisen in the wake of the Paris massacre.
With Russian President Vladimir Putin and Turkish President Recep Tayyip Erdoğan now engaged in a war of words, and given the nightmare scenario of something far worse, it is more important than ever that the European Union do all that it can to reinvigorate its ties with Turkey.
Prior to the attacks in Paris, Erdoğan had seemed to be holding all the cards in the bilateral relationship.
European leaders, faced with an escalating refugee crisis, agreed last month to pursue a joint action plan, which demanded that Turkey help stem the tide of migrants into Europe, in exchange for EU funds, visa liberalization, and, most relevant, renewed negotiations on Turkey’s EU accession.
Shortly after that decision, German Chancellor Angela Merkel reversed her previous opposition to Turkish membership in the EU, calling it an “open-ended issue” during a visit to Istanbul.
All of this served Erdoğan well in the run-up to Turkey’s November 1 general election.
The action plan and Merkel’s visit were viewed within Turkey as de facto endorsements of Erdoğan; the EU even delayed the release of a critical “progress report” on Turkey’s accession negotiations until after the vote.
In the end, Erdoğan’s Justice and Development Party (AKP) regained its comfortable parliamentary majority.
The G-20 Summit in Antalya, held on November 15-16, was to cement Erdoğan’s triumphant return to the world stage, ending a period of relative isolation by the West that reflected disapproval of his authoritarian tendencies.
And a joint EU-Turkey summit was scheduled for November 29 to formalize the action plan.
Then, as so often happens, events intervened.
The tragedy in Paris sidelined Turkey at its own summit, derailing Erdoğan’s international comeback.
Instead, the focus was on US President Barack Obama, Putin, and French President François Hollande acting from Paris.
Now, Erdoğan faces a different strategic outlook, particularly with Russia-Turkey relations under greater strain than at any time since the Cold War’s end.
With the world now more determined than ever to defeat the Islamic State – an enterprise that will, it is becoming clear, require boots on the ground – the major powers are seeking immediately available forces.
For the time being, that means, on the one hand, the Syrian Democratic Forces, dominated by the Kurdish People’s Protection Units, which oppose President Bashar al-Assad’s regime, and, on the other hand, the pro-regime forces backed by Russia, as well as Iran and its proxies, particularly Hezbollah.
From a Turkish perspective, both are unacceptable.
Meanwhile, Turkey faces a direct threat from the Islamic State, exemplified by the twin suicide bombings that killed more than 100 people in Ankara last month.
Turkish authorities have since foiled another attack, planned for the same day as those in Paris.
Finally, following Russia’s annexation of Crimea in 2014, which drove a wedge between the Kremlin and the West, Turkey had carved out a strategically advantageous position between the two sides.
But Turkey now finds itself increasingly isolated from both camps, owing to its downing of the Russian fighter and its staunch opposition to Assad, whom both American and European leaders increasingly believe will have to play some role in any political settlement.
As France shuns NATO as the centerpiece of an international response to the Islamic State, Turkey’s zero-tolerance approach to encroachments on its airspace has put NATO-Russian relations under dangerous strain.
It is in easing those tensions that the EU has an important role to play.
While Turkey still has leverage vis-à-vis the EU, owing to the continued flow of refugees toward Europe, both sides are now approaching the partnership from positions of genuine need.
Neither side can afford further complication of the already volatile situation.
This should be reflected at the upcoming summit.
On the EU side, it is important to acknowledge Turkish sensitivities regarding Kurdish forces.
This means establishing credible safeguards to prevent potential safe zones in northern Syria, essential to stemming refugee flows and beginning to stabilize the country, from threatening Turkey’s internal security.
European leaders – along with the US – must weigh in to avoid an escalation between Turkey and Russia.
And they must do a better job of reassuring the Turkish government that, despite Assad’s possible inclusion in Syria’s initial transition, he has no long-term future as the country’s leader.
For its part, Turkey needs to broaden its perspective.
The developments on its southern border concern far more than the Kurdish question; they have far-reaching implications for regional stability.
The AKP’s election victory offers a chance for the government to shift its attention back toward resolving the broader problems in its neighborhood – that is, to act like a true regional leader, instead of pursuing a narrow, self-serving agenda.
To address today’s most urgent challenges, Turkey and the EU must commit to building a genuine partnership, based on common interests, in particular security interests, rather than a transactional arrangement that addresses issues à la carte.
This necessarily includes a good-faith approach to negotiations on Turkey’s accession to the EU.
In the wake of Turkey’s fraying relations with Russia, the decision to proceed with the planned EU-Turkey Summit is an important one.
Now more than ever, the EU and Turkey have a responsibility to act together, before an already appalling situation gets even worse.
Turkey on Trial
ISTANBUL – In a Hollywood courtroom drama, you know that the hero, set up by the bad guys, will eventually be cleared – but not before the noose tightens around his neck.
Just when it looks like the accumulating evidence has condemned him, a sudden turn of events will prove his innocence and expose those who framed him.
If Turkey’s ongoing political-military trials ever find their way to the screen, there will be no shortage of such denouements.
In a series of bizarre prosecutions, Turkish courts have jailed hundreds of defendants – military officers, journalists, academics, and lawyers – for allegedly plotting to topple the country’s democratically elected government.
Prime Minister Recep Tayyip Erdoğan promotes the trials as evidence of Turkey’s new turn towards democracy and the rule of law.
They are also actively supported by news media belonging to the so-called Gülen group – a powerful ally of Erdoğan’s government made up of followers of the Muslim cleric Fethullah Gülen.
In reality, the trials amount to a grave breach of the rule of law, with the judiciary transformed into a political weapon aimed at opponents of the government and the Gülen movement.
The cases are comical – or would be if they were not really happening in a country of 74 million people whose strategic importance is difficult to overstate.
In fact, the prosecutions are riddled with such fantastic claims, imaginary conspiracies, outlandish fabrications, obvious set-ups, and credulity-straining plot twists that a Hollywood screenwriter who included them in a script might well be laughed out of the business.
Consider the “Sledgehammer” case. More than 200 military officers are charged with plotting a coup in 2003 to dislodge the then newly elected government.
The prosecutors have what looks like solid evidence: detailed plans, ostensibly authored by the defendants, describing a series of ghastly operations to destabilize the country.
The officers proclaim their innocence and assert that the coup documents are fabricated, but who is to believe them, given what the prosecutors, government, and major media say?
The trial has already had more than its share of movie-ending moments.
Several defendants have shown that they were outside the country and had no access to the computers on which they supposedly authored the plans.
Others appear to have misspelled their own names or gotten their titles wrong.
Two forensic reports have established that the handwriting on the incriminating CD was forged.
Perhaps most dramatically of all, the coup documents contain much information that could not possibly have been known at the time, including references to companies, NGOs, hospitals, and many other entities that were established years after the plan is supposed to have been hatched.
Imagine the courtroom scene. The defense lawyer points to the key piece of evidence and addresses the prosecutor: “You, sir, claim that this CD containing all the incriminating documents was prepared by my client in 2003.
Can you explain how my client could have known the names of officers on a frigate that joined the Navy only in 2005?
Or the license plate on a vehicle that was issued in 2006?”
The judge turns towards the prosecutor expectantly.
Sweating profusely, the prosecutor has nothing to say.
The judge brings down his gavel with a loud thump.
The case is dismissed.
Or consider the case of a group of young officers charged with organizing a prostitution ring and stealing state secrets.
The charges again rest on electronic files, supposedly found in the defendants’ homes.
But the police made an elementary error that revealed the set-up: after supposedly receiving an anonymous tip about Ahmet A. (a pseudonym), they mistakenly searched Ahmet B.’s home – and yet somehow found the incriminating files among B.’s possessions.
Ahmet B. is obviously not Ahmet A., and the only explanation is that the evidence was planted – in the wrong house.
Ahmet B. was eventually released (after nine months), but the case still goes on.
Similar examples abound in other cases.
A prosecutor questions a suspect about a plan to intimidate Christians before the police have actually “discovered” it.
A journalist is jailed because his notes for an unfinished manuscript on the Gülen movement are construed as instructions from a terrorist organization.
A senior police officer who has written an exposé detailing Gülenist prosecutors’ misdeeds is jailed after police find illegal recordings of intercepted calls in his office – which he had vacated days earlier.
Vindication comes quickly in Hollywood movies, but not in Turkey, whose courts have so far seemed oblivious to the glaring problems with evidence presented by police and prosecutors.
Ludicrous cases proceed, and more people are being dragged into them.
The mainstream independent media do not even report the inconsistencies for fear of provoking the government or the Gülen network.
These cases will eventually collapse under the weight of their collective absurdity.
But the damage done will extend far beyond the suffering of hundreds of innocent individuals who have been locked up under false pretenses.
The hope that Turkey is finally shedding its authoritarian vestiges and becoming a stable democracy will lie in tatters.
Turkey’s Politics of Peace
VIENNA – Turkey is moving into unchartered political territory, following the failure of the ruling Justice and Development Party (AKP) to retain its parliamentary majority in the country’s recent general election.
The choices that Turkey makes in establishing a new government will not only be pivotal to shaping the future of democracy there; the next administration could also play a decisive role in a series of peace processes vital to restoring stability in the wider Middle East.
First and foremost for Turkey, there is the ongoing peace process with its own Kurdish population.
At its core, this process is about redefining the secular, unitary state created in 1923.
Everyone in the new republic who was not explicitly defined as a member of an officially recognized minority was supposed to merge into a new Turkish identity.
But this did not happen as Atatürk planned.
Kurds held fast to their own ethnic identity.
Eventually, the suppression of the Kurdish language and culture fueled a brutal insurgency, led by the Kurdish Workers’ Party (PKK) which has cost the country more than 30,000 lives.
It is to the great credit of President Recep Tayyip Erdoğan that he had the courage to launch an open peace process with the PKK in 2013.
Since then, that process has made progress that seemed unthinkable only a few years ago.
Yet key steps toward lasting peace remain to be taken.
A comprehensive settlement of the Kurdish issue within Turkey will be key to the country’s stability and the future of its bid for accession to the European Union.
Otherwise, one can envisage scenarios in which the forces of disintegration now roiling the neighboring Levant actually spread into Turkey itself, with unimaginable consequences.
The success of the mainly Kurdish Peoples’ Democratic Party (HDP) in capturing 13% of the vote in the recent election – a total well above the party’s core constituency – should boost the Kurds’ confidence and ease the way ahead in the peace process.
But the far-right Nationalist Movement Party (MHP) performed strongly in the election, capturing 16% of the vote, probably owing largely to popular opposition to the opening to the Kurds.
Indeed, even Erdoğan, evidently trying to stop the MHP’s advance, used campaign rhetoric that alienated many Kurdish voters.
A high priority for any new government in Turkey should be to complete the peace process that Erdoğan began.
And Erdoğan should understand that his legacy might well be shaped by whether that process succeeds or fails.
The second peace process at stake is the new attempt to unify Cyprus, which has been divided since its constitutional breakdown in 1963 and Turkey’s invasion in 1974.
Indeed, it is bizarre that the capital of an EU member country is divided by a dead zone patrolled for decades by United Nations peacekeeping troops.
The continued division of Cyprus is blocking both the EU accession talks with Turkey and increasingly necessary cooperation between the EU and NATO.
But now, under President Nicos Anastasiades and the newly elected president of Northern Cyprus, Mustafa Akinci , there is a real possibility, after years of stalemate, of reaching a settlement that can re-unify the island.
UN-supported talks have acquired new and important momentum.
But a settlement will not be possible without the clear support of the Turkish government.
The new administration’s stance will thus be critical: Turkey has much to gain by supporting a solution in Cyprus; but it could also revert to old habits and spoil today’s unique opportunity.
The third peace process in play concerns Turkey’s relationship with Armenia, which, if improved, could help create the conditions for a peace settlement between Armenia and Azerbaijan.
A far-sighted agreement was signed by Armenia and Turkey in Zürich in October 2009; but wider regional forces eventually blocked progress, with Russian intervention decisive.
Maintaining the frozen conflict with Armenia is not in the long-term interests of Turkey or any other state in the region.
The ongoing blockades and military face-offs could, at some point, lead to violent upheaval in the southern Caucasus, with very negative effects for Turkey.
The next government should resume the approach it took in Zürich – and Armenia’s government must do the same.
The fourth and most immediately consequential peace process concerns Syria.
Turkey has taken a principled and strong stand against President Bashar al-Assad’s regime, and has generously taken in more than a million refugees.
But the dangers posed by the ongoing conflict, particularly the strains on Turkey itself, should not be underestimated.
All key actors have a common interest in preserving the Syrian state while changing the regime.
A complete collapse, fueled by efforts to impose a political solution by military means, would most likely lead to catastrophic consequences for decades to come, with Turkey among the worst affected.
So Turkey’s new administration should be ready to engage in a constructive dialogue, together with the United States and Iran, on possible solutions.
The immediate task facing Turkey is to bridge old divisions and establish a functioning coalition government.
Otherwise, a fresh election – and thus fresh political uncertainty – will be unavoidable.
That is why Turkey’s friends should take this opportunity to remind the country’s leaders of what is at stake – for Turkey itself, as well as for peace in the region.
Turkey Plays the European Card
Elected with a parliamentary majority almost big enough to change the country's constitution, Turkey's new Islamist government faces daunting challenges.
The most urgent is the looming war between America and Iraq.
Will Turkey maintain its vital diplomatic and logistical support for its American ally?
Or will religious solidarities reshape Turkey's orientation, as the new government joins other Muslim countries in opposing any invasion of Iraq?
Obviously, Turkey's Islamists are not the only ones with serious doubts about the war.
Many Turks share the view that the war could have harsh consequences for their country, both in the short and long run.
The struggling economy does not need the disruption of even a rapidly resolved military conflict.
The Turkish establishment (the military as well as the diplomatic corps) worries about the possibility that a war will fracture Iraq, leading to an independent Kurdish state on Turkey's southern border that would inevitably serve to strengthen Kurdish nationalism within Turkey, raising new threats to Turkey's unity and stability.
Turkey's secular bureaucratic establishment has traditionally been pro-West but with a strong dose of nationalism.
Aside from the Kurdish issue, their attention is now focused on Cyprus as well.
The Cyprus problem has reached a critical turning point, following a peace proposal put on the table by UN Secretary General Kofi Annan with a deadline impending at the end of February.
Meanwhile, the Greek Cypriots have been given their entry invitation to the EU, despite the fact that there is still no agreement on the Cyprus problem.
Cyprus now becomes a key issue athwart the road of Turkey eventually joining the EU.
Unresolved, it will provide a sure means of preventing Turkey's membership by those who are against it.
This constitutes another potential trap for the new government.
Despite the importance of Cyprus, it is the possible war with Iraq that poses the most severe test of the delicate balance that now exists between Turkey's conservative old guard and the more liberal reformers within the ruling Justice and Development Party.
Could it lead to a new power struggle in the party?
The fact that the party leader Mr.Erdogan was prevented through technicalities from becoming a deputy in the Parliament and thus Prime Minister makes the maintenance of this balance even more tricky.
Any open rupture will weaken the hands of the reformers who want to have close ties with the West and the US.
Though the Justice and Development Party has held power only briefly, it has already given clear indications of its choice.
Well aware of western doubts about the party, Erdogan travelled immediately after the elections to western capitals, pressing his argument that the change in government had not changed Turkey's fundamental orientation.
He is well aware of the contrast with the approach taken by Turkey's previous Islamist-led government.
Elected in 1996, after a campaign marked by strong claims of religious revival, the Welfare Party's Necmettin Erbakan made a conspicuous point of making his first official visits to Iran, Libya, Indonesia and Malaysia.
Erdogan stressed this pro-Western orientation again but a few weeks later, at the EU enlargement summit held in Copenhagen in mid-December.
The new government's aggressive lobbying before the summit was perceived both at home and abroad as a clear sign of its commitment to the EU cause.
Rejecting Erbakan's earlier accusation that the EU was a "Christian Club," Erdogan has campaigned openly for full membership.
In this, he received enthusiastic support from the Bush administration, which hopes that Erdogan might have found a way to mix democracy and Islam.
So far, Erdogan has played the European card skillfully, reassuring Turkey's western allies and boxing in the Turkish military, which remains skeptical of his party's intentions.
By accepting European demands for democratic reform as a pre-condition for EU membership, Erdogan played a liberalizing role, reinforcing his claim that his party represents a genuinely democratic option for a Muslim-majority country B indeed, that it is an Islamic version of the Christian Democratic parties that have long dominated Europe's political right.
There is no doubt that the political and economic program of Erdogan and his party is a dramatic departure from traditional Turkish Islamism.
Islamist movements have generally been characterized by strong anti-market and anti-western attitudes.
Yet Prime Minister Gul routinely calls his government "business friendly."
The coming months will be crucial.
To convince skeptics, the party will have to break with conventional Turkish policies on Cyprus, and with conventional Islamist doubts about Europe.
To top it off, Turkey must reach some agreement with its closest ally, the US, if it moves against Iraq.
Erdogan's insistent opening to Europe may be the key to how this all turns out.
By pressing for membership in the EU, he is reinforcing Turkey's long-held western orientation.
This may give him room to distance himself somewhat from American policy.
After all, in becoming more European, isn't Turkey entitled to share Europe's doubts about a war with Iraq?
Turkey’s Balancing Act
EAST LANSING, MICHIGAN – Turkey has over the past few weeks become the spearhead of a joint Western-Arab-Turkish policy aimed at forcing President Bashar al-Assad to cede power in Syria.
This is quite a turnaround in Turkish policy, because over the past two years the government of Prime Minister Recep Tayyip Erdoğan had gone out of its way to cultivate good relations with neighboring Syria, with whom it shares a long land border.
This change of course on Syria has also cost Turkey a great deal in terms of its relations with Iran, the principal supporter of Assad’s regime, which Turkey had also cultivated as part of Foreign Minister Ahmet Davutoğlu’s “zero problems with neighbors” policy.
Given these new strains, it is worth recalling that a only few months ago many American leaders were livid at what they perceived to be Turkey’s betrayal.
In their view, Turkey had re-oriented its foreign policy toward the Muslim Middle East and away from the West – a shift supposedly reflected in the country’s deteriorating relations with Israel and improving ties with Iran and Syria.
Many American policymakers and publicists, unable or unwilling to distinguish Turkish-Israeli relations from Turkish-American relations, interpreted Erdoğan’s condemnation of Israel’s blockade of Gaza as a bid to cozy up to his Arab neighbors at the expense of Turkey’s relations with not only Israel but with the West in general.
Turkey’s attempt to mediate between the major Western powers and Iran concerning the Islamic Republic’s uranium stockpile went unappreciated in the West; indeed, the United States scuttled the effort just as it seemed to be bearing fruit.
And Turkey’s subsequent vote in the United Nations Security Council against imposing additional sanctions on Iran seemed to offer further proof that Turkey had adopted an “Islamic” foreign policy.
America’s anxiety assumed that it is a contradiction for Turkey to seek good relations with both the West and the Muslim Middle East, and that Ankara’s decision to improve its relations with its Muslim neighbors was motivated primarily by religious and ideological concerns considered important by the ruling Justice and Development Party (AKP).
Turkey’s recent tense relations with Iran demonstrate this assumption’s basic fallacy, and point to a non-ideological foreign policy that caters to Turkish national interests as defined by the country’s political elite – including the post-Islamists in power today.
Disagreement between Turkey and Iran initially centered on their conflicting approaches to the internal rebellion against Assad’s dictatorship.
Iran has been heavily invested in the Assad regime, its lone Arab ally and the main conduit for delivering material support to Hezbollah in Lebanon.
Turkey, on the other hand, after some initial hesitation, has thrown its weight fully behind Assad’s opponents, including by providing refuge to them, as well as to defectors from Syria’s army.
Indeed, Turkey has gone further by helping the divided Syrian opposition to come together on its territory to establish a joint front against the Assad regime and provide a credible alternative to it.
Turkey abruptly shifted its stance on Syria, and aligned its position with that of the major Western powers, for two reasons.
First, the ruling Justice and Development Party (AKP) could not afford to be seen as opposing democracy in Syria, given that its own legitimacy rests heavily on its democratic credentials.
Second, once Erdoğan’s government concluded that Assad’s regime was bound to fall, it sought to secure its future interests in Syria, which is of strategic importance to Turkey – even at the cost of jeopardizing relations with Iran.
Iran’s displeasure at Turkey’s “betrayal” of Assad was compounded by the Erdoğan government’s recent decision to install a NATO anti-missile early-warning facility – aimed at tracking Iranian missile activity – in Malatya in eastern Turkey.
According to Iranian authorities, NATO’s system is designed to neutralize Iran’s deterrent capacity vis-à-vis Israel, thereby increasing the likelihood of an Israeli or US strike against Iranian nuclear facilities.
Iranian officials went so far as to warn Turkey that it would make the Malatya facility its first target in retaliation for a Western strike on Iran.
In reality, Israel can track Iranian missile activity from several sites other than Malatya.
Iran’s threat, therefore, is an expression more of discontent with Turkey than of genuine concern that the Malatya facility will adversely affect its deterrent capacity.
Iranian-Turkish tensions reflect three larger realities.
First, the Arab Spring, and especially the Syrian uprising, exposed the two sides’ underlying rivalry for influence in the Middle East and the Arab world.
Second, Turkey’s turn toward the east is not ideologically or religiously inspired, but instead is based on solid strategic and economic calculations; as the fluid situation in the Middle East continues to develop, Turkey will adapt its policies accordingly.
Finally, Turkey has invested far too much in its strategic relations with NATO, and with the US in particular, to fritter them away in exchange for uncertain gains in relations with Iran.
This does not mean that Turkey will return to its traditional strategic dependence on the US and its allies, an approach that defined Turkish foreign policy throughout the Cold War and the decade following it.
The AKP government is committed to the country’s strategic autonomy and to greater activism in the Middle East.
But it is also aware that such policies must not cost Turkey its relationship with NATO and the US.
Turkey is engaged in an intricate effort to preserve its old relationship with the West while building new ties with its Muslim neighbors.
Turkey’s leaders understand that the country can best preserve and enhance its leverage with both sides by maintaining good relations with each.
Turkey’s Choice
In what may be Turkey’s most important political event since the republic was founded in the 1920’s, the Justice and Development Party (AKP) has won a landslide parliamentary election victory, with around 47% of the vote.
Only two other parties – the Republican People’s Party (CHP) with 21% and the National Movement Party (MHP) with 14% – surpassed the 10% threshold for representation in parliament.
A number of independents will complete the legislative roster.
What makes the result so complex is that the ruling AKP got far more votes – up 13 percentage points from 2002 – but fewer seats than it had before.
The party will be able to form a government by itself, but will lack the two-thirds majority needed to bring about some of the big changes that it seeks.
Still, the AKP can be satisfied that after five years in office its popular support has climbed, while the opposition has been shown to be incapable of challenging it seriously.
The AKP’s resounding victory means that the Turkish republic originally shaped as a secular state by Kemal Ataturk in the 1920’s is dead.
However, this does not necessarily mean that Turkey will become an Islamic, must less an Islamist, country.
Ataturk viewed Islam as a major factor holding back Turkey’s progress.
He sought to banish Islam as a political and social force from the public sphere, though of course the vast majority of the population remained Muslim by religion.
For Ataturk, Westernization and modernization went hand in hand.
And, indeed, Turkey achieved great success – arguably more than any other Muslim-majority state in the world – in building democracy, maintaining stability, and moving forward economically.
This period came to an end for several reasons.
A key factor was the increasing prominence and power of more traditional sections of the population from central Anatolia, where many small businesses grew big, enriching a more Islamic-oriented middle class.
At the same time, millions of people emigrated from villages to cities, becoming mobilized and politicized as a result.
The end of the Cold War – in which Turkey was a frontline state – and the growth of political Islam elsewhere also contributed to a rebirth of Islam in the public arena.
Equally significant was the development in the old Islamic party of talented leaders that wanted to break with its backward-looking ways and extremist image.
They successfully reconciled Islamic politics with the Turkish lifestyle and modernity in general.
Cleverly, they positioned the party as conservative rather than Islamist – a process aided by the corruption, bickering, and incompetence of the existing parties.
Indeed, while the socialist left survived by uniting around the CHP, the conservative parties that largely dominated Turkish politics for a quarter-century fell apart.
Unwilling to change or work together, and unable to devise ways of appealing to voters, these once-powerful groups simply disappeared, leaving the AKP largely in control of the conservative electoral base.
But not completely.
The election’s other success story was the MHP, which has often been seen as a neo-fascist party since its creation immediately after World War II, but which has been reinventing itself along conservative nationalist lines.
The fact that two-thirds of the voters supported parties that were long considered extremist and whose allegiance to democracy is questionable has shocked many Turks, including those who comprised most of the ruling elite in modern times.
There are two sets of questions that now need to be answered.
First, what does the AKP want?
Is it a conservative party of good government that seeks equality for Islam in the public sphere, as its leaders usually suggest, or an Islamist wolf in moderate sheep’s clothing, as its enemies fear?
These alternatives are not necessarily contradictory.
The AKP contains people with both views.
Moreover, it might be that the party will push as far as it can until it is stopped by fear of a military coup or a rejection of its program by the voters.
That leads to the second question: how far can the AKP go in changing Turkish society?
The problem is that unless there is a viable opposition, the only check on the AKP will be its own conscience and a crackdown by the still secular-oriented armed forces.
But, as part of its seemingly endless effort to get into the European Union – an aspiration that seems all but doomed at present – Turkey implemented reforms that undercut the military’s political role.
Also at the top of the AKP’s agenda is choosing a president in tune with its worldview.
The president names the head of the armed forces, a power that could potentially turn the military into a servant of the government.
Given that the government can change laws, name judges, and staff the state administration, Turkey’s slide to another political model could reach a point of no return.
But what precisely would that model be?
If such a model means a Turkey that is more willing to embrace its traditional and religious heritage, the outcome would be relatively benign for most of its citizens as well as its strategic alliances.
But if it means a more anti-Western Turkey increasingly oriented toward Iran, Syria, and radical Islamist movements, a major shift in international politics would be accompanied by mounting domestic instability.
Turkey’s Coup that Failed
ANKARA – The exposure of the plan hatched by senior military officials – called “Operation Sledgehammer” – to destabilize Turkey’s government, and the subsequent arrest of high-ranking officers, demonstrates the growing strength of Turkey’s democracy.
Moreover, prosecutors’ efforts to uncover the truth are not a campaign to discredit the Turkish army, as some allege; nor has the exposure of “Sledgehammer” led to an emerging showdown between “secularists” and “Islamists.”
Turkish society and politics are too complicated to be reduced to such simplistic formulae.
Nevertheless, this is a very serious moment for Turkey, because it may mark the country’s transit from decades of military tutelage of its civilian politicians – and thus complete its transition to full-fledged democracy.
“Sledgehammer” is, sad to say, yet another alleged coup plot in a series of attempts to topple the ruling Justice and Development Party (AKP), which was first elected in 2002.
According to the Turkish constitution, it is illegal for any agency, even the military, to try to overthrow a democratically elected government.
Had such a coup attempt taken place, much less succeeded, it also would have put an end to Turkey’s aspirations to become a full member of the European Union.
Indeed, the EU’s progress reports on Turkey have consistently raised the issue of the military’s disproportionate power in Turkish politics, and the fact that some officers do not seem to accept that they are subject to civilian control.
The three military coups Turkey endured in 1960, 1971, and 1980 brought neither prosperity nor stability to the country.
The “soft coup” of 1997, whereby a democratically elected government was forced by the military to resign, left deep scars in Turkish society.
Polls show that an overwhelming majority of Turks respect the army only when it stays within its barracks.
According to the evidence gathered by Turkish prosecutors, four coup attempts, named “Sarıkız,” “Ayışığı,” “Yakamoz,” and “Eldiven,” have been made since the AKP came to power.
On April 27, 2007, the Turkish Armed Forces issued a statement opposing the presidential candidacy of Abdullah Gul, Turkey’s deputy prime minister and foreign minister at the time, warning that if Gul was elected, Turkey would descend into chaos.
But this effort at intimidation failed, and Gul won.
General Yasar Buyukanit, the top commander of the Turkish Armed Forces back then, recently admitted that he himself wrote the April 27 memorandum.
On March 14, 2008, the Chief Public Prosecutor opened an investigation aimed at shutting down the AKP on the grounds that it was intent on violating the constitutional ban on promoting religion.
But the case was motivated almost exclusively by political and ideological considerations, with evidence gathered from newspaper clips and anti-government op-eds.
“Sledgehammer” is but the most recent coup plot to be uncovered, going back to 2003.
According to the Turkish daily newspaper Taraf , to which the plot was leaked, a 5,000-page plan was drafted to create chaos in Turkey by burning mosques, downing Greek military aircraft, and carrying out mass arrests of those who opposed the military.
The intent was to prepare the ground for a military takeover.
Some critics dismiss this planning as just “war games,” not to be taken seriously.
The same thing was said by top military officials about another plot, called “The Action Plan against Religious Fundamentalism,” drafted by Col. Dursun Cicek.
On June 26, 2009, Chief of General Staff Gen. Ilker Basbug called the Action Plan “just a piece of paper.”
Eight months later, a military committee investigating the case concluded that the plan was, indeed, drafted to damage and discredit the AKP and government.
If none of the above constitutes a breach of democratic principles, one wonders what would.
No democratic country would allow such interventions by its military, whatever the circumstances.
Yet critics still insist on getting the root cause of these efforts wrong.
They try to depict this as a showdown between the “Islamist AKP” and the country’s democracy-loving secularists.
Daniel Pipes, an American polemicist, has gone so far as almost to endorse the military coups of 1960, 1971, 1980, and 1997, arguing that “on four occasions between 1960 and 1997, the military intervened to repair a political process gone awry.”
One wonders if Pipes would accept the US military taking over the American government if it should ever unilaterally conclude that American politics had gone awry.
The fact that these plots have been uncovered is a clear sign of the maturation of Turkish democracy.
The legal investigations now underway do not mark a showdown between Islamists and secularists, nor are they a campaign to discredit Turkey’s generals.
They are part of a process of normalization, of the establishment of absolute civilian control of the military, and confirmation of the principle that no one is above the law.
Turkey’s Democratic Dusk
CAMBRIDGE – When questioned recently about a constitutional law professor who was arrested for lecturing at an institute run by the country’s main pro-Kurdish political party, Turkey’s interior minister, Idris Naim Sahin, couldn’t hide his irritation: “I am having a hard time understanding those saying a professor should not be arrested while thousands of other people are being arrested in Turkey.”
Presumably, Sahin meant to say that a professor cannot claim special treatment under the law.
But his remark inadvertently underscored Turkey’s new reality, in which any perceived opponent of the current regime can be jailed, with or without evidence, for terrorism or other violent acts.
Special courts, tasked with prosecuting terrorism and crimes against the state, have been working overtime to produce charges that are often as absurd as they are baseless.
For example, journalists have been imprisoned for producing articles and books at the behest of an alleged terrorist organization called “Ergenekon,” whose existence has yet to be confirmed, despite years of investigation.
Likewise, military officers have been charged on the basis of blatantly fraudulent – indeed, amateurishly produced – documents containing obvious anachronisms.
A senior police commissioner is currently languishing in jail for allegedly collaborating with far-left militants he spent his entire career hunting down.
These prosecutions have cast an ever-widening net, ensnaring scores of journalists, authors, and academics, hundreds of military officers, and thousands of Kurdish politicians and activists, among others.
Self-censorship has become routine.
Media bosses anxious to retain Prime Minister Recep Tayyip Erdoğan’s favor have fired many of those journalists who continue to criticize his regime.
And government control now extends beyond the media, judiciary, and academia to the worlds of business and sports.
Previously autonomous regulatory bodies (such as the competition authority) have been quietly subordinated to the government, with no debate or discussion.
Even the Turkish Academy of Sciences has been targeted.
A recent decree, widely condemned abroad, allows the government to appoint two-thirds of the Academy’s members, thereby ending even the semblance of scientific independence.
Erdoğan seems immune to criticism.
His success at expanding access to health, education, and housing has enabled him to win three general elections – each with a greater share of the popular vote than previously.
He has broken the power of the military old guard and the hold of its stale Kemalist ideology – the secular nationalism introduced by Turkey’s first president, Mustafa Kemal Atatürk – thereby permanently altering the makeup of Turkish politics.
He has presided over the emergence of a vibrant new class of Anatolian entrepreneurs. And, under his rule, Turkey has become a regional power.
Yet, while Erdoğan may appear to be at the pinnacle of power, it is his government’s “Gülenist” allies who have grown increasingly powerful.
Members of the transnational Gülen movement – inspired by followers of Fethullah Gülen, a Pennsylvania-based Muslim theologian – are staffing Turkey’s police, judiciary, bureaucracy, and universities.
The Gülenist media now set the country’s new ideological tone, producing a steady stream of disinformation in their vocal support of the country’s show trials.
These trials are, in fact, often staged to serve Gülenist ends specifically.
Prominent detainees, such as the journalist Nedim Sener and police commissioner Hanefi Avci, landed in jail after exposing the wrongdoings of Gülenist police and prosecutors.
Editorials in Zaman, the Gülen network’s Turkish-language daily newspaper, no longer mince words: a new Turkey is being created; those who stand in the way are getting what they deserve.
Erdoğan has benefited greatly from Gülenist support, yet he detests sharing power and remains suspicious of the movement.
Early on, he successfully exploited the Gülenist-supported political trials in order to demonize the opposition.
But, as the charges have increased in scope and implausibility, the trials have complicated his relationships with the military, domestic liberals, and outsiders such as foreign media and the European Union.
Moreover, individuals close to him and his administration have recently become entangled in the net of judicial manipulation, which suggests that he may be losing control over the police and the special courts.
Given that the fight against the common enemy, the secularist old guard, has been decisively won, an eventual break between Erdoğan and the Gülenists is perhaps inevitable.
Unfortunately, regardless of which side emerges victorious, the outcome will not be good news for Turkish democracy.
For Turkey’s friends abroad, it is time for some tough love.
So far, the European Union and the United States have reacted to Turkey’s descent into authoritarianism with little more than vague statements of concern.
No official has offered criticism analogous to Swedish Foreign Secretary Carl Bildt’s condemnation of former Ukrainian Prime Minister Yuliya Tymoshenko’s show trial in that country, or US Secretary of State Hilary Clinton’s frank statements about Russian Prime Minister Vladimir Putin’s erosion of the rule of law.
Incredibly, the EU’s progress reports on Turkey have continued to call the Ergenekon trials, which are heavily supported by the Gülenists, an opportunity to strengthen the rule of law.
It wasn’t long ago that Turkey appeared to be a bright beacon of democracy and moderation in a region accustomed to autocracy and radicalism.
Now it looks more like a country heading towards authoritarianism at home and embracing adventurism abroad.
It is understandable that Europeans and Americans do not want to offend a regional power.
But playing Erdoğan’s game only reinforces his sense of invincibility.
It does not advance the cause of democracy in Turkey; nor does it make Turkey a more reliable ally.
Turkey\u0027s Final Act?
CAMBRIDGE: Turkey has been escaping trouble seemingly forever.
As an escape artist, indeed, it even beats Brazil!
But the bill for this bravura performance keeps growing: high and rising debt, high and rising deficits, very high inflation.
All are symptoms of Turkey's perverted politics.
Dodgy politics usually means four things: first, cover up and avoid government transparency like the pest that it is for wayward politicians.
Second, procrastinate on all but inevitable adjustments, because reform, restructuring and cleaning up financial messes never attracts new cronies.
Third, keep spending and paying off anyone who risks upsetting the process.
Lastly, don't take too dogmatic a view of corruption and or the looting of the public coffers; they are part of the system.
Remember, corruption keeps things stable.
An IMF program in 2000 was meant to offer a framework for Turkey to work its way out of its troubles.
But as is the way with exchange rate-based programs, interest rates were indeed brought down and imports made cheap, creating a boom that undermined the viability of the disinflation strategy.
What politician, after all, says no to a boom?
Act I started last December, with a financial crisis to blow Turkey's cozily corrupt system wide open.
In haste, the IMF arrived on the scene, waving $10 billion at the problem.
It soon seemed to have restored some normality.
Not quite, because interest rates remained high and creditors remained alarmed.
The precariousness of the situation called for early and dramatic declines in interest rates driven by an early restoration in confidence.
In February, however, the opposite happened: political support for the IMF program broke down when President and Prime Minister had a shouting match.
Act II began with a renewed speculative attack and a deep collapse of the currency.
Turkey has imported an economics minister from the World Bank - Kemal Dervis, an able man, though not someone very familiar with the speculative financiers preying on the country.
When Brazil hit the ropes, it imported Arminio Fraga, a senior trader for the financier George Soros, who quickly imposed himself and accomplished miracles.
The same may happen in Turkey but its politics are harder and public finances far more troublesome.
Hence the skepticism, hence the expectation that Act III may open soon.
Turkey entered its crisis with a woeful budget and a very high public debt.
It has since added formidably to its debt liabilities.
Estimates suggest that cleaning up the banking system would eat up some 25% of GDP in extra public debt (about $40 billion), over and above the 60% already in place.
Why an increase in public debt?
Because who else will pay for cleaning up Turkey's banks?
If postponed, moreover, costs will rise.
At this point two complications come together.
First, in order to stem the inflationary impact of a currency collapse, the central bank imposes extremely high real interest rates.
Of course, that makes the budget deficit larger and keeps debt growing fast.
It also means that private debts quickly become unpayable, more so because a recession is coming.
In turn, that means the bank clean up will cost more and more and that public debts will grow more and more.
What happens in the end?
Another blow up.
Turkey's public debt is simply unpayable.
Neither the G7, the IMF nor the World Bank will pay it off.
There are two ways Turkey's debt can go.
First, it can be inflated away - a currency collapse fed by money creation until the debt disappears in a whirl of inflation.
Historically, this is what happens in countries weighed down by large debts.
Of course, the social consequences are deeply traumatic; witness Europe in the 1920s.
The alternative is for government to write down public debt and bank deposits, giving creditors and depositors "hair cuts."
Politically that is more deliberate and therefore very unlikely.
So how is the Turkish government dealing with the inevitable?
By not dealing with it!
Avoiding reality is always a short term option.
But stalling only assures that debts will grow, economic normalization is postponed and the final explosion at the end of ACT III even bigger.
There is no EMU-trick, such as that which benefited Italy a few years ago, that will defuse the situation.
There is no volunteer like Germany or the US Treasury willing to dip into its deep pockets.
Turkey is on a path to a dramatic financial crash that risks throwing the country out of its precarious political situation and into the unknown.
Historically very nasty answers emerge in such situations.
Turkey is already formidably divided, so look for a strong man to ride in, probably on a tank.
What could avoid this?
Immediate debt restructuring on a grand scale, biting the bullet and accepting a few painful years of retrenchment.
That, however, is not the kind of message elected Prime Ministers want to hear.
Turkey’s Frontline Foreign Policy
JERUSALEM – A few months before he became Turkey’s foreign minister, Ahmet Davutoglu, then Prime Minister Recep Tayyip Erdogan’s chief adviser, met with a group of Middle Eastern academics and policy experts, including Arabs and Israelis.
With his academic background and immense erudition, he succeeded in painting, on a wide canvass, the new directions of Turkey’s policies under the Justice and Development Party (AKP) leadership.
By then, it had become clear that Turkey’s road to the European Union had been closed, somewhat rudely, owing mainly to combined German and French pressure.
But those who expected Islamist fire and brimstone from Davutoglu were deeply disappointed.
What was articulated was a levelheaded and sophisticated exposé, seldom heard from policymakers: it was thoughtful, honest, and breath-taking.
It was also a clear departure from the conventional foreign-policy straightjacket devised by Kemal Ataturk, which had for decades forced Turkish diplomacy into the Procrustean bed of 1920’s-style integral nationalism.
Davutoglu began conventionally, declaring that Turkey’s geopolitical situation would always dictate the country’s foreign policy.
Then came the bombshell: contrary to the conventional Kemalist view of the One and Indivisible Turkish Nation, Davutoglu referred to what everyone has known since modern Turkey was created: the country has more Azeris than Azerbaijan, more people of Albanian origin than live in Albania, more people of Bosniak origin than live in Bosnia, and more Kurds than in Iraqi Kurdistan.
This reality, Davutoglu maintained, means that violence and instability in Turkey’s immediate neighborhood threatens to spill into Turkey itself, and regional external conflicts can easily become internally disruptive.
Hence the credo of Turkish foreign policy should be “zero conflicts with our neighbors and in our neighborhood.”
This, he explained, was the reason that Turkey was trying to find an accommodation with Armenia.
It justified Turkey’s policy vis-à-vis the Kurdish Regional Government in Northern Iraq, its involvement in Bosnia and in Kosovo, its rapprochement with Syria, and also its attempt to mediate between Syria and Israel.
Turkey, he argued, is neither pro-Israeli nor pro-Syrian: it seeks an Israeli-Syrian accommodation in order to add another building block to regional stability.
All these steps are taken by the AKP government because it is in Turkey’s interest, given not only its geopolitical position, but also its unique multi-ethnic structure (he didn’t use that terminology, though the implication was clear).
Since then (Davutoglu became Foreign Minister in May 2009), much of what Turkey has done can be explained as being in line with this “zero conflicts” theory, including a slightly more nuanced policy on the Cyprus issue.
Yet recent developments suggest that, if this policy is pushed to its limits, it stumbles on its own premises.
One can well understand a Turkish policy of trying to defuse tensions with Iran over that country’s nuclear program.
But the joint Iranian-Brazilian-Turkish initiative goes beyond such a policy.
Brazil’s President Luiz Inácio Lula da Silva may have stepped on a hornets’ nest, owing to his unfamiliarity with regional policies and his general anti-Yanqui sentiments.
Erdogan must have known that, by trying in this way to shield Iran, he is opening a wider chasm with the EU – and obviously with the United States.
Opposing new sanctions against Iran in the Security Council further alienated Turkey from both the EU and the US.
This does not sit well with a “zero conflict” policy.
The same can be said about the shrill tone that Turkey, and Erdogan himself, has recently adopted vis-à-vis Israel.
Walking off the stage at Davos during a round-table debate with Israel’s President Shimon Peres might have gained Erdogan points in the Arab world, which has historically viewed Turkey with the suspicion owed to the old imperial ruler.
But the vehemence with which he lashed out at Israel during the Gaza flotilla crisis obviously went far beyond (justified) support for beleaguered Palestinians and (equally justified) criticism of the messy way in which Israel dealt with an obviously difficult situation.
While gaining support on the so-called Arab street, and perhaps upstaging Iranian President Mahmoud Ahmedinejad in the role of a modern Commander-of-the-Faithful, Erdogan’s policy and behavior have shocked not only Israelis, but also moderate Arab leaders in Egypt, Saudi Arabia, Jordan, and some of the Gulf states.
For many years, the AKP appeared to many in the region and elsewhere as a model for a democratic party with Islamic roots.
But by supporting Hamas, Erdogan has allied Turkey with the most disruptive and extremist fundamentalist force in the Muslim Arab world – an organization that has its origins in the Muslim Brotherhood, the arch-enemy of all Arab regimes in the region (including, of course, Syria).
Since Erdogan is a critic of Israel, Arab rulers cannot say this openly.
But Arab governments – and their security services – are beginning to ask themselves whether Turkey’s policies will undermine whatever internal stability their states possess.
This is the exact opposite of a genuine “zero conflict” policy that aims to minimize tensions and enhance stability.
Turkey now finds itself, through its alliance with Iran and support for Hamas, rushing headlong into a series of conflicts – with Europe, the US, Israel, and moderate Arab regimes that have survived Iranian Shia fundamentalism but may now feel threatened by a neo-Ottoman Sunni foreign policy.
Turkey is thus emerging not as a regional mediator, equidistant from contending local players, but as an assertive, if not aggressive, regional power aiming for hegemony.
Far from avoiding conflicts and mediating existing tensions, Turkey under the AKP appears intent on stoking new conflicts and creating new frontlines.
Will Turkey Weather the Middle East Storm?
ISTANBUL – A cycle of terrible violence has taken over much of the Middle East.
Its center has shifted from Iraq (where sectarian strife has recently escalated again) to Syria, but it encompasses Egypt, Yemen, Libya, and Tunisia as well.
Farther east, Afghanistan is suffering its second decade of violent conflict, while Pakistan seems to be chronically on the brink of war, civil war, or social breakdown.
The most worrisome underlying threat is the increase in fighting between Sunni and Shia Muslims.
Likewise, pious conservatives and liberal and leftist secular youth, who joined forces in Cairo and Tunis in 2010-2011 to challenge the dictators, have now turned on each other: witness the Egyptian security forces’ appalling massacres of Islamist demonstrators in Cairo recently, following a military coup carried out with liberals’ support.
The region’s people are sliding into enemy camps, deepening their societies’ wounds in the process.
I have often argued that Turkey should not intervene in the internal affairs of its neighbors or adopt a Middle East-centered policy.
Both government and opposition should remain steadfastly focused on Europe, despite the obstacles that the European Union has placed in Turkey’s way during membership negotiations.
But Turkey cannot be indifferent to the tragedy engulfing its southern neighbors.
The Arab world’s pain is acutely felt, owing to Turkey’s historical, religious, and emotional bonds with these countries.
Moreover, economic ties and sheer proximity mean that Turkey’s prosperity depends, to some degree at least, on that of the Middle East.
In recent years, there was hope that Turkey could help by serving as a model of a successful economy and well-functioning democracy; but recent events have raised doubts. In fact, Turkey must overcome four sources of internal tension if it is to continue to thrive economically, consolidate its democracy, and act as a compelling example to others.
The first and most serious source of tension stems from the need to recognize Kurdish identity as a fully legitimate part of the Turkish Republic.
Those who wish to express a Kurdish identity, as well as all other citizens, must be confident that, while all remain committed to national unity, Turkey is a country in which diversity can thrive.
Second, there is an underlying historical tension between the large Sunni majority and the Alevi-Bektashi minority, loosely linked to Shia Islam.
Third, there is the difference between those who adhere to the tradition of political Islam and those who uphold the strict secularism that came with the republic.
Often this social “divide” intersects with the Sunni-Alevi cleavage, as the Alevis have increasingly aligned themselves with the political left.
Finally, there is a growing perception of partisanship within the public administration.
Building independent, non-partisan regulatory bodies was one of the key pillars of the 2001-2002 reform program.
But these reforms have been rolled back recently, with independent regulatory authorities again coming under the control of government ministries (though it seems that the central bank has retained much of its autonomy).
As the perception of non-partisanship in public administration has diminished, proximity to those in power has become another source of tension.
Turkey benefits from republican reflexes and values that have been built over decades, as well as from humanist wisdom anchored in centuries of history.
Yet, given the regional context, Turkey’s internal tensions now represent a serious threat.
All sides must manage these tensions with great care and caution.
Respect for diversity and individual freedom, and concern for generating growth and jobs in an atmosphere of social peace, must be guiding principles.
Healing the wounds to which all sides have at times contributed, and practicing forgiveness, should be the order of the day.
A spiral of frustration and antagonism must not be allowed to develop.
Turkey must look carefully at the catastrophe unfolding around it in the Middle East.
Humanitarian help is necessary, and Turkey is providing it generously, in ways that should serve as an example for Western countries.
But Turkey’s political leaders, opinion shapers, and citizens must also recognize that the only protection against a similar disaster at home is a vibrant democracy, a fully professional public administration, and a tolerant society embodying pride and affection for the country’s diversity.
Others will not protect Turkey; some may even promote strife within its borders (historical examples of such tactics abound).
Turkey alone can protect itself, and only by upholding truly democratic behavior at home and pursuing an external policy that promotes peace and democracy but does not take sides in the region’s ongoing battles, particularly between Sunni and Shia.
Fortunately, there is hope.
The Gezi Park demonstrators who in June protested peacefully against the use of excessive police force by simply standing still also protested peacefully, years ago, against the ban on the headscarf then in effect in Turkey’s universities. This kind of concern for the rights of all is a hallmark of Turkey’s young generation.
Similarly, when the outgoing governor of Van sent a farewell message last month to the largely Kurdish-speaking people in his southeastern province, he delivered it in Kurdish – and received warm wishes in return.
A large majority of Turkey’s citizens share such generosity of spirit.
That is why, despite serious difficulties, Turkey has a good chance of overcoming its internal tensions and becoming the example that its Middle East neighbors (and perhaps a few of its European neighbors as well) so desperately need.
Turkey’s Middle Eastern Road to Europe
ISTANBUL – Just a few years ago, Europe headed Turkey’s agenda.
Recep Tayyip Erdoğan’s newly elected government had embarked on a series of ambitious reforms to meet the European Union’s political criteria for membership.
At the end of 2004, the EU decided to initiate accession talks.
But pro-European euphoria proved short-lived: for all practical purposes, the accession negotiations are now at an impasse.
Euro-skepticism is now at an all-time high in Turkey, fueled by some European political leaders’ rhetoric opposing Turkey’s accession, and by the EU’s own failure to dispel doubts about the feasibility of Turkey’s eventual membership.
Domestic support for EU accession was 70% at the start of the negotiations, but is now closer to 40%.
Not surprisingly, Turkey’s government has also lost its appetite for EU-related reforms.
For more than two years, the European Commission has found little positive to say in its annual progress reports on political reform.
Yet, just as Europe is looking more distant, the Middle East is looming larger, as Turkey shifts its attention from Brussels to Beirut and beyond.
The frustrations of dealing with an undecided Europe have led Turkish policymakers to focus their efforts on an area where the expected return on their investment is more immediate and more concrete.
In fact, whereas Erdoğan recently visited many Middle East countries – Syria, Lebanon, Egypt, Algeria, Jordan, Saudi Arabia, Iran, and Iraq – until this month, he had not been to Brussels since 2005.
Turkey was traditionally a bystander in Middle East politics.
Its leaders believed that there was little to be contributed or gained by getting involved in the region’s problems, and that Turkey’s Ottoman legacy would leave its Arab neighbors suspicious.
But developments in recent years have enabled Turkey to become a more active player in the region, and to score several diplomatic successes.
Turkey was instrumental in bringing about an end to Lebanon’s factional strife, and its overtures to Syria – undertaken despite warnings from the United States – have paid off handsomely.
Turkey was able not only to defuse the international tensions surrounding its Arab neighbor, but also to engineer the start of direct talks between Syria and Israel.
Such activism has been even more pronounced concerning Iran, with Turkish leaders multiplying diplomatic efforts in recent months to help ease the nuclear standoff with the West.
Turkey, more fearful of the regional repercussions of a nuclear Iran than of any direct threat it would pose, went as far as to host a visit by Iranian President Mahmoud Ahmadinejad last August.
Turkey’s ability to make headway in the Middle East reflects the erosion of US legitimacy and lack of EU influence.
The US lost its ability to play a more constructive role in the region following its ill-fated intervention in Iraq, while the Bush administration’s neo-conservative “freedom agenda” for the Arab world also backfired.
While the US initially distanced itself from the more autocratic Arab leaders in a bid to support homegrown democratic alternatives, when the only realistic alternative turned out to be political Islam, America quickly returned to its traditional policy of supporting the status quo .
Unlike the US, the EU’s difficulties stem not from a perceived lack of legitimacy or crude attempts at promoting democracy, but from a real lack of unity and, therefore, influence.
The absence of a common denominator among EU governments’ positions has hardly been conducive to the emergence of the cogent and reliable diplomacy needed to address the Middle East’s deep problems.
In these circumstances, Turkey has been able to leverage both its regional ties and its standing in the transatlantic community to play a more instrumental role vis-à-vis its southern neighbors.
Two additional factors further enhance Turkey’s potential for regional influence.
First, the rise of an Arab political class that is more influenced by religion than by secular nationalism has eroded the main structural barrier to Turkish engagement.
The Ottoman legacy of a working state structure, tolerant of religion, has begun to be viewed in a more favorable light, and the contemporary Turkish model, with its ability to nurture a democracy-friendly Islam, is suddenly in demand.
Second, Turkey has been more prepared than ever to take advantage of these fundamental shifts.
Erdoğan’s ruling AKP traces its roots to political Islam, and many of its leaders’ social networks are in Islamic countries – in stark contrast to the secular style of Turkey’s previous leaders, who proudly displayed their Western identity.
As a result, formal and informal links between the new Turkish political élite and the Arab world have been easier to forge.
There can be no doubt that growing foreign-policy activism, especially in relation to the Middle East, has begun to enhance Turkey’s role and influence in its own region.
Indeed, Turkey is now firmly set to become a regional power, with its recent election to the UN Security Council a further testimony to its diplomatic prowess.
But does Turkey’s shift of focus southward and toward regional power status come at the expense of the country’s EU ambitions?
For optimists, Turkey’s growing regional influence enhances its value for the EU.
But this assumes that Europe is willing and able to benefit from what Turkey has to offer.
In other words, this strategy is compatible with EU accession only if the EU strengthens its own capacity for concerted action on foreign policy.
In that case, Turkey’s membership would not, as European federalists argue, lead to a weaker Europe.
On the contrary, it would make Europe a more influential and capable world power.
Turkey\u0027s Modern, Muslim Face
Recently, Turkey assumed from Britain command of the International Security Assistance Force in Afghanistan.
Typically, hardly anyone noticed.
Turkey's troubles -- be they financial crises or the current illness of Primer Minister Bulent Ecevit -- grab headlines.
Its successes and contributions get buried in the back pages of the world's newspapers, when they are reported on at all.
But in the world forged by the terrorist attacks on America last September, the identity, and the choices and alliances that Turkey made in its historical quest to become modern, have acquired greater significance than ever before.
Turkey's leadership of the peacekeeping forces in Afghanistan, something hugely popular among Turks, highlights once more the fact that Turkey is the only Muslim nation that is a member of NATO.
Turkey's straddling of Islam and the West makes the country's domestic and international politics intriguing.
Indeed, many Turks view their country's development as a compelling rejoinder to any idea of an inevitable "clash of civilizations" between Islam and the West.
The logic of Turkish support for America's war against terrorism was quick to appear.
In the terrorist attacks against the US, many Turks found vindication of their decades-long effort to draw the world's attention - and in particular European attention - to the scourge of terror.
By both supporting America's operation in Afghanistan and at the same time speaking out against efforts to vilify Islam, the government managed to reconcile Turkey's strategic interests and its religious sensitivities.
Endless talk show debates on Turkish television demonstrated that there was plenty of reflective thinking taking place.
To the extent that some Islamists did not reject outright violence against civilians, they seem to have lost public support.
In addition, left-wing secular opposition to US policy kept the debate from focusing solely on Islam.
At the same time, Turkey hosted a two-day "dialogue of civilizations" last February between the Organization of the Islamic Conference and the European Union.
Participants from both sides found common cause expressing their doubts about American policies.
Turkey remains concerned that Iraq may be America's next target.
Iraq is the single issue on which American and Turkish interests diverge sharply.
Neither the Turkish military nor the Turkish government nor public opinion supports an American campaign against Iraq.
The best the Turks could get from Vice President Dick Cheney, during his visit last March, was a tepid assurance that no American military attack was imminent.
Officially, Turkey is concerned that Saddam Hussein's fall could result in the irreparable fracturing of the Iraqi state.
Below the surface lurk longstanding Turkish anxieties about Kurdish nationalism, and how this might threaten Turkish unity from across the borders of a newly-shattered Iraq.
But at the end of the day, few Turks doubt that if the US decides to send ground forces into Iraq, Turkey will provide the launching pad, and may even participate.
Elsewhere in the Middle East, Turkey's generally positive relations with Israel have come under strain as a result of Israel's "Operation Defensive Shield."
In the face of public anger with Israel, Turkey's military continued building its security relationship with the Jewish state, and recently awarded Israel a lucrative tank modernization contract.
A May public opinion poll found nearly two-thirds of the public opposed Turkey's stance on the Israeli-Palestinian fighting.
But this is mitigated at times by public revulsion over suicide bombing attacks in Israel.
A further element that caught the public's eye was the lethal assault in Hebron against an international observer team that included two Turkish officers.
The Turkish military believes that the attack, which killed Major Cengiz Toytunc, was carried out by Palestinians.
Most of Turkey's public objects to drawing links between Islam and mindless terrorist violence.
The government's emphasis on Turkey's secular state and Islamic tradition resonates deeply, and there is a strong feeling that Turkey can mediate between the West and the Islamic world.
Islamist parties, their political fortunes reviving as secular parties suffer yet another crisis of public confidence, have been careful not to exploit popular resentments that may have developed since September 11th.
Tayip Erdogan, the leader of one Islamist party, argued that attacks on innocent civilians could never be justified in religious terms.
Of course, the Islamists are kept under careful watch by the military, which has repeatedly intervened in Turkish politics to defend Turkey's secular political identity.
But the Islamist parties also recognize the strength of popular support for Turkey as a modern country, poised to represent Islam's modern face in today's world.
Turkey’s Nation of Faiths
ANKARA – After decades of official neglect and mistrust, Turkey has taken several steps to ensure the rights of the country’s non-Muslim religious minorities, and thus to guarantee that the rule of law is applied equally for all Turkish citizens, regardless of individuals’ religion, ethnicity, or language.
Turkey’s religious minorities include Greek Orthodox, Armenian, Assyrian, Kaldani, and other Christian denominations, as well as Jews, all of whom are integral parts of Turkish society.
As part of the Turkish government’s new initiative to end any sort of discrimination against these non-Muslim communities, President Abdullah Gül has emphasized that message by receiving Bartholemew, the Greek-Orthodox Patriarch of Istanbul, and by visiting a church and a synagogue in Hatay – a first by a Turkish president.
In August 2009, Prime Minister Recep Tayyip Erdoğan met with leaders of religious minorities on Büyükada, the largest of the Prince Islands in the Sea of Marmara, and listened to their problems and concerns, a clear signal of his government’s intent to buttress their sense of civil inclusion.
As Deputy Prime Minister, I met with representatives of religious minorities in March 2010, and visited the Armenian and Greek Orthodox Patriarchies in 2010 and 2011.
Likewise, Turkey’s minister for European Union affairs, Egemen Bağış, has met with these communities’ leaders on several occasions.
Beyond establishing warm relations between the Turkish government and the country’s religious minorities, official policy has been changing as well.
In May 2010, Prime Minister Erdoğan issued an official statement that warned public servants and citizens against any discrimination against religious minorities, and that emphasized the absolute equality of Turkey’s non-Muslim citizens.
But the groundwork for the initiative of recent years was laid long before.
In August 2003, the Erdoğan-led government introduced legal changes to resolve property-rights issues related to religious minority associations.
For the first time in the Republic’s history, 365 landholdings and buildings belonging to the minority communities were legally registered under their name.
In 2008, the government, despite fierce opposition from other political parties, changed the Law of Associations and allowed religious-minority associations to purchase real estate (and to receive contributions, regardless of size, from abroad).
Then, in August 2011, an important amendment to the Associations law mandated the return of more than 350 properties to religious minorities.
As part of these changes, the Greek-Orthodox Girls School in Beyoğlu, Istanbul, and the Jewish Community Center in Izmir have been granted legal status, ending a century-old dispute.
Even before that, in November 2010, the Greek-Orthodox Orphanage on Halki Island was returned to the Greek-Orthodox Patriarchy.
In order to facilitate their religious duties, the Orthodox metropolitans were granted Turkish citizenship.
Furthermore, the Associations Council, the country’s highest authority on religious associations, now includes for the first time a non-Muslim member representing minority faiths.
Moreover, the Directorate-General of Associations has been charged with the task of renovating houses of worship used by religious minorities, including the historic Aya Nikola Church in Gökçeada Çanakkale, and the Assyrian Catholic Church and Greek Catholic Church in Iskenderun.
A number of other churches and synagogues are also under renovation.
The authorities have taken many other historically and symbolically important steps as well.
The Ministry of Culture and Tourism has renovated the Panagia Sümela Monastery, a 1,600-year-old church in Trabzon on the Black Sea coast.
The first mass in decades was held in August 2010, led by Bartholomew and attended by hundreds of worshippers from Greece, Russia, Georgia, Europe, the United States, and Turkey.
Another milestone was the renovation and opening of the 1,100-year old Armenian Aghtamar Church in March 2007.
The first mass in 95 years was held in the church, led by the Armenian Archbishop Aram Ateşyan and attended by thousands of worshippers.
These measures have been taken to address the long-standing problems of Turkey’s non-Muslim religious minorities.
Turkish Muslims have lived with Jewish and Christian communities for centuries and treated them with respect and compassion.
We are determined to solve their remaining problems, and we believe that we can do so through mutual trust and cooperation.
Turkey’s Jews and Christians are full citizens with equal rights, and we will work to ensure that this reality is recognized in all areas of the country’s life.
Turkey’s New Course
CHICAGO – Turkey has recently been at the forefront of international economic and political debates.
On the one hand, despite the economic crisis engulfing neighboring Europe, Turkey remains the world’s second-fastest growing economy, after China.
On the other hand, there is almost no issue on the global agenda – from Iraq and Afghanistan to Somalia, Iran, and the Arab Spring, and from sustainable development to a dialogue among civilizations – on which Turkey is not playing a visible role.
This is a rather new phenomenon.
Until a decade ago, Turkey was regarded as no more than a staunch NATO ally.
That began to change in 2002, when an era of political stability dawned, giving rise to a vision for a stronger Turkey – and a firm commitment to realizing that vision.
To this end, Turkey’s governments since 2002 implemented bold economic reforms that paved the way for sustainable growth and provided a firewall against the financial crisis that hit in 2008.
As a result, in less than a decade, GDP has tripled, making Turkey the world’s 16th largest economy.
Moreover, the country benefits from strong public finances, prudent monetary policy, sustainable debt dynamics, a sound banking system, and well-functioning credit markets.
At the same time, we expanded the scope of individual rights, which had long been subordinated to security concerns.
We streamlined civil-military relations, guaranteed social and cultural rights, and attended to the problems of ethnic and religious minorities.
These reforms transformed Turkey into a vibrant democracy and a more stable society, at peace with itself and able to view its external environment in a different light.
Quite simply, we stopped viewing our geography and history as a curse or disadvantage.
On the contrary, we began to regard our location at the crossroads of Europe, Asia, and the Middle East as an opportunity to interact simultaneously with multiple players.
As a result, we began to reach out to countries in our neighborhood and beyond.
We tried to expand political dialogue, enhance economic interdependence, and strengthen cultural and social understanding. And, while ten years is too short for a definitive assessment of such an ambitious policy, we have undoubtedly covered considerable ground.
For example, we have quadrupled our trade volume just with our neighbors.
On several occasions, we have also been instrumental in facilitating peace and reconciliation.
But, what is more important, Turkey has become a model of success that many countries around us now seek to emulate.
And yet, until a year or two ago, some political pundits were asking, “Who lost Turkey?” or “Whither Turkey?” – the assumption being that Turkey had shifted its foreign-policy axis away from the West.
In fact, Turkey’s external orientation has remained constant, because it rests on the values that we share with the free world.
What has changed is our increased assertiveness in our efforts to ensure greater stability and human welfare in our region, evident in our advocacy of freedom, democracy, and accountability not only for ourselves, but also for others.
This approach has been reflected in the Arab Spring, which Turkey ardently supported from the outset.
We have not hesitated in siding with those fighting for their rights and dignity.
Indeed, in countries like Tunisia, Egypt, Libya, and Yemen, which are now attempting to institutionalize change, Turkey is their most active partner, sharing our own experience and providing tangible assistance in the form of economic cooperation and political capacity building.
In Syria, on the other hand, the revolution has not yet come to fruition, owing to the regime’s brutal repression of its opponents.
Every day, scores of people there die in pursuit of dignity.
Turkey is doing all that it can to alleviate the Syrian people’s suffering.
Unfortunately, the international community as a whole has so far performed poorly in providing an effective response to the crisis.
Turkey’s position on Iran’s nuclear program has been similarly clear: we are categorically opposed to the presence of weapons of mass destruction in our region.
Attempts to develop or acquire WMDs might well trigger a regional arms race, leading to further instability and threatening international peace and security.
That is why we have always called for the establishment of a WMD-free zone in the Middle East, including both Iran and Israel.
We support Iran’s right to use nuclear energy for peaceful purposes.
But Iran’s program must be transparent, and its leaders must assure the international community of its non-military nature.
The key is to close the confidence gap and pave the way for meaningful dialogue.
In April, we hosted the inaugural round of revived talks between the international community and Iran.
Let us be clear: there is no military solution to this problem.
Military intervention would merely further complicate the issue, while creating new layers of conflict in our region and beyond.
In this and other matters, Turkey strives to act as a “virtuous power,” which requires us to align our national interests with values such as justice, democracy, and human dignity, and to achieve our foreign-policy goals through mutual cooperation rather than coercion.
Effective multilateralism is a key facet of this vision.
Turkey served as a member of the United Nations Security Council in 2009-2010, and is now seeking another term in 2015-2016.
Given the crucial importance of developments in our part of the world, Turkey’s contribution to the Council’s work promises to be highly valuable.
In 2015, moreover, we will assume the presidency of the G-20, and we are committed to using our means and capabilities to make it a more effective organ of global governance.
Turkey’s internal transformation over the past decade has placed it in an ideal position to benefit the region – and thus the global community.
While we have accomplished much already, more is required of us.
Given the challenges of our neighborhood, and the region’s central role in global affairs, Turkey will not refrain from taking on new responsibilities.
Turkey’s New Mission
TEL AVIV – Ever since Turkey’s establishment as a republic, the country has oscillated between the Western-oriented heritage of its founder, Kemal Ataturk, and its eastern, Ottoman legacy.
Never resolved, modern Turkey’s deep identity complex is now shaking its strategic alliances and recasting its regional and global role.
Indeed, Turkey’s changing perception of itself has shaped its so-far frustrated drive to serve as a peace broker between Israel and its Arab enemies, Syria and Hamas.
Prime Minister Recep Tayyip Erdogan’s missionary zeal to replace Egypt as the essential regional mediator, and his violent tirades against Israel’s behavior in Gaza, looks to many people like an attempt to recover Turkey’s Ottoman-era role as the guarantor of regional peace and security.
Its credentials for this role in the Middle East are by no means negligible.
Turkey is a true regional superpower, with one of the largest armies in the world.
At the same time, it is the only Muslim country that, while no less worried than Israel about Iran’s nuclear ambitions, can maintain excellent economic and political relations with Iran, regardless of American displeasure.
Of course, Syria is Iran’s ally, too, but no country in the region has the leverage with it that Turkey possesses.
And Turkey’s diplomatic reach in the region is also reflected in its recent signing of a friendship treaty with Saudi Arabia, while maintaining excellent relations with Pakistan and Iraq.
Europe’s persistence in snubbing Turkey’s attempts to join the European Union, the rise of violent anti-Western popular sentiment in the wake of the Iraq war, and strained relations with the US – owing in part to the forthcoming Armenian Genocide Act – are major factors in Turkey’s change of direction.
The civilizing efforts that Ataturk’s revolution directed inward and in favor of disengagement from the Arab and Muslim worlds are now being revisited.
The Turkey of Erdogan’s dominant Justice and Development Party (AKP) appears to be seeking a new mission civilisatrice , with the Middle East and the former Soviet republics as its alternative horizons.
The uneasy challenge for Turkey is to secure its newfound regional role without betraying Ataturk’s democratic legacy.
Turkish democracy and secular values have been greatly enhanced by the country’s dialogue with Europe and its American ties.
Turkey can be a model for Middle Eastern countries if, while promoting its regional strategic and economic interests, it resists the authoritarian temptation and continues to show that Islam and democracy are fully compatible.
For Israel, the long overdue message is that its future in the Middle East does not lie in strategic alliances with the region’s non-Arab powers, but in reconciling itself with the Arab world.
In the 1960’s, David Ben-Gurion’s fatalistic pessimism about the possibility of ever reaching a peace settlement with the Arab countries led him to forge an “Alliance of the Periphery” with the non-Arab countries in the outer circle of the Middle East – Iran, Ethiopia, and Turkey (he also dreamed of having Lebanon’s Maronite community as part of that alliance).
All of these countries did not have any particular dispute with Israel, and all, to varying degrees, had tense relations with their Arab neighbors.
The myth of Israel’s military power, resourcefulness in economic and agricultural matters, and an exaggerated perception of its unique capacity to lobby and influence American policy combined to make the Israeli connection especially attractive to these countries.
The “Alliance of the Periphery” was a creative attempt to escape the consequences of the Arab-Israeli conflict.
It reflected the yearning of the Jewish state to unleash its creative energies in economic and social matters, as it created space for an independent, imaginative foreign policy that was not linked to, or conditioned by, the paralyzing constraints of the Arab-Israeli conflict.
But the security that this scheme was supposed to produce could never really be achieved; the centrality of the Arab-Israeli conflict could not be attenuated.
The Arabs’ capacity to maintain their pressure on Israel and to keep world opinion focused on the Palestinians’ plight made Israel’s quest for evading the consequences of the conflict, either through periodic wars or by forging alternative regional alliances, a futile exercise.
The Islamic revolution in Iran, the changes in Ethiopia following the end of Haile Selassie’s rule, the collapse of Maronite Lebanon, and Hezbollah’s takeover of that country left Turkey as the last remaining member of Israel’s Alliance of the Periphery.
Turkey’s powerful military establishment may want to maintain close relations with Israel, but the widely popular change in Turkey’s foreign policy priorities, and the serious identity dilemmas facing the nation, send an unequivocal message that the alliance can no longer serve as an alternative to peace with the Arab world.
From now on, it can only be complementary to such a peace.
Erdoğan’s Kurdish Gambit
ISTANBUL – Conflict in the Middle East threatens not only the security of many of its states, but also their continued existence.
Syria, Iraq, Lebanon, and others, now gripped by sectarian fighting, risk fragmenting into ethnic sub-states, transforming a region whose political geography was drawn nearly a century ago.
Surveying the regional scene, Turkish Prime Minister Recep Tayyip Erdoğan has conceived of an audacious plan to enhance Turkey’s regional standing and extend his own political dominance at home.
Facing the end of a self-imposed three-term limit as prime minister, he is intent on changing the Turkish constitution to introduce a presidential system – with himself on top as the first incumbent to wield much-enlarged power.
Erdoğan’s plan, however, depends on ending Turkey’s 30-year conflict with its own Kurdish population.
As a result, the Erdoğan government has decided on negotiations with Abdullah Ocalan, the jailed leader of the Kurdish Workers’ Party (PKK), the armed Kurdish resistance movement.
The hope is to agree on a new, more liberal constitution that will strengthen the rights of Turkey’s largest ethnic minority and include substantial devolution of power to regional governments.
In return, the PKK is expected to end its three-decade-long fight against the Turkish state.
On March 21, at a mass rally attended by almost one million people in the southeastern Turkish city of Diyarbakir, Ocalan delivered a message of peace from his prison cell.
He called for the end to armed struggle, and invited the PKK’s fighters to leave the country.
For Erdoğan, the stakes could not be higher.
Erdoğan envisions putting the constitutional changes and the terms of peace to a national referendum, a linkage that would transform Turkish politics.
If the negotiations succeed, he will be remembered for his historic role in bringing peace, and will likely stand a better chance of realizing his presidential ambition, having gained parliamentary support for revising the constitution from the Kurdish Peace and Democracy Party.
If negotiations fail, however, Erdoğan will be held responsible for any deterioration in the security environment that results.
A recently leaked account of Ocalan’s strategy highlights the risk, for it cites the PKK leader as threatening the government with full-scale war.
At the same time, the Turkish government is pursuing a separate path of negotiations, through a rapprochement with another Kurdish authority – the Kurdish Regional Government (KRG) in northern Iraq.
The grand vision is to integrate Iraqi Kurdistan into the Turkish economy.
Turkey already supplies most of the KRG economy’s imports, which accounted for 70% of Turkey’s almost $11 billion in exports to Iraq last year.
But it is the incipient energy deal between Turkey and the KRG that is set to build the foundation for a real strategic alliance.
The undisclosed deal is believed to grant Turkey substantial concessions to explore new oil and gas fields in northern Iraq, as well as preferential rates for energy exports to Turkey.
In return, Turkey is to help the KRG build pipeline infrastructure that will allow oil and gas to be exported to Turkey without relying on Iraq’s national pipeline, which is controlled by the central government in Baghdad.
Within the Turkish government, this opening is viewed as an immense opportunity to reduce Turkey’s heavy dependence on energy imports.
In addition to securing energy supplies, the deal would help Turkey to overcome its chronic current-account deficit: roughly 70% of the country’s $84 billion trade deficit is due to the import bill for energy supplies.
For the KRG, the deal would secure the region’s future economic wealth without holding it hostage to an increasingly unsympathetic Iraqi government.
Under Iraq’s constitution, the Kurdish region is entitled to 17% of the country’s oil and gas revenues.
But the distribution of proceeds from hydrocarbons is irregular, and the central government has accumulated significant arrears.
The KRG hopes that a deal with Turkey would allow it to obtain more regular and predictable hydrocarbon revenues.
But the United States remains adamantly opposed to such a deal between Turkey and the KRG, claiming that it would undermine Iraq’s stability and fuel secessionist tendencies in the north.
In late February, during his overseas trip, which included a stop in Ankara, US Secretary of State John Kerry reiterated these concerns in his talks with his Turkish counterparts.
America’s fears are not shared in Turkish government circles, where the deals between the US oil giants Exxon and Chevron and the KRG are seen as proof that America is more concerned about its share of the pie in northern Iraq than it is about alleged threats to that country’s stability.
Not surprisingly, Erdoğan’s government has decided to pay little heed to US government concerns.
The sectarian strains that are now rending societies across the Middle East are likely to change the regional map.
Erdoğan has now developed a plan that would take advantage of this development, ensure his political control, and lock in energy security for his country.
He envisions a new regional order under Turkish leadership, based on a realignment between Turks and Kurds that underpins a strategic partnership for exploiting the region’s last untapped energy resources.
Turkey’s Rise and the Decline of Pan-Arabism
TEL AVIV – The deadly fiasco of the Turkish-led “peace flotilla” to Gaza highlighted the deepening strain in the Israeli-Turkish alliance.
But it mainly helped expose the deeper, underlying reasons for Turkey’s shift from its Western orientation toward becoming a major player in the Middle East – in alliance with the region’s rogue regimes and radical non-state actors.
Foreign policy cannot be separated from its domestic foundations.
The identity of nations, their ethos, has always been a defining motive in their strategic priorities.
Israel’s blunders did, of course, play a role in the erosion of its alliance with Turkey.
But the collapse of its old “alliance of the periphery,” including Turkey, the Shah’s Iran, and Ethiopia, had more to do with revolutionary changes in those countries – the Ayatollah Khomeini’s rise to power, the end of Emperor Haile Selassie’s regime, and now Turkish Prime Minister Recep Tayyip Erdogan’s Islamic shift – than with Israeli policies.
The current crisis reveals the depth of Turkey’s identity complex, its oscillation between its Western-oriented Kemalist heritage and its Eastern Ottoman legacy.
Snubbed by the European Union, Erdogan is tilting the balance towards the latter.
Kemalism always saw the Ottoman legacy as a burden, an obstacle to modernization.
In Erdogan’s vision, modernization does not preclude a return to Turkey’s Islamic roots, nor does it require it to abandon its destiny as a Middle East power, even if this means flouting United States-led policies in the region.
Indeed, Erdogan responded positively to Europe’s conditions for Turkey’s EU membership.
His reforms – economic liberalization, cooperation with the European Court of Human Rights, improving the Kurdish minority’s rights, and undercutting the army’s Praetorian ambitions – are major advances in the history of the Turkish Republic.
Yet Erdogan has also been eager to use Europe’s requirements as a pretext to curb the army’s capacity to check his Islamic revolution.
The election of his political ally, Abdullah Gul, as president, against the army’s will – indeed, against the entire Kemalist tradition – is a case in point.
To block a move aimed at outlawing his Justice and Development Party (AKP), Erdogan also domesticated Turkey’s constitutional court – together with the army a watchdog of Kemalism – by arbitrarily changing its composition.
Now a constitutional reform supposedly aimed at “promoting Turkey’s EU membership” would further curb the army’s role as the guardian of the secular state and strengthen government control of the judiciary.
Erdogan’s Islamic revolution has also expanded into the educational system with the introduction of a markedly religious curriculum.
To back Turkey’s strategic shift, a new law has recently made the teaching of Arabic obligatory in schools.
It is difficult to imagine a more symbolic blow to Ataturk’s vision.
Erdogan believes that, by exercising Turkey’s capacity for mediation, he will recover the burden of his Ottoman forbears as the guarantors of peace and security in the Mashreq.
Turkey’s drive to serve as a peace broker between Israel and its Arab enemies, Erdogan’s vociferous championship of the Palestinian cause, and his pretension to be the mediator in the nuclear dispute between Iran and the West reflect Turkey’s changing perceptions of itself as a regional leader.
To both Israel and the West, the regional context of Turkey’s rise is especially disturbing.
Erdogan’s neo-Ottomanism is not a return to an idyllic Ottoman Commonwealth; it is more a clash between a rising radical axis, led by two major non-Arab powers (Turkey and Iran), and the declining Arab conservative regimes.
Turkey put Israel in the dock of world opinion over the “peace flotilla” in a way that might still force Binyamin Netanyahu’s government to opt for credible peace negotiations, while providing a boost to Hamas and bringing about the imminent end of Iarael’s Gaza blockade.
Such a spectacular success only serves to highlight the impotence of the West’s Arab allies.
Indeed, Turkey’s growing regional relevance is the measure of the Arabs’ failure.
They failed to advance their peace initiative with Israel, and are complicit in the blockade of Gaza in the hope that Hamas will collapse, thereby humbling their own Islamist oppositions.
As Islamist democracies whose governments emerge from popular elections, Iran and Turkey – and their Hamas and Hezbollah allies – can claim an advantage over the incumbent Arab regimes, all of which suffer from a desperately yawning legitimacy deficit.
They are all secular autocracies kept in power by intrusive, all-powerful intelligence services.
Erdogan’s strategy makes him complicit with the agenda of the West’s most vicious enemies.
He even flirted with Sudanese president Omar al-Bashir’s perverted Islamist rule, welcoming Bashir to Turkey after he was indicted by the International Criminal Court for massacres in Darfur on the grounds that “Muslims do not commit genocide.”
Iran and Turkey are bound to assert their Islamic credentials more and more as they reach out to the Arab masses.
That a pan-Islamic discourse has now replaced the cause of pan-Arabism is a major setback for moderate Arab regimes.
Yet, despite Erdogan’s creeping Islamic revolution, Turkey is not a second Iran.
The AKP remains a progressive, heterogeneous party that sees no contradiction between Islam and democracy.
Nor has it entirely given up on Turkey’s European dream.
Moreover, an increasingly robust secular opposition, the Republican People’s Party (CHP) under the vigorous leadership of Kemal Kilicdaroglu, is bound to help stem the Islamist tide.
With Israel’s return to a sober peace strategy, and with an honest dialogue between Turkey and its NATO allies, the Turkish bridge between East and West can still be salvaged.
Turkey’s Secular Fundamentalist Threat
NEW YORK &#45;&#45;
The Chief Prosecutor of Turkey’s High Court of Appeals recently recommended to the country’s Constitutional Court that the ruling Justice and Development Party (AKP) be permanently banned.
Only last July, the AKP was overwhelmingly re-elected in free and fair elections to lead the government.
The Chief Prosecutor also formally recommended that Prime Minister Recep Erdogan, President Abdullah Gul, and 69 other leading politicians be banned from politics five years.
Clearly, banning the AKP would trigger a political crisis that would end Turkey’s efforts to join the European Union in the foreseeable future and threaten its recent strong economic growth.
So the Chief Prosecutor’s threat should not be taken lightly – all the more so given that the Constitutional Court has banned 18 political parties (including the AKP’s predecessor party) since the current constitution was introduced in 1982.
Indeed, the recent call to ban the AKP is directly related to its efforts to change Turkey’s constitution.
The underlying charge in the Chief Prosecutor’s indictment is that the AKP has been eroding secularism.
But the origins of the current Constitution, and its definition of secularism, are highly suspect.
Turkey’s existing Constitution was adopted in 1982 as a direct product of the Turkish military coup in 1980.
The five senior generals who led the coup appointed, directly or indirectly, all 160 members of the Consultative Assembly that drafted the new constitution, and they retained a veto over the final document.
In the national ratification referendum that followed, citizens were allowed to vote against the military-sponsored draft, but not to argue against it publicly.
As a result, the 1982 Constitution has weaker democratic origins than any in the EU.
Its democratic content was also much weaker, assigning, for example, enormous power (and a military majority) to the National Security Council.
While the AKP has moderated this authoritarian feature, it is difficult to democratize such a constitution fully, and official EU reports on Turkey’s prospects for accession repeatedly call for a new constitution, not merely an amended one.
With public opinion polls indicating that the AKP’s draft constitution, prepared by an academic committee, would be accepted through normal democratic procedures, the Chief Prosecutor acted to uphold the type of secularism enshrined in the 1982 Constitution, which many commentators liken to French secularism.
Yet the comparison with what the French call laicité is misleading.
Certainly, both French laicité and Turkish secularism (established by modern Turkey’s founder, Kemal Atatürk) began with a similar hostility toward religion.
But now they are quite different.
In Turkey, the only religious education that is tolerated is under the strict control of the state, whereas in France a wide variety of privately supported religious education is allowed, and since 1959 the state has paid for much of the Catholic Church’s primary school costs.
In Turkey, Friday prayers are written by civil servants in the 70,000-member State Directorate of Religious Affairs, and all Turkish imams also must be civil servants.
No similar controls exist in France.
Similarly, until the AKP came to power and began to loosen restrictions, it was virtually impossible in Turkey to create a new church or synagogue, or to create a Jewish or Christian foundation.
This may be why the Armenian Patriarch urged ethnic Armenians in Turkey to vote for the AKP in last July’s elections.
Here, too, no such restrictions exist in France.
The differences between French and Turkish secularism can be put in even sharper comparative perspective.
In the widely cited “Fox” index measuring state control of majority and minority religions, in which zero represents the least state control, and figures in the thirties represent the greatest degree of control, all but two current EU member states get scores that are in the zero to six range.
France is at the high end of the EU norm, with a score of six.
Turkey, however, scores 24, worse even than Tunisia’s authoritarian secular regime.
Is this the type of secularism that needs to be perpetuated by the Chief Prosecutor’s not so-soft constitutional coup?
What really worries some democratic secularists in Turkey and elsewhere is that the AKP’s efforts at constitutional reform might be simply a first step toward introducing Sharia law.
If the constitutional court will not stop a potential AKP-led imposition of Sharia, who will?
There are two responses to this question.
First, the AKP insists that it opposes creating a Sharia state, and experts say that there is no “smoking gun” in the Chief Prosecutor’s indictment showing that the AKP has moved toward such a goal.
Second, support for Sharia, never high in Turkey, has actually declined since the AKP came to power, from 19% in 1996 to 8% in 2007.
Given that the AKP’s true power base is its support in democratic elections, any attempt to impose Sharia would risk alienating many of its own voters.
Given this constraint, there is no reason for anyone, except for “secular fundamentalists,” to support banning the AKP, Erdogan, or Gul, and every reason for Turkey to continue on its democratic path.
Only that course will enable Turkey to construct a better constitution than it has now.
Turkey’s Transformation
Abdullah Gül’s election as Turkey’s 11th president marks a watershed in the country’s history.
In July, the ruling Justice and Development Party (AKP) – religiously conservative but economically liberal – won a landslide in parliamentary elections called after the military balked at seeing Gül become president.
That victory, combined with Gül’s election, confirm the AKP’s emergence as a party of realignment, and that, despite an upsurge of xenophobic nationalism, Turks wanted to integrate with the European Union.
Last April, Gül’s candidacy brought a threat of a coup from the military, precipitating the recent elections.
Thus, the electorate also made it clear that it no longer wanted the military involved in domestic politics, rejecting the generals’ warnings that the AKP would lead the country into the darkness of theocratic rule.
The fierce debate concerning the presidency underscored the symbolic significance of the post in Turkey’s domestic balance of power.
The headscarf that Gül’s wife wears for religious reasons was seen as an assault on Turkey’s sacrosanct principle of secularism.
Indeed, outgoing President Ahmet Necdet Sezer refused to invite the wives of AKP deputies who covered their hair to state dinners and Republic Day receptions.
The president obviously represents the state, but he is not a mere figurehead.
After all, he sits in Ataturk’s chair.
He has wide-ranging powers, including the authority to make senior government appointments. He appoints judges to high courts and members to the Higher Educational Council (YOK).
He selects the presidents of state universities from a list submitted by the YOK. In times of peace, he is the commander-in-chief of the armed forces.
This is why the crisis over the presidential election was actually a crisis of the constitutional order installed by the military when it ruled from 1980-1983.
That constitution – unlike Ataturk’s – was written by and for the military on the assumption that the Cold War would never end, and that the president would always be either a military person or someone close to the military.
But the Cold War is long over, and a lot has since changed in Turkey.
An IMF-supported program in 2001 unleashed rapid economic growth, based on Turkey’s gradual but definitive transformation into a market economy.
At the same time, Turkey moved decisively onto the path of political and administrative reform in order to start EU accession negotiations.
Moreover, Turkey’s economic and social transformation brought forth a new elite.
The AKP came to represent this new elite and its quest for political power.
Many foreign commentators described the presidential and parliamentary elections as a contest between Turkey’s secular past and a putative Islamist future.
However, the contest is more accurately seen as one between an open and an introverted Turkey; between civilian, democratic rule and military tutelage; and between a globalizing and a protectionist economy.
The AKP’s support came from both the winners and losers of globalization, from conservative middle Anatolia and cosmopolitan Istanbul, from the nationalist Black Sea region and the predominantly Kurdish Southeast.
Following the AKP’s parliamentary election victory in July, and now with the election of Gül, many observers predicted military intervention.
Although there is no doubt that the military, as the bastion of the secular establishment, does not like these results, a coup is virtually out of the question.
One reason is that relations between the military and the Islamist movement are more complicated than they appear.
Back in 1997, when the military pushed the then Islamist-led government of Necmettin Erbakan out of power, the Islamist movement fractured.
The younger, more modern, and outward-looking elements broke away from the traditional, anti-western, anti-Semitic older generation.
This year’s crisis led Recep Tayyip Erdoğan, the prime minister, to complete the transformation of the AKP away from doctrinaire Islamism.
Following the AKP’s victory in July, Erdoğan initially sought to avoid antagonizing the military by not renewing Gül’s presidential candidacy.
Yet Gül insisted, and the AKP united behind him.
As a result, Turkey is entering uncharted waters. Gül will be an engaged president.
As Turkey faces many regional challenges, his experience as foreign minister ought to serve him well.
But an engaged and active president may cause tension with the prime minister who, in the Turkish system, is the real chief executive.
Gül’s ascent to the presidency should consolidate the transformation of Turkish politics.
Turkey has integrated its Islamist movement into the political mainstream.
Representatives of an economically dynamic and socially conservative heartland are moving Turkey toward reform.
The republican project of modernization will continue, with a wider mobilization of society.
Thus, Turkey will continue its unprecedented amalgam of Islam, capitalism, and secular liberal democracy.
As unlikely as it may seem in the wake of the crisis over Gül’s candidacy, so far Turkey is managing this challenge well.
Turkey’s War of Nerves
With the political standoff surrounding the selection of a new president intensifying, Turkey is entering a critical period that could have a profound effect on both the country’s internal evolution as a secular democracy and its relations with the West.
The presidential candidacy of the moderate Islamist Abdullah Gul, currently the foreign minister, has been rejected by Turkey’s highest court, and the parliamentary election scheduled for November has been moved up to July in an effort to break the political impasse.
But these steps are unlikely to defuse tensions between Prime Minister Recep Tayyip Erdogan’s government and Turkey’s military, which sees itself as the guardian of the country’s secular state.
On the contrary, these tensions have heightened as a result of changes in the top echelons of the Turkish armed forces, particularly the replacement last August of General Hilmi Ozkok as chief of the Turkish General Staff.
Ozkok was a moderate who maintained a low profile and sought to develop good working relations with Erdogan, By contrast, his successor, General Yasar Buyukanit, is a strong secularist who has been far more outspoken in asserting the military’s views.
In a speech last October to the Military Academies Command in Istanbul, Buyukanit publicly warned that Turkey faced a serious threat from “fundamentalism.”
Many viewed that charge as a direct criticism of Erdogan and the governing Justice and Development Party (AKP).
Tensions reached a boiling point on April 27 when the General Staff issued a statement stressing that “the Turkish armed forces maintain their sound determination to carry out their duties stemming from laws to protect the unchangeable character of the Republic of Turkey.
Their loyalty to this determination is absolute.”
That toughly worded statement was seen as a veiled but unmistakable warning that the military was prepared to intervene if Gul’s election as president resulted in an effort by the Erdogan government to push its Islamic agenda or take measures that threatened the secular nature of the Turkish political order.
The statement was particularly significant because the Turkish armed forces have intervened in the political process four times since 1960 – the last time in l997 when they forced the resignation of the Islamist-oriented government of Prime Minister Necmettin Erbakan in what has come to be known as a “post-modern coup.”
These tensions have been compounded by differences between Buyukanit and Erdogan over Turkey’s struggle against Kurdish separatists led by the Kurdistan Workers’ Party (PKK), which the military regards as a serious threat to Turkey’s territorial integrity.
PKK guerrilla attacks have resulted in more than 35,000 deaths since l984.
Since January 2006, PKK cross-border raids from safe havens in northern Iraq have led to roughly 600 deaths, many of them members of the Turkish security forces.
As Turkish casualties have mounted, the military’s patience has begun to wear thin and Erdogan has come under growing internal pressure to take unilateral military action against the PKK.
At a news conference on April 12, Buyukanit bluntly argued that a military operation in Iraq aimed at eliminating the PKK threat was “necessary” and “would be useful.”
His remarks reflect the military’s growing frustration with the lack of concrete American support, and seemed designed to intensify pressure on Erdogan to authorize unilateral cross-border operations against PKK bases in northern Iraq.
But Turkey’s Kurdish problem cannot be solved by military means.
It can be resolved only by dialogue between the Turkish government and the leaders of the Iraqi Kurds, as well as by economic and political measures designed to improve the living conditions and political rights of Turkey’s Kurdish population.
Erdogan’s government seems to recognize this, and has recently shown an interest in initiating a dialogue with Iraqi Kurdish leaders.
The Turkish military, however, oppose a high-level dialogue with Iraqi Kurds on the grounds that the Democratic Party of Kurdistan (DPK), headed by Massoud Barzani, and the Patriotic Union of Kurdistan, led by Iraqi President Jalal Talabani, support the PKK materially and politically.
Given the key role the military plays in Turkish politics, especially on sensitive national security issues, Erdogan will need the military’s support – or at least its acquiescence – for any initiative to succeed.
Thus, he may be reluctant to proceed with a dialogue with the Iraqi Kurds at a time when tensions with the military are running high over the influence of Islamists in Turkish politics.
Erdogan has moved to defuse the current crisis by declaring that he will seek early elections as well as sweeping constitutional changes that would make the president popularly elected, rather than elected by the parliament.
This would give the president greater legitimacy and independence, while reducing fears that he might be tempted to follow the agenda of a particular party.
At the same time, if Turkey is to become a mature, modern democracy, the military will need to accept a less intrusive role in Turkish politics.
While a number of steps have been taken in this direction during the past several years, the current crisis underscores that Turkey still faces a long road before that goal is fully realized.
Turkey: The New Indispensable Nation
ANKARA – Turkey put its imprint as one of the most influential countries not only on 2010, but on the first decade of the third millennium.
At the start of the new decade, too, Turkey’s geopolitical position, rich historical heritage, cultural depth, well-educated young population, ever-strengthening democracy, growing economy, and constructive foreign policy make it an indispensable country in a world transformed by rapid globalization.
By making use of all of its assets, Turkey is contributing to regional stability and peace and working towards a global order based on justice, equality, and transparency.
As an emerging power, Turkey will continue to realize its own potential and simultaneously contribute to global peace.
The chaotic conditions of the post-Cold War world have made civil wars, occupations, nuclear armament, and human trafficking chronic problems.
While globalization offers new opportunities, it also causes new global problems and deepens the inequalities embedded in the world order.
It is no longer possible to sustain the current world order, which, based as it is on a skewed notion of center-periphery relations, merely produces injustice and inequality.
Turkey seeks to contribute to regional and global peace by facilitating democratic reforms domestically and implementing a principled foreign policy.
As a NATO member, Turkey aims to become a full member of the European Union and establish cordial relations with all of its southern and eastern neighbors.
Turkey’s posture – looking both East and West – is neither paradoxical nor inconsistent.
On the contrary, Turkey’s multidimensional geopolitical position is an asset for the region.
There are few countries that can play such a critical role.
Turkey constitutes a new synthesis because of its ability to link such diverse qualities and backgrounds.
Turkey is thus capable of overcoming the dichotomies of East-West, Europe-Middle East, and North-South.
Indeed, this capacity is essential because we need to leave behind the Manichean disagreements, conflicts, and fears of the Cold War era.
Those who see the world through those old, fearful lenses have difficulty understanding Turkey’s rising profile and dynamism.
But the realities of the twenty-first century necessitate a multi-dimensional and inclusive political perspective.
Acting on these principles, Turkey is following a proactive foreign policy stretching from the Balkans to the Middle East and the Caucasus.
This geography is Turkey’s natural historical and cultural hinterland.
Turkey’s cultural and historical links with the peoples of these regions are deep and conducive to regional peace.
Turkey cannot remain indifferent to this geography, for it stands at the center of it.
History clearly shows that it is impossible to establish and sustain global peace without ensuring peace and stability in the Balkans and the Middle East.
Turkey is following a constructive and inclusive policy for these regions, which are marked by remarkable models of cohabitation, science, arts, culture, and civilization.
Due to our recent efforts, the wounds of the Bosnian war are being healed, facilitating peace and stability among Balkan peoples.
Turkey’s efforts are also helping to prevent wars in the Middle East, and our intense efforts have helped keep a diplomatic track open on the Iranian nuclear issue.
Moreover, we are helping to facilitate political stability in Iraq and helping the NATO mission in Afghanistan.
And, of paramount importance, Turkey is making enormous efforts to help establish an independent and sustainable Palestinian state – efforts that are appreciated by Turkey’s Western and Eastern friends alike.
Today, Turkey is following a policy that represents a sense of justice in the Middle East, and is working toward the removal of artificial borders and walls among the region’s peoples.
We desire to live in a region where the dignity of every person is respected.
That is why we have objected to Israel’s aggression in and blockade of Gaza, and will continue to do so.
We know that it is not possible to attain global peace unless we establish sustainable peace in the Middle East, which requires resolving the Palestinian question.
Therefore, we urge Israel and all other countries involved to follow constructive and peaceful policies.
Motivated by these principles, Spanish Prime Minister José Luis Rodríguez Zapatero and I showed through our “Alliance of Civilizations Initiative” in 2004 that cultural, historic, and religious differences are no reason for conflict.
The basis for our approach to humanity is the following principle of the famous Turkish poet Yunus Emre: “We love and respect the created because of the Creator.”
As a result, we stand firmly opposed to discrimination against any society, religion, sect, culture, or country.
I consider anti-Semitism, Islamophobia, and prejudice against Christianity crimes against humanity, whose common values and ethical rules oblige us to confront and reject all forms of discrimination.
Besides its cultural, historic, and diplomatic values, Turkey’s vibrant economy has become a source of stability and welfare.
When my party took office in 2002, the Turkish economy totaled around $250 billion.
Today, Turkey’s annual GDP has reached $800 billion, making it Europe’s sixth largest economy and the 17th largest in the world.
It has also been one of the least impacted by the global economic crisis, with growing foreign trade, a strong banking system, and diverse and prospering small and medium-size enterprises.
Thus, the Turkish economy returned to its pre-crisis levels in 2010.
All of these qualities have transformed Turkey into an attractive place for business, media, artists, diplomats, students, and non-governmental organizations from around the world. Turkey’s ever-increasing soft power is becoming one of its most significant traits, which we will continue to use to enhance regional and global peace.
The impact of globalization has brought about a rebalancing of power, but the demand for justice, transparency, and legitimacy remains constant.
The global problems of our times necessitate cooperation, political will, and sacrifice.
That is why we are following a proactive policy in multilateral institutions to facilitate an equitable sharing of our world’s resources.
Turkey will continue to work toward a just and equitable global order in 2011 and beyond.
This is a responsibility emanating from our history, geography, and the universal values that we hold.
Turkey to the EU’s Rescue
LAUSANNE – The Copenhagen Climate Change Conference was an unmitigated disaster for the European Union.
Instead of the EU claiming center stage, as its leaders assumed it would, the key actors were the United States, Brazil, South Africa, India, and China.
Indeed, when the accord was reached, the EU was not even in the room.
Copenhagen exposed the demise of Europe not only as a global power, but even as a global arbiter.
So what is the EU left with?
As its “hard power” ebbs, its “soft power,” as illustrated by the Copenhagen summit, seems to be very weak.
This in part arises from a failure to provide the EU with political power.
The Lisbon Treaty was a compromise constitutional arrangement that would nevertheless give the EU greater weight and authority precisely for occasions such as the Copenhagen summit, when global issues are addressed.
Though multiple European actors on the world stage were more than justified in the old days, this is no longer the case.
With China, India, the US, Indonesia, Brazil, and other major global players speaking with one voice, Europe could no longer afford a cacophony of voices.
But in Copenhagen, the structure established by the Lisbon Treaty failed.
Beyond the failure in Copenhagen, the EU has several other problems.
It tends to be perceived globally as supercilious, petulant, and prim.
Its know-it-all attitude grates almost everywhere.
With only 7% of the world’s population (and rapidly dwindling) and composed mainly of post-industrial low-growth economies, the EU is increasingly seen as marginal.
Europeans do not realize how little interest in “European affairs” there is in Seoul, Sydney, São Paolo, or San Francisco.
There is a growing general global consensus that Europe is a pompous old has-been.
There are many causes for the decline of the EU’s global position and prestige, one of which has been the way in which the Union has evolved as an aloof and bureaucratic citadel.
This is unfortunate, because, despite its problems, the EU does have much to offer.
But there seems little prospect for a European revival.
The EU will continue to decline and become increasingly marginalized as it fails to find the spirit or the structure to adjust to the profound transformations and challenges of the twenty-first century.
There is one thing, however, that could revive the EU, give it much enhanced global respectability, and make it an “interesting” place, as well as ensure a return to the international limelight: Turkey’s admission as a full member.
The debate about whether Turkey is European is absurd.
It is impossible to airbrush Turkey out of European history.
Apart from being an integral part of Europe, membership for Turkey, with its young and dynamic population, would provide a great fillip for Europe’s aging demographic profile.
In a highly complex and diverse world, the EU stands out for its homogeneity.
While the EU flatters itself on diversity, it is in fact one of the least diverse regions of the world.
There is more ethnic diversity in, say, Malaysia than in the entire EU.
ASEAN as a whole, with a population of 580 million, is not significantly bigger than the EU (with 500 million), yet it encompasses an infinitely greater degree of ethnic, linguistic, cultural, and religious diversity.
With Turkey as a member, the EU would gain legitimacy as a more “normal” world region.
By admitting Turkey, with the world’s fifth-largest Muslim population (after Indonesia, Pakistan, Bangladesh, and India), the EU would be in a position to establish close ties with the world’s 1.8 billion Muslims, and could become a credible voice on reform within the Islamic world.
Turkish membership in the Union would also greatly ease the assimilation of the EU’s own Muslim minorities.
EU lethargy and growing irrelevance in global public affairs owes much to Eurocentric political atavism.
One potential benefit of the Copenhagen debacle could be that it forces the Union to wake up to the new world of the twenty-first century.
An EU with Turkey as a member would be far better situated to meet today’s challenges than an EU without Turkey.
But, unfortunately, Turkey, like much of the rest of the world, is rather turned off by the EU.
Indeed, now it is the Union that will need to seduce the Turkish people, rather than the other way around.
That seduction should begin this year, with an agenda that sets the process and timeframe for accession, to be followed by an EU-Turkey Treaty that confirms the country’s accession by 2020.
Turkmenistan’s Tentative Opening
ASHGABAT – Turkmenistan, a country rich in natural gas and strategically located on the borders of Iran and Afghanistan, may be on the brink of transformation.
By reforming its educational system and giving its citizens access to global sources of information, the country could emerge as a leader of change in post-Soviet Central Asia, setting an example of openness for other closed societies, including North Korea.
Turkmenistan’s president, Gurbanguly Berdymukhamedov, has repeatedly and publicly announced his reformist intentions.
The world needs to welcome this possibility and back his efforts.
For 15 years, Turkmenistan was held hostage to the personality cult of former leader Saparmurat Niyazov, who styled himself Turkmenbashi (“father of the Turkmen”).
Niyazov destroyed the country’s health-care system and neglected its endemic poverty, while spending billions to turn its capital, Ashgabat, into a Las Vegas-style wonder of white marble and gold.
Niyazov forced students, from grammar school to the post-graduate level, to make his idiosyncratic book, the Ruhnama , the primary focus of their studies.
He also isolated Turkmenistan from the outside world, forbidding access to the Internet and discouraging international travel.
Since Niyazov’s death in December 2006, Berdymukhamedov has expressed his desire for reform, especially in the areas of health care, education, and information technology.
Berdymukhamedov is also courting private foreign investment.
Progress is slow.
All students must still spend one or two class periods per week on the Ruhnama , and, although many classrooms in Ashgabat are now equipped with the latest computers, Internet access remains available only to a few government officials and foreign guests.
Yet change is seeping in.
Last month the Ministry of Education invited a delegation from Columbia University’s Harriman Institute to visit the country to discuss educational practices in the United States and exchange views about educational reform.
The two sides signed a Memorandum of Understanding to hold a series of joint conferences and faculty and student exchanges over the next two years.
In the past, the US has insisted on trying to impose its own models of development and democratization on foreign countries.
But events in Iraq have demonstrated that this approach often backfires.
Now Berdymukhamedov’s small opening provides an opportunity to build a different kind of reform-minded relationship not only with the US, but also with the entire West, particularly the European Union.
Educational reform could be the first step in an evolutionary process of significant change.
Western analysts have tended either to dismiss Turkmenistan as a human rights pariah, or to approach the country simply as a source of natural gas in the ongoing pipeline competition involving Western Europe and Russia.
Both human rights and natural gas should remain on the international agenda.
But, with this exchange of visits, a wedge has been opened for dialogue on more neutral ground.
The opportunity to bolster Berdymukhamedov’s reform efforts, however halting they may be, should be seized.
Both the timing and the nuance of approaches to Turkmenistan will be crucial: a new natural gas pricing deal between Turkmenistan and Russia will likely bring windfall profits to Ashgabat in the near future, and this extra cash could make an authoritarian backslide tempting.
Western diplomats should encourage Turkmenistan’s government to follow through on its educational exchange plans, and urge Berdymukhamedov to enable wider Internet access for his population.
If more information circulates freely in the country, and more individuals experience other ways of life by traveling abroad, authoritarianism’s grip will loosen.
But change in Turkmenistan will probably be slow.
There are interest groups who benefit from the current system and the opportunities for corruption that it provides.
Even the most well intentioned of today’s government officials will undoubtedly fear the uncertainties of what a more educated and informed population might demand of them.
Nevertheless, by publicly lauding educational reform and informational exchange, Berdymukhamedov has provided a means for the outside world to help him open his country.
The world should use that door before it closes again.
Turning North Korea Around
SEOUL – Negotiations over the denuclearization of the Korean peninsula look set to resume.
Sadly, they are unlikely to end soon.
Talk of a “grand bargain” remains just that – talk.
Trust between North Korea and the United States, South Korea, and Japan is almost non-existent.
While all leaders – including North Korea’s Kim Jong Il – remain committed to denuclearization in public, none appears ready to risk much in terms of domestic politics to achieve that end.
So the best the world can currently hope for is revived dialogue, an agreement to freeze the North’s Yongbyon nuclear plant, and perhaps a moratorium on further missile and nuclear tests.
To speed the process, a new long-term strategy aimed at the underlying factors at work in North Korea – and in relations with its rulers – is needed.
Simply put, the US and other powers need to pursue constructive economic engagement with North Korea to help the regime achieve “strength and prosperity” through economic transition and integration with the global economy.
Constructive economic engagement will benefit ordinary North Koreans, who have suffered as much as any people on Earth since the Cold War’s end.
The root cause of North Korea’s economic difficulties is its isolation from the forces of globalization, from which East Asia in particular has profited.
In the late 1990’s, as China and Vietnam were posting rapid GDP growth, North Korea was ravaged by one of the worst famines in modern history.
Today, North Korea is a de-industrializing, near-subsistence economy.
The best hope for most North Koreans is the subterranean market economy that fills the gaps in the state’s planned economy and public distribution system.
Trade with China is keeping those market forces supplied with goods and business opportunities across the border.
Rather than pressure China to shut down the cross-border flow of fuel and food in order to “teach Pyongyang a lesson,” the US and its allies must find ways to support North Korea’s economic integration with the region.
More effective than freezing accounts and barring travel by officials with ties to the missile and nuclear programs would be to work with North Korea’s younger technocrats, banking and financial officials, and economic advisers to improve their expertise in managing North Korea’s economic transition.
Of course, economic engagement will not solve the nuclear conundrum in the short term.
Nothing will. The Korean Peninsula will most likely achieve “complete, verifiable, and irreversible denuclearization” only when North Korea is already moving in the direction of economic growth and integration.
North Korea’s regime will require demonstrable evidence that a secure, prosperous, non-nuclear development model is available to it before it abandons its nuclear program.
So, as nuclear talks proceed, the US and its partners should help North Korea lay the foundations for a new political economy based on international commerce, investment, and cooperation, as an alternative to the current model predicated on a hostile security environment.
We should think of North Korea’s economic transition process as a prerequisite for full denuclearization, rather than simply holding out the promise of a big assistance package as a quid pro quo .
Of course, some of the big-ticket items in an economic engagement policy will remain contingent on progress in security arrangements and peninsular denuclearization.
But North Korea and the international community can already take some substantive steps.
These include opening diplomatic and official channels in order to improve mutual understanding and the general climate for exchanges; promoting US-North Korea economic dialogues and workshops; encouraging US universities, research institutes, and non-governmental organizations with expertise in economic transition and development to initiate and develop contacts with North Korean counterparts; and permitting the International Monetary Fund, the World Bank, and the Asian Development Bank to increase North Korean participation, with the ultimate goal of membership.
During the recent visit of a high-level North Korean delegation to the US, there were encouraging signals that its rulers would welcome increased economic contacts, including with international financial institutions.
Moreover, North Korea is actively courting foreign investment.
The United Nations Development Program recently reopened its office in Pyongyang, another positive sign of the regime’s readiness to work toward common development goals.
Of course, new sources of growth in North Korea could threaten vested interests, leading to institutional rivalries, factional tension, or a conservative backlash.
And the regime will not want the process of economic opening to get too far ahead of security agreements and political normalization.
After all, the main lesson that North Korean leaders take from China’s success is that security (Mao Zedong’s rapprochement with the US) precedes economic transition (Deng Xiaoping’s reform and opening policy).
Constructive economic engagement will be a tough sell outside North Korea.
In the US, North Korea is seen mostly through the prism of nuclear non-proliferation, and the new administration is wary of being tricked into giving its rulers anything without getting fissile material in return.
In South Korea, President Lee Myung-bak’s political base wants to roll back, not reinvigorate, the Sunshine Policy, and there is a widespread (though by no means universal) weariness with engagement.
In Japan, fear of North Korea’s nuclear threat and anger over the abduction of Japanese citizens generates powerful political pressure against engagement.
China is the one place that quietly implements a constructive economic engagement approach.
Instead of pressing Beijing to cut off North Korea, the US and its allies should further develop their own efforts to draw North Korea out of its insularity.
Turning Point at Chernobyl
The nuclear meltdown at Chernobyl 20 years ago this month, even more than my launch of perestroika, was perhaps the real cause of the collapse of the Soviet Union five years later.
Indeed, the Chernobyl catastrophe was an historic turning point: there was the era before the disaster, and there is the very different era that has followed.
The very morning of the explosion at the Chernobyl nuclear station on April 26, 1986, the Politburo met to discuss the situation, and then organized a government commission to deal with the consequences.
The commission was to control the situation, and to ensure that serious measures were taken, particularly in regard to people’s health in the disaster zone.
Moreover, the Academy of Science established a group of leading scientists, who were immediately dispatched to the Chernobyl region.
The Politburo did not immediately have appropriate and complete information that would have reflected the situation after the explosion.
Nevertheless, it was the general consensus of the Politburo that we should openly deliver the information upon receiving it.
This would be in the spirit of the Glasnost policy that was by then already established in the Soviet Union.
Thus, claims that the Politburo engaged in concealment of information about the disaster is far from the truth.
One reason I believe that there was no deliberate deception is that, when the governmental commission visited the scene right after the disaster and stayed overnight in Polesie, near Chernobyl, its members all had dinner with regular food and water, and they moved about without respirators, like everybody else who worked there.
If the local administration or the scientists knew the real impact of the disaster, they would not have risked doing this.
In fact, nobody knew the truth, and that is why all our attempts to receive full information about the extent of the catastrophe were in vain.
We initially believed that the main impact of the explosion would be in Ukraine, but Belarus, to the northwest, was hit even worse, and then Poland and Sweden suffered the consequences.
Of course, the world first learned of the Chernobyl disaster from Swedish scientists, creating the impression that we were hiding something.
But in truth we had nothing to hide, as we simply had no information for a day and a half.
Only a few days later, we learned that what happened was not a simple accident, but a genuine nuclear catastrophe – an explosion of a Chernobyl’s fourth reactor.
Although the first report on Chernobyl appeared in Pravda on April 28, the situation was far from clear.
For example, when the reactor blew up, the fire was immediately put out with water, which only worsened the situation as nuclear particles began spreading through the atmosphere.
Meanwhile we were still able to take measures in helping people within the disaster zone; they were evacuated, and more than 200 medical organizations were involved in testing the population for radiation poisoning.
There was a serious danger that the contents of the nuclear reactor would seep into the soil, and then leak into the Dnepr river, thus endangering the population of Kiev and other cities along the riverbanks.
Therefore, we started the job of protecting the river banks, initiating a total deactivation of the Chernobyl plant.
The resources of a huge country were mobilized to control the devastation, including work to prepare the sarcophagus that would encase the fourth reactor.
The Chernobyl disaster, more than anything else, opened the possibility of much greater freedom of expression, to the point that the system as we knew it could no longer continue.
It made absolutely clear how important it was to continue the policy of glasnost, and I must say that I started to think about time in terms of pre-Chernobyl and post-Chernobyl.
The price of the Chernobyl catastrophe was overwhelming, not only in human terms, but also economically.
Even today, the legacy of Chernobyl affects the economies of Russia, Ukraine, and Belarus.
Some even suggest that the economic price for the USSR was so high that it stopped the arms race, as I could not keep building arms while paying to clean up Chernobyl.
This is wrong.
My declaration of January 15, 1986, is well known around the world.
I addressed arms reduction, including nuclear arms, and I proposed that by the year 2000 no country should have atomic weapons.
I personally felt a moral responsibility to end the arms race.
But Chernobyl opened my eyes like nothing else: it showed the horrible consequences of nuclear power, even when it is used for non-military purposes.
One could now imagine much more clearly what might happen if a nuclear bomb exploded.
According to scientific experts, one SS-18 rocket could contain a hundred Chernobyls.
Unfortunately, the problem of nuclear arms is still very serious today.
Countries that have them – the members of the so-called “nuclear club” – are in no hurry to get rid of them.
On the contrary, they continue to refine their arsenals, while countries without nuclear weapons want them, believing that the nuclear club’s monopoly is a threat to the world peace.
The twentieth anniversary of the Chernobyl catastrophe reminds us that we should not forget the horrible lesson taught to the world in 1986.
We should do everything in our power to make all nuclear facilities safe and secure.
We should also start seriously working on the production of the alternative sources of energy.
The fact that world leaders now increasingly talk about this imperative suggests that the lesson of Chernobyl is finally being understood.
Turning the Corner in Eastern Europe
LONDON – There are various kinds of facts, the Russian satirist Mikhail Saltykov- Shchedrin once quipped: “There are convenient facts and inconvenient ones; and there are some that aren’t even facts.”
As we enter 2010, a convenient fact is that the world economy has stopped its dramatic decline and started to recover.
An inconvenient fact is that the recovery remains fragile.
And a non-fact is that the next 12 months will be smooth sailing.
On the contrary, serious challenges remain, and they must be addressed with urgency.
The region covered by the European Bank for Reconstruction and Development – Central, Eastern and South-Eastern Europe, Russia, the Caucasus and Central Asia – has been hit particularly hard by the financial and economic crisis that began in 2008.
Massive and determined state intervention (Russia and Kazakhstan), or unprecedented coordinated support by international financial institutions (Ukraine, Hungary, and Latvia), has been necessary to prevent even more dramatic falls.
As the real economy adjusts to changed circumstances and much weaker domestic and global demand, we at the EBRD expect an increase in non-performing loans in our region.
In addition, companies will be forced to restructure in order to cut costs and increase competitiveness.
This will lead to higher unemployment, with inevitable social strains and further stress on already heavily burdened state coffers.
As credit markets remain squeezed, retaining liquidity, and rolling over and refinancing debt, will also pose serious challenges.
Credit growth has already fallen close to zero in many countries and is contracting in many others as debts levels are reduced for households and companies.
In addition, some governments in the region are under the double pressure of having to reduce their budget deficits and pay back debt; precious little will be left for expenditure that could stimulate economic activity, such as investments in infrastructure or energy efficiency.
All this will put further strain on the financial sector, which to a large degree in Central and Eastern Europe is owned by major Western banking groups. Thanks to a coordinated effort by all major players under the Vienna Initiative, these banks’ large-scale withdrawal – with potentially far-reaching consequences for the region – was averted in 2009.
But the region’s financial sector remains under stress, and a protracted adjustment process still lies ahead in response to rising levels of non-performing loans and banks’ recapitalization needs.
Another unresolved issue is the foreign-currency burden that many financial institutions still carry.
Many local currencies in the EBRD region (such as the Hungarian forint, the Ukrainian hryvnia, and the Russian ruble) have suffered severe depreciation since in the last quarter of 2008.
That is a boon for exporters, but it is a bane for banks in countries that binged on foreign-currency loans before the global crisis hit.
In Hungary, for example, foreign-currency lending amounted to 34% of the country’s GDP at the end of June 2008.
With such vulnerability to adverse currency movements, Hungary was forced four months later to sign an IMF-led rescue package worth $25 billion as the financial crisis reached Eastern Europe.
One answer to this challenge is to strengthen domestic capital markets.
This will be one of the EBRD’s strategic priorities in 2010.
We intend to take a two-pronged approach: significantly increase our local-currency lending and explore new avenues within the framework of the Vienna Initiative to tackle the crisis and prevent its recurrence.
Developing local-currency capital markets is a long-term endeavor that requires the commitment and resolve of a larger group of players.
Drawing on our experience with the Vienna Initiative, we have seen that there are crucial benefits to be gained from coordinating our efforts and involving the private sector as much as possible.
One element that central banks and regulators frequently mention is a new regulatory regime: the crisis revealed that institutional and regulatory frameworks in the EBRD region need to be reformed to introduce macro-prudential standards more systematically and effectively.
These could include higher capital or provisioning requirements as buffers for more difficult times, or the stipulation of liquidity standards and special requirements for systemically important banks in order to avoid a recurrence of the “too big to fail” dilemma that many countries – not only in the EBRD region – have been facing.
It is, however, beyond doubt that in a financially integrated Europe, attempts at new and better regulation will be effective only if such reforms are not limited to the national level.
International solutions are critical to prevent cross-border “regulatory arbitrage” – for example, the circumvention of host-country regulation by borrowing directly from the parent bank.
International financial institutions such as the EBRD and supranational bodies such as the European Union and the G-20 will play a key role in tackling such challenges in coming years.
Within the framework of enhanced and improved integration and cooperation, we will have to find solutions to put recovery on a safer and more sustainable footing.
As Saltykov- Shchedrin would say: convenient or not, that is a fact.
Turning the Page in Mexico
Three months from now, when Mexico’s new president Felipe Calderón takes office, many will consider it a dubious honor.
These are perhaps the only two certainties in Mexico’s politics right now.
With oil prices higher than ever, its country-risk premiums lower than ever, remittances from abroad, tourism revenues, and foreign investment hitting all time highs, and annual GDP growth estimated at 4.2% for this year, Mexicans – in many ways – have never had it so good.
Indeed, after ten years of uninterrupted macroeconomic stability – something Mexico had not experienced since the 1960’s – the middle class has expanded dramatically, and reasonably priced bank credit is now available to millions who had been excluded in the past.
Yet, despite these robust changes, poverty remains widespread, inequality abysmal, and social resentment is on the rise.
This is why Calderón’s opponent in July’s presidential election, the populist Andrés Manuel López Obrador, obtained such a large percentage of the vote compared to the Mexican left’s previous high-water mark in the election of 2000.
But it was not enough to win an election that López Obrador and his backers thought was in the bag.
The extremely tight race – Calderón won by 0.5% of the vote – and the profound disappointment suffered by López Obrador and his supporters led them to contest the ruling of Mexico’s electoral authorities, and to refuse to acknowledge Calderón’s victory.
Instead, López Obrador, a former Mexico City mayor, and his supporters demanded a vote-by-vote recount, which is not mandated – though it is not proscribed – by the country’s electoral laws.
The Electoral Court, however, decided otherwise.
This is where Mexico stands today: a mess by any definition, with no obvious solution in sight.
In the long run, the answer undoubtedly lies in the transformation of the Mexican left, and partly also of the Mexican right.
For years, both were de facto subsumed within the Institutional Revolutionary Party (PRI), which ruled Mexico for seven decades.
That epoch came to an end in 2000, and will not return.
Today, right and left, as well as the PRI itself, are all separate entities, and have a great deal of reconstruction to do.
The right-of-center Party of National Action (PAN), the grouping of current President Vicente Fox and Calderón, needs to acquire a sincere and profound social conscience.
It must transform itself into something like the Social Christian or Christian Democratic parties that exist in Costa Rica, Chile, Venezuela, and Peru.
Otherwise, it will continue to be seen by Mexico’s impoverished masses as the party of the rich – perhaps unfairly, but not entirely unjustly.
PAN’s metamorphosis is underway, but there is still much work to be done.
Much more importantly, however – and perhaps to the surprise of many benevolent international observers – the Mexican left is nowhere near transforming itself into a modern, reformist, social-democratic party.
Not only is it not New Labor; it is not even like the French, Spanish, or Chilean Socialist Parties, or Brazil’s Workers’ Party.
It continues to be a movement with a revolutionary faction – not a majority, but certainly a large minority – bent on insurrection, socialism, and “anti-imperialist” alignment with Cuba and Venezuelan President Hugo Chávez.
Mexico’s left refuses truly to embrace market economics, representative democracy, and the rule of law.
Obviously, many of its members and leaders do subscribe to these tenets, and disapprove in private of López Obrador’s rabble-rousing antics.
But, as long they remain relatively powerless, Mexico will remain unbalanced, deprived of the modern left that it needs to combat poverty and inequality, and hostage to those who still believe in revolution and the assault on the Winter Palace.
Without these twin transformations of its right and left, Mexico can only keep running in place, while so many others speed forward.
But change will not happen overnight, so Mexico needs short-term solutions to its travails.
The most urgent, feasible, and relevant steps involve electoral and legal reforms aimed at avoiding a repeat of the current protests over the presidential vote.
These include establishing a second-round run-off in presidential elections, so that Mexico’s next president has a mandate supported by more than 50% of the voters.
But they also entail the re-election of representatives and senators, recourse to referendums for constitutional amendments, and independent candidacies.
Perhaps most importantly, Mexico must devise a French-style semi-presidential system whereby a designated Prime Minister is responsible for building majorities in Congress, and must be ratified by the latter.
Eliminating the purchase of air time on radio and television during campaigns, with the consequent reduction in their cost, would complement these changes.
None of these indispensable and long-postponed reforms will convince López Obrador’s followers that the end of poverty and inequality in Mexico is around the corner.
But no significant improvement on these fronts can occur without thoroughly refashioning the country’s decision-making process.
Fox and his team thought that the mechanisms that worked during the authoritarian period could simply be transferred to the democratic era and function smoothly.
In fact, none of the major economic and social reforms Mexico desperately needs in order to grow more rapidly, distribute wealth more evenly, and combat poverty more effectively can be passed if the institutional scaffolding is not rebuilt.
That is what Calderón can and must do in order to render moot today’s debates about the fairness of the election that brought him to power.
It is time for Mexico to turn the page, but it must turn the right page.
Tweets of Freedom
NEW YORK – Google has been widely celebrated for its loud refusal to continue censoring its search results in China.
It is still unclear whether Google will continue to operate in China, but in any event we are not about to see much change in China’s Internet policy.
More likely, all this “foreign meddling” will merely cause the Chinese government to dig in its heels.
Even if Google does ultimately leave China, the game is not over.
Western companies can promote Internet freedom from the outside, by providing useful technology as well as the keys to access it.
Call this “Twitter diplomacy.”
Twitter is largely blocked by China’s “great firewall” (GFW), which prevents Chinese people from accessing certain sites.
Yet Twitter has an almost religious following among tech-savvy Chinese, whose determination to use the service outstrips authorities’ efforts to block access to it.
These “netizens” surmount the firewall by way of proxy servers or virtual private networks (VPNs) that allow them to browse the Web as if they were outside of China.
Earlier this month, Chinese twitterati helped get the GFW onto the list of Twitter’s top ten “trending topics” (or most tweeted terms) – an impressive feat given that Twitter is supposed to be inaccessible in China.
Twitter, which lets people send bite-size messages to large groups, allows Chinese to quickly disseminate urgent news or even uncomfortable facts.
“Twitter can create a faster information flow than any official agency,” says Michael Anti, a journalist in Beijing who has long been at the forefront of the Chinese Internet movement. “That means people would get information faster than the government.
That’s a real crisis for Communists.”
Twitter also helps protect individual citizens.
Blogger Peter Guo claims that Twitter got him out of jail.
He says that he was arrested after spreading word about a crime that allegedly involved local officials.
He tweeted an SOS via his mobile phone after he was arrested last July, and his case quickly attracted both domestic and international attention, which helped secure his release a little over two weeks later.
So just imagine if Twitter were available to the larger Chinese population.
The problem is that many Chinese still lack the simple tools that would enable them to get past the GFW.
When I asked Guo how the outside world could make Twitter more accessible in China, he replied that we could help by “providing affordable VPN service.”
Foreign companies, he added, could make available more secure browsers that would help “Chinese people to circumvent the GFW.”
Government can also play a role in empowering Chinese netizens.
Jonathan Zittrain, Co-Director of Harvard University’s Berkman Center for Internet and Society, has suggested that the United States, for example, could start with some basic funding for the kind of “science and technology innovation that gave us the Internet to begin with.”
This could include potential “game changers” in China such as ad hoc mesh networking, which allows users to communicate with one another by hopping from one device to the next without an Internet service provider in the middle.
But, given the political sensitivities of foreign pressure on China, it is unclear how far Western governments will be able to go.
That is where companies like Twitter come in.
Even if Twitter’s co-founders did not necessarily develop it to be a tool of democratization, that is precisely what it has become.
In April 2009, young people in Moldova used Twitter to organize protests against their government.
Two months later, Twitter famously helped Iranians assemble and share information during their election protests.
Now, we are beginning to see a similar phenomenon in China.
In November, citizen protests against the construction of an incinerator in Guangzhou became a widely Tweeted event.
Referring to the role that Twitter played in protests in Iran and Moldova, Twitter co-founder Jack Dorsey told me, “These are all events and movements that people chose to make happen, and Twitter was a tool that happened to be there to make it more easy.”
Twitter may now be taking more aggressive steps to promote Internet freedom abroad.
Co-founder and CEO Evan Williams recently suggested that software developers were working on technology to evade government barriers, though he did not give specific details.
Google’s adamant stance on Chinese censorship may have been well intentioned.
The problem is that the standoff has now taken on the tone of a state-to-state confrontation.
China, apparently still reeling from a “century of humiliation” at the hands of outsiders, will not be pushed around by America.
This view is not limited to the Chinese government.
Right now, many netizens are applauding Google’s move.
But if they begin to perceive Google as a pawn of the US government, this sentiment could turn on a dime.
Ultimately the Chinese Internet cat-and-mouse game will be won with innovation, not political pressure.
The world should continue to flood the Chinese market, and those of other countries that restrict freedom of expression, with cutting-edge technology.
Of course, censors will often be just one step behind, filtering information and shutting down sites.
But Chinese netizens are remarkably adept at using the limited tools available to them. In doing so, they are transforming their country in a slow but irreversible way.
Twenty-First Century Populism
In Venezuela, Bolivia, and Ecuador a new left is said to being born, which their presidents call “twenty-first century socialism.”
But, despite the supposed novelty of their vision, their actions seem only to be replicating the self-destructive policies that have brought such agony to Cuba.
Unlike the old leftist movements, which relied on armed struggle, Venezuelan President Hugo Chávez, Bolivian President Evo Morales, and Ecuadorian President Rafael Correa came to power through the ballot box.
Once in power, they have appealed to the masses and called for constitutional reforms to enlarge their power.
In Venezuela, Chávez has strengthened his political position through a Constituent Assembly that changed the constitution.
Bolivia’s Morales also has managed to impose a similar Assembly, though with uncertain results, and Correa is wielding the threat of constitutional change against “the traditional parties, the native oligarchies, and the empire” – the common enemies of all three presidents.
The Constituent Assembly approach has, so far, proven to be very effective in helping these new caudillos to consolidate their power.
Because it is a process that calls for total reform, it helps them avoid debates about specific changes.
Instead, social change is mingled with institutional reform in ways that may seem incomprehensible to voters.
For example, Chávez’s and Morales’ Constituent Assemblies are attractive not only to all of Venezuela’s or Bolivia’s radical groups who are seeking to re-found their Republics and reinvent history, but also to those who want to create a forum for democratic deliberation.
As they deliberate, however, more and more power is concentrated in the new caudillos.
The experiences of Venezuela and Bolivia suggest that the process only frustrates both radical and democratic forces.
The radicals soon discover that changing norms is not enough to change reality, while the democrats find that heightened social mobilization makes dialogue impossible.
Moreover, most find that when the Assembly gets to deal with specific proposals, which is rare, the proposals are disagreeable.
In the end, the establishment of a Constituent Assembly merely weakens all other institutions.
Since its focus is the “law of laws,” the Assembly implicitly questions the status of all public norms and bodies, thus eroding the political system.
When this happens, the presidency is strengthened, enabling the incumbent’s transformation into a caudillo.
As is always the case, those who promote the concentration of power find justification for their acts in the revolutionary need to change structures, liberate the nation, and overcome poverty.
But when this concentrated power actually begins to take action, all the old confusions of the left come back to life, as is now the case in Venezuela and Bolivia.
The most flagrant confusion is that which conflates state and nation.
As a result, transferring resources to the state is seen as putting them into the hands of the nation.
Misled by this confusion, Venezuelans and Bolivians enthusiastically support the rebirth of state companies, without realizing that this only wastes resources that could have been spent better and more efficiently elsewhere, since few state companies ever succeed in ridding themselves of bureaucratic inefficiency or corruption.
Another confusion, and perhaps a more dangerous one, similarly conflates “the people” with the so-called “masses” going out into the streets.
The logic of this type of mobilization is that resources are directed to the group that shouts the loudest and is able to trigger social conflict.
This means that attention is diverted from the weakest and those most in need to those who already are well enough off to be organized.
Indeed, often it is the state itself, now controlled by a powerful president, that mobilizes chosen groups, aided by the concentration of enormous resources in the government’s hands which has arisen due to greater state intervention in the economy.
The fight to control oil and gas revenues is paramount in this regard.
More than 90% of Venezuela’s export earnings come from the oil and gas sectors, which provide about half of the government’s income.
In Ecuador and Bolivia, income from oil and gas is more modest, but in both cases hydrocarbon exports account for the largest share of total exports, and provide about one-third of government revenue.
This concentration of revenues radically changes the relationship between society and the state.
In all three countries, the government’s financial situation does not depend on the economic fate of companies or workers. On the contrary, companies and workers depend on public services and the subsidies that the government provides with revenues derived from oil and gas.
When social organizations are limited and weak, as in Venezuela, this concentration of resources means that concentrated political power can perpetuate itself by reducing huge parts of the economy to dependent clients.
When social organizations are strong, conflict arises to control public resources.
In both cases, independent institutions begin to be perceived as enemies, which the caudillos and their client corporate groups seek to destroy.
Latin American populism has always nurtured itself on this dynamic.
Looking beyond the rhetoric of the new left in Venezuela, Bolivia, and Ecuador, it is already clear that today’s “twenty-first century socialism” is no different from its twentieth-century antecedents.
The main lesson seems to be that natural abundance may support democracy and development only when they are not in the hands of bureaucrats or caudillos.
Twenty-Five Years of HIV/AIDS
It is now a quarter-century since the acquired immune deficiency syndrome (AIDS) was recognized.
The knowledge that has been gained since then has been breathtaking, and the pace at which basic research has been translated into lifesaving treatments is unprecedented.
The discovery of the human immunodeficiency virus (HIV) as the cause of AIDS was followed by elucidation of its pathogenesis, natural history, and epidemiology, the creation of a diagnostic blood test, and the development of antiretroviral drugs.
In 1996, the approval of the first drug of a class called protease inhibitors led to the adoption of a multi-drug, anti-HIV regimen known as highly active antiretroviral therapy, or HAART.
This advance dramatically transformed the quality of life and extended the life expectancy of HIV-infected individuals.
Moreover, antiretroviral drugs given to pregnant HIV-infected women and newborns have proven enormously successful in preventing mother-to-child transmission of HIV.
As a result, since these combinations of drugs were introduced, at least three million years of life have been saved in the United States alone.
We now have more than two dozen approved anti-HIV drugs and drug combinations, and a robust pipeline of next-generation drugs in various stages of development and clinical testing.
But nowadays our task is to apply these scientific and technological advances to delivering treatment and prevention strategies to people throughout the world, particularly those in resource-poor nations.
Despite the successes in treating HIV/AIDS in the United States and other developed countries, it is clear that efforts to combat the pandemic must be scaled up in Africa, Asia, and other parts of the world where HIV/AIDS exacts its greatest toll.
Indeed, an estimated 40 million people throughout the world are infected with HIV; nearly three million died of AIDS in 2006 alone.
Programs such as the President’s Emergency Plan for AIDS Relief, the Global Fund to Fight AIDS, Tuberculosis, and Malaria, and philanthropies like the Bill and Melinda Gates Foundation and the Clinton Foundation have helped make drugs available to treat 2 million people infected with HIV in lower- and middle-income countries.
But fewer than 25% of the people in these countries who need antiretroviral drugs are receiving them.
With 4.3 million new HIV infections each year throughout the world, we face an untenable situation, as new HIV infections far outstrip our ability to treat all those infected.
So improvements in our ability to prevent HIV infections from occurring are desperately needed.
A wide array of prevention strategies, including behavioral modification, distribution of condoms, and the provision of clean needles and syringes to intravenous drug users, has emerged.
Recent studies suggest that adult male circumcision can be a promising prevention strategy, if properly and hygienically performed and accompanied by appropriate counseling and post-surgical care.
Likewise, the ongoing development of topical microbicides offers the hope of empowering women to protect themselves from HIV infection when using condoms or refusing sexual intercourse is not feasible.
But the greatest scientific and public health goal in HIV/AIDS research still eludes us: the development of an effective HIV vaccine.
This challenge has been particularly difficult because of the nature of the virus, particularly its ability to integrate itself into the genome of host cells, to readily mutate, and to conceal that part of its outer coat that would induce protective antibodies.
We also know that the body’s natural immune response against HIV is inadequate in containing or controlling the virus.
Indeed, since the discovery of HIV, there has never been a documented case in which an individual’s immune system has ever completely eradicated the virus following established infection.
Many current studies focus on developing vaccines that might not completely prevent HIV infection, but that still could slow the progression of HIV or make a person less likely to pass the virus on to others.
But our ultimate goal is to develop a vaccine that can prevent HIV infection.
To succeed, we must solve the mystery of how to induce the human body to produce a protective immune response.
Despite the extraordinary scientific and medical accomplishments in the battle against HIV/AIDS so far, history will judge us by what we accomplish in the next quarter-century, and how we respond to the challenge of delivering the fruits of our research efforts to those who need them most.
Twenty Years After the Wall
BERLIN – Those who witnessed that night 20 years ago in Berlin, or elsewhere in Germany, will never forget what happened – the night the Wall came down.
History in the making is all too often tragic. Only rarely is it capable of irony.
November 9, 1989, was one of those rare moments when irony reigned, because East Germany’s bureaucratic socialism died as it had lived – with a bureaucratic snafu.
The Speaker of the Politburo, Günter Schabowski, had simply misunderstood that body’s decision and, by releasing to the public incorrect information about the lifting of travel restrictions, triggered the fall of the Wall!
Groucho Marx could not have bettered Schabowski that night.
It was Germany’s happiest hour.
Israelis and Palestinians came closer to peace than at any time since; and a disintegrating Yugoslavia degenerated into war and ethnic cleansing. In Afghanistan, war continued under different circumstances, with serious ramifications for the region and, indeed, the world.
As the victorious heir to the collapsed Cold War order, the United States stood alone, undisputed, at the peak of its global power.
But, within two decades – following the war in Iraq and financial and economic crisis – the US had squandered that special status.
Arrogance of power and blindness about reality were the two main causes for the decline of the sole remaining superpower.
While most of the blame lies with George W. Bush, numerous negative trends had preceded him. He merely took them to the extreme.
After September11, 2001, the US had a second big chance to use its unique power to reorganize the world.
After this terrible crime, countries – including in the Arab world – were ready to embrace far-reaching steps.
At that moment, peace between Palestinians and Israelis could have been achieved, and thus a new beginning made in the Middle East.
Even a radical about-face in US energy policy, with the introduction of energy taxes, would have been possible under the banner of national security.
The challenge posed by global climate change could have been addressed more effectively that way.
But that opportunity, too, was thrown away.
Europe – and, within it, Germany – were among the big winners of November 9, 1989.
The Continent reunited in liberty: Germany on October 3, 1990;
The introduction of a common European currency was successful; political integration by means of a constitutional treaty a failure. Since then, the EU has been stagnating, both internally and externally.
Europe has made only insufficient use of its opportunities since 1989 – and could dramatically lose influence in the emerging power structure of the twenty-first century.
In Germany, which largely owes its reunification to its firm roots in the EU and NATO, Europe-weariness is palpable.
The generation ruling in Berlin today increasingly thinks in national rather than European terms.
This was never more obvious than in the deciding days and weeks of the global financial crisis.
Russia, the big loser of 1989, remains two decades later mired in a mix of social and economic depression and political regression and illusion.
Life expectancy continues to decline; investment in infrastructure, research, and education are stunted; the economy is barely able to compete internationally; and the social divide between poor and rich is deepening.
Economically, Russia has turned into a commodity exporter, dependant on the imponderables of the global energy market, while simultaneously dreaming that it can use energy as a tool to revise the post-Soviet order in its neighborhood.
Russia’s elites still largely think in the power categories of the nineteenth and twentieth centuries.
This constitutes the illusionary and historically regressive element of current Russian policy.
Russia’s desire to reclaim its role as a powerful global player is understandable and legitimate.
But if it turns toward the past in looking for its future, and if it believes it can dispense with investments in the future in favor of shameless personal self-enrichment, it will continue to lose ground.
November 9, 1989, marked not only the end of the Cold War era, but also the beginning of a new wave of globalization.
The real winners of this new world order are the large emerging countries, first and foremost China and India, which increasingly set the pace of global economic and political development.
The G-8 has been dismissed by history as a club of Western industrial nations; its place has been taken by the G-20, which conceals the underlying formula of power distribution within the new world order: the G-2 (China and the US).
All these changes reflect a dramatic transfer of power from West to East, from Europe and America to Asia, which within the next two decades is likely to bring to an end 400 years of Eurocentrism.
The past two decades also have seen the world begin to reach its ecological limits.
The majority of humanity has sought since November 9, 1989, to achieve Western living standards at all costs, overstretching our planet’s climate and ecosystems.
The years since the Berlin Wall came down have been rich in dramatic change, but the real era of upheaval lies ahead.
Global warming is only the tip of the iceberg towards which we are moving, knowingly, with eyes wide open.
What matters now is that states act globally and in unison.
Twenty years after Berlin, Copenhagen is calling.
Twilight of a Pontiff
Once again Pope John Paul II has returned to hospital, gravely ill.
Even for non-Catholics like myself, this is an occasion to ponder what the world will lose when the Pope’s body finally succumbs to his ailments.
The picture that emerges is one of a mixture of colors.
For those of us who regard the collapse of communism in 1989 as a seminal event of twentieth-century history, Pope John Paul is a hero.
In Poland, he was the focus of all the activities of civil society.
While in other countries, most emphatically in Romania, but also in what was then Czechoslovakia and in Hungary, the alternative to communism was a vacuum or at best a few isolated organizations in civil society, Poland had an alternative source of legitimacy.
Before and after his election, the then Cardinal Karol Wojtyla of Krakow was its most effective representative.
Cardinal Wojtyla’s election as Pope therefore had a significance far beyond the confines of the Church.
Actually he himself did not like the identification of his church with civil society.
In a conversation he protested: “No, the Church is not civil society, it is sacred society.”
This points to another aspect of John Paul II’s papacy, more relevant to insiders than to outsiders.
In matters of doctrine and ethics, John Paul II represented the conservative view.
He was the counterpoint to Pope John XXIII, who, through the Second Vatican Council of the 1960’s and in numerous other ways, tried to reconcile Catholics with the modern age.
Pope John Paul arrested this process and even tried to reverse it.
For progressive theologians like Hans Küng, he was and is therefore a force of anti-modernism, even counter-enlightenment.
At the same time, the Pope became the first great traveling Pontiff of modern times, almost a symbol of a globalized world.
This meant that his image if not his words reached out to millions who do not belong to his church.
There can be few people who will be recognized as widely all over the globe as John Paul II.
By that fact alone, he added a spiritual dimension to an age which is dominated by worldly concerns, such as wealth and show business.
Those of us who believe in a multidimensional culture will be grateful to him for his enormous efforts, thus for his “catholicism” in the original sense of the word, his all-embracing concerns.
On the other side of the balance sheet, and despite his global outreach, Pope John Paul II cannot be described as particularly ecumenical.
The beginnings of Christian ecumenicism under his predecessors did not advance much in his 25 years.
Paradoxically, he found it easier to reach out to non-Christian religions.
The Catholic-Jewish dialogue in particular was in good hands with him.
When a distinguished Jewish scholar thanked him for what he had done to cultivate Catholic-Jewish relations, he replied: “That was not me, that was Providence,” and then added with his inimitable smile: “And me.”
Has he been a man of peace?
Yes, of course.
But his reign spans a time in which numerous regional conflicts turned violent.
There was little he could do in Kosovo or the Congo.
The years of John Paul II’s papacy have not actually been a time in which “soft power” could achieve a great deal anywhere, so that Stalin’s famous question, “How many divisions has the Pope?,” remained topical.
This was all the more relevant to the extent that Pope John Paul II is not enamored with the United States.
There are indications that he shares the old central European prejudice of America as a materialist civilization that provides the wherewithal – but not the ideas – for what needs to be done.
The Pope’s legacy is, in other words, a story of great strengths and considerable weaknesses.
It would be incomplete, however, were one not to mention the warm, curious, friendly, and humorous human being underneath it all.
Pope John Paul II is in many ways an intellectual; he may have been underrated in that regard.
However, he is also a simple man who connected without effort to others.
He bore his suffering since the assassination attempt of 1981 with dignity.
As a person, he never failed to impress his many visitors.
Even in his current reduced state due to his illness, Pope John Paul II symbolizes human potential.
Twilight of Our Political Gods
For some time I thought that the Twenty-Second Amendment to the United States Constitution was probably the best way to ensure that political leaders do not overstay their welcome, and, just as importantly, wear out their effectiveness.
This Amendment bars US Presidents from holding office for more than two four-year terms.
Perhaps I had forgotten the travails of President George W. Bush’s predecessors in their second term, but his own current predicament shows that the constitutional limit has its own problems.
For one thing, it makes the President a lame duck sometime in his second term.
Does anyone remember that after his re-election Bush promised to reform the pension system (“Social Security”)?
Now he is clearly hamstrung not only by the Democratic opposition, but also, and perhaps more so, by the succession struggles within his own party.
However, the fate of Bush’s friend, British Prime Minister Tony Blair, shows that lame-duck status can occur even without a constitutional term limit – indeed, without a written constitution at all.
Blair made the fatal mistake of setting his own limit to his tenure of office by saying that he would not contest a fourth election as leader of the Labour Party.
But, even without such a vow, he would find it difficult after nine years in office to combine a program of reform with a sense of what can be achieved given the mood of his party and of the country.
Indeed, reforms announced by Blair increasingly sound like empty promises, because the apparently inevitable has happened: the Prime Minister has lost touch with the public.
What used to be his charisma is now the permanent re-enactment of the all-too-familiar.
Of course, it is always very hard for leaders to relinquish power.
Some have done so, more or less voluntarily, only to re-emerge suddenly from oblivion.
Can it be the same President Oscar Arias who (barely) won the recent presidential election in Costa Rica and now returns to power after 20 years?
And was not Silvio Berlusconi’s candidate for the presidency of the Italian Senate, Giulio Andreotti, a junior member of one of Italy’s first post-1945 governments?
Did Portugal’s Cavaco Silva, the successful Prime Minister of the 1990’s, have to reappear as President in 2006?
Who can forget Margaret Thatcher’s tears when her “friends” told her that her time was up?
When Prime Minister Harold Wilson suddenly resigned in 1976 and left No. 10 Downing Street to the late James Callaghan, people became suspicious: had he been forced out by some secret service plot concerning South Africa?
It appears that there is no way for political leaders to leave the scene gracefully.
Even if there is an “orderly transition” – a term much used about Tony Blair and Gordon Brown at the moment – it is accompanied by sorrow, or at least by pain.
Political office, it seems, is more addictive than heroin.
Abandoning the habit involves not only the inconvenience of losing perks and a certain lifestyle, but also the loss of power.
Power may be increasingly illusory in a globalized world, but it is an illusion that is shared by others, and the longer one inhabits it, the more one’s circle consists of others who share the belief.
The addiction to political office is always worrisome, because democracies turn into autocracies when leaders cease to recognize the limits of their power.
Disconnection is the beginning, followed by the belief that one is the only person who knows what is right and good.
When Tony Blair says that the most important liberty is security from terrorist attacks, he has forgotten the first principles of his party and his country.
Overstaying one’s welcome may be the professional disease of political leaders, but it is above all incompatible with democracy as a framework for bringing about change without violence.
The question, then, is whether there is any way to ensure that political leaders leave in time.
While the US Constitution shows the limits of institutional safeguards, the role of political parties is clearly significant when it comes to limiting terms in power.
Like Thatcher, Blair now hears from his party that he should go and replies that “the people” still want him.
Yet the party might have a better sense of what is viable not just today, but also tomorrow – at the next election, for example.
In the end, there is no foolproof method to guarantee that political leaders leave without tears.
What matters is that mechanisms are in place that do make them leave, probably rather too late, and certainly with some pain and unhappiness, but in time for the constitution of liberty to remain intact.
Twilight of the Chancellor?
Chancellor Gerhard Schröder's resignation as chairman of Germany's Social Democratic Party (SPD) will deeply affect the distribution of forces within the German government and its slim "Red-Green" majority in Parliament.
While it seems to be premature to speak, as some in Germany now do, of a "Twilight of the Chancellor" or to call Schröder's surprising step "the beginning of the end" of his tenure, it is perfectly correct to describe it as a dramatic loss of power.
The immediate winner is Franz Müntefering, age 64, the SPD's parliamentary floor leader who will succeed Schröder, as party chairman.
Both politicians will constitute a tandem, but Schröder will be more dependent on Müntefering's loyalty than Müntefering is dependent on Schröder's success.
Schröder has been representing a moderately left political platform and agenda, one comparable to British Prime Minister Tony Blair's New Labour philosophy or former US President Bill Clinton's centrism.
Müntefering, however, is more attached to traditional Social Democratic (or Old Labour) values.
In terms of leadership style, Schröder is a soloist; Müntefering a team player.
In Germany, the Chancellor holds the strongest position among the key political players.
However, the main source of any German Chancellor's strength is not to be found in the legal powers conferred upon him by the constitution; it is the actual support he holds within his own party.
With one notable exception in the 1950's, none of Germany's two main political parties - the Social Democrats and the moderately conservative Christian Democrats - has ever managed to win an absolute majority in Parliament.
As a consequence, German Chancellors usually preside over coalition governments, and their effective authority is based on the loyalty of the party forces they command within such political alliances.
Although the Social Democrats never really liked Schröder (they certainly do not love him in the way they did the unforgettable Willy Brandt), they willy-nilly followed him so long as they saw him as the only guarantor of electoral success after 16 frustrating years (1982-1998) in opposition to Helmut Kohl.
But this is no longer the case.
Since the end of 2002, Schröder and the SPD have been facing unusually low public approval ratings - and this pattern is not likely to change soon.
In 2003 alone, almost 40,000 Social Democrats left their party, a hemorrhaging previously unheard of.
If national elections had, say, been held last Sunday, February 8, a centre-right coalition consisting of the Christian Democrats and the Liberals would have won 57% of the vote, according to "Infratest dimap," one of Germany's main polling institutes.
With no more than 35% of the vote, Schröder's "Red-Green" coalition would have suffered a disaster.
At the beginning of what has been dubbed a "super election year" in Germany - with 14 elections, one at the European, five at the regional, and eight at the local levels - this is hideously bad news for the SPD.
Several times before, Schröder had been thoroughly energized by desperate situations when he stood with his back to the wall.
This quality is his greatest strength, and it seems he has now embarked on his riskiest counteroffensive ever.
It is based on the bet that there will be a considerable economic upswing from mid-2004 onwards until the next national elections in autumn 2006 - and that voters will attribute the expected recovery to the economic, labour market and welfare state reforms, called "Agenda 2010," that Schröder has made the hallmark of his chancellorship.
For a long time, Schröder's reformist rhetoric had not been matched by his politics.
Only after his re-election in autumn 2002, did he give up his previous populist stance, short-term responses and neo-corporatist ways of trying to talk trade unions and employers' associations into compromise.
In view of Germany's most pressing problems - an accelerating demographic decline, an overregulated labour market, and a cloudy and confusing tax system - Schröder's reform agenda may look far too timid, but many cuts have been perceived as extremely cruel by the SPD's core constituency, especially the powerful labour unions.
But, given Germany's economic distress, which looks likely to worsen given the country's demographic problems, the Social Democrats are now condemned to give wealth creation priority over redistribution.
Germany cannot afford to slow down or, worse yet, stop the reform process.
In the best case scenario, Schröder will therefore stick to the "Agenda 2010" philosophy, and Müntefering will patiently explain to a reluctant SPD that you have to cross the desert in order to make it to the Promised Land.
In the worst case, Schröder will lapse back into populism for the sake of short-term electoral success, and Müntefering will confirm that method so as to save the wounded Social Democratic soul from total despair.
Schröder's tragedy is that his power may further erode whatever way he chooses.
At the end of this current "super election year," we will know the answer.
Two and a Half Cheers for the Mediterranean Union
Maybe it is time to be a bit more generous to French President Nicolas Sarkozy and look at the outcome of what he does rather than the way that he does it.
The original launch of the Mediterranean Union almost sank the whole enterprise.
Appearing to speak without giving the issue much thought, Sarkozy initially proposed a club of European and mostly Arab states along the Mediterranean’s shore.
It would have been in essence a French-run enterprise that the rest of Europe would have paid for.
This did not go down well, particularly with the Germans.
There was also a strong suspicion that the French were trying to find a way to buy off Turkey with a relationship falling well short of European Union membership.
So the auguries for an attempt to revitalize Europe’s relationship with its Mediterranean partners were not good.
But by the time of the grand Paris Summit in July to send the new club on its way, the initial suspicions had largely been overcome.
Sarkozy bowed to his European critics and enjoyed a diplomatic triumph.
We shall soon see whether there is substance to the initiative, or whether it is just a coat of fresh paint on an old and tired idea.
The original Barcelona Process, launched in 1995, was an excellent scheme.
Intended to provide an economic and political backdrop to peace-making through confidence-building in the Middle East, it was an admirable recognition of Europe’s historical, commercial, cultural, and political ties with its neighbors to the south of the sea which has brought us all together over the years.
There were people-to-people links. There was a forum where Israelis and their long-term Arab foes could sit together and discuss other matters than the West Bank and the Gaza Strip.
There was a development budget. And there were meetings.
So many meetings.
The effort was far from worthless.
Development projects were funded through grants or cheap loans, and these have probably played at least some part in increasing the attractiveness of the Maghreb and the Mashraq to foreign investors.
There was some lowering of agricultural and other tariffs by the EU.
Dialogue on political reform, and euros to support it, helped further the process in some countries, notably Morocco and Jordan.
There was some co-operation on common problems like drugs and illegal immigration.
But, as a significant component of Europe’s policy toward its most crucial neighbors, the successes of the Barcelona Process were modest: a great idea on the launch pad had difficulty getting off the ground.
So Sarkozy deserves at least two and a half cheers for trying to revitalize it.
But if the Mediterranean Union is to achieve more than was managed in its first manifestation, a number of things will need to happen.
First, Europe is better at talking about free-trade areas than delivering free trade.
For example, there are still too many barriers to agricultural trade between the North and the South.
And guess which country leads the opposition to any significant opening up of European agriculture.
Step forward, France, and take a bow.
Second, however slow we have been in opening up a real Mediterranean market, the barriers to freer trade between Arab League countries are just as great.
Third, it was excellent that in Paris Sarkozy began the process of bringing Syria in out of the diplomatic cold.
We must also hope that his attempts to act as a peace-broker between West Bank Palestinians and Israel are blessed with success.
But the truth is that Europe, for all the gallant efforts of Javier Solana, has been absent from serious politics in the Middle East.
We have not dared to cross America.
A largely non-existent European policy toward the region has been dictated by the absentee monopolists of policy in Washington.
Europe should get more seriously involved, even at the risk of occasionally irritating America, which may be less likely to happen once the Bush administration is history.
For a start, we should recognize that there will be no political settlement in Palestine without including Hamas.
What would incredibly have been former British Prime Minister Tony Blair’s first visit to Gaza in his first year of peace-making had to be canceled recently because of security concerns.
Enough said.
Finally, Europe has to decide how serious it is about all the admirable stuff in the Barcelona Process on pluralism, civil society, the rule of law, and democracy.
Is Europe serious that a shared concept of human rights should be one of the foundations of our Mediterranean partnership?
If so, what are we in Europe proposing to do about it?
If this is just blah-blah, better not say it.
We discredit ourselves and important principles when we say things that we do not mean.
Two Cheers for Jiang Zemin\u0027s Three Represents
Mockery of retiring Chinse President Jiang Zemin's theory of the "Three Represents" is rife.
Pundits scorn the theory, which says that the Communist party should not only represent workers and peasants but also society's "advanced productive forces, culture and interests," and they deem it wholly inadequate to China's mounting problems of inequality, corruption, and lack of democracy.
These critics are right to point out the theory's shortcomings, and the nauseating way that "Jiang Zemin Thought" is promulgated does remind us of Mao's Cultural Revolution.
But they miss the point that the "Three Represents" marks a leap forward over the ideology it seeks to replace--the dictatorship of the proletariat.
Under today's arrangements, China faces a choice between the "Dictatorship of the Proletariat" or the "Three Represents."
Which to choose seems very clear to me.
The big contribution of the "Three Represents" is that, for the first time, a ruling communist party gives up - of its own volition - the idea of class warfare.
The gist of the Three Represents is not that the ruling party should protect the interests of capitalists at the expense of others, but that capitalists should not be automatically excluded from China's political process.
Of course, the status of capitalists will improve once the "Three Represents" is implemented.
But those who argue that this will be achieved at the expense of China's working class need a reality check.
Today, private firms employ more of China's working class than state-owned enterprises (SOEs).
With a fraction of the resources of the SOEs, private firms employ much of the proletariat, produce goods demanded by proletarian consumers, and, because of their superior performance, safeguard the interests of proletarian savers by actually paying back their bank loans.
Why most pundits miss the fact that workers are protesting, not in the liberal provinces of Zhejiang and Guangdong, but in the socialist bastions of the northeast, is a mystery.
Workers don't protest against menial jobs in capitalistic Wenzhou but against no jobs in socialist Shenyang.
The government cannot pay unemployed workers their pensions because socialism has bankrupted its finance.
Indeed, in contrast, in many Chinese regions, the tax contribution of a single private firm can exceed the combined tax revenue from all SOEs.
Moreover, describing Chinese private entrepreneurs as a "plutocracy" is grotesque.
The term plutocracy is commonly applied to Russia's oligarchs, who grew rich through political connections, corruption and shady business deals.
Of course, some private entrepreneurs in China grew rich that way.
Most, however, run mom-and-pop businesses in fiercely competitive sectors.
They became rich by working hard and because of their innovation and efficiency.
Some of China's biggest private entrepreneurs come from extremely humble backgrounds. Many hail from China's impoverished interior and rural areas.
China's biggest private firm, the Hope Group, is located in Sichuan and started in the animal feed business.
Why such origins?
In the 1980s and 1990s, the central government curtailed private sector activity in urban centers so as to minimize competition with SOEs.
The countryside was left with more freedom because the central government never thought that entrepreneurs there could succeed.
Those who think that entrepreneurs got rich because of their political connections commit a classic analytical error: they reason backward on the basis of outcomes rather than the processes that produced those outcomes.
They fail to realize that cozy relations are often the result of, not the cause of, business success.
Those who succeed command respect and leverage with the government because of their business acumen and the fact that they beat their competitors.
Only a few entrepreneurs "make it."
Many, as everywhere else in the world, fail on the way.
Detractors of the "Three Represents" also have their ideas about democracy backward.
They think that the dictatorship of the proletariat means that the communist party represents the interests of the working class.
But the dictatorship of the proletariat was as much a straightjacket on workers as on everybody else.
Only a vibrant private propertied class can one day bring democracy to China.
A market economy based on private property rights is an economic democracy, and it is only a matter of time before political democracy follows.
This optimism is not based on the belief that capitalists favor democracy.
Instead, it is based on the idea that democracy comes from forcing the state to share power with those it cannot directly control.
Capitalists control wealth and wealth creation.
Sooner or later capitalists will demand returns on their tax contributions in the form of greater accountability of government policies and practices.
There is another virtue associated with a political change engineered by propertied members of society--a stable, gradual and peaceful transition.
In the 20 th century, countries like Korea, Taiwan and Chile made the transition to democracy peacefully and successfully.
All had a vibrant private sector and a prosperous market economy.
In contrast, countries with a large and bankrupt state sector incurred tumultuous, incomplete and often violent lurches toward democracy.
Romania's current nightmare would be of unimaginable scale if repeated in China.
The "Three Represents" may offend the sense and sensibility of some.
But it's a trivial price to pay in order to make China's future more secure and peaceful for millions of Chinese.
Two Cheers for the Rhineland Model
Not so long ago, Germans and other Continental Europeans pointed to America's "working poor," as well as to the sorry state of public services in Britain, as defects that supposedly reflected the inevitable price Anglo-Saxon countries must pay for their ruthless form of capitalism.
Europeans (Germans in particular), on the other hand, enjoyed the "Rhineland model": a market economy that harnesses economic success to the cause of social justice.
So when Chancellor Gerhard Schröder, early in his first term, signed the so-called Blair-Schröder paper, which pledged agreement with British Prime Minister Tony Blair on liberalizing reforms, he made certain that it was published in London and played down in Berlin.
Similarly, the European Union's Lisbon agenda of economic liberalization was never really taken seriously in Germany, France, or most other countries on the Continent.
How things have changed in the last five years!
Today, few people - if any - refer to the Rhineland model with such satisfaction.
As things stand now, the German economy lags behind most others in Europe, and almost all European economies trail Britain and the United States.
Unemployment is high and growing, as German companies move production to low-wage countries in Eastern Europe or Asia. In Germany, "capitalism unmodified" has begun its reign.
Profitable companies are closed if their returns fall below international standards. Managers' salaries - including bonuses for failed or departing directors - have reached new highs.
If all this leads people to conclude that social justice is being sacrificed to profits, cuts in public expenditure harden that conclusion even more.
Social entitlements are being reduced, while individual contributions to cover the cost of health care, pensions, education, and basic welfare programs rise - not just in the Rhineland and neighboring länder, but in other countries that follow a similar model.
One reason is straightforward and increasingly widely understood. The old system of social justice, the welfare state, was based on assumptions which no longer hold true.
Some may never have been viable.
For example, the Rhineland model used many measures of social policy that had built-in growth trends that were bound to make them unaffordable.
This is true for health care.
In addition, demographic changes reduced the number of contributors while increasing the demand for services.
Unsurprisingly, high payroll taxes strained the capacity of working people and mounting non-wage labor costs eroded companies' international competitiveness.
For a while, borrowing hid the extent of the problem; but today the extent of the burden that the accumulated debt that resulted from this borrowing is placing on future generations - a grave injustice in its own right - is clear.
Thus, the Rhineland model's once-robust institutions of social justice were bound to be squeezed.
But the capitalism that formed the Rhineland model's other component also changed, and here it is not wrong to blame globalization. Companies formed international links in order to remain competitive.
Many of these links were with British or American companies, which led to a profound change in business culture.
The old notion that large companies are responsible for their employees' welfare from cradle to grave - providing not only wages and bonuses, but sports facilities, cheap holidays, and generous retirement benefits - fell into desuetude.
Overseas owners were less than understanding of the German custom of paying a thirteenth monthly salary at Christmas.
Beyond business culture, there is the fact that manufacturing, until recently the major source of strength of the German and other European economies, has begun to emigrate in a big way.
Soon not only our refrigerators and television sets, but even our cars and machine tools, will come largely from China.
There is no obvious substitute for such industries at home.
Does this mean the end of the Rhineland model?
In the first instance, it does mean that reforms are necessary.
People have become weary of the word reform, because for most it means a reduction in entitlements and living standards.
Still, constructing a welfare state fit for new economic conditions is a task that must be undertaken.
This will be a welfare state based on a new balance of solidarity and individual effort. It may mean that after a decades-long economic miracle, people must accept a modest reduction in their standard of living.
The more difficult task will be to transform traditional economies into truly modern ones.
No one has yet managed this process, not even the Anglo Saxons.
A truly modern economy will be a service economy that combines high-productivity knowledge activities with indispensable personal service jobs.
Such economies need not follow the same blueprint.
It is possible - indeed, likely - that modern service-based economies will look very different in the Rhineland, Southeast England, Lombardy, and the Île-de-France.
Such diversity may include varying degrees of social justice, if people choose to pay more or less for that purpose.
So there is no reason for despair in the Rhineland - or for gloating by the enemies of its economic model.
Even in an increasingly globalized economy, diversity will continue to be the hallmark.
The New “Two Chinas” Question
NEW YORK – To anyone over the age of 60 who follows world affairs, the term “two Chinas” recalls the post-1949 competition for diplomatic recognition waged by mainland (“Red”) China and Taiwan, or, more formally, the People’s Republic of China and the Republic of China.
By the early 1970s, just about every country fell in line with the People’s Republic’s demand that it alone be recognized as the legitimate sovereign government of China.
The mainland was simply too large and too important economically and strategically to alienate.
Today, a new, but very different, “two Chinas” question is emerging.
It centers on whether China is best understood as a strong country, with a promising future despite some short-term difficulties, or as a country facing serious structural problems and uncertain long-term prospects.
In short, two very different Chinas can now be glimpsed.
But which one will prevail?
Until recently, there was little reason to ask such a question.
China’s economy was growing at an astounding average annual rate of 10% or higher for more than three decades.
China had overtaken Japan as the world’s second largest economy.
Hundreds of millions of Chinese had entered the middle class.
China’s model of authoritarian efficiency seemed attractive to many other developing countries, particularly in the wake of the 2008 global financial crisis, which began in the United States and thus seemed to discredit American-style liberal capitalism.
But the question of China’s future has become unavoidable.
Officially, economic growth has slowed to near 7%; but many believe the real number is below 5%.
The slowdown should come as no surprise; all developing economies experience something similar as they grow and mature.
Nonetheless, the speed and degree of change have caught the authorities off guard, and have stoked official fears that growth will fall short of the rate needed for the country to modernize as planned.
The government’s alarm at the sharper-than-expected economic slowdown was reflected in its heavy-handed intervention in July to freeze stock markets in the midst of a dramatic price correction.
That move was followed this month by a surprise devaluation of the renminbi, which suggests that the shift away from export-led growth is not working as hoped.
Meanwhile, President Xi Jinping’s anti-corruption campaign increasingly looks like a strategy to consolidate power, rather than an effort to reform China’s state for the benefit of its economy and society.
Corruption is pervasive, and Xi’s campaign remains broadly popular.
But the wave of prosecutions that Xi has unleashed is discouraging Chinese officials from making decisions, owing to their fear that they could face criminal charges in the future.
As a result of these developments, one hears much less of late about the Chinese model and more about the Chinese reality.
Aside from slowing growth, that reality includes severe environmental damage, one result of decades of rapid, coal-fueled industrialization.
According to one estimate, air pollution is killing 1.6 million Chinese per year.
China’s aging population, an unintended consequence of its draconian one-child policy, poses another threat to long-term prosperity.
With the dependency ratio – the proportion of children and pensioners relative to working-age men and women – set to rise rapidly in the coming years, economic growth will remain subdued, while health-care and pension costs will increasingly strain government budgets.
What is increasingly apparent is that China’s leaders want the economic growth that capitalism produces, but without the downturns that come with it.
They want the innovation that an open society generates, but without the intellectual freedom that defines it.
Something has to give.
Some observers, fearing a rising China, will breathe a sigh of relief at its current difficulties.
But that may prove to be a shortsighted reaction.
A slow-growth China would undermine the global economic recovery.
It would be a less-willing partner in tackling global challenges such as climate change.
Most dangerous of all, a struggling China could be tempted to turn to foreign adventurism to placate a public frustrated by slower economic growth and an absence of political freedom.
Indeed, there are some signs that the authorities are doing just this in the South China Sea.
Nationalism could become the primary source of legitimacy for a ruling party that can no longer point to a rapidly rising standard of living.
The US and others will need to push back to ensure that China does not act on such a temptation.
But these countries would be equally wise to signal to China that it is welcome to take its place among the world’s leading countries if it acts responsibly and according to the rules set for all.
But the bigger policy choices will be China’s to make.
The government will need to find the right balance between government interests and individual rights, between economic growth and environmental stewardship, and between the role of markets and that of the state.
The choices China faces are as difficult as they are unavoidable.
Major social unrest cannot be ruled out.
The one certainty is that the next three decades will not mirror the last three.
Two Decades from Warsaw
WARSAW – “Poland – ten years, Hungary – ten months, East Germany – ten weeks, Czechoslovakia – ten days.” So chirped many in Prague in November 1989, reflecting the pride and the joy of the Velvet Revolution, but also the sustained effort that was needed to end communism, whose demise began in Warsaw the previous February.
Indeed, communism’s breakdown began ten years earlier in Poland, during Pope John Paul II’s first pilgrimage to his homeland, a visit that shook communist rule to its foundation.
Within a year, Polish workers were striking for the right to establish independent trade unions, staging two weeks of sit-ins at state-owned factories to achieve their goal.
Karl Marx would have been proud of them, but it was the Pope’s portrait that hung on the gate of Gdansk’s Lenin Shipyard during the strike.
The Solidarity union that was born in 1980 broke the Communist Party‘s monopoly on power.
The movement united ten million people: workers and professors, peasants and students, priests and freethinkers among them – all of civil society.
This infant democracy was harshly interrupted when martial law was imposed in December 1981, with Solidarity outlawed and dissidents arrested.
But this totalitarian blitzkrieg could not last.
Democracy did not die; it merely went underground.
For the next seven years, Solidarity fought for re-legalization, building the biggest underground network of resistance Europe had seen since Hitler’s war.
But this was non-violent resistance.
Its main weapon was the language of freedom.
In the mid-1980’s, there were about 1,000 independent, uncensored journals in Poland.
They represented a full range of ideas and editorial styles – from factory leaflets and bulletins to intellectual magazines.
Hundreds of books prohibited by Communist censors (for example, Gunther Grass’s The Tin Drum ) came to light.
Solidarity’s leader, Lech Wałęsa, did not surrender in prison and retained his national esteem.
With the economy in steep decline, Poland’s rulers began to seek to stabilize the political system and reestablish relations with the West.
In 1986, the government released political prisoners – a precondition for talks with the opposition.
But it took the Communists two more years to realize that they could not introduce economic reform without Solidarity’s assent.
So talks began.
The reason they were possible at all was that the opposition’s goal was not the violent overthrow of party rule.
Instead, its democratic goals were to be fulfilled by a compromise with the authorities.
Wałęsa and his closest advisers – Bronisław Geremek and Tadeusz Mazowiecki – pushed this moderate policy, demanding liberation while recognizing the political reality of Soviet domination.
Two waves of strikes in 1988 forced General Jaruzelski’s government to negotiate with Solidarity, which, after a few months of hedging, was legalized.
The “Roundtable” talks to change the political system could begin.
The haggling continued from February until April 1989.
The main issues were legalization of the opposition, partially free elections, and creating the office of president to replace the Communist Party chief.
The Communists were guaranteed a majority in parliament.
While the election to the newly created Senate was entirely free, the opposition could compete for only one-third of the seats in the Sejm (the lower house).
But the key point was that the party’s monopoly on power was jettisoned.
Solidarity gained the opportunity to create independent media and a grassroots political organization.
Finally, the Communists agreed that the elections to be held in four years would be entirely free.
The road to democracy was open.
But the dictatorship’s end came sooner then anyone expected.
In June 1989, the opposition won the parliamentary election in a landslide.
It was impossible to form a government without its participation.
Jaruzelski was elected president, but he had to accept the new division of power.
The decisive political maneuver – building a coalition with allies of Communists – was carried out by Lech Wałęsa.
A Solidarity representative, Tadeusz Mazowiecki, became prime minister.
In September 1989, Poland had the first government ever led by democratic parties in the Soviet bloc.
It was a revolution, but with a difference: the political system changed without a body count.
This was due, above all, to Solidarity’s prudent policy.
But it was civic activity - resistance movements, strikes, and other manifestations of social support – that buttressed Solidarity.
Mikhail Gorbachev was important; his non-intervention policy toward Eastern Europe meant that Soviet tanks would not annul the changes, as they had done with the Prague Spring.
The Polish Communists did not intend to build democracy; their plan was to absorb moderate opposition groups into a partially modified political system.
Handing over power to Solidarity was the last thing they had in mind.
Yet the Roundtable compromise turned out to be good even for them, as communist “reformers” began to build new careers in business and politics (one, Aleksander Kwaśniewski, became Poland’s second democratically elected president).
The Roundtable also provided the Communists with a sense of safety that diminished their fear of democratic change.
A hangman’s noose did not await them.
This was an important sign for Poland’s neighbors in the Soviet bloc, which took its example to heart.
In a few months, talks between Communist bosses and their democratic opponents (often in the form of a roundtable) paved the way to free elections and new democratic governments in Budapest, Prague, East Berlin, and Sofia.
By 1989’s end, the post-Yalta Europe was free.
Since then, the symbol of the great revolution of 1989 has been the fall of the Berlin Wall.
But the Roundtable talks in Warsaw 20 years ago this month is where the Iron Curtain began to be dismantled.
Two Degrees of Misrepresentation
COPENHAGEN &#45;&#45; The United Nations-led climate change conference in Bali will be remembered less for the “road map” that it eventually created than for a messy collision between the United States and much of the rest of the world that kept onlookers transfixed.
Environmental campaigners vilified America for resisting European Union pressure to pre-commit to specific temperature targets – namely, that global warming should be limited to no more than 2°C (3.6°F) above pre-industrial temperatures.
This target has become a veritable commandment of campaigners since the EU embraced it in 1996.
The media often refer to it, sometimes saying that unless it is met, climate change would be very dangerous for humanity.
In fact, the target is not scientifically backed, and the suggestion that we could achieve it is entirely implausible.
Stopping temperatures from rising by more than 2°C would require draconian, instant emission reductions – for the OECD the reductions would have to be between 40-50% below their expected path in just 12 years.
Even if political consensus could be found, the cost would be phenomenal: one model estimates that the total global cost would be around $84 trillion, while the economic benefits would amount to just a seventh of this amount.
The suspiciously round figure of 2°C provides one clue to the fact this target is not based in science.
The first peer-reviewed study that analyzed it, published in 2007, scathingly described it as being supported by “thin arguments, based on inadequate methods, sloppy reasoning, and selective citation from a very narrow set of studies.”
In any case, a temperature limit is obviously a political rather than a scientific statement.
Setting a limit means weighing up the costs and benefits of a world with temperatures at one level, and comparing them with the costs and benefits if we were to turn down the thermostat.
This is an inherently political process.
Deciding how much we should let temperatures rise is like working out how many people should die in traffic accidents by adjusting the speed limit.
There is no scientifically “correct” number of traffic deaths.
Ideally, the number should be zero.
But that would require lowering the limit to walking speed – at an immense cost to society.
It has been widely reported that the UN’s climate change panel (the IPCC) tells us that science shows that industrial countries’ emissions should be reduced by 25-40% by 2020.
This is simply incorrect: the IPCC’s Nobel Peace Prize-winning scientists are “policy neutral.”
Yet many journalists reported from Bali that the US had rejected the science of the 25-40% emission reduction.
They lamented how the science in the final document had been relegated to a footnote, stressing how shortsighted, national self-interest had won out.
But this interpretation is flatly wrong.
If we look at the reference in the Bali footnote, the IPCC clearly says that emissions should be reduced 25-40% if you choose the low EU target but 0-25% or less if you choose a higher target .
Nevertheless, like many newspapers, the International Herald Tribune wrote that the IPCC assessment said “that the temperature rise had to be limited to 2oC.”
Our one-sided focus on rapid reductions in CO2 emissions is both unnecessarily expensive and unlikely to succeed.
At the Rio summit in 1992, we promised to cut emissions by 2000, yet overshot the target by 12%.
In Kyoto in 1997, we promised even more radical emission cuts by 2010, which we will miss by 25%.
Making ever-stronger promises on top of ever more failed promises is hardly the right way forward.
Instead, we should look for smarter policy options, like aiming to ensure that alternative energy technologies at reasonable prices will be available within the next 20-40 years.
This could be achieved if all countries committed to spending 0.05% of GDP on research and development of non-carbon-emitting energy technologies.
The cost – a relatively minor $25 billion per year – would be almost 10 times cheaper than the Kyoto Protocol (and many more times cheaper than a standard Kyoto II).
Yet it would increase R&amp;D globally 10-fold.
Moreover, while it would embrace all countries, the rich would pay the larger share.
It would let each country focus on its own vision of future energy needs, whether that means concentrating on renewable sources, nuclear energy, fusion, carbon storage, conservation, or searching for new and more exotic opportunities.
It would also avoid ever-stronger incentives for free riding and ever-harder negotiations over ever more restrictive Kyoto-style treaties.
A sensible policy dialogue requires us to talk openly about our priorities.
Often, there is a strong sentiment that we should do anything required to ameliorate a situation.
But we don’t actually do that.
In democracies, we debate how much to spend on different initiatives, knowing that we don’t have infinite resources, and that sometimes throwing more money at the problem isn’t the best answer.
When we talk about the environment, we know tougher restrictions will mean better protection, but with higher costs.
Deciding what level of temperature change we should aim for – and how to achieve it – is a discussion that should engage all of us.
But confusing political campaigning with scientific reason won’t help.
Two Energy Futures
By 2100, the world’s energy system will be radically different from today’s. Renewable energy like solar, wind, hydroelectricity, and biofuels will make up a large share of the energy mix, and nuclear energy, too, will have a place.
Humans will have found ways of dealing with air pollution and greenhouse gas emissions.
New technologies will have reduced the amount of energy needed to power buildings and vehicles.
Indeed, the distant future looks bright, but much depends on how we get there.
There are two possible routes.
Let’s call the first scenario Scramble .
Like an off-road rally through a mountainous desert, it promises excitement and fierce competition.
However, the unintended consequence of “more haste” will often be “less speed,” and many will crash along the way.
The alternative scenario can be called Blueprints , which resembles a cautious ride, with some false starts, on a road that is still under construction.
Whether we arrive safely at our destination depends on the discipline of the drivers and the ingenuity of all those involved in the construction effort.
Technological innovation provides the excitement.
Regardless of which route we choose, the world’s current predicament limits our room to maneuver.
We are experiencing a step-change in the growth rate of energy demand due to rising population and economic development.
After 2015, easily accessible supplies of oil and gas probably will no longer keep up with demand.
As a result, we will have no choice but to add other sources of energy – renewables, yes, but also more nuclear power and unconventional fossil fuels such as oil sands.
Using more energy inevitably means emitting more CO2 at a time when climate change has become a critical global issue.
In the Scramble scenario, nations rush to secure energy resources for themselves, fearing that energy security is a zero-sum game, with clear winners and losers.
The use of local coal and homegrown biofuels increases fast.
Taking the path of least resistance, policymakers pay little attention to curbing energy consumption – until supplies run short.
Likewise, despite much rhetoric, greenhouse gas emissions are not seriously addressed until major shocks trigger political reactions. Since these responses are overdue, they are severe and lead to energy price spikes and volatility.
The Blueprints scenario is less painful, even if the start is more disorderly.
Numerous coalitions emerge to take on the challenges of economic development, energy security, and environmental pollution through cross-border cooperation.
Much innovation occurs at the local level, as major cities develop links with industry to reduce local emissions.
National governments introduce efficiency standards, taxes, and other policy instruments to improve the environmental performance of buildings, vehicles, and transport fuels.
Moreover, as calls for harmonization increase, policies converge across the globe.
Cap-and-trade mechanisms that put a price on industrial CO2 emissions gain international acceptance.
Rising CO2 prices in turn accelerate innovation, spawning breakthroughs.
A growing number of cars are powered by electricity and hydrogen, while industrial facilities are fitted with technology to capture CO2 and store it underground.
Against the backdrop of these two equally plausible scenarios, we will know only in a few years whether December’s Bali declaration on climate change was just rhetoric or the start of a global effort to counter it.
Much will depend on how attitudes evolve in China, the European Union, India, and the United States.
Shell traditionally uses its scenarios to prepare for the future without expressing a preference for one over another.
But, faced with the need to manage climate risk for our investors and our descendants, we believe the Blueprints outcomes provide the best balance between economy, energy, and environment.
For a second opinion, we appealed to climate change calculations made at the Massachusetts Institute of Technology.
These calculations indicate that a Blueprints world with CO2 capture and storage results in the least amount of climate change, provided emissions of other major manmade greenhouse gases are similarly reduced.
But the Blueprints scenario will be realized only if policymakers agree on a global approach to emissions trading and actively promote energy efficiency and new technology in four sectors: heat and power generation, industry, transport, and buildings.
This will require hard work, and time is short.
For example, Blueprints assumes CO2 is captured at 90% of all coal- and gas-fired power plants in developed countries by 2050, plus at least 50% of those in non-OECD countries.
Today, none capture CO2.
Because CO2 capture and storage adds costs and yields no revenues, government support is needed to make it happen quickly on a scale large enough to affect global emissions.
At the least, companies should earn carbon credits for the CO2 they capture and store.
Blueprints will not be easy.
But it offers the world the best chance of reaching a sustainable energy future unscathed, so we should explore this route with the same ingenuity and persistence that put humans on the moon and created the digital age.
The world faces a long voyage before it reaches a low-carbon energy system.
Companies can suggest possible routes to get there, but governments are in the driver’s seat.
And governments will determine whether we should prepare for bitter competition or a true team effort.
Two Funerals and Our Freedom
MOSCOW – My great-grandfather, Nikita Khrushchev, has been on my mind recently.
I suppose it was the 50th anniversary of the so-called “kitchen debate” which he held with Richard Nixon that first triggered my memories.
But the funeral last week in Budapest of General Béla Király, who commanded the Hungarian Revolution’s freedom fighters in 1956, and this week’s funeral in Warsaw of the philosopher Leszek Kolakowski, whose break with Stalinism that year inspired many intellectuals (in Poland and elsewhere) to abandon communism, made me reconsider my grandfather’s legacy.
The year 1956 was the best of times and the worst of times for Khrushchev.
His “secret speech” that year laid bare the monumentality of Stalin’s crimes.
Soon, the gulag was virtually emptied; a political thaw began, spurring whispers of freedom that could not be contained.
In Poland and Hungary, in particular, an underground tide burst forth demanding change.
Hungary, of course, had its short and glorious revolution.
That first war among socialist states shattered the myth of inviolable “fraternal” bonds between the Soviet Union and the captive nations of Eastern Europe.
But Khrushchev never envisioned the breakup of the Soviet empire as part of his thaw.
So the Red Army invaded Hungary – on a scale larger than the Allies’ D-Day invasion of Europe in 1944.
Béla Király, released from a sentence of life in prison (one of the four death sentences he received from the communists having been commuted) was offered the job of commander of the Hungarian National Guard and the defense of Budapest.
His task was to knock the rag-tag freedom fighters into an army, but there wasn’t time to stop the Soviet advance.
So, after a week of heroism he and a few thousand of his men crossed the border into Austria and exile.
Over the years, a mutual friend often tried to introduce me to General Király, but, to my regret, that meeting never happened.
Any man who would frame the four death sentences he had received (one signed by Khrushchev, another by Yuri Andropov, the Soviet ambassador in Budapest in 1956) and hang them in his drawing room has the sort of quirky humor I relish.
And from what I know of the man and his history, particularly his work in Hungary after 1989, I can only wish that my great-grandfather could have met him.
Certainly, Király would not have hesitated to meet the man who ordered the invasion.
After all, when he learned that one of the Russian generals who had led the invasion was still alive in 2006, Király invited him to Budapest to join the 50th anniversary celebrations.
When General Yevgeni Malashenko declined in fear that he might be arrested, the 94-year-old Király flew to Moscow, where he spent a long weekend reminiscing and going to a banya for retired Red Army generals.
Kolakowski, on the other hand, was someone I knew.
We frequently met at conferences, where it was always a delight to hear him speak Russian – a Russian that had the accent and elegance of Tolstoi and Pushkin, not the degraded Russian bark of Vladimir Putin.
Like Király, in 1956, Kolakowski turned against the Communist party he had once joined in the hope, formed in the charnel house that the Nazis had wrought in Poland, that it would build a better world.
Kolakowski, modern Poland’s most acclaimed philosopher, quickly learned that mendacity was the true building block of Communism, and he withdrew from it in horror. By 1968, the Polish regime could no longer tolerate his presence.
He was expelled from his post at Warsaw University and, when he went to teach abroad, the government forced him into exile by never allowing him to return.
The question for me is how these three men with such different backgrounds and trajectories – Khrushchev, a Russian peasant turned proletarian who became General Secretary of the Soviet Communist Party; Király, a Magyar soldier of old world Europe, steeped in aristocratic traditions; and Kolakowski, a gentleman scholar from Warsaw more attuned to Jansenist heresies than the perverse logic of Leninist dialectics – could ultimately contribute to the same goal: the resurrection of liberty in Europe.
Khrushchev did not really know anything other than Communism.
He tried to humanize it and undo the cruelty of Stalinist orthodoxy, but never doubted that the Leninist system was the way of the future.
Király, who subscribed to the old codes of military honor (he would be named a Righteous Gentile at Yad Vashem, Israel’s Holocaust memorial, for the hundreds of Jews he saved by keeping them with his army during WWII), saw that very system as the enemy of his country and its liberty.
But today, Khrushchev is remembered mostly for his contribution to the demise of Stalinism – and, via Mikhail Gorbachev, whose hero he was, ultimately for helping to bring about communism’s demise.
Király and Kolakowski became voices of moderation and reconciliation in the Hungary and Poland that emerged out of communism’s darkness at noon.
Király will be remembered not merely as a warrior, but as a humanist, the conciliator who called for no reprisals after 1989, and a liberal model for many Hungarians.
Kolakowski, in upholding the sanctity of truth in the empire of the lie, connected the new democratic Poland to the old Poland of intellect and culture.
Király, Kolakowski, and Khrushchev: each in his own way is a symbol of today’s new and uniting Europe, a Europe of rapprochement and forgiveness among erstwhile opponents.
Two Nightmare Scenarios
Europe’s Two-Speed Future
PARIS – For three years, the euro crisis has threatened not only to unravel the eurozone, but to bring down the entire European Union with it.
Although the pressure from financial markets has moderated, for now, a long-term resolution to the crisis remains an existential priority for the EU.
In today’s highly competitive global economy, European countries’ relatively small size, aging populations, and excessive indebtedness, combined with a lack of energy resources and insufficient investment in research and development, mean that their high living standards and generous social-welfare states are in jeopardy.
Individually, they cannot compete with emerging markets; they need a strong EU to face the challenges posed by globalization.
But the eurozone’s architecture – in which monetary policy is centralized, but budgetary and economic policies are left up to individual governments – is not viable in the long term.
Although Europe’s leaders have made some progress on institutional reform, the measures taken so far will not lead to real convergence of economic and budgetary policies, or to genuine economic union.
As a result, they will fail to reassure financial markets.
Given that treaty change is politically unfeasible, establishing a “two-speed Europe” – in which a core group of countries pursues deeper integration more quickly than the rest – is the EU’s best option for reaching the level of cooperation needed to escape the crisis intact.
This can be accomplished in two ways.
The first option would be to progress de facto toward a two-speed EU without establishing further legal commitments.
Eurozone countries, together with others willing to join the euro in the future (the “eurozone plus”), could simply decide to use the legal means already available to increase cooperation.
Ideally, this cooperation would take place within the EU’s institutional framework.
If all eurozone members participated, Article 136 of the Treaty on the Functioning of the EU could be used to support their action.The scope of this provision – which says that, “the [European] Council shall…adopt measures specific to [euro] Member States,” and that “only [euro] Member States…shall take part in the vote” – is wide.
In addition, Article 138 would allow unified representation of the eurozone in the International Monetary Fund and the World Bank.
The group could then extend cooperation to three other policy areas:
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Minimal harmonization of tax laws (such as a common basis for assessing corporate taxation) and social policy (such as further liberalization of national labor markets to encourage labor mobility);
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Common policy measures on immigration, linked to labor-market needs;
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Closer judicial cooperation – again aimed at encouraging mobility – in civil matters with cross-border implications, specifically concerning contracts and family law.
The group could also take some measures outside the EU framework.
Indeed, if all eurozone countries did not participate, such outside cooperation would be crucial, given that Articles 136 and 138 would no longer apply. This could include measures to strengthen the European Stability Mechanism and the Euro Plus Pact (designed to enhance economic policy coordination among member states), de facto cooperation within the Bretton Woods institutions, and voluntary approximation of national laws in certain areas.
Participating countries would have to decide whether to commit to a common set of policies, or to reserve the right to opt in on a case-by-case basis. Cooperation on matters related to the EU’s Economic and Monetary Union (discipline and solidarity) should be obligatory.
The involvement of most, or all, current and future eurozone countries would enhance the group’s coherence, making it easier to win public support for cooperation in other areas.
Pursuing this option would require that the decision-making process be legitimate.
In the Council, as in all cases of “enhanced cooperation,” only participating members have the right to vote.
In the European Parliament, by contrast, all 27 EU members participate in the decision-making process, even concerning measures that will affect only the 23 “eurozone plus” countries (the 17 eurozone members and the six that have agreed to the Euro Plus Pact) – a method that could pose a political problem.
In any case, national parliaments should become involved in order to enhance the legitimacy of decisions.
The second option would imply an international agreement, in addition to the EU treaties, which would legally bind participating countries, enabling them to commit to establishing a genuine economic union, and to define the organs and rules that will govern their cooperation.
Such a treaty would take time to be negotiated, ratified, and implemented.
But a clear, precise announcement of the decision to pursue it, together with a bold European Central Bank policy in line with its recently announced bond-purchasing program, might be enough to convince both financial markets and EU citizens that a lasting solution is within sight.
The eurozone’s path to genuine economic union will be fraught with political and institutional challenges – from determining substantive areas of cooperation to protecting the rights and interests of all EU countries and safeguarding the unity of both the internal market and foreign relations.
Two Wrongs Don’t Make a Right at the IMF and World Bank
One has go back to the “Year of Three Popes” (1978) to find a succession drama as strange as what has been happening at the International Monetary Fund and the World Bank, the two pillars of the global financial system.
Two months ago, Bank President Paul Wolfowitz resigned amidst an extraordinary staff mutiny and governance debacle.
Now, his counterpart at the International Monetary Fund, the former Spanish Finance Minister Rodrigo Rato, has shocked major stakeholders by announcing that he, too, will leave in October.
To lose one international lending institution head is misfortune, to lose two looks like carelessness (my apologies to Oscar Wilde).
Coming on the tenth year anniversary of the Asian financial crisis, the caldron in which today’s ultra-liquid capital markets were forged, conspiracy theories abound.
Frankly, sticking to the public record, the two resignations seem like night and day.
When Wolfowitz was finally pushed out after a bruising battle, Bank staff were beside themselves with joy.
By contrast, most IMF staff seem genuinely depressed by Rato’s departure.
Wolfowitz’s pre-Bank claim to fame was his role as an architect of the Iraq war, arguably one of the greatest strategic debacles since Napoleon’s invasion of Russia.
Rato, by contrast, was Spain’s finance minister during the country’s best economic era since the sixteenth century.
Under Wolfowitz, the World Bank failed to introduce any serious governance reforms to reflect the rising economic power of Asia.
Under Rato, the IMF at least took some modest steps towards giving China and other rapidly emerging markets more say in running the place.
At the same time as Rato pushed reluctant European nations to yield some of their power in the Fund, he introduced reforms that clarified and strengthened the Fund’s role in managing exchange rates.
Indeed, a week before Rato’s resignation announcement, the Fund asserted that it had the right to censure countries whose intervention policies threaten to undermine global economic stability.
The Fund’s policy change drew the ire of Chinese officials, who have been intervening on a biblical scale to hold down the value of their currency, the Yuan.
When the Fund gets the big boys to complain by saying perfectly sensible things, it must be doing something right.
True, the Fund has been notably soft on the United States of late, downplaying the continuing vulnerabilities posed by the gaping US current account and trade deficits.
One imagines this compelling theme will return soon enough.
Although there are vast differences surrounding the departure of the IMF and Bank heads, there are some worrisome similarities.
First, there is every sign that the Europeans will use Rato’s sudden announcement as an excuse to avoid a serious debate about relinquishing their privilege of always appointing the Fund’s head True the US was able to essentially blackmail the world into choosing yet another American to replace Wolfowitz, by balking at efforts to push him out peaceably.
But the Europeans have no such leverage at the Fund, where Rato has elected to go out under his own steam.
There is ample time between now and October for the IMF to install an open and fair selection process that will lead to the best person being chosen, regardless of nationality.
Central banks around the world have been enormously successful by choosing technocrats and people with proven knowledge and experience to head their institutions, rather than accepting purely political appointments.
On merit, some of the obvious candidates for the Fund job, such as Brazilian Arminio Fraga, and Egyptian-born Mohamed El-Erian, are not European.
A second similarity is that both institutions face deep existential crises.
In today’s world of deep and liquid global financial markets, the main lending instruments of the IMF and and the Bank are largely unnecessary and redundant.
Absent serious reform, both are on tract to go into deep hibernation as the Bank for International Settlements did for forty years prior to its recent resurgence.
The BIS, founded in 1930 to help manage German reparation payments and to coordinate activities among central banks, served as little more than repository for gold reserves in the years following World War II.
As central banks have gained status in recent years, and thanks to imaginative leadership, the BIS has reawakened and taken on a number of important roles, including setting international regulatory standards for global banking.
While it is encouraging to know that a hibernating IMF and World Bank may some day reawaken, it would be far better to see them invigorated now.
A more globalized world needs global financial institutions, but ones that focus on coordination, supervision and technical advice, not redundant lending mechanisms.
Before any real change can place, both institutions require fundamental governance changes.
The puzzling circumstances of the IMF head’s sudden departure announcement do not justify a business as usual approach to his replacement.
Nor does the closed-door succession process at the Bank, where the US continued its sixty year lock on the Presidency, justify continuing European monopolization of the Fund job.
Two wrongs do not make a right.
Tymoshenko’s Trial and Ukraine’s Future
STOCKHOLM – There is little doubt that the embarrassing spectacle of the trial of former Ukrainian Prime Minister Yulia Tymoshenko – and her recent arrest on contempt charges during the proceedings – is causing great damage to her country.
And there is little doubt that how Ukraine develops will be of great importance for Europe’s future.
Ukraine’s Orange Revolution in 2004 ignited the hope of a new wave of democratic reforms in the countries to the east of the European Union – a period of so-called “color” revolutions.
Soon, however, those forces that feared losing power in this vast and important region began a determined counter-offensive.
Nonetheless, Ukraine continued to stumble in a European direction, preserving important parts of the gains made in 2004.
The 2010 comeback of President Viktor Yanukovych was essentially the result of a free and fair election.
It took some time, but Yanukovych’s determination to press on with the European integration efforts begun by his predecessor, Viktor Yushchenko, has become increasingly clear – in the face of repeated calls (and sometimes thinly veiled threats) by Russia to join its customs union with Belarus and Kazakhstan.
Indeed, tension with Russia could well escalate towards the end of the year, because Ukraine’s foreign-policy orientation is of clear consequence to the Kremlin.
A democratic Ukraine with an open economy and close ties with the European Union could not fail to influence Russia’s future path as well.
Negotiations for an association agreement between Ukraine and the EU, which includes far-reaching provisions for trade and regulatory integration, are well advanced, and could even be concluded this year.
The agreement could become a model for similar agreements with other countries belonging to the EU’s Eastern Partnership.
Georgia and Moldova arelined up to start similar negotiations.
Ukraine, reasonably enough, wants this agreement to be accompanied by an acknowledgment of its European destiny, and by clear steps towards reciprocal visa-free travel.
Such an acknowledgement could be seen as formal recognition of the fact that membership of the EU remains a long-term option for Ukraine.
All of that has been put in profound jeopardy by Tymoshenko’s trial.
Of course, few saints grace Ukrainian politics. Indeed, large-scale corruption has become entrenched in the country’s political system, with various oligarchic groups often battling each other.
The corruption networks surrounding the old Soviet pipeline system carrying gas from Siberia to Western Europe have obviously impeded Ukraine’s political development.
But, whether saint or sinner, everyone deserves a fair hearing, not a show trial.
The rule of law must apply to all, and very few believe that any of the charges against Tymoshenko would stand the slightest chance of being upheld in a Western court.
It all smacks of a politically directed attempt by Yanukovych and his supporters to rid themselves of a powerful opponent before the next election.
Together with other similar cases, these trials raise serious questions about Ukraine’s judicial system and law enforcement agencies.
They provide the clearest indication yet that Ukraine, despite assurances by Yanukovych’s government, is developing in the wrong direction.
Negotiations on the EU association agreement should proceed – this is an issue of strategic importance to Europe – but subsequent steps will inevitably depend on Ukraine’s commitment to the values and principles underpinning European integration.
If the bizarre scenes now being witnessed in Kyiv continue, even Ukraine’s closest friends in Europe will find it very difficult to make the case for a deepening of relations.
Tymoshenko’s trial, and how she is treated by the Ukrainian authorities, must not only be fair, but also must be seen to be fair.
Ukraine’s moves in the direction of the EU reflect its efforts to modernize and reform its economy.
Indeed, the country could develop into a mini-China, placing massive manufacturing capacity immediately adjacent to the global economy’s largest integrated market.
And Ukraine’s potential as an agricultural producer is equally impressive.
Yet Ukraine currently is struggling to meet the conditions of its IMF assistance program.
Parliament watered down a proposal for far-reaching pension reform to the point that it borders on useless, and repeated promises to stop subsidizing wasteful energy consumption through low gas prices have not been honored.
Determined reform policies could overcome these obstacles; but, if Ukraine wants to proceed on the EU path, it must understand that the rule of law is a precondition for substantial integration.
Yanukovych’s government must take stock of its behavior.
Freedom House concluded earlier this year that, since Yanukovych came to power in 2010, Ukraine “has become less democratic and, if current trends are left unchecked, may head down a path toward autocracy and kleptocracy.” But its assessment also noted that “political and cultural diversity is a bulwark against any one force dominating political space throughout the country.”
So Ukraine’s future remains open.
It is a great country that deserves a secure and prosperous future as a member of Europe’s family.
The show-trial of Yulia Tymoshenko, unfortunately, risks turning it into an estranged cousin.
Tzipi Livni’s Israel
HAIFA – Famously irreverent, Israelis tend to call their leaders by their first name or childhood nickname.
But don’t be fooled: Tzipi (Tzipora) Livni is nobody’s close friend.
Her dry style, personal remoteness, and forced smiles make her an atypical Israeli.
Perhaps the country needs exactly this just now: an atypical Israeli at the steering wheel.
Newly elected as leader of the Kadima party, Livni only barely defeated her rival, Shaul Mofaz.
Her predecessor, Ehud Olmert, inundated by corruption charges and set to resign, is hardly her best asset.
But, beyond narrow party confines, opinion polls were exceptionally kind: a vast cross-section of the Israeli public wants Livni to lead.
It has been a while since any national figure won such high esteem.
If she manages to rebuild Olmert’s coalition and become Israel’s next prime minister, Livni’s initial credit at home and abroad will be outstanding.
The reason is that Livni is the quintessential envoy of “Middle Israel.”
She comes from the heartland of a successful and moderate civil society flanked by extremism and rage.
Despite her brief spell in Mossad, Israel’s spy service, Livni is deeply civilian when set against Israel’s militarized landscape.
Given reasonable security conditions, she may be able to navigate Israel from war to peace.
She represents the civic values that have been common to many “middle Israelis” ever since Theodore Herzl first put them in writing: the Jewish state must be modern and democratic to the core.
It should respectfully leave the rabbis and the army officers in their confined quarters.
It belongs in the world of nations, and seriously strives for peace with its Arab neighbors and equality for all its citizens.
The vast center of the Israeli political spectrum nowadays is essentially Herzlian.
Uninterested in nationalist daydreams or religious mystique, we simply want to live safely, and, if at all possible, next door to a stable and peaceful Palestine.
But, for now, Middle Israel is conducting its creative and affluent life alongside an assortment of Muslim and Jewish fanatics, many of whom are sponsored by the moderate middle’s tax money.
Livni herself, like other ex-Likudniks – including her mentor, Ariel Sharon – cool-headedly read the map.
She gave up the dream of Greater Israel in favor of a two-state solution.
If she becomes prime minister, her term may prove to be a window of opportunity, perhaps a last chance, to enact this least-of-evils settlement for the region’s future.
Moreover, Livni is as clean as politicians come.
Her legal background and previous experience as minister of justice accentuate her self-declared mission: stabilizing Israeli government and cleaning up all traces of corruption, including those associated with Olmert and Sharon.
Israel’s excellent judiciary can rely on her full support.
Livni is also an unpretentious person, not quite as ascetic as Menachem Begin and David Ben Gurion, but far humbler than Israel’s last four prime ministers, all men of sturdy egos and large expense accounts.
Livni is a selective and unsentimental peacemaker.
As minister for foreign affairs, she appeared to distrust Syria’s peace signals but kept an open link of negotiation with Palestinian President Mahmoud Abbas.
She is not “nice,” her rhetoric tends to be flat and uninspiring, and her English is not great.
Nor, for that matter, is her Hebrew.
But linguistic skills, like gender, are refreshingly irrelevant at this moment.
Far removed from left-wing apologetics, Livni is a self-righteous believer in Israel’s basic right to exist.
Yet she is ready to do business with pragmatic Palestinians and offer them full sovereignty in exchange for full peace.
She will not allow the repatriation of Palestinians to Israel proper (the controversially named “right of return”), but territory is not holy to her.
And she is offering Jews and Arabs some hope, an open horizon, and low-key rationality.
Here is an Israel that you may not recognize, especially if the electronic media is your window on the world.
In Israel’s lively market of ideological debates, the fact that Livni is a woman is almost beside the point.
After all, Israel is not the United States, and gender can never work as anyone’s sole adjective.
Nevertheless, if Livni becomes Israel’s prime minister in a few weeks, then Israel will become the world’s first country where all three branches of governments are led by women.
She would join the head of the legislature, Knesset Speaker Dalia Itzik, and the head of the judiciary, Supreme Court President Dorit Beinish – not bad for a warring nation with generals-turned-politicians and a macho public image.
Middle Israel has produced the Livni mindset, but there are many other forces at work.
Livni may fail in several ways.
If she does not put a coalition together, Israel will go to the ballot box and a religious-right coalition would be likely to emerge.
Even if she persists, she may break her teeth on the same bones of contention that kept her predecessors from achieving security and peace.
But, given Livni’s record, she richly deserves the chance to try.
The End of Work as We Know It
PARIS – In 1983, the American economist and Nobel laureate Wassily Leontief made what was then a startling prediction.
Machines, he said, are likely to replace human labor much in the same way that the tractor replaced the horse.
Today, with some 200 million people worldwide out of work – 30 million more than in 2008 – Leontief’s words no longer seem as outlandish as they once did.
Indeed, there can be little doubt that technology is in the process of completely transforming the global labor market.
To be sure, predictions like Leontief’s leave many economists skeptical, and for good reason.
Historically, increases in productivity have rarely destroyed jobs.
Each time that machines yielded gains in efficiency (including when tractors took over from horses), old jobs disappeared, but new jobs were created.
Furthermore, economists are number crunchers, and recent data show a slowdown – rather than an acceleration – in productivity gains.
When it comes to the actual number of jobs available, there are reasons to question the doomsayers’ dire predictions.
Yet there are also reasons to think that the nature of work is changing.
To begin with, as noted by the MIT economist David Autor, advances in the automation of labor transform some jobs more than others.
Workers carrying out routine tasks like data processing are increasingly likely to be replaced by machines; but those pursuing more creative endeavors are more likely to experience increases in productivity.
Meanwhile, workers providing in-person services might not see their jobs change much at all.
In other words, robots might put an accountant out of work, boost a surgeon’s productivity, and leave a hairdresser’s job unaltered.
The resulting upheavals in the structure of the workforce can be at least as important as the actual number of jobs that are affected.
Economists call the most likely outcome of this phenomenon “the polarization of employment.”
Automation creates service jobs at the bottom end of the wage scale and raises the quantity and profitability of jobs at its top end.
But the middle of the labor market becomes hollowed out.
This type of polarization has been going on in the United States for decades, and it is taking place in Europe too – with important consequences for society.
Since the end of World War II, the middle class has provided the backbone of democracy, civil engagement, and stability; those who did not belong to the middle class could realistically aspire to join it, or even believe that they were part of it, when that was not the case.
As changes in the job market break down the middle class, a new era of class rivalry could be unleashed (if it has not been already).
In addition to the changes being wrought by automation, the job market is being transformed by digital platforms like Uber that facilitate exchanges between consumers and individual suppliers of services.
A customer calling an Uber driver is purchasing not one service, but two: one from the company (the connection to a driver whose quality is assured through customer ratings) and the other from the driver (transport from one location to another).
Uber and other digital platforms are redefining the interaction among consumers, workers, and employers.
They are also making the celebrated firm of the industrial age – an essential institution, which allowed for specialization and saved on transactions costs – redundant.
Unlike at a firm, Uber’s relationship with its drivers does not rely on a traditional employment contract.
Instead, the company’s software acts as a mediator between the driver and the consumer, in exchange for a fee.
This seemingly small change could have far-reaching consequences.
Rather than being regulated by a contract, the value of labor is being subjected to the same market forces buffeting any other commodity, as services vary in price depending on supply and demand.
Labor becomes marked to market.
Other, less disruptive changes, such as the rise of human capital, could also be mentioned.
An increasing number of young graduates shun seemingly attractive jobs in major companies, preferring to earn much less working for start-ups or creative industries.
While this can be explained partly by the appeal of the corresponding lifestyle, it may also be a way to increase their overall lifetime income.
Instead of renting their set of skills and competences for a pre-set price, these young graduates prefer to maximize the lifetime income stream they may derive from their human capital.
Again, such behavior undermines the employment contract as a basic social institution and makes a number of its associated features, such as annual income taxation, suboptimal.
Whatever we think of the new arrangements, we are unlikely to be able to stop them.
Some might be tempted to resist – witness the recent clashes between taxi and Uber drivers in Paris and the lawsuits against the company in many countries.
Uber’s arrangement may be fraudulent according to the existing legal framework, but that framework will eventually change.
The transformative impacts of technology will ultimately make themselves felt.
Rather than try to stop the unstoppable, we should think about how to put this new reality at the service of our values and welfare.
In addition to rethinking institutions and practices predicated on traditional employment contracts – such as social security contributions – we will need to begin to invent new institutions that harness this technology-driven transformation for our collective benefit.
The backbone of tomorrow’s societies, after all, will be built not by robots or digital platforms, but by their citizens.
Uganda’s Smart Protectionism
KAMPALA – On a balmy afternoon, I met Dr. Gilbert Bukenya at his home on the shores of Lake Victoria, where we talked about the future of farming in Uganda. “By farming smarter,” he said, “Ugandans not only can grow more, they can earn more money.”
Working smarter is no empty slogan; it is the key to modernizing African agriculture.
An advocate of food self-sufficiency for Uganda, Bukenya wants Ugandans to eat more homegrown rice, thereby boosting local farmers and rice millers while freeing hard cash for higher uses.
Bukenya has long promoted a new strain of African rice that grows in uplands (as opposed to wetland paddies) and requires less water.
Embracing the new rice is part of the working-smarter formula.
Once rice output began to expand, Bukenya and other Ugandan politicians played another smart card: they lobbied successfully for a 75% duty on foreign rice, which stimulated rice production further.
Rice output has risen by two and a half times since 2004, according to the Ministry of Trade, to 180,000 metric tons, while consumption of imported rice fell by half from 2004 to 2005 alone.
Uganda’s importers, seeing the shift, have invested in new mills in the country, expanding employment and creating competition for farmers’ output, improving prices.
New mills, meanwhile, lowered the cost of bringing domestic rice to market, so that consumers now still pay about the same for rice as they always have.
And Uganda is poised to start exporting rice within East Africa and beyond. “It’s a very important crop for raising income and commercializing agriculture,” says Nelson Gagawala Wambuzi, Minister of State for Trade.
Uganda’s success in expanding rice production is especially interesting given that the people of sub-Saharan Africa spend nearly $2 billion a year on rice grown outside of Africa.
The amount of spending on rice alone by Africans equals the combined national budgets of Ghana and Senegal.
As more Africans move to cities, they acquire a taste for rice, which is easy to store and can be cooked quickly.
But such spending on imported rice is a scandal, because, with the help of wise policies, African farmers could grow much more rice, perhaps enough to eliminate virtually all imports.
Much of the rice grown in Pakistan, Vietnam, and especially America is stimulated by subsidies, and then dumped into African markets at low prices – sometimes below the cost of production.
These rice exporters, including the US, also maintain stiff import duties, thereby protecting domestic farmers from global competition.
African governments sharply reduced or eliminated duties on imported rice in the 1990’s, urged on by the World Bank, the International Monetary Fund, and influential free-market economists.
The assumption was that rich countries would reciprocate by curtailing subsidies to their farmers.
But they haven’t.
In response, a few African countries have raised duties on rice, violating a key tenet of neo-liberal trade philosophy.
But rice duties are working in Uganda – and in Nigeria, where rice output is also soaring and the value of imported rice is declining – and policymakers rightly believe that they must be maintained.
The big exporters, such as the US and Vietnam, continue to supply massive subsidies to their rice farmers.
Without protection, African farmers would once again be harmed by imports.
Indeed, African governments might wish to look selectively at other crops.
They need to rely on a mix of economic tools, including farm protectionism, aimed at helping indigenous producers.
Virtually every successful Asian economy was built on selective trade barriers – and in China and India, the world’s two fastest growing economies, such barriers remain in place.
Even Korea and Japan maintain massive duties on imported rice simply to protect the livelihoods of their own rice farmers.
Uganda and other African countries need to be careful that protectionism doesn’t become a cover for inefficiency or corruption.
And selective protectionism is of course no panacea for Africa, even when such policies effectively aid local producers.
But economic self-reliance is a worthy goal for most African countries, and Uganda’s experience suggests the potential of an approach long denigrated by the international community.
For too long, African governments have listened to the siren song of free trade – and have suffered from too much openness, not too little.
With the US and the European Union unwilling to slash their farm subsidies, Uganda’s rice experiment deserves wider attention, if only because it shows that Africans aren’t merely passive victims of international economic forces.
They are fighting back and, at least in the rice fields of Uganda, they are winning.
David Cameron’s Europe
STOCKHOLM – The next 18-24 months are likely to decide the shape of Europe for decades to come, and the United Kingdom has now started the clock on that process.
Reelected with a resounding – and entirely unexpected – majority in the House of Commons, Prime Minister David Cameron must now use his increased mandate to set out an EU reform package that is attractive to all member states.
In recent years, the tail has tended to wag the dog in the UK, with Cameron kowtowing to the fanatically anti-European wing of his Conservative Party, if only to hold the pro-withdrawal UK Independence Party at bay.
But now that his own authority has been strengthened significantly by his victory, with the UKIP emerging as the election’s biggest loser, he can now step forward as the pragmatic but committed European that he truly is.
In a series of speeches over recent years, Cameron has spoken about a European reform agenda centered on increasing the EU’s competitiveness and improving its institutions’ transparency.
In the wake of Russian revanchism and the mayhem spreading across the Middle East, were Cameron to speak today of the changes that Europe needs to make, I would hope that he would add his support for more effective common foreign and security policies.
If Cameron sets out such a reform agenda at the European Council in June and is prepared to listen as well as to talk, he could set in motion a process that benefits all of Europe.
Then, it will be primarily up to EU Council President Donald Tusk, under the Luxembourg, Netherlands, Slovakia, and Malta presidencies of the EU over the next two years, to move a reform package forward by early 2017.
This will be a process in which the EU’s 28 member states, rather than the European Commission, must be in command.
Only by appealing to and involving the EU’s national political institutions can EU reform succeed.
Next year should be a period of intense debate on a reform package that, when put together, will, it is hoped, be agreed by all of the EU’s members, because Cameron needs to hold his promised in-or-out referendum on the EU before the UK takes over the rotating presidency on July 1, 2017.
At the moment, opinion polls indicate that the UK electorate would vote for continued EU membership.
Then again, no opinion polls predicted that the general election would result in a majority Conservative government.
So no one should be under any illusion about the risks inherent in any British referendum on EU membership.
Of course, the EU is not powerless to influence the outcome.
The Union can do its part in the coming 18 months by demonstrating its ability to deliver not only a potent reform package, but also implement other key policies, such as the Transatlantic Trade and Investment Partnership with the United States and the Digital Single Market.
Success in such areas, and the economic benefits they will bring, will make leaving the EU even more unattractive for the UK.
But a UK decision to leave, should it come to that, would initiate a painful and complicated process of negotiating an exit and agreeing on some sort of new relationship.
There would be no attractive options, and the result – regardless of how much goodwill both sides bring to the talks – would leave both the UK and the EU visibly diminished, not least on the world stage.
Moreover, it would be naive to expect that the rest of the EU could just go on as before.
On the contrary, British withdrawal would likely inspire similar moves in other countries, with the risk that the EU, already weakened, might begin to fragment.
And, given his current efforts to divide Europe, one can be sure that Russian President Vladimir Putin would do all that he can to encourage, and finance, such a split.
During this period, the EU would also have to address the ongoing challenges to its eastern neighbors, particularly Ukraine, posed by Putin’s revisionism, as well as the meltdown of much of its southern neighborhood in the Middle East and North Africa.
In this context, a weakened and fractured Europe – unable to confront threats stemming from its immediate environment – would be a more dangerous place to live.
Cameron’s remarkable victory should be viewed as an opportunity to launch a renewed and reformed EU in the next two years.
The UK’s European partners expect Cameron to frame the debate that must now begin if a truly stronger EU – one that can face up to its future and its future challenges – is to emerge.
But there is also the possibility of it all going terribly wrong.
In these dangerous times, the consequences of Europe’s disintegration must not be underestimated.
Keeping Europe’s Eastern Promise
KYIV – For many years, the European Union’s eastward expansion seemed unstoppable.
But with Russia’s invasion of Ukraine, President Vladimir Putin appears to have succeeded in ordering a halt to Europe’s efforts to extend democracy, the rule of law, and open markets throughout the continent.
The EU must not kowtow to his demands.
Ukraine’s fate has become Europe’s fate.
Indeed, Putin not only wants to stop European political, civic, and social norms from taking root within Ukraine; he wants to roll them back in the Baltics, the Balkans, and anywhere else in Europe made politically brittle by economic crisis and/or demagogic populism.
The EU Eastern Partnership summit in Riga can and must demonstrate Europe’s determination to defend its unity, security, and values in the face of Russian aggression.
And it must do so in concrete ways, not simply with quickly forgotten official communiqués for which the Kremlin and its Ukrainian separatist proxies have only contempt.
Of paramount importance is to make the new policy a true partnership among peoples.
The citizens of the partner countries must become the real beneficiaries if this partnership is to become more than the inert agreement that it has been. Generous EU commitments on mobility, aid to SMEs and entrepreneurs, and a vast increase in educational opportunities are among the key ingredients that could make such a partnership politically popular for a vast majority.
Ukraine should be the centerpiece of any effort to revive the Eastern Partnership as a way to attract the support of Europeans who remain outside the EU.
Yes, the news from my country remains bad.
Thousands of our citizens are dead.
Hundreds of thousands are now refugees in their own homeland.
The Minsk II cease-fire agreement has failed to restrain Russian/separatist forces.
Although Ukraine’s economy is no longer in free-fall, as it was last winter, GDP has declined by a quarter since Russian troops first invaded in February 2014.
Official unemployment now stands at over 10%, compared to 7.3% before Russia’s occupation and annexation of Crimea.
Our national debt is mounting by the day to levels that inspired The Economist to suggest that we may become the “Greece of the east.”
Moreover, much of our economy remains in separatist hands, and they, no surprise, are running the stolen assets into the ground.
In the face of such calamitous conditions, Ukraine’s government is a bit like the proverbial Dutch boy who put his finger in a dike to stop the sea from leaking through.
Despite herculean efforts, more leaks continue to appear. The simple truth that Europe must grasp is that we Ukrainians simply do not have enough fingers to plug all the leaks, and thus rebuild our economy, on our own.
Despite the depth of Ukraine’s plight, Europe cannot avoid taking up the challenge that Putin has set before it.
After all, if Putin succeeds in turning Ukraine into a failed state with a frozen conflict embedded within it, he will seek the same outcome all along the EU’s borders, from Estonia to Greece.
Fortunately, the EU has a real partner in Ukraine, whose people’s devotion to Europe has been tested by snipers in the streets of Kyiv and now by the Russian army.
Their courage, and their newfound political activism, has stiffened the government’s backbone in implementing needed reforms and made it impossible for any political actor in Ukraine to buck the pro-EU consensus.
The EU can stiffen it even more by demanding much greater clarity in the fight against corruption.
Yet, given the war in the eastern Donbas region, the shattering of so much of our economy, and the precarious nature of our government’s finances, the International Monetary Fund and others are clearly asking too much of Ukrainians.
The idea that Ukraine can embrace the economic “shock therapy” that Poland pursued a quarter-century ago is the type of cookie-cutter policymaking that resulted in the 2008 global financial crisis.
That is why the Eastern Partnership, if it is to be renewed, must embrace bold new initiatives for Ukraine, and not try to reheat old policies designed for very different circumstances.
A recent report from the Vienna Institute for International Economic Studies provides some guidance concerning what the EU should now try to do for Ukraine.
For starters, the EU should help us create a more stable exchange-rate regime to overcome the currency volatility that has wracked our economy since Russia’s invasion.
And, although fiscal consolidation is necessary, given the state of our economy, Ukraine’s most vulnerable people are now enduring a hand-to-mouth existence.
They have nothing more to sacrifice.
On the contrary, they need relief, and Europe should insist that its programs, and those of the IMF, take their needs into account.
Perhaps most important for the long term, the EU must honor its commitment to the deep free-trade and association agreement that Ukraine’s previous government refused to sign in late 2013.
After all, it was to secure that agreement that young Ukrainians braved former President Viktor Yanukovych’s snipers, and are now braving the might of the Russian army.
To follow through would do more to anchor Ukrainians’ confidence in their European future, and to convince the Kremlin that it cannot succeed in rolling back European values, than anything else the EU might do.
One clear way that Europe can demonstrate that its association agreement with Ukraine remains alive is to encourage investment in my country.
Since Russia’s invasion, FDI into Ukraine has collapsed, which is precisely what Putin wants.
The EU can demonstrate its commitment to Ukraine’s economic renewal by having the European Investment Bank invest in a showcase infrastructure project, say improved rail links to the EU.
The EU faces a stark choice: a renewed Eastern Partnership or a renewed division of Europe.
The decisions that it makes, beginning at the Riga summit, will determine Europe’s fate for decades to come.
Last Chance for Ukraine and Europe
LONDON – The European Union stands at a crossroads.
The shape it takes five years from now will be decided in the coming 3-5 months.
Year after year, the EU has successfully muddled through its difficulties.
But now it has to deal with two sources of existential crisis: Greece and Ukraine.
That may prove too much.
Greece’s long-festering crisis has been mishandled by all parties from the outset.
Emotions now are running so high that muddling through is the only constructive alternative.
But Ukraine is different.
It is a black-and-white case.
Vladimir Putin’s Russia is the aggressor, and Ukraine, in defending itself, is defending the values and principles on which the EU was built.
Yet Europe treats Ukraine like another Greece.
That is the wrong approach, and it is producing the wrong results.
Putin is gaining ground in Ukraine, and Europe is so preoccupied with Greece that it hardly pays any attention.
Putin’s preferred outcome in Ukraine is to engineer a financial and political collapse that destabilizes the country, and for which he can disclaim responsibility, rather than a military victory that leaves him in possession of – and responsible for – part of Ukraine.
He has shown this by twice converting a military victory into a ceasefire.
The deterioration in Ukraine’s position between the two ceasefire agreements – Minsk I, negotiated last September, and Minsk II, completed in February – shows the extent of Putin’s success.
But that success is temporary, and Ukraine is too valuable an ally for the EU to abandon.
There is something fundamentally wrong with EU policy.
How else could Putin’s Russia have outmaneuvered Ukraine’s allies, which used to lead the free world?
The trouble is that Europe has been drip-feeding Ukraine, just as it has Greece.
As a result, Ukraine barely survives, while Putin has the first-mover advantage.
He can choose between hybrid war and hybrid peace, and Ukraine and its allies are struggling to respond.
The deterioration of Ukraine’s situation is accelerating.
The financial collapse of which I had been warning for months occurred in February, when the hryvnia’s value plummeted 50% in a few days, and the National Bank of Ukraine had to inject large amounts of money to rescue the banking system.
The climax was reached on February 25, when the central bank introduced import controls and raised interest rates to 30%.
Since then, President Petro Poroshenko’s jawboning has brought the exchange rate back close to the level on which Ukraine’s 2015 budget was based.
But the improvement is extremely precarious.
This temporary collapse has shaken public confidence and endangered the balance sheets of Ukrainian banks and companies that have hard-currency debts.
It has also undermined the calculations on which Ukraine’s programs with the International Monetary Fund are based.
The IMF’s Extended Fund Facility became insufficient even before it was approved.
But EU member states, facing their own fiscal constraints, have shown no willingness to consider additional bilateral aid.
So Ukraine continues to teeter on the edge of the abyss.
At the same time, a radical reform program within Ukraine is gaining momentum, and slowly becoming visible to both the Ukrainian public and the European authorities.
There is a stark contrast between the deteriorating external situation and the continuing progress in internal reforms.
This gives the situation in Kyiv an air of unreality.
One plausible scenario is that Putin achieves his optimal objective and Ukraine’s resistance crumbles.
Europe would be flooded with refugees – two million seems to be a realistic estimate.
Many people expect that this would mark the beginning of Cold War II.
The likelier outcome is that a victorious Putin would have many friends in Europe, and that the sanctions on Russia would be allowed to lapse.
That is the worst possible outcome for Europe, which would become even more divided, turning into a battleground for influence between Putin’s Russia and the United States.
The EU would cease to be a functioning political force in the world (especially if Greece also left the eurozone).
A more likely scenario is that Europe muddles through by drip-feeding Ukraine.
Ukraine does not collapse, but the oligarchs reassert themselves and the new Ukraine begins to resemble the old Ukraine.
Putin would find this almost as satisfactory as a complete collapse.
But his victory would be less secure, as it would lead to a second Cold War that Russia would lose, just as the Soviet Union lost the first.
Putin’s Russia needs oil at $100 a barrel and will start running out of currency reserves in 2-3 years.
The latest chapter in what I call the “Tragedy of the European Union” is that the EU will lose the new Ukraine.
The principles that Ukraine is defending – the very principles on which the EU is based – will be abandoned, and the EU will have to spend a lot more money on defending itself than it would need to spend helping the new Ukraine succeed.
There is also a more hopeful scenario.
The new Ukraine is still alive and determined to defend itself.
Though Ukraine, on its own, is no match for Russia’s military might, its allies could decide to do “whatever it takes” to help, short of becoming involved in a direct military confrontation with Russia or violating the Minsk agreement.
Doing so would not only help Ukraine; it would also help the EU to recapture the values and principles that it seems to have lost.
The Right Intervention in Ukraine
STOCKHOLM – The ongoing Greek drama may have transfixed Europe and the world, but the great crisis in Europe’s east has not gone away.
Ukraine remains under partial occupation by Russian-backed separatists, with intermittent fighting still taking place, despite the Minsk II ceasefire agreement.
The on-and-off fighting in Ukraine’s Donbas region since the Minsk deal was signed in February has made one thing clear.
If Russia is serious about seeking a solution to the conflict, it should be prepared to endorse the deployment of an international peacekeeping mission and force.
Such a mission could begin the process of rehabilitating the region, allow those displaced by the violence to return, and facilitate the reintegration of the Donbas into Ukraine with appropriate safeguards and devolved powers.
A useful model for this approach is at hand.
Two decades ago, the international community was entering the final phase of efforts to secure peace in Bosnia.
But there were also lingering conflicts in Croatia, notably in the Eastern Slavonia region, adjacent to Serbia.
Croatian military offensives, first in early May 1995, and a second in early August, had taken back three of four United Nations-protected sectors from separatist Serb control.
But the most important area, Sector East in Eastern Slavonia, remained under firm Serb control.
And, much like Russian President Vladimir Putin on the Ukraine issue today, Serbia’s then-president, Slobodan Milošević, insisted that the issue could be resolved only by direct talks between the Serb separatists and the Croat government in Zagreb.
The reality, of course, was that the Serb separatists were entirely dependent on the political, military, and economic support of Milošević’s Serbia.
And, in the end, Milošević agreed to the deployment of a UN mission and force, which was tasked with ensuring the region’s demilitarization and return to Croat sovereignty, after implementing the necessary safeguards for the Serbs living there.
Today, the UNTAES (United Nations Transitional Administration for Eastern Slavonia, Baranja, and Western Sirmium) mission is virtually forgotten – not because it failed, but because it succeeded.
To be sure, not every issue in Eastern Slavonia was sorted out then or in the years since; but there is no longer a conflict, and Croatia and Serbia now enjoy constructive bilateral relations.
This could be a model for the separatist-controlled areas of Donbas if the political will is there to make such an arrangement work.
But is the Kremlin serious about recognizing Ukraine’s sovereignty in the Donbas and resuming normal relations with the West?
At the moment, I strongly doubt it.
It is worth bearing in mind that Russia has driven every step toward escalation in this conflict – including the establishment of the separatist enclaves.
Indeed, the Kremlin appears to be waiting for Ukrainian President Petro Poroshenko’s government to fail and the West to split on the issue and stop taking an interest in its resolution.
At that point, perhaps, Putin will be ready to move against Ukraine to secure his own desired long-term outcome.
But if Ukraine’s government and the West remain united, the Kremlin might see that its enclaves in Donbas represent a threat mainly to Russia itself.
After all, the grim reality is that the separatist enclaves are in economic free-fall, with their societies becoming increasingly criminalized.
Donbas risks becoming a tar baby for which no one wants to take responsibility.
As this becomes apparent, Russia’s leaders could start to envisage a UNTAES-type solution for the region.
Absent any other arrangement, the Kremlin will have to do just that.
Former US Secretary of State Colin Powell’s doctrine – if you break it, you own it – applies to Putin’s intervention in Ukraine as much as to George W. Bush’s misadventure in Iraq.
There certainly are very difficult issues that must be sorted out before a peacekeeping mission could go into Donbas, notably the composition and formal mandate of whatever force is deployed.
But, again, if the will is there, these questions should not be intractable.
Such a mission could then ensure the real implementation of the political provisions of the Minsk II agreement.
Genuinely free and fair local elections, with the participation of all displaced people and refugees, will never be possible without a substantial international presence.
Today, this idea is sure to be dead on arrival.
So was UNTAES in the early discussions on Eastern Slavonia.
The Milošević regime then sounded exactly like the Kremlin now.
But tomorrow really is another day, and it is certainly not too early to start exploring options that promise not just to manage the conflict, but to resolve it.
Such an intervention might work – but only if and when both sides genuinely want a solution.
We are not there yet.
But if both Ukraine and the West stand firm and act to block further Russian efforts at destabilization, that day might come.
A Way Out for Ukraine and Russia
LONDON – The leaders of Russia and Ukraine will meet in Astana, Kazakstan, on January 15 to discuss, once again, an end to the fighting that has roiled eastern Ukraine’s Donbas region since last spring.
Hopes for a viable agreement are not high.
One reason why the crisis in Ukraine has proved so difficult to overcome is that its roots stretch far outside the country’s borders.
Finding a genuine solution will require the resolution of a dispute between Russia and the West that dates back to the 1990s, before Russian President Vladimir Putin came to power.
At its heart, the conflict in Ukraine is about a disagreement over NATO’s expansion into what Russia regards as its “near abroad.”
Fortunately, a solution is possible – but it will require a reworking of Europe’s security architecture.
Both sides are deeply committed to their positions.
In November, Putin’s spokesperson, Dmitry Peskov, told the BBC that Russia required a “100% guarantee that Ukraine will not join NATO.”
That is a promise that Western countries will be unable to provide.
For them, what is at stake is the principle that sovereign countries have the right to chart their own course, rather than be entangled in a larger power’s sphere of influence.
Indeed, it was this principle that, once invoked to justify NATO enlargement in the 1990s, put the two sides on a collision course.
With Russia’s neighbors free to join the alliance, the natural result could only be a new dividing line, one pressing up against the Russian Federation’s western and southern borders.
This outcome was foreseen by the veteran American diplomat George F. Kennan.
In an interview he gave to the New York Times in May 1998, he predicted that NATO enlargement would lead to a new Cold War.
Now that Kennan’s prediction has all but come to pass, the parties to the conflict would be wise to take a lesson from the diplomatic efforts that helped bring the original Cold War to an end – in particular, the 1990 Treaty on Conventional Armed Forces in Europe (CFE).
NATO enlargement may have rendered the treaty’s detailed provisions obsolete, but its underlying approach – a transparent inspections regime that enforces limitations on the overall quantity and, crucially, the regional concentrations of ground forces – remains applicable today.
For the West, a revamped CFE Treaty would help mitigate worries about military threats in the area that Russia has traditionally considered its sphere of influence.
Violations of the treaty would be easily detectable and allow time for the West to deploy countermeasures.
In addition, there would be no formal prohibition of NATO membership for Ukraine – or for any other country in the Russian periphery.
For Russia, a new treaty would allow it to live with the hitherto nightmare scenario of Ukrainian accession to NATO; as long as the pact remained in force, Ukraine’s membership would have no military consequences.
NATO, at least in the Russian hinterland, would become first and foremost a political organization.
Above all, a new treaty would allow both Russia and the West to secure their interests in a balanced and binding agreement.
For Russia, this would mean a significant improvement on what it has been offered since the end of the Cold War.
Though invitations by the West to join organizations such as the NATO-Russia Council or the G-8 may have been symbolically important and thus politically valuable, these venues provide only forums for discussion; they do not produce binding agreements.
A new treaty would do more than anything else to bring peace to Ukraine.
It would eliminate the primary motive behind Russia’s support for separatism in the country’s southeast: ensuring that Ukraine remains ineligible for NATO membership.
The dispute over the fate of Crimea would continue; but an agreement between Ukraine and Russia on the issue could be made a precondition of the treaty’s entry into full effect.
There are two other obvious objections to this proposal.
The first is that Putin would reject a treaty with NATO.
That should not stop the West from making the offer.
With the Russian economy in serious trouble, Putin may be looking for a way out of his corner.
The second objection is that the West would be best served by simply standing back and watching while sanctions and plunging oil prices bring down Russia’s economy – and ultimately Putin himself.
But this would be an irresponsibly dangerous and ultimately counterproductive strategy.
After all, economic and political breakdown in Russia would have profound adverse consequences well beyond Russia’s borders – particularly for Ukraine.
Ukraine Needs A Velvet Revolution
Ukraine is wracked by the biggest protests seen since communism's collapse over a decade ago.
Julia Tymoshenko, a former deputy prime minister turned dissident, explains why.
A poisoned public atmosphere threatens everyone who lives in Ukraine.
Corruption and incompetence have forged a state in which tens of millions of lives lay broken and hopeless; where vast swathes of the economy are in ruin; where internal and external debts multiply into many billions of dollars; and where an inept army of corrupt bureaucrats presides over a government that cannot meet the most elementary needs of Ukraine's people.
President Leonid Kuchma's regime tries to lull both Ukrainians and the outside world about this dark state of affairs.
It parrots soothing words about democratic principles, about the need for "social stability," and about signs of long-term economic growth that it alone sees.
But everything Kuchma's cabal says mocks the truth.
For as Kuchma's government mouths its platitudes, its cronies loot the national patrimony, handing it over to family and friends while they desecrate, plunder and sell the nation's independence to the highest bidder.
Why should people outside of Ukraine care?
Ukraine's fate matters because the country plays an important role in how the countries of the former Soviet Union are perceived.
A strong, prosperous Ukraine would make the whole region east of the Elbe look different.
A weak, poor Ukraine will always be in danger of whetting the appetites of Russia's unvanquished nationalists, thus undermining President Putin's efforts to make Russia a normal European country.
It will also incite fears of chaos in our neighbors.
Those risks are enhanced by the fact that Ukraine's economy is hugely in hock to Russia.
Because of the mess Mr. Kuchma has made of the economy, our thirst for Russian energy is not matched by an ability to pay the bill for these imports.
Moreover, under President Kuchma, the country is unable to respond to the West's strategic interests in Ukraine with practical signs of cooperation.
The European Union rebuffs Ukraine's approaches with increasing coldness.
The West's readiness to bail the country out has been stretched to the limit.
The cause of this situation is clear.
Today we note with bitterness that there is only one free person in Ukraine: its president.
He is free to do what he wants- free to betray state priorities, free to crush the life of every Ukrainian; free to hand out bits and pieces of the national economy to the favored few who do his bidding.
He is also Ukraine's only independent person- independent of his electoral promises; independent of responsibility for Ukraine's destiny and that of its people; independent of charity for the homeless and poor.
Independent, too, of global opinion, which long ago eliminated him from the list of respectable politicians.
Little of this gets reported (in or outside of Ukraine) because President Kuchma's arsenal of intimidation is vast.
Indeed, the heads of opposition or investigative journalists can literally be cut off, as happened in the case Georgi Gongadze, whose fate was prefigured in taped recordings on which President Kuchma is heard calling for Gongadze's elimination.
Journalists are tortured, abducted, beaten, deprived of their jobs, and their families are threatened.
But more than silence about Kuchma's actions results.
These threats make it certain that lies are printed and broadcast - lies that are the backbone of Kuchma's regime.
Opponents, too, find themselves under threat.
At this moment, the President's men are seeking to strip me of my parliamentary immunity.
Previously, I was twice arrested on charges that even Mr. Kuchma's tame courts failed to pursue.
I have even found myself in supposed "automobile accidents," an epidemic of which appears to effect President Kuchma's opponents.
As The Economist pointed out, a shockingly large number of opposition figures somehow lose their lives on Ukraine's roads and in other strange ways.
Ukraine's people tried to change their government in last spring's parliamentary elections.
The majority of voters supported parties that opposed President Kuchma.
But the president manipulated Ukraine's parliamentary procedures to continue his policies of divide and misrule.
So Ukrainians must find another legitimate means to restore their democratic choice.
Parliament must impeach President Kuchma.
Ukrainians of all walks of life are engaged in peaceful nationwide protests to bring about both this change and early presidential elections.
Some 200,000 of us braved arrest in central Kiev this week to demand Kuchma's eviction from power.
Of course, taking democracy "to the streets" is never an easy choice.
But as Prague's "Velvet Revolution" of 1989 demonstrated, as a last resort peaceful protests can galvanize a nation into ridding itself of a corrupt, undemocratic regime.
Ukraine's current autumn of discontent can end, as Shakespeare suggested, in a glorious summer, for our protests seek to change our government by legitimate democratic means, to restore normal life, and to revitalize democracy and economic development in Ukraine.
Why Ukraine Needs Weapons
MUNICH – It has become something of a mantra among diplomats and other foreign-policy analysts that there is no military solution to the conflict between Russia and Ukraine.
The only viable path to peace and stability, observers almost unanimously proclaim, is a diplomatic one.
But, despite the recent ceasefire agreement announced in Minsk, ongoing violence – reflected in the violent expulsion of Ukrainian forces from the town of Debaltseve – strongly suggests that it is time to consider what is needed to block any Kremlin-imposed military solution.
Three influential American think tanks have already done so, and arrived at the conclusion that the United States should begin supplying Ukraine not only with more non-lethal aid – such as drones, armored Humvees, and medical equipment – but also with “lethal defensive military assistance," in the form of light anti-armor missiles.
European governments, however, remain unwilling to reconsider their position on supplying defensive equipment to Ukraine, and have instead reiterated that a diplomatic solution is the only option.
Of course, from Ukraine's perspective, a one-on-one military confrontation with Russia is not a viable option.
Last year, when separatist forces in the Donbas region appeared to be crumbling under the weight of Ukraine's counter-offensive, it seemed possible that Ukraine would be able to reassert its sovereignty over the area.
But the Kremlin quickly deployed battalion-size tactical groups from the Russian army to support the rebels.
Ukraine's relatively weak forces did not stand a chance.
The move exemplifies Russia's commitment to do whatever it takes to prevent a military defeat of the separatist entities that it has incited and forged into fighting units – a determination that has endured, even as the conflict has placed considerable strain on its armed forces.
Given this, the prospects for Ukraine to reassert control over the Donbas region militarily are so slim that even trying to do so would be foolish.
If one considers the strategic ambitions of the separatists and their Russian patrons, Ukraine's prospects are even bleaker.
Beyond supplying the separatist groups with heavy and advanced weapons, and deploying special units and forces to support them, Russia now appears to be sending in “volunteers" to train a separatist army that could ultimately go on the offensive.
Such an army, separatist leaders hope, will enable them – at the very least – to secure control over the Donbas region.
They would then be positioned to secure a “Novorossiya" statelet extending along the entire Black Sea coast, up to and including Odessa.
And, in all likelihood, some would even dream of an eventual march into Kyiv.
To prevent this scenario from unfolding, a robust political dialogue with the Kremlin is clearly vital, as are continued economic sanctions to make clear that Russia will pay a rising price for ongoing aggression.
But trusting solely in a diplomatic dialogue and sanctions to bring about a lasting peace may be excessively optimistic.
A more comprehensive approach would focus on strengthening Ukraine in every respect.
To this end, political and diplomatic support is essential.
But perhaps even more important is backing for reforms aimed at eliminating corruption and promoting growth.
The recent agreement with the International Monetary Fund is of immediate importance in this respect, and the agreement with the European Union on a Deep and Comprehensive Free-Trade Area is crucial to the country's long-term transformation.
But if separatist groups, with support from Russia, believe that they can control Donbas and the Black Sea coast, efforts to rebuild Ukraine's society and economy will amount to little.
That is why Ukraine's external partners must also help to strengthen the country's defensive capabilities.
In such a charged situation, there will always be hotheads, eager to pursue military options.
But the greater concern is the behavior of pragmatists, who identify weaknesses that can be exploited.
If the Russian-backed separatists view Ukraine's defensive capacity as a serious weakness, there will be little to compel them not to push forward in pursuit of their ambitions.
A political or diplomatic solution would be next to impossible.
Security experts should identify which actions powers like the US and Europe could take to improve Ukraine's defensive capabilities.
The requests for non-lethal equipment made by Ukrainian President Petro Poroshenko at the recent Munich Security Conference could provide some guidance.
German Chancellor Angela Merkel and others are clearly right when they say that there is no purely military solution to the conflict in Ukraine.
But a year of talks and failed agreements has demonstrated that there is no purely diplomatic solution either.
Only by eliminating – or at least seriously diminishing – the potential for the separatists and their Russian backers to continue their military campaign can Ukraine and its partners hope for a lasting political solution.
Ukraine’s Other Chernobyls
KYIV – In 1983, the Soviet Union inaugurated two nuclear reactors in what is now Ukraine.
One of them, unit four at Chernobyl, experienced an explosion and fire three years later that released large quantities of radioactive particles into the atmosphere – a catastrophic accident whose effects are still being felt far beyond Ukraine’s borders.
The other reactor, unit one at the South Ukraine Nuclear Power Station, remains in operation, though all indications suggest that it should be retired.
The prolonged operation of unit one and the country’s aging nuclear power plants probably would not have been possible without financial support from European taxpayers, delivered through the European Bank for Reconstruction and Development and the European Atomic Energy Community (Euratom) as part of a €600 million ($650 million) “safety upgrade” program.
In defiance of both the Convention on Environmental Impact Assessment in a Transboundary Context (the Espoo convention) and the EBRD loan agreement, the program was undertaken in the absence of any consultation with Ukraine’s European neighbors.
Thanks to these efforts, the South Ukraine plant was granted a ten-year lifetime extension permit in 2013 by the State Nuclear Regulatory Inspectorate (SNRIU).
But, according to a comprehensive study released last month by the National Ecological Centre of Ukraine (NECU), the assessment on which this decision was based was deeply flawed.
In fact, the unit one reactor suffers dangerous vulnerabilities, with observed wear in some areas already exceeding tolerable levels by a factor of ten.
Such vulnerabilities, the study warns, could result in a nuclear emergency, including a release of radioactive particles inside the unit – or even into the environment.
This is hardly an isolated case.
Three of Ukraine’s nuclear power units are currently operating beyond their design lifetime, with nine others set to reach the end of their intended lifetime within the next five years.
Most immediately, unit two in South Ukraine will reach that point in less than three weeks, meaning that the SNRIU must now decide whether to grant that unit a 20-year lifetime extension.
The SNRIU will make this critical decision without key information about the health and environmental risks that the reactor poses to Ukraine and its neighbors.
Though this contravenes Ukraine’s responsibility, as a signatory to the Espoo convention, to carry out a cross-border environmental-impact assessment (not to mention missing the opportunity to consider potential alternatives to continuing the reactor’s operation), no such analysis is expected to take place.
Last month, campaign groups in neighboring countries wrote to their representatives at the EBRD, requesting that the bank suspend its support for revitalizing Ukraine’s nuclear power plants until a cross-border assessment is carried out.
A similar letter, signed by CEE Bankwatch Network and 45 other environmental NGOs from across the region, had already been sent to the European Commission’s Directorate-General for the Environment and the European Union’s director at the EBRD.
But, even with such an analysis, Ukraine’s nuclear regulator would be in no position to guarantee the safe operation of aging nuclear units.
Not only is its professional capacity dubious, as the NECU study highlighted; its independence has been dramatically curtailed by the government’s recent decision to reduce significantly regulatory obligations for businesses and state-owned companies (except with regard to taxation).
As the EBRD acknowledged in February, the SNRIU is now prohibited from taking the lead in conducting safety inspections, which is in breach of the EBRD loan agreement conditionality.
This is to say nothing of the immediate threat posed by the ongoing military conflict with Russia-backed rebels in the Donbas region of eastern Ukraine.
Beyond the obvious risks associated with instability, there is the fact that Ukraine depends on Russia not only for most of the fuel to run its aging reactors, but also for the treatment and storage of most of its spent fuel.
In other words, Ukraine’s dependence on nuclear energy, which accounts for about half of its electricity generation, has increased its strategic vulnerability to Russia.
That alone should be enough to convince Ukraine’s government not to perpetuate their country’s reliance on this insecure and dangerous energy source.
If it is not, the 29th anniversary of the Chernobyl disaster, commemorated this month, should serve as a stark reminder of how much damage a nuclear accident can cause.
Ukraine should take its reactors’ expiration dates as an opportunity to pursue a safer, more sustainable energy future.
Given that this would also be in Europe’s interest, EU governments and citizens must do whatever it takes to support this effort.
It is a long-term commitment, but one for which there may not be a lifetime extension.
Ukraine, Russia, and European Stability
KYIV – Since the collapse of the Soviet Union, it has seemed that new rules were being established for the conduct of international relations in Central and Eastern Europe and Central Asia.
The watchwords were independence and interdependence; sovereignty and mutual responsibility; cooperation and common interests.
They are good words that need to be defended.
But the Georgia crisis provided a rude awakening.
The sight of Russian tanks in a neighboring country on the 40th anniversary of the Soviet invasion of Czechoslovakia has shown that the temptations of power politics remain.
The old sores and divisions fester. Russia remains unreconciled to the new map of Europe.
Russia’s unilateral attempt to redraw that map by recognizing the independence of Abkhazia and South Ossetia marks not just the end of the post-Cold War period; it is also a moment that requires countries to set out where they stand on the significant issues of nationhood and international law.
Russian President Dmitry Medvedev says that he is not afraid of a new Cold War.
We don’t want one.
He has a big responsibility not to start one.
Ukraine is a leading example of the benefits that accrue when a country takes charge of its own destiny, and seeks alliances with other countries.
Its choices should not be seen as a threat to Russia, but its independence does demand a new relationship with Russia – one of equals, not that of master and servant.
Russia must not learn the wrong lessons from the Georgia crisis: there can be no going back on fundamental principles of territorial integrity, democratic governance, and international law.
It has shown that it can defeat Georgia’s army.
But today Russia is more isolated, less trusted, and less respected than it was a month ago.
It has made short-term military gains, but over time it will feel economic and political losses.
If Russia truly wants respect and influence, it must change course.
Prime Minister Vladimir Putin has described the Soviet Union’s collapse as “the greatest geopolitical catastrophe” of the twentieth century.
But most people of the former Soviet bloc don’t see it that way.
It will be a tragedy for Russia if it spends the next 20 years believing it to be the case.
Indeed, since 1991, the West has offered Russia extensive co-operation with the European Union and NATO, as well as membership of the Council of Europe and the G-8.
Summits, mechanisms, and meetings have been developed not to humiliate or threaten Russia, but to engage it.
The EU and the United States provided critical support for the Russian economy when it was needed, Western companies have invested heavily, and Russia has benefited significantly from its reintegration into the global economy.
But Russia has recently met our efforts with scorn, from suspension of its participation in the Conventional Armed Forces Treaty to harassment of business people and cyber attacks on neighbors.
Now we have Georgia.
Of course, Russia can and should have interests in its neighbors, but, like everyone else, it must earn that influence.
Indeed, these countries do not make up some “post-Soviet space” to which Putin often refers.
The collapse of the Soviet Union created a new reality – sovereign, independent countries with their own rights and interests.
Russia also needs to clarify its attitude about the use of force to solve disputes.
Some argue that Russia has done nothing not previously done by NATO in Kosovo in 1999.
But this comparison does not bear serious examination.
NATO’s actions in Kosovo followed dramatic and systematic abuse of human rights, culminating in ethnic cleansing on a scale not seen in Europe since World War II.
NATO acted only after intensive negotiations in the United Nations Security Council and determined efforts at peace talks.
Special Envoys were sent to warn then-Yugoslav President Slobodan Milosevic of the consequences of his actions.
None of this can be said for Russia’s use of force in Georgia.
Likewise, the decision to recognize Kosovo’s independence came only after Russia made clear that it would veto the deal proposed by the UN Secretary General’s Special Envoy, former Finnish President Martii Ahtisaari.
Even then we agreed to a further four months of EU-US-Russia negotiations in order to ensure that no stone was left unturned in the search for a mutually acceptable compromise.
By contrast, in Georgia, Russia moved from support for territorial integrity to breaking up the country in three weeks and relied entirely on military force to do so.
Russia must now ask itself about the relationship between short term military victories and long-term economic prosperity.
The conflict in Georgia has been followed by a sharp decline in investor confidence.
Russia’s foreign-exchange reserves fell by $16 billion in one week, and Gazprom’s value fell by the same amount in one day.
Risk premia in Russia have skyrocketed.
Isolating Russia would be counter-productive, because its international economic integration is the best discipline on its politics.
Moreover, isolation would only strengthen the sense of victimhood that fuels intolerant Russian nationalism, and it would compromise the world’s interests in tackling nuclear proliferation, addressing climate change, or stabilizing Afghanistan.
But the international community is not impotent.
Europeans need Russian gas, but Gazprom needs European markets and investment.
Our approach must be hard-headed-engagement.
That means bolstering allies, rebalancing the energy relationship with Russia, defending the rules of international institutions, and renewing efforts to tackle “unresolved conflicts,” not only in South Ossetia and Abkhazia, but also in Transdniestria and Nagorno Karabakh.
Each has its roots in longstanding ethnic tensions, exacerbated by economic and political underdevelopment.
Here, Ukraine, with its eight million ethnic Russians – many of them in Crimea – is key.
Its strong links to Russia are firmly in both countries’ interests.
But Ukraine is also a European country, which gives it the right to apply for EU membership – an aspiration voiced by Ukraine’s leaders.
The prospect and reality of EU membership has been a force for stability, prosperity, and democracy across Eastern Europe.
Once Ukraine fulfills the EU’s criteria, it should be accepted as a full member.
Nor does Ukraine’s relationship with NATO pose a threat to Russia.
The strengthening of Ukraine’s democratic institutions and independence that will result from it will benefit Russia in the long term.
Europe also must re-balance its energy relationship with Russia by investing in gas storage to deal with interruptions, diversifying supplies, and establishing a properly functioning internal market, with more interconnections between countries.
We must also reduce our dependence on gas altogether by increasing energy efficiency, and by investing in carbon capture and storage technology for coal, and in renewable resources and nuclear power.
In all international institutions, we must review our relations with Russia.
I do not apologize for rejecting knee-jerk calls for Russia’s expulsion from the G-8, or for EU-Russia or NATO-Russia relations to be broken.
But we do need to examine the nature, depth, and breadth of relations with Russia.
And we will stand by our commitments to existing NATO members, while renewing our determination that Russia will have no veto over its future direction.
The choice today is clear.
No one wants a new cold war, but we must be clear about the foundations of lasting peace.
Saving Ukraine
MUNICH – Ukraine faces two major threats to its future.
On one side stands the risk of protracted conflict and the partition of its territory.
On the other lurks the danger of bankruptcy and economic turmoil.
Looming over them both is the country’s relationship with Russia.
Addressing the challenges facing Ukraine will require policymakers inside and outside of the country to work together to stabilize the country’s economy, protect its territory, and create space for reforms, while seeking to improve cooperation with its powerful eastern neighbor.
Sending a clear military message remains essential.
NATO rightly responded to Russia’s annexation of Crimea, ongoing support for separatists in eastern Ukraine, and mock attacks on Western countries with a program of political and military reassurance.
Just as the alliance demonstrated solidarity with West Germany during the Cold War, it must now do the same with its eastern allies.
This effort should be buttressed by a reversal in the downward trend in defense spending by many NATO members.
The European Union must also begin to put in place a more credible and capable defense policy.
The time has come to realize fully the principle of European defense integration.
Doing so would not only strengthen the EU’s ability to act, it would also send a powerful signal of resolve to the Kremlin.
At the same time, the EU must advance its energy union, diversifying its oil and gas imports and lessening its dependence on Russia. Finally, given the threat a defenseless Ukraine poses to European stability, it would be a mistake to rule out the provision of military aid to the country.
In addition to the military response, an economic intervention will be necessary.
Ukraine is in desperate need of financial assistance – a point that George Soros was among the first to recognize.
Indeed, providing Ukraine with assistance is far more important than punishing Russia with sanctions.
Just as European Central Bank President Mario Draghi’s declaration that “the ECB is ready to do whatever it takes to preserve the euro” calmed financial markets, so would a proclamation by the EU that it will do everything necessary to support Ukraine’s recovery.
Given the debate over Greece, spending the sums necessary to pull the country out of its slump is likely to be politically pricey, but the cost – political, military, and financial – of allowing Ukraine to collapse is too high for failure to be an option.
Putting in place a rigorous oversight mechanism could help reassure governments and voters, and facilitate the country’s Association Agreement with the EU.
The power of European values should not be underestimated.
The young Ukrainians who protested on Maidan square – not against Russia, but against a corrupt elite that was robbing their country of its European future – must be supported.
The EU has an opportunity to make a large social impact by moving ahead with a visa-free travel program, creating more grants for Ukrainian students, and increasing support for NGOs.
These steps on their own, however, will not be enough.
Even as the EU and NATO move to support Ukraine, they must also work to address Russia’s concerns.
Their central strategy should be to demonstrate that while the West remains committed to the defense of Ukraine, it is ready to work constructively with Russia should the Kremlin prove willing to change course.
Sanctions must be maintained for as long as the Kremlin and the Ukrainian separatists it has supported fail to comply with the Minsk Protocol, but it is important to begin to bring Russia out of the cold.
To start, the dispute over Ukraine’s prospects of joining NATO must be definitively settled.
After all, the question of whether to admit Ukraine into NATO has already essentially been answered in the negative in many European capitals.
The EU could, while offering increased assistance, encourage Ukraine to redefine itself as a bridge between East and West – as Finland, Austria, and even Switzerland have done in the past.
In the meantime, steps must be taken to work around Russia’s exclusion from the G-8.
One possible approach would be to turn the “5+1” format – which enabled the five permanent members of the United Nations Security Council (China, France, Russia, the United Kingdom, and the United States), plus Germany, to conduct negotiations with Iran – into a broader relationship.
Such a forum could address all kinds of global and regional issues, ranging from Ukraine to Syria, with the additional benefit of increasing American involvement in the effort to manage the crisis in Ukraine.
A greater emphasis must be put on preventing military miscalculations and unintended escalations, especially given the dramatic increase in provocations.
A military-to-military dialogue between NATO and the Russian armed forces could greatly reduce these risks.
This kind of cooperation could serve as a first step in a collective effort by key states – including Russia – to strengthen Europe’s security architecture.
Conventional and nuclear arms control must be put back high on the agenda.
Visions of strategic economic cooperation also deserve attention.
The inclusive multilateral framework of the Organization for Security and Cooperation in Europe could serve as a basis for the way forward.
Diplomatic and political progress proved possible even during the Cold War.
Russia should be offered the chance to give new life to such an effort.
The ultimate objective, however, should be made explicitly clear.
Neither the conflict in Ukraine nor the dialogue with Russia should be allowed to undermine the Helsinki principles or the Paris Charter agreed at the Cold War’s end.
The goal should be for Russia and the West to work together to reaffirm and reinforce European security principles and, if necessary, add to them.
Russia should be made to understand that it is welcome to join the effort – or risk further isolation.
Ukraine’s Democratic Choice
Suddenly, Ukraine faces another stark choice: dismiss the government and parliament and hold new elections, or see the country’s independence surrendered bit by bit.
There is renewed talk, too, of violent civil unrest.
None of this should be surprising, given how our corrupt rulers systematically incite regional and ethnic hatred.
Some say that President Viktor Yushchenko’s decision this week to dismiss Prime Minister Viktor Yanukovych’s government was unwarranted.
They are wrong: Yushchenko’s actions were necessary because the Yanukovych government, in clear violation of the law, was preparing to mount a constitutional coup that would have stripped the president of his remaining supervisory powers over the army and police.
Either the president acted now, or Ukraine would return to the absolute rule of criminal clans that existed before our Orange Revolution in 2004.
I did not agree with Yushchenko’s decision to appoint Yanukovych prime minister following last year’s parliamentary election.
For a democratic-minded president to co-habit (as the French call it) with the very man who sought to sabotage Ukraine’s last presidential ballot would, I knew, provoke institutional paralysis and political chaos.
And so it has.
But the ultimate shortcoming of that cohabitation was its curtailment of the democratic process.
Ukraine’s democrats, who won that election, were denied their voice and their place in government.
Yushchenko offered his hand to his foes in good faith so as to bind up our nation’s wounds; in return, the governing pact that he reached with Yanukovych was betrayed at every turn.
A new election will restore democratic choice – and thus revitalize our democracy.
Europe and the world are, of course, right to worry.
But Ukraine has changed dramatically since the Orange Revolution.
Even those Europeans who believe – wrongly – that democracy does not easily take root in post-Soviet countries should recognize that our people now feel empowered.
A country that emerged so recently from one period of dictatorship is unlikely to volunteer for another at the hands of a man who sought to falsify the presidential election of 2004.
Economic growth since the Orange Revolution reinforces that reluctance, because an expanding middle class nearly always prefers the flexibility of pluralism to the thump of an authoritarian's fist.
The general election called for May 27 will help to keep things this way.
But the dangers that Ukraine faces are serious, stemming from problems – particularly fragile institutions and economic dislocation – that are common to every young post-communist democracy, as well as from some special problems of its own.
Many of Ukraine’s richest citizens, who gained their wealth through the crony capitalism that is the only way Yanukovych knows how to govern, remain unreconciled to Ukraine’s democracy.
For them, manufactured discontent in Ukraine’s Russian-speaking regions – which have embraced a centrifugal tendency greater than in any other European democracy – impels them toward the system of managed democracy found in Russia in order to protect their continued misrule.
A decade ago, the world had a foretaste of what can happen when ethnic divisions are exploited for sinister political purposes.
Yugoslavia is but a miniature version of what might happen in Ukraine if Yanukovych’s tactics are allowed to bring ethnic antagonisms to the boiling point.
Ukraine’s unity, however, is not artificial.
It is natural, as is demonstrated by the huge majority – even among the Russian minority – that continues to support the country’s independence.
So it would be wrong to say that the democratic center cannot hold in Ukraine.
The best and still most living thing about our Orange Revolution was the democratic empowerment of our people.
As a result, something remarkable for a former Soviet country informs the habits of those who are demanding that their liberties be preserved: a deep respect for the rule of law, which is the ultimate check on abuse of power.
Our people understand that the Yanukovych government is not just political poison.
It seeks to dominate, and deaden, the whole economy, too.
No business can be conducted without kowtowing to the regime for permission.
Ukraine’s neighbors should now help us by offering support and hope.
Europe must send a clear signal that Ukraine, unlike Czechoslovakia to Neville Chamberlain in 1938, is not some faraway place of which it knows little, but rather an integral part of the European project.
After all, the European Union is first and foremost a community of democracies: if Ukraine can aspire to membership, any oligarch or criminal politician who undermines that prospect will have to face the ire of all Ukrainians.
Moreover, all of Europe needs a truly democratic Ukraine.
New elections to secure our democracy are the only way forward, both for us and for advancing Europe’s interest in seeing that genuine democracy takes root in the nations of the former Soviet Union.
Ukraine’s Dollar Addiction
KYIV – Inflation in Ukraine is skyrocketing.
By March, it reached 26% per year and continues to rise.
Although prices are increasing around the world, Ukraine’s inflation is extreme, twice as much as in neighboring Russia.
Amazingly, instead of dampening inflation, Ukraine’s central bank is stoking it.
Ukraine’s prices started spiraling out of control around the time when Yuliya Tymoshenko returned as prime minister last December.
Malicious observers suggest that she is to blame for pursuing populist social expenditures.
But this is false.
Her government actually tightened the budget just before New Year.
Indeed, Finance Minister Viktor Pynzenyk reports that the state recorded a budget surplus of 0.6% of GDP during the first quarter of 2008.
This is not surprising, because state revenues expand with rising prices, while expenditures are largely fixed.
But Tymoshenko’s government has, in reality, done a solid fiscal job.
State finances are generally in good shape, with public debt at just 11% of GDP.
According to the National Bank of Ukraine (NBU), international reserves have grown steadily and now stand at $33 billion.
The real cause of Ukraine’s inflation is that its currency, the hryvnia, remains pegged to the US dollar.
When the dollar falls in value, as it has, Ukraine’s very open economy imports inflation.
In the last year, the dollar’s value dropped by 12% against the euro, which is a more important currency than the dollar in Ukraine’s foreign trade.
The International Monetary Fund has persistently warned Ukraine that its dollar peg could cause a financial crisis because of over- or undervaluation, and for years has called on Ukraine to free its exchange rate.
But the NBU refused to do so – making Ukraine the last country in Central and Eastern Europe to tie its currency to the dollar.
Ukraine’s powerful industrialists praised the NBU’s low exchange-rate policy, believing it makes the country more competitive.
They ignore the fact that the NBU can control only the nominal appreciation of the hryvnia.
But costs are determined by the real revaluation, which is the sum of exchange-rate changes and inflation.
The dollar peg has also forced the NBU to pursue a loose monetary policy.
Ukraine’s current refinance rate is 16% a year, 10% less than inflation, which means that Ukraine has a negative real interest rate of 10% a year.
As a result, Ukraine’s money supply, M3, exploded by no less than 52% in the last year, which points to inflation hitting 30% soon.
The NBU’s leadership understands that it must act to contain inflation, but its insistence on the dollar peg ties their hands, because it prevents them from raising interest rates sufficiently.
Instead, they have reverted to strict reserve requirements, effectively rationing credit and thereby causing a domestic credit squeeze in the midst of the current international financial crisis, which is likely to force some medium-sized banks into bankruptcy because of liquidity problems.
Rationing is always worse than a market.
Why does the NBU persist with this harmful policy?
Incompetence is one reason, but politics is probably the decisive cause.
The NBU is subordinate to President Viktor Yushchenko, who, despite naming Tymoshenko as prime minister, seems more interested in harming her politically than in capping inflation.
The flaws in the NBU’s policy are so obvious it will be forced to free the exchange rate, but it might act too late.
Even now, in the midst of an inflationary crisis, the NBU wants to move in small steps, evidently failing to grasp the severity of the crisis.
The NBU needs to announce that it no longer has an exchange-rate target and that it will stop intervening by ending its purchases of dollars on the currency market.
If the NBU lets the exchange rate float, Ukrainians are likely to exchange billions of dollars into hryvnia, driving up the hryvnia exchange rate.
That would contain Ukraine’s inflation, as the NBU could restrict the money supply through high interest rates rather than rationing.
Time is short.
The great economist Rudi Dornbusch used to say that a financial crisis usually starts much later than anyone expects, but then develops faster than anyone can imagine.
Ukraine is on the financial precipice.
Yushchenko and the NBU can still act, but if they do not do so immediately, a costly and unnecessary financial crisis might ensue.
As prime minister, Yushchenko saved his country from financial default in early 2000.
Ukraine’s well-being must not be sacrificed to his political ambitions.
Ukraine’s Orange Christmas
That Ukrainians will vote for their freedom this Christmas season is a coincidence of true perfection.
For our movement is a triumph, not of mobs but of joyous crowds; of protests, not of looting; of clear purpose, not confusion.
As a result, something new will color the habits of those who govern Ukraine from now on: respect for individuals, which is the ultimate check on the abuse of power.
Nothing can ever diminish what was at stake – and the victory that has been won – on the streets of Kyiv.
Ukraine’s people have renewed their self-respect through courage and resolution.
They have reason to be proud.
Self-confidence among the governed and caution among the rulers: these are the psychological springs of democracy and true freedom, and they can never again be diverted in our homeland.
Nobody ever doubted that Ukraine had changed vastly in its twelve years of independence.
Yet, caught in the sights of a gun barrel, nobody – not even the brave men and women who camped in their hundreds of thousands in the snow before Ukraine’s parliament – knew with certainty whether those changes had wrenched Ukrainians from the grip of fear and apathy.
The success of their defiance shows the power of the idea that bewilders outgoing President Leonid Kuchma and his acolytes: that democracy means taking responsibility for one’s fate into one’s own hands.
The regime clearly expected the crowds that protested the fraudulent election of November 21 to scatter in apathy.
They did not.
This left the regime to choose between using force to quell the growing resistance or cutting its losses.
By refusing to leave the streets and squares of Kyiv, Ukraine’s mass volunteer army of democrats forced our country’s gray old men of the past to retreat into the past.
This is a breakthrough that will endure.
For 70 cynical years, and for centuries before that, everything done in the name of Ukrainians was done without our consent.
Corrupt regimes, through intimidation and bribery, insisted on the loyalty of the bureaucracy, police, and armed services.
Newspapers and broadcasts were packed with lies.
The Kuchma regime’s vast wealth, stolen from ordinary Ukrainians, suggested that the reign of thuggery and deceit could go on forever.
But Ukrainians have now given their seal of approval to democracy and an open society.
From now on, the force of ideas, not the force of arms, will win the day.
For once, Karl Marx, the mischievous cause of so much of Ukraine’s misery, got something right: “the point,” he said about the world, “is to change it.”
Of course, our movement was created out of opposition: opposition to corruption, opposition to surrendering our national independence, opposition to the rule of the bully.
The joy of opposition is its simplicity; Ukrainians understood what we opposed and stood side by side with us.
Now we must lead a nation in which – thanks to the cynical ploys and hate-filled rhetoric of a discredited regime – some sections seem to be set against the democracy we seek to build.
But no section of Ukraine is our enemy and none will be treated that way.
For we need no reminding of what must be Ukraine’s priority.
We have shouted it from every platform in the country: end corruption and abuse of power for personal and partisan gain.
It is a message carved on our hearts.
Thus, our first task is legal and judicial reform, and here we are given hope by the courage of Ukraine’s Supreme Court, which in overturning the stolen election of November 21 upheld the law and the liberties of Ukrainians against a regime determined to sweep them away.
So we will resist the temptation of revenge and retribution.
That way lays demoralization and new divisions.
Ruling in the national interest, rather than for the benefit of favored sections or clans, we will apply the law equally to our supporters and our opponents.
We will be guided, and bound, by the rule of law – and the spirit of ordered liberty that animates it.
Of course, immense difficulties remain.
The first is repairing our country’s unity.
Yes, Ukraine has Ukrainian speakers and it has Russian speakers; yes, it has Orthodox and Catholics.
But those divisions were manipulated with the same sort of cynicism that Slobodan Milosevic and Franjo Tudjman used to pit Serbs, Croats, and Bosnian against each other in the former Yugoslavia.
Ukrainians recoil, in anger and horror, at the very idea of dividing the nation.
Our nation’s unity is not artificial.
We are united as a people and in our shared history of suffering.
Having laid the foundations of genuine democracy, our house will not be divided by anyone.
In renewing our liberties, we will renew our unity.
We will renew Ukraine.
Ukraine’s Own Goal
KYIV – Politics and sports are often an incendiary mix, as the controversy now swirling around the Euro 2012 football championship, to be co-hosted by Ukraine and Poland, demonstrates.
German Chancellor Angela Merkel, European Commission President José Manuel Barroso, and other European Union leaders have said that they will boycott matches held in Ukraine, owing to the imprisonment of former Prime Minister Yulia Tymoshenko and other opposition figures.
Why, two decades after communism ended and Ukraine gained its independence, does the country remain mired in economic torpor and an authoritarian politics that has aroused such ire in Europe?
When a country like Ukraine develops slowly and remains poor, it is not because of natural disaster or resource constraints.
Bad policies pursued by bad governments are to blame.
Contrary to what many Western economists think, the worst economic breakdowns are not the result of free markets gone haywire, but of excessive concentration of political power. To insure against the worst human and economic catastrophes, limits to political power must be introduced and a system of checks and balances maintained.
Witness the divergence in long-run economic growth between the Euro 2012 co-hosts.
Poland’s GDP has almost doubled over the last 20 years, while Ukraine is still barely maintaining the output level recorded during the last year of socialism.
Generally speaking, Central and Eastern European countries have performed better economically than the ex-Soviet countries (with the exception of the Baltic states).
Economic growth is a matter not just of quality of life, but of quantity as well.
Child mortality rates have declined in all Central European countries over the past 20 years, especially in Poland, where the rate fell from 17 per 10,000 live births to seven.
In the Czech Republic and Slovenia, life expectancy has increased from 71 to 77, similar to other Central European countries.
In Ukraine, by contrast, under-five child mortality rates have fallen only slightly, from 25 per 10,000 live births to 24, while life expectancy has declined from 70 years to 68.
The same stagnation applies to Russia.
The post-communist record shows that the countries that reformed most successfully are also the most democratic – indeed, as democratic as any in the West.
The worst economic outcomes in the region are found in countries that have diverged from democracy.
Democracy is not a panacea, but non-democratic regimes usually pursue worse economic polices than democratic governments do.
The former engage in predatory and unpredictable regulation, which produces a bad business environment.
Another danger is heavy taxation.
Official taxes are high when spending is high.
When spending is high, it is usually social spending that is badly targeted, which means that only a small share of poor people really benefit. Moreover, corruption payments should be added to official taxation.
It may turn out that most businesses are hit by heavy taxation of both varieties – so heavy that the economy cannot grow, as appears to be the case in Ukraine.
Furthermore, uneven protection of property rights – crony capitalism – means that a small number of businessmen are politically favored.
They may pay lower taxes, or their competitors may be subject to raids by the authorities.
Because the state uses its apparatus to deter competition – both informally, through arbitrary enforcement of property rights, and formally, through trade restrictions – crony capitalism is not only unjust, but also inefficient.
Individual businessmen may succeed, but the economy will not.
Without competition, capitalism works only a little better than socialism did.
A key ingredient of Poland’s success in the last 20 years was a clear separation, from the very beginning of the post-communist transition, between politics and business.
There were uniform rules and equal protection for everyone.
Poland introduced massive competition by dismantling monopolies and opening its economy to the world.
Moreover, Poland avoided extreme booms and the deep recessions that follow.
Most booms are produced by bad monetary and fiscal policies. This is true of the recent boom-bust sequence in Spain, Ireland, the United States, the United Kingdom, Bulgaria, and the Baltics, among others.
In Ukraine, too, a huge boom in 2004-2007 was followed by a contraction amounting to almost 15% GDP in 2009 – a direct result of domestic policies.
Ukraine’s record over the past 20 years demonstrates that it is not enough to abolish socialism.
The real challenge is to build free-market, rule-based capitalism.
And, to do that, an energetic civil society must demand an end to crony capitalism.
Ukraine’s citizens can become more like their Central European neighbors, or they can allow the economy’s many distortions from past bad policies to persist, in which case they will fall further behind.
Ukraine\u0027s Road to Europe
"East is East, and West is West, and never the twain shall meet," Rudyard Kipling famously said.
Ukraine may undoubtedly be of the East, but it is the East of Europe.
So when Ukraine regained its independence ten years ago, integration with Europe became the goal for many of us.
That road to Europe, however, wasn't paved with good intentions; it often wasn't paved at all.
Yet, as the results of the parliamentary elections held on March 31 demonstrate, Ukrainians remain determined to travel that road.
I am a social democrat who was never a Communist party member, though I achieved success as a lawyer in Soviet times.
I recognize that our Soviet "heritage" accounts for much of the hardship Ukraine faced in seeking its European vocation.
After the USSR collapsed, Ukraine possessed an inefficient and militarised industrial base and a blundering bureaucracy.
Its vast agricultural holdings were hamstrung by worn-out equipment and the inertia of Soviet state farming.
Rural people became mired in squalor.
Nowadays, low salaries make many lives here miserable, pensions are a joke, and the shadow economy is vast.
But our Soviet heritage does not excuse everything.
We muddled reform on our own.
For we often sought to import tried and tested Western practices -- private property, the free market, competition, strict observance of human rights, the creation of civil society, representative democracy -- in diluted forms that would somehow help us maintain elements of Socialism.
Despite this nostalgic policymaking, enactment by the Supreme Rada (Ukraine's Parliament) of civil, criminal, land, family and economic legal codes over the years was something of a near revolution.
Indeed, although painful, acceptance of Western values by a society excluded for centuries from European history has gained momentum despite the fact that we often see ourselves as different from Western nations.
We think ourselves more open, sentimental, cordial, and family oriented, but also more disorganized and blase, at times irresponsible and lazy.
Still, we are Europeans.
You can see that on the streets and squares of Kiev.
Drivers now allow pedestrians to cross the street, as in Geneva or Munich (while in Moscow people must still dash aside from onrushing cars impervious to pedestrian safety).
Kiev now possesses a lively cafe life, and bright public places where people can relax and enjoy life.
Young people learn English, German, French; they study computers and suft the web in internet cafes.
But this is a lyrical digression of a lover of Kiev.
Lyrical observations aside, as a professional politician, I see deeper changes.
Over the last decade we moved from complete aversion to the idea of reform to a policy of mutant reforms pursued for corrupt motives, to the gradual adaptation of legitimate Western practices.
Administrative reform illustrates this well.
At first, reform of the state incited hostility among both bureaucrats and ordinary citizens.
A sharp and ill-considered reduction of the civil service began.
Here was reform "by the numbers": shrink the state, it was assumed, and government would run more smoothly.
No one took into account the fact that countries like France and Switzerland somehow manage to thrive with large states.
The critical factor is not the size of the state, but rather its organization and sense of purpose.
By recognizing that taking a chain saw to state bureaus does not automatically improve governance, we reached the second stage of our reform process.
Slowly, the state began to be reformed in a more thoughtful way.
New departments and state secretaries with clearly designed purposes were introduced.
This helped stabilize the work of government ministries.
In the beginning, the authority given to these new posts was somewhat overstated in order to make their powers effective.
Now their functioning has become more or less normal.
Ukrainians may at times resent these impersonal modern mechanisms, but they increasingly (if grudgingly) recognize them as necessary.
Sober-minded politician also accept this.
Only radicals and populists -- of which we retain too many -- can afford a devil-may-care attitude toward making the state function more efficiently.
Taming our radicals, and the radical impulse, has not been easy.
Why?
For too long Ukraine was a province of the USSR and Tsarist empire; the most important one, of course, but still a province.
This affected our mentality, for radicalism is a by-product of the provincials' inferiority complexes.
An overwhelming sense of inferiority, and our efforts to deny it, inspired the most scandalous aspects of Ukrainian political life.
The provincial cannot admit his inferiority and refuses to learn from others.
As we shrug off our provincial defensiveness, we become more willing to accept the best that others have to offer.
A century ago, the Ottoman Empire was derided as the "sick man of Europe."
Since 1991, Ukrainians have sensed that many Europeans see Ukraine as having inherited this sorry title.
Over the course of a decade we did, perhaps, make ourselves more ill through our own actions, but now we are recovering. The recently concluded elections, which pushed the Communists out of their dominant position in the Rada and sharply curtailed the power of the "parties of power" that surround President Kuchma, pushed our provincial radicals to the fringes of our politics.
The parties of reform and of Europe triumphed.
Feeling ourselves outcasts or at least on the margins of Europe, we seek to build a society without outsiders or outcasts.
As a great (and already American at that time) writer Vladimir Nabokov wrote in the 1970s: "From all the decrees of nature the most remarkable one is, possibly, the survival of the weakest."
Walking that long, winding road to Europe has helped a weak new nation to strengthen and survive.
Ukraine’s Secret Turnaround
Ukraine’s Struggle for Law
One year after our Orange Revolution, many Ukrainians see its ideals as betrayed.
Belief in a government answerable to the people and in a transparent market purged of insider dealing no longer guides government policy.
Instead, the ideals for which we struggled appear as slogans invoked by those who want to protect their vested interests.
Cynics explain this by saying that our AOrange” ideals were never anything but the rationalizations of one set of oligarchs struggling to overthrow another.
Once masters of the situation, it is said, the zeal of those who promised reform mutated into a zeal to preserve their private wealth and that of their friends.
How did Ukraine reach this state of cynicism?
A year ago, everyone gathered in the streets of Kyiv knew what we were standing up against: a corrupt government that sought to command life and labor, and to dispose of state property, at its will.
In so far as formal legal rights existed, no court could be relied upon to enforce those rights when our rulers saw their interests as challenged.
In evicting that regime, we believed that this form of absolutism was ended.
Instead, those who benefited from the regime=s corruptions insisted that their rights to the property they had stolen were inviolate.
These crony capitalists argue that, if they are left alone to develop their assets, they will make the country prosperous.
Tamper with property, no matter how ill-gotten, and no investor will have confidence, they claim.
That is the oldest excuse to justify wrongdoing: the end justifies the means.
But power - be it political or economic - without legitimate origins is arbitrary.
An economy that appears arbitrary and illegitimate in the eyes of the majority of people may, for a time, run on the false confidence of easy profits.
Corruption, however, is inevitable because the rule of law, which is the market=s ultimate guarantor, depends on the consent of all its participants and their belief in its core fairness.
A radical lawlessness was at the heart of Ukraine’s privatization process.
So we must not be tricked by the fact that those who gained economic power by looting state assets now employ lawyers, invoke free market nostrums, and claim to follow the letter of the law.
For there is such a thing as a lawless legality.
It is found when governments deny that in making or interpreting laws they are bound by the spirit of law.
In this respect, the oligarchs and their political placemen who insist that their right to stolen property is sacred make the same crude claim as the regime that we overthrew: that they have an indefeasible right to the exercise of power.
They reject the principle that there is a law which is superior to presidents, magnates, majorities, or mobs.
If their claim is upheld, then the cynics are right: our revolution was merely about whether one class or another, one person or another, would obtain the power to work his or her will.
Endorsing the claim to arbitrary power is the cardinal heresy of those who say we should certify property stolen from the state as rightfully owned.
I call this a heresy because it rejects the supremacy of equality under law and proclaims the supremacy of particular men.
This is alien to any and all concepts of liberty.
It is the legalism of the barbarian, and the nihilist philosophy everyone in reaction against the coming of political and economic liberty to Ukraine.
Legal primitives are not alone in embracing this stance.
Many economists also believe that ownership of stolen goods must be recognized.
They liken the transition from communism to the state of nature described by John Locke.
So they imagine the property rights acquired through cronyism, nepotism, and backroom dealing as somehow emerging from a Lockean realm of freedom.
When my government questioned this assumption, they cried out that this was interference by the state with legitimate property rights.
Another group also succumbed to this delusion.
Some who a year ago displayed great public spirit came to feel, when in government, that they could not vindicate the supremacy of law without curtailing economic growth.
Because the grind of government can obscure enduring principle, people inspired by the best motives now find themselves on the same side as their criminal adversaries.
They have, I believe, lost their way and taken a path that can only lead back to the supremacy of arbitrary power.
Indeed, the denial that men may be arbitrary is the higher law by which we must govern.
Without this conviction the letter of the law is nothing but a mask for bureaucratic caprice and authoritarian will.
For when people do not believe that their government adheres to this higher spirit of law, no constitution is worth the paper it is written on; no business transaction is safe.
For maintaining a constitutional order and viable free market requires an intuitive dislike of arbitrariness, a sensitivity to its manifestations, and spontaneous resistance.
This was why my government sought to recover stolen state property.
By doing so, and then auctioning that property in a transparent manner, Ukrainians saw that arbitrary action could be redressed, that the rule of law applied to the powerful as well as the weak.
Indeed, this did happen with the one property recovery that my government was able to secure, the giant Kryvorizhstal steel works that our former president’s son-in-law gained through a rigged sale at a bargain price.
On its re-auction, Ukraine received more than five times the amount that had been paid through that insider deal.
Ukraine must continue in this way if our people are to trust the law and their institutions.
The lesson in the open Kryvorizhstal auction is clear: if a president may not act willfully, arbitrarily, by personal prerogative, then no one may.
Ministers may not.
Parliament may not.
Majorities may not. Individuals may not.
Crowds may not. Only by adhering to this higher law will Ukraine develop the consciousness of law that true liberty demands.
By identifying the law with their vested rights, the oligarchs who have (for now!) derailed the ideals of the Orange Revolution sought to shield their own interests from challenge.
But because men pervert a truth there is no reason to abandon it.
If, as we were taught by Marx, belief in a higher law is a mixture of sentimentality, superstition, and unconscious rationalizations, then the predations that incited the Orange Revolution are in reality the only possible conditions in which we can live.
We must give up the hope of liberty within an ordered society and market and resign ourselves to that interminable war of all against all of which Hobbes spoke.
Indeed, the policies now being offered seem hostile to the ideals of our Orange Revolution.
We are asked to choose between social solidarity and economic growth.
To escape from want we are told we must embrace illegality.
To promote the truth, we are told that old crimes - even the beheading of a journalist and the poisoning of our president - must not be closely examined.
These choices are as false as they are intolerable.
Yet these are the choices offered by our influential doctrinaires.
But to see these as Ukraine’s only options is to mistake weariness for wisdom, and to be discouraged rather than to understand.
For the search for law has an irresistible energy.
No human obstruction can long withstand it.
Though we may take a step back now and then, as we have recently, only by adhering to this higher law can Ukraine achieve freedom and prosperity for all.
Achieve it we will.
Ukraine’s Watershed Election
Ukraine’s politics are not those of the steppe.
Our voters cannot stroll in one direction during one poll, and in the opposite direction the next time they vote, without worrying about falling over the edge.
Ukrainians are people of the watershed: we live on either one side or the other of a great divide.
A year ago, Ukrainians dared to risk the unfamiliar territory over the hill, and found democracy and the promise of a more open and honest economy.
But democracy is messy; with some of our Orange Revolution’s promises postponed or disavowed by President Viktor Yushchenko, there is a chance that on March 26, when Ukrainians vote for a new parliament, they may in their disappointment choose to return to the realm of corrupt and autocratic rule.
The alternatives – for my country, for Russia, and for Europe – are clear.
Of the three leading electoral coalitions that are challenging each other, the forces that supported the Orange Revolution seek a modern and democratic future for our country.
The other bloc offers the near-certainty of a return to a surly and squalid isolation ­ -- perhaps the beginning of the end of our hard-won independence.
Of course, our Orange forces are not perfect, and Viktor Yanukovych – who again opposes Ukraine’s democrats – is not Stalin reincarnated.
But the records of both alternatives suggest that Ukraine under those who backed the Orange Revolution will remain a member of the club of democracies and open economies, whereas under Yanukovich, Ukraine would turn its back on reform, and may re-embrace the grimmest aspects of our Soviet past.
Yanukovych’s “Party of the Regions” has been leading in opinion polls for months, and the world should remember that Yushchenko’s ultimate triumph over him in 2004 was by a whisker, not a landslide.
Moreover, Yushchenko used his year in power mostly to disappoint those whose votes he now needs.
The case against a Yanukovych counter-revolution is that it would be just that: a ruthless effort to undo Ukraine’s democratic and legal reforms.
Moreover, he would not be left to himself to govern, but would be a marionette of the oligarchs who bankroll his party, and perhaps of Russia, which yearns ­– albeit more discretely than a year ago – for his triumph.
Yanukovych’s party contains the largest core of unreconstructed apparatchiks of any party.
Many of its candidates seek office not to work for Ukraine’s betterment, but to gain parliamentary immunity from prosecution.
Some say we should not worry, that democracy and the market are now too well established in Ukraine to be replaced; that reform is irreversible; and that the country’s ruling oligarchic clans, like those of Eastern Europe, will in time become law-abiding capitalists.
Alas, this view is based more on wishful-thinking than on reality.
A year after the Orange Revolution demonstrated ordinary Ukrainians’ fidelity to liberty, Yanukovych still evinces no faith in democracy, and the “single economic space” with Russia that he backs will strengthen the abusive oligarchic system and rule out liberalization.
Yanukovych’s foreign policy might not be openly subservient to Russia, but it won’t also be a clearly pro-western one either.
A Yanukovych government promises the semi-neutrality of semi-paralysis.
Many who support Yanukovych do not necessarily wish to go back to the old days but are confused by the buffeting they have received in the past decade.
Yanukovych panders to xenophobes and anti-Semites, and his strongest appeal is to the core of angry diehards who detest the collapse of Soviet power.
He remains unrepentant about the obscene levels of corruption during his tenure as prime minister.
I do not claim that the Orange Revolution’s protagonists are paragons, and that the split between Yushchenko and me has not disheartened many of those who stood with us in the streets of Kyiv in the winter of 2004-2005.
But no one can question that we brought more honest government, and the beginnings of a more open economy, to Ukraine.
We began the battle against entrenched corruption, imposed the rule of law on Ukraine’s robber barons, and encouraged the birth of a vital civil society.
Most Ukrainians feel more secure because of these changes.
This is why our people should know precisely what they are voting for this Sunday.
I have pledged that, under no circumstances will I form a coalition government with Viktor Yanukovych.
President Yushchenko should do the same.
Only by restoring our partnership can we hope to keep our Orange Revolution’s promises.
Criminal and civil codes will be enforced; our courts will be allowed to find their feet and their freedom.
Above all, the new Rada (parliament) will settle down to the business of enacting laws and monitoring the government, not carving up the budget among corrupt clans.
We will fight for essential reforms to bring the country in line with European norms.
Relations with Vladimir Putin’s Russia will be repaired.
Elections are seldom make-or-break affairs.
This one is.
For the battle for Ukraine’s liberty and independence was not decided last winter.
A Yanukovych restoration would be a disaster for Ukraine, for Russia, and for Europe, because it would put Ukraine’s independence in question and tempt Russia with dreams of renewed empire.
Only a second victory over Yanukovych can secure a future of freedom and hope for Ukraine’s people.
Ukraine: The Next Crisis?
The Russian invasion of Georgia has sent shock waves throughout the West and the former Soviet space - especially Ukraine.
Indeed, Ukraine could be the next potential crisis.
Georgia's increasingly pro-Western course, including growing ties to NATO, has been a thorn in Moscow's side.
But it did not pose a serious threat to Russian security.
Georgia's army is small, ill-equipped and no match for Russia's, as was amply demonstrated this month.
Ukraine's integration into NATO, by contrast, would have far-reaching strategic consequences, ending any residual Russian hopes of forming a ampquot;Slavic Unionampquot; composed of Russia, Belarus and Ukraine - a dream that still beats in the breast of many Russians.
It would also have important implications for the Russian defense industry, notably air defense and missile production.
In short, the real source of Moscow's anxiety and strategic angst is Ukraine's future political and security orientation.
Georgia has largely been a side show.
Russia has a number of means of pressuring Ukraine short of using military force.
One is energy.
Ukraine is heavily dependent on Russian energy, particularly gas.
Russia has used the gas issue as a foreign policy instrument.
Ukraine currently pays $179 per 1,000 cubic meters for gas from Russia - more than three times what it paid in 2004 - and there have been reports that Moscow is considering a further doubling of the price.
Russia's long-term strategy is to try to gain control of Ukraine's pipelines by transferring them to a joint venture, as it has done in Belarus, thus enabling it to control both supply and distribution of gas to Ukraine.
The Black Sea Fleet is another potential source of tension.
Under an agreement signed in 1997, Ukraine granted Russia basing rights for the fleet at Sevastopol in Crimea until 2017.
Ukraine has been pressing Russia to begin discussions on the fleet's withdrawal.
But Russia has dragged its feet, suggesting that Moscow may seek to use the presence of the fleet as a means of pressuring Ukraine.
Crimea itself represents a third potential flash point.
Crimea is the only region in Ukraine where ethnic Russians constitute an overwhelming majority of the population (58 per cent).
Khrushchev transferred the peninsula to Ukraine in 1954 as a gift to commemorate the 300th anniversary of the unification of Ukraine and Russia.
At the time, the gesture was largely symbolic, as Ukraine was part of the Soviet Union and few could envisage an independent Ukraine.
Separatist pressures emerged in Crimea immediately following the collapse of the Soviet Union.
They subsided after 1995 largely because the Russian separatists were divided, and Moscow, facing separatist pressures in Chechnya, showed little inclination to support them.
However, separatist pressures, while diminished, continue to exist in Crimea.
Given Crimea's historic ties to Russia and its majority ethnic Russian population, many Ukrainian officials fear that Russia could try to foment separatist movements in Crimea as a means of putting pressure on Ukraine to curb its ties to the West.
Moscow's tactics in Abkhazia and South Ossetia provide cause for concern in this regard.
Russia encouraged and supported separatist movements in both entities, then used the separatist tensions to justify sending ampquot;Russian peacekeepersampquot; into the regions.
Moreover, it granted Russian citizenship to Abkhaz and South Ossetian residents, and then justified its recent invasion of Georgia on the grounds that it had an obligation to protect Russian citizens.
Western allies have a strong strategic interest in supporting Ukrainian democracy and Ukraine's Euro-Atlantic integration.
But this course must be pursued prudently and with great care.
As the Georgian crisis has underscored, there are limits to the ability to influence developments in a region where Russia has strong strategic interests and a preponderance of military power.
Thus Europe and the United States need to be very careful about making security commitments they are unwilling or unable to carry out.
This does not mean that Moscow should be given a veto over Ukraine's security orientation or that Ukraine can never become a member of NATO.
The door for Ukraine to join NATO should remain open.
But with Russia in a defiant mood and refusing to fully withdraw its troops from Georgia, now is not the time to accelerate efforts to bring Ukraine into the Alliance.
Poking an angry bear is not a wise policy.
Ask Mikheil Saakashvili.
Ukraine’s Vote, Russia’s Fate
STOCKHOLM – When Ukraine’s voters go to the polls on October 26, not only the fate of their country will be at stake; so will the future of a significant part of Europe.
To put it simply: the future of Ukraine will decide the future of Russia, and the future of Russia will have a substantial impact on the future of Europe.
When the Soviet Union collapsed more than two decades ago, and Ukraine opted for independence, many expected the country to do better than Russia in the years to come.
But events turned out differently.
During the first decade of the new century, Russia benefited from the combined effect of an old hydrocarbon industry that privatization in the 1990s had made more efficient and high oil prices.
The reversal of sought-after economic diversification, and the reduction of “modernization” to little more than a slogan, caused no immediate concern.
By contrast, Ukraine became the worst managed of all the post-Soviet states, with cronyism and corruption thwarting productive capacity, and causing the country to fall further and further behind other post-communist countries in transition.
Most notable is the comparison with Poland: at independence, the two countries had roughly the same GDP per capita; today, Poland’s is more than three times higher.
The Orange Revolution in 2004 was a failure for most Ukrainians.
The hoped-for break with the past did not occur, as political infighting among the country’s new leaders blocked the implementation of any serious reform agenda.
But 2004 was also a bitter failure for Russian President Vladimir Putin, who tried to bring his favored presidential candidate, Viktor Yanukovych, to power in Kyiv by supporting massive vote manipulation.
The failure was a bitter blow to the Kremlin, one that was neither forgiven nor forgotten.
Then, in 2010, the Orange Revolution’s failure brought Yanukovych to power in a free and fair election, and in 2012 Putin selected himself for a third presidential term in Russia.
The creation of a new Eurasia Union was a key part of his platform.
In the meantime, Ukraine had been negotiating with the European Union for a free-trade and association agreement since 2007, and these talks were completed in early 2012.
Though entirely compatible with the existing free-trade agreement between Ukraine and Russia, the proposed pact with the EU certainly was not compatible with Putin’s Eurasia project.
A little more than a year ago, the Kremlin began its offensive to turn Ukraine away from an EU agreement that was supported even by Yanukovych and his Party of Regions.
The rest – Yanukovych’s renunciation of the EU agreement, the popular uprising that ousted him in response, two invasions by Russia, and thousands of people killed in the country’s eastern Donbas region – is history.
The Kremlin is seeking more than the annexation of Crimea and control over the Donbas rust belt; its aim is to prevent Ukraine from going West, force it to turn East, and quash any risk within Russia’s wider orbit of further revolutions like the one that brought down Yanukovych.
Western sanctions against Russia have certainly highlighted the seriousness with which the EU and the United States view Putin’s efforts to challenge and undermine the core principles of European security and international law.
But even a weakened Russia will still be a strong power in its immediate neighborhood.
At the end of the day, it is only the strength and determination of Ukraine that can block Russia’s revisionist ambitions.
But to strengthen a Ukraine plagued by corruption and cronyism, and heavily burdened by Russian aggression and destabilization, is no easy task.
The election on Sunday must give rise to a government that is truly determined to bring radical reform to the country.
Such a government must be able to count on the strong and determined support of the wider international community.
A revised and reinforced International Monetary Fund package is imperative if the necessary reforms are to be enacted.
The country’s irrational energy policy, based on immensely wasteful subsidies to consumers, must be fundamentally altered.
And the agreement with the EU must be used to drive the reform process forward.
If this agenda succeeds, the Kremlin’s revisionist bid will be blocked; as this becomes apparent, there might even be an opening for a new and urgently needed wave of reform in Russia itself.
But if reform fails, there is little doubt that the Kremlin will continue its policies until it reaches its aims in Kyiv.
Putin is in no hurry, but he clearly knows what he wants.
Then, set on a course of continued confrontation with the West, Russia might hunker down into a siege mentality, with the risk that the Kremlin might seek to compensate for economic failure with further revisionist behavior.
Anyone familiar with the aggressively nationalist posturing of Russian state-controlled media nowadays knows the danger of this.
It is in these circumstances that the real danger for Europe could arise.
The ambitions of such a Russia will not stop at the Dnieper River.
Revisionism might turn into outright revanchism as the Kremlin seeks to counter-balance internal weakness with demonstrations of external strength.
By that time, it might be too late to stop a slide toward a wider confrontation.
That is why the emergence of a strong and democratic Ukraine from decades of failure is needed now.
The election this Sunday is crucial for Ukraine, but it also holds the key to encouraging the transformation of Russia into a true member of the democratic European family.
Ukrainian Democracy and Its Cynics
MOSCOW – “A pox on both your houses” may be an appropriate individual response to frustration with the political candidates on offer in an election.
But it is a dangerous sentiment for governments to hold. Choice is the essence of governance, and to abstain from it – for whatever reason – is to shirk responsibility.
But that seems to be the stance of the entire West regarding the upcoming second round of Ukraine’s presidential election.
Because the Orange Revolution in 2004 turned out to be a seeming unending series of disappointments, most Western leaders are acting as if it makes no difference whether Prime Minister Yuliya Tymoshenko or her rival, Viktor Yanukovych, wins on February 7.
They are wrong, not only about what the election will mean for Ukraine’s people, who have stoically endured so much, but also about what it will mean for security and stability across Eurasia.
For, if the Orange Revolution demonstrated one thing, it is that Ukraine’s politics are not those of the pendulum, swinging predictably between opposing forces that agree on the fundamental rules of democracy.
Indeed, it is patently clear from his own words that Yanukovych does not accept the legitimacy of the Orange Revolution, which means that he does not accept the bedrock principle of democracy that you cannot cheat your way to power.
Yanukovych’s anti-democratic position should come as no surprise.
His criminal record is often noted, but the particular crimes that sent him to prison are never spelled out.
Let me do it.
On December 15, 1967, Yanukovych (then 17 years old) was sentenced to three years in prison for robbery and sexual assault.
He was back in prison three years later, convicted of manslaughter.
But, for reasons that remain unexplained, the Soviet courts expunged his criminal record in 1978, shortly before he joined the Communist Party.
But in 2006 Yanukovych was charged with falsifying the very documents used to expunge his earlier convictions.
Two key documents used to overturn his conviction for rape and robbery had been forged. Moreover, the signature of the judge in his case was also forged.
It is mind-boggling that an unrepentant, twice-convicted violent felon, a man who had sought to steal a presidential election – and who advocated a violent crackdown on the men and women peacefully protesting against his electoral fraud – should be a candidate for any office, let alone the presidency of a country of nearly 50 million people.
Yanukovych’s candidacy thus reveals much about the nature of the people who back him, and also about the fragility of Ukraine’s democracy.
Of course, Tymoshenko is no saint.
She carved out a successful business career in the rough and tumble of the post-Soviet gas industry.
And her opponents have consistently tried to tar her business career with a taint of criminality.
But not even when they controlled the entire apparatus of Ukraine’s justice system were they able to make any criminal charges stick.
What is more important about Tymoshenko is her record in government.
Last September, the world stood on the edge of a global financial meltdown.
In the year since, Tymoshenko’s government has consistently acted to preserve international stability, even if that meant taking political hits at home.
Within days of the crisis, her government was in talks with the International Monetary Fund to secure a loan to backstop Ukraine’s economy against the worst, and reached agreement with near-record speed, despite domestic political objections to the rigor of its terms.
Although the whole world has suffered severely from the crisis, Ukraine was hit worse than most countries, as international demand for steel, which accounted for 42% of exports in the first half of 2008, collapsed.
As the crisis gathered pace, Ukraine was completely cut off from international financial markets, despite sound public finances and low foreign debt.
One year later, Ukraine’s economy is turning around.
After a horrendous fall in late 2008 and early 2009, industrial production grew by 5% month on month in July.
Next year, Ukraine looks likely to return to solid economic growth.
Under tremendous strain, Tymoshenko’s government succeeded in keeping the budget deficit under control.
Inflation was halved from 31% in May 2008 to around 10% today.
The current-account deficit has been almost eliminated, and the banking crisis contained.
Ukraine’s international reserves are a reassuring $26 billion, roughly one-quarter of the country’s GDP.
The exchange rate has been adjusted, and, given international conditions, is relatively stable, underpinning Ukraine’s international competitiveness.
Tymoshenko’s government also made a clean break with the ancien régime in the gas business, increasing Europe’s energy security in the process.
At considerable domestic political risk, Tymoshenko concluded a long-term gas transit and purchase agreement with Russia that is transparent and market-oriented, as well as a far-reaching agreement with the European Union, the World Bank, the EBRD, and the European Investment Bank on reform of Ukraine’s gas sector and gas-transit system.
Yanukovych, whose campaign relies on financing from the main beneficiaries of the old, corrupt energy system, seems certain to undo these reforms, thus reintroducing grave risks into European energy markets.
Moreover, Tymoshenko managed Ukraine’s crisis despite the tremendous and often irresponsible resistance of her political opponents, who frequently paralyzed the parliament when the government refused to accept populist proposals that would undermine efforts at financial stabilization.
Amazingly, President Viktor Yushchenko regularly vetoed decisions necessary for that stabilization, including every effort at privatization.
For keeping Ukraine afloat over the past 15 months, Tymoshenko deserves the West’s thanks, not the cynicism that we are currently seeing.
Yanukovych’s record of violence and disdain for democratic norms is too entrenched to think that, should he win, he will ever allow his position to be challenged again.
A victory for Yanukovych now may be the last free vote Ukraine sees for a long time.
Unbalanced Europe
BRUSSELS – The G-20 governments have declared that competitive devaluations (or currency wars) must be avoided.
Excessive external imbalances, they also argue, should be monitored and perhaps fought in a coordinated way.
Those resolutions sound mild. But there is no good reason to tackle these problems differently.
After all, there are no instruments to enforce strict rules at the global level, and the unwinding of today’s global imbalances –&#160;led by some revaluation of the renminbi and China’s shift to a growth model based on stronger domestic demand – might be only a matter of time.
Europe’s internal imbalances, however, are a much knottier problem.
The G-20 decided not to deal with the issue and agreed to treat the 27-member European Union as a single region.
Defined that way, the problem disappears, because the current-account deficit of the EU as a whole is only about 0.35% of its GDP, even though individual member countries have very different external positions.
This bit of statistical legerdemain reflects the political sensitivity of Europe’s current-account imbalances, which stems from eurozone members’ inability to rely on the exchange rate to restore equilibrium.
If an internal EU imbalance is to be corrected, deficit countries must accept real output losses, while surplus countries can maintain or even boost their growth rates.
Both the EU Commission and the European Central Bank argue that macroeconomic imbalances in Europe are largely the result of widening competitiveness disparities.
Thus, deficit countries have to control price and wage growth to improve competitiveness, while surplus countries may have to accept some inflation.
But the situation is not so simple.
First, there is no close relationship between external positions and competitiveness trends – not with some of the price and cost competitiveness that the EU Commission and the ECB examine, and not with output-based competitiveness (export growth and change in export market shares).
For example, Spain’s exports have grown without producing tangible positive effects on the country’s trade balance.
The relationship becomes tight when considering the evolution of each country’s real effective exchange rate based on the GDP deflator.
That indicator is often used by the EU Commission and the ECB as a proxy for the divergence in competitiveness trends within the eurozone but in fact it does not measure price and cost competitiveness as such; instead, it captures the price effects of changes in aggregate demand.
The EU Commission’s insistence on the need to target “competitiveness” means that it is proposing a supply-side solution for a demand-side problem.
And, of course, the political sensitivity of Europe’s imbalances consists precisely in telling deficit countries that they must accept enduring hard times while surplus countries are required merely to save a little less.
Here, there is also a technical aspect that must be taken into account: it is much easier to constrain consumption through wage contraction or lower credit expansion than it is to stimulate it, especially if the high propensity to save in some surplus countries reflects cultural and institutional factors.
Moreover, it should not be taken for granted that higher prices and wages in Germany will reduce the country’s trade surplus.
To the extent that German products compete on quality rather than price, the surplus might persist even if domestic prices in Germany rise.
Finally, internal price and cost developments would have no impact on trade with non-eurozone members.
Germany is by far the largest EU exporter to China, whose trade significance, though nowhere close to that of Germany’s eurozone partners, is growing fast.
German exports to China accounted for only 0.3% of the country’s GDP in 2005, but stood at 1.4% of GDP in 2008.
If anything, EU institutions should be looking at intra-eurozone accounts.
But, even if EU members’ current-account positions are mainly driven by domestic-demand factors, international competitiveness does matter.
It is not necessarily the cause of Europe’s internal imbalances, but it may be the cure.
In principle, deficit countries may not have to go through further recession to promote external adjustment if they can generate sufficient income from exports to service their external debts.
In that case, policymakers should focus on improving productivity, rather than on price reductions alone.
Obviously, it is easier in the short run to change prices and wages than it is to boost productivity.
Still, if competitiveness underpins the sustainability of trade deficits, there is in principle no good economic reason to impose short-run measures – price and cost adjustments – for the purpose of achieving a long-term objective, unless the purpose of price and cost adjustment is indeed to dampen demand.
The problem is that some countries have no other adjustment strategy than slower growth.
This is the case where external debt was used to finance low-productivity non-tradable sectors (say, housing in Spain and Ireland).
In most deficit countries, strong credit expansion over the last decade fueled unsustainable pre-crisis booms.
In this respect, the recent Basel III preliminary agreement and the establishment of new European financial supervisory structures might be more important for correcting and preventing external imbalances than recent plans by the EU to extend economic surveillance of member countries – and even to impose sanctions to enforce non-fiscal macroeconomic targets.
The immediate problem, of course, is to correct today’s imbalances.
And, given the political considerations driving the EU’s approach to the issue, the adjustment process will be anything but rapid and smooth.
Unblocking Corporate Governance Reform
CAMBRIDGE – When they met earlier this month, G-20 finance ministers and central bankers called for global improvements in corporate governance.
Such appeals are often heard, but powerful vested interests make it hard for governments to follow through.
So, if serious reforms are to be implemented, strong and persistent public pressure will be needed.
Many countries provide investors in publicly traded firms with levels of protection that are patently inadequate.
Even in countries with well-developed systems of corporate governance, arrangements that are excessively lax on corporate insiders persist.
In the United States, for example, insiders enjoy protections from takeovers that, according to a substantial body of empirical evidence, actually decrease company value.
Lax corporate governance rules are not generally the result of a lack of knowledge by public officials.
Political impediments often enable lax arrangements to linger even after they are recognized as inefficient.
Ordinarily, corporate governance issues are not followed by most citizens.
As a result, politicians expect that their decisions on investor protection will have little direct effect on citizens’ voting decisions.
By contrast, interest groups with big stakes in the rules follow corporate governance issues closely, and they lobby politicians to get favorable regulations.
The group that, in normal times, can be expected to have the most influence is that which consists of insiders within publicly-traded companies.
Corporate insiders are an especially powerful lobbying group because of their ability to use some of the resources of the companies under their control.
They have the power to direct their firms’ campaign contributions, to offer positions or business to politicians’ relatives or associates (or to politicians upon retirement), and to use their businesses to support issues and causes that politicians seek to advance.
Because insiders gain the full benefits that arise through lobbying for lax corporate governance rules, while their firms bear most of the costs of such lobbying, insiders have an advantage in the competition for influence over politicians.
Their lobbying, which is carried out at the expense of their companies, is subsidized by their shareholders.
While individual investors cannot be expected to invest in lobbying for stronger investor protection, it might be hoped that institutional investors – mutual funds, banks, insurance companies, and so forth – will do so. Institutional investors receive funds from individuals and invest them in publicly traded companies.
Because institutional investors invest substantial amounts in such companies, they should be well informed about corporate governance issues.
But institutional investors usually do not provide a sufficient counter-weight to lobbying by corporate insiders.
In contrast to corporate insiders, institutional investors cannot charge the costs of lobbying to the publicly traded companies whose investor protection is at stake.
In addition, depending on their relationship with their own investors, some institutional investors (for example, mutual fund managers) may capture only a limited fraction of the increase in value of their portfolios as a result of governance reforms.
This reduces the willingness of institutional investors to invest in counteracting insider lobbying.
Moreover, those who make decisions for institutional investors often have interests that discourage lobbying for stronger constraints on corporate insiders.
Some institutional investors are part of publicly traded firms, and are consequently under the control of corporate insiders whose interests are not served by new constraints.
And even those institutional investors that are not affiliated with publicly traded companies may have an interest in getting business from such companies, making these institutional investors reluctant to push for reforms that corporate insiders oppose.
So, interest-group politics commonly produce substantial obstacles to reform of corporate governance.
However, some events – such as a wave of corporate scandals or a stock market crash – can interrupt the ordinary pro-insider operations of interest-group politics by leading ordinary citizens to pay attention corporate governance failures.
When citizens become so outraged that their voting decisions may be affected by politicians’ failure to improve investor protection, public demand for governance reform can overcome the power of vested interests.
Indeed, most major governance reforms occur in such circumstances.
In the US, for example, new securities laws were passed following the stock market crash of 1929, and the Sarbanes-Oxley Act was adopted in 2002, in the immediate aftermath of the collapse of the Internet bubble and the Enron and WorldCom scandals.
By creating a large public demand for reforms, the current crisis offers another opportunity to improve governance arrangements.
This opportunity should not be missed.
What Are We Betting On?
LAGUNA BEACH – When I consider the prospects for the global economy and markets, I am taken aback by the extent to which the world has collectively placed a huge bet on three fundamental outcomes: a shift toward materially higher and more inclusive global growth, the avoidance of policy mistakes, and the prevention of market accidents.
Though all three outcomes are undoubtedly desirable, the unfortunate reality is that they are far from certain – and bets on them without some hedging could prove exceedingly risky for current and future generations.
The first component of the bet – more inclusive global growth – anticipates continued economic recovery in the United States, with a 3% growth rate this year bolstered by robust wage growth.
It also assumes China’s annual growth rate will stabilize at 6.5-7%, thereby enabling the risks posed by pockets of excessive leverage in the shadow-banking system to be gradually defused, even as the economy’s growth engines continue to shift from exports and public capital spending toward domestic consumption and private investment.
Another, more uncertain assumption underpinning the bet on more inclusive growth is that the eurozone and Japan will be able to escape the mire of low growth and avoid deflation, which, by impelling households and businesses to postpone purchasing decisions, would undermine already weak economic performance.
Finally, the bet assumes that oil-exporting countries like Nigeria, Venezuela, and especially Russia will fend off economic implosion, even as global oil prices plummet.
These are bold assumptions – not least because achieving these outcomes would require considerable economic reinvention, extending far beyond rebalancing aggregate demand and eliminating pockets of excessive indebtedness.
While the US and China are significantly better placed than others, most of these economies – in particular, the struggling eurozone countries, Japan, and some emerging markets – would have to nurture entirely new growth engines.
The eurozone would also have to deepen integration.
That adds up to a tough reform agenda – made all the more challenging by adjustment fatigue, increasingly fragmented domestic politics, and rising geopolitical tensions.
In this context, a determined shift toward markedly higher and more inclusive global growth is far from guaranteed.
The second component of the collective bet – the avoidance of policy mistakes – is similarly tenuous.
The fundamental assumption here is that the untested, unconventional policies adopted by central banks, particularly in advanced countries, to repress financial volatility and maintain economic stability will buy enough time for governments to design and deliver a more suitable and comprehensive policy response.
This experimental approach by central banks has involved the conscious decoupling of financial-asset prices from their fundamentals.
The hope has been that more buoyant market valuations would boost consumption (via the “wealth effect,” whereby asset-owning households feel wealthier and thus more inclined to spend) and investment (via “animal spirits,” which bolster entrepreneurs’ willingness to invest in new plant, equipment, and hiring).
The problem is that the current economic and policy configuration in the developed world entails an unusual amount of “divergence.” With policy adjustments failing to keep pace with shifts on the ground, an appreciating dollar has assumed the role of shock absorber.
But history has shown that such sharp currency moves can, by themselves, cause economic and financial instability.
The final element of the world’s collective bet is rooted in the belief that excessive market risk-taking has been tamed.
But a protracted period of policy-induced volatility repression has convinced investors that, with central banks on their side, they are safe – a belief that has led to considerable risk-positioning in some segments of finance.
With intermediaries becoming reluctant to take on securities that are undesirable to hold during periods of financial instability, market corrections can compound sudden and dramatic price shifts, disrupting the orderly functioning of financial systems.
So far, central banks have been willing and able to ensure that these periods are temporary and reversible.
But their capacity to continue to do so is limited – especially as excessive faith in monetary policy fuels leveraged market positioning.
The fact is that central banks do not have the tools to deliver rapid, sustainable, and inclusive growth on their own.
The best they can do is extend the bridge; it is up to other economic policymakers to provide an anchoring destination.
A bridge to nowhere can go only so far before it collapses.
The nature of financial risks has morphed and migrated in recent years; problems caused by irresponsible banks and threats to the payment and settlement systems have been supplanted by those caused by risk-taking among non-bank institutions.
With the regulatory system failing to evolve accordingly, the potential effectiveness of some macro-prudential policies has been undermined.
None of this is to say that the outlook for markets and the global economy is necessarily dire; on the contrary, there are notable upside risks that could translate into considerable and durable gains.
But understanding the world’s collective bet does underscore the need for more responsive and comprehensive policymaking.
Otherwise, economic outcomes will remain, as former US Federal Reserve Chairman Ben Bernanke put it in 2010, “unusually uncertain.”
Uncertainty Shifts to China
Now that the dollar has dropped 43% from its high against the euro, the process of global financial rebalancing is seriously underway.
The United States’ trade and current account deficits have begun to shrink relative to American and world GDP.
Asian current account surpluses are about to start to shrink as well, especially if growth slows markedly in America in the aftermath of the end of its housing boom.
At the moment, Europe is feeling most of the pain, as the euro’s value has risen furthest and fastest against the dollar.
But Latin America and Asia will start to feel distress as well, as the decade-long US role as the global economy’s importer of last resort comes to an end.
As long as imbalances of world trade and capital flows unwind slowly and smoothly, the magnitude of any global economic distress should be relatively small.
Of course, it will not seem small to exporters and their workers who lose their American markets, or to Americans who lose access to cheap capital provided by foreigners.
But the next few years are certain to bring up a more threatening and more serious political-economic problem than the unwinding of global imbalances.
Yes, the US might enter a small recession – the odds are roughly 50-50 of that happening. Yes, an American recession might spill over to the rest of the world and cause a worldwide recession.
And yes, global economic growth over the next five years is unlikely to be as rapid as growth in the last five years.
A formal recession, however, is not an overwhelming probability, and is likely to be small.
The prospect of a truly hard landing – that global investors wake up one morning, suddenly recognize the US current account’s cannot be sustained, dump dollars, and bring about a crash of the global economy – is becoming less likely with each passing day.
Under two plausible scenarios – both concerning China – the unwinding of global imbalances could cause regional if not global depression.
In the first scenario, China continues to attempt to maintain full employment in Shanghai, Guangzhou, and elsewhere not by stimulating domestic demand but by trying to boost exports further by keeping the renminbi stable against the dollar and falling in value against the euro.
The effort to maintain the dollar-renminbi exchange rate at a level approved by China’s State Council has already led to an enormous increase in the Chinese economy’s financial liquidity.
The consequences of this are now manifested in property and stock market inflation, but not yet in rampant and uncontrolled consumer price inflation – at least for now.
But if China does not accelerate the renminbi’s revaluation, the world might see a large burst of consumer inflation in China in the next two or three years.
If so, the consequences will be a choice between the destructive runaway inflation familiar from much of post-WWII Latin America and stagflation.
The fall-out from this scenario, however, would be largely confined to Asia.
The second scenario is more dangerous for the entire world.
In this scenario, once again China continues to attempt to maintain full employment by keeping the renminbi undervalued.
But this time, the Chinese government manages to restrain domestic inflation, so America’s trade deficit with Asia stops falling and starts rising again, as does Europe’s, while Latin America finds itself priced out of its export markets.
Five or six years hence, the world economy faces the danger that it faced two years ago, although the fear this time is not of a sudden crash in the dollar’s value, but of a sudden crash in the value of the dollar and the euro against Asian currencies.
Four years ago, I would have said that the principal source of international economic disorder was made in America.
That has passed as a result of the dollar’s decline and the ebbing political strength of right-wing populist factions in the US that seek ever-greater redistribution to the rich fueled by ever-increasing tax cuts and ever-rising long-term deficits.
Today, the principal source of international economic disorder is made in China, owing to factions inside its government that hope to avoid a more-rapid appreciation of the renminbi’s value.
I cannot judge the strength of these factions, or whether they know that the falling US current account deficit and dollar may lessen the urgency of adjustment in the rest of the world, but not in China.
Richard Nixon’s treasury secretary, John Connally, once told a group of European leaders that while the dollar was America’s currency, its misalignment was Europe’s problem.
Today, the misalignment of the dollar – and the euro – against the renminbi and other Asian currencies is increasingly becoming Asia’s problem.
Kereta Cepat Copenhagen-Paris
COPENHAGEN – Pada tahun 2009, ketika Copenhagen menjadi tuan rumah Konferensi Perubahan Iklim PBB, saya ikut hadir sebagai anggota parlemen dan saya merasa sedang menyaksikan peristiwa yang mengubah dunia.
Selama bertahun-tahun, para negosiator mengupayakan penetapan perjanjian yang ambisius dan mengikat untuk membatasi emisi gas rumah kaca dan perhatian dunia tertuju ke Denmark.
Sayangnya, krisis keuangan gobal dan kepentingan-kepentingan khusus negara menyatu hingga menggagalkan tercapainya kesepakatan yang komprehensif.
Kini, para negosiator iklim bertemu lagi – kali ini di Paris, dimana harapan terbentuknya perjanjian juga sama besarnya.
Tetapi kali ini, besar kemungkinannya kesepakatan yang kuat akan terwujud.
Saya akan hadir, sebagai menteri Denmark yang bertanggung atas isu-isu iklim, dan saya yakin konferensi tahun ini akan menandai momen ketika negara-negara menunjukkan komitmennya untuk mengendalikan pemanasan global.
Situasi politik sekarang sangat berbeda dengan enam tahun lalu.
Dulu saat konferensi di Copenhagen diselenggarakan, dunia belum pulih dari krisis yang hampir meruntuhkan keuangan global, politisi-politisi terkemuka masih mempertanyakan apakah betul aktivitas manusia bertanggung jawab atas terjadinya perubahan iklim, dan kelompok industri menolak kewajiban penurunan emisi.
Kini, ekonomi global telah pulih, para ilmuwan iklim telah menjawab kerugian terakhir tentang penyebab perubahan iklim, dan komunitas bisnis telah berpihak dengan lingkungan hidup.
Pada tahun 2009, jumlah pemimpin bisnis hijau (green business) sangat sedikit.
Sekarang, jumlahnya melonjak pesat.
Pada bulan November, contohnya Goldman Sachs mengumumkan investasi $150 miliar pada energi hijau hingga tahun 2025.
Dinamika perundingan pun telah berubah secara drastis.
Tujuannya tidak lagi perumusan perjanjian yang memaksa penurunan emisi yang harus dilakukan semua negara; sebaliknya kami sedang mengembangkan kerangka kerja penurunan emisi yang memungkinkan pemerintah untuk memutuskan jenis kontribusi masing-masing negara.
Akibatnya, tiap negara akan menggerakkan kemajuan kesepakatan ini.
Mereka sudah menyadari bahwa konsekuensi buruk akan timbul dari tidak adanya tindakan, dan manfaat dari upaya penurunan emisi sekarang akan terbayarkan dalam jangka panjang.
Tanda-tanda kemajuan sudah banyak ditemukan.
Misalnya tahun lalu Amerika Serikat dan Tiongkok menandatangani perjanjian bilateral untuk melawan perubahan iklim.
Amerika Serikat setuju akan mengurangi emisi sebesar 26-28% hingga tahun 2025 dan Tiongkok berkomitmen akan menetapkan emisi puncaknya sekitar tahun 2030 dan lalu menurunkan jumlah emisi.
Pendekatan baru ini telah memperluas ruang lingkup perundingan iklim.
Perjanjian di Paris diharapkan akan melibatkan lebih dari 180 negara dan mencakup setidaknya 90% emisi CO2 global.
Sebagai perbandingan, Protokol Kyoto tahun 1997 mencakup kurang dari 15% emisi global.
Tentu saja banyak tindakan yang bisa dan harus dilakukan.
Denmark akan terus memerangi perubahan iklim.
Selama 25 tahun ke depan, kebutuhan energi global akan meningkat hampir sepertiga, terutama di negara-negara non-OECD seperti Tiongkok dan India, dan kita harus memastikan pemenuhan energi ini dilakukan dengan cara-cara yang berkelanjutan.
Organisasi seperti International Energy Agency (Badan Energi Internasional) bisa lebih banyak berperan dalam membantu mendorong transisi menuju energi bersih.
Komunitas internasional nampaknya akan berhasil mencapai tujuan yang disepakati sebelumnya di Copenhagen untuk mengucurkan dana $100 miliar per tahun sebagai pendanaan iklim untuk negara-negara berkembang mulai tahun 2020.
Supaya terwujud, kita perlu memanfaatkan kekuatan marketplace, meningkatkan daya tarik dana publik agar mendorong investasi swasta.
Dalam hal ini, the Danish Climate Investment Fund (Dana Investasi Iklim Denmark), yakni bentuk investasi pemerintah bersama dengan dana pensiun besar di Denmark untuk proyek-proyek iklim demi kepentingan perusahaan-perusahaan asal Denmark, bisa menjadi contoh bagi negara lain.
Upaya ini juga memerlukan penghapusan subsidi bahan bakar fosil secara bertahap, serta pengembangan instrumen keuangan baru untuk mendorong para investor memecahkan masalah secara mandiri, tanpa bergantung pada dana publik.
Kesepakatan di Paris akan menghasilkan kerangka kerja global yang sangat dibutuhkan semua negara dalam mengurangi total emisi gas rumah kaca.
Meskipun kesepakatan tersebut mampu diwujudkan, tidak berarti kita berhasil memenangkan perjuangan melawan perubahan iklim, hal itu akan menjadi landasan kuat bagi transisi menuju perekonomian hijau.
अनुकूलनशीलता का वर्ष
न्यूयॉर्क – दस साल पहले इसी महीने में, जापान के ह्योगो प्रान्त की राजधानी कोबे में संयुक्त राष्ट्र के सदस्य राज्यों के 168 प्रतिनिधि यह तय करने के लिए मिले कि हिंद महासागर की विनाशकारी सूनामी का बेहतर जोखिम प्रबंधन कैसे किया जाए जिसमें 227,000 से अधिक लोगों की जान गई थी। पाँच दिनों के दौरान, जिसमें 1995 में कोबे में आए भूकंप की सालगिरह शामिल थी, उन्होंने कार्रवाई के लिए ह्योगो फ्रेमवर्क (HFA) तैयार किया, जिसमें "जीवनों और समुदायों और देशों की सामाजिक, आर्थिक और पर्यावरणीय परिसंपत्तियों की क्षति को कम करने के लिए" अनेक उपाय शामिल किए गए।
दो महीनों में, संयुक्त राष्ट्र के सदस्य देश आपदा जोखिम न्यूनीकरण के लिए तीसरे विश्व सम्मेलन के लिए एक और जापानी शहर में मिलेंगे जो आपदा जोखिम का पर्याय बन चुका है: सेंडाइ - यह तोहोकू क्षेत्र का केंद्र है, जिसे 2011 में आए भूकंप और सूनामी का आघात सहना पड़ा जिसके फलस्वरूप फुकुशिमा परमाणु संयंत्र में रिसाव की स्थिति उत्पन्न हुई। बैठक में हर किसी के दिमाग में एक सवाल होगा: क्या दुनिया HFA के महत्वाकांक्षी लक्ष्य पर खरी उतरी है?
पिछले एक दशक में जो कुछ भी घटा वह बिलकुल अनुकूल नहीं रहा है - इस अवधि में अत्यधिक भयंकर प्राकृतिक आपदाओं का सामना करना पड़ा। पोर्ट-ओ-प्रिंस एक भूकंप में ध्वस्त हो गया। तूफान कैटरीना ने न्यू ऑरलियन्स को उजाड़ दिया। सूखे से अफ्रीका के हॉर्न में असंख्य लोग मारे गए। बाढ़ और भूकंप से पाकिस्तान और चीन में लाखों लोग प्रभावित हुए। गर्म हवाओं और जंगल की आग ने दुनिया भर के देशों में तबाही मचा दी।
इन आपदाओं से हमें HFA जैसे साधनों की आवश्यकता के बारे में भारी चेतावनी मिलती है, विशेष रूप से इसलिए कि आपदा जोखिम के कारकों - भूमि का अनुचित उपयोग, अस्तित्वहीन या ठीक तरह से लागू न किए गए भवन-निर्माण कोड, पर्यावरण क्षरण, गरीबी, जलवायु परिवर्तन, और, सबसे महत्वपूर्ण, अनुपयुक्त और अपर्याप्त संस्थाओं द्वारा कमजोर नियंत्रण – की अभी भी भरमार है। यही कारण है कि दुनिया के नेताओं को सेंडाइ सम्मेलन में HFA के अद्यतित संस्करण पर सहमत होने की जरूरत है।
निश्चित रूप से, पिछले दस वर्षों में कुछ महत्वपूर्ण सफलताएँ मिली हैं, जिनकी ओर अपेक्षाकृत कम ध्यान गया है। दुनिया की आपदाओं का 80% एशिया में केंद्रित है, जहाँ सीधे प्रभावित होनेवाले लोगों की संख्या में दशक-दर-दशक लगभग एक अरब तक की कमी हुई है, यह हिंद महासागर में सुनामी जैसी प्रारंभिक चेतावनी प्रणाली जैसे उपायों के कारण हुआ है।
वास्तव में, भारी तूफ़ान के बारे में ठीक-ठीक भविष्यवाणी करने की प्रणालियों के फलस्वरूप लोगों को समय पर निकाल लेने के कारण फिलीपींस और भारत अभी पिछले वर्ष ही हजारों जीवन बचाने में सफल हुए हैं। और, पिछले तीन वर्षों में, चीन ने आर्थिक हानियों को अपने जीडीपी लक्ष्य के 1.5% के भीतर रखने के लिए जी-तोड़ मेहनत की है।
इस बीच, टर्की वर्ष 2017 तक देश के हर स्कूल और अस्पताल को भूकंप-रोधी बना चुका होगा। इथियोपिया न केवल स���खे बल्कि अन्य प्राकृतिक खतरों का भी पता लगाने के अपने प्रयासों में मदद प्राप्त करने के लिए परिष्कृत डेटा प्रबंधन प्रणाली विकसित कर चुका है। दोनों देश - और कई अन्य देश भी - अपने विद्यालय पाठ्यक्रमों में आपदा जोखिम अध्ययन को शामिल कर चुके हैं।
लैटिन अमेरिका में, इक्वाडोर में किए गए एक लागत लाभ विश्लेषण से यह निष्कर्ष निकला है कि बाढ़ और तूफानों से बार-बार होनेवाली हानियों को दूर करने के लिए, आपदा जोखिम में कमी करने हेतु निवेश किए गए प्रत्येक डॉलर से अंततः $9.50 की बचत होती है। इसी तरह, यूरोपीय संघ का अनुमान है कि बाढ़ सुरक्षा पर खर्च किए गए प्रत्येक 1€ ($1.18) से 6€ की बचत होती है।
उदाहरण के लिए, यूनाइटेड किंगडम में, बाढ़ सुरक्षा में निवेश करने से पिछली सर्दियों के तूफानों के दौरान 8,00,000 परिसंपत्तियों को बचाया जा सका जिसके फलस्वरूप आवश्यक कार्रवाई करने और स्थिति बहाल करने के खर्च में भारी कमी की जा सकी।
लेकिन और बहुत कुछ किया जाना चाहिए। पिछले 44 वर्षों में, मौसम, जलवायु, और जल-संबंधी खतरों के कारण हुई आपदाओं के फलस्वरूप 3.5 मिलियन लोगों की मृत्यु हुई। हालाँकि आपदा-संबंधी मृत्यु दर को कम करने के मामले में प्रगति हुई है - आपदाओं के महामारी विज्ञान संबंधी अनुसंधान केंद्र के अनुसार, आपदाओं में वृद्धि होने के बावजूद, पिछले दशक में आपदा से संबंधित मौतों की संख्या में बहुत अधिक वृद्धि नहीं हुई है - फिर भी यह संख्या बहुत अधिक बनी हुई है।
इसके अलावा, जहाँ लोगों के जीवन बचाए भी जा रहे हैं, वहाँ भी अक्सर उनकी आजीविकाएँ नष्ट हो रही हैं। 1960 के बाद से, आपदाओं से दुनिया को $3.5 ट्रिलियन से अधिक की हानि हुई है, इसमें विकसित और विकासशील देशों दोनों को ही उत्पादकता में हानि और बुनियादी ढाँचे के क्षतिग्रस्त होने कारण बहुत बड़ी कीमत चुकानी पड़ी है।
यही वजह है कि सेंडाइ में आगामी संयुक्त राष्ट्र सम्मेलन में दुनिया के नेताओं को संशोधित HFA के माध्यम से, इस बात के लिए सहमत होना चाहिए कि वे समुद्र के बढ़ते स्तर, ग्लोबल वार्मिंग, अनियंत्रित शहरीकरण, और तीव्र जनसंख्या वृद्धि से उत्पन्न खतरों से निपटने के लिए अपने प्रयासों को बढ़ाएँगे। उच्चतम स्तर पर दृढ़ राजनीतिक प्रतिबद्धता होने पर ही सुरक्षित, अधिक टिकाऊ भविष्य की दिशा में वास्तविक प्रगति की जा सकती है।
संशोधित HFA के लिए समर्थन हासिल करना मुश्किल नहीं होना चाहिए। फिर भी, इस बात के लिए कोई दमदार, या तर्कसंगत, कारण नज़र नहीं आता है कि कोई वित्त मंत्री या मुख्य कार्यपालक अधिकारी स्थिति को बहाल करने पर तो खर्च करना पसंद करेगा परंतु रोकथाम में निवेश करने के लिए नहीं।
दुनिया के लिए यह सही समय है कि आपदाओं से बचाव को औद्योगीकरण की प्रक्रिया और कस्बों और शहरों के विकास से जोड़ा जाए जिसमें भूकंप के खतरों, बाढ़ संभावित मैदानी इलाकों, तटीय कटाव, और पर्यावरण क्षरण जैसे कारकों को समाहित किया जाए। यदि संयुक्त राष्ट्र सम्मेलन में उचित समझौते को तैयार कर लिया जाता है, तो अनुकूलनशीलता 2015 की पहचान बन सकती है, और यह इस वर्ष बाद में जलवायु परिवर्तन और सतत विकास पर होनेवाले समझौतों के स्वरूप को तय करेगा - आपदा जोखिम के लिए इन दोनों के ही महत्वपूर्ण निहितार्थ हैं।
An Unconventional Truth
NEW YORK – Who would have thought that six years after the global financial crisis, most advanced economies would still be swimming in an alphabet soup – ZIRP, QE, CE, FG, NDR, and U-FX Int – of unconventional monetary policies? No central bank had considered any of these measures (zero interest rate policy, quantitative easing, credit easing, forward guidance, negative deposit rate, and unlimited foreign exchange intervention, respectively) before 2008.
Today, they have become a staple of policymakers’ toolkits.
Indeed, just in the last year and a half, the European Central Bank adopted its own version of FG, then moved to ZIRP, and then embraced CE, before deciding to try NDR.
In January, it fully adopted QE.
Indeed, by now the Fed, the Bank of England, the Bank of Japan, the ECB, and a variety of smaller advanced economies’ central banks, such as the Swiss National Bank, have all relied on such unconventional policies.
One result of this global monetary-policy activism has been a rebellion among pseudo-economists and market hacks in recent years.
This assortment of “Austrian” economists, radical monetarists, gold bugs, and Bitcoin fanatics has repeatedly warned that such a massive increase in global liquidity would lead to hyperinflation, the US dollar’s collapse, sky-high gold prices, and the eventual demise of fiat currencies at the hands of digital krypto-currency counterparts.
None of these dire predictions has been borne out by events.
Inflation is low and falling in almost all advanced economies; indeed, all advanced-economy central banks are failing to achieve their mandate – explicit or implicit – of 2% inflation, and some are struggling to avoid deflation.
Moreover, the value of the dollar has been soaring against the yen, euro, and most emerging-market currencies.
Gold prices since the fall of 2013 have tumbled from $1,900 per ounce to around $1,200.
And Bitcoin was the world’s worst-performing currency in 2014, its value falling by almost 60%.
To be sure, most of the doomsayers have barely any knowledge of basic economics.
But that has not stopped their views from informing the public debate.
So it is worth asking why their predictions have been so spectacularly wrong.
The root of their error lies in their confusion of cause and effect.
The reason why central banks have increasingly embraced unconventional monetary policies is that the post-2008 recovery has been extremely anemic.
Such policies have been needed to counter the deflationary pressures caused by the need for painful deleveraging in the wake of large buildups of public and private debt.
In most advanced economies, for example, there is still a very large output gap, with output and demand well below potential; thus, firms have limited pricing power.
There is considerable slack in labor markets as well: Too many unemployed workers are chasing too few available jobs, while trade and globalization, together with labor-saving technological innovations, are increasingly squeezing workers’ jobs and incomes, placing a further drag on demand.
Moreover, there is still slack in real-estate markets where booms went bust (the United States, the United Kingdom, Spain, Ireland, Iceland, and Dubai).
And bubbles in other markets (for example, China, Hong Kong, Singapore, Canada, Switzerland, France, Sweden, Norway, Australia, New Zealand) pose a new risk, as their collapse would drag down home prices.
Commodity markets, too, have become a source of disinflationary pressure.
North America’s shale-energy revolution has weakened oil and gas prices, while China’s slowdown has undermined demand for a broad range of commodities, including iron ore, copper, and other industrial metals, all of which are in greater supply after years of high prices stimulated investments in new capacity.
China’s slowdown, coming after years of over-investment in real estate and infrastructure, is also causing a global glut of manufactured and industrial goods.
With domestic demand in these sectors now contracting sharply, the excess capacity in China’s steel and cement sectors – to cite just two examples – is fueling further deflationary pressure in global industrial markets.
Rising income inequality, by redistributing income from those who spend more to those who save more, has exacerbated the demand shortfall.
So has the asymmetric adjustment between over-saving creditor economies that face no market pressure to spend more, and over-spending debtor economies that do face market pressure and have been forced to save more.
Simply put, we live in a world in which there is too much supply and too little demand.
The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing.
The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation.
This, however, is a zero-sum game that merely exports deflation and recession to other economies.
Perhaps more important has been a profound mismatch with fiscal policy.
To be effective, monetary stimulus needs to be accompanied by temporary fiscal stimulus, which is now lacking in all major economies.
Indeed, the eurozone, the UK, the US, and Japan are all pursuing varying degrees of fiscal austerity and consolidation.
Even the International Monetary Fund has correctly pointed out that part of the solution for a world with too much supply and too little demand needs to be public investment in infrastructure, which is lacking – or crumbling – in most advanced economies and emerging markets (with the exception of China).
With long-term interest rates close to zero in most advanced economies (and in some cases even negative), the case for infrastructure spending is indeed compelling.
But a variety of political constraints – particularly the fact that fiscally strapped economies slash capital spending before cutting public-sector wages, subsidies, and other current spending – are holding back the needed infrastructure boom.
All of this adds up to a recipe for continued slow growth, secular stagnation, disinflation, and even deflation.
That is why, in the absence of appropriate fiscal policies to address insufficient aggregate demand, unconventional monetary policies will remain a central feature of the macroeconomic landscape.
Resurrecting Glass-Steagall
WASHINGTON, DC – A major shift in American politics has taken place. All three of the remaining mainstream Democratic presidential candidates now agree that the existing state of the financial sector is not satisfactory and that more change is needed.
President Barack Obama has long regarded the 2010 Dodd-Frank financial-reform legislation as bringing about sufficient change.
Former Secretary of State Hillary Clinton, Senator Bernie Sanders, and former Governor Martin O’Malley want to do even more.
The three leading Democratic candidates disagree, however, on whether there should be legislation to re-erect a wall between the rather dull business of ordinary commercial banking and other kinds of finance (such as issuing and trading securities, commonly known as investment banking).
This issue is sometimes referred to as “reinstating Glass-Steagall,” a reference to the Depression-era legislation – the Banking Act of 1933 – that separated commercial and investment banking.
This is a slight misnomer: the most credible bipartisan proposal on the table takes a much-modernized approach to distinguishing and making more transparent different kinds of finance activities.
Sanders and O’Malley are in favor of this general idea; Clinton is not (yet).
There are three main arguments against a modern version of Glass-Steagall.
None is convincing.
First, some prominent former officials argue that not all of the financial firms that got into trouble in 2008 were integrated commercial-investment banking operations.
For example, Lehman Brothers was a standalone investment bank, and AIG was an insurance company.
This argument is, at best, irrelevant.
What happened “last time” is rarely a good guide to fighting wars or anticipating future financial crises.
The world moves on, in terms of technology and risks.
We must adjust our thinking accordingly.
At worst, the argument is just plain wrong.
Some of the greatest threats in 2008 were posed by banks – such as Citigroup – built on the premise that integrating commercial and investment banking would bring stability and better service.
Sandy Weill, the primary architect of the modern Citigroup, regrets that construction – and regrets lobbying for the repeal of Glass-Steagall.
(As James Kwak and I argued in our book 13 Bankers, what really mattered was the decades-long bipartisan process of deregulation, for which the end of Glass-Steagall was a prominent symbol.)
Second, leading representatives of big banks argue that much has changed since 2008 – and that big banks have become significantly safer.
Unfortunately, this is a great exaggeration.
Ensuring a financial system’s stability is a multifaceted endeavor – complex enough to keep many diligent people fully employed.
But it also comes down to this: how much loss-absorbing shareholder equity is on the balance sheets of the largest financial firms?
In the run-up to the 2008 crisis, the largest US banks had around 4% equity relative to their assets.
This was not enough to withstand the storm.
(Here I’m using tangible equity relative to tangible assets, as recommended by Tom Hoenig, Vice Chairman of the Federal Deposit Insurance Corporation, and a beacon of clarity on these issues.)
Now, under the most generous possible calculation, the surviving megabanks have on average about 5% equity relative to total assets – that is, they are 95% financed with debt.
Is this the major and profound change that will prove sufficient as we head through the credit cycle?
No, it is not.
Finally, some observers – although relatively few at this point – argue that the biggest banks have greatly improved their control and compliance systems, and that the mismanagement of risk on a systemically significant scale is no longer possible.
This view is simply implausible.
Consider all the instances of money laundering and sanctions busting (with evidence against Credit Agricole last week, Deutsche Bank this week, and almost every major international bank in the past few years).
This is the equivalent of near misses in aviation.
If the US had the equivalent of the National Transportation Safety Board for finance, we would receive detailed public reports on what exactly is – still, after all these years – going wrong.
Sadly, what we actually get is plea bargains in which all relevant details are kept secret.
The regulators and law-enforcement officials are letting us down – and jeopardizing the safety of the financial system – on a regular basis.
The best argument for a modern Glass-Steagall act is the simplest.
We should want a lot more loss-absorbing shareholder equity.
And, to reinforce this, we should want to make the largest banks simpler and more transparent, with “strong structural firewalls” as Dennis Kelleher, of Better Markets, puts it.
Of course, in that context, we should ensure that various activities by “shadow banks” (structures that operate with bank-like features, as Lehman Brothers did) are properly regulated.
Building support for legislation to simplify the biggest banks would greatly strengthen the hand of those regulators who want to require more shareholder equity and better regulation for the shadows.
Conflict Management and Economic Growth
NEW DELHI – One of the most interesting aspects of the prolonged economic crisis in Europe, and of the even longer crisis in Japan, is the absence of serious social conflict – at least thus far.
Yes, there have been strikes, marches, and growing anger at political leaders, but protests have been largely peaceful.
While that may change, the credit for social peace must go to institutions such as elections (“throwing the rascals out” is a non-violent way to vent popular anger), responsive democratic legislatures, and effective judiciaries.
All of these institutions have successfully mediated political conflict during a time of great adversity in advanced countries.
This suggests that a major reason for underdevelopment may be that such institutions, which allow countries to cope with distress, are missing in poor economies.
Economic growth permits conflict between social actors to be papered over.
A downturn, however, usually exposes or sharpens latent social tension.
Why do the benefits of growth seem to be easier to share than are the burdens of adversity?
This is not a trivial question.
Perhaps the answer lies in human psychology.
If consumption is shaped by habit, an income loss is very hard to bear and one might fight to avoid it, while fighting for additional gain when one is doing well is less important.
Also, because conflict may destroy growth opportunities, it may be seen as costlier when growth is strong.
For example, squabbling between workers and management may drive away investors – and thus the chance to start new projects.
But if there are no new investment opportunities on the horizon, squabbling is less costly, because the existing plant and machinery are already sunk costs.
Regardless of why conflicts are greater in times of economic adversity, how a society deals with them depends on the scope and quality of its conflict-management institutions.
The Oxford University economist Paul Collier has shown that years of weak economic growth typically precede civil war in poor countries.
Even after establishing peace, the probability that these countries will relapse into conflict is high.
Not surprisingly, these states typically have weak conflict-management institutions – patchy law enforcement, limited adherence to democratic principles, and few meaningful checks and balances on the government.
Similarly, Dani Rodrik of Harvard University has found that the countries that experienced the sharpest declines in growth after 1975 had divided societies and weak conflict-management institutions.
Societies with well-functioning institutions allocate the burden of distress in predictable ways.
For example, people who suffer the most adversity can fall back on an explicit social safety net – a minimum level of unemployment insurance, for example.
In the United States in recent years, federal and state legislatures prolonged unemployment benefits as joblessness persisted.
Similarly, debtors and creditors can rely on credible bankruptcy proceedings to determine their relative shares.
With an explicit institutional mechanism in place to dictate the division of pain, there is no need to take to the streets.
By contrast, when institutions are too weak to offer predictable and acceptable settlements, or to protect existing shares, everyone has an incentive to jockey for a larger slice of the pie.
Outcomes will be mediated more by actors’ relative bargaining power than by pre-existing implicit or explicit contracts.
Often, bargaining will break down.
Everyone is made worse off by strikes, lockouts, and even violent conflict.
Can countries without a reliable and effective legislature or legal system do better to protect against downturns?
One answer may be to use arrangements that depend in a limited way on the legal system for enforcement.
For example, labor contracts in many developing countries effectively prohibit employers from firing workers.
This is regarded as inefficient because firms cannot adjust quickly to changing business conditions.
Often, such prohibitions are attributed to overly strong unions that hold the economy hostage.
But, if slow or corrupt courts mean that a worker who is wrongfully dismissed has no legal recourse, perhaps the prohibition on firing – enforced by mass protests against violations, which are easily and publicly observable – is the only way to protect workers from arbitrary decisions by employers.
Job tenure may also serve as a form of social security, because the government performs miserably on providing a safety net and private insurance markets do not exist.
Thus, an inflexible contract can protect workers when the preponderance of bargaining power is with firms.
Such inflexible arrangements are not without cost.
In a downturn, too many firms will fail, because they cannot shed labor.
Alternatively, knowing that they cannot fire permanent workers, firms may remain tiny in order to remain below the authorities’ radar.
Or they may hire informal workers who have no rights, or pay inspectors to look the other way (a related point could be made about workplace safety in Bangladesh’s garment factories).
Thus, the attempt to protect workers with rigid labor laws may have the unintended consequence of generating too few protected jobs.
This may be the situation in India, where most workers have few rights, and the few large firms that are established in the formal sector tend to use a lot of labor-saving capital in order to avoid hiring protected workers.
Change is not easy.
Protected workers have no reason to give up their benefits.
Moreover, removing rigid protections without offering alternative, contingent safety nets and judicial redress is a recipe for conflict.
At the same time, some protection is better than none, and if most workers are unprotected, change becomes necessary to avoid even worse conflict.
Sustainable change in developing countries requires reforming not only specific arrangements, such as rigid labor laws, but also more basic institutions, such as the legislature and the judiciary, to make them more responsive to people’s needs.
If developed countries’ citizens want to feel slightly better about their economies’ slow growth and high unemployment, they should contemplate how much worse matters could be without the institutions that they have.
The view expressed here are the author’s own.
Understanding Global Competitiveness
This month the World Economic Forum and the Harvard Center for International Development issued the Global Competitiveness Report for 2001.
Finland, the US, and Canada ranked first through third among the 75 countries studied, while Nicaragua, Nigeria, and Zimbabwe ranked in the last three places.
(All rankings can be found at www.weforum.com ).
As a co-director of this annual study, I am often asked what competitiveness actually means.
Do countries really compete economically, in the way that they do militarily?
Does it make sense to say that Finland is more competitive than, say, Germany or Italy?
For purposes of our report, we define competitiveness in a precise way: as a country’s capacity to achieve sustained economic growth in the medium term – ie, five-years time.
In defining competitiveness we are not claiming that one country’s competitiveness means another country’s lack of competitiveness.
With better policies all countries in the world could simultaneously achieve higher growth.
Even so, it does make sense to rank countries regarding their capacity to achieve growth.
Each country is interested in knowing whether its policies and institutions stack up against those of other nations in the capacity to achieve and sustain economic growth.
There are aspects of growth that are like head-to-head competition, in which the gains of one country or region can be at the expense of another country or region.
Countries compete for internationally mobile capital.
The more one country reaps in foreign direct investment, the less investment another country can attract.
This is clear when countries compete for an individual investment project.
When Intel plans a new semiconductor plant, it invites bids from various countries.
The competition is fierce to attract the project, and usually involves tax breaks, commitments on infrastructure, and even promises about the engineering curriculum in the local university.
In this year’s rankings, we determined a country’s competitiveness (the capacity to grow) according to three broad criteria: (1) technology; (2) public institutions; and (3) macroeconomic stability.
Indexes were created in each of these categories and then averaged in a specific manner to create an overall Growth Competitiveness Index.
Technology refers to the ability of the country to spur new inventions and to adopt technologies invented in other countries.
Some countries, like the US, Japan, Korea, Israel, and Sweden, invest heavily in research and development, and so achieve high rates of innovation.
Other countries, like Argentina and Brazil, invest less in research and development, and therefore achieve little in the way of new products and processes.
Innovators enjoy a high level of prosperity as the result of their innovations.
Here the US, Canada, and Finland rank 1st through 3rd.
Public institutions refer to the quality of governance.
Is there widespread corruption?
Are courts honest and impartial in their judgments?
Can governments be trusted to follow through on their commitments?
Countries with well-functioning public institutions achieve higher rates of economic growth than do countries plagued by corruption and rotten judges.
High ethical standards promote better economic performance.
Northern Europe stands at the top of the world in this regard, with Finland, Iceland, and Denmark ranking 1st through 3rd.
Corruption is deemed nearly non-existent in these countries.
Macroeconomic stability refers to the absence of inflation, budget balance, a realistic value for the exchange rate, the ability of businesses and government to obtain market loans, and high confidence that government financial obligations will be honored.
We have learned in the past decade that even when businesses are internationally competitive, a macroeconomic crisis can derail economic growth, as it did in most of Asia in the late 1990s.
Singapore, Ireland, and Switzerland are the three top-ranked countries in macroeconomic stability.
In our competitiveness studies, we noticed that the world economy can be divided into two categories of countries: the innovators and the non-innovators.
Only about 20 countries in the world are active creators of new inventions.
For these countries, which tend to be among the world’s richest, continued competitiveness requires an excellent system of technological innovation.
Universities must be excellent, government laboratories should be world class, and government and industry should be investing heavily in research and development.
A key determinant of future growth among these economies is the proportion of students that go on to higher education after high-school graduation.
This proportion is now around 80% of students in Canada and the US.
For “non-innovators,” technology remains important, but in these countries most new technologies are imported from abroad rather than invented at home.
Some of these countries are good at importing new technologies, and others are not.
For the past decade or more, a great deal of technological imports came in the context of foreign direct investment.
When American firms invested heavily in Mexico, or Taiwanese firms invested heavily in mainland China, the firms brought with them new technologies that upgraded the production efficiency of the host economy.
So it made sense for countries to compete vigorously for such foreign investors: they offer not only capital, but also new technologies.
A strength and weakness of our analysis of competitiveness is that it focuses on the medium term, not the coming year or two.
Our rankings cannot be used to assess short run cyclical conditions in an economy, but do provide insights into the longer-term prospects of major economies.
Thus, it is ironic that many of this year’s leaders in competitiveness, such as the U S and Singapore, are in recession, while countries further down the list, like China (39th), will escape the global recession.
Part of the slowdown relates to the terrorist attacks of September 11th, but it is becoming clear that America’s economy, and other economies linked to the US through trade and production networks, were sliding into recession before September.
Still, our best guess is that this cyclical downturn will prove temporary, and that on a five-year perspective, the US will continue to demonstrate a strong capacity to achieve economic growth.
Understanding the Arab Military Mind
A key aspect of winning any war is to define the goals.
This is especially true of the current fighting in Gaza and Lebanon.
By trying to do too much – or believing that one can achieve more than is possible – the result can be failure and certainly will be disappointment.
In this case, the mistake is to think that Israel can destroy Hezbollah or eliminate it as a political and military entity.
To claim otherwise plays into the hands of Hezbollah, Syria, and Iran, which want to define their victory as Hezbollah’s survival.
Defining victory as merely survival is a pattern often typical of Arab (and Iranian) politics and it is simultaneously disastrous and sensible.
It is disastrous because it courts defeat by attacking superior forces: the 1967 Six Day War, Saddam Hussein’s challenge to the United States and his attack on Iran, Yasir Arafat’s fighting an endless battle in which he was always defeated, and so on.
But what is to a large extent a defeat in practical and military terms also can be considered a political victory.
The Arabs never “lose” because they never surrender.
Thus they do not formally give up anything.
The leaders that brought on failure and the groups that did not triumph become heroes for being able to claim that they courageously fought the enemy without being crushed.
The important points for them are that they gained revenge by inflicting damage, showed that they were real men, did not buckle under, and survived.
Such a pattern is a formula for endless conflict and endless defeat.
Yet defeats do not force new attitudes, policies, or leaders.
The pragmatic “lesson” remains unlearned because those who take this view perceive a different lesson.
That is why the kind of tactics that work well in conflicts elsewhere in the world do not function in the Middle East.
The rules of the game are supposed to be like this: the side that loses recognizes that it is weaker and makes a deal involving concessions to avoid another costly conflict.
The stronger side then gains deterrence, because recognition of its power stops the other side from going to war in the first place.
Wanting to avoid war, all sides solve disputes by compromise, end the conflict forever, and move onto other things.
Instead, Hezbollah and Hamas thrive on fighting as an end in itself.
Moreover, Hezbollah and its friends present themselves as absolute victors no matter what happens.
And millions of Arabs and Muslims, given regime and media propaganda, believe them.
The underlying cause of conflict is not that Hezbollah or Hamas have grievances against Israel so much as that they view Jews as prophet-murdering, devil-aiding, imperialistic sub-humans whose state must be wiped off the map.
Formal ceasefires or political solutions are inconceivable.
At the same time, the conflict gives them money, power, and glory.
Any losses or suffering that occurs as a result – except perhaps to the leaders personally – are a matter of indifference.
For its part, Israel will win an objective military and political victory but is not able to destroy Hezbollah for several reasons.
First, Hezbollah has the support of most Lebanese Shia, who make up roughly 40% of the population.
The Shiites back Hezbollah because it appeals to their communal pride, represents their interests domestically, and stirs their religious passions.
The current fighting will not erode that support, which regards resistance to Israel as a victory in itself.
Second, Iran and Syria will keep backing Hezbollah because doing so gives them prestige, influence in Lebanon, and a way to hit Israel, all without cost.
Their backing includes not only arms, but also financial subsidies that enable Hezbollah to buy popular support.
Finally, a lot of Hezbollah’s resources and forces are outside Israel’s range.
Thus, only strong action by Lebanese groups could destroy Hezbollah.
But they won’t act because they fear civil war and opportunistically use Hezbollah to promote their own goals or ambitions.
For example, the current Christian leadership is a political ally of Hezbollah, even though the former opposed and the latter favored Syria’s continuing occupation of Lebanon.
Naturally, most other Lebanese are unhappy that Hezbollah’s adventurism has dragged their country into war and inflicted great destruction on it.
Many secretly want Israel to crush Hezbollah and rid them of their problem.
Yet they will do nothing themselves to help, thus ensuring that the problem continues.
There are, though, two realizable goals that Israel can achieve.
The first is to keep Hezbollah away from the border.
Ideally, Lebanon’s army and government would enter the area and run it as part of their country.
Alternatively, another international force may be able to accomplish more than its predecessors, which mostly waved at the terrorists as they passed.
But even if international institutions or Lebanon do nothing, Israel will attack any Hizballah forces trying to get close enough to cross the border or fire rockets at Israeli civilians.
The second attainable goal is to impose such a high price on Hezbollah as to be an effective deterrence in practice.
Hezbollah will keep insisting publicly that it yearns for another confrontation, shout defiance, and claim victory.
At the same time, though, it will confine its threats mainly to the verbal level.
More than this cannot – and should not – be expected.
Understanding the Frankenstein Tradition
PALO ALTO – “It’s alive, it’s moving, it’s alive... IT’S ALIVE!”
So said Dr. Victor Frankenstein when his “creation” was complete. Researchers have long been fascinated with trying to create life, but mainly they have had to settle for crafting variations of living organisms via mutation or other techniques of genetic engineering.amp#160;
In May, researchers at the J. Craig Venter Institute, led by Venter himself, synthesized the genome of a bacterium from scratch using chemical building blocks, and inserted it into the cell of a different variety of bacteria.
The new genetic information “rebooted” its host cell and got it to function, replicate, and take on the characteristics of the “donor.”
In other words, a sort of synthetic organism had been created.
Reactions in the scientific community ranged from “slight novelty” to “looming apocalypse.”
The former is more apt: Venter’s creation is evolutionary, not revolutionary.
The goal of “synthetic biology,” as the field is known, is to move microbiology and cell biology closer to the approach of engineering, so that standardized parts can be mixed, matched, and assembled – just as off-the-shelf chassis, engines, transmissions, and so on can be combined to build a hot-rod.
Achieving this goal could offer scientists unprecedented opportunities for innovation, and better enable them to craft bespoke microorganisms and plants that produce pharmaceuticals, clean up toxic wastes, and obtain (or “fix”) nitrogen from the air (obviating the need for chemical fertilizers).
During the past half-century, genetic engineers, using increasingly powerful and precise tools and resources, have achieved breakthroughs that are opening up new opportunities in a broad array of fields.
The Venter lab’s achievement builds on similar work that began decades ago.amp#160;
In 1967, a research group from Stanford Medical School and Caltech demonstrated the infectiousness of the genome of a bacterial virus called ΦΧ174, whose DNA had been synthesized with an enzyme using the intact viral DNA as a template, or blueprint.
That feat was hailed as “life in a test tube.”
In 2002, a research group at the State University of New York, Stony Brook, created a functional, infectious poliovirus solely from basic, off-the-shelf chemical building blocks.amp#160;Their only blueprint for engineering the genome was the known sequence of RNA (which comprises the viral genome and is chemically very similar to DNA).
Similar to the 1967 experiments, the infectious RNA was synthesized enzymatically.
It was able to direct the synthesis of viral proteins in the absence of a natural template.
Once again, scientists had, in effect, created life in a test tube.
Venter’s group did much the same thing in the recently reported research, except that they used chemical synthesis instead of enzymes to make the DNA.
But some of the hype that surrounded the publication of the ensuing article in the journal Nature was disproportionate.amp#160;
Along with the Venter paper, Nature published eight commentaries on the significance of the work.
The “real” scientists were aware of the incremental nature of the work, and questioned whether the Venter group had created a genuine “synthetic cell,” while the social scientists tended to exaggerate the implications of the work.
Mark Bedau, a professor of philosophy at Reed College, wrote that the technology’s “new powers create new responsibilities.
Nobody can be sure about the consequences of making new forms of life, and we must expect the unexpected and the unintended.
This calls for fundamental innovations in precautionary thinking and risk analysis.”
But, with increasing sophistication, genetic engineers using old and new techniques have been creating organisms with novel or enhanced properties for decades.
Regulations and standards of good practice already effectively address organisms that may be pathogenic or that threaten the natural environment.
(If anything, these standards are excessively burdensome.)
On the other hand, Swiss bioengineer Martin Fussenegger correctly observed that the Venter achievement “is a technical advance, not a conceptual one.”
Other scientists noted that the organism is really only “semi-synthetic,” because the synthetic DNA (which comprises only about 1% of the dry weight of the cell) was introduced into a normal, or non-synthetic, bacterium.
Understanding the history of synthetic biology is important, because recognizing the correct paradigm has critical implications for how governments regulate it, which in turn affects the potential application and diffusion of the technology.
Thirty-five years ago, the US National Institutes of Health adopted overly risk-averse guidelines for research using recombinant DNA, or “genetic engineering,” techniques.
Those guidelines, based on what has proved to be an idiosyncratic and largely invalid set of assumptions, sent a powerful message that scientists and the federal government were taking seriously speculative, exaggerated risk scenarios – a message that has afflicted the technology’s development worldwide ever since.
Synthetic biology offers the prospect of powerful new tools for research and development in innumerable fields.
But its potential can be fulfilled only if regulatory oversight is based on science, sound risk analysis, and an appreciation of the mistakes of history.
The Debt-Growth Controversy
STANFORD – The recent controversy over errors in a 2010 paper by the economists Carmen Reinhart and Kenneth Rogoff is a sad commentary on the demands of the 24/7 news cycle and the politically toxic atmosphere surrounding fiscal policy in the United States, Europe, and Japan.
In their paper, “Growth in a Time of Debt,” Reinhart and Rogoff estimated large declines in growth associated with public-debt/GDP ratios above 90%.
But it contained coding errors discovered by a University of Massachusetts graduate student.
When corrected, the effect is substantially smaller, but nonetheless economically consequential.
The Reinhart/Rogoff paper is just a small part of a voluminous academic literature that shows high debt levels to be economically risky.
A more fundamental question is causality: the state of the economy certainly affects the fiscal position, just as taxation, spending, deficits, and debts may affect economic growth.
Research errors in economics are not uncommon, but they are usually caught at an early stage, as happened once to me in a prepublication draft.
Sometimes errors are not discovered until later, when they are working papers, as with Reinhart and Rogoff, or after publication, as with Nobel laureate Ken Arrow, who had to correct a mistake in the proof of his famous impossibility theorem.
Economists use different methods to analyze fiscal issues: stylized analytical models; macroeconometric models fitted to aggregate data, such as those used by the Federal Reserve, the European Central Bank, and the US Congressional Budget Office (CBO); empirical estimation of key parameters, such as spending multipliers; vector autoregressions; and historical studies.
Each of these approaches has its strengths and weaknesses, and serious economists and policymakers do not rely on a single study; rather, they base their judgments on complementary bodies of evidence.
Thus, there is no excuse for the outrage, the exaggerated claims for one paper’s influence, and the attempt to use the error to discredit legitimate concerns over high levels of debt (let alone to vilify the authors).
While large deficits are usually undesirable, sometimes they can be benign or even desirable, such as in recession, wartime, or when used to finance productive public investment.
In normal times, deficits crowd out private investment (and perhaps crowd in private saving and/or foreign capital), and hence reduce future growth.
By contrast, in a deep, long-lasting recession, with the central bank’s policy rate at the zero lower bound (ZLB), a well-timed, sensible fiscal response can, in principle, be helpful.
But the political process may generate poorly timed or ineffective responses – focused on transfers rather than purchases, infra-marginal tax rebates, and spending that fails cost-benefit tests – that do little good in the short run and cause substantial harm later.
America’s 2008 stimulus barely budged consumption upward, and the 2009 fiscal stimulus cost hundreds of thousands of dollars per job – many times higher than median pay.
We should adopt policies that benefit the economy in the short run at reasonable long-run cost, and reject those that do not.
That sounds simple, but it is a much higher hurdle than politicians in Europe and the US have set for themselves in recent years.
I estimated the impact on GDP of America’s recent and projected debt increase (in which the explosive growth of public spending on pensions and health care looms largest), using four alternative estimates of the effect of debt on growth: a smaller Reinhart/Rogoff estimate from a more recent paper; a widely used International Monetary Fund study, which finds a larger impact (and which deals with the potential reverse-causality problem); a related CBO study; and a simple production function with government debt crowding out tangible capital.
The results were quite similar: unless entitlement costs are brought under control, the resulting rise in debt will cut US living standards by roughly 20% in a generation.
Corroborating statistical evidence shows that high deficits and debt increase long-run interest rates.
The effect is greater when modest deficit and debt levels are exceeded and current-account deficits are large.
The increased interest rates are likely to retard private investment, which lowers future growth in employment and wages.
Numerous studies show that government spending “multipliers,” even when large at the ZLB, shrink rapidly, then turn negative – and may even be negative during economic expansions and when households expect higher taxes beyond the ZLB period.
Permanent tax cuts and those on marginal rates have proved more likely to increase growth than spending increases or temporary, infra-marginal tax rebates; successful fiscal consolidations have emphasized spending cuts over tax hikes by a ratio of five or six to one; and spending cuts have been less likely than tax increases to cause recessions in OECD countries.
Some argue that fiscal consolidation by gradual permanent reductions in spending would be expansionary for high-debt countries, as occurred in some historical episodes. Others maintain that a temporary increase in spending now would boost growth.
Both could be expansionary – or not, depending on details and circumstances. Because many countries have been consolidating simultaneously, interest rates are already low; and, for the US, which accounts for more than 20% of the global economy and issues the global reserve currency, caution in generalizing from other fiscal episodes is highly advisable.
Nonetheless, the evidence clearly suggests that high debt/GDP ratios eventually impede long-term growth; fiscal consolidation should be phased in gradually as economies recover; and the consolidation needs to be primarily on the spending side of the budget.
Finally, the notion that we can wait 10-15 years to start dealing with deficits and debt, as economist Paul Krugman has suggested, is beyond irresponsible.
UNESCO for Sale
COLUMBUS, OHIO – In a better world, my nieces and nephews in Equatorial Guinea would respect our country’s president for overseeing the careful management of revenues pouring in from oil, and for using these funds for development.
In a better world, my nieces and nephews would honor the United Nations’ main cultural institution, UNESCO, for insisting on improving the education and health of Africa’s children.
But in the world as we know it, relatively few people love and respect President Teodoro Obiang.
His biggest fans might include the high-living members of his family, along with selected business executives in the United States and Europe, where he spends quite a bit of his money.
Or certain members of the UN Human Rights Council: during a session in March, some states had the gall to congratulate Equatorial Guinea for its “unequivocal commitment” to human rights.
Board members of UNESCO also seem to love and respect Obiang.
They have accepted $3 million from him for a prize named in his honor.
The prize is supposed to recognize the work of individuals and institutions, including non-governmental organizations, for scientific research in the life sciences that improves the quality of human life.
Perhaps the recipients will love Obiang, too.
It is easy to see where Obiang – who seized power in Equatorial Guinea after killing his predecessor – gets the money that he tosses around.
Since the mid-1990’s, Equatorial Guinea has become a large oil exporter.
While Obiang and his family and cronies jet around the world living the high life, my nieces and nephews number among the vast majority of the country’s people who remain mired in poverty.
Child mortality is high.
Free and fair elections do not exist.
Arbitrary detention and torture are widespread.
The government allows almost no independent news and information.
In 2009, the UN found that Equatorial Guinea had the world’s largest disparity between its per capita GDP ranking, which was on a par with Italy and Spain, and its level of human development – close to Haiti’s.
My nieces and nephews have a life expectancy of 52 years.
According to the president’s son and heir-apparent, Teodorin Obiang, in Equatorial Guinea it is not illegal for a government minister to own a company and to submit bids for government contracts to the ministry that he or she controls.
Such brazen corruption would be laughable if its effects were not so debilitating to the country.
Among its avowed priorities, UNESCO lists gender equality, universal education, sustainable development, and ethics.
My nieces and nephews in Equatorial Guinea still go to school on an empty stomach.
They return home by mid-day to help supplement the household income by selling doughnuts in the streets – at a time when they are supposed to be completing homework.
Surviving on less than a dollar a day, as most of my countrymen do, means living without running water, sanitation, or electricity.
Given the mountain of evidence of corruption and money-laundering by Obiang, his family, and his associates, as well as the deplorable living conditions that people in Equatorial Guinea endure, how is it possible that UNESCO agreed to accept Obiang’s money and name a prize in life sciences after him?
What due diligence was conducted to ensure that the money it received to fund the prize was not actually stolen from the very Africans whose interests UNESCO claims to champion?
As far as the people of Equatorial Guinea are concerned, by offering this prize, UNESCO lends credibility to Obiang and his regime, and becomes complicit in its abuses.
UNESCO – not alone among UN entities – seems more inclined to bend over backwards to avoid taking any action that might offend “African sensibilities” on its board.
One European ambassador was quoted as saying that African countries were all in favor of the prize, and they had enough supporters to take it forward.
The Obiang Prize is a mockery of everything UNESCO publicly stands for.
UNESCO remains unabashed.
It has signaled no willingness to withdraw the award or investigate the origins of Obiang’s gift.
Wouldn’t it be nice if UNESCO and its executive board – particularly the board’s African members – actually stood up for African people?
Or maybe they love Obiang’s money more than they love my nieces and nephews.
Unfreezing Europe\u0027s Northern Dimension
COPENHAGEN: Slowly, ever so slowly, Europe is establishing its new political geography.
Enlargement of the European Union to include the first batch of applicant countries is now within reach as more and more chapters are closed in the bilateral negotiations.
The biggest remaining hurdle concerns the political will among today's EU members to set the actual dates for enlargement.
Later this year, in Prague, NATO's leaders may also give the green light to the next group of new members.
So 2001 can be a crucial year in the never-ending story of the creation of a new and better Europe.
This is why relations with Russia must also be placed high on Europe's agenda this year.
If you look at the new map of Europe, it is obvious where the focus must be: Northwest Russia already shares borders with both the EU and NATO (a fact often missed by those who argue against "expanding NATO right up to the borders of Russia").
This proximity offers the prospect of friction or, if Europe seizes the moment, the most promising of possibilities for economic growth.
After all, Russia's reforms, many of Russia's leading reformers, and President Putin himself all began their careers in St. Petersburg.
The "Northern Dimension," a concept developed during Finland's EU-presidency of two years ago, has been picked up by the present Swedish presidency.
On April 9th, foreign ministers from the EU, Russia, and other countries from the Baltic Sea Region will meet in Luxembourg to review implementation of the so-called Northern Dimension Action Plan and provide political guidance for developing this initiative.
An injection of renewed purpose from the EU's political leaders is undoubtedly needed.
Such could provide inspiration for the entire region, including its postcommunist countries, where a huge potential for growth exists.
The driving force, however, can only be an understanding that EU enlargement must be regarded as a win-win situation for all countries involved directly or indirectly - including Russia.
For Russia has legitimate and undeniable interests at stake.
Think of the Kaliningrad-oblast. With Lithuania's independence it was cut off by land from Russia.
Soon, it may appear even more isolated to Russians, as Poland and Lithuania enforce the EU's Schengen border rules.
To secure regional stability, Russia must be convinced that all countries have the right to choose the international organisations in which they wish to be members.
So Estonia, Latvia, and Lithuania cannot be regarded as special Russian "spheres of influence" requiring Russian assent for membership in either the EU or NATO.
Yet, to obtain that kind of understanding, Russia must be able to see its own interests - in particular the economic health of Kaliningrad and Northwest Russia - taken into account as the EU enlarges.
So co-operation between Russia and the EU must be extended on many practical issues.
Unleashing the potential for growth in the Baltic Sea Region is one powerful way to achieve this end.
Governments and think-tanks in the region are already pointing the way ahead.
A recent study presented at the Baltic Development Forum suggested that, if Poland and the three Baltic countries become EU members in 2003 and continue their efforts to catch up economically with the rest of the Union, annual growth in their GDP can be 2-4% higher than the EU-average.
In the coming decade, Poland might double its GDP, the Baltic countries increase their GDP by 60%.
The benefits of such growth for present regional EU members will more than outweigh the direct budget costs linked to enlargement.
So: a win-win situation.
But EU-enlargement alone will not do the trick.
A comprehensive strategy is needed to realise the region's full potential.
Here Professor Michael Porter of Harvard University has proposed a "Baltic Rim Regional Agenda" to develop an innovative and co-operative mindset to improve the region's business development.
In it, private business takes the driver's seat in the economic and political transition.
But private business can only meet that challenge if governments are prepared to remove the many barriers that exist to growth and free trade.
In the past, the Baltic Sea Region was one of Europe's most economically dynamic areas. Trade and cultural exchanges flourished.
Then came years of Cold War division. Half of the Baltic Sea became an economic dead sea.
When Europe's division ended, an opportunity to recreate the Baltic's traditional free movements of people, ideas and merchandise - all of which once contributed mightily to regional prosperity - suddenly appeared.
The importance of seizing this opportunity cannot be overstated.
Indeed, Immanuel Kant's old imperative - that trade is peace-making - should not be forgotten.
Special resonance is added to this thought by the fact that Kant himself was born in what used to be K”nigsberg, now Russia's Kaliningrad.
Much talk will be heard in coming months: the ministerial meeting in Luxembourg, numerous conferences and seminars around the region, and in September a Baltic summit will be held in St. Petersburg at which political and business leaders will discuss what is needed in order to move ahead.
All this talk is essential and good. But it is vital to move quickly beyond rhetoric if we are to deal effectively with Europe's "Northern Dimension."
EU enlargement - and the process of involving Russia - must not be slowed by a lack of political will and vision among European leaders.
Unifying the West on Climate Change
WASHINGTON, DC – President Barack Obama has called climate change one of the most important challenges of our time, and is pressing forward with domestic cap-and-trade legislation while fully re-engaging the United States in United Nations negotiations.
But this changed attitude does not mean that the US and the European Union will now agree on how to tackle climate change.
Despite a convergence of long-term goals – around an 80% reduction in carbon-dioxide emissions by 2050 – substantial hurdles remain, and real leadership will be required on both sides to avoid the kind of breakdown in Copenhagen that was only narrowly averted in Kyoto in 1997.
So what are the main potential sticking points?
First, it must be understood that the EU and the US start from very different points in the race to reduce emissions.
When the then 15-nation EU ratified the Kyoto Protocol, it pledged to cut CO2 emissions by 8% from 1990 levels by 2012.
With the US outside the Kyoto process, its emissions of greenhouse gases increased by 19% from 1990 to 2005, whereas the EU-15’s emissions rose by 8% during that period, above the Kyoto targets but well below the US total.
A closer look at the figures, however, shows that much of the EU’s performance did not result from deliberate planning.
Since Kyoto’s 1990 baseline coincided with German reunification, East German emissions could be included in the EU’s initial data.
British energy policy also shifted around that time, from reliance on coal to use of natural gas from the North Sea.
If the United Kingdom and Germany are excluded from the 1990-2005 data, the EU-13’s emissions increased by 24%.
So the primary difference between the US and the EU was not the Kyoto Protocol or the EU’s climate policies, but external factors.
The European Environment Agency still maintains that the EU will meet its 2012 target.
But, to succeed, the EU will have to use reforestation and other Kyoto mechanisms, including emissions trading, which the EU originally opposed at Kyoto.
Second, the Obama administration’s proposed emissions-reduction targets will be the high-water mark for Congress, but will fall short of the EU’s 20/20/20 pledge.
Obama’s federal budget establishes a target of 14% reductions from 2005 levels by 2020, with an 83% cut by 2050 (the administration has properly chosen 2005, rather than 1990, as a baseline.)
The Waxman-Markey bill that narrowly passed the House of Representatives in the summer of 2009 essentially adopts the administration’s guidelines.
But the bill that finally emerges from Congress is likely to have less ambitious targets.
So the US will go to Copenhagen in December with a very different set of targets from Europe, and a different baseline.
The EU must also accept that it is a Herculean political task for Congress to pass mandatory emissions-reduction legislation before the Copenhagen meeting.
A solid phalanx of senators is determined to kill any mandatory climate legislation, and the global economic crisis has created the worst possible environment to add more financial burdens on companies and households.
I believe that Congress will pass some kind of mandatory cap-and-trade bill, but it is more likely to happen next year, and it will probably fall even farther below EU targets than the Obama administration’s proposals.
Moreover, Obama is unlikely to accept any binding international agreement at Copenhagen that goes beyond the targets set by Congress.
Nor is the administration likely to muster two-thirds support in the Senate to support a post-Kyoto Treaty without binding commitments from China and India.
China already has binding domestic energy-intensity standards, but will certainly not agree to binding emissions-reduction targets.
There is a real risk that a price for passing a domestic cap-and-trade bill will be potential trade sanctions on big emerging-country emitters that refuse to accept mandatory limits of some kind.
There are ways to avoid a showdown between the EU and the US at Copenhagen.
Early and constant communication with Obama’s top climate officials would help the EU understand the likely US position.
And coordinated EU-US efforts to persuade key developing countries like China and India to make meaningful contributions to the Copenhagen agreement are essential.
The problem is not merely one of competitiveness for European and American companies.
Preventing the temperature increases that scientists tell us must be avoided to stave off catastrophe requires meaningful measures by key developing countries.
The Rio Treaty in 1992 called for “common but differentiated” actions by developing nations, not inaction.
While China and other developing countries may demand technology transfer from developed nations, the EU and US must insist that this not be at the expense of the loss of intellectual property.
Most importantly, each country (or in the EU’s case group of countries) should commit to meeting its own targets, and make every effort to ensure that they add up to the overall level of reductions that scientists believe is necessary to stabilize global temperatures.
This contrasts with Kyoto, where the so-called “Annex I” developed countries adopted essentially identical targets.
This change will prove difficult for the EU, because its companies will face a tighter set of targets than competitors in the US or elsewhere.
But it may be the best we can hope for under the circumstances.
Americans’ attitudes toward climate change have been transformed under the Obama administration.
But political realities will limit how far the US can go in the run-up to Copenhagen and beyond.
The sooner these limitations are appreciated, the more likely it is that a meaningful post-Kyoto agreement can be achieved.
Benjamin Franklin said to the American colonists, “we must hang together or surely we will hang separately.” The same applies to the US and the EU.
Unilateralism vs. Multilateralism
President Bush's new strategic doctrine says that while the US will seek to enlist the support of the international community for its policies, America will not hesitate to act alone if necessary to exercise its right of self defense.
Many of America's allies say that they resent the excessive unilateralism of the Bush Administration's foreign policy, but even President Clinton argued that America must be prepared to go it alone when no alternative exists.
So the debate about unilateralism vs. multilateralism has been greatly oversimplified.
International rules bind the US and limit America's freedom of action, but they also serve American interests by binding others to observable rules and norms as well.
Moreover, opportunities for foreigners to raise their voice and influence American policies constitute an important incentive for being part of an alliance with the US.
America's membership in a web of multilateral institutions ranging from the UN to NATO may reduce US autonomy, but seen in the light of a constitutional bargain, the multilateral ingredient of America's current preeminence is a key to its longevity, because it reduces the incentives for constructing alliances against the US.
Multilateralism, however, is a matter of degree, and not all multilateral arrangements are good.
Like other countries, US should occasionally use unilateral tactics.
So how to choose when and where?
No country can rule out unilateral action in cases that involve its very survival.
Self defense is permitted under Article 51 of the UN Charter, and pre-emptive self defense may be necessary when a terrorist organization presents a strong or imminent threat.
President Bush's military action in Afghanistan was largely unilateral, but was carried out against a backdrop of support from NATO allies and UN resolutions.
Even when survival is not at stake, unilateral tactics sometimes induce others to make compromises that advance multilateral interests.
During the Reagan Administration, trade legislation that threatened unilateral sanctions if others did not negotiate helped create the conditions that prodded other countries to move forward with the creation of the World Trade Organization and its dispute settlements mechanism.
Some multilateral initiatives also are recipes for inaction, or are contrary to American values.
For example, the "New International Information Order" proposed by UNESCO in the 1970s would have helped authoritarian governments restrict freedom of the press.
More recently, Russia and China prevented Security Council authorization of intervention to stop the human rights violations in Kosovo in 1999.
Ultimately the US decided to go ahead without Security Council approval.
Even then America's intervention was not unilateral, but taken with the strong support of NATO allies.
However, some transnational issues are inherently multilateral and cannot be managed without the help of other countries.
Climate change is a perfect example.
The US is the largest source of greenhouse gases, but three quarters of the sources originate outside its borders.
Without cooperation, the problem is beyond American control.
The same is true of a long list of items: the spread of infectious diseases, the stability of global financial markets, the international trade system, the proliferation of weapons of mass destruction, narcotics trafficking, international crime syndicates and transnational terrorism.
Multilateralism is a mechanism to get other countries to share the burden of providing public goods.
Sharing also helps foster commitment to common values.
Even militarily, the US should rarely intervene alone.
Not only does this comport with the preferences of the American public - polls show that two-thirds of Americans prefer multilateral actions to unilateral ones - but it has practical implications as well.
The US pays a minority share of UN and NATO peacekeeping operations, and the legitimacy of a multilateral umbrella reduces collateral political costs to America's so-called "soft" or attractive power - ie, its aid and cultural initiatives.
Finally, in choosing between multilateral and unilateral tactics, Americans must consider the effects of the decision on its soft power, which can be destroyed by excessive unilateralism and arrogance.
In balancing whether to use multilateral or unilateral tactics, or to adhere or refuse to go along with particular multilateral initiatives, any country must consider how to explain its actions to others and what the effects will be on its soft power.
American foreign policy should have a general preference for multilateralism, but not all forms multilateralism.
At times, America will have to go it alone.
When the US does so in pursuit of public goods that benefit others as well as Americans, the nature of America's ends may substitute for the means in making US power acceptable in the eyes of others.
If the US first makes an effort to consult others and try a multilateral approach, its occasional unilateral tactics are more likely to be forgiven.
But if America succumbs to the unilateralist temptation too easily, it is likely to encounter the criticisms that the Bush Administration is now encountering.
In such cases, the likelihood of failure increases, because of the intrinsically multilateral nature of transnational issues in a global age, and the costly effects on US soft power that unaccepted unilateral actions may impose.
Even a solitary superpower should follow this rule of thumb: try multilateralism first.
The UN at 70
NEW YORK –The United Nations will mark its 70th anniversary when world leaders assemble next month at its headquarters in New York.
Though there will be plenty of fanfare, it will inadequately reflect the UN’s value, not only as the most important political innovation of the twentieth century, but also as the best bargain on the planet.
But if the UN is to continue to fulfill its unique and vital global role in the twenty-first century, it must be upgraded in three key ways.
Fortunately, there is plenty to motivate world leaders to do what it takes.
Indeed, the UN has had two major recent triumphs, with two more on the way before the end of this year.
The first triumph is the nuclear agreement with Iran.
Sometimes misinterpreted as an agreement between Iran and the United States, the accord is in fact between Iran and the UN, represented by the five permanent members of the Security Council (China, France, Russia, the United Kingdom, and the US), plus Germany.
An Iranian diplomat, in explaining why his country will scrupulously honor the agreement, made the point vividly: “Do you really think that Iran would dare to cheat on the very five UN Security Council permanent members that can seal our country’s fate?”
The second big triumph is the successful conclusion, after 15 years, of the Millennium Development Goals, which have underpinned the largest, longest, and most effective global poverty-reduction effort ever undertaken.
Two UN Secretaries-General have overseen the MDGs: Kofi Annan, who introduced them in 2000, and Ban Ki-moon, who, since succeeding Annan at the start of 2007, has led vigorously and effectively to achieve them.
The MDGs have engendered impressive progress in poverty reduction, public health, school enrollment, gender equality in education, and other areas.
Since 1990 (the reference date for the targets), the global rate of extreme poverty has been reduced by well over half – more than fulfilling the agenda’s number one goal.
Inspired by the MDGs’ success, the UN’s member countries are set to adopt the Sustainable Development Goals (SDGs) – which will aim to end extreme poverty in all its forms everywhere, narrow inequalities, and ensure environmental sustainability by 2030 – next month.
This, the UN’s third triumph of 2015, could help to bring about the fourth: a global agreement on climate control, under the auspices of the UN Framework Convention on Climate Change, in Paris in December.
The precise value of the peace, poverty reduction, and environmental cooperation made possible by the UN is incalculable.
If we were to put it in monetary terms, however, we might estimate their value at trillions of dollars per year – at least a few percent of the world economy’s annual GDP of $100 trillion.
Yet spending on all UN bodies and activities – from the Secretariat and the Security Council to peacekeeping operations, emergency responses to epidemics, and humanitarian operations for natural disasters, famines, and refugees – totaled roughly $45 billion in 2013, roughly $6 per person on the planet. That is not just a bargain; it is a significant underinvestment.
Given the rapidly growing need for global cooperation, the UN simply cannot get by on its current budget.
Given this, the first reform that I would suggest is an increase in funding, with high-income countries contributing at least $40 per capita annually, upper middle-income countries giving $8, lower-middle-income countries $2, and low-income countries $1.
With these contributions – which amount to roughly 0.1% of the group’s average per capita income – the UN would have about $75 billion annually with which to strengthen the quality and reach of vital programs, beginning with those needed to achieve the SDGs.
Once the world is on a robust path to achieve the SDGs, the need for, say, peacekeeping and emergency-relief operations should decline as conflicts diminish in number and scale, and natural disasters are better prevented or anticipated.
This brings us to the second major area of reform: ensuring that the UN is fit for the new age of sustainable development.
Specifically, the UN needs to strengthen its expertise in areas such as ocean health, renewable energy systems, urban design, disease control, technological innovation, public-private partnerships, and peaceful cultural cooperation.
Some UN programs should be merged or closed, while other new SDG-related UN programs should be created.
The third major reform imperative is the UN’s governance, starting with the Security Council, the composition of which no longer reflects global geopolitical realities.
Indeed, the Western Europe and Other Group (WEOG) now accounts for three of the five permanent members (France, the United Kingdom, and the US).
That leaves only one permanent position for the Eastern European Group (Russia), one for the Asia-Pacific Group (China), and none for Africa or Latin America.
The rotating seats on the Security Council do not adequately restore regional balance.
Even with two of the ten rotating Security Council seats, the Asia-Pacific region is still massively under-represented.
The Asia-Pacific region accounts for roughly 55% of the world’s population and 44% of its annual income but has just 20% (three out of 15) of the seats on the Security Council.
Asia’s inadequate representation poses a serious threat to the UN’s legitimacy, which will only increase as the world’s most dynamic and populous region assumes an increasingly important global role.
One possible way to resolve the problem would be to add at least four Asian seats: one permanent seat for India, one shared by Japan and South Korea (perhaps in a two-year, one-year rotation), one for the ASEAN countries (representing the group as a single constituency), and a fourth rotating among the other Asian countries.
As the UN enters its eighth decade, it continues to inspire humanity.
The Universal Declaration of Human Rights remains the world’s moral charter, and the SDGs promise to provide new guideposts for global development cooperation.
Yet the UN’s ability to continue to fulfill its vast potential in a new and challenging century requires its member states to commit to support the organization with the resources, political backing, and reforms that this new era demands.
The Children’s Revolution
LONDON – Two tragic and haunting images have emerged this year: hooded Islamic State executioners holding their knives to the necks of innocent victims, and masked medical workers bravely fighting an uphill battle against an Ebola outbreak for which the world was not prepared.
But the year’s lasting legacy will be an even more extensive disaster, with recovery taking years, if not decades: nearly two million newly displaced children, trapped in conflict zones across Iraq, Syria, Gaza, the Central African Republic, and elsewhere.
These children have joined the ranks of 25 million displaced boys and girls worldwide – a number equivalent to the population of a midsize European country and the largest in the 70 years since the end of World War II.
Images of vulnerable, desolate refugee children – likely to be displaced for a decade or more – have become so common that the world seems unable to comprehend what it is seeing.
But the plight of child refugees is only one reason why a new approach to children’s rights is needed.
This year, an estimated 15 million school-age girls will become child brides, forced into marriage against their will.
Some 14 million boys and girls below the age of 14 are child laborers, many forced to work in the most hazardous of conditions.
And 32 million girls are denied the basic right to attend school, owing to gender discrimination; around 500,000 of them are trafficked each year.
In the 1950s, the fight against colonialism dominated world politics.
In the 1960s, 1970s, and 1980s, great civil-rights battles were waged against racial discrimination and apartheid, followed by struggles to advance the rights of the disabled and sexual minorities.
It is our generation’s task to tackle the civil-rights movement’s unfinished business, by ending the exploitation of children, especially girls, and ensuring compulsory universal education.
To mark the 25th anniversary of the United Nations Convention on the Rights of the Child (CRC), I, along with this year’s Nobel Peace Prize winner, Kailash Satyarthi, and the head of the United Kingdom’s Overseas Development Institute, Kevin Watkins, am calling on the world community to offer practical support to the burgeoning civil-rights struggle of young people.
We can do more to end child labor, child marriage, child trafficking, and discrimination against girls, by not only demanding the proper policing of domestic laws, but also by establishing a new International Children’s Court, buttressed by a credible reporting and sanctions system.
Violations of children’s rights are now so rampant that there simply is no alternative.
Indeed, though no human-rights treaty has been more widely ratified than the CRC, which requires governments to report on their compliance once every five years, its work lacks adequate resources and enforcement.
Only one in seven countries submit compliance reports on time, and one-third do not submit even a year late.
Meanwhile, the scantly funded offices that manage the information have a two-year backlog.
Another promising initiative – the “optional protocol on communications,” aimed at enabling children and their advocates, for the first time, to bring cases before the UN Human Rights Committee – has been similarly weakened by a lack of strong support, authority, and resources.
Indeed, only 14 countries have ratified the protocol since it was agreed in 2011.
Moreover, states are not legally bound to change the policies or laws that are deemed to be violating their international human-rights obligations.
And a shortage of investigative resources has led to an emphasis on problematic legislation, instead of the larger issue of inadequate enforcement of laws that promote the CRC’s principles.
So there is a case not only for an International Children’s Court, but also for children and their representatives to be granted the right to petition it.
Such a court should have the capacity to receive and investigate individual complaints, the power to monitor independently the enforcement of laws, and the resources to devote to investigations into relevant areas, including child labor, child marriage, child slavery, genital mutilation, and child rape.
Over time, a reporting system could be implemented to facilitate an examination of the impact of health and education policies on the world’s most marginalized boys and girls.
Such research could provide compelling evidence to support compulsory universal education as the ideal mechanism not just for ending educational exclusion, but also for bringing an end to child labor and trafficking, early marriage, and discrimination against girls.
Another advance could follow, based on Graça Machel’s victory a decade ago in convincing the UN Security Council to implement a system for reporting violence against children in conflict zones.
At the time, it was agreed that a Special Representative on Children and Armed Conflict, whose work is backed by the threat of sanctions, would also be established.
Today, a similar post – underpinned by the same system of reporting and sanctions – should be created to focus on children’s other rights.
Next month, Satyarthi and the girls’-rights leader Malala Yousafzai will receive this year’s Nobel Peace Prize, reminding the world that a children’s-rights struggle is underway – one that is increasingly being led by young people.
Indeed, frustrated with adults’ failure to discharge what should be their duties toward children, young people are forming child-marriage-free zones, launching anti-slavery groups, and organizing education-rights campaigns.
Such initiatives – including Bangladesh’s 20 child marriage-free zones, Nepal’s Kamlari Forum, and Ethiopia’s Yellow Movement of university students – may not yet be trending on Twitter and Facebook, but they are engaging millions of young people worldwide.
Now, the Global March Against Child Labor and A World at School have come together to support the #UpForSchool petition, which links the universal provision of education to ending child exploitation.
Over the next several months, youth groups in 190 countries will be collecting, it is hoped, a record number of signatures.
But we must do more than read and sign the petition.
We must recognize that today’s movement to ensure children’s rights is the civil-rights struggle of our generation – and do whatever it takes to support it.
Uniting Asia
North Korea’s nuclear ambitions seem to have died down, at least for now.
The Six-Party Talks have, at long last, succeeded – thanks, apparently, to China’s solid opposition to the nuclearization of northeast Asia.
Under the aegis of the Six-Party umbrella, the United States and North Korea have even held the bilateral talks that North Korea’s Kim Jong Il has long coveted.
So, for now, northeast Asia is temporarily calmer and less unstable than it has been for almost two decades.
Yet it remains a potential flashpoint.
During this time of tension, an increasingly self-confident South Korea began to chart a course independent of its American patron.
In November 2005, the International Atomic Energy Agency (IAEA) accused the South Korean government of having enriched a tiny amount of uranium – to a level close to what could be used in an atomic weapon.
The government denied this, claiming that the experiments were conducted without its knowledge by academic researchers “for scientific interest.”
South Korea’s evolving foreign policy also may involve moving closer to China, as Korean nationalists join the Chinese in resisting Japan’s rival claims to potential hydrocarbon deposits in the East China Sea and the Sea of Japan.
New generations of South Koreans, who have no personal recollections of – and perhaps only casual interest in – the Korean War, apparently resent what they regard as America’s undermining South Korea’s “sunshine policy” toward North Korea.
For Japan, North Korea’s missile capability is the most immediate concern.
A sweeping defense review that Japan recently carried out reaffirms that it will continue to oppose its immediate neighbors’ possession of nuclear arms.
Of course, Japan itself already possesses both nuclear technology and solid-fuel missiles.
But the core of Japan’s defense strategy remains strong ties with the US, not military self-sufficiency.
All in all, the calmer situation in Northeast Asia might seem to be a fragile basis for creating long-term peace and prosperity in the region.
But the basic lesson from Western Europe, whose greatest powers, France and Germany, fought three great wars in 70 years, is that the only lasting solution to conflict is to embed neighboring countries in dense networks of economic, political, and security relationships, and in regional institutions that serve their mutual interests.
Of course, the creators of today’s united Europe did not start by calling for national sovereignty to be abrogated.
Indeed, Robert Schuman once declared that “Europe will not be built in a day, nor as part of an overall design.
It will be built through the practical achievements that first create a sense of common purpose.”
Accordingly, what became the European Union started inconspicuously, with the integration of French and German industries that had been most directly associated with war production – coal and steel.
Only after economic integration had progressed did the first serious efforts at political integration take place.
In today’s East Asia, too, the market is fostering integration.
Now that the 10 southeast Asian states have been gathered into ASEAN – and are promulgating an ASEAN Charter – the concept of an East Asian Economic Grouping (EAEG) that would incorporate ASEAN and China, Japan, and (a presumably unified and nuclear-free) Korea is moving forward steadily.
The initial phase of this grand ambition, a free-trade area (FTA) between ASEAN and China, began in 2004 and should be completed by 2010.
Concurrently, an FTA comprising ASEAN, Japan, and also with South Korea is being negotiated.
Since 2005, India, too, has expressed interest in such an arrangement with ASEAN-10.
But northeast Asia, alone among the Asian regions, has no regional organization.
This is why it needs a concert of powers to sustain its fragile stability.
North and South Korea must begin the work of reconciliation and community-building on their own initiative, as France and Germany did in 1952.
Economics must once again outflank politics, with trade, investment, tourism, and technology transfer intensifying across the 38th Parallel.
Meanwhile, the instruments for a larger Asia-Pacific economic community are already in place, starting with the Asia-Pacific Economic Cooperation (APEC) forum, with the ultimate goal being to meet the imperative for durable peace and security.
Over the next decade, our statesmen must replace the Pax Americana that has enforced stability in the Asia-Pacific region with a Pax Asia-Pacifica, in which the major countries and sub-regional blocs contribute to and share in the maintenance of Asia-Pacific security in the face of our common geopolitical threats.
These include international terrorism, nuclear proliferation, the instability arising out of the Arab-Israel conflict and the Iraq war, and the weakness of the United Nations.
As regional neighbors and partners, we should exploit the convergence of interests that the US, Japan, China, India, Russia, ASEAN, Canada, a unified, nuclear weapon-free Korea, Pakistan, Australia-New Zealand, and others share – just as Western European exploited the Cold War stalemate between the US and the Soviet Union to consolidate and expand the EU.
America’s overstretched military provides the irrefutable rationale for a deep restructuring of Asia-Pacific security.
But trans-Pacific peace must be based on a balance not of power but of mutual benefit.
Clearly, this will involve burden-sharing by all nations in the Asia-Pacific region, and a cooperative understanding among the most affluent and powerful countries in our part of the world – the US, Japan, China, and South Korea.
Uniting Europe’s Fleets
PARIS – Of Europe’s 23 naval forces, only France’s possesses a fully operational aircraft carrier, the 40,000-ton flagship Charles de Gaulle.
Although the United Kingdom is currently building two carriers of its own, the Royal Navy is years away from the capability to deliver instant airpower from the sea. Nevertheless, Europe is reasonably equipped to defend itself against external threats.
It is less able, however, to withstand looming budget cuts.
Europe’s maritime-security strategy has long been founded on two key tenets.
First, sea-borne trade routes, which account for nearly 85% of the European Union’s total exports and imports, must be kept free and safe.
And, second, European countries must maintain the capacity to deal with any major security crisis.
International events highlight these priorities’ relevance.
For example, rising tensions with Iran could compel Europe to deploy its navies to form a blockade around the Persian Gulf, in order to ensure the transit of oil.
Similarly, piracy in the Gulf of Guinea and the Indian Ocean, particularly along the coast of Somalia, threatens Europe’s maritime activities, including its extensive sea-borne commerce.
Indeed, growing concerns over piracy led to the launch in 2008 of the EU’s first naval response within the framework of the Common Security and Defense Policy (CSDP) – Operation Atalanta.
The operation, held annually and comprising 5-10 combat vessels, 1-2 auxiliary ships, and 2-4 maritime-patrol aircraft, includes forces from 26 European navies, and has undoubtedly helped to discourage, if not end, pirate attacks.
Atalanta’s success, combined with European naval forces’ leading role in last year’s operations in Libya, shows that Europe possesses much of the naval infrastructure that it needs to ensure its maritime security.
But the Libyan crisis also revealed that Europe’s naval security is limited and easily overstretched.
More than half of French naval forces were deployed during the Libyan crisis, during which their normal activity rate increased by 10-40% – at a cost of €40 million ($50 million), not to mention disruptions of standard training and maintenance.
Naval assets are not only expensive to build; they are extremely costly to operate, as each unit requires specialized equipment and highly trained personnel.
As a result, navies are often among the first to be targeted by cuts in defense budgets.
And yet, while naval deployments do not always end conflicts, they are a vital component of the military response to any crisis, and are critical to guaranteeing Europe’s security.
Given this, it is imperative that European governments adopt cost-cutting measures that do not jeopardize their naval assets.
First, the EU should take a leading role in maximizing the efficiency of each member state’s navy, by creating mechanisms that would facilitate the exchange of information between governments, maritime agencies, and navies.
Indeed, sound political decisions can achieve just as much as buying new ships – and at a far lower cost.
Adopting a comprehensive legal framework would be a useful first step.
Indeed, improved coordination between countries would contribute to more cost-efficient use of resources and equipment.
Surveillance strategies, for example, are often more expensive than necessary, owing to poor communication.
Information-sharing among Europe’s navies would also help to identify and fill existing gaps, thus paving the way for a more efficient European maritime-security infrastructure.
At the same time, in order to maintain a security framework fit to confront any conceivable security threat, Europe’s governments should preserve the entire spectrum of their naval assets.
Mothballing ships for the sake of saving money could have dire consequences for Europe’s security.
Rather than focusing on shrinking the size of existing fleets, European leaders should focus on getting more out of them.
To this end, Europe’s navies and maritime agencies should merge their capabilities, especially those related to defense and security missions.
This would bring massive savings, which could be reinvested in technological advances, thereby further equipping Europe’s navies to meet future threats.
Accurately assessing maritime operations’ success requires time and care, because naval capabilities cannot be built up quickly.
While reducing such capabilities might seem like an expedient way to cut costs, European governments must not lose sight of their long-term security priorities.
Above all, European leaders must promote increased naval cooperation.
After all, naval capacities are essential to the projection of European power – and crucial to maintaining geopolitical stability around the world.
Unity is Not Enough
The reconciliation between the leaders of the two major Palestinian groups, Hamas and Fatah, that has just been negotiated in Saudi Arabia is being hailed as a major political breakthrough.
But the national unity government created as a result of this agreement faces many daunting challenges.
The agreement needs to be followed by an effort to end the economic and administrative siege of Palestine, as well as serious peace talks with Israel aimed at ending the 39-year occupation of the West Bank and Gaza Strip.
At home, the new government needs to pay its civil servants, restore law and order, and end the chaos that has become the norm in the Palestinian territories.
The internal fighting in Palestine began in part as a result of the political impasse caused after Israel and the international community imposed an economic embargo on the Palestinian Authority.
This economic siege, zealously enforced even by Arab and Islamic banks, followed the new Hamas-led government’s refusal to accept the demand by the “quartet” – the United States, the European Union, the United Nations, and Russia – that it recognize Israel, accept all previous agreements with Israel, and renounce terrorism.
Palestinians complained that the international community acted unjustly, simply because they were unhappy with the result of a free and fair election in the Palestinian territories, which Hamas won overwhelmingly.
The government created after the January 2006 elections has been unable to pay civil servants because of the international banking blockade and the refusal of Israel to transfer millions of tax dollars collected on behalf of the Palestinian people.
After months without pay, the government, headed by Hamas’s Ismael Haniyeh, was confronted with a serious challenge in September, when civil servants went on strike, demanding to be paid.
The differences between the Fatah-led presidency of Mahmoud Abbas and Hamas’s Islamist government spilled into the streets.
Threats by Abbas to hold elections to resolve the deadlock seemed to add oil to the fire.
With unemployment rising, income dropping to record low levels, and internal tensions escalating, fighting between supporters of Hamas and Fatah began.
Attempts to reconcile the parties began in Gaza, before moving to Cairo, Damascus, and finally Mecca under the supervision of Saudi King Abdullah, whose country has been a financial backer of the Palestinians for decades.
One of the first challenges for the new government will be to convince the international community that it respects previous Palestinian agreements.
This includes the mutual recognition agreed by the PLO and Israel, as well as the Oslo Accords.
By announcing the acceptance of previous agreements and supporting the Arab peace initiative, the new government should be able to bring economic normalcy to the cash-strapped Palestinian Authority.
Money, however, is not the only need.
The ceasefire understanding between Palestinian factions and Israel will need to be honored through the commitment of both sides and a parallel political process.
The international community, especially the US, is giving verbal support to launching serious Palestinian-Israeli talks, and the Mecca Agreement paves the way for Abbas to negotiate an end to the occupation.
This will test the resolve of Israel and the international community to achieve tangible progress on re-starting negotiations.
But the newly established national unity government faces yet another daunting challenge.
If resumption of political violence and property destruction is to be avoided, a new internal security policy will be needed.
The numerous militias, groups, gangs, and individuals who own and use weapons must be controlled.
The new unity government must insist on the creation of a single, united armed force.
In order to end lawlessness, the Palestinian security leadership will need to lift the protection given to armed individuals who have been using their weapons with impunity to injure, kill, and destroy property.
Indeed, law and order must be the top priority of the unity government, owing to the need to restore the Palestinian public’s faith in Palestinian leaders from all factions.
The past year has been one of the most difficult years in modern Palestinian history.
For years, the world envied the Palestinian people’s strong social fiber, as they held together despite the occupation.
With a strong sense of national identity, Palestinians boasted that they had a clear unifying purpose: ending the Israeli occupation and establishing an independent and democratic state.
But the recent months of infighting have left a deep wound among Palestinians.
If that wound is to heal, much effort must be exerted to restore a functioning economy, strengthen internal security, and improve Palestinians’ relations with their neighbors and the international community.
No Child Left Out
SEOUL – On a recent visit to a camp for Syrian refugees in Turkey, I witnessed some of the most powerful displays of human endurance that anyone can imagine.
And yet, amid all the stories of trauma and loss, what affected me the most was these refugee families’ unquenchable thirst for education.
The children I spoke to told me of their continued desire to learn in the camp’s makeshift schools, crammed into classes and taught in shifts running from before dawn until after dark.
Their parents spoke of the hope they place in the transformative power of education.
Syria once boasted universal education.
Now, with more than four million people forced to flee their homes because of the violence wracking the country, it has become one of the world’s many places suffering from what can only be described as a global education crisis.
There are an estimated 58 million primary-school-aged children out of school worldwide, and those affected by conflict and natural disasters are among the hardest to reach.
Worse, the number of child refugees cut off from school – in places like Nepal, Myanmar, and Yemen – is increasing at an alarming rate.
If the international community does not act to nurture and educate these children, the cycle of poverty and conflict will be reproduced for generations to come.
The fact that so many children are cut off from education constitutes a clear failure on the part of the world’s governments, which promised in 2000, when the Millennium Development Goals (MDGs) were adopted, to ensure primary schooling for all children by 2015.
To achieve this, it is not enough to enroll children in school; they must be kept there and provided a quality education.
UNESCO estimates that at least 250 million of the world’s children of primary-school age are unable to read, write, or do basic arithmetic.
This week, the international community will have a chance to do something about this scandalous state of affairs.
Policymakers from around the world will meet in South Korea at the World Education Forum to agree on the global education targets that are set to replace the MDGs.
It is truly fitting that South Korea is hosting this forum, because it is so often seen as a model of what investment in education can deliver.
Some 8% of South Korea’s GDP is spent on education, and UNESCO estimates that every dollar invested in primary schools generates $10-$15 in economic returns.
South Korea, which has lifted itself up from the ranks of the world’s poorest countries to among its richest in just two generations, is living proof that education pays off.
The new Sustainable Development Goals that are to be agreed this year underscore the challenges that world governments must address by 2030.
I insist that quality universal primary education must be one of the SDGs’ top priorities.
The emphasis here is on quality.
Success is measured not only by the number of children we enroll, nor by their achievements on standardized tests; the most important outcomes are the tangible and intangible impacts of education on the quality of students’ lives.
This is the unfinished business of the MDGs.
Wherever I travel with the Education Above All foundation, I encounter bright, motivated children who have been denied the chance to learn.
As the world moves on to new priorities, we cannot forget our responsibility to those who have been failed by our complacency.
The job is not done.
We must remain committed to achieving the goal of quality primary education for all children – not some, and not even most – wherever they live.
Universities: Renaissance or Decay?
“Europe’s universities, taken as a group, are failing to provide the intellectual and creative energy that is required to improve the continent’s poor economic performance.” This dramatic statement introduces a new pamphlet whose subtitle, “Renaissance or Decay,” I have borrowed for this reflection.
The pamphlet’s two authors, Richard Lambert, a former editor of the Financial Times and future Director General of the Confederation of British Industry, and Nick Butler, the Group Vice President for Strategy and Policy Development at British Petroleum do not represent vested academic interests.
What they say about Europe probably applies to most other parts of the world as well, though not to the United States.
Lambert and Butler identify four main weaknesses of European universities that must be addressed.
They call for:
greater diversity in place of today’s conformity; incentives for universities to succeed, which implies the need to set their ambitions higher; less bureaucracy and more freedom and accountability; above all, more adequate funding to bring European universities close to the US level of 2.6% of GDP, from less than half on average.
Not everyone will consider the underlying assumption of this analysis compelling.
Why is this attention to universities necessary?
Because, it is said, we now live in a “knowledge society.”
Perhaps.
It is also a fact that a university education is the best guarantee for young people to find jobs in a globalized environment in which information is a key to success.
Yet it is by no means certain that education systems in which 50% or more of each generation strive to attain a university degree are best suited to cope with the exigencies of the twenty-first century.
Many jobs are, in fact, not “high tech,” but, in the words of Britain’s Adair Turner, “high touch” – service-sector jobs that do not require a university education.
Even more jobs are somewhere between the two.
Thus, a flexible system of varied educational institutions may be preferable to a system that leads one out of two students to an academic degree.
Were we to settle for, say, 25% of each generation on the academic track, universities in Europe, and indeed in many other parts of the world, would still have to overcome their unfortunate tendency to define their purposes against the business world.
This tendency has been detrimental both for the business world, which is deprived of the cultural wealth provided by higher education, and for universities, because it removes them from their proper setting in the real world.
There is a strong case for more adequate funding of higher education, including student fees, which are still unpopular in many countries outside the US.
But money is not all that is needed.
One of the greatest comparative strengths of American universities lies in the nature of human relations.
Teachers take their job seriously.
They engage with students rather than eagerly awaiting breaks and holidays to pursue their own projects.
They are true university teachers rather than people who invoke the “unity of teaching and research” in order to concentrate on research subjects and hope that teaching will take care of itself.
Moreover, the research atmosphere of American universities is characterized by a great deal of informal cooperation.
People meet in laboratories and seminars, but also in common rooms and cafeterias.
They are not obsessed with hierarchical status or surrounded by assistants.
Nor are they tied to narrow projects and the project groups formed around them.
Despite fierce competition for academic tenure, for space in journals and in other media, and for advancement in general, people talk to each other as colleagues.
This is what doctoral and postdoctoral students like when they go to American – and, to a lesser extent, British – universities.
This is also what they miss even as they relapse into the bad old habits at home.
As in so many other respects, universities not only in Europe, but also in Japan, South Korea, and developing parts of the world, including China and India, need to loosen rigid structures and habits to avoid decay and nurture a renaissance.
Unlearned Lessons from the Housing Bubble
NEW HAVEN – There is a lot of misunderstanding about home prices.
Many people all over the world seem to have thought that since we are running out of land in a rapidly growing world economy, the prices of houses and apartments should increase at huge rates.
That misunderstanding encouraged people to buy homes for their investment value – and thus was a major cause of the real estate bubbles around the world whose collapse fueled the current economic crisis.
This misunderstanding may also contribute to an increase in home prices again, after the crisis ends.
Indeed, some people are already starting to salivate at the speculative possibilities of buying homes in currently depressed markets.
But we do not really have a land shortage.
Every major country of the world has abundant land in the form of farms and forests, much of which can be converted someday into urban land.
Less than 1% of the earth’s land area is densely urbanized, and even in the most populated major countries, the share is less than 10%.
There are often regulatory barriers to converting farmland into urban land, but these barriers tend to be thwarted in the long run if economic incentives to work around them become sufficiently powerful.
It becomes increasingly difficult for governments to keep telling their citizens that they can’t have an affordable home because of land restrictions.
The price of farmland hasn’t grown so fast as to make investors rich.
In the United States, the price of agricultural land grew only 0.9% a year in real (inflation-adjusted) terms over the entire twentieth century.
Most of the benefit from land for investors has to be from the profit that agribusiness can make from their operations, not just from the appreciation of the price of land.
Despite a huge twenty-first century boom in cropland prices in the US that parallels the housing boom of the 2000’s, the average price of a hectare of cropland was still only $6,800 in 2008, according to the US Department of Agriculture, and one could build 10-20 single-family houses surrounded by comfortable-sized lots on this land, or one could build an apartment building housing 300 people.
Land costs could easily be as low as $20 per person, or less than $0.50 per year over a lifetime.
Of course, such land may not be in desirable locations today, but desirable locations can be created by urban planning.
Many people seem to think that the US experience is not generalizable, because the US has so much land relative to its population.
Population per square kilometer in 2005 was 31 in the US, compared with 53 in Mexico, 138 in China, 246 in the United Kingdom, 337 in Japan, and 344 in India.
But, to the extent that the products of land (food, timber, ethanol) are traded on world markets, the price of any particular kind of land should be roughly the same everywhere.
Farmers will not be able to make a profit operating in some country where land is very expensive, and farmers would give up in those countries unless the price of land fell roughly to world levels, though corrections would have to be made for differing labor costs and other factors.
Shortages of construction materials do not seem to be a reason to expect high home prices, either.
For example, in the US, the Engineering News Record Building Cost Index (which is based on prices of labor, concrete, steel, and lumber) has actually fallen relative to consumer prices over the past 30 years.
To the extent that there is a world market for these factors of production, the situation should not be entirely different in other countries.
An even more troublesome fallacy is that people tend to confuse price levels with rates of price change.
They think that arguments implying that home prices are higher in one country than another are also arguments that the rate of increase in those prices should be higher there.
But, the truth may be just the opposite.
Higher home prices in a given country may tend to create conditions for falling home prices there in the future.
The kinds of expectations for real estate prices that have informed public thinking during the recent bubbles were often totally unrealistic.
A few years ago Karl Case and I asked random home buyers in US cities undergoing bubbles how much they think the price of their home will rise each year on average over the next ten years.
The median answer was sometimes 10% a year.
If one compounds that rate over ten years, they were expecting an increase of a factor of 2.5, and, if one extrapolates, a 2000-fold increase over the course of a lifetime.
Home prices cannot have shown such increases over long time periods, for then no one could afford a home.
The sobering truth is that the current world economic crisis was substantially caused by the collapse of speculative bubbles in real estate (and stock) markets – bubbles that were made possible by widespread misunderstandings of the factors influencing prices.
These misunderstandings have not been corrected, which means that the same kinds of speculative dislocations could recur.
Unleashing Africa’s Girl Power
MAPUTO – Sub-Saharan Africa’s economies have boomed in recent years.
But the headline figures often mask longer-term problems – not least, an over-reliance on natural resources and chronic inequalities.
Inclusive, sustainable growth is achievable, but only by tapping the continent’s greatest reserve of energy and creativity: African women and girls.
Health and development experts, economists, non-governmental organizations, United Nations agencies, and banks agree that the key to unlocking Africa’s potential lies in expanding women’s education, freedom, and job opportunities.
Today, many African women are not only expected to fulfill traditional roles, such as raising children and caring for the elderly; they also face legal and social discrimination regarding land and property ownership, inheritance, education, and access to credit and technology – in addition to oppressive sexual mores and violence.
Yet gender equality is necessary for the continent’s well-being.
Consider the pressing issue of food security.
Women comprise half of the agriculture sector’s workforce, growing, selling, buying, and preparing food for their families.
Studies suggest that equal access to resources would increase farm yields by 20-30%, offsetting the effects of drought and climate change.
Access to education, capital, markets, and technologies would allow women to process, package, and market their products, especially for Africa’s growing middle class, bolstering both earnings and food supplies.
Agriculture is but one example.
Greater female participation in male-dominated occupations across the board would increase overall labor productivity by up to 25%.
The same is true of politics, where more female participation and leadership would improve governance and public services, as promising experiences in some parts of Africa and elsewhere have shown.
The first step to improving conditions for women must be to strengthen their sexual and reproductive health and rights – an issue concerning which Africa has some of the world’s worst indicators.
Simply put, women must be allowed to decide, free of coercion or violence, about their sexuality and health; if, when, and whom to marry; and whether and when to become a parent.
This cannot happen without providing women and girls with the information, education, and services they need to make their own decisions.
Sexual and reproductive health issues exact a huge yet largely avoidable toll on African women, their families, and communities.
The costs usually strike in the prime of women’s economically productive lives, devaluing their future contributions to society.
At the extreme, more than 400 African women and girls die every day during pregnancy or childbirth, scarring families and plunging surviving children into hardship.
Many of these deaths are caused by the estimated five million unsafe abortions carried out annually in Sub-Saharan Africa.
The cost to society in lost income from death and disability is nearly $1 billion.
Almost all of these deaths occur in countries with restrictive abortion laws, which African leaders should consider reforming as a matter of common sense and social justice.
A prime focus should be on protecting the most vulnerable – adolescent girls.
More than one-third of African girls marry before the age of 18, which threatens their health, truncates their education, and lowers their aspirations for the future.
They are also more likely than older women to die of birth-related complications, and are more prone to abuse.
Though most African states outlaw early or forced marriages, enforcement is weak.
African girls are also disproportionately vulnerable to contracting HIV.
Roughly 90% of the world’s pregnant women and children with HIV live in Africa, and, despite notable recent reductions in HIV transmission rates, adolescent girls are still more than twice as likely as boys of the same age to carry the virus.
Yet barely a third of young Africans know how to prevent HIV – another reason for urgent and comprehensive sexuality education.
Another epidemic afflicting African women is violence, all too often perpetrated with impunity.
Sexual violence is used as a tactic of war.
But it is also a disturbing feature of home life; 37% of African women report having been abused by their partner.
In the case of female genital mutilation and child marriage, such violence is culturally sanctioned.
We must change laws, judicial systems, and attitudes that exonerate the perpetrators, and we must provide help to victims.
Attitudes can change.
Contraception, for example, was once a contentious issue.
Today, most African leaders accept it as an important, cost-effective investment and as part of their countries’ economic-development strategies.
Basic family planning in 16 Sub-Saharan countries could save more than $1 billion in education costs alone.
The number of maternal deaths could fall by one-third, saving millions (in developing countries overall, maternal and new-born health-care savings could reach $5.7 billion).
However, the sad reality is that, despite support from various development partners and donors, assistance for reproductive health care and family planning fell by half in the last decade.
The compounding benefits of ending legal, economic, and gender discrimination are vast.
Healthier, wealthier, and better-educated women tend to produce healthier, wealthier, and better-educated families, because women typically invest more of their earnings than men do in their children’s wellbeing.
With the continent’s population forecast to double by 2050, there is hardly a better time to invest in women and girls.
Europe’s Hidden Stimulus
LONDON – When the European Council next meets, on February 7, it should look at private investment as a means to kick-start Europe’s stagnant economy.
With the usual drivers of GDP growth constrained across Europe, the one economic sector able to spend is the non-financial corporate sector.
Indeed, publicly traded European companies had excess cash holdings of €750 billion ($1 trillion) in 2011, close to a 20-year high.
Unlocking that cash would give Europe a much larger stimulus package than any government can provide.
In 2011, for example, private investment in Europe totaled more than €2 trillion, compared to government investment of less than €300 billion.
And yet, while trends among European economies have varied, private investment was, overall, the hardest-hit component of GDP during the crisis, plunging by more than €350 billion – ten times greater than the fall in private consumption and four times more than the decline in real GDP – between 2007 and 2011.
The magnitude of the private-investment downturn was, in fact, unprecedented – and lies at the heart of Europe’s economic malaise.
Likewise, by historical standards, the private-investment recovery is running late.
In more than 40 past episodes in which GDP fell and private investment declined by 10%, recovery took an average of five years.
Europe is four years removed from the onset of recession, but private investment in 2011 was still lower than its 2007 level in 26 of the European Union’s 27 member states.
To be sure, the fact that companies are holding on to their cash, rather than paying it out in dividends, signals that they expect investment opportunities to return – a far more positive situation than in Japan, for example, where companies lack cash to invest.
But European companies remain hesitant, despite low interest rates, keeping private investment well below its previous peak.
Governments can help to persuade companies to let go of their cash by removing regulatory barriers such as zoning regulations in retail and a plethora of requirements in the construction sector concerning everything from the height of ceilings to the size of staircase areas.
They should also address the lack of uniform standards across Europe’s internal borders; for example, there are 11 separate signaling systems for rail freight in the EU-15.
After Sweden eased planning laws in its retail sector during the 1990’s, the country posted the strongest retail productivity growth in Europe (and outstripped that of the United States) between 1995 and 2005.
Standardization and liberalization in European telecoms underpinned 9% growth in value added and productivity in this period, compared to 6% growth in the US.
The largest scope for renewed private investment is in capital-intensive sectors in which government has a major presence as regulator.
Even if European countries were to close only 10% of the variation in capital stock per worker at the subsector level, the impact could be more than €360 billion in additional investment – offsetting the €354 billion difference in private investment between 2007 and 2011.
Many projects, from airports to university campuses, benefit from returns over decades, which implies that weak demand in the short term will have only a limited impact on their overall viability.
Even among more near-term projects, some – for example, retrofitting buildings with more energy-efficient features – could become viable with action from policymakers.
Some degree of investment will add to demand, which may persuade others to invest – a virtuous circle.
This approach is not about “picking winners and losers.”
It is about targeted microeconomic reforms that reduce or remove barriers to private investment, thereby encouraging the non-financial corporate sector to propel European GDP growth.
But it is important to get this policy activism right.
First, governments need to focus on sectors in which action is likely to trigger renewed investment on a scale large enough to boost GDP – and quickly enough to enable private investment to drive the recovery.
Governments often become enamored of innovative sectors, such as semiconductors, that account for only a very small share of total investment.
Policymakers may wish to develop these sectors as a catalyst to innovation, but they should not expect that such initiatives alone can spur a recovery in private investment.
In fact, construction and real estate are the most promising candidates, as they account for roughly one-third of European fixed investment and more than 17 million jobs.
Although these sectors are unlikely to rebound to pre-crisis levels in Greece, Ireland, and Spain for many years, other European economies, including the United Kingdom, Italy, and Sweden, as well as some Eastern European economies, have scope for further investment.
To meet Europe’s ambitious 2020 energy targets, retrofitting existing buildings and improving new buildings’ energy efficiency, including the use of more energy-efficient materials and equipment, could lead to roughly €37 billion in additional annual investment between now and 2030.
In most European countries, action to spur private investment in local services and transport – both large sectors – should also be considered.
Governments, however, need to understand the barriers to investment: regulatory failures; weak enablers, including financial and human capital; poor infrastructure; and substandard technology.
And they must undertake rigorous cost-benefit analyses, in order to ensure that any intervention translates into private investment that promotes productivity growth.
It is here – at the level of execution – that governments often perform poorly.
Too often, they spend money to support private-sector projects that fail to provide a positive return for the broader economy.
Three ingredients are vital to getting it right: backing for initiatives at the highest political level; participation by all key stakeholders in deciding what action to take and driving its implementation; and establishing small, high-powered delivery units with clear mandates to coordinate interventions.
Europe’s leaders need to put private investment at the center of their growth strategy by devising policies that open the gates to large potential flows.
The European Council meeting on February 7 is an ideal opportunity to make a start.
Unmasking the Man with the Wooden Face
Ever since he became General Secretary of the Chinese Communist Party and President of the Peoples’ Republic of China four years ago, Hu Jintao has remained infuriatingly wooden-faced and opaque.
Over the past year, however, the shroud of mystery has begun to drop.
Hu’s unbridled glorification of “Mao Zedong Thought,” coupled with his suppression of dissent in the media, has begun not only to reveal a true authoritarian, but also to belie the wishful thinking of liberals, both inside and outside China, who hoped that Hu would be a reform-minded leader.
It was the late patriarch Deng Xiaoping who in 1992 made the surprising demand that Hu, former Secretary of the Communist Youth League and protégé of ousted party chief Hu Yaobang, be inducted into the Chinese Communist Party’s (CCP) Politburo Standing Committee.
Deng, in effect, personally designated Hu as successor to President Jiang Zemin.
As Deng had crushed the protestors in Tiananmen Square in June of 1989, Hu had proven himself to be “firm and resolute” in quelling anti-Beijing riots in Lhasa, Tibet, two months earlier.
Both understood the dangers of political reform.
Hu, a life-long Party functionary, was able to fool most observers during his first year in office.
He and Premier Wen Jiabao – often called a latter-day Zhou Enlai for his administrative abilities and willingness to play second fiddle – rolled out one impressive slogan after another: “Put people first,” “Run the country according to law,” “Render the media closer to the people,” and “Make government transparent.”
The leadership seemed to be moving away from the ancien regime of Jiang.
Hu pledged to replace Deng’s elitist ethos of “letting one part of the population get rich first”– a policy that has produced a staggering wealth gap – with a more egalitarian approach.
As part of his government’s efforts “to construct a harmonious society,” a tax on agricultural produce was scrapped last year, while the State Council vowed to boost annual investment in rural infrastructure.
But Hu’s administration invariably slams on the brakes whenever their “put-people-first” initiatives begin to threaten one-party rule.
Hu’s Politburo has consistently refused to let peasants set up non-official farmers’ associations or trade unions.
At the same time, it has allowed farmers across China to fall victim to an epidemic of illegal land grabs by local governments and developers.
Not only has Hu’s administration failed to protect the rights of the poor and the oppressed, but police and government-hired thugs now frequently harass lawyers and other activists who lobby on behalf of the country’s dispossessed.
Chen Guangcheng, a blind lawyer – famous for exposing a forced abortion scandal in Shandong – was given a four-year jail term on the dubious charge of “organizing a mob to disturb traffic.”
Perhaps the most revealing aspect of Hu’s rule is his failure to reform the government’s outmoded institutions.
In a landmark speech on administrative restructuring in 1980, Deng underscored the urgency of bringing about a “separation of party and government.”
Hu, by contrast, seems to find little fault with the status quo, under which the Party remains in charge of not only government, but also state enterprises.
It is also becoming increasingly clear that Hu will continue to rely on a variety of politically retrograde propaganda tactics.
He has revived the use of ideological campaigns, akin to those used during the Cultural Revolution, such as a requirement that Party members study The Collected Works of Jiang Zemin .
Indeed, Hu has sought to restore some of Mao’s luster.
In a speech marking the Great Helmsman’s 110th birthday in late 2003, he declared Mao to be a “great proletariat revolutionary strategist and theorist.”
While Deng had castigated Mao’s “leftist” errors, Hu’s hagiographic address made no mention of his manifold blunders.
Moreover, Hu has fomented nationalism, not by taking understandable pride in China’s impressive economic growth, but by demonizing Japan.
He has become increasingly reliant on the facile notion that state-sponsored patriotism and nationalism can hold China’s disparate groups together.
Finally, Hu, Wen, and the rest of the top leadership have turned themselves into superb firefighters with an uncanny ability to, in Party parlance, “nip the seeds of opposition before they sprout.”
Apart from sharpening the “tools of the proletarian dictatorship” by strengthening the Peoples Liberation Army and the People’s Armed Police, they have created a labyrinthine “advance warning” system to monitor threats ranging from peasant riots, urban unrest, and bird flu to the influx of Western ideas through the Internet.
Hu is due to remain in power until 2012.
Given the economy’s solid performance and the docility of China’s population, there seems little doubt that Hu’s twenty-first-century market dictatorship will preserve the Party’s mandate to continue ruling – for now.
But it is equally obvious that Hu, the sphinx-like apparatchik in whom Chinese and Western liberals alike had once invested hope, is unlikely to deliver the more open and humane China that they thought he had promised.
China under Hu has perhaps found its development model: a form of Leninist capitalism with no aspirations toward a more democratic form of governance.
Unpredictable Russia
When he first arrived in Paris in 2000 as the newly elected President of Russia, Vladimir Putin had a simple and reassuring message to convey. “I am bringing you what you need most: a stable and guaranteed source of energy.
My oil and my gas will not be cheaper than supplies coming from the Middle East, but they will be much more secure.”
Putin’s implicit point was that “Christian energy,” even if “Orthodox,” would be more reassuringly certain than “Muslim energy” for a Western world jittery about stability in the Middle East.
The Middle East was supposed to be messy and unpredictable, unlike the new and modern Russia of Putin.
The problem today is that for Ukrainians, Georgians, not to mention Italians, “Christian” oil and gas from Russia does not seem nearly as secure and as fail-proof as Putin promised.
The key criterion by which its allies and partners should judge Russia is predictability, and, in this respect, Russia is increasingly falling short.
When Putin welcomes Hamas’s leaders without consulting the other members of the “Quartet” – the United Nations, the European Union, and the United States – charged with shepherding peace talks between Israel and Palestine, is Russia testing its “nuisance value” or simply performing an “avant-garde” role for the other Quartet members?
What is becoming clearer by the day is that the formula defining Western policy towards Russia since communism’s collapse – “Let’s engage Russia if we can, let’s contain Russia if we must” – must now be completely rethought.
The West has largely failed to engage Russia either as a European or Western ally.
Was this due to a lack of openness or imagination on our part, or a lack of interest or goodwill on Russia’s part?
The inheritors of the Soviet empire never anticipated that their future was to become the West’s “junior,” poorer, repentant, and admiring partner.
Indeed, today’s Russians have no nostalgia for the Yeltsin years, which they associate with confusion, humiliation, shame and weakness.
For most Russians, the emergence of an independent civil society and the first fluttering of an inconstant democratic wind could not balance the deep national frustration felt over the loss of empire and shattered status.
Besides, what would a containment policy applied to Russia today look like?
Russia’s leaders, tucked behind the political safety cushion provided by high energy prices, rightly feel that time is working in their favor, that “we” in the West need Russia more than Russia needs us.
To be sure, Russia’s role as the world’s newest “petro-state” is very different from the Russia where life expectancy for men is bordering on levels seen in the poorest African countries.
But world events are inclining Russia to forget about its bleak demographic outlook and focus instead on its oil-charged future.
Indeed, escalating tensions in the Middle East – particularly Iran’s nuclear ambition – is likely to incline the US to overlook Russia’s diplomatic prickliness even more.
Rapid economic growth in China and India means that both countries will give primacy to a stable flow of energy – and therefore to placid relations with Russia.
Nor can the EU afford a serious crisis with the Kremlin.
The diplomats surrounding Putin may find it natural, given their training, to apply the old Soviet-era methods, and may believe that the moment has come to undo yesterday’s humiliation.
Defending Russia’s national interests, in their view, demands hard bargaining tactics, even if these now verge on the comical, as in the recent case of supposed British spies hiding secrets in a rock in a Moscow park.
Of course, Russia cannot seriously consider balancing the US with China, let alone with France.
An axis between Paris, Berlin, and Moscow never really made sense even when Schroeder was in power in Germany.
It is even more absurd today, with Angela Merkel – someone who is without illusions about Russia – as German Chancellor.
A fine line must be drawn in defining Western policy towards Russia.
Heavy-handed diplomatic pressure – such as threats to exclude Russia from the G8 – must be a weapon of last resort.
But resigned acquiescence in whatever Putin’s regime chooses to do would only confirm it in its belief that it now holds all the cards.
The key word to which we should return in defining our policy towards Russia is “predictability.”
The only secure, predictable Russia is one that offers not “Christian energy,” but “rule of law energy.”
The “democratic energy” of Norway may constitute too distant a goal, but Russia’s role as a predictable energy supplier requires ending the reign of corruption.
Predictability depends on accountability.
We in the West may badly need Russia’s energy, but if Russia does not want its future to degenerate into Oriental despotism, it must engage with the West in good faith.
If Putin genuinely seeks to bolster Russia’s global standing, he must not allow Russians’ sense of humiliation in the years since the Soviet collapse to stand in the way.
Clearing A Path Through the Brain
MADRID – Our brains are like a dense forest – a complex, seemingly impenetrable terrain of interacting neurons that mediates cognition and behavior.
The great challenge is to uncover its mysteries, that is, to find out how the neurons are structured and mutually connected.
How close are we to that goal?
In general, the exchange of information between the billions of neurons that make up the neuronal forest takes place through two types of highly specialized structures: chemical synapses (the majority) and so-called gap junctions (a substrate of one class of electrical synapse).
Chemical synaptic transmission involves the release of specific molecules, neurotransmitters, which diffuse through the intercellular space and interact with specific receptors located on an adjacent neuron.
In the electrical transmission mediated by gap junctions, the plasma membranes of adjacent neurons are separated by a gap of about two nanometers (two-billionths of a meter), but contain small channels (the gap junctions) that connect the cytoplasm of the adjoining neurons, permitting the diffusion of small molecules and the flow of electric current.
The major problem when analyzing the brain is the extreme complexity of its synaptic connections.
A very dense network of processes occupies the space between the cell bodies of the neurons, neuroglia (cells that support and protect neurons), and blood vessels.
This space (the neuropil) represents 90-98% of the volume of the human cerebral cortex, with an estimated one billion synapses per cubic millimeter of neuropil.
As if that didn’t make the brain mappers’ job difficult enough, a wide variety of synaptic relationships has been observed.
And a neurotransmitter may diffuse and act not only on other synaptic contacts, but also on extrasynaptic receptors.
Likewise, not all electrical transmission is mediated by gap junctions, and these forms involve different specialized structures.
In addition, electrical interactions take place between closely apposed neuronal elements without obvious membrane specializations.
Furthermore, it has been proposed that glial cells are involved in information processing through their bi-directional signaling with neurons.
And we now know that the activity of neuronal circuits is strongly influenced by neuromodulators (such as dopamine, serotonin, and acetylcholine), which are secreted by a small group of neurons and diffuse through large regions of the nervous system.
Neurohormones, released by neurosecretory cells, also have an effect on many brain regions via the circulatory system.
Nonetheless, we are beginning to find our way through the forest.
The brain’s wiring – its “synaptome” – is the anatomical substrate for a variety of functions that require information to be communicated rapidly from one point to another.
The neuronal circuits involved in reflexes are a typical example – relatively simple, fast, automatic actions that occur at a subconscious level.
Other, much more complex functions related to the synaptome include information processing in large but discrete circuits in the sensory and motor systems and in the brain regions associated with language, calculation, writing, and reasoning.
The modulatory systems, however, act on multiple neuronal circuits and brain areas.
This diffuse action is related to the overall moods and states of the brain (for example, attentiveness, sleep, and anxiety).
Rapid and automatic serial reconstruction of large tissue volumes, enabled by the recent development of automated electron microscopy techniques, is the method of choice in defining the synaptome.
Nevertheless, even using this technology, full reconstruction of whole brains is possible only for relatively simple nervous systems.
Indeed, even for a small mammal like the mouse, it is impossible to reconstruct the brain completely at the ultrastructural level, because the magnification needed to visualize synapses yields relatively small images.
For example, it has been estimated that if we were to use sections of about 35 square micrometers (millionths of a meter) at a thickness of 20 nanometers, we would need more than 1.4 billion sections to reconstruct fully just one cubic millimeter of tissue.
So, while complete reconstructions of a small region of the mammalian brain are feasible, structures like the cerebral cortex – with a surface area of 0.22 square meters and a thickness of between 1.5-4.5 millimeters – cannot be fully reconstructed.
Nonetheless, despite the technical difficulties, it should be possible to make spectacular advances in unraveling brain organization, even in humans, by adopting appropriate strategies with the tools now available.
For example, although the synaptic density within a given area and layer may vary, this variability remains within a relatively narrow window, so the statistical distribution of the variation can be modeled.
That means that we do not need to reconstruct the entire layer within a given area to determine the absolute number and types of synapses; instead, the range of variability can be determined by multiple sampling of relatively small regions within that area.
By combining these detailed structural data with the incomplete light and electron microscopy wiring diagrams, it could be possible to generate a realistic statistical model, rather than attempting to reconstruct the brain in its entirety.
Computational models of neuronal networks based on real circuits already have become useful tools to study aspects of the functional organization of the brain.
Thus, although a true synaptome of the mammalian brain is a chimerical quest, it is possible that in the near future we will be able to construct a “silicon cortex,” a computerized machine based on a realistic model of the complete anatomical, physiological, and molecular design of the cortical circuit.
If we succeed, we will finally be able to see the forest – without having to look for every tree.
Unsettling America
LONDON – Is there more to be said about Egypt?
Hosni Mubarak has been sacrificed to save the military regime.
A “strongman” who cannot keep order in the streets is of no use to anyone.
Whether “democracy” will ensue is much more dubious.
Judging on the basis of Pakistan, and much of the rest of the Muslim world, periods of (corrupt) civilian rule will alternate with “cleansing” military coups.
I doubt that most Egyptians put what we call democracy at the top of their political agenda.
Journalists who claim otherwise are not a representative sample, even in Western countries.
They are a restless breed, flitting round the world’s trouble spots, pen and camera poised.
Freedom of expression is in their bones; mass protests their visual lifeblood.
They try to report the world as it is, but theirs is not the world of most people – their business depends on the disruption of “ordinary” business, so they systematically underestimate people’s desire for law and order (or at least order).
Most people, it seems, will tolerate a modest amount of political repression, including secret police, torture, and corruption, if it delivers security and a modicum of prosperity and fairness.
Otherwise, there is no explanation for the longevity of dictatorships such as Mubarak’s 30-year rule. Likewise, in the referendum that ended his 16-year rule in Chile in 1990, General Augusto Pinochet, with thousands of tortured and vanished victims in his grisly cupboard, ran on a law-and-order platform and received 44% of the vote.
Most Western leaders think naturally in terms of a “transition to democracy.”
This is what they want to happen in Egypt, hoping that democracy will not jeopardize Egypt’s peace treaty with Israel.
But Western democracies’ combination of freedom and order – the West’s most precious gift to the world – is the product of a long history that cannot be replicated in short order.
Non-Western political systems are typically archaic: good rulers can sleep soundly at night, while bad rulers face continual danger of overthrow from the army or the streets.
Most non-Western peoples rely upon the ruler’s personal virtues, not institutional limits on his power, to make their lives tolerable.
We interpret as striving for democracy what is really the traditional way of getting rid of bad rulers.
Yet all of this leaves out the possibility of change, particularly change influenced by the United States’ unsettling role in the world.
The idea that the US is a status quo power is a delusion of international-relations experts.
In the short run, of course, the US behaves like an ordinary power.
It has interests to protect, and this often requires supporting unsavory regimes.
But America’s long-term project is to remake the world in its image.
Where America has room for maneuver, it always presses forward in this direction.
And, despite the rise of China and the move to a more “plural” international system, the US still has the power to change “facts on the ground” in large parts of the world, particularly the Middle East.
Experts have always underestimated the expansionary character of American foreign policy, because they think of expansion in old-world terms: conquest, imperialism, and colonialism.
The US does not seek to create an empire in the old sense: America pursues an imperialism of the values that it holds dear.
If all countries have the same values, traditional imperialism becomes obsolete.
Though it clearly lacks the power to impose its values by force, the US certainly has the power to unsettle established conditions, both through the attraction of its “soft power” (the American way of life) and by the exemplary use of force.
I was one of those who opposed the US-led invasion of Iraq in 2003.
Now I wonder whether I was right.
Parts of the invasion and occupation were certainly badly mishandled by the US, leading to a much greater loss of life than was necessary.
But, taking the long view, can anyone doubt that the invasion had the effect of shaking up the pieces, not just in Iraq, but across the Islamic chessboard?
That is why I am not at all sure that the street uprisings in Egypt, following those in Tunisia, and now spreading to other Muslim-majority countries, can be interpreted simply as traditional forms of protest against bad rulers.
Throughout the Muslim world, there is a sense of enlarged possibilities, especially among the young: more than half of Egypt’s 80 million people are under 25.
Surely, this sentiment can be traced back to the US invasion and forcible overthrow of Saddam Hussein.
In his great verse drama Faust, Goethe has God send humanity the Devil (Mephistopheles) in order to stir things up.
His intention is quite clear: “Man’s active nature, flagging, seeks too soon the level;
Unqualified repose he learns to crave, Whence, willingly, the comrade him I gave, Who works, excites, and must create, as Devil.”
Mephistopheles is rather a joker.
So is America, always stirring sleepy societies out of their torpor – a role begun when Commodore Matthew Perry “opened up” Japan in 1854.
If we want to hold fast to any vision of progress, this is an indispensable role, and only America can play it today.
With China, like seeks to talk to like.
With America, like deliberately engages with unlike, and tries to infuse it with some of its vigor.
True, America’s intervention in the Middle East also strengthened extremist Islam, breeding on the resentment that the US presence arouses.
But, taking the long view, the future surely does not lie with organizations like the Muslim Brotherhood. The religious demon is a far less appealing devil than Uncle Sam.
Sooner or later, the Brothers will suffer the fate of all bad devils.
Unsustainable Development Goals
ARUSHA – At the end of this month, one of the most consequential political conferences of the decade will take place, with more than 150 world leaders gathering in New York to set the path for global development spending – more than $2.5 trillion – between now and 2030.
But, in fact, heads of state are not expected to do much at the conference at all.
With the so-called Agenda for Sustainable Development having been quietly finalized by diplomats and United Nations bureaucrats last month, the leaders are expected just to smile for the cameras and sign on the dotted line.
Unfortunately, they are missing a one-in-a-generation opportunity to do much more good.
The agenda is the result of years of negotiations.
Aiming for inclusivity, the UN talked to everyone.
But, however admirable that approach may be, it did not prove successful.
Indeed, looking at the agenda they produced – more than 15,000 words and a headache-inducing 169 development targets – one might conclude that they simply threw everything they had heard into the document.
Compare this to the last global development agenda, the fairly successful Millennium Development Goals.
The MDGs included just 18 sharp targets, promising essentially to cut hunger, poverty, and child and maternal mortality, while getting all children in school and improving access to water and sanitation.
It is not that the new promises are not well-intentioned.
The problem is that they do not reflect effective prioritization, which is critical when resources are limited.
For example, the agenda calls for the provision of “universal access to safe, inclusive, and accessible green and public spaces, in particular for women and children, older persons, and persons with disabilities” by 2030.
Green spaces are nice, but at a time when 1.2 billion people still live in abject poverty, 2.5 billion lack access to water and sanitation, and almost a billion people go to bed hungry each night, are they really a top priority?
Funds are limited, after all.
Some promises seem to be based on an alternate reality.
One of the ten global promises on education is this contorted formulation: “By 2030, ensure that all learners acquire the knowledge and skills needed to promote sustainable development, including, among others, through education for sustainable development and sustainable lifestyles, human rights, gender equality, promotion of a culture of peace and non-violence, global citizenship, and appreciation of cultural diversity and of culture’s contribution to sustainable development.”
Yet research shows that more than one-third of all school-age children – a quarter-billion in all – currently fail to learn even the fundamentals of reading and mathematics.
Should we really divert resources away from basic education to ensure that we can promote sustainable development in schools?
Other targets assume that helping “small-scale artisanal fishers” and “to promote sustainable tourism” are among the most important goals for the world.
There is even a target to “ensure that people everywhere have the relevant information and awareness for sustainable development and lifestyles in harmony with nature”.
Should we really be diverting resources away from efforts to tackle poverty and hunger in developing countries to raise awareness about environmentally conscious lifestyles?
Some targets are even more misguided.
One promises to achieve “full and productive employment and decent work for all women and men, including for young people and persons with disabilities.”
While promising full employment might be politically popular, it is impossible, unnecessary, and sometimes even detrimental.
After all, every economy needs some unemployment to allow workers to change jobs.
Moreover, all functional governments are already focused on boosting employment.
And studies show interest groups use “decent work” policies to create great jobs for a minority, while leaving the rest out, often pushing vulnerable workers back into the informal economy and increasing poverty.
In short, many of the targets are either marginally useful or highly problematic.
Making matters worse, collecting data on the 169 promises could cost almost two years of development aid.
As a result, the agenda will leave the world’s poorest far worse off than they could be.
It is a rather unlikely prospect, but instead of signing the Agenda for Sustainable Development as is, leaders should forego the photo opportunity and spend their time in New York cutting it down to just 19 key development targets.
That is the number of targets that a panel of Nobel laureates identified in a project for my think tank, the Copenhagen Consensus Center.
The panel studied more than 1,800 pages of peer-reviewed analysis, in order to determine which potential targets would achieve the most good – something that the UN never did.
The targets they selected include cutting tuberculosis deaths by 95%, halving the prevalence of malaria, completing the Doha Round of global trade talks, and ensuring universal access to family planning.
Channeling the entire development budget to the 19 targets that the panel identified would do four times more good than if we spread it across the UN’s 169 targets, with a large share of those benefits going to the world’s worst-off people.
In lofty language, the UN claims that the Agenda for Sustainable Development’s 169 targets are “integrated and indivisible.”
This is nonsense.
Cutting them back is what should happen.
And that is exactly what will happen, the day after the UN conference, when leaders return home and recognize – as many quietly do already – that they cannot work on 169 grand targets simultaneously.
Inevitably, they will choose a smaller number on which to focus.
We can only hope that they choose those that promise to do the most good.
महिलाओं के अधिकार और प्रथागत अन्याय
सिएटल – महिलाओं को दुनिया के अधिकतर हिस्सों में जिस सबसे बड़ी चुनौती का सामना करना पड़ता है वह उनके कानूनी अधिकारों और व्यक्तियों के रूप में उनके बारे में दावा करने की उनकी क्षमता के बीच अंतराल है। राष्ट्रीय संविधानों में लैंगिक समानता की गारंटी देने की संभावना बहुत अधिक बढ़ती जा रही है, लेकिन बहुत से संविधान प्रथा, धर्म, या जातीय संबद्धता पर आधारित समानांतर कानूनी प्रणालियों के अधिकार को भी स्वीकार करते हैं। और, दुर्भाग्यवश, दुनिया के कई हिस्सों में कानून बदलते समय के साथ नहीं बदला है।
सौभाग्य से, अंतर्राष्ट्रीय मानवाधिकार संस्थाएं इस अंतराल पर नज़र रख रही हैं। 1999 और 2000 में, दो युवा तंज़ानियाई दर्जिनों को, जिनकी शादी तेरह से उन्नीस वर्ष की आयु में हो गई थी और उनके चार बच्चे होने के बाद वे बीस से उनतीस वर्ष की आयु में विधवा हो गई थीं, उनके जातीय समूह के विरासत के प्रथागत कानून के तहत उनको अपने घरों से बेदखल कर दिया गया था। उन प्रथागत कानूनों के तहत मृतक की संपत्ति में से उसके परिवार की महिला सदस्यों की तुलना में पुरुष रिश्तेदारों के दावे का हिस्सा अधिक होता है, और आम तौर पर पत्नियों को पूरी तरह वंचित रखा जाता है और बेटियों को बहुत कम हिस्सा दिया जाता है। तंज़ानिया के इन दोनों मामलों में, स्थानीय अदालतों ने यह निर्णय दिया कि उस महिला की मेहनत से प्राप्त आय से खरीदी गई वस्तुओं सहित जिस संपत्ति को महिला ने अपने पति के साथ साझा किया था, वह उसके देवर के पास जानी चाहिए।
युवा विधवा दर्जिनें अपने बच्चों के साथ बेघर हो गईं, लेकिन उन्होंने अपनी बेदखली को स्वीकार करने से इनकार कर दिया। तंज़ानिया के महिला कानूनी सहायता केंद्र और जॉर्ज टाउन विश्वविद्यालय के अंतर्राष्ट्रीय महिला मानवाधिकार क्लीनिक - जिसका मैं पहले निर्देशन करती थी - की मदद से उन्होंने तंज़ानिया के उच्च न्यायालय में फैसले को चुनौती दी। 2006 में, उच्च न्यायालय इस निष्कर्ष पर पहुँचा कि विरासत संबंधी प्रथागत कानून "कई तरह से भेदभावपूर्ण" थे, लेकिन उसने इनमें बदलाव करने से इनकार कर दिया। न्यायालय ने कहा कि ऐसा करने का मतलब "हमारे 120 कबीलों के विवेकशील दिखाई देने वाले रिवाजों के भानुमती के पिटारे को खोलना होगा" जिसे कानूनी चुनौती दिए जाने का खतरा है।
ये महिलाएं अपने मामले को अंततः संयुक्त राष्ट्र संघ में ले गईं, जहां उहोंने अब दुनिया भर की लाखों महिलाओं की समानता के लिए एक ऐतिहासिक जीत हासिल की है। तंज़ानिया महिलाओं के खिलाफ सभी प्रकार के भेदभाव के उन्मूलन पर कन्वेंशन (सीईडीएडब्ल्यू) और उसके प्रोटोकॉल का समर्थक देश है। इसी कारण ये दोनों महिलाएं अपनी शिकायत उस समिति के पास ले जा पाईं जो इस संधि के कार्यान्वयन के लिए राज्यों के अनुपालन की स्थिति को देखती है।
15 मार्च को, संयुक्त राष्ट्र समिति ने घोषित किया कि तंज़ानिया ने अपने अंतर्राष्ट्रीय मानवाधिकार दायित्वों का उल्लंघन किया है। समिति ने फैसला सुनाया कि "महिलाओं के लिए संपत्ति का स्व���मित्व हासिल करने, उसका प्रबंध करने, उपयोग करने, और निपटान करने का अधिकार उनकी वित्तीय स्वतंत्रता के लिए केंद्रीय है और यह उनकी आजीविका कमाने और खुद के लिए और अपने बच्चों के लिए पर्याप्त आवास और पोषण प्रदान करने की क्षमता के लिए महत्वपूर्ण हो सकता है।"
समिति ने दावा किया कि संधि के मानवाधिकार जनादेश का अनुपालन करने के लिए, तंज़ानिया को उन प्रथागत उत्तराधिकार कानूनों को निरस्त और संशोधित करना होगा जो महिलाओं के खिलाफ भेदभाव करते हैं। उसने यह भी सिफारिश की है कि इस देश को महिलाओं को सीईडीएडब्ल्यू के तहत अपने अधिकारों के बारे में शिक्षित करना चाहिए और प्रथागत कानून से भेदभावपूर्ण व्यवहार को दूर करने के लिए समर्थन जुटाने के लिए न्यायाधीशों, वकीलों, स्थानीय अधिकारियों, और पारंपरिक नेताओं को प्रशिक्षित करना चाहिए। तंज़ानिया की सरकार को सितंबर तक इस फैसले पर प्रतिक्रिया देनी है।
इस फैसले का भारी प्रभाव हो सकता है क्योंकि तंज़ानिया के इस मामले में जो समस्या सामने आई है वह अफ्रीका और एशिया के कई हिस्सों में भी बहुत आम है। उदाहरण के लिए, भारत ने ज्यादातर स्थितियों में परिवार की भूमि के वारिस के रूप में बेटों और बेटियों को बराबर का दावा उपलब्ध कराने के लिए दस साल पहले कानून बनाया था। इसके बावजूद, अंतर्राष्ट्रीय भूमि-अधिकारों के गैर-सरकारी संगठन लैंडेसा द्वारा तीन ग्रामीण भारतीय राज्यों में किए गए महिलाओं के एक सर्वेक्षण में यह पाया गया कि दो-तिहाई महिलाओं को ऐसी किसी भी महिला का पता नहीं था जिसे अपने माता-पिता से भूमि विरासत में मिली हो। चार में से एक महिला को यह पता नहीं था कि उन्हें परिवार की भूमि की विरासत का अधिकार प्राप्त है।
उत्तराधिकार के अधिकार में घर, कार, और सिलाई की मशीन किसे मिलनी चाहिए, इसके अलावा और भी बहुत कुछ दांव पर होता है। अनुसंधान से पता चलता है कि भूमि सहित, संपत्ति का स्वामित्व प्राप्त करने और संपत्ति का वारिस होने के महिलाओं के अधिकार गरीबी के चक्र को तोड़ने के लिए महत्वपूर्ण हैं। उदाहरण के लिए, तंज़ानिया में किए गए एक अध्ययन में यह पाया गया कि जिन क्षेत्रों में महिलाओं को भूमि के अधिक मजबूत अधिकार प्राप्त हैं उनमें महिलाएं चार गुना अधिक आय अर्जित कर रही हैं। और नेपाल में किए गए एक अध्ययन में पाया गया कि जिन बच्चों की माताओं के पास भूमि का स्वामित्व था उनके कुपोषित होने की संभावना 33% कम थी। ये लाभ आर्थिक लाभों से बहुत अधिक हैं: भारत में, यह पाया गया कि जिन महिलाओं को भूमि के सुरक्षित अधिकार प्राप्त थे उन महिलाओं के घरेलू उत्पीड़न से पीड़ित होने की संभावना आठ गुना कम थी।
संयुक्त राष्ट्र के फैसले ने दुनिया भर में महिलाओं की इस उम्मीद को बढ़ा दिया है कि उनके देश उन अन्यायों को दूर करने के लिए मजबूर हो जाएंगे जो किसी प्रथागत कानून में पाए जाएं और जहां पूर्वाग्रह प्रगतिशील कानून के क्रियान्वयन में बाधक बनता है। दक्षिण अफ्रीका और केन्या में कानून निर्माता इस मुद्दे से जूझ रहे हैं। तंज़ानिया और इसी तरह की परिस्थितियों वाले देशों को सुनियोजित भेदभाव को समाप्त करके महिलाओं के अधिकारों के प्रति अपनी प्रतिबद्धता प्रदर्शित करनी चाहिए। जब वे ऐसा करेंगे, तो दो विधवाओं की कहानी न सिर्फ उनके लिए बल्कि हर जगह की महिलाओं और समुदायों के लिए, सशक्तीकरण के मुद्दे पर समाप्त होगी।
Urbanizing China
BEIJING – Measured by the percentage of people living in its cities, China’s urbanization rate currently stands at about 48%, according to official statistics.
Given that the share of city dwellers was only 18% just 30 years ago, this is remarkable progress.
But it is still unsatisfactory, because most other countries at a similar stage of development experienced faster urbanization than industrialization.
China’s urbanization has lagged behind its industrialization, which now is around 70% when measured by the percentage of the labor force whose income is derived mainly from non-farm activities.
Another striking difference between China and some other developing countries is that Chinese cities, large and small, lack any sign of significant urban poverty or slums.
People often attribute this to China’s hukou, or household registration system, which separates the urban privileged and the rural poor from the start of their lives.
But, although the hukou system may prevent rural people from enjoying some urban benefits and public services, such as public education, health care, or employment insurance, it has never kept rural laborers from moving into cities.
Indeed, China’s government has actually been encouraging rural laborers to move to cities to find better jobs.
That is why more than 40% of China’s labor force, some 300 million people, has shifted over the past 30 years from agriculture to industrial and service sectors, which are now increasingly concentrated in cities.
As a result, migrant workers with a rural hukou now outnumber workers who hold an urban hukou on average in Chinese cities.
So if it is not the hukou system that has prevented the growth of slums in China, what has?
I believe that the most important institution in preventing dire urban poverty is a unique land system for China’s rural areas.
China’s entire reform process started with the adoption of the so-called “rural household contract system,” which leases productive land to farm households.
This meant that collective production was dissolved early in the reform process and private farming prevailed.
Though farm “collectives” have remained the owners of rural land, households may obtain all “residuals” of their production, which creates the necessary incentive to use land productively.
They may even transfer the lease to other farm households if their members find better jobs in the cities.
Households can keep this entitlement for the term of the lease (now 30 years), but they do not have a property right in the land itself.
If rural workers have financial difficulties, which in other countries often lead to land sales, they can work harder to find other jobs or seek government help.
But land can never be sold or mortgaged, and its use cannot be changed from farming to other commercial purposes without government permission.
This peculiar arrangement has generated an important result: if migrant workers lose their urban jobs, they retain some income from their land lease and can return to their village and reclaim the land (normally within one year).
The small piece of land allocated under the rural household contract system may not make farmers rich, but it serves as a social safety net of last resort.
This goes a long way toward explaining why China’s urbanization has lagged: the system of land tenure – which seems impossible to replicate in other developing countries – ensures that the reservoir of labor for industrialization and urbanization remains located in country villages, rather than in city slums.
Although this arrangement provides a smoother path to urbanization, it is a transitional, not a permanent one.
Migrant workers still feel unable truly to integrate into cities, because their social safety net remains anchored to their rural origins.
Indeed, the segregation caused by the land system has enlarged rather than narrowed social disparities.
Given these circumstances, and that Chinese are highly mobile, the country’s urbanization is far from stable.
To achieve “permanent urbanization,” China must develop a new safety net.
Announcing the abolition of the hukou system might be easy, but it would mean little without institutions that can cushion the risks faced by rural migrant workers in China’s cities.
Making public services like education and the formal social safety net available to rural immigrants, even at a lower level due to limited public resources, is the key to success here.
When that is achieved, rural immigrants will eagerly settle as permanent urban residents, and Chinese society will become more equal in terms of access to public services.
China’s new five-year plan for economic and social development, to be implemented starting in 2011, may address the issue in a meaningful way, by aiming for the establishment of a national, universal, and portable social-security system.
The plan may also require city governments to increase the provision of public goods – including education, health care, and a minimum level of income protection – to non-hukou regular residents.
Some experiments in this regard have already taken place in cities such as Chongqing and Chengdu.
Urbanization in China may take generations to complete.
But, after long debate and hesitation, it is clear that policymakers seem ready to move into the next phase of urbanization by adopting new approaches.
The main challenge is not infrastructure and urban facilities, however important they are.
Rather the key to success will be to make rural immigrants to Chinese cities equal citizens in terms of opportunities and public services.
That may not be achievable overnight.
But, step-by-step, it can and must be done.
The Old New Financial Risk
WASHINGTON, DC – The main financial risk facing the United States today looks very similar to what caused so much trouble in 2007-2008: big banks with too much debt and too little equity capital on their balance sheets.
Uneven global regulations, not to mention regulators who fall asleep at the wheel, compound this structural vulnerability.
We already saw this movie, and it ended badly.
Next time could be an even worse horror show.
All booms are different, but every major financial crisis has at its heart the same issue: major banks get into trouble and teeter on the brink of collapse.
Disruption at the core of any banking system leads to tight credit, with major negative effects on the real economy.
In our modern world, in which finance is interwoven throughout the economy, the consequences can be particularly severe – as we saw in 2008 and 2009.
The most important question to ask of any financial system is how much loss-absorbing equity major banks have on their balance sheets.
When a company suffers losses, its shareholder equity falls in value, and less equity means that the company is more likely to default on its debts.
The capital ratios most frequently highlighted by banks and officials are misleading, because they include items – such as goodwill and deferred tax assets – that are incapable of absorbing losses.
We need to look instead at tangible equity relative to tangible assets.
And we should also be very careful about the accounting used for derivatives.
On this technical but crucial point, US generally accepted accounting principles (GAAP) are considerably more generous (because they understate potential losses) than International Financial Reporting Standards (IFRS).
Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation, publishes his own calculation of capital levels at the world’s largest banks, and these data are now available through the end of 2014.
The most leveraged big US bank, Morgan Stanley, has less than 4% equity, meaning that 96% of its balance sheet is some form of debt.
The average for big US banks is just under 5% equity.
This is more – but not much more – capital than some troubled banks had in the run-up to the financial crisis in 2008.
Citigroup, for example, had no more than 4.3% equity, according to Hoenig’s calculation, in November 2008.
At the end of 2012, when Hoenig started to publish his US GAAP-IFRS adjustment, the average for the largest US banks was roughly 4% equity. It is possible to argue that this key measure is moving in the right direction, but the pace of improvement is glacial at best.
More important, 5% equity is unlikely to be enough to absorb the kinds of losses that a highly volatile world will throw up.
Some major shocks could come from unexpected quarters.
For example, assets may prove less liquid than investors suppose, as happened with money market funds in 2008; today, skeptics worry about exchange-traded funds (ETFs).
Or overly complex securities could become hard to price.
It is a red flag when people selling collateralized loan obligations today cannot fully explain the risks involved.
Or perhaps the shock will affect sovereign-debt values in faraway places, as happened in 1982.
It is striking that no experts – public or private – really have a firm grip on what could happen if there is another round of difficulties with Greek government debt.
But the most dangerous shocks may be those that originate with the big banks themselves.
The latest significant development to surface is what Better Markets, a pro-reform group that has put out a helpful fact sheet, calls “de facto guaranteed foreign subsidiaries” that trade derivatives – a murky phenomenon that likely involves all the big players.
The trick here is that a de jure guaranteed foreign subsidiary of a US bank would have to comply with many US rules, including those governing conduct, transparency, and clearing (how the derivatives are actually traded).
A foreign subsidiary that is supposedly independent is exempt from those rules.
But, as Dennis Kelleher of Better Markets points out, when pressure mounts and a crisis seems around the corner, banks will face great pressure to bring such subsidiaries back onto their balance sheet.
This is exactly what happened in the last crisis, with Citigroup being a leading example.
The main reason why such loopholes are left open is that regulators choose not to close them.
Sometimes this may be due to lack of information or awareness.
But, in many cases, the regulators actually believe that there is nothing wrong with the behavior in question – either because they have been persuaded by lobbyists or because they themselves used to work in the industry (or could go work there soon.)
Sound familiar?
America Adrift
TOKYO – US President Barack Obama’s hesitations, ambivalence, U-turns, and political gamesmanship with the US Congress over punishing Syria for its use of chemical weapons has achieved only two things with certainty: it has raised Russia’s diplomatic profile for the first time in many years, and it has spooked those of America’s allies – from Saudi Arabia and Israel to Japan and South Korea – that rely heavily on US promises.
To minimize the impact of both consequences, the United States now must enforce with utmost determination its agreement with Russia on eliminating Syria’s chemical weapons.
But will it do so?
US Secretary of State John Kerry’s heat-of-the-moment comment that a military strike on Syria could be avoided if all chemical weapons were turned over was a diplomatic gift to Russia, and it responded with alacrity.
Not usually noted for its diplomatic dexterity, the Kremlin quickly proposed compelling Syrian President Bashar al-Assad’s regime to join the Chemical Weapons Convention (CWC), and to place its chemical-weapons stockpile under United Nations control.
Putin’s initiative turned out to be a diplomatic lifeline, as Obama’s gambit of seeking Congressional approval for an attack on Syria looked certain to fail, which would have dented his authority as America’s commander-in-chief.
Although the agreement may yet strip Assad’s regime of some of its most dangerous weapons, the process – if it can be called that – which brought it about has strengthened a global perception that US foreign policy in Obama’s second term is either adrift or drifting into isolationism.
The US response to the so-called “Arab Spring,” for example, has lacked political conviction, much less strategic direction.
Egypt’s old-new military rulers, for example, have concluded that American criticism can be ignored, because America cannot cut off its aid to Egypt for geopolitical reasons.
When I met with Egypt’s foreign minister, Nabil Fahmy, in August, he hinted at the new regime’s dissatisfaction with attempts by the European Union and the US to influence his country’s domestic affairs.
Egypt, he said, understood the importance of democracy and human rights, but avoiding turmoil must be the government’s highest priority.
Of course, appeals to “stability” are nothing new from authoritarian governments.
As Pakistan’s then-president, Pervez Musharraf, dismissively put it when I visited Islamabad as Japan’s defense minister, “Democracy?
I know all about that.”
The US, of course, claims that it, too, knows all about democracy.
But its diplomatic cognitive dissonance – criticizing the Egyptian regime while continuing to supply it with military hardware – can serve only to undermine bilateral relations, just as the same American approach to Musharraf’s regime thoroughly eroded US-Pakistani ties.
Moreover, the consequences of such foreign-policy waffling extend far beyond the Middle East.
In November 2009, when Obama visited Japan for the first time as President, he emphasized that he was from Hawaii and proud to be “Americans’ first Pacific president.”
Two years later, then-Secretary of State Hillary Clinton published “America’s Pacific Century,” indicating a shift in America’s global strategy.
This declaration of a “return to Asia” marked the start of the famous “pivot” to the Pacific in US foreign policy – a shift away from the Middle East that was intended to meet the challenges posed by China’s growing geopolitical ambitions.
All of Asia’s democracies (and a few of its autocracies, particularly Vietnam) welcomed it.
But, though rhetoric matters in diplomacy, the pivot will be fatally undermined if Asians perceive the same sort of gap between America’s words and its actions that has become apparent in its Middle East policy (despite Kerry’s determined efforts to revitalize peace talks between Israel and the Palestinian Authority).
In particular, there is a gnawing fear that the US may yet choose the “G-2” option: a grand bargain with China for the two countries to decide Asia’s fate by themselves and over our heads.
Given the size and clout of countries like India, Japan, Indonesia, and South Korea, such a condominium is, no doubt, doomed to failure.
So, as tempting as such a relationship may be, the US ought to resist it.
Meanwhile, in Japan, Prime Minister Shinzo Abe has begun a national discussion concerning how the country can take greater responsibility for its own defense.
His government continues to place great faith in the Japan-US alliance as the bedrock of Japanese (and Asian) security.
But Abe’s government also recognizes that the world’s geopolitical tectonic plates are shifting, and that many in the US are tempted by the siren song of isolationism.
So Abe feels obliged to put Japan in a position to be able to help Asia’s democracies manage any crisis that may emerge in the event of a change in America’s regional presence.
In the coming days, Japan will welcome Caroline Kennedy, the daughter of President John F. Kennedy and the likely new US ambassador.
She will find a Japan renewing itself and its commitment to Asia’s freedoms.
May that example, similar to her father’s appeal 53 years ago for the defense of freedom, also call forth the best in the American spirit.
Asia and a Post-American Middle East
KUWAIT CITY – When the consequences of the United States-led invasion of Iraq ten years ago are fully assessed, the importance of the subsequent rise of political Islam there – and throughout the wider Middle East – may well pale in comparison to that of a geostrategic shift that no one foresaw at the time.
That shift, however, has now come into view.
With America approaching energy self-sufficiency, a US strategic disengagement from the region may become a reality.
The Middle East, of course, has experienced the withdrawal of a great power, or powers, many times before: the disintegration of the Ottoman Empire after World War I; the fraying of the French and British imperial mandates after World War II; and, most recently, the nearly complete disappearance of Russian influence following the collapse of the Soviet Union in 1991.
Each time, monumental changes in the region’s politics, particularly its alliances, quickly followed.
If America attempts to wash its hands of the Middle East in the coming years, will a similar rupture be inevitable?
Although many believe that the US-Israel alliance is the foundation of America’s Middle East policy, it was dependence on imported oil that motivated the US to establish a dominant military presence in the region after 1945.
Indeed, until the Six Day War of June 1967, the US was not a major supplier of military hardware to Israel.
America’s military presence was intended, above all, to preserve the Arab status quo, and hence the flow of energy from the Persian Gulf, for the benefit of the US, its allies, and the entire global economy.
Of course, no one should think that America’s shale-gas revolution (which has brought it to the brink of energy self-sufficiency) means that its Bahrain-based Fifth Fleet will lift anchor any time soon.
But the rationale for America’s commitment of military force to the region is changing fast; when that happens – as it has in Europe, for example, since the Cold War’s end – the distribution of military assets tends to change as well.
That change is almost certain to be reflected in America’s relationships with its Arab allies and partners.
As the US statesman/academic Joseph Nye has argued: “For decades the United States and Saudi Arabia have had a balance of asymmetries in which we depended on them as the swing producer of oil and they depended on us for ultimate military security.”
Given America’s burgeoning domestic energy supplies, Nye argues, those “bargains will be struck on somewhat better terms,” at least from the US perspective.
But, whatever new terms are struck, the degree of US disengagement from the Middle East will depend on how two key questions are answered.
First, would even a partial withdrawal of military force create a security vacuum that could be filled by a rival – say, China or Iran?
And, second, would any diminution of America’s commitment to the region incite the kind of instability that breeds failed states and terrorist havens?
President Barack Obama’s current security strategy in Afghanistan, Yemen, and elsewhere suggests that the US will seek to mitigate the latter risk by continuing its covert interventions – particularly its use of unmanned aerial vehicles.
Preventing rivals from gaining overweening influence in the region, however, will require a very different type of response – one that will require the backing of old allies, such as Japan, and new friends, like India.
The reason for this is clear: China’s dependence on Middle East energy imports means that it is almost certain to seek to fill any regional security vacuum.
Indeed, China appears to have long anticipated the coming changes in the region’s security structure, and already seems prepared to take advantage of them if permitted to do so.
Its “string of pearls” across the Indian Ocean – a series of potential naval stations connecting China to the Middle East and Africa – would support a Chinese blue-water navy able to patrol the sea-lanes of the Persian Gulf.
But, in trying to strike new bargains with Middle East oil producers, China has already been compromised by its strong backing of Iran, which is locked in a power struggle with the region’s leading Sunni states, particularly Saudi Arabia.
Absent a complete shift in China’s relations with Iran, a strategic partnership with the monarchies of the Persian Gulf may prove impossible to achieve.
And, even then, China’s domestic repression of Xinjiang’s Muslims, which provoked a fierce dispute with Turkish Prime Minister Recep Tayyip Erdoğan just a few years ago, may preclude the necessary trust from ever taking root.
Still, China’s inevitable bid for greater influence in the Middle East means that countries like India, Indonesia, Japan, South Korea, Turkey and others will also need to become proactive in creating a regional security structure that protects their national interests.
They will need to be clear with themselves about whether they have the means to achieve their national security ends.
For example, could they provide some of the security that America has long provided to the region’s Arab states?
Such a projection of Asian power – and of Asia’s power struggles – into the Middle East may seem a distant prospect today.
But ten years ago, so did the possibility of an American disengagement from the region.
The Return of the Dollar
LAGUNA BEACH – The US dollar is on the move.
In the last four months alone, it has soared by more than 7% compared with a basket of more than a dozen global currencies, and by even more against the euro and the Japanese yen.
This dollar rally, the result of genuine economic progress and divergent policy developments, could contribute to the “rebalancing” that has long eluded the world economy.
But that outcome is far from guaranteed, especially given the related risks of financial instability.
Two major factors are currently working in the dollar’s favor, particularly compared to the euro and the yen.
First, the United States is consistently outperforming Europe and Japan in terms of economic growth and dynamism – and will likely continue to do so – owing not only to its economic flexibility and entrepreneurial energy, but also to its more decisive policy action since the start of the global financial crisis.
Second, after a period of alignment, the monetary policies of these three large and systemically important economies are diverging, taking the world economy from a multi-speed trajectory to a multi-track one.
Indeed, whereas the US Federal Reserve terminated its large-scale securities purchases, known as “quantitative easing” (QE), last month, the Bank of Japan and the European Central Bank recently announced the expansion of their monetary-stimulus programs.
In fact, ECB President Mario Draghi signaled a willingness to expand his institution’s balance sheet by a massive €1 trillion ($1.25 trillion).
With higher US market interest rates attracting additional capital inflows and pushing the dollar even higher, the currency’s revaluation would appear to be just what the doctor ordered when it comes to catalyzing a long-awaited global rebalancing – one that promotes stronger growth and mitigates deflation risk in Europe and Japan.
Specifically, an appreciating dollar improves the price competitiveness of European and Japanese companies in the US and other markets, while moderating some of the structural deflationary pressure in the lagging economies by causing import prices to rise.
Yet the benefits of the dollar’s rally are far from guaranteed, for both economic and financial reasons.
While the US economy is more resilient and agile than its developed counterparts, it is not yet robust enough to be able to adjust smoothly to a significant shift in external demand to other countries.
There is also the risk that, given the role of the ECB and the Bank of Japan in shaping their currencies’ performance, such a shift could be characterized as a “currency war” in the US Congress, prompting a retaliatory policy response.
Furthermore, sudden large currency moves tend to translate into financial-market instability.
To be sure, this risk was more acute when a larger number of emerging-economy currencies were pegged to the US dollar, which meant that a significant shift in the dollar’s value would weaken other countries’ balance-of-payments position and erode their international reserves, thereby undermining their creditworthiness.
Today, many of these countries have adopted more flexible exchange-rate regimes, and quite a few retain adequate reserve holdings.
But a new issue risks bringing about a similarly problematic outcome: By repeatedly repressing financial-market volatility over the last few years, central-bank policies have inadvertently encouraged excessive risk-taking, which has pushed many financial-asset prices higher than economic fundamentals warrant.
To the extent that continued currency-market volatility spills over into other markets – and it will – the imperative for stronger economic fundamentals to validate asset prices will intensify.
This is not to say that the currency re-alignment that is currently underway is necessarily a problematic development; on the contrary, it has the potential to boost the global economy by supporting the recovery of some of its most challenged components.
But the only way to take advantage of the re-alignment’s benefits, without experiencing serious economic disruptions and financial-market volatility, is to introduce complementary growth-enhancing policy adjustments, such as accelerating structural reforms, balancing aggregate demand, and reducing or eliminating debt overhangs.
After all, global growth, at its current level, is inadequate for mere redistribution among countries to work.
Overall global GDP needs to increase.
The US dollar’s resurgence, while promising, is only a first step.
It is up to governments to ensure that the ongoing currency re-alignment supports a balanced, stable, and sustainable economic recovery.
Otherwise, they may find themselves again in the unpleasant business of mitigating financial instability.
Western Politics’ Locust Years
NEW YORK – Since my teenage years, I have been fascinated by the permutations and machinations of national politics.
Today, I find myself focusing on broader political trends that also help to explain global economic issues.
One such trend is the political fragmentation and polarization evident in Western democracies.
Fringe movements, some operating within established political structures, and others seeking to create new ones, are placing pressure on traditional parties, making it difficult for them to mobilize their supporters, and, in some cases, causing them real damage.
Desperate not to appear weak, long-established parties have become wary of cooperating across the aisle.
The resulting refusal to work together on the major issues of the day has had a dramatic impact on economic policies.
Once formulated through negotiations conducted at the political center, where Western democracies have long been anchored, policymaking is increasingly shaped by stubborn forces on the extreme left and right.
This approach has, it must be said, yielded the occasional breakthrough – sometimes good, sometimes bad.
But the overall result has been policy paralysis, with even the most basic elements of economic governance (such as actively passing a budget in the United States) suffering as a result.
Needless to say, the greater the governance and policy challenges at home, the more difficult regional and global cooperation becomes.
The Tea Party in the US is a case in point.
After its success on the national stage in the 2010 midterm congressional election, many Republican lawmakers became so concerned about securing their party’s “base” for future re-election bids that they no longer felt comfortable pursuing the type of bipartisan cooperation that underpin effective economic policymaking.
But the Tea Party’s impact did not end there.
By contributing to a shutdown of federal-government operations and repeatedly raising the threat of a technical default, it risked undermining an already-fragile US economic recovery.
While the movement has evolved and no longer threatens to hold the economy hostage, it continues to contribute to overall policy paralysis.
Europe now seems to be headed down a similar path, as non-traditional parties – many of them driven by single issues – become increasingly influential.
Movements like France’s anti-immigration National Front are making leading mainstream parties more likely to pander to extremists in order to preserve their support.
Of course, their fear is not irrational, as Pasok, a long-established left-wing party in Greece, found out when the far-left, anti-austerity Syriza Party surged to victory in January.
But that does not change the fact that parties’ need to address their electoral fears is causing serious damage to national policymaking.
Indeed, most established parties are so busy playing defense that they have little inclination to engage in the type of forward-looking strategic thinking that is needed to re-energize exhausted growth models, anchor financial stability, and ensure that technological innovation enables broad-based prosperity.
As a result, Western economies are running chronically below their potential – and risk undermining their future potential.
That is why future generations will likely remember this as a time of lost economic opportunities.
Instead of bowing to polarization and paralysis, policymakers should be promoting growth- and productivity-enhancing infrastructure investments, funded at exceptionally low interest rates, scaling up labor-market reforms, and working to address the growing income and wealth inequality that is increasingly limiting access to economic opportunity.
Likewise, policymakers should be revamping incoherent and inconsistent tax structures that are riddled with unfair exemptions.
And they should be pursuing immigration reform to overhaul a system that penalizes talent, encourages malfeasance, and, as illustrated by the thousands of migrants who have drowned in the Mediterranean Sea in recent years while trying to reach Europe, often leads to human tragedy.
Despite widespread dissatisfaction with political institutions in many Western countries – the US Congress, for example, has very low approval ratings – it is difficult to see what will break the current logjam.
Within established parties, forces promoting rejuvenation are weak and uneven.
Add to that an increasingly polarized and quasi-tribal news media, which can amplify divisions in society, and the scope for collaborative transformation is extremely limited.
For their part, many of the fringe parties, despite their rising popularity, are struggling to achieve power, a challenge illustrated in the recent British election.
And those that succeed, such as Syriza, quickly become frustrated by the largely immovable systems in which they must operate – a situation that their lack of governing experience makes all the more difficult.
Over time, Western political systems will evolve to meet the needs of their economies.
But, in the interim, the vast majority of companies and households will have to cope with systems that do relatively less to help them reach their potential, placing them at a disadvantage vis-à-vis competitors operating in more supportive systems.
To some extent, technological innovation will pick up the slack, as it empowers individuals and companies to live more self-directed lives, creating pockets of excellence and wellbeing.
But, while this is good news for some, it is inadequate to arrest the rising inequality of income, wealth, and opportunity – or to unleash the inclusive prosperity that Western economies can and should be generating.
Fed Up with the Fed
NEW YORK – At the end of every August, central bankers and financiers from around the world meet in Jackson Hole, Wyoming, for the US Federal Reserve’s economic symposium.
This year, the participants were greeted by a large group of mostly young people, including many African- and Hispanic Americans.
The group was not there so much to protest as to inform.
They wanted the assembled policymakers to know that their decisions affect ordinary people, not just the financiers who are worried about what inflation does to the value of their bonds or what interest-rate hikes might do to their stock portfolios.
And their green tee shirts were emblazoned with the message that for these Americans, there has been no recovery.
Even now, seven years after the global financial crisis triggered the Great Recession, “official” unemployment among African-Americans is more than 9%.
According to a broader (and more appropriate) definition, which includes part-time employees seeking full-time jobs and marginally employed workers, the unemployment rate for the United States as a whole is 10.3%.
But, for African-Americans – especially the young – the rate is much higher.
For example, for African-Americans aged 17-20 who have graduated high school but not enrolled in college, the unemployment rate is over 50%.
The “jobs gap” – the difference between today’s employment and what it should be – is some three million.
With so many people out of work, downward pressure on wages is showing up in official statistics as well.
So far this year, real wages for non-supervisory workers fell by nearly 0.5%.
This is part of a long-term trend that explains why household incomes in the middle of the distribution are lower than they were a quarter-century ago.
Wage stagnation also helps to explain why statements from Fed officials that the economy has virtually returned to normal are met with derision.
Perhaps that is true in the neighborhoods where the officials live.
But, with the bulk of the increase in incomes since the US “recovery” began going to the top 1% of earners, it is not true for most communities.
The young people at Jackson Hole, representing a national movement called, naturally, “Fed Up,” could attest to that.
There is strong evidence that economies perform better with a tight labor market and, as the International Monetary Fund has shown, lower inequality (and the former typically leads to the latter).
Of course, the financiers and corporate executives who pay $1,000 to attend the Jackson Hole meeting see things differently: Low wages mean high profits, and low interest rates mean high stock prices.
The Fed has a dual mandate – to promote full employment and price stability.
It has been more than successful at the second, partly because it has been less than successful at the first.
So why will policymakers be considering an interest-rate hike at the Fed’s September meeting?
The usual argument for raising interest rates is to dampen an overheating economy in which inflationary pressures have become too high.
That is obviously not the case now.
Indeed, given wage stagnation and the strong dollar, inflation is well below the Fed’s own 2% target, not to mention the 4% rate for which many economists (including the International Monetary Fund’s former chief economist, Olivier Blanchard) have argued.
Inflation hawks argue that the inflation dragon must be slayed before one sees the whites of its eyes: Fail to act now and it will burn you in a year or two.
But, in the current circumstances, higher inflation would be good for the economy.
There is essentially no risk that the economy would overheat so quickly that the Fed could not intervene in time to prevent excessive inflation.
Whatever the unemployment rate at which inflationary pressures become significant – a key question for policymakers – we know that it is far lower than the rate today.
If the Fed focuses excessively on inflation, it worsens inequality, which in turn worsens overall economic performance.
Wages falter during recessions; if the Fed then raises interest rates every time there is a sign of wage growth, workers’ share will be ratcheted down – never recovering what was lost in the downturn.
The argument for raising interest rates focuses not on the wellbeing of workers, but that of the financiers.
The worry is that in a low-interest-rate environment, investors’ irrational “search for yield” fuels financial-sector distortions.
In a well-functioning economy, one would have expected the low cost of capital to be the basis of healthy growth.
In the US, workers are being asked to sacrifice their livelihoods and wellbeing to protect well-heeled financiers from the consequences of their own recklessness.
The Fed should simultaneously stimulate the economy and tame the financial markets.
Good regulation means more than just preventing the banking sector from harming the rest of us (though the Fed didn’t do a very good job of that before the crisis).
It also means adopting and enforcing rules that restrict the flow of funds into speculation and encourage the financial sector to play the constructive role in our economy that it should, by providing capital to establish new firms and enable successful companies to expand.
I often feel a great deal of sympathy for Fed officials, because they must make close calls in an environment of considerable uncertainty.
But the call right now is not a close one.
On the contrary, it is as close to a no-brainer as such decisions can be: Now is not the time to tighten credit and slow down the economy.
Fiscal Challenges and Fiscal Follies
BERKELEY – Where is America’s economy headed in 2013?
Will the recovery continue at its frustratingly slow pace?
Or will it accelerate as the housing sector rebounds, bank lending expands, household balance sheets improve, and state and local government budgets strengthen?
With economic headwinds dissipating, the United States’ prospects for faster GDP growth appear promising.
But there is also a significant risk that a large and unnecessary dose of fiscal austerity will weaken demand, undermine confidence, and tip the economy back into recession.
Since 2010, annual GDP growth has averaged about 2.1%, less than half the average of recoveries from previous US recessions over the last 60 years.
Slow GDP growth has meant slow employment growth.
The unemployment rate remains about two percentage points higher than what most economists consider consistent with a full recovery, and the labor-force participation rate is hovering near historic lows.
The economy is still operating far below its potential: GDP is about 6% below what the economy is capable of producing at full capacity without higher inflation.
Tepid growth reflects weak demand.
Housing prices are rising, and, while residential investment is increasing, it remains depressed as a share of GDP.
Households have cut their debt and rebuilt their balance sheets, but the large loss in household wealth, weak growth in wages and income, the concentration of most income gains at the top, and a decline in labor’s share of national income to record lows continue to constrain consumption.
Under these circumstances, and with inflation subdued and interest rates on US Treasury securities far below their historical average in both nominal and real terms, the economic case for temporary fiscal measures to boost demand is compelling.
Yet the US Congress, spearheaded by Republicans in the House of Representatives, appears to be heading in the opposite direction, so far failing to agree on a deal to protect the economy from much, if not all, of the $600 billion in tax increases and spending cuts – the so-called fiscal cliff – scheduled to take effect in 2013.
Confusion, fear, ideology, and electoral self-interest all play a role in the readiness of many members of Congress – despite warnings from the Federal Reserve, the Congressional Budget Office, and most private forecasters – to make such an egregious mistake.
First, confusion.
The US faces two distinct fiscal challenges: the tax increases and spending cuts that threaten to derail the economy in 2013; and a long-term structural deficit that is likely to mean higher interest rates, less investment, and slower growth once the economy has recovered and the output gap has disappeared.
Unlike the fiscal cliff, the structural deficit problem is not imminent: contrary to deficit hawks’ dire warnings, the US does not face a time-sensitive debt crisis.
Although US federal debt is projected to rise at an unsustainable rate in the long term, the right solution is not fiscal belt-tightening now, but rather a credible plan to stabilize the debt/GDP ratio gradually as the economy recovers.
Indeed, as Fed Chairman Ben Bernanke recently observed, preventing a severe fiscal contraction in 2013 will boost growth, reduce the near-term deficit, and help to solve the long-term debt problem.
Second, fear.
The US government currently can borrow at historically low interest rates.
As a result of the financial crisis, more risk-averse investors at home and abroad have increased their demand &#160;for US Treasury securities.
But what if investors lose confidence in the US government’s ability or willingness to tackle its long-term debt problem and begin to fear a default (either explicit or through rapid inflation)?
The result could be a speculative attack by “bond-market vigilantes,” triggering a sharp rise in interest rates, a dramatic fall in the dollar, or a combination of the two.
For three years, repeated warnings that such an attack is imminent have flown in the face of the evidence: US Treasury securities remain a safe-haven asset for global investors, including risk-sensitive foreign central banks.
Indeed, global investors ignored Standard &amp;
Poor’s 2011 decision to downgrade US government debt, driving down yields even further.
Of course, Congress could spook investors and increase the likelihood of a bond-market attack by failing to raise the debt ceiling in 2013.
But, absent that monumental folly, long-term interest rates are unlikely to rise significantly as long as the Fed keeps short-term interest rates low – which it recently committed to do until unemployment falls to 6.5%.
Congress thus has adequate time to develop a sensible long-term plan to stabilize the debt without endangering the recovery.
Third, ideology.
Some members of Congress are unwilling to vote for any tax increase, even as part of a compromise to avert the fiscal cliff or to stabilize the debt.
More than 90% of House Republicans have signed a “no-tax pledge.”
Other members champion the cause of a much smaller government and welcome the deep spending cuts that are scheduled to take effect in 2013, even if they trigger a recession.
For such members, ideological purity trumps economic logic.
Finally, electoral self-interest.
The primary motivation of most members of Congress has always been winning elections.
But how this motivation affects their willingness to compromise has changed as a result of redistricting and the growing polarization of voting districts along partisan lines.
According to a recent analysis by Nate Silver, most House members now come from “hyperpartisan” districts in which the risk of losing to candidates from the other party is small.
In such districts, members have little incentive to compromise on bipartisan deals to address the country’s fiscal challenges, because failure to do so poses no threat to their re-election.
On the contrary, especially for Republicans from districts with a strong, ideologically motivated base, voting for such deals could trigger a primary electoral challenge from within their own party.
It was such self-interested Republican members who rebuffed Speaker of the House John Boehner’s proposal to maintain current tax rates for all but those earning more than $1 million per year.
The outlook for the US economy over the next few years hinges on what a deeply divided Congress decides.
Right now, the prospect that they will make the right choices appears to be dim.
Exposing America
WASHINGTON, DC – If not for President Barack Obama’s bold, unexpected diplomatic breakthrough with Cuba, the last weeks of 2014 would have been relentlessly unkind to America.
The deep flaws in our country’s justice system, the continuing racism in our society, and our government’s recent record of torture and abuse have been on display for the entire world to see.
The video of five police officers subduing and then killing a man, despite his pleas that he could not breathe, could have come from many countries around the world.
But the killing of Eric Garner in New York City, like that of Michael Brown in Ferguson, Missouri, last summer and of 12-year-old Tamir Rice in Cleveland in November, reflect the heightened risk that young African-American men face at the hands of the police in many US cities.
Indeed, according to one recent analysis, young African-American males are 21 times more likely than young white males to be fatally shot by the police.
Then came the release by the US Senate Select Committee on Intelligence of 528 pages of its report on the CIA’s detention and interrogation program, established following the September 11, 2001, terrorist attacks on America.
What the committee described as an “executive summary” detailed horrific behavior by government officials acting on instructions from their superiors.
Worse, rather than seeking to make amends for the abuses, at least one group of former US officials sought to justify them.
When asked on US television about the estimated 25% of detainees who were innocent, former Vice President Dick Cheney responded: “I have no problem as long as we achieve our objective.
And our objective is to get the guys who did 9/11 and it is to avoid another attack against the United States.” For their part, some current CIA officials continue to insist on the value of America’s “enhanced interrogation” program (which Obama halted), despite the Senate report’s conclusion that the techniques it employed yielded no valuable intelligence.
Indeed, other accounts of America’s “global war on terror” also make it clear that many of the people who were detained and tortured were not threats to America’s security – at least not until US actions made them so.
The week the Senate report came out, I was reading Anand Gopal’s new book No Good Men Among the Living,&nbsp;which tells contemporary Afghanistan’s story through the eyes of a supporter of former President Hamid Karzai, a Taliban commander, and a Kabul-born housewife who spent years in purdah in Taliban country.
Over and over again, the same story plays out: a local power-broker is willing, even eager, to support the new US-backed government, only to be denounced as a Taliban member by a fellow Afghan – typically for local political or personal reasons – to unwitting American troops.
Indeed, this pattern recurs in the accounts of anyone who has lived in Afghanistan, spoken the language, and understood the workings of patronage and power there.
It was often these denounced men who were detained – and tortured – for years.
From my vantage point as a US foreign-policy expert, the only bright spot in recent months has been Obama’s normalization of diplomatic relations with Cuba.
Finally, America has an opportunity to launch a new beginning, not only with Cuba but also with the Caribbean and Latin American countries that have pressed us hard and often to change our stance.
Indeed, the move will stand as one of Obama’s most substantial foreign-policy achievements, with implications that will reverberate for decades.
Yet a common theme runs through all of these recent events, good and bad alike.
In each case, US institutions and officials held other US institutions and officials to account.
Congress documented and publicized the actions of the executive branch in the torture report.
Senator Dianne Feinstein worked doggedly to ensure that the Senate intelligence committee could research and document US interrogation practices, even in the face of staunch opposition by the CIA (which even surreptitiously searched the committee’s computers).
“There are those who will seize upon the report and say ‘see what Americans did,’” Feinstein said, “and they will try to use it to justify evil actions or to incite more violence.
We cannot prevent that.
But history will judge us by our commitment to a just society governed by law and the willingness to face an ugly truth and say ‘never again.’”
Likewise, the press and many civil-society groups documented and publicized not only the killings of Brown, Garner, and others, but also how those cases reflected a pattern of racially disparate treatment by the police.
And when Obama announced the restoration of full diplomatic relations with Cuba, the White House described the last half-century of US policy as a “failed approach,” isolating the US, constraining its influence in hemispheric politics, and tying its hands in Cuba itself.
Americans are no better (and no worse) than anyone else.
We have no right to moralize, and we have much to learn from others.
Fortunately, our founding fathers gave us the exceptional gift of a political system that pushes us continually in the direction of self-correction.
The ability to correct wrongdoing can never justify doing wrong in the first place.
The point of exposure is not to celebrate our ability to expose.
We Americans must learn how to look at ourselves and our government the way others do.
We have much to answer for.
But at least we know that we have asked the right questions.
The Single-Engine Global Economy
TOKYO – The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms.
Unfortunately, only one of its four engines is functioning properly: the Anglosphere (the United States and its close cousin, the United Kingdom).
The second engine – the eurozone – has now stalled after an anemic post-2008 restart.
Indeed, Europe is one shock away from outright deflation and another bout of recession.
Likewise, the third engine, Japan, is running out of fuel after a year of fiscal and monetary stimulus.
And emerging markets (the fourth engine) are slowing sharply as decade-long global tailwinds – rapid Chinese growth, zero policy rates and quantitative easing by the US Federal Reserve, and a commodity super-cycle – become headwinds.
So the question is whether and for how long the global economy can remain aloft on a single engine. Weakness in the rest of the world implies a stronger dollar, which will invariably weaken US growth.
The deeper the slowdown in other countries and the higher the dollar rises, the less the US will be able to decouple from the funk everywhere else, even if domestic demand seems robust.
Falling oil prices may provide cheaper energy for manufacturers and households, but they hurt energy exporters and their spending.
And, while increased supply – particularly from North American shale resources – has put downward pressure on prices, so has weaker demand in the eurozone, Japan, China, and many emerging markets.
Moreover, persistently low oil prices induce a fall in investment in new capacity, further undermining global demand.
Meanwhile, market volatility has grown, and a correction is still underway.
Bad macro news can be good for markets, because a prompt policy response alone can boost asset prices.
But recent bad macro news has been bad for markets, owing to the perception of policy inertia.
Indeed, the European Central Bank is dithering about how much to expand its balance sheet with purchases of sovereign bonds, while the Bank of Japan only now decided to increase its rate of quantitative easing, given evidence that this year’s consumption-tax increase is impeding growth and that next year’s planned tax increase will weaken it further.
As for fiscal policy, Germany continues to resist a much-needed stimulus to boost eurozone demand.
And Japan seems to be intent on inflicting on itself a second, growth-retarding consumption-tax increase.
Furthermore, the Fed has now exited quantitative easing and is showing a willingness to start raising policy rates sooner than markets expected.
If the Fed does not postpone rate increases until the global economic weather clears, it risks an aborted takeoff – the fate of many economies in the last few years.
If the Republican Party takes full control of the US Congress in November’s mid-term election, policy gridlock is likely to worsen, risking a re-run of the damaging fiscal battles that led last year to a government shutdown and almost to a technical debt default.
More broadly, the gridlock will prevent the passage of important structural reforms that the US needs to boost growth.
Major emerging countries are also in trouble.
Of the five BRICS economies (Brazil, Russia, India, China, and South Africa), three (Brazil, Russia, and South Africa) are close to recession.
The biggest, China, is in the midst of a structural slowdown that will push its growth rate closer to 5% in the next two years, from above 7% now.
At the same time, much-touted reforms to rebalance growth from fixed investment to consumption are being postponed until President Xi Jinping consolidates his power.
China may avoid a hard landing, but a bumpy and rough one appears likely.
The risk of a global crash has been low, because deleveraging has proceeded apace in most advanced economies; the effects of fiscal drag are smaller; monetary policies remain accommodative; and asset reflation has had positive wealth effects. Moreover, many emerging-market countries are still growing robustly, maintain sound macroeconomic policies, and are starting to implement growth-enhancing structural reforms.
And US growth, currently exceeding potential output, can provide sufficient global lift – at least for now.
But serious challenges lie ahead.
Private and public debts in advanced economies are still high and rising – and are potentially unsustainable, especially in the eurozone and Japan.
Rising inequality is redistributing income to those with a high propensity to save (the rich and corporations), and is exacerbated by capital-intensive, labor-saving technological innovation.
This combination of high debt and rising inequality may be the source of the secular stagnation that is making structural reforms more politically difficult to implement.
If anything, the rise of nationalistic, populist, and nativist parties in Europe, North America, and Asia is leading to a backlash against free trade and labor migration, which could further weaken global growth.
Rather than boosting credit to the real economy, unconventional monetary policies have mostly lifted the wealth of the very rich – the main beneficiaries of asset reflation.
But now reflation may be creating asset-price bubbles, and the hope that macro-prudential policies will prevent them from bursting is so far just that – a leap of faith.
Fortunately, rising geopolitical risks – a Middle East on fire, the Russia-Ukraine conflict, Hong Kong’s turmoil, and China’s territorial disputes with its neighbors – together with geo-economic threats from, say, Ebola and global climate change, have not yet led to financial contagion.
Nonetheless, they are slowing down capital spending and consumption, given the option value of waiting during uncertain times.
So the global economy is flying on a single engine, the pilots must navigate menacing storm clouds, and fights are breaking out among the passengers.
If only there were emergency crews on the ground.
The Great Democracies’ New Harmony
CAMBRIDGE – When Indian Prime Minister Narendra Modi invited US President Barack Obama to attend his country’s Republic Day ceremonies earlier this year, it signaled an important change in relations between the world’s two biggest democracies.
Ever since the 1990s, three American administrations have tried to improve bilateral relations, with mixed results.
While annual trade between the countries has soared during this period, from $20 billion to more than $100 billion, annual US-China trade is worth six times more, and the political relationship has had ups and downs.
The two countries have a long history of confusing each other.
By definition, any alliance with a superpower is unequal; so efforts to establish close ties with the United States have long run up against India’s tradition of strategic autonomy.
But Americans do not view democratic India as a threat.
On the contrary, India’s success is an important US interest, and several factors promise a brighter future for the bilateral relationship.
The most important factor is the acceleration in India’s economic growth, which the International Monetary Fund projects will exceed 7.5% through 2020.
For decades, India suffered from what some called the “Hindu rate of economic growth”: a little more than 1% per year.
It might more properly have been called a 1930s British socialist rate of growth.
After independence in 1947, India adopted an inward-looking planning system that focused on heavy industry.
Market-oriented reforms in the early 1990s changed that pattern, and annual growth accelerated to 7% under the Congress party, before slumping to 5%.
Since the 2014 general election brought Modi’s Bharatiya Janata Party to power, the government has reversed the slowdown.
And prospects for continued growth are strong.
India has an emerging middle class of several hundred million, and English is an official language spoken by some 50 to 100 million.
Building on that base, Indian information industries are able to play a major global role.
Moreover, with a population of 1.2 billion people, India is four times larger than the US, and likely to surpass China by 2025.
Its sheer scale will be increasingly important not only to the global economy, but also to balancing China’s influence in Asia and managing global issues such as climate change, public health, and cyber security.
India also has significant military power, with an estimated 90-100 nuclear weapons, intermediate-range missiles, 1.3 million military personnel, and annual military expenditure of nearly $50 billion (3% of the world total).
And, in terms of soft power, India has an established democracy, an influential diaspora, and a vibrant popular culture with transnational influence.
Bollywood produces more films every year than any other country, out-competing Hollywood in parts of Asia and the Middle East.
But one should not underestimate India’s problems.
Population alone is not a source of power unless those human resources are developed, and India has lagged well behind China in terms of literacy and economic growth.
Despite its progress, around a third of India’s population lives in conditions of acute poverty, making the country home to a third of the world’s poor.
India’s $2 trillion GDP is only a fifth of China’s $10 trillion, and a ninth of America’s $17.5 trillion (measured at market exchange rates).
Likewise, India’s annual per capita income of $1,760 is just one-fifth that of China.
Even more striking, while 95% of the Chinese population is literate, the proportion for India is only 74% – and only 65% for women.
A symptom of this problem is India’s poor performance in international comparisons of universities, with none ranked among the world’s top 100.
India’s high-tech exports are only 5% of its total exports compared to 30% for China.
India is unlikely to develop the power to become a global challenger to the US in the first half of this century.
Indeed, even in terms of soft power, a recent study by the Portland Consultancy in London placed India outside the top 30 countries.
China ranked 30th, and the US came in third, behind the United Kingdom and Germany.
Nonetheless, India has considerable assets that already affect the balance of power in Asia.
While India and China signed agreements in 1993 and 1996 that promised a peaceful settlement of the border dispute that led them to war in l962, the issue has heated up again, following Chinese actions in recent years.
India and China are fellow members of the BRICS (along with Brazil, Russia, and South Africa).
But cooperation within that caucus is limited.
While Indian officials are often discreet in public about relations with China, and wisely want bilateral trade and investment to grow, their security concerns remain acute.
As part of the group of Asian countries that will tend to balance China, India has already begun to strengthen its diplomatic relations with Japan.
It would be a mistake to cast the prospects for an improved US-India relationship solely in terms of China’s rising power.
Indian economic success is an American interest on its own. So is the open approach taken by India and Brazil on issues such as governance of the Internet, at a time when Russia and China are seeking more authoritarian control.
No one should expect an Indian-American alliance any time soon, given historical Indian public opinion.
But one can predict a relationship in the coming years that will be both sui generis and stronger.
A Marshall Plan for the United States
NEW YORK – When a major highway bridge in California collapsed last month, the impact on the entire southwestern United States once again highlighted the country’s serious infrastructure problem.
Indeed, in a sense, the world’s largest economy is falling apart.
Ideological aversion to public-sector investment, together with the endemic short-term thinking of those who write budgets, has kept spending on roads, airports, railways, telecommunication networks, and power generation at levels far below what is needed.
And yet the problem can no longer be ignored.
If the US does not act quickly to provide its fragile economic recovery with a solid foundation of modern infrastructure, it could find itself sinking slowly back into stagnation.
It seems self-evident that a developed economy requires adequate, ongoing investment in public goods.
But the state of infrastructure in the US suggests that many decision-makers do not share this view.
A 2013 report by the American Society of Civil Engineers gave the US a pathetic overall grade of D+ for its infrastructure.
The report cited numerous state-specific shortcomings, including Michigan’s “88 high-hazard dams and 1,298 structurally deficient bridges” and the “$44.5 billion needed to upgrade drinking-water systems” in California.
The report concludes that a $3.6 trillion investment (roughly one-fifth of the country’s annual GDP) will be needed by 2020 to boost the quality of US infrastructure by addressing the “significant backlog of overdue maintenance [and the] pressing need for modernization.”
Otherwise, the country’s crumbling infrastructure will drag down economic growth for years to come.
America’s desperate need for modern infrastructure has come, in some ways, at a fortuitous moment.
At a time when the economic recovery remains fragile, a publicly financed infrastructure program could meaningfully transform the prospects of US workers, providing new employment opportunities for low and un-skilled labor.
Meanwhile, scaling up infrastructure spending could provide an often-overlooked opportunity for long-term institutional investors.
Pension funds, insurance companies, and mutual funds in the US manage combined assets totaling roughly $30 trillion, and they have been struggling to find investments that match their long-term obligations.
Persistently low interest rates have been particularly challenging for pension funds, which face rising liabilities (calculated on a discounted basis).
A large-scale program to reboot America’s crumbling infrastructure would go a long way toward addressing this gap between assets and liabilities, providing pension funds with investments with long time horizons (and thus guaranteeing the incomes of tomorrow’s retirees) while leveraging private capital for the public good.
In fact, US pension funds are already investing in infrastructure, but they are doing so in Canada, Australia, the United Kingdom, and the Netherlands.
Sadly, ideological objections and partisan politics are likely to strew obstacles in the path of any effort to modernize America’s infrastructure and create such opportunities at home.
Public-sector investment invariably rekindles the age-old struggle between those who insist that government should stay out of efforts to create jobs and those who believe that part of government’s role is to put underutilized human resources to work.
One way to avoid this bottleneck would be for US President Barack Obama to establish a bipartisan Infrastructure Commission tasked with finding solutions to the problem.
This would operate much like the bipartisan National Commission on Fiscal Responsibility and Reform, established in 2010 to address America’s fiscal challenges, or the military-base-closing commissions of the 1980s and 1990s.
By splitting the responsibility between the country’s two main parties, the commission would free its members from the pressures of day-to-day politics and allow them to concentrate on the health of the economy.
Congress would then hold an up-or-down vote on the commission’s recommendations.
Infrastructure has long been acknowledged as fundamental to a country’s economic prospects.
In neglecting the necessary investments, the US has put itself on a precarious path, one that could lead to stagnation and decline, which would be difficult to reverse.
There is little reason for US policymakers to accept this fate.
Low interest rates, the dollar’s continuing role as the world’s main reserve currency, and the capacity of the public sector to increase spending make the case for higher infrastructure spending compelling.
In the twentieth century, the US government spent billions of dollars to rebuild the European economy.
Its project for the first half of this century should be to do the same at home.
Using Africa\u0027s Diversity
When we think of "Africa," what image arises?
Many imagine a continent consumed by poverty, war, desperation, corruption and failure.
Yet, Africa is Morocco, Sierra Leone, and South Africa; it is Mozambique and Mali, Nelson Mandela and Charles Taylor - the contrasts always seemingly greater than any similarities.
No matter how easy and convenient, it makes no sense to think of Africa as a single unit, not as an economic concept, nor as a political or cultural one.
The differences between African countries are too huge.
Even within countries, say Tanzania where the mainland and the island of Zanzibar are usually at loggerheads, there are often radical differences in opinion and approach.
In Africa, we can profitably speak of diversity, for in searching for solutions to the economic challenges facing Africa's countries, it is far more reasonable to think in terms of its diverse regions.
Thankfully, this is already happening.
Indeed, a number of interesting practical moves in this direction are underway, though not all of them pursue the original regional course set by their founders.
The Economic Community of West African States (ECOWAS), for example, has unexpectedly demonstrated both the will and the capacity to raise a fighting force to intervene in regional conflicts, such as the awful civil war in Sierra Leone.
Less spectacularly, but perhaps more important in the long run, ECOWAS is laying the groundwork for regional economic integration, with the creation of a single currency now a stated objective.
In Southern Africa, the Southern African Development Community, after a shaky start, is pushing ahead with joint projects, of which transport infrastructure, a blight on much intra-African commerce, is a central theme.
East African countries are also pushing integration projects ahead, and appear to have learned from past failures in the region, which were the result of hastily constructed, inappropriate, and overly ambitious structures.
In a very different setting, the European Union was created on the basis of shared values and shared objectives.
Its early history began while much of Europe was rebuilding itself after WWII.
Africa's regional integration now faces a similar economic imperative; it too must be built on shared values, rather than on vague notions of geographical determinism.
The Organisation of African Unity, renamed the African Union, set itself impossibly high objectives when it was founded in 1963.
It neglected the fact that groupings like the EU began with small, practical steps forward.
Indeed, African summits, which in the past saw democrats and dictators from different language, religious and cultural environments sharing the same table, usually produced little serious development policies because they indulged in pie-in-the-sky rhetoric.
Proclamation of the African Union may, sadly, form part of this tradition.
Missing, as so often in the past, is sufficient consideration of the vital ingredient of shared values and a context of practical projects for African countries to perform together.
The parallel with Europe's integration is striking.
European unity arose from a desire to see conflict on the continent end.
That objective, insofar as EU member countries are concerned, has been met.
Today, many African countries are ravaged by conflict and, as the EU rendered war between its members redundant, practical regional integration could achieve the same in Africa.
Here ECOWAS is showing the way.
More ambitiously, the NEPAD initiative demonstrates a new commitment by the continent's leaders to realistic joint action on a regional basis.
Shared values and like-mindedness do not necessarily imply creating new political entities.
Indeed, the goal of regional co-operation could be perverted if empty political rhetoric is allowed to dominate sound policy-making.
Indeed, overheated oratory has damaged many African initiatives, and, sadly, major industrial countries and international organizations often abet this by lending verbal support to plans they have no intention of supporting with practical help.
If any of this is to be changed, the perception of Africa as single, miserable mass that discourages both investors and global public opinion from sustained engagement must be changed.
This means information; more, it calls for the same type of mature, neutral and dispassionate analysis that, say, OECD delivers to its own member countries.
The new "African Economic Outlook" (AEO), an attempt to dispel this cloud of stereotyped knowledge by analyzing the comparative prospects of 22 countries, is based on the OECD model.
Such knowledge is essential if investors and donors in Africa are to support the practical, regionally-based policies Africa needs.
Policy initiatives such as debt reduction, domestic and foreign productive investment, and OECD countries opening themselves to African products, which would undoubtedly improve the continent's economic prospects, can only be pushed when benefits are clearly identified.
Yet, increased participation in the world economy resulting from lower trade barriers will only be possible if Africa's regional institutions are strengthened.
There is no point in advocating regionalism for regionalism's sake; Europe's experience shows that agreements based on shared values, peer reviews, and with clearly defined achievable goals can form the foundation for an ever-improving economy.
Co-operative regional projects are, today, Africa's best hope for constructing the type of infrastructure African economies require.
African unity need not remain a dream; it can be built through viable regional projects based on the values shared by Africans and supported by sound, reliable, analysis.
Africa's diversity is Africa's strength.
Using and Abusing the Hague Tribunal
The International Tribunal in The Hague was intended as a Sword of Damocles for human rights violators in the Balkans.
Within the Balkans, however, it has become a political tool that both nationalists and their opponents exploit in a never-ending game of divide and (hope to) rule.
Croatia provides a textbook case of this.
Snags and fissures now bedevil Croatia's infant democratic reforms.
The reasons are connected to Premier Ivica Racan's unwillingness to tackle the centers of power left behind by the regime of the late President Franjo Tudjman, whose nationalist-minded party, the Croatian Democratic Union (HDZ), was voted out of office in January 2001 following Tudjman's death in December 1999.
Tudjman forged an authoritarian regime that blurred the distinctions between HDZ and state agencies, in particular the army and police.
This muddied legacy remains at the heart of Croatia's current problems and its relations with the Hague Tribunal.
In January 2001 the then new Premier Ivica Racan faced a sharp choice: swiftly purge state bureaucracies of Tudjman's partisans or yield to the obstructive ploys of HDZ loyalists.
True to Racan's instinctive indecisiveness, the Prime Minister dallied.
He preferred to concentrate on constitutional reforms that were largely interpreted as a bid to strip the new president, Stjepan Mesic (himself a longtime opponent of Tudjman) of the robust executive powers Tudjman wrote into the constitution for himself.
Meanwhile, the new government failed to investigate numerous war crimes, miscarriages of justice, and the corruption of the Tudjman era.
This failure emboldened HDZ loyalists to test the Racan government's resolve.
One favorite trick was to create enormous obstacles to even minimal attempts at cracking down on war criminals.
In September 2000, following the assassination of a Hague Tribunal witness and the arrest of a Croatian commander accused of massacring Serbs in 1991, twelve army generals published a letter calling for the defense of Croat veterans and a halt to ``the negative and historically unfounded representation'' of Croatia's record in the Balkan wars.
In a rare show of state determination, President Mesic suspended and forced into retirement all twelve officers.
Several went on to join and lead a new party - Croatian Integrity and Prosperity (HIP), organized by Tudjman's eldest son Miroslav, the former chief of the Croatian intelligence service.
Parrying with Tudjman loyalists continued into the spring of this year, with the arrest of Mirko Norac, one of the twelve generals, who was accused of massacring Serb civilians in 1991.
Various veterans' organizations staged mass rallies against the ``treacherous'' government of Mesic and Racan.
These pressures would not have been as damaging had they not met with approval in parts of Racan's ruling coalition, especially from Drazen Budisa's Croatian Social Liberal Party (HSLS), and also among influential Catholic bishops.
Weakened, the government became psychologically prepared for still greater concessions.
In July, the Hague Tribunal for the Former Yugoslavia charged two Croatian generals - Rahim Ademi and Ante Gotovina - with war crimes.
Instead of turning them over to the tribunal, Racan used the opportunity for a power play, requesting a parliamentary vote of confidence for what was intended to be a soft-pedaling of the Hague Tribunal's warrants.
This provoked the resignation of Budisa from the presidency of the Social Liberal Party, inciting a virtual split in this key coalition partner, the only party in the government coalition that wanted to resist the Hague Tribunal.
Despite this, Racan won his vote of confidence and secured a modicum of stability within his cabinet.
Still, the various factions that comprise the Tudjmanite opposition gained a chance to pull Budisa toward them, creating a new center of political gravity for the next crisis.
The Hague Tribunal is often blamed for burdening fragile reform governments in Croatia and Serbia with unreasonable requests that play into the hands of nationalist politicians.
This is true to the extent that the Tribunal is insensitive to the intricate balancing expected of officials in the countries of the former Yugoslavia.
For example, the pre-trial release of Biljana Plavsic, one of the most culpable of Bosnian Serb leaders, in exchange for her evidently ample testimony would make more sense had the Tribunal been equally accommodating on less culpable non-Serb defendants.
A reluctance to prosecute war criminals is an asset that Balkan governments use in order to pacify their nationalist audience and, indeed, to avoid the thorny problems of a thoroughgoing reform.
Racan would not have had to deal with the Hague Tribunal had he the courage to begin his own housekeeping and investigations of Tudjman's cronies and the war criminals the deceased president protected.
Now, Premier Racan is cashing in on his procrastination over Tudjman acolytes, hoping that they will be as generous with him should they return to government.
For in Croatia, every new regime issues a plenary absolution for its predecessors.
A tiny elite is thus insulated from serious challenges and, ultimately, of responsibility for anything, even the most heinous of crimes.
प्रतिजैविकों का समझदारी से उपयोग करना
लंदन – प्रतिसूक्ष्मजीवों (एंटीमाइक्रोबियल) के प्रतिरोध की समस्या के समाधान के लिए, दुनिया को न केवल नई दवाओं की आवश्यकता है बल्कि इसके लिए हम सभी सात अरब लोगों का व्यवहार भी नया होना चाहिए। प्रतिजैविकों के गलत और आवश्यकता से अधिक इस्तेमाल की वजह से, निमोनिया और तपेदिक जैसी आम संक्रामक बीमारियों के वर्तमान इलाजों में भी प्रतिरोध बढ़ता जा रहा है, कुछ मामलों में तो वे पूरी तरह से रोगक्षम हो गए हैं।
यह खतरा वैश्विक स्तर पर है। रिव्यूऑन एंटीमाइक्रोबियल रेज़िस्टेंस (एंटीमाइक्रोबियल प्रतिरोध की समीक्षा) के अनुसार, जिसका मैं अध्यक्ष हूँ, दवा-प्रतिरोधी संक्रमण रोगों से हर साल कम-से-कम 7,00,000 लोग मारे जाते हैं। 2050 तक यदि इस समस्या के समाधान के लिए कुछ नहीं किया गया तो संभवतः हर साल लगभग एक करोड़ लोग इन व्याधियों से मर जाएँगे, जबकि कभी इनका इलाज संभव था।
एंटीमाइक्रोबियल प्रतिरोध से लड़ने के लिए समन्वित प्रतिक्रिया के रूप में नई दवाओं को विकसित करना एक महत्वपूर्ण दृष्टिकोण है। लेकिन यह पर्याप्त नहीं होगा। हमें प्रतिजैविकों की अपनी माँग को भी कम करना होगा और यह समझना होगा कि उनसे कुछ अच्छा होने की बजाय नुकसान ही अधिक हो सकता है। एक अनुमान के अनुसार, अमेरिका में प्रतिजैविकों के लिए दी जा रही डॉक्टरी पर्चियों में से लगभग आधी अनुचित और गैर-ज़रूरी होती हैं। इसलिए प्रतिजैविकीय प्रतिरोध में भारी वृद्धि होने पर कोई हैरत नहीं होनी चाहिए।
इस ढर्रे को बदलने के लिए महत्वपूर्ण है कि समस्या को समझने की लोगों की सोच में सुधार लाया जाए। अधिकतर लोग या तो एंटीमाइक्रोबियल प्रतिरोध के प्रति पूरी तरह असावधान हो गए हैं या उनकी यह गलत धारणा है कि व्यक्ति विशेष का शरीर ही उस दवा का प्रतिरोध करता है न कि खुद जीवाणु। प्रतिजैविकों का प्रयोग कब और कैसे प्रभावी रूप में किया जाए, इसकी बेहतर समझ होने पर ही लोग ज़िम्मेदारी से इसका इस्तेमाल कर पाएँगे।
हमें ऐसे अभियानों की ज़रूरत है जैसा ऑस्ट्रेलियाई धर्मार्थ संस्था एनपीएस मेडिसिनवाइज़ ने आरंभ किया था, जिसमें उन्होंने प्रतिजैविकों के इस्तेमाल के बारे में लोगों में जागरूकता लाने के लिए वीडियो बनाने की प्रतियोगिता का आयोजन किया था। इसके परिणामस्वरूप लघु व्यंग्यात्मक फिल्मों की शृंखलाएँ बनने लग गईं, जिनमें बहुत ही आम लेकिन मज़ाकिया तरीके से बताया जाता था कि प्रतिजैविकों का किस तरह गलत इस्तेमाल किया जा सकता है।
इस तरह के प्रयास विश्वभर में होने चाहिए, खासकर विशाल और तेज़ी से विकसित होने वाले देशों में। ब्रिक देशों - ब्राज़ील, रूस, भारत और चीन - में अमेरिका की तुलना में प्रतिजैविकों की प्रति व्यक्ति खपत काफी कम होती है। लेकिन जैसे-जैसे इन देशों के आर्थिक विकास में तेज़ी आ रही है, उनमें प्रतिजैविकों की खपत दर में भी तेज़ी से वृद्धि हो रही है।
निराशावादी तो मानकर चलेंगे ही कि व्यवहार को बदलना बहुत कठिन होता है, खास तौर पर तब जब जीवाणु-विज्ञान के बारे में अशिक्षित श्रोताओं को सिखाने की बात हो। इस सोच के कारण निम्न आय वाले देशों के मरी��ों को एचआईवी की दवा किफ़ायती दरों पर उपलब्ध कराने के बारे में सबसे घृणित यही तर्क दिमाग में आता है: अफ्रीका के लोगों के पास घड़ी तो होती नहीं, इसलिए वे एंटीरेट्रोवायरल दवा दिन में तीन बार नहीं ले सकेंगे।
जैसा कि शोधकर्ताओं ने बताया है, सच तो यह है कि अफ्रीकी लोग एंटीरेट्रोवायरल चिकित्सा का पालन बहुत ईमानदारी से करने में पूरी तरह सक्षम हैं - कई बार तो उत्तरी अमेरिका के लोगों से भी ज़्यादा। वास्तव में, जुलाई में यूएनएआईडीएस ने घोषणा की थी कि 2015 के अंत तक डेढ़ करोड़ लोगों को जीवन रक्षक एचआईवी चिकित्सा सेवा देने का लक्ष्य निश्चित समयावधि से बहुत पहले ही पूरा कर लिया गया है।
हर साल 1 दिसंबर को, विश्व एड्स दिवस पर इस मुद्दे को प्रमुखता दी जाती है और वैश्विक जागरूकता को बढ़ावा दिया जाता है। हमें इसी तरह की कोशिशें एंटीमाइक्रोबियल प्रतिरोध की शंकाओं को दूर करने की दिशा में भी करनी होंगी। यूँ तो, 18 नवंबर को आयोजित किए जानेवाले यूरोपीय एंटीबायोटिक जागरूकता दिवस से एक अच्छी शुरूआत हुई है, लेकिन इस संदेश को फैलाने के लिए हमें और नए, रचनात्मक तरीके खोजने होंगे।
प्रौद्योगिकी के नवोन्मेष के कारण लोगों तक सीधे पहुँचने के लिए अभूतपूर्व अवसर मिलने लगे हैं। लगभग 95% चीनी और 75% भारतीय नियमित तौर पर मोबाइल फ़़ोन का इस्तेमाल करते हैं। जिन क्षेत्रों में साक्षरता दर ऊँची है, वहाँ संदेश के प्रचार-प्रसार के लिए लिखित संदेशों को भेजना त्वरित और प्रभावी तरीका हो सकता है। यूरोप और अमेरिका में की गई शोध से पता चलता है कि 90% लिखित संदेश पहुँचने के तीन मिनट के भीतर ही पढ़ लिये जाते हैं।
सोशल मीडिया लाखों लोगों तक पहुँचने का एक और ताकतवर और अपेक्षाकृत सस्ता साधन है। विश्व के सबसे बड़े इंटरनेट आधारवाले देश चीन में, 6410 लाख लोग इंटरनेट का उपयोग करते हैं - 80% डॉक्टर व्यावसायिक प्रयोजनों के लिए स्मार्ट फ़ोन का उपयोग करते हैं, जिसमें सोशल मीडिया के ज़रिए चिकित्सीय सलाह देना भी शामिल है, कुछ चिकित्सकों के तो लाखों अनुगामी भी हैं। आम लोगों को एंटीमाइक्रोबियल प्रतिरोध की आवश्यकता के बारे में प्रशिक्षित करने के लिए इन मेडिकल सोशल-मीडिया सुपरस्टारों को सूचीबद्ध करने का काम एक जबर्दस्त अवसर सिद्ध हो सकता है।
विश्व स्वास्थ्य संगठन द्वारा धूम्रपान के विरोध में चलाए गए सोशल मीडिया अभियान को भी एक अनुकरणीय आदर्श माना जा सकता है। चीनी सेलीब्रेटीज़ की पोस्टों का उपयोग इनडोर सार्वजनिक स्थानों पर धूम्रपान विरोधी कानून के प्रति जागरूकता उत्पन्न करने के लिए किया गया।
दुनिया के कुछ हिस्सों में, दवा प्रतिरोध का मुकाबला करने का सबसे बढ़िया तरीका यही होगा कि व्यवहार में इस तरह से बदलावों को बढ़ावा दिया जाए जिनसे संक्रामक रोगों को बढ़ने से रोका जा सके और उपचार की आवश्यकता को कम किया जा सके। सही तरीके से हाथों को धोना एकदम सही शुरूआत है। भारत में, सुपर अम्मा नामक एक सूझबूझपूर्ण अभियान चलाया गया था - जिसमें लोगों को हाथ धोने के लिए प्रोत्साहित करने के लिए गंदगीवाले स्थानों पर काम करनेवाले लोगों की तस्वीरों का उपयोग किया गया था। यह अभियान इतना सफल हुआ कि संबंधित समूहों में नियमित रूप से हाथ धोनेवाले लोगों की संख्या 1% से बढ़कर लगभग 30% हो गई।
वैश्विक स्तर पर एंटीमाइक्रोबियल प्रतिरोध के खतरे के प्रति जागरूकता पैदा करने की लागत, नई दवाओं और प्रौद्योगिकियों को विकसित करने के लिए खर्च की जानेवाली लागत की तुलना में नगण्य होगी, जबकि किसी भी सूरत में उनके उपलब्ध होने में अभी सालों लग जाएँगे। देशों को चाहिए कि वे शैक्षणिक अभियानों के ज़रिये लोगों के व्यवहार में बदलाव लाने पर ज़ोर दें। हम सब मिलकर, अपनी खराब प्रतिजैविक आदतों को बदल सकते हैं।
India’s Data of Discrimination
NEW DELHI – Last December’s fatal gang rape of a 23-year-old woman in New Delhi triggered an unprecedented public outcry in India.
Tens of thousands of citizens took to the streets to demand an end to police indifference to women’s safety, stronger laws, and speedier trials for those charged with crimes against women.
The protests launched a countrywide movement, spurring nonstop media coverage of women’s issues.
So, has significant change followed?
Within eight days of the rape, a special commission, led by former Supreme Court Chief Justice J.S. Verma, was established.
The commission’s roughly 700-page report, completed in only 29 days, urged the government to take swift, far-reaching action.
Among the report’s recommendations were stronger penalties for sex crimes, including harassment; a requirement that police officers report every instance of alleged rape; and broader measures to address pervasive discrimination against women.
India’s government responded two weeks later, announcing a new ordinance that not only expands the definition of rape, but also makes behavior such as groping, stalking, trafficking, and voyeurism serious criminal offenses.
But, as the commission’s report highlighted, India does not lack laws intended to deter sexual violence against women.
Rather, amid widespread ignorance and apathy, government and law enforcement have lacked the motivation to administer existing laws adequately.
The recent explosion of long-dormant public outrage should be a tipping point, precipitating genuine progress toward a more equal society.
But designing effective policies to diminish the obstacles confronting women and girls requires measuring the prevalence of the attitudes and habits that limit their potential.
If the recently enacted laws are to have the intended effect, Indian society must reject discriminatory mindsets and practices.
Unlike conventional indicators, which capture inequality in outcomes like education and employment, the OECD’s Social Institutions Gender Index (SIGI) evaluates the underlying drivers of such outcomes, comparing factors such as preferential treatment of sons over daughters, violence against women, and restrictions on property rights.
According to this metric, in 2012, India ranked 56th out of 86 countries for gender equality, lower than other major emerging markets like Brazil, China, Indonesia, and South Africa.
But Indian society, which comprises more than 1.2 billion citizens, is hardly homogeneous.
Indeed, India is a complex amalgam of 28 states with widely varying social indicators.
For example, the nine states that the government has labeled “high focus” account for 62% of India’s maternal deaths and 70% of infant deaths, but contain only 48% of the country’s population.
Meanwhile, the southern states of Kerala, Tamil Nadu, Karnataka, and Andhra Pradesh account for roughly 22% of the population, but less than 12% of maternal deaths.
Similarly, while infant deaths account for less than 5% of all deaths in Kerala and Tamil Nadu, more than 20% of babies born in the northern states of Uttar Pradesh, Madhya Pradesh, and Rajasthan (all high-focus states) do not see their first birthday.
So, given the limited value of countrywide generalizations, India’s leaders must focus on the differences between states in order to devise targeted policies.
India’s National Rural Health Mission has adopted such an approach, using region-specific data to identify low-quality prenatal care,&#160;unsafe deliveries, and lack of access to birth control as high-priority issues in 18 states.
The measures that the mission has implemented since 2005 – including free contraception, pregnancy tracking, prenatal care, compensation for hospital delivery, and regular home visits to new mothers – contributed to a 20% drop in fertility rates in the targeted states by 2010, and helped to reduce maternal and infant deaths.
But this approach is not sufficient to address the gender inequality that characterizes Indian politics and society.
Women comprise just 10% of India’s parliament, and only two of 35 ministers with full Cabinet rank are women.
And, while the 33% quota for women in local-government bodies has placed a million of them in elected positions at the grass roots, the extent to which this has actually improved women’s status has yet to be measured.
Moreover, discrimination in India often begins in the family.
Indian families’ tendency to prefer sons has resulted in an adverse sex ratio, particularly in some northern states.
Moreover, in the same region, more than 60% of girls are married well before the legal age, making pregnancies among anemic and malnourished teenagers a common occurrence.
But, at the same time, most girls complete 12 years of schooling in the northern mountain state of Himachal Pradesh, demonstrating that the north-south distinction is no more conclusive than countrywide generalizations.
To facilitate the design of effective targeted policies, India’s Central Statistical Organization is working to provide detailed data through a pilot project that captures Indian states’ SIGI indicators.
The study will highlight the variations in social, cultural, and economic barriers to female empowerment across India.
Policies based on generalities will not work.
To initiate a fundamental shift in citizens’ gender-related attitudes and behavior, India’s leaders must understand – by the numbers – the often-dramatic disparities between their country’s individual states.
Slow Growth for US Interest Rates
LONDON – The US Federal Reserve’s new policy statement will, as usual, be analyzed in excruciating detail in the days ahead, as investors seek guidance on when and how quickly interest rates will be raised.
Notably, the word “patient” does not appear, and the Fed has signaled that it may raise its benchmark rate as early as June.
But the particular wording is far less telling than the context in which the statement is being released.
In fact, uncertainty about monetary policy in the United States has been the leading driver of financial-market volatility this year.
After all, the potential effect of interest-rate hikes on the US yield curve has a major impact on the pricing of all global assets.
But three factors suggest that investors are over-emphasizing the risk of a curve re-pricing.
First, economic developments will likely lead the Fed to exhibit caution when it comes to the process of raising interest rates.
Second, even if the Fed acts quickly, investor appetite for returns will anchor yields.
Third, the technical features of the market will ensure strong demand for US Treasury bills.
Let us begin with the relevant economic developments.
The consensus nowadays is that the US economy is growing steadily, with the leading indicators pointing toward further expansion, and labor-market data surpassing expectations.
Job creation is strong, with total non-farm payroll employment having increased by 295,000 in February and the unemployment rate falling yet again, to just 5.5%.
But some indicators still have the Fed concerned.
The Personal Consumption Expenditures deflator remains well below the 2% target.
The core consumer price index, to be released next week, is expected to show a year-on-year increase of just 1.7% – or even less, if the lower oil price feeds through from headline to core CPI.
And real wage growth stands at less than 2%, which is below the level deemed necessary by the Fed to underpin a sustainable acceleration in consumer spending.
On top of already modest inflation expectations – characterized by a five-year break-even inflation rate of 1.9% – the dollar has appreciated by around 10% this year, and by almost 25% since the beginning of last year.
Given the deflationary impact of a stronger currency – and the Fed’s general intolerance of deflation – there is good reason to believe that the Fed will exercise caution in raising interest rates.
Even if the Fed ignores deflationary pressure and hikes interest rates more quickly, medium- and long-term rates are still likely to be anchored, given how little yield is available elsewhere in the world.
Yields on German Bunds are now negative out to eight years.
In Europe’s peripheral economies, ten-year yields are edging closer to 1%, as the European Central Bank pursues a €1.1 trillion ($1.3 trillion) quantitative-easing program.
And, in Japan, ten-year yields are below 0.4%.
Lending to the emerging economies is hardly attractive, either, with even the riskiest economies offering low hard-currency yields.
Indeed, even Russia – whose military intervention in Ukraine has led the West to impose strict economic sanctions – offers annual yield of less than 6% on ten-year bonds.
Given such low yields in most of the world, investors will be eager to take advantage of the relative value opportunity offered by rising US interest rates.
Add to that America’s safe-haven status, and the fact that any re-pricing of US rates surely would reflect an economic resurgence, and the bid for US Treasuries should be exceptionally strong.
In this context, interest rates would remain capped, mitigating the risk of a disorderly bond-market sell-off.
The final, technical reason why interest rates are not likely to rise excessively is that years of central-bank purchases and a shrinking US budget deficit have made US Treasuries scarce.
Indeed, so-called “repo” activity – that is, the sale of a US Treasury obligation that the seller promises to buy back later at a slightly higher price – has declined considerably, with the balance of such transactions having fallen from $5 trillion before the crisis to $2.5 trillion today.
Both the two-year and five-year US repo rates have been pushed periodically into negative territory, owing to the combined effects of risk-averse behavior, investor deleveraging, and stricter banking regulation.
Though US monetary policy undoubtedly exerts significant influence on global markets, fears surrounding the direction of US interest rates may be overdone.
Though the Fed may no longer be promising patience, the current financial environment implies that investors should not, for the time being, anticipate a major hike.
America in the Way
NEW YORK – The Third International Conference on Financing for Development recently convened in Ethiopia’s capital, Addis Ababa.
The conference came at a time when developing countries and emerging markets have demonstrated their ability to absorb huge amounts of money productively.
Indeed, the tasks that these countries are undertaking – investing in infrastructure (roads, electricity, ports, and much else), building cities that will one day be home to billions, and moving toward a green economy – are truly enormous.
At the same time, there is no shortage of money waiting to be put to productive use.
Just a few years ago, Ben Bernanke, then the chairman of the US Federal Reserve Board, talked about a global savings glut.
And yet investment projects with high social returns were being starved of funds.
That remains true today.
The problem, then as now, is that the world’s financial markets, meant to intermediate efficiently between savings and investment opportunities, instead misallocate capital and create risk.
There is another irony. Most of the investment projects that the emerging world needs are long term, as are much of the available savings – the trillions in retirement accounts, pension funds, and sovereign wealth funds.
But our increasingly shortsighted financial markets stand between the two.
Much has changed in the 13 years since the first International Conference on Financing for Development was held in Monterrey, Mexico, in 2002.
Back then, the G-7 dominated global economic policymaking; today, China is the world’s largest economy (in purchasing-power-parity terms), with savings some 50% larger than that of the US.
In 2002, Western financial institutions were thought to be wizards at managing risk and allocating capital; today, we see that they are wizards at market manipulation and other deceptive practices.
Gone are the calls for the developed countries to live up to their commitment to give at least 0.7% of their GNI in development aid.
A few northern European countries – Denmark, Luxembourg, Norway, Sweden and, most surprisingly, the United Kingdom – in the midst of its self-inflicted austerity – fulfilled their pledges in 2014.
But the United States (which gave 0.19% of GNI in 2014) lags far, far behind.
Today, developing countries and emerging markets say to the US and others: If you will not live up to your promises, at least get out of the way and let us create an international architecture for a global economy that works for the poor, too.
Not surprisingly, the existing hegemons, led by the US, are doing whatever they can to thwart such efforts.
When China proposed the Asian Infrastructure Investment Bank to help recycle some of the surfeit of global savings to where financing is badly needed, the US sought to torpedo the effort.
President Barack Obama’s administration suffered a stinging (and highly embarrassing) defeat.
The US is also blocking the world’s path toward an international rule of law for debt and finance.
If bond markets, for example, are to work well, an orderly way of resolving cases of sovereign insolvency must be found.
But today, there is no such way.
Ukraine, Greece, and Argentina are all examples of the failure of existing international arrangements.
The vast majority of countries have called for the creation of a framework for sovereign-debt restructuring.
The US remains the major obstacle.
Private investment is important, too.
But the new investment provisions embedded in the trade agreements that the Obama administration is negotiating across both oceans imply that accompanying any such foreign direct investment comes a marked reduction in governments’ abilities to regulate the environment, health, working conditions, and even the economy.
The US stance concerning the most disputed part of the Addis Ababa conference was particularly disappointing.
As developing countries and emerging markets open themselves to multinationals, it becomes increasingly important that they can tax these behemoths on the profits generated by the business that occurs within their borders.
Apple, Google, and General Electric have demonstrated a genius for avoiding taxes that exceeds what they employed in creating innovative products.
All countries – both developed and developing – have been losing billions of dollars in tax revenues.
Last year, the International Consortium of Investigative Journalists released information about Luxembourg’s tax rulings that exposed the scale of tax avoidance and evasion.
While a rich country like the US arguably can afford the behavior described in the so-called Luxembourg Leaks, the poor cannot.
I was a member of an international commission, the Independent Commission for the Reform of International Corporate Taxation, examining ways to reform the current tax system.
In a report presented to the International Conference on Financing for Development, we unanimously agreed that the current system is broken, and that minor tweaks will not fix it.
We proposed an alternative – similar to the way corporations are taxed within the US, with profits allocated to each state on the basis of the economic activity occurring within state borders.
The US and other advanced countries have been pushing for much smaller changes, to be recommended by the OECD, the advanced countries’ club.
In other words, the countries from which the politically powerful tax evaders and avoiders come are supposed to design a system to reduce tax evasion.
Our Commission explains why the OECD reforms were at best tweaks in a fundamentally flawed system and were simply inadequate.
Developing countries and emerging markets, led by India, argued that the proper forum for discussing such global issues was an already established group within the United Nations, the Committee of Experts on International Cooperation in Tax Matters, whose status and funding needed to be elevated.
The US strongly opposed: it wanted to keep things the same as in the past, with global governance by and for the advanced countries.
New geopolitical realities demand new forms of global governance, with a greater voice for developing and emerging countries.
The US prevailed in Addis, but it also showed itself to be on the wrong side of history.
The Decline of US Military Innovation
NEW YORK – The United States is at risk of losing its military edge.
America’s armed forces may still be the most advanced in the world; after all, the US spends more than twice as much on military research and development as major powers like France and Russia, and nine times more than China and Germany. But America’s continued technological leadership is far from assured.
Since 2005, the US Department of Defense has cut R&amp;D spending by 22%.
In 2013, as part of a deal to avert a showdown over the debt ceiling, the US Congress mandated some $1.2 trillion in automatic spending cuts.
The move, which requires reduced spending in numerous programs, including many defense research initiatives, was described by US President Barack Obama’s administration as “deeply destructive to national security.”
If US defense innovation continues to erode, not only will America’s defense capabilities suffer; the country will also risk slipping in terms of commercial innovation and competitiveness.
Budget limitations pose some of the greatest challenges to the US military’s efforts to maintain its technological edge.
The Army and the Missile Defense Agency have been particularly hard hit, with R&amp;D spending nearly halved since 2005.
The Navy’s research budget has been cut by some 20%, and the Defense Advanced Research Projects Agency (DARPA) – the organization tasked with keeping the US military ahead of the technological curve – has had to slash R&amp;D spending by 18%.
Even the Air Force, where research spending has traditionally been a congressional priority, has been forced to cut its budget by roughly 4%.
When money does get allocated, cost pressures too often encourage investment in projects that promise quick results – a bias that comes at the expense of long-term innovation that could provide a strategic advantage.
Even DARPA has fallen prey to pressure for research that can demonstrate immediate progress.
To make matters worse, the US military’s innovation efforts face several structural problems.
Six decades of attempts to reform the defense acquisition process have yet to yield fruit.
Most of the design, development, and production of military systems is carried out by civilian industry, but decision-making remains firmly in the hands of military officials, who may not be able to strike the right balance between cost-cutting and innovation.
Rivalries within and among the military services once mimicked the role of competition in the private sector: they drove innovation.
But with the end of the Cold War, the pressure to remain a step ahead has waned, depriving the defense sector of a crucial engine of progress.
Moreover, top defense contractors’ R&amp;D spending as a proportion of sales plummeted by nearly a third from 1999 to 2012.
By contrast, America’s technology giants invest 4-6 times as much in R&amp;D.
Meanwhile, the US is suffering from the hollowing out of its defense industrial base.
Increased competition from China and other large emerging economies has eroded US manufacturing capabilities, jeopardizing America’s ability to develop the most technologically sophisticated defense platforms.
The defense industry once created the new technologies – lasers, GPS, and the Internet, for example – that helped drive the American economy.
Today, in most fields, civilian technology is likely to be leading the way.
The result can be seen in the rise of foreign competition in the international arms market.
American manufacturers are finding themselves increasingly vulnerable in areas that they once dominated – including unmanned aerial platforms, intelligence surveillance and reconnaissance, missiles, and satellites – as low-cost competitors gain market share.
In 2013, Russia’s weapons exports surpassed America’s by more than $2 billion.
“Continued fiscal pressure will likely limit our military’s ability to respond to long-term challenges by increasing the size of our force or simply outspending potential adversaries on current systems,” he said. “So to overcome challenges to our military superiority, we must change the way we innovate, operate, and do business.”
Nine days later, Hagel handed in his resignation, which will take effect as soon as the US Senate confirms his replacement.
A policy aimed at restoring defense innovation and production in America would ensure that the US upholds its global technological leadership and commercial competitiveness.
Unfortunately, Hagel’s successor is likely to find that, in an era of limited budgets and automatic spending cuts, the type of comprehensive innovation strategy that Hagel envisioned may simply not be viable.
Fixing America’s Fiscal Problem
CAMBRIDGE – With America’s elections less than six weeks away, it is time to think seriously about what will be done afterwards to deal with the nation’s fiscal mess.
Regardless of who wins, addressing the problem can no longer be postponed.
Americans are rightly focused on the “fiscal cliff” looming at the start of 2013, when, under current legislation, virtually all tax rates will rise, sucking more than 3% of GDP out of households and businesses.
In addition, automatic cuts in government spending on defense and non-defense programs will subtract nearly another 1% of GDP in 2013 and similar amounts in future years.
The Congressional Budget Office warns that falling off the fiscal cliff would push America’s economy into a serious recession next year.
And the fiscal cliff is only part of the problem that must be solved.
The bigger problem is that the United States has an enormous fiscal deficit – now about 7% of GDP and predicted to grow rapidly in future decades as an aging population and rising health-care costs increase government outlays for the “entitlement programs” that benefit middle-class seniors.
Although politicians on both the left and the right recognize that these programs’ growth must be slowed to avoid massive deficits or very large tax increases, their growth is unlikely to slow enough to prevent the national debt/GDP ratio from rising.
Fiscal consolidation therefore requires additional revenue as well as slower growth in entitlement spending.
The challenge facing US politicians after the election will be to find a politically acceptable way to raise that revenue without undermining incentives and economic growth.
The task is made more complex by the large number of legislators who insist that the deficit should be reduced by spending cuts alone.
Although no one can be sure how this complex problem will be solved, here is my best guess: Soon after the election, the US Congress will vote to postpone the fiscal cliff for about six months to allow time to work out an acceptable legislative solution.
That solution will involve slowing the growth of Social Security pension benefits for future middle- and upper-income retirees.
Mitt Romney, the Republican candidate, has explicitly proposed this, and President Barack Obama indicated support for such an approach back in 2009, before he turned his attention to health care.
The tougher problem will be how to raise revenue.
The key will be to focus on the many special features of the tax code that are equivalent to government spending.
If I buy a hybrid car, install a solar panel at my home, or upgrade to a more efficient water heater, I get a tax credit.
And if I buy a bigger home or just increase the size of my mortgage, I receive a larger deduction that reduces my taxable income, lowering my tax bill.
While the government is not giving me money, these special targeted tax breaks are no less “government spending” than they would be if the government sent me a check.
These features are rightly called “tax expenditures,” because they describe the government spending that occurs through the tax code.
Eliminating or reducing these tax expenditures should therefore be seen as cutting government spending.
Although the effect is to raise revenue, that is just an accounting convention.
The fundamental economic effect is to reduce government spending.
So the key to raising revenue is to reduce tax expenditures, use some of the resulting revenue to reduce tax rates, and devote the rest to reducing future deficits.
Opponents of tax increases should see that, because such revenue-raising is really cutting government spending, it does not imply the adverse incentive effects of raising marginal tax rates.
But even if the intellectual objection to extra revenue can be overcome in this way, the practical political problem is that every large tax expenditure – the home mortgage interest deduction, the exclusion of employer payments for health insurance, etc. – has its fervent defenders.
So here is an idea that might work politically: Let taxpayers keep all of the current tax expenditures, but limit the total amount by which each taxpayer can reduce his or her tax liability in this way.
I have explored the idea of “capping” the benefit that individuals can get as a percentage of their total income (their “adjusted gross income,” or AGI in US tax parlance). Applying a 2%-of-AGI cap to the total benefit that an individual can receive from tax expenditures would have a very powerful effect.
It would not limit the amount of deductions and exclusions to 2% of AGI, but rather would limit the resulting tax reduction – that is, the tax benefit – that the individual gets by using all these special features. For someone with a 15% marginal tax rate, a 2%-of-AGI cap would limit total deductions and exclusions to about 13% of AGI.
Such a cap would have a significant impact on the fiscal outlook.
Even if the cap were applied only to “itemized deductions” and the health-insurance exclusion, it would raise about $250 billion in the first year and about $3 trillion over the first decade.
There are many options in designing such a policy.
The cap rate could be higher, or it could start higher and be gradually tightened, or it could vary with an individual’s income level.
But the economic and political attractiveness of a cap consists in its ability to raise substantial revenue without eliminating specific tax expenditures.
Fixing America’s fiscal problem will be as difficult as it is important.
But slowing the growth of Social Security benefits and capping total tax expenditures would be a good framework for the coming reform.
Why is Obama Winning?
PRINCETON – James Carville, Bill Clinton’s chief campaign strategist in 1992, famously expressed a bit of established insider wisdom about winning elections: “It’s the economy, stupid.”
Incumbents win if the economic outlook is rosy, and are vulnerable – as George H. W. Bush was – when times are hard.
Indeed, throughout Europe – in France, Greece, Ireland, Portugal, Spain, and the United Kingdom – governments have been turned out of office in the face of a crisis that they have seemed unable to address.
By this standard, President Barack Obama should now be in a hopeless situation.
According to United States Census data, household income fell in 2011 for the fourth consecutive year.
Unemployment remains persistently high, despite the $787 billion stimulus package in 2009, and house prices, though recovering slowly, remain far below their pre-2008 peak.
And yet Obama seems likely to be reelected in November.
One reason is that there is no reliable way to render an instant judgment about economic effectiveness, and the legacy that Obama inherited – coming to office in the middle of a major economic and financial catastrophe – clearly matters.
President George W. Bush and Prime Minister Gordon Brown are obviously more responsible for the financial crisis than are their successors, who have to clean up the mess.
Moreover, as Zhou Enlai memorably responded when Henry Kissinger asked him about the effects of the French Revolution, “It is too early to tell” (though Zhou apparently thought he was being asked about the consequences of the 1968 Paris student uprising).
Tracing the precise consequences of policy measures or institutional reforms –&#160;and estimating when they might “pay off” – is hopelessly complex.
Much else is happening.
Obama could not have known that a European crisis would have a big impact on US banks, and he could not have done much more to get European leaders to solve their problems.
The long-term success of the economy, and its capacity to build wealth and jobs, depends on productivity gains, which in turn depend on technical and organizational innovation.
Governments cannot just conjure that up by waving a magic wand.
But governments can influence the development of productivity.
And this is where legitimate debate begins, because immediate action to save jobs does not necessarily help.
The wrong kind of stimulus may get in the way of future productivity growth by channeling workers into the wrong kind of employment (or keeping them there). Large-scale public projects, particularly when they are aimed simply at putting as many people as possible quickly back to work, will lead to a shortage of labor available for more productive jobs.
In the 1930’s, some governments tried to make themselves popular with large-scale public work programs.
John Maynard Keynes and his disciples pushed the idea that even apparently useless projects, such as pyramid construction in ancient Egypt, made sense.
Keynes’s Cambridge disciple, Joan Robinson, was particularly worried because Hitler seemed to have grasped this point more quickly than democratic governments had.
Hitler, she noted sarcastically, had solved Germany’s problem by “painting the Black Forest white and putting down linoleum in the Polish Corridor.”
In fact, increased spending, which the Keynesians saw simply as boosting aggregate demand, produced distortions.
Under Hitler, the German economy in the 1930’s shifted to a lower-productivity mechanism in order to churn out armaments and shoddy manufactured goods, neither of which would have any use in a market economy.
Such misallocation of resources was not just a menace of the interwar period.
The big pre-2008 construction boom in Spain did as much harm as subsequent high unemployment, because it encouraged a generation of young people to take high-paying, low-skill jobs in the building industry.
But simply permitting the crisis to continue is a terrible option.
A severe and long-lasting episode of large-scale unemployment is devastating, because it erodes an economy’s skill base, undermines human potential, and affronts human dignity.
Government policy should thus be subject to a longer-term test: How effectively is initiative being enabled and skills developed?
But the answer to that question is not why the pundits are cheering Obama.
They are cheering because financial markets are cheering, following the Federal Reserve’s recent announcement of further stimulus.
Though the evidence that monetary stimulus produces increased investment and a business upturn is patchy, its effects on financial markets and asset prices are very easy to document quickly. Asset prices create a large “wealth effect” that determines how financially well off people feel.
With many Americans anxiously monitoring the monthly performance of their private pension plans, the only economic statistic that matters is that the S&amp;P 500 has returned to its pre-2008 level.
As a result, the lesson about the economy’s electoral salience is being subtly reformulated.
It is no longer the real state of the economy, but rather the perception of asset markets, that is crucial.
And the perception can be far removed from reality, which means that the more the prevailing political wisdom assigns decisive electoral importance to the economy, the greater the temptation to view monetary policy’s impact on asset prices, and not on long-term growth, as crucial.
In America, the Federal Reserve is bound to become much more politicized as a result.
Republicans will blame their defeat in November on the Fed’s monetary stimulus (if not on the ineffectiveness of Mitt Romney’s blunder-filled campaign).
Meanwhile, in Europe, many national leaders, looking at Obama and the Fed, may conclude that they would do better with more direct control over the central bank.
Given the difficulty of establishing such control over the European Central Bank, the euro’s next great challenge may be growing sentiment in favor of a return to national currencies.
America’s Why Not Election
WASHINGTON, DC – Those having trouble making sense of the American presidential election campaign need not worry.
It doesn’t make sense.
The 2016 race is shaping up as the weirdest in modern times, owing not just to the number of candidates – currently 14, with two or three more expected to announce soon – but also to the unusual nature of many of them.
The usual question posed about presidential aspirants is: Why is he running?
This year, the answer seems to be: Why not?
As long as one is not too attached to one’s dignity, there is little to lose and a lot to be gained from running.
A failed presidential campaign, even a disastrous one, can lead to higher speaking fees, richer book contracts, or a television gig.
Newt Gingrich and Mike Huckabee both failed to win the Republican nomination, but secured seats on cable talk shows.
On the Democratic side, the question asked in political circles these days is not whether Hillary Clinton can win the nomination, but whether she can lose it.
The answer is yes – in the sense that anything is possible.
Nobody I know thinks she is likely to stumble so badly; still, the Clintons are known to be accident-prone, and they have been full of surprises – scandals and scandalettes – since they first appeared on the national scene a quarter-century ago.
This is why many Democrats back her without enthusiasm.
Bernie Sanders, a self-described socialist, inspires enthusiasm.
Sanders is riding the leftist wave in Democratic politics, and while many of his proposals may not be able to stand up against hard questioning (how, for example, would he fund his plan to make college tuition free for everyone?), he has so far managed to avoid any serious challenge to them.
Sanders’s main advantage is that he comes off as authentic – a candidate, who, like the billionaire businessman Ross Perot in 1992, “tells it like it is” – while Clinton very much does not.
She seems packaged and cautious, slow to get around to a position on some key issues, such as trade, that divide Democrats.
For the moment, however, nobody can predict whether Sanders will be able to convert the impressive crowds he has been drawing into electoral strength, or even how long he will remain in fashion.
The latest entry into the Democratic race, Jim Webb – who has served as Assistant Secretary of Defense, Secretary of the Navy, and Senator from Virginia – has talent, but lacks steadiness.
Martin O’Malley, the former governor of Maryland, has promise, but has yet to catch on.
And Lincoln Chaffee, a former governor of Rhode Island, is an ethereal mystery.
None is likely to make more than a fleeting impact, if that.
Clinton has fame, money, and organization – advantages that only she (or perhaps her husband) can throw away.
The Republican race, by contrast, remains wide open.
At the beginning of the year, the conventional wisdom was that if Jeb Bush threw his hat into the ring, he would be the odds-on favorite.
He looked like a shoo-in on paper, but candidates don’t run on paper.
Will he prove nimble enough to maneuver through the Republican nominating process, given that its early stages are heavily tilted to the right?
Evangelical Christians play a crucial role in the Iowa caucuses, the first contest in the quest for the nomination, but putting too much effort into pleasing them can make a candidate unelectable.
Bush shows signs of skipping Iowa, but then he would “have to” win New Hampshire.
Bush’s interest in running was enough to convince Mitt Romney, who lost the 2012 election to Barack Obama, not to try a third time.
But even the supposedly formidable Bush name was not enough to convince younger, scrappier candidates to step aside.
Ambitious young pols like Florida Senator Marco Rubio and Wisconsin Governor Scott Walker currently are viewed as Bush’s strongest rivals, but both will be facing increased scrutiny and testing.
Rand Paul enjoyed a period of buzz, but that seems to have faded, as his dovish brand of libertarianism clashes with a party that leans toward social conservatism and interventionism abroad.
I seem to have been one of the few journalists who from the outset didn’t think that Donald Trump’s entry into the presidential race was funny.
Trump is not remotely qualified to be president, but he is no joke.
And, sure enough, even in his announcement speech, he demonstrated his ability to appeal to Americas’ dark side.
Trump’s offensive comments about immigrants from Mexico – “They’re bringing drugs.
They’re bringing crime.
They’re rapists.
And some, I assume, are good people.” – sent his popularity soaring, to the mortification of many Republican leaders.
Those leaders have good reason to be panicked by Trump's rise: They know that if they can’t find a way to attract more Hispanic voters than Romney did in 2012, they will have a poor chance of winning the presidency.
Trump’s comments may have cost him some of his commercial ties, but anyone who thinks he doesn’t know what he’s doing should think again.
No one knows right now whether Trump will flame out or prove to have staying power, but one thing is clear: he is not the only one injecting strangeness into the nomination contest.
One of the more bizarre aspects of this election is the success of Ben Carson, a retired neurosurgeon and political neophyte.
His extreme views on homosexuality – he has likened it to bestiality and claimed that spending time in prison makes people gay – has resonated with a swath of the Republican electorate, making him a real contender in Iowa.
The 2016 presidential election campaign not only has more candidates than ever; it also has the highest proportion in memory who are flat-out unqualified for the job.
And some of them are doing very well at this point.
Foreign Policy and America’s Presidential Campaign
NEW YORK – It is impossible to know whom American voters will choose as their next president.
But it is certain that the choice will have profound consequences, for better and for worse, for the entire world.
More than anything else, this reflects the continuing reality of American power.
It also reflects the near-certainty that the next president will inherit a world in considerable turmoil.
What he or she chooses to do, and how he or she chooses to do it, will matter a great deal to people everywhere.
That said, it is difficult to know what role foreign policy will play in determining who will next occupy the Oval Office.
The 2016 election is still 17 months away.
A lot can, and will, happen between now and then.
Two related but distinct political processes – the Democratic and Republican parties’ nominating contests – will play out over the next year.
Former Secretary of State Hillary Clinton is the Democratic frontrunner, though her nomination is not a foregone conclusion.
In any case, foreign policy probably will play little role in the decision, as the issues that most concern voters likely to participate in the Democratic primary elections are domestic and economic in nature.
The Republican side is far more crowded and uncertain, and it seems far likelier that foreign policy will play a large role in choosing the party’s nominee.
The economy is improving under President Barack Obama, making it a less attractive political target.
Global turbulence, by contrast, has given the Republicans more room to attack Obama and the Democrats.
Nonetheless, a few foreign-policy issues will dominate the conversation in both parties.
One is trade, which is both a domestic and international matter.
Obama is seeking Trade Promotion Authority, a necessary prelude to gaining congressional support for the Trans-Pacific Partnership, which would reduce barriers between the US and 11 other Pacific Rim countries.
Many – but not all – of the Republican candidates back the TPP; the politics on the Democratic side is more hostile to the deal, making it potentially risky for any Democratic candidate to support it.
A second issue certain to dominate both parties’ nominating debates is Iran and the international negotiations to contain its nuclear program.
One can expect many of the Republican candidates to be critical of any proposed deal.
Questions will be raised about which sanctions are to be eased and when; about the terms of compliance inspections; and about what will happen once some of the limits on Iran’s nuclear activities expire.
Democratic candidates are more likely to be sympathetic to whatever is negotiated; but there are certain to be differences among candidates on both sides.
A third issue is climate change.
Pope Francis will boost the issue’s salience when he releases a major statement on it next week.
Likewise, planning for the United Nations Climate Change Conference in Paris in December will keep the issue in the news.
Democrats will be more supportive of more far-reaching US commitments, although, again, differences of view will emerge on both sides.
A fourth cluster of issues involves the Middle East.
There is little appetite on either side for large-scale military intervention in Iraq and Syria to counter the Islamic State.
But there will be heated debate – and considerable posturing – over what should and should not be done.
Then there are all the other issues, from Chinese assertiveness in Asia to Russian revanchism in Ukraine.
The rhetoric, especially on the Republican side, will be muscular.
One hopes that what emerges from the parties’ nominating processes is insight into how the successful candidates answer three big questions.
The first concerns how much importance, in absolute and relative terms, the nominee assigns to foreign policy.
If one thinks of national security as two sides of a coin, with foreign policy on one side and domestic policy on the other, how likely is each to land face up for the next president?
This is the classic “guns versus butter” debate over how resources, from dollars to presidential attention, should be allocated.
Second, what are the purposes and priorities of foreign policy?
The realist tradition in international relations focuses on influencing other countries’ foreign policies and places less emphasis on their internal affairs.
The main alternative tradition takes the opposite tack, arguing that other countries’ domestic affairs are what matter most, whether for reasons of morality and principle, or because it is believed that how a government behaves at home affects how it acts abroad.
According to this idealist view, countries that are democratic and treat their citizens with respect are more likely to treat other countries’ citizens with respect.
The problem, of course, is that affecting the trajectories of other societies is typically a difficult, long-term proposition; in the meantime, there are pressing global challenges that need to be addressed, sometimes with the assistance of unsavory regimes.
The last question concerns the nominees’ approach to the execution of foreign policy.
What will be their preferred mix of unilateralism and multilateralism, and which tools – from diplomacy and sanctions to intelligence operations and military force – will they reach for most often?
The answers to these questions should become clearer during the campaign.
Along the way, Americans will gain a better sense of whom to vote for, and people everywhere will develop a better sense of what to expect in January 2017, when the 45th US president takes the oath of office.
The Not-Ready-for-Prime-Time Republicans
WASHINGTON, DC – Shortly after America's Republican Party trounced the Democrats and gained control of the Senate in last November's midterm congressional elections, Mitch McConnell, the new Senate majority leader, appealed to his colleagues not to be “scary," but to be “positive" and effective.
This has proved very difficult.
McConnell's strategy is typically farsighted.
He knows that, if the Republicans are to win back the presidency in 2016, they must prove their ability to govern responsibly.
He also recognizes that the Republicans would otherwise find it much more difficult to hold onto the Senate in the next election, when more swing-state seats are in play.
And he is aware that public approval of Congress has fallen to the mid-teens – nearly an all-time low.
With this in mind, McConnell decided that continuing to block President Barack Obama's initiatives, as the Republicans had done during the previous six years, could no longer work.
So he promised that his party would try to compromise on a few issues, and offered an explicit pledge that there would be no government shutdowns like the highly unpopular one in 2013.
And he schemed to make Obama the “negative" one by regularly sending him bills that he would be forced to veto.
But the strategy has been tough to execute – partly because Congress' staunchest conservatives, such as Senator Ted Cruz of Texas and his Tea Party-affiliated allies, refuse to be tamed.
In fact, the Tea Party candidates who swept into Congress in 2010 campaigned on a pledge never to compromise – even, apparently, if it means opposing their own party members, such as House Speaker John Boehner, whom they view as too amenable to bipartisanship.
This refusal to compromise has put the Republican Party in a pickle.
Meanwhile, many Democrats view their new minority status as a source of relief, as it has removed the pressure to deliver results or obey their party's leaders.
Even Obama seems to feel liberated, proposing popular programs – for example, free tuition at two-year community colleges and a minimum-wage increase – that he knows the Republicans will reject, thereby upholding their reputation as the “party of no."
The ideological divide between Republicans and Democrats is deeper than ever.
The Republicans eschew anything that enhances the role of the federal government, unless they consider it to be essential to national security (the party of personal liberty supports warrantless wiretapping, for example).
The Democrats, by contrast, support a more active federal role in setting national standards and ensuring that the benefits of public programs are distributed fairly.
The Tea Party's rise exacerbated this split.
Though the movement's ranks have thinned somewhat, its adherents continue to exert considerable influence in Congress.
It has powerful and well-funded backers, including the billionaire brothers Charles and David Koch.
And, after some successful challenges by Tea Party members, Republican incumbents have moved steadily rightward.
Some Republican strategists say that even Ronald Reagan could not be nominated by today's Republicans.
To be sure, now that the Democrats are the minority in both congressional chambers, they have turned to tactics – like Senate filibusters and amendments that would be politically costly to oppose – previously favored by Republicans.
But the Democrats' efforts – say, to force a vote on an amendment designating climate change a human-induced phenomenon – pale in comparison to past Republican manipulations, such as the addition of anti-abortion provisions to entirely unrelated bills.
Despite the desire of party leaders to boost trust in a Republican-led government, many Republicans care little about the effect of their behavior on their party's prospects of winning back the White House.
Indeed, the party's agenda remains laden with proposals to reverse or overturn Obama's achievements.
In the new Congress' first couple of weeks, the House passed a bill scaling back the Dodd-Frank financial reform act.
Numerous proposals are pending to undo significant parts of the Patient Protection and Affordable Care Act, Obama's signature health-insurance program (if the Supreme Court does not do the job later this year).
Moreover, the Senate spent weeks on a bill to force Obama to approve the Keystone XL pipeline, a 1,179-mile conduit to carry oil from Canada's tar sands to the US for refinement and export.
Obama has, as promised, vetoed the bill, owing to the pipeline's adverse environmental implications.
Though it will be difficult to marshal the two-thirds House and Senate majorities needed to override a presidential veto, the Republicans will seek to capitalize politically by portraying Democrats who oppose the pipeline as effete elitists who do not care about jobs or national security.
But it is the House Republicans' move to overturn Obama's executive actions on immigration reform – which would shield as many as five million undocumented immigrants from deportation – that has turned into the biggest headache for party leaders.
They know that in 2016, the party will need more Hispanic votes than it received in 2012.
In this sense, the recent ruling by a federal judge in Texas halting the order's implementation – a decision that the Obama administration is appealing – does not help the Republicans, however joyous anti-immigration forces may be.
Likewise, House Republicans set a trap for their party last December, by demanding that funding of the Department of Homeland Security (DHS) be separated from legislation funding all other government agencies, so that the anti-immigration legislation could be attached to it.
But, as should have been expected, the Senate – which adopted a bipartisan immigration bill in 2013 – would not accept the anti-immigration baggage.
The Republicans' inability to control their House faction has exposed them to responsibility for a DHS shutdown at a time of increased terror threats.
To break the impasse, McConnell has proposed addressing the issues in separate bills.
In their first couple of months dominating Congress, the Republicans have passed no major legislation; taken largely negative positions; and may be about to impede the operation of a crucial government department.
This is exactly where McConnell and other national leaders did not want their party to be.
The Secret Corporate Takeover
NEW YORK – The United States and the world are engaged in a great debate about new trade agreements.
Such pacts used to be called “free-trade agreements”; in fact, they were managed trade agreements, tailored to corporate interests, largely in the US and the European Union.
Today, such deals are more often referred to as “partnerships,”as in the Trans-Pacific Partnership (TPP).
But they are not partnerships of equals: the US effectively dictates the terms.
Fortunately, America’s “partners” are becoming increasingly resistant.
It is not hard to see why.
These agreements go well beyond trade, governing investment and intellectual property as well, imposing fundamental changes to countries’ legal, judicial, and regulatory frameworks, without input or accountability through democratic institutions.
Perhaps the most invidious – and most dishonest – part of such agreements concerns investor protection.
Of course, investors have to be protected against the risk that rogue governments will seize their property.
But that is not what these provisions are about.
There have been very few expropriations in recent decades, and investors who want to protect themselves can buy insurance from the Multilateral Investment Guarantee Agency, a World Bank affiliate (the US and other governments provide similar insurance).
Nonetheless, the US is demanding such provisions in the TPP, even though many of its “partners” have property protections and judicial systems that are as good as its own.
The real intent of these provisions is to impede health, environmental, safety, and, yes, even financial regulations meant to protect America’s own economy and citizens.
Companies can sue governments for full compensation for any reduction in their future expected profits resulting from regulatory changes.
This is not just a theoretical possibility.
Philip Morris is suing Uruguay and Australia for requiring warning labels on cigarettes.
Admittedly, both countries went a little further than the US, mandating the inclusion of graphic images showing the consequences of cigarette smoking.
The labeling is working.
It is discouraging smoking.
So now Philip Morris is demanding to be compensated for lost profits.
In the future, if we discover that some other product causes health problems (think of asbestos), rather than facing lawsuits for the costs imposed on us, the manufacturer could sue governments for restraining them from killing more people.
The same thing could happen if our governments impose more stringent regulations to protect us from the impact of greenhouse-gas emissions.
When I chaired President Bill Clinton’s Council of Economic Advisers, anti-environmentalists tried to enact a similar provision, called “regulatory takings.”
They knew that once enacted, regulations would be brought to a halt, simply because government could not afford to pay the compensation.
Fortunately, we succeeded in beating back the initiative, both in the courts and in the US Congress.
But now the same groups are attempting an end run around democratic processes by inserting such provisions in trade bills, the contents of which are being kept largely secret from the public (but not from the corporations that are pushing for them).
It is only from leaks, and from talking to government officials who seem more committed to democratic processes, that we know what is happening.
Fundamental to America’s system of government is an impartial public judiciary, with legal standards built up over the decades, based on principles of transparency, precedent, and the opportunity to appeal unfavorable decisions.
All of this is being set aside, as the new agreements call for private, non-transparent, and very expensive arbitration.
Moreover, this arrangement is often rife with conflicts of interest; for example, arbitrators may be a “judge” in one case and an advocate in a related case.
The proceedings are so expensive that Uruguay has had to turn to Michael Bloomberg and other wealthy Americans committed to health to defend itself against Philip Morris.
And, though corporations can bring suit, others cannot.
If there is a violation of other commitments – on labor and environmental standards, for example – citizens, unions, and civil-society groups have no recourse.
If there ever was a one-sided dispute-resolution mechanism that violates basic principles, this is it.
That is why I joined leading US legal experts, including from Harvard, Yale, and Berkeley, in writing a letter to congressional leaders explaining how damaging to our system of justice these agreements are.
American supporters of such agreements point out that the US has been sued only a few times so far, and has not lost a case.
Corporations, however, are just learning how to use these agreements to their advantage.
And high-priced corporate lawyers in the US, Europe, and Japan will likely outmatch the underpaid government lawyers attempting to defend the public interest.
Worse still, corporations in advanced countries can create subsidiaries in member countries through which to invest back home, and then sue, giving them a new channel to bloc regulations.
If there were a need for better property protection, and if this private, expensive dispute-resolution mechanism were superior to a public judiciary, we should be changing the law not just for well-heeled foreign companies, but also for our own citizens and small businesses.
But there has been no suggestion that this is the case.
Rules and regulations determine the kind of economy and society in which people live.
They affect relative bargaining power, with important implications for inequality, a growing problem around the world.
The question is whether we should allow rich corporations to use provisions hidden in so-called trade agreements to dictate how we will live in the twenty-first century.
I hope citizens in the US, Europe, and the Pacific answer with a resounding no.
America’s Education Bubble
SAN FRANCISCO – One of the fundamental purposes of government is to advance important public goods.
But, if not handled carefully, the pursuit of significant social goals can have unfortunate economic and financial consequences, sometimes even leading to systemic disruptions that undermine more than just the goals themselves.
This happened a decade ago in the United States, with the effort to expand home ownership.
It has been playing out more recently in China, following an initiative to broaden stock-market participation.
And it could happen again in the US, this time as the result of an attempt to improve access to funding for higher education.
In the first case, the US government eagerly supported efforts to make mortgages more affordable and accessible, including the creation of all sorts of “exotic” lending vehicles.
The approach worked, but a little too well.
The surge in debt-enabled demand drove up real-estate prices, while banks’ greater willingness to lend led many people to purchase homes they couldn’t afford.
The collapse of the subsequent bubble – a major contributor to the 2008 global financial crisis – nearly tipped the world economy into a multi-year depression.
In China’s case, the government hoped that broader stock-market participation – achieved through efforts to bolster equity prices and promote lending for investment – would make citizens more open to pro-market reforms.
Again, the approach proved too effective, and a bubble formed.
Now, the government is trying to counter the risk of a disorderly deleveraging that would damage the Chinese economy and produce significant knock-on effects for the rest of the world.
America’s effort to expand access to student loans – a fundamentally good initiative, aimed at enabling more people to pursue higher education – carries similar risks.
Fortunately, there is still time to do something about it.
No one doubts that investment in education is vital.
Numerous studies have shown major returns for individuals and societies alike.
Higher levels of educational attainment improve overall economic wellbeing and prosperity, lower retirement burdens, and enhance social mobility and satisfaction.
The unemployment rate for college graduates in the US, at 2.5%, is roughly one-third the rate for those without a high school diploma.
What policymakers must determine is how to invest in education in ways that maximize these benefits, without creating new risks.
This is where the US risks falling short.
Over the last ten years, the combination of higher tuition fees, more student enrollment, and greater reliance on loans has caused the stock of outstanding student debt nearly to triple.
It now stands at well over $1.2 trillion, more than 60% of which is held by the bottom quartile of households (those with a net worth of less than $8,500).
Today, seven out of ten post-secondary students graduate with debt, with the total volume exceeding debt from credit cards and auto loans combined.
Moreover, student loans constitute 45% of federally owned financial assets.
Making matters worse, the return on investment in education is falling, because the economy is growing slowly and changing rapidly, making it difficult for some graduates to secure employment that takes advantage of their knowledge and skills.
Universities are often slow to adapt their curricula to the economy’s needs, while new technologies and business models are exacerbating the winner-take-all phenomenon.
If the return on investment in education continues to decline, the servicing of student loans will tend to crowd out other consumption and investment outlays, especially given that student debt has considerable seniority in the capital structure.
In this scenario, the risks of default and delinquency would rise, along with financial insecurity and general instability, all of which would exacerbate the inequality trifecta (income, wealth, and opportunity).
The good news is that, though some 10% of borrowers already face repayment problems, the macroeconomic and financial tipping points remain some way off.
But this is no excuse for complacency; it merely provides time for a concerted effort to implement measures that will ameliorate the destructive trends stemming from student loans.
First and foremost, US politicians need to take full responsibility for economic governance, seeking not only to boost growth, but also to avert a reduction in long-term growth potential.
After depending on unconventional monetary policy for far too long, the US Congress needs to adopt a more comprehensive approach, with measures aimed at improving worker training and retooling, modernizing education curricula, and incorporating transformational technologies more effectively into the economy.
Increased infrastructure investment, better corporate-tax policies, and an updated budgetary approach are also needed.
For their part, universities – which have benefited considerably from the wide availability of student loans – should rein in their costs, while offering more direct financial aid funded through philanthropy.
Some universities have already adopted “no loan” policies; students’ demonstrated financial need is met entirely with grants financed by the university and other donors.
Not all universities need to go this far – and most can’t, because they lack large enough endowments to cover the costs.
But a broader move in the direction of non-debt financing of higher education is needed.
Efforts could also be made to encourage households to save more, starting earlier, for education.
Student loan disclosures should be made more transparent, thereby enabling applicants to make responsible decisions, with lower-cost two-year community colleges serving as a useful stepping stone to a traditional college education.
And more could be done to expand income-based repayment schemes.
None of these measures will be easy.
But if implementation continues to lag behind realities on the ground, the challenges will be far greater down the road.
As borrowers’ growing debt burdens limit their financial flexibility and productive contribution to the economy, the policy emphasis will shift from mitigating future risks to reducing indebtedness directly through loan forgiveness and bailouts.
That would raise thorny issues of fairness and misaligned incentives, and could ultimately have the perverse effect of reducing educational access.
Securing the Internet Commons
WASHINGTON, DC – Ever since Edward Snowden’s revelations about the National Security Agency’s spying on citizens and leaders around the world, a debate has raged in the United States about the proper balance between national security and individual privacy and liberty.
Most recently that debate has focused on encryption: whether technology companies should be able to develop programs that encrypt their users’ messages so securely that no one but their intended recipients – not even governments – can read them.
It is a debate to which governments and citizens everywhere should pay attention.
Not surprisingly, the US government’s national security officials oppose full encryption by American technology companies, arguing that the country will be less safe if the proper authorities have no “backdoor” – a piece of code that lets them in.
Software engineers call backdoors “vulnerabilities,” deliberate efforts to weaken security.
They regard a request for backdoors the same way an automobile manufacturer would view a request for a defective engine.
A large coalition of technology companies and civil-society organizations recently sent a letter to President Barack Obama arguing against backdoors.
In addition to “undermining every American’s cyber security and the nation’s economic security,” the signers argued, “introducing new vulnerabilities to weaken encrypted products in the US would also undermine human rights and information security around the globe.”
What supporters of encryption recognize is that “if American companies maintain the ability to unlock their customers’ data and devices on request, governments other than the United States will demand the same access, and will also be emboldened to demand the same capability from their native companies.”
The US government will not be able to object, given its own policies.
The result “will be an information environment riddled with vulnerabilities that could be exploited by even the most repressive or dangerous regimes.”
What is at stake is nothing less than the health of the “global digital ecosystem.”
The technology corporations that signed this letter understand that while they may be incorporated in the US, they are global players and have global responsibilities.
They also understand, in a more self-interested vein, that if foreign consumers believe that using American social media and search engines exposes them to the scrutiny of US intelligence agencies, those consumers will turn to other providers.
The response of many foreign governments has been to focus on how to ensure and protect their “technological sovereignty.”
Information may transcend borders, but servers and cables still have physical locations.
The Open Technology Institute at New America (which I head) is collaborating with the German Global Public Policy Institute (GPPI) on a series of transatlantic dialogues about “security and freedom in the Digital Age.”
An initial report identifies 18 proposals from more than a dozen European governments on subjects including new undersea cables, encryption, localized data storage, domestic industry support, international codes of conduct, and data protection laws.
Many of these proposals will not actually achieve their goals.
But the most important issues to sort out are less about feasibility than about desirability, from both a national and a global perspective.
As with US companies, it is important to differentiate among corporate, economic, and public interests at the national and global levels.
Citizens from around the world have a stake in getting this right.
For starters, digital protectionism should be as suspect as any other form of protectionism, albeit with exceptions for health, safety, and social solidarity. “Technological sovereignty” can easily be a pretext for insisting that citizens buy only homegrown tech products.
Moreover, rules should be formulated globally and implemented nationally.
The Internet is essentially a country with both state and non-state actors as its citizens.
It is our task to ensure that it is a free, open, and universally accessible country that advances and safeguards universal human rights.
Principle 1 requires that policymakers “promote and protect the global free flow of information”; Principle 2 insists on promotion of “the open, distributed, and interconnected nature of the Internet”;
Principle 8 mandates “transparency, fair process, and accountability” across the Internet; Principle 11 promotes “creativity and innovation”; and Principle 13 “encourage[s] cooperation to promote Internet security.”
Other countries and regional organizations have come up with similar guidance.
The point is less the specific wording or even content than the recognition that such principles are necessary for policymakers around the world.
From this perspective, it is not clear whether “technological sovereignty” is a helpful or harmful concept.
It makes digital space sound like airspace or territorial seas, something that is somehow derived from or adjacent to physical territory.
The New America-GPPI report is entitled “Technological Sovereignty: Missing the Point?”
The authors conclude that “data privacy and security depend primarily not on where data is physically stored or sent, but on how it is stored and transmitted.”
For data purposes, at least, we are in a post-territorial age.
Decoupling sovereignty from territory is hard to do, particularly after Snowden showed the world just how far one country’s technological tentacles can reach.
Still, the larger lesson is that differentiating between national security and global security in the digital world may be both impossible and deeply counter-productive.
We need new maps and mindsets and new coalitions of business, civic activists, and all those who understand that national security must include the protection of privacy and freedom of expression.
And we need new ways to engage both governments and citizens in a new, exhilarating, dangerous, and still largely unexplored world.
Pakistan’s Winnable War on Polio
LAHORE – I grew up in Pakistan throughout the 1980’s and 1990’s, and my parents, like parents everywhere, wanted me to be fit and healthy and to get the best start in life.
I was lucky enough to be brought up in a middle-class family with good sanitation facilities and clean water.
I was also given vaccines to prevent life-threatening infections such as polio and measles.
But I remember the many children in my neighborhood who were not vaccinated.
Those early experiences of children I knew contracting disease, especially the poliovirus that is so visibly impairing, shaped my views on the immense value of good health and the power of vaccines.
I live in London now, but my roots will always be in Pakistan.
As head of the British Pakistan Foundation, I help philanthropists from the Pakistani diaspora invest in sustainable and effective social development projects.
Over the last few weeks, I have been in my hometown of Lahore, the country’s second-largest city, discussing everything from the upcoming elections to everyday life challenges.
Last week, I visited an orphanage on the outskirts of the city, set up after the 2005 earthquake that killed an estimated 75,000 people.
I was impressed and encouraged that roughly four-fifths of the 85 children were fully vaccinated.
National statistics on immunization back up the positive signs that I saw.
In 1994, Pakistan had roughly 25,000 cases of polio, many resulting in death or permanent disability.
But, thanks to intensive vaccination campaigns, there were only 58 cases of polio in the entire country last year – down 70% from 2011.
And the government and international health officials have agreed on a plan to stop polio transmission in Pakistan completely by the end of 2014 – a historic accomplishment that would be a huge source of national pride.
The main driver of Pakistan’s dramatic reduction in polio cases over the last two decades has been leadership at all levels.
In 1994, Prime Minister Benazir Bhutto launched the first national vaccination drive by inoculating her baby daughter, Aseefa.
Nineteen years later, Aseefa is Pakistan’s Goodwill Ambassador on Polio Eradication and a powerful advocate of completing her mother’s dream of a polio-free country.
International public-private partnerships and an army of vaccinators are working on the frontlines to protect every last child.
Collectively, we are helping children and communities once considered unreachable.
With the recent progress on polio, Pakistan has a blueprint for future public-health interventions.
In fact, we are already seeing the new framework take shape.
For example, vitamin A drops – which provide infants with an essential micronutrient for vision and healthy growth – are now delivered twice yearly in conjunction with polio vaccines.
Moreover, last year Pakistan became the first country in the region to introduce the latest vaccine to protect children against pneumonia.
With pneumonia accounting for a shockingly high 20% of child deaths each year in Pakistan, widespread access to the new vaccine should have a major impact.
Major challenges remain.
According to UNICEF, Pakistan has the second-highest rate of child mortality in South Asia.
There is an important debate taking place in our country about how best to organize the health-care system so that it is accountable for serving the poorest and most marginalized communities.
The size of the challenges that we face was made clear at the beginning of this year, when a measles outbreak killed more than 300 children in Pakistan – most of whom had not received vaccines.
Just this month, we learned the tragic news that a guard accompanying health workers was killed during an immunization drive.
But we will not be deterred.
Those who advocate violence are a minority in Pakistan, and will not stand in the way of our people’s betterment.
With the upcoming elections, we have a valuable opportunity to reaffirm our commitment to vaccines by strengthening national leadership on health and increasing investment in the health-care system.
And, as I heard from the guardians at the orphanage, educating communities about the value of vaccines and mobilizing their support is critical for reaching every last child.
The cooperation of the Pakistani diaspora movement and international donors like the Islamic Development Bank (which in March signed a financing package of $227 million to fight polio in Pakistan), together with the vaccinators’ determination to reach all of the country’s children, is inspirational.
It is also changing lives for the better.
With continued support for vital vaccines from Pakistan’s government and people, I am hopeful that the next time I return home, there will be even more reasons to be optimistic about our children’s future.
Vaccination’s Lifetime of Blessings
CAPE TOWN – A world in which our children and their children grow up free from the threat of polio and other preventable diseases is a dream that everyone shares.
But, unlike most dreams, this one is achievable.
Over my lifetime, I have been fortunate to witness the extraordinary impact that vaccines have had on protecting children from illness and death – especially in the developing world.
Vaccines have always had a special meaning for me.
As a young child in South Africa, I nearly died from polio.
Back then – in the early 1930’s – there was no vaccine for this highly infectious disease.
With good reason, parents everywhere were terrified that poliovirus would reach their doorstep – like a plague – striking a child and causing irreversible paralysis in a matter of hours, or, worse, death in a matter of days.
The doctors told my parents that little could be done for me, so my father prepared for my funeral.
Fortunately, I recovered, except for the use of my right hand.
I have gone on to live a wonderful life, but the paralysis in my hand is a daily reminder of why we must urgently pursue the eradication of polio and ensure that all children have access to the vaccines that they need.
Just a quarter-century ago, polio was endemic in 125 countries – and paralyzed more than 1,000 children every day.
Today, we have the fewest cases of polio, in fewer countries, than ever before.
Last year, India – once thought to be the most difficult place to stop polio – was declared polio-free.
In the remaining three countries where polio has not yet been eliminated – Pakistan, Afghanistan, and Nigeria – there were just 223 reported cases in 2012.
This makes me optimistic that I will live to celebrate the day when this dreaded disease is stamped out forever.
The remarkable progress that we have made so far is the result of a sustained global effort, supported by significant resources committed by donor and affected countries, millions of dedicated health workers, and sustained political will to get the job done.
But we must finish what we have started.
Until the polio virus is eradicated everywhere, no country is safe from reinfection.
At the same time, we must make the most of scientific advances over the last half-century, which have made vaccines for other preventable diseases the most powerful and cost-effective health-care investment that currently exists.
Vaccines are inexpensive and easy to deliver, and they protect children for a lifetime.
Vaccines have already eradicated smallpox, and dramatically reduced child deaths and disease associated with measles, diphtheria, and tetanus.
Yet, sadly, a child still dies every 20 seconds from diseases like pneumonia, which can be prevented by a vaccine.
Most of them live in poor and remote communities that still lack access to the basic vaccines that are universally available in better-off countries.
This is one of the reasons why a child born in a high-income country is 18 times less likely than a child born in a low-income country to die before reaching the age of five.
Fortunately, the world is taking action.
This week in Abu Dhabi, Mohamed bin Zayed bin Sultan Al Nahyan, Crown Prince of Abu Dhabi – in partnership with United Nations Secretary-General Ban Ki-moon and Bill Gates – is hosting the world’s first global summit dedicated to ensuring that all children everywhere have access to the full benefits of vaccines.
The vaccine summit builds on a commitment last year by nearly 200 countries to eradicate polio, develop new and improved vaccines at affordable prices, and deliver them to every child by 2020.
Ending polio will be a key milestone on the path to realizing this vision.
And the summit in Abu Dhabi has provided a clear plan to get there by 2018 – a strategy that complements other efforts to raise immunization coverage for diseases such as measles, pneumonia, and rotavirus.
Strengthening routine immunization will protect our gains against polio and enable us to reach the most vulnerable children in the hardest-to-reach and most underserved communities.
Having grown up in a country where nearly one in four children infected with polio died from the disease, my heart soars when I imagine a world in which all families have access to lifesaving vaccines, freeing them from the burden of preventable death and disease.
Now we need funds, commitment, and the resolve to implement the plan presented in Abu Dhabi.
When it comes to the health of our children, there must be no distance between rich and poor, and no distinctions among communities.
Following through on polio eradication by extending the reach of vaccines to all children who need them is an opportunity for all of us to stand together on behalf of our global community.
We must do it.
And when we succeed, it will be a triumph for humanity.
Vaclav Havel: The Dissident in Power\n
The life of Vaclav Havel, who is stepping down as president of the Czech Republic, could serve as inspiration for one of Havel's own absurdist plays.
Born in 1936 into one of the wealthiest Czech families, Havel was one of the people persecuted because of their "wrong class origins" after the Communist takeover of 1948.
Havel defied his misfortune by establishing himself during the 1960s as one of Europe's leading playwrights, only to become a pariah again after the Soviet-led invasion of Czechoslovakia crushed the "Prague Spring" reform movement in 1968.
But he returned to lead his country's tiny dissident community.
Famous around the world for both his writings and his struggle against communism, he endured ceaseless harassment, including imprisonment for five years at the beginning of the 1980s.
In fact, he was just released from another term in prison when the "Velvet Revolution" of November 1989 catapulted him into the presidency.
It is impossible to separate Havel the playwright from Havel the dissident or Havel the political leader.
His earliest plays were political, ridiculing the wooden locutions of communist rhetoric.
Even during the liberal Prague Spring, Havel remained a dissenter, never accepting the idea of "socialism with a human face," arguing instead that real democracy was the only alternative to communism.
Later, as a dissident, Havel continued writing and became a politician of sorts as the unofficial leader of the anti-communist opposition.
Later still, he became the leader of that opposition at its moment of triumph.
A dissident as president is bound to be unorthodox.
Havel continued writing, changing his genre from plays and essays to speeches, most of which are, in fact, philosophical writings.
Indeed, he regularly put forth ideas- on the dangers of globalization, on the need for global responsibility, on his vision of Europe as a federation of states and regions- before other political leaders dared to do so.
At home, he exasperated party politicians by preaching the need for morality in politics or by warning against excessive partisanship.
He repeatedly spoke of building a robust civil society, arguing that political parties will degenerate into sects if they are closed to influence from below.
Although Havel refuses to describe himself in terms of left and right, he is more a communitarian than a classical liberal, and certainly more leftist than rightist.
He emphasized that a democratic system cannot be based only on institutions and mechanisms, such as the checks and balances between the executive, the legislature, and the judiciary; democracy needs more than political parties and free elections.
For Havel, democracy without true democrats is impossible.
Only a civil society, in which active citizens are freely engaged in public life and show altruism and solidarity with others, can keep democracy vital.
To quote Havel's close friend, the Catholic priest and philosopher Tomas Halik (whom Havel once proposed as his successor), democracy without civil society is like a body without blood circulation.
Perhaps a person as original and unorthodox as Havel only becomes a political leader in revolutionary times.
Revolutions demand moral clarity and unshakeable conviction.
But elevation to the heights of power in this way has its costs.
Because Havel did not go through the usual party schools of political training, he often felt that he need not respect the rules of the political game, and he often showed contempt for the compromises and moral short cuts practiced by politicians.
While he was seen abroad through the prism of his heroism and his philosophical speeches, at home Havel was often perceived as being deeply engaged in the political scrum.
His critics argue that he developed a taste for intrigue and used behind-the-scenes maneuvering to achieve his aims.
Others accused him of pursuing "non-political politics"- a concept of democracy whose protagonists wish to do away with political parties entirely and replace them with the more nebulous and perhaps more easily manipulated "civil society."
But Havel was drawn into everyday politics because the Czech constitution gave him no choice.
He had to appoint officials, select prime ministers after parliamentary elections, award state decorations, and make speeches.
True, he provoked party bosses by his often unorthodox approach.
But given the partisanship and intense provincialism of the Czech Republic, any president who bucks the system and is as cosmopolitan as Havel would face difficulties.
Perhaps Havel's biggest failure was that he did not grasp as quickly as others, including his main political rival, Vaclav Klaus, that Czechoslovakia as a federal state of two nations was doomed after 1989.
The Slovaks, who had not experienced their own state and felt patronized by the Czechs, gradually eroded the common state.
Klaus, who thought that the economically less successful Slovakia was holding the Czechs back, did not object.
Havel, however, believed until the last moment that the common state could be saved.
As a result, many Slovaks saw him as condescending toward them, of failing to understand their national aspirations.
In July 1992, Slovak lawmakers blocked his reelection as Czechoslovak president.
But Havel's domestic failures were more than offset by his foreign policy contributions: persuading America and Western Europe to enlarge NATO -an organization which, prior to 1989, he thought should be abolished, and advocating Czech membership in the European Union.
Above all, Havel used his international prestige to give the Czech Republic a positive image, one which the country- plagued by many post-communist ills- perhaps did not fully deserve.
Partly owing to Havel, the Czech Republic is now a standard democratic country whose fate does not depend on one politician.
But without Havel, the Czechs may well find that they no longer receive the same warm reception in the international arena.
In Defense of Varoufakis
LONDON – From blaming him for the renewed collapse of the Greek economy to accusing him of illegally plotting Greece’s exit from the eurozone, it has become fashionable to disparage Yanis Varoufakis, the country’s former finance minister.
While I have never met or spoken to him, I believe that he is getting a bad rap (and increasingly so).
In the process, attention is being diverted away from the issues that are central to Greece’s ability to recover and prosper – whether it stays in the eurozone or decides to leave.
That is why it is important to take note of the ideas that Varoufakis continues to espouse.
Greeks and others may fault him for pursuing his agenda with too little politesse while in office.
But the essence of that agenda was – and remains – largely correct.
Following an impressive election victory by his Syriza party in January, Greece’s prime minister, Alexis Tsipras, appointed Varoufakis to lead the delicate negotiations with the country’s creditors.
His mandate was to recast the relationship in two important ways: render its terms more amenable to economic growth and job creation; and restore balance and dignity to the treatment of Greece by its European partners and the International Monetary Fund.
These objectives reflected Greece’s frustrating and disappointing experience under two previous bailout packages administered by “the institutions” (the European Commission, the European Central Bank, and the IMF).
In pursuing them, Varoufakis felt empowered by the scale of Syriza’s electoral win and compelled by economic logic to press three issues that many economists believe must be addressed if sustained growth is to be restored: less and more intelligent austerity; structural reforms that better meet social objectives; and debt reduction.
These issues remain as relevant today, with Varoufakis out of government, as they were when he was tirelessly advocating for them during visits to European capitals and in tense late-night negotiations in Brussels.
Indeed, many observers view the agreement on a third bailout program that Greece reached with its creditors – barely a week after Varoufakis resigned – as simply more of the same.
At best, the deal will bring a respite – one that is likely to prove both short and shallow.
In part, the criticism of Varoufakis reflects less the substance of his proposals than the manner in which he approached his interlocutors.
Eschewing the traditional duality of frank private discussions and restrained public commentary, he aggressively advocated his case openly and bluntly, and did so in an increasingly personal manner.
Whether deemed naive or belligerent, this approach undeniably upset and angered European politicians.
Rather than modifying a policy framework that had failed for five years to deliver on its stated objectives, they dug in their heels, eventually resorting to the economic equivalent of gunboat diplomacy.
And they evidently also made it clear to Varoufakis’s boss, Tsipras, that the future of negotiations depended on him casting aside his unconventional minister – which he did, first by assigning someone else to lead the negotiations and then by appointing a new finance minister altogether.
Now that he is out of office, Varoufakis is being blamed for much more than failing to adapt his approach to political reality.
Some hold him responsible for the renewed collapse of the Greek economy, the unprecedented shuttering of the banking system, and the imposition of stifling capital controls.
Others are calling for criminal investigations, characterizing the work he led on a Plan B (whereby Greece would introduce a new payments system either in parallel or instead of the euro) as tantamount to treason.
But, love him or hate him (and, it seems, very few people who have encountered him feel indifferent), Varoufakis was never the arbiter of Greece’s fate.
Yes, he should have adopted a more conciliatory style and shown greater appreciation for the norms of European negotiations; and, yes, he overestimated Greece’s bargaining power, wrongly assuming that pressing the threat of Grexit would compel his European partners to reconsider their long-entrenched positions.
But, relative to the macro situation, these are minor issues.
Varoufakis had no control over the economic mess that Syriza inherited when it came to power, including an unemployment rate hovering around 25% and youth joblessness that had been running at more than 50% for a considerable period.
He could not influence in any meaningful manner the national narratives that had sunk deep roots in other European countries and thus undermined those countries’ ability to adapt.
He could not counter the view among some of the region’s politicians that success for Syriza would embolden and strengthen other non-traditional parties around Europe.
It also would have been irresponsible for Varoufakis not to work behind closed doors on a Plan B. After all, Greece’s eurozone destiny largely was – and remains – in the hands of others (particularly Germany, the ECB, and the IMF).
And it is yet to be established whether Varoufakis broke any laws in the way he and his colleagues worked on their contingency plan.
When push came to shove, Varoufakis faced the difficult choice of going along with more of the same, despite knowing that it would fail, or trying to pivot to a new approach.
He bravely opted for the latter.
While his brash style undermined outcomes, it would be a real tragedy to lose sight of his arguments (which have been made by many others as well).
If Greece is to have any realistic chance of long-term economic recovery and meeting its citizens’ legitimate aspirations, policymakers must recast the country’s austerity program, couple pro-growth reforms with greater social justice, and secure additional debt relief.
And if Greece is to remain in the eurozone (still a big if, even after the latest agreement), it must not only earn its peers’ respect; it must be treated with greater respect by them as well.
European Universities’ Identity Crisis
MADRID – Higher education in Europe today finds itself in a state of profound uncertainty.
What should universities’ primary focus be – research, professional training, or social inclusion?
Should governments invest more in higher education to underpin long-term economic growth?
Should universities be left alone to compete and survive (or not) in a global education marketplace?
Amid the debates about their future role, Europe’s universities must not lose sight of their individual identity, their traditions, and their sense of social purpose.
This will not be easy.
University administrators face pressures from above – European institutions and national governments – and from their own researchers, teachers, and students.
Moreover, the parameters of the debate are becoming hazy.
On one hand, universities are abiding by long-standing agreements with government; on the other, they face zealous reformers who seek market-based solutions that stress competition among institutions, encourage staff and student mobility, and emphasize student-centered learning.
Obviously, these outlooks generate very different implications for universities’ future.
Traditionally, universities undertook research, provided a professional education, and offered a country’s young people a cultural foundation as they entered society.
Today, none of these aims appears secure.
Indeed, the gravest danger to Europe’s universities is a prolonged period of confusion about their ultimate aims.
Seeking truth through observation, experimentation, rational argument, and mutual criticism has always been a raison d’être of universities.
Reflecting this, some European institutions are encouraged by government to try to match the research excellence attained by top universities in the United States.
But not all of Europe’s universities regard themselves primarily as research institutions.
Many prefer to focus on preparing their students for the world of work.
However, the skills that are now required outside academia are changing so rapidly that universities may struggle to marry the generic cognitive skills taught in the classroom – such as critical thinking, analytical reasoning, problem solving, and writing – with the professional expertise that is increasingly acquired in the workplace.
And if years of schooling do not translate into greater cognitive skills, then much of the economic justification for investing in higher education falls apart.
Universities have also had a public-service mission: to provide students with a cultural foundation for life.
This purpose may seem increasingly controversial in pluralistic Western societies, but universities should at least provide their students with an understanding of the models, history, and philosophical fundamentals with which to debate these issues.
Without a reasonable awareness of their socio-cultural environment, students may view universities merely as a place to pursue private goals, make useful connections, enjoy student life, and perhaps pick up a superficial sense of diversity.
Whichever path Europe’s universities take, maintaining a distinct identity in the face of global change and education reform will become increasingly difficult.
Researchers are no longer confined within their ivory towers, but work as part of complex global networks alongside private-sector participants.
Tenured professors, once central to the life and image of a college, are being replaced by part-time teachers who lack a strong connection to their institution.
Likewise, in the emerging conception of universities – one that draws heavily from the corporate world – educational “managers,” applying “best practices” (and always ready to move on to the next posting) – retain the most cursory regard for the institution’s life and traditions.
And students, seen as mere consumers of a service, are invited to exercise choice regarding teachers, curricula, and location.
Some may find these changes exciting.
But their purpose will be lost if pursuing them weakens the very identity of Europe’s universities, many of which are used to functioning in a world of state patronage and strict regulation.
Policymakers must be aware of the educational and cultural damage that continuous reforms – all justified in the future-oriented jargon of the day – can wreak.
Universities must protect their institutional memories, local traditions, and commitment to each new generation of students.
A loyal and grateful alumni network can help to ensure this.
The alternative is a formulaic educational experience that not only lacks individual character, but that is also devoid of moral purpose.
Veiled Sexuality
NEW YORK –A woman swathed in black to her ankles, wearing a headscarf or a full chador , walks down a European or North American street, surrounded by other women in halter tops, miniskirts and short shorts.
She passes under immense billboards on which other women swoon in sexual ecstasy, cavort in lingerie or simply stretch out languorously, almost fully naked.
Could this image be any more iconic of the discomfort the West has with the social mores of Islam, and vice versa?
Ideological battles are often waged with women’s bodies as their emblems, and Western Islamophobia is no exception.
When France banned headscarves in schools, it used the hijab as a proxy for Western values in general, including the appropriate status of women.
When Americans were being prepared for the invasion of Afghanistan, the Taliban were demonized for denying cosmetics and hair color to women; when the Taliban were overthrown, Western writers often noted that women had taken off their scarves.
But are we in the West radically misinterpreting Muslim sexual mores, particularly the meaning to many Muslim women of being veiled or wearing the chador ?
And are we blind to our own markers of the oppression and control of women?
The West interprets veiling as repression of women and suppression of their sexuality.
But when I traveled in Muslim countries and was invited to join a discussion in women-only settings within Muslim homes, I learned that Muslim attitudes toward women’s appearance and sexuality are not rooted in repression, but in a strong sense of public versus private, of what is due to God and what is due to one’s husband.
It is not that Islam suppresses sexuality, but that it embodies a strongly developed sense of its appropriate channeling – toward marriage, the bonds that sustain family life, and the attachment that secures a home.
Outside the walls of the typical Muslim households that I visited in Morocco, Jordan, and Egypt, all was demureness and propriety.
But inside, women were as interested in allure, seduction, and pleasure as women anywhere in the world.
At home, in the context of marital intimacy, Victoria’s Secret, elegant fashion, and skin care lotions abounded.
The bridal videos that I was shown, with the sensuous dancing that the bride learns as part of what makes her a wonderful wife, and which she proudly displays for her bridegroom, suggested that sensuality was not alien to Muslim women.
Rather, pleasure and sexuality, both male and female, should not be displayed promiscuously – and possibly destructively – for all to see.
Indeed, many Muslim women I spoke with did not feel at all subjugated by the chador or the headscarf.
On the contrary, they felt liberated from what they experienced as the intrusive, commodifying, basely sexualizing Western gaze.
Many women said something like this: “When I wear Western clothes, men stare at me, objectify me, or I am always measuring myself against the standards of models in magazines, which are hard to live up to – and even harder as you get older, not to mention how tiring it can be to be on display all the time.
When I wear my headscarf or chador , people relate to me as an individual, not an object;
I feel respected.” This may not be expressed in a traditional Western feminist set of images, but it is a recognizably Western feminist set of feelings.
I experienced it myself. I put on a shalwar kameez and a headscarf in Morocco for a trip to the bazaar.
Yes, some of the warmth I encountered was probably from the novelty of seeing a Westerner so clothed; but, as I moved about the market – the curve of my breasts covered, the shape of my legs obscured, my long hair not flying about me – I felt a novel sense of calm and serenity.
I felt, yes, in certain ways, free.
Nor are Muslim women alone.
The Western Christian tradition portrays all sexuality, even married sexuality, as sinful.
Islam and Judaism never had that same kind of mind-body split.
So, in both cultures, sexuality channeled into marriage and family life is seen as a source of great blessing, sanctioned by God.
This may explain why both Muslim and orthodox Jewish women not only describe a sense of being liberated by their modest clothing and covered hair, but also express much higher levels of sensual joy in their married lives than is common in the West.
When sexuality is kept private and directed in ways seen as sacred – and when one’s husband isn’t seeing his wife (or other women) half-naked all day long – one can feel great power and intensity when the headscarf or the chador comes off in the sanctity of the home.
Among healthy young men in the West, who grow up on pornography and sexual imagery on every street corner, reduced libido is a growing epidemic, so it is easy to imagine the power that sexuality can still carry in a more modest culture.
And it is worth understanding the positive experiences that women – and men – can have in cultures where sexuality is more conservatively directed.
I do not mean to dismiss the many women leaders in the Muslim world who regard veiling as a means of controlling women.
Choice is everything.
But Westerners should recognize that when a woman in France or Britain chooses a veil, it is not necessarily a sign of her repression.
And, more importantly, when you choose your own miniskirt and halter top – in a Western culture in which women are not so free to age, to be respected as mothers, workers or spiritual beings, and to disregard Madison Avenue – it’s worth thinking in a more nuanced way about what female freedom really means.
Veils of Ignorance
France's decision to ban Muslim female students from wearing headscarves in public schools was made in the name of separation of State and Church, an old and querulous question in French history.
But passage of that law also revealed something else: how difficult it is for French people to deal with what Americans refer to as the minorities issue .
In fact, despite the two nations' seemingly radical differences, they share a similar habit of confusing poverty with something else.
In France, poverty is confused with religion; in America, poverty is confused with race.
Because so many of America's blacks are poor, many surveys show that Americans confuse poverty and blackness.
Asked "Why are they so poor?" two out of three Americans say that the root cause is laziness; only one in three believes that poor blacks have been unlucky.
(That ratio is reversed, however, if the same question is asked of Americans "who recently had dinner with a black friend.")
Americans, it appears, cover up the social issue of poverty with a racial one, and the result is that poor people are not considered as brothers in adversity.
In the US, because it is blacks who are perceived as making up most of the poor, there is less social intervention.
This is not the case - at least not yet - in Europe, where the majority, according to the same survey, believes that poor people are ordinary people who have been unlucky.
But Europe, especially France, seems to be "Americanizing" its conception of poverty, because a big gap now exists between the poverty levels of white people and minorities.
Whatever the education level, the French unemployment rate is two to three times higher among immigrants and their descendants than among the general population.
Surveys suggest that, at the same social level, young children from poor neighborhoods achieve as well at school as others.
Over time, however, social and family surroundings, and the limited resources of their families, begin to hold minority children back.
Inexorably, racial prejudice creeps in.
To be sure, Polish and Italian immigrants also endured victimization and discrimination before gaining acceptance by French society.
But this offers little comfort to newcomers today, in part because of the profound economic upheaval of recent decades.
The factory work that once provided both a lifelong career and a path to citizenship is fast disappearing, together with the opportunity of advancement that it gave to earlier immigrants.
In studies of the Paris suburb of Montbéliard (the French Detroit), the sociologists S. Beaud and M. Pialoux tracked underprivileged youth over a ten-year period.
Before employment increased in 1997, young people bounced from one training place to another.
With economic recovery in 1997 and high demand for workers, the situation changed.
Suddenly, two days of training became sufficient before starting real jobs; the failure rate was low.
Factories welcomed the young people of Montbéliard with hard work, but also with good paychecks.
Unfortunately, none of these young workers attained their dream: a long-term work contract.
Condemned to short contracts and temporary work, they lacked job security: since they were the last to be hired, they were the first to be let go at the next downturn.
The authors conclude that France's commitment to universal rights is belied by deepening discrimination against immigrants, "who have been ostracized and concentrated in bad schools, poor neighborhoods, positions without job security, and fake job training."
The ban on headscarves has become one more denial of the existence of a
Both issues may have something in common, but their logic is different.
Laws against genital mutilation are not enacted for the sake of secularism, but to protect the physical integrity of young women.
Banning the headscarf, of course, raises a less serious issue, but the root concern is similar: the defense of the moral and personal integrity of schoolgirls.
A bill banning any kind of negative discrimination against young women (including the headscarf) would have been enough to accomplish this goal.
Insisting on the religious side of the ban radically changed the very meaning of the law.
The late American philosopher John Rawls suggested that the best way to judge the rightness of any social policy is to put oneself in the place of the underdogs before reaching a conclusion.
A decision is right if it improves the situation of a society's worst off.
Discussions about the headscarf achieve the opposite.
Heads and thoughts are turned away from the underprivileged and what can be done to ameliorate their situation.
As with Molière's infamous hypocrite, Tartuffe, such a law merely covers up an evil that we don't want to see: social inequality and exclusion.
Venezuelans Test Democracy
After enormous difficulties, uncertainties, and constant attempts to derail the process, Venezuelans will vote on August 15th to decide whether President Hugo Chávez should be recalled and new presidential elections held.
This plebiscite marks the latest stage in a bitter campaign to unseat a president who has already survived a coup, a two-month general strike, and a previous attempt to force a vote on his leadership.
Chávez himself appears to have tacitly, if reluctantly, accepted that the recall vote will be held this August.
So is he on the way out?
Not necessarily.
But, no matter what happens, the battle between Chávez and the opposition has already tested - and will continue to test - the strength of Venezuela's democracy.
Independent supervision of the referendum must be agreed upon soon.
The Organization of American States and the Atlanta-based Carter Center, named for former US President Jimmy Carter, have been active in facilitating the process. Together with a group of friendly countries, the OAS and the Carter Center helped convince Chávez of the inevitability of a recall vote.
It is to be hoped that similar external cooperation can ensure that the mid-August poll is conducted fairly, so that the results reflect the will of Venezuelan voters.
Although Chávez has railed against outside interference in the referendum, he surely understands that its legitimacy needs to be guaranteed in the eyes of a watchful foreign press and other international observers.
One only has to look at the fight Chávez put up to stall the August vote to understand that neither he nor the opposition will give up easily.
Earlier in the year, Chávez's government brazenly attempted to disqualify hundreds of thousands of citizens who had gone to the polls in support of the referendum.
He followed this with government-inspired reprisals and threats to punish anyone who favored the recall.
Nevertheless, for two days in May, Venezuelans whose previous vote had been questioned on technical grounds returned to ratify their decision.
If enough people agree on August 15 to unseat Chávez, new presidential elections will follow in 30 days.
The winner of that vote will then serve out the remainder of Chávez's term, which the Supreme Court has extended until February of 2007.
The date of the recall referendum is crucial. If it had been scheduled for after August 19, there would have been no prospect of fresh elections until 2007, because if the recall won, the vice-president would have taken over.
But the opposition's task is far from finished.
It will need to mobilize a higher number of votes to force Chávez out of office than it collected to trigger the referendum.
That won't be easy.
Chávez, no doubt, will cast himself as an opponent of the plutocracy that once ruled the country with the backing of the traditional, and highly corrupt, political parties.
Anti-Americanism could also rally support to his side.
For its part, the opposition still lacks clear leadership and a single leader who can offer a clear alternative to Chávez and mobilize voters.
Even if the opposition wins the recall, a new election might return Chávez to the presidency precisely because of this failing.
The opposition must also contend with recent experience in Haiti. There, democratically elected President Jean-Bertrand Aristide was thrown out under visible American pressure, but his departure failed to reinvigorate the economy or end civil strife.
Nor can the risk of violent clashes between pro- and anti-Chávez forces be ruled out.
Chávez has strong support among the poor, who reacted with fury when he was overthrown two years ago.
Although physical confrontation has largely been avoided, there is no assurance that his supporters will not take to the streets in the event of a defeat.
As for Chávez, he does not want to be branded a dictator.
Both he and the opposition know that the result of the plebiscite is not a foregone conclusion.
Much will depend on who chooses to vote.
Of course, Chávez has a few cards up his sleeve - including how to phrase the recall question itself.
While events in Venezuela may look chaotic from afar, they are in fact democracy at work.
The direct participation of broad segments of Venezuelan society is very different from the traditional methods employed to overthrow governments in our region.
Whichever way the vote goes, Venezuela will have shown the region that democracy can work, which is a milestone in a Latin America too often shaken in the recent past by military coups, foreign intervention, and civil wars.
Victors’ Justice, Iraqi-Style
Saddam Hussein is dead, but not all Iraqis are celebrating.
On the contrary, the way in which the various religious and ethnic groups in Iraq responded to his execution is emblematic of the difficulty of holding Iraq together as a coherent entity.
To the Shiite majority, long brutally oppressed by Saddam and all previous Sunni-dominated Iraqi regimes, Saddam’s death symbolizes their attainment of political hegemony.
Moreover, their triumphalist rejoicing is a cruel reminder that when the oppressed become liberated, they can very easily turn into oppressors themselves.
To the Sunni minority, pushed from power by the American invasion and giving vent to their frustration with daily attacks on the Shi’a population and their holy sites, Saddam will remain a hero for a long time to come.
The Kurds – who, like the Shi’a, were victimized by Saddam for decades – quietly cling to their de facto independence in the north, making sure that they will never again come under Arab rule.
Iraq’s prime minister, Nuri el-Maliki, representing the ruling Shi’a-Kurdish coalition, expressed the hope that the dictator’s end would help to heal the sectarian divides.
But, however sincere his words may sound, reality is moving in the opposite direction, and the ugly verbal exchanges surrounding the act of execution itself will certainly do little to dispel the notion that this was “victors’ justice” – the victors being not the United States, but the Shi’a.
None of this augurs well for the future of what we should get used to calling “the former Iraq.”
Indeed, the Washington debate surrounding how to “fix Iraq” is irrelevant, because something that does not exist any longer – namely, Iraq as a functioning state – cannot be fixed.
Under the guise of US-inspired constitutional arrangements, the Shia majority has succeeded in arrogating near-absolute power to itself.
Thus, what only a few months ago had looked from Washington like a successful transition to some sort of representative government is obviously a travesty: just as under Saddam, power today grows out of the barrel of the gun – only now the state does not hold a monopoly on the means of violence.
Every militia, every ministry, every Shia political faction, has its own guns, goons, and death squads – while the Sunnis continue to use the stockpiles of weapons they accumulated under Saddam to fight a rear-guard action against the new order, apparently legitimized by elections.
There is no power – save a new violent dictatorship – that can bring Shi’a, Sunnis, and Kurds to live once again in one body politic.
America’s chimerical dream of democratizing overnight a deeply divided society accustomed only to violence and coercion has unleashed a terrifying array of political demons.
In these circumstances, the post-Baker-Hamilton debate in Washington is largely irrelevant to the future of Iraq – though it continues to be crucial to the future of US power, prestige, and standing in the world.
The future of Iraq will be decided by the people of Iraq, but with bullets, not ballots.
The US and the entire international community are utterly unequipped to deal with this Middle Eastern version of Yugoslavia and its regional consequences.
And, unlike Yugoslavia’s successor states, which could look to Europe, the lack of a legitimate Arab democratic role model makes crafting a democratic order even more difficult.
Some Europeans and others may gloat over America’s failure in Iraq, and the ineptness – or worse – of US post-occupation policy cries to heaven.
Yet the root causes of that failure go deeper, to Iraq’s creation as an artificial entity in the 1920’s by British imperialist planners, who stitched together three disparate provinces of the defeated Ottoman Empire into a state that never had a coherent identity.
Indeed, the very foundation of Iraq was based on victors’ justice: the British Empire, having vanquished the Ottomans, made the Sunni Arabs overlords in a country in which they were a minority.
That arrangement has now come unglued following another cycle of victors’ justice.
The consequences of this re-ordering of power are not yet clear.
But a coherent Iraqi state – whether unitary, federal, or confederal – will not grow out of a society in which one part of the population views Saddam, rightly, as a gruesome oppressor, while another part reveres him as a hero and martyr.
Wars always have unintended consequences and cruel ironies.
In Iraq, only now is it becoming evident that some states cannot be saved without being destroyed.
The Humanitarian Impact of Nuclear Weapons
VIENNA – In 1983, three years before I was born, a chilling television docudrama about the consequences of a nuclear war was broadcast around the world.
The Day After, now cited as the highest-rated film in TV history, left then-US President Ronald Reagan “greatly depressed” and caused him to rethink his nuclear strategy.
At their summit in Reykjavik in October 1986, he and Soviet President Mikhail Gorbachev came tantalizingly close to eliminating all nuclear weapons.
My generation has conveniently consigned such fears to history.
Indeed, with the Cold War tensions of 1983 far in the past and the international order dramatically changed, many people nowadays ask why these memories should concern us at all.
But the premise of that question is both wrong and dangerous.
This week, Austria is providing the world an opportunity to rethink its complacency.
On December 8-9, representatives from the governments of more than 150 countries, international organizations, and civil-society groups will meet in Vienna, to consider the humanitarian impact of nuclear weapons.
These weapons, which terrified people 30 years ago, still remain in countries’ arsenals and continue to pose a grave risk to human security and safety.
Austria’s concern is that as long as nuclear weapons exist, the risk of their use exists, either by accident or design.
An overwhelming majority of states share this view.
Consider how many nuclear weapons there are: an estimated 16,300 around the world, with 1,800 on high alert and ready for use on short notice.
Nearly 25 years after the Cold War’s end, we remain stuck with its strategic legacy: Nuclear weapons continue to underpin the international security policy of the world’s most powerful states.
There are too many risks – human error, technical flaws, negligence, cyber attacks, and more – to believe that these weapons will never be used.
Nor is there good reason to believe that adequate fail-safe mechanisms are in place.
The history of nuclear weapons since 1945 is studded with near misses – both before and after the Cuban missile crisis.
On more than one occasion, the actions of plucky individuals, applying their intelligence against orders, saved us from catastrophe.
For example, in 1983, the Soviet Union’s nuclear early-warning system reported, not once but twice, the launch of US missiles.
Fortunately, Stanislav Yevgrafovich Petrov of the Soviet Air Defense Forces recognized these as false alarms, preventing a mistaken nuclear retaliation.
It is remarkable that the world has avoided disaster thus far.
Why continue to push our luck?
Since 2012, when the humanitarian impact initiative was conceived, most countries have stepped up to support it, owing to their anxiety and frustration at the snail-like pace of disarmament.
Still, one might legitimately ask whether world leaders shouldn’t first focus their attention on other problems, such as climate change and sustainable development.
In fact, like past generations’ loading of the earth’s atmosphere with carbon, nuclear weapons represent a legacy to overcome.
But nuclear weapons, unusable and extremely expensive to maintain, are low-hanging fruit – a risk that we can easily grasp and eliminate.
Enticing the nuclear-weapon states to give up their arsenals will not be easy.
As long as some states possess them, other states will be led by envy or fear to desire their own.
But the status quo reflects yesterday’s thinking.
Acknowledgement that these Cold War relics are outmoded security tools – indeed, that they cause insecurity – is coming from a diverse range of voices.
Thirty years ago, The Day After galvanized a president.
The goal of next week’s Vienna conference is to provide the public with new and updated evidence of the impact of using nuclear weapons.
The picture is even grimmer and the consequences more dire than we believed in 1983.
As long as nuclear weapons exist, it is irresponsible not to confront the implications of their use – implications for which there is no antidote or insurance policy.
They are not some deadly virus or long-term environmental threat.
They are the poisonous fruit of a technology that we created – and that we can and must control.
Vietnam’s Chinese Lessons
TOKYO – For 30 years after World War II’s end, Vietnam claimed the global spotlight.
Its victories over France and the United States were the defining wars of independence of the post-colonial era.
But ever since those immortal scenes of US army helicopters hovering above the abandoned US embassy in Saigon in 1975, Vietnam has mostly slipped from the world’s consciousness.
No longer.
Vietnam’s strategic position – as a neighbor of China, situated parallel to the great sea trade routes of Asia – always made the country tremendously important, which may be one reason why its anti-colonial wars lasted so long.
In recent years, however, Vietnam’s strategic significance has increased dramatically, owing to huge – and not always widely recognized – transformations in its economic performance and foreign-policy orientation.
Reinvigorated by two decades of rapid economic growth and a broad-based opening to the outside world, Vietnam is now an emerging player in regional economic and security affairs.
Indeed, in recent months the country has played a pivotal role in helping to establish Asia’s emerging security order.
In late October, Hanoi hosted the East Asian Summit, a meeting at which the US and Russia were recognized as Asian powers with vital national interests in the region.
Earlier in October, at the inaugural summit of ASEAN defense ministers in Hanoi, US Defense Secretary Robert Gates declared the US a “resident power” in Asia.
And earlier this summer, while hosting US Secretary of State Hillary Clinton, Vietnam encouraged her to intervene in the growing maritime disputes between China and Malaysia, the Philippines, Japan, and Vietnam itself.
Vietnam’s emergence as a central player in Asian affairs should not be surprising, for the country was the catalyst of perhaps the key turning point in modern Asian history.
In February 1979, China’s leader, Deng Xiaoping, ordered the People’s Liberation Army to invade Vietnam.
Deng wanted to punish the Vietnamese for their own invasion of Cambodia, which ended the genocidal rule of China’s allies, the Khmer Rouge.
So vital was this decision to Deng that he assigned overall command of the invasion to his fellow Long March veteran, General Hsu Shih Yun (who had given Deng shelter when, in 1976, he was purged for the second time by the dying Mao Zedong).
The British military analyst Major General Shelford Bidwell has dubbed this form of Chinese military strategy “teach a lesson” warfare.
The first example of it was the brief Sino-Indian War of 1962.
That Chinese invasion was intended to teach India a lesson for its support of the Dalai Lama and the Tibetan resistance.
An existing border dispute was used as a pretext to launch a swift invasion (one that caught Nehru’s India by surprise), inflict a humiliating defeat, and then stage a seemingly magnanimous unilateral withdrawal designed to highlight India’s impotence.
Deng’s invasion of Vietnam in 1979 was supposed to be another “teach a lesson” war.
But, when the fighting ended, it was Deng who had to absorb most of the lessons.
In a war that lasted barely a month, 250,000 Chinese front-line soldiers were thrashed by 100,000 Vietnamese border-militia troops.
The Chinese lost more soldiers (perhaps 20,000) in those four weeks than the US lost in any single year of the Vietnam War.
The scale of China’s defeat stunned Deng, and historians often credit the PLA’s miserable performance with forcing him to take a hard look at China’s moribund Maoist system.
Within months of the war’s end, indeed, Deng initiated the reforms that have since transformed his country.
Ten years later, Vietnam’s Communist rulers also concluded that Marxism-Leninism was an economic dead end, and decided to start down the same path of market reform that Deng had taken.
As in China, it took time for the benefits to appear, but over the past few years Vietnam has seen the same rapid, poverty-reducing growth that China has experienced.
An agricultural miracle has transformed a country of nearly 90 million people who were once barely able to feed themselves into a global food-exporting powerhouse.
Vietnam has also become a major exporter of clothes, shoes, and furniture.
These are soon to be joined by microchips, given the $1 billion factory that chipmaker Intel built outside Ho Chi Minh City.
Vietnam’s total trade turnover now equals 160% of GDP, making it one of the world’s most open economies.
With Vietnam’s emergence as a pivotal player in Asia, we are able to view the Vietnam War in the context of the US strategy of global containment, which led it to defend not only South Vietnam, but also South Korea and Taiwan – “the three fronts,” as Mao Zedong put it.
Then and now, Vietnam was the locus of a struggle between the vision of a monolithic Asia and that of an Asia that is open internally and to the world.
Today, that choice must be made anew.
By acting to invigorate an Asian order that rejects hegemonic dominance, even to the extent of improving its military ties with the US, Vietnam has shown that it has learned its own lessons from the blood and treasure that it lost in its long wars of independence.
The Global Classroom
MOUNTAIN VIEW, CALIFORNIA – When I taught at Stanford University in the 1970’s, I was always on the lookout for ways that technology could help to improve learning.
The big innovation of that time was that my classes were broadcast around the San Francisco Bay Area.
We even sent videotapes of lectures farther afield.
Today, teachers record and upload their lectures, and, thanks to the Internet, students anywhere in the world can watch them as many times as they want.
Education – one of the last big economic sectors yet to be transformed by the digital age – is on the cusp of a revolution.
And why shouldn’t it be digitized?
The Web is the fuel of the twenty-first century, and it will propel students of all ages, from all corners of the globe, into a successful future.
For example, MOOCs (Massive Open Online Courses) offer free or low-cost, high-quality higher-education classes to hundreds of thousands of people on the Internet, making it easier to learn whatever – and wherever – they want.
I see similar opportunities coming to primary and secondary education in the future.
MOOCs enable an unlimited number of students to take courses on almost any subject, from computer science to music, taught by some of the world’s leading specialists.
Some MOOCs have mass appeal, like those from the University of Alicante in Spain and the Humboldt Institute in Germany, both of which offer courses on the practical aspects of starting up a business.
The University of Alicante is now on its second version and has already welcomed more than 30,000 + attendees.
Other MOOCs, like an upcoming one on cellular metrics offered by France’s Institut Mines-Télécom, are more tailored to niche audiences.
MOOCs can also be creative or unique.
Anyone who has ever wanted to figure out just how and why footballers get paid as much as they do can sign up for the Valoración de Futbolistas MOOC offered by the University of Valencia.
In this program, one can learn all one ever wanted about how to assess a footballer’s value.
Watching a football match might never be the same again!
Wherever youth unemployment remains high, MOOCs offer a new way to boost skills and employability.
A key area should be support for teachers, particularly in computer science, especially in middle and high school curricula.
Fortunately, many governments are taking steps to promote the online education revolution.
Malaysia’s government has announced a plan to provide lightweight laptops to primary and secondary schools nationwide, and has adopted free Web-based email, calendar, and document processing for ten million students, teachers, and parents.
Providing Web-based services to students and educators enables access to information and makes it possible for everyone – regardless of financial resources, location, or influence – to become educated.
But much more needs to be done.
Governments must expand national infrastructure so that students in densely packed urban areas and remote rural villages alike can get online.
Public-private partnerships are often a good way to do this.
For example, 10,000 Malaysian public schools should get 4G access this year through a collaboration with a local telecom provider.
Once students are online, there is no limit to what they can do with the vast amount of information available to them or how they will collaborate with and learn from one another.
Imagine students in Malaysia working with students around the world on a weather project.
They could conduct virtual experiments, work simultaneously to update data in a spreadsheet or document, and create a shared final presentation.
Where desktop or laptop computers are not widely available, students might use smartphones or tablets to augment their learning.
For example, they could turn to sophisticated mobile biology apps that let them interact with a 3D version of a cell, or polling apps that they could use to conduct a psychology experiment.
Study groups can be far more accessible and flexible with the Web.
It might be difficult for a child to go to a classmate’s house to study after school, because of bad roads, unsafe neighborhoods, or parents who are working and cannot provide a lift (or do not own a car).
With sufficient bandwidth, students can now meet virtually via Google+ Hangouts or other social-media platforms and study together – or with the leading experts on the planet.
Thanks to the Internet, distances no longer matter: the world really can be our classroom.
Virtual Vices
In a popular Internet role-playing game called Second Life, people can create a virtual identity for themselves, choosing such things as their age, sex, and appearance.
These virtual characters then do things that people in the real world do, such as having sex.
Depending on your preferences, you can have sex with someone who is older or younger than you – perhaps much older or younger.
In fact, if your virtual character is an adult, you can have sex with a virtual character who is a child.
If you did that in the real world, most of us would agree that you did something seriously wrong.
But is it seriously wrong to have virtual sex with a virtual child?
Some Second Life players say that it is, and have vowed to expose those who do it.
Meanwhile, the manufacturers, Linden Labs, have said they will modify the game to prevent virtual children from having sex.
German prosecutors have also become involved, although their concern appears to be the use of the game to spread child pornography, rather than whether people have virtual sex with virtual children.
Laws against child pornography in other countries may also have the effect of prohibiting games that permit virtual sex with virtual children.
In Australia, Connor O’Brien, chair of the criminal law section of the Law Institute of Victoria, recently told the Melbourne newspaper The Age that he thought the manufacturer of Second Life could be prosecuted for publishing images of children in a sexual context.
The law is on solid ground when it protects children from being exploited for sexual purposes.
It becomes much more dubious when it interferes with sexual acts between consenting adults.
What adults choose to do in the bedroom, many thoughtful people believe, is their own business, and the state ought not to pry into it.
If you get aroused by having your adult partner dress up as a schoolchild before you have sex, and he or she is happy to enter into that fantasy, your behavior may be abhorrent to most people, but as long as it is done in private, few would think that it makes you a criminal.
Nor should it make any difference if you invite a few adult friends over, and in the privacy of your own home they all choose to take part in a larger-scale sexual fantasy of the same kind.
Are computers linked via the Internet – again, assuming that only consenting adults are involved – so different from a group fantasy of this kind?
When someone proposes making something a criminal offense, we should always ask: who is harmed?
If it can be shown that the opportunity to act out a fantasy by having virtual sex with a virtual child makes people more likely to engage in real pedophilia, then real children will be harmed, and the case for prohibiting virtual pedophilia becomes stronger.
But looking at the question in this way raises another, and perhaps more significant, issue about virtual activities: video game violence.
Those who play violent video games are often at an impressionable age.
Doom, a popular violent videogame, was a favorite of Eric Harris and Dylan Klebold, the teenage Columbine High School murderers.
In a chilling videotape they made before the massacre, Harris says “It's going to be like fucking Doom….That fucking shotgun [he kisses his gun] is straight out of Doom!”
There are other cases in which aficionados of violent videogames have become killers, but they do not prove cause and effect.
More weight, however, should be given to the growing number of scientific studies, both in the laboratory and in the field, of the effect of such games.
In Violent Video Game Effects on Children and Adults, Craig Anderson, Douglas Gentile, and Katherine Buckley, of the Department of Psychology at Iowa State University, draw these studies together to argue that violent video games increase aggressive behavior.
If criminal prosecution is too blunt an instrument to use against violent video games, there is a case for awarding damages to the victims, or families of the victims, of violent crimes committed by people who play violent video games.
To date, such lawsuits have been dismissed, at least in part on the grounds that the manufacturers could not foresee that their products would cause people to commit crimes.
But the evidence that Anderson, Gentile, and Buckley provide has weakened that defense.
André Peschke, editor-in-chief of Krawall.de , one of Germany’s leading online computer and video game magazines, informs me that in ten years in the video game industry, he has never seen any serious debate within the industry on the ethics of producing violent games.
The manufacturers fall back on the simplistic assertion that there is no scientific proof that violent video games lead to violent acts.
But sometimes we cannot wait for proof.
This seems to be one of those cases: the risks are great, and outweigh whatever benefits violent video games may have.
The evidence may not be conclusive, but it is too strong to be ignored any longer.
The burst of publicity about virtual pedophilia in Second Life may have focused on the wrong target.
Video games are properly subject to legal controls, not when they enable people to do things that, if real, would be crimes, but when there is evidence on the basis of which we can reasonably conclude that they are likely to increase serious crime in the real world.
At present, the evidence for that is stronger for games involving violence than it is for virtual realities that permit pedophilia.
Vladimir de Gaulle?
MOSCOW &#45;&#45; The greatest disappointment of the postcommunist era has been the failure of the West – particularly Europe – to build a successful relationship with Russia.
Most policymakers and experts expected that, after an inevitably troublesome period of transition, Russia would join the United States and Europe in a strategic and economic partnership, based on shared interests and values.
The pace of change might be doubtful, but not its direction.
Vladimir Putin’s massive electoral triumph in this week’s Duma elections has put the lie to that notion.
Today, shared interests have shrunk and values have diverged.
A resurgent Russia is the world’s foremost revisionist power, rejecting a status quo predicated on the notion of a Western victory in the Cold War.
Its two super-power assets – nuclear weapons and energy – make it a potential leader of all those lesser powers dissatisfied with their position in the world.
A potential Russia-China axis based on shared resistance to US hegemony carries the seeds of a new bipolarity.
Western expectations of postcommunist Russia’s trajectory rested on three assumptions that proved to be mistaken.
First, most of Russia’s elite rejected the view that the loss of empire was irreversible.
Second, the Bush administration’s unilateralism shattered the belief that the US would continue to provide the world with “multilateral” leadership; indeed, US unilateralism was a cue for Russia to pursue its own unilateral policy.
Third, Russia has not yet become economically integrated with the West, especially Europe, as was expected.
What happens when the pull of a country’s imperial history meets the constraints of its current international position?
Will it try to weaken the constraints?
Or will it adjust to them?
The first option may involve international conflict, the second domestic conflict.
I believe that the attempt by President Putin’s Kremlin to impose “liberal empire” or “sovereign democracy” on the post-Soviet states will fail.
Of course, Russia is bound to exercise strong influence in the former Soviet territories, but it will have to share that influence with others.
Russia has too little to offer for exclusive dominance.
The European Union, the US, and China offer the former Soviet republics opportunities for “balancing” against Russia.
Of course, it is not very difficult to envisage the voluntary reincorporation of the ethnic Russian populations of Belarus, eastern Ukraine, and northern Kazakhstan into the Russian Federation – but only in a context in which Russia emerges as a true regional leader on a par with the EU.
Alternatively (or coincidentally), Russia might discover a new business center of gravity in Central Asia and East Asia, though this would hardly be the “liberal empire” that Anatoli Chubais once envisaged, for it would be based on the mutual attraction of autocrats.
Russia also will not transform its economic system along Anglo-American lines.
Apart from their incapacity to do so, Russians are well aware of the Anglo-American model’s faults.
We may see some compromise between European (Sarkozy-style) capitalism and an authoritarian, protectionist model with a lot of industrial policy.
This is the kind of civilizational choice that sovereign countries are entitled to make for themselves.
The territorial and economic imperatives of empire will continue to make it difficult for Russia to develop a political system that conforms to Western norms.
The middle class will expand, but there is no assurance that it will become “liberal” in the Western sense.
So Russia’s political system will probably remain autocratic for the foreseeable future, with a facade of democracy.
While this is disappointing, it is an improvement on anything Russia has ever experienced, except briefly.
It is hard to see Russia offering the world a new type of universalism, as it once did with communism.
The Russian strain of political messianism is pretty much exhausted.
Nevertheless, Russia may be able to develop, out of its own spiritual and cultural resources, an attractive alternative to both the American and European models, provided it achieves long run economic success.
If Russia fails in its attempt to become an independent center of power to rival the US (and eventually China), what role will it play?
A suggestive analogy may be to France during the long period of Anglo-American hegemony.
Broadly speaking, France has been the “awkward partner” in the Anglo-American club – a role it played right up to its orchestration of opposition to the Iraq war in 2003.
Twice in the twentieth century – in 1931 and again in 1969-70 – France helped to bring down the world monetary system.
Charles de Gaulle took France out of the NATO military alliance in 1966.
France, uniquely in Western Europe, built its own independent nuclear deterrent, and has been a champion of creating a European military capacity outside NATO.
Without explicitly challenging US leadership, France tried to build its own “Ostpolitik” with Russia, and to use its axis with Germany to create a European position on foreign policy.
The French have been the most insistent that Europe has interests that are not identical to America’s – particularly in the Middle East, where France has been pro-Arab.
And, like de Gaulle, Putin has sought to rescue his country from humiliation and defeat by carving out a role consonant with popular feelings of national mission and pride, with national interest interpreted as “sovereignty.”
The Gaullist dream of creating an independent power center never succeeded, but the role of “awkward partner” has given a distinctive flavor to French diplomacy, and it may be equally viable for a shrunken, proud, but no longer hegemonic Russia.
Being an “awkward partner” may offer Russia its best hope of reconciling its yearning for independence with the realities of the modern world.
Vladimir Putin, Part Two
LONDON &#45;&#45; Opinions about Vladimir Putin run the gamut.
In the West, he is regarded as an “authoritarian,” an “autocrat,” even as a “dictator” while in Russia a huge majority regard him as the most “democratic” of leaders, on the grounds that he has done more than his predecessors to improve the lot of ordinary people.
But there is one point on which both camps agree: Putin intends to remain in power indefinitely.
That conclusion stems from Putin’s recent statement that he might become prime minister after relinquishing the presidency next May.
But, regardless of what Putin does, his personal influence and the strategic direction in which he has taken Russia will remain dominant for years to come.
Given this reality, what matters now is how this “Putin system” will work, which will depend on institutional frameworks and practices.
At stake, both for Russia and the wider world, are stability and legitimacy, hence the prospects for steady political and economic modernization.
Legitimacy and stability are inseparable in practice, because maintaining stability in the absence of legitimacy would ultimately require Tiananmen-style repression.
But this can be ruled out in today’s Russia, because the instruments to implement it – notably an army that would obey orders to mow people down in the streets – are lacking.
Much opinion poll evidence shows that the presidency is the only institution that Russians accept as legitimate (in contrast to the legislature and judiciary, which are perceived as corrupt and ineffective).
This is not surprising, given the country’s history and culture.
More important is that an almost equally large majority values the power to hire and fire their czar – in free elections held at regular intervals in line with the constitution.
In Russia’s current political cycle, which will culminate in the presidential election of March 2008, there will be no difficulty in meeting the main conditions of legitimacy: respecting the constitution’s rules about regular free elections to the presidency.
Given Putin’s popularity, these rules present no threat to the ruling group’s power.
The voters will enthusiastically elect anyone who has Putin’s blessing.
But looking forward to the next political cycle in 2012, or the one after that in 2016, there is no guarantee that today’s conditions will still apply.
Invincible popularity can evaporate.
Even in the rosiest economic scenario, expectations about rising living standards will outstrip reality, causing disenchantment.
If, in the meantime, the political system has not acquired more institutional cushioning, and the presidency’s unique legitimacy remains – like today – based merely on the public’s approval of an incumbent surrounded by shady and bickering Kremlin factions, there would be a high risk of chronic destabilisation.
In these circumstances, an isolated and increasingly unpopular regime might decide to cancel or rig the presidential election when it fell due.
This is what happened in Ukraine in November 2004, with revolutionary consequences.
It would be rash to assume that the outcome in Russia would be as benign as Ukraine’s “Orange Revolution.”
Integrating the presidency into broader political structures and procedures – especially into party politics – would reduce this risk.
A political party infused with a normal instinct for self-preservation would produce a fresh face to run in a proper presidential election, replacing an unpopular incumbent and his cronies.
As it happens, Putin is now entrenching the already dominant United Russia party by his decision to head the party’s candidate list in December’s parliamentary election.
Could Russia emulate Japan’s post-war model, in which a single dominant party revives and modernizes the country?
Like all historical analogies, this one may prove flawed, but it is not absurd.
Japan’s
While inferior to the open alternation of power between two or more political parties, the evolution of United Russia into something resembling the LDP would still leave Russia in a much better shape than a personal regime confined to the Kremlin.
Despite Russia’s history after 1917, one dominant political party is preferable to none at all.
Putin’s recent public statements point to such a vision: a dominant center-right ruling party, with a (non-communist) social democratic alternative waiting in the wings to maintain stable government should the main party falter.
As so often in politics, much will depend on how far Putin matches deeds to words after leaving the presidency.
Should he choose to exercise his vast residual influence through United Russia (with its inevitable majority in the newly elected parliament), we will know that he means what he says.
If, by contrast, he leaves the presidency, gets himself appointed prime minister, and overhauls the constitution to shift powers from the former to the latter, we will know that he is going for a personal regime after all.
Emasculating the elected presidency, which is Russia’s sole source of political legitimacy, would pave the way to chaos.
The habit of changing the rules to keep power would persist after the strongman eventually leaves the scene, but the superficial stability of his rule would not.
The Crisis of Putinism
PARIS – Why is Russian President Vladimir Putin resorting to increasingly repressive measures against his opponents?
After all, the Putin regime, in place for nearly 14 years, controls most public institutions and the entire security apparatus, including the public prosecutors, and can close or censor any media outlet at any time without notice.
So why target journalists, small entrepreneurs, and NGOs – an approach that inevitably stifles social and economic life and condemns the country to stagnation?
Is the lion scared of the mouse?
Or is the mouse actually not that small and harmless?
The government’s recent record is depressing: in just a few months, the authorities have imposed several new repressive laws, forced influential journalists out of their jobs, and prosecuted human-rights defenders, mayors, lawyers, and prominent politicians.
Political leaders, government officials, and judges do not even pretend that the judicial system is independent and fair.
Kompromaty – fake, compromising charges – are used liberally and openly.
The closure of the United States Agency for International Development’s operations in Russia, and of Radio Svoboda, are emblematic of efforts to restrict freedom of opinion and limit foreign cooperation.
But the recent clampdown has not deterred the opposition or silenced criticism.
The Internet remains vibrant, and street protests continue to be held in major cities.
Even prosecuted opponents, like Sergei Udaltsov and Alexei Navalny, have managed to “remain in the game.”
The Opposition Coordination Council was chosen in an online election in October, with tens of thousands participating in the vote, notwithstanding threats and hacking.
This is the first sign of institutionalization of organizations and movements outside Putin’s orbit, and outside captive public institutions, like the State Duma and government-controlled television.
Alternative modes of action remain limited and vulnerable, but they exist and will not disappear; in an authoritarian regime, that is already a significant achievement.
The Internet cannot be fully controlled, and will thus develop into Russia’s main sphere of communication and free speech.
In this new context of institutionalization of anti-establishment groups, the Presidential Council for Civil Society and Human Rights looks even more outmoded and useless after it added 39 new members, for a total of 62 (the most authoritative independent figures quit last year).
At its first meeting with Putin in November, Council Chairman Mikhail Fedotov looked uncomfortable and admitted that it will be difficult to work effectively.
To many observers in Russia, however, the regime’s post-electoral offensive against “unfriendly” forces seems certain to be counterproductive in the longer term.
They may be right.
For starters, the nationwide anti-Putin demonstrations last winter and spring should not be underestimated.
The protests mobilized hundreds of thousands of Russians, putting huge pressure on central, regional, and local government authoritiesfor several months.
They showed that the Kremlin cannot reduce a new and powerful social trend – memorialized by countless Web sites, blogs, and online archives – to “isolated outbursts” fomented by “foreign agents.”
Second, Putin and his cronies know full well that their legitimacy is shaky, given their failure to dispel the widespread perception that the elections in December 2011 and March 2012 were rigged.
And, while talk of “modernization” has subsided since Putin regained his presidential seat in May, corruption has not, and ordinary Russians now hold senior officials responsible for it.
For the first time in years, they question their leaders’ real intentions and their capacity to deliver better living standards.
Third, a widening generation gap has spread to the ruling elites.
Putin’s men are seen by their own children, whose horizon is not limited to Russia, as outdated and out of touch.
The younger generation feels stifled by their elders’ stale, protectionist policies.
They did not experience the dull but stable certainties of the Soviet party-state, and few yearn for its resurrection.
This is why former President Dmitri Medvedev’s “rise and fall,” staged like a soap opera, has played a socially corrosive role.
While holding Putin’s place until he could return for a third presidential term, Medvedev actually rallied public support.
As President, he achieved virtually nothing in terms of the rule of law, decentralization, or economic modernization; nonetheless, a significant part of Russia’s elite and middle class pinned their hopes on him as a counterweight to the Putin clans and siloviki (security officials).
It was wishful thinking, but it permeated the political and social climate.
The spell was broken when Putin reasserted his grip on executive power.
His current term will be different from his previous presidential administrations, and more uncertain.
Putin and his government lack a forward-looking strategy, an innovative spirit, and political agility.
While Putin still has considerable resources at his disposal, using them will become increasingly costly – politically, economically, and socially.
Authoritarian clientelist regimes depend on the silent assent of their populations and the loyalty of their elites.
Unfortunately for Putin, when the former is called into question by popular protest, the latter can no longer be taken for granted.
Vladimir Putin’s Potemkin Nation
MOSCOW – “Image is everything” might be a viable credo if you are the house of Gucci or a catwalk model, but it is definitely not appropriate as a national strategy.
Yet “Putinism,” the ruling ideology of the Russia that Vladimir Putin has forged during his ten years in power, is all about image – the image of a reconstituted great power restored to the world stage.
The problem is that, unlike the rail thin catwalk model who starves herself half to death to stay slim, the image of Russia that Putin seeks to project is completely imaginary.
The Russian economy is a shambles, and Russia’s mighty military had to exert itself to its fullest to vanquish tiny Georgia in 2008.
Of course, Russia’s rulers have usually preferred myth to reality.
After all, it was during the reign of Catherine the Great that the “Potemkin village” was invented, whereby the squalor of the lives of Catherine’s serfs was hidden behind cheerfully painted housing façades as the Empress toured her country.
In today’s Russia, the overriding myth is that Putin has presided over a rapidly modernizing country.
Here the cheerful façade is composed of Russia’s miniature president, Dmitri Medvedev, whose job – like that of the American First Lady – is to keep up appearances.
And the appearance that needs the most maintenance is that of a modern and civilized Russia.
Upon assuming the presidency in 2008, Medvedev proclaimed: “We must achieve a true respect for law, and overcome the legal nihilism that is hampering modern development.” And, in a much discussed newspaper article entitled “Russia Forward,” he declared, “Should we continue to drag into the future our primitive raw-materials economy, endemic corruption, and inveterate habit of relying on the state to solve our problems?
And, just this October, remembering the victims of Stalin, Medvedev wrote in his blog (itself a sign meant to convey how up-to-date he is), “We can hear voices saying that those numerous deaths were justified by some supreme goals of the state.
I am convinced that no development of a country, no success or ambitions, can be achieved through human grief and losses.
Nothing can be valued above human life, and there is no excuse for repressions.”
Of course, if Medvedev actually meant what he says, he would be leading the opposition to the Russian state that Putin has built.
But, since Putin put Medvedev in his job and can remove him anytime he pleases, Russia’s president is not opposed to the ways of the Putin regime.
So what is going on here?
Putin’s political genius is that he understands that, for Russians, being perceived as powerful is even more important than actually being powerful.
He does not need to modernize Russia so that it can actually compete with the world’s mightiest powers; he just needs to bluster enough that people – particularly his own – believe that Russia is once again among the first rank of nations.
Putin’s promise to restore national self-respect, shattered by Russia’s bitter loss of superpower status in 1991, is centered around cowing Europe into submissively accepting Russia’s sphere of “privileged interest” in the post-Soviet nations.
By increasing oil and gas prices, or limiting supplies, flexing its military muscles in Georgia, or sending ships to Cuba and Venezuela to parade Russia’s power on the world stage, Putin has convinced many people that Russia is back.
Moreover, Putin’s project to safeguard “great Russian statehood” from the disarray of the post-Soviet era has seen the imprisoning of “dishonest” oligarchs; the prosecution of an “irresponsible” press; and the establishment of his personal dictatorship over the rule of law.
Because the world associates these traits with the Soviet era, many people mistake their reappearance as a sign that Russian power is now approaching that of the USSR.
Nothing could be farther from the truth.
As in the Soviet era, the dictatorial mask disguises the system’s economic and political fragility.
Thus, instead of investing in the energy industry – the lifeblood of the economy – in order to reverse declining output, the Kremlin is devoting its energy to a presidential commission to “counteract attempts to falsify history to the detriment of Russia’s interests.” This means that the state will decide which interpretations of history should be considered “true,” creating endless opportunities for manipulation to serve the agenda of those in power.
Likewise, instead of welcoming the sort of foreign investors who can modernize the economy, the regime continues to wage its judicial war against Mikhail Khodorkovsky and Platon Lebedev of Yukos Oil.
They were convicted for financial crimes in a 2004 trial, but in August faced a fresh round of charges, including tax evasion and embezzlement.
Journalists and human rights activists and lawyers – Anna Politkovskaya, Stanislav Markelov, Anastasia Baburova, Natalia Estemirova, and dozens of others – are murdered, and no one in the Kremlin seems to mind, because they are not really a part of the New Russia that Putin is building.
Indeed, just this November, Sergei Magnitsky, a lawyer for Hermitage Capital Management, died in prison because of his captors’ negligence.
Perhaps US Vice President Joe Biden summed up Russia’s predicament best: “The reality is, the Russians are where they are, having a shrinking population base, a withering economy, and a banking structure that is unlikely to withstand the next 15 years.
The world’s changing before them and they’re clinging to something in the past that’s not sustainable.” So long as the façade holds, Russians will continue to cling to Putin’s illusion of power.
The Goebbels of the Kremlin
MOSCOW – In Soviet Russia, everybody knew that they were being watched.
Any deviation from officially sanctioned behavior would be treated with suspicion and most likely punished.
The Soviet state saw itself as being at war with almost everything – foreign spies, class enemies, people wearing jeans or playing jazz.
The regime’s dominant ideology was not Marxism-Leninism, but suspicion and animosity.
Not since the early 1980s, before the first rays of glasnost in Russia, have those dark times felt as close as they do now.
Protecting society from enemies, foreign and domestic, is once again the order of the day.
Indeed, an ethos of perpetual vigilance is central to sustaining President Vladimir Putin’s high popular-approval ratings.
And no one plays a more important role in creating the necessary public atmosphere than Vladislav Surkov.
Once Putin’s chief of staff, Surkov served as Deputy Prime Minister from 2011 to 2013.
He now formally advises Putin on foreign affairs, but is really the regime’s chief propagandist.
He has been credited with the introduction of the concept of “managed democracy” in Russia, and he played a leading role in nurturing the secession of Abkhazia and South Ossetia from Georgia.
More recently, he was a guiding hand behind Russia’s invasion of Ukraine and annexation of Crimea, inspiring the feverish media campaigns that have delivered near-universal public support for these moves.
Surkov is the man most responsible for nurturing pro-Putin sentiment, which increasingly resembles a Stalin-like cult of personality.
Surkov is Chechen by descent, infused – like Stalin – with the saber-rattling mindset of the Caucasus.
Under his watch, the central focus of the Kremlin’s communication strategy has been to sustain the perception that the West wants to destroy Russia.
Thus, the conflict in Ukraine has been framed as a renewed struggle against fascism – and in defense of Russia’s true, anti-Western identity.
The supposed threat to Russia today was underscored for the 70th anniversary of the end of World War II, with billboards springing up across Moscow to remind Russians of the sacrifices that victory required.
Like the Nazi propagandist Joseph Goebbels, Surkov is not overly concerned about facts.
Emotions are at the core of the Kremlin’s message; indeed, they are the tie that binds Putin to his subjects.
This is why Surkov portrays Putin, who recently divorced his wife of 30 years and is rumored to have fathered several children with a former Olympic gymnast, as an avatar of conservative values, with the Orthodox Patriarch constantly at his side.
The Kremlin’s campaign against gay rights has secured the support of the church, while reminding ordinary Russians that the state takes a watchful interest in their lives.
Today’s Russian propaganda combines quintessentially Soviet-style heavy-handedness and state-of-the-art technique.
There have been no mass purges and few large rallies.
Western values may be under assault, but Western goods are welcome.
A common sight in Russia is a shiny German-made car with a bumper sticker recalling the glories of World War II: “On to Berlin” or “Thank you, grandfather, for the victory, and grandmother for the tough bullets.”
For the last two decades, Russians have been able to travel internationally without restrictions.
Now, however, many seem ready to give up this right.
Last month, the Kremlin warned the country’s citizens that the United States was “hunting” Russians abroad.
A few Russians have indeed been arrested and extradited to the US: the arms dealer Viktor Bout, for example, who is charged with providing aid to terrorists, or the hacker Vladimir Drinkman, who is accused of stealing millions of credit card numbers.
There is no credible threat to ordinary Russians, yet Surkov’s campaign is having a profound impact.
Rather than risking mockery with outlandish claims – a staple of Soviet propagandists – that Russia will one day surpass the West economically, Surkov taps a deeper and safer emotion: fear.
Whatever Russians think of the country’s economic malaise – GDP is expected to contract by 3.8% this year, while inflation could top 15% – they are assured that they would be much worse off without Putin.
And Russians have fallen into line.
A few years ago, it seemed that every tenth person wore a white ribbon, a symbol of protest against Putin.
Today, one gets the impression that every third Russian is wearing the Ribbon of Saint George, an orange and black symbol of patriotism and loyalty to the Kremlin.
Those who do not wear the ribbon can expect to be asked – and not very politely – why they choose not to.
It is an insidious and effective strategy, one that marginalizes dissenters and generates the impression of near-universal support for the regime.
On my last visit to Moscow, I noticed that a friend, a singer in the Bolshoi opera, had tied a small Ribbon of Saint George to her white Mercedes.
Though she is no fan of Putin, she did not want to stand out unnecessarily.
It is through small surrenders like hers that men like Surkov ultimately succeed.
Citizens pretending to be loyal build a culture of conformity.
With dissent suppressed, the authenticity of citizens’ loyalty becomes irrelevant.
Indeed, like Goebbels, Surkov understands that when public life and private expression can be turned into theater, there is no difference between performance and reality.
The Middle East’s Three Timelines
BERLIN – Three distinct timelines are shaping developments in the Middle East: the short-term timeline of daily struggles and politics; the medium-term timeline of geopolitical shifts, which is measured in decades; and the long-term timeline of sociocultural transformation, or what the historian Fernand Braudel called the longue durée.
Understanding each is essential to craft an effective strategy in the region.
The first timeline certainly receives the most attention.
The media report relentlessly on the latest round of fighting between Israel and Hamas; recent negotiations over Iran’s nuclear program; ongoing opposition activity and political repression in Egypt and Bahrain; and the slaughter and humanitarian tragedies unfolding in Syria and Iraq.
But political thinking in the Middle East is often linked to the second timeline.
Indeed, it is impossible to grasp the region’s contemporary history and politics without understanding the emergence of the regional state system after World War I and the demise of the Ottoman Empire.
For example, there are the constant reminders that external powers – most notably, the United Kingdom and France – established the existing borders.
Resistance against the so-called Sykes-Picot order nurtured the founding myths of many states and political movements in the region.
That order has remained largely intact for almost a century, enabling the emergence of separate, though not necessarily exclusive, political identities in Syria, Iraq, Jordan, Lebanon, and, to varying degrees, in Saudi Arabia and the other Gulf countries.
It has dictated the political parameters for 4-5 generations in the Arab world, including today’s main protagonists, who have battled over it, adapted to it, and attempted to manipulate it.
But the system may finally be unraveling.
The border between Iraq and Syria is evaporating, as the Sunni militants of the Islamic State capture a widening swath of territory.
And the rise of Kurdish military forces against them raises the possibility that a full-fledged Kurdish state will eventually emerge.
Meanwhile, the tenuous status quo in Israel and Palestine is crumbling.
With a two-state solution less likely than ever, the area is likely to experience the creeping consolidation of a one-state reality.
In the Persian Gulf, ongoing international negotiations over Iran’s nuclear program are but the latest chapter in a struggle over strategic hegemony, security, and economic interests.
And, though the world’s appetite for energy resources from the Gulf will not diminish anytime soon, the structure of influence may be set to change again.
When it comes to external power brokers, the United States plays the largest role, having replaced Great Britain by the 1970s.
It now must learn to cope with the growing influence of India and China, as well.
But it is the leading regional powers – Iran and Saudi Arabia – that have the greatest potential to transform the Middle East.
The question is whether they will continue their competition for regional dominance, regardless of its destabilizing impact, or become pillars of a new regional security structure.
Such a structure has become all the more important as the major external powers’ appetite for sustained involvement in Middle Eastern conflicts wanes.
Having learned the hard way that they cannot dictate regional political outcomes, Western powers – as well as Russia, China, and India – will likely limit their involvement to protecting their direct interests and, if necessary, containing regional threats.
Wherever the political and socioeconomic conditions of the short- and medium-term timelines fail to provide order and stability, the confessional, ethnic, or tribal identities that emerged over the longue durée gain prominence.
The extent to which identities are invented matters little, as long as their invocation helps to appropriate elements of history and harness them to current political goals.
Episodes from this timeline thus become as relevant as recent events.
The conflict over the succession of religious leadership following the death of the Prophet Muhammad nearly 1,400 years ago is the origin of the split between Sunni and Shia Islam.
The battles between the Fatimids and the Abbasids, the Crusades, the Mongol invasion, the Ottoman conquest, and, of course, Western imperialism all serve as points of reference for today’s struggles.
But these events provide more than explanation; they often provoke powerful responses.
Consider the Islamic State’s recent declaration of a caliphate in parts of Iraq and Syria.
Most Sunnis are outraged by the brutal behavior of the Islamic State’s self-appointed caliph, Abu Bakr al-Baghdadi, and consider his claim that he will eventually “conquer Rome” ridiculous.
Nonetheless, the symbols and “memories” from the longue durée that Baghdadi uses – such as the black flag of the Abbasids and the glorious stories of a time when the caliphate constituted a great power and a lodestar for all Sunnis – have an enduring impact.
Of course, these ideas would amount to little were they not backed by modern weaponry, and had the countries whose territory the Islamic State is seizing not failed to create inclusive social contracts.
But they imbue the Islamic State’s project with a powerful historical narrative that cannot be dismissed.
Navigating this narrative can be tricky for external actors.
They must neither ignore the longue durée nor believe misleading claims that the struggle is really over the legitimacy of opposing interpretations of the faith.
More generally, these actors’ actions in the region must never be shaped by the delusion that the Sunnis, Shia, or any other ethnic or religious minority is on their side.
One lesson common to all of the Middle Eastern timelines is that all local actors are on their own side – and more than willing to draw foreigners into their wars if doing so fortifies them against their enemies.
Syria’s No-Solution Solution
BERLIN – The Russian-American plan to eliminate Syria’s chemical weapons – now embodied in the United Nations Security Council Resolution 2118 – may open a more constructive approach to ending the country’s civil war, because the Security Council is also demanding that the long-planned Geneva II conference on Syria convene as soon as possible.
Rightly so: elimination of Syria’s chemical-weapons stockpiles and a political process to end the war must occur simultaneously.
As a practical matter, efforts to verify, secure, and eventually destroy Syria’s huge supply of chemical weapons cannot be implemented without at least a lasting ceasefire.
But synchronizing the two processes is necessary for other reasons, too.
Aside from the human suffering caused by Syria’s ongoing war, we should be aware of the potentially dire regional consequences.
Some people now warn of a “Lebanonization” of Syria – partition of the country into rival fiefdoms and quasi-independent regions.
But Syria’s fragmentation is not the only plausible scenario.
Indeed, the Lebanon metaphor is too benign.
Unlike Lebanon during its 15-year civil war, no regional power today would be able to contain Syria’s war within its borders.
As a result, it is much more likely that Syria’s disintegration would call the entire post-World War I (or post-Ottoman) Middle Eastern state system – also called the “Sykes-Picot” system – into question.
Such region-wide instability is not just a theoretical scenario; it follows from developments on the ground.
Lebanon’s established political contours already are beginning to blur under the relentless pressure of the Syrian conflict.
A zone of de facto control by Lebanon’s Hezbollah and Syrian regime forces has emerged between Baalbek and Homs, straddling the Lebanese-Syrian border.
Likewise, the fighting has created highly fluid conditions in the Kurdish-majority areas of Iraq and Syria.
Since the fall of Saddam Hussein, the Kurdistan Regional Government (KRG) in northern Iraq has effectively established de facto autonomy vis-à-vis the central government in Baghdad.
Regional and domestic developments could push the Kurdish authorities in Erbil, their capital, toward declaring formal independence.
With its oil income and good neighborly relations with Turkey, such a state would be viable.
Indeed, the KRG government has long made clear that it respects Turkish sovereignty and will not interfere with relations between Turkey’s government and its own Kurdish population.
And, if only for its own security, the KRG is attempting to extend its power, formally or informally, into northern Syria.
Regional acceptance of a Kurdish state-building project that transcends today’s KRG-controlled borders would depend, among other things, on the scale of the Kurds’ national ambitions.
From Turkey’s perspective, a confederation of Syria’s northeastern region with the KRG might be favorable to continuing domestic Kurdish unrest, much less rule by the anti-Turkish Kurdish Workers Party (PKK) along its border with Syria.
In contrast, any attempt by the KRG to establish a Kurdish corridor to the Mediterranean would certainly meet resistance, not only from Turkey, but also from other warring factions in Syria.
What, however, would Kurdish independence mean for the rest of Iraq?
This is not only a question of territory, borders, and oil, but also one that concerns the domestic balance of power.
With a Kurdish exit removing the third constituent element – besides Shia and Sunni Arabs – of Iraqi politics, the country’s sectarian polarization would most likely deepen.
Moreover, Kurdish independence could encourage demands for autonomy in the Sunni-majority provinces bordering Syria, Jordan, and Saudi Arabia – a third region where Syria’s civil war is blurring international borders.
Social, tribal, and economic ties between the provinces of Deir al-Zour in Syria and Anbar in Iraq are strong and have strengthened further as control by the Syrian and Iraqi governments has loosened.
It is astonishing how many regional observers seem to expect, hope, or fear that such developments will somehow lead, almost automatically, to a “new Sykes-Picot” – that is, to the establishment of a new regional order in the Middle East created by today’s great powers.
(A Google search for “new Sykes Picot” in Arabic brings 52,600 hits.)
Such expectations are patently unrealistic.
Europeans and Americans have learned – and China, Russia, and others have learned from Western experience – that external powers cannot successfully engineer political arrangements or regional order in the Middle East.
Rather than pondering or devising new borders, regional and external powers need to focus their efforts on holding Syria together.
The planned Geneva II conference is a necessary first step.
To be sure, there are many reasons to be pessimistic about the willingness of Syria’s warring parties to engage in serious negotiations.
Indeed, no one – not Russia, the US, Iran, Saudi Arabia, or other external patrons of either the regime or the opposition – can guarantee that Geneva II will succeed.
But all of them could improve conditions for negotiations by sending the same message to their respective Syrian clients, namely that they henceforth exclude a military victory by one side over the other.
Thus, Russia and Iran will have to tell Syrian President Bashar al-Assad that they will not support his effort to seek a military victory.
Saudi Arabia, the US, Turkey, and others will have to tell the National Coalition for Syrian Revolutionary and Opposition Forces that it will not win on the battlefield; the Salafists must hear this message from Saudi Arabia, too.
And Turkey and Qatar, for their part, will have to pass the same message to the Muslim Brotherhood.
The message to all of these groups should be consistent: We will continue to support you politically, financially, and in negotiations with the Syrian regime, but we will no longer support a military solution.
This would be a strong incentive to go to Geneva.
Warring parties start to negotiate seriously only if and when they know that other alternatives are out of reach.
Europe in a Multipolar World
BERLIN – One aspect of the Ukraine crisis that both Russia and the West need to understand is that the rest of the world appears to be relatively unconcerned about it.
Though the West, along with Japan, may view the crisis as a challenge to the global order, most other states do not feel threatened by Russia’s annexation of Crimea or designs it may have elsewhere in Ukraine.
Instead, many view this crisis as being largely about Europe’s inability to resolve its own regional disputes – though a successful outcome could bolster Europe’s global influence as a peacemaker.
As the Ukraine crisis unfolded, Russian policymakers and commentators talked about “the end of the Post-Cold War era,” while Russian Deputy Prime Minister Dimitri Rogozin even appeared to welcome the start of a New Cold War.
Such wishful thinking is predicated on the notion that conflict between Russia and the West would once again come to define the entire international system, thereby returning Russia to its former superpower status.
That is not going to happen.
As emerging powers’ reactions to the Ukraine crisis demonstrate, world politics is no longer defined by what happens in Europe, even when a major conflict is brewing there.
The international system has become so multi-polar that non-European states can now choose to follow their own interests rather than feel obliged to side with the East or the West.
Few world leaders doubt that Russia’s use of force to compromise Ukraine’s territorial integrity, change its borders, and annex Crimea violated international law.
China’s abstention in the subsequent United Nations Security Council vote clearly signaled its leaders’ displeasure with Kremlin policy.
But nearly one-third of the UN’s members sent an equally emphatic message by abstaining or not participating in a General Assembly vote condemning Russia’s actions.
Even Western-friendly governments – including Brazil, India, South Africa, and Israel – were not prepared to take sides.
The Indian journalist Indrani Bagchi referred to the abstentions as a new form of non-alignment.
Cynicism and schadenfreude may also be playing a role.
Raja Mohan, a prominent Indian strategist, notes that Europe “has never ceased to lecture Asia on the virtues of regionalism,” but now seems unable to cope with its own regional security challenges.
The implicit message from the new non-aligned is straightforward: Why should we care about a territorial conflict in Europe when you Europeans fail to act decisively on Palestine, Kashmir, or territorial disputes in the East and South China Seas?
Instead, many of these countries are calling on the West to de-escalate the crisis and, as an official Chinese foreign-ministry statement advocated, to “exercise restraint and refrain from raising tensions.”
That is good advice – and no different from what Europeans tell others in similar situations.
Unlike other regions of the world, however, Europe, including Russia, can be proud of its regional security organizations, such as the Organization for Security and Cooperation in Europe (OSCE);
Europe needs to make them work.
The OSCE, for example, would be greatly strengthened if, using its wide range of diplomatic mechanisms (such as roundtable discussions and support for constitutional reforms), it succeeded in defusing the Ukraine crisis and thereby bolstered European security.
Doing so would also provide a powerful example of institutionalized regionalism that might serve as a conflict-resolution model for other countries.
Alternatively, if Europe is unable to resolve the Ukraine crisis with diplomacy, its global influence, and that of Russia, will surely fade.
Russia has reminded the world that it is possible to bully one’s neighbors and steal their territory using brute force; but, in a globalized, multi-polar system, this alone will not be enough to rally other countries to its cause.
And the EU, as a highly sophisticated paper tiger, would be no more attractive.
EU member states have no interest in letting their continent slip back into ethnic nationalism and power politics.
The Ukraine crisis is therefore both a challenge and an opportunity.
If Europe wants to remain a pole in a multi-polar international system, it must prove that it can pursue a common foreign and security policy, particularly in times of crisis and conflict.
That means that the EU must emerge from the Ukraine crisis with a stronger commitment to common defense and joint contingency planning, and a unified energy policy that can secure independence from Russian oil and gas.
But Europe must also show that it can, and will, defend the principles of rules-based international relations.
Maintaining and strengthening the pillars of Europe’s common defense is not a simple task; but multilateral security organizations like the OSCE are not made for easy times.
They are intended to protect members from manipulation and aggression, and in a way that can garner global support.
In this sense, Europe’s main task now is to leverage its already considerable strategic assets.
A Syrian Farewell to Arms
BERLIN – The Geneva II conference on Syria, set to begin in Montreux, Switzerland, on January 22, is unlikely to achieve its goal of forming a transitional governing authority with full executive powers.
But what it can do is launch a much-needed political process and, more important, produce a ceasefire agreement between government and opposition forces.
Only when the fighting has stopped can Syria make genuine progress toward a political transition.
Of course, Al Qaeda-linked jihadist groups like the Islamic State of Iraq and Syria (ISIS), which has become a potent force on the ground, and the Nusra Front will not and should not be represented in Montreux – not least because they will not feel bound by any agreement.
But this should not serve as an excuse not to pursue a ceasefire.
After all, even stopping the fighting between regime forces and some armed groups – that is, those that associate themselves with the Syrian National Coalition, or are at least willing to coordinate with the Free Syrian Army (FSA) and the partly Saudi-sponsored Islamic Front – would be a major achievement.
A ceasefire is critical, because the fighting serves the interests of the most brutal elements on both sides of the conflict.
This includes the core leadership of President Bashar al-Assad’s regime, which is now supported by Hezbollah and Iraqi militias, as much as the ISIS, which is composed largely of non-Syrian fighters who are unconcerned about rebuilding the country or safeguarding its people’s future.
As in any civil war, such entrepreneurs of violence become increasingly likely to carry the day the longer the conflict endures.
They feed on their own atrocities or on those of their opponents to win support through fear rather than conviction – using videos to raise funds and recruit new members.
With skilled fighters and plenty of money and arms, the ISIS and the Nusra Front thrive amid persistent war and anarchy.
Meanwhile, the Assad regime benefits from the fact that parts of the country that it no longer controls cannot be called “liberated zones,” given the prevailing chaos and extremism in these areas.
A ceasefire would initiate a shift in this dynamic, allowing humanitarian supplies to reach the areas where they are needed most urgently, while halting the country’s gradual “Somalization.”
This would help to stem the flow of refugees – and the spillover of violence – to neighboring countries, particularly Lebanon and Iraq.
Furthermore, if the ceasefire held, it would facilitate economic reconstruction, while enabling moderate political actors and civil society to win back some power from the extremists – a shift that ordinary Syrians would welcome.
Indeed, people in jihadist-controlled areas are deeply unhappy with Al Qaeda thugs terrorizing them and trying to enforce their version of Islamic mores – so much so that the Assad regime increasingly appears to be a better alternative to continued warfare or an Al Qaeda takeover.
The problem is that, as long as violence prevents moderate forces from restoring local services and administrative structures, people’s capacity for resistance will remain weak.
International organizations could treat such structures as de facto authorities, supplying them directly with aid and also giving NGOs or United Nations investigators an opportunity to collect evidence of war crimes for future judicial or truth-commission proceedings.
To be sure, fears that a ceasefire could lead to a stabilization of the conflict’s frontlines, turning them into semi-permanent lines of division, are not without merit.
After all, a ceasefire is not a peace agreement; it would, for the time being, leave regime and opposition forces in their respective positions.
But having different authorities administer different parts of Syria is preferable to the absence of any responsible governance across large swaths of the country.
Moreover, a ceasefire would enable the FSA and its allies to coordinate action with units of the regular army against Al Qaeda bands, which would undoubtedly try to sustain the violence.
Even such limited cooperation would advance the “Geneva process” – especially negotiations aimed at establishing a transitional authority that would command the armed forces.
Given that the Assad regime has overwhelming firepower, its consent is vital to achieving a ceasefire agreement.
Responsibility for convincing Assad to stop bombing and shelling opposition-held areas would fall primarily on his international allies, Russia and Iran.
In doing so, they should bear in mind that it was Assad who led the country into civil war by choosing a military solution when high-level members of his own government and political party argued for a negotiated settlement.
Neither Russia nor Iran has an interest in prolonging a war that is destabilizing the Middle East and fostering the spread of Al Qaeda-style extremism.
Indeed, both have already helped to bring the Syrian regime to Geneva.
Now, they must make their support for Assad’s delegation conditional upon his acceptance of a ceasefire.
Otherwise, prospects for an outcome that leaves Syria intact and viable will only become bleaker.
The Decadence of the People’s Car
PRINCETON – So far, the Volkswagen scandal has played out according to a well-worn script.
Revelations of disgraceful corporate behavior emerge (in this case, the German automaker’s programming of 11 million diesel vehicles to turn on their engines’ pollution-control systems only when undergoing emissions testing).
Executives apologize.
Some lose their jobs.
Their successors promise to change the corporate culture.
Governments prepare to levy enormous fines.
Life goes on.
This scenario has become a familiar one, particularly since the 2008 financial crisis.
Banks and other financial institutions have enacted it repeatedly, even as successive scandals continued to erode confidence in the entire industry.
Those cases, together with Volkswagen’s “clean diesel” scam, should give us cause to rethink our approach to corporate malfeasance.
Promises of better behavior are clearly not enough, as the seemingly endless number of scandals in the financial industry has shown.
As soon as regulators had dealt with one case of market manipulation, another emerged.
The trouble with the banking industry is that it is built on a principle that creates incentives for bad behavior.
Banks know more about market conditions (and the likelihood of their loans being repaid) than their depositors do.
This secrecy lies at the heart of financial activity.
Polite analysts call it “management of information.”
Critics consider it a form of insider dealing.
Banks are also uniquely vulnerable to scandal because many of their employees are simultaneously behaving in ways that could influence the reputation, and even the balance sheet, of the entire firm.
In the 1990s, a single Singapore-based trader brought down the venerable Barings Bank.
In 2004, Citigroup’s Japanese private bank was shut down after a trader rigged the government bond market.
At JPMorgan Chase, a single trader – known as “the London Whale” – cost the company $6.2 billion.
What these repeated scandals show is that apologies are little more than words, and that talk about changing the corporate culture is usually meaningless.
As long as the incentives remain the same, so will the culture.
The Volkswagen case is a useful reminder that corporate wrongdoing is not confined to the banking industry, and that merely levying fines or ramping up regulation is unlikely to solve the problem.
Indeed, it is one of the iron laws of corporate physics: For every regulation, there is a proportionate proliferation of innovations to circumvent it.
It should come as no surprise that there were incentives in the automobile industry to game the system.
Everyone knows that actual fuel economy does not correspond to the numbers on the showroom sticker, which are generated by tests carried out with the wind blowing from behind or on a particularly smooth road surface.
Similarly, anyone who has stood next to a diesel vehicle, even one proclaiming the virtues of “clean diesel,” could tell that it was smellier than cars powered by gasoline.
There are two important similarities between the scandals in the finance industry and at Volkswagen.
The first is that large corporations, whether banks or manufacturers, are deeply embedded in national politics, with elected officials dependent on such firms for job creation and tax revenues.
Volkswagen in particular is an icon of German manufacturing.
Chancellor Angela Merkel has gone out of her way to support the company, as did her predecessor, Gerhard Schröder, who came to its defense in 2003, when the European Commission challenged the legality of its holding structure.
The second similarity is that both industries are subject to multiple regulatory objectives.
Regulators may want banks to be safer, but they also want them to lend more to the real economy, which often means taking more risks.
As a consequence, they impose rules that do not clearly push banks in one direction or the other.
The regulation of automobile emissions faces a similar problem.
As regulators’ focus turned toward limiting global warming, there were tremendous incentives to manufacture vehicles that produced fewer greenhouse-gas emissions, even if that meant, as with diesel engines, emitting other gases and micro-particles that are much more harmful to humans in their vicinity.
There was never a discussion of the tradeoff between limiting local pollution and fighting climate change.
As the Volkswagen crisis so vividly illustrates, we need more than corporate apology and regulatory wrist slapping.
It is time for a sustained discussion about how to craft regulations that provide the proper incentives to achieve the objectives we truly desire: economic and social wellbeing.
It is only when that discussion takes place that we will get the banks, cars, and other goods and services that we want.
Voodoo Economics Revisited
WASHINGTON, DC – Democratic and Republican leaders in Washington are suddenly falling over themselves to agree on the need for major tax cuts – affecting not just middle-class Americans, but also very rich people (both living and when they die).
Does this sudden outbreak of the long-desired bipartisan consensus indicate that a new, stronger America is just around the corner?
Unfortunately, the opposite is true.
What we are seeing is agreement across the aisle on a very dangerous approach to public finance: a continuation and extension of what President George H.W. Bush memorably called “voodoo economics.”
Its consequences are about to catch up with America, and the world.
Bush was competing with Ronald Reagan for the Republican nomination in 1980.
Reagan suggested that tax cuts would pay for themselves, i.e., actually raise revenue – a notion that became known as “supply side” economics.
There’s nothing wrong with worrying about the disincentive effect of higher taxes, but the extreme version put forward by Reagan did not really apply to the United States.
When you cut taxes, you get lower revenue, which means a bigger budget deficit.
To be sure, no serious people are claiming the full Reagan effect today – partly because the Congressional Budget Office has kept everyone honest by showing in detail that the tax cuts will increase the deficit by close to $900 billion.
But there is a broader Reagan-type reasoning at work here: unemployment is high, the economy is not growing fast enough, and we “need a fiscal stimulus.”
For those who generally like lower taxes, of course, this, too, is wishful thinking.
Experience with fiscal policy over the past few decades is clear.
It is worth stimulating the economy with discretionary fiscal policy only occasionally – specifically, when not doing so would be calamitous.
Thus, it made sense to pursue a fiscal stimulus of some kind in early 2009.
More generally, fiscal stimulus is unlikely to have much lasting effect, as is the case now.
There may be some temporary positive impact on demand, or higher interest rates could offset the entire fiscal push – rates on the benchmark 10-year Treasury bond are up significantly from a month ago (from 3.21% to 4.16%), when the discussion of tax cuts began in earnest.
The market is nervous – mostly about the prospect of large fiscal deficits as far as the eye can see.
Some commentators dismiss this as irrational, but, again, that is wishful thinking.
The path-breaking work over many years of Carmen Reinhart, my colleague at the Peterson Institute in Washington, makes this very clear – no country, including the US, escapes the deleterious consequences of persistent large fiscal deficits.
(Indeed, her book with Ken Rogoff, This Time Is Different, should be required reading for US policymakers.)
In this environment, a further fiscal stimulus may prove counterproductive, with the extra spending counterbalanced by the negative effect on the housing market of higher interest rates.
The US Federal Reserve promised to hold down longer-term rates, but its commitments in that direction now seem ineffective.
But that is not the real danger here.
Most American politicians like to think and talk only about the US.
But longer-term US interest rates are very much affected by what happens in the rest of the world – and how private-sector investors view US government debt relative to other countries’ sovereign debt.
The eurozone’s problems certainly help the US sell more debt at lower prices – for now.
But the chances are high that the eurozone will sort out its difficulties in a year or so (most likely after another round or two of crisis), in part through the judicious use of fiscal austerity.
It would make complete sense if a German-led core emerged stronger and more politically integrated than before – within a eurozone that has a different composition, a different structure, and very different rules.
This presumably more fiscally unified political entity would be highly attractive to investors.
A year from now, what kind of economy will the US have?
Any short-term “fiscal stimulus” effect will have worn off, unemployment will still be high, and there will no doubt be politicians clamoring for more tax cuts.
The budget deficit will likely be in the range of 8-10% of GDP, even if growth comes back to some extent.
And the bond markets will be much more nervous, meaning higher interest payments, which will widen the deficit further.
We might also be looking at a potential ratings downgrade for US government debt – implying the prospect of even higher interest rates.
Some people expected Paul Ryan, a rising star within the Republican Party who will become Chairman of the House budget committee in the next Congress, to provide a fiscally responsible anchor to the next round of the deficit debate in the US.
Writing in The Financial Times in early November, Ryan suggested, “America is eager for an adult conversation on the threat of debt.”
But all indications are that he is just as childishly reckless on fiscal policy as most of his Republican colleagues since Ronald Reagan.
Unfortunately, there is no sign yet that the Democratic leadership is ready for a mature conversation about fiscal consolidation, either.
Both parties’ leaders will get there – but only when dragged, kicking and screaming, by the financial markets.
Voters vs. the Welfare State
STANFORD – Canada’s Prime Minister Stephen Harper, by winning an outright majority of seats in his country’s parliament for the first time since assuming office, continues a remarkable series of national election victories, backed by voters demanding at least a pause, and perhaps some reversal, of the growth of the welfare state.
Moreover, Harper’s victory follows the Republican Party’s resounding 2010 triumph in the United States’ mid-term election, a campaign largely fought on the size and scope of government, following the massive expansion of public spending in the wake of the financial crisis and recession.
British Prime Minister David Cameron (who leads, as Harper did until recently, a center-right coalition government), likewise won on a platform to roll back the excesses of the welfare state.
Next up is French President Nicolas Sarkozy’s anticipated re-election bid.
France has higher taxes and social-welfare benefits than the United Kingdom, Canada, or the US.
Sarkozy, despite initial attempts to roll back some French entitlements, has thus far produced less reform than Cameron or Harper, let alone Ronald Reagan or Margaret Thatcher in the 1980’s.
Some might argue that economic problems faced by governments are so severe that simply being in power invites being tossed out of office, regardless of ideology.
But Harper’s re-election suggests otherwise.
Harper lowered Canada’s sales and corporate taxes (now well below America’s), and, like Cameron, desires more rapid fiscal consolidation than US President Barack Obama.
The potential significance of these elections must be understood in the context not only of the recession and financial crisis, and the government interventions designed to deal with them, but also in the broader sweep of the historical evolution of these countries’ welfare states.
The following trends stand out:
· In all four countries, there has been a sizeable upward trend in government outlays as a share of GDP;
· In each country, there has been a sizeable increase in public spending in the last few years, particularly in the US and the UK;
· France has the highest government spending as a share of GDP – well over 50%, according to the OECD – and this has increased continually, decade after decade;
· The US currently has the smallest share of government spending in GDP, although it has gained substantially on Canada because of the spending explosion since 2000 – President George W. Bush’s military spending and Obama’s social spending;
· The increase in Canada’s public spending as a share of GDP since 2000 has been the smallest of the four countries;
· Canada and the UK have had periods of important reductions in the share of government spending.
In the UK, the share fell four percentage points in 1980-1990 (the Margaret Thatcher revolution), and fell further until 2000.
In the years prior to the financial crisis, Canada’s share fell from the mid-40’s to about 40%;
· Likewise, the Reagan Revolution in the US stopped the upward trend in non-defense spending.
What about economic performance, as measured by real GDP per capita?
The four countries rank exactly in inverse order of their government spending shares (according to both 2009 and pre-crisis 2007 data), with the US highest, followed by Canada, the UK, and France.
The simple correlation coefficient is about -0.9!
The voters appear to be onto something important.
Of course, correlation does not prove causation; there are myriad other factors that affect economic performance besides the size, composition, and nature of welfare-state spending (and clearly related taxes and debt).
Moreover, governments provide services, from defense and law enforcement to a humane safety net, that are essential to a successful economy and society.
But the size of the welfare state – and the erosion of incentives to work, save, and invest, owing to high taxes and bloated transfer payments – is a major impediment to faster income growth.
This simple analysis should raise a red flag about how we think about the trade-offs between dynamism and security, or growth and redistribution.
After all, real per capita income in the US is about 40% higher than in France, 22% higher than in Canada, and 31% higher than in Great Britain.
The relative histories have followed a similar trend (again, other factors are involved, not just taxes and spending).
For example, the US advantage over France has expanded from 25% to 40% since 1980, a period in which the share of government spending in GDP was stabilized in the US (until recently), while it grew substantially in France.
Likewise, French real per capita GDP exceeded the UK level in 1980, but was overtaken in 2000, and by 2007 lagged the UK by about 10%.
These differences are the equivalent of an entire generation of economic progress.
Those who want to control, reform, and reduce government spending seem to have the big picture right.
It is a prerequisite for substantial economic advance.
That is the broad lesson of history – from the Reagan and Thatcher revolutions in the US and the UK, to Stephen Harper’s more recent experience, to the repeat performance that David Cameron and the Republicans in the US Congress are now trying to engineer.
Only time will tell if the recent elections in the UK, the US, and Canada signal a retreat from the growth of the welfare state or just a temporary respite.
But comparing the US, Canada, the UK, and France reveals that the stakes are immense.
Waiting for America
Waiting for Obama
This is the season for Asian gatherings.
The Association of Southeast Asian Nations (ASEAN) summit in Thailand in late October brought all the key players of Asia together.
Come mid-November, almost all of them will meet again in Singapore at the Asia Pacific Economic Cooperation summit, which will include other Pacific leaders, plus US President Barack Obama.
Summits are a circus with many rings and acronyms.
At the ASEAN summit, the 10 Southeast Asian leaders met counterparts from China, Japan, and South Korea. These 13 countries then met again with India, Australia, and New Zealand.
Some 42 agreements were reportedly penned at the meeting, on issues ranging from outstanding trade and economic matters to the launch of a human rights commission.
Not bad for a summit that some feared would not happen at all: an earlier meeting planned for April in Bangkok had been disrupted by protesters – “red shirts” who support ousted Thai premier Thaksin Shinawatra.
As for Obama, he will first visit Japan, and, while at APEC, will also attend the first US-ASEAN Summit.
Afterwards, he will go to China and South Korea.
What additional dimension might America’s president bring on his first visit to the region?
Obama is still fighting back home for his healthcare initiative, and is hamstrung from acting on climate change in time for the Copenhagen summit, which is to agree on a successor treaty to the Kyoto Protocol.
So there is a risk that he will come to Asia for just a star turn and photo opportunities while reserving his strength for other battles.
But more is needed and should be expected of him.
Starting with Japan, Obama needs to ensure a good working relationship with Yukio Hatoyama, the new premier.
Japan has voiced support for an East Asian community that includes India, Australia, and New Zealand, while the Chinese and others question widening the circle.
The US should welcome the Japanese initiative and engage with Asia as a whole.
Keeping Japan close is a starting point.
Moving onto ASEAN, much attention will be on how Obama interacts with Myanmar’s leader, who will also be present.
Obama should stand for democracy and help push for a clean vote in the elections that the junta has promised for 2010.
But there are other, broader opportunities.
ASEAN has been the hub for Asian regionalism, but some in Australia have proposed focusing only on the larger countries.
Southeast Asians have a renewed openness towards American leadership, and meaningful initiatives can be started that would resonate with regional aspirations.
One such initiative is for freer trade.
While the US has stood on the sidelines, intra-Asian agreements have run ahead.
US Senator Richard Lugar has floated the idea of a free-trade agreement between the US and ASEAN.
But, with Myanmar included, this may be too difficult politically, and an ASEAN sub-grouping may be more realistic.
Another option is for the US to press for a Trans-Pacific Partnership.
This was proposed late in the Bush administration in order to forge links with some ASEAN members – Singapore, Vietnam, and Brunei – as well as others across the Pacific.
This could be built up to include other open Southeast Asian economies – Malaysia and Thailand – with the eventual aim being an APEC-wide agreement, which would be an impressive achievement if realized by the end of 2011, when it will be Obama’s turn to play host to all the leaders.
In this time of crisis and unemployment, the American public may question freer trade.
But more and more American businesses realize that still-growing Asian markets are vital for their future profits and overall economic recovery.
Most economic frameworks are among Asians only, but an American initiative could trump them and ensure that the region remains open and engaged with the US.
It could also help lessen the tendency of some governments to gravitate ever closer towards the booming Chinese economy.
Of course, when Obama arrives in Beijing, he must continue to strengthen cooperation with China.
On the economic crisis, climate change, and many other global issues, China and the US are potentially the decisive actors.
But the US must also engage in a more multilateral way to include Southeast Asia’s smaller countries.
China has been charming them over the past decade, and the US must offer an attractive alternative.
To cynics, APEC is a talking shop, while ASEAN is an arena for an ongoing contest between China and Japan, with India on the side.
But, despite the rivalries and all the chatter, it is clear that Asians are coming closer together.
And, while Asian regionalism is messy and rife with tensions and flash points, the US has been the stabilizing power in the region.
Obama has the opportunity to ensure that the region continues to see the US as the essential actor – now more open and helpful than before.
If he achieves this, Obama’s long trip will be valuable for Americans, and Asians will realize that it was worth waiting for him.
Walking with Giants
PARIS –In the aftermath of the G20 Pittsburgh Summit last year, European and American officials insisted that G20 membership was imposing “new responsibilities.”
They invited policymakers from the emerging giants to become more involved in designing a new global economic framework – implicitly suggesting that this has not been the case so far.
Yet the evidence does not support this view.
Brazil, China, India, Korea, and Mexico had already been playing a decisive role in two major areas – the global trade regime and the management of the worldwide economic crisis; the jury is still out on a third – climate change.
Few people appear to realize the fundamental contribution of the emerging economies to the success of the current global trade regime.
During the last three decades, the amazing success of China’s trade liberalization has done much more to convince other developing countries of the gains from trade than all the OECD countries’ exhortations.
Similarly, among World Trade Organization members, China has made the deepest commitment to liberalization of services, India has raised the issue of wider services liberalization, and Brazil has been decisive in cracking American and European agricultural protection.
During key WTO ministerial negotiations in July 2008, Brazil was the most pro-active negotiator.
Those negotiations failure are generally attributed to India and the United States, but most observers seem to agree that America’s responsibility was greater.
On crisis management in the wake of the financial meltdown in 2008, the emerging economies have been as diligent and active as the US and the European Union.
The deterioration of the overall fiscal balances of South Korea, China, and India has been just as severe as in the larger EU member states.
Crisis-related discriminatory macroeconomic measures taken in 2009 by all the main emerging economies other than India and Brazil are comparable to those in the US and throughout the EU.
Last but not least, the core emerging economies have abstained from increasing tariffs, and their stimulus packages grant much more limited subsidies to the banking and automobile sectors than do comparable packages in OECD countries.
The exception has been China’s dramatic stimulus measures, which, being industrial policies, will be a source of severe trouble in the future.
As for climate change, the positions of the emerging economies were until mid-2009 negative or defensive.
But India did much to change the mood when it became pro-active in the climate-change debate in the run-up to last December’s Copenhagen summit.
Just before the meeting, China announced a substantial cut in the increase, although not the level, of its emissions.
The leadership credentials of other G20 countries, such as Argentina, Indonesia, South Africa, Russia, Saudi Arabia, South Africa, and Turkey, have been less convincing.
These countries have been more hesitant in trade matters, more ambiguous in the instruments they have chosen for managing the crisis, and remain reluctant to deal with environmental issues. These attitudes also largely echo their less convincing economic performance.
The fact that the core emerging economies have contributed substantially to shaping the new global economic framework does not mean that they do not still face serious challenges.
In particular, the huge income discrepancies between them and the rich countries endanger their own long-term growth and political stability, and could yet impair their future involvement in the G20 process.
It is fashionable nowadays to look to stricter international rules as “the solution” to most global problems, But such a strategy is not well-suited to an ongoing shift in international economic relations.
The emergence of new world powers, combined with the diminishing influence of current powers, is not propitious for stricter disciplines.
The world’s rising powers are likely to be increasingly disinclined to accept constraints that they see as American or European tutelage.
At the same time, they are still far from being able either to exert leadership or introduce more discipline themselves.
This means that the OECD countries will have to lead by example.
What, in concrete terms, would such an approach mean?
First, when reforming their own domestic regulatory frameworks, they should avoid dramatic swings away from allegedly rational markets to allegedly rational governments.
Rather, they should improve the quality of regulation, along with enforcement and monitoring.
As regulation is a form of competition between governments, focusing on improved regulation increasingly looks like the best channel of influence available to OECD countries.
Second, OECD countries should keep their markets open, and open those that are closed – in agriculture (crucial to the sustained growth of emerging economies like Argentina, Brazil, and Indonesia) or in services (crucial for countries like India or Korea).
Above all, these areas hold the key to generating more domestically-based growth in all the emerging economies.
All of this implies much stronger support from OECD countries, especially the US, for a successful conclusion of the Doha WTO trade round.
This year, South Korea – one of the best performers during the global crisis – will hold the G20 chair.
Giving strong support to South Korea’s initiatives offers a splendid opportunity for the OECD countries to show that, though they remain proud of the disappearing post-WWII world, they do not fear the new world that is emerging.
Wall-to-Wall Wal-Mart?
Do you want to know which video clip will soon be scaring the daylights out of policymakers throughout the world?
In a scenario that looks uncannily like the spread of a global pandemic, the economist Thomas Holmes has prepared a dynamic map simulation showing the spread of Wal-Mart stores throughout the United States.
Starting at the epicenter in Bentonville, Arkansas, where Sam Walton opened his first store in 1962, giant boxy Wal-Mart stores have now multiplied to the point where the average American lives less than seven kilometers from an outlet.
Interestingly, the video shows how the stores spread out like petals of a flower, ever thickening and expanding.
Rather than jumping out to the coasts – 80% of all Americans live within 80 kilometers of the Pacific or Atlantic oceans – Wal-Marts have spread organically through an ever-expanding supply chain.
Even though each new store takes away business from Wal-Mart stores established nearby, ever-improving supply efficiencies help maintain the chain’s overall growth.
Love them or hate them, what is undeniable is that Wal-Mart is the quintessential example of the costs and benefits of modern globalization.
Consumers pay significantly less than at traditional outlets.
For example, economists estimate that the food section of Wal-Mart charges 25% less than a typical large supermarket chain.
The differences in price for many other consumer goods is even larger.
Consider the following stunning fact: together with a few sister “big box” stores (Target, Best Buy, and Home Depot), Wal-Mart accounts for roughly 50% of America’s much vaunted productivity growth edge over Europe during the last decade.
Fifty percent!
Similar advances in wholesaling supply chains account for another 25%!
The notion that Americans have gotten better at everything while other rich countries have stood still is thus wildly misleading.
The US productivity miracle and the emergence of Wal-Mart-style retailing are virtually synonymous.
I have nothing against big box stores.
They are an enormous boon to low-income consumers, partly compensating for the tepid wage growth that many of them have suffered during the past two decades.
And I don’t agree with friends of mine who turn their noses down at Wal-Mart stores, and claim never to have visited one.
As a consumer, I think big-box stores are great.
They have certainly been great for America’s trading partners; Wal-Mart alone accounts for over 10% of all US imports from China.
But I do have some reservations about the Wal-Mart model as a blueprint for global growth.
First, there is the matter of its effect on low-wage workers and smaller-scale retailers.
While completely legal, studies suggest that Wal-Mart’s labor policies exploit regulatory loopholes that, for example, allow it to sidestep the burden of healthcare costs for many workers (Wal-Mart provides healthcare coverage to less than half its workers).
And the entry of big-box stores into a community crushes long-established retailers, often traumatically transforming their character.
Yes, to some extent, such is the price of progress.
But the loss of aesthetics and community is not easily captured in simple income and price statistics.
Big-box stores are not exactly attractive – hence their name.
If they continue their explosive growth over the next 20 years, will Americans someday come to regard their proliferation as a spectacular example of the failure to adopt region-wide blueprints for balanced growth?
Indeed, many Europeans, and others, will view Holmes’s video simulation of Wal-Mart’s spread as a horror film.
The French may have invented the hyper mart – the forerunner of the big-box store – but they never intended to let their growth go unchecked.
The big question for Europeans is whether they can find ways to exploit some of the efficiency gains embodied by the Wal-Mart model without being overrun by it.
For Americans, there is the additional question of what to do when the big-box store phenomenon has run its course.
If so much of the US productivity edge really amounts to letting Wal-Mart and its big-box cousins run amok, what will happen after this source of growth tapers off?
The US economy has many other strengths, including its superior financial system and leading position in high-tech capital goods, but the fact remains that America’s advantage in these areas has so far not been nearly as striking as the Wal-Mart phenomenon.
It is curious how many people seem to think that the US will grow faster than Europe and Japan over the next ten years simply because it has done so for the past ten years.
Wal-Mart and its ilk are a central feature of the modern era of globalization.
They are not quite the pandemic that their explosive growth pattern resembles, but nor is their emergence completely benign.
Those who would aim to emulate US productivity trends must come to grips with how they feel about big-box stores sprouting across their countryside’s, driving down wages and plowing under smaller-scale retailers.
Americans, in turn, must think about where the proper balance lies between aesthetics, community, and low prices.
Shaking Up “Shaken Baby Syndrome”
OXFORD – The most tragic event that can befall new parents is the sudden, unexpected death of their baby.
Perhaps the only thing worse is the parents being wrongly accused of causing the death, and indeed prosecuted, owing to the medical community’s misinterpretation of the findings.
A small number of babies who collapse and die unexpectedly in their first year are found to have one or more of the following three symptoms in common: bleeding just outside the brain (subdural hemorrhage); bleeding at the back of the eye (retinal hemorrhage); and brain swelling.
These same features are also seen in some babies who have suffered trauma, such as falls or motor-vehicle accidents.
Yet many babies with these symptoms have no history or medical evidence of trauma (such as fractures, abrasions, or bruises), physical abuse, or neglect.
Pediatricians wrestled with this conundrum until the 1970’s, when it was proposed that shaking might induce rotational forces and cause the “triad” of symptoms without bruises or fractures. Over the years, these findings evolved into “shaken baby syndrome” (SBS), a medico-legal hypothesis that remains contentious, and scientifically unproven, to this day.
The SBS hypothesis attributed the triad of symptoms to the physical rupture of blood vessels on the brain’s surface and in the retina, and the tearing of nerve fibers within the brain.
It was suggested that these outcomes required a force equivalent to a multi-story fall or major motor-vehicle accident, causing immediate symptoms or collapse.
Because violent shaking cannot be accidental, the hypothesis simultaneously established a criminal act and identified the perpetrator, typically the person with the baby at the time of collapse.
Though the SBS hypothesis was incorporated into medical training and judicial decisions worldwide, it remained untested for almost two decades.
In 1987, the first biomechanical experiments found that the force of shaking is much less than that of impact and concluded that shaking alone was unlikely to cause the triad of symptoms.
Subsequent research in my specialty, pediatric neuropathology, established that the medical basis for the SBS hypothesis was also flawed.
We learned that the brain damage in these children did not reflect trauma to nerve fibers, but rather a failure of blood supply.
We also learned that the typical subdural hemorrhages in these cases are too thin to result from the rupture of the large bridging veins on the brain’s surface.
And we learned that the same findings are seen in natural deaths.
In the last decade, the list of other causes – including accidental trauma, congenital causes, and natural illness – has continued to grow.
Perhaps the most compelling observation in recent years is that subdural hemorrhages are present in nearly half of normal, healthy newborns with no evidence of birth trauma.
These findings, combined with the immature anatomy of the infant dura, suggest that dural bleeding in young babies may be a natural protective device – a reservoir to prevent backflow into the brain’s blood vessels during the pressure fluctuations of normal labor and delivery.
Because these anatomical features persist into early childhood, the dura may remain similarly vulnerable to bleeding beyond the newborn period.
Indeed, both birth-related bleeds and those attributed to shaking are most often located in the folds of membranes covering the brain that have more and larger blood vessels at this age than later in life.
While scientific evidence over the last three decades has undermined the shaken baby hypothesis, no new evidence has emerged to support it. Instead, several researchers have relied upon the data in older studies to calculate the statistical probability of inflicted brain injury when certain features (such as intracranial hemorrhage, retinal hemorrhage, brain swelling, and seizures) are present.
These probabilities are then offered as the basis for diagnosis and as evidence in court.
However, the reasoning behind the studies on which these researchers rely is circular, and based on assumptions now known to be unreliable. For example, in some studies, the researchers decided arbitrarily that falls of less than one meter could not harm a baby, so that parents who described such a fall must be lying.
Other studies viewed the parents’ inability to explain the findings as evidence of abuse.
Given these flaws, reviews of old studies do not provide a reliable evidence base for diagnosing abuse.
They simply predict the likelihood that specific findings will be categorized as abusive, and that, consequently, the child’s caregiver at the time will be accused or convicted of abuse, regardless of the accuracy of the diagnosis.
Leading proponents of the SBS hypothesis now acknowledge that the triad is a “myth,” that SBS diagnoses consist of “informed speculation,” and that the hypothesis is supported solely by confessions.
Some courts are following suit, with one US federal judge describing the types of confessions obtained as “worthless as evidence,” and another noting that, given recent developments, claims of SBS may be “more an article of faith than a proposition of science.”
No one questions whether infants can be damaged or killed by violent shaking or abuse; of course they can.
The real issue is whether shaking or abuse can be inferred on the basis of a hypothesis that lacks scientific support.
In no other area of medicine and law would an unproved hypothesis provide a basis for diagnosis, let alone criminal prosecution.
Given the developments of the past decade, we now face the possibility that for the past 30 years we have been wrongly imprisoning parents on the basis of a flawed hypothesis.
China’s North Korean Pivot
BEIJING – After a spring of heightened tension on the Korean Peninsula, a flurry of diplomatic activity in recent weeks has brought some hope of a meeting of the minds, at least between China, South Korea, and the United States.
But the emergence of a viable consensus on how to minimize the security risks emanating from North Korea’s mercurial leadership remains to be found.
After a reportedly tough meeting between Chinese President Xi Jinping and Vice Marshall Choe Ryong-hae, one of the four members of North Korea’s ruling presidium, the US-China summit in California took place with North Korea as one of the central points of discussion.
This was quickly followed by a Beijing summit between Xi and South Korean President Park Geun-hye.
The fact that Xi participated in all three meetings underscores two truths: China’s policy toward North Korea is the key to a solution to the problems posed by North Korea, and China may be actively searching for a new approach to its wayward ally.
China’s interest in a new North Korea policy is not entirely new.
After all, China’s policy toward the country has been gradually moving in a more constructive direction for the past two decades, reflecting China’s growing international prominence, as well as its leaders’ cautious embrace of the global role that their country’s new economic might has provided.
In the immediate post-Cold War period, China cooperated with other concerned parties in the process of resolving the first North Korea nuclear crisis of 1993-1994; but it tended to regard the North’s nuclear ambitions mainly as a bilateral issue between North Korea and the US.
President Bill Clinton seemed to agree, and adopted a bilateral approach to the nuclear crisis, which resulted in the two countries’ Agreed Framework of 1994.
But China upgraded its role in the 2000’s.
After North Korea’s enriched uranium program triggered another crisis in late 2002, President George W. Bush wanted to mobilize China’s influence in a more systematic way.
But China’s leaders balked, circumscribing their role severely.
Though Chinese leaders became more active by hosting the six-party talks, they still regarded their role as that of mediator between the US and the North, rather than that of a party whose security interests were seriously affected by events on the Korean Peninsula.
Immediately after the North’s second nuclear test in 2009, Chinese officials undertook a review of their country’s North Korea policy and decided to separate the nuclear issue from the overall bilateral relationship.
Thus, former Prime Minister Wen Jiabao visited Pyongyang in October 2009 and promised generous economic aid.
Chinese leaders may have believed that inducing the North to adopt the Chinese model of economic opening would create a better political environment for denuclearization.
One result was a deepening of North Korea’s economic dependence on China.
But the big problem was that the North’s leadership apparently interpreted China’s policy as a sign of unwillingness to pressure the North on nuclear matters.
Indeed, North Korean behavior became much more provocative, including an attack in 2010 that sank the South Korean corvette Cheonan and another in which the South’s Yeonpyeong Island was shelled.
Following this spring’s round of North Korean provocations, Xi appears to have concluded that enough is enough.
As a result, China’s North Korea policy has entered a new stage.
Xi’s criticism of the North’s nuclear ambitions has become both unusually public and blunt.
Chinese leaders may still view North Korea as a strategic buffer state, but China’s status as a global power is pushing them to view the North in a new way.
Former State Councilor Tang Jiaxuan was even reported to have said recently that denuclearization is now a higher priority for China than stabilization of the Korean Peninsula.
This approach should favor China’s global strategy, which is premised upon Xi’s desire to build a new type of “major power” relationship between China and the US (the Chinese government prefers “major power” to “great power,” probably in order to highlight its stated renunciation of hegemonic ambition).
Indeed, among the myriad unresolved issues dividing the US and China, North Korea’s nuclear program is the one most likely to impede mutual trust.
If the US and China are to avoid being steered by North Korea onto a collision course, they probably have four or five years to pursue a joint strategy – a timetable established by the point at which North Korea could have the technology to load miniaturized nuclear warheads atop long-range missiles.
As the North approaches this point, the US will have to strengthen its missile defenses in the western Pacific – areas close to China – in order to deter the North Korean threat.
The result, invariably, will be heightened Sino-US tension.
China has no interest in such an outcome.
The long-term costs of a worsening security confrontation with the US would exceed the short-term tactical benefits to be derived from continuing to support the North as a buffer state, especially given China’s deepening relationship with South Korea.
Though Park’s visit to Beijing has not closed the gap between the Chinese and South Korean approaches to the North Korean nuclear issue, it does seem to have prepared the ground for closer coordination between the two governments.
Those improved ties matter, because the time has come for China to rebalance its traditional geostrategic interests with its role as a global leader.
That calls for a Chinese policy of disciplined engagement toward North Korea, without which an internationally coordinated solution to the nuclear problem – and, with it, the promise of more productive relations with the US and South Korea – will be impossible.
Wanted: An Arab Jean Monnet
The Middle East is beyond doubt one of the most dangerous crisis regions worldwide.
The next war, terrorist attack, or failed peace initiative may lurk just around the corner.
Compared to the politics of this region, a rollercoaster ride is downright calming.
And yet the Middle East is also a region that, throughout its innumerable conflicts, has hardly changed, languishing in a strange kind of standstill.
There must be an intrinsic correlation between the lack of developmental dynamism of most Middle Eastern societies and the fact that the region is so crisis-prone.
The conflict between Israel and the Palestinians stands out as an example of the static nature of this key geopolitical region, because it seems to be completely unaffected by any international upheaval.
The Ottomans, the British, decolonization, the Cold War, numerous American Presidents, and even more international mediators have come and gone, but the parameters of this conflict and the inability to find a solution never seem to change.
However, this impression – correct where the past is concerned – might prove deceptive in the future, because two global megatrends will subject the region to more profound change than all the many previous political crises and wars were able to bring about.
The first is globalization, by which ever-larger parts of the Arab world, beginning with the Persian Gulf and its oil countries, will be influenced, albeit slowly, both economically and culturally.
With the shift of wealth and power from the West to the East, the pressures of globalization will increasingly come from the East.
In Morocco, for instance, investment from the Arab oil countries has already significantly reduced Europe’s importance.
The inherent contradiction between a governance structure incapable of change and economic modernization, between cultural and religious conservatism and social and normative transformation, will therefore increase and bring about new, additional frictions if positive answers to these fundamental changes cannot be found.
The second megatrend is the global climate crisis.
Apart from those countries that are threatened – partly or completely –by rising sea levels, global warming will primarily affect the desert belts and their already precarious water supplies.
And, while the conflicts in the Middle East are primarily about territory, this includes the scarce water resources so essential for survival.
Rapid population growth, a dramatic increase in water consumption due to industrial, agricultural, and tourism growth, and rising standards of living will make the water issue even more important to the region’s political stability than it is already.
A sustainable answer to questions of such vital importance to the Middle East only makes sense if it is regional in character.
And the same applies to the increasing demand for energy: although the region as a whole is rich in energy resources, their uneven geographical distribution suggests that any viable solution must be built on cooperation.
Of course, resolving the political crises and conflicts remains the top priority.
To make regional peace and stability possible, however, the region’s very young and rapidly increasing populations require an economic perspective that makes their participation in globalization possible – in a dignified manner and grounded in their own culture and history.
The Middle East’s individual states won’t be able to manage this without regional cooperation.
The European Union’s successful track record could therefore provide an almost perfect model.
In fact, the preconditions for intra-regional cooperation – up to partial integration of the interests of the countries involved – look more auspicious than they did in Western Europe in the early 1950’s.
Europe had neither a common language, nor was it as religiously and culturally as homogeneous as the Middle East.
For Europe, the starting point was visionary leaders like Jean Monnet and the creation of new institutions like the Coal and Steel Community.
In the Middle East, the process of regional integration could begin with water and energy.
A common market for goods and services could follow, along with a regional security system.
This would, finally, give the Middle East – a region poor in growth and rich in conflicts – a distinct identity, making it a player in global economic terms as well, and thus enabling it to become the architect of its own future.
Europe, once the continent of war, has shown that this is possible.
And Europe can help the Middle East – its neighboring region – achieve this strategic objective.
An instrument for it already exists: the new Union for the Mediterranean.
In any case, the time of standstill in the Middle East is coming to an end.
Whether the consequences of this development will be good or bad depends on whether the region can muster the foresight and strength actively to shape this process.
Imagination, vision, and pragmatic perseverance will be necessary. What is needed now is an Arabian Jean Monnet.
Wanted: Chinese Leadership on Currencies
WASHINGTON, DC – I share the growing concern around the world about the misalignment of currencies.
Brazil’s finance minister speaks of a latent currency war, and he is not far off the mark: it is in the currency markets that different economic policies and different economic and political systems interact and clash.
The prevailing exchange-rate system is lopsided.
China has essentially pegged its currency to the dollar, while most other currencies fluctuate more or less freely.
China has a two-tier system in which the capital account is strictly controlled; most other currencies don’t distinguish between current and capital accounts.
This makes the renminbi chronically undervalued and assures China of a persistent large trade surplus.
Most importantly, this arrangement allows the Chinese government to skim off a significant slice from the value of Chinese exports without interfering with the incentives that make people work so hard and make their labor so productive.
It has the same effect as taxation, but it works much better.
This secret of China’s success gives the country the upper hand in its dealings with other countries, because the government has discretion over the use of the surplus.
And it has protected China from the financial crisis, which shook the developed world to its core.
For China, the crisis was an extraneous event that was experienced mainly as a temporary decline in exports.
It is no exaggeration to say that since the financial crisis, China has been in the driver’s seat of the world economy.
Its currency moves have had a decisive influence on exchange rates.
Earlier this year, when the euro got into trouble, China adopted a wait-and-see policy.
Its absence as a buyer contributed to the euro’s decline.
When the euro fell to $1.20, China finally stepped in to preserve the euro as an international currency.
Chinese buying reversed the euro’s decline.
More recently, when the United States Congress threatened legislation against Chinese currency manipulation, China allowed the renminbi to appreciate against the dollar by a couple of percentage points.
Yet the rise in the euro, yen, and other currencies compensated for the fall in the dollar, preserving China’s advantage.
China’s dominant position is now endangered by both external and internal factors.
The impending global slowdown has intensified protectionist pressures.
Countries such as Japan, South Korea, and Brazil are intervening unilaterally in currency markets.
If they start imitating China by imposing restrictions on capital transfers, China will lose some of its current advantages.
Moreover, global currency markets would be disrupted, and the global economy would deteriorate.
China expert Michael Pettis has shown that consumption as a percentage of Chinese GDP has fallen from an already low 46% in 2000 to 35.6% in 2009.
Additional investments in capital goods offer very low returns.
From now on, consumption must grow much faster than GDP.
External considerations, too, cry out for allowing the renminbi to appreciate.
But currency adjustments must be part of an internationally coordinated plan to reduce global imbalances.
The imbalances in the US are the mirror image of China’s.
Whereas China is threatened by inflation, the US faces the risk of deflation.
At nearly 70% of GDP, consumption in the US is too high.
The US needs fiscal stimulus to enhance competitiveness, rather than so-called “quantitative easing” in monetary policy, which puts upward pressure on all currencies other than the renminbi.
The US also needs the renminbi to rise in order to reduce the trade deficit and alleviate the burden of accumulated debt. China, in turn, could accept a stronger renminbi and a lower overall growth rate as long as the share of consumption in its economy was rising and the improvement in living standards continued. The public in China would be satisfied; only exporters would suffer, and the surplus accruing to the Chinese government would diminish.
A large appreciation would be disastrous, as Premier Wen Jiabao says, but 10% a year should be tolerable.
Since the Chinese government is the direct beneficiary of the currency surplus, it would need to have remarkable foresight to accept this diminution in its power and recognize the advantages of coordinating its economic policies with the rest of the world.
China’s leaders need to recognize that their country cannot continue rising without paying more attention to the interests of its trading partners.
Only China is in a position to initiate a process of international cooperation, because it can offer the enticement of renminbi appreciation.
China has already developed an elaborate mechanism for building consensus at home.
Now it must go a step further and engage in consensus-building internationally.
The reward would be acceptance by the rest of the world of China’s rise.
Whether it recognizes it or not, China has emerged as a world leader.
If it fails to live up to the responsibilities of leadership, the global currency system is liable to break down and take the world economy with it.
Either way, the Chinese trade surplus is bound to shrink, but it would be much better for China if that happened as a result of rising living standards rather than global economic decline.
The chances of a positive outcome are not good, yet we must strive for it, because, in the absence of international cooperation, the world is headed for a period of great turbulence and disruption.
War Against the Laws of War
The value of the Geneva Conventions of 1949 and the additional `Protocols' of 1977 is impossible to overestimate.
In simple human terms, millions of people are alive today because these norms enabled the work of the International Committee of the Red Cross (ICRC).
Together, the conventions and protocols form what is misleadingly called international humanitarian law (IHL), but which in fact regulate war--seeking to limit its effects, regardless of the rights and wrongs involved, and to restrict its methods, even in battles undertaken in a just cause.
For example, many states now believe that the prohibition on intentionally targeting civilians is binding, and they act on that basis by actually limiting their battlefield tactics.
Consider the transformation of American military behavior from the Vietnam era, when commanders spoke of destroying villages "in order to save them," to its operations in Kosovo and Afghanistan, where military lawyers and even ICRC officials were consulted on what targets could be bombed.
This progress, which gained a further institutional foothold with the establishment of the International Criminal Court last July, led many to believe that the triumph of international law is no longer a utopian hope but a practical prospect.
The vision remains attractive, but in its moral seductiveness lies profound moral and intellectual danger.
It is worth recalling Walter Benjamin's observation that "every document of civilization is simultaneously a document of barbarism."
Florence Nightingale understood this when she declined to join the ICRC's founder, Henri Dunant, in the 1860s.
She argued that to set limits on war, as the ICRC devotes itself to doing, is also to make war more morally palatable to those who wage them and those who fight them.
Indeed, the fetishization of any document has a religious cast that should make any thinking person skeptical.
The law should be no more immune to critical examination than any other creed.
When Jakob Kellenberger, the ICRC's current president, asserts that it is "the principle of humanity" that underlies all of IHL, we enter the realm of legal idolatry.
But IHL is confronted not only by the ethical challenge of coping with its own moral hubris.
War began to mutate in the last part of the 20 th century.
Notwithstanding the horrors of the recent conflict between Ethiopia and Eritrea and the likelihood of catastrophe accompanying any Anglo-American attack on Iraq, most wars nowadays are civil wars.
As such, they are, almost by definition, less rule-bound than interstate wars.
The reasons are simple and brutal.
In civil wars, each side tends to deny the legitimacy, if not the humanity, of the other.
The goal is less often victory on the battlefield than ethnic cleansing, subjugation, even genocide.
If, as in Bosnia, a commander's goal is to replace the Muslim population of a given area with Serbs, then war has, by definition, been made indistinguishable from a war crime.
Were such a Serb commander to fight by the rules outlined in IHL--that is, afford civilians a basic measure of protection--there would be no purpose in initiating hostilities in the first place.
For the Bosnian Serbs in 1992, the Rwandan Hutus in 1994, or the Revolutionary United Front in Sierra Leone, the real adversaries were not enemy combatants but the civilian population of a rival ethnic or cultural group.
In such circumstances, law is useless.
The commission of war crimes may trigger international intervention à la Kosovo or East Timor.
But the idea that such interventions can become customary, that great powers (and only great powers have the resources to act effectively) will commit their troops to kill and die in endless wars of altruism is utopian in the worst sense of the term--it is utterly unrealizable.
So, far from having triumphed, international humanitarian law has never been more imperiled.
The law assumes a moral consensus among states and warlords that exists only in rhetoric.
Yes, the Rwandan government signed the Genocide Convention.
But a signature does not mean sincerity.
Obviously, some norms do eventually enlist the consent and support of those toward whom they are directed.
The problem is that no law of nature guarantees this.
Meanwhile, the actual conduct of intrastate war is growing more, not less, barbarous.
In most conflicts, prisoners' rights are routinely debased, torture is commonplace, and the inviolability of cultural and religious edifices is ignored.
When Kellenberger cheers on the rise of a civil society supposedly determined to "bring about greater respect for human rights and humanitarian law," he is mistaking his dreams for reality.
In fact, the assault on IHL comes not simply from warlords from Ivory Coast to Chechnya to Aceh.
It increasingly comes from states that, in their conduct of conventional military operations, tend to respect the laws of war.
The so-called "war on terrorism" saw to this.
The US, in particular, now believes that most of its adversaries are not soldiers in the conventional sense, but "unlawful combatants"--people to whom the protections of the Geneva Conventions do not apply.
If anything, the erosion of IHL now stems as much from decisions made in Washington as from the cruelties of militia commanders in West African jungles.
War and the Environment
Concern about the environmental consequences of war probably started after the first atomic bombs were dropped on Hiroshima and Nagasaki at World War Two's end, when no one knew how long lasting the radioactive contamination would be or what clean-up measures could be taken.
During the Cold War, the environmental effects of an all-out nuclear confrontation became a matter of forecast and speculation, illustrated by the concept ``nuclear winter.''
Not only nuclear weapons incited these fears.
The use of Agent Yellow and Agent Orange as defoliants during the Vietnam War gave rise to an intensive debate about--and some investigations of--such chemicals' toxicological and ecological effects.
Before the first Gulf War in 1991, there was discussion of the possible effects on the global climate if Iraq set the Kuwaiti oilfields on fire--which subsequently became the prime image of that war's environmental impact.
Attempts have been made ever since to systematically examine and document the environmental consequences of wars.
Studies of the Balkan wars and the many wars that consumed Afghanistan during the 1990's have been launched through international organisations like the United Nations Environment Progam (UNEP).
Unfortunately, Africa's wars--in Congo, Rwanda and Burundi, Liberia, Sierre Leone, and the Ivory Coast--have not yet received the attention they require.
What have we learned about the environmental consequences of wars?
First of all the effects depend upon the type of war and the type of environment.
A high-tech armed conflict has different--and not necessarily more benign--effects than one fought with machetes.
A war in the jungles of Southeast Asia is different from one in the deserts of Kuwait or one in the mountains of Afghanistan.
Despite these vast differences, it is possible to draw some conclusions:
Effects following destruction of infrastructure. These include burning oil wells, along with chemical or radioactive spills from bombed factories or storage facilities, bacterial contamination of water when sewage treatment systems are destroyed, and flooded or dessicated lands following the destruction of dams and irrigation systems;
Effects of physical or chemical impact on land cover. This category includes erosion and lack of re-growth--or significantly different growth--following deforestation, sand drift caused by damage to the ``desert crust,'' or beach erosion after destruction of coral reefs (e.g., by oil spills or bombs);
Effects of chemicals used by armed forces. Restrictions on civilian use are often not applied to the military.
Thus, Soviet-built tanks and artillery use PCB's in their hydraulic systems, airplanes in combat mission add ozone destroying halons to their fuel, and marine units use organic-tin compounds in the paint used on their hulls;
Effects of the weapons themselves. Ordinary bullets often consist of lead, tank-buster missiles contain uranium, and explosives are organic nitrogen compounds, sometimes containing mercury.
Moreover, mines, bombs, and grenades that failed to explode during combat often continue to render areas inaccessible both for humans and larger animals long after a war ends.
Among the environmental effects are also health effects following exposure to hazardous materials, such as inhalation of smoke from burning oil fields or uranium dust, resulting in asthma and possibly lung cancer.
Other health problems, such as ``Gulf War Syndrome,'' have proven more difficult to assign to any specific cause, despite much research.
Among the explanations are the combinations of pesticide fogging military camps, the treatment with a bromide compound, the use of insect repellents, vaccinations and exposure to depleted uranium.
Exposure to chemical warfare agents following the detonation of Iraq munitions in Khamisiyah has been discussed as a cause of the syndrome.
The massive scale of many wars and their impact is a special factor in their environmental impact.
The amount of oil pumped into the Persian Gulf by the Iraqis in 1991, probably to prevent an American Normandy-style landing, was over a million barrels and most likely close to 1.5 million tons--fifty times the amount released from the tanker ``Prestige'' off the Spanish coast last fall and forty times as much oil as ravaged the coast of Alaska in the 1980's, after the Exxon ``Valdez'' disaster.
Given the logistics involved in large-scale wars, there are also significant indirect or second-order effects, such as when a civilian oil tanker on route to Vietnam with fuel for America's forces there ran aground on the coral island of Kiltan in the Laccadives.
The environmental consequences measured in economic terms are also significant.
The cost of environmental restoration from oil on 640 kilometers of Saudi beaches after the 1991 Gulf War was $540 million.
Removal of some 1.6 million landmines in Kuwait cost in more than $400 million.
These are only two components of the environmental debt of that war.
Paradoxically, while wars are environmentally destructive, former military zones, both within and between countries, often become wildlife refuges where endangered plant and animal species thrive.
In Europe, both the black stork and the European sturgeon have survived in such areas, and the former line of demarcation between East and West Germany is today a biodiversity sanctuary.
Warning: Hospitals May be Unsafe for the Poor
Most public health initiatives in developing countries focus on controlling infectious diseases in the community.
The morbidity and mortality caused by diseases such as malaria, tuberculosis, schistosomiasis, and pediatric pneumonia and diarrhea certainly justify such priorities.
But another aspect of the public health system in nations with limited healthcare resources – hospital�acquired infection – has been largely ignored by the public, press, and funding agencies.
Developing nations lavish their limited resources on hospitals, which consume more than 50% of healthcare budgets in many poor countries.
Officials in these countries are striving to identify sick patients in the community and to triage them to regional facilities that have the expertise to provide appropriate diagnosis and treatment.
Some of these facilities may be modest local clinics with a few beds.
Others are regional or national tertiary care centers offering as much high�tech diagnosis and treatment as the country can afford (or persuade industrialized nations or philanthropists to provide).
The craving for expensive, technologically sophisticated care is noteworthy.
In part, poor countries make these large investments because they are devoted to improving the quality of diagnosis and treatment.
In part, they make them to keep their best physicians.
These doctors, trained in advanced countries, return home with a keen desire to use their newly honed skills, only to find themselves hamstrung by outdated radiology equipment, a limited range and unreliable supply of drugs, and primitive life�support technology.
High�tech hospitals are also status symbols, and some countries seek prestige by building the most modern facilities.
The industrialized countries that build and help fund these projects may be motivated, at least in part, by pressure from the companies that make high�tech equipment and supplies.
Nations that make large investments in hospitals and physicians who are devoted to improving quality of care clearly expect to see improved patient outcomes.
But their expectations often are disappointed.
Indeed, these huge investments are frequently counterproductive.
Many patients enter hospitals only to fall victim to largely preventable, potentially fatal, antimicrobial�resistant infections.
These infections also prolong hospitalization and require additional diagnosis and treatment, generally with expensive, difficult�to�obtain antibiotics.
The more advanced (and expensive) the care, the higher the risk.
Danger is greatest in intensive care units (ICUs).
Concentrating large numbers of critically ill patients on a single ward facilitates transmission of disease�causing microorganisms via the hands of care�givers.
Patients admitted to ICUs become colonized rapidly with hospital bacterial pathogens, which often are resistant to antibiotics.
ICU patients are infection�prone because they are exposed to invasive devices (such as intravenous or arterial catheters and mechanical ventilation), complex surgical procedures, and drugs that weaken the immune system.
ICUs in developing countries not only have high rates of infection day�in and day�out, but also are subject to devastating outbreaks of lethal bloodstream infection and pneumonia due to contamination of equipment, medications, and other supplies.
The widespread lack of appreciation of the importance of hospital�acquired infections among care�givers and policymakers in developing countries is disheartening.
The thirst for technology is not accompanied by an appetite for infection control.
On one occasion, my colleagues and I were invited to a public hospital in a developing country to investigate why the death rate in a pediatric ICU caring for patients with dengue hemorrhagic fever was so high.
The prevailing theory held a virulent strain of the dengue virus responsible.
Instead, we discovered that most of the children were dying from hospital�acquired bloodstream infection caused by the very devices that were supposed to save their lives – intravenous catheters, mechanical ventilators, and bladder drainage catheters.
Though the equipment was adequate, infection control and staff training were not.
A damp towel teaming with hospital bacterial pathogens was used to dry hands.
Intravenous and bladder catheters were neither inserted nor maintained properly.
Tubing for ventilators (hung to dry over a hole in the floor used to dispose of urine and wastes) was not disinfected correctly.
We found innumerable other violations of basic infection control technique.
Nonetheless, a bone marrow transplant unit, financed largely by Japan, had just opened in the same hospital – placing the most vulnerable patients at the mercy of deadly infections.
Sound infection control costs only a mere fraction of even basic medical technologies.
Granted, countries with limited resources cannot supply their hospitals with the full repertoire of infection controls available in wealthier nations.
Yet, much can be done.
Infection control principles, such as effective hand hygiene and good aseptic technique, are simple and easily taught.
Even where safe water is unavailable, effective decontamination of hands can be accomplished in seconds by using a water�less, alcohol�based hand gel that costs a few US pennies if manufactured locally.
Gloves, locally manufactured, can be reserved for high risk activities to prevent cross�infection among patients and protect care�givers from blood�borne infections.
Proper disinfection of equipment is generally affordable (especially in comparison to the cost of equipment itself), and contamination of medications and solutions can be avoided through training and vigilance.
Deadly outbreaks of Lassa fever and Ebola have occurred among patients and care�givers in rural facilities simply because gloves and other personal protection necessary to prevent the spread of these blood�borne viruses were unavailable or, if available, not used properly.
Experience shows that invasive devices, such as intra�vascular catheters, ventilators, and bladder catheters, tend to be overused in hospitals that have access to them, and tend to be left in place for longer than is medically necessary.
This is the worst�case scenario – expensive material is wasted and the risk of infection increased.
Overuse of antibiotics can also be curtailed by standardized protocols, thus reducing costs and retarding the emergence of resistance.
Healthcare policy leaders and funding agencies should remember that even the most fearsome contagious diseases can yield to basic infection control training and equipment.
But hospital�acquired infections must be given proper priority.
If not, many investments in costly hospital facilities in the developing world may do more harm than good.
War Without End on Congo’s Women
NEW YORK – The violence in Congo is unspeakable.
But, if the horror of Congo’s recent wars – which have killed more people than any war since World War II – is to end, the unspeakable must be spoken.
Across the eastern regions of the Democratic Republic of Congo, government soldiers, members of renegade government military units, and myriad militias are gang raping untold thousands of women.
They are making sex slaves of some women, branding some victims like cattle, and maiming and mutilating women and girls, some as young as three years old, by destroying their vaginas and other internal organs.
Sometimes, the gunmen force their victims’ fathers, brothers, and husbands to rape them, or the women to eat the flesh of their murdered relatives.
Afterward, many of the women find themselves utterly alone as they suffer the physical and psychological effects of trauma and cope with destitution, unwanted pregnancies and children, HIV/AIDS, and ostracism by their loved ones who shun them as “diseased” or “tainted.”
Who are these killers and rapists, these men who have committed appalling crimes for more than a decade with complete impunity?
Many are the so-called “genocidaires” who fled from Rwanda into Congo after participating in the massacre of 800,000 Tutsis in 1994.
Others are Rwandan rebels and members of Congo’s army.
Still others are men and boys recruited and press-ganged into militia units.
Violence has displaced more than 350,000 people in eastern Congo since the beginning of 2007.
Recently, thousands more fled fresh outbreaks of fighting between local militias and supporters of Laurent Nkunda, a renegade general of Congo’s army, who has rejected a call to begin disarming his troops.
A United Nations peacekeeping force deployed in eastern Congo was supposed to have protected the region’s civilians; the peacekeeping force’s failure to safeguard the women has gone unremarked, in part, because a veil of silence surrounds what is occurring.
Women in the eastern Congo have no say in the decision-making that drives the conflict consuming so many of their lives.
They have no access to political and economic power in a society that considers them of scant value.
Congo’s government has undertaken no significant effort to bring those responsible for these gender atrocities to justice; new laws have paid lip service to sexual violence, but no one has been prosecuted.
The international community, too, has failed.
The International Criminal Court in The Hague, which is investigating the crimes in eastern Congo, has only this week indicted the first Congolese militia commander for gender-based crimes.
It is Secretary General Ban Ki-Moon’s duty to speak up, to take a leadership role, to bring this situation before the Security Council, call for it to meet in a special session, and urge it to take effective action immediately.
Thousand more peacekeepers – let many of them be women – must be deployed in the affected provinces.
The Chief Prosecutor of the ICC, Luis Moreno Ocampo, should be urged to accelerate his investigations and, once the evidence is sufficient, bring charges against those who have committed these crimes or failed to discipline or prosecute the perpetrators.
The local authorities should be assisted in efforts to pursue, arrest, and prosecute accused perpetrators before new local tribunals that enjoy significant prosecutorial and police powers.
Support should be given to courageous local women’s groups that are providing care to the victims.
Medical and other assistance is needed to treat the overwhelming numbers of victims.
If the people with the power to end the violence in the Democratic Republic of Congo maintain their silence and continue to do nothing, the perpetrators will grow only bolder in their destruction of women’s lives.
When impunity for unspeakable acts goes unchallenged, those acts become even more unspeakable.
Washington and the Art of the Possible
CHICAGO – These days, the United States media are full of ordinary Americans venting their rage at the incompetence and immaturity of their politicians.
Even though the US government’s debt limit was raised in the nick of time, the process was – and remains – fraught with risk.
Why, the public asks, can’t politicians sit down together like sensible adults and come up with a timely agreement that commands broad consensus?
If we can balance our household budgets, they ask irately, why can’t our political leaders?
The reality, though, is that US politicians reflect the views of the American electorate – views that are fundamentally inconsistent.
The absence of broad consensus is no wonder.
Indeed, the last-minute agreement to raise the debt ceiling is proof that the politicians did what they were sent to Washington to do: represent their constituencies and only compromise in the interests of the country as a whole.
The key question is whether the political gridlock exposed by the debt-ceiling debate will worsen in the run-up to the 2012 presidential and congressional elections – if not beyond.
That is possible, but we should not overlook cause for hope in what America’s politicians just accomplished.
Let’s start with why the electorate is so polarized.
There are two key divisive factors: income and age.
Income inequality has been growing in the US over the last three decades, largely because the labor market has increasingly demanded skills that the education system has been unable to supply.
The everyday consequence for the middle class is a stagnant paycheck and growing employment insecurity, as the old economy of well-paying low-skilled jobs with good benefits withers away.
Until the financial crisis, the easy availability of credit, especially against home equity, enabled the middle class to sustain higher consumption despite stagnant incomes.
With the collapse of the housing bubble, many people lost their jobs and health insurance, risked losing their homes, and suddenly had little reason for economic optimism.
The response from America’s Democratic Party, which has traditionally represented this constituency, was to promise affordable universal health care and more education spending, while also protecting government jobs and entitlement programs.
When added up, such spending is unaffordable, especially with current federal revenues at just 15% of GDP.
The solution for many Democrats is to raise revenues by taxing the rich.
But the rich are not the idle rich of the past; they are the working rich.
To balance the budget only by taxing the rich will require a significant increase in income taxes, to the point that it would lower incentives for work and entrepreneurial activity considerably.
This is not to say that taxes on the rich cannot be increased at all; but such increases cannot be the primary way of balancing the budget.
Republicans, trying to give voice to many working Americans’ ambient uneasiness with rising government expenditures, as well as to the growing anger of the working rich, find it easier to defend a principle than a particular constituency.
Hence their mantra: no additional taxes.
The neat divide based on income is muddled by the elderly.
It is understandable that older Americans who have few savings want to protect their Social Security and Medicare benefits.
However, even elderly Tea Party Republicans, who are typically against big government, defend these programs because they view them as a form of property right, paid for when they worked.
In truth, rising life expectancy and growing health-care costs mean that today’s elderly have contributed only a fraction of what they expect to receive from Social Security and Medicare.
The government made a mistake in the past by not raising taxes to finance these programs or reducing the benefits that they promised.
Unless the growth of these entitlement programs is curbed now, today’s young will pay dearly for that mistake, in the form of higher taxes now and lower benefits when they are old.
But the elderly are politically active and powerful.
Not only do many defend their entitlements strongly; some oppose growth in other types of public spending for fear that it will weaken the government’s ability to pay for the benefits that they believe they are owed.
These then are the roots of America fiscal impasse, which has produced passionate constituencies viscerally opposed to compromise.
Any political deal significantly before the debt-ceiling deadline would have exposed politicians to charges of betrayal from their constituents.
And, given that President Barack Obama would ultimately be held responsible for a default, he needed the deal more than the Republicans did.
So he had to coerce his party into accepting a deal full of spending cuts and devoid of tax increases.
Will the deal deliver what it promises?
A bipartisan committee has to propose $1.5 trillion in deficit reduction by the end of this year, and Congress must either accept that proposal, or see immediate, politically painful expenditure cuts, which would include defense spending – an area that America’s Republicans care about strongly.
If this structure works as advertised, Congress will be forced to reach a compromise, which can be sold once again by politicians to their polarized constituencies as being necessary to avoid a worse outcome.
This time, Obama’s Democrats will be on a level playing field, because both parties will be held equally responsible for a failure to reach a deal.
Ultimately, the big necessary decisions on curbing entitlement growth and reforming the tax code will probably have to wait until after the next election, giving the divided electorate an opportunity to reflect on its own inconsistency and send a clearer message.
In the meantime, US politicians might have done just about enough to convince debt markets that America’s credit is still good.
For that, Americans – and others around the world – should stop pillorying them and give them their due credit.
Was Killing Bin Laden a Mistake?
LONDON – “He lived a hero, he died a martyr...if they killed one Osama, a thousand others will be born,” says a comment on a Facebook group called “We are all Osama bin Laden.”
The group was formed one hour after US President Barack Obama’s announcement of the Al Qaeda leader’s death.
That Facebook group already has around 30,000 “likes.”
Moreover, there are more than 50 similar groups on Facebook.
Reaction to Bin Laden’s death on Al Jazeera and other Arabic news outlets has been mixed.
Some view the man considered a mass murderer in the West as an icon, and his death and burial at sea at the hands of American forces will not undermine that perception in the eyes of his sympathizers.
Indeed, Egypt’s former Mufti, Sheikh Nasr Farid Wasil, has already declared Bin Laden a martyr, “because he was killed by the hands of the enemy.”
(Sheikh Wasil, it should be made known, has no links or known sympathies for Al Qaeda and he represents a very different Islamic school of thought.)
Aside from the mixed signals online, in the virtual world, the critical question is whether eliminating Bin Laden marks the beginning of Al Qaeda’s demise in reality.
Some terrorist organizations have, of course, collapsed following the death of their charismatic leader.
The case of Shoko Asahara, the founder of Aum Shinrikyo (the Japanese group that organized the Sarin gas attack on Tokyo’s subway in 1995), comes to mind here.
But capturing and trying violent leaders is probably a better marker of the end of such organizations –&nbsp;the chances of such an outcome being higher when such leaders recant their views and call on their followers to lay down their arms.
Abimael Guzmán, the leader of the Maoist Shining Path in Peru, and Abdullah Ocalan, the leader of the Kurdistan Workers’ Party (PKK) in Turkey, are notable examples of this.
By contrast, far from causing the demise of an armed movement, the killing of a charismatic leader at the hands of his enemies can transform such a figure into a martyr.
Che Guevera was far more valuable to leftist militancy after his death than he was while alive.
Armed Islamism has its particularities, of course, but it also shares important characteristics with some of these groups, including the relationship between the physical elimination of a leader and organizational survival.
Decentralized organizations with relevant ideologies, operating in contexts full of conditions conducive to armed action, usually survive leadership losses, whereas hierarchical, cult-like organizations often do not.
Since 9/11, Al Qaeda has been far from a hierarchical, cult-like organization.
Abu Musab al-Zaraqawi’s Al Qaeda offshoot in Iraq demonstrates this well: the group was called Al Qaeda in Mesopotamia for recruitment and propaganda purposes, but it was quite autonomous organizationally and operationally.
When Bin Laden’s close collaborator Ayman al-Zawahiri asked al-Zaraqawi to avoid targeting Shiites, al-Zaraqawi instead escalated the violence against them.
Al Qaeda’s franchise model applies to Algeria, Yemen, North Mali, and Somalia as well.
And, like guerrilla movements of yore, Al Qaeda partakes of “ideological front” tactics: small urban cells and/or vulnerable individuals subscribe to the ideology and self-recruit or self-start an affiliated cell.
In all of its decentralized modes of operation, Bin Laden mainly played the role of inspirational guide and iconic figurehead – a role better played when dead by American guns than alive, hiding from them.
Consider Sayyid Qutb, the Islamist intellectual who influenced Bin Laden and others.
Qutb was executed by Gamel Abdel Nasser’s dictatorship in Egypt in August 1966, in an attempt to reduce his influence.
That tactic backfired badly.
Of the 98 fellow Muslim Brotherhood prisoners with whom Qutb discussed his new confrontational ideology in 1964, 35 were strongly supportive, 23 strongly opposed, and 50 hesitant.
Despite his intellectual status and prestige, Qutb had failed to persuade the majority of like-minded inmates under conditions of repression.
But, no sooner was Qutb the intellectual executed than Qutb the grand martyr was born.
His supporters soon numbered in the thousands, rather than the dozens, and he came to inspire generations, not just individual inmates.
Moreover, Qutb was executed by an Arab Nationalist Muslim leader, whereas Bin Laden was killed by US Navy Seals.
That makes a significant difference in the Muslim world.
Imprisonment, followed by recantation of violence, has become almost a trend in several jihadist groups, notably the 20,000-strong Egyptian Islamic Group, factions of the al-Jihad Organization in Egypt, and smaller groups like the Libyan Islamic Fighting Group.
Leading figures in armed Islamist movements have not only abandoned political violence, but have also de-legitimized it as a means for social and political change after spending periods in prison.
For example, Sayyid Imam al-Sharif (a.k.a. Dr. Fadl), an Al Qaeda ideologue for a decade, published several books denouncing armed activism, both theologically and on tactical grounds, after spending several years in prison.
The same applies to the Islamic Group, a movement implicated in violent acts in almost a dozen countries throughout the 1980’s and 1990’s, including armed insurgency in Egypt, bombings in the United States and Croatia, assassination attempts in Ethiopia, and training camps in Afghanistan.
In the 2000’s, the imprisoned leadership of the Group produced more than 25 books aimed at de-legitimizing political violence as a method for change.
Eliminating the “spiritual guide” (as opposed to the organizational leaders) of a militant group might be perceived as a political victory for a government in the short term, but it probably makes a comprehensive de-radicalization process less likely, and it will not necessarily mean the end of the organization in question.
For long-term results, capture is almost always more effective than killing.
Wasting Food in a Hungry World
OTTAWA – One-quarter of all the food in the world is lost each year, owing to inefficient harvesting, inadequate storage, and wastage in the kitchen.
Halve that waste, and the world could feed an extra billion people – and make hunger yesterday’s problem.
The extent of food loss is particularly galling in view of a new global study on food security from the United Nations Food and Agricultural Organization.
According to the FAO, 57 developing countries have failed to achieve the Millennium Development Goal of halving the proportion of hungry people by this year.
One in every nine people on the planet – 795 million in all – still goes to sleep hungry.
Of course, there has also been remarkable progress: over the last 25 years, the world has fed an extra two billion people, and – for all the 57 failures – the developing world as a whole has almost halved its hunger rate.
But the challenge is to sustain the progress: by 2050, demand for food will have nearly doubled.
One reason is that by then the world will have added another two billion mouths to feed; a second reason will be the growing appetite of a surging new middle class.
At the moment, the UN is considering 169 new development targets to succeed the Millennium Development Goals (hunger is one target area, among many).
These targets are vitally important, because they will determine how more than $2.5 trillion in development money is spent on everything from climate change to malaria.
My think tank, the Copenhagen Consensus Center, therefore asked 60 teams of top economists to assess which proposed targets will do the most good – and which will not.
Our research on food security shows that there are smart ways to feed many more on the planet – but they have little to do with the campaigns against waste seen in most of the rich world.
In the rich world, the focus is on food wasted by the consumer.
This makes sense: more than half of the rich world’s losses take place in its kitchens (basically because we can afford it).
In Britain, for example, the greatest waste is in salads, vegetables, and fruits – luxuries when compared with the cheap calories contained in the grains and tubers consumed throughout the developing world.
Smaller households in rich countries waste more per person, because it is harder to put everything to use, while richer households add waste when they can afford to buy extra “just to be on the safe side.”
By contrast, the world’s hungry poor waste very little, simply because they cannot afford to.
In Africa, daily food waste averages 500 calories per person – but consumers account for only 5% of this loss.
More than three-quarters of the waste occurs well before the kitchen, in inefficient agriculture, because birds and rats eat crops during harvest, for example, or pests spoil grain stores.
There are many remedies for this kind of waste – from the “curing” of roots and tubers to minimize damage, to more expensive refrigeration.
So why aren’t these technologies – widely used in richer countries – adopted in the developing world?
The answer is a lack of infrastructure.
If there are no proper roads linking fields to markets, farmers cannot easily sell their surplus produce, which may then spoil before it can be eaten.
Improving road and rail capacity enables farmers to reach buyers – and fertilizer and other agricultural inputs to reach farmers.
Supplying reliable electricity permits grains to be dried and vegetables to be kept cool.
Economists from the International Food Policy Research Institute estimate that the overall cost of approximately halving post-harvest losses in the developing world would be $239 billion over the next 15 years – and would generate benefits worth more than $3 trillion, or $13 of social benefits for every dollar spent.
This would make food more affordable for the poor.
By 2050, better infrastructure could mean that 57 million people – more than the current population of South Africa – would no longer be at risk of hunger, and that about four million children would no longer suffer from malnutrition.
Most of these gains would be in Sub-Saharan Africa and South Asia, the world’s most deprived regions.
But there is an even better investment.
We can achieve three times the economic benefits, and even larger reductions in the number of people at risk of hunger, if we focus on improving food production rather than just on preventing food losses.
Today, only $5 billion is spent annually on research to improve the seven major global food crops, and just one-tenth of that is targeted to help small farmers in Africa and Asia.
Investing an extra $88 billion in agricultural research and development over the next 15 years would increase yields by an additional 0.4% each year.
That might not sound like very much, but the reduction in prices and improvements in food security would help almost everyone.
It would be worth nearly $3 trillion in social good – yielding an enormous $34 of benefits for every dollar spent.
Hunger is a complex problem, exacerbated by financial pressures, volatile commodity prices, natural disasters, and civil wars.
But we could take an enormous step toward winning the global campaign against malnutrition, simply by investing in improved infrastructure and in agricultural research and development.
Water for All
This month, water once again takes center stage at the Fourth World Water Forum in Mexico City.
It is an opportune moment: while much of the world’s attention has been fixed on issues of energy supply and security, hundreds of millions of people in the developing world continue to see the supply and security of fresh water as equally, if not more, important.
Surveys undertaken by the World Bank in developing countries show that, when poor people are asked to name the three most important concerns they face, “good health” is always mentioned.
And a key determinant of whether they will have good health or not is access to clean water.
More than a billion people around the world today do not.
As a result, they are increasingly vulnerable to poor health.
The World Bank estimates that by 2035, as many as three billion people, almost all of them in developing countries, could live under conditions of severe water stress, especially if they happen to live in Africa, the Middle East, or South Asia.
This will cause obvious hardship, but it will also hold back the economic growth needed for millions of people to escape poverty.
In Latin America, about 15% of the population – roughly 76 million people – do not have access to safe water, and 116 million people do not have access to sanitation services.
The figures are worse in Africa and parts of Asia.
This is a situation that few people in rich countries face.
Generally, these countries’ citizens enjoy services that provide for all water needs, from drinking to irrigation to sanitation.
In addition, other water-related issues, such as the risks posed by flooding, have been reduced to manageable levels.
Rich industrial countries have invested early and heavily in water infrastructure, institutions, and management capacities.
The result, beyond the health benefits for all, has been a proven record of economic growth; one only has to look at investment in hydropower to see the positive impact of water management projects on many economies.
Granted, rich countries have a certain advantage: they benefit from generally moderate climates, with regular rainfall and relatively low risks of drought and flooding.
Even so, they are not immune to water-related disasters, as Hurricane Katrina’s destruction of New Orleans taught us.
But the impact of such events on poor countries is much greater.
Extreme rainfall variations, floods, and droughts can have huge social and economic effects and result in the large-scale loss of life.
The Gulf coast of Mexico and Central American countries has repeatedly experienced such tragedies, with poor communities the most vulnerable and the least able to cope.
Ethiopia and Yemen are equally stark examples.
Ethiopia’s development potential is closely tied to seasonal rains, so high rainfall variation, together with lack of infrastructure, has undermined growth and perpetuated poverty.
A single drought can cut growth potential by 10% over an extended period.
Yemen, for its part, has no perennial surface water; its citizens depend entirely on rainfall, groundwater, and flash flooding.
To move forward, developing countries need new water infrastructure and better management.
Any approach must be tailored to the circumstances of each country and the needs of its people, but there is no fundamental constraint to designing water development investments that ensure that local communities and the environment gain tangible and early benefits.
In some countries, new water infrastructure may mean canals, pumping stations, and levees.
Still others might need deeper reservoirs, more modern filtration plants, or improved water transport schemes.
These can all potentially be designed to improve and expand water supplies for power generation, irrigation, and household and industrial use, while providing security against droughts and protection from floods.
The key to successful increased investment in water infrastructure is an equally increased investment in water institutions.
Badly managed infrastructure will do little to improve peoples’ health or support economic growth, so water development and water management must go hand in hand.
Water infrastructure can and must be developed in parallel with sound institutions, good governance, great attention to the environment, and an equitable sharing of costs and benefits.
A water investment policy that reduces the vulnerability of the poor and offers basic water security for all will require customized planning and an effective partnership of donor countries, developing country governments, the private sector, and local communities.
Delegates to the World Water Forum will have ample opportunity to forge and/or strengthen these partnerships.
If they succeed, the rewards for the world’s poor will be immense.
Hard Wisdom for Scarce Water
CAMBRIDGE – In California, residential consumers are being fined for wasting water.
The goal is to combat a severe drought by reducing residential consumption by 20%.
The trouble is that residential water use accounts for less than 15% of total consumption.
The rest is used mainly for agriculture.
Even if the desired cuts are achieved, they will account for less than 3% of total demand – a drop in an otherwise empty bucket.
Meanwhile, in China, some 30,000 workers are trying to change the weather, attempting to seed clouds from airplanes or using anti-aircraft guns to shoot shells into the air, hoping to coax some rain from the sky.
There is no statistical proof that this type of weather manipulation works, but cloud seeders are also busy in the United States, mainly in the west.
These pointless policies are what I have come to call “political placebos”: attempts by governments to demonstrate to their citizens that they are doing something – anything! – to alleviate water shortages.
Placebos may have their place in medicine, but when they distract from efforts to address the underlying malady, they can do more harm than good.
Measures like those in California are like instructing police officers to blare their sirens wherever they drive to create the impression that crime is being fought.
As climate change leads to deeper and more frequent droughts, the resulting water shortages will require new, sometimes difficult, solutions that go beyond futile attempts to placate the public.
The challenges are daunting.
In many places, underground water is considered the property of the owner of the land where the water is extracted, even when a well’s user is tapping an aquifer that spreads across thousands of square miles.
As a result, there is little incentive to conserve.
Meanwhile, widespread pumping lowers the level of the entire aquifer, potentially allowing salt water to encroach.
And, because this arrangement is tied to property rights, only the bravest of politicians dare to address it.
In some parts of California and Texas, a portion of the water supply is provided to consumers for almost nothing – delivered by a network of dams, reservoirs, and aqueducts that were built decades ago.
The Hoover Dam, for example, which created Lake Mead, the largest reservoir in the US, was built in 1936 during the Great Depression as part of the New Deal.
Even if the federal government had intended to get a return on its investment by selling the water from Lake Mead, the dam’s construction costs have long since been amortized.
Unlike other commodities, the price of water is very often a political decision, subject to the influence of interest groups that lobby for subsidies.
For example, most of the water used in agriculture in Texas and California is sold at a price below its cost.
As a result, it is frequently wasted.
The cost for an acre-foot of water in Dallas or Austin is at least $150.
Texas rice farmers, however, pay just $10, and every year they consume the equivalent of a five-foot flood.
Such a large quantity of water is not even necessary for rice farming; most of it is used to drown weeds.
The US federal government needs to intervene in the water industry.
As long as these distortions persist, new technologies will struggle to compete.
Rationalizing the water sector would allow new investors to enter the market.
Farmers in Texas and California need to stop growing rice, which should be imported from water-rich countries like Vietnam.
Instead, US farmers should be encouraged to shift to other crops, such as sesame, with the government sharing the cost of replacement machinery needed to cultivate and harvest them.
The adoption of technologies like drip irrigation would make current water use seem primitive and outdated.
The water sector should follow the example of the electric-power industry, where changes to federal regulations in the second half of the twentieth century allowed independent power producers to use existing transmission lines.
The deep price cuts and improved service ushered in by these regulatory changes prompted other countries to adopt the American model.
It is time to turn off the tap on subsidized water and find a real cure for persistent water shortages.
Water Wars.
What is more vital for the future of humanity – and life in general – than water?
Water abounds in nature, and most of humanity will have lived more than ten millenniums without ever wondering about it.
We draw it, use it, throw it away, most often back into rivers or oceans.
But we could very soon end up not having enough of the fresh water that accounts for just 3% of all the water available on our planet.
When one considers the fights we are capable of having over oil, one shudders to imagine where a lack of water could lead.
While Latin America seems well endowed, the situation is very different elsewhere.
Europe is nearing its limits, and water scarcity is already a pressing issue in Africa, Central Asia, and China.
Over the last 20 or 30 years we have begun to comprehend what is at stake, owing to initiatives like the World Water Forum, which held its fourth annual meeting in March.
Unfortunately, the Forum is not yet an official body and has no decision-making power.
But providing an arena for thought and debate has brought at least one huge benefit: greater awareness about water issues among the public and policymakers.
Water management is an inherently difficult challenge, and experience counts for a lot.
Practice shows that local levels of government provide the most efficient water management, even if regulations must necessarily be national in scope.
But this is a division of labor that few national governments are ready to accept.
Nor do most states seem prepared to start a real dialogue over water policy with civil society groups.
At one extreme of exclusion, for example, consider that decisions about water management are largely taken by men, though in most of the world it is women who use the water.
Moreover, interference is constant, and inevitable, between the public and the private sectors.
A subtle mix of official regulation and private contracting is required. But not all jurisdictions respond in the same way.
The multiplicity of interlocutors inevitably creates a multiplicity of water systems with vastly unequal levels of efficiency.
Initiatives like the World Water Forums thus inevitably highlight debates about what constitutes good water management, as well as elaborating useful concepts.
One casualty of such debates has been the myth that water is free.
Water has a cost, and someone, either end-users or taxpayers, has to pay it.
It is possible, of course, to envision sharing the costs, but it is no longer possible not to charge for water.
The most recent World Water Forum debated two issues that will confront policymakers in the years ahead.
The first concerns the so-called “right to water.”
The urgency of the needs, with a billion people lacking access to drinking water and two billion without proper sewer systems, together with the vast number of diseases that result, underscore the need to recognize such a fundamental human right.
A consensus was reached at the Forum that such a right makes sense only if it is formulated in such a way that particular policymaking entities, be they water companies or local governments, face an affirmative duty to respect this right.
Only the state can be made responsible here.
But the acknowledged responsibility of states in implementing the right to water cannot turn them into the sole paying authority.
The state must be charged with ensuring an effective water system that meets the basic needs of all, but the balance of this system remains to be defined.
These uncertainties, indeed, led the Forum to avoid acknowledging a formal right to water in its final resolution.
The second issue concerned the role of local authorities.
Despite the political and administrative centralization of most of the countries represented at the Forum, there was widespread agreement that the most efficient water systems are managed as close as possible to the resource and its users.
Agreement on this provided a real breakthrough for the future of water policy.
Naturally, conflicts among governments or local authorities and private enterprises resurfaced.
Inevitably, the cruel lack of means was pointed out time and again.
And, unsurprisingly, the lack of solidarity among water haves and have-nots was openly on display at the Forum.
As we grapple with our joint water future, we will face a time of trial and error in finding workable solutions.
But humanity already seems to be making more progress on matters related to drinking water than other global threats, such as climate change.
We should all drink to that.
Water Wars
NEW YORK – Many conflicts are caused or inflamed by water scarcity.
The conflicts from Chad to Darfur, Sudan, to the Ogaden Desert in Ethiopia, to Somalia and its pirates, and across to Yemen, Iraq, Pakistan, and Afghanistan, lie in a great arc of arid lands where water scarcity is leading to failed crops, dying livestock, extreme poverty, and desperation.
Extremist groups like the Taliban find ample recruitment possibilities in such impoverished communities.
Governments lose their legitimacy when they cannot guarantee their populations’ most basic needs: safe drinking water, staple food crops, and fodder and water for the animal herds on which communities depend for their meager livelihoods.
Politicians, diplomats, and generals in conflict-ridden countries typically treat these crises as they would any other political or military challenge.
They mobilize armies, organize political factions, combat warlords, or try to grapple with religious extremism.
But these responses overlook the underlying challenge of helping communities meet their urgent needs for water, food, and livelihoods.
As a result, the United States and Europe often spend tens or even hundreds of billions of dollars to send troops or bombers to quell uprisings or target “failed states,” but do not send one-tenth or even one-hundredth of that amount to address the underlying crises of water scarcity and under-development.
Water problems will not go away by themselves.
On the contrary, they will worsen unless we, as a global community, respond.
A series of recent studies shows how fragile the water balance is for many impoverished and unstable parts of the world.
The United Nations agency UNESCO recently issued The UN World Water Development Report 2009 ; the World Bank issued powerful studies on India ( India’s Water Economy: Bracing for a Turbulent Future ) and Pakistan ( Pakistan’s Water Economy: Running Dry ); and the Asia Society issued an overview of Asia’s water crises ( Asia’s Next Challenge: Securing the Region’s Water Future ).
These reports tell a similar story.
Water supplies are increasingly under stress in large parts of the world, especially in the world’s arid regions.
Rapidly intensifying water scarcity reflects bulging populations, depletion of groundwater, waste and pollution, and the enormous and increasingly dire effects of manmade climate change.
The consequences are harrowing: drought and famine, loss of livelihood, the spread of water-borne diseases, forced migrations, and even open conflict.
Practical solutions will include many components, including better water management, improved technologies to increase the efficiency of water use, and new investments undertaken jointly by governments, the business sector, and civic organizations.
I have seen such solutions in the Millennium Villages in rural Africa, a project in which my colleagues and I are working with poor communities, governments, and businesses to find practical solutions to the challenges of extreme rural poverty.
In Senegal, for example, a world-leading pipe manufacturer, JM Eagle, donated more than 100 kilometers of piping to enable an impoverished community to join forces with the government water agency PEPAM to bring safe water to tens of thousands of people.
The overall project is so cost effective, replicable, and sustainable that JM Eagle and other corporate partners will now undertake similar efforts elsewhere in Africa.
But future water stresses will be widespread, including both rich and poor countries.
The US, for example, encouraged a population boom in its arid southwestern states in recent decades, despite water scarcity that climate change is likely to intensify.
Australia, too, is grappling with serious droughts in the agricultural heartland of the Murray-Darling River basin.
The Mediterranean Basin, including Southern Europe and North Africa is also likely to experience serious drying as a result of climate change.
However, the precise nature of the water crisis will vary, with different pressure points in different regions.
For example, Pakistan, an already arid country, will suffer under the pressures of a rapidly rising population, which has grown from 42 million in 1950 to 184 million in 2010, and may increase further to 335 million in 2050, according to the UN’s “medium” scenario.
Even worse, farmers are now relying on groundwater that is being depleted by over-pumping.
Moreover, the Himalayan glaciers that feed Pakistan’s rivers may melt by 2050, owing to global warming.
Solutions will have to be found at all “scales,” meaning that we will need water solutions within individual communities (as in the piped-water project in Senegal), along the length of a river (even as it crosses national boundaries), and globally, for example, to head off the worst effects of global climate change.
Lasting solutions will require partnerships between government, business, and civil society, which can be hard to negotiate and manage, since these different sectors of society often have little or no experience in dealing with each other and may mistrust each other considerably.
Most governments are poorly equipped to deal with serious water challenges.
Water ministries are typically staffed with engineers and generalist civil servants.
Yet lasting solutions to water challenges require a broad range of expert knowledge about climate, ecology, farming, population, engineering, economics, community politics, and local cultures.
Government officials also need the skill and flexibility to work with local communities, private businesses, international organizations, and potential donors.
A crucial next step is to bring together scientific, political, and business leaders from societies that share the problems of water scarcity – for example, Sudan, Pakistan, the US, Australia, Spain, and Mexico – to brainstorm about creative approaches to overcoming them.
Such a gathering would enable information-sharing, which could save lives and economies.
It would also underscore a basic truth: the common challenge of sustainable development should unify a world divided by income, religion, and geography.
Breakthrough Vaccines
NEW YORK – Vaccines are one of the great success stories in the history of individual and public health.
They have helped rid the planet of the scourge of smallpox, are poised to eliminate polio, and each year prevent millions of deaths, reducing the suffering and costs caused by infectious diseases.
But there are still many diseases for which vaccines do not yet exist.
Moreover, strategies that have previously led to the successful development of vaccines are unlikely to work against more complex bacteria or viruses, such as HIV, which have evolved multiple mechanisms to evade the immune system.
The history of vaccinology is one in which biomedical and technological advances usher in the “next generation” of vaccines.
In the 1950’s, a breakthrough that enabled viruses to grow in tissue cultures led to the development of both live attenuated vaccines and inactivated vaccines for measles, polio, and other diseases.
In the 1980’s, recombinant DNA technology led to the development of vaccines against hepatitis B and human papillomavirus.
Around the turn of the century, the first sequencing of the human genome led to “reverse vaccinology.”
This approach, whereby computational analysis of a pathogen’s genome enables identification and screening of a great many more potential vaccine targets than was previously possible, was used in the successful development of a vaccine against meningitis B.
The past decade has already yielded major advances in structure-assisted vaccine discovery, synthetic biology, systems biology, and immune monitoring.
However, successfully translating these advances into the development of next-generation vaccines continues to be impeded by gaps in our understanding of the human immune response that protects against specific bacteria, viruses, or parasites.
That is why I, along with eight fellow scientists, have proposed the establishment of a new human-immunology-based clinical-research initiative, the Human Vaccines Project.
In February 2014, leading scientists and public-health specialists will gather in La Jolla, California, to craft a scientific plan to identify, prioritize, and, most important, solve the major problems currently hindering development of vaccines against diseases such as AIDS, tuberculosis, and malaria.
Such a project would represent a paradigm shift in vaccine development.
The current process is long (often spanning decades from concept to licensure), has a low probability of success (because of the limitations of animal models in predicting immune response and efficacy in humans), and is costly (often requiring hundreds of millions of dollars to develop a single vaccine).
Consider this: In just the past few years, many candidate vaccines against HIV, dengue, herpes, tuberculosis, and staphylococcus aureus have failed, at a cost of more than $1 billion.
Investing that amount over the next decade in a coordinated effort to address the major questions facing vaccine development would rapidly accelerate our search for effective solutions, implying a transformative impact on individual and public health.
HIV presents perhaps the greatest challenge, because the virus leverages its extensive genetic variability to hide from the immune system.
Using recent advances, however, scientists have now identified highly conserved regions of this variable virus, determined their molecular structure, and begun designing next-generation vaccine candidates to elicit antibodies that target these regions to prevent HIV infection.
But HIV vaccine development, like that for several other diseases, is still impeded by the limitations of what animal models can tell us about how to elicit the necessary immune responses in humans.
Two recent advances could accelerate vaccine development and reduce its costs dramatically.
In synthetic biology, the rapid engineering of nucleic acid-based vaccines means more candidates move more quickly from concept to trial.
In systems biology, high-throughput technologies have increased the number of genetic and immunologic parameters assessed in trials.
This approach has helped predict the efficacy of potential new-generation vaccines against yellow fever and influenza within days of immunization, compared with the usual timeframe of months or years.
Vaccines already prevent the deaths of 2-3 million people every year, preempt human suffering, lighten the burden placed on health-care systems, and enable more rapid economic and social development.
Models show that adding even a partly effective AIDS vaccine to the current range of prevention and treatment procedures could dramatically lower the rate of HIV infection.
As the Nobel Peace Prize laureate Desmond Tutu, one of the world’s great campaigners against HIV/AIDS, wrote recently: “We must make the most of scientific advances over the last half-century, which have made vaccines for other preventable diseases the most powerful and cost-effective health-care investment that currently exists.”
That is the idea behind the Human Vaccines Project – a concept that would have been unimaginable even a decade ago.
Today, technological advances in vaccine discovery and immune monitoring allow us realistically to explore this potentially game-changing approach to disease prevention.
February’s gathering in California may take us a giant step closer to a world without deadly and debilitating infectious diseases.
The G-20 to the Rescue?
BRISBANE – The G-20’s upcoming meeting in Brisbane, Australia, comes at a time when a precarious global economy requires big decisions to be made.
But it is far from clear who will provide the decisive voice needed to set a bold agenda – and then shepherd its implementation.
Economic data reveal that the global economy is shakier than at any time in the past two years.
Capitalism is struggling to generate adequate demand.
Wealth and income have become increasingly concentrated, while middle-class incomes in the developed world have stagnated.
Tax avoidance by multinational companies is draining developing-country incomes, limiting their ability to invest in education and infrastructure.
And much more action is needed to address the largest and most urgent structural weakness of all – climate change.
Many leading economists and policymakers are forecasting continued economic gloom.
Stephen Roach has suggested that in the post-crisis global economy “relapse is the rule”; economist Brad DeLong, speaking of the “consequences of our lesser depression,” argues that the pretense of a eurozone recovery has collapsed; and European Central Bank President Mario Draghi has acknowledged the need not only for structural reform, but also fiscal expansion to boost aggregate demand.
At the heart of their concerns is the lack of sustained demand needed to drive growth.
While structural reforms – particularly on the supply side – are required in developed and developing countries, they are not sufficient to address what former US Treasury Secretary Larry Summers has called “secular stagnation” – that is, the difficulty of sustaining sufficient demand to permit normal levels of output.
The G-20’s central task, therefore, must be to establish a framework for strong and sustainable growth.
Member states need to introduce reforms aimed at achieving a 2% annual growth target, as agreed earlier this year by finance ministers.
One structural reform that could drive global growth is substantial infrastructure investment in developing and developed countries alike.
Unfortunately, no G-20 leader has seriously articulated this need, let alone lobbied for a solution.
Apart from a World Bank presentation for a possible pilot infrastructure program, there is little to suggest how the 2% target could be met over the medium term.
G-20 governments, especially those with strong balance sheets, should be calling for large-scale public and private infrastructure investment to expand the productive capacity of member economies.
In the area of tax avoidance, discussion needs to broaden beyond developed economies; as the International Monetary Fund recently pointed out, developing economies’ budgets are disproportionately affected by multinational companies’ savvy accounting strategies.
Unfortunately, judging by the initiatives already on the Brisbane agenda, the summit looks set to take a business-as-usual approach.
If the G-20 fails to put policy meat on its rhetorical bones, it will risk looking weak and irrelevant.
Its very credibility is on the line.
Indeed, some in the developed world would prefer a smaller, more exclusive body – a G-14 or even a new G-7.
Such a move would hurt the developing world, especially the Asia-Pacific region, including Australia.
One reason why some want a tighter group is that the G-20 struggles to achieve consensus.
But this misses the&nbsp;point: It is harder to reach agreement precisely because all of the key leaders (representing around two-thirds of the world’s population and 80% of global GDP), whose support is needed for any truly global decision, are in the room.
The Brisbane Summit therefore needs to rediscover the activism that it displayed in 2008 and 2009, during the height of the financial crisis.
It must be led by the United States and other advanced economies, and backed up by major emerging economies.
Australia, as host, also has a role to play.
The country is respected by developed and developing countries alike, often bridging the interests of both, and is widely viewed as an honest broker.
Unfortunately, the current government has had little to say about the big structural problems that underlie the world’s economic malaise.
The modest initiatives on the table reflect the government’s anti-public-sector rhetoric.
Worse, as developed and developing countries are starting to take climate change seriously, Australia is moving in the opposite direction.
The Brisbane summit will be a crucial test for Australia, the G-20, and the possibility of truly global policy coordination.
Europe’s German Ball and Chain
BRUSSELS – A storm-tossed ship near dangerous cliffs needs a strong anchor to avoid finishing on the rocks.
In 2012, when a financial storm engulfed the eurozone, it was Germany that kept the European ship off the shoals of financial disaster.
But now Europe’s anchor has become a brake, hindering forward movement.
Of course, German Chancellor Angela Merkel acted in 2012 only when she could tell her domestic constituency that there was no alternative.
But in the end, Merkel agreed to a permanent bailout fund for the eurozone.
She also backed the formation of a banking union, which remains incomplete but still represents a key step toward a financial system supervised by the European Central Bank.
Thanks to these measures, and ECB President Mario Draghi’s vow, which Germany tacitly approved, to do “whatever it takes” to save the euro, the financial storm abated.
But now the eurozone seems incapable of escaping near-deflation, with little economic growth and prices barely moving upwards.
That was not supposed to happen.
When the crisis struck, the economies of the eurozone periphery were buffeted by the twin shocks of spiking risk premiums and a collapsing housing market.
At the same time, the German economy benefited from the return of capital fleeing the periphery.
Real (inflation-adjusted) interest rates in Germany became substantially negative, triggering a housing boom.
It was assumed that this would generate strong domestic demand in Germany, helping the periphery to export more.
Instead, the German economy has barely grown; indeed, weaker world trade threatens to put it in recession.
The current-account surplus, which was supposed to decline sharply, has actually increased, as savings have remained higher – and investment lower – than expected.
Another problem, at least from the point of view of the rest of the eurozone, is that inflation in Germany remains too low.
With German prices rising at less than 1% annually, the eurozone periphery needs falling prices in order to regain the competitiveness lost during the pre-2008 boom years.
This lack of dynamism at the core of the eurozone has now become its key problem.
With no growth in Germany, the rest of the eurozone might not be able to reduce debt via external surpluses.
And there might be no solution short of a magic button to increase German domestic demand.
Obviously, the German government is in charge of the country’s public finances.
But fiscal policy has been roughly neutral in recent years, and thus cannot be blamed for the German economy’s lack of dynamism.
This year, the public-sector budget might move from a small deficit to what German officials call a “black zero” – a very small surplus.
But this tightening by a fraction of a percentage point of GDP implies no adverse effect on growth.
The root cause of Germany’s sluggish economic performance in recent years is the continuing unwillingness of its households and enterprises to consume and invest.
And it is difficult to see what the government can do about this.
Indeed, investment has fallen despite financing conditions for enterprises that have never been easier, both in terms of ultra-low interest rates and banks’ willingness to lend.
Yet Germany’s corporate sector remains reluctant to borrow and invest in the country, because it sees little reason to expect long-term economic growth, given that the population is set to decline and productivity gains remain anemic.
With investment unlikely to become a motor for the German economy, consumption holds the key to stronger demand growth in Germany.
Its weakness is somewhat surprising: real incomes are up, and the coalition government that came to power last year has introduced a series of generous welfare measures, including a large increase in the minimum wage, a reduction of the retirement age, and a special top-up pension for women with children.
But even these measures, which foreign observers have largely overlooked, have failed to boost consumer demand.
So what more could the German government do to wean the Germans off their abstemious habits?
Public investment is the one area where the government could act.
But the growth fillip from public-sector infrastructure spending can only be modest.
Increasing infrastructure spending by a quarter, which would represent a huge administrative effort, would lift GDP growth by just 0.4 percentage points.
The main danger now is political. A weak German economy makes the necessary structural adjustments in the eurozone periphery much more difficult.
That, in turn, fuels the perception that responsibility lies with the German government, which is seen as unwilling to take the steps needed to strengthen domestic demand – even as it prohibits the periphery governments from spending more themselves.
As unemployment remains stubbornly high and incomes stagnate in much of the eurozone, the temptation to blame “the Germans” is becoming ever stronger.
The German government, no surprise, does not even acknowledge that there is a problem.
With unemployment remaining near record lows, the lack of demand growth is simply dismissed, and the absence of inflation is taken as a sign of success.
This is a mistake.
Europe’s German anchor has become stuck, and the rising tide of anxiety among Germany’s partners should not leave its government indifferent.
Weak Labor, Strong Securities Markets
A vital distinction between market economies is the degree to which ownership of large firms is separate from a firm's day-to-day management.
What makes a company's owners willingly hand over control to professional managers?
That question is increasingly urgent as wealthy countries-as well as many transition and developing economies-attempt to create the robust securities markets needed to boost investment, productivity, and growth.
Separation of ownership from management and effective securities markets reinforce each other.
The underlying theory is straightforward: if bosses can steal, distant owners will not buy shares.
The formalistic civil-law systems that prevail in continental Europe supposedly provide inadequate protection, so ownership remains concentrated.
By contrast, Anglo Saxon common-law systems empower judges to interpret open-ended fiduciary rules on a case-by-case basis, thereby establishing legal precedents that are binding on managers.
But this is a weak explanation.
Before World War I, Europe's civil-law countries were developing securities markets as fast as the US and the UK.
Indeed, regulatory agencies like the US Securities and Exchange Commission (SEC) arose because common-law fiduciary duties failed to protect distant owners.
Insider trading, for example, was generally legal under the rules governing fiduciary duties in America's states, which back then played a dominant role.
By contrast, the SEC is a rule-generating institution of the type that civil-law countries like France or Germany would have little difficulty creating if they wished to .
Moreover, fiduciary duties only aspire to prevent insiders from stealing.
They do not control the main costs that shareholders face when they do not manage the company themselves, such as unprofitable expansion, shirking, retention of free cash flow, and empire building.
Unless there is a conflict of interest between a company's management and its board, owners in common-law countries have no legal recourse when managers' operational or strategic decisions are bad, stupid, or otherwise harmful to shareholders.
Throughout the rich world, institutions that raise the costs to shareholders of turning over control to professional managers play a powerful role in determining outcomes.
But these institutions reflect the political power of social forces, not the differences between civil-law and common-law systems.
In particular, ownership separation in the wealthy continental European nations and the US can be linked with the role of labor inside the firm and within society.
In some nations, labor greatly influences the firm through politics-i.e., opposing mass lay-offs and resisting restructuring plans that change the nature of the workplace.
Consider a simple scenario: a nation bars firms and owners from laying off employees for economic reasons.
Faced with a no-fire rule, shareholders have reason to be very cautious: if expansion is not profitable, they cannot reduce labor costs.
France, for example, is notorious for forcing foreign firms like Britain's Marks and Spencer to keep redundant workers on the payroll.
Of course, no nation completely bans lay-offs, but flexibility varies greatly and can be central to profitability.
In a nation like the US, where employees can be fired easily, shareholders have less to fear.
But in a labor-strong society, dominant shareholders-those with the most to lose if expansion goes awry-have reason to keep managers on a short leash.
Italy's Fiat illustrates the problem: even a conservative government seeks to impede downsizing.
A second factor should also make owners want to stay close to the firm if labor is politically strong.
Bargaining over the economic surplus is often open-ended, especially if competition is weak.
Where employees have high bargaining power, the profits pie is constantly up for re-division, both within the firm and at the national level.
If managers are only loosely tied to shareholders, they could more willingly give up a bigger share of the pie to labor.
Similarly, where shareholder interests do not come first, say, in a corporatist system, dominant owners have greater reason to keep financial information private, lest labor use it to press for more favorable terms.
Both considerations support concentrated ownership and work against securities markets.
So, where political and social values strongly favor labor, managers' loyalty to shareholder interests will be weaker.
Managers in such "left" societies are no less technically capable, but their organizational constraints, incentives, and goals are less pro-shareholder.
When forced to cut employment, they are more likely to think that they are destroying lives rather than raising economic efficiency and increasing wealth.
Such societies should have fewer public firms, and narrower or no ownership separation.
So they do.
The OECD has indexed how easy it is to fire an employee in member countries.
Employees enjoy the least protection in the US, and a high degree of protection in Italy, France, and Germany.
The correlation with ownership separation is striking: a sample of the 20 largest firms in each country shows that, whereas 90% of the US companies have no shareholder with more than a 20% stake, none of the Italian, French, or German firms have such highly dispersed ownership.
True, with only 16 countries rich enough to be included in the survey, the correlation isn't perfect.
The United Kingdom is in seventh place in terms of labor-market flexibility, but a higher proportion of its largest companies have widely dispersed ownership than sixth-place Switzerland-and double the share of fifth-place Denmark and fourth-place Australia.
But whatever measures of "political" qualities and ownership separation we use, the index of employment protection appears to be the best predictor of ownership separation in the wealthy West.
More fundamentally, creating the regulatory institutions conducive to ownership separation may be impossible unless a society's political orientation towards labor and capital is more favorable to capital.
Wealth and the Culture of Nations
Modern economists have turned Adam Smith into a prophet, just as Communist regimes once deified Karl Marx.
The central tenet they attribute to Smith – that good incentives, regardless of culture, produce good results – has become the great commandment of economics.
Yet that view is a mistaken interpretation of history (and probably a mistaken reading of Smith).
Modern growth came not from better incentives, but from the creation of a new economic culture in societies like England and Scotland.
To get poor societies to grow, we need to change their cultures, not just their institutions and associated incentives, and that requires exposing more people in these societies to life in advanced economies.
Despite the almost universal belief by economists in the primacy of incentives, three features of world history demonstrate the dominance of culture.
In the past, excellent governments – that is, governments that fully incentivized the citizenry – have gone hand in hand with economic stagnation.
The incentives for economic activity are much better in most poor economies, including pre-industrial economies, than in such prosperous and contented economies as Germany or Sweden.
The Industrial Revolution itself was the product of changes in basic economic preferences by people in England, not changes in institutions.
For example, the cotton textile industry that developed in Bombay between 1857 and 1947 operated with no employment restrictions, complete security of capital, a stable and efficient legal system, no import or export controls, freedom of entry by entrepreneurs from around the world, and free access to the British market.
Moreover, it had access to some of the world’s cheapest capital and labor, in an industry where labor accounted for more than 60% of manufacturing costs.
Profit rates of only 6-8% in the early twentieth century were enough to induce construction of new mills.
Yet India’s textile industry could not compete against Britain’s, even though British wages were five times higher.
Incentives alone could not produce growth.
At the opposite end of the spectrum, Scandinavia is notorious among economists for high taxes and government spending.
Wage income is effectively taxed at a whopping rate of 50-67%.
Economic activity is everywhere hedged by rules, regulations, and restrictions.
Yet these are successful economies, producing as much per worker hour as the United States, and growing steadily.
By contrast, in medieval England, typical tax rates on labor and capital income were 1% or less, and labor and product markets were free and competitive.
Yet there was no economic growth.
Even though assets such as land were completely secure (in most English villages, land had passed from owner to owner unchallenged through the courts for 800 years or more), investors had to be paid real returns of 10% to hold land.
The Industrial Revolution occurred in a setting where the economy’s basic institutional incentives were unchanged for hundreds of years, and, if anything, were getting worse.
Yet, over the centuries, the responses to these incentives gradually strengthened and entrepreneurship took hold.
Profit opportunities from converting common land into private land, which had existed since the Middle Ages, were finally pursued.
Roads that had been largely impassable from neglect for hundreds of years were repaired and improved by local efforts.
The rate of return required on safe investments declined from 10% to 4%.
Thus the crucial determinants of wealth and poverty are not differences in incentives, but differences in how people respond to them.
In successful economies, people work hard, accumulate, and innovate even when their incentives are poor.
In failed economies, people work little, save little, and stick with outmoded techniques even when incentives are good.
How can we transform the economic cultures of poor societies to be more like rich ones?
When workers move from a poor to a rich economy, there is rapid adaptation to the economic mores of the new society.
In the textile industry in the early twentieth century, for example, output per worker hour of Polish workers in New England was four times greater than that of Polish workers using the same machines in Poland.
One reason for illegal migration from the poor to the rich economies is many such migrants’ ability to adapt to economic life in rich economies.
Migrants accustomed to conditions in successful economies are a potential nucleus for industrialization in poor societies.
But these workers usually choose to remain in rich economies.
A skilled Nigerian immigrant in the US, for example, has more opportunities there than if he returned to Nigeria.
The flow of migrants is all from poor to rich economies, particularly for workers with skills and education.
Thus, the problem is to engineer a sufficient flow of return migration to poor societies by those with exposure to the social conditions of economically successful societies.
Aid to poor societies in the form of programs designed to expose their students and workers to the experience of living and working in the US before returning home will be more effective than trying to make these societies’ governments and institutions more like those of the advanced economies.
People come first.
The Failed State of Egypt?
CAIRO – The aggrieved supporters of ousted Egyptian President Mohamed Morsi and the jubilant protesters who pushed the military to remove him have divided Egypt into two irreconcilable camps, both reflecting and reinforcing the country’s deeper problems.
Indeed, Egypt is now largely an ungovernable country that subsists on generous foreign handouts.
Morsi never appreciated his tenuous position.
Though elected democratically, he chose to govern undemocratically.
He was bent on purging the judiciary and the public prosecutor’s office, claiming that they were aligned with the protesters opposing his government and their military backers, who had been overthrown in 2011.
Morsi brooked little opposition in pushing through a controversial draft constitution.
In doing so, he neglected to focus on the structural problems that propelled a docile society to pour into the streets two and a half years ago to bring down his predecessor, Hosni Mubarak.
Just as damaging as Morsi’s governing style was the Muslim Brotherhood’s go-it-alone mentality.
Decades of persecution have instilled in its leaders the belief that the world is aligned against them.
Assuming power only stoked their paranoia.
The Brotherhood’s leaders believed that the United States and Egypt’s elite were bent on ensuring their failure.
For this reason, they refused to reach out to their secular opponents to offer them a piece of the political pie.
Even members of the more puritanical Islamist Nour Party were not invited to join the government.
But it was not only Brotherhood politicians – inexperienced in the ways of democracy (and skeptical of them) – who stumbled.
The debate in the US, long Egypt’s primary ally and donor, did not center on strengthening Egypt’s embattled institutions, but focused instead on how to ease the military out of power by withholding aid.
Multilateral lenders like the International Monetary Fund were fixated on fiscal reforms such as reducing costly subsidies rather than shoring up a beleaguered economy.
Today, a democratic transition that the West sought to portray as a model that other Arab nations could emulate lies in tatters.
Egypt’s economy, bruised by the outflow of foreign investment and a dearth of tourists, is on life support.
Rebuilding the country will require much more than the cheering from the sidelines that Western countries have offered so far.
Egypt has always relied on munificent benefactors to sustain its patchy state and economy.
After the military coup in 1952, the Soviets provided much of the needed aid.
Their “technical” experts turned the country’s second city, Alexandria, into a Russian country club.
After Egypt pivoted to the West in the wake of the 1973 war against Israel, America became its main patron.
But America’s ritual annual gift of roughly $1.5 billion could only dull the pain of Egypt’s problems, not resolve them.
The country can no longer provide enough government stipends in the form of bureaucratic posts for college graduates.
Egypt can only hope for cash infusions to offset its internal hemorrhaging.
By making aid conditional on economic reform and democratic transition, however, the international community risks political triage.
It should instead focus on financial assistance that blunts Egyptians’ frustrations and that contributes to building the institutions that will facilitate the transition toward democracy.
But, of the $1.56 billion that the US State Department requested for Egypt in 2013, only $250 million is earmarked for non-military programs.
The US should increase funding for projects that focus on governance, civil society, and strengthening the rule of law.
Such programs receive a paltry $25 million in the 2013 budget.
To bolster the economy, the US needs to shift its aid policies away from funding projects toward providing immediate budgetary relief.
Though financing water-efficiency schemes certainly helps society, its effects are felt years after the aid is initially dispensed.
The US, and other Western donors, should instead help Egypt to husband its resources, which are often misspent in an effort to placate its people.
Egypt is the largest wheat importer in the world, and food subsidies account for approximately 2% of GDP.
To preserve its precious foreign-currency reserves, Egypt needs the US and its allies to provide foodstuffs.
Such a policy was adopted in the aftermath of the 1973 war, when America offered $200 million annually for wheat procurement.
Embracing such policies will give institutions and the democratic process the time and space they need to plant firm roots.
Beyond such questions lies the fate of democracy in one of civilization’s most ancient lands.
Whoever triumphs in future elections will lack the legitimacy that only a majority can provide.
Such a majority spoke last year, when it elected Morsi.
To strip him of his post negates a basic pillar of democracy and sets a dangerous precedent.
But, in a country that faces so many problems, the paradox of Morsi’s removal from power and the dilemmas of democracy that occasioned it are not among them.
We Don’t Torture
New York – Asked in September 2006 whether there was anything wrong with the way American interrogators were handling “high-value” prisoners in Guantánamo Bay, and elsewhere, President George W. Bush famously responded: “We don’t torture.”
The definition of torture is notoriously slippery, but we have known for some time now that the former president was being, shall we say, economical with the truth.
At the very least, American interrogators were in breach of the Geneva Conventions, ratified by the United States, against “cruel, inhuman, or degrading treatment.”
Tying a person to a board and bringing him to the point of drowning, over and over, or forcing a prisoner – stripped naked and covered in his own excrement – to stand with his hands shackled to the ceiling for days, until his legs swell to twice their normal size, may not have constituted torture in memos prepared by government lawyers, but such practices are surely cruel, inhuman, and degrading.
Barack Obama’s first act as America’s president was to ban torture immediately.
The question now is how to deal with the past, and specifically with the fact that these acts were not just condoned, but ordered by the highest US officials.
Should the responsible officials, including Bush, be prosecuted for breaking the law?
Should all the details of what was done be released and publicized?
Should there be a special commission to investigate?
Or would it be better, in Obama’s words, to “look to the future, not the past”?
In fact, as Obama quickly realized, his preferred response is proving to be impossible, for a refusal to look back will burden the future with greater perils.
Ex-Vice President Dick Cheney has stated on several occasions that he has no regrets about what he likes to call “enhanced interrogation” techniques, such as near-drowning, because they “kept our country safe” from terrorist attacks. Obama’s ban, in his view, leaves the US “vulnerable.”
In short, liberal scruples about morality, legality, and international torture conventions are foolish and irresponsible.
The implication is clear: if the US were to be attacked by terrorists again, we will know whom to blame.
The stakes, then, could not be higher in the “torture debate” gripping the US.
On one side are Cheney and his allies, who see torture in pragmatic terms; if a severe threat to collective safety is perceived, even a liberal democracy must get its hands dirty.
Nobody likes to torture, but security is more important than moral scruples, and the laws will simply have to be adjusted or finessed.
On the other side are those who condemn torture as a moral abomination that cannot be allowed under any circumstances.
This, in fact, is also the legal position of those who ratified the Geneva Conventions: “No exceptional circumstances whatsoever, whether a state of war or a threat of war, internal political instability or any other public emergency, may be invoked as a justification of torture.”
But these are not the main grounds upon which the torture debate is being fought out in the US today.
For understandable reasons, many defenders of Obama’s decision to ban torture are attempting to answer Cheney’s pragmatic view with an equally pragmatic counter-narrative.
They argue, contrary to Cheney, that torture is not the best way to keep us safe.
A person in extreme pain will say anything, thus providing unreliable information.
They claim that other, more sophisticated, interrogation techniques are not only more humane (and legal), but also more effective.
To drive this point home to the general public, which, in the US, is still easily persuaded by Cheney’s point of view that torture is justified if it saves lives, liberal commentators and politicians have called for a special commission to investigate fully the last administration’s record.
This, they believe, will show clearly that torturing is counter-productive.
Not only does it do great harm to the country’s image, and the rule of law, but it is likely to cause more, not less, terrorism.
The intellectual and political merits of such an argument are obvious.
The current administration cannot afford to walk into the trap set by Cheney, and be held responsible for another possible terrorist attack just because it abolished torture.
But are these really the proper terms on which this debate should be held?
If torture is an absolute wrong, whatever the circumstances, the question of its effectiveness is irrelevant.
To hold the debate on those terms threatens to dilute the moral principle.
This leaves the question of why torture should be condemned absolutely, whereas other acts of war, such as bombing, which cause more damage to human life, might be acceptable as inevitable consequences of national defense.
Bombing can, of course, be a war crime if it is used as an act of terror against unarmed people.
But military operations that kill or injure civilians often do not automatically qualify as crimes, as long as deliberately inflicting pain or humiliation on a helpless individual – even if he or she is an enemy – is not the aim.
In the case of torture, that is the aim, which is why it is different from other acts of war.
A prominent American right-wing commentator recently opined that any attempt to hold the torturers, and their masters in the Bush administration, accountable, would make a mockery “of the efforts of the tough and brave Americans who guard us while we sleep.”
Aside from the fact that torturing people is not the same as combat, and requires little bravery, this gets it exactly wrong.
After years of torturing people in one of South America’s most savage “dirty wars,” Brazil’s generals decided to stop it, because its institutionalized use was undermining the armed forces’ discipline and morale.
It was making a mockery of men who should be tough and brave, but had become thugs instead.
Preparing for the Unknown Unknowns
LONDON – We live in perilous times.
Just as we seem to get our bearings, something happens to make us feel as if our legs have been knocked out from under us.
Actions and events often are intertwined, and what happens on one level – affecting individuals, states, economic sectors, and companies of all sizes – may have repercussions on others.
The recent terrorist attacks in Paris are a case in point, affecting not only the families and friends of the victims, or even only the people of France.
The reverberations are being felt around the world, and they will continue to have an impact – far beyond Europe – on public policy, electoral politics, media freedom, and more.
The attacks came at a time when the world traditionally tries to make sense of the year ahead – to forecast the risks that lie in wait, the opportunities that will arise, and the challenges that will have to be overcome.
But what about longer-term risks?
Do events like the Paris attacks show that forecasting them is impossible?
Or did the attacks expose precisely the type of risk that long-term projections should identify?
The World Economic Forum has just released its “Global Risks 2015” report which attempts to predict and rank the biggest risks that the world faces over the next ten years.
The WEF’s focus is squarely on the macro level.
For example, “the biggest threat to the stability of the world in the next ten years comes from the risk of international conflict.”
And the menace of war is followed by a raft of social, environmental, geopolitical, technological, and economic risks and trends.
But all of these risks will be felt on an organizational, and ultimately, individual level as well.
That is why we spend time in conference rooms and around kitchen tables trying to identify and mitigate them.
And yet we also know that the pace of change is faster than ever before, and that governments, businesses, and households are finding it increasingly difficult to keep up.
Beneath all of our identifying, quantifying, and mitigating of risk lies the undeniable and timeless truth that the only constant is change.
For Heraclitus, change was the fundamental principle of life.
Machiavelli referred to it as fortuna:the events that shape us and determine our wellbeing are often beyond our reason and control.
Though we can attempt to plan for change, we cannot always predict the precise nature and time at which it will occur.
Moreover, for all the risks that we can and do plan for, it is those for which we cannot prepare that can do the most damage.
That is why, alongside all of the identifying, quantifying, and mitigating, we must also embrace the idea that not all change can be clearly foreseen and planned for.
The implication is that we must instill in our families, organizations, and states the resilience and tools needed to act effectively in times of crisis – and thus to minimize the potentially damaging impact of unexpected change.
This ethos will also help us maximize the potential benefits of such flux.
After all, without unforeseen change, much of human endeavor would be fruitless, and innovation would be unnecessary.
Shocking things like the massacre at Charlie Hebdo in Paris happen, and they seem to be happening more frequently than ever.
They turn our world upside down and make us question our sense of who we are.
It is at such moments that we demonstrate our ability – or lack of it – to confront the unexplained, the unplanned, and the unfathomable.
At the same time, such moments remind us that future generations ultimately will judge us not on the basis of what we accumulated – whether personally, as organizations, or as states – but by the impact we had on those around us, and by how well we responded to their needs.
In perilous times, when the emergence, timing, and diffusion of risks can have a paralyzing effect, what matters is not simply what we accomplish, but how we accomplish it.
In such times, the value we create cannot be measured only in terms of money.
More important is how much stronger, more capable, and more resilient we help our colleagues, partners, children, and fellow citizens become.
Perhaps the main risk this year – and in the decade ahead – is that we lose sight of this fundamental truth.
Weimar Russia Revisited
The phrase “Weimar Russia” first appeared about 13 years ago, at the height of the confrontation between then President Boris Yeltsin and the Supreme Soviet that ended when Yeltsin’s tanks shelled the parliament.
The meaning was clear to all: Weimar Russia, like Weimar Germany, signified a weak republic attacked from within by nationalists yearning to restore authoritarian ways.
In the late 1990’s and the early years of this decade, the problems that incited fears of a dysfunctional state seemed to fade.
But over the past 18 months, the specter of Weimar has once again begun to haunt Russia.
If taken to extremes, Russian society’s response to its wrenching modernization could degenerate into a nationalist revolution led by xenophobes.
A different and healthy conservative response is possible if the tattered remnants of old threads, torn apart in the course of postcommunist modernization, can reconnect and grow together in a new way.
The problem is that everyone writes history in their own manner, and that there are no scales that can fix the precise point at which the remedy of unifying patriotism turns into the lethal poison of rabid nationalism.
Weimar Germany blindly poisoned itself.
In the period from 1991 to 1993, nationalism was on the rise because Yeltsin’s infant democracy seemed weak, with the country in the throes of a deep economic crisis, as well as an acute confrontation between different branches of government.
But what explains today’s resurgence of nationalism, when the regime and economy are strong, and all branches of government appear to operate in total unity?
Indeed, there are no practical reasons for Russia’s current system of governance to fall into crisis (although such reasons may emerge in the event of an economic downturn).
But there is another reason, no less important, that concerns morals and ideology.
Challenges to established political authority have been chilled, fairly effectively, by means of state-sponsored patriotism.
But the virus of nationalism has survived and multiplied.
Opinion polls, for example, indicate that 50% of Russians support the slogan “Russia for Russians.”
Moreover, nationalism has spread from the streets into the elite.
Nationalist statements that would have been confined to the extremist newspaper Den in the early 1990’s are now considered normal, “centrist,” even commonplace.
Today’s hardcore Russian nationalists consider Putin’s regime too soft, too pragmatic, too reasonable – in their language, “weak and indecisive.”
They loathe it for its “surrender” in Ukraine to the “Orange Revolution,” and they condemn the decision to give land along Siberia’s Amur River to China.
The “Putin Center” can be displaced.
Recall that Russia’s pro-Western liberals, ascendant a decade ago, have been relegated to the ideological fringe, with the very word “democrat” (let alone “pro-West”) now a term of abuse.
Fortunately, there is no sign yet (not even on the horizon) of a charismatic leader capable of forging the scattered energies of national-socialist grievances into a critical mass of hatred and “national revival.”
Stalin’s ghost is no substitute for a real live leader; he will never leap out of his portraits, no matter how often they are waved.
Moreover, times have changed.
For example, no one even mentions the idea of introducing a dictatorship, abolishing elections, and so on.
No matter how harshly Russia’s “democrats” are abused, the word “democracy” remains a sacred cow.
Instead, a populist-nationalist revolution might resemble the attempt to overthrow Mikhail Gorbachev in August 1991, or a Russian version of Ukraine’s Orange Revolution.
It might be some sort of “democratic nationalist revolution” – spontaneous, and not made by any one political party but by a popular mass movement.
It would be anti-bureaucrat, anti-oligarch, anti-West, and staunchly pro-nationalist.
These are the key ingredients in the nationalist stew that seems to appeal to Russians nowadays.
Judging by Putin’s most recent address to parliament, his regime is fully aware of the danger posed by populist nationalists.
It is likely that the regime will attempt to counter this eruption of nationalism while maintaining its strong statist rhetoric.
But, in order to defeat the far right, Putin’s regime will be forced to take its stand on more or less liberal ideological grounds.
This won’t be easy for a regime based on the twin pillars of bureaucracy and the security apparatus.
What liberals should do in these circumstances is obvious: support Putin’s regime insofar as it maintains the foundation and institutions of a liberal order.
The populist nationalists, because they reject these fundamentals, are the unremitting political antagonists of all liberals.
Yet an alliance with the nationalists against Putin currently tempts many Russian liberals.
Indeed, the most popular tactic among liberals nowadays is to unite with all opponents of the regime.
That scheme is both absurd and dangerous.
After all, the word “Weimar” draws its infamy from the pact with the devil that German conservatives and royalists made by backing Hitler.
Welcome to the Era of Incompetence
Two diametrically opposed scenarios exist for what will happen to global real interest rates over the next generation.
Those who predict generally low interest rates over the next generation point to rapid growth of productivity and potential output in the world economy.
According to this view, the principal problem faced by central banks will not be restraining demand as it shoots above potential, but boosting demand as it lags behind potential.
They point to the fact that the world's major central banks - the Federal Reserve, the European Central Bank, and the Bank of Japan - have so firmly established their anti-inflation credibility that the inflation risk premium has been wrung out of interest rates.
Believers in low interest rates also emphasize shifts in income distribution in the United States away from labor and toward capital, which have greatly boosted firms' resources to finance investment internally and reduced their dependence on capital markets.
They point to rapid technological progress, which has boosted output from new and old capital investments.
With competition strong across the economy, they say that we can look forward to a generation of relatively high asset prices and relatively low real interest rates worldwide.
By contrast, those who predict generally high real interest rates over the next generation point to low savings rates in the US, high spending driven by demographic burdens in Europe, and feckless governments running chronic deficits and unsustainable fiscal policies.
Imagine a bunch of irresponsible Bush-like administrations making fiscal policy, forever.
They also cite investment opportunities in emerging markets, and make the obvious point that if China and India stay on track, their economies' relative weight in the world will double in the next decade or so, as rapid real growth is accompanied by appreciation in their real exchange rates.
Sooner or later, the Chinese and Indian central banks' desire to hold down exchange rates to boost exports and their rich citizens' desire to keep their money in accounts at Bank of America will be offset by the sheer magnitude of investment opportunities.
In this scenario, bond prices in post-industrial countries are heading for a serious fall - as are real estate prices in California, New York, and London.
What, then, is an economist to do?
One could emulate J.P. Morgan, whose standard response to questions about stock prices, bond prices, and interest rates was to say simply, "The market will fluctuate."
Another alternative is to recall the late Rudi Dornbusch, who taught that any economist who forecasts interest rates based on fundamentals is a fool, because fundamentals are complex and unstable, shifting suddenly and substantially.
Even if an economist correctly understands fundamentals, Dornbusch warned, that doesn't mean that markets do.
In forecasting interest rates one is engaged not in examining fundamentals, but in predicting what average market opinion expects average market opinion about fundamentals to be.
But Rudi never followed his own advice.
So let me place my bet - which I think is only 60% likely - and say that my best guess is that world real interest rates will be high over the next generation, and that current bond prices (and real estate prices) are not sustainable.
Four features of modern politics in the world's post-industrial core lead me to this conclusion:
· In the US, the collapse of "grownup" Republicans in Congress - the extraordinary failure of fiscal conservatives to mount any effective opposition to the Bush administration's renewed destabilization of American government finances.
The deficit orgy of the Reagan era is looking less like a freak political accident and more like a structural feature of Republican Party governance - what the modern Republican governing coalition tends to do whenever it gains power;
· The parallel collapse of a grownup Republican presence in the executive branch.
As Ron Suskind reports in his recent biography of Bush's first Treasury Secretary, Paul O'Neill, former Bush Budget Director Mitch Daniels once whispered to himself at the end of a disastrous meeting, "Not a typical Republican package.
Definitely not."
But Daniels decided he would rather run for office in Indiana than take a stand in support of sound fiscal finance;
· The failure of Western European governments to even begin to think about how to address the coming fiscal crisis of the social-insurance state as a result of their aging populations;
· The inability of Western European governments to enact sufficiently bold liberalizing reforms to create the possibility of full employment, together with the failure of western European monetary policy to be sufficiently stimulative to create the reality of full employment.
The arguments for low interest rates seem to me to require a degree of government competence that is unlikely, given political parties' current positions and the existing structure of the institutions that make fiscal policy.
I hope to be surprised.
I hope to see governments in Western Europe and the US face up to their responsibilities and conduct sensible, sustainable fiscal policies.
But that is my hope, not my forecast.
Power to the Poorest
BREMEN – An estimated 1.2 billion people worldwide, including 550 million in Africa and 400 million in India, have no access to electricity.
Most live in rural areas where the population is sparse and incomes are low, making it uneconomical to connect homes and businesses to a grid.
Nor is it feasible to generate power locally with a diesel unit, owing to high fuel costs and the need for substantial initial investment.
A stable supply of affordable electricity is a prerequisite for economic development.
In fact, the consequences for people living without electricity can be dire: they may be deprived of adequate health care, or be unable to store fresh food.
But one solution, based on the local use of renewable energy, requires minimal initial investment and can be expanded over time.
This “boot-strap” approach is based on the use of photovoltaics – a simple, universal, and scalable technology that is easy to maintain.
Typically, in the first stage of this process, consumers would use a renewable energy source such as LED lighting, selling any surplus until they save enough money to buy lamp oil (on which Africans spend around $20 billion annually).
The additional revenue might initially come from selling small electricity surpluses to local farmers to recharge their mobile phones (thereby allowing them to work out the optimal prices for their crops), or to help them irrigate farmland using small electric pumps.
This is a new opportunity.
Until three or four years ago, photovoltaics were prohibitively expensive.
But advances in the industry and over-production have reduced their price by as much as 75%.
The cheapest system, generating two watts of power, can cost as little as $10-20 and be expanded to almost any level, depending on the size and number of photovoltaic (PV) modules and the size of the battery storage unit.
It is simple, too.
A residential solar-power system consists of just three components: the PV modules, a battery storage unit, and a charge controller.
Such a system can supply low-voltage DC electric power at five volts for mobile phones, and 12V for LED lighting, pumps for outdoor use, and electrical appliances such as computers and televisions.
When single-phase or three-phase 230V AC power is needed (say, to power larger machines), an inverter must be used.
This makes sense only for systems that are larger than a kilowatt of peak power and that have sufficient battery capacity.
Local systems in one building could be connected to local low-voltage DC or 230V AC grids to improve the security of supply.
One major challenge to the boot-strap approach is developing cheap and durable batteries.
Many residential systems break down after 3-5 years when the battery dies, undermining confidence in the system among owners who assumed that they had a lifetime supply of energy.
But it is not a complicated process to demonstrate how to extend a battery’s life to as much as ten years.
Indeed, getting the most out of a battery may require only that its owner fully charges it at least once every two weeks and never discharges it to less than 50% capacity.
In addition, our own research team is currently exploring ways to rejuvenate old solar or car batteries – without requiring any chemical treatment or disassembly – for re-use in a residential solar-power system.
Once such technologies have been perfected, we can turn our attention to developing a boot-strap business model.
We believe that existing distribution, sales, and maintenance networks for other goods and services could be adapted to supply and provide customer support for solar-power systems as well.
For example, bicycle mechanics, who are plentiful in Africa and rural India, or small shop and kiosk owners could be trained to install and maintain these systems.
The combination of low-investment electricity generation for households and the ability to sell surpluses, scale up output, and access pre-existing distribution and maintenance networks bridges a crucial gap in the energy market.
It is a simple idea that would allow millions of people in poor, rural areas worldwide to integrate their activities with the wider economy, accumulate capital, and improve their lives.
What the West Owes Ukraine
WASHINGTON, DC – Ukraine may not be grabbing as many headlines now as it did a year ago, but the crisis there is far from over.
The latest ceasefire agreement, concluded in Minsk in February, has contained, but not stopped, Russian military aggression.
And, though the stabilization program that Ukraine agreed with the International Monetary Fund last month is superior to last year’s deal – this one includes both more financing from the IMF and a more credible economic-reform plan from the government – it will be insufficient to repair the country’s economy.
What Ukraine really needs is to escape the old Soviet order – and, for that, it needs the West’s help.
Ukraine never managed to recast its state after the Soviet Union’s collapse.
Instead, the old Soviet elites held onto power – and most of the country’s wealth – through corrupt practices that became entrenched in the country’s economy and political system.
Reforming both will be a major challenge – one that Ukraine’s leaders have lately committed themselves to meeting.
Since February of last year, when the parliament voted then-President Viktor Yanukovych out of power by more than a two-thirds majority, Ukraine has held fresh elections for both institutions.
Hundreds of top officials have been replaced by young, Western-educated professionals, and the government is now working feverishly to implement deep and comprehensive reforms, including a new law on public procurement and a package of anti-corruption legislation.
Dozens of superfluous inspection agencies have been abolished, significantly reducing the regulatory burden.
Just last month, President Petro Poroshenko sacked the governor of the Dnipropetrovsk region, the billionaire tycoon Igor Kolomoisky
More recently, the authorities have been working to reform the energy sector – a hub of corruption.
On April 1, household gas prices were quadrupled, taking them to half the market price, with offsetting compensation provided to the poor.
And the parliament has enacted a law that harmonizes energy standards with those of the European Union, thereby delineating clearly the state’s role and opening the gas market to investors.
But Ukraine still has a long way to go.
The good news is that the public largely understands and supports the government’s reform efforts.
The bad news is that Ukraine still faces considerable destabilizing threats – beginning with a renewed Russian military offensive.
A Russian attack on, say, Mariupol, eastern Ukraine’s second-largest port (accounting for roughly one-third of the country’s exports), would devastate an economy that is already tanking.
Though several factors – including Western sanctions, a lack of public support for war in Ukraine, and the Russian economy’s rapid decline – should discourage the Kremlin from taking such a step, they may not be enough.
After all, Russia’s leaders have shown themselves to be unpredictable.
Even absent further Russian aggression, Ukraine’s economic woes could prevent further progress on reform.
The economy contracted by 6.8% year on year in 2014, and output has plunged by 15% in each of the two last quarters.
Moreover, at the end of February, with the country running low on reserves, Ukraine’s currency, the hryvnia, lost half its value; as a result, annualized inflation surged to 45% in March.
A full-scale financial meltdown was avoided only when the IMF provided an early disbursement that doubled Ukraine’s reserves, to $9.9 billion; by the end of the month, the exchange rate more or less recovered.
Nonetheless, the international financing that Ukraine has received, though invaluable, remains insufficient to support genuine recovery and reform.
The latest bailout program foresees about $40 billion in funding, nearly half of which will come from the IMF, over the next four years.
That means that, this year, Ukraine will receive only $10 billion – not enough to enable the country to replenish its reserves and service its debts.
Indeed, given Ukraine’s large bond debts, many of which will mature in the next two years, there is a $15.3 billion funding gap in the bailout package, which the IMF and Ukraine’s government hope to plug with a debt restructuring.
But, even if they succeed, Ukraine would need more funding than it is getting.
It needs more strategic support as well.
European politicians’ overwhelming opposition to supplying Ukraine with defensive arms is difficult to fathom.
Europe’s leaders claim that they want to avoid giving Russia reason to escalate its war on Ukraine.
But that is already happening, and Ukraine’s fight against Russia is, after all, a defense of core European values – and, indeed, of Europe itself.
The EU flag has draped the caskets of Ukrainians killed in that fight.
Europe’s leaders argue that the central focus of their policy toward Ukraine must be to support its economic recovery.
But here, too, Europe is doing too little, offering paltry credits of €1.8 billion ($1.9 billion) this year, when €10 billion would be more appropriate.
If the United States then met Europe halfway (at least), Ukraine’s financial crisis could finally be contained.
On April 28, Ukraine’s government will host a donor conference in Kyiv.
At a time when the country’s leaders and public are more committed than ever to combating corruption, building a welfare-creating economy, and becoming a normal liberal democracy, Europe should be eager to support it.
It is time for Western politicians to remember their ideals – and stand up for them.
Copycat Capitalists
ZURICH – It is all too easy to envy China.
At current growth rates, the Chinese economy will double in size in only nine years, raising an estimated 100 million people above the poverty line in the process.
Compare this to the major economies of the Western world. The eurozone’s GDP remains mired below 2008 levels, and the United States last enjoyed Chinese-style growth back in 1984, when gasoline was $1.10 a gallon and the first Apple Macintosh was rolling off the production line in California.
Given the West’s anemic performance in recent years, it is hardly surprising that envy of China’s economic dynamism has manifested itself in official policy.
Recent examples range from direct market interventions (such as America’s effort to boost its automotive industry via the “cash for clunkers” program), to the British government’s attempt to reflate the United Kingdom’s housing market by guaranteeing mortgages under its “Help to Buy” scheme.
Even hitherto independent central banks have not escaped the creep toward state-sponsored capitalism.
The US Federal Reserve has been gently encouraged to buy 90% of annual net issuance of US Treasury bills, effectively funding the US fiscal deficit and ensuring, via the resulting negative real interest rates, that businesses and individuals wishing to save, rather than spend, will lose purchasing power by doing so.
Ironically, Western countries are shifting to statism at the very moment that China appears to be heading in the opposite direction – witness its recent moves to liberalize its financial system.
In just 10 years, the share of state-directed bank lending in China has fallen from 92% of new credit creation to less than half.
But copycat capitalism is not without risk; indeed, it is unlikely to end without someone getting scratched.
The West’s efforts to emulate China are hindered by its inability to replicate the conditions of Chinese growth, such as labor mobilization, and its unwillingness to pursue practices such as the one-child policy.
Thus, the West’s forays into state capitalism are more likely to result in the misallocation of capital, more in the vein of China’s vastly oversupplied steel industry but without the stellar headline economic performance of the national economy.
Coming from the other direction, China’s crawl toward a more market-oriented brand of capitalism also has potential pitfalls.
We need look no further than its recent problems with so-called wealth-management products (WMPs) for evidence that reform intentions without adequate regulatory institutions can cause problems.
WMPs were commonly marketed to individuals as alternatives to deposit accounts.
But the funds contributed were then invested in riskier assets that included “trust loans” to companies such as property developers.
The number of trust loans rose by 40% in 2012, which triggered serious concern among China’s authorities that WMPs could become the next financial “WMDs,” because banks had strong incentives to make uneconomic lending decisions.
The subsequent state-directed WMP regulation put a brake on credit creation and sent Chinese stock markets plunging.
Ultimately, however, the measures should enable China’s shadow banking system to continue to grow at a more manageable pace and in a more sustainable way.
There is a risk that the lack of growth in the West may make economic transformation in the direction of the Chinese model appear more urgent to its governments.
But the Western economic model has brought about unprecedented standards of living.
This achievement should not be dismissed because of one crisis, no matter how prolonged, and the economic model that produced today’s living standards should not be cast aside without careful consideration.
By contrast, China’s rapid growth should not obscure its need for economic change.
According to the International Monetary Fund, at some point between 2020 and 2025, China will pass what economists call the “Lewis Turning Point,” at which a country’s vast supply of low-cost workers is exhausted and factors such as labor mobilization provide a diminishing contribution to growth.
With smaller demographic and resource advantages in the coming years, the consequences of capital misallocation, unavoidable under a state-directed economic model, will come to the fore.
As China’s recent experience with WMPs demonstrates, economic change can expose old problems and create new ones.
Ironically, China’s transformation from a state-directed to a market-driven economy may require the greatest amount of planning of all.
Western Europe’s Eastern Challenge
In January, the European Union expanded eastward once again.
Following the “Big Bang” enlargement of 2004, which added 75 million new EU citizens, the accession of Romania and Bulgaria has added 30 million more.
What does this mean for the labour markets of Western Europe?
Politicians tend to argue that, although some plumbers migrate to the West and companies relocate to the East, the West will enjoy more jobs in net terms due to the likely expansion of its exports.
That reasoning is familiar, but is it correct?
One thing is certain: enlargement has confronted Western Europe with extremely stiff wage competition.
Whereas an employee in the old EU’s manufacturing sector on average earns €26.09 per hour, in Romania the average is €1.60 and in Bulgaria a mere €1.39.
The view that eastward enlargement will create jobs in the West assumes that East European low-wage workers will complement, and boost demand for, West European workers.
In fact, this is partly the case.
West European engineers are needed to design world-class products to be manufactured by East European workers, while people with managerial skills can be sure that their abilities will be needed to integrate the EU’s newest workers into the European economy.
But for the great majority of workers who have only their normal labor to sell, East European employees are actually substitutes, not complements.
They find themselves confronted by low-wage competition from people who have similar skills and ambitions, and are consequently likely to lose ground from enlargement.
According to empirical studies, the group of losers ranges from low-skilled to skilled workers with a completed educational training.
The implications for the labor market are clear: for the highly qualified in the West European workforce, eastern enlargement will lead to an increase in labor demand; for all others, it will mean a decrease.
Due to a fundamental asymmetry in the flexibility of wages this will lead to a net decline of employment. Since unemployment is low among the more highly qualified, higher demand for their services will lead to an increase in wages rather than an increase in employment.
For the less qualified in Western Europe, a decrease in employment will be inevitable, because the scope for wage fluctuation is limited by collective agreements and by the minimum-wage levels that the welfare state sets through wage-replacement benefits and legal minimum wages.
Wage inflexibility, combined with the substitution effect exerted on the great majority of West European workers implies that eastern enlargement will cause a net loss of jobs in Western Europe, if the labor market remains as inflexible as it now is.
To be sure, eastern enlargement is leading to an increase in West European exports, because more markets have been opened in which western firms can sell their products.
However, if exports increase, the factors of production – namely capital, qualified workers, and unskilled workers – must be diverted from other sectors of the economy, and this leads to a loss of jobs there.
Since export goods are considerably more capital and knowledge-intensive in their production than other goods, the structural change will even reduce the net demand for unskilled labour: capital and talents that move away from the other sectors will not take all the unskilled workers with them.
The shrinking sectors include the labour-intensive upstream stages of the production process, where jobs have been outsourced to other countries – a phenomenon that is neither apparent to customers nor reflected in statistics on foreign direct investment.
Moreover, while it is often conceded that jobs can be lost via foreign direct investment, much more important are financial capital exports, that is, the loans that enable foreign firms to create jobs on their own turf.
Consider Germany, which in 2006 exported capital worth €108 billion, only €25 billion of which was for direct investments, whereas net domestic investment in all sectors combined was only €75 billion.
Part of this capital export flowed to the new EU members in Eastern Europe, which enjoyed, relative to their size, gigantic capital imports.
Considering all these factors, the assertion that the EU’s eastward enlargement will lead to net job creation in Western Europe appears to be nothing more than empty politically correct rhetoric.
Western European wages are far too rigid for the benefits of competition and sectoral change to be shared by a majority of workers.
Western Geopolitics: An Infantile Disorder
Recent statements from some American leaders and NATO representatives give the impression that not only Islamic and other radicals, but also quite civilized figures, are losing their grasp of reality and have begun acting irrationally.
The world is becoming an increasingly difficult place to predict and manage, especially for those who are accustomed to being in charge.
The mistakes of the past decade will exact a very high price.
Three countries – Pakistan, India, and North Korea – have been allowed to develop nuclear weapons, proving that there are no remaining political or moral arguments against nuclear proliferation, only air strikes or bribery.
Instead of a dialogue of civilizations and support for modernist forces in the Middle East, preference has been given to an almost opposite course of action.
The invasion of Iraq destroyed a very unpleasant tyranny, but it has inspired a wave of hatred towards the West, even among those who despised Saddam, and has divided the West against itself.
Indeed, anti-American coalitions have appeared not only in the Middle East but also in Latin America, while some Western politicians have apparently sought to aggravate relationships with Russia and China in order to restore transatlantic solidarity and further weaken Europe.
For example, there is talk of installing anti-missile defense systems in Poland in proximity to the Russian border, supposedly to prevent terrorist missile strikes, which by definition cannot reach Poland.
There is also talk of NATO accession by Australia, South Korea, Japan, and New Zealand.
None of these countries needs NATO, but the smell of PATO, CENTO, SEATO, and other long forgotten pacts and pseudo pacts is again in the air.
Similarly, NATO’s Parliamentary Assembly has announced preparations for NATO accession by such countries as Croatia, Macedonia, and even Albania, all of which fall short of the alliance’s traditional membership criteria.
More importantly, the United States and Ukraine are talking seriously about Ukraine’s rapid accession to NATO, by 2008.
NATO expansion is sought by those in Ukraine who are not sure of themselves and the viability of the Ukrainian state, are afraid of a competitive Russia, and would like to bind their state, militarily and politically, to the US.
But this betrays a profound lack of understanding of the consequences of Ukraine’s accession to NATO.
It is unlikely, for example, that Ukraine could remain without a demarcated border with Russia.
However, if a real border is to be created – it currently exists only on paper and provides income for corrupt customs officials – huge problems will arise.
Every hill will become strategic, and every gully will become historic.
They will be fought for, and bloodshed is not hard to imagine.
Millions of families will be divided, and millions of people who work on the other side of the border may lose their jobs.
Do those who support NATO’s expansion to Ukraine understand this?
Some may, but it seems that the majority simply do not recall or consider the lessons of recent history.
Of course, Russia is not Serbia.
It will survive NATO’s further enlargement, although it will be weakened temporarily and pushed into anti-Western alliances.
Many Russian officials will lose patience with Russia’s remaining a status-quo power, and one hopes that they will not seek confrontation.
Immeasurably larger damage will be done to Ukraine: it will lose a vital partner, one that perhaps has not always been ideal, but that nonetheless has never inflicted any damage and has never allied with other countries against it.
But the West would also suffer, for a new “instability arch” along the Russian-Ukrainian border would kill the idea of establishing an alliance of the world’s large powers against new threats and revive rivalry between blocs of a different kind.
If this happens, everyone will lose – apart from terrorists and radicals of every stripe.
Nobody can afford so seriously dangerous an expansion of NATO into Ukraine.
Let us hope, therefore, that reason – and the instinct of self-preservation – will ultimately prevail.
Westernize the Black Sea Region
The bloody end to the schoolhouse hostage crisis in North Ossetia, and recent clashes in Georgia between government troops and separatist forces, have put the troubled Black Sea region on the front pages of newspapers once again.
This rising violence is also a wake-up call for the West, highlighting the need for a new Euro-Atlantic strategy in a vitally important region that lies at the crossroads of Europe, Eurasia, and the Middle East.
Indeed, the Black Sea region is the Euro-Atlantic community's eastern frontier with the wider Middle East.
With Afghanistan, Iraq, and Iran topping the list of strategic challenges facing the West, anchoring democracy and security in these new borderlands of the Euro-Atlantic community has become imperative for both the United States and the EU.
Moreover, success here can provide lessons in how to facilitate the daunting process of reform and modernization in the wider Middle East.
Georgia's "Rose Revolution" last winter demonstrated that the will to implement radical reform now exists.
For the first time, a country in the region is matching its aspirations with the concrete steps needed to become a viable candidate for eventual membership in Euro-Atlantic institutions.
A visitor to Georgia's capital, Tbilisi, now sees the same level of determination to join the West that existed a decade ago in the Baltic states.
America and Europe share an interest in the success of these efforts, particularly as they seek to diversify energy supplies away from Saudi Arabian and Persian Gulf oil.
The Black Sea is poised to become a key conduit for non-OPEC, non-Gulf oil and natural gas flowing into European markets and beyond.
The Black Sea region's long-term stability and integration with the West is thus critically important to the long-term energy security strategy of EU and NATO members.
Anchoring these countries to the West will not be easy. Whether the end result is better relations or full integration of these countries into the EU and NATO is an open question.
But both organizations need to reach out to these countries, a process that should be seen as the next phase in completing the wider Europe.
What should a new bold yet realistic EU and NATO outreach strategy for the Black Sea region look like?
Clearly, the region's countries are weaker and further behind previous candidates for Western integration.
But the good news is that the EU and NATO are much better positioned to develop an ambitious strategy than they were vis-à-vis Central and Eastern Europe a decade ago.
If the EU and NATO decide to launch a bold outreach strategy for the region, they will be able to draw on existing tools, conceptual talent, and practical experience.
For example, NATO already has three members - Bulgaria, Romania, and Turkey - bordering the Black Sea.
As for the EU, the candidacies of Romania and Bulgaria need to be concluded successfully, together with the issue of Turkey's membership aspirations.
An EU that includes Sofia and Bucharest, and that is on track with Ankara, will be well positioned to engage the wider region.
The EU also needs to put meat on the bones of its new Neighborhood Policy, while NATO must apply new mechanisms for strengthening ties with the region.
As opposed to a 100- or 200-meter sprint, both organizations need to think more in terms of a much longer race, perhaps a marathon.
If countries in the region embrace the idea, a network of current EU and NATO members could step forward with projects and assistance aimed at promoting a Black Sea identity and community.
Recent events in Georgia remind us that resolving the region's "frozen conflicts"- i.e., those in the breakaway regions of South Ossetia and Abkhazia, of Transdneistria in Moldova, and Nagorno-Karabakh in Azerbaijan - must be a priority.
In reality, these conflicts are not frozen; they are festering wounds that breed corruption and organized crime.
They inhibit democratization and incite instability.
While these conflicts involve historical grievances, outside actors - particularly Russia - contribute to their lack of resolution, which is essential for successful reform.
So far, neither America nor Europe has made these conflicts a top priority.
Resolving these semi-dormant wars requires stepped-up political involvement, economic engagement, and a willingness to provide Western peacekeeping forces and monitors if and when they are needed.
But the long-term peace and stability needed to advance economic and political reform in the region will also require either a change in Russian behavior or a reduction in Russian influence.
The experience of the last decade suggests that a policy of engaging the Kremlin intensely while protecting fundamental Western interests may be the best way to proceed.
Developing a new Euro-Atlantic strategy for the Black Sea region must start with the democracies of North America and Europe recognizing their moral and political stake in the outcome.
Projecting stability and security in these countries is the next logical step in building a Europe "whole and free" and securing the Euro-Atlantic community's eastern frontier with the Middle East.
This task will be as important over the next decade as integrating Central and Eastern Europe into the West was in the 1990's.
The Despotic Temptation
MADRID – US President Franklin D. Roosevelt, when asked about American support for the notorious Nicaraguan despot Anastasio Somoza, purportedly replied, “He may be a son of a bitch, but he’s our son of a bitch.”
Whether or not the quip is apocryphal, it sums up a longstanding Western approach to much of the world – and one that underpinned US foreign policy throughout the Cold War.
But lately an even more troubling sentiment seems to have emerged, with Western leaders willing to settle not for “our son of a bitch,” but for just about any son of a bitch who can impose stability, whatever the cost.
It is an alluring but dangerous mindset.
Experience should have pushed Western leaders in the opposite direction.
After all, as time passed, the ostensibly pragmatic clientelism of the Cold War proved far from ideal.
Indeed, in many cases – the Shah of Iran, Cambodia’s Lon Nol, Chile’s Augusto Pinochet, and the Democratic Republic of the Congo’s Mobutu Sese Seko, to name a few – it led to long-term insecurity and disorder.
But these are desperate times.
Unable to contain the violence, suffering, and chaos engulfing the Middle East and North Africa – the consequences of which are increasingly being felt in Europe – Western leaders are falling back into the Cold War trap.
All they want is for someone – and now virtually anyone – to enforce order.
This desperation is perhaps most apparent in Syria.
After years of insisting that Syrian President Bashar al-Assad was the problem, a growing number of Western policymakers and strategists are now suggesting that he may actually be part of the solution – or at least the transition.
Last month, German Chancellor Angela Merkel noted the necessity of including Assad in talks about Syria’s future.
Likewise, both US Secretary of State John Kerry and British Prime Minister David Cameron now concede a role for Assad in a hypothetical transition.
Spanish Prime Minister Mariano Rajoy went so far as to say that the world had to “count on” Assad in the fight against the Islamic State.
Whether driven by realism or resignation, this shift reflects a distinct desire for stability – a desire that is reinforced, especially in Europe, by the presence of another governance black hole in Libya.
The same desire has already driven the West to support Abdel Fattah al-Sisi’s regime in Egypt – despite its dubious origins and continuing repression – with only the slightest of pressure for reform.
When confronted with anarchy, this eagerness to secure stability by whatever means necessary is understandable.
But it is a slippery slope.
And, in fact, it is based on a false dichotomy between autocracy and instability.
Of course, autocratic figures like Russian President Vladimir Putin have a strong interest in promoting this dichotomy.
As the Bulgarian political analyst Ivan Krastev recently noted, Putin – a long-time ally of Assad – is doing his best to promote the idea that Western efforts to promote good governance lead only to volatility. “Rather than bringing about reforms,” Putin declared in a recent address to the UN General Assembly, “aggressive foreign interference has resulted in…violence, poverty, and social disaster.”
A strong Assad-led government, the logic goes, would have the opposite effect – a point that Russia is now trying to prove on the ground in Syria.
However compelling this idea might be, and however weary the West feels, the reality, demonstrated starkly during the Cold War and its bloody aftermath, is that tyranny is never genuinely stable – certainly not in the long run.
The desire for human dignity and respect – the cornerstones of good governance – cannot be quelled, especially at a time when people have unprecedented access to information through the Internet and mobile technologies.
So good governance is the key to long-term stability.
But, like stability, good governance cannot be imposed from the outside; rather, it must develop organically, supported by sturdy roots within a society.
This does not mean that there is nothing Western governments can do.
On the contrary, by helping to cultivate a strong civil society at the local and national levels, external forces can play an important role in creating a strong foundation for good governance in crisis-stricken countries.
The Tunisian National Dialogue Quartet – the group of civil-society organizations that was awarded this year’s Nobel Peace Prize for its “decisive contribution” to democracy after the country’s 2011 revolution – has shown just how effective a strong civil society can be in supporting stability.
To make a real difference in stabilizing today’s most tumultuous regions, the international community should hold Tunisia up as a model (and remain committed to ensuring that it continues on the path toward stable democracy), rather than falling prey to Putin’s cautionary fables about Syria and Libya.
Unfortunately, Western leaders have repeatedly shown that they lack the patience and dedication needed to engage consistently and humbly with communities in crisis-stricken countries or to provide the reliable, incremental, and prolonged governance assistance needed to prevent state collapse.
With their short attention spans and heightened sense of their own importance, they prefer the option of simply installing a despot to deal with it.
The Politics of Islamophobia
NEW YORK – There are many roads to political disaster: greed, hubris, the charisma of the demagogue, and, perhaps most dangerous of all, fear.
When people panic, they can become hysterical, and hysteria often leads to mass violence.
When politicians convince people that they are in a life-or-death battle – that survival is a matter of “us or them” – anything becomes possible.
Adolf Hitler combined all the elements of political catastrophe: hubris, charisma, greed, and the idea that “Aryans” and Jews were locked in a struggle for survival.
Of course, none of the demagogues in the West today – from Donald Trump in the United States to Marine Le Pen or Geert Wilders in Europe – are comparable to Hitler.
None has promoted dictatorship, let alone mass murder.
But they are definitely stirring up the politics of fear.
Trump, for one, also promotes greed, openly boasting of his wealth, and has somehow refined outlandish hubris and contradictory posturing into a bizarre form of charisma.
On the one hand, he promises to fix all the world’s problems, and to show China, Russia, the Islamic State, or anyone else who is boss.
On the other hand, he claims that his vast and powerful country cannot take in desperate refugees from Syria, because, he warns, Muslim asylum-seekers might stage “one of the great military coups of all time.”
Trump’s Republican colleagues in the race for the US presidency, such as Ted Cruz, Ben Carson, and Marco Rubio, stoke similar fears about refugees.
Cruz, as well as the supposedly more moderate Jeb Bush, even suggested that only Christians should be allowed into the US.
More than 10,000 people are killed every year by gun violence in the US – all but a handful for reasons having nothing to do with Islam.
And yet all of the Republican candidates are proud of opposing gun-control measures; indeed, they have no problem allowing people to enter a school or a bar bearing concealed weapons.
But even a relative handful of Muslim refugees is too dangerous to contemplate.
This is not to say that terrible acts of Islamist terror could not happen in the US, or elsewhere.
They have, and there probably will be more of them, so long as the Middle East remains in turmoil and revolutionary Islam appeals to disaffected Western youth.
But it is hardly an existential threat.
An American friend of mine speculated that, “We might be one terrorist act away from a Trump presidency.” A spectacular murder spree by Islamists could spook Americans enough to vote for the greatest fear-monger.
Anything is possible, but I don’t believe American voters would be that stupid.
The greater danger is, however, that the demagogues will drive even mainstream politicians into their camp.
Since the November 13 terror attacks in Paris, François Hollande, the unpopular but altogether sensible French president, has been so afraid of being labeled a weakling by politicians of the right and far right that he has declared a national state of emergency – and war on the Islamic State (ISIS).
As long as France’s state of emergency lasts, police may arrest people without warrants, break down the doors of private residences in the middle of the night, take over restaurants and other public places with armed force, and generally behave like agents in a police state.
Most French citizens are now so frightened of Islamist attacks that such measures are widely supported.
But they are almost certainly counter-productive.
A national leader can declare war on a state, not on a network of revolutionaries.
ISIS, despite its claims, is not a state, and Hollande should not treat it as one.
Besides, even if bombing ISIS strongholds in Iraq or Syria makes military sense, it won’t break the spell of Islamist revolution for frustrated, bored, and marginalized young people in French slums.
On the contrary: The canny leaders of ISIS also rely on an apocalyptic “us or them” view of the world.
Most Muslims are not violent revolutionaries who condone, let alone admire, mass violence.
ISIS seeks to broaden its support, especially among young Muslims, by convincing them that true Muslims are in an existential war with the West – that the infidels are their mortal enemies.
For them no less than for Trump, fear is the most powerful weapon.
So the more a Western government allows its policemen to humiliate and bully Muslims in the name of security, the more ISIS is likely to win European recruits.
The only way to combat revolutionary Islamist violence is to gain the trust of law-abiding Muslims in the West.
This will not be easy, but arbitrary arrests are surely the wrong way to go about it.
Likewise, when it comes to civil wars in the Middle East, Western restraint is usually a better strategy than hasty military intervention driven by domestic fear.
Republican candidates in the US are already using the recent murder spree in Paris to blame President Barack Obama, and by extension any future Democratic candidate, for being weak.
Trump has promised to “bomb the shit out of ISIS.”
This bellicosity has had the effect of pushing Hillary Clinton, the front-runner for the Democratic presidential nomination, into distancing herself from Obama.
Like Hollande, she has to assuage public fear by talking tough and promising more military action.
Obama has consistently resisted the temptation to unleash more wars.
His policies have sometimes been inconsistent and irresolute.
But in his refusal to give in to panic and act rashly, he has been far braver than all the big talkers who accuse him of being a wimp.
What About the World?
As America’s primaries move beyond Iowa and New Hampshire, it is simply impossible to predict who will be the Democratic and Republican nominees, much less who will become the 44th president of the United States.
But it is not too soon to address the question of what effect US foreign policy is having on the campaign and what it reveals about how Americans see the world.
To the surprise of many seasoned observers, foreign policy is having only a modest impact on voters.
This is unexpected, because only six months ago the war in Iraq dominated the political landscape.
Although Iraq still matters a lot to Americans, its importance for determining how they vote has receded, partly because US casualties there are markedly down as the security situation appears to be gradually improving.
As a result, there is considerably less public pressure to do something dramatically different.
Foreign policy has also become less salient than it was only months ago as the chance of war between the US and Iran has diminished, following the recently published National Intelligence Estimate on Iran’s nuclear program.
The judgment by America’s intelligence community that Iran has suspended its nuclear weapon development program – and, more importantly, that its large-scale uranium enrichment capacity is likely years away – postpones the day when a US president may have to decide between living with or attacking a nuclear Iran.
A third reason for the modest impact of international issues on voters’ choice of the next president is another surprising development: more agreement between and among the leading candidates than meets the eye.
There is something of a consensus, for example, emerging around the notion that the US should remain in Iraq for some time to come, albeit with a reduced level of military forces.
There is also widespread acknowledgement that the US must do more both at home and diplomatically to address global climate change; that the US must work with its European allies to prevent Afghanistan from slipping back into anarchy; and that the US must take the strongest possible stand against terrorism and those who would support it in any way. No major candidate is advocating anything remotely resembling isolationism.
Finally, and perhaps most importantly, the deterioration of America’s economy is now overshadowing foreign policy.
The greatest crisis facing many Americans is their increasing inability to meet their monthly mortgage payments.
Recession, job loss, and expensive oil, not war, is what Americans fear most for 2008.
This is not to suggest that foreign policy is absent from the campaign.
Along with the economy, a dominant issue on the political agenda – and one that has affected Republican politics in particular – is immigration.
There is growing opposition to illegal entry, but no consensus about what to do about those who have been in the country illegally for years or those who want to come to the US in the future.
It is also possible to see in the politics of both parties mounting concern about globalization.
With tougher economic times inevitably come tougher positions toward foreign competition and outsourcing.
There may also be latent concern about foreign policy in the attention being given to the quantity and quality of candidates’ relevant experience.
A desire for “change” is a common refrain of the American debate, but it is far from the only one.
Renewed interest in foreign policy and the rest of the world could surface if there were a dramatic overseas development.
We saw this a few weeks ago, when former Pakistani Prime Minister Benazir Bhutto was assassinated.
Democratic and Republican candidates alike were called upon to explain what they would be prepared to do if there were an opportunity to capture Osama Bin Laden or a need to secure Pakistan’s nuclear weapons.
Likewise, Iraq could return to center stage if the positive momentum of recent months were suddenly reversed, perhaps following a new outbreak of violence between the country’s Sunnis and Shia.
The US and Iran could go to war not over nuclear issues but because of reckless behavior by the Revolutionary Guards (as occurred recently in the Strait of Hormuz), with Iranian President Mahmoud Ahmedinejad possibly seeking to provoke a crisis in order to distract domestic attention from his economic failures.
Order in Pakistan could break down irretrievably.
A terrorist attack could remind Americans of their fundamental vulnerability.
The possibilities are endless.
America’s next president will face a host of pressing and difficult foreign policy challenges – and how he or she responds will affect not only the US, but the entire world.
In the meantime, though, foreign policy will have only an indirect influence on Americans’ choice.
What Are Homebuyers Thinking?
Many places around the world have been in a housing boom since the late 1990’s.
As I argued last year, in the second edition of my book Irrational Exuberance , the boom is rooted in speculative investment by ordinary homebuyers, fueled substantially by the worldwide perception that capitalism has triumphed, and that all people must look out for themselves by acquiring property.
Convinced that private ownership has become essential to smart living, buyers bid up home prices.
Moreover, the fear that one must get in on the boom before it is too late often drives people to bid up home prices faster now.
This certainly seems to be the market psychology in China and India, where rapidly rising incomes and newly successful people are widely expected to put pressure on markets for land, real estate, and construction materials.
Real estate booms have been going on in these countries’ major cities for years.
In China, despite some signs of weakness – the Shanghai market is down, for example – price growth is still robust in much of the country.
But the boom generated by such beliefs cannot go on forever, because prices can’t go up forever, and there are already signs of a hard landing.
In the United States, newspapers and magazines are trumpeting reports in the last few months that the decade-long boom in home prices may be at an end, and that the bubble may be bursting.
The psychology has suddenly changed, creating widespread fear of sharp drops in US home prices.
The new futures market for single-family homes at the Chicago Mercantile Exchange (which I helped establish last May with our firm MacroMarkets LLC) is predicting that by next August prices will fall between 6% and 8% in all ten US cities traded.
If home prices crash in the US, the bastion of capitalism, could it destroy confidence and end the boom in other countries?
If so, could a worldwide recession follow?
This scenario is a distinct possibility, although there are reasons to be skeptical.
Most importantly, the ultimate sources of the housing boom – the beliefs about capitalism and future economic growth – seem solidly entrenched.
The downward price trend in the US market, for example, does not seem to reflect underlying changes in long-run economic confidence.
The survey that Karl Case and I conducted in May and June of this year, under the auspices of the Yale School of Management, shows sharp declines in short-term expectations for home prices in the US, but relatively little change in long-term expectations.
Most people still believe that housing is a great long-term investment.
Maybe real estate prices are unlikely to fall to pre-boom levels because the fundamental change in perceptions concerning capitalism’s triumph will be longstanding.
Changes in people’s fundamental ways of thinking are not easily reversed.
Nor, therefore, is their interest in housing as a major speculative investment asset likely to change.
The transformation in investors’ beliefs is striking.
Before the real estate boom of the late 1970’s, hardly anyone was worried about rising home prices.
A search of old newspapers finds surprisingly few articles about the outlook for home prices.
Those that did appear generally seem to be based on the assumption that minor fluctuations in construction costs, not massive market swings, drove the modest home price movements that they noted.
Indeed, hardly anything interesting about home prices was ever reported at all, aside from an occasional comment in an article about something else.
For example, an article in The Times of London in 1970 argued that rising home prices reflected the switch to a new British Standard Time (imposed as a three-year experiment in 1968 to facilitate commerce with Western Europe by putting Britain in the same time zone).
The article claimed that the change raised costs by forcing British construction workers to perform more of their jobs in relative darkness.
Speculative investment behavior was hardly an issue in those rare instances in which home prices were discussed.
To understand the nature of the subsequent shift, consider that it is hard to find anyone today who worries that automobile prices will soar because rising demand in China and India for steel and other materials will push automobile prices out of reach in the future.
Though a small group of collectors invests speculatively in antique or specialty cars, the idea of speculating in automobiles just is not in the public consciousness.
That is how it was with housing until the late 1970’s.
Now that we think differently about real estate, we will never be the same again.
But, of course, housing prices can only rise so fast.
High and rapidly rising home prices tend to stimulate new housing supply, which in turn tends to undermine prices.
Over a period of years, as people see how much new supply there is, they may begin to revise their view that homes are such a terrific investment, causing a gradual, but eventually significant, drop in home prices.
Indeed, while changes in fundamental perceptions may not occur easily or fast, they should never be ruled out.
Urban land prices in major Japanese cities have steadily dropped over much of the period since 1991, as the enormous faith in the miraculous powers of Japanese capitalism gradually faded.
The same kind of erosion in home prices could occur in many cities around the world.
All that is required is that growth in housing supply eventually outstrips investors’ faith in capitalism to sustain faster growth in demand.
What Bolivia\u0027s Chaos Means
The forced resignation of Bolivia's President Gonzalo Sánchez de Lozada, following a month of violent demonstrations, marks a tragic milestone whose meaning extends far beyond his impoverished country.
Bolivia's civil and political breakdown provides another vivid example of the poverty of US foreign policy.
Sánchez de Lozada is one of Latin America's true heroes, a leader who helped usher in democracy and modest--if fragile--economic growth during the past 20 years, including two terms as president.
Yet now he has fled Bolivia in fear for his life.
American arrogance and neglect played a big part in this stunning reversal.
Virtually all of South America has been in deep economic malaise of late, with high unemployment, rising poverty, and growing social unrest.
Argentina endured economic collapse and four failed presidencies during the past three years.
Brazil is battling recession and rising unemployment.
Political systems have fallen apart in Peru, Ecuador, and Venezuela.
Colombia is in open civil war.
As a landlocked Andean country, Bolivia suffers its own special distress.
Its transport costs are among the highest in the world, reflecting mountainous terrain and international trade routes that must cross political boundaries and depend on foreign ports.
This discourages inward investment and strains relations with coastal neighbors.
Indeed, the precipitating factor in Bolivia's collapse was a plan to export natural gas to the US through archrival Chile, a country deeply resented since the War of the Pacific in the late 19 th century, which rendered Bolivia landlocked.
Sánchez de Lozada spoke of the gas exports as a means for investing in health, education, and economic development.
But Bolivia's impoverished population had been ripped off too many times and feared, understandably, that gas revenues would accrue to foreigners or to Bolivia's own rich.
Yet the spark in Bolivia was more than a regional economic crisis amplified by bad geography and a distrusted gas deal.
Just as US presidents treat the Middle East as America's gasoline station, they treat the Andean countries not as home to 130 million poor and struggling people, but, first and foremost, as suppliers of cocaine.
Bolivia's peasant coca cultivators are viewed not as indigenous people trying to survive in a region mostly without jobs, but as drug traffickers.
America's domestic public health problem is seen as an Andean-wide plot to be suppressed with military force, exacerbating violence throughout the region.
When the Bolivian government before Sánchez de Lozada faced US demands to destroy the coca crop, I advised that it insist on adequate aid to finance economic development.
Desperate for any assistance at all, Bolivia's governments ultimately uprooted thousands of hectares of peasant crops--and got almost nothing in return but a lot of phony slogans about alternative development.
Not surprisingly, the 2002 elections turned on the explosive coca eradication issue.
Evo Morales, the leader of the coca growers' federation, came within a whisker of winning the presidency, helped by the US ambassador's warning that his election would be seen as hostile to America.
That "endorsement" by itself was almost enough to give Morales the presidency.
In the event, it put him into the leadership of the insurrection that toppled Sánchez de Lozada.
The main surprise is that Sánchez de Lozada lasted as long as he did.
He inherited an economic, political, and social crisis as deep as any in the world, and he warned President Bush last year that extreme poverty and widening ethnic divisions could incite insurrection.
Bush literally laughed in his face, saying not to worry, that he, too, faced political pressures.
Sánchez de Lozada pressed again for US financial help--$150 million--but Bush ushered him from the Oval Office with a pat on the back.
Sánchez de Lozada returned to Bolivia empty-handed, except for instructions from the IMF to implement austerity measures in accordance with the dictates of the US Treasury.
The measures led to a police strike, followed by a popular insurrection and an assassination attempt.
IMF officials deny responsibility for the upheaval, but have failed to provide an honest public appraisal of Bolivia's urgent financial needs.
Even after a failed assassination attempt, the US again brushed off requests for aid.
The US adventure in Iraq has squandered $150 billion over two years, while Bolivia received $10 million--that's right, $10 million--in "emergency" help, a fifteenth or less of what was realistically needed to ease the intense economic crisis and help displaced peasants.
Now US interests in Bolivia lie in shambles: the country seethes with violence, and coca production is likely to soar.
American foreign policy is brain dead.
Even as Sánchez de Lozada was hounded from office on the streets of La Paz as an American lackey, the Bush administration showed no interest or support.
An obsessive US administration, led by a President who reportedly believes that he is on a holy mission to fight terror in the Middle East, pays no attention to the rest of the world.
Woe to any poor country that follows US dictates.
A narrow-minded and violent US administration has lost interest even in helping its friends.
What Can Save the Euro?
NEW YORK – Just when it seemed that things couldn’t get worse, it appears that they have.
Even some of the ostensibly “responsible” members of the eurozone are facing higher interest rates.
Economists on both sides of the Atlantic are now discussing not just whether the euro will survive, but how to ensure that its demise causes the least turmoil possible.
It is increasingly evident that Europe’s political leaders, for all their commitment to the euro’s survival, do not have a good grasp of what is required to make the single currency work.
The prevailing view when the euro was established was that all that was required was fiscal discipline – no country’s fiscal deficit or public debt, relative to GDP, should be too large.
But Ireland and Spain had budget surpluses and low debt before the crisis, which quickly turned into large deficits and high debt.
So now European leaders say that it is the current-account deficits of the eurozone’s member countries that must be kept in check.
In that case, it seems curious that, as the crisis continues, the safe haven for global investors is the United States, which has had an enormous current-account deficit for years.
So, how will the European Union distinguish between “good” current-account deficits – a government creates a favorable business climate, generating inflows of foreign direct investment –&#160;and “bad” current-account deficits?
Preventing bad current-account deficits would require far greater intervention in the private sector than the neoliberal and single-market doctrines that were fashionable at the euro’s founding would imply.
In Spain, for example, money flowed into the private sector from private banks.
Should such irrational exuberance force the government, willy-nilly, to curtail public investment?
Does this mean that government must decide which capital flows – say into real-estate investment, for example – are bad, and so must be taxed or otherwise curbed?
To me, this makes sense, but such policies should be anathema to the EU’s free-market advocates.
The quest for a clear, simple answer recalls the discussions that have followed financial crises around the world.
After each crisis, an explanation emerges, which the next crisis shows to be wrong, or at least inadequate.
The 1980’s Latin American crisis was caused by excessive borrowing; but that could not explain Mexico’s 1994 crisis, so it was attributed to under-saving.
Then came East Asia, which had high savings rates, so the new explanation was “governance.”&#160;
But this, too, made little sense, given that the Scandinavian countries – which have the most transparent governance in the world – had suffered a crisis a few years earlier.
There is, interestingly, a common thread running through all of these cases, as well as the 2008 crisis: financial sectors behaved badly and failed to assess creditworthiness and manage risk as they were supposed to do.
These problems will occur with or without the euro.
But the euro has made it more difficult for governments to respond.
And the problem is not just that the euro took away two key tools for adjustment –&#160;the interest rate and the exchange rate – and put nothing in their place, or that the European Central Bank’s mandate is to focus on inflation, whereas today’s challenges are unemployment, growth, and financial stability.
Without a common fiscal authority, the single market opened the way to tax competition – a race to the bottom to attract investment and boost output that could be freely sold throughout the EU.
Moreover, free labor mobility means that individuals can choose whether to pay their parents’ debts: young Irish can simply escape repaying the foolish bank-bailout obligations assumed by their government by leaving the country.
Of course, migration is supposed to be good, as it reallocates labor to where its return is highest.
But this kind of migration actually undermines productivity.
Migration is, of course, part of the adjustment mechanism that makes America work as a single market with a single currency.
Even more important is the federal government’s role in helping states that face, say, high unemployment, by allocating additional tax revenue to them – the so-called “transfer union” so loathed by many Germans.
But the US is also willing to accept the depopulation of entire states that cannot compete.
(Some point out that this means that America’s corporations can buy senators from such states at a lower price.)
But are European countries with lagging productivity willing to accept depopulation?
Alternatively, are they willing to face the pain of “internal” devaluation, a process that failed under the gold standard and is failing under the euro?
Even if those from Europe’s northern countries are right in claiming that the euro would work if effective discipline could be imposed on others (I think they are wrong), they are deluding themselves with a morality play.
It is fine to blame their southern compatriots for fiscal profligacy, or, in the case of Spain and Ireland, for letting free markets have free reign, without seeing where that would lead.
But that doesn’t address today’s problem: huge debts, whether a result of private or public miscalculations, must be managed within the euro framework.
Public-sector cutbacks today do not solve the problem of yesterday’s profligacy; they simply push economies into deeper recessions.
Europe’s leaders know this.
They know that growth is needed.
But, rather than deal with today’s problems and find a formula for growth, they prefer to deliver homilies about what some previous government should have done.This may be satisfying for the sermonizer, but it won’t solve Europe’s problems – and it won’t save the euro.&#160;
What China Wants in 2012
BEIJING – With economic globalization and the advent of a multi-polar world, China and other emerging countries are clearly set to play much more important roles not only in 2012, but in the coming decades.
As China’s economic power and influence in the world economy have increased following the financial crisis of 2008, the idea has been floated that China and the United States should co-lead the world under some sort of “G-2” arrangement.
But such a G-2 framework is not consistent with China’s independent foreign policy, nor with the general trend towards wider dispersion of geopolitical power within the international community.
Although China’s senior leadership will change this year, this position will not change.
Indeed, when China’s Premier Wen Jiabao visited Prague in May 2009 for the 11th China-European Union summit, he explained that China is opposed to the G-2 concept.
It is China’s firm intention never to seek hegemony, nor to support global domination by a small minority of countries.
What China does believe in is deepening cooperation with all of the world’s major regions.
Consider Europe – a splendid and time-honored civilization, and now a major player on the world stage.
The progressive deepening of EU integration has brought dynamic vigor to the European continent; despite Europe’s current difficulties, it still boasts extraordinary overall strength and international influence.
China has always supported European integration, and hopes that the EU will become a pillar of international order.
In the wake of the global financial crisis and the eurozone’s sovereign-debt crisis, China has bought government bonds, made direct investments, and sent business delegations to Europe.
During Spanish Prime Minister José Luis Zapatero’s visit to Beijing in April 2011, Wen reaffirmed China’s willingness to continue purchasing Spanish government bonds as a further demonstration of our support for Europe’s efforts to emerge from its crisis.
Moreover, China’s huge market and labor pool have created important opportunities for Europe.
In this new multi-polar era, China and Europe must work together, and they are now at a critical moment if they are to deepen their cooperation.
What we do to share opportunities, meet challenges, and pursue development will be directly relevant not only to our own peoples’ welfare, but also to the world’s future.
China-EU cooperation will be essential to maintaining global peace and stability.
We share a commitment to resolving international issues through political means, and both sides have already played a constructive role in addressing global challenges such as climate change, terrorism, and the proliferation of weapons of mass destruction.
The parallel launch of China’s 12th Five-Year Plan and Europe’s 2020 Strategy has also helped to deepen our cooperation.
China and Europe worked together after 2008 to prevent a global financial meltdown, oppose protectionism, and promote reform of the international financial system, thus facilitating worldwide economic recovery.
China also takes its relations with the US very seriously.
Indeed, our bilateral relationship is among the most important in the international community.
That relationship has gone through some rough patches since diplomatic ties were established in 1979, but, overall, it has continued to grow and benefit both sides.
Today, China and the US share more interests than ever, and there are encouraging prospects for still broader cooperation.
When President Hu Jintao visited Washington, DC in January 2011, he and President Barack Obama agreed to build what Hu referred to as “a China-US cooperative partnership based on respect and mutual benefit.”
They reaffirmed their deference for each other’s sovereignty and territorial integrity, and reached agreements on major strategic issues, including efforts to strengthen cooperation in the Asia-Pacific region and in multilateral institutions, and to respond jointly to regional and global challenges to peace and stability, for example, on the Korean Peninsula.
China is the world’s largest developing country; Europe is the largest bloc of developed countries; and the US is the largest single developed country.
Together, we account for nearly a third of humanity and two-thirds of the world economy.
As the three major global powers, China, the EU, and the US must strengthen their cooperation, and must work with the rest of the world to face the complex international issues that challenge us all.
Together, we must shoulder the great task of upholding world peace and promoting common development.
While China is committed to its own independent foreign policy, it cannot achieve development in isolation.
Likewise, the world cannot develop without China.
Hu once said that the twenty-first century should be a century of peace, development, and cooperation.
China is willing to join with the EU, the US, and the rest of the world to realize the potential of a truly harmonious world.
Over the Cliff We Go
BERKELEY – Unless something unexpected happens, the United States’ many legislated reductions in taxes over the past 12 years – all of which have been explicitly temporary – will expire simultaneously at the start of 2013.
American tax rates will revert overnight to their Clinton-era levels.
Some of these reductions were implemented to fight what was seen four years ago as a temporary downturn.
Although their supporters wanted to make them permanent, claiming that they were temporary allowed for the circumvention of procedural requirements in the legislative process that Democrats had created in a vain effort to guarantee fiscal sanity.
The immediate increase in tax rates is only part of the story.
At the same time, automatic reductions in the defense budget and “discretionary” domestic spending – agreed to by both Democrats and Republicans in the summer of 2011 –&#160;will take effect.
Couple these tax increases and spending cuts with the provisions of “Obamacare,” the US health-care reform championed by President Barack Obama, and, as of January 1, 2013, America’s &#160;long-run structural budget deficit disappears.
The restored tax rates will, for the foreseeable future, be sufficient to support the US defense establishment, the growing US social-insurance system, and a moderate – albeit inadequate and suboptimal – amount of other “discretionary” federal spending.
The US national debt/GDP ratio will be on track to fall from its current level of 75% to 50% by 2035.
Moreover, the US will begin running primary budget surpluses – the fiscal balance minus interest payments on existing debt – by 2015.
So why isn’t the prospect of going over the fiscal cliff greeted with enthusiasm?
Yes, there will be big spending cuts – which will hit defense contractors, doctors with Medicare patients, and all who benefit from or rely on government discretionary spending – and substantial tax increases.
But, to balance the budget in the long run, either taxes have to go up or spending has to go down relative to some baseline, or both.
There are two reasons why deficit hawks are not declaring victory.
First, many who call themselves deficit hawks are really spending hawks: they believe that US social insurance is too generous to the unemployed, the disabled, the elderly, and the sick, and that by far the best policy is to cut back on such programs rather than raise taxes to pay for them.
But, they fear that calling for spending cuts will be unpopular, unlike, they hope, demands to balance the budget.
For them, the problem with the fiscal cliff is that it does not cut spending enough and raises taxes too much.
Second, and more important for those who worry about the US economy’s health, the process is not well-described by the term “fiscal cliff.”
It is, rather, an austerity bomb that hits an economy in which unemployment remains high, the employment-to-population ratio remains horrifyingly low, and there are only feeble signs that the large gap between current and potential output is closing.
The past two months’ run-up to the austerity bomb’s detonation has already reduced projected real GDP growth in 2013 from 3% to 2.5%, and has raised likely end-2013 unemployment from 7.5% to 7.7%.
Each day from January 1 to June 30 that the damage continues will have a roughly linear impact on economic performance in 2013, reducing the likely full-year real GDP growth rate by 0.0084% – and only if a deal is ultimately reached that would have caused no economic harm in 2013 had it been reached on November 10, 2012.
If no deal is reached by June 30, America’s likely 2013 real GDP growth rate will be -0.5%, with the likely unemployment rate returning to 8.9%.
Spending cuts and tax increases that in the long run restore fiscal sanity and balance are good.
Having them all hit a weak, still-depressed economy simultaneously is not good.
Thus, US officials face four tasks.
First, Republicans and Democrats must negotiate a bipartisan agreement to stretch out the spending cuts and tax increases that take effect on January 1, 2013.
That way, they will affect the economy gradually over five years, rather than all at once.
Second, the Federal Reserve should expand its quantitative easing and forward guidance programs.
Consumers will be spending less in 2013, owing to higher taxes, as will government, which means that someone has to be spending more.
Housing construction and exports are the obvious candidates, and both can be boosted somewhat by more aggressive balance-sheet operations by the Fed, together with promises of continued low nominal interest rates and higher inflation in the medium term.
Third, the large government-sponsored mortgage enterprises, Fannie Mae and Freddie Mac, should be used as macroeconomic-policy tools to restore housing construction to its long-term trend level.
This should have been done five years ago, but better late than never.
Finally, and also five years too late, the US Treasury secretary should announce that while the strong-dollar doctrine was appropriate (and in America’s interest) during the dot-com boom, the country needs a weak dollar in the aftermath of the austerity bomb’s detonation.
Reaching the wrong agreement to defuse the austerity bomb, or cushion the economy from its impact, would merely recreate America’s long-run structural budget deficit –&#160;a very bad outcome.
Failure to take all four steps outlined above all but guarantees renewed recession in America, even if a good agreement is reached on stretching out the tax hikes and spending cuts.
And if no agreement is reached on that, undertaking the last three steps would at least reduce somewhat the subsequent damage.
What Communism Still Teaches Us
PRAGUE - The fifteenth anniversary of the Velvet Revolution on November 17, 1989, which brought an end to 41 years of communist dictatorship in Czechoslovakia, is an opportunity to ponder the meaning of moral behavior and free action.
Today we live in a democratic society, but many people - not only in the Czech Republic - still believe that they are not true masters of their destiny.
They have lost faith that they can really influence political developments, much less influence the direction in which our civilization is evolving.
During the communist era, most people believed that individual efforts to effect change did not make sense.
Communist leaders insisted that the system was the result of history's objective laws, which could not be challenged, and those who refused this logic were punished - just in case.
Unfortunately, the way of thinking that supported Communist dictatorships has not disappeared entirely.
Some politicians and pundits maintain that Communism merely collapsed under its own weight - again, owing to "objective laws" of history.
Again, individual responsibility and individual actions are belittled. Communism, we are told, was only one of the dead ends of Western rationalism; therefore, it was sufficient to wait passively for it to fail.
The very same people often believe in other manifestations of inevitability, such as various supposed laws of the market and other "invisible hands" that direct our lives.
As there is not much space in such thinking for individual moral action, social critics are often ridiculed as naive moralists or elitists.
Perhaps this is one of the reasons why 15 years after the fall of Communism, we again witness political apathy.
Democracy is increasingly seen as a mere ritual.
In general, Western societies, it seems, are experiencing a certain crisis of the democratic ethos and active citizenship.
It is possible that what we are witnessing is a mere change of paradigm, caused by new technologies, and we have nothing to worry about.
But perhaps the problem is deeper: global corporations, media cartels, and powerful bureaucracies are transforming political parties into organizations whose main task is no longer public service, but the protection of specific clienteles and interests.
Politics is becoming a battleground for lobbyists; media trivialize serious problems; democracy often looks like a virtual game for consumers, rather than a serious business for serious citizens.
When dreaming about a democratic future, we who were dissidents certainly had some utopian illusions, as we are well aware today.
However, we were not mistaken when we argued that Communism was not a mere dead end of Western rationalism.
Bureaucratization, anonymous manipulation, and emphasis on mass conformism were brought to "perfection" in the Communist system; however, some of the very same threats are with us today.
We were already certain then that if democracy is emptied of values and reduced to a competition of political parties that have "guaranteed" solutions to everything, it can be quite undemocratic.
This is why we put so much emphasis on the moral dimension of politics and a vibrant civil society as counterweights to political parties and state institutions.
We also dreamed about a more just international order.
The end of the bipolar world represented a great opportunity to make the international order more humane.
Instead, we witness a process of economic globalization that has escaped political control and, as such, is causing economic havoc as well as ecological devastation in many parts of the world.
The fall of Communism was an opportunity to create more effective global political institutions based on democratic principles - institutions that could stop what appears to be, in its current form, the self-destructive tendency of our industrial world.
If we do not want to be overrun by anonymous forces, the principles of freedom, equality and solidarity - the foundation of stability and prosperity in Western democracies - must start working globally.
But, above all, it is necessary - just as it was during the Communist era - that we not lose faith in the meaning of alternative centers of thought and civic action.
Let's not allow ourselves to be manipulated into believing that attempts to change the "established" order and "objective" laws do not make sense.
Let's try to build a global civil society, and let's insist that politics is not just a technology of power, but needs to have a moral dimension.
At the same time, politicians in democratic countries need to think seriously about reforms of international institutions, because we desperately need institutions capable of real global governance.
We could start, for example, with the United Nations, which, in its current form, is a relic of the situation shortly after the end of World War II.
It does not reflect the influence of some new regional powers, while immorally equating countries whose representatives are democratically elected and those whose representatives speak only for themselves or their juntas, at best.
We, the Europeans, have one specific task.
Industrial civilization, which now spans the whole world, originated in Europe.
All of its miracles, as well as its terrifying contradictions, can be explained as consequences of an ethos that is initially European.
Therefore, unifying Europe should set an example for the rest of the world regarding how to face the various dangers and horrors that are engulfing us today.
Indeed, such a task - which is closely tied to the success of European integration - would be an authentic fulfillment of the European sense of global responsibility. And it would be a much better strategy than cheaply blaming America for the contemporary world's various problems.
What Corporate Tax for Europe?
The European Commission is considering a common model of corporate taxation for the European Union that cannot possibly work.
Instead, it should consider a simpler, and more viable, alternative that already exists.
Corporate income in the EU is currently taxed under widely divergent national rules, based on separate accounting (SA) of income earned in each country.
Cross-border intra-company transactions are accounted for according to market prices for similar transactions – the so-called “arm’s-length principle” (ALP).
The system is complex, expensive to administer, and can result in double taxation because members usually do not allow full write-offs for losses and tax liabilities incurred abroad.
It is also prone to tax evasion, owing to different definitions of corporate income in the member states and the vast opportunities for cheating offered by ALP (since reference market prices often do not exist), not to mention profit-shifting to low-tax jurisdictions.
The Commission is now proposing that EU companies operating in more than one member state be taxed on a common definition of earned income – the Common Consolidated Base Taxation (CCBT).
Earned income would be calculated on a consolidated basis for the group and then “apportioned” among the member states according to a formula reflecting each business unit’s contribution to overall group income.
The formula could include such factors as sales, payroll, and tangible assets, as in Canada and the United States, or value-added, adjusted to exclude imports in order to measure the value-added “produced” in each country.
Each member state would remain free to decide the tax rate applicable to its portion of group income.
Under this approach, taxable income would be determined from the consolidated accounts based on international accounting standards (IAS), which since 2005 have become legally binding for EU-listed companies’ financial reports.
This offers full tax write-offs for losses within company groups, and transfer prices would no longer matter.
Even so, the Commission’s proposal has fatal shortcomings.
For one thing, the factors included in the apportionment formula would in practice be taxed at the national rates, creating fresh incentives for factor- and profit-shifting.
But it is two other obstacles that render CCBT hopeless.
First, the IAS responds to the information needs of financial investors, but it does not provide a reliable definition of income for tax purposes.
The accrual principle typical of financial accounting is incompatible with tax systems’ realization principle.
Moreover, the IAS leaves the allocation of profit and losses to different fiscal years largely undetermined, with each member state choosing different solutions.
Second, common legal rules on group consolidation do not exist; indeed, many EU countries’ commercial law contains no legal definition of a group.
The attribution of companies to a common group would need to be based on legal control, that is, ownership of some defined threshold of equity – 51% or higher.
But a much lower share of equity often is sufficient to secure de facto control, thus encouraging groups to adapt their capital structure – moving firms in and out of the group’s boundaries – to minimize tax liabilities.
Clearly, CCBT is a non-starter.
But this doesn’t mean that EU companies are condemned to live with 25 different national tax systems.
The idea of a common tax base must be preserved in order to simplify the system and narrow the scope for profit-shifting.
However, a radical change in approach is required: the notion of income as a basis for corporate taxation should be scrapped altogether.
Referring to corporate income made sense when company taxation was seen as a “back stop” within a system of progressive taxation of personal incomes.
But most countries have now adopted “dual” income taxation that treat the fruits of capital more leniently than other personal income.
More importantly, the notion of corporate income is inherently arbitrary, for it is based on correct measurement of capital consumption in each tax period, which has become less and less reliable owing to the increased importance of intangibles in the value of companies.
Moreover, any tax whose proceeds increase in line with company returns is bound to discourage investment.
This disincentive disappears if the corporate tax base is decoupled from current profits and linked to some broad measure of activity.
Indeed, this would create an incentive for each company to outperform the average, since above-average profits would go untaxed.
Another reason to scrap income and move to presumptive taxation of corporate activities stems from the EU’s decentralized nature.
While taxing the return on capital at the national level could discourage investment, taxing companies in exchange for location advantages might not.
Countries that offer world-class infrastructure, high-skill staff, and simple business rules may be well entitled to ask companies to pay a commensurate tax in return.
In sum, the EU “federal” corporate tax should be thought of as a benefit tax, based on a broad measure of activity, applied at a moderate rate, and unrelated to current returns; nor should it be deductible from other taxes.
Among the various options under consideration, the value-added tax base – perhaps averaged over a number of years – looks best, since the accounting and tax-assessment infrastructures already exist.
Of course, value-added includes profits, and to this extent the incentive for companies to manipulate transfer prices may reappear.
But the incentive would be much weakened, because gross returns typically represent a fairly small share of total value-added.
This model leaves the assessment and administration of corporate taxes entirely in the hands of member states, and would not require harmonization of legal and accounting rules.
It would be transparent, simple, and easy to administer.
The gigantic apparatus for managing transfer prices and tax credit claims with foreign tax authorities could be dismantled.
Indeed, the only losers would be Europe’s outsized army of tax lawyers and accountants.
What do Egypt’s Generals Want?
CAIRO – “Whatever the majority in the People’s Assembly, they are very welcome, because they won’t have the ability to impose anything that the people don’t want.”
Thus declared General Mukhtar al-Mulla, a member of Egypt’s ruling Supreme Council of the Armed Forces (SCAF).
Al-Mulla’s message was that the Islamists’ victory in Egypt’s recent election gives them neither executive power nor control of the framing of a new constitution.
But General Sami Anan, Chief of Staff and the SCAF’s deputy head, quickly countered that al-Mulla’s statement does not necessarily represent the official views of the Council.
So, one year after the revolution that overthrew Hosni Mubarak, who, exactly, will set Egypt’s political direction?
The electoral victory of the Muslim Brotherhood’s political wing and the Salafi parties, which together won more than 70% of the parliamentary seats, will give them strong influence over the transitional period and in drafting the constitution.
But they are not alone.
Aside from the Islamists, two other powerful actors will have their say: the “Tahrirists” and the generals.
Tahrir Square-based activism has not only brought about social and political change, but also has served as the ultimate tool of pro-democracy pressure on Egypt’s military rulers.
Indeed, while the army, the most powerful of the three actors, still officially controls the country, there is little confidence in the generals’ commitment to democracy.
“The SCAF are either anti-democratic….or some of their advisers told them that democracy is not in their best interest,” says Hazem Abd al-Azim, a nominee in the first post-Mubarak government.
If the generals do not want democracy, nor do they want direct military rule à la Augusto Pinochet.
So, what do they want?
Ideally, they would like to combine the Algerian army’s current power and the Turkish army’s legitimacy.
This implies a parliament with limited powers, a weak presidency subordinate to the army, and constitutional prerogatives that legitimate the army’s intervention in politics.
The minimum that they insist on is reflected in statements by Generals al-Mulla, Mamdouh Shahim, Ismail Etman, and others.
That would mean a veto in high politics, independence for the army’s budget and vast economic empire, legal immunity from prosecution on charges stemming from corruption or repression, and constitutional prerogatives to guarantee these arrangements.
The new parliament and constitutional assembly will have to lead the negotiations with the SCAF.
But, given that any successful democratic transition must include meaningful civilian control over the armed forces and the security apparatus, the SCAF’s minimum demands could render the process meaningless.
The veto in high politics would include any issues that touch on national security or sensitive foreign policy, most importantly the relationship with Israel.
With an Islamist majority in the parliament promising to “revise” the peace agreement with Israel, tensions over foreign policy are likely to rise.
The independent military-commercial empire, which benefits from preferential customs and exchange rates, no taxation, land-confiscation rights, and an army of almost-free laborers (conscripted soldiers), is another thorny issue.
With the Egyptian economy suffering, elected politicians might seek to improve conditions by moving against the military’s civilian assets – namely, by revising the preferential rates and imposing a form of taxation.
Immunity from prosecution is no less salient.
“The Field-Marshal should be in jail now,” screamed the elected leftist MP, Abu Ezz al-Hariri, on the second day of the new parliamentary session.
When Mahmoud Ghozlan, the Muslim Brotherhood spokesperson, proposed immunity (known in Egypt as the “safe-exit” option), he faced a wave of harsh criticism.
Pressure from the United States has also influenced the SCAF’s decision-making.
“The military establishment receives $1.3 billion from the US….They are very sensitive to US requests,” according to Saad Eddin Ibrahim, who lobbied the Obama administration to support the revolution in January 2011.
But most of the SCAF’s pro-democracy decisions have come as a result of massive pressure from Tahrir Square.
This includes the removal of Mubarak, his trial (and that of other regime figures), and bringing forward the presidential election from 2013 to June 2012.
Two other factors are equally, if not more, influential: the status quo inherited from the Mubarak era and the army’s internal cohesion.
With few exceptions, the SCAF’s members benefited significantly from Mubarak’s regime.
They will attempt to preserve as much of it as possible.
“The sight of officers in uniform protesting in Tahrir Square and speaking on Al Jazeera really worries the Field Marshal,” a former officer told me.
And one way to maintain internal cohesion is to create “demons” – a lesson learned from the “dirty wars” in Algeria in the 1990’s and Argentina in the 1970’s and 1980’s.
In particular, Coptic protesters are an easy target against which to rally soldiers and officers.
Last October, amid an unnecessary escalation of sectarian violence, state-owned television featured a hospitalized Egyptian soldier screaming, “The Copts killed my colleague!”
The systematic demonization of the Tahririst groups, and the violent escalation that followed in November and December, served the same purpose.
Despite everything, democratic Egypt is not a romantic fantasy.
A year ago, Saad al-Ketatni, the Muslim Brotherhood leader, would never have dreamed of being Speaker of Parliament.
The same applies to the leftists and liberals who now hold around 20% of the parliament’s seats.
If 2011 witnessed the miracle of Mubarak’s removal, a brave parliament’s institutional assertiveness, coupled with non-institutional Tahririst pressure, could force the generals to accept a transfer of power to civilian rule (with some reserved domains for the army establishment) in 2012.
What is certain is that this year will not witness a return to the conditions of 2010.
Egypt may become stuck in democratization’s slow lane, but there will be no U-turn.
The hundreds of thousands who marched to Tahrir Square on the revolution’s anniversary will guarantee that.
What Does America Want?
When the leaders of the world's richest nations gather in Evian, France, one unasked question will dominate: what does America want in the world?
So it may be helpful to outline the principles and ideas that guide US foreign policy.
First, inconsistency is no vice.
Indeed, in foreign policymaking, inconsistency is often a virtue.
I speak not of principles, but of policy.
The US does not have a "one size fits all" approach to the world.
What happened in Iraq should not be over‑interpreted as a rigid template for US policy toward countries that pursue weapons of mass destruction, support terrorism, or deny people liberty.
In Iraq, the US used force as a last resort, against a country with a clear record of aggression, and after a large degree of international consensus had developed about what Iraq needed to do.
Different policies-tailored for local, regional, and international realities-will be needed to meet the challenges posed by North Korea, Iran, Syria, or elsewhere.
America's armed forces are an essential background to much of what the US accomplishes internationally.
But defense policy is only one component of foreign policy.
Not every threat to America's national interests can be addressed with military power.
If all you have to work with is a hammer, as the saying goes, every problem looks like a nail.
Success in foreign policy, as in carpentry, requires the right tools for the job.
Partnership is essential here.
For all of America's power, there is little that the US can do in the world that it can't do better with the active participation of others, be they governments, international organizations, or non-governmental organizations.
Partnership facilitates solutions to problems that defy purely national responses and means that burdens are shared.
America relies on partnerships in the global war on terrorism: foreign governments provide intelligence and law enforcement cooperation; trading partners ensure the security of shipping containers; private financial institutions help track the transfers of funds that sustain terror networks.
Beyond partnerships, international institutions add value-provided they are effectively organized, have realistic mandates, and contain members that are committed to common norms and aims.
Such institutions can and often do advance US national interests.
Indeed, it would be difficult to carry out critical dimensions of US foreign policy-from trade to non‑proliferation to environmental policy-without them.
The World Trade Organization is a case in point.
It provides a forum in which to negotiate new trade liberalization agreements, seek remedies against protectionist and discriminatory policies, and resolve disputes with trading partners.
But the US must also ensure that existing institutions are adapted to current realities.
NATO, for example, is evolving from a Cold War alliance focused solely on Europe to one suited to meeting today's security challenges wherever they may arise, such as in Afghanistan and possibly Iraq.
Multilateralism is most successful when built on a real convergence of interests and values.
The UN and other global frameworks may sometimes be best placed to address US foreign policy goals.
When the UN or other bodies are unwilling or unable to move against dire threats, America reserves the right to act in less encompassing alliances or flexible, ad hoc coalitions of the willing.
Not even the UN has a monopoly on legitimacy, which depends most on an action's rationale and the manner in which it is undertaken.
This flexibility is needed because of the nature of the challenges that loom on the horizon.
We ignore failing states at our peril, because anarchy creates an environment conducive to extremist ideologies and can offer a haven for terrorists, criminals, and drug traffickers.
One of our most pressing tasks today is to prevent the implosion of weak states.
Another is to assist countries that have collapsed into violence to begin the slow process of recovery.
One impulse behind America's international engagement, and one of the great sources of its global power, has been its enduring impulse to make the world a better place.
Any US foreign policy must combine interests and values, because the American public always insists that US national objectives be linked to national ideals.
The appeal of US leadership abroad rests in part on the attractiveness of America's political institutions, society, and culture, and its willingness to champion human rights and democracy.
At the same time, our efforts to promote democracy worldwide serve US interests, owing to the hardheaded realization that democracies settle their differences peaceably.
Today's world lacks irreconcilable conflict among the main concentrations of world power: Europe, Russia, China, Japan, and the US.
This congruence of interest and agreement on the rules of international order offers a promising foundation for managing the common challenges that confront us all.
Our over‑riding goal should be to create a world in which governments, organizations, and peoples embrace arrangements that allow them to realize their shared interests and that reflect fundamental universal values.
Everyone has an interest in a world in which force is used only as a last resort, terrorism is regarded as beyond the pale, weapons of mass destruction do not spread and are not used, free trade becomes the norm, citizens enjoy basic liberties, democratic values triumph, and the rule of law replaces the way of the gun.
Bringing such an integrated world may be optimistic, even idealistic, but it is hardly naive.
What Does Japan Want from America?
OSAKA – Three months after the Democratic Party of Japan’s landslide general-election victory, the new administration’s foreign and security policy appears to be increasingly at odds with that of the United States.
Indeed, there is growing concern on both sides of the Pacific that Prime Minister Yukio Hatoyama intends to turn away from the declining US hegemon and reach out to a rising China.
Indeed, Hatoyama has announced his rudimentary vision of building an East Asian community that excludes the US.
Hatoyama has hastily attempted to fulfill the DPJ’s party manifesto and his own public pledges.
This includes terminating replenishment support for the US-led interdiction operation in the Indian Ocean, reducing host-nation support to US forces based in Japan, and revising the bilateral status-of-force agreement.
Moreover, Hatoyama is set to expose a secret Cold War nuclear agreement that opened Japanese ports to US naval vessels carrying nuclear weapons, in contravention of Japan’s Three Non-Nuclear Principles, which have guided official policy since the late 1960’s.
Last but not least, Hatoyama is postponing implementation of a bilateral agreement with the US to relocate a Marine Corps base on the island of Okinawa, from Futenma to Henoko, thereby causing confusion for America’s plan to relocate part of its forces on Okinawa to Guam.
The significance of these moves has, however, been poorly understood.
Hatoyama’s assertiveness vis-à-vis the US is in accord with Japan’s position as the world’s largest creditor with the least damaged banking sector.
But a decisive foreign-policy shift has not occurred – nor will one occur in the near future.
Instead, Hatoyama has simply stressed Japan’s need to be on an equal footing in alliance management with the US.
Likewise, his proposed regional community would be open in nature, and would welcome strong US involvement, although without formal US membership, on geographic grounds.
Thus, the current US-Japanese estrangement is being driven by a spiral of mistrust that does not stem from geo-strategic concerns.
Rather, Japan has initiated a series of abrupt policy changes, while the US, only dimly aware of the significance of its relative decline, assumes that Japan’s decades-long docility will continue.
Flaws in the transition between Japanese governments are also to blame.
Hatoyama’s ministers did not ask their counterparts in the departing administration of former Prime Minister Taro Aso to inform them fully about existing and potential foreign-policy problems. Nor did the Aso government’s members, stupefied by their crushing electoral defeat, offer to do so.
The relocation of the Marine Corps base – an issue burdened by the competing imperatives of Hatoyama’s coalition government, American military strategy, and local anti-base politics on the island of Okinawa – is now a focal point of tensions with the US.
The base agreement – reached after ten years of bilateral negotiations – is the most practical option for avoiding potentially disastrous aerial accidents in a heavily populated area, and for reducing crimes committed by US soldiers against local Japanese, including, most notoriously, several rapes.
The base agreement is essential for maintaining the political and strategic viability of the bilateral alliance.
Yet, during the DPJ’s election campaign, Hatoyama vowed to eliminate the Marines’ presence on Okinawa.
To make matters worse, the Social Democratic Party (SDP) has threatened to leave the government coalition if Hatoyama breaks his promise – a move that would deny the DPJ a simple majority in the Diet’s upper house.
Nor does it hold the two-thirds majority in the lower house needed to override upper-house resolutions.
Thus, Hatoyama is forced to subordinate Japan’s alliance with the US to his government’s survival, at least until next summer’s upper-house elections.
By then, the government will have enacted more of its legislative program, potentially enabling the DPJ to gain seats.
Hatoyama cannot please everyone all the time, least of all the US.
While he has repeatedly emphasized Japan’s equal footing with the US in alliance management, this does not extend to Japan’s military capability and defense burden.
Obviously, he intends to keep asymmetrical reciprocity embedded in the bilateral mutual security treaty: the US defends Japan, and Japan leases to the US many large bases that are essential to its global military posture.
Moreover, he evidently believes that the geo-strategic value of the bases enable him to bargain for a major US compromise.
If this approach does not work, and if the existing Marine base on Okinawa remains, Hatoyama can pass the buck to the US, thereby deflecting anti-base pressure from local residents.
He would also retain the current Marine Corps presence as a tripwire for US military intervention in the case of a flare-up across the Taiwan Strait, whereas Guam is beyond the effective range of Chinese ballistic missiles.
Hatoyama is certainly a clever political tactician, but that is not sufficient to make him a wise leader.
Above all, he must not play with fire: the US-Japan alliance is a public good that is indispensable for the peace and security of the Asia-Pacific region.
What Do Muslim Women Want?
NEW YORK – When caricature takes the place of dialogue, everyone suffers – especially when it comes to understanding issues affecting women, who struggle worldwide against being silenced.
Some right-wing American bloggers recently twisted an article that I wrote in a way that did just that.
I wrote that many women activists in Muslim countries tend to emphasize issues such as honor killings, legal inequality, and lack of access to education, and that they express frustration that the obsession among Westerners with Muslim women’s clothing can come at the expense of these concerns.
I also pointed out that many Muslim feminists defend their dress in terms of nationalism, anti-imperialism, or as a matter of faith.
This provoked a small firestorm of distortion in the West: “Wolf Wants to Institutionalize the Burka,” etc.
I was so sure that Muslim women should be allowed to speak for themselves because of the faces of Muslim feminism I encountered in recent travels – notably in Jordan, a country fascinatingly poised between tradition and innovation, developing under a forward-looking monarchy that is seeking to modernize and, to an extent, democratize. For those Westerners who worry about Islamic fundamentalism in the Arab world, surely Jordan is a worthy model to understand, support, and engage.
The women leaders I met in Amman were not saying, “Please tell the West to save us.” They were too busy making egalitarian, modernist new worlds of their own, with an Arab, and often Islamic, imprimatur.
Princess Rym Ali, sister-in-law of Queen Rania – the Chanel-wearing media star who is rebranding a more contemporary Jordan – is one vivid example;
Princess Rym is making immense progress in a more behind-the-scenes way.
She met me in a leafy Amman suburb, in the palace that she shares with Prince Ali and their small children.
A former CNN journalist, her quiet bearing and diplomatic manner belie her courage: she captured her husband’s heart as she was reporting from Baghdad on the eve of “shock and awe,” standing firm before the cameras even as the bombs were falling.
Princess Rym and Prince Ali have supported a new film institute, the Red Sea Institute of Cinematic Arts, a joint production with the University of Southern California that is bringing together bright young people from all over the Middle East to learn contemporary filmmaking, apprentice with international film productions, and get the region’s stories out.
Though she can no longer practice journalism directly, Princess Rym is also co-founding new Jordanian journalism school.
Her aim is to replace journalists’ acceptance of the “party line” – even if the party is her own extended family – with a more critical perspective.
She directed my attention to Jordanian-made films about the subordination of women inside the home, and to Rana Husseini’s powerful book on honor killings, Murder in the Name of Honor .
But her implicit message was that these critical examinations of women’s inequality in the Arab world are most enlightening when they are created by women’s advocates from within that culture, rather than sensationalized or superficial versions of the problem created in the West.
Mary Nazzal, owner, with her family, of a chic and bustling boutique hotel, is another dynamo who looks as if she stepped out of a fashion shoot.
But it would be a mistake to underestimate her seriousness.
I call her “Martha Stewart meets Che Guevara,” because, when not renovating the elegant public spaces of her hotel, she is suing Israeli generals for war crimes that she claims were committed against civilians in Gaza.
Nazzal was trained as a British barrister, and chairs the board of the Human Rights Legal Aid Fund.
Her organization is intent on using international law to hold accountable members of the Israeli military who put civilians in harm’s way during the invasion of Gaza – events that the recent Goldstone Report confirms.
She is passionate about the Palestinian cause, mixing her cutting-edge legal advocacy with a willingness to listen to decent people from all sides of the conflict, and a fierce attachment to peace in the region based on due process and justice.
Finally there is Rana Husseini herself – a role model for investigative reporters everywhere who began documenting and investigating honor killings in her newspaper, The Jordan Times .
Honor killings claim an estimated 5,000 women every year, and are increasingly common in immigrant communities abroad.
According to her account, a woman can be killed for “laughing at a joke in the street, wearing makeup or a short skirt…or being raped by a brother.”
After she began her series of reports, Husseini received death threats at her office almost daily – as well as hundreds of letters of support from readers.
As a result of her brave investigations, which included interviews in prisons, many Muslim countries are revising their criminal codes, and the issue has taken center stage internationally.
These women are exactly the kind of leaders that everyone should be cultivating and supporting, rather than overlooking because of a belief that they cannot exist in the Middle East.
We would do better to find out more about them than to waste our time on superficial debates about how they – and many others who are just as accomplished – should dress.
What Euro Crisis?
MUNICH – Despite huge rescue packages, interest-rate spreads in Europe refuse to budge.
Markets have not yet found their equilibrium, and the governments on Europe’s southwestern rim are nervously watching how events unfold.
What is going on?
The rescue packages were put together on the weekend of May 8-9 in Brussels.
In addition to the €80 billion program already agreed for Greece, the European Union countries agreed on a €500 billion credit line for other distressed countries.
The International Monetary Fund added a further €280 billion.
The driving force behind all this was French President Nicolas Sarkozy, who colluded with the heads of Europe’s southern countries.
French banks, which were overly exposed to southern European government bonds, were key beneficiaries of the rescue packages.
Since rescue measures beyond the pre-arranged Greek package had not been on the agenda for the Brussels meeting, German Chancellor Angela Merkel thought she could safely go to Moscow to commemorate the end of World War II – unlike Sarkozy, who declined Russian Prime Minister Vladimir Putin’s invitation.
Worse, the leader of the German delegation to the EU meeting fell ill and was taken to hospital upon arrival in Brussels. This left the German delegation headless.
Proclaiming a systemic crisis of the euro, Sarkozy seized the opportunity and took Germany by surprise.
He asked for huge sums of money and, as Spanish Prime Minister José Luis Zapatero reported, threatened to pull France out of the euro and break up the Franco-German axis unless Germany opened its purse.
After just two days of negotiations, the Maastricht Treaty’s no-bailout clause, which Germany once had made a condition for giving up the Deutsche Mark, was defunct.
The “Club Med,” as Germans call the southern countries, had taken over Europe.
Even the European Central Bank chipped in, buying government bonds of over-indebted countries, using a loophole in the Maastricht Treaty and overruling the Bank’s German representatives.
The European house creaked mightily.
Germany’s president stepped down soon after the decisions – some say because of them.
Germany’s political elite are in an uproar, and serious voices advocate splitting the eurozone into northern and southern tiers, with France relegated to the latter.
I do not share this view.
The euro has successfully protected Europe against exchange-rate risks, and it is a useful step towards further European integration.
Moreover, the stability provided by the Franco-German axis is indispensable for Europe.
Nevertheless, the tensions created by Sarkozy’s recklessness threaten Europe’s political stability, heightening market uncertainty relative to what a more prudent, coordinated rescue program would have implied.
The programs that have been agreed will not suffice to reassure creditors, and Germany will most likely be unwilling to bow once again to Sarkozy in the coming negotiations to prolong the rescue measures – at least as they are constructed now – beyond the initially stipulated three years.
The arguments used to justify the coup are dubious.
In order to overcome the no-bailout clause, Sarkozy and other European leaders dramatized the decline of southern European governments’ bonds and the corresponding increase in interest-rate spreads.
By formally proclaiming a systemic euro crisis – when in fact there was only nervous market reaction concerning a few European countries’ government bonds – they could invoke Article 122 of the Union Treaty, which was intended to help member countries in the event of natural disasters beyond their control.
If anything, the proclamation of a systemic crisis poured fuel on the fire.
Investors took Europe’s leaders at their word, because politicians usually downplay rather than overstate a crisis.
The average interest-rate spread relative to Germany of the countries protected by the new rescue package was 1.08 percentage points on May 7, when the world was claimed to be going under.
Then it seemed that the rescue packages were pushing the spreads to much lower values, but optimism faded as European leaders’ interpretation of the crisis sunk in with more and more market participants.
In the week ending June 18, the average spread had climbed to 1.1 points.
Obviously, the market is now as nervous as it was before that May weekend.
But that is a far cry from spelling doom for the euro.
In 1995, shortly before the euro was announced, the corresponding interest-rate spread was 2.6 percentage points, more than twice today’s level.
The euro was simply in no danger when European leaders decided to rescue it, and it is not in danger now.
Markets are just moving towards a new equilibrium with higher interest-rate spreads, which reflect the higher default risk of some European countries – a bit like in pre-euro times, though much less extreme.
There is nothing wrong with this. The market adjustment will end when appropriate spreads are found.
Any political attempt to stop this process any sooner is bound to fail.
There is no reason for panic, and every reason to stay calm and wait for the new equilibrium to emerge.
Interest-rate spreads between safe and risky assets are natural to functioning credit markets.
They signal potential risks and enforce debt discipline on borrowers.
This is exactly what Europe needs.
The Stability and Growth Pact, aimed at punishing countries that breach the 3%-of-GDP deficit limit, was a joke: not a single wayward country was ever punished.
Fortunately, capital markets finally stepped in to impose the necessary hard budget constraints on governments.
This discipline will stem the gigantic capital imports by the countries at Europe’s periphery and end the overheating ushered in by the interest-rate convergence that the euro brought about.
These countries will go through a slump that will reduce their inflation (perhaps bringing them close to deflation) improve their competitiveness, and reduce their current-account deficits.
Conversely, Germany, which has suffered from relative deflation and a long slump under the euro, will experience an inflationary boom that will reduce its competitiveness and current-account surplus.
French Finance Minister Christine Lagarde, who often complained about trade imbalances in Europe, should applaud these market reactions, which were unintentionally strengthened by her president.
What Euro Crisis?
FRANKFURT – What constitutes a crisis?
Is it sustained economic decline, high and long-term unemployment, poverty, rampant inflation, a precipitous fall in the exchange rate, fiscal deficits, high borrowing costs, and political dysfunction?
Most would agree that a crisis exists if just some of these “misery indices” are present.
But, while Europe is widely perceived to be in the grip of crisis, only a handful of them are present, and in only a few eurozone countries.
So, why is there a eurozone crisis, and what defines it?
Time and again, it is argued that the single currency does not fit the different needs of its member countries, and that unsustainable economic divergence will ultimately require that the euro be abandoned.
The fatal divergences that are most frequently cited include differences in growth rates, job-creation, and unemployment rates, as well as dramatic disparities in current-account balances, all of which may be traceable to wide deviations in unit labor costs.
Perceptions of such divergences force considerable risk premiums on problem countries, inevitably resulting in accelerating capital flight to safe havens.
All of these developments are now visible in the eurozone, particularly in its peripheral countries.
Risk premiums started rising above benign levels in 2009, and then more strongly in 2011-2012, while capital flight became rampant in 2011.
But, if one considers what might underlie capital movements of this sort, suspicion must also fall on unsustainable policies that extend to countries well outside the eurozone.
In the wider European Union, countries like the United Kingdom or Hungary are as much afflicted by structural deficiencies as some peripheral eurozone countries are.
Exchange-rate flexibility has not helped them much, or at least they have chosen not to exploit it.
Moreover, there are countries with government-debt burdens that are as large, if not larger, than those on Europe’s periphery – the United States and Japan being prime examples.
Other countries, like Norway and Switzerland, are running current-account surpluses that exceed 10% of their GDP, but are resisting currency revaluation.
It is worth remembering that, for the decade until 2005, Germany was labeled the “sick man of Europe.”
Germany was uncompetitive when it entered the eurozone, owing to excessive wage and price increases following the country’s reunification – a problem that has since been overcome by structural reforms that the country undertook within the single currency.
The same is true for the most recent eurozone member, Estonia, whose rigorous wage restraint ensured competitiveness in the single market in a short period of time.
Why, then, is there such strong doubt that the euro can survive?
Some say that the current efforts to enforce sound policies in the peripheral countries are bound to fail, and that sacrificing democracy in these countries to keep the monetary union intact is too high a price to pay.
In fact, the efforts of governments and international institutions point the way toward more sustainable solutions.
Who would have believed at this time last year that the fiscal pact adopted in March would have been possible?
And, despite fluctuations, has there not been a considerable reduction in risk premiums for problem countries, without adding to the financing costs of donor countries?
Much remains unknown.
Are we seeing tentative signs of escape from the eurozone’s malaise?
Will debtor countries be able to stick to tough reform programs, or will their citizens reject austerity?
And will donor countries avoid the sort of populist backlash at home that might push them in a protectionist direction?
Intelligent cooperation that avoids moral hazard should be able to prevent panic, reduce risk premiums, and permit fuller use of resources.
For example, transnational migration flows should certainly be made easier and more attractive.
High levels of unemployment, particularly among young skilled workers, could be avoided if donor countries that need migrants to invigorate their own workforces were able to attract them.
More immigration would strengthen skills and raise income levels, while reducing distressed countries’ expenditure on unemployment benefits.
Greater labor mobility within the EU would also help to create a more open European mindset, and thus weaken old nationalist prejudices.
So, will Europe commit to moving toward political union, and thereby address what has remained missing, despite the single market, the euro, and the Schengen Agreement’s elimination of internal borders?
The model for a future United States of Europe is Switzerland, a country with four languages and ethnicities, fiscally strong sub-national units (cantons), a single first-rate currency, and a federal government and a parliament that exercises genuine, if limited, fiscal authority.
If the EU made the most of the competencies that it already has, and governed more effectively, the Union as a whole could achieve faster economic growth for at least the next decade, with a 2.5% annual rate not out of reach.
More generous support for countries in trouble is essential, because the euro must be preserved (albeit not necessarily on the base of a larger eurozone).
Financial markets would be more easily convinced if such support were complemented by the recipient countries’ acceptance of the fiscal pact, together with technical help to strengthen their governance.
In Greece, anti-corruption officers from the US, Italian tax-efficiency specialists, German privatization experts, and Spanish tourism professionals should be made available to accelerate the pace of modernization.
All of this amounts to a much-needed and often-advocated Marshall Plan for the periphery.
But it recognizes that what Europe’s troubled countries need most is not money, but the planning and administrative capacity to spend it effectively.
Over the last decade, Greece could absorb only a fifth of the EU modernization funds available to it.
It didn’t have to be that way then, and Europe cannot afford to let it remain that way now.
Whatever Happened to Wage Insurance?
A lot of public attention and worry nowadays surrounds the new risks that globalization and information technology create for our wages and livelihoods.
But there has been far less constructive discussion of new ideas about how to confront these risks.
In fact, we might be losing the momentum we had a few years ago to implement some of these ideas.
To be sure, we still sympathize with people who, upon reaching middle age or later, find themselves replaced by lower-paid workers in another part of the world, if not by a computer or a robot.
But are we really going to do anything about these risks?
One new idea that seemed hot a few years ago is “wage insurance.”
As then floated, the idea was simple: the government would protect people from the risk of losing their job and being unable to find a new one at the same wage.
A government insurance program would pay these people a fraction, say, half, the difference between their old pay and their pay in a new job for a specified period, such as two years.
The idea was first proposed by Robert Z. Lawrence and Robert Litan in their 1986 book, Saving Free Trade, andrevived in a 2001 article by Litan and Lori Kletzer.
The proposal generated interest.
A demonstration program was adopted in the United States in 2002. In 2002, the Hartz Commission recommended a version of it in Germany.
Wage insurance programs have been actively talked about or actually implemented in some form in Britain, France, Switzerland, and Ireland.
Despite all the intellectual applause, however, wage insurance programs are still not a significant force in the world economy.
They should be.
But they should also be supplemented by other devices.
One advantage of wage insurance is that it may be a more effective way to subsidize on-the-job training than traditional government-run vocational training programs.
Often, after completing a government-sponsored program, participants find it impossible to secure a job with the promised higher pay.
Far better, proponents of wage insurance argue, for the training to be carried out by an employer who wants a job done and knows what the employee needs to learn.
It seems plausible that two years is long enough for retraining, after which the employee might command a higher wage without a government subsidy.
But governments, fearing the expense of wage insurance if a lot of people exploit it, have not been willing to implement it on a large scale.
For example, the US wage insurance program is confined to manufacturing workers over age 50 who are in competitively vulnerable industries and are deemed by the Secretary of Labor to have nontransferable skills.
Moreover, the benefit is capped at $5,000 per year.
The program has practically been forgotten, and will expire next year unless it is renewed.
With government deficits the norm, that appears unlikely.
The way to regain lost momentum is to recognize that wage insurance is only one of several new ideas for insuring the emerging risks of this century.
The weakness of the current wage insurance proposal is that it pays benefits only for a limited period and relies for its long-term effect on the retraining incentives that it creates.
In reality, however, losing a high-paying job may be a lifetime event, and the supposed retraining that wage insurance would encourage for a laid-off 50-year-old worker often may be ineffective.
In my 2003 book, New Financial Order: Risk in the 21st Century, I proposed a different idea, which I called “livelihood insurance.”
As the name implies, livelihood insurance is designed to provide more than just a brief respite or a subsidy for retraining.
It is aimed at dealing with long-term changes in the labor market, rather than assuring temporary wage levels.
It would also rely on the market rather than a government program.
With livelihood insurance, a private insurer would pay a stream of income to a policyholder if an index of average income in the insured person’s occupation and region declines substantially.
Moreover, this income stream would continue for as long as the index stays down, not just for a couple of years (or any other arbitrary period).
In other words, this insurance policy would protect against lifetime income risks.
One reason why government-run wage insurance programs must have limited duration is that they involve so-called “moral hazard”: the risk that people will get lazy or would take easier, lower-paying jobs and continue to collect insurance that pays them the wage of a more demanding occupation.
But this would not apply to livelihood insurance, because its benefits are tied to the rise and fall of income indices, which are beyond the control of individuals.
Livelihood insurance would also have another advantage.
Since the premium would be determined by the market, it would be higher in occupations that the market believes to be in danger from outsourcing or technical change.
This, in turn, would give workers a tangible warning and an incentive to anticipate job losses before they occur.
This is not to say that wage insurance is a bad idea, or that it should not be implemented on a wider scale.
Both wage and livelihood insurance appear to have important risk management functions.
Indeed, for the future, it is imperative to think about many new ways, involving both government and the market, to ensure that we manage better the greatest personal risks now faced by workers around the world.
France’s German Mirror
BERLIN – Berlin’s Tegel Airport, which still greets most of the passengers arriving in the capital of Europe’s leading economic power, is outdated and provincial.
The opening of Schönefeld Airport, transformed into an international hub, has been delayed for more than a year for technical reasons (a somewhat reassuring challenge to Germany’s reputation for efficiency).
Yet, despite the gray and chill of March in Central Europe, Berlin exudes confidence.
More than ever, the city is a work in progress – confused, not very beautiful, and overcharged with history.
Berlin is a construction site that has managed to transform its multiple pasts into positive energy.
“Diversity destroyed: Berlin 1933-1938” is the unifying theme of a series of exhibits marking the 80th anniversary of Hitler’s coming to power and the 75th of the Pogromnacht. &#160;At the Deutsches Historisches Museum on Unter den Linden, entire classes of young pupils and students flock to see the exhibit’s evocation of destruction by a criminal regime whose objects, from loudspeakers to uniforms and weapons, are displayed in an educational manner.
Young Berliners cannot ignore where they come from.
Yet, perhaps because the past still rings like a warning – and is still physically visible in the topography and architecture of the city today – Berlin is striking in its simplicity, its radiant modernity (symbolized by the glass dome of the Reichstag, a conception of the British architect Norman Foster), and, above all, its intensity.
That positive energy contrasts starkly with the decadent beauty of Paris, a city that is on a path of “museification.”
Of course, if you can afford to live there, Paris remains a great place to be.
But Berlin is a better place to work, even if what you do is very poorly paid.
The porter who brings my luggage to my hotel room is of Tunisian origin.
He is a happy Berliner and a proud new German.
And, even on a low salary, he can live and raise his children in the city itself.
Thanks to its moderate housing costs, Berlin has not become, like Paris, a ghetto for the rich.
Unlike the French, who are handicapped by the high cost of housing, Germans’ purchasing power is more harmoniously distributed, creating more room for household consumption to contribute to economic growth.
Germany’s positive energy is, of course, the result of success translated into confidence, which Chancellor Angela Merkel incarnates with strength and simplicity.
Merkel has changed profoundly while in office.
Five years ago, she did not exude the natural authority that she now possesses.
Today, like Pope Francis, she is clearly at ease with herself.
Has there been a French president since François Mitterrand who was truly a match for a German chancellor?
If France has replaced Germany as “the sick man of Europe,” it is for political reasons, above all: vision, courage, and strength on the northern side of the Rhine, and vacillation, inertia, and weakness on the southern.
Of course, given its excessively low salaries and adverse demographic trends, Germany will continue to face difficulties.
But to emphasize only these problems, as some French do, is pure escapism.
German demography cannot be described as the solution to French youth unemployment, as though one could rest on a slogan such as: “They lack young people, our young people lack jobs – what a perfect match!”
France’s current direction is a source of deep concern in Germany, whose evolution should be seen in France as a source of inspiration – an example to be emulated, even if the country must not fall into self-flagellation.
Yet today’s debate in France over the German model reminds one eerily of the discussions that followed France’s defeat in the Franco-Prussian War.
In June 1871, just after the war ended, the French statesman Léon Gambetta declaimed: “Our adversaries have won, because they rallied to their side foresight, discipline, and science.”
The major difference now is that the European unification process rules out war – even economic war – between the two countries.
On the contrary, in the mirror of Germany, the French must ask themselves fundamental questions.
Have they made the right choices in terms of leaders and policies in recent decades?
The places of power in France do not encourage modesty.
In his latest book, Days of Power, the former agriculture minister, Bruno Le Maire, writes condescendingly of the building that houses his Danish counterpart in Copenhagen, which he compares to low-income housing.
With too much pomp, too many stumbling blocks, and a dearth of dynamism, France today can and should learn from Germany.
What Hamas Wants
As it struggles to form a government for the Palestinian territories, Hamas seems to be clutching to the Biblical verses in Ecclesiasties rather than the desires of the Quartet (the United States, Russia, the European Union, and the United Nations) charged with trying to bridge the Israeli-Palestinian divide. “To everything there is a season, and a time to every purpose under heaven,” fits Hamas’s current agenda because its priorities and time frame are different from those of the international community, which is pressing it to make immediate political declarations, most importantly, to recognize Israel’s right to exist.
Hamas understands the political obligations that it must meet in order to be fully accepted in the world community, but its leaders prefer to wait until they are fully empowered before exploring these issues.
Moreover, Hamas, like most Palestinians, is trying to evaluate the best way forward in the peace process.
In their eyes, the current process produced years of inaction in negotiations, allowing for continued occupation and theft of Palestinian lands.
As an example, Hamas leaders point out that in the past year, with the moderate Mahmoud Abbas in power, the Israelis have not even negotiated with him.
So, from their point of view, Israel is not going to rush to negotiate with any Palestinian authority, whether it recognizes Israel’s right to exist or not.
Instead, the newly elected Hamas leaders are preoccupied with basic issues like preserving internal unity among Palestinians, ending lawlessness, ensuring greater respect for the rule of law, fighting corruption, and reforming Palestinian governance.
Most Palestinians are in complete agreement with these priorities.
Indeed, the latest public opinion poll among Palestinians shows that 73% feel as secure as or even more secure than they did before the election.
Of the 709 randomly selected Palestinians who were surveyed, 30% said that they hope the new Hamas government tackles corruption.
Twenty-two percent said that they hope Ismael Haniyeh, Hamas’s designated prime minister, will end the chaos in Palestinian towns and provide internal security and the rule of law.
Almost one in five hoped that unemployment would be addressed.
Ironically, while the majority of Palestinians voted a religious movement into power, only 1% of those polled said that Hamas’s priority should be to implement Islamic law in Palestine.
While the poll showed that an overwhelming 73% of Palestinians still support a peace deal with Israel, they are not confident that any deal is around the corner.
Eleven percent of the respondents said that the prisoner issue should be the most important priority for the new government – nearly twice the number who said that a peace settlement with Israel should be the top priority.
More than 8,000 Palestinians are held in Israeli prisons, many without charge or trial.
Nevertheless, 62% of Palestinians said that they believe Hamas should change its position regarding recognition of Israel.
It is difficult for an international superpower like the US or a regional one like Israel to realize that a group or a people dare to have priorities different from theirs.
But Palestinians have shown over the years that they are a proud people who will not cave in just because the other side is militarily or politically more powerful.
In any case, Hamas cannot be blamed for using America’s push for democracy to attain popular goals.
After all, anyone who wants to be re-elected must give priority to the needs of their own people and not necessarily to the demands of the international community.
Only when elected representatives deal with the day-to-day issues that face their people can they begin to tackle external negotiations.
What is clear is that Hamas and the Palestinians want an end to the 38-year Israeli occupation, and that selling Palestinians the same plans that were sold to the PLO will not work.
If Israel and the international community are genuinely serious about ending the occupation, Hamas will cooperate.
While Hamas must be flexible in dealing with legitimate requests by the international community, the international community is obliged to provide an effective road map to peace.
Once Palestinians are convinced that there is an opportunity for genuine peace and independence, they will press Hamas to act on it – or elect a party that will.
Clearly, the international community has lacked the political will to press Israel to change.
For the time being, and until this will is found, the world should give Hamas time to deal with the daily needs of Palestinians.
Once the possibility of serious negotiations appears, a Hamas that has improved the lives of ordinary Palestinians will be in a position to carry out the negotiations that will be needed for a historic compromise.
What Happened to India?
CHICAGO – Emerging markets around the world – Brazil, China, India, and Russia, to name the largest – are slowing.
One reason is that they continue to be dependent, directly or indirectly, on exports to advanced industrial countries.
Slow growth there, especially in Europe, is economically depressing.
But a second reason is that they each have important weaknesses, which they have not overcome in good times.
For China, it is excessive reliance on fixed-asset investment for growth.
In Brazil, low savings and various institutional impediments keep interest rates high and investment low, while the educational system does not serve significant parts of the population well.
And Russia, despite a very well educated population, continues to be reliant on commodity industries for economic growth.
Hardest to understand, though, is why India is underperforming so much relative to its potential.
Indeed, annual GDP growth has fallen by five percentage points since 2010.
For a country as poor as India, growth should be what Americans call a “no-brainer.”
It is largely a matter of providing public goods: basic infrastructure like roads, bridges, ports, and power, as well as access to education and basic health care.
And, unlike many equally poor countries, India already has a very strong entrepreneurial class, a reasonably large and well-educated middle class, and a number of world-class corporations that can be enlisted in the effort to provide these public goods.
Satisfying the demand for such goods is itself a source of growth.
But, also, a reliable road creates tremendous additional activity, as trade increases between connected areas, and myriad businesses, restaurants, and hotels spring up along the way.
As India did away with the stultifying License Raj in the 1990’s, successive governments understood the imperative of economic growth, so much so that the Bharatiya Janata Party (BJP) contested the 2004 election on a pro-development platform, encapsulated in the slogan, “India Shining.”
But the BJP-led coalition lost that election.
Whether the debacle reflected the BJP’s unfortunate choice of coalition partners or its emphasis on growth when too many Indians had not benefited from it, the lesson for politicians was that growth did not provide electoral rewards.
In any event, that election suggested a need to spread the benefits of growth to rural areas and the poor.
There are two ways of going about that.
The first, which is harder and takes time, is to increase income-generating capabilities in rural areas, and among the poor, by improving access to education, health care, finance, water, and power.
The second is to increase voters’ spending power through populist subsidies and transfers, which typically tend to be directed toward the politically influential rather than the truly needy.
In the years after the BJP’s loss, with a few notable exceptions, India’s political class decided that traditional populism was a surer route to re-election.
This perception also accorded well with the median (typically poor) voter’s low expectation of government in India – seeing it as a source of sporadic handouts rather than of reliable public services.
For a few years, the momentum created by previous reforms, together with strong global growth, carried India forward.
Politicians saw little need to vote for further reforms, especially those that would upset powerful vested interests.
The lurch toward populism was strengthened when the Congress-led United Progressive Alliance concluded that a rural employment-guarantee scheme and a populist farm-loan waiver aided its victory in the 2009 election.
But, while politicians spent the growth dividend on poorly targeted giveaways such as subsidized petrol and cooking gas, the need for further reform only increased.
For example, industrialization requires a transparent system for acquiring land from farmers and tribal people, which in turn presupposes much better land-ownership records than India has.
As demand for land and land prices increased, corruption became rampant, with some politicians, industrialists, and bureaucrats using the lack of transparency in land ownership and zoning to misappropriate assets.
India’s corrupt elites had moved from controlling licenses to cornering newly valuable resources like land.
The Resource Raj rose from the ashes of the License Raj.
India’s citizenry eventually reacted.
An eclectic mix of idealistic and opportunistic politicians and NGOs mobilized people against land acquisitions.
With investigative journalists getting into the act, land acquisition became a political land mine.
Moreover, key institutions, such as the Comptroller and Auditor General and the judiciary, staffed by an increasingly angry middle class, also launched investigations.
As evidence emerged of widespread corruption in contracts and resource allocation, ministers, bureaucrats, and high-level corporate officers were arrested, and some have spent long periods in jail.
The collateral effect, however, is that even honest officials are now too frightened to help corporations to navigate India’s maze of bureaucracy.
As a result, industrial, mining, and infrastructure projects have ground to a halt.
Populist government spending and the inability of the supply side of the economy to keep pace has, in turn, led to elevated inflation, while Indian households, worried that no asset looks safe, have taken to investing in gold.
Because India does not produce much gold itself, these purchases have contributed to an abnormally wide current-account deficit.
Not much more was required to dampen foreign investors’ enthusiasm for the India story, with the rupee falling significantly in recent weeks.
As with the other major emerging markets, India’s fate is in its own hands.
Hard times tend to concentrate minds.
If its politicians can take a few steps to show that they can overcome narrow partisan interests to establish the more transparent and efficient government that a middle-income country needs, they could quickly re-energize India’s enormous engines of potential growth.
Otherwise, India’s youth, their hopes and ambitions frustrated, could decide to take matters into their own hands.
What Happened to Mohamed al-Hanashi?
NEW YORK – Mohammed al-Hanashi was a 31-year-old Yemeni citizen who was held at Guantánamo Bay without charge for seven years.
On June 3, while I was visiting Guantánamo with other journalists, the press office there issued a terse announcement that al-Hanashi had had been found dead in his cell – an “apparent suicide.”
Because my commercial flight was canceled, I got a ride back to the United States on a military transport.
I happened to be seated next to a military physician who had been flown in to do the autopsy on al-Hanashi.
When would there be an investigation of the death, I asked him? “That was the investigation,” he replied.
The military had investigated the military.
This “apparent suicide” seemed immediately suspicious to me.
I had just toured those cells: it is literally impossible to kill yourself in them.
Their interiors resemble the inside of a smooth plastic jar; there are no hard edges; hooks fold down; there is no bedding that one can use to strangle oneself.
Can you bang your head against the wall until you die, theoretically, I asked the doctor? “They check on prisoners every three minutes,” he said.
You’d have to be fast.
The story smelled even worse after a bit of digging.
Al-Hanashi, it turned out, had been elected by the detainees to serve as their representative.
(The Geneva Conventions call for this process but the US did not give it any formal recognition).
As their designated representative, al-Hanashi knew which prisoners had claimed to have been tortured or abused, and by whom.
On January 17, al-Hanashi, according to his fellow prisoner Binyam Mohamed (who has since been released), was summoned to a meeting with the Admiral of Guantánamo and the head of the Guard Force there.
He never returned to his cell.
He was taken to the psychiatric ward, where, according to another prisoner who had been there, he was kept until he died.
Can you kill yourself in the psych ward?
According to Cortney Busch of Reprieve, a British organization that represents Guantánamo detainees, there is video running on prisoners in the psychiatric ward at all times, and there is a guard posted there continually, too.
The day after al-Hanashi died, the nurse and psychologist had shown a group of journalists of which I was a part an oddly defensive display of how hunger-striking prisoners are bound in restraint chairs when being “enterally fed” (that is, force-fed).
Al Hanashi, the press office at Guantánamo noted, had formerly been a hunger striker.
It is worth considering how easy it would be to do away with a troublesome prisoner being force-fed by merely adjusting the calorie level.
If it is too low, the prisoner will starve, but too high a level can also kill, since deliberate liquid overfeeding by tube, to which Guantánamo prisoners have reported being subjected, causes vomiting, diarrhea, and deadly dehydration that can stop one’s heart.
I have been putting questions to Lt. Commander Brook DeWalt, the head spokesman for the Guantánamo press office, about how al-Hanashi died, for eight weeks now.
According to the Yemeni embassy in Washington, al-Hanashi’s body was repatriated in mid-August.
Al Jazeera has reported that the Yemeni government announced only what the US had – that al-Hanashi had died from “asphyxiation.”
When I noted to DeWalt that self-strangulation was impossible, he said he would get back to me when the inquiry – now including a Naval criminal investigation – was completed.
I have yet to receive an answer.
The Yemeni government, too, notes that they have yet to receive the coroner’s report from the US.
An investigation by the military of the death of its own prisoners violates the Geneva Conventions, which demand that illness, transfer, and death of prisoners be registered independently with a neutral authority (such as the ICRC), and that deaths be investigated independently.
If governments let no outside entity investigate the circumstances of such deaths, what will keep them from “disappearing” whomever they take into custody, for whatever reason?
I sent DeWalt a copy of the relevant section of the Geneva Conventions and asked how the US military’s handling of al-Hanashi’s death conforms to it.
Actually, I sent it twice.
Again, no answer.
Was al-Hanashi suicidal?
Binyam Mohamed told the Associated Press that al-Hanashi was a positive person (and, one can assume, a natural leader) who would never consider suicide.
He had been in custody for seven years without a lawyer, and killed himself just two weeks after having finally been assigned one?
That lawyer, Elizabeth Gilson, probably knows al-Hanashi’s state of mind before he died, but the US government will not allow her to talk about it.
What happened to Mohamed al-Hanashi, and why?
The fact that no one can answer this question yet means that even in Barack Obama’s America, as in Stalin’s Russia or Ahmadinejad’s Iran, people can simply be disappeared without trial.
The world’s law-abiding governments and ordinary citizens should call and email DeWalt, the Pentagon, and the White House press office to demand answers.
A young man with a great deal of potentially compromising information died under suspicious circumstances in US custody.
The facts concerning his case must be independently verified.
www.defenselink.mil/faq/comment.html , +1 703-428-0711
http://www.whitehouse.gov/contact/, +1 202-456-1111
What Have Climate Activists Learned?
COPENHAGEN – Advocates of drastic cuts in carbon-dioxide emissions now speak a lot less than they once did about climate change.
Climate campaigners changed their approach after the collapse of the Copenhagen climate-change summit last December and the revelation of mistakes in the United Nations climate panel’s work – as well as in response to growing public skepticism and declining interest.
Although some activists still rely on scare tactics – witness the launch of an advertisement depicting the bombing of anybody who is hesitant to embrace carbon cuts – many activists now spend more time highlighting the “benefits” of their policy prescription.
They no longer dwell on impending climate doom, but on the economic windfall that will result from embracing the “green” economy.
You can find examples all over the world, but one of the best is in my home country, Denmark, where a government-appointed committee of academics recently presented their suggestions for how the country could go it alone and become “fossil fuel-free” in 40 years.
The goal is breathtaking: more than 80% of Denmark’s energy supply comes from fossil fuels, which are dramatically cheaper and more reliable than any green energy source.
I attended the committee’s launch and was startled that the “Climate Commission” barely mentioned climate change.
This omission is understandable, since one country acting alone cannot do much to stop global warming.
If Denmark were indeed to become 100% fossil-free by 2050, and remain so for the rest of the century, the effect, by 2100, would be to delay the rise in average global temperature by just two weeks.
Instead of focusing on climate change, the Climate Commission hyped the benefits that Denmark would experience if it led the shift to green energy.
Unfortunately, on inspection these benefits turn out to be illusory.
Being a pioneer is hardly a guarantee of riches.
Germany led the world in putting up solar panels, funded by €47 billion in subsidies.
The lasting legacy is a massive bill, and lots of inefficient solar technology sitting on rooftops throughout a fairly cloudy country, delivering a trivial 0.1% of its total energy supply.
Denmark itself has also already tried being a green-energy innovator – it led the world in embracing wind power.
The results are hardly inspiring.
Denmark’s wind industry is almost completely dependent on taxpayer subsidies, and Danes pay the highest electricity rates of any industrialized nation.
Several studies suggest that claims that one-fifth of Denmark’s electricity demand is met by wind are an exaggeration, in part because much of the power is produced when there is no demand and must be sold to other countries.
The sorry state of wind and solar power shows the massive challenge that we face in trying to make today’s technology competitive and efficient.
Direct-current lines need to be constructed to carry solar and wind energy from sunny, windy areas to where most people live.
Storage mechanisms need to be invented so that power is not interrupted whenever there is no sunshine or wind.
Proponents of carbon cuts argue that green-energy technologies only seem more expensive, because the price of fossil fuels does not reflect the cost of their impact on the climate.
But allowing for this would make little difference.
The most comprehensive economic meta-study shows that total future climate impacts would justify a tax of around €0.01 per liter of petrol ($0.06 per gallon in the United States) – an amount dwarfed by the taxes already imposed by most European countries.
Despite the fact that changing from fossil fuels to green energy requires a total economic transformation, Denmark’s Climate Commission claimed that the price tag would be next to nothing.
The Commission reached this conclusion by assuming that the cost of not embracing its recommended policy would be massive.
The Commission believes that over the next four decades, fossil-fuel costs will climb sharply, because sources will dry up and governments will place massive taxes on fossil fuels.
But this flies in the face of most evidence.
There is clearly plenty of cheap coal for hundreds of years, and with new cracking technology, gas is becoming more abundant.
Even oil supplies are likely to be significantly boosted by non-conventional sources like tar sands.
By the same token, the prediction that governments will impose massive carbon taxes has little basis in reality.
Such assumptions seem like a poor framework on which to build significant public policy, and seem to ignore the substantial cost of eliminating fossil fuels, which is likely to amount to at least 5% of GDP per year.
The shift away from fossil fuels will not be easy.
Policymakers must prioritize investment in green-energy research and development.
Trying to force carbon cuts instead of investing first in research puts the cart before the horse.
Breakthroughs do not result automatically from a combination of taxes on fossil fuels and subsidies for present-day green energy: despite the massive outlays associated with the Kyoto Protocol, participating countries’ investment in R&amp;D as a percentage of GDP did not increase.
The change in message after the disaster of the Copenhagen summit was probably inevitable.
But the real change that is needed is the realization that drastic, early carbon cuts are a poor response to global warming – no matter how they are packaged.
What if not all goods are compatible?
It is an abiding conceit of our age that all good ideas go together.
Truth and reconciliation, peace and justice, even justice and truth: these are only some of the worthy ambitions for human society that are routinely presented as totally reconcilable.
But the stony reality is that it is by no means obvious that they are.
Of course, in societies that are basically in good shape, both psychologically and materially, such moral fables - such wishful thinking, really - rarely do much harm and can often do considerable good.
Think of the current multiculturalist fables that we in the West have concocted for ourselves in order to cope with the dilemmas and challenges of mass immigration from the non-European world.
In this piece of inspired oversimplification, cultural 'diversity' is invariably seen as a boon rather than a threat.
Yet one does not have to be a follower of Jorg Haider or the late Pim Fortuyn to know that, whatever the gains have been, whether in terms of economic growth or even the widening of cultural experience in the West, much has and is being lost.
At the very least, the national cultures of the major Western countries - their deep structures of ideology, taste, and aesthetics - are being changed, as new peoples, with new assumptions, demand that their sense of the world be taken into account.
Sometimes those changes can be for the worse.
Think, say, of how in much of Western Europe the only way that new immigrants and their host culture are reconciled is through a culture of consumption and materialism - that is, a culture of the lowest common denominator.
Still, it is preferable that this culture of the supermarket prevails, rather than one in which everyone's gods, habits, and beliefs are in perpetual conflict.
Although the moral and cultural simplifications of multiculturalism may have done the West little actual harm, the same cannot be said about poorer parts of the world.
For it is when "First Worlders" try to think about the plight of the poor, and, above all, about what can be done with regard to the Kosovos, the East Timors, the Afghanistans, and the Liberias of our planet, that thinking in happy over-simplifications becomes dangerous. Dangerous to the people who are fated to live in desperately poor countries, or societies at war, or overwhelmed by refugees, or struck down by pandemics.
Specialists in human rights, conflict resolution, humanitarian relief, and democracy-building tend to see themselves as coworkers striving toward a 'holistic' solution, and those in need as requiring all those elements in their historical cure.
Reality is usually very different.
Take humanitarian action and human rights.
Most activists in these fields, not to mention their allies in private philanthropies and international organizations like the UN, believe that they need to work together - that humanitarian emergencies are the product of human rights crises and the former cannot be seriously addressed unless and until the latter are as well.
The stark truth, however, is that the moral imperatives of each activity are starkly different.
To put the matter crudely, the human rights activist is a moral absolutist par excellence.
He or she must uphold human rights standards, and, above all, human rights law to the letter or risk seeing the entire enterprise come unstuck.
In contrast, humanitarians are meliorists.
Their first job is to get the desperately-needed aid that often they alone can deliver to populations in need and in danger.
In the absence of some military force to protect them (in itself a mixed blessing, as interventions from Somalia to Bosnia demonstrated), these humanitarian groups must negotiate access with criminal warlords, oppressive governments, and war criminals.
In contrast to human rights activists, they cannot and must not be purists.
What is at stake here is far more than some easily resolved question about a division of labor.
A human rights activist may want to see an oppressive regime overthrown, may believe that this is the only long-term solution.
A humanitarian, by contrast, may want to feed a population, knowing full well that food aid could strengthen the oppressive regime.
What takes place in the interface of human rights and humanitarianism is often the conflict of two rights.
So far, at least, those who wish for a better world, and who participate in the struggles for it either as activists or as sympathizers, have refused to face the tragic possibility that they will have to choose between good actions, and between moral imperatives.
Such reluctance is understandable, for the choice is almost like being forced to choose death over life.
Yet, as Africa burns, as the AIDS pandemic spreads, and as it becomes clearer that the material means at the disposal of those who ache for a better world do not match their moral aspirations, such choices will become more and more pressing.
The less willing we are to ask harsh questions about humanitarianism and human rights, peace and justice, truth and reconciliation, the longer we take refuge in self-flattering fantasies about the fundamental reconcilability of all good efforts, the higher the cost will be when the moment of reckoning comes.
Ireland and the Austerity Debate
DUBLIN – Both sides of the austerity debate that is now gripping economists and policymakers cite Ireland’s experience as evidence for their case.
And, however much they try to position the country as a poster-child, neither side is able to convince the other.
Yet this tug-of-war is important, because it illustrates the complex range of arguments that are in play.
It also demonstrates why more conclusive economic policy making is proving so elusive.
Here is a quick reminder of Ireland’s sad recent economic history.
Lulled into complacency and excess by ample supplies of artificially cheap financing, Irish banks went on a lending binge.
Irresponsible risk-taking and excessive greed outpaced prudential regulation and supervision.
The banking system ended up fueling massive speculation, including a huge run-up in real-estate prices, only to be brought to its knees when the bubbles popped.
Unlike the many Irish households that lost jobs and part of their wealth, the banks were deemed to be “too big to fail,” so Ireland’s political elites intervened with state funding.
But, by under-estimating both the domestic and international aspects of the problem, the authorities transformed a banking problem into a national tragedy.
Rather than restoring the banks to financial health and ensuring responsible behavior, the Irish economy as a whole was dragged down.
Growth collapsed; unemployment spiked. Lacking opportunities, emigration increased – a vivid reminder of how economic crises have wreaked havoc on the country’s demographics throughout its history.
Investors withdrew in droves from what was once deemed the “Celtic Tiger.”
The government had no choice but to request a bailout from the “troika” – the International Monetary Fund, the European Central Bank, and the European Commission – thereby transferring an important component of national economic governance to an ad hoc, fragile, and sometimes feuding group of institutions.
While other struggling eurozone members also turned to the troika, Ireland stands out in at least two notable ways.
First, two democratically-elected governments have steadfastly implemented the agreed austerity programs with little need for waivers and modifications – and thus without the associated political drama.
Second, despite enduring considerable pain, Irish society has stuck with the program, staging few of the street protests that have been common in other austerity-hit countries.
All of this puts Ireland in the middle of three important issues raised in the austerity debates: whether orthodox policy, with its heavy emphasis on immediate budget cuts, can restore conditions for growth, employment gains, and financial stability; whether the benefits of eurozone membership still outweigh the costs for countries that must restructure their economies; and how a small, open economy should strategically position itself in today’s world.
Austerity’s supporters point to the fact that Ireland is on the verge of “graduating” from the troika’s program.
Growth has resumed, financial-risk premia have fallen sharply, foreign investment is picking up, and exports are booming.
All of this, they argue, provides the basis for sustainable growth and declining unemployment.
Ireland, they conclude, was right to stay in the eurozone, especially because small, open economies that are unanchored can be easily buffeted by a fluid global economy.
“Not so fast,” says the other side.
The critics of austerity point to the fact that Irish GDP has still not returned to its 2007 level.
Unemployment remains far too high, with alarming levels of long-term and youth joblessness. Public debt remains too high as well, and, making matters worse, much more of it is now owed to official rather than private creditors (which would complicate debt restructuring should it become necessary).
The critics reject the argument that small, open economies are necessarily better off in a monetary union, pointing to how well Switzerland is coping. And they lament that eurozone membership means that Ireland’s “internal devaluations,” which involve significant cuts in real wages, have not yet run their course.
The data on the “Irish experiment” – including the lack of solid counterfactuals – are not conclusive enough for one side to declare a decisive victory.
Yet there is some good analytical news.
Ireland provides insights that are helpful in understanding how sociopolitical systems, including economically devastated countries like Cyprus and Greece, have coped so far with shocks that were essentially unthinkable just a few years ago.
On my current visit, most of the Irish citizens with whom I have spoken say that the country had no alternative but to follow the path of austerity.
While they appreciate the urgent need for growth and jobs, they believe that this can be achieved only after Ireland’s finances are put back on a sound footing.
They also argue that, given the banks’ irresponsibility, there is no quick way to promote sustained expansion.
They are still angry at bankers, but have yet to gain proper retribution.
Ireland’s accumulation of wealth during its Celtic Tiger period, when the country surged toward the top of Europe’s economic league table, has also been an effective shock absorber.
This, together with fears about being left out in the geopolitical cold (despite the country’s historical links with Britain and America), dampens Irish enthusiasm for economic experiments outside the eurozone.
Indeed, Irish society seems remarkably hesitant to change course.
Right or wrong, Ireland will stick with austerity.
Efforts to regain national control of the country’s destiny, the Irish seem to believe, must take time.
In some of Europe’s other struggling countries, however, citizens may well prove less patient.
What is Full Employment?
CAMBRIDGE – In an important sense, the US economy is now at full employment.
The relatively tight labor market is causing wages to rise at an accelerating rate, because employers must pay more to attract and retain employees.
This has important implications for policymakers – and not just at the Federal Reserve.
Consider this: Average hourly earnings in May were 2.3% higher than in May 2014; but, since the beginning of this year, hourly earnings are up 3.3%, and in May alone rose at a 3.8% rate – a clear sign of full employment.
The acceleration began in 2013 as labor markets started to tighten.
Average compensation per hour rose just 1.1% from 2012 to 2013, but then increased at a 2.6% rate from 2013 to 2014, and at 3.3% in the first quarter of 2015.
These wage increases will soon show up in higher price inflation.
The link between wages and prices is currently being offset by the sharp decline in the price of oil and gasoline relative to a year ago, and by the strengthening of the dollar relative to other currencies.
But, as these factors’ impact on the overall price level diminishes, the inflation rate will rise more rapidly.
Accelerating wage growth implies that the economy is now at a point at which increases in demand created by easier monetary policy or expansionary fiscal policy would not achieve a sustained rise in output and employment.
Instead, this demand would be channeled into higher wages and prices.
There are of course other definitions of full employment.
Some would say that the United States is not at full employment, because 8.7 million people – about 6% of those who are employed – are looking for work.
There are millions more who would like to work but are not actively looking, because they believe that there are no available jobs for people like themselves.
And an additional 6.7 million are working part-time but would like to work more hours per week.
In many cases, these unemployed and underemployed individuals are experiencing real hardship.
By that indicator, the US economy is not at full employment.
But, for the Fed, it is, in the sense that excessively easy monetary policy can no longer achieve a sustained increase in employment.
At the same time, other types of policies that change incentives or remove barriers can lead to increased employment and higher real incomes, without raising wage and price inflation.
Consider, for example, the high rate of non-employment among men aged 25 to 54, a group too old to be in school and too young to retire.
More than 15% of men in this age group are not employed.
Among those in this age range who have less than a high school education, 35% are not employed.
Programs to provide market-relevant education and training should be able to raise employment among this group.
Or consider the employment experience of men and women over age 65. This group is eligible for Social Security (pensions) and Medicare (health insurance), and the majority are retired.
But experience shows that the decision to retire or to work fewer hours is influenced by the compensation that members of this group receive.
And this amount partly reflects the fact that employed people who collect Social Security and Medicare are subject to the payroll tax that finances them.
The payroll tax paid by employees is 6.65% (employers pay the same rate), and is in addition to the personal income tax.
Moreover, because of the complex rules that govern the level of Social Security benefits, the older worker who pays this payroll tax is likely to receive no extra benefits.
For many older workers, the choice is not whether to work, but how much.
We now have less than full employment in the sense that the payroll tax encourages older workers to work fewer hours than they otherwise would.
The Affordable Care Act (“Obamacare”) also reduces hours worked, in two different ways.
First, for some individuals, working fewer hours reduces incomes enough to entitle them to a larger government subsidy for health insurance.
Second, some employers are being incented to reduce the number of working hours for individual employees, because, above a specified number, Obamacare imposes a larger burden on them.
Or consider minimum-wage legislation, which reduces employers’ willingness to hire low-skilled workers.
As the minimum wage is increased, employers’ incentive to substitute equipment or more skilled employees strengthens.
This reduction in the demand for low-skilled workers could be offset by taking into account the hourly equivalent of transfer payments when calculating the minimum wage.
For example, someone who receives $8,000 a year in transfer payments (such as food stamps, housing assistance, and the Earned Income Tax Credit) might be deemed to have received the equivalent of $4 an hour toward meeting the minimum wage.
That individual’s combined income would be achieved with a lower cost to the employer, increasing the individual’s ability to find employment.
I could easily extend this list.
The basic point is that employment can be increased, and unemployment decreased, by removing barriers to job creation and reducing marginal tax rates.
By contrast, increasing demand by prolonging easy monetary policy or expanding fiscal spending is likely to result in rising inflation rather than rising employment.
What is the Deficit Endgame?
REYKJAVIK – No one yet has any real idea about when the global financial crisis will end, but one thing is certain: government budget deficits are headed into the stratosphere.
Investors in the coming years will need to be persuaded to hold mountains of new debt.
Although governments may try to cram public debt down the throats of local savers (by using, for example, their rising influence over banks to force them to hold a disproportionate quantity of government paper), they will eventually find themselves having to pay much higher interest rates as well.
Within a couple years, interest rates on long-term US Treasury notes could easily rise 3-4%, with interest rates on other governments’ paper rising as much, or more.
Interest rates will rise to compensate investors both for having to accept a larger share of government bonds in their portfolio and for an increasing risk that governments will be tempted to inflate away the value of their debts, or even default.
In research that Carmen Reinhart and I have done on the history of financial crises, we find that public debt typically doubles, even adjusting for inflation, in the three years following a crisis.
Many nations, large and small, are now well on the way to meeting this projection.
China’s government has clearly indicated that it will use any means necessary to backstop growth in the face of a free fall in exports.
The Chinese have $2 trillion in hard currency reserves to back up their promise.
President Barack Obama’s new budget calls for a stunning $1.75 trillion deficit in the United States, a multiple of the previous record.
Even those countries that are not actively engaged in a fiscal orgy are seeing their surpluses collapse and their deficits soar, mainly in the face of falling tax revenues.
Indeed, few governments have submitted remotely realistic budget projections, typically relying on overly rosy economic scenarios.
Unfortunately, in 2009, the global economy will not be a bed of roses.
Income in the US and euro-area both appear to have declined at an annualized rate of roughly 6% in the fourth quarter of 2008;
Japan’s GDP fell at perhaps twice that rate.
China’s claim that its GDP grew at a 6% rate, during the end of last year, is suspect.
Exports have collapsed throughout Asia, including Korea, Japan, and Singapore. Arguably India, and to a lesser extent Brazil, have been holding out a bit better.
But few emerging markets have reached a stage at which they can withstand a sustained collapse in the developed economies, much less serve as substitute engines of global growth.
With the credit crisis still making it difficult for many small and medium-size businesses to obtain even the minimal level of financing necessary to maintain inventories and conduct trade, global GDP is on a precipice in 2009.
There is a real possibility that global growth will register its first contraction since World War II.
In all likelihood, a slew of countries will see output declines of 4-5% in 2009, with some. having true depression level drops, of 10% or more.
Worse yet, unless financial systems spring back, growth could disappoint for years to come, especially in “ground zero” countries such as the United States, Britain, Ireland and Spain.  US long-term growth could be particularly dismal, as the Obama administration steers the country toward  more European levels of welfare assistance and income redistribution,
Countries with European-style growth rates could handle debt obligations of 60% of GDP when interest rates were low.
But, with debts in many countries rising to 80% or 90% of GDP, and with today’s low interest rates clearly a temporary phenomenon, trouble is brewing.
Many of the countries that are piling on massive quantities of debt to bail out their banks have only tepid medium term growth prospects, raising real questions of solvency and sustainability
Italy, for example with a debt-to-income ratio already exceeding 100%, has been able to manage so far thanks to falling global rates.
But as debts mount, and global interest rates rise, investors will become rightly nervous about the risk of debt restructuring.
Other countries, such as Ireland, Britain, and the US, started with a much stronger fiscal position, but may not be much better off when the smoke clears.
Exchange rates are another wild card.
Asian central banks are still nervously clinging to the dollar. But with the US printing debt and money like it is going out of style, it would appear the euro is set to appreciate against the dollar two or three years down the road, if the euro is still around, that is.
As debt mounts and the recession lingers, we are surely going to see a number of governments trying to lighten their load through financial repression, higher inflation, partial default, or a combinations of all three.
Unfortunately, the endgame to the great recession of the 2000’s will not be a pretty picture.
What is the Dollar’s Sustainable Value?
How much further will the dollar fall?
Or has it already fallen so far that it will now start to move back to a higher level?
For travelers to the United States from Europe or Asia, US prices are dramatically lower than at home.
A hotel room or dinner in New York seems a bargain when compared to prices in London, Paris, or Tokyo.
And shoppers from abroad are loading up on a wide range of products before heading home.
But, despite this very tangible evidence, it would be wrong to conclude that US goods are now so cheap at the existing exchange rate that the dollar must rise from its current level.
Although the goods and services that travelers buy may cost less in the US than abroad, the overall price of American products is still too high to erase the enormous trade imbalance between the US and the rest of the world.
To be sure, the falling dollar over the past few years has made American products more competitive and has caused the real value of US exports to rise sharply – by more than 25% over the past three years.
But the trade deficit in 2007 nevertheless remained at more than $700 billion, or 5% of GDP.
The large trade deficit and equally large current account deficit (which includes net investment income) implies that foreign investors must add $700 billion of US securities to their portfolios.
It is their unwillingness to do so at the existing exchange rate that causes the dollar to fall relative to other currencies.
In falling, the dollar lowers the value of the dollar securities in foreign portfolios when valued in euros or other home currencies, shrinking the share of dollars in investors’ portfolios.
The weaker dollar also reduces the risk of future dollar decline, because it means that the dollar has to fall less in the future to shift the trade balance to a sustainable level.
But what is that sustainable level of the trade balance and of the dollar?
While experts try to work this out in terms of portfolio balances, a more fundamental starting point is the fact that a US trade deficit means that Americans receive more goods and services from the rest of the world than they send back – $700 billion more last year. The difference was financed by transferring stocks and bonds worth $700 billion.
The interest and dividends on those securities will be paid by sending more “pieces of paper”.
And when those securities mature, they will be refinanced with new stocks and bonds.
It is unthinkable that the global economic system will continue indefinitely to allow the US to import more goods and services than it exports.
At some point, the US will need to start repaying the enormous amount that it has received from the rest of the world.
To do so, the US will need a trade surplus.
So the key determinant of the dollar’s long-term value is that it must decline enough to shift the US trade balance from today’s deficit to a surplus.
That won’t happen anytime soon, but it is the direction in which the trade balance must continue to move.
And that means further depreciation of the dollar.
An important factor in this process will be the future price of oil and the extent of US dependence on oil imports.
In each of the past four years, the US imported 3.6 billion barrels of oil.
At the current price of more than $140 a barrel, that implies an import cost of more than $500 billion. The higher the cost of oil, the lower the dollar has to be to achieve any given reduction in the size of the trade deficit.
So a rising oil price as measured in euros or yen implies a greater dollar fall, and therefore an even higher oil price when stated in dollars.
There is one further important consideration in thinking about the future value of the dollar: relative inflation rates in the US and abroad. The US trade deficit depends on the real value of the dollar – that is, the value of the dollar adjusted for differences in price levels in the US and abroad.
If the US experiences higher inflation than our trading partners, the dollar’s nominal value must fall even further just to maintain the same real value.
The inflation differential between the dollar and the euro is now relatively small – only about one percentage point a year – but is greater relative to the yen and lower relative to the renminbi and other high-inflation currencies. Over the longer run, however, inflation differentials could be a more significant force in determining the dollar’s path.
What is the IMF’s Mission?
BERKELEY – The International Monetary Fund has been one of the few beneficiaries of the global economic crisis.
Just two years ago, it was being downsized, and serious people were asking whether it should be closed down.
Since then, there has been a renewed demand for IMF lending. Members have agreed to a tripling of its resources.
It has been authorized to raise additional funds by selling its own bonds.
The Fund is a beehive of activity.
But the crisis will not last forever. Meanwhile, the IMF’s critics have not gone away; they have merely fallen silent temporarily.
The Fund only encourages their criticism by failing to define its role.
It needs to do so while it still has the world’s sympathetic ear.
The IMF’s first role is to assist countries that, as a result of domestic policies, experience balance-of-payments crises.
Their governments have no choice but to borrow from the Fund.
To safeguard its resources – that is, to be sure that its shareholders are paid back – the Fund must demand difficult policy adjustments on the part of these borrowers.
The problem is that the IMF has bought into the rhetoric of its critics by agreeing to “streamline” its conditionality.
In fact, where structural weaknesses are the source of problems, the Fund should still require structural adjustment as the price of its assistance.
By seeming to give ground on this point in the effort to win friends and influence people, the IMF has created unnecessary confusion.
A second role for the IMF is to act as a global reserve pool.
Countries have accumulated large reserves in order to insure against shocks.
This is costly for poor economies, which could better use the resources for investment and consumption.
Unfortunately, the recent demonstration of the volatility of global financial markets only encourages the tendency to stockpile reserves.
It would be more efficient to pool the reserves of countries that need them at different times.
The IMF has moved in this direction by creating a Short-Term Liquidity Facility through which countries with strong policies can draw from the Fund up to five times their quota without conditionality.
But the STLF still requires a burdensome application process, which only Mexico, Colombia, and Poland have been willing to endure.
This made sense so long as the IMF’s resources were limited, as the application process allowed the Fund to limit its liability.
But, with the tripling of resources, this rationale no longer exists.
The IMF should categorically announce which countries qualify for the facility, automatically making them members of the pool.
A third role for the IMF is macro-prudential supervisor.
Recent events have made clear that someone needs to anticipate and warn of risks to global financial stability.
The G-20 suggests that the Financial Stability Board (FSB), made up of national supervisory authorities, should take the lead in these tasks.
The Fund, through its early-warning exercises and joint IMF-World Bank Financial Sector Assessments, is to only play a supporting role.
But why the FSB should head up this process is far from clear.
The IMF, with its universal membership, is more representative, and it has a larger expert staff.
National supervisors may be reluctant to surrender this responsibility to a multilateral organization.
If so, this is shortsighted.
Financial markets and institutions with global reach need a global macro-prudential regulator, not just a loosely organized college of supervisors.
Or it could be that national policymakers don’t trust the IMF, given that it essentially missed the global financial crisis.
If so, the Fund needs to win back their confidence.
This brings us to the IMF’s fourth role, namely using its bully pulpit to warn of risks created by large-country policies.
Small countries are subject to market discipline, as any Latvian will tell you.
But when large economies whose currencies are used internationally need more resources, they can just print more money.
Not only do they feel less market discipline, but they are subject to less IMF discipline, since they are not compelled to borrow from the Fund.
But, as the sub-prime mortgage debacle reminds us, large countries’ policies can place the global financial system at risk.
The Fund, wary of biting the hand that feeds it, has been reluctant to issue strong warnings in such instances.
But if the IMF is to have a future, its management will have to issue stronger warnings about the next dangerously large US current-account deficit, the next unsustainable housing boom, or whatever large-country problem succeeds them.
There can be no more mincing of words.
Finally, the IMF needs to coordinate reform of the international system.
If, in the long run, a supra-national unit, the Special Drawing Right, is to replace national currencies in international use, then the Fund will need to guide its development.
If stop-gap measures are required during the transition, the Fund must provide leadership there as well.
So far, however, the innovative ideas for reforming the international system have come from the United Nations, 10 Downing Street, and the People’s Bank of China.
The Fund has been notable mainly for its silence.
The crisis is not yet forgotten, but the window is closing.
The next meeting of the IMF’s Board of Governors will be in early October in Istanbul.
If the Fund does not provide a clear vision of its future by then, the opportunity will have been missed.
What is the West?
PARIS &#45;&#45; Everyone everywhere has by now heard about the “clash of civilizations.”
This Samuel Huntington concept has become universal.
In the 1950’s, the French economist, Alfred Sauvy had a comparable success with the expression “third world.”
One reason these phrases gain wide acceptance is their lack of clear definition.
The “clash of civilizations,” basically the West against the rest, is supposed to describe the world as it is.
In reality, the West is vague enough to include a vast array of areas without describing their unifying characteristics.
So what exactly is West?
What does Westernization mean?
Why is Japan considered Western and China not?
Where does Shanghai stand?
Is Russia part of the West?
From these uncertainties, we can conclude that the West is not a geographic entity.
It probably first established itself as a mindset when the Greeks, 25 centuries ago, perceived themselves as Western versus the Oriental Persians.
Since the West has lost any clear territorial basis since then, the phrase “the West” has become a universal not a local notion.
To be Western or Westernized, above all, is a mindset which does not coincide with any continent, nor with any specific nation or religion.
Huntington’s mistake, it seems, was to contain the West inside national borders: there is no map of the West.
No map can work when some Asian nations are Western (Japan, Taiwan), when non-Western groups (Muslims in Europe) live in supposedly Western countries, when some Eastern countries are partially Westernized and some Western countries (Russia) are not fully Westernized. Eventually it looks easier to define the mental borders of the West than its territorial borders.
I believe that the West is a mindset defined by three fundamental traits that cannot easily be found in the so-called Eastern civilizations: a passion for innovation, a capacity for self-criticism, and gender equality.
‘What is new?’ &#45;&#45; a personal greeting since the Hellenistic age – captures the essence of the Western mind.
The non-Westerner, however, would rather place tradition above innovation.
But innovation as a fundamental value explains the scientific breakthroughs of the West versus the East. It explains unavoidable conflicts with conservative non-Western societies and it also explains what we should call ‘the Westernization of the West.’
The West keeps destroying its own traditions, including its religions. The economist Joseph Schumpeter defined this process as one of “creative destruction.”
The term could be applied to all walks of life in the West.
Western conservatives are no less prone to creative destruction than Western liberals: conservatives, indeed, are well known for inventing traditions. Take the 19th century British Prime Minister Benjamin Disraeli, who invented most of the supposedly ancient traditions around the British monarchy.
Innovation in the West seems to be a never-ending, self-transforming process.
Self-criticism, even more than innovation, is a defining characteristic of the West.
In most if not all non-Western civilizations, pride and self love exclude self-criticism or at least the criticism of one’s civilization as such.
A true Muslim or Chinese scholar cannot be defined as a true Chinese or a true Muslim by being critical of his own world.
Not so in the West.
The Western scholar remains perfectly legitimate when putting to death Western values: there is no Chinese or Muslim Nietzsche claiming that his own God is dead.
Is there a Chinese or a Muslim Montaigne ready to write that the “Indian savages” may be wiser than us, as Montaigne did in 16th century France?
Of course there must be some Chinese or Muslim Montaigne or Nietzsche, but they would not be considered beacons of their civilizations.
Self-criticism, not self-love, and cultural relativism are the nuts and bolts of the Western mindset.
The same goes with gender equality.
This has not always been so. In the ancient Greek, Jewish, and Christian religions, women were perceived as inferior to men.
But this notion has been contentious in the West for centuries. Nowadays, gender equality has become the norm.
This is not the case in most non-Western civilizations.
Some would argue that gender equality is a consequence of the modernization process, not of Westernization.
This may be true, but the status of women is clearly one issue that puts non-Western Muslims into opposition to the West.
If we accept the above definition of the West as a mindset, this leaves open three major questions: can the East be modernized without being Westernized?
Where do we draw the line between West and East?
Will the West remain Western?
So far, there is no case in history of non-Western modernization; the discourse on Asian values, initially started in Singapore, is basically a political discourse.
It is after retooling their mindset towards innovation and self-criticism that Asian countries have become modern.
This does not make them less Asian.
Contemporary Koreans or Japanese remain fully Korean or Japanese but are closer to a Westerner than they would be to their own ancestors.
Similarly, a modern Egyptian or a modern Saudi will be more on par with a French or an American than they would be with an ancient Arab.
Does this Westernization make the Egyptian or the Saudi less authentic Arabs?
Such a debate does take place within all Eastern societies, which leads us to the real clash of civilizations: all societies today are fragmented between Westernizers and non-Westernizers.
This clash within civilizations on what modernization means is more significant than Huntington’s alleged conflict between geographical entities.
The controversy on the essential meaning of modernization, also known as an identity crisis, does impact Western countries as well.
Vast groups who live in the West, Western and non-Western fundamentalists, fight the unending Westernization process in the name of tradition.
Many would like to stop the engine by using various guises like ecology or identity, but a Western society where you could not start your day by asking ‘What's new?’ would not be Western any more.
What Is Wrong With Sub-Saharan Africa?
The world’s economic powers finally appear to be closing ranks behind efforts to address global poverty and economic underdevelopment.
At this year’s World Economic Forum, within the G-8, and elsewhere, the consensus that something needs to be done has been as clear and as it is welcome.
But, for some of the world’s poorest regions, particularly Sub-Saharan Africa (SSA), a commitment to help may not be enough.
Basic indicators of economic and social development show SSA lagging far behind other developing areas.
The average income per capita of SSA countries in 2000 was less than half that for all developing countries, about 40% of the level of East Asian and Pacific developing countries, and less than 25% that of Latin America and the Caribbean countries.
Similarly, life expectancy at birth in SSA countries lagged 16 years behind the developing-country average, 14 years behind countries in South Asia, and 21 years behind countries in East Asia, Latin America, and the Caribbean.
In combined gross enrolment in primary, secondary and higher education, SSA countries stood 19% below the average for developing countries, 11% below South Asian countries, 29% below East Asia and the Pacific, and 32% below Latin America and the Caribbean.
What accounts for this broad-based underdevelopment?
Until the late 1800’s, most of Africa was unexplored and occupied by hunter-gatherers and practitioners of subsistence agriculture.
Land was relatively abundant and allocated by tribal chiefs without regard to Western-style property rights.
The only territorial units resembling those that exist today were Ethiopia, Liberia, and South Africa.
During the burst of imperial expansion in Africa that followed national integration and trade liberalization in Europe, colonial powers showed little interest in delineating colonial national boundaries based on cultural or ethnic considerations; they cared only about raw materials and markets.
The Berlin Conference of 1885 fixed the borders of Europe’s African colonies so that they included within them a large variety of languages, religions, and ethnic groups.
Most SSA countries attained national independence some time after the end of the Second World War, as the British, French, Belgian, and Portuguese empires unraveled (Germany had already lost its colonies after 1918).
Thus, SSA countries have only enjoyed independence for a short period in comparison with, say, South America, where countries had their wars of independence around 1810-1820 and achieved some type of constitutional government by 1850-1880.
The legacy of arbitrarily drawn borders and limited political centralization meant that in many SSA countries remnants of the colonial experience continue to play a big role in defining the institutional landscape, such as the civil service and public administration, educational system, and economic infrastructure.
To be sure, many countries adopted English, French, or Portuguese as their official languages, and European missionaries, who often followed in the colonizers’ footsteps, had success in transmitting their religious practices to local populations.
Nevertheless, linguistic variety and ethnic divisions remain more important than in most of the developing world, and tribal affiliation has continued to hinder the emergence of unifying national identities.
Moreover, self-rule has not brought many democratically elected regimes.
Instead, anti-colonial liberation leaders often developed personality cults and hogged power for decades.
Monopolization of political power led, in turn, to rampant cronyism and corruption, which stifled economic and social development.
Recent data on perceived corruption in public transactions show the SSA countries with the lowest average score for all developing regions.
Only Botswana and Namibia achieved respectable scores, while the worst offenders were Cameroon, Uganda, Kenya, Angola, Madagascar, and Nigeria.
Weak national unity has underpinned an even more damaging pattern.
Since the 1990’s, many of the world’s armed conflicts have taken place in SSA countries.
Congo and Lesotho each experienced two conflicts during the decade, while civil strife ravaged Sierra Leone, Ivory Coast, Liberia, Congo, and Sudan.
This deterred not only foreign and domestic investment, but, more fundamentally, the formation of the very institutions needed for successful economic development.
Sustained economic growth requires, everywhere, the accumulation of physical and human capital, as well as the acquisition of technological capabilities.
This process does not occur in a historical vacuum, devoid of the influence of powerful social and political factors.
Structure, institutions, and policies are critical determinants, as is the availability of qualified technical and administrative personnel.
Indeed, the availability of a highly qualified bureaucracy in both South Korea and Taiwan – and before that in their model country, Japan – was a necessary precondition for achieving rapid economic growth.
By contrast, the shortage in SSA of scientific, technical, and administrative skills, such as those of engineers, natural scientists, managers, and technicians, is a key reason why the East Asian “miracle” could not be reproduced there.
None of the preconditions of economic development will be met in SSA until the legacy of colonialism and weak states that has defined the region is overcome.
Developed countries can provide limited help by means of well-focused, untied aid and technical assistance projects.
But success depends mainly on the emergence of dedicated, talented, and honest national and regional political leaders.
Only such leaders can build up the legitimacy needed to unite their countries, and only then will they be able to confront head on the many challenges that the region faces in shaking loose from the shackles of backwardness.
What Is Wrong with Terrorism?
People all over the world react with visceral horror to attacks on civilians by Al Quaeda, by Palestinian suicide bombers, by Basque or Chechen separatists, or by IRA militants.
As there now seems to be a pause in the spate of suicide bombings and other terrorist acts--if only momentary--perhaps now is a moment to grapple with a fundamental question: What makes terrorist killings any more worthy of condemnation than other forms of murder?
The special opprobrium associated with the word "terrorism" must be understood as a condemnation of means, not ends.
Of course, those who condemn terrorist attacks on civilians often also reject the ends that the attackers are trying to achieve.
They think that a separate Basque state, or the withdrawal of US forces from the Middle East, for example, are not aims that anyone should be pursuing, let alone by violent means.
But the condemnation does not depend on rejecting the aims of the terrorists.
The reaction to the attacks of September 11, 2001 on New York and Washington and their like underscores that such means are outrageous whatever the end; they should not be used to achieve even a good end--indeed, even if there is no other way to achieve it.
The normal balancing of costs against benefits is not allowable here.
This claim is not as simple as it appears because it does not depend on a general moral principle forbidding all killing of non-combatants.
Similarly, those who condemn terrorism as beyond the pale are usually not pacifists.
They believe not only that it is all right to kill soldiers and bomb munitions depots in times of war, but that inflicting "collateral damage" on non-combatants it is sometimes unavoidable--and morally permissible.
But if that is permissible, why is it wrong to aim directly at non-combatants if killing them will have a good chance of inducing the enemy to cease hostilities, withdraw from occupied territory, or grant independence?
Dying is bad, however one is killed.
So why should a civilian death be acceptable if it occurs as a side-effect of combat that serves a worthy end, whereas a civilian death that is inflicted deliberately as a means to the same end is a terrorist outrage?
The distinction is not universally accepted--certainly not by the major belligerents in World War II.
Hiroshima is the most famous example of terror bombing, but the Germans, the Japanese, and the British as well as the Americans deliberately slaughtered civilian non-combatants in large numbers.
Today, however, terrorism inspires widespread revulsion, which in turn helps to justify military action against it.
So it is essential that the reason for that revulsion become better understood.
The core moral idea is a prohibition against aiming at the death of a harmless person.
Everyone is presumed to be inviolable in this way until he himself becomes a danger to others; so we are permitted to kill in self-defense, and to attack enemy combatants in war.
But this is an exception to a general and strict requirement of respect for human life.
So long as we are not doing any harm, no one may kill us just because it would be useful to do so.
This minimal basic respect is owed to every individual, and it may not be violated even to achieve valuable long-term goals.
However there are some activities, including legitimate self-defense or warfare, that create an unavoidable risk of harm to innocent parties.
This is true not only of violent military or police actions but also of peaceful projects like major construction in densely populated cities.
In those cases, if the aim is important enough, the activity is not morally prohibited provided due care is taken to minimize the risk of harm to innocent parties, consistent with the achievement of the aim.
The moral point is that we are obliged to do our best to avoid or minimize civilian casualties in warfare, even if we know that we cannot avoid them completely.
Those deaths do not violate the strictest protection of human life--that we may not aim to kill a harmless person.
On the contrary, our aim is if possible to avoid such collateral deaths.
Of course, the victim ends up dead whether killed deliberately by a terrorist or regrettably as the side effect of an attack on a legitimate military target.
But in our sense of what we are owed morally by our fellow human beings, there is a huge difference between these two acts, and the attitudes they express toward human life.
So long as it remains an effective means for weak parties to exert pressure on their more powerful enemies, terrorism cannot be expected to disappear.
But we should hope nonetheless that the recognition of its special form of contempt for humanity will spread, rather than being lost as a result of its recent successes.
What Lies Ahead in 2011?
NEW YORK – The global economy ends 2010 more divided than it was at the beginning of the year.
On one side, emerging-market countries like India, China, and the Southeast Asian economies, are experiencing robust growth.
On the other side, Europe and the United States face stagnation – indeed, a Japanese-style malaise – and stubbornly high unemployment.
The problem in the advanced countries is not a jobless recovery, but an anemic recovery – or worse, the possibility of a double-dip recession.
This two-track world poses some unusual risks.
While Asia’s economic output is too small to pull up growth in the rest of the world, it may be enough to push up commodity prices.
Meanwhile, US efforts to stimulate its economy through the Federal Reserve’s policy of “quantitative easing” may backfire.
After all, in globalized financial markets, money looks for the best prospects around the world, and these prospects are in Asia, not the US. So the money won’t go where it’s needed, and much of it will wind up where it’s not wanted – causing further increases in asset and commodity prices, especially in emerging markets.
Given the high levels of excess capacity and unemployment in Europe and America, quantitative easing is unlikely to trigger a bout of inflation.
It could, however, increase anxieties about future inflation, leading to higher long-term interest rates – precisely the opposite of the Fed’s goal.
This is not the only, or even the most important, downside risk facing the global economy.
The gravest threat comes from the wave of austerity sweeping the world, as governments, particularly in Europe, confront the large deficits brought on by the Great Recession, and as anxieties about some countries’ ability to meet their debt payments contributes to financial-market instability.
The outcome of premature fiscal consolidation is all but foretold: growth will slow, tax revenues will diminish, and the reduction in deficits will be disappointing.
And, in our globally integrated world, the slowdown in Europe will exacerbate the slowdown in the US, and vice versa.
With the US able to borrow at record-low interest rates, and with the promise of high returns on public investments after a decade of neglect, it is clear what it should do.
A large-scale public-investment program would stimulate employment in the short term, and growth in the long term, leading in the end to a lower national debt.
But financial markets demonstrated their shortsightedness in the years preceding the crisis, and are doing so once again, by applying pressure for spending cuts, even if that implies reducing badly needed public investments.
Moreover, political gridlock will ensure that little is done about the other festering problems confronting the American economy: mortgage foreclosures are likely to continue unabated (legal complications aside); small and medium-sized enterprises are likely to continue to be starved of funds; and the small and medium-sized banks that traditionally provide them with credit are likely to continue to struggle to survive.
In Europe, meanwhile, matters are unlikely to be any better.
Europe has finally managed to come to the rescue of Greece and Ireland.
In the run up to the crisis, both were governed by right-wing governments marked by crony capitalism or worse, demonstrating once again that free-market economics didn’t work in Europe any better than it did in the US.
In Greece, as in the US, a new government was left to clean up the mess.
The Irish government that encouraged reckless bank lending and the creation of a property bubble was, perhaps not surprisingly, no more adept in managing the economy after the crisis that it was before.
Politics aside, property bubbles leave in their wake a legacy of debt and excess capacity in real estate that is not easily rectified – especially when politically connected banks resist restructuring mortgages.
To me, attempting to discern the economic prospects for 2011 is not a particularly interesting question: the answer is bleak, with little upside potential and a lot of downside risk.
More importantly, how long will it take Europe and America to recover, and can Asia’s seemingly export-dependent economies continue to grow if their historical markets languish?
My best bet is that these countries will maintain rapid growth as they shift their economic focus to their vast and untapped domestic markets.
This will require considerable restructuring of their economies, but China and India are both dynamic, and proved their resilience in their response to the Great Recession.
I am not so bullish on Europe and America.
In both cases, the underlying problem is insufficient aggregate demand.
The ultimate irony is that there are simultaneously excess capacity and vast unmet needs – and policies that could restore growth by using the former to address the latter.
Both the US and Europe, for instance, must retrofit their economies to address the challenges of global warming.
There are feasible policies that would work within long-term budget constraints.
The problem is politics: in the US, the Republican Party would rather see President Barack Obama fail than the economy succeed.
In Europe, 27 countries with different interests and perspectives are pulling in different directions, without enough solidarity to compensate.
The bailout packages are, in this light, impressive achievements.
In both Europe and America, the free-market ideology that allowed asset bubbles to grow unfettered – markets always know best, so government must not intervene – now ties policymakers’ hands in designing effective responses to the crisis.
One might have thought that the crisis itself would undermine confidence in that ideology.
Instead, it has resurfaced to drag governments and economies down the sinkhole of austerity.
If politics is the problem in Europe and America, only political changes are likely to restore them to growth.
Or else they can wait until the overhang of excess capacity diminishes, capital goods become obsolete, and the economy’s internal restorative forces work their gradual magic.
Either way, victory is not around the corner.
What McCain and Obama Ignore
PRINCETON – Barack Obama worked for three years as a community organizer on Chicago’s blighted South Side, so he knows all about the real poverty that exists in America.
He knows that in one of the world’s richest nations, 37 million people live in poverty, a far higher proportion than in Europe’s wealthy nations.
Yet Obama’s campaigning has focused on “Main Street” and tax cuts for the middle class, bypassing the issue of what to do about poverty.
It’s not as if Obama has no policies for helping the poor.
Go to his Web site, click on “The Issues” and then on “Poverty.”
There you will find a set of thoughtful proposals ranging from raising the minimum wage to establishing model “Promise Neighborhoods” that will attempt to turn around areas with high levels of poverty and low levels of educational achievement by providing services such as early childhood education and crime prevention.
(Go to John McCain’s Web site, and you won’t even find “poverty” among the list of issues to click on – although “Space Program” is there.)
So why isn’t Obama speaking up about an issue on which he has so much more first-hand experience than his opponent, and better policies, too?
Perhaps not enough of the poor vote, or they will vote Democratic anyway.
Moreover, his researchers presumably have told him that independent middle-class voters are more likely to be won over by appeals to their wallets than to concern for America’s poor.
If America’s poor don’t rank high among voters’ concerns, it is no surprise that the poor abroad are virtually invisible.
Again, Obama has both the background – with his family ties to Kenya – and a promising policy, to increase America’s foreign assistance to $50 billion by 2012, using the money to stabilize failing states and bring sustainable growth to Africa.
(Currently, of all the OECD donor nations, only Greece gives a lower percentage of its gross national income than the United States does.)
But when Obama’s running mate, Joe Biden, was asked, in his debate with his Republican counterpart, Sarah Palin, what proposals an Obama-Biden administration might have to scale back as a result of the $700 billion Wall Street bailout, the only specific proposal he mentioned was the increase in foreign assistance.
McCain has never gotten down to specifics about how much foreign aid he would like the US to give.
Both candidates refer to deaths of American military personnel in Iraq, but there has been less attention to the war’s civilian causalities.
In her debate with Biden, Palin actually attacked Obama for saying that, in her words, “All we’re doing in Afghanistan is air-raiding villages and killing civilians.” She called that comment “reckless” and “untrue,” because, “That’s not what we’re doing there.
We’re fighting terrorists, and we’re securing democracy.”
Of course, killing civilians is not all that the US and its NATO allies are doing in Afghanistan, and if Obama implied that it was, his rhetoric was careless.
But what is extraordinary about Palin’s comment is that, despite being a strong proponent of the sanctity of human life, in criticizing Obama she did not pause to deplore the serious loss of innocent human life that American air strikes in Afghanistan have caused.
Afghanistan’s president, Hamid Karzai, has repeatedly expressed outrage at American air strikes that have killed civilians – most recently in August, when he said that 95 Afghans, including 50 children, were killed in the bombing of a village.
The global ethical challenge that has been most prominent in the campaign is climate change.
Here, the candidates’ goals are virtually identical: they both support a cap-and-trade system to make deep cuts in US greenhouse-gas emissions by 2050.
Obama wants the goal to be an 80% reduction and McCain says 66%, but, since the next president will leave office no later than 2016, that difference is irrelevant.
Interestingly, one ethical issue on which neither candidate has campaigned has been shown to have the potential to move voters.
A group called Defenders of Wildlife has been running an ad graphically highlighting Palin’s support for shooting wolves from aircraft.
A study of Republicans, Democrats, and independents showed that viewing the ad led to greater support for Obama.
According to Glenn Kessler, the head of HCD research, which conducted the study with the Muhlenberg College Institute of Public Opinion, whereas recent ads from both parties have had little impact among voters, “This is the first ad in over a month that seems to have broken through.”
Consistent with that finding, an historic ballot initiative in California to ban cruel forms of animal confinement on factory farms, including the battery cage system of keeping hens, is also showing strong support.
What Money Can Buy
CHICAGO – In an interesting recent book, What Money Can’t Buy: The Moral Limits of the Market, the Harvard philosopher Michael Sandel points to the range of things that money can buy in modern societies and gently tries to stoke our outrage at the market’s growing dominance.
Is he right that we should be alarmed?
While Sandel worries about the corrupting nature of some monetized transactions (do kids really develop a love of reading if they are bribed to read books?), he is also concerned about unequal access to money, which makes trades using money inherently unequal.
More generally, he fears that the expansion of anonymous monetary exchange erodes social cohesion, and argues for reducing money’s role in society.
Sandel’s concerns are not entirely new, but his examples are worth reflecting upon.
In the United States, some companies pay the unemployed to stand in line for free public tickets to congressional hearings.
They then sell the tickets to lobbyists and corporate lawyers who have a business interest in the hearing but are too busy to stand in line.
Clearly, public hearings are an important element of participatory democracy.
All citizens should have equal access.
So selling access seems to be a perversion of democratic principles.
The fundamental problem, though, is scarcity.
We cannot accommodate everyone in the room who might have an interest in a particularly important hearing.
So we have to “sell” entry.
We can either allow people to use their time (standing in line) to bid for seats, or we can auction seats for money.
The former seems fairer, because all citizens seemingly start with equal endowments of time.
But is a single mother with a high-pressure job and three young children as equally endowed with spare time as a student on summer vacation?
And is society better off if she, the chief legal counsel for a large corporation, spends much of her time standing in line?
Whether it is better to sell entry tickets for time or for money thus depends on what we hope to achieve.
If we want to increase society’s productive efficiency, people’s willingness to pay with money is a reasonable indicator of how much they will gain if they have access to the hearing.
Auctioning seats for money makes sense – the lawyer contributes more to society by preparing briefs than by standing in line.
On the other hand, if it is important that young, impressionable citizens see how their democracy works, and that we build social solidarity by making corporate executives stand in line with jobless teenagers, it makes sense to force people to bid with their time and to make entry tickets non-transferable.
But if we think that both objectives – efficiency and solidarity – should play some role, perhaps we should turn a blind eye to hiring the unemployed to stand in line in lieu of busy lawyers, so long as they do not corner all of the seats.
What about the sale of human organs, another example Sandel worries about?
Something seems wrong when a lung or a kidney is sold for money.
Yet we celebrate the kindness of a stranger who donates a kidney to a young child.
So, clearly, it is not the transfer of the organ that outrages us – we do not think that the donor is misinformed about the value of a kidney or is being fooled into parting with it.
Nor, I think, do we have concerns about the scruples of the person selling the organ – after all, they are parting irreversibly with something that is dear to them for a price that few of us would accept.
I think part of our discomfort has to do with the circumstances in which the transaction takes place.
What kind of society do we live in if people have to sell their organs to survive?
But, while a ban on organ sales may make us feel better, does it really make society better off?
Possibly, if it makes society work harder to ensure that people are never driven to the circumstances that would make them contemplate selling a vital organ.
But possibly not, if it allows society to ignore the underlying problem, either moving the trade underground, or forcing people in such circumstances to resort to worse remedies.
Then again, part of our unease probably has to do with what we perceive as an unequal exchange.
The seller is giving up part of her body in an irreversible transaction.
The buyer is giving up only money – perhaps earned on a lucky stock trade or at an overpaid job.
If that money had been earned by selling a portion of a lung, or represented savings painfully accumulated during years of backbreaking work, we might consider the exchange more equal.
Of course, the central virtue of money is precisely its anonymity.
I need know nothing about the dollar bill I receive to be able to use it.
But, because money’s anonymity obscures its provenance, it may be socially less acceptable as a medium of payment for some objects.
In both examples – congressional tickets and organ sales – Sandel suggests reducing money’s role.
But money has many virtues in facilitating transactions – hence its ubiquitous use.
So, perhaps the more important message is that society’s tolerance for monetization is proportional to the legitimacy accorded to the distribution of money.
The more people believe that it is the hardworking and the deserving who have money, the more they are willing to tolerate transactions for money (though some transactions remain beyond the pale).
But if people believe that the moneyed are primarily those who are well connected or crooked, their tolerance for monetary transactions falls.
Rather than focusing on prohibiting monetary transactions, perhaps a more important lesson imparted by Sandel’s examples is that we should work continuously to improve the perceived legitimacy of money’s distribution.
The Moral Limits of Markets
TOKYO – Today, there are very few things that money can’t buy.
If you are sentenced to a jail term in Santa Barbara, California, and don’t like the standard accommodations, you can buy a prison-cell upgrade for about $90 per night.
If you want to help to prevent the tragic fact that, each year, thousands of babies are born to drug-addicted mothers, you can contribute to a charity that uses a market mechanism to ameliorate the problem: a $300 cash grant to any drug-addicted woman willing to be sterilized.
Or, if you want to attend a US Congressional hearing, but don’t want to wait for hours in line, you can enlist the services of a line-standing company.
The company hires homeless people and others in need of work to wait in line – overnight if necessary.
Just before the hearing begins, the paying customer can take his or her line-stander’s place in the queue, and claim a front-row seat in the hearing room.
Is there anything wrong with buying and selling these things?
Some would say no; people should be free to spend their money to buy whatever someone else is willing to sell.
Others believe that there are some things that money should not be able to buy.
But why?&#160;
What exactly is wrong with selling prison-cell upgrades to those who can afford them, or offering cash for sterilization, or hiring line-standers?
To answer questions such as these, we need to pose a bigger question: What role should money and markets play in a good society?
Asking this question, and debating it politically, is more important than ever.
The last three decades have witnessed a quiet revolution, as markets and market-oriented thinking have reached into spheres of life previously governed by non-market values: family life and personal relations; health and education; environmental protection and criminal justice; national security and civic life.
Almost without realizing it, we have drifted from having market economies to becoming market societies.
The difference is this: A market economy is a tool – a valuable and effective tool – for organizing productive activity.
A market society, by contrast, is a place where almost everything is up for sale.
It is a way of life in which market values seep into social relations and govern every domain.
We should be worried about this trend for two reasons.
First, as money looms larger in our societies, affluence – and its absence – matters more.
If the main advantages of affluence were the ability to afford yachts and fancy vacations, inequality would matter less than it does today.
But, as money comes to govern access to education, health care, political influence, and safe neighborhoods, life becomes harder for those of modest means.
The marketization of everything sharpens the sting of inequality.
A second reason to resist putting a price tag on all human activities is that doing so can be corrupting.
Prostitution is a classic example.
Some object to it on the grounds that it typically exploits the poor, for whom the choice to sell their bodies may not be truly voluntary.
But others object on the grounds that reducing sex to a commodity is inherently degrading and objectifying.
The idea that market relations can corrupt higher goods is not restricted to matters of sex and the body.
It also applies to civic goods and practices.
Consider voting.
We don’t allow a free market in votes, even though such a market would arguably be “efficient,” in the economist’s sense of the term.
Many people don’t use their votes, so why let them go to waste?
Why not let those who don’t much care about an election’s outcome sell their vote to someone who does?
Both parties to the transaction would be better off.
The best argument against a market in votes is that the vote is not a piece of private property; rather, it is a public responsibility.
To treat a vote as an instrument of profit would be to degrade it, to corrupt its meaning as an expression of civic duty.
But, if a market in votes is objectionable because it corrupts democracy, what about systems of campaign finance (including the one currently in place in the United States) that give wealthy donors a disproportionate voice in elections?
The reason to reject a market in votes –&#160;preserving the integrity of democracy – may be a reason to limit financial contributions to political candidates as well.
Of course, we often disagree about what counts as “corrupting” or “degrading.”
To decide whether prostitution is degrading, we have to decide how human sexuality is properly valued.
To decide whether selling prison-cell upgrades corrupts the meaning of criminal justice, we have to decide what purpose criminal punishment should serve.
To decide whether we should allow the buying and selling of human organs for transplantation, or hire mercenaries to fight our wars, we have to think through hard questions about human dignity and civic responsibility.
These are controversial questions, and we often try to avoid addressing them in public discourse.
But that is a mistake.
Our reluctance to engage morally contested questions in politics has left us ill-equipped to deliberate about one of the most important issues of our time: Where do markets serve the public good, and where do they not belong?
What Next After the Gaza Withdrawal?
The withdrawal of Israeli troops and the evacuation of Jewish settlers from Gaza, after 38 years of occupation, is the most recent proof of the limits of military power, even when that power is overwhelming.
Now is the time to take stock of the lessons learned from the years of occupation and resistance in order to understand what Israelis and Palestinians should do next.
To begin with, it is imperative to understand how much credit Palestinians can credibly claim for the Israeli withdrawal.
True, Palestinian resistance and sacrifices were a contributing factor in Ariel Sharon’s decision to reverse a policy he had espoused for decades.
But it would be a mistake to attribute the Israeli withdrawal exclusively to Palestinian militancy.
After all, this bittersweet Israeli action was neither a clear result of military defeat nor a consequence of political negotiations.
But unilateralism is not a rational long-term and effective policy, for it will not lead to a genuine and lasting peace in the Middle East.
Just as President Bush has discovered in Iraq, Sharon will also be forced to acknowledge the limits of his strategy.
Unilateralism seems very expedient to shortsighted politicians, for it obviates the need for what they perceive as the mess of actual negotiations – that is, meeting their counterparts face to face and discovering the human results of their policies.
Going it alone also seems politically advantageous domestically, because leaders can decide how much and how far they want to carry out a particular policy.
To be fair, unilateralism is convenient not only for a reluctant Israeli prime minister who does not wish to make substantial compromises during negotiations; it is also attractive to hard-line Palestinians who regard multilateralism as a means of pressing them to make unpopular concessions.
In any case, the day after the completion of the Gaza withdrawal, Israelis and Palestinians will be confronted with important unresolved questions.
There is no doubt that the evacuation of Jewish settlers in areas that Israelis consider part of their God-given territory represents a huge ideological reversal.
But after years of preaching and practicing one of Zionism’s main tenets, will the removal of settlements continue in the West Bank, or will this be a one-time exception?
Palestinians, for their part, will be expected to answer questions – in deeds, not just in words – about their ability to build a modern pluralistic state.
How will the Palestinian body politic deal with the growing power of the Islamic movements that undoubtedly will expect a significant share of power in post-withdrawal Gaza?
The international community also will have to answer some key questions. According to the Palestinian Economic Council for Reconstruction and Development (PECDAR), annual per capita income in Gaza continues to average roughly $700, while Israelis enjoy incomes averaging a $16,000 per capita.
In the absence of relatively well-paying jobs, what will happen to the lines of unemployed Gazans? The potential flight of employment seekers – a formidable force worldwide – is only one problem.
More immediately, if Gazan families are not well fed, the recurrence of cross-border violence, if not the eruption of a third intifada, will only be a matter of time.
While the economic situation in Gaza is a critical issue, the future of the Palestinian-Israeli conflict will be determined mainly by the next steps in the peace process.
Permanent-status issues concerning borders, the West Bank, Jerusalem, and refugees must be dealt with bilaterally.
Any serious observer of the Palestinian-Israeli conflict will no doubt acknowledge that there can be no unilateral solution to these issues.
As for the peace process’s multilateral guarantors, the United States and its quartet partners – the European Union, the United Nations, and Russia – have failed to provide even the most basic facts regarding Israel’s withdrawal or how it relates to the “road map” agreed in 2003.
They cannot continue to sit on the sidelines. Washington’s quixotic decision to call Israel’s unilateral move part of the road map has failed to convince many Palestinians.
The prevailing opinion among Palestinians is that the road map will be put into deep freeze once the Israelis complete their Gaza withdrawal.
But the Palestinian and Israeli peoples, their leaders, and the international community must all respond to the challenges that will follow.
Most importantly, the future of the conflict and the chances for genuine peace in the region will depend on understanding the limits of offensive military power, defensive resistance, and unilateralism.
Serious face-to-face talks, in accordance to international law and with the help of the international community, are the only way forward.
What Next After the Likud Referendum?
Prime Minister Ariel Sharon's proposal for a unilateral Israeli withdrawal from the Gaza Strip and part of the West Bank has been overwhelmingly defeated by a referendum within his own party, Likud, in what seems to be a humiliating defeat.
Yet this is likely to have little or no effect on Sharon's intention to carry through with the plan.
At first, this seems surprising, since he said before the referendum that he would abide by its outcome.
But Sharon is 75 years old and probably within two years of retirement.
He is determined that his plan becomes his political legacy.
Since there is no precedent for a party referendum, he can argue that the vote does not bind him.
Moreover, Sharon made sure that his main political rivals - notably former Prime Minister Benjamin (Bibi) Netanyahu - supported his plan.
They are now in no position to challenge him as the champions of the opposition within Likud.
So while some members may walk out, Sharon can easily hold on to control of the party.
In addition, many Sharon supporters, torn by what they saw as the plan's combination of costs and benefits, stayed home or even voted against it, but still want Sharon as their leader.
But Sharon is prepared to go even further in taking political risks to push through the withdrawal.
Small right-wing parties in his coalition have already announced that his determination to do so will make them walk out of the government.
Sharon will then turn to the leader of the opposition, 80-year-old former prime minister Shimon Peres, to form a national unity government.
And Peres is ready to do so.
The passionate debate stirred up by Sharon's plan shows how truly revolutionary his proposal is.
Having the army uproot Jewish settlements - with inevitable scenes of settlers resisting and being dragged off - will be a traumatic event for the country.
The plan also entails considerable strategic risks, which, probably more than the prospect of uprooted settlements, account for the large "no" by Likud members.
A key concern is the precedent of withdrawal from southern Lebanon in 2000.
Today, most Israelis believe that this step, though justified on strategic grounds in the face of constant attacks by the Lebanese group Hizbollah, convinced Palestinians that violence worked.
In the same manner, a withdrawal from Gaza, many people worry, will bring increased anarchy there and a rise in overall terrorist attacks.
But convinced - as are most Israelis - that there is no Palestinian partner ready to negotiate seriously and implement its promises, the prime minister wants to prepare for an extended interim period.
Assuming that terrorist attacks against Israel are going to continue under any circumstances, he seeks to improve the country's strategic position to handle this war.
Combined with the long-completed security fence around the Gaza Strip and one being built near Israel's border with the West Bank, pulling out of the most exposed positions is intended to reduce casualties and the number of clashes with the Palestinians.
A secondary intention is to show the world that Israel is ready to withdraw from most of the remaining territories it captured in 1967 in exchange for real peace.
The United States and Britain have supported the withdrawal plan, while most other European countries have been critical.
While demanding an Israeli withdrawal for years, the Palestinian leadership opposes Sharon's plan, arguing it is intended to create permanent borders.
Nevertheless, if implemented, Sharon's proposal would leave them in control of about 99 percent of the Gaza Strip and roughly 50 percent of the West Bank.
If it appears that the withdrawal will proceed and Sharon can assemble a government to implement it, the Palestinian side will then face a major challenge.
Will it be able to put together an effective governmental authority to rule the Gaza Strip, or will that area dissolve into bloody battles among Palestinian factions and a staging area for attacks into Israel that will bring reprisal raids?
A key issue in this mix is the division of power between the nationalist Fatah group and the Islamist Hamas organization.
Local Fatah officials want support from their leader, Yassir Arafat, to take firm control of the territory.
But Arafat has shown a willingness to let groups act as they please, apparently believing that continuing unrest will bring international sympathy and intervention on his behalf.
Yet Arafat himself will be 75 in a few months and is clearly reaching the end of his career.
He has been the only leader his movement has ever known, having led Fatah for 40 years and the Palestinians as a whole for 35 years.
With no apparent successor, his departure from the scene will bring a massive and unpredictable shake-up in Palestinian politics.
The Israeli government's projection has been that both the withdrawal and the security fence will be completed by the end of 2005.
Sharon's retirement is likely to come within another twelve months, with a new opposition leader having to be chosen as well.
Thus, while the Likud referendum seems to have left the Israeli-Palestinian dispute at yet another impasse, both sides are on the verge of enormous changes.
What Next for Europe?
In many ways, 2005 has been Europe’s annus horibilis.
It began well, when Spanish voters approved the draft European Union constitution, but it turned sour when French and Dutch voters spurned it soon after.
Those votes partly reflected displeasure with domestic policies, and partly disappointment with the way governments conduct European affairs.
Governments promptly obliged with more of the same.
Within days of the votes, they failed to agree on the EU budget for 2007-13.
French and British leaders engaged in a heated quarrel that derailed the subsequent summit, before Britain assumed the rotating six-month EU presidency in July.
Normally, countries use their EU presidencies to display their ability to solve problems and move the Union forward.
But, as of early December, Britain has remained dormant.
Besides burying the draft constitution, it has largely sidestepped the budget issue.
Chances that it gets the budget approved this year are slim, and, unless the dispute is resolved soon, the Union will not have an operational budget by 2007.
Even if a budget is adopted, there is no lack of depressing business for the Austrian presidency, which starts on January 1.
The deepest problem is Europe’s inability to grow at more than a snail’s pace and to provide jobs to its citizens.
This is mostly due to the Big Three – France, Germany, and Italy – which produce 70% of Europe’s GDP.
The collective response, adopted in 2000, has been the “Lisbon Strategy,” which aims at making the EU “the most dynamic and competitive knowledge-based economy in the world” by 2010.
More realistically, it is designed to provide governments with the incentive to undertake the reforms that stimulate economic growth and productivity.
That means facing down the myriad interest groups – from industry lobbies to trade unions and entrenched bureaucracies – that have (so far) successfully protected their turfs.
The strategy rests on peer pressure, naming and shaming governments that fail to make progress.
In practice, however, peer pressure has become peer collusion.
When EU leaders met last spring to assess progress, they pitifully recognized that the Lisbon Strategy’s goal was unlikely to be met.
The best that they could do now would be to dump the pretense of a strategy and carry on with the other business.
Unfortunately, the host of the 2000 summit was José Manuel Barroso, then Prime Minister of Portugal and current President of the European Commission, who has staked his presidency on the Lisbon Strategy.
Expect him to push on hopelessly.
One of the few good ideas contained in the Lisbon Strategy was to remove barriers to trade in services.
Intra-European competition in services is restricted by innumerable national regulations that, for instance, strictly determine the requirements for becoming a hairdresser or a plumber.
One of the defining features of the past decades is the sharp increase in services productivity in the US; none of that happened in Europe.
Guess why.
Because services account for 70% of European GDP, the potential impact from enhanced competition is substantial.
But removing protection is always politically difficult.
The European Commission submitted a proposal in 2005 – just as the constitution was being put up for a vote.
Not surprisingly, the proposal was quickly shelved.
Now, with countless private interest groups trying to water it down into irrelevance, the battle will be firmly on the EU’s agenda in 2006.
At the same time, Europe is again blocking progress in the Doha round of world trade talks, with the farmers’ lobby fighting to preserve its subsidies.
Many governments are so fearful of their farmers that they see no other option than to hold their ground, no matter what.
Europe has agreed to a single trade policy.
When disagreements run as deep as they do on agriculture, there can be no give-and-take of the kind that allows for successful negotiations.
There is little reason for optimism.
And what next for the ECB, which has just nudged up interest rates by 0.25%, after 30 months on hold.
Experts can disagree about whether the move was premature, but no one agrees with the many political leaders who have argued that the tiny hike will derail the timid resumption of economic growth.
The sharpness of political attacks on the ECB might trigger dangerous talk about restricting its independence.
While such a move is out of the question – it would require a change in the European Treaty – the noise is unhealthy.
It distracts the ECB, adds to the impression that Europe is bad, and, more importantly, will be used by ineffective governments as a scapegoat for their failings.
Expect more ECB-bashing.
Is Europe stuck?
The current team of leaders has been an enormous disappointment.
But as they fade away, there could be some light at the end of the tunnel.
In Germany, Chancellor Angela Merkel is obviously more positive on Europe and more pro-reform than her predecessor, but she is tied up in a grand coalition.
In France, President Jacques Chirac, the epitome of a leader captured by his lobbies, is staggering impotently toward the end of his term in 2007.
The two frontrunners to succeed him, Dominique de Villepin and Nicolas Sarkozy, both in government, compete on a reformist agenda, but pre-election years do not encourage bold moves.
Meanwhile, Italy must decide whether it replaces Prime Minister Silvio Berlusconi, who displayed no interest in reform and European affairs, with the cautious Romano Prodi, the former European Commission President.
Tony Blair, once an ardent pro-European (at least by Britain’s undemanding standards), might finally have to cede power to Gordon Brown, who is famously cold to European integration.
Fortunately, Britain has always been an outsider.
In the end, whatever light there is, it may not shine until 2007, after the French elections.
What Next in Afghanistan?
BERLIN – Afghanistan’s future does not look good.
The Taliban are gaining military and political strength, and President Hamid Karzai is losing support at home and internationally due to his administration’s rampant corruption and the obvious fraud committed in his re-election.
Weariness with the war is spreading in the United States, where President Barack Obama finds it difficult to decide about an increase in troops, as demanded by his own generals.
European NATO members with troops in Afghanistan would prefer to withdraw them today rather than tomorrow.
The West seems to have lost its orientation in the Hindu Kush – that “graveyard of empires,” as it was called after the British disaster in January 1842, when only one man survived an expedition 16,000.
What, many people are asking, is NATO really fighting for in Afghanistan?
Europe remains silent on that question and has only one aim: to get out.
In the US, the debate about the purposes being served in Afghanistan is at least still taking place.
Follow it, and you will conclude that, ultimately, the war is all about the American superpower’s military victory over the Taliban, so that it can finally withdraw its troops – for a second time.
The source or meaning of the conflict in Afghanistan is impossible to find in the country itself.
Afghanistan is the battlefield, but the causes of the wars that have devastated it since the mid-1970’s were and are still to be found beyond its borders.
So an exclusively “Afghan solution” is not possible.
Three dates are central to understanding today’s Afghan quagmire: 1989, 2001, and 2003.
In 1989, when the Cold War ended, the Red Army had already withdrawn from the country, thereby admitting its defeat.
Following the Soviet Union, the US withdrew from the conflict, too, and at that moment, the second Afghan war started – a proxy war between regional neighbors over power in the Hindu Kush, disguised as a civil war.
Supported by Saudi Arabia, Pakistan sought strategic depth against its arch-enemy India with the help of militant religious students from Afghan refugee camps. These “Taliban” were created and equipped by the Pakistani secret service, the ISI.
Iran defended its own interests and those of the Shia minority in the west of the country.
And in the north, the Tajik Northern Alliance and Abdul Rashid Dostum’s Uzbek militia were supported and equipped by Afghanistan’s northern neighbors and Russia.
In the shadow of this second Afghan war, Osama bin Laden established his terrorist organization in Taliban-ruled Afghanistan: Al Qaeda, which, on September 11, 2001, carried out its terrible terrorist attack on the US.
A month later, the current war in Afghanistan started.
In March 2003, George W. Bush launched his invasion of Iraq, not only squandering America’s military strength, but also connecting all the individual crises between the eastern Mediterranean and the Indus Valley.
As a result of America’s foreign-policy folly, Iran became the central geo-political player in the entire region, linking the western and eastern part of this long belt of instability.
So, those who are grappling with the Afghan riddle today should consider, first and foremost, the regional realities: can the West afford to withdraw?
If so, we should pull out of Afghanistan immediately.
If not, we should stop discussing an “exit strategy.”
The cost of the West’s retreat from this troubled region is predictable, since we must deal with several threats that endanger Western security, and that would not disappear with withdrawal from Iraq and Afghanistan: terrorism, Islamist radicalism, nuclear threats (Pakistan, Iran), proxy wars and regional conflicts (Israel-Palestine, Iraq, Afghanistan, and Kashmir), and looming disintegration (Iraq, Afghanistan, Pakistan, and in the longer term in the Persian Gulf and the Arabian Peninsula).
This means that we cannot talk about withdrawing our troops, but only of redrawing the battle line farther West.
It is extremely doubtful that such a step would bring more security.
On the other hand, the West’s strategy in Afghanistan up to now has also yielded little progress, only strengthening the Taliban day by day.
So what should we do?
First, we need to define a clear political goal: a stable status quo in Afghanistan that will prevent the country from again becoming a battlefield of regional interests and an organizational base for Al Qaeda.
Without a sufficient military presence, as well as improved and reinforced reconstruction efforts, this goal is not attainable.
Second, a renewed regional consensus on Afghanistan’s future would also help avoid further destabilizing nuclear-armed Pakistan. This requires that Pakistan’s and Iran’s interests be included in this consensus, as well as India’s, Saudi Arabia’s and probably also China’s.
(The Kashmir conflict must, indirectly, play a role in this settlement, but the difficulties of including it should not be underestimated.)
Forging this consensus will not be an easy diplomatic task.
But it is feasible and should be the goal of a new conference on Afghanistan.
Third, a parallel effort at crisis containment – and perhaps even at finding solutions – is needed for the wider Middle East, Iraq, the Persian Gulf, and Iran.
It’s an equation with very many known unknowns, but if we do not try at least to mitigate these issues, the known unknowns will continue challenging all partial solutions.
But the big question remains whether the US and its European allies still have the strength, perseverance and far-sightedness for such an undertaking.
There are good reasons to doubt this.
The alternative would be a chaotic and dangerous future in this large hot spot.
Afghanistan may seem far away, but its chaos and violence are in fact just next door.
What Now?
More Europe!
The rejection of the European Union’s Constitution by French and Dutch voters forces us to think well beyond that treaty.
That much is clear from the current debate on the Community budget.
The naysayers’ victories show that sovereignty-based arguments that oppose any kind of European political union are on the march.
Euroskeptics, it seems, are gaining ground everywhere, and a kind of xenophobia is on the rise.
But xenophobia and sovereignty were not the primary impulses that propelled the “no” votes.
Above all, the “no” votes in France and Holland – and rising discontent in other member states, such as Germany – are the result of the inability of national governments and the Union to respond effectively to the problems that most concern citizens.
Not only anti-Europeans rejected the constitution; far from it.
Many Europeans are, in fact, calling on the EU to act to reduce unemployment and to intervene decisively in the international arena.
Many interpreted Europe’s internal division over the war in Iraq, with ordinary citizens overwhelmingly opposed to military intervention, as a sign of the Union’s weakness.
But the answer to such doubt and dismay is more Europe, not less.
The European Council’s summit on June 16-17 should give a clear sign that it recognizes this.
Most supporters of the Constitution believe that it will not only help build a citizens’ Europe, but also create better conditions for European economic development, and for the EU to act globally.
They are right.
It would be imprudent to assume that the French and Dutch “no” votes were not about discontent with Union policies; but that anger was directed against the French and Dutch governments, not Europe itself.
The fact is that citizens in every EU member country are increasingly aware that national policies are determined by decision making at the European level, over which they have little influence.
The European Constitution has little to do with this, but referenda are never confined to the actual questions put to voters.
Instead, they provide opportunities for citizens to express what they feel about the choices their governments make, particularly within the EU framework.
The 2004 elections for the European Parliament had already shown that the level of discontent with the Union was high.
Voters heavily punished almost all national governments.
Yet nobody thought that that election had changed the course of Europe.
Above all, the French and Dutch referendums confirmed that politics in the Union is now conducted “on the street,” and that it is no longer possible to “construct” Europe at a distance and by stealth.
This means that EU governments must respond to popular anxieties and make the Union more transparent and democratic.
This would be a lot easier with the Constitution in place, but there are measures that can and should be adopted now to make that possible.
First, the community budget should be structured so that it has a significant impact on growth and employment (a return to the voluntarism of the Delors Packages, now applied to the Lisbon Strategy).
Second, European governments must show a real commitment to act together.
A key opportunity presents itself with the celebration of the tenth anniversary of the Barcelona Declaration to define a common position to support democratic change in the Mediterranean by ceasing to back the political status quo there.
Finally, Council meetings should be open when legislative matters are at stake, so that citizens can know who voted for what and according to which criteria.
All of this can be decided at the next European Council, even before the constitutional problem is resolved.
This kind of action is more likely to win back a skeptical citizenry than any information campaign, however well designed.
At the same time, it is necessary to solve the Constitutional deadlock.
As already proposed by the Convention, this would mean separating constitutional matters per se from Union policy.
The real innovations are found in Part I and II of the proposed Constitution, in the definition of the normative and political identity of the Union, its competences, the new institutional balance – including the creation of a European Minister of Foreign Affairs – and, last but not least, the introduction of a Bill of Rights.
The part that was actually rejected and raises the most concerns among citizens of the member States is in Part III, which focuses on Union policies such as the Common Market, competition policy and the Common Agricultural Policy.
So the first and second parts could be ratified without new negotiations and could form the basis for the new Treaty, so that the Treaty of Nice would still apply; and the debate on the European social model would continue.
It is essential to reaffirm the normative essence of the Constitutional Treaty to protect the greatest achievement of the Constitutional Convention.
Diversity and inclusiveness, through the integration of European democracies with a common project, remains Europe’s great gift to the world.
It is what has made Europe an “international public good” to use former Brazilian foreign minister Celso Lafer’s felicitous turn of phrase.
Such a Europe is better placed to contribute to a fairer international order than the narrow, bitter Europe the xenophobes have in mind.
For Europe to remain a promise for the world, it must thrive as a public good for all its citizens.
Europe and Europeans cannot wait for a new treaty to show that the Union is able to fulfill that promise.
What Rebalancing?
TOKYO – The American economist Herbert Stein once said that if something cannot continue forever, it will not. In the case of imbalances between China and the West, however, the cut-off point still looks to be a long time in the future.
Five years ago, many people warned that excess spending in the West and undervalued exchange rates in Asia were producing unsustainable imbalances.
From 2005 to 2008, China’s bilateral surplus with the United States increased by 41%, and its trade surplus with Europe more than doubled.
After falling in 2009, China’s surplus with the US and Europe increased by 32% and 16%, respectively, in 2010.
Someone who fell asleep in August 2008 and woke up in 2010 would probably never guess that there had been any interruption whatsoever in China’s burgeoning imbalances with the West.
These surpluses are generated primarily within East Asian production networks.
Multinational corporations in Japan, South Korea, and elsewhere ship sophisticated parts and components to China for assembly and re-export to developed countries.
The China Customs Agency classifies this type of trade as “processing” trade.
In 2010, China ran deficits of more than $100 billion in processing trade with East Asia and surpluses of $100 billion with Europe and $150 billion each with the US and Hong Kong.
Its global surplus in processing trade in 2010 totaled $322 billion.
While rebalancing is not taking place in processing trade, it is occurring in “ordinary “trade (China’s other major customs regime).
Ordinary exports are produced using Chinese factors of production, and ordinary imports are intended for China’s internal market.
China’s balance in ordinary trade shifted from a surplus of $38 billion in 2005 to a deficit of $48 billion in 2010.
Researchers at the Centre D’Études Prospectives et D’Information Internationales, analyzing China’s ordinary trade using data up to 2007 (http://www.cepii.fr/anglaisgraph/workpap/summaries/2011/wp2011-03.htm), found that Europe (especially Germany) exported large volumes of automobiles and other consumer goods to China.
Moreover, East Asian countries exported increasing quantities of parts and components and capital goods to foreign-owned enterprises in China that produce for the local market.
By contrast, the share of ordinary US exports to China shrank, suggesting that China’s rebalancing is likely to be associated with continued large bilateral surpluses with the US.
Subsequent data indicate that this pattern is continuing.
In 2010, China’s ordinary-trade balance recorded a $71 billion deficit with East Asia and surpluses of $44 billion and $23 billion with the US and Europe, respectively.
Europe’s ordinary exports to China increased from $85 billion in 2009 to $115 billion in 2010.
By contrast, America’s ordinary exports to China increased more slowly, from $50 billion in 2009 to $64 billion in 2010.
Thus, firms in East Asia and Europe are benefiting more than firms in the US from increasing demand in China.
According to China Customs Statistics, America’s combined bilateral deficit in processing and ordinary trade in 2010 totaled $186 billion.
But this understates the size of the deficit, because the lion’s share of China’s processed exports to Hong Kong are trans-shipped to advanced economies (which means that Europe’s bilateral deficit is significantly higher as well).
By contrast, US data treat goods coming from China via Hong Kong as being exported from China, yielding a bilateral trade-deficit figure of $273 billion, up from $203 billion in 2005.
Many researchers warned in 2005 that imbalances between the US and East Asia were unsustainable, noting that they were driven by excess spending in the US and undervalued exchange rates in East Asia.
Excess spending was fueled by deterioration in the US fiscal balance, from a surplus of 2% of GDP in 2000 to a deficit of 4% of GDP in 2004.
Undervalued exchange rates in Asia were supported by accumulated reserves of almost $1 trillion in China, plus hundreds of billions of dollars elsewhere in the region.
Since 2005, US budget deficits have increased by another 6% of GDP, while China’s external reserves have increased by $2 trillion.
It is likely that at some point investors will be unwilling to continue lending to the US at low interest rates, and that China will regard continued reserve accumulation as a bad investment.
At that point, the US trade deficit will shrink.
If imbalances between the US and China are thus unsustainable, it makes sense for policymakers to pursue a soft landing.
In the case of the US, this requires recognizing that the government faces a budget constraint.
For China, it means redirecting saving away from reserve accumulation towards cash-strapped small and medium-size enterprises, as well as much-needed investments in education, health care, and affordable housing.
What Reset Button?
MOSCOW – The emergence of a Kremlin leader, President Dmitri Medvedev, without a KGB background, combined with the economic crisis, has inspired talk that when Barack Obama visits Moscow, America’s president will be seeing a country on the verge of a new political thaw, a revived perestroika .
But pushing the “re-set button” on US-Russia relations may be harder than Obama and his team imagined.
Russian (or Soviet) leaders opt for perestroika or a thaw only when forced to do so by dire conditions that threaten the regime’s survival.
An atmosphere of mortal fear, mutual suspicion, and hatred among the Communist elite was the catalyst for Nikita Khrushchev’s post-Stalin thaw.
For Mikhail Gorbachev in the 1980’s, the catalyst for his perestroika was the USSR’s growing economic paralysis.
For both men, the goal of clinging to power was a top priority.
Changing the system and easing their grip on power was a risky move that could undermine their authority.
But the risks of inertia seemed to be even higher.
In the end, having opted for change, both were forced to leave their posts prematurely, against their will.
As he revived centralized Kremlin control over Russian politics and public affairs, Vladimir Putin has been concerned primarily with minimizing challenges to state power, which he concentrated in his own hands.
To this end, he stripped the political system of competition, emasculated state institutions, marginalized the opposition, and basically eliminated public participation.
His power-building project was facilitated by high oil prices, but came at the cost of a steady deterioration in the quality of governance and abandonment of the goal of modernization.
With policymaking fully nontransparent and reduced to a very closed circle, and implementation delegated to an unaccountable bureaucracy, the inevitable result of Putin’s political model was pervasive corruption.
The desire to avoid public discontent and ensure social stability led to a suspension of reform.
Instead of creating incentives that would unleash public energies, the government pushed citizens farther and farther from politics and policymaking, thereby deepening social apathy and atomization.
Moreover, the opportunity provided by the oil boom was wasted.
Indeed, today Russia risks lagging even further behind the developed countries.
Its economy remains undiversified and uncompetitive, and its contribution to global technological progress is minuscule.
Worse still, economic growth based on exports of natural resources has proved unsustainable.
When oil prices were high and growing, the government could compensate for poor performance by throwing money at problems.
Today, with oil prices dramatically reduced, this largesse is no longer available, and economic experts agree that the growth potential of Russia’s petro-economy has been exhausted.
Despite all this, the situation is not sufficiently dire to push Russia’s leaders to open at least some channels of genuine public participation and yield any of their power.
The price of oil, at around $70 a barrel, may be half of what it was a year ago, but up from around $40 earlier this year.
Nor does the Russian economy’s contraction and the expected deepening of poverty (the World Bank’s report released in late June was grimmer about Russia than its previous report) presage an immediate catastrophe.
And, unlike in the late 1980’s and 1990’s, Russia is not indebted to foreign banks or international organizations, though it plans to resume foreign borrowing next year.
So the government will prefer to muddle through the crisis, rather than risk any decisive reform.
The goal of clinging to power remains the priority, and risk-aversion the main guideline.
The ruling elite are known to be torn by disputes and rivalries.
Just recently, two of Putin’s deputies gave interviews to two Western media outlets offering what sounded like starkly opposite visions for Russia’s development.
But such disputes never spill over into the broad public sphere; members of the elite are primarily concerned about social and political stability and would not stir the public by seeking support for an alternative policy course.
These delaying tactics are enabled by a lack of pressure from below.
Russians may be concerned by growing unemployment and reduced incomes, but this is not manifesting itself in any drive to organize or try to effect political change.
The public below, just like the leaders above, cherish political stability; the popularity ratings of both Prime Minister Putin and President Dmitri Medvedev remain above 70%.
Disgruntlement over the increasingly authoritarian governance may be common among business circles, elements of the neutered political opposition, liberal intellectuals, and even part of the bureaucracy.
But these forces are too timid and fragmented, with no drive for political action.
The current government’s tactic of muddling through without changing the political system or the structure of the economy is fraught with the risk of gradual decline.
To the Kremlin’s rulers, this may seem an acceptable cost for retaining power, but postponing reform will only aggravate Russia’s countless problems.
Besides, muddling through may prove unaffordable even in the short run, if oil prices decline again.
A dramatic curtailment of state resources may eventually push the government toward modernization, but it might also produce an uglier shift— toward harder political crackdown, economic nationalism and an essentially isolationist course.
This would be catastrophic for Russia— to say nothing of relations with the US.
What’s Happening to the US Economy?
CAMBRIDGE – The American economy has recently slowed dramatically, and the probability of another economic downturn increases with each new round of data.
This is a sharp change from the economic situation at the end of last year – and represents a return to the very weak pace of expansion since the recovery began in the summer of 2009.
Economic growth in the United States during the first three quarters of 2010 was not only slow, but was also dominated by inventory accumulation rather than sales to consumers or other forms of final sales.
The last quarter of 2010 brought a welcome change, with consumer spending rising at a 4% annual rate, enough to increase total real GDP by 3.1% from the third quarter to the fourth.
The economy seemed to have escaped its dependence on inventory accumulation.
This favorable performance led private forecasters and government officials to predict continued strong growth in 2011, with higher production, employment, and incomes leading to further increases in consumer spending and a self-sustaining recovery.
A one-year cut of the payroll tax rate by two percentage points was enacted in order to lock in this favorable outlook.
Unfortunately, the projected recovery in consumer spending didn’t occur.
The rise in food and energy prices outpaced the gain in nominal wages, causing real average weekly earnings to decline in January, while the continued fall in home prices reduced wealth for the majority of households.
As a result, real personal consumer expenditures rose at an annual rate of just about 1% in January, down from the previous quarter’s 4% increase.
That pattern of rising prices and declining real earnings repeated itself in February and March, with a sharp rise in the consumer price index causing real average weekly earnings to decline at an annual rate of more than 5%.
Not surprisingly, survey measures of consumer sentiment fell sharply and consumer spending remained almost flat from month to month.
The fall in house prices pushed down sales of both new and existing homes.
That, in turn, caused a dramatic decline in the volume of housing starts and housing construction.
That decline is likely to continue, because nearly 30% of homes with mortgages are worth less than the value of the mortgage.
This creates a strong incentive to default, because mortgages in the US are effectively non-recourse loans: the creditor may take the property if the borrower doesn’t pay, but cannot take other assets or a portion of wage income.
As a result, 10% of mortgages are now in default or foreclosure, creating an overhang of properties that will have to be sold at declining prices.
Businesses have responded negatively to the weakness of household demand, with indices maintained by the Institute of Supply Management falling for both manufacturing and service firms.
Although large firms continue to have very substantial cash on their balance sheets, their cash flow from current operations fell in the first quarter.
The most recent measure of orders for nondefense capital goods signaled a decline in business investment.
The pattern of weakness accelerated in April and May.
The relatively rapid rise in payroll employment that occurred in the first four months of the year came to a halt in May, when only 54,000 new jobs were created, less than one-third of the average for employment growth in the first four months.
As a result, the unemployment rate rose to 9.1% of the labor force.
The bond market and share prices have responded to all of this bad news in a predictable fashion.
The interest rate on 10-year government bonds fell to 3%, and the stock market declined for six weeks in a row, the longest bearish stretch since 2002, with a cumulative fall in share prices of more than 6%.
Lower share prices will now have negative effects on consumer spending and business investment.
Monetary and fiscal policies cannot be expected to turn this situation around.
The US Federal Reserve will maintain its policy of keeping the overnight interest rate at near zero; but, given a fear of asset-price bubbles, it will not reverse its decision to end its policy of buying Treasury bonds – so-called “quantitative easing” – at the end of June.
Moreover, fiscal policy will actually be contractionary in the months ahead.
The fiscal-stimulus program enacted in 2009 is coming to an end, with stimulus spending declining from $400 billion in 2010 to only $137 billion this year.
And negotiations are under way to cut spending more and raise taxes in order to reduce further the fiscal deficits projected for 2011 and later years.
So the near-term outlook for the US economy is weak at best.
Fundamental policy changes will probably have to wait until after the presidential and congressional elections in November 2012.
What Should Bretton Woods II Look Like?
NEW YORK – For those of us who have long claimed that the world’s international financial architecture needed deep reform, the call for a “Bretton Woods II” is welcome.
Of course, similar calls were made after the Asian and Russian crises of 1997-1998, but were not taken seriously by the rich industrial countries.
Now that these countries are at the center of the storm, perhaps they will now be serious.
Two fundamental problems exist with the call for reform.
First, it lacks content: it is unclear what any eventual Bretton Woods II discussions will be about.
Second, the process started the wrong way, by excluding most countries from the talks.
It is obviously good for the G-7 or a subset of G-7 members to show leadership, but no fundamental reform can occur without an inclusive process that gives both industrial and developing countries, and both large and small countries an adequate voice.
Global institutions, not ad hoc groups of countries, must be at the center of the reform effort.
The clearest issue right now is correcting the deficit of regulations that characterizes global financial markets.
Discussion must start by agreeing on regulatory principles .
An obvious one is that regulations must be comprehensive, to avoid the massive loopholes that led to the current turmoil.
Regulations should also have a strong counter-cyclical focus, preventing excessive accumulation of leverage and increasing capital and provisions (reserves) during booms, as well as preventing asset price bubbles from feeding into credit expansion.
Reliance on financial institutions’ internal models, the major focus of the Basel II agreement on banking regulation, should be discarded.
That strategy has now been exposed as perilous, and the use by financial institutions of similar risk models can lead to greater instability.
Any new regulatory system should be based on a well functioning network of national and regional authorities (still missing in the European Union) and include truly international supervision of financial institutions with a global reach.
Most agree that the International Monetary Fund should not be at the center of the regulatory system.
The Bank for International Settlements and the Basel Committee are better placed, but a fundamental reform is needed to broaden their membership and to avoid a major problem of the Basel Committee: its lack of representation of developing countries.
Three central issues of IMF reform should also be taken on board.
The first is the need for a truly global reserve currency, perhaps based on the IMF Special Drawing Rights (SDRs).
This would overcome both the inequities and the instability that is inherent in a global reserve system based on a national currency.
Today’s system is plagued by cycles of confidence in the dollar and by periodic shocks due to American policies that are adopted independently of their global impact and thus imposed on the rest of the world.
The second issue is the need to place the IMF, not the G-7 – or any other “G” – at the center of global macroeconomic policy coordination.
This is the only way to give developing countries a voice.
The multilateral surveillance on global imbalances that the Fund launched in 2006 was an interesting step in this direction, but it has lacked commitment by the parties, as well as teeth.
The third issue is developing countries’ major demand. The IMF should lend during balance-of-payments crises rapidly and without overburdening conditions, particularly when the source of the crisis is a rapid reversal of capital flows or a sharp deterioration in the terms of trade. This would make the IMF more like a central bank, providing liquidity in an agile way, just as advanced countries’ central banks have been providing funds on a massive scale recently.
In the case of the IMF, the financing for such liquidity could be counter-cyclical issues of SDRs.
In all these areas, the IMF should make more active use of regional institutions.
For a decade, I have proposed that the IMF of the future should be seen as the apex of a network of regional reserve funds – that is, a system closer in design to the European Central Bank or the United States Federal Reserve system.
A similar institutional design could be adopted for prudential policies.
A denser network of institutions seems better adapted to a heterogeneous international community, and it is likely to provide better services and give a stronger voice to smaller countries.
Finally, one major deficiency of the current international financial architecture is the lack of an institutional framework – i.e., a court similar to those created to manage bankruptcies in national economies – to manage debt overhangs at the international level.
The current system relies on ad hoc mechanisms, which generally operate too late, after high indebtedness has already imposed devastating effects.
The only regular institutional mechanism is the Paris Club, which deals exclusively with official financing. Bretton Woods II should resolve this problem by creating an international debt court.
The current financial crisis has made the need for reform of the international financial architecture patently clear.
But any summons to a “Bretton Woods II” conference must be concrete in its content.
A global system for prudential regulation and supervision; a revamped IMF managing a global reserve currency, coordinating global macroeconomic policy, and providing agile credit lines; and an international debt court – all of these must be on the agenda.
What’s in a BRIC?
SAO PAULO – Brazil, Russia, India, and China recently held their second annual summit in Brasilia.
Journalists continue to lavish attention on these so-called “BRIC” countries, but I remain skeptical of the concept.
Goldman Sachs coined the term in 2001 to call attention to profitable opportunities in what it considered “emerging markets.”
The BRICs’ share of world GDP rose from 16% in 2000 to 22% in 2008.
Collectively they did better than average in the subsequent global recession. Together, they account for 42% of world population and one-third of global economic growth in the past ten years.
Putting aside the United States (which ranks third in population), annual economic growth in the other four most populous countries – China, India, Indonesia, and Brazil – was above 5-6 % in 2000-2009.
Obviously, that is good news for the world economy, but an economic term has taken on a political life of its own, despite the fact that Russia fits poorly in the category.
As the Beijing Review commented, “when Goldman Sachs created the acronym BRIC in 2001, neither the economists nor the rest of the world imagined that Brazil, Russia, India, and China would finally sit together to build up a substantial platform one day.” In June 2009, the foreign ministers of the four countries met for the first time in Yekaterinburg, Russia, to transform a catchy acronym into an international political force.
The BRICs hold $2.8 trillion or 42% of global foreign reserves (though most of that is Chinese.)
So, in Yekaterinburg, Russian President Dmitri Medvedev declared that “there can be no successful global currency system if the financial instruments that are used are denominated in only one currency.” After China eclipsed the US as Brazil’s largest trading partner, China and Brazil announced plans to settle trade in their national currencies rather than dollars.
Although Russia accounts for only 5% of China’s trade, the two countries announced a similar agreement.
After the recent financial crisis, Goldman Sachs upped the ante and projected that the combined GDP of the BRICs might exceed that of the G-7 countries by 2027, about 10 years sooner than initially believed.
Such simple extrapolations of current economic growth rates often turn out to be mistaken because of unforeseen events.
But, whatever the merits of this linear economic projection, the term BRICs still makes little sense for long-term assessments of global power relations.
While a BRICs meeting may be convenient for coordinating some short-term diplomatic tactics, the term lumps together disparate countries that have deep divisions.
It makes little sense to include Russia, a former superpower, with three developing economies.
Of the four members, Russia has the smallest and most literate population and a much higher per capita income, but, more importantly, many observers believe that Russia is declining while the other three are rising in power resources.
Russia today not only suffers more from the aftermath of the global recession, but it faces severe long-term liabilities: a lack of diversified exports, severe demographic and health problems, and, in Medvedev’s own words, an urgent need for “modernization.”
As The Financial Times recently pointed out, just two decades ago “Russia was a scientific superpower, carrying out more research than China, India and Brazil combined.
Since then it has been left behind not only by the world-beating growth of Chinese science but also by India and Brazil.”
When one looks closely at the numbers, the heart of the BRIC acronym is the rise in China’s resources, but the role of Brazil is a pleasant surprise.
When the BRIC acronym was first invented, The Economist objected that “a country with a growth rate as skimpy as its swimsuits, prey to any financial crisis that was around, a place of chronic political instability, whose infinite capacity to squander its obvious potential was as legendary as its talent for football and carnivals, did not seem to belong with those emerging titans.”
Now, as The Economist notes, “in some ways, Brazil outclasses the other BRICs.
Unlike China, it is a democracy.
Unlike India, it has no insurgents, no ethnic and religious conflicts nor hostile neighbors.
Unlike Russia, it exports more than oil and arms and treats foreign investors with respect.”
Since curbing inflation and instituting market reforms in the 1990’s, Brazil has shown an impressive rate of economic growth in the range of 5%.
With a territory nearly three times the size of India’s, 90% of its 200 million people literate, a $2 trillion GDP equivalent to Russia’s and per capita income of $10,000 (three times India’s and nearly twice China’s), Brazil has impressive power resources.
In 2007, the discovery of massive offshore oil reserves promised to make Brazil a significant power in the energy arena as well.
Brazil, like the other BRICs, also faces a serious number of problems.
It ranks 75th out of 180 countries on Transparency International’s corruption perceptions index (compared to 79th for China, 84th for India, and 146th for Russia).
The World Economic Forum ranks Brazil 56th among 133 countries in terms of economic competitiveness (compared to 29th for China, 49th for India, and 63rd for Russia).
Poverty and inequality remain serious problems.
Brazil’s Gini coefficient is .57 (1.0 is perfect inequality, with one person receiving all income), compared to .45 for the United States, .42 for China, .37 for India and .42 for Russia.
So, how seriously should analysts take the term BRIC?
As an indicator of economic opportunity, they should welcome it, though it would make more sense if Indonesia replaced Russia.
In political terms, China, India, and Russia are competitors for power in Asia, and Brazil and India have been hurt by China’s undervalued currency.
Thus, BRIC is not likely to become a serious political organization of like-minded states.
What Size is the Fire Exit?
BRUSSELS – The eurozone is being thrown into turmoil by a collective rush to the exits by investors.
Yields on government debt of peripheral eurozone countries are skyrocketing, because investors do not really know what the risks are.
Officials want to be reassuring.
Investors should not worry, they argue, because the current bailout mechanism – the European Financial Stability Facility (EFSF) – has worked so far without any haircut for bondholders, and will continue to be applied until about 2013.
Only after that date would any new mechanism open the door for losses for private investors, and only for debt issued after that date.
But markets do not trust this message – and for good reason: it is not credible, because it makes no economic sense.
After all, the claim that the risk of loss will arise only for debt issued after the new crisis-resolution mechanism starts in 2014 implies that all debt issued until then is safe, and that insolvency can occur only in some distant future, rather than now, as in Greece and Ireland. In effect, EU officials are saying to investors, “Whom do you believe – us or your own eyes?”
Moreover, for too many investors, Portugal, with its poor growth prospects and insufficient domestic savings to fund the public-sector deficit, looks like Greece.
And Spain clearly has to grapple with its own Irish problem, namely a huge housing over-hang – and probably large losses in the banking sector – following the collapse of an outsized real-estate bubble.
The problems of Portugal and Spain might be less severe than those of Greece and Ireland, but this apparently is not enough to induce investors to buy their government debt.
A danger these countries share is thus the acute danger of large-scale runs on their banking systems.
So far, investors trying to exit first have been made whole.
Holders of Greek debt maturing now are repaid courtesy of the €110 billion bailout program, and holders of Irish bank bonds have been given a guarantee by the Irish government, whose promises have in turn been underwritten by the EFSF.
The EFSF will also provide funds to ensure that Irish banks’ depositors can get their money back today.
The problem with this approach is that it creates the wrong incentives.
Investors have now learned that the first to sell will avoid losses.
The situation resembles that of a crowded cinema with only one exit.
Everyone knows that in case of fire, only the first to leave will be safe.
So, if the exit is small, even the faintest whiff of smoke can trigger a stampede.
But if the exit looks comfortably large, the public will be much more likely to remain calm, even if parts of the room are already filling with smoke.
For the financial market, the size of the exit depends on the funds available to make short-term investors whole.
Unfortunately, the size of the EFSF looks inadequate to finance a collective exit by short-term investors.
When the EFSF was created, it was assumed that the only problem was to ensure financing for the government deficits of the four prospective problem countries (Portugal, Ireland, Greece, and Spain).
From this perspective, the headline figure of €750 billion allocated to the EFSF looked adequate.
But the EFSF’s founders did not take into account banks’ enormous short-term liabilities, which in a crisis effectively become government debt, as Ireland has been the most recent to demonstrate.
The EFSF might be just enough to guarantee the public debt of the four problem countries, but certainly not their banking sectors’ liabilities as well.
For example, the Spanish banking sector alone has short-term liabilities of several hundred billion euros.
To return to the cinema analogy: investors know that the exit is not large enough to allow them all to squeeze through at the same time.
So each one want to be among the first to get out.
The official line so far has been “no default,” meaning no sovereign default or that of any bank can be considered.
If this line is to be maintained, the exit door must immediately be made much wider, and huge fire extinguishers must be brandished.
The International Monetary Fund and the European Central Bank must show investors that they have enough funding to finance the simultaneous exit of all short-term investors.
It could work.
A show of overwhelming force might restore calm to the markets.
But it is a risky proposition: if investors exit nonetheless, the required funds might be so large that creditor countries’ taxpayers’ revolt.
The alternative is to change strategy and focus instead on investors’ incentives.
Patient investors should be rewarded.
In particular, they should be able to expect to be better off than those rushing to the exit.
This approach depends on two major policy shifts.
First, governments should not be pushed into insolvency just to save all banks.
This means that the Irish government (maybe the next one) should demand that holders of bank bonds share the losses, perhaps by offering them a simple debt-equity swap.
Doubts about the Irish government’s solvency would then disappear quickly, and its guarantee of bank deposits would no longer look so shaky.
Something similar might have to be done for the Spanish banking system’s exposure to the local housing market.
The second component of a permanent anti-crisis mechanism is a floor for bond prices – and thus a ceiling for losses.
The yields and volatility of longer-term bonds should then fall relative to short-term securities, allowing peripheral governments to finance themselves reliably and at reasonable cost.
None of this would resolve Europe’s fundamental problems, namely weak fiscal positions, poorly functioning financial sectors, and lack of competitiveness.
But all of them would be easier to manage with calmer financial markets.
What’s Left After 1989?
NEW YORK – Twenty years ago, when the Berlin Wall was breached and the Soviet empire was collapsing, only die-hard believers in a communist utopia felt unhappy.
A few people, of course, clung to the possibility of what was once called “actually existing socialism.”
Others criticized the triumphalism of the “new world order” promised by George H.W. Bush.
And the way West Germany rolled over the wreckage of its East German neighbor seemed almost like an act of cruelty.
Still, 1989 was a good time to be alive (except in China, where the democrats were put down).
Many of us felt that we were seeing the dawn of a new liberal age, in which freedom and justice would spread, like fresh flowers, across the globe.
Twenty years on, we know this was not to be.
Xenophobic populism is stalking democracies in Europe.
Social-democratic parties are shrinking, while right-wing demagogues promise to protect “Western values” from the Islamic hordes.
And the economic debacles of the last few years seem to bear out Mikhail Gorbachev’s recent warning that “Western capitalism, too, deprived of its old adversary and imagining itself the undisputed victor and incarnation of global progress, is at risk of leading Western society and the rest of the world down another historical blind alley.”
The way it looks now, liberals, in the “progressive” American sense of the word, may actually have been among the losers of 1989.
Social democrats were always despised by communists, and vice versa.
But many social-democratic ideals, rooted in Marxist notions of social justice and equality, were thrown out, like the proverbial baby, with the bathwater of communism.
This process was already underway before the fall of the Berlin Wall, with the free-market radicalism of the Thatcher-Reagan era.
Society, Margaret Thatcher once famously declared, doesn’t exist.
Only individuals and families counted.
It was everyone for themselves.
For many people, this had the ring of liberation – from overregulated markets, overbearing trade unions, and class privilege. That is why it was called neo-liberalism.
But free-market radicalism undermined the role of the state in building a better, more just, and more equal society.
Neo-liberals are not so much interested in justice as in greater efficiency, more productivity, the bottom line.
At the same time that neo-liberals were slashing and burning their way through old social-democratic arrangements, the left was dissipating its energies on cultural politics, “identity,” and ideological multiculturalism.
Democratic idealism was once the domain of the left, including social democrats and liberals.
In the United States, it was Democrats, such as John F. Kennedy, who promoted freedom around the world.
But, in the late twentieth century, it became more important to many leftists to save “Third World” culture, no matter how barbaric, from “neo-colonialism,” than to support equality and democracy.
People on the left would defend brutal dictators (Castro, Mao, Pol Pot, Khomeini, et al.) simply because they opposed “Western imperialism.”
As a result, all politics that were derived, no matter how loosely, from Marxism, lost credibility, and finally died in 1989.
This was naturally a disaster for communists and socialists, but also for social democrats, for they had lost an ideological basis for their idealism.
And, without idealism, politics becomes a form of accounting, a management of purely material interests.
This explains why Italians, and later Thais, chose business tycoons to lead their countries.
They hoped that men who managed to accumulate so much personal wealth could do the same for their voters.
Yet the rhetoric of idealism has not quite disappeared.
It merely shifted from left to right.
This, too, began with Reagan and Thatcher. They took up Kennedy’s promotion of democracy in the world.
Once the left abandoned the language of internationalism – democratic revolution, national liberation, and so forth – it was taken up by neo-conservatives.
Their promotion of American military force as the strong arm of democracy may have been misguided, crude, arrogant, ignorant, naïve, and deeply dangerous, but it was indisputably idealistic.
The allure of revolutionary élan has drawn some former leftists to the neo-conservative side.
But most liberals were deeply alarmed by the neo-cons, without being able to find a coherent answer.
Having lost their own zest for internationalism, a common response among liberals to neo-con radicalism has been a call for “realism,” non-interference in others’ affairs, and withdrawal from the world.
This may be the wiser course in many cases, but it is hardly inspiring.
So it is no wonder that a left-wing internationalist, such as French Foreign Minister Bernard Kouchner, has found a kind of home for his idealism in Nicolas Sarkozy’s conservative government.
For the first time since the Kennedy administration, the US is one of the only liberal democracies in the world with a center-left government.
Can President Obama lead the way to a new era of social and political idealism?
It seems unlikely.
His efforts to provide better healthcare for Americans, for example, is not so much an innovation, as an attempt to catch up with arrangements which most Europeans and Japanese have long taken for granted.
And for this he is already being called a “socialist” by his enemies.
Obama is neither a socialist, nor a mere political accountant.
He has some modest ideals, and may yet be an excellent president.
But what is needed to revive liberal idealism is a set of new ideas on how to promote justice, equality and freedom in the world.
Reagan, Thatcher, and Gorbachev, assisted in the end of an ideology, which once offered hope, and inspired real progress, but resulted in slavery and mass murder.
We are still waiting for a new vision, which will lead to progress, but this time, we hope, without tyranny.
What’s Left of Confucianism?
BEIJING – The Chinese government’s very public display of compassion and transparency in response to the devastating earthquake in Sichuan province appears to have strengthened its authority and its bonds with ordinary Chinese people.
The government and army worked hand in hand with legions of volunteers and private networks to rescue quake victims.
Even die-hard cynics were won over by Prime Minister Wen Jiabao’s emotional comforting of the survivors.
But heroic rescue efforts will not be able to help the government forever, so it is worth asking what can provide long-term political legitimacy.
After all, communism has lost its capacity to inspire the Chinese.
So what should replace it?
Most Westerners think the answer is liberal democracy, as did many Chinese liberals in the twentieth century.
But there is another answer, which takes the form of the old and venerable tradition of Confucianism, which is being revived by government officials, critical intellectuals, and ordinary citizens.
The opening ceremony of the Olympic games will highlight this revival: it will feature not quotes from Marx, but sayings from the Analects of Confucius.
Such sayings as “The world’s peoples are all brothers” and “Isn’t one of life’s greatest pleasures to have friends visiting from afar?” will be beamed to billions worldwide, expressing the best that Chinese culture has to offer.
Here, however, we run into trouble.
Ever since the Han dynasty (more than 2,000 years ago), Chinese governments have manipulated the most prominent political interpretations of Confucianism for their own purposes.
Confucianism has been combined with Legalism, China’s other main political tradition, to justify such practices as blind obedience to the ruler, subordination of women, and the use of harsh punishments.
The “official” Confucianism being revived today may be less dangerous – it emphasizes social harmony, meaning the peaceful resolution of conflicts – but it remains a conservative morality.
But there is another interpretation of Confucianism – let’s call it “left Confucianism” – that stresses intellectuals’ obligation to criticize bad policies, obliges governments to provide for the people’s material well-being and support those without key family relations, and calls for governments to adopt a more international-minded outlook and to rely on moral power rather than military might to pursue political aims.
It leaves open basic metaphysical commitments and takes a plural and tolerant view of religious life.
It emphasizes equality of opportunity in education as well as meritocracy in government, with leadership positions being distributed to the community’s most virtuous and qualified members.
Such values owe their origin to the “original Confucianism” of Confucius, Mencius, and Xunzi, which existed before Confucianism became established as state orthodoxy.
In imperial times, the critical tradition was carried forward by such scholars as Huang Zongxi.
Today, new Confucian leftists such as Gan Yang are calling for the creation of a “Confucian socialist republic.”
Confucian scholars such as Jiang Qing openly acknowledge that their interpretation of Confucianism most closely parallels socialist ideals: not the “actually existing socialism” in today’s China, but the socialist ideals defended by Karl Marx and others.
This Confucian tradition aims to influence contemporary politics, but it also remains separate from state power and orthodoxy, always ready to point to the gap between ideals and reality.
Indeed, left Confucianism’s departure from the status quo is precisely the point: it is meant to provide a moral standard for social critics and to inspire visions of a more desirable political future.
Unlike communism, it offers a future that derives its legitimacy from tradition and building upon what the past has to offer – including the socialist tradition – rather than destroying it.
Thus, left Confucians favor institutional reform, arguing that the long-term stability and legitimacy of political institutions requires that they be founded on Chinese traditions.
Jiang Qing advocates a tri-cameral legislature – a democratically elected People’s House representing the common people’s interests, a House of Exemplary Persons to secure the good of all those affected by government policies, including foreigners and minority groups, and a House of Cultural Continuity that would maintain China’s various religions and traditions.
Such concrete proposals for political reform inspired by Confucian values can rarely be published in mainland China.
In fact, there are fewer constraints imposed on public discussion of liberal-democratic institutions precisely because few Chinese are inspired by Western-style liberal democracy.
Today, the most viable alternative to China’s political status quo is left Confucianism.
What’s So Good about America’s Tax Package?
CAMBRIDGE –The tax package agreed to by President Barack Obama and his Republican opponents in the United States Congress represents the right mix of an appropriate short-run fiscal policy and a first step toward longer-term fiscal prudence.
The key feature of the agreement is to continue the existing 2010 income-tax rates for another two years with no commitment about what will happen to tax rates after that.
Without that agreement, tax rates would have reverted in 2011 to the higher level that prevailed before the Bush tax cuts of 2001.
That would mean higher taxes for all taxpayers, raising tax liabilities in 2011 and 2012 by about $450 billion (1.5% of GDP).
Because America’s GDP has recently been growing at an annual rate of only about 2% – and final sales at only about 1% – such a tax increase would probably have pushed the US economy into a new recession.
Although the new tax law is generally described as a fiscal stimulus, it is more accurate to say that it avoids a large immediate fiscal contraction.
The long-term implications of the agreement stand in sharp contrast both to Obama’s February 2010 budget proposal and to the Republicans’ counter-proposal.
Obama wanted to continue the 2010 tax rates permanently for all taxpayers except those with annual incomes over $250,000.
The Republicans proposed continuing the 2010 tax rates permanently for all taxpayers.
By agreeing to limit the current tax rates for just two years, the tax package reduces the projected national debt at the end of the decade (relative to what it would have been with the Obama budget) by some $2 trillion or nearly 10% of GDP in 2020.
That reduction in potential deficits and debt can by itself give a boost to the economy in 2011 by calming fears that an exploding national debt would eventually force the Federal Reserve to raise interest rates – perhaps sharply if foreign buyers of US Treasuries suddenly became frightened by the deficit prospects.
The official budget arithmetic will treat the agreement on personal-income tax rates as a $450 billion increase in the deficit, making it seem like a big fiscal stimulus.
But the agreement only maintains the existing tax rates, so taxpayers do not see it as a tax cut.
It would be a fiscal stimulus only if taxpayers had previously expected that Congress and the administration would allow the tax rates to rise – an unlikely prospect, given the highly adverse effects that doing so would have had on the currently weak economy.
Even for those taxpayers who had feared a tax increase in 2011 and 2012, it is not clear how much the lower tax payments will actually boost consumer spending.
The previous temporary tax cuts in 2008 and 2009 appear to have gone largely into saving and debt reduction rather than increased spending.
It is surprising, therefore, that forecasters raised their GDP growth forecasts for 2011 significantly on the basis of the tax agreement.
A typical reaction was to raise the forecast for 2011 from 2.5% to 3.5%.
While an increase of this magnitude would be plausible if a forecaster had previously expected tax rates to increase in 2011, it would not have been reasonable to forecast 2.5% growth in the first place with that assumption in mind.
So, either the initial 2.5% forecast was too high or the increase of one percentage point is too large.
What is true of the agreement is also true of the decision, as part of that agreement, to maintain unemployment insurance benefits for the long-term unemployed.
This, too, is essentially just a continuation of the status quo.
No new benefit has been created.
The most substantial potential boost to spending comes from a temporary reduction of the payroll tax, lowering the rate paid by employees on income up to about $100,000 from 6.2% to 4.2%.
But, while the decline in tax payments will be about 0.8% of GDP, it is not clear how much of this will translate into additional consumer spending and how much into additional saving.
Because this tax cut will take the form of lower withholding from weekly or monthly wages, it may seem more permanent than it really is, and therefore have a greater impact on spending than households’ very feeble response to the previous temporary tax changes.
The final component of the agreement is temporary acceleration of tax depreciation, allowing firms in 2011 to write off 100% of capital investment immediately, in contrast to the current rule, which stipulates a 50% immediate write-off, followed by depreciation of the remaining 50% over the statutory life of the equipment.
But, at a time when interest rates are very low and large businesses have enormous amounts of cash on their balance sheets, this change in the timing of tax payments is not likely to do much to stimulate investment.
A greater stimulus to business investment may come from the perception that Obama’s agreement to extend the personal-income tax cuts for high-income individuals signals his administration’s reduced antagonism to business and the wealthy.
Obama’s recent statement that he favors reforming personal and corporate taxes by lowering rates and broadening the tax base reinforces that impression.
Let’s hope that’s true.
What’s Stopping Women?
PRINCETON – When I wrote the cover article of the July/August issue of The Atlantic, entitled “Why Women Still Can’t Have It All,” I expected a hostile reaction from many American career women of my generation and older, and positive reactions from women aged roughly 25-35.
I expected that many men of that younger generation would also have strong reactions, given how many of them are trying to figure out how to be with their children, support their wives’ careers, and pursue their own plans.
I also expected to hear from business representatives about whether my proposed solutions – greater workplace flexibility, ending the culture of face-time and “time machismo,” and allowing parents who have been out of the workforce or working part-time to compete equally for top jobs once they re-enter – were feasible or utopian.
What I did not expect was the speed and scale of the reaction – almost a million readers within a week and far too many written responses and TV, radio, and blog debates for me to follow – and its global scope.
I have conducted interviews with journalists in Britain, Germany, Norway, India, Australia, Japan, the Netherlands, and Brazil; and articles about the piece have been published in France, Ireland, Italy, Bolivia, Jamaica, Vietnam, Israel, Lebanon, Canada, and many other countries.
Reactions differ across countries, of course.
Indeed, in many ways, the article is a litmus test of where individual countries are in their own evolution toward full equality for men and women.
India and Britain, for example, have had strong women prime ministers in Indira Gandhi and Margaret Thatcher, but now must grapple with the “woman-as-man” archetype of female success.
The Scandinavian countries know that women around the world look to them as pioneers of social and economic policies that enable women to be mothers and successful career professionals, and that encourage and expect men to play an equal parenting role.
But they are not producing as many women managers in the private sector as the United States is, much less at the top ranks.
The Germans are deeply conflicted.
One major German magazine decided to frame my contribution to the debate as “career woman admits that it’s better to be home.”
Another (more accurately) highlighted my emphasis on the need for deep social and economic change to allow women to have equal choices.
The French remain studiously aloof, even a little disdainful, as befits a nation that rejects “feminism” as an anti-feminine American creation and manages to produce a leader who is simultaneously as accomplished and as elegant as Christine Lagarde, the head of the International Monetary Fund.
Of course, the example of her predecessor, Dominique Strauss-Kahn, and other stories about French male behavior that would count as clear sexual harassment in the stodgy US, suggest that perhaps a bit more feminisme a la Française is in order.
Beyond Europe, Japanese women lament how far they must still go in a relentlessly male and sexist culture.
The Chinese now have a generation of educated, empowered young women who are not sure whether they want to marry at all, owing to the constraints that a husband (and a mother-in-law) would place on their freedom.
Brazilian women point with pride to their president, Dilma Rousseff, but also underscore how much discrimination remains.
In Australia, with its robust work-life debate, women point to the success of Julia Gillard, the first woman prime minister, but note that she has no children (nor does German Chancellor Angela Merkel, the first woman to lead her country).
The global nature of this debate demonstrates at least three important lessons.
First, if “soft power” means exercising influence because “others want what you want,” as Joseph Nye puts it, then women the world over want what American feminists began fighting for three generations ago.
Second, Americans, not surprisingly, have much to learn from other countries’ debates, laws, and cultural norms.
After all, women have ascended the political ladder faster in many other countries than they have in the US.
Indeed, the US has never had a woman president, Senate majority leader, Secretary of the Treasury, or Secretary of Defense.
Finally, these are not “women’s issues,” but social and economic issues.
Societies that discover how to use the education and talent of half their populations, while allowing women and their partners to invest in their families, will have a competitive edge in the global knowledge/innovation economy.
Of course, hundreds of millions of women around the world can only wish that they had the problems about which I wrote.
Last week brought news of yet another murder of a women’s rights activist in Pakistan; evidence that the Egyptian military may be deliberately using sexual assault to deter women from demonstrating in Cairo’s Tahrir Square; a horrific report from the New York-based Women’s Media Center about Syrian government forces’ use of sexual violence and gang rape; and a video of a Taliban commander brutally executing a woman for adultery as his fellow soldiers and villagers cheered.
Those are just the most extreme cases of physical violence that many women face.
Worldwide, more than a billion women confront grinding and overt gender discrimination in education, nutrition, health care, and salaries.
Women’s rights are a global issue of the highest importance, and it is necessary to focus on the worst violations.
Still, consider a recent matter-of-fact report from a sober and respected US magazine.
In an article on “Women in Washington,” the National Journal observed that women in the US capital have come a long way, but “still face career barriers, and often the biggest one is having a family.”
If “having a family” is still a career barrier for women, but not for men, that, too, is a matter of women’s rights (and thus of human rights).
In the global debate about work, family, and the promise of gender equality, no society is exempt.
What’s the Beef in South Korea?
NEW YORK – At the outset of the ongoing violent protests in South Korea over imported beef from the United States, the entire cabinet of South Korean President Lee Myung-bak offered to resign. Last week, President Lee fired three of them.
But beef, it turns out, represents just the tip of the iceberg of grievances against President Lee.
Only four months in office, his approval rating is down to single digits.
Lee won the December 2007 election with 48.7% of the vote, having run on the “747” platform, promising 7% annual GDP growth, per capita income of $40,000, and to make Korea the world’s seventh largest economy (up from 13th currently).
During his inauguration speech, he vowed to revive the economy, strengthen relations with the US, and deal with North Korea.
So what went wrong?
The economy is slowing – the Bank of Korea cut its growth forecast for this year to 4.7%, while the OECD expects only 4.3% growth – inflation is rising, and some are concerned that Lee’s policies are too geared toward foreign investors and big business.
Lee also must confront factors beyond his control, such as soaring oil prices and the global credit crunch.
Beyond the economy, Lee has been faced with charges of appointing officials with questionable ethics and of heavy-handed leadership (his nickname is “Bulldozer”), which is reflected in efforts to push through a controversial cross-country canal system and an unpopular proposal to privatize the healthcare system.
Furthermore, Lee’s hard-line approach to North Korea – very different from that of his predecessors – has resulted in a popular backlash.
To be sure, as North Korea seemingly snubbed the international community in recent years, there was considerable popular discontent with the previous two administrations’ “sunshine” policy, which emphasized peaceful cooperation prior to eventual Korean unification.
But now, with the North’s destruction of key elements of its nuclear program, international negotiations appear to be bearing fruit, and Lee’s tougher stance has gained less approval than might have been anticipated when he came to office.
The combined effect of these developments has been to erode Lee’s reputation precipitously.
Now, on top of everything, comes the beef controversy.
In April, on his first foreign trip following his inauguration, Lee traveled to the US.
On the eve of the visit, his government agreed to lift the five-year-old ban on US beef imports as part of efforts to improve bilateral ties following years of up-and-down relations during former President Roh Moo-hyun’s administration.
While most in the West applauded Lee’s visit, the reaction in Korea was significantly more negative.
Many in Korea viewed the beef decision as having been hastily taken, and without appropriate consultation of all relevant parties.
In addition, significant segments of the population saw the agreement as Lee selling out or kowtowing to the Americans.
The public reaction began with a demonstration in Seoul on May 2 in which hundreds of teenagers held a candlelight vigil.
Soon, tens of thousands of Koreans joined the protests.
Lee seems to have misjudged the strength of his election victory and the currents of opinion in several important ways.
Given the nationalist sentiments motivating the beef protesters, the strength of opposition forces, and widespread hostility to opening and privatizing the South Korean economy further, Lee, whose authoritarian style of management reminds many of the era of military rule, will now need to move forward carefully.
Lee must reach out to the opposition, both within his party and outside it, to build agreement or negotiate compromise on the contentious issues that his administration faces.
He must reach out to the people of Korea and demonstrate that he is willing to listen to their concerns and act accordingly.
Finally, he must act on his campaign promises to build a more prosperous and confident Korea.
The upside of all this political turmoil is that it demonstrates the vigor of Korean democracy.
Lee’s task now is to discover how best to take advantage of this new political activism.
He has faced political adversity before, and he will again.
And, with approval ratings in the single digits, there’s nowhere to go but up.
What’s Wrong with Ethnic Profiling?
BRUSSELS – Several years ago, as terrorism, immigration, and unrest in suburban Paris were at the top of the news in France, a French police officer confided to a researcher: “If you consider different levels of trafficking, it is obviously done by blacks and Arabs.
If you are on the road and see a black man or a man with Arabic features, you say to yourself, ‘He doesn’t look French,’ and then you might stop him to see if he has papers.”
This police officer was describing a textbook example of “ethnic profiling”: law enforcement officials use of stereotypes, rather than specific information about behavior, in deciding to stop, search, or detain people.
Ethnic profiling is illegal in Europe.
It is ineffective in apprehending criminals.
It is counter-productive in the campaign against terrorism.
But police officers across Europe continue to use it.
The inefficiency of ethnic profiling was highlighted in early May, when the British government released figures showing that, of the more than 117,000 police stops made between 2007 and 2008, only 72 led to an arrest for terrorism-related offences.
Other major European countries do not collect data on police stops broken down according to the targets’ ethnic or religious background.
But private research and anecdotal reports provide a frighteningly similar picture.
A massive data-mining exercise in Germany from 2001 to 2003 trawled through personal information on 8.3 million people and failed to find a single terrorist.
Stops and searches conducted under counter-terrorism powers in Europe have produced few terrorism charges and no convictions.
Separate studies in Britain, the Netherlands, Sweden, and the United States have concluded that ethnic profiling wastes time and resources.
As a new report by the Open Society Justice Initiative shows, by targeting ethnic minorities, police alienate some of the very people on whom they depend for cooperation and intelligence.
And by pre-selecting fixed categories of people for heightened scrutiny, the authorities overlook those who do not fit the profile.
A young Spanish man who is a member of an ethnic minority group put it this way: “I worry when I go on the street that the police will stop me and ask me for my papers because of the color of my skin, by my tone of skin, by my way of walking.”
Given its failings, why is ethnic profiling so widespread?
The answer is simple.
When the police use ethnic profiling, they project an image of being tough on crime and terrorism.
This appeases public opinion, which demands robust anti-terrorism action.
Following the September 2001 attacks in New York, and again after the bombings in Madrid in 2004 and London in 2005, law-enforcement authorities across Europe launched mass-arrest operations, undertook widespread surveillance of mosques, carried out stops and searches of people who appeared to be Muslim, and used other intrusive measures that disrupted the lives of – and in many cases humiliated – law-abiding European citizens.
As public anxiety has abated, and senior officials have felt less pressure to show that they are doing something, the most flagrant abuses have declined.
But such practices are still being applied to a lesser degree, and they can be pulled out of the arsenal whenever political or social conditions dictate.
Fortunately, some of Europe’s leaders recognize the problem.
In late April, the European Parliament issued a report highlighting the danger that unrestricted data mining that relies on racial, ethnic, or national origin would subject innocent people to arbitrary stops, travel restrictions, and bans on employment or banking.
The report called for legislation to protect against ethnic profiling.
The solution is not to ignore the threat of terrorism, but to address the threat more intelligently.
Over the past two years, a project that our organization undertook with police forces and civil-society groups in Hungary and Spain found that, when stops were systematically monitored and data publicly reported, the proportion of stops that produced an arrest or other law-enforcement outcome actually increased.
Police work became more efficient.
This makes sense.
When officers are required to articulate grounds for suspicion, they are more likely to rely on behavioral factors rather than prejudice.
In the future, the European Union and its member states should fund more collaboration between police and minority communities.
The EU should combat radicalization by addressing exclusion, not by conflating conservative religious faith with terrorism.
And it should make clear that police may not use ethnic, racial, or religious stereotypes.
By treating people as suspicious purely because of who they are, how they look, or where they pray, rather than what they do or have done, ethnic profiling threatens the very ethos of the EU, a union firmly rooted in values of liberty, democracy, and respect for human rights and fundamental freedoms.
What\u0027s Wrong with Europe\u0027s Right?
WARSAW: Everywhere in Europe, traditional right wing parties are in crisis.
Britain's Tories appear on a suicidal march to isolating themselves in an imaginary little England.
A civil war grips the French right, with a Euro MP grandson of Charles de Gaulle abandoning the Gaullists to join Jean-Marie Le Pen's National Front.
Even Germany's rock solid Christian Democrats are poised over an abyss of scandal.
Only the extreme right-wing Freedom Party of Austria's Jörg Haider is on the march.
Is Europe's right doomed to extinction or extremism?
I am neither a man of the left, nor of the right.
Still, the troubles of the right should worry all thinking democrats; and these troubles are not confined to Europe's western half.
Two years ago I admired the professionalism with which Poland's and Hungary's rightist parties came to power.
Since then, like Western Europe's conservatives, they managed to – at least in political terms – botch nearly everything.
Both movements now garner only around 20% of support in opinion polls.
So-called post-communists are flying high with around 70%.
Perhaps the collapsing popularity of the right in our new democracies tells something about the right in Europe's old democracies.
For like their Western counterparts, the Polish and Hungarian conservatives are caught between their increasingly unappealing neo-liberalism and their increasingly anachronistic communitarian traditions.
Fidesz in Hungary and the Solidarity Electoral Alliance (AWS) in Poland gained power two years ago because of a reaction to their post-communist predecessors.
During their tenures, neither post-communist party rocked the reform boat very much, nor did they threaten democracy.
Yet the voters were ready to move away from the old ties – the electorate had become much younger in the 1990s and the improvements over the old regime, after the recession of the early 1990s had run its course and the reform policies began to pay off, became palpable.
In fact, people may have been somewhat ashamed at having allowed the post-communists to win the second round of democratic elections in mid-1990s.
The right always saw the post-communist interlude as a type of locust years – a time when the seeds of reform withered.
So the rightist rhetoric hardened.
No longer was it neo-liberal.
What we heard was a robust form of Christian conservatism unheard since the days of de Gaulle, Adenauer, and de Gasperi – and the communitarian tone helped sweep the post-communists away.
The right in Poland and Hungary used the communitarian rhetoric of Christian conservatism, but once in power, they reverted to their original programs and governed like neo-liberals.
The outcome was positive economically but a disaster politically.
For people ask: if growth is strong, why is unemployment high?
Why are state schools and health services so bad?
Why do we suddenly have an underclass of the kind we used to see in the American cities portrayed in communist propaganda films?
As the rigors of the transition continued, fatigue set it.
And that fatigue with liberal economics found resonance in our memories.
We remember something called "Solidarity," which promised that we were equal brethren; that everyone would be taken care of.
The common good, civil society: all were to be nourished in our post-communist democracies.
Although few seriously question the free market economy and liberal individualism in manners and customs, we feel uneasy about forsaking these values.
Two years ago our new right governments promised to tame the coldness of the market with the warmth of human understanding.
But in keeping to the reform path they failed to discover a language which reconciled their policies with these goals.
Their warmth seemed nothing but political hot air.
The so-called left, both in Poland and in Hungary, has a language which (coming from ex-communists) is breathtakingly cynical, yet effective.
It is a carbon copy of the language of the social-democrats who are so successful in Western Europe.
Because our right-leaning governments have been too decent to use the populist language of the radical right, they are helpless in appealing to mass emotions.
Their words appear to have nothing to do with their deeds.
They talk of family, morality, nation, but their policies lead to NATO, the European Union, massive foreign investment, international capital, and globalization – all things that appear to undermine the communitarian values of the right.
Here our right confronts much the same dilemma as that facing the right in Western Europe – how to bridge the gulf between the market and the community.
Unlike in the English-speaking world, liberalism has never been really popular on the European continent, and the conservatives have always appealed to the patriotic and religious feelings of their supporters.
The traditional right is therefore caught between a populist line that still appeals to the voters and the liberalizing policies that are the stuff of modern government everywhere.
The choice that the Austrian conservatives now face appears to confirm this stark dichotomy.
In this light, Haider may not be a historical leftover somehow unearthed in the mountains and valleys of Carinthia, but an augury of the future of the right across the European continent.
There was much talk recently about the "crisis of the left," as the Labor party in Britain, the Social-Democrats in Germany, and the Democrats in America had to struggle between their old socialist and New Deal traditions and the imperatives of a modern economy, with the fading labor unions and other political bastions of the old left.
The left may have not found any real answers to its predicaments, but through a pragmatic patchwork of policies and rhetoric it managed to reclaim the center stage.
All the while, the seemingly unstoppable march of the market, globalization, and individualism that had propelled the right since Thatcher and Reagan came to an abrupt halt.
And the communitarian traditions of the right, with their nationalist past lurking behind, may not be any easier to revitalize than the old fashioned socialism or New Deal populism.
What’s Wrong with Transformational Leadership?
CAMBRIDGE – This year’s presidential campaign in the United States has been marked by calls from Barack Obama’s would-be Republican challengers for a radical transformation of American foreign policy.
Campaigns are always more extreme than the eventual reality, but countries should be wary of calls for transformational change.
Things do not always work out as intended.
Foreign policy played almost no role in the 2000 US presidential election.
In 2001, George W. Bush started his first term with little interest in foreign policy, but adopted transformational objectives after the September 11, 2001, terrorist attacks.
Like Woodrow Wilson, Franklin Roosevelt, and Harry Truman before him, Bush turned to the rhetoric of democracy to rally his followers in a time of crisis.
Bill Clinton had also talked about enlarging the role of human rights and democracy in US foreign policy, but most Americans in the 1990’s sought normality and a post-Cold War peace dividend rather than change.
By contrast, Bush’s 2002 National Security Strategy, which came to be called the Bush Doctrine, proclaimed that the US would “identify and eliminate terrorists wherever they are, together with the regimes that sustain them.”
The solution to the terrorist problem was to spread democracy everywhere.
Bush invaded Iraq ostensibly to remove Saddam Hussein’s capacity to use weapons of mass destruction and, in the process, to change the regime.
Bush cannot be blamed for the intelligence failures that attributed such weapons to Saddam, given that many other countries shared such estimates.
But inadequate understanding of the Iraqi and regional context, together with poor planning and management, undercut Bush’s transformational objectives.
Although some of Bush’s defenders try to credit him with the “Arab Spring” revolutions, the primary Arab participants reject such arguments.
Bush was described by The Economist as “obsessed by the idea of being a transformational president; not just a status-quo operator like Bill Clinton.”
Then-Secretary of State Condoleezza Rice praised the virtues of “transformational diplomacy.”
But, while leadership theorists and editorial writers tend to think that transformational foreign-policy officials are better in either ethics or effectiveness, the evidence does not support this view.
Other leadership skills are more important than the usual distinction between transformational and “transactional” leaders.
Consider President George H.W. Bush, who did not do “the vision thing,” but whose sound management and execution underpinned one of the most successful US foreign-policy agendas of the past half-century.
Perhaps genetic engineers will one day be able to produce leaders equally endowed with both vision and management skills; comparing the two Bushes (who shared half their genes), it is clear that nature has not yet solved the problem.
This is not an argument against transformational leaders.
Mohandas Gandhi, Nelson Mandela, and Martin Luther King, Jr., played crucial roles in transforming people’s identity and aspirations.
Nor is this an argument against transformational leaders in US foreign policy.
Franklin Roosevelt and Truman made crucial contributions.
But, in judging leaders, we need to pay attention to acts of both omission and commission, to what happened and to what was avoided, to the dogs that barked and to those that did not.
A big problem in foreign policy is the complexity of the context.
We live in a world of diverse cultures, and we know very little about social engineering and how to “build nations.”
When we cannot be sure how to improve the world, prudence becomes an important virtue, and grandiose visions can pose grave dangers.
In foreign policy, as in medicine, it is important to remember the Hippocratic Oath: first, do no harm.
For these reasons, the virtues of transactional leaders with good contextual intelligence are very important.
Someone like George H. W. Bush, unable to articulate a vision but able to steer successfully through crises, turns out to be a better leader than someone like his son, possessed of a powerful vision but with little contextual intelligence or management skill.
Former Secretary of State George Shultz, who served under Ronald Reagan, once compared his role to gardening –“the constant nurturing of a complex array of actors, interests, and goals.”
But Shultz’s Stanford colleague, Condoleezza Rice, wanted a more transformational diplomacy that did not accept the world as it was, but tried to change it.
As one observer put it, “Rice’s ambition is not just to be a gardener – she wants to be a landscape architect.” There is a role for both, depending on the context, but we should avoid the common mistake of automatically thinking that the transformational landscape architect is a better leader than the careful gardener.
We should keep this in mind as we assess the current US presidential debates, with their constant reference to American decline.
Decline is a misleading metaphor.
America is not in absolute decline, and, in relative terms, there is a reasonable probability that it will remain more powerful than any other country in the coming decades.
We do not live in a “post-American world,” but we also do not live in the American era of the late twentieth century.
The US will be faced with a rise in the power resources of many others – both states and non-state actors.
It will also confront a growing number of issues that require power with others as much as power over others in order to obtain the country’s preferred outcomes.
America’s capacity to maintain alliances and create cooperative networks will be an important dimension of its hard and soft power.
The problem of America’s role in the twenty-first century is not one of (poorly specified) “decline,” but rather of developing the contextual intelligence to understand that even the largest country cannot achieve what it wants without others’ help.
Educating the public to understand this complex globalized information age, and what is required to operate successfully in it, will be the real transformational leadership task.
Thus far, we are not hearing much about it from the Republican candidates.
What’s Wrong With Turkey?
On December 16, Orhan Pamuk, one of Turkey’s most famous writers, will enter an Istanbul court to face a charge of “insulting the national identity” after he advocated open discussion of the Turkish genocide of 1.5 million Armenians in 1915 and 1916.
Pamuk faces three years in prison.
Turkey’s effort to fine and imprison those who do not toe the official line convinces me that I was correct to oppose opening negotiations on the country’s European Union membership.
In December 1999, the European Council granted Turkey the status of EU candidate-member, implying that Turkey would accede to the Union at some future, unspecified date.
The Council subsequently asked the European Commission to decide by October 2004 whether Turkey had sufficiently fulfilled the political criteria – including democracy, the rule of law, and respect for the rights of ethnic minorities – for membership.
That decision was one of the last taken by Romano Prodi’s Commission, of which I was a member.
Of its 30 members, 29 said that Turkey had fulfilled the criteria sufficiently to proceed.
I was the lone dissenter.
The Commission’s own report on Turkey, prepared by Günter Verheugen, who was then in charge of EU enlargement, shaped my decision.
This report mentioned that in 2003 some 21,870 Turks submitted asylum claims in the EU, of which 2,127 were accepted.
In other words, the EU’s own governments acknowledged in 2003 that the Turkish government had persecuted more than 2,000 of its own citizens.
Meanwhile, the Commission published a progress report on Turkey that granted that reforms were continuing, albeit at a slower pace, under Prime Minister Recep Tayyip Erdogan’s mildly Islamic-minded government.
Yet the report also presented serious misgivings: human rights violations, including torture, continued; the military’s influence remained too high; freedom of speech was not universally observed; non-Muslim religious and cultural minorities faced discrimination; and violence against women was not opposed strongly enough.
Not much has changed since accession talks began this October.
Beyond the current persecution of Pamuk, unacceptable behavior abounds.
In March 2005, the police violently disrupted a demonstration to celebrate International Women’s Day.
In May, the largest teachers’ union was banned for promoting the education of Turkey’s 14 million Kurds in their own language.
Indeed, intolerance goes right to the top of the Turkish government.
Foreign Minister Abdullah Gül abruptly cancelled a recent press conference in Copenhagen when he spied a Kurdish journalist in the audience and the Danes refused to evict him.
Such actions and attitudes amply justify my dissent of October 2004.
But, even if these shortcomings were removed, Turkey should still not be admitted to the EU, because it is not a European country.
Christianity, feudalism, the Renaissance, the Enlightenment, democracy, and industrialization have made us what we Europeans are, but they have not made Turks who they are.
So I am not convinced that reforms in Turkey implemented at the insistence of the European Commission would continue after accession.
Indeed, I suspect that there will be backsliding.
Moreover, Turkey’s accession would lead inevitably to that of Ukraine, Belarus, and Moldova, and perhaps of Georgia, Armenia, and Azerbaïdjan.
The first three of these countries are certainly more European than Turkey.
Leaving the three Caucasian republics aside but including the successor states to Yugoslavia, this would mean an EU of some 35 members.
What sort of Union would that be?
The EU is not simply a club of friends.
It is based on freedom of movement of goods, services, capital, and people.
The Commission, as the guardian of the Union’s treaties, must protect these four fundamental freedoms, which means that it must sometimes persuade, and if necessary force, member states to change their laws.
Alcohol policy in Sweden, the Volkswagen-law in Germany, and discrimination against foreign investment funds in France are examples of cases that made the Commission unpopular.
But they were necessary.
By the time I left the Commission, I was sitting on a pile of 1,500 such infringement proceedings.
In short, EU membership entails having to accept incisive measures that deeply affect a state’s internal affairs.
That will be impossible with such disparate members.
The EU would fall victim to what the historian Paul Kennedy calls “imperial overreach.”
The EU would become unacceptably diluted.
That is why former French President Valéry Giscard d’Estaing feared that Turkey’s entry would lead to the EU’s breakup, and it is why former German Chancellor Helmut Schmidt said, “Accession of Turkey would be more than the EU could bear.”
But the strongest reason to oppose Turkey’s accession is a question of democracy: a majority of the EU’s population simply does not want it.
Tinker, Tailor, Snowden, Spy?
MOSCOW – A worldwide media frenzy has turned the plight of the rogue American intelligence analyst Edward Snowden into something resembling a John le Carré novel, full of suspense and intrigue.
Whose spy is he?
Who will grant him asylum?
Will he be able to outmaneuver the National Security Agency as it attempts to force him to return to the United States to stand trial on charges of theft and espionage?
And what will US President Barack Obama say to his Russian counterpart, Vladimir Putin, at their scheduled meeting in Moscow – where Snowden is currently taking refuge at Sheremetyevo Airport – this September?
The real espionage, however, lies not in Snowden’s decision to release NSA secrets, but in the surveillance programs that he exposed.
The leaked information highlighted the West’s long-ignored failure to strike an informed balance between security and liberty.
Current political and economic uncertainty has exacerbated the situation, driving policymakers to settle on simplistic solutions that, as Snowden made starkly apparent, can undermine the values that the West espouses.
This is not true only in the US and the United Kingdom, which happen to be entangled in the Snowden scandal.
The reluctant responses by Germany and France to evidence that the NSA has been conducting unprecedented surveillance of their officials indicate that Europe’s governments may also be involved.
Indeed, it now appears that America has shared its intelligence trove with Germany’s spy services when needed.
So far, Obama’s handling of the Snowden affair shows that he places more stock in the logic of security than in adherence to principle.
Coming from a president who won global sympathy – and a Nobel Peace Prize – for his moral stance, the claim that the NSA’s activities are justified because “that’s how intelligence services operate” is particularly disappointing.
A state that emphasizes security over civil rights and liberties is easily hijacked by security agencies.
While America’s “war on terror” demands a stronger emphasis on security, the NSA’s activities expose an alarming willingness to violate the privacy of millions of individuals – including in allied countries, whose constitutions and sovereignty have also been breached.
Western leaders must now ask themselves whether the ends justify the means.
With the all-powerful US training its sights on a young former analyst, the answer appears to be no.
The current scandal’s impact on Obama’s image increasingly resembles the impact of the Watergate scandal on President Richard Nixon’s standing in the 1970’s – only now the events are playing themselves out on a global stage.
But Obama is not really the problem; at the heart of the issue is a model of liberal democracy that fails to respond to challenges that contradict the values it is supposed to uphold.
In fact, Snowden’s warning that “any NSA analyst, at any time, can target anyone, from a federal judge to the president” suggests that NSA head Keith Alexander – dubbed “Emperor Alexander” – could already be more powerful than Obama.
Monitoring individuals’ private lives is not limited to the state and its security services.
Major global telecommunication companies – such as Google, Microsoft, Facebook, and Skype – have assembled secret stockpiles of personal information about their users, which they share with the NSA.
Beyond the obvious violation of individuals’ privacy implied by such activities lies the danger that these firms will later make a deal with authoritarian regimes in Russia or China, where little, if any, effort is made to preserve even the illusion of privacy.
Google already has some experience in turning over information to China’s security services.
Against this background, it is impossible to know whether these companies are already spying on Western leaders, together with the NSA.
Snowden’s presence in Russia, even in the airport’s international transit zone, has given the US a pretext to declare that he is not a whistleblower, but a traitor.
The fact that Snowden has now applied for temporary asylum in Russia has reinforced that interpretation.
Ironically, by turning the affair into a spy thriller, Putin has helped the US to salvage its reputation – or at least to deflect some of the attention from the NSA’s surveillance programs.
The discussion about security, privacy, and freedom that the Snowden drama has sparked is long overdue.
But the scandal has begotten many losers.
Snowden has effectively given up his future.
The US and Obama have lost their claim to the moral high ground.
And liberal democracies’ apparent inability to protect their citizens from infringement of their individual rights has undermined their standing at home and abroad.
Russian society will also pay a price, with the NSA’s surveillance programs giving the Kremlin ammunition to defend the expansion of state control over the Internet and other aspects of citizens’ personal lives.
Similarly, the scandal will likely inspire China to strengthen its Great Firewall further.
The ordeal’s only victor is Putin, who now has grounds to dismiss US criticism of his authoritarian rule.
Indeed, at the slightest provocation, Putin will be able to point to America’s hypocrisy for spying on, say, European Union facilities as part of expanded surveillance programs supposedly within the scope of the war on terror, and for hunting Snowden after accusing Russia of unfairly prosecuting the whistleblower Sergei Magnitsky.
Snowden did not create the security-privacy dilemma, but he did illuminate a deeply rooted problem that Western leaders have long tried to obscure.
One can only hope that his actions, and the resulting scandal, will compel Western leaders to reassess their approach to national security – and not simply lead them to try to conceal it better.
What the West Can Do
TBILISI – Given the tremendous damage that Russia has inflicted on Georgia, it is easy to conclude that the Kremlin has achieved its objectives.
But, so far, Russia has failed in its real goal – getting rid of Mikheil Saakashvili, Georgia’s pro-democracy, pro-American president.
To be sure, Russia has tightened its control of the separatist enclaves of South Ossetia and Abkhazia. It shattered the Georgian military, grievously damaged Georgia’s economy, and stirred up discord within the Western alliance.
For three years, it has tried every conceivable tactic to bring Saakashvili down – fomenting a domestic uprising, imposing an economic blockade, beefing up its forces in the enclaves, and finally a war.
Yet Georgia’s president remains in power.
Here in Tbilisi, tension is understandably high.
Russian tanks are less than 25 miles away, and the wheat fields along the main road to Gori were ablaze, set on fire by Russian troops, as I drove through Russian checkpoints to get to that deserted, occupied city.
(Most memorable sight: drunken Russian soldiers in stolen Georgian uniforms – “because they are better than ours.”)
Russia’s invasion of Georgia has reshaped the strategic landscape.
But, as the West debates how to “punish Russia,” it is vital to remember that the main front is still in Georgia.
Talk about taking away the 2014 Winter Olympics or ejecting Russia from the G-8 may (or may not) have some effect on the Kremlin, but the most important thing the West can do now is strengthen the government in Tbilisi.
The equation is simple: if Saakashvili survives, Vladimir Putin loses.
The intense personal hatred between these men overlays two centuries of tortured history between Russia and Georgia.
Many people report that Putin simply “loses it” when discussing the upstart Saakashvili, who led his country from near bankruptcy into a golden age of economic growth and the world’s highest rate of foreign direct investment relative to GDP.
All this has been halted by Russian tanks.
The Kremlin has probably lost its chance to remove Saakashvili by overt force, although sinister, more stealthy means cannot be ruled out.
Having just dined with him in a public restaurant, I wish his security was a little tighter.
(His predecessor, Eduard Shevardnadze, was a near-miss target for several assassination attempts that are widely believed to have been Russian-directed.) The Kremlin’s best hope now is that Georgia’s economy will crumble, its currency will collapse, and an unhappy populace, encouraged by some opposition leader (perhaps bankrolled by Russia), will force Saakashvili from power.
The Western response to this challenge must go beyond rhetoric.
What matters most right now is massive economic and military assistance.
Public commitments to help rebuild Georgia are the best way to prevent Russia from achieving its goal.
Prime Minister Vladimir Gurgenidze estimates that rebuilding railroads, bridges, ports and other infrastructure will cost at least $1 billion; this does not include humanitarian relief, refugee resettlement costs, or rebuilding Georgia’s military.
Gurgenidze also foresees negative economic growth, a huge budget deficit, and a collapse of tourism, which was just taking off in this beautiful country.
United States Senator Joseph Biden has called for an immediate $1 billion supplemental appropriation, a proposal quickly endorsed by Barack Obama.
But the Bush administration has not yet been specific on economic support.
Congress will be in session only briefly before the election, and a supplemental appropriation will pass only if President Bush pursues it vigorously as a bipartisan measure.
Even if delayed until next year, its immediate proposal by Bush and endorsement by both presidential candidates would help morale in Georgia.
The European Union, the World Bank, the International Monetary Fund, and the European Bank for Reconstruction and Development must match American support.
In the long run, Georgia and Russia must coexist peacefully.
Here, Georgia must do its part.
Saakashvili, an immensely talented 41-year-old, saved his country from utter collapse in 2003. But he must think strategically about the future.
On occasion, he has berated the Europeans for insufficient support – not a good tactic for someone trying to join the EU – and has used rhetoric about Russia that, while understandable, only increases the danger to himself.
Saakashvili cannot pick up his tiny country and move it to Mexico.
He has to manage the situation with greater care.
There will be consequences, of course, for Russia’s relations with the West.
(Bush’s inattentiveness to this Russian threat – dramatically illustrated by his literal embrace of Putin in Beijing as Russian tanks rolled into Georgia – may have led the Kremlin to think it could get away with its invasion.)
While the West will not going to war over Georgia, Russia must understand that it will pay for using force, or the threat of force, against neighbors that were once part of the Soviet space.
This is especially true for Ukraine and Azerbaijan, which are likely to be Moscow’s next targets for intimidation.
The rules of the post-Cold War world are changing – but not to the ultimate benefit of Russia, which has underestimated the unifying effect its actions will have on the West.
Exactly how these relationships evolve depends on what each side does in the coming weeks – especially in Georgia.
What Threatens Russia?
It is fashionable in Russia to disparage our fundamental shift in foreign policy that followed the terrorist attacks on the US last year.
According to this view, Russia sold its loyalty to the US-led anti-terror coalition too cheaply.
In exchange for more bilateral and multilateral financing, Russia now faces growing US military bases on its southern flank in Central Asia and the Caucasus, while NATO is poised to expand right up to our Western border.
But however justified criticism of growing US unilateralism may be--in the so-called war on terrorism and elsewhere--the gravest risks facing Russia lie elsewhere.
The first concerns the most basic interest of any state: defense of its territorial integrity.
Here the most immediate threat is not posed by America or NATO, but by the European Union, whose enlargement means that member states will soon surround Russia's Kaliningrad region on all sides.
Russia's task is to ensure that this does not impede the free movement of people and goods between Kaliningrad and the rest of the country.
This is a vital condition for keeping the region Russian, and special EU transit visas should therefore be granted to Kaliningrad's residents in order to ensure simplified travel through adjacent EU countries.
The EU, however, does not want to give Kaliningrad's citizens such rights.
A solution must be found, not least because the EU's attitude to the Kaliningrad problem will be a litmus test of its desire for broader rapprochement with Russia.
Our mistake was to broach the subject of "corridors" linking Kaliningrad with the rest of Russia.
Poland immediately associated the idea with the pre-war Danzig (Gdansk) Corridor and interpreted it as an ex-territorial encroachment on Polish sovereignty.
But this is not so.
We are talking about transport routes for people and goods, nothing more .
Common sense should prevail.
The second risk facing Russia is no less daunting.
Owing to a steeply declining birth rate and falling life expectancy--largely the result of poor diet, widespread smoking, and alcohol abuse--Russia's population is contracting by nearly a million people per year.
Little, if anything, is being done to stem the demographic crisis, and it cannot be resolved by a higher birth rate alone (although this is obviously an important factor).
Moreover, the crisis is aggravated by the uneven distribution of the population throughout Russia, with a near vacuum in the Far East and Siberia.
A vacuum never survives for long.
But can Russia manage to permit controlled and measured immigration?
After all, the US gets a million new citizens annually from Latin America, mostly Mexico, and the Italian population grows annually by 90,000 Africans.
The difference is literally one of degrees - educational degrees.
When a well-educated, skilled foreigner emigrates to the US, he or she can hope to obtain citizenship relatively soon.
Foreigners with less developed skills, on the other hand, must work diligently for several years to obtain permanent residency.
In Russia, we lack any such gradation.
So we need to formulate, jointly with neighboring countries, a legal framework for immigration.
Our policy should be explicitly designed to foster a more developed economic and social infrastructure in Eastern Russia.
Currently, those who want to settle in Russia emigrate overwhelmingly from the CIS countries, and 99% of them settle in European Russia.
Unless we equalize conditions throughout the country, the already profound regional disparities will worsen.
This will require that we accept not only ex-Soviet citizens but also Chinese and Korean immigrants.
The third challenge that Russia faces--one related to addressing its demographic crisis--is the need to diversify investment to ensure more even economic development, both geographically and by sector.
Capital that has accumulated in the raw materials sector in recent years should be shifted to manufacturing and infrastructure.
Currently, only oil production and export benefit from capital accumulation, whereas large sums are simply being sent out of the country.
President Vladimir Putin recently hinted that Russians with cash in offshore accounts may find their funds frozen pending audits of money suspected of assisting terrorist groups.
While Russia itself will not freeze accounts, President Putin's meaning was clear: it would be better for all sides if this money were brought home and invested in the national economy.
To achieve this end, Russia must create a secure and attractive investment climate.
Most importantly, if we are to reverse capital flight, the government must persuade individual savers that they can deposit money safely and withdraw it on demand.
How can the government expect to mobilize domestic investment as long as ordinary Russians keep their savings--$50 billion, according to most estimates--at home?
Russia's people need to be convinced of the country's political stability--that, for example, nobody will suggest nationalization, as happened repeatedly during the eight months that I was prime minister.
The model of socialism that existed in the Soviet Union is dead; even the Communist Party does not seriously question the need for market economic relations.
But the manner in which the market is established and operates is another matter.
Unfortunately, central planning was not the only way to deepen Russia's backwardness relative to the West.
What to Expect From the 44th President
NEW YORK – Campaigns, be they political or military, are waged to be won, and the current American presidential campaign is no exception.
The Democratic and Republican candidates are doing all they can to distinguish themselves from an unpopular incumbent president and from one another in the remaining weeks before Americans vote.
For good reason, much attention is focused on foreign policy differences between the two nominees, which in many areas are both obvious and considerable.
Still, it is possible to discern some similarities between them, in part because some of their disagreements are not as pronounced as they seem, and in part because the constraints that the next president of the United States will face are certain to limit what either man could do in office.
Consider Iraq, the most divisive issue in American politics for the past five years.
Barack Obama regularly points out that the decision to go to war was deeply flawed;
John McCain emphasizes how much things have turned around since early 2007, when US troop numbers were increased and US strategy revised.
Observers could be forgiven for thinking that they are speaking about two entirely different conflicts.
But what about the future?
No matter who wins this November, it is clear that Iraq will not dominate US foreign policy in the years ahead to anything near the degree that it has in recent years.
We are entering the post-Iraq era of American foreign policy.
Consistent with this, the US military presence is decreasing.
Where the two candidates differ is on the timing and pace of this drawdown, not on its general direction.
By contrast, the US commitment to Afghanistan will increase, and troop levels will climb.
Behind this prediction is a widely shared assessment that the trends in Afghanistan (unlike in Iraq) are negative, and that the US must strengthen its military presence there and revise its strategy if the Taliban are not to gain the upper hand.
It is also widely understood that Pakistan has become part of the problem.
Pakistan’s western reaches are now a sanctuary for militias and terrorists that are moving in and out of Afghanistan.
Here, Barack Obama appears more willing to have the US launch unilateral military raids against terrorists should the opportunity arise.
But whoever is elected will confront difficult choices if a nuclear-armed Pakistan remains unable or unwilling to act as an American partner and meet its responsibilities in the effort against terrorism.
A third area of some consensus (and some distance from George W. Bush) is climate change.
Under the next president, the US will no longer be a drag on international efforts to create a global regime that sets a ceiling on greenhouse gas emissions.
One result of this likely evolution in US policy is that pressure will shift to other countries, particularly China and India, to accept some limits on their own economic behavior.
A President McCain or Obama will take steps to improve America’s image in the world.
One of his first decisions will be to implement a ban on all forms of torture.
Also to be expected early on is a decision to close the facility at Guantánamo Bay, where terrorism suspects have been held for years without trial.
Iran is another area where the differences – at least initially – may not be as sharp as the campaign suggests.
Both candidates have stressed that an Iran with nuclear weapons would be unacceptable.
The victor will almost surely endorse a new diplomatic initiative aimed at ending Iran’s independent ability to enrich uranium.
Less clear are the details of such an initiative, or what the US would do if it were to fail.
The candidates’ statements on Iran do suggest two different philosophies of diplomacy.
Obama seems to regard meeting with foreign leaders as a normal component of foreign policy, to be employed as one of many tools.
McCain appears to embrace the view that such meetings are something of a reward, to be offered when preconditions are met (Iran comes to mind) and withdrawn when certain lines are crossed, as Russia was judged to have done this August in Georgia.
Despite such differences, either would carry out policies closer to those of Bush’s second term than his first.
With a strained military and a struggling economy, the next president will often have little choice other than to talk.
On other issues, such as trade, there are distinctions between the candidates.
McCain is a stronger advocate of free trade than Obama is.
But this difference may have less impact than meets the eye.
Congress plays a large role in trade policy, and the near certainty that the Democratic Party’s majority in Congress will grow after the election means that protectionism will grow as well.
Difficult economic times will make it hard to generate support for trade pacts, despite the current importance of export-oriented firms for the American economy.
There are real and important differences between the two candidates when it comes to how they would approach the world.
But there are also more similarities than might be evident from the debates and the campaign.
Aspects of the next president’s foreign policy are there to see if observers read between the lines and take as much note of what is not said as what is.
What Went Wrong with America
The latest edition of the Pew Global Attitudes Survey shows that favorable opinions of the United States have fallen again in 12 out of 15 countries polled, a sad reflection of a country’s loss of image.
How can America recover international legitimacy?
This is probably one of the most important challenges for today’s world, for America retains a unique power that should be used – and be perceived – as a force for good if global stability is to prevail.
Nearly two decades after the demise of the Soviet empire, what stands out is a prevailing sense of lost opportunities.
The US had a unique opportunity at the end of the Cold War to use its benevolent and enlightened superiority to establish a better international order.
But, for a combination of political and personal reasons, America lost time under the two presidencies of Bill Clinton.
Indeed, during this necessarily short and fragile “unipolar moment,” Clinton probably had an intuition of what America’s new responsibilities should be, but he did not deliver.
The defeat of the Democrats in the mid-term elections in 1994, followed by the Monica Lewinsky affair, hampered the effectiveness of one of America’s most energetic and gifted Presidents.
That failure was epitomized by the inability to impose a peace agreement on Palestinians and Israelis in 2000.
By contrast, George W. Bush did not lose time.
He did worse: he simply took a wrong turn – and he took it before 9/11, a traumatic event that reinforced, but did not create, America’s Manichean view of itself and its role in the world.
Three recent examples illustrate what went wrong with America, its loss of unique status, and its growing image as a partisan and unethical, if not destabilizing, force in the world.
Consider, first, the recent nuclear agreement signed between the US and India.
In strictly legal terms, there is nothing wrong, since India never signed the Nuclear Non-Proliferation Treaty.
But in psychological and political terms, the deal signed could only be perceived as legitimizing for Iran’s nuclear ambitions, not to mention North Korea’s.
It was the ultimate proof that the Bush administration does not believe in universal norms.
A “good” country would be treated with extreme leniency, whereas a “bad” country would not.
Guantánamo, Abu Ghraib, and more recent war-crimes scandals have done much worse damage to America’s stature.
Regimes that systematically violate human rights have been quick to seize on every episode of US wrongdoing.
With its own human rights record in question, the US, which had been the democratic teacher of the post-war world, is in a much weaker position to give lessons and set standards.
Nor does the appearance of hypocrisy end there.
At a time when “democracy” and “democratization” have become the watchwords of US foreign policy, normalization of diplomatic relations with Gaddafi’s Libya, not to mention leniency towards Egypt and Saudi Arabia hardly boosts America’s credibility.
In global terms, the contrast between what America says and what it does has become glaring.
In February 2005, in a major speech in Paris during her first foreign trip as Secretary of State, Condoleezza Rice stated America’s ambition in the world.
She said essentially the following: “The role of the world is to improve the world.
America, as the most powerful and ethical country in the world, has a unique responsibility to perform.”
Eighteen months later, the results are falling far short of the goal.
On the contrary, the failures of US policy have contributed to reduce the legitimacy of America’s power further.
Despite the recent death of Zarqawi in Iraq, the situation there, and in Afghanistan, does not justify the continued Bush administration’s optimism.
As America’s legitimacy diminishes, new actors are appearing on the world stage – or returning for an encore.
Russia and China today are united not only by their energy deals, but also by both countries’ conviction that their time has come, and that the outside world needs them more than they need the outside world, particularly the US.
In strategic terms, the waning influence of a paralyzed Europe is also very bad news for America.
The US needs allies now more than ever, for the world is reverting to its pre-war multi-polar state.
Of course, given America’s objective military superiority, I would call it “asymmetrical multi-polarity.” But the US is no longer the country that others seek to emulate, or that they look to for global leadership.
It is too early to dismiss America and proclaim the end of an imperial moment.
America retains unique qualities – particularly its ability to rebound.
The next US president should be able to capitalize on Americans’ fundamental optimism, pragmatism, and activism.
But he or she will face an uphill struggle to prove to the world that America can be a force for good, a democratic beacon that cares for the planet and that lives up to the standards that it sets for others.
When are Public Services Successful?
How do we judge the quality of public services?
That question is far trickier than it appears.
In some cases the answer seems simple enough: whether trains run on time.
But is this really all we want from our trains?
Surely not.
They should be safe, too, and reasonably comfortable.
They should run not only on time, but at the right time and at reasonable intervals.
More important still, they should be affordable.
As the list of criteria grows longer, it becomes evident that the most easily measured component, punctuality, is but one of many desirable features, and not necessarily the most significant.
This example is relevant for the politics of public services, which dominates debate in many countries because it lies at the heart of the big problems of both government budgets (and cutting them back) and taxes (and their reduction).
In keeping with the spirit of the times, governments introduce business criteria for measuring the efficiency--and the "success," more generally--of public services.
This means, above all, that they set performance targets.
So ministers proclaim that street crime will be halved by next spring, or that the proportion of each generation going to universities will be raised to 50% in five years. Waiting lists for hospital beds will be cut by one-third within two years.
This method of governance makes it appear that, at long last, we can hold politicians accountable by establishing whether targets have been reached or not.
But is this what we really want?
The examples just given are taken from real life.
In real life, however, performance targets also have curious side effects.
Cutting hospital waiting lists has led doctors to treat minor illnesses more quickly, leaving those with more serious conditions off the lists altogether.
The rapid increase in university students has led to declines in admission standards and the quality of final degrees.
Reducing street crime encouraged the police to stop registering certain offenses altogether.
In short, because the availability of government support depends on achieving seemingly precise targets, the incentive to aim for apparent rather than real success becomes an almost overwhelming temptation.
Moreover, many public services are so-called "soft services."
Hospital care entails much more than a well-functioning conveyor belt for surgical operations.
Education is in all cases about more than achieving a certain "throughput."
Social services generally need time, not least the time of caregivers, and their time is often required in unpredictable bursts--a fact utterly at odds with target-mania.
Obviously, public money must not be wasted.
But, even here, questions arise.
Consider publicly-funded scientific research.
It is in the nature of such research that it proceeds by trial and error.
For every road to new discoveries, there will be several negative results and cul-de-sacs.
If only highly targeted research with guaranteed success is funded, the probability must be high that innovative researchers emigrate to countries or institutions that have a more generous and appropriate approach to the relationship between funding and success.
While all this may be true, the question remains: how do we make sure that public services are run with reasonable efficiency and produce the results intended by governments and expected by taxpayers?
One answer has to do with input rather than outcomes--that is, with the quality and ethos of those running our public services and working in them.
Here the business analogy is simply not sufficient.
The old French administrative training for public services taught both relevant skills and an ethos of civic commitment.
The old civil service in countries like Britain or Germany embraced an approach to their tasks that made it a matter of honor to perform well.
Self-interest and charity are not the only human motivations; there is also the motive of service, and it needs to be cultivated.
At the other end--that of results--some targets do make sense.
Trains should run on time.
But beyond that is the human judgment of those most affected.
This is why parents' councils for schools, or committees of users of public transport, or patients' boards for hospitals are crucial.
Such bodies may seem weak at first sight.
They may even be regarded as a nuisance by professionals.
In fact, however, they provide an invaluable check on sloppy and inefficient providers of public services.
We must beware of overly business-guided approaches to public service.
At certain times and in certain countries, services that need not be public had to be privatized and run along business lines in order to make them run better--or to keep them running at all.
But core public services in health, education, transport, and a few other areas will forever be just that, services , and will therefore need to be appreciated in more complex ways than meeting measurable targets.
When Capital Markets Fail
When Democracies Collide
BERLIN – The multipolar nature of today’s international system will again be on display at the upcoming G-20 summit in Los Cabos, Mexico.
Global problems are no longer solved, crises managed, or global rules defined, let alone implemented, the old-fashioned way, by a few, mostly Western, powers.
Incipient great and middle powers, such as India, Brazil, Indonesia, South Korea, Turkey, and South Africa, also demand their say.
Some of these powers are still emerging economies.
Politically, however, most of them have crossed the threshold that has long limited their access to the kitchen of international decision-making.
The five permanent members of the United Nations Security Council (the “P-5”) still defend their right to veto resolutions, and their military power is unmatched.
But they can no longer dispose of sufficient resources, competence, and legitimacy to cope with global challenges or crises on their own.
Bipolarity is a thing of the past, and it is unlikely to re-emerge in a new Sino-American “G-2.”
It is equally unlikely for the foreseeable future that any one club of countries, such as the G-7 or G-8, will again assume a quasi-hegemonic position.
Even the G-20 in its current composition may not really represent the forces that can and will shape the twenty-first century.
For the Unites States, the European Union, Japan, and other members of the “Old West,” the good news is that most of the emerging powers that are positioning themselves for a more active global role are also democracies.
Within the G-20, only two states – China and Saudi Arabia – explicitly do not want to be liberal democracies, while a third, Russia, has developed into an autocracy with a democratic façade.
The not-so-good news is that these new democratic powers do not necessarily share the Old West’s political agenda.
For example, they differ about climate policies, seeing a threat to development.
Similarly, while new middle and great powers do not always agree, they are generally more skeptical of both international sanctions and military interventions.
Moreover, some of the most important of these states differ substantially with the US, and often also with the EU, about the right approach toward regional conflicts, especially in the Middle East.
Thus, in 2010, the US found itself in a serious diplomatic dispute with Turkey and Brazil about how to resolve the conflict with Iran over its nuclear program.
Without actually admitting it, the US was clearly unhappy that these two states tried to play a diplomatic role of their own in the dispute.
Differences are also apparent where new democratic middle or great powers have formed new groups or clubs, such as the BRICS, together with non-democratic powers.
India, Brazil, and South Africa are using such formats in a pragmatic way to pursue their interests, or simply to demonstrate their increased international weight.
There is little agreement between them and Russia or China – both P-5 members – with regard to political values or to fundamental questions of international order.
Along with many other states in the global South, however, Russia and China tend to defend the principle of non-interference, and they are generally reluctant to support any US or European attempts to project democracy or defend human rights in other countries.
Not a few policymakers in the US and in Europe have reacted with astonishment, or even annoyance, to these emerging democratic powers’ attempts to pursue their own agendas on the world stage.
Such reactions partly reflect old thinking rooted in the Cold War, when democratic countries might differ over details, but would agree about the main questions of international politics.
Those who pursued a different agenda on substantial matters were either not part of the “democratic camp” or were not important international players.
By contrast, a central feature of today’s globalized, multipolar world is that shared democratic values do not guarantee agreement about substantial questions of international politics.
The more democracies there are, the more conflicts of interests and differences are likely to emerge between democratic countries.
There is little reason to react with anger when states like Turkey, Brazil, and South Africa set priorities different from those of Europe or the US, or have different views about how to deal with the Arab-Israeli conflict, Iran, development aid, democracy promotion, or environmental protection.
The US example shows clearly that democratic great powers often pursue their interests with little regard for a global common good that others have defined.
In other words, the international order is becoming more pluralistic.
The task for established Western democracies is to accept and cope with such “democratic differences” on the international level, and to seek multilateral coalitions to manage or solve problems.
In principle, the EU is better positioned than the US (and certainly than China) to take on this task.
Europeans are well practiced in dealing with differences and shaping consensus among principally like-minded states.
That said, Europe needs to learn to be clearer and more transparent about the interests underlying its own policies, rather than suggesting that its positions on a specific subject represent the only rational implementation of democratic values and norms.
When Doctors Kill
PRINCETON – Of all the arguments against voluntary euthanasia, the most influential is the “slippery slope”: once we allow doctors to kill patients, we will not be able to limit the killing to those who want to die.
There is no evidence for this claim, even after many years of legal physician-assisted suicide or voluntary euthanasia in the Netherlands, Belgium, Luxembourg, Switzerland, and the American state of Oregon.
But recent revelations about what took place in a New Orleans hospital after Hurricane Katrina point to a genuine danger from a different source.
When New Orleans was flooded in August 2005, the rising water cut off Memorial Medical Center, a community hospital that was holding more than 200 patients.
Three days after the hurricane hit, the hospital had no electricity, the water supply had failed, and toilets could no longer be flushed.
Some patients who were dependent on ventilators died.
In stifling heat, doctors and nurses were hard-pressed to care for surviving patients lying on soiled beds.
Adding to the anxiety were fears that law and order had broken down in the city, and that the hospital itself might be a target for armed bandits.
Helicopters were called in to evacuate patients.
Priority was given to those who were in better health, and could walk.
State police arrived and told staff that because of the civil unrest, everybody had to be out of the hospital by 5 p.m.
On the eighth floor, Jannie Burgess, a 79-year-old woman with advanced cancer, was on a morphine drip and close to death.
To evacuate her, she would have to be carried down six flights of stairs, and would require the attention of nurses who were needed elsewhere.
But if she were left unattended, she might come out of her sedation, and be in pain.
Ewing Cook, one of the physicians present, instructed the nurse to increase the morphine, “giving her enough until she goes.”
It was, he later told Sheri Fink, who recently published an account of these events in The New York Times , a “no-brainer.”
According to Fink, Anna Pou, another physician, told nursing staff that several patients on the seventh floor were also too ill to survive.
She injected them with morphine and another drug that slowed their breathing until they died.
At least one of the patients injected with this lethal combination of drugs appears to have otherwise been in little danger of imminent death. Emmett Everett was a 61-year-old man who had been paralyzed in an accident several years earlier, and was in the hospital for surgery to relieve a bowel obstruction.
When others from his ward were evacuated, he asked not to be left behind.
But he weighed 380 pounds (173 kilograms), and it would have been extremely difficult to carry him down the stairs and then up again to where the helicopters were landing.
He was told the injection he was being given would help with the dizziness from which he suffered.
In 1957, a group of doctors asked Pope Pius XII whether it is permissible to use narcotics to suppress pain and consciousness “if one foresees that the use of narcotics will shorten life.”
The Pope said that it was.
In its Declaration on Euthanasia , issued in 1980, the Vatican reaffirmed that view.
The Vatican’s position is an application of what is known as “the doctrine of double effect.”
An action that has two effects, one good and the other bad, may be permissible if the good effect is the one that is intended and the bad effect is merely an unwanted consequence of achieving the good effect.
Significantly, neither the Pope’s remarks, nor the Declaration on Euthanasia , place any emphasis on the importance of obtaining the voluntary and informed consent of patients, where possible, before shortening their lives.
According to the doctrine of double effect, two doctors may, to all outward appearances, do exactly the same thing: that is, they may give patients in identical conditions an identical dose of morphine, knowing that this dose will shorten the patient’s life.
Dr. Cook had little time for such subtleties.
Only “a very naïve doctor” would think that giving a person a lot of morphine was not “prematurely sending them to their grave,” he told Fink, and then bluntly added: “We kill ‘em.”
In Cook’s opinion, the line between something ethical and something illegal is “so fine as to be imperceivable.”
At Memorial Medical Center, physicians and nurses found themselves under great pressure.
Exhausted after 72 hours with little sleep, and struggling to care for their patients, they were not in the best position to make difficult ethical decisions.
The doctrine of double effect, properly understood, does not justify what the doctors did; but, by inuring them to the practice of shortening patients’ lives without obtaining consent, it seems to have paved the way for intentional killing.
Roman Catholic thinkers have been among the most vocal in invoking the “slippery slope” argument against the legalization of voluntary euthanasia and physician-assisted dying.
They would do well to examine the consequences of their own doctrines.
When Enough is Not Enough
NEW YORK – The US dollar is plunging, the economy is imploding, and a crisis of identity is shaking countries around the world.
So, what are Americans obsessed with at this critical moment?
“Octamom”: the saga of Nadya Suleman, a young single mother in Los Angeles who, having already given birth to seven children, underwent fertility treatments and is now bringing home octuplets.
The story would ordinarily be a mere curiosity.
But, ever since Suleman hit the news stream, dozens of media outlets have begun to report, with a kind of obsessive revulsion, on her every move.
And, as if being called “Octamom” weren’t bad enough, pop stars such as Cher have come forward to denounce her; blogs have been created to track the details of her plastic surgery; and entertainment Web sites have sent reporters to stalk her and write shaming exposés of her sojourn at an expensive cosmetics counter.
It is true that there is plenty to condemn: Suleman’s family lives on food stamps, the children already at home don’t have enough baby furniture, and her own parents are giving interviews to the media in which they criticize her choices.
Her publicist quit, calling her “crazy.”
There have been plenty of oddball flash-in-the-pan media stars in US popular culture before Suleman.
But her story just goes on and on, and the emotion that attaches to it seems strangely furious and vengeful.
I believe that Americans’ obsession with Suleman is a projection of their own guilt and shame at their recent choices.
Suleman does not have a decent job, but she managed to invest in costly fertility treatments and could afford many expensive cosmetic surgeries.
Worse yet, her surgeries seem designed to make her resemble the actress Angelina Jolie.
She somehow has a spacious house, but no proper beds for the kids.
In other times, it would have been the absence of a man that turned Suleman into an object of public scorn.
Today, that scarcely registers against the other themes: a working-class or unemployed person dared to aspire to resemble someone of too high a status, and spent too much money conceiving too many blameless babies who deserve protection and care, and who have now been put at risk by their mother’s selfish choices.
Bewitched by symbols of affluence and a level of consumption that she could not afford, she acted like a child herself, with no thought to the future.
Sound familiar?
Sound like anyone you know?
Right now, Americans are staggering from the reality of what they themselves have done.
The real estate bubble inflated and collapsed partly because millions of Americans borrowed more than they could afford to repay – and knew it.
It takes nothing away from the pain of those now losing their houses to notice that something oddly American and a bit perverse happened: millions of Americans were seduced by fantasies of a beautiful big house, vague about their own plans for the future, and yet full of crazy confidence that it would all somehow work out.
American optimism became as much a curse as a blessing.
The credit freeze is partly the work of bankers and hedge fund managers who acted just like Nadya Suleman, leveraging the present for an unrealizable future.
But it is also the result of ordinary Americans, who ran up more credit card debt than any previous generation.
In the mall, or at home on the Internet, Americans acted like Nadya Suleman, too: seduced by the bag, the shoes, the beauty treatments, the vacations, and the life that the stars they admire take for granted.
And, with education and health care faltering and social security funding at risk, their kids, like Suleman’s, are now endangered partly because of their own choices.
The manageable, honorable American Dream of the 1950’s – a decent, affordable college education; a small house of one’s own; hope that one’s children will be better off than oneself – was misplaced in the last decade and a half.
In the new, reality-show version of that dream, countless Americans came to expect to be able to live, look, dance, and party like celebrities, or else feel themselves to be failures.
Enough is not enough anymore.
That is the American Dream that Nadya Suleman bought into, and, in their obsession with her, Americans are coming to grips with how seriously they went astray.
Indeed, a strange sense of relief is now creeping into Americans’ consciousness as the consumer economy grinds to a halt.
The relief comes from not aspiring to spend like Suleman, or Britney Spears, or the neighbors down the street.
It comes from the thought that this really might be enough to be able to afford a small house, a college education, and the children that one already has.
When France Says No
Not long ago, an American political analyst compared France’s loss of influence in Europe following its “No” vote in the 2005 referendum on the EU constitutional treaty with France’s surrender in 1940.
A provocative analogy, but is it apt?
The collapse in 1940 revealed the fragility of France’s democracy and its loss of confidence in the country’s capacity to face outside threats.
In rejecting the European constitution, France expressed its fear of, among other things, globalization.
A better analogy for the No vote was the rejection in 1954 of the treaty to establish a European Defense Community (EDC).
In both cases, a major historical mistake was made.
France had to a large extent initiated both treaties, had managed to get them accepted by its European partners, but in the end vetoed its own undertakings.
Why, in both 1954 and 2005, did the French – in one case the National Assembly, in the other the electorate – reject proposals that France itself had conceived?
Both projects sought to construct a genuinely supranational Europe.
The EDC would have created a European army, in which even German troops would have been included.
The proposed defense treaty was also to be buttressed by plans for a European political community whose main features were to be defined by a constitutional commission made up of members of national parliaments.
In effect, this commission would have been the precursor to the 2003-2004 Convention for the Future of Europe, which, presided over by former French President Valéry Giscard d’Estaing drafted the constitutional treaty.
The political community of the 1950’s that France had persuaded its five European partners to accept was supposed to absorb both the European Coal and Steel Community and the EDC.
It was to have both diplomatic and military powers, as well as a legislative assembly much like today’s European Parliament – just as the 2005 EU constitutional plan would have extended the European Parliament’s powers and created a European minister of foreign affairs.
But now, as back then, fear and doubt won the day.
Political parties and others who mobilized opposition to the EDC feared a remilitarized Germany and a threat to France’s sovereignty.
Today, those in France who opposed the EU constitution succeeded in stigmatizing “Europe” as the threat.
They trumpeted France’s invasion by “Polish plumbers,” calling into question Europe’s two principal achievements: the introduction of a single market, which has undeniably boosted the French economy, and EU enlargement, which has done so much to foster democratic transition in new member states.
But the failure of the referendum in France carries more serious consequences than the EDC’s rejection.
Back in the 1950’s, the founding nations’ foreign ministers promptly turned to their Belgian colleague, Paul-Henri Spaak, for fresh proposals.
After intensive discussion among the six, and especially between France and Germany, the Treaty of Rome was drawn up and signed within two years of the EDC debacle.
By contrast, two years after the French and Dutch No votes, there is no sign of a Plan B, despite the claims of the French politicians who helped mobilize the No vote. Europe’s Franco-German locomotive has broken down and ratification has stopped, even though member states that had yet to ratify the treaty could have completed the process of ratification.
France’s loss of influence in Europe is no longer at stake today, because the notion of influence presupposes that the overriding preoccupation of EU member states is to advance their own national interests.
If Europe were only about gaining the upper hand, it would generate perpetual conflict.
The reality is that Europe does manage to move ahead, but step by step through mutual compromise.
The real question has more to do with France’s credibility and its capacity to remain a driving force in Europe.
A journalist recently expressed the view that France’s special role in Europe was due to its “centrality,” meaning that the French are, in equal measure, both open to the world and attached to their nation. They also participate successfully in a market economy while seeking to preserve an egalitarian social model.
The No vote sullied this image of a balanced France.
Indeed, the French themselves are among the first to lament their bleak situation, inventing a new concept – “la déclinologie” – to describe this loss of self–confidence.
Moreover, the No vote has given a new legitimacy to euro-skepticism in other member states.
To be sure, the rise of populism in Europe was not caused by the French; nationalism is deeply rooted in Europe’s history and has many causes.
But France’s referendum result fueled other European governments’ fears that any new proposal they might put forward to re-launch the EU constitution would fail in the face of domestic and Europe-wide opposition.
But reducing European aspirations to the goals of Realpolitik is no answer to today’s crisis.
Europeans need to recognize that strength lies in unity, and that Europe’s integration cannot be guaranteed without a common constitutional framework that promotes a common identity.
Until we think in terms of European sovereignty, rather than fret over risks to national sovereignty, the present crisis cannot be overcome.
When India Votes
KERALA, INDIA – Beginning this month, the largest exercise of the democratic franchise in history will take place, as India n voters head to the polls to elect a new national parliament. They have done this 14 times since India gained its independence.
Each time India has voted has been the world’s largest exercise in electoral democracy. India’s growing population keeps breaking its own record.
This time, the electorate includes 714 million voters, an increase of 43 million over the previous general election in 2004.
Votes will be cast in 828,804 polling stations scattered throughout the country for over 5000 candidates from seven national political parties and several state and other parties.
The process involves four million electoral officials and 6.1 million police and civilian personnel.
The numbers involved are so huge that the elections will be staggered over five phases, ending only on May 13, with electoral and security personnel being moved from state to state as polling is concluded in each place.
Despite the phased voting, the counting takes place nationwide immediately after the last phase, and the results of the elections everywhere will be announced on May 16.
A new parliament will be convened on June 2 to elect a national government to succeed the outgoing administration of Prime Minister Manmohan Singh.
India’s elections, conducted by the autonomous (and all-powerful) Election Commission of India , are an extraordinary event, and not just because of their sheer scale.
It takes the felling of a sizeable forest to furnish enough paper for 714 million ballots, and every election has at least one story of officers battling through snow or jungle, or traveling by elephant and camel, to ensure that the democratic wishes of remote constituents are duly recorded.
(There is even one polling booth for a single voter, who lives too far from civilization to travel to another polling station.)
Nor is any Indian election complete without the media publishing at least one picture of a female voter whose enthusiasm for the suffrage is undimmed by the fact that she is old, blind, crippled, toothless, purdah-clad, or any combination of the above.
The exotica do not end there.
Because so many voters are illiterate, India invented the party symbol, so that voters who cannot read the name of their candidate can vote for him or her anyway by recognizing the symbol under which they campaigned.
Symbols range from the open palm of the ruling Indian National Congress to the lotus of the Bharatiya Janata Party and variants of the hammer and sickle for India’s profusion of Communist parties.
Independent candidates can choose from an assortment of alternatives, ranging from a cricket bat to images of various large animals.
(Small ones were removed from the list when one candidate, running against another whose symbol was a parrot, wrung the neck of a live parrot at a public meeting to signify what he would do to his rival.)
India was also the first country to use an indelible stain on the voter’s fingernail to signify that he has already cast his ballot.
At every election, someone “discovers” a new chemical that will remove the stain and permit one to vote twice, though this is unlikely to make a great difference in constituencies the size of India’s, where each MP represents more than two million people.
Likewise, some distinguished voter invariably claims that his name is missing from the rolls, or that someone has already cast his vote (but usually not both).
In any case, India’s elections have a reputation for honesty.
In this election, as in previous ones, votes will be cast on electronic voting machines invented in India, which combine the virtues of simplicity, reliability, and ruggedness.
The electoral rolls carry photographs of every individual voter, as does each voter’s identity card.
The elections have also been increasingly free of violence.
There was a time when, in certain parts of India, workers could stuff ballot boxes for a candidate and political parties could “capture” polling booths.
Electronic voting machines and strict security arrangements have largely eliminated that possibility.
It has been some time since there were reports of the occasional election worker, candidate, or voter being assaulted, kidnapped, or shot.
Nothing (short of the death of a major contender) interrupts the franchise.
Elections are an enduring spectacle of free India, and give foreign journalists the opportunity to remind the world that India is the world’s largest democracy.
Indeed, Indians now take for granted that elections will take place, that they will be free and fair, and that they will result in actual transfers of power.
There are few developing countries in the world where this is true, and fewer still where poverty and illiteracy are both rife.
That may be the real miracle of what will occur in India over the next few weeks.
When Internet Boom Went Bust
While the internet boom lasted, nothing seemed able to deflate the bubble.
Few internet and dot com companies were profitable, but investors never seemed to mind.
They looked at the number of customers or subscribers as the basis for valuing internet stocks.
The name of the game became raising capital, not making profits.
Even when fashionable stocks dipped, there was remarkably little effect on the rest of the market.
People had learned that it pays to buy the dips, and were not weaned from the habit until it ceased to pay.
Now that internet fever has abated, we hear that the “fundamentals” are reasserting themselves.
But this view is as much a half-truth as the previous notion that the boom would last forever because the internet economy had created new fundamentals.
Indeed, the internet boom/bust cycle brings into question prevailing economic theories about financial markets.
What should now be clear is that the so-called fundamentals that supposedly determine stock prices are not independently given.
Instead, they are contingent on the behavior of financial markets.
There are, indeed, myriad ways in which stock prices affect the fortunes of companies: they determine the cost of equity capital; they decide whether a company will be taken over or acquire other companies; stock prices influence a company’s capacity to borrow and its ability to attract and reward management through stock options; stock prices serve as an advertising and marketing tool.
In other words, when financial markets believe a company is doing well, its “fundamentals” improve; when markets change their mind, the actual fortunes of the company change with them.
Moreover, changes in financial markets also have far reaching macroeconomic consequences.
It did not take a genius to realize that the internet boom, based not on profit expectations but on the expectations of selling stock to the public at ever increasing prices, rested on an unsustainable business model.
It also did not take a genius to see that boom would be followed by bust, but it was harder to guess when that bust would occur.
In the summer of 1999 I was convinced that an internet crash was imminent.
Yet internet stocks recovered from a short dip; some soon rose to new highs.
Institutions that live and die by relative performance felt obliged to increase their internet holdings.
When Yahoo was included in the S&P 500 Index, it jumped 30% in a day.
People like me who had sold internet stocks short in the belief that a crash was imminent were forced to cover them at whopping losses.
I remained convinced that a bust was bound to come, but I could not afford to stand by my convictions.
Despite its irrational aspects, the internet boom was more than a matter of inflated valuations.
The optimism of the financial markets not only changed the “fundamentals” of individual businesses, it had real and profound effects throughout the whole economy.
The boom did not only follow from the development of the internet; it accelerated that development and contributed to the speed and extension of technological innovation.
The same was true in telecommunications, where the boom also accelerated the spread of new technology.
The internet bust, when it finally came, was caused not by an unsound business model, but by over-extension of credit.
The present slowdown is affecting the fundamentals of individual companies almost as much as their stock prices; it also affects the financial system and macroeconomic performance.
Instead of a one-way connection in which financial markets discount the future more or less accurately, there exists a two-way connection in which financial markets shape the future they are supposed to discount.
Instead of a single outcome, there is a range of possibilities.
Which of those possibilities materializes depends not only on the future evolution of the so-called fundamentals but on financial market behavior as well.
In these circumstances, it is irrational for market participants to base their decisions solely on their expectations about fundamentals because the fundamentals do not determine market prices; on the contrary, they are shaped by market conditions.
So what matters to market participants is the future course of market prices, not the fundamentals they are said to reflect.
If market prices deviate from a theoretical equilibrium there can be no assurance that they will ever return to it.
This is why the recent boom/bust sequence in internet and telecommunication stocks is so revealing.
These developments cannot be explained in terms of efficient markets and rational expectations.
I have proposed an alternative explanation based on the two-way connection between fundamentals and valuations which I call “reflexivity”.
I am amazed and amused that economists ignore my arguments.
They claim that the phenomenon of reflexivity is already taken into account in the concept of multiple equilibria which has gained acceptance recently.
Maybe so, but I have yet to see how persistent movements away from a theoretical equilibrium can be explained within the framework of multiple equilibria.
Any divergence from equilibrium, whether one assumes that there is a unique equilibrium or many equilibria, amounts to more than noise; it is a causal factor in determining the very nature of the “equilibrium” that will prevail.
By ignoring this condition, efficient market theory presents a totally misleading picture of financial markets.
Why is my reasoning dismissed out of hand?
Because it leads to the conclusion that financial markets are inherently unpredictable.
What is the value of a scientific theory, I am asked, if it does not yield useable predictions?
I contend that it would be better to recognize the uncertainties inherent in the behavior of financial markets than to cling to a supposedly scientific theory that distorts reality.
One consequence of the realization that financial markets are potentially unstable, is a recognition of the need for financial authorities to make it their business to prevent excesses.
The debate about efficient markets may be arcane, but the consequences for our lives are very real indeed.
The Myth of Khaki Democracy
NEW YORK – Egypt and Thailand have little in common, except for one thing. In both countries, at different times, educated people who pride themselves on being democrats have ended up applauding military coups against elected governments.
They had resisted oppressive military regimes for many years.
But, in Thailand in 2006, as in Egypt last month, they were happy to see their political leaders ousted by force.
This perversity is not without reason.
The elected leaders in both countries, Thaksin Shinawatra in Thailand and Mohamed Morsi in Egypt, were good examples of illiberal democrats: they tended to view their electoral success as a mandate to manipulate constitutional norms and behave like autocrats.
They are not alone in this respect.
In fact, they are probably typical of leaders in countries with little or no history of democratic government.
Turkey’s prime minister, Recep Tayyip Erdoğan, is in the same camp.
And if the leaders of Algeria’s Islamic Salvation Front (FIS) had been allowed to take power in 1991, after their early success in a democratic election, they would almost certainly have been illiberal rulers.
(Instead, they were crushed by a military coup, before a second round of elections could take place, triggering a brutal eight-year civil war in which an estimated 200,000 people died.)
The aftermath of the 2006 coup in Thailand was not nearly so bloody.
But the bitterness lingers among Shinawatra’s supporters – even now, when his sister, Yingluck, is Prime Minister.
Street violence is a constant threat.
Only the frail and ailing 85-year-old King Bhumibol Adulyadej still functions as a symbol of national cohesion.
Without him, fighting between the rural poor and the urban elites could quickly erupt again.
This does not bode well for Thai democracy.
Another military intervention is the last thing the country needs.
In Egypt, things look far worse at the moment.
The leader of the military coup, General Abdul-Fattah al-Sisi, has promised to confront Morsi’s Muslim Brotherhood with maximum force.
In two separate incidents in July, security forces opened fire on supporters of the Brotherhood as they peacefully protested against Morsi’s ouster and arrest, killing almost 200 people.
Secret-police units that were active under former President Hosni Mubarak (and known for their frequent use of torture) are being reconstituted for the first time since the 2011 revolution.
None of this is either democratic or liberal.
And yet many Egyptians, including some human-rights activists, have endorsed it.
One man, who was savagely stomped by a member of the armed forces in Tahrir Square in 2011, now claims that the Egyptian people should “stand together” with the military, and that all Muslim Brotherhood leaders should be arrested.
A prominent democracy activist, Esraa Abdel Fattah, has denounced Morsi’s party as a gang of foreign-backed terrorists.
The army leadership is saying the same thing: Special measures, maximum force, and revived security units are all necessary to “fight terrorism.”
Some foreign commentators have been as deluded as Egyptians who back the coup.
A well-known Dutch novelist voiced a rather typical response, saying that he didn’t care much what happened to Morsi’s supporters, for they were all “Islamo-fascists” anyway.
And foreign governments, including that of the United States, are averting their eyes.
President Barack Obama’s administration refuses to describe what happened as a “coup.”
US Secretary of State John Kerry even claimed that the military was “restoring democracy.”
There is no doubt that Morsi’s government was inexperienced, often incompetent, and showed little interest in listening to views other than those of its supporters, which were often far from liberal.
But Morsi’s people are not foreign-backed terrorists. Nor was Morsi an Egyptian version of Iran’s Ayatollah Ruhollah Khomeini.
The election that brought Morsi to power gave a political voice for the first time to millions of people, many of them poor, uneducated, and religious.
They may not have been very good democrats, or even particularly tolerant of different views.
Many of them had opinions – for example, on the role of women, on sex, and on the place of Islam in public life – that secular liberals find abhorrent.
But silencing these people by force, and calling them foreign-backed terrorists, can have only one result: more violence.
If the outcomes of democratic elections are not respected, people will seek other means to make themselves heard.
Morsi’s autocratic inclinations may have damaged democracy; taking him out in a coup deals it a mortal blow.
How to bridge the gap in developing countries between secular, more or less Westernized urban elites and the rural poor is an old question.
One solution is to enforce secular modernization by oppressing the poor and their religious organizations.
Egypt has already endured the harsh rule of secular police states, of both the right and the left.
The other solution is to give democracy a chance.
This is not possible without allowing some form of religious expression in public life.
No democracy in the Middle East that fails to take account of Islam will work.
But, without the freedom to express other views and beliefs, democracy will remain illiberal.
This is hard for Islamist parties to accept.
Many Islamists may in fact prefer an illiberal to a liberal democracy.
But liberals who truly favor democracy must accept that Islamists are entitled to play a political role, too.
The alternative is to revert to illiberal autocracy.
Applauding the military coup against Morsi makes this the more likely outcome.
When Marijuana is Legal
BRISBANE – What will happen if Californians votes this November to legalize marijuana use by any adult over the age of 21 years?
Let’s ignore for the moment the vexed constitutional issues that will be raised if a US state enacts legislation that conflicts with federal law.
Let’s focus instead on what may happen if the law changes as the referendum proposes.
If we are to believe the referendum’s supporters, all Californians will be winners.
The change will legitimize marijuana’s de facto legal status since passage of Proposition 215 in 1996.
It will thus reduce state expenditure on enforcing a widely violated law; remove marijuana growing and selling from the black market; enable any adult who wishes to use marijuana to do so; and introduce a tax on legal marijuana sales that will fill state coffers with revenue that formerly went to illegal growers (so long as there is no large-scale tax evasion).
By contrast, opponents predict that the change will increase rates of marijuana use, and thus magnify the harm arising from that use.
The adverse consequences of greatest concern include more marijuana-related road traffic accidents and deaths; more psychoses and other serious mental health problems among heavy users; and heavier marijuana use by young people, negatively affecting their life chances.
These effects, they argue, will more than offset any gains from tax revenue and savings from law enforcement.
It is difficult to know who is right, because no other country has adopted this policy.
The Netherlands, which is popularly believed to have legalized cannabis use along these lines, has in fact tolerated only small-scale retail sales of marijuana in a limited number of coffee shops in its larger cities.
Marijuana cultivation remains illegal and coffee shop sales are regulated – more strictly in recent years in response to complaints from neighboring countries about “drug tourism.”
Nevertheless, some broad predictions can be made.
First, openly tolerating a market in a previously illegal commodity will expand the number of users, especially if the retail price is lower than the black-market price (as is proposed in the Ammiano Bill currently before the California legislature).
Use may not increase immediately, but it will over time, because marijuana will become more freely available, much cheaper (in order to discourage the persistence of a black market), and its use will be implicitly condoned.
Experience with alcohol suggests that marijuana will be available to underage users (as it is now), whatever the minimum legal age.
Thus, legally available cheaper marijuana will probably mean more use by more young people, and probably more daily use later into adulthood. In general, the more people who use a drug, the larger the number of problem users there will be (on the reasonable assumption that problem users comprise a fixed proportion of all users).
If current estimates are correct, around 10% of users (and one in six who start in adolescence) may become dependent on marijuana – that is, find it difficult to control or discontinue their use.
A minority of these problem users will seek professional help to quit.
Dependent marijuana users are more likely to experience road and workplace accidents (if they drive or work while intoxicated); increased respiratory disease (if they smoke marijuana); exacerbations of some serious mental disorders; and impaired school and work performance.
It is uncertain how far these adverse effects can be mitigated by preventive measures such as implementing roadside drug-testing programs, persuading users to use vaporizers rather than smoke joints, discouraging young people from using marijuana, and encouraging early treatment for problem users.
Experience with alcohol suggests that these approaches may modestly reduce, but not eliminate, the harms associated with use, especially if sellers are allowed to promote their wares.
Indeed, the scale of any increase in marijuana use will critically depend on how tightly regulated marijuana sales are – how many licensed growers there are, the number of sales outlets, their locations and trading hours, eligibility requirements for use, content of THC (marijuana’s psychoactive ingredient), and how much promotion and advertising is allowed.
If marijuana were allowed to be marketed much like alcohol is now, we could expect more problem users than if it were regulated more like pharmaceutical drugs (say, by requiring users to be licensed; restricting the number of sales locations, hours of sale, and licensed growers; and imposing high rates of taxation on higher-THC marijuana).
It will be a major policy challenge to get this balance right.
Greater restrictions would provide incentives for illegal operators to remain, while less restrictive regulation would discourage black marketeers, but at the price of increasing the number of users and problem users.&#160;
Marijuana policy involves a choice between the evils of current repressive policies and the evils of increased use under a legal market.
Californians will have to decide how much weight to give to respect for adult liberty, protection of minors, avoidance of a large-scale black market, fiscal considerations, and protection of marijuana users’ health.
If they vote for legalization, it will probably be 20 years or more before anyone can say whether, on balance, they decided wisely.
When Prevention is Better than Relief
PRINCETON – When the earthquake and tsunami hit Japan in March, Brian Tucker was in Padang, Indonesia.
Tucker was working with a colleague to design a refuge that could save thousands of lives if – or rather, when – a tsunami like the one in 1797 that came out of the Indian Ocean, some 600 miles southeast of where the 2004 Asian tsunami originated, strikes again.
Tucker is the founder and president of GeoHazards International, a nonprofit organization whose mission is to reduce death and suffering due to earthquakes in the world’s most vulnerable communities.
Padang is one of those communities.
Just to its northwest, in Banda Aceh, 160,000 lives were lost in the 2004 tsunami.
Now, geologists say, the fault that triggered that tsunami is most likely to rupture farther south, putting low-lying coastal towns like Padang, with a population of 900,000, at high risk of a major earthquake and tsunami within the next 30 years.
In Banda Aceh, the tsunami killed more than half the city’s population.
In Padang, according to an estimate by the director of the city’s disaster management office, a similar tsunami could kill more than 400,000 people.
Tucker says that he has stood on the beach in Padang, looking out at the ocean and trying to imagine what it would be like to see a five-meter-high wall of water stretching across the horizon, bearing down on the city.
Now that we have seen the footage of the tsunami that hit Japan, the demands on our imagination have been lessened – except that we have to imagine away the sea walls that Japan had built to reduce the impact of the tsunami.
True, those walls did not work as well as had been hoped, but Japan was nonetheless much better prepared for a tsunami than Padang is.
In Padang, even with advance warning of a tsunami, higher ground is too far away, and the narrow streets too choked with traffic, for many people to get to safety in time.
GeoHazards International is therefore working on a more practical idea, which it calls a Tsunami Evacuation Raised Earth Park (TEREP).
The idea is to build small hills in low-lying parts of the city, with level tops that could be used as parks or sports fields.
With the few minutes’ warning that an earthquake’s strong shaking would automatically provide, people could walk to a TEREP and be safe above the highest level a tsunami could reach.
Such raised earth parks are a low-cost solution to the tsunami danger in low-lying coastal areas.
They use only local materials, provide a valuable community resource in normal times, and have the potential to save hundreds of thousands of lives when a tsunami strikes.
Nevertheless, GeoHazards International lacks the resources to build anything like enough TEREPs to meet the need.
After 20 years of operation, the organization remains tiny, especially when compared to organizations like the Red Cross, which primarily do disaster relief work.
People are willing to donate hundreds of millions of dollars to help people after a disaster – even after a disaster in a wealthy country like Japan – but are unwilling to invest anything like the same amount to save lives before a predictable disaster strikes.
One reason for this is that preventing a disaster does not make good television.
People give to identifiable victims.
If we build raised earth parks, we will never see the people who, but for our aid, would have died; no orphans in desperate need will appear on the nightly news.
But isn’t it much better to keep parents safe than to help orphans after their parents have been killed?
This is a situation in which we must stretch our imagination, to understand and be motivated by the good that we are doing.
Unfortunately, not everyone can do that.
Another reason why we do not give to prevent disasters should be familiar to anyone who has ever delayed going to the dentist because the prospect of serious pain in the coming weeks or months just wasn’t as motivating as the reluctance to face some more immediate slight discomfort.
We tell ourselves that maybe we won’t get a toothache after all, even though we know that the odds are that we will.
Most of us are not very good at giving proper weight to future events, especially if they are uncertain.
So we may tell ourselves that the geologists could be wrong, and perhaps no tsunami will hit Padang in the next 30 years, and by then perhaps we will have new and better technologies for predicting them, giving people more time to get to higher ground.
Instead, we should be guided by the best estimates of the chances that an intervention will save lives, as well as by the number of lives that would be saved, and the cost of saving those lives.
The evidence suggests that building raised earth parks in places like Padang is very good value indeed.
When Technophobia Becomes Toxic
STANFORD – During the late 1990’s, a singular phenomenon appeared in countries around the world.
One after another, food and beverage companies capitulated to activists opposed to a promising new technology: the genetic engineering of plants to produce ingredients.
They are still capitulating to this day.
The Japanese brewer Kirin and the Danish brewer Carlsberg eliminated genetically engineered ingredients from their beers.
In the United States, the fast-food giant McDonald's banned them from its menu; food manufacturers Heinz and Gerber (then a division of Switzerland-based Novartis) dropped them from their baby-food lines; and Frito-Lay demanded that its growers stop planting corn engineered to contain a bacterial protein that confers resistance to insect predation.
These measures were rationalized in various ways, but the reality is that by yielding to the demands of a minuscule number of disingenuous activists, the companies opted to offer less safe products to consumers, thereby exposing themselves to legal jeopardy.
Every year, innumerable packaged-food products worldwide are withheld or recalled from the market due to the presence of “all natural” contaminants like insect parts, toxic molds, bacteria, and viruses.
Because farming takes place outdoors and in dirt, such contamination is a fact of life.
Over the centuries, the main culprit in mass food poisoning often has been contamination of unprocessed crops by fungal toxins – a risk that is exacerbated when insects attack food crops, opening wounds that allow fungi (molds) to get a foothold.
For example, fumonisin and some other fungal toxins are highly toxic, causing esophageal cancer in humans and fatal diseases in livestock that eat infected corn.
Fumonisin also interferes with the cellular uptake of folic acid, a vitamin that reduces the risk of neural tube defects in developing fetuses, and thus can cause folic acid deficiency – and defects such as spina bifida – even when one’s diet contains what otherwise would be sufficient amounts of the vitamin.
Many regulatory agencies have therefore established recommended maximum fumonisin levels permitted in food and feed products made from corn.
The conventional way to meet those standards and prevent the consumption of fungal toxins is simply to test unprocessed and processed grains and discard those found to be contaminated – an approach that is both wasteful and failure-prone.
But modern technology – specifically, the genetic engineering of plants using recombinant DNA technology (also known as food biotechnology or genetic modification) – offers a way to prevent the problem.
Contrary to the claims of food-biotech critics, who insist that genetically modified crops pose risks (none of which has actually occurred) of new allergens or toxins in the food supply, such products offer the food industry a proven and practical means of tackling the fungal contamination at its source.
An excellent example is corn that is crafted by splicing into commercial varieties a gene (or genes) from a harmless bacterium.
The bacterial genes express proteins that are toxic to corn-boring insects, but that are harmless to birds, fish, and mammals, including humans.
As the modified corn fends off insect pests, it also reduces the levels of the mold Fusarium, thereby reducing the levels of fumonisin.
Indeed, researchers at Iowa State University and the US Department of Agriculture have found that the level of fumonisin in the modified corn is reduced by as much as 80% compared to conventional corn.
Similarly, an Italian study of weaned piglets that were fed either conventional corn or the same variety modified to synthesize a bacterial protein that confers resistance to insect predation found that the modified variety contained lower levels of fumonisin.
More importantly, the piglets that consumed the modified corn achieved a greater final weight, a measure of overall health, despite no difference in feed intake between the two groups.
Given the health benefits – to say nothing of the often higher and more reliable yields – governments should introduce incentives aimed at increasing use of such genetically engineered grains and other crops.
In addition, one would expect public-health advocates to demand that such improved varieties be cultivated and used for food, not unlike requirements that drinking water be chlorinated and fluoridated.
And food producers that are committed to offering the safest and best products to their customers should be competing to get genetically engineered products into the marketplace.
Alas, none of this has come to pass.
Activists continue to mount vocal and tenacious opposition to genetically engineered foods, despite almost 20 years of demonstrated, significant benefits, including reduced use of chemical pesticides (and thus less chemical runoff into waterways), greater use of farming practices that prevent soil erosion, higher profits for farmers, and less fungal contamination.
Responding to the bleating of activists, policymakers have subjected the testing and commercialization of genetically engineered crops to unscientific and draconian regulations, with dire consequences.
A groundbreaking study of the political economy of agricultural biotechnology concluded that over-regulation causes “delays in the global diffusion of proven technologies, resulting in a lower rate of growth in the global food supply and higher food prices.”
Current policies also create “disincentives for investing in further research and development, resulting in a slowdown in innovation of second-generation technologies anticipated to introduce broad consumer and environmental benefits.”
Everyone involved in food production and consumption has suffered: consumers (especially in developing countries) have been subjected to avoidable health risks, and food producers have placed themselves in legal jeopardy for selling products known to have “design defects.”
Public policy that discriminates against and discourages vital innovations in food production is not policy that has the public’s interest at heart.
Ready for a US Rate Hike?
MANILA – The possibility that the US Federal Reserve could raise the interest rate for the first time in a decade sent jitters across emerging markets for weeks.
Though the Fed has now decided to keep its policy rate ‎unchanged, it also stated that a rate hike is still on the table for 2015.
The concern is that countries that are dependent on foreign financing could be hit by sudden outflows of international capital, or that currency depreciation following the Fed hike could raise debt-servicing costs for countries and businesses.
Governments in the developing world would be wise to worry less about interest-rate changes in the United States – which, in any case, they cannot control – and think more about policy changes they can make at home to strengthen their economies’ resilience.
An increase in US interest rates is not necessarily bad news for emerging countries.
Many developing countries – especially in Asia – are in much better macroeconomic shape than they were just before the Asian financial crisis of the late 1990s or at the onset of the 2008 global financial crisis.
And the Fed is likely to raise rates only if it judges US economic growth to be strong and sustainable, which would be a positive sign for the global economy in general.
Furthermore, a delay in raising rates carries its own dangers, encouraging yield-hungry investors to take larger risks – possibly necessitating a sharper or more abrupt change in interest rates in the future.
Emerging countries can enhance their resilience to fluctuations in global interest rates by pursuing sound fiscal and monetary policies, continuing necessary structural reforms, and strengthening their financial systems.
In particular, recent research suggests four key policy areas in which governments should consider intervening.
For starters, countries should embrace policies that favor foreign direct investment (FDI) over inflows that can be withdrawn more quickly, such as foreign bank loans, debt, or equity investments.
My research with Hui Tong of the International Monetary Fund shows that countries whose capital inflows that are mainly in the form of FDI tend to be more resilient to foreign financial shocks.
When the global financial crisis erupted, countries with high FDI relative to total capital flows tended to experience a less severe liquidity crunch.
Second, exchange rates need to reflect economic fundamentals.
But while theory suggests that flexible exchange rates should blunt foreign monetary or financial shocks, in practice, such a currency regime rarely works on its own.
Indeed, my research with the Asian Development Bank’s Xuehui Han has shown that when the US raises or lowers interest rates, most developing countries tend to follow suit, even when they have a flexible exchange rate.
The key reason is that they want to avoid large swings in the value of their currency.
Appreciation can harm competitiveness, while depreciation increases the cost of servicing foreign-currency debt, erodes market confidence, and leads to higher inflation.
The notable exceptions to this trend are countries that manage cross-border capital flows, especially the corporate sector’s exposure to foreign-currency debt.
Indeed, certain types of capital-flow management – including limiting domestic debt denominated in foreign currency for both firms and households – have been shown to increase resilience.
Third, domestic macroprudential and microprudential policies increase resilience.
These policies should aim at reducing or eliminating the wedge between activities that are good for individuals, banks, and firms, and those that benefit society as a whole.
One example of such a policy is to link banks’ mandatory reserve ratios to the speed at which credit is expanding or to the stage of the business cycle.
Thus, during periods of expansion, when banks are eager to fund ever more risky borrowers, the reserve ratio rises, curbing potentially disruptive asset bubbles or overinvestment.
For those countries capable of designing and implementing prudential regulations, management of cross-border capital flows becomes less useful and less desirable.
Finally, it is no longer appropriate to judge whether a country’s foreign-currency reserves are adequate based on how many months of imports they can cover.
Instead, the question to ask is whether the reserves can comfortably service the public and private sectors’ debt denominated in foreign currencies.
The US will normalize its interest rate policy sooner or later according to its need.
For other countries, it is important to focus on policies that can strengthen resilience to foreign financial or monetary shocks.
When will we win the war against cancer?
Thirty years ago America's president declared ``war on cancer''.
This year, in the US alone, 1,500 men, women and children lose their personal battle with cancer every day.
When will the war end?
I believe that for many cancers the war will end soon.
Thanks to knowledge from basic research, we have new tools with which to attack cancer.
These new tools are providing more rapid diagnosis and more effective treatments.
They are producing new drugs that target molecular changes unique to cancer cells, making it possible to predict who may be at risk for developing cancer because of genetic or environmental factors.
These advances will save many lives.
Cancer affects many different organs and tissues in the body.
Although cancers differ greatly in their appearance and behavior, they have a common cause: damage to genes.
Genes are chemical coding units that specify the structure and function of our bodies.
All the cells in our bodies have the same complement of genes, half from each of our parents.
What makes one kind of cell different from another is the combination of genes that are active in each cell.
Genes can be damaged by environmental factors, such as radiation or chemicals.
They can also be damaged by the products of normal metabolism.
Our bodies have elaborate repair systems that maintain the integrity of our genes, even in the presence of damaging agents.
Occasionally, however, damage is not repaired.
If the damage occurs in key genes that regulate cell growth, cancer can develop.
The repair systems themselves help protect us from cancer.
For example, one kind of colon cancer develops more frequently in individuals who have a defect in a system that repairs damaged genes.
Cell growth is regulated by a balance between genes that stimulate growth, and those that inhibit it.
Genes that stimulate cell growth are called oncogenes ; those that inhibit it are called tumor suppressor genes .
When oncogenes are activated, or tumor suppressor genes disabled, cells can multiply out of control.
Oncogenes can be activated by mutation (changes in gene structure) or by gene amplification (production of many copies of a gene).
Tumor suppressor genes can be disabled by mutation, or by spontaneous loss during cell division.
Cancer cells are genetically unstable, that is, they have abnormal numbers of chromosomes, the cellular elements that carry genes.
Genetic instability contributes to loss of growth control by producing imbalances in gene activity.
Traditionally cancer has been diagnosed by the characteristic appearance of cancer cells observed through a microscope.
Increasingly, cancers are identified by their characteristic patterns of gene activity (their ``molecular signature'').
New techniques, including ``gene chips'', have made it possible to measure the activity of thousands of genes simultaneously.
The molecular signatures can be used to classify cancers more precisely, making them easier to treat.
For example, these techniques have been used to identify some kinds of lymphomas (cancers of the blood) that respond well to chemotherapy.
Similar techniques have been used to identify genes involved in tumor metastasis.
Some genetic changes are common to many types of cancer, whereas other changes are specific to particular cancers.
Dozens of oncogenes and tumor suppressor genes have been identified, providing targets for the development of new anti-cancer drugs.
A striking recent example is a drug that targets a molecular change characteristic of chronic myelogenous leukemia cells.
The drug is providing an alternative to bone marrow transplantation, the only treatment that was effective previously.
Mutations in certain genes have been found to cause hereditary forms of breast and ovarian cancer.
This has made it possible to identify women who may be at high risk because they inherit these susceptibility genes.
(Inherited forms of breast and ovarian cancer are only a small fraction of the total.)
Close observation and rapid treatment, or prophylactic surgery, can reduce the risk of these inherited forms of cancer.
Advances in imaging techniques are making it possible to detect cancer earlier, which can help eliminate tumors before they become life-threatening.
New imaging techniques are also helping to guide surgery, so that tumors can be removed more precisely.
Other leads are emerging from a better understanding of how tumors grow.
Tumors need a plentiful blood supply, so they produce factors that induce the formation of blood vessels (a process called angiogenesis).
New drugs, which have been designed to inhibit tumor angiogenesis, are showing promise in clinical trials.
It is estimated that 10-15% of cancer worldwide is associated with viral infection.
Liver cancer, which is associated with hepatitis, and cervical cancer, associated with human papilloma virus infection, are prominent examples.
A vaccine against hepatitis B virus is proving to be effective in reducing the incidence of liver cancer.
Rapid and specific diagnostic tests for the human papilloma virus are supplementing traditional Pap tests, helping to identify women at risk for cervical cancer.
One of the most intriguing discoveries of modern biology is that cell death is intimately involved with growth and development.
For example, nerve cells are produced in excess, and some die in order for proper connections to be established in the nervous system.
Cells contain a ``suicide program'' that is activated when the cells are damaged beyond repair.
Intriguingly, cancer cells respond abnormally to death signals.
Some of the genes involved in the suicide program are the same genes that are altered in cancer cells.
A promising approach now being explored for treating cancer is to activate the suicide program of cancer cells without disturbing normal cells.
Although the future cannot be predicted with assurance, it seems reasonable to expect that the burden of cancer will be reduced substantially in the next ten years by new treatments.
For some cancers, like liver cancer and chronic myelogenous leukemia mentioned, this is already happening.
For other cancers, the means for prevention are at hand, but the application is problematical, as in the case of lung cancer caused by cigarette smoking.
It is unlikely that most cancers will disappear in the near future; rather they will be diagnosed more precisely and treated more effectively, thereby increasing the number of people who can be cured.
When Women Lead
MUNICH – Would the world be more peaceful if women were in charge?
A challenging new book by the Harvard University psychologist Steven Pinker says that the answer is “yes.”
In The Better Angels of Our Nature, Pinker presents data showing that human violence, while still very much with us today, has been gradually declining.
Moreover, he says, “over the long sweep of history, women have been and will be a pacifying force.
Traditional war is a man’s game: tribal women never band together to raid neighboring villages.”
As mothers, women have evolutionary incentives to maintain peaceful conditions in which to nurture their offspring and ensure that their genes survive into the next generation.
Skeptics immediately reply that women have not made war simply because they have rarely been in power.
If they were empowered as leaders, the conditions of an anarchic world would force them to make the same bellicose decisions that men do.
Margaret Thatcher, Golda Meir, and Indira Gandhi were powerful women; all of them led their countries to war.
But it is also true that these women rose to leadership by playing according to the political rules of “a man’s world.”
It was their success in conforming to male values that enabled their rise to leadership in the first place.
In a world in which women held a proportionate share (one-half) of leadership positions, they might behave differently in power.
So we are left with the broader question: does gender really matter in leadership?
In terms of stereotypes, various psychological studies show that men gravitate to the hard power of command, while women are collaborative and intuitively understand the soft power of attraction and persuasion.
Americans tend to describe leadership with tough male stereotypes, but recent leadership studies show increased success for what was once considered a “feminine style.”
In information-based societies, networks are replacing hierarchies, and knowledge workers are less deferential.
Management in a wide range of organizations is changing in the direction of “shared leadership,” and “distributed leadership,” with leaders in the center of a circle rather than atop a pyramid.
Former Google CEO Eric Schmidt said that he had to “coddle” his employees.
Even the military faces these changes.
In the United States, the Pentagon says that Army drillmasters do “less shouting at everyone,” because today’s generation responds better to instructors who play “a more counseling-type role.”
Military success against terrorists and counterinsurgents requires soldiers to win hearts and minds, not just break buildings and bodies.
Former US President George W. Bush once described his role as “the decider,” but there is much more to modern leadership than that.
Modern leaders must be able to use networks, to collaborate, and to encourage participation.
Women’s non-hierarchical style and relational skills fit a leadership need in the new world of knowledge-based organizations and groups that men, on average, are less well prepared to meet.
In the past, when women fought their way to the top of organizations, they often had to adopt a “masculine style,” violating the broader social norm of female “niceness.”
Now, however, with the information revolution and democratization demanding more participatory leadership, the “feminine style” is becoming a path to more effective leadership.
In order to lead successfully, men will not only have to value this style in their women colleagues, but will also have to master the same skills.
That is a trend, not (yet) a fact.
Women still lag in leadership positions, holding only 5% of top corporate positions and a minority of positions in elected legislatures (just 16% in the US, for example, compared to 45% in Sweden).
One study of the 1,941 rulers of independent countries during the twentieth century found only 27 women, roughly half of whom came to power as widows or daughters of a male ruler.
Less than 1% of twentieth-century rulers were women who gained power on their own.
So, given the new conventional wisdom in leadership studies that entering the information age means entering a woman’s world, why are women not doing better?
Lack of experience, primary caregiver responsibilities, bargaining style, and plain old discrimination all help to explain the gender gap.
Traditional career paths, and the cultural norms that constructed and reinforced them, simply have not enabled women to gain the skills required for top leadership positions in many organizational contexts.
Research shows that even in democratic societies, women face a higher social risk than men when attempting to negotiate for career-related resources such as compensation.
Women are generally not well integrated into male networks that dominate organizations, and gender stereotypes still hamper women who try to overcome such barriers.
This bias is beginning to break down in information-based societies, but it is a mistake to identify the new type of leadership we need in an information age simply as “a woman’s world.”
Even positive stereotypes are bad for women, men, and effective leadership.
Leaders should be viewed less in terms of heroic command than as encouraging participation throughout an organization, group, country, or network.
Questions of appropriate style – when to use hard and soft skills – are equally relevant for men and women, and should not be clouded by traditional gender stereotypes.
In some circumstances, men will need to act more “like women”; in others, women will need to be more “like men.”
The key choices about war and peace in our future will depend not on gender, but on how leaders combine hard- and soft-power skills to produce smart strategies.
Both men and women will make those decisions.
But Pinker is probably correct when he notes that the parts of the world that lag in the decline of violence are also the parts that lag in the empowerment of women.
When Yes Means No
Most commentators routinely assume that a Yes vote in the May 29 French referendum on the proposed European Union Constitution would be good for Europe and the EU.
But there is reason to doubt the conventional wisdom.
The French referendum will determine the political fate of French President Jacques Chirac – not France’s commitment to Europe, which is fixed and immutable.
If the French vote No, M. Chirac is finished.
If they vote Yes, he is re-empowered.
Europe clearly would be better off with Chirac weakened than strengthened, even if it means a temporary slowing of the pace of integration.
Chirac practices the politics of “scapegoatism” and excuses.
According to Chirac, France’s exports are lagging not because France is losing its international competitiveness – although it is, especially to Germany – but because of the strong euro.
Likewise, France’s economic growth is waning not because France has failed to undertake necessary structural reforms, but because European interest rates are too high.
Who does Chirac think is at fault?
The European Central Bank, of course, for allowing the euro to appreciate too much and for not cutting interest rates enough.
Unfortunately, this is typical of Chirac’s leadership style: blame others, excuse yourself, and ignore reform.
This is hardly the type of leadership Europe needs to survive and prosper in the modern world.
But Europe will get more of it if the French vote Yes.
Europe also would continue to be dominated by the interests of the big countries, with the small countries in the back of the bus.
The fate of the Franco-German axis, in particular, hinges on the outcome of the referendum.
A Yes invigorates the axis; a No weakens it.
“Who would follow Chirac if the French vote No?” asked one EU ambassador in a recent interview. “Even Berlin has options.”
If Chirac goes down, German Chancellor Gerhard Schroeder loses face as well. Two birds would be wounded with one stone.
The prospect of a re-energized Franco-German axis is why the Dutch – who are traditionally pro-European but do not want a Europe that marginalizes small countries – might vote No in their referendum (which follows shortly upon France’s) if the French vote Yes.
A Dutch No would signal rejection of a corporatist Europe dominated by French and German interests, as well as representing a protest against the unpopular conservative and moralistic policies of the Balkenende government.
France is not the only EU country with an unpopular leader.
Eastern Europe also has a big stake in the outcome of the French referendum.
Chirac made it perfectly clear how he feels about the new smaller countries when he told them to “shut up” when they disagreed with him over Iraq.
More recently, Chirac’s foreign minister, Michel Barnier, chastised the Romanian President Traian Barescu for lacking a “European reflex,” because Barescu plans to align Romania with Anglo-Saxon liberal economic policies, and wants a special relationship with the US and UK to improve security in the Black Sea region.
Rather than buckle to France’s will, however, the Romanian president warned France’s leaders to stop lecturing his country – a sure sign that French influence is on the wane even in countries with which it has had close historical ties.
A French No would sit well with the Union’s newer members from Eastern Europe, who know Chirac is not their friend, and who are more attracted by promises of rapid economic growth than social protection and corporate state mischief.
Finally, the referendum contains an unstated question about the future of European Monetary Union (EMU) and the euro.
The Yes camp argues that rejecting the Constitution would damage the European Central Bank (ECB) and the euro.
But why would the EU fall into chaos and the euro wilt if the Treaty of Nice remains in force.
In the area of monetary integration, the European Constitution doesn’t change anything, other than the voting procedures in the Governing Council if EMU grows beyond 15 member countries.
A Yes vote, on the other hand, would encourage a reassured Chirac to continue his policy of no reform and scapegoating the ECB.
External political pressure on the ECB and its president, Jean-Claude Trichet, to lower interest rates and talk the euro down surely would increase.
This is more likely to bring the euro down than a No vote.
Where are Europe\u0027s Optimists?
The European Union has been so successful that you would have thought there would be dancing in the streets at its 50th anniversary.
Alas, there has been only persistent talk of failure – to achieve political union, to adopt a constitution, to exercise global leadership and vision, to implement economic reforms, and the list of laments goes on. “The EU is on autopilot, in stalemate, in deep crisis,” claims Joschka Fischer, the former German foreign minister and an important voice in Europe.
But this angst and hand-wringing simply is not convincing.
Consider Germany.
After World War II, it was a beaten and devastated nation with a history of dysfunctional nationalism. Today, a totally rehabilitated Germany is as thoroughly European and democratic as any other EU nation – indeed, under the leadership of Angela Merkel, Germany has earned its place as Europe’s most important country.
The EU deserves great credit for this transformation.
After the War, it was a prime EU objective to moderate nationalism and promote regionalism in Germany, a feat that was accomplished to the benefit of all Europeans.
Shouldn’t they – and others – be celebrating this major success instead of becoming bogged down in defeatist talk of crisis and stalemate?
Besides, where is the alleged crisis and stalemate?
On the economic front, the euro-zone economy performed extremely well in 2006, and most experts predict that economic growth in 2007 will be faster in Europe than in the United States, notwithstanding Germany’s hefty increase in value-added tax.
Even more impressive, the lack of full political union in Europe has not stalemated the EU’s adoption of the euro and the common monetary policy.
On the contrary, the quick international acceptance of the euro as one of the world’s premier currencies, aided by the European Central Bank’s determination to keep inflation under control, indicates that the monetary project is going full steam ahead.
Currently, the euro is strengthening against the US dollar, because central banks in Asia and the Middle East are increasing the euro component of their foreign exchange reserves – a clear vote of confidence in the new currency and the ECB.
Both the success of the euro and the smooth functioning of the common monetary policy show that important “European” projects can be accomplished even without the benefit of full political union.
While the EU’s member states have proved themselves capable of putting aside their differences when forging a common monetary policy, a common foreign policy has proved more elusive.
On issues like the Iraq war and American plans to install missile defenses in Poland and the Czech Republic, Europeans appear to find it difficult to speak with a single voice.
The reason is clear: Europe remains too dependent on the US for its defense needs.
Some EU members (Germany and Italy) are more dependent on the US than others (France), and thus more likely to support US strategic initiatives.
So long as these differences remain, so will Europe’s political divisions.
But defense independence vis-à-vis US implies a vast re-allocation of resources from social welfare programs to the military, which so far has not interested the Europeans.
Rather than reflecting a lack of political will to come together and speak with a single voice on strategic issues – the conventional interpretation – diverse voices are the result of an implicit choice that Europeans make.
Many Europeans have decided that it is better to keep their robust social welfare programs and forgo a common foreign and defense policy, which would require massive changes in the European way of life.
Moreover, with the disappearance of the Soviet Union as a common threat, Europe’s left-wing parties are increasingly defining themselves as anti-American.
Thus, when José Zapatero and the Socialists took control of Spain’s government from the conservatives, the country’s foreign policy changed from supporting the Americans in Iraq to opposing them.
(But, interestingly, the switch from Silvio Berlusconi to Romano Prodi in Italy is having a less dramatic effect on Italy’s foreign policy because of the country’s greater defense dependence on the US.)
Naturally, with socialists and social democrats in power in some EU countries, and conservatives in power in others, it is difficult for Europeans to find a single voice.
This may change if a new common threat to Europe emerges, or if conservative parties follow the left and become anti-American.
Given US President George W. Bush’s extreme unpopularity in Europe, the emergence of an anti-American right should no longer be considered a remote possibility.
But with Europe enjoying an unprecedented level of economic prosperity as a result of the EU’s dramatic accomplishments during its first 50 years, further political unification clearly can wait.
Congratulations, not hand-wringing, should be the order of the day.
Where Are the Global Leaders?
The G-8 Summit in Japan earlier this month was a painful demonstration of the pitiful state of global cooperation.
The world is in deepening crisis.
Food prices are soaring. Oil prices are at historic highs.
The leading economies are entering a recession.
Climate change negotiations are going around in circles. Aid to the poorest countries is stagnant, despite years of promised increases.
And yet in this gathering storm it was hard to find a single real accomplishment by the world’s leaders.
The world needs global solutions for global problems, but the G-8 leaders clearly cannot provide them.
Because virtually all of the political leaders that went to the summit are deeply unpopular at home, few offer any global leadership.
They are weak individually, and even weaker when they get together and display to the world their inability to mobilize real action.
There are four deep problems.
The first is the incoherence of American leadership.
While we are well past the time when the United States alone could solve any global problems, it does not even try to find shared global solutions.
The will to global cooperation was weak even in the Clinton administration, but it has disappeared entirely during the Bush administration.
The second problem is the lack of global financing.
The hunger crisis can be overcome in poor countries if they get help to grow more food.
The global energy and climate crises can be overcome if the world invests together to develop new energy technologies.
Diseases such as malaria can be overcome through globally coordinated investments in disease control.
The oceans, rainforests, and air can be kept safe through pooled investments in environmental protection.
Global solutions are not expensive, but they are not free, either.
Global solutions to poverty, food production, and development of new clean energy technology will require annual investments of roughly $350 billion, or 1% of GNP of the rich world.
This is obviously affordable, and is modest compared to military spending, but is far above the pittance that the G-8 actually brings to the table to solve these urgent challenges.
British Prime Minister Gordon Brown has made a valiant effort to get the rest of Europe to honor the modest aid pledges made at the G-8 Summit in 2005, but it has been a tough fight, and one that hasn’t been won.
The third problem is the disconnection between global scientific expertise and politicians.
Scientists and engineers have developed many powerful ways to address today’s challenges, whether growing food, controlling diseases, or protecting the environment.
And these methods have become even more powerful in recent years with advances in information and communications technology, which make global solutions easier to identify and implement than ever before.
The fourth problem is that the G-8 ignores the very international institutions – notably the United Nations and the World Bank – that offer the best hope to implement global solutions.
These institutions are often deprived of political backing, underfinanced, and then blamed by the G-8 when global problems aren’t solved.
Instead, they should be given clear authority and responsibilities, and then held accountable for their performance.
President Bush may be too unaware to recognize that his historically high 70% disapproval rating among US voters is related to the fact that his government turned its back on the international community – and thereby got trapped in war and economic crisis.
The other G-8 leaders presumably can see that their own unpopularity at home is strongly related to high food and energy prices, and an increasingly unstable global climate and global economy, none of which they can address on their own.
Starting in January 2009 with the new US president, politicians should take the best chance for their own political survival, and of course for their countries’ well-being, by reinvigorating global cooperation.
They should agree to address shared global goals, including the fight against poverty, hunger, and disease (the Millennium Development Goals), as well as climate change and environmental destruction.
To achieve these goals, the G-8 should set clear timetables for action, and transparent agreements on how to fund it.
The smartest move would be to agree that each country tax its CO2 emissions in order to reduce climate change, and then devote a fixed amount of the proceeds to global problem solving.
With the funding assured, the G-8 would suddenly move from empty promises to real policies.
Backed by adequate funding, the world’s political leaders should turn to the expert scientific community and international organizations to help implement a truly global effort.
Rather than regarding the UN and its agencies as competitors or threats to national sovereignty, they should recognize that working with the UN agencies is in fact the only way to solve global problems, and therefore is the key to their own political survival.
These basic steps – agreeing on global goals, mobilizing the financing needed to meet them, and identifying the scientific expertise and organizations needed to implement solutions – is basic management logic.
Some may scoff that this approach is impossible at the global level, because all politics are local.
Yet today, all politicians depend on global solutions for their own political survival.
That by itself could make solutions that now seem out of reach commonplace in the future.
Time is short, since global problems are mounting rapidly.
The world is passing through the greatest economic crisis in decades.
It’s time to say to the G-8 leaders, “Get your act together, or don’t even bother to meet next year.” It’s too embarrassing to watch grown men and women gather for empty photo opportunities.
Where are the Global Problem Solvers?
NEW YORK – One odd and disturbing aspect of global politics today is the confusion between negotiations and problem-solving.
According to a timetable agreed in December 2007, we have six months to reach a global agreement on climate change in Copenhagen.
Governments are engaged in a massive negotiation, but they are not engaged in a massive effort at problem-solving.
Each country asks itself, “How do I do the least and get the other countries to do the most?,” when they should be asking instead, “How do we cooperate to achieve our shared goals at minimum cost and maximum benefit?”
These might sound like the same thing, but they are not.
Addressing the problem of climate change requires reducing emissions of carbon dioxide from fossil fuels, which in turn involves choices in technology, some of which already exists and much of which needs to be developed.
For example, coal plants, if they are to remain a major part of the energy mix, will need to capture and store their CO2, a process called “carbon capture and sequestration,” or CCS for short.
Yet this technology remains unproved.
Similarly, we will need renewed public confidence in a new generation of nuclear power, with plants that are safe and reliably monitored.
We will need new technologies to mobilize large-scale solar power, wind power, and geothermal power.
We might try to tap bio-fuels, but only in forms that do not compete with food supplies or with precious environmental assets.
The list goes on.
We will need improved energy efficiency, through “green buildings” and more efficient appliances.
We will need to switch from cars with internal-combustion engines to hybrids, plug-in hybrids, battery-powered, and fuel-cell-powered vehicles.
Achieving a new generation of electric vehicles will require a decade of public and private partnership to achieve basic technological development (such as improved batteries), a more robust electric grid, new infrastructure for re-charging the automobiles, and much more.
Similarly, it will take a decade of public and private investments to demonstrate the feasibility of coal-fired plants that capture their carbon dioxide.
The switchover to new technologies is not mainly a matter of negotiation but of engineering, planning, financing, and incentives.
How can the world most effectively develop, demonstrate, and then spread these new technologies?
Where the benefits are unlikely to accrue to private investors, who should pay for the early demonstration models, which will require billions of dollars?
How should we preserve private incentives for research and development while committing to transfer successful technologies to developing countries?
These are pressing, unsolved questions.
Yet the global negotiations on climate change are focusing on a different set of questions.
The negotiations are mainly about which groups of countries should cut their emissions, by how much, how fast, and relative to which baseline year.
Countries are being pressed to cut emissions by 2020 by certain percentage targets, without much serious discussion about how the cuts can be achieved.
The answers depend, of course, on which low-emission technologies will be available, and on how fast they can be deployed.
Consider the United States.
To cut emissions sharply, the US will need to switch over this decade to a new fleet of automobiles, powered increasingly by electricity.
The US will also have to decide on the renewal and expansion of its nuclear power plants, and on the use of public lands to build new renewable energy plants, especially using solar power.
And the US will need a new power grid to carry renewable energy from low-density population sites – such as the southwestern deserts for solar power and the northern plains for wind power – to the high-density populations of the coasts.
Yet all of this requires a national plan, not simply a numerical target for emissions reduction.
Similarly, China, like the US, can reduce CO2 emissions through increased energy efficiency and a new fleet of electric vehicles.
But China must consider the question from the vantage point of a coal-dependent economy.
China’s future choices depend on whether “clean coal” can really work effectively and on a large scale.
Thus, China’s emissions path depends crucially on early testing of the CCS technologies.
A true global brainstorming approach would first discuss the best technological and economic options available, and how to improve these options through targeted research and development and better economic incentives.
The negotiations would discuss the range of options open to each country and region – from CCS to solar, wind, and nuclear power – and would sketch a timetable for a new generation of low-emission automobiles, recognizing that market competition as well as public financing will set the actual pace.
Based on these building blocks, the world could agree on allocating the costs for speeding the development and spread of new low-emission technologies.
This global framework would underpin national and global targets for emissions control and for monitoring the progress of the technological overhaul.
As new technologies are proven, the targets would become more stringent.
Of course, part of the strategy would be to create market incentives for new low-emission technologies, so that inventors could develop their own ideas with the prospect of large profits if those ideas are right.
My plea to discuss plans and strategies alongside specific emissions targets might seem to risk impeding the negotiations.
But if we don’t have a strategy to accompany our targets, the world’s governments might not accept such targets in the first place, or might accept them cynically, without any intention of actually meeting them.
We need to think hard, and collaboratively, about the world’s real technological options, and then pursue a common global framework that allows us to move into a new era, one based on feasible and sustainable technologies for energy, transport, industry, and buildings.
Where Did Market Volatility Go?
Television and newspapers continue to trumpet every twist and turn of global financial markets.
In truth, however, the big story is the uneerie calm that has engulfed virtually every major asset class, from stocks to bonds.
Is the whole investment world on Prozac?
Conspiracy theories abound, particularly among the ranks of financial traders, for whom volatility is like wind to a sailor.
These traders confidently figure that as long as markets gyrate, no matter what the direction, they can always make money.
And, thanks to the rest of us who don’t have the time, information, and skill to match wits with them, they are mostly right.
But, with today’s dormant markets, the pickings are slim.
The favored bogeymen of the day are giant government investors, particularly Asian central banks, with their trillions of dollars in assets.
These superfunds, whose managers do not necessarily share the same passion for profit as private investors, are said to be squeezing the life out of interest rates and exchange rates. “The big Asian central banks are oppressing us,” one young trader recently complained to me.
What a difference a decade makes.
During the 1990’s, private investors looked at big, lumbering central banks as cash cows, long on money and short on financial acumen.
George Soros once made a billion dollars off the Bank of England in just an hour.
His basic strategy was a standard one: bet against any central bank that tries to defend an inconsistent macroeconomic policy.
Traders did not win every battle, of course.
It was the speculators whose blood flowed in the streets when they attacked Hong Kong’s dollar peg in 1998.
But overall, betting against big government financial institutions proved to be a richly rewarding business.
That was the 1990’s.
Today, many traders see formerly inept state giants as financial geniuses, capable of taming complex financial formulas and exploiting their superior size and trading information to squeeze the life out of currency and interest rate markets.
These behemoths’ innate conservatism, having calmed bond and currency markets, is now having a similar effect on stocks.
Although few accuse Asian central banks of explicitly conspiring to calm global markets, some say that their common cautious approach to trading is a form of implicit collusion.
As much as we may sympathize with young would-be millionaire traders, does their story of oppression make any sense?
Could it be true that huge government investors from Asia (not to mention Russia, Latin America, and the Middle East) have quietly taken control of world markets?
Perhaps, but the bogeyman theory seems a bit overblown.
Yes, the big Asian central banks do sit on almost $3 trillion in assets; China’s central bank alone has around a trillion dollars.
This gives them a capital base similar to the combined assets of all the world’s major hedge funds.
But this metric is very deceptive.
Hedge funds constitute only a small percentage of overall world financial markets, which, according to a recent study by the McKinnsey Global Institute, now exceed $120 trillion.
And hedge funds, unlike banks, can leverage their bets, borrowing to take on assets many times the size of their capital base.
Otherwise, George Soros and his wealthy fellow investors could not have dreamed of taking on the Bank of England.
In fact, the explanation for market calm probably lies elsewhere.
So, if a conspiracy of Asian central banks is not to blame for the volatility drought that is parching traders’ earnings, what is?
Surely, today’s low volatility is partly cyclical.
Stock market volatility was also very low during the early 1990’s, before reaching new peaks later in the decade.
Moreover, financial innovation and globalization allow markets to spread risk more effectively than ever before, placing it in the hands of those who can best manage it.
Improved central bank policy is another huge factor.
In the early 1990’s, the average level of world inflation exceeded 30%; now it is less than 4%.
All of these changes have in turn contributed to lower economy-wide output and consumption volatility in both rich and developing countries.
They have also contributed mightily to the high general level of asset prices, helping create the vast riches of which today’s hungry young traders are so jealous.
So will today’s relative market calm continue?
Unfortunately, no.
Today’s brave new world of financial globalization will almost surely face severe new stress tests, reminding us that recessions still happen.
Frankly, although I do not see the five-year-old global expansion coming to an end yet, there is no question that risks are on the rise, with output in the United States having slowed sharply in the third quarter, and central banks’ hands tied by inflation risks.
Further ahead, it is not hard to imagine geopolitical instability – possibly emanating from Iran, Iraq, or North Korea – unsettling markets.
Whatever the scenario that ends the calm, today’s age of low volatility will seem like a distant dream to most of us – and a forgotten nightmare for ambitious financial traders.
Where’s Europe?
As the global financial crisis transforms itself inexorably into economic crisis and now industrial crisis, the cry “where’s Europe?” can be heard across the EU.
So far, Brussels’ response has been less than reassuring.
The European Commission’s watchword has been that the integrity of the Single Market must be defended at all costs, and that it will use its formidable legal powers to ensure that bailouts and other state aid by EU governments do not distort fair competition.
It is a familiar mantra, and among industrialists the mood now seems to be hardening that it is not enough.
With anxiety mounting across Europe that industrial lay-offs will mean major plant closures and cascading job losses in thousands of smaller companies, national governments find themselves on a collision course with the EU, though they know that their best chance of salvation lies in concerted European action.
In Brussels, there is awareness that the crisis offers real political opportunity, even if the Commission has yet to grasp it.
The time has come for a new EU industrial-policy framework that would permit Brussels to use its “honest broker” status to manage competing interests.
The Commission’s eurocrats should dust-off their files from 30 years ago and recall how their predecessors handled the steel crisis that then threatened to provoke an intra-European trade war.
In the late 1970’s, the Commission declared a state of “manifest crisis” and agreed with member governments the details of what came to be called the Davignon Plan.
Drawn up by the Belgian member of the Commission who held the industry portfolio, several of its provisions are clearly relevant to the current situation, not least to the automobile industry.
The Davignon Plan imposed Europe-wide production and price controls, monitored and coordinated national governments’ state aids, organized the closures of outdated plants, encouraged mergers, and awarded EU funding to retraining schemes for redundant steel workers.
Its overall aim was to make the backbone of Europe’s heavy-engineering sector more competitive internationally.
The plan’s author, Vicomte Etienne Davignon, recently commented in the Belgian press that he can’t understand why the Commission is not doing something similar today.
“To do so would legitimate national aids (to carmakers) but would ensure they are based on a common EU-level strategy,” he wrote.
The signals from the Commission, though, are not encouraging.
Industry commissioner Gunther Verheugen recently reacted to calls by both General Motors and Renault for a more “proactive” EU role in coordinating bailouts by saying: “There will be no sector-specific plans whatsoever.”
That will be a matter of opinion until the recession begins to abate; the truth is that we don’t yet know whether this crisis will be a snowball that grows layer by layer or an avalanche that sweeps away entire industries.
In either case, the Single Market will come under increasing pressure.
The Commission rightly says that in this age of globalization there is no longer such a thing as a national carmaker, but there are still national plants and national payrolls that politicians facing elections will be desperate to defend.
It doesn’t really matter whether a new crisis-beating EU strategy bears some resemblance to the largely forgotten Davignon Plan.
The important point is that Europe should be seen to have set out a common framework for addressing the slowdown.
Eurocrats insist that the necessary policy instruments and rules are already in place, but that is to ignore political reality.
Unless the EU’s internal-market rules can be made more flexible, member governments will flout them.
The crisis has also underscored a longer-term need for a more concerted EU approach to industrial policy.
There is a growing awareness in Europe that the crisis is set to re-shape our industrial base, as Asian countries take over from the EU and the United States many of their advanced technology fiefdoms.
But Europe’s 10-year-old Lisbon strategy to secure global high-tech leadership is widely discredited, which is a further reason to include a large R&amp;D component in any EU-wide industrial program.
Presentation is an essential part of any political process, and it’s the part where the European Commission is least competent.
Industrial leaders and ordinary citizens alike want to be told that the EU is working on a policy approach that looks farther ahead than the gloomy present.
Verve and fanfare may be alien to Brussels, but what is urgently required is a sense of political showmanship that restores confidence in the European project as well as the economy.
Where Will Genetic Knowledge Lead Us?
Deciphering the human genome has provided insights into the nature of humanity, our relationship to the world, and our future.
We now have the set of instructions that specifies human development--how each of us progressed from a single cell (a fertilized egg) to an adult human comprising a hundred trillion cells of thousands of different types.
So what comes next?
The genome's language is DNA, whose alphabet has just four different letters: G, C, A, and T. But the genome contains three billion of these letters.
The Human Genome Project translated them into a `Book of Life,' that consists of 500 volumes, each with 1,000 pages averaging 1,000 six-letter words per page.
Operationally, the human genome is composed of one long sentence of three billion letters cut into 24 pieces--chromosomes--that range in size from 45-280 million letters.
In a book, words are collected into sentences, sentences into paragraphs, and paragraphs into chapters.
Each level provides a higher, more coherent level of meaning.
So, too, with the human genome.
DNA's words are genes, which encode proteins--the molecular building blocks of life.
Genes and proteins are, in turn, gathered into the biological systems-- heart, brain, kidneys, and so forth--that execute the functions of life.
The first draft of the human genome, published in February 2001, provided four new fundamental insights.
First, humanity's Book of Life has only 30,000-35,000 different words, or genes.
This is surprising, because the genome of a tiny worm that had been sequenced earlier contains about 20,000 genes.
How we make do with only one-third more genes than this simple worm remains an unanswered puzzle.
Second, there are essentially no race-specific words in the Book of Life.
Indeed, the Book of Life for two Black people may differ more than that for a Caucasian person and a Black person.
The concept of race is cultural, not genetic.
Third, the Books of Life for humans, fish, flies, and yeast contain a large number of shared words (although the spellings are somewhat different).
Many fundamental biological systems composed of these genes and proteins are remarkably similar.
This underscores the descent of all life from a single common ancestor.
The fourth observation similarly highlights the interconnectedness of all life.
For example, the Book of Life for humans contains around 200 genes derived from other organisms, contradicting the long-held view that all of our genes are transmitted vertically, from grandparents to parents to children.
It seems that evolution also occurs in a horizontal context, in which any living creature can incorporate information from surrounding organisms.
The knowledge contained in the Book of Life has catalyzed paradigm changes in biology and medicine.
We can now study a biological system in terms of how all of its components interact rather than one gene or one protein at a time.
Indeed, the Institute for Systems Biology, which I co-founded two years ago, reflects my conviction that systems approaches will dominate biological study in the 21st century.
The paradigm change in medicine will be similarly radical.
The next 10-15 years will see a shift away from our current reactive model--you come in when you get sick and the physician attempts to make you well--to a predictive, preventive, and ultimately a personalized form of medicine.
For example, if you are a woman with a single bad copy of the breast cancer 1 gene, you have a 70% chance of getting breast cancer by the time you are 60 years old.
Why only a 70% chance?
In some cases, defective genes require certain environmental signals to be activated, while another, more likely, explanation is that single defective genes are not enough to cause disease; a number of defective genes must act in concert.
The important point is that within the next 10-15 years we will have identified hundreds of genes that predispose individuals to virtually all of the common, late-onset diseases, such as cancer and cardiovascular, neurological, and metabolic diseases.
We will be able to take a blood sample, determine the possibility of genetic defects, and create a probabilistic health history of what is likely to happen.
Physicians will be able to study your genes in the context of the biological systems within which they operate and learn how to circumvent the limitations they impose.
The predictive, preventive and personalized medicine of the future could include changes in environment, specially designed drugs, gene engineering, and embryonic stem cells.
All of this will propel us into a very different world, one that may well extend humans' life span by 10-30 years, presenting enormous opportunities, but also confronting us with fascinating and perplexing ethical, social, and legal issues.
How, for example, can we capture the enormous potential increase in creativity and productivity if the average human life span is extended into the 90's or even beyond?
Who gets to know about predictive health histories?
Will we permit doctrinaire religious views to block our ability to explore the enormous potential of embryonic stem cells and thereby lift the yoke of disease from tens of millions of people?
These questions underscore our obligation to keep abreast of advances in science and technology, so that we may use the opportunities they provide to better humankind while dealing thoughtfully and rationally with the challenges they present.
Which Globalization Will Survive?
CAMBRIDGE – The world economy will shrink this year for the first time since 1945, and some economists worry that the current crisis could spell the beginning of the end of globalization.
Hard economic times are correlated with protectionism, as each country blames others and protects its domestic jobs.
In the 1930’s, such “beggar-thy-neighbor” policies worsened the situation.
Unless political leaders resist such responses, the past could become the future.
Ironically, however, such a grim prospect would not mean the end of globalization, defined as the increase in worldwide networks of interdependence.
Globalization has several dimensions, and, though economists all too often portray it and the world economy as being one and the same, other forms of globalization also have significant effects – not all of them benign – on our daily lives.
The oldest form of globalization is environmental.
For example, the first smallpox epidemic was recorded in Egypt in 1350 BC.
It reached China in 49 AD, Europe after 700, the Americas in 1520, and Australia in l789.
Bubonic plague, or the Black Death, originated in Asia, but its spread killed a quarter to a third of Europe’s population in the fourteenth century.
Europeans carried diseases to the Americas in the fifteenth and sixteenth centuries that destroyed up to 95% of the indigenous population.
In 1918, a flu pandemic caused by a bird virus killed some 40 million people around the world, far more than the recently concluded world war.
Some scientists today predict a repeat of an avian flu pandemic.
Since 1973, 30 previously unknown infectious diseases have emerged, and other familiar diseases have spread geographically in new, drug-resistant forms.
In the 20 years after HIV/AIDS was identified in the 1980’s it killed 20 million people and infected another 40 million around the world.
Some experts project that that number will double by 2010.
The spread of foreign species of flora and fauna to new areas has wiped out native species, and may result in economic losses of several hundred billion dollars per year.
Global climate change will affect the lives of people everywhere.
Thousands of scientists from more than 100 countries recently reported that there is new and strong evidence that most of the warming observed over the last 50 years is attributable to human activities, and average global temperatures in the twenty-first century are projected to increase between 2.5 and 10 degrees Fahrenheit.
The result could be more severe variations in climate, with too much water in some regions and not enough in others.
The effects will include stronger storms, hurricanes, and floods, deeper droughts, and more landslides.
Rising temperatures have lengthened the freeze-free season in many regions, and glaciers are melting.
The rate at which the sea level rose in the last century was ten times faster than the average rate over the last three millennia.
Then there is military globalization, consisting of networks of interdependence in which force, or the threat of force, is employed.
The world wars of the twentieth century are a case in point.
The prior era of economic globalization reached its peak in 1914, and was set back by the world wars.
But, while global economic integration did not regain its 1914 level until half a century later, military globalization grew as economic globalization shrank.
During the Cold War, the global strategic interdependence between the United States and the Soviet Union was acute and well recognized.
Not only did it produce world-straddling alliances, but either side could have used intercontinental missiles to destroy the other within 30 minutes.
This was distinctive not because it was totally new, but because the scale and speed of the potential conflict arising from military interdependence were so enormous.
Today, Al Qaeda and other transnational actors have formed global networks of operatives, challenging conventional approaches to national defense through what has been called “asymmetrical warfare.”
Finally, social globalization consists in the spread of peoples, cultures, images, and ideas.
Migration is a concrete example.
In the nineteenth century, some 80 million people crossed oceans to new homes – far more than in the twentieth century.
At the beginning of the twenty-first century, 32 million US residents (11.5% of the population) were foreign-born.
In addition, some 30 million visitors (students, businesspeople, tourists) enter the country each year.
Ideas are an equally important aspect of social globalization.
Technology makes physical mobility easier, but local political reactions against immigrants had been growing even before the current economic crisis.
The danger today is that short-sighted protectionist reactions to the economic crisis could help to choke off the economic globalization that has spread growth and raised hundreds of millions of people out of poverty over the past half-century.
But protectionism will not curb the other forms of globalization.
Modern technology means that pathogens travel more easily than in earlier periods.
Easy travel plus hard economic times means that immigration rates may accelerate to the point where social friction exceeds general economic benefit.
Similarly, hard economic times may worsen relations among governments, as well as domestic conflicts that can lead to violence.
At the same time, transnational terrorists will continue to benefit from modern information technology, such as the Internet.
And, while depressed economic activity may slow somewhat the rate of greenhouse-gas build-up in the atmosphere, it will also slow the types of costly programs that governments must enact to address emissions that have already occurred.
So, unless governments cooperate to stimulate their economies and resist protectionism, the world may find that the current economic crisis does not mean the end of globalization, but only the end of the good kind, leaving us with the worst of all worlds.
Which Way is West for Turkey?
When Turkey's parliament voted in March 2003 against allowing American troops to open a northern front against Iraq, Turkey's traditional strategic partnership with the United States ended.
The two countries still recognize many mutual interests, but now they manage these interests on a far different basis.
The vote shocked "old Europe" and the Arab world as much as the Bush administration.
Europeans who considered Turkey a potential Trojan horse for America within the European Union were forced to reconsider.
For many Arabs, the vote showed that Turkey was not an American lackey and would not cooperate with American imperial designs, despite close Turkish-Israeli relations.
Long-simmering disagreements between Turkey and the US came to a boil with the emergence of the Kurds of northern Iraq as the Pentagon's main allies in the Iraq War.
The American administration made it clear that military intervention by Turkey in Northern Iraq would not be tolerated.
That message was confirmed on July 4, 2003, when American forces arrested several Turkish Special Forces troops in the town of Sulaimaniya, humiliating them by putting sacks over their head as they took them into custody.
Only intervention by US Vice President Dick Cheney two and a half days later secured the release of the soldiers, who were alleged to have been planning clandestine operations within the Kurdish zone.
Despite ongoing tensions, the Turkish government has been eager to mend relations with America, as it is anxious to have some influence over developments in Iraq.
So the authorities responded quickly to the Bush administration's request for Turkish troops to join the coalition, although the idea was stillborn - rejected by both the Kurds and the American-appointed Governing Council in Iraq.
America has its own reasons to patch up the relationship.
Turkey's secular, capitalistic, democratic order has become especially valuable to the Bush administration as it seeks to integrate the wider Middle East into the world system by liberalizing its economy and democratizing its polity.
Thus, America trumpeted its continuing support for Turkish membership in the EU, notably in President Bush's speech in June at Istanbul's Galatasaray University - at a bridge that joins Asia and Europe.
But serious bilateral problems remain.
The government is irritated by US occupation forces' neglect of the northern Iraqi bases of the PKK, the Kurdish separatist insurgents who have fought a 15-year war against Turkey.
More broadly, the government regards the US as too complacent vis-à-vis Kurdish political developments and unmoved by Turkey's concerns about Kurdish independence.
The US, for its part, is unhappy with the government's objections to unrestricted American use of the Incirlik airbase in southeastern Turkey, as well as by recent tensions with Israel.
In the meantime, Turkey is moving closer to the EU, with the government overcoming nationalistic objections in the Parliament to push through comprehensive reforms.
Turkey also showed its good will over Cyprus, removing a nagging political obstacle to EU membership.
These steps led to the European Commission's recent recommendation to begin accession negotiations with Turkey.
The EU accession process has also underpinned a shift in Turkish policy on Iraq.
Previously, Turkey viewed Iraq solely in the context of its domestic Kurdish problem.
But widespread European opposition to the war removed the possibility of Turkish military intervention, forcing the government to develop another vision of Turkey's interests.
At the same time, the Iraqi Kurds also appear to appreciate how much they need a friendly Turkey.
The northern border with Turkey is their lifeline to the outside world.
As a result, Turkey no longer considers a federalized Iraq a threat to its security, as long as each federal unit maintains a measure of ethnic diversity.
Of course, Turkey remains opposed to an independent Kurdistan.
But now its concern is more closely tied to regional politics than to the Kurdish issue.
Turkey has no desire to serve as a strategic counterweight to Iran and believes that only a territorially intact Iraq can continue to play that role.
Furthermore, Turkey is concerned about the possibility of civil war in Kurdistan between the two largest Kurdish factions.
But, unlike either Iran or Syria, Turkey genuinely wishes to see a strong and representative government in Baghdad.
Thanks to EU pressures, Turkey's domestic Kurdish problem is well on the way to being resolved democratically, with most Kurdish leaders in Turkey expressing their commitment to Turkish unity.
For Turkey to consider military intervention in Kurdistan, EU member states would first have to renege on their commitment to negotiate Turkish accession.
Equally dramatic would be any attempt by the Kurds to forcibly change the demographic balance of the multiethnic city of Kirkuk.
Turkey would prefer that Kirkuk, with its large Turkmen population, be given special status in the forthcoming draft Iraqi constitution.
The US also shows signs of understanding the importance of maintaining a multiethnic Kirkuk and is putting pressure on its Kurdish allies.
Turkish diplomacy has thus become a well-calibrated balancing act, moving closer to European positions in the Middle East, but eager to maintain close relations with the US.
If this approach succeeds, Europe's bridge to Asia may also become its bridge to America.
While Russia Slept
Elections in Russia usually somehow signal a political crisis: Boris Yeltsin's re-election as President in 1996, for example, seemed to hold off a communist resurrection--not by revolution but through the ballot box.
Elections to the State Duma (the lower house of Russia's parliament) are normally quieter affairs, and the just completed campaign and Duma elections ( NOTE TO EDITORS, the vote is December 7 th ) were certainly silent--deadly silent.
Indeed, so omnipotent is President Vladimir Putin in Russia nowadays that the Duma election would have been scarcely noticed--by the world and Russia alike--were it not for the arrest and imprisonment this autumn of Mikhail Khodorkovsky, the oil industry oligarch who dared to put his money behind two liberal parties opposed to Putin.
Khodorkovsky's arrest did not galvanize ordinary Russians, who increasingly see elections as beside the point in their difficult lives.
His arrest did, however, shake international confidence in Putin, as well as arouse Russia's other oligarchs and democratic reformers to seriously fear for their freedoms.
The greater the power, the more dangerous the abuse, said Edmund Burke in 1771.
Putin exercises a power greater than that allowed any other democratically elected leader, and the manner in which he exercises it is now causing serious concern.
Lord Acton's phrase about the corrupting effect of power does not yet apply; Burke's warning does.
The presidency that Boris Yeltsin created for himself a decade ago--fattened when Yeltsin's tanks shelled an unruly Duma in 1993--gives Putin astonishing freedom from accountability.
Unlike America's or Mexico's president, he need not cajole a congress entrenched behind the ramparts of constitutionally separate powers.
Unlike a British or Spanish prime minister, he cannot be removed by a vote of no confidence.
Unlike Germany's Chancellor, he is not shackled to a coalition partner who can prevent him going too far.
Unlike Berlusconi in Italy, Lula in Brazil, and Koizumi in Japan, he does not have to face down infighting within his own party.
To the huge power of the Russian presidency Putin adds his own aloof temper and a familiarity, from his KGB years, with the subtle levers of Russia's bureaucracy.
None of this is necessarily wrong: Russia's hard times demand a government that can act decisively.
But Putin's power is pressing hard against the limits of what is permissible in a democracy.
Yeltsin never spread his fingers into the nooks and crannies of government as comprehensively as Putin.
Nothing escapes the eye of the Kremlin--whether it be which buildings are restored in Saint Petersburg or the appointment of minor Russian envoys abroad.
When so much power is concentrated in one place, it is tempting to stifle criticism about how that power is used.
Most complaints about Putin focus on his efforts to silence voices of independent criticism.
In taming the oligarchs Boris Berezovsky and Vladimir Gusinsky--who balked at accepting his "settlement" whereby Russia's richest men would keep their business empires, no matter how ill-gotten, if they kept out of politics--Putin did choke the media empires both men used to promote their causes.
In a country where the president names the heads of all Russia's state television and radio channels, criticism is not so abundant that any of it can afford to be lost.
But Putin's press policy does not add up to an argument that he ought not to be re-elected next March, when he stands again.
Indeed, on the great issues of policy, as distinct from the murky corners of self-interest, Putin can still be seen as a good president.
Abroad, he has drawn Russia into ever closer cooperation with the West: in much of the "war on terror" and the handling of North Korea, his policy parallels that of America; elsewhere, rhetoric about "independence" persists, but the real doubts about who is a reliable partner for the West now point to Schroeder's Germany more than to Putin's Russia.
At home, Putin has mostly done the right things for Russia's economy, leaving his government in office long enough to reap the benefits of consistency.
His idea of a "dictatorship of law" satisfies enough Russians to put him solidly in command of the political center.
What is worrying about Putin's rule is his inability to make Russia's government more transparent.
All deals are private.
Laws appear as if by magic.
No one knows if the president ordered Khodorkovsky's arrest or even considered the devastating impact it would inevitably have on investment in Russia.
The problem here is that, by keeping political decision-making in the dark, Russia's myriad power factions are never held to account.
For example, what "deal"--if any--was struck with Russia's nuclear industry to allow for the continued construction of nuclear plants in Iran?
No one knows.
Would the military have been so successful in retarding reform if it had to act in the open?
In his efforts to "get things done," Putin prefers to deal directly with powerful industries and lobbies, rather than shape laws through a rather tame Duma.
It is the apparent inevitability of Putin's re-election next spring that justifies concern about his way of wielding power.
Putin could earn the gratitude of future Russians by coolly re-examining the powers of his office.
Power is best checked by democratically elected institutions--by a Duma with real power and a judiciary with real teeth--not by cutting deals with special interests and military/industrial insiders, or by stacking the government with ex-KGB men who can only intimidate, never inform.
Putin should recognize that the sheer extent of his presidential power makes it essential that the darkest corners of Kremlin decision-making be exposed to daylight.
White House Sex Crimes
NEW YORK – Sex crime has a telltale signature, even when those directing the outrages are some of the most powerful men and women in the United States.
How extraordinary, then, to learn that one of the perpetrators of these crimes, Condoleezza Rice, has just led the debate in a special session of the United Nations Security Council on the use of sexual violence as a weapon of war.
I had a sense of déjà vu when I saw the photos that emerged in 2004 from Abu Ghraib prison.
Even as the Bush administration was spinning the notion that the torture of prisoners was the work of “a few bad apples” low in the military hierarchy, I knew that we were seeing evidence of a systemic policy set at the top.
It’s not that I am a genius.
It’s simply that, having worked at a rape crisis center and been trained in the basics of sex crime, I have learned that all sex predators go about things in certain recognizable ways.
We now know that the torture of prisoners was the result of a policy set in the White House by former Secretary of Defense Donald Rumsfeld, Vice President Dick Cheney, and Rice – who actually chaired the torture meetings.
The Pentagon has also acknowledged that it had authorized sexualized abuse of detainees as part of interrogation practices to be performed by female operatives.
And documents obtained by the American Civil Liberties Union have Rumsfeld, in his own words, “checking in” on the sexualized humiliation of prisoners.
The sexualization of torture from the top basically turned Abu Ghraib and Guantánamo Bay into an organized sex-crime ring in which the trafficked sex slaves were US-held prisoners.
Looking at the classic S and M nature of some of this torture, it is hard not to speculate that someone setting policy was aroused by all of this.
The nonsexual torture that was committed ranged from beatings and suffocation, electrodes attached to genitals, and forced sleep deprivation, to prisoners being hung by the wrists from the ceiling and placed in solitary confinement until psychosis was induced.
These abuses violate both US and international law.
Three former military attorneys, recognizing this blunt truth, refused to participate in the “military tribunals” – rather, “show trials” – aimed at condemning men whose confessions were elicited through torture.
Though we can now debate what the penalty for water-boarding should be, America as a nation, maintaining an odd silence, still cannot seem to discuss the sexual crimes involved.
Why?
It’s not as if the sex crimes that US leaders either authorized or tolerated are not staring Americans in the face: the images of male prisoners with their heads hooded with women’s underwear; the documented reports of female US soldiers deployed to smear menstrual blood on the faces of male prisoners, and of military interrogators or contractors forcing prisoners to simulate sex with each other, to penetrate themselves with objects, or to submit to being penetrated by objects.
Indeed, the Military Commissions Act of 2006 was written deliberately with loopholes that gave immunity to perpetrators of many kinds of sexual humiliation and abuse.
There is also the testimony by female soldiers such as Lynndie England about compelling male prisoners to masturbate, as well as an FBI memo objecting to a policy of “highly aggressive interrogation techniques.”
The memo cites a female interrogator rubbing lotion on a shackled detainee and whispering in his ear – during Ramadan when sexual contact with a strange woman would be most offensive – then suddenly bending back his thumbs until he grimaced in pain, and violently grabbing his genitals.
Sexual abuse in US-operated prisons got worse and worse over time, ultimately including, according to doctors who examined detainees, anal sodomy.
All this may sound bizarre if you are a normal person, but it is standard operating procedure for sex offenders.
Those who work in the field know that once sex abusers control a powerless victim, they will invariably push the boundaries with ever more extreme behavior.
Abusers start by undressing their victims, but once that line has been breached, you are likely to hear from the victim about oral and anal penetration, greater and greater pain and fear being inflicted, and more and more carelessness about exposing the crimes as the perpetrator’s inhibitions fall away.
The perpetrator is also likely to engage in ever-escalating rationalizations, often arguing that the offenses serve a greater good.
Finally, the victim is blamed for the abuse: in the case of the detainees, if they would only “behave,” and confess, they wouldn’t bring all this on themselves.
Silence, and even collusion, is also typical of sex crimes within a family.
Americans are behaving like a dysfunctional family by shielding sex criminals in their midst through silence.
Just as sex criminals – and the leaders who directed the use of rape and sexual abuse as a military strategy – were tried and sentenced after the wars in Bosnia and Sierra Leone, so Americans must hold accountable those who committed, or authorized, sex crimes in US-operated prisons.
Throughout the world, this perverse and graphic criminality has added fuel to anxiety about US cultural and military power.
These acts need to be called by their true names – war crimes and sex crimes – and people in America need to demand justice for the perpetrators and their victims.
As in a family, only when people start to speak out and tell the truth about rape and sexual assault can the healing begin.
Whither Africa’s “Frontier Markets”?
NEW YORK – Zimbabwe’s election appears, once again, to confirm a truism: Africa only seems to make international headlines when disasters strike – a drought, a coup, a war, a genocide, or, as in the case of Robert Mugabe, grossly incompetent government.
But, over the past several years, a number of sub-Saharan countries have attracted unprecedented inflows of foreign capital.
Recent global financial turmoil has only added to Africa’s allure, because its frontier markets are less vulnerable to international volatility than are most of the world’s more familiar emerging economies.
There are three main reasons why many sub-Saharan countries are performing well.
First, high commodity prices yield windfall profits for the region’s leading producers of raw materials.
Growing demand for energy, metals, and minerals – particularly in China – has driven unprecedented levels of foreign investment.
Even large pension funds are beginning to take notice.
Moreover, a large number of Africa’s poorest countries have benefited from exponential growth in (primarily United States-based) philanthropy.
But, while both of these positive trends are likely to continue, a third positive factor may not prove as durable.
Every year, Africans living outside the continent send roughly $30 billion to family and friends back home.
These remittances are vitally important for economic stability in several African countries.
An economic slowdown in the US and Europe could substantially slow this infusion of cash, because immigrants are often the first to lose their jobs when recession fears take hold.
At the same time, though Africa’s frontier economies are less vulnerable than other emerging markets to global financial turbulence, they are highly vulnerable to political turmoil closer to home.
The three countries that served as pillars of regional stability for the past several years – Nigeria, Kenya, and South Africa – are now too pre-occupied with political troubles of their own to provide the peacekeepers, reconstruction funds, and political pressure that often limit the damage from conflicts elsewhere in the region.
Most of Nigeria’s problems are well known.
Militants in the oil-rich Niger Delta region have at times shut down as much as 30% of the country’s oil exports, a vital source of state revenue.
President Umaru Yar’Adua has taken concrete steps to tackle elite-level corruption in Nigeria, and appears to have made progress toward a comprehensive peace agreement with the Delta rebels.
But Yar’Adua might soon confront a big short-term problem.
The country’s National Election Tribunal, having overturned the outcomes of several provincial elections, may well annul the results of last year’s presidential race, forcing him to run for president all over again.
While Yar’Adua could use the goodwill that he has built up over the past year to win by an even larger margin, the 90-day election campaign would almost certainly trigger civil unrest, and Nigeria’s leadership would be too busy navigating domestic political rivalries to help stabilize conflicts elsewhere in Africa.
Kenya’s troubles run deeper.
Solid economic expansion and one of the world’s fastest-growing stock markets have not helped the country avert a deepening political crisis and mounting ethnic violence since disputed presidential election results in December.
President Mwai Kibaki, whom international observers accuse of rigging the vote, has hinted at a plan to share power in a unity government, but opposition leader Raila Odinga has heard these promises before.
Odinga worked hard to help elect Kibaki in 2002, only to see Kibaki renege on a similar pledge.
Despite the alarming escalation in violence, fears of civil war in Kenya are probably exaggerated.
The country’s Orange opposition movement has recently won key posts in parliament and, for the moment, is heeding calls for calm from former United nations Secretary-General Kofi Annan and representatives of the African Union.
But no one should expect Kenya to play a stabilizing regional role again anytime soon.
The continent’s third pillar, South Africa, will spend 2008 mired in an escalating political feud between Thabo Mbeki, the lame-duck president, and Jacob Zuma, a former deputy who is the newly elected leader of the ruling African National Congress and the leading candidate to succeed Mbeki, his bitter rival, next year.
South Africa’s courts have become a political battleground, as Mbeki and his allies use corruption charges to try to cripple Zuma’s candidacy.
The resulting political firestorm may well force Zuma to rely on core support from key allies within the country’s trade union movement and Communist Party, challenging the political elite’s pro-market consensus and provoking debate over the future of South Africa’s economic policy.
No countries in sub-Saharan Africa will have the economic heft and political self-confidence to replace Nigeria, Kenya, and South Africa as pillars of stability anytime soon.
Regional blocs like the Economic Community of West African States (ECOWAS), the Southern African Customs Union (SACU), and the East African Community (EAC) will eventually assume larger roles in helping resolve the continent’s most intractable diplomatic and economic problems.
But that won’t happen this year.
There remain many good reasons for investors to take a chance on Africa’s frontier markets.
But it will not necessarily take a drought, a coup, a war, or a genocide to make them think twice.
Whither Europe?
BEIJING – With the likelihood of a contagious sovereign-debt implosion and European bank failures greatly reduced by the Greek debt deal and the European Central Bank’s lending program, it is time to look ahead.
Where do the European Union, the eurozone, and the EU’s highly indebted countries go from here?
Will Europe be able to roll back its welfare states’ biggest excesses without economic distress and social unrest toppling governments and, in the peripheral countries, undermining already-tenuous agreements with creditors?
Some good news globally will have an impact on how these questions are resolved.
The United States’ economy is gradually reviving, albeit slowly by the standards of recovery from a deep recession.
China, Brazil, and India have not decoupled from their customers in Europe and North America, and so are slowing, though a relatively soft landing is likely if Europe’s recession is as short and mild as predicted.
The EU’s economic output and population are larger than that of the US, so the fate of the 27 EU countries is everyone’s business, from New York to New Delhi, São Paulo to Shanghai.
Formed originally as a free-trade area, the eurozone comprises 17 of the countries. Knitting together 17 disparate economies, cultures, and institutions was a monumental undertaking, fraught with risk.
The Lisbon Treaty emphasizes unanimity in decision-making.
With some members inside of the eurozone, and others remaining outside of it, and with disparate economic interests and monetary and fiscal traditions even within the eurozone, agreement is difficult.
That sets the stage for three broad scenarios, each with implications for the European and global economy, the financial and banking system, and relations between the member states and EU institutions.
In the first scenario, a more united and homogeneous Europe emerges from the crisis, enforcing greater restrictions on member states’ budgets to reduce apparent risk.
Accompanied by a strong, broad eurozone, risk of a future currency crisis remains.
In the second scenario, a two- or three-tiered Europe includes a two-tiered euro, with the weaker countries using a separate “euro-B” currency that can float against the stronger economies’ “euro-A.”
This arrangement would hold out the promise to fiscally stressed economies that, if they get their act together, they could rejoin euro-A – and do so more readily than they could from their own currency.
In the final scenario, what emerges is a more decentralized Europe, with less top-down agreement in areas beyond trade and a smaller, more homogeneous eurozone composed of the EU’s core economies.
Such a construct would be far more popular with citizens who are unhappy with the accretion of EU power in Brussels and the loss of traditional sovereignty.
Some current euro members – Greece (and perhaps others) – would revert to national currencies.
None of these options is easy; each entails serious difficulties and great risks.
Episodic muddling through may be the best that can be hoped for.
For example, how would Greece (or any country) exit the euro in order to cushion the extreme downward wage adjustment required to regain competitiveness, and to avoid the severe social unrest that could result from reining in debt too rapidly?
As soon as word got out that Greece was seriously considering such a move – well before it could even generate a new drachma currency – euro bank deposits would flee Greece.
As a result, Greece would be forced to impose capital controls.
Some contracts denominated in euros would be subject to Greek law, some to European law, and others – for example, derivatives contracts – to British or US law.
Legal chaos would result.
Yet sticking to the euro and forcing all of the adjustments in wages risks greater unrest; indeed, it might merely postpone the inevitable.
Governments and the bond market will test the seriousness of the newly agreed fiscal guidelines (if they are ratified).
While talk is tough now, the history of such agreements does not inspire optimism.
Before the financial crisis, even Germany violated the EU Stability and Growth Pact’s (SGP) deficit limits.
In the US, the 1980’s deficit limits set by the Gramm-Rudman-Hollings law were not met, and, like the SGP, were revised and extended.
Agreements with, and access to, the International Monetary Fund and Europe’s new bailout fund provide (soft) constraints.
Regardless of how these governance and fiscal issues are resolved, or muddled through, Europe’s banks remain a thorny issue.
With the time afforded by the ECB’s three-year cheap loans, they have some breathing room to rebuild their capital and clean up their balance sheets.
But, while doing so, they are not likely to be expanding private-sector lending to support economic growth.
European banks are far more thinly capitalized, and account for a much larger share of credit extended, than banks in the US, where much more lending originates in capital markets.
Most large US banks – Citi is an exception – passed US Federal Reserve stress tests recently, with enough capital to withstand a hypothetical deep recession (13% unemployment, a 21% further fall in home prices, and a 50% stock-market decline).
Europe’s stress tests have been much weaker.
Some sort of Brady bond to reduce and extend excessive sovereign debt will be necessary.
We can expect further European turmoil – from banks, sovereign debt, and social unrest in response to even modest welfare-state rollbacks – and clashing visions, within and among countries, concerning the desirability of deeper European integration.
Europe has come a long way from the days when its leaders prophesied that the euro would quickly rival the dollar as a global reserve currency.
Yet no one should write off Europe.
It still has great strengths, and, with sensible reforms, the EU can survive and eventually return to greater prosperity and stability.
But Europe remains closer to the beginning of that process of renewal than to the end.
Whither Pakistan?
LAHORE – Pakistan remains the world’s never-ending question.
As 2010 concludes, several outstanding issues continue to bedevil the country.
How they are managed in the year ahead will determine not only Pakistan’s immediate future and long-term prospects, but also the security of its region and, indeed, much of the world.
It has been said – without exaggeration – that Pakistan faces an existential threat.
The country has not defined a coherent approach towards those who are resorting to terrorism to advance their agendas, both within Pakistan and abroad.
It remains uncommitted to the idea of denying sanctuaries on its territory to Taliban fighters battling American and NATO troops in Afghanistan.
Relations with India have soured in recent months, because Pakistan’s government is once again lending diplomatic support to the insurgency in Indian-controlled Kashmir.
Domestic terrorism in Pakistan has taken a heavy human and economic toll.
It is no longer aimed at official support of United States-led anti-terrorism activities.
Sunni Islamic extremists now target minority groups as well as other Muslim sects.
Some 800 liberal and Sufi Islamic scholars have died in targeted killings by extremist groups who receive financial assistance from like-minded people in the Middle East, and some well-known and much-visited Sufi shrines have been bombed.
The economy is in shambles, and unable to meet the International Monetary Fund demands for its continued support.
If the IMF terminates its current program, Pakistan will be unable to service its foreign debt.
Indeed, a senior cabinet minister suggested recently that the international community should write off Pakistan’s debts – an amount estimated at $40 billion.
The minister of finance forcefully repudiated the suggestion the following day, indicating that the government has not developed a consistent approach towards the faltering economy.
The economy was also badly hurt by the massive floods of 2010, which caused damage estimated at $10 billion.
This damage could lower annual GDP growth by 1-1.5% for several years to come.
In the 2010-2011 fiscal year, the IMF estimates that economic output will increase by less than 3% – one-third the rate expected in neighboring India and less than half that of Bangladesh.
Slower economic growth will cause a shortfall of jobs for new entrants to the workforce, thereby increasing the incidence of poverty.
Indeed, the number of people living in absolute poverty is likely to increase by 10 million, bringing the total to more than 70 million, or 40% of the population.
Pakistan thus ends 2010 as the sick man of South Asia.
The political system also remains unsettled.
Despite passage in July of the 18th amendment to the Pakistani constitution, which restored it to the form in which it was promulgated in 1973, political and executive authority remains in the hands of President Asif Ali Zardari.
The changes are supposed to make the executive branch accountable to the elected parliament, expand the prime minister’s authority, devolve more power to the provinces, and ensure independence to the judiciary.
In late 2009, the president also approved the seventh National Finance Commission, which will allocate to the provinces a larger share of the revenues collected by the central government.
But a significant transfer of power from the presidency to parliament, or from the central to provincial governments, has yet to be brought about.
Worse yet, the military remains outside civilian control.
General Ashfaq Pervez Kayani’s term in office, which was set to expire in November, was extended by three years.
Thus empowered, the general has been able to exert his influence over foreign policy, in particular in defining the country’s relations with the US, India, and Afghanistan.
Even though the US offered $2 billion of assistance to the military to be disbursed over a period of 3-5 years, Kayani has resisted American pressure to move against the Taliban’s sanctuary in North Waziristan, used to stage operations against US and NATO troops in southern and eastern Afghanistan.
So, is a further increase in violence by various extremist groups likely?
Will the economy collapse if the IMF withdraws its support?
Will the US increase its pressure by intervening militarily if Pakistan continues to harbor Taliban fighters operating from the tribal areas?
Will the military subvert the constitutional changes aimed at reforming the political system?
Despite all the grim news and auguries, there is some hope, owing to the increased political mobilization of Pakistan’s middle classes, whose members have finally begun to question those espousing extremism.
The judiciary is also more active, and is attempting to force the executive to remain within the bounds of the constitution.
Moreover, a trade agreement with Afghanistan that allows Afghan goods to cross Pakistan en route to India may be one step towards an improvement of economic relations with that large and rapidly growing neighbor.
Indeed, an able economic team that has been installed in the government seems – at long last – to be addressing some of the economy’s deep structural flaws.
As India in the 1990’s and Brazil in the early 2000’s showed, economies in deep distress can recover quickly once the right policies are implemented.
It could also happen in Pakistan, which would help to solve other, seemingly intractable problems.
So all hope is not lost in Pakistan.
On the contrary, 2011 may well prove to be a better year for a battered economy and a political system under stress.
Whither the Dollar?
Whither the Egyptian Revolution?
WASHINGTON, DC – Egypt’s revolution toppled a dictator in February, but the country’s future as a stable, functioning democracy remains uncertain.
The West is, of course, limited in its ability to shape the transition process.
Nonetheless, the potential for constructive influence remains considerable, and it should be responsive to those in Egypt who favor liberal ideas, democratic institutions, and broad distribution of the benefits of economic development.
The upcoming parliamentary elections are but an early stage in a long (perhaps decades-long) struggle to define the new Egypt.
Will Egypt gravitate toward Islamic theocracy or adopt a secular government that respects minority rights?
Which economic policies – statist, liberal, or some combination of the two – will best ensure social justice and broad distribution of prosperity?
Can civilian control of the military be established?
Will the regional security structure formed around the United States, Egypt, and Israel survive?
The November elections will not resolve these fundamental questions, and whether a workable constitutional framework will develop is uncertain.
A parliamentary system of government will likely emerge, including a prime minister and a cabinet, with the strong possibility that the presidency will be politically overshadowed, particularly if the presidential election is delayed.
The central unknown is the composition of the ruling coalition.
It appears unlikely that a single party will emerge from the election with enough parliamentary seats to govern on its own.
So a coalition government will be necessary.
The political arm of the Muslim Brotherhood (the Freedom and Justice Party) currently is the best-organized party, and may be in the strongest position to form a majority coalition, including Salafist elements.
By contrast, secular liberal parties have yet to develop effective organizations or project compelling visions for the future.
Although sentiment favoring a secular state is considerable, a coalition that can serve as an alternative or counterweight to the Muslim Brotherhood will be difficult to assemble.
In the near term, the most likely counterweight could be a liberal coalition with a heavy component of former members of deposed President Hosni Mubarak’s National Democratic Party (NDP) – that is, those who have not been discredited by their association with Mubarak.
Election rules favor those who were organized before the revolution.
Approximately one-third of the new parliament will comprise “non-party list” candidates.
Established networks based on family, local loyalties, and tribal affiliations will be key determinants in voting.&#160;These circumstances may favor “non-party list” candidates associated with the Muslim Brotherhood and the former NDP, particularly in rural Egypt.
Post-election shifts in the composition of coalitions could complicate the situation, making governance even more difficult.
Power-sharing among coalition partners will be an intricate affair, including behind-the-scenes deals with the military, which will insist on measures to safeguard its interests.
The political atmosphere in Egypt remains volatile.
Expectations of economic improvement are extremely high.
The initial elected government may pay an early political price for failure.
The starting point for the West in trying to assist Egypt’s transition must be recognition that patient, long-term engagement will be required.
The effectiveness of this engagement will depend primarily on the persuasiveness of the West’s policy prescriptions, rather than on the volume of financial assistance.
G-8 countries have already pledged support to post-Mubarak Egypt, including economic aid, debt relief, and loan guarantees.
These steps are important, though delivery will be prolonged and the likely impact modest, at least in the near-term.
Egypt has already declined support from the International Monetary Fund.
But, apart from an IMF-backed reform program, if the Egyptian government’s policy framework is right, resources will flow from the private sector, including foreign investment supportive of job creation and economic development.
This is the message that Egypt needs to grasp and embrace.
G-8 governments should urgently and repeatedly undertake quiet, structured, and consistent communications with Egyptian counterparts about the economic reforms needed to bring about prosperity.
It is far too early to judge the strength of internal forces promoting liberal economic policies.
The need for economic growth could intrinsically push policymakers toward market-oriented economic policies (sensitive to considerations of “social justice”) and an open investment environment.
Powerful forces within the Egyptian business community are silent at the moment, but in time will reassert themselves.
Many business interests with job-creating capacity want the continuation of market-oriented reforms begun a decade ago (which produced impressive growth rates), but support broadening prosperity and rooting out corruption.
Moreover, an independent media might tend to reinforce pro-market and democratic sentiment.
Indeed, Western governments should continue to use their channels to the Egyptian military and future civil leadership to encourage them to uphold the rule of law, to act with restraint, and to respect free expression.
Regional security arrangements will also require careful maintenance.
Finally, countries supportive of a democratic Egypt should focus on encouraging the institutional and social underpinnings of democratic process and market reform.
This depends on the development of a robust civil society, tolerant of open debate, and healthy liberal political parties, as well as active participation by women and an independent media.
Winning broad public support will take time.
Private non-profit organizations and private enterprise, rather than governments directly, are best equipped to provide this type of training and expertise for leadership development and capacity building.
The job of democratic governments is to provide the resources that can make delivery of this aid possible.
Whither the Strong Dollar?
CAMBRIDGE: In his first international outing America’s new Treasury Secretary Paul O’Neill got tripped up – by telling the truth.
During the Clinton Administration, Treasury Secretary Robert Rubin and then Lawrence Summers stated that America had a “strong dollar policy.”
O’Neill reportedly said that “We are not pursuing... a policy of a strong dollar.” Immediately attacked for reversing a long-held policy, he quickly retreated.
Too bad, because his comment made a lot more sense than his predecessors’ statements.
The truth is, America really doesn’t have an exchange rate policy.
When Alan Greenspan ponders the next move in US interest rates, little attention is paid to the dollar’s exchange rate vis-à-vis the Euro, Yen, or other currencies.
American monetary policy decisions depend on the strength or weakness of the domestic economy and on US inflation.
If the economy is slowing, if there is excess capacity, and if inflation is low, interest rates are reduced; if the economy is strong, if excess capacity is limited, and if inflationary pressures are growing, interest rates are raised.
Nor does the Fed intervene directly in foreign exchange markets except in extraordinary circumstances.
In only one sense does the US actually pursue a “strong dollar” policy: the Federal Reserve’s monetary policy is designed to keep inflation low.
The dollar is kept “strong” in terms of its purchasing power over US goods and services.
But this is not what markets believed the “strong dollar”policy meant. They believed that the strong dollar policy referred to exchange rates.
In this sense, the “strong dollar” policy would mean that America has a “weak Euro” policy or a “weak Yen” policy.
It has no such thing.
So why did successive Treasury Secretaries say that the US has a strong dollar policy?
Part of the answer is that support for a strong dollar is an easy slogan; it sounds patriotic.
Moreover, it would have been viewed as hostile if Secretaries Rubin and Summers insisted that they believed in a “weak Euro”, even if they were implicitly saying that.
A truer statement for Rubin and Summers would have been to say that America actually has no exchange rate policy, the answer that O’Neill tried to give.
Another reason exists for their statements. Some US officials believe that the “strong dollar” statements helped stabilize foreign exchange markets, even if American monetary policy was not directed at the dollar’s strength vis-à-vis the Euro or Yen.
Some believe that, without such statements, the dollar would plunge relative to the Euro and Yen.
After all, if the USTreasury Secretary does not support the dollar, what would sustain its value?
According to this interpretation, market participants would begin to predict the decline of the dollar.
They would sell dollars in anticipation of its decline. Those currency sales would indeed lead to a collapse of the currency.
The decline in the dollar’s value would be a self-fulfilling prophecy.
Self-fulfilling swings in a currency do seem to operate.
Statements about a “strong dollar” policy could support the value of the dollar over a short period of time, even years.
But eventually, fundamental economic strengths and weaknesses have more effect on the exchange rate than self-fulfilling prophecies.
If, as now seems to be the case, America’s economy is weakening while Europe’s economies remain strong, the dollar will weaken vis-à-vis the Euro whether or not the US Treasury Secretary promotes the dollar.
A weaker dollar vis-à-vis the Euro will help sustain demand in the US as the economy slows.
Similarly, the Yen will tend to weaken vis-à-vis both the dollar and the Euro because of Japan’s underlying weaknesses.
If statements about a strong dollar policy had any effect at all, they probably helped promote America’s financial bubble during 1998-2000.
Investors in the US and the rest of the world believed for this short period that investments in the US guaranteed riches; this contributed to the boom and bust in US technology stocks.
The naive view that the dollar would always remain strong (and would strengthen even more) vis-à-vis the Euro added fuel to the capital inflows into America.
Now that the bubble is bursting, US stock markets are down and the dollar is weakening relative to the Euro.
The earlier excesses could bring on a recession in the US this year.
So what should America’s exchange rate policy be?
Basing American monetary policy on domestic business conditions, rather than on the exchange rate, is correct.
Small economies closely integrated with their trading partners might set exchange rate targets, or fix their exchange rate to the currencies of their trading partners, but large and relatively closed economies like the US, EU, and Japan, do better to focus on their own business conditions, letting markets determine the exchange rate.
The dollar should be left to rise or fall vis-à-vis the Euro and Yen depending on the underlying strengths and weaknesses of the three economic areas.
In today’s context, market forces will probably lead to a further weakening of the dollar vis-à-vis the Euro, and a further weakening of the Yen vis-à-vis both the dollar and the Euro.
Secretary O’Neill therefore had it right, even if his words were clumsy.
America should have neither a strong dollar nor a weak dollar policy, only a policy of sensible domestic monetary policies, and a belief that foreign exchange markets should determine exchange rates.
Who Are Tomorrow’s Consumers?
SINGAPORE – Luxury-brand companies’ stock prices plunged in July, after their financial results disappointed investors, owing largely to slower sales in emerging markets, especially in China.
Meanwhile, news reports indicate that high-end shopping malls in India and China are increasingly empty.
What is going on?
Many analysts had expected emerging markets to generate exponential growth over the next decade.
But now there is talk of how the global crisis is slowing down these economies and killing off discretionary spending.
But a slowdown in China’s economic growth cannot really be blamed for slower sales of luxury goods or empty malls.
The annual growth rate of China’s $7.5 trillion economy decelerated to 7.6% in the second quarter, from 8.1% in January-March – hardly a cause for panic.
Moreover, two-thirds of the decline is attributable to slower investment rather than slower consumption.
For all of China’s long-term structural problems, it is not exactly slipping into recession.
The real problem is that many analysts had exaggerated the size of the luxury-goods segment in emerging markets.
China is by far the largest emerging-market economy, with 1.6 million households that can be called “rich” (defined as having annual disposable income of more than $150,000).
But this is still smaller than Japan’s 4.6 million and a fraction of the 19.2 million rich households in the United States.
The number of rich households amounts to barely 0.7 million in India and one million in Brazil.
The point is that developed countries still dominate the income bracket that can afford luxury goods.
The explosive growth recorded by this segment in emerging markets in recent years reflected entry into previously untapped markets, with the subsequent slowdown resulting from saturation.
The number of high-income households is still growing, but not enough to justify the 30-40% compounded growth rates expected by some.
This does not mean that growth opportunities in emerging markets have disappeared, but expectations do need to be recalibrated.
Despite the economic boom of the last decade, China still has 164 million households that can be called “poor” (with annual disposable income of less than $5,000) and another 172 million that are “aspirant” (between $5,000-$15,000).
Similarly, India has 104 million poor households and 107 million aspirant households.
The real story for the next two decades will be these countries’ shift to middle-class status.
Although other emerging regions will undergo a similar shift, Asia will dominate this transformation.
A study by the economist Homi Kharas of the Brookings Institution gives us a sense of the scale of this change.
He estimates that 18% of the world’s middle class lived in North America in 2009, while another 36% lived in Europe.
Asia’s share was 28% (after including Japan).
But Kharas’s projections suggest that Asia will account for two-thirds of the world’s middle class by 2030.
In other words, Asia will displace not just the West, but even other emerging regions.
This is the real business opportunity.
Of course, the rise of Asia’s middle class is not the only change we should expect.
We are in the middle of a social and demographic shift that will both destroy and create consumer markets. The aging of developed markets is well known, but the latest data show that emerging markets are aging at an even faster pace.
China’s median age is today 34.5 years, compared to 36.9 years for the US.
However, the average Chinese will be 42.5 years old by 2030, compared to 39.1 for the average American.
The median Russian will be even older, at 43.3 years.
The impact of aging is already being felt in these countries’ education systems.
The number of students enrolled in primary schools in China has fallen by 18% since 1990, and by an astonishing 33% in South Korea.
At the other end of the demographic scale, the share of the aged is growing explosively.
Meanwhile, the nature of the basic consuming unit – the household – is also changing rapidly.
In most developed countries, the traditional nuclear family is in severe decline and is being replaced by single-individual households.
In Germany, for example, 39% of households consist of just one person.
Couples with children now account for barely 19% and 22% of households in the United Kingdom and the US, respectively.
Nevertheless, it is not all about consumer atomization.
We are simultaneously witnessing the re-emergence of the multigenerational extended family, with as many as 22% of American adults in the 25-35 age group living with parents or relatives.
By contrast, the extended family is giving way in India to nuclear families, which now account for 64% of households.
All of these changes will profoundly affect the future of consumer markets.
For example, we need to revise our mental image of the nuclear family from American suburbia to fit the rapidly expanding cities of India.
By the same token, our mental image of the multigenerational extended family needs to include those in the West.
An aging but increasingly middle-class Asia will be at the core of this new consumer landscape.
Who Beats Corruption?
Corruption undermines the quality of life for people around the world, not only in poor countries.
The US currently is witnessing several corruption scandals.
Even America’s Federal Emergency Management Agency, responsible for providing relief after natural disasters and man-made catastrophes, was in the hands of inept political cronies rather than professionals.
When hurricane Katrina struck America’s Gulf Coast, that incompetence proved fatal.
All societies require an effective government that can provide vital and irreplaceable public services and infrastructure.
Thus, governments are invested with unique powers, especially the powers of policing and judicial control.
But these powers are also readily abused.
How, then, to ensure that governments are law-abiding as well as strong?
The best answer, both in theory and practice, is to find ways to hold governments accountable to the people that they serve.
Elections are obviously one method, though campaign financing can be a source of corruption.
Politicians around the world trade favors for cash needed to win elections, and they often use that cash to buy the votes of desperately poor people.
Clear electoral rules and procedures can help ensure transparency, but accountability also comes from the broad society in between elections.
Privately owned newspapers, independent radio and television networks, trade unions, churches, professional societies, and other groups within civil society provide a bulwark against despotism.
In the poorest countries, where illiteracy is high, desperate people are subject to government manipulation, and there is a lack of independent control through the media and professional organizations, governments face only weak control by society.
They tend to be the most despotic and corrupt, not because poor people care less about good governance – on the contrary, their very lives depend on it – but because they lack the means to keep their government disciplined and law abiding.
The result is a trap in which poverty causes bad governance and bad governance causes poverty – a two-way spiral downward that can lead to such extreme deprivation that the government, lacking computers, telephones, information systems, and trained civil servants, couldn’t function honestly even if it wanted to.
The end result can be collapse into a kind of anarchy, as in Liberia, Sierra Leone, and Somalia.
One measure of the quality of governance in over 150 countries is provided by Transparency International, an organization dedicated to strengthening civil society in the fight against government corruption.
Transparency International produces an annual ranking of “corruption perceptions,” measuring the public’s view of the extent of corruption in a country.
In the 2005 rankings, Iceland scored as the least corrupt country, with the Scandinavian countries, New Zealand, and Singapore close behind.
The US ranked seventeenth from the top, a not-so-glorious position for the world’s leading power.
In general, the poorer the country, the lower the ranking: tied for last place are Chad and Bangladesh.
A bit of statistical analysis reveals further important patterns.
First, Sub-Saharan African countries are less corrupt on average than countries at the same income level in other parts of the world.
For example, Burkina Faso, Ghana, Mali, and Rwanda rank much higher than Bangladesh, Indonesia, Pakistan, and Vietnam.
Yet the Asian countries’ economies have tended to grow much faster over the past generation.
Corruption therefore cannot be the unique factor that holds Africa back.
Africa’s problems have more to do with droughts, malaria, AIDS, and lack of infrastructure.
Poor countries achieve lower levels of corruption when civil rights are protected.
When people have the freedom to assemble, to speak, and to publish their views, society benefits not only by increasing the range of ideas that are debated, but also by keeping corruption in check.
It is no surprise that corrupt regimes routinely clamp down on the press, trade unions, and on professional associations.
In Africa, less corrupt countries like Ghana also have much better protection of civil liberties than more corruption-prone countries like Chad and Ethiopia, which are also even poorer.
Finally, the data show that corruption is highest in oil and gas-producing countries.
In general, natural resources like oil, gas, diamonds, and other precious minerals breed corruption, because governments can live off of their export earnings without having to “compromise” with their own societies.
The natural resources are therefore not only a target of corruption but also an instrument of holding power.
Many foreign companies, intent on cashing in, fuel the pathology of corrupt regimes by peddling in bribes and political protection.
The implications for action are clear. By strengthening civil society – through legal rights and long-term economic development – and instituting clear rules to ensure accountability, political despotism and corruption will be brought under control.
We should be uncompromising, therefore, in our defense of civil liberties.
The rich world should offer impoverished regions like sub-Saharan Africa more economic support to break out of poverty.
Of course, aid should be directed to specific needs – for example, malaria control, food production, safe drinking water, and sanitation – whose fulfillment can be measured and monitored to resist corruption.
By raising living standards, we would also be empowering both civil society and impoverished governments to defend the rule of law.
Who Caused the Currency Wars?
WASHINGTON, DC – The world is on the brink of a nasty confrontation over exchange rates – now spilling over to affect trade policy (America’s flirtation with protectionism), attitudes towards capital flows (new restrictions in Brazil, Thailand, and South Korea), and public support for economic globalization (rising anti-foreigner sentiment almost everywhere).
Who is to blame for this situation getting so out of control, and what is likely to happen next?
The issue is usually framed in terms of whether some countries are “cheating” by holding their exchange rates at an undervalued rate, thus boosting their exports and limiting imports relative to what would happen if their central banks floated the local currency freely.
The main culprit in this conventional view is China, although the International Monetary Fund is a close second.
But, considered more broadly, the seriousness of today’s situation is primarily due to Europe’s refusal to reform global economic governance, compounded by years of political mismanagement and self-deception in the United States.
China certainly bears some responsibility.
Partly by design and partly by chance, about a decade ago China found itself consistently accumulating large amounts of foreign reserves by running a trade surplus and intervening to buy up the dollars that this generated.
In most countries, such intervention would tend to push up inflation, because the central bank issues local currency in return for dollars.
But, because the Chinese financial system remains tightly controlled and the options for investors are very limited, the usual inflationary consequences have not followed.
This gives China the unprecedented – for a large trading country – ability to accumulate foreign-exchange reserves (now approaching $3 trillion).
Its current-account surplus peaked, before the financial crisis of 2008, at around 11% of GDP.
And its export lobby is fighting fiercely to keep the exchange rate roughly where it is relative to the dollar.
In principle, the IMF is supposed to press countries with undervalued exchange rates to let their currencies appreciate.
The rhetoric from the Fund has been ambitious, including at the recently concluded annual meeting of its shareholders – the world’s central banks and finance ministries – in Washington.
But the reality is that the IMF has no power over China (or any other country with a current-account surplus); the final communiqué last weekend was arguably the lamest on record.
Unfortunately, the IMF is guilty of more than hubris.
Its handling of the Asian financial crisis in 1997-1998 severely antagonized leading middle-income emerging-market countries – and they still believe that the Fund does not have their interests at heart. Here, the West Europeans play a major role, because they are greatly overrepresented on the IMF’s executive board and, despite all entreaties, simply refuse to consolidate their seats in order to give emerging markets significantly more influence.
As a result, emerging-market countries, aiming to ensure that they avoidneeding financial support from the IMF in the foreseeable future, are increasingly following China’s lead and trying to ensure that they, too, run current-account surpluses.
In practice, this means fervent efforts to prevent their currencies from appreciating in value.
But a great deal of responsibility for today’s global economic dangers rests with the US, for three reasons.
First, most emerging markets feel their currencies pressed to appreciate by growing capital inflows.
Investors in Brazil are being offered yields around 11%, while similar credit risks in the US are paying no more than 2-3%.
To many, this looks like a one-way bet.
Moreover, US rates are likely to stay low, because America’s financial system blew itself up so completely (with help from European banks), and because low rates remain, for domestic reasons, part of the post-crisis policy mix.
Second, the US has run record current-account deficits over the past decade, as the political elite – Republican and Democrats alike – became increasingly comfortable with overconsumption.
These deficits facilitate the surpluses that emerging markets such as China want to run – the world’s current accounts add up to zero, so if one large set of countries wants to run a surplus, someone big needs to run a deficit.
Leading Bush administration officials used to talk of the US current-account deficit being a “gift” to the outside world.
But, honestly, the US has been overconsuming – living far beyond its means – for the past decade.
The idea that tax cuts would lead to productivity gains and would pay for themselves (and fix the budget) has proved entirely illusory.
Third, the net flow of capital is from emerging markets to the US – this is what it means to have current-account surpluses in emerging markets and a deficit in the US.
But the gross flow of capital is from emerging market to emerging market, through big banks now implicitly backed by the state in both the US and Europe.
From the perspective of international investors, banks that are “too big to fail” are the perfect places to park their reserves – as long as the sovereign in question remains solvent.
But what will these banks do with the funds?
When a similar issued emerged in the 1970’s – the so-called “recycling of oil surpluses” – banks in Western financial centers extended loans to Latin America, communist Poland, and communist Romania.
That was not a good idea, as it led to a massive (for the time) debt crisis in 1982.
We are now heading for something similar, but on a larger scale.
The banks and other financial players have every incentive to load up on risk as we head into the cycle; they get the upside (Wall Street compensation this year is set to break records again) and the downside goes to taxpayers.
The “currency wars” themselves are merely a skirmish.
The big problem is that the core of the world’s financial system has become unstable, and reckless risk-taking will once again lead to great collateral damage.
Who is Gordon Brown?
At long last, Gordon Brown is taking over from Tony Blair as Britain’s Prime Minister, thus attaining his life-long ambition, as if by right.
That is his first problem.
He has not been elected by anyone – not by the Labour Party, and not by Britain’s voters; he has merely come into an inheritance that he has long thought was his due.
How, then, will Brown acquire legitimacy as Britain’s new leader?
The one thing that is clear is that he will not gain legitimacy if he offers only more of what Blair has been dishing up for the past ten years.
Brown’s second problem is the mirror image of the first.
As a senior member of Blair’s government throughout its tenure, he shares responsibility for everything that Blair has done.
Political commentators sometimes claim to detect important differences in their underlying political attitudes.
However, in practice, Brown has remained in the shadows, skillfully managing the economy, but remaining silent and enigmatic on vital political issues, and apparently endorsing everything Blair did.
If Brown is to gain legitimacy, he must offer something new; but he can do that only by distinguishing himself from the Blair legacy in clearly perceptible – and therefore fairly radical – ways.
This will be a difficult trick to pull off.
Perhaps the single most important domestic question Brown faces concerns where he stands on the balance between the free market and the claims of social policy.
Blair’s government moved the Labour Party a long way to the right of its traditional priorities of protecting the underprivileged, and to justify the change he re-named the party “New Labour.”
In many ways, the Blair government’s support of free-market policies turned out to be a shrewd and productive shift.
Britain’s economy grew more steadily and rapidly than it had done for several generations, and the tax revenue generated by growth enabled the government to pour money into education and the National Health Service.
But this has come at a price, or rather several prices.
First, inequality has grown at both ends of the income scale.
At the bottom, the proportion of the population with an income below the poverty line increased from 13% at the start of Blair’s government to 20% now.
That situation is much worse among ethnic minorities.
And, despite the government’s efforts, childhood poverty also has increased under Blair.
At the top, the incomes of the mega-rich have soared, with predictable repercussions, especially in the property market.
Public concern about this issue has been made much worse by claims that the rich get even richer by paying little tax.
There was a time when Brown was thought to be a believer in traditional Labour Party values.
Was it true?
Is it true now?
What will he say about inequality?
Unfortunately, Blair and his government are perceived to be tainted by some of the less attractive features of free-market capitalism.
Blair himself seems to prefer to have “friends” who are very rich and who will lend him their holiday villas in Tuscany.
This “closeness” has led the police to investigate claims that some Labour Party donors have been rewarded with political honors.
In short, Blair’s government exudes an aura of sleaze and cronyism.
Can Brown show that he is different?
The worst part of Blair’s legacy, of course, is the war in Iraq.
Many people predicted, and everyone can now see, that the decision to invade was a disastrous error; that it is having catastrophic consequences, not just for Iraq, but also for the Middle East generally; and that it has seriously damaged the moral standing of the United States and Britain.
The most critical issue facing Brown is whether he chooses to distance himself from Blair’s self-satisfied and delusional claim that the invasion of Iraq was “the right thing to do.”
Britain has already reduced its forces in southern Iraq, and is on course to reduce them still further as they hand over “security” to the Iraqi police and military.
In reality, of course, the civil and guerrilla war under way in the rest of Iraq means that any security in the south can only be a temporary illusion.
The choice facing Brown is whether to cling silently to the existing policy, in the futile hope that the problem will go away, or explicitly recognize Britain’s share in the disaster.
This is partly a question of what to do now in Iraq; but it is also a question of Britain’s relationship with the US.
With hindsight, it is clear that Britain’s participation in the Iraq war was driven solely by Blair’s determination to stick limpet-like to the US.
Brown believes, and has said, that Britain must always be close friends with America; and obviously that is the right thing to believe and say.
But is he prepared to make clear that there is a difference between being close friends and going into an illegal and disastrous war just to please George W Bush?
So far, there is no indication that he will.
While he has publicly regretted the errors in British intelligence about Saddam Hussein, that is merely a way of shifting the blame from the government to the intelligence services.
But it was not the intelligence services that decided to go to war; it was Tony Blair, with the support of Gordon Brown.
The Boston Paradox
MOSCOW – Whose fault is it that the Boston Marathon was bombed?
Is Russia to blame for 250 years of trying to incorporate the Muslim North Caucasus nations, like the Chechens and Dagestanis, first into the czars’ Christian Orthodox Empire, then into the Soviet Union, and now into President Vladimir Putin’s all-controlling Russian state?
Or is radical Islam the only explanation we need, both in Russia and the West?
The attack by Tamerlan and Dzhokhar Tsarnaev has invariably elicited comparisons to the Saudi-born terrorists who struck the United States on September 11, 2001, or to the Pakistani immigrant Faisal Shahzad, who attempted to set off a car bomb in Times Square in 2010.
Others have suggested that the 26-year-old Tamerlan, an ethnic Chechen, may have witnessed the Russian/Chechen war of 1999, or Russia’s brutal efforts to pacify insurgent fighting in the North Caucasus.
Overwhelmed by the Russian Army’s ruthlessness, it is said, he and his teenage brother chose to spread the violence to US soil.
The problem with this explanation, of course, is that the Tsarnaev brothers were from Kyrgyzstan.
They never lived in Chechnya, and only briefly passed through Dagestan in the early 2000’s.
Their ties with the region are those of the diaspora.
Chechen President Ramzan Kadyrov, a former rebel, immediately said that the brothers had nothing to do with his republic.
Dzhokhar, now 19, was only eight years old when the family moved to the US – settling in Cambridge, Massachusetts – and by many accounts he was a reasonably well-adjusted American-immigrant.
He recently began to identify with his religious and ethnic origins, and was experiencing academic difficulties at university, but he was well versed in multiple US subcultures.
Tamerlan, a boxer almost good enough to turn professional, was married to an American Christian woman who converted to Islam and became observant with her husband.
Patimat Suleimanova, the Tsarnaevs’ aunt in Dagestan, explained that her older nephew never prayed before he went to America at age 16.
“He didn’t even know what Islam was,” she told CNN.
In her view, Tamerlan’s radicalization was made in America.
Essentially, the young men’s stories are not so different from America’s home grown “lone wolves,” typically white and equally disenchanted, who have so often shed blood in the US.
The difference is that white men are not collectively blamed for the atrocities.
Adam Lanza in Newtown, Connecticut, or James Holmes in Aurora, Colorado, are not viewed as part of a “suspicious” religious or ethnic group.
Even when non-Muslim white men launch explicitly terrorist attacks – for example, Oklahoma City bomber Timothy McVeigh, who murdered 168 people in 1995, or the “Unabomber” Theodore Kaczynski – their offenses are typically regarded as isolated law-enforcement issues, not as terrorism.
By contrast, darker-skinned terrorism suspects, especially Muslims, are considered agents of larger conspiracies that require military involvement and justify human-rights violations.
The initial call by various US congressmen to prosecute Dzhokhar Tsarnaev as an “enemy combatant” is a case in point.
Never mind that Tsarnaev is a naturalized US citizen, and thus cannot be tried by military tribunals, or that he was captured on US soil, not on a battlefield.
To President Barack Obama’s credit, Tsarnaev will be tried in a civilian court.
But that has not altered Americans’ tendency to generalize invidiously about peoples and countries.
Indeed, so rapid was the vilification of Chechens that the Czech Republic’s ambassador to the US felt compelled to issue a statement aimed at preventing any confusion among Americans about his country’s involvement.
In Russia, too, the fallout is pernicious.
The Tsarnaevs’ attack superficially appears to justify Putin’s nationalist politics in the North Caucasus, and to lend credence to his argument that Russia’s two wars against Chechen independence – from 1994 to 1996 and in 1999 – were waged in the name of national security.
In this sense, the Boston bombings have been a diplomatic gift to him.
But just about the only thing that seems clear about this murderous affair is that utterly alienated young men of any religion or ethnicity might suddenly rebel violently.
Dzhokhar Tsarnaev’s reluctant rejection of the materialistic American life – even after the bombing, he continued to tweet, attend campus parties, and go to the gym – appears to have been consolidated by what indeed could have been his older brother’s resentment of Putin’s brutal reassertion of control in the North Caucasus.
In that case, however, the Boston bombings appear to present a paradox.
While the Tsarnaev brothers may have objected to the supposed vanity of the secular state, there is another sense in which they might be right that Russia and the West are not so different from each other.
Just as Russia must deal with a growing wave of fundamentalism that its own policies have fueled, the summary condemnation of Muslims in America will breed more alienation and retribution from within.
After all, the attacks on the Madrid train system in 2004, and on London’s public-transport system in 2005, were not carried out by Saudi or Taliban immigrants, but by young men born and raised in Spain and the United Kingdom.
For years afterward, the US was held out as an exception – a country in which young men, whatever their background, felt truly at home.
The Boston Marathon bombings, like so many acts of mass violence in America, should retire that view once and for all.
Who is to Blame?
PRINCETON – Now that the economic crisis looks less threatening (at least for the moment), and forecasters are spying “green shoots” of recovery, an ever more encompassing blame game is unfolding.
The financial crisis provides an apparently endless opportunity for unmasking deceit, malfeasance, and corruption.
But we are not sure quite who and what should be unmasked.
Leading bankers were initially the most obvious culprits.
They presided over institutions that made large profits for a substantial period of time by mispricing risk, and then argued for public support on the grounds that they were too big to fail.
They appeared arrogant and overpaid, and were easily demonized.
But what about the political process?
Why were the banks not more closely controlled and better regulated?
It is not that politicians were “bought” in a simple sense; rather, they convinced themselves that financial innovation opened the gate to greater general prosperity, increased home ownership, and, of course, popular support in elections.
Governments are now vulnerable, and politicians are under attack almost everywhere.
Administrations have collapsed in the Czech Republic, Hungary, Iceland, and Ireland.
Riots and paralyzing strikes have crippled Thailand, France, and Greece.
In Kuwait, the government dismissed parliament.
Britain is convulsed by a scandal about parliamentary expenses that has no equivalent since the attacks on “old corruption” in the early nineteenth century.
Recriminations after financial crises have a long history, and they recur in regular cycles.
The stock exchange boom of the early 1870’s was followed by collapse in 1873 and a witch-hunt for those responsible.
In 1907, J.P. Morgan was first viewed as the savior of the market, and then as the enemy of the commonweal.
In the 1930’s, bankers and finance ministers were accused.
But for the rest of the twentieth century, the backlash cycle seemed to have stopped.
Today the attacks are not limited to the political and financial establishment.
Critics are trying to identify the ideas as well as the interests that were responsible for financial and economic dysfunction.
In this respect, the contemporary crisis is unlike the historical analogies, in that it looks as if financial innovation was driven by a set of intellectual and even technological innovations.
Since it is an economic crisis, most people seeking its intellectual roots are tempted to begin with economists, who, with a few exceptions, look particularly discredited.
The founder of the rational expectations revolution, Robert Lucas, is endlessly quoted as having stated in 2003 in his presidential address to the American Economic Association that the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”
It is also clear that academic economists had an impact on policy.
Larry Summers, now the highly influential director of President Barack Obama’s National Economic Council, concluded as a young economist that “financial and monetary shocks are less important sources of depression than we had suspected.” If the economy was foolproof, and if so many good policy options existed to deal with crisis and distress, there was less need to avoid mistakes.
Things could always be set right retrospectively.
Other academic disciplines have looked rather smugly at the public humiliation of their colleagues in economics.
The non-mathematical appear to have their revenge, as the perils of over-reliance on complex symbolic notation and arcane formulae are relentlessly exposed.
In fact, developments or fashions in other academic disciplines and also in the general culture contributed at least as much to a willingness to engage in absurd risks and to provide and accept valuations of complex and inherently unfathomable securities.
The general cultural developments are sometimes termed post-modernism, which involves the replacement of reason by intuition, feeling, and allusion.
But post-modernism has itself been generated by technology, with which it has a deeply ambiguous relationship.
In contrast to a steam engine or an old-fashioned automobile, whose operations were easily comprehensible, modern automobiles or airplanes are so complicated that their operators have no idea how the technology they are using actually works.
The Internet has created a world in which strict logic is less important than the juxtaposition of striking images.
Post-modernism moves away from the rational culture of the so-called “modern era.”
Many people are finding more analogies with medieval life, in which humans were surrounded by processes that they found difficult to comprehend.
As a result, they thought they lived in a world populated by demons and mysterious forces.
The recent era of global finance – perhaps we should speak of it as being past? – differed from the financial surge of a century ago.
Its cultural manifestations also appeared to be novel.
It was playful, allusive, and edgy – in short, post-modern.
It treated tradition and history not as a constraint, but as a source of ironic reference.
At the era’s height, major financial players built vastly expensive collections of highly abstract modern art.
A post-modern neglect or disdain for reality generated the sense that the whole world was constantly shifting and malleable, and might be as transient and meaningless as stock quotations.
An alliance was formed between financial experts who thought they were selling truly innovative ideas, a political elite that endorsed the philosophy of “regulation lite,” and a cultural climate that pushed experimentation and the rejection of traditional values.
The result was that every sort of value – including financial values – came to be seen as arbitrary and fundamentally absurd.
When incomprehension no longer produces new heights of prosperity, but rather economic collapse and failure, it is not surprising that it turns to anger.
Finding out who is to blame becomes more and more like the late medieval and early modern search for witches: a way of making sense of a disorderly and hostile universe.
Who Killed Wall Street?
CAMBRIDGE – You don’t have to break a sweat to be a finance skeptic these days.
So let’s remind ourselves how compelling the logic of the financial innovation that led us to our current predicament seemed not too long ago.
Who wouldn’t want credit markets to serve the cause of home ownership?
So we start by introducing some real competition into the mortgage lending business.
We allow non-banks to make home loans and let them offer creative, more affordable mortgages to prospective homeowners not well served by conventional lenders.
Then we enable these loans to be pooled and packaged into securities that can be sold to investors, reducing risk in the process.
We divvy up the stream of payments on these home loans further into tranches of varying risk, compensating holders of the riskier kind with higher interest rates.
We then call on credit rating agencies to certify that the less risky of these mortgage-backed securities are safe enough for pension funds and insurance companies to invest in.
In case anyone is still nervous, we create derivatives that allow investors to purchase insurance against default by issuers of those securities.
If you wanted to showcase the benefits of financial innovation, you could not have come up with better arrangements.
Thanks to them, millions of poorer and hitherto excluded families became homeowners, investors made high returns, and financial intermediaries pocketed the fees and commissions.
It might have worked like a dream – and until about a year and a half ago, many financiers, economists, and policymakers thought that it did.
Then it all came crashing down.
The crisis that engulfed financial markets in recent months has buried Wall Street and humbled the United States.
The near $1 trillion bailout of troubled financial institutions that the US Treasury has had to mount makes emerging-market meltdowns – such as Mexico’s “peso” crisis in 1994 or the Asian financial crisis of 1997-1998 – look like footnotes by comparison.
But where did it all go wrong?
If our remedies do not target the true underlying sources of the crisis, our newfound regulatory zeal might end up killing useful sorts of financial innovation, along with the toxic kind.
The trouble is that there is no shortage of suspects.
Was the problem unscrupulous mortgage lenders who devised credit terms – such as “teaser” interest rates and prepayment penalties – that led unsuspecting borrowers into a debt trap?
Perhaps, but these strategies would not have made sense for lenders unless they believed that house prices would continue to rise.
So maybe the culprit is the housing bubble that developed in the late 1990’s, and the reluctance of Alan Greenspan’s Federal Reserve to deflate it.
Even so, the explosion in the quantity of collateralized debt obligations and similar securities went far beyond what was needed to sustain mortgage lending.
That was also true of credit default swaps, which became an instrument of speculation instead of insurance and reached an astounding $62 trillion in volume.
So the crisis might not have reached the scale that it did without financial institutions of all types leveraging themselves to the hilt in pursuit of higher returns.
But what, then, were the credit rating agencies doing?
Had they done their job properly and issued timely warnings about the risks, these markets would not have sucked in nearly as many investors as they eventually did.
Isn’t this the crux of the matter?
Or perhaps the true culprits lie halfway around the world.
High-saving Asian households and dollar-hoarding foreign central banks produced a global savings “glut,” which pushed real interest rates into negative territory, in turn stoking the US housing bubble while sending financiers on ever-riskier ventures with borrowed money.
Macroeconomic policymakers could have gotten their act together and acted in time to unwind those large and unsustainable current-account imbalances.
Then there would not have been so much liquidity sloshing around waiting for an accident to happen.
But perhaps what really got us into the mess is that the US Treasury played its hand poorly as the crisis unfolded.
As bad as things were, what caused credit markets to seize up was Treasury Secretary Henry Paulson’s refusal to bail out Lehman Brothers.
Immediately after that decision, short-term funding for even the best-capitalized firms virtually collapsed and the entire financial system simply became dysfunctional.
In view of what was about to happen, it might have been better for Paulson to hold his nose and do with Lehman what he had already done with Bear Stearns and would have had to do in a few days with AIG: save them with taxpayer money.
Wall Street might have survived, and US taxpayers might have been spared even larger bills.
Perhaps it is futile to look for the single cause without which the financial system would not have blown up in our faces.
A comforting thought – if you still want to believe in financial sanity – is that this was a case of a “perfect storm,” a rare failure that required a large number of stars to be in alignment simultaneously.
So what will the post-mortem on Wall Street show?
That it was a case of suicide?
Murder?
Accidental death?
Or was it a rare instance of generalized organ failure?
We will likely never know.
The regulations and precautions that lawmakers will enact to prevent its recurrence will therefore necessarily remain blunt and of uncertain effectiveness.
That is why you can be sure that we will have another major financial crisis sometime in the future, once this one has disappeared into the recesses of our memory.
You can bet your life savings on it.
In fact, you probably will.
Who Lost Russia?
Who lost Russia?
This question remains hotly debated in media and policy circles across the West.
The question seems to presuppose, not only that Russia was lost, but also that if someone in America’s government, the IMF, or EU headquarters had been paying more attention or had devoted more resources towards helping Russia’s government, the results would have been better.
But hardly anyone today thinks the West should have been putting more money into Russia, or even that it should have been helping Yeltsin, and now Putin, to a greater extent than it has been.
An opposing critique, favored by some of George W. Bush’s advisors, holds that the Clinton Administration tried too hard to help, not that it did not try hard enough.
There is something contradictory about using the phrase “Who lost Russia?” to mean that the US tried too hard to help.
The harshest criticism comes from those (including some Bush advisers) who say America and the West sent money down a rat-hole instead of following the practice adopted to fighting some wildfires B ie, standing back and letting the flames burn themselves out.
All in all, the patiently calibrated approach of the last eight years has been right for the most part.
Few will agree with this, probably not even those responsible for conducting Russia policy over the past years.
So let me add that I do not claim that things are good in Russia, nor that American and Western policy had much positive effect there, nor that there isn’t corruption, misery, and their like in abundance across Russia.
Of course, the current situation for the West is more satisfactory, not only from where it was 10 or 20 years ago, when the Soviet Union’s fall did not appear even a remote possibility, but also from where it might have been given Russia’s economic hardship and social instability.
Russia pulled back from hyperinflation in 1995; it has not veered off either toward rightwing dictatorship nor back to Communism; nor has it entirely degenerated into anarchic chaos.
This is an accomplishment considering that Russia never had historical experience with any sort of democracy or market system.
Russia probably hasn’t even done as badly as Ukraine, Belarus, and Central Asia.
But I don’t claim that America and the West necessarily had much effect on this outcome B beyond doing what they do best: thriving domestically, and thus making others want to become free market democrats.
What happens in Russia is mainly determined by Russians.
Consider specific policy choices faced by the West and the specific decisions made, not an imaginary menu that includes the option “Establish the rule of law first, eliminate corruption and inequality, then proceed with market reforms and aid.”
That combination of choices was never an option.
The West’s choices attempted to strike a balance between too much and too little.
The big decisions included:
• approving Russian membership in the IMF in 1992 and immediately giving it a $1 billion stand-by arrangement, with the usual conditions;
• working closely with Yeltsin in the run-up to Russia’s presidential election in 1996 and thereafter, despite his personal shortcomings and the dubious “shares-for-loans” privatizations of the summer of 1995;
• subsequently augmenting the IMF lending agreement by making more resources available even though most of the conditions set previously had not been met, in particular the elimination of unsustainably large Russian budget deficits because of a poorly-functioning national tax collection system;
• pulling the plug in August 1998 when the IMF program didn’t work (much IMF money having quickly flowed back out of the banking system), with the result that the Russians immediately devalued the ruble, defaulted on domestic debt, and imposed controls on capital outflows (whence contagion spread throughout the world, in the worst phase of the 1997-98 financial turmoil);
• adding new conditions to those required for an IMF program in the latter part of 1999.
Although the odds for success in 1991-2 were not great, the West had to try.
Not to try would have sent a signal that the West would never help.
And, despite “moral hazard,” about which we now hear so much and which everyone agrees was greatest in respect to nuclear-armed Russia, the West did let Russia default in 1998.
This was a lesson for the world B debtors and creditors alike B that conditionality is more than mere rhetoric, and bailouts are not unlimited.
Europeans complain that the US used the IMF as a tool for its purposes.
It may be true that the mandate of the IMF, which is supposed to make decisions strictly on objective economic criteria rather than broader political goals, was stretched at times.
America, in particular, may have given Russia more attention than another country would have.
But the basic IMF principle of conditionality was not twisted until unrecognizable.
In the real world there was no other way of helping.
Everyone, not just Americans, has a stake in Russia prospering peacefully.
In general, the guiding principle in the future should be to continue to stand ready to help Russia if social and political conditions supportive of the rule of law and economic reform manifest themselves.
Standing ready includes mustering more domestic support for assistance than is currently available, not whipping up anti-Russian feelings with supposedly new discoveries of money-laundering.
But support should always be conditional on fundamentals.
In the end, the West must recognize that much of the time there is little that can be done.
Who “Lost” Turkey?
BERLIN -- Turkey’s “no” last month (a vote cast together with Brazil) to the new sanctions against Iran approved in the United Nations Security Council dramatically reveals the full extent of the country’s estrangement from the West.
Are we, as many commentators have argued, witnessing the consequences of the so-called “neo-Ottoman” foreign policy of Turkey’s Justice and Development Party (AKP) government, which is supposedly aimed at switching camps and returning to the country’s oriental Islamic roots?
I believe that these fears are exaggerated, even misplaced.
And should things work out that way, this would be due more to a self-fulfilling prophecy on the West’s part than to Turkey’s policies.
In fact, Turkey’s foreign policy, which seeks to resolve existing conflicts with and within neighboring states, and active Turkish involvement there, is anything but in conflict with Western interests. Quite the contrary.
Turkey is and should be a member of the G-20, because, with its young, rapidly growing population it will become a very strong state economically in the twenty-first century.
Even today, the image of Turkey as the “sick man of Europe” is no longer accurate.
When, after the UN decision, United States Secretary of Defense Robert Gates harshly criticized Europeans for having contributed to this estrangement by their behavior towards Turkey, his undiplomatic frankness caused quite a stir in Paris and Berlin.
But Gates had hit the nail on the head.
Ever since the change in government from Jacques Chirac to Nicolas Sarkozy in France and from Gerhard Schröder to Angela Merkel in Germany, Turkey has been strung along and put off by the European Union. Indeed, in the case of Cyprus, the EU wasn’t even above breaking previous commitments vis-à-vis Turkey and unilaterally changing jointly-agreed rules.
Only now, when the disaster in Turkish-European relations is becoming apparent, is the EU suddenly willing to open a new chapter in the negotiations (which, incidentally, clearly proves that the deadlock was politically motivated).
The eastern Mediterranean, the Aegean, the western Balkans, the Caspian region and the southern Caucasus, Central Asia, and the Middle East are all areas where the West will achieve nothing or very little without Turkey’s support. And this is true in terms not only of security policy, but also of energy policy if you’re looking for alternatives to Europe’s growing reliance on Russian energy supplies.
The West, and Europe in particular, really can’t afford to alienate Turkey, considering their interests, but objectively it is exactly this kind of estrangement that follows from European policy towards Turkey in the last few years.
Europe’s security in the twenty-first century will be determined to a significant degree in its neighborhood in the southeast – exactly where Turkey is crucial for Europe’s security interests now and, increasingly, in the future.
But, rather than binding Turkey as closely as possible to Europe and the West, European policy is driving Turkey into the arms of Russia and Iran.
This kind of policy is ironic, absurd, and shortsighted all at once.
For centuries, Russia, Iran, and Turkey have been regional rivals, never allies.
Europe’s political blindness, however, seems to override this fact.
Of course, Turkey, too, is greatly dependent on integration with the West.
Should it lose this, it would drastically weaken its own position vis-à-vis its potential regional partners (and rivals), despite its ideal geopolitical location.
Turkey’s “no” to new sanctions against Iran in all likelihood will prove to be a significant error, unless Prime Minister Recep Tayyip Erdoğan can deliver a real turnaround in Iran’s nuclear policy.
This, however, is highly unlikely.
Moreover, with the confrontation between Israel and Turkey strengthening radical forces in the Middle East, what is European diplomacy (both in Brussels and in European capitals) waiting for? The West, as well as Israel and Turkey themselves, most certainly cannot afford a permanent rupture between the two states, unless the desired outcome is for the region to continue on its path to lasting destabilization.
Worse still, while Europe’s listlessness is visible first and foremost in the case of Turkey and the Middle East, this lamentable state of affairs is not limited to that region. The same applies to the southern Caucasus and Central Asia, where Europe, with the approval of the smaller supplier countries there, should firmly pursue its energy interests and assert itself vis-à-vis Russia, as well as to Ukraine, where Europe should also become seriously involved.
Many new developments have been set in motion in that entire region by the global economic crisis, and a new player, China (a long-term planner), has entered the geopolitical stage.
Europe risks running out of time, even in its own neighborhood, because active European foreign policy and a strong commitment on the part of the EU are sorely missed in all these countries.
Or, as Mikhail Gorbachev, that great Russian statesman of the last decades of the twentieth century, put it: “Life has a way of punishing those who come too late.”
Who Lost Turkey?
PARIS – “Who lost Turkey?” That question, often raised in the past, has been heating up in the aftermath of Prime Minister Recep Tayyip Erdogan’s emotional outburst during the recent World Economic Forum 2009 in Davos, when he abruptly left a panel he was sharing with Israeli President Shimon Peres.
And the Turkish question matters greatly, because it touches on some of the most unstable and unsettling of the world’s diplomatic disputes.
If Turkey has indeed been “lost,” those responsible include the European Union, the United States, Israel, and Turkey itself.
The EU’s growing reservations about Turkey’s membership have been expressed unambiguously by French President Nicolas Sarkozy.
In the US, former President George W. Bush gets some of the blame because of the war in Iraq.
Israel, too, has played its part in Turkey’s alienation from the West, as a result of the Lebanon war of 2006 and its recent military operations in Gaza.
All of these events have disturbed and disoriented Turkey, and are magnified by the domestic impact of worst global economic crisis since the 1930’s.
Of course, Turkey’s secular, pro-Western elites may still consider the EU and the US important, if not indispensable, allies and partners, and they may consider Islamic fundamentalism, Hamas, Hezbollah, and Iran real or at least potential threats.
Yet they are also convinced that Europe has behaved improperly toward Turkey, through a combination of short-term populist reflexes and the absence of a long-term strategic vision.
The Turkish question is, of course, complex.
Turkey’s geography is predominantly Asian, Turkey’s emotions are increasingly Middle Eastern, i.e., Muslim on the Israeli-Palestinian conflict, and yet Turkey’s elites remain resolutely pro-Western and pro-European.
But for how long?
At the beginning of the twenty-first century, when dialogue with the Islamic world is one of the Western world’s key challenges, Europe would commit a historic strategic blunder if it were to close its doors to Turkey.
To do so would push back the inheritors of the Ottoman Empire back onto an Asian, Muslim, and Middle Eastern historical trajectory.
In the question of Turkish accession to the EU, the journey matters more than the destination.
The reforms that Turkey has already implemented in a very short period of time, thanks to its EU candidate status, are impressive.
Should we in Europe really put at risk that progress by expressing an all-too-audible “no”?
The EU desperately needs a strategic and diplomatic partner that can significantly reinforce its clout in the Middle East.
Europe also needs the dynamism of a youthful Turkey.
Above all, it needs the message of reconciliation sent to Islam that Turkey’s entrance into the Union would represent.
Of course, to want Turkey “in” is an act of will, if not an act of faith that is in many ways counterintuitive.
Most Europeans do not perceive Turkey as a “European Other” but as a “non-European Other.”
Even in Istanbul, the most Westernized of Turkish cities, as soon as one leaves the main arteries, one seems to be immersed in a Middle Eastern or Asian culture.
Israel is not in the European Union, but it, too, is in great danger of losing Turkey.
Far from reinforcing Israel’s security, its last two military adventures, in Lebanon and now in Gaza, have caused further self-isolation and loss of world sympathy.
Nowhere has this phenomenon been stronger than in Turkey, where those military escapades have strained the two countries’ strategic alliance almost to the breaking point.
It is too early to speak of Obama’s policy towards Turkey; suffice it to say that in his willingness to open a respectful dialogue with Islam, he is the only Western leader to move in the right direction.
But can positive American gestures towards Turkey, a key NATO member, be sufficient to offset Israel’s insensitive, if not reckless, policies?
The answer is unclear.
Turkey, too shares some of the responsibility for this mounting process of estrangement. Erdogan’s behavior in Davos was, at the very least, irresponsible.
He may have gained popularity back home, but in today’s difficult economic times, the temptations of cheap populism are more dangerous than ever.
One does not play lightly with matches next to a pile of dry wood.
Who Needs a Flat Tax?
WASHINGTON, DC – With America’s Republican presidential candidates lining up to declare their fealty to a flat tax – a system of personal-income taxation that assesses a single rate for all – opponents have focused on why it is a bad idea to raise taxes on the poor in order to reduce them for the wealthy.
But, if a flat tax is such a bad idea, why have so many countries embraced it?
A careful study of these countries – mainly post-communist countries in Eastern Europe and a smattering of tiny micro-states worldwide – suggests that there are three main reasons. First, some countries are so relatively poor and lacking in domestic capital that they opt to drop rates in order to attract foreign investors.
Other countries are so small and ineffective at collecting revenue that they cannot afford a progressive tax system.
Finally, some countries are so corrupt that they have to offer the wealthy a huge rate cut to get them to pay any taxes at all.
The United States, like other developed countries, does not suffer from any of these conditions (yet), so it is not clear why it needs a flat tax.
The formerly communist countries of Eastern Europe that have adopted a flat tax – including Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Macedonia, Romania, Slovakia, and Ukraine, among others – sorely lack investment capital.
Whether on the European Union’s doorstep or just inside, they compete for the attention of foreign direct investors, for whom a flat tax provides an important signal: You are welcome, we will not steal your money, and you can keep what you earn.
For developed countries that already have capital and a track record of inward investment, “the appeal of the flat tax is consequently less,” as a report by the International Monetary Fund concludes.
Thus, the flat tax has not been adopted in any developed countries, or in China.
The other countries that have embraced a flat tax are small or micro-states: Jamaica, Tuvalu, Grenada, Mauritius, Timor-Leste, Belize, and Seychelles.
The only (partial) exception to this rule is Paraguay, which adopted a flat tax in 2010.
Here, flat-tax advocates’ administrative-simplicity arguments have some traction.
If a country is so small that it cannot develop a tax administration effective enough to manage a fair system of progressive taxation, then a flat tax may make sense.
Moreover, some small countries have other sources of revenue, so the benefit of implementing a progressive tax system does not justify the cost.
Tuvalu’s government, for example, derives nearly 10% of its revenues from the sale of rights to its “.tv” Internet domain name, which brings in about $2 million annually.
Countries that are just slightly larger can afford to collect income taxes in a fairer way.
Finally, if a country’s public institutions are in the thrall of oligarchs who are accustomed to stealing with impunity from the public till, a flat tax may be the only way to induce the wealthy to pay any tax at all.
Thus, in 2001 Russia became the first large state to adopt a flat tax, reducing the top marginal rate from 30% to 13%.
In 2003, Ukraine dropped its top rate from 40% to 13%.
In nearly all countries that have introduced a flat tax, government revenues from income tax have declined.
That is why its adoption is often associated with an increase in value-added tax rates (as has occurred throughout Eastern Europe).
In the US, the Republican presidential candidate Herman Cain’s “9-9-9” plan calls for a 9% rate for personal and corporate taxes, together with a new 9% national sales tax.
A country’s tax system reflects its institutional capacity, economic circumstances, and distribution of political power.
If the US were to become the first developed country to experiment with a flat tax, that shift would tend to confirm what many suspect but hope is not true: that America is broke, desperate for inward investment, incompetently governed, and increasingly ruled by a self-regarding oligarchic elite.
Who Needs the Humanities?
WARWICK, UK – Nowadays, in country after country, policymakers have become obsessed with the need to strengthen science education.
But what about the humanities – all those disciplines (literature, history, languages, and so forth) whose relevance to economic competitiveness is not so obvious?
We need the humanities only if we are committed to the idea of humanity.
If the humanities have become obsolete, then it may be that humanity is losing its salience.
I do not mean that we are becoming “less human” in the sense of “inhumane.”
If anything, we live in a time when traditionally human-centered concerns like “rights” have been extended to animals, if not nature as a whole.
Rather, the problem is whether there is anything distinctive about being human that makes special demands of higher education.
I believe that the answer continues to be yes.
Today, it sounds old-fashioned to describe the university’s purpose as being to “cultivate” people, as if it were a glorified finishing school.
However, once we set aside its elitist history, there remains a strong element of truth to this idea, especially when applied to the humanities.
Although we now think of academic disciplines, including the humanities, as being “research-led,” this understates the university’s historic role in converting the primate Homo sapiens into a creature whose interests, aspirations, and achievements extend beyond successful sexual reproduction.
What was originally called the “liberal arts” provided the skills necessary for this transformation.
By submitting to a common regime of speaking, writing, reading, observing, and calculating, the “upright ape” acquired the capacity to reason in public.
This enabled first him and then her to command authority regardless of birth, resulting in the forging of networks and even institutions whose benefits cut deeply across bloodlines.
We too easily forget that our heterogeneous societies rely on at least a watered-down version of this training to maintain political and economic order.
The university began with the humanities at its heart, but today it is playing catch-up with the natural sciences.
This is largely because the natural sciences have most closely imitated the productivity measures associated with industry.
The result is a “bigger is better” mentality that stresses ever more publications, patents, and citations.
Yet, this agenda tends to be pursued without much concern for how – or if – these measures feed into something of greater social, cultural, and even economic relevance.
The Science Citation Index, originally designed to help researchers discern aggregate trends in increasingly complex subject domains sciences, has helped measure productivity.
But now these trends are routinely converted into norms against which the performance of particular universities, departments, and even individual researchers is judged.
What is most easily measured has become confused with what is most worth measuring.
But, more profoundly, this entire line of thinking neglects the distinctly transformative capacity of the knowledge in which the humanities specializes.
An adequate assessment of this capacity requires looking at its multiplier effects.
As with John Maynard Keynes’s notion that returns on public investment must be measured as the long-term consequence of other investments that it stimulates across the economy and society, so, too, with the knowledge generated by the humanities.
This idea is lost in today’s cost accounting for universities, which treats what transpires between teacher and student in the classroom as akin to what happens between producer and consumer in the market.
In both cases, it is assumed that the value of the exchanged good is decided shortly after its delivery according to how it satisfies an immediate need.
Not surprisingly, students value their degree by the first job it gets them rather than the life it prepares them for over the next half-century.
Today, it is hard to believe that in the heyday of the welfare state, universities were both more elite and more publicly funded than they are today.
Back then, it was assumed that the benefits of academic training accrued not only, or even primarily, to those who experienced it but also, and more importantly, to the rest of the population, whose lives were variously enriched by the application of the arts and sciences.
Of course, this enrichment included such practical benefits as medical breakthroughs and labor-saving technologies.
But the enrichment provided by the humanities was no less enduring, though its subtler nature makes it harder to track.
Nevertheless, to paraphrase Keynes, every time we turn on the radio or television, read a newspaper, pick up a novel, or watch a movie, we are in the thrall of one or more dead humanists who set the terms of reference through which we see the world.
In its long history as the premier form of academic knowledge, the humanities were frequently criticized for their subversive character.
That some would now question whether the humanities have any impact at all merely reflects the crude and short-sighted way in which the value of academic knowledge is measured and judged today.
Perhaps that befits creatures whose lives are “solitary, poor, nasty, brutish, and short,” to recall Thomas Hobbes’ description of the state of nature. But it does a grave injustice to those of us who still aspire to full-fledged humanity.
Who Needs the Social Sciences?
Why are the social sciences so much more at risk of having their budgets cut than the other two great bodies of academic knowledge, the humanities and the natural sciences?
Former British Prime Minister Margaret Thatcher notoriously proposed that the field simply does not exist: there is no such thing as society, she claimed.
Others point to the restructuring of university social science departments.
But the expansion of business schools arguably testifies to the continued vitality of the social sciences.
Nor is it true that the social sciences belabor the obvious, as is sometimes said.
On the contrary, today's commonplaces were yesterday's innovations.
If you compare the concepts used to frame newspaper editorials today and ten or more years ago, you will find the deep - but unacknowledged - impact of the social sciences.
The influence may be regretted, but at least it is registered.
Still, where are the social sciences in the vast conversation over "human nature" that has been prompted by recent advances in cognitive neuroscience, behavioral genetics, and evolutionary psychology?
Check out the elaborate and informative website ( www.edge.org ) devoted to the promotion of a "third culture" that bridges the humanities and the natural sciences.
Social scientists are conspicuous by their absence.
But what difference would their presence make?
It is often assumed that everyone recoils at the prospect that there are genetic limits to our capacity for change.
Actually, only those imbued with the optimistic spirit of social science recoil.
Everyone else is relieved.
In the "third culture" best seller The Blank Slate: The Modern Denial of Human Nature , Steven Pinker says that we may need to admit a natural scientific basis for what humanists have for centuries called "fate."
In other words, the configuration of our brains and genes may ultimately be out of our control, however deeply we come to understand them.
Pinker's message will appeal to those eager to avoid political reforms that would compel a greater sense of collective responsibility.
After all, the social sciences historically offered empirical support and spiritual hope for just such reforms, which are increasingly dismissed as "utopian."
By contrast, the humanities and the natural sciences share a sense of reality that transcends time and place; hence their common interest in a fixed "human nature."
This is tied to a way of thinking and a sense of knowing that is largely contemplative and sometimes even disempowering, as reality comes to seem to be whatever resists our concerted efforts at change.
These two great academic cultures also prefer to study humanity without having to mingle with flesh-and-blood human beings.
Thus, evolutionary psychologists infer what makes us who we are from the remains of our Stone Age ancestors (including their DNA), whereas humanists focus on artifacts of a more recent and literate age.
In contrast, the social sciences adhere to the maxim that the best way to study humans is to interact with them, typically by getting them to do and say things that they might otherwise not.
This profoundly simple idea, common to experiments and ethnographies, inspired the triumphs and disasters that punctuate modern politics.
It requires an increasingly controversial assumption: all human beings - whatever their achievements, competences, status, or health - are equally significant members of society, whose strength ultimately lies in what they can do together.
The social sciences' egalitarianism runs counter to both the humanist fixation on elite "classic" texts and the natural scientific tendency to generalize across species.
Thus, social scientists made the everyday lives of ordinary people respectable, while refusing to privilege certain animals over certain - typically disabled or unwanted - humans.
"Welfare" occupies a pride of place in the social sciences that humanists and natural scientists replace with "survival" and maybe even "fortune."
To be sure, the checkered history of welfare in the 20 th century put the future of the social sciences in doubt.
But a way forward can be found in T. H. Huxley, Darwin's fabled public defender.
A late convert to evolution, he was a lifelong skeptic about the theory's political implications.
For Huxley, civilized society rose above nature by its systematic resistance to natural selection.
In his words, the human condition is not about "survival of the fittest" but "the fitting of as many as can survive."
Huxley identified humanity's achievements with legal conventions and medical technologies, artifices that extend human dominion by enabling people to be and do more than they could individually.
The future of the social sciences may lie in rekindling this coalition of law and medicine and upgrading the artificial in a world that may have come to overvalue nature.
Who Needs to Be EU President?
Whoever steps into Europe’s new top job as President of the European Council will set the mold.
If it is someone of worldwide renown, the presidency will immediately be established as a post of global importance.
But if its first occupant is not a household name, the presidency will be doomed as just another of the European Union’s confusing plethora of worthy senior positions that are neither valued nor understood outside Brussels.
The key point here is that Europe won’t be able to upgrade the job later.
If the presidency goes to a politician who lacks fame and charisma, its place will forever be low down in the international pecking order.
Of the half-dozen candidates to become “Europe’s President,” only Tony Blair needs no introduction anywhere.
All the other names in the ring have to be accompanied by a description – the former Finnish this or Austrian that.
Nobody knows whether the current prime ministers of the EU’s 27 member countries will choose Blair.
There is considerable lingering ill will over his role in the invasion of Iraq, and there is the inconvenient fact that he is from Euro-skeptic Britain, and that many on the left view him as a leader whose “third way” was a betrayal of socialism.
But choosing a president for Europe isn’t about Blair the man, or about the political records of any of the others who would like the job.
It is about the job itself.
Europe’s problem is that it lacks a clearly identifiable leader. As a result, despite the EU’s many successes, it still speaks with too many voices.
This was among the problems that the EU’s controversial Lisbon treaty was designed to fix.
It is now in the final stages of its long and difficult birth, and by the New Year should be bringing new mechanisms to bear to streamline European decision-making.
The jewel in its crown is to be the appointment for a 30-month term of a full-time president of the European Council, which groups the heads of EU member governments, along with a foreign policy chief who will be backed by an embryonic EU diplomatic service.
Now that more than two-thirds of Irish voters have reversed their country’s earlier opposition to the Lisbon treaty – with only the Czech Republic’s Europhobic president, Václav Klaus, holding out against it – the focus is on who will fill these two jobs.
And that, in turn, has triggered a round of bitter political squabbling that threatens to negate the entire idea of a much more powerful European voice on the global stage.
The three Benelux countries, along with a few other smaller EU nations, are opposed to the new European president being from a large nation.
And there are also those who fear that a political heavyweight in the job might eclipse the EU Commission’s President, former Portuguese prime minister José Manuel Barroso, who has just been confirmed for a second five-year term, and devalue the role of the foreign policy chief whose authority Lisbon is due to beef up.
These are specious arguments.
The EU’s external relations involve two different types of politics.
The first is the politics of world theatre, where a political figure of global stature could do much to raise the EU’s profile and ensure that it has a major say in re-ordering the post-crisis global economic rulebook.
The second is the politics of detail, where the new foreign policy chief’s role is to create a single EU stance on the wide range of issues about which European governments still have wildly different national positions.
Europe has an international image problem that in part stems from a complex institutional structure that non-EU countries find baffling.
It is over-represented at G-20 world summits, for instance, but the presence of four European national leaders, plus EU representatives like Barroso, weakens rather than strengthens its political weight.
The same is true of other global bodies like the World Bank and the International Monetary Fund.
The result is that Europe’s achievements in recent years – its expansion to create a single economic market of 500 million people and its creation of the euro as a currency that challenges the dollar – are not accompanied by a significantly greater global standing.
World leaders from Barack Obama to Hu Jintao address themselves to Berlin, Paris, and London, rather than to Brussels.
The result is that EU policy proposals that could do much to advance the economic and geopolitical interests of Europeans are not as influential as they could be.
The text of the Lisbon treaty is studiously vague in its job description of the president’s role – an approach that prevented trouble for treaty’s framers, but merely postponed disagreement.
The real argument now taking place between Europe’s national governments is about the authority that the EU’s president should have.
The risk is that Europe’s squabbling politicians will opt for a figurehead and miss this golden opportunity to create a global leader.
Who Owns Bolivia?
A few months ago, Evo Morales became Bolivia‘s first democratically elected indigenous head of state.
Indigenous groups constitute 62% of Bolivia’s population, and those with mixed blood another 30%, but for 500 years Bolivians had been ruled by colonial powers and their descendants.
Well into the twentieth century, indigenous groups were effectively deprived of a vote and a voice.
Aymara and Quechua, their languages, were not even recognized for conducting public business.
So Morales’ election was historic, and the excitement in Bolivia is palpable.
But Morales’ nationalization of Bolivia’s oil and gas fields sent shock waves through the international community.
During his campaign, Morales made clear his intention to increase state control over national gas and oil.
But he had made it equally clear that he did not intend to expropriate the property of energy firms – he wanted foreign investors to stay.
(Nationalization does not, of course, necessarily mean expropriation without appropriate compensation.)
Perhaps surprising for modern politicians, Morales took his words seriously.
Genuinely concerned about raising the incomes of his desperately poor people, he recognized that Bolivia needs foreigners’ expertise to achieve growth, and that this entails paying fairly for their services.
But are foreign owners getting more than a fair rate of return?
Morales’ actions are widely supported by Bolivians, who see the so-called privatizations (or “capitalizations”) under former President Gonzalo “Goni” Sanchez de Lozada as a rip-off: Bolivia received only 18% of the proceeds!
Bolivians wonder why investments of some $3 billion should entitle foreign investors to 82% of the country’s vast gas reserves, now estimated to be worth $250 billion.
While there has not yet been full disclosure of returns, or an audit of the true value of investments, it appears that investors would, at the old terms, have recouped all their money within just four years.
Bolivians also ask why foreigners reap all the benefits of today’s high prices for oil and gas?
It costs no more to extract oil or gas today than it did when prices were one-third of their current level.
Yet, the foreign oil companies get 82% of the increase – in the case of oil, this would amount to a windfall for them of $32 a barrel or more.
No wonder that Bolivians thought they were being cheated and demanded a new deal.
On May 2, Morales simply reversed the percentages, pending renegotiation of the contracts: the companies operating in the two largest fields would get 18% of the production for themselves.
As part of this new deal, Bolivia should also get a larger share when prices increase.
(Bolivia may, of course, not want to bear the risk of a fall in the price, so it may strike a deal to transfer some of the downside risk to foreign companies, giving them in exchange more of the upside potential.)
To most Bolivians, what is at stake is a matter of fairness: Should foreign oil and gas companies get a fair return on their capital, or a supernormal return?
Should Bolivia be paid a fair value for its resources?
And should Bolivia, or foreign companies, reap most of the windfall gains from increases in energy prices?
Moreover, many deals were apparently done in secret by previous governments – and apparently without the approval of Congress.
Indeed, because Bolivia’s Constitution requires the approval of Congress for such sales, it isn’t clear that Morales is nationalizing anything: the assets were never properly sold.
When a country is robbed of a national art treasure, we don’t call its return “re-nationalization,” because it belonged to the country all along.
As with many privatizations elsewhere, there are questions as to whether the foreign investors have kept their side of the bargain.
Bolivia contributed to these joint enterprises not only with resources, but also with previous investments.
The foreign companies’ contribution was supposed to be further investment.
But did they fully live up to their commitments?
Are accounting gimmicks being used to overstate the true value of foreign capital contributions?
Bolivia’s government has, so far, simply raised questions, and set in motion a process for ascertaining the answer.
The problem in Bolivia is a lack of transparency, both when contracts are signed and afterwards.
Without transparency, it is easy for citizens to feel that they are being cheated – and they often are.
When foreign companies get a deal that is too good to be true, there is often something underhanded going on.
Around the world, oil and gas companies have themselves to blame: too often, they have resisted calls for greater transparency.
In the future, companies and countries should agree on a simple principle: there should be, to paraphrase President Woodrow Wilson’s memorable words, “open contracts, openly and transparently arrived at.”
If the Bolivians do not get fair value for their country’s natural wealth, their prospects are bleak.
Even if they do, they will need assistance, not only to extract their resources, but also to improve the health and education of all Bolivians – to ensure long-term economic growth and social welfare.
For now, the world should celebrate the fact that Bolivia has a democratically elected leader attempting to represent the interests of the poor people of his country.
It is a historic moment.
Who Pays for Bird Flu?
Fifty years ago, American chicken farmers found that by keeping their birds in sheds they could produce chickens for the table more cheaply and with less work than by traditional farmyard methods.
The new method spread: chickens disappeared from fields into long, windowless sheds.
Factory farming was born.
It isn’t called “factory farming” merely because those sheds look like factories.
Everything about the production method is geared towards turning live animals into machines for converting grain into meat or eggs at the lowest possible cost.
Walk into such a shed – if the producer will let you – and you will find up to 30,000 chickens.
The National Chicken Council, the trade association for the US chicken industry, recommends a stocking density of 85 square inches per bird – less than a standard sheet of typing paper.
When the chickens approach market weight, they cover the floor completely.
No chicken can move without having to push through other birds.
In the egg industry, hens can barely move at all, because they are crammed into wire cages, which makes it possible to stack them in tiers, one above the other.
Environmentalists point out that this production method is unsustainable.
For a start, it relies on the use of fossil fuel energy to light and ventilate the sheds, and to transport the grain eaten by the chickens.
When this grain, which humans could eat directly, is fed to chickens, they use some of it to create bones and feathers and other body parts that we cannot eat.
So we get less food back than we put into the birds – and less protein, too – while disposing of the concentrated chicken manure causes serious pollution to rivers and ground water.
Animal-welfare advocates protest that crowding the chickens keeps them from forming a natural flock, causes them stress, and, in the case of laying hens, prevents them from even stretching their wings.
The air in the sheds is high in ammonia from bird feces, which are usually allowed to pile up for months – and in some cases for a year or more – before being cleaned out.
Medical experts warn that because the birds are routinely fed antibiotics to keep them growing in such crowded, filthy, and stressful conditions, antibiotic-resistant bacteria could cause a public-health threat.
Yet, despite these well-founded criticisms, over the last 20 years factory farming – not only of chickens, but also of pigs, veal calves, dairy cows, and, in outdoor feedlots, cattle – has spread rapidly in developing countries, especially in Asia.
Now we are discovering that the consequences may be far more deadly than we ever imagined.
As University of Ottawa virologist Earl Brown put it after a Canadian outbreak of avian influenza, “high-intensity chicken rearing is a perfect environment for generating virulent avian flu viruses.”
Other experts agree.
In October 2005, a United Nations task force identified as one of the root causes of the bird flu epidemic, “farming methods which crowd huge numbers of animals into small spaces.”
Supporters of factory farming often point out that bird flu can be spread by free-range flocks, or by wild ducks and other migrating birds, who may join the free-range birds to feed with them or drop their feces while flying overhead.
But, as Brown has pointed out, viruses found in wild birds are generally not very dangerous.
On the contrary, it is only when these viruses enter a high-density poultry operation that they mutate into something far more virulent.
By contrast, birds that are reared by traditional methods are likely to have greater resistance to disease than the stressed, genetically similar birds kept in intensive confinement systems.
Moreover, factory farms are not biologically secure. They are frequently infested with mice, rats, and other animals that can bring in diseases.
So far, a relatively small number of human beings have died from the current strain of avian influenza, and it appears that they have all been in contact with infected birds.
But if the virus mutates into a form that is transmissible between humans, the number of deaths could run into the hundreds of millions.
Governments are, rightly, taking action to prepare for this threat.
Recently, the US Senate approved spending $8 billion to stockpile vaccines and other drugs to help prevent a possible bird flu epidemic.
Other governments have already spent tens of millions on vaccines and other preventive measures.
What is now clear, however, is that such government spending is really a kind of subsidy to the poultry industry.
Like most subsidies, it is bad economics.
Factory farming spread because it seemed to be cheaper than more traditional methods.
In fact, it was cheaper only because it passed some of its costs on to others – for example, to people who lived downstream or downwind from the factory farms, and could no longer enjoy clean water and air.
Now we see that these were only a small part of the total costs.
Factory farming is passing far bigger costs – and risks – on to all of us.
In economic terms, these costs should be “internalized” by the factory farmers rather than being shifted onto the rest of us.
That won’t be easy to do, but we could make a start by imposing a tax on factory-farm products until enough revenue is raised to pay for the precautions that governments now have to take against avian influenza.
Then we might finally see that chicken from the factory farm really isn’t so cheap after all.
The US Still Runs the World
WASHINGTON, DC – Reports of the death of American power have often been greatly exaggerated.
In the 1950s the Soviet Union was thought to have surpassed the United States; today, the Soviet Union no longer exists.
In the 1980s, Japan was widely regarded as on the verge of overtaking the US; today, after more than two decades of Japanese stagnation, no one would take this scenario seriously.
And in the 1990s, monetary union was considered likely to propel Europe to greater global prominence; today, the European economy is frequently in the world’s headlines, but not in a good way.
Now it is China’s turn.
Until recently, China, in many people’s view, was poised to assume global leadership, if it hadn’t done so already.
Today, doubts about the Chinese economy’s long-term prospects are rattling stock markets worldwide (including in the US).
China matters, and its economic policy, including how the exchange rate is managed, must be taken seriously.
But China does not run the world, and it is unlikely to do so anytime soon.
The potential for global leadership still rests, believe it or not, with the US.
The best case for taking China seriously as a world power is made in Arvind Subramanian’s best-selling book Eclipse: Living in the Shadow of China’s Economic Dominance, published in 2011.
(The author, now Chief Economic Adviser at India’s finance ministry, and I were colleagues and sometimes co-authors at the International Monetary Fund and the Peterson Institute for International Economics.)
One hopes that the Indian government will heed Subramanian’s account of how China grew through exports of manufactured goods and associated productivity improvements.
China also became integrated into global supply chains – producing things for companies elsewhere – on a previously unimaginable scale, and Chinese managers learned how to make better products.
But other parts of China’s experience have served it less well over time.
China ran a very large current-account surplus during the early 2000s and accumulated a vast stock of foreign reserves – including at least several trillion dollars’ worth of US Treasury debt.
Although this looks impressive on paper, reserves of this magnitude are essentially useless.
If China were to sell its US assets, the dollar would weaken, and US companies would find it easier to export and to compete against imports.
But Americans’ anxiety about being overtaken is not new.
There was great angst in the late 1980s when a Japanese company bought New York City’s Rockefeller Center.
In retrospect, that was one of the great non-events of the twentieth century.
Similarly, Americans will most likely look back on China’s accumulation of US government debt and simply shrug.
The bigger issue is China’s exchange-rate policy.
For a long time, China prevented the renminbi from becoming overvalued – and this was good policy, as Subramanian’s research confirms.
But in the early 2000s, China went too far.
For reasons that are still debated, the renminbi became massively undervalued; exports were much higher than imports, and the current-account surplus reached more than 10% of GDP.
Instead of letting the renminbi appreciate and gradually reducing their reliance on export markets, the Chinese authorities preferred to accumulate foreign reserves (US Treasury debt).
Now China has to figure out a way to sustain growth when demand in the rest of the world is sluggish.
A return to a substantially undervalued exchange rate would almost certainly provoke an international response, including from the US Congress.
But switching suddenly to domestic-led growth is not easy.
China will not collapse (it is not the Soviet Union), and Japanese-style stagnation is also unlikely.
But China is aging fast – and could become old before it becomes rich.
Every decade, important people predict the end of American power.
And there are reasons to be concerned – particularly when some US politicians refuse to acknowledge the nature of America’s global role.
For example, the US built the world’s trading and monetary system 70 years ago, but now Republicans in Congress refuse to support change at the IMF – including sensible reforms that almost all other countries favor.
Still, it is the US that is currently leading the push for freer trade across the Pacific and a substantial reduction in barriers to trade with Europe.
If America gets the rules right – favoring ordinary citizens, rather than footloose corporations – its trade initiatives will make a major contribution to global growth and its own prosperity.
Likewise, in terms of monetary policy, the major issue for the world over the next year is when and how much the Federal Reserve will raise interest rates.
As US monetary officials gather for their annual Jackson Hole conclave, they will consider myriad relevant dimensions of the global economy.
But the policy-setting Federal Open Market Committee will move interest rates based almost entirely on its collective read of US economic circumstances.
Once again, the rest of the world will react to what the US does.
Who\u0027s Afraid of Al Jazeera?
No one is indifferent to Al Jazeera, the Qatari-based Arab satellite television station.
You can practically see the blood of US officials boil when they discuss it.
To be sure, in the context of the dream of all Arabs being united and independent of foreign control, Al Jazeera is undeniably partial to Arab aspirations. But that does not make its news reporting untruthful.
In fact, Al Jazeera, which US Secretary of State Colin Powell calls "horrible" and "slanted," is a pivotal vehicle for reform and change, which genuinely democratic Arab activists and the international community alike have been calling for.
So incensed has America been, however, that it created its own Arabic language mouthpiece in the form of satellite station Al Hurra.
Yet Al Hurra is forbidden from broadcasting within the US, because it is state controlled.
Arabs don't trust it, either.
It demonstrated its lapdog status by never broadcasting images of prisoners being abused inside Baghdad's notorious Abu Ghraib prison.
In this respect, at least, Al Hurra fits perfectly within the tame tradition of Arab state broadcasters.
America, however, is not alone in challenging Al Jazeera head on.
The BBC, which briefly ran its own Arabic language news station in the mid-1990's - before closing it down because its Saudi funders were unhappy with its reporting - recently announced that it will re-launch an Arabic language news satellite station.
But instead of bashing or seeking to undermine Al Jazeera, politicians should encourage this bastion of free expression, recognizing that Arabs will need to endure a messy process on the way to democracy.
Along that tortuous route, the world's major powers are bound to be offended, probably quite regularly.
Television in the Arab world has for years been the mouthpiece used by ruling presidents, kings, and emirs to propagate their official opinions and nothing else.
Elite military units usually protect radio and television stations, because they have often been the first targets in military coups.
Given this history, and the storm of calls for reform in the Arab world, it is a tragic irony that America and the West have paid so little attention to the terrestrial Arab monopoly television channels.
Indeed, US criticism of Al Jazeera sounds more like special pleading because of America's inept bumbling in Iraq than a genuine desire for free, open, and critical Arab media.
If democracy means giving people a free choice, then there is no doubt that the choice of most Arabs is for a television broadcaster that reflects their aspirations.
In this sense, Al Jazeera is clearly biased, because it is run by Arab patriots and reflects Arab sentiment.
But this is no more a crime than the fact that America's media reflects American aspirations, and in times of war behaves like a cheerleader for US forces.
The key issue here is whether Al Jazeera, as well as American TV stations, are truthful in what they say.
Al Jazeera is certainly professional.
Its leading journalists are Western-trained, many having worked for years at the BBC.
In fact, Al Jazeera was founded only after the BBC closed its Arabic language station under Saudi pressure.
Al Jazeera's motto, "opinion and opposing opinion," has galvanized Arab viewers, because clashing opinions are rarely heard on terrestrial Arab television stations.
Of course, when covering the Israeli occupation of Palestine and the US-led war on Iraq, Al Jazeera has not been objective.
How could it be?
But it did not make up facts; it merely reflected majority Arab opinion.
On such fundamental issues of Arab consensus, it is simply illogical to expect an Arab broadcaster to be even-handed.
Moreover, Al Jazeera has not been dumb to complaints about it.
In July, Al Jazeera became the first Arab TV station to create a professional code of ethics.
According to the BBC, the code defines with absolute clarity and transparency how Al-Jazeera journalists are to behave, and sets clear divisions between news, analysis, and commentary.
As for Al Jazeera's journalistic performance, it is past time that the station be judged by respected professional journalists, not by US or other officials with a policy axe to grind.
A major university department of journalism working with Arab media critics, for example, could provide a much more honest analysis of the station's work.
If American, British, and other Western officials are serious about reform in the Arab world, they must support reform-minded Arab individuals and organizations, even if those organizations make them uncomfortable at times.
If that becomes the West's standard, Al Jazeera will rightly be seen as part of the solution, not part of the problem.
Who’s Afraid of Climate Change?
COPENHAGEN – Imagine that over the next 70 or 80 years, a giant port city – say, Tokyo – found itself engulfed by sea levels rising as much as 15 feet or more.
Millions of inhabitants would be imperiled, along with trillions of dollars worth of infrastructure.
This awful prospect is exactly the sort of thing global-warming evangelists like Al Gore have in mind when they warn that we must take “large-scale, preventive measures to protect human civilization as we know it.”
The rhetoric may sound extreme, but with so much hanging in the balance, surely it’s justified.
Without a vast, highly coordinated global effort, how could we possibly cope with sea-level rises on that order of magnitude?
Well, we already have. In fact, we’re doing it right now.
Since 1930, excessive groundwater withdrawal has caused Tokyo to subside by as much as 15 feet, with some of the lowest parts of the downtown area dropping almost a foot per year in some years.
Similar subsidence has occurred over the past century in a wide range of cities, including Tianjin, Shanghai, Osaka, Bangkok, and Jakarta.
In each case, the city has managed to protect itself from such large sea-level rises and thrive.
The point isn’t that we can or should ignore global warming.
The point is that we should be wary of hyperbolic predictions.
More often than not, what sound like horrific changes in climate and geography actually turn out to be manageable – and in some cases even benign.
Consider, for example, the findings of climate scientists Robert J. Nicholls, Richard S.J. Tol, and Athanasios T. Vafeidis.
In research funded by the European Union, they studied what the global economic impact would be if global warming were to result in a collapse of the entire West Antarctic Ice Sheet.
An event of this magnitude would likely cause the oceans to rise by perhaps 20 feet over the next hundred years – precisely the sort of thing that environmental activists have in mind when they warn about potential end-of-the-world calamities.
But would it really be all that calamitous?
Not according to Nicholls, Tol, and Vafeidis.
Here are the facts.
A 20-foot rise in sea levels (which, not incidentally, is about ten times more than the United Nations climate panel’s worst-case expectations) would inundate about 16,000 square miles of coastline, where more than 400 million people currently live.
That’s a lot of people, to be sure, but hardly all of mankind.
In fact, it amounts to less than 6% of the world’s population – which is to say that 94% of the population would not be inundated.
And most of those who do live in the flood areas would never even get their feet wet.
That’s because the vast majority of those 400 million people reside within cities, where they could be protected relatively easily, as in Tokyo.
As a result, only about 15 million people would have to be relocated.
And that is over the course of a century.
In all, according to Nicholls, Tol, and Vafeidis, the total cost of managing this “catastrophe” – if politicians do not dither and pursue smart, coordinated policies – would be about $600 billion a year, or less than 1% of global GDP.
This figure may seem surprisingly low, but that is only because so many of us have accepted the widespread view that we lack the capacity to adapt to large rises in sea levels.
Not only do we have this capacity, but we have demonstrated it many times in the past.
Like it or not, global warming is real, it is man-made, and we need to do something about it.
But we are not facing the end of the world.
Climate science is a subtle and fiendishly convoluted discipline that rarely yields unambiguous forecasts or straightforward prescriptions.
And after 20 years of much talk but precious little action on global warming, a certain amount of frustration is to be expected.
There is an understandable desire to want to cut through the verbiage and shake people by the shoulders.
Unfortunately, trying to scare the socks off of people doesn’t help matters.
Yes, a startling statistic, combined with some hyperbolic prose, will make us sit up and pay attention.
But we quickly become desensitized, requiring ever more outrageous scenarios to move us.
As the scare stories become more inflated, so, too, does the likelihood that they will be exposed for the exaggerations that they are – and the public will end up tuning the whole thing out.
This may explain recent polling data showing that public concern about global warming has declined precipitously in the last three years.
In the United States, for example, the Pew Institute reported that the number of Americans who regard global warming as a very serious problem had declined from 44% in April 2008 to only 35% last October.
More recently, a BBC study found that only 26% of Britons believe that man-made “climate change is happening,” down from 41% in November 2009.
And in Germany, Der Spiegel magazine reported survey results showing that only 42% feared global warming, compared with 62% in 2006.
Fear may be a great motivator in the short term, but it is a terrible basis for making smart decisions about a complicated problem that demands our full intelligence for a long period.
Who’s Dependent Now?
If the late great Argentine economist Raul Prebisch were alive today, he no doubt would wonder whether the world had turned upside down.
His hugely influential “dependency” theory argued that if poor countries relied too much on commodity exports, they would never achieve the industrial depth needed to sustain rapid growth.
Instead, they would become mired in a cycle of declining global commodity prices and ever-dwindling income shares.
Prebisch’s preferred policy response, protectionism, proved disastrous for the many Latin American and African countries that heeded him.
But the fact is that for many years, Prebisch seemed to have made the right call on long-term commodity price trends.
Relentless efficiency gains in agriculture and resource extraction pushed down prices for commodities, especially during the 1980’s and 1990’s.
With few exceptions, countries that focused on commodity exports performed dismally, whereas many resource-poor Asian countries raced ahead.
Today, however, with Asia’s giants, India and China, joining the global economy, prices for oil, gold, wheat, and virtually every other commodity are exploding.
While there will always be cycles – oil prices, for example, will probably fall before they start rising again – the long-run trend for many commodities will clearly remain upward for some time to come.
What many trade negotiators and other policymakers do not seem to have recognized yet, though Prebisch would have realized it instantly, is that this dramatic turn of events carries huge implications for the global balance of power.
Indeed, perhaps no other aspect of economic globalization will pose greater challenges to world leaders over the coming decades.
The questions are many.
Are today’s rich countries prepared for an era of co-dependency, in which they are just as desperate for commodities as developing countries are for industrial imports and technology?
Are they prepared for the inevitable flow of power and influence to commodity producers as they become much wealthier?
How will the world’s two superpowers, China and the United States, come to terms with the fact that important commodity-exporting regions from Africa to the Middle East to Central Asia are littered with ill-formed nation states?
Some self-anointed seers portray the problem as being one of finite natural resources, with the world running out of critical commodities at an alarming rate.
Nowadays, there are many adherents of the “Hubbert’s peak” theory of oil production, which holds that we have reached the upper limits of output capacity, the wells are running dry, and it is all downhill from here.
However, as leading oil historian Dan Yergin points out, prophets of doom have declared that the world is running out of oil at least four times already.
Each time, radical improvements in technology made the threat evaporate.
In the late 1800’s, oil extraction involved dredging with a mule.
Today, no one thinks anything of drilling 3,000 meters beneath the ocean floor.
There have been similar improvements across the board in metals mining and agriculture.
No, the world is not about to run out of commodities.
Instead, what is happening is that the integration of 2.5 billion people (China and India alone) into the global economy is producing a demand shift that is likely to put far more upward pressure on commodity prices than any technology gains are likely to offset.
So, for at least the next 50 to 75 years, and perhaps until humans start mining on Mars sometime in the coming centuries, prices for many natural resources are headed up.
Will the rebalancing of global economic power that results from this destabilize world politics?
World War I, of course, was partly set off by Germany’s concern that the other colonial powers had locked up too large a share of world oil and commodity supplies.
Similarly, in World War II, Japan feared for the stability of its foreign supplies of oil and other natural resources.
Will similar tensions arise between resource-challenged China (where even water scarcity is a problem) and the West?
Fortunately, this does not seem likely for the moment, especially given the Chinese leadership’s sober and pragmatic approach to its resource problems.
The Chinese are looking to regions like Africa, hoping to find stable trading partners.
They do not share the political evangelism of the Americans, who don’t just want to trade with commodity exporters, but to convert them as well.
Then there are those American leaders who still speak of making the US self-sufficient in energy supplies.
But this is basically a joke: self-indulgent, maybe, but self-sufficient, never.
Much of the Arab world understandably views the invasion of Iraq as the cornerstone of the real US strategy for securing stable energy supplies.
If they are right, one can only hope that America has a plan B.
Meanwhile, commodity prices will continue to rise, with oil exporters now constituting the largest contributors to America’s gaping trade deficit.
Maybe the real US strategy is to try to owe the commodity-exporting countries so much money that they will feel dependent on making America happy!
That is one twist that Prebisch would never have anticipated.
Whose Champions, Anyway?
The links between states and companies have grabbed headlines, most recently in Russia, where President Vladimir Putin seems obsessed with creating “national champions” in the energy and aerospace sectors.
Such efforts seem but a part of a surge of protectionism in European political debate about business, especially when it comes to cross-border acquisitions.
Across Europe, governments position themselves to be seen as defending “national” players from “foreign” competitors.
“Economic patriotism,” the slogan coined by France’s Prime Minister Dominique de Villepin following PepsiCo’s rumored attempt in July 2005 to takeover Danone, perhaps best encapsulates the political imperative.
Although de Villepin’s speeches are more flamboyant than those of most political leaders, the underlying sentiment extends far beyond France.
The same impulse appears to be at work behind Italy’s policy on Autostrade, Spain’s on Endesa, Poland’s on its banking sector, the former Swedish Prime Minister’s on Volvo, German unease about “locust”-like funds on Deutsche Börse, or the United Kingdom’s ever louder defense of the London Stock Exchange’s independence from the United States.
The basic belief that underpins “economic patriotism” is that of an alignment of interests between companies considered “national” (most prominently the largest ones or so-called “champions”), their national employees, and the national community.
According to de Villepin, “to defend the employees’ interests well, we must protect the interests of our companies.”
He later argued that Danone should be considered “French” because its “milk collection and its water sources are in France.”
But Danone’s own filings indicate that only 22% of its global sales and less than 14% of its global workforce are in France.
In fact, the link between European companies and national communities is becoming more tenuous by the day.
Research that I carried out for Bruegel surveyed the largest 100 listed companies headquartered in Europe (ranked by market capitalization) and analyzed the geographical distribution of their revenue, which is increasingly transparent since the adoption of International Financial Reporting Standards (IFRS) last year.
Europe was divided into eight broad zones, comprising individual countries like Germany, France, and Italy, or groupings of smaller countries such as Benelux and the Nordic area.
The survey then calculated the share of revenue earned by each company in the zone in which it is headquartered (or “home base”), the rest of Europe, and the rest of the world.
Where relevant information for companies was available, the comparable distribution of employees was also examined.
The results show that the share of the home base in total revenue has become, on average, relatively low: just three-eighths, or 37.5%, on average for Europe’s largest 100 companies.
Of course, this figure covers a wide diversity of industries, and also some geographical differences across the continent.
For example, the averages for German (34%) or French (35%) companies are markedly lower than for their Spanish (56%) or Italian (65%) counterparts.
But the general trend is unambiguous.
For a broadly representative sub-sample of 55 companies that could be tracked since 1997, the proportion of revenue generated in the home region has fallen sharply on average, from 50.2% to 36.9%.
For these companies, sales to the “rest of Europe,” which represented an average of less than 30% of total European sales in 1997, rose above 43% in 2005.
If the trend is extrapolated, the home bases of Europe’s largest companies will account, on average, for less than half of their European revenue, and less than a third of their global revenue, before the end of this decade.
These companies are “Europeanizing” fast, and the relative weight of their home base is declining even faster.
Moreover, this is not just a story about sales.
The survey also measured the geographical distribution of employees relative to the distribution of revenue.
While the distribution profiles between employees and revenue could be sharply dissimilar in some companies, on average they were almost identical: for a sub-sample of 73 companies among Europe’s top 100, the home base represented 37% of employees and 35% of revenue on average in 2005, while the rest of Europe accounted for 29% of employees and 28% of revenue.
This strongly suggests that jobs broadly “follow” sales (or perhaps the other way round), even though, once again, this is true only on average and not for all companies.
What are the implications for policymakers?
Put simply, the numbers show a growing gap of interests between these so-called “champions” and their national home bases.
For Europe’s governments, fostering champions increasingly means providing benefits to non-national customers and employees – a dubious use of taxpayer money.
Another consequence is that regulatory competition is likely to increase in Europe, as companies are less bound by local interests to keep their headquarters at “home” if the tax or regulatory environment becomes unfavorable.
The decision by Depfa Bank to shift its headquarters from Wiesbaden to Dublin in 2002 may be a sign of things to come.
The biggest risk is that the growing disconnect between the perception of “national” companies and the reality of Europeanization may lead to spectacularly ill-judged policies.
It is high time for business leaders to be more candid about where their real constituencies lie, and for national politicians to recognize that they can no longer wield control over the giants of today’s European business.
Whose Corporate Social Responsibility?
NEW YORK – Increasingly, corporations are under pressure, often from activist non-governmental organizations, to take on specific “corporate social responsibility” (CSR) obligations.
But the fact that CSR is being demanded, and occasionally conceded, does not ensure clarity about either its rationale or the ways in which it should be undertaken.
CSR can be divided into two categories: what corporations should do (say, contribute to a women’s rights NGO or build a village school) and what they should not do (say, dump mercury into rivers or bury hazardous materials in landfills).
The latter is wholly conventional and subject to regulation (and recently to questions about how corporations should behave when there are no host-country regulations).
But are CSR obligations really good practice?
Milton Friedman and other critics often asked if it was the business of businesses to practice corporate altruism.
Prior to the rise of the corporation, there were mainly family firms, such as the Rothschilds.
When they made money, it accrued principally to the family itself.
Altruism, where it existed, also was undertaken by the family, which decided how and on what to spend its money.
Whether the firm or its shareholders and other stakeholders spent the money was beside the point.
With the rise of the business corporation, large family firms have generally disappeared.
But that does not mean that a corporation is the right entity to engage in altruism – though its various stakeholders obviously can spend any portion of the income they earn from the corporation and other sources in altruistic ways.
Instead of CSR, we should have PSR (personal social responsibility).
One can also argue for PSR on the grounds that asking for CSR becomes a way of “passing the buck” – evading personal responsibility for doing good.
This is the flip side of blaming corporations for everything from obesity to scalding from spilled coffee – both the subject of lawsuits in recent years.
There is also an added advantage in replacing CSR with PSR: there is virtue in diversity of approaches to altruism.
Chairman Mao wanted a hundred flowers to bloom, but only so that he could cut them all off at their roots.
But PSR is more like President George H.W. Bush’s metaphor of a “thousand points of light.”
Moreover, it is hard to see how a corporation’s stakeholders can always arrive democratically at a common position on how the corporation should engage in social responsibility on their behalf.
Each will consider his or her CSR view the best.
But there are strong arguments in favor of CSR as well.
First, the political reality is that society treats corporations as if they were persons, which is often also a legal reality for many purposes.
Society increasingly demands that these “corporate citizens” be altruistic, just as people are.
Given this reality, corporations want to give simply because it is expected of them.
Such CSR builds the firm’s image as a “good” corporation, just as giving by Bill Gates and Warren Buffet builds their image as “good” billionaires.
Second, many corporations view CSR as an effective defensive strategy against powerful activist NGOs (such as Greenpeace) that have taken to using online agitation, boycotts, and other means to “blackmail” targeted corporations into acceding to the activists’ demands.
The more CSR a company can point to, the less such efforts will succeed – or even be mounted.
Consider the contrasting experiences of Coke and Pepsi.
Coke has been targeted by NGOs for alleged lapses in labor and environmental standards.
By contrast, Pepsi, which once teamed up with AT&amp;T and the CIA to oust President Salvador Allende in Chile, smells like a rose nowadays, because it has distributed CSR largesse to several causes that influential NGOs embrace.
That is a lesson that Wal-Mart has since learned.
In 2005, the Service Employees’ International Union (SEIU) created Wal-Mart Watch, with an annual budget of $5 million.
The purpose was to make Wal-Mart a “better employer, neighbor, and corporate citizen,” and Wal-Mart eventually capitulated on some of the SEIU’s specific demands as well.
Finally, CSR can be simply a matter of advertising.
In this case, the choice of CSR spending is focused directly on generating added revenue, much like advertising, and is aimed at sales much the way advertising is.
A benign example is Adidas’s sponsorship of tennis tournaments.
A malign example is Philip Morris’s donation of money to museums, symphony orchestras, and opera houses, cynically aimed at buying off artists who might otherwise work to ban cigarettes.
All these rationales for CSR suggest that it should be left to each corporation to determine, just as PSR leaves altruism to each individual’s conscience and sense of what needs supporting.
The attempt by some NGOs and activists to impose a straitjacket on CSR, reflecting their priorities, is misguided and must be rejected.
Instead, the model should be former United Nations Secretary General Kofi Annan’s initiative, the Global Compact.
What Annan has done is to embrace ten wide-ranging guiding principles while leaving signatory corporations free to choose that which they wish to support actively.
Whose Georgia?
In recent weeks, leaders of various opposition organizations in Georgia, such as Antisoros and Fairness, have been jailed on unfair accusations of plotting a coup on behalf of Russia.
But the wave of political repression merely reflects President Mikhail Saakashvili’s desperate effort to cling to power.
With popular dissent growing and opposition forces strengthening, the authorities have sought to controll non-governmental organizations (NGOs) and strengthen the security forces.
But this will only make mass protests inevitable, ultimately jeopardizing the democratic transition in Georgia that Saakashvili claims to represent.
Saakashvili sees a “Moscow hand” in every challenge to his authority, which could be explained by his government’s close alliance with the United States.
But the people rounded up in the latest raid against the opposition were originally imprisoned by Eduard Shevarnadze’s government, which Saakashvili helped depose in Georgia’s supposedly democratic “Rose revolution” in 2003.
The latest events clearly indicate that a czarist mentality survived the revolution, reflected in a Byzantine model of political power — an emperor and his court — that has as its main vehicle largely unconstrained presidential authority.
Before the security forces targeted the opposition bloc that I represent, supporters of educational reforms were prosecuted, while most of the press is under the influence of the government.
Saakashvili claims that the opposition forces that I represent oppose Western values.
But we advocate parliamentarism – genuine separation of executive and legislative power – in Georgia.
And, in supporting the Western model of parliamentariansm, we are on the side of Georgia, not Russia.
It is strange that Saakashvili, a graduate of Columbia Law School, fails to see the disparity between his own democratic rhetoric and autocratic actions.
Thus, those of us who value Georgia’s historical ties with Russia are called, at best, “archaists,” and at worst “enemies of Georgian independence,” as if Georgia would become a Russian colony if we ever came to power.
But what separates us from Saakashvili is that we understand that history, geography, and economics dictate close ties to Russia.
We simply see no contradiction between that stance and support for Western values.
Indeed, even Russia, with all its imperfections, cannot be said to oppose Western values.
The unfortunate paradox in Georgia – and elsewhere in the post-Soviet world – is that self-serving pro-Western rhetoric has often led democratic values to be sacrificed in favor of a new dictatorship.
When the West actively supports popular revolutions, as in Georgia and Ukraine, the newly established power relies on democratic slogans, not democratic behavior.
Shevardnadze, too, was initially viewed as a symbol of post-Soviet Georgian democracy.
As a government minister in 1993, however, I was already hearing CIA officials express concern that a “Mafia state” was being created instead.
First with Shevarnadze, and now with Saakashvili, popular disillusionment reflects not rejection of democracy, but frustration with its continuing absence.
Saakashvili is evidently mesmerized by the US, and the West in general, but what is the point if there is no independent and democratic political process in Georgia today?
And why, then, is sustaining close ties to the US so desirable, while refusing to dismiss Russia as a partner is regarded as being an agent of the Kremlin?
Is the US, in contrast to Russia, by definition honest, innocent, and high-minded?
There should be no place for such unfortunate double standards.
Regardless of what the Saakashvili government claims about his opponents, our political orientation is not pro-Russian, but pro-Georgian.
We believe that Georgia should pursue its own interests, which it may share with Europe, Russia, or the US, but which are nonetheless our own.
We have no interest in merely executing US policy, or in basing Georgia’s foreign and domestic policy solely on distancing the country from Russia, as Saakashvili has done.
Thus, pro-Georgian politics should not countenance nationalism.
Nowadays, some of our politicians have embraced the slogan “Georgia for Georgians.”
But nationalism suggests the lack of a coherent conception of Georgia’s interests.
Georgia’s tradition as a multinational, tolerant state, which has been weakened in the last 15 years, must be reinvigorated, because we have no need for enemies against which to define ourselves.
A strong relationship with Russia need not come at the expense of relations with America and the West, and vice versa.
Georgia should be neither pro-Russian nor pro-American.
It is a small, poor country that desperately needs stability and economic development.
Its model should not be Palestine and permanent battle, but Switzerland and permanent prosperity.
Whose War on Terror?
“We are all Americans,” wrote Le Monde on September 12, 2001. And so it was with most people in the Muslim world, who were as appalled as anyone else at the carnage of the terrorist attacks on Washington and New York.
Indeed, when America responded to the attacks, almost no one mourned the fall of the Taliban, who were universally condemned for their fanaticism.
This unanimity of opinion no longer exists.
In the five years since the attacks, two audiences for the so-called “war on terror” have emerged.
Indeed, as the “war” progressed, the audience closest to the action began to see the emerging combat in a way that was diametrically opposed to that of the United States and the West.
To the US administration, every act in the drama of the war on terror was seen as discrete and self-contained: Afghanistan, Iraq, Palestine, and Hezbollah in Lebanon.
The Bush administration, having proclaimed a war on terror, invaded and occupied countries, and yet failed to see that these events were being linked in the eyes of people in the region.
Glued to Al Jazeera and other Arab satellite channels, the various battles of the “war on terror” came to be viewed as a single chain of events in a grand plot against Islam.
Worse yet, America waved the banner of democracy as it prosecuted its wars. But hopes for democracy, be it secular or Islamist, for the people concerned have been buried in the rubble and carnage of Baghdad, Beirut, and Kandahar.
Many Muslims understand – as well as anyone in the West, and in the same terms – the underlying causes of the alienation that animates Islamic radicalism and violence. They know that the rigid dictatorships of the region have paralyzed their populations. Only those consumed by the fires of their rage seem able to melt the shackles of these authoritarian societies.
But the price of escape is a kind of deformation.
Embittered, fanatical, vengeful: those who rebel against the status quo enter the wider world seeking retaliation, not just against the regimes that deformed them, but against the West, which propped up the region’s authoritarians in the interest of “stability.”
Many Muslims also understand that the problem of Palestine, unsolved for three generations, goes beyond the suffering of the Palestinian people. They know that the region’s dictators have used Palestine to justify their misrule and to avoid political and economic liberalization.
So when America called for democracy, the hearts of many in the region soared with the hope that reform would come at last. But America, as so many times before, let them down.
As people at last began to hope for more liberal and decent societies, the US continued to endorse the regimes that were repressing them. America simply could not adhere to its own democracy-promotion script.
After the ouster of the Taliban in Afghanistan, the US turned its sights on the secular dictatorship of Saddam Hussein’s Iraq. Instead of encouraging reform of the Saudi/Wahhabi regime – the system that spawned 15 of the 19 hijackers in the 9/11 attacks – the average Muslim saw America as waging war on a regime that had nothing to do with that crime.
Many Muslims acquiesced in this deviation, viewing the invasion of Iraq as part of the passing of dictatorship and the coming of democracy. But the bloodstained shambles of the US occupation led America to abandon the quest for democracy.
The deeper America sank into the Iraqi quagmire, the more the US began to turn a blind eye to the region’s surviving dictators, particularly those in Saudi Arabia, Syria, Egypt, and Pakistan.
Indeed, the last thing the region’s dictators wanted to see was a democratic Iraq.
Almost from the moment of Saddam’s fall, Saudi/Wahhabi jihadis poured into Iraq almost unimpeded.
Worse yet, the Muslims who supported the project to democratize Iraq widely suspect that the Sunni resistance that incited the Iraqi civil war has been financed by Saudi oil money.
(Terrorism also kept Iraqi oil from becoming a serious challenger to Saudi Arabia.)
So the effort to democratize Iraq – indeed, the entire American project to democratize the region – has fallen under deep suspicion by even the most moderate of Muslims.
America, they believe, only wants a democracy that suits its interests.
If Palestinians freely vote for Hamas, their choice is actively opposed.
Lebanon’s “Cedar Revolution,” which galvanized the West in the same way as Ukraine’s Orange Revolution, has been systematically undermined.
With democracy in most of the region still a long way off – indeed, perhaps a more distant prospect now than five years ago – US Secretary of State Condoleezza Rice repeats her mantra that the dead civilians of Beirut, Sidon, Tyre, and Gaza represent the “birth pangs” of a new Middle East.
But until the West stops regarding dead babies as political props, we cannot understand how the Muslim world perceives all that has happened since September 11, 2001.
Only then will we understand why the unified view of five years ago has fractured so violently.
Whose World Bank?
NEW YORK – US President Barack Obama’s nomination of Jim Yong Kim for the presidency of the World Bank has been well received – and rightly so, especially given some of the other names that were bandied about.
In Kim, a public-health professor who is now President of Dartmouth College and previously led the World Health Organization’s HIV/AIDS department, the United States has put forward a good candidate.
But the candidate’s nationality, and the nominating country – whether small and poor or large and rich – should play no role in determining who gets the job.
The World Bank’s 11 executive directors from emerging and developing countries have put forward two excellent candidates, Ngozi Okonjo-Iweala of Nigeria and Jose Antonio Ocampo of Colombia.
I have worked closely with both of them.
Both are first-rate, have served as ministers with multiple portfolios, have performed admirably in top positions in multilateral organizations, and have the diplomatic skills and professional competence to do an outstanding job.
They understand finance and economics, the bread and butter of the World Bank, and have a network of connections to leverage the Bank’s effectiveness.
Okonjo-Iweala brings an insider’s knowledge of the institution.
Ocampo, like Kim, brings the advantages and disadvantages of being an outsider; but Ocampo, a distinguished professor at Columbia University, is thoroughly acquainted with the World Bank.
He previously served not only as minister of economics and finance, but also of agriculture – a critically important qualification, given that the vast majority of the developing countries’ poor depend on farming.
He also brings impressive environmental credentials, addressing another of the Bank's central concerns.
Both Okonjo-Iweala and Ocampo understand the role of international financial institutions in providing global public goods.
Throughout their careers, their hearts and minds have been devoted to development, and to fulfilling the World Bank’s mission of eliminating poverty.
They have set a high bar for any American candidate.
Much is at stake.
Almost two billion people remain in poverty in the developing world, and, while the World Bank cannot solve the problem on its own, it plays a leading role.
Despite its name, the Bank is primarily an international development institution.
Kim’s specialty, public health, is critical, and the Bank has long supported innovative initiatives in this field. But health is only a small part of the Bank’s “portfolio,” and it typically works in this area with partners who bring to the table expertise in medicine.
Rumors suggest that the US is likely to insist on maintaining the perverse selection process in which it gets to pick the World Bank’s president, simply because, in this election year, Obama’s opponents would trumpet loss of control over the choice as a sign of weakness.
And it is more important for the US to retain that control than it is for emerging and developing countries to obtain it.
Indeed, the more powerful of the emerging markets know how to live within the current system, and they may use it to their advantage.
They will, in effect, obtain an IOU, to be cashed in for something that is more important.
The Realpolitik of the moment makes fighting over the presidency unlikely;
America may well prevail. But at what cost?
Should America continue to insist on controlling the selection process, it is the Bank itself that would suffer.
For years, the Bank’s effectiveness was compromised because it was seen, in part, as a tool of Western governments and their countries’ financial and corporate sectors.
Ironically, even America’s long-term interests would be best served by a commitment – not just in words, but also in deeds – to a merit-based system and good governance.
One supposed achievement of the G-20 was an agreement to reform the governance of the international financial institutions – most importantly, how their leaders are selected.
Since expertise on development by and large lies within the emerging and developing countries – after all, they live development – it seems natural that the World Bank’s head would come from one of those countries.
To maintain a cabal among developed countries, whereby the US appoints the World Bank president and Europe picks the International Monetary Fund’s head, seems particularly anachronistic and perplexing today, when the Bank and the Fund are turning to emerging-market countries as a source of funds.
While the US, the international community, and the Bank itself repeatedly emphasize the importance of good governance, a selection procedure that de facto leaves the appointment to the US president makes a mockery of it.
Okonjo-Iweala put the matter forcefully in an interview with the Financial Times: what is at stake is a matter of hypocrisy.
The integrity of the advanced industrial countries, which have a majority of the votes at the World Bank, is being put to the test.
Who Should Be Helped First?
The list of urgent challenges facing humanity is depressingly long.
AIDS, hunger, armed conflict, and global warming compete for attention alongside government failure, malaria, and the latest natural disaster.
While our compassion is great, our resources are limited.
So who should be helped first?
To some, making such priorities seems obscene.
But the United Nations and national governments spend billions of dollars each year trying to help those in need without explicitly considering whether they are achieving the most that they can.
The western media focuses on a tsunami in Asia; donations flow freely.
An earthquake that devastates Pakistan garners fewer headlines, so the developed world gives a lot less.
There is a better way.
We could prioritize our spending to achieve the greatest benefit for our money.
This month, I will ask UN ambassadors how they would spend $50 billion to reduce suffering.
They will repeat the same exercise that some of the world’s best economists tackled in a 2004 project called the “Copenhagen Consensus”: weighing up solutions to the great challenges facing the world, and deciding what should be done first.
But the question shouldn’t be left to politicians or Nobel laureates alone.
We must all engage in the debate.
One hopes that this task has been made slightly simpler by the publication of a book in which the Copenhagen Consensus economists boil down their insights.
Here’s one fact to consider: the entire death toll from the Southeast Asian tsunami is matched each month by the number of worldwide casualties of HIV/AIDS.
A comprehensive prevention program providing free or cheap condoms and information about safe sex to the regions worst affected by HIV/AIDS would cost $27 billion and save more than 28 million lives.
This, say the economists who took part in the Copenhagen Consensus, makes it the single best investment that the world could possibly make.
The social benefits would outweigh the costs by 40 to one.
Other options that the economists favored spending some of their $50 billion include providing micro-nutrients to the world’s hungry, establishing free trade, and battling malaria with mosquito nets and medication.
At the other end of the scale, responses to climate change like the Kyoto Protocol would cost more than they would achieve, so the economists crossed them off the list of things to do right now.
Regardless of whether we agree with the economists, everybody must admit that we cannot do everything at once.
Discussing our priorities is crucial.
Often, politicians avoid prioritization.
Why?
The glib answer is because it is hard.
There are many interested parties.
No group wants their solution to come last, and no government wants its country’s national challenges to be overlooked.
The UN conference won’t be easy.
But it shows that there is a will to put prioritization squarely at the center of attention.
It will produce a “to do” list that will demonstrate how to achieve the most that we can for humanity, which could lead, in turn, to more transparent decision-making.
The principles of economics provide a sound basis on which to make rational choices.
Now, the discussion needs to shift from the academic sphere to political life.
It’s time for all of us to consider and compare our own priority lists.
We must endeavor to shorten the list of challenges facing humanity.
But that requires all of us to engage in a debate about what we need to do first.
समलैंगिक पुरुषों को जोखिम-पूर्व रोग-निवारण (PrEP) के लिए तैयार करना
लंदन – अक्तूबर में, एचआईवी के खिलाफ लड़ाई में एक संभावित महत्वपूर्ण खोजवाली दवा के प्रभाव पर शोध करनेवाले दो समूहों ने कुछ असामान्य किया। उन्होंने घोषणा की वे चिकित्सा के लिए जिस ट्रूवाडा (Truvada) नामक एंटीरेट्रोवाइरल दवा का परीक्षण कर रहे थे, वह परीक्षण के यादृच्छिक चरणों को समाप्त करने के लिए काफी प्रभावी सिद्ध हुई है, और वे यह गोली अध्ययन के सभी प्रतिभागियों को दे रहे थे।
शोधकर्ताओं ने यह पाया कि जो समलैंगिक पुरुष पुरुषों से यौन संबंध बनाते समय कंडोम का उपयोग करने के अलावा ट्रूवाडा लेते हैं, उनमें एचआईवी होने की संभावना काफी कम होती है। इस जोखिम-पूर्व रोग-निवारण (PrEP) से इसकी कारगरता और भी अधिक सिद्ध होती है, यह एक ऐसी तकनीक है जिसके द्वारा एचआईवी नेगेटिव वाले लोग खुद को संक्रमण से बचाने के लिए एंटीरेट्रोवाइरल दवाओं का उपयोग करते हैं। 2011 में, गेट्स फाउंडेशन द्वारा वित्तपोषित एक परीक्षण में यह पाया गया कि ट्रूवाडा का उपयोग करनेवाले विषमलिंगी युगलों में एचआईवी संचारण का जोखिम 73% कम हो जाता है।
इस प्रकार एचआईवी/एड्स के प्रसार को रोकने के लिए लड़ रहे लोगों के शस्त्रागार में यह एक नया उपकरण आ गया है। अब प्रश्न यह है कि इसे उन लोगों, अर्थात विकासशील देशों में समलैंगिक पुरुषों को आसानी से कैसे उपलब्ध किया जाए, जिन्हें इसकी सबसे ज्यादा ज़रूरत है।
इस साल की गर्मियों में, विश्व स्वास्थ्य संगठन ने इस उद्देश्य से एक महत्वपूर्ण कदम उठाया, उसने सभी समलैंगिक पुरुषों और पुरुषों के साथ यौन संबंध रखने वाले पुरुषों के लिए जोखिम-पूर्व रोग-निवारण (PrEP) की सिफारिश की है, जिससे यह ऐसा करने वाला पहला प्रमुख अंतर्राष्ट्रीय स्वास्थ्य संगठन बन गया। डब्ल्यूएचओ का अनुमान है कि जोखिम-पूर्व रोग-निवारण (PrEP) का अधिक उपयोग करने से पुरुषों के साथ यौन संबंध रखने वाले पुरुषों में अगले दशक तक एचआईवी संक्रमणों में 25% तक की कमी हो सकती है (इस श्रेणी में अधिक जोखिम वाला कोई भी व्यक्ति शामिल है, न केवल वे व्यक्ति जिनकी पहचान समलैंगिक के रूप में की गई हो)।
लेकिन इसमें आनेवाली एक महत्वपूर्ण बाधा: विकासशील दुनिया के अधिकतर भाग में समलैंगिक पुरुषों की कानूनी स्थिति है। नाइजीरिया जैसे देशों में, जहाँ समलैंगिकता-विरोधी कानून को हाल ही में मंजूरी दी गई है, डब्ल्यूएचओ के नए जोखिम-पूर्व रोग-निवारण (PrEP) के दिशानिर्देशों का पालन करनेवाले कारावास के दंड के भागी हो सकते हैं।
नाइजीरिया में आधिकारिक रूप से स्वीकृत समलैंगिकता के विरोध के वातावरण ने एड्स के खिलाफ लड़ाई में पहले ही अड़चन डाल दी है। 2006 में, एक अध्ययन से पता चला था कि नाइजीरिया में पुरुषों के साथ यौन संबंध रखने वाले पुरुषों ��ें 13% एचआईवी पॉज़िटिव हैं, जबकि इसकी तुलना में कुल नाइजीरियाई व्यक्तियों में से 4.5% एचआईवी पॉज़िटिव हैं। 2012 तक, पुरुषों के साथ यौन संबंध रखने वाले पुरुषों के बीच एचआईवी की दर बढ़कर 17% हो गई। इस बीच, स्वास्थ्य केन्द्रों पर अधिक संख्या में पुरुषों ने बताया कि उन्हें समलैंगिकता के विरोध के वातावरण का सामना करना पड़ रहा है, जिसके कारण इसकी संभावना कम है कि वे मदद प्राप्त करने के लिए आगे आएँगे।
परिणाम इससे अधिक गंभीर नहीं हो सकते थे। दो साल पहले, एक युवा एचआईवी पॉज़िटिव नाइजीरियाई पुरुष ने मुझे क्लीनिक में हर महीने होनेवाले अपने कटु अनुभव के बारे में बताने के लिए मुझसे फेसबुक पर संपर्क किया था। अस्पताल में नर्स, वह जो दवाइयाँ ले रहा था उन दवाइयों और उनके संभावित दुष्प्रभावों के बारे में बताने के बजाय, उसे समलैंगिकता की बुराइयों के बारे में व्याख्यान देने पर अधिक समय लगाती थी। उस आदमी ने, जो तीसरे वर्ष का मेडिकल छात्र था, मुझे बताया कि उसने क्लीनिक न जाने का फैसला कर लिया है। जब मैंने उससे पूछा कि वह इलाज कैसे जारी रखेगा, तो उसने कहा कि विदेश में उसका एक दोस्त है जो उसे दवाएँ दिलवा सकता है। दो साल से कुछ कम समय के बाद, मैंने फेसबुक पर एक अपडेट देखा जिसमें उसकी मृत्यु की घोषणा की गई थी।
मेरा फेसबुक का दोस्त ही ऐसा अकेला व्यक्ति नहीं है जिसे नाइजीरिया के समलैंगिकता के विरोध की कीमत चुकानी पड़ी हो। सॉलिडेरिटी एलायंस नाइजीरिया, समलैंगिक, समलिंगी, उभयलिंगी, और विपरीतलिंगी (एलजीबीटी) संगठनों के गठबंधन की एक प्रारंभिक रिपोर्ट में बताया गया है कि समलैंगिकता-विरोधी कानून बनने के बाद छह महीनों में पुरुषों के साथ यौन संबंध रखने वाले पुरुषों द्वारा एचआईवी सेवाओं के उपयोग में भारी कमी हुई है। यह कमी नाइजीरिया के सबसे अधिक महानगरीय शहर लागोस में 40% से लेकर मुस्लिम-बहुल राज्य कानो में 70% तक थी।
एचआईवी के साथ जीनेवाले नाइजीरियाइयों को केवल संक्रमण से लड़ने के बजाय कुछ और भी करना चाहिए, उन्हें सामाजिक कलंक का बहादुरी से सामना करना चाहिए, धर्मनिरपेक्ष और धार्मिक संस्थाओं द्वारा किए जानेवाले भेदभाव का मुकाबला करना चाहिए, और अब, संभावित रूप से, कानूनी व्यवस्था से खतरों का सामना करना चाहिए। इस माहौल में, जोखिम-पूर्व रोग-निवारण (PrEP) का वायदा मंद पड़ना शुरू हो जाता है, क्योंकि संभावित रूप से जीवन को बचाने के लाभों की तुलना में उपचार कराने के जोखिम अधिक हो जाते हैं।
युगांडा में भी यही कहानी है। पिछले वसंत में वहाँ समलैंगिकों पर किए जानेवाले कानूनी उत्पीड़न में बढ़ोतरी हो गई, सरकार ने एक एचआईवी क्लीनिक पर छापा मारा और उसके प्रचालन लाइसेंस पर इसलिए रोक लगा दी कि उसमें पुरुषों के साथ यौन संबंध रखने वाले एचआईवी पॉज़िटिव पुरुषों के लिए देखभाल और सहायता प्रदान की जाती है।
एचआईवी के खिलाफ लड़ाई का दस वर्ष से अधिक का अनुभव रखनेवाला एक अफ्रीकी कार्यकर्ता होने के कारण, मुझे उम्मीद है कि डब्ल्यूएचओ जोखिम-पूर्व रोग-निवारण (PrEP) के उपयोग की सलाह देने के अपने पहले महत्वपूर्ण कदम से आगे बढ़ेगा। इसका मतलब है नाइजीरिया, युगांडा, गाम्बिया, और रूस जैसे देशों के साथ एचआईवी के खिलाफ लड़ाई में शामिल किए जाने के महत्व पर एक सार्वजनिक वार्तालाप की शुरुआत की जानी चाहिए।
डब्ल्यूएचओ को यह बात स्पष्ट कर देनी चाहिए कि हालाँकि वह एलजीबीटी के राजनीतिक अधिकारों का पक्षधर नहीं है लेकिन वह यह सुनिश्चित करने के लिए दृढ़-निश्चयी है कि जिस किसी को भी जोखिम-पूर्व रोग-निवारण (PrEP) से फायदा हो सकता है, उन सभी को कानूनी परिणामों के डर के बिना, आवश्यक दवाओं तक पहुँच प्राप्त करने में सक्षम होना चाहिए। शोधकर्ताओं, दवा कंपनियों, और मानव-अधिकारों के प्रचारकों को यह सुनिश्चित करने के लिए लड़ाई शुरू करनी चाहिए कि उन लोगों को जोखिम-पूर्व रोग-निवारण (PrEP) जोखिम के बिना उपलब्ध कराया जाता है, जिन्हें इसकी सबसे ज्यादा ज़रूरत है।
Who Should Safeguard Financial Stability?
NEW HAVEN – Central bankers around the world failed to see the current financial crisis coming before its beginnings in 2007.
Martin Čihák of the International Monetary Fund reported in July 2007 that, of 47 central banks found to publish financial stability reports (FSRs), “virtually all” gave a “positive overall assessment of their domestic financial system” in their most recent reports.
And yet, although these central banks failed us before the crisis, they should still play the lead role in preventing the next crisis.
That is the conclusion, perhaps counterintuitive, that the Squam Lake Group [http://squamlakegroup.org/], a think tank of 15 academic financial economists to which I belong, reached in our recently published report,Fixing the Financial System.
Macro-prudential regulators (government officials who focus not on the soundness of individual financial institutions, but rather on the stability of the whole financial system) are sorely needed, and central bankers are the logical people to fill this role.
Other regulators did no better in predicting this crisis, and are even less suited to prevent the next.
David Cameron’s new government in the United Kingdom apparently came to the same conclusion when it announced plans to transfer regulatory authority from the Financial Services Authority (FSA) to the Bank of England.
But agreement about the regulatory role of central banks is not widely spread.
In the United States, for example, there is recognition of the importance of macro-prudential regulation, but not of giving this authority to the Federal Reserve.
The newly passed US financial-reform legislation entrusts macro-prudential policy to a new Financial Stability Oversight Council.
That is good, but the US Treasury secretary will be the council’s chairman, and the Fed, despite gaining some new powers, will for the most part be only one of many members.
The head of the council is thus a political appointee who serves at the pleasure of the president.
Recent history shows that political appointees often fail to take courageous or unpopular steps to stabilize the economy.
A modern US president certainly remembers how difficult it was to convince voters to put him where he is, and is perpetually campaigning to maintain approval ratings and to preserve his party’s prospects in the next election.
The Treasury secretary is part of the president’s team, and works next door to the White House.
George W. Bush won the 2000 election, despite losing the popular vote.
In 2003, Bush chose as his Treasury secretary John W. Snow, a railroad president who, as Barron’s columnist Alan Abelson put it, “may not be the sharpest knife in the cabinet.” Snow obliged the president and gave unquestioning support to his policies until leaving office in 2006, just before the crisis erupted.
Under the new law, Snow would have been in charge of the stability of the entire US economy.
One theme that Bush found resonated with voters in his 2004 re-election campaign was that of the “ownership society.”
A successful economy, Bush argued, requires that people learn to take responsibility for their actions, and policies aimed at boosting home ownership would inculcate this virtue on a broader scale.
That sounded right to voters, especially if it meant government policies that encouraged the emerging real-estate bubble and made their investments in homes soar in value.
Snow echoed his boss. “The American economy is coiled like a spring and ready to go,” he chirped in 2003.
Two years later, near the very height of the bubbles in the equity and housing markets, he declared that, “We can be pleased that the economy is on a good and sustainable path.”
But, to Bush’s credit, he also brought in Ben Bernanke in 2006 as Fed Chairman.
Not part of Bush’s team, Bernanke was protected from political pressures by America’s long tradition of respect for the Fed’s independence.
The choice of Bernanke, an accomplished scholar, apparently reflected Bush’s acceptance of the public’s expectation of a first-rate appointee.
The same problems occur in many other countries.
People who are chosen in part to win the next election often find their economic judgment constrained.
A news story in 2003 reported, for example, that Australian Secretary to the Treasury Ken Henry had warned of a “housing bubble” there, but then quickly tried to withdraw his comment, saying that it was “not for quotation outside of this room.” He did earlier this year finally propose new tax policy to slow the still-continuing Australian housing bubble, but now he can’t get his government to implement it.
By contrast, in recent decades central bankers in many countries have gradually won acceptance for the principle of independence from day-to-day political pressures.
The public in much of the world now understands that central bankers will be allowed to do their work without interference from politicians.
There is a tradition of the central banker as a worldly philosopher, who stands up for long-term sensible policy, and this tradition makes it politically easier for central bankers to do the right thing.
In fact, while the world’s central banks did not see the current crisis coming and did not take steps before 2007 to relieve the pressures that led to it, they did react decisively and energetically as the crisis unfolded, with coordinated international action.
This was facilitated by the tradition of political independence and cooperation that has developed over the years among central bankers.
The crisis has underscored the utmost importance of macro-prudential regulation.
Although our central bankers are not perfect judges of financial stability, they are still the people who are in the best political and institutional position to ensure it.
Who\u0027s to Blame for Britain\u0027s Euro Allergy?
Forty years ago, Charles de Gaulle said "Non" to Britain's request to join the European Community.
By June 9, British Chancellor of the Exchequer Gordon Brown will offer his own "No" to Europe.
But Britain's decision whether to join the single European currency, the Euro, was taken long ago, and it was always going to be some version of "No."
When France first invited Britain to join the infant European enterprise, a decade before General de Gaulle barred the door, the supercilious mandarins in Britain's Treasury ensured that Britain would indignantly reject the offer.
Treasury bureaucrats have remained predictably anti-European ever since.
Like the courtiers who surrounded Louis XVIII, they have forgotten nothing and learned nothing.
The only question now in doubt is whether Brown's verdict on the Euro will be "Not quite yet," "Not before the next election," or just plain "No."
It is a decision being taken virtually independently of Prime Minister Tony Blair, and even against his wishes.
Blair believes that Britain ought to join the Euro, because he wants Britain to be, as he puts it, "at the heart of Europe".
Most commentators tended to assume that, if that's what Tony Blair wants, then sooner or later that is what will happen, because, after all, he is the Prime Minister.
The flaw in this reasoning is that Blair surrendered control of the single currency decision to the Treasury early in his first term, and he has never had the courage or political strength to take it back.
It is sometimes said that Tony Blair is instinctively European (though that is said less often since the Iraq war).
But when he came to power, in 1997, he was not able or willing to face down Britain's traditional anti-Europeanism; in particular, he was not prepared to commit his government to eventual Euro membership.
Blair's solution to his Euro dilemma was to pretend that adopting the Euro was not a major political decision, but a technical question, to be decided on "purely" economic grounds.
So, in October 1997, Gordon Brown announced that he had devised five tests to see whether Britain and the Euro were suited to each other.
In due course, the Treasury would reach a judgment that would be technically expert, economically impartial, and politically neutral.
If Tony Blair ever believed any of this, he was a fool.
Brown claimed that his five tests would produce answers that were plain and unambiguous.
Yet, because they were all questions about the future, they would inevitably be based entirely on speculation.
Where Gordon Brown himself really stands on the issue is unclear, because he is a deeply secretive man.
Many believe that his primary concern in the Euro debate is over how it affects his power vis-à-vis Blair.
In any event, once the decision of principle had been subordinated to ostensibly technical economic tests, it was unavoidable that Treasury mandarins, who are institutionally opposed to European integration, would conduct them.
So the verdict was always going to be "No," which is why the only freedom of movement for Blair and Brown was going to be "Not yet."
Of course, there is not and cannot be an overpowering economic case for joining the Euro, at any time.
Imagine that the British government decides one day to go for Euro membership, and to put the issue to the test of a referendum.
At the moment, the electorate is hostile to Euro membership by a large margin; if the government is to persuade the voters to change their minds on purely economic grounds, it must deploy a powerful case.
Voters will not be impressed by the Treasury's mumbo-jumbo; they will need strong, simple arguments that Britain will be better off by joining.
If the British economy and the Euro-zone economy are both doing well, the economic case for British membership is obviously weak.
The same is true if the British economy and the Euro-zone economy are both doing badly.
If the British economy is doing well and the Euro-zone economy is doing badly, there is no economic case whatsoever for British membership.
That is the current situation.
The only scenario in which there could be a strong, purely economic case for Euro membership is one in which the Euro-zone is doing very well, the British economy is doing very badly, and membership looks like the best way to deliver long-term recovery.
But if the British economy were doing very badly, the other member states might snub Britain.
Obviously, "doing well" and "doing badly" are clumsy notions; but we are talking about a referendum, not about higher mathematics.
A referendum on joining the Euro probably cannot be won unless a British government is willing to say three things: first, that it favors closer EU political integration; second, that the single currency is but one expression of that integration, and third, that it is committed to Euro membership.
Curiously, many voters who oppose Euro membership nonetheless believe that it will happen.
No doubt they would prefer the government to tell them the truth first.
Who’s Who on Putin’s Payroll?
MOSCOW – Germany’s ex-Chancellor Gerhard Schroeder is a legend in Russia.
He serves Gazprom’s interests for a measly couple of million euros a year, sits in at sessions of the Russian Academy of Sciences, and writes books about his staunch friendship with “Genosse Wladimir,” who, in the not-so-distant past, earned himself the well-deserved nickname of “Stasi” among business circles in gangster-ridden St. Petersburg.
But it is not immediately obvious whether it is Schroeder licking Putin’s boots nowadays or vice versa.
The two of them are building, or trying to build, the Nord Stream gas pipeline, an exceptionally costly project that satisfies twin strategic objectives.
Demonstratively hostile to the interests of both Belarus and Ukraine, the pipeline is intended to ensure that these countries are under Russia’s energy thumb, regardless of who is in power in Minsk and Kiev.
As a bonus, the pipeline will also consolidate the Russian economy’s status as an appendage of Germany’s – its supplier of natural resources.
Certain of Schroeder’s predecessors as German chancellor sought to attain the same objective by rather different means.
The Kremlin’s achievements in securing the help of Americans willing to offer their influence are equally impressive.
Indeed, the Obama administration’s Russia policy is being nurtured with advice from people who have no official position in the administration but close business ties to Russia and the Kremlin: Henry Kissinger, James A. Baker, Thomas Graham, and Dimitri Simes.
The first two are major geo-politicians;
Graham and Simes are respected as outstanding Russia specialists.
They write key reports for the administration, and shuttle between Moscow and Washington, coordinating the parameters of the Obama administration’s effort to “reset” the bilateral relationship.
Like Schroeder, all these people are not economically disinterested.
Baker is a consultant for the two companies at the commanding heights of the Russian economy, Gazprom and Rosneft.
The Kissinger Associates lobbying group, whose Russian section is headed by Graham, feeds in to the Kissinger-Primakov working group, a quasi-private-sector effort, blessed by Putin, to deepen ties between Russia and the United States.
It is highly instructive to read the recommendations of these people and groups, as they unobtrusively render the objectives of their Kremlin clients into a language familiar to American leaders.
Graham’s latest contribution, “Resurgent Russia and US Purposes,” is most revealing in this respect.
The author finds the government of a “Russia getting up off its knees” to consist of progressive modernizers fully aware of the challenges facing their country as it attempts to “return to the great powers club.”
“In order to become a genuinely developed and modern country,” Graham continues, “in the coming decade Russia will need to invest at least one trillion dollars in modernizing its infrastructure.
America and the West in general have a vital interest in seeing the modernization of Russia succeed.
The lion's share of the technologies, know-how, and a substantial proportion of the investment, needs to come from Europe and the USA.”
In addition to the technology and investments, Graham quietly slips in a foreign policy suggestion for the Obama administration that is sure to please the Kremlin: “Finlandizing” Ukraine.
Unless that sort of appeasement is pursued, he warns, Russia will continue to oppose the US “wherever and whenever it can.” According to Graham, “At the extreme, a weak Russia, with its vast resources and sparse population east of the Urals, could become the object of competition among the great powers, notably China and the United States.”
That unspoken help-us-develop-or-we’ll-let-the-Chinese-do-it threat is a logical development of Prime Minister Putin’s homily at this year’s World Economic Forum in Davos, where he advocated decisive action to end the world economic crisis.
His recipe?
Western countries should write off half a trillion dollars’ worth of debt owed to them by the Russian state corporations run by his pals from the Dresden KGB and the Ozero dacha cooperative.
But no amount of money will succeed in modernizing Putin's kleptocratic regime, which has already squandered trillions in oil wealth.
Simply put, the Putin system is politically, institutionally, and intellectually antithetical to the task of modernization.
Graham’s only error in his presentation is his attempt to frighten the administration with a hypothetical confrontation between the US and China over Russian resources.
This is not his area of specialization.
Kissinger works personally with the Chinese account, jointly propounding with his long-time rival Zbigniew Brzezinski the notion, so seductive for an America growing weary of its imperial burden, of a global Big Two.
Here is a recent sample of Kissinger’s geopolitical arts: “The role of China in a new world order is crucial.
A relationship that started on both sides as essentially a strategic design to constrain a common adversary has evolved over the decades into a pillar of the international system... The Sino-American relationship needs to be taken to a new level.
This generation of leaders has the opportunity to shape relations into a design for a common destiny, much as was done with trans-Atlantic relations in the post-war period.”
No doubt Kissinger believes every word he wrote, but his ideas also honestly articulate the aspirations of his customers.
It’s just that not all customers have the same motives.
One wants to get his hooks into a further trillion dollars that it can pick away at, while the other wants to become “a central construct of the system of international relations.”
But, in both cases, the customers are getting the influence for which they are paying.
Who Threatens Our Identity?
PRAGUE: Identity and sovereignty are often discussed nowadays.
But what do they actually mean?
Both probably consist of feelings that a community can only be its true self when it can be so without hindrance – in essence, when a community can decide its own fate.
Today’s talk about identity and sovereignty is often rather gloomy.
Both are allegedly endangered: by an EU that wishes to assimilate “us” as much as possible; by the European Commission with its standards; by NATO, the International Monetary Fund and the World Bank; by the United Nations; by foreign capital; by Western ideologies; by Eastern mafias; by American influence; by Asian or African immigration; and by God knows what else.
Some of these concerns may contain a rational core.
Yet they all derive from a traditional misconception – the belief that upholding character, identity or sovereignty is not principally the task of a community or a people but is something left in the control of others; that is, left to those who would attempt to deprive “us” of our identity, or at least to weaken it.
I do not think, however, that the world’s main concern is to find ways to rob people of their identity and sovereignty.
Respect for any nation’s unique character; the manner of its development; and, the degree to which a community decides its fate, is determined primarily by those living within it.
How is this fate determined?
It depends on whether a people close themselves off in hope that the various winds of this world will pass them by; or, whether a nation takes the opposite tack and conducts itself as true inhabitants of this continent and of this planet, that is, as people engaged with the world and who assume their share of responsibility for it.
All humanity is faced by this crucial dilemma: to silently watch a suicidal self-propulsion of our civilization; or to become active participants in the maintenance of global public assets, including the most precious one of all – our planet and its biosphere – of which we are a part.
But the concept of community is also composed of concrete things.
It depends, for example, on whether the environment is nurtured.
It depends on whether a people let their cities and towns become marred by a banal universal architecture devoid of creativity and imagination.
Such blights are not imposed by the European Union or by global capital with its transnational corporations, or by evil foreigners.
All of this physical degradation – as it happens – is accomplished with local consent and active local assistance.
In other words: those who defile “our” identity are primarily ourselves – we who should be its protectors and guardians.
Who is it that infests language and conversation with cliches, ill-structured syntax and rote expressions that flow mindlessly from mouth to mouth and pen to pen?
Who is responsible for the sterile language of commercials seen on every wall and television, indeed, seen everywhere, and without which we appear to be unable to know even the time of day?
Aren’t these severe attacks on language also assaults on a root of our identities?
And aren’t we who use them, quite willingly, also responsible for them?
Let us go farther: Who allows young people to bathe from morning till night in blood flowing on television and movie screens, and yet are sanctimonious and astonished about the aggressiveness of the young?
Who reads all kinds of trash and porno-trash?
These “entertainments” are not filmed and published by bureaucrats from Brussels or by representatives of international institutions, foreign states or large international corporations: they are marketed by citizens to fellow citizens.
Behind these visible assaults on identity found in every industrial country, the postcommunist countries confront other serious threats to both sovereignty and identity.
Over the past ten years of economic transformation, unimaginable wealth has unaccountably disappeared from banks and companies; billions in taxes go unpaid.
Few of those responsible have been brought to justice.
Perhaps worst of all, those who transferred money to tax havens seem to enjoy the silent admiration of the people of whom they have taken advantage.
But who, precisely, are those who do not repay their debts, and who are those who hire assassins to get rid of their creditors?
Who, among those who should be serving as models for others, that is, who among the leaders of political parties, denies his own financial machinations with a smirk?
Who emits into our political and public life the poisons of dissension, foul play, egoism, hatred and envy?
Who – quite inconspicuously – is leading us to become ever more hardened in our sensibilities and toward becoming increasingly accustomed to the fact that everyone can lie about everything and anything?
I repeat: if a nation's identity is jeopardized, it is placed in that position primarily from within; it is placed in jeopardy by choice – often the choices expressed at the ballot box – and out of negligence or indolence.
Threats to identity nowadays are primarily not matters of dictates from outside.
True, the blind pursuit of profit is not the invention of any one people.
True, that pursuit is a trait which is immensely contagious.
But it is also true that nobody can force anyone to take that course.
If we really want it, if we all are prepared to express the desire to preserve community and identity by taking part in elections and by making the right choices, an open international environment and the advanced democratic cultures of our neighbors, friends and allies constitutes the best ground for advancing a people’s uniqueness.
Nowadays, any identity can truly live and flourish only if it breathes the free air of the world; if it defines itself against a background of lasting and living neighborly relations with other identities; and, if it confronts, in a dignified manner, both the adverse winds that blow across today’s world and, perhaps more importantly, the adverse desires that come from within.
Who Wants Cold War II?
TOLEDO, Spain – Does the war in the Caucasus herald the coming of Cold War II?
Or is it a Russian invitation to the West to reshape the global status quo that has prevailed since the end of Cold War I?
Russia’s military is certainly not fit for a global confrontation with the West.
Not only did Russian intelligence fail to catch the coming Georgian attack on South Ossetia, but Russia’s electronic warfare system and ill-equipped ground troops looked like outdated Soviet-era relics.
Then again, a war does not have to display state-of-the-art weaponry to convey a powerful political message.
After all, America’s global leverage is dwindling even as its army remains the most sophisticated military machine in history.
By showing that the United States has lost its monopoly on the unilateral use of force, and by invading an American ally – which even the Soviet Union never dared – Russia blatantly challenged the Pax Americana that emerged from the US victory in the Cold War.
The war in Georgia could not have happened if America had not mishandled its global hegemony so disastrously.
The US entered a calamitous war in Iraq, missed more than one opportunity to engage Iran's revolutionary regime, pushed for unending expansion of NATO onto the doorstep of Russia, and haughtily ignored Russia’s protests against the deployment of missile defenses in Eastern Europe.
Under the cover of the “war on terror,” the US played into Russia’s fear of encirclement through its military penetration into Central Asian countries such as Afghanistan, Pakistan, Uzbekistan, Kyrgyzstan, Kazakhstan, and Tajikistan.
In its quest to counter what it sees as a hostile US strategy of creating American “Cubas” on its doorstep, the Kremlin is promoting alliances with Raúl Castro’s Cuba and Hugo Chávez’s Venezuela.
In the Middle East, Russia is doing everything to regain some of the footholds it had in the past with the aim of sidelining America as the sole global actor in the region.
Syrian President Bashar al-Assad’s recent visit to Moscow is a transparent manifestation of the potential for a renewed alliance.
Russia continues to place hurdles before American proposals for sanctions on Iran, has signed with it lavish energy contracts, and is about to sell it advanced aerial systems aimed at thwarting a possible Israeli or American attack.
Likewise, the Russians have just erased much of Iraq’s debt and agreed lucrative oil drilling deals.
One victim of American post-Cold War unilateralism has been the transatlantic alliance.
The US drive to expand NATO is not shared by all its allies, and Europe is in no mood to follow in the footsteps of Georgia’s impulsive president and be dragged by the ex-Soviet Baltic states and Poland into a confrontation with Russia.
Europe, dependent as it is on Russian energy supplies, is not prepared for a new Cold War, and its alternative to Russian oil – Iran – is not palatable to the Americans.
A return to a Cold War strategy is clearly not in the West’s interest.
Threats to expel Russia from the G-8 or keep it out of the World Trade Organization will only increase its sense of isolation, strengthen its authoritarianism, and push it into the role of a revolutionary anti-status quo power in the Soviet Union’s old sphere of influence and beyond.
Russian minorities still waiting to be “redeemed” in Ukraine, the Baltic states, and Moldova are potential triggers for Russia’s neo-imperialism.
But, as a power burdened with too many domestic ills and a chronic sense of insecurity along its vast and dangerously depopulated borders, Russia cannot be interested in a Cold War II, either.
Its recent agreement with China on border demarcation notwithstanding, Russia can never be assured of China’s ultimate intentions as a colossal power hungry for raw materials for its booming economy and living space for its massive population.
As the war in the Caucasus has shown, the global economy does not offer a foolproof guarantee against war.
But it is one thing to take a calculated risk, as the Russians did in rightly assuming that the West would not go to war over Georgia; it is another thing for Russia to jeopardize its colossal economic gains of recent years in an all-out confrontation with the West.
Indeed, the war in Georgia already has thrown Russia into the most severe financial crisis since its virtual bankruptcy in 1998; $17 billion were lost in capital flight in just one week.
The Moscow stock exchange lost 15% of its value in August, and Russia’s central bank forecasts a 25% decline in foreign investment this year.
Russia must seek genuine strategic partnership with the US, and the latter must understand that, when excluded and despised, Russia can be a major global spoiler.
Ignored and humiliated by the US since the Cold War ended, Russia needs integration into a new global order that respects its interests as a resurgent power, not an anti-Western strategy of confrontation.
Who Wants Peace in the Middle East?
Forty years after the Six Day War peace between Israelis and Palestinians seems as distant as ever.
Israel still refuses to accept the new Palestinian national unity government as a negotiating partner because Hamas is part of that government.
What is the cause of this seeming paradox?
Is there any hope?
The Palestinian government is united administratively, but divided politically.
The Palestinians have one government with two policies.
Politically, Palestine’s Prime Minister Ismail Haniyeh remains against recognizing Israel and respecting the existing agreements.
He declared that he is for the continuation of resistance in all forms.
What kind of guarantee of a good faith effort to reach a peace agreement can come from such a stance?
That is the question the European Union needs to ask itself as it debates whether to resume providing financial aid to the Palestinian Authority.
The EU should make it clear to Hamas that the Union is not going to finance terror and is not going to finance a refusal to make peace.
If the Palestinians want to have European help – which I support completely – it must be ready to make peace, not to break peace.
After all, it is not Hamas as a party that is objectionable; what is objectionable are the politics and policies which Hamas pursues.
We have nothing against Hamas; we are against their belligerent policies, which service in government has not changed.
There was a time when the PLO held positions that were the same as those of Hamas.
Then the PLO changed.
If the current Palestinian leadership changes its position, there will be no problem from our side.
We will have nothing against negotiations.
We are for negotiations.
We are for the “two-state solution.”
We accept the Middle East “road map.”
What we are against is terror.
Where we cannot agree, however, is on a “right of return” for Palestinians.
If such a right were recognized, there would be a Palestinian majority instead of a Jewish majority, which would mean the end of the Jewish state.
This is a demographic, not a religious, question: an Arab state is where the Arabs are the majority, and the Jewish state is where the Jews are the majority.
Indeed, the “right of return” contradicts the very idea of a two-state solution, as it would mean one state – a Palestinian state.
Nobody in Israel will accept this.
But there are other problems in the region that Israel – and the world – must face.
The Palestinians’ current unity government resulted from Saudi mediation, which came in response mainly to Iran’s ambition to increase its influence, not only in Iraq, but also in Lebanon, Gaza, and the West Bank.
Of course, that issue is completely outside Israel’s control.
The ongoing fight in the Muslim world between Sunnis and Shi’a recalls the struggle between Protestants and Catholics in seventeenth-century Europe.
So it is little wonder that the Saudis, Jordanians, Egyptians, and the Gulf states are seeking to resist Iran’s hegemonic ambitions in the region.
Nevertheless, the stakes are far higher than in the seventeenth century, because Iran represents a threat that combines a fanatic religion with a determination to acquire nuclear weapons.
Indeed, Iran is the only country that openly declares its desire to destroy another member of the United Nations.
That is a threat that every country is obliged to take seriously.
When a country’s president delivers crazy speeches, denies the Holocaust, and does not hide his ambition to control the Middle East, who can guarantee that the threat is not serious?
The issue is not one of restoring nuclear “balance” to the Middle East, as Iran’s leaders maintain.
First of all, Israel does not threaten anybody.
Israel never said that it wants to destroy Iran; Israel never openly proclaimed that it would enrich uranium and build nuclear bombs in order to destroy another country.
On the contrary, Israel has said that it will not be the first to use nuclear weapons in the Middle East.
But that does not mean that we can afford to ignore an obvious threat from countries that want to destroy us.
Despite the current unfavorable situation, the path to stabilizing the Middle East still leads through joint economic projects.
Even now, Israel is planning to build a new “corridor of peace,” which will comprise the Jordanians, the Palestinians, and us.
Within the framework of this project, we are seeking to halt the dehydration of the Dead Sea, build a joint airport and a joint water network with Jordan, and develop tourism infrastructure, at a cost of up to $5 billion.
We have the donors, so there is no shortage of money to finance our efforts, which, I am sure, will be realized.
Israel wants – indeed, desperately needs – peace and stability in the Middle East, and we will continue to do everything in our power to achieve it.
But we cannot reach that goal alone, much less negotiate with those whose idea of a stable and peaceful Middle East is one that has no place for Israel.
Who Will Eclipse America?
WASHINGTON, DC – According to Voltaire, the Roman Empire fell “because all things fall.”
It is hard to argue with this as a general statement about decline: nothing lasts forever.
But it is also not very useful.
In thinking, for example, about American predominance in the world today, it would be nice to know when it will decline, and whether the United States can do anything to postpone the inevitable.
Contemporary commenters despaired of the Roman Empire for several hundred years before it finally collapsed.
Could America find its way to a similar extension?
In terms of providing an essential structure for discussion of this problem, Arvind Subramanian’s new book, Eclipse: Living in the Shadow of China’s Economic Dominance, is a major contribution.
(Full disclosure: Subramanian and I are colleagues at the Peterson Institute for International Economics, and we have worked together on other issues.)
In particular, Subramanian develops an index of economic dominance that should become a focus of conversation anywhere that people want to think about changes in world economic leadership.
There is no need to know any economics in order to be fascinated by this book: it is about power, pure and simple.
The basic facts are incontrovertible.
The United Kingdom was the world’s dominant economic power from the rise of industrialization in the early nineteenth century.
But it lost its predominance and was gradually eclipsed by the US, which, at least since 1945, has been the undisputed leader among market-based economies.
The US surpassed the UK in terms of industrial production as early as the end of the nineteenth century, but that was not enough to tip the balance.
Economic predominance shifted only when the UK ran large current-account deficits during World Wars I and II – the country had to borrow heavily in order to finance its war effort, and imports were significantly higher than exports.
Much of the world’s gold reserves ended up in the hands of the US.
This helped undermine the role of the British pound internationally and catapulted the US dollar to the fore – particularly after the Bretton Woods conference in 1944, at which it was agreed that countries would hold their reserves in dollars as well as gold.
More recently, however, it has been the Americans’ turn consistently to run large current-account deficits, buying more from the rest of the world than they earn by selling goods and services abroad.
On this dimension, the US seems destined to repeat the mistake of the British.
At the same time, emerging-market countries’ per capita income has risen – as has their international role.
In particular, China has followed a strategy in the past decade or so that entails running large current-account surpluses and building up foreign-exchange reserves, which are now reported to be in excess of $3 trillion.
Indeed, Subramanian’s most provocative argument is that China has already surpassed the US in terms of economic dominance – but we have not yet woken up to this new reality.
The story is fascinating and well told; but there is still a great deal worth arguing.
For example, did the British decline because the US could not be stopped, or because of problems within the British Empire and at home?
A few years ago, some regarded Japan as having overtaken the US.
Europe also was supposedly vying for global economic dominance.
Now any such claims would seem preposterous.
In both cases, the credit system got out of control, with too much lending to the private sector in 1980’s Japan and excessive government borrowing during the 2000’s in the eurozone.
Similarly, it remains unclear that the Chinese development path will remain smooth.
Fixed investment in China is close to 50% of GDP – which must be a world record.
Credit to state firms and to households continues to grow rapidly.
Isn’t this a version of exactly what derailed Japanese growth?
On the key issue of being able to issue a “reserve currency” that investors and governments want to hold, Subramanian is correct that China has many of the prerequisites in place.
But it still lacks some key elements, including fully-fledged property rights.
If you worry about getting your money out of a country when times turn tough, China is not an attractive place to hold your reserves.
External challenges do sometimes bring down states.
But, more frequently, the big problems are internal – the regime cannot deliver growth, its legitimacy fades, and people start to head for the exits (or at least get their money out).
If the US is eclipsed any time soon, this will more likely be due to its loss of social cohesion and its dysfunctional politics.
China might well step in to fill that vacuum, but that is quite different from being able to elbow America aside.
Who Will Help the Poor?
PARIS – With the deepening of the economic crisis and the prospect of another recession looming large on the horizon, growing social inequality has become an increasingly urgent issue.
How does one reinforce a sense of solidarity and responsibility within a country?
Who will protect the weakest?
As I ponder this issue, I am reminded of a debate that I had more than ten years ago in Berlin with the German theologian Hans Küng and American and Asian participants.
The subject was “Globalization and Ethics” – specifically, a comparison of the ways that Europe, the United States and Asia protect the most fragile members of their respective societies.
All of the participants agreed that in Europe the state traditionally filled the role played by private philantropy in the US and by the family in Asia.
But we all hastened to add that no model was “pure,” i.e., the family was no longer what it used to be in Asia, the state was playing a bigger role than expected in America, and it was often underperforming in Europe.
Reality has become even more complicated since then: the family’s role continues to decline in Asia; philantropy, despite a few extraordinarily generous individuals, has more than met its limits in America; and, with the possible exception of the Nordic countries, the state in Europe, overburdened by debt, no longer has the means or the will to shoulder new responsibilities.
So who will take on the responsibility to protect the weakest if none of these three actors can do it properly?
Are we heading toward a world united by shared incompetence and inadequacy?
In the Western world, the poorest are the worst affected by economic stagnation.
But, in rapidly growing emerging-market countries, the rich tend to close their eyes to the suffering of the poorest, except when they feel threatened by the risk of political upheaval, as in, say, Saudi Arabia.
In fact, wealthy elites in emerging countries live in a state of denial towards their poor, literally ignoring them.
Brazil and India are particularly striking in this regard.
Economic growth is necessary, but not sufficient: a strong sense of social responsibility is needed as well.
It would be absurd to condemn, as some do, globalization as the main and only culprit in the erosion of traditional sources of support for the poor.
Globalization is above all a context, an environment, even if the consequences of the first major financial and economic crisis of the global age will further deepen the gap between the very rich and the very poor.
But globalization makes the weakest among us more visible, and therefore makes the absence of social justice more unacceptable.
A world of much greater transparency and interdependency creates new responsibilities for the rich.
Or, more precisely, it makes the old responsibility to protect the weakest both more difficult and more urgent.
In a world of increasing complexity, perhaps what is needed are simple solutions.
One could follow, for example, Adam Smith’s principle of comparative advantage: what Europe does best is the state, while Asia still relies on the family and the US continues to focus on individual initiative.
The problem is that in a world of universal benchmarking, the legitimacy of solutions will stem more than ever from their cultural acceptability and their efficiency.
In Western Europe, for example, the call for sacrifice from all citizens in order to resolve the debt crisis runs up against a lingering perception that not all will contribute equally, and that social inequality will be exacerbated by austerity.
Restoring growth in the short term while addressing debt problems in the medium and long term may well be the only valid response to the crisis.
But it will not work, in Europe or elsewhere, without a much greater emphasis on social justice.
While some of the very rich complain, as Warren Buffett did recently, that they do not pay enough taxes, the enlightened generosity of these happy few – who want to save capitalism and liberalism – is unlikely to be emulated by the new rich in the emerging countries, much less by the rich elsewhere.
Let’s be realistic: people like Buffett and Bill Gates have very few followers even among the very rich in the US.
And can Asian societies really revive an effective sense of family responsibility?
Globalization does appear to have weakened cultural differences noticeably in the past decade.
But, when it comes to the protection of the weakest and the struggle against rising social injustice, perhaps “global deculturation” creates an opportunity to combine the best of what remains in particular traditions.
Perhaps countries should seek to base their social-welfare systems on a new synthesis of the state, the family, and philanthropy.
Who Will Pay the Price of Enlargement?
LONDON: The glow of optimism at the European Union's Helsinki summit last month, when EU leaders decided to extend membership negotiations to all ten candidate countries from Central and Eastern Europe, plus Malta and Cyprus, is fading fast.
It has now become crystal clear that enlargement is going to be a very difficult process: difficult to negotiate, and just as difficult, perhaps, to sell to the voters.
The predicament can be expressed in stark terms: Who Will Pay the Price of Enlargement?
Enlargement will not be cost-free: there will be losers, as well as winners.
But the common dilemma facing all sides in this negotiation, the ins as well as the outs, is to make sure that there are not too many losers in any one country.
Otherwise, enlargement simply will not get past the voters.
The most immediate manifestation of this predicament is the European Union's Common Agricultural Policy.
This policy has long been a burden, both on EU consumers, because it has kept food prices high, and on EU taxpayers, because the subsidy to farmers' incomes costs the Union some e(Euro) 41bn every year (about $40bn), or around half of the total EU budget.
But it has been part of the core bargain which has kept the union together.
On purely economic grounds, subsidising EU farmers has no justification, and it is an increasing anomaly in a world of global markets and international competition.
At the start of the Common Market, it was the political price insisted on by France, a major agricultural country, as the condition for opening the French market to German industrial goods.
Today, that bargain has lost most of its original justification.
France is now an immensely rich and powerful industrial country; and though it is still one of the world's great food producers, its farm population has shrivelled from around 30% of the total population after World War II to around 5% today.
Most EU governments, including the French, now recognise that the CAP must be reformed, if only because of international pressure from other food-exporting countries.
And in recent years, the EU has at least started to reduce the market support prices of some foods, while compensating farmers by making direct income supplement payments instead.
The trouble is that the candidate countries now seeking membership are keen to get their share of the CAP gravy.
The six front-running countries (Czech Republic, Estonia, Hungary, Poland, Slovenia and Cyprus) recently submitted position papers to the EU demanding that their farm sectors should participate fully in the CAP from Day 1, and that their farmers should get all the benefits, including income support payments.
It is not clear that this opening position is wise, in economic terms.
One social justification for the CAP is to prevent too large a gap between rural and industrial incomes in the existing EU.
But all incomes in the candidate countries are much lower than those in the EU, and if EU membership were to give a sudden upward shove to rural incomes in Central Europe, it could be quite destabilising for social relations there.
Moreover, it might also seriously distort economic development, by attracting excessive investment into agriculture.
Nor is it clear that this opening position is prudent in negotiating terms.
If all the benefits of the CAP were paid in full in all the six front runners, the cost to the EU budget could be an extra e6bn a year, and virtually all of that would have to be paid by existing member states, because they are so much richer.
But they have made no provision for this kind of spending, and are unlikely to agree to it.
One solution mooted by the Commission as a way of finessing the problem is to have a long transition period between membership of the EU, and full participation in the CAP.
But the position papers of the candidate countries explicitly rule out this delaying tactic.
The farm policy puzzle will be followed by a similar predicament over EU regional and social policies.
By definition these funds now go mainly to the poorer parts of the EU.
Candidate countries, however, are poorer still, so the full application of these regional policies would call for large extra budgetary transfers to Central and Eastern Europe.
At issue here is not mainly justice and morality.
Of course, justice and morality come into it, and these emotive banners will no doubt be waved by candidate countries during the negotiations.
But these are not likely to be the decisive considerations.
The first decisive consideration will be the operational feasibility of the negotiation process, which means striking a politically acceptable balance between winners and losers throughout the enlarged Union.
It is difficult to over-state what a difficult task that may turn out to be. Remember, it only needs the voters of one member state to say No, and the whole process fails.
The second consideration is the future architecture of the enlarged EU.
Postponing access to the CAP may seem a partial solution to this problem; but it is also a partial step towards creating a two-tier Union.
Given the immense disparities in economic and other development, between the EU and the candidate countries, it may be debatable whether it will be possible to create a unitary or one-tier Union with 27-plus countries.
But if not, what will be the architecture of this enlarged EU?
Unfortunately, this is a question which the member states have not thought about, and apparently do not wish to think about.
Who Will Run the World?
SINGAPORE – Barack Obama’s election comes at a moment when a new bit of conventional wisdom is congealing.
It concerns the end of America’s global dominance.
True, freewheeling American-style capitalism has not acquitted itself proudly of late.
And America’s military superiority has not proved all that useful in accomplishing American ends.
But who may pick up the slack in providing global leadership?
The uncomfortable answer that Obama is likely to confront is this: nobody.
America may be damaged, but no replacement is on offer.
Europe is self-absorbed, focused on creating whatever kind of entity it ends up deciding to be.
China’s standard response to any suggestion that it exercise global leadership is to hide beneath its vast internal agenda and plead poverty.
No other country comes close to having either the capacity or the ambition.
In the face of the familiar litany of desperate global problems – not just financial instability, but also climate change, energy insecurity, potential pandemics, terrorism, and the spread of weapons of mass destruction – the prospect of a rudderless world is more than alarming.
What is to be done?
And by whom?
Given that the United States has not been playing much of a leadership role on many of these issues recently, it is worth taking a look at what happens when no one country exercises effective leadership.
One set of answers might seem apparent from the collapse of international trade negotiations and the unraveling international system to control the spread of nuclear weapons. Things can certainly get grim.
But that is not the whole story.
To see why, consider climate change.
It is now clear that avoiding catastrophic climate change requires dramatic and rapid reductions in greenhouse-gas emissions, cuts that would lower annual emissions to 80% below 1990 levels by 2050.
Yet emissions are not just rising, but accelerating.
The coming recession may stem their growth temporarily, but only slightly.
The necessary reductions imply a rapid and radical transformation of industrial, energy, and land-use systems around the world.
What are governments doing about this?
Supposedly, by December 2009 they will agree on a new treaty to set limits on emissions.
But the prospects that an agreement will be reached in Copenhagen in December 2009 are close to nil.
The new Obama administration will have only a few months to develop meaningful proposals that can win domestic support, and will be preoccupied with the aftermath of the current financial debacle and the Iraq war.
Europe is pushing for ambitious targets but is having trouble with its own vested interests.
The large emerging countries, although they will suffer disproportionately from wilder weather and rising sea levels, show little interest in picking up the slack.
Negotiation watchers term the current American-Chinese dance of mutual blame a suicide pact.
In short, the process is a mess.
This is hardly surprising.
An inter-governmental system that falls apart under the challenges of trade negotiations and proliferation threats is unlikely to master the deep complexity and multitudinous vested interests that the issue of climate change entails.
Traditional diplomacy will at best devise a face-saving but meaningless accord next year.
In many areas, frustration with inter-governmental intransigence and incompetence has sparked extraordinary innovation by non-governmental organizations, corporations, and ordinary people.
Private organizations such as the Forest Stewardship Council and the Marine Stewardship Council provide and, increasingly, implement environmental standards where inter-governmental action has failed.
Private actors from foundations to pharmaceutical corporations to NGOs are actively experimenting with alternative ways to tackle transnational health challenges.
Often governments are part of these experiments – but they are not necessarily the drivers, and progress does not depend on signing treaties.
Indeed, there are many ways to put matters on the global agenda, as shown by Bono’s campaigns on African development and Al Gore’s on climate change.
Agreements about how to make things better already frequently include NGOs and corporations in various capacities – and sometimes exclude governments altogether.
Private groups using everything from satellite imagery (as in forestry) to the unofficial equivalent of on-site inspections (as in human rights) monitor who is abiding by – or violating – what standard of behavior.
While enforcement in the coercive sense remains the domain of states, coercive enforcement is rare even when it comes to inter-governmental agreements.
Whether countries abide by agreements has far more to do with international processes of persuasion, socialization, and capacity-building – and those can be done by anyone with a good argument.
The big question today is whether all these alternative approaches can add up to more than a bit of desperate tinkering around the edges.
Standard international-relations thinking does not even entertain the question, and those conventional ways of seeing the world have blinded us to looking at this crucial question.
As a result, we do not yet know the answer.
Data remain scarce.
There are hundreds of global public-private partnerships working on various global ills – but few have been examined to see what good they do.
The mishmash of initiatives, actors, campaigns, and appeals creates opportunities for major progress – and mass confusion.
If there is to be real progress toward more effective and efficient global governance that can address the unprecedented challenges posed by climate change and the rest of the global agenda, we must do much more than look for an easy replacement for American hegemony.
We must figure out how to make sense of this enormous diversity of ways of saving the world.
Why America Isn’t Working
CAMBRIDGE – As the US economy limps toward the second anniversary of the Lehman Brothers bankruptcy, anemic growth has left unemployment mired near 10%, with little prospect of significant improvement anytime soon.
Little wonder that, with mid-term congressional elections coming in November, Americans are angrily asking why the government’s hyper-aggressive stimulus policies have not turned things around.
What more, if anything, can be done?
The honest answer – but one that few voters want to hear – is that there is no magic bullet.
It took more than a decade to dig today’s hole, and climbing out of it will take a while, too.
As Carmen Reinhart and I warned in our 2009 book on the 800-year history of financial crises (with the ironic title “This Time is Different”), slow, protracted recovery with sustained high unemployment is the norm in the aftermath of a deep financial crisis.
Why is it so tough to boost employment rapidly after a financial crisis?
One reason, of course, is that the financial system takes time to heal – and thus for credit to begin flowing properly again.
Pumping vast taxpayer funds into financial behemoths does not solve the deeper problem of deflating an overleveraged society.
Americans borrowed and shopped until they were blue in the face, thinking that an ever-rising housing price market would wash away all financial sins.
The rest of the world poured money into the US, making it seem as if life was one big free lunch.
Even now, many Americans believe that the simple solution to the nation’s problem is just to cut taxes and goose up private consumption.
Cutting taxes is certainly not bad in principle, especially for supporting long-term investment and growth.
But there are several problems with the gospel of lower taxes.
First, total public-sector debt (including state and local debt) is already nearing the 119%-of-GDP peak reached after World War II.
Some argue passionately that now is no time to worry about future debt problems, but, in my view, any realistic assessment of the medium-term risks does not permit us simply to dismiss such concerns.
A second problem with tax cuts is that they might well have only a limited impact on demand in the short run, with the private sector hoarding a significant share of the funds to repair badly over-leveraged balance sheets.
Last but not least, there is a fairness issue.
By some measures, nearly half of all Americans do not pay any income tax already, so cutting taxes skews an already very unequal income distribution.
Deferred maintenance on income equality is one of many imbalances that built up in the US economy during the pre-crisis boom.
If allowed to fester, the political consequences could be severe, including trade protectionism and perhaps even social unrest.
Those who think that the government should take up the slack in private spending point out that there is an abundance of growth-enhancing projects – a point that should be obvious to anyone familiar with America’s fraying infrastructure.
Likewise, transfers to state and local governments, which have limited constitutional scope to borrow, would help slow down wrenching layoffs of teachers, firefighters, and police.
Lastly, extending unemployment insurance in the wake of a once-in-a-half-century crisis should be a no-brainer.
But, unfortunately, Keynesian demand management is no panacea, either.
Nor can the government always be the employer of last resort.
While tax cuts enhance long-term productivity, expanding the government sector is hardly a recipe for economic vitality.
There are surely many useful activities for the government to undertake in a market economy, but a frenzied orgy of stimulus spending is not conducive to rational discussion of what they should be.
And of course, there again is the matter of the soaring national debt.
All in all, the G-20’s policy of aiming for gradual stabilization of growth in government debt, bringing it into line with national-income growth by 2016, seems a reasonable approach to balancing short-term stimulus against longer-term financial risks, even at the cost of lingering unemployment.
While America is facing the limits of fiscal policy, monetary policy can do more, as Federal Reserve Chairman Ben Bernanke detailed in a recent speech in Jackson Hole, Wyoming.
With credit markets impaired, the Fed could buy more government bonds or private-sector debt.
Bernanke also noted the possibility of temporarily raising the Fed’s medium-term inflation target (a policy that I suggested in this column in December 2008).
Given the massive deleveraging of public- and private-sector debt that lies ahead, and my continuing cynicism about the US political and legal system’s capacity to facilitate workouts, two or three years of slightly elevated inflation strikes me as the best of many very bad options, and far preferable to deflation.
While the Fed is still reluctant to compromise its long-term independence, I suspect that before this is over it will use most, if not all, of the tools outlined by Bernanke.
The bottom line is that Americans will have to be patient for many years as the financial sector regains its health and the economy climbs slowly out of its hole.
The government can certainly help, but beware of pied pipers touting quick fixes.
Why America Must Not Re-elect President Bush
I have never been heavily involved in partisan politics, but these are not normal times.
President George W. Bush is endangering the United States and the world's safety while undermining American values.
For opposing him, I have been demonized by the Bush campaign.
President Bush ran in 2000 on a platform promising a "humble" foreign policy.
If re-elected, the Bush doctrine of preemptive action - and the invasion of Iraq - will be endorsed, and the world will have to live with the consequences.
By repudiating Bush's policies at the polls, America will have a chance to regain the respect and support of the world.
The terrorist attacks of September 11, 2001, required a strong response.
But they also led to suspension of the critical process so essential to a democracy - a full and fair discussion of the issues.
Bush silenced criticism by calling it unpatriotic.
For 18 months after 9/11, he managed to suppress all dissent.
That is how he led America in the wrong direction.
In fact, Bush played right into the hands of Osama bin Laden.
Afghanistan's invasion was justified: that was where bin Laden lived and al Qaeda had its training camps.
Invading Iraq was not.
It was Bush's unintended gift to bin Laden.
Immediately after 9/11, there was a spontaneous outpouring of sympathy for America worldwide.
It has given way to widespread resentment.
There are many more people willing to risk their lives to kill Americans than there were on September 11.
Bush likes to insist that terrorists hate Americans for what they are - a freedom loving people - not what they do.
But war and occupation create innocent victims.
We count the body bags of American soldiers - over 1,000 in Iraq.
The wider world also counts the Iraqis who get killed daily, perhaps 20 times more.
Nor was the torture of detainees at Abu Ghraib prison the work of a few bad apples.
It was part of a system of dealing with prisoners put in place by Defense Secretary Donald Rumsfeld.
Public opinion condemns America worldwide, and our troops in Iraq are paying the price.
Bush convinced people that he is good for American security by playing on the fears generated by the 9/11 attacks.
At a time of peril, people rally around the flag, and Bush exploited this by fostering a sense of danger.
His campaign assumes that people do not really care about the truth and will believe almost anything if it is repeated often enough.
There must be something wrong with Americans if we fall for it.
For instance, some 40% of Americans still believe that Saddam Hussein was connected with 9/11, although the 9/11 Commission - set up by Bush and chaired by a Republican - definitively established that no such connection existed.
I want to shout: "Wake up America.
Don't you realize we are being misled?"
The war in Iraq was misconceived from start to finish - if it has a finish.
It is a war of choice, not necessity.
Moreover, America went to war on false pretenses. Weapons of mass destruction could not be found, and the connection with al Qaeda could not be established.
Bush then claimed that America went to war to liberate Iraq.
But democracy cannot be imposed by force.
Saddam Hussein was a tyrant, and Iraqis - and the world - can rejoice in being rid of him.
But America had an obligation to maintain law and order; instead, we stood idly by while Baghdad and other cities were ransacked.
If we had cared about the Iraqi people, we should have had more troops available for the occupation.
We should have provided protection not only for the oil ministry, but also other ministries, museums, and hospitals.
Worse still, when American soldiers encountered resistance, they employed methods - invading homes and mistreating prisoners - that alienated and humiliated the population, generating resentment and rage.
The Bush administration's flip-flops and missteps are legion.
First the Iraqi army was dissolved, then America tried to reconstitute it.
First the US tried to eliminate the Baathists, then America turned to them for help.
When the insurgency became intractable, America installed an Iraqi government.
The man chosen to lead it was a protégé of the CIA with a reputation for being a strongman - a far cry from democracy.
Despite the Bush campaign's efforts at spin control, the situation in Iraq is dire.
Much of the western part of the country has been ceded to insurgents, the prospect of holding free and fair elections in January is fast receding, civil war looms.
Bush's war in Iraq has done untold damage to America as well, impairing its military power and undermining the morale of the armed forces.
Before the war, America could project overwhelming force.
Not anymore.
Afghanistan is slipping from control.
North Korea, Iran, Pakistan, and other countries pursue nuclear programs with renewed vigor.
The Bush administration can be criticized for many other policies, but none are as important as Iraq.
The war has cost nearly $200 billion, and costs will continue to mount, because getting into Iraq was much easier than getting out will be.
Bush has been taunting John Kerry to explain how he would do things differently.
Kerry has responded that he would have done everything differently, and that he would be in a better position to extricate us.
But it won't be easy for him, either, because America is caught in a quagmire.
Top military and diplomatic experts desperately warned Bush not to invade Iraq.
He ignored them.
He suppressed the critical process, arguing that any criticism of the Commander-in-Chief puts US troops at risk.
But this is Bush's war, and he ought to be held responsible for it.
Americans should step back for a moment and ask: who got them into this mess?
A moment's reflection should raise another question: does Bush's Texas swagger qualify him to remain America's Commander-in-Chief?
Why America Must Rejoin the World
The terrorist attacks on New York and Washington of September 11, 2001, profoundly changed the US, spawning a new focus on foreign policy.
The Bush administration's new national security strategy, issued in September 2002, identifies the combination of terrorism, rogue states, and weapons of mass destruction as the primary threat confronting America.
Most people agree with the new focus of American foreign policy, but debate the means by which it is carried out.
Is the threat so great that America must act alone, or should the US act only with the support of international institutions, even if that holds the country back?
Events in Iraq illustrate this debate, but it has deeper roots.
In his 2000 election campaign, George W. Bush said about America, "If we are an arrogant nation, they'll view us that way, but if we're a humble nation, they'll respect us."
He was right, but unfortunately many of America's friends saw the first eight months of his administration as arrogantly concerned with narrow American interests, focused on military power, and dismissive of treaties, norms, and multilateralism.
The administration's peremptory announcement that the Kyoto Protocol on global climate change was "dead" contributed to a reaction from other countries that cost the US its seat on the UN Human Rights Commission.
September 11 th supposedly changed all that.
Congress finally paid America's UN dues, and the president turned his efforts to building a coalition against terrorism.
But the rapid success of the war in Afghanistan led some in the administration and some commentators to conclude that unilateralism works.
The columnist Charles Krauthammer, for example, urges a "new unilateralism" where America refuses to play the role of "docile international citizen" and unashamedly pursues its own ends.
The new unilateralists make a mistake in focusing too heavily on military power alone.
True, America's military power--backed up by a budget equivalent to the next eight countries combined -is essential to global stability, and an essential part of the response to terrorism.
But the metaphor of war should not blind us to the fact that suppressing terrorism will take years of patient, unspectacular civilian cooperation with other countries in areas such as intelligence sharing, police work, tracing financial flows, and cooperation among customs officials.
Military success in Afghanistan addressed the easiest part of the problem.
Al Qaeda retains cells in some fifty countries.
Rather than proving the unilateralists' point, the partial nature of the success in Afghanistan illustrates the continuing need for cooperation.
Similarly, it was much easier to win the war in Iraq than to win the peace.
The problem for Americans in the 21 st century is that more issues and forces than ever before are outside the control of even the most powerful state.
What the attacks of September 11 th demonstrated is that the information revolution and globalization, have changed world politics in a way that means Americans cannot achieve all their international goals acting alone.
The US lacks both the international and domestic prerequisites to resolve conflicts internal to other societies, and to monitor and control transnational transactions that threaten Americans at home.
On many of today's key issues, such as international financial stability, drug smuggling, the spread of diseases, or global climate change, military power is ineffective.
Indeed, its use can be counterproductive.
America must instead mobilize international coalitions to address these shared threats and challenges.
The willingness of others to cooperate depends in part on their own self-interest, but also on the attractiveness of American positions.
That power to attract is what I call "soft power."
It means that others want what you want, and there is less need to use carrots and sticks to make others do what you want.
Hard power grows out of a country's military and economic might.
Soft power arises from the attractiveness of a country's culture, ideals, and policies.
Hard power will always remain vital, but soft power will become increasingly important in dealing with transnational issues whose resolution requires multilateral cooperation.
To be sure, no large country can afford to be purely multilateralist, and sometimes the US must take the lead, as it did in Afghanistan.
But in Iraq, President Bush should have followed his father's example and built a broad international coalition.
Now, as his administration returns to the UN to seek a new resolution that will enable other countries to contribute troops and resources for peacekeeping and reconstruction in Iraq, he is paying the price for the way he went to war.
Granted, multilateralism can be used by smaller states to restrict American freedom of action, but this does not mean that it is not generally in American interests.
By embedding US policies in multilateral frameworks, America can make its disproportionate power more legitimate and acceptable.
Even well intentioned Americans are not immune to Lord Acton's famous warning that power tends to corrupt.
Learning to listen to others and to define US interests broadly to include global interests will be crucial to American soft power and whether others see the American preponderance as benign or not.
The paradox of American power is that the largest power since Rome cannot achieve many of its objectives unilaterally in a global information age.
America needs to pay more attention to soft power and to multilateral cooperation.
That is the real lesson of September 11 th .
Calling Off America’s Bombs
NEW YORK – As the US Congress considers whether to authorize American military intervention in Syria, its members should bear in mind a basic truth: While Syrian President Bashar Al-Assad has repeatedly used extreme violence to retain power, the United States – and other governments in the Middle East and Europe – share responsibility for turning Syria into a killing field.
These governments, led by the US, have explicitly sought the violent overthrow of Assad.
Without their involvement, Assad’s regime would most likely have remained repressive; with their involvement, Syria has become a site of mass death and destruction.
More than 100,000 people have died, and many of the world’s cultural and archaeological treasures have been demolished.
Syria’s civil war has occurred in two phases.
The first phase, roughly from January 2011 until March 2012, was largely an internal affair.
When the Arab Spring erupted in Tunisia and Egypt in January 2011, protests erupted in Syria as well.
In addition to the usual grievances under a brutal regime, Syrians were reeling from a massive drought and soaring food prices.
The protests became a military rebellion when parts of the Syrian army broke with the regime and established the Free Syrian Army.
Neighboring Turkey was probably the first outside country to support the rebellion on the ground, giving sanctuary to rebel forces along its border with Syria.
Although the violence was escalating, the death toll was still in the thousands, not tens of thousands.
The second phase began when the US helped to organize a large group of countries to back the rebellion.
At a meeting of foreign ministers in Istanbul on April 1, 2012, the US and other countries pledged active financial and logistical support for the Free Syrian Army.
Most important, then-Secretary of State Hillary Clinton declared: “We think Assad must go.”
That open-ended statement, without any clear means to achieve the goal that it announced, has done much to fuel military escalation and the rising death toll in Syria, while pushing the US repeatedly to defend its “credibility” against a line in the sand that it should not have drawn.
Then and now, the US has claimed to speak in the interest of the Syrian people.
This is very doubtful.
The US views Syria mainly through the lens of Iran, seeking to depose Assad in order to deprive Iran’s leaders of an important ally in the region, one that borders Israel.
The US-led effort in Syria is thus best understood as a proxy war with Iran – a cynical strategy that has contributed to the massive rise in violence.
The US government’s misguided move from potential mediator and problem solver to active backer of the Syrian insurrection was, predictably, a terrible mistake.
It put the US in effective opposition to the United Nations peace initiative then being led by former UN Secretary-General Kofi Annan, whose approach was to call for a ceasefire followed by a negotiated political transition.
The US preempted this process by backing the military rebellion and insisting on Assad’s immediate departure.
It is hard to understand this blunder.
Even if the US ultimately sought to force Assad from office, its blunt action hardened Assad’s resistance, as well as that of his two allies in the UN Security Council, Russia and China.
Aside from seeking to defend their own interests in the region, both countries understandably rejected the idea of US-led regime change in Syria.
Russia argued that America’s insistence on Assad’s immediate departure was an impediment to peace.
In this, Russia was right.
Indeed, Russia was playing a plausibly constructive role at the time, albeit one premised on Assad remaining in power for at least a transitional period, if not indefinitely.
Russia sought a pragmatic approach that would protect its commercial interests in Syria and its naval base at the port of Tartus, while bringing an end to the bloodletting.
The Russians openly backed Annan’s peace initiative.
Yet, with the US and others financing the rebels, Russia (and Iran) supplied more – and more sophisticated – weapons to the regime.
Now, with the use of chemical weapons, probably by the Syrian government (and possibly by both sides), the US has again ratcheted up the stakes.
Bypassing the UN once again, the US is declaring its intention to intervene directly by bombing Syria, ostensibly to deter the future use of chemical weapons.
America’s motivations are not entirely clear.
Perhaps there is no underlying foreign-policy logic, but only carelessness.
If there is a kind of logic, however weak, it seems to revolve around Iran and Israel, rather than Syria per se.
There are many dictatorships in the world that the US does not try to overthrow.
On the contrary, many of them are ostensibly America’s close allies.
So why does the US continue to back a deadly rebellion in a civil war that is continuing to escalate dangerously, now to the point of chemical-weapons attacks?
To put it simply, President Barack Obama’s administration has inherited the neoconservative philosophy of regime change in the Middle East.
The overriding idea is that the US and its close allies get to choose who governs in the region.
Assad must go not because he is authoritarian, but because he is allied with Iran, which, from the perspective of the US, Israel, Turkey, and several Gulf countries, makes him a regional threat.
In fact, the US has probably been lured into serving these countries’ own narrower interests, whether it be Israel’s unconvincing vision of its own security or the Sunni countries’ opposition to Shia Iran.
But, in the long term, US foreign policy divorced from international law cannot produce anything other than more war.
The US should reverse course.
A direct US attack on Syria without UN backing is far more likely to inflame the region than it is to resolve the crisis there – a point well appreciated in the United Kingdom, where Parliament bucked the government by rejecting British participation in a military strike.
Instead, the US should provide evidence of the chemical attacks to the UN; call on the Security Council to condemn the perpetrators; and refer such violations to the International Criminal Court.
Moreover, the Obama administration should try to work with Russia and China to enforce the Chemical Weapons Convention.
If the US fails in this, while acting diplomatically and transparently (without a unilateral attack), Russia and China would find themselves globally isolated on this important issue.
More broadly, the US should stop using countries like Syria as proxies against Iran.
Withdrawal of US financial and logistical support for the rebellion, and calling on others to do the same, would not address Syria’s authoritarianism or resolve America’s issues with Iran, but it would stop or greatly reduce the large-scale killing and destruction in Syria itself.
It would also enable the UN peace process to resume, this time with the US and Russia working together to restrain violence, keep Al Qaeda at bay (a shared interest), and find a longer-term pragmatic solution to Syria’s deep domestic divisions.
And the search for a US modus vivendi with Iran – where a new president suggests a change of course on foreign policy – could be revived.
It is time for the US to help stop the killing in Syria.
That means abandoning the fantasy that it can or should determine who rules in the Middle East.
Why America Will Lead the “Asian Century”
SINGAPORE – Not a week passes, it seems, without a big-picture thinker releasing a big-picture book or giving a big-picture sermon describing the gradual eclipse of American hegemony in Asia.
True, American power will inevitably decline in relative terms as Asian giants such as China and India rise.
But, at least as far as Asia is concerned, arguments about the end of American hegemony ring hollow.
For one thing, the United States was never a hegemon in Asia.
Only some American post-Cold War triumphalists thought it was.
The nature of US power and the exercise of its influence was always much more clever and subtle than most assume.
In fact, as India and China rise, the US could actually find itself in a stronger position.
How can this be?
After all, power and influence are built on the back of economic success.
The Chinese economy has been doubling in size every ten years since 1978.
The Indian economy has been doing the same since 1991.
In contrast, it takes about two decades for the US economy to double in size.
Doesn’t this surely mean that Asia is rushing toward a state of multi-polarity – a configuration of roughly equal great powers balancing against each other – while American influence is on the wane?
The seemingly obvious conclusion would be true but for the fact that Asia has a unique kind of hierarchical security system that came about partly by accident and partly by design.
No power can be preeminent if it cannot maintain its military advantage over rivals.
Yet, despite the fact that America spends more on defense than the next ten powers combined, it has never been a regional hegemon because it actually relies on the cooperation of other states to remain predominant.
Without cooperation from allies such as Japan, South Korea, Singapore, and the Philippines, the US could not retain its forward military positions in the West Pacific.
Likewise, the US needs the cooperation of Indonesia, Malaysia, and Thailand to host its critical radar infrastructure.
Moreover, in remaining preeminent, America requires other key states and regional groupings, such as ASEAN, to acquiesce in its security relationships.
Thus, there is broad-based regional approval of US alliances with Japan, South Korea, and Australia, as well as with partners such as the Philippines, Singapore, Thailand, and India.
The key to the effectiveness of these bilateral relationships is that they enjoy widespread support (and thus legitimacy) in the region as stabilizing arrangements.
The whole is greater than the sum of its parts.
Combined with the raw military capacity that the US brings to the table, this means that America is powerful enough to enforce the peace and provide stability for commerce to thrive.
America’s presence and bilateral partnerships are complementary to Asian states’ obsession with counter-dominance and non-interference in the region.
This dynamic “liberal order” – largely fair, flexible, and open enough to welcome new entrants as they rise – will continue to serve Asia well.
For example, even China has been a major beneficiary of the public goods provided by the US-led hierarchical system.
This interdependent relationship means that the US is not so powerful, that it can readily ignore the wishes of key states, and it is here that its apparent weakness is actually strength.
America is not a Hobbesian Leviathan with absolute authority and power.
Indeed, China’s strategists are frequently puzzled by the lack of “balancing” that takes place against the US in the region.
But it is puzzling only if we characterize Asia as being multi-polar rather than hierarchical.
In fact, any balancing tends to take place in order to preserve the hierarchy, not to replace or supersede it.
Other states tend to resist bids by any Asian power – be it Japan, China or India – to rise to the top of the pyramid.
As a foreign-based power, the US needs the cooperation of Asian partners.
This keeps the top dog in check.
Were an Asian country like China to rise to the top, it would not need the same level of regional cooperation and acquiescence to maintain its position and military footholds.
As China and India rise, and Japan becomes more “normal,” they will balance each other within the US-led hierarchy to ensure that the US remains on top and one or the other doesn’t dominate.
If China makes a bid for regional hegemony, it will find it difficult to resist the structural constraints placed on it within this hierarchy.
US power is in relative decline, but that is no bad thing.
False triumphalism breeds poor discipline.
But a sense of strategic vulnerability breeds interdependency, which has always been the key to successful US leadership in Asia.
Why an American Recovery Matters
MILAN – It is hard to be optimistic about America at present.
With the help of crucial government support in the crisis, the US financial sector (or at least parts of it) has bounced back, while America’s real economy struggles with high unemployment, discouraged labor-force dropouts, and damaged balance sheets.
So it is no surprise that the American public and the US Congress are angry.
The focus of that anger has been the massive and unwise financial-sector bonuses.
As a result, regulatory reforms have thus far consisted of, first, a threat to the Federal Reserve’s autonomy, and, second, a tax on bonuses.
The first idea is a bad one.
The latter may be politically mandatory and marginally beneficial in fiscal terms. Its effects on risk-taking are debatable.
But the much-needed structural reforms to limit leverage and contain the risks that the financial system periodically imposes on the real economy – and the public purse – have only belatedly gotten off the to-do list, and the prospects of enacting them are difficult to estimate.
In fairness, the new rule proposed by former US Federal Reserve Chairman Paul Volcker to separate financial intermediation from proprietary trading is not a bad idea.
Combined with elevated capital requirements for banks, it would reduce the chance of another simultaneous failure of all credit channels.
But it is not sufficient.
Hedge funds can also destabilize the system, as the collapse of Long Term Capital Management in 1998 demonstrated.
So they also need clear, albeit different, limits on leverage.
Health-care reform has deeply divided the American public and US politicians alike.
Whatever the merits and shortcomings of various proposals, these divisions suppressed the bipartisan aspects of the political process and emphasized its zero-sum dimension.
That, in turn, has put in jeopardy other reforms.
One might expect that after a dangerous crisis rooted in growing structural imbalances and an unsustainable growth pattern on the demand side, there would be serious, ongoing debate about what is needed to restore long-term growth and productive job creation in the context of a rapidly evolving global economy.
But there is not, which is both puzzling and worrisome.
This is not to say that the US economy has lost its dynamism.
Far from it.
But in the long term, sustaining it will require far-sighted public policies and investments in hard and soft infrastructure to support the private sector’s high capacity for innovation.
There are those who disagree and believe that an economy’s dynamism is found almost entirely in the private sector, while the task of government is mainly to stay out of the way.
Still others accept that government could in principal do something useful, but believe that it normally does not, and that the risks outweigh the benefits.
A policy agenda in the US that is overloaded, overwhelmingly domestically focused, and partially paralyzed will mean a lack of attention to global issues that require cooperation and compromise, including the international dimensions of financial reform.
Absent coordination, there is also a risk that monetary policies designed to promote growth (or at least not impede it) will lead to a return of financial-sector distortions and imbalances.
The rebalancing and restoration of global demand in the medium term is discussed within the G-20, but has not really gotten underway.
From the perspectives of both policy and investment, the short and medium term is once again risky.
Many countries, including developing ones, will adopt defensive postures, some of which, such as making better use of the domestic market as a driver of growth, will have broadly positive impacts, even if growth prospects are somewhat diminished in the aggregate.
More importantly, the crisis highlighted the risks associated with high dependence on foreign capital.
That, combined with slow progress on financial-sector reform, makes it likely that risk-aversion will prevail, which could slow, if not reverse, financial globalization, and probably lead to slower growth in many countries.
Restarting the Doha round of trade negotiations with a more manageable agenda – and one focused on the poorer and more vulnerable developing countries – would be a good way to revive progress on trade.
But, in an environment of slow growth and high unemployment, sentiment in the advanced countries regarding efforts to liberalize trade is distinctly negative.
The restoration of growth and balance in the US economy is crucially important, not only for its effect on global growth, but also as a foundation for tackling a broad array of international problems and challenges.
Right now, it looks as though creating that foundation is on hold.
Outside the advanced countries, there is a view that the world will return to pre-crisis conditions, with a stable US that functions as borrower, lender, and consumer of last resort.
What this perspective ignores is that pre-crisis growth in the US and the global economy was based in part on an unsustainable configuration.
Returning to that model is neither likely nor wise.
While a relatively high and sustainable growth pattern can be achieved, it will take time.
And it will occur (if it does) in a global economy with fundamentally different structural and regulatory characteristics.
Waiting around for the advanced countries to right their ships so that we can all go back to the old normal is neither good policy nor a good bet.
What is needed is coordinated restructuring and policy setting.
That is hard to do when the US, the largest fiscally unified economy, is focused elsewhere.
Why Are Good Policies Bad Politics?
BERKELEY – From the day after the collapse of Lehman Brothers last year, the policies followed by the United States Treasury, the US Federal Reserve, and the administrations of Presidents George W. Bush and Barack Obama have been sound and helpful.
The alternative – standing back and letting the markets handle things – would have brought America and the world higher unemployment than now exists.
Credit easing and support of the banking system helped significantly by preventing much worse.
The fact that investment bankers did not go bankrupt last December and are profiting immensely this year is a side issue.
Every extra percentage point of unemployment lasting for two years costs $400 billion.
A recession twice as deep as the one we have had would have cost the US roughly $2 trillion – and cost the world as a whole four times as much.
In comparison, the bonuses at Goldman Sachs are a rounding error.
And any attempt to make investment bankers suffer more last fall and winter would have put the entire support operation at risk.
As Fed Vice Chairman Don Kohn said, ensuring that a few thousand investment bankers receive their just financial punishment is a non-starter when attempts to do so put the jobs of millions of Americans – and tens of millions outside the US – at risk.
The Obama administration’s fiscal stimulus has also significantly helped the economy.
Though the jury is still out on the effect of the tax cuts in the stimulus, aid to states has been a job-saving success, and the flow of government spending on a whole variety of relatively useful projects is set to boost production and employment in the same way that consumer spending boosts production and employment.
And the cost of carrying the extra debt incurred is extraordinarily low: $12 billion a year of extra taxes would be enough to finance the fiscal-stimulus program at current interest rates.
For that price, American taxpayers will get an extra $1 trillion of goods and services, and employment will be higher by about ten million job-years.
The valid complaints about fiscal policy over the past 14 months are not that it has run up the national debt and rewarded the princes of Wall Street, but rather that it has been too limited – that we ought to have done more.
Yet these policies are political losers now: nobody is proposing more stimulus.
This is strange, because usually when something works the natural impulse is to do it again.
Good policies that are boosting production and employment without causing inflation ought to be politically popular, right?
With respect to Obama’s stimulus package, it seems to me that there has been extraordinary intellectual and political dishonesty on the American right, which the press refuses to see.
For two and a half centuries, economists have believed that the flow of spending in an economy goes up whenever groups of people decide to spend more.
Sometimes spending rises because there is more disposable cash in the economy, and sometimes because changes in opportunity costs – the cost of forgoing some other action, such as saving – make people want to spend the cash they have more rapidly.
Sometimes and to some degree these increases show up as increases in prices, and sometimes and to some degree as increases in production and employment.
But, whatever the cause or effect, spending always goes up whenever groups decide to spend more – and government decisions to spend more are as good as anybody else’s.
They are as good as the decisions of mortgage companies and new homebuyers to spend more on new houses during the housing bubble of the mid-2000’s, or of the princes of Silicon Valley to spend more building new companies during the dot-com bubble of the late 1990’s.
Obama’s Republican opponents, who claim that fiscal stimulus cannot work, rely on arguments that are incoherent at best, and usually simply wrong, if not mendacious.
Remember that back in 1993, when the Clinton administration’s analyses led it to seek to spend less and reduce the deficit, the Republicans said that that would destroy the economy, too.
Such claims were as wrong then as they are now.
But how many media reports make even a cursory effort to evaluate them?
A stronger argument, though not by much, is that the fiscal stimulus is boosting employment and production, but at too great a long-run cost because it has produced too large a boost in America's national debt.
If interest rates on US Treasury securities were high and rising rapidly as the debt grew, I would agree with this argument.
But interest rates on US Treasury securities are very low and are not rising.
Every single Treasury auction, at which the market gobbles up huge new tranches of US Treasury debt at high prices, belies the argument that the economy has too much debt.
Those who claim that America has a debt problem, and that a debt problem cannot be cured with more debt, ignore (sometimes deliberately) that private debt and US Treasury debt have been very different animals – moving in different directions and behaving in different ways – since the start of the financial crisis.
What the market is saying is not that the economy has too much debt, but that it has too much private debt, which is why prices of corporate bonds are low and firms find financing expensive.
The market is also saying – clearly and repeatedly – that the economy has too little public US government debt, which is why everyone wants to hold it.
The Long Mystery of Low Interest Rates
CAMBRIDGE – As policymakers and investors continue to fret over the risks posed by today’s ultra-low global interest rates, academic economists continue to debate the underlying causes.&#160;
By now, everyone accepts some version of US Federal Reserve Chairman Ben Bernanke’s statement in 2005 that a “global savings glut” is at the root of the problem.
But economists disagree on why we have the glut, how long it will last, and, most fundamentally, on whether it is a good thing.
Bernanke’s original speech emphasized several factors – some that decreased the demand for global savings, and some that increased supply.
Either way, interest rates would have to fall in order for world bond markets to clear.
He pointed to how the Asian financial crisis in the late 1990’s caused the region’s voracious investment demand to collapse, while simultaneously inducing Asian governments to stockpile liquid assets as a hedge against another crisis. Bernanke also pointed to increased retirement saving by aging populations in Germany and Japan, as well as to saving by oil-exporting countries, with their rapidly growing populations and concerns about oil revenues in the long term.
Monetary policy, incidentally, did not feature prominently in Bernanke’s diagnosis.
Like most economists, he believes that if policymakers try to keep interest rates at artificially low levels for too long, eventually demand will soar and inflation will jump.
So, if inflation is low and stable, central banks cannot be blamed for low long-term rates.
In fact, I strongly suspect that if one polled investors, monetary policy would be at the top of the list, not absent from it, as an explanation of low global long-term interest rates.
The fact that so many investors hold this view ought to make one think twice before absolving monetary policy of all responsibility.
Nevertheless, I share Bernanke’s instinct that, while central banks do set very short-term interest rates, they have virtually no influence over long-term real (inflation-adjusted) rates, other than a modest effect through portfolio management policies (for example, “quantitative easing”).
A lot has changed since 2005.
We had the financial crisis, and some of the factors cited by Bernanke have substantially reversed.
For example, Asian investment is booming again, led by China.
And yet global interest rates are even lower now than they were then.
Why?
There are several competing theories, most of them quite elegant, but none of them entirely satisfactory.
One view holds that long-term growth risks have been on the rise, raising the premium on assets that are perceived to be relatively safe, and raising precautionary saving in general.
(Of course, no one should think that any government bonds are completely safe, particularly from inflation and financial repression.)
Certainly, the 2008 financial crisis should have been a wakeup call to proponents of the “Great Moderation” view that long-term volatility has fallen.
Many studies suggest that it is becoming more difficult than ever to anchor expectations about long-term growth trends.
Witness, for example, the active debate about whether technological progress is accelerating or decelerating.
Shifting geopolitical power also breeds uncertainty.
Another class of academic theories follows Bernanke (and, even earlier, Michael Dooley, David &#160;Folkerts-Landau, and Peter Garber) in attributing low long-term interest rates to the growing importance of emerging economies, but with the major emphasis on private savings rather than public savings.
Because emerging economies have relatively weak asset markets, their citizens seek safe haven in advanced-country government bonds.
A related theory is that emerging economies’ citizens find it difficult to diversify the huge risk inherent in their fast-growing but volatile environments, and feel particularly vulnerable as a result of weak social safety nets.
So they save massively.
These explanations have some merit, but one should recognize that central banks and sovereign wealth funds, not private citizens, are the players most directly responsible for the big savings surpluses.
It is a strain to think that governments have the same motivations as private citizens.
Besides, on closer inspection, the emerging-market explanation, though convenient, is not quite as compelling as it might seem.
Emerging economies are growing much faster than the advanced countries, which neoclassical growth models suggest should push global interest rates up, not down.
Similarly, the integration of emerging-market countries into the global economy has brought with it a flood of labor.
According to standard trade theory, a global labor glut ought to imply an increased rate of return on capital, which again pushes interest rates up, not down.
Surely, any explanation must include the global constriction of credit, especially for small and medium-size businesses.
Tighter regulation of lending standards has shut out an important source of global investment demand, putting downward pressure on interest rates.
My best guess is that when global uncertainty fades and global growth picks up, global interest rates will start to rise, too.
But predicting the timing of this transition is difficult.
The puzzle of the global savings glut may live on for several years to come.
Austerity and Demoralization
NEW HAVEN – The high unemployment that we have today in Europe, the United States, and elsewhere is a tragedy, not just because of the aggregate output loss that it entails, but also because of the personal and emotional cost to the unemployed of not being a part of working society.
Austerity, according to some of its promoters, is supposed to improve morale.
British Prime Minister David Cameron, an austerity advocate, says he believes that his program reduces “welfare dependency,” restores “rigor,” and encourages the “the doers, the creators, the life-affirmers.”
Likewise, US Congressman Paul Ryan says that his program is part of a plan to promote “creativity and entrepreneurial spirit.”
Some kinds of austerity programs may indeed boost morale.
Monks find their life’s meaning in a most austere environment, and military boot camps are thought to build character.
But the kind of fiscal austerity that is being practiced now has the immediate effect of rendering people jobless and filling their lives with nothing but a sense of rejection and exclusion.
One could imagine that a spell of unemployment might be a time of reflection, reestablishment of personal connections, and getting back to fundamental values.
Some economists even thought long ago that we would be enjoying much more leisure by this point.
John Maynard Keynes, in his 1930 essay “Economic Possibilities for Our Grandchildren,” speculated that, within a hundred years, that is, by 2030, higher incomes would reduce the average workday to a mere three hours, for a total workweek of only 15 hours.
While there are still 17 years to go, it appears that Keynes was way off the mark.
So was Robert Theobald, who, in his 1963 book Free Men and Free Markets questioned the public’s repugnance toward high unemployment.
He asserted that “we can have meaningful leisure rather than destructive unemployment,” and that we do not need “a whirling-dervish economy dependent on compulsive consumption.”
But finding something satisfying to do with our time seems inevitably to entail doing some sort of work: “meaningful leisure” wears thin after a while.
People seem to want to work more than three hours a day, even if it is assembly-line work.
And the opportunity to work should be a basic freedom.
Unemployment is a product of capitalism: people who are no longer needed are simply made redundant.
On the traditional family farm, there was no unemployment.
Austerity exposes the modern economy’s lack of interpersonal connectedness and the morale costs that this implies.
Work-sharing might keep more people marginally attached to their jobs in an economic slump, thereby preserving their self-esteem.
Instead of laying off 25% of its workforce in a recession, a company could temporarily reduce workers’ hours from, say, eight per day to six.
Everyone would remain employed, and all would come a little closer to Keynes’s ideal.
Some countries, notably Germany, have encouraged this approach.
But work-sharing raises technical problems if increased suddenly to deal with an economic crisis like the one we are now experiencing.
These problems preclude the sudden movement toward the ideal of greater leisure that thinkers like Keynes and Theobald proclaimed.
One problem is that workers have fixed costs, such as transportation to work or a health plan, that do not decline when hours (and thus pay) are cut.
Their debts and obligations are similarly fixed.
They could have bought a smaller house had they known that their hours would be reduced, but now it is difficult to downsize the one that they did buy.
Another problem is that it may be difficult to reduce everyone’s job by the same amount, because some jobs scale up and down with production, while others do not.
In his book Why Wages Don’t Fall During a Recession, Truman Bewley of Yale University reported on an extensive set of interviews with business managers involved with wage-setting and layoffs.
He found that they believed that a serious morale problem would result from reducing everyone’s hours and pay during a recession.
Then all employees would begin to feel as if they did not have a real job.
In his interviews with managers, he was told that it is best (at least from a manager’s point of view) if the pain of reduced employment is concentrated on a few people, whose grumbling is not heard by the remaining employees.
Employers worry about workplace morale, not about the morale of the employees they lay off.
Their damaged morale certainly affects others as a sort of externality, which matters very much; but it does not matter to the firm that has laid them off.
We could perhaps all be happy working fewer hours if the decline reflected gradual social progress.
But we are not happy with unemployment that results from a sudden fiscal crisis.
That is why sudden austerity cannot be a morale builder.
For morale, we need a social compact that finds a purpose for everyone, a way to show oneself to be part of society by being a worker of some sort.
And for that we need fiscal stimulus – ideally, the debt-friendly stimulus that raises taxes and expenditures equally.
The increased tax burden for all who are employed is analogous to the reduced hours in work-sharing.
But, if tax increases are not politically expedient, policymakers should proceed with old-fashioned deficit spending.
The important thing is to achieve any fiscal stimulus that boosts job creation and puts the unemployed back to work.
End Austerity Now
EDINBURGH – In recent weeks, talk about a budding recovery in the eurozone has gained traction, with key indices pointing to expansion in the core countries – data that many are citing as evidence that austerity is finally working.
Money-market funds from the United States are returning, albeit cautiously, to resume funding of European bank debt.
Even Goldman Sachs is now bullishly piling into European equities.
But is a recovery really underway?
Cynics recall that a European recovery was supposed to take hold as early as the fourth quarter of 2010, and that every International Monetary Fund projection since then has predicted recovery “by the end of the year.”
Instead, GDP has collapsed, with the Spanish and Italian economies expected to contract by close to 2% this year.
Portugal’s economy is set to shrink by more than 2%, and Greece’s output will fall by more than 4%.
Moreover, unemployment in the eurozone has skyrocketed to an average rate of roughly 12%, with more than 50% youth unemployment in the periphery countries implying a long-term loss of talent and erosion of the tax base.
And, despite the spike in unemployment, productivity growth in the eurozone is decidedly negative.
More significant, over the last year, the public debt/GDP ratio rose by seven percentage points in Italy, 11 in Ireland, and 15 in Portugal and Spain.
If the sine qua non of recovery via austerity is the stabilization and reduction of debt, the cynics’ case appears to have been made.
Against this background, the return of US investors to provide short-term dollar funding for European bank debt smacks of a desperate hunt for yield that relies on European Central Bank President Mario Draghi’s promise to do “whatever it takes” to save the euro.
As for Goldman’s equity play, as bond-market guru Bill Blain put it, “the words ‘buy cheap, sell a bit dearer on the up, and then dump and run’ spring to mind.”
In fact, any talk of recovery is premature until the losses incurred by austerity are recouped.
As it stands, every country that has implemented an austerity program without imposing losses on private creditors has more debt now than when it started.
For example, according to official estimates, Spain’s public debt, which amounted to only about 36% of GDP when the crisis began, has almost tripled – and the actual figure may be much higher.
More telling, the countries that cut expenditure the most experienced the largest bond-yield spikes and the most significant debt growth.
The explanation for this is simple. When a country gives up its monetary sovereignty, its banks are effectively borrowing in a foreign currency, making them exceptionally vulnerable to liquidity shocks, like that which sparked turmoil in Europe’s banking system in 2010-2011.
The government, unable to print money to bail out the banks or increase export competitiveness through currency devaluation, is left with only two options: default or deflation (austerity).
Austerity’s underlying logic is that budget cuts, by reducing the debt burden and restoring confidence, ultimately enhance stability and support growth.
But, when countries pursue austerity simultaneously with their main trading partners, overall demand plummets, causing all of their economies to contract and, in turn, increasing their debt/GDP ratios.
But the problem with austerity in the eurozone is more fundamental: policymakers are attempting to address a sovereign-debt crisis, though the real problem is a banking crisis.
With Europe’s banking system triple the size and twice as leveraged as its US counterpart, and the ECB lacking genuine lender-of-last-resort authority, the sudden halt in capital flows to peripheral countries in 2009 created a liquidity-starved system that was too big to bail out.
As holders of euro-denominated assets recognized this situation, they turned to the ECB for insurance (which the ECB could not deliver under its previous president, Jean-Claude Trichet, whose leadership was defined by his commitment to maintaining price stability).
Investors’ subsequent efforts to price in the risk of a eurozone breakup – not the volume of sovereign debt – caused bond yields to spike.
But the financial-market turmoil fueled a panic among eurozone leaders, leading them to misdiagnose the malady and prescribe the wrong medicine, which has served only to generate new symptoms.
While Draghi’s promise, embodied by the ECB’s “outright monetary transactions” program – as well as its long-term refinancing operation and emergency liquidity assistance program – has bought time and lowered yields, the eurozone’s banking crisis persists.
Eurozone leaders must recognize that spending cuts will do nothing to stabilize the balance sheets of core-country banks that are over-exposed to peripheral countries’ sovereign debt.
Until Europe rejects austerity in favor of a growth-oriented approach, all signs of recovery will prove illusory.
Why Barack Obama?
NEW YORK – The winner of America’s presidential election will inherit a perfect storm of problems, both economic and international.
He will face the most difficult opening-day agenda of any president since – and I say this in all seriousness – the man who saved the Union, Abraham Lincoln.
But a more instructive precedent is 1933, when Franklin Roosevelt offered inspiring rhetoric and “bold experimentation” to a nation facing economic meltdown and a breakdown in public confidence.
For me, the choice is simple – and not only because I am, by temperament and history, a Democrat.
The long and intense political campaign has revealed huge differences in the two candidates’ positions, style, and personal qualities.
And the conclusion seems clear.
Judgment .
John McCain has shown throughout his career a penchant for risk-taking; in his memoirs, he proudly calls himself a gambler.
His selection of Sarah Palin, a charismatic but spectacularly unqualified candidate, as his running mate, is just the most glaring of many examples of the real McCain.
His bravery in combat attests to his patriotism, courage, and toughness, but his judgment has been found sorely lacking time and time again over his career.
Barack Obama is tough, too, but in a different way.
No one should underestimate how difficult it was to travel his road, against incredible odds, to the cusp of the presidency.
But where McCain is impulsive and emotional, Obama is low-key and unemotional.
He makes his judgments in a calm and methodical manner;
McCain’s impulsiveness is anathema to Obama, and rightly so – one cannot play craps with history.
Having seen so many political leaders falter under pressure, I prize this ability above most others.
And Barack Obama has it.
The economy .
The first priority of the new president will be the economy and the financial crisis.
Since the crisis hit, Obama has been calm and, indeed, presidential.
He consulted the best advisory team in the nation, weighed each course of action carefully, and then issued a series of precise, calm statements.
Meanwhile, McCain has veered bizarrely, issuing contradictory statements, “suspending” his campaign (while continuing to campaign), and urging that the first debate be canceled (when it was all the more needed).
Advantage Obama.
Foreign policy .
The most explicit disagreements between the candidates are over Iraq, Iran, and Russia.
But there are deeper differences.
McCain’s positions, with the notable exception of climate change, suggest that he would simply try to carry out George W. Bush’s policies more effectively.
Obama offers a different approach to foreign policy.
By starting to draw down combat troops in Iraq, Obama would change the image and policies of America immediately.
By engaging Iran in talks that would cover not only the nuclear issue but other aspects of Iran’s destabilizing role in the region, he would either reach agreements that lowered the dangers from Iran, or he would mobilize a stronger international coalition to isolate Iran.
Either way, engaging Iran is the right policy, and it is hard to understand why Bush and McCain have continued to hold out against such an obvious change of course, which, if carried out with firmness, will not compromise American or Israeli national security.
On Russia since its invasion of Georgia, Obama and his running mate, Joe Biden (who was the first member of Congress to visit Georgia after the invasion), emphasize helping Georgia rebuild its economy and maintain its independence in the face of a continuing Russian campaign against it.
McCain, on the other hand, wants to punish Russia by such actions as expelling it from the G-8.
Such measures may ultimately be necessary, but they will not help Georgia survive as an independent democracy.
Moreover, even after the outrage in Georgia, there are issues of common interest – such as energy, climate change, and Iran – on which the West and the Kremlin must cooperate.
This was true even during the Cold War, and remains true today, yet McCain seems not to recognize it.
Leadership .
In the end, all presidential elections come down to the intangibles of leadership.
The vote for a president is a sort of private contract directly between each voter and his or her preferred choice.
Who do you want to see on your television screen for the next four years?
To whom do you wish to entrust the nation’s fate?&
Here again, the contrasting styles of Obama and McCain offer a clear choice between a calm and confident man and a highly emotional one, between a major change in the nation’s direction and a minor one, between a conciliatory style and a more combative one.
Effectiveness .
Finally, in a year in which the Democrats are certain to increase their majority in both houses of Congress, an Obama victory would offer the Democrats control of both the legislative and executive branches for the first time since 1994, and with it the possibility of legislative achievement after years of stalemate.
After so many years of polarization at home and unilateralism abroad, the choice for president seems clear.
Why Bipartisanship is Good Politics
LONDON – Bipartisanship seems to have taken a drubbing in Washington since President Barack Obama got to the White House.
Like most recent American presidents, Obama campaigned on a promise to work with his political opponents for the greater good of the country.
Bill Clinton said much the same thing before he was elected, and then spent his first term in a knockdown fight with Newt Gingrich’s Republican majority in Congress, and his second term fighting off impeachment.
George W. Bush also said that he would reach out to those who disagreed with him.
He then turned into the most partisan and ideological president of modern times, egged on by his vice-president, Dick Cheney.
Obama already appears to have gone further in the pursuit of bipartisanship than his predecessors.
His selection of Republicans for key posts – including retaining Robert Gates as Secretary of Defense – has raised a few eyebrows among his supporters.
But, above all, he has tried hard to secure Republican support for his efforts to prevent the economy from disappearing into a deep recessionary hole.
Only three maverick Republican Senators went along with Obama’s proposals to get the plan accepted.
And in the House of Representatives, the Republicans unanimously rejected every amendment, every compromise, and every courtesy that he offered.
Some commentators suggest that Obama made a bad mistake.
First, he promised bipartisanship, but got heavily rebuffed.
Second, he and his administration were so busy trying to build consensus that they watered down some of the vital ingredients of the stimulus package, and failed to defend it robustly from Republican attack.
There may sometimes be a downside in trying to woo your opponents.
When they are plainly wrong, why let them off the hook?
Here we have had Republicans criticizing an increase in America’s budget deficit after doubling America’s national debt in the Bush presidency’s eight years.
Moreover, Republicans’ belief that only tax cuts, not public spending, will delivery recovery is a sad example of blinkered ideology.
But there are more positive reasons for Obama effort at bipartisanship.
In any democratic system of checks and balances, leaders usually require coalitions in order to get what they want done.
Moreover, a consensual style is good politics.
Most voters – certainly swing voters, who usually decide elections – do not like partisan battles as much as some politicians and their supporters do.
After all, the wise, the moderate, and the floating voter do not switch on the radio to listen to archconservatives like the American broadcaster Rush Limbaugh.
When things get tough in politics, as will happen in most of the world as we struggle with the impact of the global recession, every sensible government will try to hang on to the benefit of doubt.
It is the most important attribute in politics.
Citizens know that running a country, especially in a time like this, is tough.
They are prepared to spare governments from too much criticism, if they think they are trying to do what is right for everyone.
They bridle at a government that must do unpopular things and that also looks narrow and mean-spirited.
There is also a lot to be said for making political argument more civil.
Ronald Reagan had a strong ideological bent.
He reshaped American politics, pulling the center firmly to the right.
But he did so without ever seeming to despise his opponents or disparage their intentions.
Obama’s aides have confessed that he modeled his own election program on the sunny and optimistic decency of the Republican actor.
Civility in politics is not simply political confectionery.
A leader who respects his or her opponents is more likely to earn respect himself than one who doubts their patriotism and resents their criticism.
One reason for the widespread respect felt for Nelson Mandela is that years of imprisonment did not embitter him.
Jawaharlal Nehru was hugely popular because he was known to cherish free speech, take seriously the views of his critics, and defend their right to disagree with him.
His role in establishing enduring democracy in India, despite the tensions of caste, ethnicity, religion, and regional loyalties, made him one of the towering figures of the twentieth century.
So my own hope is that Obama will not be dissuaded from trying to work with his opponents, to build consensus, and to deal courteously even with those whose views he may thoroughly dislike.
Personally, I do not think that those whose philosophy deplores the whole idea of government, except when it is required to bail out businesses or banks, and who purport to offer a better future by stitching together the shreds and tatters of policies that helped produce today’s economic disaster, will have much respect or support from voters.
Even in Washington, there is not much to be said for being partisan, unpopular, and wrong.
Did the Bankers Do It?
NEW DELHI – Few areas of economic activity in the United States are more politicized than housing finance.
Yet the intellectual left has gone to great lengths to absolve regulators, government lending mandates, and agencies like Fannie Mae and Freddie Mac of any responsibility for the housing boom and the subsequent bust.
The rationale is clear: if these officials, institutions, and policies were held accountable, the reform agenda would necessarily shift from regulating greedy bankers and their bonuses to asking broader questions.
Might government mandates contribute to bad behavior by private players?
Can regulators be trusted to make appropriate trade-offs between financial stability and mandates that have wide political support?
Indeed, can central bankers be truly independent?
Unquestioning acceptance of a greater government role in taming markets would, in short, give way to asking whether that role can sometimes be part of the problem.
The left has had an easy task in dominating the debate, partly because the intellectual right’s attempt to place all the blame for the crisis on government is thoroughly implausible.
It is far more defensible and correct to argue that everyone – bankers, households, regulators, and politicians – contributed to (and took credit for) the boom while it lasted, only to point fingers at one another when it collapsed.
But bankers’ political tin ear in the aftermath of the crisis – first taking public bailouts and then paying themselves huge bonuses as if nothing had changed – ensured that they got the lion’s share of the blame, with everyone else willing to pose as their unwitting victims.
As a result, the public-policy response has been dominated by “the bankers did it” narrative.
The risk is that this approach is incomplete – and thus unlikely to be effective.
It is therefore refreshing to see a careful econometric study take on an assertion by Paul Krugman, perhaps the most influential left-leaning US economist, that “the Community Reinvestment Act of 1977 was irrelevant to the subprime boom.”
The CRA instructs federal financial supervisory agencies to encourage the institutions that they regulate to help the communities in which they are chartered to meet their credit needs, while also conforming to “safe and sound” standards.
In practice, regulators measure the volume of lending to CRA target tracts – poor areas with median income less than 80% of the median income of the local community – as well as to low-income and minority borrowers in non-CRA tracts to verify compliance with the Act.
The left has dismissed any claim that the CRA played a role in the housing boom by pointing out that it was enacted in 1977, while the subprime boom played out in the early 2000’s.
But this ignores the possibility that regulators may have started to enforce the CRA rigorously only later.
To enforce the statute, regulators periodically examine banks for CRA compliance.
To hone in on the “regulatory enforcement” effect, the recent study compares the behavior of banks that are undergoing examination (which takes place over several quarters) to that of banks that are not undergoing examination in a particular tract in a particular month.
The findings are clear.
Compared to banks that are not undergoing examination, the volume of loans by banks in the six quarters surrounding a CRA examination is 5% higher, and these loans are 15% more likely to be delinquent one year after origination.
In other words, banks undergoing examination lend more and make riskier loans – and these findings are even more pronounced in CRA-eligible tracts.
Good econometric studies examine secondary effects to persuade readers that the main effect is what it is.
Regulators’ primary tool to enforce compliance was their authority to reject non-CRA-compliant banks’ requests for new branches or mergers.
During the subprime boom, large banks were more likely to want to expand, and thus had greater incentive to comply.
The study finds that CRA lending by larger banks does indeed respond more to a CRA examination.
At the height of the lending frenzy (2004-2006), the study finds that banks loaned even more in response to an examination, and that the outcomes were even worse.
The authors speculate that easier loan securitization may have made risky CRA-compliant loans seem less costly.
Finally, like all good studies, this one explains why the authors more careful analysis produces results that differ from those in previous studies.
Because of the way it is structured, the study only suggests a lower bound on the effects of CRA compliance.
It focuses on the differential impact of the CRA on banks undergoing examination and those not undergoing examination.
In fact, all banks are likely to have upped their CRA-compliant lending.
The study cannot measure this increase.
There is room in economics for grand speculation – some part intuition, some part common sense, and some part ideology.
If economists were to wait for careful studies before offering opinions about policy, we would never have anything timely to say.
And it is certainly better to have some economic intuition guiding policy than none at all.
But there is a danger that the public mistakes speculation for truth, only because of the speculator’s credentials and assertiveness.
Studies like this one are useful in setting the record straight.
More broadly, the study suggests that we should move beyond blaming the bankers.
We must recognize that in the desire to broaden home ownership, essential checks and balances broke down.
Households, politicians, and regulators were also complicit.
As we go about the process of reform, we should bear in mind that the only thing worse than fighting the last war is fighting the wrong last war.
Why Border Walls Fail
HONOLULU – Call this the Year of Border Walls.
In 2015, Estonia, Hungary, Kenya, Saudi Arabia, and Tunisia all announced or began the construction of barriers on their frontiers.
We may live in an era of globalization, but much of the world is increasingly focused on limiting the free movement of people.
At the end of World War II, there were only five border walls around the world.
Today, according to Elisabeth Vallet of the University of Quebec at Montreal, there are 65, three-quarters of them built in the past 20 years.
And in the United States, Republican presidential candidates are promising more.
The Republican frontrunner, Donald Trump, has repeatedly proposed building a wall along the entire border with Mexico.
And on a Sunday morning talk show, another Republican candidate, Wisconsin Governor Scott Walker, described building a wall on the US-Canada border as “a legitimate issue for us to look at.”
And yet existing border walls are neither cheap nor effective.
Israel’s wall in the West Bank cost more than $1 million per mile to construct.
According to US Customs and Border Protection, building and maintaining the existing 670 miles of border fencing on the US-Mexico border would cost $6.5 billion over the barrier’s expected 20-year life cycle.
At this price, fortifying the remaining 1,300 miles of the Mexico border would cost more than $12.6 billion.
Erecting a wall along the 5,525-mile border with Canada would cost almost $50 billion and would cut through an airport runway, an opera house, homes, and businesses that currently straddle the border.
Nor is there much evidence that border walls work as intended.
To be sure, prisons demonstrate that short, well-guarded walls can be extremely effective at preventing movement.
But even prison walls are only as effective as the guards who ensure that they are not breached, and guards can be susceptible to bribes.
The recent escape of the drug cartel leader Joaquin “El Chapo” Guzman from a Mexican prison highlights another vulnerability of border walls: tunnels.
Since 1990, the US Border Patrol has found 150 tunnels beneath the US-Mexico border.
Those with money will always be able to cross borders using fake documents, bribes, or innovative infrastructure.
Indeed, fortified frontiers are most effective at stopping poor migrants and refugees.
And even then, rather than preventing migrants from entering, fortifications all too often funnel them toward more dangerous crossing points.
The result is a mounting toll of predictable deaths.
The International Organization for Migration estimates that from 2005 to 2014, some 40,000 people died attempting to cross a border.
Unlike prison perimeters, borders can be thousands of miles long, which makes them difficult to monitor properly.
The US employs more than 20,000 Border Patrol agents; but even if they were all on duty at the same time, each would need to guard a 1,700-foot section of the border.
Of course, equipment like cameras, motion sensors, drones, helicopters, and vehicles allow agents to watch long sections of the border.
But the necessity of monitoring border walls points to one of the fundamental truths about them: historically, most have proved to be pretty useless.
The most famous sections of the Great Wall of China were overrun within a few decades of their construction.
When Germany invaded France in WWII, it simply went around the Maginot Line.
The Berlin Wall fell within 30 years of its construction.
Indeed, border guards and their equipment can be equally effective without a physical barrier.
At best, walls and fences only slow people down, making them a poor investment from a security standpoint.
They are similarly ineffective from a military perspective.
Missiles and airplanes can fly over them and tanks can smash through them.
And yet, despite their high cost and low efficacy, walls remain popular among policymakers and politicians.
They provide imposingly tangible evidence that something is being done about migration.
High-tech surveillance and boots on the ground may be more effective at preventing people from crossing a border, but a wall can be used as a political prop.
If Trump ever builds his wall, he should build a really nice one, like the Great Wall of China.
Then one day it might become a popular tourist attraction – and finally serve a useful purpose.
Football Fury
PARIS – Who would have thought it?
There they were, Brazilians, protesting outside football stadiums against their country hosting the World Cup in 2014 –&#160;and this even as their national team was thrashing Spain in the final of the Confederations Cup.
It was as if Catholics were to protest outside the Vatican against picking a new Pope.
What cuisine is to the French, soccer is to Brazilians: a matter of the highest national pride.
Regardless of their economic, racial, or political differences, all Brazilians are uplifted by having the best team in the world, winning the World Cup many times, and inventing and reinventing “the beautiful game.”
Staging the next World Cup in Brazil, as well as the Olympic Games in 2016, even though the football tournament alone will cost up to $13 billion, seems a logical move.
Rio de Janeiro is where soccer belongs.
So what possessed the 19-year-old Brazilian male who told reporters: “We don’t need the World Cup.
We need education, better health services, more humane police.” Many people feel the same way.
Have millions of Brazilians suddenly lost their passion for the game?
If so, it is not the game itself that they have forsaken, but rather the kind of game that football has become: a billion-dollar business, a prestige object for louche plutocrats, and an extravagant showpiece for corrupt governments and international sporting organizations.
Football was once a popular sport, rooted in local communities. Local working-class boys played for local clubs that inspired fierce loyalty among fans.
Football chauvinism always contained an edge of violence, for it often included an ethnic, religious, or class component: Protestants versus Catholics (in Scotland);
“Jewish” clubs (in Amsterdam, Berlin, London, and Budapest), taunted by fans who opposed the “Yids”; posh clubs (like Galatasaray in Istanbul) and resolutely proletarian sides (West Ham in London); clubs that took pride in a strong regional identity (Barcelona); and clubs that were close to the centers of power (Real Madrid).
Some clubs were financed by industrial corporations in order to promote loyalty among their workers: Philips sponsored the Dutch club PSV Eindhoven, for example, while Fiat played the same role for Italy’s Juventus.
But, regardless of the sponsorship or the location, fans felt close to most of the clubs, as well as to their national teams.
They were part of people’s “identity.”
This is still true to some extent, but something crucial has changed: football, like other types of commerce, has gone global.
Thanks to new ownership rules, cable television, product endorsements, and other business-related factors, there are probably more supporters of Manchester United in China than there are in the United Kingdom, let alone in the city of Manchester.
Football teams are now like multinational franchises, with coaches and players from all over the world.
But this alone does not account for the kind of alienation from the game expressed by the Brazilian protesters.
The worldwide reach of football was preceded by that of the Olympic Games, and it is here where we should turn to understand the corruption of globalized sports.
Unlike football, the Olympics were always closely associated with elites: amateur athletes recruited from universities, and so on.
His aim for the Olympic Games was to embody a noble ideal of world peace and brotherhood through athletic competition.
How easily this ideal could be corrupted by distinctly ungentlemanly politics was already clear in 1936, when Coubertin’s doddering speech about peace and fair play was played over the loudspeakers of the Olympic Stadium in Berlin, while Hitler and his henchmen raised their arms to salute the Nazi flag.
But even without noisome politics, the sheer amount of money required to stage the Olympic Games – the building contracts for stadiums, transport infrastructure, and hotels, together with all the other commercial razzmatazz – was bound to produce a culture of bribery and kickbacks.
An international elite of Olympic officials arose, living in a self-contained bubble of wealth and privilege.
I once had occasion to watch these men as they trooped in and out of first-class hotels in an Asian capital, sleek figures in gold-buttoned blazers.
It was striking to see how often the most prosperous-looking representatives came from the world’s poorest countries.
Football is now like the Olympics (or Formula 1 racing), except that even more money is involved.
Football clubs have become the status symbols of newly rich tycoons from Russia or the Middle East, and international competitions, especially the World Cup, have become occasions to bolster the prestige, and sometimes even the legitimacy, of national governments.
Such events reinforce the tendency of modern political regimes, dictatorships as well as democracies, to measure themselves in monumental building projects – giant new stadiums, gargantuan shopping malls, huge conference halls – which are sometimes needed, but often are not.
As a result, developers, architects, politicians, tycoons, and international sporting officials are now in charge of the beautiful game.
This adds to their power, wealth, and prestige.
But once they have staged their spectacles, at vast expense to the host country, they move on.
This is especially galling in countries where much of the population is poor and deprived of decent schools or proper medical services.
Millions of Brazilians have made clear where their priorities lie.
They haven’t fallen out of love with football.
On the contrary, by protesting against the grotesque manipulation of the modern game, they are trying to take it back.
BRICS Without Mortar
CAMBRIDGE – Last month, China’s new president, Xi Jinping, chose Moscow for his first foreign visit.
He and Russian President Vladimir Putin announced a number of agreements and then traveled to Durban, South Africa, for the fifth “BRICS” summit, where they joined with the leaders of India, Brazil, and South Africa to announce the creation of a new development bank that could challenge the dominance of the World Bank and the International Monetary Fund.
The five leaders’ speeches referred to a shifting world order, and Xi said “the potential of BRICS development is infinite.”
It looked as if the BRICS had finally come of age.
Three years ago, I was skeptical about the BRICS.
And, despite the recent summit’s apparent success, I still am.
Nearly 12 years ago, Jim O’Neill, then the chief economist for Goldman Sachs, coined the term “BRIC” to describe the “emerging markets” of Brazil, Russia, India, and China.
From 2000 to 2008, these four countries’ share of global output rose rapidly, from 16% to 22% (in purchasing power parity terms), and their economies performed better than average in the subsequent global recession.
For investors, that outcome justified the creation of the catchy acronym.
But then a strange thing happened: the investors’ creature came to life.
In 2009, the four countries met for the first time in Russia in an effort to forge an international political organization.
South Africa joined the bloc in late 2010 primarily for political reasons.
As O’Neill recently told China Daily, “South Africa is quite fortunate enough to be in the group, as, economically, it is rather small compared to the others.” Moreover, its economic performance has been relatively sluggish, with a growth rate of just 2.3% last year.
Indeed, while the BRICS may be helpful in coordinating certain diplomatic tactics, the term lumps together highly disparate countries.
Not only is South Africa miniscule compared to the others, but China’s economy is larger than those of all of the other members combined.
Likewise, India, Brazil, and South Africa are democracies, and occasionally meet in an alternative forum that they call “IBSA.”
And, while the large autocracies, Russia and China, find it diplomatically advantageous to tweak the Americans, both have different but crucial relationships with the United States.
And both have worked to thwart efforts by India, Brazil, and South Africa to become permanent members of the United Nations Security Council.
As I wrote three years ago, in analytical terms, it makes little sense to include Russia, a former superpower, with the developing economies.
Russia lacks diversified exports, faces severe demographic and health problems, and, in former President Dmitri Medvedev’s words, “greatly needs modernization.”
Little has changed since Putin returned to the presidency last year.
While economic growth benefited from the dramatic growth in oil and gas prices during the last decade, other competitive industries have yet to emerge, and the country now faces the prospect of declining energy prices.
While it aims to maintain 5% annual growth, its economy was relatively flat last year.
If Russia’s power resources seem to be declining, Brazil’s appear to be more impressive, given it has a territory nearly three times the size of India’s, a 90% literacy rate, and triple the per capita income of India (and nearly twice that of China).
But, in the three years since my earlier assessment, Brazil’s performance has slipped: annual economic growth has slowed from 7.5% in 2010 to 1% last year, with a 3.5% rate expected in 2013.
Like Brazil, India experienced a spurt of output growth after liberalizing its economy in the 1990’s; indeed, until a few years ago, GDP growth was approaching Chinese-style rates.
This year, however, output is expected to rise by a relatively sluggish 5.9%.
Unless it improves its infrastructure and literacy rate (particularly for women), India is unlikely to catch up with China.
So, should we take today’s BRICS more seriously than the BRICs of three years ago?
Tellingly, the meeting in Durban failed to produce any details of the structure of the proposed new development bank, suggesting that little progress had been made in the year since the BRICS’ last meeting in New Delhi, where the plan was announced.
In fact, despite a commitment to launch “formal negotiations” to establish the bank, disagreements about the size and shares of the bank’s capital have not been resolved.
That lack of unity is symptomatic of the BRICS members’ underlying incompatibilities.
In political terms, China, India, and Russia are vying with each other for power in Asia.
And, in economic terms, Brazil, India, and South Africa are concerned about the effects of China’s undervalued currency on their economies.
Three years ago, I wrote that, “BRIC is not likely to become a serious political organization of like-minded states.”
The BRICS’ most recent meeting has given me no reason to revise that assessment.
Why Capital Flows Uphill
LONDON – At first, it seems difficult to grasp: global capital is flowing from poor to rich countries.
Emerging-market countries run current-account surpluses, while advanced economies have deficits.
One would expect fast-growing, capital-scarce&nbsp;(and young)&nbsp;developing countries to be importing capital from the rest of world to finance consumption and investment.
So, why are they sending capital to richer countries, instead?
China is a case in point.
With its current-account surplus averaging 5.5% of GDP in 2000-2008, China has become one of the world’s largest lenders.
Despite its rapid growth and promising investment opportunities, the country has persistently been sending a significant portion of its savings overseas. &nbsp;
And China is not alone.
Other emerging markets – including Brazil, Russia, India, Mexico, Argentina, Thailand, Indonesia, Malaysia, and the Middle Eastern oil exporters – have all increased their current-account surpluses significantly since the early 1990’s.
Collectively, capital-scarce developing countries are lending to capital-abundant advanced economies.
Many observers believe that these global imbalances reflect developing economies’ financial integration, coupled with underdevelopment of domestic financial markets.
According to this view, these countries’ demand for assets cannot be met – in terms of both quantity and quality –&nbsp;at home, so they deploy part of their savings to countries like the US, which can offer a more diverse array of quality assets.
While plausible, this argument suggests that, as financial markets improve over time in developing countries, the global imbalances are bound to shrink.
But such a reversal is nowhere in sight.
Why?
A crucial dimension of globalization has been trade liberalization.
For China, foreign trade as a percentage of GDP soared from 25% in 1989 to 66% in 2006, largely owing to its admission to the World Trade Organization in 2001. &nbsp;
Most of what China and other developing countries produce and export are labor-intensive goods such as textiles and apparel.
This has allowed advanced economies, in turn, to produce and export more capital-intensive, higher-value-added products.
Globalization of trade enabled countries to tap the efficiency gains that specialization in their sectors of comparative advantage has brought about.
With a slight mental stretch, one can imagine that what a country produces and trades may affect its savings and investment decisions.
An economy in which the main productive activity is berry picking, for example, has little need for investment and capital accumulation.
Its laborers earn wages, consume, and save part of that income.
Since the production process requires little capital, there is no demand for domestic investment – and thus no savings vehicles.
Instead, the only way to save is by purchasing capital abroad – in economies with capital-intensive production and demand for investment.
This economy will always export its savings.
That may be an extreme example, but it illustrates a more general point about how merchandise trade can influence financial flows.
Countries that produce and export more labor-intensive goods – perhaps owing to increased trade openness, or faster labor-force and productivity growth, all of which are true of China – may experience a rise in saving, but a less-than-equivalent increase in demand for capital.
Rich countries, by contrast, are able to export more capital-intensive goods, and thus have a greater need for investment.
So they may be importing more capital – resulting in a greater current-account deficit – simply because they are producing more capital-intensive goods.
With developing countries – in particular, China, India, and the ex-Soviet bloc – bringing almost 1.5 billion workers into the world economy since the early 1990’s, it is not difficult to understand the potential impact of this effect.
After all, much of this labor force was absorbed by labor-intensive industries that eventually churned out products exported to the rest of the world.
Indeed, that massive addition of labor helped to drive down the relative price of labor-intensive goods, which fell by roughly 15% between 1989 and 2008.
As developing countries increased their labor-intensive production and exports, their current-account surpluses rose – by almost 3.6 percentage points, on average, between 1989-1993 and 2002-2006.
China’s current-account surplus increased by almost 11 percentage points over the same period, India’s by 2.5 percentage points, and Russia’s by seven percentage points.
These countries, as well as other large surplus economies, such as Brazil, Saudi Arabia, and Iran, all experienced a simultaneous increase in the labor content of exports.
This pattern contrasts with that of the United States and many other advanced countries, which have experienced a deterioration of their current-account balances as their production and exports have become more capital-intensive.
Many might doubt the view that China is exporting more labor-intensive goods, rather than upgrading its exports on the capital- and skill-intensity ladder.
But trade data suggest the opposite, perhaps because China’s accession to the WTO led to tariff reductions that released more labor-intensive production.
In fact, trade data may underestimate the true extent of China’s labor intensity andoverstate the capital and skill intensity of China’s exports.
China has witnessed rapid growth in the processing trade: assembling intermediate inputs – imported from countries like the US and Japan – that have high capital and skill content.
So, while the exports of these final goods may count towards China’s own capital and skill content, the country’s real role was only in the labor-intensive process of assembly.
A country’s production structure may very well determine how much capital it supplies and how much it needs.
So the fact that capital may flow towards rich countries that produce and export more capital-intensive goods should not be so puzzling, after all.
Why Castro Survives
In a rehearsal studio, a young Cuban ballet dancer turns through the air, pivoting as though some invisible power has unfurled him in an arc.
Then, without pause, he leaps once, twice, and I gasp at the height of his grandes jetés and then gasp again because his pointed toe is heading right for a barre .
Welcome to Cuba, a country that dazzles and disappoints, where one finds miracles and monsters, but no easy answers.
Cubans recognize the contradictions as readily as any outsider.
Yet even as inflation rises and the 77-year-old dictator tightens Internet access and closes the economic openings that encouraged self-employment in the mid-1990's, it is unlikely that Cubans will turn Castro out before he dies.
The rabidly anti-Castro Cuban exiles clustered in Miami argue that it is fear that holds Cubans back, but that's not true.
A visitor in Cuba finds many ready to complain, but the palpable fear and visceral hatred rampant in El Salvador and Chile in the 1980's is absent in today's Cuba.
Instead there is a kind of paralysis - born of a mix of loyalty, fear, and indoctrination - as they grudgingly wait for Castro to expire.
Unlike many of Latin America's freely elected governments, Castro has actually provided his constituents with public services - and without earning a reputation for corruption. "All the free education and health care gives a certain balance," said a prominent writer.
"Their work is less valuable," he said referring to the pesos Cubans earn in an economy sustained by dollar remittances from the foreign diaspora. But "it's not a total disaster because people have this balance."
So, unlike the East Europeans who overthrew their corrupt political leaders in 1989, and some Latin Americans who did so more recently in Bolivia, Argentina, and Ecuador, Cubans have failed to rally against Castro.
Yes, Castro jailed 75 independent journalists and others in an April sweep - that is the monster in him.
But other dissidents remain free.
That is the contradiction.
Moreover, unlike other luxury-loving Latin American leaders, Cuban officials do not flaunt lavish lifestyles.
Among Latin American countries, only Chile and Uruguay rate better than Cuba in Transparency International's corruption index.
But this could change as dollars become hard to resist and Cubans use them to cut through ridiculous bureaucratic hurdles.
Already, the dollar has created a divide in living standards between those who have greenbacks and those who don't.
Despite a moribund economy, Castro still delivers what the majority of Latin American residents fail to get - free health care and education and a relatively drug- and crime-free environment.
With more than 40% of Latin America's population living in poverty, Cuba stands out as an example of a country where being poor does not mean a life of squalor.
Even World Bank president James Wolfensohn acknowledged in 2001 that Cuba had done a "great job" on education and health care.
More recently, in discussing the Bank's 2004 report Making Services Work for Poor People , officials put Cuba among countries like Sri Lanka, Costa Rica, and China that "managed to achieve a level of outcomes in health and education that are extremely favorable."
This winter, the Cuban government reinvested some of its income from tourism in upgrading schools that deteriorated in the years following the loss of Soviet aid. "Cubans are still endeared by that," said one Western diplomat.
Amazingly, many Latin America leaders fail to make the connection between reducing poverty and their own popularity.
Compare Castro's campaign to improve schools to a poverty reduction program waged by Mexico's Institutional Revolutionary Party during a six-year period in the 1990's.
Mexico spent 1.2% of GDP per year to provide basic services to communities in Mexico.
According to Santa Deverajan, the director of the World Bank's World Development Report 2004 , some studies showed that the program could have reduced poverty by as much as 64%.
Instead, the money was doled out to municipalities based on political loyalty, so poverty fell by only 3%. "If they had just given it out equally to the entire Mexican population," Deverajan says, "it would have reduced poverty by 13%."
Examples like this abound in Latin America, but it is a mistake for Castro to think that Latin America is the competition.
Cubans don't think it is.
Their touchstones are Madrid, Paris, and New York.
An educated professional with a wife and two children takes a breath when he recalls a trip to Spain.
"It's hard to explain how I felt when I went there.
It wasn't like another world or another planet; it was like another galaxy."
With family in Spain, he could immigrate, but he doesn't consider that option seriously. "This is where I want to live, but 5% of the way things are run has got to change.
They blame everything on the embargo.
We have a self-imposed embargo.
We limit ourselves."
More precisely, Castro limits Cubans.
They want to breathe, but life with a patriarchal tyrant can be suffocating.
Younger Cubans often sound like well-educated teenagers with parents who are too strict.
They want to travel, publish what they want, dance when and where they want, and experience the world as Castro experienced it.
"It's not my fight," says one 28-year-old Cuban, referring to the political battle of communism versus capitalism that keeps him trapped on the island. "I'm a new generation.
I want to see as they had the chance to see."
Why China Can’t Adjust
CLAREMONT, CALIFORNIA – China’s current economic slowdown has no shortage of causes: Europe’s financial turmoil, sputtering recovery in the United States, and weak domestic investment growth, to name the most commonly cited factors.
Since exports and investment account, respectively, for 30% and 40% of China’s GDP growth, its economy is particularly vulnerable to weakening external demand and accumulation of non-performing loans caused by excessive and wasteful spending on fixed assets.
But China’s vulnerability to these factors, as serious as they are, is symptomatic of deeper institutional problems.
Until these underlying constraints are addressed, talk of a new consumption-based growth model for China, reflected in the government’s recently approved 12th Five-Year Plan, can be no more than lip service.
After all, China’s major trading partners, international financial institutions such as the World Bank and the International Monetary Fund, and senior Chinese officials themselves have long recognized the structural vulnerabilities caused by excessive investment and low household consumption.
And, for nearly a decade, China has been urged to undertake reforms to redress these economic patterns, which have undermined the welfare of ordinary Chinese and strained the global trading system.
The best-known feature of China’s macroeconomic imbalances is heavy dependence on exports for growth, which is typically attributed to weak domestic demand: as a middle-income country, China lacks the purchasing power to consume the goods that it produces.
With nearly unlimited access to advanced-country markets, China can tap into global external demand and raise its GDP growth potential, as it has done for the past two decades.
If this view is right, the solution is straightforward: China can correct its imbalances by increasing its citizens’ incomes (by cutting taxes, raising wages, or increasing social spending), so that they can consume more, thereby reducing the economy’s dependence on exports.
Indeed, nearly all mainstream economists prescribe this approach for China.
But there is another explanation for China’s excessive export dependence, one that has more to do with the country’s poor political and economic institutions.
Specifically, export dependence partly reflects the high degree of difficulty of doing business in China.
Official corruption, insecure property rights, stifling regulatory restraints, weak payment discipline, poor logistics and distribution, widespread counterfeiting, and vulnerability to other forms of intellectual-property theft: all of these obstacles increase transaction costs and make it difficult for entrepreneurs to thrive in domestic markets.
By contrast, if China’s private firms sell to Western multinationals, such as Wal-Mart, Target, or Home Depot, they do not have to worry about getting paid.
They can avoid all of the headaches that they would have encountered at home, because well-established economic institutions and business practices in their export markets protect their interests and greatly reduce transaction costs.
The Chinese economy’s institutional weakness is reflected in international survey data.
The World Bank publishes an annual review of “the ease of doing business” for 183 countries and sub-national units.
In its June 2011 survey, China was ranked 91st, behind Mongolia, Albania, and Belarus.
It is particularly difficult to start a business in China (151st), pay taxes (122nd), obtain construction permits (179th), and get electricity (115th).
Faced with such a hostile environment, Chinese private entrepreneurs have been forced to engage in “institutional arbitrage” – taking advantage of efficient Western economic institutions to expand their business (most export-oriented businesses are owned by private entrepreneurs and foreign firms).
Unfortunately, as China has already claimed a large share of the world’s merchandise exports (10.4% in 2010) and economic stagnation in the West is constraining external demand, this strategy can no longer work.
But reorienting their businesses toward the Chinese domestic market requires far more than government policies that put more money in consumers' pockets.
In order to enjoy the same low transaction costs that they have in exporting, China’s entrepreneurs need a much better business environment: an effective legal system, a sound regulatory framework, a government that protects their brands by fighting intellectual-property theft, dependable logistics and distribution networks, and a graft-resistant bureaucracy.
China cannot create such an environment quickly.
In essence, the Chinese government must transform a predatory state into a nurturing one, and treat private entrepreneurs as creators of wealth rather than targets of extraction.
In nearly all other countries, such a transformation was accomplished by establishing the rule of law and/or moving from autocracy to democracy.
The impossibility of sustaining growth in the absence of the rule of law and political accountability presents the Chinese Communist Party with an existential dilemma.
Ever since it crushed the pro-democracy movement in Tiananmen Square in 1989, the party has vowed not to surrender its political monopoly.
The investment boom and the globalization dividend of the last two decades allowed the Party to have its cake and eat it – maintaining its rule on the basis of economic prosperity, while failing to establish the institutions critical to sustaining such prosperity.
Today, this is no longer possible.
So in a sense, the Chinese bubble – as much an intellectual and political bubble as an economic one – has burst.
As China’s economic deceleration exposes its structural vulnerabilities and flawed policies, the much-hyped notion of “Chinese exceptionalism” – that China can continue to grow without the rule of law and the other essential institutions that a modern market economy presupposes – is proving to be nothing but a delusion.
China is Not Collapsing
LONDON – One question has dominated the International Monetary Fund’s annual meeting this year in Peru: Will China’s economic downturn trigger a new financial crisis just as the world is putting the last one to bed?
But the assumption underlying that question – that China is now the global economy’s weakest link – is highly suspect.
China certainly experienced a turbulent summer, owing to three factors: economic weakness, financial panic, and the policy response to these problems.
While none on its own would have threatened the world economy, the danger stemmed from a self-reinforcing interaction among them: weak economic data leads to financial turmoil, which induces policy blunders that in turn fuel more financial panic, economic weakness, and policy mistakes.
Such self-reinforcing financial feedback is much more powerful in transmitting global economic contagion than ordinary commercial or trade exposures, as the world learned in 2008-2009.
The question now is whether the vicious circle that began in China over the summer will continue.
A sensible answer must distinguish between financial perceptions and economic reality.
China’s growth slowdown is not in itself surprising or alarming.
As the IMF noted, China’s growth rate has been declining steadily for five years – from 10.6% in 2010 to a projected rate of 6.8% this year and 6.3% in 2016.
This deceleration was inevitable as China advanced from extreme poverty and technological backwardness to become a middle-income economy powered by external trade and consumer spending.
It was also desirable, because rapid growth was hitting environmental limits.
Even as the pace of growth slows, China is contributing more to the world economy than ever before, because its GDP today is $10.3 trillion, up from just $2.3 trillion in 2005.
Simple arithmetic shows that $10.3 trillion growing at 6% or 7% produces much bigger numbers than 10% growth starting from a base that is almost five times smaller.
This base effect also means that China will continue to absorb more natural resources than ever before, despite its diminishing growth prospects.
Yet China is causing high anxiety, especially in emerging countries, largely because financial markets have convinced themselves that its economy is not only slowing, but falling off a cliff.
Many Western analysts, especially in financial institutions, treat China’s official GDP growth of around 7% as a political fabrication – and the IMF’s latest confirmation of its 6.8% estimate is unlikely to convince them.
They point to steel, coal, and construction statistics, which really are collapsing in several Chinese regions, and to exports, which are growing much less than in the past.
But why do the skeptics accept the truth of dismal government figures for construction and steel output – down 15% and 4%, respectively, in the year to August – and then dismiss official data showing 10.8% retail-sales growth?
One reason can be found in the financier George Soros’s concept of “reflexivity.”
Soros has argued for years that financial markets can create inaccurate expectations and then change reality to accord with them.
This is the opposite of the process described in textbooks and built into economic models, which always assume that financial expectations adapt to reality, not the other way round.
In a classic example of reflexivity, when China’s stock-market boom turned into July’s bust, the government responded with a $200 billion attempt to support prices, closely followed by a small devaluation of the previously stable renminbi.
Financial analysts almost universally ridiculed these policies and castigated Chinese leaders for abandoning their earlier pretenses of market-oriented reforms.
The government’s apparent desperation was seen as evidence that China was in far greater trouble than previously revealed.
This belief quickly shaped reality, as market analysts blurred the distinction between a growth slowdown and economic collapse.
In mid-September, for example, when the private-sector Purchasing Managers’ Index (PMI) came out at 47.0, the result was generally reported along these lines: “The index has now indicated contraction in the [manufacturing] sector for seven consecutive months.”
In fact, Chinese manufacturing was growing by 5-7% throughout that period.
The supposed evidence was wrong because 50 is the PMI’s dividing line not between growth and recession, but between accelerating and slowing growth.
Indeed, for 19 out of the PMI’s 36 months of existence, the value has been below 50, while Chinese manufacturing growth has averaged 7.5%.
Exaggerations of this kind have undermined confidence in Chinese policy at a particularly dangerous time.
China is now navigating a complex economic transition that involves three sometimes-conflicting objectives: creating a market-based consumer economy; reforming the financial system; and ensuring an orderly slowdown that avoids the economic collapse often accompanying industrial restructuring and financial liberalization.
Managing this trifecta successfully will require skillful juggling of priorities – and that will become much more difficult if Chinese policymakers lose international investors’ trust or, more important, that of China’s own citizens and businesses.
Vicious circles of economic instability, devaluation, and capital flight have brought down seemingly unbreakable regimes throughout history.
This probably explains the whiff of panic that followed China’s tiny, but totally unexpected, devaluation of the renminbi.
The renminbi, however, has recently stabilized, and capital flight has dwindled, as evidenced by the better-than-expected reserve figures released by the People’s Bank of China on October 7.
This suggests that the government’s policy of shifting gradually to a market-based exchange rate may have been better executed than generally believed; even the measures to support the stock market now look less futile than they did in July.
In short, Chinese economic management seems less incompetent than it did a few months ago.
Indeed, China can probably avoid the financial meltdown widely feared in the summer.
If so, other emerging economies tied to perceptions about China’s economic health should also stabilize.
The world has learned since 2008 how dangerously financial expectations can interact with policy blunders, turning modest economic problems into major catastrophes, first in the US and then in the eurozone.
It would be ironic if China’s Communist leaders turned out to have a better understanding of capitalism’s reflexive interactions among finance, the real economy, and government than Western devotees of free markets.
Why China\u0027s Falun Gong Movement Is Important
BEIJING: Continuing suppression of members of Falong Gong, a movement whose supporters continue to “step forward” to respond to their leader’s call to “achieve consummation by facing imprisonment or death,” provides clear evidence that something new, if inexplicable, is happening in China.
But there is a paradox here, for this “something new” is also something very old.
It is precisely because this mass cult-turned-protest-movement has a traditional resonance that it poses such a threat to the Party establishment.
When, in April 1999, ten thousand members of the Falun Gong sect appeared mysteriously in front of Zhongnanhai, the compound of the Chinese Communist Party’s leadership, to be arrested en masse, observers found it hard to explain what was going on.
The overseas press corps in Beijing was used to explaining political dissidents, student protesters, disgruntled workers and disenfranchised members of the “floating population.”
This mystical, crypto Buddhist/Taoist sect of middle class meditators, however, seemed to arise out of nowhere so that its origins and seriousness as a threat to China’s Party establishment were difficult to assess.
The group, it turned out, was led by an exiled patriarch, Li Hongzhi, who had conjured his cult out of traditional Chinese breathing exercises (qigong), a belief in miracle cures, nostrums about clean living, and a mish-mash of Buddhist and Taoist mysticism.
As wave after wave of Falun Gong supporters arrived in Tiananmen Square to be arrested, however, what began as an aberrant event became the most widespread movement of organized protest in China since 1989.
When, like the Tianamen Square demonstrators, it met with an uncompromising government counter-attack, it soon became obvious that, however strange and fantastic its followers might seem from the outside, Party leaders viewed the movement as a menace They labeled it a xiejiao zuzhi, literally a “heretical” or “depraved” organization, a term of denigration long-reserved for “unorthodox” religious or spiritual groups based on superstition.
What makes Falun Gong so threatening is that not only is it led by a very traditionalistic leader, but that its mystical doctrine and charismatic rebelliousness evoke for Chinese an ingrained sense of historical memory of past ruling dynasties that fell after being challenged by a similar internal millenarian movement.
For Chinese, such cultic movements have deep symbolic significance because of their association with the idea of dynastic decay and collapse.
Few Chinese do not know legends and stories from history, which are passed down through the generations in novels, operas, plays and now films, comic books and even TV series.
These stories tell of how the Han Dynasty’s (206 B.C-422 A.D) end was presaged by the mystical Yellow Turban Rebellion or of how the Qing Dynasty (1644-1911), China’s last, ran afoul of the equally mystical White Lotus and then the Boxer Rebellions.
Cult-animated uprisings against unjust authority, with which Falun Gong is now identified, have always been viewed by Chinese as portents that political legitimacy -- sanctioned by the so-called “mandate of heaven” (tianming)that is said to exist when “heaven” confers its favor on a ruling dynasty -- has been withdrawn.
For a government such as that now ruling China, one which does not derive legitimacy from the will of the people, the deeply rooted cultural presumption of ordinary people that the cosmic forces of heaven no longer shine on it, could deal a devastating psychological blow.
So, Falung Gong is viewed as an ominous threat to Party hegemony, perhaps even more ominous than any previous protest movement.
There are four reasons for this:
 because it has deep traditional and nativist Chinese roots, Falung Gong’s message cannot be branded as an imported and inappropriate foreign ideology in the way that notions of democracy and Christianity are dismissed by Chinese nationalists and xenophobes;
 because the destruction of traditional Confucian values during Mao’s revolution and then the implosion of Marxist ideology during Deng Xiaoping’s economic reform era left China bereft of a coherent belief system, many Chinese are susceptible to any group that offers basic answers to questions about the meaning of life;
 unlike student protesters who were basically rationalists and usually had clear demands to which the Party could respond (if it wished), Li Hongzhi’s critique that contemporary Chinese life has fallen into a morass of immorality and venality brooks no easy response;
 because this diffuse but mass-based sect communicates with its members by word of mouth and over the Internet rather than by conventional means, it is difficult for the Party to disrupt its nerve centers.
In this sense Falun Gong is a double paradox: a traditionalistic movement freighted with deep historical symbolism, it is also a cyber-savvy, modern Chinese protest movement.
Nothing in China ever seems to happen quite in the way China experts predict.
Virtually no expert foresaw the events of 1989; no expert whom I know imagined that China’s next wave of destabilizing protest might come from a mass movement of superstitious middle-aged, middle-class citizens dedicated to recycled notions of Buddhist and Taoist clean living, health through meditation, breathing exercises and mysticism spread via the Internet.
By detaining thousands of sect followers the Party may unwittingly transform an errant spiritual movement into a dangerous political force.
Controlling China’s Currency
BEIJING – It is indisputable that China is over-issuing currency.
But the reasons behind China’s massive liquidity growth – and the most effective strategy for controlling it – are less obvious.
The last decade has been a “golden age” of high growth and low inflation in China.
From 2003 to 2012, China’s annual GDP growth averaged 10.5%, while prices rose by only 3% annually.
But the unprecedented speed and scale of China’s monetary expansion remain a concern, given that it could still trigger high inflation and lead to asset-price bubbles, debt growth, and capital outflows.
Data from the People’s Bank of China (PBOC) show that, as of the end of last year, China’s M2 (broad money supply) stood at ¥97.4 trillion ($15.6 trillion), or 188% of GDP.
To compare, M2 in the United States amounts to only roughly 63% of GDP.
In fact, according to Standard Chartered Bank, China ranks first worldwide in terms of both overall M2 and newly issued currency.
In 2011, China accounted for an estimated 52% of the world’s added liquidity.
But a horizontal comparison of absolute values is inadequate to assess the true scale of China’s monetary emissions.
Several other factors must be considered, including China’s financial structure, financing model, savings rate, and stage of economic development, as well as the relationship between currency and finance in China.
China’s intensive economic monetization is a key factor driving its money-supply growth.
But China’s sharply rising monetization rate cannot be judged against the high, steady rates of developed countries without bearing in mind that China’s monetization process began much later, and has distinct structural and institutional foundations.
As China has opened up its economy, deepened reforms, and become increasingly market-oriented, the government has facilitated the continuous monetization of resources – including natural resources, labor, capital, and technology – by ensuring their constant delivery to the market.
This has fueled rising demand for currency, leading to the expansion of the monetary base, with the money multiplier – that is, the effect on lending by commercial banks – boosting the money supply further.
And, as GDP growth has become increasingly dependent on government-led investment, currency demand has continued to rise.
Indeed, the rapid expansion of bank credit needed to finance skyrocketing government-led investment is increasing the amount of liquidity in China’s financial system.
As a result, in the last four years, China’s M2, spurred by a stimulus package totaling ¥4 trillion in 2008 and 2009, has more than doubled.
This trend is exacerbated by the declining efficiency of financial resources in the state sector, a product of the soft budget constraint implied by easily accessible, cheap capital.
Consequently, maintaining high GDP growth rates requires an ever-increasing volume of credit and a continuously growing money supply.
So China is stuck in a currency-creating cycle: GDP growth encourages investment, which boosts demand for capital.
This generates liquidity, which then stimulates GDP growth.
The key to controlling China’s monetary expansion is to clarify the relationship between currency (the central bank) and finance (the financial sector), thereby preventing the government from assuming the role of a second currency-creating body.
According to Pan Gongsheng, a deputy governor of the PBOC, the relationship between the central bank and the financial sector entails both a division of labor and a system of checks and balances.
In theory, the financial sector serves as a kind of accountant for the treasury and the government, while the PBOC acts as the government’s cashier.
In practice, however, the relationship between currency and finance is vague, with both assuming quasi-fiscal functions.
China’s low official government debt largely reflects the role of currency in assuming quasi-fiscal liabilities – not only the write-off costs incurred from reforming state-owned banks, but also the takeover of banks’ bad debts via note financing and the purchase of asset-management companies’ bonds.
These activities both damage the PBOC’s balance sheet and constrain monetary policy.
At the same time, finance takes on quasi-fiscal functions by excluding government fiscal deposits – government deposits in the national treasury, commercial banks’ fiscal savings, and central treasury cash managed through commercial-bank deposits – from the money supply.
Given the large volume of fiscal deposits – which totaled ¥2.4 trillion (3.3% of M2) at the end of 2010 – their impact on the money supply cannot be ignored.
Clarifying the relationship between currency and finance is essential to ensuring that all newly issued currency is backed by assets.
Only by exerting a harder budget constraint on the state sector, limiting fiscal expansion, and reducing dependence on government-led investment can China’s excessive currency issuance be addressed in the long term.
Why China Won’t Rule
LONDON – Is China poised to become the world’s next superpower?
This question is increasingly asked as China’s economic growth surges ahead at more than 8% a year, while the developed world remains mired in recession or near-recession.
China is already the world’s second largest economy, and will be the largest in 2017.
And its military spending is racing ahead of its GDP growth.
The question is reasonable enough if we don’t give it an American twist.
To the American mind, there can be only one superpower, so China’s rise will automatically be at the expense of the United States.
Indeed, for many in the US, China represents an existential challenge.
This is way over the top.
In fact, the existence of a single superpower is highly abnormal, and was brought about only by the unexpected collapse of the Soviet Union in 1991.
The normal situation is one of coexistence, sometimes peaceful sometimes warlike, between several great powers.
For example, Great Britain, whose place the US is often said to have taken, was never a “superpower” in the American sense.
Despite its far-flung empire and naval supremacy, nineteenth-century Britain could never have won a war against France, Germany, or Russia without allies.
Britain was, rather, a world power – one of many historical empires distinguished from lesser powers by the geographic scope of their influence and interests. &nbsp;
The sensible question, then, is not whether China will replace the US, but whether it will start to acquire some of the attributes of a world power, particularly a sense of responsibility for global order.
Even posed in this more modest way, the question does not admit of a clear answer.
The first problem is China’s economy, so dynamic on the surface, but so rickety underneath.
The analyst Chi Lo lucidly presents a picture of macro success alongside micro failure.
The huge stimulus of RMB4 trillion ($586 billion) in November 2008, mostly poured into loss-making state-owned enterprises via directed bank lending, sustained China’s growth in the face of global recession.
But the price was an increasingly serious misallocation of capital, resulting in growing portfolios of bad loans, while excessive Chinese household savings have inflated real-estate bubbles.
Moreover, Chi argues that the crisis of 2008 shattered China’s export-led growth model, owing to prolonged impairment of demand in the advanced countries.
China now urgently needs to rebalance its economy by shifting from public investment and exports towards public and private consumption.
In the short run, some of its savings need to be invested in real assets abroad, and not just parked in US Treasuries.
But, in the longer term, Chinese households’ excessive propensity to save must be reduced by developing a social safety net and consumer credit instruments.
Moreover, to be a world economic power, China requires a currency in which foreigners want to invest.
That means introducing full convertibility and creating a deep and liquid financial system, a stock market for raising capital, and a market rate of interest for loans.
And, while China has talked of “internationalizing” the renminbi, it has done little so far.
“Meanwhile,” writes Chi, “the dollar is still supported by the strong US political relations with most of the world’s largest foreign-reserve-holding countries.”
Japan, South Korea, Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates all shelter under the US military umbrella.
The second problem is one of political values.
China’s further “ascent” will depend on dismantling such classic communist policy icons as public-asset ownership, population control, and financial repression.
The question remains how far these reforms will be allowed to go before they challenge the Communist Party’s political monopoly, guaranteed by the 1978 constitution.
Two important cultural values underpin China’s political system.
The first is the hierarchical and familial character of Chinese political thought.
Chinese philosophers acknowledge the value of spontaneity, but within a strictly ordered world in which people know their place.
As the Analects of Confucius puts it: “Let the ruler be a ruler, the subject a subject, a father a father, and a son a son.”
There is also very little belief in the sanctity of human life: Buddhism holds that there is no difference between humans and animals and plants.
A pledge to protect human rights was written into the Chinese constitution in 2004; but, as the recent case of the blind dissident Chen Guangcheng illustrates, this is mostly a dead letter.
Similarly, private property ranks below collective&nbsp;property.
Then there is the Confucian doctrine of the “mandate of heaven,” by which political rule is legitimized.
Today, the mandate of Marxism has taken its place, but neither has any room for a&nbsp;mandate of the people.
Ambivalence about the source of legitimate government is not only a major obstacle to democratization, but is also a potential source of political instability.
These historical legacies limit the extent to which China will be able to share in global leadership, which requires some degree of compatibility between Chinese and Western values.
The West claims that its values are universal, and the US and Europe will not cease pressing those values on China.
It is hard to see this process going into reverse, with China starting to export its own values.
China has a choice: it can either accept Western values, or it can try to carve out an East Asian sphere to insulate itself from them.
The latter course would provoke conflict not only with the US, but also with other Asian powers, particularly Japan and India.
China’s best possible future thus probably lies in accepting Western norms while trying to flavor them with “Chinese characteristics.”
But neither choice is a scenario for China “replacing” the US.
Nor, I think, is this what China wants.
Why Chinese Companies Stay at Home
Why Cutting Carbon Emissions is not Enough
Twenty years ago, governments adopted the Montreal Protocol, a treaty to protect the Earth’s ozone layer from emissions of destructive chemicals.
Few could have foreseen how far-reaching that decision would prove to be.
The Protocol explicitly aimed at phasing-out substances such as chlorofluorocarbons (CFCs) – found in products such as refrigerators, foams, and hairsprays – in order to repair the thin gassy-shield that filters out the sun’s harmful, ultra-violet rays.
By 2010, close to 100 ozone-depleting substances, including CFCs, will have been phased-out globally.
Without the decisions taken 20 years ago, atmospheric levels of ozone-depleting substances would have increased ten-fold by 2050.
This could have led to up to 20 million additional cases of skin cancer and 130 million more cases of eye cataracts, not to speak of damage to human immune systems, wildlife, and agriculture.
But this is only part of the story that we celebrate on the International Day for the Preservation of the Ozone Layer (September 16).
Over the past two years, it has been established that the Montreal Protocol has also spared humanity a significant level of climate change, because the gases that it prohibits also contribute to global warming.
Indeed, a study in 2007 calculated the climate mitigation benefits of the ozone treaty as totalling the equivalent of 135 billion tons of CO2 since 1990, or a delay in global warming of 7-12 years.
So the lessons learned from the Montreal Protocol may have wider significance.
Scientists now estimate that somewhere close to 50% of climate change is being caused by gases and pollutants other than CO2, including nitrogen compounds, low-level ozone formed by pollution, and black carbon.
Of course, a degree of scientific uncertainty about some of these pollutants’ precise contribution to warming remains.
But they certainly play a significant role.
Meanwhile, many of these gases need to be curbed because of their wider environmental impact on public health, agriculture, and the planet’s multi-trillion dollar ecosystems, including forests.
Consider black carbon, a component of the soot emissions from diesel engines and the inefficient burning of biomass cooking stoves that is linked to 1.6 million to 1.8 million premature deaths annually as a result of indoor exposure and 800,000 as a result of outdoor exposure.
Black carbon, which absorbs heat from the sun, also accounts for anywhere from 10% to more than 45% of the contribution to global warming, and is also linked to accelerated losses of glaciers in Asia, because the soot deposits darken, ice making it more vulnerable to melting.
One study estimates that 26% of black carbon emissions are from stoves for heating and cooking, with more than 40% of this amount from wood burning, roughly 20% from coal, 19% from crop residues, and 10% from dung.
Some companies have developed stoves that use passive air flows, better insulation, and 60% less wood to reduce black carbon emissions by around 70%.
Mass introduction of such stoves could deliver multiple green-economy benefits.
While CO2 can remain in the atmosphere for centuries, other pollutants, including black carbon and ozone, remain for relatively periods – days, weeks, months, or years – so that reducing or ending emissions promises almost immediate climate benefits.
The international community’s over-arching concern must be to seal a serious and significant deal at the United Nations climate summit in Copenhagen in December to curtail C02 emissions and assist vulnerable countries to adapt.
If the world also is to deploy all available means to combat climate change, emissions of all substances that contribute to it must be scientifically evaluated and urgently addressed.
The Centrists Cannot Hold
WASHINGTON – In most advanced democracies, a large center-right party competes with a large center-left party.
Of course, the extent to which an electoral system favors large parties – by having high popular-vote thresholds to enter parliament, or through winner-take-all constituencies – affects the degree of political fragmentation.
But, by and large, the developed democracies are characterized by competition between large parties on the center left and center right.
What, then, are true centrists like Mario Monti, Italy’s respected technocratic prime minister, to do?
To be sure, regional and ethnic allegiances play a greater role in some places in Europe – for example, Scotland, Belgium, and Catalonia – but far more so in emerging countries, where political cleavages also reflect specific post-colonial circumstances and often the legacy of single-party rule.
Nonetheless, even in “emerging market” democracies, such as Chile, Mexico, South Korea, and India, a left-right cleavage plays an important role – while those who claim the political center generally remain weak.
The British Liberal Democrats, for example, have tried for decades to become a strong centrist third party, without success.
While the political vocabulary in the United States is different, the Democratic Party, since Franklin Roosevelt’s presidency, is indeed a center-left force, the Republican Party occupies the right, and no other significant party exists.
In France and Germany, there is more fragmentation.
Politics is still dominated by a large center-left party and a large center-right party, but smaller groups – some claiming the center and others the right and left extremes – challenge them to various degrees.
In some countries, the “Greens” have their own identity, close to the left; but, despite remarkable progress in Germany, they remain unable to reach the electoral size of the large center-right and center-left parties.
Variations of this basic structure exist in Spain, Portugal, Greece, Turkey, and the Nordic countries.
The situation is particularly interesting in Italy, where Monti, having decided to contest the upcoming general election, has had to position himself on the right (which he signaled by attending a gathering of the leaders of Europe’s center-right parties).
He and former Prime Minister Silvio Berlusconi are now fighting for space on the right, with the center-left Democrats leading in the polls.
There are at least four differences between center-right and center-left approaches to social and economic challenges.
The right has greater confidence in markets to allocate resources and provide appropriate incentives; favors private consumption over public goods; is minimally concerned with economic inequality; and tends to be more nationalistic and less optimistic about international cooperation.
The left, by contrast, believes that markets, particularly financial markets, need considerable government regulation and supervision to function well; gives greater weight to public goods (for example, parks, a clean environment, and mass-transit systems); seeks to reduce economic inequality, believing that it undermines democracy and the sense of fairness that is important to well-being; and is more willing to pursue international cooperation as a means to secure peace and provide global public goods, such as climate protection.
When looking at actual economic policies as they have evolved over decades, we see that they always combine center-right and center-left elements.
Repeated financial crises have tempered even the right’s faith in unregulated markets, while the left has become more realistic and cautious about state planning and bureaucratic processes.
Likewise, the choice between privately consumed and publicly consumed “goods” is often blurred, as politicians tend to reinforce citizens’ understandable tendency to demand public goods while rejecting the taxes needed to pay for them.
As income inequality has increased – dramatically in some countries, such as the US – it is moving to the forefront of the debate, reinforcing the traditional political divide.
Nonetheless, the center right and the center left are arguing about the degree of redistribution, not about the need for some progressivity in taxes and transfers.
Both also agree on the need for international cooperation in an increasingly interdependent world, with differences mainly concerning how much effort to spend on it.
So, given that differences in policies as they are implemented have become largely a matter of degree, why do centrist parties remain weak?
Why have they failed to unite moderates on both sides of the ideological divide?
One reason is that only a minority of any population is active politically.
Active party members hold more ideologically consistent views – and hold them more strongly – than most of those who are politically less engaged, giving activists disproportionate influence in the political process.
After all, more nuanced ideas and policy proposals are relatively difficult to propagate effectively enough to generate broad and enthusiastic popular support.
But there also really are fundamental differences in values and economic philosophies, as well as in economic interests, leading to a fairly consistent positioning of voters on the right or left.
Disagreement may lead to compromises, but that does not change the underlying differences in starting positions.
It is probably a good thing that structured competition between large center-right and center-left parties persists.
Such parties can help to integrate the extremes into the political mainstream, while facilitating alternation in power, which is essential to any democracy’s dynamism; a system in which a large centrist party remained permanently in power would be far less desirable.
Those, like Monti, who want to mount a challenge from the center, however personally impressive they may be, have steep obstacles to overcome, and for good reasons.
Emerging-Market Resilience
NEW YORK – With most of the world focused on economic instability and anemic growth in the advanced countries, developing countries, with the possible exception of China, have received relatively little attention.
But, as a group, emerging-market economies have been negatively affected by the recent downturn in developed countries.
Can they rebound on their own?
The major emerging economies were the world’s main growth engines following the eruption of the financial crisis in 2008, and, to some extent, they still are.
But their resilience has always been a function of their ability to generate enough incremental aggregate demand to support their growth, without having to make up for a large loss of demand in developed countries.
A combination of negligible (or even negative) growth in Europe and a significant growth slowdown in the United States has now created that loss, undermining emerging economies’ exports.
Europe is a major export destination for many developing countries, and is China’s largest foreign market. China, in turn, is a major market for final products, intermediate goods (including those used to produce finished exports), and commodities.
The ripple effect from Europe’s stalling economy has thus spread rapidly to the rest of Asia and beyond.
Moreover, not only is the tradable sector of Japan’s economy highly vulnerable to a slowdown in China, but the recent conflict over the Senkaku/Diaoyu Islands raises the prospect of economic decoupling.
Apart from that, Japanese economic performance is set to remain weak, because the non-tradable side is not a strong growth engine.
The key questions for the world economy today, then, are how significant the growth slowdown will be, and how long it will last.
With wise policy responses, the impact is likely to be relatively mild and short-lived.
One key issue clouding the future is trade finance.
European banks, traditionally a major source of trade finance, have pulled back dramatically, owing to capital-adequacy problems caused by sovereign-debt capital losses and, in some cases, losses from real-estate lending.
This vacuum could reduce trade flows even if demand were present.
In Asia, especially, filling the vacuum with alternative financing mechanisms has become a high priority.
In particular, although China’s tradable sector is highly exposed to developed economies, the government is likely to accept some short-run slowdown, rather than adopting potentially distorting stimulus measures.
Given the risk of re-inflating asset bubbles, no one should expect a dramatic easing of credit of the type that followed the 2008 meltdown.
An accelerated public-investment program that avoids low-return projects is not out of the question.
But the best and most likely responses are those that accelerate domestic consumption growth by increasing household income, effectively deploy income from state-owned assets, and strengthen China’s social-security systems in order to reduce precautionary saving. Indeed, these are all key components of China’s recently adopted 12th Five-Year Plan.
Admittedly, China’s major systemic reforms await the country’s leadership transition, now expected in November.
By most accounts, the pace of reform directed at expanding the market side of the economy needs to pick up quickly to achieve the ambitious economic and social goals of the next five years.
Some countries have bucked the global trend.
Indonesia, for example, has experienced accelerating growth, with rising business and consumer confidence boosting investment to almost 33% of GDP.
Likewise, Brazil’s growth has been dented, but now looks set to recover.
Moreover, overall economic performance in Brazil masks an important fact: growth rates have been substantially higher among the country’s poorer citizens, and unemployment is declining.
The aggregate growth rate does not capture this inclusiveness, and thus understates the pace of economic and social progress.
The main challenge for Brazil is to increase its investment rate from 18% of GDP currently to closer to 25%, thereby sustaining rapid growth and economic diversification.
Commodity dependence, even with the creation of considerable domestic value added, remains high.
Economic-growth rates in other systemically large countries, including Turkey and Mexico, have risen as well, despite European and US headwinds.
Many African countries, too, are showing a broad pattern of sound macroeconomic fundamentals, durable growth acceleration, economic diversification, and investor confidence.
The outlook for India’s economy remains more uncertain.
While growth slowed recently from very high rates – owing to a combination of exposure to developed-country weakness, internal loss of reform momentum, and declining investor confidence – that trend appears to be reversing after recent decisive corrective moves by the government.
The main question is whether India’s parliament will pass crucial legislation or remain paralyzed by hyper-partisan, scandal-fueled infighting.
Combining this general picture with more general developing-country trends – rising incomes, rapid growth in middle classes, expanding trade and investment flows, bilateral and regional free-trade agreements, and a growing share of global GDP (roughly 50%) – these economies’ growth momentum should return relatively rapidly, over the next 1-2 years.
Most of the downside risk to this scenario lies in the systemically important economies of Europe, the US, and China.
To derail emerging economies’ growth momentum at this stage probably would require either an additional major demand shock from the advanced economies, or some kind of failure in China’s leadership transition that impedes systemic reform and affects the country’s growth.
Notwithstanding low growth forecasts for the entire developed world, these systemic risks, taken individually and in combination, appear to be declining (though certainly not to the point that they can be dismissed).
On balance, then, the multispeed growth patterns of the past decade are likely to continue.
Even as the developed economies experience an extended period of below-trend growth, the emerging economies will remain an important growth engine.
Why Did Economists Not Foresee the Crisis?
CHICAGO – At the height of the financial crisis, the Queen of England asked my friends at the London School of Economics a simple question, but one for which there is no easy answer: Why did academic economists fail to foresee the crisis?
Several responses to that query exist.
One is that economists lacked models that could account for the behavior that led to the crisis.
Another is that economists were blinkered by an ideology according to which a free and unfettered market could do no wrong.
Finally, an answer that is gaining ground is that the system bribed economists to stay silent.
In my view, the truth lies elsewhere.
It is not true that we academics did not have useful models to explain what happened.
If you believe that the crisis was caused by a shortage of liquidity, we had plenty of models analyzing liquidity shortages and their effects on financial institutions.
If you believe that the blame lies with greedy bankers and unthinking investors, lulled by the promise of a government bailout, or with a market driven crazy by irrational exuberance, we had studied all this too, in great detail.
Economists even analyzed the political economy of regulation and deregulation, so we could have understood why some US politicians pushed the private sector into financing affordable housing, while others deregulated private finance.
Yet, somehow, we did not bring all this understanding to bear and collectively shout our warnings.
Perhaps the reason was ideology: we were too wedded to the idea that markets are efficient, market participants are rational, and high prices are justified by economic fundamentals.
But some of this criticism of “market fundamentalism” reflects a misunderstanding.
The dominant “efficient markets theory” says only that markets reflect what is publicly known, and that it is hard to make money off markets consistently – something verified by the hit that most investor portfolios took in the crisis.
The theory does not say that markets cannot plummet if the news is bad, or if investors become risk-averse.
Critics argue that the fundamentals were deteriorating in plain sight, and that the market (and economists) ignored it.
But hindsight distorts analysis.
We cannot point to a lonely Cassandra like Robert Shiller of Yale University, who regularly argued that house prices were unsustainable, as proof that the truth was ignored.
There are always naysayers, and they are often wrong.
There were many more economists who believed that house prices, though high, were unlikely to fall across the board.
Of course, these expectations could have been distorted by ideology – it is hard to get into the past minds of economists.
But there is a better reason to be skeptical of explanations relying on ideology.
As a group, neither behavioral economists, who think that market efficiency is a joke, nor progressive economists, who distrust free markets, predicted the crisis.
Could it be corruption?
Some academic economists consult for banks or rating agencies, give speeches to investor conferences, serve as expert witnesses, and carry out sponsored research.
It would be natural to suspect us of bias.
The bias could be implicit: our worldview is shaped by what our friends in industry believe.
Or it may be an explicit bias: an economist might write a report that is influenced by what a sponsor wants to hear, or give testimony that is purely mercenary.
There are enough instances of possible bias that the issue cannot be ignored.
One remedy would be to ban all interaction between economists and the corporate world.
But if economists were confined to the ivory tower, we might be unbiased, but we would also be ignorant of practicalities – and thus even less capable of predicting problems.
One way to restore trust may be disclosure – for economists to declare a monetary interest in a particular analysis and, more generally, to explain who pays us.
A number of universities are moving in this direction.
But I believe that corruption is not the main reason that the profession missed the crisis.
Most economists have very little interaction with the corporate world, and these “unbiased” economists were no better at forecasting the crisis.
I would argue that three factors largely explain our collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.
Like medicine, economics has become highly compartmentalized – macroeconomists typically do not pay attention to what financial economists or real-estate economists study, and vice versa.
Yet, to see the crisis coming would have required someone who knew about each of these areas – just as it takes a good general practitioner to recognize an exotic disease.
Because the profession rewards only careful, well-supported, but necessarily narrow analysis, few economists try to span sub-fields.
Even if they did, they would shy away from forecasting.
The main advantage that academic economists have over professional forecasters may be their greater awareness of established relationships between factors.
What is hardest to forecast, though, are turning points – when the old relationships break down.
While there may be some factors that signal turning points – a run-up in short-term leverage and asset prices, for example, often presages a bust – they are not infallible predictors of trouble to come.
The meager professional rewards for breadth, coupled with the inaccuracy and reputational risk associated with forecasting, leads to disengagement for most academics.
And it may well be that academic economists have little to say about short-term economic movements, so that forecasting, with all its errors, is best left to professional forecasters.
The danger is that disengagement from short-term developments leads academic economists to ignore medium-term trends that they can address.
If so, the true reason why academics missed the crisis could be far more mundane than inadequate models, ideological blindness, or corruption, and thus far more worrisome; many simply were not paying attention!
Malala’s Revolution
ISLAMABAD – The men who attempted to kill 14-year-old Malala Yousafzai on October 9 knew what she represented.
Her active involvement since the age of eleven in campaigning for the rights of girls in her region to be educated was well known.
Malala’s efforts, while applauded by the West and some segments of Pakistani society, were deeply resented by the obscurantist forces that go by the name of the Taliban, which in Pakistan calls itself Tehrik-e-Taliban Pakistan.
Their choice of name is an ironic one, for Taliban, an Arabic word, means those seeking to be educated, whereas the Taliban’s principal aim is to keep Muslim societies backward so that they can be persuaded to adopt a seventh-century version of Islam.
Education, particularly of women, stands in the way of achieving this goal.
But the attack on Malala will, most likely, have an effect that is opposite to that intended by those who carried it out.
Several religious leaders joined the chorus of condemnation that followed the attack on Malala.
In a sign of unity, a council of Sunni Muslim scholars in the eastern city of Lahore issued a fatwa, signed by 50 clerics, saying that the justifications cited by the girl’s attackers were “deviant” and had no basis in Islamic law.
The Taliban seem to have been taken aback by the public and media reaction to the attack.
Dawn, Pakistan’s largest-circulation English-language newspaper, reported that Hakimullah Mehsud, the Pakistani Taliban’s leader, had ordered his foot soldiers to target media organizations in Karachi, Lahore, Rawalpindi, and Islamabad in response.
Several TV channels had been extremely critical of the Taliban’s assaults on Pakistani society.
The extremists wanted to silence the majority that was waking up to the existential threat that radical Islam poses to their country.
There is a widespread belief that Pakistani women are doing poorly when it comes to obtaining education.
That impression is correct to some extent.
The overall literacy rate for women is undoubtedly low – much lower than that for men.
But male education and literacy in Pakistan is not very high, either.
Although Pakistan is a signatory to the United Nations Millennium Development Goals, which include attainment of universal literacy for both boys and girls by 2015, the country is far from achieving the target, with literacy rates of 70% for boys and only 45% for girls in 2010.
That said, over the 17-year period from 1993 to 2010, the number of girls enrolled in primary education increased from 3.7 million to 8.3 million.
This implies a rate of growth of 6.7% a year, about 2.5 times the rate of increase in the number of girls entering the primary-school age cohort.
But, even with this growth rate, girls still accounted for just 44.3% of the total number of enrolled students in 2010.
It is in higher education that Pakistani women have made extraordinary progress in recent years.
Their share of total college enrollment has increased from 36% to 57% over the last couple of decades, rising from less than 15,000 in 1993 to 436,000 in 2010.
The proportion of women receiving higher education is approaching the 60% mark, owing to an impressive 28% annual rate of growth in their enrollment numbers in 2010, up from a 20% increase in 1993.
Although a very large number of girls drop out after primary school, the number completing higher education is now large.
This year, roughly 750,000 women will graduate from Pakistan’s institutions of higher learning.
If the current rate of growth is maintained, by 2015 the number of women completing higher education could exceed 1.5 million a year.
Had Malala died, she eventually would have been forgotten – another victim of the war that the extremists are waging in Pakistan.
Her death would have added just one more individual to the tens of thousands who have already been killed in terrorist attacks across the country.
Malala’s survival – and possibly even full recovery – provides a vibrant symbol for a troubled country.
She will begin to be identified with the change that is already underway.
It is not often recognized that women in Pakistan – at least those of a certain class – are receiving the kind of education that enables them to enter the modern sectors of the economy or to become entrepreneurs.
In education, numbers make a revolution.
Why Do Economies Stop Growing?
MILAN – Over the years, advanced and developing countries have experimented, sometimes deliberately and frequently inadvertently, with a variety of approaches to growth.
Unfortunately, many of these strategies have turned out to have built-in limitations or decelerators – what one might call elements of unsustainability.
And avoiding serious damage and difficult recoveries requires us to get a lot better at recognizing these self-limiting growth patterns early on.
Here are some of the items in a growing library of decelerating growth models.
In developing countries, import substitution as a way to jump-start economic diversification can work for a while; but, over time, as productivity growth lags and comparative advantage is over-ridden, growth grinds to a halt.
Small, open economies are naturally somewhat specialized, which leaves them vulnerable to shocks and volatility.
But, in terms of growth and living standards, the cost of economic diversification, when implemented by protecting domestic industries from foreign competition, eventually outweighs the benefits.
It is better to allow specialization, and build effective social safety nets and support systems to protect people and families during economic transitions.
Such “structural flexibility” is better adapted to enabling the broad changes that rapidly evolving technological and global economic forces require.
Mismanagement of natural-resource wealth underpins an especially potent self-limiting pattern of growth and development.
If invested in infrastructure, education, and external financial assets, natural-resource revenues can accelerate growth.
But, too often, such revenues distort economic incentives, which come to favor rent-seeking and interfere with the diversification that is essential for growth.
More recently, many advanced countries have discovered a “new” set of growth models with built-in structural limitations: excessive private or public consumption, or both, usually accompanied and enabled by rising debt and inflated asset prices, and a corresponding decline in investment.
This approach appears to work until domestic aggregate demand can no longer sustain growth and employment, at which point it ends in either gradual stagnation or a violent financial and economic crisis.
(In fact, many developing countries have learned this the hard way, but the lessons seem not to have crossed over to advanced countries.)
But the opposite of the excessive-consumption model – excessive reliance on investment to generate aggregate demand – is also a self-limiting growth pattern.
When the private and social returns of investment diminish too much, growth cannot be sustained indefinitely, even though rising investment rates can sustain aggregate demand for a while.
Altering this growth pattern is a significant part of the challenge that China now faces.
Rising inequality in either opportunity or outcomes (and often both) also poses threats to the sustainability of growth patterns.
While people in a wide range of countries accept some degree of market-determined income variation, based on differential talents and personal preferences, there are limits.
When they are breached, the typical result is a sense of unfairness, followed by resistance and, ultimately, political choices that address the inequality, though sometimes in counter-productive, growth-impeding ways.
Perhaps the largest long-run sustainability issue concerns the adequacy of the global economy’s natural-resource base: output will more than triple over the coming two or three decades, as high-growth developing economies’ four billion people converge toward advanced-country income levels and consumption patterns.
Existing economic-development strategies will require significant adaption to accommodate this kind of growth.
Some adaptation will occur naturally, as rising energy and other commodity prices generate incentives to economize or seek alternatives.
But the un-priced environmental externalities – global warming and water depletion, for example – will require serious attention, not myopic, reactive mindsets and approaches.&nbsp;
All of these self-limiting growth patterns tend to have three things in common. First, in one or several dimensions, some part of the economy’s base of tangible, intangible, and natural-resource assets is being run down.
I would include social cohesion as part of the asset base: it is the one that is depreciated by excessive inequality.
Measurement issues play an important role here.
It is easier to run down something that is partly invisible because it is not regularly or effectively measured.
Expanded measurement of the dimensions of economic, social, and environmental performance is necessary to broaden awareness of sustainability issues. &nbsp;
Second, unidentified self-limiting growth patterns produce very bad results.
Expectations come to exceed reality, and resetting the system to a sustainable growth pattern is difficult.
After all, past investment shortfalls have to be made up and future-oriented investments undertaken simultaneously – a double burden that must be borne by the current generation.
An inability to resolve the distributional and fairness problem can produce gridlock, paralysis, and prolonged stagnation.
Finally, many of these flawed growth patterns involve fiscal distress.
Contrary to the prevailing wisdom nowadays, some degree of Keynesian demand management in the transition to a more sustainable growth pattern is not in conflict with restoring fiscal balance over a sensible time period.
On the contrary, applied both individually and together, fiscal stimulus and consolidation are necessary parts of the adjustment process.
But they are not sufficient.
The crucial missing pieces are a shift in the structure of accessible aggregate demand and restoration of those parts of the economy’s asset base that have been run down, implying the need for structural change and investment.
Why Does Pain Hurt?
Pain is a familiar experience for everyone, but its nature remains a troubling enigma for sufferers and scientists alike.
Why do different patients who undergo the same surgical procedure experience markedly different post-operative pain?
How is it that people with little or no medical explanation for a persistent pain become partially or totally disabled by it, even with extensive and resourceful treatment?
Many doctors would like to think of pain as a simple sensation that usefully calls disease or injury to our attention.
But pain resists explanation as a simple sensation, just as music resists explanation as simple tones.
A contemporary non-medical writer described the qualities of intense pain as including extreme unpleasantness, an ability to annihilate complex thoughts and other feelings, an ability to destroy language, and a strong resistance to objectification.
She reminds physicians that, for the person suffering intense pain, what dominates awareness above all else is a powerful negative emotion.
Most of the time, pain occurs after simple nerve endings detect tissue injury in various ways and generate signals that travel to the spinal cord and from there to the brain.
For many years, scientists thought that these signals traveled along a few well-defined routes to reach a relay station in the brain called the thalamus.
From there, scientists believed, the signals went on to the part of the brain's cortex that managed body awareness, and somehow the cortex turned them into conscious experience.
Unfortunately, the neural roadmap for sensory messages of tissue injury explains only a part of how we experience pain.
It cannot explain why pain involves emotion and cognition.
Psychologists are quick to point out that whenever humans experience strong emotions, cognitions--thoughts, memories, expectations, beliefs, and interpretation of the situation--help form the experience.
In other words, pain may begin with a neural message of tissue injury or disease, but it is the end product of complex events within the brain.
The conscious experience of pain involves emotion and cognition as well as sensation.
We always experience pain as a distressing thing happening in some part of the body, in some particular circumstance, and usually it has a particular meaning.
New evidence points to more complex mechanisms for pain that involve higher levels of the brain.
Injury messages, it seems, travel to many brain structures, not just to sensation-generating areas.
Some injury messages directly excite brain structures that produce emotion, and these in turn stimulate areas of the brain that create the meaning of the immediate situation.
Pain emerges into awareness only after sensory, emotional, and cognitive processes have combined to form a coherent, integrated pattern of experience.
Studies of functional brain imaging in people experiencing pain tend to confirm this view.
As we might expect, sensation-generating areas are active, but so are structures in emotion-generating areas of the brain and structures related to attention and thinking.
Even motor structures that enable so-called "fight or flight" responses to a dangerous situation become active.
Such studies show that simple signals of tissue injury generate many simultaneous brain processes.
These processes combine to produce the private and unpleasant bodily awareness that we call pain.
Because emotions and cognitions are an intrinsic part of the experience of pain, people differ greatly in their responses to a common injury, such as a standard surgical operation.
Individual memory, beliefs, cultural background, and personal meaning all shape pain, so that an injury that is horrible to one person can be a minor discomfort to another.
Psychological researchers are beginning to investigate why individual patients form the experience of pain differently when they experience similar tissue injury.
Why seemingly healthy body areas can hurt persistently, and thereby disable a person, still eludes explanation.
Some researchers are finding that long-lasting injury signals in neural pathways can change the way those pathways function, and over long periods of time, relentless signals of injury can even alter neural structures themselves.
The altered parts of the nervous system might keep generating injury messages, even after the original injury has healed.
Other researchers apply the same principle to higher levels of the brain.
Memory of tissue injury rather than new messages of injury might contribute to the formation of pain, and in this way the brain might continuously create pain in the absence of its original cause.
Alternatively, the brain might turn minor signaling of tissue injury into a major pain by mixing cognitive and emotional memories into the formation of the pain experience.
Research on pain is progressing on many fronts.
Perhaps the most challenging is that of understanding how the brain integrates sensory, emotional, and cognitive processes when an injury occurs to form the complex bodily awareness that we know as pain.
Unlocking this secret may help doctors prevent, treat, or eliminate some chronic pain disorders.
Why Do Jews Succeed?
WASHINGTON , DC – In recent decades, economists have been struggling to make use of the concept of human capital, often defined as the abilities, skills, knowledge, and dispositions that make for economic success. Yet those who use the term often assume that to conceptualize a phenomenon is a first step to manipulating it.
Simon Kuznets, one of the twentieth century’s great economists, was a pioneer of human-capital theory. Not long before he died, Kuznets recommended to a young colleague that one ought study the role of Jews in economic life.
By and large, economists and other social scientists have neglected the history of Jews and capitalism, for reasons that are understandable, though unconvincing. For most economists, the extent to which modern capitalism has been shaped by earlier cultural predispositions is a source of puzzlement at best, if not merely a factor to be dismissed.
When economists examine “human capital,” they prefer measurable criteria such as years of schooling. To the extent that human capital involves character traits and varieties of “know-how” that are transmitted within the realms of the family and the community, rather than by formal education, it becomes both methodologically elusive and difficult to manipulate by public policy.
A look at the historical experience of the Jews shows that while most Jews were mired in poverty at the beginning of the twentieth century, over time they tended to do disproportionately well in societies that allowed them to compete on an equal basis. That was the case first in central and western Europe, and then in the United States.
In search of economic niches not already occupied by others, Jews frequently created markets for new products and services. They pioneered new retail institutions, from department stores to box stores.
The fastest growing sectors of the economy since the late nineteenth century have been those loosely classified as “service industries,” often involving the dissemination of information and entertainment – activities in which Jews have been especially prominent, from publishing to vaudeville and from movies to commercial sports. They also tended to do disproportionately well in the learned professions – such as medicine, law, and accounting – that are so central to modern capitalist society.
The fact that Jews were long a minority subject to discrimination is sometimes given as a reason for their tendency to devote themselves to commerce, finance, and the professions. Yet not all minorities long subject to discrimination necessarily succeed under conditions of market competition.
There are a number of ways to account for Jews’ disproportionate achievement. For one thing, Jews had more experience with commerce than most other groups, and the tacit knowledge of buying, selling, and calculating advantage that was passed on in families with ties to business helps explain why Jews tended to be better at it.
Moreover, in much of Europe, Jews had long been excluded from most of the established economy of land ownership, and from many other fields that were reserved for Christians. So they learned to be on the lookout for new opportunities in underserved markets, working as peddlers, for example, or creating new products, or new forms of marketing.
Jews were spread across many countries, but to some extent shared a common language and a sense of common fate. So they were more aware of distant opportunities, had more international contacts, and were disproportionately active in international trade.
In addition, Jews had a religious culture that promoted universal adult literacy – at least for men – and a culture that respected book learning. Those attitudes and dispositions were transferred from religious texts to secular forms of education.
Such factors provide a sense of why attention to the history of Jews under capitalism helps us to understand capitalism more generally. It reminds us that much of success in a capitalist society is based on cultural and historical factors that produce qualities such as innovativeness, willingness to tolerate risk, and willingness to defer gratification through savings and education.
These cultural traits are difficult to quantify, so economists are uncomfortable in dealing with them. They are often passed down within families, so they elude social policies that are based on the notion that equality of opportunity can be created by government action.
Exploring the economic history of the Jews also reminds us that groups that are disproportionately successful are met by different political reactions. Societies long oriented to economic dynamism tend to welcome the economically successful, viewing them as a source of mutual gains.
But cultures that tend to resent the economically successful – either as an affront to equality, or on the implicit assumption that the economic gains of some must be at the expense of others – tend to be more hostile toward Jews and given to conspiratorial theories to explain their economic success. Most societies lie somewhere along a spectrum between these two poles.
Some social scientists are wary of calling attention to the reality of disproportionate Jewish economic success for fear of arousing anti-Semitism, or contributing to conspiratorial theories about Jewish economic dominance. No doubt, conspiratorial minds will always find fodder for their obsessions.
Why Do Smart People Live Longer?
EDINBURGH – People with higher intelligence test scores in childhood and early adulthood tend to live longer.
This result has been found among people from Australia, Denmark, England and Wales, Scotland, Sweden, and the United States. In fact, it has been found within every population that has been studied.
Indeed, the impact of intelligence on mortality rivals well-known risk factors for illness and death, such as high blood pressure, being overweight, high blood glucose, and high cholesterol.
Its effect is almost as important as that of smoking.
Differences in human intelligence have environmental and genetic causes.
An intelligence test score in early life is partly a record of what the environment has wrought on the brain and the rest of the body up to that time.
Babies who have lower birth weights, for example, are more prone to chronic illnesses later in life.
They also have, on average, slightly lower intelligence.
But tests of whether birth weight might explain some of the link between intelligence and mortality have found no connection.
Parents’ occupations are also related to their child’s intelligence and later risk of illness: children from more privileged backgrounds tend to have higher intelligence and better health, and to live longer.
However, there is no convincing evidence that parental background explains the link between higher intelligence and longer life.
Other researchers have viewed intelligence test scores as possibly more than just an indicator of an efficient brain.
After all, the brain is just one organ of the body, so people whose brains work well in early life may also have other organs and systems that are more efficient than others’.
But this “system integrity” idea is somewhat vague and difficult to test.
The best we have done to date has been to examine whether people’s reaction speeds are related to intelligence and to mortality.
They are.
Reaction-time tests involve little thinking, and merely ask people to respond as fast as they can to simple stimuli.
People who react faster have, on average, higher intelligence scores and live longer.
But we need to think of better measures of the body’s integrity to test this idea more fully.
A third potential explanation is that intelligence is about good decision-making.
Every day, as we live our lives, we make decisions about our health: what, when, and how much to eat; how much exercise to take; how to look after ourselves if we have an illness; and so forth.
Therefore, the reason that intelligence and death are linked might be that people with higher intelligence in childhood make better decisions about health, and have healthier behaviors.
As adults, they tend to have better diets, exercise more, gain less weight, have fewer hangovers, and so on.
So far, so good.
But we do not yet have the full story.
There have not been any studies with data on childhood intelligence, lots of subsequent data on adult health behaviors, and then a long-term follow-up for deaths.
And only such a study could tell us whether it is these healthy behaviors that explain the link between intelligence and death.
A fourth type of explanation is that people with higher intelligence in childhood tend to attain better educational qualifications, work in more professional jobs, have higher incomes, and live in more affluent areas.
These variables are related to living longer, too.
So, perhaps that’s it: higher intelligence buys people into safer and more health-friendly environments.
Certainly, in some studies, social class in adulthood seems to explain a lot of the link between intelligence and death.
The problem is that this “explanation” is statistical.
We are still not sure whether, say, education and occupation “explain” the effect of intelligence on health, or whether they are, in effect, merely surrogate measures of intelligence.
Researchers have also searched for clues about the intelligence-mortality link in specific types of death.
This has been revealing.
Lower intelligence in early life is associated with a greater likelihood of dying from, for example, cardiovascular disease, accidents, suicide, and homicide.
The evidence for cancer is less certain.
As we have come across these specific findings, we have realized that each link might need a different explanation.
Finally, we know that how intelligent we are and how long we shall live are caused by both environmental and genetic influences.
There are experimental designs, using twins, that can find out the extent to which intelligence and mortality are linked because they share environmental and genetic influences.
Among the most informative exercises we can undertake in cognitive epidemiology is to obtain a large group of twins on whom there is data on early-life intelligence and who were tracked for a long time to find out who had died.
We haven’t yet come across a large enough group of twins with such data.
Finding one is a priority.
The ultimate aim of this research is to find out what intelligent people have and do that enables them to live longer.
Once we know that, we will be able to share and apply that knowledge with the aim of achieving optimal health for all.
Growth Out of Time
CAMBRIDGE – Robert Gordon of Northwestern University is a distinguished economist whose work in macroeconomics and studies of long-term economic growth have properly earned him high regard.
So his recent exercise in speculative future history, which asks whether economic growth in the United States has come to an end, has attracted much favorable attention.
But a basic flaw in Gordon’s argument is immediately apparent – and becomes glaringly so on closer examination.
Gordon distinguishes three Industrial Revolutions that have driven economic growth and improved living standards since the eighteenth century: IR #1 (“steam, railroads”), whose defining inventions date from 1750 to 1830;
IR #2 (“electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum”), whose defining inventions date from 1870 to 1900; and IR #3 (“computers, the web, mobile phones”), dating from 1960.
The core of his article contrasts the transformational impact of IR #1 and, especially, IR #2 on per capita GDP and the quality of life with the relatively trivial consequences of IR #3.
The vulnerability of Gordon’s argument is his shortened time horizon for IR #3. Consider the following four sentences in his paper:
·&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; “Both the first two revolutions required about 100 years for their full effects to percolate through the economy.”
·&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; “At a minimum, it took 150 years for IR #1 to have its full range of effects.”
·&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; “The inventions of IR #2 were so important…that they took a full 100 years to have their main effect.”
·&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; “…[T]he productivity impact of IR #3 evaporated after only eight years, compared to the 81 years (1891-1972) required for the benefits of IR #2 to have their full impact…”
The last sentence is crucial: Gordon cuts off IR #3 circa 2005 – that is, 45 years from its onset, but less than half the time allowed for IR #1 and IR #2 to run their respective courses.
To take a salient example from the prior industrial revolutions, this is as if the impact of the railroads on the US economy were to be measured as of 1873, 45 years after construction began on America’s first line, the Baltimore &amp; Ohio.
In 1873, the retailer Montgomery Ward was just a year old, and the first Sears Roebuck catalogue was still 20 years away.
Together, these companies invented mail order as the “killer app” of the railroad age, creating a continental market for consumer goods, with all of the economies of scale that followed.
Or, to take another example, what if we stopped measuring the economic impact of electrification only 45 years after the first generating plant, Thomas Edison’s Pearl Street Station, became operational in 1882?
At that point, America’s manufacturing industries were just discovering the benefits of flexible (re)configuration, which enabled distribution of generated electric power, while America’s home-appliance industry was in its infancy.
Gordon asserts that “the era of computers replacing human labor was largely over” during the past decade.
Innovation in information and communications technology (ICT) focused first on electronic commerce, “itself largely completed by 2005.” After that, “labor-saving innovation” took a back seat to “a succession of entertainment and communication devices that do the same things as we could do before, but now in smaller and more convenient packages.”
In thus truncating and trivializing the ongoing ICT revolution, Gordon misses two fundamental processes.
First, and most evident, the rise of e-commerce is far from over.
In the US, the most advanced country in this respect, e-commerce has just reached 10% of total retail spending, and is continuing to grow at double-digit rates through the slow recovery from the Great Recession.
At the same time, something much more significant is happening beneath the economic surface.
From the early days of the computer revolution, researchers and popularizers envisioned “artificial intelligence” as the ultimate killer app (literally, in the case of the computer HAL in the film 2001: A Space Odyssey).
Decades of frustration are now yielding to success: the application of sophisticated statistical techniques to the accelerating accumulation of unprecedented quantities of so-called Big Data that the Internet simultaneously generates and captures.
For proof of artificial intelligent “life,” consider the “virtual assistants” populating smart phones, beginning – but just beginning – with Apple’s Siri.
The next wave of IR #3’s consequences can be discerned in systems that capture the intention behind a search request and couple it to a completed transaction, and in the application of predictive analytics to industrial supply chains and service provisioning.
If these innovations’ prospective impact on productivity and GDP growth cannot be quantified, well, that is the way it is with future history.
Flawed as Gordon’s reading of IR #3 is, his concluding concern for the future of innovation in the US is well founded.
Of the assorted “headwinds” that he cites, the enormous increase in inequality and the plateau reached in educational attainment represent threats that differentiate America’s position from that of other advanced countries.
But Gordon ignores the greatest threat to continued US global leadership in innovation: the delegitimation over the past generation of the state’s role as an economic actor.
As I illustrate and analyze at length in my new book, Doing Capitalism in the Innovation Economy: Markets, Speculation and the State, the state has become central to the Innovation Economy’s dynamics.
It funds the upstream research that generates discovery and invention; supports the creation of new networks, from canals to the Internet; and serves as a creative customer for innovative products, as it did during the computer revolution’s nascence.
The state must also preserve continuity in the market economy when the speculative bubble that has funded its transformation bursts.
And here, too, Gordon disappoints.
The only reference to government in his paper is not even to this stabilizing role. Rather, it is to the asserted headwind represented by the very debt incurred to prevent the global financial crisis of 2008 from triggering a second Great Depression.
The Truth About Sovereignty
CAMBRIDGE – In the French parliament’s recent debate on Europe’s new fiscal treaty, the country’s Socialist government vehemently denied that ratification of the treaty would undermine French sovereignty.
It places “not one constraint on the level of public spending,” Jean-Marc Ayrault, the prime minister, asserted. “Budget sovereignty remains in the parliament of the French Republic.”
As Ayrault was trying to reassure his skeptical colleagues, including many members of his own party, European Commissioner for Competition Joaquin Almunia was delivering a similar message to his fellow social democrats in Brussels.
To succeed, he argued, Europe must prove wrong those who believe there is a conflict between globalization and sovereignty.
Nobody likes to give up national sovereignty, least of all, it seems, politicians on the left.
Yet, by denying the obvious fact that the eurozone’s viability depends on substantial restraints on sovereignty, Europe’s leaders are misleading their voters, delaying the Europeanization of democratic politics, and raising the political and economic costs of the ultimate reckoning.
The eurozone aspires to full economic integration, which entails the elimination of transaction costs that impede cross-border commerce and finance.
Obviously, it requires that governments renounce direct restrictions on trade and capital flows.
But it also requires that they harmonize their domestic rules and regulations –&nbsp;such as product-safety standards and bank regulations – with those of other member states in order to ensure they do not act as indirect trade barriers. And governments must forswear changes in these policies, lest the uncertainty itself act as a transaction cost.
This was all implicit in the European Union’s single-market initiative.
The eurozone went one step further, aiming through monetary unification to eradicate fully the transaction costs associated with national currencies and exchange-rate risk.
Simply put, the European integration project has hinged on restrictions on national sovereignty.
If its future is now in doubt, it is because sovereignty stands in the way once again.
In a true economic union, underpinned by union-wide political institutions, the financial problems of Greece, Spain, and the others would not have blown up to their current proportions, threatening the existence of the union itself.
Consider the United States.
No one even keeps track of, say, Florida’s current-account deficit with the rest of the country, although we can safely guess that it is huge (since the state is home to many retirees living off benefits that come from elsewhere).
When Florida’s state government goes bankrupt, Florida’s banks continue to operate normally, because they are under federal rather than state jurisdiction.
When Florida’s banks go belly-up, state finances are insulated, because the banks are ultimately the responsibility of federal institutions.
When Florida’s workers become unemployed, they get unemployment checks from Washington, DC.
And when Florida’s voters are disenchanted about the economy, they do not riot outside the state capital; they put pressure on their representatives in Congress to push for changes in federal policies.
Nobody would argue that US states have an abundance of sovereignty.
The relationship between sovereignty and democracy is also misunderstood.
Not all restrictions on the exercise of sovereign power are undemocratic.
Political scientists talk about “democratic delegation” – the idea that a sovereign might want to tie its hands (through international commitments or delegation to autonomous agencies) in order to achieve better outcomes.
The delegation of monetary policy to an independent central bank is the archetypal example: in the service of price stability, daily management of monetary policy is insulated from politics.
Even if selective limitations on sovereignty may enhance democratic performance, there is no guarantee that all limitations implied by market integration would do so.
In domestic politics, delegation is carefully calibrated and restricted to a few areas where the issues tend to be highly technical and partisan differences are not large.
A truly democracy-enhancing globalization would respect these boundaries.
It would impose only those limits that are consistent with democratic delegation, possibly along with a limited number of procedural norms (such as transparency, accountability, representativeness, use of scientific evidence, etc.) that enhance democratic deliberation at home.
As the American example illustrates, it is possible to give up on sovereignty –&nbsp;as Florida, Texas, California, and the other US states have done –&nbsp;without giving up on democracy.
But combining market integration with democracy requires the creation of supranational political institutions that are representative and accountable.
The conflict between democracy and globalization becomes acute when globalization restricts the domestic articulation of policy preferences without a compensating expansion of democratic space at the regional/global level.
Europe is already on the wrong side of this boundary, as the political unrest in Spain and Greece indicates.
That is where my political trilemma begins to bite: We cannot have globalization, democracy, and national sovereignty simultaneously.
We must choose two among the three.
If European leaders want to maintain democracy, they must make a choice between political union and economic disintegration.
They must either explicitly renounce economic sovereignty or actively put it to use for the benefit of their citizens.
The first would entail coming clean with their own electorates and building democratic space above the level of the nation-state.
The second would mean giving up on monetary union in order to be able to deploy national monetary and fiscal policies in the service of longer-term recovery.
The longer this choice is postponed, the greater the economic and political cost that ultimately will have to be paid.
Economic Policy’s Narrative Imperative
WASHINGTON, DC – The best advice I received when taking up policymaking responsibilities in Turkey more than a decade ago was to take “a lot of time and care to develop and communicate the ‘narrative’ to support the policy program that you want to succeed.” The more that economic policy is subject to public debate – that is, the more democracy there is – the more important such policy narratives are.
The crisis faced by the European Union and the eurozone is a telling example of the need for a narrative that explains public policy and generates political support for it.
A successful narrative can be neither too complicated nor simplistic.
It must capture the imagination, address the public’s anxieties, and generate realistic hope.
Voters often sense cheap populism.
European Central Bank President Mario Draghi provided such a narrative to the financial markets last July.
He said that the ECB would do everything necessary to prevent the disintegration of the euro, adding simply: “Believe me, it will be enough.”
With that sentence, Draghi eliminated the perceived re-denomination tail risk that was highest in the case of Greece, but that was driving up borrowing costs in Spain, Italy, and Portugal as well.
It was not a populist message, because the ECB does indeed have the firepower to buy enough sovereign bonds on the secondary market to put a ceiling on interest rates, at least for many months.
Central bankers, more generally, are typically able to provide short- or medium-term narratives to financial markets.
US Federal Reserve Board Chairman Ben Bernanke provided his own by pledging that US short-term interest rates would remain very low, and the Bank of Japan’s new chairman, Haruhiko Kuroda, has just provided another by saying that he will double the money supply so that inflation reaches 2%.
While central bankers can provide such narratives to financial markets, it is political leaders who must provide the overall socioeconomic messages that encourage long-term real investment, electoral support for reform, and hope for the future.
Central bank alchemy, to borrow a term from the US journalist Neil Irwin’s new book, has its limits.
Europe, in particular, needs a narrative of long-term hope that will trigger a real recovery.
France is coming closer to the danger zone, and even Germany’s annual GDP growth is falling well below 1% per year.
In the meantime, the easing of sovereign interest-rate spreads provides little comfort to the growing army of unemployed in southern Europe, where youth unemployment has reached dramatic heights – close to 60% in Greece and Spain, and almost 40% in Italy.
The narrative should address three essential questions.
How can the European model of strong social solidarity and security be reformed, but endure?
How can economic growth be revived and sustained throughout the EU?
And how can Europe’s institutions function with enhanced legitimacy to accommodate countries that share the euro and others that retain their national currencies?
For starters, a revolution is required in the organization of work, learning, and leisure.
Social solidarity, essential to European identity, can and must include longer work lives, but also more work-sharing, adult learning, and shorter average work weeks (particularly close to retirement).
Such flexibility requires the consent of all: employees must adjust to changing requirements; employers must re-organize their enterprises to allow more work-sharing, work from home, and learning intervals; and governments must overhaul taxes, income support, and regulation to promote a “flex-solidarity revolution” that encourages personal choice and responsibility, while remaining committed to social cohesion.
This can lead to a better future for all, with citizens gaining better access to adult education, having more free time to pursue personal interests, and remaining productive and occupationally engaged far longer into their healthy lives.
Europe does not need Asia’s rates of economic growth.
It can secure decent jobs and prosperity, with a sustained annual growth rate of around 2%.
To achieve that, German voters should be told not that their country’s resources will forever flow to Spain, but that their wages can rise at twice the rate of the recent past without risking inflation or a current-account deficit, because Germany has the world’s largest external surplus.
Service-sector industries throughout the EU must be opened up.
The countries with stronger fiscal positions should take the lead in a major pan-European skill-upgrading program.
The number of pan-European scholarships should be doubled.
School programs everywhere should aim to educate trilingual citizens.
Moreover, a full European banking union with shared resources for resolution should be created without further delay.
The European Investment Bank, which received a significant capital increase in 2012, should add a large investment-support program for medium-size enterprises to its current operations, with a subsidy financed from the European budget to encourage first-time job takers for a limited period.
Jobs and training for young people must be the centerpiece for the new growth pact, and projects must move ahead in “crisis mode,” rather than according to business as usual.
Finally, while monetary union obviously requires greater sharing of sovereignty, there should also be a “greater Europe” that includes the United Kingdom and others.
This implies two-tier institutions that can accommodate both types of countries: the “euro-ins” and those that prefer to preserve their monetary sovereignty in a larger Europe built around a vibrant single market and common democratic values.
These interconnected visions can and must be realized if Europe is to thrive again.
Together, they form a compelling narrative that European leaders must begin to articulate.
Will More Integration Save Europe’s Social Model?
BRUSSELS – At high-level gatherings of the European Union elite, one often hears the following type of statement: “Europe must integrate and centralize economic governance in order to defend its social model in an age of globalization.”
European Commission President José Manuel Barroso and his counterpart at the European Council, Herman van Rompuy, are particularly keen on this argument.
But the claim that only deeper EU integration can save the “European” social model from the onslaught of emerging markets is not true.
Yes, globalization represents a challenge to all EU member states; but it is not clear how more integration would help them to confront it.
More European economic governance is not a panacea.
In fact, it is not even clear which European social model needs to be saved.
There are enormous differences among EU members in terms of the size of their public sectors, the flexibility of their labor markets, and almost any socio-economic indicator that one can think of.
The common elements that are usually identified with the “European” social model are a quest for equality and a strong welfare state.
But neither of the main problems confronting Europe’s social-security systems – slow economic growth and aging populations (a function of low fertility) – can be addressed at the European level.
This is obvious for fertility, which is determined by deeper social and demographic trends that cannot really be influenced by government action.
And, while aging could be transformed into an opportunity if the elderly could be made more productive, this requires action at the national and societal levels, not more European integration.
It is understandable that European leaders talk so much about globalization, given that the European economy is rather open for its size, with exports amounting to about 20% of GDP, compared to just 12% in the US.
The (re-)emergence of big economies like China is thus bound to have a greater impact on Europe than on the US.
Economists long ago recognized that it is theoretically possible that the emergence of new growth poles abroad does more harm than good to an economy.
This can happen if the new economic powers are more important as competitors than they are as customers.
But this does not seem to be the case, even with respect to China.
The EU does have a bilateral trade deficit with China, but it also exports a lot to the Chinese market – much more than the US does.
More important, even if one accepts the view that globalization constitutes a threat to Europe’s social model, there is little scope for further integration, given that trade policy is already fully unified at the EU level.
In any case, the EU has generally contributed constructively to all major rounds of global trade liberalization.
With the EU helping to keep global markets open, European exports have held up rather well, with the EU maintaining its market share.
Although it has lost ground relative to the emerging markets (especially China), it has far outperformed other developed economies like the US and Japan.
This is true even in services, despite slow productivity growth in Europe.
It is thus wrong to assume that economies based on cheap labor are massively outcompeting the EU.
Moreover, this relatively good trade performance has been achieved with a much lower increase in wage inequality in Europe than in the US.
The various European social models have thus been, on average, quite robust – most likely because of the absence of a master plan from Brussels on how to respond to globalization.&#160;
Each member country has had to adapt in its own way, knowing that it could not bend the rules of the game in its own favor.
Not all succeeded; but the successes (Germany, for example) far outweigh the failures (see Greece).
The key to ensuring the future of Europe’s social-security systems, and thus its social model, is faster growth.
And, again, it is difficult to see how more Europe would improve the situation.
The obstacles to growth are well known, and have existed for a long time without being removed.
The reason is quite simple: if there were a politically easy way to generate growth, it would have been implemented already.
Moreover, most national policymakers have a tendency to blame “Brussels” for all of their difficult choices, thus creating the impression at home that the economy would improve if economic affairs could be managed without EU interference.
More integration is preached at the European level, but implicitly portrayed at home as an obstacle to growth.
This double-speak on the part of national political elites is perceived as such by voters, whose trust in both national and EU institutions is naturally declining.
The claim that Europe needs more integration to save its social model has long lost credibility.
Integration is irrelevant to that question, and, in those areas where deeper integration really would benefit Europe, it appears to be the last thing that national leaders want.
Why Eurobonds are Un-American
BRUSSELS – The emerging consensus in Europe nowadays is that only “debt mutualization” in the form of Eurobonds can resolve the euro crisis, with advocates frequently citing the early United States, when Alexander Hamilton, President George Washington’s treasury secretary, successfully pressed the new federal government to assume the Revolutionary War debts of America’s states.
But a closer look reveals that this early US experience provides neither a useful analogy nor an encouraging precedent for Eurobonds.
First, taking over a stock of existing state debt at the federal level is very different from allowing individual member states to issue bonds with “joint and several” liability underwritten by all member states collectively.
Hamilton did not have to worry about moral hazard, because the federal government did not guarantee any new debt incurred by the states.
Second, it is seldom mentioned that US federal debt at the time (around $40 million) was much larger than that of the states (about $18 million).
Thus, assuming state debt was not central to the success of post-war financial stabilization in the new country; rather, it was a natural corollary of the fact that most of the debt had been incurred fighting for a common cause.
Moreover, the most efficient sources of government revenues at the time were tariffs and taxes collected at the external border.
Even from an efficiency point of view, it made sense to have the federal government service public debt.
Federal assumption of the states’ war debts also yielded an advantage in terms of economic development: once states no longer had any debt, they had no need to raise any revenues through direct taxation, which might have impeded the growth of America’s internal market.
Indeed, after the federal government assumed the states’ debt (already a small part of the total), state revenues fell by 80-90%.
The states then became for some time fiscally irrelevant.
Finally, the key to the success of financial stabilization was a profound restructuring.
Hamilton estimated that the federal government could raise enough revenues to pay approximately 4% interest on the total amount of debt to be serviced – significantly less than the 6% yield on the existing obligations.
Holders of both state and federal bonds were thus offered a basket of long-dated bonds, some with an interest rate of 3%, and others with 6 % (with a ten-year grace period).
The basket was designed in such a way as to result in an average debt-service cost of 4%.
In modern terms, the “net present value” of the total debt (federal and state) was reduced by about one-half if one were to apply the usual exit yield of 9%.
Moreover, the new federal bonds’ very long maturities meant that there was no rollover risk.
It would have been very dangerous to expose the federal government to this danger, given that the operation was rightly perceived at the outset as extremely risky.
For the country’s first few years, debt service swallowed more than 80% of all federal revenues.
The slightest negative shock could have bankrupted the new federal government.
Fortunately, the opposite happened: federal revenues tripled under the impact of a rapid post-war reconstruction boom, and continued to grow rapidly, aided by the country’s ability to remain neutral while wars ravaged the European continent.
By contrast, growth prospects in Europe today are rather dim, and interest payments, even for Greece or Italy, account for less than 20% of total revenues.
The real problem is the rollover of existing debt in a stagnating economy.
For example, Italy will soon have a balanced budget in structural terms, but must still face the problem of refinancing old debt as it matures each year.
Assuaging doubt about the sustainability of public debt in the eurozone would thus probably require a deep restructuring as well.
The eurozone crisis could certainly be resolved if all existing public debt were transformed into 20-year Eurobonds with a yield of 3%, and a five-year grace period on debt service.
One can easily anticipate the impact that this would have on financial markets.
More interesting in view of the current situation in the eurozone is what followed roughly a half-century after Hamilton acted.
In the 1830’s and 1840’s, a number of states had over-invested in the leading transport technology of the time –&nbsp;canals.
When the canal-building boom ended, eight states and the Territory of Florida (accounting for about 10% of the entire US population at the time) were unable to service their debt and defaulted on their, mostly British, loans.
British bankers threatened that they would never again invest in these untrustworthy Americans.
They could point to the precedent set by Hamilton, and had probably invested on the implicit understanding that, if necessary, the federal government would bail out the states again.
But, despite foreign creditors’ threats, the federal government did not come to the rescue.
The bailout request did not succeed because it could not muster a simple majority of the states (represented by the Senate) and the population (represented by the House of Representatives) under the normal decision-making procedure (the “Community method,” in European Union jargon).
The defaults proved to be costly.
The 1840’s were a period of slow growth, and continued pressure from foreign creditors forced most of the official debtors to resume payments after a while.
Default was not an easy way out, and all US states (with the exception of Vermont) have since embraced balanced-budget amendments to their constitutions as a way to shore up their fiscal credibility.
Why Fair Trade?
LONDON – Historically, the term “fair trade” has meant many things.
The Fair Trade League was founded in Britain in 1881 to restrict imports from foreign countries.
In the United States, businesses and labor unions use “fair trade” laws to construct what economist Joseph Stiglitz calls “barbed-wire barriers to imports.”
These so called “anti-dumping” laws allow a company that suspects a foreign rival of selling a product below cost to request that the government impose special tariffs to protect it from “unfair” competition.
Such dark protectionist thoughts are far from the minds of the benevolent organizers of the United Kingdom’s annual “Fairtrade Fortnight,” during which I just bought two bars of fair-trade chocolate and a jar of fair-trade chunky peanut butter.
Their worthy aim is to raise the price paid to developing-country farmers for their produce by excluding the inflated profits of the middlemen on whom they depend for getting their goods to distant markets.
Fair-trade products like cocoa, coffee, tea, and bananas do not compete with domestic European production, and therefore do not have a protectionist motive.
This is how it works: In exchange for being paid a guaranteed price and meeting “agreed labor and environmental standards” (minimum wages, no pesticides), poor-country farming cooperatives receive a FAIRTRADE mark for their products, issued by the FAIRTRADE Labeling Organization.
This certification enables supermarkets and other retailers to sell the products at a premium.
Third-world farmers get a boost to their income, while first-world consumers get to feel virtuous: a marriage made in heaven.
The fair-trade movement, launched in the 1980’s, has been growing rapidly.
In a notable breakthrough in 1997, the British House of Commons decided to serve only fair-trade coffee.
By the end of 2007, more than 600 producers’ organizations, representing 1.4 million farmers in 58 countries, were selling fair-trade products.
Today, a quarter of all bananas in UK supermarkets are sold under a FAIRTRADE mark.
But FAIRTRADE-labeled products still represent a very small share – typically less than 1% – of global sales of cocoa, tea, coffee, etc.
The economic rationale for guaranteed prices is well known: stabilizing the prices of primary products, which are subject to sharp fluctuations, stabilizes their producers’ incomes.
This argument inspired proposals – most famously by John Maynard Keynes in 1942 – to create “buffer stocks” for the main commodities, which would take supply off the market when prices fell, and add to supply when prices rose.
Keynes’s proposal never made it into the Bretton Woods Agreement of 1944, and, while buffer-stock schemes re-surfaced in the 1970’s, they, too, went nowhere.
Left-wing economists like Raúl Prebisch, moreover, later advanced the theory of “declining terms of trade” for primary products: their prices’ long-run tendency to fall relative to the prices of manufactured goods.
This tendency seemed to be at work from the mid-1980’s, as commodity producers experienced a persistent decline in prices.
In addition, price fluctuations throughout that decade were huge, with dire effects on sub-Saharan African and other developing countries that were largely dependent on commodities for export earnings.
Since then, however, the price decline has been reversed.
Food commodity prices have increased by 150% since 2001.
This has raised farm producers’ income independently of the fair-trade movement’s efforts.
The “declining terms of trade” argument has collapsed.
But primary-product prices remain much more volatile than the prices of manufactured goods and services, causing large fluctuations in producers’ incomes.
This exaggerates the effects of booms and busts.
So the issue of price stabilization has not gone away.
It is difficult to see how the fair-trade movement can contribute much to solving this problem, because the only serious policy for stabilizing producers’ incomes is to control supply.
But that is beyond the scope of fair trade.
The target of all versions of fair trade is “free trade,” and the most damaging attacks on FAIRTRADE have come from free traders.
In Unfair Trade, a pamphlet published in 2008 by the Adam Smith Institute, Mark Sidwell argues that FAIRTRADE keeps uncompetitive farmers on the land, holding back diversification and mechanization.
According to Sidwell, the FAIRTRADE scheme turns developing countries into low-profit, labor-intensive agrarian ghettos, denying future generations the chance of a better life.
This is without considering the effect that FAIRTRADE has on the poorest people in these countries – not farmers but casual laborers – who are excluded from the scheme by its expensive regulations and labor standards.
In other words, FAIRTRADE protects farmers against their rivals and against agricultural laborers.
Consumers, Sidwell argues, are also being duped.
Only a tiny proportion – as little as 1% – of the premium that we pay for a FAIRTRADE chocolate bar will ever make it to cocoa producers.
Nor is FAIRTRADE necessarily a guarantee of quality: because producers get a minimum price for fair-trade goods, they sell the best of their crop on the open market.
But, despite its shaky economics, the fair-trade movement should not be despised.
While cynics say that its only achievement is to make consumers feel better about their purchases – rather like buying indulgences in the old Catholic Church – this is to sell fair trade short.
In fact, the movement represents a spark of protest against mindless consumerism, grass-roots resistance against an impersonal logic, and an expression of communal activism.
That justification will not convince economists, who prefer a dryer sort of reasoning.
But it is not out of place to remind ourselves that economists and bureaucrats need not always have things their own way.
Why Finance Can Save the Planet
PARIS – Most people hate finance, viewing it as the epitome of irresponsibility and greed.
But, even after causing a once-in-a-century recession and unemployment for millions, finance looks indispensable for preventing an even worse catastrophe: climate change.
Action is urgently needed to contain global warming and prevent a disaster for humanity; yet the global community is desperately short of tools.
There is not much support for the most desirable solutions advocated by economists, such as a global cap on greenhouse-gas emissions, coupled with a trading system, or the enforcement of a worldwide carbon price through a global tax on CO2 emissions.
Instead, negotiations for the United Nations Climate Change Conference in Paris in December are being conducted on the basis of voluntary, unilateral pledges called Intended Nationally Determined Contributions.
Although the inclusion of voluntary targets has the merit of creating global momentum, this approach is unlikely to result in commitments that are both binding and commensurate to the challenge.
That is why climate advocates are increasingly looking for other means of triggering action.
Finance is at the top of their list.
For starters, finance provides an accurate yardstick to gauge if deeds are consistent with words.
In 2011, “Unburnable Carbon,” a path-breaking report by the nongovernmental Carbon Tracker Initiative, showed that the proven fossil-fuel reserves owned by governments and private companies exceed by a factor of five the quantity of carbon that can be burned in the next 50 years if global warming is to be kept below two degrees Celsius.
Reserves held just by the 200 top publicly listed fuel companies – thus excluding state-owned producers such as Saudi Arabia’s Aramco – exceed this carbon budget by one-third.
And that means that these companies’ stock-market valuation is inconsistent with containing global warning.
This realization prompted a campaign to convince investors to divest from carbon-rich assets.
Individuals and institutions representing a $2.6 trillion portfolio have already joined the divestment movement.
Furthermore, Bank of England Governor Mark Carney has highlighted the threat represented by potentially stranded carbon assets.
Investors are being warned that, from the standpoint of financial stability, “brown” securities bear specific risk.
The amount of divestment may look big – and it is, particularly given that the campaign started recently.
Yet $2.6 trillion amounts to less than 5% of global private non-financial securities.
The trend is real, but it is still too little to trigger significant changes in fossil-fuel companies’ valuation and behavior.
A second reason why finance matters is that the transition to a low-carbon economy requires huge investments.
According to the International Energy Agency, global investment in energy supply currently amounts to $1.6 trillion annually, and 70% of it is still based on oil, coal, or gas.
Green investment amounts to only 15% of the total, and investment in energy efficiency – in buildings, transport, and industry – totals a meager $130 billion.
Containing the increase in average surface temperature to two degrees requires developing clean technologies, and even more important, a four-fold increase in investment in energy efficiency over the next ten years.
Yet such investment will not be financed easily: its return depends on a still-elusive carbon price and will often materialize only in the long run, while improving energy efficiency implies replacing hundreds of millions of outdated vehicles and refitting hundreds of millions of energy-voracious buildings.
Adequate financing instruments are required for the right purpose at the right place and at the right scale.
Development banks and green banks have a huge role to play.
For example, dedicated long-term loans, coupled with a tax break or a subsidy, would help households decide to modernize their homes.
But the real hope among climate specialists is that innovative finance could help provide the planning clarity that is currently missing.
To elicit the investments that are necessary to mitigate climate change and green the economy, the elimination of fossil-fuel subsidies and a credible, fast-rising path for the price of carbon are vital.
But, because high fuel prices are unpopular with consumers and raise competitiveness concerns among businesses, governments are reluctant to take action today – and may renege on their commitments to act tomorrow.
To overcome such trepidation, advocates for climate action are turning to incentives.
Some have recommended that governments issue CO2 performance bonds, whose yield would be reduced if companies exceed their carbon target.
Another idea, put forward in a recent paper by Michel Aglietta and his colleagues, is to map out a path for an indicative price of carbon called its “social value” and provide green project developers a government-guaranteed carbon certificate representing the value of the corresponding emissions reduction.
Central banks, they suggest, would then refinance loans to such developers, up to the value of the carbon certificate.
This would amount to a calculated bet.
If the price of carbon in, say, ten years, actually corresponds to the announced social value, the project will be profitable and the developer will repay the loan.
But if the government reneges on its commitment, the developer will default, leaving the central bank with a claim on the government.
Failure to increase the price of carbon would result either in higher public debt or, in the case of monetization, inflation.
The idea is to force governments to have skin in the game, by balancing the risk of inaction on the carbon tax with the risk of insolvency or inflation.
There would be no procrastination.
Action against global warming would take place without delay.
But a decade or so later, governments – and societies more broadly – would need to choose between taxation, debt, and inflation.
Undertaking massive investment now and deciding only later how to finance it looks irresponsible – and so it is.
But not acting at all would be even more irresponsible.
Why Financial Pay Shouldn’t be Left to the Market
CAMBRIDGE – Although some financial firms are reforming how they pay their employees, governments around the world are seriously considering regulating such firms’ compensation structures.
The Basel Committee on Banking Supervision has recently come out in favor of such regulations, and the United States House of Representatives has voted to require regulators to set compensation rules.
Perhaps not surprisingly, many financial bosses are up in arms over such moves.
They claim that they need the freedom to set compensation packages in order to keep their most talented people – the ones who will revive the world’s financial system.
So, should governments step back and let financial firms reform themselves?
The answer is clearly no.
In the post-crisis financial order, governments must take on the role of monitoring and regulating pay in financial firms; otherwise, the perverse incentives that contributed to the current crisis could easily recur.
It is important to distinguish between two sources of concern about pay in financial firms.
One set of concerns arises from the perspective of shareholders.
Figures recently released by New York’s attorney general, Andrew Cuomo, indicate that nine large financial firms paid their employees aggregate compensation exceeding $600 billion in 2003-2008 – a period in which their aggregate market capitalization substantially declined.
Such patterns may raise concerns among shareholders that pay structures are not well designed to serve their interests.
Even if financial firms have governance problems that produce pay decisions deviating from shareholder interests, however, such problems do not necessarily warrant government regulation of those decisions.
Such problems are best addressed by rules that focus on improving internal governance processes and strengthening investors’ rights, leaving the choices that determine compensation structures to corporate boards and the shareholders who elect them.
But pay in financial firms also raises a second important source of concern: even if compensation structures are designed in the interests of shareholders, they may produce incentives for excessive risk-taking that are socially undesirable.
As a result, even if corporate governance problems in financial firms are fully addressed, a government role in regulating their compensation structures may still be warranted.
Suppose that most financial firms could be relied upon by regulators to be run in the interest of their shareholders.
Would this justify exempting these firms from existing regulations that constrain their decisions with respect to lending, investment, or capital reserves?
Clearly not, because shareholders do not bear the full costs of a firm’s collapse, and, as the recent crisis demonstrates, the bill for such a downfall must be picked up, at least in part, by taxpayers and the economy.
So shareholders’ interests might sometimes be served by business decisions that are too “risky,” and regulating such decisions is justified – indeed, necessary.
Regulation of pay in financial firms is called for by the same reasons that justify the traditional regulations of the firms’ business decisions.
The incentives generated by compensation structures determine how firms’ managers behave within the boundaries permitted by such traditional, direct regulations.
And as traditional regulation of business decisions is bound to be imperfect, regulating compensation structures can be a useful additional tool to control the risks posed by financial firms’ behavior.
If choices of compensation structures can be expected to affect financial firms’ stability, regulating these choices can also be useful for protecting this stability.
Financial firms opposed to pay regulation will likely warn against “micro-managing” compensation, and argue that compensation choices must take into account information about each individual manager that regulators are almost certain to lack.
But pay regulation can improve matters without micro-management by setting general standards from which firms may not deviate but that still leave them with significant freedom to account for the individual circumstances of managers.
For example, regulatory standards could require equity-based plans to preclude managers from cashing out awarded shares and options during a certain minimum period after vesting.
In such a case, firms could still remain free to choose the number of shares and options awarded to any given manager, as well as to adjust somewhat the length of the post-vesting period during which cashing out would be precluded.
Finally, those opposing pay regulation are certain to warn us about “unintended consequences.”
But this warning should not carry the day.
We have experienced over the last several years the real and costly consequences of a compensation regime that left financial firms free to set their own pay structures.
Are we to believe that those consequences are preferable to the unintended consequences of pay regulation?
The effort to avoid the harm of flawed compensation decisions in the future should not be deterred by speculative arguments about unintended consequences.
Financial firms should not retain the freedom to create perverse incentives that put all of us at risk.
Models Behaving Badly
LONDON – “Why did no one see the crisis coming?” Queen Elizabeth II asked economists during a visit to the London School of Economics at the end of 2008.
Four years later, the repeated failure of economic forecasters to predict the depth and duration of the slump would have elicited a similar question from the queen: Why the overestimate of recovery?
Consider the facts.
In its 2011 forecast, the International Monetary Fund predicted that the European economy would grow by 2.1% in 2012.
In fact, it looks certain to shrink this year by 0.2%.
In the United Kingdom, the 2010 forecast of the Office for Budget Responsibility (OBR) projected 2.6% growth in 2011 and 2.8% growth in 2012; in fact, the UK economy grew by 0.9% in 2011 and will flat-line in 2012.
The OECD’s latest forecast for eurozone GDP in 2012 is 2.3% lower than its projection in 2010.
Likewise, the IMF now predicts that the European economy will be 7.8% smaller in 2015 than it thought just two years ago.
Some forecasters are more pessimistic than others (the OBR has a particularly sunny disposition), but no one, it seems, has been pessimistic enough.
Economic forecasting is necessarily imprecise: too many things happen for forecasters to be able to foresee all of them.
So judgment calls and best guesses are an inevitable part of “scientific” economic forecasts.
But imprecision is one thing; the systematic overestimate of the economic recovery in Europe is quite another.
Indeed, the figures have been repeatedly revised, even over quite short periods of time, casting strong doubt on the validity of the economic models being used.
These models, and the institutions using them, rely on a built-in theory of the economy, which enables them to “assume” certain relationships.
It is among these assumptions that the source of the errors must lie.
Two key mistakes stand out.
The models used by all of the forecasting organizations dramatically underestimated the fiscal multiplier: the impact of changes in government spending on output.
Second, they overestimated the extent to which quantitative easing (QE) by the monetary authorities – that is, printing money – could counterbalance fiscal tightening.
Until recently, the OBR, broadly in line with the IMF, assumed a fiscal multiplier of 0.6: for every dollar cut from government spending, the economy would shrink by only 60 cents.
This assumes “Ricardian equivalence”: debt-financed public spending at least partly crowds out private spending through its impact on expectations and confidence.
If households and firms anticipate a tax increase in the future as a result of government borrowing today, they will reduce their consumption and investment accordingly.
On this view, if fiscal austerity relieves households of the burden of future tax increases, they will increase their spending.
This may be true when the economy is operating at full employment – when state and market are in competition for every last resource.
But when there is spare capacity in the economy, the resources “freed up” by public-sector retrenchment may simply be wasted.
Forecasting organizations are finally admitting that they underestimated the fiscal multiplier.
The OBR, reviewing its recent mistakes, accepted that “the average [fiscal] multiplier over the two years would have needed to be 1.3 – more than double our estimate – to fully explain the weak level of GDP in 2011-12.”
The IMF has conceded that “multipliers have actually been in the 0.9 and 1.7 range since the Great Recession.”
The effect of underestimating the fiscal multiplier has been systematic misjudgment of the damage that “fiscal consolidation” does to the economy.
This leads us to the second mistake.
Forecasters assumed that monetary expansion would provide an effective antidote to fiscal contraction.
The Bank of England hoped that by printing £375 billion of new money, ($600 billion), it would stimulate total spending to the tune of £50 billion, or 3% of GDP.
But the evidence emerging from successive rounds of QE in the UK and the US suggests that while it did lower bond yields, the extra money was largely retained within the banking system, and never reached the real economy.
This implies that the problem has mainly been a lack of demand for credit – reluctance on the part of businesses and households to borrow on almost any terms in a flat market.
These two mistakes compounded each other: If the negative impact of austerity on economic growth is greater than was originally assumed, and the positive impact of quantitative easing is weaker, then the policy mix favored by practically all European governments has been hugely wrong.
There is much greater scope for fiscal stimulus to boost growth, and much smaller scope for monetary stimulus.
This is all quite technical, but it matters a great deal for the welfare of populations.
All of these models assume outcomes on the basis of existing policies.
Their consistent over-optimism about these policies’ impact on economic growth validates pursuing them, and enables governments to claim that their remedies are “working,” when they clearly are not.
This is a cruel deception.
Before they can do any good, the forecasters must go back to the drawing board, and ask themselves whether the theories of the economy underpinning their models are the right ones.
Hollande in Mali
PARIS – While hundreds of thousands demonstrated in Paris against the right of homosexual couples to marry and adopt children, French troops were arriving in Mali to stop a coalition of Islamist and rebel forces from taking control of its capital, Bamako, and creating in the Sahel a sanctuary for terrorists.
These are trying times for French President François Hollande.
Besieged economically at home, where his popularity is at its lowest since his election last year, can he regain credibility, if not support, as supreme commander of French forces?
Once upon a time, “I intervene, therefore I am” might as well have been a French motto, particularly in Africa.
But, while French national identity is intimately bound up with France’s international standing – how it is perceived in the world – enthusiasm for intervention has receded.
The benefits have become more dubious, while the costs and risks have grown increasingly evident.
If France has again become a regional gendarme by default, it is largely for three reasons.
American enthusiasm for intervention in Africa has greatly diminished since the operation in Somalia in 1992-1993 – and more globally following the long wars in Iraq and Afghanistan.
European interest in military intervention in Africa is as low as ever.
And, as for the region’s governments, it would be an understatement to say that they are not yet ready militarily to take their fate into their own hands.
While France is not alone – manifestations of support have come from its Western and African partners, as well as from the Middle East – it will bear the primary responsibility and the risks.
For Islamic fundamentalists, France is now the “Great Satan.”
Indeed, the conflict in Mali is taking place geographically in Africa, but in many ways its causes and ramifications lie in the Middle East.
When France intervened in an African country in the past, there was no risk of terrorist attacks on its territory or on its citizens elsewhere in the world.
That is no longer the case.
It is too early to say what will happen in Mali or the Sahel – or, for that matter, in France itself.
For the moment, the French are standing, overwhelmingly, behind Hollande. They would have criticized him had he remained passive while Bamako fell into the hands of terrorists.
Yet this support may be fragile, and could collapse if something goes wrong on the ground – or, worse, in France.
Before the intervention, Mali was not a French priority.
Rising unemployment at home seemed to be a more urgent task than did addressing instability in Africa.
While the French public agrees that Mali cannot be allowed to become a haven for terrorists, the way Afghanistan did in the late 1990’s, attitudes toward intervention have evolved in recent decades.
In the early 1980’s, after a particularly bloody terrorist attack on French and American forces in Lebanon, France’s tolerance for military casualties seemed much higher than that of the United States.
But this has changed.
The French now find themselves on the front line at a time when they have much less appetite for it.
Moreover, budget restrictions have severely constrained French military capabilities.
French and British military intervention was successful in Libya in 2011 at least in part as a result of US military procurement.
Of course, from a French perspective, the US role is somewhat ironic.
In the years after the terrorist attacks of September 11, 2001, the Americans always had to be on the front line – battling the enemy abroad to avoid having to battle him at home, in the parlance of the time – while the European allies were perceived as the cleaning staff.
But imperial fatigue after Iraq and Afghanistan has left its imprint.
Americans are starting to enjoy – probably too much for their allies – what President Barack Obama, describing the US role in Libya, called “leading from behind.”
For Hollande, war in Mali is both an opportunity and a risk.
If Nicolas Sarkozy, whom he defeated, was widely regarded as “too” presidential, Hollande has given the impression of not being presidential “enough.”
His fall from public grace – too statist and fiscally intrusive for the right, but too moderate and social democratic for the true left – was more rapid than that of any president of the Fifth Republic.
Of course, with unemployment rising every month, it is difficult to remain popular for long.
As the supreme commander of an army at war, Hollande can now try to reinvent himself.
But, successive presidents since Jacques Chirac have failed to reconcile the French with politics.
France’s citizens have tended to expect too much from their state, and now they may be expecting too little from politics and politicians at a time when deep divisions on fundamental economic and social issues run not only between the traditional right and left, but also within both camps.
Will foreign intervention reunite the French?
Will war in Africa be the defining moment of Hollande’s presidency?
Will he be remembered as the French Harry Truman – a discreet, uncharismatic man who, when faced with urgent and dramatic circumstances, ended up doing the right things for lack of a better alternative?
This is a portentous moment both for Mali and for security in the Sahel and Europe.
It is no less significant for Hollande and France.
France Alone?
PARIS – In less than two years, France has carried out three decisive foreign military interventions.
In March 2011, its airstrikes in Libya (alongside those of Great Britain) thwarted Colonel Muammar el-Qaddafi’s troops as they prepared to retake the city of Benghazi.
A month later, French forces in Côte d’Ivoire arrested President Laurent Gbagbo, who had refused to recognize his rival’s election victory, putting the country at risk of civil war.
Now France has intervened in Mali.
The latest intervention was initially planned as part of a European mission to support African forces, but France abruptly decided to act unilaterally to blunt the advance of Islamists who threatened to overrun Mopti, the last barrier before reaching the capital, Bamako.
Beyond that objective, France seeks to protect its many nationals in the region; maintain stability in the Sahel, where states are very weak; and prevent Mali’s transformation into a base of Islamist terrorism directed at Europe.
A lot is at stake – all the more so because French intervention is likely to be extensive.
While the Islamists have been temporarily defeated, they are well armed and receive supplies from Libya via Algeria, which has suppressed Islamists at home but seems to turn a blind eye to their transit through its territory.
Moreover, the capabilities of the Malian army and those of other West African countries that are supposed to join the operation are too weak to turn the tide.
The United States tried to train the Malian army, but failed miserably.
So, with the security of Europe as a whole at stake, why is France the only country involved?
One explanation is to view the intervention as a neo-colonial bid to protect a French preserve.
This is a profound error.
France has no interest in protecting a Malian regime that it knows to be corrupt and incompetent; indeed, France recently refused to support a request from President François Bozizé’s regime in the neighboring Central African Republic for aid in dealing with rebels.
France’s motivations are broader.
In particular, France has always considered Sub-Saharan Africa and the Arab world to be natural spheres of political and strategic influence that are necessary to maintaining its position as a global power.
The second explanation is more credible: France, aside from Great Britain, is Europe’s only true military power.
It believes that operational military capability is a condition of power – a view that is not shared by the overwhelming majority of European states, which continue to display a collective aversion to war.
To be sure, Europe has the means for joint action.
In 2003, following the start of the Iraq war, Europe embraced a strategy prepared by Javier Solana, then the European Union’s High Representative for the Common Foreign and Security Policy.
But, while a large number of Europeans naively believed that this was the prelude to a joint European strategy, the proposal was drafted in terms that were so vague as to allow any outcome – or none.
The EU’s Lisbon Treaty mentions “permanent structured cooperation” in security and defense policy, and an entire institutional apparatus of political and military committees exists to anticipate, prepare for, and implement military operations at the European level.
But this mechanism lacks the common political will needed to activate it; the less it is used, the less usable it will become.
During the Libyan crisis, Solana’s successor, Catherine Ashton, deliberately sought to limit the EU’s role to that of a super-NGO focused on humanitarian aid and economic development.
Recently, during the vote on Palestinian representation at the United Nations, the EU called for its members to abstain – an odd way to affirm Europe’s commitment to global leadership.
For Great Britain, Europe-wide defense is a nonstarter.
Britain has deviated from this principle only once, when it agreed to participate in the Atalanta anti-piracy operation off the Horn of Africa – probably because it was placed in command.
As a result, those who want a common European defense capability lack the means to create it, while those who have the means to create it do not want it (with the possible exception of France).
Britain’s bilateral cooperation with France – highlighted during the Libyan crisis – is sometimes very strong.
But, despite the two countries’ 2010 treaty on defense and security cooperation, the British have decided, for budgetary reasons, to acquire aircraft that will not be compatible with French aircraft carriers.
Even Spain and Italy, the two countries most affected by developments in the Mediterranean and the Sahel, have reduced their military expenditures significantly.
Unlike Germany, both participated in the Libyan intervention, but with highly limiting rules of engagement for their forces.
For example, Italian naval forces were instructed to avoid the waters off the coast of Tripoli, and Spanish tanker aircraft were forbidden to refuel fighter jets.
Europe as a whole currently devotes only 1.6% of its GDP to defense, compared to 4.8% for the US.
It is the only world region where military expenditures are decreasing.
Its deployed forces are extremely small, accounting for 4% of all military personnel worldwide, versus 14% for the US.
Industrial cooperation, which could constitute an economic and military asset, is also weakening, as demonstrated by Germany’s successful opposition to the proposed EADS/BAE merger, which was officially canceled in October.
Germany had seemed to embark on a more robust policy since its participation in military operations in Afghanistan.
Now, however, it recoils at any prospect of military intervention, even as it remains the world’s third-largest arms exporter.
Europe is reluctant to develop a substantial military force, because the European project was created in opposition to the idea of power.
Yet this stance has become untenable.
Europe faces real threats, which France alone cannot contain.
Moreover, the international system is increasingly coalescing around national powers that consider military force to be an essential prerequisite of influence.
Europe does not face a choice between soft and hard power.
The French Disconnection
PARIS – Dire conditions can permit what was once unthinkable to push its way into public debate.
In France, the idea that now dares to speak its name is that the country will sink into an ever-deeper economic malaise unless it regains its monetary sovereignty.
Two striking statements on economic policy by France’s leaders in the first weeks of this year have highlighted the force of this logic.
First, President François Hollande, worried about the euro’s appreciation against other major world currencies, called for an exchange-rate target.
Then, Pierre Moscovici, the finance minister, said that Europe might grant France a delay in meeting the 3%-of-GDP budget-deficit target mandated from this year onward under the eurozone’s newly ratified fiscal compact.
These positions imply a desire to exercise sovereign power over the Economic and Monetary Union’s rules and decisions.
Back in 1989-1991, exactly the same motive underlay President François Mitterrand’s imposition of the euro on Germany – that is, to harness the Bundesbank’s monetary power to a framework in which France could be confident of wielding decisive influence. Since the single currency was France’s condition for accepting German reunification, Germany played along.
Two decades later, Germany may be in a different mood.
The sovereign-debt-and-banking crisis that has roiled the monetary union since 2010 has steadily exposed the realities at play here, as irrevocably fixed exchange rates lock in and deepen differences in eurozone members’ competitiveness.
In France’s case, the loss of competitiveness and resulting sharp decline in export performance has been aggravated by relying on crushing taxation of labor to finance generous welfare programs and top-drawer public services (a practice exacerbated by stifling labor-market regulation).
In a monetary union, there are only two ways to close a competitiveness gap between countries: transfers from the more competitive to the less competitive, or internal devaluation, which means real wage cuts.
Not surprisingly, the preference has been for transfers, which, until the 2008 financial crash, took the form of cross-border private-sector lending to governments and banks.
Following the credit-bubble burst in 2008, fiscal transfers replaced these private financial flows, causing budget deficits to balloon.
And now, with the German government, as chief creditor, calling the shots on cross-border transfers to weaker eurozone countries, all such transfers are conditional on austerity (that is, internal devaluation).
Bailouts from the European Stability Mechanism represent the clearest example of this, with the fiscal compact now committing signatories to tight deficit targets and structural adjustment.
And more austerity is a vital, if less well remarked on, condition of the European Central Bank’s declared willingness to buy unlimited quantities of troubled countries’ short-term government debt.
So far, the “bazooka” represented by the ECB’s “outright monetary transactions” program has had the desired effect – without having to be used.
Eurozone financial markets have stabilized, and the euro has appreciated against the dollar and the yen.
But, as Hollande’s recent declarations indicate, currency appreciation is the last thing that an uncompetitive country like France needs.
Although the French government, unlike its Spanish and Italian counterparts, has not yet had any difficulty financing itself at low interest rates, currency appreciation as the economy slides into recession is like fuel poured onto an unlit bonfire.
Unless growth is restored, France’s already large public debt will expand unsustainably, heightening the risk that investors will shun French government bonds.
From this predicament stems the fashionable idea that the bond market would actually welcome less fiscal austerity, because this would boost economic growth, in turn making the level of public debt appear more sustainable in the long run.
It is no surprise that Moscovici is beginning to push for a “collective European decision” to relax the fiscal treaty’s terms, given that French compliance would require massive new spending cuts.
Will Germany agree to such a relaxation – or, for that matter, to Hollande’s implicit demand that the ECB follow Japan’s example and loosen monetary policy to drive the exchange rate back down?
Unlike Japan (and, of course, the United States), France, as a member of a monetary union, cannot pursue domestic goals unilaterally.
To avoid disaster, France has only two options: somehow force a change in German policy or go it alone.
There are two reasons why, until now, the second option – leaving the monetary union – has been unthinkable.
The first has to do with economic and financial risks. Ditching the euro might trigger a banking crisis, capital flight, inflation, and perhaps even sovereign default.
On the other hand, higher competitiveness and erosion of the real value of debt would quickly outweigh these costs by restoring confidence in the French economy’s prospects.
This strategy’s success, starting with the speed of restored access to external financing, would depend on the credibility of government policies – monetary, fiscal, and, above all, the radical and indispensable supply-side reforms for which there would now be breathing space.
The specter of continuing economic stagnation and ever-rising unemployment (with the young and older workers being the worst hit) should remove the second, geopolitical obstacle to a French exit from the eurozone.
For French elites since World War II, alignment with Germany has been central to projecting French power and influence.
Such ambitions must now be sacrificed for the sake of the French public’s well-being.
France will not regain its economic strength without setting aside the euro.
Even during that adjustment, there is no reason why relations with European partners should suffer in any fundamental sense.
On the contrary, the sustainable prosperity that would result from that adjustment would create a much healthier long-term foundation for continuing the quest for an “ever closer union” in Europe.
Why France Will Sink Europe’s Constitution
If public opinion polls are to be believed, on May 29 the French will reject the European Union’s draft constitutional treaty. Because all EU member countries must ratify the constitution, a French “Non” will, in effect, kill it.
Amazing as this turn of events seems, it has been long in the making.
It is amazing because France is not just a founding member of the European Community, but also has been the main driving force behind all major steps toward “ever closer union.”
But French opposition was also predictable because, for over a decade now, France has veered away from Europe and now finds itself increasingly isolated.
Of course, Europe has also moved away from France through successive enlargements, but the main roots of the estrangement lie in France itself.
The French regard with great sadness their declining status and prestige – not only in world politics, but also in culture, science and, importantly, language.
Europe, in their view, was always a way of reclaiming world influence.
For three decades, this worked.
France and Germany had forged an alliance that called the shots in Europe.
Not interested in geopolitical power – a legacy of its Nazi past – Germany was content to back France’s ambitions as long as the Common Market allowed it to be Europe’s economic powerhouse.
But that alliance is unraveling as Germany’s own status declines, owing to its mediocre economic performance and the loss of its prestigious Deutschemark.
Moreover, Germany is increasingly interested in exercising political influence on its own; as a result, it is no longer happy with what it gets from the alliance with France.
At the same time, successive EU enlargements over the decades have brought in other powerful contenders, chiefly Spain and the UK, as well as smaller countries who are unwilling to bow before French-German leadership.
In short, France has lost control of Europe.
This is not new, but it has only recently started to sink in, and it hurts.
France is also economically wounded.
Here is a country that has long cherished its “exception” from the normal rules of market economics, a foggy view that rejects both central planning and free markets and claims to offer a well-balanced middle ground.
The French do not care that they have never been able to articulate their vision of a “third way,” for they remain deeply convinced that the state has a key role to play in steering markets in order to defend “higher” values from the single-minded pursuit of materialism.
This view, propagated since World War II by a quasi-Marxist intelligentsia, is so ingrained that the French do not even bother to understand how markets operate.
They look upon economics as an ideological battleground, where all views can be entertained without being confronted with logic, much less with facts.
Yet facts have been hitting hard.
Growth has been lackluster for a quarter of a century and unemployment remains stubbornly high.
Urban crime, once described as the wages of unfettered individualism, now resembles what is found in the United States, the French model’s bête noire.
What has this to do with Europe?
The EU, by design, increases economic competition, but France is ill equipped.
One after the other, most European countries have reformed their economies, shedding the cozy arrangements that used to protect every interest group from the pressure of competition.
Even Germany, after even worse performance than France, has now taken decisive steps.
Unable to reform their labor markets because of the fear of street protests, French governments of all political stripes seek to protect their ailing firms, only to face limits imposed by the rules of the Common Market.
The bloated French public sector, which many see as the employer of last resort, cannot afford its expensive personnel.
While many private French firms are thriving, they do so by economizing on manpower and, increasingly, by outsourcing production, often to new EU member countries where labor costs are considerably lower.
Public education is in shambles and France’s higher education system now faces competition from other European countries.
Humbled by economic malaise and loss of influence, the French are scared.
They fear the future, because the future means either market-oriented reforms or further economic and political downgrading, both of which are seen as unacceptable, if only because they clash with French self-esteem.
The European Constitution has little to do with any of these challenges, but a majority of French people has started questioning the strategy that has long masked France’s diminishing status.
They are alarmed by what they see as the domination of Anglo-Saxon economic principles – the last nail in the coffin of France’s mythical “exception.”
So the EU is now seen as the Trojan horse that threatens the myriad of state-sanctioned benefits and handouts that every citizen enjoys.
Of course, most French people would ultimately benefit from doing away with this inefficient web of big and small privileges, but most voters, depressed by poor economic prospects and unnerved by high unemployment, are simply unwilling to take the risk.
They do not understand the roots of their economic troubles and are nostalgic for better times.
They mistakenly see the European Constitution as one more challenge, at a time when they want to be nursed and protected.
Scared people rarely make wise choices.
Why Free Trade Matters
NEW YORK – Contrary to what skeptics often assert, the case for free trade is robust.
It extends not just to overall prosperity (or “aggregate GNP”), but also to distributional outcomes, which makes the free-trade argument morally compelling as well.
The link between trade openness and economic prosperity is strong and suggestive.
For example, Arvind Panagariya of Columbia University divided developing countries into two groups: “miracle” countries that had annual per capita GDP growth rates of 3% or higher, and “debacle” countries that had negative or zero growth rates.
Panagariya found commensurate corresponding growth rates of trade for both groups in the period 1961-1999.
Of course, it could be argued that GDP growth causes trade growth, rather than vice versa – that is, until one examines the countries in depth.
Nor can one argue that trade growth has little to do with trade policy: while lower transport costs have increased trade volumes, so has steady reduction of trade barriers.
More compelling is the dramatic upturn in GDP growth rates in India and China after they turned strongly towards dismantling trade barriers in the late 1980’s and early 1990’s.
In both countries, the decision to reverse protectionist policies was not the only reform undertaken, but it was an important component.
In the developed countries, too, trade liberalization, which started earlier in the postwar period, was accompanied by other forms of economic opening (for example, a return to currency convertibility), resulting in rapid GDP growth.
Economic expansion was interrupted in the 1970’s and 1980’s, but the cause was the macroeconomic crises triggered by the success of the OPEC cartel and the ensuing deflationary policies pursued by then-Federal Reserve Chairman Paul Volcker.
Moreover, the negative argument that historical experience supports the case for protectionism is flawed.
The economic historian Douglas Irwin has challenged the argument that nineteenth-century protectionist policy aided the growth of infant industries in the United States.
He has also shown that many of the nineteenth century’s successful high-tariff countries, such as Canada and Argentina, used tariffs as a revenue source, not as a means of sheltering domestic manufacturers.
Nor should free traders worry that trade openness resulted in no additional growth for some developing countries, as critics contend.
Trade is only a facilitating device.
For instance, if your infrastructure is bad, or you have domestic policies that prevent investors from responding to market opportunities (such as South Asia’s stifling licensing restrictions), you will see no results.
To gain from trade openness, you have to ensure that complementary policies are in place.
But then critics shift ground and argue that trade-driven growth benefits only the elites and not the poor; it is not “inclusive.”
In India, however, the shift to accelerated growth after reforms that included trade liberalization has pulled nearly 200 million people out of poverty.
In China, which grew faster, it is estimated that more than 300 million people have moved above the poverty line since the start of reforms.
In fact, developed countries benefit from trade’s effect on poverty reduction as well.
Contrary to much popular opinion, trade with poor countries does not pauperize rich countries.
The opposite is true.
It is unskilled, labor-saving technical change that is putting pressure on the wages of workers, whereas imports of cheaper, labor-intensive goods from developing countries help the poor who consume these goods.
If freer trade reduces poverty, it is presumptuous for the critics to claim greater virtue.
In truth, the free traders control the moral high ground: with at least a billion people still living in poverty, what greater moral imperative do we have than to reduce that number?
Talk about “social justice” is intoxicating, but actually doing something about it is difficult.
Here the free traders have a distinct edge.
As the historian Frank Trentmann has demonstrated, the case for free trade was made in nineteenth-century Britain in moral terms: it was held to promote not just economic prosperity, but also peace.
It is also worth recalling that US Secretary of State Cordell Hull was awarded the Nobel Peace Prize in 1945 for policies that included his tireless efforts on behalf of multilateral free trade.
It is time for the Norwegian Nobel committee to step up again.
Rule, Germania
PRINCETON – A persistent theme – indeed the leitmotif – of the way that German leaders discuss the eurozone is their insistence on the importance of following the rules.
That refrain is followed by a chorus from the rest of the monetary union demanding to know why Germany is taking such an inflexible approach.
The answer, it turns out, reflects the way Germany’s federal system of government has shaped its decision-making, as well as Germany’s historic experience with debt crises.
Germany’s obsession with rules long predates the current eurozone crisis.
The country’s policymakers always insisted that Europe could not have a common currency without first achieving economic convergence.
But that looked like it would never happen.
So, in the 1990s, as the eurozone was being established, Germany argued for rigorous enforcement of the “convergence criteria,” the requirements necessary for adopting the euro.
Economists in every other country ridiculed the Teutonic fixation on firm rules.
There is no reason, for example, why a debt-to-GDP ratio of 59% should be considered safe, but 62% regarded as irresponsibly dangerous.
But the Germans insisted – and ultimately got what they wanted.
That approach stemmed in part from Germany’s political structure.
The more federal a country’s system of government is, the more rules are needed to ensure its smooth functioning.
When the responsibilities of different levels of government are not clearly delimited, there is the danger that officials will try to pass burdens to higher levels.
In order to avoid this, federations often adopt a legalistic approach.
Indeed, there is a strong correlation, historically, between successful federations and a stable monetary policy undergirded by clear rules.
In the late twentieth century, Switzerland, Germany, and the United States – all federal countries – were pioneers in applying a stability-oriented monetary policy.
Given that the eurozone is in many ways federal in its structure, a clear commitment to the rules seemed to Germany to be a prerequisite for its success.
To be sure, even Germans know that rules sometimes need to be bent.
Thinkers as far back as Aristotle have argued that rules fail when they are too rigid.
In the Nicomachean Ethics, Aristotle pointed to the use by sculptors on the island of Lesbos of rulers made from flexible lead – rather than rigid iron – for cutting curved lines in stone.
The ability to reshape the rulers to fit the stone served as a metaphor for the need to adjust laws when circumstance change.
But when it comes to debt, Germans have insisted on using the most rigid of rulers.
Since the beginning of the eurozone crisis, the German government dug in its heels on European treaty provisions that it interprets as forbidding bailouts and monetary financing of government debt.
Recently, Germany reacted to a proposal to forgive a portion of Greece’s debt by maintaining that the treaty provision that proscribes bailouts also rules out state bankruptcies and debt forgiveness.
The lesson that Germany has taken from its history is that debt is an area in which flexibility must be steadfastly avoided.
This might come as a surprise to American commentators, who have argued that Germany is acting hypocritically, having defaulted on its debts in 1923, 1932-1933, 1945, and 1953, only to insist today that others do differently.
The truth is that Germans viewed nearly all of those defaults as destabilizing.
The internal default in 1923, conducted via hyperinflation, weakened the German financial system and helped cause the Great Depression.
The defaults in the early 1930s became inevitable when Germany could not access private capital markets and the country had lost faith in its future.
Rather than set the stage for a sustainable economic recovery, deflation and default fanned the flames of nationalism – to disastrous effect.
The default of 1945 was the consequence of losing World War II.
Indeed, the tradition of so-called Ordoliberalism that has shaped Germany’s post-war economic policy was a response to the Nazis’ destructive arbitrariness.
Only the debt cancellation of 1953 is viewed in a positive light in Germany, and a look at the circumstances in which it occurred reveals much about the country’s approach to the eurozone crisis.
As the Yale economist Timothy Guinnane has shown, the debt that was canceled was not the principal, but accumulated interest arrears that had not been paid between the Great Depression and WWII.
More important, from Germany’s perspective, was the political context in which the negotiations took place.
For starters, there had been a complete regime change in Germany.
The victorious Allies had removed those responsible for the destructive, destabilizing policies of the past, providing the country with a clean break and its debtors with confidence that Germany was on a new course.
Furthermore, Germany’s new policymakers had demonstrated their financial seriousness.
In 1950, the country had undergone a severe balance-of-payments crisis.
Some officials were in favor of capital controls, but the government instead implemented monetary austerity.
This experience explains another of Germany’s obsessions: reforms in debtor countries.
Germany needed a complete change of its domestic regime to break out of its cycle of debt and default.
That might be a bit much to ask in the context of the eurozone; but, without a fundamental reorientation of a country’s politics, the thinking in Germany goes, debt forgiveness will always remain a futile exercise.
Why Germany Should Lead or Leave
NEW YORK – Europe has been in a financial crisis since 2007.
When the bankruptcy of Lehman Brothers endangered the credit of financial institutions, private credit was replaced by the credit of the state, revealing an unrecognized flaw in the euro.
By transferring their right to print money to the European Central Bank (ECB), member countries exposed themselves to the risk of default, like Third World countries heavily indebted in a foreign currency.
Commercial banks loaded with weaker countries’ government bonds became potentially insolvent.
There is a parallel between the ongoing euro crisis and the international banking crisis of 1982.
Back then, the International Monetary Fund saved the global banking system by lending just enough money to heavily indebted countries; default was avoided, but at the cost of a lasting depression.
Latin America suffered a lost decade.
Germany is playing the same role today as the IMF did then.
The setting differs, but the effect is the same.
Creditors are shifting the entire burden of adjustment on to the debtor countries and avoiding their own responsibility.
The euro crisis is a complex mixture of banking and sovereign-debt problems, as well as divergences in economic performance that have given rise to balance-of-payments imbalances within the eurozone.
The authorities did not understand the complexity of the crisis, let alone see a solution. So they tried to buy time.
Usually, that works.
Financial panics subside, and the authorities realize a profit on their intervention.
But not this time, because the financial problems were combined with a process of political disintegration.
When the European Union was created, it was the embodiment of an open society – a voluntary association of equal states that surrendered part of their sovereignty for the common good.
The euro crisis is now turning the EU into something fundamentally different, dividing member countries into two classes – creditors and debtors – with the creditors in charge.
As the strongest creditor country, Germany has emerged as the hegemon.
Debtor countries pay substantial risk premiums for financing their government debt.
This is reflected in their cost of financing in general.
To make matters worse, the Bundesbank remains committed to an outmoded monetary doctrine rooted in Germany’s traumatic experience with inflation.
As a result, it recognizes only inflation as a threat to stability, and ignores deflation, which is the real threat today.
Moreover, Germany’s insistence on austerity for debtor countries can easily become counterproductive by increasing the debt ratio as GDP falls.
There is a real danger that a two-tier Europe will become permanent. Both human and financial resources will be attracted to the center, leaving the periphery permanently depressed.
But the periphery is seething with discontent.
Europe’s tragedy is not the result of an evil plot, but stems, rather, from a lack of coherent policies.
As in ancient Greek tragedies, misconceptions and a sheer lack of understanding have had unintended but fateful consequences.
Germany, as the largest creditor country, is in charge, but refuses to take on additional liabilities; as a result, every opportunity to resolve the crisis has been missed.
The crisis spread from Greece to other deficit countries, eventually calling into question the euro’s very survival.
Since a breakup of the euro would cause immense damage, Germany always does the minimum necessary to hold it together.
Most recently, German Chancellor Angela Merkel has backed ECB President Mario Draghi, leaving Bundesbank President Jens Weidmann isolated.
This will enable the ECB to put a lid on the borrowing costs of countries that submit to an austerity program under the supervision of the Troika (the IMF, the ECB, and the European Commission).
That will save the euro, but it is also a step toward the permanent division of Europe into debtors and creditors.
The debtors are bound to reject a two-tier Europe sooner or later.
If the euro breaks up in disarray, the common market and the EU will be destroyed, leaving Europe worse off than it was when the effort to unite it began, owing to a legacy of mutual mistrust and hostility.
The later the breakup, the worse the ultimate outcome.
So it is time to consider alternatives that until recently would have been inconceivable.
In my judgment, the best course of action is to persuade Germany to choose between either leading the creation of a political union with genuine burden-sharing, or leaving the euro.
Since all of the accumulated debt is denominated in euros, it makes all the difference who remains in charge of the monetary union.If Germany left, the euro would depreciate.
Debtor countries would regain their competitiveness; their debt would diminish in real terms; and, with the ECB under their control, the threat of default would disappear and their borrowing costs would fall to levels comparable to that in the United Kingdom.
The creditor countries, by contrast, would incur losses on their claims and investments denominated in euros and encounter stiffer competition at home from other eurozone members.
The extent of creditor countries’ losses would depend on the extent of the depreciation, giving them an interest in keeping the depreciation within bounds.
After initial dislocations, the eventual outcome would fulfill John Maynard Keynes’ dream of an international currency system in which both creditors and debtors share responsibility for maintaining stability.
And Europe would avert the looming depression.
The same result could be achieved, with less cost to Germany, if Germany chose to behave as a benevolent hegemon.
That would mean implementing the proposed European banking union; establishing a more or less level playing field between debtor and creditor countries by establishing a Debt Reduction Fund, and eventually converting all debt into Eurobonds; and aiming at nominal GDP growth of up to 5%, so that Europe could grow its way out of excessive indebtedness.
Whether Germany decides to lead or leave, either alternative would be better than creating an unsustainable two-tier Europe.
Why Greece Declined a Euro Holiday
BRUSSELS – For the entire first half of this year, since the far-left, anti-austerity Syriza party came to power in January, the Greek saga virtually monopolized the attention of European policymakers.
Even as their country’s economy crashed, Greece’s new government remained adamant in demanding debt relief without austerity – that is, until mid-July, when they suddenly agreed to the creditors’ terms.
Indeed, as of July 13, Greece’s staunchly anti-austerity government has been obliged to impose even tougher austerity and pursue painful structural reforms, under its creditors’ close supervision.
Why did the Greek government concede to terms that not only controverted its own promises, but also closely resembled those that voters had overwhelmingly rejected in a popular referendum barely a week earlier?
Many believe that Greek Prime Minister Alexis Tsipras was responding to an ultimatum from his European partners: Accept our demands or leave the euro.
The question is why a Greek exit from the euro (“Grexit”) amounted to such a potent threat.
In fact, from an economic perspective, Grexit no longer represents the potential catastrophe that it once did.
After all, the main short-term cost – financial-system disruption – has already materialized in Greece: banks and the stock market have been shut down, and capital controls have been imposed.
While those actions were needed to stem large-scale capital flight and prevent the banking system’s collapse, they also caused the Greek economy to contract sharply.
In this context, Greek negotiators might have considered another proposal, circulated informally by the German finance ministry, recommending that Greece receive immediate debt forgiveness, in exchange for leaving the euro temporarily.
If Greece remained in the euro, no relief would be granted – a proviso consistent with the German position that debt restructuring for eurozone countries would be illegal.
While the legal argument is probably spurious, an outright debt reduction for a eurozone country remains politically impossible.
The German proposal, spearheaded by Finance Minister Wolfgang Schäuble, highlights the fundamental change that has occurred in Greece’s relationship with its European partners since its last bailout package three years ago. In 2012, Greece was offered hundreds of billions of euros in financial support, and its creditors, including Greek commercial banks, were pushed to accept substantial “voluntary” haircuts.
Tellingly, when George Papandreou, Greece’s prime minister at the time, proposed a referendum on the existing adjustment program and his country’s continued eurozone membership in 2011, he was warned off in no uncertain terms by France’s then-President Nicolas Sarkozy and German Chancellor Angela Merkel.
Though Papandreou would have campaigned for the adjustment program and the euro, a referendum was a risk that his European partners were unwilling to take.
Tsipras’s government, by contrast, was able to hold its referendum, and even campaign against the creditors’ proposed adjustment program (which, it should be noted, was no longer on the table).
Even the resounding “no” delivered by Greek voters could not strengthen the government’s negotiating position, for a simple reason: Grexit is no longer considered a threat to the euro’s stability.
That is why German officials – especially Schäuble – have been encouraging Greece to leave.
One can only speculate about Schäuble’s motivation in pushing for Grexit.
He seems to believe that a more integrated eurozone, though certainly desirable, is not feasible with a country that cannot be trusted to abide by the terms to which its government has agreed.
Whatever Schäuble’s reasons, his proposal could have represented a way out for Greece, whose economy had been squeezed dry by austerity and whose banking system was already closed.
Immediate debt reduction and the recovery of economic sovereignty – even at the expense of exiting the euro, at least temporarily – would seem to have offered significant long-term benefits.
In a sense, it amounted to a golden opportunity, with Germany offering to pay for something that many believe Greece should be doing anyway.
Nonetheless, the Greek government rejected an exit, and instead accepted the creditors’ tough terms.
This suggests that, during the negotiations, Greece’s leaders were driven by more than economics.
Perhaps, contrary to popular belief, countries’ political attachment to Europe via the euro remains very strong, even where, as in Greece, people have endured unprecedented hardship since joining the monetary union.
The monetary union’s rationale, as many have noted, was always more political than economic.
For precisely that reason, it may well be too early to write off the single currency.
Why Greece Will Default
CAMBRIDGE – Greece will default on its national debt.
That default will be due in large part to its membership in the European Monetary Union.
If it were not part of the euro system, Greece might not have gotten into its current predicament and, even if it had gotten into its current predicament, it could have avoided the need to default.
Greece’s default on its national debt need not mean an explicit refusal to make principal and interest payments when they come due.
More likely would be an IMF-organized restructuring of the existing debt, swapping new bonds with lower principal and interest for existing bonds.
Or it could be a “soft default” in which Greece unilaterally services its existing debt with new debt rather than paying in cash.
But, whatever form the default takes, the current owners of Greek debt will get less than the full amount that they are now owed.
The only way that Greece could avoid a default would be by cutting its future annual budget deficits to a level that foreign and domestic investors would be willing to finance on a voluntary basis.
At a minimum, that would mean reducing the deficit to a level that stops the rise in the debt-to-GDP ratio.
To achieve that, the current deficit of 14% of GDP would have to fall to 5% of GDP or less.
But to bring the debt-to-GDP ratio to the 60% level prescribed by the Maastricht Treaty would require reducing the annual budget deficit to just 3% of GDP – the goal that the eurozone’s finance ministers have said that Greece must achieve by 2012.
Reducing the budget deficit by 10% of GDP would mean an enormous cut in government spending or a dramatic rise in tax revenue – or, more likely, both.
Quite apart from the political difficulty of achieving this would be the very serious adverse effect on aggregate domestic demand, and therefore on production and employment.
Greece’s unemployment rate already is 10%, and its GDP is already expected to fall at an annual rate of more than 4%, pushing joblessness even higher.
Depressing economic activity further through higher taxes and reduced government spending would cause offsetting reductions in tax revenue and offsetting increases in transfer payments to the unemployed.
So every planned euro of deficit reduction delivers less than a euro of actual deficit reduction.
That means that planned tax increases and cuts in basic government spending would have to be even larger than 10% of GDP in order to achieve a 3%-of-GDP budget deficit.
There simply is no way around the arithmetic implied by the scale of deficit reduction and the accompanying economic decline: Greece’s default on its debt is inevitable.
Greece might have been able to avoid that outcome if it were not in the eurozone.
If Greece still had its own currency, the authorities could devalue it while tightening fiscal policy.
A devalued currency would increase exports and would cause Greek households and firms to substitute domestic products for imported goods.
The increased demand for Greek goods and services would raise Greece’s GDP, increasing tax revenue and reducing transfer payments.
In short, fiscal consolidation would be both easier and less painful if Greece had its own monetary policy.
Greece’s membership in the eurozone was also a principal cause of its current large budget deficit.
Because Greece has not had its own currency for more than a decade, there has been no market signal to warn Greece that its debt was growing unacceptably large.
If Greece had remained outside the eurozone and retained the drachma, the large increased supply of Greek bonds would cause the drachma to decline and the interest rate on the bonds to rise.
But, because Greek euro bonds were regarded as a close substitute for other countries’ euro bonds, the interest rate on Greek bonds did not rise as Greece increased its borrowing – until the market began to fear a possible default.
The substantial surge in the interest rate on Greek bonds relative to German bonds in the past few weeks shows that the market now regards such a default as increasingly likely.
The combination of credits from the other eurozone countries and lending by the IMF may provide enough liquidity to stave off default for a while.
In exchange for this liquidity support, Greece will be forced to accept painful fiscal tightening and falling GDP.
In the end, Greece, the eurozone’s other members, and Greece’s creditors will have to accept that the country is insolvent and cannot service its existing debt.
At that point, Greece will default.
Why Has America’s Economic Recovery Stalled?
CAMBRIDGE – The United States’ import bill now exceeds $2.4 trillion a year, more than twice that of China and greater than that of the 27 European Union countries combined.
Since the volume of US imports varies with the overall strength of the American economy, so does the volume of other countries’ exports.
So it was good news for everyone when the US economy began expanding in the summer of 2009, 19 months after falling into the recession that officially started in December 2007.
Unfortunately, the recovery has turned out to be very anemic.
Now, 15 months into the expansion, the level of real GDP is still lower than it was when the recession started.
Even more worrying, the rate of GDP growth has been declining almost from the start of the recovery.
Real GDP rose by 5% in the fourth quarter of 2009, reflecting the end of the decline in inventories.
GDP growth then fell to 3.7% in the first quarter of 2010 and to only 1.7% in the second quarter.
The third quarter is shaping up to be much like the second.
This recovery has been much weaker than previous ones because of fundamental differences in the cause of the downturn and in the policies chosen to achieve recovery.
Previous downturns were caused by the central bank’s efforts to reverse or prevent inflation by hiking short-term interest rates.
When the central bank succeeded, it lowered those rates and the economy bounced back.
But this time the downturn was not caused by higher interest rates, and reducing those rates did not produce a strong rebound.
This recession was caused by a mispricing of risk, leading to excessive leverage and high prices for a wide range of assets.
When those price bubbles burst, households lost substantial wealth and financial markets became dysfunctional.
Because the downturn was not caused by high interest rates, lowering them could not lift the economy out of recession.
The Obama administration therefore turned to fiscal policy – tax cuts and a range of spending programs.
Unfortunately, the fiscal stimulus was not well enough designed to get the economy onto a strong, self-sustaining growth path.
And, now that those stimulus programs are coming to an end, there is a danger that the economy will slide back into slow growth or even recession.
One key to the US economy’s future is household demand.
Although consumer spending has increased during the past four quarters, helped by substantial government transfer payments, the pace of spending growth by households was less than the overall pace of GDP growth, because households were increasing their rate of saving.
Indeed, household saving rose from 2% of after-tax incomes in 2007 to about 6% in recent months.
If the saving rate continues to rise at the same pace in the future as it has over the past three years, the overall GDP growth rate could turn negative after a few quarters.
Of course, there is no way to be certain of what will happen to saving.
But it is worth remembering that the saving rate averaged 9% in the quarter-century from 1960 to 1985.
If the saving rate now rises quickly to that level, it will be hard to keep overall GDP growing.
A significantly higher saving rate would help the US economy in the long run, but it would be a barrier to robust growth in the next few years.
A major obstacle to higher consumer spending is the current condition of the housing market.
The rapid rise in house prices until 2006 caused households to increase their spending, financed in part by converting home equity into cash.
But house prices have since fallen some 40% on average, leaving one-third of homeowners with mortgages owing more than their house is worth.
The resulting fall in wealth has reduced consumer spending, while the decline in homeowners’ equity prevents borrowing to finance any increase.
And the recent end of a special tax subsidy for first-time homebuyers has caused house prices to start falling again.
If that decline continues, it will inevitably reduce the pace of consumer spending.
Earlier this year, economic forecasters were predicting that annual GDP growth would reach 3% or more in the second half of 2010.
Now those projections have been cut to less than 2%, which is too slow to make a dent in the very high rate of unemployment.
The forecasters have now shifted their predictions of 3%-plus growth to 2011.
Let’s hope that they are right this time.
Why I Am Challenging Putin
Russia is living through the deepest, most prolonged crisis in modern history.
It is a man-made crisis that has struck every sphere of society and the state.
This crisis is not a natural disaster but one engineered by the choice of a false doctrine of reform, one that is leading the country to degradation.
Few people believe in the Putin regime's ability to achieve serious change.
The corruption and inefficiency of the state apparatus and the government's incompetence and inertia leave no hope for a real improvement in living standards.
Instead of the state being strengthened, it is being reborn as a police-bureaucratic apparatus to suppress social protest, extort bribes, and assure political repression.
I am running for president in order to cleanse the state apparatus of corruption and bureaucratic arbitrariness and to summon competent and responsible people into state service.
Russia cannot withstand another four years of plunder and destruction.
I am running so as to implement a real program to rebuild the economy.
The current regime will not implement such a program and will continue to serve the oligarchic clans that have grown fat by plundering state property.
Putin's corrupt and irresponsible regime has become part of the system of oligarchic parasitism, with its pathologically unjust distribution of incomes and property.
The current regime is ignoring an immutable law of governance: a state's effectiveness is indivisible from its responsibility for social justice.
By abandoning this responsibility, today's state has become not only ineffective but dangerous.
The impoverishment of great masses of the population has destroyed the structures of civil society, giving rise to a "civilization of slums."
Roughly half of Russia's population, primarily children, is not getting enough to eat.
Child neglect and homelessness are growing.
Towns and villages are swamped by violence and banditry.
Poverty, psychological stress, and the collapse of health care have led to an anomalously high death rate, a mass decrease in health, and the wasting of colossal labor resources.
Many people cannot buy the most basic medicines and have no access to modern medical services.
The prospects for modernizing or even preserving the national health care system are shrinking with every year.
I am running in the election in order to guarantee everyone living in our country, which is the richest in the world, the constitutional right to a decent life and to develop freely.
In order to do this, we must take back as state revenue the profits from the exploitation of our natural wealth, double the budget, and guarantee everyone's real right to free education and healthcare.
The "reforms" that have been conducted over the last 15 years have denied a large proportion of the work-fit population, primarily young people, of jobs and the right to a decent life.
But they are the backbone of our country.
Continuing on the current path will only destroy the nation's workers.
Implementing our program of social justice and economic growth will allow wages to be doubled in the course of a year by bringing them into line with labor's contribution to the national income, expanding workers' rights to stand up for their interests, and increasing the minimum wage by three times.
Real wages should grow fourfold by 2010; pensions must also grow accordingly.
Economic growth must encompass all regions of the country, and people must have equal social guarantees, rights, and opportunities regardless of their place of residence.
At the moment, revenues are diverted away from the regions to the center and then dispatched abroad ­- the oligarchs' wealth of billions comes from fleecing the Russian provinces.
I will put an end to this.
To improve the economy we will direct lending to manufacturing and entrepreneurial activity, protect the right to honestly earned and legally acquired property, rebuild savings, and stimulate scientific-technical innovation and investment.
Markets will be purged of criminals and monopolies; honest competition will begin to operate.
Those who work well and benefit society will get high incomes, not those who take what belongs to other people.
The prices of basic commodities and charges for electricity, heating, and other vital services will be reduced to their actual production costs.
The geopolitical legacy of the USSR as a great power has been squandered over the years of "reform."
Reform of the armed services has boiled down to disarmament alone.
Combat capability has fallen to an unprecedented low level.
Russia is being threatened with losing its status as a power.
Russia will not be reborn without the rebirth of a powerful, modern army.
Afflicted by corruption, the law-enforcement authorities are not in a position to prevent the threat of terrorism or to crush organized crime.
I will purge these bodies of corruption, eradicate organized crime, and liberate our towns from terrorists and bandits.
Under the slogan of the market, the current regime has allowed depravity to flourish on television and in mass culture.
The profound values of Russian culture are being systematically destroyed, stripping life of its meaning and joy, and sowing an enmity of each against all.
To give Russians back a feeling of pride in their homeland, and to create the conditions for a revival of our historical spiritual and cultural traditions, we must revive our schools, eradicate the spirit of depravity and violence in the media, provide everyone with access to masterpieces of Russian culture, and create the conditions for a social partnership between the state and the church.
Now is the moment for Russians to take Russia back!
Why India is Riskier than China
NEW HAVEN – Today, fears are growing that China and India are about to be the next victims of the ongoing global economic carnage.
This would have enormous consequences.
Asia’s developing and newly industrialized economies grew at an 8.5% average annual rate over 2010-11 – nearly triple the 3% growth elsewhere in the world.
If China and India are next to fall, Asia would be at risk, and it would be hard to avoid a global recession.
In one important sense, these concerns are understandable: both economies depend heavily on the broader global climate.
China is sensitive to downside risks to external demand – more relevant than ever since crisis-torn Europe and the United States collectively accounted for 38% of total exports in 2010.
But India, with its large current-account deficit and external funding needs, is more exposed to tough conditions in global financial markets.
Yet fears of hard landings for both economies are overblown, especially regarding China.
Yes, China is paying a price for aggressive economic stimulus undertaken in the depths of the subprime crisis.
The banking system funded the bulk of the additional spending, and thus is exposed to any deterioration in credit quality that may have arisen from such efforts.
There are also concerns about frothy property markets and mounting inflation.
While none of these problems should be minimized, they are unlikely to trigger a hard landing. Long fixated on stability, Chinese policymakers have been quick to take preemptive action.
That is particularly evident in Chinese officials’ successful campaign against inflation.
Administrative measures in the agricultural sector, aimed at alleviating supply bottlenecks for pork, cooking oil, fresh vegetables, and fertilizer, have pushed food-price inflation lower.
This is the main reason why the headline consumer inflation rate receded from 6.5% in July 2011 to 4.2% in November.
Meanwhile, the People’s Bank of China, which hiked benchmark one-year lending rates five times in the 12 months ending this October, to 6.5%, now has plenty of scope for monetary easing should economic conditions deteriorate.
The same is true with mandatory reserves in the banking sector, where the government has already pruned 50 basis points off the record 21.5% required-reserve ratio.
Relatively small fiscal deficits – only around 2% of GDP in 2010 – leave China with an added dimension of policy flexibility should circumstances dictate.
Nor has China been passive with respect to mounting speculative excesses in residential property.
In April 2010, it implemented tough new regulations, raising down-payments from 20% to 30% for a first home, to 50% for a second residence, and to 100% for purchases of three or more units.
This strategy appears to be working.
In November, house prices declined in 49 of the 70 cities that China monitors monthly.
Moreover, it is a serious exaggeration to claim, as many do today, that the Chinese economy is one massive real-estate bubble.
Yes, total fixed investment is approaching an unprecedented 50% of GDP, but residential and nonresidential real estate, combined, accounts for only 15-20% of that – no more than 10% of the overall economy.
In terms of floor space, residential construction accounts for half of China’s real-estate investment.
Identifying the share of residential real estate that goes to private developers in the dozen or so first-tier cities (which account for most of the Chinese property market’s fizz) suggests that less than 1% of GDP would be at risk in the event of a housing-market collapse – not exactly a recipe for a hard landing.
As for Chinese banks, the main problem appears to be exposure to ballooning local-government debt, which, according to the government, totaled $1.7 trillion (roughly 30% of GDP) at the end of 2010.
Approximately half of this debt was on their books prior to the crisis.
Some of the new debt that resulted from the stimulus could well end up being impaired, but ongoing urbanization – around 15-20 million people per year move to cities – provides enormous support on the demand side for investment in infrastructure development and residential and commercial construction.
That tempers the risks to credit quality and, along with relatively low loan-to-deposit ratios of around 65%, should cushion the Chinese banking system.
India is more problematic.
As the only economy in Asia with a current-account deficit, its external funding problems can hardly be taken lightly.
Like China, India’s economic-growth momentum is ebbing.
But unlike China, the downshift is more pronounced – GDP growth fell through the 7% threshold in the third calendar-year quarter of 2011, and annual industrial output actually fell by 5.1% in October.
But the real problem is that, in contrast to China, Indian authorities have far less policy leeway.
For starters, the rupee is in near free-fall.
That means that the Reserve Bank of India – which has hiked its benchmark policy rate 13 times since the start of 2010 to deal with a still-serious inflation problem – can ill afford to ease monetary policy.
Moreover, an outsize consolidated government budget deficit of around 9% of GDP limits India’s fiscal-policy discretion.
While China is in better shape than India, neither economy is likely to implode on its own.
It would take another shock to trigger a hard landing in Asia.&#160;&#160;
One obvious possibility today would be a disruptive breakup of the European Monetary Union.
In that case, both China and India, like most of the world’s economies, could find themselves in serious difficulty – with an outright contraction of Chinese exports, as in late 2008 and early 2009, and heightened external funding pressures for India.
While I remain a euro-skeptic, I believe that the political will to advance European integration will prevail.
Consequently, I attach a low probability to the currency union’s disintegration.
Barring such a worst-case outcome for Europe, the odds of a hard landing in either India or China should remain low.
Seduced by the political economy of false prosperity, the West has squandered its might.
Driven by strategy and stability, Asia has built on its newfound strength.
But now it must reinvent itself.
Japanese-like stagnation in the developed world is challenging externally dependent Asia to shift its focus to internal demand.
Downside pressures currently squeezing China and India underscore that challenge.
Asia’s defining moment could be hand.
Why is America’s Budget Deficit So Large?
CAMBRIDGE – America’s enormous budget deficit is now exceeded as a share of national income only by Greece and Egypt among all of the world’s major countries.
To be sure, the current deficit of 9.1% of GDP is due in part to the automatic effects of the recession.
But, according to the official projections of the United States Congressional Budget Office (CBO), even after the economy returns to full employment, the deficit will remain so large that America’s national debt-to-GDP ratio will continue to rise for the rest of this decade and beyond.
Understanding how to achieve US fiscal consolidation requires understanding why the budget deficit is projected to remain so high.
Before looking at the projected future deficits, consider what happened in the first two years of President Barack Obama’s administration that caused the deficit to rise from 3.2% of GDP in 2008 to 8.9% of GDP in 2010 (which in turn pushed up the national debt-to-GDP ratio from 40% to 62%).
The 5.7%-of-GDP rise in the budget deficit reflected a 2.6%-of-GDP fall in tax revenues (from 17.5% to 14.9% of GDP) and 3.1%-of-GDP rise in outlays (from 20.7% to 23.8% of GDP).
According to the CBO, less than half of the 5.7%-of-GDP increase in the budget deficit was the result of the economic downturn, as the automatic stabilizers added 2.5% of GDP to the rise in the deficit between 2008 and 2010.
The CBO analysis calls the changes in the budget deficit induced by cyclical conditions “automatic stabilizers,” on the theory that the revenue decline and expenditure increase (mainly for unemployment benefits and other transfer payments) caused by an economic downturn contribute to aggregate demand and thus help to stabilize the economy.
In other words, even without the automatic stabilizers – that is, if the economy had been at full employment in 2008-2010 – the US budget deficit still would have increased by 3.2% of GDP.
Lower revenue and increased outlays each account for about half of this “full-employment” rise in the deficit.
Looking ahead, the CBO projects that enacting the budget proposed by the Obama administration in February would add $3.8 trillion to the national debt between 2010 and 2020, causing the debt-to-GDP ratio to soar from 62% to 90%.
That $3.8 trillion net debt increase reflects a roughly $5 trillion increase in the deficit, owing to higher spending and weaker revenues from middle- and lower-income taxpayers, offset in part by $1.3 trillion in tax increases, primarily on high-income earners.
Even this enormous increase in the projected deficits and debt underestimates the fiscal damage that the Obama administration’s budget, if enacted, would inflict.
The proposed budget assumes that non-defense “discretionary” spending (which requires congressional approval, unlike so-called “mandatory” spending like Social Security pension benefits, which continues to grow unless Congress changes the benefits) will rise by a total of only 5% in the decade 2010-2020, implying a decline in real terms and no scope for new programs.
The annual level of defense spending is projected to decline by about $50 billion in each year after 2012 – a very optimistic view of US military needs in the decade ahead.
Shrinking America’s budget deficit to prevent a further rise in the debt-to-GDP ratio from its current level will require reduced spending and increased revenue.
That increase in revenue can be achieved without raising marginal tax rates, namely by limiting the amount of tax reduction that individuals and businesses can achieve from the various “tax expenditures” that form an important part of the US tax code.
But that is a subject for another column.
On the expenditure side, however, the prospect that the national debt could double during the next decade is just the start of the fiscal problem that the US now faces.
The budget outlook in subsequent decades is dominated by the increasing costs of Social Security and Medicare benefits, which are projected to take the debt-to-GDP ratio from 90% in 2020 to 190% in 2035.
Fundamental reform of these programs is the primary challenge for America’s public finances – and thus for the long-term health of the US economy.
Why is China Booming?
Providence, R.I. – China is now celebrating the 30th anniversary of the period officially known as “reform and opening.”
Labeling time in this way echoes China’s imperial history.
During moments of political transition – a military victory, for example – the emperor might designate a special “era name” to help celebrate the good news.
Or the court might test out a new era name after a political debacle, in an effort to wipe the slate clean.
The last emperor of the Tang Dynasty proclaimed seven era names in fourteen years, as he sought in vain to “re-brand” his reign and avoid his regime’s demise.
Deng Xiaoping began to champion “reform and opening” in 1978. “Reform” suggested a loosening of central controls on economic life, undertaken in a spirit of pragmatism and gradualism, as an antidote to Mao Zedong’s ideology of “revolution.”
Similarly, “opening” heralded the PRC’s integration into the world community – especially the capitalist West.
Deng’s principles still guide policy today.
One must go back to the Qing Dynasty (1644-1912) and its 60-year era of “heavenly flourishing” ( Qianlong ) in the eighteenth century to find a comparable period of coherent political and economic policy.
The era of “reform and opening” has outlived its “emperor” by more than a decade, and has been the common thread running through transfers of political authority from Deng to Jiang Zemin and Hu Jintao.
Even the largest popular challenge the Chinese Communist Party ever faced, the demonstrations of 1989, now looks like a blip that helped Deng consolidate support for his model of development.
If one factor undergirds China’s commitment to “reform and opening,” it is the extraordinary macroeconomic changes of the past 30 years.
In China, people call it fazhan , or “development,” but in much of rest of the world, it is more commonly described simply as the “China Boom,” or the “China Miracle.”
The boom began in the countryside in the late 1970’s and 1980’s, and was followed by today’s urban, industrial-led growth.
Indeed, there have been many smaller “booms” – in consumption, foreign direct investment, domestic stock markets, trade, travel, overseas study, military modernization, and international diplomacy.
There is also a boom in pollution and toxic waste, and booming interest in religion – from Buddhism to Pentecostal Christianity – and in Confucian philosophy.
Little in China today speaks of moderation.
A leading fashion industry executive argues that a key engine driving the economic boom has been the influx of women into the workforce, particularly in the manufacturing zones of the south.
Another compelling explanation comes from a venture capitalist who credits Chinese society with copious reserves of entrepreneurial energy that derives, he believes, from the fact that Chinese culture attaches very little shame to failing in a business enterprise.
High tolerance for failure keeps everybody striving to succeed.
Whatever the cause, the boom seems an unlikely capstone to a century of war, ferment, and revolution, and only adds to the sense of discontinuity that characterizes modern China.
Certainly, few observers looking in 1978 at the smoldering embers of the Cultural Revolution, or at the seeming ruination of the post-1989 years, thought China would emerge as the lightning rod of the world’s developmental hopes.
Paradoxically, the apparently discontinuous and contradictory nature of the “era of reform and opening” may actually help explain how China’s boom came about.
The tumult of the Maoist period instilled in a broad cross-section of people a profound appreciation for stability, and a yearning to be left alone.
Deng capitalized on this revolution-weariness by diminishing the role of politics and the state in people’s private lives and freeing them to release their pent-up energy to pursue their own goals.
Revolutionary communism may well have cleared the path for the boom in other ways as well, suggesting that the shift from socialist utopianism to capitalist pragmatism was less a U-turn than a sequential process of “creative destruction.”
After all, Mao’s Cultural Revolution against “feudal society” did raze much of the cultural landscape, denuding it not only of traditional values and institutions, but also of failed socialist efforts, leaving China ready for the seeds of capitalist development.
Mao’s revolution fueled countless rectification movements and campaigns that inverted the once-inviolate primacy of ruler over ruled, scholar over worker, husband over wife, father over son, and family over individual.
By the time of the reforms of the 1980’s and 1990’s, bonds tying individuals to culture, the state, the work unit, and household-registration systems, for example, had largely unraveled.
The path had been cleared for a vast new population of atomized entrepreneurs and laborers, freed from fealty to family and Party, to storm the marketplace with newly liberated individual energy.
Of course, the boom’s costs should not be discounted.
Environmental damage has been staggering, the gap between rich and poor has been growing, and urbanization – with all its attendant problems – has surged.
And, at least so far, the boom has not induced the systemic political changes for which many hoped.
But still, a key question remains unanswered: why did China’s boom happen?
This is one of the great questions of our time, relevant not only to China’s future, but to scores of other developing countries enthralled by China’s extraordinary, but still largely unexplained, success.
Why is France Burning?
The urban disturbances in France have been called the most severe since the riots by students and workers in 1968.
The analogy is misleading.
While the 1968 protests challenged the French Republican model to live up to its finest aspirations, today’s crisis challenges the French Revolution’s model of citizenship and integration itself.
The French Republican model asserts that all French citizens have the same cultural identity. Indeed, this is the only acceptable identity.
To achieve this shared identity, all citizens have to speak the one official language and be educated according to a common curriculum.
But they also enjoy equal rights, and have the same duties, in the public arena.
All this is not only fostered by the state, but also requires the kind of uniformity that only a centralized state can impose.
Indeed, the French Revolution’s ideological commitment to unity was so strong that during parts of the nineteenth century, advocating federalism was a capital offense.
Three components of this model incited today’s crisis and make it difficult for the French Republic to address it effectively.
The first component is the classic French Republican prohibition on gathering data in the official census – or by government agencies or public or private enterprises – on ethnicity, religion, and even social class.
Collecting these data would, it is argued, violate the Republican tenet that France is “one and indivisible.”
But the absence of a secondary breakdown of such data, like the UK-style, four-fold class analysis (plus examination of patterns of unemployment by ethnicity or religion), makes it hard for social workers, public heath officials, and economic planners to diagnose new problems.
Without the necessary data for analysis, public health policies, for example, cannot be directed toward groups that are especially disadvantaged or otherwise at risk.
The second factor is the classic French Republican rejection of, and legal norms against, any form of “affirmative action,” or positive discrimination, even of the most inoffensive kind.
Like the prohibition of fine-tuned data – without which positive discrimination is in any case impossible – affirmative action is seen as damaging to the Republican model because it is based on recognition of ethnic differences.
The third component is the post-welfare state, which is now part of the French model of citizenship and guarantees all full-time employees one of the highest minimum wages in the world and high employer-paid benefits.
This makes it extremely difficult to let workers go, which makes employers reluctant to hire new people in the first place.
Many of the social-democratic countries of Europe, like Sweden, Holland, and Denmark, created similar norms in their full-employment eras.
Unlike France, however, they also used census data to identify pockets of new unemployment, and to invest socially and politically, not only in excellent job-training programs, but in job creation, and, just as importantly, in job-placement schemes.
France is now very bad at creating new jobs.
It has few training programs, but high benefits for the unemployed and strong restrictions against firing workers.
Put all of this together, and it is like slamming a door in the face of young minority men looking for work.
This is the primary cause of the 30-50% unemployment rates among minorities aged 16-24 in many French “urban zones of sensitivity.”
Thus, the riots that France is now seeing emerge from French policies, not from instigations by Islamists.
France has simply failed to incorporate minority citizens – many of them third-generation immigrants who have been educated for twenty years in assimilationist public schools.
But few political leaders accept that the crisis has anything to do with the French model of citizenship.
Indeed, they confidently wait for assimilation to kick in.
But in today’s high unemployment, low job-creation, and now multicultural France, assimilation will not occur without big changes.
France is only now beginning to come to grips with the crisis of its Republican model of equal citizenship.
A newly created Minister of Social Cohesion has begun to commission studies documenting discrimination.
One study showed that for similarly qualified job applicants, those with an Islamic-sounding name, and an address in an ethnically segmented suburb, had only one-fifth the chance of even getting an interview as people with a French-sounding name and a “safe” address.
Two hundred and fifty of the largest private and public enterprises have created an organization aimed at working with the government to allow them, for the first time ever, to document, and then redress, their discriminatory employment practices.
Fortunately, organized Muslim leaders so far have not aggravated the rioting.
Of course, the government’s reduction of community policing in favor of paramilitary forces stationed in quasi-military barracks, and the Minister of Interior’s description of the young rioters as “scum” who should be washed away with an industrial power hose, has not helped.
The French Republican model enshrines the laudable abstract principles of liberty, equality, and fraternity.
However, so long as second- and third-generation minority citizens are taught that the only acceptable cultural identity is French, but are not in fact accepted as French – indeed, are blocked from enjoying the full rights of French citizenship – the Republican model will fuel alienation rather than democratic integration.
Why is Rape Different?
NEW YORK – As Swedish prosecutors’ sex-crime allegations against WikiLeaks founder Julian Assange play out in the international media, one convention of the coverage merits serious scrutiny.
We know Assange by name.
But his accusers – the two Swedish women who have brought the complaints against him – are consistently identified only as “Miss A” and “Miss W,” and their images are blurred.
News organizations argue that the policy is motivated by respect for the alleged victims.
But the same organizations would never report charges of, say, fraud – or, indeed, non-sexual assault – against a suspect who has been named on the basis on anonymous accusations.
In fact, despite its good intentions, providing anonymity in sex-crime cases is extremely harmful to women.
The convention of not naming rape accusers is a relic of the Victorian period, when rape and other sex crimes were being codified and reported in ways that prefigure our own era.
Rape was seen as “the fate worse than death,” rendering women – who were supposed to be virgins until marriage – “damaged goods.”
Virginia Woolf called the ideal of womanhood in this period “The Angel in the House”: a retiring, fragile creature who could not withstand the rigors of the public arena.
Of course, this ideal was a double-edged sword: their ostensible fragility – and their assigned role as icons of sexual purity and ignorance – was used to exclude women from influencing outcomes that affected their own destinies.
For example, women could not fully participate under their own names in legal proceedings.
Indeed, one of the rights for which suffragists fought was the right to be convicted of one’s own crimes.
Nonetheless, even after women gained legal rights – and even as other assumptions about women have gone the way of smelling salts and whalebone stays – the condescending Victorian convention of not identifying women who make sex-crime charges remains with us.
That convention not only is an insult to women, but also makes rape prosecutions far more difficult.
Overwhelmingly, anonymity serves institutions that do not want to prosecute rapists or sexual harassers.
The United States military, for instance, hides rape accusers’ identities, and the prevalence of rape in the US armed forces today is off the charts.
Maintaining anonymous charges enables the military authorities to avoid keeping comprehensive records, which in turn allows officials to evade responsibility for transparent reporting of assaults and of prosecutions – and thus not to prosecute sex crime in any serious, systematic way.
The same is true with universities.
My alma mater, Yale, used anonymity in reporting of sex harassment and rape to sweep sex-crime incidents and repeat offenders’ records under the rug for two decades, thereby protecting its own interest in preventing systematic investigation.
Because of the prevalence of universities’ anonymity policy, at least two alleged serial rapists – whose assaults were reported to their employers separately by more than one victim – are teaching at new universities, with no charges ever brought against them.
The lesson is clear: when charges are made anonymously, no one takes them as seriously as charges brought in public, resulting in institutionalized impunity for sexual predators.
Indeed, only when victims have stood up and stated their names – granted, a difficult and often painful thing to do – have institutional change and successful prosecutions been possible.
Anita Hill’s decision in 1991 not to make anonymous accusations against Clarence Thomas, now a US Supreme Court justice, spurred a wave of enforcement of equal-employment-opportunity law.
Hill knew that her motives would be questioned.
But, as a lawyer, she understood how unethical anonymous allegations are – and how unlikely they are to bring about real consequences.
In fact, the convention of anonymity merely allows rape myths to flourish.
When victims are not kept hidden, it becomes much clearer that rape can happen to anyone – grandmothers and students, homemakers and prostitutes.
Instead, we have stereotypes about how “real” rape victims must look and act in order to be taken seriously.
And we have the myth of higher false reporting of rape relative to other crimes (in the US, the rate is no different: 2-4%).
Feminists have long argued that rape must be treated like any other crime.
But in no other crime are accusers kept behind a wall of anonymity. Treating rape so differently serves only to maintain its mischaracterization as a “different” kind of crime, loaded with cultural baggage and projections.
Finally, there is a profound moral issue at stake.
Though children’s identities should, of course, be shielded in sex-crime allegations, women are not children.
If one makes a serious criminal accusation, one must wish to be treated – and one must treat oneself – as a moral adult.
That is why justice systems – at least in democracies – typically demand that the accused be able to face his or her accuser.
Why, for example, in a case that is so dependent on public opinion – and on which so much depends – must Assange face allegations that may have grave consequences for him, while his accusers remain hidden?
So-called “rape shield” laws should be used to protect alleged victims. It is no one’s business whom a victim has slept with previously, or what she was wearing when she was attacked.
But preventing an accuser’s sexual history from entering into an investigation or prosecution is not the same as providing anonymity.
Nor should it be.
After all, motive and context are legitimate questions in any serious criminal allegation.
Hill, for example, knew that she would have to explain why she waited years to accuse Thomas, her former employer.
Likewise, adult accusers of Church-protected sex criminals knew that they would have to answer fundamental questions (notably, many of them have identified themselves, which has helped get real prosecutions).
It is wrong – and sexist – to treat female sex-crime accusers as if they were children, and it is wrong to try anyone, male or female, in the court of public opinion on the basis of anonymous accusations.
Anonymity for rape accusers is long overdue for retirement.
Why Mexico is Sick
Mexico City – As I reflect on my troubled country, the lyrics of a Bruce Springsteen song come to mind: “We are far, far away from home.
Our home is far, far away from us.”
That’s how it feels to live in Mexico nowadays: far from democratic normalcy; far from a health system that inspires confidence; far from a government that builds trust; far from home and close to everything that imperils it.
My homeland has become a place where too many people are victims, succumbing to a virus, or gunned down by a drug-trafficker; assaulted by a robber, shot by an ill-trained policeman, or kidnapped by a member of a criminal gang.
The flu epidemic, which probably began in the southern state of Veracruz, is yet another sign that all is not well in Mexico.
The country seems to be caught in a permanent, uneasy tug-of-war between the past and the future, between change and the actors who seek to place obstacles in its path.
For example, when initial reports surfaced about the first swine flu cases, it took three weeks for the information to reach federal health authorities, because state governments were reluctant to report cases quickly due to political and electoral considerations.
Mexico faces mid-term elections for Congress in the fall, and President Felipe Calderón’s National Action Party is trailing slightly in the polls over its main rivals, who would like nothing better than to see a health emergency translate into a political defeat.
In the face of a public health system that seemed incapable of diagnosing and treating the outbreak quickly, the government felt it had little choice but to shut down Mexico City, dealing a severe blow to an already crippled economy.
In contrast with Mexico’s authoritarian past, when an “imperial presidency” constituted a major obstacle to modernization, power has been dispersed.
What the executive branch has relinquished, or been forced to give up, vested interests have seized.
The problem is no longer too much power in the president’s hands, but too much power in the hands of “veto centers” – including public-sector unions – that are blocking much-needed reforms, including in the health system.
In all likelihood, the 22 reported dead from swine flu reflect a social safety net falling to pieces due to lack of public investment and union recalcitrance.
The flu also revealed some of Mexico’s other fundamental flaws.
The political system has become a peculiar hybrid of authoritarian remnants and newly established mechanisms for transparency.
The electoral process has been unable to guarantee decent democratic governance, rein in predatory practices among the political class, or make public officials follow established rules, keep them responsive to citizen preferences, and deter them from channeling public funds into private hands.
Lack of accountability has both encouraged corruption and fed perceptions that abuse remains unpunished.
Impunity, in turn, erodes the credibility of the country’s institutions, including public hospitals and clinics.
Today, conspiracy theories abound in Mexico about the origins of the virus, because government officials are viewed with such ingrained suspicion.
Throughout the epidemic, citizens have largely obeyed government guidelines and followed public health prescriptions.
But that doesn’t mean they trust the government.
Public-opinion polls reveal that more than 50% of the population believe that political parties are “not necessary” for the good of the country.
Disapproval of Congress is growing, and people’s satisfaction with representative democracy has decreased.
In the midst of the epidemic, 66% of Mexicans believe that the country is regressing.
Seventy-five percent of crimes are not reported due to lack of trust in the authorities, and 98% of crimes are never resolved or punished.
Public opinion seems disenchanted with a democracy incapable of offering tangible solutions to problems, the flu crisis being the most recent example.
Saddled by a viral infection, drug-related insecurity, and rising crime, Mexico feels like a besieged place.
The noted columnist Miguel Angel Granados Chapa wrote last week: “All that’s missing is for Mexico to get peed on by a dog.”
Mexico’s bad health is a symptom of problems that run deeper and are more widespread than swine flu.
Over the past ten years, political and economic actors intent on preserving the status quo have blocked further democratic change and economic reform, condemning Mexico to move sideways, even as other emerging markets surge ahead.
Lately, political battles among key actors have not been about how to build a more effective of representative political system or a more equitable, dynamic economy, but about how to maintain control of accumulated power or distribute it among their allies.
Political parties appear far removed from citizen demands, beset by internal divisions, incapable of addressing deep-rooted inequality and lawlessness, and prone to populist or authoritarian leadership that promises quick fixes to entrenched problems.
Mexico’s current quandary is the flu, but it faces more important challenges than a mutating microbe.
With more than 40 million people living in poverty and 7,000 killed in drug-related violence last year, Mexico will need to reform quickly to address what the virus has brought to light: a government far removed from the suffering of ordinary people and too frequently insensitive to their plight.
In this national crisis, Mexico’s people have closed ranks, collaborated, and showed that they are capable of working together to achieve common goals in the public interest.
But their political and economic elites frequently seem incapable of doing so.
That is why home seems far, far away for so many Mexicans.
Why Musharraf Survives
Recent threats by the Bush administration to cut off billions of dollars in aid to Pakistan have sparked panic in government circles.
Likewise, according to the Pakistani ambassador in Washington, military strikes by the United States aimed at al-Qaeda and Taliban havens inside Pakistan’s tribal areas would destabilize Pakistan and “possibly could bring [General Pervez Musharraf] down.”
But how worried should the Pakistani authorities really be in the face of growing US pressure to root out Islamic militants?
Occasional frustrations notwithstanding, it is, in fact, unlikely that the US will turn against a faithful – and dependent – ally, especially one whose leader enjoys cordial personal relations with Bush.
Nor, due to a lack of organized opposition, will public anger at Musharraf’s pro-US policy destabilize his regime.
Indeed, the wily general-president does not merely survive crisis after crisis, but has thrived in power.
How does he do it?
The answer lies in a finely honed strategy, perfected over years, that juggles US demands and the interests of local intelligence chiefs, mullahs, tribal leaders, venal politicians, and a host of fortune seekers.
Webs of intrigue and murky players obscure details, but the priorities are unmistakeable.
First, American impatience must be held in check.
Pakistan is expected to deliver results on al-Qaeda and the Taliban.
However, the pot is not to be emptied all at once.
For example, when US Vice-President Dick Cheney arrived in Islamabad in early March, threatening an aid cut and direct US action against Islamic militants, his message was not lost.
Shortly before his unmarked aircraft landed, Pakistan announced the capture in Quetta of Mullah Obaidullah, deputy to the elusive Taliban chief, Mullah Omar.
Obaidullah carried a $1 million reward and was the most senior Taliban captured since November 2001.
Obaidullah’s capture – carried out reluctantly – underscores the Pakistan military’s ambiguous relationship with the Taliban.
Despite more than 700 Pakistani combat deaths, many in Musharraf’s army wish to retain the Taliban as quasi-allies who – when the Americans leave Afghanistan someday – will give Pakistan the “strategic depth” it needs against India.
Thus, to the chagrin of Afghanistan’s president, Hamid Karzai, Quetta remains a hub of Taliban opposition to his regime.
A second aspect of Musharraf’s strategy is to create mutually beneficial relations with Islamists.
This is a tricky business.
Musharraf cannot permit the mullahs to become too strong.
The mullahs, on the other hand, consider Musharraf an agent of the great Satan, America, and thus a traitor to Islam.
Nevertheless, Musharraf’s men have skillfully fractured the main Islamic opposition party, Muttahida Majlis-e-Amal (MMA), with bribes, blackmail, and internal dissension fomented by agent provocateurs.
As part of the trade-off, terrorist leaders who are officially under house arrest – like Maulana Masood Azhar and Hafiz Saeed – remain able to open offices, address rallies, and preach jihad freely.
Such appeasement carries a price.
This is clear in Islamabad, where over the past two months, Kalashnikov-toting students have openly challenged the state, following a government order for the demolition of dozens of illegally built mosques and seminaries.
Unnerved by the wild-eyed students, the government faltered, then surrendered.
In a dramatic reversal, Musharraf’s minister of religious affairs, the son of former dictator General Zia ul-Haq, promised to rebuild damaged mosques and even symbolically laid the first stone at one construction site.
The third element of Musharraf’s strategy is more positive: he knows that he must do some good – and also be seen doing it.
This is crucial for his image as a newly emerged world leader, promising moderate Islam in an ocean of extremism.
Some of Musharraf’s achievements are significant.
Relations with India have improved, the Kashmir insurgency supported by Pakistan has been scaled back, a women’s protection bill was passed in the teeth of Islamic opposition, and a virulent public school curriculum that emphasized jihad and martyrdom has been toned down.
But men who live by the gun are willing to die by the gun, and Musharraf is not taking chances.
He knows that the real threat to his power – and his life – comes from within his constituency, the military.
As a result, he has become obsessed with micromanaging everything from troop movements and special events to postings and promotions, all of which require his personal stamp of approval.
Hardline Islamists, favored previously, are now out, and soldiers charged with mutiny have received the death penalty.
Although this has further deepened pro- and anti-US divisions within the army, among both commissioned and non-commissioned officers, Musharraf clearly expects to remain president well beyond the October 2007 elections, as well as to extend further his term of leadership of the army.
To achieve this end, whatever needs to be done will be done; principles and rules are elastic.
One might have expected the Americans to know better than to bet all on a man who might be gone tomorrow.
But, beyond pumping in dollars and supporting Musharraf and his military, the US appears clueless in dealing with Pakistan and its problems of social development.
With the defeat of al-Qaeda and the Taliban America’s only visible goal, it is no surprise that the US remains enormously unpopular among Pakistanis, forcing Musharraf to maintain his perilous balancing act.
The US with Iran in Syria
PRINCETON – The prospect of a US military strike on Syria has dimmed following President Barack Obama’s embrace of an international initiative to take control of Syria’s chemical-weapons stockpile.
The eleventh-hour U-turn on the push for military action has come against a backdrop of intensifying diplomatic pressure from the international community to avoid escalation of the violence in Syria.
And that outcome is not possible without Iran.
In a joint press conference with his Syrian counterpart, Walid al-Moallem, Russian Foreign Minister Sergey Lavrov tabled a proposal, originally agreed with Iran, calling for Syria to “place chemical weapons storage sites under international control.” The stockpiles would then be destroyed and Syria would fully join the international Chemical Weapons Convention.
The second component of the Russian-Iranian proposal calls for international efforts, under the auspices of the United Nations Security Council, to rein in Syrian rebel forces’ chemical-weapons capabilities.
Moallem immediately embraced the proposal.
Hours later, UN Secretary-General Ban Ki-moon did as well, while Obama said that “I fervently hope that this can be resolved in a non-military way.”
This initiative would allow Obama to escape from a messy political and foreign-policy predicament.
But the matter is far from settled: Obama has not ruled out a military strike.
So here are 12 reasons why America should grasp the opportunity for a diplomatic resolution afforded by the Russian-Iranian plan.
First, there is evidence that the Syrian opposition has amassed chemical weapons.
In December 2012, Iran officially informed the US about chemical weapons, including sarin gas, being transferred to Syria.
The US declined to cooperate with Iran to press ahead on the case.
Second, US military strikes on Syria have the potential to engulf the entire region – and perhaps the US – in a broader war.
After its experiences in Afghanistan and Iraq over the past decade, the US can hardly afford a Syrian quagmire.
Third, with the regional Sunni-Shia conflict intensifying, the prospect of tens of billions of petrodollars backing terrorist extremists has already destabilized the region.
US military strikes against Syria would further fuel extremism and result in widespread atrocities by the rebels against Syrians of all faiths.
Reports point to the execution and mutilation of Syrian-government prisoners.
There is no doubt that the fate of Syria’s Christian and Jewish communities is now extremely precarious.
Fourth, America’s decision to back extremists in Syria contradicts its “war on terrorism” and will erode international support for it.
The prospect of Iranian cooperation to root out Al Qaeda extremists, which it provided in Afghanistan and Iraq, would be unlikely following any intervention.
Fifth, it is wrong to assume that without Syrian President Bashar al-Assad, Iran would lose its influence in the Muslim world as well as its link to Hezbollah in Lebanon.
America’s regional position weakened, and Iran’s strengthened, following the US-led invasions of Afghanistan and Iraq; US intervention in Syria could reproduce that pattern.
Sixth, a US attack on Syria would leave the US isolated internationally and end any hope of a diplomatic resolution.
There is no domestic or international appetite for another US military adventure – NATO, the G-20, the Europeans, Russia, China, and 60% of Americans oppose a unilateral US military strike.
Seventh, the civilian casualties arising from a military strike would be high.
If the main justification for an attack is humanitarian – to end the senseless slaughter of Syrian civilians – US military intervention would do more harm than good.
Eighth, US involvement in Syria will breathe new life into efforts to press for a wider war between the US and Iran.
Al Qaeda affiliates will target US regional interests in the hope that the blame falls on Iran and its militant proxies – providing a pretext for US military confrontation.
Ninth, a US military strike against a third Muslim-majority country would demolish the credibility of Obama’s efforts to repair America’s image in the Islamic world.
Indeed, it would most likely prove to be a strategic boon to the “resistance axis” – Iran and Hezbollah.
Tenth, any US unilateral military strike against Syria would ratchet up tensions between the US and Russia.
This, in turn, would strengthen the Russia-Iran alliance.
Eleventh, Iranian Supreme Leader Ayatollah Ali Khamenei has issued permission for President Hassan Rouhani’s new administration to enter into direct talks with the US.
No better opportunity to end decades of bilateral hostility is likely to come along.
In these circumstances, a US attack on Syria would almost certainly dash any hope of a US-Iran rapprochement for years to come.
Finally, with the moderate Rouhani now installed as President, a US military strike could undermine a golden opportunity for America and Iran to reach a face-saving solution (for both sides) on Iran’s nuclear program.
Both Iran and the US consider the use of weapons of mass destruction a grave crime.
Indeed, Iran was a major victim of chemical-weapons attacks during its 1980-1988 war with Saddam Hussein’s Iraq.
Iran can be a major partner to halt proliferation of WMDs in Syria, the Middle East, and beyond.
Iran maintains that the Security Council is the only body legally authorized to verify allegations concerning the use of such deadly weapons and to decide on the appropriate response.
One promising avenue for US-Iran cooperation on Syria could be joint support for a fact-finding mission by the Security Council to identify the perpetrators.
Obama has his “red line” on the use of chemical weapons.
Why Overseas Chinese Dominate China\u0027s Exports
Since the early 1990s, more foreign direct investment (FDI) has flowed into China than to any country except America.
Of this vast capital inflow, overseas Chinese – from Hong Kong, Taiwan, Macao and Southeast Asia – delivered the lion’s share.
Investments from Hong Kong and Macao claimed 70% of Chinese FDI in the early 90s; since then their share has decreased, yet it still accounts for 50% of China’s total FDI.
That China receives so much capital from expatriates is a global source of envy.
Indian officials bemoan the fact that overseas Indians lack both the wealth and the propensity to invest back home.
Economists and China-watchers celebrate this ready supply of capital, know-how, and marketing channels which enabled China to become – in a short period of time – Asia’s manufacturing base and export power-house.
Lavish praise for this stream of expatriate FDI, however, misses its deep flaws.
Yes, expatriate-invested firms produce many Chinese exports, but they often do it by seizing control of export-oriented businesses from indigenous Chinese.
Two ratios tell the story.
One is the export/GDP ratio, which rose from 15% in 1990 to 20% in 1999, an increase of 5%.
The other is the share of exports by foreign firms of total Chinese exports: this rose from 15% to almost 40% during the same period.
So, foreign firms may create exports for China, but they also divert a big slice of the export pie away from indigenous Chinese entrepreneurs.
Expatriate control of so much export-oriented businesses reflects a fundamental failing in China’s financial system.
China may have the second highest savings rate in the world, lagging behind only Singapore, but these funds are usually wasted on inefficient state-owned enterprises (SOEs).
These investments have failed to increase the competitiveness of Chinese SOEs, yet have starved efficient local entrepreneurs of the credits they need.
As a result, expatriate Chinese investors buy up businesses controlled by indigenous entrepreneurs on the cheap because the money they bring is the only source of funds available for business expansion.
China’s ability to attract so much export-oriented FDI is thus a warning that there is something very wrong with the financial system.
Discrimination against indigenous private entrepreneurs in China goes beyond finance.
Until recently, private Chinese firms could not export directly to foreign buyers and could not retain foreign exchange earnings.
But if you are in the export business, you need foreign exchange to import designs or intermediate inputs.
The restriction of access to foreign exchange made it impossible for private entrepreneurs to run independent export businesses.
Chinese law also discriminated against local export businesses.
Foreign investors often complain that their property rights go unprotected.
True, perhaps, but private Chinese entrepreneurs get a far worse deal.
As early as 1982, China’s Constitution contained a clause to protect property rights of foreign investors; domestic private entrepreneurs were not offered the same protection until 1999!
Supposedly, the match between China’s cheap labor costs and the entrepreneurship of expatriate Chinese investors is made in heaven.
The problem with this view is that it implies that indigenous Chinese entrepreneurs are somehow incompetent.
What matters about FDI is not only that foreign money comes into China, but also that it brings foreign control of business.
And foreign control only makes sense if it brings in the management know-how that local entrepreneurs lack.
Is this a plausible explanation as to why Chinese entrepreneurs cede control to expatriates?
A look at other countries may be instructive.
Native Indian and Turkish entrepreneurs run successful export garment businesses in their countries and contract with foreign buyers to sell goods.
The foreign buyers provide designs and even raw materials, while domestic entrepreneurs put them together according to required specifications.
Unless Chinese entrepreneurs are more incompetent than their Indian and Turkish counterparts - and no one suggests that – there is no reason why expatriate Chinese cannot contract with indigenous entrepreneurs to produce goods for export.
The difference is that FDI brings not only a business opportunity but also financing to liquidity-starved Chinese entrepreneurs, whereas a contract only brings forth a business opportunity.
China’s entrepreneurs lack money, not talent.
In fact, in some areas, Chinese entrepreneurs should know more than expatriates. Take traditional handicrafts like jade and ivory carving.
In 1995, there were some 900 foreign-controlled firms producing traditional Chinese handicrafts; the average foreign equity share was 88%.
Thus, in industries in which Chinese have excelled for thousands of years, foreign control is now almost absolute.
Cheap labor is the least plausible argument why so much export-oriented FDI has gone to China.
FDI is not the only form of cross-border economic transaction.
A Hong Kong firm can contract out its production in Guangdong province to reap the same labor-savings benefits it would gain from investing in China.
Cheap labor explains why expatriate Chinese seek to produce in China; it does not explain why their investments are so sought after by the Chinese.
As China nears membership in the WTO, its political and administrative apparatus is mobilizing to improve the investment environment and property rights for foreign investors.
But why not look after the interests of domestic entrepreneurs as well?
The most urgent task for China’s government is not WTO membership, but improving the political, regulatory and financial treatment of Chinese entrepreneurs, who are as talented, innovative and hard working as their expatriate counterparts.
There is no compelling reason why they should lose control of their businesses – often at fire-sale prices – to overseas cousins on so massive a scale.
Why Pay More for Fairness?
Marks & Spencer, a supermarket and clothing chain with 400 stores throughout Britain, recently announced that it is converting its entire range of coffee and tea, totaling 38 lines, to Fairtrade, a marketing symbol of “ethical production.”
The chain already sells only Fairtrade tea and coffee in its 200 Café Revive coffee shops.
It is also boosting its purchases of shirts and other goods made with Fairtrade cotton.
The announcement came during “Fairtrade Fortnight,” a two-week promotion of Fairtrade products that included speaking tours by farmers from developing countries, telling Britons how Fairtrade has assisted their communities.
The movement toward more ethical consumption has made significant gains in the United States as well, as consumers increasingly turn to organic, locally produced foods, and eggs from hens not kept in cages.
In the UK, a survey has found that half of those shown the Fairtrade symbol recognized it and understood that it refers to products that give a better deal for Third World farmers.
There is no comparable US research, but related data, and discussions with my own students, suggests that the figure would be much lower.
Traders seeking Fairtrade certification must pay producers a price that covers the costs of sustainable production and provides a living wage.
For example, the minimum price for coffee is $1.26 per pound, no matter how low the market price may fall.
If the market price rises above that figure, the fair trade price will increase so that it remains five cents per pound higher.
Small farmers, for their part, are required to be organized in cooperatives or other groups that allow democratic participation.
Plantations and factories can use the Fairtrade label if they pay their workers decent wages, comply with health, safety, and environmental standards, allow unions or other forms of workers’ associations, provide good housing if workers are not living at home, and do not use child labor or forced labor.
Not every one approves of Fairtrade.
Brink Lindsey, director of the pro-market Cato Institute’s Center for Trade Policy Studies, believes that the campaign for Fairtrade coffee is a “well-meaning dead end.”
With some justification, he argues that the real cause of the fall in coffee prices was not the profiteering of multinationals, but big increases in coffee production in Brazil and Vietnam, combined with new techniques that make it possible to grow coffee with less labor and hence more cheaply.
In Lindsey’s view, if we want to assist coffee growers, we should encourage them either to abandon coffee and produce more profitable crops – and here he rightly points to rich nations’ trade barriers and subsidies as obstacles that must be dismantled – or to move into higher-value products, like specialty coffees, that bring higher prices.
What is curious about Lindsey’s argument, however, is that the Fairtrade coffee campaign can be seen as doing just what he recommends – encouraging coffee farmers to produce a specialty coffee that brings a higher price.
Pro-market economists don’t object to corporations that blatantly use snob appeal to promote their products.
If people want to pay $48 for a pound of Jamaican Blue Mountain coffee because that’s what James Bond prefers, economists don’t object that the market is being distorted.
So why be critical when consumers choose to pay $12 for a pound of coffee that they know has been grown without toxic chemicals, under shade trees that help birds to survive, by farmers who can now afford to feed and educate their children?
Economists might reply that if you want to help people feed and educate their children, you can pay $10 for a pound of non-Fairtrade coffee that tastes the same and give the $2 you save to an aid agency that provides food and education to poor children.
That’s a possible strategy, but there are advantages to Fairtrade.
The growers know that they have to provide a product that consumers like, both for its taste and for the way it is grown.
If their product sells well, they can take pride in having produced something that is sought after around the world.
From the growers’ perspective, receiving a premium by selling a Fairtrade product is preferable to receiving a charitable handout that they would get whether they worked or not and regardless of the quality of what they produce.
Paying more for a Fairtrade label is no more “anti-market” than paying more for a Gucci label, and it reflects better ethical priorities.
Fairtrade is not a government subsidy.
Its success depends on market demand, not political lobbying.
Fortunately, in Europe, that market demand is growing rapidly.
One hopes that it will soon reach similar levels throughout the developed world, and wherever people can make choices about their discretionary spending.
Why Putin Makes a Bad Ally
STANFORD – Russian President Vladimir Putin’s intervention in the Syrian conflict has been welcomed by some as a moment for the Kremlin to “come in from the cold.”
Russia’s conflict with the Islamic State, the argument goes, has aligned the country’s interests with those of the West.
Even Turkey’s downing of a Russian warplane does not seem not to have deflated this optimism.
Indeed, at a recent press conference, US President Barack Obama again urged Putin to join the alliance against the Islamic State.
And French President François Hollande billed his recent visit to Moscow as an effort to build a broad international coalition against the terrorist group.
At first blush, the idea that Russia is a natural ally against Islamist terrorists seems to make sense.
The country has suffered horrific terrorist attacks by Islamist extremists, including the bombing in November of a plane above the Sinai Peninsula, which killed 224 passengers and crew, nearly all of them Russian.
Around 20 million Muslims, most of them Sunni, live within the Russian Federation, and the country’s security officials report that some 7,000 fighters from the former Soviet republics and Russia have joined the Islamic State.
On deeper examination, however, it becomes clear that an anti-terror alliance with Russia is wishful thinking.
Putin has not gone into Syria to defeat the Islamic State. He has intervened to save the regime of Russia’s client, Syrian President Bashar al-Assad.
Putin may sometimes give the appearance that he is ready to abandon Assad, but ultimately he will defend him.
Leaving Assad to his fate would be a sign of weakness – and thus anathema to Putin.
Ordinary Russians may be in danger of attacks by Islamic extremists, but they pose little threat to Putin or his allies.
Russia has indeed suffered a number of terrorist attacks, including the 2004 Beslan massacre, in which 334 people, most of them schoolchildren, were killed.
In nearly every case, the response to the attacks was brutal, inept, and costly in terms of civilian lives lost.
And yet the Putin regime has emerged unscathed each time.
Indeed, terrorist attacks at the turn of the century solidified public opinion against Chechen rebels and gave Putin the public support he needed to raze Grozny, Chechnya’s capital.
Putin’s confidence in dealing with terrorism reflects the design of Russia’s security state.
Russia spends more on internal security than it does on national defense.
It has interior ministry troops, federal security agency (FSB) special forces, OMON (mobile special service) troops, military intelligence troops, and a vast network of internal spies and informants.
Regime opponents are not allowed to run for office, their rights to demonstrate are restricted, and they are subject to a legal arbitrariness in the courts.
Citizens have virtually no protection from wiretaps or the interception of their electronic communications.
Every society must balance civil rights against national security.
Putin’s Russia has swung to one extreme of the spectrum, while the United States and Europe (despite the protests of civil libertarians) have chosen to occupy the other end.
Indeed, Russia is an example of the upper limit of what state power can do to control terrorist activity.
It would be a rare extremist group that had not been infiltrated with an informant who reports to Moscow.
There is even evidence that those who carried out the Beslan massacre were infiltrated by Russian intelligence.
Moreover, any terrorist group knows that their operations will be met with the most extreme use of force.
In Beslan, for example, Russian special forces used thermobaric weapons.
As the reaction to the attacks in Paris illustrates, the seemingly random murder of 130 civilians has monumental resonance in the West – especially when the religious and ideological motives are difficult to understand.
But the Kremlin places a lower value on human lives than Western societies do.
In Putin’s calculations, the loss of lives in extremist attacks is unwelcome, but ultimately acceptable if it does not threaten the regime.
The Russian people might be horrified and frightened. But the Russian regime is primarily concerned with its own survival – and with how it might use the public’s horror to its benefit.
Working with the West to combat the Islamic State serves neither of those purposes.
Hard to be Easing
NEW YORK – The United States Federal Reserve’s decision to undertake a third round of quantitative easing, or QE3, has raised three important questions.
Will QE3 jump-start America’s anemic economic growth?
Will it lead to a persistent increase in risky assets, especially in US and other global equity markets?
Finally, will its effects on GDP growth and equity markets be similar or different?
Many now argue that QE3’s effect on risky assets should be as powerful, if not more so, than that of QE1, QE2, and “Operation Twist,” the Fed’s earlier bond-purchase program.
After all, while the previous rounds of US monetary easing have been associated with a persistent increase in equity prices, the size and duration of QE3 are more substantial.
But, despite the Fed’s impressive commitment to aggressive monetary easing, its effects on the real economy and on US equities could well be smaller and more fleeting than those of previous QE rounds.
Consider, first, that the previous QE rounds came at times of much lower equity valuations and earnings.
In March 2009, the S&amp;P 500 index was down to 660, earnings per share (EPS) of US companies and banks had sunk to a financial-crisis low, and price/earnings ratios were in the single digits.
Today, the S&amp;P 500 is more than 100% higher (hovering near 1,430), the average EPS is close to $100, and P/E ratios are above 14.
Even during QE2, in the summer of 2010, the S&amp;P 500, P/E ratios, and EPS were much lower than they are today.
If, as is likely, economic growth in the US remains anemic in spite of QE3, top-line revenues and bottom-line earnings will turn south, with negative effects on equity valuations.
Moreover, fiscal support is absent this time: QE1 and QE2 helped to prevent a deeper recession and avoid a double dip, respectively, because each was associated with a significant fiscal stimulus.
In contrast, QE3 will be associated with a fiscal contraction, possibly even a large fiscal cliff.
Even if the US avoids the full fiscal cliff of 4.5% of GDP that is looming at the end of the year, it is highly likely that a fiscal drag amounting to 1.5% of GDP will hit the economy in 2013.
With the US economy currently growing at a 1.6% annual rate, a fiscal drag of even 1% implies near-stagnation in 2013, though a modest recovery in housing and manufacturing, together with QE3, should keep US growth at about its current level in 2013.
But there is no broader rebound underway.
In both 2010 and 2011, leading economic indicators showed that the first-half slowdown had bottomed out, and that growth was already accelerating before the announcement of monetary easing.
Thus, QE nudged along an economy that was already recovering, which prolonged asset reflation.
By contrast, the latest data suggest that the US economy is performing as sluggishly now as it was in the first half of the year.
Indeed, if anything, weakness in the US labor market, low capital expenditures, and slow income growth have contradicted signals in the early summer that third-quarter growth might be more robust.
Meanwhile, the main transmission channels of monetary stimulus to the real economy – the bond, credit, currency, and stock markets – remain weak, if not broken.
Indeed, the bond-market channel is unlikely to boost growth.
Long-term government bond yields are already very low, and a further reduction will not significantly change private agents’ borrowing costs.
The credit channel also is not working properly, as banks have hoarded most of the extra liquidity from QE, creating excess reserves rather than increasing lending.
Those who can borrow have ample cash and are cautious about spending, while those who want to borrow – highly indebted households and firms (especially small and medium-size enterprises) – face a credit crunch.
The currency channel is similarly impaired.
With global growth weakening, net exports are unlikely to improve robustly, even with a weaker dollar.
Moreover, many major central banks are implementing variants of QE alongside the Fed, dampening the effect of the Fed’s actions on the dollar’s value.
Perhaps most important, a weaker dollar’s effect on the trade balance, and thus on growth, is limited by two factors.
First, a weaker dollar is associated with a higher dollar price for commodities, which implies a drag on the trade balance, because the US is a net commodity-importing country.
Second, any improvement in GDP derived from stronger exports leads to an increase in imports.
Empirical studies estimate that the overall impact of a weaker US dollar on the trade balance is close to zero.
The only other significant channel to transmit QE to the real economy is the wealth effect of an equity-market increase, but there is some circularity in the argument that QE3 will lead to a persistent rise in equity prices.
If persistent asset reflation requires a significant GDP growth recovery, it is tautological to say that if equity prices rise enough following QE, the resulting increase in GDP from a wealth effect justifies the rise in asset prices.
If monetary policy’s transmission channels to the real economy are broken, one cannot assume that QE will have a significant effect on economic growth.
Fed Chairman Ben Bernanke has recently emphasized the importance of an additional channel: the confidence channel, through which the Fed’s commitment to maintaining generous monetary conditions for longer could improve private spending.
The issue is how substantial and durable such effects will be.
Confidence is fragile in an environment characterized by ongoing deleveraging, macro uncertainties, weak labor-market growth, and a fiscal drag.
In short, QE3 reduces the tail risk of an outright economic contraction, but is unlikely to lead to a sustained recovery in an economy that is still enduring a painful deleveraging process.
In the short run, QE3 will lead investors to take on risk, and will stimulate modest asset reflation.
But the equity-price rise is likely to fizzle out over time if economic growth disappoints, as is likely, and drags down expectations about corporate revenues and profitability.
Shinzo Abe’s Monetary-Policy Delusions
NEW HAVEN – The politicization of central banking continues unabated.
The resurrection of Shinzo Abe and Japan’s Liberal Democratic Party – pillars of the political system that has left the Japanese economy mired in two lost decades and counting – is just the latest case in point.
Japan’s recent election hinged critically on Abe’s views of the Bank of Japan’s monetary policy stance.
He argued that a timid BOJ should learn from its more aggressive counterparts, the US Federal Reserve and the European Central Bank.
Just as the Fed and the ECB have apparently saved the day through their unconventional and aggressive quantitative easing (QE), goes the argument, Abe believes it is now time for the BOJ to do the same.
It certainly looks as if he will get his way.
With BOJ Governor Masaaki Shirakawa’s term ending in April, Abe will be able to select a successor – and two deputy governors as well – to do his bidding.
But will it work?
While experimental monetary policy is now widely accepted as standard operating procedure in today’s post-crisis era, its efficacy is dubious.
Nearly four years after the world hit bottom in the aftermath of the global financial crisis, QE’s impact has been strikingly asymmetric.
While massive liquidity injections were effective in unfreezing credit markets and arrested the worst of the crisis – witness the role of the Fed’s first round of QE in 2009-2010 – subsequent efforts have not sparked anything close to a normal cyclical recovery.
The reason is not hard to fathom.
Hobbled by severe damage to private and public-sector balance sheets, and with policy interest rates at or near zero, post-bubble economies have been mired in a classic “liquidity trap.”
They are more focused on paying down massive debt overhangs built up before the crisis than on assuming new debt and boosting aggregate demand.
The sad case of the American consumer is a classic example of how this plays out.
In the years leading up to the crisis, two bubbles – property and credit –&#160;fueled a record-high personal-consumption binge.
When the bubbles burst, households understandably became fixated on balance-sheet repair – namely, paying down debt and rebuilding personal savings, rather than resuming excessive spending habits.
Indeed, notwithstanding an unprecedented post-crisis tripling of Fed assets to roughly $3 trillion – probably on their way to $4 trillion over the next year – US consumers have pulled back as never before.
In the 19 quarters since the start of 2008, annualized growth of inflation-adjusted consumer spending has averaged just 0.7% – almost three percentage points below the 3.6% trend increases recorded in the 11 years ending in 2006.
Nor does the ECB have reason to be gratified with its strain of quantitative easing.
Despite a doubling of its balance sheet, to a little more than €3 trillion ($4 trillion), Europe has slipped back into recession for the second time in four years.
Not only is QE’s ability to jumpstart crisis-torn, balance-sheet-constrained economies limited; it also runs the important risk of blurring the distinction between monetary and fiscal policy.
Central banks that buy sovereign debt issued by fiscal authorities offset market-imposed discipline on borrowing costs, effectively subsidizing public-sector profligacy.
Unfortunately, it appears that Japan has forgotten many of its own lessons – especially the BOJ’s disappointing experience with zero interest rates and QE in the early 2000’s.
But it has also lost sight of the 1990’s – the first of its so-called lost decades – when the authorities did all they could to prolong the life of insolvent banks and many nonfinancial corporations.
Zombie-like companies were kept on artificial life-support in the false hope that time alone would revive them.
It was not until late in the decade, when the banking sector was reorganized and corporate restructuring was encouraged, that Japan made progress on the long, arduous road of balance-sheet repair and structural transformation.
US authorities have succumbed to the same Japanese-like temptations.
From quantitative easing to record-high federal budget deficits to unprecedented bailouts, they have done everything in their power to mask the pain of balance-sheet repair and structural adjustment.
As a result, America has created its own generation of zombies – in this case, zombie consumers.
Like Japan, America’s post-bubble healing has been limited – even in the face of the Fed’s outsize liquidity injections.
Household debt stood at 112% of income in the third quarter of 2012 – down from record highs in 2006, but still nearly 40 percentage points above the 75% norm of the last three decades of the twentieth century.
Similarly, the personal-saving rate, at just 3.5% in the four months ending in November 2012, was less than half the 7.9% average of 1970-99.
The same is true of Europe.
The ECB’s über-aggressive actions have achieved little in the way of bringing about long-awaited structural transformation in the region.
Crisis-torn peripheral European economies still suffer from unsustainable debt loads and serious productivity and competitiveness problems.
And a fragmented European banking system remains one of the weakest links in the regional daisy chain.
Is this the “cure” that Abe really wants for Japan?
The last thing that the Japanese economy needs at this point is backsliding on structural reforms.
Yet, by forcing the BOJ to follow in the misdirected footsteps of the Fed and the ECB, that is precisely the risk that Abe and Japan are facing.
Massive liquidity injections carried out by the world’s major central banks – the Fed, the ECB, and the BOJ – are neither achieving traction in their respective real economies, nor facilitating balance-sheet repair and structural change.
That leaves a huge sum of excess liquidity sloshing around in global asset markets.
Why Remember Pearl Harbor?
NEW YORK – December 7 marks the 67th anniversary of the Japanese attack on Pearl Harbor.
Over the years, “the day of infamy” has become a classic reference point for galvanizing patriotic sentiment in America.
In the wake of the September 11, 2001 terrorist attack, for example, analogies to Pearl Harbor were made frequently.
But despite its central place in America’s collective memory, Pearl Harbor remains little understood.
Why did Japan initiate such a seemingly self-destructive war in the first place?
Aside from lessons that Japan must learn from its momentous decision, is there something to be learned by the United States as well?
The decision to attack Pearl Harbor was reached after five months of deliberations that included numerous official conferences.
It was a gradual process in which more sympathetic, albeit firm, US engagement might have helped sway Japan in a different direction.
In fact, Japanese government opinion was so divided that it is surprising that it was able to unite in the end.
Many in the Japanese Army initially regarded the Soviet Union as the main threat facing the country.
Others saw the US as the primary enemy.
Some were concerned with more abstract, ideological enemies, such as Communism and “Americanism,” while there were also voices highlighting the menace of the “white race” (including Japan’s allies, Germany and Italy) against the “yellow race.”
Then there were those who preferred not to fight any enemy at all, particularly the US, whose long-term war-making power, the government knew, far surpassed Japan’s own.
The tactical mastermind of the Pearl Harbor operation, Admiral Isoroku Yamamoto, was one of them.
Over the course of the summer of 1941, events slowly tilted Japan towards the possibility of war with the West.
But Pearl Harbor was in no way inevitable.
Germany’s attack on the Soviet Union compelled Japan in July 1941 to prepare a plan of attack.
Although it made clear Japan’s desire to take advantage of the European conflict and gain a foothold in the European colonies in Southeast Asia, the plan was not clear about who constituted Japan’s true enemy.
Japan’s military thrust into Southeast Asia led President Franklin Delano Roosevelt’s administration to impose sanctions.
The US froze Japanese assets, an example followed by Britain and the Dutch East Indies.
When Japan responded by taking over southern French Indochina, the US retaliated by imposing an embargo on oil exports to Japan.
Rather than telling Japan that the US was determined to search for a diplomatic solution, America’s categorical reaction confirmed it to the Japanese as an arrogant and conceited enemy.
Moreover, by transferring its Pacific Fleet from San Diego to Pearl Harbor, the US encouraged the Japanese understanding that the US fully anticipated war with Japan.
World War II in the Pacific finally came about for many different reasons.
But it was, above all, the sense of encirclement and humiliation that united the deeply divided Japanese government.
Feeling defeated by a series of failed approaches to the US, including an overture to hold direct talks with Roosevelt, Prime Minister Fumimaro Konoe resigned on October 16, making hard-line Army Minister Hideki Tōjō his successor.
The high-handed tone of the Hull Note of November 26, demanding Japan’s withdrawal of all its troops from China, was a final blow to the moderates in Japan’s government, who still hoped for diplomatic negotiations.
By this time, many policymakers were convinced that the US was not ready to hear them out.
It was ultimately in the name of saving Asia for all Asians from what was regarded as Western arrogance that the government united to wage war.
On December 1, it was decided that the war would commence in six days.
There were legitimate historical reasons for Japan to feel humiliated on the eve of war.
The gunboat diplomacy that resulted in the opening of Japan and unequal treaties in the mid-19th century was but a beginning.
More immediately, the Great Depression and the subsequent compartmentalization of the world into economic blocs also worked to the advantage of the already powerful.
Coupled with the economic hardship of the interwar years were instances of racial prejudice in the US that aimed at preventing Japanese immigration.
United by this long-simmering and humiliating sense of exclusion, Japanese policymakers, whatever their differences, stumbled toward the December 1 decision to go to war.
With almost 70 years of hindsight, Pearl Harbor should offer some lessons for US foreign policy today.
Despite obvious differences between Pearl Harbor and recent Islamist terrorist tactics, they show the common desire of self-proclaimed Davids to topple their Goliaths in a clearly lop-sided battle.
These Davids depend on Western technologies to overcome imbalances of power, and are driven by a sense of real or imagined humiliation.
But no matter how strong and historically justified such grievances may be those who resort to murderous tactics must be condemned.
However, high-handedness and tough talk alone are an inadequate response, for this approach further humiliates those who already feel humiliated, and alienates those who might otherwise proffer a more moderate voice.
Diplomacy no longer works with terrorism, but it can help to prevent it by dealing carefully with potentially hostile states.
With global expectations mounting for a fresh start in US foreign policy, it is vital not just to remember, but to understand the attack on Pearl Harbor.
America’s Global Election
NEW YORK – Most people around the world will not be able to vote in the United States’s upcoming presidential election, even though they have a great deal at stake in the result.
Overwhelmingly, non-US citizens favor Barack Obama’s re-election over a victory for his challenger, Mitt Romney.
There are good reasons for this.
In terms of the economy, the effects of Romney’s policies in creating a more unequal and divided society would not be directly felt abroad.
But, in the past, for better and for worse, others have often followed America’s example.
Many governments quickly subscribed to Ronald Reagan’s mantra of deregulated markets – policies that eventually brought about the worst global recession since the 1930’s.
Other countries that followed America’s lead have experienced growing inequality –&nbsp;more money at the top, more poverty at the bottom, and a weaker middle class.
Romney’s proposed contractionary policies –&nbsp;the attempt to reduce deficits prematurely, while the US economy is still frail –&nbsp;will almost surely weaken America’s already anemic growth, and, if the euro crisis worsens, it could bring on another recession.
At that point, with US demand shrinking, the rest of the world would indeed feel the economic effects of a Romney presidency quite directly.
That raises the question of globalization, which entails concerted action on many fronts by the international community.
But what is required with regard to trade, finance, climate change, and a host other areas is not being done.
Many people attribute these failures partly to an absence of American leadership.
But, while Romney may summon bravado and strong rhetoric, other world leaders would be unlikely to follow him, owing to the belief (correct in my judgment) that he would take the US – and them – in the wrong direction.
American “exceptionalism” may sell well at home, but it does poorly abroad.
President George W. Bush’s Iraq war – arguably a violation of international law –&nbsp;showed that though America spends almost as much on defense as the rest of the world combined, it could not pacify a country with less than 10% of its population and less than 1% of its GDP.
Moreover, it turned out that US-style capitalism was neither efficient nor stable.
With most Americans’ incomes stagnating for a decade and a half, it was clear that the US economic model was not delivering for most citizens, whatever official GDP data said.
Indeed, the model blew up even before Bush left office.
Together with the abuses of human rights under his administration, the Great Recession – the predictable (and predicted) consequence of his economic policies – did as much to weaken America’s soft power as the wars in Iraq and Afghanistan did to weaken the credibility of its military power.
In terms of values – namely, the values of Romney and his running mate, Paul Ryan – things are not much better.
For example, every other advanced country recognizes the right to accessible health care, and Obama’s Affordable Care Act represents a significant step toward that goal.
But Romney has criticized this effort, and has offered nothing in its place.
America now has the distinction of being among the advanced countries that afford the least equality of opportunity to their citizens.
And Romney’s drastic budget cutbacks, targeted at the poor and middle class, would further impede social mobility.
At the same time, he would expand the military, spending more money on weapons that do not work against enemies that do not exist, enriching defense contractors like Halliburton at the expense of desperately needed public investment in infrastructure and education.
While Bush is not on the ballot, Romney has not really distanced himself from the Bush administration’s policies.
On the contrary, his campaign has featured the same advisers, the same devotion to higher military spending, the same belief that tax cuts for the rich are the solution to every economic problem, and the same fuzzy budget math.
Consider, for example, the three issues that are at the center of the global agenda mentioned earlier: climate change, financial regulation, and trade.
Romney has been silent on the first, and many in his party are “climate deniers.”
The world cannot expect genuine leadership from Romney there.
As for financial regulation, while the recent crisis has highlighted the need for stricter rules, agreement on many issues has proven to be elusive, partly because the Obama administration is too close to the financial sector.
With Romney, though, there would be no distance at all: metaphorically speaking, he is the financial sector.
One financial issue on which there is global agreement is the need to close down offshore bank havens, which exist mainly for purposes of tax evasion and avoidance, money laundering, and corruption.
Money does not go to the Cayman Islands because sunshine makes it grow faster; this money thrives on the absence of sunshine.
But, with Romney unapologetic about his own use of Cayman banks, we are unlikely to see progress even in this area.
On trade, Romney promises to launch a trade war with China, and to declare it a currency manipulator on Day One – a promise that gives him little wiggle room.
He refuses to note the renminbi’s large real appreciation in recent years, or to acknowledge that, while changes in China’s exchange rate may affect the bilateral trade deficit, what matters is America’s multilateral trade deficit.
A stronger renminbi would simply mean a switch in the US from China to lower-cost producers of textiles, apparel, and other goods.
The irony –&nbsp;again lost on Romney – is that other countries are accusing the US of currency manipulation.
After all, one of the main benefits of the Federal Reserve’s policy of “quantitative easing” – perhaps the only channel with a significant effect on the real economy – derives from the depreciation of the US dollar.
The world has a lot riding on America’s election.
Unfortunately, most people who will be affected by it – almost the entire world – will have no influence on the outcome.
Long Live China’s Slowdown
NEW HAVEN – At 7.7%, China’s annual GDP growth in the first quarter of this year was slower than many expected.
While the data were hardly devastating relative to a consensus forecast of 8.2%, many (including me) expected a second consecutive quarterly rebound from the slowdown that appeared to have ended in the third quarter of 2012.
China doubters around the world were quick to pounce on the number, expressing fears of a stall, or even a dreaded double dip.
But slower GDP growth is actually good for China, provided that it reflects the long-awaited structural transformation of the world’s most dynamic economy.
The broad outlines of this transformation are well known – a shift from export- and investment-led growth to an economic structure that draws greater support from domestic private consumption.
Less well known is that a rebalanced China should have a slower growth rate – the first hints of which may now be evident.
A rebalanced China can grow more slowly for one simple reason: By drawing increased support from services-led consumer demand, China’s new model will embrace a more labor-intensive growth recipe.
The numbers seem to bear that out.
China’s services sector requires about 35% more jobs per unit of GDP than do manufacturing and construction – the primary drivers of the old model.
That number has potentially huge implications, because it means that China could grow at an annual rate in the 7-8% range and still achieve its objectives with respect to employment and poverty reduction.
China has struggled to attain these goals with anything less than 10% growth, because the old model was not generating enough jobs per unit of output.
As Chinese manufacturing moved up the value chain, firms increasingly replaced workers with machines embodying the latest technologies.
As a result, its economic model spawned a labor-saving, capital-intensive growth dynamic.
On one level, that made sense.
Capital-labor substitution is at the heart of modern productivity strategies for manufacturing-based economies.
But it left China in a deepening hole: increasingly deficient in jobs per unit of output, it needed more units of output to absorb its surplus labor.
Ultimately, that became more of a problem than a solution.
The old manufacturing model, which fueled an unprecedented 20-fold increase in per capita income relative to the early 1990’s, also sowed the seeds of excessive resource consumption and environmental degradation.
Services-led growth is, in many ways, the antidote to the “unstable, unbalanced, uncoordinated, and ultimately unsustainable” growth model that former Premier Wen Jiabao’s famously criticized in 2007.
Yet services offer more than just a labor-intensive growth path.
Compared to manufacturing, they have much smaller resource and carbon footprints.
A services-led model provides China with an alternative, environmentally friendlier, and ultimately more sustainable economic structure.
It is premature, of course, to conclude that a services-led transformation to slower growth is now at hand.
The latest data hint at such a possibility, with the tertiary sector (services) expanding at an 8.3% annual rate in the first quarter of this year – the third consecutive quarter of acceleration and a half-percentage point faster than the 7.8% first-quarter gain recorded by the secondary sector (manufacturing and construction).
But it will take more than a few quarters of mildly encouraging data to validate such an important shift in the Chinese economy’s underlying structure.
Not surprisingly, China skeptics are putting a different spin on the latest growth numbers.
Fears of a shadow-bank-induced credit bubble now top the worry list, reinforcing longstanding concerns that China may succumb to the dreaded “middle-income trap” – a sustained growth slowdown that has ensnared most high-growth emerging economies at the juncture that China has now reached.
China is hardly immune to such a possibility.
But it is unlikely to occur if China can carry out the services-led pro-consumption rebalancing that remains the core strategic initiative of its current (12th) Five-Year Plan.
Invariably, the middle-income trap afflicts those emerging economies that cling to early-stage development models for too long.
For China, the risk will be highest if it sticks with the timeworn recipe of unbalanced manufacturing- and construction-led growth, which has created such serious sustainability problems.
If China fails to rebalance, weak external demand from a crisis-battered developed world will continue to hobble its export machine, forcing it to up the ante on a credit- and investment-led growth model – in effect, doubling down on resource-intensive and environmentally damaging growth.
But I remain hopeful that China’s new leadership team will move quickly to implement its new model.
There are no viable alternatives.
Financial markets, as well as growth-starved developed economies, are not thrilled with the natural rhythm of slower growth that a rebalanced Chinese economy is likely to experience.
Resource industries – indeed, resource-based economies like Australia, Canada, Brazil, and Russia – have become addicted to China’s old strain of unsustainable hyper-growth.
Yet China knows that it is time to break that dangerous habit.
The United States is likely to have a different problem with consumer-led growth in China.
After all, higher private consumption implies an end to China’s surplus saving – and thus to the seemingly open-ended recycling of that surplus into dollar-based assets such as US Treasury bills.
Who will then fund America’s budget deficit – and on what terms?
Just as China must embrace slower growth as a natural consequence of its rebalancing imperative, the rest of the world will need to figure out how to cope when it does.
Rebalancing the State’s Balance Sheet
MILAN – Until recently, relatively little attention was paid to states’ balance sheets.
Measurement and reporting were neglected.
Even today, states’ liabilities receive considerable attention, while their asset sides receive significantly less.
In an earlier era, states owned substantial industrial assets.
This “commanding heights of the economy” model was rejected largely because it seriously under-performed, especially when state-owned sectors were protected from competition (as was the norm).
Efficiency declined.
But, more important, the absence of entry and exit by firms, a key ingredient of innovation, caused dynamism to suffer and losses to grow over time.
The model’s shortcomings led to privatization in many developed and developing countries.
In Europe, privatization was viewed as a key step in the integration process.
The theory, in Europe and elsewhere, was that states could not be impartial owners of industrial assets.
Through regulation, public procurement, and hidden subsidies, they would favor their own assets.
Of course, state ownership is not the only way to impede efficiency and dynamism.
Regulations in a range of countries, from Japan to Italy, create sectors that are sheltered from competition, with detrimental effects on productivity.
This pattern is particularly pronounced in the non-tradable sectors (which account for two-thirds of the economy), where the discipline of foreign competition is absent by definition.
Even here, foreign-based domestic competitors could improve performance.
It is important that more attention is now paid to public liabilities – not only growing sovereign debt, but also larger, non-debt liabilities embedded in social-insurance programs.
A combination of defective growth models, rising longevity, and unanticipated increases in costs (such as health care in America) have caused these longer-term liabilities to explode.
Reining in debt and other liabilities has substantially reduced governments’ scope for sustaining demand in the face of severe negative shocks, thus reducing their ability to buy time for structural adjustment in the private sector.
For now, investment in a shift to a sustainable growth and employment pattern has been crowded out.
Shifting consumption to investment via tax increases is possible, but too problematic politically, with the burden-sharing issue usually leading to impasse and inaction.
Meanwhile, the asset side of states’ balance sheets remains largely invisible.
States own land, mineral rights, and infrastructure.
Some have sovereign wealth funds.
Many have public pension funds of substantial magnitude, consisting of diversified portfolios of assets.
These assets are, in a sense, spoken for – there are claims on them in the form of liabilities, which have grown as expected risk-adjusted returns on assets decline; but they do represent a partial funding of public liabilities and are an element of resilience.
By contrast, in China, the asset side of the state balance sheet is very large: land, foreign-currency reserves of $3.5 trillion, and around an 85% stake in state-owned enterprises that account for about 40% of output.
This balance-sheet configuration has helped China to respond to shocks and sustain high levels of public-sector investment.
The liability side will expand as social insurance grows – but slowly, owing to a fear of underestimating the liabilities being created.
In the best case – without a sharp decline in financial assets accelerating an economic downturn, a sudden collapse of a defective growth model, or even rapid increases in liabilities associated with demographic shifts or health-care technology – it might make sense to focus only on controlling liabilities.
But a best-case scenario provides a poor policy framework in our imperfect world.
In fact, states are routinely called upon to deal with a wide range of market failures or limitations: unsustainable growth patterns and regulatory myopia; distributional problems associated with the evolution of technology and globalization; accelerating concentration of national income; and major structural transitions associated with shocks and secular trends in technology and the global economy.
Here is the dilemma: Governments with substantial assets have flexibility and the capacity to act, but they can also mismanage their assets to the detriment of markets and economic dynamism.
In China, where the asset side of the balance sheet is large, the strategy of shrinking it via privatization has been largely rejected, at least for now.
The loss of resilience would be too great.
That leads to the challenge of effective management of public assets – management that promotes rather than impedes market efficiency and innovation.
Here, what might be called the pension/sovereign-wealth-fund model – in which a public entity holds and manages a diversified portfolio of assets as a financial investor with appropriately specified duties and governance – seems to be the right way to go.
The asset side of the balance sheet is maintained in the aggregate, but the management of the assets, particularly the diversification of holdings, can be thought of as prudent and de facto privatized.
For developed countries, increasing resilience and flexibility over time by building public assets should be a long-term priority.
Periodic systemic risk affects entire economies and public finances, not only financial markets, and governments should be able to respond during periods of rapid structural change.
In practice, this means two things.
First, once a collective choice is made about the desired levels of social insurance, the implied liabilities should be fully funded over time.
The alternative is a poor intergenerational burden-sharing choice.
Second, governments, like individuals, households, and businesses, need to save for a rainy day.
That is all the more important in periods – like the current one – of rapid change, high volatility, and only partly predictable systemic instability.
Why Talk to Iran?
WASHINGTON, DC – June 12 marks the first anniversary of Mahmoud Ahmadinejad’s disputed re-election as Iran’s president.
Despite the Iranian opposition’s continuing efforts to contest the outcome and advance political liberalization, Ahmadinejad and his allies have largely succeeded in consolidating their hold on power by using brute force to repress the reform movement. Hopes that a popular uprising might topple the regime have fizzled.
Meanwhile, the crisis over Iran’s nuclear program is escalating.
The Iranian regime continues to defy the international community’s efforts to prevent it from developing nuclear weapons.
In response, US President Barack Obama’s administration has been working through the United Nations Security Council to impose tougher economic sanctions. Nonetheless, Iran edges toward mastering the process of enriching uranium to weapons-grade purity.
The closer Iran gets to developing a nuclear weapon, the greater the likelihood that Israel, with or without US help, might attack Iran’s nuclear facilities.
The Iranian government’s intransigence, its blatant efforts to mislead nuclear inspectors, its odious calls for the destruction of Israel, its brutal repression of political opponents – all provide good reason for Obama to slam the door shut on dialogue.
With diplomacy having failed to curb Iran’s nuclear ambitions, critics of engagement charge, it is time to resort to coercion before Iran crosses the nuclear Rubicon.
A rising chorus of voices now forswears engagement with Iran’s rulers, insisting that it is time for the regime to go.
But closing off dialogue with Iran would be a precipitous and dangerous mistake.
As my new book, How Enemies Become Friends, confirms, even fierce adversaries can settle their differences through negotiation.
For four compelling reasons, the US and its allies should keep the door open to dialogue until the eleventh hour.
First, tighter sanctions make sense only as a diplomatic tool, not as a blunt instrument of coercion.
The new sanctions simply are not severe enough to intimidate Iran into submission, and more restrictive ones would not pass muster within the Security Council.
Accordingly, if tougher sanctions prove to be useful, they will do so by confronting Iran with a united diplomatic front, thereby encouraging its government to make a deal in order to end the country’s isolation.
New sanctions are warranted, but as a complement, not an alternative, to diplomacy.
Second, the costs of abandoning diplomacy are so high that continued engagement makes sense even as Iran refuses to budge.
To give up on diplomacy is to leave the international community with two ugly options: living with a nuclear Iran or carrying out a preventive military strike against Iran’s nuclear installations.
Should Iran possess the ultimate weapon, it might embrace a new restraint in its foreign policy; nuclear-weapons states, precisely because they confront the prospect of nuclear retaliation, have historically tread with caution.
But the Iranian regime is no ordinary government; it may not adhere to the normal practices of nuclear restraint.
Even if it does, a nuclear Iran may trigger an arms race in the region and embolden an Iranian government that already supports extremist movements throughout the Middle East.
An American security umbrella over the Persian Gulf and Israel might calm nerves, but it would do little to counter increased Iranian support of Islamic radicals.
A military strike would likely have worse consequences.
Even if a strike was an operational success, it would only set back Iran’s nuclear program by several years – while giving the regime a new incentive to acquire a nuclear deterrent and build better hidden and defended nuclear facilities.
In response to an attack, Iran might well seek to obstruct shipping in the Persian Gulf, potentially triggering oil shortages and soaring prices.
Iran could also intensify efforts to fund and arm insurgents in Iraq and Afghanistan, imperiling both countries.
And it could launch attacks on US, European, and Israeli targets on a global basis.
Such prospects make continued diplomacy, however elusive the prospects of success, nothing short of mandatory.
The third reason for pursuing dialogue is that factional infighting and political intrigue within the Iranian regime make for considerable political fluidity.
Admittedly, turmoil in Tehran brings inconstancy to Iran’s foreign policy, warranting caution about the prospects for a meaningful diplomatic breakthrough.
But internal jockeying for power also means that a coalitional alignment favoring a negotiated settlement just might fall into place.
Ahmadinejad himself, after all, late last year voiced enthusiasm for a Western proposal to break the logjam by exporting Iran’s uranium for processing abroad, only to reverse course soon thereafter. Then last month, he reversed course again, working with Brazil and Turkey to craft a watered-down version of the original proposal.
Ahmadinejad may be bobbing and weaving. But his mercurial ways make it plausible that he may find it politically advantageous to strike a serious bargain on the nuclear issue.  Just in case, the diplomatic door should remain ajar.
Finally, even as stalemate continues on Iran’s uranium enrichment, continued engagement may offer a roundabout means of arriving at a bargain on the nuclear issue.
Dialogue with the US could focus on areas, such as Iraq and Afghanistan, where the two parties share a measure of common ground.
Joint efforts to combat drug trafficking in Afghanistan, for example, could help dilute the mutual antagonism and distrust that contribute to blockage on the nuclear front.
Iran remains several years away from mastering the technology needed to build nuclear weapons, which provides time to search for such diplomatic openings.
With Iran having spurned Obama’s offers of compromise, it is tempting for the US administration to turn its back on dialogue.
But the stakes are too high to abandon engagement.
Even with new sanctions in the offing, dialogue still offers the best prospect for peacefully resolving what may be the world’s most dangerous dispute.
Why Target Big Banks?
LONDON – It seemed that a new model for global governance had been forged in the white heat of the financial crisis.
But now that the ashes are cooling, different perspectives on bank regulation are emerging on either side of the Atlantic.
The emphasis in Europe has been on regulating financial markets with a view to moderating future crises.
Credit mistakes are made during the boom, not during the crash, so the argument goes.
Better regulation and monetary policy during the boom years, therefore, could limit the scale of any bust.
By contrast, the emphasis in the United States has been on finding market-friendly ways to contain spillovers from bank failure.
Policy debates in the US are chiefly preoccupied with ensuring that banks are never “too big to fail”; that private investors rather than taxpayers hold “contingent capital,” which in a crash can be converted into equity; and that “over-the-counter” markets’ functioning be improved through greater reliance on centralized trading, clearing, and settlements.
The chief point of intersection between the European and US approaches is major banks.
This convergence has less to do with regulatory thinking on bank size or function than with a common need to play to the political gallery and raise more tax revenue.
Banks’ balance sheets are systemically dangerous when bloated by leverage, and it is this that regulatory or fiscal policy should address through liquidity buffers and leverage ratios.
After all, it is the contagiousness of financial crises, not banks’ size, that matters.
Any list conjured up in 2006 of institutions that were “too big to fail” would not have included Northern Rock, Bradford &amp;
Bingley, IKB, Bear Sterns, or even Lehman Brothers.
Banks lend to banks, so while some are more illiquid than others, they are all intrinsically illiquid institutions.
Small failures can give birth to large panics, which means that in a crisis almost everyone is “too big to fail.”
The reality is that we can have as large a financial boom and subsequent bust as we just experienced, resulting in the same economic misery, in a world made up only of small banks.
Many argue that bankers’ belief that their institutions are too big to fail and that their jobs are safe encourages them to underestimate the risks that they assume.
But if that belief dominated bankers’ thinking, they would still worry about their savings.
In other words, they would not wrap themselves up in their institutions’ equity and the leveraged products they were selling.
Yet they did.
The revealed preference of banks’ and bankers’ behavior is that they did not lend more because they thought they could get away with it, but because they thought it was safe.
They were fools more than knaves.
The main driver of excessive lending and leverage is a mistaken view of risk that is shared by everyone.
The riskiest institutions were not the largest: firms like J. P. Morgan and HSBC proved safer than others, and neither sought nor needed state funding.
Those that failed were relatively small, like IKB, Bear Sterns, and so on.
Big banks like the idea that regulation should care less about banks’ size and more about their riskiness, and so champion a “risk-sensitive” approach – not least because they have the bigger risk-management operations and databases, so risk-sensitive regulation is more onerous for their smaller competitors.
But this approach suffers from a fatal fallacy: if booms are fueled by underestimation of risks, and regulation is made more sensitive to the estimation of risks, booms will be bigger and busts deeper.
A better argument for curbing bank size is the excessive influence of big banks on policy.What policymakers should therefore be looking for is regulation that makes the financial system less sensitive to error in markets’ estimation of risk, not more so.
There are two ways to do this.
The first is to observe that this error is correlated with the boom-bust cycle.
Booms have similar characteristics – strong growth in banks’ balance sheets and credit, and therefore a rise in leverage.
These trends imply an increased probability that the market is underestimating risk, so systemic risk regulators should raise minimum capital requirements as soon as they spot them.
Counter-cyclical capital requirements fit with this idea, and a range of indicators could be used to calibrate the increase in capital requirements, coupled perhaps with some discretion.
There are many reasons why the market fails to correct systemic error, including that booms are always founded on a belief by both regulators and bankers that “this time it is different.”
Let’s not forget the essays in central banks’ stability reports on how credit derivatives were benefiting the financial sector.
The second way to reduce the financial system’s sensitivity to risk-estimation errors is to limit the flow of risks to institutions with a structural, rather than a statistical, capacity for holding that risk.
That way, when the risk modelers get it wrong, we will be in less trouble.
Credit risk is best hedged through diversification across uncorrelated credits.
Liquidity risk is best hedged through diversification across time.
Market risk is best hedged through a combination of diversification across assets and enough time to decide when to sell.
In the past, risks with volatility of similar statistical magnitudes were considered to be fungible, and,could flow to whomever was prepared to bear them.
But, while banks with short-term funding and many branches originating loans have a deep capacity for holding credit risks, they have a limited capacity for holding market risks, and little capacity for holding liquidity risk.
Insurance companies and pension funds, on the other hand, have limited capacity for credit risk, but more for market and liquidity risks.
The lesson for regulators is simple: capacity for risk is related to the maturity of funding, not to what an institution is called.
Europe’s Non-Deal of the Century
BRUSSELS – As Europe picks over the ruins of the mega-merger that would have created a world-beating new aerospace and defense giant, questions are being asked about the inglorious role that the European Union played in the fiasco.
The European Commission’s failure to champion the $50 billion merger of the Franco-German European Aeronautic Defence and Space Company (EADS), owner of Airbus, and the United Kingdom’s BAE Systems is being seen as a crucial factor in the deal’s collapse.
The integration of the two high-tech aviation and avionics leaders had looked like an EU-inspired blueprint for industrial success.
For several years, EU leaders have been urging the consolidation of Europe’s defense industries, so the proposed deal – which originated in the corporate boardrooms of EADS and BAE Systems – looked like an answer to their calls.
Yet both the Commission and the European Parliament kept silent and withheld the political support that might have ensured that the deal went through.
A timely reminder by EU leaders of the strategic importance of the aerospace sector would have helped allay many of the misgivings in Berlin, and to a lesser degree in London, that ultimately sank the deal.
Aviation, like defense, is the sharpest of the R&amp;D cutting edges available to advanced countries, and regularly produces key technological breakthroughs.
Nationalist squabbles over the details of the merger would surely have been attenuated by a statesmanlike intervention from the Commission in Brussels.
It was therefore a bizarre coincidence that the merger’s collapse came on the day that the Commission unveiled its new industrial strategy for regaining Europe’s competitive edge in the face of Asian and North American competition.
One of the most powerful arguments for the EADS-BAE marriage had been the expectation of industry analysts that within 20 years China will challenge Airbus and Boeing in the global aviation market, while also creating a powerful new defense industry.
That scenario now looks all the more likely.
Why, then, did the European Commission remain silent?
The answer appears to be that it feared negative reactions from the three governments involved in the merger talks, and believed that its own authority would suffer from any public rebuff.
The persistent rumor circulating among defense company executives is that soon after news of the proposed merger leaked, the weekly commissioners’ meeting chaired by Commission President José Manuel Barroso was enjoined to keep silent on the matter in order to avoid any potential dangers.
Whether true or not, the important point is that the merger transcended national considerations, and the European Commission had a duty to involve itself.
The EU’s executive body is meant to be the driving force behind Europe’s efforts to revive laggard industries and fight to reverse the long-term economic decline that the eurozone crisis appears to presage.
Nobody is arguing that the Commission is responsible for the deal’s unhappy end – only that it should have rallied support for it.
The significance of the merger’s collapse is now becoming clear to observers across Europe, especially in Germany, where the media have been extremely critical of how “negative politics” sealed the proposed merger’s fate.
With the EU in the throes of the seemingly endless eurozone sovereign-debt crisis and facing a looming debate over its future decision-making architecture, the collapse of the EADS-BAE merger will be no more than a footnote in the history books.
But it may be said to mark the point when the European Commission openly acknowledged that it has become little more than a secretariat to EU governments.
That is a far cry from the political powerhouse that some Europeans fear – and for which others still hope.
Why the Fed Should Postpone Rate Hikes
JACKSON HOLE, WYOMING – As central bankers from around the world gather this week in Jackson Hole for the Federal Reserve’s annual Economic Policy Symposium, one key topic of discussion will be the current global stock-market turmoil.
There are many reasons for these gyrations, but the expectation that the Fed will start to raise interest rates – perhaps as early as September – is clearly one of them.
The arguments for a rate hike are valid.
The United States’ economy is gaining traction.
The International Monetary Fund forecasts 3% annual growth in 2015 and 2016, accompanied by inflation rates of 0.1% and 1.5%, respectively.
When an economy is normalizing, it is reasonable to reduce expansionary measures, such as those introduced after the crisis of 2008.
Because the Fed has clearly communicated that it will move gradually toward less expansionary policies, its credibility would be damaged if it did not follow through.
But there are strong reasons for the Fed to postpone interest-rate hikes and to keep monetary policy expansionary over the coming quarters.
For starters, the US recovery remains weak.
Historically, 3% growth during a recovery is far from impressive.
In other recent recoveries, growth often hit 4% or even 5% when increased capacity utilization pushed up productivity and investment.
Over the past three decades, the US has been able to grow at an average annual rate of around 2.5%.
Some attribute relatively slow growth to demographic factors, which have reduced the labor force, as well as to weak productivity levels, which have been low.
But America’s potential output may be underestimated, and its inflation propensity exaggerated.
The US labor market works well.
Unemployment is down to 5%, with no signs of overheating.
The employment cost index suggests that wage increases so far have been surprisingly low.
One reason for this is that labor-market flexibility increased during the recovery.
Self-employment, short-term contracts, or part-time arrangements account for many of the jobs that have been created over the past few years.
Full-time jobs with comprehensive benefits are now much rarer.
This ongoing “Uberization” of the US labor market means that the balance in the wage-setting process has shifted.
As a result, it will take longer for demand to feed through to wages and inflation than in the past.
Moreover, the economy is undergoing an ongoing technological shift stemming from digitization and globalization.
Estimates from Citigroup indicate that almost half of all jobs will be disrupted in the coming decades.
Jobs that require lower skills and less training are particularly vulnerable; but it is also clear that many other occupational categories – including administration, accounting, logistics, banking, and various service activities – are likely to be affected.
Companies will be able to reduce their headcount and production costs while improving customer service, which, like Uberization, will affect the wage-setting process.
Central bankers, I believe, are underestimating the impact of this structural shift.
In the more tech-oriented economies, like the US, the United Kingdom, and the Nordic countries, there is a risk that traditional macroeconomic models will overestimate the cost pressure from labor.
Another reason why the Fed should postpone a rate hike is that financial turmoil in emerging markets, particularly China, could have a substantial impact on the global economy, with some clear implications for the US economy.
In particular, lower energy and commodity prices are likely to dampen inflationary pressure.
When inflation is low for a long period, inflation expectations also tend to be low.
Add falling commodity and energy prices to the mix and there is a risk that inflation expectations will remain too low to sustain a balanced recovery.
The global implications of lower emerging-market currencies are also likely to be deflationary.
The direct impact is that a stronger dollar reduces the cost of imported goods.
The indirect effect, which might be substantial, is that cost-competitive light manufacturing in emerging markets increases.
That would reinforce the deflationary pressure from globalization for years to come.
There is also a risk of greater currency-market volatility if the Fed jumps the gun in raising rates.
The Fed’s unconventional monetary policies have been necessary for the US.
But, because they flooded global markets with liquidity, large portfolio flows have moved into emerging-market countries, whose currencies often are not as liquid as the dollar.
When investment moves back into dollars, the currency fluctuations in these less liquid markets can become excessive.
The Fed clearly has a responsibility to consider how its policy decisions affect the global financial system.
Excessive currency volatility is not in America’s interest, not least because large exchange-rate depreciations in emerging markets would amplify the effects of globalization on US jobs, wages, and inflation, particularly as weaker foreign currencies make outsourcing a more economically viable solution.
Another reason for the Fed to reconsider hiking rates is that the legitimacy of the Bretton Woods institutions depends on a well-functioning global financial system.
The global economy’s center of gravity is moving to Asia, Latin America, and Africa, but the IMF and the World Bank still seem to mirror the reality of the 1950s.
If the Fed is seen as unleashing a major crisis in emerging markets, this will almost certainly do long-term damage to the global financial system.
The Fed should regard lower commodity prices, reduced inflationary pressures, changes in the labor market, and further disruptive technological shifts as sufficiently convincing arguments to postpone a rate hike.
Including the risk of excessive volatility in the global financial system tips the balance even further.
There is plenty of time for the Fed to signal that its policy stance has shifted, and the conclave in Jackson Hole is an excellent opportunity to start that communication.
If the facts have changed, the policy implications must also change.
The greatest loss of credibility always comes when policymakers try to ignore changing realities.
Why the Greek Bailout Failed
CAMBRIDGE – As the Greek crisis evolves, it is important to understand that a successful structural-adjustment program requires strong country ownership.
Even if negotiators overcome the most recent sticking points, it will be difficult to trust in their implementation if the Greek people remain unconvinced.
That has certainly been the experience so far.
And without structural reform, there is little chance that the Greek economy will see sustained stability and growth – not least because official lenders are unwilling to continue extending an unreformed Greece significantly more money than it is asked to pay. (This has been the case through most of the crisis, even if one would never know it from the world press coverage.)
Greece’s membership in the European Union gives its creditors significant leverage, but evidently not enough to change the fundamental calculus.
Greece remains very much a sovereign country, not a sub-sovereign state.
The “troika” of creditors – the International Monetary Fund, the European Central Bank, and the European Commission – simply do not enjoy the kind of leverage over Greece that, say, the Municipal Assistance Corporation wielded over New York City when it teetered on the edge of bankruptcy in the mid-1970s.
The best structural-adjustment programs are those in which the debtor country’s government proposes the policy changes, and the IMF helps design a bespoke program and provides the political cover for its implementation.
Imposing them from the outside is simply not an effective option.
So, for reforms to take hold, the Greek government and its electorate must believe in them.
That a country must take ownership of its reform program is not a new lesson.
The IMF’s rocky relationship with Ukraine began long before the latest round of negotiations.
Back in 2013, IMF staff wrote a sobering report on the organization’s experience in the country.
Their conclusion, in essence, was that the government’s failure to embrace the reform process fully all but guaranteed that its program would not work.
If a government is incapable of or uninterested in making the needed adjustments, the report argued, the best option is to drip money out as reforms are implemented, as is now being done in Greece.
Unfortunately, that approach has not proved adequate to overcome the challenges there.
Structural-reform conditions often tilt the balance between competing domestic factions, for better or for worse.
If there is no will inside the country to maintain the reforms, they will quickly be undermined.
Left-wing ideologues have long viewed structural-reform programs with deep suspicion, accusing international lenders like the IMF and the World Bank of being captured by neoliberal market fundamentalists.
This critique has some truth in it, but is overblown.
To be sure, structural reforms often favor policies like labor-market flexibility.
But one should not make the mistake of viewing these interventions in black-and-white terms.
Breaking down dual labor markets that are excluding young workers (as they do in much of southern Europe, including Italy and, to some extent, France) is very different from making it easier to fire all workers.
Making pension systems sustainable does not amount to making them stingier.
Making tax systems simpler and fairer is not the same as raising all taxes.
Recently, opponents of structural reform have put forward more exotic objections – most notably the problem caused by deflation when policy interest rates are at zero.
If structural reforms simply lower all wages and prices, it may indeed be difficult in the short-term to counter the drop in aggregate demand.
But a similar critique could be made of any other change in policy: if it is poorly designed, it will be counter-productive.
The truth is that the way forward in Europe requires achieving greater productivity.
The lessons from Greece and other unsuccessful bailout programs are sobering.
If a debt bailout program requires a wholesale change in a country’s economic, social, and political model, the best course of action might be to write off the private losses, rather than pour in public money to cover them.
In cases like Greece, the creditors’ passion for structural reforms might be better directed at home – particularly toward improving financial regulation.
The vast majority of Greeks want to stay in the EU.
In an ideal world, offering financial aid in exchange for reforms might help those in the country who want to shape it into a modern European state.
But given the difficulty Greece has had so far in making the necessary changes to reach that goal, it might be time to reconsider this approach to the crisis completely.
In place of a program providing the country with further loans, it might make more sense to provide outright humanitarian aid – regardless of whether Greece remains fully within the eurozone.
Why the Greek Deal Will Work
LONDON – Now that Greek banks have reopened and the government has made scheduled payments to the European Central Bank and the International Monetary Fund, does Greece’s near-death experience mark the end of the euro crisis?
The conventional answer is a clear no.
According to most economists and political commentators, the latest Greek bailout was little more than an analgesic.
It will dull the pain for a short period, but the euro’s deep-seated problems will metastasize, with a dismal prognosis for the single currency and perhaps even the European Union as a whole.
But the conventional wisdom is likely to be proved wrong.
The deal between Greece and the European authorities is actually a good one for both sides.
Rather than marking the beginning of a new phase of the euro crisis, the agreement may be remembered as the culmination of a long series of political compromises that, by correcting some of the euro’s worst design flaws, created the conditions for a European economic recovery.
To express guarded optimism about the Greek deal is not to condone the provocative arrogance of former Greek Finance Minister Yanis Varoufakis or the pointless vindictiveness of German Finance Minister Wolfgang Schäuble.
Neither is it to deny the economic criticism of the bailout provisions presented by progressives like Joseph Stiglitz and conservatives like Hans-Werner Sinn.
The arguments against creating a European single currency and then allowing Greece to cheat its way into membership were valid back in the 1990s – and, in theory, they still are.
But this does not mean that breaking up the euro would be desirable, or even tolerable.
Joining the euro was certainly ruinous for Greece, but there is always “a great deal of ruin in a nation,” as Adam Smith remarked 250 years ago, when losing the American colonies seemed to threaten Britain with financial devastation.
The great virtue of capitalism is that it adapts to ruinous conditions and even finds ways of turning them to advantage.
The United States in the mid-nineteenth century was badly suited for a single currency and a single economic structure, as evidenced by the Civil War, which was provoked as much by single-currency tensions as by moral abhorrence to slavery.
Italy would probably be better off today if Garibaldi had never launched unification.
But once unification has happened, the pain of dismantling the political and economic settlement usually overwhelms the apparent gains from a break-up.
This seems to be the case in Europe, as clear majorities of voters are saying in all eurozone countries, including Germany and Greece.
Thus, the question was never whether the single currency would break up, but what political reversals, economic sacrifices, and legal subterfuges would occur to hold it together.
The good news is that Europe now has some persuasive answers.
Indeed, Europe has overcome what could be described as the “original sin” of the single-currency project: the Maastricht Treaty’s prohibition of “monetary financing” of government deficits by the ECB and the related ban on mutual support by national governments of one another’s debt burdens.
In January, ECB President Mario Draghi effectively sidestepped both obstacles by launching a program of quantitative easing so enormous that it will finance the entire deficits of all eurozone governments (now including Greece) and mutualize a significant proportion of their outstanding bonds.
Moreover, European governments have belatedly understood the most basic principle of public finance.
Government debts never have to be repaid, provided they can be extended in a cooperative manner or bought up with newly created money, issued by a credible central bank.
But for this to be possible, interest payments must always be made on time, and the sanctity of debt contracts must always take precedence over electoral promises regarding pensions, wages, and public spending.
Now that Prime Minister Alexis Tsipras’s government has been forced to acknowledge the unqualified priority of debt servicing, and can now benefit from unlimited monetary support from the ECB, Greece should have little problem supporting its debt burden, which is no heavier than Japan’s or Italy’s.
Finally, Germany, Spain, Italy, and several northern European countries required, for domestic political reasons, a ritual humiliation of radical Greek politicians and voters who openly defied EU institutions and austerity demands.
Having achieved this, EU leaders have no further reason to impose austerity on Greece or strictly enforce the terms of the latest bailout.
Instead, they have every incentive to demonstrate the success of their “tough love” policies by easing austerity to accelerate economic growth, not only in Greece but throughout the eurozone.
This raises a key issue that the Tsipras government and many others misunderstood throughout the Greek crisis: the role of constructive hypocrisy in Europe’s political economy.
Gaps between public statements and private intentions open up in all political systems, but these become huge in a complex multinational structure like the EU.
On paper, the Greek bailout will impose a fiscal tightening, thereby aggravating the country’s economic slump.
In practice, however, the budget targets will surely be allowed to slip, provided the government carries out its promises on privatization, labor markets, and pension reform.
These structural reforms are much more important than fiscal targets, both in symbolic terms for the rest of Europe and for the Greek economy.
Moreover, the extension of ECB monetary support to Greece will transform financial conditions: interest rates will plummet, banks will recapitalize, and private credit will gradually become available for the first time since 2010.
If budget targets were strictly enforced by bailout monitors, which seems unlikely, this improvement in conditions for private borrowers could easily compensate for any modest tightening of fiscal policy.
In short, the main conditions now seem to be in place for a sustainable recovery in Greece.
Conventional wisdom among economists and investors has a long record of failing to spot major turning points; so the near-universal belief today that Greece faces permanent depression is no reason to despair.
Transatlantic Free Trade?
MADRID – This month, the United States National Intelligence Council released a sobering report entitled Global Trends 2030: Alternative Worlds.
Most important, according to the authors, if current trends continue, Asia could soon surpass North America and Europe in global power.
It will have a higher GDP, larger population, higher military spending, and more technological investment.
In this geopolitical context, Europe and the US need each other more than ever, making greater transatlantic cooperation crucial.
This seems to be the approach that inspired outgoing US Secretary of State Hillary Clinton’s recent speech at the Brookings Institution on US-European relations.
Given the shift in global power and the prospect of US energy self-sufficiency as domestic hydrocarbon output booms, America is trying to adapt its foreign policy to the new multi-polar international order.
And, although Asia is now America’s strategic priority, Europe is still the partner with which Americans have the most in common.
“I want to be clear,” Clinton noted.
“Our reorientation toward Asia is not a withdrawal from Europe.”
The US, according to Clinton, hopes that Europe will follow suit, so that Asia is seen not only as a market, but also as a focus of common strategic action.
But, beyond that, as the US and Europe seek to ensure their global roles, cooperation between them is more important than ever.
So now is the time for a bold initiative: the launch of a US-European Union free-trade agreement.
Clinton has already hinted at America’s readiness for this, mentioning the possibility of negotiating a complete agreement that would increase trade and stimulate growth on both sides of the Atlantic.
The journalist David Ignatius even dared to give it a name in a recent article in The Washington Post: TAFTA (Transatlantic Free-Trade Agreement).
Edward Luce, writing in the Financial Times, preferred “Transatlantic Partnership.”
The US and the EU (taken as a whole) are not only the world’s two largest economies and typically the largest commercial partners for other major economies; they also maintain the world’s largest bilateral trade relationship.
American investment in Europe is three times higher than it is in Asia.
European investment in the US is eight times larger than its investments in China and India combined.
So transatlantic trade is crucial for both economies, particularly for job creation.
Indeed, it is estimated that one-third of all bilateral US-EU trade consists of internal transfers by companies that operate in both markets.
Although US and EU tariffs on each other’s marketed manufactured goods are already low (below 3%, on average), a free-trade agreement would be enormously beneficial in promoting further investment, thereby boosting economic growth and creating more jobs.
Such an agreement could include trade in goods, services, financial instruments, and agriculture, and would necessitate greater compatibility of European and American regulations and legal norms, implying substantial savings.
Moreover, the effects of such an agreement would be felt far beyond the US and Europe.
For example, both have already signed free-trade treaties with various Latin American countries, implying the creation of a geographically enormous free-trade area, which should boost economic resilience in the face of global crisis.
Indeed, regional free-trade agreements are gaining momentum worldwide.
The Trans-Pacific Partnership, a free-trade agreement spearheaded by the US, is set to be a game-changer in the Asia-Pacific region, with decisive advances this year putting it on course to be concluded in 2015.
Potential signatories include the US, Australia, Malaysia, Vietnam, Singapore, New Zealand, Chile, Peru, Brunei, Canada, Mexico, and perhaps Japan and South Korea.
The result will be trade liberalization in an area that produces 40% of global GDP.
Isn’t it time to consider something similar for Europe and the US?
The EU, now confronting a wave of populism and Euro-skepticism, could revive its sense of purpose by committing itself to closer transatlantic cooperation and coordination on trade, to be carried out by the European Commission.
Such a project has worked before in bringing Europe together; it can do so again.
The most precious asset today is confidence, and the mere fact of launching negotiations would generate it in abundance.
Protectionism is no solution to the crisis, whereas a transatlantic free-trade agreement would favor multilateralism and openness.
In this sense, it is important to stress the work of the World Trade Organization, the best multilateral forum that the world has for resolving trade disputes.
Signing a transatlantic trade treaty would be irrefutable proof that the political case for open trade can be made – and won.
The only way to achieve this is through the clear commitment of political leaders on both sides of the Atlantic, together with private-sector involvement, which is fundamental to sustaining urgently needed economic growth.
But let’s not wait: faced with predictions of the West’s relative decline, the US and the EU must commit themselves to more union, more cooperation, and more prosperity.
Financial Reform’s Breakthrough Year
ZANZIBAR – Here’s an odd prediction for the coming year: 2013 will be a watershed for financial reform.
True, while the global financial crisis erupted more than four years ago, and the Dodd-Frank financial reforms were adopted in the United States back in 2010, not much has changed about how Wall Street operates – except that the large firms have become bigger and more powerful.
Yet there are reasons to expect real progress in the new year.
The US Federal Reserve is finally shifting its thinking.
In a series of major speeches this fall, Governor Dan Tarullo made the case that the problem of “too big to fail” financial institutions remains with us.
We need to take additional measures to reduce the level of systemic risk – including limiting the size of our largest banks.
News reports indicate that the Fed has already started saying no to some bank mergers.
At the same time, the US Federal Deposit Insurance Corporation has become a bastion of sensible thinking on financial-sector issues.
In part, this is because the FDIC is responsible for cleaning up the mess when financial-sector firms fail, so its senior officials have a strong incentive to protect its insurance fund by preventing risks from getting out of control.
The FDIC is showing intellectual leadership as well as organizational capabilities – Vice Chairman Tom Hoenig’s speeches are a must-read.
Wall Street is pushing back, of course.
But the rolling series of scandals surrounding global megabanks makes it difficult for anyone to keep a straight face when executives insist that our largest banks must maintain their current scale and scope.
Do we need HSBC to facilitate global money laundering?
Do we need Barclays and UBS to manipulate Libor (a key benchmark for interest rates around the world)?
Do we need still more losses at poorly run trading operations for JP Morgan Chase?
The pro-bank lobby groups are positioning themselves to argue that the new resolution powers under Dodd-Frank have ended the too-big-to-fail problem, and we can expect a public-relations drive in this direction early in the new year.
But the consensus view at the most recent meeting of the FDIC’s Systemic Resolution Advisory Committee (of which I am a member) was that this claim should not be taken seriously.
Under Dodd-Frank, it is arguably easier for the FDIC to handle the failure of a single large financial institution than it was in pre-Dodd-Frank days.
But what if two or three or seven firms are all in trouble at the same time?
The answer, as former Fed Chairman Paul Volcker implied at the meeting, is that we would be right back where we started – in the panic and frozen credit markets that followed the collapse of Lehman Brothers in September 2008.
Indeed, the idea that substantial shocks could soon hit the US financial system is not far-fetched.
The European debt crisis, for example, remains far from being resolved.
A significant sovereign-debt restructuring there would bring down European banks and potentially damage US banks – as well as financial institutions around the world.
Meanwhile, the continuing problems at European banks are a stark reminder that operating highly leveraged, thinly capitalized firms is incredibly risky.
And the regulatory failures in Europe – consider the German Landesbanks, for example – will become only more obvious in the coming months.
Creating a common supervisory authority will mean nothing unless it can clean up the mess created by the existing supervisors.
And that cleanup will expose more of the rot in banks’ current operations.
The need for banks to finance themselves with more equity and relatively less debt will be the focus of one of the main publishing events in economics in 2013. Anat Admati and Martin Hellwig’s The Bankers’ New Clothes: What’s Wrong with Banking and What to Do About it? will appear officially in March, but advance copies are already being closely read in leading central banks.
Bankers everywhere will rush to read it before their regulators do.
The road to the ongoing financial and economic crisis was built on a foundation of intellectual capture: not only regulators, but academics, too, became captivated by modern finance and its methods.
Admati and Hellwig are at the vanguard of the counterrevolution, challenging the great myths of banking head-on.
Do we need financial institutions to be so highly leveraged (that is, carrying so much debt relative to equity)?
No, they argue.
If banks of all kinds were financed with more equity, they would have stronger buffers to absorb losses.
Both the equity and the debt issued by well-capitalized banks would be safer – and therefore cheaper.
Bankers want to be so highly leveraged for a simple reason: implicit government guarantees mean that they get the upside when things go well, while the downside is someone else’s problem.
Contrary to bankers’ claims, this is not a good arrangement for society.
Admati and Hellwig are confronting the bankers and their allies in no uncertain terms, grounding their argument in deep financial thinking, yet writing for a broad audience.
Whatever else happens in 2013, we can be sure that they will not win the Goldman Sachs Business Book of the Year award.
In Defense of Non-Visionaries
OXFORD – Many of the recent tributes for Margaret Thatcher following her death celebrated her as a “transformational” leader who brought about great changes.
There were frequent references to her equally transformational American counterpart, Ronald Reagan.
But a more interesting comparison is with her other presidential contemporary, George H. W. Bush.
Though often dismissed as a mere “transactional” manager, Bush had one of the best foreign-policy records of the past half-century.
His administration managed the end of the Cold War, the dismantlement of the Soviet Union, and the unification of Germany within NATO – all without violence.
At the same time, he led a broad United Nations-backed coalition that repelled Saddam Hussein’s aggression against Kuwait.
Had he dropped any of the balls he was juggling, today’s world would be much worse.
Although he presided over a major global transformation, Bush, by his own account, did not have transformational objectives.
On the unification of Germany, he resisted the advice of Thatcher and others, apparently out of a sense of fairness and responsiveness to his friend, German Chancellor Helmut Kohl.
In October 1989, Bush responded to a call from Kohl by publicly stating that he did not “share the concern that some European countries have about a reunified Germany.”
At the same time, he was careful to let Kohl and others take the lead.
When the Berlin Wall was opened a month later, partly owing to an East German mistake, Bush was criticized for his low-key response.
But Bush had made a deliberate choice not to humiliate the Soviets or gloat: “I won’t beat on my chest and dance on the wall,” was his response – a model of emotional intelligence in a leader.
Such self-restraint helped to set the stage for the successful Malta Summit with Soviet President Mikhail Gorbachev a month later.
The Cold War ended quietly, and the dismantlement of the Soviet empire followed.
As Bush and his team responded to forces that were largely outside of his control, he set goals and objectives that balanced opportunities and constraints in a prudent manner.
Some critics have faulted him for not supporting the national aspirations of Soviet republics like Ukraine in 1991 (when he delivered his infamous “Chicken Kiev” speech warning against “suicidal nationalism”); for failing to go to Baghdad to unseat Saddam Hussein in the Gulf War; or for sending Brent Scowcroft to Beijing to maintain relations with China after the Tiananmen Square massacre of 1989.
But, in each instance, Bush was limiting his short-term gains in order to pursue long-term stability.
Other critics complained that Bush did not set more transformational objectives regarding Russian democracy, the Middle East, or nuclear non-proliferation at a time when world politics seemed fluid.
But, again, Bush remained more focused on maintaining global stability than on advancing new visions.
Bush was also respectful of institutions and norms at home and abroad, going to the US Congress for authorization of the Gulf War, and to the United Nations for a resolution under Chapter 7 of the UN Charter.
Although a realist in his thinking, he could be Wilsonian in his tactics.
Bush’s termination of the ground war in Iraq after only four days was motivated in part by humanitarian concerns about the slaughter of Iraqi troops, as well as by an interest in not leaving Iraq so weakened that it could not balance the power of neighboring Iran.
While Bush’s invasion of Panama to capture (and later put on trial) Manuel Noriega may have violated Panamanian sovereignty, it had a degree of de facto legitimacy, given Noriega’s notorious behavior.
And, when Bush organized his international coalition to prosecute the Gulf War, he included several Arab countries – not to ensure military success, but to boost the mission’s legitimacy.
When Bush and Thatcher met in Aspen, Colorado, in the summer of 1990, Thatcher allegedly warned him “not to go wobbly.” But most historians agree there was no such danger.
With his careful combination of hard and soft power, Bush created a successful strategy – one that accomplished American goals in a manner that was not unduly insular and with minimal damage to the interests of foreigners.
He was careful not to humiliate Gorbachev, and to manage the transition to Boris Yeltsin’s presidency in a newly independent Russia.
Of course, not all foreigners were adequately protected.
For example, Bush assigned a low priority to Kurds and Shia in Iraq, to dissidents in China, and to Bosnians in the former Yugoslavia.
In that sense, Bush’s realism set limits to his cosmopolitanism.
Could Bush have done more had he been a transformational leader like Thatcher or Reagan?
Perhaps he might have done more in a second term.
And, with better communication skills, he might have been able to do more to educate the American public about the changing nature of the post-Cold War world.
But, given the profound uncertainty of a world in flux, as well as the dangers of miscalculation as the Soviet empire collapsed, prudent management trumped grand visions.
Bush famously said that he did not do “the vision thing.”
Nonetheless, few people at the end of 1989 believed that Germany could be reunited peacefully within the Western alliance.
Thatcher certainly did not.
The lesson is that in some circumstances, we should prefer leadership by good transactional managers like George H. W. Bush (or Dwight Eisenhower before him), rather than by more flashy and inspirational transformers.
Why Turkey\u0027s Army Will Stay Home
Just when the smoke from Turkey’s domestic political conflicts of the past year had begun to clear, another deadly attack by Kurdish separatists on Turkish soldiers has the government threatening military attacks inside northern Iraq.
That prospect raises risks for Turkey, Iraq, and the United States.
But there are reasons to doubt that the situation is as dangerous as recent headlines suggest.
Turkey accuses Iraqi Kurds of harboring between 3,000 and 3,500 of Turkey’s most active Kurdish militants – the PKK separatist guerillas who are blamed for the deaths of 80 Turkish soldiers so far this year.
The trouble reached the boiling point on October 7, when Kurdish fighters killed 13 Turkish soldiers near Turkey’s border with Iraq.
The Turkish public has demanded action, and Prime Minister Recep Tayyip Erdogan’s government has responded.
On October 17, despite pleas for patience and restraint from Iraq and the US, Turkish lawmakers voted 507-19 to authorize Erdogan to order cross-border military strikes into Iraq at any time over the next year.
Erdogan has sent Iraqi Kurds a forceful message.
But, for several reasons, the Turkish military is likely to limit its operations to small-scale incursions and air strikes on specific targets rather than launch an all-out war.
First, the Turkish military has no interest in embracing the risks that come with involvement in Iraq’s sectarian strife.
A full-scale invasion might well provoke Iraq’s own Kurdish guerrillas into a prolonged and bloody battle with Turkish forces that can only undermine support for Erdogan’s government at home and abroad.
Second, Turkey’s government hopes to keep the country’s bid to join the European Union moving forward.
An invasion of Iraq would bring that process to a grinding halt.
EU Foreign Policy chief Javier Solana has made plain that Europe strongly opposes any large-scale Turkish military operation in Iraq.
Third, Turkey is well aware that an all-out attack inside Iraq is exactly what Turkey’s Kurdish separatists want.
What better way to damage Turkey than to pull its military into conflict with Iraq, the US, and the EU?
Erdogan has no intention of being drawn into that trap.
With all that in mind, this latest move by Turkey’s parliament should be seen more as an ultimatum to Iraq’s Kurdish Regional Government to expel the Turkish Kurds and an attempt to persuade the US to use its considerable influence there.
That’s hardball politics, not a declaration of war.
The parliamentary authorization itself is carefully worded to underline Turkey’s limited aims.
It stresses that Turkey’s military has no intention of occupying Iraqi territory or threatening Iraqi Kurds or their oil infrastructure.
An attack would certainly make Iraq’s Kurdish provinces less appealing for foreign investors. But Turkey has no reason to attack the assets of foreign oil companies.
Iraq’s central government is aware of the risks, as well, and is likely to exercise maximum restraint.
A limited Turkish strike into northern Iraq would probably elicit little reaction beyond public condemnation and rhetorical assertions of Iraqi sovereignty.
Threats to Iraq’s oil infrastructure around the northern Iraqi city of Kirkuk and other territory under the Kurdish Regional Government’s control are minimal.
Turkey’s government knows that any move to shut down the 600-mile pipeline from Kirkuk to Turkey’s Mediterranean port at Ceyhan would have little near-term impact, since most of Iraq’s oil exports flow from the south, hundreds of miles from the country’s border with Turkey.
Furthermore, the Turkish military can increase the pressure on Iraqi Kurds with far less drastic measures.
It can close the two countries’ principal border crossing, an important route for food, fuel, and other goods headed for Iraqi Kurds.
It could also cut exports of electricity to northern Iraq.
Still, even small-scale military operations would generate risk.
If the PKK is able to launch a major attack on troops or civilians inside Turkey, the public outcry might leave Erdogan with little choice but to up the ante.
The issue is complicated further by Turkey’s refusal to negotiate directly with the Kurdish Regional Government in northern Iraq.
Such talks, Turkey fears, would offer tacit acknowledgement that Iraqi Kurds have won a degree of autonomy from Baghdad.
That’s a bridge too far for Turkey’s nationalists and its military.
There are risks for Iraqi Prime Minister Nouri al Maliki as well, because Turkish military strikes on Iraq’s northern provinces could undermine the Kurdish support on which his government increasingly depends.
Both Sunni Arabs and Kurds already resent al Maliki’s mild reaction to Iran’s recent shelling of Iraqi territory – an attempt to strike at Iranian Kurdish militants fleeing across its border with Iraq.
There are also risks for the US.
Most supplies headed for US troops in Iraq and Afghanistan move through the Incirlik airbase in Turkey.
With the threat that the US House of Representatives will approve a resolution that accuses Turks of genocide against ethic Armenians nine decades ago, this is a particularly inopportune moment for the two countries to be at odds over Iraq.
But, worst-case scenarios aside, a Turkish invasion of northern Iraq can only serve the interests of Turkey’s Kurdish separatists.
That’s why cooler heads are likely to prevail.
Limited cross-border operations are increasingly likely. A war between Turkey and Iraqi Kurds is not.
Why Ukraine Deserves a Haircut
LONDON – In addition to its many other troubles, Ukraine now finds itself in a showdown with its creditors.
Investors holding high-yielding bonds – many of them bought at heavy discounts after Russia’s annexation of Crimea last year – are demanding to be paid in full.
Ukraine’s government, for its part, argues that the country’s financial difficulties – in particular the economic effects of the conflict and the plunge in the value of the hryvnia – have made its debt burden unsustainable.
The outcome of this standoff could determine Ukraine’s future, as much as the military confrontation with Russia.
Recent developments have put the country on a path that would have been unimaginable until very recently.
For the first time in Ukraine’s post-Soviet history, it has a government that is willing and able to carry out real reform.
Ukraine’s progress, however, could not be more fragile.
Without some form of debt relief, it could easily be lost.
A little over a year ago, Ukraine did not have an elected president or a representative and functioning parliament.
The political landscape was deeply fragmented.
Civil society had been energized by the Maidan revolution that ousted former President Viktor Yanukovych, but it was in turmoil.
Debate over the association agreement with the European Union, along with the Russian-backed rebellion in the east, had stoked tensions over distinctions that previously played little or no role in people’s lives.
But since parliamentary elections in October, Ukraine has begun to pull itself together.
Russia’s intervention has to some extent backfired, strengthening support for a European orientation.
Eastern Ukraine may have voted differently from the rest of the country, but the overwhelming majority of voters came out in favor of Europe.
The electorate also said no to the more virulent forms of nationalism, leaving the right-wing extremist parties marginalized.
The result of the elections was the formation of a five-party governing coalition.
Though seemingly fragile, it has held up remarkably well.
Some of its members have displayed worrying populist tendencies, but an analysis of parliamentary voting patterns indicates that so far the coalition has been able to find agreement, even on very difficult issues.
The government has, among other things, raised gas tariffs by 450% (from absurdly low levels).
Dissension has been relatively moderate.
As a result, Ukraine’s core institutions are undergoing fundamental change.
The central bank – once in the pocket of the country’s oligarchs, supplying inside information on exchange rates and liquidity in exchange for bribes – has been put under the command of a governor committed to reform, surrounded by an increasingly professional team. The energy monopoly Naftogaz, previously a cesspool of illicit transactions, has in a year managed the seemingly impossible: making Ukraine virtually independent from direct gas delivery from Russia for at least a year.
Perhaps Ukraine’s single most important achievement is the establishment of the National Reform Council.
Originally set up to coordinate reforms across ministries and monitor their implementation, it has come to serve as an important tool to discuss and ensure coherence among the different branches of government.
This latter role is particularly important, given the constitutional ambiguity created by the reversion back to a parliamentary system and the uneasy co-habitation of President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk in government.
Meetings are held every three weeks and are attended by the president, the prime minister, and his entire cabinet, providing a forum in which tensions can be discussed and eased.
In between meetings, the council’s special project-management office assists in the preparation and implementation of key reforms by ministries.
With support from the European Bank for Reconstruction and Development, the George Soros-funded International Renaissance Foundation, and bilateral assistance from, among others, the Swedish government, the office has been able to hire staff at market rates, raising the quality of the government administration.
Ukraine’s government has also benefited from the expertise of private-sector leaders.
Deputy Head of the Presidential Administration Dmytro Shymkiv, who drove the National Reform Council, was CEO of Microsoft Ukraine.
Finance Minister Natalie Jaresko and Economic Development and Trade Minister Aivaras Abromavicius were both investment bankers (neither was a Ukrainian citizen when they joined the government).
Infrastructure Minister Andriy Pivovarsky, also a former investment banker, was most recently CEO of Continium, one of the country’s largest holding companies.
Each has played a key role in pushing the reform agenda forward, working for salaries that are orders of magnitude smaller than what they earned before.
Some have even employed staff using their own money.
Meanwhile, the ambitious agendas of the government ministers and the presidential administration are closely monitored by an energized civil society.
As Soros has noted, Ukraine probably has the most active civil society in Europe.
One of the country’s most interesting new ventures is VoxUkraine, a blogging platform set up by two Ukrainian economics professors based in the United States, Yuriy Gorodnichenko and Timofiy Mylovanov.
They have championed modern evidence-based decision-making and constantly come up with new, constructive ways of challenging the government and its assumptions.
Despite all this progress, however, the odds remain stacked against the country.
The government is fighting at least two wars simultaneously – taking on a deeply entrenched oligarchy, while trying to fend off its hostile eastern neighbor.
Further trouble – in the form a steeply declining economy – is something it cannot afford.
The stakes could not be higher.
For the first time since the country gained its independence in 1992, Ukraine has a clear sense of direction and a government capable of supporting reform.
There are signs that the oligarchs’ grip is beginning to loosen, owing partly to internal conflicts among them.
The EU and the US are working to help resolve its conflict with Russia.
Ukraine’s private creditors must now do their part, recognize the country’s economic and political situation, and accept a haircut on their bonds.
Neither the Ukrainian economy – nor its political system – can afford that they do otherwise.
When Inflation Doves Cry
PITTSBURGH – The Wall Street Journal recently ran a front-page article reporting that the monetary-policy “doves,” who had forecast low inflation in the United States, have gotten the better of the “hawks,” who argued that the Fed’s monthly purchases of long-term securities, or so-called quantitative easing (QE), would unleash faster price growth.
The report was correct but misleading, for it failed to mention why there is so little inflation in the US today.
Were the doves right, or just lucky?
The US Federal Reserve Board has pumped out trillions of dollars of reserves, but never have so many reserves produced so little monetary growth.
Neither the hawks nor the doves (nor anyone else) expected that.
Monetarists insist that economies experience inflation when money-supply growth persistently exceeds output growth.
That has not happened yet, so inflation has been postponed.
Instead of rejecting monetary theory and history, the army of Wall Street soothsayers should look beyond the Fed’s press releases and ask themselves: Does it make sense to throw out centuries of experience?
Are we really so confident that the Fed has found a new way?
The Fed has printed new bank reserves with reckless abandon.
But almost all of the reserves sit idle on commercial banks’ balance sheets.
For the 12 months ending in July, the St. Louis Fed reports that bank reserves rose 31%.
During the same period, a commonly used measure of monetary growth, M2, increased by only 6.8%.
No sound monetarist thinks those numbers predict current inflation.
Indeed, almost all the reserves added in the second and third rounds of QE, more than 95%, are sitting in excess reserves, neither lent nor borrowed and never used to increase money in circulation.
The Fed pays the banks 0.25% to keep them idle.
With $2 trillion in excess reserves, and the prospect of as much as $85 billion added each month, banks receive $5 billion a year, and rising, without taking any risk.
For the bankers, that’s a bonanza, paid from monies that the Fed would normally pay to the US Treasury.
And, adding insult to injury, about half the payment goes to branches of foreign banks.
In normal times, there are valid reasons for paying interest on excess reserves.
Currently, however, it is downright counter-productive.
Bank loans have started to increase, but small borrowers, new borrowers, and start-up companies are regularly refused.
Current low interest rates do not cover the risk that banks would take.
To be sure, they could raise the rate for new and small borrowers; but, in the current political climate, they would stand accused of stifling economic recovery if they did.
The new Consumer Financial Protection Board is also a deterrent, as banks consider it safer to lend to the government, large corporations, and giant real-estate speculators.
The banks can report record profits without much risk, rebuild capital, and pay dividends and bonuses.
And the Fed can congratulate itself on the mostly unobserved way that the large banks have used taxpayers’ money.
Instead of continuing along this futile path, the Fed should end its open-ended QE3 now.
It should stop paying interest on excess reserves until the US economy returns to a more normal footing.
Most important, it should announce a strategy for eliminating the massive volume of such reserves.
I am puzzled, and frankly appalled, by the Fed’s failure to explain how it will restore its balance sheet to a non-inflationary level.
The announcements to date simply increase uncertainty without telling the public anything useful.
Selling $2 trillion of reserves will take years.
It must do more than repeat that the Fed can raise interest rates paid on reserves to encourage banks to hold them.
It will take a clearly stated, widely understood strategy – the kind that Paul Volcker introduced in 1979-1982 – to complete the job.
Should the end of QE come in September, December, or later?
Does it matter?
Historically, the Fed has typically been slow to respond to inflation.
Waiting until inflation is here, as some propose, is the usual way.
But that merely fuels inflation expectations and makes the task more painful.
And how high will the Fed push up interest rates?
Once rates get to 5% or 6%, assuming inflation remains dormant, the Fed can expect a backlash from Congress, the administration, unions, homebuilders, and others.
When contemplating the consequences of this, remember that 40% of US government debt comes due within two years.
Rolling it over at higher rates of 4% or 5% would add more than $100 billion to the budget deficit.
And that is just the first two years.
The budget cost increases every year, as more of the debt rolls over –&#160;and that does not include agency debt and the large increase in the current-account deficit to pay China, Japan, and other foreign holders of US debt.
Those who believe that inflation will remain low should look more thoroughly and think more clearly.
There are plenty of good textbooks that explain what too many policymakers and financial-market participants would rather forget.
Send in the Clowns
NEW YORK – When too many Italians voted late last month for either a louche and discredited business tycoon or a comedian, European stock markets plummeted.
With no public trust in the political class, Italy might become ungovernable.
But Italians are not alone.
Rage against the political establishment has become a global phenomenon.
Chinese bloggers, American Tea Party activists, British Europhobes, Egyptian Islamists, Dutch populists, Greek ultra-rightists, and Thai “red shirts” all have one thing in common: hatred of the status quo and contempt for their countries’ elites.
We are living in an age of populism.
The authority of conventional politicians and traditional media is slipping away fast.
Populism can be a necessary corrective when political parties grow sclerotic, mass media become too complacent (or too close to power), and bureaucracies are unresponsive to popular needs.
In a globalized world managed by bankers and technocrats, many people feel that they have no say in public affairs; they feel abandoned.
Our national politicians, increasingly powerless to cope with serious crises, are suspected, often with good reason, of simply looking after their own interests.
All we can do is vote the rascals out, sometimes by voting for candidates whom we would not take seriously in more normal times.
Italian elites are not the only ones in need of being shaken up.
But the problem with populism is that it is rarely benign.
In the 1930’s, it resulted in violent movements led by dangerous men in uniform.
Today’s populists are different.
They do not, on the whole, advocate violence.
Some preach that Muslims are destroying Western civilization.
Others think that President Barack Obama is a kind of communist out to destroy America.
Two types of contemporary populist, however, stand out: the ultra-rich business tycoon and the clown.
In the Anglo-Saxon media world, Rupert Murdoch, owner of far too many newspapers, TV stations, and movie studios, is a typical populist tycoon.
But he never aspired to lead a country.
Former Italian Prime Minister Silvio Berlusconi and former Thai Prime Minister Thaksin Shinawatra did – and still do.
Neither the clown nor the tycoon is well suited to being a democratic leader.
The question is which is worse.
Clowns have always played a role in politics.
Medieval court jesters were often the only ones who could speak truth to despotic kings.
Today, it is often comedians who claim to speak truth to power – and to the public.
In America, liberals turn for political commentary to television comedians like Jon Stewart and Stephen Colbert, who are now more trusted than traditional news broadcasters.
And clownish right-wing radio talk-show hosts now have more influence on many conservative American voters than the sober journalists of the mainstream media do.
A few years ago, a clown named Brozo, with a large red nose and a bright green wig, was Mexico’s most popular political commentator on television, actively courted by all candidates running for national office.
In 1980, the French clown Coluche actually dropped out of the presidential race when one newspaper put his popular support at 16%, causing him to fear that he might influence the result too much.
The prototype of modern European populism was the flamboyant Dutch political showman Pim Fortuyn, who was assassinated in 2002 by a fanatical vegan.
Fortuyn’s outrageousness was deliberately provocative and always entertaining.
His rants against the elites were often confused, but he was funny, which made the old elite politicians look like stuffy old bores – which many of them were.
And now Italy has Beppe Grillo, whose success in the country’s recent election makes him the first professional comedian to lead a major political party in Europe.
The thing about clowns, though, is that few have any aspirations to rule their countries.
Before his death, Fortuyn is said to have been terrified of the prospect of becoming Prime Minister.
And Grillo cannot even aspire to the job in Italy because of his criminal record.
Clowns mostly seek to provoke, and this can be healthy.
They are less likely than members of the professional political class to allow political calculations to influence their views.
And, sometimes, they actually say things that are uncomfortable but true, and that need to be said.
Political business tycoons, on the other hand, have different ambitions.
They attack the old elites not to shake things up, but to take their power.
Promising to spread the riches that they have made for themselves, they exploit the fantasies of those of us who have little and want more.
Berlusconi understood the dreams of many Italians very well.
His extravagance, clownishness, and even his girls were part of his popular appeal.
In Thailand, the self-made ethnic-Chinese media billionaire Thaksin Shinawatra was especially admired by the rural poor.
Like a beneficent king, he would give them money, and promised to challenge the old elites in Bangkok – the bankers, generals, judges, and even the courtiers surrounding the Thai king.
But tycoons are not natural democrats.
Their main interest is in their own business.
And they do not hesitate to undermine an independent press or judiciary when their business interests are threatened.
Even though his sister, Yingluck Shinawatra, is now in power, Thaksin is still trying to evade trial in Thai courts on a wide array of financial charges.
As it happens, Thaksin was overthrown in 2006 by a military coup that was largely backed by the Bangkok elites.
Berlusconi was replaced by a government run by elite technocrats, whose policies had to be approved by European bankers and European Union bureaucrats.
Neither of these responses to populism is likely to boost democracy.
On the contrary, they make things worse.
What is needed is mainstream politicians who understand and respond to what is fueling popular rage.
Paying attention to some of what the clowns are saying might be a good first step.
The Battle for Water
NEW YORK – The sharpening international geopolitical competition over natural resources has turned some strategic resources into engines of power struggle.
Transnational water resources have become an especially active source of competition and conflict, triggering a dam-building race and prompting growing calls for the United Nations to recognize water as a key security concern.
Water is different from other natural resources.
After all, there are substitutes for many resources, including oil, but none for water.
Similarly, countries can import fossil fuels, mineral ores, and resources from the biosphere like fish and timber; but they cannot import water, which is essentially local, on a large scale and on a prolonged – much less permanent – basis.
Water is heavier than oil, making it very expensive to ship or transport across long distances even by pipeline (which would require large, energy-intensive pumps).
The paradox of water is that it sustains life but can also cause death when it becomes a carrier of deadly microbes or takes the form of a tsunami, flash flood, storm, or hurricane.
Many of the greatest natural disasters of our time – including, for example, the Fukushima catastrophe in 2011 – have been water-related.
Global warming is set to put potable-water supplies under increasing strain – even as oceans rise and the intensity and frequency of storms and other extreme weather events increase.
Rapid economic and demographic expansion has already turned adequate access to potable water into a major issue across large parts of the world.
Lifestyle changes, for example, have spurred increasing per capita water consumption, with rising incomes promoting dietary change, for example, especially higher consumption of meat, production of which is ten times more water-intensive, on average, than plant-based calories and proteins.
Today, the earth’s human population totals slightly more than seven billion, but the livestock population at any given time numbers more than 150 billion.
The direct ecological footprint of the livestock population is larger than that of the human population, with rapidly rising global meat consumption becoming a key driver of water stress by itself.
Political and economic water wars are already being waged in several regions, reflected in dam construction on international rivers and coercive diplomacy or other means to prevent such works.
Consider, for example, the silent water war triggered by Ethiopia’s dam building on the Blue Nile, which has elicited Egyptian threats of covert or overt military reprisals.
A report reflecting the joint judgment of US intelligence agencies warned last year that the use of water as a weapon of war or a tool of terrorism would become more likely in the next decade in some regions.
The InterAction Council, comprising more than 30 former heads of state or government, has called for urgent action to prevent some countries battling severe water shortages from becoming failed states.
The US State Department, for its part, has upgraded water to “a central US foreign policy concern.”
In many countries, inadequate local water availability is increasingly constraining decisions about where to set up new manufacturing facilities and energy plants.
The World Bank estimates that such constraints are costing China 2.3% of GDP.
China, however, is not yet in the category of water-stressed states.
Those that are, stretching from South Korea and India to Egypt and Israel, are paying an even higher price for their water problems.
These countries already understand that water is a renewable but finite resource.
Nature’s water-replenishment capacity is fixed, limiting the world’s usable freshwater resources to about 200,000 cubic kilometers.
But the human population has almost doubled since 1970, while the global economy has grown even faster.
Major increases in water demand, however, are being driven not merely by economic and demographic growth, or by the additional energy, manufacturing, and food production to meet rising consumption levels, but also by the fact that the global population is getting fatter.
The average body mass index (BMI) of humans has been increasing in the post-World War II period, but especially since the 1980’s, with the prevalence of obesity doubling in the past three decades.
Heavier citizens make heavier demands on natural resources, especially water and energy.
The issue thus is not just about how many mouths there are to feed, but also how much excess body fat there is on the planet.
For example, a study published in the British journal BMC Public Health has found that if the rest of the world had the same average body mass index as the US, this would be the equivalent of adding almost one billion people to the global population, greatly exacerbating water stress.
With the era of cheap, bountiful water having been replaced by increasing supply and quality constraints, many investors are beginning to view water as the new oil.
The dramatic rise of the bottled-water industry since the 1990’s attests to the increasing commodification of the world’s most critical resource.
Not only are water shortages likely to intensify and spread, but consumers also will increasingly have to pay more for their water supply.
This double whammy can be mitigated only by innovative water management and conservation, and by developing nontraditional supply sources.
As in the oil and gas sector – where tapping unconventional sources, such as shale and tar sands, has proved a game changer – the water sector must adopt all unconventional options, including recycling wastewater and desalinating ocean and brackish waters.
In short, we must focus on addressing our water-supply problems as if our lives depended on it.
The Biology of Luxury
PARIS – Despite the global economic crisis, sales of luxury goods are surging worldwide.
Why?
While marketing has contributed to the rise, the luxury market’s robust growth is actually rooted in biology.
Discussions about the structure of human thought have long been dominated by the Enlightenment view that reality is composed of four elements: space, time, matter, and energy.
But recently, a fifth element, information, has entered the debate.
And information, it turns out, is crucial to understanding the fundamental drivers of luxury-goods consumption, and thus to predicting the luxury market’s future.
Living organisms communicate, and the information that they exchange shapes their reality.
While animals use colorful displays and complicated behaviors to signal fitness and strength, humans use luxury goods to demonstrate economic health.
But, more than a symbol, buying luxury goods could indicate future success, owing to the selective advantage that showing off provides.
In nature, competitors perform, and the most compelling, beautiful spectacle wins.
For most animals, males are the performers.
Male birds, for example, often have brightly colored plumage or intricate appendages, such as the Australian lyrebird’s long tail.
As a result, competitive displays have been interpreted as a way to demonstrate fitness to a potential mate.
A bird that survives, despite inconvenient plumage that slows it down or makes it visible to predators, must be fit, and will likely sire a healthy progeny.
Given that females bear the physical burden of offspring, an unobtrusive appearance is more advantageous – and thus more common – in nature.
But humans are social creatures with no natural predators, so female competition is more widespread – and demonstrative performance and display are more likely.
Indeed, while visual manifestations of wealth are prevalent for both genders, women’s appearance is frequently more vivid (and more closely scrutinized).
But effective display is costly.
Developing complex, vibrant plumage demands significant energy and genetic resources.
Genes are difficult to maintain, requiring subtle and energy-intensive correcting processes.
Just as writing too fast can cause typographical errors that garble a text, rapid changes to the genome can undermine a species’ integrity.
Likewise, purchasing luxury goods requires substantial financial resources.
This cost dictates the display’s competitive impact.
In today’s information-based world, selection is effective only if a striking appearance is obtained at a very high price – and that price is known.
For example, those who use cosmetics known to be expensive often seem healthier, more vibrant, and more attractive than those who do not.
This is not the result of efficiency (the most effective cosmetics frequently become pharmaceutical drugs).
Rather, it signals a lifestyle that values the preservation of beauty and youth.
Cosmetics, like all luxury products, gain influence not from their production, or even their purchase, but from their visibility.
Indeed, an expensive item with no label or identifying characteristics has less competitive impact than a recognized item or brand.
For luxury goods to have any function, society needs information about their cost.
This has been true to varying degrees throughout history – sometimes resulting in price bubbles.
False information, such as counterfeit goods, jeopardizes the competition-based selection process.
Animals commonly use mimicry to capitalize on knowledge – or fear – of another’s strength.
By imitating an animal with a well-known protective profile, a weaker one may enjoy selective benefits without the costs.
But mimicry’s success in nature depends on the ratio of the original to the ersatz.
If there are too few of the original, the profile loses its significance, and its protective value vanishes.
Similarly, nobody would display a symbol of wealth if it were too common.
Therefore, assessing whether luxury goods will maintain their impact, and thus their appeal, requires monitoring the extent of counterfeiting.
Given that luxury goods provide individuals with a competitive advantage, higher luxury-goods sales could indicate a brighter economic future for a country.
In a time of crisis, countries in which luxury goods play their selective role effectively are the safest bets for productive investment.
Why We Need “Game of Thrones”
PARIS – Today’s popular television programs have become the equivalent of the feuilletons that began appearing in newspapers in the nineteenth century.
Series like “Game of Thrones” and “Downton Abbey,” like Balzac and Dickens before them, serve as a source of entertainment and fodder for debate.
In this sense, our television screenplays have emerged as key tools of social and political analysis.
Such tools can be used to comprehend, for example, the difference between Israeli Prime Minister Binyamin Netanyahu and US President Barack Obama.
Netanyahu is still stuck in the third season of “Homeland” – that is, obsessed with Iran – whereas Obama, having begun to include the renewed Russian threat in his strategic calculus, has already moved into the third season of “House of Cards.”
Of course, the availability of such comparisons is rooted in what often drives a TV series’ popularity: its ability to hold up a mirror to a society – to reflect its anxieties and longings – and create a window through which outsiders can peer in.
Consider “Downton Abbey,” a British period drama that follows the lives of the Crawley family and its servants in the family’s classic country house, from 1912 to the mid-1920s.
Why are millions of people worldwide – from Europe to the United States to Asia – so attracted to these characters?
Are they nostalgic for a time long past, which the show reconstitutes with exacting verisimilitude?
Or are they fascinated by the social dynamics that the show explores?
For Julian Fellowes, who created the series, the explanation lies elsewhere – in our search for order in a chaotic world.
People feel so disoriented nowadays, he believes, that they are drawn to “Downton Abbey’s” tidy realm, in which the setting, clearly delineated in space and time, is governed by strict rules.
Just as the Crawley house serves as a kind of refuge for its characters, it may give its viewers a safe, predictable outlet by which to escape the tumultuous present – and avoid the unknown future.
Similarly, the American political drama “House of Cards” reflects a kind of disillusionment – this time, with US politics.
Whereas “The West Wing,” a popular political drama that ran from 1999 to 2006, portrays the US presidency – held by a sophisticated, cultivated, and humanistic leader – with a kind of longing, “House of Cards” immerses the viewer in a murky milieu of humanity’s worst impulses.
In “House of Cards,” the world is not as viewers believe it should be, but as they fear it is.
This is the opposite of the approach taken by the Danish political drama “Borgen,” which presents an idealized prime minister, Birgitte Nyborg.
But the effect is similar.
One often hears people saying that the true problem facing Denmark – and, in particular, its political class – is that Prime Minister Helle Thorning-Schmidt lacks Nyborg’s strengths.
By exposing the fundamental challenges and anxieties facing a society, a TV series can, at times, almost prefigure the future.
In France, “Engrenages” – sold in English under the title “Spiral” – explores the deep malaise of French society.
In retrospect, the series seems to have foreshadowed the tragedies that beset the country in January.
In particular, the fifth season, which aired in France in late 2014, offered a clinical description of how young people in the Paris suburbs went astray, while portraying the relationship between the police and their political superiors as cynical and even combative.
The show’s dialogue could have come straight out of a real-life Parisian “power lunch.”
The TV show that has emerged as the most hotly debated of our time is, without a doubt, “Game of Thrones,” a medieval fantasy epic based (increasingly loosely) on George R.R. Martin’s best-selling book series A Song of Ice and Fire.
The series has become known not just for its massive budget or intricate storytelling, but also for its sustained choreography of brutal violence.
Students of international politics, especially in Canada and the US, wonder whether the show, by stressing the role of sheer brutality, encourages a“realist” vision of the world.
Could the savagery featured on “Games of Thrones” – including abundant beheadings, rape, and sexual torture – have helped to encourage the tactics of, say, Boko Haram and the Islamic State?
Or could the series – in which violence often begets more violence, but does not necessarily get the characters what they want – actually be highlighting the limits of force?
On a more philosophical level, the show’s universe – a combination of ancient mythology and the Middle Ages – seems to capture the mixture of fascination and fear that many people nowadays feel.
It is a fantastic, unpredictable, and devastatingly painful world – one that is so complex that even the show’s most loyal viewers often are confused.
In this sense, it is much like the world in which we live.
Though the West has no monopoly on the production of TV series, it undoubtedly dominates the field – and thus the worldview that such shows reflect.
Given this, one might wonder whether Chinese or Russian leaders are making time in their busy schedules to watch series such as “House of Cards” or “Games of Thrones,” in order to understand their rivals’ mentality.
Leading government advisers, at least, seem to recognize the value of tuning in.
A Chinese friend recently told me that “House of Cards” was very popular among China’s political elite.
They relish the reminder that politics is just as ruthless in the US as it is at home.
Why Wolfensohn Mattered
At the end of this month, James Wolfensohn’s ten-year tenure as President of the World Bank comes to an end.
Though much remains to be accomplished and consolidated, his achievements as leader of the international development community are noteworthy and provide a strong foundation upon which to build.
Perhaps Wolfensohn’s most important contribution was to clarify the Bank’s mission – to promote growth and eradicate poverty in the developing world – while recognizing the massive scale of that task and the inadequacy of previous approaches.
At one time, it was thought that since developing countries had less capital than more developed countries, merely supplying more capital would solve their problems.
Indeed, this view provided part of the rationale for the World Bank: if a shortage of funds was the problem, clearly a Bank would have to be a key part of the solution.
In the 1980’s, there was a switch from projects to policies – structural adjustments, involving trade liberalization, privatization, and macroeconomic stabilization (typically focusing on prices rather than employment or output.)
But these policies proved neither necessary nor sufficient for growth; the countries of East Asia, which followed different policies, achieved faster growth and were far more successful in poverty reduction.
Under Wolfensohn’s leadership, the Bank began to look for multifaceted strategies, framed by what he called a Comprehensive Development Framework.
Many of the links were obvious, but had been given insufficient attention.
Improved rural productivity or better market access would do little good if roads and harbors were lacking.
In a malaria-infested country, mosquito eradication programs can boost production and even increase effective land usage, as acres that were almost uninhabitable become livable.
The returns from education, too, can be increased, if more individuals live longer because of better health care.
The Bank began to recognize that developing countries differed from more developed countries not just in their lack of resources; there was also a knowledge gap.
This was particularly important as the world moved into what we call the “knowledge economy.”
Among the success stories were India and East Asia, which invested heavily not just in primary education, but also in secondary and tertiary education, and especially in technology and science.
This represented a major change in the Bank’s approach to education, which previously focused on primary schooling .
Wolfensohn’s campaign against corruption also represented a major change in thinking, a shift from downsizing the state to improving the State.
Failed states, it was now acknowledged, were no less an impediment to development than were overbearing states.
The Bank’s 1997 World Development Report reflected this new attempt at finding a balanced role for the state, and showed an understanding of the limitations both of markets and government.
Under Wolfensohn, the Bank repeatedly stood up to the United States, where both the Clinton and Bush administrations might have preferred a more pliant President.
When then US Deputy Secretary of the Treasury Lawrence Summers tried to change the Bank’s Decennial report on poverty – to downgrade concerns about insecurity and empowerment and to focus more narrowly on income – the Bank prevailed.
When the US tried to suppress the Bank’s call for a more balanced intellectual property regime – one more consonant with the interests of developing countries – the Bank prevailed yet again.
Both the Bush administration and the EU would undoubtedly have preferred less criticism of their trade regimes, which have such adverse effects on developing countries.
It would have been helpful for Bush if the World Bank quietly accepted proposals to finance debt relief for the poorest countries by depleting its reserves, thereby making poor countries pay for the poorest by reducing the Bank’s lending capacity.
But it would have been wrong, and the Bank again stood up for the interests of the developing world.
Changing the relationship between the Bank and the countries seeking its help was no less of an achievement.
In the past, the Bank was seen as a purveyor of neoliberal orthodoxy – an approach to development whose credibility had weakened by the time Wolfensohn arrived, and whose standing has eroded further since.
That orthodoxy often went hand in hand with the national, corporate, and financial interests of the advanced industrial countries, or so it was perceived.
Worse, the Bank typically demanded myriad conditions in return for assistance, an approach that undermined democratic processes and domestic ownership of policies, thereby enervating their effectiveness.
When Bank research showed that conditionality did not work, the Bank under Wolfensohn moved away from it.
The Bank began to realize that on many key issues there were legitimate disagreements among economists about the right course of action.
Democracy requires active debate about economic policies, not the suppression of discussion or the delegation of decision-making to experts, whether domestic or foreign.
The Bank’s attempt to open the debate was not well received, by either the US Treasury or the IMF, but its influence was undeniable.
The Fund, too, began to reduce conditionality, and eventually it began to question the desirability of capital market liberalization, which previously had been central to its agenda.
Gradually the Bank came to be perceived, at least in many quarters, as a partner in the joint quest for growth and poverty reduction, not an adversary attempting to promote a Western economic agenda or ideology.
Wolfensohn meant it when he said that he wanted to put the country in the driver’s seat, though not everyone within the Bank was as enthusiastic about this (or some of his other) initiatives.
James Wolfensohn presided over the World Bank at a time of enormous change, tumult, and opportunity, an era marked by the end of the Cold War, the postcommunist transition to market economies, and the East Asian – and then global – financial crises.
His commitment to those in the developing world has been contagious.
He has left an impressive legacy for his successor to take up.
Why Women Still Can’t Ask the Right Questions
NEW YORK – We are just recovering, in the United States, from the entirely predictable kerfuffle over a plaint published by Anne-Marie Slaughter, former Director of Policy Planning at the State Department and a professor at Princeton University, called “Why Women Still Can’t Have it All.”
The response was predictable because Slaughter’s article is one that is published in the US by a revolving cast of powerful (most often white) women every three years or so.
The article, whoever has written it, always bemoans the “myth” of a work-life balance for women who work outside the home, presents the glass ceiling and work-family exhaustion as a personal revelation, and blames “feminism” for holding out this elusive “having-it-all ideal.”
And it always manages to evade the major policy elephants in the room – which is especially ironic in this case, as Slaughter was worn out by crafting policy.
The problems with such arguments are many.
For starters, the work-family balance is no longer a women’s issue.
All over the developed world, millions of working men with small children also regret the hours that they spend away from them, and go home to bear the brunt of shared domestic tasks.
This was a “women’s issue” 15 years ago, perhaps, but now it is an ambient tension of modern life for a generation of women and men who are committed to gender equality.
Such arguments also ignore the fact that affluent working women and their partners overwhelmingly offload the work-family imbalance onto lower-income women – overwhelmingly women of color.
One can address how to be an ethical, sustainable employer of such caregivers; nannies in New York and other cities are now organizing to secure a system of market-pegged wages, vacation time, and sick days.
Or, as so often happens in a racist society, one can paint the women who care for the elite’s children out of the picture altogether.
Moreover, an inflexible and family-unfriendly corporate environment is no longer the only choice for working women.
Many, particularly in the US, have left that world to start their own businesses.
Most importantly, Americans have a remarkable tendency to reduce problems that others addressed through public policy to a matter of private “choice” and even personal psychology.
But the real question is not whether “women can have it all.”
Rather, it is how a sophisticated foreign-policy professional can write as if countries like Canada and the Netherlands simply did not exist.
In Canada, couples with a baby may sequence six-month leaves of absence at up to 90% pay.
In the Netherlands – the best scenario I have seen yet – families can take a day off each week, and the government subsidizes full-time daycare.
This solution was not framed as a “women’s issue,” but as a family benefit.
And Dutch women have simply moved on, focusing on other interesting goals in their personal and family lives.
In America, by contrast, the Chamber of Commerce and other business interests lobby hard to keep politicians from ever proposing such solutions.
They know that billions of dollars are made from hiring women at lower income levels than men, and then ensuring that a work-family conflict derails women’s careers before they become too expensive to compensate fairly.
Of course, Europe is not gender-equality Nirvana.
In particular, the corporate workplace will never be completely family-friendly until women are part of senior management decisions, and Europe’s top corporate-governance positions remain overwhelmingly male.
Indeed, women hold only 14% of positions on European corporate boards.
The European Union is now considering legislation to compel corporate boards to maintain a certain proportion of women – up to 60%.
This proposed mandate was born of frustration.
Last year, European Commission Vice President Viviane Reding issued a call to voluntary action.
Reding invited corporations to sign up for gender balance goals of 40% female board membership.
The Forte foundation in America has now followed suit with its own list of “board-ready women.”
But Reding’s appeal in Europe was considered a failure: only 24 companies took it up.
Do we need quotas to ensure that women can continue to climb the corporate ladder fairly as they balance work and family?
“Personally, I don’t like quotas,” Reding said recently.
“But I like what the quotas do.”
Quotas get action: they “open the way to equality and they break through the glass ceiling,” according to Reding, a result seen in France and other countries with legally binding provisions on placing women in top business positions.
I understand Reding’s reticence – and her frustration.
I don’t like quotas either; they run counter to my belief in meritocracy.
But, when one considers the obstacles to achieving the meritocratic ideal, it does look as if a fairer world must be temporarily mandated.
After all, four decades of evidence has now shown that corporations in Europe as well as the US are evading the meritocratic hiring and promotion of women to top positions – no matter how much “soft pressure” is put upon them.
When women do break through to the summit of corporate power – as, for example, Sheryl Sandberg recently did at Facebook – they garner massive attention precisely because they remain the exception to the rule.
If appropriate public policies were in place to help all women – whether CEOs or their children’s caregivers – and all families, Sandberg would be no more newsworthy than any other highly capable person living in a more just society.
WikiLeaks, Secrets, and Lies
SINGAPORE – The latest information dump from WikiLeaks offers fascinating insights into the workings of the US State Department that will keep foreign policy wonks and conspiracy theorists busy for months.
Much of what has been reported is not “news” in the traditional sense, of course, but a series of embarrassing gaffes: truths that were never meant to be said aloud.
Underlying these various, and often banal, tidbits of information – it should be no surprise that Americans found Italian Prime Minister Silvio Berlusconi “vain,” or regarded Zimbabwe’s Robert Mugabe as a “crazy old man” – is the larger question of whether governments should be able to keep secrets.
WikiLeaks founder Julian Assange argues that the answer is no, and that greater transparency “creates a better society for all people.”
This raises the question of why governments keep secrets at all, and whether those reasons are justified.
The task of keeping a state’s secrets frequently falls to its intelligence services, which tend to focus on the protection of three types of information.
The first type is their own sources and methods, which need to be safeguarded if they are to remain effective when gathering data.
When the Washington Times reported in 1998 that the National Security Agency was able to monitor Osama bin Laden’s satellite phone, for example, he stopped using it.
Second, the identities and activities of a service’s operational staff should be withheld, so that they can do their jobs and to ensure their safety.
Following WikiLeaks’ release in July of tens of thousands of documents on the Afghan war, a Taliban spokesman told British journalists that the group was “studying the report” with a view to identifying and punishing anyone found to have collaborated with US forces.
Third, information provided in confidence by foreign governments or intelligence services must be closely held to avoid embarrassing the provider of the information and thereby reducing the likelihood that information will be shared in future.
A lasting consequence of the most recent leak is circumspection when sharing intelligence with the United States.
In reality, of course, governments typically attempt to keep much more than this secret.
Avoiding embarrassment may at times be in the national interest, but it can also protect the careers of politicians and bureaucrats. In other circumstances, it may be prudent to avoid revealing how much – or how little – is known about a given situation.
WikiLeaks sees itself as part of the tradition in which the media hold governments accountable for abuse.
The role of the Fourth Estate was particularly important during the administration of President George W Bush.
Revelations of torture, extraordinary rendition, and warrantless electronic surveillance all depended on investigative journalism of a kind that is now threatened by budget cuts and the media’s relentless focus on whatever is current – often at the expense of what is genuinely newsworthy.
But, whereas true investigative journalism depends on quality, WikiLeaks distinguishes itself by quantity.
The sheer volume of the data being dumped on the Internet makes it impossible for thorough analysis or, indeed, for thorough examination of potentially damaging information.
The threshold for exposure is no longer wrongdoing of the scale that coined the term “Watergate” and all the subsequent “-gates.”
Instead, government officials are being warned that every document may potentially be leaked and published worldwide by a disgruntled junior officer.
The consequence is unlikely to be transparency.
Perversely, it will lead to greater secrecy.
The message that is almost certainly going through every major power is: be careful what you commit to writing.
In place of candid assessments and provocative analysis, many important decisions will now be based on oral briefings and meetings that are not recorded in minutes.
Decision-makers will be wary of openness even with their closest staff.
These changes are likely to outlast US Secretary of State Hillary Clinton’s embarrassment.
Such self-censorship will lead to worse decisions and less accountability for the decisions that are made.
It seems a high price to pay for gossip.
WikiLeaky Power
PARIS – Beyond the headlines, the embarrassment of governments, and the blow dealt to the secrecy of diplomatic correspondence, WikiLeaks’ exposure of US diplomatic cables offers a raw illustration of how deeply the essence of power has been altered in our information age.
Since its inception, the state has been the main vessel of power; access to power usually meant control of the state, whether by election or by violent takeover.
This model, within which individuals are subjects or, at best, taxpayers and voters, is being undermined by several recent trends that have empowered the individual.
Consider the Internet, a network of connected nodes invented in the 1960’s, at the height of the Cold War, to preserve the United States from total chaos after a nuclear attack on its nerve centers.
It was deliberately constructed with no hierarchy, no core, and no central authority, though few at the time could have suspected where, given the numerous breakthroughs of the digital revolution, the Internet’s built-in trend toward decentralized power would lead.
It has led to the second trend: a metamorphosis of the production process.
Information has become much more than a message conveyed by technology; it is now the raw material of services-intensive advanced economies, and the building block of modern social and productive organizations.
The third trend concerns the room this has opened for individual and collective action.
In The Human Condition, the philosopher Hannah Arendt linked politics to the human capacity not simply to act, but to “act in concert.”
While concerted action is a familiar notion, it used to be aimed mainly at influencing the state – exemplified by the way civil society prompted America’s withdrawal from Vietnam.
Today, however, collective action is of a different magnitude.
Because of the universality of the digital language, its ease of use, and the virtual absence of marginal costs for producing or disseminating information, the state’s tools of control have been weakened and depleted.
Global finance has been one of the most eager beneficiaries of these trends, using Internet networks not just as a tool to conduct operations with greater efficiency and velocity, but also as a means to circumvent state supervision.
Corporations have dwelled on connectivity to globalize their markets, R&amp;D, ownership, tax domiciliation, and leadership, thoroughly transforming their relationship with states, whether in their country of origin or elsewhere.
In September 1992, it took George Soros $10 billion to bring the Bank of England to its knees and impose devaluation on the pound.
It now takes only a computer and Internet connection to cause serious trouble: intrusion by hackers into protected networks, or the introduction of havoc-wreaking software viruses and worms in sensitive information systems.
While the terrorist attacks of September 11, 2001 – the deadliest of all time – had nothing “virtual” about them, their perpetrator, al-Qaeda, projects a cloud of threat and power by using cyberspace to promote its bloody “successes,” spread hatred, and recruit jihadists.
Of course, access to a networked world has also balanced state power in positive ways, by giving a formidable boost to independent advocacy, as seen in the online campaign to ban landmines and the treaty that ratified its success – despite opposition by powerful states.
Many similar organizations have flourished, gaining the ability to shape political outcomes and public policies.
But there is no place where the transformative power of connectivity is potentially greater than in China, with its reported 420 million Internet users.
No matter how eager China’s authorities are to keep the Internet under their control – for example, by blocking foreign Web sites – they are also aware of how much their economy now needs the Internet.
As a result, the room for “concerted action” has never been so large for individual Chinese to gain access to uncensored information, share opinions, and communicate country-wide to expose official misconduct.
The Nobel Peace Prize laureate Liu Xiaobo was jailed for circulating on the Internet his proposal for a truly democratic constitution, Charter 08, which gathered 10,000 signatures online in only 24 hours.
In the late 1980’s, glasnost – transparency – was one of the nails in the coffin of the Soviet Union.
While WikiLeaks has certainly not had a similar effect, it epitomizes the extent of the individual’s empowerment in a networked world.
All that was necessary to challenge the world’s mightiest power, after all, was a disgruntled US Army intelligence analyst, some hacking knowledge, a few computers, and a handful of determined activists enrolled under the contested banner of transparency.
At the time she was named Director of Policy Planning at the US State Department, Anne-Marie Slaughter, a respected scholar of international affairs, boldly heralded the advent of a networked world. “War, diplomacy, business, media, society…are networked,” she wrote in Foreign Affairs in January 2009, and “in this world, the measure of power is connectedness.”
This drive prompted US Secretary of State Hillary Clinton in January 2010 to proclaim the “freedom to connect” as the cyber-equivalent of the more familiar freedoms of assembly or expression.
Of course, Clinton added, these technologies are not an unmitigated blessing, and can be misused for darker purposes.
But her list of the potential abuses of the connected world contained nothing similar to the WikiLeaks storm.
That storm will leave behind no trace of understanding if it is assessed in isolation, rather than as part of a broader pattern.
WikiLeaks’ latest release demonstrates that the transformation of power by the “digital revolution” could be as far-reaching as that brought about by the fifteenth-century printing revolution.
In this game, where new players invite themselves, the edge goes to agility and innovation.
All of this implies that connectedness will remain a double-edged sword – the leverage it provides being fraught with vulnerability.
And that means that we can count on more surprises in store for states.
Wild about Risk
Most people do not feel the same impulse to go out and buy insurance, or diversify their investments, as they do to buy a sofa or new clothes.
They should, but they don't.
Insurance, investment, and banking institutions have historically had to fight an uphill battle to get individuals, businesses, and government to pay for risk management.
Their successes, while impressive, remain incomplete: people still have difficulty facing the inherent risks and uncertainties about their economic future.
This is why almost every advanced country has mandatory social security and health insurance programs.
Of course, people are not really unaware of life's big risks.
We simply ignore them for reasons that are rooted in human psychology.
The link between intellectual recognition of risks and the impetus to act against them is mediated by fear: we have been programmed over millions of years of evolution to take decisive action against immediate and obvious threats.
If a menacing wild animal approaches, we feel fear and anxiety.
Adrenaline flows, our attention is focussed, and our instinct to protect friends and family aroused.
But more remote risks simply do not stimulate our emotions, so we often postpone taking action indefinitely.
We are also more afraid of well-publicized risks - especially those that can kill us in grisly ways.
After the September 11, 2001, terrorist attacks in the US, many Americans drove to distant locations rather than fly, even though statistics showed that flying remained far safer.
Meanwhile, many of these same people were probably among the millions of Americans who didn't get an annual medical check-up.
Measuring risks, especially important long-term ones, is imprecise and difficult.
Virtually none of the economic statistics reported in the media measure risk.
To fully comprehend risk, we must stretch our imagination to think of all the different ways that things can go wrong, including things that have not happened in recent memory.
We must protect ourselves against fallacies, such as thinking that just because a risk has not proved damaging for decades, it no longer exists.
Yet another psychological barrier is a sort of ego involvement in our own success.
Our tendency to take full credit for our successes discourages us from facing up to the possibility of loss or failure, because considering such prospects calls into question our self-satisfaction.
Indeed, self-esteem is one of the most powerful human needs: a view of our own success relative to others provides us with a sense of meaning and well-being.
So accepting the essential randomness of life is terribly difficult, and contradicts our deep psychological need for order and accountability.
We often do not protect the things that we have - such as our opportunities to earn income and accumulate wealth - because we mistakenly believe that our own natural superiority will do that for us.
This tendency is especially apparent when it comes to public policy.
Government leaders find it hard to address economic risks to the nation because it is impolitic to call into question the self-esteem of their constituency.
But no one who looks at the matter seriously can argue that the tremendous inequality between the world's nations reflects fundamental differences in inherent ability or immutable character.
The per capita GDP of India in 2000, for example, was only 7% of that of the US.
Can anyone believe that this is because Americans are 14 times smarter or 14 times better in character than Indians?
Obviously, these two countries' relative positions are due to circumstances that can be changed, or that will change in response to economic events and political decisions.
But the leaders of the world's rich countries have great difficulty addressing risks to their relative success vis-à-vis less developed countries, because national self-esteem is too tied up with it.
Citizens in advanced countries just can't believe - and don't want to be told - that their privileged status may be dissipated unless proper steps are taken to insure against the risks they face.
For example, the world's advanced countries are scarcely less dependent on oil today than they were in 1973, when the OPEC embargo stifled their economies and sent prices soaring.
Despite occasional efforts at conservation, rich countries always go back to "business as usual."
Most companies are no better at managing or even recognizing the different kinds of economic risks that their workers face.
Many maintain insurance and pensions for their employees, but also encourage their workers to trust the company to provide for them forever, and even to invest in the company's stock.
When an employee is laid off in middle age, or the company goes bankrupt, the suddenly materialized risk may come as a shock.
Clearly, establishing mandatory social security and health insurance programs, and a social safety net for the poor, has helped hedge the most fundamental risks that people face.
The problem is the lack of any coherent policy for ensuring that individuals are protected against a broader array of economic risks to their incomes, investments, and homes.
So new risk management institutions need to be devised.
They should use markets, rather than state guarantees, and while they should not be mandatory, they must be designed in accordance with humans' psychological limitations, so that people will use them.
We know enough about risk perception to recognize that helping people cope with the risks of modern life requires addressing their hearts as well as their heads.
Will America’s Pain be China’s Gain?
NEW YORK– In their efforts to pass a bailout plan for America’s financial system, Bush administration officials invoked the specter of the Great Depression of the 1930’s.
But, for most Asians, economic Armageddon is far more recent.
The Asian financial crisis of a decade ago brought banks, corporations and governments to their knees.
The bonfire was sparked by the collapse of the Thai baht in the summer of 1997.
Contagion soon spread across East Asia, with the ripple effects of serial currency devaluations reaching as far as Russia and Brazil.
The long-running “economic miracles” of South Korea and Hong Kong ended, as did surging growth in Indonesia and Thailand.
The central lesson taken from that crisis was to maintain large foreign-exchange reserves.
This became a virtual article of faith among East Asian governments.
Back in the 1990’s, Asia’s fast-growing economies maintained small reserves, despite booming exports and foreign investment.
Once the tailspin began in 1997, governments’ lack of reserves hampered their ability to rescue failed banks, forcing them to appeal to international institutions for relief.
But the International Monetary Fund’s bailout came with strings attached, including demands for more of the rapid capital market liberalization that induced the crisis in the first place.
Indeed, what the West calls the “Asian financial crisis” is known in Asia as the “IMF crisis.”
The political humiliation and economic frustration of dealing with IMF imperatives confirmed the central importance of maintaining large reserves, as an issue not just of currency stability, but also economic sovereignty.
One Asian economy emerged from the 1997-1998 crisis relatively unscathed: China.
There were many reasons for this, but foremost among them was that China had already amassed more than $100 billion in reserves, and refused to revalue its currency, when the crisis hit.
Since then, China has aggressively pursued a fast-growth, export, and investment heavy model of economic development.
By capping the exchange rate and producing far more than it consumes, China’s reserves grew into a Leviathan, hitting the $1 trillion mark in 2005.
Even after China (under pressure from US Treasury officials) let the yuan partially float in 2005, the Leviathan kept growing by about $200 billion annually.
Over the past year and a half, China’s reserves skyrocketed to $1.8 trillion, far and away the world’s largest.
The Chinese state probably hasn’t sat on so much lucre since the halcyon days of the Qing Empire, when insatiable European demand for porcelain, tea and silk flooded the central coffers in Beijing with silver bullion.
But the paradox is that today’s reserves are not real wealth that can be pumped back into the domestic economy.
Instead, China’s reserves mostly underwrite America’s debt.
Even before Wall Street hit the skids, there was growing consensus in China that its reserves had grown far beyond what was necessary to avert another 1997-style crisis.
Calls for a more diversified investment strategy intensified.
Investing in US Treasuries, after all, was a sure loss-maker, given the gap between their modest yield and the steady appreciation of the yuan.
With the creation one year ago of a $200 billion sovereign wealth fund, the China Investment Corporation, Beijing positioned itself for more equity investment (although its early investments, in the Blackstone Group and Morgan Stanley, were widely criticized).
Economist Andy Xie, formerly with Morgan Stanley, proposed last week that China trade its dollar assets for shares in US companies on a grand scale, challenging America to overcome its financial xenophobia in order to avert a disaster of undercapitalization.
But many in China, from nationalist bloggers to social justice activists, advance a deeper critique of the Leviathan reserve.
Why bind up Chinese capital to finance America’s debt-consumption economy, they ask, when so many needs go unmet at home?
China was one of the world’s most egalitarian societies as late as 1985.
Today, it suffers one of the world’s biggest gaps between haves and have-nots.
Chinese-style capitalism is flaunting its defiance of one Confucius’ basic teachings—don’t worry about poverty, he warned, worry about inequality.
China’s physical infrastructure in booming central cities is undergoing radical modernization, but the social and environmental infrastructure is falling apart, especially in the interior and for the huge rural population.
For years, the central government has talked about creating “social harmony”—with a “new-type rural cooperative medical services system,” by increasing spending on education to 4% of GDP and eliminating school fees, and implementing “sustainable development” models.
The promises are grand, but the actions have not measured up.
And the economic costs of restricted access to healthcare and education, on top of the scarcity of clear air and potable water, will be crippling in the mid- and long-term.
The challenge for China in the years to come is to divest itself of American debt, and begin investing in the health, education and environmental well-being of its own people.
Growing the economy at an average annual rate of 10%, it turns out, may have been the easy part.
Will Banks and Financial Markets Recover in 2009?
NEW YORK – Global financial markets in 2008 experienced their worst crisis since the Great Depression of the 1930’s.
Major financial institutions went bust; others were bought up on the cheap or survived only after major bailouts.
Global stock markets fell by more than 50%; interest-rate spreads skyrocketed; a severe liquidity and credit crunch appeared; and many emerging-market economies staggered to the International Monetary Fund for help.
So what lies ahead in 2009?
Is the worst behind us or ahead of us?
To answer these questions, we must understand that a vicious circle of economic contraction and worsening financial conditions is underway.
The United States will certainly experience its worst recession in decades, a deep and protracted contraction lasting about 24 months through the end of 2009.
Moreover, the entire global economy will contract.
There will be recession in the euro zone, the United Kingdom, Continental Europe, Canada, Japan, and the other advanced economies.
There is also a risk of a hard landing for emerging-market economies, as trade, financial, and currency links transmit real and financial shocks to them.
In the advanced economies, recession had brought back earlier in 2008 fears of 1970’s-style stagflation (a combination of economic stagnation and inflation).
But, with aggregate demand falling below growing aggregate supply, slack goods markets will lead to lower inflation as firms’ pricing power is restrained.
Likewise, rising unemployment will control labor costs and wage growth.
These factors, combined with sharply falling commodity prices, will cause inflation in advanced economies to ease toward the 1% level, raising concerns about deflation, not stagflation.
Deflation is dangerous as it leads to a liquidity trap: nominal policy rates cannot fall below zero, so monetary policy becomes ineffective.
Falling prices mean that the real cost of capital is high and the real value of nominal debts rise, leading to further declines in consumption and investment – and thus setting in motion a vicious circle in which incomes and jobs are squeezed further, aggravating the fall in demand and prices.
As traditional monetary policy becomes ineffective, other unorthodox policies will continue to be used: policies to bail out investors, financial institutions, and borrowers; massive provision of liquidity to banks in order to ease the credit crunch; and even more radical actions to reduce long-term interest rates on government bonds and narrow the spread between market rates and government bonds.
Today’s global crisis was triggered by the collapse of the US housing bubble, but it was not caused by it.
America’s credit excesses were in residential mortgages, commercial mortgages, credit cards, auto loans, and student loans.
There was also excess in the securitized products that converted these debts into toxic financial derivatives; in borrowing by local governments; in financing for leveraged buyouts that should never have occurred; in corporate bonds that will now suffer massive losses in a surge of defaults; in the dangerous and unregulated credit default swap market.
Moreover, these pathologies were not confined to the US.
There were housing bubbles in many other countries, fueled by excessive cheap lending that did not reflect underlying risks.
There was also a commodity bubble and a private equity and hedge funds bubble.
Indeed, we now see the demise of the shadow banking system, the complex of non-bank financial institutions that looked like banks as they borrowed short term and in liquid ways, leveraged a lot, and invested in longer term and illiquid ways.
As a result, the biggest asset and credit bubble in human history is now going bust, with overall credit losses likely to be close to a staggering $2 trillion.
Thus, unless governments rapidly recapitalize financial institutions, the credit crunch will become even more severe as losses mount faster than recapitalization and banks are forced to contract credit and lending.
Equity prices and other risky assets have fallen sharply from their peaks of late 2007, but there are still significant downside risks.
An emerging consensus suggests that the prices of many risky assets – including equities – have fallen so much that we are at the bottom and a rapid recovery will occur.
But the worst is still ahead of us.
In the next few months, the macroeconomic news and earnings/profits reports from around the world will be much worse than expected, putting further downward pressure on prices of risky assets, because equity analysts are still deluding themselves that the economic contraction will be mild and short.
While the risk of a total systemic financial meltdown has been reduced by the actions of the G-7 and other economies to backstop their financial systems, severe vulnerabilities remain.
The credit crunch will get worse; deleveraging will continue, as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, thus causing more price falls and driving more insolvent financial institutions out of business.
A few emerging-market economies will certainly enter a full-blown financial crisis.
So 2009 will be a painful year of global recession and further financial stresses, losses, and bankruptcies.
Only aggressive, coordinated, and effective policy actions by advanced and emerging-market countries can ensure that the global economy recovers in 2010, rather than entering a more protracted period of economic stagnation.
Europe’s Unending Berlusconi Problem
LONDON – Silvio Berlusconi, Italy’s three-time prime minister and the country’s dominant politician for two decades, has now been convicted and sentenced to four years in prison – a sentence since reduced to one year.&#160;
But few people in Italy – or in Europe – believe that Berlusconi will fade from Italian, or European, politics anytime soon. Just a few days ago, he declared his intention to remain involved in politics, though not to run for prime minister a fourth time.
Whatever role Berlusconi chooses to play, it is unlikely to be a marginal one.
He may not wish to be king again, but he certainly can be a kingmaker, owing to his control of Mediaset, Italy’s largest media group.
And, given his abysmal popularity ratings, he may decide to play the wild card, embrace a euro-skeptic and anti-government stance, and try to bring down Prime Minister Mario Monti’s technocratic administration.
Monti’s government took over from Berlusconi in November 2011, arriving with a clear mandate, and full parliamentary support, to implement the measures needed to restore market confidence and reassure Italy’s eurozone partners and the International Monetary Fund that the country was not going down the path taken by Greece.
At the time of the G-20 summit in Cannes that month, Italy – and Europe – was dangerously close to collapse, with Berlusconi’s government deeply divided about the fiscal measures needed to bring down the country’s debt-service costs.
Domestic political deadlock, and Berlusconi’s inability to engage with Germany and France resulted in spiraling refinancing costs, with the spread relative to German bunds consistently over 500 basis points between July and November 2011.
The Monti government has restored market confidence and Italy’s international credibility.
But the overall picture remains fragile.
The interest-rate spread has stabilized around a more manageable 300 basis points, but is still higher than it was three years ago.
In addition, Italy’s economic outlook remains highly uncertain.
Indeed, the modest economic recovery that should benefit many countries in 2013 seems to be eluding Italy.
According to the IMF, the economy will remain in recession next year, and, though the rate of contraction will be less severe than in 2012 (-0.7% in 2013, compared to -2.3% this year), the unemployment rate is expected to rise further, from 10.6% to 11.1%.
More needs to be done in order to support economic growth in the short term, improve the country’s fiscal position in the medium term, and implement the structural reforms needed to make the Italian economy more robust and internationally competitive in the long term.
Italy is ranked 43rd in the World Economic Forum’s global competitiveness index, well below the main eurozone countries, owing to lack of investment – especially in human capital – and structural rigidities that have constrained growth for many years.
The answer to Italy’s economic problems is not, as Berlusconi advocates, an exit from the eurozone and a return to the flexibility of its own currency, which in the past allowed policymakers to boost competitiveness through irresponsible devaluations.
Italy needs to learn how to live with the euro and within the eurozone, which means adopting policies that ensure that productivity growth and innovation, not currency devaluation, are the main drivers of competitiveness.
A stable, competent, and responsible government with a comfortable parliamentary majority is essential to continue what Monti’s government has initiated.
While the odds still favor a relatively smooth transition, many uncertainties could derail the reform process.
In particular, whether Italy will be able to move beyond technocratic politics to a “normal” government remains the outstanding question both at home and for the other eurozone member states.
From this perspective, what Berlusconi advocates for Italy, and the consequences of his agenda for the eurozone, is not good news.
Any hint that the country may be locked again in parliamentary inertia, as in the final months of Berlusconi’s last government, would push the markets to question the credibility of Italy’s fiscal-consolidation plan, jeopardizing the country’s ability to refinance its debt.
That debt is the largest in the eurozone – at roughly €2 trillion ($2.6 trillion), or 120% of the country’s GDP – which means that Italy can be helped, but not rescued.
With potential instability looming, Monti should ensure that Italy is not defenseless in the event of another round of market instability.
Unlike some months ago, now the European Central Bank can intervene and buy troubled countries’ debt.
But this mechanism can be activated only by formal request.
Italy should follow this route without delay.
It is better to have a powerful weapon that may gather dust than to be unarmed in a time of need.
Will Cancun Promote or Undermine Development?
From September 10-14, trade ministers from around the world will meet for the next stage of what is supposed to be the Development Round of trade talks.
At their last meeting in Doha in November 2001, ministers recognized the inequities of the previous round of trade negotiations, the Uruguay round.
This round was supposed to redress those imbalances.
One would have thought that the developing countries would look forward to the meeting as a chance to achieve a fairer global trading system.
Instead, many fear that what has happened in the past will happen again: secret negotiations, arm twisting, and the display of brute economic power by the US and Europe--and by special interests in the advanced countries--aimed at ensuring that the interests of the rich are protected.
While some progress has been made in making the negotiations more open and transparent, efforts to go further have met with resistance, and for good reason: unbalanced processes help ensure unbalanced outcomes.
Ironically, the World Trade Organization, where each country has one vote, might seem far more ``democratic'' than, say, the IMF, where a single country, the US, has a veto.
Yet the realpolitik of economic power has ensured that the interests of the developed countries predominate.
Here is a short checklist against which to assess whether the outcomes of Cancun represent a move towards a true development round .
· Agriculture.
Most people in the developing world live in the rural sector, which is why free and fair trade in agriculture matters.
It's not just a question of providing access, but of eliminating the subsidies that encourage production in rich countries and harm farmers in poor countries.
The numbers are truly alarming: subsidies in advanced countries exceed the total income of sub-Saharan Africa; the average European subsidy per cow matches the $2 per day poverty level on which billions of people barely subsist;
America's $4 billion cotton subsidies to 25,000 well-off farmers bring misery to 10 million African farmers and more than offset America's miserly foreign aid to some of the affected countries.
Although both Europe and America accuse each other of unfair agricultural policies, neither side seems willing to make major concessions.
· Drugs and intellectual property. TRIPS, the intellectual property regime adopted in the last round of trade negotiations, deprived millions in the developing world of access to life-saving drugs.
As a chorus of researchers has pointed out, the provisions, pushed by the pharmaceutical companies, were so unbalanced that they were bad for scientific progress.
Here, there has been some progress--but not enough.
Provisions demanded by the US would have made it difficult for small countries, like Botswana, to gain affordable access.
Developing countries also continue to worry about bio-piracy--the patenting by Western firms of traditional foods and drugs.
· Textiles.
The Uruguay round promised the elimination of quotas in 2004, enabling many developing countries to exploit another area of comparative advantage.
But many developing countries worry that trade restrictions will remain, whether through ``safeguards'' to protect jobs or through high tariffs.
Many also fear that the West will find some way to wiggle out of its commitments.
· A more balanced liberalization agenda.
With services comprising an increasing share of production in developed countries, attention has shifted to liberalization of trade in services.
A more balanced agenda would balance attempts to ease capital flows with efforts to facilitate the flow of labor, including unskilled labor.
· Competition.
Everyone advocates ``fair competition.''
But discussions about competition and fair trade again demonstrate the intellectual poverty and inequity of trade negotiations.
Anti-dumping laws are intended to ensure fair trade by preventing the sale of goods below cost.
Within the developed countries, there has long been concern about such behavior--so-called ``predation''--and well-defined standards have been developed.
With globalization, it would be natural to extend such principles to the international arena, making it irrelevant whether a producer is domestic or foreign when judging whether he is engaged in an unfair trade practice.
But it does make a difference whether a good is produced at home or abroad.
Foreign producers are accused of ``unfair'' competition far more easily than domestic producers.
Indeed, if the standards of domestic trade laws were applied internationally, perhaps a majority of firms within the US would be guilty of dumping.
Yet America's Supreme Court has set standards so high for American firms to be found guilty of predation that few cases are successfully prosecuted domestically.
The trade negotiators are not even discussing eliminating this double standard.
So developing countries worry that efforts to introduce ``competition'' within trade negotiations will only make life even more difficult.
They worry that efforts to promote domestic industries or provide preferential treatment to disadvantaged groups (the kind of affirmative action programs that have been so important, both in developed and less developed countries) will be labeled ``unfair'' to foreign firms, and thus be prohibited.
There is a real danger that what was intended to remedy the imbalances of previous trade rounds will not only fail to do so, but may introduce new imbalances.
Pushing countries to liberalize their capital markets and open them up to speculative capital flows is one example.
At the very moment when the IMF has finally recognized that such liberalization may produce instability but not growth, the WTO is now pursuing it.
Failure at Cancun would confirm the fears of those who resisted a new round of trade negotiations.
Needless to say, it would also provide support for the anti-globalization protestors everywhere.
Will Cap-and-Trade Incite Protectionism?
CAMBRIDGE ­– There is a serious danger that the international adoption of cap-and-trade legislation to limit carbon-dioxide emissions will trigger a new round of protectionist measures.
While aimed at reducing long-term environmental damage, cap-and-trade policies could produce significant harmful economic effects in the near term that would continue into the future.
Scientific evidence appears to indicate that the accumulation of CO2 in the atmosphere from the burning of fossil fuels (primarily coal, oil, and natural gas) – mainly in electricity production, transportation, and various industrial processes – contributes to gradual global warming, with long-term adverse effects on living conditions around the world.
It is with this in mind that representatives of more than 150 countries are scheduled to meet in Copenhagen in December to discuss ways to reduce CO2 emissions.
A common suggestion is to impose a tax on all CO2 emissions, which would be levied on companies that emit CO2 in production, or that sell products like gasoline that cause CO2 emissions when used.
Such a tax would cause electricity companies and industrial firms to adopt techniques that reduce their CO2 emissions, as long as the cost of doing so is less than the tax that they would otherwise have to pay.
The higher cost of production incurred to reduce emissions – and of any emissions tax still due – would, of course, be included in the price charged to consumers.
Consumers would respond to the tax-induced increase in the cost of the emissions-intensive products by reducing their consumption of those goods and services in favor of goods and services that create smaller amounts of CO2 emissions.
A carbon tax causes each firm and household to respond to the same cost of adding CO2 to the atmosphere.
That uniform individual cost incentive allows total CO2 to be reduced at a lower total cost than would be achieved by a variety of administrative requirements, such as automobile mileage standards, production technology standards (e.g., minimum renewable fuel inputs in electricity generation), etc.
Yet we do not see carbon taxes being adopted.
Although governments levy taxes on gasoline, they are reluctant to impose a general carbon tax because of public opposition to any form of taxation.
Governments have therefore focused on a cap-and-trade system as a way of increasing the cost of CO2-intensive products without explicitly imposing a tax.
In a cap-and-trade system, the government sets total allowable national emissions of CO2 per year and requires any firm that causes CO2 emissions to have a permit per ton of CO2 emitted.
If the government sells these permits in an auction, the price of the permit would be a cost to the firm in the same way as a carbon tax – and with the same resulting increases in consumer prices.
The cap-and-trade system thus imposes a carbon tax without having to admit that it is really a tax.
A cap-and-trade system can cause serious risks to international trade.
Even if every country has a cap-and-trade system and all aim at the same relative reduction in national CO2 emissions, the resulting permit prices will differ because of national differences in initial CO2 levels and in domestic production characteristics.
Because the price of the CO2 permits in a country is reflected in the prices of its products, the cap-and-trade system affects its international competitiveness.
When the permit prices become large enough to have a significant effect on CO2 emissions, there will be political pressure to introduce tariffs on imports that offset the advantage of countries with low permit prices.
Such offsetting tariffs would have to differ among products (being higher on more CO2-intensive products) and among countries (being higher for countries with low permit prices).
Such a system of complex differential tariffs is just the kind of protectionism that governments have been working to eliminate since the start of the GATT process more than 50 years ago.
Worse still, cap-and-trade systems in practice do not rely solely on auctions to distribute the emissions permits.
The plan working its way through the United States Congress (the Waxman-Markey bill) would initially give away 85% of the permits, impose a complex set of regulatory policies, and allow companies to buy CO2 offsets (e.g., by paying for the planting of trees) instead of reducing their emissions or buying permits.
Such complexities make it impossible to compare the impact of CO2 policies among countries, which in turn would invite those who want to protect domestic jobs to argue for higher tariff levels.
There is no easy answer to this problem.
But before rushing to impose tariffs, it is important to remember that cap-and-trade policies would not be the only government source of differences in competitiveness.
Better roads, ports, and even schools all contribute to a country’s competitiveness.
No one attempts to use tariffs to balance those government-created differences in competitiveness, and there should be no such attempts if a cap-and-trade system is introduced.
If an international agreement to impose a cap-and-trade scheme is adopted in Copenhagen, the countries there should agree as well that there will be no attempt to introduce offsetting tariffs that would ultimately threaten our global system of free trade.
Will China Lead?
NEW YORK – China’s willingness to join negotiations on potential sanctions against Iran and to send President Hu Jintao to a nuclear security summit in Washington this month are important preliminary steps towards taking more responsibility in managing international affairs.
But merely joining conversations or showing up for meetings is not enough.
Given its growing profile, China must do far more to demonstrate its bona fides as a responsible global leader or risk undermining the system that has enabled its own miraculous rise.
China has emerged as a world power far more quickly than most observers – and China’s own leaders – might have predicted as little as a decade ago.
China’s rapid economic growth, juxtaposed against America’s problems in Iraq and Afghanistan, monumental debt, and role in sparking the global financial crisis, have changed global power realities – and global perceptions of those realities even more.
China’s current international influence likely outstrips its desire or capacity.
This puts China in a difficult position in relation to the so-called international system – the structures and rules created by the United States and others after the Second World War to check national sovereignty through a system of overlapping jurisdictions, transnational obligations, and fundamental rights.
China has been an enormous beneficiary of this system, and its rise would have been unthinkable without the US-led free-trade system and globalization process, access to US markets, and global shipping lanes secured by the US Navy.
But China’s history of humiliation at the hands of European colonial powers has made its leaders ardent supporters of inviolable national rights and suspicious of any sacrifice of sovereignty.
Because China’s leaders are not popularly elected, their legitimacy stems largely from two sources – their connection to the Chinese revolution and their ability to deliver national security and economic growth.
Although Mao Zedong is widely implicated in the unnecessary death of millions and is officially designated by the current regime as having been 30% wrong, his photograph still adorns Tiananmen Square, because the regime’s legitimacy depends in part on its connection to the restoration of national sovereignty that Mao represents.
The economic foundation of the Chinese government’s legitimacy also places an enormous burden on China’s leaders to make decisions that foster domestic economic growth at the expense of virtually everything else – including, some say, the viability of the international currency regime, nuclear non-proliferation, and basic rights in resource-rich countries.
This dichotomy creates a difficult situation as China emerges as the world’s second largest economy.
If China, in the name of national sovereignty, does not buy into the international system, it becomes hard to argue that this system exists.
China’s unwillingness, for example, to join other members of the international community in pressuring Iran and North Korea to abandon nuclear weapons programs foreshadows the potential collapse of the nuclear non-proliferation regime.
China’s active courtship of countries that violate human rights on a massive scale, such as Sudan, North Korea, and Burma, similarly represents a preliminary decapitation of the international human rights regime.
Given its size and importance, and regardless of its intentions, China will, perhaps inadvertently, destroy the international system if it does not either actively endorse and work to maintain it, or reframe it for the greater common good.
If it does neither, the world is in trouble.
If China sees itself as the heir and beneficiary of the US-led post-war international system, it must do much more to prevent and roll back nuclear proliferation in Iran and North Korea, pay a much greater percentage of costs for the United Nations, and curtail its mercantilist policies.
It must also end its alleged corrupt practices in resource-rich parts of the developing world, align its currency policy with global norms, lead efforts to curb greenhouse-gas emissions, and, more generally, take into more account the fate of people outside of China in its decision-making.
If, on the other hand, as is its right, Chinese leaders have an alternative vision of what an improved international system might look like, the onus is on them to articulate that vision and outline what they are willing to do to realize it.
There may be a better international model than the current one, but it will not emerge by default.
As US Presidents Franklin Roosevelt and Harry Truman demonstrated in the 1940’s, such a system must be articulated and then forged through decisive action and global leadership.
If China sees inviolable state sovereignty as the foundation of twenty-first century international affairs, as now appears to be the case, then it must explain why this principle will not lead to the same disastrous consequences as it did in the nineteenth and early twentieth centuries.
The US and the international community must acknowledge that today’s fast-rising China has earned the right to play an important role in shaping how the twenty-first century unfolds.
But if China’s leaders will neither do more to support the current international system, nor articulate an alternative, and instead continue to hark back to nineteenth-century models of inviolable sovereignty, they will destroy a global order that, warts and all, has served the world exceedingly well.
Those countries that value the current system will increasingly feel the urge to close ranks to defend it.
Will China “Lose” the 2008 Olympics?
When the International Olympic Committee awarded Beijing the 2008 Summer Games in July 2001, the announcement ignited wild celebrations across the country.
The Chinese Communist Party hoped to use the Games to showcase the country’s emergence as a dynamic, modern nation.
But as China’s leaders begin final preparations for the Games next August, they may be wondering if hosting the event was such a good idea after all.
They have significant reasons for doubt.
China’s senior leaders always closely monitor spontaneous public expressions of nationalist fervor, fearful that shifting winds might blow an unwelcome storm in their direction.
Of course what they hope is that the Games will channel these energies toward national solidarity, which will allow the leadership to deliver its people a moment of achievement and patriotic glory.
But the Olympics will also bring intense international scrutiny of China’s weaknesses at a delicate moment in the country’s development.
The world already knows of China’s success and its attractiveness as a destination for foreign investment, but few outsiders have seen firsthand the steep price the country is paying for its new prosperity.
The most obvious signs of that cost flow through the country’s waterways and contaminate its air.
Runaway growth and development have left about 70% of China’s lakes and rivers severely polluted, many unfit for human use of any kind.
Indeed, nearly a half-billion Chinese lack access to clean drinking water, and the number of terminally polluted rivers and lakes grows daily.
But air quality will prove the more embarrassing problem next August.
Television coverage of athletes gasping for breath will hardly provide Beijing with the signature Olympic image it had in mind, and growing international anxiety over climate change and other environmental hazards will ensure that such issues receive considerable media coverage.
There is also the risk that the Games will become a political circus, as the international spotlight generates irresistible opportunities for public protest.
The Chinese leadership has demonstrated many times that it can quell domestic dissent, but the unique scale of the Olympics will require round-the-clock vigilance.
Activists with grievances over Tibet, Taiwan, Burma, Darfur, and dozens of other political, environmental, and human-rights issues are already making plans.
Is China ready for Greenpeace, Human Rights in China, Amnesty International, and Falun Gong supporters to take to the streets, with thousands of foreign journalists hungry for stories and asking questions that the authorities are unaccustomed to answering?
Even if police are able to maintain order in Beijing, can they extend that control across the country?
Can they manage the flow of information and ideas through the blogosphere as online activists open yet another front in their battle for free information?
What we do know that Chinese officials have never faced a challenge of this scale with such a potential to both win and lose face.
The Games will generate significant foreign-policy risks as well.
In Taiwan, outgoing President Chen Shui-bian is stirring the independence pot, knowing that the Olympic spotlight will limit Beijing’s ability to respond forcefully.
He has already proposed a popular referendum on Taiwanese membership in the United Nations.
China’s influence within the UN would prevent such a move even if Taiwan voted yes, but an international confrontation is the last thing China wants coinciding with the Olympics.
Then there is the matter of how the Games will be received in the West.
Since 2001, China has increasingly become the focal point of much anxiety in the developed world.
Huge bilateral trade deficits, accusations that China keeps its currency undervalued, and a rash of defective and dangerous Chinese-made exports have fueled a protectionist backlash in the United States and Europe.
Amid bitter election-year debates over Iraq and Iran, and a souring economic outlook, Americans may be in no mood for the triumphalist pageantry of a new rising power on display in Beijing.
Will China’s uneasy Asian neighbors be any more receptive?
International criticism is sure to follow if something, anything, goes wrong during the Games, especially if it involves the suppression of dissent and is vectored around the world via 24-hour cable television and the Internet.
China has changed since it “won” the 2008 games seven years ago.
The Party leadership has grown more self-assured in its growing international role, but its ability to manage the pace of change at home has become more uncertain.
In 2001, then President Jiang Zemin hoped the Games would herald China’s arrival as an industrialized power.
But his successor, Hu Jintao, has focused on the damage that has come from unrestrained growth.
He and Premier Wen Jiabao have also championed a more “harmonious” society, because they understand that the growing wealth gap, social tensions, environmental and public health problems, and the Party’s tenuous relationship with China’s less advantaged people can no longer be neglected.
As China’s leaders scramble to address these challenges, will they still relish the idea of providing an international audience with front-row seats?
How they look back on the Games once the confetti is swept from the streets is far from certain.
Will China Rule the World?
CAMBRIDGE – Thirty years ago, China had a tiny footprint on the global economy and little influence outside its borders, save for a few countries with which it had close political and military relationships.
Today, the country is a remarkable economic power: the world’s manufacturing workshop, its foremost financier, a leading investor across the globe from Africa to Latin America, and, increasingly, a major source of research and development.
The Chinese government sits atop an astonishing level of foreign reserves – greater than $2 trillion.
There is not a single business anywhere in the world that has not felt China’s impact, either as a low-cost supplier, or more threateningly, as a formidable competitor.
China is still a poor country.
Although average incomes have risen very rapidly in recent decades, they still stand at between one-seventh and one-eighth the levels in the United States – lower than in Turkey or Colombia and not much higher than in El Salvador or Egypt.
While coastal China and its major metropolises evince tremendous wealth, large swaths of Western China remain mired in poverty.
Nevertheless, China’s economy is projected to surpass that of the US in size sometime in the next two decades.
Meanwhile, the US, the world’s sole economic hyper-power until recently, remains a diminished giant. It stands humbled by its foreign-policy blunders and a massive financial crisis.
Its credibility after the disastrous invasion of Iraq is at an all-time low, notwithstanding the global sympathy for President Barack Obama, and its economic model is in tatters.
The once-almighty dollar totters at the mercy of China and the oil-rich states.
All of which raises the question of whether China will eventually replace the US as the world’s hegemon, the global economy’s rule setter and enforcer.
In a fascinating new book, revealingly titled When China Rules the World , the British scholar and journalist Martin Jacques is unequivocal: if you think China will be integrated smoothly into a liberal, capitalist, and democratic world system, Jacques argues, you are in for a big surprise.
Not only is China the next economic superpower, but the world order that it will construct will look very different from what we have had under American leadership.
Americans and Europeans blithely assume that China will become more like them as its economy develops and its population gets richer.
This is a mirage, Jacques says.
The Chinese and their government are wedded to a different conception of society and polity: community-based rather than individualist, state-centric rather than liberal, authoritarian rather than democratic.
China has 2,000 years of history as a distinct civilization from which to draw strength.
It will not simply fold under Western values and institutions.
A world order centered on China will reflect Chinese values rather than Western ones, Jacques argues.
Beijing will overshadow New York, the renminbi will replace the dollar, Mandarin will take over from English, and schoolchildren around the world will learn about Zheng He’s voyages of discovery along the Eastern coast of Africa rather than about Vasco de Gama or Christopher Columbus.
Gone will be the evangelism of markets and democracy.
China is much less likely to interfere in the internal affairs of sovereign states.
But, in return, it will demand that smaller, less powerful states explicitly recognize China’s primacy (just as in the tributary systems of old).
Before any of this comes to pass, however, China will have to continue its rapid economic growth and maintain its social cohesion and political unity. None of this is guaranteed.
Beneath China’s powerful economic dynamo lie deep tensions, inequalities, and cleavages that could well derail a smooth progression to global hegemony.
Throughout its long history, centrifugal forces have often pushed the country into disarray and disintegration.
China’s stability hinges critically on its government’s ability to deliver steady economic gains to the vast majority of the population.
China is the only country in the world where anything less than 8% growth year after year is believed to be dangerous because it would unleash social unrest.
Most of the rest of the world only dreams about growth at that rate, which speaks volumes about the underlying fragility of the Chinese system.
The authoritarian nature of the political regime is at the core of this fragility.
It allows only repression when the government faces protests and opposition outside the established channels.
The trouble is that it will become increasingly difficult for China to maintain the kind of growth that it has experienced in recent years. China’s growth currently relies on an undervalued currency and a huge trade surplus.
This is unsustainable, and sooner or later it will precipitate a major confrontation with the US (and Europe).
There are no easy ways out of this dilemma.
China will likely have to settle for lower growth.
If China surmounts these hurdles and does eventually become the world’s predominant economic power, globalization will, indeed, take on Chinese characteristics.
Democracy and human rights will then likely lose their luster as global norms.
That is the bad news.
The good news is that a Chinese global order will display greater respect for national sovereignty and more tolerance for national diversity.
There will be greater room for experimentation with different economic models.
Will China’s Capitalist Revolution Turn Democratic
Communist China has experienced a monumental capitalist revolution in the last two decades, with an economy that is now six times bigger than it was 20 years ago.
A minor player in the global economy in the 1980’s, China today is the world’s third largest trading power.
But if these stunning economic statistics make you think that so much capitalist development must also have brought more democracy to China, think again.
Most Westerners believe in a theory of liberal evolution, according to which sustained economic growth, by increasing wealth and the size of the middle class, gradually makes a country more democratic.
While the long-run record of this theory is irrefutable, China’s authoritarian ruling elite is not only determined to hold on to power, but it also has been smart enough to take adaptive measures aimed at countering the liberalizing effects of economic development.
Thus, for all its awe-inspiring economic achievement, China has made remarkably little progress in political liberalization.
Indeed, judging by several key indicators, progress toward democracy in China has stalled, despite unprecedented economic prosperity and personal freedom.
For instance, in the mid-1980’s, Chinese leaders seriously discussed and later drew up a blueprint for modest democratic reforms.
Today, the topic of political reform is taboo.
Nearly all the major institutional reforms, such as strengthening the legislature, holding village elections, and building a modern legal system, were launched in the 1980’s.
Since the Tiananmen Square massacre of June 1989, however, not a single major democratic reform initiative has been implemented.
Instead of democratic transition, China has witnessed a consolidation of authoritarian rule – the strengthening of a one-party regime through organizational learning and adaptation.
Since 1989, the Chinese Communist Party (CCP) has been pursuing a two-pronged strategy: selective repression that targets organized political opposition and co-optation of new social elites (the intelligentsia, professionals, and private entrepreneurs).
This strategy emphasizes the maintenance of an extensive law enforcement apparatus designed to eliminate any incipient organized opposition.
Huge investments have strengthened the People’s Armed Police (PAP), a large anti-riot paramilitary force whose specialty is the quick suppression of anti-government protests by disgruntled industrial workers, peasants, and urban residents.
Frequent deployment of the PAP is a major reason why the tens of thousands of collective protests that occur each year (74,000 in 2004 and 86,000 in 2005) have had a negligible impact on China’s overall stability.
To deal with new emerging political threats, such as the information revolution, the Chinese government has spent mightily on manpower and technology.
A special 30,000-strong police unit monitors and screens Internet traffic, advanced technology is deployed to block access to overseas Web sites considered “hostile or harmful,” and Internet service and content providers, both domestic and Western, must comply with onerous restrictions designed to suppress political dissent and track down offenders.
The regime has even conducted multi-agency exercises to test whether different government bodies could cooperate closely to keep “harmful information” off the Net during an emergency.
Having learned from the collapse of the Soviet Union that a bureaucratic ruling party must co-opt new social elites to deprive potential opposition groups of leaders, the Communist Party has conducted an effective campaign of expanding its social base.
The urban intelligentsia and professionals have been pampered with material perks and political recognition, while new private entrepreneurs have been allowed to join the Party.
This strategy of pre-emptive political decapitation has produced enormous dividends for the Party.
In the 1980’s, its principal adversaries were the urban intelligentsia, who constituted the backbone of the pro-democracy movement that culminated in Tiananmen Square.
Today, the mainstream of the Chinese intelligentsia is an integral part of the ruling elite.
Many have joined the Party and become government officials, and a large percentage enjoy various professional and financial privileges.
Predictably, the intelligentsia, usually the most liberal social group, is no longer a lethal threat to party rule.
Worse, without support from this strategic group, other social groups, such as workers and peasants, have become politically marginalized and rudderless.
Although the Party’s carrot-and-stick approach has worked since 1989, it is doubtful that it will retain its efficacy for another 17 years.
To the extent that China’s authoritarian regime is by nature exclusionary (it can only incorporate a limited number of elites), the co-optation strategy will soon run up against its limits, and the Party will no longer have the resources to buy off the intelligentsia or keep private entrepreneurs happy.
At the same time, selective repression can contain social frustrations and discontent only temporarily.
As long as much of Chinese society views the current political system as unjust, unresponsive, and corrupt, there will always be a large reservoir of ill will toward the ruling elites.
When things go wrong – as is likely, given mounting social strains caused by rising inequality, environmental degradation, and deteriorating public services – China’s alienated masses could become politically radicalized.
And, unlike past protests, which have usually been allied with students or members of the intelligentsia, popular disaffection might not have the virtue of rational leaders with whom the government could talk and negotiate.
So it may be premature for the Party to celebrate the success of its adaptive strategy.
China’s rulers may have stalled democratic trends for now, but the current strategy has, perhaps, merely delayed the inevitable.
Will China Stand Up in North Korea?
On October 1, 1949, as Chiang Kai-chek's defeated Kuomintang (KMT) troops fled for Taiwan, Mao Zedong declared that "China has stood up."
China has, indeed, stood up, and continues to rise as one of the world's largest economies.
Last year, China alone accounted for roughly 60% of global export growth.
But in a crisis, China's diplomatic influence usually resembles that of some peripheral backwater.
Nowhere does this seem truer than in China's own backyard.
Beijing's seeming silence over the nuclear ambitions of North Korea has left US, Japanese, and South Korean officials alike wondering when it will "stand up" to assert its influence over its neighbor and erstwhile ally.
One reason China seems paralyzed in the current crisis is that, among the world's major powers, it is almost alone in having a genuine "two Koreas" policy.
Since China established diplomatic relations with South Korea in the early l990's, economic ties have grown dramatically, and cultural relations have expanded at a comparable pace.
China also reciprocated outgoing President Kim Dae-jung's overtures in the political-security realm, despite South Korea's strategic ties with the US.
But in recognizing South Korea, China took greater care than, say, Russia, in seeking to ameliorate North Korea's anxieties.
China is North Korea's most important trading partner, with turnover exceeding $700 million in 2002, up 30% from 2001.
Indeed, China is believed to supply about 70% of the North's oil, and has doubled its sales of grain and vegetables.
While China no longer promises the North military support (except in the event of external attack), "consultations" are pledged.
Privately, China's leaders are dubious (at best) about North Korea.
They think that economic reform is long overdue, and, like others, consider Kim Jong-il's political system bizarre.
For their part, North Korea's elite understands that they have no true allies at present, not even in Beijing.
Yet Kim Jong-il's two trips to China illustrate his interest in China's reforms and his desire to cultivate China's support.
How much the Chinese know about the inner workings of North Korea's policy-making and power structure, and how much influence they can have, are uncertain.
China claims that its power over Pyongyang is limited.
What China wants above all is to prevent North Korea from collapsing, whatever the cause.
Conflict on the Korean peninsula, nourished by the vitriolic language often employed by Kim Jong-il's regime, is China's nightmare.
War between the Koreas would confront Beijing with a flood of hundreds of thousands of refugees.
Equally important, China is wary of the prospect of Korea being unified under South Korean rule and backed up by continued strategic support from the US.
Fortunately, North Korea's leaders prefer survival to suicide.
They know that despite the extensive damage that they could inflict on the South, in the end, they would be destroyed by American and South Korean power if combat ever starts.
Hence, war initiated by the North, while not unthinkable, seems unlikely.
A third possibility is an indefinite continuation of the status quo.
This, too, seems doubtful.
North Korea is a failing state economically, a fact that Kim Jong-il and his cronies appear to recognize.
Since the mid-l990's, they have been exploring--albeit cautiously and uncertainly--avenues of change, including flawed price liberalization many prices in mid-2002.
Whatever the eventual outcome, the status quo is untenable.
A fourth alternative, favored by China and other key players, is an evolutionary process that combines economic reform with increased interaction with the external world, focusing initially on South Korea.
China will move carefully but firmly in promoting this path.
It is anxious to see a US-North Korea dialogue begin, one capable of alleviating the North's anxieties about an American attack and America's concerns about a renewed nuclear program.
Indeed, the main factor fueling the current crisis and complicating its resolution is that the North has only one bargaining chip: threats.
Aside from a pledge of non-aggression, its central interest is in obtaining economic assistance.
Yet the US and others are wary of being labeled appeasers.
Well aware of the complexities and hazards--and seeking to avoid alienating any of the parties--China is willing to play the role of convener, but not adjudicator, of an American-North Korean dialogue.
Thus, its proclaimed "disagreement" with North Korea's withdrawal from the Non-Proliferation Treaty was relatively mild.
Nonetheless, China's stake in the outcome of the current crisis is big enough to make it a party to a wide range of exchanges, formal and informal, bilateral and multilateral--all with the objective of promoting change without upheaval on the Korean peninsula.
In this respect, the US and China have common interests, as do Japan, Russia, and South Korea.
China, too, believes that if advocates of "regime change" do not push North Korea too hard, a strategy can be pursued that is based on slow evolution rather than a precipitous break--and a possible violent breakdown.
The Mirage of the Financial Singularity
NEW HAVEN – In their new book The Incredible Shrinking Alpha, Larry E. Swedroe and Andrew L. Berkin describe an investment environment populated by increasingly sophisticated analysts who rely on big data, powerful computers, and scholarly research.
With all this competition, “the hurdles to achieving alpha [returns above a risk-adjusted benchmark – and thus a measure of success in picking individual investments] are getting higher and higher.”
That conclusion raises a key question: Will alpha eventually go to zero for every imaginable investment strategy?
More fundamentally, is the day approaching when, thanks to so many smart people and smarter computers, financial markets really do become perfect, and we can just sit back, relax, and assume that all assets are priced correctly?
This imagined state of affairs might be called the financial singularity, analogous to the hypothetical future technological singularity, when computers replace human intelligence.
The financial singularity implies that all investment decisions would be better left to a computer program, because the experts with their algorithms have figured out what drives market outcomes and reduced it to a seamless system.
Many believe that we are almost there.
Even legendary investors like Warren Buffett, it is argued, are not really outperforming the market.
In a recent paper, “Buffett’s Alpha,” Andrea Frazzini and David Kabiller of AQR Capital Management and Lasse Pedersen of Copenhagen Business School, conclude that Buffett is not generating significantly positive alpha if one takes account of certain lesser-known risk factors that have weighed heavily in his portfolio.
The implication is that Buffet’s genius could be replicated by a computer program that incorporates these factors.
If that were true, investors would abandon, en masse, their efforts to ferret out mispricing in the market, because there wouldn’t be any. Market participants would rationally assume that every stock price is the true expected present value of future cash flows, with the appropriate rate of discount, and that those cash flows reflect fundamentals that everyone understands the same way.
Investors’ decisions would diverge only because of differences in their personal situation. For example, an automotive engineer might not buy automotive stocks – and might even short them – as a way to hedge the risk to his or her own particular type of human capital.
Indeed, according to a computer crunching big data, this would be an optimal decision.
There is a long-recognized problem with such perfect markets: No one would want to expend any effort to figure out what oscillations in prices mean for the future.
Thirty-five years ago, in their classic paper, “On the Impossibility of Informationally Efficient Markets,” Sanford Grossman and Joseph Stiglitz presented this problem as a paradox: Perfectly efficient markets require the effort of smart money to make them so; but if markets were perfect, smart money would give up trying.
The Grossman-Stiglitz conundrum seems less compelling in the financial singularity if we can imagine that computers direct all the investment decisions.
Although alpha may be vanishingly small, it still represents enough profit to keep the computers running.
But the real problem with this vision of financial singularity is not the Grossman-Stiglitz conundrum; it is that real-world markets are nowhere close to it.
Computer enthusiasts are excited by things like the blockchain used by Bitcoin (covered on an education website called Singularity University, in a section dramatically titled Exponential Finance).
But the futurists’ financial world bears no resemblance to today’s financial world.
After all, the financial singularity implies that all prices would be based on such things as optimally projected future corporate profits and the correlation of profits with expected technological innovations and long-term demographic changes.
But the smart money hardly ever talks in such ethereal terms.
In this context, it is difficult not to think of China’s recent stock-market plunge.
News accounts depict hordes of emotional people trading on hunch and superstition.
That looks a lot more like reality than all the talk of impending financial singularity.
Markets seem to be driven by stories, as I emphasize in my book Irrational Exuberance.
There are stories of great new eras and of looming depressions.
There are fundamental stories about technology and declining resources. And there are stories about politics and bizarre conspiracies.
No one knows if these stories are true, but they take on a life of their own.
Sometimes they go viral.
When one has a heart-to-heart talk with many seemingly rational people, they turn out to have crazy theories.
These people influence markets, because all other investors must reckon with them; and their craziness is not going away anytime soon.
Maybe Buffett’s past investing style can be captured in a trading algorithm today.
But that does not necessarily detract from his genius.
Indeed, the true source of his success may consist in his understanding of when to abandon one method and devise another.
The idea of financial singularity may seem inspiring; but it is no less illusory than the rational Utopia that inspired generations of central planners.
Human judgment, good and bad, will drive investment decisions and financial-market outcomes for the rest of our lives and beyond.
Will Europe Be Willing but Disabled?
NEWPORT BEACH – When it comes to describing Europe’s ever-worsening crisis, metaphors abound.
For some, it is five minutes to midnight; for others, Europe is a car accelerating towards the edge of a cliff.
For all, a perilous existential moment is increasingly close at hand.
Optimists – fortunately, there remain a few, especially in Europe itself – believe that when the situation becomes really critical, political leaders will turn things around and put Europe back on the path of economic growth, job creation, and financial stability.
But pessimists have been growing in number and influence.
They see political dysfunction adding to financial turmoil, thereby amplifying the eurozone’s initial design flaws.
Of course, who is ultimately proven correct is a function of eurozone governments’ willingness to make the difficult decisions that are required, and in a coordinated and timely fashion.
But that is not the only determinant: governments must also be able to turn things around once the willingness to do so materializes.
And here, the endless delays are making the challenges more daunting and the outcome more uncertain.
Experienced observers remind us that crises, rather than vision, have tended to drive progress at critical stages of Europe’s historic integration – a multi-decade journey driven by the desire to ensure long-term peace and prosperity in what previously had been one of the world’s most violent regions and the site of appalling human suffering.
After all, the European Union (including the eurozone’s 17 members) remains a collective of nation-states with notable divergences in economic, financial, and social conditions.
Cultural differences persist.
Political cycles are far from synchronized.
And too many regional governance mechanisms, with the important exception of the European Central Bank, lack sufficient influence, credibility, and, therefore, effectiveness.
Left to its own devices, such a grouping is vulnerable to recurrent bickering, disruptive posturing, and disagreement over visions of the future.
As a result, progress towards meaningful economic and political integration can be painfully slow during the good times.
But all of this can change rapidly when a crisis looms, especially if it threatens the integrity of the European project.
That is where the eurozone is today.
A debt crisis that erupted in Greece, the eurozone’s outer periphery, has migrated with a vengeance towards the core, so much so that the survival of the eurozone itself is at stake.
The more the policy response has lagged, the broader the set of questions about Europe’s future has become.
Maintaining a 17-member monetary union is no longer a given.
Talk of countries exiting, starting with Greece (the “Grexit”), is now rampant.
And only hard-core idealists dismiss altogether the mounting risk of the eurozone’s total disintegration.
Nonetheless, many veterans of the European integration project see a silver lining in the dark clouds massing over their creation.
For them, only a crisis can stop politicians from just kicking various cans farther down the road and, instead, catalyze the policy initiatives – greater fiscal, banking, and political union – that, together with monetary union, would ensure that the eurozone rests on a stable and sustainable four-legged platform.
But this view is not without its own risks.
It assumes that, when push comes to shove, political leaders will indeed do what is necessary – the willingness question.
It also presumes that they will have the capacity to do so – the ability question.
And, over time, uncertainty concerning the latter question has risen to an uncomfortable level.
Today’s eurozone is beset by an unprecedented degree of rejection – on economic, financial, political, and social grounds –&nbsp;by citizens in a growing number of countries.
The longer this persists, the harder it will be for politicians to maintain control of their countries’ destinies and that of Europe’s collective enterprise.
Private-sector activity is slowing, and it is nearing a standstill in the eurozone’s most vulnerable economy (Greece), where a bank run is in full swing.
Elsewhere, too, depositors are beginning to transfer their savings to the strongest economy (Germany) and to safe havens beyond (Switzerland and the United States).
Weaker companies are shedding labor, while stronger firms are delaying investments in plant and equipment.
And global investors continue to exit the eurozone in droves, shifting countries’ liabilities to taxpayers and the ECB’s balance sheet.
No wonder that social unrest is evident in a growing number of countries.
No wonder that fringe political movements are gaining traction throughout the eurozone.
And no wonder that voters in almost two-thirds of eurozone countries have turned out the incumbents in their most recent elections.
All of this serves to undermine the effectiveness of government policies – by reducing their credibility, clogging their channels of transmission to the economy, and making it difficult to offset the withdrawal of private-sector capital and spending.
As a result, the market-based economic and financial systems that prevail in Europe, and that, not so long ago, were a source of significant strength, are losing their vibrancy.
I, too, am fond of metaphors.
During a trip to the continent last week, I heard one that captures very well the key dynamic in Europe today.
The eurozone’s leaders are on a raft heading towards a life-threatening waterfall.
The longer they wait, the more the raft gains speed.
So the outcome no longer depends only on their willingness to cooperate in order to navigate the raft to safety.
It also hinges on their ability to do so in the midst of natural forces that are increasingly difficult to control and overcome.
The message is clear.
The current crisis might indeed eventually break eurozone leaders’ inherent resistance to compromise, collaboration, and common action.
But the longer they bicker and dither, the greater the risk that what they gain in willingness will be lost to incapacity.
Will Europe Learn to Love Bush?
President George W. Bush will soon travel to Europe, and President Jacques Chirac will visit Washington.
EU “Foreign Minister” Javier Solana has already been there, and returned bullish on future transatlantic cooperation.
Atmospherically, at least, relations have, indeed, improved since the US presidential election, and both sides have expressed good will.
Yet there is little ground for genuine optimism.
Bush’s declared intention to “better explain the reasons for his decisions” to America’s Allies simply will not do.
Europeans don’t want explanations; they want to be consulted – to have input into American decision-making and see their concerns reflected in US foreign policy.
None of this is likely to happen.
On the contrary, the US is continuing to thwart European efforts gradually to establish a rule-based international order.
There are no signs that the Bush administration is relenting on, for example, the UN, the Kyoto Protocol, the International Criminal Court, the ban on land mines, or the Anti-Ballistic Missile Treaty.
In Iraq, Europeans fully share the American objectives of preserving the country’s unity and achieving at least some modicum of democracy.
At the same time, they believe that it is up to the US to remove the chaos it created, so they are reluctant to contribute to the task in a substantive way.
European attitudes may seem shortsighted to Americans, but it would need a lot of cajoling to change them.
There is general agreement on the aims to be achieved in the Israeli-Palestinian conflict: the end of violence and a peaceful solution based on the concept of two sovereign states.
However, Europeans consider the opinion recently expressed by Bush – that Palestinian democracy and not Israeli occupation of the West Bank is at the core of the problem – to be ill conceived.
The same is true with respect to the President’s assertion that Israel’s permanent presence in Palestinian territories and the non-return of Palestinian refugees to their homes in Israel must be accepted as realities on the ground.
It may well be that such painful deviations from agreed principles will be reflected in an eventual comprehensive settlement, but prejudging these issues before the beginning of negotiations denies the Palestinians some of their most important bargaining chips.
On the question of Iran’s nuclear weapons capability, Americans and Europeans also fundamentally agree: it should be prevented.
While the US tries to achieve this through hard power, regime change, sanctions, and threats of pre-emptive military intervention, Europe uses soft power, diplomacy, inclusion, and partnership.
Unfortunately, this “good cop, bad cop” game doesn’t work in international politics.
European efforts to induce Teheran to renounce its nuclear designs by addressing Iran’s legitimate security concerns and offering important opportunities for economic and social betterment cannot be successful without active US support.
In other words, Europe’s carrots are not enough; a successful outcome requires American carrots, too.
By standing aside and discounting the European approach from the outset, America is merely helping to bring about a self-fulfilling prophecy.
It would be more productive for the US to join in, at the same time agreeing with Europeans on measures to be taken should their combined efforts fail.
Relations with China have improved over the years on both sides of the Atlantic.
China has become Europe’s biggest trading partner, and its huge reserves of US dollars has made it America’s most important creditor.
Despite this rosy picture, China could be the cause of a major transatlantic row if Europeans make good on their intention to lift the arms export embargo in place since the Tiananmen Square massacre of 1989.
The Bush administration is fiercely opposed to lifting the embargo, pointing out that in the event of a military clash over Taiwan, US troops would face weapons provided to China by America’s own allies.
In fact, European assurances that arms sales to China could be controlled and threats to an ally avoided do appear unconvincing.
On the other hand, economic interdependence between Taiwan and mainland China has grown to such an extent that an armed conflict is increasingly unlikely.
Of course, this would change were Taiwan to push for independence, but it would hardly do so without a nod from Washington.
In short, on many of the most important current international issues, Americans and Europeans share the same objectives and basic goals.
Where they often diverge is in the means to achieve them.
Political wisdom would demand that the two sides pool their considerable resources and march together whenever possible.
This, however, requires a change of attitudes both in America and in Europe.
Bush must be willing to accept Europeans as genuine partners and stop treating them like recalcitrant vassals.
European leaders must overcome any latent Anti-Americanism and be prepared to make the kind of contributions to common endeavors that would entitle them to equal partnership with the US.
Will Europe’s Economies Regain Their Footing?
STOCKHOLM – What will Europe’s growth trajectory look like after the financial crisis?
For some Europeans, still nervous that their economies and banking systems might collapse, this is a little like asking a passenger on the Titanic what they plan to do when they arrive in New York.
But it is a crucial question to ask, especially when Europe has been facing so much outside pressure from the likes of the United States and the International Monetary Fund to focus on short-term Keynesian stimulus policies.
True, things are pretty ugly right now.
Europe’s income is projected to fall a staggering 4% this year.
Unemployment will soon be in double digits throughout most of the Continent, with Spanish and Latvian unemployment on track to exceed 20%.
Europe’s banking system remains sickly, even though many national governments have gone to great lengths to hide their banks’ woes.
Yet, ugly or not, the downturn will eventually end.
Yes, there is still a real risk of hitting an iceberg, beginning perhaps with a default in the Baltics, with panic first spreading to Austria and some Nordic countries.
But, for now, a complete meltdown seems distinctly less likely than gradual stabilization followed by a tepid recovery, with soaring debt levels and lingering high unemployment.
It is not a pretty picture.
Some commentators have savaged Europe’s policymakers for not orchestrating as aggressive a fiscal and monetary policy as their US counterparts have.
Why else is Europe suffering a deeper recession than America, they complain, when everyone agrees that the US was the epicenter of the global financial meltdown?
But these critics seem to presume that Europe will come out of the crisis in far worse shape than the US, and it is too early to make that judgment.
An epic, financial-crisis-driven recession, such as the one we are still experiencing, is not a one-year event.
So policymakers’ responses cannot be evaluated by short-term measures, either.
It is just as important to ask what happens over the next five years as over the next six months, and the jury is still very much out on that.
America’s hyper-aggressive fiscal response means a faster rise in government debt, while its hyper-expansive monetary policy means that an exit strategy to mop up all the excess liquidity will be difficult to execute.
Government spending in the US has risen in short order from 18% to 28% of income, while the US Federal Reserve has effectively tripled its balance sheet.
Europe’s more tempered approach, while magnifying short-term risks, could pay off in the long run, especially if global interest rates rise, making it far more painful to carry oversized debt loads.
The real question is not whether Europe is using sufficiently aggressive Keynesian stimulus, but whether Europe will resume its economic reform efforts as the crisis abates.
If Europe continues to make its labor markets more flexible, its financial market regulation more genuinely pan-European, and remains open to trade, trend growth can pick up again in the wake of the crisis.
If European countries look inward, however, with Germany pushing its consumers to buy German cars, the French government forcing car companies to keep unproductive factories open, etc., one can expect a decade of stagnation.
Admittedly, the past year has not been a proud one for policy reform in Europe.
Recessions have never proven an easy time for European leaders to push forward with reforms.
Matters were not helped when the Czech government lost a confidence vote midway through its six-month presidency of the European Union, leaving a lame duck European Commission.
The shadow of forthcoming elections in Germany, together with concern over whether Irish voters will ratify the Lisbon treaty (giving Europe a badly needed new constitution), has conspired to impede reform momentum.
Yet Europe’s many strengths, including strong democratic governments and sound legal institutions, are often under-rated as long-term competitive strengths in today’s globalized economy.
The recent recession has presented challenges, but European leaders were right to avoid becoming intoxicated with short-term Keynesian policies, especially where these are inimical to addressing Europe’s long-term challenges.
If reform resumes, there is no reason why Europe should not enjoy a decade of per capita income growth at least as high as that of the US.
Moreover, with growing concerns about the sustainability of US fiscal policy, the euro has a huge opportunity to play a significantly larger role as a reserve currency.
One shudders to think what will happen if Europe does not pull out of its current funk.
Certainly, Europe would lose traction as a badly needed counterweight to the US in world economic policy.
Europeans may not mind this right now (one sees more Obama t-shirts in Europe than in the US), but they might not be so happy if a George Bush III comes along.
Fortunately, Europeans will probably not wait so long to start moving ahead again.
Will Europe\u0027s Financial Revolution Continue?
Over the last two decades Europe experienced a dramatic expansion of financial markets at the expense of its traditional system of financing based on close relationships between large banks and established firms.
Since 1980 the ratio of stock market capitalization to GDP soared more than 13-fold, while equity financing rose 16-fold.
In 1980, stock market capitalization relative to GDP was five times greater in the US and UK than in Continental Europe; by 2000, it was only 60% higher.
Disclosure standards improved throughout the Continent, as did laws to protect minority shareholders.
For example, before 1980 no member of today's European Union, except France and Sweden, had an anti-insider trading law--and in Sweden the law, although introduced in 1971, was not enforced for the first time until 1990.
By 2000, all EU members had anti-insider trading laws and most were enforcing them.
What caused this change?
Is it benefiting all EU countries, and will it persist as EU enlargement proceeds?
Relationship-based financial systems perform better when markets and firms are smaller, when legal protection is weaker, there is little public information, and innovation is incremental.
Banks tend to have close, long-term, and protective ties with the managers of such firms, primarily because the bank's holdings are illiquid.
This can provide considerable stability--indeed, the second half of the 20th century saw only four German firms succumb to hostile takeovers--but at the cost of reducing access to finance and curtailing future opportunities.
By contrast, market-based financial systems perform better when economies and firms are bigger and more formally organized, with better legal enforcement and transparency, and when innovation is constant.
A market-based system gives new firms--hence new technologies--more chances to obtain financing, because many investors assess firms independently.
But financial systems do not emerge as a result of their superiority in a particular environment.
Vested interests distort the process of evolution.
Over the last decade, trade liberalization and monetary integration supported the expansion of market-based financing in Europe.
Trade integration exposed domestic banks and firms to foreign competition, limiting national governments' ability to intervene on behalf of favored domestic companies.
Similarly, the European Commission deemed subsidies to publicly-owned firms illegal if they distorted competition across member states, while the fiscal discipline imposed by the Euro ended pervasive general government credit subsidies--the essential lubricant of relationship-based systems.
Moreover, the volume of corporate debt securities almost tripled after the introduction of the Euro eliminated exchange-rate risk.
The European Commission also opened up the market for corporate control by vetoing the barriers against hostile takeovers that most EU governments had erected.
But now that Europe's internal economic boundaries have been mostly removed, and the political objective has shifted to political unification, integration may no longer be so market-friendly.
The more political power is centralized, the more the central authority can interfere with market development.
The pro-market bias that characterized EU policy up to now (with notable exceptions, such as agricultural policy) may well shift in the opposite direction.
In trade zones formed by heterogeneous states, vested interests tend to be diverse and find it hard to lobby at the supranational level.
Political integration, by contrast, might have an opposite effect on the development of markets.
The threat of capital flight to nearby political entities creates a strong incentive to keep policies market-friendly, but it is suppressed when neighboring political entities coalesce.
Incumbent financiers, meanwhile, have a powerful vested interest in opposing a market-based system, which favors credit evaluation and risk management over their main ``skill'': being well connected.
They also have the ability to organize successfully against the market, particularly in small countries, where incumbents form a well-defined group whose members often attended the same elite schools, frequent the same clubs, and intermarry.
The question is not whether Europe should move toward a market-based financial system. The real question is whether Europe retains the political will to continue to do so, and whether EU countries can strengthen the institutions necessary to reap the full benefits of financial markets.
There is a serious danger that reforms that facilitate markets will benefit northern Europe but harm underdeveloped regions in southern Europe by depriving them of the relationship-based system.
In these regions, higher rates of corruption and tax evasion, together with smaller average firm size, undermine the production of credible information that financial markets need.
Partly for this reason, EU enlargement is superior--at least for financial markets--to political unification, which encourages vested interests to lobby at the central level.
Indeed, one benefit of the European Commission's rule that some decisions must be unanimous is that its impedes the exercise of monopoly power, thus reducing the risk that centralized authority will be used against markets.
This is all the more important because leaders in both the US and Europe are beginning to pander to the anti-globalization movement.
America's corporate scandals have undermined the market's moral standing, while the end of the Internet bubble has weakened its economic credibility.
The adverse distributive effects of market-based finance may serve to further strengthen anti-market forces in Europe, especially in southern Europe.
The EU can buck this anti-market trend by promoting structural reforms in southern European countries and focussing on enlargement to increase economic competition.
But it should maintain a clear division of power between local and central authorities at all levels to maintain strong competition and a healthy diversity of interests.
Will Ex-Mexicans Choose America’s Next President?
Among the many surprises during the Republican Party presidential candidates’ debates a couple of weeks ago was the rekindled importance of immigration.
After the failure of President George W. Bush’s and Senator Edward Kennedy’s comprehensive immigration reform effort last spring, most observers thought the matter would remain dormant until 2009, since even touching it was potentially fatal for Democrats and Republicans alike.
But as Democrats discovered in other recent debates, and as Republicans realized with a little help from the CNN organizers, who skewed the questions toward issues they feel strongly about, immigration is an issue that just won’t go away.
This is one reason why I wrote a short but – I hope – useful book on Mexican immigration to the United States, entitled Ex-Mex: From Migrants to Immigrants .
Based on internal documents from the Mexican and US governments, countless interviews, and a survey of much of the existing literature on the subject, Ex-Mex seeks to fulfill three purposes.
First, I wanted to provide a Mexican voice in the immigration debate.
Mexicans make up more than half of the flow and stock – legal or not – of all immigrants in the US, but a point of view attempting to reflect their interests and aspirations has been largely absent from the American discussion.
Of course, my book cannot be the Mexican stance.
But an assessment from the vantage point of past, current, and future Mexican immigrants to the US is a necessary component of the American debate – all the more so when one recalls that immigration has, in fact, not generally been exclusively a domestic US policy question.
The first American immigration agreement with another country was signed in 1907 – the so-called Gentleman’s Agreement with Japan, while the US and Mexico negotiated and administered the Bracero Program for more than twenty years, from 1942 thru 1964.
And, of course, the US has had a standing immigration agreement since 1965 with a country most Americans would not imagine: Fidel Castro’s Cuba.
Second, it is important to place the current, raging debate in historical context.
The most important feature of that context is that the actual flow of Mexicans entering the US today is not much greater than the overall average figure for the Bracero Program period: around 400,000 per year.
It is similarly important to understand the evolution of US legislation on immigration since the 1920’s, and the shifts and hypocrisy involved in the application of those laws.
For example, the 1996 immigration reforms implemented by the Clinton administration, along with other, underlying structural trends, halted the traditional circular pattern whereby Mexicans came and went to the US every year.
Instead, they began to settle in communities farther from the border, greatly increasing the stock of Mexicans in the US.
Finally, the efforts of the Mexican and US governments since 2001 to reach an accommodation on the issue have not been well understood.
Confidential papers from the Bush and Fox administrations show that talks went further than previously known.
The US, and particularly then-Secretary of State Colin Powell, was willing, as stated in a unclassified memo addressed to Bush in late August 2001, to go to great lengths to reach an understanding with Mexico on the issue.
Indeed, the substance of the negotiations was not much different from the content of the Bush-Kennedy “grand bargain” that was fashioned in 2007.
The electoral numbers perhaps best explain the immigration equation’s importance in today’s presidential campaigns.
In 2008, it is likely that Latinos will make up 9% to 10% of the electorate, the highest share ever.
They will wield decisive importance in swing states like Colorado, New Mexico, Florida, and Nevada.
Having made significant inroads among Hispanic voters in 2000 and 2004, thanks to Bush’s support for immigration reform, Republicans now can barely count on 20% of that total – mainly among Cuban-Americans – thanks to their strident anti-immigration stance.
Thus, if the Democrats demonstrate a minimum of compassion, sensitivity, and realism, they can count on a 7% advantage in the popular vote.
But doing so could cost Democrats dearly in old industrial states like Pennsylvania, Ohio, and Michigan, where the arrival of Mexican migrants, transformed into immigrants, has stoked passions.
Since the Democrats’ victory will most likely depend on these states, the Democratic candidate who can square this circle, or the Republican who can break it, may well win the presidency.
Will Global Imbalances Return?
BEIJING – Future history books, depending on where they are written, will take one of two approaches to assigning blame for the world’s current financial and economic crisis.
One approach will blame lax regulation, accommodating monetary policy, and inadequate savings in the United States.
The other, already being pushed by former and current US officials like Alan Greenspan and Ben Bernanke, will blame the immense pool of liquidity generated by high-savings countries in East Asia and the Middle East.
All that liquidity, they will argue, had to go somewhere. Its logical destination was the country with the deepest financial markets, the US, where it raised asset prices to unsustainable heights.
Note the one thing on which members of both camps agree: the global savings imbalance – low savings in the US and high savings in China and other emerging markets – played a key role in the crisis by allowing Americans to live beyond their means.
It encouraged financiers desperate to earn a return on abundant funds to put them to more speculative use.
If there is a consensus on one issue, it is the impossibility of understanding the bubble and the crash without considering the role of global imbalances.
Preventing future crises similar to this one therefore requires resolving the problem of global imbalances.
Here, the early signs are reassuring.
American households are saving again.
The US trade deficit has declined from $60 billion a month to just $26 billion, according to the most recent data.
As a matter of simple arithmetic, we know that the rest of the world is running correspondingly smaller surpluses.
But once American households rebuild their retirement accounts, they may return to their profligate ways.
Indeed, the Obama administration and the Federal Reserve are doing all they can to pump up US spending.
The only reason the US trade deficit is falling is that the country remains in a severe recession, causing US imports and exports to collapse in parallel.
With recovery, both may recover to previous levels, and the 6%-of-GDP US external deficit will be back.
In fact, there has been no change in relative prices or depreciation of the US dollar of a magnitude that would augur a permanent shift in trade and spending patterns.
Whether there is a permanent reduction in global imbalances will depend mainly on decisions taken outside the US, specifically in countries like China.
One’s forecast of those decisions hinges, in turn, on why these other countries came to run such large surpluses in the first place.
One view is that their surpluses were a corollary of the policies favoring export-led growth that worked so well for so long. China’s leaders are understandably reluctant to abandon a tried-and-true model.
They can’t restructure their economy instantaneously.
They can’t move workers from painting children’s toys in Guangdong to building schools in Western China overnight.
They need time to build a social safety net capable of encouraging Chinese households to reduce their precautionary saving.
If this view is correct, we can expect to see global imbalances re-emerge once the recession is over and to unwind only slowly thereafter.
The other view is that China contributed to global imbalances not through its merchandise exports, but through its capital exports.
What China lacked was not demand for consumption goods, but a supply of high-quality financial assets.
It found these in the US, mainly in the form Treasury and other government-backed securities, in turn pushing other investors into more speculative investments.
Recent events have not enhanced the stature of the US as a supplier of high-quality assets.
And China, for its part, will continue to develop its financial markets and its capacity to generate high-quality financial assets internally.
But doing so will take time.
Meanwhile, the US still has the most liquid financial markets in the world.
This interpretation again implies the re-emergence of global imbalances once the recession ends, and their very gradual unwinding thereafter.
One development that could change this forecast is if China comes to view investing in US financial assets as a money-losing proposition.
US budget deficits as far as the eye can see might excite fear of losses on US Treasury bonds.
A de facto policy of inflating away the debt might stoke such fears further.
At that point, China would pull the plug, the dollar would crash, and the Fed would be forced to raise interest rates, plunging the US back into recession.
There are two hopes for avoiding this disastrous outcome.
One is relying on Chinese goodwill to stabilize the US and world economies.
The other is for the Obama administration and the Fed to provide details about how they will eliminate the budget deficit and avoid inflation once the recession ends.
The second option is clearly preferable.
After all, it is always better to control one’s own fate.
Will Governmental Folly Now Allow for a Cyber Crisis?
CAMBRIDGE – When the financial crisis of 2008 hit, many shocked critics asked why markets, regulators, and financial experts failed to see it coming.
Today, one might ask the same question about the global economy’s vulnerability to cyber-attack.
Indeed, the parallels between financial crises and the threat of cyber meltdowns are striking.
Although the greatest cyber threat comes from rogue states with the capacity to develop extremely sophisticated computer viruses, risks can also come from anarchistic hackers and terrorists, or even from computer glitches compounded by natural catastrophe.
A few security experts have voiced great alarm, including, most recently, Jonathan Evans, the head of the British Security Service (MI5).
By and large, however, few leaders are willing to compromise growth in the tech sector or the Internet in any significant way in the name of a threat that is so amorphous.
Instead, they prefer to establish relatively innocuous working groups and task forces.
It is difficult to overstate the dependence of modern economies on large-scale computer systems.
But imagine if one day a host of key communications satellites were incapacitated, or the databases of major financial systems were erased.
Experts have long identified the electricity grid as the most acute vulnerability, since any modern economy would collapse without power.
True, many skeptics argue that with reasonable low-cost prophylactic measures, large scale cyber-meltdowns are highly implausible, and that doom-mongers overstate the worst-case scenarios.
They say that the ability of cyber-terrorists and blackmailers to take the global economy to the brink, as in the 2007 Bruce Willis movie Die Hard 4, is utterly fictional.
It is difficult to judge who is right, and there are important experts on both sides of the debate.
But there do seem to be an uncomfortable number of similarities between the political economy of cyberspace regulation and of financial regulation.
First, both cyber-security and financial stability are extremely complex topics with which government regulators can hardly keep up.
Industry remuneration for experts is far in excess of any public-sector salary, and the best minds are continually bid away.
As a result, some argue that the only solution is reliance on self-regulation by the software industry.
One hears this argument for many modern industries, from big food to big pharma to big finance.
Second, like the financial sector, the tech industry is enormously influential politically through contributions and lobbying.
In the United States, all presidential candidates must make pilgrimages to Silicon Valley and other tech centers to raise money.
Excessive financial-sector influence was, of course, a root cause of the 2008 meltdown and remains deeply implicated in today’s continuing eurozone mess.
Third, with slowing growth in advanced economies, information technology seems to hold the moral high ground, just as finance did until five years ago.
And crude attempts by governments to enforce regulation are likely to prove ineffective in protecting against catastrophe, while all too effective in strangling growth.
In both cases – financial stability and cyber security – the risk of contagion creates a situation in which a wedge can form between private incentives and social risks.
Admittedly, progress in the technology sector overall often produces huge social-welfare gains, which arguably outstrip those produced by all other sectors in recent decades.
But, just as with nuclear power plants, progress can go awry in the absence of good regulation.
Finally, the greatest risks come from arrogance and ignorance, two human characteristics at the heart of most financial crises.
Recent revelations about the super-viruses “Stuxnet” and “Flame” are particularly disconcerting.
These viruses, apparently developed by the US and Israel to disrupt Iran’s nuclear program, embody a level of sophistication far beyond anything previously seen.
Both are deeply encrypted and difficult to detect once inside a computer.
The Flame virus has the capacity to take over a computer’s peripherals, record Skype conversations, take pictures through a computer’s camera, and transmit information via Bluetooth to any nearby device.
If the world’s most sophisticated governments are developing computer viruses, what guarantee is there that something won’t go awry?
How can we be sure that they won’t “escape” and infect a much broader class of systems, or be adopted for other uses, or that future rogue states or terrorists won’t find a way to turn them on their creators?
No economy is more vulnerable than the US, and it is arrogance to believe that US cyber superiority (to all except perhaps China) provides it with impenetrable security from attack.
Unfortunately the solution is not so simple as just building better anti-virus programs.
Virus protection and virus development constitute an uneven arms race.
A virus can be just a couple hundred lines of computer code, compared to hundreds of thousands of lines for anti-virus programs, which must be designed to detect wide classes of enemies.
We are told not to worry about large-scale cyber meltdowns, because none has occurred, and governments are being vigilant.
Unfortunately, another lesson of the financial crisis is that most politicians are congenitally incapable of making difficult choices until risks actually materialize.
Will Greece Go To the IMF?
WASHINGTON, DC – Traditionally, “you should go to the IMF” was not something you would say to friendly neighbors and close allies.
Over the past few decades, the International Monetary Fund became associated with excessive fiscal austerity, extreme political insensitivity, and – since the Asian financial crisis of 1997-1998 – with an out-and-out stigma.
Countries borrowed from the IMF only under duress, when all else failed – and when there was simply no other way to pay for essential imports.
(For Iceland in the fall of 2008, for example, the only alternative to IMF financing was to eat locally obtained goods, which mostly means fish.)
But the IMF has changed a great deal in recent years, largely under the auspices of Dominique Strauss-Kahn, its current managing director.
Strauss-Kahn, a former French finance minister and contender for the Socialist nomination for the French presidency, has pushed through changes that allow the IMF to lend without conditions in some circumstances, and to give greater priority to protecting social safety nets (including unemployment benefits and healthcare systems).
He has also moved the Fund decisively away from its obsession with fiscal austerity measures (a big early mistake – with lasting traumatic consequences – in Indonesia and Korea in late 1997).
Greece undoubtedly has serious problems today.
T he great opportunities offered by European integration have been largely squandered.
And lower interest rates over the past decade – brought down to German levels through Greece being allowed, rather generously, into the euro zone – led to little more than further deficits and a dangerous buildup of government debt.
Germany and France – as de facto leaders of the European Union – are haggling over a belated support package, but they have made it abundantly clear that Greece must slash public-sector wages and other spending.
Greek trade unions know what this means – and are in the streets.
If Greece still had its own currency, everything would be easier.
Just as in the case of the United Kingdom since 2008, the Greek exchange rate would depreciate sharply.
This would lower the cost of labor, restoring competitiveness (as in Asia after 1997-98) while also inflating asset prices and thereby helping borrowers who are underwater on their mortgages and other debts.
But, with Greece and other troubled euro-zone economies (known to their detractors as the PIIGS: Portugal, Ireland, Italy, Greece, and Spain) having surrendered monetary policy to the European Central Bank (ECB) in Frankfurt, their currencies cannot fall in this fashion.
So Greece – and arguably the PIIGS more generally – are left with the need to curtail demand massively, lower wages, and reduce the public-sector workforce.
The last time we saw this kind of precipitate fiscal austerity – when countries were tied to the gold standard – it contributed directly to the onset of the Great Depression in the 1930’s.
This is a situation tailor-made for Strauss-Kahn and the “new IMF” to ride to the rescue.
Since early 2009, the Fund has had significantly greater resources to lend to countries in trouble, to cushion the blow of crisis, and to offer a form of international circuit-breaker when it looks like the lights might otherwise go out.
The idea is not to prevent necessary adjustments – for example, in the form of budget-deficit reduction – but to spread them out over time, to restore confidence, and to serve as an external seal of approval on a government’s credibility.
T he IMF was created in the waning days of World War II, essentially as a United States-West European partnership.
Europe retains strong representation at the Fund, and has always chosen its top leader – in fact, most emerging markets (in Asia, Latin America, and Africa) complain that Europe is overrepresented and has far too much say in how the Fund operates.
Yet at this moment of growing European crisis, while there is still time to act, the Fund is confined to the sidelines.
This is partly because German Chancellor Angela Merkel, currently maneuvering to ensure that a German is the next head of the ECB, does not want the Fund to become more involved in euro-zone policies.
The IMF might reasonably take the position that ECB policies have been overly contractionary – resulting in a strong euro and very low inflation – and are no longer appropriate for member countries in the midst of a financial collapse.
If the IMF were to support Europe’s weaker economies, this would challenge the prevailing ideology among Frankfurt-dominated policy makers.
But the real reason is much simpler.
When French President Nicolas Sarkozy put forward Strauss-Kahn’s name to run the IMF, he meant to park a past and potentially future rival in a faraway place about which people cared little.
Then the global financial crisis hit, and Strauss-Kahn was propelled to center stage.
With France’s next presidential election fast approaching in 2012, the last thing Sarkozy now needs is for Strauss-Kahn to play a statesman-like role in saving the euro zone.
We can expect to hear all kinds of misleading excuses from EU sources for excluding the IMF: “the Fund is too American,” “Europe must resolve its own problems,” and “the IMF is not appropriate to our circumstances.”
Sometimes history is driven by deep forces beyond our control, and sometimes by sheer chance.
And at other times, like now, much that hangs in the balance is affected by the deliberate, personal, and short-term tactical considerations of people running for election.
The EU’s leaders will try hard to keep the IMF at bay.
This is not good news for Greece – or for anyone who cares about global financial stability.
Will Greece Make It?
CAMBRIDGE – Greece has bought some time with a new package of financial support, but the country is not out of the woods yet.
It remains to be seen whether the souped-up austerity policies that Prime Minister George Papandreou’s government has promised will prove to be politically acceptable and sustainable.
History suggests some grounds for skepticism.
In a democracy, when the demands of financial markets and foreign creditors clash with those of domestic workers, pensioners, and the middle class, it is usually the locals who have the last say.
Britain’s exit from the Gold Standard in 1931 remains the historical landmark.
Having made the mistake of restoring parity with gold at a level that left the economy desperately uncompetitive, Britain struggled for several years with deflation and rising unemployment.
Industries such as coal, steel, and shipbuilding were hit hard, and labor strife became rampant.
Even as unemployment reached 20%, the Bank of England was obliged to maintain high interest rates in order to prevent a massive outflow of gold.
Eventually, increasing financial-market pressure pushed the country off gold in September 1931.
It wasn’t the first time that financial probity had required the real economy to suffer under the Gold Standard.
What was different was that Britain had become a more democratic society: the working class had become unionized, the political franchise had expanded fourfold since the end of World War I, mass media publicized ordinary people’s economic plight, and a socialist movement was waiting in the wings.
Despite their own instincts, central bankers and their political masters understood that they could no longer remain aloof from the consequences of economic recession and high unemployment.
Even more importantly, investors understood this, too.
As soon as financial markets begin to question the credibility of a government’s commitment to a fixed exchange rate, they become a force for instability.
At the slightest hint of things going awry, investors and depositors pull up stakes and move capital out of the country, thereby precipitating the collapse of the currency.
This movie was replayed in Argentina in the late 1990’s.
The linchpin of Argentina’s economic strategy after 1991 was the Convertibility Law, which legally anchored the peso to the US dollar at a one-to-one exchange rate and prohibited restrictions on capital flows.
Argentine Economy Minister Domingo Cavallo envisioned the Convertibility Law as both a harness and an engine for the economy.
The strategy worked well initially by bringing much-needed price stability.
But, by the end of the decade, the Argentine nightmare had returned with a vengeance.
The Asian financial crisis and the Brazilian devaluation in early 1999 left the Argentinean peso looking decidedly overvalued.
Doubts about Argentina’s ability to service its external debt multiplied, confidence collapsed, and before too long, Argentina’s creditworthiness slid below that of some African countries.
Ultimately, what sealed Argentina’s fate was not its leaders’ lack of political will, but rather their inability to impose ever-more costly policies on their domestic constituents.
In fact, the Argentine government was willing to abrogate contracts with virtually all domestic constituencies – public employees, pensioners, provincial governments, and bank depositors – in order to meet its obligations to foreign creditors.&#160;
But investors grew increasingly skeptical that the Argentine congress, provinces, and ordinary people would tolerate the austerity policies needed to continue servicing foreign debt.
As mass protests spread, they were proved right.
When globalization collides with domestic politics, the smart money bets on the home team.
Perhaps there is another path.
Consider Latvia, which recently found itself experiencing economic difficulties similar to those of Argentina a decade ago.
Latvia had grown rapidly since joining the European Union in 2004, on the back of large-scale external borrowing and a domestic property bubble.
It had run up a current-account deficit and a foreign-debt burden that were literally of Greek proportions.
Predictably, the global financial crisis and abrupt reversal in capital flows in 2008 left the Latvian economy in dire straits.
As lending and property prices collapsed, unemployment rose to 20% and GDP declined by 18% in 2009.
In January 2009, the country had its worst riots since the collapse of the Soviet Union.
Latvia had a fixed exchange rate and free capital flows, just like Argentina.
Its currency has been pegged to the euro since 2005.
Unlike Argentina, however, the country’s politicians managed to tough it out without devaluing the currency and introducing capital controls.
What seems to have changed the balance of political costs and benefits was the prospect of reaching the promised land of eventual membership in the eurozone, which compelled Latvian policymakers to foreclose any options that would endanger that objective.
That, in turn, increased the credibility of their actions – despite those actions’ very high economic and political costs.&#160;&#160;&#160; &#160;&#160;&#160;
Will Greece be an Argentina or a Latvia?
The economics is not encouraging.
Unless the Greek economy recovers, taking on new debt is a temporary palliative that will require even more austerity down the line.
And, as long as domestic demand remains depressed, structural reforms – privatization and liberalization of labor markets and professional services – are unlikely to deliver the needed growth.
As the experiences of interwar Britain – and, more recently, of Argentina and Latvia – show, it is the politics that ultimately determines the outcome.
For the Greek program to have any chance, the Papandreou government must mount a monumental effort to convince its domestic constituents that economic pain is the price they are paying for a brighter future – and not just a means to satisfy external creditors.
Will Hamas Win the Peace?
WASHINGTON, DC –For generations to come, the Palestinians will remember the horrific war in Gaza with pain and bitterness.
But what cannot yet be seen is how Palestinians will view Hamas.
Whether Hamas can claim a victory – and whether Palestinians will believe them will be determined by the type of ceasefire that is eventually agreed, if a formal one is eventually agreed.
The end game – for both Israel and Hamas – is thus crucially important.
For the moment, Hamas is perceived by the majority of Palestinians as the victim of a war intended to gain its surrender.
After all, Hamas was democratically elected, but was forbidden from ruling and besieged in Gaza.
At the same time, Palestinian President Mahmoud Abbas is accused of siding with Israel in order to restore his lost authority in Gaza.
The war exposed flaws in Hamas’ judgment.
Hamas apparently did not envision a full-scale confrontation with Israel when it refused to renew a six-month truce.
With Gaza suffering under a lengthy siege, Hamas leader Khalid Mashal said that there was no point in a new truce, since the old one had “failed to lift the siege on Gaza.”
Other leaders were quoted as saying that Hamas would “lift the siege by force.”
If Hamas is to survive the war, it must demonstrate that its resistance resulted in a permanent opening of Gaza’s border crossings, especially in Rafah.
For Palestinians, these are signs of victory.
With open borders, Hamas would secure its regime in Gaza and build its popularity in the West Bank, putting enormous pressure on Abbas, the leader of the rival Fatah movement, to accept a national unity government on terms set by Hamas.
Members of Fatah’s Central Committee are already accusing Abbas of supporting Israel in the fighting, of wanting to “return to Gaza on an Israeli tank.”
Radical groups within Fatah are leaning toward an open alliance with Hamas.
If Hamas comes out ahead, Abbas’s allies in other Palestinian factions will press him to accept Hamas and Islamic Jihad within the PLO.
Egypt will have to backtrack on its rejection of Hamas in order to recover its image among the Arabs and to reduce tensions within Egyptian society.
Pressure to integrate Hamas into Palestinian politics is also likely in some European capitals, particularly Paris and London, where some expressed opposition to isolating Hamas even before the war.
But if Israel forces Hamas to accept its conditions for border controls and a formal ceasefire, Hamas’s image as the guardian of Palestinian resistance will be severely damaged.
Palestinians will ask if it was really necessary to fight this war and pay such a high price.
Abbas will be able to argue that he advised Hamas to renew the truce and to end its missile fire on Israeli towns, but that Hamas insisted on exposing Palestinian civilians to devastation.
One indicator to watch for: the length of that ceasefire.
Palestinians will recognize Hamas’s acceptance of a multi-year truce with Israel as a sign of defeat, which would also underscore Palestinian feelings of humiliation and abandonment.
Hezbollah, despite its rhetoric, has taken no steps to support Hamas, and the Arab states seemed more than willing to support its defeat.
It is in rebuilding Gaza that the stakes of the competition will increase.
Abbas, supported by the United States and the European Union, may have control over significant funding.
The test for him will be to deliver quickly.
Hamas will also have resources for reconstruction.
Qatar, a Hamas supporter, has already announced an investment fund for Gaza and contributed $250 million.
Hamas will have to make a convincing case that Gaza’s near destruction is a price that had to be paid.
Many Palestinians believe that Israel inflicted this damage on Gaza to drive a wedge between the people and the “resistance.”
There is a precedent for this argument: Hezbollah described the destruction of Beirut’s southern suburbs in exactly these terms at the end of the Lebanon War in July 2006.
More importantly, Hamas can demonstrate that its leaders have been on the front lines during this war, sharing Palestinian suffering; many have been killed, along with their families.
The biggest question is whether the war will alter Hamas’ political goals.
Two weeks ago, Musa Abu Marzouk, a senior Hamas official, praised Jimmy Carter in The Los Angeles Times as the only American president who had brought true peace in the Middle East.
This is a radical departure from Hamas rhetoric, which has always portrayed the Camp David agreement between Israel and Egypt as a betrayal of the Islamic world.
It remains to be seen whether Abu Marzouk’s view is merely a tactic intended to encourage the Obama administration to reach out to Hamas, or whether the war convinced Hamas that the two-state solution is the only viable option to settle the conflict with Israel.
The Framing of MH-17
PHILADELPHIA – US President Barack Obama called the downing of Malaysia Airlines Flight 17 an “outrage of unspeakable proportions,” whereas Russian President Vladimir Putin termed it an “accident” and a “terrible tragedy.”
Ukrainian President Petro Poroshenko branded it an “act of terrorism,” and Malaysian Prime Minister Najib Razak called it an “inhumane, uncivilized, violent, and irresponsible act.”
All of these descriptions may be accurate, but each carries different rhetorical weight and legal implications.
The time has come for governments and international organizations to call the attack on MH17 a probable war crime.
This rhetorical shift is needed, first and foremost, because framing the moral reprehensibility of this despicable act within a common language will help to align public perceptions of it.
As it stands, the public narrative in Russia and the West diverges sharply.
Russian media and officials portray the episode as, at best, a terrible mistake, and, at worst, an American plot to undermine support for the rebels.
Americans and Europeans, for their part, increasingly blame Russia for possibly equipping or assisting the rebels.
As a result, the possibility of achieving a common understanding of the act is being lost – and, with it, whatever potential there may be for meaningful cooperation.
But, by recognizing the downing of MH17 as a war crime, governments may be able to create an opening to reconcile these narratives.
Whatever the perpetrators’ underlying motives, there is no denying the moral and legal wrongdoing that occurred.
Calling the offense by its legal name acknowledges this, thereby preempting a rhetorical battle to frame the attack as terror, tragedy, or conspiracy.
Even the Russians may be willing to accept this framing, because it avoids finger-pointing against particular actors and affirms that a court of law – not a series of media statements – will determine what occurred and who is responsible.
In fact, another important reason to characterize the downing of MH17 publicly as a war crime is that it may prove beneficial in apprehending the perpetrators.
There is a real danger that those responsible for pressing the launch button – and, perhaps, for ordering the launch – will disappear into the chaos of eastern Ukraine, the vast expanses of Russia, or elsewhere.
There is also a danger that the perpetrators, if found, might avoid trial if the local authorities label the crime political, and thus exempt from normal extradition requirements.
All of the relevant states in the region have accepted the legal obligation to assist in the investigation and prosecution of war crimes.
The obligation to prosecute suspected war criminals, or extradite them to face prosecution elsewhere, becomes more compelling in accordance with the seriousness of the alleged crime.
While the full details of the attack on MH17 remain unknown, shooting a surface-to-air missile at a civilian airliner flying over a war zone is most likely a violation of the law of war – by which the Ukrainian government, the Russian government, and the rebels are all bound.
Indeed, the conflict in eastern Ukraine constitutes a non-international armed conflict (a war between a government and rebel movement) governed by international humanitarian law, which categorically bans the intentional targeting of civilians.
In other words, if whoever launched the missile did so with the intent of killing the civilian passengers aboard MH17, the act was unmistakably a war crime.
Even if the objective was to strike a Ukrainian transport aircraft, the act likely constitutes a war crime.
Fundamental to the law of war, including the law applicable in non-international armed conflicts, is the principle of distinction – the requirement that fighting parties distinguish between civilian and military targets.
In the words of the International Committee of the Red Cross, that duty of care includes doing “everything feasible to verify that targets are military objectives.”
In this case, many steps could easily have been taken to differentiate MH17 from a military-transport plane, including visual identification (perhaps with binoculars), radar-signature analysis, and a check of the civilian aircraft transponder-code broadcast.
If, as seems likely, these basic steps were not taken, even an accidental strike on MH17 would constitute a war crime.
A Dutch or Malaysian court, or even a special tribunal under the auspices of the United Nations (like the one that prosecuted the 1988 Pan Am Lockerbie bombing), will ultimately determine who bears legal responsibility for the downing of MH17.
Framing the attack as a likely war crime now – as UN High Commissioner for Human Rights Navi Pillay has done – may help to reconcile the conflicting narratives that are emerging.
And, perhaps more important, doing so can play a key role in securing the political, diplomatic, and legal support needed to bring the perpetrators to justice.
China’s New Reforms in Theory and Practice
HONG KONG – On November 12, the Third Plenary of the 18th Central Committee of the Chinese Communist Party (CCP) announced a major turn to market-oriented policies: interest-rate and currency liberalization, reform of banks and state enterprises, clearer land ownership for rural inhabitants, and a better deal for urban migrants.
Behind this landmark decision was a potential crisis.
China’s success has been driven by cheap exports based on cheap labor, infrastructure built by state enterprises with low-cost bank funding, and government budgets funded by land sales.
But labor is no longer cheap, road construction to connect major cities has given way to building large shopping malls in small towns, and land sales based on rezoning are reaching both economic limits and the limits of villagers’ tolerance.
Cheap money with limited investment outlets now risks fueling property bubbles and industrial overcapacity.
Without fundamental change, China faces slower economic growth, inadequate job creation and innovation, and popping bubbles.
The solution is a rapid shift from China’s export-based growth model to one based on domestic demand; from infrastructure to consumption; from the dominance of large state-owned enterprises (SOEs) to that of small and medium-size private enterprises; from industry to services; and, more broadly, from bureaucratic control to market control.
All successful Asian countries have made this shift; South Korea and Taiwan are models.
But rapid change entails immense pain.
SOEs will lose their low-interest loans, subsidized land, monopoly protection, and privileged housing.
Party and state bureaucracies will lose power (and income).
Local governments are particularly desperate. They have huge debts, which they amortize by rezoning and selling land.
Already squeezed by exorbitant property prices and popular resistance to land takings, they now face higher interest rates, property taxes, villagers empowered by stronger rights, and expensive new requirements to provide social services to migrants.
The desperation of local potentates and SOE executives has created powerful resistance to reform.
At a plenary reportedly marked by acrimony, China’s political leaders sided with reform.
As one economic planner said, when asked about resistance before the decisive meeting, “In the end, all of our leaders understand numbers.
The implications of the numbers are clear.”
The Third Plenum’s announcement of its decisions took the form of a statement of broad principles, leaving many observers concerned by the lack of detail.
But the CCP’s role is to set the direction of policy; executing the Party’s decisions is the government’s job.
And the Plenum did establish a top-level group to coordinate and enforce implementation of its decisions.
While implementation will be a long struggle, with occasionally fierce resistance, key reforms are already underway.
The current 12th Five-Year Plan calls for annual wage increases to average at least 13.4%; this year, wages are rising at an average rate of 18%, which will squeeze out industries characterized by obsolescence or overcapacity.
Moreover, the government’s anti-corruption campaign is targeting some of the most powerful industry groups, such as the petroleum faction, thereby weakening their resistance to reform.
Most important, economic outcomes are becoming increasingly aligned with the authorities’ goals.
Services already account for more output and employment than industry – the Internet company Alibaba, for example, is empowering both consumers and smaller companies on a previously unimaginable scale – and recent growth has been driven by domestic demand rather than net exports.
Reform is not just a plan; it is already happening.
Economic openings to Central Asia and to ASEAN (specifically to Vietnam) are well underway, and reform will include further international opening.
The Third Plenum’s decisions follow the launch in September of the Shanghai Free-Trade Zone, which will open new sectors to foreign investment and permit largely market-based financial transactions and capital flows.
The liberalization of capital flows is intended to be a gradual national policy, channeled through trusted institutions in Shanghai.
For trade in goods, the new free-trade zone is intended to compete directly with Singapore and Hong Kong.
China fears dependence on those entrepôts in the event of conflict.
For foreign investors, the policy will be to expand greatly the range of opportunities while curtailing foreign control; foreign companies, for example, may hold minority stakes in the telecoms sector, while dominant foreign companies like Monsanto will face constraints.
President Xi Jinping faces the politically risky task of pushing the CCP’s reform agenda against fierce opposition while the economy slows.
By emphasizing Party control – through a crackdown on SOEs, government opponents, and critics in the media and academia – Xi seeks to maximize his ability to impose economic reforms while minimizing the risk of a challenge from conservative forces.
Above all, he is determined to avoid the fate of previous Chinese leaders like Hu Yaobang and Zhao Ziyang, who lost their jobs after a critical mass of their opponents came to believe that economic and political reform jeopardized Party control.
So, at least for now, China will focus on another great wave of economic reform, whereas political reform will mostly be limited to reorganization of government agencies to boost efficiency and strengthen efforts to reduce corruption.
(There have been some steps toward reform, including a decision to remove judges from local political control.)
And yet China will find it increasingly difficult to postpone stronger measures that would appease popular demands for fairness, including the establishment of an independent judiciary, which could prove to be no less an imperative than structural economic reforms.
Likewise, the leaders must either accept much of the information revolution’s swamping of controls or engage in far more costly repression.
Hopes for political reform rest on the possibility that Xi’s second term will see the accession to top leadership of reformers like Politburo member Wang Yang and Vice President Li Yuanchao.
For now, however, China will focus on another great wave of economic reform.
China’s Xi Factor
HONG KONG – Before China’s leadership transition earlier this year, experts said that the Chinese Communist Party was intent on preventing a larger-than-life personality from assuming power.
The CCP, it was argued, wanted someone more like the bureaucratic outgoing leader, Hu Jintao, rather than a charismatic successor like, say, the former Chongqing provincial governor Bo Xilai.
Yet the new president and CCP leader, Xi Jinping, is hardly dull.
He began his term by paying homage to Deng Xiaoping at his statue in Shenzhen, where, more than three decades ago, the former Communist Party leader had launched the campaign to convert a reluctant Party to free-market reforms.
In a top-level November meeting, Xi set out the details of a fundamental change in economic direction, overshadowing his colleagues.
Xi now leads a new economic group that will coordinate and impose his reforms on fractious colleagues.
And, unlike Hu, he immediately became head of the military and now runs a parallel national security council.
At first glance, a new “paramount leader” appears to be emerging.
Recent history explains this re-concentration of power.
In 1993, central-government leaders enjoyed relatively limited powers: they did not control the money supply and had difficulty firing provincial governors or relocating top generals.
Central government revenue was low; indeed, proportionately smaller than that of central governments in any other major economy.
This changed when then-Party leader Jiang Zemin and his prime minister, Zhu Rongji, centralized authority in order to stave off economic crisis at a time of growing risk to China’s banks.
In the process, the labor force of China’s state enterprises declined by 50 million, China lost 25 million manufacturing jobs, and central-government employment was slashed.
These measures saved China’s economy, but at the price of widespread social stress, which made Zhu widely disliked when he left office.
Popular reaction against the cosmopolitan, coastal, and market-oriented reforms of Zhu and Jiang brought to power leaders whose formative experiences were in the inland provinces of Gansu and Tibet.
Riding a wave of resentment against inequality and social tensions, Hu and his prime minister, Wen Jiabao, promised a “harmonious society,” without the stresses of Zhu’s agenda.
They slowed economic reform and ceased political reforms.
The bureaucracy expanded from 40 million to 70 million, and power devolved to provinces, bureaucracies, and state-owned enterprises (SOEs).
The somnolent Hu/Wen era, fortunately, did not dampen the economic growth triggered by the earlier reforms undertaken by Jiang and Zhu.
But the economic-growth model that those reforms created was running out of steam.
Low-cost exports were struggling as labor costs rose.
Investment in infrastructure was shifting from growth-enhancing projects, such as inter-city highways, to less productive shopping malls in second- and third-tier cities.
Productivity plummeted in SOEs, whose privileged access to financing crowded out private-sector investment.
Local-government funding, through the seizure and resale of property, was reaching its limits.
Thus, it became essential to launch a new wave of far-reaching reforms, including liberalization of interest rates, securities markets, and foreign-exchange controls, in order to fund the more productive private sector and reduce excess capacity in SOEs.
In particular, the reforms were needed to deflate an emerging property bubble resulting from huge savings and foreign capital inflows that had no other profitable investment outlet.
The government planned to liberalize interest rates and the capital account to encourage investment in modern, high-value industries, rather than continue to subsidize low-value exports.
It started to shift the economy’s base from export-oriented industries to domestic growth, and from manufacturing to services.
And it announced its intention to slow local governments’ seizures of farmland and excessive borrowing through captive enterprises.
Unsurprisingly, opposition to reform was implacable.
SOEs were determined to defend their privileges.
Highly leveraged local governments could not tolerate higher interest rates or an appreciating currency, and they were adamant about continuing land sales and opposing property taxes.
They feared the financial burden of new requirements to provide social services to urban migrants.
As a result, a new, lean leadership team had to be mobilized.
The number of top leaders was cut from nine to seven.
The new lineup eliminated the most powerful voice on the left (Bo) and relegated the “extreme reformers” on the right (Li Yuanchao and Wang Yang) to the second tier.
To reduce elders’ interference, Hu stepped down as head of the military and Jiang Zemin promised to step back.
Moreover, a leading economic group was established to enforce bureaucratic compliance, as was a national security council (similar to that in the United States) to coordinate foreign policy.
Previously, the military often kept the foreign ministry in the dark; and the party’s foreign-affairs office, which handled North Korea, often failed to coordinate its activities with the foreign ministry, which handled South Korea.
An anti-corruption campaign weakened opposition, and Zhu re-emerged as a hero.
This set the stage for Xi’s arrival.
In short, the new-style leadership, a form of managed charisma, was collectively designed to serve national needs.
And it implies that Xi is unlikely to emerge as paramount leader.
The Chinese presidency’s authority has certainly increased; but Xi is powerful only when he has the votes.
Desperate Women’s Dangerous Moves
GENEVA – One of the most significant recent trends in migration has been the rise in the number of women using dangerous routes previously used mainly by men.
More and more women – fleeing discrimination, violence, or poverty – are now taking the same risks as men in search of a better life for themselves and their children.
This is desperation migration.
Indeed, while many women travel with their families, the International Organization for Migration (IOM) is seeing an increasing number of women migrating on their own to an unknown, unpredictable, and often dangerous future.
Women and children migrants are dying with increasing frequency at sea, crossing deserts, and on other hazardous routes.
What has changed?
Among the many factors pushing women to migrate are pervasive gender bias and social prejudices against single mothers or widows in their country of origin.
But poverty is almost always the strongest force driving women to leave.
In most poor countries, women are poorer than men, owing to the systematic discrimination that they face in education, health care, employment, and control of assets.
Of course, most migrant women do not encounter mistreatment or die on their journeys; in fact, many derive real benefits from migration.
But, among the world’s estimated 111 million migrant women (half the total), violence and abuse can occur at any time, starting from the very outset of the migration process.
Throughout the migration cycle, women are more at risk from physical violence by fellow migrants, smugglers, and state officers, and can be forced to exchange sex for transportation, food, or accommodation.
Unsurprisingly, migrant women are often victims of human trafficking, finding themselves enslaved as laborers, prostitutes, or participants in organized begging operations.
This is true regardless of why women migrate.
When women run for their lives because of natural or man-made disasters, gender-based violence is one of the great risks they face.
Displaced women, often destitute, are easy prey for criminals.
This was one of my immediate concerns when Typhoon Haiyan struck the Philippines, and at my request a special program was instituted to alert and help women in peril.
Even when women migrants find a job in a host country, it is rarely easy for them.
They are predominantly employed in domestic work, care-giving, agriculture, and entertainment – all low-paid, largely unregulated sectors that are rarely covered by national labor laws.
They are often subject to punishingly long working hours, non-payment of wages, forced confinement, starvation, beating, sexual abuse, and threats and intimidation.
Many women migrants are unskilled or undocumented domestic workers.
This makes them more vulnerable to violence, because they typically depend on a single employer and in many countries face deportation if they attempt to change jobs.
Moreover, social integration in a new country can be more difficult for women than for men.
This is partly because women are often subject to harmful traditional practices, such as early and forced marriage, female genital mutilation, and so-called “honor” crimes, enforced by families who want to maintain a link with their country of origin.
And it is especially difficult for women migrants to navigate between the tantalizing freedom of choice and expression in their host society and the traditional roles expected of them at home.
The rising number of migrant deaths – both women and men – at sea and in deserts is a wake-up call for the international community to act.
IOM has called on all relevant actors – including countries of origin, transit countries, and destination countries – to address the plight of migrants attempting life-threatening journeys and find solutions.
Protecting women migrants – often the most desperate of the desperate – should top their priorities.
In 2014, the international community will review the United Nations Millennium Development Goals, which expire next year, and decide on a post-2015 development agenda.
IOM believes that migrants, and in particular women migrants, who in the past have been largely invisible in the language of development, must be a part of this.
We must no longer ignore half the world’s migrants.
Like all migrants, women on the move are entitled to personal security and basic dignity.
Will NATO’s Prodigal Son Return?
PARIS &#45;&#45; Few state visits have lasting results.
Nicolas Sarkozy’s just completed trip to Washington may be an exception, because the French President may be preparing to bring NATO a highly valued present for its 60th anniversary in the spring of 2009: France’s return to NATO’s integrated military structure, from which Charles de Gaulle withdrew in 1966.
In retrospect, de Gaulle’s decision proved to be much more detrimental for France than for the Alliance.
By withdrawing from NATO’s integrated military command, France excluded itself from political decision-making within the Alliance and thus became the equivalent of the “Harkis”– the local soldiers who served with the French army during the Algerian war: fine soldiers, but with virtually no reward for their service.
How realistic is the possibility of scenario French return to NATO’s military fold?
Historically, aborted moves and faux pas abound on both sides in the French/NATO relationship, the latest being Jacques Chirac’s failed attempt to patch up France’s relations with NATO upon his arrival in power in 1995.
Success is not guaranteed this time, either, but the chances are much higher now, because France, the United States, and the world have changed.
For starters, the US now has a real friend and ally in the Élysée Palace.
To speak of Sarkozy as a substitute for Tony Blair in Europe would be premature – and unhelpful, given Blair’s inability to exert significant influence on US policy.
But Sarkozy is both eager to transform France’s relations with the Alliance and has a strategy to do so.
Moreover, the French army supports such a move, while only a small segment of the Foreign Ministry is opposed.
Sarkozy’s strategy is to link progress in building a common European defense and security structure with a redefinition of NATO.
More Europe in security terms means more Alliance.
So, because Sarkozy wants to be seen as a convinced European, he must normalize France’s relations with a new Alliance based on two pillars – European and American.
Moreover, financial and human resources for military affairs are scarce and cannot be duplicated, while France and Britain want to restart the Saint-Malo process of bilateral defense efforts launched nearly ten years ago.
As a result, for the sake of Europe, France must move closer to the Alliance.
Sarkozy has also fully integrated into France’s approach to Europe a reckoning with the new balance of power within the European Union following the accession of Eastern European states.
Unlike Chirac, he understands that it is counterproductive and unrealistic to ask countries like Bulgaria or Romania to choose between their European or Atlantic loyalties.
Here, again, strengthening Europe requires strengthening the Alliance.
Sarkozy’s approach may work, because America, too, has changed.
In American eyes, the Kosovo war in 1999 demonstrated NATO’s glaring and myriad shortcomings, while the terrorist attacks of September 11, 2001, moved America still further away from the Alliance, particularly after President George W. Bush disparagingly rejected NATO’s offer of help.
Former Secretary of Defense Donald Rumsfeld even tried to use divide-and-rule tactics by pitting “New” Europe against the “Old” Europe led by France and Germany, which opposed the Iraq war.
Those divisions are now history, and American reservations about a European security pillar cannot trump America’s pressing needs for allied support.
Confronted with disaster in Iraq, the risk of Afghanistan following Iraq into chaos, and the escalating crisis with Iran, the US can no longer treat the NATO allies with disdain.
Although Europe remains militarily weak, America’s power is now in doubt.
If a European pillar within NATO is needed to strengthen the Alliance, why not accept it?
Beyond the changes in France and the US, the decisive factor behind the possible reinvention of NATO is the transformation of the international system itself.
Aside from the explosive situation in the Middle East and the threat of Islamist terrorism, the West is now confronted with the rise of Asia, the return of a more assertive Russia, and new energy and environmental challenges.
Both France and America have a key role to play in addressing these issues effectively.
Sarkozy’s trip to Washington, and his address to a receptive US Congress, was one more step toward ensuring that they do so together.
Will Next Time Be Different?
CHICAGO – Carmen Reinhart and Kenneth Rogoff, in their excellent, eponymous book on debt crises, argue that the most dangerous words in any language are “This time is different.” Perhaps the next most dangerous words are “Next time will be different.”
These words are often uttered when politicians and central banks want to bail out some troubled segment of the economy. “Yes,” one can almost hear them saying, “we understand that bailing out banks will subvert market discipline.
But you cannot expect us to stand by and watch the system collapse, causing millions of innocent people to suffer.
We have to live with the hand we are dealt.
But next time will be different.” They then use every tool they have to prevent economic losses on their watch.
The government’s incentives are clear.
The public rewards them for dealing with the problem at hand – whether building levees to protect houses built on a flood plain or rescuing banks that have dodgy securities on their balance sheets.
Politicians and central bankers gain little by letting the greedy or careless face the full consequences of their actions, for many innocent people would suffer as well.
A sympathetic press would amplify their heart-rending stories of lost jobs and homes, making those counseling against intervention appear callous.
Democracies are necessarily soft-hearted, whereas markets and nature are not; government inevitably expands to fill the gap.
To the extent that the rough justice meted out by markets or nature teaches anyone to behave better, it has consequences far beyond the horizon of anyone in power today.
When asked to choose between the risk of being known to posterity as the central banker who let the system collapse and the intangible future benefits of teaching risk takers a lesson, it does not take genius to predict the central banker’s decision.
Democracy tends to institutionalize moral hazard in sectors that are economically or politically important, such as finance or real estate, allowing them to privatize gains and socialize losses.
Even though the authorities insist that the next time will be different, everyone knows that they will make the same decision when confronted with the same choice again.
So, knowing that next time will not be different, the authorities try their best to prevent a “next time.”
But risk takers have every incentive to try their luck again, knowing that, at worst, they will be bailed out.
In this cat-and-mouse game, risk takers have the upper hand.
For one thing, risk takers are typically small, cohesive interest groups that, once rescued, have a powerful incentive, as well as the resources, to buy the political influence needed to ensure a return to the status quo ante.
If risk takers were allowed to face more serious losses, they would have fewer resources to fight political attempts to constrain their risky activities.
Moreover, the public does not have a long memory, a long time horizon, or an appetite for detail.
Even as the United States’ voluminous Dodd-Frank bill tried to ensure that bankers never subjected American taxpayers to undue risk again, public attention had moved on to the state of the real economy and unemployment.
Why focus on financial regulation when the risks of an immediate collapse are small, and when the details are so tedious?
As technical experts and lobbyists took over, and the public lost interest, Dodd-Frank became friendlier and friendlier to the banks.
So how can this one-way betting be stopped?
The scary answer may be that it does not end until governments run out of money (as in Ireland) or the public runs out of sympathy (as in Germany vis-à-vis the rest of Europe).
To avoid that fate, governments should start by recognizing that the system is programmed to respond to deep distress, and that they can do nothing about it.
But they must try to ensure that they do not destroy incentives by doing too much.
And they must offset the distortions created by intervention in other ways.
For example, the US Federal Reserve has essentially guaranteed the financial sector that if it gets into trouble, ultra-low interest rates will be maintained (at the expense of savers) until the sector recovers.
In the early to mid-1990’s, rates were kept low because of banks’ real-estate problems.
They were slashed again in 2001 and kept ultra-low after the dot-com bust.
And they have been ultra-low since 2008.
Senior Fed policymakers deny that their interest-rate policy bears any responsibility for risk taking, but there is much evidence to the contrary.
It would be difficult for the Fed to respond differently if the financial sector gets into trouble again.
But it does not have to maintain ultra-low interest rates after the crisis has passed, especially if those rates have little impact on generating sustainable economic activity.
Doing so merely rewards banks for their past excesses – and taxes savers.
More importantly, if the Fed wants to restore incentives for risk takers and savers, it should offset the effects of staying “low for long” in bad times by increasing interest rates more rapidly than is strictly necessary as the economy recovers.
This will, of course, be politically difficult, because the public has been programmed to think that ultra-low rates are good, and higher rates bad, for growth, without any consideration for the long-term sustainability of growth.
Finally, the pressure on governments to intervene would be lower if individuals had access to a minimum safety net.
Official US policy is so activist in downturns (regardless of its effectiveness) partly because unemployment is so costly to workers – who have little savings, unemployment benefits that run out quickly, and health care that is often tied to a job.
A stronger safety net for individuals might allow politicians to accept more corporate or financial-sector distress, and help bolster their claim that next time really will be different.
Will Olmert Survive?
After Israel’s inability last summer to achieve a conclusive victory over Hezbollah in southern Lebanon, public pressure forced Prime Minister Ehud Olmert’s government to appoint a commission to examine the causes of this surprising failure.
How could a small militia, numbering less than a few thousand combatants, survive the onslaught of the Middle East’s most formidable military machine?
The commission, headed by retired Supreme Court judge Eliyahu Winograd, has just published its interim report.
Its criticism of Olmert, Defense Minister Amir Peretz, and Chief-of-Staff Dan Halutz – set forth in a detailed and meticulous 117-page assessment – is harsh, but not surprising.
The Winograd Commission articulated what most Israelis already think: Olmert and Peretz lacked the military, security, and policy experience to confront a terrorist organization that raided Israeli territory, killed a number of soldiers and kidnapped two, and then launched thousands of rockets on civilian targets for over a month.
Indeed, the inexperience of the prime minister and the defense minister are unprecedented in Israel’s history.
Olmert, who stepped into Ariel Sharon’s shoes as leader of the new Kadima Party, was considered a competent but lackluster parliamentarian – and later mayor of Jerusalem – who was known more for his polemical style than for his political stature or gravitas.
For most Israelis, even those who voted for him as the bearer of Sharon’s legacy after the Gaza disengagement, Olmert thus remained the accidental prime minister.
Likewise, Peretz, a rabble-rousing but effective trade unionist, surprised all when he won the Labor Party’s leadership primary and then chose the defense portfolio over the treasury.
To many, the duo of Olmert and Peretz seemed to invite trouble.
Precisely because Israelis are aware of the constant security threat facing their country, they have always believed that their leaders should be able to lead Israel in war – but also to ask the military tough questions when diplomacy may fail.
When such a moment arrived, totally out of the blue (or so it seemed) with Hezbollah’s raid on July 12, 2006, Israel’s two top politicians were completely out of their depth, stumbling into a war for which neither they nor the Israeli Army were prepared.
The military was led – for the first time in its history – by an Air Force general, Dan Halutz, who believed that everything could be solved by air power, creating a combustible combination of civilian ignorance and military arrogance.
In measured but devastating prose, the Winograd Commission gives failing marks to all three leaders.
Olmert decided to go into battle recklessly and unaware of the consequences.
Peretz was unable to gauge the strategic implications of his decisions.
And Halutz failed to present the civilian leadership with the full panoply of military options at the army’s disposal.
Halutz already resigned a few months ago.
But both Olmert and Peretz have declared that, despite the Commission’s conclusions, they would not quit: instead, they have vowed to implement the report’s many far-reaching substantive recommendations about policy, strategy, and decision-making processes.
Will Olmert and Peretz be able to stay on?
Their coalition government enjoys a comfortable parliamentary majority; nor does the political arithmetic imply a viable parliamentary alternative.
But public opinion – volatile and angry – calls for both to resign: a public-opinion poll conducted after the Commission published its report indicated that only 14% of Israelis believe that Olmert should keep his job, while less than 11% support Peretz.
Later this week, demonstrations calling for the government's resignation are planned, and it will become obviously more difficult for the government to continue to function.
There are already rumors about a palace coup within Kadima, aimed at replacing Olmert with either the deputy prime minister, the veteran Shimon Peres, or the popular foreign minister, Tzipi Livni.
But it does not appear that Olmert will allow himself to be pushed out.
In fact, Olmert’s weak and discredited government may yet survive.
If the government were to fall and new elections held, there are strong indications that the winner might be Binyamin Netanyahu, of the right-wing Likud, which was decimated in the 2006 elections, but is now patiently waiting in the wings.
Many who want Olmert to go would still not welcome a Netanyahu comeback, which may also explain what appears to be an indirect endorsement of Olmert by the United States.
Only a strong Israeli government can make the painful decisions necessary for negotiations with the Palestinians to succeed.
As a result, the prospects for meaningful continuation of Israeli-Palestinian talks look even dimmer than they did before.
Indeed, the real loser of the 2006 Lebanon war was neither Israel nor Hezbollah, but, at least for the time being, the peace process.
Will Rising Interest Rates Torpedo Stock and House Prices?
Interest rates around the world are poised to rise.
Short-term rates have gone so low since the worldwide recession of 2001 - 1% and 2%, respectively, in the United States and the Eurozone, and practically zero in Japan - that a strengthening world economy will force central banks to tighten the monetary reins.
Australia's central bank has already been raising rates since May 2002, and Great Britain's since November 2003.
In the US, the two-day Federal Open Market Committee meeting on June 29-30 is likely to mark a major turning point, reversing the steady decline of the benchmark federal funds rate since Alan Greenspan began loosening monetary policy in 2001.
This is likely to be followed by rate increases in China, the Eurozone, and elsewhere.
Given the tendency of central banks to change interest rates gradually, any change of direction likely means more changes in the same direction later.
What will this landmark change mean for prices of such assets as stocks and homes?
In theory, when interest rates go up, there is reason to believe that asset prices will go down.
The higher interest rates go, the better are investments in bonds, which compete with investments in other assets such as stocks or homes.
Higher interest rates also raise the cost of borrowing to buy these assets, which may diminish demand for them, exerting downward pressure on their prices.
When interest rates fall, the opposite effect on asset prices may be predicted.
In fact, the history of the stock market's reactions to changing interest rates is mixed.
Sometimes interest rate changes have the predicted effect, sometimes they don't.
For example, the NASDAQ stock price index made a spectacular 14% jump upwards on the day (January 3, 2001) when America's Fed began its latest series of interest rate cuts. A jump in the market is what one might have expected.
But then the NASDAQ index fell 22% over the following year, although the Fed continued to cut interest rates aggressively.
Does that experience suggest that the NASDAQ index will drop sharply if the Fed raises interest rates on June 30?
No.
The timing of the 2001 rate decrease stunned the market.
By contrast, the Fed is widely expected to raise rates at the end this month, so there will be no surprise element.
The market may know, not just from the experience of 2001-2, that interest rate movements do not have predictable effects on stock prices.
But, there are reasons to believe that higher interest rates, even though expected, can have a negative impact on home prices.
That is because home buyers are mostly ordinary people with little financial sophistication, unlike the professionals who trade in stocks.
Untrained people with other things on their minds can make serious economic errors.
Home values have soared to high levels in many countries as irrational exuberance grips the markets.
High home prices are already putting great stress on many families, which are struggling to make their mortgage payments.
When interest rates go up, these payments will (when the rate is variable) also go up, possibly becoming unsustainable.
If one borrows the equivalent of three years' income to buy a house, a mortgage rate of 6% means that 18% of one's income goes to interest payments, which may be tolerable.
But if the rate rises to 8%, mortgage interest payments rise to 24%, which, together with amortization, taxes, other debts, and necessary expenditures, may claim too much of the family budget.
Some will then try to sell their overpriced homes, and the resulting market imbalance will cause prices to fall.
People with fixed-rate mortgages are also vulnerable to rate increases, though less directly.
This is because if they have to move and sell their house, there may be no buyers who can afford higher interest payments, unless the home's price also falls.
By contrast, sophisticated investors, such as big stock market players, are unlikely to fall prey to this trap.
But homebuyers are not as savvy, so they may not see the change coming or they may fail to plan for it.
As psychologists have shown, people are susceptible to "wishful thinking bias," wishing away possible future problems that they would rather not think about.
They may overemphasize the likelihood of economic success ("I will be making a lot more money in a few years") and underemphasize the commonplace problems that regularly challenge family budgets ("I will be losing my job or getting a divorce").
This blithe attitude is ultimately behind real estate bubbles where they are occurring.
Low interest rates did not cause the bubbles. They only made it easier for people, in those areas of the world where there is a half-believable story about a fabulous future economy, to indulge their fantasies.
Interest rate increases will deliver a fresh dose of reality: the interest expense of owning a home is going to claim a larger share of family budgets, a hard fact that will eventually sink into our thinking.
But declines in home prices will not occur quickly when central banks begin to raise interest rates.
After two years of rate increases, Australia's home price boom only recently shows signs of abating.
Dominated by amateur investors, home markets do not turn on a dime.
In places where home prices have been rising rapidly, the upward trend may continue or level off for a while.
In most high-priced places, a real decline may not come for some time.
Will Success Spoil Brazil?
RIO DE JANEIRO – Brazil has been making international headlines of late, but not for traditional stories about urban violence, natural catastrophes, political corruption, or deforestation in the Amazon.
At the G-20 Summit in London last April, for example, US President Barack Obama called for the world to pay heed to Brazilian President Luiz Inácio Lula da Silva, the “most popular politician on earth,” and shook hands with him, saying: “My man right here.
I love this guy.”
In September, the ousted president of Honduras, Manuel Zelaya, reappeared in the country inside the Brazilian embassy in Tegucigalpa after three months of exile.
Although his presence dramatically fuelled the situation for a time, Brazilian diplomats, working with the US, were able to reach agreement with Honduran authorities to allow Manuel Zelaya to return to office.
Then came the news that Brazil will host the 2016 Summer Olympic Games – this coming on top of hosting the 2014 World Cup.
As for the global – and fortunately now abating – economic crisis, Brazil has shined throughout, recording a fast and strong recovery. And, as if this good news were not enough, Brazil’s giant state oil company, Petrobrás, is already at work developing two huge deep-water oil fields discovered in the sea off the coast of Rio de Janeiro.
For these and other reasons, Brazil is gaining the world’s attention.
Brazilian democracy, at long last, is working well, following many years of military government, and its economy seems more robust than ever.
As a result, many people are enthusiastically pointing to an increased international role for Brazil in the future.
But two connected and major challenges lie ahead for Brazil and its government: the need to build a far more equal society and to resist the temptation to use nationalism to mask whatever domestic failures may manifest themselves.
Brazil’s current success is rooted not only in Lula’s two terms, which must end in 2010.
The economic stabilization program enacted by Fernando Henrique Cardoso since 1994 (the Real Plan), first as finance minister and then as president for two terms, solidified a structure that made it possible for Lula’s tenure to be so prosperous.
This is not meant to take anything away from Lula.
His presidency has guaranteed political stability and strengthened social cohesion.
Indeed, by managing the political process to make the government work for Brazil’s people, Lula’s administration has made Brazil a truly stable and consensual democracy.
There is nothing modest about that achievement, given Brazil’s traditional institutional instability and the series of major corruption scandals that engulfed Lula’s government in 2005 and 2006.
Lula survived those scandals and did not move to amend the constitution in order to seek a third term, though some in Brazil pressed him to do so.
Lula also enacted critically important social policies.
Under his government, two million homes received electric power for the first time, 11 million very poor families gained the support of a minimum income (the Bolsa Família), the minimum salary grew 45% in real terms, thus benefiting 42 million people.
Moreover, eight million jobs were created, 17 million people escaped poverty, and the income of the poorest 50% grew 32% – twice as fast as the income of the richest 10% in the same period.
And Lula achieved all this without triggering inflation, which he knows – perhaps a result of his own impoverished childhood – wreaks havoc on the poor most of all.
This vast transformation has not only generated a virtuous circle that strengthened institutional stability and social capital.
It has also differentiated Brazil from other countries in Latin America, putting the country in the forefront in the region in terms of dealing with traditional social and economic injustices in a democratic way.
Yet the remaining challenges are huge, for Brazil remains the seventh most unequal society in the world – and severe violence persists.
Sixty-four percent of Brazilian homes lack electricity and sanitation, and only 22% have electricity, a telephone, a computer, a refrigerator, a television, and a washing machine.
In the poorest region, the North and Northeast, the numbers fall to 8.6% and 8.3%.
Among the young, almost 37% of 18-24-year-olds do not finish high school.
Only half the population over age 25 has more than eight years of formal education.
As for Brazil’s international role, a subtle competition is emerging with the US.
America wants to conclude as many free-trade agreements in the region as it can, while Brazil favors expanding its custom union, Mercosul/Mercosur.
The entrance of Venezuela into the Brazilian bloc, Brazilian leadership at the United Nations mission in Haiti, and Brazil’s role in the Honduran affair are all part of this emerging competition.
If Brazil is to remain on its prosperous path, it must continue to give higher priority to its social and economic programs than to foreign adventures.
The construction of a major egalitarian, free, and democratic society that respects and works with the international institutions is the best thing that Brazil can give to the world right now.
Will Syria Come in From the Cold?
ISTANBUL – Will the recent rapprochement between the United States and Syria mark a new era in Syria’s international standing?
Syria can hope for two major changes following the restoration of full diplomatic relations with the US.
First, it will be removed from America’s informal blacklist of “Axis of Evil” countries, which will substantially improve its chances to enter the World Trade Organization.
Second, Syria will probably receive the go-ahead for a pipeline to bring Iraqi oil across its territory to Turkey.
Such a link to Turkey’s economy – and thus possibly to the European Union – would encourage Syria to open its economy even more to foreign investment.
But all of this will undoubtedly come at a price.
Syria’s side of the bargain will invariably need to be an end to its support for Hezbollah in Lebanon, for which it will likely seek the return of the Golan Heights.
Israel would presumably resist this outcome, and Iran – as leader of the so-called “Shia crescent” spreading from Lebanon to Tajikistan – would strongly, and perhaps violently, oppose such a bargain as well.
During Iranian President Mahmoud Ahmadinejad’s visit to Syria earlier this year, Syria’s President Bashar Assad and he reiterated their unyielding cooperation in the face of “Western manipulations.”
But Assad is under growing pressure from the ranks of his Baath Party to modernize the country and its infrastructure, which is impossible without improved ties to the West.
Syria’s economy is a rust pile.
With a per capita income of $2,000, it has been closed to the outside world until recently.
Rationing is pervasive.
But, in order to secure public support, Assad’s government has allowed for greater domestic consumption, so foreign imports are rising fast.
Indeed, the country has run a trade deficit since 2005, with no path back to balance in sight.
Supposedly “friendly” countries like Iran have been giving a helping hand, but almost always in the form of oil – and not even refined oil – rather than cash.
The effort to liberalize foreign investment has not taken up the slack in investment from the regime’s regional political partners.
For example, the Foreign Investment Law of 2007, which fixed a 15-day deadline for projects to be authorized, has resulted in only $200 million in new inward investment.
This lack of investment has left the economy, particularly the oil industry, in a shambles.
A member of OPEC, Syria is now a net importer of oil.
The ruling Shia elite that surrounds President Assad – and that, together with the military oligarchy, retains almost total control of the economy – appears to be interested mainly in preserving the stagnant status quo.
In opposition stand Syria’s Sunni traders, who are joined in demanding a change in the rules of the game by the country’s various minorities, composed of two million Christians, 1.7 million Kurds, and 400,000 Druze.
The combined economic weight of the Christians – Nestorians, Maronites, Catholic Greeks, and Syriacs – is greater than their actual number, and the Bathist regime has always sought to accommodate these minorities.
But it was only with the accession to power of Bashir al Assad that they were given more economic and political breathing space.
Assad has good reason to do so, because the unequal distribution of wealth, combined with an official unemployment rate of 15%, is fueling social pressure.
The $3 fare for a bus ride between Aleppo and Damascus might look cheap to someone from outside Syria, but, given that a well-trained technician may earn only $150 monthly, it is almost prohibitively expensive.
A warming of relations with the US could set in play two types of dynamics: one originates with the OECD’s development initiative for the Middle East and North Africa (MENA), created in 2004.
For the first time, the OECD became directly involved with non-member countries in the Middle East, and in 2009 Syria was included in its development cooperation master plan.
The second positive dynamic may come from improved Turkish-Syrian economic ties.
Bilateral relations started to thaw 12 years ago, when Syria expelled the leader of the violent Kurdish separatist PKK movement, Abdullah Ocalan.
A Turkish-Syrian Business Council was established soon after with the hope of developing economic relations, but little impact has been felt, owing to Turkey’s lingering suspicion of Syria’s political alignment.
The only Turkish investment was made in the textile field by the firm Akteks.
Last year, however, as Prime Minister Recep Tayyip Erdogan pushed forward on strengthening Turkey’s Middle Eastern ties, visa requirements between the two countries were eased, with cross-border car traffic increasing 22% in five months.
Regular bus lines have been opened, and, according to a high-ranking Turkish bank official, “We were hesitating about opening a branch in Syria because of the US embargo, so the sending of an envoy is like a green light to us.”
For Syria, the choice now is between seizing this opportunity to open its economy, or retreating back into its Baathist shell. The benefits of such an opening are clear.
The question is whether Syria’s rulers can make the political choices necessary to obtain them.
Will the Bond Bubble Burst?
Unless inflation drops much more, now is an ideal time to be a borrower and a bad time to be a lender or investor in long-term bonds.
Indeed, in many countries, exaggerated fears of deflation are keeping interest rates depressed and the cost of capital at historic lows.
The lowest rates were seen on June 13 th .
Ten-year bonds in the US yielded 3.11%, not much above the 2.1% inflation rate of the past 12 months.
Ten-year government bonds in the Euro-area yielded 3.54%, while the Euro-area inflation rate was 1.9%.
The yield in the UK was 3.86%, while inflation was 3%, and Japanese bonds yielded 0.44%, compared with inflation of -0.1%.
In each case, a small increase in today's very low inflation rates would eliminate any real gain from investing in bonds.
If low long-term rates do not hold, long-term bond prices will drop sharply, leaving investors with a loss.
The history of developed-country bond markets in the last half-century is relatively straightforward.
Consumer inflation increased fairly steadily (albeit with major short-run swings), until the oil crises of 1973-4 and 1979-81 propelled it to historic highs in Europe, North America, Japan and other countries.
Afterwards, the trend was reversed, and inflation declined fairly steadily.
The oil crises marked a political as well as an economic turning point.
Until that time, central banks, fearing recession, were gradually losing their grip on inflation.
But public anger over sky-high price growth precipitated by the oil crises finally allowed central banks to tighten credit and smother inflation with massive global recessions.
Corporate managers, meanwhile, got the public support needed to resist many cost-of-living allowances that were fueling a wage-price spiral.
The general investing public never really understood these trends.
They did not comprehend the upward trend in prices before 1980, so bond yields, lagging behind rising inflation, were too low.
In the US, ten-year US Treasury yields averaged only 1.46% above the inflation rate between 1953, when annual average inflation was only 0.63%, and March 1980, when inflation peaked at 14.66%.
Nor did the investing public fully comprehend the downtrend in inflation after 1980, so long-term bond yields, lagging behind falling inflation, were too high.
In the US, yields on ten-year Treasuries have averaged 4.14% above the rate of inflation throughout the period of declining inflation that began in April 1980.
The public's failure to recognize inflation trends meant that long-term bonds were a terrible investment until 1980, when inflation was only a little lower than yields, and a lucrative investment thereafter, when declining inflation and high yields guaranteed large real gains.
Investors are again making the mistake of pricing bonds in expectation that the downward trend of inflation will continue into deflationary territory.
Indeed, today's low long-term rates suggest that investors are projecting the downward trend to continue over the next ten years at the same pace that it has done since 1980, implying that the current US inflation rate of 2.1% would fall to zero or below by 2013.
Is this reasonable?
Almost certainly not.
No central bank would permit deflation for long, and the current level of inflation probably represents the lower boundary that most monetary authorities consider acceptable.
At the same time, there is no such clear upper bound to inflation.
So with inflation rates near their long-term lower bound, the expectation should be for higher , not lower, inflation rates over the longer term.
The current situation in the bond markets does not reflect this because of public overreaction to the talk of deflation, with Japan used as a scarecrow.
But even in Japan, annual deflation has been only about 0.7% since 1998, and was caused by a monetary-policy error unlikely to be repeated.
Japan is really the only example of advanced-country deflation in the post-1945 era.
So why should bad policy by the Bank of Japan set the trend for world inflation rates?
Indeed, the opposite may be the case: combating deflation could have the perverse effect of creating high inflation.
This is what Masuru Hayami, the former governor of the Bank of Japan, feared when he resisted calls for more monetary stimulus.
He was right to worry: a sharply expanding money supply may have unexpected and unquantifiable lagged effects.
The kinds of heterodox monetary policy that might be used to prevent deflation similarly risk an overreaction and renewed inflation.
But fear of deflation is so widespread nowadays that if inflation overshoots the target, central banks will merely try to stop further inflation, rather than try to bring the consumer price level back down which would mean deflation.
Then any inflationary monetary policy errors driven by exaggerated fears of deflation will be allowed to stand, and the cumulative inflation will offset any returns on investments in long-term bonds.
Today's fears about deflation may represent a historic turning point, much as when the public mood turned decisively against inflation around 1980.
Conventional wisdom has changed, and many people will be breathing a sigh of relief when inflation rates rise above 3% or more in the US and elsewhere.
If we have arrived at such a turning point, as the trend in bond markets in recent weeks might suggest, it will be a turning point for interest rates and bond prices as well.
The current combination of exceptionally low yields and high prices suggests that much of the world is in a bond-market bubble, and when it bursts in coming years, a period of higher long-term interest rates and lower long-term bond prices will follow.
Will the Euro Dethrone the Dollar?
Much of America’s dominance in world finance comes from the dollar’s status as international money.
America’s commitment to free capital markets, the rule of law, and price stability confer credibility on the dollar as a store of value.
But American spending habits have undermined the dollar’s reputation, with the excess supply of dollars on world markets depressing its price.
This spring, the euro’s exchange rate against the dollar reached an all-time high, and central banks have increased the euro share of their international reserves.
Is the dollar about to lose the crown of world finance to the euro?
History suggests otherwise, despite a vulnerable dollar.
American financial supremacy in the twenty-first century resembles Britain’s position in world finance a century ago.
Before the outbreak of World War I in August 1914, the pound sterling served as the currency of choice for international transactions, just as the dollar does today, and the world’s borrowers visited the City of London to raise capital.
The British economist John Maynard Keynes worried that countries would not use sterling to settle trading balances with each other if the pound were not viewed as a reliable store of value.
The “future position of the City of London,” according to Keynes, depended on the pound sterling continuing to serve the business world as the equivalent of gold.
Britain maintained the pound’s convertibility into gold at the outbreak of the Great War to preserve its credibility as the international medium of exchange.
The dollar could not challenge sterling’s role as the world’s currency without matching its reputation.
August 1914 provided the opportunity.
The biggest gold outflow in a generation imperiled America’s ability to repay its debts abroad.
Fear that the US would abandon the gold standard sent the dollar plummeting on world markets.
But Treasury Secretary William G. McAdoo secured American financial honor in August 1914 by remaining true to gold while everyone else, except for the British, abandoned their obligations.
Despite the dollar’s instant credibility, however, it took more than a decade for America’s currency to match Britain’s as an international medium of exchange.
Payment habits melt at a glacier’s pace.
Britain’s transformation from international creditor to international debtor during the Great War gave the dollar a second wind in its battle with sterling.
The British were forced to abandon gold convertibility in April 1919 – a tactical withdrawal intended to pave the way for Britain’s return to the former $4.8665 parity with the American dollar.
Six years later, in April 1925, Britain confirmed its monetary credibility and returned to the gold standard.
But the pound had already suffered irreparable damage.
The experience of 1914 implies that a credible alternative can replace an entrenched world currency, especially after an unfavorable balance of trade has weakened it.
But even then, dethroning the reigning king of international exchange takes time.
Today, the euro – a currency without a country – lacks a long track record of credibility.
Thirteen countries in the European Union use the euro as money.
But the commitment of these independent political entities to the euro cannot match the history of America’s commitment to the dollar.
The European Central Bank, established in 1998, has a mandate to manage the new currency to maintain price stability.
But the ECB needs time to establish its inflation-fighting credentials.
It cannot hitch a ride on gold, the way America did a century ago.
So the euro must earn its reputation crisis by crisis to confront the dollar’s dominance as the currency of choice for international transactions.
Recent experience with the euro as an official reserve asset is instructive.
Between 2000 and 2005, the dollar lost more than 25% of its value against the euro.
Meanwhile, the fraction of international reserves held in euros grew from 18% to 24%, and the dollar’s share dropped from 71% to 66%.
In short, the euro has clearly made some headway during this period of US balance of payment deficits, but this reflects an evolutionary decline in the dollar’s dominance, not a revolutionary regime shift.
What might trigger a fatal run on the dollar in world markets?
While a broad and abrupt sell-off by major foreign holders of dollars – for example, China – appears unlikely, a cataclysmic event, similar to the outbreak of the Great War in 1914, could prompt a search for a new international medium of exchange.
In the modern era of automated payments, the upheaval might come from a terrorist attack that undermines the computerized transfer facilities of the world’s banking system.
A catastrophic loss of electronic records could surely destroy the credibility of the dollar as the international medium of exchange.
But exactly what would replace the dollar under such circumstances remains an open question.
After all, a loss of computer records would make the euro equally suspect.
Perhaps gold, a store of value impervious to physical distortion, could make a comeback.
Of course, one can only hope that such a scenario remains pure conjecture.
Will the Euro Survive the Current Crisis?
CAMBRIDGE – The European Economic and Monetary Union (EMU) and the euro are about to celebrate their tenth anniversary.
The euro was introduced without serious problems and has since functioned well, with the European Central Bank delivering the low inflation that is its sole mandate.
But the current economic crisis may provide a severe test of the euro’s ability to survive in more troubled times.
While the crisis could strengthen the institutions provided by the EMU, it could also create multiple risks, of which member countries need to be aware if they want to avoid them.
The primary problem is that conditions in individual EMU members may develop in such different ways that some national political leaders could be tempted to conclude that their countries would be better served by adopting a mix of policies different from that of the other members.
The current differences in the interest rates of euro-zone government bonds show that the financial markets regard a break-up as a real possibility.
Ten-year government bonds in Greece and Ireland, for example, now pay nearly a full percentage point above the rate on comparable German bonds, and Italy’s rate is almost as high.
There have, of course, been many examples in history in which currency unions or single-currency states have broken up.
Although there are technical and legal reasons why such a split would be harder for an EMU country, there seems little doubt that a country could withdraw if it really wanted to.
The most obvious reason that a country might choose to withdraw is to escape from the one-size-fits-all monetary policy imposed by the single currency.
A country that finds its economy very depressed during the next few years, and fears that this will be chronic, might be tempted to leave the EMU in order to ease monetary conditions and devalue its currency.
Although that may or may not be economically sensible, a country in a severe economic downturn might very well take such a policy decision.
The Stability and Growth Pact, which limits euro-zone members’ fiscal deficits, is another reason why a country might want to leave the EMU. In a serious downturn, a country may wish to pursue a traditional Keynesian policy through large-scale, deficit-financed fiscal stimulus.
Although the Stability and Growth Pact may be elastic enough to permit some deficit stimulus, a country may feel constrained from acting as aggressively as it wants.
The current financial crisis raises yet another problem: the lack of a clear “lender of last resort.”
It remains to be seen how willing the ECB will be to provide national central banks with the volume of euros needed to play this role fully.
If a country sees its banks failing because its national bank cannot lend them enough, it may chose to leave the EMU so that its central bank can provide whatever amount of local currency it deems necessary.
Moreover, the current economic crisis has led to renewed talk about the need for the European Union to have taxing authority.
Whatever the logic of that proposition, it would open the door to much greater income redistribution.
High-income countries might find that reason enough to want out.
Even if officials do not want to abandon the euro, they may come to do so as a result of a strategy of trying to get other countries to agree to a policy change.
A country that believes that monetary or fiscal policy is too tight may threaten to leave if policy is not changed.
That is clearly a substantial risk if the country is Germany or France.
But even if it is one of the smaller countries, it might be a serious threat because it could be seen as the beginning of the end.
So either type of country could make the threat in the hope that it would be enough to cause their EMU colleagues to agree to their desired change in policy.
The risk, of course, is that the other countries may not be intimidated.
The threatening country would then have to choose whether to accepting a humiliating defeat and stay, or stand on “principle” and leave.
All of this assumes that political leaders would select only a policy change that they think will be in their nation’s long-term interest.
But there is also a risk that some politicians act solely out of self-interest, seizing on the economic downturn as an opportunity to get elected by promising to withdraw the country from the EMU, or by saying that they will threaten to do so if the other member countries do not agree to their proposed policy changes.
None of these risks implies that the monetary union will inevitably be a victim of this severe economic downturn.
But the downturn will be a more severe test for the euro than any that it faced during its first ten years.
Will the IMF Stand Up to Europe?
CAMBRIDGE – As the eurozone crisis continues to deepen, the International Monetary Fund may finally be acknowledging the need to reassess its approach.
New Managing Director Christine Lagarde’s recent call for forced recapitalization of Europe’s bankrupt banking system is a good start.
European officials’ incensed reaction – the banks are fine, they insist, and need only liquidity support – should serve to buttress the Fund’s determination to be sensible about Europe.
Until now, the Fund has sycophantically supported each new European initiative to rescue the over-indebted eurozone periphery, committing more than $100 billion to Greece, Portugal, and Ireland so far.
Unfortunately, the IMF is risking not only its members’ money, but, ultimately, its own institutional credibility.
Only a year ago, at the IMF’s annual meeting in Washington, DC, senior staff were telling anyone who would listen that the whole European sovereign-debt panic was a tempest in a teapot.
Using slick PowerPoint presentations with titles like “Default in Today’s Advanced Economies: Unnecessary, Undesirable, and Unlikely,” the Fund tried to convince investors that eurozone debt was solid as a rock.
Even for Greece, the IMF argued, debt dynamics were not a serious concern, thanks to anticipated growth and reforms.
Never mind the obvious flaw in the Fund’s logic, namely that countries such as Greece and Portugal face policy and implementation risks far more akin to emerging markets than to truly advanced economies such as Germany and the United States.
As the situation deteriorated, one might have guessed that the IMF would mark its beliefs to market, as it were, and adopt a more cautious tone.
Instead, at the IMF’s April 2011 interim meeting, a senior official declared that the Fund now considers troubled Spain to be a core eurozone country like Germany, rather than a peripheral country like Greece, Portugal, or Ireland.
Evidently, investors were supposed to infer that for all practical purposes they should think of Spanish and German debt as identical – the old hubris of the eurozone.
My own sarcastic reaction was to think, “Oh, now the IMF thinks that some of the core eurozone countries are a default risk.”
Having served as the IMF’s chief economist from 2001 to 2003, I am familiar with the Fund’s need to walk a tightrope between building investor confidence and shaking up complacent policymakers.
But it is one thing to be circumspect in the midst of a crisis; it is quite another to spew nonsense.
The late Chicago-school economist George Stigler would have described the IMF’s role in Europe as reflecting acute “regulatory capture.”
Simply put, Europe and the US control too much power in the IMF, and their thinking is too dominant.
What European leaders may want most from the Fund are easy loans and strong rhetorical support.
But what Europe really needs is the kind of honest assessment and tough love that the Fund has traditionally offered to its other, less politically influential, clients.
The IMF’s blind spot in dealing with Europe until now is only partly due to European voting power.
It also stems from an “us” and “them” mentality that similarly permeates research at the top Wall Street investment houses.
Analysts who have worked their entire lives only on advanced economies have learned to bet on things going well, because for the couple of decades prior to the crisis, things mostly did go well – very well.
That is why, for example, so many keep assuming that a normal rapid recovery is just around the corner.
But the financial crisis should have reminded everyone that the distinction between advanced economies and emerging markets is not a bright red line.
In his recent speech in Jackson Hole, Wyoming, US Federal Reserve Chairman Ben Bernanke forcefully complained that political paralysis has possibly become the principal impediment to recovery.
But analysts accustomed to working on emerging markets understand that such paralysis is very difficult to avoid after a financial crisis.
Rather than slavishly believing policymakers’ assurances, emerging-market researchers have learned to be cynical about official promises.
All too often, everything that can be done wrong will be done wrong.
The IMF needs to bring much more of this brand of skepticism to its assessment of eurozone debt dynamics, instead of constantly seeking strained assumptions that would make the debt appear sustainable.
Anyone looking closely at Europe’s complex options for extricating itself from its debt straightjacket should realize that political constraints will be a huge obstacle no matter which route Europe takes.
Even outside Europe, the IMF has long given too much credence to sitting governments, rather than focusing on the long-term interests of the country and its people.
The Fund is doing Europe’s people no favor by failing to push aggressively for a more realistic solution, including dramatic debt write-downs for peripheral eurozone countries and re-allocating core-country guarantees elsewhere.
Now that the Fund has squarely acknowledged the huge capital holes in many European banks, it should start pressing forcefully for a comprehensive and credible solution to the eurozone debt crisis, a solution that will involve either partial breakup of the eurozone or fundamental constitutional reform.
Europe’s future, not to mention the future of the IMF, depends on it.
Will the Iraq War Kill Globalization?
The UN and NATO are widely perceived as damaged, if not broken, by their failure to agree on what to do about Iraq.
Will these cracks in the international political system now wound the world's economic architecture, and with it globalization, as well?
International economic agreements have never been easy to make.
Reaching consensus among the World Trade Organization's 145 members, where one dissent can cause utter disarray, was difficult even before the world's governments divided into pro- and anti-American camps.
Indeed, multilateral trade agreements were being eclipsed by bilateral deals, such as between the EU and various developing countries, long before the divisions over Iraq appeared.
Of course, the problem goes deeper and not everything that touches globalization has turned dark.
Immigration controls, for example, have been relaxed in several European countries (notably Germany) due to declining populations and educational shortcomings.
But bad economic times are rarely moments when governments push bold international economic proposals.
Economic fragility among the world's leading economies is the biggest stumbling block.
The US and the EU have few fiscal and monetary levers left to combat weak performance.
Short-term interest rates in the US, at 1.25%, are at a 40-year low.
Congress has pared $100 billion from the Bush administration's 10-year $726 billion tax cut plan, and the US's projected 10-year $2 trillion budget deficit will grow as the Iraq war's costs mount, with President Bush submitting a supplemental request for $80bn (0.8% of GDP) in extra military spending this year.
Such spending risks absorb productive resources that could be employed more efficiently elsewhere.
This was demonstrated by the rapid growth of output and incomes that followed the arrival of the so-called "peace dividend" which came with the Cold War's end.
Moreover, others (Arab countries, Germany, and Japan) will not cover America's military costs, as in the 1991 Gulf War.
We are now back to the more usual situation where war is financed by government debt, which burdens future generations unless it is eroded by inflation.
In the Eurozone the scope for fiscal stimulus (lower taxes and/or higher public spending) was constrained until war blew a hole in the Stability Pact, which caps member budget deficits at 3% of GDP. The limit will now be relaxed due to the "exceptional" circumstances implied by the Iraq war-providing relief, ironically, to the war's main European opponents, France and Germany.
But the European Central Bank remains reluctant to ease monetary policy.
In Japan, there seems little hope that the world's second-largest economy can extricate itself from its homemade deflation trap to generate the demand needed to offset economic weakness elsewhere in the world.
Four years of deflation and a drawn-out banking crisis offer little prospect of economic stimulus.
Higher oil prices and lower trade turnover aggravate the problem.
But high oil prices threaten the health of the entire $45 trillion world economy.
Oil prices have flirted with their highest level since the Gulf War and will go higher if Iraq's oil infrastructure (or that of neighboring countries) is damaged.
The adverse effects on growth will be felt everywhere, but nowhere more, perhaps, than in the energy-dependent South Korea and China.
Although China's official growth rate reached 8% in 2002, its high budget deficit and large stock of non-performing loans (about 40% of GDP) mean that it cannot afford any slowdown if it is to keep people employed, especially in rural areas.
Some poor economies will be directly damaged by the loss of the Iraq market, which accounts for roughly 40% of Vietnam's tea exports and 20% of its rice exports.
For others, weakness in the world's big economies may be compounded by political risks.
Turkey has suffered from rising oil prices, falling tourism income (its second-largest source of foreign exchange), and declining foreign investment.
Now the Erdogan government's lukewarm support for US policy on Iraq exposes Turkey to doubts about America's commitment to its economic well being, and global markets may question its ability to service its $100 billion public-sector debt in 2003 and 2004.
The test of whether multilateral cooperation can be put back on track, and reconciled with America's war against terrorism and the spread of weapons of mass destruction, may come with Iraq's reconstruction.
With the costs of ousting Saddam Hussein and occupying Iraq likely to run at anywhere from $100 to $600 billion over the next decade, the US will want to "internationalize" Iraq's reconstruction.
Iraq's $20 billion annual oil revenues cannot meet such costs.
Indeed, those revenues will scarcely cover the costs of rebuilding basic infrastructure, feeding and housing displaced populations, and paying for the country's civil administration.
After the ouster of the Taliban last year, the $4.5 billion of reconstruction aid pledged to Afghanistan's new government demonstrated that a multilateral approach to reconstruction is possible.
But the poisoned atmosphere that followed the UN debates on Iraq may prevent the US from getting its way here.
Already, French President Jacques Chirac has promised to veto any Security Council resolution on reconstruction that seeks to justify the war.
If the world economy is to recover, the diplomatic failures and name-calling must end.
Will the Meek Inherit Russia?
MOSCOW – In a recent interview, Russia’s President Dmitri Medvedev proclaimed that he wants a second term in office following the 2012 election, but that he would not run against Prime Minister Vladimir Putin, who put him in power in the first place.
Such a rivalry, Medvedev implied, would damage the country’s well-being and image.
Medvedev’s statement should end speculation about whether he is running, yet it keeps the suspense alive regarding Putin, whose influence is far greater than that of Russia’s meek president.
Many, particularly in the West, would like to see Putin and his prickly, anti-Western authoritarianism pass from the scene.
Indeed, over the last ten years, Russian foreign policy has been animated by defensiveness and suspicion.
Russia even has uneasy relations with the congenitally non-threatening European Union.
It is touchy about the independence of the near-abroad countries, especially those politically or geographically close to the West – Belarus, Moldova, Ukraine, and Georgia.
More than a decade after the fact, the Kremlin still decries NATO’s eastward enlargement as a security threat.
The reality, of course, is that NATO is as much of an offensive threat to Russia as Switzerland is.
But it is not NATO’s military power that Putin’s Kremlin finds alarming; the real threat is the alliance’s potential to “swallow” Moldova or Ukraine at some point.
Creating a precedent for the democratization of post-Soviet space is a nightmare scenario for Putin and his cronies.
As in Soviet times, the main task of today’s ruling elite – Putin and his former KGB associates – is to preserve their tight-knit political and economic regime, built for their personal control and material benefit.
Russian foreign policy is, as it was under the Soviets, an extension of official domestic priorities.
The current regime is clearly autocratic.
Yet it aspires to democratic legitimacy in the eyes of Russian citizens and the international community.
It is to this end that Medvedev performs his civilizing mission – participating in world forums, posting Twitter updates, berating rampant corruption, and supporting “modernization” and the “rule of law.”
The result of this duality – authoritarian establishment and Potemkin Village democratic façade – is that Russia occupies a unique geopolitical no man’s land.
A democratic Russia would want to catch up with the West and integrate into Western institutions.
Yet this is not in the group interests of Putin’s backers, the people who run, and own, Russia: its security, military, and industrial complex.
Of course, these people have been personally integrated into Europe for two decades now – their money is in European banks; their holiday villas are in the south of France, Tuscany, and the Greek isles; their children are educated in the poshest boarding schools.
So, despite the current regime’s tough, often anti-Western rhetoric, they are not at all interested in closing Russia off from the West.
What they want is to prevent the integration with the West of Russia itself, for that would mean the end of their regime.
But, to sustain the charade of a strong and prosperous Russia, standing against the predations and hypocrisy of the West, the regime cannot be as authoritarian as Putin himself might wish.
If it were, Swiss banks and international organizations would close their doors.
So the regime’s backers have a strong interest in maintaining its “democratic” side.
The West, despite its years of experience in dealing with the Soviets, is still a sucker for such Janus-like behavior, especially now, when Medvedev presents such an endearing democratic face.
In June, speaking at the St. Petersburg Economic Forum, Medvedev mesmerized his audience by simultaneously sounding avant-garde and hackneyed: he attacked corruption, vowed that Russia is not “building state capitalism,” and promised legal and federal reforms.
Decisions, he said, should be left to business or made locally, not in the Kremlin.
The St. Petersburg Economic Forum is mostly for international consumption.
If Western bankers and investors want to buy snake oil, that is their business.
But no one should leave such events thinking that anything Medvedev says means that Russia is changing.
US Vice President Joe Biden, usually a sharp critic of Russia, arrived in Moscow in March, supposedly to convince Putin to surrender his presidential ambitions for 2012.
A month later, talking to Putin by phone, Biden invited him to visit Washington, though, according to Russia’s constitution, the prime minister has no foreign-policy role.
Does the United States support Putin in the elections, or, by recognizing Putin’s historic importance, do the Americans mean to convince him to leave power?
No one knows.
Until Russia’s internal political situation changes, relations with the West will remain unchanged and ambiguous.
Putin, however, would be well advised to listen to Biden, who is rumored to have offered him important international positions, such as chairing the International Olympic Committee, or perhaps even leading the United Nations.
After all, Putin knows well the old Soviet playbook: the fate of previous KGB functionaries may await him.
Dreaded secret-police chief Lavrenti Beria, who operated the machinery of repression under Joseph Stalin, was executed by the system he perfected, after being sentenced to death in 1953 for “spying against the state.”
In his decade in power, Putin has consolidated and strengthened the security forces, intimidated and jailed opponents, and muzzled the media and courts.
If he doesn’t step down or aside so that Russia can move forward, the system he has created may turn his own methods against him.
Will the Next Democratic Revolution Be Egypt’s?
Responses to America’s call for democracy in the Middle East have been tepid at best.
Arab governments feel provoked by President George W. Bush, particularly as he announced his initiative with little regional consultation.
Seeking to pre-empt American action, Egypt backed a counter-proposal, the Alexandria Declaration, at an Arab League summit last May, and followed this with President Hosni Mubarak’s recent announcement that he will allow opposition candidates to challenge him for the presidency.
Is this just another stalling tactic, or an opening to real reform?
What is clear is that the recent elections in Iraq and Palestine, together with the swelling protests against Syria’s distorting influence on Lebanon’s democracy, have reinvigorated debate about political reform within Egypt.
Members of the opposition have argued that the country is compelled to reform itself if it is not to have reform imposed from abroad.
Going further, the managing director of one newspaper claims that delaying political and constitutional reform as if it were a grant to citizens – rather than their right – would invite outside intervention in Egypt’s domestic affairs.
Arab democracy, he claims, has now become a domestic concern in the United States, which will make it hard for American presidents to sweep the abuses of friendly Arab regimes under the rug, as they did in the past.
In the Arab world, authoritarian governments have deprived people of political, civil, and intellectual freedoms for decades.
For young citizens, particularly Islamists, normal channels of political participation have been closed off.
As a result, they have gravitated towards underground extremist movements.
Poverty, cronyism, and official corruption heighten this popular frustration.
In this climate, the momentum for political and constitutional reform in Egypt is gathering pace.
There is great nostalgia for the last liberal experiment (from the 1920’s until the 1952 Revolution), which was a model for other Arab countries.
Egypt’s vibrant political life, press, and liberal culture were then supported by an ideology of secular nationalism and improved religious harmony.
There was a vibrant multiparty parliamentary democracy, with an independent judiciary and one of the world’s earliest movements for female emancipation.
The achievements and aspirations of that liberal experiment today unite Egyptians who favor reform.
They have even inspired the birth of a new political party, Hizb al ghad (the Party of Tomorrow), founded by a young parliamentarian committed to democratic reform.
The party denies the argument that democracy will foster Islamic extremism and claims that it is the delay of reform that presents a major source of danger.
Hizb al ghad recently produced a 48-page draft constitution, aimed at reviving Egypt’s stagnant political life.
Its preamble, which opens with the phrase “We, the Egyptian people,” can be read as a scathing attack on Egypt’s current political order, and calls for an end to fear and despotism.
Among the document’s proposals is an end to the emergency rule imposed since President Anwar Sadat’s assassination in 1981.
That seemingly endless “emergency” has resulted in the severe restriction, or even suspension, of individual and political liberties.
Other provisions include curbing the far-reaching powers granted to the President in the 1971 constitution and introducing direct presidential elections with multiple candidates.
The draft constitution would transform Egypt into a parliamentary republic.
The dominant National Democratic Party (NDP) takes a different view, arguing that political change can be achieved without constitutional reform.
The NDP appears to believe that democratization must begin with changing the political culture and instilling democratic values.
These steps would precede concrete legal and constitutional reforms, such as those proposed by Hizb al ghad.
So far, however, the NDP has missed every opportunity imaginable to gain popular support by proposing a reform program designed to bring real increases in public participation.
This is one reason why Mubarak’s call to hold a multi-candidate presidential election failed to galvanize Egypt’s electorate.
The government, indeed, prefers to offer only hollow initiatives focused narrowly on the economy.
The conflict between the two visions of reform should not obscure the fact that there is a general consensus in Egypt: substantial reform of some kind is necessary and long overdue.
Most importantly, liberal voices in Egypt are not merely a response to US democratic initiatives.
They are a homegrown challenge to an entrenched political order, and they are riding a powerful historical current.
Will the Polluters Pay for Climate Change?
I am writing this in New York in early August, when the mayor declared a “heat emergency” to prevent widespread electricity outages from the expected high use of air conditioners.
City employees could face criminal charges if they set their thermostats below 78 degrees Fahrenheit (25.5 Celsius).
Nevertheless, electricity usage has reached near-record levels.
Meanwhile California has emerged from its own record-breaking heat wave.
For the United States as a whole, the first six months of 2006 were the hottest in more than a century.
Europe is experiencing an unusually hot summer, too.
July set new records in England and the Netherlands, where weather data go back more than 300 years.
The hot northern summer fits well with the release of An Inconvenient Truth, a documentary film featuring former US Vice-President Al Gore.
Using some remarkable graphs, images, and other information, the film makes a compelling case that our carbon dioxide emissions are causing global warming, or, at the very least, contributing to it, and that we must urgently address the issue.
Americans tend to talk a lot about morality and justice.
But most Americans still fail to realize that their country’s refusal to sign the Kyoto protocol, and their subsequent business–as-usual approach to greenhouse gas emissions, is a moral failing of the most serious kind.
It is already having harmful consequences for others, and the greatest inequity is that it is the rich who are using most of the energy that leads to the emissions that cause climate change, while it is the poor who will bear most of the costs.
(To see what you can do to reduce your own contribution, go to www.climatecrisis.net.)
To see the inequity, I merely have to glance up at the air conditioner that is keeping my office bearable.
While I’ve done more than the mayor requested, setting it at 82F (27C), I’m still part of a feedback loop.
I deal with the heat by using more energy, which leads to burning more fossil fuel, putting more greenhouse gases into the atmosphere and heating up the planet more.
It even happened when I watched An Inconvenient Truth: on a warm evening, the cinema was so chilly that I wished I had brought a jacket.
Heat kills.
A heat wave in France in 2003 caused an estimated 35,000 deaths, and a hot spell similar to the one Britain had last month caused more than 2,000 deaths, according to official estimates.
Although no particular heat wave can be directly attributed to global warming, it will make such events more frequent.
Moreover, if global warming continues unchecked, the number of deaths that occur when rainfall becomes more erratic, causing both prolonged droughts and severe floods, will dwarf the death toll from hot weather in Europe.
More frequent intense hurricanes will kill many more.
Melting polar ice will cause rising seas to inundate low-lying fertile delta regions on which hundreds of millions of people grow their food.
Tropical diseases will spread, killing still more people.
Overwhelmingly, the dead will be those who lack the resources to adapt, to find alternative sources of food, and who do not have access to health care.
Even in rich countries, it usually isn’t the rich who die in natural disasters.
When Hurricane Katrina hit New Orleans, those who died were the poor in low-lying areas who lacked cars to escape.
If this is true in a country like the US, with a reasonably efficient infrastructure and the resources to help its citizens in times of crisis, it is even more evident when disasters strike developing countries, because their governments lack the resources needed, and because, when it comes to foreign assistance, rich nations still do not count all human lives equally.
According to United Nations figures, in 2002 per capita emissions of greenhouse gases in the US were 16 times higher than in India, 60 times higher than in Bangladesh, and more than 200 times higher than in Ethiopia, Mali, or Chad.
Other developed nations with emissions close to those of the US include Australia, Canada, and Luxembourg.
Russia, Germany, Britain, Italy, France, and Spain all have levels between a half and a quarter that of the US.
This is still significantly above the world average, and more than 50 times that of the poorest nations in which people will die from global warming.
If a polluter harms others, those who are harmed normally have a legal remedy.
For example, if a factory leaks toxic chemicals into a river that I use to irrigate my farm, killing my crops, I can sue the factory owner.
If the rich nations pollute the atmosphere with carbon dioxide, causing my crops to fail because of changing rainfall patterns, or my fields are inundated by a rise in the sea level, shouldn’t I also be able to sue?
Camilla Toulmin, who directs the International Institute for Environment and Development, a London-based NGO, was present at a lecture on climate change that Al Gore gave in June.
She asked him what he thought about compensation for those who are hit hardest by climate change, but who have done the least to cause it.
The question, she reports on www.opendemocracy.net, seemed to take him by surprise, and he did not support the idea.
Like Toulmin, I wonder if this is a truth that is just too inconvenient, even for him.
Will the Rumsfeld Revolution Continue?
America’s defense policy is at a crossroads.
Since 1997, the United States Congress has required the Department of Defense to undertake a major defense review every four years.
The department is currently developing the third such review and will release it later this year.
The review promises to be nothing short of a watershed.
The last Quadrennial Defense Review was published a few weeks after the September 11, 2001, terrorist attacks. As a result, it gave only hints of the counterterrorism strategy to come.
The 2005 review, by contrast, will represent several years of thinking by the Bush administration, and thus will serve as a key indicator of the future course of American defense policy.
The grand strategy that serves as the foundation for American defense policy has not undergone major change since 2002.
Focusing on terrorism, the strategy calls for strengthening the network of international partners seeking to eradicate transnational terrorism, and for direct action against terrorist organizations and their sponsors.
Ultimately, it seeks to address what President Bush considers the root causes of terrorism, particularly the absence of open political systems and economic opportunity.
What is changing is the way that US military power is used to implement this grand strategy.
There is little doubt that the 2005 Defense Review will formalize the change in focus underway since September 11, 2001.
Before that, the American military concentrated on swift victory in a major theater war against another state’s military forces.
Today, however, the US military is more likely to be used to stabilize and rebuild failed states, assist partners in countering insurgency and terrorism, control nuclear weapons when regimes collapse, or directly eradicate terrorist organizations and their supporters.
This requires a different type of force, and one capable of running a marathon rather than a sprint, sustaining major deployments for extended periods.
The global configuration of America’s military is also changing.
The goal is to keep most of the force stationed at home in the US, with a network of lightly-manned bases abroad that can serve as forward operating locations during a crisis or war.
Rather than being miniature Americas, many of these bases will be operated in conjunction with or by the host nation.
This will capitalize on the US military’s ability to project force around the world quickly, while providing a more flexible and politically palatable way of doing so.
But, beyond the ongoing changes, major strategic questions persist.
First, how much conventional war-fighting capability should the US military retain?
The goal is to maintain enough to deter aggressors, but not so much that it detracts from other, more likely missions.
Second, what will America’s relationship with its traditional allies be?
Will formal alliances such as NATO remain the centerpiece of American strategy, or will they be superseded by mission-specific coalitions?
Third, how much should the US continue to invest in advanced, high-tech weapons more appropriate for conventional enemies than for fighting terrorists or insurgents?
Systems such as the F/A-22 Raptor aircraft and the Army’s Future Combat System are extraordinarily expensive.
At a time when deployments to Iraq and Afghanistan are straining the defense budget and much of the military’s existing equipment needs repair or replacement, questions arise as to whether such programs are a good investment.
Fourth, what is the appropriate size of the US military?
Many defense intellectuals, former military leaders, and politicians believe that America’s military, particularly the ground forces, are too small to implement Bush’s grand strategy.
Secretary of Defense Donald Rumsfeld, on the other hand, believes the size of the military is adequate if it is re-organized for maximum efficiency. He is also concerned that an increase in the size of the military will diminish funds available for advanced technology and systems.
Because Rumsfeld is the primary architect of the upcoming defense review, it is very unlikely to recommend an increase in the size of the force.
The changes underway in American defense policy reflect planning assumptions.
The strategy that emerges will be only as strong as these assumptions are accurate.
The upcoming defense review will mandate changes based on events of the past five years, focusing especially on Iraq, Afghanistan, and other aspects of the war on terror.
The question is whether future American military missions will replicate those of the past five years.
If not, the US might be preparing for the last war rather than the next one.
One hopes that the 2005 Defense Review will address this issue, although it is certain to answer some strategic questions and leave others open to continued debate.
In any case, the new review will serve as a roadmap for future US defense policy, thus affecting America’s partners and adversaries alike.
Will the Sun Still Rise?
TOKYO – The scale of the earthquake and tsunami that struck Japan in March was far greater than even the authorities’ worst scenarios foresaw.
Nearly six months later, the total damage remains difficult to estimate.
Social unrest and confusion, as well as radiation leaks from the Fukushima nuclear power plant, continue.
And now the country has absorbed another huge blow: another downgrade of its bond ratings.
Both Moody’s and Standard &amp;
Poor’s now rate Japanese bonds at only their fourth-highest level.
So what policies should be implemented in response to these economic blows?
Last year, Japan’s economy grew at a relatively healthy 3% annual rate, higher than in the United States or the European Union, owing mainly to the fiscal expansion undertaken after the collapse of Lehman Brothers in 2008.
But growth in 2011 had been predicted to slow even before the earthquake.
Indeed, the economy shrank by 3.5% year on year in the first quarter.
Now, with so much fixed capital and infrastructure destroyed by the earthquake and tsunami, the economy’s productive capacity has fallen by an estimated 2% of GDP.
But that may not be a bad thing: Prior to the earthquake, Japan had a demand-supply gap of approximately 5% of GDP.
While reducing this gap to 3% of GDP has led to higher prices, this is exactly what Japan needs after years of persistent deflation.
Meanwhile, higher public spending on capital investment and other special procurements will boost domestic demand.
The Hanshin earthquake in 1995 destroyed capital stock worth 2% of GDP.
This time, the loss is estimated at 3.4% of GDP, implying a larger increase in domestic demand if the right public policies are pursued.
On the downside, confidence among consumers and investors alike has taken a hit, mainly owing to fears about radiation leakages and power shortages.
According to the Japan Center for Economic Research, power-supply disruptions could negatively affect the Japanese economy for the next three years.
If the Tokyo metropolitan area’s power supply were to decrease by 10% this year, for example, Japan’s GDP would fall by 2%.
Soon after the disaster, the government announced that reconstruction demand and higher prices would bring about relatively rapid economic recovery.
I think this view is too optimistic, because I suspect that the government wants to finance its new expenditure with a tax hike.
Moreover, the extremely sharp contraction in first-quarter GDP may indicate that the disaster’s negative impact on the economy was more significant than expected.
Indeed, the economy is expected to have shrunk by another 2.6% year on year in the second quarter, with growth set to resume only in July-September.
And, contrary to the government’s outlook, the start of economic recovery could be delayed until the end of this year, with medium-term annual growth reaching 1.5- 2%.
A key question has been the disaster’s impact on global supply chains.
According to Japan’s Ministry of Economy, Trade, and Industry, which surveyed firms roughly a month after the earthquake, more than 60% of production sites in affected areas had already recovered as of April 15.
Almost 30% expected to recover by the summer, and the remaining 10% foresaw normal operations after the autumn.
But the impact of even a small number of disruptions to supply chains can be highly significant, particularly for the Asia-Pacific region.
Consider Renesas Electronics, a medium-size company, with ¥150 billion ($1.9 billion) in annual sales, which accounts for more than half of worldwide production of essential micro-computing components for automobiles.
Partly as a result of the damage at Renesas, Toyota’s capacity-utilization rate dropped to 50% at the beginning of May.
Likewise, the chemical manufacturer Kureha (¥130 billion in annual sales) has a 70% share of the global market for adhesive materials for lithium-ion batteries – a small but essential component of cell phones.
Nokia in Finland, for example, imports 12% of its cell-phone components from Japan, and thus could be indirectly affected by the disaster.
As a result, more companies are likely to create and implement business continuity plans. Indeed, “BCP” is set to become a key term in the region’s economic discourse.
Using BCPs to determine alternative producers means that regional economies will be integrated in a new form, with companies establishing cooperative relationships even with their competitors.
Unfortunately, Japan’s public officials appear incapable of similar flexibility.
The disaster confirmed the traditional view of Japan as a country that combines a dynamic private sector with an anemic public sector and central administration.
The government’s mistakes in so-called “risk communication” regarding the Fukushima nuclear plant, and its slowness in getting necessary aid to people displaced by the disaster, have once again put the stereotype on full display.
In terms of international relations, however, the disaster could improve Japan’s bilateral ties with influential countries.
For example, Chinese Premier Wen Jiabao and South Korean President Lee Myung-bak met with outgoing Japanese Prime Minister Naoto Kan in Fukushima, near the damaged plant –&nbsp;helping to ease neighboring countries’ concerns about radiation leakage.
Moreover, Japan’s relations with the US, which had suffered since the Democratic Party of Japan came to power two years ago, appear to have emerged from the disaster stronger than ever.
Japan’s Self-Defense Forces played an important role in rescue and restoration activities, with about half of its 200,000 personnel dispatched to the damaged area.
While this severely weakened Japan’s defenses, the US ensured East Asia’s security by deploying an aircraft carrier and cruisers, and American forces also searched for missing victims together with the JSDF.
But Japan’s neighbors expect rapid reconstruction and normalization, and for that, stronger political leadership is needed.
The earthquake and tsunami have confronted Japan with a profound crisis – but also with a rare opportunity to undertake the comprehensive reforms that the country has postponed for far too long.
Will The US Have A “Debt Crisis”?
WASHINGTON, DC – John Boehner, Speaker of the United States House of Representatives, is leading the Republican Party’s charge on fiscal policy, arguing that his side needs to see “trillions of dollars” in spending cuts in order for Congress to approve an increase in the US government’s debt ceiling.
But framing the issue this way creates a major problem for Boehner: it will directly, completely, and quickly antagonize one of the Republicans’ most important constituencies – the US corporate sector.
Focusing on the debt ceiling creates a political trap for Boehner and the Republicans.
It is true that the US Treasury’s ability to borrow will reach its legally authorized limit in early August.
It is also true that whenever Republicans rattle their sabers about the debt ceiling, and threaten not to raise it, the bond market yawns and there is no significant impact on yields.
If the Republicans’ threats were credible, any news that increased the likelihood of a problem with the debt ceiling would send Treasury bond prices down and yields up.
This is not happening, because bond traders cannot imagine that the Republicans would be able – or even willing – to follow through.
After all, the consequences of failing to increase the debt ceiling would be catastrophic.
The entire credit system in the US – and in much of the rest of the world – is based on the notion that there are “risk-free assets,” namely US government securities.
There is no provision in the US Constitution to guarantee that the US will always pay its debts, but the American Republic has proven itself for 200-plus years to be about as good a credit risk as has ever existed.
US fiscal resolve has been tested at least five times: at independence, in the war of 1812, during and after the Civil War, and in World War I and World War II.
We can debate the exact fiscal pressures in each case, and precisely how various kinds of bondholders were treated, but the simple fact of the matter is that when the going gets tough, the US pays its debts.
At least in the near term, the chance that the US will not service its debt is vanishingly small – perhaps in the same order of probability as a large meteor striking the earth.
To be sure, there are big fiscal questions to be sorted out – including how much the government should spend and on what, as well as how much tax it should collect and by what means.
There is also the vexing question of how much debt is too much for the modern US.
In a world where international investors (from both the private and official sectors) routinely wring their hands about US fiscal deficits – and then go out and buy more US government debt – who knows the answer?
Countries never default because they can’t pay their debts; there are always ways to decrease expenditures or raise taxes.
Countries default because their political processes bring them to the point where the people in power decide, for whatever reason, not to pay the government’s debts.
It is not difficult to identify who would bear what costs if the US did not pay – or if it disrupted markets by not increasing its debt ceiling.
Everyone who borrows or interacts with the credit system in any way would suffer a shock that would make the crisis of 2008 look small.
Among others, the US corporate sector – big and small business – would be livid.
To be sure, executives and entrepreneurs like to shake their heads over the current US fiscal deficit.
And some of them engage constructively in debates about the real issues: how to control health-care costs, prevent future financial crises, and end America’s expensive foreign wars.
But these are the issues for the presidential election of 2012, in which one hopes for debates that will set a more encouraging fiscal agenda for the next 20-30 years.
How and when America’s budget problems will be resolved is unknown, but US fiscal history is encouraging – the Republic has managed and survived crisis before.
Simply put, America will not score an own goal over the debt ceiling – and Boehner must know it.
Symbolic gestures are to be expected, as with the threatened government shutdown earlier this year, which merely created fodder for political advertising by both parties.
But any manufactured debt crisis now would deeply antagonize the corporate sector – and most of the electorate.
In the wake of economic disaster, the party held responsible would presumably be exiled from power for a generation (the Great Depression kept the Republicans from the US presidency for 20 years).
The Republican leadership is making threats that are not credible.
If Barack Obama’s administration plays its hand well, the result will be a last-minute extension of the debt ceiling with no significant concessions.
It is unclear how Boehner or anyone else would be able to portray that as a political victory.
Will the US-Japan Alliance Survive?
CAMBRIDGE – Next year marks the 50th anniversary of the United States-Japan Security Treaty, a central feature of stability in East Asia for half a century.
But now, with the Japanese experiencing a period of domestic political uncertainty, and North Korea’s nuclear tests and missile launches increasing their anxiety, will Japan reverse its long-standing decision not to seek a national nuclear-deterrent capability?
Is the US-Japan alliance coming to an end?
In the early 1990’s, many Americans regarded Japan as an economic threat.
Some people – in both countries – viewed the security alliance as a Cold War relic to be discarded.
These trends were reversed by the Clinton administration’s 1995 “East Asia Strategy Report.”
In 1996, the Clinton-Hashimoto Declaration stated that the US-Japan security alliance was the foundation for stability that would allow growing prosperity in post-Cold War East Asia.
That approach has continued on a bipartisan basis in the US, and polls show that it retains broad acceptance in Japan.
Most close observers of the relationship agree that the US-Japan alliance is in much better shape today than 15 years ago.
Nonetheless, the alliance faces three major challenges in a new external environment.
One is North Korea, whose recent behavior has been clever and deceptive.
The North Koreans have violated their agreements, knowing that China, the country with the greatest potential leverage, is most concerned about regime collapse in North Korea, and thus the threat of chaos on its borders.
Japan officially endorses the objective of a non-nuclear world, but it relies on America’s extended nuclear deterrent, and wants to avoid being subject to nuclear blackmail from North Korea (or China).
The Japanese fear that the credibility of American extended deterrence will be weakened if the US decreases its nuclear forces to parity with China.
It is a mistake, however, to believe that extended deterrence depends on parity in numbers of nuclear weapons.
Rather, it depends on a combination of capability and credibility.
During the Cold War, the US was able to defend Berlin because our promise to do so was made credible by the NATO alliance and the presence of American troops, whose lives would be on the line in the event of a Soviet attack.
Indeed, the best guarantee of American extended deterrence over Japan remains the presence of nearly 50,000 American troops (which Japan helps to maintain with generous host-nation support).
Credibility is also enhanced by joint projects such as the development of regional ballistic missile defense.
Equally important are American actions that show the high priority that the US gives to the alliance, and its guarantees not to engage in what Japan fears will be “Japan-passing” in its relations with Asia.
That is why it was so important that US Secretary of State Hillary Clinton’s first trip was to Asia, and her first stop in Japan.
It is also why it is mistaken to speak of a formal G-2 with China, rather than multilateral cooperation.
A second challenge for Japan is the dramatic rise of China’s economy. Although an important trade partner, China’s growing power makes Japan nervous.
When re-negotiating the US-Japan security alliance in the 1990’s, Japanese leaders sometimes privately asked me if the US would desert Japan in favor of China.
I responded then (and today) that there is little prospect of such a reversal, for two reasons.
First, China poses a potential threat, whereas Japan does not.
Second, the US shares democratic values with Japan, and China is not a democracy.
Moreover, China’s internal evolution remains uncertain.
While Chinese are more free today than at any time in their history, China’s political evolution has lagged behind its economic progress.
Unlike India, China has not solved the problem of political participation.
There is always a residual danger that China will embrace nationalism to ward off domestic problems.
At the same time, it is in the interest of the US, Japan, and China that China’s rise be peaceful and harmonious (in the words of Chinese leaders).
Treat China as an enemy, and you guarantee enmity.
That is why the strategy of integration, plus a hedge against uncertainty, makes sense for both the US and Japan.
Indeed, there are strong grounds for the US, Japan, and China to engage in areas of trilateral and other regional cooperation.
Third, the US-Japan alliance will have to face a new set of transnational challenges to our vital interests, such as pandemics, terrorism, and human outflows from failed states.
Chief among these challenges is the threat posed by global warming, with China having surpassed the US as the leading producer of carbon-dioxide emissions (though not in per capita terms).
Fortunately, this is an area that plays to Japan’s strengths.
Although some Japanese complain about the unequal nature of the alliance’s security components, owing to the limits that Japan has accepted on the use of force, in these new areas, Japan is a stronger partner.
Japan’s overseas development assistance in places ranging from Africa to Afghanistan, its participation in global health projects, its support of the United Nations, its naval participation in anti-piracy operations, and its research and development on energy efficiency place it at the forefront in dealing with the new transnational challenges.
Given today’s agenda, there is enormous potential for an equal partnership, working with others, in the provision of global public goods that will benefit the US, Japan, and the rest of the world.
That is why I remain optimistic about the future of the US-Japan alliance.
Will the US “Lose” Latin America?
On November 4-5, the fourth Summit of the Americas took place in Mar del Plata, Argentina.
The heads of state of the hemisphere’s democratic countries met to discuss economic, political, and social issues – and to lose another opportunity to create a new and healthier relationship between the United States and its Latin American neighbors.
Indeed, the Summit amounted to nothing more than an outsized photo opportunity.
No important issues were resolved, and no progress was made on the many topics that increasingly divide the countries of Latin America and the US.
In particular, no progress was made on the creation of a free-trade area for the region.
This is all the more disappointing, given that the region’s leaders declared more than a decade ago, during the first Summit of the Americas, held in Miami in December 1994, that free-trade negotiations would be “concluded no later than 2005.”
At the center of the failure to make headway on the creation of the Free Trade Area of the Americas (FTAA) is America’s unwillingness, and that of the Bush administration, to open up its agricultural sector to competition from countries such as Argentina, Brazil, and Uruguay.
True, the US is not the worst offender in the world when it comes to farm protectionism; the European Union’s trade distortions are significantly more pervasive.
But it is also true that if the US wants to improve relations with its neighbors to the south, America should make significant bilateral trade concessions to the Latin American countries.
In the absence of US leadership in matters of international trade, the majority of Latin American countries will not open their economies further to foreign competition, and some may even return to increased protectionism.
Unfortunately, the lack of progress on trade-related issues is not the only burden on relations between the US and Latin America. There are also serious diplomatic and political problems.
Very few Latin American countries support the Iraq war; indeed, only a handful of small countries in the region contributed troops to the so-called “coalition of the willing,” and today only El Salvador still has its troops in Iraq.
More broadly, most Latin American governments are increasingly critical of the Bush administration’s foreign policy, and they are unlikely to support major initiatives in international forums, including in the United Nations.
Moreover, a growing number of Latin American countries are veering left, and Hugo Chávez, the belligerent and anti-American Venezuelan president, is becoming increasingly popular in every Latin American country.
Voters across Latin America are becoming skeptical of market-oriented policies and globalization, making it more likely that in coming years, and under new leadership, economic policies in the region will be less friendly to foreign investment in general, and to US economic interests in particular.
It is not too late for the US to regain its political and diplomatic influence in Latin America.
But improving relations with its neighbors to the South will require making commitments at several levels.
Three commitments are particularly important. First, US agricultural protectionism should be reduced.
Second, immigration reform in the US should be enacted in a way that protects the rights of Latino migrants. And, third, the US should support the demands of Latin American countries for a greater say in international institutions such as the World Bank and the International Monetary Fund.
These initiatives will give the signal to Latin American leaders that, despite appearances to the contrary – including the latest Summit of the Americas – the region has not been completely neglected by President Bush and the US.
Will We Save the International Financial System?
The World Bank and IMF have completed their annual meetings, which were greeted by street demonstrations and a paucity of innovative ideas.
Here George Soros suggests a bold new tack to restructure the world's financial system.
The international financial system is broken down in the sense that it fails to provide adequate capital to countries that need it most and qualify for it.
Global financial markets suck most of the world's savings to the center, but they fail to pump money back out to the periphery.
Indeed, since 1997, there has been a reverse flow of capital from countries on the poor periphery of the world economy to those in the wealthy center.
The facts speak for themselves.
America runs a chronic current account deficit approaching an astonishing 5% of GDP; $242 billion in the first half of this year.
At the same time, Brazil - which has followed sound economic policies and has healthy budget and trade surpluses - cannot refinance its debt at acceptable rates.
The prevailing belief that market discipline corrects such imbalances is false, for two reasons.
First, financial markets are inherently unstable.
Second, the international financial system is biased in favor of the wealthy center.
Instability arises because financial markets try to discount a future that depends on their own behavior.
It is now recognized that this can lead to what economists call "multiple equilibria," but we continue to deny the clear implication that financial markets cannot be left to their own devices.
In practice, of course, international financial markets never have been left to their own devices.
Rich countries, led by the US, are in charge.
Their primary task is protecting their own interests.
When these countries get into trouble, their authorities intervene forcefully.
Countries that cannot borrow in international markets in their own currency lack that power.
They must turn to the IMF, and the IMF is more concerned with international financial stability than with enabling developing countries to pursue the countercyclical policies needed to avoid recession.
Until recently, IMF rescue programs were designed to enable debtor countries to meet their obligations.
Taxpayers in debtor countries, such as Mexico, picked up the tab.
This may have been unfair, but at least it kept money flowing to the periphery.
The emerging market crisis of 1997-1998 changed all this.
That crisis was attributed not to instability in the financial markets and the lopsidedness of the system, but to the "moral hazard" introduced by IMF bail-outs.
This lead to a U-turn: from bail-outs to "bail-ins," and to private sector burden sharing.
Moral hazard has been curtailed but the risks of investing in emerging markets increased.
Those risks are now reflected in market prices, which is the source of today's problem.
What can prevent the situation from deteriorating further and perhaps culminating in a systemic crisis?
In the broadest terms, we must create a more level playing field.
There is nothing wrong with imposing market discipline on countries that follow unsound policies, but the risk-reward ratio for lending and investing has shifted too far against the periphery.
Countries that qualify ought to have access to a lender of last resort and be empowered to pursue countercyclical policies.
Brazil, for example, confronts an unambiguous case of market failure.
Although the maximum sustainable real interest rate is about 10%, Brazil's dollar-denominated debt yields 24.5%.
A one-year Real note pays 27%.
At these rates, Brazil is heading for bankruptcy.
If no lender of last resort ensures that credit is available at or below 10%, Brazil cannot be expected to meet its obligations - dealing a terrible blow both to Brazil and the international financial system.
Where there is a political will, there is a way.
For instance, the central banks of the US, Europe, Japan, and Britain could accept Brazilian paper at their discount windows.
The IMF could guarantee the central banks against market risk at current prices.
This would provide a tremendous boost to the market and drastically reduce interest rates.
Naturally, all guarantees would be conditional on Brazil abiding by the IMF agreement.
If successful, the IMF guarantee would never be invoked.
What I propose is novel: it would leverage the IMF's $30 billion loan to Brazil tenfold (and set a useful precedent).
Unfortunately, such a scheme exceeds the imagination and political will of the IMF's shareholders.
But let's be clear: failure to address the problem could have disastrous consequences.
After all, how would a Brazilian default affect Mexico?
Addressing the broader, system-wide problem, we must find ways to stimulate domestic-led growth in the periphery countries.
Countries that follow sound macroeconomic policies do not derive sufficient economic benefits from doing so.
This generates political discontent that could have adverse consequences beyond the economic sphere.
At present, the US serves as the motor of the global economy.
But a chronic current account deficit is unsound, unfair, and unsustainable in the long run.
More urgently, the US motor is sputtering.
It would be benefit all parties to start another motor.
To this end, I proposed an annual issue of Special Drawing Rights (SDR) that rich countries would donate for international assistance.
This is a proposal whose time has come because the world economy is hovering on the brink of deflation.
Until recently, globalization unfolded against the background of a global boom; now we are experiencing a global bear market.
I am afraid globalization may not survive unless we find new ways to stimulate the global economy.
The SDR donation scheme would activate resources that are currently idle, benefiting donors and recipients.
It would also reduce the increasing inequality between rich and poor countries.
Ukraine’s Revolt of the Oligarchs
KYIV – Ukraine’s parliamentary election on October 28 will be neither free nor fair.
After eight unproductive years since the 2004 Orange Revolution, the democratic opposition is depressed and demoralized.
Even so, the elections may check President Viktor Yanukovych’s power.
Yanukovych came to power in February 2010, in elections that were rated free and fair (and at a time when Freedom House still ranked Ukraine as democratic).
But he quickly consolidated power and turned Ukraine into a mildly authoritarian state.
A dozen prominent opposition politicians have been sentenced to prison, including former Prime Minister Yulia Tymoshenko and the former interior minister, Yuri Lutsenko.
Tymoshenko, who was and remains the leader of the liberal and pro-Western opposition, was sentenced to seven years in prison for a gas deal with Russia in which she was not even accused of having benefited personally.
Without her, the democratic opposition has no strong leader.
But Yanukovych has not stopped there.
He exerts heavy pressure on private television channels, and has blocked licenses and cable access for the independent television channel TVi, which has exposed the most serious corruption cases of his administration.
Moreover, he uses the civil service and law-enforcement authorities extensively to repress the opposition and promote his protégés.
And yet the upcoming election matters.
Ukraine has a vibrant civil society and excellent free Internet media.
But the opposition, which comprises half the country, is badly demoralized after five years of stalemate among the Orange Revolution’s leaders, for which the largest share of blame falls on former President Viktor Yushchenko, who by almost all accounts has betrayed the democratic breakthrough that he represented.
He now leads a party that supports Yanukovych, who has even allowed Yushchenko to remain in the presidential residence since leaving office.
Ukrainian voters are fickle.
They voted against the incumbent powers in the presidential elections of 1994, 2004, and 2010. They may do so again.
The most recent public-opinion poll suggested that Yanukovych’s Party of Regions would obtain 28% of the vote, and that its only ally to surpass the 5% electoral threshold would be the communists, with 11%, giving them a total of 39%, compared to 36% for two opposition parties, Tymoshenko’s Fatherland party (19%) and the heavyweight boxing champion Vitali Klitschko’s UDAR (17%).
The predatory nature of Yanukovych’s rule is not exactly well hidden; his family members and loyalists control the entire security apparatus and the main economic agencies.
He is rightly scared by the democratic opposition, which he is emasculating by all reasonably soft means.
Anticipating that his party might lose the upcoming election if Ukraine’s proportional voting system were maintained, Yanukovych has reverted to the electoral system of 2002, with only half of the 450 seats to be distributed proportionally.
The remaining 225 seats will be filled in winner-take-all single-member constituencies – a change that gives regional tycoons a great opportunity to buy seats.
But Yanukovych failed to anticipate that tycoons would dare to be disloyal to him.
Initially, his government contained nine groups of big businessmen, but that number has fallen gradually, and even top businessmen have been marginalized by his core loyalists, who are widely rumored to be enriching themselves at the expense of both the state and private business.
Unlike Russian President Vladimir Putin, Yanukovych seems to have steamrolled too many too fast, overestimating his power and narrowing his base.
Indeed, he appears to have turned all of Ukraine’s top oligarchs into his enemies.
Each summer, the prominent Ukrainian businessman Victor Pinchuk organizes a major international conference, the Yalta European Strategy, attended by the Ukrainian elite and prominent foreigners.
This September, the lesson of the conference was that Yanukovych has isolated himself not only from the West and Russia, but also from his main backers at home.
The Ukrainian tycoons are no fools.
They view the upcoming election as their last chance to stand up against Yanukovych.
The many parliamentarians to be elected in single-member constituencies are more likely to obey them than Yanukovych.
Under the electoral system in place in 2002, the ruling party quickly disintegrated into nine oligarchic party factions.
Something similar is likely to happen this time around.
The tycoons might not oust Yanukovych, but they will check his power.
Their most vocal public representatives are First Deputy Prime Minister Valeriy Khoroshkovskiy and the economy minister, Petro Poroshenko, who was a major force behind the Orange Revolution.
The businessmen’s main objection to Yanukovych is that he prefers to keep Tymoshenko in prison rather than obtain an Association Agreement with the European Union.
The already-concluded free-trade agreement with the EU would offer Ukraine badly needed market access and increased exports, but the EU will not ratify it unless Tymoshenko is released and repression of the opposition and media ceases.
Similarly, the tycoons advocate restored cooperation with the International Monetary Fund, because they want access to credit at reasonable interest rates.
But Yanukovych refuses to liberalize gas prices, a key IMF demand.
Concern that the West’s pro-reform stance will push Ukraine into Russia’s embrace is largely unfounded.
Yanukovych’s personal relations with Putin are so poor that Putin all but refuses to talk to him – other than to make preposterous demands.
The West thus has an important role to play in the election, and is providing two thousand election monitors to help to ensure a free and fair vote.
Indeed, the United States and the EU, in particular, have a large stake in the outcome.
Ukraine is a friendly country – one that always joins Western “coalitions of the willing.”
But it is a lapsed democratic country.
Blowing It On the Wind
BERLIN – When considering climate change, most people think wind turbines and solar panels are a big part of the solution.
But, over the next 25 years, the contribution of solar and wind power to resolving the problem will be trivial – and the cost will be enormous.
The International Energy Agency estimates that about 0.4% of global energy now comes from solar and wind.
Even in 2040, with all governments implementing all of their green promises, solar and wind will make up just 2.2% of global energy.
This is partly because wind and solar help to reduce greenhouse-gas emissions only from electricity generation, which account for 42% of the total, but not from the energy used in industry, transport, buildings, and agriculture.
But the main reason why wind and solar power cannot be a major solution to climate change stems from an almost insurmountable obstacle: we need power when the sun is not shining and the wind is not blowing.
This has major implications for claims about costs.
For example, wind power, we are repeatedly told, is just about to be cheaper than fossil fuels – or even, as a recent global news story claimed, that it is now cheaper than fossil fuels in Germany and the United Kingdom.
This is mostly a mirage – large-scale wind power will not work anytime soon without subsidies.
As Warren Buffet says: “[W]e get a tax credit if we build a lot of wind farms.
That’s the only reason to build them.
They don’t make sense without the tax credit.” The IEA estimates that the annual bill for global wind subsidies will increase over the next 25 years, not decrease or fall to zero.
One reason is that cheaper wind in Germany and the UK is true only for new construction.
Most existing coal and gas suppliers cost about half or less than wind and could run for decades; instead, we half-close them to accommodate wind.
Whereas the new, cheap German wind-energy producers cost $80 per MWh ($0.08 per kWh), the average German spot price in 2014 was just $33 per MWh.
More important, wind is cheaper only when the wind blows.
When the wind is not blowing, wind-generated electricity is the most expensive electricity of all, because it cannot be bought at any price.
Installing more wind generators makes the electricity they produce less valuable.
The first wind turbine brings a slightly above-average price per kWh.
But with 30% market share, since all wind producers sell electricity at the same time (when the wind blows), the electricity is worth only 70% of the average electricity price.
Solar prices drop even faster at similar market shares.
So wind and solar generators have to be much cheaper than the average price to be competitive.
Moreover, wind and solar make fossil-fuel-generated electricity more expensive.
Some people may think that is a good thing; but, if our societies are to continue functioning in cloudy, windless weather, that means relying on some fossil fuels.
The IEA estimates that 56% of electricity will come from fossil fuels in 2040, with nuclear and hydro accounting for another 28%.
Significant wind and solar usage reduces the number of hours gas and coal generation operates; with large fixed costs, this makes every kWh more expensive.
In a real electricity market, this would result in much higher electricity costs on windless evenings.
But this is politically problematic, which is why markets are often constructed to spike much less.
In Spain, gas plants were used 66% of the time in 2004, but only 19% of the time now, largely because of more wind use.
Because the plants must be kept running 57% of the time to avoid losses, many are likely to close.
Across Europe, possibly 60% of all gas-fired generation is at risk.
Keeping the lights on means either accepting much higher prices or emulating what many European governments are beginning to do – namely, subsidize fossil-fuel plants.
For example, in 2018 alone, the UK will pay nearly £1 billion ($1.5 billion), mostly to fossil-fuel-based generators, to keep backup capacity available for peak power usage.
Building more wind and solar generating capacity with subsidies means societies end up paying three times for power – once for the power, once for subsidies to inefficient renewables, and once more to subsidize our now-inefficient fossil fuels.
Many will say, “But at least we cut CO2.”
That is true, although the reduction is perhaps only half of what is often touted, because the back-up power needed to smooth intermittent wind and solar is often more CO₂-heavy.
Moreover, we pay dearly for these cuts.
In 2013, the world produced 635 TWh of wind electricity and paid at least $28 billion in subsidies, or $76 per avoided ton of CO₂, and likely twice or more than that.
When the estimated damage costs of CO2 are about $5 per ton, and a ton of CO2 can be cut in the European Union for about $10, we are paying a dollar to do less than 7-13 cents of good for the climate.
And its positive impact on the climate is negligible.
Consider two worlds: in the first, all governments implement all their green promises, as indicated by the IEA, and increase solar and wind energy more than seven-fold by 2040; in the second, not one new solar panel or wind turbine is purchased over the next 25 years.
The difference in subsidy spending between the two worlds is more than $2.5 trillion.
Yet the difference in temperature increase by the end of the century, run on the United Nations climate panel’s own model, would be a mere 0.0175°C (0.03°F).
One day, when the wind price has fallen much further and solar is almost as cheap as wind, significant investments in wind and solar could be a great idea.
But even after decades of capital reallocation, these sources might account for a bit less than a quarter of our electricity.
In short, a world powered by solar and wind – one that has resolved the climate challenge – is very unlikely anytime soon.
Winners and Losers in the Post-9/11 Era
September 11, 2001, is one of those dates that mark a transformation in world politics.
Just as the fall of the Berlin Wall on November 9, 1989, signified the Cold War’s end, al-Qaeda’s attack on the United States opened a new epoch.
A non-governmental group killed more Americans that day than the government of Japan did with its surprise attack on another transformative date, December 7, 1941.
While the jihadi terrorist movement had been growing for a decade, 9/11 was the turning point.
Five years into this new era, how should we characterize it?
Some believe that 9/11 ushered in a “clash of civilizations” between Islam vs. the West.
Indeed, that is probably what Osama bin Laden had in mind.
Terrorism is a form of theater.
Extremists kill innocent people in order to dramatize their message in a way that shocks and horrifies their intended audience.
They also rely on what Clark McCauley and others have called “jujitsu politics,” in which a smaller fighter uses the strength of the larger opponent to defeat him.
In that sense, bin Laden hoped that the US would be lured into a bloody war in Afghanistan, similar to the Soviet intervention two decades earlier, which had created such a fertile recruiting ground for jihadists.
But the Americans used a modest amount of force to remove the Taliban government, avoided disproportionate civilian casualties, and were able to create an indigenous political framework.
While far from perfect, the first round in the fight went to the US.
Al-Qaeda lost the sanctuaries from which it planned its attacks; many of its leaders were killed or captured; and its central communications were severely disrupted.
Then the Bush administration succumbed to hubris and made the colossal mistake of invading Iraq without broad international support.
Iraq provided the symbols, civilian casualties, and recruiting ground that the jihadi extremists had sought in Afghanistan.
Iraq was George Bush’s gift to Osama bin Laden.
Al-Qaeda lost its central organizational capacity, but it became a symbol and focal point around which like-minded imitators could rally.
With the help of the Internet, its symbols and training materials became easily available around the world.
Whether al-Qaeda had a direct role in the Madrid and London bombings, or the recent plot to blow up airliners over the Atlantic, is less important than the way it has been transformed into a powerful “brand.”
The second round went to the extremists.
The outcome of future rounds in the struggle against jihadi terrorism will depend on our ability to avoid the trap of “jujitsu politics.”
That will require more use of the soft power of attraction rather than relying so heavily on hard military power, as the Bush administration has done.
For the struggle is not a clash of Islam vs. the West, but a civil war within Islam between a minority of terrorists and a larger mainstream of non-violent believers.
Jihadi extremism cannot be defeated unless the mainstream wins.
Military force, intelligence, and international police cooperation needs to be used against hardcore terrorists affiliated with or inspired by al-Qaeda, but soft power is essential to attracting the mainstream and drying up support for the extremists.
US Secretary of Defense Donald Rumsfeld once said that the measure of success in this war is whether the number of terrorists we are killing and deterring is larger than the number that the terrorists are recruiting.
By this standard, we are doing badly.
In November 2003, the official number of terrorist insurgents in Iraq was given as 5,000.
This year, it was reported to be 20,000.
As Brig. General Robert Caslen, the Pentagon’s deputy director for the war on terrorism, put it, “We are not killing them faster than they are being created.”
We are also failing in the application of soft power.
According to Caslen, “We in the Pentagon are behind our adversaries in the use of communication – either to recruit or train.”
The manner in which we use military power also affects Rumsfeld’s ratio.
In the aftermath of 9/11, there was a good deal of sympathy and understanding around the world for America’s military response against the Taliban.
The US invasion of Iraq, a country that was not connected to the 9/11 attacks, squandered that good will, and the attractiveness of the US in Muslim countries like Indonesia plummeted from 75% approval in 2000 to half that level today.
Indeed, occupying a divided nation is messy, and it is bound to produce episodes like Abu Ghraib and Haditha, which undercut America’s attractiveness not just in Iraq, but around the world.
The ability to combine hard and soft power is smart power.
When the Soviet Union invaded Hungary and Czechoslovakia during the Cold War, it undercut the soft power that it had enjoyed in Europe in the aftermath of World War II.
When Israel launched a lengthy bombing campaign in Lebanon last month, it created so many civilian casualties that the early criticisms of Hezbollah by Egypt, Jordan, and Saudi Arabia became untenable in Arab politics.
When terrorist excesses killed innocent Muslim civilians such as Egyptian Islamic Jihad did in 1993 or Abu Musab al-Zarqawi did in Amman in 2005, they undercut their own soft power and lost support.
The most important lesson five years after 9/11 is that failure to combine hard and soft power effectively in the struggle against jihadi terrorism will lead us into the trap set by those who want a clash of civilizations.
Muslims, including Islamists, have a diversity of views, so we need to be wary of strategies that help our enemies by uniting disparate forces behind one banner.
We have a just cause and many potential allies, but our failure to combine hard and soft power into a smart strategy could be fatal.
The Middle East’s Lost Decade
BERLIN – The United States has waged three wars since Al Qaeda’s terrorist attacks on September 11, 2001: against Al Qaeda, in Afghanistan, and in Iraq.
The first two were forced upon the US, but the third was the result of a willful, deliberate decision by former President George W. Bush, taken on ideological grounds and, most likely, for personal reasons as well.
Had Bush, former Vice President Dick Cheney, former Secretary of Defense Donald Rumsfeld, and their neocon allies been forthright about their intentions – to bring down Saddam Hussein by means of war, thereby creating a new, pro-Western Middle East – they never would have received the support of Congress and the American public. Their vision was both naive and reckless.
So a threat – Iraqi weapons of mass destruction – had to be created. As we now know, the threat was based on lies (aluminum tubes for a nuclear-weapons program, for example, meetings between the 9/11 plot leader, Mohamed Atta, and Iraqi officials in Prague, and even glaring forgeries like supposed Iraqi orders for yellowcake uranium from Niger).
Such were the justifications for a war that was to claim the lives of almost 5,000 US soldiers and more than 100,000 Iraqis.
Add to that the millions more who were injured and displaced from their homes, as well as the destruction of one of the world’s oldest Christian communities.
For this, the US alone spent up to $3 trillion.
Bush’s war against Saddam did radically change the Middle East, though not as he envisaged. For starters, if the US had set out to destabilize Iraq, its efforts could hardly have been more successful: ten years later, the country’s viability as a single state has never been in greater doubt.
With Saddam gone, Iraq’s Shia majority assumed power after a horrendous civil war, leaving Iraq’s defeated Sunnis longing for revenge and waiting for an opportunity to regain their ascendancy.
The Kurds in the north cleverly and adeptly used the window of opportunity that opened before them to seize de facto independence, though the key question of control over the northern city of Kirkuk remains a ticking time bomb.
And all are fighting for as large a share of Iraq’s enormous oil and gas reserves as they can get.
Taking stock of “Operation Iraqi Freedom” a decade later, the Financial Times concluded that the US won the war, Iran won the peace, and Turkey won the contracts.
I can only agree.
In political terms, Iran is the big winner of Bush’s war.
Its number-one enemy, Saddam, was dispatched by its number-two enemy, the United States, which presented Iran with a golden opportunity to extend its influence beyond its western border for the first time since 1746.
Bush’s war, with its poor strategic vision and worse planning, increased Iran’s regional standing in a way that the country was unlikely ever to have achieved on its own.
The war enabled Iran to assert itself as the dominant power in the Gulf and the wider region, and its nuclear program serves precisely these ambitions.
The losers in the region are also clear: Saudi Arabia and the other Gulf states, which feel existentially threatened, and have come to regard their own Shia minorities as an Iranian fifth column.
They have a point: with the Shia in power in Iraq, Iran will seek suitable opportunities to use local Shia populations as proxies to assert its hegemonic claims.
This is what is fueling Bahrain’s domestic turmoil, beyond the Shia majority’s local grievances.
Leaving aside the lies, fictions, and questions of morality and personal responsibility, the critical mistake of America’s war against Iraq was the absence of either a viable plan or the necessary strength to enforce a Pax Americana in the Middle East.
America was powerful enough to destabilize the existing regional order, but not powerful enough to establish a new one.
The US neocons, with their wishful thinking, grossly underestimated the scale of the task at hand – unlike the revolutionaries in Iran, who quickly moved in to reap what the US had sowed.
The Iraq war also marked the beginning of America’s subsequent relative decline.
Bush squandered a large part of America’s military strength in Mesopotamia for an ideological fiction – strength that is sorely missed in the region ten years later.
And there is no alternative to be seen without America.
While there is no causal link between the Iraq war and the Arab revolutions that began in December 2010, their implications have combined in a malign manner.
Since the war, the bitter enmities between Al Qaeda and other Salafist and Sunni Arab nationalist groups have given way to cooperation or even mergers.
This, too, is a result brought about by the American neocon masterminds.
And the regional destabilization triggered by the Arab revolutions is increasingly converging on Iraq, mainly via Syria and Iran.
Indeed, the gravest current danger to the region is a process of national disintegration emanating from the Syrian civil war, which is threatening to spread not only to Iraq, but also to Lebanon and Jordan.
What makes Syria’s civil war so dangerous is that the players on the ground are no longer its driving forces.
Rather, the war has become a struggle for regional dominance between Iran on one side and Saudi Arabia, Qatar, and Turkey on the other.
As a result, the Middle East is at risk of becoming the Balkans of the twenty-first century – a decline into regional chaos that began with, and was largely the result of, the US-led invasion ten years ago.
Winning at Corporate Governance
CAMBRIDGE: Despite NASDAQ crashes and the threat of US recession, the New Economy is here to stay.
Indeed, it remains the key to improved performance in Europe and Japan in the years ahead.
But where, exactly, does the heart of the New economy lie?
Is it in more competitive labor markets or in better tax systems or in deregulation?
Corporate governance, too, is a motor of the New Economy that should not be underrated.
If managers create productive, flexible structures focused on wealth creation, companies find it easy to adjust and explore new sources of productivity and cost control.
If decentralization and risk taking are part of a company’s mission, innovation in products and processes is certain to take place.
If, on the contrary, bosses behave like cautious executors of a wealthy estate, their companies will soon look like museums.
A country’s economic performance, indeed, is a mirror image of its resident companies.
Countries with great companies show great performance.
Where then are the great companies of the world to be found?
No surprise that more than half of the most respected companies are American.
Although Europe is roughly the same economic size as the US, it has far fewer winning corporate teams.
Japan may be much smaller than America or Europe, but it underperforms its share of G7 income or wealth.
The picture could not be clearer: the US economy performs stunningly, as does its corporate sector;
Europe is far behind; and Japan does not really register.
Peering into the future of this premier league of companies five years from now, the FT sees a number of shifts as likely, with Europe catching up, Japan losing even more ground, and America giving up some ground, too.
This glimpse into the future mirrors today’s perceptions of a maturing (a code-word for losing its edge) American economy and a Europe able to play catch-up because the new business culture is at last taking hold.
This survey also accurately reflects the reality that very few Japanese firms are succeeding at the hard task of restructuring, of shifting to modern, world-class governance.
World-class Sony stays ahead;
NTT ( its Docomo subsidiary is the key here) holds on, but old and tired Honda and Matsushita are likely to be relegated to second class status.
The dynamics of the next 5 years will also reflect a head-on competition between winning corporations.
Boeing versus Airbus may be the most interesting example.
In the current rankings, both are locked in a clinch close to the bottom of the FT list of top firms.
In 5 years, however, Airbus will likely be up and Boeing out of the champions league altogether.
Why?
Airbus has looked ahead, invested, and is bringing on a new Jumbo jet that will make Boeing’s existing products look outdated and inefficient.
For Boeing became complacent and forgot that the airline business is a cut-throat world.
When thinking about economic potential, we tend to look at the quality of the labor force, a people’s willingness to work, and the level of education.
Seen from this perspective, Europe and Japan should trounce the US because of their far superior basic education systems, and Japanese discipline make Europeans look lazy.
In fact, effort and education are not what matters most.
Far more significant is the economic environment in which people work – a market economy versus some form of socialism – and the organization of businesses in which they participate.
The best model of corporate governance to produce strong and lasting economic performance remains to be found.
In the 1980s, respect for the long-run view of the Japanese model ran high.
This is no longer so because of Japan’s economic malaise.
Then there was the flirtation with the German model of business-banking integration, which brings capital markets in-house.
That lost its attraction when it became clear that cozy relations between bankers and bosses result in tolerance for poor rates of return on capital.
Now the US model is in: decentralized, lean on middle management, tough on the CEO; and with a “don’t take no for an answer” code.
But this won’t be the last answer, although for the time being it will drive corporate restructuring and the managerial mind.
All this begs the question as to whether it makes sense to change corporate cultures every 10 or 20 years.
The pragmatic answer is that it takes very different models to handle a stable and stationary world as opposed to a world in which deregulation and technology produce dramatic change daily.
The US model works in times of rapid, pervasive change.
This is what lies ahead for the foreseeable future.
Hold on tight.
Winning the Confidence Game
NEW HAVEN – On April 2, the G-20 will hold a summit in London to discuss what we may hope will be an internationally coordinated plan to address the world economic crisis.
But can such a plan really work?
The basic problem, of course, is confidence.
People everywhere, consumers and investors alike, are canceling spending plans, because the world economy seems very risky right now.
The same thing happened during the Great Depression of the 1930’s.
A contemporary observer, Winthrop Case, explained it all in 1938: economic revival depended “on the willingness of individual and corporate buyers to make purchases that necessarily tie up their resources for a considerable length of time.
For the individual, this implies confidence in the job, and in the end comes equally back to the confidence of industry leaders.” Unfortunately, confidence did not return until World War II ended the depression.
If the leaders meeting in London are to succeed where governments failed in the 1930’s, they must commit themselves to a fiscal target that is sufficient to restore full employment under normal credit conditions.
They must also commit themselves to a credit target that will restore lending to normal.
People will not spend normally unless they have both a job and normal access to credit.
During the Great Depression, such targets were not used on a large enough scale, merely fueling public despair that stimulus policies would ever work.
The G-20 Summit should also be an occasion for affirming some basic principles.
Confidence isn’t built up on the basis of spending or lending alone.
People need to believe that the money represents something more lasting than stimulus measures, which may eventually end in failure.
After all, the Great Depression did not end simply because of the massive stimulus of war-related expenditures.
Why should World War II have produced any confidence in the future?
To be sure, World War II reduced the unemployment rate in the United States dramatically, from 15% in 1940 to 1% in 1944, and had a similar effect in other countries.
But this was not because of a revival in business confidence. It was because of a nasty war, plain and simple, with people drafted into fighting, or into industries supplying the war effort.
The real recovery of confidence did not occur until after World War II, when the world did not sink back into depression.
The US Council of Economic Advisors warned of this possibility in 1949, and it was not alone.
There appears to be more than one reason why, on the contrary, confidence came roaring back.
First, there was a general perception of “pent-up demand.”
After years of privation (and in many countries the physical destruction of war), people just wanted to live normally – to rebuild, own a home, a car, and other consumer goods.
The widespread impression that there was such pent-up demand also led people to believe that there could not be another depression.
The perception of pent-up demand was like a powerful economic stimulus package, and it had the advantage that people believed it would be long-lasting.
Indeed, the same long-term confidence triggered the post-war “baby boom.”
According to some contemporary observers, however, “pent-up demand” was only part of the story.
During the brief but deep recession of 1949, the financial commentator Silvia Porter reflected on the attitudes that led to the 1929 crash: “We saw nothing wrong – in fact, we saw everything right – with the wild speculative boom and credit inflation that…culminated in the now almost unbelievable gambling orgy of 1929.”
But now, Porter wrote, after the depression and war, “We began to listen to the idea that a hundred million citizens, acting through a central government, could achieve much more than a hundred million acting as separate selfish units.
We developed, in short, a new attitude toward the responsibilities of government.” She concluded that the positive effect of “pent-up demand” and government measures can “make sense only when viewed against the background of our changed economic and political philosophy.”
The Marshall Plan, which operated from 1947 to 1951, became a symbol of this new attitude.
The US gave billions of dollars of aid to rebuild war-ravaged countries in Europe.
The plan was widely viewed as reflecting a new kind of enlightenment, a recognition of the importance of supporting people who needed help.
Europe would not be allowed to languish, and the stimulus came from abroad.
After the war, Keynesian economic theory, which was generally not accepted or understood during the Great Depression, became the basis of a new social compact.
It was a theory that was perfectly suited to a generation that had just endured exceptional sacrifices, for it reaffirmed a belief in our responsibility for each other.
The effect of economic stimulus is redoubled by this kind of inspirational belief.
That is why all of the commitments made and intentions expressed at the upcoming G-20 summit matter.
The countries represented must show a generous spirit and make the world economy work for all people.
Seemingly peripheral issues, like aid to the developing world and the poor, who suffer the most from a crisis like this one, will be part of the primary story of the renewal of confidence, just as the Marshall Plan was part of that story after World War II.
Winning the European Confidence Game
CHICAGO – If any solution to the European crisis proposed over the next few days is to restore confidence to the sovereign-bond markets, it will have to be both economically viable and politically palatable to rescuers and rescued alike.
This means paying attention not just to the plan’s technical details, but also to appearances.
There is growing consensus about any solution’s key elements.
First, Italy and Spain will have to come up with credible medium-term plans that will not just restore their fiscal health, but also improve their ability to grow their way out of trouble.
While any plan will involve pain for citizens, the markets must deem the pain politically tolerable, at least relative to the alternatives.
It is important that these plans be seen as domestically devised (though voters will have no illusions about the external and market pressures that have forced their governments to act).
At the same time, an external agency such as the International Monetary Fund could render the plan more credible by evaluating it for consistency with the country’s goals and monitoring its implementation.
Second, some vehicle – the IMF or the European Financial Stability Facility, with either entity funded directly by countries or the European Central Bank – has to stand ready to fund borrowing by Italy, Spain, and any other potentially distressed countries over the next year or two.
But there is an important caveat, which has largely been ignored in public discussions: if this funding is senior to private debt (as IMF funding typically is), it will be harder for these countries to regain access to markets.
After all, the more a country borrows in the short term from official sources, the further back in line it pushes private creditors.
That makes private lenders susceptible to larger haircuts if the country eventually defaults – and thus more hesitant to lend in the first place.
In other words, private markets need to be convinced both that there is a low probability of default (hence the importance of credible plans), and that there is some additional loss-bearing capacity in the new funding, so that, if there is a default, outstanding or rolled-over private debt does not have to bear the full brunt.
This may seem unfair.
Why should the taxpayer accept a loss when they are bailing out the private sector by providing new funding?
In an ideal world, distressed countries would default as soon as private markets stopped funding them, and they would impose the losses on private bondholders.
In the real world, however, if Italy and Spain are viewed as being solvent, or too big to fail, official funding should be structured so that it gives these countries their best chance to regain market confidence.
This does not mean that official funding should be junior to private debt in any restructuring, for that would require substantially more loss-bearing capacity from the official sector – capacity that is probably not available.
Indeed, if official funding were junior, it would be providing a larger cushion to private creditors – and thus bailing them out to an even greater extent.
The simplest solution is to treat official funding no differently from private debt – best achieved if official lenders buy sovereign bonds as they are issued (possibly at a predetermined yield) and agree to be treated on par with private creditors in a restructuring.
As the country regains market confidence, the official funding can be reduced, and eventually the bonds can be sold back to the markets.
The bottom line is that official funding must be accompanied by loss-bearing capacity.
If the funding is channeled through the IMF, and is to be treated on par with private debt, the Fund will need a guarantee from the EFSF or strong eurozone countries that it will be indemnified in any restructuring.
Of course, the IMF’s member states might be willing to accept some burden sharing if a sufficient buffer provided by the eurozone were eroded, but that cannot be taken for granted.
Once the first two elements of the plan are in place, there should be little need for the third – bond purchases by the ECB in the secondary market in order to narrow interest-rate spreads and provide further confidence.
Indeed, if the ECB intends to claim preferred-creditor status for any bonds that it buys, it is probably best that it buy very few.
Of course, the ECB will have to continue to provide support to banks until confidence about their holdings returns.
But there is one more element that is needed to assure markets that the solution is politically viable.
Citizens across Europe, whether in rescued countries or rescuing countries, will be paying for years to clean up a mess for which they were not responsible.
Not all banks voluntarily loaded up on distressed government bonds – some were pressured by supervisors, others by governments – but many have made unwise bets.
If they are seen as profiting unduly from the rescue, even as they return to their bad old ways of paying for non-performance, they will undermine political support for the rescue – and perhaps even for capitalism.
So a final element of the package ought to be a monitored pledge by eurozone banks that they will not unload bonds as the official sector steps in; that they will raise capital over time instead of continuing to deleverage (if this hurts bank equity holders, they should think of this as burden sharing); and that they will be circumspect about banker bonuses until economies start growing strongly again.
Cries that this is not capitalism should be met with a firm retort: “Nor are bailouts!”
Winning the Peace
Afghanistan’s future hangs in the balance as its weak national government struggles to maintain support and legitimacy in the face of a widening insurgency, warlords, the heroin trade, and a disappointed populace.
Across an arc extending from Afghanistan to East Africa, violence now also surges in Iraq, Lebanon, Somalia, and beyond, to Sudan’s Darfur region.
Everywhere, politicians, generals, and even diplomats talk of military strategies and maneuvers, but everywhere something utterly different is needed.
Stability will come only when economic opportunities exist, when a bulging generation of young men can find jobs and support families, rather than seeking their fortune in violence.
We are seeing again and again that a foreign army, whether NATO’s in Afghanistan, America’s in Iraq, Israel’s in occupied Palestine, or Ethiopia’s in Somalia, may win a battle, or even a war, but never the peace.
Peace is about dignity and hope for the future.
Military occupation saps dignity, and grinding poverty and economic disarray sap hope.
Peace can be achieved only with a withdrawal of foreign troops, and the arrival of jobs, productive farms and factories, tourism, health care, and schools.
Without these, military victory and occupation quickly turn to ashes.
The United States government has proven itself blind to these facts, but the international community also remains ill equipped to assist in the restoration of peace following conflicts in impoverished countries.
Repeatedly, a fragile peace has broken down because of the lack of economic follow-up.
Despite grand promises of foreign aid, economic reconstruction, and development in Afghanistan, Iraq, Lebanon, and elsewhere, the actual record of international assistance to post-war reconstruction is gravely deficient.
The scenario has become painfully familiar.
A war ends.
An international donors’ conference is called.
Pledges of billions of dollars are announced.
A smiling new head of state graciously thanks the international community, including the occupying power.
Months pass.
World Bank teams from Washington start to arrive.
But actual reconstruction and recovery is delayed, perhaps for years.
Crony businesses from the US and Europe, which are utterly unfamiliar with local conditions, squander time, aid funds, and opportunities.
Two or three years pass.
The grand pronouncements become a pile of out-of-date World Bank studies.
Recriminations fly, the occupying army remains, and a new insurgency spreads.
Many factors contribute to this disarray, beginning with the shocking inability of the US, Europe, and the international organizations to understand things from the perspective of poor and displaced people.
Their lack of empathy is deplorable, but there are conceptual problems as well.
The international agencies involved in post-conflict reconstruction have so far failed to understand how to start or restart economic development in a low-income setting.
It’s important to distinguish four distinct phases of outside help to end a conflict.
In the first phase, during the war itself, aid is for humanitarian relief, focusing on food, water, emergency medicine, and refugee camps.
In the second phase, at the war’s end, aid remains mainly humanitarian relief, but now directed towards displaced people returning home, and to decommissioned soldiers.
In the third phase, lasting three to five years, aid supports the first phase of post-war economic development, including restoration of schools, clinics, farms, factories, and ports.
In the fourth phase, which can last a generation or more, assistance is directed to long-term investments and the strengthening of institutions such as courts.
The international community, and the US in particular, is dreadful at the third stage.
Once a conflict is over, aid agencies seem paralyzed.
Instead of sending help, they send study groups.
There is often a lag of years before moving from humanitarian relief to real economic development.
By the time such help actually arrives, it is often too late: war has been re-ignited.
In fact, it is possible to restart economic development through targeted “quick-impact” initiatives.
Since the economies of most impoverished post-conflict countries are based on agriculture, restarting farm output is vital.
Impoverished farmers should receive a free package of seeds, fertilizers, and low-cost equipment (such as pumps for irrigation).
When such aid is made available quickly, former soldiers will return to their farms, and can establish a livelihood by the beginning of the first growing season following the end of hostilities.
This type of aid does not require long studies, but quick action.
Similar quick-impact measures should be undertaken to control disease.
Small rural clinics can be built or rebuilt very quickly, within the first year of peace.
Solar panels and wind turbines can provide off-grid power in isolated rural areas. Wells and cisterns can be put in place to ensure safe drinking water.
These and similar efforts can mean the difference between famine and food security, epidemic disease and health, income and utter poverty, and, most importantly, hope and despair.
Yet the window of opportunity closes quickly.
Quick-impact economic development is exactly what is needed now to help end the horrific violence and suffering in Darfur.
Sanctions, threats, and peacekeepers are only short-term measures, whereas real progress there against extreme poverty is not only achievable, but also is something that the government and rebels can agree on.
The same applies in Somalia.
But the window of opportunity closes quickly in these and other post-conflict regions.
Only by taking quick, meaningful action to fight hunger, poverty, and disease can there be a chance of creating conditions for long-term peace.
Winning the Transition
WASHINGTON, DC – Is the Arab Spring turning into a gloomy autumn?
With brutal crackdowns in Syria, a bloody civil war in Libya, and Yemen teetering on the brink of chaos, the number of skeptics is growing.
Although Egypt and Tunisia’s pro-democracy movements achieved rapid regime change, uncertainties remain in those countries, too.
After a brief period of hope, many observers now wonder whether the region is capable of producing viable, and economically vibrant, democracies.
Revolutions and their aftermaths, of course, are always fluid and fickle times, and the outcome is often perched on a knife’s edge.
Bridging the vast gap between high expectations and the reality of limited budgets and capabilities is a test in itself.
Redressing past injustice and building an economy that offers opportunity to all are major challenges as well, fraught with volatility, uncertainty, and the dangers of political opportunism.
But transitions are also times of great opportunity.
In the 1990’s, I was among those Indonesians who demanded and celebrated the departure of our own autocrat, Suharto, and I joined the new government when he left.
Many observers predicted that Indonesia, the world’s most populous Muslim country, would be unable to sustain democracy and would ultimately decline into chaos.
The task ahead of us was daunting.
But we proved the skeptics wrong, and learned some fundamental lessons.
Perhaps most importantly, we learned that there is no one-size-fits-all solution for democratization.
Each of the countries of the Middle East and North Africa will face unique challenges, which will have to be addressed on their own terms.
Even so, they all must make a real and symbolic break with the past.
The new authorities must send strong signals that the old ways are finished.
Change must be formally manifested, with new laws that are widely publicized.
Legislation that empowers citizens with freedom of expression, free and independent elections, and freedom of association is crucial, and it must be made clear to the public that no one is above the law.
Anything less will undermine the transition.
Moreover, corruption is the bane of development everywhere, so new governments should move fast to establish institutions and procedures to fight it.
Transparency and accountability are powerful ideas with near-universal support, which means that new leaders should not give up when the fight becomes difficult.
Civil-society organizations, local communities, representatives of the poor and vulnerable, and women play a vital role in this regard, and they should be included at every level of decision-making.
In Indonesia, we signed a hundred laws in less than 18 months, covering everything from media freedom to elections, corruption, decentralization, and anti-trust rules.
We ratified new public-finance legislation and ensured the independence of the country’s central bank.
New leaders must also expect and manage setbacks.
In post-revolutionary times, expectations are high, and the obstacles to meeting them are enormous.
I know from personal experience that we did not always have the luxury of getting the best outcomes.
We had to compromise and settle for the best possible results.
Security threats are among the most serious setbacks in transitions.
Nationalistic sentiment is strong, and politicians and interest groups can exploit it.
Often, the security forces are holdovers from the old regime, and there is no independent judicial system.
Reforms will take time, and the old bureaucracies may not be able to implement them.
In Indonesia, we used various innovations to work around such dilemmas.
For example, we appointed an independent judge to take over the bankruptcy and corruption courts, because career judges were too tainted.
Likewise, when we started cash-for-work programs as part of our pro-poor agenda, we asked communities to run these initiatives.
More broadly, new leaders are well advised to ensure that the economy performs well.
It is important to restore economic activity and create a favorable environment for entrepreneurs, particularly small and medium-size businesses, which constitute the main engine of job creation.
The recent revolutions, it should be recalled, started with the self-immolation of a Tunisian fruit vendor, who was harassed and insulted by the authorities.
But economic success without accountability and social inclusion is not sustainable, and new governments often must face tough choices in order to protect the poor and vulnerable.
They might have to abolish mis-targeted subsidies to free up resources for more targeted and efficient anti-poverty and job-creation programs.
In Indonesia, we had to draw a line between the very poor and the near-poor.
We could not afford to raise salaries or provide subsidies for everybody.
Our help had to be targeted.
So, while we helped the neediest, we excluded others who were not poor enough to benefit.
This was a tough and unpopular choice.
Finally, countries in transition need support – not only money, but also technical know-how to implement highly complex reforms.
When I became Indonesia’s finance minister, I had 64,000 employees.
But when we had to modernize our tax system, we could not find the required expertise anywhere in our country.
Yes, we needed external assistance, but we never surrendered “ownership” of the reform process; we made it work for us.
If we Indonesians had not been in charge of our own transition, it could easily have failed.
That lesson, too, is one that all countries in transition should bear in mind.
Winning with Opium in Afghanistan
Despite considerable effort by the international community in Afghanistan since 2001 to eliminate the Taliban and al Qaeda, the insurgency in the south of the country has gathered momentum at breakneck speed in recent months.
Our field research shows that we are not winning the campaign for the hearts and minds of the Afghan people – the Taliban are.
Indeed, the international community’s methods of fighting the insurgency and eradicating poppy crops have actually helped the insurgents gain power.
The international community has so far pursued policies of destruction, rather than the promised reconstruction.
The aggressive United States-led counter-narcotics policy of crop eradication has failed to win the support of Afghans, because it has triggered a chain reaction of poverty and violence in which poor farmers, with their only livelihood destroyed, are unable to feed their families.
This has been exacerbated by the failure to provide even the most basic aid and development in the country’s poorest areas.
At the same time, communities have been torn apart as a result of bombing campaigns, which have destroyed the very homes we came to protect.
This, in addition to four years of drought, has forced entire families to leave their villages for makeshift internal refugee camps.
You do not win people over by bombing them, but by helping them.
The Taliban have exploited the failures of the international community in extremely effective anti-Western propaganda that has fueled significant doubt in the minds of the public concerning the reasons justifying the international presence in Afghanistan.
Sadly, our troops are often the first to pay the price – sometimes with their lives.
It is not too late to win back the hearts and minds of the Afghan people.
International troops are excelling in an exceptionally hostile environment, but this is not a war that will be won by military means alone.
With public perception a crucial factor in winning the war, and the Taliban poised to launch a large military initiative next spring, failure to adopt a successful local strategy could signify the last chance the international community will have to build a secure and stable Afghanistan.
But a successful strategy – one that responds to Afghanistan’s extreme poverty crisis –requires that the international community reverse course on crop eradication.
In fact, the eradication of poppy crops not only damage local communities and undermines the international community’s goals, but it is also failing: opium production last year was at an all-time high.
In September, the United Nations Office on Drugs Crime announced that poppy cultivation soared by a record-high 60%.
Eradication will never be successful in Afghanistan, because it destroys the single crop that will grow in the south’s harsh climate – and thus serves as the main source of income to millions of people.
So a new, long-term, economically sustainable solution is urgently needed – one that directly engages with the communities that are suffering most – in order to achieve the support of the deeply impoverished rural population.
As a way to address this dilemma, the Senlis Council is proposing to run scientific pilot projects to research an opium licensing system for Afghanistan, which would be a core component of the economic reconstruction process.
A system in which poppy is cultivated under license for the production of pain-killing medicines such as morphine and codeine would allow farmers to pursue their traditional livelihood and way of life, and, more importantly, to feed themselves and their families.
There is a global shortage of morphine and codeine, particularly in underdeveloped countries, where these vital medicines are often in short supply, if not completely unavailable.
Not only would poppy licensing address the poverty and hunger crises that have engulfed the south of Afghanistan; it also would stabilize existing local structures, giving communities a reason to support President Hamid Karzai’s government and the international community.
Farmers would gain a sense of ownership in counter-narcotics efforts, in sharp contrast to the current idealistic – and evidently un-achievable – policy of crop eradication.
We must have the backing of the Afghan people if we are to defeat the Taliban.
By endorsing such an initiative, the international community would demonstrate that it is in Afghanistan for the good of the local population, which would help farmers sever ties with the insurgency.
But for such a system to be successful, the extreme poverty in the south of the country must first be our top priority.
According to the World Food Program, 70% of the population lack food security.
An immediate injection of emergency food and medical aid is urgently needed to break the vicious circle of suffering and violence.
Only then could a new, long-term development strategy in Afghanistan – one that admits that the international community is not winning the war, and that the status quo is unacceptable – be implemented.
Licensing the opium crop would be a realistic and pragmatic cornerstone of that strategy’s success.
Wolfowitz and the World Bank at Bay
Will World Bank President Paul Wolfowitz’s troubles finally catalyze real change at the World Bank?
Will there finally be an end to the archaic practice by which the President of the United States unilaterally appoints the head of the world’s most important development agency?
Facing an extraordinary rebuke from the Bank’s ministerial oversight committee and open revolt from his professional staff, Wolfowitz has faint hope of limping through the last three years of his term.
The immediate uproar is over the exceedingly generous pay and promotion package that Wolfowitz awarded in 2005 to his girlfriend as compensation for leaving the Bank to pave the way for his arrival.
At a time when the Bank has been emphasizing high governance standards as the key to development, the recent revelation of that arrangement’s details have dealt a serious blow to the Bank’s credibility.
But even if Wolfowitz is eventually forced to resign, nothing will be gained if US President George W. Bush is allowed summarily to choose his replacement, as US Presidents have been doing ever since the Bank was founded after World War II.
Instead, the Bank’s head should be chosen in an open and transparent process that aims to select the best-qualified candidate, whether from the US, Europe, or the developing world.
Indeed, a big part of Wolfowitz’s weakness today is the way he came to his job, as an in-your-face appointment from a US administration weak at international cooperation.
The World Bank is a development finance institution.
But Wolfowitz’s background at the US State and Defense Departments gave him no real expertise or experience in either area.
Instead, his claim to fame was his role as architect of America’s failed war in Iraq.
By all accounts, Wolfowitz is brilliant, but it seems inconceivable that an open, transparent, and multilateral selection process would have chosen him to head the World Bank.
I reach this conclusion even though I am sympathetic to the Bush administration’s desire to catalyze change at the Bank.
I have long advocated shifting the Bank’s center of gravity from lending to outright grants, a policy that the Bush administration strongly endorses.
But choosing someone with no obvious background or experience in economic development was not the way to make progress on this front.
A more open selection process, indeed, would have zoomed in on the fact that Wolfowitz’s girlfriend worked at the Bank.
This may seem a trivial issue, but it is not, given the Bank’s strong policies to protect against nepotism.
If Wolfowitz were otherwise overwhelmingly the most qualified candidate, the selection committee may have found a way to finesse the issue, openly and transparently.
But, given his questionable fit for the job in the first place, the girlfriend issue might have been disqualifying.
Why does the world meekly go along with the status quo and let the US dictate the Bank’s top position?
It is a sorry tale of poor global governance.
Europe does not get in America’s way because it wants to maintain Europe’s equally out-dated privilege of appointing the head of the International Monetary Fund, the Bank’s sister institution.
Asia has little choice but to defer to the US and Europe’s shenanigans because it is grossly under-represented in both organizations.
As for Africa, its leaders are loath to do or say anything that might interrupt the flow of World Bank largesse.
Many people, including myself, have long complained about the leadership selection process at the World Bank and the IMF.
How can the Bank and the Fund continue to go around lecturing developing economies on good governance and transparency but fail to allow change in their own houses?
Now and again, both organizations pay lip service to the issue.
But so far, they have exhibited no real desire for change.
To be fair, the IMF’s leadership is making a determined effort to give dynamic emerging economies, particularly in Asia, a bigger say in Fund governance.
If carried far enough, this process would ultimately catalyze the necessary changes.
Unfortunately, the IMF’s rebalancing efforts are proceeding at a glacial pace.
At the World Bank, nothing seems to be happening at all.
Perhaps when Gordon Brown becomes the UK’s next prime minister, he will be able to convince the G7 group of rich countries to lead the charge for change.
As head of the Fund’s ministerial oversight committee, Brown understands the issues as well as anyone.
Or perhaps the Wolfowitz debacle will prove to be the catalyst.
Maybe at last, the next World Bank or IMF president will come from outside their usual domains.
There are plenty of great potential non-American candidates.
South African Finance Minister Trevor Manuel has ably served as head of the World Bank’s oversight committee and would make a brilliant World Bank president.
And it still could be a qualified American.
What about Bill Clinton?
One way or the other, the Bank and the IMF leadership selection process urgently needs to be revamped.
What the Wolfowitz debacle tells us most clearly is that the time for patience with the status quo is over.
Women for Integration
COPENHAGEN – The past decade has proven again and again that empowering women worldwide holds the key to solving many seemingly intractable issues that have otherwise stymied policymakers.
Poverty in the developing world seemed ineradicable until micro-lenders saw millions of low-income, destitute women as potential entrepreneurs.
Involving African women in decision-making about crop production turns out to enable environmentally sustainable farming practices.
Runaway population growth becomes controllable when women have access to literacy and business opportunities as well as to contraception.
Could the tensions and conflicts surrounding the issue of immigration in Europe be yet another issue for which the empowerment of women holds a solution?
In a recent visit to Copenhagen to commemorate International Women’s Day, I took part in many conversations that duplicate others throughout Europe: citizens from across the political spectrum were struggling with the issue of non-European immigration and the cultural tensions that have ensued.
What does it mean to be Danish, German, or French in the presence of these millions of newcomers, most of whom come from non-democratic societies?
Some of this anxiety is pure racism; but some is not.
What would “integration” mean, and how is it achieved without the loss of cherished civil-society values?
These are not necessarily xenophobic questions: a post-enlightenment civil society, with a free press and due process, is a precious thing, and those values should not be sacrificed to politically correct moral relativism.
This issue has been given new urgency by the arrests in Ireland of alleged jihadists from several countries who are accused of plotting to murder a Swedish cartoonist who drew an image of the prophet Mohammed as a dog.
Across Europe, the discussions are growing more intense as anti-immigration platforms gain supporters in otherwise liberal countries, from Germany to France to traditionally inclusive and tolerant Denmark itself.
Then I witnessed the prototype of a true solution.
I met Elisabeth Møller Jensen, the director of KVINFO, “the Danish center for information on gender, equality and ethnicity” – an extraordinary organization funded by Denmark’s Ministry of Culture.
One of its many innovative programs is already showing results in terms of genuinely integrating immigrant families into Danish society.
By addressing immigrant women – and by viewing them as potential leaders, rather than as quiescent potential maids or service workers – KVINFO is enabling their families to witness the benefits of an open civil society in their own lives.
KVINFO began a “mentor network” aimed at immigrant and refugee women in 2002.
By 2010, it had 5,000 participants, had won awards and international acclaim for best integrative practices, and is being replicated throughout Denmark – and observers are exploring programs or partnerships modeled upon it in Canada, Spain, Portugal, and Norway.
The program pairs refugee and immigrant women in a one-to-one mentoring relationship with women who are established leaders at all levels of Danish society.
The pairing is not cursory.
A careful matchmaking process unites the interests and goals of the women on both sides, and already has paid amazing dividends.
Women who were journalists, engineers, or scientists in their countries of origin – and who could not get jobs as checkout cashiers in Denmark – have been paired with Danish counterparts and are now back in school, or working in research.
But even women who arrive with no higher education or professional skills create an “action plan.”
They learn from their mentors what options there are, how to proceed, and what to do to reach their objectives. As they enter the workforce, their language skills improve, their household income soars, and their children see firsthand a woman in a respected, economically valued role.
Their loved ones thus learn how to thrive in a European context – occasionally coming to KVINFO events and benefiting from their mothers’ expanding network of contacts.
So, rather than feeling exploited and condemned indefinitely to the fringes of a Northern European society – and thus vulnerable to the stirrings of demagogues and extremists – these women’s children grow up fully familiar with Danish civil society, well informed about higher education and professional opportunities, and hopeful rather than cynical.
By empowering women, the whole family is lifted up and, in a supportive rather than a colonizing way, “Europeanized” in the best sense.
I am often struck by the way many Europeans use arms-length euphemisms when talking about immigrants: they want immigrants to feel “welcome” or “comfortable.”
I always wonder, “But do you want them to feel French, or German, or Norwegian?”
To be fully integrated, Muslim and other newcomers to European countries must be welcomed not as perpetual visitors – even if, ideally, as nicely treated visitors – but rather as family members, as the American model does (or aspires to do).
As Møller Jensen put it, “I want these children to feel Danish .” These young people and Denmark itself will benefit, as this “KVINFO generation” grows up with a genuine stake in Danish civil society, and seeing the world as Danes, not as guests.
Arab Women’s Unfinished Revolution
FEZ – Though women across the Middle East participated actively in the Arab Spring protests that began in late 2010, they remain second-class citizens, even where popular uprisings managed to topple autocratic regimes.
Indeed, the Islamist governments now in power in several countries seem more determined than the despots that they replaced to keep women out of politics.
In conducting interviews with women in the region, I am struck by their overall pessimism.
They fear the loss of their rights.
They see economic disintegration all around them, raising the possibility of a further increase in violence.
As social bonds fray, they feel increasingly vulnerable.
More than once, I heard them express the view that things were better before the revolutions.
Female representation in parliaments and government cabinets after the Arab Spring has been either absent or meager, and women activists worry that Islamist parties will implement reactionary policies that discriminate on the basis of gender.
In Egypt, for example, the Freedom and Justice Party, which dominates the parliament, claims that a woman cannot become President.
Egyptian women were heavily represented in the protests that brought down former President Hosni Mubarak’s regime in 2011, but they have been largely excluded from any official decision-making role ever since.
In Morocco, while there were eightwomen in the previous cabinet, today there is only one in the Islamist-led government.
In January, the Islamist-dominated parliament adopted a decree lowering the age of marriage for girls from 18 to 16, a major setback.
Moroccan feminists have protested vigorously, but to no avail.
Parliamentary representation for women has also taken a hit.
Women hold less than 1% of seats in the current Egyptian parliament; previously, they held 12%.
In Libya, a first draft of the electoral law reserved 10% of seats in the constituent assembly for women, but the quota was later abandoned.
In Tunisia, the election in 2011 brought 49 women into the 217-seat Constituent Assembly.
But 42 of these women are members of Ennahda, which regards Sharia (Islamic law) as the source of legislation.
Long-time Tunisian activists fear that Ennahda, which dominates the assembly, will use the presence of women MPs to restrict women’s rights.
The recent assassination of the secular Tunisian opposition leader Chokri Belaid has raised the stakes for women there.
Belaid was a voice on behalf of women’s rights, and the threat of increased political violence will focus on those who advocate secular equality for all Tunisians, including women.
Unfortunately, conservative forces in the Arab world repeatedly turn against women when political unrest spreads.
In Bahrain, several women protesters have been arrested and&#160;tortured.
In Yemen, the authorities call on male relatives to “tame” their women.
In Tunisia, the most Westernized of the Arab countries, women have been attacked at universities and schools, and are being forced to wear the hijab.
A woman who was allegedly raped by two policemen in September 2012 was charged with public indecency when she filed a complaint.
Likewise, in Egypt, women protesters face greater scrutiny than men.
Those arrested by the military during the anti-Mubarak protests were subjected to virginity tests as a form of intimidation.
Across the Middle East, Islamist militias have harassed, arrested, raped, and tortured women pro-democracy activists.
The model of Iran’s Islamic Revolution in 1979, which imposed second-class citizenship on women, is frequently cited as a threat in Arab countries now ruled by Islamist parties.
These countries are at a crossroads.
Women make up half of the Middle East’s population, and any hope of political and economic development must account for that fact.
Organizations like the United Nations Development Program have repeatedly issued reports demonstrating the connection between economic decline and oppression of women.
Simply put, the Arab countries will not succeed unless women are fully integrated into political and economic life.
In her Nobel Peace Prize acceptance speech in 2011, Yemeni political activist Tawakkol Karman, made the point clearly: “The solution to women’s issues can only be achieved in a free and democratic society in which human energy is liberated, the energy of both women and men together.”
Middle Eastern countries should protect and consolidate women’s rights as a way to reinforce democratic ideas and habits.
They must institute the Universal Declaration of Human Rights and other international laws and agreements in order to eradicate gender-based discrimination and violence.
The hope for women’s progress is really a hope for a decent society in which development for all is possible.
Women on Top?
What will G-8 summit meetings be like when American President Hillary Clinton and French President Ségolène Royal join German Chancellor Angela Merkel in a formidable triangle of women’s power?
The scenario is not altogether unlikely.
Indeed, in the United States and France, there are even alternative female candidates for the presidency (Condoleezza Rice in America, Michelle Alliot-Marie in France).
Will this mean a new style of both domestic politics and international relations?
The answer is not obvious.
After all, some women have long had the strength and the will to make it to the top.
Think of Indira Gandhi, Golda Meir, or Margaret Thatcher.
All three were powerful prime ministers of their countries, though perhaps not the epitome of what might be regarded as feminine values.
They all outdid men at their own game and had little time for what came to be called feminism.
Indeed, another trend may be more significant as far as political leadership is concerned.
When it comes to the formation of governments, women have managed to break out of the prison of their traditional domains, such as education and social affairs.
Foreign policy in particular has become a female aspiration.
Both the US and the European Union have women leading their foreign offices; so do half a dozen EU countries, including Britain.
Has this changed the style, indeed, the substance of foreign policy?
Undoubtedly, a shift in policy styles is occurring in many parts of the world.
In a word, it appears that the Reagan-Thatcher period is over.
While opponents of globalization still fight “neo-liberal” policies, political discourse has taken a new turn.
Words like “justice” are back in fashion; there is concern about globalization’s losers and the “underclass.”
Likewise, the leader of Britain’s Conservatives, David Cameron, startled more old-fashioned supporters of his party by saying that people released from prison “need, above all, love.” When Prime Minister Tony Blair described the next election as a fistfight in which the “flyweight” Cameron would be carried out and the “heavyweight” Brown victorious after a short bout, he got much applause from his supporters in the House of Commons, but the remark went down badly with voters.
Somehow, people prefer “softer” values than were prevalent in the last two decades.
Yet it is not the leading women who above all represent these values.
Merkel may have been softened by having to preside over a grand coalition, but her original stance was more of the Reagan-Thatcher variety.
Yuliya Tymoshenko was clearly the most stouthearted among the leaders of Ukraine’s Orange Revolution, and no one has ever described Hillary Clinton as particularly “soft.”
On the contrary, her possible Republican opponent in 2009, Senator John McCain, while a war hero, is also a man who represents to many Americans the new soft values.
Merkel had a difficult time in the run-up to her recent party conference, because Jürgen Rüttgers, the minister-president of the largest German state, North-Rhine Westphalia, reminded the Christian Democrats of their historical support for strong social-welfare policies.
Only Royal may be said to represent softer lines against the hard-liner of the governing party, Nicolas Sarkozy.
So, have women at or near the top made no real difference to politics?
Whatever change they have brought has not been obvious.
In a sense, women’s advance is simply the normal consequence of the gradual move to effective equality of opportunity that began in the 1960’s.
It took decades to become real, and there are still countries that have a long way to go.
Despite Tymoshenko’s leading role in Ukraine, it would be surprising to see Russian President Vladimir Putin replaced by a woman, and, while there is a female vice-president in China, there is no sign of a woman becoming Japanese prime minister soon.
Even so, in many parts of the world, women have made considerable headway on the path to the top.
Not infrequently this has been helped by explicit policies.
David Cameron prides himself on a successful campaign to make 40% of all Conservative parliamentary candidates in Britain are women.
But this is precisely the point.
It is not the women at the top who have changed the scene.
Rather, it is a more general trend, helped along by open-minded leaders of both sexes, that has changed the political climate in countries.
No one, man or woman, can today aspire to setting the tone of public discourse without recognizing that politics is no longer only a man’s game.
In other words, normalization by equal opportunity is itself the change.
Whatever the particular values of leading candidates, this is undoubtedly progress.
Through the Lookism Glass
NEW YORK – Do women suffer from a double standard in the workplace in relation to how they look?
Have we gotten past the subtle (and sometimes not-so-subtle) shade of sexism in hiring and promotion – disproportionately affecting women – that I identified in 1991 as “the professional beauty quotient”?
It is hard to believe that we are still talking about this 20 years later – but we must.
When anti-feminists make the case that there is now a “level playing field” for women, and that any gender gap in achievement and pay reflects women’s own choices, they should consider what used to be called “lookism.”
In a recent commentary, the sociologist Michael Kimmel described an Iowa case in which a 33-year-old dental technician, Melissa Nelson, was fired by her male boss, not for issues related to her job performance, but because he found her too sexually attractive to work beside without fear of jeopardizing his marital vows.
When Nelson sued, the court issued a heinous ruling – upheld by the Iowa Supreme Court – affirming his right to dismiss her for this reason.
One could argue that men, too, are promoted or penalized on the basis of their appearance; indeed, economists have found that those with an “above-average” appearance earn 5% more than their “less attractive” counterparts, and that workers with a “below-average” appearance earn 7-9% less than their “average” counterparts.
To be fair, there is now a professional premium on male looks as well.
We all know that there is a reason that politicians spend $400 on haircuts and CEOs boast about working out at dawn with personal trainers.
Looking healthy, fit, youthful, and professional are now signs that male elites use to signal their status to one another in an advanced consumer and corporate economy.
But, as the Nelson case shows, women are not just subjected to the straightforward – equally onerous – lookism that men, too, might face on the job.
Young women, especially, suffer from discrimination in the workplace when they are seen as “too” aesthetically appealing.
Many workplaces channel conventionally attractive young women into out-front support, or subordinate, jobs, in which their appearance – as they bring coffee to high-status men in meetings – can add value to the corporate “brand,” though no value is being added to their own careers.
Young women are put into these visible, cheerleader roles even when their professional development might be better suited to their being unseen in a lab, or slogging away over copy late at night, or addressing a room from a position of authority.
Potentially worse is the beating their confidence takes as they spend their twenties worrying, as their male peers – however attractive – almost never do, that their (generally minimal) advancement reflects an evaluation of their looks, and is not tied to their accomplishments.
Even more insidious is the reflex even today in major Western media whereby attention is regularly directed to the appearance and sexuality of powerful women, especially those in politics.
The Huffington Post, an otherwise rational publication, ran a report about German Chancellor Angela Merkel under the headline “Merkel’s cleavage takes center stage in German elections,” while anti-Merkel bloggers have called attention to Merkel’s “attractiveness gap.”
Germany’s Die Partei, established by the editors of the satirical magazine Titanic, made light of the offensive trope, running a campaign under the slogan: “A woman – yes!
But attractive.”
The late Christopher Hitchens, by contrast, was not joking when he parsed Margaret Thatcher’s sex appeal.
This continual, rather fetishistic sexualizing of powerful women confirms the argument I made more than two decades ago in my book The Beauty Myth: Women’s appearance is used against them most rigorously – as a diversionary tactic – when real social, economic, or political power is at stake and almost within their grasp.
It is doubtless demoralizing and distracting to an influential woman to be continually treated like a bimbo, or else told by major news outlets how unattractive, old, fat, or badly dressed she is.
This gauntlet of scrutiny is why young women with great leadership qualities are often reluctant to enter the public eye: they see this abuse, whether “positive” or negative, as a no-win proposition, one that powerful men simply do not face.
Does the business press ever call JPMorgan CEO Jamie Dimon cute, or describe him as “pouty,” or remark on his good hair and nice abs, as though he were a male stripper?
Do they ever ask Ben Bernanke, “What’s with the facial hair?
It’s not 1979.”
Do political reporters ever take Newt Gingrich to task for, say, being overweight, unfit, and a poor dresser?
No media outlet would ever print such observations, which, when aimed at men, would appear insulting, inappropriately personal, and irrelevant.
So why is it still acceptable to run public commentary about the state of Merkel’s cleavage, or Hillary Clinton’s ankles?
We should try to imagine a world in which the Jamie Dimons and Newt Gingriches struggle daily to stay focused on their high-pressure jobs, while torrents of comment and attention are devoted to how “hot” and well-dressed they are, or alternatively, how out of shape, middle-aged, and sexually unappealing they are.
Many countries have government agencies whose job is to ensure that women – and men – do not face workplace discrimination on the basis of their appearance.
Unfortunately, that task has not been completed.
But, because the media play a major role in perpetuating this double standard against women in the public eye, legislating or litigating against this kind of workplace harassment will not help.
Sexist commentators have to scrutinize themselves; if they do so honestly, they will not like what they see in the mirror.
Worker Protests In China: Plentiful But Preempted
The last annualized figure for labor protests that Beijing was willing to announce publicly was 100,000 for the year 1999.
But a 2001 internal report from the Ministry of Public Security disclosed that the numbers "began a rise like a violent wind" from 1997, the year of the Communist Party's Fifteenth Congress, which pressed for factory firings in the name of "efficiency."
While the government is determined to keep news of all disturbances out of the media--or at least downplay their size and disruptiveness--it has been possible to collect information on nearly 200 separate events occurring between 1994 and 2004, some from news sources in Hong Kong, some from the Western media, and a few from Chinese publications.
They all exhibit the same, unchanging pattern: the government, whether in Beijing or the localities, tolerates the low-decibel, smaller-scale, relatively non-disruptive marches and sit-ins by demonstrators bearing petitions and posters, especially if they appear to be spontaneous, un-organized, localized and leaderless.
The incidents loom substantially more dangerous to the political elite if they seem to have been mobilized by dissidents, are marked by some measure of violence, threaten to spread, or entail the obstruction of major transport trunklines.
Indeed, the episodes that make it into the media beyond the Mainland are usually such protests.
What is sparking so much unrest in a country usually depicted as daily growing more affluent? Generally the causes are these: unpaid wages and pensions; sudden and massive job terminations; and management corruption held responsible for the bankruptcy of industrial enterprises--where discharged workers were secure, enjoying privileges and benefits, since the 1950s.
Job losses in the range of 60 million have suddenly rendered nearly an eighth of the urban populace indigent. Often without a dependable channel for airing their grievances, hordes of laid-off workers and retired folk have filled the avenues over the past decade or so.
Doesn't the government mind if so much of its urban populace is sinking into poverty and becoming disaffected? Why is this stability-obsessed regime allowing so much instability?
In fact, the leaders are terribly uneasy about the situation and discuss it frequently. Some of the response has been coldly coercive.
But there is also a compensatory effort that has absorbed much of the energy of the bureaucracies for labor and social security, and for civil affairs.
For 2004, the central government allocated some 78 billion yuan for laid-off workers and the poor, with localities also upping their outlays. But the sad truth is that probably only about a quarter of those pushed out of their plants ever received assistance.
For those who have, however, this policy has nipped discontent in the bud.
Additionally, there have been attempts to create new posts, develop labor-intensive industries and small and medium sized firms, promote the private sector, and encourage service jobs, plus offering occupational training: the government allocated an additional 4.7 billion yuan expressly for job creation in 2004.
These policies mitigate the pain of job loss for their recipients.
Promotion of the law also aims at alleviating anger.
As workers' consciousness of their rights increases, they are gradually more and more apt to appeal grievances to the courts: from 1995 to 2001, adjudicated labor disputes rose from 28,000 to 101,000.
Offering workers legal redress has turned their attention temporarily from the streets to mediation and may well have reduced the number of street demonstrations.
Other initiatives are a program of allowances, training and placement for the laid-off; unemployment insurance (which, unfortunately, depends on the economic health of the firm to which a worker was once attached); and pension reform--having similar problems.
There is also a scheme to supply a "minimum livelihood guarantee" to the desperately poor.
Recipients numbered over 20 million as of early 2004, when 15 billion yuan was budgeted for the program (with the central government contributing a full 60%). These programs are noticed at the grassroots, with the indigent feeling grateful for them.
Protest in China has spun upward dramatically in recent years, in numbers, scale, and organization. But by the means listed above the regime has become adept at suppressing opposition.
Its power to intimidate and punish may trump all its other moves to stay ahead of the discontent.
But overall, increasing responsiveness--if clearly not in a democratic mode--has managed to maintain the instability that does exist at a level and within a scope that marks a game of unwritten rules -- one of complainants confining their choler within understood bounds and of the government watchful over an ever-simmering stew.
Workers’ Paradise?
CAMBRIDGE &#45;&#45; Will the political resurgence of labor unions throw a wrench into the wheels of globalization?
Or will their growing strength serve to make globalization more sustainable by fostering great equality and fairness?
One way or the other, unions stand as a major wild card for the evolution of our economic system in 2008 and beyond.
Unions’ rising influence is evident in many recent events: German Chancellor Angela Merkel’s controversial deal to raise minimum wages for postal employees; several American presidential candidates’ open misgivings about trade and immigration; and the Chinese leadership’s nascent concerns about labor standards.
Along with their political clout, unions’ intellectual respectability is also experiencing a renaissance.
After decades of vilification by economists for raising unemployment and strangling growth, the union movement is now receiving backing from thought leaders such as Paul Krugman, who argues that stronger unions are needed to counter globalization’s worst excesses.
The sudden emergence of unions as a political force is particularly surprising in the United States, where private-sector union membership has fallen from 25% in 1975 to 8% today.
From high-tech Google to mass retailer Wal-Mart, US companies have found ways to keep their shops union-free.
Only the public sector, where the membership rate is 35%, has remained a union bastion.
One of my best friends from childhood married a union organizer who found it so difficult to land a job in the US that he eventually moved his family to strike-happy Canada.
Today, US political leaders such as Congressman Barney Frank want to bring back unions.
But there is good reason to be skeptical.
For a relatively poor country like China, real unions could help balance employers’ power, bringing quality-of-life benefits that outweigh the growth costs.
Factory conditions in parts of China are all too reminiscent of the early twentieth-century, pre-union US.
Thousands of Chinese workers die each year in coal mines that sometimes lack basic safety precautions.
But, for the US and rich countries in Europe, the argument that stronger unions would bring more benefits than costs is far more dubious.
Nowadays, most workers already have legal and statutory rights that cover the basic protections that unions originally fought for a century ago.
Instead, union influence today all too often serves to promulgate inflexible work practices and flat salary structures that do not adequately reward work effort and skill.
It is no surprise that the public sector, where productivity is low and fiscal constraints soft, typically has the greatest union concentration.
Teachers’ unions, especially, are a catastrophe, blocking any rationalization or improvement of many countries’ education systems.
Before the modern globalization era, unions could thrive by organizing on a national scale, giving them enormous bargaining power vis-à-vis both employers and consumers.
Now, after the explosive post-war expansion of global trade, most unions have seen their monopoly power eroded, if not shattered.
That is why unions throughout much of the developed world have been fighting so hard to block free-trade negotiations that might erode their position further.
Some of the issues that unions are promoting, such as human rights and environmental quality, are unassailable.
When they try to connect these issues with trade, however, their motives become questionable.
A case in point is union lobbying against the US-Colombia free-trade agreement, ratification of which would greatly advance US-Latin American relations.
Legitimate questions about how the Colombian government conducted its epic civil war with drug-financed rebels do not trump broader issues.
So anti-pact activists have complained that Colombia is anti-union because it does not protect union members from rebel violence.
Yet the Colombian government notes that all Colombians suffer from rebel violence – union members actually experience less of it than the rest of the population.
Unfortunately, this play is being re-enacted across a host of trade issues, including many involving China.
For rich countries, income redistribution is much better handled through taxes and benefits system, rather than by government edicts to strengthen unions.
The rich today pay so little in taxes in many countries, that it would be a big improvement simply to move to a flat tax, with a very high exemption level so that lower-income families pay nothing.
For middle-income countries, it is a tougher call.
But here, too, increasing workers’ legal and statutory rights, while allowing most unions to fade away, seems like the right approach.
Unfortunately, we are far more likely to see unions’ growing political influence become a major destabilizing force in trade and growth, with highly uncertain consequences.
When we see political leaders in many rich countries pander to unions by bashing each other on free trade and immigration, there is every reason to worry about trouble ahead.
That is why unions will be one of the main economic wild cards in 2008.
विश्व बैंक के लिए नया मिशन
वाशिंगटन, डीसी - आर्थिक विकास के इतिहास में हरित क्रांति को महान सफलताओं में से एक माना जाता है। 1960 के और 1970 के दशकों के बाद, अधिक उपज देने वाली अनाज की किस्मों को तैयार करने और उन्हें अपनाए जाने से भारतीय अर्थव्यवस्था का रूपातंरण हो गया था और इसने विकासशील दुनिया के ज़्यादातर भागों में अरबों लोगों को भुखमरी से बचा लिया था।
लेकिन आज, हरित क्रांति के लिए जिम्मेदार संस्था – दुनिया भर में 15 अनुसंधान केन्द्रों का कंसोर्शियम जिसे अंतर्राष्ट्रीय कृषि अनुसंधान सलाहकार समूह (CGIAR) कहा जाता है – का भविष्य खतरे में है। विश्व बैंक, जो इसके प्रमुख वित्तपोषकों में से एक है, अपना वित्तीय समर्थन वापस लेने पर विचार कर रहा है।
अपने आप में, यह निर्णय पर्याप्त चिंता का विषय है। CGIAR का मिशन वैश्विक खाद्य सुरक्षा है, और बुनियादी कृषि अनुसंधान में दुनिया के गरीबों को आर्थिक लाभ प्रदान करने की विशाल संभावनाएं मौजूद हैं। लेकिन इससे भी अधिक चिंताजनक बात विश्व बैंक द्वारा यह संकेत दिया जाना है कि वह अब कम वित्तपोषित वैश्विक सार्वजनिक वस्तुओं का और समर्थन नहीं करेगा जो पिछली शताब्दी की सामाजिक, आर्थिक और राजनीतिक प्रगति का संरक्षण करने के लिए महत्वपूर्ण हैं।
CGIAR की प्रस्तावित कटौतियाँ विश्व बैंक के अपने प्रशासनिक बजट को $400 मिलियन कम करने के प्रयासों का हिस्सा हैं - जो संगठन के अध्यक्ष, जिम योंग किम द्वारा 2013 में किया गया संकल्प है। विश्व बैंक फ़िलहाल CGIAR को $50 मिलियन का वार्षिक अनुदान दे रहा है जिसमें $20 मिलियन की कटौती की जाएगी, और कुछ वर्षों की अवधि में पूरी राशि संभवतः चरणबद्ध रूप में समाप्त कर दी जाएगी।
अपने आप में, इसमें शामिल पैसा दोनों में से किसी भी संगठन के लिए बहुत-ज़्यादा महत्वपूर्ण नहीं होगा। जिन आँकड़ों पर चर्चा हो रही है, वे विश्व बैंक के दानकर्ताओं द्वारा वैश्विक गरीबी से लड़ने और कम आय वाले देशों को सहायता प्रदान करने में मदद करने के लिए 2013 में प्रतिबद्ध की गई $52 मिलियन की राशि की तुलना में बहुत छोटी है। CGIAR के लिए, प्रस्तावित कटौतियाँ कष्टकर तो होंगी, लेकिन विनाशकारी नहीं होगी; 2013 में, समूह ने अपनी गतिविधियों के वित्तपोषण के लिए $984 मिलियन खर्च किए थे।
अभी भी, विश्व बैंक – जो विशिष्ट महत्व की वैश्विक विकास संस्था है – वास्तव में यह घोषणा कर रहा है कि कृषि अनुसंधान विकास की प्राथमिकता नहीं है। निश्चित रूप से, CGIAR का वित्तपोषण एकमात्र ऐसा वित्तपोषण नहीं है जो जोखिम में है। विश्व बैंक वैश्विक विकास नेटवर्क को अपने छोटे लेकिन उत्प्रेरक अंशदानों में भी कटौतियाँ करने पर विचार कर रहा है, जो विकासशील देशों में शोधकर्ताओं को वित्त प्रदान करता है। खनन उद्योग पारदर्शिता पहल के लिए इसका समर्थन भी जोखिम में है, जो भ्रष्टाचार को कम करने के लिए प्राकृतिक संसाधनों से संबंधित सौदों के प्रकटीकरण को बढ़ावा देती है, साथ ही उष्णकटिबंधीय रोगों में अनुसंधान और प्रशिक्षण के लिए विशेष कार्य���्रम के लिए किया जा रहा इसका वित्तपोषण भी जोखिम में है। ये कार्यक्रम, और दूसरे कार्यक्रम, विश्व बैंक की विकास अनुदान सुविधा द्वारा समर्थित हैं जिसे प्रशासनिक बजट में कटौतियों के संभावित स्रोत के रूप में लक्षित किया गया है।
विकास से संबंधित वैश्विक सार्वजनिक वस्तुओं के प्रावधान के समर्थन के लिए विश्व बैंक द्वारा उपलब्ध कराया गया पैसा कभी भी इसके खर्च का बड़ा भाग नहीं बना। CGIAR और अन्य अनुदान प्राप्तकर्ताओं के समर्थन के लिए वर्ष में मोटे तौर पर $200 मिलियन का इसका खर्च, 2012 में इसके द्वारा दिए गए $35 बिलियन के ऋण की तुलना में बहुत कम है। लेकिन प्रस्तावित कटौतियाँ विश्व बैंक की गतिविधियों के उस क्षेत्र को समाप्त कर देंगी, जिसका विस्तार कियाजाना चाहिए, न कि कम किया जाना चाहिए।
सच्चाई यह है कि विश्व बैंक की स्थापना पर इसकी कल्पना वैश्विक सार्वजनिक वस्तुओं पर काम करने वाली संस्थाओं को अनुदान देने वाली संस्था के रूप में नहीं की गई थी। इसका प्रमुख मिशन था - और अभी भी है – सरकारों को ऋण और तकनीकी सहायता प्रदान करना। लेकिन ध्यान देने योग्य बात यह है कि सरकारी ऋण, निजी निवेश, और प्रवासियों द्वारा प्रेषणों की तुलना में, इक्कीसवीं सदी में विकासशील देशों के वित्त के संबंध में विश्व बैंक की प्रासंगिकता बहुत अधिक कम हुई है।
क्योंकि विश्व बैंक के ऋण या गारंटियाँ विशेषज्ञता और सलाह के साथ जुड़े होते हैं, इसलिए इसके पास अभी भी एक व्यवहार्य उत्पाद उपलब्ध है। लेकिन जैसा कि मैंने पहले तर्क दिया है, इसके पास एक और उत्पाद होना चाहिए। दुनिया की प्रमुख और एकमात्र पूरी तरह वैश्विक विकास संस्था होने के रूप में यह इस स्थिति में है - और वास्तव में इसकी ज़िम्मेदारी है कि यह वैश्विक सार्वजनिक वस्तुओं के प्रबंधन में प्रायोजन, वित्तपोषण, और प्राथमिकताएं तय करने में मदद करे।
अब समय है कि विश्व बैंक की सदस्य सरकारों में से कोई एक या अधिक सरकारें इस मुद्दे को उठाएँ। हाल ही में इबोला महामारी के बारे में संगठन की त्वरित प्रतिक्रिया वैश्विक चिंताओं पर कार्रवाई करने की इसकी क्षमता का प्रभावशाली उदाहरण पेश करती है। इसके अलावा, इस वर्ष अंतर्राष्ट्रीय समुदाय स्थायी विकास लक्ष्यों पर सहमत होगा – ये ऐसे लक्ष्य हैं जो कृषि अनुसंधान और विकास, भूमि और जल के उपयोग को इष्टतम करने के प्रयासों, और वानिकी संरक्षण जैसे क्षेत्रों में निवेश द्वारा भली-भाँति प्राप्त किए जा सकेंगे।
जर्मनी, यूनाइटेड किंगडम, और चीन के निकट सहयोग से, संयुक्त राज्य अमेरिका को इस संबंध में विश्व बैंक के लिए स्पष्ट जनादेश प्रदान करने में सक्षम होना चाहिए। विश्व बैंक का बीसवीं सदी का मिशन - देशों को उनके विकास के वित्तपोषण में मदद करना - निकट भविष्य के लिए महत्वपूर्ण बना रहेगा। लेकिन विश्व बैंक के पास विकास के लिए मूल पूर्व-आवश्यकताओं में से एक -वैश्विक सार्वजनिक वस्तुओं का सावधानीपूर्वक प्रबंधन और संरक्षण करना - पर अधिक जोर देकर अपना ध्यान इक्कीसवीं सदी पर केंद्रित करने का अवसर भी है।
World Cup Heralds a New Korea
The euphoria of fans whose team wins a major sporting event is ephemeral.
But, prominent professors at Korean universities tell me that the unprecedented success of the Korean team in the current World Cup competition is causing a turning point in Korean attitudes towards their own society and economy.
Why?
Many Koreans, especially those who studied or lived in the West, complain about the "cronyism", and the resulting importance of "connections" in all walks of Korean life, which they see as pervasive features of Korean society.
They claim that such rampant cronyism is preventing Korea from catching up economically with the West, despite the fact that Korea soon will have as much human capital as western countries.
To understand Korean cronyism we have to see it as one aspect of a set of related social conventions.
Koreans accept a sense of knowing one's place in society that seems extreme to Americans.
In social interactions, and also in business dealings, Koreans maintain a hierarchy that seems to weigh age more highly than performance.
Also, although admission to elite universities is as meritocratic in Korea as in the West, the outcome of the university entrance competition has a more important and more permanent effect on one's place in Korean society.
It is only a slight exaggeration to say that in America people have to prove themselves continually, whereas in traditional Korean society people have only to prove themselves once, then they can be set for life due in large measure to the network of crony contacts that initial success will have provided.
What do Korean cronyism and related social conventions have to do with the World Cup?
In the past cronyism apparently has been as pervasive in the selection of Korean teams for international sports competitions as in other areas of Korean society.
But, two years ago when the Korean soccer football association hired the Dutchman, Guus Hiddink, to coach the Korean national soccer team, Hiddink made it clear that he would select his players based on merit alone.
The performance of the Korean team in the 2002 World Cup competition is demonstrating to every Korean in a way that is easily seen that meritocracy yields better results than cronyism.
It also helps that Hiddink has been able to use his coaching skills to bring out in his team the strengths of the Korean national character: intelligence, discipline, tenacity, and perseverance.
Of course, Korean traditionalists reject criticism of what westernized Koreans call cronyism.
Traditionalists argue that criticism of cronyism is really criticism of social solidarity and responsibility, which they see as positive features of Korean society.
Traditionalists also argue that meritocracy implies individualism, and that too much individualism and too little social solidarity and responsibility are negative features of western society.
Some traditionalists even might claim that they do not want Koreans to be as rich as westerners if that requires Koreans to be as individualistic as westerners.
The Hiddink phenomenon did not emerge suddenly out of thin air.
The accumulation of gradual changes that have already occurred in Korean society made it acceptable to import a westerner to coach the Korean national soccer team and to allow him to establish a meritocratic regime.
But Hiddink has expedited the process of change within Korean society, and his success has made it look revolutionary.
It remains to be seen how fast, in what ways, and with what effects, Korean society will continue to change.
Koreans are talking about learning the lessons of Hiddink. But the western model of a meritocratic society is not easy to emulate.
A soccer team is a relatively simple organization.
Implementing the lessons of Hiddink throughout Korean society will present more difficult challenges.
Whatever the outcome, it seems that in the case of the 2002 World Cup the effects of success in a major sporting event will not be ephemeral.
The Return of Currency Wars
NEW YORK – The recent decision by the Bank of Japan to increase the scope of its quantitative easing is a signal that another round of currency wars may be under way.
The BOJ’s effort to weaken the yen is a beggar-thy-neighbor approach that is inducing policy reactions throughout Asia and around the world.
Central banks in China, South Korea, Taiwan, Singapore, and Thailand, fearful of losing competitiveness relative to Japan, are easing their own monetary policies – or will soon ease more.
The European Central Bank and the central banks of Switzerland, Sweden, Norway, and a few Central European countries are likely to embrace quantitative easing or use other unconventional policies to prevent their currencies from appreciating.
All of this will lead to a strengthening of the US dollar, as growth in the United States is picking up and the Federal Reserve has signaled that it will begin raising interest rates next year.
But, if global growth remains weak and the dollar becomes too strong, even the Fed may decide to raise interest rates later and more slowly to avoid excessive dollar appreciation.
The cause of the latest currency turmoil is clear: In an environment of private and public deleveraging from high debts, monetary policy has become the only available tool to boost demand and growth.
Fiscal austerity has exacerbated the impact of deleveraging by exerting a direct and indirect drag on growth.
Lower public spending reduces aggregate demand, while declining transfers and higher taxes reduce disposable income and thus private consumption.
In the eurozone, a sudden stop of capital flows to the periphery and the fiscal restraints imposed, with Germany’s backing, by the European Union, the International Monetary Fund, and the ECB have been a massive impediment to growth.
In Japan, an excessively front-loaded consumption-tax increase killed the recovery achieved this year.
In the US, a budget sequester and other tax and spending policies led to a sharp fiscal drag in 2012-2014.
And in the United Kingdom, self-imposed fiscal consolidation weakened growth until this year.
Globally, the asymmetric adjustment of creditor and debtor economies has exacerbated this recessionary and deflationary spiral.
Countries that were overspending, under-saving, and running current-account deficits have been forced by markets to spend less and save more.
Not surprisingly, their trade deficits have been shrinking.
But most countries that were over-saving and under-spending have not saved less and spent more; their current-account surpluses have been growing, aggravating the weakness of global demand and thus undermining growth.
As fiscal austerity and asymmetric adjustment have taken their toll on economic performance, monetary policy has borne the burden of supporting faltering growth via weaker currencies and higher net exports.
But the resulting currency wars are partly a zero-sum game: If one currency is weaker, another currency must be stronger; and if one country’s trade balance improves, another’s must worsen.
Of course, monetary easing is not purely zero-sum.
Easing can boost growth by lifting asset prices (equities and housing), reducing private and public borrowing costs, and limiting the risk of a fall in actual and expected inflation.
Given fiscal drag and private deleveraging, lack of sufficient monetary easing in recent years would have led to double and triple dip recession (as occurred, for example, in the eurozone).
But the overall policy mix has been sub-optimal, with too much front-loaded fiscal consolidation and too much unconventional monetary policy (which has become less effective over time).
A better approach in advanced economies would have comprised less fiscal consolidation in the short run and more investment in productive infrastructure, combined with a more credible commitment to medium- and long-term fiscal adjustment – and less aggressive monetary easing.
You can lead a horse to liquidity, but you can’t make it drink.
In a world where private aggregate demand is weak and unconventional monetary policy eventually becomes like pushing on a string, the case for slower fiscal consolidation and productive public infrastructure spending is compelling.
Such spending offers returns that are certainly higher than the low interest rates that most advanced economies face today, and infrastructure needs are massive in both advanced and emerging economies (with the exception of China, which has overinvested in infrastructure).
Moreover, public investment works on both the demand and supply sides.
It not only boosts aggregate demand directly; it also expands potential output by increasing the stock of productivity-boosting capital.
Unfortunately, the political economy of austerity has led to sub-optimal outcomes.
In a fiscal crunch, the first spending cuts hit productive public investments, because governments prefer to protect current – and often inefficient – spending on public-sector jobs and transfer payments to the private sector.
As a result, the global recovery remains anemic in most advanced economies (with the partial exception of the US and the UK) and now also in the major emerging countries, where growth has slowed sharply in the last two years.
The right policies – less fiscal austerity in the short run, more public investment spending, and less reliance on monetary easing – are the opposite of those that have been pursued by the world’s major economies.
No wonder global growth keeps on disappointing.
Homesick Politics
MADRID – World order – or the lack thereof – is a hot topic these days.
Our fixation with the future of global structures and systems is evident everywhere – in the news and at conferences, on bestseller lists, even in popular television shows.
People are anxious.
The world seems to be undergoing fundamental change: new actors are emerging on the world stage, previously sacrosanct rules of international behavior are being openly defied, and a new wave of technological progress is disrupting entire industries and economic sectors.
In our quest for structure and predictability – a natural impulse in times of rapid change – we are desperate for hints about how the world, and our role in it, will develop.
It is of course vital in such situations that we identify the best, or at least the most feasible, way forward; predictability provides a foundation for cost-benefit analysis and strategic thinking.
The problem arises when our yearning for certainty overwhelms rational thinking, taking our ideas and actions in an unproductive – or even dangerous – direction.
The current trend toward rose-colored retrospection is a case in point.
Faced with political, economic, geostrategic, and social uncertainty, policymakers have increasingly succumbed to the allure of nostalgia, promising a return to what they portray as the familiar and complete rules and practices of the past.
In Russia, President Vladimir Putin has been operating according to a nineteenth-century worldview, in which great powers dominate their spheres of influence unchallenged.
As he noted at last October’s meeting of the Valdai Discussion Club, “The bear will not even bother to ask permission.
Here, we consider it the master of the taiga.”
The Islamic State is attempting to return to an even more distant past.
Its adherents espouse a medieval ninth-century doctrine to justify their effort to reestablish the caliphate, in which “the legality of all emirates, groups, states, and organizations becomes null” and summary execution and slavery are mandatory.
The West, too, has fallen into the trap of nostalgia, clinging to a late-twentieth-century conception of order in which it makes the rules and can choose whether to follow them.
The latest example of this anachronistic perspective is America’s ham-fisted (not to mention failed) attempt to stem support for the China-led Asian Infrastructure Investment Bank, after repeatedly refusing to provide a greater voice for the world’s emerging powers in the Bretton Woods institutions.
Nostalgia has also emerged as a major factor in many countries’ domestic affairs.
Throughout Europe, populist parties – from the right-wing United Kingdom Independence Party to the far-left Syriza in Greece – seek a return to the ostensibly simpler and happier times of national control and closed borders. In the US, a prominent strain of jurisprudence defends the “original intent” of the Constitution’s framers, while Republicans are shifting toward isolationism and Democrats are denouncing free-trade agreements.
But nostalgia offers no solutions – only a dream of escape.
Looking backward gets us no closer to what we want; on the contrary, it is a surefire way to miss the challenges – and miss out on the opportunities – that lie before us.
Trying to advance one’s interests based on the rules of the past is like trying to solve today’s crossword puzzle using yesterday’s clues.
Let’s face it: the halcyon world to which many people are so eager to return – before, say, the European Union or the United Nations or even the nation-state – never really existed.
As Marcel Proust noted: “Remembrance of things past is not necessarily the remembrance of things as they were.”
The past is being abridged and sugarcoated in order to portray it as superior to the widespread tumult and misery of today.
Over time, nostalgia has come to have a benign connotation.
But the word – a combination of the Greek nostos (homecoming) and algos (pain) – was coined to describe the disease of “acute homesickness.”
Perhaps it would be beneficial to return to that definition of nostalgia, at least in its political manifestation, as something more akin to an illness: a condition that distorts reality and impedes the formulation of effective solutions for real-world challenges.
No worldview rooted in the nineteenth century – much less in the ninth century – is adequate to the complexities of today’s globalized world.
Likewise, the rise of new powers and non-state actors means that rule making (and breaking) can no longer be restricted to a small Western club.
And the intensity of global competition means that European countries cannot hope to thrive independently of one another.
Flimsy ideas thrive in the absence of a viable alternative.
That is why a period of reflection on world order is so important.
But, rather than allowing ourselves to be swept up in the regressive tide of nostalgia, we need to engage one another in a constructive conversation about the challenges that we actually face and propose new ideas for addressing them.
Worlds Apart
Macroeconomic policies, financial globalization, and changes in labor market institutions have exacerbated inequality in recent decades, not only in income and wealth, but also in access to education, healthcare, social protection, as well as in political participation and influence.
Even within countries experiencing rapid economic growth, an array of factors, exacerbated by tremendous demographic changes, has conspired to transmit inequality of knowledge, social responsibility, and life chances from one generation to the next.
As surveyed in the United Nations report The Inequality Predicament, few countries, rich or poor, have proved immune to the global trend of rising inequality, or to its consequences for education, health, and social welfare.
Of course, there is no simple causal relationship linking poverty and inequality to violence.
But inequality and a sense of deprivation do contribute to resentment and social instability, threatening security.
Excluded and facing bleak life prospects, young people, in particular, often experience anomie and may turn to anti-social behavior, including violence.
Nor is there a simple explanation of what causes poverty.
Clearly, however, poverty arises from various complex conditions, and its amelioration requires a multidimensional approach.
It is hard to imagine, for example, how to “make poverty history” without also generating enough decent work, educational opportunities, and healthcare for all.
To be sure, the world has seen progress on some fronts in recent decades.
Access to education for girls has improved, and some gender gaps have been reduced.
Despite AIDS and the resurgence of malaria and tuberculosis, life expectancy has increased in much of the world due to improved public health systems.
Overall, however, the inequality gaps are large and, in many cases, growing.
The most important determinant of income inequality today is wealth inequality, with the increasing concentration of asset ownership in recent years principally responsible for greater income inequality in most countries.
Meanwhile, growing unemployment, widening skill and productivity gaps, and the “informalization” or “casualization” of labor markets have exacerbated income inequalities worldwide, as the number of “working poor” and the incidence of “jobless growth” has spread.
Nor have stabilization and structural adjustment programs, imposed since the 1980’s, delivered on their promise of achieving higher economic growth.
Growth in much of the world during the past quarter-century has been slower than in the previous 25 years, despite more rapid growth in East Asia, India, and a few other countries.
Such growth differences suggest that overall global inequality may not have increased unequivocally.
But inequalities at the national level have deepened in most countries in recent years, largely due to economic liberalization at both the national and international levels.
Indeed, in much of the world, such economic reforms have actually undermined growth rates as well as the progressive role of government, while otherwise increasing overall inequalities.
The few exceptions have been due largely to continued or new progressive government interventions.
But they are exceptions: the cumulative impact of these reforms over the past 25 years has been greater inequality in most developed and developing countries, with rising unemployment, greater earnings disparities, reduced social protection, and environmental degradation.
International financial liberalization, for example, has undermined the use of more inclusive and targeted developmental credit to promote desired economic activities.
In addition, contrary to the promises of its proponents, financial liberalization has actually resulted in net capital flows from the capital-poor to the capital-rich over the long term, while increasing financial volatility and weakening economic activity.
Meanwhile, free-trade negotiations seem to ignore historical trends.
Developing countries’ international terms of trade have worsened: prices of primary commodities have declined in relation to manufactures, as have tropical agriculture prices against temperate agriculture, and prices of generic manufactures have fallen relative to output protected by intellectual property rights.
As a result, trade liberalization of manufactures has resulted in de-industrialization and greater unemployment in much of the world, as in the case of garments this year.
And, while agricultural trade liberalization may enhance export earnings for some poor countries, the main beneficiaries will be the more well-to-do agricultural exporters.
Countries that import currently subsidized food will be worse off.
The “retreat of the state” in much of the developing world in recent decades has involved a generally reduced role for government, including the capacity to lead and sustain development, as well as its progressive social interventions in areas such as public education, health, housing, and utilities.
The economic liberalization carried out in much of the world in the last 25 years was a flawed policy from the start, and its consequences have become glaringly obvious.
Unless the world refocuses economic policies to address the adverse impact of economic inequality on growth and poverty reduction, the poor and the privileged will continue to live worlds apart.
Wrongheaded in Rio
COPENHAGEN – Tens of thousands of people will soon gather in Rio de Janeiro for the United Nations Earth Summit.
The participants, ranging from weary politicians to enthusiastic campaigners, are supposed to reignite global concern for the environment.
Unfortunately, the summit is likely to be a wasted opportunity.
The UN is showcasing the alluring promise of a “green economy,” focused on tackling global warming.
In fact, the summit is striking at the wrong target, neglecting the much greater environmental concerns of the vast majority of the world.
Global warming is by no means our main environmental threat.
Even if we assumed – unreasonably – that it caused all deaths from floods, droughts, heat waves, and storms, this total would amount to just 0.06% of all deaths in developing countries.
In comparison, 13% of all Third World deaths result from water and air pollution.
So, for each person who might die from global warming, about 210 people die from health problems that result from a lack of clean water and sanitation, from breathing smoke generated by burning dirty fuels (such as dried animal dung) indoors, and from breathing polluted air outdoors.
By focusing on measures to prevent global warming, the advanced countries might help to prevent many people from dying.
That sounds good until you realize that it means that 210 times as many people in poorer countries might die needlessly as a result – because the resources that could have saved them were spent on windmills, solar panels, biofuels, and other rich-world fixations.
But of course, poor countries’ tangible pollution problems are not trendy, and they do not engage outspoken campaigners, media, and governments the way that global warming can.
Nowhere are the failed priorities better illustrated than in the UN’s official, colorful “Rio+20” leaflet.
Here, the UN helpfully provides a layman’s explanation of the summit, along with examples of its envisioned “green economy” in action.
We see scary pictures of dry riverbeds (the result of global warming), along with plenty of pretty solutions like wind turbines and solar panels.
The problem is that green energy mostly is still much more expensive, less effective, and more intermittent than the alternatives.
Yet, the summit literature claims that it will boost economic growth and eradicate poverty.
But seriously, why do well-meaning First Worlders think that the Third World should have energy technologies that are more expensive, feebler, and less reliable than their own?
Without a hint of irony, the leaflet is called “The Future We Want.” But, in a world where a billion people go to bed hungry, and where six million die each year from air and water pollution, most of those in the developing world likely have a very different set of priorities for their future.
The leaflet cheerfully claims that China’s shift “to a low-carbon growth strategy based on the development of renewable energy sources [has] created jobs, income, and revenue.”
In fact, over the past 25 years, China has quadrupled its CO2 emissions.
While China does produce about half of the world’s solar panels, 98% are exported to reap generous subsidies from rich-world markets.
Only 0.005% of China’s energy comes from solar panels.
China’s decades-long economic expansion has lifted 600 million people out of poverty, but the enormous pollution that this has entailed does not fit into Rio+20’s green narrative.
Likewise, the brochure explains that some farmers in Uganda have embraced organic farming.
Unfortunately, Africa is almost entirely organic now – leading to low yields, hunger, and deforestation.
Africa needs to boost its yields, and that means enabling farmers to use modern crops, fertilizers, and pesticides.
Producing less with more effort might appeal to well-fed First Worlders, but it is literally starving the poor.
Reading further, the leaflet gushes that France has created 90,000 jobs in the green economy. But the stark reality remains hidden: the average cost of each green job is more than $200,000 per year, which French taxpayers patently cannot afford.
And economic models show that France has lost as many or more jobs because of the extra costs of the subsidies.
Adding insult to injury, a beautiful photograph shows electric cars finishing the “Zero Emissions Race” in Geneva.
Omitted is the fact that most electricity still comes from burning fossil fuels, so the cars are anything but “zero” emissions.
And, more importantly, most of our planet’s inhabitants still dream of owning some form of mechanized transport – which is unlikely to be an electric vehicle with a price tag of $50,000 or more.
In a world plagued by serious problems caused by air and water pollution, this breezy focus on trendy topics and unrealistic solutions is deeply disturbing.
A disconnected global elite is flying to Rio to tell the world’s poor to have a solar panel.
Rather than pandering to advanced countries’ obsessions, Rio+20 could do more good for humanity – and the planet – by focusing on the top environmental problems and their simple solutions.
Putin on Parade
NEW YORK – This May’s parade in Moscow to commemorate the 70th anniversary of the end of World War II promises to be the greatest Victory Day celebration since the Soviet Union’s collapse.
Some 16,000 soldiers, 200 armored vehicles, and 150 planes and helicopters are set to pass through and over Red Square.
It will be a scene that would easily have been familiar to Soviet leaders like Leonid Brezhnev and Nikita Khrushchev, taking the salute atop Lenin’s tomb.
Yet, though Russia’s WWII allies were from Europe and North America, no Western leaders will attend the commemoration – a reflection of the West’s disapproval of Putin’s invasion of Ukraine and annexation of Crimea.
Instead, Russian President Vladimir Putin’s high-profile guests will include the leaders of China, India, and North Korea, underscoring just how few friends Russia has these days.
The surreal nature of this gathering reflects the increasingly bizarre nature of Putin’s regime.
Indeed, watching Russia nowadays is like watching the last installment of the X-Men film franchise, “Days of Future Past.”
Just as the X-Men in that film join forces with their younger selves to save mankind’s future, today’s Kremlin is harking back to Russia’s Soviet past in what it sees as a contemporary fight for the country’s survival.
Critical to this strategy is propaganda conflating the West today with the Germans who invaded Russia in 1941, while painting Ukrainian government officials as “fascists” and “neo-Nazis.”
The Kremlin has relied on such claims, together with the supposed need to defend Russians abroad, to justify its aggression against Ukraine.
In Putin’s speech following the annexation of Crimea, he charged that the West’s refusal “to engage in dialogue” left Russia with no choice. “We are constantly proposing cooperation on all key issues,” he declared.
“We want to strengthen our level of trust and for our relations to be equal, open, and fair. But we saw no reciprocal steps.”
A month later, Putin reinforced this image of Russians as the morally superior victims of a cruel and uncompromising West. “We are less pragmatic than other people, less calculating,” he asserted, before adding that Russia’s “greatness” and “vast size” means “we have a more generous heart.”
It is not difficult to see the parallels between Putin’s approach and that of Joseph Stalin, who declared at the start of WWII that the “enemy” aims to “destroy” Russia’s “national culture,” to “Germanize” its people, and “convert them into slaves.”
The difference, of course, is that the Nazi Wehrmacht actually invaded the Soviet Union, whereas Ukraine simply wanted to decide its own future.
Without defending Stalin, one must recognize the immense Soviet contribution – including the lives of 26 million citizens – to the Allied victory in WWII.
At the time, the military parade in Red Square – featuring almost 35,000 troops, up to 1,900 pieces of military equipment, and a 1,400-man orchestra – was a well-deserved pageant.
The Soviet leadership spared no cost in staging its military displays, which, in the absence of an external military threat, became an important vehicle for rallying national unity.
After the Soviet Union’s collapse, Russia, no longer a superpower, put its military spectacles on ice.
But in 2005, to commemorate the 60th anniversary of the end of WWII, Putin held a major parade – one that Western leaders, believing that Russia might have a European future, did attend.
The tone of this year’s Victory Day commemorations is far less anticipatory.
How can one celebrate the end of a war at a time when the descendants of those who fought it (undoubtedly driven by the hope that future generations would live in peace) are killing one another in a brutal little war in eastern Ukraine?
What is the point of grandiose fireworks displays amid the firing of real howitzers and rockets?
The historian Robert Paxton believed that one could tell much about a country by its parades.
His 1966 book Parades and Politics at Vichy describes how Philippe Pétain, as Chief of State of Vichy France, used pageantry, reactionary politics, and, of course, a partnership with Adolf Hitler to dupe his defeated country into believing that it still mattered in the world.
The Vichy state’s brand of authoritarian traditionalism lionized family and fatherland, with Pétain, a former military commander, serving as a kind of military king, exalted on the tribune.
The parallels with Putin’s Russia are clear.
Putin views himself as a new czar.
His KGB background dictates his leadership style, which includes the abolition of free and fair elections, the persecution of opponents, and the promotion of conservative values that he, like Pétain before him, juxtaposes with the corrupting influence of an “immoral” and “decadent” West.
Relying on this approach, Putin has built alliances with the likes of Syria’s President Bashar al-Assad and Egypt’s military ruler Abdel Fattah el-Sisi.
China, the world’s second largest economy, is a useful addition to this collection of friendly anti-democratic states, as it has its own strategic grievances with the West.
Unlike China, however, Russia is not a rising superpower.
Putin may try to portray his actions in Ukraine as a fight against fascism.
But it is really a fight for relevance – a fight he will never win.
No matter how grand the parade, he cannot hide the truth: Russia’s days as a superpower are in the past.
Putin’s patriotism, like Pétain’s, is that of the vanquished.
The World According to Xi
BEIJING – On November 15 Xi Jinping became General Secretary of the Chinese Communist Party and Chairman of the CCP’s Central Military Commission, giving him supreme authority over China’s armed forces.
Next March, he will become President of China as well.
How does China’s new leader see the world, and how will he handle the country’s foreign policy?
Do his style and preferences differ significantly from those of his predecessor, Hu Jintao?
The answers will determine China’s relations with the world, and vice versa, for the next decade.
China’s leaders approach power in a very different way than do political leaders in, say, the United States.
American politicians must sell their ideas and values to voters; China’s leaders do not need to inform the press and the public directly about anything, including their foreign-policy positions.
Indeed, with the notable exceptions of Mao Zedong and Deng Xiaoping, China’s leaders have seldom imposed their own personalities upon Chinese diplomacy.
In this sense, Xi’s leadership style will most likely continue in the tradition of his predecessors.
Nevertheless, Xi’s outlook and worldview are surely different from Hu’s.
For starters, Xi is part of a generation raised and educated mostly in China’s reform era, which has been a decisive influence in their lives.
China opened itself to the world in 1978, when Xi and his contemporaries were young men eager to understand the world outside China.
They are a generation inspired by Deng’s realistic approach to shattering the walls that radical leftists had built around China, and one that believes that knowledge can change the destiny of the country and its people.
When this generation assumes the mantle of leadership, its members will turn their passion and curiosity about knowledge and innovation into real work.
They are surely willing to learn from the wider world as they seek to promote China’s national interests abroad and encourage gradual change at home.
Xi may address Chinese diplomacy’s thorniest issues – particularly Sino-US relations – with more realism and flexibility than in recent years.
His visit to the US in February 2012 was widely regarded as a sequel to Deng’s visit in January 1979.
Xi talked to President Barack Obama and visited the Pentagon. He gave a luncheon speech and saw old friends from his brief stay in Iowa as a young man.
He showed interest in American culture, just as Deng did in 1979.
He ate chocolate and watched NBA games.
Most important, instead of spending countless hours drearily discussing political and strategic topics, he spoke directly and vigorously about the current state of Sino-US relations. “The Pacific Ocean is wide enough to accommodate the two major countries of China and the US,” he declared.
Unhappy with America’s “pivot” to Asia, Xi remained calm, but emphasized that “one cannot rely too much on military power regarding Asia-Pacific diplomacy.”
Similarly, Xi tried to avoid major arguments on human rights, saying simply, “There’s no best, only better.” In essence, he sought to demonstrate that however many questions, arguments, and even potential conflicts exist between China and the US, both countries’ leaders should address them with an attitude of cooperation and sincerity.
Leaders should not become entangled in details that fuel suspicion of their counterparts’ motives, lest they lose sight of the bigger picture.
Xi’s confidence extends to China’s domestic politics.
His generation is more certain of reform than previous leadership cohorts were, owing less to official ideology than to the country’s enormous achievements in the last three decades.
In practice, Xi may well prove to be a nationalist; certainly, his generation, like the founding fathers of the People’s Republic, dreams of turning China into a stronger, more prosperous country.
The country’s new leaders want the world’s applause, but they are more eager for domestic ovations.
Like previous Chinese leaders, Xi firmly believes that the world should respect China’s authority to manage its own affairs.
Thus, he is willing to show diplomatic muscle if China is challenged on a core area of concern.
His speech in Mexico in 2009 demonstrated this. “Some foreigners with full bellies and nothing better to do engage in finger-pointing at us,” he said.
“First, China does not export revolution; second, it does not export famine and poverty; and, third, it does not mess around with you.
So what else is there to say?”
Xi understands that the world expects not only a better China, but also a China that is committed to constructing a better world.
He will be a tough and strong-minded leader, but one who understands the world in a pragmatic way and knows how to work well with his foreign counterparts.
Indeed, his 2012 visit to the US left two impressions.
First, he is a leader at ease both in front of and away from the television cameras.
Second, he is not afraid to have a little fun.
With those simple touches of humanity, Xi could bring a revolution to China’s diplomacy.
Yale’s Safe Sex Criminals
NEW YORK – In October 2010, the current brothers of George W. Bush’s former fraternity at Yale, Delta Kappa Epsilon, marched through the first-year quad chanting, “No means yes!
Yes means anal!” They held up signs reading, “We love Yale Sluts.”
Sixteen graduate and undergraduate students, male and female, felt that the university’s administration then did little to push back against such encroachments on female students’ rights to a fair and non-threatening learning environment.
In March, they filed a federal lawsuit against Yale, alleging that its “failure to address incidents of sexual harassment and sexual assault has created a ‘hostile environment.’”
The lawsuit did not stop with the DKE incident.
First-year women were ranked on their sex appeal, the complaint noted, and, most seriously, Yale failed to respond adequately to reports of sexual assault or attempted assault and stalking.
According to Alexandra Brodsky, a Yale junior and one of the 16 complainants, the students are “really frustrated and disappointed that Yale again and again fails to respond to both public and private acts of sexual harassment and assaults, which…perpetuates an environment in which these…acts are okay.”
The students’ complaint coincides with a federal investigation by the Department of Education’s Office for Civil Rights, which announced that it would review Yale’s policies for dealing with sexual harassment and sexual assault.
This is no small matter: Yale and other American universities receive millions of federal dollars annually – money that would be jeopardized if the university was found to tolerate an unequal learning environment.
In 2004, I wrote an article for New York magazine about my own experience of having been sexually encroached upon as a third-year undergraduate at Yale by an esteemed professor (the crime of “sexual harassment” had not yet been codified).
I wrote, too, about Yale’s cover-up of many situations like mine.
So the students’ lawsuit was not surprising to me.
Indeed, in the course of trying to report to the university in 2004 what had happened to me in 1983, I found the same pattern of stonewalling victims and defending perpetrators.
Worse still, I discovered that the university and its lawyers used the sexual harassment “grievance procedure” as a screen to protect the institution, its harassers, and even its rapists, rather than as a means to investigate incidents of abuse.
This situation had persisted for two decades.
As I conducted my reporting, I heard woman after woman allege that the same professor or the same fraternity had engaged in multiple instances of assault or harassment.
Victim after victim would plead, heartbreakingly, “Help me.”
But I could do nothing, because the women chose to remain anonymous, and because the university treated each case as top secret.
Alleged perpetrators were free to teach in a new university – where more young women (and in some cases, young men) would become their prey.
Compounding the lack of transparency, Yale maintains its own campus police force, to which sex-crime victims are encouraged to report their complaints if they insist upon formal documentation.
But victims often do not understand that this actually tends to contain potentially embarrassing scandals, by preventing real – that is, accountable – law enforcement from getting involved.
Indeed, there have been disclosed to me reports of at least three alleged sex assaults by faculty or academic staff in the past decade – two alleged incidents reported by two different women involving the same man.
I know that one undergraduate has more recently pursued legal action against a staff member, who, she said, drugged her with Rohypnol, the “date rape” drug, and assaulted her.
I know these accounts, but I can’t report them, even at this critical moment in the long-overdue formal investigation, because of confidentiality protocols.
Each of these women feels alone.
Like virtually every private university in the United States, Yale has relied on “privacy” to keep these incidents under wraps, so that incoming women (and men) have no idea who among the faculty or students is dangerous; which fraternity is a site of repeated harassment or worse; and when to keep the door open on a student-teacher meeting.
Like the Catholic Church, private universities like Yale can use victims’ shame and isolation to disenfranchise them and to protect the perpetrators.
But I believe that the victims themselves have a responsibility.
The convention of taking sex-crime testimony from alleged victims behind closed doors, under conditions of anonymity or confidentiality, only serves institutions like universities or the military that are intent on covering up criminal behavior.
Some feminists have attacked me for this position, but the numbers bear me out: thirty years ago, 30% of reported rapes in the US and the United Kingdom resulted in prosecutions; today, after three decades of confidential sex-crime reporting, the number is 12% in the US and 6% in the UK.
This is largely because confidentiality in sex-crime reporting prevents the media from shining a light on the crime, inhibits institutional memory of repeated assailants, and prevents scrutiny of whether a court, college, or police precinct is doing better or worse at handling such cases.
As a result, serious crimes can be swept under the rug – at Yale and at every other private US university I have ever visited (public universities are less free to conceal crime data) – in the guise of “protecting the victims.”
Yale alumnae are reportedly now contacting these 16 students with their own stories of sexual assault and harassment, spanning two decades.
But if they had come forward publicly years ago, it is likely that Yale could not have continued for so long to protect the sex criminals in its midst.
The students are right: a sexually abusive environment does make it harder for students to study and learn.
But victims – whether current students or alumnae – would be well advised to take a deep breath, come forward, and tell their stories out loud.
Only then would Yale and other institutions be forced to reckon publicly with a problem that has persisted for generations.
Yankee Bases Go Home
RIO DE JANEIRO – Last month, the leaders of all 12 countries of South America (except one) gathered in Quito, Ecuador’s capital, for the summit of the Union of South American Nations.
UNASUR or UNASUL (depending on whether one speaks Spanish or Portuguese) was established by the twelve presidents in Brasília in May 2008 with the aim of furthering economic and political integration.
Instead, Venezuelan President Hugo Chávez hijacked the Quito meeting to propagate his Bolivarian Revolution and expound his own ideas for the continent’s future as independent of the United States.
Thanks to America’s recently announced military agreement with Colombia, Chávez’s ideas got more of a hearing than might have been expected.
For, instead of infrastructure plans, commercial or environmental treaties, or even multilateral action against such common problems as violence and poverty, the issue that dominated both press accounts and the speeches at the gathering was the new US-Colombian military agreement, announced less than a month before the summit.
To no one’s surprise, Chávez dominated the criticism of the pact.
He claimed that the “Winds of war are blowing,” and that the announcement of the military agreement “can transform itself into a tragedy.”
Unfortunately, Colombian President Álvaro Uribe was absent from the meeting.
Colombia and Ecuador broke diplomatic relations in March 2008, after Colombia’s army pursued FARC guerillas, who have been fighting Colombia’s government for decades, into Ecuadorean territory.
So Uribe could not defend the new military agreement.
This left the floor open to Chávez to isolate Colombia and preach against the US.
In a continent where anti-Americanism remains both very popular and an effective way to consolidate national cohesion and political power, Chávez’s attacks found a ready audience.
In addition, Uribe’s absence allowed Chávez to avoid responding to Colombia’s accusations that Venezuela and its ally Ecuador support the narco-Marxist FARC.
One week after the summit, US Secretary of State Hillary Clinton tried to calm the continent’s fears about the US-Colombia agreement, explaining that it is merely a minor revision of the Bill Clinton-era Plan Colombia, an American program to support the government against the drug cartels.
But her words did little soothing.
Nor did it seem to help that even most local military analysts say that the agreement does not represent any major change in the US military position on the continent.
The simple fact is that the timing of the announcement of the pact was terrible, and gave a platform for Bolivarian rants that will not be without consequences.
Indeed, the ongoing fallout is likely to remain very negative.
By raising anti-American suspicions and strengthening Chávez’s position across the continent, the agreement weakens the influence of Brazil.
Recently, Brazil had been differentiating itself from the rest of the continent through its stable economy and vibrant democratic political system, both of which were helping the country’s poor.
So the spread and strengthening of Chávez’s so-called Bolivarian Revolution was not in Brazil’s interests, even though some of President Luiz Inácio Lula da Silva’s officials appear to be fans of Chávez and his administration.
The terrible timing of the US-Colombia military agreement also gave Chávez and his allies a reason to build up their armies against the “evil imperialist ianque .”
After all, one must remember, the Bolivarian Revolution’s supposed “enemy” is the US, and no one else.
So the agreement may legitimize and produce an arms race in South America, which is in no one’s interest.
Another unexpected consequence of the US-Colombia military agreement may be a further heightening of tensions between Venezuela and Colombia.
The radical polarization of the Andean region between those two countries will create difficulties in building regional consensus and security problems in the Amazon, as well as weakening the Brazilian project for South American political and economic integration.
Finally, another major consequence of the US-Colombia deal are the doubts that it has created in Latin America about President Barack Obama’s administration, and about the future of relations between the US and South America, especially Brazil, the main regional power.
The agreement revived the perception that US diplomacy lacks sensitivity where the region is concerned.
If Obama wants to encourage moderate and democratic politics in South America, and to bolster Brazil’s efforts to foster stability and economic progress against the region’s radical and undemocratic forces, it must take greater care in not appearing to undermine those the US claims to support.
For Chávez is showing that the old cry of “Yankee go home” still resonates.
China’s Real-Estate Wrongs
BEIJING – China’s real-estate sector has been a source of serious concern for several years, with soaring property prices raising fears of overheating in the housing market.
But, with price growth easing, it seems that the government’s campaign to rein in property risk is finally taking hold.
The danger now is that the housing market will collapse – bringing China’s economic prospects down with it.
In its effort to control rising housing prices, China’s government has pursued nine distinct policies, not all of which have served their purpose.
Though policies like limits on mortgages for first-time buyers and minimum residency requirements for purchasing property in a first-tier city like Beijing or Shanghai helped to ease demand, supply-side tactics, such as limiting credit to real-estate developers and imposing new taxes on property sales, have proved to be counter-productive.
This flawed approach allowed China’s housing prices to continue to rise steadily, fueling major housing bubbles, especially in first-tier cities.
The average Beijing resident would have to save all of his or her income for 34 years before to be able to purchase an apartment outright.
In Shanghai and Guangzhou, the equivalent is 29 and 27 years, respectively – much higher than in other major international cities.
The expectation that this trend will continue has driven homeowners to retain possession of their properties, even though rental rates amount to less than 2% of a property’s market value.
But, with the real-estate sector finally facing a downturn, the time to rethink this investment strategy has arrived.
In the first four months of 2014, housing sales dropped by nearly 7% year on year, with construction of new floor area falling by more than 22%.
As a result, downward pressure on property prices is mounting.
In normal times, citizens and officials alike would welcome this trend.
But, at a time of weakening economic performance, China cannot afford an implosion of the real-estate sector, which accounts for at least 30% of overall growth.
Indeed, though China’s government has expressed its willingness to sacrifice some growth in its pursuit of structural reform and rebalancing, the impact of a housing-market collapse on the financial sector would cause growth to slow beyond the acceptable limit.
That impact partly reflects the highly problematic nature of the Chinese government’s long-awaited move to liberalize interest rates.
Instead of taking a direct approach – lifting the interest-rate cap imposed on banks – liberalization has been achieved by allowing shadow banking to flourish.
As a result, a large number of nonbank financial institutions – such as wealth-management companies and online financial-services providers – are now using promises of high returns to attract small investors.
Making matters worse, the monetary authorities have tightened the credit supply, in an effort to deleverage the Chinese economy.
While both interest-rate liberalization and deleveraging are critical to the long-term health of China’s economy, the skyrocketing cost of borrowing is forcing many low-risk companies, which are unable to offer sufficiently high rates of return, out of the market.
At the same time, real-estate developers who have borrowed heavily from shadow-banking institutions, based on the assumption that property prices would continue to rise steadily, may struggle to repay their debts, with a sharp decline in prices inevitably leading to defaults.
Given that the formal banking sector provides a large share of shadow-banking finance, this could initiate a chain reaction affecting the entire financial sector.
Many remain convinced that China’s government – which wields with the world’s largest foreign-exchange reserves and virtually unchecked authority – would be able to prevent a major financial crisis.
But the financial crisis in the fast-growing city of Wenzhou, triggered by bad loans, suggests otherwise – not least because the economy has yet to recover fully.
There is no reason to believe that a similar crisis could not occur on a national scale.
To avoid such an outcome, China’s leaders must urgently adopt counter-cyclical measures.
They should begin by eliminating non-market-based restrictions on the real-estate sector, which have generated serious distortions not only to the economy, but also to people’s lives, with couples divorcing temporarily to gain the right to purchase an additional apartment.
When it comes to the real-estate sector, China’s government has consistently had the right objective and the wrong strategy.
It is time to align intention with action.
Otherwise, China’s financial sector – indeed, its entire economy – will suffer.
Yeltsin\u0027s Last Surprise
MOSCOW: The hardest thing about power is knowing when to let go.
The next hardest, particularly in a country like Russia which has experienced nothing but dictatorship for a millennium, is knowing whom to hand over power to.
In announcing his resignation on December 31 Boris Yeltsin may have succeeded on both counts, assuring not only his personal safety, but his place in history and Russia's infant democracy.
Yeltsin was more than the man who saved Russia in 1991 when a coup by communist hard-liners threatened to turn back the clock by nullifying Mikhail Gorbachev's perestroika and glasnost.
In nine muddy years since then Yeltsin also created a new Russia, very much in his own image: one unpredictable, wayward, but full of promise.
By stepping down now, Yeltsin has given his handpicked successor, acting president Vladimir Putin, the best chance to win elections that will take place this coming March.
Shades of Kremlin tsars and commissars of old? As a deft manoeuvrer of the old school of communist politics, the gibe is tempting to apply to Yeltsin.
It is also unfair. With mandatory presidential elections next year, Moscow was awash in rumours: “feeding time at the zoo” as one British prime minister called it.
By ending the whispering campaign that he intended to cling to power no matter what, President Yeltsin deserves more cheers than jeers.
Through this orderly and constitutionally correct device to attempt to assure his succession, Yeltsin may have put paid to any possibility of a chaotic power struggle in the Kremlin without sacrificing democratic principles.
Russia may now go on to complete its transition from communism to capitalism.
But what do we know of the heir apparent, Vladimir Putin?
In keeping with his shadowy KGB background, very little.
Putin is a married 46 year old, and a graduate of Saint Petersburg University's Law Faculty.
Stationed for a decade as a KGB agent in the former East Germany, he saw Western democratic and business practices at close hand, and is believed to be committed to them.
After communism's collapse, he worked with people like Anotoly Chubais in the liberal St. Petersburg government of the early 1990s.
Transferred to Moscow, he headed the FSB (the transformed KGB) until Yeltsin suddenly appointed him prime minister last August.
Despite his murky profile, Putin's most potent claim to fame – and to power – is a dour toughness.
In the bloody mountains and ruined cities of Chechnya, Putin established his credentials as the hard man Russia needs to restore order and stop the country's internal disintegration by revitalizing state power.
That the West seems nervous about Putin only enhances his prestige at home.
With Western economic policy prescriptions widely seen as having failed in Russia; with NATO expanding near to the country's borders and old allies like Serbia bombed; with America seen as wanting to weaken Russia even more, breaking it up into pieces and controlling the oil-rich Caspian basin, anti-western sentiments are on the rise.
President Putin's keen political antenna has caught this trend.
So the fact that the West eyes Russia's acting president with suspicion makes him even more desirable to the traditional Russian heart.
Vladimir Putin, however, prefers to promote the impression of his being a more enlightened and modern leader.
His prime ministerial new year's address – "Russia at the Turn of the Millennium" -- was posted on a Russian Government website for all the world to see before being published in Russian newspapers.
In it he outlined his presidential program: playing to the crowds, he declared that Russia is no plaything for the West to kick around.
But demagoguery stopped there.
Russia, he also declared, must mend itself.
It will remain cooperative and friendly with the world, provided that the world is cooperative and friendly too.
But the hard work of rebuilding Russia must be done by Russians, and with no time to waste.
In Russia cultural instincts, in which communal ideas remain more valued than individualist principles, help determine the success or failure of policies.
The national strategies Putin will likely follow will take into account these social impulses.
Thus he is unlikely to publicly trumpet the unforgiving capitalist policies of Gaidar and Chubais, even if he quietly pursues them.
Undoubtedly a strong patriot, Putin also knows that Russia's national idea of itself must be cleansed of haughtiness and imperial ambitions.
Time and again he has said that Russia's national idea must blend traditional Russian concepts with a new, modern content.
The Russia he envisions will be a great power once more, but great in the ways that a truly modern society must be: in its democratic commitments, its economy, and its domestic tranquillity.
The consensus in Russia today is that Putin is a man of neither great talents nor great vices.
To ordinary Russians he appears as modest, principled, and honest – a vast contrast with the tainted politicians of the Yeltsin years.
He is a perfect fit for a Russia grown tired of the heroes, revolutionaries, criminals – even saviours – who make life exciting but rarely stable.
A recent poll showed that what Russia most wants is a new Brezhnev, whose 20 years (1964-1982) of leadership first were disdained as an "era of stagnation," but are now nostalgically recalled as the "golden era of stagnation."
Putin fits the desired mould for a firmness and stolidity that ensures stability, a strong state, and a "golden middle" between radical reforms and strong-arm rule.
In the back of their minds, however, Russians also hold a secret fear about Putin.
It concerns a man, a pleasant quiet individual who walks soundlessly through the Kremlin's corridors, someone who uncomplainingly takes on (and completes) many hard and unpleasant tasks neglected by others who fight noisily for high position.
Russians know that, one day, these unassuming political beasts of burden suddenly come out on top, as Stalin did in the early 1920s.
So of President Putin Russia, like history, must still reserve its judgement.
Did US Drone Strikes Lose Yemen?
NEW YORK – Recent revelations that the US killed an innocent American in a drone strike in Pakistan confirm what a new study, “Death by Drone,” of civilian harm caused by US drone strikes in Yemen shows – that claims about the precision of drone strikes are overstated.
The revelations also underscore the stark asymmetry between how the US treats drone strikes that kill its own citizens and those that kill others. While the Obama administration has now publicly acknowledged that it has recently killed three US citizens in drone strikes, it has refused to acknowledge countless other drone strikes around the world which have killed non-US civilians.
In Yemen, the US has been conducting drone strikes since at least 2002, with estimates of the total number of strikes ranging from 91 to 203.
While the American and Yemeni governments have lauded the drones’ precise targeting, they have refused to meaningfully disclose key details about the strikes, including how many have been conducted, who has been targeted, or, crucially, the number and identities of civilians killed.
In a May 2013 speech at the National Defense University, Obama offered assurances that, outside the Afghan war theater, no drone strike would be carried out unless there was “near-certainty that no civilians will be killed or injured.”
Obama also claimed that the US targets only “terrorists who pose a continuing and imminent threat to the American people,” and that it does not launch drone strikes when it has “the ability to capture individual terrorists.”
“Death by Drone,” which includes first-hand testimony from eyewitnesses and survivors of drone strikes in Yemen, tells a different story.
The nine case studies documented in the report, four of which cover attacks that came after the 2013 speech, provide credible evidence that US drone strikes have killed and injured Yemeni civilians, suggesting that the “near-certainty” standard is not being effectively implemented.
The report also casts doubt on Obama’s other claims, with evidence indicating that targets of drone strikes, though perhaps posing a threat to Yemen, may not have posed a direct threat to the US, and that their capture may have been possible.
In other words, Yemeni civilians have suffered and died from drone strikes that may not have been necessary.
More generally, the report provides a window into the experiences of Yemeni civilians directly affected by US drone strikes.
The testimonies of these individuals, vital for assessing the US drone program, are all too easy to overlook because these individuals are poor and have no political influence, and because the strikes are conducted in secret, far away from the US.
As Yaslem Saeed bin Ishaq, whose son was killed in a US drone strike in Wadi Sir on August 1, 2013, observed, “They just kill.
They do not know what havoc their missiles have caused. They are unaware of the suffering they create for our families.”
Indeed, if the US never acknowledges the specific strikes, how can ordinary Americans possibly know that Rasilah al-Faqih, a pregnant Yemeni woman, was killed in Walad Rabei’, along with her husband and ten-year-old daughter, as they headed home from a visit to the doctor?
Or that Abdoh Mohammed al-Jarraah’s house in Silat al-Jarraah had 19 people, including women and children, inside when it was hit by a US drone strike?
The US’ refusal to acknowledge drone strikes that kill foreigners is sending a damaging message in Yemen and beyond. As Moqbel Abdullah Ali al-Jarraah, a villager from Silat al-Jarraah, put it: “I believe that America is testing its lethal inventions in our poor villages, because [it] cannot afford to do so at any place where human life has value.
Here, we are without value.”
In every incident recorded in this report, the families of Yemeni civilians killed in US strikes want to know why they were targeted.
As the father of Nasser Mohammed Nasser, one of four innocent civilians killed in a US drone strike on April 19, 2014, lamented: “My son and those who were with him had nothing to do with Al Qaeda.
Why, then, did the American aircraft strike them?”
But the US has given Nasser no answers.
It has not even acknowledged that it killed his son.
In February 2013, then-White House counterterrorism chief John Brennan testified at his Senate confirmation hearing to become CIA Director that, “in the interest of transparency,” the US must acknowledge mistaken killings publicly.
Later that month, he recognized that the US government “should make public the overall numbers of civilian deaths resulting from US strikes targeting Al Qaeda.” The US has done neither.
It should come as no surprise, then, that civilians like Nasser, who have lost mothers, fathers, sons, and daughters in US strikes, are outraged not only at the US, but also at the Yemeni government, which consented to the attacks.
They believe that instead of making Yemen and the US safer, drone strikes only strengthen support for Al Qaeda.
Earlier this year, the US announced a new policy for drone exports, purportedly part of a broader effort to work with other countries to “shape international standards” on the use of drones and compel recipient states “to use these systems in accordance with international law.”
But, as “Death by Drone” shows, the US drone program is fundamentally flawed and should not be perpetuated.
Can Yemen Be Saved?
SANA'A – Yemen is no stranger to crisis.
Exposed to a regional proxy war between Iran and Saudi Arabia, plagued by an entrenched Al Qaeda affiliate, and divided by tribal disputes and a secession movement, the country has become a poster child for everything that can go wrong in the Arab world.
Yemen has demonstrated remarkable resiliency in the past.
To ensure that the recent overthrow of its government by the Shia Houthi rebel movement does not deal Yemen the lethal blow that it has avoided so far, the international community must not abandon the country in what may be its hour of greatest need.
The origins of the Houthi movement date to 1991, when it was created to protect Zaydism, a moderate form of Shi'ism, from the encroachment of Sunni Islamists.
After the attacks on New York and Washington, DC, on September 11, 2001, the group's battle took on a geopolitical dimension, as its fighters objected to Yemen's decision to collaborate with the United States and enhance bilateral intelligence cooperation.
From 2004 to 2010, the group fought six wars against the Yemeni government and even skirmished with Saudi Arabia.
Yet it never managed to expand its reach beyond its stronghold in the north of the country.
That changed in 2011, when the popular protests and political chaos stemming from the Arab Spring led to widespread institutional paralysis, allowing the Houthis to march past a military that largely refused to fight it.
The group's power grab has frightened its adversaries, leading them to seek new alliances that could imperil the state's security.
In the central region of Marib, home to the oil and gas facilities that Yemen relies on for foreign currency, several tribes have vowed to fight the Houthis.
The region was once a stronghold of Al Qaeda in the Arabian Peninsula (AQAP), an affiliate of the global terrorist organization.
If the military refuses to assist the tribes – as is likely – they may be tempted to turn to AQAP.
The situation is no less precarious in the southern provinces, where a secession movement has been active since 2007.
Southerners are up in arms because the Houthi rebellion halted plans for the adoption of a federal system, which would have given the region greater autonomy.
In response, armed groups seized checkpoints and closed the port of Aden.
The risk of secession is very real.
Southern Sunnis have been marginalized since a 1994 civil war that left northerners in control of most of the country's political institutions.
Many in the region worry that the Houthis will discriminate against them further.
AQAP is firmly rooted in this region as well, implying the possibility that local residents will seek its help in defending against an expected Houthi onslaught.
Meanwhile, Yemen continues to serve as a battleground in a proxy war between Iran and Saudi Arabia.
Iran has armed and trained the Houthis, and, though the rebels' brand of Shi'ism shares little with that practiced in Tehran, they have praised the Islamic Republic's founder, Ayatollah Ruhollah Khomeini, and held up Iran's Lebanese proxy, Hezbollah, as a model to be emulated.
When the Houthis took over Sana'a, the capital, in September, Saudi Arabia cut off aid to the country.
To make matters worse, falling oil prices and attacks on pipelines imperil a hydrocarbon industry that provides 63% of government revenues.
Decreased earnings led Yemen to forecast a $3.2 billion budget deficit last year.
If the turmoil is not curtailed and the Saudis do not resume the payments that have long ensured the country's ability to function, Yemen may not be able to cover its expenditures.
The US has followed Saudi Arabia's lead, shuttering its embassy and freezing intelligence cooperation and counterterrorism operations.
This is a mistake.
Yemen's military is largely intact, having remained in its barracks as the Houthis marched to the capital, and there is little evidence that the units that work with the Americans are loyal to the new rebel government.
Suspending cooperation risks giving AQAP free rein in a country where it was able to wreak havoc even when bridled.
Yemen is mired in crises that it cannot solve alone.
Unless its international allies throw it a lifeline, it risks being swallowed by a sea of disorder that could imperil the entire region.
Yemen’s Regime Change Gets Personal
SANAA – When Yemen’s President Ali Abdullah Saleh ordered his military on March 18 to fire on peaceful protesters calling for his resignation, he sealed his fate.
A wave of military, government, and diplomatic defections, led by his long-time ally First Armored Brigade Commander General Ali Muhsin al-Ahmar, rocked his regime.
But, although al-Ahmar announced that he was appalled by the use of force and vowed to defend the constitution, his decision was anything but altruistic.
The disgruntled general, who has long-standing ties to the type of jihadists that the United States is battling in Yemen, merely sought to settle a score with the president’s family.
The relationship between al-Ahmar and Saleh extends to their youth, with Saleh’s mother having had a second marriage to al-Ahmar’s uncle.
Though they are not half-brothers, this frequent, if mistaken reference, indicates their closeness.
Al-Ahmar has long been considered either Saleh’s right hand man or the country’s hidden president. When the Nasserite party attempted to overthrow Saleh less than 100 days into his presidency, al-Ahmar defended him and quashed the coup.
In 1994, his units put down a secessionist movement in the south.
But, as Saleh prepared the way for his son Ahmad – the head of the Presidential Guard – to succeed him, he began to marginalize al-Ahmar.
In 2009, Saleh sacked al-Ahmar’s key backers, including Central Command Chief General al-Thahiri al-Shadadi and Lieutenant General Haydar al-Sanhani, from power.
Al-Ahmar has also not benefited from the military aid that the US lavished on Yemen in the wake of al-Qaeda’s failed Christmas Day plot in 2009 to down an American airliner.
While the Central Security Service, led by Saleh’s nephew Yahya, has received millions of dollars to fight al-Qaeda in the Arabian Peninsula, al-Ahmar has been left out of the economic bonanza.
At the same time, al-Ahmar’s dismal performance in spearheading the war against the Houthi-led sectarian rebellion in the north made him a convenient scapegoat for the regime’s failures.
The regime’s desire to get al-Ahmar out of the picture became clear during the last round of fighting aginst the Houthis in 2009-2010, when Saudi Arabia began bombing the rebels.
According to a US diplomatic cable released by WikiLeaks, Yemeni officials gave the Saudis the coordinates for al-Ahmar’s command center, telling them that it was a Houthi camp.
His relationship with Saleh frayed and his influence waning, al-Ahmar understood that his loyalty to Saleh had become a liability.
So his decision to abandon Saleh stemmed less from his love of the constitution and democracy than from his desire to even the score with the president and his son Ahmad Saleh, with whom he has long clashed.
Their units skirmished during the Houthi campaign, and the two engaged in a power struggle over defense of the radio and television stations.
Saleh won at the time, but today al-Ahmar’s troops have control.
Al-Ahmar’s relationship with jihadists is a source of serious concern.
He is married to the sister of Tariq al-Fadhli, a Yemeni who fought alongside al-Qaeda leader Osama bin Ladin in Afghanistan.
When more than 4,000 Arabs returned from fighting the Soviets there, al-Ahmar organized them into units and deployed them in the 1994 civil war.
One jihadist who trained in al-Qaeda’s camps, and met bin Ladin, told me that upon his return from Afghanistan, he was invited to meet al-Ahmar’s associates and was given a monthly stipend.
During a 1999 trial of Yemenis convicted of kidnapping 16 Europeans, it emerged that the group’s ringleader called al-Ahmar during the ordeal.
Though his ties to jihadists may be expedient rather than ideological, they are deeply worrying.
Today, Saleh’s support among his top generals is dwindling.
Of Yemen’s four regional commanders, only Southern Command Chief General Mahdi Maqwala still backs him.
Lesser lieutenant generals have deserted the president in droves.
The fate of the country may not hinge on Saleh, a crafty veteran who knows that his career is over.
But his son Ahmad, who is less politically astute, may yet seek to settle accounts with al-Ahmar.
His forces have already clashed with rival units in Mukalla and surrounded the presidential palace in Aden.
If the Salehs retain control of the air force, which remains under the control of Saleh’s half-brother, employing it against defecting military divisions would likely lead to a bloodbath.
Nevertheless, the doomsday scenarios predicting anarchy and chaos in the post-Saleh era are most likely exaggerated.
Unlike in Egypt, the vacuum resulting from Saleh’s departure can be quickly filled, so the country need not fall back on a military oligarchy.
The Yemeni opposition is not only organized, but also plays an active role in politics and has true grassroots support.
And, unlike in Egypt, where the ruling party was detested and out of touch with the masses, Yemen’s General People’s Congress has some following in society.
If Saleh leaves peacefully and represses the urge to unleash the last remaining loyal army units against protesters and defecting soldiers, the country can avert Libya-like mayhem.
Indeed, the opposition parties have already organized a transitional council to take Saleh’s place.
With the sun quickly setting on the Saleh era, the president is out of options.
The only decision before him and his thinning ranks of allies is whether to leave peacefully or go down fighting.
महिलाओं के विकास के लक्ष्य
न्यू यॉर्क - संयुक्त राष्ट्र के मिलेनियम विकास लक्ष्यों (MDGs) की 2015 की समय सीमा नज़दीक आने पर, दुनिया के नेताओं के सामने एक विकल्प होगा: निर्धारित लक्ष्यों को एक या दो दशक आगे ले जाएँ, या उन लोगों को जवाबदेह ठहराएँ जो अपने वायदे पूरे करने में विफल रहे हैं। महिलाओं के लिए तो विकल्प स्पष्ट है।
हम यहाँ पहले मिल चुके हैं। 1978 में, अल्मा-आटा में प्राथमिक स्वास्थ्य-सेवा पर अंतर्राष्ट्रीय सम्मेलन में, 134 राज्यों ने घोषणा पर हस्ताक्षर किए जिसमें वर्ष 2000 तक सभी के लिए पर्याप्त स्वास्थ्य-सेवा का आह्वान किया गया था। सोलह साल बाद, 1994 में, काहिरा में, 179 सरकारों ने प्रजनन अधिकारों को बुनियादी मानव अधिकार के रूप में अपनाया और परिवार नियोजन सहित, जनन स्वास्थ्य सेवाओं की पूरी श्रेणी तक सार्वभौमिक पहुँच का प्रावधान सुनिश्चित करने के लिए प्रस्ताव पारित किए गए।
लेकिन ये समय सीमाएँ आईं और चली गईं जब सितंबर 2000 में, 55वीं संयुक्त राष्ट्र महासभा के दौरान, 189 देशों के नेताओं ने मिलेनियम विकास लक्ष्यों (MDGs) को अपनाया। और मिलेनियम विकास लक्ष्यों (MDG) की घोषणा से पहले और बाद में दुनिया के नेताओं ने अनेक अन्य प्रतिबद्धताएँ और संकल्प किए।
तो, अब हम कहाँ हैं?
हम जानते हैं कि कई मिलेनियम विकास लक्ष्य (MDG) पहले ही पूरे किए जा चुके हैं। 2000 के बाद से चरम ग़रीबी आधे से ज़्यादा कम कर ली गई है, 2010 में यह लगभग 22% थी - जिसमें लगभग 700 मिलियन लोगों को दुनिया के सबसे ग़रीब की श्रेणी से बाहर निकाल लिया गया। हमने HIV/AIDS, मलेरिया और तपेदिक के ख़िलाफ़ लड़ाई में सकारात्मक परिणाम देखे हैं। अरबों लोगों की बेहतर पीने के पानी तक पहुँच है; और अनेक लोगों को स्वच्छता तक पहुँच प्राप्त हो गई है (हालाँकि एक अरबों लोगों को अभी भी खुले में शौच करना होता है - जो भारी स्वास्थ्य जोखिम है)।
लैंगिक समानता में भी प्रगति हुई है। लड़कियाँ और लड़के बराबर संख्या में स्कूल जाते हैं, और महिलाएँ राजनीतिक क्षेत्र में अपनी आवाज़ अधिकाधिक रूप से उठा रही हैं।
लेकिन यह तस्वीर जल्दी ही धुँधली हो जाती है। हालाँकि छोटे बच्चों में दीर्घकालिक अल्प-पोषण में कमी आई है, लेकिन विश्व स्वास्थ्य संगठन के अनुसार हर चार में से एक बच्चा - 162 मिलियन बच्चे - अभी भी विकास में रुकावट होने से प्रभावित होता है। बेशक, मातृक और बाल मृत्यु दर में कई लाख की कमी हुई है, लेकिन रोकी जा सकने वाली ये मौतें अभी भी हर साल हज़ारो��-लाखों महिलाओं और बच्चों का जीवन हर रही हैं।
इसके अलावा, संयुक्त राष्ट्र फ़ाउंडेशन ने रिपोर्ट किया है कि 222 मिलियन महिलाएँ अभी भी सबसे बुनियादी जानकारी, उत्पादों, और सेवाओं तक पहुँच प्राप्त नहीं कर पाती हैं जिनसे उन्हें यह तय करने में मदद मिले कि उन्हें कितने बच्चे पैदा करने चाहिए और अपने गर्भधारण के समय को इस तरीके व्यवस्थित करें जिससे उनके स्वास्थ्य की रक्षा हो सके, वे शिक्षा प्राप्त कर सकें, और अपने जीवन को बेहतर बना सकें। इसी रिपोर्ट में उल्लेख किया गया है कि हर साल 15-19 आयु वर्ग की 300,000 से ज़्यादा लड़कियों और महिलाओं की गर्भावस्था से संबंधित जटिलताओं की वजह से मृत्यु हो जाती है, जबकि अनेक अशक्तता संबंधी असमर्थताओं से जूझने के लिए बच जाती हैं।
संयुक्त राष्ट्र महासचिव की 2013 की रिपोर्ट "सभी के लिए गरिमा का जीवन" में यह सुनिश्चित करने के लिए सार्वभौमिक कार्यक्रम के लिए आह्वान किया गया है कि कोई भी छूट न जाए। लेकिन लाखों लोग - और ख़ास तौर से महिलाएँ – पहले ही पीछे छूट चुकी हैं। और, क्योंकि दुनिया के नेता और उनके विकास साझेदार एक बार फिर से महिलाओं की बुनियादी प्रजनन-स्वास्थ्य की ज़रूरतें पूरा करने में विफल रहे हैं, इसलिए स्थायी विकास के लिए कार्यक्रम को साकार करने की दिशा में ठोस प्रगति हासिल करना और भी मुश्किल हो जाएगा।
मिलेनियम विकास लक्ष्यों (MDGs) की समाप्ति के लिए 500 दिन की उलटी गिनती शुरू होने पर गति में तेज़ी लाने के लिए संयुक्त राष्ट्र का अपना आह्वान इस तथ्य को उजागर करता है कि असमानता, प्रसव से मातृक मृत्यु दर, सार्वभौमिक शिक्षा की कमी, और पर्यावरण ह्रास संबंधी गंभीर चुनौतियाँ बनी हुई हैं।
सही मायने में बदलाव लाने के लिए – और केवल महिलाओं के लिए ही नहीं - हमें परिवार नियोजन, महिलाओं और बच्चों की स्वास्थ्य सेवाओं तक पहुँच के लिए वैश्विक समर्थन, और सशक्तीकरण की पहल के लिए समर्थन की ज़रूरत है। शिक्षित महिला खुद का बेहतर ढंग से ख्याल रख सकती है, जानकारी-युक्त विकल्प चुन सकती है, और अपने समुदाय के लिए अपने योगदान को व्यापक बना सकती है। जब हम महिलाओं को पीछे छोड़ देते हैं, तो हम उनके समुदायों को भी पीछे छोड़ देते हैं।
इस पर कोई विवाद नहीं है कि विकास समावेशी और न्यायोचित होना चाहिए। कूटनीतिक प्रस्तावों में जो चीज़ नदारद है, वह है सरकारों और विकास साझेदारों को मानव अधिकारों जैसे उदात्त आदर्शों - ख़ास तौर से स्वास्थ्य और सामाजिक सेवाओं तक पहुँच के अधिकार - को व्यावहारिक समाधानों का रूप देने के लिए जवाबदेह ठहराने के लिए मजबूत बुनियादी ढाँचा होना।
जब 2015 के बाद के सतत विकास कार्यक्रम का प्रारूप तैयार किया जा रहा है, तो दुनिया के नेताओं और उनके विकास साझेदारों को नए लक्ष्य निर्धारित करने से परे सोचने की ज़रूरत है जो समय के साथ धुँधले हो जाते हैं, और यह सुनिश्चित करने के लिए जवाबदेही तंत्र, प्रक्रियाओं और प्रणालियों की स्थापना की ओर बढ़ने की ज़रूरत है कि हम वे लक्ष्य पूरे करें जो हमने पहले ही निर्धारित किए हुए हैं।
हमें उन नेताओं के लिए वर्तमान अलिखित "शून्य जवाबदेही" की संहिता को छोड़ना होगा जो अंतर्राष्ट्रीय स्तर पर सहमति के लक्ष्यों को अपनी खुद की प्रतिबद्धताओं का पालन करने में विफल रहते हैं। संक्षेप में, हमारी सरकारों को वह करना शुरू करना चाहिए जिसका उन्होंने वायदा किया है। जब हम अधिकाधिक ख़तरनाक समय की ओर अग्रसर हो रहे हैं, जवाबदेही के मजबूत तंत्र के बिना, रोकी जा सकने वाली मातृक-मृत्यु को समाप्त करना और सतत और उचित विकास को बढ़ावा देना हमसे दूर रहेगा।
Filling the Global Leadership Vacuum
SEOUL – Has the world entered a new era of chaos?
America’s vacillating policy toward Syria certainly suggests so.
Indeed, the bitter legacy of the invasions of Iraq and Afghanistan, followed by the 2008 financial crisis, has made the United States not only reluctant to use its military might, even when “red lines” are crossed, but also seemingly unwilling to bear any serious burden to maintain its global leadership position.
But, if America is no longer willing to lead, who will take its place?
China’s leaders have demonstrated their lack of interest in active global leadership by openly rejecting calls to become a “responsible stakeholder” in the international political and economic systems.
Meanwhile, though Russia may wish to maintain the illusion that it is a global power, it lately seems interested primarily in thwarting America whenever possible – even when doing so is not in its own long-term interests.
And Europe faces too many internal problems to assume any significant leadership role in global affairs.
Unsurprisingly, this dearth of leadership has seriously undermined the effectiveness of international institutions, exemplified by the United Nations Security Council’s ineffectual response to the Syria crisis and the failure of the current round of World Trade Organization (WTO) trade negotiations.
This situation resembles the 1930’s – a decade when, as the economic historian Charles P. Kindleberger argued, a leadership vacuum led to the under-production of global public goods, deepening the Great Depression.
In these circumstances, the US and China – the only viable candidates for global leadership – must achieve a grand compromise that reconciles their fundamental interests, in turn enabling them to act in concert to provide and protect global public goods.
Only by stabilizing the bilateral Sino-American relationship can a global system that supports peace and shared prosperity be achieved.
Such a compromise should begin with a concerted effort by the US to enhance China’s role in international economic institutions like the International Monetary Fund, the World Bank, and the WTO.
While the appointment of the Chinese central banker Zhu Min as IMF Deputy Managing Director was a positive step, it has not been followed by other appointments or steps that would increase China’s influence.
Moreover, China should be included in the Trans-Pacific Partnership – the pan-Asian free-trade area that the US is now negotiating with Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam.
Dividing the Asia-Pacific region into two economic blocs – one centered around China and the other around the US – will increase mistrust and encourage economic friction.
In fact, as former US National Security Adviser Zbigniew Brzezinski argued at the World Peace Forum in Beijing in June, what the world really needs is a comprehensive economic partnership between the US and China.
But such cooperation will be impossible unless the US recognizes China as an equal partner – and not just rhetorically.
Given that the US retains a significant military advantage over China, America could support such a partnership without incurring significant security risks.
The irony is that military superiority could weaken US leaders’ willingness to make the kinds of concessions, particularly with regard to security matters, that an equal partnership would require.
But, even then, the needed adjustments could be made without compromising US security interests.
Consider US arms sales to Taiwan.
Given the degree of China-Taiwan cooperation nowadays, reducing such sales would be unlikely to endanger Taiwan, and doing so would contribute substantially to confidence-building between the US and China.
The question is whether any US president, Republican or Democrat, would be willing to risk alienating those who still view Taiwan through the lens of its conflict with the People’s Republic.
The quid quo pro for these changes to US policy would be a commitment by China to respect and defend a set of international norms, principles, and institutions that was created largely without its involvement.
Given that China’s rapid GDP growth since 1979 would have been impossible without America’s efforts to create an open world order, Chinese leaders should not consider this too difficult a pill to swallow.
To be sure, China’s increasingly assertive foreign policy since 2009 could indicate that, despite the universal advantages that a Sino-American leadership condominium would bring, its leaders will remain unwilling to commit to enforcing the existing global order.
But the growing sense that this new assertiveness has backfired, increasing anxiety among China’s neighbors and compelling the US to ramp up its strategic involvement in Asia, means that China could probably be convinced to reset its relationship with the US.
The major test here will be whether China is willing to accept the status quo in the East and South China Seas.
Doomsayers frequently cite the wars that followed Imperial Germany’s rise as a historical parallel to the Sino-American relationship today.
But a better example – in which a global hegemon accommodates an emerging power – might be the United Kingdom’s acceptance of America’s rise.
As China’s leaders define the country’s global role, they should bear in mind the success of the UK’s approach – as well as the failure of Imperial Germany’s arrogant diplomacy.
Yukos Now, Russia\u0027s Economy Later
Just as familiarity breeds contempt, success often spawns complacency.
Sadly, that seems to be the case in Russia, where the government has chosen the first period of prolonged economic growth since communism's fall--with the budget in surplus and capital flight seemingly reversed--to re-open the oligarch wars of the 1990's.
Optimists beware: the arrest of Mikhail Khodorkovsky--and the freezing of his shares in oil giant Yukos--will have a profound long-term impact on Russia's economy and on relations between business and government.
The Yukos imbroglio will not bring Russia's economy to a screeching halt, because no single company determines the country's fate. But long-term prospects are certain to deteriorate.
The problem is one of trust between the business community and the government, which in recent years had just begun to develop.
To put it bluntly, violating that fledgling trust will break the back of Russia's economic upswing.
"Operation Clean Hands"--what some are calling the investigations into Khodorkovsky and his associates--will not increase tax revenue, but only spur growth in the informal economy, as businessmen try to conceal their affairs even more completely from the government.
After all, once Russia's richest man can be stripped of his assets at any moment, ordinary Russian businessmen may be forgiven for concluding that operating in the open is risky.
The first signs of this realization will probably take the form of an increase in capital flight.
Until the Yukos affair, capital flight was reversing.
After a decade of hemorrhaging capital, the first half of this year saw data indicating that Russians who had taken their money out of the country were bringing it back to invest at home.
If capital flight resumes, it will quickly snowball if President Putin fails to convince people that the Yukos affair is an isolated case.
I believe that capital flight will increase substantially.
Reduced business activity, with long-term investment projects being cancelled, seems just as certain.
A lower rate of economic growth thus seems inevitable.
Nor am I alone.
Independent Russian economic experts are unanimous in sharing this grim conclusion.
Only people linked to the regime appear to differ.
If investment stalls, President Putin will have no hope of doubling the size of the economy within a decade, as he has promised.
My longstanding skepticism about this promise has now hardened into certainty: the Yukos affair will make it impossible to sustain the growth rate required to achieve this goal because the arrest of Mikhail Khodorkovsky and the seizure of his assets has dealt a devastating blow to business confidence.
Indeed, times have changed dramatically since the cutthroat Russian capitalism of the 1990's--supposedly a world in which entrepreneurs were indifferent, at best, to each other's problems.
That caricature, if ever true, is certainly not true today: the business community's negative reaction to the persecution of Khodorkovsky by the law enforcement agencies has been strong and nearly unanimous.
The growing calls of some state officials to deal with economic crime are viewed by the business community as both a mockery of the legal code and a veiled threat that the prosecutors want their cut of Russia's riches.
The improved image of Russia's legal system is in tatters.
Today, the business community understands that the Prosecutor General's Office can find any pretext to go after any one of them.
If prosecutors can treat huge businesses so roughly, what hope is there for medium and small businesses?
No surprise, then, that owners of companies of all sizes are now forming a united front to protect their interests.
President Putin, meanwhile, steadfastly refuses to discuss the Yukos affair or the actions of the law enforcement agencies with Russia's business community.
His silence clearly implies consent to the actions of the prosecutors.
But if the president will not publicly account for the fidelity of Russia's law enforcement agencies to law, who will?
One of the great flaws of Putin's presidency has been to allow law enforcement agencies to evaluate their own actions.
Of course, they invariably conclude that their actions were right and lawful.
So the president's position is clear and he will not back down.
In fact, only businesspeople may now be able to influence events: a sharp and pronounced slowdown, with Russian capital showing its displeasure by voting with its feet, might be the last hope for turning the prosecutors from their chosen course.
But I see no reason for optimism.
On the contrary, the arrest of Khodorkovsky has only whetted the prosecutors' appetite.
Once they have digested Yukos, they will look for another meal.
After that, can anyone seriously doubt that the craving for fresh prey will intensify?
A Prisoner’s Reflections on Nelson Mandela
KHARKIV – Incarceration is said to leave you with a feeling of helplessness and vulnerability.
But the truth of life for a political prisoner, even for one on a hunger strike, is the opposite.
As a prisoner, I have been forced to focus on what is essential about myself, my political beliefs, and my country.
So I can almost feel the presence of the brave women and men, old and young, who have gathered in Kyiv and other Ukrainian cities to defend their dreams of a democratic and European future.
In prison, your hopes and dreams become your reality.
I am sure that Nelson Mandela would have understood my feelings and agreed.
The South African apartheid regime may have locked him away for almost three decades, but in the great Soweto protests and the other demonstrations for freedom and equality, courageous young South Africans invariably looked to his example and felt his presence.
Around the world, most people now rightly celebrate the gentle dignity with which Mandela led South Africa out of the political wilderness.
Even here, behind prison bars and 24-hour surveillance of the type that he experienced for so long, I can conjure the warmth of his broad smile, merry eyes, and those colorful Hawaiian-style shirts that he wore with such panache.
And I can admire his unyielding – and, yes, sometimes wily – commitment to reconciliation, which saved his country from the race war that those who refused to accept the end of white-minority rule saw as inevitable.
How wrong they were, and how miraculous was Mandela’s achievement in making even his most implacable enemies feel at home in post-apartheid South Africa.
But here, in this place, it is not Mandela the statesman who touches my soul and fires my imagination. “My” Mandela is the prisoner, the Mandela of Robben Island, who endured 27 years behind bars (18 of them on a rock in the South Atlantic) and yet emerged with his spirit intact, brimming with a vision of a tolerant South Africa, a country liberated even for apartheid’s architects and beneficiaries.
No purges marked the end of white rule.
There were no witch-hunts, nor was there summary justice.
All that Mandela demanded was that the truth about the past be revealed.
Through the unique innovation of the Truth and Reconciliation Commission, Mandela found the only viable bridge between his country’s racist legacy and its multi-racial present and future – a combination of political genius and humane wisdom that only the greatest of leaders possess.
Mandela was able to guide South Africa to freedom, because he was able to see its future more clearly than those who lived through the apartheid years outside of prison.
Indeed, he possessed that rare clarity of moral vision that prison – perhaps like no other environment – can nurture.
Imprisonment brought Aleksandr Solzhenitsyn this clarity as well. “Gradually it was disclosed to me that the line separating good and evil passes not through states, nor between classes, nor between political parties, either – but right through every human heart – and through all human hearts,” he wrote in The Gulag Archipelago.
“This line shifts….And even within hearts overwhelmed by evil, one small bridgehead of good is retained.
And even in the best of all hearts, there remains...an un-uprooted small corner of evil.”
The ability to begin to see more clearly than most the inner workings of the human soul is one of the few gifts that imprisonment can bestow.
Forced to reckon with your own vulnerability, isolation, and losses (and seemingly lost cause), you learn to look more carefully into the human heart – yours and that of your jailers.
Mandela epitomized this rare gift.
How else could he have personally invited one of his Robben Island jailers to attend his inauguration as South Africa’s first democratically elected president?
Of course, behind Mandela’s generous spirit was a character of steel.
He bore his imprisonment for the sake of his cause.
And he bore the anguish of the suffering imposed on his family.
And yet he neither broke nor surrendered to the rage that would have consumed most people.
As usual, Mandela’s own words about his day of personal liberation show how well he understood this: “As I walked out the door toward the gate that would lead to my freedom, I knew if I didn’t leave my bitterness and hatred behind, I’d still be in prison.”
याल्टा प्रलोभन
कीव – सितंबर 1939 में युद्ध की घोषणा और मई 1940 में बेल्जियम और फ़्रांस पर नाज़ी हमले की तैयारी के बीच की शांत अवधि को अक्सर "छद्म युद्ध" कहा जाता है। जब से रूस ने क्रिमिया पर आक्रमण और कब्ज़ा किया है, और हमारी पूर्वी सीमा पर सैनिकों की टुकड़ियाँ और बख्तरबंद सेना तैनात करना शुरू किया है, तब से यूक्रेन में हम "छद्म शांति" में जी रहे हैं।
तथापि, हम यूक्रेनियन लोग अब अपने देश और अपने लोकतंत्र की रक्षा के लिए जो प्रयास कर रहे हैं उनमें कुछ भी छद्म नहीं है। हमारे युवा पुरुष और महिलाएँ सैन्य सेवा के लिए स्वैच्छिक रूप से आगे आ रहे हैं, जैसा पहले कभी नहीं हुआ। हमारी सरकार ने अंतर्राष्ट्रीय मुद्रा कोष के साथ आपातोपयोगी ऋण अनुबंध किया है जिससे हमें वे साधन मिल सकेंगे जिनकी हमें अपनी वित्तीय और आर्थिक स्थिति को व्यवस्थित करने के लिए ज़रूरत है। उस अनुबंध से वास्तविक आर्थिक परेशानियाँ भी शुरू हो जाएँगी, लेकिन यूक्रेनियन लोग अपनी आज़ादी की रक्षा करने की क़ीमत अदा करने के लिए तैयार हैं।
उपेक्षा की अवधि के बाद, वह एक ऐसा समय था जब - यूरोप के बाकी हिस्सों की तरह - हम भी मानते थे कि महाद्वीप की सीमाओं को फिर कभी बल प्रयोग से नहीं बदला जाएगा, अपनी अर्थव्यवस्था की अनिश्चित स्थिति के बावजूद, हम अपने रक्षा ख़र्च में भी बढ़ोतरी कर रहे हैं। संप्रभु यूक्रेनी क्षेत्र को अब और समर्पित नहीं किया जाएगा। एक इंच भी नहीं।
सबसे महत्वपूर्ण बात यह है कि हमारे ख़िलाफ़ रूसी सेना के लामबंद हो जाने के बावजूद, हम चुनाव अभियान की तैयारी कर रहे हैं। अगले महीने, यूक्रेन के नागरिक स्वतंत्र रूप से नए राष्ट्रपति का चुनाव करेंगे - जो लोकतंत्र बनाए रखने की हमारी तथाकथित विफलता पर रूसी प्रचार का सर्वोत्तम संभव मुँहतोड़ जवाब होगा।
और फिर भी, जब विक्टर यानुकोविच के हिंसक शासन के बाद यूक्रेनियन के लोग अपने देश के पुनर्निर्माण के लिए काम कर रहे हैं, तब हम "शांति आक्रमण" के रूप में, नए ख़तरे का सामना कर रहे हैं - जो पश्चिमी संकल्प को कमज़ोर करने के लिए तैयार किया गया सोवियत कूटनीति का पुराना हथकंडा है। कूटनीतिक वार्ता बहाल करने के लिए रूसी राष्ट्रपति व्लादिमीर पुतिन की अमेरिकी राष्ट्रपति बराक ओबामा को हाल ही में की गई फ़ोन कॉल और उसके बाद क्रेमलिन बनाने के संकट को हल करने के तरीके के बारे में जारी रूसी श्वेत पत्र, वास्तव में शांति पर हमला है।
पुतिन की यह चाल 1945 के कुख्यात याल्टा सम्मेलन जैसी है, जिसमें ��ोसेफ़ स्टालिन ने विंस्टन चर्चिल और फ़्रैंकलिन डी. रूज़वेल्ट को यूरोप के विभाजन का भागीदार बनाया था जिससे आधा महाद्वीप लगभग आधी सदी तक ग़ुलाम बन गया। आज, पुतिन क्रेमलिन द्वारा तैयार किए गए संघीय संविधान पर समझौता-वार्ता के द्वारा पश्चिम को यूक्रेन के विभाजन में भागीदार बनाना चाह रहे हैं जिससे दर्जन भर क्रिमिया बन जाएँगे - अर्थात ऐसे छोटे-छोटे टुकड़े बन जाएँगे जिन्हें रूस बाद में ज़्यादा आसानी से निगल सकेगा।
बेशक, संघवाद अच्छी बात लगती है। राजनीतिक शक्ति को उस जगह के निकट रखना हमेशा आकर्षक, और आम तौर से प्रभावी होता है, जहाँ लोग वास्तव में रहते हैं।  लेकिन पुतिन के मन में यूक्रेनी लोकतंत्र की भलाई की बात नहीं है; उनके लिए संघीय प्रणाली क्रेमलिन के लिए राजनीतिक चाल चलने और अंततः यूक्रेन के पूर्वी और दक्षिणी क्षेत्रों को रूसी संघ में शामिल करने का साधन है।  क्लाउज़विट्ज़ के कथन की व्याख्या की जाए,  तो पुतिन के लिए संघवाद अन्य तरीकों से अधिग्रहण करना है।
हमें रूसी प्रस्ताव को बारीकी से समझने की ज़रूरत है: यूक्रेन की नई संघीय इकाइयों के पास "यूक्रेन की विदेश नीति की दिशा" तय करने का शक्तिशाली अधिकार होगा।  यह प्रावधान पुतिन को रूसी-भाषी क्षेत्रों को देश के यूरोपीय भविष्य पर वीटो करने के लिए विवश और हेरफेर करने की कोशिश करने में सक्षम बना देगा।
यूक्रेन के संवैधानिक ढाँचे पर फ़ैसला मात्र यूक्रेन के नागरिक कर सकते हैं। रूस का इसमें कोई हस्तक्षेप नहीं हो सकता - और न ही अन्य देशों को करना चाहिए, चाहे वे कितना भी मददगार होना चाहते हों। यूक्रेन बोस्निया नहीं है, जहाँ संविधान उन शांति वार्ताओं से उभरा जिनसे यूगोस्लाविया के अलग होने पर सालों से चला आ रहा ख़ूनी युद्ध समाप्त हुआ।  और न ही यह कोसोवो है, जो उसी समय आज़ाद हुआ जब उसकी सरकारी संरचनाओं में जालसाज़ी की जा रही थी।  यूक्रेन पूरी तरह संप्रभु देश है, जिसे रूस सहित दुनिया ने इसी रूप में मान्यता दी है।
पुतिन के नकली संघवाद को स्वीकार करने का मतलब है, उस झूठ को स्वीकार करना जिसे क्रेमलिन यूक्रेन की मौजूदा अंतरिम सरकार और उन साहसी पुरुषों और महिलाओं के बारे में फैला रहा है जिन्होंने यानुकोविच को अपदस्थ किया था। पुतिन के प्यादों का दावा है कि यूक्रेन के रूसी-भाषी लोग ख़तरे में हैं, लेकिन वे उनके उत्पीड़न का एक भी उदाहरण पेश नहीं कर सकते जो इसे साबित कर सके। पूर्वी यूक्रेन या क्रिमिया से कोई भी रूसी-भाषी शरणार्थी भागकर रूस में नहीं गया, और न ही किसी रूसी-भाषी ने देश के बाहर कहीं और राजनीतिक शरण की माँग की है।
वजह साफ़ है: यूक्रेन में रूसी-भाषियों का कोई उत्पीड़न नहीं हो रहा है, और ऐसा कभी हुआ भी नहीं है।  यानुकोविच के शासन में यूक्रेन की सरकार अक्षम, भ्रष्ट और फ़रेबी थी।  लेकिन इससे समान-अवसर का उत्पीड़न होता था।
अगर यूक्रेन में रूसी-भाषियों का कोई उत्पीड़न नहीं हो रहा है, तो देश के राजनीतिक ढाँचे को बदलने का कोई कारण नहीं है। तो क्या यूक्रेन को वास्तव में बड़े झूठ पर आधारित नई संवैधानिक व्यवस्था बनाने के लिए मजबूर किया जाना चाहिए?  हमें ज़रूरत है एक ऐसी सरकार की जो सक्षम, कुशल, और भ्रष्टाचार-मुक्त हो।  और यूरोप की मदद और तकनीकी सहायता से, हम इसे स्थापित करेंगे।
यूक्रेन के संकट का शांतिपूर्ण समाधान खोजने की राजनयिकों की इच्छा स्वाभाविक है। लेकिन रूस जिन शर्तों की माँग कर रहा है, अगर पश्चिम उन्हें स्वीकार कर लेता है, तो यह यूक्रेन की संप्रभुता को घातक रूप से कमज़ोर कर देगा; और इससे भी ख़राब बात यह होगी कि रूस की शर्तें स्वीकार करने से इस विचार की पुष्टि हो जाएगी कि शक्तिशाली देश अपने कम शक्तिशाली पड़ोसी देशों पर अपनी बात मनवाने के लिए ज़ोर-ज़बरदस्ती कर सकते हैं, जो उनकी आज़ादी के समर्पण तक जा सकती है।
यूक्रेन इस धमकी का सामना करेगा - अगर ज़रूरी हुआ तो अपने दम पर सामना करेगा। हम भविष्य के इतिहास की पाठ्यपुस्तकों में असहाय शिकार की भूमिका निभाने से इंकार करते हैं।
Sweet Caroline in Tokyo
TOKYO – Fifty years have passed since the assassination of US President John F. Kennedy, with official ceremonies held in Washington, DC, and Dallas to commemorate the anniversary.
But JFK’s eldest daughter, Caroline Kennedy, was not present at either event; she had just taken up her post in Tokyo as the 29th US Ambassador to Japan.
On November 19, thousands of people lined the streets to catch a glimpse of Kennedy as she made her way from Tokyo Station to the Imperial Palace, around a kilometer away, by horse-drawn carriage to present her credentials to the emperor.
Waving to the onlookers, she looked like Snow White.
November 22, 1963, was also the day satellite broadcasting from the United States to Japan began, and many Japanese got up early to watch a speech by JFK in Dallas that began at 5:30 a.m.
But, rather than airing the speech, the broadcast brought the shocking news of the assassination.
The image of young Caroline – the inspiration for Neil Diamond’s famous song – solemnly standing beside her three-year-old brother as he saluted his father’s coffin is deeply engrained in the hearts of Japan’s people.
So there probably is not a single Japanese who would not welcome her as US Ambassador.
US ambassadors to Japan have come in three types. There have been academic experts on Japan, like the acclaimed scholar Edwin Reischauer.
There have also been political heavyweights, such as Michael Mansfield, a long-time Democratic majority leader of the US Senate, former Vice President Walter Mondale, former Speaker of the House of Representatives Thomas Foley, and Senator Howard Baker, who also served as President Ronald Reagan’s chief of staff.
The third type are presidential political appointees, such as Thomas Schieffer, a former business partner of President George W. Bush, and John Roos, a noted Silicon Valley lawyer.
Clearly, Caroline Kennedy, an important early supporter of President Barack Obama, is in this category.
Indeed, her backing for Obama in the Democratic Party primaries in 2008, when he was still a relatively unknown senator from Illinois, gave his campaign credibility among party insiders who remain loyal to her family’s legacy.
Kennedy’s address to the Senate Foreign Relations Committee during her confirmation hearing elicited bipartisan support – a rare occurrence nowadays, given America’s highly polarized national politics – and she received unanimous approval.
Although she lacks formal political or diplomatic experience, her personal connections, particularly to Obama, will have great significance for US-Japan relations.
And there are pressing issues that need the new ambassador’s attention.
For example, there are security questions related to strengthening the alliance between Japan and the US, including the relocation of the Futenma Air Station, the base of operations for the US Marine Corps on Okinawa.
There are also issues related to economic cooperation, such as the Trans-Pacific Partnership (TPP), the proposed mega-regional free-trade treaty covering Pacific Rim economies.
Although powerful domestic interest groups, particularly those representing the agricultural sector, have objected to Japanese participation in the TPP negotiations, Prime Minister Shinzo Abe’s government chose to join the talks late in the day.
Instead of banking the political capital that his high approval ratings had given him, he chose to spend some of it on an initiative that his predecessors had rejected, but that will help to transform myriad aspects of Japan’s economy.
Of course, given today’s hyper-partisan environment in the US, there is a danger that fast-track negotiating authority – under which Congress binds itself to an up-or-down vote on trade agreements (thereby precluding amendments and filibusters) – will not be given to the president.
If this roadblock cannot be overcome and the agreement stalls, the Abe government’s approval ratings will suffer, despite progress in the negotiations.
Given the unanimity with which Kennedy was confirmed, she may be able to use her own political capital to help sell fast-track authority in Congress.
The Abe government is banking on its high approval rating not only to participate in the TPP, but also to address the need to escape from 15 years of deflation and strengthen Japan’s national-security posture, which has been hamstrung for decades.
Given the nexus of issues that tie vital US interests to Japan’s reform process, Kennedy, with her character and skills, could well prove to be an essential link between the countries at a crucial point in their relationship.
Who Lost Thailand?
TOKYO – Thailand, Southeast Asia’s most developed and sophisticated economy, is teetering on the edge of the political abyss.
Yet most of the rest of Asia appears to be averting its eyes from the country’s ongoing and increasingly anarchic unrest.
That indifference is not only foolish; it is dangerous.
Asia’s democracies now risk confronting the same harsh question that the United States faced when Mao Zedong marched into Beijing, and again when Ayatollah Ruhollah Khomeini ousted the Shah in Iran.
Who, they will have to ask, lost Thailand?
Much of the world is wondering how such a successful economy could allow its politics to spin out of control.
What accounts for the armies of protesters – distinguished, gang-like, by the color of their shirts – whose mutual antipathy often borders on nihilistic rage?
The roots of the current unrest extend back more than a decade, to former Prime Minister Thaksin Shinawatra’s first electoral victory in 2001.
Thaksin’s triumph did not represent the normal alternation in power that one finds in a democracy.
Instead, his victory heralded the political rise of the country’s poor, long-silenced rural majority.
Bangkok’s entrenched elite recoiled in alarm.
But, instead of learning to compete with Thaksin for the votes of Thailand’s rural poor, the country’s urban elite (including the powerful military) sought to delegitimize his rule.
When he was re-elected by an even larger majority, his government was overthrown, his political party was banned by the Supreme Court, and he was forced to flee the country after corruption charges against him led to a criminal conviction.
Yet Thaksin’s supporters did not abandon him.
When Thailand’s military returned to their barracks, many Thai citizens voted for Thaksin at one remove, with his sister – Yingluck Shinawatra, a long-time executive at Thaksin’s communications firm – becoming Prime Minister, supported by a powerful parliamentary majority.
For much of her term in office, Yingluck garnered praise for her pragmatism, and for seeking to ameliorate the antagonism of her opponents.
But that praise and success appears to have bred a form of hubris.
She proposed an amnesty law that would have not only pardoned opposition leaders, including Abhisit Vejjajiva, her predecessor as prime minister (who faces murder charges), but allowed her brother to return to the country.
And, in defiance of a Supreme Court ruling, she sought a constitutional amendment that would make the Senate, whose members are appointed, an elected body.
The opposition, sensing that its moment had arrived, launched a wave of street protests.
Yingluck, in an effort to defuse the situation, called for a parliamentary election in February.
But the opposition has rejected this and says that it will boycott the vote.
It fears – rightly, most people suspect – that the Thaksin camp will be returned to power in any free and fair vote.
So, in essence, what is happening in Thailand is an attempted nullification of democracy by the opposition and the country’s entrenched elite.
Unable to compete successfully with Thaksin for votes, they now want to dilute Thai democracy in order to prevent the electorate from ever again choosing a government that goes against their will.
If Thailand were an insignificant country with little geostrategic weight, its problems might not matter as much as they do to the rest of Asia.
But Thailand is Southeast Asia’s lynchpin economy.
It is a key partner for Myanmar (Burma) as it makes its own political and economic transition, and it is a hub for trade with neighboring Cambodia, Laos, and Vietnam.
But the biggest reason that Thailand matters for Asia’s democracies is fierce competition for influence between a rising China and the democratic world.
Until now, Thailand has been a firm member of the democratic camp.
Its military is mostly trained by the United States; indeed, it was the key staging point for the US during the Vietnam War.
Likewise, Japan and India have long regarded Thailand as a democratic bulwark in a neighborhood where some regimes – Cambodia and Laos – are firmly under China’s hegemonic sway.
Indeed, its government has proved to be a strong supporter of Myanmar’s president, Thein Sein, as he seeks to free his country from China’s tight embrace.
By standing aside as Thailand’s opposition and traditional elite seek to undermine the country’s democracy in the name of a permanent right to rule, Asia’s democracies risk driving some elements of the Thaksin camp into the arms of China, which would happily accept the role of patron to so potent a political force.
But this need not happen.
Thailand’s military has long and respectful ties not only with the US military, but with officers in Japan as well.
Thailand’s opposition politicians, many of whom were educated at top Western universities, may also be open to quiet advice that they are pushing things too far, not only putting Thailand’s stability at risk, but also jeopardizing regional security.
Just as, a decade ago, the West objected to the efforts of Turkey’s entrenched secular elite to rob Recep Tayyip Erdoğan’s mildly Islamist AKP party of its democratic victory, it needs to speak clearly today in defense of Thai democracy.
The opposition’s claim that it is acting in the interests of the world’s democracies needs to be rebutted.
Thaksin may be no saint, and some constitutional reform will be needed if political reconciliation is to come about.
But Thaksin’s governments, like that of his sister, have kept China at one remove from influence.
That is the key strategic interest that is now at stake.
Should Yingluck be ousted in a coup, or should the country’s democracy be hollowed out to preclude her return to power, the Shinawatras may be left with no choice but to seek support from Thailand’s giant neighbor to the north.
If that happens, we will all know who lost Thailand.
Equality or Estrangement
TOKYO – Those whom the gods would destroy, they grant their wishes.
Will that bit of ancient wisdom now hold for the United States and Japan?
For a half-century, the US, which wrote Japan’s postwar “peace” constitution, has pressed the Japanese to play a greater role in maintaining Asian and global stability.
But now that Japan finally has a leader who agrees, the US is getting nervous, with Secretary of State John Kerry supposedly calling Japan under Prime Minister Shinzo Abe “unpredictable.”
These strains in the US-Japan relationship – surely the foundation stone of Asian stability – first became noticeable in December, when Abe visited the Yasukuni Shrine in Tokyo, which houses the “souls” of (among others) Class A war criminals from the Pacific War.
The US has always criticized Japanese officials’ visits to the shrine, but through diplomatic channels.
This time, America voiced its displeasure openly.
The US is rightly concerned about the negative impact of such pilgrimages on Japan’s relations with its neighbors, particularly China and South Korea.
But the harsh tone publicly adopted by President Barack Obama’s administration raised serious concerns among some in Abe’s government who question Obama’s commitment to the alliance and suspect that he was using the Yasukuni issue as a pretext to signal a weakening of America’s defense commitment.
Such suspicions were sharpened after China declared its new Air Defense Identification Zone, which overlaps Japanese sovereign territory.
The US tried to have it both ways: though the Obama administration sent US bombers through the new ADIZ to demonstrate its refusal to recognize China’s move, it also told US commercial airliners to acknowledge the zone and report their flight plans to the Chinese authorities.
Likewise, US acquiescence in China’s de facto ouster of the Philippines from the Scarborough Shoal (a disputed outcropping in the South China Sea) raised questions in Japan about the two countries’ supposed harmony of interests.
In fact, although the US extols the virtues of its partnership with Japan, successive American presidents have been vague about the details.
Ultimately, the idea always seemed to be that Japan would pay more for defense, but the US would set the partnership’s objectives.
Abe’s conception of the US-Japan partnership presupposes much greater equality.
After all, a society like Japan, trying to escape two decades of economic malaise, cannot feel completely comfortable outsourcing its national-security strategy, even to an ally that is as respected and reliable as the US.
Far from being based on chest-thumping nationalism, Abe’s national-security strategy reflects, above all, a deep awareness of how a lost generation of economic growth has affected the Japanese.
His bravura diplomatic performances sometimes give the impression that a self-confident Japan has been a normal feature of the global landscape.
Strangely, it is all but forgotten – particularly by the Chinese – that for two decades Japan has watched China’s rise quietly from the sidelines (even supportively, to the extent that Japanese investors have poured in billions of dollars in the three decades since Deng Xiaoping opened the economy).
Indeed, Abe has succeeded so well in returning Japan to the world stage that his US and Asian critics act as if the only problem now is to moderate Japanese self-confidence – a notion that would have been laughable just two years ago.
But the fact remains that one of Abe’s primary worries is the spiritual malaise that accompanied Japan’s long economic stagnation. Those who see in his patriotic rhetoric a desire to whitewash history miss his real concern: economic revival is meaningless if it does not secure Japan’s position as a leading Asian power.
The US, however, regards Abe’s worries about Japan’s spirit as peripheral to its efforts to forge a lasting relationship with China and overhaul its strategic presence in the Pacific.
For example, the US views the Trans-Pacific Partnership – the huge trade agreement involving it, Japan, and 10 other leading Pacific Rim countries – as a technical scheme that will bring economic benefits through greater trade.
But, for Abe, the TPP’s value for Japan’s sense of identity – that it is now a more outward-looking nation – is just as important.
In Abe’s view, Japan needs to regain, wherever possible, the right of independent decision-making if it is to manage successfully the challenge posed to it by China. This does not mean that Abe’s Japan will become an ally like France under Jacques Chirac, spurning US leadership for the sake of it; instead, Abe seeks a policy of cooperation with the US that reflects the alliance's voluntary nature.
He believes that, given the new balance of power in Asia, the alliance will be meaningful only if each partner has a real choice, and the wherewithal, to act autonomously or with regional allies.
Fortunately, Japanese and American analyses of Chinese trends are not very different.
Both generally view China as having embarked on a probing strategy in search of weak spots where it can expand its geopolitical reach.
And both believe that only when China is convinced that such probes will yield no lasting benefit can serious negotiations about a comprehensive security structure for Asia take place.
But even here, there is a difference.
The US, convinced of the importance of intentions in the conduct of foreign policy, believes that once China recognizes the limits to its power, a structure of peace will follow naturally.
Abe, by contrast, believes that only a favorable balance of power can be relied upon, and he is determined that Japan play its part in constructing that balance.
Although Abe has lifted Japan’s sights and self-confidence, he recognizes that Japan faces real limits.
The US, too, should recognize that there are limits to the extent of the subordination that it can ask of an ally.
Securing Japan
TOKYO – Shinzo Abe’s second term as Japan’s prime minister began with a laser-like focus on economic revitalization.
That policy, almost instantly dubbed “Abenomics,” comprises what have been called the three “arrows”: bold monetary policy, an expansionary fiscal stance, and structural reforms to stimulate private investment.
Hosting the Olympic Games in Tokyo in 2020 has added a fourth arrow to this quiver in the form of increased infrastructure investment and tourism revenue in the years leading up to the Games.
To be sure, after 15 years of deflationary recession, revitalization of the Japanese economy remains far from complete.
Nonetheless, the effects of Abe’s reforms are becoming visible in areas such as equity prices and exchange rates.
But Abe also confronts a security environment in Asia that is every bit as brittle as Japan’s economy was before his government took office last December.
Indeed, he confronted many of the same issues during his first administration seven years ago.
His efforts back then were halted by his own resignation, and he is now making a second attempt to establish a national-security governance system to meet Japan’s needs – and those of its allies – in twenty-first-century Asia.
In a speech to a plenary session of the lower house of Japan’s Diet on October 25, Abe emphasized that, given the current security situation in Asia, “It is essential to strengthen command functions for implementing the prime minister’s national security policy.”
Now that split control of the Diet’s upper and lower houses has been resolved, with Abe’s Liberal Democrats in strong control of both chambers, a bill to modernize Japan’s national-security governance is certain to pass.
The bill that Abe has submitted aims to establish a Japanese National Security Council, based on lessons from the successes and failures of similar institutions in other countries, such as the NSC in the United States.
The Security Council of Japan – something of a stopgap measure created to provide advice from relevant cabinet members to the prime minister in times of crisis – will now be reorganized as a formal institution.
The new NSC’s membership will be limited to the prime minister, the cabinet secretary, and the foreign and defense ministers, with relevant ministers added on an ad hoc basis.
A permanent National Security Secretariat, headed by a person with abundant diplomatic experience, will be established in the prime minister’s office, with 60 security specialists from various fields laying the policy groundwork for medium- and long-term national security strategy.
This strategy will then be reflected in guidelines issued to Japan’s defense bodies and diplomats.
Japan, like other countries, has faced jurisdictional disputes among foreign-policy, defense, and police agencies that have hindered the aggregation and analysis of intelligence information.
But, with the creation of the NSC, each ministry and agency will report important national-security information to the new secretariat, which will then carry out integrated analysis and issue reports to the prime minister and others.
Of course, as in other countries, bureaucracies are creatures of habit. As we can already see, it will not be easy to overcome the obstacles posed by vertically integrated ministries and agencies.
Institutionalization will take time – and the importance of its success cannot be understated.
For example, the new NSC will be responsible for sharing intelligence with other countries, including the US, Japan’s most important ally.
As a result, ensuring the protection of information will be a key issue, particularly given the old habit of leaking security information to the press.
That is why the Diet is also considering a bill on the protection of classified information that would impose harsher punishment on government officials who leak secrets, particularly those concerning national security.
The trauma of gag laws that were imposed on the press before and during World War II resulted in the elimination of all restraints afterwards, which had the effect of making Japan a spy’s paradise, with insufficient counterintelligence measures and poor secrecy.
Moreover, the long decades of peace since 1945 have served to lower awareness among politicians of the need for confidentiality.
For example, Japanese newspapers always report when, where, and with whom the Prime Minister met for dinner in the following day’s editions.
In contrast to the US system of presidential government, Japan has a parliamentary form of government.
Yet the goals of national security and crisis management are the same in both systems – indeed, one of British Prime Minister David Cameron’s first acts when he came to power was to establish an NSC to improve coordination of policymaking.
Although the establishment of the Japanese NSC is long overdue, it is not too late for Japan to benefit from the improvement in policy direction and coherence that it seems certain to bring.
How to End an Insurgency
TOKYO – When the Moro Islamic Liberation Front guerrilla movement took up arms in the Philippines in the 1960’s, Ferdinand Marcos had yet to become the country's president – let alone dictator.
Despite the country’s many political transformations in the last half-century, the MILF’s campaign to achieve independence for the Bangsamoro nation – whose territory, they claim, covers the islands of Mindanao, Palawan, Sulu, and Sabah – remained constant, until President Benigno Aquino III resolved to change it.
The MILF was not deterred by the popular overthrow of Marcos’s 20-year dictatorship in 1986, following the assassination of the opposition leader Benigno Aquino, Jr.
Nor did the establishment of democracy – now deeply entrenched – inspire the group’s leaders to reconsider their approach.
The MILF remained engaged in a brutal campaign of beheadings, assassination, kidnappings, and indiscriminate butchery.
Then, last January, Aquino managed to achieve a landmark deal that finally ended Mindanao’s agony.
This is one of the most remarkable feats of peacemaking in Asia since World War II, and at least as worthy of international recognition as former Finnish President and 2008 Nobel Peace Prize laureate Marti Ahtissari’s role in brokering peace in Aceh, Indonesia, in 2005.
In fact, given the myriad security and political risks that Aquino ran in concluding a peace deal with the MILF, he may be an even worthier Nobel laureate.
Aquino’s approach to the negotiations reflected his recognition that the MILF had twice used peace talks – once brokered by Libya’s Colonel Muammar el-Qaddafi – as a cynical ploy to buy time to regroup and raise funds (including from Al Qaeda).
With freshly restocked arsenals, they would relaunch their campaign to seize Mindanao by force.
Against this background, it is no surprise that, when Aquino relaunched stalled peace talks in 2012, the Filipino people were highly skeptical.
But, over time, the effort gained credibility.
Though questions about the peace agreement’s durability remain, with full disarmament yet to take place, the political autonomy granted to the country’s Muslim areas seems to have persuaded most MILF fighters that the time has come to end the carnage.
For the people of Mindanao, this is a life-changing development.
In the few short months since the peace deal was reached, Filipino and foreign investment has been flowing into the island.
With nearly half of Mindanao’s population living below the poverty line, these funds could not be more critical.
But the benefits of Aquino’s leadership are not limited to Mindanao.
His entire presidency, which began in 2010, has been characterized by the creativity and doggedness that made peace with the MILF possible.
Whereas other Filipino leaders – including Aquino’s mother, Corazon Aquino, who was elected president after Marcos’s overthrow – spoke out against corruption, Aquino has attacked it at its roots.
He has brought to justice not only small-time wrongdoers – or “flies,” as Chinese President Xi Jinping’s calls such people – but also “tigers” like Senator Juan Ponce Enrile, who helped overthrow Marcos and bring Corazon Aquino to power two decades ago.
As a result, the Philippines has dramatically improved its ranking in Transparency International’s annual corruption index, rising from a 134th-place tie with Nigeria in 2010, to 94th place, alongside India, last year.
Aquino’s efforts to fight corruption and rebuild his country’s economic foundations has enabled the Philippines – at long last – to become Southeast Asia’s fastest-growing economy, with annual GDP growth of 7.2% last year.
While growth is expected to slow slightly this year, to 6.5%, the Philippines can now be counted among Asia’s “tiger” economies.
Of course, the country still has a long way to go.
Some ten million Filipinos – one-quarter of the workforce ­– ­are compelled to seek employment overseas, owing to inadequate opportunities at home.
If the Philippines is to attract enough investment to achieve living standards comparable to Malaysia and Thailand, Aquino must remain persistent in his efforts to open the economy and curtail corruption.
Fortunately, he seems determined to do so.
Aquino’s foreign policy has also been characterized by the same resoluteness.
Nowhere is this more apparent than in his willingness to stand up to China’s territorial claims in the South China Sea.
Indeed, the Philippines is challenging China’s claims in the International Court of Arbitration, using provisions from the United Nations Convention on the Law of the Sea.
Aquino’s stern criticism of China’s expansionist policies has certainly not endeared him to the Chinese.
But regional powers like the United States and Japan have supported his stance, with Japan promising to deliver enhanced equipment for the Philippine Coast Guard.
And the Filipino people undoubtedly appreciate his tenacity in protecting their interests.
Aquino’s success in bringing the decades-old MILF rebellion to a peaceful end highlights a courage and tenacity that will enable him to play a key role in reining in China’s regional ambitions.
Just as David’s ingenuity enabled him, against all odds, to defeat Goliath, Aquino’s bold and calculated leadership can succeed in bolstering stability and security throughout Asia by bringing China, perhaps against its will, into a rules-based regional order.
Japan’s Russian Dilemma
TOKYO – For Japanese leaders and citizens, President Vladimir Putin’s brutal annexation of Crimea was an unsurprising return to the normal paradigm of Russian history.
Indeed, most Japanese regard the move as having been determined by some expansionist gene in Russia’s political DNA, rather than by Putin himself or the specifics of the Ukraine crisis.
Japan is particularly concerned with Russian expansionism, because it is the only G-7 country that currently has a territorial dispute with Russia, which has occupied its Northern Territories since the waning days of World War II.
That occupation began between August 28 and September 5, 1945, when the Soviet Union hurriedly nullified the existing Soviet-Japanese Neutrality Treaty and invaded not only Japanese-occupied Manchuria, but also southern Sakhalin Island and the ancient Japanese territories of Etorofu Island, Kunashiri Island, Shikotan Island, and the Habomai Islands.
Concerned that America’s development and use of atomic weapons against Japan would deprive the Soviet Union of any territorial gains in the east, Stalin ordered the Red Army to invade.
But Japan, having already endured the bombings of Hiroshima and Nagasaki, had accepted the Potsdam Declaration on August 14, meaning that the war was already over when the Red Army marched in.
Since then, these islands have been controlled by either the Soviet Union or its successor state, Russia.
And, as elsewhere in Russia, their residents have been impoverished by consistently incompetent and corrupt government, whether run by Communists or today’s crony capitalists.
In a strange historical twist, given the Crimean annexation, after the Japanese citizens native to the Northern Territories were killed or expelled, many Ukrainians were brought to the islands during the Soviet years, and still live there.
If an independence referendum were to be held on Etorofu Island, where some 60% of the inhabitants have roots in Ukraine, I wonder whether Putin would accept the result as readily as he did the ballot in Crimea, undertaken at the barrel of a gun?
After coming to power at the end of 2012, Japanese Prime Minister Shinzo Abe had sought to improve relations with Putin in the hope of beginning serious talks on the Northern Territories.
But now that Putin has made his project of imperial restoration crystal clear, those hopes are stillborn.
Recognizing this, Abe condemned the annexation of Crimea, calling it “a violation of Ukraine’s integrity and the integrity of its sovereignty and territory.”
Abe added that “attempts to change the status quo by force cannot be overlooked,” and that Japan would consider further economic sanctions against Russia in cooperation with the G-7.
Needless to say, these remarks underscored the fact that Japanese territory and territorial waters are being threatened “by force” in the East China Sea by China.
The lesson now being drawn is that, where territorial disputes are concerned, Japan must not kowtow to “attempts to change the status quo backed by force.”
China’s response to the crisis in Ukraine was particularly revealing.
For three decades, China has proclaimed “non-interference” in the internal affairs of sovereign states as the most important rule governing international relations.
But when Putin invaded Ukraine, China showed the hollowness of its adherence to this principle.
Instead of condemning Russia for invading and annexing Crimea, it abstained at the United Nations Security Council, and has offered more criticism of Ukraine’s new popular government than it has of Putin’s thuggish behavior.
Every country in Asia is bound to draw only one conclusion from China’s tacit approval of Putin’s Crimean land grab: China, too, thinks that might makes right, and if it believes that it can get away with invading disputed territories, whether in the South China Sea or in the Indian Himalayas, it will do so.
As a result, effective deterrence will require Asian countries to strengthen their defenses and unite to demand adherence to international law, so that China understands that any Putin-style land grabs will cost its economy dearly.
In the immediate future, Japan will work with the G-7 to ensure that Putin’s reckless ambitions do not endanger other parts of Ukraine.
Already, Japan has decided to provide ¥150 billion ($1.5 billion) in economic aid for Ukraine, the largest pledge by any individual country, including the US, thus far.
Before the Crimea invasion, territorial negotiations between Japan and Russia showed signs of progress.
Moreover, several bilateral economic cooperation efforts, such as projects involving liquefied natural gas, were moving forward.
But it is now clear not only that Putin is returning Russia to the stagnation of the late-Soviet era, but also that he subscribes to former Soviet leader Leonid Brezhnev’s dictum that “what we have, we hold.”
So Putin’s talk about reaching an agreement with Japan on the Northern Territories was likely as mendacious as his claims that Russians in Crimea were in peril, and thus in need of protection by Russian troops.
More important, Japan understands that business as usual with an aggressive Russia that undermines the international order could embolden others closer to home to embrace Putin’s lawless tactics.
The days of an inward looking Japan are over.
Japan now sees threats elsewhere in the world in the context of its own security, and will react appropriately.
Abenomics’ Women Problem
TOKYO – When Japanese Prime Minister Shinzo Abe addressed the United Nations General Assembly last week, he emphasized his determination to build a society in which women shine.
Indeed, creating opportunities for women in the workforce is an essential pillar of the government’s reform program, so-called “Abenomics.”
Abe is clearly on the right track.
According to an analysis by researchers at Goldman Sachs, closing the gender gap could boost GDP by 9% in the United States and nearly 13% in Japan.
During his stay in New York, Abe also discussed “womenomics” with Hillary Clinton, who had made empowering women in the economy a key policy goal during her tenure as US Secretary of State.
Abe, strange to say, is the first Japanese leader to grasp that the underutilization of women’s skills has been holding back Japan’s economy.
Japan ranked 105th out of 136 countries in the World Economic Forum’s “Global Gender Gap Report 2013,” down from 101st place in 2012.
The problem begins in Abe’s own domain – politics.
In his cabinet reshuffle earlier this month, five female ministers were appointed, but in the face of strong opposition from male MPs.
More important, the appointments amounted to painting over the cracks: Only 39 of the 480 members of the Japanese Diet’s lower house, or 7.9%, are women.
The Inter-Parliamentary Union ranks Japan 158th out of 189 countries in terms of its ratio of female MPs.
Things are just as bad at lower levels of government, where women account for a mere 13.1% of representatives in local parliaments, more than 40% of which have no female members at all.
As the leader of the Liberal Democratic Party, Abe should instruct local party branches to choose more female candidates to run in next April’s local elections.
But, at least so far, Abe seems to lack the will to do so (though he may choose to work with local party bosses behind the scenes to bring in more women).
It is also worrying that some of the women Abe has selected for his cabinet and for key party posts are arch-conservatives who advocate that women stay at home and take care of children.
Given this, one cannot help feeling uncertain about the credibility of his womenomics initiatives.
That is especially true when one considers the lack of women in corporate management positions.
Everyone at the meeting of the Keidanren, the Federation of Economic Organizations, to welcome US Ambassador Caroline Kennedy were men in dark suits.
In 2003, Norway revised its corporation law to state that companies that failed to place women in 40% of management positions could face delisting.
If the same law were applied to Japan today, every company would be delisted.
Women currently hold an estimated 9% of senior management positions in Japan, compared to 40% in the Philippines, 24% in France, and 22% in the United States.
One reason that Japan’s consumer electronics manufacturers are no longer world-beaters is that they have not fully used their female employees in managerial positions, despite their varied experiences.
The exceptions are instructive.
When Akira Matsumoto became CEO of the Japanese snack manufacturer Calbee, he began appointing both female executives and foreigners to the company’s leadership.
Revenues and earnings have increased, and net sales have grown threefold.
Though there is no proof that the former caused the latter, Matsumoto’s commitment to lead in this area suggests that corporate dynamism may well increase with a more prominent role for women.
Likewise, Daiwa Securities CEO Shigeharu Suzuki has appointed women as executive officers to improve sales capabilities, with promising results.
Although the employment rate of women in Japan reached 69.5% in 2013, more than 60% of women leave the workplace prematurely, mostly owing to childbirth.
This pattern results from institutional impediments to achieving a viable work-family balance – impediments that embody the harsh view of male superiors and colleagues toward working mothers.
Changing this view is not easy, because the Confucian belief that women belong in the home remains embedded in Japanese and some other Asian societies.
Moreover, most of the people participating in forums or workshops focused on womenomics are women; too often, these events simply turn into platforms for women to complain among themselves.
Abe’s womenomics will not work unless and until Japanese men change their thinking.
If Abenomics is now stalling, as many fear, the reason may be found in a lack of capacity to implement the policies put forward, particularly with respect to women.
Indeed, the key to Abenomics’ success or failure may turn out to be whether the Japanese people are convinced that women are essential to their country’s economic revival, and are willing to support an earnest effort to establish institutions that support working women.
Tipping Points to Asia’s Future
TOKYO – A week, it is said, is a long time in politics.
But events in Asia over the past week may define the region for decades to come.
Thailand, one of Asia’s most prosperous countries, seems determined to render itself a basket case.
A military coup, imposed following the Thai constitutional court’s ouster of an elected government on spurious legal grounds, can lead only to an artificial peace.
Unless Thailand’s military is prepared to serve as a truly honest broker between deposed Prime Minister Yingluck Shinawatra (and her supporters) and the anti-democratic Bangkok elite, which has sought a right to permanent minority rule, today’s calm may give way to a new and more dangerous storm.
To Thailand’s east, Vietnam is the latest Asian country to feel pinched by China’s policy of creating facts on the ground, or in this case at sea, to enhance its sovereignty claims on disputed territory.
Vietnam’s government reacted vigorously to China’s placement of a huge, exploratory oilrig near the disputed Paracel Islands in the South China Sea.
Ordinary Vietnamese, taking matters into their own hands, reacted even more vigorously, by rioting and targeting Chinese industrial investments for attack.
China’s unilateral behavior has exposed a strain of virulent anti-Chinese sentiment bubbling beneath the surface in many Asian countries.
Renewed protests over China’s mining investments in Myanmar this week confirmed this trend, one that China’s leaders seem either to dismiss as trivial, or to regard as somehow unrelated to their bullying.
Indeed, like Russian President Vladimir Putin, who faces widespread public antipathy in Ukraine, China’s leaders appear to believe that popular protests against them can only be the product of an American plot.
Yet, despite their shared contempt for expressions of the popular will, China’s President Xi Jinping and Putin struggled, during Putin’s two-day visit to Shanghai, to agree on a new gas deal that the Kremlin desperately needs.
Putin had viewed China as his backup option should the West seek to isolate Russia following its annexation of Crimea.
Putin’s idea was that he could pivot Russia’s economy into a partnership with China.
But Xi balked, signing the gas agreement only after Putin offered a steep, long-term discount.
Xi’s self-confidence reflected not only the Chinese leadership’s contempt for Putin’s mismanagement of the Russian economy, but also the fact that China’s energy worries have lessened considerably of late.
Successful deployment of hydraulic fracturing (“fracking”) technology in Xinjiang suggests that China, like America, will soon be able to draw on its own reserves of shale energy.
Moreover, plentiful gas supplies from Myanmar and Central Asia will provide China with sufficient supplies of energy for at least a decade.
China’s hard bargaining with Russia has exposed the limits of the two countries’ bilateral cooperation, which has important geo-strategic consequences for Asia and the world.
China, it now seems, is happy to see Putin poke his finger in the West’s eye and challenge America’s global leadership.
But it is not willing to underwrite with hard cash Russian pretensions to world power status.
Instead, China appears interested in turning Russia into the sort of vassal state that Putin is seeking to create in Ukraine.
But the most epochal events of the last week took place in two of Asia’s great democracies: India and Japan.
Narendra Modi’s landslide victory in India’s general election was not only a huge personal triumph for the son of a tea seller, but may well mark a decisive break with India’s traditional inward-looking policies.
Modi is determined to reform India’s economy and lead the country into the front rank of world powers.
Here, Modi will find no stauncher ally than Japanese Prime Minister Shinzo Abe, who was among the first Asian leaders to embrace him in his bid to lead India.
Given that both countries have almost perfectly aligned regional security interests, there should be plenty of scope for the two to act in tandem to improve regional security and mutual prosperity.
Thailand’s crisis might well mark a good early test of their ability to work together, because both countries have strong interests in Thailand’s rapid return to democracy and the credibility needed to act as an honest broker in ending the country’s crisis.
In the past week, Abe created for himself considerably more political space to act as a strategic partner, not only to India, but also to Japan’s other allies, particularly the United States.
Quietly, a panel appointed by Abe’s government this week offered a reinterpretation of a key element of Article 9 of Japan’s constitution.
For the first time since the Pacific War’s end in 1945, Japan’s Self-Defense Forces would be able to participate in “collective self-defense” – meaning that Japan could come to the aid of its allies should they come under attack.
Of course, China and others in Asia have tried to muddy this change with the alarmist charge of a return to Japanese militarism.
But the new interpretation of Article 9 augurs just the opposite: it embeds Japan’s military within an alliance system that has been, and will remain, the backbone of Asia’s prevailing structure of peace.
Abe will make this clear when he delivers the keynote address in Singapore at this year’s Shangri La Dialogue, the annual meeting of Asian military and civilian military leaders.
Modi’s victory and Abe’s increased ability to stand by Japan’s allies can help to forge deeper bilateral ties and, if properly understood by China, foster a greater strategic equilibrium in the region.
It is now possible for Asia’s greatest powers – China, India, Japan, and the US – to form something akin to the concert system that gave Europe a century of almost complete peace in the nineteenth century.
Of course, such a system would require China to set aside its goal of regional hegemony.
Clear-sighted Chinese must already see that, short of a victorious war, such dominance is impossible.
Now is the moment for China to anchor its rise within a stable and mutually acceptable Asian regional order.
Indeed, for China, this may be the ultimate tipping point in its modernization.
The Pyongyang Purge
TOKYO – During the Cold War, the term “Kremlinology” referred to efforts to understand what was taking place at the commanding heights of the Soviet Union – indeed, behind the entire Iron Curtain. Kremlinologists monitored (in whatever way possible) who was up and who was down among the core Soviet leadership.
Great significance was read into who signed an official document, or who stood where atop Lenin’s Tomb in Red Square when reviewing military parades.
All of that was grammar-school stuff compared to efforts to decipher the regime in North Korea, where the truth is far more opaque.
Consider what happened on December 17.
Choe Ryong-hae, Vice Chairman of the Central Military Commission of the Korean Workers’ Party, was conspicuously present on stage at the commemoration of the second anniversary of “Dear Leader” Kim Jong-il’s death – the first major ceremony following the purge and execution of Jang Song-thaek, the former vice chairman of the National Defense Commission.
Choe’s speech, with its threats against the United States and South Korea, seemed to set the stage for his political elevation.
Jang Song-thaek had been seen as a kind of regent to Kim Jong-un, the young successor to the Kim family dynasty, and was thought to be number two in the regime.
But he owed his position to his wife, Kim Kyong-hui, the only sister of Kim Jong-il, Kim Jong-un’s deceased father.
Jang’s tact, as well as his usefulness as an interlocutor with China, enabled him to keep his position, despite his long-term separation from his wife.
But in North Korea, blood is paramount: everything, including ideology and the national interest, is subservient to the maintenance of the Kim dynasty.
The “legacy” of the “Great Leader” Kim Il-sung and his son, “Dear Leader” Kim Jong-il, determines all major decisions.
I have long believed that the true holder of power since Kim Jong-il’s death has been his sister, Kim Kyong-hui, and no one else.
North Korean culture would suggest that women do not take positions of leadership, but it appears that she was the only family member whom Kim Jong-il could trust.
When he was incapacitated by illness, it was she who called the shots.
Her blood tie to the Kim dynasty is the reason why, even after her husband was purged and executed (and the rest of his family rounded up), she maintained her political position.
It has even been suggested that she made the decision to purge her husband.
Though it cannot be known whether she also proposed killing him, it is not surprising that she believed that, with her own health failing, she could not leave the family dynasty to her husband’s care.
Perhaps the most chilling aspect of Jang’s execution is that it appears to be part of a feeding frenzy that has claimed the lives of a number of senior officials and generals.
And the bloodletting has been extremely personal: In August, Kim Jong-un reportedly ordered the execution by firing squad of an ex-girlfriend and other members of her musical ensemble; the killings are said to have been carried out in front of their families.
Elsewhere in the communist world, such murderous purges were renounced long ago, first in the Soviet Union by Khrushchev, following his denunciation of Stalin, and then in China by Deng Xiaoping, following his rehabilitation and return to power in the late 1970’s.
This “reform” did not make these regimes any more beneficent or efficient, but it did bring a degree of stability and predictability to their behavior.
North Korea, always the least predictable of totalitarian communist states, remains in a twilight world.
More disturbing is the question of whether China is going down a parallel path under President Xi Jinping.
Ever since Deng’s rule, there has been an understanding that members of the Chinese Communist Party’s Politburo are not to be touched, even in retirement.
But Xi, under the pretext of his anti-corruption battle, has targeted retired Politburo member Zhou Yongkang, who is now reportedly under house arrest, facing graft charges – and lurid allegations not only that he murdered his first wife but that he tried to assassinate Xi.
China’s emphasis since Deng on rule by consensus may not have made the country any more democratic, but it at least prevented the re-emergence of a new cult of personality à la Mao Zedong.
The question today is whether Xi’s flouting of this internal party convention is another step in re-creating one-man – and thus completely arbitrary – rule in China.
In North Korea, of course, arbitrary rule – no matter how bizarre and inept – is always the norm.
And now, with Jang purged, responsibility for economic failure in North Korea has been shifted to Choe.
All officials and people related to him now live under the shadow of the executioner, for he is certain to bear the blame when the dynasty needs a scapegoat for its mounting problems.
And Jang’s purge may make those problems worse.
While China lost a convenient point of contact with the Kim regime, North Korea may have lost the only channel by which to sustain itself.
The economy cannot be revived so long as international sanctions are maintained, and the sanctions seem certain to remain in place so long as the regime continues with its nuclear brinkmanship.
China, which has been the Kim dynasty’s lifeline, no longer appears willing to offer it a blank check.
So the day is fast approaching when Kim Jong-un and his clan will have to take responsibility for the country’s dire condition, and it may come soon after Kim Kyong-hui dies.
If so, the Kim dynasty’s last chapter may have begun with the current spasm of executions, though the ending – for the Korean Peninsula and East Asia alike – remains very much in doubt.
The New Neutrality
TOKYO – Throughout the Cold War, the Soviet Union used every imaginable threat and inducement – including the ultimate prize of reunification – to bring about a neutral Germany.
But German leaders of both the left and the right, from Konrad Adenauer to Willy Brandt, spurned every Soviet offer.
Will authoritarian mercantilism now succeed where communism failed?
Countries join alliances, or entities such as the European Union, because these groups make the benefits and obligations of membership as unambiguous as anything in international relations can be.
For Germany and South Korea, however, relationships with historic allies – NATO and the United States, respectively – appear to be changing before our eyes.
Through their huge purchases of goods, with promises of even more to come, today’s authoritarian/mercantilist regimes in Russia and China may be about to achieve by commerce what the Soviets could not achieve by bribery and threats.
And the scale of that commerce is breathtaking, with German exports to China growing from $25.9 billion a decade ago to $87.6 billion in 2011, while South Korea’s exports have increased from $53 billion to $133 billion during the same period of time.
A form of stealth neutralism, indeed, appears to be entering both countries’ diplomacy.
Witness Chinese President Xi Jinping’s recent trip to South Korea, German Chancellor Angela Merkel’s unwillingness to impose effective sanctions on Russia for its intervention in Ukraine, and the business-only focus of her just-concluded visit to China.
In both Germany and South Korea, the idea that historic alliances may offer fewer tangible benefits than tacit neutrality – particularly in terms of exports – appears to be taking root, especially among business elites.
Xi’s visit to Seoul was another bold step in China’s systematic efforts to wean South Korea from its commitment to the US-led international economic order.
By offering to permit South Korea to settle its bilateral trade accounts in renminbi, and to launch the first-ever Sino-South Korean initiative toward North Korea, Xi is seeking to convince South Korea’s leaders that the country’s future, including reunification, will be determined in Beijing.
China’s invitation to South Korea to participate in a new Asian Infrastructure Investment Bank (alongside other countries in Asia and the Arab world, but excluding Japan and India) furthers Xi’s efforts to create an alternative financial system, with the AIIB mimicking the Asia Development Bank’s work.
China’s embrace of South Korea is part of a long-term strategy to turn it into a subordinate state in terms of foreign and national security policy (much as Finland kowtowed to the Soviet Union throughout the Cold War).
And yet, though courted by all sides in the struggle to maintain stability in Northeast Asia, South Korea now runs the risk of becoming isolated.
Every gesture by the South toward one of the protagonists – China, the US, Japan, and North Korea – elicits so much pressure by the others that its government must then somehow devise a compensatory policy.
For example, following President Park Geun-hye’s request that Xi honor the Korean assassin of a Japanese prime minister, to which Xi readily agreed, she began to discuss joining the US-led Trans-Pacific Partnership free-trade negotiations, in order to assuage the US.
As China continued to pursue an anti-Japanese propaganda campaign throughout 2013, Park felt obliged to make some effort to revive ties with Japan by sending a private envoy to Prime Minister Shinzo Abe to seek talks on reconciling their disputes.
Given its insecurity, a by-product of the Korean Peninsula’s long division, South Korea requires, above all, calm and steady partners.
But frequent changes in US policy toward Northeast Asia in recent years have disoriented South Korean policymakers, while Chinese policy, though consistent, confronts South Korea’s leaders with choices that they appear unprepared to make.
As a result, South Korea’s elite appears to be splitting into pro-Chinese and pro-American factions that transcend party lines.
Over a period of time, the only beneficiaries are likely to be those who call for “Finlandization” of the Korean peninsula.
Meanwhile, the impact on German foreign policy of the country’s deepening economic ties with Russia has been evident throughout the Ukraine crisis.
Though Merkel frequently admonished the Kremlin about its intervention in Ukraine, German public opinion – particularly that of the country’s business leaders – tied her hands.
Indeed, German big businesses have been the main obstacle to imposing the type of systemic sanctions that might have dissuaded Russian President Vladimir Putin from annexing Crimea and continuing to back the insurgency (which Russia itself incited) in eastern Ukraine.
This is not the only recent case in which Germany has distanced itself from its allies and partners.
In Libya in 2011, Germany refused to offer even rudimentary material support to the military intervention staged by its British and French allies.
Germany has also continuously failed to meet its commitment to spend 2% of its GDP on defense, at the same time that it has insisted that troubled EU economies stick to austerity budgets that limit their deficits to a fixed proportion of their economic output.
Indeed, throughout the eurozone crisis, Germany did the absolute minimum – and always at the last possible moment – to assist its EU partners.
And German leaders’ obsession with maintaining their country’s “golden decade” of exports appears to have gagged them on topics like China’s human rights abuses and its aggressive behavior toward its Asian neighbors.
That silence is being rewarded with the first-ever joint cabinet sessions between a democracy and a communist dictatorship, which will take place in Berlin this autumn.
In both Germany and South Korea, economic strength seems to have produced an illusion of policy independence that is opening a chasm between the two countries and their allies – a chasm that revelations of US spying, on Merkel in particular, have deepened.
Germany and South Korea, however, will gain little, and risk much, if they downgrade their alliance ties in favor of commercially motivated, if unofficial, neutrality.
Whatever short-term benefits they receive will be more than offset by their strategic vulnerabilities vis-à-vis Russia and China.
Ending East Asia’s History Wars
TOKYO – Georges Clemenceau, who, as France’s prime minister, led his country to victory in World War I, famously said that “war is too important to be left to the generals.”
Japan is now discovering that history is too important to be left to newspaper editors.
In the 1990s, the newspaper Asahi Shimbun caused a firestorm at home and in South Korea by publishing a series of articles, based upon testimony by the former Japanese soldier Seiji Yoshida, on “comfort women” – Koreans forced to provide sexual services to the Japanese Imperial Army during World War II.
Asahi has now admitted that the soldier’s confessions were unfounded, and has disavowed the core supporting evidence for the articles.
That retraction appears to be causing as much embarrassment – and diplomatic vitriol – in Japan and South Korea today as the original series did.
But, at a time when both countries cannot afford to permit partisan or sloppy abuses of history to roil their bilateral relations, Asahi’s careless work has turned out to be more than abysmal journalism; it has introduced a dangerous element into regional diplomacy.
Some say that Japan and South Korea should follow the example set by France and Germany.
Reconciling in the first two decades following the Nazi Occupation of France, these countries’ leaders understood that their security and economic ties were far too important to their citizens’ wellbeing to allow the old hatreds to fester.
They knew that the unimaginable violence of WWII was a direct result of the antagonisms that had festered since the Napoleonic Wars and that were allowed to persist after 1918.
In Charles de Gaulle and Konrad Adenauer, France and Germany had two of the twentieth century’s greatest statesmen, leaders who were able to discern the broad sweep of history through the fog of quotidian politics.
Their loyalty was not only to the citizens who elected them, but also to the generations of the past that had endured the consequences of Franco-German enmity, and to generations yet to come, which would benefit from reconciliation.
Of course, given that Japan and Korea have not fought a series of wars against each other, their relationship is not the same as that between Germany and France.
But it is clear that no one will benefit from a new round of heated historical debate.
To avoid this, political leaders like de Gaulle and Adenauer are needed.
Only when we can discuss the past without endangering the future will the countries of Northeast Asia be able to establish a truly durable structure of peace.
As Admiral Dennis C. Blair, a former commander of the US Pacific Fleet, stated at a recent conference, “The history of Asia from the 1930s to about 1955 or so was not pretty in any way&hellip;.I don’t think any country can have a monopoly on righteousness, or on guilt and shame” for that time.
Blair added that “the attempt to hold a ‘we were right’ and ‘you were wrong’ sweepstakes is not going to help our children and grandchildren understand what happened there.”
Japan and South Korea need to take responsibility for the future, not obsess about the past.
A recent Japanese government white paper called South Korea the country “that shares the closest relationship with Japan historically and in areas such as economy and culture.” No doubt, many, if not most, South Korean foreign-policy experts and strategists share that sentiment.
But it will take committed leadership to transcend the history wars and tap the full potential of Japanese-Korean cooperation, something that both countries’ key ally, the United States, strongly desires, as it seeks to draw China into a lasting and peaceful Asian order.
For too long, intemperate historical debates – often driven by biased newspaper accounts – have poisoned bilateral relations.
Now, as another war of words heats up, Japanese and South Korean leaders need to step back, recognize where the real interests of their people lie, both today and in the future, and calmly begin to take the measures required to ensure durable reconciliation.
The Enigma of European Defense
PARIS – While Europe’s citizens largely support the establishment of a common security and defense policy, most European leaders have demonstrated a clear lack of interest in creating one – including at last month’s European Council meeting.
What accounts for this paradox?
One possible explanation is that financially strained European governments lack the means to fulfill their citizens’ expectations.
But that is unconvincing, given that the issue was framed in almost identical terms three decades ago, when budgetary constraints were not a problem.
In fact, it could be argued that such constraints should spur, not impede, the creation of a European defense structure.
After all, member countries would then be able to pool their resources, harmonize programs, and rationalize costs, thereby reducing individual governments’ financial burden.
Another, far more credible explanation is that Europeans’ interpretations of “a more active and stronger security policy” differ widely.
Indeed, current discussions in Europe concerning the use of force are dominated by three main perspectives, championed by France, the United Kingdom, and Germany.
France, which has once again intervened in Africa – this time to restore order in the Central African Republic – is the only European Union country that seems genuinely interested in satisfying popular demand for more robust European security structures.
The French consider Europe to be a kind of superpower – a status that implies a corresponding military capacity.
While this view probably stems from France’s historical political and military prowess, it also reflects the country’s current interests.
As Europe’s greatest military power (despite the UK’s larger defense budget), France would play a key role in any wide-ranging European military operation.
The UK, for its part, shares France’s belief that military power is a prerequisite to strategic effectiveness.
It claims that its opposition to a European defense structure stems from its belief that NATO – and thus the United States – is critical to European defense.
But, given that no other EU country has seriously considered excluding NATO, this argument seems to be little more than an excuse.
The truth is that the only kind of defense the British accept is that conducted by a coalition of European states acting under their national flags, as occurred in Libya.
In the UK’s view, “European” operations should be limited to humanitarian and peacekeeping objectives.
While it supported the fight against piracy off the Horn of Africa, that was more a policing operation than a military one, and it was guided by a shared interest in protecting trade routes from the Middle East and Asia.
Germany’s vision of European defense is very different from the French and British perspectives.
Unlike the UK, Germany supports a European security and defense policy, proudly highlighting its consistent military budget and major presence in European missions (larger than that of the overstretched French).
And, though Germany shares the UK’s belief that NATO bears primary responsibility for protecting Europe, its view of European engagement is even more restrictive.
In Germany’s view, European military intervention should be limited to the continent, and should not include combat operations.
In fact, a majority of Europe’s citizens prefer that European forces be deployed only for non-combat missions.
And, so far, virtually all European military operations have been aimed at evacuating European nationals, delivering humanitarian aid, or maintaining peace in the aftermath of conflict.
These differing views explain the uncertainty surrounding France’s recent interventions in Africa.
The French have lamented the miniscule support offered by the rest of Europe for its operations in Mali and the Central African Republic – exemplified by Germany’s refusal to create a fund for EU member-state operations.
But, given the urgency of the situations in Libya, Mali, and the Central African Republic, this lack of support has not undermined France’s efforts as much as prior consultation with European leaders would have done.
Had the Germans been consulted, they probably would have rejected the interventions anyway.
This conflict between the need for rapid response and the requirement for deliberation explains why the EU’s much-discussed “battlegroups” are unlikely ever to be deployed.
The fact that most Europeans are satisfied with limited political and military involvement outside of Europe makes increased defense cooperation even less likely.
A pessimist would say that Europeans are unable – or at least unwilling – to rethink their defense policy, because the US ultimately ensures their security through NATO.
According to this view, France’s efforts to encourage both transatlantic integration and autonomous political action are insufficient to change most Europeans’ minds.
A more optimistic interpretation is that Europe needs defense structures that account for the role of member states – not just for that of the EU.
From this perspective, Europe does have a significant military presence, whether in Afghanistan and Libya or Mali and the Central African Republic.
Zhu Rongji Reexamined
As China's new leadership team emerges, the world's attention has focused on President Jiang Zemin's successor.
But this is misguided, for perhaps the most significant moment in China's recent history of boom and transformation was the 1998 appointment of Zhu Rongji (pronounced "Joo Rong-jee") as premier of the State Council, a position once held by Deng Xiaoping.
Given the obvious importance of the post in recent years, the choice of Mr. Zhu's replacement may be of even more significance than President Jiang's departure from center stage.
Even before he became premier, Mr. Zhu, as the president of China's central bank, was known as the architect of China's 8% annual economic growth in the 1990s and the mastermind of its successful fight against inflation.
Mr. Zhu has been China's Jack Welch, the tough-minded, longtime CEO of the American conglomerate General Electric--a man celebrated for his candor, his global sophistication, and his insistence on performance.
Indeed, Mr. Zhu was renowned for punishing those who fell short of his expectations.
As mayor of Shanghai, he once disciplined his tourist bureau officials by making them scrub the city's public toilets themselves.
A few months after his appointment as premier, Mr. Zhu delivered his "three promises" speech, in which he pledged to make three bold moves to secure a more vibrant, self-sustaining economy.
First, he would overhaul the 300,000 state-run national corporations that still conducted an overwhelming amount of China's business and accounted for the bulk of its economic activity.
More than 70% of such companies were unprofitable and were propped up by government subsidy.
Just as Mr. Welch promised to "fix, close, or sell" nonperforming divisions of General Electric when he took over the company, Mr. Zhu threatened to fire chief executives of Chinese firms that lost money for more than two consecutive years, and then either to shut them down or sell them.
This forced national corporations to be privatized and go public or to be overseen by provincial governments, a change that proved to be a major impetus for a sudden decentralization of China's governance structure--another key legacy of Mr. Zhu's tenure.
Second, Mr. Zhu said he would wipe out the many bad debts of China's banks and "international trust companies."
Many of these had contributed to a softening in China's economy by routinely lending money to insolvent corporations.
At the time, there were 245 such trust companies, which had such a poor record of repayment that overseas investors were beginning to shun China entirely.
Reforming them would take 10 years, he said.
Third, Mr. Zhu said he would streamline the central government and take on one of China's most pernicious problems: high-level corruption in government agencies.
He would propose measures including, for example, cutting links between government and organized crime, and making it more difficult for bureaucrats to accept bribes.
Politicians often make bold promises but rarely keep them.
On July 1, 2001, at the celebration of the 80th anniversary of the Chinese Communist Party, Mr. Zhu assessed his progress.
His appraisal of his record in office is notably accurate, and stands as a convincing testament to the effectiveness of his leadership.
Mr. Zhu told the assembled Communist leadership that he had fulfilled the first promise: many of China's public corporations had become profitable private entities or had been shut down.
Those that were still operating were given stringent profitability targets, were allowed to choose the people they hired, and were encouraged to raise money on private stock exchanges, which effectively propelled them into the private sector as "red chip" corporations.
As for the second promise, more than 50 heads of financial institutions had at that point been fired (more followed), and reforms had changed the investment climate dramatically.
Instead of fleeing the country, capital was flowing in more rapidly than ever before.
Mr. Zhu's record concerning his third promise was more mixed.
While the size of the central government fell dramatically, with employment at the State Council halved from 34,000 to 17,000, corruption continued to fester.
Despite Mr. Zhu's efforts, opposition from vested interests throughout the government--particularly at the highest levels--impeded reform.
Nonetheless, Zhu Rongji's reforms created the kind of level playing field and rule of law on which a vibrant capitalist system depends.
That is a political legacy second to none in modern Chinese history.
Zimbabwe\u0027s Last Chance
As the world rooted for former United Nations Secretary General Kofi Annan in his recent efforts to end the violence in Kenya, many also found themselves wondering whether a weary Annan, or some other global leader, will be battling another fire by the end of this month: this time in Zimbabwe.
Zimbabwe’s upcoming elections, scheduled for March 29, offer both fear and hope to the millions trapped in or trying to escape the country’s hellish conditions.
Even official data now put the inflation rate at more than 100,000%, and the plight of ordinary Zimbabweans grows more desperate by the day.
The elections could bring Zimbabweans a chance to end the long dictatorship of President Robert Mugabe.
But, without supervision, they will be held in an environment that could dash Zimbabweans’ hopes.
Zimbabweans are denied their basic freedoms and subjected to violence.
Torture is widespread.
Civil society groups report the arrests of opposition electoral candidates, the manipulation of food supplies for political purposes, and violent incidents of voter intimidation.
The Zimbabwe Election Support Network has also expressed concern about the country’s state of readiness for this complex election, which will combine presidential, parliamentary, senatorial, and local government contests.
And this is to say nothing of the structural faults that continue to impede political progress – a defective constitution, censored media, and a partisan security and military establishment.
It didn’t have to be this way.
This past year has seen one missed opportunity after another.
South African president Thabo Mbeki convened negotiations with Zimbabwe’s political groups; but they have been so unfruitful that opposition leaders recently all but accused Mbeki of lying to the world about the progress of the talks.
Some African leaders – notably Ghana’s president, John Kufuor, and outgoing African Union head Alpha Konare – have tried to cajole Mugabe towards reform, to no avail.
Perhaps more significantly, the international community’s failure to address Zimbabwe seriously shows, once again, that it lacks the political will to prevent foreseeable crises.
Last year, UN Secretary General Ban Ki-moon and UN High Commissioner for Human Rights Louise Arbour condemned the regime’s use of torture and its mistreatment of pro-democracy forces.
Regrettably, the UN failed to follow up with institutional action.
The UN would say it must be invited into a country before it can take certain forms of action, such as sending official election observers.
But it is also true that with adequate political will, the UN Security Council could live up to its responsibility to Zimbabweans by responding to the crisis more aggressively.
The UN should have put Mugabe on the defensive with a forceful public offer to help Zimbabwe prepare for internationally supervised elections.
Instead, the UN continues to defer to Mugabe, who hides behind claims of sovereignty while jailing a defenseless populace.
With so many lives at stake, what can be done to avert an intensification of the Zimbabwe crisis?
People of good will throughout the world, including those affiliated with multilateral organizations like the UN, should descend on Zimbabwe to observe this month’s elections.
Accredited or not, they should stand in solidarity with the people of Zimbabwe at this crucial moment, act as witnesses to the deteriorating pre-election environment, and serve as a bulwark against any escalation of state brutality during and after the vote.
Mugabe would prefer to limit the presence of international observers to those sent by neighboring states – the same allies that somehow managed to deem the violent and fraudulent elections of the past seven years “legitimate.”
Zimbabwe’s neighbors also face a choice: they can use their proximity to halt Mugabe’s abuses, or to shield him from international scrutiny and rebuke.
Their choice may depend on what the world demands of them.
The people of Zimbabwe will play their part on March 29.
As for the regional and world community, their actions today and in the coming weeks could make the difference between a reprise of the violence in Kenya and the first step towards a more stable and democratic future.
Zimbabwe’s Permanent Guantánamo
JOHANNESBURG – Last week, the United States Supreme Court ruled that detainees at Guantánamo Bay have the right to habeas corpus – the right to challenge the factual and legal basis of their detention in a court of law. I was elated by the decision, having spent four years working on ensuring the rule of law in US detention and interrogation policy, including monitoring military commission trials at Guantánamo Bay. But my happiness is tempered by where I sit, close to the border with Zimbabwe – a country where the writ of habeas corpus and the rule of law have become obsolete.
Habeas corpus, Latin for “you have the body,” is an old English common law principle incorporated into the US Constitution to ensure freedom from unlawful detention by the state.
It was and continues to be a critical check against the imprisonment of individuals without oversight by independent courts.
In Zimbabwe, this right – like so many other checks and balances – has been torn away by a repressive state.
Just hours before the US Supreme Court ruling, Tendai Biti, the Secretary-General of the opposition Movement for Democratic Change (MDC), was arrested upon his return to Zimbabwe.
Despite immediate attempts by his lawyers to locate him, his whereabouts remained unknown for days.
The police dismissed an initial court order demanding that Biti be produced before the court.
After Biti was finally produced before the court days later, the government announced that he will be charged with treason – which carries the death penalty – for unofficially announcing the results of the March 29, 2008, elections. Prior to his detention, Biti had responded to such allegations by stating that his only crime was to fight for democracy in Zimbabwe.
It is unlikely that he will be able to challenge the basis of his detention in an independent court.
Since 1999, the MDC has offered a democratic alternative to President Robert Mugabe’s regime.
In the most recent elections, Zimbabweans made their choice known, despite serious obstacles and widespread repression, with the MDC’s presidential candidate, Morgan Tsvangirai, gaining more votes than Mugabe.
But, according to the vote counts released by the government after a suspicious month-long delay, the MDC’s margin of victory – 48% to 43% – fell short of the 50% required to avoid a run-off election.
Biti is not the only MDC member to be “disappeared” for a period of time by Mugabe’s government.
Over the past two years, police and government-supported paramilitaries have routinely jailed, beaten, and even killed MDC officials and suspected MDC members.
Last year, Biti was detained and beaten along with Tsvangirai and dozens of other MDC officials.
The photos of Tsvangirai’s pummeled body led to an international outcry.
State-sponsored violence against the MDC and its supporters has escalated as the June 27 run-off vote draws near. Just weeks ago, Biti described the discovery of the mutilated body of Tonderai Ndira, an MDC youth leader.
Ndira had been taken by the police from his home.
He was missing for seven days; when his body was found, it was recognizable only by a bracelet he always wore.
Here in our offices in Johannesburg, we have two Zimbabwean lawyers who fled their country after receiving death threats for their work defending human rights.
At least five of their clients have been murdered in the past few weeks.
Most recently, the Zimbabwean police suspended the work of numerous human rights organizations that were documenting the recent violence.
It is hard to imagine that a free and fair election can take place against the backdrop of such intense and systemic violence.
Indeed, even South African president Thabo Mbeki, who, despite an outcry from many of his citizens, has supported Mugabe, felt compelled to label it a “cause for serious concern.”
In the majority opinion in Boumediene v. Bush , Justice Anthony Kennedy wrote that “Liberty and security can be reconciled; and in our system they are reconciled within the framework of the law.” But there is no rule of law left in Zimbabwe – no habeas corpus and no check on arbitrary state action.
It is time for the international community to step in, call for an end to the detention and disappearance of MDC officials and perceived supporters, and push for a democratic transition in Zimbabwe.
Only then can the principles underlying the Supreme Court’s decision come within reach of ordinary Zimbabweans.
Zoellick to the Rescue?
Will newly anointed World Bank President Robert Zoellick be able to get the organization back on its feet after the catastrophic failed presidency of Paul Wolfowitz?
Although hardly a megawatt star of the Bob Rubin category, he certainly brings some positive attributes to the job.
First, as a key player in bringing China into the World Trade Organization, Zoellick is a proven internationalist in an American administration where internationalists have sometimes seemed like an endangered species.
Second, he is a firm believer in the power of markets and free trade, which have clearly done far more to alleviate poverty over the past half-century than any aid program.
Third, he seems to have been a consistent behind-the-scenes supporter of the Bank, whereas many of his Bush administration colleagues would be just as happy to see it shut down and its Washington headquarters turned into private condominiums and offices.
So presumably he has a constructive vision for the Bank’s future.
But Zoellick is not without his weaknesses.
First and foremost, his appointment extends the embarrassingly outmoded practice of always installing an American in the job.
With the Bank tirelessly preaching the merits of good governance, its failure to adopt democratic principles undercuts its own legitimacy.
The claim that the World Bank needs an American president to ensure that the US keeps donating money is ridiculous.
The annual cost of the US contribution to the World Bank, even taking into account off-the-books loan guarantees, is relatively minor.
Any number of developing countries, from China to India to Brazil, could easily step up if the US foolishly stepped down.
Zoellick’s background as a lawyer hardly makes him perfect for the job, either.
The World Bank presidency is not about negotiating treaties, as Zoellick did when he was US Trade Representative.
The Bank’s most important role in development today is as a “knowledge bank” that helps aggregate, distill, and disseminate best practices from around the world.
In this respect, the Bank’s technical assistance to governments is very similar to what private consultants offer to companies.
Moreover, many of the World Bank president’s most important decisions involve economics in an essential way.
Wrong economic decisions, such as in the 1970’s, when Robert McNamara pushed grandiose, but environmentally devastating, infrastructure projects, have haunted the Bank for decades.
The biggest question mark, though, is whether Zoellick will be able to hit the ground running and implement desperately needed reforms.
Reform number one, of course, is to ensure that the next World Bank President is not an American.
Rodrigo de Rato, Zoellick’s counterpart at the European-dominated International Monetary Fund, has already suggested that his successor should be chosen in a more inclusive process.
The World Bank should be ashamed that its president has not yet offered a similar proposal.
Second, Zoellick should ask why the Bank spends only 2.5% of its budget on the “knowledge bank” research function that it trumpets so proudly in its external relations materials, while it spends three times that amount on maintaining its executive board.
Third, Zoellick should use his formidable negotiating skills to cajole rich countries into greatly increasing the grant component of World Bank aid.
The idea that a big government-guaranteed global bank is needed to fill holes in private capital markets is laughable nowadays.
True, the Bank’s poorest clients have little access to private capital markets. By and large, however, the poorest countries need grants, not loans that they still won’t be able to pay in 20 years.
As the Bank switches from loans to grants, it can use some of its massive retained earnings to endow its “knowledge bank” function and related technical advice.
But all this knowledge shouldn’t be free.
A lot of technical advice falls on deaf ears, with countries listening only long enough to get their hands on Bank money.
Instead of merely pushing its agenda, the Bank should start charging for its technical advice on a graduated scale so that more of its engagements are client-driven.
Last but not least, the Bank needs to play a much bigger role in environmental issues and, in general, in promoting good international citizenship by both rich and poor countries.
(Some of us have been proposing this for almost two decades.)
Of course, Zoellick could just attempt to fill the role symbolically and do little or nothing, as some of his predecessors have done.
Or, less likely, he could embrace some megalomaniacal and over-reaching vision of government intervention, as others have tried.
In any case, let’s wish him luck.
The world needs the World Bank a lot more than it needs another condominium.
Zuma Rising
The anxiety over Jacob Zuma’s election as president of South Africa obscures a significant milestone: for the first time in decades, a sub-Saharan nation has at its helm a champion of ordinary people.
African politics has long been the exclusive domain of aristocrats, soldiers, and technocrats.
Even with the spread of democratic elections, the region’s leaders tend to come from the ranks of soldiers (Uganda, Rwanda, Zimbabwe), family dynasties (Togo, Kenya, etc), or university professors, lawyers, and economists (Ghana, Malawi, Liberia).
Now South Africa, the region’s economic engine and home to its most sophisticated universities, media, and corporations, has a former goat herder at its helm, a rare African leader with the common touch.
Zuma is legendary for his ability to connect with ordinary people.
He’s secure enough to dance and sing in public. He speaks the language of populism, raising hopes for the vast majority of South Africans who daily endure the misery of poor housing, schools, and health care.
In contrast to his two predecessors – the saintly Nelson Mandela, who emphasized racial healing, and the aristocratic Thabo Mbeki, who reassured financiers with his strong grasp of macroeconomics – Zuma recognizes the pent-up demand for material improvement in the lives of his country’s tens of millions of have-nots. “We have learned from the mistakes of the past 15 years, especially the manner of which we may have, to some degree, neglected the people’s movement,” he said in April, before his African National Congress swept to victory.
Until now, populism has been the missing note in African political culture.
Zuma, who spent his youth herding cattle and only gained formal education while in the notorious Robben Island prison with Mandela, is refreshingly aware that Africa’s biggest problem is its inequalities, not its global marginalization. In Africa’s wealthiest nation – but also the nation where wealth is most unequally shared – a bold populist now holds ultimate power over government policy.
Yet, while Zuma’s populist appeal reflects South Africa’s especially large differences in economic class, the threat of imposing higher taxes and other obligations on employers and the wealthy has raised fears at home and internationally.
Moreover, Zuma has been called a chameleon, accused of telling his audiences what they want to hear.
Zuma’s turbulent personal life – many wives and his embarrassing contention during a rape trial that he avoided HIV infection by taking a shower – has invited ridicule.
Most seriously, doubts persist about his commitment to democracy, with critics arguing he’s an old-style African “big man” ready to bully opponents and ravage the public coffers with his cronies.
Dismissing complaints, Zuma insists, “There’s no cloud around me.”
His defenders, meanwhile, point to two benefits that he has already delivered: an end to Mbeki’s ambivalent approach to fighting HIV/AIDS, the country’s major public health threat, and a refreshing willingness to move against Zimbabwe’s aged dictator, Robert Mugabe, whom Mbeki coddled out of a misguided sense of loyalty for his support during the struggle against apartheid.
In an Africa bereft of successful populist politicians, Zuma’s role models may come from Latin America, where income inequality is also extreme and the trade-union movement, as in South Africa, is strong and militant.
With enormous pressure from ordinary people to deliver tangible gains, Zuma the populist will quickly face a major test: will he emulate Lula of Brazil, who has struck an admirable balance between good economic governance and re-distribution of wealth to the poor?
Or will he follow the path of Hugo Chávez, a popular autocrat who seems to prefer building a cult of personality over raising living standards for the poor.
The stakes for Africa are enormous.
South Africa has the continent’s largest economy and, until the global financial crisis, posted 10 years of steady economic growth.
In an economic slowdown, the country’s severe crime problem might only worsen; so might unemployment, which already tops 20% in the formal economy.
Zuma senses the urgency of the situation.
He is, after all, 67 years old and likely to serve only a single term in office. “We can’t waste time,” he says.
Yet, according to the political economist Moeletsi Mbeki, at his core, “Zuma is a conservative.” In this sense, Zuma represents yesterday’s South Africa.
He is part of the proud generation that defeated apartheid – and then peacefully engineered a transition to durable black-majority rule.
Their achievement remains one of the greatest in recent history.
At the same time, Zuma’s revolutionary generation still seems uneasy leading South Africa in a post-apartheid era that is now 15 years old.
In a region that reveres the elderly, Zuma’s attachment to his rural traditions must be matched by an equal openness to the appetites of the country’s youth.
Three in ten South Africans are younger than 15, meaning that they did not live a day under apartheid.
Somehow Zuma must find a way to honor his own generation’s commitment to racial justice and national liberation, while empowering the masses who daily suffer the sting of class differences and yearn for material gain.
